Investment in Banking

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Factors Influencing Investment Decisions in Banking Stocks
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(Frank .K. Reilly and Keith .C. Brown).
Investment involves making of a sacrifice in the present with the hope of deriving
future benefits. Two most important features of an investment are current sacrifice
and future benefit. Investment is the sacrifice of certain present values for the
uncertain future reward. It involves commitment of funds in various investment
avenues. It involves numerous decisions such as type, mix, amount, timing, grade etc,
of investment the decision making has to be continues. Investment is concerned with
the management of an investors¶ wealth which is the sum of current income and the
present value of all future incomes.
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The chief characteristics of investment are explained as follows-
c All investments are characterized by the expectation of a return. In fact,

investments are made with the primary objective of deriving return. The expectation
of a return may be from income (yield) as well as through capital appreciation.
Capital appreciation is the difference between the sale price and the purchase price.
The expectation of return from an investment depends upon the nature of investment,
maturity period, and market demand and so on.
c Risk is inherent in any investment. Risk may relate to loss of capital, delay in
repayment of capital, nonpayment of return or variability of returns. The risk of an
investment is determined by the investments, maturity period, repayment capacity,
nature of return commitment and so on.
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Alliance Business Academyc
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Risk and expected return of an investment are related. Theoretically, the higher the
risk, higher is the expected returned. The higher return is a compensation expected by
investors for their willingness to bear the higher risk.
c The safety of investment is identified with the certainty of return of capital
without loss of time or money. Safety is another feature that an investor desires from
investments. Every investor expects to get back the initial capital on maturity without
loss and without delay.
c An investment that is easily saleable without loss of money or time is said
to be liquid. Well developed secondary markets for security increase the liquidity of
the investment. An investor tends to prefer maximization of expected return,
minimization of risk, safety of funds and liquidity of investment.
!"#c $%c&' cIt refers to the buying capacity of investment in market.

Purchasing power stability has become one of the import traits of investment.
Investment always involves the commitment of current funds with the objective of
receiving greater amounts of future funds.
&'c $c !$( c It refers to constant return from an investment. Another major
characteristic feature of the Investment is the stability of income. Stability of income
must look for different path just as security of principal. Every investor always
considers stability of monetary income and stability of purchasing power of income.
)c * c Tax benefits refer to an investment program without regard to one¶s
residential status decrease the tax liability by investing in avenues such as life
insurance policies, post office savings schemes, infrastructure bonds etc.
Thus, these are the important of characterstics of investment.
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Investment process involves a series of activities leading to purchase of securities or

other investment alternatives. The investment process involves the following steps:
i.c Investment Policy:

It involves identification of investors, objectives, constraints and preference.
This gives an ideal of channels of investment in terms of asset classed to be
selected and securities to be chosen.
ii.c Investment or Security analysis:
It involves analysis of economy, studying industry which are performing well
and have tremendous prospects and select the company which is performing
profitably and efficiently.
iii.c Investment or Security valuation:
Investment value is taken to be the present worth to the owners of future
benefits from investments. Comparison of the value with the current market
price of the asset, allows the determination of the relative attractiveness of the
asset.
iv.c Portfolio construction:
It involves determination diversification level, consideration of investment
timing, selection of investment timing, allocation of investible wealth to
investment assets and acquisition of securities/assets.
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Jbjectives of investment are as under:-
c .$c $c !/' It means the investment should be in assets so that

the principal sum as well as its purchasing power remains intact.
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c &'c $c !$( The investment should be made in a manner that the
investor gets systematic income for re-investment or consumption.
c /'c //!$ The investments should be made in assets which have
the feasibility of having capital growth
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Investment generally involves commitment of funds in two types of assets:
-c Financial assets
-c Real assets
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Financial assets are piece of paper representing an indirect claim to real assets held by
someone else. These pieces of paper represent debt or equity commitment in the form
of IJ s or stock certificates. Investments in financial assets can be broadly
categorized under the following heads: -
1. Corporate securities
c Equity shares
c Preference shares
c Debentures/Bonds.
c Warrants.
c Derivatives
2. Deposits in banks and non banking companies
3. Post office deposits and certificates
4. Life insurance policies
5. Provident fund schemes

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6. Government and semi government securities
7. Mutual fund schemes
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oint stock companies issue corporate securities. These include equity shares,
preference shares, and debentures. These are explained in brief in following
paragraph.
c" cBy investing in shares, investors basically buy the ownership right to
that company. When the company makes profits, shareholders receive their share of
the profits in the form of dividends. In addition, when a company performs well and
the future expectation from the company is very high, the price of the company¶s
shares goes up in the market. This allows shareholders to sell shares at profit, leading
to capital gains. Investors can invest in shares either through primary market offerings
or in the secondary market.
!c " c Preference shares refer to a form of shares that lie in between
pure equity and debt. They have the characteristic of ownership rights while retaining
the privilege of a consistent return on investment. The claims of these holders carry
higher priority than that of ordinary shareholders but lower than that of debt holders.
These are issued to the general public only after a public issue of ordinary shares.
&c c *$ c These are essentially long-term debt instruments. Many
types of debentures and bonds have been structured to suit investors with different
time needs. Though having a higher risk as compared to bank fixed deposits, bonds,
and debentures do offer higher returns. Debenture investment requires scanning the
market and choosing specific securities that will cater to the investment objectives of
the investors.
1 c A warrant is a certificate giving its holder the right to purchase securities
at a stipulated price within a specified time limit or perpetually. It can be defined as a
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long-term call option issued by a company on its shares. A warrant holder is not
entitled to any dividends; neither does he have a voting right
.. c The introduction of derivative products has been one of the most
significant developments in the Indian capital market. Derivatives are helpful risk-
management tools that an investor has to look at for reducing the risk inherent in as
investment portfolio. Derivatives involve Forwards, futures, options and swaps.
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Deposits include mainly deposits with commercial banks and company deposits and
these are explained below.
/$c%"c$((!'c* cA safe, liquid, and convenient investment option,

a savings bank account is an ideal investment avenue for setting aside funds for
emergencies or unexpected expenses. Investors may prefer to keep an average balance
equal to three months of their living expenses.
A bank fixed deposit is recommended for those looking for preservation of capital
along with current income in the short term. However, over the long-term the returns
may not keep pace with inflation.
$(/c )c /$ c Many companies have come up with fixed deposit
schemes to mobilize money for their needs. The maturity period varies from three to
five years. Fixed deposits in companies have a high risk since they are unsecured, but
they promise higher returns than bank deposits. The company fixed deposit market is
a risky market and ought to be looked at with caution. RBI has issued various
regulations to monitor the company fixed deposit market. However, credit rating
services are available to rate the risk of company fixed deposit schemes.
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The investment avenues provided by post offices are non-marketable. However, most
of the savings schemes in post offices enjoy tax concessions. Post offices accept
savings deposits as well as fixed deposits from the public. There is also a recurring
deposit scheme that is an instrument of regular monthly savings. National Savings
Certificates (NSC) is also marketed by post office to investors. The interest on the
amount invested is compounded half-yearly and is payable along with the principal at
the time of maturity, which is six years from the date of issue.
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Insurance companies offer many investment schemes to investors. These schemes

promote savings and additionally provide insurance cover. Insurance policies, while
catering to the risk compensation to be faced in the future by investors, also have the
advantage of earning a reasonable interest on their investment insurance premiums.
Life insurance policies are also eligible for exemption from income tax.
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Provident fund schemes are deposit schemes, applicable to employees in the public
and private sectors. There are three kinds of provident funds applicable to different
sectors of employment, namely, Statutory Provident Fund, Recognized Provident
Fund, and nrecognized Provident Fund. In addition to these, there is a voluntary
provident fund scheme that is open to any investor, employed or not. This is known as
the Public Provident Fund (PPF). Any member of the public can join the PPF, which
is operated by the State Bank of India
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Government and semi-government bodies such as the public sector undertakings

borrow money from the public through the issue of government securities and public
sector bonds. These are less risky avenues of investment because of the credibility of
the government and government undertakings. The government issues securities in
the money market and in the capital market. The government also introduced the
privatization programme in many corporate enterprises and these securities are traded
in the secondary market.
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These are institutions which pool the savings of many individual investors and
combine them into as large and well diversified portfolio of investments. The returns
are in the form of dividends and appreciation in net asset value. The nit Trust of
India is the first mutual fund in the country. A number of commercial banks and
financial institutions have also set up mutual funds. Mutual funds have been set up in
the private sector also. These mutual funds offer various investment schemes to
investors.
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Real assets include real estate, bullion, precious stones, art etc. Real estate, gold,
silver, currency, and other real assets investments such as art are also treated as
investments since the expectation from holding of such assets is associated with
higher returns.
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It involves investments in agricultural land, farm houses, urban land, hose property
and commercial property. Real estate investment is often linked with the future
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development plans of the location. Besides making a personal assessment from the
market, the assistance of government-approved valuers may also be sought.
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These are traditional investments and it is more in India. It includes investment in

gold, silver, and other metals. The bullion market presents an opportunity for an
investor by offering returns and end value in future. It has been observed that on
several occasions, when the stock market failed, the gold market provided a return on
investments. The fluctuation prices, however, have been compensated by real returns
for many investors who have followed a buy and hold strategy in the bullion market.
Thus, these are important financial and real assets meant for investment.
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An organized view of the investment process involves analyzing the basic nature of
investment decisions and organizing the activities in the decision process. nderlying
all investment decisions is the tradeoff between expected return and risk.
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Why invest? Stated in simplest terms, investors wish to earn a return on their money.
Cash has an opportunity cost: By holding cash, you forego the opportunity to earn a
return on that cash. Furthermore, in an inflationary environment, the purchasing
power of cash diminishes, with high rates of inflation bringing a relatively rapid
decline in purchasing power.
In investments, it is critical to distinguish between an expected return (the anticipated

return for some future period) and a realized return (the actual return over some past
period). Investors invest for the future for the returns they expect to earn but when the
investing period is over, they are left with their realized returns. Investors must
always consider the risk involved in investing.
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Risk is explained theoretically as the fluctuation in returns from a security. A security

that yields consistent returns over a period of time is ± termed as ³ risk less security ³
or ³ risk free security ³. Risk is inherent in all walks of life. An investor cannot
foresee the future definitely; hence, risk will always exist for an investor. Risk is in
fact the watchword for all investors who enter capital markets. When one invest,
expects some particular return, but there is a risk that he ends up with a different
return when he terminates the investment. The more the difference between the
expected and the actual the more is the risk. It is not sensible to talk about the
investment returns without talking about the risk, because the investment decision
involves a trade-off between the two, return and risk.
Traditionally, investors have talked about several factors causing risk such as business
failure, market fluctuations, change in the interest rate, inflation in the economy,
fluctuations in exchange rates changes in the political situation, changes in exchange
rates, changes that take place in an industry etc. There are other factors that influence
investment decisions that include age, income, education, occupation, objectives of
investments, etc.
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The number of stock investors in India is not very large. It is just less than 2 percent
whereas it is more than10 percent in developed countries1. In recent years, it is
picking up and following factors have contributed to the stock investment trend.
In India, increase in working population, larger family income and consequent

higher savings
Provision of tax incentives in respect of investments in specified channels provided

by government
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Increasing tendency of people to hedge against inflation that protected by
government
Availability of large and attractive investment alternatives developed in India
Increase in investment related publicity in India
Ability to invest to get income and capital gains etc.
These are some the factors which chip in growing investment trend in India.
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The sector, which was considered dry in the last several years, has caught the investor
fancy in expectations of changing regulations and improving business conditions due
to opening up of the economy. Entry of private and foreign banks in the segment has
provided healthy competition and has been bringing more operational efficiency into
the sector.
Influenced by the global financial turmoil and repercussion of the subprime crisis, the
global banking sector has been witness to some of the largest and best known names
succumb to multi-billion dollar write-offs and face near bankruptcy. However, the
Indian banking sector has been well shielded by the central bank and has managed to
sail through most of the crisis with relative ease. Further with the economic buoyancy
the world over showing signs of cooling off, the investment cycle has also been
wavering. Having said that, the latent demand for credit (both from the food and non
food segments) and structural reforms have paved the way for a change in the
dynamics of the sector itself. Besides gearing up for the compliance with Basel II
accord, the sector is also looking forward to consolidation and investments on the FDI
front.
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www.equitymaster.com/research-it/sector-info/bank
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Public sector banks have been very proactive in their restructuring initiatives be it in
technology implementation or pruning their loss assets. Apart from streamlining their
processes through technology initiatives such as ATMs, telephone banking, online
banking and web based products, banks also resorted to cross selling of financial
products such as credit cards, mutual funds and insurance policies to augment their
fee based income.
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Supply Liquidity is controlled by the Reserve Bank of India

