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A
PROJECT REPORT
ON
COMPREHENSIVE STUDY
OF
INDIAN BANKING SYSTEM
PREFACE
The introduction and application of the concept of customer services entered in a welcoming way
in India only after independence. The banking system in India has come a long way during the
last two centuries. Its growth was faster and the coverage wider since 1969. In 1969a major
position of banking sector was entrusted to the public sector. This process continued and
embraced few private banks in 1980.
The transfer of ownership of banks from the public to private was aimed at entrusting the banks
with greater responsibilities for the economic development of India by taking banking services to
the masses and taking special care of the weaker section of the society and the priority sector of
the economy. Though the number of banks offices magnitude and the variety of their operations
has grown considerably during the period of near about three decades, but it appears that the
banking sector has entered into serious among customers.
For overcoming this problem, banking industry should seek introspection and adopt refined
management techniques. It has been endeavor of this study to analyze the present state of various
banks keeping in view the primary data has been collected regarding the present state of loan
schemes in various banks by using a questionnaire.
1
Table of contents
Indian
Particulars
S. No.
1.
EXECUTIVE SUMMERY
2.
INTRODUCTION:
Banking SystemPages
201
0
07-08
09-19
REVIEW OF LITERATURE
OBJECTIVES OF THE STUDY
SIGNIFICANCE OF THE STUDY
CONCEPTULIZATION
FOCUS OF THE PROBLEM
LIMITATION OF THE STUDY
3.
RESEARCH METHODOLOGY:
20-24
RESEARCH DESIGN
SAMPLING: DESIGN AND PROCEDURE
4.
INDIAN ECONOMY:
25-31
SECTOR
5.
32-37
6.
38-41
CREDIT GROWTH
7.
42-48
LOAN DEMAND
RISING FUNDING
NON-PERFORMING LOANS
TECHNOLOGY
8.
VALUATION TOOLS:
49-57
EXECUTIVE
SUMMARY
EXECUTIVE SUMMARY
The Indian Economy is driven by strong fundamentals with GDP growth at 9.1% for H1 FY07
strongest growth in any six months since H1 FY04 and uptrend in Industrial Cycle with Average
Index of Industrial Production growth at 10.2% being the strongest run in the past 11 years.
On political front, the Indian Government has signed nuclear deal with America indicating
Indias importance in the global context opening up many opportunities. Along with this,
Chinese President Hu is expected to visit India. This will improve trade and other ties between
two of the fastest growing economies.
In Capital Market, Strong foreign inflows with Portfolio flows of nearby USD 9.2bn took BSE
Sensex to 14,000 + (50% higher) compared to FY 05-06. The Indian corporate raised USD 6bn
by issuing Initial public offer in India and abroad. High Credit growth at 30%, it continued the
trend of last 5 years where it has averaged around 25% and lastly M&A activity which was at its
peak with sectors beyond IT and Pharma making global & domestic acquisitions.
The high growth sectors are Power where power ministry and local private players
announce 9 ultra mega projects (4,000 MW each) provides visibility on power & infra
front.
Retail - a Point of inflection with major Indian corporate announcing plans, entry of
world majors like Wal-Mart & foreign investment allowed in single brand retail and Real
Estate with major huge build-out plans and Special Economic Zone policy of government
is major driver of growth.
Banking in which Banks are allowed to raise hybrid capital which opens new avenues for
funding credit growth.
As such, the report focus on change factors in Banking Industry as this industry is expected to
have major impact on Indian Economy.
INTRODUCTI
ON
INTRODUCTION
In India, given the relatively underdeveloped capital market and with little internal resources,
firms and economic entities depend, largely, on financial intermediaries to meet their fund
requirements. In terms of supply of credit, financial intermediaries can broadly be categorized as
institutional and non-institutional. The major institutional suppliers of credit in India are banks
and non-bank financial institutions (that is, development financial institutions or DFIs), other
financial institutions (FIs), and non-banking finance companies (NBFCs). The non-institutional
or unorganized sources of credit include indigenous bankers and money-lenders. Information
about the unorganized sector is limited and not readily available.
