A PROJECT REPORT

ON

“ANALYSIS OF PERFORMANCE OF PRIVATE SECTOR

BANKS ON CAMEL MODEL”

IN THE PARTIAL FULFILLMENT OF THE DEGREE OF

“MASTER OF BUSINESS AND ADMINISTRATION”

SESSION: 2009-2011

SUBMITTED TO

UP TECHNIVAL UNIVERSITY, LUCKNOW

SUBMITTED BY

KAPIL DEV

ROLL NO: - 0911470039

INSTITUTE OF PROFESSIONAL EXCELLANCE AND

MANAGEMENT GHAZIABAD

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 DECLARATION

I hereby declare that this project work entitled Analysis of Performance of Private
Sectors Banks on CAMELS MODEL is my work, carried out under the guidance of
my guide Dr. Nidhi Shrivastava. My report neither fully nor partially has ever been
submitted for award of any other degree to either this university or any other
university.

KAPIL DEV

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 ACKNOWLEDGMENT

Words are the dress of thoughts, appreciating and acknowledging those who are
responsible for the successful completion of the project.

My sincerity gratitude goes to Dr. Nidhi Shrivastava who assigned me responsibility

to work on this project and provided me all the help, guidance and encouragement to
complete this project.

The encouragement and guidance given by Dr. Nidhi Shrivastava have made this a
personally rewarding experience. I thank him for his support and inspiration, without
which, understanding the intricacies of the project would have been exponentially
difficult.

I am sincerely grateful to my parents and friends who provided me with the time and
financial assistance and inspiration needed to prepare this training report in congenial
manner.

WITH SINCERE THANKS

KAPIL DEV

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 PREFACE

The banking sector has been undergoing a complex, but comprehensive phase of
restructuring since 1991, with a view to make it sound, efficient, and at the same time
forging its links firmly with the real sector for promotion of savings, investment and
growth. Although a complete turnaround in banking sector performance is not
expected till the completion of reforms, signs of improvement are visible in some
indicators under the CAMEL framework. Under this bank is required to enhance
capital adequacy, strengthen asset quality, improve management, increase earnings
and reduce sensitivity to various financial risks. The almost simultaneous nature of
these developments makes it difficult to disentangle the positive impact of reform
measures. Keeping this in mind, signs of improvements and deteriorations are
discussed for the three groups of scheduled banks in the following sections.

CAMELS Framework

Supervisory framework, consistent with international norms, covers risk-monitoring

factors for evaluating the performance of banks. This framework involves the analyses
of six groups of indicators reflecting the health of financial institutions. The indicators
are as follows:

CAPITAL ADEQUACY

ASSET QUALITY

MANAGEMENT SOUNDNESS

EARNINGS & PROFITABILITY

LIQUIDITY

The whole banking scenario has changed in the very recent past on the
recommendations of Narasimham Committee. Further BASELL II Norms were
introduced to internationally standardize processes and make the banking industry
more adaptive to the sensitive market risks. The fact that banks work under the most
volatile conditions and the banking industry as such in the booming phase makes it an
interesting subject of study. Amongst these reforms and restructuring the CAMELS
Framework has its own contribution to the way modern banking is looked up on now.
The attempt here is to see how various ratios have been used and interpreted to

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reveal a banks performance and how this particular model encompasses a wide range
of parameters making it a widely used and accepted model in today’s scenario.

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 CONTEXT

CONTENTS PAGE NO.

DECLARATION 2

ACKNOWLEDGEMENT 3

PREFACE 4

CONTEXT 5

INTRODUCTION 7-28

LITERATURE SURVAY 29-54

OBJECT OF STUDY 55

SCOPE OF STUDY 56

RESEARCH METHODOLOGY 57-59

DATA ANALYSIS 60-68

FINDINGS 69-71

CONCLUSION 72

RECOMMENDATION 73

LIMITATIONS 74

BIBLOGRAPHY 75

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INTRODUCTION

Indian Banking Industry

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Banking in India originated in the first decade of 18th century with The General Bank
of India coming into existence in 1786. This was followed by Bank of Hindustan. Both
these banks are now defunct. The oldest bank in existence in India is the State Bank
of India being established as "The Bank of Bengal" in Calcutta in June 1806. A couple
of decades later, foreign banks like Credit Lyonnais started their Calcutta operations
in the 1850s. At that point of time, Calcutta was the most active trading port, mainly
due to the trade of the British Empire, and due to which banking activity took roots
there and prospered. The first fully Indian owned bank was the Allahabad Bank, which
was established in 1865.

By the 1900s, the market expanded with the establishment of banks such as Punjab
National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of
which were founded under private ownership. The Reserve Bank of India formally
took on the responsibility of regulating the Indian banking sector from 1935. After
India's independence in 1947, the Reserve Bank was nationalized and given broader
powers.

Nationalisation

By the 1960s, the Indian banking industry has become an important tool to facilitate
the development of the Indian economy. At the same time, it has emerged as a large
employer, and a debate has ensued about the possibility to nationalize the banking
industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the
GOI in the annual conference of the All India Congress Meeting in a paper entitled
"Stray thoughts on Bank Nationalisation." The paper was received with positive
enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an
ordinance and nationalised the 14 largest commercial banks with effect from the
midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described
the step as a "masterstroke of political sagacity." Within two weeks of the issue of the
ordinance, the Parliament passed the Banking Companies (Acquition and Transfer of
Undertaking) Bill, and it received the presidential approval on 9th August, 1969.

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A second dose of nationalisation of 6 more commercial banks followed in 1980. The
stated reason for the nationalisation was to give the government more control of credit
delivery. With the second dose of nationalisation, the GOI controlled around 91% of
the banking business of India.

After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer
to the average growth rate of the Indian economy.

Liberalisation

In the early 1990s the then Narasimha Rao government embarked on a policy of
liberalisation and gave licences to a small number of private banks, which came to be
known as New Generation tech-savvy banks, which included banks such as UTI
Bank(now re-named as Axis Bank) (the first of such new generation banks to be set
up), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the
economy of India, kickstarted the banking sector in India, which has seen rapid growth
with strong contribution from all the three sectors of banks, namely banks, private
banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in
the norms for Foreign Direct Investment, where all Foreign Investors in banks may be
given voting rights which could exceed the present cap of 10%,at present it has gone
up to 49% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time,
were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of

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functioning. The new wave ushered in a modern outlook and tech-savvy methods of
working for traditional banks.All this led to the retail boom in India. People not just
demanded more from their banks but also received.

Current Situation

Currently (2007), banking in India is generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the
private sector and foreign banks. In terms of quality of assets and capital adequacy,
Indian banks are considered to have clean, strong and transparent balance sheets
relative to other banks in comparable economies in its region. The Reserve Bank of
India is an autonomous body, with minimal pressure from the government. The stated
policy of the Bank on the Indian Rupee is to manage volatility but without any fixed
exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-
especially in its services sector-the demand for banking services, especially retail
banking, mortgages and investment services are expected to be strong. One may also
expect M&As, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its
stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an
investor has been allowed to hold more than 5% in a private sector bank since the
RBI announced norms in 2005 that any stake exceeding 5% in the private sector
banks would need to be vetted by them.

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Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks
(that is with the Government of India holding a stake), 29 private banks (these do not
have government stake; they may be publicly listed and traded on stock exchanges)
and 31 foreign banks. They have a combined network of over 53,000 branches and
17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public
sector banks hold over 75 percent of total assets of the banking industry, with the
private and foreign banks holding 18.2% and 6.5% respectively.

Private sector banks

A new wave in the banking industry came about with the private sector banks in India.
With policies on liberalization being generously taken up, these private banks were
established in the country that also contributed heavily towards the growth of the
economy and also offering numerous services to its customers. Some of the most
popular banks in this genre are: Axis Bank, Bank of Rajasthan, Catholic Syrian Bank,
Federal Bank, HDFC Bank, ICICI Bank, ING Vysya Bank, Kotak Mahindra Bank and
SBI Commercial and International Bank. The Foreign Banks in India like HSBC,
Citibank, and Standard Chartered bank etc can also be clubbed here.

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 Private Sector Banks in India

• Bank of Punjab

• Bank of Rajasthan

• Catholic Syrian Bank

• Centurion Bank

• City Union Bank

• Dhanalakshmi Bank

• Development Credit Bank

• Federal Bank

• HDFC Bank

• ICICI Bank

• IndusInd Bank

• ING Vysya Bank

• Jammu & Kashmir Bank

• Karnataka Bank

• Karur Vysya Bank

• Laxmi Vilas Bank

• South Indian Bank

• United Western Bank

• UTI Bank

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 PERFORMANCE ANALYSIS OF BANKS

Banks and other financial institutions are a unique set of business firms whose assets
and liabilities, regulatory restrictions, economic functions and operating make them an
important subject of research, particularly in the conditions of the emerging financial
sectors in the EU accession countries from Central and Eastern Europe (CEE).
Banks' performance monitoring, analysis and control needs special analysis in respect
to their operation and performance results from the viewpoint of different audiences,
like investors/owners, regulators, customers/clients, and management themselves.
Some historical notes on the development of the Estonian banking system and the
capital structure of banks are presented in this article. Different versions of financial
ratio analysis are used for the bank performance analysis using financial statement
items as initial data sources. The usage of a modified version of DuPont financial ratio
analysis and a novel matrix approach is discussed in the article. Empirical results of
the Estonian commercial banking system performance analysis are also presented in
the article (1994-2002).

