A PROJECT RERORT

ON
AN ANAIYILCAL STUDY OF CAPITAL STRUCTURE OF ICICI BANK
COMPARATIVE STUDY OF SBI AND ICICI BANKS
Submitted to

YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVESITY, NASHIK

For
IN PARTIAL FUFILMENT OF THE REQIREMENT FOR THE DEGREE OF
MASTER OF BUSINESS ADMINSRATION

Submitted by

MR.RITESH SURESHRAO DESH

PRN NO. 2010017754380941
M.B.A. Final Year
(IN FINANCE MANAGEMENT)
Guide

MISS. MINAL D. DESHPANDE

Study Centre

JAGADAMBA COLLEGE, NANDED

(2013-14)

AN ANAIYILCAL STUDY OF CAPITAL STRUCTURE OF ICICI

BANK
COMPARATIVE STUDY OF SBI AND ICICI BANKS
----------------------------------------------------------------------------------------------------------------------------

ABSTRACT
Today business organizations use a range of alternatives for collecting the funds.
Small and Big organizations used the way of collecting funds according to their
paying capacity, degree of risk, size of capital, working system of the business
etc. so, here in this paper the research paper, the researcher analyze the capital
structure of two banks according to its convenience. Capital Structure is the Ratio
of long-term sources of finance in the total capital of the firm includes 'Proprietor's
Funds' and 'Borrowed Funds'(Proprietors Funds include equity capital, preference
capital, reserves and surpluses retained earnings and Borrowed Funds include
long-term debts such as loans from financial institutions, debentures etc. In this
paper, the researcher has taken two banks viz. ICICI and SBI for making
comparison of their debt and equity. By using, the technique of average and
percentage the researcher have made the conclusion about the collection of funds
of these banks. Lastly, some suggestions have given by the researcher which the
banks can follow. Hence, the research may contribute in providing a new way to
the banks for capital structure decision.

Keywords: Equity; Debts; Cost of Capital; Cost of Debts Banking reforms,

Capitalization, Capital Structure, Debt-equity ratio, Earning Per Share, ICICI bank.

INTRODUCTION

The term 'Capital Structure' refers to the proportion between the various longterm sources of finance in the total capital of the firm includes 'Proprietor's Funds'
and 'Borrowed Funds'(Proprietors Funds include equity capital, preference capital,
reserves and surpluses retained earnings and Borrowed Funds include long-term
debts such as loans from financial institutions, debentures etc. On the other hand,
equity share capital is the most costlier source of finance (as return expected by
equity shareholders is greater, than the interest on debentures and the dividend
on preference shares) but these are least risky (as there is no fixed commitment
to pay dividend and the return of equity capital). Preference share capital lies
between debentures and equity .capital in terms of risk and cost. While choosing
the source of finance a financial manager makes an attempt to ensure that risk as
well as cost of capital is minimum for this purpose he has to answer the following
questions:
1. How much amount should be raised through issue of equity?
2. How much amount should be raised through issue of preference share capital?
3. How much amount should be raised through debentures and other long-term
debts?
The capital structure of bank is still relatively under-explored area in the banking
literature. There is no clear understanding on how banks choose their capital
Structure and what factors influence their corporate financing behavior. It is seen
that lending of large banks is less subject to changes in cash flow and capital. It
Is also seen that sifts in deposit supply affect lending at small banks that do not
have access to the large internal capital market. The fact that large banks tend to
Decrease their capital and increase their lending after merger. Due to these
relevant aspect that the present study will try to provide indebt knowledge to the
Concepts.
Capital composition matters to most firms in free markets but there are
differences. Companies in non-financial industries need capital mainly to support
Funding such as to buy property and to build or acquire production facilitates and
equipment to pursue new areas of business. While this is also true for banks,
Their main focus is somewhat different. By its very nature, banking is an attempt
to manage multiple and seemingly opposing weeds Banks provide liquidity on
Demand to depositors through the current account and extend credit as well as
liquidity to their borrowers through lines of credit. Owing to these fundamental
Roles, banks have always been concerned with solvency and liquidity. Given the
central role of market and credit risk in their core business, the success of banks
Depend on their ability to identify assess, Monitor and mage these risks in sound
and sophisticated way. The competitive and regulatory pressures are likely to
Reinforce the central strategic issue of capital and profitability and cost of equity
capital in shaping banking strategy.
In order to assess and manage risks banks must have effective ways of
determining the appropriate amount of capital that is necessary to absorb
unexpected

