an indepth analysis of hdfc bank

7/31/2019 An Indepth Analysis of HDFC Bank

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THESIS

AN IN-DEPTH ANALYSIS OF HDFC BANK

ON FOLLOWING AREASFINANCE

HUMAN RESOURCE

SUBMITTED TO: SUBMITTED BY:


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thesis


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CERTIFICATE

TO WHOMSOEVER IT MAY CONCERN. THIS IS TO CERTIFY THAT,

ACCORDING TO THE BEST OF MY KNOWLEDGE , ROLL NO.: ,

STUDENT OF INSTITUTE OF , INSTITUTIONAL AREA, HAS DONE IN

ORIGINAL THE THESIS ON :

THE INDEPTH ANALYSIS OF THE HDFC BANK, NEW DELHI IN THE

FOLLOWING AREAS:

DATE: SIGNATURE

FINANCE

HUMAN RESOURCE


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Acknowledgement

I give me tremendous pleasure in acknowledging the invaluable assistance extended to me

by various persons in the successful completion of the thesis.

Firstly I wish to thanks who allowed me to work on the topic of my thesis.

Firstly I wish to thanks who allowed me to work on the topic of my choice.

I am greatly indebted to for her priceless support and guidance.

I am grateful to Of HDFC Bank Ltd. for his invaluable support in giving me details of

desired information.


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OBJECTIVE

TO STUDY THE NATURE AND FLOW OF PROCESSES IN A

FINANCIAL SERVICE FIRM.

TO ANALYSE THE FIANANCIAL PERFORMANCE OF HDFC

BANK

TO ANALYSE THE HR POLICIES OF HDFC BANK


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TABLE OF CONTENTS

TOPIC PAGE NOS.

SYNOPSIS

INTRODUCTION

CORE CONTENT

METHODOLOGY

FINDINGS

COMPANY PROFILE

FINANCE

HUMAN RESOUCE

SWOT ANALYSISLIMITATIONS

CONCLUSIONS

RECOMMENDATIONS

APPENDICES

BIBLIOGRAPHY


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SYNOPSIS

India has a strong financial system with a network of commercial banks, financial institutions

and small financial services firms that offer leasing, merchant banking, portfolio management

and bill discounting. Some 63,000 bank branches are scattered across country, many of which

are located in villages.

Banking is the backbone of a modern economy Health of banking industry is one of the most

important pre conditions for sustained economic progress of any country.

The banking structure in India can broadly be classified into public sector, private sector (old

and new) and foreign banks. Banks have made a significant contribution to the economic andsocial development of the country. Since nationalization of banks in 1969, the Indian banking

system saw phenomenal growth in terms of geographic reach and business.

The acute balance of payments crisis in 1991 and the subsequent downgrading of Indian risk by

international credit rating agencies encouraged the Government of India and the Reserve Bank

of India to formulate reforms in banking with the advent of Narasimhan committee report along

with economic reforms. Deregulation of interest rates, norms with respect to income recognition

and classification of assets, removal of entry bal for new private sector and foreign banks,

abolishing the practice of branch licensing and presuming a minimum of 8% capital adequacy

to be achieved within a specified time frame were a few recommendations by the committee.

Many of the recommendations of the committee were accepted and banks are now fast moving

to achieving international beat practice as set by the Base Committee. RBI introduced the

CAMELS (Capital adequacy, asset quality, management, earnings, liquidity, systems and

control) accounting and capital adequacy requirements. Government securities found favour

with banks due to risk aversion and banks concentrated on providing funds to industries and

trade and subsequently escalated to the second phase of growth in 1998. The budget at the

center and the credit policies of the RBI has some measures pertaining to the banking sector.


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To succeed in todays market, a bank must adopt an ideal combination of new technologies,

high standards of credit risk appraisal, treasury management, systematic improvements focused

on internal control to adopt to the changing environment require rained human resources.

At stages through which an individual application from travels have been described, emphasis

has been given to the role played by the information system in this flow of information. The

study confirms that streamlined procedures are a salient feature of the organization. The state of

the art information system is a one of its kind phenomena with regards to the high levels of

efficiency it is able to provide.

The results of the project study depict immense opportunities for the corporation. Over 45

potential clients have been identified. The concept of providing House Building Advance (s) to

employees seems to be flourishing in the corporate sector. Top management seeks to provide

work motivation through such schemes, thus leading to retention of the work force. In todays

competitive scenario, where companies are heading towards strategic cost management, all

efforts are made to free company funds from all possible avenues. Hence, lies the inclination

towards financial institutions for HBAs. However, most companies look for rates of interest

lower than those prevailing in the market. Aversion towards the Deduction at source clause is

also apparent.

The overall result of the study is that there is strong scope for tie-ups with most of the

companies contracted. The final execution rests on negotiation on the term.


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Research Framework:

The study involved an in-depth analysis of marketing strategies and Human Resources policies

of Hutch. The framework for the research was chosen to beExploratory in nature.

Exploratory Research is that part of the overall market research which is used to discover

something new. Normally in any case there can be a number of opportunities or possible

problems and its is impractical to study each of them. Exploratory Research is useful in such a

case to find out the most likely alternatives. These alternatives are then turned into hypothesis.

Hypothesis is tentative answer to questions that services a guides for most research projects.

They are derived from previous studies overdrawn from new ideas to exploratory research is,

therefore, undertaken is relative to possible answers.

The various means of going about for executing Exploratory Research are:

Secondary Data:

When an investigator uses data which have already been collected by others, such data

is called secondary data. Such data are primary data for the agency that collected

them, and becomes secondary for someone else who uses this data for his own purposes.

The secondary data can be obtained from journals, reports, government publications,

publications of professional and research organizations, etc.

This is the quickest and most economical way of collecting data.

A large amount of data is collected from:

o Websites

o Newspapers

o Magazines

o Library

o Books

Primary Data:

Primary data are those data which are collected by the investigator himself for the purpose

of a specific inquiry or study. Such data are original in character and are generated by

surveys conducted by the individuals or research institutions.It was very hard to get because of busy schedule of the HR personnel. The data was

collected from:

Internet

Dealer


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Introduction

Banking Industry

THE INDIAN FINAICAL SYSTEM

The financial system junctions as an intermediary and facilities the flow of funds from the areas

of surplus to areas of deficit. A financial system is a composition of various institutions,

markets, regulations and law practices, money managers, analysts, transactions and claims and

liabilities.

A Financial System

Flow of funds

Seekers of Funds(meinly Businessfirms & Govt.)-

Suppliers of funds(mainly householders)Flow of financial

Income & Financial claims


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The financial system helps determine both the cost and volume of credit. Following are the

various functions performed by a financial system:

The savings functions

Liquidity functions

Payments functions

Risk functions

Policy functions

Financial Markets:

A financial market can be defined as a market in which financial assets are created or

transferred. These markets are classified as money market (where the instruments dealt are of

short term maturity) and capital market (the instruments dealt are of long term maturity).

Money Market:

These markets deal with instruments that have a maturity period of less than 1 year. These are

further sub divided into following:

1. Call Money Market:

It is in this market that Banks and other participants borrow loans for a very short period i.e. for

1 to 15 days.

2. Treasury Bills or Government Securities Market:

This is a market for teaching in instruments issued by the Central Government, State

Government and treasury bills issued by the RBI.

3. Market for Commercial paper (CP) and certificate of deposit (CD).

Commercial paper are short term, unsecured promissory notes issued at a discount to the face

value by well known companies that are financially strong and carry a high rating.

Certificates of deposits are defined as short term deposits by way of unasked promissory notes

having a short maturity of not less than 3 months and not more than one year.

4. Money Market Mutual Funds (MMMF):


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MMFs are mutual funds that invest primarily in the money market. This helps even a small

investor to invest in the money markets.

Capital Market:

This market deals with instruments that have a maturity period greater than one year. It is

further divided into:

Primary Market:

This is the market where new securities are issued by companies and are purchased by the

investors.

Secondary Market:

This market deals with trading of outstanding securities. This market operates via the medium

of Stock Exchanges.


