CHAPTER-1 INTRODUCTION

1.1 INTRODUCTION The word bank means an organization where people and business can invest or borrow money; change it to foreign currency etc. According to Hals bury A Banker is an individual, Partnership or Corporation whose sole pre-dominant business is banking, that is the receipt of money on current or deposit account, and the payment of cheque drawn and the collection of cheque paid in by a customer. The Origin and Use of Banks The Word Bank is derived from the Italian word Banko signifying a bench, which was erected in the market-place, where it was customary to exchange money. The Lombard Jews were the first to practice this exchange business, the first bench having been established in Italy A.D. 808. Some authorities assert that the Lombard merchants commenced the business of money-dealing, employing bills of exchange as remittances, about the beginning of the thirteenth century. About the middle of the twelfth century it became evident, as the advantage of coined money was gradually acknowledged, that there must be some controlling power, some corporation which would undertake to keep the coins that were to bear the royal stamp up to certain standard of value; as, independently of the sweating which invention may place to the credit of the ingenuity of the Lombard merchants- all coins will, by wear or abrasion, become thinner, and consequently less valuable; and it is of the last importance, not only forth credit of a country, but for the easier regulation of commercial transactions, that the metallic currency be kept as nearly as possible up to the legal standard. Much unnecessary trouble and annoyance has been caused formerly by negligence in this respect. The gradual merging of the business of a goldsmith into a bank appears to have been the way in which banking, as we now understand the term, was introduced into England; and it was not until long after the establishment of banks in other countries-for state purposes, the regulation of the coinage, etc. that any large or similar institution was introduced into England. It is only within the last twenty years that printed

cheques have been in use in that establishment. First commercial bank was Bank of Venice which was established in 1157 in Italy. 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 Narasimham 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 banks 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 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. Infect, 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. BASEL - II ACCORD Bank capital framework sponsored by the world's central banks designed to promote uniformity, make regulatory capital more risk sensitive, and promote enhanced risk management among large, internationally active banking organizations. The International Capital Accord, as it is called, will be fully effective by January 2008 for banks active in international markets. Other banks can choose to "opt in," or they can continue to follow the minimum capital guidelines in the original Basel Accord, finalized in 1988. The revised accord (Basel II) completely overhauls the 1988 Basel Accord and is based on three mutually supporting concepts, or "pillars," of capital adequacy. The first of these pillars is an explicitly defined regulatory capital requirement, a minimum capital-toasset ratio equal to at least 8% of risk-weighted assets. Second, bank supervisory agencies, such as the Comptroller of the Currency, have authority to adjust capital levels for individual banks above the 9% minimum when necessary. The third supporting pillar calls upon market discipline to supplement reviews by banking agencies. Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital

banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. The final version aims at: 1. Ensuring that capital allocation is more risk sensitive; 2. Separating operational risk from credit risk, and quantifying both; 3. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage. While the final accord has largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic. Basel II has largely left unchanged the question of how to actually define bank capital, which diverges from accounting equity in important respects. The Basel I definition, as modified up to the present, remains in place. The Accord in operation Basel II uses a "three pillars" concept (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline to promote greater stability in the financial system. The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all. The First Pillar The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk and market risk. Other risks are not considered fully quantifiable at this stage.
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The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB stands for "Internal Rating-Based Approach". For operational risk, there are three different approaches - basic indicator approach, Standardized approach and advanced measurement approach. For market risk the preferred approach is VAR (value at risk). As the Basel II recommendations are phased in by the banking industry it will move from standardized requirements to more refined and specific requirements that have been developed for each risk category by each individual bank. The upside for banks that do develop their own bespoke risk measurement systems is that they will be rewarded with potentially lower risk capital requirements. In future there will be closer links between the concepts of economic profit and regulatory capital. Credit Risk can be calculated by using 1. Standardized Approach 2. Foundation IRB (Internal Ratings Based) Approach 3. Advanced IRB Approach The standardized approach sets out specific risk weights for certain types of credit risk. The standard risk weight categories are used under Basel 1 and are 0% for short term government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages and100% weighting on commercial loans. A new 150% rating comes in for borrowers with poor credit ratings. The minimum capital requirement (the percentage of risk weighted assets to be held as capital) has remains at 8%.For those Banks that decide to adopt the standardized ratings approach they will be forced to rely on the ratings generated by external agencies. Certain Banks are developing the IRB approach as a result. The Second Pillar The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal

risk, which the accord combines under the title of residual risk. It gives banks a power to review their risk management system. The Third Pillar The third pillar greatly increases the disclosures that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately. The new Basel Accord has its foundation on three mutually reinforcing pillars that allow banks and bank supervisors to evaluate properly the various risks that banks face and realign regulatory capital more closely with underlying risks. The first pillar is compatible with the credit risk, market risk and operational risk. The regulatory capital will be focused on these three risks. The second pillar gives the bank responsibility to exercise the best ways to manage the risk specific to that bank. Concurrently, it also casts responsibility on the supervisors to review and validate banks risk measurement models. The third pillar on market discipline is used to leverage the influence that other market players can bring. This is aimed at improving the transparency in banks and improves reporting. 1.2 COMPANY PROFILE ABOUT INDIAN OVERSEAS BANK Established on 10th February 1937 by Mr. M. Ct. M. Chidambaram Chettyar, leader in banking, insurance and industry areas, Indian Overseas Bank (IOB) had the twin aims of attaining specialization in overseas banking as well as foreign exchange business. IOB has always been talked about for its excellent presence and services. At the time of inauguration, IOB started its business in three branches at the same time. The branches were located at Karaikudi and Chennai in India and Rangoon in Myanmar, erstwhile Burma. It had a branch in Penang also. During the time when India became an independent nation, Indian Overseas Bank was running 38 branches in India and 7 overseas branches. At that point of time, the Deposits of the bank was Rs.6.64 corer and Advances was Rs.3.23 corer

IOB received the status of nationalized bank in the year 1969 along with other 13 major banks. By this time, it had 195 branches. Gradually between the periods 1969 and 1992, IOB started spreading its wings in foreign destinations like Colombo and Seoul. IOB was the first bank to receive ISO 9001 Certification from Det Norske Verities (DNV), Netherlands in the month of September 1999 for its Computer Policy and Planning Department. Besides, in its journey, it has won many awards and accolades too. These include:

NABARD's award 2000-2001 for creating maximum number of credit links of Self Help Groups in comparison to all the other Banks in Tamil Nadu

Best Award under the category of Banking Technology in the year 2001

BRANCH PROFILE (IOB CATHEDRAL) Cathedral is also one of the important branches in Chennai. In cathedral branch has more than 28000 account is there and also issuing pension like Chennai co-operation, Port trust, Govt. Hospitals, railways, MTC, PWD, Tele-communication department etc. this service is offering from 35years ago. Totally 32 staff working for that the branch, Foreign exchange dealing is done here. All type of loans is provided here. Locker, DD, BC, gold coins etc., are the facilities given here. Cathedral branch is CBS type. WORKING HOURS: In Indian overseas bank working hours is from 9:30AM to 4:30PM. HEAD OFFICE: The head office of the Indian overseas bank is located at mount road near Spencer plaza ADDRESS: No; 763 Anna salai, Chennai 600002 INDIAN OVERSEAS BANK: IOB is a one of the major bank based in Chennai with over 1400 domestic branch & 6 branches in Abroad. The bank was established in 1937 to encourage overseas banking for foreign exchange operation. The bank started simultaneously with 3 branches there are; Indian overseas bank Chennai
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Indian overseas bank Rangoon Indian overseas bank Singapore Indian overseas bank Burma Indian overseas bank Malaysia Indian overseas bank Sri lanka Indian overseas bank Sumatra

In the year 2000 I.O.B engaged India in IPO which brought the Govt. share in the bank down to 75%. IOB International expansion

1937-38: As mentioned above, IOB was international from its inception with branches Indian Overseas Bank Rangoon, Indian Overseas Bank Penang, and Indian Overseas Bank Singapore.

1941: IOB opened a branch in Malaya that presumably closed almost immediately because of the war.

1946: IOB opened a branch in Ceylon. 1947: IOB opened a branch in Bangkok and re-opened others. 1948: United Commercial Bank (see below) opened a branch in Malaya. 1949: IOB opened a branch in Bangkok. 1963: The Burmese government nationalized IOB's branch in Rangoon. 1973: IOB, Indian Bank and United Commercial Bank established United Asian Bank Berhad. (Indian Bank had been operating in Malaysia since 1941 and United Commercial Bank Limited had been operating there since 1948.) The banks set up United Asian to comply with the Banking Law in Malaysia, which prohibited foreign government banks from operating in the country. Also, IOB and six Indian private banks established Bharat Overseas Bank as a Chennai-based private bank to take over IOB's Bangkok branch. The Baharat Overseas Bank is the only private bank that the Reserve Bank of India has permitted to have a branch outside India. The ownership
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was: Indian Overseas Bank (30%), Bank of Rajasthan (16%), Vysya Bank (14.66%), Federal Bank (19.67%), KarurVysya Bank (10%), South Indian Bank (10%) and Karnataka Bank (8.67%). Bharat Overseas serves the Indian ethnic community in Thailand.

