27864828 Final Project Report on CAMELS Model

TOLANI INSTITUTE OF

“RATING THE PERFORMANCE OF THE BANK

THROUGH CAMELS MODEL

A PROJECT REPORT SUBMITTED BY

In partial fulfillment of the requirements of

Tolani I

Post

TOLANI INSTITUTE OF MANAGEMENT STUDIES

Rating The Performance of the Bank through CAMELS Model



THROUGH CAMELS MODEL


RAVI MAJITHIYA (08085)

AMIN PATTANI (08100)

BATCH – 2008-2010

TO,

Prof. Hitendra Lachhwani

partial fulfillment of the requirements of

Institute of Management Studies

For the award of the degree of

ost Graduate Diploma in Management

TOLANI INSTITUTE OF MANAGEMENT STUDIESADIPUR – 370205 March - 2010


MANAGEMENT STUDIES


THROUGH CAMELS MODEL”


partial fulfillment of the requirements of

tudies, Adipur

For the award of the degree of

anagement




ACKNOWLEDGMENT

Words are the dress of thoughts, appreciating and acknowledging those, who are

responsible for the successful completion of the project.

Our sincerity gratitude goes to Prof. Hitendra Lachhwani who assigned us responsibility

to work on this project and provided us all the help, guidance and encouragement to

complete this project.

The encouragement and guidance given by Prof. Hitendra Lachhwani have made this a

personally rewarding experience. We thank him for his support and inspiration, without

which, understanding the details of the project would have been exponentially difficult.

With Sincere Thanks,

Ravi Majithiya

Amin Pattani



DECLARATION

We hereby declare that this project work entitled to “Rating the Performance of the

Banks through CAMELS Model” for banking institutions is our work, carried out under

the guidance of our college guide, Prof. Hitendra Lachhwani. Our report neither fully nor

partially has ever been submitted for award of any other degree to either this college or any

other college.

Signature …........………………… Ravi Majithiya (08085)

Date: …………………….. Place: ………………………

…………………………. Amin Pattani (08100)



PREFACE

We know that final the project is for the development and enhancement of the knowledge in

particular field. It can never be possible to make a mark in today’s competitive era only

with theoretical knowledge when industries are developing at global level, practical

knowledge of administration and management of business is very important. Hence,

practical study is of great importance to PGDM student.

With a view to expand the boundaries of thinking, we have done 4th SEM FINAL

PROJECT at three banks i.e. AXIS bank, Gandhidham Co-operative Bank and Bank of

India. We have made deliberate efforts to collect the required information and fulfill project

objectives.



EXECUTIVE SUMMARY

In today’s scenario, the banking sector is one of the fastest growing sector and a lot of funds

are invested in Banks. Also today’s banking system is becoming more complex. So, we

thought of evaluating the performance of the banks. There are so many models of

evaluating the performance of the banks, but we have chosen the CAMELS Model to

evaluate the performance of the banks. We have read a lot of books and found it the best

model because it measures the performance of the banks from each parameter i.e. Capital,

Assets, Management, Earnings and Liquidity

After deciding the model, we have chosen three banks from the three different sectors, i.e.

AXIS Bank from Private Sector, Gandhidham Co-operative Bank from co-operative banks

and Bank of India from the public sector. Then we have collected annual reports of the

consecutive five years i.e. 2004-05 to 2008-09 of all the banks. And we have calculated

ratios for all the banks and interpreted them.

After that we have given weightage to each parameter of the CAMELS

Model. According to their importance and our understandings, we have allocated weightage

to the each ratios of the each parameter. From the weighted results of each ratio, we have

given marks on the bases of the performance of the bank. And after addition of all the

marks, we have given the rank 1, 2 and 3 to the banks.

As per the whole evaluation, we gave 1st rank to AXIS Bank, 2nd rank to Bank of India and

3rd rank to Gandhidham Co-operative Bank.



CONTENTS

Particulars Page No.

Chapter – 1 INTRODUCTION OF BANKING SECTOR 10

1.1) The Bank 11

1.2) The Origin and Use of Banks 11

1.3) Banking Reform 12

1.4) BASEL – II Accord 14

Chapter – 2 INTRODUCTION TO THE BANKS UNDER THE STUDY 18

2.1) AXIS Bank 19

2.2) Bank of India 21

2.3) Gandhidham Co-operative Bank 23

Chapter – 3 CAMELS FRAMEWORK 25

3.1) C - Capital Adequacy 26

3.2) A - Asset Quality 28

3.3) M - Management 30

3.4) E - Earning 31

3.5) L - Liquidity 34

3.6) S - Sensitivity to Market Risk 36

Chapter – 4 LITRATURE REVIEW 39

Chapter – 5 OBJECTIVE & METHODOLOGY 43

5.1) Objective of the Study 43

5.2) Methodology Adopted 45

5.3) Limitations 47

Chapter – 6 DATA INTERPRETATION AND ANALYSIS 48

6.1) Data Interpretation 49

6.2) Analysis 82

Chapter – 7 CONCLUSION, SUGGESTIONS AND RECOMMENDATION

89

7.1) Conclusion 91

7.2) Suggestions and Recommendation 92

BIBLIOGRAPHY 93

ANNEXURE 94



LIST OF TABLES:


TABLE – 1) Capital Risk Adequacy Ratio 49

TABLE – 2) Debt Equity Ratio 51

TABLE – 3) Total Advance to Total Asset Ratio 52

TABLE – 4) Government Securities to Total Asset Ratio 54

TABLE – 5) Gross NPA to Total Loan 56

TABLE – 6) Net NPA to Total Loan 58

TABLE – 7) Total Advance to Total Deposits 60

TABLE – 8) Business per Employee 62

TABLE – 9) Profit per Employee 64

TABLE – 10) Dividend Payout Ratio 65

TABLE – 11) Return on Asset 66

TABLE – 12) Operating Profit to Average Working Fund 67

TABLE – 13) Net Profit to Average Asset 68

TABLE – 14) Interest Income to Total Income 69

TABLE – 15) Other Income to Total Income 71

TABLE – 16) Liquid Asset to Total Asset 73

TABLE – 17) Government Security to Total Security 75

TABLE – 18) Approved Security to Total Security 77

TABLE – 19) Liquidity Asset to Demand Deposit 79

TABLE – 20) Liquidity Asset to Total Deposit 81

TABLE - 21) Component Weightage 82

TABLE – 22) Ratio Wise Weightage 83

TABLE – 23) Capital Adequacy (Frequency) 84

TABLE – 24) Asset Quality (Frequency) 84

TABLE – 25) Management Quality (Frequency) 84

TABLE – 26) Earning Quality (Frequency) 85

TABLE – 27) Liquidity (Frequency) 85

TABLE – 28) Capital Adequacy (Marks) 86

TABLE – 29) Asset Quality (Marks) 86

TABLE – 30) Management Quality (Marks) 87

TABLE – 31) Earning Quality (Marks) 87



TABLE – 32) Liquidity (Marks) 88

TABLE – 33) Overall Ranking 88

LIST OF CHARTS:


CHART – 1) Capital Risk Adequacy Ratio 49

CHART – 2) Debt Equity Ratio 51

CHART – 3) Total Advance to Total Asset Ratio 52

CHART – 4) Government Securities to Total Asset Ratio 54

CHART – 5) Gross NPA to Total Loan 56

CHART – 6) Net NPA to Total Loan 58

CHART – 7) Total Advance to Total Deposits 60

CHART – 8) Business per Employee 62

CHART – 9) Profit per Employee 64

CHART – 10) Dividend Payout Ratio 65

CHART – 11) Return on Asset 66

CHART – 12) Operating Profit to Average Working Fund 67

CHART – 13) Net Profit to Average Asset 68

CHART – 14) Interest Income to Total Income 69

CHART – 15) Other Income to Total Income 71

CHART – 16) Liquid Asset to Total Asset 73

CHART – 17) Government Security to Total Security 75

CHART – 18) Approved Security to Total Security 77

CHART – 19) Liquidity Asset to Demand Deposit 79

CHART – 20) Liquidity Asset to Total Deposit 81



ABBREVIATIONS

BOI – Bank of India

CAMELS – Capital Adequacy, Asset Quality, Management, Earning, Liquidity, Sensitivity to Market Risk

CRAR – Capital Risk Adequacy Ratio

CRR – Cash Reserve Ratio

GCB – Gandhidham Co-Operative Bank

GIC – General Insurance Corporation

G-Sec – Government Securities

IRB – Internal Rating Based Approach

LIC – Life Insurance Corporation

NII – Net Interest Income

NIM – Net Interest Margin

NPA – Non Performing Asset

RBI – Reserve Bank of India

ROA – Return on Asset

SLR – Statutory Liquidity Ratio

VaR – Value at Risk

YoY – Year on Year



Chapter – 1

INTRODUCTION OF BANKING SECTOR



1.1) The Bank

The word bank means an organization where people and business can invest or borrow

money; change it to foreign currency etc. According to Halsbury “A Banker is an

individual, Partnership or Corporation whose sole pre-dominant business is banking, that is

the receipt of money on current or deposit account, and the payment of cheque drawn and

the collection of cheque paid in by a customer.’’

1.2) The Origin and Use of Banks

The Word ‘Bank’ is derived from the Italian word ‘Banko’ signifying a bench, which was

erected in the market-place, where it was customary to exchange money. The Lombard

Jews were the first to practice this exchange business, the first bench having been

established in Italy A.D. 808. Some authorities assert that the Lombard merchants

commenced the business of money-dealing, employing bills of exchange as remittances,

about the beginning of the thirteenth century.

About the middle of the twelfth century it became evident, as the advantage of coined

money was gradually acknowledged, that there must be some controlling power, some

corporation which would undertake to keep the coins that were to bear the royal stamp up to

a certain standard of value; as, independently of the ‘sweating’ which invention may place

to the credit of the ingenuity of the Lombard merchants- all coins will, by wear or abrasion,

become thinner, and consequently less valuable; and it is of the last importance, not only for

the credit of a country, but for the easier regulation of commercial transactions, that the

metallic currency be kept as nearly as possible up to the legal standard. Much unnecessary

trouble and annoyance has been caused formerly by negligence in this respect. The gradual

merging of the business of a goldsmith into a bank appears to have been the way in which

banking, as we now understand the term, was introduced into England; and it was not until

long after the establishment of banks in other countries-for state purposes, the regulation of

the coinage, etc. that any large or similar institution was introduced into England. It is only

within the last twenty years that printed cheques have been in use in that establishment.

First commercial bank was Bank of Venice which was established in 1157 in Italy.



1.3) THE BANKING REFORMS

In 1991, the Indian economy went through a process of economic liberalization, which was

followed up by the initiation of fundamental reforms in the banking sector in 1992. The

banking reform package was based on the recommendations proposed by the Narasimham

Committee Report (1991) that advocated a move to a more market oriented banking system,

which would operate in an environment of prudential regulation and transparent accounting.

One of the primary motives behind this drive was to introduce an element of market

discipline into the regulatory process that would reinforce the supervisory effort of the

Reserve Bank of India (RBI). Market discipline, especially in the financial liberalization

phase, reinforces regulatory and supervisory efforts and provides a strong incentive to banks

to conduct their business in a prudent and efficient manner and to maintain adequate capital

as a cushion against risk exposures. Recognizing that the success of economic reforms was

contingent on the success of financial sector reform as well, the government initiated a

fundamental banking sector reform package in 1992.

Banking sector, the world over, is known for the adoption of multidimensional strategies

from time to time with varying degrees of success. Banks are very important for the smooth

functioning of financial markets as they serve as repositories of vital financial information

and can potentially alleviate the problems created by information asymmetries. From a

central bank’s perspective, such high-quality disclosures help the early detection of

problems faced by banks in the market and reduce the severity of market disruptions.

Consequently, the RBI as part and parcel of the financial sector deregulation, attempted to

enhance the transparency of the annual reports of Indian banks by, among other things,

introducing stricter income recognition and asset classification rules, enhancing the capital

adequacy norms, and by requiring a number of additional disclosures sought by investors to

make better cash flow and risk assessments.

