INTRODUCTION TO THE STUDY

Financial statement is that statement which provides information on the firm’s

position at a point in time and its operation over a period of time.

Financial statement contains information about the wealth of the organization,

which if well analyzed and interpreted can provide valuable insight into firm’s

performance and its operations. Analysis of financial statement is of interests

to lenders, investor’s, owners, outsiders, shareholders and others.

Due to ongoing advancements in technology, new legislation, and other

innovation, the field of finance is rapidly changing. Introduction to finance

develops the three components of finance in an interactive framework that is

consistent with the responsibilities of all- financial professionals, managers,

intermediaries, and investors in today's economy. In the last decade, the

academic study of finance has experienced an infusion of new concept and

quantitative methodologies that pace it among the most sophisticated and

growing areas of business and economics.

New developments in the traditional areas of finance theory of rational

investor portfolio choice, interpretation and determination of security prices,

efficient corporate decision making has been approached from the perspective

of a single integrating paradigm derived from economic theory.

In our present day economy finance is defined as provision of money at a time

when it is required. Every enterprise whether it is big, medium or small needs

finance to carry out its operation and to achieve its target. Infact finance is so

indispensable today that it is rightly said to be lifeblood of enterprise without

adequate finance no enterprise can possibly accomplish it objectives

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The importance of corporation finance has arisen because of the fact that

present day business activities are predominantly on a company or corporate

form of organization. The advent of corporate enterprises has resulted into:

• the increase in size and influence of the business enterprise

• wide distribution of corporate ownership

• separation of ownership and management

These factors have increased the importance of finance.

AIMS OF FINANCE

• Acquiring sufficient funds

• Proper utilization of funds

• Increasing profitability Maximizing firms value

• Estimating financial requirements

• Deciding capital structure

• Selecting a source of finance

• Selecting a pattern of investment

• Proper cash management

• Implementing financial control

• Proper use of surplus

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BUSINESS FINANCE

Business finance is the activity, which is concerned with the acquisition and

conservation of capital funds in meeting the financial requirements and

overall objectives of the firm. Business finance deals primarily with raising,

administering and disbursing funds by private own business units operating in

non- financial fields of industry. To sum up in simple words we can say that

financial management as practiced by business firms can be called corporation

finance or business finance.

FINANCIAL STATEMENTS

Financial statements (or financial reports) are formal records of a business'

financial activities. It is a collection of data organized according to logical and

consistent accounting procedures. These statements provide an overview of a

business' profitability and financial condition in both short and long term.

A sound understanding of financial statements helps you:

• Identify unfavorable trends and tendencies in your business's operations

(for example, the unhealthy buildup of inventory or accounts receivable)

before the situation becomes critical.

• Monitor your cash flow requirements on a timely basis, and identify

financing needs early.

• Monitor important indicators of financial health (for example, liquidity

ratios, efficiency ratios, profitability ratios, and solvency ratios).

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• Monitor periodic increases and decreases in wealth (specifically, owners'

or stockholders' equity).

• Monitor your performance against your financial plan, if you have

developed one.

Definition

According to John N. Myer “the financial statements provide a summary of

the accounts of a business enterprise, the balance sheet reflecting the assets

and liabilities and the income statement showing the results of operations

during a certain period”

Objectives of financial statement

The primary objective of financial statements is to assist in decision making.

The Accounting Principles Board of America (APB) states the following other

objectives:

• To provide reliable financial information about economic resources and

obligations of a business firm.

• To provide other needed information about changes in such economic

resources and obligations.

• To provide reliable information about changes in net resources (resources

less obligations) arising out of business activities.

• To provide financial information that assists in estimating the earning

potentials of business.

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• To disclose, to the extent possible, other information related to the

financial statements that is relevant to the needs of the users of these

statements.

Types of financial statements

Generally Accepted Accounting Principles (GAAP) specify that a complete

set of financial statements must include:

• Balance Sheet

The American Institute of Certified Public Accountants defines Balance Sheet

as, “A tabular statement of summary of balances (debits and credits) carried

forward after an actual and constructive closing of books of account and kept

according to principles of accounting.”

The purpose of the balance sheet is to show the resources that the company

has, i.e., its assets, and from where those resources come from, i.e. its

liabilities and investments by owners and outsiders. The balance sheet shows

all the assets owned by the concern and all the liabilities and claims it owes to

owners and outsiders. The Companies Act, 1956 has prescribed a particular

form for showing assets and liabilities in the balance sheet for companies

registered under this act.

• Income Statement (Profit and Loss Account)

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Income statement is prepared to determine the operational position of the

concern. It is a statement of revenues earned and the expenses incurred for

earning that revenue. If there is excess of revenues over expenditures it will

show a profit and if the expenditures are more than the income then there will

be a loss. The income statement may be prepared in the form of a

Manufacturing Account to find out the cost of production, in the form of

Trading Account to determine gross profit or gross loss, in the form of a Profit

and Loss Account to determine net profit or net loss. A statement of Retained

Earnings may also be prepared to show the distribution of profits.

• Statement of Changes in Owners’ Equity (Retained Earnings)

The term owner’s equity refers to the claims of the owners of the business

(shareholders) against the assets of the firm. It consists of two elements

i) Paid-up share capital, i.e. the initial amount of funds invested by the

Shareholders

ii) retained earnings or reserves and surplus representing undistributed

Profits.

The statement of changes in owners’ equity simply shows the beginning

balance of each owner’s equity account, the reasons for increases and

decreases in each, and its ending balance. A statement of retained earnings is

also known as Profit and Loss Appropriation Account or Income Disposal

Statement. As the name suggests it shows appropriations of earnings. The

balance in this account will show the amount of profit retained in hand and

carried forward.

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• Statement of Changes in Financial Position.

The basic financial statements, that is; the balance sheet and the profit and

loss account or income statement of a business reveal the net effect of the

various transactions on the operational and financial position of the company.

But there are many transactions that do not operate through profit and loss

account. Thus, for a better understanding another statement called statement

of changes in financial position has to be prepared to show the changes in

assets and liabilities from the end of one period to the end of another point of

time. The objective of this statement is to show the movement of funds

(working capital or cash) during a particular period.

The statement of changes in financial position may take any of the following

two forms:

i) Funds Flow Statement: The funds flow statement is designed to analyse

the changes in the financial condition of a business enterprise between two

periods. The word ‘Fund’ is used to denote working capital. This statement

will show the sources from which the funds are received and the uses to which

these have been put. This statement helps the management in policy

formulation and performance appraisal.

ii) Cash Flow Statement: A statement of changes in the financial position of

a firm on cash basis is called Cash Flow Statement. It summarises the causes

of changes in cash position of a business enterprise between dates of two

balances sheets. This statement is very much similar to the statement of

changes in working capital, that is; funds flow statement. A cash flow

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statement focuses attention on cash changes only. It describes the sources of

cash and its uses.

Characteristics of ideal financial statement

The financial statements are prepared with a view to depict financial position

of the concern. The financial statements should be prepared in such a way that

they are able to give a clear and orderly picture of the concern. The ideal

financial statements have the following characteristics:

• Depict True Financial Position: The information contained in the

financial statements should be such that a true and correct idea is taken

about the financial position of the concern. No material information should

be withheld while preparing these statements.

• Effective Presentation: The financial statements should be presented in a

simple and lucid way so as to make them easily understandable. A person

who is not well versed with accounting terminology should also be able to

understand the statements without much difficulty. This characteristic will

enhance the utility of these statements.

• Relevance: Financial statements should be relevant to the objectives of the

enterprise. This will be possible when the person preparing these

statements is able to properly utilise the accounting information. The

information which is not relevant to the statements should be avoided,

otherwise it will be difficult to make a distinction between relevant and

irrelevant data.

• Attractive: The financial statements should be prepared in such a way that

important information is underlined so that it attracts the eye of the reader.

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• Easiness: Financial statements should be easily prepared. The balances of

different ledger accounts should be easily taken to these statements. The

calculation work should be minimum possible while preparing these

statements. The size of the statements should not be very large. The

columns to be used for giving the information should also be less. This

will enable the saving of time in preparing the statements.

• Comparability: The results of financial analysis should be in a way that

can be compared to the previous years statements. The statement can also

be compared with the figures of other concerns of the same nature.

Sometimes budgeted figures are given along with the present figures. The

comparable figures will make the statements more useful. The comparison

of figures will enable a proper assessment for the working of the concern.

• Analytical Representation: The information should be analysed in such a

way that similar data is presented at the same place. A relationship can be

established in similar type of information. This will be helpful in analysis

and interpretation of data.

• Brief: If possible, the financial statements should be presented in brief.

The reader will be able to form an idea about the figures. On the other

hand, if figures are given in details then it will become difficult to judge

the working of the business.

Importance of financial statements

The financial statements are mirror which reflects the financial position and

operating strength or weakness of the concern. These statements are useful to

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management, investors, creditors, bankers, workers, government and public at

large. Following major uses of financial statements:

• As a report of stewardship.

• As a basis for fiscal policy.

• To determine the legality of dividends.

• As guide to advise dividend action.

• As a basis for the granting of credit.

• As informative for prospective investors in an enterprise

• As a guide to the value of investment already made.

• As an aid to government supervision.

• As a basis for price or rate regulation.

• As a basis for taxation.

Users of Financial Statements

Financial statements are used by a diverse group of parties, both inside and

outside a business. Generally, these users are:

Internal Users: are owners, managers, employees and other parties who are

directly connected with a company.

• Owners and managers require financial statements to make important

business decisions that affect its continued operations. Financial analysis

are then performed on these statements to provide management with a

more detailed understanding of the figures. These statements are also used

as part of management's report to its stockholders, as it form part of its

Annual Report.

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• Employees also need these reports in making collective bargaining

agreements (CBA) with the management, in the case of labor unions or for

individuals in discussing their compensation, promotion and rankings.

External Users: are potential investors, banks, government agencies and

other parties who are outside the business but need financial information

about the business for a diverse number of reasons.

• Prospective investors make use of financial statements to assess the

viability of investing in a business. Financial analysis are often used by

investors and is prepared by professionals (Financial Analysts), thus

providing them with the basis in making investment decisions.

• Financial institutions (banks and other lending companies) use them to

decide whether to grant a company with fresh working capital or extend

debt securities (such as a long-term bank loan or debentures) to finance

expansion and other significant expenditures.

• Government entities (Tax Authorities) need financial statements to

ascertain the propriety and accuracy of taxes and other duties declared and

paid by a company.

• Media and the general public are also interested in financial statements for

a variety of reasons.

Limitations of financial statements

The following are the main limitations of the financial statements:

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• Interim and not final reports: Financial statements do not depict the

exact position and are essentially interim reports. The exact position can

be only known if the business is closed.

• Lack of precision and definiteness: Financial statements may not be

realistic because these are prepared by following certain basic concepts

and conventions.

• Lack of objective judgement: Financial statements are influenced by the

personal judgement of the accountant. He may select any method for

depreciation, valuation of stock, amortization of fixed assets and treatment

of deferred revenue expenditure. Such judgement if based on integrity and

competency of the accountant will definitely affect the preparation of the

financial statements.

