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CHAPTER 1

INTRODUCTION

1 . 1 INTRODUCTION TO THE STUDY

In todays scenario, the banking sector is one of the fastest growing sectors and a

lot of funds are invested in Banks. Also todays banking system is becoming more

complex. There are so many models of evaluating the performance of the banks, but I have

chosen the CAMEL Model to evaluate the performance of the banks. It measures the

performance of the banks from each parameter i.e. Capital, Assets, Management, Earnings

and Liquidity.

1.1.1 CAMEL Framework

CAMEL norms are the supervisory framework consisting of risk-monitoring factors

used for evaluating the performance of banks. This framework involves the analysis of six

groups of indicators reflecting the health of financial institutions.

The indicators are as follows:

C - Capital adequacy

A - Asset quality

M - Management soundness

E - Earnings & profitability

L - Liquidity

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1.2 INDUSTRY PROFILE

The whole banking scenario has changed in the very recent past on the

recommendations of Narasimham Committee. Further BASEL II Norms were introduced

to internationally standardize processes and make the banking industry more adaptive to

the sensitive market risks. Amongst these reforms and restructuring the CAMELS

Framework has its own contribution to the way modern banking is looked up on now. The

attempt here is to see how various ratios have been used and interpreted to reveal a banks

performance and how this particular model encompasses wide range of parameters making

it a widely used and accepted model in todays scenario. The project attempts to analyze

the performance of State bank of India on the basis of CAMELS model and gives

suggestions on the basis of the finding of the analysis. The overall strategy of State bank of

India is also studied to gain a better understanding of the working of the bank and to

identify its strength and weakness.

1.2.1 BASEL II Accord

It is the bank capital framework sponsored by the world's central banks designed topromote uniformity, make regulatory capital more risk sensitive, and promote enhanced

risk management among large, internationally active banking organizations. The revised

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

mutually supporting concepts, or "pillars, of capital adequacy.

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.

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1.2.1.1 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.

Developed for each risk category by each individual bank. The first pillars are an explicitly

defined regulatory capital requirement, a minimum capital-to-asset ratio equal to at least

8% of risk-weighted assets. 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

1.2.1.2 The Second Pillar

Second, bank supervisory agencies, such as the Comptroller of the Currency, have

authority to adjust capital levels for individual banks above the 8% minimum when

necessary. It 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 riskmanagement system.

1.2.1.3 The Third Pillar

The third supporting pillar calls upon market discipline to supplement reviews by

banking agencies. 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.

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1.3 COMPANY PROFILE

1.3.1 An overview of the State Bank of India

The origin of the State Bank of India goes back to the first decade of the

nineteenth century with the establishment of the Bank of Calcutta in Calcutta on 2 June

1806. Three years later the bank received its charter and was re-designed as the Bank of

Bengal. A unique institution, it was the first joint-stock bank of British India sponsored by

the Government of Bengal. The Bank of Bombay (15 April 1840) and the Bank of Madras

(1 July 1843) followed the Bank of Bengal. These three banks remained at the apex of

modern banking in India till their amalgamation as the Imperial Bank of India on 27

January 1921.

Primarily Anglo-Indian creations, the three presidency banks came into existence

either as a result of the compulsions of imperial finance or by the felt needs of local

European commerce and were not imposed from outside in an arbitrary manner to

modernize India's economy. Their evolution was, however, shaped by ideas culled from

similar developments in Europe and England, and was influenced by changes occurring in

the structure of both the local trading environment and those in the relations of the Indian

economy to the economy of Europe and the global economic framework.

Establishment

The establishment of the Bank of Bengal marked the advent of limited liability,

joint-stock banking in India. So was the associated innovation in banking, viz. the decision

to allow the Bank of Bengal to issue notes, which would be accepted for payment of public

revenues within a restricted geographical area. This right of note issue was very valuable

not only for the Bank of Bengal but also its two siblings, the Banks of Bombay andMadras. It meant an accretion to the capital of the banks, a capital on which the proprietors

did not have to pay any interest.

The concept of deposit banking was also an innovation because the practice of

accepting money for safekeeping (and in some cases, even investment on behalf of the

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clients) by the indigenous bankers had not spread as a general habit in most parts of India.

But, for a long time, and especially up to the time that the three presidency banks had a

right of note issue, bank notes and government balances made up the bulk of the investible

resources of the banks.

The three banks were governed by royal charters, which were revised from time to

time. Each charter provided for a share capital, four-fifth of which were privately

subscribed and the rest owned by the provincial government. The members of the board of

directors, which managed the affairs of each bank, were mostly proprietary directors

representing the large European managing agency houses in India. The rest were

government nominees, invariably civil servants, one of whom was elected as the president

of the board.

Business

The business of the banks was initially confined to discounting of bills of

exchange or other negotiable private securities, keeping cash accounts and receiving

deposits and issuing and circulating cash notes. Loans were restricted to Rs.one lakh and

the period of accommodation confined to three months only. The security for such loans

was public securities, commonly called Company's Paper, bullion, treasure, plate, jewels,

or goods 'not of a perishable nature' and no interest could be charged beyond a rate of

twelve per cent. Loans against goods like opium, indigo, salt woolens, cotton, cotton piece

goods, mule twist and silk goods were also granted but such finance by way of cash credits

gained momentum only from the third decade of the nineteenth century. All commodities,

including tea, sugar and jute, which began to be financed later, were either pledged or

hypothecated to the bank. Demand promissory notes were signed by the borrower in favor

of the guarantor, which was in turn endorsed to the bank. Lending against shares of the

banks or on the mortgage of houses, land or other real property was, however, forbidden.