During the pre economic reforms period, commercial banks & development financial

institutions were functioning distinctly, the former specializing in short & medium term

financing, while the latter on long term lending & project financing. Commercial banks

were accessing short term low cost funds thru savings investments like current accounts,

savings bank accounts & short duration fixed deposits, besides collection float.

Development Financial Institutions (DFIs) on the other hand, were essentially depending on



budget allocations for long term lending at a concessionary rate of interest. The scenario has

changed radically during the post reforms period, with the resolve of the government not to

fund the DFIs through budget allocations. DFIs like IDBI, IFCI & ICICI had posted dismal

financial results. Infect, their very viability has become a question mark. Now, they have

taken the route of reverse merger with IDBI bank & ICICI bank thus converting them into

the universal banking system.



1.4) BASEL - II ACCORD

Bank capital framework sponsored by the world's central banks designed to promote

uniformity, make regulatory capital more risk sensitive, and promote enhanced risk

management among large, internationally active banking organizations. The International

Capital Accord, as it is called, will be fully effective by January 2008 for banks active in

international markets. Other banks can choose to "opt in," or they can continue to follow the

minimum capital guidelines in the original Basel Accord, finalized in 1988. The revised

accord (Basel II) completely overhauls the 1988 Basel Accord and is based on three

mutually supporting concepts, or "pillars," of capital adequacy. The first of these pillars is

an explicitly defined regulatory capital requirement, a minimum capital-to-asset ratio equal

to at least 8% of risk-weighted assets. Second, bank supervisory agencies, such as the

Comptroller of the Currency, have authority to adjust capital levels for individual banks

above the 9% minimum when necessary. The third supporting pillar calls upon market

discipline to supplement reviews by banking agencies.

Basel II is the second of the Basel Accords, which are recommendations on banking laws

and regulations issued by the Basel Committee on Banking Supervision. The purpose of

Basel II, which was initially published in June 2004, is to create an international standard

that banking regulators can use when creating regulations about how much capital banks

need to put aside to guard against the types of financial and operational risks banks face.

Advocates of Basel II believe that such an international standard can help protect the

international financial system from the types of problems that might arise should a major

bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by

setting up rigorous risk and capital management requirements designed to ensure that a

bank holds capital reserves appropriate to the risk the bank exposes itself to through its

lending and investment practices. Generally speaking, these rules mean that the greater risk

to which the bank is exposed, the greater the amount of capital the bank needs to hold to

safeguard its solvency and overall economic stability.



The final version aims at:

1. Ensuring that capital allocation is more risk sensitive;

2. Separating operational risk from credit risk, and quantifying both;

3. Attempting to align economic and regulatory capital more closely to reduce the scope

for regulatory arbitrage.

While the final accord has largely addressed the regulatory arbitrage issue, there are still

areas where regulatory capital requirements will diverge from the economic.

Basel II has largely left unchanged the question of how to actually define bank capital,

which diverges from accounting equity in important respects. The Basel I definition, as

modified up to the present, remains in place.

The Accord in operation

Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressing risk),

(2) supervisory review and (3) market discipline – to promote greater stability in the

financial system.

The Basel I accord dealt with only parts of each of these pillars. For example: with respect

to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while

market risk was an afterthought; operational risk was not dealt with at all.

The First Pillar

The first pillar deals with maintenance of regulatory capital calculated for three major

components of risk that a bank faces: credit risk, operational risk and market risk. Other

risks are not considered fully quantifiable at this stage.

The credit risk component can be calculated in three different ways of varying degree of

sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB

stands for "Internal Rating-Based Approach".

For operational risk, there are three different approaches - basic indicator approach,

standardized approach and advanced measurement approach. For market risk the preferred

approach is VaR (value at risk).

TOLANI INSTITUTE OF

As the Basel II recommendations are phased in by the banking industry it will move from

standardized requirements to more refined and specific requirements that have been

developed for each risk category by each individual bank. The upside for banks that do

develop their own bespoke risk measurement systems is that they will be rewarded with

potentially lower risk capital requirements. In future there will be closer links between the

concepts of economic profit and regulatory capital.

Credit Risk can be calculated by usin

1. Standardized Approach

2. Foundation IRB (Internal Ratings Based) Approach

3. Advanced IRB Approach

Credit Risk

More risk sensitivity

Operating Risk

New

Trading Market Risk

Unchanged

Minimum Capital

PILLAR -



recommendations are phased in by the banking industry it will move from

ed requirements to more refined and specific requirements that have been


own bespoke risk measurement systems is that they will be rewarded with


concepts of economic profit and regulatory capital.

Credit Risk can be calculated by using one of three approaches..

1. Standardized Approach

2. Foundation IRB (Internal Ratings Based) Approach

3. Advanced IRB Approach

NEW ACCORD

More risk sensitivity

Trading Market Risk

Minimum

I

Supervisory Assessment of Bank

Risk Management Policies and Practices

Economic Capital Process

Canresult in additional capital requirments

Supervisory Review

PILLAR - II

Mandates increased

disclosure of bank's risk information.

Disclosure

PILLAR


MANAGEMENT STUDIES

recommendations are phased in by the banking industry it will move from

ed requirements to more refined and specific requirements that have been


own bespoke risk measurement systems is that they will be rewarded with


Mandates increased minimum public

disclosure of bank's risk information.

Market Disclosure

PILLAR - III



The standardized approach sets out specific risk weights for certain types of credit risk. The

standard risk weight categories are used under Basel 1 and are 0% for short term

government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages and

100% weighting on commercial loans. A new 150% rating comes in for borrowers with

poor credit ratings. The minimum capital requirement (the percentage of risk weighted

assets to be held as capital) has remains at 8%.

For those Banks that decide to adopt the standardized ratings approach they will be forced

to rely on the ratings generated by external agencies. Certain Banks are developing the IRB

approach as a result.

The Second Pillar

The second pillar deals with the regulatory response to the first pillar, giving regulators

much improved 'tools' over those available to them under Basel I. It also provides a

framework for dealing with all the other risks a bank may face, such as systemic risk,

pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk,

which the accord combines under the title of residual risk. It gives banks a power to review

their risk management system.

The Third Pillar

The third pillar greatly increases the disclosures that the bank must make. This is designed

to allow the market to have a better picture of the overall risk position of the bank and to

allow the counterparties of the bank to price and deal appropriately. The new Basel Accord

has its foundation on three mutually reinforcing pillars that allow banks and bank

supervisors to evaluate properly the various risks that banks face and realign regulatory

capital more closely with underlying risks. The first pillar is compatible with the credit risk,

market risk and operational risk. The regulatory capital will be focused on these three risks.

The second pillar gives the bank responsibility to exercise the best ways to manage the risk

specific to that bank. Concurrently, it also casts responsibility on the supervisors to review

and validate banks’ risk measurement models. The third pillar on market discipline is used

to leverage the influence that other market players can bring. This is aimed at improving the

transparency in banks and improves reporting.



Chapter – 2

INTRODUCTION OF THE BANKS

UNDER THE STUDY



2.1) AXIS Bank

Axis Bank was the first of the new private banks to have begun operations in 1994, after the

Government of India allowed new private banks to be established. The Bank was promoted

jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I),

Life Insurance Corporation of India (LIC) and General Insurance Corporation of India

(GIC) and other four PSU insurance companies, i.e. National Insurance Company Ltd., The

New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United

India Insurance Company Ltd.

The Bank today is capitalized to the extent of Rs. 401.95 crore with the public holding

(other than promoters) at 53.23%.

The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai.

The Bank has a very wide network of more than 905 branches and Extension Counters (as

on 30th September 2009). The Bank has a network of over 3894 ATMs (as on 30th

September 2009) providing 24 hrs a day banking convenience to its customers. This is one

of the largest ATM networks in the country.

The Bank has strengths in both retail and corporate banking and is committed to adopting

the best industry practices internationally in order to achieve excellence.

Board of Directors

The members of the Board are:

Smt. Shikha Sharma Managing Director & CEO

Shri M. M. Agrawal Deputy Managing Director (Designate)

Shri N.C. Singhal Director

Shri J.R. Varma Director

Dr. R.H. Patil Director

Smt. Rama Bijapurkar Director

Shri R.B.L. Vaish Director

Shri M.V. Subbiah Director

Shri K. N. Prithviraj Director

Shri V. R. Kaundinya Director



Mission

Ø Customer Service and Product Innovation tuned to diverse needs of individual and

corporate clientele.

Ø Continuous technology up gradation while maintaining human values.

Ø Progressive globalization and achieving international standards.

Ø Efficiency and effectiveness built on ethical practices.

Core Values

Ø Customer Satisfaction through providing quality service effectively and efficiently.

Ø "Smile, it enhances your face value" is a service quality stressed on Periodic Customer

Service.

Ø Audits Maximization of Stakeholder value Success through Teamwork, Integrity and

People.



2.2) BANK OF INDIA

Bank of India was founded on 7th September, 1906 by a group of eminent businessmen

from Mumbai. The Bank was under private ownership and control till July 1969 when it

was nationalized along with 13 other banks.

Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50

employees, the Bank has made a rapid growth over the years and blossomed into a mighty

institution with a strong national presence and sizable international operations. In business

volume, the Bank occupies a premier position among the nationalised banks.

The Bank has 3101 branches in India spread over all states/ union territories including 141

specialized branches. These branches are controlled through 48 Zonal Offices . There are 29

branches/ offices (including three representative offices) abroad.

The Bank came out with its maiden public issue in 1997 and follow on Qualified

Institutions Placement in February 2008. . Total number of shareholders as on 30/09/2009 is

Rs. 2,15,790.

While firmly adhering to a policy of prudence and caution, the Bank has been in the

forefront of introducing various innovative services and systems. Business has been

conducted with the successful blend of traditional values and ethics and the most modern

infrastructure. The Bank has been the first among the nationalized banks to establish a fully

computerized branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in

1989. The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction

of the Health Code System in 1982, for evaluating/ rating its credit portfolio.

The Bank's association with the capital market goes back to 1921 when it entered into an

agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It

is an association that has blossomed into a joint venture with BSE, called the BOI

Shareholding Ltd. to extend depository services to the stock broking community. Bank of

India was the first Indian Bank to open a branch outside the country, at London, in 1946,

and also the first to open a branch in Europe, Paris in 1974. The Bank has sizable presence

abroad, with a network of 29 branches (including five representative offices) at key banking

and financial centers viz. London, Newyork, Paris, Tokyo, Hong-Kong and Singapore. The

international business accounts for around 17.82% of Bank's total business.



Mission

"To provide superior, proactive banking services to niche markets globally, while providing

cost-effective, responsive services to others in our role as a development bank, and in so

doing, meet the requirements of our stakeholders".

Vision

"To become the bank of choice for corporate, medium businesses and up market retail

customers and to provide cost effective developmental banking for small business, mass

market and rural markets"

Board of Directors:

The members of the Board are:

Shri. Alok Kumar Misra Chairman & Managing Director

Shri B. A. Prabhakar Executive Director

Shri M. Narendra Executive Director

Shri Tarun Bajaj Govt. Nominee Director

Shri A.V.Sardesai RBI Nominee Director

Shri A.K.Motayed Officer Employee Director

Shri K. S. Sampath Part-Time Non-Official Director

Shri Indresh Vikram Singh Part-Time Non-Official Director

Shri M.N. Gopinath Shareholder Director

Shri Prakash P. Mallya, Shareholder Director

Shri P.M. Sirajuddin Shareholder Director

Dr. Shantaben Chavda Part-time Non-Official Director



2.3) THE GANDHIDHAM CO-OPERATIVE BANK LTD.

“The oldest Bank at Gandhidham Established by the Founder of the city for

Small But ultimately made Big by you all.”

It’s Milestones:-

§ Oldest bank in Gandhidham Township established in 1951.