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BANKING SYSTEM

The Banking system is an integral Sub system of the financial system. It represents an

important channel of connecting small savings from the households and lending it to the

corporate sector.

The Indian Banking system has the Reserve Bank of India (RBI) as the apex body for all

matters relating to the banking system. It is the Central Bank of India. It is the banker to

all other banks.

Functions of RBI:

1. Currency issuing authority.

2. Banker to the Government

3. Banker to other banks

4. Framing of monetary policy

5. Exchange control

6. Custodian of foreign exchange and gold reserves

7. Development activities

8. Research and Development in the banking sector.

Following is the classification of banks:

1. Non scheduled Banks:

These are banks which are not included in the second schedule of the Banking

Regulation Act, 1965. It means they do not satisfy the conditions laid down by that

schedule. They are further classified as follows:i) Central Co-operative Banks & Primary Credit Socieities.

ii) Commercial Banks

2. Scheduled Banks:

Scheduled Banks are banks which are included in the second schedule of the Banking

Regulation Act, 1965. According to this schedule a scheduled bank.


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(a) Must have paid up capital reserve of not less than Rs. 5,00,000/-

(b) Must also satisfy the RBI that its affairs are not conducted in a

manner detrimental to the interest of its depositors.

Scheduled banks are sub divided as:

1. State co-operative Banks:

2. These are co-operative owned and managed by the state.

3. Commercial banks.

4. These are business entities whose main business is accepting deposits and extending

loans. Their main objective is profit maximization and adding shareholder value.

These are further sub divided as:

1. Indian Banks:

These banks are companies registered in India under the companies Act. Their place

of origin is in India.

These are also sub divided as:

1. State Bank of India and its subsidiaries.

2. This group comprises of the State Bank of India (SBI) and its seven subsidiaries viz.

State Bank of Patiala, State Bank of Hyderabad, State Bank of Tranavcore,

However, TIER-II capital can not be more than 50% of TIER 1 capital.

1. TIER-I Capital

2. This refert to the core capital that provides the most permanent and ready support

against unexpected losses. Equity investments in subsidiaries, intangible assets, losses in

current period and those brought formed from previous years, will be deducted from

TIER I capital.

Tier I capital consists of the following unemployments :-

1. Paid up equity capital

2. Statutory reserves

3. Other undisclosed resumes

Capital reserves representing surplus arising out of sale proceeds of assets also be added to

TIER I capital.


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3. TIER-I Capital

This consists of capital elements that are not permanent and are not readily available to meet

unforeseen contingencies.

Following are its components:

1. Undisclosed reserves and cumulative perpetual preferences shares.

2. Undisclosed reserves often take the character of disclosed reserves. Also when

cumulative perpetual preferences shares are fully paid up

8. These are banks that were registered outside India and had originated in a foreign country.

RBI Norms to be followed by Banks

1. Capital Adequate Ratio (CAR)

2. Cash Reserve Ratio (CRR)

3. Statutory Liquidity Ratio (SCR)

4. Bank Rate

5. Exposure Norms

1. Capital Adequacy Ratio (CAR):

In India banks are institutions where deposits place their hard earned savings on the

assumptions that the risk shall be borne by the bank. In such a scenario, the banks must

have enough capital to meet unforeseen continues so that the confidence of the deposits

is not shaken. To fulfill this need the RBI has laid down the norms of capital adequacy

that need to be fulfilled by banks. The banks have to maintain the capital Adequacy

Ratio (CAR) specified by RBI from time to time.

Capital Adequacy Ratio is equal to the ratio of TIER I and TIER II capital to the

aggregate of Risk weighted assets (RWA).


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Thus CAR = (TIER I + TIER II)/RWA. However, TIER II capital can not be more

than 50% of TIER I capital.

1. TIER CAR = TIER I + TIER II/RWA.

3. State Bank of Indore. State Bank of Bikaner and Jaipur, State Bank of Mysore, State

Bank of Saurastra,

4. Other Nationalized Bank

This group consists of private sector banks that were nationalized. The government of

India nationalized 14 private banks in 1969 and another 6 in the year 1980.

5. Regional Rural Banks:

These were established by the RBI in the year 1975 of Banking Commission. It was

established to operate exclusively in rural areas to provide credit and other facilities to

small and marginal farmer, agricultural labours, and small entrepreneurs.

6. Old Private Sector Banks:

This group consists of banks that were established by the primary status, community

organizations or by a group of professionals for the cause of economic betterment in

their area of operations. Initially their operations cure concentrated in a few regional

areas. However, their branches slowly spread throughout the national as they grew.

7. New Private Sector Banks:

These banks were started as profit oriented companies after the RBI opened the banking

sector to the Private Sector. These banks are mostly technology driven and better

managed than other banks they take the character of equity capital. Thus they display

the characteristics elements that can absorb losses.


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3. Revaluation Reserves:

These are profits arising increase in the market value of the assets. These can be relied in

absorbing losses only if the market value of the assets they represent is subject to fewer

fluctuations. Therefore, they are discounted before inclusion in TIER II capital. The

minimum discount is 55%.

4. General Provisions and loss reserves:

These are not attributable tot eh actual diminution in value or identifiable potential loss in

any specific asset and are available potential to meet unexpected losses. Hence they can be

included in TIER II capital. However, these elements will be admitted up to a manumit of

1.25% of Risk Weighted Assets.

5. Hybrid Debt Capital Instruments

These are instruments that posses certain characteristics of debt and certain characteristics

or equity. When they have close similarities to equity and are able to support losses

continuously without trigging liquidation they can be included in TIER-II capital.

6. Subordinated Debt:

For subordinated debt to be eligible for inclusion in TIER II capital it should be fully paid

up, unsecured, subordinated to the claims of the creditors free of restrictive clauses and

should not be redeemable at the initiative of the holder or without the consent of the banks

supervisory authorities. These are discounted according to their period of maturity.


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The discount to be applied is to such instruments is as follows:

Rate of Maturity Discount

Beyond 5 years 0%

Between 4-5 years 20%




Between 1 years 100%

1. Risk weighted Assets (RWA): RWA refers to weighted aggregate of financial and non

funded items as detailed below:

Risk weights of funded items or balance sheet items:

Nature of items Weight

1. Cash and Balance with RBI

II. Investments

a. Govt. & approved securities

b. Share/Debentures/Bonds/CPs MF unit.

100

III. Current Assets

a. Stock

b. Inter corporate loans/Deposits

c. Loans and advances fully secured by

companys deposits

d. Other secured advances considered good

e. Bills purchased/discounted

f. Others (to be specified)

100

0

100

100

100

IV. Fined Asset

a. Asset leased out

b. Premises

c. Furniture and fintive

100

100

100

V. Other Asset

a. Income tax deducted At source

(net)

b. Advance tax paid (net)

c. Interest due on govt. securities

d. Others (to be specified)

0

0

0

100


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Risk weighted for non funded / off balance sheet items:

Nature of Items Weight

a. financial and other guarantee

b. Share/debenture under writing obligation

c. Partly paid shares/debentures

d. Bills discounted/rediscounted

e. Lease contracts entered into but yet to be

executed

f. Other contingent liabilities

100

50

100

100

100

50

4. Current scenario:

The CAR at present is 9%. Also TIER II capital cannot be more than 50% of TIER I

capial. It is proposed to hike the CAR to 12% by 2004 based on the Base Committee

recommendations.

Following are the average CAR across different segments of banks.

1996-97 97-98 98-99 99-2000

National bank 8.69 10.94 11.14State Bank

Group

10.43 12.54 11.88 11.95

Old Pvt. Sector

Bank

11.13 11.69 12.34 12.47

New Pvt. Sector

Banks

15.38 13.63 11.77 13.41

Foreign Bank 62.29 40.83 44.23 31.50

The diminishing CAR of foreign banks indicates that their liabilities. Also the new privatesector banks have kept their CAR well above the statutory limit of 9% to protect themselves

norms relating to capital adequacy. Other banks have their CAR marginally above the other

indicating low growth or higher capital requirement in the coming years.