1977: IOB opened a branch in Seoul. 1991: Bank of Commerce (BCB), a Malaysian bank, acquired United Asian Bank (UAB). In 1999 BCB merged with Bank Bumiputra Malaysia to form BumiputraCommerce Bank Berhad. Indian overseas bank has being operated in Malaysia since 1941, and united

commercial bank limited has been operated since 1948. The bank has being set up united Asian company with banking law in Malaysia, which prohibited foreign Govt. Bank from operating in the county. Also I.O.B and other six bank Indian private bank etc. Bharath overseas banks as Chennai based private bank to take over I.O.B Bangkok branch. The bharath overseas bank is the only private bank, which the reserve bank of India has permitted to have a branch out side India. The ownership was, Indian overseas bank (30%) Bank of Rajasthan (18%) Vysya bank (14.66%) Federal bank (19.67) South Indian bank (10%). Karnataka bank (8.67%). Bharath overseas bank the Indian ethic community in Thailand. In 1977 I.O.B opened a branch in Seoul. 1991 bank of commerce (BCB) a Malaysian bank (U.A.B) in 1999 BCB merged with bank Brahmaputra Malaysia.

FUNCTIONS OF INDIAN OVERSEAS BANK Its accept deposits from the public. It lends money to the needy people, for having loans, jewels loans & for the customer durable goods. Bank issue Cheque. It deals in the bill of exchange, dies, promissory notes, coupons, draft, and bill of lending, railway receipts, warrants, certificates, scripts & other securities weather transferable or negotiable. It acts as agent for remittance of money on behalf of government, municipality, local board, Insurance Corporation & other. It grants & issue letter of credit travelers Cheque& circular notes. INDIAN BANKS PROFILE HISTORY The Indian Bank Limited the predecessor to Indian Bank Managed by Indians on Western lines in the wake of the widespread misery caused to depositor by the failure of the house of Messrs.Arbothnet & Co in the year 1906. The late Honble

Shri.V.Krishnaswamy Iyer CSI conceived the idea of starting of bank of Chennai and called a meeting of prominent citizens on November 3, 1906. The Indian Bank Limited commenced services on 15th August 1907 exactly forty years before India political freedom on August 1947. A PREMIER BANK OWNED BY THE GOVERNMENT OF INDIA Established on 15th August 1907 as part of the Swedish movement Serving the nation with a team of over 18782 dedicated staff Total Business crossed Rs.2, 11,988 Crores as on 31.03.2012 Operating Profit increased to Rs. 3,463.17 Crores as on 31.03.2012 Net Profit increased to Rs.1746.97 Crores as on 31.03.2012

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Core Banking Solution (CBS) in all 2089 branches as on 31/03/2013

INTERNATIONAL PRESENCE Overseas branches in Singapore, Colombo including a Foreign Currency Banking Unit at Colombo and Jaffna 240 Overseas Correspondent banks in 70 countries

DIVERSIFIED BANKING ACTIVITIES -2 SUBSIDIARY COMPANIES Indbank Merchant Banking Services Ltd IndBank Housing Ltd.

A FRONT RUNNER IN SPECIALIZED BANKING 97 Forex Authorized branches inclusive of 1 Specialised Overseas Branch at Chennai exclusively for handling forex transactions arising out of Export, Import, Remittances and Non Resident Indian business 73 Special SME Branches extending finance exclusively to SSI units Established MSME CPUs at 9 key centers at Chennai, Mumbai, Kolkata, New Delhi, Ahmedabad, Bangalore, Pune, Coimbatore and Kancheepuram. MoU entered with National Small Industries Corporation (NSIC) to focus on MSME Segment LEADERSHIP IN RURAL DEVELOPMENT Under Financial Inclusion Plan, Indian Bank has been allotted with 1523 villages with population above 2000 ,all the 1523 villages have been provided with banking services as on 30thSeptember 2012 as below: * 1425 villages through Smart card based Business Correspondent (BC) Model * 53 villages through Brick and mortar branches /Banking Service Centres (BSCs) * 45 villages through Mobile Branch/Van Pioneer in introducing Self Help Groups and Financial Inclusion Project in the country Award winner for Excellence in Agricultural Lending from Honourable Union Minister for Finance

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Best Performer Award for Micro-Finance activities in Tamil Nadu and Union Territory of Puducherry from NABARD Established 45 specialized exclusive Microfinance branches called "Microsate" across the country to cater the needs of Urban poor through SHG (Self Help Group)/JLG (Joint Liability Group) concepts

A special window for Micro finance viz., Micro Credit Kendras are functioning in 44 Rural/Semi Urban branches Harnessing ICT (Information and Communication Technology) for Rural Development and Inclusive Banking Provision of technical assistance and project reports in Agriculture to

entrepreneurs through Agricultural Consultancy & Technical Services (ACTS)

A PIONEER IN INTRODUCING THE LATEST TECHNOLOGY IN BANKING 100% Core Banking Solution(CBS) Branches 100% Business Computerisation 1322 Automated Teller Machines(ATM) 24 x 7 Service through more than 99242 ATMs under shared network Internet and Tele Banking services to all Core Banking customers e-payment facility for Corporate customers Cash Management Services Depository Services Reuter Screen, Telerate, Reuter Monitors, Dealing System provided at Overseas Branch, Chennai I B Credit Card Launched I B Gold Coin I B Prepaid Cards Launched (GIFT Card, International Travel Card)

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CHAPTER-2 REVIEW OF LITERATURE 2.1 CONCEPTUAL REVIEW CAMEL FRAMEWORK C A CAPITAL ADEQUACY ASSET QUALITY

M MANAGEMENT E L EARNINGS LIQUIDITY

2.1.1 CAPITAL ADEQUACY It is important for a bank to maintain depositors confidence and preventing the bank from going bankrupt. It reflects the overall financial condition of banks and also the ability of management to meet the need of additional capital. The following ratios measure capital adequacy: Capital Adequacy Ratio (CAR): The capital adequacy ratio is developed to ensure that banks can absorb a reasonable level of losses occurred due to operational losses and determine the capacity of the bank in meeting the losses. As per the latest RBI norms, the banks should have a CAR of 9 per cent. Debt-Equity Ratio (D/E): This ratio indicates the degree of leverage of a bank. It indicates how much of the bank business is financed through debt and how much through equity. Advance to Assets Ratio (Adv/Ast): This is the ratio indicates a banks aggressiveness in lending which ultimately results in better profitability. Government Securities to Total Investments (G-sec/Inv): It is an important indicator showing the risk-taking ability of the bank. It is a banks strategy to have high profits, high risk or low profits, low risk.

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2.1.2 ASSETS QUALITY The quality of assets is an important parameter to gauge the strength of bank. The prime motto behind measuring the assets quality is to ascertain the component of non-performing assets as a percentage of the total assets. The ratios necessary to assess the assets quality are: Net NPAs to Total Assets (NNPAs/TA): This ratio discloses the efficiency of bank in assessing the credit risk and, to an extent, recovering the debts. Net NPAs to Net Advances (NNPAs/NA): It is the most standard measure of assets quality measuring the net non-performing assets as a percentage to net advances. Total Investments to Total Assets (TI/TA): It indicates the extent of deployment of assets in investment as against advances. Percentage Change in NPAs: This measure tracks the movement in Net NPAs over previous year. The higher the reduction in the Net NPA level, the better it for the bank.

2.1.3 MANAGEMENT EFFICIENCY Management efficiency is another important element of the CAMEL Model. The ratio in this segment involves subjective analysis to measure the efficiency and effectiveness of management. The ratios used to evaluate management efficiency are described as: Total Advances to Total Deposits (TA/TD): This ratio measures the efficiency and ability of the banks management in converting the deposits available with the bank excluding other funds like equity capital, etc. into high earning advances. Profit per Employee (PPE): This shows the surplus earned per employee. It is known by dividing the profit after tax earned by the bank by the total number of employees.

Business per Employee (BPE): Business per employee shows the productivity of human force of bank. It is used as a tool to measure the efficiency of employees of a bank in generating business for the bank.

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Return on Net worth (RONW): It is a measure of the profitability of a bank. Here, PAT is expressed as a percentage of Average Net Worth.

2.1.4 EARNING QUALITY The quality of earnings is a very important criterion that determines the ability of a bank to earn consistently. It basically determines the profitability of bank and explains its sustainability and growth in earnings in future. The following ratios explain the quality of income generation. Operating Profit to Average Working Funds (OP/AWF): This ratio indicates how much a bank can earn profit from its operations for every rupee spent in the form of working fund. Percentage Growth in Net Profit (PAT Growth): It is the percentage change in net profit over the previous year. Net Profit to Average Assets (PAT/AA): This ratio measures return on assets employed or the efficiency in utilization of assets.

2.1.5 LIQUIDITY Risk of liquidity is curse to the image of bank. Bank has to take a proper care to hedge the liquidity risk; at the same time ensuring good percentage of funds are invested in high return generating securities, so that it is in a position to generate profit with provision liquidity to the depositors. The following ratios are used to measure the liquidity: Liquid Assets to Demand Deposits (LA/DD): This ratio measures the ability of bank to meet the demand from depositors in a particular year. To offer higher liquidity for them, bank has to invest these funds in highly liquid form. Liquid Assets to Total Deposits (LA/TD): This ratio measures the liquidity available to the total deposits of the bank. Liquid Assets to Total Assets (LA/TA): It measures the overall liquidity position of the bank. The liquid asset includes cash in hand, balance with institutions and money at call and short notice. The total assets include the revaluation of all the assets.