Indians were the principal borrowers against deposit of Company's paper, while

the business of discounts on private as well as salary bills was almost the exclusive

monopoly of individuals Europeans and their partnership firms. But the main function of

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the three banks, as far as the government was concerned, was to help the latter raise loans

from time to time and also provide a degree of stability to the prices of government

securities.

Major change in the conditions

A major change in the conditions of operation of the Banks of Bengal, Bombay

and Madras occurred after 1860. With the passing of the Paper Currency Act of 1861, the

right of note issue of the presidency banks was abolished and the Government of India

assumed from 1 March 1862 the sole power of issuing paper currency within British India.

The task of management and circulation of the new currency notes was conferred on the

presidency banks and the Government undertook to transfer the Treasury balances to the

banks at places where the banks would open branches. None of the three banks had till then

any branches (except the sole attempt and that too a short-lived one by the Bank of Bengal

at Mirzapore in 1839) although the charters had given them such authority.

The State Bank of India was thus born with a new sense of social purpose aided by

the 480 offices comprising branches, sub offices and three Local Head Offices inherited

from the Imperial Bank. The concept of banking as mere repositories of the community's

savings and lenders to creditworthy parties was soon to give way to the concept of

purposeful banking sub serving the growing and diversified financial needs of planned

economic development.

Branches

The corporate center of SBI is located in Mumbai. In order to cater to different

functions, there are several other establishments in and outside Mumbai, apart from the

corporate center. The bank boasts of having as many as 14 local head offices and 57 Zonal

Offices, located at major cities throughout India. It is recorded that SBI has about 10000

branches, well networked to cater to its customers throughout India.

ATM Services

SBI provides easy access to money to its customers through more than 8500 ATMs

in India. The Bank also facilitates the free transaction of money at the ATMs of State Bank

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Group, which includes the ATMs of State Bank of India as well as the Associate Banks

State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, etc. You

may also transact money through SBI Commercial and International Bank Ltd by using the

State Bank ATM-cum-Debit (Cash Plus) card.

The eight banking subsidiaries are:

State Bank of Bikaner and Jaipur (SBBJ)

State Bank of Hyderabad (SBH)

State Bank of India (SBI)

State Bank of Indore (SBIR)

State Bank of Mysore (SBM) State Bank of Patiala (SBP)

State Bank of Saurashtra (SBS)

State Bank of Travancore (SBT)

1.3.2 Vision and Values

Vision statement

To be amongst most trusted power utility company ofthe country by providing

environment friendly power on most cost effective basis, ensuring prosperity for

its stakeholders and growth with human face.

Values

Excellence in customer service

Profit orientation

Belonging and commitment to the bank.

1.3.3 Achievements/ recognition

Business Standard has been awarded the Banker of the Year Award to Shri

O.P.Bhatt.

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June 08 Awards & Recognitions CNN IBN Network 18 has selected Shri

O.P.Bhatt as Indian of the Year Business 2007.

Asian Centre for Corporate Governance & Sustainability and Indian Merchants

Chamber has awarded the Transformational Leader Award 2007.

State Bank of India ranked as NO.1 in the 4Ps B & M & ICMR Survey on India's

Best Marketed Banks in August-2009.

Shri Om Prakash Bhatt declared as one of the '25 Most Valuable Indians' By The

Week Magazine For 2009.

State Bank of India has been adjuged The Best Bank 2009 By Business India in

August-2009.

It bagged Most Preferred Bank and Most Preferred Brand for Home Loan at

CNBC Awaaz Consumer Awards.

It became the only Indian bank to get listed in the Fortune Global 500 List.

SBI was at the 70th slot in the top 1000 bank survey by Banker Magazine.

It was awarded Golden award for being among the two most trusted banks in India

by Readers Digest.

SBI is ranked 6th in the Economic Times Market Cap List.

SBI ranked as no.1 in the 4Ps B & M & ICMR Survey on India's Best Marketed

Banks (August-2009)

1.3.4 SWOT Analysis

STRENGTHS

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SBI has 49% CASA deposits which is the highest among the banks. State bank of

India has the history of great resource raising ability. Their CASA deposits are in

advantage. The dependence on external resource is minimal.

W E A K N E S S E S

Stand alone Credit Ratings downgraded from C- to D+ (C denotes adequate

intrinsic Financial Strength and D suggests Modest intrinsic financial strength,

requiring outside support at times)

Ratings lowered due to SBIs Low Tier 1 Capital (7.6% as on June 11) below GOI

Committed Level of 8% and increasing high stressed asset quality (3.52% June11)

it is estimating that stress case may go up to 12.07% under pessimistic conditions.

Its a warning bell rather than disrupting Systematic Stability.

OPPORTUNITIES

The Banks/NBFC companies have been attempting to diversify their resources base

by increasingly accessing the capital markets and secondary market for its

resources.

THREATS

Advent of MNC banks

Customer Relationship Management

Private bank venturing into the rural

1.4 LITERATURE REVIEW

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

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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)

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.

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

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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 acomplement to on-site examinations.

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.

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 componentsearnings

objectively discriminates among the ratings.

CHAPTER 2

THE MAIN THEME OF THE PROJECT

2.1 NEED FOR THE STUDY

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2.1.1The CAMEL 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.