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2. Cash Reserve Ratio (CRR):- CRR is the minimum reserve deposits which banks have

to compulsory keep with the RBI. These are calculated as specific percentage to Resolvable

liabilities arrived at in the basis of net renewal and time liabilities (NDTL).

1. Net Demand and time liabilities

2. NOTC constitutes liabilities of banks, which it asses to the banking system and

others.

Thus NDTL = Liabilities to others + Net Inter Bank Liabilities (NIBL), where ]

NIBC = Liabilities to Banking system Asset with Banking System.

3. Resolvable liabilities (RC):

These are arrived at after subtracting all liabilities exempted from statutory reserve

requirements from NDTL.

4. Exempted Liabilities:

All Inter Bank Transactions are exempted for the calculation of Receivable

liabilities.

5. Reporting Friday:

NDTL for the calculations of reserve requirements shall be considered as on

reporting Friday. Every alternate Friday is considered as reporting Friday. If

reporting Friday is a holiday, then the previous working day is considered for

calculations of NDTL.

6. CRR calculations.

CRR rate is prescribed from time to time by the RBI. At present it is at 7.5% The

cash reserve to be maintained by banks is to be highest of the following:

a. 3%ofd NDTL.

b. 7.5% of Resolvable Liabilities (RL)

1. Maintenance period.

2. The CRR so computed shall be required to be maintained for a fortnight. The minimum

daily CRR at be maintained for a fortnight. The minimum daily CRRR at be maintained

is 60% for the first seven days of the reporting week and 65% for the remaining period.


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However, on the 14th day or the reporting Friday entire reserve requirement has to be

met on a product basis.

3. Yields and Penalties

RBI gives bank an interest of 6% on the reserve kept above 3% of NDTL with it. This

means that at current CRR rate of 7.5% RBI pays interest only on the 7.5% of the

deposits. It has the goal of aligning this yield with the bank rate.

There can be two types of defaults:

a. When the banks fail to meet the daily minimum CRR requirements for the first

13 days of the fortnight.

b. Penalty in case of default is that the banks loses interest on the amount of CRR

maintained on that day.

c. When banks fail to meet the total reserve requirement for the fortnight.

Penalty in case of dealt is interest @25% p.a. on the shortfall and also loss of interest on

the amount of shortfall.

1. Statutory liquidity Ratio (SLR):

According to Sec. 24(2-A) of amended Banking Regulation Act, 1949 a

scheduled bank and every other banking company, shall, in addition to the cash reserves

maintained by them under Sec. 42 of RBI Act, maintain reserves in cash or gold named

at price not exceeding the current market price or in unencumbered approved securities

valued at price determined. The banks should maintain such reserves not exceeding 40%

and not less than 25% as the RBI may from time to time specify, of the total of its

demand and time liabilities (NDTL), as on last Friday of the second preceding fortnight.

1. Calculations of SLR.

2. A bank has to maintain : (a) 25% of NDTL or (b) 25% (current rate) of RL

whichever is higher.

3. Exempted Liabilities


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4. All Inter Bank transactions are exempted for the computation of RL

5. Maintenance period.

All statutory reserves are to be maintained for a period of a fortnight. An important

difference from CRR is that the SLR reserves for the fortnight will be accessed based on

the NDTC of the reporting Friday of the preceding fortnight. Since NTDL is known in

advances SLR figures can be calculation based on actual figures. Also unlike CRR,

there is no flexibility of maintaining these reserves on average basis. They have to be

maintained on a daily basis.

6. SLR Trends (1949-2000)

It can be seen that the RBI started varying the SLR only after 1970 onwards. Also

the recent trend indicates downwards pressure on SLR.

7. Bank Rate.

The rate of which RBI lends to commercial banks by rediscounting bills or eligible

paper is called the bank rate. It is basically the refinancing rate. the banks decide the

interest rates based on the bank rate. It is also should be the RBI to control inflation.

Following chart shows the

8. Exposure Norms:

The RBI has stipulated certain ceiling relating to advances and interest rates which

banks have to adhere to which carrying out their lending operations. Some of them

are as follows:

a. Exposure to a single borrower should not exceeds 15% of advances.

b. Exposure to a business group should not exceeds 40%

c. Exposure to stock market should not exceed 5% of total advances as at the end

of previous year.


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CLASSIFCATION OF BANK

Reserve Bank of India

Scheduled Banks Non Scheduled Banks

State Co-op-Banks Commercial Banks

Indian BanksForeign Banks

Public sector Banks Private sector Banks Private sector Banks

SBI & its Subordiantes Nationalized Banks Regional Rural Banks


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FUNCTIONS OF A BANK

Functioning of a bank is among the mere complicated of corporate operations. Since banking

involves dealings directly with money, governments in most countries regulate this sector rather

stringently. In India, the regulation traditionally has been very strict and in the opinion ofcertain quarters, responsible for the present condition of banks, where NPA are of a very high

order. The process of financial reforms, which started in 1991 has cleared the

..somewhat but a lot remains to be done. The multiplicity of policy and regulations

that a bank has to work with makes its operations even more complicated, sometimes bordering

on illogical. This section, which is also intended for banking professional, attempts to give an

overview of the functions in as simple manner as possible.

Banking Regulation Act of India, 1949, defines Banking as accepting, for the purpose of

lending or investment of deposits of money from the public, repayable on demand or otherwise

and withdrawal by cheques, draft order or otherwise. During from this definition and view

edsolely from the point of view of the customers. Banks essentially perform the following

functions.

1. Accepting deposits is one of the two major activities of the banks- Banks are also

called custodians of public money. Basically, the money is accepted as deposit for

safekeeping. But since the banks are this money to earn interest from people who

need money. Banks shall a part of this interest with the depositors. However,

accepting deposits and keeping track of money involves a lot of bookkeeping and

other operations. Let us see what the banks must maintain to provide this service.

An effective branch network to reach the targeted customer base.

A system of intra branch accounting with separate accounts for each customer

A system reconciliation of the end of the study

Availability of adequate funds at each branch.

Trained staff for effective customer services.

Infrastructures inputs like space, stationary, comfortable environment etc.


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2. Lending money to the public

Lending money is one of the two major activities of any bank. In a way, the bank

acts as an intermediary between the people who have the need for money to carry out

business transactions.

This activity places its own requirements on the resources of the Bank. For effective

functioning of this, a bank must posses:

Skills to appraise the potential borrowers and the activity.

Legal skills for documentation.

Skills to follow up of monitor the end use of money lent by it.

An effective credit delivery system.

Review of credit portfolio.

3. Transfer of Money:

Apart from accepting deposits and lending money, banks also carry out, on behalf of

their customers the act of transfer of money both domestic and foreign from place to

another. This activity is known remittance business. Banks issue, demand drafts.

Bankers cheques, money orders etc. for transferring the money. Banks also have the

facility of quick transfer of money also know as telegraphic transfer or little cash

orders. To delivery this service, a bank must have:

An effective branch network or correspondent relationships.

A system of inter branch reconciliation

Availability of funds at allt eh center.

4. Trustee Business

Banks also act as trustees for various purposes e.g. whenever a company wishes to

issue secured debentures, it has to appoint a financial intermediary as trustee who

takes charges of the security for the debenture and looks after the interests of the

debenture holders. Such entity necessarily have to have expertise in financial


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matters and also be of sufficient standing in the market/society to generate

confidence in the minds of potential subscribes to the debenture. While banks must

posses the following to be effective and retain that:

A track record of sufficient length.

Facilities for safe keeping.

Legal skills to take necessary steps for the trusteeship.

5. Safe Keeping

Bankers are in the business of providing security to the money and valuables of the

general public, while security of money is taken care of through offering various

types of deposit schemes, security of valuables is provided through maiming secured

space available to general public for keeping these valuables. These spaces are

available in the shape of lockers. The latter are small compartments with dual

locking facility built into strong cupboards. These are stored in the Banks strong

room and are fully secure. Lockers can neither be opened by the hirer or the bank

individually. Both must come together and use their respective keys to open the

locker. To make this facility available to its customers, the Bank must provide:

Physical structures to house the lockers

Locker cabinets

Security arrangements

Record of access to lockers

6. Government Business:

Earlier Government business used to be exclusively carried out by Government

treasures where all type of transactions took place. However, now banks act onbehalf of the Government to accept its tan and non tan receipts most of the

Government disbursements like pension payments and tax refunds also take place

through banks. While the banks carry out this business for a free to be paid by the

Government, providing this service requires a lot of effort and organization. The

banks must provide:


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5. Operating Expenses/Operating Income.