• Record only monetary facts: Financial statements disclose only

monetary facts, that is; those transactions are recorded in the books of

accounts which can be measured in monetary terms. Those transactions

which cannot be measured in monetary terms such as, conflict between

production manager and marketing manager may be very important for a

business concern but not recorded in the business books.

• Historical in nature: These statements are drawn after the actual

happening of the events. They attempt to present a view of the past

performance and have nothing to do with the accounting for the future.

Modern management is forward looking but these statements do not

directly help them in making future estimates and taking decisions for the

future.

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• Artificial view: These statements do not give a real and correct report

about the worth of the assets and their loss of value as these are shown on

historical cost basis. Thus, these statements provide artificial view as

market or replacement value and the effect of the changes in the price level

are completely ignored.

• Scope of manipulations: These statements are sometimes prepared

according to the needs of the situation or the whims of the management. A

highly efficient concern may conceal its real profitability by disclosing

loss or minimum profit whereas an inefficient concern may declare

dividend by wrongly showing profit in the profit and loss account. For this

under or over valuation of inventory, over or under charge of depreciation,

excessive or inadequate provision for anticipated losses and other such

manipulations may be resorted to.

• Inadequate information: There are many parties who are interested in the

information given in the financial statements but their objectives and

requirements differ. The financial statements as prepared under the

provisions of the Companies Act, 1956, fail to meet the needs of all. These

are mainly prepared to safeguard the interest of shareholders.

FINANCIAL ANALYSIS

The term ‘financial analysis’ also known as analysis and interpretation of

financial statements, refers to the process of determining financial strengths

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and weaknesses of the firm by establishing strategic relationship between the

items of balance sheet, profit and loss account and other operative data.

`The purpose of financial analysis is to diagnose the information contained in

financial statements so as to judge the profitability and financial soundness of

the firm. It is an attempt to determine:

• The significance and meaning of the financial statement data so that

forecast may be made of the future earnings.

• Ability to pay interest and debt maturities (both current and long term).

• Profitability of a sound business policy.

• The operational efficiency of the concern as a whole and of its various

parts or departments.

• The comparative study in regard to one firm with another firm or one

department with another department

Types of financial statement analysis

Different types of financial statements analysis can be made on the basis of:

• According to the nature of the analyst and the material used by him.

On this basis, the financial analysis can be external and internal analysis:

External Analysis: It is made by those persons who are not connected with

the enterprise. They do not have access to the enterprise. They do not have

access to the detailed record of the company and have to depend mostly on

published Statements. Such type of analysis is made by investors, credit

agencies, governmental agencies and research scholars.

Internal Analysis: The internal analysis is made by those persons who have

access to the books of accounts. They are members of the organization.

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Analysis of financial statements or other financial data for managerial purpose

is the internal type of analysis. The internal analyst can give more reliable

result than the external analyst because every type of information is at his

disposal.

• According to the objectives of the analysis. On this basis the analysis

can be long-term and short-term analysis.

Long-term Analysis: This analysis is made in order to study the long-term

financial stability, solvency and liquidity as well as profitability and earning

capacity of a business concern. The purpose of making such type of analysis

is to know whether in the long-run the concern will be able to earn a

minimum amount which will be sufficient to maintain a reasonable rate of

return on the investment so as to provide the funds required for

modernisation, growth and development of the business and to meet its costs

of capital.

Short-term Analysis: This is made to determine the short-term solvency,

stability and liquidity as well as earning capacity of the business. The purpose

of this analysis is to know whether in the short run a business concern will

have adequate funds of readily available to meet its short-term requirements

and sufficient borrowing capacity to meet contingencies in the near future.

This analysis is made with reference to items of current assets and current

liabilities (working capital analysis).

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• According to the modus operandi of the analysis. On this basis, the

analysis may be horizontal analysis and vertical analysis.

Horizontal (or Dynamic) Analysis: This analysis is made to review and

analyse financial statements of a number of years and, therefore, based on

financial data taken from several years. This is very useful for long-term trend

analysis and planning. Comparative financial statement is an example of this

type of analysis.

Vertical (or Static) Analysis: This analysis is made to review and analyse the

financial statements of one particular year only. Ratio analysis of the financial

year relating to a particular accounting year is an example of this type of

analysis.

Techniques (devices or methods) of financial analysis

The following techniques can be used in connection with analysis and

interpretation of financial statements:

• Comparative financial statements

The comparative financial statements are statements of the financial position

at different periods of time. The elements of financial position are shown in a

comparative form so as to give an idea of financial position at two or more

periods. The statements of two or more periods are prepared to show absolute

data of two or more years, increases or decreases in absolute data in value and

in terms of percentages. The two comparative statements are:

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i) Comparative Balance Sheet: the comparative balance sheet analysis is the

study of the trend of the same items, group of items and computed items in

two or more balance sheets of the same business enterprise on different dates.

ii) Comparative Income Statement: the comparative income statement gives

the results of the operations of a business. It gives an idea of the progress of a

business over a period of time.

• Trend percentage analysis

Trend analysis is an important tool of horizontal financial analysis. This

analysis enables to know the changes in the financial function and operating

efficiency between the time period chosen. By studying the trends of each

item we can know the direction of changes and based upon the direction of

changes, the opinions can be formed. These trend ratios may be compared

with industry in order to know the strong or weak points of a concern.

• Common size statement

Common size financial statements are those in which figures reported are

converted to some common base. Vertical analysis is required for an

interpretation of underlying causes of changes over a period of time. For this,

items in the financial statements are presented as percentages or ratios to total

of the items and a common base for comparison is provided. Common size

statements may be used for

i) Common Size Balance Sheet: a statement in which balance sheet items

are expressed as the ratio of each asset to total assets and the ratio of each

liability is expressed as a ratio of total liabilities.

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ii) Common Size Income Statement: the items in income statement can be

shown as percentages of sales to show the relation of each item to sales. A

significant relationship can be established.

• Funds Flow Statement (or Analysis)

This statement is prepared in order to reveal clearly the various sources where

from the funds are procured to finance the activities of a business concern

during the accounting period and also brings to highlight the uses to which

these funds are put during the said period.

• Cash Flow Statement (or Analysis)

This statement is prepared to know clearly the various items of inflow and

outflow of cash. It is an essential tool for short-term financial analysis and is

very helpful in the evaluation of current liquidity of a business concern. It

helps the business executives of a business in the efficient cash management

and internal financial management.

• Statement of Changes in Working Capital (Net Working Capital

Analysis)

This statement is prepared to know the net change in working capital of the

business between two specified dates. It is prepared from current assets and

current liabilities of the said dates to show the net increase or decrease in

working capital.

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• Ratio Analysis

It is done to develop meaningful relationship between individual items or

group of items usually shown in the periodical financial statements published

by the concern. An accounting ratio shows the relationship between the two

inter-related accounting figures as gross profit to sales, current assets to

current liabilities, loaned capital to owned capital etc. Ratios should not be

calculated between the two unrelated figures as it will not serve any useful

purpose.

Limitations of Financial Statement Analysis

Analysis of financial statements is a very important device but the person

using this device must keep in mind its limitations. The following are the

main limitations of the analysis:

• Historical nature of financial statements: The basic nature of these

statements is historical, that is; relating to the past period. Past can never

be a precise and infallible index of the future and can never be hundred per

cent helpful for the future forecast and planning.

• No substitute for judgement: Analysis of financial statements is a tool

which can be used profitably by an expert analyst but may lead to faulty

conclusions if used by unskilled analyst. The results of analysis, thus,

should not be taken as judgements or conclusions.

• Reliability of figures: The reliability of analysis depends on reliability of

the figures of the financial statements under scrutiny. The entire working

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of analysis will be vitiated by manipulations in the income statement,

window dressing in the balance sheet, questionable procedures adopted by

the accountant for the valuation of fixed assets and such other factors.

• Single year analysis is not much valuable and useful: The analysis of

these statements relating to a single year only will have limited use and

value. It will not be advisable to depend fully on such analysis. Analysis

should be extended over a number of years so that the results may be

compared to draw meaningful conclusions.

• Results may have different interpretation: The results or indications

derived from the analysis of these statements may be differently

interpreted by different users. For example, a high current ratio may suit

the banker, a

supplier of goods or the short-term lender but it may be index of

inefficiency of the management due to non-utilisation of funds.

• Change in accounting methods: Analysis will be effective if the figure

derived from the financial statements are comparable. Due to change in

accounting methods (i.e., depreciation method, or method of valuation of

stock), the figures of the current period may have no comparable base,

then the whole exercise of analysis will become futile and will be of little

value.

• Pitfalls in inter-firm comparison: When different firms are adopting

different procedures, records, objectives, policies and different items under

similar headings, comparison will become more difficult. If done, it will

not provide reliable basis to assess the performance, efficiency,

profitability and financial condition of the firm as compared to industry as

a whole.

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• Price level changes reduce the validity of the analysis: The continuous

and rapid changes in the value of money, in the present day economy, also

reduce the validity of the analysis. Acquisition of assets at different levels

of prices make comparison useless as no meaningful conclusions can be

drawn from a comparative analysis of such items relating to several

accounting periods.

• Shortcoming of the tool of analysis: There are different tools of analysis

available to the analyst. Which tool is to be used in a particular situation

depends on the skill, training, intelligence and expertise of the analyst. If

wrong tool is used, it may give misleading results and may lead to wrong

conclusions or inferences which may be harmful to the interest of

business.

FINANCIAL RATIO ANALYSIS

Financial ratio analysis is the calculation and comparison of ratios which

are derived from the information in a company's financial statements. The

level and historical trends of these ratios can be used to make inferences about

a company's financial condition, its operations and attractiveness as an

investment.

When you compare changes in your business's ratios from period to period,

you can pinpoint improvements in performance or developing problem areas.

By comparing your ratios to those in other businesses, you can see

possibilities for improvement in key areas. A number of sources, including

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many trade or business associations and organizations, provide data for

comparison purposes; they are also available from commercial services.

USE AND SIGNIFICANCE OF RATIO ANALYSIS

The ratio analysis is one of the most powerful tools of financial analysis. The

use of ratios is not confined to financial managers only. There are different

parties interested in the ratio analysis for knowing the financial position of a

firm for different purposes. The supplier of goods on credit, banks, financial

institutions, investors, shareholders and management all make use of ratio

analysis as a tool in evaluating the financial position and performance of a

firm for granting credit, providing loans or making investments in the firm.

With the use of ratio analysis one can point out whether the condition of the

firm is strong, good, questionable or poor. The conclusions can also be drawn

as to whether the performance of the firm is improving or deteriorating. Thus,

ratios have wide applications and are of immense use today.

• Managerial Uses of Ratio Analysis

i) Ratio analysis helps in making decisions from the information

provided in these financial statements.

ii) It helps in financial forecasting and planning.

iii) The financial strength and weakness of a firm are communicated in a

more easy and understandable manner by the use of ratios.

iv) Ratios even help in co-ordination which is of utmost importance

ineffective.

v) Ratio analysis even helps in making effective control of the business.

vi) These are so many other uses of the ratio analysis. It is an essential

part of the budgetary control and standard costing.