Losses arising from their market, credit and operational risk exposures. The profits
that arise from various business activities of the banks need to be evaluated
Relative to the capital necessary to cover the associated risks. These two major
links to capital risk as a basis to determine capital and the misplacement of
Profitability against risk-based capital allocations-explain the critical role of capital
as a key component in the management of bank portfolio. The capital
Structure of bank is still relatively under-explored area in the banking literature.
There is no clear understanding on how banks choose their capital structure and
What factors influence their corporate financing behaviour it is seen that lending
of large banks is less subject to changes in cash flow and capital. It is also seen
That sifts in deposit supply affect lending at small banks that do not have access
to the large internal capital market. The fact that large banks tend to decrease
Their capital and increase their lending after merger. Due to these relevant aspect
that the present study will try to provide indebt knowledge to the concepts.
Companys short and long term debt is considered when analyzing capital
structure. A method of analyzing the impact of alternative possible capital
structure
Choices on a firms credit statistics and reported financial results, especially to
determine whether the firm will be able to use projected tax shield benefits fully.
There are different method of analyzing capital structure of the bank are ratios,
trend analysis, common size statements, comparative statements. In this study
The analysis of capital structure of state bank of India and ICICI Bank is done
through ratios.
RESEARCH PROBLEM
The study is to find the different determinant of capital structure in the banking
industry as it affects the whole form of the organization. So it is very important to
have a clear idea about these factors and cost of different sources in the banking
industry. So the problem in the study is to find out effective determinant of capital
structure.
NEED AND SIGNIFICANCE OF THE PROJECT
Capital structure decision is one of the strategic decisions taken by the financial
management. Considerable attention is required to decide the mix up of various
sources of finance. A judicious and right capital structure decision reduces the
cost of capital and increase the value of a firm while a wrong decision can
adversely affect the value of the firm. As discussed earlier, various sources of
finance differ in terms of risk and cost. Hence, there is utmost need of designing
an appropriate capital structure. Capital structure decisions are of great
significance due to the following reasons:
Capital structure determines the risk assumed by the firm.
Capital structure determines the cost of capital of the firm.
It affects the flexibility and liquidity of the firm.

It affects the control of owners on the firm.

OBJECTIVES OF THE STUDY

The objective of the study is to comparatively analyze the capital structure
position of state bank of India and ICICI Bank. The above objective has been
Approached by analyzing the various ratios of the banks which include debt equity
ratio, funded debt to capitalization ratio, solvency ratio, interest coverage ratio,
capital gearing ratio, proprietary ratio. Other objectives are to examine the bank
policy regarding capital structure and the effect of capital structure on the
Profitability of the companies in relation of various ratios
The area of the study had remained an unexplained field in India as for as in the
depths study was concern; therefore the thesis will bridge the gap as it is useful
To all these banks which are associated with the present study. This will also serve
as a literature in the field of banking. It will also help the professionals,
Academicians who have a better understanding of the relevance of capital
structure of banks. The study covers the depths knowledge on the role of capital
Structure in banks which are fast changing fact of the economy.
The importance of capital structure in banking companies become helpful in
development of industries, as provision of rupee and foreign currency loans,
Subscription to share and debentures, underwriting of share and debentures
guaranteeing of deferred payments and loans are the important types of financial
Assistance provided by institutions. Development of entrepreneurship through
training and motivation, assistance in project identification feasibility of studies
And preparation of project reports, technical and managerial consultancy seed/risk
capital assistance etc.
The present study will be helpful for the society in view of various scheme as
acceptance of deposits, provide facility of insurance mutual fund management,
Long-term pension fund and provide consumer loan for various purpose as
housing loan, car loan, educational loan etc. and it also provide electronic banking
facilities which save the important time of consumer.

1.
2.
3.
4.