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2.2 RESEARCH REVIEW In the process of continuous evaluation of the banks financial performance both in public sector and private sector, the academicians, scholars and administrators have made several studies on the CAMEL model but in different perspectives and in different periods. 1. CAMEL rating system (Keeley and Gilbert) This study uses the capital adequacy component of the CAMEL rating system to assess whether regulators in the 1980s influenced inadequately capitalized banks to improve their capital. Using a measure of regulatory pressure that is based on publicly available information, he found that inadequately capitalized banks responded to regulators' demands for greater capital. This conclusion is consistent with that reached by Keeley (1988). Yet, a measure of regulatory pressure based on confidential capital adequacy ratings reveals that capital regulation at national banks was less effective than at state-chartered banks. This result strengthens a conclusion reached by Gilbert (1991) 2. Banks performance evaluation by CAMEL model (Hirtle and Lopez) Despite the continuous use of financial ratios analysis on banks performance evaluation by banks' regulators, opposition to it skill thrive with opponents coming up with new tools capable of flagging the over-all performance ( efficiency) of a bank. This research paper was carried out; to find the adequacy of CAMEL in capturing the overall performance of a bank; to find the relative weights of importance in all the factors in CAMEL; and lastly to inform on the best ratios to always adopt by banks regulators in evaluating banks efficiency. 3. CAMEL model examination (Rebel Cole and Jeffery Gunther) To assess the accuracy of CAMEL ratings in predicting failure, Rebel Cole and Jeffery Gunther use as a benchmark an off-site monitoring system based on publicly available accounting data. Their findings suggest that, if a bank has not been examined for more than two quarters, off-site monitoring systems usually provide a more accurate indication of survivability than its CAMEL rating. The lower predictive accuracy for CAMEL ratings older" than two quarters causes the overall accuracy of CAMEL ratings to fall substantially below that of off-site monitoring systems.
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The higher predictive accuracy of off-site systems derives from both their timeliness-an updated off-site rating is available for every bank in every quarter-and the accuracy of the financial data on which they are based. Cole and Gunther conclude that off-site monitoring systems should continue to play a prominent role in the supervisory process, as a complement to on-site examinations. 4. Check the Risk taken by banks by CAMEL model The de-regulation of the U.S. banking industry has fostered increased competition in banking markets, which in turn has created incentives for banks to operate more efficiently and take more risk. They examine the degree to which supervisory CAMEL ratings reflect the level of risk taken by banks and the risk-taking efficiency of those banks (i.e., whether increased risk levels generate higher expected returns). Their results suggest that supervisors not only distinguish between the risk-taking of efficient and inefficient banks, but they also permit efficient banks more latitude in their investment strategies than inefficient banks. 5. Bank soundness - CAMEL ratings Indonesia (Kenton Zumwalt) This study uses a unique data set provided by Bank Indonesia to examine the changing financial soundness of Indonesian banks during this crisis. Bank Indonesia's nonpublic CAMEL ratings data allow the use of a continuous bank soundness measure rather than ordinal measures. In addition, panel data regression procedures that allow for the identification of the appropriate statistical model are used. They argue the nature of the risks facing the Indonesian banking community calls for the addition of a systemic risk component to the Indonesian ranking system. The empirical results show that during Indonesia's stable economic periods, four of the five traditional CAMEL components provide insights into the financial soundness of Indonesian banks. However, during Indonesia's crisis period, the relationships between financial Characteristics and CAMEL ratings deteriorate and only one of the traditional CAMEL componentsearningsobjectively discriminates among the ratings.

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6. CAMELs and Banks Performance Evaluation (Muhammad Tanko) Despite the continuous use of financial ratios analysis on banks performance evaluation by banks' regulators, opposition to it skill thrive with opponents coming up with new tools capable of flagging the over-all performance ( efficiency) of a bank. This research paper was carried out; to find the adequacy of CAMEL in capturing the overall performance of a bank; to find the relative weights of importance in all the factors in CAMEL; and lastly to inform on the best ratios to always adopt by banks regulators in evaluating banks efficiency. The data for the research work is secondary and was collected from the annual reports of eleven commercial banks in Nigeria over a period of nine years (1997 - 2005). The purposive sampling technique was used. The findings revealed the inability of each factor in CAMEL to capture the holistic performance of a bank. Also revealed, was the relative weight of importance of the factors in CAMEL which resulted to a call for a change in the acronym of CAMEL to CLEAM. In addition, the best ratios in each of the factors in CAMEL were identified. The paper concluded that no one factor in CAMEL suffices to depict the overall performance of a bank. Among other recommendations, banks' regulators are called upon to revert to the best identified ratios in CAMEL when evaluating banks performance. When we were searching for the research paper for literature review, we could not find a single report or any research paper on the CAMELS model prepared on Indian Banks. Though it may be prepared by them but we have not found. So we inspired to make the project report on CAMELS Model especially on Indian Banks.

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CHAPTER-3 CAMEL FRAMWORK

3.1 CAMELS 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 CAMELS rating. 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. A CAMEL is basically a ratio-based model for evaluating the performance of banks. Various ratios forming this model are explained below: 3.1.1 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 9 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 risksforeign exchange, credit, and interest rate risksby assigning risk weightings to the institutions assets. 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. The following ratios measure capital adequacy:
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a) Capital Risk Adequacy Ratio: CRAR is a ratio of Capital Fund to Risk Weighted Assets. Reserve Bank of India prescribes Banks to maintain a minimum Capital to risk-weighted Assets Ratio (CRAR) of 9 % with regard to credit risk, market risk and operational risk on an ongoing basis, as against 8 % prescribed in Basel documents. Total capital includes tier-I capital and Tier-II capital. Tier-I capital includes paid up equity capital, free reserves, intangible assets etc. Tier-II capital includes long term unsecured loans, loss reserves, hybrid debt capital instruments etc. The higher the CRAR, the stronger is considered a bank, as it ensures high safety against bankruptcy. CRAR = Capital/ Total Risk Weighted Credit Exposure b) Debt Equity Ratio: This ratio indicates the degree of leverage of a bank. It indicates how much of the bank business is financed through debt and how much through equity. This is calculated as the proportion of total asset liability to net worth. Outside liability includes total borrowing, deposits and other liabilities. Net worth includes equity capital and reserve and surplus. Higher the ratio indicates less protection for the creditors and depositors in the banking system. Borrowings/ (Share Capital + reserves) c) Total Advance to Total Asset Ratio: This is the ratio of the total advanced to total asset. This ratio indicates banks Aggressiveness in lending which ultimately results in better profitability. Higher ratio of advances of bank deposits (assets) is preferred to a lower one. Total advances also include receivables. The value of total assets is excluding the revolution of all the assets. Total Advances/ Total Asset d) Government Securities to Total Investments: The percentage of investment in government securities to total investment is a very important indicator, which shows the risk taking ability of the bank. It indicates a banks strategy as being high profit high risk or low profit low risk. It also gives a view as to the

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availability of alternative investment opportunities. Government securities are generally considered as the most safe debt instrument, which, as a result, carries the lowest return. Since government securities are risk free, the higher the government security to investment ratio, the lower the risk involved in a banks investments. Government Securities/ Total Investment 3.1.2 ASSET QUALITY Asset quality determines the healthiness of financial institutions against loss of value in the assets. The weakening value of assets, being prime source of banking problems, directly pour into other areas, as losses are eventually written-off against capital, which ultimately expose 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 nonperforming 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 recognizing 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.

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In this regard, it is useful to emphasize 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 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. Higher ratio 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 nonperforming when it ceases to generate income for the Bank. An NPA is a loan or an advance where: 1. Interest and/or installment of principal remains overdue for a period of more than 90days in respect of a term loan; 2. The account remains "out-of-order'' in respect of an Overdraft or Cash Credit (OD/CC); 3. The bill remains overdue for a period of more than 90 days in case of bills purchased and discounted; 4. 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 5. 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. 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.

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The following ratios are necessary to assess the asset quality. a) Gross NPA ratio: This ratio is used to check whether the bank's gross NPAs are increasing quarter on quarter or year on year. If it is, indicating that the bank is adding a fresh stock of bad loans. It would mean the bank is either not exercising enough caution when offering loans or is too lax in terms of following up with borrowers on timely repayments.

Gross NPA/ Total Loan b) Net NPA ratio: Net NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also wear down the value of the asset. Loans and advances usually represent the largest asset of most of the banks. It monitors the quality of the banks loan portfolio. The higher the ratio, the higher the credits risk.

Net NPA/ Total Loan 3.1.3 MANAGEMENT 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. 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 advance to total deposit, business per employee and profit per employee helps in gauging the management quality of the banking institutions. Several indicators, however, can jointly serveas, for instance, efficiency measures doas an indicator of management soundness. The ratios used to evaluate management efficiency are described as under:
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a) Total Advance to Total Deposit Ratio: This ratio measures the efficiency and ability of the banks management in converting the deposits available with the banks (excluding other funds like equity capital, etc.) into high earning advances. Total deposits include demand deposits, saving deposits, term deposit and deposit of other bank. Total advances also include the receivables. Total Advance/ Total Deposit b) Business per Employee: Revenue per employee is a measure of how efficiently a particular bank is utilizing its employees. Ideally, a bank wants the highest business per employee possible, as it denotes higher productivity. In general, rising revenue per employee is a positive sign that suggests the bank is finding ways to squeeze more sales/revenues out of each of its employee. Total Income/ No. of Employees c) Profit per Employee: This ratio shows the surplus earned per employee. It is arrived at by dividing profit after tax earned by the bank by the total number of employee. The higher the ratio shows good efficiency of the management. Profit after Tax/ No. of Employees 3.1.4 EARNING & 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 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 aroused to serve the purpose, the best and most widely used indicator is Return on Assets (ROA).