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• Utility to Shareholders/Investors

An investor in the company will like to assess the financial position of the

concern where he is going to invest. His first interest will be the security of

his investment and then a return in the form of dividend or interest. For the

first purpose he will try to asses the value of fixed assets and the loans raised

against them. The investor will feel satisfied only if the concern has sufficient

amount of assets. Long-term solvency ratios will help him in assessing

financial position of the concern. Profitability ratios, on the other hand, will

be useful to determine profitability position. Ratio analysis will be useful to

the investor in making up his mind whether present financial position of the

concern warrants further investment or not.

• Utility to Creditors

The creditors or suppliers extend short-term credit to the concern. They are

interested to know whether financial position of the concern warrants their

payments at a specified time or not. The concern pays short- term creditors

out

of its current assets. If the current assets are quite sufficient to meet current

liabilities then the creditor will not hesitate in extending credit facilities.

Current and acid-test ratios will give an idea about the current financial

position of the concern.

Utility to Employees

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The employees are also interested in the financial position of the concern

especially profitability. Their wage increases and amount of fringe benefits

are related to the volume of profits earned by the concern. The employees

make use of information available in financial statements. Various

profitability ratios relating to gross profit, operating profit, net profit, etc.

enable employees to put forward their viewpoint for the increase of wages and

other benefits.

Utility to Government

Government is interested to know the overall strength of the industry. Various

financial statements published by industrial units are used to calculate ratios

for determining short-term, long-term and overall financial position of the

concerns. Profitability indexes can also be prepared with the help of ratios.

Government may base its future policies on the basis of industrial information

available from various units. The ratios may be used as indicators of overall

financial strength of public as well as private sector. In the absence of the

reliable economic information, governmental plans and policies may not

prove successful.

CLASSIFICATIONS OF RATIO

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Ratios may be classified from the point of view of financial management or

objective

• Liquidity Ratios.

• Capital Structure Ratios.

• Turnover Ratios.

• Profitability Ratios.

LIQUIDITY RATIOS (Short Term Solvency)

‘Liquidity’ means ability of a firm to meet its current liabilities. The liquidity

ratios, therefore, try to establish a relationship between current liabilities,

which are the obligations soon becoming due and current assets, which

presumably provide the source from which these obligations will be met. The

failure of a company to meet its obligation due to lack of adequate liquidity

will result in bad credit ratings, loss of creditor’s confidence or even in law

suits against the company. The following ratios are commonly used to

indicate the liquidity of business:

i) Current Ratio (Working Capital Ratio)

This ratio is most commonly used to perform the short-term financial analysis.

Also known as the working capital ratio, this ratio matches the current assets

of the firm to its current liabilities.

Formula:

Current ratio = Current Assets/Current Liabilities

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Current assets include cash in hand and at bank, readily marketable securities,

bills receivable, debtors less provision for bad and doubtful debts, stock in

trade, prepaid expenses, any other asset which, in the normal course of

business will be converted in cash in a year’s time.

Current Liabilities include all obligations maturing within a year, such as

sundry creditors, bills payable, bank overdraft, income tax payable, dividends

payable, outstanding expenses, provision for taxation and unclaimed

dividends.

Significance and Objective: Current ratio throws good light on the short-

term financial position and policy. It is an indicator of a firm’s ability to

promptly meet its short-term liabilities. A relatively high current ratio

indicates that the firm is liquid and has the ability to meet its current

liabilities. On the other hand, a relatively low current ratio indicates that the

firm will find it difficult to pay its bills. Normally a current ratio of 2 : 1 is

considered satisfactory. In other words, current assets should be twice the

amount of current liabilities A very high current ratio is also not desirable

because it indicates idleness of funds which is not a sign of efficient financial

management.

ii) Quick Ratio

This ratio is also known as acid test ratio or liquid ratio. It is a more severe

test of liquidity of a company. It shows the ability of a business to meet its

immediate financial commitments. It is used to supplement the information

given by the current ratio.

Formula:

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Quick ratio = Quick (or Liquid) Assets/Quick Liabilities

The quick assets include cash, debtors (excluding bad debts) and securities

which can be realised without difficulty. Stock is not included in quick assets

for the purpose of this ratio. Similarly prepaid expenses are also excluded as

they cannot be converted into cash.

Liquid or quick liabilities refer to all current liabilities except bank overdraft.

Significance and Objective: When quick ratio is used along with current

ratio, it gives a better picture of the firm’s ability to meet its short-term

liabilities out of its short-term assets. This ratio is of great importance for

banks and financial institutions. Generally a quick ratio of 1 :1 is considered

to represent a satisfactory current financial position. On account of a low

ratio, the business may find itself in serious financial difficulties.

iii) Absolute Liquid Ratio

This is also known as super quick ratio or cash ratio.

Formula:

Absolute Liquidity ratio =

(Cash + Short term marketable securities)/Current liabilities

In calculating this ratio, both inventories and receivables are deducted from

current assets to arrive at absolute liquid assets such as cash and easily

marketable investments in securities.

27

Significance and Objective: Higher the ratio, the higher is the cash

liquidity. A low ratio is not a serious matter because the company can always

borrow from the bank for short term requirements.

CAPITAL STRUCTURE RATIOS OR GEARING RATIOS (Long

Term Solvency)

Capital structure Ratios are also known as gearing ratios or solvency ratios or

leverage ratios. These are used to analyse the long term solvency of any

particular business concern. There are two aspects of long term solvency of a

firm:

Ability to repay the principal amount when due.

Regular payment of interest.

Important Capital Structure ratios are:

i) Debt-Equity Ratio

This ratio attempts to measure the relationship between long term debts and

shareholders’ funds. In other words, this ratio measures the relative claims of

long term creditors on the one hand and owners on the other hand, on the

assets of the company.

Formula:

Debt Equity ratio = Long term debts/Shareholders’ funds

Long term debts include debentures, long term loans, say from financial

institutions.

Shareholders’ funds on the other hand include share capital (both equity and

preference) and accumulated profits in the form of general reserve, capital

reserve, and any other fund that belongs to the shareholders. Past accumulated

28

losses and deferred expenditure like preliminary expenses should be deducted

while computing shareholders’ funds.

Significance and Objectives: This ratio shows the relative amount of funds

supplied to the company by outsiders and by owners. A low debt equity ratio

implies a greater claim of owners on the assets of the company than the

creditors. On the other hand, a high debt equity ratio indicates that the claims

of the creditors are greater than those of the owners. The debt equity ratio of

1: 1 is generally acceptable. The lower the ratio, the less the company has to

worry in meeting its fixed obligations. This ratio also indicates the extent to

which a company has to depend upon outsiders for its financial requirements.

ii) Proprietary Ratio

This is a variant of debt equity ratio. It measures the relationship between

shareholders’ funds and total assets.

Formula:

Proprietary ratio = Shareholders’ funds/Total assets

Shareholders’ funds comprise of ordinary share capital, preference share

capital and all items of reserves and surplus.

Total assets include all tangible assets and only those intangible assets which

have a definite realisable value.

Significance and objective: Proprietary ratio shows the extent to which

shareholders own the business and thus indicates the general financial strength

of the business. The higher the proprietary ratio, the greater the long term

stability of the company and consequently greater protection to creditors.

However, a very high proprietary ratio may not necessarily be good because if

29

funds of outsiders are not used for long term financing, a firm may not be able

to take advantage of trading on equity.

iii) Interest Coverage Ratio (Fixed Charges Cover)

This ratio indicates whether the business earns sufficient profit to pay

periodically the interest charges.

Formula:

Interest Coverage ratio =

Earnings before tax and interest (EBIT)/Fixed interest charges

Significance and Objective: This ratio is very important from lender’s point

of view because it indicates the ability of a company to pay interest out of its

profits. This ratio also indicates the extent to which he profits of the company

may decrease without in any way affecting its ability to meet its interest

obligations. The standard for this ratio for an industrial company is that

interest charges should be covered six to seven times.

iv) Debt to Total Funds Ratio

This ratio shows the relationship between debts and total funds employed in

the business.

Formula:

Debts to Total Funds ratio = Debt/Total Funds

The term debt includes long term loans and current liabilities like sundry

creditors, bills payable, bank overdraft, outstanding expenses etc.

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Total funds employed includes shareholders’ funds, long tem loans and

current liabilities.

Significance and Objectives: This ratio shows the proportion of funds

supplied by outsiders in the total funds employed in the business. The lower

this ratio, the better it is for creditors because they are more secure and vice-

versa, higher this ratio it gives a feeling of insecurity to the creditors. In other

words, a high ratio of debts to total funds employed is a danger signal for

creditors. This ratio also serves the purpose of indicating the possibility of

raising additional loans.

v) Capital Gearing Ratio

This is the ratio between the fixed interest bearing securities und equity share

capital.

Formula:

Capital gearing ratio = Fixed income securities/Equity share holders fund

Fixed income securities include debentures and preference share capital.

Significance and Objectives: a company is highly geared if this ratio is

more than one. If it is less than one, it is low geared. If the ratio is exactly one,

it is evenly geared. A highly geared company has the advantage of trading on

equity.

TURNOVER RATIOS (Performance Ratios or Activity Ratios)

31

Turnover ratios are used to indicate the efficiency with which assets and

resources of the firm are being utilised. These ratios are known as turnover

ratios because they indicate the speed with which assets are being converted

or turned over into sales. These ratios, thus, express the relationship between

sales

and various assets. A higher turnover ratio generally indicates better use of

capital resources which in turn has a favourable effect on the profitability of

the firm. Important turnover ratios are:

i) Inventory turnover Ratio (Stock Turnover Ratio)

This ratio is calculated by dividing the cost of goods sold by average

inventory.

It establishes the relationship between the cost of goods sold during a given

period and the average amount of stock carried during the period.

Formula:

Inventory Turnover ratio = Cost of goods sold/Average Stock (Inventory)

Where, Cost of goods sold = Sales - Gross profit

Cost of goods sold = Opening stock +Purchases + Carriage inward

and

other direct expenses - Closing stock

Average Stock = 1/2 (Opening stock + Closing stock)

Significance and Objectives: Inventory or stock turnover ratio indicates

the efficiency of a firm’s management. This ratio gives the rate at which

stocks are converted into sales and then into cash. A low inventory turnover

ratio is an indicator of dull business, accumulation of inventory, over

32

investment in inventory or unsaleable goods etc. Generally speaking, a high

stock turnover ratio is considered better as it indicates that more sales are

being produced by each rupee of investment in stock but a higher stock

turnover ratio may not always be an indicator of favourable results. It may be

the result of a very low level of stock which results in frequent out-of-stock

positions. Such a situation prevents the company from meeting customers’

demands and the company cannot earn maximum profits.

ii) Debtors Turnover Ratio (Receivables Turnover Ratio)

This ratio indicates the relationship between net credit sales and trade debtors.

It shows the rate at which cash is generated by the turnover of debtors.

Formula:

Debtors Turnover ratio = Credit Sales/Average Debtors

The term debtors includes trade debtors and bills receivables. Doubtful debts

are not deducted from debtors. Moreover, debtors that do not arise from

regular sales should be excluded.

Significance and Objectives: The significance of this ratio lies in the fact

that debtors constitute one of the important items of current assets and this

ratio indicates as to how many days’ average sales are tied up in the amount

of debtors. The efficiency of debt collection is also indicated by this ratio. A

higher debtors turnover ratio indicates that debts are being collected more

quickly. Changes in this ratio show the changes in the company’s credit

policy or changes in its ability to collect from its debtors.

