Professional Documents
Culture Documents
RESEARCH METODOLOGY
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Portfolio Management With Respect To Banking Industry
Limitations
This study is based on the secondary data only.
The data for some banks was not available so we
can not say the banks that we scrutinized are only
fundamentally strong banks.
The projections for different banks are based on
historical data only and we did not have the complete
information about the company’s future plans.
Time constraint. We have selected the banks on the
basis of some limited criteria only.
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Portfolio Management With Respect To Banking Industry
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Portfolio Management With Respect To Banking Industry
a) Trendy Moves
One of the most prominent factors to come to the fore
in Indian banking is that a large number of banks are
gravitating towards the retail customer. There are
several reasons for this. The first being that overall
credit off take has been quite low. And second, banks
found that there were not enough profitable and
creditworthy corporate customers for their funds. As far
as the benefits to the bottom-line are concerned, it will
take some time to become significantly visible.
According to bankers high initial infrastructure cost
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Portfolio Management With Respect To Banking Industry
b) Earnings Pattern
It is important to consider the changing face of bank
profit and loss accounts. Traditionally, the main
earnings of banks have come from the core activity of
lending. This is reflected in the break-up of income
wherein interest/discount on advances/bills represents
a large part of income. With the normal credit off-take
of the bank on slower ground, many banks have
pumped an increasing amount into government
securities. Due to this, income on investments has
gone up significantly which is reflected in the
increasing investment deposit ratio. This has given
banks the required boost in tough times faced by the
economy.
c) Mergers
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Portfolio Management With Respect To Banking Industry
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h) Food Credit
On the credit off take front, the only area, which has
been witnessing a rapid rise, is the food credit sector.
With procurement going up and the country go downs
overflowing with stocks; credit on this front has shown
a sharp increase. The total outstanding food credit
figure has jumped 40% over the past one year and
stood at Rs. 52,276 crore at the end of December
2001.
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Portfolio Management With Respect To Banking Industry
j) Non-Performing Assets
Non-performing assets of the banks include sub-
standard assets, doubtful assets, and loss assets as per
the classification used by banks. Although the NPAs
have declined over the years, they were and are still at
a worrisome level. The route problem is that there is a
sizable overhang component arising from the weak
debt recovery processes, inadequate legal structure,
weakness in underlying security, inadequate risk
management techniques, etc. the non-performing
loans can be categorized as loans to agricultural
sector, directed lending, loans to small enterprises and
loans to corporate sector. Many of the directed loans
are subsistence loans, where default rates are high and
recovery prospects not bright. As regards loan to
agricultural borrowers, legal impediments often prove
to be a challenging proposition for banks to recover
their dues. Loans to small enterprise become difficult
to recover due to inordinate judicial delays. Even if
court decrees can be obtained towards recovery, by
the time the charge of the assets is taken, its realizable
value is significantly diminished because of several
reasons including depreciation of the asset, lack of
borrower’s cooperation, limited market value of the
asset, with the concomitant effect that such decrees
are not executed. As regards corporate loans, suits
pending/referred to BIFR leave little headroom for
banks to affect recovery. Inadequate corporate
governance practices coupled with problems of fixation
of accountability leaves little maneuverability for banks
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Portfolio Management With Respect To Banking Industry
l) Credit Cards
The credit card is a convenient medium of exchange
which enables its holder to buy goods and services
from member-establishments without using money.
The credit cards are issued to people having a certain
minimum income. The cardholder is required to pay
neither an interest to the bank nor a higher price for
goods purchased, he pays only a fee to the bank for
the facility. The cost of arrangement is met from the
increase sales, which result from the use of credit
cards. The care-issuing bank pays to the seller as soon
as goods are sold but charges the buyer after 30 to 45
days, the bank also beats the risk that the cardholder
might default. For all this, the bank gets commission
from the seller which is about 2.5 to 5 percent of the
value of goods sold, the gain of the bank is the extent
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Portfolio Management With Respect To Banking Industry
m) Consortium Approach
This approach requires that more than one bank would
finance a single borrower requiring large credit limit. It
(a) enables banks to spread risk of lending, (b) break
the monopoly of big banks to have large accounts, (c)
enables banks to share experience and expertise, (d)
introduce uniformity in approaches to lending, (e)
enables banks to pool their resources, and (f) checked
multiple financing of the same account.
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Portfolio Management With Respect To Banking Industry
PORTFOLIO MANAGEMENT
3.1 Introduction
In view of peculiar nature of stock exchange operations
most of the investors feel insecure in managing their
investment on the stock market because it is difficult for
an individual to identify companies that have growth
prospects conducive for investment. This is further
complicated by the volatile nature of the markets, which
demands constant reshuffling of portfolios to capitalize on
the growth opportunities.
Even if the investor is able to identify growth
oriented companies and their securities, the trading
practices are complicated, making it a difficult task for
investors to trade in all the exchanges and follow up post
trading formalities. That is why professional investment
advice through portfolio management services can help
the investor to make an intelligent and informed choice
between alternative investments opportunities without
the worry of post trading hassles.
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ECONOMIC ANALYSIS
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Monsoon
The dependence of Indian economy on agriculture
and monsoon is very high due to lack of infrastructure
facilities like irrigation network. It has lead to high
dependence on monsoon rains. Nearly 60% of
country’s gross cropped area under cultivation is
dependent on rains. Therefore poor monsoons are
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GDP
National Income Accounts measures the value of
production in an economy, and how that produce is
disposed off by all the agents of that economy. Though
there are several components and categories in which
this output is measured are the GDP at market price,
and GDP at factor cost. There is the broadest maser of
output in the economy what the GDP measure is value
added. There are two ways in which GDP measured.
One way is to do so by measuring it at the production
stage and the other is to measure it as the sum total of
consumptions. Both should yield the some result. In
India, central statistical organization measures output
from the production side, broadly dividing it into three
sectors: agriculture, industry and services.
