A PROJECT REPORT

ON

“EQUITY RESEARCH ON BANKING SECTOR”

AT
INDIA INFOLINE
Pune

BY
Mr. Shailendra Chawla

IN THE PARTIAL FULFILLMENT OF THE COURSE

MASTER OF BUSINESS ADMINISTRATION
AFFILIATED TO UNIVERSITY OF PUNE

INDIRA INSTITUTE OF MANAGEMENT, PUNE.

TATHWADE, PUNE-411033
2009 – 2011
 ACKNOWLEDGEMENT

The completion of my report and the success of my efforts reminds of our indebtedness
towards my guide Mr. for his invaluable guidance and affectionate encouragement
throughout.

I would like to assert my heartfelt appreciation to Mr. for allowing me to work in

such a reputed organization.

I am also thankful to all the employees for helping me throughout the period.

I also thank Mr.Praveen Tungare(College Internal Guide) for his valuable guidance.
 EXECUTIVE SUMMARY

Project is undertaken to understand an efficient working and strategies of different

payoffs in derivates segments of NSE, banking sectoral Analysis by analyzing Macro and
Micro-Economy on banking sector, impact of various major factors on Bank of Baroda.

It tries to explain derivates products (Forward, Futures, Options, Warrants,

Swapation) terminology for effective carrying out a various payoff strategies. Futures and
Options mix strategies for properly hedging against uncertain environments of Indian Stock
Market. Hedging is done for avoiding a future risk of underlying assets. Options strategies
that include BULL SPREAD, BEAR SPREAD, and CALENDAR SPREAD Etc .are properly
taken into consideration for determine a range payoff in market conditions.

It evaluates various Macro-Economy parameters such as Global GDP, US Economy,

and Rupee Dollar fluctuations, Crude Oil etc & cascading effect of global cues on the Micro-
Economy view of Indian Economy are taken to understand its impact on the Indian Banking
Sector. Banks profitability and liquidity are properly gauged in given current context.

Impacts of various factor is analyzed on Bank of Baroda (3rd Largest Public Sector
Bank). It’s undergone fundamentals of the bank and studied it various impact on changing
variables. BOB delivered on core performance as quality of earnings continued to improve on
the back of robust margins, steady business expansion, and lower NPA. Bank shows steady
increase in balance sheet strength, improving metrics, and strong management. Advances
grew 30% Y-o-Y and 6% Q-o-Q to INR 1.86 tn with increased traction in both domestic
(27% Y-o-Y and 3% Q-o-Q) and overseas (38% Y-o-Y and 15% Q-o-Q) businesses. Growth
remained strong in SME and retail at 43% and 23.3%, respectively, Y-o-Y. Contribution of
housing loans to the overall retail book remained stable at 43%. Management is guiding for
~22-24% growth in advances for FY11.Five years of financial and Income expenditure are
studied in great details for determine a trend in deposits and Loans & Advances of BOB.
Factor and growth is properly is taken in consideration to obtain a future valuations of the
bank with the approximate future financial and Income statements.
 CONTENTS

Sr. Title Pg.No

B
1 Introduction
2 Industry Profile
2.1 Banking and Financing
2.2 Insurance
2.3 Capital Market
2.4 Emerging Opportunitites
3 Company Profile
3.1 Introduction
3.2 History and Milestones
3.3 Product and Services
4 Objectives of the Report
5 Theoretical Background
5.1 Review Literature
5.2 Fundamental Analysis
5.3 Introduction to Derivatives
5.4 Introduction to Forwards, Futures, and Options
5.5 RBI’s Key Policy Rate
6 Research Methodology
6.1 Introduction
6.2 Collection of Data
6.3 Type of Research
7 Data Analysis and Interpretation
7.1 Futures Payoff
7.2 Options Payoff
7.3 Sectoral Analysis of Banking Sector
7.4 Bank of Baroda
8 Observation and Findings
9 Suggestion and Recommodation
10 Limitations of the Study
11 Conclusion
C
References/ Bibliography
 LIST OF TABLES

Sr.No Heading Title Pg.No

1 7.1 Payoff for buyer of futures: Long futures
2 7.2 Payoff for seller of futures: Short futures
3 7.3 Payoff for buyer of call option
4 7.4 Payoff for writer of call option
5 7.5 Payoff for buyer of put option
6 7.6 Payoff for writer of put option
7 7.7 Payoff for seller of call option at various strikes
8 7.8 Payoff for buyer of put options at various strikes
9 7.9 Payoff for a bull spread created using call options
10 7.10 Bear spreads - sell a call and buy another
11 7.11 Sectoral Analysis
12 7.12 C-D Ratio
13 7.13 Spread
14 7.14 Net Profit/ Working Cap & Admin Expenses/ Working Cap
15 7.15 Net Worth
16 7.16 Deposits
17 7.17 Deposits breakup
18 7.18 Loans & Advances
19 7.19 Total Assets
20 7.20 Total Income
21 7.21 Other Income + Interest Income
22 7.22 Net Profit
23 8.1 Equity/ Assets
24 8.2 Operating Expense/ Assets
25 8.3 ROA
26 8.4 EPS
27 8.5 Retention Ratio
28 8.6 ROE
 LIST OF FIGURES

Sr.No Heading Title Pg.No

1 2.1 Finacial Regulator(RBI)
2 2.2 Finacial Regulator(IRDA,SEBI,PCDRA)
1 3.1 History and Milestones
2 5.1 Movement in Key Policy Rates
3 7.1 One month calls and puts trading at different strikes
4 7.2 Bull spread created using call options
5 7.3 Bear spreads - sell a call and buy another
6 7.4 Macro Economy
7 7.5 Micro Economy
8 7.6 Cramped Credit
9 7.7 Bank Specific
10 7.8 Bank of Baroda
11 7.9 Balance Sheet Bank of Baroda
12 7.10 Income Statement Bank of Baroda
13 7.11 Projected Balance Sheets and Interpretation
14 7.13 Interpretation of Business Models
15 7.14 Ratios
16 8.1 Keys Growth Ratios
17 8.2 Keys Projected Ratios
18 8.3 Valuations on BOB
19 8.4 According to Capital Assets Pricing Model
20 8.5 Efficiency Ratio
 CHAPTER 1

Company Profile
 Industry Profile

Financial Sectors is greatly impacted by the recessions. The sector is looking like a lost
ground in economic turmoil. Many persons believe a balance sheet of financial sector does
not have right things in liabilities side and nothing is left in assets sides. It caused a greater
uncertainly in economic global environments.

The Indian Financial Services Sector

The services sector in India has been witnessing a boom in recent times. In addition to the
strong growth in IT/ ITES, the Indian financial service sector is considered to be stable and
progressive, and has been a major beneficiary of India’s growth story. Retail lending has
powered the explosive growth in the financial services sector with players focused on the
retail segment registering impressive top-line growth. Increasing prosperity coupled with
rising consumerism of Indian consumers has fueled a remarkable boom in retail credit
demand. Rapid growth by the corporate sector has generated a need for capital which has
resulted in growth of institutional finance. A large number of Non-Banking Finance
Companies (NBFCs) have been operating in the country. This has helped drive asset
penetration on account of a wider distribution reach. The growing attractiveness of the
financial services sector has triggered the entry of global majors. Aggressive plans of
incumbents coupled with the entry of new players are expected to further drive the growth of
the sector. The financial services sector analyzed comprises the following key sub-sectors:

Banking and Financing –

Consumer Finance, Small and Medium Enterprise (SME) finance, Agriculture and rural
finance, Institutional Finance and Project Finance

Insurance – Life and Non-life insurance

Capital Markets – Asset Management, Pension, Wealth management, Investment Banking

and Securities Broking

Emerging Opportunities –Private Equity,

Attractive Investment Opportunities

The opportunities in Indian financial services have been analyzed in detail based on
parameters such as market size, growth, profitability, intensity of competition, future outlook
and government regulations governing entry. An analysis of the various sub-sectors using the
above criteria has yielded several attractive opportunities for entry in the medium term.

2.1 Banking & Financing

Banking Sector:

The banking sector is the most dominant sector in the financial system in India. Post
liberalization, the banking sector has witnessed several changes. There has been a paradigm
shift in products, technology, operations and customer service. Key reform initiatives
included banking licenses to new private sector banks, deregulation of interest rates, adoption
of Basel II norms and a roadmap for foreign banks entry unveiled by RBI in 2005. The
financial health of commercial banks has improved manifold with respect to capital
adequacy, profitability, asset quality and risk management. Further, deregulation has created
new opportunities for banks to increase revenue by diversifying into investment banking and
other sub-sectors

The Indian banking sector is growing at a fast pace as players are aggressively targeting
semi-urban and rural areas which are under penetrated. The increased focus on “financial
inclusion” by the government has also led to introduction of newer products, such as ‘no-
frills banking accounts’ and ‘kisan (farmer) credit cards’ to enhance banking access to rural
and economically weaker sections of the population. However, under the RBI’s road map for
presence of foreign banks in India

Consumer Finance:

Rising consumerism and increasing focus by leading banks and NBFCs have resulted in rapid
growth of the consumer finance sector in India. Since banking penetration in rural India
remains significantly lower compared to urban India, it has become an attractive segment for
players to gain an early mover advantage.
SME Finance:

SME financing is witnessing strong growth due to the strong performance of the buoyant
SME sector and increasing focus from banks owing to higher profitability. The burgeoning
SME sector has also led to a focus on factoring services for working capital anagement and
other advisory services.

Institutional Finance and Project Finance:

An excellent performance by corporates in India coupled with their expansion strategies

seeking inorganic growth, have resulted in a huge demand for institutional finance. Project
finance in India is also witnessing participation from leading banks and financial institutions
due to the lowered operational and execution risks.

Agri and Rural finance:

About two-thirds of India’s population resides in rural areas. There lies a huge customer base
which is under-serviced providing a significant opportunity for agri-lending and rural finance
for early movers.

Capital Markets

With India witnessing an economic boom, capital flows into the country via the FII route
have been on the rise, positively impacting the Indian equity markets. The performance of
Indian equity markets has been impressive, not only because of FII inflows but also due to
increased confidence levels among retail investors in the country. The key sub-sectors that
have benefited from this strong growth include asset management, wealth management,
investment banking and securities broking services. The Indian asset management industry
has witnessed a massive increase in AUM, post the entry of large domestic and foreign
players. However, there exists a huge opportunity on account of low penetration levels in
comparison with other countries. Wealth management services are likely to witness
heightened activity owing to increasing prosperity and awareness of financial planning.
Increasing participation from retail investors due to a strong equity market performance has
led to a robust demand for securities broking. The increasing appetite of Indian corporates for
capital as well, as an acquisition-led inorganic growth strategy, has also resulted in a strong
demand for investment banking and advisory services. The changing Indian demographic mix
and low pension coverage has sparked reforms in the pension sector which is set to
dramatically change the pension landscape in India in the medium to long term.

2.2 Insurance

The Indian insurance industry witnessed a landmark event with the enactment of the
Insurance Regulatory and Development Authority Act in 1999 to regulate, promote and
ensure orderly growth of the insurance industry. Under the new dispensation, private and
foreign insurance companies have been permitted to operate in India with some restrictions
on FDI limits.Given that the Indian insurance market is largely under penetrated especially in
the non-life segment, there exists a huge potential for investment due to the burgeoning
middle-class that can afford to buy life, health, disability and pension products. The recent
detariffication of key non-life insurance categories is also expected to give a fillip to motor,
fire and engineering insurance, while increasing focus of all players towards health insurance.

Life Insurance

The Indian life insurance industry has experienced tremendous activity since the opening up
of the insurance market in 2000 to private and foreign investments. Though the industry is
still dominated by the public sector behemoth, the Life Insurance Corporation of India private
players are catching up rapidly. The new entrants have been able to garner market share by
aggressively building the distribution network (in the form of agents) and reaching rural and
semi-urban areas, to take on the market leader. Besides, the private players are focusing on
unit-linked policies, which have contributed to their increasing market share vis-à-vis LIC in
value terms. The growth in the life insurance sector has been catalyzed by increased
awareness of the need for life insurance and introduction of unit linked policies and products
which are more acceptable to the Indian masses. The insurance industry in India has
tremendous growth potential, due to a large population, fast and rapid growing economy and
constant improvement in the standard of living. Besides, life insurance penetration in India is
low, in comparison to other developed nations. Life insurance penetration in India is slated to
grow rapidly due to the increasing reach of players in Tier II and Tier III cities. Micro-
insurance is expected to significantly increase the size of the target population as it increases
the affordability of the product. The anticipated increase in Foreign Direct Investment (FDI)
limit from the current 26 percent is expected to spur the entry of global players into this
sector. The market size for FY 2007 was USD 18.9 billion, and is projected to grow to USD
41.1 billion by FY 2010.
Non-life Insurance

The Indian Non-life insurance sector witnessed the entry of several global majors after the
sector was opened up to private sector players in the year 2000. The entry of private sector
insurers marked a paradigm shift in this industry and has triggered several changes in product
features and service levels. However, the growth potential was not fully realized due to fixed
tariffs and relatively low scope for customization. India has an extremely low insurance
penetration with tremendous scope for improvement to reach levels comparable with other
emerging markets. In fact, non-life insurance density is very low in comparison to other
nations, indicating the tremendous opportunity. The entry of new players and introduction of
new products coupled with increasing distribution reach is helping increase awareness among
customers. The changing demographic profile with rising incomes and a young population is
also leading to increased per capita expenditure on insurance products. With saturated
markets in most developed nations, global insurers are increasingly interested in India for
sustaining growth. The anticipated increase in the FDI limit for foreign companies and recent
de-tariffication is expected to significantly increase global interest in this sector. The non-life
insurance industry is currently worth around USD 6.1 bn and is projected to grow at a CAGR
of 13 percent in the foreseeable future.

2.3 Capital Markets

The Indian capital market is one of the oldest capital markets in Asia (the Mumbai stock
exchange was established in 1875). Post introduction of reforms in 1992, when the Securities
and Exchange Board of India (SEBI) was elevated to a fullfledged capital market regulator,
capital markets in India have increasingly progressed towards becoming more stable and
mature. An important policy initiative in 1993 was the opening of capital markets to Foreign
Institutional Investors (FIIs). To inject an international standard to the Indian stock market,
the National Stock Exchange was started in 1992 which has increased transparency. Further,
share dematerialization systems were also introduced to enhance the efficiency of the
transaction cycle.

Investment Banking

In the last few years, the number of investment banks operational in India has increased
significantly, because of the rise in the number of global merger and acquisition (M&A) deals
involving Indian companies. High-value deals such as the Tata-Corus deal and the
Hutchison-Essar stake sale is creating further interest amongst global players, with respect to
the Indian investment banking space. M&A Advisory has been the most significant
contributor to Investment Banking revenues. With an increasing number of Indian companies
looking at overseas acquisitions, this activity is likely to increase in prominence. The strong
regulatory mechanism and capital market environment has attracted the interest of leading
Wall Street investment banks, who are focusing on their India operations. Deregulation has
also opened opportunities to offer more services like risk management, distressed debt,
proprietary investing and leveraged finance, apart from other conventional offerings.
Investment banking is a people-driven business and requires human resources with
experience in the industry, track record of success, ability to win and execute deals, strong
negotiation skills and excellent relationship management skills. Going forward, players need
to focus on skilled professionals having domain expertise, given that increased activity in the
investment banking space has resulted in a talent crunch.