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iii) Fixed Assets Turnover Ratio

This ratio indicates the efficiency with which the firm is utilising its

investments in fixed assets such as plant and machinery, land and building etc.

Formula:

Fixed Assets Turnover = Sales (or Cost of Sales)/Net Fixed Assets

The term net fixed assets means depreciated value of fixed assets.

Significance and Objectives: Generally speaking, a high ratio indicates

efficient utilization of fixed assets in generating sales and a low ratio may

signify that the firm has an excessive investment in fixed assets.

iv) Working Capital Turnover Ratio

This ratio indicates the efficiency or inefficiency in the utilisation of working’

capital in making sales.

Formula:

Working Capital Turnover ratio = Sa1es/Net working Capital

The term net working capital means current assets minus current liabilities.

Significance and Objective: A high working capital turnover ratio shows the

efficient utilisation of working capital in generating sales. A low ratio, on the

other hand, may indicate excess of net working capital. This ratio thus shows

whether working capital is efficiently utilised or not.

v) Capital Turnover Ratio

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This ratio shows the relationship between cost of sales (or sales) and the total

capital employed.

Formula:

Capital Turnover ratio = Cost of Sales (or Sales)/Total capital employed

The term capital employed includes the long term liabilities and total of

shareholders funds. From this are deducted non-operating assets (e.g.,

investments) and fictitious assets like preliminary expenses, discount on the

issue of shares, debits balance of Profit and Loss Account, etc.

Significance and Objectives: This ratio shows the efficiency with which

capital employed in a business is used. A high capital turnover ratio indicates

the possibility of greater profit and a low capital turnover ratio is a sign of

insufficient sales and possibility of lower profits.

vi) Creditors Turnover Ratio

This ratio also known as Payables Turnover Ratio, measures the relationship

between credit purchases and average accounts payable.

Formula:

Creditors turnover ratio = Net credit purchases/Average accounts

payable

Accounts payable include creditors and bills payable.

PROFITABILITY RATIOS

Every business should earn sufficient profits to survive and grow over a long

period of time. Infact efficiency of a business is measured in terms of profits.

35

Profitability ratios are calculated to measure the efficiency of a business.

Profitability of a business may be measured in two ways

• Profitability in relation to sales

• Profitability in relation to investment.

If a company is not able to earn a satisfactory return on investment, it will not

be able to pay a reasonable return to its investors and the survival of the

company may be threatened. These ratios are:

i) Gross Profit Ratio (Gross Profit Margin)

This ratio expresses the relationship between gross profit and sales.

Formula:

Gross Profit ratio = (Gross profit/Net sales) x 100

Net sales means sales minus sales returns.

Gross profit is sales minus cost of goods sold.

Significance and Objectives: Gross profit ratio indicates the average

margin on the goods sold. It shows whether the selling prices are adequate or

not. It also indicates the extent to which selling prices may be reduced without

resulting in losses.

A low gross profit ratio may indicate a higher cost of goods sold due to higher

cost of production. It may also be due to low selling prices. A high gross

profit ratio, on the other hand, indicates relatively lower cost and is a sign of

good management.

ii) Net Profit Ratio (Net Profit Margin)

36

This is the ratio of net profit to net sales.

Formula:

Net Profit ratio = (Net profit/Net sales) x 100

In calculating the net profit, all non- operating expenses and losses (e.g. loss

on sale of old assets, provision for legal damages etc.) are deducted and all

non-operating incomes (e.g. dividend income, interest received on

investments etc.) are added. Some accountants deduct income tax also for

calculating the net profit.

Significance and Objectives: The net profit ratio is the overall measure of a

firm’s ability to turn each rupee of sales into profit. It indicates the efficiency

with which a business is managed. A firm with a high net profit ratio is in an

advantageous position to survive in the face of rising cost of production and

falling selling prices. Where the net profit ratio is low, the firm will find it

difficult to withstand these types of adverse conditions.

Comparison of net profit ratio with other firms in the same industry or with

the previous years will indicate the scope for improvement. This will enable

the firm to maximize its efficiency.

iii) Operating Ratio

This is also an important profitability ratio. This ratio explains the relationship

between cost of goods sold and operating expenses on the one hand and net

sales on the other.

Formula:

37

Operating ratio =

[(Cost of goods sold + operating expenses)/Net sales] x 100

Significance and Objective: The operating ratio is the yardstick to measure

the efficiency with which a business is operated. It shows the percentage of

net sales that is absorbed by cost of goods sold and operating expenses. A

high operating ratio is considered unfavourable because it leaves a smaller

margin of profit to meet non-operating expenses. On the other hand, a lower

operating ratio is considered a good sign.

iv) Return on investment (ROI) or return on capital employed

This is the most important test of profitability of a business. It measures the

overall, profitability. It is ascertained by comparing profit earned and capital

(or funds) employed to earn it.

Formula:

ROI = (profit before interest and taxes/Capital employed) x 100

Significance and Objective: ROl is the only ratio which measures

satisfactorily the overall performance of a business from the point of view of

profitability. This ratio indicates how well the management has utilised the

funds supplied by the owners and creditors. In other words, this ratio is

intended to measure the earning power of the net assets of the business. The

higher the ROI, the more efficient the management is considered to be in

38

using the funds available. In fact, this ratio can also be advantageously used in

judging the performance efficiency of different firms in different industries.

Management also uses this ratio for decision making purposes.

v) Return of Equity capital

This ratio establishes the relationship between the net profit available to

equity shareholder and the amount of capital invested by them.

Formula:

Return on Equity Capital =

(NAT/Equity shareholders funds) x 100

Where, NAT = Net profit after interest, taxes and preference dividend

Net profit for the purpose of this ratio is taken after dividend payable to

preference shareholders, if any. Equity shareholders funds include equity

capital, reserves and other undistributed profits.

Significance and Objectives: This ratio shows the profit percentage

for equity shareholders. A high rate of return on equity shareholders funds is

favoured by investors and a higher market valuation is placed on such shares.

This ratio is used for inter-firm comparison to judge the comparative

profitability of different firms.

vi) Earning Per Share (EPS)

This ratio measures the earnings per equity share that is, it measures the

profitability of the firm on a per share basis.

39

Formula:

Earning per share =

(Net profit after taxes - Preference dividend)/No. of equity shares

EPS is one of the most commonly quoted and widely publicized ratio.

vii) Dividend Pay-out Ratio (Or Pay-out Ratio)

It indicates the percentage of equity share earnings distributed as dividends to

equity shareholders.

Formula:

Dividend Pay-out ratio = Dividend per share/Earning per share (EPS)

viii) Dividend Yield Ratio

Dividend is declared by a company as a percentage of par value or paid up

value or a specific amount per equity share.

Formula:

Dividend Yield Ratio =

Dividend per equity share/Market price per equity share

This ratio is important for those investors who make investment decisions for

the purpose of earning a reasonable yield on the amount of investment.

ix) Price Earning Ratio (P/E Ratio)

40

This ratio is the market price of shares expressed as multiple of earning per

share (EPS).

Formula:

P/E ratio = Market price per equity share/Earning per share

This ratio guides investors to decide whether to buy shares of a company or

not.

Limitations of Accounting Ratios

Ratio analysis is very important in revealing the financial position and

soundness of the business. But, in spite of its advantages, it has some

limitations which restrict its use. These limitations should be kept in mind

while making use of ratio analysis for interpreting the financial statements.

The following are the main limitations of accounting ratios:

False results if based on incorrect accounting data: Accounting ratios

can be correct only if the data (on which they are based) are correct.

Sometimes, the information given in the financial statements is affected by

window dressing, i.e., showing position better than what actually is. For

example, if inventory values are inflated or depreciation is not charged on

fixed assets, not only will one have an optimistic view of profitability of

the concern but also of its financial position. So the analyst must always be

on the lookout for signs of window dressing, if any.

No idea of probable happenings in future: Ratios are an attempt to make

an analysis of the past financial statements; so they are historical

41

documents. Now-a-days keeping in view the complexities of the business,

it is important to have an idea of the probable happenings in future.

Variation in accounting methods: The two firms’ results are comparable

with the help of accounting ratios only if they follow the same accounting

methods or bases. Comparison will become difficult if the two concerns

follow the different methods. Comparison of financial statements of such

firms by means of ratios is bound to be misleading.

Price level changes: Changes in price levels make comparison for various

years difficult. For example, the ratio of sales to total assets in 2006 would

be much - than in 1986 due to rising prices, fixed assets being shown at

cost and not at market price.

Only one method of analysis: Ratio analysis is only a beginning and

gives just a fraction of information needed for decision-making. Therefore,

to have a comprehensive analysis of financial statements, ratios should be

used along with other methods of analysis.

No common standards: It is very difficult to lay down a common

standard for comparison because circumstances differ from concern to

concern and the nature of each industry is different.

Different meanings assigned to the same term: Different firms, in order

to calculate ratio may assign different meanings. For example, profit for

the purpose of calculating a ratio may be taken as profit before charging

interest and tax or profit before tax but after interest or profit after tax and

interest. This may affect the calculation of ratio in different firms and such

ratio when used for comparison may lead to wrong conclusions.

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Ignores qualitative factors: Accounting ratios are tools of quantitative

analysis on1y. But sometimes qualitative factors may surmount the

quantitative aspects. The calculations derived from the ratio analysis under

such circumstances may get distorted.

No use if ratios are worked out for insignificant and unrelated figures:

Accounting ratios may be worked for any two insignificant and unrelated

figures as ratio of sales and investment in government securities. Such

ratios may be misleading. Ratios should be calculated on the basis of cause

and effect relationship.

RESEARCH METHODOLOGY

INTRODUCTION

43

Finance and its functions plays very major role in determining the profitability

and stability of the business. Most of the studies in India on business finance

have laid more stress in comparing financial results of public and private

sector undertaking vis-à-vis profitability. The current study undertaken at

ALLAHABAD BANK is to find out and evaluate its financial performance.

The purpose was also to closely examine the relationship between various

financial elements, which may be compared to the prescribed standards and

norms.

A research design is purely and simply the framework or plan for a study that

guides the collection and analysis of data. It is a blue print that if followed in

completing a study. A good research design has the characteristics, viz., and

problem definition, specific methods of data collection and analysis, time

required for research project and the estimate of expenses of to be incurred.

The three basic types of research design viz.,

• Exploratory

• Descriptive

• Casual or experimental

Running a business means taking decisions all the time. Some of these

decisions have short term consequences, however affects the long term

prospects of business. Whatever the nature of the decision, a common thread

is the nature of the information. Information is needed to increase your

charges of making the best decisions and this study guides the decision maker.

TITLE OF THE STUDY

44

A study of “ANALYSIS OF FINANCIAL PERFORMANCE OF

ALLAHABAD BANK”

STATEMENT OF THE PROBLEM

Financial soundness in terms of solvency, liquidity, leverage, profitability and

earning capacity are the main objectives of any organization. Each and every

organization strives to be financially sound. The financial position of a

business concern depends on the growth it attains in every aspect of the

concern. The financial statements clearly reveal the growth of the company

over a number of years. But it is difficult to analyze and take important

decisions only by studying the financial statements without any comparison.