(RBI).
Demand India is a growing economy and demand for credit is high

though it could be cyclical.
Barriers to entry Licensing requirement, investment in technology and

branch network.
Bargaining High during periods of tight liquidity. Trade unions in

power of public sector banks can be anti reforms. Depositors may
suppliers invest elsewhere if interest rates fall.
Bargaining For good creditworthy borrowers bargaining power is high

power of due to the availability of large number of banks
customers
Competition High- There are public sector banks, private sector and
foreign banks along with non banking finance companies
competing in similar business segments.
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With most private sector banks and the PS ones that have complied with Basel II
having sufficient capital in their books; it will be a challenge to deploy the same
safely and profitably in the event of economic slowdown. Banks are likely to
concentrate more on non funded income in this scenario.
Banks, especially the private sector ones, are likely to face penetration concerns. The
lack of credit penetration and the geographic concentration of bank credit is evident
from the fact that 5 states having the highest proportion of per capita credit enjoy 55%
of the total credit disbursals in the country.
RBI¶s roadmap for the entry of foreign banks and the acquisition of stake by the
foreign entities in Indian private banks seems to be a step towards facilitating entry of
foreign banks into India. However, the same is set to aggravate the tussle for market
share in the already fragmented sector.
The proposal for Cabinet¶s approval to allow PS banks to bring down the
government¶s stake in them below the stipulated 51%, which is yet to be tabled, can
help the bank raise substantial capital without borrowing at high rates and give the
entities an opportunity to enhance their capital adequacy ratios before the Basel II
compliances, and compete with their private sector peers.
In a nutshell, since the banking sector has tremendous prospects to grow, improved
efficiency and profitability of banks, banking stocks are attracting investors¶ attention
since recent times and has been succeeded to deliver returns expected.
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The banking sector in India was considered dry in the last several years. But the trend
has changed. Since recent past, the industry has succeeded to draw attention of
investors towards it by its steady performance and tremendous prospects to grow.c
An investor would like to assess the financial position of the company where he is
going to invest. His/her first interest will be the security of his/her principal
investment and then a return in the form of dividend or capital appreciation. Security
of investment depends on assets-base of the company and Returns depends on the
profit earning capacity of the company. Both Profitability and security of investment
depend on how efficiently the company conducts its operations.
nlike, any other manufacturing or service company, a bank¶s accounts are presented
in a different manner (as per the banking regulation). The analysis of a bank¶s
accounts differs significantly from any other company due to their structure and
operating systems. Those key operating and financial ratios, which one would
normally evaluate before investing in the company, may not hold true for a bank. For
that, an investor has to consider various factors that influence the profitability,
efficiency of the bank.
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Christian Roland (2004) in his study on µ*#c !$c &'9$c c :c
found that the degree of financial repression has steadily increased between 1960 and
1980, then declined somewhat before rising to a new peak at the end of the 1980s;
Since the start of the overall economic reforms in 1991, the level of financial
repression has steadily declined; Despite the high degree of financial repression, no
statistically significant negative effects on savings, capital formation and financial
development could be established, which is contrary to the predictions of the financial
liberalization hypothesis.
Rajesh Chakraborthy (2005) in his study on µ*#c c c 6c $(c c
$#9$:c found that Interest rates have declined considerably but there is
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evidence of under-lending by the banks; the ³social´ objectives of banking measured
in terms of rural credit are, expectedly, taking a back seat; the performance of the
banks has improved slightly over time with the public sector banks doing the worst
among all banks; the banking sector as a whole and particularly the public sector
banks still suffer from considerable NPAs, but the situation has improved over time;
new legal developments like the SARFAESI Act provide new options to banks in
their struggle against NPAs; Jver time, the Indian banking industry has become more
competitive and less concentrated and the new private sector banks have been
emerging as the most efficient category.
Mr.Basanta Kalita (2006) in his study on µ $c á;;á&#c !$c $(c c
c 6c $'!c c (/!:c has found that the reforms has produced mixed
response; the sector has responded positively in the field of enhancing the role of
market forces, regarding measures of prudential regulations of accounting, income
recognition, introduction of CAMELS supervisory system, reduction of NPAs and up-
gradation of technology; but, it has failed to bring the sector at par with international
level and still mainly controlled by RBI and Government owned banks are the leaders
in all spheres of the banking network in India.
Harpreet Kohli and A S Chawla (2006) in their study on µ $&'c c c
$((!'c*c6cccc'!c$((!'c*:c(State bank of India,
ICICI bank, Punjab National bank and Bank of Punjab) found that the two private
banks have been able to reduce burden tremendously and increase spread to a greater
extent; Jperating expenses has been maximum for bank of Punjab and minimum for
ICICI bank and same results for interest expenses; the two private banks
outperformed the two public sector banks in terms of the parameter considered.
J.P Verma and Dr. K. Chandel (2007)in their study on µ#!c (c
c $&'c c *#c !$c c :c found that Jperating costs of poor
performing banks is quite high and efficiency ratios revealed the need for suitable
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human resource development strategy as it is the major determinant of Profitability;
the profitability of banks depends on the its ability to manage the various risks such as
credit risk, market risk, liquidity risk and exchange rate risk; IT has emerged as
strategic tool to increase efficiency and profitability of banks.
B S Bodla and Richer Verma (2007) in their study on µ(c c

$&'c c *c c c 6c '.c ': found that the variables
such as Non-interest income, Jperating Expenses, Spread have significant
explanatory power and hence they have significant relationship with net profits; Cost
of Intermediation ( operating cost/Assets) are huge and there exists huge gap to fill to
par with the international standards; Interest is major source of income and Non-
interest income has shown improving trend over time in case of Public Sector Banks.
Dr.Kasturi Rangan (2008) in his study on µ(c c $c c *c 3c
#c $'$:c found that Spread, Non-Interest Income and Jperating
expenses are important determinants of profit and there exists positive correlation
between spread and non-interest income and negative correlation between operating
expenses in case of Public sector banks, Jld generation banks and Foreign banks and
opposite results in case of New generation Private banks.
Dr. Marinder Kaur Batra and Reeta Kapoor (2008) in their study on µ $&'c
'c c %c .c *c c : found that HDFC bank in Exponential
growth rate of credit deposit ratio, Indus Ind bank in Return on assets, IDBI bank in
Jperating Profit Margin, TI bank in Spread, Kotak Mahindra bank in interest
income to total income ratio are the best performers.
R K ppal and Rimpi Kaur (2006) in their study on µ !!ccc"c $3&#c

!$c$(cc6c%c!"''#ccc$//$: found that Foreign
banks are most efficient banks and followed by private sector banks and then Public
sector banks in terms of efficiency at branch and Employee level; foreign banks pays
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highest compensation followed by new private sector banks; there exists positive and
significant relationship between per employee profitability and expenses and per
branch profitability and expenses at 5 % level of significance.
Manish Mittal and Aruna Dhade (2006) in their study on µ $&'c c
$!.c c c * c c $(/.c : found that there is no
remarkable difference in the spread ratio, there is a significant difference in Burden
ratio among the public sector and private sector & Foreign banks; The key to
profitability for the public sector banks is increased productivity; Foreign banks
outperformed their Indian counterparts.
Dr. Monika Agarwal (2006) in study on µ'9#c '.c !!c $c c
!$((!'c&c#c c//$!": found that majority of banks in State Bank
group and Nationalized banks were less efficient because of excessive deposits, less
non-interest income and unutilized borrowings; State Bank of Travancore in SB
group, Indian Jverseas Bank in nationalized group, Sonali Bank in private bank and
Bank International Indonesia in foreign bank were most efficient bank in their
respective categories; Foreign bank were the top performer in overall banking
industry.
Gunjan M.Sanjeev (2006) study on µc c c $c (#c !"!'c !!c $c
*:cfound that Indian banks showed overall an improving trend in efficiency over
the study period and it indicated that positive impact of deregulation; Foreign banks
outperformed their Indian counterparts and Indus Ind bank and Sonali bank were most
efficient banks; there exists strong inverse relationship between efficiency scores and
Non Performing Assets of Public Sector banks and Non Performing Assets is matter
of great concern to these banks.
Dr. N Sundaram et al (2008) in their study on µ !!c$c!"'c$((!'c

&ccc 6cc'!'c: found that efficiency with respect to employee
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registered a high growth rate in private bank group and SBI group and nationalized
banks group registered lower efficiency and it has shown improving trend marginally;
Efficiency with regard to branch also registered high growth in private bank category
than other groups; and though SBI group had wider network of branches, it had
registered lower contribution from each branch.
Prof. Deepak Tandon (2008) in his study on $(!c .!c <c !!c
/(c $c "c c &'!c !$c *c 6c c ##.c =$/(!>c
c $'c found that Corporation bank emerged as the most efficient by revealing
consistency in performance with input slack of 4.36% of interest expenses and
15.23% of operating expenses; the most efficient in interest efficiency is Punjab
National Bank and Jriental Bank of Commerce emerged as most efficient in terms
operating expenses efficiency; Relatively inefficient banks in terms of operating
expenses were Andhra Bank, Central bank of India, Dena bank and Indian bank and
were required to reduce their expenses by about 30%.
Dr. A Ramachandran and N Kavitha (2008) in their study on µ!'c