To
To
To
To

conduct comparative study regarding to capital structure of SBI and ICICI.

find out the cost of different financial sources of project financing.
know the portion of debt and equity in capital structure.
find out the overall cost of capital of SBI & ICICI

RESEARCH METHODOLOGY

In the present research the data is taken from the secondary sources. Research
methodology explains and chooses the best (in terms of quality and economy)
Way of doing it. The information and data for the research can be collected
through primary as well as secondary sources i.e. published articles, journals,
news
Papers, reports, books and websites. The profit & loss account and balance sheet
of the State Bank of India and ICICI Bank for the last five years i.e. from 31st
March 2005 to 31st March 2010 were studied to get the clear picture of the capital
structure. The available data between these periods has been carefully
Analyzed, interpreted and presented by studying the capital structure of State
Bank of India and ICICI Bank. Commensurate with the objective of the study,
Various tools of analysis have been employed in order to arrive at certain
conclusions regarding Comparative analysis of capital structure of state bank of
India
And ICICI Bank. Tabular analysis, percentage and graphs have been used for
analysis of the data.
STATE BANK OF INDIA-PROFILE
The State Bank of India was constituted on 1st July 1955, pursuant to the State
Bank of India Act, 1955 (the "SBI Act") for the purpose of creating a state
partnered
And state-sponsored bank integrating the former Imperial Bank of India. In 1959,
the State Bank of India (Subsidiary Banks) Act was passed, enabling
The Bank to take over eight former state associated banks as its subsidiaries.
The Bank is India's largest bank, with approximately 9,000 branches in India and
54 international offices. Its Associate Banks have a domestic network of around
4,600 branches, with strong regional ties. The Bank also has subsidiaries and joint
ventures outside India, including Europe, the United States, Canada, Mauritius,
Nigeria, Nepal, and Bhutan. The Bank has the largest retail banking customer base
in India.
The Bank is engaged in corporate banking for many of India's most significant
corporate and institutions, including State-owned enterprises, as well as providing
Banking services to commercial, agricultural, industrial and retail customers
throughout India. The Bank services its most important corporate customers,
Including certain state-owned enterprises, through its Corporate Banking Group,
and its other customers, including other large corporations and State-owned
Enterprises, small scale industries, agriculture and personal banking customers
through its National Banking Group. The National Banking Group also provides
Financial services to the Government and the state governments, including tax
collection and payment services. The Bank is engaged in international banking
and
Have foreign operations in 28 countries with a global network of 54 branches.
The Bank has a presence in diverse segments of the Indian financial sector,
including asset management, factoring and commercial services, insurance, and
credit
Cards and payment services.
The Authorized Share Capital of the Company is Rs.25, 0000,000 (Rupees Twenty
Five Crores Only) divided into 25, 00,000 (Twenty Five Lakhs) Equity Shares of

Rs.100/- each (Rupees One Hundred Only) with powers to the Company acting
through its Directors to increase, reduce or modify its capital and to divide all or
any of the shares in the capital of the Company, for the time being, classify and
reclassify such shares from shares of one class into shares of other class or
classes and to attach thereto respectively such preferential, deferred, qualified, or
other special rights, privileges, conditions or restrictions as may be
Determined by the Company in accordance with the Articles of Association of the
Company, and to vary, modify or abrogate any such rights, privileges,
Conditions or restrictions in such manner and by such persons as May, from the
time being, be permitted under the provisions of the Articles of Association of
The Company or legislative provisions, for the time being in force in that behalf.

ICICI BANK-PROFILE
ICICI Bank limited is major banking and financial services organization in India.
The bank is the second largest bank in India and the largest private sector bank in
India by market capitalization. They are publicly held banking company engaged
in providing a wide range of banking and financial services including commercial
Banking and treasury operations. The bank and their subsidiaries offer a wide
range of banking and financial services including commercial banking, retail
Banking, project and corporate finance, working capital finance, insurance,
venture capital and private equity, investment banking, broking and treasury
Products and services. They offer through a variety of delivery channels and
through their specialized subsidiaries in the area of investment banking, life and
Non-life insurance, venture capital and assets management.
The bank has a network of 2035 branches and about 5518 ATMs in India and
presence in 18 countries. They have subsidiaries in the United Kingdom, Russia
and
Canada, branches in United States, Singapore, Bahrain, Hong-Kong, Srilanka,
Qatar and Dubai International finance centre and representative offices in United
Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia.
Our UK subsidiary has established branches in Belgium and Germany.
The bank equity shares are listed in India on Bombay Stock Exchange and
National stock exchange of India Limited and their American Depository Receipts
(ADRs) are listed on NYSE. The bank is first Indian banks listed NYSE.
In September 12, 2003 the bank incorporated ICICI bank Canada as a 100 %
subsidiary company. In May 2005, the bank acquired the entire paid- up capital of
Investitsionno-Kreditny Bank, a Russian bank with their registered office in
Balabanovo in the Kaluga region and a branch in Moscow. Thus, IKB became a
Subsidiary of bank with effect from May 19, 2005. In August, 2005, the bank
acquired additional 6% equity share capital of Prudential ICICI Assets Management
company limited and Prudential ICICI Trust Limited from Prudential Corporation
Holdings Limited and thus these two companies became the subsidiaries of the