§ Fully Computerized and Centrally Air Conditioned premises.

§ Divided Track Record: -15% continuously since 15 years (Max. permissible) Audit

Classification “A” since 15 years.

§ Total Advance Rs.72.79 Crores.

§ Share Capital Rs.4.94 Crores.

§ Profit before Income Tax Rs.2.33 Crores.

§ Total Deposit Rs.125.63 Crores.

§ Working Capital Rs. 4.94 Crores.

§ Reserves and Surplus Rs. 24.58 Crores.

Facilities Offered to The Valued Share Holders and Depositors: -

§ Prizes/Scholarship to Children of Shareholders.

§ Medical Facility to Shareholders.

§ A lump sum grant of Rs. 10,000/- on unfortunate death of a Shareholder.

§ In case of unfortunate death of Shareholder in Accident, a lump sum grant of

Rs.50,000/-

§ Personalized service and attractive Saving Scheme.

§ Safe Deposit Locker Facility at Head Office and Branch Office.

§ Special Interest Rates for Senior Citizens.

§ D.D. Facility for locations all over India.

§ Facility of collection of Electricity (PGVCL) Bills & Modern School Fees.

§ Deposit up to Rs.1,00,000/- is insured with the Deposit Insurance and Credit Guarantee

Corporation.

§ Franking Machine facility available at Gandhidham Branch for payment of Stamp Duty.



0% Interest Loan under Scheme – “Flood IT KG TO PG”

To contribute towards computer literacy, Gujarat Urban Co-operative Bank federation launched 0 % Interest loan scheme for purchase of Computers/Laptops on discounted rate under FLOOD IT KG TO PG and the honorable chief minister Narendra Modi on 10th Feb. 2009 inaugurated the same. This facility is granted to the banks shareholders as well as customers for purchase of computer/laptops for their children’s.

Welfare Activities and Programmed for the Valued Shareholders

§ Under the Benevolent Programmed of welfare of members, the bank had introduced a

scheme, according to which in the event of the death of the shareholders, who had

remained continuously the member of the bank for the last four years, the family of

deceased will be paid a lump sum grant of Rs. 10,000 by the Bank and Rs 50,000 will

be granted in the case of an accidental death. During the year, 68 shareholders have been

granted the benefit under above scheme and the total expenditure incurred during the

year was Rs. 8,00,000.

§ The bank has increased a number of medical centers to enable member to avail services

from their nearby places in case of Nil. The total expenditure incurred during the year

on the medical aid was Rs. 8,30,000.

§ It has been bank’s endeavor to encourage the children of Shareholders in their academic

pursuits. In this context the cash prizes are awarded every year to the meritorious

students who secure highest marks in SSC and higher examination. The scheme of

payment of scholarship to the excel student has also been liberalized. Accordingly, the

children of shareholders studying after 12th up to graduate anywhere in India are also

entitled to get the benefit of scholarship.

§ As usual, this year too, the bank has significantly contributed and encouraged social,

religious and other activities in the form of donation, prizes, and advertisement etc. for

the benefit of general public of Adipur/Gandhidham Township.

Technology Development

Due to up-gradation of software of the computers of the Banks it has been possible to link

both Adipur/Gandhidham branch online (Core Banking Solution). After this up-gradation,

the customers will be able to transact at any of the branches for account maintain whether

HO or Branch which leads to the saving of Time and Energy of all valued customers,

shareholders and Depositors.



Chapter – 3

CAMELS FRAMEWORK



CAMELS FRAMEWORK

During an on-site bank exam, supervisors gather private information, such as details on

problem loans, with which to evaluate a bank's financial condition and to monitor its

compliance with laws and regulatory policies. A key product of such an exam is a

supervisory rating of the bank's overall condition, commonly referred to as a CAMELS

rating. The acronym "CAMEL" refers to the five components of a bank's condition that are

assessed: Capital adequacy, Asset quality, Management, Earnings, and Liquidity. A sixth

component, a bank's Sensitivity to market risk was added in 1997; hence the acronym was

changed to CAMELS.

CAMELS is basically a ratio-based model for evaluating the performance of banks. Various

ratios forming this model are explained below:

3.1) C- Capital Adequacy:

Capital base of financial institutions facilitates depositors in forming their risk perception

about the institutions. Also, it is the key parameter for financial managers to maintain

adequate levels of capitalization. Moreover, besides absorbing unanticipated shocks, it

signals that the institution will continue to honor its obligations. The most widely used

indicator of capital adequacy is capital to risk-weighted assets ratio (CRWA). According to

Bank Supervision Regulation Committee (The Basle Committee) of Bank for International

Settlements, a minimum 9 percent CRWA is required.

Capital adequacy ultimately determines how well financial institutions can cope with

shocks to their balance sheets. Thus, it is useful to track capital-adequacy ratios that take

into account the most important financial risks—foreign exchange, credit, and interest rate

risks—by assigning risk weightings to the institution’s assets.

A sound capital base strengthens confidence of depositors. This ratio is used to protect

depositors and promote the stability and efficiency of financial systems around the world.

The following ratios measure capital adequacy:



Ø Capital Risk Adequacy Ratio:

CRAR is a ratio of Capital Fund to Risk Weighted Assets. Reserve Bank of India prescribes

Banks to maintain a minimum Capital to risk-weighted Assets Ratio (CRAR) of 9 % with

regard to credit risk, market risk and operational risk on an ongoing basis, as against 8 %

prescribed in Basel documents.

Total capital includes tier-I capital and Tier-II capital. Tier-I capital includes paid up equity

capital, free reserves, intangible assets etc. Tier-II capital includes long term unsecured

loans, loss reserves, hybrid debt capital instruments etc. The higher the CRAR, the stronger

is considered a bank, as it ensures high safety against bankruptcy.

CRAR = Capital/ Total Risk Weighted Credit Exposure

Ø Debt Equity Ratio:

This ratio indicates the degree of leverage of a bank. It indicates how much of the bank

business is financed through debt and how much through equity. This is calculated as the

proportion of total asset liability to net worth. ‘Outside liability’ includes total borrowing,

deposits and other liabilities. ‘Net worth’ includes equity capital and reserve and surplus.

Higher the ratio indicates less protection for the creditors and depositors in the banking

system.

Borrowings/ (Share Capital + reserves)

Ø Total Advance to Total Asset Ratio:

This is the ratio of the total advanced to total asset. This ratio indicates banks

aggressiveness in lending which ultimately results in better profitability. Higher ratio of

advances of bank deposits (assets) is preferred to a lower one. Total advances also include

receivables. The value of total assets is excluding the revolution of all the assets.

Total Advances/ Total Asset



Ø Government Securities to Total Investments:

The percentage of investment in government securities to total investment is a very

important indicator, which shows the risk taking ability of the bank. It indicates a bank’s

strategy as being high profit high risk or low profit low risk. It also gives a view as to the

availability of alternative investment opportunities. Government securities are generally

considered as the most safe debt instrument, which, as a result, carries the lowest return.

Since government securities are risk free, the higher the government security to investment

ratio, the lower the risk involved in a bank’s investments.

Government Securities/ Total Investment

3.2) A – Asset Quality:

Asset quality determines the healthiness of financial institutions against loss of value in the

assets. The weakening value of assets, being prime source of banking problems, directly

pour into other areas, as losses are eventually written-off against capital, which ultimately

expose the earning capacity of the institution. With this backdrop, the asset quality is

gauged in relation to the level and severity of non-performing assets, adequacy of

provisions, recoveries, distribution of assets etc. Popular indicators include nonperforming

loans to advances, loan default to total advances, and recoveries to loan default ratios.

The solvency of financial institutions typically is at risk when their assets become impaired,

so it is important to monitor indicators of the quality of their assets in terms of overexposure

to specific risks, trends in nonperforming loans, and the health and profitability of bank

borrowers— especially the corporate sector. Share of bank assets in the aggregate financial

sector assets: In most emerging markets, banking sector assets comprise well over 80 per

cent of total financial sector assets, whereas these figures are much lower in the developed

economies. Furthermore, deposits as a share of total bank liabilities have declined since

1990 in many developed countries, while in developing countries public deposits continue

to be dominant in banks. In India, the share of banking assets in total financial sector assets

is around 75 per cent, as of end-March 2008. There is, no doubt, merit in recognizing the

importance of diversification in the institutional and instrument-specific aspects of financial

intermediation in the interests of wider choice, competition and stability. However, the

dominant role of banks in financial intermediation in emerging economies and particularly



in India will continue in the medium-term; and the banks will continue to be “special” for a

long time. In this regard, it is useful to emphasize the dominance of banks in the developing

countries in promoting non-bank financial intermediaries and services including in

development of debt-markets. Even where role of banks is apparently diminishing in

emerging markets, substantively, they continue to play a leading role in non-banking

financing activities, including the development of financial markets.

One of the indicators for asset quality is the ratio of non-performing loans to total loans.

Higher ratio is indicative of poor credit decision-making.

NPA: Non-Performing Assets:

Advances are classified into performing and non-performing advances (NPAs) as per RBI

guidelines. NPAs are further classified into sub-standard, doubtful and loss assets based on

the criteria stipulated by RBI. An asset, including a leased asset, becomes nonperforming

when it ceases to generate income for the Bank.

An NPA is a loan or an advance where:

1. Interest and/or installment of principal remains overdue for a period of more than 90

days in respect of a term loan;

2. The account remains "out-of-order'' in respect of an Overdraft or Cash Credit

(OD/CC);

3. The bill remains overdue for a period of more than 90 days in case of bills purchased

and discounted;

4. A loan granted for short duration crops will be treated as an NPA if the installments

of principal or interest thereon remain overdue for two crop seasons; and

5. A loan granted for long duration crops will be treated as an NPA if the installments

of principal or interest thereon remain overdue for one crop season.

The Bank classifies an account as an NPA only if the interest imposed during any quarter is

not fully repaid within 90 days from the end of the relevant quarter. This is a key to the

stability of the banking sector. There should be no hesitation in stating that Indian banks

have done a remarkable job in containment of non-performing loans (NPL) considering the

overhang issues and overall difficult environment.



The following ratios are necessary to assess the asset quality.

Ø Gross NPA ratio:

This ratio is used to check whether the bank's gross NPAs are increasing quarter on quarter

or year on year. If it is, indicating that the bank is adding a fresh stock of bad loans. It

would mean the bank is either not exercising enough caution when offering loans or is too

lax in terms of following up with borrowers on timely repayments.

Gross NPA/ Total Loan

Ø Net NPA ratio:

Net NPAs reflect the performance of banks. A high level of NPAs suggests high probability

of a large number of credit defaults that affect the profitability and net-worth of banks and

also wear down the value of the asset.

Loans and advances usually represent the largest asset of most of the banks. It monitors the

quality of the banks loan portfolio. The higher the ratio, the higher the credits risk.

Net NPA/ Total Loan

3.3) M – Management:

Management of financial institution is generally evaluated in terms of capital adequacy,

asset quality, earnings and profitability, liquidity and risk sensitivity ratings. In addition,

performance evaluation includes compliance with set norms, ability to plan and react to

changing circumstances, technical competence, leadership and administrative ability.

Sound management is one of the most important factors behind financial institutions’

performance. Indicators of quality of management, however, are primarily applicable to

individual institutions, and cannot be easily aggregated across the sector. Furthermore,

given the qualitative nature of management, it is difficult to judge its soundness just by

looking at financial accounts of the banks.

Nevertheless, total advance to total deposit, business per employee and profit per employee

helps in gauging the management quality of the banking institutions. Several indicators,

however, can jointly serve—as, for instance, efficiency measures do—as an indicator of



management soundness. The ratios used to evaluate management efficiency are described as

under:

Ø Total Advance to Total Deposit Ratio:

This ratio measures the efficiency and ability of the banks management in converting the

deposits available with the banks (excluding other funds like equity capital, etc.) into high

earning advances. Total deposits include demand deposits, saving deposits, term deposit and

deposit of other bank. Total advances also include the receivables.