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Portfolio Management With Respect To Banking Industry
the first quarter, for the period April- Jun the GDP
showed 6% growth. More significant, in the 2nd quarter,
July – September, despite drought in many part of the
country, it slipped only marginally to 5.8. The first half
of the previous fiscal year 2001-2002 had witnessed
4.4 % growth. The July-September period of 2001-2002
had witnessed 5.3% growth.
The data for agricultural growth is given in the
previous topic. On the other hand, the service sector
has shown 7.5% growth in the first half of 2002-03.
This sector had shown 5.5% growth in the first half of
the previous financial year.
April-
PARTICULARS September
2002- 2001-
03 02
A Agriculture Sector 2.5 3.3
B Service Sector 7.5 5.5
a
) Financing, insurance, 8.9 7.6
Real estate & busi.
Services
b Trade, hotels,
) communication 8 2.4
C Industrial Sector 5.1 2.1
a
) Capital Goods 8.9 6.8
b
) Basic Engineering Goods 4.8 2.1
c
) Non-durable goods 14.8 2.8
d Consumer Durables -6.5
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GDP At Constant
Factor Cost
1990-91 5.60%
1991-92 1.30%
1998-99 6.50%
1999-00 6.10%
2000-01 4%
2001-02 5.40%
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Interest Rates
Interest rates have different meanings for different
people. For the man on the street it could mean the
rate of interest he earns on his deposits or the rate he
pays on his housing loans. For corporate it could mean
the rate of interest it pays for borrowing money from
banks and for bank traders it would mean the yields on
gilts.
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Inflation
Inflation rates for different years are as follow.
INFLATION
RATES
1998-99 6%
1999-00 3.30%
2000-01 7.10%
2001-02 3.60%
Forex reserve
FOREIGN DIRECT
INVESTMENT
1998-99 13339.84
1999-00 16867.79
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2000-01 19341.73
2001-02 19265.1
Fiscal Deficit
The fiscal deficit, as a proportion of GDP, has gone up
from 4.1% in 1996-97 to 5.9% in 2001-02 for the
central government and from 9.6% in 1999-00 to 9.9%
in 2001-02 for the general government (i.e.
consolidated centre and states).
The government’s failure to rein in fiscal deficit
has emerged as a major impediment threatening the
economy, nullifying benefits arising out of low inflation,
soft interest regime, high foreign exchange reserve
and upturn in the performance of manufacturing
sector. Inability to meet revenue growth targets and
lack of adequate control over expenditure, particularly
plan expenditure, as led to a situation where only
drastic steps could contain the deficit from going out of
hand. The situation has only worsened due to
uncertainty over disinvestments, which was expected
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INDUSTRY ANALYSIS
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Non-Performing Assets
The issue of NPA Management is the biggest challenge
before the banking sector. The higher competition has
led the banks to accumulate poor quality of assets.
The quantum of NPA is the true indicator of quality of
assets. NPAs are a serious strain on the profitability as
banks cannot book income in such accounts and they
are required to charge the funding cost and provision
requirement to their profits.
The total non-performing loans for the financial
sector were estimated at Rs. 110,000 crores. Banks
alone have about Rs. 70,900 crore worth of NPAs, were
estimated at approximately 10.4% of their gross
advances. The level of gross NPAs of all groups of
banks for the last three years is shown in the following
table.
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Portfolio Management With Respect To Banking Industry
Gross NPAs*
200
Bank Group 0 2001 2002
Public Sector 5303 5477
Banks 3 3 56507
12.40 11.10
14% % %
Private Sector
Banks 4761 6039 11672
8.20 8.40
% % 9.70%
Foreign Banks 2614 3071 2726
6.80
7% 5.40% %
6040 6388
Total 8 70905 3
12.7 11.4
% 10.4% %
*% figures are gross NPAs as % of
gross
advances
Source: Professional Banker, March
2003
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12
10
8 Public Sector
6 Private Sector
4 Foreign Banks
2
0
Public Sector Private Foreign
Sector Banks
Public Sector
Private Sector
Foreign Banks
565.07
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Portfolio Management With Respect To Banking Industry
Spreads
The magnitude of spread measures the intrinsic profit
earning power of the banks. Spread is defined here
simply as the difference between the ratio of interest
earned to total assets and the ratio of interest
expended to total assets, which is the formula used by
the RBI in estimating a banks spread. By definition,
higher the spread the greater is the banks efficiency
and vice versa. According a recent study by RBI the
average spread of 97 scheduled commercial banks
both, Indian and Foreign, declined by 0.65% points
during the last 5 years from 3.22% in 1996-97 to
2.57% in 2001-02. During this period the interest rates
were falling at regular intervals. The fall in interest
rates affected both interest earnings and interest
expenditure of banks but its impact was higher on the
earning side.
Thus there is a steady decline in commercial
bank’s spread in recent years and this indicates a
decline in profit earning capacity.
Technological Shift
After entry of Private Sector Bank into the banking
sector, the Public Sector Banks have loosened their
clients, who switched their loyalties on discovering the
joys of convenient banking. One of the biggest changes
that the Private sector has brought about is in the
application of modern technology like Internet banking
and just around the corner ATMs. This has benefited
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Securitisation Bill
An ordinance on Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest
was promulgated on 24th June 2002. The same has
been passed by the Parliament in Nov. 2002. The
ordinance will help banks and financial institutions
improve their financial position in three ways. Firstly it
will help banks and FIs turn their assets into securities,
which could be traded in the market in smaller
bundles. This would bring immediate liquidity, which
can be lent, instead of waiting for loans to be realized.
The new law will also help them in setting up asset
reconstruction companies to recover their bad assets.
And finally, it will help in the enforcement of security
interest (i.e. right to the security in case of default by
the client). This ordinance creates a right environment
for faster recovery of dues and gives hope that the
huge the burden (now estimated at over Rs 1,100
billion) of NPAs on Indian financial sector will be
reduced to a more reasonable level. It also offers scope
for Public Sector Banks to clean up their balance sheets
faster.