Bank. During the year 2006-07 ICICI bank Canada incorporated ICICI health
management insurance as a subsidiary company. In April 2007, Sangli bank
Limited
Merged with the bank with effect from April 19, 2007. In 2007 June, the bank
entered into an agreement with networking solution provider GTL Limited to lease
Out their call centers facility at Mahape worth of around Rs 100 crore for a period
of 25 years. During the year 2007-08 the bank increased their branches and
Extension counters from 755 Nos to 1262 Nos including the additional of about
200 branches through the merger of Sangli bank. They increased their ATM
Network from 3271 ATMs to 3881 ATMs. They launched the mobile banking service
enabling a wide range of banking transaction using the mobile phones.
During the year 2008-09, bank increased their branches and extensions counter
from 1262 Nos to 1419 Nos. They also received license for 580 additional
Branches from RBI.
The bank is committed to using its effort to adopt technology to achieve efficiency
in its business operations. The bank is moving towards centralized database
Using enhanced technology to credit it "CBS". The CBS will enable on time, real
time transaction processing and provide live interface to a multitude of
Technology delivery channels.
The Authorized Share Capital of the Company is Rs.1275 Crores but issued
capital is Rs.1152.71 crore divided into 115271442 Equity Shares of Rs.100/- each
(Rupees One Hundred Only) with powers to the Company acting through its
Directors to increase, reduce or modify its capital and to divide all or any of the
Shares in the capital of the Company, for the time being, classify and reclassify
such shares from shares of one class into shares of other class or classes and to
attach thereto respectively such preferential, deferred, qualified, or other special
rights, privileges, conditions or restrictions as may be determined by the
Company in accordance with the Articles of Association of the Company, and to
vary, modify or abrogate any such rights, privileges, conditions or restrictions in
Such manner and by such persons as May, from the time being, be permitted
under the provisions of the Articles of Association of the Company or legislative
Provisions, for the time being in force in that behalf.
ANALYSIS OF THE STUDY
The finding is achieved after analyzing the following capital structure ratios of
State Bank of India (SBI) and ICICI Bank. These ratios are as follows:
Five years analysis of debt equity ratio
Five years analysis of funded debt to total capitalization ratio
Five years analysis of solvency ratio
Five years analysis of interest coverage ratio
Five years analysis of capital gearing ratio
Five years analysis of earning per share
The financial position of the firms can be studied and analyzed in two perspectives
i.e., the short term financial position and long term financial position. The
Long term financial position, its composition and implications have been
considered.

The long term source of funds for any firms comprise of the shareholders funds
and long term.
Resources of funds may consist of the following:

The
The
The
The

Preference share capital.

equity share capital.
accumulated profit
long term debt.

The debt position of the firm indicates the amount of loans and borrowings used in
generating profits. If the raised from debts earn more than the cost of these
Funds, then the surplus ultimately belongs to the equity shareholders. As the debt
involves firms commitment to pay interest over the long run and eventually
to repay the principles amount, the financial analyst, the debt lender, the
preference shareholders and the management will all pay close attention to the
Degree of indebtedness and capacity of the firm to serve the debt. The more the
debt a firm use, the higher is the profitability that the firm may be unable to
Fulfill its commitments towards its debt lenders. The position of the debt and its
implications can be analyzed in two different ways:
As degree of indebtedness.
As the ability to service the debt.
MEASURES OF THE DEGREE OF INDEBTEDNESS
The measures of identifying the degree of indebtedness attempt to establish the
relationship of the total liabilities or only long term liabilities with the
Shareholders funds or total assets of the firm.
REVIEW OF LITERATURE
(1963) used a better Var. measure in his Ph.D. thesis. Although the measure is