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 CAMEL FRAMEWORK

CAPITAL
ADEQUECY

ASSETS
LIQUIDITY
QUALITY
CAMEL
MODEL

MANAGEM
EARNINGS ENT
SOUNDNESS

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 CAMEL FRAMEWORK

During an on-site bank exam, supervisors gather private information, such as details
on problem loans, with which to evaluate a bank's financial condition and to monitor
its compliance with laws and regulatory policies. A key product of such an exam is a
supervisory rating of the bank's overall condition, commonly referred to as a CAMELS
rating. This rating system is used by the three federal banking supervisors (the
Federal Reserve, the FDIC, and the OCC) and other financial supervisory agencies to
provide a convenient summary of bank conditions at the time of an exam.

The acronym "CAMEL" refers to the five components of a bank's condition that are
assessed: Capital adequacy, Asset quality, Management, Earnings, and Liquidity. A
sixth component, a bank's Sensitivity to market risk , was added in 1997; hence the
acronym was changed to CAMELS. (Note that the bulk of the academic literature is
based on pre-1997 data and is thus based on CAMEL ratings.) Ratings are assigned
for each component in addition to the overall rating of a bank's financial condition. The
ratings are assigned on a scale from 1 to 5. Banks with ratings of 1 or 2 are
considered to present few, if any, supervisory concerns, while banks with ratings of 3,
4, or 5 present moderate to extreme degrees of supervisory concern.

In 1994, the RBI established the Board of Financial Supervision (BFS), which
operates as a unit of the RBI. The entire supervisory mechanism was realigned to suit
the changing needs of a strong and stable financial system. The supervisory
jurisdiction of the BFS was slowly extended to the entire financial system barring the
capital market institutions and the insurance sector. Its mandate is to strengthen
supervision of the financial system by integrating oversight of the activities of financial
services firms. The BFS has also established a sub-committee to routinely examine
auditing practices, quality, and coverage.

In addition to the normal on-site inspections, Reserve Bank of India also conducts off-
site surveillance which particularly focuses on the risk profile of the supervised entity.
The Off-site Monitoring and Surveillance System (OSMOS) was introduced in 1995 as
an additional tool for supervision of commercial banks. It was introduced with the aim

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to supplement the on-site inspections. Under off-site system, 12 returns (called DSB
returns) are called from the financial institutions, wich focus on supervisory concerns
such as capital adequacy, asset quality, large credits and concentrations, connected
lending, earnings and risk exposures (viz. currency, liquidity and interest rate risks).

In 1995, RBI had set up a working group under the chairmanship of Shri S.
Padmanabhan to review the banking supervision system. The Committee certain
recommendations and based on such suggetions a rating system for domestic and
foreign banks based on the international CAMELS model combining financial
management and systems and control elements was introduced for the inspection
cycle commencing from July 1998. It recommended that the banks should be rated on
a five point scale (A to E) based on the lines of international CAMELS rating model.

All exam materials are highly confidential, including the CAMELS. A bank's CAMELS
rating is directly known only by the bank's senior management and the appropriate
supervisory staff. CAMELS ratings are never released by supervisory agencies, even
on a lagged basis. While exam results are confidential, the public may infer such
supervisory information on bank conditions based on subsequent bank actions or
specific disclosures. Overall, the private supervisory information gathered during a
bank exam is not disclosed to the public by supervisors, although studies show that it
does filter into the financial markets.

CAMELS ratings in the supervisory monitoring of banks

Several academic studies have examined whether and to what extent private
supervisory information is useful in the supervisory monitoring of banks. With respect
to predicting bank failure, Barker and Holdsworth (1993) find evidence that CAMEL
ratings are useful, even after controlling for a wide range of publicly available
information about the condition and performance of banks. Cole and Gunther (1998)
examine a similar question and find that although CAMEL ratings contain useful
information, it decays quickly. For the period between 1988 and 1992, they find that a
statistical model using publicly available financial data is a better indicator of bank
failure than CAMEL ratings that are more than two quarters old.

Hirtle and Lopez (1999) examine the usefulness of past CAMEL ratings in assessing
banks' current conditions. They find that, conditional on current public information, the

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private supervisory information contained in past CAMEL ratings provides further
insight into bank current conditions, as summarized by current CAMEL ratings. The
authors find that, over the period from 1989 to 1995, the private supervisory
information gathered during the last on-site exam remains useful with respect to the
current condition of a bank for up to 6 to 12 quarters (or 1.5 to 3 years). The overall
conclusion drawn from academic studies is that private supervisory information, as
summarized by CAMELS ratings, is clearly useful in the supervisory monitoring of
bank conditions.

CAMELS ratings in the public monitoring of banks

Another approach to examining the value of private supervisory information is to

examine its impact on the market prices of bank securities. Market prices are
generally assumed to incorporate all available public information. Thus, if private
supervisory information were found to affect market prices, it must also be of value to
the public monitoring of banks.

Such private information could be especially useful to financial market participants,

given the informational asymmetries in the commercial banking industry. Since banks
fund projects not readily financed in public capital markets, outside monitors should
find it difficult to completely assess banks' financial conditions. In fact, Morgan (1998)
finds that rating agencies disagree more about banks than about other types of firms.
As a result, supervisors with direct access to private bank information could generate
additional information useful to the financial markets, at least by certifying that a
bank's financial condition is accurately reported.

The direct public beneficiaries of private supervisory information, such as that

contained in CAMELS ratings, would be depositors and holders of banks' securities.
Small depositors are protected from possible bank default by FDIC insurance, which
probably explains the finding by Gilbert and Vaughn (1998) that the public
announcement of supervisory enforcement actions, such as prohibitions on paying
dividends, did not cause deposit runoffs or dramatic increases in the rates paid on
deposits at the affected banks. However, uninsured depositors could be expected to
respond more strongly to such information. Jordan, et al., (1999) find that uninsured
deposits at banks that are subjects of publicly-announced enforcement actions, such
as cease-and-desist orders, decline during the quarter after the announcement.

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The holders of commercial bank debt, especially subordinated debt, should have the
most in common with supervisors, since both are more concerned with banks' default
probabilities (i.e., downside risk). As of year-end 1998, bank holding companies
(BHCs) had roughly $120 billion in outstanding subordinated debt. DeYoung, et al.,
(1998) examine whether private supervisory information would be useful in pricing the
subordinated debt of large BHCs. The authors use an econometric technique that
estimates the private information component of the CAMEL ratings for the BHCs' lead
banks and regresses it onto subordinated bond prices. They conclude that this aspect
of CAMEL ratings adds significant explanatory power to the regression after
controlling for publicly available financial information and that it appears to be
incorporated into bond prices about six months after an exam. Furthermore, they find
that supervisors are more likely to uncover unfavorable private information, which is
consistent with managers' incentives to publicize positive information while de-
emphasizing negative information. These results indicate that supervisors can
generate useful information about banks, even if those banks already are monitored
by private investors and rating agencies.

The market for bank equity, which is about eight times larger than that for bank
subordinated debt, was valued at more than $910 billion at year-end 1998. Thus, the
academic literature on the extent to which private supervisory information affects
stock prices is more extensive. For example, Jordan, et al., (1999) find that the stock
market views the announcement of formal enforcement actions as informative. That
is, such announcements are associated with large negative stock returns for the
affected banks. This result holds especially for banks that had not previously
manifested serious problems.

Focusing specifically on CAMEL ratings, Berger and Davies (1998) use event study
methodology to examine the behavior of BHC stock prices in the eight-week period
following an exam of its lead bank. They conclude that CAMEL downgrades reveal
unfavorable private information about bank conditions to the stock market. This
information may reach the public in several ways, such as through bank financial
statements made after a downgrade. These results suggest that bank management
may reveal favorable private information in advance, while supervisors in effect force
the release of unfavorable information.

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Berger, Davies, and Flannery (1998) extend this analysis by examining whether the
information about BHC conditions gathered by supervisors is different from that used
by the financial markets. They find that assessments by supervisors and rating
agencies are complementary but different from those by the stock market. The
authors attribute this difference to the fact that supervisors and rating agencies, as
representatives of debtholders, are more interested in default probabilities than the
stock market, which focuses on future revenues and profitability. This rationale also
could explain the authors' finding that supervisory assessments are much less
accurate than market assessments of banks' future performances.

In summary, on-site bank exams seem to generate additional useful information

beyond what is publicly available. However, according to Flannery (1998), the limited
available evidence does not support the view that supervisory assessments of bank
conditions are uniformly better and more timely than market assessments.