In order to facilitate comparison and take strategic and managerial decisions

analytical techniques are required to study the financial statements.

Accounting ratios or Ratio Analysis establishes relationship between closely

related Financial Statements. If the items appearing in the Financial

Statements are to be really meaningful and useful, they should be analyzed in

such a way that one item can be compared with another. Ratio Analysis is one

of the tools available to analyze the Financial Statements.

Hence, this Project Report contains analysis of Financial Statements through

Comparative Balance sheets, Statement of Cash Flow, Comparative Profit &

Loss Accounts some of the Ratio Analysis and their interpretation.

SCOPE OF THE STUDY

45

The study is concentrated mainly on understanding and analyzing the

financial statements based in the annual reports of 2008 and 2009 of

ALLAHABAD BANK with reference to Comparative Balance sheets,

Statement of Cash Flow, Comparative Profit & Loss Accounts some of the

Ratio Analysis and their interpretation.

METHODOLOGY

The Hypothesis that was framed for study relating to banks’ financial

performance is the following:

Financial performance of Allahabad bank has shown constant

improvement & rise in profits.

Financial performance of Allahabad bank is not constant but it is

fluctuating.

The Data was collected from associated literature, banking journals,

observations, questionnaire and other inputs, from related experts. The

method and examination of records were widely used in framing this report.

46

OBJECTIVES OF THE STUDY

The following are the objectives of the study:

• The primary objective of the study is to analyze the financial statements,

profit and loss account and the balance sheet of the company.

• To understand the efficiency of the company.

• Assess the profitability of the concern.

• To study the solvency, liquidity and long-term financial position of the

concern.

• To interpret the financial statement with the help of accounting ratios

derived from financial statements.

• To make suggestions out of the findings of the study.

SOURCES OF DATA

PRIMARY DATA

Primary data is that data or information collected for the first time and which

not have been collected from any other sources. Primary data is called first

hand data/information.

The primary data was collected with great care keeping in mind the research

objective.

Primary data was collected in the form of :

• I visited ALLAHABAD BANK during my field work and met with the

manager.

47

• The data was gathered by the medium of detailed discussions with

officials of the bank to understand the problems of the requirement.

SECONDARY DATA

Secondary data is any data that have been gathered earlier for the same

purpose.

Fact sheet published by the bank.

Annual repots of the bank.

Newspaper.

Magazines etc.

Internet etc.

48

LIMITATIONS OF THE STUDY

• This study extensively uses the data provided in the financial reports. If

there is any window dressing, the findings could be misleading.

• This being an academic study, it suffers from time and cost constraints.

• No other company is the same sector has been considered to evaluate the

ratio standards.

• It’s purely a theoretical study.

• Lastly different individuals interpret the ratios in a different manner.

• Some information could not be collected as it is confidential.

METHOD OF PROCESSING AND ANALYSIS OF DATA

Research design specific for this study including following:-

Selection of the study period.

Collection of information from various journals to understand the

industrial background of study.

Identification of means of financing sources over the study period.

Collection of banks specific literature that is annual report for the study

period.

Analysis or tabulated data to recognize the financial position or location

of the firm.

Finally forwarding recommendations and conclusions to the firm.

49

CHAPTER SCHEME

1. INTRODUCTION

This chapter talks about the theory behind financials performance evaluation

major techniques of evaluation contribution in the field and what the study

attempting to achieve.

2. RESEARCH METHEDOLOGY OF THE STUDY

The design of the study sated the research design, sources of data, sampling

plan, fieldwork, data processing analysis plan, and assumptions regarding

methodology are discussed here. The study overview as well as the studies

limitations is also discussed here.

3. BACKGROUND OF THE STUDY

This chapter throws light on origin and of the industry as a whole, its present

status and major players in the industry.

4. PROFILE OF THE ORGANIZATION

This chapter views the origin and growths of Allahabad bank its business

activities, percent status, objectives and the profile of the organization.

5. DISCUSSION OF FINDINGS

50

In this chapter data collected is complied, tabulated process and analyzed. The

statistical techniques for the construction of graphs and diagram are used to

present data.

6. CONCLUSION AND RECOMMEDATIONS

This chapter contains the summary of finding and suggestion made to increase

the profitability.

COMPANY PROFILE

51

INTRODUCTION TO THE BANKING

DEFINITION

The Indian Banking Regulation Act 1949 has defined the term “Banking”

under section 5 (1) (b) as accepting for the purpose of lending or investment,

of deposits of money from public, repayable on demand or otherwise, and

withdrawl by cheque, draft, order or otherwise.”

ORIGIN OF THE BANKING

The term bank is supposed to be derived from banco, the Italian word for

bench, the Lombard Jews in Italy having benches in the market-place where

they exchanged money and bills. When a banker failed, his bench was broken

by the people, and he was called a bankrupt.

This derivation of the term, however, is probably wrong. "The true original

meaning of banco,"says Macleod,” is a heap, or mound, and this word was

metaphorically applied to signify a common fund, or joint stock, formed by

the contributions of a multitude of persons."

A brief account of the first banking operations in Venice will dispel the haze

enveloping this subject. In 1171 the financial condition of Venice was strained

in consequence of the wars in which the people were engaged. The great

council of the republic finally determined to raise a forced loan. Every citizen

was obliged to contribute the hundredth part of his possessions to the State,

receiving therefore interest at the rate of five per cent. The public revenues

were mortgaged to secure the interest, and commissioners were appointed to

pay the interest to the fund holders and to transfer the stock. The loan had

several names in Italian, Compera, Mutuo, but the most common was Monte,

52

a joint stock fund. Afterward, two more loans were contracted, and in

exchange for the money contributed by the citizens, the commissioners gave

stock certificates bearing interest, and which could be sold and transferred.

EVALUATION OF BANKING IN INDIA

Banking in India originated in the last decades of the 18th century. The first

banks were The General Bank of India which started in 1786, and the Bank of

Hindustan, both of which are now defunct. The oldest bank in existence in

India is the State Bank of India, which originated in the Bank of Calcutta in

June 1806, which almost immediately became the Bank of Bengal. This was

one of the three presidency banks, the other two being the Bank of

Bombay and the Bank of Madras, all three of which were established under

charters from the British East India Company. For many years the Presidency

banks acted as quasi-central banks, as did their successors. The three banks

merged in 1921 to form the Imperial Bank of India, which, upon India's

independence, became the State Bank of India.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed

in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad

Bank, established in 1865 and still functioning today, is the oldest Joint Stock

bank in India. It was not the first though. That honor belongs to the Bank of

Upper India, which was established in 1863, and which survived until 1913,

when it failed, with some of its assets and liabilities being transferred to

the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton

to Lancashire from the Confederate States, promoters opened banks to finance

53

trading in Indian cotton. With large exposure to speculative ventures, most of

the banks opened in India during that period failed. The depositors lost money

and lost interest in keeping deposits with banks. Subsequently, banking in

India remained the exclusive domain of Europeans for next several decades

until the beginning of the 20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s.

The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and

another in Bombay in 1862; branches in Madras and Pondichery, then a

French colony, followed. HSBC established itself in Bengal in 1869. Calcutta

was the most active trading port in India, mainly due to the trade of the British

Empire, and so became a banking center.

The first entirely Indian joint stock bank was the Oudh Commercial Bank,

established in 1881 in Faizabad. It failed in 1958. The next was the Punjab

National Bank, established in Lahore in 1895, which has survived to the

present and is now one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through

a relative period of stability. Around five decades had elapsed since the Indian

Mutiny, and the social, industrial and other infrastructure had improved.

Indians had established small banks, most of which served particular ethnic

and religious communities.

COMMERCIAL BANKS

Commercial Banks in India are broadly categorized into Scheduled

Commercial Banks and Unscheduled Commercial Banks. The Scheduled

Commercial Banks have been listed under the Second Schedule of the

Reserve Bank of India Act, 1934. The selection measure for listing a bank

54

under the Second Schedule was provided in section 42 of the Reserve Bank of

India Act, 1934

The modern Commercial Banks in India cater to the financial needs of

different sectors. The main functions of the commercial banks are transferring

of funds, acceptance of deposits, offering those deposits as loans for the

establishment of industries, purchase of houses, equipments, capital

investment purposes etc.

The banks are allowed to act as trustees. On account of the knowledge of

the financial market of India the financial companies are attracted towards

them to act as trustees to take the responsibility of the security for the

financial instrument like a debenture.

The Indian Government presently hires the commercial banks for various

purposes like tax collection and refunds, payment of pensions etc.

FUNCTIONS OF COMMERCIAL BANK

The functions of commercial banks are divided into two categories:

1) PRIMARY FUNCTION.

2) SECONDARY FUNCTION INCLUDING AGENCY FUNCTION.

PRIMARY FUNCTION.

The primary functions of a commercial bank include:

55

a) Accepting deposits.

b) Granting loans and advances.

a) Accepting deposits.

The most important activity of a commercial bank is to mobilize deposits

from the public. People who have surplus income and savings find it

convenient to deposit the amounts with banks. Depending upon the nature of

deposits, funds deposited with bank also earns interest. Thus, deposits with

the bank grow along With the interest earned. If the rate of interest is higher,

public are motivated to deposit more funds with the bank. There is also safety

of funds deposited with the bank.

b) Granting loans and advances.

The second important function of a commercial bank is to grant loans and

advances. Such loans and advances are given to members of the public and to

the business community at a higher rate of interest than allowed by banks on

various deposit accounts. The rate of interest charged on loans and advances

varies depending upon the purpose, period and the mode of repayment. The

difference between the rate of interest allowed on deposits and the rate

charged on the Loans is the main source of a bank’s income.

i) Loans

A loan is granted for a specific time period. Generally, commercial banks

grant short-term loans. But term loans, that is, loan for more than a year, may

also be granted. The borrower may withdraw the entire amount in lump sum

56

or in installments. However, interest is charged on the full amount of loan.

Loans are generally granted against the security of certain assets. A loan may

be repaid either in lump sum or in installments.

ii) Advances

An advance is a credit facility provided by the bank to its customers. It differs

from loan in the sense that loans may be granted for longer period, but

advances are normally granted for a short period of time. Further the purpose

of

granting advances is to meet the day to day requirements of business. The rate

of interest charged on advances varies from bank to bank. Interest is charged

only on the amount withdrawn and not on the sanctioned amount.

MODES OF SHORT TERM FINANCIAL ASSISTANCE

Banks grant short-term financial assistance by way of cash credit, overdraft

and bill discounting.

a) Cash Credit

57

Cash credit is an arrangement whereby the bank allows the borrower to draw

amounts upto a specified limit. The amount is credited to the account of the

customer. The customer can withdraw this amount as and when he requires.

Interest is charged on the amount actually withdrawn. Cash Credit is granted

as per agreed terms and conditions with the customers.

b) Overdraft

Overdraft is also a credit facility granted by bank. A customer who has a

current account with the bank is allowed to withdraw more than the amount of

credit balance in his account. It is a temporary arrangement. Overdraft facility

with a specified limit is allowed either on the security of assets, or on personal

security, or both.

c) Discounting of Bills

Banks provide short-term finance by discounting bills, that is, making

payment of the amount before the due date of the bills after deducting a

certain rate of discount. The party gets the funds without waiting for the date

of maturity of the bills. Incase any bill is dishonored on the due date, the bank

can recover

the amount from the customer.