$(!c c %c .c *c 1"c "c *c 2$/c c c
*#c: found that New private banks outperformed other groups in terms
of operating profit and net profit in spite of high total expenditure; new private banks
achieved lowest wage bills and it reflected the lesser number of branches and
employees and impact of technology; new private banks failed to reach rural masses
and could not achieve the stipulation of opening 25% of branches in rural and sub-
urban areas; new private banks penetrated the government business segment which
was earlier dominated by Public sector banks.
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Banking stocks, which was considered dry in the last several years, has caught the
investor fancy in expectations of changing regulations and improving business
conditions due to opening up of the economy. Entry of private and foreign banks in
the segment has provided healthy competition and has been bringing more operational
efficiency into the sector.
An investor would like to assess the financial position of the firm where he is going to
invest. Investors¶ first interest will be the security of principal investment and then a
return in the form of dividend or capital appreciation. Security of investment depends
on assets-base of the company and returns depend on the profitability of the company.
Both Profitability and security of investment depend on efficiency with which the
bank conducts its operations.
While analyzing the banking financial performance, it calls for special attention.
Because, unlike, any other manufacturing or service company, a bank¶s accounts are
presented in a different manner (as per the banking regulation). The analysis of a
bank¶s accounts differs significantly from any other company due to their structure
and operating systems.
Its operations are influenced by macro factors such as interest rates, inflation,
monetary policy and regulatory guidelines etc and micro factors such as its resource-
base, presence in the market, profit earning capacity and efficiency in operations etc.
Therefore, understanding these factors will give guidance to the investor while taking
investment decisions. Hence, the study entitled µFactors Influencing Investment
Decisions in Banking Stocks ± A Study¶ is conducted to throw light upon the various
factors that influence the investment decisions.
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The objectives of the study were as follows-
c To identify the factors influencing investment decisions in banking
stocks
c To understand the significance given by investors to those factors and
to understand the familiarity of investors with respect to those
factors
c To rank the Indian scheduled commercial banks according to the
significance given by investors to those factors c
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The Ranking of Indian scheduled commercial banks is made on the basis of Return on
Assets, Capital adequacy ratio and Non-performing assets as on December 2008.
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The study involves identifying various factors that influence investment decisions in
banking stocks and understanding the significance of them to investors. Since, the
study attempted to identify various factors that influence investment decisions in
banking stocks, it is )/'$$c.c
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The following is the data required in the order of objective.
Jbjective 1: To identify the factors influencing invest ment decisions in banking
stocks
c Demographic factors
1.c Age
2.c Marital status
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3.c Education
4.c Annual average household income
5.c Savings pattern
6.c Primary objective of investment
7.c Ideal time horizon
c Macro factors
1.c Regulatory framework
2.c Interest rates
3.c Monetary policy
4.c Fiscal policy
5.c Business cycles and any other factor
c Micro factors
1.c Profitability
2.c Efficiency
3.c Capital adequacy
4.c Liquidity
5.c Capital structure and any other factor
Jbjectivec2:cTo understand the significance given by investors to those factors and to

understand the familiarity of investors with respect to those factors
c Significance of macro factors in investment decisions banking stocks
c Significance of micro factors in investment decisions in banking stocks
c Familiarity of investors with respect to profitability determinants, efficiency
indicators and capital adequacy
Jbjective 3: To rank the Indian scheduled commercial banks (listed) according to the
significance given by investors to those factors
c Return on Assets
c Capital Adequacy Ratios
c
c
c
cc
c
c Non-performing Assets as percentage on net advances
The above mentioned data can be classified into primary data and secondary data.
c
(c
It includes demographic factors such as age, marital status, education, Annual average
household income, Savings pattern, Primary objective of investment, Ideal time
horizon etc, macro factors like interest rates, regulatory framework, business cycles
etc and micro factors namely profitability, efficiency, capital adequacy, liquidity etc
and significance given to these factors by investors and familiarity of investors with
regard to those factors. These primary data collected by administering a structured
questionnaire among investors.
c
!$c c
Return on assets, capital adequacy ratios and NPA are secondary data. The sources of
secondary data mentioned in the following section.
4 +c$!c$c!$cc
The secondary data such as Return on Assets, Capital adequacy ratios, Non-
performing assets as percentage on net advances collected from financial statements
of banks.
4 ,c"$c$cc$''!$c
The method of data collection is survey method as the primary data mentioned above
section are required to be collected from the investors directly.
4 0c/c$c.c
A very large number of investors constitute the population. All the investors cannot be
reached with the given time. As Investors have similar financial needs, they exhibit
similar characteristics. Therefore, the sample survey is found suitable for the study.c
c
c
c
cc
c
4 4c(/'#c 'c
c
>c"$c$c(/'#c
Investors:
Since, the investors dispersed around the country and they have similar investment
needs, it is found convenience sampling is good method of sampling for time given.
Banks:
Since investors are interested in knowing about banks which are available for
investment, the udgmental sampling method is used for choosing banks which are
listed in Indian stock exchanges.
&>c(/'c9c
Investors:
Since investors are dispersed around the country and they exhibit similar
characteristics, sample size of 100 is found sufficient. With the given time constraint,
a large number of investors cannot be reached for the survey.
Banks:
For ranking purpose, only Indian scheduled commercial banks, which are listed, are
used as it is found that other-than scheduled commercial banks are not as attractive as
scheduled commercial banks for investment.
4 7c!"c$c'c
The following are different techniques used for achieving objectives of the study and
are presented in the order of objectives.
c
c
c
cc
c
Jbjectivec 1:c To identify the factors influencing investment decisions in banking
stocks
To study the influence of demographic factors on investment decision in banking
stocks, Pearson chi-square test of independence was conducted and it is illustrated as
follows with an example used in the study.
Influence of age of investors on their preference to banking stocks -
Table No. 4.1 Table showing Age of investors and their Preference to Banking Stocks
Preference to Banking Stocks

Age (in years)
Prefer Not Prefer Total
nder 30 51 16 67
30-40 20 09 29
40-50 03 01 04
50 & above 00 00 00
Total 74 26 100
Chi-Square (X2c)ccc@c0.541
In Pearson chi-square test of independence at 5% level of significance, it is proven that

the two variables age and preference to banking stocks are independent as Chi-Square
(X2c)cis less than the table value 5.99 at 2 d.f.
c
If the calculated chi-square is greater than the table value or level of significance is
more than 5%, the two variables independent. Jtherwise the two variables are
dependent that is one variable influences other. The Pearson chi-square test of
independence is used for studying the influence of demographic factors like age,
marital status, education, annual average household income, savings, primary
objective of investment, ideal time horizon with respect to preference of banking
stocks in same manner as shown in illustration.
For studying the risk appetite of investors, the model developed from ICICI wealth
management is employed. According to the model, investors are asked to mention
their a) investment philosophy, b) their most comfortable investment portfolio over
next 15 years, c) strategy in adverse circumstances despite no change in fundamentals
c
c
c
cc
c
of the company, d) maximum loss tolerance levels and composition of current/future
investment portfolio and each are given different alternatives and different Weightage
are given to different alternatives. It is illustrated with response of an investor as
follows-
á>c.(c/"'$$/"ccc$'! c Weights Response

i) I want my investments to be completely safe; I do not wish to risk
my capital even slightly and am comfortable with deposit like
returns. 1
ii) I want to preserve my capital but I am willing to accept
infrequent and minor negative returns over a brief period in
anticipation of returns which are slightly higher than bank deposits 3 3
iii) I want my investments to grow in value and to achieve this I can
accept moderate negative returns over slightly longer periods 6
iv) I want my investments to grow substantially in value and earn
highest possible returns; I can accept negative returns for longer
duration, including possible loss of principal. 9
>c$c!$($&'c.(c/$$'$c$.c)cá0cc
i) worst return of 2% and best return of 6% 1
ii) worst return of 2% and best return of 6% 4 4
iii) worst return of 2% and best return of 6% 7
iv) worst return of 2% and best return of 6% 9
v ) worst return of 2% and best return of 6% 11
+>c#c%"c"c/!cc''c&c
0Accc$c!"#cc
('c
a) Sell 100% 1
b) Sell 50% 3 3
c) Hold 5
d) Increase holding 7
c
c
c
cc
c
,>c)((c'$c"cc.$c!c$'c
a) 0% to 4.99% 1
b) 5% to 9.99% 3 3
c) 10% to 17.99% 5
d) 18% to 24.99% 7
e) 25% or more 9
0>cBc.(c/$$'$c
a) Mainly cash/bank deposits with a small portion invested in low
risk bonds 2
b) Mainly debt market investments and some portion in blue chip 4 4
c) A mix of debt instruments, blue chip and aggressive stocks 5
d) Mostly speculative or high risk investments (aggressive stocks,
high risk funds, options, leveraged positions, etc.) 7
$'c!$c cc á7c
The total score obtained by the investor fall among one of the following risk category.
!$c c!#$c !/$c
Preservation of capital is the most important objective.
06-12 Risk Averse Investors are not willing to take any risk, and are
comfortable with returns that are commensurate with bank
deposits or other highly rated debt instruments
Investors are prepared to take a small amount of short-term
13-19 Conservative risk for potential returns that are higher than bank deposits
over the medium to long term.
Investors are looking for moderate capital growth over the
20-27 Balanced long term; cautious towards taking high levels of risk,
however, comfortable with short-term fluctuations in returns
c
c
c
cc
c
Investors are willing to take significant risk in pursuit of
28-35 Growth higher long-term capital growth; willing to accept high
market volatility and fluctuations in returns.
Investors are willing to accept high risk for the potential of
36-43 Aggressive substantially higher long-term capital growth. Investors may
experience wide fluctuations in returns from year to yea
Based on the score obtained by the respondents, the investors are categorized in to
Risk-averse, Conservative, Balanced, Growth and Aggressive investors on the basis
of risk. For the respondent illustrated above, he falls in conservative category. In the
same manner, all the respondents are classified.
Jbjectivec2:cTo understand the significance given by investors to those factors and to

The data pertaining to macro factors, micro factors, profitability determinants and
efficiency indicators and fundamental factors and significance given by investors to
these factors are analyzed by employing weighted average arithmetic mean. The
manner in which it is computed is illustrated as follows with ranking of macro factors.
Regulatory Business Monetary Interest Fiscal

Weights Rank obtained Framework cycles measures rates policy
5 1 16 14 50 12 7
4 2 22 28 17 21 9
3 3 28 34 18 11 5
2 4 23 11 5 14 43
1 5 8 10 7 39 33
W=15 Weighted Sum 306 316 389 244 205
Weightage mean 20.4 21.1 25.9 16.3 13.7
Jverall rank III II I IV V
sing weighted average arithmetic mean, macro factors, micro factors, profitability
determinants, efficiency indicators and fundamental factors are ranked.
c
c
c
cc
c
Jbjective 3: To rank the Indian scheduled commercial banks (listed) according to the
significance given by investors to those factors
The criterions used for ranking of Indian scheduled commercial banks are
profitability, efficiency and capital adequacy. The ratios used are return assets, NPA
as percentage on net advances and capital adequacy ratios according to Basel II.
c
7ccc?c
The limitations of the study are as follows
c The sample used is small and chosen at convenience. The conclusions drawn
cannot be generalized for the whole population of investors.
c The Pearson chi-square test of independence is used for finding association
between selected variables. The inherent limitations of the technique such as
ignoring variables that non-occurred, failure to equalize sum of observed
frequencies with sum of expected frequencies etc are hold good.
c The rankings of macro factors, micro factors etc are done using weighted
arithmetic mean. The weighted arithmetic mean has limitation of assigning
arbitrary weights to the variables.
c The financial data used for the ranking of banks are collected from financial
statements of the bank. The financial statement has inherent limitations such
as figures can be window-dressed, revealing historical data etc. c
c
c
c
cc
c
8c c c
c
"/cá c$!$c
This particular chapter provides background to factors influencing Investment

decisions. It involves introductions to investment, characteristics of investment,
various investment avenues and trends of investment in India.
"/c
c!"c#c
This particular chapter includes literature review, statement of the problem,

Jbjectives, Scope, Methodology, Limitations of the study.
"/c+ c $'c
This chapter involves brief profile of Indian economy and the detail profile of Indian
banking sector including evolution of banking sector in India, Classification of banks
in India, current scenario of the banking sector, challenges of the sector and impact of
global woes on the sector.
"/c , c C!$c '!#c .(c !$c c *#c $!3c