An important feature of the credit market is its term structure:
(a) Short-term credit
(b) Medium-term credit
(c) Long-term credit.
While banks and NBFCs predominantly cater for short-term needs, FIs provide mostly medium
and long-term funds.
REVIEW OF LITERATURE
IA Bank ties up with SBI for money transfers
NEW JERSEY: Indus American Bank has tied up with State Bank of India to offer money
transfer services to India for its clients. Under the new money transfer service, which will
provide expanded services to Indus American Bank customers can expect service at over 14,000
branch locations of State Bank of India within India, and at over 14,000 additional RTGS
participating banks.
Funds remitted from Indus American Bank would reach recipients typically within 24 hours. As
the largest bank in India, State Bank of India offers excellent exchange rates which are now
available to Indus American Bank customers. India is one of the biggest destinations for foreign
remittances.
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CONCEPTUALIZATION
The last decade has seen many positive developments in the Indian banking sector. The policy
makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related
government and financial sector regulatory entities, have made several notable efforts to improve
regulation in the sector. The sector now compares favourably with banking sectors in the region
on metrics like growth, profitability and non-performing assets (NPAs). A few banks have
established an outstanding track record of innovation, growth and value creation. This is
reflected in their market valuation. However, improved regulations, innovation, growth and value
creation in the sector remain limited to a small part of it.
The cost of banking intermediation in India is higher and bank penetration is far lower than in
other markets. Indias banking industry must strengthen itself significantly if it has to support the
modern and vibrant economy which India aspires to be. While the onus for this change lies
mainly with bank managements, an enabling policy and regulatory framework will also be
critical to their success.
The failure to respond to changing market realities has stunted the development of the financial
sector in many developing countries. A weak banking structure has been unable to fuel continued
growth, which has harmed the long-term health of their economies. In this white paper, we
emphasize the need to act both decisively and quickly to build an enabling, rather than a limiting,
banking sector in India
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1. Banking Challenges
It is expected that the Indian banking and finance system will be globally competitive. For this
the market players will have to be financially strong and operationally efficient. Capital would be
a key factor in building a successful institution. The banking and finance system will improve
competitiveness through a process of consolidation, either through mergers and acquisitions
through strategic alliances. Technology would be the key to the competitiveness of banking and
finance system. Indian players will keep pace with global leaders in the use of banking
technology.
In such a scenario, on-line accessibility will be available to the customers from any part of the
globe; Anywhere and Anytime banking will be realized truly and fully. In this context, the
research paper approached Indian Banking System as the shape of the banking sector will be
the result of a strong interplay between the decisions taken by policy makers and actions of bank
managements.
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14
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RESEARCH
METHODOLO
GY
RESEARCH METHODOLOGY
Problem Definition:
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Objective:
Discover insights into and develop an understanding of the various Macro and Micro Economic
Factors that have bearing on the functioning of the Banking sector.
Evaluate the performance of some of the banks based on the past data and forecast the future
prospects.
Valuation:
The project involves valuation of major Indian Banks including ICICI Bank, SBI and HDFC
Bank. The methodology followed is Target Pricing, which includes estimating growth rate by
regression on historical sales to forecast next year sales, earning and Profit and Loss account.
Then EPS is calculated which is multiplied to Historical P/E to forecast intrinsic value of share.
Result:
All shares are undervalued and expected to give positive risk adjusted returns to investors. Since
the intrinsic value is more than current market price for all the companies, the share can be
recommended to conservative investors.
RESEARCH DESIGN
18
19
Lack of time availability with the people involved in any manner with the research
especially when decisions were to be made quickly.
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INDIAN
ECONOMY
22
Source: www.rbi.org.in
In FY 06-07, services sector account for major 55% of India GDP followed by 25% in Industrial
sector and 20% in agriculture sector.