Capital Adequacy

Capital base of financial institutions facilitates depositors in forming their risk

perception about the institutions. Also, it is the key parameter for financial managers
to maintain adequate levels of capitalization. Moreover, besides absorbing
unanticipated shocks, it signals that the institution will continue to honor its
obligations. The most widely used indicator of capital adequacy is capital to risk-
weighted assets ratio (CRWA). According to Bank Supervision Regulation Committee
(The Basle Committee) of Bank for International Settlements, a minimum 8 percent
CRWA is required.

Capital adequacy ultimately determines how well financial institutions can cope with
shocks to their balance sheets. Thus, it is useful to track capital-adequacy ratios that
take into account the most important financial risks—foreign exchange, credit, and
interest rate risks—by assigning risk weightings to the institution’s assets.

A Capital Adquecy Ratio is a measure of a bank's capital. It is expressed as a

percentage of a bank's risk weighted credit exposures.

Also known as ""Capital to Risk Weighted Assets Ratio (CRAR).

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Capital adequacy is measured by the ratio of capital to risk-weighted assets (CRAR).
A sound capital base strengthens confidence of depositors.

This ratio is used to protect depositors and promote the stability and efficiency of
financial systems around the world.

Asset Quality:

Asset quality determines the robustness of financial institutions against loss of value
in the assets. The deteriorating value of assets, being prime source of banking
problems, directly pour into other areas, as losses are eventually written-off against
capital, which ultimately jeopardizes the earning capacity of the institution. With this
backdrop, the asset quality is gauged in relation to the level and severity of non-
performing assets, adequacy of provisions, recoveries, distribution of assets etc.
Popular indicators include non-performing loans to advances, loan default to total
advances, and recoveries to loan default ratios.

The solvency of financial institutions typically is at risk when their assets become
impaired, so it is important to monitor indicators of the quality of their assets in terms
of overexposure to specific risks, trends in nonperforming loans, and the health and
profitability of bank borrowers— especially the corporate sector. Share of bank assets
in the aggregate financial sector assets: In most emerging markets, banking sector
assets comprise well over 80 per cent of total financial sector assets, whereas these
figures are much lower in the developed economies. Furthermore, deposits as a share
of total bank liabilities have declined since 1990 in many developed countries, while in
developing countries public deposits continue to be dominant in banks. In India, the
share of banking assets in total financial sector assets is around 75 per cent, as of
end-March 2008. There is, no doubt, merit in recognising the importance of
diversification in the institutional and instrument-specific aspects of financial
intermediation in the interests of wider choice, competition and stability. However, the
dominant role of banks in financial intermediation in emerging economies and
particularly in India will continue in the medium-term; and the banks will continue to be
“special” for a long time. In this regard, it is useful to emphasise the dominance of
banks in the developing countries in promoting non-bank financial intermediaries and
services including in development of debt-markets. Even where role of banks is
apparently diminishing in emerging markets, substantively, they continue to play a

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leading role in non-banking financing activities, including the development of financial
markets.

One of the indicators for asset quality is the ratio of non-performing loans to total
loans (GNPA). The gross non-performing loans to gross advances ratio is more
indicative of the quality of credit decisions made by bankers. Higher GNPA is
indicative of poor credit decision-making.

NPA: Non-Performing Assets

Advances are classified into performing and non-performing advances (NPAs) as per
RBI guidelines. NPAs are further classified into sub-standard, doubtful and loss assets
based on the criteria stipulated by RBI. An asset, including a leased asset, becomes
non-performing when it ceases to generate income for the Bank.

An NPA is a loan or an advance where:

Interest and/or instalment of principal remains overdue for a period of more than 90

days in respect of a term loan;

The account remains "out-of-order'' in respect of an Overdraft or Cash Credit

(OD/CC);

The bill remains overdue for a period of more than 90 days in case of bills purchased

and discounted;

A loan granted for short duration crops will be treated as an NPA if the installments of

principal or interest thereon remain overdue for two crop seasons; and

A loan granted for long duration crops will be treated as an NPA if the installments of

principal or interest thereon remain overdue for one crop season.

The Bank classifies an account as an NPA only if the interest imposed during any
quarter is not fully repaid within 90 days from the end of the relevant quarter.

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This is a key to the stability of the banking sector. There should be no hesitation in
stating that Indian banks have done a remarkable job in containment of non-
performing loans (NPL) considering the overhang issues and overall difficult
environment. For 2008, the net NPL ratio for the Indian scheduled commercial banks
at 2.9 per cent is ample testimony to the impressive efforts being made by our
banking system. In fact, recovery management is also linked to the banks’ interest
margins. The cost and recovery management supported by enabling legal framework
hold the key to future health and competitiveness of the Indian banks. No doubt,
improving recovery-management in India is an area requiring expeditious and
effective actions in legal, institutional and judicial processes.

Management Soundness

Management of financial institution is generally evaluated in terms of capital

adequacy, asset quality, earnings and profitability, liquidity and risk sensitivity ratings.
In addition, performance evaluation includes compliance with set norms, ability to plan
and react to changing circumstances, technical competence, leadership and
administrative ability. In effect, management rating is just an amalgam of performance
in the above-mentioned areas.

Sound management is one of the most important factors behind financial institutions’
performance. Indicators of quality of management, however, are primarily applicable
to individual institutions, and cannot be easily aggregated across the sector.
Furthermore, given the qualitative nature of management, it is difficult to judge its
soundness just by looking at financial accounts of the banks.

Nevertheless, total expenditure to total income and operating expense to total

expense helps in gauging the management quality of the banking institutions. Sound

22
management is key to bank performance but is difficult to measure. It is primarily a
qualitative factor applicable to individual institutions. Several indicators, however, can
jointly serve—as, for instance, efficiency measures do—as an indicator of
management soundness.

The ratio of non-interest expenditures to total assets (MGNT) can be one of the
measures to assess the working of the management. . This variable, which includes a
variety of expenses, such as payroll, workers compensation and training investment,
reflects the management policy stance.

Efficiency Ratios demonstrate how efficiently the company uses its assets and how
efficiently the company manages its operations.

Revenue
=
Asset Turnover Ratio
Total Assets .

Earnings & Profitability

Earnings and profitability, the prime source of increase in capital base, is examined
with regards to interest rate policies and adequacy of provisioning. In addition, it also
helps to support present and future operations of the institutions. The single best

23
indicator used to gauge earning is the Return on Assets (ROA), which is net income
after taxes to total asset ratio.

Strong earnings and profitability profile of banks reflects the ability to support present
and future operations. More specifically, this determines the capacity to absorb
losses, finance its expansion, pay dividends to its shareholders, and build up an
adequate level of capital. Being front line of defense against erosion of capital base
from losses, the need for high earnings and profitability can hardly be
overemphasized. Although different indicators are used to serve the purpose, the best
and most widely used indicator is Return on Assets (ROA). However, for in-depth
analysis, another indicator Net Interest Margins (NIM) is also used. Chronically
unprofitable financial institutions risk insolvency. Compared with most other indicators,
trends in profitability can be more difficult to interpret—for instance, unusually high
profitability can reflect excessive risk taking.

ROA-Return On Assets

An indicator of how profitable a company is relative to its total assets. ROA gives an
idea as to how efficient management is at using its assets to generate
earnings. Calculated by dividing a company's annual earnings by its total assets, ROA
is displayed as a percentage. Sometimes this is referred to as "return on investment".

The formula for return on assets is:

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ROA tells what earnings were generated from invested capital (assets). ROA for
public companies can vary substantially and will be highly dependent on the industry.
This is why when using ROA as a comparative measure, it is best to compare it
against a company's previous ROA numbers or the ROA of a similar company.

The assets of the company are comprised of both debt and equity. Both of these
types of financing are used to fund the operations of the company. The ROA figure
gives investors an idea of how effectively the company is converting the money it
has to invest into net income. The higher the ROA number, the better, because the
company is earning more money on less investment. For example, if one company
has a net income of $1 million and total assets of $5 million, its ROA is 20%; however,
if another company earns the same amount but has total assets of $10 million, it
has an ROA of 10%. Based on this example, the first company is better at converting
its investment into profit. When you really think about it, management's most
important job is to make wise choices in allocating its resources. Anybody can make a
profit by throwing a ton of money at a problem, but very few managers excel at
making large profits with little investment

Liquidity

An adequate liquidity position refers to a situation, where institution can obtain

sufficient funds, either by increasing liabilities or by converting its assets quickly at a
reasonable cost. It is, therefore, generally assessed in terms of overall assets and
liability management, as mismatching gives rise to liquidity risk. Efficient fund
management refers to a situation where a spread between rate sensitive assets
(RSA) and rate sensitive liabilities (RSL) is maintained. The most commonly used tool
to evaluate interest rate exposure is the Gap between RSA and RSL, while liquidity is
gauged by liquid to total asset ratio.

Initially solvent financial institutions may be driven toward closure by poor

management of short-term liquidity. Indicators should cover funding sources and
capture large maturity mismatches.

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The term liquidity is used in various ways, all relating to availability of, access to, or
convertibility into cash.