SECONDARY FUNCTION INCLUDING AGENCY

FUNCTION.

Besides the primary functions of accepting deposits and lending money,

banks perform a number of other functions which are called secondary

functions. These are as follows –

58

a) Issuing letters of credit, travellers cheques, circular notes etc.

b) Undertaking safe custody of valuables, important documents, and

securities by providing safe deposit vaults or lockers.

c) Providing customers with facilities of foreign exchange.

d) Transferring money from one place to another; and from one branch to

another branch of the bank.

e) Standing guarantee on behalf of its customers, for making payments

for purchase of goods, machinery, vehicles etc.

f) Collecting and supplying business information.

g) Issuing demand drafts and pay orders.

h) Providing reports on the credit worthiness of customers.

ROLE OF THE BANKS

Banks provide funds for business as well as personal needs of individuals. They play

a significant role in the economy of a nation:

It encourages savings habit amongst people and thereby makes funds

available for productive use.

59

It acts as an intermediary between people having surplus money and

those requiring money for various business activities.

It facilitates business transactions through receipts and payments by

cheques instead of currency.

It provides loans and advances to businessmen for short term and long-

term purposes.

It also facilitates import export transactions.

It helps in national development by providing credit to farmers, small-

scale industries and self-employed people as well as to large business

houses which lead to balanced economic development in the country.

It helps in raising the standard of living of people in general by providing

loans for purchase of consumer durable goods, houses, automobiles, etc.

60

ABOUT ALLAHABAD BANK

The Oldest Joint Stock Bank of the Country, Allahabad Bank was founded on

April 24, 1865 by a group of Europeans at Allahabad. At that juncture

Organized Industry, Trade and Banking started taking shape in India.

Allahabad Bank is oldest nationalized Bank with rich experience in extending

various banking solutions to its valued clients since 1865. Their consistent

track record of growth with profit provides the confidence of meeting all your

Banking requirements.

In 1991 the bank commenced its wholly-owned subsidiary All Bank Finance

for merchant banking. In June 2006 the bank opened its first representative

office at Shenzhen, China and same year it rolled out first branch under CBS.

Currently the bank serves customers across 110 cities with network 6 zonal

offices, 2227 branches (including one in Hong Kong) and 221 ATMs.

Allahabad Bank is well spread out in India and recently opened first

International Branch at Hong Kong. Bank has also arrangements with

correspondents at various important overseas locations, which will ensure

extending to all our NRI customers rich banking experience.

61

PRODUCTS AND SERVICES OFFERED BY THE BANK :

PRODUCTS

I. Deposit Products

Flexi-fix Deposit

Rs.5 Banking

All Bank Tax Benefit Term Deposit Scheme

All Bank Premium SB Account

All Bank Mahila Sanchay Account

All Bank Vikash SB Account

All Bank Premium Current Account

Current Plus Deposit Scheme

Sishu Mangal Deposit Scheme

II. Retail Credit Products

All Bank Housing Finance Scheme

All Bank Educational Loan Scheme

All Bank Car Finance Scheme

All Bank Saral Loan Scheme

Personal Loan Scheme for Pensioners

Personal Loan Scheme for Doctors/ Medical Practitioners

Loan against NSC/ KVP

All Bank Property Loan

All Bank Furnishing Loan

All Bank Gold Loan Scheme

All Bank Mobike Scheme

Overdraft Facility in Savings Bank Account

All Bank Abhusan Scheme

62

All Bank Trade Scheme

AllBank Gyan Dipika Scheme

Allabnk Reverse Mortgage Scheme

III. Other Credit Products

Kisan Credit Card

Kisan Shakti Yojana

AllBank-Expo

SERVICES

All Ayushman Bima Yojana

Cash Management Services

Depository Services

Visa Debit Cum ATM Card

Real Time Gross Settlement (RTGS)

National Electronic Funds Transfer (NEFT)

Gold Card Scheme for Exporters

Charter for MSMEs

Government Business

Regional MSME Care Centres

The Oldest Joint Stock Bank of the Country, Allahabad Bank was founded on

April 24, 1865 by a group of Europeans at Allahabad. At that juncture

Organized Industry, Trade and Banking started taking shape in India. Thus,

the History of the Bank spread over three Centuries - Nineteenth, Twentieth

and Twenty-First.

63

MILESTONES

Nineteenth Century

April 24, 1865

The Bank was founded at the confluence city of Allahabad by a group of

Europeans.

Twentieth Century

1920’s

The Bank became a part of P & O Banking Corporation's group with a bid

price of Rs.436 per share,

1923’s

The Head Office of the Bank shifted to Calcutta on Business considerations.

July 19, 1969

Nationalized along with 13 other banks, Branches - 151 Deposits - Rs.119

crores, Advances - Rs.82 crores.

October, 1989

United Industrial Bank Ltd. merged with Allahabad Bank.

1991’s

64

Instituted All Bank Finance Ltd., a wholly owned subsidiary for Merchant

Banking.

Twenty-First Century

October, 2002

The Bank came out with Initial Public Offer (IPO), of 10 crores share of face

value Rs.10 each, reducing Government shareholding to 71.16%.

April, 2005

Follow on Public Offer (FPO) of 10 crores equity shares of face value Rs.10

each with a premium of Rs.72, reducing Government shareholding to 55.23%.

June, 2006

The Bank Transcended beyond the National Boundary, opening

Representative Office at Shenzen, China.

Oct, 2006

Rolled out first Branch under CBS.

February, 2007

The Bank opened its first overseas branch at Hong Kong.

March 2007

Bank's business crossed Rs.100,000 crores mark.

65

2008

Allahabad Bank announces special package for housing loan & MSME

borrowers

Allahabad Bank revises Interest rates on FCNR and NRE Deposits.

Allahabad bank cuts Benchmark Prime Lending Rate (BPLR) by 75

basis points

Allahabad Bank- Diwali Bonanza – 11% On Term Deposits

Allahabad Bank crosses Rs.125000 crore business

Allahabad bank increases interest rates on deposits

Allahabad Bank Chairman Calls On Hon’ble Union Finance Minister

Allahabad bank keeps housing, personal, education, car/auto loans

unaffected by BPLR increase

Allahabad Bank Maintains Its Surge Forward

Allahabad bank completes Debt Waiver exercise

Allahabad bank increases BPLR and Deposit interest rates

Allahabad Bank Launches Debt Waiver Scheme

Allahabad Bank Presents Powerful Performance and Spectacular

Results

Allahabad Bank cuts benchmark prime lending rate (BPLR) by 25

basis points

Hon'ble Union Finance Minister opens 2154th branch of Allahabad

Bank at Pudukkottai, Tamil Nadu

Allahabad Bank cuts interest on housing loans By 25 basis points

Allahabad Bank cuts Deposit as well as Lending rates

Allahabad Bank steady on growth path

66

2009

Deposits registered Growth of 25.39 % (YOY)

Gross Credit up by 24.51% (YOY)

Total Business soared by 25.03 % (YOY)

Operating Profit surged by 47 % (YOY)

Provision Coverage Ratio increased to 88.29 %

Capital Adequacy Ratio surges to 15%.

Book Value per share mounts to Rs. 152.72.

Net NPA reduced to 0.35 % from 0.82% last year.

Bank has geared up CBS implementation and 961

Branches/Offices covering 81.02 % of the Bank’s business have been

brought within the network.

Internet Banking, SMS Banking, e-Payment of Taxes made available

through all CBS Branches.

Instant ATM-cum Debit Card facility launched for the customers of

CBS Branches. Bank has installed 211 ATMs facilitating more than

5.80 lacs ATM –cum-Debit Cardholders of our Bank.

Bank is offering RTGS/NEFT fund transfer facility through its all CBS

Branches in which funds can be transferred to any of 61000 Bank

Branches across the country.RTGS/NEFT facility has also been

extended through Internet Banking.

Online Payment Gateway Services launched by the Bank for its

Customers to make online payments at the billers’ site with instant

debit from their accounts.

67

PROFILE

Date of Establishment 24-04 1865

Revenue 1454.33 (USD in Millions)

Corporate Address

2 Netaji Subhas Road,

Kolkata-700001,

West Bengal,

www.allahabadbank.in

MANAGEMENT DETAILS

Chairperson - J P Dua

Managing Director- J P Dua

LIST OF DIRECTORS

Shri Debabrata Sarkar

Executive Director

Shri M.R. Nayak

Executive Director

Smt. Sukriti Likhi

Government Nominee Director

68

Shri Mohammad Tahir

RBI Nominee Director

Shri K. K. Dogra

Officer Employee Director

Shri P. V. Gudireddy

Part Time Non - Official Director

Shri P. V. Gudireddy

Part Time Non - Official Director

Dr. Vasant Baburao Kaujalgi

Shareholder Director

Dr. Shakeel Uz Zaman Ansari

Part Time Non - Official Director

Smt Joginder Kaur

Part Time Non - Official Director

REGISTRAR & SHARE TRANSFER AGENT

M/S MCS LTD.

77/2A, Hazra Road,

Kolkata-700029

BUSINESS OPERATIONS

Bank - Public

69

FINANCIALS

Total Income - Rs. 85066.521 Million (year ending Mar 2009)

Net Profit - Rs. 7685.981 Million (year ending Mar 2009)

Company Secretary Dina Nath Kumar

BANKERS AUDITORS

M/s Venkat & Rangaa

M/s Sudit K Parekh & Co

M/s M.R. Narain & Co.

M/s S. Ghose & Co.

M/s K.M. Agarwal & Co.

COMPETITORS DETAILS

STATE BANK OF INDIA

70

CANARA BANK

HDFC BANK

ICICI

VIJAY BANK

UTI

PUNJAB NATIONAL BANK

DENA BANK

SYNDICATE BANK

BANKS VISION AND MISSION

Vision

To put the Bank on a higher growth path by building a Strong Customer-base

through Talent Management, induction of State-of-the-art Technology and through

Structural Re-organization.

MissionTo ensure anywhere and any time banking for the customer with latest

state-of-the-art technology and by developing effective customer centric relationship

and to emerge as a world-class service provider through efficient utilization of

Human Resources and product innovation.

ANALYSIS OF DATA & INTERPRETATION

Comparative Balance sheets as on 31 st March 2008 and 31 st March 2009

71

(Rs in 000)

Particulars As on31-03-2008

As on31-03-2009

Increase/Decrease

% change

A. Capital & Liabilities1. Capital 4,467,000 4,467,000 0 Negligible2.Reserves &

Surplus

47,743,491 54,052,497 63,09,006 13.2%

3. Deposits 716,163,831 849,717,887 13,35,54,056 18.6%4. Borrowings 17,919,987 9,370,367 (85,49,620) (47.70)%5.Other Liabilities &Provisions

43,098,927 58,872,328 (15773401) (36.59)%

6.Total

Liabilities

829,393,236 976,480,079 147086843 17.7%

B. Assets1.Cash & Balancewith RBI

62,888,552 51,153,786

(11,734,766) (18.7)%2. Balance with banks & Money at call &Short Notice

7,532,410 15,213,849

7,681,439 102%3. Investments 234,002,500 296,510,497 62,507,997 26.71%4. Advances 497,204,661 588,017,634 90,812,973 18.26%5. Fixed Assets 10,714,676 11,097,519 382,843 3.53%6. Other Assets 17,050,437 14,486,794 (2,563,643) (15)%7. Total Assets 976,480,079 829,393,236 (147,086,843) (15.1)%

Analysis Based on Comparative Balance Sheets

1) Capital & Liabilities

1) The total issued capital as at 31-03-2009 is Rs. 4,467,000,000 divided

into 2,467,000,000 equity shares of Rs.10 each held by central

72

government and 2,000,000,000 equity Shares of Rs.10/- each held by

Public & Others. The bank’s authorized capital is Rs. 150,00,00,000.