In 1994, the RBI established the Board of Financial Supervision (BFS), which

operates as a unit of the RBI. The entire supervisory mechanism was realigned to suit the

changing needs of a strong and stable financial system. The supervisory jurisdiction of the

BFSwas slowly extended to the entire financial system barring the capital market

institutions and the insurance sector. Its mandate is to strengthen supervision of the

financial system by integrating oversight of the activities of financial services firms.

The BFS has also established a sub-committee to routinely examine auditing

practices, quality, and coverage. In addition to the normal on-site inspections, Reserve

Bank of India also conducts off-site surveillance which particularly focuses on the risk

profile of the supervised entity. The Off-site Monitoring and Surveillance System

(OSMOS) were introduced in 1995 as an additional tool for supervision of commercialbanks. It was introduced with the aim to supplement the on-site inspections. Under off-site

system,12 returns (called DSB returns) are called from the financial institutions, which

focus on supervisory concerns such as capital adequacy, asset quality, large credits and

concentrations, connected lending, earnings and risk exposures (viz. currency, liquidity and

interest rate risks). In 1995, RBI had set up a working group under the chairmanship of Shri

S. Padmanabhan to review the banking supervision system.

The Committee certain recommendations and based on such suggestions a ratingsystem for domestic and foreign banks based on the international CAMELS model

combining financial management and systems and control elements was introduced for the

inspection cycle commencing from July 1998. It recommended that the banks should be

rated on a five point scale (A to E) based on the lines of international CAMELS rating

model. All exam materials are highly confidential, including the CAMELS.

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2.1.1.1 Capital Adequacy

A Capital Adequacy Ratio is a measure of a bank's capital. It is expressed as a

percentage of a banks risk weighted credit exposures. Also known as ""Capital to Risk

Weighted Assets Ratio (CRAR). Capital adequacy is measured by the ratio of capital to

risk-weighted assets (CRAR). 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.

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 Basel Committee) of Bank for

International Settlements, a minimum 8 percent CRWA is required. Capital adequacy

ultimately determines how well financial institutions can cope with shocks to their balance

sheets. Thus, it is useful to track capital-adequacy ratios that take into account the most

important financial risksforeign exchange, credit, and interest rate risksby assigning

risk weightings to the institutions assets.

2.1.1.2 Asset Quality:

Asset quality determines the robustness of financial institutions against loss of

value in the assets. The deteriorating value of assets, being prime source of banking

problems, directly pour into other areas, as losses are eventually written-off against capital,

which ultimately jeopardizes 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,

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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 on-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 (GNPA). The gross non-performing loans to gross advances ratio is more indicative

of the quality of credit decisions made by bankers. Higher GNPA 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.

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2.1.1.3 Management Soundness

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. In effect, management rating is just an amalgam of performance in the above-

mentioned areas. 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

expenditure to total income and operating expense to total expense helps in gauging the

management quality of the banking institutions. Sound management is key to bank

performance but is difficult to measure. It is primarily a qualitative factor applicable to

individual institutions. Several indicators, however, can jointly serveas, for instance,

efficiency measures doas an indicator of management soundness. The ratio of non-

interest expenditures to total assets (MGNT) can be one of the measures to assess the

working of the management. . This variable, which includes a variety of expenses, such as

payroll, workers compensation and training investment, reflects the management policy

stance.

2.1.1.4 Earnings & 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

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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 Net

Interest Margins (NIM) is also used. Chronically unprofitable financial institutions risk

insolvency. Compared with most other indicators, trends in profitability can be more

difficult to interpretfor instance, unusually high profitability can reflect excessive risk

taking.

ROA-Return on Assets

An indicator of how profitable a company is relative to its total assets. ROA gives

an idea as to how efficient management is at using its assets to generate earnings.

Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as

a percentage. Sometimes this is referred to as "return on investment".

ROA tells what earnings were generated from invested capital (assets). ROA for

public companies can vary substantially and will be highly dependent on the industry. This

is why when using ROA as a comparative measure, it is best to compare it against a

company's previous ROA numbers or the ROA of a similar company. The assets of the

company are comprised of both debt and equity. Both of these types of financing are used

to fund the operations of the company.

The ROA gives investors an idea of how effectively the company is converting themoney it has to invest in tone income. The higher the ROA number, the better, because the

company is earning more money on less investment. For example, if one company has a

net income of $1 million and total assets of $5 million, its ROA is 20%; however, if

another company earns the same amount but has total assets of $10 million, it has an ROA

of 10%. Based on this example, the first company is better at converting its investment into

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profit. When you really think about it, management's most important job is to make wise

choices in allocating its resources. Anybody can make a profit by throwing at on of money

at a problem, but very few managers excel at making large profits with little investment.

2.1.1.5 Liquidity

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

sufficient funds, either by increasing liabilities or by converting its assets quickly at a

reasonable cost. It is, therefore, generally assessed in terms of overall assets and liability

management, as mismatching gives rise to liquidity risk. Efficient fund management refers

to a situation where a spread between rate sensitive assets (RSA) and rate sensitive

liabilities (RSL) is maintained. The most commonly used tool to evaluate interest rate

exposure is the Gap between RSA and RSL, while liquidity is gauged by liquid to total

asset ratio. Initially solvent financial institutions may be driven toward closure by poor

management of short-term liquidity. Indicators should cover funding sources and capture

large maturity mismatches. The term liquidity is used in various ways, all relating to

availability of, access to, or convertibility into cash.