Securities Broking

The Indian stock broking industry is witnessing increased global attention with increase in
number of mergers and acquisitions and rising trading volumes. The continued Foreign
Institutional Investor (FII) interest in the Indian capital markets and robust stock market
performance is fueling retail investor interest in equity products. The immense potential
offered by leveraging the latent demand in semiurban and rural markets is driving aggressive
expansion plans of leading Indian broking houses. The Indian broking industry currently
includes a number of players with a regional or sectoral focus. Large brokerage houses are
growing and scaling up through geographical expansion. This process is expected to continue
with the entry of global majors into the industry. However, increasing competition is
expected to reduce margins in the industry thereby impacting profitability. The entry of
aggressive players such as Reliance Capital through its portal ‘Reliance Money’ is expected
to significantly increase the reach and penetration of securities broking services in India.
Several large global players are also mulling an entry into the Indian market in the near
future. This sector is therefore set to witness increasing action with intensifying levels of
competition among existing players and new entrants leading to the emergence of large
players with a pan-India presence and a significant share in the total market volumes. Players
are also positioning themselves as retail financial services brands to improve share of wallet
and enhance customer retention.
Wealth Management

The booming Indian economy, rising stock prices and increase in salaries has turned the
spotlight on the Wealth Management sector. Key products and services include investment
advisory - in debt, equity, mutual funds and derivatives; besides tax advisory; estate planning;
and insurance advisory. The wealth management space was hitherto considered the preserve
of some foreign banks, which offered ‘exclusive services’ to select high networth customers.
Today, several private banks offer these services, while there is virtually no participation
from the large nationalized banks. Further, international players are increasingly offering
dedicated wealth propositions with more evolved products than their Indian counterparts.
The growing number of affluent Indians coupled with increasing awareness of financial
planning has resulted in expanding the base of potential wealth management customers.

Private Equity

In the past few years, India has become one of the top five PE destinations in the Asia Pacific
region with PE funds constituting over 25 percent of FDI inflows into India. Liberal foreign
investment policy encouraging foreign participation and availability of targets at attractive
valuations relative to other emerging markets have resulted in a rapid growth of private
equity investments in the country.

Pensions

The current demographic dividend that India enjoys may not last indefinitely. As a result of
declining birth rates and longer life expectancy, the elderly will constitute a large proportion
of the total population. Even today, while the population of the elderly is proportionately
lower, in absolute terms, it is till a very significant number. The changing demographic
dynamics calls for a critical look at the pension support system in India. Less than 10 percent
of the estimated working population in India is covered under formal old-age income security
schemes. The penetration by way of the Public Provident Fund (PPF) account is less than 1
percent of the entire working population. In the past few years, there have been numerous
discussions on permitting participation from the private sector and foreign players in the
Indian pensions industry, powered by the proposed introduction of favorable regulatory
initiatives. The regulations planned for the pension and provident fund industries require
structural and procedural modifications. The formation of the interim Pension Fund
Regulatory and Development Authority (PFRDA) kicked-off the reform process. The pension
reforms in the country then acquired momentum with the announcement from Reserve Bank
of India (RBI) regarding norms for management of pension funds by banks. Implementation
of pension sector reforms is expected to have a salutary impact on the Indian pension and
provident fund sector. PFRDA has already laid down the eligibility criteria for pension funds.
Though the RBI norms intend to eventually permit private and foreign banks to enter the
business of pension funds management, the definition of the roadmap for future growth is
still awaited.

2.4 Emerging opportunities

The vibrant Indian economy and robust financial services sector have led to the emergence of
several emerging opportunities which are expected to gain prominence in the long term based
on regulatory and market developments. The Indian structured finance sector is dominated by
asset backed securitization. Increasing regulatory clarity and initiatives to enhance liquidity is
expected to increase the breadth and depth in the sector. The Indian distressed assets sector is
also witnessing increasing attention due to the rapid economic growth and higher asset values
with the real estate boom. India has charted an ambitious infrastructure development program
in the next five to seven years, wherein public-private partnerships are emerging as the
preferred investment vehicle. Non recourse lending is emerging as the preferred lending route
owing to reduced leverage, thereby obviating the need for security. Real estate funds are
witnessing intense activity with significant participation from domestic (specifically High
Networth Individuals) and foreign investors; estimates suggest that funds exceeding USD 12-
15 billion are awaiting deployment in the Indian real estate sector. The booming Indian
economy and the robust corporate and SME performance has led to a massive inflow in
Private Equity capital into India. The acquisition-led inorganic growth strategy of Indian
corporates is also expanding the leveraged finance market in India.

Private Equity Market Size

Private equity capital is being preferred over traditional sources of funds to leverage their
brand equity, sector knowledge and relationships. PE investment in India was earlier limited
to the IT and ITES industry with a focus on early stage ventures. However, in recent times,
PE investment has extended to a large number of sectors besides IT and ITES. PE players are
increasingly focusing on attractive opportunities in real estate, media and entertainment,
telecom, financial services and manufacturing and auto industry. With investments of over
USD 20-2517 billion needed by India in the infrastructure sector alone, the current high
growth trajectory in the private equity sector is expected to continue in the medium term.

Financial Services and Regulator are as follows:

(Figures 2.1 Finacial RBI a regulator)

Investment Considerations

The Indian financial services sector will continue to tread the high growth path in the medium
term on the back of favorable structural drivers, which will continue to drive GDP growth.
This provides South African firms an opportunity to enter an expanding market with high
growth potential. The Indian regulatory framework for entry into the Indian financial services
sector has been defined by various regulators with respect to the entry vehicle (FDI or FII),
mode of operations/ presence (branch, representative office or subsidiary) which have a
significant bearing on the tax and reporting requirements. To develop a coherent strategy for
entry into the Indian market, South African firms should consider the regulatory implications
as well. An India strategy is increasingly becoming a key imperative for any truly global
corporation, and interested South African players need to weigh their options and choose the
optimal strategy to leverage the India opportunity in the financial services sector. India is the
world's largest democracy and ranks second in the list of fastest growing economies globally.
The past decade has witnessed fundamental changes in the Indian economy with respect to
government policy, business outlook and more importantly, the Indian mindset. Some
contributors to the dynamic growth of the Indian economy include, a new industrial
resurgence, increased business and investor confidence, increased investment, relatively
modest inflation in spite of spiraling global crude prices, laying of some institutional
foundations for faster development of physical infrastructure and progress in fiscal
consolidation.

Services-led Growth

Traditionally, developing countries have transitioned from being ‘primary’ agriculture-based

to ‘secondary’ manufacturing-based and subsequently to ‘tertiary’ services-based economies.
India has leap-frogged a stage through its direct transformation from a primary focused into a
tertiary services based economy.

(Figure 2.2 Finacial Regulator(IRDA,SEBI,PFRDA))

Favorable Demographics: The Engine of Growth

A key factor driving India’s growth is its large and young population. With a median age of
around 24 years and over 500 million Indians below the age of 21 years, a large percentage of
India’s population is expected to be in the working age even in 2025, when the median age
shall be 31 years. This large class of consumers is expected to drive India’s impressive
growth, making it the world’s fifth largest consumer market by 2025,4 surpassing Germany.
According to a study by the McKinsey Global Institute, India’s growth is expected to create a
vast middle class (Income of USD 5,000 – USD 25,0005), bigger than that of U.S. and
Europe combined. This middle class, numbering around 600 million by 2025, is expected to
account for over 60 percent of the total spending in the country. India has fast become a
preferred investment destination for global investors and

companies propelled by:

• Existence of a stable democracy and political system;

• Globalization of the Indian economy;

• Favorable regulatory reforms and institutional framework leading to

integration with the global economy;

• Emergence as a global hub for manufacturing, software and BPO services;

• Robust earnings growth of the corporate sector and a booming capital market;

• Favorable demographics with a growing consuming and investing class; and

• Increased savings in the economy, channelized into the creation of productive

assets
 COMPANY PROFILE

1.1 INTRODUCTION:

INDIA INFOLINE LTD

Head Office: India Infoline Ltd., 75, Nirlon Complex, Off. Western Express Highway,
Goregaon (East), Mumbai 400063.

Web Address: www.indiainfoline.com

BSE: 532636 | NSE: INDIAINFO | ISIN: INE530B01024

Market Cap: [`Cr.] 2,887 | Face Value: [`] 2
Industry: Finance & Investments

The IIFL (India Infoline) group, comprising the holding company, India Infoline Ltd
(NSE: INDIAINFO, BSE: 532636) and its subsidiaries, is one of the leading players in the
Indian financial services space. IIFL offers advice and execution platform for the entire range
of financial services covering products ranging from Equities and derivatives, Commodities,
Wealth management, Asset management, Insurance, Fixed deposits, Loans, Investment
Banking, GoI bonds and other small savings instruments. IIFL recently received an in-
principle approval for Securities Trading and Clearing memberships from Singapore
Exchange (SGX) paving the way for IIFL to become the first Indian brokerage to get a
membership of the SGX. IIFL also received membership of the Colombo Stock Exchange
becoming the first foreign broker to enter Sri Lanka

A network of over 2,500 business locations spread over more than 500 cities and
towns across India facilitates the smooth acquisition and servicing of a large customer base.
All our offices are connected with the corporate office in Mumbai with cutting edge
networking technology. The group caters to a customer base of about a million customers,
over a variety of mediums viz. online, over the phone and at our branches

1.2 History and Milestones

Ye a r M ile s to ne s
1995 C o mmenced o p eratio ns as an Eq uity R esearch firm
Launchedresearchp ro d uctso flead ingInd ianco mp anies, k eysecto rsa ndthe
1997
eco no my C lient includ ed lead ing F IIs, b ank s and co mp anies
1999 Launched w w w .ind iainfo line.co m
2000 Launched w w w .5 p aisa.co m S tarted d istrib utio n o f life insurance an
2003 Launched p ro p rietary trad ing p latfo rm Trad er Terminal fo r retail cu
2004 A cq uired co mmo d ities b ro k ing license
Launched P o rtfo lio M anagement S ervice
2005 M aid en IP O and listed o n N S E, B S E
2006 A cq uired memb ership o f D G C X
C o mmenced the lend ing b usiness
2007 C o mmenced institutio nal eq uities b usiness und er IIF L
F o rmed S ingap o re sub sid iary, IIF L (A sia) P te Ltd
2008 Launched IIF L W ealth
Transitio ned to insurance b ro k ing mo d el
2009 A cq uired registratio n fo r H o using F inance
S EB I in- p rincip le ap p ro val fo r M utual F und
O b tained V enture C ap ital license
R eceivedin- p rincip lea p p ro valfo r memb ershipo f the S ingap o reS to ck
2010 Exchange
R eceived memb ership o f the C o lo mb o S to ck Exchange
(Table 1.1: History and Milestones)
1.3 PRODUCT AND SERVICES:

We are a one-stop financial services shop, most respected for quality of its advice,
personalized service and cutting-edge technology.

• Equities Broking:
India Infoline provided the prospect of researched investing to its clients, which was
hitherto restricted only to the institutions. Research for the retail investor did not exist
prior to India Infoline. India Infoline leveraged technology to bring the convenience of
trading to the investor’s location of preference (residence or office) through computerized
access. India Infoline made it possible for clients to view transaction costs and ledger
updates in real time

• Commodities

IIFL offers commodities trading to its customers vide its membership of the MCX and the
NCDEX. Our domain knowledge and data based on in depth research of complex
paradigms of commodity kinetics, offers our customers a unique insight into behavioral
patterns of these markets. Our customers are ideally positioned to make informed
investment decisions with a high probability of success.

Credit and finance

IIFL offers a wide array of secured loan products. Currently, secured loans (mortgage
loans, margin funding, and loans against shares) comprise 94% of the loan book. The
Company has discontinued its unsecured products. It has robust credit processes and
collections mechanism resulting in overall NPAs of less than 1%. The Company has
deployed proprietary loan-processing software to enable stringent credit checks while
ensuring fast application processing. Recently the company has also launched Loans
against Gold.
Insurance
IIFL entered the insurance distribution business in 2000 as ICICI Prudential Life
Insurance Co. Ltd’s corporate agent. Later, it became an Insurance broker in October
2008 in line with its strategy to have an ‘open architecture’ model. The Company now
distributes products of major insurance companies through its subsidiary India Infoline
Insurance Brokers Ltd. Customers can choose from a wide bouquet of products from
several insurance companies including Max New York Life Insurance, MetLife, Reliance
Life Insurance, Bajaj Allianz Life, Birla Sunlife, Life Insurance Corporation, Kotak Life
Insurance and others.
Wealth Management Service
IIFL offers private wealth advisory services to high-net-worth individuals (HNI) and
corporate clients under the ‘IIFL Private Wealth’ brand. IIFL Private Wealth is managed
by a qualified team of MBAs from IIMs and premier institutes with relevant industry
experience. The team advises clients across asset classes like sovereign and quasi-
sovereign debt, corporate and collateralised debt, direct equity, ETFs and mutual funds,
third party PMS, derivative strategies, real estate and private equity. It has developed
innovative products structured on the fixed income side. It also has tied up with
Interactive Brokers LLC to strengthen its execution platform and provide investors with a
global investment platform

• Research:
Sound investment decisions depend upon reliable fundamental data and stock selection
techniques. Equity investment professionals routinely use our research and models as
integral tools in their work. They choose Ford Equity Research when they can clear your
doubts.

• Invest In Mutual Fund

India Infoline offers you a host of mutual fund choices under one roof, backed by in-
depth research and advice from research house and tools configured as investor friendly.
Investment Banking
IIFL’s investment banking division was launched in 2006. The business leverages upon its
strength of research and placement capabilities of the institutional and retail sales teams.
Our experienced investment banking team possesses the skill-set to manage all kinds of
investment banking transactions. Our close interaction with investors as well as corporate
helps us understand and offer tailor-made solutions to fulfil requirements
The Company possesses strong placement capabilities across institutional, HNI and retail
investors. This makes it possible for the team to place large issues with marquee investors
In FY10, the team advised and managed more than 10 transactions including four IPOs
and four Qualified Institutions Placements

• Portfolio Management Services:

Our Portfolio Management Service is a product wherein an equity investment portfolio is
created to suit the investment objectives of a client. We at India infoline invest your
resources into stocks from different sectors, depending on your risk-return profile. This
service is particularly advisable for investors who cannot afford to give time or don't have
that expertise for day-to-day management of their equity portfolio.

• Mortgages:
During the year under review, Indiainfoline acquired a 75% stake in Moneytree
Consultancy Services to mark its foray into the business of mortgages and other loan
products distribution. The business is still in the investing phase and at the time of the
acquisition was present only in the cities of Mumbai and Pune. The Company brings on
board expertise in the loans business coupled with existing relationships across a number
of principals in the mortgage and personal loans businesses. Indiainfoline now has plans
to roll the business out across its pan-Indian network to provide it with a truly national
scale in operations.
 CHAPTER 2

Objectives of the Report

 OBJECTIVES OF THE PROJECT

• TO STUDY DERIVATES SEGMENTS OF NSE (FUTURES & OPTIONS)

WITH EFFECTIVE PAYOFF STRATEGIES.

• TO ANALYZE IMPACTS OF VARIOUS MACRO-ECONOMY & MICRO-

ECONOMY FACTORS ON INDIAN BANKING SECTOR

• TO EVALUATE VALUATIONS ON BANK OF BARODA IN INDIAN STOCK

MARKET WITH RESPECT TO ITS FINANCIAL PERFORMANCE AND
FUTURE EARNINGS CAPACITY.
 CHAPTER 3

Theoretical Background
 THEORETICAL BACKGROUND

3.1 FUNDAMENTAL ANALYSIS

Fundamental analysis is a technique that attempts to determine a security’s value by
focusing on underlying factors that affect a company's actual business and its future
prospects.

Fundamental analysis serves to answer questions, such as:

• Is the company’s top-line is growing?

• Is it actually making an increase in bottom line of company?
• Is it able to repay its debts?
• Is management effective focusing on utilization of resources and able to grow in near
future?

In general, the investor should try to get greater insights on the following aspects of the
company:

• Business Model
• Competitive Advantage
• Management
• Corporate Governance
• Financial and Information Transparency
• Stakeholder Rights
• Structure of the Board of Directors
• Customers
• Market Share
• Industry Growth
• Competition
• Regulation, if any
 Financial statements are the medium by which a company discloses information
concerning its financial performance, which include profit and loss account, balance sheet
and other financial statements published by the company from time to time.