FY07 Vs Q2FY06, the growth rate in GDP components are as follows:
Agriculture: 1.7%
Industry: 10.5%
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3. Inflation:
Inflation remained largely benevolent due to investment driven nature of growth and
subsidized nature of oil prices as pass-on of international crude price rise remained
incomplete in India. WPI Inflation has risen to 5.45% for the week ended November 18,
2006 after remaining in the range of 4.0-5.0% earlier. RBI has repeatedly cautioned that
maintaining inflation in the target range may call for substantial monetary tightening should
crude prices persist at high level. The money supply has grown by 18.7% yoy till November
10, 2006 during the current fiscal, which poses a significant threat to RBIs efforts of
containing inflation in the desired range of 5.0-5.5%.
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5. Interest Rate:
26
Source: RBI
Real interest rate indicated by spread between inflation and 10 year benchmark yield has trended
in the range of 2-4%. The real interest rate in developed economies is normally in the range of 23%. However, the marginal productivity of capital being much higher in the developing economy
like India. Due to this, real interest should be higher than those prevailing in more matured
economies.
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INDIAN
BANKING
INDUSTRY
29
Role of Bank
Channel
household savings
Risk
Transformation
30
Service
Provider
The nationalization of banks was the culmination of pressures to use the banks as public
instruments of development. The GoI imposed `social control on banks. However, by the 1980s,
it was generally perceived that the operational efficiency of banks was declining. Banks were
characterized by low profitability, high and growing non-performing assets (NPAs), and low
capital base. Average returns on assets were only around 0.15% in the second half of the 1980s,
and capital aggregated an estimated 1.5% of assets. Poor internal controls and the lack of proper
disclosure norms led to many problems being kept under cover. The quality of customer service
did not keep pace with the increasing expectations. In 1991, a fresh era in Indian banking began,
with the introduction of banking sector reforms as part of the overall economic liberalization in
India.
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Weaknesses:
Continued crowding out effect from govt budget deficit, combined with accelerating
private sector credit demands
Ownership restrictions
Constraints on state-owned banks' micro reforms, including HR, staff cut, branch cut
constraints
Opportunities:
Improving secular GDP growth prospects
Establishment of special economic zones likely to promote further industrialization
Years, if not decades, of catch-up economics low per capita income, educated
workforce
Rapid financial deepening, i.e. loan growth as multiple of nominal GDP growth
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Threats:
"Running on empty" in terms of liquidity
Tightening in global liquidity may trickle down to India
Potentially hawkish RBI stance on inflation/monetary policy
Potential rise in long bond \ yields, MTM risk for banks
Potential for valuation pullback, should earnings delivery disappoint expectations
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STRUCTURE
Of
banking
35
36
Source: IBA
Source : IBA
In terms of asset size, among Foreign banks Citibank, HSBC and Standard Chartered bank are
leaders with asset base of Rs.45437 cr, Rs.37473 cr and Rs.48412 cr. Resp. in FY 05-06. Among
private sector banks, ICICI Bank is the leader with asset base of Rs.251389 cr followed by
HDFC Bank of size Rs.73506 cr and UTI Bank of size Rs.49731 cr. In terms of asset size,
public sector banks have highest base compared to private and foreign banks. SBI & Associated
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Credit Growth
The bank lending has expanded in a number of emerging market economies, especially in Asia
and Latin America, in recent years. Bank credit to the private sector, in real terms, was rising at a
rate between 10 and 40 per cent in a number of countries by 2005 (BIS, 2006). Several factors
have contributed to the significant rise in bank lending in emerging economies such as strong
growth, excess liquidity in banking systems reflecting easier global and domestic monetary
conditions, and substantial bank restructuring.