Resiliency is the speed with which prices return to equilibrium following a large trade.

Examples of assets that tend to be liquid include foreign exchange; stocks traded in the

Stock Exchange or recently issued Treasury bonds. Assets that are often illiquid include

limited partnerships, thinly traded bonds or real estate.

Cash maintained by the banks and balances with central bank, to total asset ratio

(LQD) is an indicator of bank's liquidity. In general, banks with a larger volume of liquid

assets are perceived safe, since these assets would allow banks to meet unexpectedwithdrawals.

Credit deposit ratio is a tool used to study the liquidity position of the bank. It is

calculated by dividing the cash held indifferent forms by total deposit. A high ratio shows

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that there are more amounts of liquid cash with the bank to meet its clients cash

withdrawals.

2.1.1.6 Sensitivity to Market Risk

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

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

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 institutions

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 managements

ability to monitor and control market risk. Banks are increasingly involved in diversified

operations, all of which are subject to market risk, particularly in the setting of interest

rates and the carrying out of foreign exchange transactions. In countries that allow banks to

make trades in stock markets or commodity exchanges, there is also a need to monitor

indicators of equity and commodity price risk.

2.1.1.7 Interest Rate Risk Basics

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

balance the quantity of reprising assets with the quantity of reprising liabilities. For

example, when a bank has more liabilities reprising in a rising rate environment than assets

reprising, the net interest margin (NIM) shrinks. Conversely, if your bank is asset sensitive

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in a rising interest rate environment, your NIM will improve because you have more assets

reprising at higher rates.

An extreme example of a reprising imbalance would be funding 30-year fixed-rate

mortgages with6-month CDs. You can see that in a rising rate environment the impact on

the NIM could bed evastating as the liabilities reprise at higher rates but the assets do not.

Because of this exposure, banks are required to monitor and control IRR and to maintain a

reasonably well-balanced position.

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.

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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 marked-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. The decision is important because firms employ fundamentally

different techniques for managing the two risks. Business risk is managed with along-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.

2.2 SCOPE OF THE STUDY

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2.3 OBJECTIVE OF STUDY

To evaluate the financial performance of State Bank of India by using

CAMELS model technique.

To analyze three banks to get the desired results by using CAMEL as a tool

of measuring performance.

To analyze the banks performance through CAMEL model and give

suggestion for improvement if necessary.

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2.4 LIMITATIONS OF STUDY

Time and resources constraints.

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

sheets.

It has not been possible to get a personal interview with the top management

employees of SBI.

It has not been possible to get sensitive real data on actual CAMELS analysis

performed by the RBI on State bank of India.

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2.5 RESEARCH METHODOLOGY

Research Methodology is a way to systematically solve the research problem. It

may be understood as a science of studying how the research has to be done scientifically.

From this we analyze and study the various steps that ate generally adopted by the research

and study the research problem along with the logic behind them.

RESEARCH

Research is common parlance refers to search for knowledge. One can also define

research as a scientific and systematic search for pertinent information on a specific topic.

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RESEARCH DESIGN

Research Design is a framework or plan for a study that guides the collection and

analysis of the data. A research design is the arrangement of conditions for collection and

analysis of data in a manner that aims to combine relevance to the research purpose with

economy in procedure. The design used in the study is quantitative and analytical.

METHOD OF DATA COLLECTION

The period for evaluating performance through CAMELS in this study is four

years, i.e. from financial year 2008-09 to 2010-11. The data is collected from various

sources as follows.

Primary data:

A Primary data is a data, which is collected for the first time for a particular interest

to have more information. Primary data was collected from the company balance sheets

and company profit and loss statements and interaction with the employees of State Bank

of India.

Secondary data:

Secondary data are those which have already been collected by someone else and

which have already passed through the statistical processes.

Secondary data on the subject was collected from Business journals, Business

dailies, company prospectus, company annual reports and RBI websites.

TOOLS USED

The tools used are

CAMEL Analysis

Trend Analysis

Comparative Analysis

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Trend Analysis

Trend Analysis is the practice of collecting information and attempting to spot a

pattern, or trend, in the information. In some fields of study, the term "trend analysis" has

more formally-defined meanings. Although trend analysis is often used to predict future

events, it could be used to estimate uncertain events in the past. Considering the base year

as 2008.

2.6 DATA ANALYSIS AND INTERPRETATION

ANALYSIS

Analysis is the process of placing the data in the ordered form, combining them

with the existing information and extracting the meaning from them. Only analysis brings

out the information from the data.

INTERPRETATION

Interpretation is the process of relating various factors with other information. It

brings out the relation between the findings to the research objectives and hypothesis

framed for the study in the beginning.

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STATISTICAL TOOLS

To analyze the data the following tools were applied:

CAMEL Analysis

Trend Analysis

Comparative Analysis

2.6.1 CAMEL Analysis

Table no: 2.6.1.1 Capital Risk Adequacy Ratio

Capital risk adequacy ratio is used to protect depositors and promote the stability

and efficiency of financial systems around the world.

Capital Risk Adequacy Ratio= Capital fund of the bank/ Risk weighted assets*100

Year Capital Fund (Tier 1

and Tier 2)

Risk weighted asset Ratio %

2007 4882.29 - -

2008 10368 72761 14.252009 2339.92 82148 13.39

2010 4882.27 33918.87 13.40

2011 3399.45 25376.24 14.39

Source: Secondary Data

Chart: 2.6.1.1 Capital adequacy ratio

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Interpretation:

Capital risk adequacy ratiohas reduced from the year 2009 to 2011 from 14.25 %

to 11.98%. It is expressed as a percentage of a bank's risk weighted credit exposures.

