UNIT 3: Performance Evaluation

Parameters
for
Banks & Retail

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3.1 Performance Evaluation Parameters

for Banks
(a) Customer base of banks
- Customer is an entity having business
relationship with bank
- Customer base depends on:
1. No. of branches
2. Variety of services provided
3. Quality of service provided
4. Use of technology by bank
5. Risk taking ability of bank
6. Benefits provided to customers
7. Brand equity of bank
8. Long term relationship maintained by bank
9. consistent good financial performance
10. contribution
to economic growth
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-Customer base depends on type of relationship with

customer
1. Depositing money with bank
2. Bank as a trustee
3. Collection of bills & cheques
4. Safe deposit lockers
5. Bank as indemnity holder
- Customer base is classified on the basis of risk
involved
- Components of customer base:
Individual minor/ Individual major/HUF/
Partnership firm
Private Limited Companies/ Public Limited
Companies/Trusts
Co-operative societies/ Government & public
departments
- Specific separatePravin
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(b) Non Performing Assets (NPAs)

- Asset which ceases to generate income for the
bank
- Loan/advance where
1. interest /principal overdue for > 90 days
2. O.D. or C.C. is out of order for > 90 days
3. Bills discounted is overdue for > 90 days
4. interest /principal overdue for 2crop seasons
[ short duration crops]
5. interest /principal overdue for 1 crop season
[ long duration crops]
- Bank cannot take interest on NPA to income
account
- NPAs must be reported to RBI & disclosed

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- Types of NPAs:
Category of NPA
Less than 12 months

Type of Asset
Substandard asset

12 months or more

Doubtful asset

Auditors/RBI identified loss

Loss asset
but amount not written of
-Provisions to be made for NPAs by bank
1. Loss assets are written of
2.Doubtful assets:
Period of NPA up to 1 year
1 - 3 years
> 3 years
Provision
25%
40%
100%
3. Substandard assets: 15% of total outstanding
- Lower the NPAs better
is the performance of bank
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(c) Deposits accepted by Bank

Demand Deposits
- Payable on demand
- Low or no interest
- Current/Savings/ Overdue & unclaimed
deposits
- Interest paid six monthly on savings deposit
Time or Term Deposits
- Time period 7 days to 120 months
- Interest depends on duration & bank specific
- Interest rate reduced if withdrawn before
maturity
- Interest cumulative on quarterly basis
- TDS for interest more than Rs. 10,000 P.A.
- Non transferrable
Types of deposits: FD/ MIS/ QIS/ Short term/
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(d) Return on Investment (ROI)

- Two components : ROA & ROE
ROA = [Net Income] / [ AV. Total Assets]
Interest income on assets
(-) Interest Expenses on liabilities
= Net Interest income
(+) Non interest income
(=) TOTAL REVENUE (a)
Provision for loan losses
(+) Non interest expense
(=) TOTAL EXPENSES (b)
Income Before Tax (a-b)
(-) Income Tax Expenses
(=) NET INCOME
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- Following are the assets of bank

(a) Cash
- Cash in hand
- Cash with RBI
- Cash with other banks
(b) Money at short notice
When bank makes money available at
short notice to
other banks & Financial Institutions (FIs)
for a short
period of 1 to 14 days it is treated as asset
(c) Investments made by bank in various
securities
(d) Loans & Advances: Money given to
various entities
as loans &
advances
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- Following are the liabilities of bank

(a) Share Capital is the contribution of
shareholders for
starting a bank
(b) Reserves are accumulated funds from
undistributed
profits
(c) Deposits are the money owned by
customers & therefore
it is a liability of a bank
* Current Deposits
* Savings Deposits
* Time
Deposits
* Other Deposits
(d) Borrowings are money borrowed from
RBI & other banks
(e) Other liabilities
not
included
above
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Return on Equity (ROE)