6. This ratio denotes how much a bank has to spend on operating expenses for

every rupee earned.

The lesser the ratio, the better.

7. Cost of Deposits

This is the ratio of total Interest Expnaded/Total deposits. This indicates the

cost of funds to a bank. Thus a bank that can obtain funds at a lower cost in a

position to earn better profits in the future.

3. Earnings Quality:

This parameter lays importance on how a bank earns its profits. This also explains the

sustainability and growth in earnings in the future.

1. Income spread/Average working funds.

2. Income spread is the difference between interest income earned and interest

expanded. This ratio shows how much a bank can earn for every rupee of

working fund spent. The higher the ratio of the better.

3. Operating profit/average working funds.

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

operating expenses for every rupee spent on working funds. The higher the

ratio, the better.

5. Net profit/Assets.

6. This ratio measures the net free profits earned for every rupee of asset

owned. A higher ratio means better income generating capacity of the assets.

A higher ratio indicates better earnings potential in the future.

7. Net Profit/Net worth

8. This ratio measures the return on net worth or the return on equity. This is a

very important ratio for the shareholders. A higher ratio mans that the

shareholders funds are utilized in a better manner than would have been

elsewhere. Also, only a high return on equity justifies retention of profits.


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9. Other income/net interest income other income includes fee based income,

income from non crore activities, income from non fund based exposures

and other activities. This ratio determines the future ability to work on low

spreads. This also indicates whether the bank is solely reliant on interest

income for its profit or are there other sources of income as well.

4. Productivity:

This parameter indicates how efficient are the banks employee and branches in

generating business and profits.

1. Business per Branch.

2. Business of a bank is equal to sum of deposits and advances. This ratio

indicates whether the branches of bank are used optimally or not.

3. Business per employee.

4. This ratio is used to find out whether a bank is relatively over or under

staffed. The higher the ratio, the better.

5. Operating profits per employee.

6. This is also a ratio to check whether a bank is over or under staffed. The

higher the ratio, the better.

7. Operating Profits per branch.

This ratio is denotes the profitability per Branch. The higher the ratio, the

better.

5. Capital Adequacy:

Capital adequacy indicates whether the bank has enough capital to absorb unexpected

losses. It is required to maintain depositor confidence and presenting the bank from

going bankrupt.

1. Capital Adequacy Ratio (CAR).

2. The banks have to maintain the capital adequacy ratio (CAR) specified by

RBI from time to time. Capital Adequacy Ratio is equal to the ratio of TIER-

I and TIER-II capital tot eh aggregate of risk weighted assets (RWA).


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Thus CAR = (TIER 1 + TIER II) RWA higher tighter CAR norms. Also

high CAR denotes high safety against bankruptcy. However, a CAR over 2- 3%

above the statutory norms indicate that the funds are not deployed properly by

the banks. The current requirements is 9% which is to be raised to 10% by

March 2002.

3. TIER-I capital.

4. This refers to the core capital that provides the most permanent and ready

support against unexpected losses. Equity investments in subsidiaries,

intangible assets, losses in current period and those brought forward from

previous years, will be deducted from TIER I capital.

5. Debt Equity ratio:

6. This is calculated as the proportion of total outside liability to net worth.

Thus this ratio is equal to (capital + Reserves)/Deposits + Borrowings +

other liabilities). This ratio thus indicates the banks financial lowerage.

7. Advances / Assets.

8. This ratio indicates a banks aggressiveness in lending which ultimately

results in better profitability. Higher ratio of advances/deposits is preferred

to a lower one.

9. G-secs to investments.

10. This ratio indicates a banks strategy as being high profits high risk or low

profits low risk. Govt. securities are generally considered as the most safe

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

11. G-sec to assets:

This ratio again shows whether a bank is conservation or aggressive in its

approach towards making profit. Higher ratio indicates conservation and a

lower ratio indicates aggressiveness.

6. Asset Quality:

This indicates what types of advances the bank has made to generate interest income.

When loans are given to highly rated blue chip corporate, the rates attached are lower


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than that by lower rated doubtful corporate. These asset quality indicates the type of

debtors of the banks.

1. Non performing asset.

2. These are the assets that are doubtful to return the principal/or interest due in

the near future. This results in huge losses to a bank. Thus a bank with a low

profit but at the same time low NPA is preferable to the one having higher

profits and higher NPA.

3. Contingent liabilities / total assets.

4. This is the ratio of non funded exposure of a bank to the total assets. Such

exposures result in high losses in cases of default. Thus the lower the ratio,

the better.

5. Advance growth.

6. This indicates the increases in the lending activity year to year (YOY).If this

ratio is greater than the average ratio for the industry, it indicates that the

bank is aggressively trying to increase its profits by increasing its advances.

This may also result in higher losses due to loans turning bad (NPA).

1. Advances yield.

2. This indicates the interest income earned by the bank from its lending activity.

Generally, yield increases with the increases in the lick perception of the assets.

Thus a high yield indicates that the bank has invested in more risky assets, which

may be harmful for the future profitability of the banks.

Investments/Assets:

This ratio indicates the proportion of investments to the total assets of a bank. A higher ratio

means that the bank has conservatively kept a high cushion of investment to guard against NPA.

However, this affects its profitability adversely.

7. Management Quality:

This parameter is used to evaluate management quality so as to assign premises to better

quality banks and discounts pooley managed ones.

1. Credit/deposit ratio.


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2. This indicates the total advance as proportion of total deposits. It indicates

the managements aggressiveness to improve in some by higher lending

operation.

3. Return on Average Net Worth

4. This indicates the return on shareholders funds.

It should be reasonably be above the cost of capital to warrant ploughing

back of the profits. This ratio is very important from share valuations point

of view. Average net work is the simple average of opening and closing

balances of net worth.

5. Asset growth:

This is the balance sheet growth indicating an aggressive attitude towards

growth.

8. Liquidity:

Banks are in a business where liquidity is of prime importance. Among assets cash and

investments are the most liquid of a banks assets.

1. Liquid Asset/Total Asset.

2. Liquid assets consist of cash balance and investments. This proportion

indicates the overall liquidity position of a bank.

3. Cash Assets/Total assets.

4. Cash has the highest liquidity and safely among all assets.

5. Investments/total assets.

6. Investments are the second most liquid assets. This ratio measures

investments as a proportion of total assets.

7. G-sec / total assets.

8. G-sec are the most liquid and safe investments. This ratio measures G-sec, as

a proportion of a total assets.


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Nationalised banks

1. Size

The total deposits mobilized by national banks is Rs. 2562.9 bn that is just around

29% of the deposits mobilized by all the scheduled banks together. Also the growthin deposits areas average at 16.87%. Thus inspire of their sheer number (19 banks)

they have not been able to mobilize enough deposits. However, they contribute to a

third of the total profits earned by all SCBs. However, the growth in net profits was

just 36.28%. This shows tiredness in their bottomline, as they have not been able to

desire new ways to earn income.

2. Operational Efficiency:

Nationalized banks aearn more interest income per rupee of assets than they other

bank. They earn 14.24paise of interest income and 1.67 of paise non iterest income

for every rupee of assets. Thus nationalized banks seem more efficient than other

banks as far as earnings on assets is concerned. However, they are among the least

prudent banks next only to the foreign banks, in spending money on operating

expenses. They spend almost a fourth (24.93%) of every rupee earned as operational

income, which is increasing rapidly at a rate highest in the sector. Also the cost of

deposits is highest in the industry for them at 13.84 that has been increasing at the

rate of 12.49%. YOU inspire of the large network of branches. Thus, though the

income generated on assets is high, the spending is also very high indicating future

trouble, since only the efficient banks can survive the imminent shakeout.