Total Advance/ Total Deposit

Ø Business per Employee:

Revenue per employee is a measure of how efficiently a particular bank is utilizing its

employees. Ideally, a bank wants the highest business per employee possible, as it denotes

higher productivity. In general, rising revenue per employee is a positive sign that suggests

the bank is finding ways to squeeze more sales/revenues out of each of its employee.

Total Income/ No. of Employees

Ø Profit per Employee:

This ratio shows the surplus earned per employee. It is arrived at by dividing profit after tax

earned by the bank by the total number of employee. The higher the ratio shows good

efficiency of the management.

Profit after Tax/ No. of Employees

3.4) E – Earning & Profitability:

Earnings and profitability, the prime source of increase in capital base, is examined with

regards to interest rate policies and adequacy of provisioning. In addition, it also helps to

support present and future operations of the institutions. The single best indicator used to

gauge earning is the Return on Assets (ROA), which is net income after taxes to total asset

ratio.



Strong earnings and profitability profile of banks reflects the ability to support present and

future operations. More specifically, this determines the capacity to absorb losses, finance

its expansion, pay dividends to its shareholders, and build up an adequate level of capital.

Being front line of defense against erosion of capital base from losses, the need for high

earnings and profitability can hardly be overemphasized. Although different indicators are

used to serve the purpose, the best and most widely used indicator is Return on Assets

(ROA).

However, for in-depth analysis, another indicator Interest Income to Total Income and

Other income to Total Income is also in used. Compared with most other indicators, trends

in profitability can be more difficult to interpret—for instance, unusually high profitability

can reflect excessive risk taking. The following ratios try to assess the quality of income in

terms of income generated by core activity – income from landing operations.

Ø Dividend Payout Ratio:

Dividend payout ratio shows the percentage of profit shared with the shareholders. The

more the ratio will increase the goodwill of the bank in the share market.

Dividend/ Net profit

Ø Return on Asset:

Net profit to total asset indicates the efficiency of the banks in utilizing their assets in

generating profits. A higher ratio indicates the better income generating capacity of the

assets and better efficiency of management in future.

Net Profit/ Total Asset

Ø Operating Profit by Average Working Fund:

This ratio indicates how much a bank can earn from its operations net of the operating

expenses for every rupee spent on working funds. Average working funds are the total

resources (total assets or total liabilities) employed by a bank. It is daily average of total

assets/ liabilities during a year. The higher the ratio, the better it is. This ratio determines the

operating profits generated out of working fund employed. The better utilization of the



funds will result in higher operating profits. Thus, this ratio will indicate how a bank has

employed its working funds in generating profits.

Operating Profit/ Average Working Fund

Ø Net Profit to Average Asset:

Net profit to average asset indicates the efficiency of the banks in utilizing their assets in

generating profits. A higher ratio indicates the better income generating capacity of the

assets and better efficiency of management. It is arrived at by dividing the net profit by

average assets, which is the average of total assets in the current year and previous year.

Thus, this ratio measures the return on assets employed. Higher ratio indicates better

earning potential in the future.

Net Profit/ Average Asset

Ø Interest Income to Total Income:

Interest income is a basic source of revenue for banks. The interest income total income

indicates the ability of the bank in generating income from its lending. In other words, this

ratio measures the income from lending operations as a percentage of the total income

generated by the bank in a year. Interest income includes income on advances, interest on

deposits with the RBI, and dividend income.

Interest Income/ Total Income

Ø Other Income to Total Income:

Fee based income account for a major portion of the bank’s other income. The bank

generates higher fee income through innovative products and adapting the technology for

sustained service levels. The higher ratio indicates increasing proportion of fee-based

income. The ratio is also influenced by gains on government securities, which fluctuates

depending on interest rate movement in the economy.

Other Income/ Total Income



3.5) L – Liquidity:

An adequate liquidity position refers to a situation, where institution can obtain sufficient

funds, either by increasing liabilities or by converting its assets quickly at a reasonable cost.

It is, therefore, generally assessed in terms of overall assets and liability management, as

mismatching gives rise to liquidity risk. Efficient fund management refers to a situation

where a spread between rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is

maintained. The most commonly used tool to evaluate interest rate exposure is the Gap

between RSA and RSL, while liquidity is gauged by liquid to total asset ratio.

Initially solvent financial institutions may be driven toward closure by poor management of

short-term liquidity. Indicators should cover funding sources and capture large maturity

mismatches. The term liquidity is used in various ways, all relating to availability of, access

to, or convertibility into cash. An institution is said to have liquidity if it can easily meet its

needs for cash either because it has cash on hand or can otherwise raise or borrow cash. A

market is said to be liquid if the instruments it trades can easily be bought or sold in

quantity with little impact on market prices. An asset is said to be liquid if the market for

that asset is liquid.

The common theme in all three contexts is cash. A corporation is liquid if it has ready

access to cash. A market is liquid if participants can easily convert positions into cash— or

conversely. An asset is liquid if it can easily be converted to cash.

The liquidity of an institution depends on:

Ø The institution's short-term need for cash;

Ø Cash on hand;

Ø Available lines of credit;

Ø The liquidity of the institution's assets;

Ø The institution's reputation in the marketplace—how willing will counterparty is to

transact trades with or lend to the institution?

The ratios suggested to measure liquidity under CAMELS Model are as follows:



Ø Liquidity Asset to Total Asset:

Liquidity for a bank means the ability to meet its financial obligations as they come

due. Bank lending finances investments in relatively illiquid assets, but it fund its loans

with mostly short term liabilities. Thus one of the main challenges to a bank is ensuring its

own liquidity under all reasonable conditions. Liquid assets include cash in hand, balance

with the RBI, balance with other banks (both in India and abroad), and money at call and

short notice. Total asset include the revaluations of all the assets. The proportion of liquid

asset to total asset indicates the overall liquidity position of the bank.

Liquidity Asset/ Total Asset

Ø Government Securities to Total Asset:

Government Securities are the most liquid and safe investments. This ratio measures the

government securities as a proportion of total assets. Banks invest in government securities

primarily to meet their SLR requirements, which are around 25% of net demand and time

liabilities. This ratio measures the risk involved in the assets hand by a bank.

Government Securities/ Total Asset

Ø Approved Securities to Total Asset:

Approved securities include securities other than government securities. This ratio measures

the Approved Securities as a proportion of Total Assets. Banks invest in approved securities

primarily after meeting their SLR requirements, which are around 25% of net demand and

time liabilities. This ratio measures the risk involved in the assets hand by a bank.

Approved Securities/ Total Asset

Ø Liquidity Asset to Demand Deposit:

This ratio measures the ability of a bank to meet the demand from deposits in a particular

year. Demand deposits offer high liquidity to the depositor and hence banks have to invest

these assets in a highly liquid form.

Liquidity Asset/ demand Deposit



Ø Liquidity Asset to Total Deposit:

This ratio measures the liquidity available to the deposits of a bank. Total deposits include

demand deposits, savings deposits, term deposits and deposits of other financial institutions.

Liquid assets include cash in hand, balance with the RBI, balance with other banks (both in

India and abroad), and money at call and short notice.

Liquidity Asset/ Total Deposit

3.6) S – Sensitivity to Market Risk:

It refers to the risk that changes in market conditions could adversely impact earnings

and/or capital. Market Risk encompasses exposures associated with changes in interest

rates, foreign exchange rates, commodity prices, equity prices, etc. While all of these items

are important, the primary risk in most banks is interest rate risk (IRR), which will be the

focus of this module. The diversified nature of bank operations makes them vulnerable to

various kinds of financial risks. Sensitivity analysis reflects institution’s exposure to interest

rate risk, foreign exchange volatility and equity price risks (these risks are summed in

market risk).

Risk sensitivity is mostly evaluated in terms of management’s ability to monitor and control

market risk. Banks are increasingly involved in diversified operations, all of which are

subject to market risk, particularly in the setting of interest rates and the carrying out of

foreign exchange transactions. In countries that allow banks to make trades in stock markets

or commodity exchanges, there is also a need to monitor indicators of equity and

commodity price risk.

Interest Rate Risk Basics:

In the most simplistic terms, interest rate risk is a balancing act. Banks are trying to balance

the quantity of reprising assets with the quantity of repricing liabilities. For example, when

a bank has more liabilities repricing in a rising rate environment than assets repricing, the

net interest margin (NIM) shrinks. Conversely, if your bank is asset sensitive in a rising

interest rate environment, your NIM will improve because you have more assets repricing at

higher rates.



Liquidity risk is financial risk due to uncertain liquidity. An institution might lose liquidity

if its credit rating falls, it experiences sudden unexpected cash outflows, or some other event

causes counterparties to avoid trading with or lending to the institution. A firm is also

exposed to liquidity risk if markets on which it depends are subject to loss of liquidity.

Liquidity risk tends to compound other risks. If a trading organization has a position in an

illiquid asset, its limited ability to liquidate that position at short notice will compound its

market risk. Suppose a firm has offsetting cash flows with two different counterparties on a

given day. If the counterparty that owes it a payment defaults, the firm will have to raise

cash from other sources to make its payment. Should it be unable to do so, it too we default.

Here, liquidity risk is compounding credit risk.

Accordingly, liquidity risk has to be managed in addition to market, credit and other risks.

Because of its tendency to compound other risks, it is difficult or impossible to isolate

liquidity risk. In all but the most simple of circumstances, comprehensive metrics of

liquidity risk don't exist. Certain techniques of asset-liability management can be applied to

assessing liquidity risk. If an organization's cash flows are largely contingent, liquidity risk

may be assessed using some form of scenario analysis. Construct multiple scenarios for

market movements and defaults over a given period of time. Assess day-today cash flows

under each scenario. Because balance sheets differed so significantly from one organization

to the next, there is little standardization in how such analyses are implemented.

Regulators are primarily concerned about systemic implications of liquidity risk. Business

activities entail a variety of risks. For convenience, we distinguish between different

categories of risk: market risk, credit risk, liquidity risk, etc. Although such categorization is

convenient, it is only informal. Usage and definitions vary. Boundaries between categories

are blurred. A loss due to widening credit spreads may reasonably be called a market loss or

a credit loss, so market risk and credit risk overlap. Liquidity risk compounds other risks,

such as market risk and credit risk. It cannot be divorced from the risks it compounds.

An important but somewhat ambiguous distinguish is that between market risk and business

risk. Market risk is exposure to the uncertain market value of a portfolio. Business risk is

exposure to uncertainty in economic value that cannot be mark-to-market. The distinction

between market risk and business risk parallels the distinction between market-value

accounting and book-value accounting. The distinction between market risk and business



risk is ambiguous because there is a vast "gray zone" between the two. There are many

instruments for which markets exist, but the markets are illiquid. Mark-to-market values are

not usually available, but mark-to-model values provide a more-or-less accurate reflection

of fair value. Do these instruments pose business risk or market risk? The decision is

important because firms employ fundamentally different techniques for managing the two

risks.

Business risk is managed with a long-term focus. Techniques include the careful

development of business plans and appropriate management oversight. Book-value

accounting is generally used, so the issue of day-to-day performance is not material. The

focus is on achieving a good return on investment over an extended horizon. Market risk is

managed with a short-term focus. Long-term losses are avoided by avoiding losses from one

day to the next. On a tactical level, traders and portfolio managers employ a variety of risk

metrics —duration and convexity, the Greeks, beta, etc.—to assess their exposures. These

allow them to identify and reduce any exposures they might consider excessive. On a more

strategic level, organizations manage market risk by applying risk limits to traders' or

portfolio managers' activities. Increasingly, value-at-risk is being used to define and monitor

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



Chapter – 4

LITERATURE REVIEW



4.1) CAMEL rating system (Keeley and Gilbert)

This study uses the capital adequacy component of the CAMEL rating system to assess

whether regulators in the 1980s influenced inadequately capitalized banks to improve their

capital. Using a measure of regulatory pressure that is based on publicly available

information, he found that inadequately capitalized banks responded to regulators' demands

for greater capital. This conclusion is consistent with that reached by Keeley (1988).