An institution is said to have liquidity if it can easily meet its needs for cash either
because it has cash on hand or can otherwise raise or borrow cash.

A market is said to be liquid if the instruments it trades can easily be bought or sold in
quantity with little impact on market prices.

An asset is said to be liquid if the market for that asset is liquid.

The common theme in all three contexts is cash. A corporation is liquid if it has ready
access to cash. A market is liquid if participants can easily convert positions into cash
—or conversely. An asset is liquid if it can easily be converted to cash.

The liquidity of an institution depends on:

the institution's short-term need for cash;

cash on hand;

available lines of credit;

the liquidity of the institution's assets;

The institution's reputation in the marketplace—how willing will counterparty is to

transact trades with or lend to the institution?

The liquidity of a market is often measured as the size of its bid-ask spread, but this is
an imperfect metric at best. More generally, Kyle (1985) identifies three components
of market liquidity:

Tightness is the bid-ask spread;

Depth is the volume of transactions necessary to move prices;

Resiliency is the speed with which prices return to equilibrium following a large trade.

26
Examples of assets that tend to be liquid include foreign exchange; stocks traded in
the Stock Exchange or recently issued Treasury bonds. Assets that are often illiquid
include limited partnerships, thinly traded bonds or real estate.

Cash maintained by the banks and balances with central bank, to total asset ratio
(LQD) is an indicator of bank's liquidity. In general, banks with a larger volume of
liquid assets are perceived safe, since these assets would allow banks to meet
unexpected withdrawals.

Credit deposit ratio is a tool used to study the liquidity position of the bank. It is
calculated by dividing the cash held in different forms by total deposit. A high ratio
shows that there is more amounts of liquid cash with the bank to met its clients cash
withdrawals.

27
 PERFORMANCE RATING STANDARDS

Each of the above six parameters are weighted on a scale of 1 to 100 and contains
number of sub-parameters with individual weightings.

Rating
Rating symbol indicates
Symbol

A Bank is sound in every respect

B Bank is fundamentally sound but with moderate weaknesses

financial, operational or compliance weaknesses that give cause for

C
supervisory concern.

serious or immoderate finance, operational and managerial weaknesses

D
that could impair future viability

critical financial weaknesses and there is high possibility of failure in the

E
near future.

28
LITRATURE SURVAY ABOUT SYUDY

29
 Department of Banking Supervision

The Banking Regulation Act, 1949 empowers the Reserve Bank of India to inspect
and supervise commercial banks. These powers are exercised through on-site
inspection and off site surveillance. Till 1993, regulatory as well as supervisory
functions over commercial banks were performed by the Department of Banking
Operations and Development (DBOD). Subsequently, a new Department of Banking
Supervision (DBS) was set up to take over the supervisory functions relating to the
commercial banks from DBOD. For dedicated and integrated supervision over all
credit institutions, i.e., banks, development financial institutions and non-banking
financial companies, the Board for Financial Supervision (BFS) was set up in
November 1994 under the aegis of the Reserve Bank of India. For focussed attention
in the area of supervision over non-banking finance companies, Department of
Supervision was further bifurcated in August 1997 into Department of Banking
Supervision (DBS) and Department of Non-Banking Supervision (DNBS). These
Departments now look after supervision over commercial banks & development
financial institutions and non-banking financial companies, respectively. Both these
departments now function under the direction of the Board for Financial Supervision
(BFS).

30
 The Board for Financial Supervision constituted an audit
sub-committee in January 1995 with the Vice-Chairman of the Board as its Chairman
and two non-official members of BFS as members. The sub-committees main focus is
upgradation of the quality of the statutory audit and concurrent / internal audit
functions in banks and development financial institutions.

On site Inspection

On site inspection of banks is carried out on an annual basis. Besides the head
office and controlling offices, certain specified branches are covered under inspection
so as to ensure a minimum coverage of advances.

The Annual Financial Inspection (AFI) focusses on statutorily mandated areas of

solvency, liquidity and operational health of the bank. It is based on internationally
adopted CAMEL model modified as CAMELS, i.e., capital adequacy, asset quality,
management, earning, liquidity and system and control. While the compliance to the
inspection findings is followed up in the usual course, the top management of the
Reserve Bank addresses supervisory letters to the top management of the banks
highlighting the major areas of supervisory concern that need immediate rectification,
holds supervisory discussions and draws up an action plan, that can be monitored. All
these are followed up vigorously. Indian commercial banks are rated as per
supervisory rating model approved by the BFS which is based on CAMELS concept.

Off-site Monitoring

As part of the new supervisory strategy, a focussed off-site surveillance function was
initiated in 1995 for domestic operations of banks. The primary objective of the off site
surveillance is to monitor the financial health of banks between two on-site
inspections, identifying banks which show financial deterioration and would be a
source for supervisory concerns. This acts as a trigger for timely remedial action.

31
During December 1995 first tranche of off-site returns was introduced with five
quarterly returns for all commercial banks operating in India and two half yearly
returns one each on connected and related lending and profile of ownership, control
and management for domestic banks. The second tranche of four quarterly returns for
monitoring asset-liability management covering liquidity and interest rate risk for
domestic currency and foreign currencies were introduced since June, 1999. The
Reserve Bank intends to reduce this periodicity with effect from April 1,2000.

Corporate Governance

With a view to strengthening the corporate governance and internal control function in
the banks, several steps have been initiated. Introduction of concurrent audit system,
constitution of independent audit committee of board, appointment of RBI nominees

on boards of banks, creation of a post of compliance officer, such are some steps.
Besides,the Reserve Bank monitors the implementation of recommendations of Jilani

Committee relating to internal control systems in banks on an on-going basis during

the annual financial inspection of banks.

Initiatives and Directions

The Reserve Bank has taken several other supervisory policy initiatives. These
include quarterly monitoring visits to banks displaying financial and systemic
weaknesses, appointment of monitoring officers and direct monitoring of certain
problem areas in house-keeping, etc. In addition the department provides secretarial
support to the Board for Financial Supervision and acts as its executive arm. It is the
BFS which evolves policies relating to supervision. It also attends to appointment of
statutory central auditors / branch auditors for all banks and selected all India financial
institutions and to complaints against banks. The department monitors cases of frauds
perpetrated in banks and reported to it. The department as a one time measure,
issued several guidelines to banks and all india financial institutions to enable them to
become Y2K compliant.

Core Principles

32
Against the backdrop of banking sector reforms in India and the global focus on
internal control and supervisory mechanism, the need for building a strong and
efficient banking system comparable to the international standards cannot be
gainsaid. A detailed study was carried out so as to ascertain gaps, if any, in
implementing the 25 core principles of effective banking supervision enunciated by the
Bank for International Settlements (BIS). Necessary steps have already been initiated
to fill in the gaps, so as to make the regulatory as well supervisory system more sound
and comparable to international standards.

Supervision over FIs

On the basis of the recommendations made by an in-house group, the monitoring of

the financial institutions first started after 1990. This was done through prescribed
quarterly returns on liabilities / assets, source and deployment of funds, etc. The
objective of this monitoring was to obtain a macro level perspective for evolving
monetary and credit policy, to assess the quality of assets of the financial system and
to improve co-ordination between banks and FIs. In 1994, these institutions were
brought under the prudential regulation of the Reserve Bank.

The Reserve Bank has adopted more or less, the CAMELS approach for regulation of
Fis. Since FIs are vested with developmental role as welland with responsibility of
supervision of other institutions, evaluation of their developmental, co-ordinating and
supervisory role is also undertaken.

The newly created division in the department at present supervises and regulates ten
select all-India financial institutions viz., IDBI, ICICI, IFCI, IIBI, Exim Bank, NABARD,
NHB, SIDBI, IDFC and TFCI. With a view to having a continuous monitoring and
supervision of these FIs, an off-site surveillance system has also been put in place.

Further, the division collects from LIC, GIC and UTI information relating to assets and
liabilities and flow of funds for the purpose of overall assessment of the impact of the
operations of FIs on the total flow of resources in the economy and for compiling new
liquidity and monetary aggregates

33
 THE BANKING REFORMS

In 1991, the Indian economy went through a process of economic liberalization, which
was followed up by the initiation of fundamental reforms in the banking sector in 1992.
The banking reform package was based on the recommendations proposed by the
Narsimhan Committee Report (1991) that advocated a move to a more market
oriented banking system, which would operate in an environment of prudential
regulation and transparent accounting. One of the primary motives behind this drive
was to introduce an element of market discipline into the regulatory process that
would reinforce the supervisory effort of the Reserve Bank of India (RBI). Market
discipline, especially in the financial liberalization phase, reinforces regulatory and
supervisory efforts and provides a strong incentive to banks to conduct their business
in a prudent and efficient manner and to maintain adequate capital as a cushion
against risk exposures. Recognizing that the success of economic reforms was
contingent on the success of financial sector reform as well, the government initiated
a fundamental banking sector reform package in 1992.

