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“A STUDY ON THE FINANCIAL PERFORMANCE OF
LAKSHMI VILAS BANK LTD., BY USING CAMELS RATING
SYSTEM”
MAJOR PROJECT REPORT
Submitted by
YUVARAJA.M
08BA113
Under the guidance of Dr.J.REEVES WESLEY
PROFESSOR
KSM
A project report submitted in partial fulfilment of the requirements for the award of
the degree of
“MASTER OF BUSINESS ADMINISTRATION”
2008-2010
SCHOOL OF MANAGEMENT
KARUNYA UNIVERSITY
COIMBATORE – 641 114
KARUNYA SCHOOL OF MANAGEMENT
KARUNYA UNIVERSITY
COIMBATORE - 641 114
CERTIFICATE
This is to certify that the project entitled “A STUDY ON THE FINANCIAL
PERFORMANCE OF LAKSHMI VILAS BANK LTD., BY USING CAMELS RATING
SYSTEM” is the bonafide work done by YUVARAJA.M, Register No:
08BA113and is submitted in partial fulfillment of the requirements for the degree
of Master of Business Administration of Karunya University.
Dr.C.SAMUEL JOSEPH Dr.J.REEVES WESLEY
(DIRECTOR IN - CHARGE) (PROFESSOR)
Place:
Date:
Viva-Voice Examination held on………………
…………………………. ……………………..
Internal Examiner External Examiner
DECLARATION
I YUVARAJA.M (Reg No: 08BA113) hereby declare that the project report
entitled “A STUDY ON THE FINANCIAL PERFORMANCE OF LAKSHMI VILAS
BANK LTD., BY USING CAMELS RATING SYSTEM” submitted in partial
fulfilment of the requirement for the award of the degree MASTER OF
BUSINESS ADMINISTRATION is a record of the original project work done
by me under the guidance of, Dr.J.REEVES WESLEY, Assistant professor
Karunya School of Management, Coimbatore. This project work has not formed
the basis for the award of any Degree/ Diploma/ Associate ship/ Fellowship of
similar titles to any candidate of any University.
Place: COIMBATRORE YUVARAJA.M
Date : (REG NO 08BA113)
Acknowledgement
This study would not be completed without acknowledging my sincere gratitude to those
who have helped me in my efforts to make this report possible in time. I express my gratitude to
each and every one of them who have extended their hand and guided me for the completion of
this report.
First of all, I thank ALMIGHTY GOD who has guided me in every step of the project work.
Again, I express my deep gratitude to Mr. C.SAMUEL JOSEPH, Director- in charge,
Karunya School Of Management. I accord with profound gratitude, my sincere thanks to all
other lectures for enabling me to complete my project work successfully
I am immensely grateful to my guide Dr.J.REEVES WESLEY, Faculty Guide, Karunya
School of Management who has been instructed for not only germinating the idea but also
nurturing the final report. But for his untiring assistance with facile pen and knowledge over the
subject, the task would have been indeed impossible.
I am also very much thankful to Mr. P. NARASIMHAN, Branch Manager, LAKSHMI
VILAS BANK, for allowing me to do the project with all the requirements and facilities.
My deep sense of gratitude to my Company Guide Mr. M.SREENIVASAN, Deputy
Manager, LAKSHMI VILAS BANK for his expert guidance and support provided in completion
of the research work.
Last but not least, I am grateful to my Parents, and friends who have supported me during
different phases of the project.