different from Markowitzs diagonal covariance matrix, it helped Sharpe to

propose capital asset pricing model (CAPM). There were innovations in 1970s and
1980s in the financial markets as well as in every field of human life. The effect of
these innovations was the rising of leverage. As this was the case, firms had a
tendency to find new ways to manage risk. This in turn leads new measures of risk
Kalish (III) and Gilbert (1973) studied the impact of size and organizational form of
the commercial bank on its efficiency. Cost and output of the banks were collected
for this purpose. They used 898 commercial banks that look part in the .Federal
Reserve's Functional Cost Analysis Program in 1968. Banks were categorized into
unit banks, branch banks and holding company subsidiaries on the basis of their
organizational form and the amount of assets they had. The minimum average
cost (AC) al which bank of the same size and organizational form can operate is
called as technical efficiency of the bank while the excess AC of the bank over
minimum AC represents the operational inefficiency of the bank.

(1990) analyzed technical, scale and locative efficiencies in U.S. banking by using

non parametric frontier approach on a sample of 3.22 independent banks.

According to them, major contributor to the low score of overall efficiency was
technical inefficiency in the banking units as compared to al locative inefficiency.
(1991) stated that rapid changes in financial service industries make it important

to determine the efficiency of financial institutions. Banks play an important role

in the financial markets of the developing countries and it is very important to
evaluate whether banks operate efficiently or not. There are many research
studies that try to look into the efficiency of banks operating within a country and
across the countries. These studies can be differentiated on the basis of used
methodologies, considered variables, type and number of banks included in the
sample.
(1992) evaluated the relative efficiency of bank branches of the largest

commercial bank in Saudi Arabia by means of Data Envelopment Analysis (DEA)

for the improvement of the utilization of available resources at branch level more
efficiently. They applied DEA methodology on fifteen branches of the bank located
in the Eastern province of Saudi Arabia. One year actual input-output data of the
bank was used for the study. Eight inputs and seven output factors were identified
at branch level on the basis of consultation and personal interview with the
administrators of the several banks.DEA enabled them to identify three inefficient
branches out of fifteen banks branches under consideration.
investigated the relationship of concentration of decision management
and control in one person on the cost efficiency level of the bank and returns on
assets. On the basis of their study, they found that the banks whose chairman of
the board and CEO were the same person had significantly less efficiency than
those banks that possessed not similar governance structure and concluded that
performance was affected by top management structure.
(1993)

(1994) justified the privatization of Turkish public banks on the grounds of

efficiency improvement. For the study, they used the stochastic cost techniques
for the analysis of performance difference between public and private banks. After
analysis, they found a statistically non significant inefficiency difference between
private and public banks. So on the basis of statistically insignificant inefficiency
difference; they favoured the privatization of public banks.

(1995) propounded that there have always been controversies among finance

scholars when it comes to the subject of capital structure. So far, researchers

have not yet reached a consensus on the optimal capital structure of firms by
simultaneously dealing with the agency problem. This paper provides a brief
review of literature and evidence on the relationship between capital structure
and ownership structure. The paper also provides theoretical support to the
factors (determinants) which affects the capital structure.
(2001) elaborated that there have been many definitions of risk over years. The

literature on risk is comprehensive. Origin of the word risk can be traced back to

Latin, through the French risqu and the Italian risco. Risk concept is firstly
seen in ancient Italian maritime trade. It was defined as the combination of
chance or uncertainty to mean the loss of ships and cargo on the seas. Merchants
used a term risk because of uncertainty they faced.
(2002) Firms having high risk exposure, rely more on the cash flow than the

others. Financial distress is main reason for this proposal. Facing high risk signals
the financial weakness of the firms. Once they are financially weak today it is very
probable that they are weak in the future. These firms need more external funds
to survive. They need these funds to sustain their obligations. But it is not very
easy for these firms to find the needed funds because of having financing
premium. Firms should carry the burden of higher costs of external funding than
before. These firms are also in the risk of losing chances of profitable investments.
As a consequence, these firms are more cash-flow dependent.
(2004) made a comparative analysis of commercial banks in India and Pakistan
during 1988-1998. To measure technical efficiency, they used Data Envelopment
Analysis and employed two input-output specifications for efficiency
measurement. In one specification (loan based model), operating and interest
expenses were used as inputs while loans and advances (along investment) were
considered as outputs of the commercial bank. In second specification (income
based model), operating and interest expenses were considered as inputs while
interest and non interest income worked as outputs of the commercial bank. They
decomposed technical efficiency into pure technical efficiency and scale efficiency.
From analysis, they found that the efficiency score in loan based model was much higher
as compared to the income based model. At the same time, results also indicated the
presence of space for improvement in the efficiency of banks in these countries.