Banking sector, the world over, is known for the adoption of multidimensional
strategies from time to time with varying degrees of success. Banks are very
important for the smooth functioning of financial markets as they serve as repositories
of vital financial information and can potentially alleviate the problems created by
information asymmetries. From a central bank’s perspective, such high-quality
disclosures help the early detection of problems faced by banks in the market and
reduce the severity of market disruptions. Consequently, the RBI as part and parcel of

34
the financial sector deregulation, attempted to enhance the transparency of the annual
reports of Indian banks by, among other things, introducing stricter income recognition
and asset classification rules, enhancing the capital adequacy norms, and by requiring
a number of additional disclosures sought by investors to make better cash flow and
risk assessments.

During the pre economic reforms period, commercial banks & development financial
institutions were functioning distinctly, the former specializing in short & medium term
financing, while the latter on long term lending & project financing.

Commercial banks were accessing short term low cost funds thru savings investments
like current accounts, savings bank accounts & short duration fixed deposits, besides
collection float. Development Financial Institutions (DFIs) on the other hand, were
essentially depending on budget allocations for long term lending at a concessionary
rate of interest.

The scenario has changed radically during the post reforms period, with the resolve of
the government not to fund the DFIs through budget allocations. DFIs like IDBI, IFCI &
ICICI had posted dismal financial results. Infact, their very viability has become a
question mark. Now they have taken the route of reverse merger with IDBI bank &
ICICI bank thus converting them into the universal banking system.

Major Recommendations by the Narasimham Committee on Banking Sector

Reforms

• Strengthening Banking System

• Capital adequacy requirements should take into account market risks in

addition to the credit risks.

35
 • In the next three years the entire portfolio of government securities should be
marked to market and the schedule for the same announced at the earliest
(since announced in the monetary and credit policy for the first half of 1998-99);
government and other approved securities which are now subject to a zero risk
weight, should have a 5 per cent weight for market risk.

• Risk weight on a government guaranteed advance should be the same as for

other advances. This should be made prospective from the time the new
prescription is put in place.

• Foreign exchange open credit limit risks should be integrated into the
calculation of risk weighted assets and should carry a 100 per cent risk weight.

• Minimum capital to risk assets ratio (CRAR) be increased from the existing 8
per cent to 10 per cent; an intermediate minimum target of 9 per cent be
achieved by 2000 and the ratio of 10 per cent by 2002; RBI to be empowered
to raise this further for individual banks if the risk profile warrants such an
increase. Individual banks' shortfalls in the CRAR are treated on the same line
as adopted for reserve requirements, viz. uniformity across weak and strong
banks. There should be penal provisions for banks that do not maintain CRAR.

• Public Sector Banks in a position to access the capital market at home or

abroad be encouraged, as subscription to bank capital funds cannot be
regarded as a priority claim on budgetary resources.

• Asset Quality

An asset is classified as doubtful if it is in the substandard category for 18 months in

the first instance and eventually for 12 months and loss if it has been identified but not
written off. These norms should be regarded as the minimum and brought into force in
a phased manner.

For evaluating the quality of assets portfolio, advances covered by Government

guarantees, which have turned sticky, be treated as NPAs. Exclusion of such

36
advances should be separately shown to facilitate fuller disclosure and greater
transparency of operations.

For banks with a high NPA portfolio, two alternative approaches could be adopted.
One approach can be that, all loan assets in the doubtful and loss categories should
be identified and their realisable value determined. These assets could be transferred
to an Assets Reconstruction Company (ARC) which would issue NPA Swap Bonds.

An alternative approach could be to enable the banks in difficulty to issue bonds which
could from part of Tier II capital, backed by government guarantee to make these
instruments eligible for SLR investment by banks and approved instruments by LIC,
GIC and Provident Funds.

The interest subsidy element in credit for the priority sector should be totally
eliminated and interest rate on loans under Rs. 2 lakhs should be deregulated for
scheduled commercial banks as has been done in the case of Regional Rural Banks
and cooperative credit institutions.

• Prudential Norms and Disclosure Requirements

In India, income stops accruing when interest or installment of principal is not paid
within 180 days, which should be reduced to 90 days in a phased manner by 2002.

Introduction of a general provision of 1 per cent on standard assets in a phased

manner be considered by RBI.

As an incentive to make specific provisions, they may be made tax deductible.

• Systems and Methods in Banks

There should be an independent loan review mechanism especially for large borrowal
accounts and systems to identify potential NPAs. Banks may evolve a filtering
mechanism by stipulating in-house prudential limits beyond which exposures on

37
single/group borrowers are taken keeping in view their risk profile as revealed through
credit rating and other relevant factors.

Banks and FIs should have a system of recruiting skilled manpower from the open
market.

Public sector banks should be given flexibility to determined managerial remuneration

levels taking into account market trends.

There may be need to redefine the scope of external vigilance and investigation
agencies with regard to banking business.

There is need to develop information and control system in several areas like better
tracking of spreads, costs and NPSs for higher profitability, , accurate and timely
information for strategic decision to Identify and promote profitable products and
customers, risk and asset-liability management; and efficient treasury management.

• Structural Issues

With the conversion of activities between banks and DFIs, the DFIs should, over a
period of time convert them to bank. A DFI which converts to bank be given time to
face in reserve equipment in respect of its liability to bring it on par with requirement
relating to commercial bank.

Mergers of Public Sector Banks should emanate from the management of the banks
with the Government as the common shareholder playing a supportive role. Merger
should not be seen as a means of bailing out weak banks. Mergers between strong
banks/FIs would make for greater economic and commercial sense.

‘Weak Banks' may be nurtured into healthy units by slowing down on expansion,
eschewing high cost funds/borrowings etc.

The minimum share of holding by Government/Reserve Bank in the equity of the

nationalised banks and the State Bank should be brought down to 33%. The RBI
regulator of the monetary system should not be also the owner of a bank in view of
the potential for possible conflict of interest.

38
There is a need for a reform of the deposit insurance scheme based on CAMELs
ratings awarded by RBI to banks.

Inter-bank call and notice money market and inter-bank term money market should be
strictly restricted to banks; only exception to be made is primary dealers.

Non-bank parties are provided free access to bill rediscounts, CPs, CDs, Treasury
Bills, and MMMF.

RBI should totally withdraw from the primary market in 91 days Treasury Bills.

INDUSTRY PROFILE

39
 INDUSTRY PROFILE

The following discussion deals with the 6 parameters & 5 major banks in India have
been taken for study. The following banks have been taken for the study:

• CITY UNION BANK

• YES BANK

• FEDRAL BANK

• KARUR VYSYA BANK

• DHANLUXMI BANK

40
CITY UNION BANK

41
The bank, 'The Kumbakonam Bank Limited' as it was then called was incorporated as
a limited company on 31st October,1904. The first Memorandum of Association was
signed by twenty devoted and prominent citizens of Kumbakonam including Sarvashri
R. Santhanam Iyer, S.Krishna Iyer, V.Krishnaswami Iyengar and T.S.Raghavachariar.
Shri T.S.Raghavachariar was the First Agent of the Bank. In 1908, he was succeeded
by Shri R. Santhanam Iyer who became the Secretary of the bank under the amended
Articles of Association which created the office of a Secretary to be in charge of the
Bank's Management in the place of the Agent, which post he held till his death in
1926. He was succeeded by Shri. S. Mahalinga Iyer as Secretary who subsequently
became the First full-time Managing Director of the bank in tune with the amendment
of Articles in 1929. He held the position of Secretary from 1926 to 1929 and that of
Managing Director from 1929 to 1963.

The bank in the beginning preferred the role of a regional bank and slowly but
steadily built for itself a place in the Delta District Thanjavur. The first Branch of the
Bank was opened at Mannargudi on 24th January 1930. Thereafter, branches were
opened at Nagapattinam, Sannanallur, Ayyampet, Tirukattupalli, Tiruvarur,
Manapparai, Mayuram and Porayar within a span of twenty five years. The Bank
was included in the Second Schedule of Reserve Bank of India Act,1934, on 22nd
March 1945.

The Bank celebrated it's Golden Jubilee on 14th November, 1954 at

Kumbakonam under the Presidentship of Shri.C.R. Srinivasan, Editor, 'Swadesmitran'
& Director, Reserve Bank of India.

In 1957, the bank took over the assets and liabilities of the Common Wealth
Bank Limited and in the process annexed to it the five Branches of Common Wealth
Bank Limited at Aduthurai, Kodavasal, Valangaiman, Jayankondacholopuram and
Ariyalur.

In 1963, Shri. R. A.Venkataramani Iyer took charge as the Chairman of the

Bank which position he held upto 1969.

In April, 1965, two other local banks viz., 'The City Forward Bank Limited' and
'The Union Bank Limited' were amalgamated with the Bank under a scheme of
amalgamation with the resultant addition of six more branches viz., Kumbakonam-

42
Town, Nannilam, Koradacherry, Tiruvidaimarudur, Tirupanandal and Kuttalam.
Consequently, the Bank's name was changed to 'The Kumbakonam City Union Bank
Limited'.