Nationalized banks have an interest margin higher than even the foreign banks. This

indicates that the growth in their assets, the income will increase more than that

earned by any other bank with a similar growth in assets. However one of the major

concerns is the low non interest income. Hence, the operating profit is only 1.90% of

the assets next only to the foreign banks. Thus even though the interest spread is

highest, due to lower non interest income, the operating profits get subdued.


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The net profit is however only marginally higher at 0.72% than the industry average

of 0.66%, which has grown at 1.28% YOU thus under performing the sector. This

reflects higher provisioning due to higher NPA (Non Performing Assets). Thus in

their aggressiveness to increase yield. Nationalized banks have put in their money

into more risky assets leading to higher NPA & lower net profits.

However from the point of view of owners, nationalized banks return the highest

rate on net worth at 15.70% highest in the industry.

This is due to very high capital gearing of Rs. 20.67 of debt for every rupee of

equity, once again highest in the industry,. However, a growth rate of 28.03% in this

raises doubts over the sustainability of such returns in future.


The capital adequacy ratio of nationalized banks is 11.14%, higher than the statutory

requirement of 9%. However, it is lesser than that of all other groups. This indicates

that the scope of expansion for the bank in future is very low. Also the RBI has

announced that it would increase the CAR to 12% in a phased manner. In view of

such regulations these banks may have to raise capital either by a rights issue or

through subordinated debt.

The debt equity ratio is also the highest in the industry at 20.67 times that makes

these banks most dangerous to lend funds to. Hence, in future these capital starved

banks have to raise their equity capital to warrant future growth.

However, this bank group ahs a diversified portfolio of assets. Advances comprises

only 38.37% of the total assets and investments another 36.10%. the advances are

growing marginally faster than the assets at 40.82% however this group is

aggressively increasing investments deposits have gone into investments. Also

government securities comprise of 75% of total investments which are also

increasing their share in incremental deposits indicating high liquidity of majority of

investments.


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5. Asset Quality:

The Net NPA of this groups was at Rs. 174 bn. Forming almost 57.85% of the total

NPA of the sector. The high NPA levels were due to lending at high rates to

doubtful borrowers (reflected in the high interest yield). Also the figure is increasing

@ 1.53% annually, much higher than the sector average of 6.81%. this is the most

worrisome aspect of this group and represents a drag on the bottomless of the banks.

A control of NPA shall greatly improve the bottom line of these banks. However,

nationalized banks have a very low non funded exposure at 28.87% that is way

below the entire industry average at 59.63%. This shows limited vulnerability to

credit risks on future incomes. But for each rupee of incremental asset, 4.018 paise

worth non funded exposure is taken by the bank indicating an alarming trend. Also

the advances have grown at 19.01% lower than the sector average of 2.09%.

However, the advances yield is a whopping 38.96 (industry average is 22.44%)

which indicates investment in riskeier assets (indicated by high NPA levels) since

yield is inversely proportional to the risk perception of an asset. The bright spot

seems to be the reducing yield growth at 29.03% of the total assets increasing at

51.40% of incremental assets indicating better asset liability management.


Advances are made at average 50.35 paise for every rupee of deposits mobilized

increasing at 55.61% of the incremental deposits. Thus the management is

conservative in its approach to lending. Profit earned on the average owner capital is

16.97% second highest in the sector. This indicates better management of the banks

from shareholder wealth creation point of view. Also the assets have grown at

17.66% indicating conservative attitude towards growth. However, the high NPA

reveal the management till towards profitability at the cost of safety.


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7. Liquidity:

This group has 52.98 liquid assets as a percentage to total assets marginally higher

than the sector average of 55.26%. Thus half the assets can be liquidated quickly to

meet unexpected losses. The ratio of growth of liquid assets to total assets is

increasing at a declining rate of 40.54% mainly due to development of incremental

assets in investments instead of cash. However, investments are 36.01% of total

assets and G-sec are at 27.22% indicating a proper mix of assets and balancing of

risk and return.


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SBI & IASE ASSOICATES

1. Size

Deposits mobilized by this group are 4810.25 bn. I.e. about 53.43% of the deposits

mobilized by the entire sector. However this groups deposits have grown at a rate of

15.21% that is lowest in the sector. Thus the eight banks have mobilized more than half

the deposits of the entire sector. However, their net profit is only 36.63% of the total

profit earned by the sector. However, this profit is growing at a whapping 82.64%

greater than twice the growth rate of nationalized banks. This is due to many factors

like improving advances to deposits ratio. Provisioning expenses and lower growth in

operating expenses.

2. Operating Efficiency:

The interest income earned per rupee of working funds is among the lowest in the sector

of this group at 4.84 paise per rupee. This is due to deployment of funds in less riskier

assets due to which it realize a yield that is lowest in the sector at 13.08% against a

sector average of 22.44%. However, interest income is growing at a marginally higher

pace than assets growth. The most dangerous signal to future income, however, is the

low non interest income or fee based income 0.81% to working fund against a sector

average of 1.24%. Also the growth of other income on incremental assets is marginally

higher than the existing at 0.86%. This shows thinning due to a fall in PLR and

increased completion leading to declining interest income. Operating expenses are also

very high with almost a fourth part of the operating income spent on expenses. To

maintain future profitability these expense have to be trimmed. The bright spot in

operations seem to be the lowest cost of deposits at 4.14% the lowest in the sector.

3. Earnings Quality :

This group has very low interest spreads. Thus net interest income earned per rupee in

just 1.57 paise growing at 24.79% over incremental deposits. Low spreads is mainly due

to investments in low yielding assets with lower perceived risk. Due to these factors

operating profit is just 0.89% to working funds as compared to sector average of 2.56%.


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However, due to lower provisions for NPA, the net profit to Asset is 0.48% which is

healthy considering the operating profit.


The CAR at 11.95% is higher than the statutory requirement of 9%. However

considering moves to raise this limit to 12% the banks in this group may have to raise

fresh capital or restrict growth. The debt equity ratio is also very high at 17.16 times

which makes the blank to perceived as risky by lenders, also for every rupee of net

worth added, a sum of Rs. 36.28, is added as debt. However, the advances are 40.22%

of the total assets, which is near the sector average and growing at 49.12% to

incremental assets. Similarly G-sec to asset and G-sec to investments are at 26.34% and

68.82% respectively close to the sector average with their respective growth to

incremental assets 36.23% and 83.09% indicating better asset liability management.

5. Asset Quality:

The NPA of this group was at Rs. 87.35 bn. Forming 29.42% of the NPA of the

entire of the entire sector. However, NPA are growing at a rate lower than the sector

average. The reducing advances yield on incremental assets indicates the management

caution towards lending to borrowers with lower credit rating. Also the NNPA as a

percentage to assets stood at 2.60% marginally lower than sector average of 2.71% the

groups exposure to non funded liabilities at 24.73% to assets growing at 34.55% to

assets, is far lower than the sector average of 52.63%. This is also one of the reason of

low other incomes. Even thought the state bank group mobilized a large share of the

national deposits, they are however growing at a snail pace of 18.32% deposits, they are

however growing at a snail pace of 18.32%. Similarly, advances yield are lower at

13.08% than the sector average indicating investment in low risk assets. The yield on

incremental advances plunged to 11.76% indicating investment in good quality debt.

Investment are at 38.98% to assets, increasing at 43.60% to incremental assets, which is

near the industry average.


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The management has put less than half the credit mobilized in the lending business

indicating conservative attitude. This is however, changing with advances over

incremental deposits being 54.40%. The assets are growing at a rate of 14.52% that is

less than that of the entire sector. The high levels of NPA indicate that in the past,

management followed a more liberal lending policy. However, the situation now seems

to be changing with lowering yields on advances indicating a cautions attitude towards

lending.