Dc
3cc'c
This chapter includes Tabulation and analysis of the data collected using the
techniques mentioned in previous section, research methodology. Based on the
analysis, inferences are drawn and it is presented in this chapter.c
"/c0 c((c$c#Ec$!'$ cc##$ c
This Chapter covers the summary of findings elicited from analysis of data collected;
conclusions are drawn in order of objectives and followed by overall conclusion.
Suggestions are made to investors.
c
c
c
cc
c
+ ácc ?c
The Indian Economy has been consistently posting robust growth numbers in all
sectors leading to impressive growth in Indian GDP. A consistent 8 to 9% growth
rate has been supported by a number of favorable economic indicators including a
huge inflow of foreign funds, growing reserves in the foreign exchange sector, both
an IT and real estate boom, and a flourishing capital market. All of these positive
changes have resulted in establishing the Indian economy as one of the largest and
fastest growing economy in world. c
c
Agriculture is one of the strongholds of the Indian economy and it accounts for 18.5
per cent of the gross domestic product (GDP). Agriculture draws its significance from
the vital supply and demand links with the manufacturing sector and is a source of
livelihood for the rural population of India.
c
The Indian service sector forms the backbone of the social and economic development
of the country. It plays an important role in the Indian economy, both in terms of
employment potential and contribution to national income. The sector has come to
play an increasingly dominant role in the economy accounting for 59.6 per cent of the
overall average growth in GDP in the last eight years between 2000-01 and 2007-08.
In the current global slowdown scenario, Indian economy has been witnessing some
bitter experiences like loss of jobs, reduction of exports opportunities, and
depreciation of rupee against dollar, etc first ever in its growth trajectory since 1991.
The following paragraph describes major economy indicators for three quarters of
current fiscal year.
For the current fiscal year, the economy has registered 7.9 and 7.6 growth in GDP for
the first two fiscal quarters. The Q3 GDP growth rate for India has come at 5.3% over
the corresponding quarter, previous year as per the CSJ (Central Statistical
c
c
c
cc
c
Jrganization) on India. The number has come way below economist¶s estimates of
6% plus growth rate.c
Negative growth in Farm output by 2.2% caused significantly to the unexpected fall in
the overall GDP. Manufacturing, which too contracted by 0.2% on an annual basis
was expected to be weak after studying the IIP data for the last few months. Mining
(+5.3%) and construction (+6.7%) were also looking weaker on a consistent basis for
past many months. According to the latest estimates, Index of Industrial Production
(IIP) for Mining, Manufacturing and Electricity registered growth rates of 1.5%, -
0.7% and 2.9% respectively in Q3 FY09. This was against a growth rate of 5.5%,
8.9% and 4.6%in those sectors in Q3 FY 08. Construction grew 6.7% in Jct-Dec
versus 9.7% Q2, 09 showing continuing weakness and against 9% growth in the
similar period last year
Inflation was matter of the concern during this fiscal year. It was surged to over 13
percent in the mid of the fiscal year. Jver the period, it fell down to a six-year-low of
0.43% for the week ended March 28 and it has raised possibilities of further rate cuts.
Analysts expect it to reach 0% by the end of this month. Lower prices of food items
and manufactured products resulted in a fall in the inflation.
To conclude, Indian economy is one which is not as much affected as other

developing nations like china, Indonesia etc. as about 64% of GDP is driven by
domestic consumption rather than more dependence on exports. According to
economy pundits, Exports will dwindle for few quarters and pick up as soon as global
economy revives and Indian economy will not face as bitter experience as SA,
European nations and other developing nations.
c
c
c
cc
c
+
cc*52c c
+
ác$!$c
A safe and sound financial sector is a prerequisite for sustained growth of any
economy. Globalization, deregulation and advances in information technology in
recent years have brought about significant changes in the operating environment for
banks and other financial institutions. Banks play a very useful and dynamic role in
the economic life of every modern state. A study of the economic history of western
country shows that without the evolution of commercial banks in the 18th and 19th
centuries, the industrial revolution would not have taken place in Europe. The
economic importance of commercial banks to developing countries may be viewed
thus:
c Promoting capital formation

c Encouraging innovation
c Influence economic activity
c Facilitator of monetary policy
+

c .$'$c*#cc c
The origin of banking can be traceable in the early times of human history. In the
ancient Rome and Greece, the practice of storing precious metals and coins at safe
places and loaning out money for public and private purpose on interest was
prevalent. The writings of kautilya contained references of banking. The modern
banking came into existence only after industrial revolution. The bank of England
started its business in 1694 with a view to finance the government to carry on its war
with France by subscribing money from people. The first bank in India, though
conservative, was established in 1786. From 1786 till today, the journey of Indian
c
c
c
cc
c
Banking System can be segregated into three distinct phases. They are as mentioned
below:
c Early phase from 1786 to 1969 of Indian Banks (Phase I)

c Nationalization of Indian Banks and up to 1991 prior to Indian banking sector
Reforms (Phase II).
c New phase of Indian Banking System with the advent of Indian Financial &
Banking Sector Reforms after 1991(Phase III).
Phase I (1786-1969):
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan
and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank
of Bombay (1840) and Bank of Madras (1843) as independent units and called it
Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank
of India was established which started as private shareholders banks, mostly
Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906
and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian
Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also experienced periodic
failures between 1913 and 1948. There were approximately 1100 banks, mostly small.
To streamline the functioning and activities of commercial banks, the Government of
India came up with The Banking Companies Act, 1949 which was later changed to
Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965).
Reserve Bank of India was vested with extensive powers for the supervision of
banking in India as the Central Banking Authority.
c
c
c
cc
c
Phase II (1970-1991)c
Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive banking
facilities on a large scale especially in rural and semi-urban areas. It formed State
Bank of India to act as the principal agent of RBI and to handle banking transactions
of the nion and State Governments all over the country.
The following are the steps taken by the Government of India to Regulate Banking
Institutions in the Country during the phase II:
c 1949: Enactment of Banking Regulation Act.

c 1955: Nationalization of State Bank of India.
c 1959: Nationalization of SBI subsidiaries.
c 1961: Insurance cover extended to deposits.
c 1969: Nationalization of 14 major banks.
c 1971: Creation of credit guarantee corporation.
c 1975: Creation of regional rural banks.
c 1980: Nationalization of seven banks with deposits over 200 crores.
Phase III ( Post-1991)
This phase has introduced many more products and facilities in the banking sector in
its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee
was set up by his name which worked for the liberalization of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being
put to give a satisfactory service to customers. Phone banking and net banking is
introduced. The entire system became more convenient and swift. Time is given more
importance than money.
Thus, the Indian banking sector evolved over a period of time.
c
c
c
cc
c
+
+ccc*5ccc
The banking system in India can broadly be classified into public sector, private
sector (old and new) and foreign banks.
c The government holds a majority stake in public sector banks. This segment
comprises of SBI and its subsidiaries, other nationalized banks and Regional
Rural Banks (RRB). The public sector banks comprise more than 70% of the
total branches.
c Jld private sector banks have a largely regional focus and they are relatively
smaller in size. These banks existed prior to the promulgation of Banking
Nationalization Act but were not nationalized due to their smaller size and
regional focus.
c Private Banks entered into the sector when the Banking Regulation Act was
amended in 1993 permitting the entry of new private sector banks. Most of
these banks are promoted by institutions and their operating environment is
comparable to foreign banks.
c Foreign banks have confined their operations to mostly metropolitan cities, as
the RBI restricted their operations. However, off late, the RBI has granted
approvals for expansions as well as entry of new foreign banks in order to
liberalize the system.
c Co-operative banks are those banks which are formed on the cooperative
principles and as such they are more service oriented rather than profit
oriented and dealing in ordinary banking business. Co-operative banks are
generally concerned with the rural credit and provide financial assistance for
agricultural and rural activities. Co-operative banks were formed to promote
savings among members and thereby increase supply of funds and to promote
the effective use of credit and to reduce the risk in the granting of credit. Co-
operative banks were set up under the legislation of Cooperative societies act,
1904.
c
c
c
cc
c
+
,cc*52c ccc?ccc c
Currently, banking in India is generally fairly mature in terms of supply, product

range and reach-even though reach in rural India still remains a challenge for the
private sector and foreign banks. In terms of quality of assets and capital adequacy,
Indian banks are considered to have clean, strong and transparent balance sheets
relative to other banks in comparable economies in its region.
As of now, there are 79 scheduled commercial banks (SCBs) - 27 public sector banks,
22 private banks and 30 foreign banks in India. They have a combined network of
over 61,500 branches and more than 50,000 ATMs. According to a report by ICRA
Limited, a rating agency, the public sector banks hold over 75 percent of total assets
of the banking industry, with the private and foreign banks holding 18.2% and 6.5%
respectively.
Furthermore, a report "//$c c c *#c !$ ", by market

research company, RNCJS, forecasts that the Indian banking sector will grow at a
healthy compound annual growth rate (CAGR) of around 23.3 per cent till 2011.
Banking, financial services and insurance (BFSI), together account for 38 per cent of
India's outsourcing industry (worth S$ 47.8 billion in 2007). According to a report
by McKinsey and NASSCJM, India has the potential to process 30 per cent of the
banking transactions in the S by the year 2010. Jutsourcing by the BFSI to India is
expected to grow at an annual rate of 30±35 per cent.
According to a study by Dun & Bradstreet (an international research body)²"India's

Top Banks 2008"²there has been a significant growth in the banking infrastructure.
Taking into account all banks in India, there are overall 56,640 branches or offices,
893,356 employees and 35,000 ATMs. Public sector banks made up a large chunk of
the infrastructure, with 87.7 per cent of all offices, 82 per cent of staff and 60.3 per
cent of all ATMs.
c
c
c
cc
c
+
0c c*5ccccc 2cc
Reserve Bank of India (RBI) was established in April 1935 under Reserve Bank of
India Act, 1934 with a share capital of Rs. 5 crores on the basis of the
recommendations of the Hilton Young Commission. It was nationalized in 1949. The
general superintendence and direction of the Bank is entrusted to Central Board of
Directors of 20 members, the Governor and four Deputy Governors, one Government
official from the Ministry of Finance, ten nominated Directors by the Government to
give representation to important elements in the economic life of the country, and four
nominated Directors by the Central Government to represent the four local Boards
with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards
consist of five members each Central Government appointed for a term of four years
to represent territorial and economic interests and the interests of co-operative and
indigenous banks.
RBI act as bank of Issuing Notes, banker to Government, banker to other Indian bank
and Lender of the Last Resort to other commercial banks, Controller of Credit in
economy, and Custodian of Foreign Reserves of economy also performs supervisory
and promotional functions.
+
4c 2 c c*?cc*52c?
The banking industry in India is undergoing a major transformation due to changes in