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However, for in-depth analysis, another indicator Interest Income to Total Income and Other income to Total Income is also in used. Compared with most other indicators, trends in profitability can be more difficult to interpretfor instance, unusually high profitability can reflect excessive risk taking. The following ratios try to assess the quality of income in terms of income generated by core activity income from landing operations. a) Dividend Payout Ratio: Dividend payout ratio shows the percentage of profit shared with the shareholders. The more the ratio will increase the goodwill of the bank in the share market. Dividend/ Net profit b) Return on Asset: Net profit to total asset indicates the efficiency of the banks in utilizing their assets in generating profits. A higher ratio indicates the better income generating capacity of the assets and better efficiency of management in future. Net Profit/ Total Asset c) Operating Profit by Average Working Fund: This ratio indicates how much a bank can earn from its operations net of the operating expenses for every rupee spent on working funds. Average working funds are the total resources (total assets or total liabilities) employed by a bank. It is daily average of total assets/ liabilities during a year. The higher the ratio, the better it is. This ratio determines the operating profits generated out of working fund employed. The better utilization of the funds will result in higher operating profits. Thus, this ratio will indicate how a bank has employed its working funds in generating profits. Operating Profit/ Average Working Fund d) Net Profit to Average Asset: Net profit to average asset indicates the efficiency of the banks in utilizing their assets in generating profits. A higher ratio indicates the better income generating capacity of the assets and better efficiency of management. It is arrived at by dividing the net profit by average assets, which is the average of total assets in the current year and previous year.

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Thus, this ratio measures the return on assets employed. Higher ratio indicates better earning potential in the future. Net Profit/ Average Asset e) Interest Income to Total Income: Interest income is a basic source of revenue for banks. The interest income total income indicates the ability of the bank in generating income from its lending. In other words, this ratio measures the income from lending operations as percentage of the total income generated by the bank in a year. Interest income includes income on advances, interest on deposits with the RBI, and dividend income. Interest Income/ Total Income f) Other Income to Total Income: Fee based income account for a major portion of the banks other income. The bank generates higher fee income through innovative products and adapting the technology for sustained service levels. The higher ratio indicates increasing proportion of fee-based income. The ratio is also influenced by gains on government securities, which fluctuates depending on interest rate movement in the economy. Other Income/ Total Income 3.1.5 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
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mismatches. 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 marketplacehow willing will counterparty is to transact trades with or lend to the institution? The ratios suggested to measure liquidity under CAMELS Model are as follows: a) Liquidity Asset to Total Asset: Liquidity for a bank means the ability to meet its financial obligations as they come due. Bank lending finances investments in relatively illiquid assets, but it fund its loans with mostly short term liabilities. Thus one of the main challenges to a bank is ensuring its own liquidity under all reasonable conditions. Liquid assets include cash in hand, balance with the RBI, balance with other banks (both in India and abroad), and money at call and short notice. Total asset include the revaluations of all the assets. The proportion of liquid asset to total asset indicates the overall liquidity position of the bank. Liquidity Asset/ Total Asset b) Government Securities to Total Asset: Government Securities are the most liquid and safe investments. This ratio measures the government securities as a proportion of total assets. Banks invest in
27

government securities primarily to meet their SLR requirements, which are around 25% of net demand and time liabilities. This ratio measures the risk involved in the assets hand by a bank. Government Securities/ Total Asset c) Approved Securities to Total Asset: Approved securities include securities other than government securities. This ratio measures the Approved Securities as a proportion of Total Assets. Banks invest in approved securities primarily after meeting their SLR requirements, which are around 25% of net demand and time liabilities. This ratio measures the risk involved in the assets hand by a bank. Approved Securities/ Total Asset d) Liquidity Asset to Demand Deposit: This ratio measures the ability of a bank to meet the demand from deposits in a particular year. Demand deposits offer high liquidity to the depositor and hence banks have to invest these assets in a highly liquid form. Liquidity Asset/ demand Deposit e) Liquidity Asset to Total Deposit: This ratio measures the liquidity available to the deposits of a bank. Total deposits include demand deposits, savings deposits, term deposits and deposits of other financial institutions. Liquid assets include cash in hand, balance with the RBI, balance with other banks (both in India and abroad), and money at call and short notice. Liquidity Asset/ Total Deposit

3.1.6 SENSITIVITY TO MARKET RISK It refers to the risk that changes in market conditions could adversely impact earnings and/or capital. Market Risk encompasses exposures associated with changes in interstates, foreign exchange rates, commodity prices, equity prices, etc. While all of these items are important, the primary risk in most banks is interest rate risk (IRR), which will be the focus
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of this module. The diversified nature of bank operations makes them vulnerable to various kinds of financial risks. Sensitivity analysis reflects institutions exposure to interstate risk, foreign exchange volatility and equity price risks (these risks are summed in market risk). Risk sensitivity is mostly evaluated in terms of managements ability to monitor and control market risk. Banks are increasingly involved in diversified operations, all of which are subject to market risk, particularly in the setting of interest rates and the carrying out of foreign exchange transactions. In countries that allow banks to make trades in stock markets or commodity exchanges, there is also a need to monitor indicators of equity and commodity price risk. Interest Rate Risk Basics: In the most simplistic terms, interest rate risk is a balancing act. Banks are trying to balance the quantity of reprising assets with the quantity of reprising liabilities. For example, when a bank has more liabilities reprising in a rising rate environment than assets reprising, the net interest margin (NIM) shrinks. Conversely, if your bank is asset sensitive in a rising interest rate environment, your NIM will improve because you have more assets repricing at higher rates. Liquidity risk is financial risk due to uncertain liquidity. An institution might lose liquidity if its credit rating falls, it experiences sudden unexpected cash outflows, or some other event causes counterparties to avoid trading with or lending to the institution. A firm is also exposed to liquidity risk if markets on which it depends are subject to loss of liquidity. Liquidity risk tends to compound other risks. If a trading organization has a position in an illiquid asset, its limited ability to liquidate that position at short notice will compound its market risk. Suppose a firm has offsetting cash flows with two different counterparties on a given day. If the counterparty that owes it a payment defaults, the firm will have to raise cash from other sources to make its payment. Should it be unable to do so, it too we default. Here, liquidity risk is compounding credit risk. Accordingly, liquidity risk has to be managed in addition to market, credit and other risks. Because of its tendency to compound other risks, it is difficult or impossible to isolate liquidity risk. In all but the most simple of circumstances, comprehensive metrics of
29

liquidity risk don't exist. Certain techniques of asset-liability management can be applied to assessing liquidity risk. If an organization's cash flows are largely contingent, liquidity risk may be assessed using some form of scenario analysis. Construct multiple scenarios for market movements and defaults over a given period of time. Assess day-today cash flows under each scenario. Because balance sheets differed so significantly from one organization to the next, there is little standardization in how such analyses are implemented. Regulators are primarily concerned about systemic implications of liquidity risk. Business activities entail a variety of risks. For convenience, we distinguish between different categories of risk: market risk, credit risk, liquidity risk, etc. Although such categorization is convenient, it is only informal. Usage and definitions vary. Boundaries between categories are blurred. A loss due to widening credit spreads may reasonably be called a market loss or credit loss, so market risk and credit risk overlap. Liquidity risk compounds other risks, such as market risk and credit risk. It cannot be divorced from the risks it compounds. An important but somewhat ambiguous distinguish is that between market risk and business risk. Market risk is exposure to the uncertain market value of a portfolio. Business risk is exposure to uncertainty in economic value that cannot be mark-to-market. The distinction between market risk and business risk parallels the distinction between marketvalue accounting and book-value accounting. The distinction between market risk and business risk is ambiguous because there is a vast "gray zone" between the two. There are many instruments for which markets exist, but the markets are illiquid. Mark-to-market values are not usually available, but mark-to-model values provide a more-or-less accurate reflection of fair value. Do these instruments pose business risk or market risk? The decision is important because firms employ fundamentally different techniques for managing the tworisks. Business risk is managed with a long-term focus. Techniques include the careful development of business plans and appropriate management oversight. Book-value accounting is generally used, so the issue of day-to-day performance is not material. The focus is on achieving a good return on investment over an extended horizon. Market risk is managed with a short-term focus. Long-term losses are avoided by avoiding losses from one day to the next. On a tactical level, traders and portfolio managers employ a variety of
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risk metrics duration and convexity, the Greeks, beta, etc.to assess their exposures. These allow them to identify and reduce any exposures they might consider excessive. On a more Strategic level, organizations manage market risk by applying risk limits to traders' or portfolio managers' activities. Increasingly, value-at-risk is being used to define and

monitor these limits. Some organizations also apply stress testing to their portfolios.

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CHAPTER-4 RESEARCH METHODOLOGY

4.1 PROBLEM STATEMENT In the recent years the financial system especially the banks have undergone numerous changes in the form of reforms, regulations & norms. The attempt here is to see how various ratios have been used and interpreted to reveal a banks performance and how this particular model encompasses a wide range of parameters making it a widely used and accepted model in todays scenario 4.2 NEED FOR THE STUDY The ultimate need for the study is to find the performance level of two public sector bank (Indian overseas bank and Indian bank) using CAMEL Framework as a Tool. Through this project the Company is made aware of the areas in which they are effective and the areas in which they need to lay more emphasis. 4.3 SCOPE OF THE STUDY This study was done using CAMEL Framework to the study of banking performance of public sector bank in India. The study covers two public sector banks only (Indian overseas bank and Indian bank). Financials and other data regarding the bank financials are based on the yearly annual reports. This study also suggests that the bank should try formulating their future course of action. 4.4 OBJECTIVES OF THE STUDY To understand the financial performance of the banks. To describe the CAMELS model of ranking, banking institutions, so as to analyze the comparative of IOB and INDIAN BANK To analyze the banks performance through CAMEL model and give suggestion for improvement if necessary.
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4.5 RESEARCH METHODOLOGY ADOPTED We are under going to have analytical research i.e. analysis of banks financial statements which will make us understand the position of one bank in comparison of another and their financial position. 4.5.1 RESEARCH DESIGN To achieve our objective we have done analytical research. We have selected three banks for our study. Public Sector Bank Indian Overseas Bank Public Sector Bank Indian Bank The period for evaluating performance through CAMELS in this study is three years, (i.e.) from financial year 2009-10 to 2010-11 and 2011 to 2012.