(2005) examined the efficiency of banking sector of Indian sub-continent over the
period 1993 to 2001. An output oriented DCA is used for the estimation of the
efficiency of banks. Two outputs, i.e. interest income and non-interest income and
two inputs i.e. interest expenses and non-interest expenses were used for DEA
specification to estimate the efficiency of banks under variable returns to scale. To
estimate the impact of bank characteristics, macroeconomic indicators and
financial structure variables on estimated efficiency score, they used to bit
model).
(2006) compared the productive efficiency of Islamic and conventional banks in
Malaysia. They used stochastic frontier function approach to estimate the
efficiency of banks to compare their relative performance. For the study, 34 banks
were selected and data about these banks were obtained from the annual reports
of the banks and the directory of the association of banks in Malaysia from 1993
to 2000. Their results showed insignificant difference in terms of cost efficiency
between Islamic and conventional banks but Islamic banks did marginally better
than conventional banks while cost efficiency difference was significant (al 5%
level of significance) between foreign and local banks. They found no relationship
between ownership and efficiency. However, their study related inefficiency of the
bank with its size in a non linear way.

(2007) used DBA to analyze the technical, allocate and cost efficiency of 16
Greek cooperative banks over the period 2000 to 2004. Following intermediation
approach, fixed assets, deposits and number employees were considered as
inputs of the banks while loans, liquid assets and investments were considered as
outputs of the banks. Estimated yearly average cost efficiency score for
cooperative banks ranged from 0.802 to 0.836 in their study. According to them,
major source of cost inefficiency was allocating inefficiency present in banks. After
the estimation of efficiency, they used tobil model to find out the influence of the
internal and external factors on its efficiency. From estimated to bit model, among
bank specific variables, they found positive impact of equity to assets, number of
ATMs, loans to assets and assets of the bank on the estimated efficiency of banks.
Company Profile.
Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it should
be able to meet new challenges posed by the technology and any other external
and internal factors.
Phase I
The General Bank of India was set up in the year 1786. Next came Bank of
Hindustan shareholders. And Bengal Bank. The East India Company established
Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as
independent units and called it Presidency Banks. These three banks were
amalgamated in 1920 and Imperial Bank of India was established which started as
private shareholders banks, mostly Europeans. In 1865 Allahabad Bank was
established and first time exclusively by Indians, Punjab National Bank Ltd. was
set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of
India, Central Bank of India, Bank of Baroda, Canada Bank, Indian Bank, and Bank
of Mysore were set up. Reserve Bank of India came in 1935. During the first phase
the growth was very slow and banks also experienced periodic failures between
1913 and 1948. There were approximately 1100 banks, mostly small. To
streamline the functioning and activities of commercial banks, the Government of
India came up with The Banking Companies Act, 1949 which was later changed to
Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965).
Reserve Bank of India was vested with extensive powers for the supervision of
banking in India as the Central Banking Authority.
Phase II
Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive
banking facilities on a large scale especially in rural and semi-urban areas. It
formed State Bank of India to act as the principal agent of RBI and to handle
banking transactions of the Union and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on
19th July, 1969, major process of nationalization was carried out. It was the effort
of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks
in the country were nationalized. Second phase of nationalization Indian Banking