Using this law, banks may make lesser
provisions for NPAs and recoveries may in fact result in
some write backs thereby adding to the bottomline
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RBI Regulation
The Reserve Bank of India (RBI) in its recent credit
policy declared on 29th Oct. 2002 has decided to
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reduce the bank rate; cash reserve ratio (CRR) and the
repo-rate by 25 basis points (bps) each. The bank rate
has been reduced from 6.5% to 6.25%. Likewise, the
repo-rate under RBI's liquidity adjustment facility (LAF)
has been reduced from 5.75% to 5.5%. CRR has been
reducing from 5% to 4.75%. However this will be
effective from the fortnight beginning 16th Nov. 2002.
RBI has also asked bank to maintain a minimum of
80% of the required CRR on a daily basis with effect
from the fortnight beginning 16th Nov. 2002. As per
industry estimate, the CRR reduction would infuse
further liquidity of around Rs 3,000 crore into the inter-
bank market.
While fiscal policies are the domain of the
government, the monetary policy is the domain of RBI.
It has taken various measures to adjust the money
supply in the economy in accordance with the internal
and external business environment prevailing. Banks,
which control sizeable flows of money of the nation,
are accordingly advised/ directed by RBI.
The Union Budget 2002 has furthered banking
reforms and facilitated improvement in the margins of
the sector. The finance minister announced that a new
law will be enacted to improve foreclosure and
enforcement of securities and also enable
securitization of long term loans. It also promised that
Asset Reconstruction Company would be formed by
June'02.
On direct taxes front, the Union Budget 2002
increased the provision for bad and doubtful debts
from 5% hitherto to 7.5% of their total income w.e.f.
accounting year 2002-03. Further, the optional
deduction of their NPAs categorized as loss or doubtful
debts has also been increased from 5% to 10%.
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Div.
BANKS NPA/NA* Net Worth CAR P/E P/BV OI/TI** EPS %
Bank of Baroda 5.7 38277.6 11.32 3.8 0.58 85.71 18.44 40
Bank of India 6 26518 10.68 2.9 0.67 83.56 7.91 25
Bank of Punjab 1913.4 12.82 4.3 0.81 75.59 3.4 13
Bank of Rajasthan 8.9 2108.5 12.07 3.2 0.77 82.32 4.02 0
Corporation Bank 2.3 20462.4 17.9 5 0.86 83.6 23.65 40
Dena Bank 16.3 4209.3 7.64 5.4 0.62 82.88 0.55 0
Dhanlakshmi Bank 11.9 849 11.23 4.8 0.5 67.23 0.95 15
Federal Bank 8.7 4487.9 10.63 2.1 0.43 82.55 37.76 35
Global Trust Bank 9.2 11.21 5.4 0.53 75.96 3.32 10
HDFC Bank 0.5 13.93 18 3.08 83.63 11.01 25
ICICI Bank 5.6 58559 11.44 12.9 1.38 78.92 11.61 20
IDBI 2.2 3009.1 9.59 7.9 1.22 80.61 3.74 10
Indian Overseas
Bank 6.3 9647.2 10.82 2.5 0.7 86.12 5.18 12
Indusind Bank 5619.3 12.51 3.6 0.44 79.39 3.17 15
Karnataka Bank 6 4419.9 12.96 1.6 0.29 75.53 67.57 60
Karur Vysya Bank 6.3 4301.1 16.9 2.9 0.59 82.16 180.9 70
Oriental bank of
Commerce 3.2 16197.3 10.98 2.6 0.6 86.52 16.65 35
PNB 5.3 28780.6 10.7 2.7 0.59 87.18 26.5 30
SBI 5.6 152244 13.35 5.3 0.98 87.72 46.2 60
State Bank of
Travancore 5.7 6101.4 12.54 1.4 0.32 86.33 241.9 30
Syndicate Bank 4.6 12044.9 11.72 2.9 0.65 91.26 5.31 12
United Western
Bank 7.9 2289.6 9.79 2.6 0.3 76.34 8.62 15
UTI Bank 3.5 6147.6 10.65 5.3 1.36 73.93 9.34 20
Vijaya Bank 6 5956.3 12.25 3.1 0.8 89.07 3.65 12
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FUNDAMENTAL ANALYSIS
7.1 Introduction
To select a company for investment purposes a number
of qualitative factors have to be seen. Before purchasing
the shares of a company, relevant information must be
collected and properly analysed. An illustrative list of the
factors, which help the analyst in taking the investment
decision, is given below. However, it must be
emphasized that past performance and information is
relevant only to the extent it indicates the future trends.
Hence, the investment manager has to visualize the
performance of the company in future by analyzing its
past performance.
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Quality of Management:
This is an intangible factor. Yet it is a very important
bearing on the value of the share. Every investment
manager knows that the shares of certain business
houses command a higher premium than those of
similar companies managed by other business
houses. This is because of the quality of
management, the confidence that investors have in a
particular business house, its policy vis-à-vis its
relationship with the investors, dividend and financial
performance record of other companies in the same
group, etc. This is perhaps the reason that an
investment manager always gives a close look to the
management of a company in whose shares he/she is
to invest. Quality of management has to be seen with
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Quality of Management
This is an intangible factor. However, if we look at the
past performance of the bank, we would find that the
bank is continuously growing. This gives a good sign of
the management. If we compare the P/E ratio of ICICI
bank with that of the industry average, we will find that
the P/E ratio of bank is higher than that of the industry.
It means that the shares of ICICI command higher
premium than the industry. This is because of the
quality of management, the confidence that investors
have in a particular business house. If we look this
point with reference to experience and qualification, all
the directors are highly qualified with high degrees
such as MBA, CA, law etc. and also they are highly
experienced people having experience of more than 25
years in the same institution.