economic conditions and continuous deregulation. These multiple changes happening
one after other has a ripple effect on a bank trying to graduate from completely
regulated sellers market to completed deregulated customers market. The challenges
of banking industry can be summarized in the following section.c
c
c
c
cc
c
#'$cc
The continuous deregulation has made the Banking market extremely competitive
with greater autonomy, operational flexibility, and decontrolled interest rate and
liberalized norms for foreign exchange. The deregulation of the industry coupled with
decontrol in interest rates has led to entry of a number of players in the banking
industry. At the same time reduced corporate credit off take thanks to sluggish
economy has resulted in large number of competitors battling for the same pie.
%c'c
As a result, the market place has been redefined with new rules of the game. Banks
are transforming to universal banking, adding new channels with lucrative pricing and
freebees to offer. Natural fall out of this has led to a series of innovative product
offerings catering to various customer segments, specifically retail credit.c
!!ccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc ccccccccccccccccccc
This in turn has made it necessary to look for efficiencies in the business. Banks need
to access low cost funds and simultaneously improve the efficiency. The banks are
facing pricing pressure, squeeze on spread and have to give thrust on retail assets.
c$(c$'c
This will definitely impact Customer preferences, as they are bound to react to the
value added offerings. Customers have become demanding and the loyalties are
diffused. There are multiple choices; the wallet share is reduced per bank with
demand on flexibility and customization. Given the relatively low switching costs;
customer retention calls for customized service and hassle free, flawless service
delivery.
c
c
c
cc
c
'#cc
These changes are creating challenges, as employees are made to adapt to changing
conditions. There is resistance to change from employees and the Seller market
mindset is yet to be changed coupled with Fear of uncertainty and Control orientation.
Acceptance of technology is slowly creeping in but the utilization is not maximized.
$(/!c2/c
Placing the right skill at the right place will determine success. The competency gap
needs to be addressed simultaneously otherwise there will be missed opportunities.
The focus of people will be on doing work but not providing solutions, on escalating
problems rather than solving them and on disposing customers instead of using the
opportunity to cross sell.
+
7c cc2*c1 cc*5cc
Currently, the Indian banking sector is facing bitter experience in its operations due to
the global financial crisis followed by global economic slowdown. The economic
superpowers like .S.A., European nations, apan and developing nations are facing
the toughest time their existence. The current macro-economic conditions have
resulted in following impact on Indian banking system.
c Slowdown in credit growth

c Impact on margins of banks
c Pressure on credit quality
'$%$%ccc2$%"c
While the rise in interest rates should lead to a moderation in demand for credit,
Indian banks too are exercising caution while lending. Risks and uncertainties in the
c
c
c
cc
c
system have increased given the higher crude and commodity prices and its
inflationary impact. This would curtail consumption, which would impact economic
growth adversely. Further higher rates will not only impact the profitability of Indian
corporate but also impact IRRs of various proposed capex projects. This coupled with
elections next year could lead to some postponement of capex plans of corporate,
leading to negative impact on demand for credit.c
(/!c$c#c$c*c
During the past 18 months, CRR has increased by 400 bps to 9.0% and RBI has also
discontinued with interest payment on CRR balances. Every 50 bps hike in CRR
generally negatively impacts margins by 5 bps. Till une¶08, most of the banks had
restrained from hiking lending rates despite significant monetary tightening. However
on account of recent measures by RBI, banks have resorted to hiking PLRs in
uly/August by 50-150 bps to preserve their margins. (as on anuary 2009).
In fact in an environment, where liquidity is tight, interest rates are at elevated levels
and risk premiums have increased, the banks tend to regain the pricing power. This
would not only help the banks to adequately price in risks but also help protect their
margins. Apart from hiking PLRs, banks are also resorting to reprising (in fact right-
pricing) the loans that were sanctioned well below PLRs. Significant portion of fixed
rate loans would also get re-priced over the period of 12-18 months.
c$ccF'c
Higher lending rates are expected to impact credit quality for the banking system. The
extent of the impact on credit quality would also be bank specific given the loan mix
(retail vs. corporate), proportion of unsecured lending, credit profile of corporate loan
book and industry wise exposure. Indian banks¶ fundamentals are relatively resilient
with better risk management systems, dramatically improved asset quality, stronger
c
c
c
cc
c
recovery mechanisms (legal provisions) and with adequate capitalization and
provisioning.
Even Certain sectors (like real estate, airlines industry) might feel the stress due to the
changing macro environment and rise in interest rates. Many companies where crude
forms a key raw material component are expected to get hit more severely. Similarly,
sectors like real estate and SMEs, which are interest rate sensitive, would face higher
delinquencies if interest rates strengthen further by 100-200 bps.
To conclude, the Indian financial services sector is a nerve system of Indian economy.
Banking sector plays an important role in development of economy. For steady
growth in economy, innovation and development in financial sector is very essential.
The Indian banking sector currently going through consolidation process, it will
further strengthen. The current situation is little pessimistic as banking sector is very
sensitive to economic factors like prevailing business cycles, interest rates etc and in
an integrated and interdependent global scenario, it is inevitable. The current scenario
of banking sector is featured by tremendous prospects to grow, improved profitability
and efficiency of public sector banks.
c
c
c
c
c
c
c
c
c
c
c
c
c
cc
c
, ácc
The study entitled µ!$c '!#c .(c !$c c *#c $!:c
is undertaken to understand the factors influencing investment decisions in banking
stocks. An investor would like to assess the financial position of the bank where he is
going to invest. While analyzing the banking financial performance, it calls for special
attention as its operation mechanism is different from that of any non-financial firms.
Its operations are influenced largely by macro factors such as interest rates, inflation,
monetary policy and regulatory guidelines etc and micro factors such as its resource-
base, presence in the market, profit earning capacity and efficiency in operations etc.
Therefore, understanding these factors is essential and it will give guidance to the
investor while taking investment decisions. Hence, the study is conducted with the
objectives of identifying those factors that influence investment decisions and to study
the understanding of investors of those factors and significance to those factors and
accordingly rank Indian scheduled commercial banks listed. The sample size is 100
and method of sample is convenience sampling. A structured questionnaire is
constructed and administered to collect the required data. The data so collected is
analyzed in this chapter.
c
,
c*- cá cc ?c cc 2c
c cc*52c5c
It is popularly believed that the demographic characteristics such as age, gender,

marital status, education etc and economic characteristics such as Annual Household
income, savings, etc are the important factors that influence one¶s investment
decisions as that influence the one¶s financial needs, risk appetite etc. Banking stocks
are no exception to the above popular belief.
c
c
c
cc
c
Age is considered as influencing factor in investment decisions. When reaches
different stages of lifecycle, Investor¶s needs for investment changes. The investment
needs of young investor and needs of aged investors are different because young
investor looks capital appreciation whereas aged investor look for current income as
he does not have any regular source of income. Therefore, respondents are asked to
state the age and responses of investors are tabulated as follows.
&'c$ c, ác
&'c"$%#c#c$c.$cc"c !c$c*#c$!c

Age (in years)
nder 30 51 16 67
30-40 20 09 29
40-50 03 01 04
50 & above 00 00 00
Total 74 26 100
Chi-Square (X2c)ccc@c0.541
Significance = 0 .763
In Pearson chi-square test of independence at 5% level of significance, it is proven

that the two variables age and preference to banking stocks are independent as Chi-
Square (X2c)c is less than the table value 5.99 at 2 d.f. The chance of occurring
association between these two variables is only 23.7% whereas it is required to be
95% (confidence level). From the result, it can be inferred that Preference of banking
stocks and Age of investor are not related. It is adverse to the popular belief.
c
c
c
c
cc
c
The investment needs of married person are different from that of investor who is
single from his marital status. A married investor look forward save more to meet
his/her educational expenses of children, marriage of daughters etc and married
investor would not withstand the substantial losses arising from the risky investment.
Therefore, the investors are asked to state the marital status and so collected data is
tabulated as follows.
&'c$ c,
cc
&'c"$%#c'cc$c.$cc"c !c$c*#c
$!c
Marital Preference to Banking Stocks

Status Prefer Not Prefer Total
Married 29 06 35
Single 45 20 65
Total 74 26 100
Chi-Square (X2c)c@c2.796
Significance = 0.138c
The calculated Chi-Square (X2c) is less than the table value 3.84 at 1 d.f. at 5% level
of significance. It can be noticed that the level of significance associated with the
relationship between these variables is 13.8% which is more than the set level of
significance 5%. It can be inferred that marital status and preference of banking stocks
are independent. It is adverse to the popular belief.
c
c
c
cc
c
Education level of investor plays major role in investment decisions. The assets
involved in educated investors¶ portfolio is different from that of less educated
investors¶. The higher education an investor has higher will be knowledge of
investment and knowledge of investment will influence the investment decisions.
Therefore, education levels of investors are asked and responses of investors are
&'c$ c, +cccc
&'c"$%#c !$c'.'c$c.$cc"c !c$c*#c

$!c

Education
pto X 00 00 00
Class X to +2 06 01 07
Graduation 33 11 44
P G and/or Professional courses 35 14 49
Total 74 26 100
Chi-Square (X2c) = 0.691

Significance = 0.708
The chi-square calculated (X2c) of two variables, Education and Preference of banking
stocks, is less than the table value 5.99 at 2 d.f. at 5 % level of significance. The
chance of occurring association between these variables is around 29% which is less
than the required occurrence chance of 95%. It can be inferred that Education of
investors and Preference of banking stocks for investment are independent. The two
variables do not influence each other. It is opposite to popular belief of education
level of investors influence investment decisions.
c
c
c
c
cc
c
Income of investors from all possible sources influences the investment decisions. If
an investor has higher income that exceeds all possible expenditures, there is
possibility that he will invest remaining disposable income in various avenues of
investment he is comfortable with. Therefore, investors are asked to mention their
average annual household income and responses of investors are tabulated as follows.
&'c$ c, ,cc
&'c"$%#c.#c$"$'c'c!$(c$c.$cc"c

/!c$c*#c$!c
Average Annual Household Preference to Banking Stocks

Income ( Rs in lakhs) Prefer Not Prefer Total
Below Rs 2 11 03 14
2 - 3.5 27 11 38
3.5 - 5 24 10 34
5 & above 12 02 14
Total 74 26 100

c
2
The Chi-Square (X c) (is 1.528) is less than the table value of 7.81 at 3 d.f at 5%
level of significance between two variables average household annual income and
preference to banking stocks. The level of significance pertaining to these variables is
67.6% whereas it is required to be 5%. From the result of the test, it can be inferred
that average annual household income and preference to banking stocks are
independent. Hence, Average household annual income and preference of banking
stocks for investment do not influence each other.
c
c
c
cc
c
Along with income, it is savings, excess of income over expenditures, which
influence investment decisions because higher the savings of investors higher will be
the quantum of investment. Hence, investors are asked to mention the savings bracket
and responses are tabulated as below.
&'c$ c, 0cc
&'c"$%#c.#c$c.$cc !c$c*#c$! c

Savings
10% or below 09 08 17
10% - 20% 28 08 36
20%-30% 30 10 40
30% & above 07 00 07
Total 74 26 100

The calculated Chi-Square (X2c) for the two variables savings and preference to
banking stocks is less than the table value 7.81 at 3 d.f at 5% level of significance.
The result of the test of independence leads to infer that the two variables are
independent. The probability of occurring association between savings and preference
to banking stocks over 92 percent whereas it is expected to be 95 percent. Hence,
Savings and preference to banking stocks do not influence each other and it is
opposite to popular belief.
c
c
c
cc
c
The objective of investor determines the portfolio of his/her investment. If an investor
who expects higher income in very short period will look for speculative stocks for
investment and ready to take higher risk. If the investors¶ objective is to reduce the tax
burden, he looks for tax savings avenues of investment. Therefore, respondents are
asked to mention the primary objective of investment and the data so collected is
&'c$ c, 4c
&'c"$%#c (c&G!.c$c.(c$c.$cc"c
!c$c*#c$!c

Primary objective of Investment
Current Income 07 01 08
Preservation of Capital 10 02 12
Appreciation of Investment 23 11 34
Appreciation and Regular Income 22 09 31
Tax Benefits 05 03 8
Quick Profit 07 00 07
Total 74 26 100

The result of Pearson Chi-Square Tests of independence for Primary Jbjective of

Investment and Preference of Banking stocks indicates that the chance of association
between the variables holds good is only 61.5% which is less than the required 95%
of confidence. The above results lead to infer that the two variables are independent.
They do not influence each other and it is adverse to the popular belief.
c
c
c
cc
c
Investor who wants to park his/her savings for longer period look for growth stocks
and investor who wants to make quick profits employ funds for shorter period. The
ideal time horizon of investment depends on objective of investor. Therefore,
investors are asked to state ideal time horizon of investment and the responses are
&'c$ c, 7cc
&'c"$%#c'c(c$9$c$c.(c$c.$cc"c
!c$c&#c$!c
Ideal Time horizon for Preference to Banking Stocks