Yet, a measure of regulatory pressure based on confidential capital adequacy ratings reveals

that capital regulation at national banks was less effective than at state-chartered banks. This

result strengthens a conclusion reached by Gilbert (1991)

4.2) Banks performance evaluation by CAMEL model (Hirtle and Lopez)

Despite the continuous use of financial ratios analysis on banks performance evaluation by

banks' regulators, opposition to it skill thrive with opponents coming up with new tools

capable of flagging the over-all performance ( efficiency) of a bank. This research paper

was carried out; to find the adequacy of CAMEL in capturing the overall performance of a

bank; to find the relative weights of importance in all the factors in CAMEL; and lastly to

inform on the best ratios to always adopt by banks regulators in evaluating banks'

efficiency.

In addition, the best ratios in each of the factors in CAMEL were identified. For example,

the best ratio for Capital Adequacy was found to be the ratio of total shareholders' fund to

total risk weighted assets. The paper concluded that no one factor in CAMEL suffices to

depict the overall performance of a bank. Among other recommendations, banks' regulators

are called upon to revert to the best identified ratios in CAMEL when evaluating banks

performance.



4.3) CAMEL model examination (Rebel Cole and Jeffery Gunther)

To assess the accuracy of CAMEL ratings in predicting failure, Rebel Cole and Jeffery

Gunther use as a benchmark an off-site monitoring system based on publicly available

accounting data. Their findings suggest that, if a bank has not been examined for more than

two quarters, off-site monitoring systems usually provide a more accurate indication of

survivability than its CAMEL rating. The lower predictive accuracy for CAMEL ratings

"older" than two quarters causes the overall accuracy of CAMEL ratings to fall substantially

below that of off-site monitoring systems.

The higher predictive accuracy of off-site systems derives from both their timeliness-an

updated off-site rating is available for every bank in every quarter-and the accuracy of the

financial data on which they are based. Cole and Gunther conclude that off-site monitoring

systems should continue to play a prominent role in the supervisory process, as a

complement to on-site examinations.

4.4) Check the Risk taken by banks by CAMEL model

The deregulation of the U.S. banking industry has fostered increased competition in banking

markets, which in turn has created incentives for banks to operate more efficiently and take

more risk. They examine the degree to which supervisory CAMEL ratings reflect the level

of risk taken by banks and the risk-taking efficiency of those banks (i.e., whether increased

risk levels generate higher expected returns). Their results suggest that supervisors not only

distinguish between the risk-taking of efficient and inefficient banks, but they also permit

efficient banks more latitude in their investment strategies than inefficient banks.

4.5) Bank soundness - CAMEL ratings – Indonesia (Kenton Zumwalt)

This study uses a unique data set provided by Bank Indonesia to examine the changing

financial soundness of Indonesian banks during this crisis. Bank Indonesia's non-public

CAMEL ratings data allow the use of a continuous bank soundness measure rather than

ordinal measures. In addition, panel data regression procedures that allow for the

identification of the appropriate statistical model are used.



They argue the nature of the risks facing the Indonesian banking community calls for the

addition of a systemic risk component to the Indonesian ranking system. The empirical

results show that during Indonesia's stable economic periods, four of the five traditional

CAMEL components provide insights into the financial soundness of Indonesian banks.

However, during Indonesia's crisis period, the relationships between financial

characteristics and CAMEL ratings deteriorate and only one of the traditional CAMEL

components—earnings—objectively discriminates among the ratings.

4.6) CAMELs and Banks Performance Evaluation (Muhammad Tanko)

Despite the continuous use of financial ratios analysis on banks performance evaluation by

banks' regulators, opposition to it skill thrive with opponents coming up with new tools

capable of flagging the over-all performance ( efficiency) of a bank. This research paper

was carried out; to find the adequacy of CAMEL in capturing the overall performance of a

bank; to find the relative weights of importance in all the factors in CAMEL; and lastly to

inform on the best ratios to always adopt by banks regulators in evaluating banks'

efficiency. The data for the research work is secondary and was collected from the annual

reports of eleven commercial banks in Nigeria over a period of nine years (1997 - 2005).

The purposive sampling technique was used. The findings revealed the inability of each

factor in CAMEL to capture the holistic performance of a bank. Also revealed, was the

relative weight of importance of the factors in CAMEL which resulted to a call for a change

in the acronym of CAMEL to CLEAM. In addition, the best ratios in each of the factors in

CAMEL were identified. The paper concluded that no one factor in CAMEL suffices to

depict the overall performance of a bank. Among other recommendations, banks' regulators

are called upon to revert to the best identified ratios in CAMEL when evaluating banks

performance.

Ø When we were searching for the research paper for literature review, we could not

find a single report or any research paper on the CAMELS model prepared on Indian

Banks. Though it may be prepared by them but we have not found. So we inspired to

make the project report on CAMELS Model specially on Indian Banks.



Chapter – 5

OBJECTIVE & METHODOLOGY



5.1) Objectives of the Study

Ø To understand the financial performance of the banks.

Ø To describe the CAMELS model of ranking, banking institutions, so as to analyze the

comparative of various banks.

Ø To analyze the banks performance through CAMEL model and give suggestion for

improvement if necessary.



5.2) Methodology Adopted

5.2.1) Research Design:

Ø To achieve our objective we have done descriptive research.

Ø We have selected three banks for our study.

Private Sector Bank – AXIS Bank

Public Sector Bank – Bank of India

Co-operative Bank – Gandhidham Co-operative Bank

Ø The period for evaluating performance through CAMELS in this study is five years,

i.e. from financial year 2004-05 to 2008-09. The data is collected from various

sources as follows.

Primary Data:

Primary data collected from the Bank’s Balance Sheets, Profit & Loss statements

and also by taking personal visit to the employees of the banks.

Secondary Data:

Secondary data for the ratio analysis & interpretation was collected from journals,

bank’s prospectus, bank’s annual reports and internet.

TOLANI INSTITUTE OF

Ø To achieve our objective we have calculated following ratios as per CAMEL

framework.

• Capital Risk Adequacy Ratio• Debt Equity Ratio• Total Advance to Total Asset• Government Securities to Total Asset

Capital Adequacy

• Gross NPA to Total Loan• Net NPA to Total Loan

Asset Quality

• Total Advance to Total Deposits• Business per Employee• Profit per Employee

Management

• Dividend Payout Ratio• Return on Asset• Operating Profit to average Working Fund• Net Profit to Average Asset• Interest income to Total Income• Other Income to Total Income

Earnings

• Liquid Asset to Total Asset• Government Security to Total Security• Approved Security to Total Security• Liquidity Asset to Demand Deposit• Liquidity Asset to Total Deposit

Liquidity



our objective we have calculated following ratios as per CAMEL

Capital Risk Adequacy RatioDebt Equity RatioTotal Advance to Total AssetGovernment Securities to Total Asset

Capital Adequacy

Gross NPA to Total LoanNet NPA to Total Loan

Asset Quality

Total Advance to Total DepositsBusiness per EmployeeProfit per Employee

Management

Dividend Payout RatioReturn on AssetOperating Profit to average Working FundNet Profit to Average AssetInterest income to Total IncomeOther Income to Total Income

Liquid Asset to Total AssetGovernment Security to Total SecurityApproved Security to Total SecurityLiquidity Asset to Demand DepositLiquidity Asset to Total Deposit


MANAGEMENT STUDIES

our objective we have calculated following ratios as per CAMEL



5.3) LIMITATIONS OF THE STUDY Ø The study was limited to three banks only.

Ø Time and resource constrains.

Ø The method discussed pertains only to banks though it can be used for performance

evaluation of other financial institutions.

Ø The study was completely done on the basis of ratios calculated from the balance sheets.

Ø It was not possible to get a personal interview with the top management employees of

all banks under study.



Chapter – 6

DATA INTERPRETATION AND

ANALYSIS



6.1) DATA INTER PRETATION

6.1.1) Capital Adequacy:

Capital Risk Adequacy Ratio:

CRAR = Capital

Total Risk Weighted Credit Exposure

TABLE - 1

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 – 09

AXIS Bank 12.66% 11.08% 11.57% 13.73% 13.69%

GCB 31.32% 37.75% 37.38% 36.58% 40.56%

Bank of India 11.52% 10.75% 11.71% 12.95% 13.21%

Interpretation:

CRAR is a ratio of Capital Fund to Risk Weighted Assets. Reserve Bank of India prescribes

Banks to maintain a minimum Capital to risk-weighted Assets Ratio (CRAR) of 9 % with

regard to credit risk, market risk and operational risk on an ongoing basis, as against 8 %

prescribed in Basel documents.

Capital adequacy ratio of the

AXIS Bank was well with 13.69%

for the year 2008 – 09, above

prescribed by RBI. Higher the

ratio the banks are in a

comfortable position to absorb

losses. In 2006 capital has been

increased approx. 40% to capital

of 2005 and total risk weighted

asset increased by approximately

60%. So, CRAR for the year decreased. During 4 years (2006 – 2009) capital increased by

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 – 09

Chart - 1

AXIS Bank GCB Bank Bank of India



approx. 3 times and risk weighted assets increased by approx. 2 times. So ratio of the year

2009 is increased.

The reason of increase the ratio for the AXIS Bank in the last year is, the bank has raised

capital of 1700 crore, by way of subordinated bonds (unsecured redeemable non-convertible

debentures) qualifying as Tier II capital. The raising of this non-equity capital has helped

the Bank continue its growth strategy and has strengthened its capital adequacy ratio.

GCB also maintain the higher ratio against prescribed by RBI. In 2005 this ratio is 31.32%

and it has increased to 40.56% in 2009. The ratio was increased by 4% in the year 2009

because of increment in share capital of Rs. 10 lakhs.

Bank of India has 11.52% CRAR in 2005 and it has increased to 13.21% in 2009. Total

capital of BOI increased by approx. 1.5 times and total weighted asset doubled from 2006 to

2009. So, CRAR increased by approx. 3%.

The reason of increment in CRAR of Bank of India is, the Bank has raised Rs.400 crore by

way of Innovative Perpetual Debt Instrument (IPDI) as Tier I capital and Rs.500 crore by

way of Upper Tier II Bonds to strengthen capital adequacy.



Debt-Equity Ratio:

Debt-Equity Ratio = Borrowings

Share Capital + Reserves

TABLE - 2

Banks 2004 – 05 2005 – 06 2006 - 07 2007 – 08 2008 – 09

AXIS Bank 73.97% 93.34% 153.12% 64.14% 102.98%

GCB Nil Nil Nil Nil Nil

Bank of India 133.53% 118.26% 112.31% 67.74% 70.30%

Interpretation:

The Debt to Equity Ratio measures how much money a bank should safely be able to

borrow over long periods of time. Generally, any bank that has a debt to equity ratio of over

40% to 50% should be looked at more carefully to make sure there are no liquidity

problems.

In AXIS Bank, this ratio is more than

the expected ratio from 2005 to 2009.

In 2008 Axis Bank is showing very

less ratio as compared to 2007 because

their profit has been increasing by

61% and they have paid their

liabilities during the year and vice

versa in the year 2009.

In GCB there is no borrowing. So the

ratio shows nil.

In BOI the ratio is 133.53% in the year 2005 and after decreased it reached to 70.30% in the

year 2009. Since the year 2003 to 2008, there is a continuous increment in reserves and

surplus so that the ratio was continuously decrease and in the year 2009 there is increment

in borrowings so that the ratio was slightly increased.