Year Dividend
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Portfolio Management With Respect To Banking Industry
(%)
1997 10
1998 10
1999 12
2000 15
2001 20
2002 20
Institutional Investors
Others
Any Other
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APPROPRIATIONS/
TRANSFERS
Statutory Reserve 250 800 650
Investment fluctuation Reserve **** 65 160
Special Reserve *** *** 140
Revenues & Other Reserves 528.2 260 960
Proposed Dividend 247.5 440.7 ***
Interim Dividend Paid *** *** 440.7
Corporate Dividend Tax 27.2 45 45
Balance carried to Balance
Sheet 1.4 8.3 195.6
Total 1054.3 1619 2591.3
The above table shows the profit and loss account of ICICI
bank for the last three years. The balance sheet for the
last three years is shown in the next table.
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ASSETS
Cash and balance with RBI 7219 12316.6 17744.7
Balances with banks and
money 26932.7 23620.3 110118.8
at call and short notice
Investments 44166.8 81868.6 358910.8
Advances 36573.4 70314.6 470348.7
Fixed Assets 2221.2 3847.5 42393.4
Other Assets 3613.2 5398.3 41582.8
TOTAL 120726.3 197365.9 1041099.2
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Return on Investments
Return on Investments = PAT/ Total Assets
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Particulars %
Statutory Reserve 30
Investment fluctuation
Reserve 8
Special Reserve 7
Revenues & Other
Reserves 46
Balance carried to
Balance Sheet 9
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PARTICULARS %
Interest on
Advances 50
Interest on
Investments 80
Interest on
Balances 14
Others 300
Other Income 95
Interest Expended 55
Payment/provision
for employees 110
Other operating
expenses 100
Provision and
Contingencies 135
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APPROPRIATIONS/ TRANSFERS
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ASSETS
Cash and balance with RBI 6669.734 13011.76
Balances with banks and money 40971.23 79929.4
at call and short notice
Investments 947523.93 1705543.074
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Adustments for:
(Increase)/ Decrease in Investments(-) 588613.1 758019.1
(Increase)/ Decrease in Advances (-) 3151337 1810843
Increase/(Decrease) in Borrowings 2053404 1400217
Increase/(Decrease) in Deposits 1507118 1005396
(Increase)/ Decrease in Other Assets(-) 37424.52 71106.59
Increase/(Decrease) in Other liabilities & Prov. 121556.9 241087.8
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0.2
0.1
-0.1
-0.2
-0.3
Returns
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0.3
0.2
0.1
Return
0 ICICI
Return
-0.1 BSE
-0.2
-0.3
Nov-01
Nov-02
May-01
May-02
Sep-01
Sep-02
Mar-02
Jul-01
Jan-02
Jul-02
Jan-03
Month/Year Price BSE Price ICICI Return BSE(X) Returns ICICI X*Y X^2
Bank Bank (Y)
Mar-01 3911.865 179.175
Apr-01 3386.665 172.45 -0.134258212 -0.037533138 0.005039132 0.01802
May-01 3590.05 150.6 0.060054656 -0.126703392 -0.007609129 0.00360
Jun-01 3469.63 137.625 -0.033542708 -0.086155378 0.002889885 0.00112
Jul-01 3377.725 122.425 -0.026488415 -0.11044505 0.002925514 0.00070
Aug-01 3300.095 116.55 -0.022982925 -0.047988564 0.001102918 0.00052
Sep-01 2931.4 88.2 -0.111722541 -0.243243243 0.027175753 0.01248
Oct-01 2901.03 91.475 -0.010360237 0.037131519 -0.000384691 0.00010
Nov-01 3190.88 104.5 0.09991279 0.142388631 0.014226445 0.00998
Dec-01 3300.385 90.95 0.034318119 -0.129665072 -0.004449861 0.00117
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Calculation of Beta
N ∑XY − (∑X )( ∑Y )
Beta =
N ∑X 2
− (∑X ) 2
24 (0.065281) - (-0.141130 078)(-0.06 8261515)
=
24(0.06812 1) - (-0.141130 078) 2
= 0.964
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Calculation of Alpha
Alpha =α =Y − β X
=-0.0028442 3 - (-0.005880 42)(0.964)
=0.00275
Coefficient of
(2 0 4 .-( 0 - 060 785. 1 82 4 )68 (1 1 - 1 05) 3 .1 0 0 5 6 )
Determination
= 2 2 1/ 2
The squared coefficient of
correlation is 0.23(23%). It
[ *{0 (. -( 2 - 5640 } 218. { 0457-1 ( 6()-5 0 08 }3 .7 .2 0])1 8 6 6 4 ) 1 8 1 1 1 2 3 0
indicates the percentage of
variance of ICICI Bank’s returns
= 0.4 8 3
explained by the changes in
the market returns. Thus, 23%
of ICICI’s risk is explained by
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Bank Beta
ICICI Bank 0.964
State Bank of India 1.158
Corporation Bank 0.88
HDFC Bank 0.32
96
Portfolio Management With Respect To Banking Industry
Therefore,
Economic value of equity = Present value of cash flow of
ICICI bank
= - 80222.54 + 45300.204
(1+0.1128)
=-38514.23303
The market value per share of ICICI bank was Rs. 128.75 in March
2002, while its book value per share is Rs. 101.90.
Therefore,
MV/BV = 128.75/101.90
= 1.26
A firm is said to create shareholder value when its market value per
share is greater than its book value per share. Here MV/BV > 1 for ICICI
bank, this implies that the firm is creating value of shareholders.
97
Portfolio Management With Respect To Banking Industry
Growth Record
The growth record of the company we find from two
parameters, which are percentage growth rate of
earnings per annum and price earnings ratio. If we look
at the past data of HDFC bank, we can find that EPS is
between ranges, which is not very low and not very
high.