Sector Reform was carried out in 1980 with seven more banks. This step brought
80% of the banking segment in India under Government ownership.
The following are the steps taken by the Government of India to
Regulate Banking Institutions in the Country:
1949: Enactment of Banking Regulation Act.
1955: Nationalization of State Bank of India.
1959: Nationalization of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalization of 14 major banks.
1971: Creation of credit guarantee corporation.
1975: Creation of regional rural banks.
1980: Nationalization of seven banks with deposits over 200 crore.
After the nationalization of banks, the branches of the public sector bank India
rose to approximately 800% in deposits and advances took a huge jump by
11,000%.
Phase III
This phase has introduced many more products and facilities in the banking sector
in its reforms measure. In 1991, under the chairmanship of M Narasimham, a
committee was set up by his name which worked for the liberalization of banking
practices. The country is flooded with foreign banks and their ATM stations. Efforts
are being put to give a satisfactory service to customers. Phone banking and net
banking is introduced. The entire system became more convenient and swift. Time
is given more importance than money.
History of ICICI Ltd
ICICI was formed in 1955 at the initiative of the World Bank, the Government of
India and representatives of Indian industry. The principal objective was to create
a development financial institution for providing medium-term and long-term
project financing to Indian businesses. In the 1990s, ICICI transformed its business
from a development financial institution offering only project finance to a
diversified financial services group offering a wide variety of products and
services, both directly and through a number of subsidiaries and affiliates like ICICI
Bank.
State Bank of India.
The Bank is actively involved since 1973 in non-profit activity called Community
Services Banking. All our branches and administrative offices throughout the
country sponsor and participate in large number of welfare activities and social
causes. Our business is more than banking because we touch the lives of people
anywhere in many ways. The bank is entering into many new businesses with
strategic tie ups Pension Funds, General Insurance, Custodial Services, Private
Equity, Mobile Banking, Point of Sale Merchant Acquisition, Advisory Services,
structured products etc each one of these initiatives having a huge potential for
growth. The Bank is forging ahead with cutting edge technology and innovative
new banking models, to expand its Rural Banking base, looking at the vast

untapped potential in the hinterland and proposes to cover 100,000 villages in the
next two years.
Special Features of State Bank of India
1. There schemes meet the customer varied needs.
2. Nominal services processing charges.
3. Loan at competitive rates.
4. Interest charges on reducing balance only instead of annual balance.
5. Interest is compounded quarterly risk.
6. No penalty for repayment of loans.
RESEARCH METHODOLOGY
In Research Methodology we study the various steps that are generally adopted
by researcher in studying his research problem along with the logic behind them.
Research Methodology includes:

Research Design
The research design used is descriptive between capital structure and cost of
capital of ICICI and SBI. The study is descriptive because already a wide literature
is present on this topic.
SCOPE OF THE STUDY
The area of the Study is two banks SBI and ICICI to make a comparison between
the capital Structure. In fact, the research design is the conceptual structure
within which research conducted. It constitutes the blue print for the collection,
measurement and analysis. This research is of Explanatory & analytical in nature.
In explanatory & analytical research we have sufficient data on the concept and
research material. Because many researcher have been done the work on the
concept.
METHODS OF COLLECTING DATA
Since the report required studying the theoretical as well as practical aspects of
Project Finance, the books have provided in the theoretical aspects of the study. To
get the latest information, Internet was also used as a medium at various stages.
The data for the project report has been collected from the secondary sources.
ANALYSIS AND INTERPRETATION

The large size of the dominant market position of the bank has helped it to build
up a loan portfolio which is well diversified across industries as well as region thus
cushioning the impact of problems in certain industries moreover the increased
focus on its top clients and the size of relationship banking approach subsequent
to the formation of the corporate accounting groups (CAG) has helped the bank in
retaining its top clients and also increasing them share of business from them.

Capital Structure of SBI and ICICI

The capital structure which maximize the value of firm, minimize the cost of
capital is called optimum capital structure.
In Millions
Bank

SBI

ICICI

Year
Sources
2008

Equity

Debt

Equity

Debt.

6314.70

11126.79

2007

5262.99

2006

5262.99

517274.1
1
397033.3
5
306412.4
4

656484.3
4
512560.2
6
385219.1
4

8993.44
8898.34

Interpretation
It is clear from the study that debt and equity used by ICICI is more than SBI. Debt
and equity used by ICICI more than SBI. Debt used by ICICI and SBI at increasing
rate, also equity used by ICICI & SBI bank at increasing rate.
Comparison of Equity Capital
Equity capital is owners capital and most costly source of finance but least risky
then the preference and debt source of finance

1
2
3

2006
2007
2008

Interpretation
It is clear from the study that equity used by ICICI is more than SBI. The equity
used by ICICI and SBI at increasing rate. Equity capital is owners capital it means a
good indicator for health of an organization.
Comparison of Debt
Debt are least costly source of finance because the rate of interest is lower than
the rate of dividend and interest paid on debenture is deducted from the profit
while calculating the taxes but these are most risky.

Interpretation
It is clear from the study that debt used by ICICI is more than SBI. The debt used
by ICICI and SBI at increasing rate.
State Bank of India
Debt-Equity Ratio = Debt Equity
Abhinav International Monthly Refereed Journal of Research in Management &
Technology

In
%age
Bank
Year
Source
s
2008
2007

SBI
Cost of Cost of
Equity
Debt

ICICI
Cost of
Equity

Cost of
Debt.