3.2 INTRODUCTION TO DERIVATIVES

The emergence of the market for derivative products, most notably forwards, futures
and options, can be traced back to the willingness of risk-averse economic agents to guard
themselves against uncertainties arising out of fluctuations in asset prices. By their very
nature, the financial markets are marked by a very high degree of volatility. Through the use
of derivative products, it is possible to partially or fully transfer price risks by locking-in asset
prices. As instruments of risk management, these generally do not influence the fluctuations
in the underlying asset prices. However, by locking in asset prices, derivative products
minimize the impact of fluctuations in asset prices on the profitability and cash flow situation
of risk-averse investors.

Derivatives Defined

Derivative is a product whose value is derived from the value of one or more basic
variables, called bases (underlying asset, index, or reference rate), in a contractual manner.
The underlying asset can be equity, forex, commodity or any other asset. The price of this
derivative is driven by the spot price of "underlying".

In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R)A) defines
"derivative" to include-

1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract for differences or any other form of security.

2. A contract which derives its value from the prices, or script of prices, of underlying
securities.

Derivatives are securities under the SC(R) A and hence the trading of derivatives is governed
by the regulatory framework under the SC(R) A.
Derivatives Product

Derivative contracts have several variants. The most common variants are forwards, futures,
options and swaps. We take a brief look at various derivatives contracts that have come to be
used.

• Forwards: A forward contract is a customized contract between two entities, where

settlement takes place on a specific date in the future at today's pre-agreed price.
• Futures: A futures contract is an agreement between two parties to buy or sell an
asset at a certain time in the future at a certain price. Futures contracts are special
types of forward contracts in the sense that the former are standardized exchange-
traded contracts.
• Options: Options are of two types - calls and puts. Calls give the buyer the right but
not the obligation to buy a given quantity of the underlying asset, at a given price on
or before a given future date. Puts give the buyer the right, but not the obligation to
sell a given quantity of the underlying asset at a given price on or before a given date.
• Warrants: Options generally have lives of upto one year, the majority of options
traded on options exchanges having a maximum maturity of nine months. Longer-
dated options are called warrants and are generally traded over-the-counter.
• Swaps & Swaptions: Swaps are private agreements between two parties to exchange
cash flows in the future according to a prearranged formula. They can be regarded as
portfolios of forward contracts. The two commonly used swaps are:
o Interest rate swaps: These entail swapping only the interest related cash
flows between the parties in the same currency.
o Currency swaps: These entail swapping both principal and interest between
the parties, with the cash flows in one direction being in a different currency
than those in the opposite direction.
o Swaptions: Swaptions are options to buy or sell a swap that will become
operative at the expiry of the options. Thus a swaption is an option on a
forward swap. Rather than have calls and puts, the swaptions market has
receiver swaptions and payer swaptions. A receiver swaption is an option to
receive fixed and pay floating. A payer swaption is an option to pay fixed and
receive floating.
3.3 INTRODUCTION TO FORWARD, FUTURES AND OPTIONS

Forward Contract:

A forward contract is an agreement to buy or sell an asset on a specified date for a

specified price. One of the parties to the contract assumes a long position and agrees to buy
the underlying asset on a certain specified future date for a certain specified price. The other
party assumes a short position and agrees to sell the asset on the same date for the same price.
Other contract details like delivery date, price and quantity are negotiated bilaterally by the
parties to the contract. The forward contracts are normally traded outside the exchanges.

The salient features of forward contracts are:

• They are bilateral contracts and hence exposed to counter party risk.

• Each contract is custom designed, and hence is unique in terms of contract size, expiration
date and the asset type and quality.

• The contract price is generally not available in public domain.

• On the expiration date, the contract has to be settled by delivery of the asset.

• If the party wishes to reverse the contract, it has to compulsorily go to the same counter-
party, which often results in high prices being charged.

Forward contracts are very useful in hedging.

For E.g. Classic hedging application would be that of an exporter who expects to receive
payment in dollars three months later. He is exposed to the risk of exchange rate fluctuations.
By using the currency forward market to sell dollars forward, he can lock on to a rate today
and reduce his uncertainty. Similarly an importer who is required to make a payment in
dollars two months hence can reduce his exposure to exchange rate fluctuations by buying
dollars forward.

Limitations of Forward Market

Forward markets world-wide are afflicted by several problems:

• Lack of centralization of trading,

 • Illiquidity, and

• Counterparty risk

Futures

Futures markets were designed to solve the problems that exist in forward markets. A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price. But unlike forward contracts, the futures contracts are standardized
and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies
certain standard features of the contract.

The standardized items in a futures contract are:

• Quantity of the underlying

• Quality of the underlying

• The date and the month of delivery

• The units of price quotation and minimum price change

• Location of settlement

Futures Terminology

• Spot price: The price at which an asset trades in the spot market.
• Futures price: The price at which the futures contract trades in the futures market.
 • Contract cycle: The period over which a contract trades. The index futures contracts
on the NSE have one- month, two-months and three months expiry cycles which
expire on the last Thursday of the month. Thus a January expiration contract expires
on the last Thursday of January and a February expiration contract ceases trading on
the last Thursday of February. On the Friday following the last Thursday, a new
contract having a three- month expiry is introduced for trading.
• Expiry date: It is the date specified in the futures contract. This is the last day on
which the contract will be traded, at the end of which it will cease to exist.
• Contract size: The amount of asset that has to be delivered under one contract also
called as lot size.
• Basis: In the context of financial futures, basis can be defined as the futures price
minus the spot price. There will be a different basis for each delivery month for each
contract. In a normal market, basis will be positive. This reflects that futures prices
normally exceed spot prices.
• Cost of carry: The relationship between futures prices and spot prices can be
summarized in terms of what is known as the cost of carry. This measures the storage
cost plus the interest that is paid to finance the asset less the income earned on the
asset.
• Maintenance margin: This is somewhat lower than the initial margin. This is set to
ensure that the balance in the margin account never becomes negative. If the balance
in the margin account falls below the maintenance margin, the investor receives a
margin call and is expected to top up the margin account to the initial margin level
before trading commences on the next day.

Introduction to Options

Options are fundamentally different from forward and futures contracts. An option
gives the holder of the option the right to do something. The holder does not have to exercise
this right. In contrast, in a forward or futures contract, the two parties have committed
themselves to doing something. Whereas it costs nothing (except margin requirements) to
enter into a futures contract, the purchase of an option requires an up-front payment.

Option Terminology

• Index options: These options have the index as the underlying. Some options are
European while others are American. Like index futures contracts, index options
contracts are also cash settled.
• Stock options: Stock options are options on individual stocks. Options currently
trade on over 500 stocks in the United States. A contract gives the holder the right to
buy or sell shares at the specified price.
• Buyer of an option: The buyer of an option is the one who by paying the option
premium buys the right but not the obligation to exercise his option on the
seller/writer.
• Writer of an option: The writer of a call/put option is the one who receives the
option premium and is thereby obliged to sell/buy the asset if the buyer exercises on
him.
• There are two basic types of options, call options and put options.

• Call option: A call option gives the holder the right but not the obligation to buy an
asset by a certain date for a certain price.
• Put option: A put option gives the holder the right but not the obligation to sell an
asset by a certain date for a certain price.
• Option price/premium: Option price is the price which the option buyer pays to the
option seller. It is also referred to as the option premium.
• Expiration date: The date specified in the options contract is known as the
expiration date, the exercise date, the strike date or the maturity.
• Strike price: The price specified in the options contract is known as the strike price
or the exercise price.
• American options: American options are options that can be exercised at any time up
to the expiration date. Most exchange-traded options are American.
• European options: European options are options that can be exercised only on the
expiration date itself. European options are easier to analyze than American options,
 and properties of an American option are frequently deduced from those of its
European counterpart.
• In-the-money option: An in-the-money (ITM) option is an option that would lead to
a positive cash flow to the holder if it were exercised immediately. A call option on
the index is said to be in-the-money when the current index stands at a level higher
than the strike price (i.e. spot price > strike price). If the index is much higher than the
strike price, the call is said to be deep ITM. In the case of a put, the put is ITM if the
index is below the strike price.
• At-the-money option: An at-the-money (ATM) option is an option that would lead to
zero cash flow if it were exercised immediately. An option on the index is at-the-
money when the current index equals the strike price (i.e. spot price = strike price).
• Out-of-the-money option: An out-of-the-money (OTM) option is an option that
would lead to a negative cash flow if it were exercised immediately. A call option on
the index is out-of-the-money when the current index stands at a level which is less
than the strike price (i.e. spot price < strike price). If the index is much lower than the
strike price, the call is said to be deep OTM. In the case of a put, the put is OTM if the
index is above the strike price.
• Intrinsic value of an option: The option premium can be broken down into two
components - intrinsic value and time value. The intrinsic value of a call is the amount
the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is zero. Putting it
another way, the intrinsic value of a call is Max[0, (St — K)] which means the
intrinsic value of a call is the greater of 0 or (St — K). Similarly, the intrinsic value of
a put is Max[0, K — St],i.e. the greater of 0 or (K — St). K is the strike price and St is
the spot price.
• Time value of an option: The time value of an option is the difference between its
premium and its intrinsic value. Both calls and puts have time value. An option that is
OTM or ATM has only time value. Usually, the maximum time value exists when the
option is ATM. The longer the time to expiration, the greater is an option's time value,
all else equal. At expiration, an option should have no time value.

The following factors affect the value of an option:

1. Underlying market price

2. Strike price
3. Volatility (variability) of underlying instrument

4. Time to expiration

5. Interest rate

As these factors change, the value of options maintained within a portfolio also changes.

3.4 RBI’S KEY POLICY RATE:

The key policy rate include the bank rate, the repo rate, the reverse repo rate, the cash reserve
ratio (CRR) and the statutory liquidity ratio (SLR). RBI increases its key policy rates when
there is greater volume of the money in the economy. Conversely, when there is a liquidity
crunch or recession, RBI would lower its key policy rates to inject more money into the
economic system.
Repo rate:

Repo rate or repurchase rate is the rate at which RBI lends to banks for short periods. This is
done by RBI buying government bonds from banks with an agreement to sell them back at
fixed rate. If central bank wants to make more expensive for banks to borrow money, it
increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it
reduces the repo rate. The current repo rate is 5.50%

Reverse Repo rate:

Reverse repo rate is the rate of interest at which the central bank borrows funds from other
banks in the short term. Like the repo, this is done by selling government bonds to banks with
the commitment to buy them back at future date. The banks use the reverse repo facility to
deposits their short term excess funds with central bank to earn interest on it.RBI can reduce
liquidity in the banking system by increasing the rate at which it borrow from banks. Hiking
the repo and reverse repo rate ends up reducing the liquidity and pushes up interest rates.

Statutory Liquidity Ratio (SLR)

Apart from keeping a portion of deposits with RBI as cash, banks are also required to
maintain a minimum percentage of deposits with them at the end of every business day, in the
form of gold, cash, government bonds or other approved securities. This minimum
percentage is called Statutory Liquidity Ratio. The current SLR is 25%.In times of high
growth, an increase in SLR requirement reduces lendable resources of banks and pushes up
interest rates.

Cash Reserve Ratio

Cash reserve Ratio (CRR) is the amount of funds that banks have to park with RBI. If RBI
decides to increase the cash reserve ratio, the available amount with banks would reduce. The
central bank increases CRR to impound surplus liquidity.CRR serves two purposes:
 • It ensures that a portion of bank deposits are always available to meet withdrawal
demand
• It enables that RBI control liquidity in the system and thereby, inflation by tying their
hands in lending money. The current CRR is 6%

Impact of CRR change:

When there is a change in the CRR, the first impact is seen in the banks. For banks, the rise in
CRR would mean that a larger proportion of funds will be with RBI, while a fall in rate will
mean a lower proportion will be with the apex bank.

Bank Rate
Unlike other policy rates, the banks rate is purely a signaling rate and most interest rate are
delinked from the bank rate. Also, the bank rate is the indicative rate at which RBI lends
money to other banks (or financial institutions).The bank rate signals the central bank’s long
–term outlook on interest rates. If the bank rate moves up, long –term interest rates also tend
to move up, and vice-versa.

Movement in key policy rates in India

Effective Rate Reverse Repo Repo Rate Cash Reserve

Rate Ratio

JUNE 27 2010 4.50% 5.75% 6.00%

(Table 3.1: Movement in Key Policy Rates)

Base rate:

The new benchmark rate below which banks will not provide loans is termed as base rate. It
is linked to the cost of funds and will replace the benchmark prime lending rate or BPLR, and
bring in transparency in loan pricing.RBI have given banks the flexibility to fix their base
rate.

Sector Exempt: The base rate will not apply to concessional loans for agriculture, exports,
and other specified sectors.

Provisions and Contingent Assets / Liabilities

The Bank creates a provision when there is a present obligation as a result of a past event that
probably requires an outflow of resources and a reliable estimate can be made of the amount
of the obligation. A disclosure for contingent liability is made when there is a possible
obligation or a present obligation that may but probably will not require an outflow of
resources. When there is a possible obligation or a present obligation in respect of which the
likelihood of outflow of resources is remote, no provision or disclosure is made.
 CHAPTER 4

Research Methodology

RESEARCH METHODOLOGY
4.1 INTRODUCTION

Research in common parlance refers to a search for knowledge. Research is termed as a

scientific & systematic search for pertinent information on specific topic. According to
Redman and Mory define research as a “systematized effort to gain new knowledge.
Thus, term Research refers to the systematic method of consisting of enunciating
problem, collecting the facts or data, analyzing the facts and reaching a certain conclusion
either in the form of solutions towards concerned problem or in certain generalizations for
some theoretical formulation.

Research Design:

A “Research Design” is the arrangement of conditions for collection and analysis of data in a
manner that aims to combine relevance to the research purpose with economy in procedure.
Research Design is blueprint of the research.

Sample Design: It deals with method of selecting items to be observed for the given study by
analyze a group of population size available.

For e.g. Sample Size is One (Bank of Baroda) from the population of various Banks
operating in India (Nationalized =19, Private players=7, Co-operative, RRB, Foreign banks
etc.)

4.2 COLLECTION OF DATA:

1. Primary Data Collection:

Primary data is originally gathered specifically on project hand. Project obtains

information for various future payoff strategies from India Infoline Research teams. It
offers much greater accuracy and reliability.

 Observation method by Research team of company.

2. Secondary Data Collection:

 After doing the data collection in primary method, the researcher did the
collection through the secondary data. In this there are several types such as:

 General library: Books of Fundamental research, Valuation techniques.

 Trade-Books: Capital Market magazine, Business papers etc.
 Press releases & Media: RBI policy releases, Govt. Policy etc.
 Internet :Collecting an annuals reports and some major announcements
through official website Bank of Baroda

4.3 TYPE OF RESEARCH:

Analytical Research:

In analytical research, researcher has to use facts or information already available for
carry out an intensive research. Project mainly undergoes an analytical research. Project
collects a various available facts regarding Macro-economy and Micro-economy view.
Project collects a five years financial of company through annual reports. Banking
impacts of various factors is analyzed to form some concrete information.

Statistically Data Used:

• CAGR (%) is determined for last five years (2006-2010) to understand it is annual
compounding growth.

• Y-o-Y (%) is also calculated for knowing a upward or downward bias of various
parameters of company.

• Projected earning of next two years is determined by using a CAGR (%) and its
impacted factors in economic conditions.

• Average and Growth (%) in dividend yield and retention is studied for
understanding it future market value of Bank of Baroda script.
 CHAPTER 5

Data Analysis and Interpretation

 DATA ANALYSIS AND INTERPRETATION

7.1 FUTURES PAYOFFS

Futures contracts have linear payoffs. In simple words, it means that the losses as well
as profits for the buyer and the seller of a futures contract are unlimited. These linear payoffs
are fascinating as they can be combined with options and the underlying to generate various
complex payoffs.

Payoff for buyer of futures: Long futures

The payoff for a person who buys a futures contract is similar to the payoff for a
person who holds an asset. He has a potentially unlimited upside as well as a potentially
unlimited downside. Take the case of a speculator who buys a two month SBI futures
contract stands at 2220. The underlying asset in this case is the SBI script. When the index
moves up, the long futures position starts making profits, and when the script moves down it
starts making losses. Figure shows the payoff diagram for the buyer of a futures contract.