The bank has issued approximately 9.5% of its authorized capital. It is

observed that there has been no change in the called-up capital. An

amount of Rs.6,000 towards allotment money has been collected in the

year 2008-2009 from the public. The share of central government in

paid-up capital stood at Rs 246700000 which is approximately 55.23%

of the paid-up capital. The balance of 44.77% is held by the public.

2) It is observed that during the year 2008-2009 the amount of reserves

and surplus has gone up by 13.2%. There has been no change in share

premium account. Transfers to statutory reserves and capital reserves

have increased during the year 2008-2009 by approximately 44% while

transfer to general reserve has dropped by 66%.

3) Deposits during the year 2008-2009 have grown by 18.6%%.Savings

bank deposits has grown by 13.71% and stood at Rs. 227,743,903

thousands. Deposits from banks and others has grown by 21.32% and

stood at Rs. 555,742,363 thousands.

4) The borrowings during the year 2008-2009 have gone down by

47.70%. Borrowings from outside India have gone down by a massive

36.59% during the year 2008-2009. On the other hand borrowings

from RBI has been cleared in 2006-2007. Borrowings from banks and

other institutions in India have gone down by 100% from Rs.

12,850,000,000. Borrowings from outside India are increased to Rs.

8,628,446,000 from 4,813,745,000. All the borrowings are non-

secured.

73

5) Other liabilities, which include bills payable, and interest outstanding

has gone up 26.78% during the year 2008-2009. Outstanding interest

stood at Rs.3,241,705,000 during the year 2008-2009.

6) The total liabilities during 2008-2009 have increased by approximately

36.5%. It is important to note here that there was no change in share

capital, hence indicating that liabilities other than capital have gone up

during the year 2008-2009.

Assets

1) The cash and balance with RBI has deccreased by around 20.32%

during the year 2008-2009. The cash in hand, which has increased, by

Rs.3,94,608,000 stood at Rs.35,98,070,000 by 12.32%. Balance with

Banks in Current Accounts has decreased by 7.07% during the year

2008-2009.

2) The balances with banks and money at call and short notice is nil

during the year 2008-2009. The balances with banks in India in current

accounts and other deposits accounts have marginally decreased by Rs.

1294210 at 24.15%. There is no money at call and short notice in India

or outside India. The balances with banks outside India in current

accounts and other deposits accounts have increased to 171.98%. It is

important to note that there was Rs. 1,749,734,000 balance in current

accounts with banks outside India during the year 2007-2008, but stood

at around Rs.4,759,000,000 during 2008-2009.

3) Investments during the year 2008-2009 have marginally gone up by

26.71 % and stood at Rs. 296,510,497,000 . Provision for depreciation

on investments has increased in the year 2008-2009 by 33.62% and so

increase in gross investment. It is worth noting that around 72.12% of

the total investment is in government securities in the year 2008-2009

74

while investment in shares is only 0.86%. Investment in debentures and

bonds in the year 2008-2009 has dropped 24.17% comparatively.

4) Advances during the year 2008-2009 have gone up by 18.26%. Term

loans comprise 55.56% of the total advances while cash credits,

overdrafts and loan repayable on demand comprise 41.32%. A majority

78% of advances is secured by tangible assets while unsecured

advances have gone up by 31.57% during the year 2008-2009.

There are no advances outside India while in India, advances in priority

and public sector account for 46.76%.

5) Investment in fixed assets during the year 2008-2009 has gone up by

3.57%. During 2008-2009, premises to the tune of Rs. 9,390,680,000

and other fixed assets including furniture fixtures of Rs.785,318,000

were added. The total accumulated depreciation as on 31-03-09 stood

at Rs.4,096,300,000.

6) Other assets have gone down by 15% during the year 2008-2009. Other

assets include outstanding interest and comprise around 32% of the

total. There has been a increase in outstanding interest in the year

2008-2009 as compared to 2007-2008. The inter-office adjustments is

nil for both the year.

7) The total assets during 2008-2009 have gone down approximately by

15%.

75

Comparative Profit & Loss Accounts for the year ended31 st March 2008 and 31 st March 2009

(Rs in 000)Particulars 31-03-

2008

31-03-

2009

Increase/Decrease

% change

A. Income1. Interest earned 61,712,159 73,647,278 11,935,119 19.34%

2. Other income 9,647,573 11,419,243 1,771,670 18.36%

B. Expenditure1. Interest expended

44,988,795 52,060,613

7,071,818 15.72%

2.Operating 2,418,550 20.89%

76

expenses 11,575,834 13,994,384

3. Provision and Contingencies

5,047,679 11,325,543

6,277,864 124.4%

C. Net Profit (A –

B)

7,685,981 9,747,424

2,061,443 26.82%

Total Income 85,066,521 71,359,732 (13,706,789) (16.1%)

Total

Expenditure

77,380,540 61,612,308

(15,768,232) (20.4%)

Analysis Based on Comparative Profit and Loss Account

A) Income

1) The total interest earned during the year 2008-2009 has gone up by

19.34%. Income on investments has increased by only 10.78% though

it may be observed that an investment during the year 2008-2009 has

gone up by 26.71%.

2) There is an increase of 18.36% in other income during the year 2008-

2009. Income from commission, exchange and brokerage has gone up

by 24.78%, while income from subsidiaries has decreased by a massive

74%.

B) Expenditure

1) There is an increase in interest expended during 2008-2009 it has gone

up by around 15.72%. During 2008-2009 the interest paid on deposits

has up by approximately 13.46% during the year 2008-2009

2) Operating expenses during 2008-2009 have gone up by around

20.89%. Payment to employees and directors fees is Rs. 10,290,000 of

77

the operating expenses, advertisement and publicity expenses has gone

down by 7.67% during 2008-2009 while law charges have gone down

by 22.17%.

C) Net Profits

The net profits have shown an increase of approximately 26.82% during

2008-2009.

Statement of Cash Flow for the year ended 31st March 2008

(Rs. in ‘000)Particulars Rs. Year ended

31-03-07A. Cash flow from operating activities 7032660B. Cash flow from investing activities (683038)C. Cash flow from financing activities (14651653)D. Balances at the beginning of the

year

Cash and Balances with the RBI

Balances with Banks and Money at

Call

40679399

8740288

49419687

E. Balances at the end of the year

Cash and Balances with the RBI

Balances with Banks and Money at

Call

62888552

7532410 70420962

Total cash flow during the year

(A+B-C) or (D-E)

21001275

78

Statement of Cash Flow for the year ended 31st March 2009

(Rs. in ‘000)Particulars Rs. Year ended

31-03-07A. Cash flow from operating activities (23853)B. Cash flow from investing activities (946030)C. Cash flow from financing activities (3083444)D. Balances at the beginning of the

year

Cash and Balances with the RBI

Balances with Banks and Money at

Call

62888552

7532410 70420962

E. Balances at the end of the year

Cash and Balances with the RBI

Balances with Banks and Money at

Call

51153786

15213849 66367635

Total cash flow during the year

(A+B-C) or (D-E)

(4053327)

79

RATIO ANALYSIS

Ratio analysis is widely used of financial analysis. It is defined as the

systematic use of ratio interpreter statement so that strength and weakness of a

firm as well as the historical performance and correct condition, can be

determined.

Single most important technique of financial analysis in which quantities are

converted into ratios for meaningful comparisons, with past ratios and ratios

of other firms in the same or different industries.

Ratio analysis determines trends and exposes strengths or weaknesses of a

firm.

TYPES OF RATIO

1. Short term Solvency Ratio

2. Long term Solvency Ratio

3. Turn-over Ratio

4. Profitability Ratio

1. SHORT TERM SOLVENCY RATIO

These are the Ratio, which measures, the short-term solvency of

financial position of the firm. These Ratios are calculated to comment upon

the short term paying capacity of a concern or the firm’s ability to current

obligations

80

The various types are: -

a) Current Ratio

b) Quick Ratio

a) CURRENT RATIO

It may be defined as the relationship current liabilities. The Ratio is a

measure of the general liquidity of the Bank for a short period of time.

Current Assets (CA) Current Ratio = -----------------------------------------

Current Liabilities (CL)

CURRENT RATIO

YEAR 2007-08 2008-09

Total current asset567,625,623 654,385,269

Total current liabilities

734,083,818 859,088,254

Current Ratio 0.77 0.76

81

0 .7 54

0 .7 56

0 .7 58

0 .76

0 .7 62

0 .7 64

0 .7 66

0 .7 68

0 .77

C u rre n t R a t io

2 0 0 7 -08

2 0 0 8 -09

Interpretation:

As conventional rules, a current ratio of 2:1 or more is considered

satisfactory. The higher the current ratio, the greater the margin of safety, the

larger the amount of current assets in relation to current liabilities, the more

the items ability to meet its current obligations.

b) QUICK RATIO

It can be defined as the relationship between quick or liquid assets and

current or liquid liabilities .An assets is said to be liquid if it can be converted

82

and cash with in a short period without loss of value. Quick assets include all

current assets except stock and prepaid expenses.

Quick/Liquid Assets Quick Ratio = ------------------------------------------

Current Liabilities

YEAR 2007-08 2008-09

Total current asset567,625,623 654,385,269

Total current liabilities 734,083,818 859,088,254

Current Ratio 0.77 0.76

QUICK RATIO

83

0 . 7 5 4

0 . 7 5 6

0 . 7 5 8

0 . 7 6

0 . 7 6 2

0 . 7 6 4

0 . 7 6 6

0 . 7 6 8

0 . 7 7

C u r r e n t R a t i o

2 0 0 7 - 0 8

2 0 0 8 - 0 9

84

Interpretation:

By conversion a quick ratio of 1:1 is considered satisfactory. It is

considered that if quick assets equal to current liabilities, then the concern can

meet its obligations.

CAPITAL STRUCTURES AND LONG TERM SOLVENCY

RATIO

Debt

Debt –Equity Ratio = ------------------------

Equity

Total Liabilities Solvency ratio = -----------------------------------

Total Assets

85

Comments:

Debt-Equity Ratio is decreased from 2007-08(4.01) March 2008-2009

(2.09) as the ratio has been decreased by 47.70%, from Rs. 1792 cr. to 932 cr.

It shows that the Bank financial position is becoming more sound as it is

crossing every financial year.

Year 2007-08 2008-09

Debt 17,919,987 9,370,367

Equity 4,467,000 4,467,000

Total Assets 976,480,079 829,393,236

Total Liabilities 829,393,236 976,480,079

YEAR 2007-08 2008-09Debt-Equity RATIO 4.01 2.09

Solvency Ratio 1.17 0.84

86

There is fall in the ratio but all the time it always maintain the ratio

which is above standard (2:1) so, we can that solvency position is not bad at

all.