2.05
1.34

3.950
2.93

35.77
31.92

61.73
59.05

2006

Ke

1.34

65.79

2.47

24.92

DPS MP100 DPS = Dividend per share MP = Market

Price
Kd

I NP100 I = Interest NP = Net Proceed

SBI Bank
2008
2006-2007
2008
2007
2006

Ke
Ke
Kd
Kd
Kd

= 21.501047100= 2.05
= 141047100= 1.34
= 319290.77517274.11100= 61.73
= 234368.21397033.35100=59.03
= 201592.89 306412.44100=65.79

ICICI Bank
2008
2007
2006
2008
2007
2006

Ke
Ke
Ke
Kd
Kd
Kd

=
=
=
=
=
=

13.65346100=3.95
10.13346100=2.93
8.53346100=2.47
234842.97656484.39100= 35.77
163584.94512560.20100= 31.92
95974.48385219.14100=24.92

Comparison of Cost of Capital

Cost of capital is minimum rate of return that firm must earn on the equity
financed position of an investment project in order to leave unchanged the market
price of the share
Year Debt Equity Ratio

Interpretation
It is clear from the study that Cost of equity of ICICI is more than SBI. On the basis
of study it is clear that cost of debt of SBI is more than ICICI and cost of equity of
ICICI is more than SBI and cost of debt is decreasing and cost of equity is
increasing in SBI and cost of debt is increasing and cost of equity is also increasing
in ICICI
Cost of Debt
The firm borrows the fund from the financial institute or public for a specific period
of time at a specific rate of interest.
Interpretation
From the above table, It is clear that cost of debt of SBI is more than ICICI.
Overall Cost of Capital of ICICI
Year

2006
2007

Source

Book Value

Weight

Cost
%age

Weighted Average cost

Equity
Debt
Total
Equity
Debt

8898.34
385219.14
394117.48
8893.44
51252560.26

0.02257
0.9774

2.47
24.92

0.0172
0.9826

2.93
31.92

0.055
24.35
24.40
0.505
31.366

2008

Total
Equity
Debt
Total

521553.7
11126.79
656484.34
667611.13

0.0166
0.98333

3.950
35.77

31.871
0.0658
35.17
35.239

Overall Cost of
Capital of SBI
Source

Book value

Weight

Cost%
age

Weighted
Average
cost

Equit
y
Deb

5262.99

0.016
88
0.983
1

1.34

0.0226

65.79

64.678

Year
2006

Total
2007

Equity
Deb
Total
Equity

2008

306412.
44
311675.
43
5262.99
397033.35
402296.34
6314.70

Deb

517274.11

Total

523588.81

64.70
0.01308
0.9869

1.34
59.03

0.0175
58.256
58.27

0.01206

2.0534

0.9879

61.73

60.98

35.239

61.004

Comparison of Overall cost of Capital of SBI & ICICI

Year

Overall Cost of
Capital of ICICI

Overall Cost of
Capital of SBI

2006
2007

24.40
31.87

64.70
58.27

2008

35.239

61

0.0247

Interpretation
It is clear from the study that overall cost of capital of ICICI is increasing per year,
cost of capital is decreasing per year and overall cost of capital of ICICI is less than
SBI

FINDINGS AND CONCLUSIONS

The cost of capital of SBI is decreasing per year and cost of capital of ICICI is
increasing.
On the basis of study conclude that ICICI is better than SBI because it continue to
focus decreasing the cost of capital as compared to SBI

 ICICI have the better capital structure than SBI.

Cost of debt of SBI is more than ICICI.
Cost of equity of ICICI is more than SBI.
Cost of equity of SBI & ICICI is increasing per year.
Cost of debt of ICICI is increasing & SBI is decreasing.
Overall cost of capital of ICICI is increasing per year.
Overall cost of capital of SBI is decreasing per year.

RECOMMENDATION
Public bank should improve their capital structure.
Private sector bank should try to reduce their overall cost of capital.
Determinant of capital structure should be considered while forming capital
structure.
Bank should have liquidity in their capital structure
Timely review of their capital structure is necessary in banking industry
Timely review of their cost of capital of different sources (debt, equity) is
necessary in banking industry
REFERENCES
Websites
1. www.sbi.com
2. www.icici.com