(Figure 7.1: Payoff for buyer of futures: Long futures)

Payoff for seller of futures: Short futures

The payoff for a person who sells a futures contract is similar to the payoff for a person who
shorts an asset. He has a potentially unlimited upside as well as a potentially unlimited
downside.

For E.g. Take the case of a speculator who sells a two-month SBI futures contract when the
SBI script at 2220. The underlying asset in this case is the SBI scrip. When the script moves
down, the short futures position starts making profits, and when the script moves up, it starts
making losses.

Figure shows the payoff diagram for the seller of a futures contract.

(Figure 7.2: Payoff for seller of futures: Short futures)

Pricing Futures:

The cost of carry model used for pricing futures is given below:

r =Cost of financing (using continuously compounded interest rate)

T =Time till expiration in years e =2.71828

Hedging: Long security, sell futures

Futures can be used as an effective risk-management tool.

For E.g. Take the case of an investor who holds the shares of a company and gets
uncomfortable with market movements in the short run. He sees the value of his security
falling from `450 to `390. In the absence of stock futures, he would either suffer the
discomfort of a price fall or sell the security in anticipation of a market upheaval. With
security futures he can minimize his price risk. All he need do is enter into an offsetting stock
futures position, in this case, take on a short futures position. Assume that the spot price of
the security he holds is `390. Two-month futures cost him `402. For this he pays an initial
margin. Now if the price of the security falls any further, he will suffer losses on the security
he holds. However, the losses he suffers on the security will be offset by the profits he makes
on his short futures position. Take for instance that the price of his security falls to `350. The
fall in the price of the security will result in a fall in the price of futures. Futures will now
trade at a price lower than the price at which he entered into a short futures position. Hence
his short futures position will start making profits. The loss of `40 incurred on the security he
holds, will be made up by the profits made on his short futures position.

Index futures in particular can be very effectively used to get rid of the market risk of a
portfolio. Every portfolio contains a hidden index exposure or a market exposure. This
statement is true for all portfolios, whether a portfolio is composed of index securities or not.

Suppose we have a portfolio of ` 1 million which has a beta of 1.25. Then a

complete hedge is obtained by selling `1.25 million of Nifty futures.
7.2 OPTIONS PAYOFF:

Payoff for buyer of call option

The figure shows the profits/losses for the buyer of a three-month SBI Script 2250
call option. As can be seen, as the spot Script rises, the call option is in-the-money. If upon
expiration, Script closes above the strike of 2250, the buyer would exercise his option and
profit to the extent of the difference between the Script-close and the strike price. The profits
possible on this option are potentially unlimited. However if Script falls below the strike of
2250, he lets the option expire. His losses are limited to the extent of the premium he paid for
buying the option.

(Figure 7.3: Payoff for buyer of call option)

Payoff for writer of call option

The figure shows the profits/losses for the seller of a three-month SBI Script 2250 call option.
As the spot Script rises, the call option is in-the-money and the writer starts making losses. If
upon expiration, Script closes above the strike of 2250, the buyer would exercise his option
on the writer who would suffer a loss to the extent of the difference between the Script -close
and the strike price. The loss that can be incurred by the writer of the option is potentially
unlimited, whereas the maximum profit is limited to the extent of the up-front option
premium of `86.60 charged by him.

(Figure 7.4: Payoff for writer of call option)

Payoff for buyer of put option

The figure shows the profits/losses for the buyer of a three-month SBI Script 2250 put
option. As the spot Script falls, the put option is in-the-money. If upon expiration, Script
closes below the strike of 2250, the buyer would exercise his option and profit to the extent of
the difference between the strike price and Script-close. The profits possible on this option
can be as high as the strike price. However if Script rises above the strike of 2250, he lets the
option expire. His losses are limited to the extent of the premium he paid for buying the
option.

(Figure 7.5: Payoff for buyer of put option)

Payoff for writer of put option

(Figure 7.6: Payoff for writer of put option)

The figure shows the profits/losses for the seller of a three-month SBI Script 2250 put
option. As the spot Script falls, the put option is in-the-money and the writer starts making
losses. If upon expiration, Script closes below the strike of 2250, the buyer would exercise his
option on the writer who would suffer a loss to the extent of the difference between the strike
price and Script-close. The loss that can be incurred by the writer of the option is a maximum
extent of the strike price (Since the worst that can happen is that the asset price can fall to
zero) whereas the maximum profit is limited to the extent of the up-front option premium of
`61.70 charged by him.
One month calls and puts trading at different strikes

The spot price is 1250. There are five one-month calls and five one-month puts
trading in the market. The call with a strike of 1200 is deep in-the-money and hence trades at
a higher premium. The call with a strike of 1275 is out-of-the-money and trades at a low
premium. The call with a strike of 1300 is deep-out-of-money. Its execution depends on the
unlikely event that the price of underlying will rise by more than 50 points on the expiration
date. Hence buying this call is basically like buying a lottery. There is a small probability that
it may be in-the-money by expiration in which case the buyer will profit. In the more likely
event of the call expiring out-of-the-money, the buyer simply loses the small premium
amount of ` 27.50. Table shows the payoffs from buying calls at different strikes. Similarly,
the put with a strike of 1300 is deep in-the-money and trades at a higher premium than the at-
the-money put at a strike of 1250. The put with a strike of 1200 is deep out-of-the-money and
will only be exercised in the unlikely event that underlying falls by 50 points on the
expiration date

Underlying Strike price of options Call Premium(Rs.) Put Premium(Rs.)

1250 1200 80.1 18.15
1250 1225 63.65 26.5
1250 1250 49.45 37
1250 1275 37.5 49.8
1250 1300 27.5 64.8

(Table 7.1: One month calls and puts trading at different strikes)
Payoff for seller of call option at various strikes

The figure shows the profits/losses for a seller of calls at various strike prices. The in-the
money option has the highest premium of `80.10 whereas the out-of-the-money option has
the lowest premium of ` 27.50.

(Figure 7.7: Payoff for seller of call option at various strikes)

Payoff for buyer of put options at various strikes

The figure shows the profits/losses for a buyer of puts at various strike prices. The in-the
money option has the highest premium of `64.80 whereas the out-of-the-money option has
the lowest premium of ` 18.50.
(Figure 7.8: Payoff for buyer of put options at various strikes)

Bull spreads - Buy a call and sell another

A spread trading strategy involves taking a position in two or more options of the
same type, that is, two or more calls or two or more puts. A spread that is designed to profit if
the price goes up is called a bull spread. It is basically done utilizing two call options having
the same expiration date, but different exercise prices. The buyer of a bull spread buys a call
with an exercise price below the current index level and sells a call option with an exercise
price above the current index level. The spread is a bull spread because the trader hopes to
profit from a rise in the index. The trade is a spread because it involves buying one option
and selling a related option.

Compared to buying the underlying asset itself, the bull spread with call options limits
the trader's risk, but the bull spread also limits the profit potential.

Payoff for a bull spread created using call options

The figure shows the profits/losses for a bull spread. The payoff obtained is the sum
of the payoffs of the two calls, one sold at `40 and the other bought at `80. The cost of
setting up the spread is `40 which is the difference between the call premium paid and the
call premium received. The downside on the position is limited to this amount. As the index
moves above 3800, the position starts making profits (cutting losses) until the index reaches
4200. Beyond 4200, the profits made on the long call position get offset by the losses made
on the short call position and hence the maximum profit on this spread is made if the index on
the expiration day closes at 4200. Hence the payoff on this spread lies between -40 to 360.
Somebody who thinks the index is going to rise, but not above 4200. Hence he does not want
to buy a call at 3800 and pay a premium of 80 for an upside he believes will not happen. In
short, it limits both the upside potential as well as the downside risk. The cost of the bull
spread is the cost of the option that is purchased, less the cost of the option that is sold. It
gives the profit/loss incurred on a spread position as the index changes. Figure shows the
payoff from the bull spread.

(Figure 7.9: Payoff for a bull spread created using call options)

Broadly, we can have three types of bull spreads:

1. Both calls initially out-of-the-money.

2. One call initially in-the-money and one call initially out-of-the-money, and

3. Both calls initially in-the-money.

The decision about which of the three spreads to undertake depends upon how much
risk the investor is willing to take. The most aggressive bull spreads are of type 1. They cost
very little to set up, but have a very small probability of giving a high payoff.
Table Expiration day cash flows for a Bull spread using two-month calls

The table shows possible expiration day profit for a bull spread created by buying
calls at a strike of 3800 and selling calls at a strike of 4200. The cost of setting up the spread
is the call premium paid (`80) minus the call premium received (`40), which is `40. This is
the maximum loss that the position will make. On the other hand, the maximum profit on the
spread is limited to `360. Beyond an index level of 4200, any profits made on the long call
position will be cancelled by losses made on the short call position, effectively limiting the
profit on the combination.

Nifty Buy Jan 3800 Call Sell Jan 4200 Call Cash Flow Profit&Loss (Rs.)
3700 0 0 0 -40
3750 0 0 0 -40
3800 0 0 0 -40
3850 50 0 50 10
3900 100 0 100 60
3950 150 0 150 110
4000 200 0 200 160
4050 250 0 250 210
4100 300 0 300 260
4150 350 0 350 310
4200 400 0 400 360
4250 450 0 450 410
4300 500 -50 450 410

(Table 7.2: Bull spread created using call options)

Bear spreads - sell a call and buy another

A spread trading strategy involves taking a position in two or more options of the
same type, that is, two or more calls or two or more puts. A spread that is designed to profit if
the price goes down is called a bear spread. This is basically done utilizing two call options
having the same expiration date, but different exercise prices. How a bull is spread different
from a bear spread? In a bear spread, the strike price of the option purchased is greater than
the strike price of the option sold. The buyer of a bear spread buys a call with an exercise
price above the current index level and sells a call option with an exercise price below the
current index level. The spread is a bear spread because the trader hopes to profit from a fall
in the index. The trade is a spread because it involves buying one option and selling a related
option.

Compared to buying the index itself, the bear spread with call options limits the
trader's risk, but it also limits the profit potential. In short, it limits both the upside potential
as well as the downside risk.

A bear spread created using calls involves initial cash inflow since the price of the call sold is
greater than the price of the call purchased. Table gives the profit/loss incurred on a spread
position as the index changes. Figure shows the payoff from the bear spread.

(Figure 7.10: Bear spreads - sell a call and buy another)

Broadly we can have three types of bear spreads:

1. Both calls initially out-of-the-money.

2. One call initially in-the-money and one call initially out-of-the-money, and

3. Both calls initially in-the-money.

The decision about which of the three spreads to undertake depends upon how much risk the
investor is willing to take. The most aggressive bear spreads are of type 1. They cost very
little to set up, but have a very small probability of giving a high payoff. As we move from
type 1 to type 2 and from type 2 to type 3, the spreads become more conservative and cost
higher to set up. Bear spreads can also be created by buying a put with a high strike price and
selling a put with a low strike price.

The figure shows the profits/losses for a bear spread. As can be seen, the payoff obtained is
the sum of the payoffs of the two calls, one sold at ` 150 and the other bought at `50. The
maximum gain from setting up the spread is ` 100 which is the difference between the call
premium received and the call premium paid. The upside on the position is limited to this
amount. As the index moves above 3800, the position starts making losses (cutting profits)
until the spot reaches 4200. Beyond 4200, the profits made on the long call position get offset
by the losses made on the short call position. The maximum loss on this spread is made if the
index on the expiration day closes at 2350. At this point the loss made on the two call
position together is `400 i.e. (4200-3800). However the initial inflow on the spread being
`100, the net loss on the spread turns out to be 300.The downside on this spread position is
limited to this amount. Hence the payoff on this spread lies between +100 to -300.

Table Expiration day cash flows for a Bear spread using two-month calls

The table shows possible expiration day profit for a bear spread created by selling one market
lot of calls at a strike of 3800 and buying a market lot of calls at a strike of 4200. The
maximum profit obtained from setting up the spread is the difference between the premium
received for the call sold (` 150) and the premium paid for the call bought (`50) which is `
100.

In this case the maximum loss obtained is limited to `300. Beyond an index level of 4200,
any profits made on the long call position will be canceled by losses made on the short call
position, effectively limiting the profit on the combination.
Nifty Buy Jan 4200 Call Sell Jan 3800 Call Cash Flow Profit&Loss (Rs.)
3700 0 0 0 100
3750 0 0 0 100
3800 0 0 0 100
3850 0 -50 -50 50
3900 0 -100 -100 0
3950 0 -150 -150 -50
4000 0 -200 -200 -100
4050 0 -250 -250 -150
4100 0 -300 -300 -200
4150 0 -350 -350 -250
4200 0 -400 -400 -300
4250 50 -450 -400 -300
4300 100 -500 -400 -300

(Table 7.3: Bear spreads - sell a call and buy another)

Calendar spread

A calendar spread is a position in an underlying with one maturity which is hedged by an

offsetting position in the same underlying with a different maturity: for example, a short
position in a July futures contract on Reliance and a long position in the August futures
contract on Reliance is a calendar spread. Calendar spreads attract lower margins because
they are not exposed to market risk of the underlying. If the underlying rises, the July contract
would make a profit while the August contract would make a loss.
7.3 SECTORAL ANALYSIS ON BANKING SECTOR

(Figure 7.11: Sectoral Analysis)

Macro-Economy
Parameters Effect on Banking Sector
Economy Global economy is under recession showing
captures upswings and downswings manifesting in
the business cycles. Consequently, movements in general
activity level are expected to generate direct impact on bank.

Rupee-Dollar Fluctuations Export oriented sector is greatly affected by Rupee-Dollar

Fluctuations. IT, Textiles, Diamonds etc are affecting a forex
Transactions to Banks

Crude Oil Rate India is one of the largest Importer of Oil & Gas which leads
to generation of forex transaction to Banks

Inter Bank Rate LIBOR and Interbank rate is very efficient in deciding a short term
Inter bank lending for maintaining profitability and liquidity.

FDI Global economy must correlate for attracting a FDI in INDIA for
generating growth in Indian economy and Banking sector

(Table 7.4: Macro Economy)

7.3.1Macro-Economic Context:
The global economy is recovering faster than expected from the global crisis amidst
ongoing policy support and improving financial market conditions. The recovery process is
led by EMEs, especially those in Asia, as growth remains weak in advanced economies. The
global economy continues to face several challenges such as high levels of unemployment,
which is close to 10% in the US and the Euro area. In its World Economic Outlook update for
April 2010, the International Monetary Fund(IMF) has projected that global growth will
recover from a decline of (– 0.6%) in 2009 to a growth of 4.2% in 2010 and a growth of 4.3%
in 2011.Among the advanced economies, the United States is off to a better start than Europe
and Japan. IMF projected that US GDP growth will recover from (– 2.4%) in 2009 to 3.1% in
2010. Growth in Euro area will recover from (– 4.1%) in 2009 to 1.0% in 2010. Amongst
EMEs, China continues to grow at a rapid pace, led mainly by domestic demand. China’s
growth is forecast at 10% in 2010, with India also at a rapid pace of 8.8%. Malaysia and
Thailand have recovered to register positive growth in the second half of 2009. Indonesia
recorded positive growth throughout 2009. Global headline inflation rates rose between
November 2009 and January 2010, softened in February 2010 on account of moderation of
food, metal and crude prices and again rose marginally in some major economies in March
2010.