In November 1965, the bank's first branch at Madras was opened at

Thiyagaraya Nagar. In May, 1969 the Bank secured the services of Shri. O.R.
Srinivasan, a former Officer of Reserve Bank of India to be at the helm of affairs as
Chairman and Chief Executive Officer which event proved to be a turning point in the
annals of the Bank. Under the new Management the Branch Expansion got a fresh
impetus and branches were opened at Eravancheri, Sembanarkoil, Tiruchirapalli,
Madurai, Thanjavur, Dindigul, Keelapalur, Tirumakkottai, Kottur, Tiruvarur Town and
Coimbatore during the period from March, 1968 to August, 1973.

In April, 1974 the bank secured the services of Shri. K.Srinivasan, another
former Senior Officer of Reserve Bank of India as it's Secretary. At that time a Young
Chartered Accountant from Thippirajapuram, a village near Kumbakonam, Shri.
V.Narayanan was appointed as Assistant Secretary of the Bank.

During the period ended 31-12-1976 Branches were opened at Periyakulam,

Mandaveli (Madras), Pattukkottai, Triplicane (Madras), Cuddalore, Pudukkottai,
Chidambaram and Salem.

When Shri. O.R.Srinivasan relinquished his office in June 1977, the then
Secretary Shri. K.Srinivasan was appointed as Chairman and Chief Executive Officer
of the Bank and Shri. V.Narayanan was elevated to the rank of the Secretary.

From July,1977 to September,1979 the bank has opened ten more branches
including those at George Town (Madras), Mount Road (Madras), Tirunelveli and
Karaikudi.

The Bank celebrated its Platinum Jubilee on 9th December, 1979 at

Kumbakonam with Dr. Rajah Sir M.A.Muthiah Chettiar, Shri. G.Rengasamy
Moopanar, Shri. Kosi.Mani and Shri. M.V.Arunachalam as Guests of Honour.

In November, 1980, the then Secretary Shri. V.Narayanan, assumed charge

as the Chairman and Chief Executive Officer of the Bank consequent to the
completion of the term by Shri. K.Srinivasan. The event opened a glorious chapter in
the history of the bank.

43
 The first branch outside the state of Tamilnadu was opened at Sultanpet,
Bangalore in Karnataka in September,1980. Branches were also opened at the twin
cities of Hyderabad and Secunderabad in Andhrapradesh. In tune with the national
image attached to the Bank, the Bank's name was changed to 'City Union Bank
Limited' with effect from December,1987.

The Bank started it's own Staff Training College on 21st August, 1989 at
Kumbakonam with the avowed objective of imparting need based and result oriented
training to its Staff Members irrespective of the cadre.

Taking into account the bank's financial strength, managerial competence and
consistent progress in all spheres of its activities, Reserve Bank of India has granted
an Authorised Dealers License to deal in Foreign Exchange business with effect from
October, 1990.

The bank has introduced computerisation in the year 1990 and as of now all
the Branches have been computerised.

The Bank's Centenary Celebrations were inaugurated on 27th December,2003

at the Saraswathi Patasala Girl's Higher Secondary School Grounds, Kumbakonam
under the Chairmanship of Shri. V.Narayanan with Shri. R.Venkataraman, Former
President of India, Dr.A.R.Lakshmanan, Judge, Supreme Court, New Delhi and Shri.
N.Rengachari, Retired Chairman, IRDA & Advisor to the Government of Andhra
Pradesh as distinguished Guests.

In the glorious history of City Union Bank Limited, nearly one third of the
period of it's existence and progress centered around a key person, namely,
Shri.V.Narayanan. The enviable leadership style of Shri. V. Narayanan and his vision
for the consistent growth of the bank in all spheres, his tireless efforts in augmenting
the Bank's Business, widening the branch network, maintaining harmonious industrial
relations, ensuring the unique achievement of not loosing not even a single manday
by way of labour unrest-a record of sort in the country has earned name and fame not
only for himself but to the bank in the entire Banking Industry in India. His famous
words of 'Take care of the bank; The bank will take care of you' have made wonders
enhancing the morale and improving the productivity of the workforce, the facts of
which can be vouchsafed by the financial results of the bank during his tenure as

44
Chairman. But the bank has lost it's illustrious Chairman Shri.V.Narayanan in an
unexpected car accident near chennai on 5th November, 2004.

With the irreparable loss of Shri. V.Narayanan, the mantle of leading the bank
to make his dreams a reality has fallen on Shri.S.Balasubramanian, the then
Executive Director, who has been appointed as the Chairman & Chief Executive
Officer of the Bank by the Board of Directors with the approval of Reserve Bank of
India with effect from 31-1-2005.

Sri. N. Kamakodi, the then General Manager has been elevated to the rank of
Executive Director.

To provide value added services, the Bank has entered into Memoranda of
understanding with Life Insurance Corporation of India and National Insurance
Company Limited for selling insurance products. The Bank has been accorded
license by Insurance Regulatory Authority of India [IRDA] to act as Corporate Agent.

The bank has entered into an agreement with Tata Consultancy Services
Limited for introducing Core Banking Solution[CBS].As such all the branches have
been brought under CBS as on date.

The bank has made arrangements with IDBI Bank Ltd., and UTI Bank Ltd., for
issuing at par cheques and sending outstation bills for collection.

Automated Teller Machines are available at select branches of the bank

where the ATM Card holders can withdraw cash, make balance enquiries and obtain
Statement of accounts.

The Bank has tied up with Export Credit & Guarantee Corporation Limited
[ECGC] for marketing export credit insurance products through its branch network.

The Bank has obtained License to function as Depository Participant under

National Securities Depository Ltd.,

The Bank is having a network of 202 Branches spread in different parts of our
Country as on 01/02/2009

45
YES BANK

46
YES BANK is a state-of-the-art high quality, customer centric, service driven, private
Indian Bank catering to the “Future Businesses of India”, and isan outcome of the
professional & entrepreneurial commitment of Rana Kapoor, Founder, Managing
Director & CEO. As the Professionals’ Bank of India, YES BANK has exemplified
‘creating and sharing value’ for all itsstakeholders, and has created a differentiated
Banking Paradigm. Sinceinception, YES BANK has tried to play a catalytic role in
bridging the infrastructureand knowledge gap in various Sunrise sectors of the
economy. As part of the differentiated strategy, YES BANK has had a strong focus on
Development Banking, and has tried to play a catalytic role in bridging
theinfrastructure and knowledge gap in Sunrise sectors of the economy, asis evident
from cutting-edge work that the Bank has done in the area of Food & Agribusiness, in
most cases first-of-its kind in India, Infrastructure, Microfinance, and Sustainability.
Our focus on Governanceand Good Corporate Citizenship, actualized through YES
BANK’s Responsible Banking approach, stands evidence of YES BANK’s strategic
vision.

Ina short span of 6 years, YES BANK has fructified into a ‘“Full Service Commercial
Bank” that has steadily built Corporate and Institutional Banking, Financial Markets,
Investment Banking, Corporate Finance, Branch Banking, Business and Transaction
Banking, and Wealth Management business lines across the country, and is well
equipped to offer a range of products and services to corporate and retail customers.
YES BANK offers a full-range of client-focused corporate banking services, including
working capital finance,specialised corporate finance, trade and transactional
services, treasury riskmanagement services, investment banking solutions and
liquidity management solutions among others to a highly focused client base. The
Bank also has a widespread branch network of over 200 branches across 149
cities, with over 290 ATM's and 2 National Operating Centres in Mumbai and
Gurgaon. Sinceinception, YES BANK has adopted innovative and creative
technologies that facilitate robust systems and processes and facilitate in the delivery
of world-class banking solutions that significantly improve the business andfinancial
efficiency of our clients.

47
YES BANK has been recognized amongst the Top and the Fastest Growing Bank in
various Indian Banking League Tables by prestigious media houses and Global
Advisory Firms, and has received national and international honours for our various
Businesses including Corporate Finance, Investment Banking, Treasury,Transaction
Banking, and Sustainable practices through Responsible Banking. TheBank has
received several recognitions for our world-class IT infrastructure,and payments
solutions, as well as excellence in Human Capital.

The sustained growth of YES BANK is based on the key pillars of Growth, Trust,
Technology, Human Capital, Transparency and Responsible Banking. YES BANK is
committed towards building the “Best Quality Bank of the World in India” – resting on
the strengths of its six key pillars and differentiation built through exemplary Customer
Service, to ensure that it provides the finest Banking Experience to its customers.

48
 FEDRAL BANK

History:

The history of Federal Bank dates back to the pre-independence era. Though initially
it was known as the Travancore Federal Bank, it gradually transformed into a full-
fledged bank under the able leadership of its Founder, Mr. K P Hormis. The name
Federal Bank Limited was officially announced in the year 1947 with its headquarters

49
nestled on the banks on the river Periyar. Since then there has been no looking back
and the bank has become one of the strongest and most stable banks in the country.

Vision:

Become the dominant “numero uno” bank in Kerala and a leading player in target
markets.

Be the ‘trusted’ partner of choice for target (SME, Retail, NRI) customers.

Be a customer-centric organisation setting the benchmarks for service.