0.00%

50.00%

100.00%

150.00%

200.00%

2004 –05

2005 –06

2006 - 07 2007 –08

2008 –09

Chart - 2

AXIS Bank Bank of India



Total Advance to Total Asset Ratio:

Total Advance to Total Asset Ratio = Total AdvanceTotal Asset

TABLE - 3

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 – 09

AXIS Bank 41.34% 44.87% 50.34% 54.45% 55.21%

GCB 34.40% 31.82% 41.75% 51.72% 44.80%

Bank of India 58.97% 58.05% 59.97% 63.45% 63.37%

Interpretation:

Total Advance to Total Asset Ratio shows that how much amount the bank holds against its

assets. Here in AXIS Bank, from 2005 to 2009 this ratio is continuously increased because

increase in advances is more than increase in total assets which shows growth in

investment. And that is good

sign for the bank. During the

year, total advances of the Bank

grew by 36.70% in the previous

year. Of this, corporate

advances (comprising large and

mid-corporate) increased by

41.98% during the same period,

while agricultural lending

increased by 49.23%. Retail

loans grew 18.10%.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

2004 – 05 2005 – 06 2006 - 07 2007 – 08 2008 – 09

Chart-3




This ratio of GCB has also increased continuously. In the year 2008, the loans & advances

were increased by Rs. 27.20 crore so the ratio was increased to 51%. The same way because

of decreasing advances during the year 2008-09 the ratio was decreased. In 2005 this ratio

was 34.40% and it has increased to 44.80% in 2009. So this is good sign for GCB.

Bank of India’s Total Advances to Total Asset Ratio is continuously increasing from

58.97% to 63.37%, which shows the sound condition of the bank. As the bank is growing

the advances and the assets are increased in same proportion. Because of that the ratio keeps

in same rate.



Government Securities to Total Investments:

G-sec to Total Investment = Government Securities

Total Investment

TABLE - 4

Banks 2004 – 05 2005 – 06 2006 - 07 2007 – 08 2008 – 09

AXIS Bank 52.81% 54.77% 61.09% 59.87% 59.85%

GCB 94.58% 96.51% 97.33% 93.64% 76.46%

Bank of India 67.90% 69.00% 71.26% 79.02% 80.85%

Interpretation:

This ratio shows the

percent of investment in

government securities. It

is believed that the more

investment in

government security is

safer.

As per norms stipulated

by the RBI, the banks

have to maintain

SLR at the rate of 25%.

In AXIS Bank government security Investment increased by approx 250% and total

investment increased by approx 200% during 5 years of 2005 to 2009. Particularly in the

year 2009 the Bank's total investments increased by 37.46% with investments in

government and approved securities, held to meet the Bank's SLR requirement, increasing

by 37.41% as a result of the increase in total deposits.

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

2004 – 05 2005 – 06 2006 - 07 2007 – 08 2008 – 09

Chart - 4




In GCB the ratio was averagely 95% but in the last year it was decreased to 76.46% in the

year 2009. The ratio was decreased in the year 2009 because of decrease in investment in

government securities by 11 crore. Moreover as against statutory requirement to invest 15%

out of 25% of SLR in central government securities the bank has invested 100% of SLR

requirement in Govt. of India Securities. So, GCB has adequate liquidity as per RBI norms,

but it reduces their profitability.

In Bank of India the ratio increased from approx 67% to 80%. Because of more increment

in Government securities to the increment in total asset the ratio is increased. The more

investment in government securities shows the good sign of the bank.



6.1.2) Asset Quality

Gross NPA ratio:

Gross NPA= Gross NPATotal Loan

TABLE - 5

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

AXIS Bank 1.99% 1.68% 1.14% 0.83% 1.10%

GCB 8.98% 7.02% 10.08% 8.33% 8.35%

Bank of India 6.49% 4.35% 2.83% 1.99% 1.98%

Interpretation:

This ratio is used to

check whether the

bank's gross NPAs are

increasing quarter on

quarter or year on year.

If it is, indicating that

the bank is adding a

fresh stock of bad loans.

It would mean the bank

is either not exercising

enough caution when

offering loans or is too lax in terms of following up with borrowers on timely repayments.

In 2005, AXIS Bank’s gross NPA is 1.99% and it has decreased to 1.10% till 2009. It

means this ratio in AXIS Bank is decreased year by year from 2005 to 2009 because AXIS

Bank takes enough care of money. But than, we can say that a bank's business is making

loans and world over, some percentage of the loans always turn bad.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2004 – 05 2005 – 06 2006 - 07 2007 – 08 2008 - 09

Chart - 5




In GCB in the year 2006-07 the Gross NPA was increased by approx 47% against the

increment in total loans was approximately 19%. So, the ratio was increased. But in the last

two years as the Gross NPA and loans were increased in the same proportion the ratio has

maintained the average of 8%.

In Bank of India the ratio is decreased from approx 6.49% to 1.98% which shows the BOI

takes care of their money. That’s why their Gross NPA decreases year by year. During the

year 2009, some impaired assets of Rs.118 crore were sold on bid and Portfolio basis to

ARCIL/ASEREC/IFCI/Pegasus ARC Pvt. Ltd. for Rs 89 crore on Cash cum Security

Receipt terms. This has helped in reducing Gross NPA and also unlocking funds in old NPA

accounts, where there was no scope of immediate realization. Amount received in written-

off accounts helped in improving the profit.



Net NPA Ratio:

Net NPA = Net NPA

Total Loan

TABLE - 6

Banks 2004 – 05 2005 – 06 2006 - 07 2007 – 08 2008 - 09

AXIS Bank 1.39% 0.98% 0.72% 0.42% 0.40%

GCB 3.22% 0.65% 4.10% 3.45% 0%

Bank of India 3.19% 1.70% 0.85% 0.61% 0.50%

Interpretation:

Net NPAs reflects the performance

of banks. A high level of NPAs

suggests high probability of a large

number of credit defaults that affect

the profitability and net-worth of

banks and also wear down the value

of the asset.

Loans and advances usually represent

the largest asset of most of the banks.

It monitors the quality of the bank’s

loan portfolio. The higher the ratio,

the higher the credits risk.

Above ratios show the fluctuation of NPA of AXIS Bank during the last 5 years. The bank

has lowest net NPA is 0.40% in 2008-09. Net NPA is continuously decreased from 2005 to

2009. So it is good for the bank to decrease in NPA. Because of decrease in NPA the risk of

bad loans are also decreased.

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

2004 – 05 2005 – 06 2006 - 07 2007 – 08 2008 - 09

Chart - 6




GCB has been successful to make their NPA at minimum level and there is Zero Net NPA

level at the end of the year. Because they started new schemes for granting of credit

facilities to all sections of society at large.

In Bank of India the NPA ratio is decreased from 3.19% to 0.50%, which shows that they

have been successful in recovering their bad loans. In the last year the ratio was decreased

by 0.11% because of increment in the provisions.



6.1.3) Management Quality

Total Advance to Total Deposit Ratio:

Total Advance to Total Deposit = Total AdvanceTotal Deposit

TABLE - 7

Banks 2004 – 05 2005 – 06 2006 - 07 2007 – 08 2008 - 09

AXIS Bank 49.20% 55.62% 62.73% 68.08% 69.48%

GCB 39.07% 44.14% 53.87% 67.21% 57.94%

Bank of India 70.45% 69.38% 71.00% 75.64% 75.33%

Interpretation:

This ratio shows the

investment of the bank

through approving the loans

against accepting the loan.

In AXIS Bank, the ratio is

continuously increasing year

by year from 49.20% to

69.48% in year 2005 to 2009.

This shows good sign of the

bank, if it will be increased

more, than it may be risky for

the bank. In the year 2009, the ratio is increased a little because of 37% increment in

Advances and 34% increment in Deposits.

Same in GCB, this ratio is continuously increased from 39.07% to 57.94% in year 2005 to

2009. In the year 2009, the ratio decreased because of increment in Deposits by 10.5 crore.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

2004 – 05 2005 – 06 2006 - 07 2007 – 08 2008 - 09

Chart - 7




In Bank of India the ratio is continuously increased from 70.45% in 2005 to 75.64% in 2008

and decreased a little to 75.33% in the year 2009. In the year 2009 the ratio is decreased

because of approximately 32% increment in Deposits and against that there was not any

notable deference in advances.



Business per Employee:

Business per Employee = Total Income

No. of Employees

TABLE - 8 (Amount in Rs. Crore)

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 – 09

AXIS Bank 8.95 10.20 10.24 11.17 10.60

GCB 3.12 2.97 3.31 3.57 3.47

Bank of India 3.20 3.81 4.98 6.52 8.33

Interpretation:

Revenue per employee is

a measure of how

efficiently a particular

bank is utilizing its

employees. Ideally, a

bank wants the highest

business per employee

possible, as it denotes

higher productivity. In

general, rising revenue per

employee is a positive

sign that suggests the

bank is finding ways to squeeze more sales/revenues out of each of its employee.

In AXIS Bank, this ratio increases continuously year by year from 8.95 crore in the year

2005 to 11.17 crore in year 2008 and in the year 2009, it decreased to 10.60 crore. Because

of less recruitment in the year 2008 the ratio is increased to 11.17 crore otherwise the ratio

was maintained averagely 10.5 crore during the 5 years.

0

2

4

6

8

10

12

2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 – 09

Chart - 8




In GCB the ratio was maintained average 3 crore to 3.5 crore during the last 5 years.

In Bank of India also this ratio increases continuously from 3.2 crore in the year 2005 to

8.33 crore in the year 2009 which is good. The main reason for this increment is the

increase in profit by approximately 49%.



Profit per Employee:

Profit per Employee = Net Profit

No. of Employees

TABLE – 9 (Amount in Rs. Lac)

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

AXIS Bank 7.03 8.69 7.59 8.39 10.02

GCB 3.98 4.30 2.82 4.13 4.40

Bank of India 0.80 1.66 2.71 4.95 7.49

Interpretation:

Profit per employee is a

measure of how efficiently a

particular bank is utilizing its

employees. Ideally, a bank

wants the highest profit per

employee.

In AXIS Bank, the profit per

employee was 7.03 lakhs in

2005 and it has increased to

10.02 lakhs in 2009 which

shows that profit per employee is increased from 2005 to 2009.

In GCB the ratio is increased a little from 3.98 lakh in 2005 to 7.49 lakh in 2009. The ratio

was increased in the year 2009 because of increment in Net profit by approximately 10.5%.

This shows the efficiency of work staff of GCB.

In BOI profit per employee is increased from 0.8 lakh in 2005 to 7.49 lakh in 2009 which is

because of more increase in profit than the increment in number of employee.

0

2

4

6

8

10

12

2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

Chart - 9




6.1.4) Earnings Quality:

Dividend Payout Ratio:

Dividend Payout Ratio= DividendNet Profit

TABLE - 10

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 – 09

AXIS Bank 26.23% 23.20% 22.58% 23.50% 23.16%

GCB 27.83% 26.49% 46.08% 33.20% 31.37%

Bank of India 16.34% 23.77% 7.62% 12.23% 10.22%

Interpretation:

Dividend payout ratio shows the

percentage of profit shared with

the shareholders. The more the

ratio will increase the goodwill of

the bank in the share market.

In AXIS Bank, the average ratio

during the five years is approx

24%. They have paid highest

dividend in the year 2005. Then,

the average was maintained by approximately by 25%.

In GCB, though the profit was increased by 23 lakhs, but the share capital was also

increased by 10 lakhs, so the ratio was slightly decreased in the year 2009.

In BOI also the ratio is much fluctuated. In 2006, it was highest at 23.77% and minimum in

the year 2007 which was 7.62% only. At last it was 10.22% in the year 2009.

0.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%50.00%

2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

Chart - 10




Return on Asset:

Return on Asset = Net ProfitTotal Asset

TABLE - 11

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

AXIS Bank 0.90% 0.98% 0.90% 0.98% 1.23%

GCB 1.45% 1.63% 1.01% 1.41% 1.44%

Bank of India 0.35% 0.62% 0.79% 1.12% 1.33%

Interpretation:

Return on Asset Ratio shows that how

much return bank can get from their

total asset. Higher the ratio is good for

the bank. Because if ratio is higher than

we can say that the return of bank is

high.