0

0 . 5

1

1 . 5

2

2 . 5

3

3 . 5

4

4 . 5

2 0 0 7 - 0 8 2 0 0 8 - 0 9

D e b t - E q u i t y R A T I O

S o l v e n c y R a t i o

1) RETURN ON EQUITY RATIO

Return on Equity Ratio indicates the profitability of owner’s investment.

Net Profit

87

Return on Equity Ratio = --------------------- X 100Equity

Particulars 2007-08 2008-09

Net Profit7,685,981 9,747,424

Equity4,467,000 4,467,000

Ratio 58.12% 45.83%

Interpretation:

With compared to the figures of the year 2007-08, there has been fall of

profit to total equity during the year 2008-09. So, the overall position of the

bank is not favorable at all. Its position was good in the year 2007-08.

880.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

2007-08 2008-09

Ratio

Ratio

1. RETURN ON INVESTMENT RATIO

This ratio indicates profitability according to the total money invested

Net Profit Return on Investment Ratio = ---------------------------- X100 Investments

Rs. In thousand

Particulars 2007-08 2008-09

Net Profit 7,685,981 9,747,424

Investments 234,002,500 296,510,497

Ratio 3.284 3.287

Interpretation:

The above study shows on upward trend in the ratio in the year 2008-09 as

compared to 2007-08, which is same so it’s a good sign for the bank.

89

3 . 2 8 %

3 . 2 8 %

3 . 2 8 %

3 . 2 9 %

3 . 2 9 %

3 . 2 9 %

2 0 0 7 - 0 8 2 0 0 8 - 0 9

R a t i o

R a t i o

RETURN ON CAPITAL EMPLOYED RATIO

90

EBIT Return on Capital Employed Ratio = -------------------------------X100 Capital Employed

Rs. In thousand

Year2007-08 2008-09

EBIT85,066,521 71,359,732

Capital Employed

786,294,309 917,607,751

Year

2007-08 2008-09

Return Capital

10.81% 7.77%

Interpretation:

The Return on Capital has been very low in the year 2008-09 as

compared to previous year that is 2007-08. The higher the Return on capital

means higher the soundness of the bank. In the year 2007-08, Return on

Capital is 10.81 in the next year 2008-09 (7.77%) decreased little.

91

0 . 0 0 %

2 . 0 0 %

4 . 0 0 %

6 . 0 0 %

8 . 0 0 %

1 0 . 0 0 %

1 2 . 0 0 %

2 0 0 7 - 0 8 2 0 0 8 - 0 9

R e t u r n C a p i t a l

R e t u r n C a p i t a l

NET PROFIT TO TOTAL INCOME

The bank net profit as compared to the total income of the

bank is depicted with this ratio of net profit to total income.

92

Net Profit Net Profit to Total Ratio = ----------------------------------- X100 Total Income

Rs. In thousand

Particular2007-08 2008-09

Net Profit7,685,981 9,747,424

Total Income85,066,521 71,359,732

Ratio9.03% 13.65%

Interpretation:

The Net Profit of the bank has increased from 9.03% in the year 2007-

08 to 13.65% in the year 2008-09. But there has been steady growth rate of

net profit from the year 2007-08. So, increase in the net profit is good at all

for the bank.

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0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

2007-08 2008-09

Ratio

Ratio

2. NET PROFIT TO TOTAL DEPOSIT RATIO

The ratio illustrates the profit, which is earned with respect to the

deposit made.

Net Profit

Net Profit to Total Deposit Ratio = -------------------------------------- X100

Total Deposits

Rs. In thousand

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Particulars

2007-08 2008-09

Net Profit

7,685,981 9,747,424

Total Deposit

716,163,831 849,717,887

Ratio

1.07% 1.14%

Interpretation:

The above ratio shows a increase in the net profit respective of a

steady growth of deposits.

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1 . 0 2 %

1 . 0 4 %

1 . 0 6 %

1 . 0 8 %

1 . 1 0 %

1 . 1 2 %

1 . 1 4 %

2 0 0 7 - 0 8 2 0 0 8 - 0 9

R a t i o

R a t i o

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FINDINGS & RECOMENDATIONS:

1. The authorized capital of the Bank is Rs.1500 crores divided into equity

shares of Rs 10 each.

2. The Bank has issued and subscribed capital of Rs.446.7 crores. The capital

was last raised during 2004-2005.

3. The share of central government of India is 55.23% of the paid-up capital.

The balance of 44.77% is held by the public. The bank has no amount due

towards allotment money.

4. The total foreign shareholding (NRI and FIIs) as at 31st March 2009 was

8.8%, which is within the stipulated level of 20% of the total paid-up

capital of the Bank.

5. During 2008-2009, reserves and surplus went up by 13.2% and it was

Rs. 47,743,491,000 as at 31st March 2009.

6. The net worth of the Bank was Rs.1521.38 crores as on 31st March 2009.

7. The total deposit stood at Rs. 84,971 crores at the end of 2009.

8. In 2008-2009, the deposits grew by 18.6%.

9. A majority 56% of the deposits have a maturity of over 1 year and below 3

years. Only 2% of the deposits have a maturity period of 5 years and

above.

10. The Bank’s share in the total deposits of Scheduled Commercial

Banks (SCBs) stood at 25.40% at the end of 2009 stood at 386.38 crores.

12) The Bank’s cost of deposit came down to 5.49% for the year

2008-2009 from 6.99% for the year 2007-2008.

13) Borrowings during the year 2008-2009 went down by 47.70%.

14) Borrowings from outside India went up by massive 79.25% during

2006-2007 and stood at Rs.882.84 crores as at 31st March 2007.

15)The entire borrowings of the Bank, both from within India as

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well as outside India are un-secured.

16)A major 47% of the borrowings have a maturity period of 91 to

180 days. Only 3% of the borrowings have maturity of over 1

year and below 3 years.

17) The total liabilities during 2008-2009 went up by 17.7%.There

was no change in share capital, hence indicating that liabilities

other than capital have gone up.

18) The cash in hand which was Rs.6288.86 crores at the end of 2008

went down to Rs.5115.38 crores as on 31st March 2009.

19) The Bank’s balance with RBI in Current Accounts decreased by

20.32% during 20082009

20) The balances with Banks outside India in Current Accounts and

other deposit accounts gone up by 412.79% during 2008-2009.

21) The Bank does not have money at call and short notice with

Banks or other institutions in India or outside India.

22) Investments increased by 26.61% during 2008-2009.

23) A majority 62% of the investments have maturity period of over

5 years. Around 11% of the investments are short term with

maturity below 1 year.

24) Around 71.70% of the Bank’s investments is in government

securities while only .89% of the total investment is in Equity

shares.

25) The average yield on investments during 2008-2009 stood at

9.33%.

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CONCLUSIONS:

The topic “AN ANALYSIS OF THE FINANCIAL STATEMENT OF

ALLAHABAD BANK” was undertaken to study in detail regarding

the banking function and financial statement analysis.

After having conducted by the analysis for the first objective i.e. the study and

analysis of ALLAHABAD BANK has the tremendous improvement

achievement done by ALLAHABAD BANK. After completing 100 years

ALLAHABAD BANK has achieved tremendous results in short period of

span. This shows in short period time it will number one in banking sector.

Nearly 95% of customers are satisfied. Taking overall into account we can say

that good services are offered to customer.

The one of the main objective is service, the service offered by

ALLAHABAD BANK to the customer in terms of ATM, Clearance, Locker

facility, e- Cheque facility, etc. these are facilities given by the bank in all

facility they doing well compared to the other bank.

As far as the main concerned is Market Potentiality for ALLAHABAD

BANK. It is observed form the analysis that the bank can expand its market

by few changes and improving advertisement. By reviving the interest rates,

reducing the margins etc. bank can considerably attract new customers.

Thus from this analysis it is seen that the overall performance of the

institution is profitable. And in this stiff era of competition by making some

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minutes changes the bank a successfully maintain and improve its market

position.

ANNEXURE

Tenor Existing Interest Rate p.a. (%)

Revised Interest Rate p.a. (%)

For below

Rs. 1 cr

For Rs. 1 cr to

less than Rs. 10 cr

For Rs.10 cr & above

For below Rs. 1 cr(w.e.f.

23.11.09)

For Rs. 1 cr to less than

Rs. 10 cr(w.e.f.

18.11.09)

For Rs.10 cr& above

(w.e.f. 18.11.09)

7 daysto

14 days

NA 1.50 1.50 NA 1.50 1.50

15 daysto

29 days

3.00 2.00 2.00 3.00 2.00 2.00

30 daysto

45 days

3.00 2.25 2.25 3.00 2.25 2.25

46 daysto

60 days

4.00 2.75 2.75 4.00 2.75 2.75

61 daysto

90 days

4.00 2.75 2.75 4.00 2.75 2.75

91 daysto

179 days

5.25 3.25 3.25 5.00 3.25 3.25

180 days to 269 days

6.00 4.25 4.25 5.50 4.25 4.25

270 days to 364 days

6.00 5.00 5.00 5.50 5.00 5.00

1 yearto

less than2 years

7.00 5.75 5.75 6.50 6.00 6.00

2 yearsto

less than 3 years

7.00 5.75 5.75 6.75 5.50 5.50

100

3 yearsto

less than 5 years

7.25 5.50 5.50 7.00 5.50 5.50

5 yrs andupto 10 yrs

7.50 5.50 5.50 7.25 5.50 5.50

The above rates will be applicable for fresh deposits and renewal of deposits and rates are subject to revision at any time.

As part of our Centenary year celebrations, Senior Citizens are offered an additional rate of 0.75% over and above the mentioned rates for deposits with maturity period above 91 days. These rates are applicable to deposits opened / renewed after March 12, 2008.

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Non Resident (External) Rupee Savings Deposit Account (NRE-SB)

Interest Rate % p.a.(unchanged since 18.11.2005)

3.50

Non Resident (External) Rupee Term Deposit Account (NRE)With effect from 01.03.2010

Period Existing rate % p.a.w.e.f 1st February,

2010

Revised Rate % p.a.w.e.f 1st March,

2010

1 year to less than 2 years

2.60 2.59

2 years to less than 3 years

2.91 2.83

3 years only 3.53 3.44

PENAL RATE OF INTEREST FOR PREMATURE WITHDRAWAL OF DOMESTIC TERM DEPOSITS

Period of Deposit

1.Amount of DepositPenal Rate of Interest

Premature closure of term deposits for reinvestment in our bank

Any amount

No penal rate to be charged2.

15 days and upto 1 (one) year*

Any amount

No penal rate to be charged

3. All others All others 1 % penal interest to be charged

The above rates are applicable to fresh deposits and for renewal of deposits only.

These rates are subject to change without notice and the depositors will be advised

of the current rates on the date of deposit. The depositors may contact:

FOREIGN DEPARTMENT HEAD OFFICE

14, India Exchange Place,2nd Floor,

Kolkata-700 001.

Telephone:(033)22316703,6704,6706

FAX:(033)2231-702.

E- MAIL ID : hofd.allbank@gmail.com 102

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