4.5.2 DATA COLLECTION METHOD The data is collected from various sources as follows. a) Primary Data: Primary data collected from the Banks Balance Sheets, Profit & Loss statements and also by taking personal visit to the employees of the banks. b) Secondary Data: Secondary data for the ratio analysis & interpretation was collected from journals, Banks prospectus, banks annual reports and internet. 4.5.3 FINANCE TECHNIQUES It is also known as financial techniques. Various accounting techniques such as Comparative Financial Analysis, Common-size Financial Analysis, Trend Analysis, Fund Flow Analysis, Cash Flow Analysis, Ratio Analysis, etc. may be used for the purpose of financial analysis. Some of the important techniques which are suitable for the financial analysis of GSRTC are discussed hereunder: a. Ratio Analysis A ratio is a mathematical relationship between two items expressed in a quantitative form. Ratio is defined as a relationship expressed in quantitative terms,
33

between figures which have cause and effect relationship or which are connected with each other in some manner or the other. The analysis also reveals whether the company's financial position has been improving or deteriorating over time. b. Comparative analysis: This is yet another technique used in financial statement analysis. These statements summaries and present related data for a number of years, incorporating therein changes in individual items of financial statements. These statements normally comprise of comparative balance sheet, profit and loss, comparative statements of changes in total capital as well as in working capital. These statements highlight the trends in performance efficiency and financial position. c. Common-Size Financial Analysis: Common size statements indicate the relationship of various items with some common items, (expressed as percentage of the common item). In this income statement the sales figure is taken as basis and all other figures are expressed as percentage of sales. Similarly in the balance sheet the total assets and liabilities are taken as base and all other figures are expressed as percentage of this total. 4.5.4 TOOLS USED Common size statement. Comparative statement. Ratio analysis 4.6 LIMITATIONS OF STUDY The study was limited to two banks only. Time and resource constrains. The method discussed pertains only to banks though it can be used for performance evaluation of other financial institutions. The study was completely done on the basis of ratios calculated from the balance sheets.

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CHAPTER-5 DATA ANALYSIS AND INTERPRETATIONS 5.1 ANALYSIS OF CAMELFRAMEWORK CAPITAL ADEQUACY RATIO Table 5.1.1 CAPITAL ADEQUACY RATIO BANKS IOB INDIAN BANK 2010 14.78 % 12.71 % 2011 14.55 % 13.76 % 2012 13.32% 13.47%

Chart 5.1.1
IOB 14.78% INDIAN BANK

14.55% 13.76% 13.47% 13.32%

12.71%

2010

2011

2012

INTERPRETATION: CRAR is a ratio of Capital Fund to Risk Weighted Assets. Reserve Bank of India prescribesBanks to maintain a minimum Capital to risk-weighted Assets Ratio (CRAR) of 9 % withregard to credit risk, market risk and operational risk on an ongoing basis, as against 8 %prescribed in Basel documents. The Bank with an international presence has alreadymoved to the revised New Capital Adequacy Framework (BASEL II) from 31.3.2008 in line with RBI guidelines. IOB and INDIAN banks CRAR as per BASEL-II framework as on 31.3.2012 worksout to 13.32% which is well above the requirement of 9%prescribed by RBI.
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DEBT-EQUITY RATIO TABLE 5.1.2 DEBT-EQUITY RATIO BANKS IOB INDIAN BANK 2010 119.37 % 11.57 % 2011 207.56 % 22.06 % 2012 197.97 % 45.11 %

CHART 5.1.2

INTERPRETATION: The Debt to Equity Ratio measures how much money a bank should safely be able to borrow over long periods of time. Generally, any bank that has a debt to equity ratio of over 40% to 50% should be looked at more carefully to make sure there are no liquidity problems. In IOB bank, this ratio more than expected from 2010 to 2012. In 2010 IOB shows low ratio as compare to 2011 because their profit has been increasing and they paid liabilities. In 2012 IOB slightly changed.

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In Indian bank there is no liability problem because the ratios maintain 50%.there is a continuous increment in reserves and surplus so that the ratio was continuously decrease and in the year 2012 there is increment in borrowings so that the ratio was slightly increased. TOTAL ADVANCE TO TOTAL ASSET RATIO TABLE 5.1.3 TOTAL ADVANCE TO TOTAL ASSET RATIO BANKS IOB INDIAN BANK 2010 60.26 % 61.29% 2011 62.55 % 61.82 % 2012 64.06 % 63.86 %

CHART 5.1.3

INTERPRETATION: Total Advance to Total Asset Ratio shows that how much amount the bank holds against its assets. Here in AXIS Bank, from 2010 to 2012 this ratio is continuously increased because increase in advances is more than increase in total assets which shows growth in investment. And that is good sign for the bank.

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This ratio of IOB has increased continuously. In the year 2012, the loans & advances were increased so the ratio was increased to 64.06%. The same way because of decreasing advances during the year 2010 the ratio was decreased. Indian banks Total Advances to Total Asset Ratio is continuously increasing from 61.29% to 63.86%, which shows the sound condition of the bank. As the bank is growing the advances and the assets are increased in same proportion. Because of that the ratio keeps in same rate.

GOVERNMENT SECURITIES TO TOTAL INVESTMENTS

TABLE 5.1.4 GOVERNMENT SECURITIES TO TOTAL INVESTMENTS BANKS IOB INDIAN BANK 2010 85.13 % 81.66 % 2011 78.33 % 54.11 % 2012 89.91 % 60.79 %

CHART 5.1.4

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INTERPRETATION: In IOB the ratio increased from approx 78.33% to 90%. Because of more increment in Government securities to the increment in total asset the ratio is increased. The more investment in government securities shows the good sign of the bank. In INDIAN BANK the ratio was averagely 60.79 % but in the last year it was decreased to 54.11% in the year 2011. The ratio was decreased in the year 2011 because of decrease in investment in government securities.

ASSET QUALITY GROSS NPA RATIO TABLE 5.1.5 BANKS IOB INDIAN BANK 2010 4.47% 0.81% 2011 2.72% 0.98% 20122.74% 2.03%

CHART 5.1.5

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INTERPRETATION: In IOB the ratio is decreased from approx 4.47% to 2.72% which shows the IOB takes care of their money. Thats why their Gross NPA decreases year by year. Amount received in written off accounts helped in improving the profit. In Indian bank the ratio is increase from 0.81% to 2.00%. The gross NPA increased because increments in total loans but in the last two years as the Gross NPA and loans were increased in 2012 average 2.03%. NET NPA RATIO TABLE 5.1.6 NET NPA RATIO BANKS IOB 2010 2011 2012

2.52% 0.23%

1.19% 0.53%

1.35% 1.33%

INDIAN BANK

CHART 5.1.6

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INTERPRETATION: Net NPAs reflects the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also wear down the value of the asset. Loans and advances usually represent the largest asset of most of the banks. It monitors the quality of the banks loan portfolio. The higher the ratio, the higher the credits risk. Above ratios show the fluctuation of NPA of IOB during the last 2 years. The bank has lowest net NPA is 1.35% in 2012. Net NPA is continuously decreased from 2009 to 2011. So it is good for the bank to decrease in NPA. Because of decrease in NPA the risk of bad loans are also decreased. In Indian bank ratio shows NPA increasing 0.23% to 1.3% its bad for the bank. MANAGEMENT QUALITY TOTAL ADVANCE TO TOTAL DEPOSIT RATIO TABLE 5.1.7 Total Advance to Total Deposit Ratio BANKS IOB 2010 2011 2012

71.30 % 70.43 %

77.00 % 71.12 %

78.86 % 74.76 %

INDIAN BANK

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CHART 5.1.7
80.00% 78.00% 76.00% 74.00% IOB 72.00% 70.00% 68.00% 66.00% 2010 2011 2012 INDIAN BANK

INTERPRETATION: This ratio shows the investment of the bank through approving the loans against accepting the loan. In IOB Bank, the ratio is continuously increasing year by year from 71.30% to 78.86% in year 2010 to 2012. This shows good sign of the bank, if it will be increased more, than it may be risky for the bank. Same in Indian bank, this ratio is continuously increased from 74.43% to 74.76% in year 2010 to 2012.