98
Portfolio Management With Respect To Banking Industry
1997 20 25
1998 24 20
1999 28 16.66
2000 34 21.42
2001 40 17.64
2002 48 20
99
Portfolio Management With Respect To Banking Industry
Individuals
% Of shareholding
5.412 Companies
18.532
18.695 Promoters
8.027
ADS Issue
11.564
Chase group
13.297 24.473
FIIs, NRIs, OCBs
100
Portfolio Management With Respect To Banking Industry
101
Portfolio Management With Respect To Banking Industry
Appropriations
Special reserve 1000 1250 1750
General reserve 466 1592.3 967.3
Debenture redemption reserve 0 200 0
Shelter assistance reserve 40 40 40
Interim dividend (millennium) 1191.1 0 0
Interim dividend 1072 0 0
Proposed dividend 0 1501.1 3042.8
Additional tax on dividend 248.9 153.1 0
Total 4018 4736.5 5800.1
102
Portfolio Management With Respect To Banking Industry
ASSETS
Loans 100630.0 132246.7 171692.0
Investments 33343.3 30430.5 29310.3
Deferred tax assets 0.0 0.0 545.2
Current asset, loans & advances 25328.3 25252.4 32043.2
Less : current liab and Prov. 10586.6 12727.9 14271.1
Net current assets 14741.8 12524.6 8772.1
Fixed assets
Gross Block 4243.5 5620.6 6921.4
Less : Depreciation 2113.6 2405.1 2655.7
Net Block 2129.9 3215.5 4265.6
TOTAL 150845.0 178417.3 214585.2
103
Portfolio Management With Respect To Banking Industry
Return on Investments
Return on Investments = PAT/ Total Assets
The Bank’s ROI has remained almost same for the last
three years.
104
Portfolio Management With Respect To Banking Industry
105
Portfolio Management With Respect To Banking Industry
106
Portfolio Management With Respect To Banking Industry
Appropriations
Special reserve 2475.68 3550.979
General reserve 1368.42 1962.778
Debenture redemption reserve 0 0
Shelter assistance reserve 40 40
Interim dividend (millennium) 0 0
Interim dividend 0 0
Proposed dividend 3042.8 3042.8
Additional tax on dividend 304.3 304.3
Total 7247.79 8942.023
107
Portfolio Management With Respect To Banking Industry
ASSETS
Loans 223199.6 290159.5
Investments 27551.68 25898.58
Deferred tax assets
Current asset, loans and advances 36208.82 40915.96
Less : current liab and Prov. 16554.48 19203.19
Net current assets 19654.34 21712.77
Fixed assets
Gross Block 8859.392 11340.02
Less : Depreciation 3402.007 4354.568
108
Portfolio Management With Respect To Banking Industry
2003 2004
Cash flow from Operating Activities
Net Profit Before taxes 7247.786 8942.023
Adjustments for :
Depreciation on fixed assets 746.3065 952.6
Adjustments for:
(Increase)/ Decrease in Loans 8593.9 9797.046
(Increase)/ Decrease in Bonds 875 9975
109
Portfolio Management With Respect To Banking Industry
0.15
0.1
0.05
-0.05
-0.1
-0.15
Series1
0.1
0.05
0
Returns HDFC
Return BSE
-0.05
-0.1
-0.15
Nov-02
Nov-01
May-01
Sep-01
May-02
Jul-02
Sep-02
Jul-01
Mar-02
Jan-02
Jan-03
110
Portfolio Management With Respect To Banking Industry
111
Portfolio Management With Respect To Banking Industry
N ∑ XY − (∑ X )(∑ Y )
Beta =
N ∑ X 2 − (∑ X ) 2
24(0.032074) - (-0.141130078)(0.026956288)
=
24(0.068121) - (-0.141130078) 2
= 0.32.
Calculation of Alpha
Alpha = α = Y − β X
= 0.001123179 - (0.32)(-0.00588042)
= 0.003
112
Portfolio Management With Respect To Banking Industry
N ∑ XY - (∑ X)(∑ Y)
Coefficient of correlation =
[{(N∑ Y 2 ) − (∑ Y ) 2 }{N ∑ X 2 − (∑ X ) 2 }]1 / 2
24(0.032074) - (-0.141130078)(0.026956288)
=
[{(24 * 0.062196) - (0.026956288) 2 }{24(0.068121) - (-0.141130078) 2 }]1 / 2
= 0.41
113
Portfolio Management With Respect To Banking Industry
Therefore,
Economic value of equity = Present value of cash flow
of HDFC bank
= - 80222.54 + 45300.204
(1+0.1128)
= -38514.23303
As the cash flows are negative, it is difficult to apply
discounted cash flow model.
Market-To-Book Value Approach for HDFC Bank
The market value per share of HDFC bank was Rs. 236.25 in March
2002, while its book value per share is Rs. 69.2
Therefore,
MV/BV = 236.25 / 69.2
= 3.41
A firm is said to create shareholder value when its market value per
share is greater than its book value per share. Here MV/BV > 1 for
HDFC bank, this implies that the firm is creating value of
shareholders.
114
Portfolio Management With Respect To Banking Industry
Category Branches
No Presen
t
115
Portfolio Management With Respect To Banking Industry
Metro 173 26
Port Town & 169 26
Urban
Semi-Urban 152 23
Rural 165 25
Total 659 100
Growth aspect
For assessing the growth record of the company we
have taken two indicators, which are percentage
growth rate of earnings per annum and price earnings
ratio, and percentage growth rate of net block.
116
Portfolio Management With Respect To Banking Industry
Quality Of Management
In the corporation bank total no of director is 14 from
that 11 are non-executives director which are
independent director not engaged in day-to-day
operation. But its effect cannot find in the performance
of Corporation bank. If we see the CAR of the company
than it is highest among the all listed banks. Which
shows good capital-to-risk weighted assets position of
the bank. The NPAs level is also under control. The
bank is also rewording to its shareholders in good
terms. The management is not only worried about the
profit but they also doing social good also. If we see
the cautious trend of the bank than wee find the bank
cautiously improving its CAR and also managing its
NPAs level properly. The net profit of bank is also
cautiously increasing. The bank has comparatively
young workforce. Out of the total staff 77% are with in
117
Portfolio Management With Respect To Banking Industry
Pattern Of Shareholdings
The pattern of shareholding in corporation bank is as
follow.