Investment Prefer Not Prefer Total
Less than 1 year 07 00 07
1-3 years
09 07 16
3-5 years 33 12 45
5 years & above 25 07 32
Total 74 26 100

The chi-square calculated value (5.373) is less than the table value (7.81) at 3 d.f at
5% level of significance. It indicates that the occurring level of significance (14.6%)
is more than the required (5%) for the association between ideal time horizon and
Preference to banking stocks. The chance of occurring association is about 85%
whereas it is expected to be 95%. It can be inferred that the two variables are not
dependent. Hence, there is no association exists between Ideal time horizon and
preference to banking stocks.
c

c
c
c
cc
c
Investment decision in stocks is influenced by many factors including demographic
factors, socio-economic factors, etc. Decisions of buying or selling of a stock is
mostly influenced by recommendations of brokers/consultant as investor believes that
consultant/broker has expertise and specialized in the domain. Investor who believes
they have required expertise make decisions based on their investment philosophy
like belief in fundamental factors and or technical factors. Therefore, investors are
asked to mention the most significant factor that influence investment decisions and
the responses so collected is tabulated as follows.
&'c$ c, 8cc
&'c"$%#c$c#!c!$c"c'!c.(cc*#c
$!cc
Most Significant factor influencing Preference to Banking Stocks

investment decisions Prefer Not Prefer Total
Fundamentals factors like asset-base etc 06 02 08
Trends of Price and Volume Movements 09 06 15
Recommendations of Brokers 32 12 44
Advice of Friends and Peer group 27 06 33
Any other factor 00 00 00

Total 74 26 100
2
Chi-Square (X c) = 2.618
Significance = 0.454c
The above table shows that the most influencing factor of investment decisions is
recommendations of brokers and followed by advice of friends and peer group. About
82% of investors who are influenced most by advice of friends and peer group and
about 72% of investors who favors recommendations of brokers the most prefer
banking stocks.
The chi-square calculated (2.618) is less than the table value (7.81) at 3 d.f. at 5%
level of significance. It proved that the chance of occurring association between
Preference of banking stocks and Most influencing factor in investment decision is
54.6% whereas it is required to be 95% or more. Hence, Preference of banking stocks
c
c
c
cc
c
and most influencing factor in investment decision are independent. They do not
influence each other.
It is believed that fundamental analysis is to arrive at value of a stock and technical

analysis is to arrive at timing of buying or selling. But speculators use technical factor
to make quick profits and genuine investors would like to make money by parking
their funds for a longer horizon. Therefore, investors are asked to state whether they
read financial statements of the company before parking in their funds or whether
they consider only trends of price and volume movements or they consider both
fundamental factor and technical factor and the responses of investors are tabulated as
follows.
&'c$ c, ;c
&'c"$%#c1""c.$cc!'c(c$c!$(/cc
$cc$c !cc$'(c($.(c
Reading Financial Statements

Trends of Price and of the Company
Volume movements
Read Do Not read Total
Consider 67 20 87
Not consider 10 3 13
Total 77 23 100
From the above table, it be inferred that a significant number of investors, 77%, invest
in stocks based on the fundamentals. 87% of investors use the Trends of price and
volume movements of stocks for making investment decisions. About 67% of
investors consider both fundamentals of the company and Trends of price and volume
movements before investing. The reason for that might the investors use
fundamentals to value the shares and use technical factors for deciding the timing of
the purchase or sell decisions.
c
c
c
cc
c
Investment decisions of investors depend on the perceived adequacy of knowledge of
investment. Therefore respondents are asked to state their perceived knowledge of
investment and the responses are tabulated as below.
&'c$ c, áHcc
&'c"$%#c/$c$c.$c%"c#c$c"c5$%'#c&$c
.(c
Number of
Knowledge about Investments
Investors
Very little knowledge 58
Moderate amount of knowledge 30
Good working knowledge 12
Expert in Investment 00
Total 100
The above table shows that most of the investors (over 58%) perceived that they have
very little knowledge about investments. And over 30 percent of investor believed
they have moderate amount of knowledge and only 12% investors believed that they
have good working knowledge. But, none of the investors perceived that they are
expert in investment.
c
c
c
cc
c
The major factor that influences investment decisions is risk appetite of investor.
Investor who is able to withstand the substantial losses arising out of an investment
will prefer speculative stocks as it gives higher return. Hence investors are asked to
different questions that constitute risk appetite of investors and it is summarized in the
following table with respect to preference to banking stocks and responses are
&'c$ c, áácc
&'c"$%#c'!$c$c.$c&c$cc//c
Investors on the basis of Preference to Banking Stocks

Risk appetite Prefer Not Prefer Total
Risk-averse 12 2 14
Conservative 36 18 54
Balanced 23 6 29
Growth 2 1 3
Aggressive 0 0 0
Total 73 27 100
Note: The risk appetite model is borrowed from ICICI wealth management.
The above table shows that about 54% of investors are conservative and 29% of
investors are balanced. It is surprise that there is no aggressive investor found in the
survey conducted. And Risk-averse and Growth investors are other investors groups
which are not significant in number. The table also depicts that about 67%
conservative investors, 79 % of balanced investors and about 86% of Risk-averse
investors prefer to invest in banking stocks. It shows that investors perceive that
banking stocks are less risky than other stocks.
c
c
c
cc
c
An analysis of Fundamental factors is to arrive at value of share. Profitability of a
firm, long-term solvency position, liquidity of the firm, efficiency with respect to
asset utilization are considered as fundamental factors. Investors weight different
factors differently. Therefore, respondents are asked to rank these fundamental factors
according to its significance with respect to investment decisions and ranks are
tabulated as below.
&'c$ cc, á
cc
&'c"$%#cc$c('c!$c$c"c&c$c#!!c
!'c c
Profitability I
Long-term solvency position III
Liquidity IV
Efficiency of firm II
The fundamental factors which is considered most is Profitability of the company and
followed by efficiency of the company. The other two factors considered are liquidity
and efficiency of the firm. It can be inferred that investors prefer those company¶s
share which are profitable and which are more efficient. Investors opine that their
future returns depend on profitability and efficiency of the firm as efficiency of the
firm influence the future returns of the firm and thereby returns of investors and it will
ensure their objective of investment over a period of time.
c
c
c
cc
c
Banking stocks were ignored till recent years. But in recent years banking stocks
succeeded to gain attention of investors. The reason might be higher dividend yield,
tremendous prospects to grow and increased of profitability of banks etc. therefore,
investors are asked to state the reason for preferring banking stocks and the responses
are tabulated as follows.
&'c$ c, á+c
&'c"$%#c$c$c !c$c*#c$!cc
$c$c !c $ cc.$c !c

Steady Performance 23 31.08
Tremendous Prospects 20 27.03
Increased Profitability 17 22.97
Improved efficiency of banks 14 18.92
$'c 7,c áHHc
From the above table it can be inferred that about 74% of investors prefer to invest in
banking stocks. They prefer banking stocks because of banks¶ steady performance
(about 31%) and tremendous prospects of banking sector (about 27%) and its
increased profitability (about 23%).
c
c
c
cc
c
Still banking stocks are not as attractive as other stocks to many investors. The
reasons are varied. The main reasons may be its high sensitivity to macro factors and
availability of better avenues. Therefore, investors are asked to state the reasons for
not consideration of banking stocks and the responses of investors are tabulated
below,
&'c$ c, á,cc
&'c"$%#c$c$c$c #c*#c$! c
$c$c$c!$$c $ c$c.$c !c

Highly Sensitive to Macro factors like Monetary 08 30.77
measures, Regulations and Business cycles etc
Better alternatives are available 18 69.23
Jther reasons 00 00
$'c
4c áHHc
The above table indicates that about 26% of investors do not prefer banking stocks.
Because it is not as attractive as other stocks and also believed it is highly sensitive to
macro factors such as monetary measures, regulations and business cycles etc.c
c
c
c
cc
c
Current investment pattern of investor plays important role in further investment
decisions. If investor is not satisfied with the current portfolio, he may look for better
opportunities. Therefore, investors are asked to state their current investment and data
so collected is analyzed as follows.
&'c$ c, á0cc
&'c"$%#cc.(c c$c.$c
Percentage of investment in Avenues