TABLE NO 2.6.1.2 Debt to Equity Ratio

Debt to Equity Ratio(%) = (Borrowings / Total Shareholders Equity)

Years Total liability Share holders equity Debt Equity ratio%

2008 721526 6583266.4 10.96

2009 964432 7528743.1 12.81

2010 10534 86415 12.19

2011 12237 85159 14.37


Chart: 2.6.1.2 Debt to Equity Ratio

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Interpretation:

The debt equity ratio has increased from 2008 to 2009 and decreased and

again increased in the year 2011 from 10.91 % (2008) to 14.37 % (2011).

TABLE NO 2.6.1.3 Advances to assets ratio

Advances to assets ratio (%) = (Advance /total asset)

Year Advances Total asset Advances to assets

ratio%

2008 416,768 721,526 57.76

2009 542,503 964,432 56.252010 631,914 1,053,413 60.0

2011 756,719 1223736 61.8


Chart: 2.6.1.3 Advances to assets ratio

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Interpretation:

The advance to asset ratio has seen decrease from 2008 to 2009 but then

increased from 56.25 % to 61.8 % steadily in 2011.

TABLE NO 2.6.1.4 Govt.securities to Total investments ratio

Govt.securities to Total investments ratio (%) = Govt securities / Total investments

Year G-sec Total investments G-sec to

investments ratio

5435.71

2008 4849.32 189,501 74.26

2009 226217 275,953 81.98

2010 104018398 285,790 79.32

2011 100218617 295600 78.05


Chart: 2.6.1.4 Govt.securities to Total investments ratio

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Interpretation:

The govt.securities to investment ratio increases from 2008 to 2009 as74.26% to

81.98% and decreases in the next two years from 79.32% to 78.05%.

A-ASSET QUALITY

TABLE NO 2.6.1.5 Gross NPA ratio

Gross NPA ratio(%) = (Gross NPA/Total Loan)

Year Gross NPA Total loan Gross NPA ratio

2007 158.89 4222.7 3.04

2009 179.13 5494.4 2.86

2010 12347 4048.19 3.05

2011 25326 7721.34 3.28


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Chart: 2.6.1.5 Gross NPA ratio

Interpretation:

The asset quality ratio has decreased from 3.045 to 2.86% in the first two years

but has increased in the last two year from 3.05% to 3.28% from 2010 to 2011.

TABLE NO 2.6.1.6 Net NPA ratio

Net NPA ratio (%)= (Net NPA/ Total Loan)

Year Net NPA Total Loan Net NPA ratio

2008 7424.33 4170.97 1.78

2009 9552 5336.31 1.79

2010 10870.17 6319 1.72

2011 12347 7574.85 1.63


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Chart: 2.6.1.6 Net NPA ratio

Interpretation:

The net NPA ratio has increased from the year 2008 to 2009 as 1.78 to 1.79

Again it has decreased from 2010 to 2011 to 1.63.

M-MANAGEMENT QUALITY

TABLE NO 2.6.1.7 Total Advance to Total Deposit Ratio

Total Advance to Total Deposit Ratio = (Total Advance/ Total Deposit)* 100

Year Total Advance Total Deposit Total Advance to

Total Deposit Rat

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2008 416,768 537,403 77.55

2009 542,503 742,073 73.10

2010 631,914 804,116 78.58

2011 756719 933932 81.02


Chart: 2.6.1.7 Total Advance to Total Deposit Ratio

Interpretation:

The net total advance to total deposit ratio has decreased from the year 2008

to 2009 from 77.55%. Then increased from 78.58% to 81.02% in the year 2010 to 2011.

TABLE NO 2.6.1.8 Business per employee ratio

Business per employee ratio (%) = Total Income / No.of Employees

Year Total Income No.of Employees Business per

employee ratio

2008 58,348 179205 3.26

2009 76,479 205896 3.71

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2010 85,962 200299 4.30

2011 96,329 222933 4.36


Chart: 2.6.1.8 Business per employee ratio

Interpretation:

Business per employee ratio kept on increasing from 2008 to 2011 from

3.26% to 4.36%.

TABLE NO 2.6.1.9 Profit per employee ratio

Profit per employee ratio (%) = Net Profit / No.of Employees

Year Net Profit No.of Employees Profit per employee

ratio

2008 6,729 179205 3.75

2009 9,121 205896 4.43

2010 9,166 200299 4.58

2011 7,370 222933 3.30

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Chart: 2.6.1.9 Profit per employee ratio

Interpretation:

Profit per employee ratio increased from 2008 to 2010 as 3.75% to 4.58% and

decreased in the year 2011 as3.30%.

E-EARNING PERFORMANCE

TABLE NO 2.6.1.10 Dividend Payout Ratio

Dividend Payout Ratio = (dividend / net profit)

Year dividend Net profit DividendPayout Ratio

2008 1,357 6,729 20.17

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2009 1,841 9,121 20.18

2010 1,904 9,166 20.77

2011 1,905 7,370 25.85


Chart: 2.6.1.10 Dividend Payout Ratio

Interpretation:

Dividend payout ratio increased continuously from 2008 to 2011 from 20.17% to

25.85%

TABLE NO 2.6.1.11 Return on Assets

Return on Assets (%) = Net Income after Tax x 100/ Average Total Assets

Year Net income Total assets Return on assets

2008 6,729 721,526 1.02

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2009 9,121 964,432 1.04

2010 9,166 1,053,413 0.87

2011 8,264 1223736 0.7


Chart: 2.6.1.11 Return on Assets

Interpretation:

The return on asset ratio has increased from 2008 to 2009 from 1.02% to1.04% .Then

decreased from 0.87% to 0.7% from 2010 to 2011.