Category of % Of
Shareholders total
holding
Government of India 57.17
Life Insurance 27.02
Corporation of India
Indian Financial 2.31
Institutions & Banks
Mutual Fund, & UTI 4.78
Bodies Corporate 0.67
Foreign Institutional 3.39
Investors (FIIs)
Overseas Corporate 0.04
Bodies (OCBs)
Overseas Corporate 0.33
Bodies (OCBs)
Resident Individuals 4.29
118
Portfolio Management With Respect To Banking Industry
Marketability of share
Liquidity: The Bank's shares are included in the
Specified Group in BSE and CNX Nifty Junior Index of
NSE. The fair volume of trading provides enough
entry/exit opportunities to the shareholders. The share
price of the Bank which was Rs.109.90 as at 31st
March 2001 in BSE, moved up to Rs.134.00 as on 31st
March 2002.
119
Portfolio Management With Respect To Banking Industry
APPROPRIATIONS/ TRANSFERS
Statutory Reserve 622 656.9 772.4
Staff Welfare Fund 60 60 70
Investment fluctuation Reserve 66 -35.8 825.9
120
Portfolio Management With Respect To Banking Industry
ASSETS
Cash & balance with RBI 11616.7 10877.7 13362.4
Balance with banks& 12916.7 20966.1 20098.8
money at call&short notice
Investments 57909.2 68603.4 80,564.9
Advances 77774.7 86661 109874
Fixed Assets 1434.7 1552.2 1993.4
Other Assets 5970.8 8371.6 10148.4
121
Portfolio Management With Respect To Banking Industry
122
Portfolio Management With Respect To Banking Industry
Return on Investments
Return on Investments = PAT/ Total Assets
123
Portfolio Management With Respect To Banking Industry
124
Portfolio Management With Respect To Banking Industry
125
Portfolio Management With Respect To Banking Industry
126
Portfolio Management With Respect To Banking Industry
ASSETS
Cash and balance with RBI 17920.2 33394.15
Balances with banks & money 26880.4 50091.22
at call and short notice
Investments 88366 98097
Advances 120918.3 134232.9
Fixed Assets 2352.212 2775.61
Other Assets 13192.92 17150.8
TOTAL 269630 335741.7
127
Portfolio Management With Respect To Banking Industry
Adjustments for:
(Increase)/ Decrease in Investments (-) 7801.1 9731
(Increase)/ Decrease in Advances (-) 11044.2 13314.6
Increase/(Decrease) in Borrowings 18323.79 2279.09
Increase/(Decrease) in Deposits 12617.23 14130.24
(Increase)/ Decrease in Other Assets (-) 3044.52 3957.879
Increase/(Decrease) in Other liabilities & Provisions 992.323 1073.693
128
Portfolio Management With Respect To Banking Industry
0.2
0.15
0.1
0.05
0
-0.05
-0.1
-0.15
-0.2
Series1
0.2
0.15
0.1
0.05
Returns Corp.
0 Bank
-0.05 Return BSE
-0.1
-0.15
-0.2
Nov-01
Nov-02
Jul-01
Jul-02
Jan-03
Jan-02
May-02
May-01
Sep-01
Mar-02
Sep-02
129
Portfolio Management With Respect To Banking Industry
Returns
Month Price BSE Price corp. Bank Return BSE(X) Corp.Bank(Y) X*Y X^2 Y^2
Mar-01 3911.865 126.875
Apr-01 3386.665 122.3 -0.134258212 -0.036059113 0.004841 0.018025 0.0013
May-01 3590.05 129.2 0.060054656 0.056418643 0.003388 0.003607 0.003183
Jun-01 3469.63 140.35 -0.033542708 0.08630031 -0.00289 0.001125 0.007448
Jul-01 3377.725 148.55 -0.026488415 0.058425365 -0.00155 0.000702 0.003414
Aug-01 3300.095 140.5 -0.022982925 -0.054190508 0.001245 0.000528 0.002937
Sep-01 2931.4 120.925 -0.111722541 -0.139323843 0.015566 0.012482 0.019411
Oct-01 2901.03 119 -0.010360237 -0.015918958 0.000165 0.000107 0.000253
Nov-01 3190.88 130.5 0.09991279 0.096638655 0.009655 0.009983 0.009339
Dec-01 3300.385 132 0.034318119 0.011494253 0.000394 0.001178 0.000132
Jan-02 3351.745 118.1 0.015561821 -0.10530303 -0.00164 0.000242 0.011089
Feb-02 3524.055 130.7 0.051409042 0.106689246 0.005485 0.002643 0.011383
Mar-02 3606.27 142.7 0.023329659 0.091813313 0.002142 0.000544 0.00843
Apr-02 3417.685 140.375 -0.052293644 -0.016292922 0.000852 0.002735 0.000265
May-02 3287.875 130.95 -0.03798185 -0.067141585 0.00255 0.001443 0.004508
Jun-02 3263.225 117.475 -0.007497244 -0.102901871 0.000771 5.62E-05 0.010589
Jul-02 3149.545 113.25 -0.034836703 -0.035965099 0.001253 0.001214 0.001293
Aug-02 3058.43 106.85 -0.028929576 -0.056512141 0.001635 0.000837 0.003194
Sep-02 3100.795 105.325 0.013851878 -0.014272344 -0.0002 0.000192 0.000204
Oct-02 2933.7 101.225 -0.053887793 -0.03892713 0.002098 0.002904 0.001515
Nov-02 3087.305 104.75 0.052358796 0.034823413 0.001823 0.002741 0.001213
Dec-02 3300.225 119.9 0.068966299 0.144630072 0.009975 0.004756 0.020918
Jan-03 3308.05 141.3 0.00237105 0.178482068 0.000423 5.62E-06 0.031856
Feb-03 3279.99 144.25 -0.008482339 0.020877565 -0.00018 7.2E-05 0.000436
Total -0.141130078 0.203784357 0.057806 0.068121 0.154309
130
Portfolio Management With Respect To Banking Industry
Alpha =α =Y −β X
= 0.00849101 5 - (-0.005880 42)(0.88)
= 0.0137
131
Portfolio Management With Respect To Banking Industry
N∑ X -(∑ X ∑ Y ) )(
C t o c f eon = fr f2 r i e 2 c l i2a e t 2 n1/i2 o The coefficient of correlation is
[ ∑ {Y )− (∑ Y) }N ∑ X{ − (∑ X) } ]
0.58. The positive correlation
indicates that when the market
sensex return goes up ICICI
return also goes up.