In AXIS Bank, we can see that in 2005

this ratio is 0.90% and it has increased in

2009 to 1.23%. The main reason for this major change in the ratio is 69% increment in Net

profit and 39% change in Assets. YoY both of them are increasing in same proportion but in

last year per cent increment in profit was more than the increment in assets.

In GCB, in the year 2007-08 because of increment in profit by approx 48% but there was no

major change in the assets so the ratio was increased by 0.40%. And it was maintained in

the year 2009.

This ratio in BOI increased year by year. In 2005 this ratio is 0.35% and it has increased in

2009 to 1.33%. The ratio was increased in the last year because of 49% increment in net

profit against the increase in assets were 34%. It means this is good for BOI to increase the

profit from their asset.

0.00%0.20%0.40%0.60%0.80%1.00%1.20%1.40%1.60%1.80%

2004 –05

2005 –06

2006 –07

2007 –08

2008 - 09

Chart - 11




Operating Profit by Average Working Fund:

Operating Profit to Avg. Working Fund= Operating Profit

��

TABLE - 12

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

AXIS Bank 2.04% 2.43% 2.10% 2.57% 2.95%

GCB * * * * *

Bank of India 1.62% 1.64% 1.88% 2.31% 2.70%

* Data not available

Interpretation:

Earning reflect the growth

capacity and the financial

health of the bank. High

earnings signify high growth

prospects.

In AXIS Bank, it has

increased from 2.04% to

2.95% during the year 2005

to 2009 which is good for the

bank. In the last year 2009

the operating profit was increased by 67%.

In BOI, it was increased from 1.62% in the year 2005 to 2.70% in the year 2009 which is

good for the bank. Because of 47% increment in the net profit the ratio was increased in the

year 2009.

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

Chart - 12

AXIS Bank Bank of India



Net Profit to Average Asset:

Net Profit to average Asset= Net Profit

Average Asset

TABLE - 13

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

AXIS Bank 1.21% 1.18% 1.10% 1.24% 1.44%

GCB 1.46% 1.58% 1.00% 1.45% 0.75%

Bank of India 0.38% 0.68% 0.88% 1.25% 1.49%

Interpretation:

Net profit to average asset indicates the

efficiency of the banks in utilizing their

assets in generating profits. A higher

ratio indicates the better income

generating capacity of the assets and

better efficiency of management.

In AXIS Bank the ratio is continuously

increase year by year from 1.21% in

2005 to 1.44% in the year 2009. This is

a good time for Bank to be 'giving back', for it has just completed a very successful year. Its

Net Profit rose 69.50% to Rs. 1,815.36 crore, its assets grew 35%, and productivity and

efficiency levels (whether measured by Return on Assets or Return on Equity or Profit per

Employee) have risen well over the year. Most of all, the Bank finds itself competitively

positioned in several of its key businesses, and this should predict well for the year ahead.

In BOI the ratio was 0.38% in the year 2005 and increased to 1.49% in the year 2009which

is good for the bank. In the year 2009 there was 49% increment in net profit, against that

increment in average asset was approximately 37%. Because of that the ratio was increased

by 0.24% in the year 2009.

0.00%0.20%0.40%0.60%0.80%1.00%1.20%1.40%1.60%1.80%

2004 – 052005 – 062006 – 072007 – 08 2008 - 09

Chart - 13




Interest Income to Total Income:

Interest Income to Total Income = Interest IncomeTotal Income

TABLE - 14

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

AXIS Bank 63.75% 59.64% 59.24% 59.02% 56.00%

GCB 96.24% 93.92% 96.22% 95.96% 97.09%

Bank of India 83.92% 85.58% 85.05% 85.29% 84.29%

Interpretation:

Interest income to total income

ratio shows that how much

interest income earn from total

income. This ratio was

continuously decreased from

2005 to 2009 in AXIS Bank.

This shows bad effect in profit

from interest in AXIS Bank,

because interest income is a

regular income from customer.

The growth of NII may be attributed to an expansion in the balance sheet size, with average

earning assets in the year increasing by 48.37% (Rs. 74,589 crore in 2007-08 to Rs.

1,10,664 crore in 2008-09). Although this gain in NII was partly offset by the hardening of

interest rates, particularly in the second half of the financial year, the growth of demand

deposits (which on a daily average basis increased by 33.81% to Rs. 34,141 crore from Rs.

25,515 crore in the previous year) helped the Bank contain the cost of funds.

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

Chart - 14




GCB was maintained on an average same percentage from 2005 to 2008. In 2009 it was

increased to 97.09%. So, here we can say that GCB was making most of profit from interest

income. So this is good sign for the GCB.

In the income statement of BOI most income is from the interest income. Averagely 85% of

the income of BOI is from Interest income, which is from the main business of the bank

which is good sign for a bank. In the year 2009 Net interest income grew by 30.02% on the

backdrop of rise in volume of business mix by 26.30% (from Rs. 2,64,804 crore to Rs.

334,440 crore).



Other Income to Total Income:

Other Income to Total Income = Other than Interest Income

Total Income

TABLE - 15

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

AXIS Bank 36.25% 40.36% 40.76% 40.98% 44.00%

GCB 3.76% 6.08% 3.78% 4.04% 2.91%

Bank of India 16.08% 14.42% 14.95% 14.71% 15.78%

Interpretation:

Fee based income account for a

major portion of the bank’s other

income. The bank generates higher

fee income through innovative

products and adapting the

technology for sustained service

levels. The higher ratio indicates

increasing proportion of fee-based

income. The ratio is also influenced

by gains on government securities,

which fluctuates depending on interest rate movement in the economy.

This ratio in AXIS Bank increased from 36.25% to 44.00% in 2005 to 2009 which shows

that AXIS Bank earning from government security and through providing innovative

products. In the year other income increased by 63% because of that the ratio was increased

by 4% in the year 2009 and the main increment was in the fee income.

In GCB’s income statement, a very small part of income is from income from other than

interest income because as we have discussed before that bank invests most of its fund in

Government securities.

0.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%50.00%

2004 – 052005 – 062006 – 072007 – 08 2008 - 09

Chart - 15




The BOI has averagely 15% part of income is from other way of income which is good for

the bank. In the year 2005-06 the ratio was decreased because of proportionately more

increment in total income than other than interest income vice-versa in the year 2009.



6.1.5) Liquidity:

Liquidity Asset to Total Asset:

Liquidity Asset to Total Asset = ��

TABLE - 16

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

AXIS Bank 11.93% 7.32% 9.45% 11.41% 10.17%

GCB 11.17% 9.70% 7.67% 5.29% 15.47%

Bank of India 7.92% 10.90% 12.27% 9.90% 9.65%

Interpretation:

Liquidity for a bank means the ability

to meet its financial obligations as

they come due. Bank lending

finances investments in relatively

illiquid assets, but it fund its loans

with mostly short term

liabilities. Thus one of the main

challenges to a bank is ensuring its

own liquidity under all reasonable

conditions.

In AXIS Bank this ratio is continuously decreased from 2005 to 2009. In 2005 this ratio is

11.93% and it has decreased to 10.17%. The ratio was decreased in the year 2009 because

of increment in total assets by approx 35 crore.

In GCB this ratio is continuously decreased from 2005 to 2008 but in 2009 it has increased.

In 2005 this ratio is 11.17% and it has decreased in 2008 to 5.29% and in 2009 it has

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

Chart - 16




increased to 15.47%. The reason for this much increment is increment in liquidity asset of

Rs. 18 crore.

This ratio in Bank of India was continuously increased. In 2005 this ratio is 7.92% and it

has increased to 9.65% in the year 2009.



Government Securities to Total Asset:

G-sec to Total Asset = Government Securities

Total Asset

TABLE - 17

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

AXIS Bank 19.97% 23.71% 22.43% 18.42% 18.77%

GCB 46.40% 51.18% 45.64% 37.09% 27.13%

Bank of India 20.16% 19.53% 17.84% 18.47% 18.86%

Interpretation:

Government securities to total

asset ratio shows that, what

percentage of government

securities bank has against total

assets. Higher the ratio is good

for the bank because if this ratio

is higher than we can say that

bank is more investing in

government securities.

In AXIS Bank, the ratio is

increase from 19.97% in 2005 to 23.71% in 2006 and it decreased to 18.77% in 2009. In the

year 2005, the ratio was highest because the bank has increased investment in only

government securities but in the last year bank has increased the total investment in govt.

securities as well as debentures & bonds also.

In GCB, the ratio was fluctuating during the five years. At last in the year 2009 the ratio

was 27.13%. In the year 2009, the G-sec investment was decreased by 11 crore and the total

assets were increased by approximately 13 crore. So, the ratio was decreased. Bank has

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

Chart - 17




withdrawal their fund from invested in other banks and they have invested into government

securities during the previous year.

IN BOI this ratio, is continuously decreased from 2005 to 2009. In 2005, this ratio was

20.16 and it has decreased to 18.86%. In the year 2007, because of less increment in the

government securities to the increment of total investment the ratio was decreased. Vice

versa in the year 2009 the ratio was increased.



Approved Securities to Total Asset:

Approved Securities to Total Asset = Approved Securities

Total Asset

TABLE - 18

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

AXIS Bank 0 0 0 0 0

GCB 1.01% 1.41% 0.97% 0.82% 0.62%

Bank of India 0.87% 0.72% 0.56% 0.41% 0.29%

Interpretation:

Approved securities include

securities other than government

securities. This ratio measures the

Approved Securities as a

proportion of Total Assets. Banks

invest in approved securities

primarily after meeting their SLR

requirements, which are around

25% of net demand and time

liabilities. This ratio measures the

risk involved in the assets hand by

a bank.

In AXIS Bank the ratio is 0 because they are not having any investment in approved

securities.

In GCB the ratio was highest in the year 2006 by 1.41% and at last it was 0.62% in the year

2009 which was lowest during the last five years. In the year 2009 there was minor change

in investment in government securities but the ratio was decreased because of increment in

total asset by 11 crore.

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

Chart - 18

GCB Bank Bank of India



In BOI the ratio was continuously decreased from 0.87% in the year 2005 to 0.29% in the

year 2009. The ratio is continuously decreased because of decrement in Approved

securities. In the last year 2009 the ratio was decreased because of decrement in approved

securities by approx 13%.



Liquidity Asset to Demand Deposit:

Liquidity Asset to Demand Deposit =Liquidity AssetDemand Deposit

TABLE - 19

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

AXIS Bank 37.38% 22.71% 29.53% 31.24% 29.70%

GCB 36.33% 41.68% 49.90% 19.72% 61.16%

Bank of India 27.63% 34.80% 45.07% 38.54% 42.80%

Interpretation:

The ratio shows the power of

liquidity asset against total demand

deposits. It means what part of the

demand deposits can be easily

converted into monetary form in

need.

In AXIS Bank, this ratio was

continuously decreased from

37.38% in 2005 to 29.53% in 2007,

than increased to 31.24% in 2008

and again decreased in 2009 to 29.70%. The ratio was decreased in the year 2009 because

of increment in the assets was 18% which was less than the increment in the demand

deposits which was 27%.

In GCB the ratio was fluctuate because of the change in the cash balance during the each

year ending. In the year 2009 because of increment in cash balance by approx 14 crore the

liquidity assets were increased and vice versa the ratio was also increased.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

Chart - 19




In BOI the ratio was 27.63% in 2005 and at last in 2009 it was 42.80%. The ratio was

increased in the last year because of increment in assets by 20%. There was not any large

difference in demand deposits than the previous year.



Liquidity Asset to Total Deposit:

Liquidity Asset to Total Deposit = Liquidity AssetTotal Deposit

TABLE - 20

Banks 2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 – 09

AXIS Bank 14.20% 9.08% 11.77% 14.27% 12.79%

GCB 8.67% 12.45% 15.67% 6.88% 20.01%

Bank of India 9.55% 12.19% 14.52% 11.81% 11.47%

Interpretation:

The ratio shows how much part of

the deposits invested into the

liquidity asset, which can be easily

convert in to monetary value in the

time of need.