7. Liquidity:

The groups liquid assets conspire more than hay the total assets at 52.39% indicating

ability to meet unforeseen liquidity crunch. However the ratio of liquidity assets to

incremental asset to total assets is diminishing at 45.36% indicating the tilt towards

profitability against liquidity cash comprises 14.11% consisting mostly of reserves kept

with RBI to comply with CRR requirements with growth in cash on incremental assets

being just 0.61% indicating lower cash balances due to lowering of CRR by RBI and

thrust towards improving profitability. Also investments are at 38.28% to assets

growing at 43.60% to incremental assets G-sec are more than a fourth of the assets at

26.34% to assets growing at 36.23 to incremental assets. Thus the liquidity position of

the group is more or less the same as the sector average.


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Old Private Sector Banks

1. Size

The group of contributed just 7.44% of the total deposit mobilized by all commercial

banks at 669.88 bn. Also the deposits are growing at 19.53% marginally higher than the

sector average. However, inspite of such low growth in deposits, the net profits jumped

by a whopping 110.33% to 6.55 bn. This is mainly due to higher other income,

improved spreads and cost control resulting in operating efficiency.

2. Operating Efficiency:

Interest income constituted 9.07 of the working funds (Assets) and non interest income

constituted 1.21% of working fund. While the interest income grow at a reduced pace of

7.75% of incremental assets, non interest income grew at a feverish pace of 3.59%

making a big difference to the bottomline. Operating expenses were at 19.34% of the

operating income. However, the heartening fact is that the operating expenses grew at

just 15.12% to the incremental operating income indicating better operational efficiency.

Cost of deposits stood at 8.40% marginally higher than the sector average at 7.70%.

however, the cost of incremental deposits is lower at 4.94%.


Interest spread stood at 1.396% much lower than the sector average of 2.56%. however,

spreads on incremental assets rocketed to 26.31% indicating better future prospects.

Operating profits remained low at 1.11% to assets, however, growing at 5.20% to

incremental assets. The net profit was at 0.84% to assets increasing at 2.81% to

incremental assets, more than thrice the current net margin. Return on net worth was at

15.19%and on incremental net worth areas at 45.93% due to a debt equity ratio of 17.02

times. The other income to net interest income was at 72.15% growing at 107.84% to

incremental net interest income. This shows the low reliance on interest income, that a

turn immunizes groups bottomline from future squeeze in spreads.


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The group CAR was at a compatible 13.42 indicating scope for further expansion

without the need to raise fresh capital. The debt equity ratio is at 17.02 times, marginally

higher than the sector average. Advances to assets stood at 43.22%improving to 47.71%

on incremental assets. G-sec as a percentage to the assets and investments stood at

22.58% and 64.32% respectively growing at approximately the same rate.

5. Asset Quality:

The net NPA for the group stood at 24.84 bn. Consisting around 8.26% of the total NPA

of the sector. However, the NPAs formed 3.17% of total assets indicating lower quality

assets. However, the banks seem to have awakened to this dangerous situation. The

NPA growth is negative at 0.98%. The off balance sheet exposure also stood at a mere

26.90%, growing at 41.13%. This indicates a better quality of other income from

relatively low risk business like remittance, credit cards etc. the advances grew at just

21.04% year of year, marginally higher than the industry. However, the net profits

showed a significant jump year of year. Similarly advances yield was average at

22.16%. It is reducing an incremental assets indicating investments in high quality

assets and lower interest rates in the economy.


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NEW PRIVATE SECTOR BANKS

1. Size

This group mobilized 466.81 bn. i.e just 5.19% total deposits mobilized by the sector.

However, there is explosive growth in deposit growth at 51.50% year of yar indicating

tremendous growth potential. The net profit was at 5.09 bn. growing at a phenomenal

rates of 43.41%. Thus this group of banks will be a force to reckon with in future.

2. Operational Efficiency:

Interest income constituted 7.27% of the assets growing at a snail pace of 4.34% of

incremental assets. This shows that this group has very low interest spreads due to

intense competition and disdain entages of entering late in to the market. Non interest

income is 12.1% of assets growing at 1.91% of incremental assets. This shows that the

thrust for this group is the non interest income operating expenses are just 15.48% of

operating income among the lowest ratio in the sector. This is further dipping and is

only 13.14% on incremental operating income cost of deposits at 7.13% is near the

sector average but higher than that of public sector banks due to lack of prescience in

rural and semi urban areas where low cost deposits are available.


Income spread is at 1.47% of assets, among the lowest in the sector. This is however

increasing at 9.18% assets indicating effect of lowering cost of deposits due to

increasing share of retail deposits in total deposits. Operating profit is at 1.41% of assets

and is increasing at 2.75% to incremental assets. Net profit is at 0.97 of assets increasing

at a diminishing rate of 0.85% due to increase in the NPA and capital expenditure.

Return on shareholder funds is a modest 14.85%. however, it is increasing at a

diminishing rate of 11.87% due lower incremental net profit to incremental assets and

relatively low debt equity ratio. However, the major excitement for the group is

occurring in the other income which was at 88.72% of net interest that the new private

banks are completely ready to meet the future challenges of lower interest rate regime.


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The average CAR for this group stood at 12.47%. This is well above the prescribed

statutory ratio of 9%. Thus these banks can leverage the capital to raise more deposits

tempos their profitability. Debt equity ratio is one of next lowest in the sector indicating

5. Asset Quality:

The net NPA to total assets stood at a mere 1.08% indicating high quality of assets of

the group. The NPAs one of the lowest in the sector, stood at 6.36 bn. i.e. 2.11% of the

entire sector. Also more encouraging is the fact that the NPAs are reducing annually @

5.20%. this was due to investment in high rated assets giving a low yuield at 19.99%.

however, the non funded exposure of these banks was at 78.04% growing at the rate of

68.54% on incremental assets. This indicates moves to shift away from this risky

business. Inspire of investing in only high quality assets, the advances grew at a

phenomenal 47.31% year of year. Also the cost of deposits significantly reduced at

12.48% on incremental assets. Investments comprised about two fifths of the total

assets.


The advances were 47.46% of total deposits. However the lending activity at 44.84% to

incremental assets seems slowing down due to thrust in fee based income businesses.

Thus management seems to be conservative in its lending activity. Similarly, return on

average net worth was a healthy 18.29%, however this group of banks is growing in

balance sheet at a feverish pace. The assets grew at 52.75% which no other could

compare. This was due to increases in capital deposits and advances.


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7. Liquidity

The group faud well on the liquidity aspect as well. Liquid assets constituted about

55.64% of total assets increasing at 60.20% on incremental assets showing a tilt towards

liquidity than on profitability. Cash assets stood at 15.60% of total asset which increased

at 5.36% to incremental assets indicating lower reserve requirements. Investments to

total assets were increasing at 45.03% to incremental assets and G-secs to assets was

increasing at 30.61% to incremental assets. These ratios indicate the groups famous in

investment as low risk low return game highlighting the focus to keep NPA low earned

in regular equation expenses. Though foreign banks have lower number of employees,

the pay packets are one of the highest in the industry. However, the banks are now

waking up to this fact and reducing their expenses. Thus their expenses actually

decreased @ 14.71% on incremental operational income. The cost of deposits is among

the highest in the sector at 10.11%, however, foreign banks are aggressively replacing

high cost corporate debt with low cost retail deposits by opening newer branches. This

is showing up in the declining cost of deposit on incremental deposits @ 11.52%.

3. Earning Quality:

The income spread is higher than the average for the sector indicating better deployment

of credit in reducing cost of deposits. However the most fascinating aspect is the growth

in the spread, which were at 93.11% of incremental assets. Operating profits were at

2.32% of assets growing at a whooping 14.53% in incremental asset, mainly due to

improved spreads and higher other income Net profits to assets were at 1.17% of

total assets. Once again the growth in net profit was at 7.00% of incremental asset, due

to growth in operating profits. Other income to net interest income is at 67.47%

indicating improving reliance on lesser this loses notable source of income. However,

the worrisome aspect seems to the growth rate in this at 55.38% on incremental income.