The recent surge in bank lending has been associated with important changes on the asset side of
banks balance sheet. First, credit to the business sector - historically the most important
component of banks assets has been weak, while the share of the household sector has
increased sharply in several countries. Second, banks investments in Government securities
increased sharply until 2004-05. As a result, commercial banks continue to hold a very large part
of their domestic assets in the form of Government securities - a process that seems to have
begun in the mid-1990s
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MICRO
FACTORS
MICRO FACTORS AFFECTING INDIAN
BANKING INDUSTRY
39
Source: RBI
The slowdown of the mid-1990s hit the banks very hard because corporate, which accounted for
a lions share of bank credit, went into a less profitable and hence a financial restructuring mode.
40
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Technology:
The trend in banking is changing from computerization of branches to laying a common platform
by having a core banking solution in all the branches. At the same time, Indian banks are looking
at internet banking which promises to grow into an alternate self-service channel. As the mindset
of the Indian customer undergoes a change, Indian banks need to encompass the extension of all
the services that are required and dictated by customers. In future, banks will need to focus on
value-differentiating services by keeping in-Houser their competitive advantages while
partnering with others who complement its services. The emergence of peer-to-peer money
transmission mechanisms (such as Western Union Money Transfer) poses a challenge to current
role of bankers and emphasizes the role of robust payment systems like RTGS in maintaining
and promoting financial stability.
Areas of Improvement:
Few challenges associated with technology adoption by banks are:
Indian banks still dont have the robust systems required for efficient functioning
of online banking. RBI has provided guidelines relating to security and other
issues and hopefully, online banking will see a surge in the usage from current 1%
to at least 10% in the next couple of years.
Banks need to explore newer channels such as SMS, WAP and 3G mobile
telephony applications to facilitate online access to customers.
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VALUATION
TOOLS
46
ICICI Bank:
Business
ICICI Bank was promoted in 1994 by ICICI Ltd., an Indian development financial institution.
The two entities subsequently merged to become the largest commercial bank in the private
sector. A new generation bank, ICICI Bank started with all the latest technologies to hit the
Indian banking industry in the second half of the nineties. All its branches are fully computerized
with the state-of-the-art technology and systems, networked through VSAT technology. The bank
is connected to the SWIFT International network. In 2005, it expanded its network to 562
branches and 1,910 ATMs. It continued to expand its electronic channels, namely internet
banking, mobile banking, call centers and ATMs, and migrate customer transaction volumes to
these channels. Over 70% of customer induced transactions take place through these electronic
channels. It has acquired a small Russian banking entity, Investitsionno-Kreditny Bank (IKB),
which will help boost its corporate business and deposit franchise overseas. The bank has also
built several strategic alliances with banks like Wells Fargo in USA, Lloyds TSB in UK and DBS
in Singapore.
ICICI has entered into strategic alliance with Prudential plc. of UK for its mutual find
business. The duo has been fairly aggressive through their companies, Prudential ICICI
Asset Management Company Limited and Prudential ICICI Trust Limited. The bank is
also keen to offer its services to the Indian agricultural sector. Over 2,000 Internet kiosks
and 70 agri-desks have been established in locations with large agricultural markets.
Developments
ICICI Bank launched `Mutual Fund Sweep Account` - an automatic sweeping facility
which allows current account holders to park their short-term surpluses into liquid mutual
funds and earn higher returns. Initially, ICICI Bank current account customers will have
47
The bank is in the process of the reverse merger of ICICI with ICICI Bank. The merger of
two wholly-owned subsidiaries of ICICI, ICICI Personal Financial Services Limited and
ICICI Capital Services Limited, with ICICI Bank is also underway.
ICRA has assigned an A1+ rating, indicating highest safety in the short-term, to the Rs
500 crore certificates of deposit (CD) programme of ICICI Bank Ltd (IBL). The rating
agency said in its report that the rating takes into consideration IBL`s strategic
importance to its parent ICICI, IBL`s comfortable profitability and capital adequacy,
good control on asset quality.
ICICI Bank has tied up with MasterCard International to launch ICICI Bank MasterCard
credit cards. At present ICICI Banks credit card base stands at around 5, 50,000, while
for debit cards it is 4,50,000. ICICI Bank is the largest card issuer in the market. The
bank is adding credit and debit cards at the rate of 1,00,000 per month. The bank had
launched the credit card business 2 years back, while the debit card business is relatively
new.