Investment Avenues
< 10% 10%-20% 20%-30% 30%-40% 40% < Total Mean
Bank Deposits 51 3 0 3 2 59 8.06
Post office Savings
Schemes 10 20 11 3 0 44 16.59
Mutual funds 7 15 19 6 1 48 21.14
Insurance Policies 3 22 27 6 0 58 21.21
Stocks 13 6 25 7 0 51 20.09
Bonds 10 20 10 0 0 40 15.00
Gold and Bullion 4 31 24 7 0 66 20.15
Real Estate 6 17 26 5 0 54 20.56
Jthers(PF, etc) 37 13 6 0 0 56 9.45
The above table indicates that Gold and bullion is favorite investment avenue for the
investors and followed by insurance policies, real estate, and other avenues like PF
etc. Though bank deposits form as second most favorite, most of investments belong
to less 10% of their investment. About 51% of investors have invested in stocks and
about 50% of stock investors invested about 20 to 30 percent in stocks. The average
of investment of investors in mutual funds and insurance policies is over 21 percent
and in gold and bullion, stock and real estate is over 20 percent.
c
c
c
cc
c
, +c *- c
c c c c 2 c 2 c *?c
c c c c c c c c
?cc c1c cc cc
The knowledge about macro factors such as regulatory framework of RBI, business
cycles prevailing in the economy, monetary measures, and fiscal policy of
government etc is essential as it is believed that they influence the performance of
banks. Hence, investors are asked to rank these factors based on their significance in
investment decisions and it is shown as below.c
&'c$ c, á4cc
&'c"$%#cc$c!$c!$c$c"c&c$c#!!c
!'c c
Regulatory Framework III
Business cycles II
Monetary measures I
Interest rates IV
Fiscal Policy V
The above table shows that monetary measures of RBI play a very vital role, followed
by business cycles prevailing in the economy and regulatory framework of RBI. It can
be inferred that banking stocks are very sensitive to monetary measures, business
cycles and regulatory framework. Monetary measures influence the cost of funds bank
would get from RBI and its PLR and in turn influence the profitability of the bank.
Banking business depends on the business cycles prevailing as in booming conditions
the customers require more funds from banks than in recessionary period.
c
c
c
cc
c
Micro factors are related to particular bank¶s stocks. It is believed that investors study
the bank¶s fundamentals such as profitability, capital adequacy and or technicals of
banking stock such as price and volume trends before investing in. The banks which
have adequate level of capital are attractive to investors rather than banks of lower
than the required levels. Therefore, investors are asked to rank these micro factors
based on their significance in investment decisions and it shown as follows.
&'c$ c, á7cc
&'c"$%#cc$c!$c!$c$c"c&c$c#!!c
!'c c
Profitability of Bank I
Liquidity of Bank V
Capital Adequacy of Bank II
Efficiency of Bank III
Capital structure VI
Price and Volume trends IV
The above table shows that fundamental factors such as profitability, capital
adequacy, efficiency of the bank are mostly considered (mentioned in the order of
rank) and followed by price and volume trends and liquidity of the bank. It can be
inferred that fundamentals of the bank are considered as the most rather than technical
factors by investors.
c
c
c
cc
c
*?c cc*5c
It is believed that companies which are profitable attract the investors rather than less
or non profitable. Banks are no exception. Profitability of banks mainly depends on
spread/Net Interest Margin, Non-interest incomes, lower operating costs, burden etc.
the knowledge of determinants of profitability is essential and investors are asked to
rank major determinants of profitability and summarized as below.
&'c$ c, á8cc
&'c"$%#c#c$c $&'c( c
!'c c
Spread/Net Interest Margin I
Lower operating costs II
Ability to Manage risks IV
Non-interest incomes III
Burden V
The above table shows that investors believe the first three significant factors that
influence profitability of bank is Net interest margin, lower operating costs, non-
interest incomes and followed by ability to manage risks etc. Investors might opine
that non-interest incomes along with income from conventional banking services are
major revenue sources and operating costs, which is the second major expenditure a
bank incurs, is controllable expenditures and controlling these elements determines
the profitability of bank.c
c
c THIS SPACE IS LEFT INTENTIJNALLY
c
c
c
c
c
c
cc
c
51 2 cc c F?c
A ratio below the required level indicates that the bank is not adequately capitalized to
expand its operations. It is believed that investor should know whether bank is
adequately capitalized or not as it influences the future growth prospects of the bank
before investing.
&'c$ c, á;cc
&'c"$%#c5$%'#c$c/'c!c
/$c $ c$c.$c
Know 61
Do not Know 39
Total 100
It is noticed from the above table that about only 61% of investors know about capital
adequacy and its significance. And the remaining 39% of investors do not know it.
The reason for this is lesser exposure of investors to these terms.
c
c
c
c
c
c
cc
c
?cc*5c
It is believed that higher efficient firm is preferred to less or inefficient firm to invest
in. Banks are no exception to that. But, what constitute the efficiency of bank is
questionable. The following parameters are popular in finding out efficiency of banks.
nderstanding of these factors is considered essential for investors. Therefore,
investors are asked to rank the popular parameters of efficiency according to their
familiarity and it shown as below.
&'c$ c,
Hcc
&'c"$%#c#c$c !!c!$c
!'c c
Lower NPA I
Lower Jperating Costs and Wage bills II
Investment in Technology IV
Higher Business per Employee/Branch III
Higher Profit per Employee/Branch V
Investors believed that NPA indicates the efficiency of the bank and it is ranked as
first and followed by lower operating costs and wage bills and higher business per
employee/branch is placed in third place. NPA do not indicate the efficiency of bank
as whole because it does not consider the efficiency of employee which is considered
as major input in banking industry.
c
c
c
cc
c
, ,c *- c + c c 5c c c c c
*5c2cc c2 c2 c*?c cc
cccc
The above analysis of factors that influence the investment decisions in banking
stocks shows that the profitability, capital adequacy and efficiency of the bank are the
major influencing factor in investment decisions in banking stocks.
Efficiency of bank is indicated by NPA of the bank which is given highest
significance by the most of investors.
&'c$ c
ác
&'c"$%#c#c$cc!"'c!$((!'c/&'!c&c$c"c
&c$c$3 $(#cc
c!"'c$((!'c c $(#c #c&c

*c c= >c $c c
Allahabad Bank 1.96 44

Andhra Bank 0.21 04
Bank of Baroda 0.47 15
Bank of India 0.52 17
Bank of Maharashtra 0.82 27
Canara Bank 1.28 38
Central Bank of India 1.17 35
Corporation Bank 0.29 05
Dena Bank 1.05 32
Indian Bank 0.16 03
Indian Jverseas Bank 1.30 39
Jriental Bank of Commerce 0.76 26
Punjab & Sind Bank 0.37 09
Punjab National Bank 0.39 11
Syndicate Bank 0.97 30
CJ Bank 0.73 24
nion Bank of India 0.14 02
nited Bank of India 1.10 34
Vijaya Bank 0.74 25
c
c
c
cc
c
State Bank of India 1.36 41
State Bank of Bikaner & aipur 0.82 27
State Bank of Hyderabad 0.42 14
State Bank of Indore 0.63 22
State Bank of Mysore 0.62 21
State Bank of Patiala 0.56 18
State Bank of Travancore 0.58 19
ICICI Bank 2.09 47
Axis bank 0.39 11
Kotak Mahindra Bank 1.01 31
Bank of Rajastan 0.69 23
Catholic Syrian Bank 1.98 45
City nion Bank 1.24 37
Development Credit Bank 2.04 46
Dhanalakshmi Bank 0.89 29
Federal Bank 0.33 06
HDFC Bank 0.60 20
IndusInd Bank 1.30 39
ING Vysya Bank 1.09 33
ammu & Kashmir Bank 1.22 36
Karnataka Bank 1.40 42
Karur Vysya Bank 0.47 15
Lakshmi Vilas Bank 1.47 43
Nainital Bank 0.35 08
SBI Comm. & Intl. Bank 0.05 01
South Indian Bank 0.39 11
Tamilnad Mercantile Bank 0.38 10
Yes Bank 0.34 07
The above table depicts the ranks of Indian scheduled commercial banks based on
Non-performing assets as a percentage on net advances. It is found that SBI
Commercial & International bank is ranked first as it has lowest Non-performing
assets of 0.05 percent and followed by nion bank of India and Indian bank. ICICI
has posted high Non-performing asset of 2.09 percent and it is ranked as 47.
c
c
c
cc
c
Capital adequacy ratio is ratio between tier 1 and tier 2 capital of bank and risk
weighted assets of bank. It indicates ability of a bank in terms of meeting the time
liabilities and other risk such as credit risk; operational risk etc. Capital adequacy ratio
calculated as Basel II recommendations is selected as another criterion for ranking of
banks.
&'c$ c
c
&'c"$%#c#c$cc!"'c!$((!'c/&'!c&c$c"c
&c$c/'c!c$c=>c
c!"'c$((!'c /'c!c #c&c

*c $c=>c $cc
Andhra Bank 11.61 39
Canara Bank 13.41 21
Dena Bank 11.79 37
Indian Bank 13.09 25
CJ Bank 12.53 29
Vijaya Bank 11.40 42
c
c
c
cc
c
ICICI Bank 15.53 05
Axis bank 13.84 14
HDFC Bank 13.70 16
Yes Bank 16.63 04
The above table shows the ranking of Indian scheduled commercial banks based on
capital adequacy ratio. SBI Commercial & International bank is ranked first as it has
capital adequacy ratio of 25.06 percent and followed by Federal bank and Kotak
Mahindra bank. Catholic Syrian bank is ranked last as it has got lowest capital
adequacy ratio of 9.58 percent.
c
c
c
cc
c
Profitability of banks depends mainly on the net interest margin, non-interest incomes
and lower operating costs. It can be captured better in return on assets ratio as whole.
&'c$ c
+c
&'c"$%#c#c$cc!"'c!$((!'c/&'!c&c$c"c
&c$cc$cc=> c
c!"'c$((!'c ccc #c&c

*c =>c $cc
Andhra Bank 1.04 25
Canara Bank 1.45 13
Dena Bank 1.35 16
Indian Bank 1.83 04
CJ Bank 1.28 21
Vijaya Bank 1.05 24
ICICI Bank 0.80 33
Axis bank 1.48 12
c
c
c
cc
c
HDFC Bank 0.30 45
Yes Bank 1.52 09
c
The above table depicts ranking of Indian scheduled commercial banks based on
return on assets. It can be noticed that SBI Commercial and International bank is
ranked first as it has highest RJA of 1.93 percent and followed by nion bank of
India and State bank of Mysore. Development credit bank is ranked last as it has got
lowest return on assets of 0.2 percent
c
c
c
cc
c
0 ácc
The study entitled C!$c'!#c.(c!$cc*#c$!c6c
cDcis undertaken to understand the factors influencing investment decisions in
banking stocks. An investor would like to assess the financial position of the bank
where he is going to invest. While analyzing the banking financial performance, it
calls for special attention as its operation mechanism of a bank is different from that
of any non-financial firms. Its operations are influenced largely by macro factors such
as interest rates, inflation, monetary policy and regulatory guidelines etc and micro
factors such as its resource-base, presence in the market, profit earning capacity and
efficiency in operations etc. Therefore, understanding these factors is essential and it
will give guidance to the investor while taking investment decisions.
The study is conducted with the objectives of identifying those factors influencing
investment decisions in banking stocks and to study the understanding of investors of
those factors and significance given to those factors while making investment
decisions and accordingly rank Indian scheduled commercial banks listed. The sample
for the study chosen is 100 investors and method of sample is convenience sampling.
A structured questionnaire was constructed and administered to collect the required
data. The data so collected is analyzed in the previous chapter. From the data so
analyzed, the summary of findings is elicited, conclusions are drawn and suggestions
are made in this chapter.
0
c?cc2c
The summary of findings of the study is presented as following. Findings are
presented according to the objectives of study.
Üc The chance of occurring association between age and preference of banking
stocks is only 23.7%. Hence, age of investors does not influence the
Preference of banking stocks. It is adverse to the popular belief that age
influences investment decisions.
Üc The preference of banking stocks is not influenced by marital status of
investors as level of significance is more than the accepted level of
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c
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c
significance 5% and it is opposite the popular belief that marital status
influences the investment decisions.
Üc Influence of Education levels of investors on investment decisions do not
occur at more than 95% confidence level. Hence, education levels of investors
do not influence preference of banking stocks.
Üc Average annual household income of investors and preference to banking
stocks are independent because the possibility of occurring association is
about 33%. Hence, Average annual household income and preference of
banking stocks for investment do not influence each other.
Üc About 75% of investors have their savings bracket between 10-30 percent.
Savings of investors and their preference to banking stocks are independent.
They do not influence each other and it is opposite to popular belief of
investment.
Üc Most of the investors are long-term investors as their ideal time horizon of
investment is lies between 3-5 years and above 5 years. Ideal time horizon of
investment of investors and preference of banking stocks do not influence
each other as possibility of occurring dependency is very less.
Üc Appreciation in investment and decent current income is primary objective of
most of the investors. The independency of primary objective of investment
and preference of banking stocks is found.
Üc The most significant factor that influences the investment decisions in stocks
is recommendations of brokers and advice of friends and peer group.
Üc Most of investors believe in both fundamental analysis and technical analysis
as about 67 percent of investors consider both fundamentals of the company
and Trends of price and volume movements of stock before investing in. The
reason for that might be the investors use fundamentals of firm to arrive at
value the stock and use technical factors for determining timing of the
purchase or sell of stocks.
c
c
c
cc
c
Üc Conservative and balanced investors are found largely (about 83%) in the
study. None of the aggressive investors and a few growth investors (3%) are
found.
Üc About 67% of conservative investors, 79 % of balanced investors and about
86% of Risk-averse investors prefer to invest in banking stocks as investors
perceive that banking stocks are less risky than other stocks.
Üc Investors prefer stocks of those companies which are profitable and which are
more efficient. Investors might opine that their future returns depend on
profitability and efficiency of the company as they influence the future earning
capacity of the firm and thereby returns of investors.
Üc About 74% of investors prefer investment in banking stocks because banks are
succeeded in giving steady performance with improved profitability and
efficiency as well as tremendous prospects to grow.
Üc About 26% of investors do not prefer banking stocks because of its high
sensitivity to macro factors such as business cycles, monetary measures,
inflation and changes in interest rates etc and availability of better alternatives.
Üc Gold and bullion is most favorite investment avenue for the investors and
followed by insurance policies, real estate, and other avenues like PF etc.
Üc About 51% of investors have invested in stocks and out of which about 50%
of investors parked between 20 to 30 percent in stocks. It is because most of
the investors opined that they moderate knowledge of stock investment and it
is not adequate.
Üc Most of the investors opined that the most significant macro factors that
influence their investment decisions in banking stocks are monetary policy of
RBI, followed by prevailing stages in business cycles and followed by
regulatory framework of RBI to the banks.
Üc Profitability, capital adequacy and efficiency of banks are three major
influencing micro factors while choosing banking stocks for investment.
Trends of Price and volume of stocks is given later significant.
c
c
c
cc
c
Üc Investors opined that profitability of bank depends on the net-interest margin
and non-interest incomes and operating cost, which is second major
expenditure after interest expenses of bank.
Üc Most of the investors are of the opinion that efficiency of the bank is indicated
by its NPA, Lower the NPA, higher the efficiency, and followed by lower
operating costs and higher business per branch/employee.
Üc About 61% of investors have knowledge of investors and a few of them have
known its significance. The same result found in the case of spread, burden as
determinants of profitability. Because investors are not very much exposed to
these technical jargon as it is mainly used in financial services industry like
banking, housing etc.
Üc In terms of NPA, ICICI bank has got last position with net NPA of 2.09% on
net advances. Development Credit bank placed end in terms of return on
assets. Catholic Syrian Bank is placed last in terms of capital adequacy ratio.
SBI Comm. & International bank is ranked first in respect of the entire
criterion used, which are Non-performing assets, Capital Adequacy ratio, and
Return on Assets.
0 + c
Jbjective 1: To identify the factors influencing investment decisions in banking
stocks
The factor influencing investment decisions in banking stocks can be classified
mainly into macro factors, micro factors and demographic factors. From the findings
of the study, it can be concluded that the significant macro factors are monetary
policy of RBI, prevailing state of business cycles, interest rates, fiscal policy of
government and regulatory framework of RBI, the most significant micro factors are
profitability, capital adequacy, liquidity position of bank, capital-structure, efficiency
of the bank and trends of price and volume movements of the banking stocks. The
demographic factors such as age, marital status, education levels, annual household
income, etc do not influence the investment decisions in banking stocks. Many of the
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c
investors prefer banking stocks because of bank¶s steady performance, improved
profitability and efficiency and tremendous prospects to grow as about 50 percent of
Indians are yet to penetrated for banking services (source: The Indian Banker).
Jbjective 2: To understand the significance given by investors to those factors and to