ROE = [ROA] x [Leverage Ratio]
= [ROA] x [ Bank Assets / Bank
Capital ]
ROA can be improved by:
(i) Employing optimum level of assets
(ii) Getting maximum interest on loans &
advances
(iii) Investing in securities which give more
yield
(iv) Minimizing other assets such as
buildings, furniture,
ATM machines & other infrastructure
facilities
(v) Keeping NPAs to minimum level
(vi) Borrowings should be at minimum cost
(vii) Minimizing
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(e) Spread
Spread = [ Av. Interest rate received on
assets]
(-) [Av. Interest rate paid on
liabilities]
Higher the spread more are the profits &
better is the
performance of bank

(f) Financial inclusion

- Delivery of financial services at afordable
costs to low
income sections of society
- Prime objective of financial inclusion is the
availability of
banking & payment services to entire
population
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- Goals of financial
inclusion
as per UN are:

11

-Initiatives by RBI
Opening of NO- Frill Accounts
Relaxation on KYC norms
Engage business correspondents
Use of technology
Adoption of Electronics Benefit Transfer (EBT)
Introduction of General purpose Credit Card (GCC)
Simplified branch authorization
Opening branches in unbanked rural centers
-Challenges of financial inclusion
Difficulties for banks to expand their business to
remote areas
Lack of quality staf in remote areas
Working in remote areas is tough & costly
Lack of awareness of banking in remote areas
Technological backwardness
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(g) Credit Appraisal

- Essential for deciding eligibility & quantum of
loan by bank
- Criteria fixed by bank to decide creditworthiness
of borrower
- Creditworthiness assures repayment capacity of
borrower
- Norms to decide creditworthiness difers from
bank to bank,
type of loan & type of customer
- For individual loan amount depends on three
ratios
Installment to income ratio
Fixed obligation to income ratio
Loan amount to asset to be purchased
- For corporate viability of project assessed on :
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(h) Investments by bank

- Investment as per CRR & SLR norms
- CRR is cash kept with RBI
- SLR is investment :with RBI in excess of
CRR/Gold/ T-Bills/
Government bonds
- Investments are shown under following 5
heads
1. Government Securities
2. Shares
3. Debentures & Bonds
4. Investment in subsidiaries & joint ventures
5. Others

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3.2 Performance Evaluation Parameters

for Retail
(a) Meaning of merchandising
- Essence of retail
- Process of making products available to
end customer
- Planning for: Marketing right merchandise
At right place
At right time
In in right quantities
At right place
- Measuring performance of merchandise is
necessary
to know performance of the products as
per target
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(b) Methods of analyzing merchandise

performance
1. ABC Analysis
- Three categories of items
A items can never be out of stock
B items can be occasionally out of stock
C items can be deleted from stock
- Analysis can be done at any level of
merchandise
- Important performance measure used is
contribution margin
- Contribution = [Net Sales] - [COGS] - [Other
variable expenses]
- Three categories on the basis of contribution
margin
A items 5% in quantity giving 80%
contribution
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B items 15% in quantity giving 15%

-Analysis allows
Maximum concentration on products giving more
profitability
Minimum eforts on products giving insignificant
contribution
2. Sell Through Analysis
Comparison between actual & planned sales to
decide:
Whether early markdown are required
or
Whether more merchandise are required to satisfy
demand
3. Multiple Attribute Method
Step 1: Make a list issues for decision making
Step 2: Give importance weights to each attribute
Step 3: Make judgment of each brands performance
on each issue
Step 4: CombinePravin
importance
& performance scores
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Step 5: Add all to arrive at the brand scores

4. Gross Margin Return On Investment (GMROI)

- An inventory profitability evaluation ratio which
analyzes ability
of firm to turn inventory into cash above the cost
of inventory
- GMROI =
Gross Margin
Av. Inventory Cost
- GMROI > 1 means firm is selling merchandise
above cost
GMROI < 1 means firm is selling merchandise
below cost
- GMROI = [Sales] - [COGS]
- It is a merchandising planning & decision making
tool
- It focuses more on ROI rather on sales as basis for
merchandise
decision
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