The Global economy, which was stunted by the impact of unprecedented ‘Global
Meltdown’ of 2008-09 witnessed gradual recovery through the last year, supported largely by
extraordinary policy intervention by the Government and Central banks of countries across
globe. The pace of recovery, however, remained uneven across countries, with tepid growth
by advanced economies and faster growth by emerging and developing economies. Although
recovery process continue to progress, the recent sovereign debt crisis in several European
countries has created new hurdles in the way of sustainable growth and stability. The fallout
and contagion effect of European debt crisis has, however, been contained to a European
Union, IMF, European central bank. However, should there be any case of default or
restricting of sovereign European debt, it can adversely affect market sentiments, cause
interest rates to rise, impact capital flows eventually affecting growth process. This apart, for
sustaining global recovery and growth momentum the challenges will be surmounting high
unemployment rate, high fiscal deficit and high debt to GDP ratio prevailing especially in
case of Developed countries and need to unwind fiscal and monetary stimulus measures
sometimes in future.
 The global GDP, as projected by World bank recently, is expected to grow by 3.3% in
2010 and 2011 as against contraction by 2.1% during 2009.The growth rate of developing
counties will remain higher at 6.0% than that of the Advanced countries who are to grow by
only 2.3%.Among the developing economies, China and India will be at the fore front with
growth rate for 2010 projected at over 9.5% and 8.2%, respectively.

(a) IMF gives U.S. finances a mixed review in its latest report

• While the IMF’s Financial Sector Assessment Report has assessed the U.S. financial
system as “stable”, it has warned of continued stress for smaller banks. According to
IMF, “the sweeping financial reform bill signed into law this month was a step in the
right direction, but it missed the opportunity to streamline the complex web of
agencies that oversee banks and other financial institutions."

• Among its harshest observations, the IMF said the government's strategy for dealing
with the housing crisis has been "costly, inefficient and complex, with subsidies that
do not translate into a higher homeownership rate."

• Bank stress tests conducted for the country's largest banks in April 2009 prompted the
19 largest U.S. banks to raise an additional $205 billion in capital -- a plus. “On the
negative side, a substantial slide in the commercial real estate market could threaten
the nation's regional banks, which have yet to raise additional funds to enable them to
survive a downturn”, said the IMF Report.

b) Rupee –Dollar Fluctuations:

• Rupee-Dollar Fluctuations is causing a greater unstably in deciding a forex reserves in

treasury. Due to economic slowdown in economy many credit off take from export
oriented sectors. Banking sector must properly decide a proper hedge against various
uncertainties.

(c) Crude oil price at $ 77.43 per bbl in New York on July 30, 2010

• Crude oil extended losses in New York on July 30th after a Report showed US
economic growth missed economists’ expectations, crimping demand for oil.
(d) LIBOR and Inter-Bank rate:

• Economy is showing direct impacts on profitability and liquidity of banks. LIBOR

and Inter-Bank rate is must shows direct relations on soundness and beliefs in banking
systems. Uncertain conditions makes situation worse and increase very high Inter-
Bank rate.

• Central banks play a very cruial role in controlling liquidity of system by easing funds
gradually to make a situations in controls.

e) FDI:

India is undoubtedly emerging as the next big investment destination, riding on a high
savings and investment rate, as compared to other Asian economies. The actual average GDP
growth during 2007-2010 has been 7.6% with per capita income rising to USD 20,000 from
the current USD 2,932. Over 50 per cent of the population is less than 25 years of age, with
the proportion of working population likely to increase significantly over the next decade.
The trend of rising personal incomes has been witnessed not only amongst the young
population, but also the high net worth (HNI) segment, which have sizeable sums to invest.
One estimate indicates that there are more than 120,000 dollar millionaires in India and the
number is increasing.
 Micro-Economy

Parameters Effect on Banking Sector

Indian GDP RBI outlook Indian Economy to grow by 8.5% this fiscal for showing
signs of Global recovery of Economy. It may have a upward bias in
credit demand by properly analyzing on deposit rate.

Agriculuture Production Agriculture comes under a priority sector lending of bank. It growths
helps in good picking in rural credit demand which leads to high
profitability with RBI objective of Financial inclusion strengths.
Current outlook is having good agricultural production of Kharif crop
due to normal monsoon and Govt. supporting policy

Industrial Growth It plays a very dominant role in profitability of bank. Bank is highly
dependent on credit demand.
Current Outlook is showing a upward movement in Industrial growth.
3 G Lending and future increase in demand in credit during festive seasons

Inflations Central Bank one of the main objective is to control an Inflation

Bank continuously monitor the things and take necessary action in
Monetary Policy which leads to affects profitability and liquidity
in System.

RBI Monetary Policy In 27 July 2010, RBI review committee has increase a REPO RATE
to 5.75% ,REVERSE REPO RATE to 4.5%
While CRR & SLR remains constants.
It mainly affects a short term liquidity in market for controlling a
double digits inflations.

Fiscal conditions Govt. is showing some reliefs in fiscal conditions by 3 G spectrum auctions and
some disinvestments policy in end of this years.

Political Stability Govt must stable to take any reforms, decisions, effective working
of Indian Economy cruical decisions.

Govt.Policy Currently Finance Minister has announced the issue of Banking

licenses in annual budgets. It may again create a competitive
environment for bank to maintain a profitability.

Festive Seasons Festival seasons in India plays very important role in increase a credit
demand. Bank must properly capitalize to increase in loans and advances.

(Table 7.5: Micro Economy)

7.3.2Micro-Economy Context:
a) Indian GDP

The fiscal year 2009‐10 was a challenging year for the Indian economy. The
significant deceleration in the second half of 2008‐09 brought the real GDP growth down to
6.7 per cent, from an average of over 9 per cent in the preceding three years. India was
among the first few countries in the world to implement a broad‐based counter‐cyclic policy
package to respond to the negative fallout of the global slowdown. It included a substantial
fiscal expansion along with liberal monetary policy support.

The effectiveness of these policy measures became evident with fast paced recovery.
The economy stabilized in the first quarter of 2009‐10 itself, when it clocked a GDP growth
of 6.1 per cent, as against 5.8 per cent in the fourth quarter of the preceding year. It registered
a strong rebound in the second quarter, when the growth rate rose to 7.9 per cent. With the
Advance Estimates placing the likely growth for 2009‐10 at 7.2 per cent, we are indeed
vindicated in our policy stand. The final figure may well turn out to be higher when the third
and fourth quarter GDP estimates for 2009‐10 become available.

This recovery is very encouraging for it has come about despite a negative growth in
the agriculture sector. More importantly, it is the result of a renewed momentum in the
manufacturing sector and marks the rise of this sector as the growth driver of the economy.
The growth rate in manufacturing in December 2009 was 18.5 per cent— the highest in the
past two decades. There are also signs of a turnaround in the merchandise exports with a
positive growth in November and December 2009 after a decline of about twelve successive
months. Export figures for January are also encouraging. Significant private investment can
now be expected to provide the engine for sustaining a growth of 9 per cent per annum.

Present demand for loan lending is likely to be increase during current quarter after
fixing of base rate. The International Monetary Fund (I.M.F) has raised India’s growth
forecast for 2010 to 9.5% on improving global counts. Robust corporate profits and favorable
financing conditions are likely to fuel investments.
 The Indian Government expects the economy to growth at 8.5% in the financial year
2010-11. I.M.F. predicts the large demands based of some of the Asian economies such as
China, India and Indonesia would cushion the impact of EURO area shocks.GDP forecast for
Asia have been revised upward for 2010 from around 7%.World growth is projected at
around 4.5% in 2010-11 and 4.25% in 2011-12.

* Source: IMF Press releases.

In contrast to advanced economies, India Economy saw a comparatively stronger and

faster recovery during 2009-10.Inspite of deficient rainfall and marginal growth in
Agricultural output, the GDP registered a growth rate of 7.4% during 2009-10 as against
6.7% growth rate for 2008-09.The strong rebound in Industrial output with 10.4% growth
crate and resilience shown by the service sector with 8.3% growth rate, have contributed
considerably to recovery in GDP growth. The Export sector, which was reeling under
negative territory till October, 2009 has bounced back with over 30% growth rate registered
for the last three months since February,2010.However,for the year as a whole, both exports
and imports growth remained negative at -4.7% and -8.2% respectively. The year 2009-10
saw large volatility in inflation. From a negative figure during June to August 2009 period,
headline WPI inflation gradually rose to 9.9% by March, 2010. Inflationary pressure, which
emanated from rising food prices initially, gradually turned out to be generalized, spreading
to non-food manufactured products. The fiscal deficit rose by 25% during 2009-10 under the
impact of lower tax revenue growth and additional burden on account of fiscal stimulus stood
at 6.6% of the GDP.

The outlook for Indian economy for the 2010-11 appears encouraging, with growth
rate projected at over 8%, assuming a normal monsoon and higher Agricultural output. The
continued buoyancy in Industrial output and Exports will help boost the growth momentum
of the economy. However, certain downside risks like decline in Saving Rate, deceleration in
private and Government consumption demand, any adverse global development and an early
exit from fiscal stimulus and supportive monetary measures may dampen the growth
prospects.

The Indian Govt. are expected to reduce the inflation to single digits before end of
second quarter and make fiscal deficits to 5.5% at end of fiscal. Govt. is planning to
implement first phase of the UID’s (Aadhar) linked with NERGA, ration card distribution
with bank A/c s License.
Snapshots of Indian economic highlights on Quarter ended in 2010
• India’s Manufacturing PMI rose to 57.6 in July’10 from 57.3 a month ago, according
to a survey done by HSBC and Markit. However, the PMI is still off the 27-month high of
59.0 posted in May’10. The latest result suggests 16 straight months of manufacturing sector
expansion.

Growth in India’s key infrastructure industries decelerated to an 11-month low of

3.4% (y-o-y) in June’10 primarily on account of a nearly flat coal output. Except for the
growth in crude oil that stood at the healthy 6.8% (y-o-y), the other sectors grew in the range
of 0.9% to 3.6% in the month of June. While one sees a lot of noise and variance in the core
industries’ monthly data, one has to carefully watch its future growth trajectory as it is an
important leading indicator of the manufacturing activity.

Indian government’s fiscal deficit declined to Rs 402 bln in Apr-Jun, FY11 from
Rs1.243 trln in Apr-Jun, FY10 on windfall gains from spectrum auctions. The fiscal deficit
accounted for 10.5% of the budget estimate of Rs 3.814 trln for FY11. While the government
raised a little over Rs 1 trln from sale of 3G and broadband spectrum, it mobilized Rs 344 bln
by way of corporate tax collections in June’10

• On July 26th, 2010, the Moody’s Investors Service raised the rating on India’s local
currency debt to one notch below investment grade at “Ba1” with a positive outlook,citing
improving public finances.

The Moody’s, however, kept the local currency deposit ratings of Indian banks
unchanged at a grade that is two notches up from India’s sovereign rating. The bank deposits
at “Baa” grade, implies that they will be able to fulfill financial commitments, even though
there is moderate credit risk in the medium-term.

In its First Quarterly Review of Monetary Policy on July 27th, the RBI raised the
Repo rate by 25 bps to 5.75% and Reverse Repo rate by 50 bps to 4.5% to control the impact
of growing demand pressures on inflation and to reduce the volatility of short-term interest
rates. It also announced that it will come out with monetary policy statements every six
weeks instead of once a quarter. The next announcement is scheduled on Sept. 16th, 2010.
 Indian Banking Industry’s Non-Food Credit growth stayed at the decent level of
21.75% (y-o-y) as on July 16th, 2010, while Aggregate Deposit growth stayed weaker around
14.6% (y-o-y). With this, the Incremental Credit-Deposit Ratio climbed to 101.2% as on July
16th. A slowdown in deposit mobilization has prompted several banks like BoB, PNB, ICICI
Bank, HDFC Bank, Kotak Mahindra Bank, Laxmi Vilas Bank, Syndicate Bank, etc., to raise
their deposit rates in the range of 25 to75 bps. While the M3 growth stayed at 15.2% (y-o-y)
as on 16th July, the growth in Reserve Money was stronger at 26.7% as on July 9th due to the
RBI’s extended LAF operations.

India’s Foreign Exchange Reserves (FER) increased by US $1.04 bln during the latest
reported week to US $282.94 bln as on July 23, 2010.

b) Agriculture
• The data released by Ministry of Agriculture shows that copious rains in the country
over the last 10-12 days boosted sowing of most kharif crops this week.
• Whereas the sowing of kharif rice, pulses, sugarcane, coarse cereals, maize, groundnut
and cotton has improved so far compared to the previous year, the sowing of
oilseeds has been flat. However, the sowing of kharif soyabean has declined marginally
on year on year basis.

• Distribution of rains too was good in the week ended July 28, with 26 of 36
meteorological subdivisions receiving normal to excess rains. Timely rains in
Maharashtra particularly the pulses belt of Latur, facilitated an increase in tur, moong and
urad area. According to trade officials, pulses sowing has increased also in the wake of
higher support prices/additional incentives promised to growers.

• The government is aiming for record 16.5 mln tn pulses output this crop year to cut
down on the country’s dependence on imports.
 c) Industrial Growth:

Indian economy is robust recovery in Industrial Growth due to various initiatives

taken by the central govt. Lot many of stimulus packages have been announced to make
economic in back into tracks. Currently Outlook is showing an upwards bias in credit demand
due to 3 G lending and festival demands coming in second half of year.

d) Inflation situation

Inflations is currently in double digits from past 6 months. RBI is taking lot many
measures to curb the inflations. Central Bank is targeting to make an inflation to 5.5% during
end of financial years.
Non-food manufacturing inflation accelerated from near-zero in November 2009 to 7.3% in
June 2010, reflecting higher input costs, recovering private demand, and associated return of
pricing power. Given risks to inclusive growth from higher inflation, the monetary unwinding
that started in Oct 2009 should continue till inflation expectations are firmly anchored and
inflation is reduced.

Indian annualized food inflation at 9.67% in the week to July 17, 2010

• The government’s weekly data showed that for the week ended July 17th, India’s
primary articles’ inflation increased by 0.4% on weekly basis. In annualized terms, it
stood at 14.50%.

• While food inflation rose by 0.6% on weekly basis, the non-food inflation increased
by 0.17%. In annualized terms, the food inflation stood at 9.67% versus 12.47% a
week ago.

• During the week under review, within the food articles’ group, prices of wheat,
pulses, potatoes, fruits and milk recorded an increase, while prices of rice, vegetables
and onions declined to some extent.

• On weekly basis, while the minerals index remained unchanged (as it had shown a
huge growth of 28.3% a few weeks ago), the fuel price index declined by 0.1%. In
annualized terms, the fuel price inflation stood at 14.29%.
 • This week also saw the release of CPI for industrial workers for the month of
June,2010. Inflation measured in terms of CPI (IW) eased marginally to 13.73% in
June’10 from 13.91% a year ago.

• Going by the current trends, we expect the headline inflation to remain in the range of
8.5% to 9.0% by the fiscal year-end. However, the RBI has pegged it to 6.0% by end-
March, 2010, implying that it would continue to tighten policy aggressively in the
remaining part of 2010-11 until it brings the inflation down to 6.0%.

e) RBI Monetary Policy:

The RBI has released ‘Macroeconomic and Monetary Developments First Quarter
Review 2010-2011. Below are key highlights of RBI’s assessment of various parameters of
the economy.

Monetary and liquidity conditions

Liquidity conditions have turned tight in June 2010 on account of sharp increase in
government balances due to higher mobilization under 3G/BWA spectrum auctions. RBI has
acted to mitigate the liquidity pressure, but continued with its calibrated monetary tightening
in view of higher level of inflation. Non-food credit growth to the private sector remained
buoyant.