ICICI Bank is India's second-largest bank with total assets of Rs. 3,562.28 billion (US$ 77
billion) at December 31, 2009 and profit after tax Rs. 30.19 billion (US$ 648.8 million) for the
nine months ended December 31, 2009. The Bank has a network of 1,646 branches and about
4,883 ATMs in India and presence in 18 countries. ICICI Bank offers a wide range of banking
products and financial services to corporate and retail customers through a variety of delivery
channels and through its specialised subsidiaries and affiliates in the areas of investment
banking, life and non-life insurance, venture capital and asset management. The Bank currently
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HDFC Bank:
HDFC Bank Ltd was set up in 1994 by Indias leading housing finance company Housing
Development Finance Corporation (HDFC). The bank offers a wide range of services which can
be classified into three categories namely, treasury, wholesale banking and retail banking
services. The bank has a distribution network of 535 (in 228 cities) and 1,323 ATMs and a
customer base of 9.6 million as of March 2006.
Under wholesale banking, it provides working capital finance, trade services, transactional
services and cash management. Treasury function includes foreign exchange & derivatives,
money market securities and equities. Retail loan products are auto loans, personal loans and
loans for two-wheelers. It also provides depository participant services for retail customers. It
was the first Indian bank which launched an international debit card.
With products including the Kisan Gold Card, rural supply chain initiatives and commodity
finance covering the entire agriculture financing cycle, the banks agriculture lending increased
by over 60% during the year. The proportion of NPA`s to total advances increased to 0.4 per cent
from 0.3 per cent last year. This marginal increase is because of the changing mix of loans as
HDFC Bank has a high share of auto loans.
The banks focus on semi-urban and under banked markets continued with more than half of its
retail loans being given in non-metro markets. The banks total capital adequacy ratio (CAR) as
on March 31, 2006 stood at 11.41%
The authorized capital of HDFC Bank is Rs.450 crore (Rs.4.5 billion). The paid-up capital is
Rs.311.9 crore (Rs.3.1 billion). The HDFC Group holds 22.1% of the bank's equity and about
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Technology:
HDFC Bank operates in a highly automated environment in terms of information technology and
communication systems. All the bank's branches have online connectivity, which enables the
bank to offer speedy funds transfer facilities to its customers. Multi-branch access is also
provided to retail customers through the branch network and Automated Teller Machines
(ATMs).
The Bank has made substantial efforts and investments in acquiring the best technology available
internationally, to build the infrastructure for a world class bank. The Bank's business is
supported by scalable and robust systems which ensure that our clients always get the finest
services we offer.
The Bank has prioritised its engagement in technology and the internet as one of its key goals
and has already made significant progress in web-enabling its core businesses. In each of its
businesses, the Bank has succeeded in leveraging its market position, expertise and technology to
create a competitive advantage and build market share.
Business:
HDFC Bank offers a wide range of commercial and transactional banking services and treasury
products to wholesale and retail customers. The bank has three key business segments:
Wholesale Banking Services:
50
Based on its superior product delivery / service levels and strong customer orientation,
the Bank has made significant inroads into the banking consortia of a number of leading
Indian corporates including multinationals, companies from the domestic business houses
and prime public sector companies. It is recognised as a leading provider of cash
management and transactional banking solutions to corporate customers, mutual funds,
stock exchange members and banks.
Retail Banking Services:
The objective of the Retail Bank is to provide its target market customers a full range of
financial products and banking services, giving the customer a one-stop window for all
his/her banking requirements. The products are backed by world-class service and
delivered to customers through the growing branch network, as well as through
alternative delivery channels like ATMs, Phone Banking, NetBanking and Mobile
Banking.