Offer innovative yet simple products supported by the state-of-the art technology.

Have a dynamic and energised workforce with a strong sense of belonging.

Deliver top tier financial performance and superior value to stakeholders.

Be a role model for corporate governance and social responsibility.

Mission:

Devote balanced attention to the interests and expectations of stakeholders, and

Adopt best industry practices.

Future:

We are the fourth largest bank in India in terms of capital base and can easily boast of
a Capital Adequacy Ratio of 17.23 %, one of the highest in the industry. This along
with the existence in a highly regulated environment has helped the bank to tide over
the recession with minimum impact to its financial stability.

In fact we have been expanding organically over the past few months. We believe in
extending our reach to our customers by making our services available to all, 24x7.
We have Branches and ATMs across India in addition to the Representative Office at
Abu Dhabi that serves as a nerve centre for the NRI customers in UAE.

50
We are transforming ourselves, keeping our principles in tact, into an organisation that
offers service beyond par.

Being in the service industry we are conscious of our surroundings and what happens
in the society.

KARUR VYSYA BANK

Karur Vysya Bank was started in the year 1916 in Karur, then a small textile town with
a vast agricultural background, by two illustrious sons of the soil – Sri M.A.
Venkatarama Chettiar and Sri Athi Krishna Chettiar. What started as a venture with a

51
seed capital of Rs. 1.00 lakh has grown into a leading financial institution that offers
the wide gamut of financial services to millions of its customers under one roof.

Commercial banking in India can boast of a history of about

200 years. Though one could trace the history of banking back to the 19th century, the
beginning of the last century saw the birth of many banks in India, set up by people
with vision, commitment and national spirit.

The Karur Vysya Bank Limited, popularly known as KVB, one such endeavour, was
set up in 1916 by two great visionaries and illustrious sons of Karur, the Late Shri M A
Venkatarama Chettiar and the Late Shri Athi Krishna Chettiar to inculcate the habit of
savings and provide financial assistance to traders and small agriculturists in and
around Karur, a textile town in Tamil Nadu.

Though the bank started with a seed capital of Rs.1 lakh, it has withstood innumerable
changes and challenges in the past few decades and has profitably emerged as one
of the leading banks in India without compromising on its fundamentals.

The bank is professionally managed and guided by the Board of Directors drawn from
different fields with vision, experience, knowledge and business acumen.

Shedding its inherent regional flavour, the bank has now spread its wings far and wide
with over 320 branches in 13 States and 3 Union Territories in order to gain a pan
India presence. The bank has been conducting its affairs meticulously to conform to
all the prudential norms and exacting statutory regulations.

KVB has consistently maintained strong fundamentals with a higher percentage of

Capital Adequacy Ratio than mandated by the RBI. KVB has also been generating
profits and rewarding its stakeholders with handsome dividends since inception.

52
 DHANLUXMI BANK

Incorporated in November 1927 at Thrissur, Kerala by a group of ambitious

entrepreneurs, Dhanlaxmi Bank Ltd. started business with Rs. 11,000 as capital and
seven employees. It became a Scheduled Commercial Bank in 1977, and in 2009,

53
was awarded approvals by the Reserve Bank of India for opening 66 branches.

The Bank's Board of Directors is comprised of eminent professionals who provide

leadership and guidance to a strong, multi skilled management team. Its
comprehensive range of banking and financial services and its extensive nationwide
presence has set the stage for an era of unprecedented growth.

To become a strong and innovative bank with integrity and social responsibility and to
maximize customer satisfaction and the satisfaction of its employees, shareholders
and the community."

VISION:

To become a strong and innovative bank with integrity and social responsibility and to
maximize customer satisfaction and the satisfaction of its employees, shareholders.

Achievements, Affiliations and Milestones

Achievements

Serviced business worth Rs. 12,155 crores as on 31 March 2010, comprising deposits
worth Rs. 7098 crores and advances worth Rs. 5056 crores.

Earned a net profit of Rs. 23.30 crores for the financial year ended 31st March 2010,
with a capital adequacy ratio of 12.99% (Basel II) during the same period.

Put in place the Real Time Gross Settlement (RTGS) and National Electronic Fund
Transfer (NEFT) systems to facilitate large value payments and settlements online in
real time, on a transaction-by-transaction basis.

54
Set up NRI Boutiques (Relationship Centres) across nine locations in Kerala and
Tamil Nadu, with plans to open specialized NRI outlets at potential locations with
emphasis on impeccable service levels.

Dispensed Micro Credit among private and public banks in Kerala, the Bank's
outstanding under micro credit was Rs. 270.62 crores at the end of March 2009.

Attained ISO 9001-2000 certification for the Bank's corporate office at Thrissur and
industrial finance branch at Kochi.

Affiliations
Al Ahalia Money Exchange Bureau

Foreign Correspondent Banks

Deutsche Bank Trust Company Americas

Wachovia Bank NA -A Wells Fargo Company

Commerzbank AG

National Westminister Bank PLC

Insurance Partner

Bajaj Allianz

Milestones

1927 - Founded on 14 November, 1927, at Thrissur, Kerala

1975 - Set up the first branch outside the home state of Kerala, at Chennai

1977 - Designated as Scheduled Commercial Bank by the Reserve Bank of India

(RBI)

55
1980 - 100-strong branch network

1986 - Total business of Rs. 100 crores

1996 - First public issue. Total business of Rs. 1,000 crores

2000-Installed the first ATM

2002 - First Rights Issue

2002 - Platinum Jubilee year

2007 - Total business of Rs. 5,000 crores. 80th Anniversary year

2008- Total business of Rs. 7,500 crores. Second Rights Issue
2009/10- Expanded branch network to 270 branches. Total business surpassed Rs.
12,000 crore

OBJECTIVES

• To do Depth Analysis of the Model for Performance Evaluation.

• To do Analysis of Performance of Private Sector Banks in India.

• To Give the Raking of Private Banks in India.

• To analyze 5 banks soundness & sustainability by using CAMELS as a tool of

measuring Performance.

56
 SCOPE OF THE STUDY

• The study is useful for Banking Institutes in India.

• The study is very important for Managements Institutes.

• The study has the scope in Financial Research in India.

• The study is Helpful in Education Sector.

• The study is useful for Consulting Firm.

57
RESERCH METHODOLOGY

58
 RESERCH METHODOLOGY

STATEMENT OF THE PROBLEM

In the recent years the financial system especially the banks have undergone
numerous changes in the form of reforms, regulations & norms. CAMEL framework for
the performance evaluation of banks is an addition to this. The study is conducted to
analyze the pros & cons of this model.

RESEARCH PROPOSAL

59
The Bank after the implementation of the balanced scorecard in 2002 has under gone
a drastic change. Both its peoples and process perspectives have changed visibly and
the employees have full faith in the new strategy to produce quick results and keep
them ahead in the industry. The balanced scorecard approach has brought about
more role clarity in the job profile and has improved processes. In short it focuses not
only on short term goals but is very clear about its way to achieve the long term goal.

Type of research:

Descriptive Research is used for the study of the performance of private banks on
CAMEL MODEL in India.

Data collection:

Secondary data on the subject was collected from the Books, ICFAI journals,
company prospectus, company annual reports and IMF, RBI & SEBI websites.

SAMPLING TECHNIQUE :

Non Probability sampling (judgment sampling) was done for the whole study and
selection of Data.

PLAN OF ANALYSIS:

60
The data analysis of the information got from the balance sheets was done and ratios
were used. Graph and charts were used to illustrate trends.

61
 DATA ANALYSIS & INTERPRETATION

ANALYSIS AND INTERPRETATION

Now each parameter will be taken separately & discussed in detail.

(A)CAPITAL ADEQUACY:

Capital adequacy ratio is defined as

62
Where Risk can either be weighted assets ( ) or the respective national regulator's
minimum total capital requirement. If using risk weighted assets,

≥ 8%.

The percent threshold (8% in this case, a common requirement for regulators
conforming to the Basel Accords) is set by the national banking regulator.

Two types of capital are measured: tier one capital, which can absorb losses without a
bank being required to cease trading, and tier two capital, which can absorb losses in
the event of a winding-up and so provides a lesser degree of protection to depositors.

CAPITAL ADEQUACY RATIO FOR 5 MAJOR BANKS IN INDIA

Banks City Yes Federal Karur Dhanlaxmi

Union Bank Bank Vysya Bank
Bank Bank

Capital 5.00% 10.75% 5.5% 4.5% 5.25%

Adequacy

63
 CAPITAL ADEQUACY

12
10
8
%OF CA 6 10.75
4
5 5.5 5.25
4.5
2
0
CUB YB FB KVB DLB
BANKS

INTERPRETATIONS:-

Reserve Bank of India prescribes Banks to maintain a minimum Capital to risk-

weighted Assets Ratio (CRAR) of 9 percent with regard to credit risk, market risk and
operational risk on an ongoing basis, as against 8 percent prescribed in Basel
Documents. Capital adequacy ratio of the YES Bank, was well above the industry
average of 10.75% to CAR of all others bank in the list of private banks up to the
particular year 2008-09. So all others banks have to increase its CAR. Higher the ratio
the banks are in a comfortable position to absorb losses.