Return on shareholders equity was at 11.98% equal to the sector average, inspire of are

relatively higher net profit. This is due to lower debt equity ratio of just 9.26 times

compared to sector average of 16.33 times. Thus foreign banks have incremental

income. Return on shareholders equity was at 11.98% equal tot eh sector average,

inspire of a relatively higher net profit. This is due to lower debt equity ratio of just 9.26


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times compared to sector average of 16.33 times. Thus foreign banks have generated

income from both its core and non core business alike. Thus they are in a better position

to absorb shocks like thin spreads.

4. Capital Adequacy Ratio:

This group has the highest CAR of 31.50% thus they are in a better position to expand

their business without the need for fresh fund infusion. Also the debt equity ratio is at

9.36 times thus making them lesser risky compared to their peers. Also the debt is

increasing at just Rs. 6.14 of debt of every rupee of equity indicating increase in owned

capital is more than the increase in debt capital. Advances were at around 43% above e

sector average. However advances are growing at 97% on incremental assets indicating

gone at 28.39% in incremental investments indicating a tilt against G-secs in favor of

corporation debt and other securities.

5. Asset Quality:

Net NPAs form only 1.02% to total assets, lowest in the industry. The total NPAs stood

at 8.44 bn. forming just 2.81% of industry NPAs. Also the NPAs are reducing @2.75%

annually indicating prudent management. However, the most worrisome aspect of

foreign banks is foreign banks is their high exposure in non four needed business. The

total contingent liability to assets was at 342.01 or nearly 3.5 times teir assets and

increasing at almost 10 times of incremental assets/ this shows that in a bid to increase

their other income, they have exponentially increased their exposure in non funded

business. Though the current NPA levels are low inspire of such high non funded

exposure, it (non-funded, business) should be anyway be reduced as such exposure

levels can have disastrous effects on future bottom line. The advances yield is average at

22.96 growing a just 5.18% on incremental assets indicating new investments in high

quality assets. Investments were at 35.80% of total assets increasing at 52.94% on

incremental assets indicating the strategy to diversity the asset portfolio.



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Foreign banks lent almost 3/4th of their deposits mobilized highest in the sector.

however, the management is aggressively increasing the lending activity. They lent

3.27% of the incremental deposit mobilized, indicating not only complete lending of

incremental deposit, but also for each rupee of deposit mobilized the banks lent Rs. 2.27

from the existing deposits not lent. This definitely is a dangerous trend and indicates

entre risk taking tendency in favour of returns. However the heartening fact is that their

NPA levels are one of the lowest in the industry at 2.81% indicating high quality assets.

Return on average net worth is at 12.67% comparable to sector average of 16.79. thus

though the funded business of the growth.

Trends

1. Universal Banking

Universal banking refers to financial institution offering all types of financial

services under one roof. Thus, besides borrowings and lending for the long term, the

development financial institutions will be able to borrow/lend for the short term as well.

This flexibility brings about a sea change in the bottmline of the institution.

Impact on DFI:

Two key aspects of the business are affected. The institution can have access to cheap

retail deposits and the breadth of its advances increases to include short term working

capital loans to corporate. The institution has greater operational flexibility. Also they

can now effectively compete with the commercial banks and thus increase their

business.

Indian Scenario:

In India the fine DFIs that are front runners in the race to convert to universal bank are:

Industrial Credit and Investment Corporation of India (ICICI)

Industrial Development Bank of India (IDBI)

Export Import Bank (EXIM)


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Industrial Investment Bank of India (IIB)

ICICI is already a virtual bank with subsidiaries like ICICI bank engaged in Banking

business. Thus with clearing of legal hurdles it just has to work or the modealities to

formally call itself a universal bank.

Similarly other DFIs are charting out aggressive plans to stay ahead in this race.

Also recently Bank of Baroda, a commercial bank has indicated its intention to convert

to a universal bank.

RBI norms:

The norms stipulated by RBI treat DFIS at part with the existing commercial banks.

Thus all universal banks have to maintain the CRR and the SLR requirement on the

same lines as the commercial banks. Also they have to fulfill the priority sector lending

norms applicable to the commercial banks. These are the major hurdles as perceived by

the institutions, as it is very difficult to fulfill such norms without hurting the

bottomline.

Effect on the Banking sector.

However, with large term lenders converting into commercial banks, the existing

players in the industry are likely to face stiff competition, lower bottomline ultimately

leading to a shakeout in the industry with only the operationally efficient banks will stay

into the business, irrespective to the size.

Mergers and Acquisition:

The Indian Banking sector is more over crowded then ever. There are 96 commercial

banks reporting to the RBI. Ever since the RBI opened up the sector to private players,

there have been nine new entrants. All of them are growing at a scorching pace and

redefining the rules of the business. However, they are dwarfed by many large public

and old private sector banks with a large network of branches spread over a diverse


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geographical area. Thus they are unable to make a significant dent in the market share of

the old players. Also it is impossible to exponentially increase the number of branches.

The only route available for these banks is to grow inorganically via the M&A route.

Hence the new banks are under a tremendous pressure to acquire older banks.

Currently most of the institutionally promoted banks have already globed smaller banks.

ICICI banks has acquired ITC classic, Anagram Finance and Bank of Matura within a

period of two years. HDFC bank has merged times Bank with itself .UTI bank had

almost completed its merger with Global Trust Bank before it ran into rough weather.

Also nationalized banks like Bank of Punjab, Vyasa Bank are wooing IDBI Bank for a

merger. Among foreign Banks, Standard & Chartered Bank has acquired ANZ

Grinellays Banks Asian and Middle East operations. The above happenings clearly

indicate that the M&A scenario in the Indian banking sector is far from over strong

banks will continue to takeover weak and inefficient banks to increase their size.

IV. Multiple delivery channels.

Today the technology driver banks are finding various means to reduce costs and reach

so as many customers as possible spread over a diverse area. This has led to using

multiple channels of delivery of their products.

1. ATM (Automatic Teller Machine):

An ATM is basically a machine that can delivery cash to the customers on

demand after authentication. However, nowadays we have ATMs that are used to vent

different FMCG products also. An ATM does the basic function of a banks branch i.e.

delivering money on demand. Hence setting of newer Brachs is not required thereby

significantly lowering infrastructure costs.

Cost reduction is however possible only when these machines are used. In India,

the average cash withdrawal per ATM per day ahs fallen from 100 last year to 70 this

year. Though the number of ATMs has increased since last year, it is not in sync with


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the number of cards issued. Also, there are many dormant card holders who do not use

the ATMs and prefer the teller counters. Inspire of these Indian banks are increasing the

number of ATMs at a feverish face. These machines also hold the keys to future

operational efficiency.

2. Net Banking

Net banking means carrying out banking transactions via the internet. Thus the need for

a branch is completely eliminated by technology. Also this helps in serving customer

better and tailoring products better suited for the customer.

A customer can view his account details, transaction history, order drafts, electronically

make payments, transfer funds, check his account position and electronically

communicate with the bank through the internet for which he may have wanted to visit

the bank of branch.

Net banking helps a bank spread its reach to the entire world at a fraction of the cost.

3. Phone Banking:

This means carrying out of banking transaction through the telephone. A customer can

call up the banks helpline or phone banking number to conduct transactions like transfer

of funds, making payments, checking of accounts balance, ordering cheques etc. this

also eliminates the customer of the need to visit the banks branch.

4. Mobile Banking:

Banks can now help a customer conduct certain transaction through the mobile phone

with the help of technologies like WAR, SMS etc. this helps a bank to combine the

internet and telephone and lowerage it to cut costs and at the same time provide its

customer the convenience.

Thus it can be seen that teach savy banks are topping all the above alternative

channels to cut cost improve customer satisfaction.

5. VRS (Voluntary Retirement Scheme)


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VRS or the Golden Handshake is picking up very fast in the recent times due to the

serious attention of the government towards overstaffing in the banks, especially among

the public sector banks. The govt. had also cleared a uniform VRS framework fort eh

sector giving the banks a seven months time frame to cut flab. The scheme was open till

31st March, 2001.

Though many banks had announced different VRS schemes it invested an outflow of

money. This could have had an adverse impact on the Capital Adequacy Ratio (CAR).

Hence the RBI allowed the banks to write off the VRS expenses over a period of 5

years.