The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank Plus
and the Investment Advisory Services programs have been designed keeping in mind
needs of customers who seek distinct financial solutions, information and advice on
various investment avenues. The Bank also has a wide array of retail loan products
including Auto Loans, Loans against marketable securities, Personal Loans and Loans for
Two-wheelers. It is also a leading provider of Depository Participant (DP) services for
51
Treasury
Within this business, the bank has three main product areas - Foreign Exchange and
Derivatives, Local Currency Money Market & Debt Securities, and Equities. With the
liberalisation of the financial markets in India, corporates need more sophisticated risk
management information, advice and product structures. These and fine pricing on
various treasury products are provided through the bank's Treasury team. To comply with
statutory reserve requirements, the bank is required to hold 25% of its deposits in
government securities. The Treasury business is responsible for managing the returns and
market risk on this investment portfolio.
Management:
Mr. Jagdish Capoor took over as the bank's Chairman in July 2001. Prior to this, Mr. Capoor was
a Deputy Governor of the Reserve Bank of India. The Managing Director, Mr. Aditya Puri, has
been a professional banker for over 25 years, and before joining HDFC Bank in 1994 was
heading Citibank's operations in Malaysia. The Bank's Board of Directors is composed of
eminent individuals with a wealth of experience in public policy, administration, industry and
commercial banking. Senior executives representing HDFC are also on the Board.
52
SBI :
State Bank of India (SBI) is the largest bank in India. It is also, measured by the number of
branch offices and employees, the largest bank in the world. Established in 1806 as Bank of
Bengal, it remains the oldest commercial bank in the Indian Subcontinent and also the most
successful one providing various domestic, international and NRI products and services, through
its vast network in India and overseas. With an asset base of $126 billion and its reach, it is a
regional banking behemoth. The bank was nationalized in 1955 with the Reserve Bank of India
having a 60% stake. It has laid emphasis on reducing the huge manpower through Golden
handshake schemes and computerizing its operations.
State Bank of India has often acted as guarantor to the Indian Government, most notably during
Chandra Shekhar's tenure as Prime Minister of India. With more than 9400 branches and a
further 4000+ associate bank branches, the SBI has extensive coverage. State Bank of India has
electronically networked most of its metropolitan, urban and semi-urban branches under Core
Banking System(CBS). The bank has the largest ATM network in the country having more than
5600 in number [1]. The State Bank of India has had steady growth over its history, though it
was marred by the Harshad Mehta scam in 1992.Following its arch-rival ICICI Bank, the bank
has started Core banking process by which more than 4400+ branched have been completed so
53
According to PM Network, State Bank of India launched a project in 2002 to network more than
14,000 domestic and 70 foreign offices and branches. The first and the second phases of the
project have already been completed and the third phase is still in progress. As of December
2006, over 10,000 branches have been covered.The new infrastructure serves as the bank's
backbone, carrying all applications, such as the IP telephone network, ATM network, Internet
banking and internal e-mail. The new infrastructure has enabled the bank to further grow its
ATM network with plans to add another 3,000 by the end of 2008 raising the total number to
8,600.
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55
MAJOR
FINDINGS
MAJOR FINDINGS
Major Macro Economic Factors include Gross Domestic Product which has grown by over
8% in 2005-06, FDI Confidence Index where India stands II in the world, Inflation which has
slow down due to falling crude prices, Gross Fiscal Deficit Interest Rate the UPA government
is confident to achieve the budgeted targets, Rising Oil prices & Exchange Rate Indian
government and oil companies are relax as oil prices have fallen beside Indian Rupee has
56
ICICI Bank is the leading market player with change in loans market share in FY02-06 of over
5% and change in deposits market share in FY 02-06 is nearby 2.5%. HDFC Bank and UTI Bank
are also in high growth phase. The laggards are SBI Bank, Bank of Baroda Bank, Bank of India
and Punjab National Bank.
57
58
conclusion
CONCLUSION
The project involves valuation of major Indian Banks including ICICI Bank, SBI and HDFC
Bank. The methodology followed is Target Pricing, which including estimating growth rate by
regression on historical sales to forecast next year sales, earning and Profit and Loss account.
59
60