ASSET QUALITY OF 5 MAJOR BANKS IN INDIA

In the Assets Quality We consider the Non Performing Assets of all the banks.

Banks City Yes Federal Karur Dhanlaxmi

Union Bank Bank Vysya Bank
Bank ASSETS QUALITY Bank

8
7
Assets 7.25%
6 7.25% 6.50% 4.00 % 7.75%
5
Quality%OF AQ 4 7.25 7.25 7.75
6.5
3
2 4
1
0
CUB YB FB KVB DLB
BANKS
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INTERPRETATIONS:

Above ratios show the highest NPA of Dhanlaxmi Bank City Union Bank & Yes Bank
up to FY 2008-09 is coming. KVB asset quality is the best in the Private banking
sector despite the bank sustaining aggressive growth for the past several quarters.
The bank has maintained its net NPAs at 4.00% as at end FY08-09. It has continued
to make general provisions and holds specific general provisions on its standard
customer assets that are higher than regulatory requirements. Federal bank is also
approaching to this level.

MANAGEMENT SOUNDNESS

In the Management Soundness we consider the Asset Turnover Ratio.

Banks City Yes Federal Karur Dhanlaxmi

Union Bank Bank Vysya Bank
Bank Bank

Assets 7.25% 2.00% 7.00% 6.75% 8.25%

Quality

65
 MANAGEMENT

9
8
7
6
5
% OF ATR 8.25
4 7.25 7 6.75
3
2
1 2
0
CUB YB FB KVB DLB
BANKS

INTERPRETATION:

Asset turnover measures a firm's efficiency at using its assets in generating sales or
revenue - the higher the number the better. From the above information, it is clear that
the asset turnover ratio of Dhanlaxmi bank is increasing every year and highest
comparing with the others bank in the Private Sector in FY2008-09.It shows the
bank’s efficiency in using its assets to generate high revenue.

EARNINGS & PROFITABILITY

The ratio that is used for the profitability for 5 banks is ROA-Return On Assets.

Banks City Yes Federal Karur Dhanlaxmi

Union Bank Bank Vysya Bank
Bank Bank

Assets 4.67% 5.83% 4.83% 7.50% 8.50%

Quality

66
 EARNINGS

9
8
7
6
5
% OF ROA 8.5
4 7.5
3 5.83
4.67 4.83
2
1
0
CUB YB FB KVB DLB
BANKS

INTERPRETATIONS:

A measure of a company's profitability, equal to a fiscal year's earnings divided by its

total assets, expressed as a percentage. The above table shows the highest ratio of
Dhanlaxmi Bank for the FY 2008-09.ROA of City Union Bank Bank is falling every
year .and KVB is also in good position in the year, so the Earning is also Fluctuating.

LIQUIDITY

Credit Deposit Ratio is used to find out the Liquidity of an Organization.

Banks City Yes Federal Karur Dhanlaxmi

Union Bank Bank Vysya Bank
Bank Bank

Assets 8.00% 6.00% 8.60% 9.80% 5.20%

Quality

67
 LIQUIDITY

10

6
% OF CDR 9.8
8 8.6
4
6
5.2
2

0
CUB YB FB KVB DLB
BANKS

INTERPREATIONS:

Credit deposit ratio is a tool used to study the liquidity position of the bank. A high
ratio shows that there is more amounts of liquid cash with the bank to met its clients
cash withdrawals. We can find from the above table, KVB has maintained high ratio
during the period of study. But the Dhanlaxmi Bank has maintained a least ratio during
all years of study. So the other Banks like City Union Bank, Federal Bank & KVB also
try to decrease its liquidity.

CAMEL MODEL SCORE

Banks City Yes Federal Karur Dhanlaxmi

Union Bank Bank Vysya Bank
Bank Bank

Assets 6.43% 6.43% 6.49% 6.51% 6.99%

Quality

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 CAMEL SCORE

7
6.9
6.8
6.7
% OF 6.6 6.99
VALUE 6.5
6.4
6.3 6.47 6.49 6.51
6.43
6.2
6.1
CTU YB FB KVB DLB
BANKS

INTERPREATIONS:

As per the diagram and the according o the data chart we can conclude that the
Performance of City Union Bank is higher and it has the sound management as per
the CAMEL MODEL. The Yes Bank has also the good position on the basis of
CAMEL MODEL; it has the minimum score from the other Banks. Dhanlaxmi Bank.
Has the higher score so its performance is not good according to the CAMEL MODEL.
So other banks also have to work hardly on the MODEL

PERFORMANCE RATING OF BANKS

Each of the above six parameters are weighted on a scale of 1 to 100 and contains
number of sub-parameters with individual weightings. On the basis of Composite
score of CAMEL MODEL the Rating provided by the RBI for Private Banks are as
follows…

Rating Symbol Rating symbol

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 indicates

A City Union Banks

B YES Bank

C Federal Bank

D Karur Vysya Bank

E Dhanlaxmi Bank

Now after given the Rating to the all Private Banks we can conclude that the highest
performance is given by the City Union Bank so it has the Rating A. Same as the Yes
Bank has the Rating B. The Federal Bank Has the Rating C. The KVB has the Rating
D and the last Dhanlaxmi Bank has the Rating Symbol D. these Rating is done by the
RBI on the basis of CAMEL MODEL.

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 FINDINGS,RECOMMENDATIONS &
LIMITATIONS

FINDINGS

1. The Depth Analysis of the Model for Performance Evaluation are as Follows..

Capital adequacy:

The capital adequacy ratio of the Yes Bank is above the minimum requirements and
above the industry average while the others are below the minimum requirements.

Assets:

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Karur Vysya Bank has maintained minimum NPA’s in the period of 2008-2009 from
other Banks while CTU, YB & DLB has the Highest NPA Ratio.

Management:

Professional approach that has been adopted by the banks in the recent past is in
right direction & also it is the right decision, only the Yes Bank is not performing well.

Earnings:

Karur Vysya Bank & Dhanlaxmi Bank has shown a good growth record for its ROA.
But City Union Bank, Yes Bank & Federal Bank has gone down in its performance
with Average growth.

Liquidity:

Banks should maintain quality securities with optimum liquidity to meet market risk &
contingencies. Dhanlaxmi Bank & Yes Bank has a minimal and optimal Liquidity from
other Banks. So they have to decrease its liquidity up to certain level.

2. The performance of Some Private Banks is good & satisfactory with the
CAMEL MODEL from Public Banks.

3. The City Union Bank Has the Rating A in whole private Banks in India while the
Dhanlaxmi Bank has the Rating E.

4. The City Union Bank, Yes Bank is very sound & sustainable While the Federal

Bank & Karur Vysya Bank is Average sound and Sustainable & the Dhanlaxmi

Bank is Least Sound and Sustainable in Private Bank.

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 CONCLUSION

• The Private Banks who is following the CAMEL MODEL is very sound and
sustain from the other Banks in India in its performance.
• That bank that has the Composite score very minimum on the CAMEL
FRAMEWORK has good performance in banking norms.
• The variable of CAMEL MODEL varying from bank to bank but the average
score is considered for giving the Rating to banks in terms of its performance.

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 • The performance of banks fluctuates every year on its CAMEL MODEL that’s
the rank of banks change and other bank get good position.
• That banks that has high earnings has the good performer as per CAMEL
MODEL.
• That banks has high liquidity, they has less profitability.

RECOMMENDATIONS

1) The banks should adapt themselves quickly to the changing norms for Measuring
Performance about Themselves.

2) The system is getting internationally standardized with the BASEL II accords so the
Indian Private Banks should strengthen internal processes so as to cope with the
standards.

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3) The banks should try to maintain a least % of NPA by always lending and
investing or creating quality assets which earn returns by way of interest and profits.

4) The banks should try to adopt a optimum level of Liquidity Norms so the Banks
can hedge risks and generate the Revenues in the Market.

5) Have good appraisal skills, system, and proper follow up to ensure that banks are
above the risk.

LIMITATIONS

• The study is limited up to Private sector Banking Industries in India.

• The study is based on 5 Private Banks in India.

• The study is based on Secondary Data only.

• Time is to much short for the study.

• The Research is done on Past Publish Data.

75
76
 BIBLIOGRAPHY

Bibliography

Books

Kothari, C.R., “Research Methodology: Methods and Techniques”, Wishwa

Publication, Delhi

Niti Bhasin , Banking Sectors Development in India, New Century Publication, Delhi.

Indian Banking 2008-09, the Analyst, The icfai university press,Oct. 2009.

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Websites Visited

http://www.sebi.com

http://www.rbi.com

http://www.stock-picks-focus.com

http://www.basel2implementation.com

http://www.cityunionbank.com

http://www.yesbank.com

http://ww.federal.com

http://kvb.com

http://dhanlaxmi.com

http://www.allbankingsolutions.com/camels.htm

http://www.finance.indiamart.com

http://www.answers.com/topic/basel-ii

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