CONTENT
Contents Page no
1. INTRODUCTION & DESIGN OF THE STUDY 1.1 Theoretical background 1.2 Statement of the problem 1.3 Design of the study 1.4 Need for the study 1.5 review of literature 1.6 Chapter scheme
1-11
1 8 8 8 9 11
2. PROFILE 2.1 Industrial Profile
2.2 Company Profile
12-14
12
13
3. METHODOLOGY 3.1 Objectives 3.2 Data collection 3.3 Sample size 3.4 Tools of Analysis 3.4 Limitation
15-18
15 15 15 15 18
4. ANALYSIS AND INTERPRETATION
19-41
5. FINDINGS AND CONCLUSION 5.1 FINDINGS 5.2 SUGGESTION 5.3 CONCLUSIN
42-45
42 44 45
BIBLIOGRAPHY
46
LIST OF TABLES
TABLE NO NAME OF TABLE PAGE NO
TABLE 4.1 TABLE SHOWING CAPITAL ADEQUACY RATIO 20
TABLE 4.2 TABLE SHOWING NET NPA TO TOTAL ASSETS 21
TABLE 4.3 TABLE SHOWING NET NPA TO ADVANCE 22
TABLE 4.4 TABLE SHOWING PERCENTAGE CHANGE IN NPA 23
TABLE 4.5 TABLE SHOWING ADVANCE YIELD RATIO 24
TABLE 4.6 TABLE SHOWING TOTAL ADVANCE TO TOTAL DEPOSITS 25
TABLE 4.7 TABLE SHOWING PROFIT PER EMPLOYEE 26
TABLE 4.8 TABLE SHOWING BUSINESS PER EMPLOYEE 27
TABLE 4.10 TABLE SHOWING BRANCH PROFITABILITY 28
TABLE 4.11 TABLE SHOWING BRANCH PRODUCTIVITY 29
TABLE 4.12 TABLE SHOWING EARNINGS PER SHARE 30
TABLE 4.13 TABLE SHOWING ASSET UTILIZATION 31
TABLE 4.14 TABLE SHOWING SPREAD 32
TABLE 4.15 TABLE SHOWING PERCENTAGE GROWTH IN NET PROFIT 33
TABLE 4.16 TABLE SHOWING NON-INTEREST INCOME TO TOTAL INCOME 34
TABLE 4.17 TABLE SHOWING INTEREST INCOME TO TOTAL INCOME 35
TABLE 4.18 TABLE SHOWING LIQUID ASSETS TO DEMAND DEPOSITS 36
TABLE 4.19 TABLE SHOWING LIQUID ASSETS TO TOTAL DEPOSITS 37
TABLE 4.19 TABLE SHOWING LIQUID ASSETS TO TOTAL ASSETS 38
TABLE 4.20 TABLE SHOWING GOVT.SECURITIES TO TOTAL ASSETS 39
TABLE 4.21 TABLE SHOWING APPROVED SECURITIES TO TOTAL ASSETS 40
LIST OF CHARTS
CHART NO NAME OF CHARTS PAGE NO
CHART 4.1 CHART SHOWING CAPITAL ADEQUACY RATIO 20
CHART 4.2 CHART SHOWING NET NPA TO TOTAL ASSETS 21
CHART 4.3 CHART SHOWING NET NPA TO ADVANCE 22
CHART 4.4 CHART SHOWING PERCENTAGE CHANGE IN NPA 23
CHART 4.5 CHART SHOWING ADVANCE YIELD RATIO 24
CHART 4.6 CHART SHOWING TOTAL ADVANCE TO TOTAL DEPOSITS 25
CHART 4.7 CHART SHOWING PROFIT PER EMPLOYEE 26
CHART 4.8 CHART SHOWING BUSINESS PER EMPLOYEE 27
CHART 4.10 CHART SHOWING BRANCH PROFITABILITY 28
CHART 4.11 CHART SHOWING BRANCH PRODUCTIVITY 29
CHART 4.12 CHART SHOWING EARNINGS PER SHARE 30
CHART 4.13 CHART SHOWING ASSET UTILIZATION 31
CHART 4.14 CHART SHOWING SPREAD 32
CHART 4.15 CHART SHOWING PERCENTAGE GROWTH IN NET PROFIT 33
CHART 4.16 CHART SHOWING NON-INTEREST INCOME TO TOTAL INCOME 34
CHART 4.17 CHART SHOWING INTEREST INCOME TO TOTAL INCOME 35
CHART 4.18 CHART SHOWING LIQUID ASSETS TO DEMAND DEPOSITS 36
CHART 4.19 CHART SHOWING LIQUID ASSETS TO TOTAL DEPOSITS 37
CHART 4.19 CHART SHOWING LIQUID ASSETS TO TOTAL ASSETS 38
CHART 4.20 CHART SHOWING GOVT.SECURITIES TO TOTAL ASSETS 39
CHART 4.21 CHART SHOWING APPROVED SECURITIES TO TOTAL ASSETS 40
SYNOPSIS
I have done the analysis on the financial performance of the Lakshmi Vilas Bank Ltd., by
using CAMELS rating model. The ratios used in CAMELS model is capital adequacy ratio, Net
profit to total asset, net NPA to total advances, change in net NPA, Advance Yield Ratio, Total
Advance to total Deposits, Profit Per Employee, Business Per Employee, Branch Profitability,
Branch Productivity, Earnings per share, Asset Utilisation, Spread, % growth in Net Profit, Non
interest income to total income, Interest income to total income, Liquid assets to Demand
Deposits, Liquid assets to Total deposits, Liquid assets to Total assets, Govt. Securities to Total
assets, approved securities to Total assets.