Investors give highest significance to monetary policy of RBI, prevailing state of
business cycle and regulatory framework of RBI as these factors are given first three
ranks among all the macro factors. Profitability, capital adequacy and efficiency of
bank are given most significance among the micro factors that influence investment
decisions. Most of the Investors surveyed are of the opinion that profitability of the
bank is mainly determined by net-interest margin, non-interest income and operating
cost and efficiency is best indicated by NPA of bank followed by lower operating
cost. Most of the investors are not familiar with banking jargon like spread, burden,
significance of capital adequacy ratios etc.
Jbjective 3. To rank the Indian scheduled commercial banks (listed) according to the
significance given by investors to the factors
The Indian Scheduled commercial banks are ranked based on the three criterion
namely profitability, capital adequacy and efficiency of bank. Return on assets
captures the influence of all Profitability determinants and so it was chosen as
parameter. Efficiency of bank is determined by NPA of company as it was given the
highest priority. Capital adequacy ratio calculated as Basel II recommendations has
chosen. SBI Commercial & International bank placed first in terms of three criterions
and it would be the best bank to park their money for investors.
In a nutshell, investors prefer banking stocks mainly for its tremendous prospects to
grow and steady performance and improved profitability and efficiency. While
making investment decisions in banking stocks, the investor has to consider factors
that influence industry as whole, which are macro factors, and bank specific factors,
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c
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c
that is micro factors. The macro factors that influence investment decisions are
monetary policy, prevailing state business cycles etc and the significant micro factors
are profitability, capital adequacy and efficiency of bank. Most of the investors do not
familiar with banking jargon such as spread, burden, significance of capital adequacy
ratio etc. Most of the investors are of the opinion that Profitability of bank is mainly
determined by net interest margin, non-interest incomes and lower operating costs and
efficiency is better indicated by NPA and followed by lower operating cost and wage
bills. sing these three criteria namely profitability, capital adequacy and efficiency
of bank, Indian scheduled commercial banks are ranked and SBI commercial &
International bank is the bank which is placed first rank in terms three criteria.
According to the study, SBI Commercial & International bank is suggestible to
investors to park in their money. But, it should be noticed that NPA do not capture the
efficiency of bank as whole as it does not consider the efficiency of employees which
is considered as major input in the banking industry and wage bills constitute major
expenditure after interest expenses. The investors are to be educated in stock
investment because percentage of stock investors is only 51 percent and they
perceived that they do not have adequate knowledge of stock investment.
0 ,c22 c
Based on the study,cthe following suggestions are made.
#'$c"$ c
Üc The common investment avenues of investors are mainly gold and bullion,
insurance policies, real-estate, and bonds and stocks. Jnly 51 percent of
investors have invested in stocks. It is because of investor¶s perceived
inadequacy of knowledge of stock investment and low risk appetite of
investors. Therefore, this difficulty needs to be addressed. It can be addressed
by conducting investment education programs to investors.
c
c
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cc
c
Üc Most of the investors are not familiar with banking jargons like spread, burden
and capital adequacy ratio etc. because these terms are not often used and it is
used specifically in financial services industry like banking. Therefore,
investors are to be educated in respect of it by providing definitions of such
terms and significance to the bank and to the investors. It can be addressed
conducting more effective investor education programs and providing
information in investment specific websites.
c
* c
Üc Banks are suggested to take part in educating investors by providing sufficient
information relating to banking jargon and its significance, impact on banks¶
performance and to its investors. It leads to gain higher attention of investors
and gain higher market capitalization of bank and thereby enhance the
shareholder value.
c
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Üc It is found that most of the investors opined that efficiency is better indicated
by only NPA of the bank. But NPA does not consider the efficiency of
employees which is considered as major input in banking industry and
commands fat wage bills. Therefore, investors are to be educated to in this
respect too.
Üc Most of Investors perceived that they do not sufficient knowledge of stock
investment. They are suggested to take part in stock investment education
program conducted by stock exchanges, other institutions so that they can
invest according to their investment needs. It may enhance the risk appetite of
investor.
c
c
c
c
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cc
c
?c 2c
The study threw light up on the various factors that influence investment decisions. It
was a great learning experience for me as throughout the study, I learnt many things.
Some of my learnings can be highlighted as follows-
c It enhanced the Knowledge of Indian banking sector.
c Knowledge about the determinants of profitability of banks and efficiency
indicators of bank
c Factors influencing investment decisions in general and in specific to banking
stocks
c Bullion investment like gold, silver and insurance policies are favorite avenues
of investment of people.c
c Investors¶ knowledge pertaining to investment
c A few investors prefer stocks for investment and need of investor education
program for stock investment
c The reason for lower stock investment is perceived inadequacy of stock
investment knowledge
c Most of the stock investor make their decisions based on both fundamental
factors and technical factors
c Significance of macro factors like monetary policy, regulatory guidelines etc
with respect to banking sector c
c Importance of capital adequacy ratio in banking sectorc
c Got an insight of research by undergoing a systematic process practically c
c sage of SPSS for research purpose and enhanced the familiarity of using
spreadsheet.c
c
c
c
c
c
c
cc

Investment in Banking

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Investment in Banking

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c

The chief characteristics of investment are explained as follows-

 c All investments are characterized by the expectation of a return. In fact,

!"#c $%c&' cIt refers to the buying capacity of investment in market.

Thus, these are the important of characterstics of investment.

á +c  c  c

Investment process involves a series of activities leading to purchase of securities or

i.c Investment Policy:

á ,c*-  cc  c

Jbjectives of investment are as under:-

c .$c $c !/' It means the investment should be in assets so that

á 0c  c    c

Investment generally involves commitment of funds in two types of assets:

á 0 ác  c  :

2. Deposits in banks and non banking companies

3. Post office deposits and certificates

4. Life insurance policies

5. Provident fund schemes

7. Mutual fund schemes

/$c%"c$((!'c* cA safe, liquid, and convenient investment option,

 c  c   c

Insurance companies offer many investment schemes to investors. These schemes

Government and semi-government bodies such as the public sector undertakings

These are traditional investments and it is more in India. It includes investment in

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In investments, it is critical to distinguish between an expected return (the anticipated

Risk is explained theoretically as the fluctuation in returns from a security. A security

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 In India, increase in working population, larger family income and consequent

 Provision of tax incentives in respect of investments in specified channels provided

 Availability of large and attractive investment alternatives developed in India

 Increase in investment related publicity in India

 Ability to invest to get income and capital gains etc.

5c $c #c$ccc

Supply Liquidity is controlled by the Reserve Bank of India

Demand India is a growing economy and demand for credit is high

Barriers to entry Licensing requirement, investment in technology and

Bargaining High during periods of tight liquidity. Trade unions in

Bargaining For good creditworthy borrowers bargaining power is high

B S Bodla and Richer Verma (2007) in their study on µ(c c

R K ppal and Rimpi Kaur (2006) in their study on µ !!ccc"c $3&#c

Dr. N Sundaram et al (2008) in their study on µ !!c$c!"'c$((!'c

Dr. A Ramachandran and N Kavitha (2008) in their study on µ!'c

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Jbjectivec2:cTo understand the significance given by investors to those factors and to

Preference to Banking Stocks

In Pearson chi-square test of independence at 5% level of significance, it is proven that

á>c.(c/"'$$/"ccc$'! c Weights Response

Jbjectivec2:cTo understand the significance given by investors to those factors and to

Regulatory Business Monetary Interest Fiscal

The limitations of the study are as follows

THIS SPACE IS LEFT INTENTIJNALLY

This particular chapter provides background to factors influencing Investment

This particular chapter includes literature review, statement of the problem,

"/c , c C!$c '!#c .(c !$c c *#c $!3 c

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To conclude, Indian economy is one which is not as much affected as other

THIS SPACE IS LEFT INTENTIJNALLY

c Promoting capital formation

c Early phase from 1786 to 1969 of Indian Banks (Phase I)

c 1949: Enactment of Banking Regulation Act.

Phase III ( Post-1991)

c All investments are characterized by the expectation of a return. In fact,

!"#c $%c&' cIt refers to the buying capacity of investment in market.

á +c c c

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c .$c $c !/' It means the investment should be in assets so that

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/$c%"c$((!'c* cA safe, liquid, and convenient investment option,

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á 4c cc5c6c c*cc c c

á 7c c cc cc

In India, increase in working population, larger family income and consequent

Provision of tax incentives in respect of investments in specified channels provided

Availability of large and attractive investment alternatives developed in India

Increase in investment related publicity in India

Ability to invest to get income and capital gains etc.

5c $c #c$ccc

B S Bodla and Richer Verma (2007) in their study on µ(c c

R K ppal and Rimpi Kaur (2006) in their study on µ !!ccc"c $3&#c

Dr. N Sundaram et al (2008) in their study on µ !!c$c!"'c$((!'c

Dr. A Ramachandran and N Kavitha (2008) in their study on µ!'c

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á>c.(c/"'$$/"ccc$'! c Weights Response

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c Promoting capital formation

c Early phase from 1786 to 1969 of Indian Banks (Phase I)

c 1949: Enactment of Banking Regulation Act.

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c Slowdown in credit growth

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