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BUSINESS PER EMPLOYEE TABLE 5.1.8

BUSINESS PER EMPLOYEE (Amt in Rs crore) BANKS IOB INDIAN BANK 2010 7.12 5.93 CHART 5.1.8 2011 10.05 4.81 2012 11.76 3.87

INTERPRETATION: Revenue per employee is a measure of how efficiently a particular bank is utilizing its employees. Ideally, a bank wants the highest business per employee possible, as it denotes higher productivity. In general, rising revenue per employee is a positive sign that suggests the bank is finding ways to squeeze more sales/revenues out of each of its employee. In IOB Bank, this ratio increases continuously year by year from 7.12crore in the year 2010 to 10.05crore in year 2011 and 11.76crore in the year 2012. In Indian bank, this ratio decreases continuously year by year from 5.93 to 3.87. Because past two years less recruitments in the year 2010 to 2012.
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PROFIT PER EMPLOYEE TABLE 5.1.9

(Amount in Rs. lac)

PROFIT PER EMPLOYEE BANKS IOB INDIAN BANK 2010 2.63 7.92 CHART 5.1.9 2011 4.16 8.88 2012 3.84 9.30

INTERPRETATION: Profit per employee is a measure of how efficiently a particular bank is utilizing its employees. Ideally, a bank wants the highest profit per employee. In IOB the ratio is increased a little from 2.63lakh in 2010 to 4.16lakh in 2009. The ratio was increased in the year 2009 because of increment in Net profit. This shows the efficiency of work staff of IOB. In INDIAN Bank, the profit per employee was 7.92lakhs in 2010 and it has increased to near 10lakhs in 2012 which shows that profit per employee is increased from 2010 to 2012.
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EARNINGS QUALITY: DIVIDEND PAYOUT RATIO TABLE 5.1.10 BANKS IOB 2010 2011 2012

31.55 21.34

33.52 22.67

39.69 22.32

INDIAN BANK

CHART 5.1.10
45 40 35 30 25 20 15 10 5 0 2010 2011 2012 IOB INDIAN BANK

INTERPRETATION: Dividend payout ratio shows the percentage of profit shared with the shareholders. The more the ratio will increase the goodwill of the bank in the share market. In IOB bank, the average ratio during the 3 years is approx 40%. They have paid highest dividend in the year 2012. Then, the average was maintained by approximately by 35%. and In INDIAN bank, the average ratio during 3 years maintained by approximately by 21%.

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RETURN ON ASSET TABLE 5.1.11 BANKS IOB 2010 2011 2012

0.76 % 1.67 %

0.71 % 1.53 %

0.52 % 1.31 %

INDIAN BANK

CHART 5.1.11
1.80% 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% 2010 2011 2012 IOB INDIAN BANK

INTERPRETATION: Return on Asset Ratio shows that how much return bank can get from their total asset. Higher the ratio is good for the bank. Because if ratio is higher than we can say that the return of bank is high. In IOB bank slightly decreasing past three years maintained 0.76% to 0.71%. In 2012 slightly decreased. In INDIAN BANK ratio shows year by year slightly decreasing. It shows low return on asset.

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OPERATING PROFIT BY AVERAGE WORKING FUND

TABLE 5.1.12 BANKS IOB 2010 2011 2012

1.40 % 2.70 %

1.60 % 2.70 %

1.60 % 2.44 %

INDIAN BANK

CHART 5.1.12
3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 2010 2011 2012 IOB INDIAN BANK

INTERPRETATION: Earning reflect the growth capacity and the financial health of the bank. High earnings signify high growth prospects. In IOB Bank, it has increased from 1.40% to 1.60% during the year 2010 to 2012 which is good for the bank. In Indian bank ratio shows maintained same percentage past three years.

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NET PROFIT TO AVERAGE ASSET TABLE 5.1.13 NET PROFIT TO AVERAGE ASSET BANKS IOB INDIAN BANK 2010 0.56 % 1.67 % 2011 0.69 % 1.53 % 2012 0.52 % 1.33 %

CHART 5.1.13

INTERPRETATION: Net profit to average asset indicates the efficiency of the banks in utilizing their assets in generating profits. A higher ratio indicates the better income generating capacity of the assets and better efficiency of management. In IOB Bank the ratio is continuously increase year by year till 2011.This is a good time for Bank to be 'giving back', for it has just completed a very successful year. Its assets grew and productivity and efficiency levels (whether measured by Return on Assets or Return on Equity or Profit per Employee) have risen well over the year. Most of all, the Bank finds itself competitively positioned in several of its key businesses, and this should predict well for the year ahead. Indian bank yearly decreases 2009 to till now 2013.
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INTEREST INCOME TO TOTAL INCOME TABLE 5.1.14 INTEREST INCOME TO TOTAL INCOME BANKS IOB 2010 2011 2012

89.54 % 87.00 %

90.44 % 88.78 %

91.25 % 90.84 %

INDIAN BANK

CHART 5.1.14
92.00% 91.00% 90.00% 89.00% IOB 88.00% 87.00% 86.00% 85.00% 84.00% 2010 2011 2012 INDIAN BANK

INTERPRETATION: Interest income to total income ratio shows that how much interest income earn from total income. IOB and INDIAN bank both ratios increasing from 2009 to 2012.this shows good effect in profit from interest in bank because interest income is regulator income from customer.

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OTHER INCOME TO TOTAL INCOME TABLE 5.1.15 OTHER INCOME TO TOTAL INCOME BANKS IOB INDIAN BANK 2010 10.45 % 12.99 % 2011 9.55 % 11.12 % 2012 8.74 % 9.15 %

CHART 5.1.15
14.00% 12.00% 10.00% 8.00% IOB 6.00% 4.00% 2.00% 0.00% 2010 2011 2012 INDIAN BANK

INTERPRETATION: Fee based income account for a major portion of the banks other income. The bank generates higher fee income through innovative products and adapting the technology for sustained service levels. The higher ratio indicates increasing proportion of fee-based income. The ratio is also influenced by gains on government securities, which fluctuates depending on interest rate movement in the economy. The ratios shows year by year decreasing.IOB bank 10.45% to 8.74% decreasing. In INDIAN bank ratio also decreasing 2010 to 2012.
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LIQUIDITY LIQUIDITY ASSET TO TOTAL ASSET TABLE 5.1.16 LIQUIDITY ASSET TO TOTAL ASSET BANKS IOB INDIAN BANK 2010 7.49 8.00 CHART 5.1.16
9 8 7 6 5 4 3 2 1 0 2010 2011 2012 IOB INDIAN BANK

2011 6.72 7.03

2012 7.40 6.23

INTERPRETATION: Liquidity for a bank means the ability to meet its financial obligations as they come due. Bank lending finances investments in relatively illiquid assets, but it fund its loans with mostly short term liabilities. Thus one of the main challenges to a bank is ensuring its own liquidity under all reasonable conditions. In INDIAN Bank this ratio is continuously decreased from 2010 to 2013. In 2010 this ratio is 8.00 % and it has decreased to 6.23 %. The ratio was decreased in the year 2012 because of increment in total assets.

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In IOB this ratio is continuously decreased from 2011 but in 2012 it has increased. In 2010 this ratio is 8.00 % and it has decreased in 2011 to 7.03 % and in 2009 it has increased to 6.23%. GOVERNMENT SECURITIES TO TOTAL ASSET TABLE 5.1.17 GOVERNMENT SECURITIES TO TOTAL ASSET BANKS IOB 2010 2011 2012

24.44 % 22.76 %

21.29 % 21.62 %

22.74 % 21.00 %

INDIAN BANK

CHART 5.1.17
25.00% 24.00% 23.00% 22.00% 21.00% 20.00% 19.00% 2010 2011 2012 IOB INDIAN BANK

INTERPRETATION: Government securities to total asset ratio shows that, what percentage of government securities bank has against total assets. Higher the ratio is good for the bank because if this ratio is higher than we can say that bank is more investing in government securities.

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In IOB Bank, the ratio is increase from in 2010 to 24.44% and it decreased to 21.29% in 2011. In the year 2010, the ratio was highest because the bank has increased investment in only government securities but in the last year bank has increased the total investment in govt. securities as well as debentures & bonds also. In INDIAN bank, the ratio was fluctuating during the three to four years. At last in the year 2009 the ratio was 21.00%. In the year 2009, the G-sec investment was decreased and the total assets were increased. So, the ratio was decreased. APPROVED SECURITIES TO TOTAL ASSET TABLE 5.1.18 APPROVED SECURITIES TO TOTAL ASSET BANKS IOB INDIAN BANK 2010 8.06 20.65 2011 4.56 8.70 2012 2.99 3.04

CHART 5.1.18

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INTERPRETATION: Approved securities include securities other than government securities. This ratio measures the Approved Securities as a proportion of Total Assets. Banks invest in approved securities primarily after meeting their SLR requirements, which are around 25% of net demand and time liabilities. This ratio measures the risk involved in the assets hand by a bank. In IOB and INDIAN the ratio was continuously decreased from 2009 to 2013.The ratio is continuously decreased because of decrement in Approved securities. In the last year 2012 the ratio was decreased because of decrement in approved securities. LIQUIDITY ASSET TO DEMAND DEPOSIT TABLE 5.1.19 BANKS IOB INDIAN BANK 2010 102.21 122.46 2011 101.80 132.96 2012 132.34 126.52

CHART 5.1.19
140 120 100 80 IOB 60 40 20 0 2010 2011 2012 INDIAN BANK

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INTERPRETATION: The ratio shows the power of liquidity asset against total demand deposits. It means what part of the demand deposits can be easily converted into monetary form in need. In IOB the ratio was fluctuate because of the change in the cash balance during the each year ending. In the year 2012 because of increment in cash balance and the liquidity assets were increased and vice versa the ratio was also increased. In INDIAN bank the ratio was 101.80% in 2010 and at last in 2012 it was 132.34 %. The ratio was increased in the last year because of increment in assets by 20%. There was not any large difference in demand deposits than the previous year. LIQUIDITY ASSET TO TOTAL DEPOSIT TABLE 5.1.20 LIQUIDITY ASSET TO TOTAL DEPOSIT BANKS IOB 2010 2011 2012

109.37 847.45

62.09 407.65

68.86 180.86

INDIAN BANK

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CHART 5.1.20
900 800 700 600 500 400 300 200 100 0 2010 2011 2012 IOB INDIAN BANK

INTERPRETATION: The ratio shows how much part of the deposits invested into the liquidity asset, which can be easily convert in to monetary value in the time of need. IOB bank show in 2009 to 2010 increment of 109.37 the ratio was decreased a little because of 68.86 %.In Indian bank ratio continually decreased year by year.