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TABLE NO 2.6.1.12 Return on Equity

Return on Equity (%) = Net Income after Tax x 100/ Average Total Equity

Funds

Year Net income Total equity fund Return on equity2008 6729.12 631.47 10.65

2009 9121.23 634.88 14.36

2010 9166.05 634.88 14.43

2011 7370.35 635 11.6


Chart: 2.6.1.12 Return on Equity

Interpretation:

The return on equity ratio has seen a increase from the year 2008 to 2009 from

10.65% to 14 .36% whereas it has reduced in the next year and decreased from 2010 to

2011 from 14.435 to 11.60%.

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TABLE NO 2.6.1.13 Liquidity asset to Total Asset Ratio

Liquidity asset to Total Asset Ratio (%) = Liquidity Asset/ Total Asset

Year Liquidity asset to

Total Asset Ratio

Total Asset Liquidity asset to

Total Asset Ratio

2008 54673.84 721,526 7.58

2009 59120.58 964,432 6.13

2010 65408.6 1,053,413 6.20

2011 98817.45 1223736 8.07


Chart: 2.6.1.13 Liquidity asset to Total Asset Ratio

Interpretation:

Liquidity asset to total asset ratio decreased from 7.58% to 6.13% in the year 2008 to

2009 and then increased from 2010 to 2011 from 6.2% to 8.07%.

TABLE NO 2.6.1.14 Liquidity asset to Total Deposit Ratio

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Liquidity asset to Total Deposit Ratio (%) = Liquidity Asset/ Total deposit

Year Liquidity asset Total Deposit Liquidity asset to

Total Deposit Ratio

2008 54673.84 537,403 10.17

2009 59120.58 742,073 7.97

2010 65408.6 804,116 8.13

2011 98817.45 933932 10.58


Chart: 2.6.1.14 Liquidity asset to Total Deposit Ratio

Interpretation:

Liquidity asset to total deposit ratio decreased from 10.17% to 7.97% in the year

2008 to 2009 and increased in the year 2011 to 10.58%.

2.6.2 TREND ANALYSIS

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Table no 2.6.2.1 Balance sheet of State bank of India

PARTICULARS 2008 2009 2010 2011

Liabilities:

Total share capital 100 100.54 0 100.01

Equity share capital 100 100.54 0 100.01

Reserves 100 118.41 113.96 98.48

Net worth 100 118.18 113.80 98.54

Deposits 100 138.08 108.36 116.14

Borrowings 100 103.84 191.78 116.07

Total debt 100 135.08 113.90 116.14

Other liabilities &provisions

100 132.80 72.57 131.09

Total liabilities 100 133.66 109.23 116.17

Assets

Cash&balance withRBI

100 107.78 110.34 154.01

Balance withbanks,money at call

100 306.67 71.42 81.62

Advance 100 130.17 116.48 119.75

Investment 100 145.62 103.56 103.65

Gross block 100 115.74 113.73 111.47

Accumulateddepreciation

100 116.75 112.96 113.53

Net block 100 113.86 115.20 107.63

Capital work in

progress

100 112.46 112.04 112.55

other assets 100 84.95 93.05 124.68

Total assets 100 133.66 109.23 116.17

Interpretation:

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The cash balance of State bank of India is in increasing trend. Investment is in

fluctuating trend i.e. increases and decreases. Share capital increases and goes to zero and

then again increases. Reserves is fluctuating, it increases and again decreases. The total

asset of the bank is fluctuating. The total liabilities also increase and then again decrease

and increase again.

2.6.3 COMPARATIVE ANALYSIS OF SBI,ICICI AND HDFC

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Table no: 2.6.3.1 Capital Adequacy Ratio

PARTICULARS 2008 2009 2010 2011

SBI 13.47% 14.25% 13.39% 11.98%

ICICI 13.97% 15.53% 19.41% 19.54%

HDFC 13.60% 15.10% 17.40% 16.22%


Chart: 2.6.3.1 Capital Adequacy Ratio

Interpretation:

Capital Adequacy Ratio of SBI increased from 13.47% to 14.25% and again

goes on decreases to 11.98% in the year 2011. ICICI is increasing from 13.97% to 19.54%

in the year from 2008 to 2011. HDFC is increased from 13.60% to 17.40% in the year 2008

to 2010 and again decreased to 16.22% in the year 2011.

Table no: 2.6.3.2 Gross NPA Assets

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PARTICULARS 2008 2009 2010 2011

SBI 3.04 2.84 3.05 3.41

ICICI 3.3 4.32 5.06 5.41

HDFC 1.3 1.98 1.43 1.67Source: Secondary Data

Chart: 2.6.3.2 Gross NPA Assets

Interpretation:

Gross NPA asset of SBI decreased from 3.04% to 2.84% in the year 2008 to 2009

and again increased to 3.41%. ICICI keeps on increasing in nonperforming asset from 3.3%

to 5.41%. HDFC is fluctuating i.e. increases and decreases from 2008 to 2011.