(2 0 4 .-( 0 - 050 7 . 1 8 4 )04 (1 360 1 5) . 32 7 0 ) 3
= 2 2 1/ 2
Coefficient of Determination
132
Portfolio Management With Respect To Banking Industry
Therefore,
133
Portfolio Management With Respect To Banking Industry
Growth records
134
Portfolio Management With Respect To Banking Industry
Quality of Management
In the year 2001 and 2002 SBI has given dividend of
Rs.50 and Rs.60 respectively, which shows an increase
of 12%. SBI has wide network of branches i.e.13000 all
over India. SBI is at the top position in India. Having a
wide network SBI is able to maintain its position in the
banking industry. SBI also updates the skills and
knowledge of its employees by providing training to
them. So we can say that the quality of management is
good. SBI bank has the highest net worth among the all
banks. The CAR is also very high. The bank’s P/E ratio
is at par with industry average. The P/BV ratio is also
very good. The only negative factor is the higher NPA
levels but by looking at the factors we feel that the
bank would be able to overcome this point especially
135
Portfolio Management With Respect To Banking Industry
RBI
7.87
1.47 Non-Residents
4.32
7.2 Bank,Fis
including
Insurance Co.
MF/UTI
19.41 59.73
Domestic
co./Pvt.Corporat
Bodies/Trusts
Resident
Individuals
Industrial Relations
In the area of industrial relations, the Bank aims at
development of a collaborative culture and resolving
issues through joint consultations/negotiations. Well-
established and on-going consultative machinery is
functioning at various tiers of the administration in the
Bank for achieving these objectives. The industrial
relations during the year remained peaceful and
cordial.
136
Portfolio Management With Respect To Banking Industry
137
Portfolio Management With Respect To Banking Industry
138
Portfolio Management With Respect To Banking Industry
ASSETS
Cash and balance with RBI 189030.5 184958.7 218725.3
Balances with banks and money
at call and short notice 282334.0 422133.2 430576.3
Investments 918786.9 1228764.9 1451420.3
Advances 981019.7 1135902.7 1208064.7
Fixed Assets 24776.1 25933.0 24152.3
Other Assets 219102.6 158749.6 149343.6
TOTAL 2615049.6 3156442.1 3482282.5
139
Portfolio Management With Respect To Banking Industry
140
Portfolio Management With Respect To Banking Industry
141
Portfolio Management With Respect To Banking Industry
142
Portfolio Management With Respect To Banking Industry
143
Portfolio Management With Respect To Banking Industry
ASSETS
Cash and balance with RBI 245352.2 272102.9
Balances with banks& money
at call and short notice 498139.3 552451.4
Investments 1828789.6 2304274.9
Advances 1340951.8 1488456.5
Fixed Assets 24152.3 24152.3
Other Assets 123955.2 102882.8
TOTAL 4061340.3 4744320.7
144
Portfolio Management With Respect To Banking Industry
2003 2004
Cash flow from Operating Activities
Net Profit Before taxes 77998.903 103708.6
Adjustments for :
Depreciation on fixed assets 4249.568 4249.568
Adjustments for:
(Increase)/ Decrease in Investments (-) 377369.28 475485.3
(Increase)/ Decrease in Advances (-) 132887.1 147504.7
Increase/(Decrease) in Borrowings 1398.591 1419.6
Increase/(Decrease) in Deposits 459952.244 538144.1
(Increase)/ Decrease in Other Assets 25388.4 21072.4
Increase/(Decrease) in Other liabilities and Provisions 58431.8 64859.3
145
Portfolio Management With Respect To Banking Industry
Returns of SBI
0.2
0.15
0.1
0.05
-0.05
-0.1
-0.15
-0.2
Returns
0.2
0.15
0.1
0.05
Returns SBI
0
Return BSE
-0.05
-0.1
-0.15
-0.2
Se 01
J a 01
Ja 0 2
Se 02
Ju 1
M 02
Ju 2
03
N 01
N 02
M 02
-0
-0
-
-
l-
l-
n-
n-
p-
p-
-
ov
ov
ay
ay
ar
M
146
Portfolio Management With Respect To Banking Industry
Average
Month/Year BSE Average SBI Bank Return BSE(X) Returns SBI Bank (Y) X*Y X^2 Y^2
1-Mar 3911.865 237.75
Apr-01 3386.665 207.75 -0.134258212 -0.126182965 0.016941 0.018025 0.015922
May-01 3590.05 227.95 0.060054656 0.09723225 0.005839 0.003607 0.009454
Jun-01 3469.63 219 -0.033542708 -0.039262996 0.001317 0.001125 0.001542
Jul-01 3377.725 218.45 -0.026488415 -0.002511416 6.65E-05 0.000702 6.31E-06
Aug-01 3300.095 204.15 -0.022982925 -0.065461204 0.001504 0.000528 0.004285
Sep-01 2931.4 169.325 -0.111722541 -0.170585354 0.019058 0.012482 0.029099
Oct-01 2901.03 182.675 -0.010360237 0.078842463 -0.00082 0.000107 0.006216
Nov-01 3190.88 201.575 0.09991279 0.103462433 0.010337 0.009983 0.010704
Dec-01 3300.385 189.2 0.034318119 -0.061391542 -0.00211 0.001178 0.003769
Jan-02 3351.745 203.85 0.015561821 0.07743129 0.001205 0.000242 0.005996
Feb-02 3524.055 237.875 0.051409042 0.166911945 0.008581 0.002643 0.02786