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5.2 ANALYSIS COMPONENT RATINGS TO THE BANKS Now, after analyzing the ratio next, task to do is to give weightage to all the parameters according to the importance of the ratios. Each component will be given weightage according to the importance of itself and ratios covered in that particular point. The total weightage allocated to the all parameters would be out of 100. The weightage given to different parameters is as follows: TABLE- 5.2.1 COMPONENTS OF WEIGHTAGE PARAMETER Capital adequacy Assets quality Management Earnings Liquidity TOTAL PERCENTAGE 28 % 14 % 15 % 18 % 25 % 100 %

RATIO WISE WEIGHTAGE: After giving the importance to the each parameter, now its turn to give the weightage according to the importance of the ratio we will allocate the weightage to the each particular ratio. The weightage given to the each ratio is as follows: TABLE-5.2.2 RATIO Capital Adequacy Capital risk adequacy ratio Debt equity ratio Total advance to total asset ratio Government securities to total asset Asset Quality Gross NPA to Total Loan Net NPA to Total Loan
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WEIGHTAGE Out of 28 % 7% 7% 7% 7% Out of 14 % 7% 7%

Management Total Advance to Total Deposits Business per Employee Profit per Employee Earnings Dividend payout ratio Return on asset Operating profit to average working fund Net profit to average asset Interest income to total income Other income to total income Liquidity Liquid asset to total asset Government security to total security Approved security to total security Liquidity asset to demand deposit Liquidity asset to total deposit Total

Out of 15 % 5% 5% 5% Out of 18 % 3% 3% 3% 3% 3% 3% Out of 25 % 5% 5% 5% 5% 5% 100%

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After allocating the weightage, we have made frequency classes according to the results found from the ratios for each ratio of each parameter. He frequency classes for each ratio are as follows: CAPITAL ADEQUACY: TABLE 5.2.3 Marks Ratios CRAR Debt-equity Total Advance to Total Asset G-sec to Total Investment ASSET QUALITY: TABLE 5.2.4 Marks Ratios Gross NPA to Total Loan Net NPA to Total Loan 1 Above 9 Above 3 2 7.509.00 2.503.00 3 6.007.50 2.002.50 4 4.506.00 1.502.00 5 3.004.50 1.001.50 6 1.503.00 0.501.00 7 Below 1.5 Below 0.5 1 Below 15.50 Below 75 Below 35 Below 58 2 15.5020.00 75-85 35-40 58-65 3 20.0024.50 85-95 40-45 65-72 4 24.5029.00 95-105 45-50 72-79 5 29.0033.50 105115 50-55 79-86 6 33.5038.50 115125 55-60 86-93 7 Above 38 Below 125 Above 60 Above 93

MANAGEMENT QUALITY: TABLE 5.2.5 Marks Ratios TA to TD Business Per Employee Profit per Employee 1 Below 46 Below 2.50 2 46-55 2.505.00 Below2.00 2.004.50
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3 55-64 5.00-7.50

4 64-73 7.50-10

5 Above 73 Above 10

4.50-7.00

7.00-9.50

Above 9.50

EARNINGS QUALITY: TABLE 5.2.6 Marks Ratio Dividend payout Ratio 0.5 Below 10 Return on Asset Below 0.5 Operating profit to Avearage Working Fund Net profit to Average Asset Interest Income to Total Income Other Income to Total Inome Below 1.75 Below 0.5 Below 56 Below 4 4-13.50 13.50-23 23-32.5 32.5-42 Ab-42 56-67 67-67 76-85 0.5-0.75 0.75-1.00 1.00-1.25 1.75-2.00 2.00-2.25 2.25-2.50 0.50-0.75 0.75-1.00 1.00-1.25 1.251.50 2.502.75 1.251.50 85-94 Ab1.50 Ab2.75 Ab1.50 Ab-94 1.0 10-17 1.5 17-24 2.0 24-31 2.5 31-38 3.0 Ab-38

LIQUIDITY: TABLE 5.2.7 Marks Ratio LA to TA G-sec to TA AP-sec to TA 1 Below7 Below 24 Below 0.50 2 7-9 24-31 0.500.75 LA to DD LA to TD Below 27 Below 9 27-35 9-12 35-43 12-15 43-51 15-18 9-11 31-38 0.75-1.00 3 4 11-13 38-45 1.00-1.25 5 Above 13 Above 45 Above 1.25 Above 51 Above 18

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5.3 RANKING After allocating classes for the each ratio and for the three years, now we will give marks to each bank on the basis of average of their average of performance during the last three years i.e. 2010 to 2012 to all the banks. CAPITAL ADEQUACY: The Table Given Below Shows The Marks Given To The Capital Adequacy Out Of 7 Marks. TABLE 5.3.1 Banks Ratios CRAR Debt-Equity Total Advance to Total Asset G-sec to Total Investment Total IOB 2 7 7 5 21 INDIAN BANK 2 1 7 2 12

ASSET QUALITY: The Table Given Below Shows the Marks Given To the Asset Quality Out Of 7 Marks TABLE 5.3.2 Banks Ratios Gross NPA to Total Loan Ratio Net NPA to Total Loan Ratio Total IOB 5 5 10 INDIAN BANK 7 7 14

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MANAGEMENT QUALITY: The Table Given Below Shows the Mars Given to the Management Quality out Of 5 Marks TABLE 5.3.3 Banks Ratios Total Advance to Total Deposit Business per Employee Profit per Employee Total EARNINGS QUALITY: The Table Given Below Shows the Marks Given to the Earnings Quality out Of 3 Marks TABLE 5.3.4 Banks Ratios Dividend payout Ratio Return on Asset Operating Profit to Avg Working Fund Net profit to Average asset Interest Income to Total income Other Income to Total Income Total IOB 2.5 1.0 0.5 0.5 2.5 1.0 8 INDIAN BANK 1.5 2.5 2.5 2.0 2.5 1.0 11 IOB 5 5 2 12 INDIAN BANK 5 2 4 11

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LIQUIDITY: The Table Given Below Shows the Marks Given to the liquidity ratio out Of 5 Marks TABLE 5.3.5 Banks Ratios Liquidity Asset To Total Asset G-Sec To Total Asset Approved Securities To Total Asset Liquid Asset To Demand Deposit Liquid Asset To Total Deposit Total IOB 2 1 5 5 4 17 INDIAN BANK 2 1 5 5 5 18

OVERALL RANKING TO THE BANKS TABLE 5.3.6 Banks Parameters Capital Adequacy Asset Quality Management Quality Earnings Quality Liquidity Total Rank IOB 21 10 12 8 17 68 1 Indian Bank 12 14 11 11 18 66 2

After going through the whole the process, we found INDIAN OVERSEAS BANK scored the highest score so we gave 1st rank to them, and accordingly the 2nd rank was given to INDIAN BANK and. We found that IOB Bank has performed better than INDIAN BANK during the last three years.

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CHAPTER-6 CONCLUSION SUGGESTIONS AND RECOMMENDATION 6.1 CONCLUSION The report makes an attempt to examine and compare the performance of the two different public sector banks of India i.e. IOB Bank and INDIAN Bank. The analysis is based on the CAMEL Model. The study has brought many interesting results, some of which are mentioned as below: The two banks have succeeded in maintaining CRAR at a higher level than the prescribed level, 9%. But the IOB and Indian has maintained highest across the duration of last three years. It is very good sign for the bank to survive and to expand in future. Gross NPA ratio has registered declining trend for all the two banks during the last three years. But IOB Bank has been successful during the last two years in managing the level of NPA. Thus, it indicates for improvement in the asset quality position of all the three banks. In Management Quality, we have found that Business per Employee Ratio and Profit per Employee Ratio is increased during the last 3 years in IOB Bank and INDIAN BANK. The improvement shows the growth of the bank as well as efficiency of the employee, which is very good in both the banks and they will help to the bank to grow in future. In Earnings Quality, the major part of income of INDIAN BANK is from Interest income. Because their large part of investment is in Government Securities. A little change in Interest Rate will effect on it more. In comparison of that the IOB Bank has average investment in G-sec. And the same way has a little more than IOB Bank. The Liquidity ratios indicate better liquidity of all the banks. However, IOB Bank has performed throughout well, INDIAN BANK has an edge over in liquidity if compared with each other according to these ratios.

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From the above analysis we would like to conclude that IOB bank has high efficiency in terms of Assets Quality, Management Quality and IOB is good in terms of Capital Adequacy and Liquidity whereas Bank of India is good in terms of Capital Adequacy. After evaluating all the ratios, calculations and ratings we have given 1st Rank to IOB bank, 2nd Rank to INDIAN BANK. 6.2 SUGGESTIONS AND RECOMMENDATION In IOB bank, debt equity ratio is continuously rising over the years which are not good so they have to increase equity or reduce debts in their capital structure.

INDIAN BANK has comparatively less total advance to total asset ratio. So, bank has to give more advances in order to earn more interest. But they should have to also keep in mind the credit worthiness of the customers.

INDIAN BANK has highest Gross NPA ratio which is not good for the bank. They should give loans to the customers, whose credit worthiness is good. Though their Net NPA ratio is rising, they have to make more provisions in order to meet their Gross NPA which is affecting their profitability badly.