Table no: 2.6.3.3 Net NPA Assets

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PARTICULARS 2008 2009 2010 2011

SBI 1.78 1.76 1.72 1.91

ICICI 1.12 2.09 2.12 2.41

HDFC 0.5 0.6 0.5 1.32


Chart: 2.6.3.3 Net NPA Assets

Interpretation:

Net NPA asset of SBI keeps on decreases for the first two years and increased to

1.91% in the year 2011. ICICI NPA keeps on increasing. HDFC is fluctuating i.e.

decreases and increases to 1.32%

Table no: 2.6.3.4 Total advance to Total deposit Ratio

PARTICULARS 2008 2009 2010 2011

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SBI 6.32 7.2 7.26 7.24

ICICI 5.61 5.14 4.6 3.55

HDFC 5.18 5 4.24 4.65


Chart: 2.6.3.4 Total advance to Total deposit Ratio

Interpretation:

Total advance to total deposit ratio of SBI is increases from 6.32% to 7.26%

in the year 2008 to 2010 and decreased to 7.24%. ICICI keeps on decreasing from 5.61% to

3.55%. HDFC decreases from 5.18% to 4.24% and increases to 4.65% in the year 2011.

Table no: 2.6.3.5 Asset turnover Ratio

PARTICULARS 2008 2009 2010 2011

SBI 126.62 143.77 144.37 116.07

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ICICI 39.39 33.76 36.14 44.73

HDFC 46.2 52.9 67.6 84.4


Chart: 2.6.3.5 Asset turnover Ratio

Interpretation:

Asset turnover ratio of SBI is fluctuating from 126.62% to 116.07% in the

year 2008 to 2011 and decreases to 116.97%. ICICI is also fluctuating i.e. decreases and

increases from 39.39% to 44.73%.HDFC keeps on increasing from 46.2% to 84.4% in the

year 2008 to 2011.

Table no: 2.6.3.6 Net profit margin

PARTICULARS 2008 2009 2010 2011

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SBI 11.65 12.03 10.54 8.55

ICICI 10.51 9.74 12.17 15.91

HDFC 12.82 11.35 14.76 16.09


Chart: 2.6.3.6 Net profit margin

Interpretation:

Net profit ratio of SBI is fluctuating i.e. increases and decreases from 11.65% to

8.55%.ICICI net profit if fluctuating ,decreased and increased from 10.51% to

15.91%.HDFC is fluctuating i.e. decreases and increases from 12.82% to 16.09%.

Table no: 2.6.3.7 Return on Asset

PARTICULARS 2008 2009 2010 2011

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SBI 1.01 1.04 0.88 1.37

ICICI 1.12 0.98 1.13 1.23

HDFC 1.42 1.42 1.45 1.82


Chart: 2.6.3.7 Return on Asset

Interpretation:

Return on asset of SBI is fluctuating, it increases and decreases from 2008 to 2011

as 1.01% to 1.37%. ICICI if fluctuating ,it decreases and increases from 1.12% to

1.23%.HDFC remains constant for two years as 1.42% and increases from 1.45% to 1.82%.

Table no: 2.6.3.8 Assessing Liquidity

PARTICULARS 2008 2009 2010 2011

SBI 77.55 73.11 78.58 81.03

ICICI 92.3 99.98 89.7 95.91

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HDFC 62.74 69.24 75.17 76.7


Chart: 2.6.3.8 Assessing Liquidity

Interpretation:

Assessing the liquidity ratio of SBI is in fluctuating flow i.e. decreases from

73.11% and increases to 78.58%. ICICI liquidity also fluctuates i.e. increases, decreases

and again increases to 95.91% in the year 2011. HDFC liquidity is increases from 62.74%

to 76.7% in the year 2008 to 2011.

2.6.4 FINDINGS

Capital risk adequacy ratiohas reduced from the year 2009 to 2011 from 14.25 %

to 11.98%. It is expressed as a percentage of a bank's risk weighted credit

exposures.

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The debt equity ratio has increased from 2008 to 2009 and decreased and again

increased in the year 2011 from 10.91 % (2008) to 14.37 % (2011).

The advance to asset ratio has seen decrease from 2008 to 2009 but then increased

from 56.25 % to 61.8 % steadily in 2011.

The govt.securities to investment ratio increases from 2008 to 2009 as74.26%

to 81.98% and decreases in the next two years from 79.32% to 78.05%.

The asset quality ratio has decreased from 3.045 to 2.86% in the first two years but

has increased in the last two year from 3.05% to 3.28% from 2010 to 2011.

The net NPA ratio has increased from the year 2008 to 2009 as 1.78 to 1.79

again it has decreased from 2010 to 2011 to 1.63.

The net total advance to total deposit ratio has decreased from the year 2008 to

2009 from 77.55%. Then increased from 78.58% to 81.02% in the year 2010 to

2011.

Business per employee ratio kept on increasing from 2008 to 2011 from 3.26%

to 4.36%.

Profit per employee ratio increased from 2008 to 2010 as 3.75% to 4.58%

and decreased in the year 2011 as3.30%.

Dividend payout ratio increased continuously from 2008 to 2011 from 20.17% to

25.85%

The return on asset ratio has increased from 2008 to 2009 from 1.02% to1.04%

.Then decreased from 0.87% to 0.7% from 2010 to 2011.