March 2010
• Policy rates – both repo and reverse repo hiked by 25bps each to 5% and 3.5% respectively,
w.e.f. March 19, 2010
• CRR and SLR left unchanged
April 2010
• The RBI hiked repo rate, reverse repo rate and CRR by 25 bps each. The CRR hike
absorbed ~INR 125 bn from the system.
July 2010
• In a mid-cycle move on July 02, the RBI hiked the policy rates by 25bps each, taking repo
rate to 5.5% and reverse repo to 4% while keeping the CRR unchanged. The move was not
unanticipated given the fuel price hikes announced by the government in the previous week.
• In the scheduled policy meeting on July 27, the RBI announced 25 bps hikes in repo rate, 50
bps hike in reverse repo rate and no change in CRR citing inflation as a dominant concern.
With this the LAF corridor shrinks to 125 bps from 150 bps earlier

Cramped Credit

Fortnight Credit Flow Y-O-Y growth Deposit Y-O-Y growth

Ended mobilised

9 April’10 826 17 43,501 16

23 April’ 10 -26483 17.13 -23,327.90 14.97

7 May’ 10 13,031 17.25 24,471 14.72

21 May’ 10 2,406 18.04 -4,997 14.16

4 June’ 10 57,895 19.12 -9,024 14.33

18 June’ 10 22,343 19.59 -23,761 13.92

2 July’ 10 91,972.53 21.7 1,15,162 14.92

17 July’ 10 -38,913 21.27 -40,867 14.55

Figures in Rs Crore; y-o-y growth(%) at the end of fortnight

(Table 7.6: Cramped Credit)

f) Fiscal conditions

Government’s fiscal position has benefited from larger-than-expected mobilization

from 3G/BWA spectrum auctions. As a result, non-tax revenue receipts are expected to jump
48% from the budgeted level. This will result in 100bps reduction in the gross fiscal deficit %
GDP compared to that envisaged in Budget estimates 2010-2011. Partial de-
regulation/upward revisions in petroleum product prices will further support government
finances.

g) Political Stability:
 Political Stability plays a crucial role in deciding various policy and effective
implementations

h) Govt. Policy:

Banking Licenses

As the Reserve Bank of India (RBI) considers issuing fresh banking licenses, it has
proposed higher capital requirements and capping foreign investments in new private sector
banks below 50%. The RBI is applying the “Survival of the Fittest Strategy” and looking
forward to increase a healthy completion with better customer satisfaction.

The discussion paper mentions three different options for minimum capital
requirements to open new banks. The first option asks for a capital base above 300cr, while
the second is for a steeper 1,000cr. The third option which is likely to be adopted is to have
an initial minimum capital of 500cr, to be increased to 1,000cr in five years.

Another discussion was towards the total foreign shareholding through direct and
institutional investments. This has been advised to be capped below 50% with a lock-in
period of 10 years. The RBI proposed multiple options for minimum foreign shareholding.
There was an option of retaining the existing rule of founders initially bringing in at least
40% of capital with a lock-in clause of five years, while the maximum stake of other
shareholders capped at 10% as earlier.

The discussion continued with allowing the industrial and business houses to enter
into the banking sector. As mentioned, firms that have experience in financial services may
be considered for the banking licenses. Second option may allow corporations to take over
Regional Rural Banks (RRB’s) before a bank license is issued to them.

The RBI also mentioned about not considering the real-estate sector companies due to
the sectors sensitivity. Also, there have been past instances where a lot of individual
promoters who had got licenses did not do well. For example the Centurion Bank, Bank of
Punjab and Global Trust Bank have failed. RBI has decided to take stringent measures to
decide upon the licensing requirements.
The final paper will be coming out on 30 September this year and it would be early to
provide opinions on the guidelines that may get created for industrial houses to enter into the
banking space.

The Indian banking system has emerged unscathed from the crisis. We need to ensure
that the banking system grows in size and sophistication to meet the needs of a modern
economy. Besides, there is a need to extend the geographic coverage of banks and improve
access to banking services.
During 2008‐09, the Government infused Rs.1900 crore as Tier‐I capital in four
public sector banks to maintain a comfortable level of Capital to Risk Weighted Asset Ratio.
An additional sum of `1200 crore is being infused now. For the year 2010‐11, it propose to
provide a sum of `16,500 crore to ensure that the Public Sector Banks are able to attain a
minimum 8 per cent Tier‐I capital by March 31, 2011. Recapitalization of Regional Rural
Banks
Regional Rural Banks (RRBs) play an important role in providing credit to rural
economy. The capital of these banks is shared by the Central Government, sponsor banks and
State Governments. The banks were last capitalized in 2006‐07. Minister proposes to provide
further capital to strengthen the RRBs so that they have adequate capital base to support
increased lending to the rural economy.

* Source: Union Budget 2010

i) Festive Seasons:
Banking sector is showing upwards increase in credit demands in festive seasons.
Banks shows a very great resilience in lending to retail customers and Industry for picking
demands in revival economy.

5.3.3 Bank’s Specific:

Bank Specific role helps in undergoing profitability and liquidity.

Bank Specific

Management Effective Management plays a crucial role in Profitability and Liquidity of

Bank. Properly management of Loan portfolio and low deposits growth.

Customer Service Bank must properly capitalized a highly utilization of customer service
for long term relations.

Operating Process Bank operating process plays a crucial role in deciding level of satisfaction
for customers. Banks can get high dividend by simplifying process.

Credit Rating Effective Credit Rating pattern must properly studied for reducing
NPA .Handling a greater loans portfolio design directly impacted margins.

Ambience Locality and ambience plays a very important role in deposits and
Loans and advances for banks.
(Table 5.7: Bank Specific)

Snapshots of Details Output

Agriculture output is expected to be better than last year (given the progress of the
monsoon), industry is growing strongly, and lead indicators for services continue to exhibit
strong momentum. Accordingly, GDP growth can be expected to be higher than 8% projected
in April 2010. On the expenditure side, investment demand has picked up strongly in
Q4FY10 and production trends in capital goods suggest continuation of the momentum in the
near term. Private consumption demand, which had been subdued so far, is likely to pick up
as suggested by some lead indicators. Fiscal consolidation, however, will mean moderation in
government consumption. At the same time, the recovery in exports in recent months may
slowdown in the coming months given the developments in Europe. RBI’s professional
forecasters’ survey places overall (median) GDP growth rate for FY11 at 8.4%, higher than
8.2% reported in the previous round of survey.

Future Outlook
The Government’s record market borrowings programme proceeded well and in a
non-disruptive manner during FY10 with limited impact on bond yields. The Union Budget
for FY11 has set the goal of reducing the fiscal deficit to 5.5% of GDP in FY11 and further to
4.8% in FY12 and to 4.1% in FY13. This will be facilitated by the expected fall in
expenditure items and likely revenue buoyancy, going forward. The Union Budget for FY11
began the exit from fiscal stimulus by partially rolling back some of the duty relaxations
introduced during the crisis period. It hiked the excise duty from 8.0% to 10.0%. The other
tax proposals included rationalization of income tax slabs, additional excise duty on petrol &
diesel, and a restoration of 5.0% customs duty on petroleum products, including crude oil. A
landmark reform in the area of government subsidy is the introduction of nutrient-based
subsidy for fertilizers. This policy is expected to improve agricultural productivity, contain
the subsidy bill over time and offer environmental benefits. Furthermore, the government has
decided not to issue any more special off-budget bonds from FY11 to finance subsidies for
fuel, food and fertilisers. Another major fiscal development is a revival programme for the
disinvestment of state-owned enterprises listed on the stock exchanges. During FY10, the
government raised a record Rs 33,500 crore through this route, whereas the FY11 Budget
calls for realisation of Rs 40,000 crore through disinvestment. The outlook for India, going
forward, looks strongly positive. Its economy has been showing steady improvement.
Industrial recovery is expected to take firmer hold on the back of rising domestic and external
demand. Exports and imports have bounced back since October-November, 2009. Flows of
funds to the commercial sector from both bank and non-bank sources have picked up.
Business outlook surveys by the RBI and other agencies suggest that business optimism has
improved. On balance, under the assumption of normal monsoon and

Sustained good performance of the industrial and services sectors, the RBI has
projected real GDP growth for India for FY11 at 8.0% with an upside bias.

Targets set for agriculture credit flow in the past few years. For the year 2010‐11, the
target has been raised to `3, 75,000 crore from `3, 25,000 crore in the current year.

• Banking Scenario:
 The Indian banking industry, which remained largely immune to global financial
crisis, was however impacted by slow down prevailing in Real sector. The credit off take
remained subdued for a prolonged period of time. The pressure on Net Interest Margin was
visible as a result of reduction in PLR and the magnitude of stressed assets, which increased
on account of global economic slowdown following the financial crisis, showed hardly any
perceptible improvement.

The deposits growth of the Scheduled Commercial Banks during 2009-10 slowed
down to 17.0% during the year as against 19.9% during the previous year. The Bank credit
growth remained less than 5% during the first half of 2009-10.However, subsequent recovery
in credit pick up enabled the system to log 16.7% growth during the year as against 17.5% in
previous year. While the bank credit during the year decelerated, financing by corporate
sector from non-bank sources increased sharply. The Credit Deposits ratio of the banking
system, which remained below 70% for major part of the year improved to 72% by end
March.

The deposits and lending rates softened during 2009-10, with rates on deposits of
above one year maturity coming down from 8.0-9.25% in March ,09 end to 6.00-7.50% by
the end March,2010.The Benchmark Prime Lending Rate(BPLR) of five major PSB banks
came down from 11.50%-12.50% in March,2009 to 11.0-12.0% in March 2010.

During 2009-10, considering the pace recovery in economy and to rein in the
inflationary pressures, RBI initiated gradual exit from the expansionary policy from the
second half of the year. During the last quarter, CRR and Repo rates were also raised on
concerns of inflationary expectation. Banks have been advised by RBI to maintain a
minimum NPA provision coverage ratio to 70 % by the end –September 2010.More leeway
has been given to banks for opening branches in rural and Semi-urban areas. In pursuance of
the recommendation of RBI working Group, BPLR now has been replaced by Base Rate
from July 2010.The base rate will ensure transparency and would be beneficial to the
borrowers at large.

Indian banking industry stood firm and resilient amid the global crisis on the back of
its improved productivity since the mid- 1990s and a robust regulatory and supervisory
framework.
 The Industry’s financial soundness indicators remained strong with the Return on
Average Assets (ROAA) at 1.13%, Capital Adequacy Ratio (CAR) at 13.98% and Net NPA
ratio at 1.05% as at end-March, 2009. During the year FY10, the banking industry posted a
decent business and financial performance despite several challenges. For instance, the
scheduled commercial banks’ (SCB) Aggregate Deposits grew by 17.1% (y-o-y). Within this,
the term deposits grew by 16.2%, primarily due to a sharp decline in interest rates offered on
term deposits by several banks. As credit growth was quite muted until November, 2009, the
banks struggled to protect their net interest margins by reducing the pressure on cost of
deposits. A slower growth in term deposits resulted in a slower growth of broad money
supply or M3 by 16.8% (y-o-y) during FY10. However, the banks’ demand deposits grew
healthily by 22.8% (y-o-y) during FY10 reflecting the industry’s aggressive efforts to
mobilize low-cost (CASA) deposits to reduce the pressure on cost of funds. Amongst the
sources of money supply, Net Bank Credit to the Government grew at a strong pace till mid-
November, 2009, as the Government financed majority of its market borrowing requirements
during this period. However, after November, 2009 the growth in this component eased
considerably. On year on year basis, the Net Bank Credit to Government (including the RBI
Credit) increased by 30.6% during FY10. The demand for non-food credit from the
commercial sector started improving from November, 2009 and eventually posted a growth
of 16.9% (y-o-y) by end-March 2010 as against the Reserve Bank of India’s (RBI’s)
indicative target of 16.0%. In the year up to October 2009, deceleration in non-food credit
had continued and reached a low of 10.3%. With the industrial recovery getting increasingly
broad-based, demand for nonfood credit revived since end-November 2009 and pushed
upwards the incremental credit-deposit ratio in the second half of FY10. While, the state-
owned banks played a major role in credit expansion during FY10, credit extended by private
banks also showed some improvement in FY10 over last year. However, as per the RBI
report, the loan portfolio of foreign banks contracted further in FY10.

Reflecting the revival in credit demand from the private sector, the SCBs’ investment
in SLR securities increased at a lower rate of 18.5% (y-o-y) as on March 26, 2010 as against
20.0% a year ago. The SCBs’ holdings of SLR securities was at 28.8% of their net demand
and time liabilities at the end of March, 2010. Disaggregated data on sectoral deployment of
gross bank credit in FY10 put out by the RBI show an improvement in credit growth (y-o-y)
to all major sectors like agriculture, industry, services and retail loans from November 2009
onwards. Within industrial sector, the sectors like infrastructure, basic metals and metal
products led the demand. Within services sector, credit growth for transport operators,
computer software, tourism, hotels, restaurants & trade accelerated in February 2010. The
credit to real estate decelerated sharply in FY10 mainly on account of change in the concept
of real estate introduced in September 2009. Asset quality of Indian banks too remained
largely stable during the year FY10 except for a few banks. The fears of rising delinquencies
have faded now with improving economic outlook and resumption of capital inflows.

For the year FY11, the outlook for Indian banking industry remains positive. With
improving economic prospects for India, many International Credit Rating Agencies have
revised their outlook for the Indian banking industry in the recent past. For instance, the
Moody’s Rating Agency has changed the fundamental credit outlook for the Indian banking
system from “negative” to “stable” on the back of favourable trends in India’s economic
indicators over the last few months. Even the Fitch Rating Agency has stated in its latest
report on Asian

Banking Industry that the operating environment for banks in Asia (including India)
has strengthened unexpectedly fast in June-December, 2009 shifting concerns away from
potential bad loans arising from severe economic slowdown to concerns over asset price
bubbles.
5.3.4 Bank of Baroda

Brief Profile:

Registered office address

Baroda Corp. Centre,

Plot C/26, G-Block,Bandra-Kurla Complx,

Bandra-E Mumbai - Maharashtra

Industry: Banking services BSE Listing group A

NSE Scrip Code BANKBARODA

Face value (Rs) 10.00 Beta 1.10

M ARKET DATA
CM P : INR 539
52-we e k range (IN R) : 730/381
Share in issue (mn) : 364.3
M cap (IN R bn/USD mn) : 193 / 4,191.6
Avg. D aily Vol. BSE (‘000) : 1,113.10

Share holding (%) Mar-10

Promoters 53.81
Public 5.95
FIIs 16.53
Others 23.71

(Table 5.8: Bank of Baroda)

Source: www.bseindia.com
Company Background

Bank of Baroda was established with a paid-up capital of `10 lakh in 1908 in Baroda
in Gujarat. After raising `300 crore through a bond issue in 1995, the bank tapped the capital
market with an initial public offering of `850 crore in 1996. The bank's
international presence covers 21 countries through 40 overseas branches, 3 representative
offices and 17 branches of the bank's overseas subsidiaries. It has approvals for opening
branches in Trinidad and Tobago, Ghana, Australia and Bahrain. It set up a global loan
syndication centre in London in 2000 and plans to set up two syndication centres in Dubai
and Singapore.

During 2009-10, the bank upgraded 917 branches to take take the total number of
branches on core banking platform to 3,148. As of 31 March 2007, the bank had 1,893 fully
networked branches. Total branch strength of the bank in the country stood at 2,732 of which
1,164 are rural branches, 572 are semi-urban branches, 506 are urban branches and 490 are
metro branches. More than 47 per cent of the bank's branch network is concentrated in the
western region.

Bank of Baroda classified its loan business into working capital finance, term finance,
SSI, SME, small business/borrowers and trader loans. For the retail and SME segments, it has
set up a chain of 13 retail and 16 SME `loan factories'. The SME loan factories are located in
Ahmedabad, Surat, Pune, Baroda, Kolkata, Coimbatore, Chennai, Jaipur, Bhilwara, Kanpur,
Ludhiana, Delhi, Kalbadevi (Mumbai) and Jogeshwari (Mumbai), Thane and Lucknow. The
bank defines SMEs as entities with sales revenues less than `100 crore. The bank identifies
the following four groups as `critical business segments' viz. Retail, SME, Wholesale (mid-
corporate and large corporate) and rural/agri business. The bank's wholesale credit business
recorded a growth of 38 per cent during 2006--07. SME credit reported a 31.4 per cent
growth to `9,006 crore. Within the SME segment, growth in small enterprises was 27.03 per
cent while growth in medium enterprises segment was 40.3 per cent. Retail credit continues
to be a major thrust area for the bank. The bank's retail credit grew by a robust 46.4 per cent
during 2009-10.