Mar-02 3606.27 229.725 0.023329659 -0.034261692 -0.0008 0.000544 0.001174
Apr-02 3417.685 233.75 -0.052293644 0.017520949 -0.00092 0.002735 0.000307
May-02 3287.875 224.05 -0.03798185 -0.041497326 0.001576 0.001443 0.001722
Jun-02 3263.225 238.225 -0.007497244 0.063267128 -0.00047 5.62E-05 0.004003
Jul-02 3149.545 232.8 -0.034836703 -0.022772589 0.000793 0.001214 0.000519
Aug-02 3058.43 232.2 -0.028929576 -0.00257732 7.46E-05 0.000837 6.64E-06
Sep-02 3100.795 234.325 0.013851878 0.009151593 0.000127 0.000192 8.38E-05
Oct-02 2933.7 230.85 -0.053887793 -0.01482983 0.000799 0.002904 0.00022
Nov-02 3087.305 248.3 0.052358796 0.07559021 0.003958 0.002741 0.005714
Dec-02 3300.225 282 0.068966299 0.135722916 0.00936 0.004756 0.018421
Jan-03 3308.05 288.15 0.00237105 0.021808511 5.17E-05 5.62E-06 0.000476
Feb-03 3279.99 300.325 -0.008482339 0.042252299 -0.00036 7.2E-05 0.001785
Total -0.141130078 0.307859753 0.076117 0.068121 0.149283
147
Portfolio Management With Respect To Banking Industry
N ∑XY − (∑X )( ∑Y )
Beta =
N ∑X 2
− (∑X ) 2
24 (0.076117) - (-0.141130 078)(0.307 859753)
=
24(0.06812 1) - (-0.141130 078) 2
=1.158
Calculation of Alpha
Alpha =α =Y − β X
=0.01282749 - (-0.005880 42)(1.158)
=0.0196
148
Portfolio Management With Respect To Banking Industry
N∑ X -(∑ X ∑YY ) ()
C to c f eon = f r f2r i e 2c l i a2 e t 2 n1i/2 o The coefficient of correlation is
[ ∑ {Y )− (∑ Y) }NN∑ X{ − (∑ X) } ]
0.789. The positive correlation
indicates that when the market
sensex return goes up SBI
return also goes up.
2 1/ 2
[ *{0 ( .-( 12 0 54 }. 2 39 { 4 0)-1 2( ( )-7 8 0 0 8}3 .7. 05]1 8 694 ) 871 1 1 2 3 0
The squared coefficient of
correlation is 0.62(62%). It
indicates the percentage of
= 0.7 8 9 variance of SBI Bank’s returns
explained by the changes in
the market returns. Thus, 62% of SBI’s risk is explained
by the market. It is called the market risk and therefore
it is undiversifiable. 38% unexplained variance is the
firm specific it is called unsystematic risk and it is
diversifiable.
149
Portfolio Management With Respect To Banking Industry
150
Portfolio Management With Respect To Banking Industry
COMPARATIVE ANALYSIS
151
Portfolio Management With Respect To Banking Industry
Recommendation
ICICI bank’s return on equity is expected to increase
drastically, however its higher beta value indicates that
it is a riskier share. So we recommend that the person
with riskier nature can buy these shares.
As indicated above, HDFC bank is the strongest
among all the four banks. Therefore we recommend
buying its share.
Corporation bank’s share is under priced that may
attract an investor. But the other aspects are not in
favour of this share. Its beta is very high which shows
its riskiness and it is also not creating value for
shareholders, its return on equity is also lower than the
other three banks.
SBI’ s return on equity is attractive but it is very
risky share. Its beta is greater than one and even its
152
Portfolio Management With Respect To Banking Industry
CONCLUSION
From this study, we can conclude that the Indian
economy is standing on the strong foothold. This can be
attributed to lower interest rate, lower inflation rate, high
forex reserves and favorable monetary and fiscal policy.
153
Portfolio Management With Respect To Banking Industry
BIBLIOGRAPHY
154
Portfolio Management With Respect To Banking Industry
Books
Financial Management, I.M.Pandey.
Financial Management, Theory and Practices.
Management Accounting & Financial Analysis, CA
Final.
Security Analysis and Portfolio Management, Fischer
& Jordan.
Annual Reports
Annual Report of ICICI Bank, 2000-01 and 2001-
2002.
Annual Report of Corporation Bank, 2000-01 and
2001-2002.
Annual Report of SBI, 2000-01 and 2001-2002.
Annual Report of HDFC Bank, 2000-01 and 2001-
2002.
Sites
www.bseindia.com
www.hdfcsec.com
www.indiamart.com
www.5paisa.com
www.businessworld.com
Capitalline 2002
Articles
The journal of Indian Institute of Bankers, Bank
Quest, “Accounting and Auditing Standards for
Banks-Contemporary issues in Corporate
Governance”
The journal of Indian Institute of Bankers, Special
feature Basel Committee-Consultative Document-
implication of credit risk and capital allocation.
SBI Monthly review, Feb.2002 – “Definition of Capital
funds”
155
Portfolio Management With Respect To Banking Industry
Magazines
The banking and Investment Review, 12 Aug. 2002.
Report on Bank Economist’s conference, 2002.
Professional Banker, March 2003 – Management
Challenges in Banking.
Business Standard, 16 Dec. 2002 – The smart
Investor.
156