The return on equity ratio has seen a increase from the year 2008 to 2009

from 10.65% to 14 .36% whereas it has reduced in the next year and decreased

from 2010 to 2011 from 14.435 to 11.60%.

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Liquidity asset to total asset ratio decreased from 7.58% to 6.13% in the year

2008 to 2009 and then increased from 2010 to 2011 from 6.2% to 8.07%.

Capital Adequacy Ratio of SBI increased from 13.47% to 14.25% and again goes

on decreases to 11.98% in the year 2011. ICICI is increasing from 13.97% to

19.54% in the year from 2008 to 2011. HDFC is increased from 13.60% to 17.40%

in the year 2008 to 2010 and again decreased to 16.22% in the year 2011.

Gross NPA asset of SBI decreased from 3.04% to 2.84% in the year 2008 to

2009 and again increased to 3.41%. ICICI keeps on increasing in nonperforming

asset from 3.3% to 5.41%. HDFC is fluctuating i.e. increases and decreases from

2008 to 2011.

Net NPA asset of SBI keeps on decreases for the first two years and increased

to 1.91% in the year 2011. ICICI NPA keeps on increasing. HDFC is fluctuating

i.e. decreases and increases to 1.32%

Total advance to total deposit ratio of SBI is increases from 6.32% to 7.26% in the

year 2008 to 2010 and decreased to 7.24%. ICICI keeps on decreasing from 5.61%

to 3.55%. HDFC decreases from 5.18% to 4.24% and increases to 4.65% in the

year 2011.

Asset turnover ratio of SBI is fluctuating from 126.62% to 116.07% in the year

2008 to 2011 and decreases to 116.97%. ICICI is also fluctuating i.e. decreases and

increases from 39.39% to 44.73%.HDFC keeps on increasing from 46.2% to 84.4%

in the year 2008 to 2011.

Net profit ratio of SBI is fluctuating i.e. increases and decreases from 11.65%

to 8.55%.ICICI net profit if fluctuating ,decreased and increased from 10.51% to

15.91%.HDFC is fluctuating i.e. decreases and increases from 12.82% to 16.09%.

Return on asset of SBI is fluctuating, it increases and decreases from 2008 to

2011 as 1.01% to 1.37%. ICICI if fluctuating ,it decreases and increases from

1.12% to 1.23%.HDFC remains constant for two years as 1.42% and increases from

1.45% to 1.82%.

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Assessing the liquidity ratio of SBI is in fluctuating flow i.e. decreases from

73.11% and increases to 78.58%. ICICI liquidity also fluctuates i.e. increases,

decreases and again increases to 95.91% in the year 2011. HDFC liquidity is

increases from 62.74% to 76.7% in the year 2008 to 2011.

CHAPTER 3

SUGGESTIONS AND CONCLUSION

3.1 SUGGESTIONS

To further optimize Capital Adequacy

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Export Credit Covered under ECGC(those which are not covered earlier) to reduce

the capital

requirement by Rs.10-14 Bn

SME activities up to Rs.10 mn under Credit Guaranteed Fund Trust for MSME canbe increased

from current Rs.310 bn to Rs. 650-700 bn. Hence any loans losses would be borne

by Guarantor.

Hopeful of capital infusion by Dec2011 or latest by March 2012 which will

increase

Tier 1 ratio 9%

3.2 CONCLUSION

ANNEXURE

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FINDINGS

Currently SBIs Tier 1 capital position has remained lower than of 8%

SBIs Tier 1 Capital stood comfortable level of 9.57% until Q4 FY10. However in

March 11,

SBIs pension Liability amounting Rs.7900 Crs. Was taken through its capital

account, thus

resulting in the bank Tier 1 capital declining below 8% to 7.77% and further by 17

bps to 7.6% in

June 11.

The non-performing assets of SBI is the highest among public sector banks with

few exceptions.

The economic slowdown lack of coal for power projects, poor investments in

infrastructure by

Government can also affect the asset quality.

CRAMEL Model

Capital Adequacy

It is obvious that a Bank/Finance companies should keep more capital in reserves

for riskier assets.

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The reported capital adequacy is in compliance with RBI requirements. Banks

minimum 9%(tier 1 capital %) and NBFC deposit taking 12% to 15% from March

12

Basel norms suggest CAR of 8%. RBI as proposed CAR of 9%by 2012. CAR is

one of the main criteria taken for rating.

Banking industry keeps 15-20%capital normally. Tier 1 capital is equity &

reserves. Tier 2is Bonds of five years and above. The rest is mobilized as resource.

Cash with RBI as Zero risk. Personal loans without security as175% risk. In case of

govt. banks management is not a concern.

Resource Raising Ability

The raising a resource funds is like a raw material to the Banks/ Finance company.

Reverse Repo, Call money, CDS,CASA, Bonds ,Other Borrowings

Management

The quality of a companys management, its business strategies and ability and

track record in

responding to changes in market conditions form a central input in the credit

assessment.

In the evaluation , the parentage of the organization is also important.

Shareholding Pattern & Structure

Market Share , Risk Management Systems ,Experience of Key Employees

As SBI is owned by the Government , the management co-related to the

Government. SBI has

59% shareholding by the Government and has long history. The market share of

SBI is 17% as a

whole and among Public Sector Banks it is 27%. SBI is a representative of allIndian Banks and

the Government.

Earnings

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Distribution of Income basket. It is important for both shareholders and Bond

holders.

Key Ratios

Return on Net worth

Return on Average Assets

Interest Spread

PAT to total income

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