The Bank has reported a healthy growth in its business and profits with improvement
in all key parameters during FY10.As stated earlier, its Global Business touched a new
milestone of Rs 4,16,080 crore in FY10 reflecting a growth of 24.0% (y-o-y). Both its
domestic deposits and advances increased at the above-industry pace of 22.4% and 21.3%,
respectively. The Bank’s domestic low-cost or CASA deposits grew by an unprecedented
25.1% taking the share of domestic CASA deposits to 35.63% in FY10 versus 34.87% in
FY09. Its Social Sector Advances or Priority Sector Credit surpassed the mandatory
requirement and posted a growth of 24.0% (y-o-y).

The Bank recorded a growth of 44.0% in SME credit, 27.0% in farm credit and 24.0%
in retail credit reflecting a well-diversified growth achievement. In its overseas business,
while the Bank’s deposits grew by 36.0% (y-o-y), its advances grew by 25.0% during FY10.
Within total overseas deposits, the customer deposits grew by 33.7%. Total assets of the
Bank’s overseas operations increased from Rs 51,165 crore to Rs 68,375 crore registering a
growth of 33.6% during the year under review. The growth in profits was led by healthy top
line growth, prudent management of deposit costs and better operating efficiency. The Bank’s
Net Profit at Rs 3,058.33 crore for FY10 reflected a robust year-on-year growth of 37.3%. As
the Bank’s primary objective has been to grow with quality, the Bank focused on containing
the impaired assets to the minimum possible level. While the Gross NPA in domestic
operations stood at 1.64% at end-March 2010, the same for Overseas Operations was at
0.47%. In spite of growing slippages for Indian banking industry during FY10, our Bank
succeeded in restricting its global Gross NPA level to 1.36% and Net NPA level to 0.34% by
end-March, FY10.

While the RBI has extended the deadline for recovery from the Agricultural Debt
Relief accounts till end-June, 2010, the Bank has continued to classify these accounts as NPA
as a prudent measure. Despite this, the Bank enjoys one of the lowest ratios for Gross and Net
NPA in the industry. The Bank’s NPA coverage ratio at 74.90% as on 31st March, 2010 has
been comfortably above the norm of 70.0% set recently by the RBI. The Bank’s Return on
Average Assets (ROAA) at 1.21%, Earnings per Share (EPS) at Rs 83.96, Book Value per
Share (BVPS) at Rs 378.40, and ROE (Return on Equity) at 22.19% reflect a significant
improvement over their previous year’s levels.

The Bank’s Capital Adequacy Ratio too stood at the healthy level of 14.36% with the
Tier 1 capital at 9.20% during FY10. The Bank’s Cost-Income ratio also eased from 45.38%
to 43.57% on year-on-year basis.

BALANCE SHEET:

Liabilities Mar 2006 Mar 2007 Mar 2008 Mar 2009 Mar 2010
Bank of BARODA(` Crore) 12 mths 12 mths 12 mths 12 mths 12 mths
Equity capital 365.53 365.53 365.53 365.53 365.53
Reserves & surplus 7478.91 8284.41 10678.4 12470.71 14740.86
Net Worth 7844.44 8649.94 11043.93 12836.24 15106.39
Current deposits 8378.72 9874.8 11696.01 14451.22 18923.59
Saving deposits 27160.44 31577.28 35776.38 42487.28 52543.92
Time deposits 58122.83 83463.9 104561.74 135458.45 169576.75
Deposits 93661.99 124915.98 152034.13 192396.95 241044.26
Total borrowings 4802.2 1142.56 3927.05 5636.09 13350.09
Other liabilities & Provisions 7083.9 8437.7 12594.41 16538.15 8815.97
Total liabilities 113392.53 143146.18 179599.52 227407.43 278316.71
Assets
Bank Of Board Mar 2006 Mar 2007 Mar 2008 Mar 2009 Mar 2010
Rs. Crore (Non-Annualised) 12 mths 12 mths 12 mths 12 mths 12 mths
Cash & Bank balance at RBI 3333.43 6413.52 9369.72 10596.34 13539.97
Money at call & short notice 10121.21 11866.85 12929.56 13490.77 21927.09
Investments 35114.22 34943.63 43870.07 52445.88 61182.38
Net fixed assets 920.73 1088.81 2427.01 2309.72 2284.76
Other assets 3991.16 5212.5 4301.83 4578.12 4347.22
Loans & advances 59911.78 83620.87 106701.32 143985.9 175035.29
Total assets
(Table 113392.53 143146.18 179599.51 227406.73 278316.71
5.9: Balance Sheet Bank of Baroda)

Source: Annual Report of Bank of BARODA.

Income Statements:

Income & expenditure

Bank Of Baroda( ` Crore)
Income Mar 2006 Mar 2007 Mar 2008 Mar 2009 Mar 2010
Bank of Board 12 mths 12 mths 12 mths 12 mths 12 mths
Income
Interest Income 7049.95 9004.09 11813.48 15091.58 16698.34
Other Income 1124.39 1381.79 2051.04 2757.66 2806.36
Total 8174.34 10385.88 13864.51 17849.24 19504.70

Expenditure
Interest Expended 3875.09 5426.56 7901.67 9968.17 10758.86
Operating Expenses 2384.75 2544.31 2934.29 3576.06 3810.58
Provisions & Contigencies 1090.54 1388.54 1593.03 2077.80 1876.93
Total 7350.38 9359.41 12428.99 15622.03 16446.37

Profit
Net Profit for the Period 823.96 1026.46 1435.52 2227.20 3058.33
(Table 5.10: Income Statement Bank of Baroda)

Source: Annual Report of Bank of BARODA.

5.3.4.1 Projected Balance Sheets and Interpretation

Liabilities M ar 2011(E) M ar 2012(E)CAGR(%)Growth(E)

Bank of Board 12 mths 12 mths
` Crore
Equity capital 365.53 365.53 0.00%
Free Reserves 8096.87 8854.62 9.36%
Specific reserves 9802.88 13097.72 33.61%
Reserves & surplus 17899.75 21952.34 18.49% 21.43%
Net Worth 18265.28 44270.20 17.80% 20.91%
Current deposits 23198.50 28439.14 22.59% 22.59%
Saving deposits 61968.20 73082.82 17.94% 17.94%
Time deposits 221626.25 287651.70 30.69% 30.69%
Deposits 306792.95 389173.66 26.66% 27.28%
Total borrowings 15831.05 17447.65 29.13% 18.58%
Other liabilities & Provisions 11375.13 12014.50 5.62% 29.03%
Total liabilities 352264.41 462906.02 25.17% 26.57%

Assets M ar 2011(E) M ar 2012(E)CAGR(%)

Bank Of Board 12 mths 12 mths
`Crore
Cash & Bank balance at RBI 19222.03 42555.59 41.97%
M oney at call & short notice 26602.24 32274.18 21.32%
Investments 70293.02 80760.32 14.89%
Net fixed assets 2867.59 3599.11 25.51%
Other assets 4441.09 4536.99 2.16%
Loans & advances 228838.43 299179.83 30.74%
Total assets 352264.41 462906.02 25.17%
Income & expenditure
Bank Of Baroda(` Crore)
Income Mar 2011(E) Mar 2012(E) CAGR(% ) Growth(E)
Bank of Board 12 mths 12 mths
Income
Interest Income 20715.49 26341.81 24.06% 27.16%
Other Income 3527.36 4620.84 25.69% 31.00%
Total Income 24242.84 30962.65 24.29%
Expenditure
Interest Expended 13887.92 18220.95 29.08% 31.20%
Operating Expenses 4382.17 5039.49 12.43% 15.00%
Provisions & Contigencies 2167.85 2503.87 14.54% 15.50%
Total Expendiure 20437.94 25764.32 22.30%
Profit
Net Profit for the Period 3804.90 5198.33 38.80% ~24%& 36%
(Table 5.11: Projected Balance Sheets and Interpretation)

Interpretation of Business Models:

P a r a m e te r s M a r 2 0 0 6M a r 2 0 0 7M a r 2 0 0 8M a r 2 0 0 9M a r 2 0 1 0
1 2 m th s 1 2 m th s 1 2 m th s 1 2 m th s 1 2 m th s
O w n 's F u n d s 5542.22 6044.72 6695.08 6782.49 7769.49
C -D R a ti o 58.05% 6 2.1 0 % 6 5 .7 8 % 71.31% 6 9 .3 9 %
C r e d i t G r o w th 39.57% 27.60% 34.94% 21.56%
D e p o si ts G r o w th 33.37% 21.71% 26.55% 25.28%

Y ie ld o n a d v a n c e s 11.77% 10.77% 11.07% 10.48% 9.54%

D e p o si ts 4 .1 4 % 4 .3 4 % 5 .2 0 % 5 .1 8 % 4 .4 6 %
S p re a d 7 .6 3 % 6 .4 2 % 5 .8 7 % 5 .3 0 % 5 .0 8 %
CASA 38% 33% 31% 30% 30%
N e t P r o fi t/ W o r k i n g C a p i ta l (W . C . ) 0.717%
0.727% 0.799% 0.979% 1.099%
A d m i n E x p e n se s/ W . C . 2.10% 1.78% 1.63% 1.57% 1.37%
(Table 5.11 Interpretation of Business Models)
5.3.4.2 Projected Business Models:

Parameters Mar 2010 Mar 2011(E) Mar 2012(E)

12 mths 12 mths 12 mths
Own's Funds 7769.49 8462.40 9220.15
C-D Ratio 69.39% 71.83% 74.51%
Credit Growth 21.56% 30.74% 30.74%
Deposits Growth 25.28% 27.28% 26.85%

Yield on advances 9.54% 9.05% 8.80%

Deposits 4.46% 4.46% 4.46%
Spread 5.08% 4.59% 4.34%

Net Profit/Working Capital 1.099% 1.080% 1.123%

Admin Expenses/Working Capital 1.37% 1.24% 1.09%

(Table 5.13: Projected Business Models)

(Figure 5.12: C-D Ratio)

C-D Ratio: = (Credit- Own Funds)/Deposits

Own Funds =Paid up equity Capital+ Free Reserves

Bank is properly maintain a good level of C-D ratio in range of 62.10% to 69.39% for the
period of FY05 & FY10 to benchmark range of 60-70%

Bank is properly maintaining a C-D Ratio in the required range of 60-70% for the period of
Mar 2006 to Mar 2008.But during a period of financial year 2009 bank is heavily pumping
the money in system for picking of some drought demand in recession period. Bank properly
maintains a SLR and CRR by taking a short term borrowing from banks, which thereby
increase other liabilities.

Mar 07 Mar 08 Mar 09 Mar 10 Mar 11(E) Mar 12(E)

12 mths 12 mths 12 mths 12 mths 12 mths 12 mths
Credit Growth(%) 39.57% 27.60% 34.94% 21.56% 30.74% 30.74%
Deposits Growth(%) 33.37% 21.71% 26.55% 25.28% 27.28% 27.50%
C-D Ratio 62.10% 65.78% 71.31% 69.39% 71.83% 74.13%
CRR(6%) 14462.6556 18407.57728 23470.41981
SLR (25%) 60261.065 76698.23869 97793.41587
Book Value 8649.940 11043.930 12836.240 15106.390 17831.550 21060.513
(Table 5.14: Ratios)

CRR:

Currently CRR is 6% of Deposits of bank. Bank required 14462.65 which are more than the
actual present’s 13539.97.But amount of investment has a good quality of near money
avenues.

SLR (%)

Currently SLR is 25% of Deposits of bank. Bank required maintaining 60261.065 which is
less than 61182.38.

Spread:

(Figure 5.13: Spread)

Bank is showing a declining way of spread in current competitive environment. Bank is
running business model on very vapours thin margins.

Alternatives Options:

• Bank must properly try to exploit a new financial services avenues by providing a
wealth management, customize services, online and Mobile banking for getting a
better returns.
• Bank can have to reduce a certain cost of funds which is currently showing an upward
bias. Bank can effectively managed by issuing a rights issue, QIP etc for obtaining a
cheaper source of money.
• Bank must try to redesign a loan portfolio for increasing a higher yield on advances
by effectively maintains a NPA.

Comments:

Bank is properly maintaining a Net Profit/Working Capital in Standard range of less than 1%.
Bank is properly maintaining a Admin. Expenses/Working Capital in Standard range of less
than 2%.

(Figure 5.14: Net Profit/ Working Cap v/s Admin Expenses/ Working Cap)
Interpretations:

Bank is showing the greater sign of resilience to robust global economy. Bank is
helping to utilize a greater profit for the further growth expansions. Bank plays a vital role in
financial needs of the corporate and personal demands.

Net Worth=Paid up capital+ Reserves & surplus

*Reserves & Surplus: Bank shows a ~20-22% growth in net profits. Bank may have
increase in Reserves & Surplus for the two consecutive years would be around ~18-19% after
distribution of the dividend.

(Figure 5.15: Net Worth)

Deposits:

(Figure 5.16: Deposits)

 Deposits play a vital role in determining a cost of funds. Bank is witnessing a good
increase in deposits by having a widest intensive network. With the third largest branch
network (excluding SBI group) of ~3,029 branches, built over a century, BoB has one of the
most attractive franchisee, enabling it to build a strong retail liability franchisee that funds the
bank’s growth, not only within the country but also abroad. Importantly, the bank has been
aggressively increasing its deposit franchise, especially in the past four years, from 2,700
branches in FY06 to 3,029 currently.

Deposits Break-up with increase in growth rate:

Deposits = Demand(Current A/c and Saving A/cs) Deposits + Time Deposits

(Figure 5.17: Deposits breakup)

Time (Saving) Deposits are the cheapest sources of the cost of funds for the bank.Bank plays
a nomial interest of currently around ~3.5%.Bank use this cheapest fund for the further credit
growth in the finacial market.Bank may witeness a growth in saving A/cs around ~17-18%.

Bank can sustain the growth in saving A/cs by the following factors:

• Finacial Intensive network.

• Increase in Per Capita Income by increase in Indian GDP and govt. execesive spending
in Infrastructure and social reforms projects.

• UIDAI(Aadhar) A/cs may be opened direcltly by bank to enhance transperency in the

system.
 • Bank is showing an increase in upwards bias in Interest offered to customers.

Demand Deposits:

Bank can witness an increase in Demand Deposits for the coming year may be around
~22.59%.Demand deposits provide a surplus liquidity to bank to undergo a picking demand
in the deposits from the second half of this financial year.

Loans & Advances

(Figure 5.18: Loans & Advances)

The bank’s domestic advance book posted ~30% CAGR between FY05 and FY10 to ~INR
1100 bn. domestically; BOB’s portfolio is well-diversified amongst SME, retail,
rural/agriculture and wholesale business. In the corporate/wholesale portfolio, infrastructure
is the biggest segment at ~9% of its loan book (12% of domestic loan book). As per latest
data, SME, retail and agriculture/rural segments contribute ~11%, 14%, and 12%,
respectively, to BoB’s overall advances, while the corporate book contributes ~36%. The
housing portfolio contributes ~45% to the bank’s retail portfolio. BoB operates a hub–and-
spoke model for credit delivery, especially for retail (Home Loan Factory) and SME loans
(34 centers in India have a SME loan factory), streamlining business operations to ensure
faster turnaround time and increase cross-selling of products.
 The bank can witness a sustainable growth in credit demand by the following factors:

• Demand for the credit can be increase from the second half of these financial years. The
Indian economy is again started moving a upward swing from good monsoons and healthy
sign of the industrial growth.

• Govt. is spending aggressively in Infrastructure and social welfare manners to have a

meet in expanding global recovery.

• Indian Industrial and heavy Goods Company can pick a further pace by increase in the
Infrastructure reforms of the Govt.

• Bank can expand heavy to invest in an Individual picking demands by high ends of
the Individual needs.

• Bank is doing greater sense of the growth by properly financing working capital to
Corporate.

Assets:
Bank is witnessing a good growth in Assets as demand for the credit may pick up in coming
years. Bank helps in providing a greater growth in providing financial services such as
Wealth Management, Portfolio Management service.