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INTRODUCTION

FINANCIAL MANAGEMENT:

Finance management is concerned mainly with procuring funds in the most economical and

prudent manner deploying these funds in most profitable way in a given risk situation, planning

future operations and controlling current and future performances and development through

different tools. It is an approach by which depending on importance, resources can be allocated

to various projects.

For efficient operation of a business there is necessity for obtaining and effectively utilizing

funds. Financial management does these jobs. Basically, therefore, finance management center

round fund raisins for business in the most economical may and investing these funds in

optimum way so that maximum return can be obtained for the shareholders. Since all business

decisions have financial implications, financial management is interlined wit all other functions

of the business.


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SCOPE OF FINANCIAL MANAGEMENT

The approach to the scope and functions of financial management is divided, for purposes of

exposition, into two broad category (a) The Traditional Approach, and (b) The Modern

Approach.

Traditional Approach

The traditional approach to the scope to the scope of financial management refers to its subject

matter, in academic literature in the initial stage of its evolution, as a separate branch of

academic study. The term corporation finance was used to describe what is now known in the

academic world as financial management. As the name suggests, the concern of corporation

finance us with the financing of corporate enterprises. In other words, the scope of the finance

function was treated by the traditional approach in the traditional approach in the narrow sense

of procurements of funds by corporate enterprise to meet their financing needs. The term

procurement was used in a board sense so as to include the whole gamut of raising funds

externally. Thus defined the field of study dealing with finance was treated as encompassing

three interrelated aspects of raising and administering resources from outside : (I) the

institutional arrangement in the form of financial institutions which comprise the organization

of the capital market : (II) the financial instruments through which funds are raised from the

capital markets and related aspected of practices and the procedural aspects of capital markets:

and (III) the legal and accounting relationship between a firm and its sources of funds. The

coverage of corporation finance was therefore, coneived to describe the rapidly evolving

complex of these major events such as instruments and practices. A related aspect was that

firms require funds at certain episodic events such as merge, liquidation, reorganization and so

on. A detailed description of these major events constituted the second elements of the scope of

this field of academic study. That these were the broad features of the subject matter of

corporation finance is eloquewnlty reflected in the academic weiting around the period during

which the traditional approach dominated academic thinking. Thus, the issue to which literature

on finance addressed itself was how resources could best be raised from the combination of the

available source.


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Modern Approach

The modern approach view the term financial management in a broad sens and provides a

conceptual and analytical framework for financial making. According to it, the finance function

covers both acquisition of funds as well as their allocations. Thus apart from the issues involved

in acquiring external funds, the main concern of financial management is the efficient and wise

allocation of funds to various uses. Defined in a broad sense, it is viewed as an integral part of

overall management.

Investment Decision: The investment decision relates to the selection of assets in which funds

will be invested by a firm. The assets which can be acquired fall into two broad groups: (I) long

term assets which yield a return over a period of time in future, (II) short term or current assets,

defined as those assets which in the normal course of business are vovertible into cash without

dimunition in value, usually within a year. The first of these involving the first category of

assets is popularly known in financial literature as capital budgeting. The aspect of financial

decision making with reference to current assets or short term assets is popularly termed as

working capital management.

Capital budgeting : Is probably the most crucial financial decision for a firm. It relates to the

selection of an asset or investment proposal or course of action whose benefits are likely to be

available in future over the lifetime of the project. The long term assets can be either new or old

existing ones. The first aspect of the capital budgeting decision relates to the choice of the new

asset out of alternatives available or the reallocation of capital when an existing asset out of

alternatives available or the reallocation of capital when an existing asset fails to jusfity the

funds committed. Whether an asset will be accepted or not will depend upon the relative

benefits and returns associated with it. The measurement of the worth of the investment

proposals is, therefore, a major element in the capital budgeting exercise. This implies a

discussion of the methods of appraising investment proposals.

The second element of the capital budgeting decision is the analyisis of risk and uncertainity.

Since the benefits from the investment proposals extend into the future, their accrual is

uncertain. They have to be estimated under various assumptions of the physical volume of sale


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and the level of prices. An element of risk in the since of uncertainity of future benefits is, thus,

involved in the exercise.

The returns from capital budgeting decision should, therefore, be evaluated in relation to the

risk associated with it.

Finally, the evaluation of the worth of a long term project implies a certain norm or standard

against which the benefits are to be judged. The requisite norm is known by different names

such as cut off rate, hurdle rate, required rate, minimum rate of return and so on. This standard

is broadly expressed in terms of the cost of capital. The concept and measurement of the cost of

capital is, thus, another major aspect of capital budgeting decision. In brief, the main elements

of capital budgeting decisions are: (I) the long term assets and their composition : (II) the

business risk complexion of the firm and (III) concept and measurement of the cost of capital.

Working Capital Management: Is concerned with the management of current assets. It is an

important and integral part of financial management as short term survival is a prequisisite for

long term success. One aspect of working capital management is the trade of between

profitability and risk (liquidity). There is a conflict between profitability and liquidity. If a firm

does not have adequate working capital, that is it does not invest sufficined funds in currentassets, it may become illiquid and consequently may not have the ability to meet its current

obligations and thus, invite the risk of bankruptcy. If the current assets are too large,

profitability is adversely affected. The key strategies and considerations in ensuring a trade off

between profitability and liquidity is one major dimension of working capital management. In

addition, the individual current assets should be efficiently managed so that neither inadequate

nor unnecessary funds are locked up. Thus the management of working capital has two basic

ingredients : (I) an overview of working capital management as a whole, and (2) efficient

management of the individual current assets such as cash, receivables and inventory.

Financing Decision: The second major decision involved in financial management is the

financing decision. The investment decision is broadly concerned with the asset mix or the

composition of the assets of a firm. The concern of the financing decision is with the financing


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mix or capital structure or leverage. The term capital structure refers to proportion of debt (fixed

interest sources of financing) and equity capital (Variable dividend securities/sources of funds).

The financing decision of a firm to the choice of the proportion of these sources to finance the

investment requirements. There are two aspects of the financial decision. First, the theory of

capital structure which shows the theoretical relationship between the employment of debt and

the return on the shareholders. The use of debt implies a higher return to the shareholders as

also the financial risk. A proper balance between debt and equity to ensure a trade off between

risk and return to the shareholders is necessary capital structure with a reasonable proportion of

debt and equity capital is called the optimum capital structure? And in what proportion should

funds be raised to maximize the return to the shareholders? The second aspect of the financing

decision covers two interrelated aspects: (I) capital structure theory and (2) capital structure

decision.

Dividend Policy Decision: The third major decision of financial management is the decision

relating the dividend policy. The dividend should be analyssed in relation to the financial

decision of a firm. Two alternatives are available in dealing with the profits of a firm: they can

be distributed to the shareholders in the form of dividends or they can be retained in the

business itself. The decision as to which course should be followed depends largely on a

significant element in the dividend decision, the devidend pay out ratio, that is what proportion

of net profits should be paid out to the shareholders. The final decision will depend upon the

preference of the shareholders and investment opportunities available within the firm. The

second major aspect of the dividend decision is the factor determining devidend policy of a firm

in practice.

To conclude the traditional approach had a very narrow perception and was devioed of an

integrated conceptual and analytical framework. It had rightly been siscareded in current

academic literature. The modern approach has broadened the scope of financial management

which involves the solution of three major decisions, I namely investment financing and

divident. There are interrelated and should be jointly taken so that financial decisions is the

objective of financial management. In other words, to ensure an optimum decision in respect of

these three areas, they should be related to the objectives of financial management.


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OBJECTIVES OF FINANCIAL MANAGEMENT

To make wise decisions a clear understanding of the objectives which are sought to be achieved

is necessary. The objectives provide a framework for optimum financial decision making. In

other words, they are concerned with designing a method of operating the internal investmentand finanail of a firm. We discuss in this section the alternative approaches in financial

literature. There are two widely doscissed approaches : (I) profit maximization approach, and

(II) Wwalth maximization approach).

Profit Maximisation Decision Criterion

According to this approach, actions that increase profits should be und

an indepth analysis of hdfc bank

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