In AXIS Bank, the ratio was

14.20% in 2005 and after

fluctuation it was 12.79% in 2009.

In the year 2009, the deposits were

increased by 33.95% and the assets

were increased by 18 %. So the ratio for the year 2009 was decreased.

In GCB, the ratio was 8.67% in 2005 and after fluctuation it was 20.01% in 2009. The ratio

was increased because of increment in the liquidity assets and the main increment was in

cash balance and it was increased from 7.28 crore to 22.16 crore.

In BOI, the ratio was 9.55% in 2005 and after fluctuation it was 11.47% in 2009. The ratio

was decreased a little because of 22% increment in deposits and approx 20% increment in

assets in the year 2009.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2004 – 05 2005 – 06 2006 – 07 2007 – 08 2008 - 09

Chart - 20




6.2) ANALYSIS

COMPONENT RATINGS TO THE BANKS

Now, after analyzing the ratio next, task to do is to give weightage to all the parameters

according to the importance of the ratios. Each component will be given weightage

according to the importance of itself and ratios covered in that particular point. The total

weightage allocated to the all parameters would be out of 100. The weightage given to

different parameters is as follows:

TABLE - 21 – Component Weightage

Parameter Weightage

Capital Adequacy 28%

Asset Quality 14%

Management 15%

Earnings 18%

Liquidity 25%

Total 100%



Ratio Wise Weightage:

After giving the importance to the each parameter, now its turn to give the weightege

according to the importance of the ratio we will allocate the weightage to the each particular

ratio. The weightage given to the each ratio is as follows:

TABLE - 22

RATIO WEIGHTAGE

Capital Adequacy Out of 28%

Capital Risk Adequacy Ratio 7%

Debt Equity Ratio 7%

Total Advance to Total Asset Ratio 7%

Government Securities to Total Asset 7%

Asset Quality Out of 14%

Gross NPA to Total Loan 7%

Net NPA to Total Loan 7%

Management Out of 15%

Total Advance to Total Deposits 5%

Business per Employee 5%

Profit per Employee 5%

Earnings Out of 18%

Dividend Payout Ratio 3%

Return on Asset 3%

Operating Profit to Average Working Fund 3%

Net Profit to Average Asset 3%

Interest Income to Total Income 3%

Other Income to Total Income 3%

Liquidity Out of 25%

Liquid Asset to Total Asset 5%

Government Security to Total Security 5%

Approved Security to Total Security 5%

Liquidity Asset to Demand Deposit 5%

Liquidity Asset to Total Deposit 5%

Total 100%



After allocating the weightage, we have made frequency classes according to the results found from the ratios for each ratio of each parameter. He frequency classes for each ratio are as follows:

Capital Adequacy:

TABLE - 23

Ratios Marks

1 2 3 4 5 6 7

CRAR Below 15.50

15.50-20.00

20.00-24.50

24.50-29.00

29.00- 33.50

33.50 – 38.00

Above 38

Debt-Equity Ratio Above 125

115-125

105-115 95-105 85-95 75-85 Below

75 Total Advance to Total Asset Below 35 35-40 40-45 45-50 50-55 55-60 Above

60 G-sec to Total Investment Below 58 58-65 65-72 72-79 79-86 86-93 Above

93

Asset Quality:

TABLE - 24

Ratios Marks

1 2 3 4 5 6 7 Gross NPA to Total Loan

Above 9

7.50 – 9.00

6 - 7.50

4.50-6.00

3.00-4.50

1.50-3.00

Below 1.5

Net NPA to Total Loan

Above 3

2.50 – 3.00

2 – 2.50

1.50 – 2.00

1.00 – 1.50

0.50 – 1.00

Below 0.5

Management Quality:

TABLE - 25

Ratios Marks

1 2 3 4 5

Total Advance to Total Deposit Below 46 46-55 55-64 64-73 Above

73

Business per Employee Below 2.50

2.50 – 5.00

5.00 – 7.50

7.50 – 10

Above 10

profit per Employee Below 2.00

2.00 – 4.50

4.50 – 7.00

7.00 – 9.50

Above 9.50



Earnings Quality:

TABLE - 26

Ratios Marks

0.5 1.0 1.5 2.0 2.5 3.0

Dividend payout Ratio Below 10 10-17 17-24 24-31 31-38 Above

38

Return on Asset Below 0.5

0.50 – 0.75

0.75 – 1.00

1.00 – 1.25

1.25 – 1.50

Above 1.50

Operating Profit to Average Working Fund

Below 1.75

1.75-2.00

2.00 – 2.25

2.25 – 2.50

2.50 – 2.75

Above 2.75

Net Profit to Average Asset

Below 0.5

0.50 – 0.75

0.75 – 1.00

1.00 – 1.25

1.25 – 1.50

Above 1.50

Interest Income to Total Income

Below 56 56 – 67 67 – 76 76 – 85 85 – 94 Above

94 Other Income to Total Income

Below 4 4-13.50 13.50-

23 23-32.5 32.5-42 Above 42

Liquidity:

TABLE - 27

Ratios Marks

1 2 3 4 5

Liquidity Asset to Total Asset Below 7 7 – 9 9 – 11 11 -13 Above 13

G-Sec to Total Asset Below 24 24 – 31 31 – 38 38 – 45 Above

45

Approved Securities to Total Asset Below 0.50

0.50 – 0.75

0.75 – 1.00

1.00 – 1.25

Above 1.25

Liquid Asset to Demand Deposit Below 27 27 – 35 35 – 43 43 – 51 Above

51

Liquid Asset to Total Deposit Below 9 9 – 12 12 -15 15 – 18 Above 18



After allocating classes for the each ratio and for the five years, now we will give marks to each bank on the basis of average of their average of performance during the last five years i.e. 20005 to 2009 to all the banks.

Capital Adequacy:

The table given below shows the marks given to the Capital Adequacy ratios out of 7 marks.

TABLE - 28

Ratios Banks

AXIS bank GCB Bank of India

CRAR 1 6 1

Debt-Equity Ratio 4 0 4

Total Advance to Total Asset Ratio 6 4 7

G-Sec to Total Investment 1 6 4

TOTAL 12 16 16

Asset Quality:

The table given below shows the marks given to the Asset Quality ratios out of 7 marks.

TABLE - 29

Ratios Banks


Gross NPA to Total Loan Ratio 7 2 5

Net NPA to Total Loan Ratio 6 3 5

TOTAL 13 5 10



Management Quality:

The table given below shows the marks given to the Management Quality ratios out of 5 marks.

TABLE - 30

Ratios Banks


Total Advance to Total Deposit 3 2 4

Business per Employee 5 2 3

profit per Employee 4 2 2

TOTAL 12 6 9

Earning Quality:

The table given below shows the marks given to the Earning Quality ratios out of 3 marks.

TABLE - 31

Ratios Banks


Dividend Payout Ratio 1.5 2.5 1

Return on Asset 1.5 2.5 1.5

Operating profit to Average working Fund 2 - 1.5

Net profit to Average asset 2 2.5 1.5

Interest Income to Total Income 1 3 2

Other Income to Total Income 2.5 1 1.5

TOTAL 10.5 11.5 9



Liquidity:

The table given below shows the marks given to the Liquidity ratios out of 5 marks.

TABLE - 32

Ratios Banks


Liquidity Asset to Total Asset 3 3 3

G-Sec to Total Asset 1 4 1

Approved Securities to Total Asset 0 3 2

Liquid Asset to Demand Deposit 2 3 3

Liquid Asset to Total Deposit 3 3 2

TOTAL 9 16 11

Overall Ranking to the Banks:

TABLE - 33

Parameters Banks


Capital Adequacy 12 16 16

Asset Quality 13 5 10

Management Quality 12 6 9

Earning Quality 10.5 11.5 9

Liquidity 9 16 11

TOTAL 56.5 54.5 55

Rank 1 3 2

After going through the whole the process, we found AXIS Bank scored the highest score

so we gave 1st rank to them, and accordingly the 2nd rank was given to Bank of India and 3rd

rank was given to Gandhidham Co-operative Bank. We found that AXIS Bank has

performed better than other two banks during the last five years.



Chapter – 7

CONCLUSION, SUGGESTIONS AND

RECOMMENDATION



7.1) CONCLUSION

The report makes an attempt to examine and compare the performance of the three different

sector banks of India i.e. from private sector bank, AXIS Bank, from Co-operative bank,

Gandhidham Co-operative Bank and from the public sector bank, Bank of India. The

analysis is based on the CAMEL Model. The study has brought many interesting results,

some of which are mentioned as below:

Ø All the three banks have succeeded in maintaining CRAR at a higher level than the

prescribed level, 9%. But the GCB has maintained highest across the duration of last

five years i.e. more than 30%. It is very good sign for the bank to survive and to expand

in future.

Ø Gross NPA ratio has registered declining trend for all the three banks during the last five

years. But Bank of India and Axis Bank have been successful during the last five years

in managing the level of NPA. Whereas the GCB has yet 8.35% of Gross NPA after

declining. But at the end of the year 2008-09 GCB has 0% Net NPA whereas BOI and

AXIS have 0.40% to o.50% Net NPA. Thus, it indicates for improvement in the asset

quality position of all the three banks.

Ø In Management Quality, we have found that Business per Employee Ratio and Profit per

Employee Ratio is increased during the last five years in Axis Bank and Bank of India

but there is not any major change in the GCB. The improvement shows the growth of

the bank as well as efficiency of the employee, which is very good in both the banks and

they will help to the bank to grow in future.

Ø In Earnings Quality, the major part of income of GCB is from Interest income. Because

their large part of investment is in Government Securities. A little change in Interest

Rate will effect on it more. In comparison of that the Axis Bank has average investment

in G-sec. And the same way BOI has a little more than Axis Bank.



Ø The Liquidity ratios indicate better liquidity of all the banks. However, AXIS Bank has

performed throughout well, GCB has an edge over in liquidity if compared with each

other according to these ratios.

From the above analysis we would like to conclude that AXIS bank has high efficiency in

terms of Assets Quality, Management Quality and GCB is good in terms of Capital

Adequacy and Liquidity whereas Bank of India is good in terms of Capital Adequacy.

After evaluating all the ratios, calculations and ratings we have given 1st Rank to AXIS

bank, 2nd Rank to BOI and 3rd Rank to GCB.



7.2) Suggestions and Recommendation

Ø In AXIS bank, debt equity ratio is continuously rising over the years which are not

good so they have to increase equity or reduce debts in their capital structure.

Ø GCB has comparatively less total advance to total asset ratio. So, bank has to give

more advances in order to earn more interest. But they should have to also keep in

mind the credit worthiness of the customers.

Ø GCB has highest Government Security to total investment ratio which leads to

reduce their income and ultimately reduce their profitability so they have to invest in

other than government investment option rather than only in government securities.

Ø GCB has highest Gross NPA ratio which is not good for the bank. They should give

loans to the customers, whose credit worthiness is good. Though their Net NPA ratio

is nil, they have to make more provisions in order to meet their Gross NPA which is

affecting their profitability badly.

Ø In AXIS Bank Interest Income to Total Income Ratio is less. Because they are

giving fewer advances. So, in order to earn more interest income they should invest

more in government approved securities and give more advances to their customers.



BIBLIOGRAPHY

Websites:

www.rbi.org.in

www.allbankingsolutions.com

www.axisbank.com

www.bankofIndia.com

www.economictimes.indiatimes.com

http://www.springerlink.com/content/j0311813x7672564/

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1150968

Books and Journals:

The ICFAI Journal of “Bank Management” Vol. V, No.3, August 2006

“Indian Finance System” by Bharti Pathak

Annual Reports of AXIS Bank

Annual Reports of Gandhidham Co-Operative Bank

Annual Report of Bank of India

http://www.rbi.org.in/

http://www.allbankingsolutions.com/

http://www.axisbank.com/

http://www.bankofindia.com/



ANNEXURE

27864828 Final Project Report on CAMELS Model

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