(Figure 5.19: Total Assets)

In line with the trend in public sector banks and the underlying macro environment,
BoB has witnessed steady decline in gross NPLs over the past few years due to lower
slippages, strong cash recoveries, higher up gradation and aggressive write offs. Gross NPA,
which was ~11% in FY03, steadily declined to 1.3% in FY10, while net NPA declined from
4.9% in FY03 to 0.3% in FY10. Provision coverage (including floating provisions), which
has been relatively stable at ~75% over the past few years, has now increased to ~80% in
FY10, becoming one of the best amongst peers. The international book too has been stable
despite strong headwinds, especially in Middle East (not expecting any sharp slippages with
key accounts are being serviced as per schedule), with gross NPAs at ~0.5% currently..
Overall, within the domestic portfolio, SME gross NPAs declined from 2.8% of advances in
FY09 to 1.7% in FY10. The agriculture portfolio witnessed an increase of over 50bps in this
period to 2.9%. Large corporate portfolio is currently stable at 1.2%, which estimate is also
due to the restructuring exercise undertaken by the bank. The retail portfolio has witnessed a
decline in gross NPA from the peak of 3.5% in FY09 to 2.4% in FY10, primarily due to
decline in housing portfolio NPA from 4.6% in FY09 to 2.7% in FY10. BoB’s outstanding
restructured assets were INR 45.5 bn (facility wise). The bank restructured INR 3 bn during
the quarter against INR 16 bn in the previous quarter

Total Income
Total Income = Interest Income+ Other income

(Figure 5.20: Total Income)

Bank is showing a great resilence to vibrat global economy.Bank can increase in total income
in coming years.Bank has shown a increase in growth rate of CAGR(%) of 24.29%.
Supporting Factors:
• Increase in Credit demand
• Global economy recovery.
• Indian GDP forecasts of around 8.6% and 9.2% in next two finacial years .Increase
in GDP implied a highly growth rate in Industrial economy and Infrastructure.
• GDP per capita also increases for providing a substainal catering the finacial needs of
ratail banking.
Bank may have highly conducive growth in Interest & other income. The central bank is
focusing greater monetary policy to control a growth in inflation factor.
Bank expects to grow in total Income by around ~24.29% for the next two finacial years.

Other Income:
Despite a strong international presence, BoB’s fee income contribution to assets has
been lower at ~100bps Non-interest income has posted 25.61% CAGR over FY05-10. The
contribution of non-core and treasury income to non-interest income for BoB has been
relatively higher. Over the past few years, (barring FY09), the average recovery from written
off accounts has been at ~20% (total fee income less treasury income).Over the past two
years, investment profits contributed ~35-40bps of assets. Bank has conservatively estimated
fee income at ~28% CAGR for FY10-12.

Contribution of subsidiaries marginal

In the past, BoB had invested in non-banking as well as banking operations within
and outside India. It is engaged in capital market business and also operates credit card
operations as a subsidiary. Apart from this, the bank also has an AMC (majority stake
divested to Pioneer in FY09) and 18.8% stake in UTI AMC. It also owns Nainital Bank and
five regional rural banks.
The bank has recently started a life insurance venture “First Insurance”, wherein it has 44%
stake and Andhra Bank 30%; the balance 26% stake is held by Legal and General, BoB’s
UK-based insurance partner. BoB has adopted the subsidiary approach in Africa (six of its
nine subsidiaries in Africa). Besides, it has an associate bank (Indo Zambia Bank) with
Central Bank of India and Bank of India, in Africa. These have marginal balance sheets
compared to the bank’s Indian operations. As of FY08, all the subsidiary banks (barring
Trinidad and Tobago and Ghana operations) were profit making.
Net-Profit

(Figure 5.21: Net Profit)

Bank has a growth in net profit for the coming financial years. Bank is showing a greater
resilience towards the vibrant economy.

Supporting Factors:

• Demand for the credit is increasing in recovery economy of the developed world.

• Highly increase in other income by providing a financial need catering of the retail
and corporate

• Bank can have a good boosts of the demand available for having a intensive network.
 8.0 Observation & Finding

5.3.4.3 Keys Growth Ratio (%)

ROA Decompostion (%) Mar 2006 Mar 2007 Mar 2008 Mar 2009 Mar 2010
12 mths 12 mths 12 mths 12 mths 12 mths
Investment Profit/Assets 30.97% 24.41% 24.43% 23.06% 21.98%
Income/Assets 7.21% 7.26% 7.72% 7.85% 7.01%
Operating expense/Assets 2.10% 1.78% 1.63% 1.57% 1.37%
ROA 0.727% 0.717% 0.799% 0.979% 1.099%
Equity/Assets 0.322% 0.255% 0.204% 0.161% 0.131%
Provision/Assets 0.96% 0.97% 0.89% 0.91% 0.67%
ROA 0.73% 0.72% 0.80% 0.98% 1.10%
ROE(%) 10.50% 11.87% 13.00% 17.29% 20.25%

(Table 5.15: Keys Growth Ratios)

Keys Projected Ratio (%):

ROA Decompostion (%) Mar 2010 Mar 2011(E) Mar 2012(E)

12 mths 12 mths 12 mths
Investment Profit/Assets 21.98% 19.95% 17.45%
Income/Assets 7.01% 6.88% 6.69%
Operating expense/Assets 1.37% 1.24% 1.09%
ROA 1.099% 1.08% 1.12%
Equity/Assets 0.131% 0.10% 0.08%
Provision/Assets 0.67% 0.62% 0.54%
ROA 1.10% 1.08% 1.12%
ROE(%) 20.25% 20.83% 11.74%

(Table 5.16: Keys Projected Ratios)

Comments:

Investment /Assets =Investment/Assets

Bank is showing a good reducing in investment for uncertain economic conditions. Bank is
highly keeping very less investment various avenues. Bank is currently utilizing a fund in
Reverse REPO

Income/Assets =Income/Assets

Bank is maintaining a reducing in Income/Assets in highly competitive environment.

Equity/Assets = Equity/Assets

Equity contribution to Assets is considerable reduce.

(Figure 5.22: Equity/ Assets)

Provision/Assets = Provision/Assets

Bank is continuously maintaining good provision for against a increase advances.

Operating Expense/Assets: = Operating Expense/Assets

Bank is currently reducing operating expense. Bank is highly utilizing a operating expense
for increasing profitability.

(Figure 5.23: Operating Expense/ Assets)

ROA= Net Profit/Assets

(Figure 5.23: ROA)

5.3.4.4 Valuations on Bank of Baroda:

B a n k O f B a r o d aM a r 2 0 0 6 M a r 2 0 0 7 M a r 2 0 0 8 M a r 2 0 0 9 M a r 2 0 1 0
R s . C r o re 1 2 m th s 1 2 m th s 1 2 m th s 1 2 m th s 1 2 m th s

R O E (% ) 1 0 .1 9 1 1 .5 6 1 2 .6 4 1 6 .7 1 1 9 .4 6
B o o k V a lu e 8112.95 8877.54 11358.54 13324.71 15714.60
N o .o f S h a r e s 3642700000 3642700000
3642700000
3642700000
3642700000
EPS 22.70 28.18 39.41 61.14 83.96
M a r k e t p ric e 6 3 0 .0 0
P /E R a tio 7.50
B o o k V a lu e /s h 222.72
a re 243.71 311.82 365.79 431.40
P /B v 1.46
D iv id e n d (% ) 50.00 30.00 80.00 90.00 150.00
T o ta l d iv id e n d 207.68
p a id 252.46 252.46 340.94 383.56
R e te n tio n 619.28 774.00 1183.06 1886.26 2674.77
R e te n tio n R a tio0 .75 0.75 0.82 0.85 0.87
Bank of Board Mar 2011(E) Mar 2012(E)
Rs. Crore 12 mths 12 mths

ROE(%) 21.34% 24.68%

Total dividend paid 447.14 521.26
Retention 3357.76 4677.07
Retention Ration 80.95% 82.18%
Sustainable growth rate(%) 11.81% 13.77%(Table 5.17: Valuations
Payout Ratio 19.05% 17.82%on BOB)
Required Rate of Return 20.00% 23.80%
Expected Growth in dividend 17.90% 21.80%
P/E as constant Growth Model 9.07 Bank is accepting to
8.91
EPS 104.09 142.21
make a growth rate
Projected Values 944.13 1266.82
momentum by the recovery of Global economy in near terms. Bank may have heavy growth
in credit after second half of these financial years. Central Bank is very optimistic for
controlling Inflation to below 5.5% in this December End. Bank can maintain a high growth
in coming years.

Bank is properly utilizing an earned profit for maintain a commitment for the shareholders by
providing a dividend and growth prospects.

Sustainable growth rate:

Bank is showing a good sustainable growth rate. Bank is very optimistic for making a good
sustainable growth rate.

Sustainable growth rate = (AVG.ROE (%))*(AVG. Retention ratio (%))*100

Bank is considerably maintaining a good ROE and Retention ratio for future expansion plans.

Payout ratio= (1- Retention ration)

Bank is properly cutting down a payout ratio for maintain a growth momentum near future
expansions.

Required Rate of Return (%)

The investment in any stock market scripts is having comparatively high amount of risk as
compared to other Govt .securites.

Risk free interest is having a very modest amount of risk associated with it. Persons investing
in share market must properly required high return as amount of risk is higher.

According to Capital Assets Pricing Model:

Particulars Mar 11(E) Mar 12(E)

Risk free return 3.50% 4.00%

Beta value 1.1 1.1
Return Required 18.50% 22%
Risk Premium 15.00% 18.00%
Required Rate of Return 20.00 23.80%
(Table 5.18: According to Capital Assets Pricing Model)

Growth in dividend:

Bank is properly maintaining a commitment towards delivering a high amount of dividend to

its shareholders. Bank is considerably increase dividend in next two financial years as high
growth prospects are looking around in recovery global economy.

P/E Ratio as per constant growth

=payout Ratio/(Required Rate of return –Sustainable Growth)

Bank is expects to increase in P/E multiply in next coming year in ratio of ~9.01(X) -10.1(X)
to the present P/E is 7.2(X)

Industry banking P/E is currently is 16.2(X) which expects to grow around ~18 in next
coming two finical years.

Expected Share Price

=EPS (E)*P/E(X)

Bank is showing a greater increase in ROE (%) from 10.19% FY05 to 19.49% FY10
Book value =Net worth of bank
Book value of bank looks attractive by aggressive growth in past five year’s periods.
EPS= Net profit/No. of shares
(Figure 5.24: EPS)

Bank earning has substantially increased in past five year periods. Bank is professionally
managed to get a high earning despite a heavy turmoil in global economy.

P/E =Market price/EPS

Bank is having a P/E in range of around 7.5(X)
Bank is regularly following their commitment to the shareholders by offering a regular
divided. Bank is properly using effective management for giving a required divided
commitment.
Retention Ratio:

(Net profit-Dividend)/Net profit

Bank is maintaining a proper balance between a dividend and their growth expansion plan.
Bank has around a ~75% retention for FY05 to ~87% for FY10.
Bank can properly maintain a good sustainable Retention Ratio of around ~81.00 to 83.00%
in next coming years.
(Figure 5.25: Retention Ratio)

ROE (%)

= Net Profit after paying a preference dividend /paid up equity capital

(Figure 5.26: ROE)

Bank is showing a greater increase in growth of ROE (%) Bank is properly maintain a sustain
growth in variant economy.
Efficency Ratio

Bank of Board Mar 2006 Mar 2007 Mar 2008 M ar 2009 M ar 2010
Rs. Crore (Non-Annualised)12 mths 12 mths 12 mths 12 mths 12 mths
Employees (number) 38774 38086 36774 36838 38960
Branches(number) 2743 2772 2899 2974 3148
Employee/Branches 14.13561794 13.73953824 12.68506382 12.3866846 12.37611182
Net profit/Employee 0.021250315 0.026951229 0.039036333 0.060459357 0.078499256
Net profit/Branch 0.300386329 0.370297439 0.495178372 0.748890989 0.971515565
(Table 5.19: Efficiency Ratio)

Comments
Bank is considering showing a high depent on human assets to get future expansion
plan.Bank must effectively try to enhance some stratergy for tapping the huge talent potential
gap in coming years.Bank must aggesively handled for having enough number of employee
for meeting a future branches expansion.

Net Profit/Branch

Net profit/Branch is steadily increasing in future finacial inclusion and meeting a global
recovery parameter is expected to enhance in coming years.

Factors to support for further growth in ROE (%)

• Good Growth in Agriculture as monsoon looks good.

Bank provides a very high amount of loan portfolio towards linked in agriculture. Monsoon
looks good as compared to last financial year. Bank can sufficient lend to increase in
agriculture business.

• Automobile

Bank can sufficiently supply automobiles loans to increase in record sales of automobile and
becoming a new automobile hub for the small passenger car.

• House Loan & Infrastructure

Govt. is heavily spending in infrastructure for meeting the future demands of the Indian
Economy. Bank can tab is process for the further growth in loan portfolio of bank.
Key Risks:

• Sharper-than-expected decline in net interest margins

Sustained decline in credit off take and non commensurate cuts in lending and deposit
rates to boost credit demand can impact NIMs in an environment of rising interest
rates. Further, rising interest rates can result in declining low-cost deposits due to
higher differential interest rates in term deposits. Sharp rise in international business
could increase BOB’s dependence on wholesale funds, while doing business at lower
margins.
• Inflation

High inflation leads to low consumption and low increase in credit demand for
corporate can heavily affect the profitability of bank.

• RBI Banking Liecences:

RBI new banking liecences can create a greater competition among the established
banks.It may also again affects the NIM and profitabiltiy of banks.
 CHAPTER 6

Limitations of the Study

LIMITATIONS OF THE STUDY

• The futures valuations are the approximate variable considers for determine the value
of share in long Horizons of time. The growth factor of the Indian and Global are
predicated for making a constructive Path for determine the future price of the
selected script in project. The exact level of future price is next to impossible.

• To understand the overall working of share market, the period of 60 days is not
enough.
Moreover, very few investor and agents have a detail knowledge of the study.

• The study was conducted to understand with respect to Risk involved in broking firm
and investors, which is a part of the equity share market.
CHAPTER 7
 Conclusion

CONCLUSION

Project understands various payoffs strategies in derivates segments of NSE.

Derivates segments possess high amount of risk and must be avoided by the retail customers
for carry out transactions. Derivates segments must properly analyze for taking various hedge
strategies. It must be use to gauge against various uncertainty in conditions.

The global economy is recovering faster than expected from the global crisis amidst
ongoing policy support and improving financial market conditions. The global GDP, as
projected by World Bank recently, is expected to grow by 3.3% in 2010 and 2011 as against
contraction by 2.1% during 2009.
 Agriculture output is expected to be better than last year (given the progress of the
monsoon), industry is growing strongly, and lead indicators for services continue to exhibit
strong momentum. Accordingly, GDP growth can be expected to be higher than 8% projected
in April 2010. On the expenditure side, investment demand has picked up strongly in
Q4FY10 and production trends in capital goods suggest continuation of the momentum in the
near term. Private consumption demand, which had been subdued so far, is likely to pick up
as suggested by some lead indicators. Fiscal consolidation, however, will mean moderation in
government consumption and disinvestments. At the same time, the recovery in exports in
recent months may slowdown in the coming months given the developments in Europe.

Bank of Baroda is showing a greater resilience to vibrant economy. Bank is showing a

greater conducive NIM in a highly competitive environment. They may show a good sign of
the increase in credit demand from the second Half of the financial year. It has vast presence
of network across India and Overseas market. The net NPA of the bank is showing
almost~0.3% of total Advances. The bank is very rigid for bearing the economic turmoil in
global economy Bank is having good high value of ROE (%) and also low PBV is considered
as under performer.
 References

BIBLIOGRAPHY

Books:

• Investment Analysis and Portfolio Management Third edition –PRASANNA

CHANDRA
• Valuation-DAMODARAN

Magazines:
 • Capital Market
• Business week

Website:

• RBI policy from www.rbi.org.

• Bank of BARODA annual reports from their home website:
www.bankofbaroda.com
• Sector view from various economists on financial media and press.
• Annual budget given by Finance Minister
• Global and US economy view by IMF press releases.
• Bloomberg