IOB has highest Government Security to total investment ratio which leads to reduce their income and ultimately reduce their profitability so they have to invest in other than government investment option rather than only in government securities.

Interest income to total income ratio shows that how much interest income earn from total income. IOB and INDIAN bank both ratios increasing from 2009 to 2012.this shows good effect in profit from interest in bank because interest income is regulator income from customer.

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APPENDIX
Profit & Loss account of Indian Overseas Bank Mar '12 12 mths Income Interest Earned Other Income Total Income Expenditure Interest expended Employee Cost Selling and Admin Expenses Depreciation Miscellaneous Expenses Preoperative Exp Capitalised Operating Expenses Provisions & Contingencies Total Expenses Mar '11 12 mths ----------------- in Rs. Cr. ------------------Mar '10 12 mths Mar '09 12 mths Mar '08 12 mths

17,897.08 12,101.47 1,716.02 1,278.02 19,613.10 13,379.49 12,880.91 2,082.98 2,031.78 111.06 1,456.25 0.00 4,633.23 7,893.44 1,741.14 1,473.33 105.00 1,094.04 0.00 3,606.12

10,245.77

9,641.40

7,968.25 1,075.46 9,043.71 5,288.79 949.68 419.34 75.10 1,108.46 0.00 1,610.73 941.85 7,841.37 Mar '08 12 mths 1,202.34 0.00 0.00 1,202.34 0.00 203.96 0.00 22.07 35.00 87.05 409.16 589.22 203.96 0.00 1,202.34

1,196.59 1,713.07 11,442.36 11,354.47 7,077.91 1,734.75 1,320.98 111.76 490.00 0.00 3,385.96 6,771.81 1,271.84 737.99 100.94 1,146.10 0.00 2,307.20

1,048.84 807.39 18,562.98 12,306.95 Mar '12 12 mths Mar '11 12 mths 1,072.54 0.00 0.00 1,072.54 0.00 359.56 0.00 17.33 50.00 131.96 324.98 388.00 359.56 0.00 1,072.54

271.53 949.67 10,735.40 10,028.68 Mar '10 12 mths 706.96 0.00 0.00 706.96 0.00 223.09 0.00 12.98 35.00 116.54 356.29 127.58 223.09 0.00 706.96 Mar '09 12 mths 1,325.79 0.00 0.00 1,325.79 0.00 286.82 0.00 24.34 45.00 109.06 1,029.30 9.67 286.82 0.00 1,325.79

Net Profit for the Year Extraordinary Items Profit brought forward Total Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Earnings Per Share (Rs) Equity Dividend (%) Book Value (Rs) Appropriations Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet Total

1,050.13 0.00 0.00 1,050.13 0.00 416.83 0.00 13.18 45.00 135.34 586.00 47.30 416.83 0.00 1,050.13

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Balance Sheet of Indian Overseas Bank Mar '12 12 mths Capital and Liabilities: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities

------------------- in Rs. Cr. ------------------Mar '11 12 mths Mar '10 12 mths Mar '09 12 mths Mar '08 12 mths

797.00 618.75 544.80 797.00 618.75 544.80 0.00 0.00 0.00 0.00 0.00 0.00 9,989.40 7,546.19 5,804.18 1,141.26 1,159.99 1,175.60 11,927.66 9,324.93 7,524.58 178,434.18 145,228.75 110,794.71 23,613.85 19,355.40 8,982.20 202,048.03 164,584.15 119,776.91 5,672.50 4,875.19 3,794.90

544.80 544.80 0.00 0.00 5,396.59 1,209.57 7,150.96 100,115.89 6,548.28 106,664.17 7,258.26 121,073.39 Mar '09 12 mths

544.80 544.80 0.00 0.00 4,197.90 113.97 4,856.67 84,325.58 6,353.65 90,679.23 6,323.84 101,859.74 Mar '08 12 mths

219,648.19 178,784.27 131,096.39 Mar '12 Mar '11 Mar '10 12 mths 12 mths 12 mths

Assets Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets Contingent Liabilities Bills for collection Book Value (Rs)

10,198.91 6,062.19

10,010.89 2,007.76

7,666.45 2,158.19

5,940.44 4,981.46 74,885.27 31,215.44 2,352.74 655.95 1,696.79 13.07 2,340.93 121,073.40 31,016.27 10,839.82 109.06

9,124.23 1,217.09 60,423.84 28,474.71 1,102.80 569.11 533.69 24.88 2,061.29 101,859.73 24,173.83 10,215.01 87.05

140,724.44 111,832.98 79,003.93 55,565.88 48,610.45 37,650.56 2,699.76 2,535.57 2,460.53 970.66 859.36 768.63 1,729.10 1,676.21 1,691.90 14.95 4.90 7.67 5,352.70 4,641.08 2,917.70 219,648.17 178,784.27 131,096.40 42,601.94 24,927.12 135.34 33,490.63 15,838.45 131.96 31,288.74 11,252.80 116.54

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Profit & Loss account of Indian Bank Mar '12 12 mths Income Interest Earned Other Income Total Income Expenditure Interest expended Employee Cost Selling and Admin Expenses Depreciation Miscellaneous Expenses Preoperative Exp Capitalised Operating Expenses Provisions & Contingencies Total Expenses

------------------- in Rs. Cr. ------------------Mar '11 12 mths Mar '10 12 mths Mar '09 12 mths Mar '08 12 mths

12,231.32 1,232.16 13,463.48 7,813.32 1,483.96 1,128.19 80.89 1,201.85 0.00 2,939.69 955.20 11,708.21 Mar '12 12 mths

9,361.03 1,181.89 10,542.92 5,324.92 1,332.69 1,022.28 71.63 1,077.32 0.00 2,639.96 863.96 8,828.84 Mar '11 12 mths 1,714.07 0.00 87.91 1,801.98 40.00 322.33 57.23 38.95 75.00 184.44 534.70 759.00 419.56 88.73 1,801.99

7,857.06 1,173.72 9,030.78 4,553.18 1,212.39 660.62 87.89 961.71 0.00 2,122.35 800.26 7,475.79 Mar '10 12 mths 1,554.99 0.00 86.09 1,641.08 40.00 279.35 53.91 35.25 65.00 154.66 529.91 649.99 373.26 87.91 1,641.07

6,830.33 1,035.44 7,865.77 4,221.82 979.76 254.62 84.56 1,079.70 0.00 1,428.79 969.85 6,620.46 Mar '09 12 mths 1,245.32 0.00 84.26 1,329.58 37.50 214.89 42.89 28.10 50.00 127.52 417.22 531.00 295.28 86.09 1,329.59

5,150.78 1,067.89 6,218.67 3,159.08 967.39 564.91 102.45 416.10 0.00 1,749.87 300.98 5,209.93 Mar '08 12 mths 1,008.74 0.00 80.69 1,089.43 35.00 128.93 27.86 22.66 30.00 106.93 328.37 485.01 191.79 84.26 1,089.43

Net Profit for the Year Extraordionary Items Profit brought forward Total Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) Appropriations Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet Total

1,755.27 -8.30 88.73 1,835.70 40.00 322.33 58.78 39.91 75.00 214.94 578.43 747.00 421.11 89.15 1,835.69

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Balance Sheet of Indian Bank

------------------- in Rs. Cr. ------------------Mar '12 12 mths Mar '11 12 mths Mar '10 12 mths Mar '09 12 mths Mar '08 12 mths

Capital and Liabilities: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities

829.77 829.77 829.77 829.77 429.77 429.77 429.77 429.77 0.00 0.00 0.00 0.00 400.00 400.00 400.00 400.00 8,807.63 7,496.77 6,217.25 5,050.53 1,164.03 1,194.56 1,225.09 1,255.62 10,801.43 9,521.10 8,272.11 7,135.92 120,803.80 105,804.18 88,227.66 72,581.83 4,872.86 2,100.37 957.36 530.78 125,676.66 107,904.55 89,185.02 73,112.61 4,941.10 4,292.65 3,932.19 3,873.22 141,419.19 121,718.30 101,389.32 84,121.75 Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths

829.77 429.77 0.00 400.00 4,165.78 215.23 5,210.78 61,045.95 1,283.24 62,329.19 2,967.72 70,507.69 Mar '08 12 mths

Assets Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets Contingent Liabilities Bills for collection Book Value (Rs)

6,318.87 2,494.49

6,877.94 1,684.37

7,060.72 1,052.48

6,211.58 472.24

6,432.94 339.88 39,838.71 21,915.07 1,050.72 516.87 533.85 5.42 1,441.81 70,507.68 9,873.25 2,862.69 106.93

90,323.60 75,249.91 62,146.13 51,465.28 37,976.03 34,783.76 28,268.33 22,800.57 2,535.89 2,352.44 2,269.20 2,194.17 910.47 801.71 711.65 604.52 1,625.42 1,550.73 1,557.55 1,589.65 5.27 55.31 22.01 4.57 2,675.52 1,516.29 1,282.10 1,577.85 141,419.20 121,718.31 101,389.32 84,121.74 43,700.02 6,734.57 214.94 30,119.66 5,697.00 184.44 16,192.65 14,167.49 5,382.92 4,882.79 154.66 127.52

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BIBILOGRAPHY WEBSITES www.rbi.org.in www.allbankingsolutions.com www.axisbank.com www.bankofIndia.com www.economictimes.indiatimes.com www.moneycontrol.com BOOKS AND JOURNALS: Indian Finance System by Bharti Pathak Annual Reports of INDIAN OVERSEAS BANK Annual Reports of INDIAN BANK

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