LVB obtained its license from RBI in June 1958 and in August 1958 it became a
Scheduled Commercial Bank. During 1961-65 LVB took over nine Banks and raised its branch
network considerably. The Bank earned a Net profit of Rs. 50.30 Crores. The Net owned Funds
of the Bank reaches Rs. 453.70 Crores. With a fairly good quality of loan assets the Net NPA of
the bank was pegged at 1.24 % as on March 31, 2009. In order to increase their profitability have
done this analysis.
INTRODUCTON AND DESIOGN OF THE STUDY
1.1 THEORETICAL BACKGROUND
CAMELS system is used by the rating agencies also, for evaluating the performance of
the banks when banks opt for public issue, issue of bonds etc.such rating made by the rating
agencies help the investors to make an assessment of the current financial position of banks.
The developments in the financial sector have made the work of regulators difficult in
that, any disruption of the financial markets or financial infrastructure would have broader
economic ramifications. in this context reserve bank of India has been aware of the need for the
banks to establish a framework for identification, measuring, monitoring and control of risks
associated with their business.RBI then decided to implement the internationally accepted
„CAMELS‟ rating system for evaluating the performance of the banks.
The on-site examination ratings are treated as the most significant and reliable tool for
assessing the current financial condition of a banking institution. They also form the basis for
determining casual relationships between financial ratios calculated through off site analysis and
the actual rating assigned after on-site examination.
CAMELS system is used by the rating agencies also, for evaluating the performance of
the banks when banks opt for public issue, issue of bonds etc.such rating made by the rating
agencies help the investors to make an assessment of the current financial position of banks.
In short the growing complexity of the financial products and the operations of the banks
and financial institutions it is imperative for them to adopt risk identification, risk measurement
and risk management systems.
This is a system of evaluating the performance of a bank based on six parameters viz:
C-Capital Adequacy
A-Asset Quality
M-Management
E-Earnings Quality
L-Liquidity
S-Systems and Control
The CAMELS rating system is used by the rating agencies also, for evaluating
performance of banks when banks opt for public issue, issue of bonds etc.such a rating made by
the rating agencies help investors make an assessment of a current financial positions of banks.
Each component of CAMELS rating system is briefly explained below.
1. CAPITAL ADEQUACY:-
The ratio of capital funds in relation to a bank‟s deposits or its asset is a well recognized
and universally accepted measures of strength and stability of the institution. Capital helps to
establish a level of confidence sufficient to attract enough deposits to fund bank‟s operations and
act as a cushion to absorb unforeseen.. Capital asset ratio is crucial in assessing the credit rating
of banks in international market. The size of long to an individual borrower, lines of credit
enjoyed from foreign banks, exclusion of guarantees in support of international contracts is all
related to size of capital base.
For a long time, the ratio of capital to deposits was conceived as an ideal measure
adequacy. However, over the years the capital adequacy norms in terms of deposits ratio was
found to be inadequate in as much as that did not truly reflect the shock absorption capacity of
the banks. Hence it was modified in terms capital to asset ratio. The Basle committee on banking
regulations and supervisory practices appointed by the bank of international settlement (BIS) has
prescribed certain capital adequacy standards to be followed by commercial banks and most
countries for implementation have accepted these standards universally. The BIS standard seeks
to measure capital adequacy as the ratio of capital to risk weighted assets.
Under the system, the balance sheet assets and off-balance sheet exposure will be assigned
weights according to prescribed risk. The value of each asset shall be multiplied asset. Banks
have to maintain minimum capital funds equivalent to the prescribed ratio on an aggregate of
risk-weighted assets on an ongoing basis. at present the minimum stipulated CAR(capital
adequacy ratio) is 9%.in simple terms it means that for every risk-weighted asset of Rs 100/-
,banks have to maintain capital funds amounting to Rs 9/-.
Bank with higher CAR will get better rating as it indicates that the assets of the bank are
backed by a higher percentage of capital funds. For the purpose of rating, CAR of the bank will
be compared with those of the per group banks. The evaluation of capital adequacy should
include, but is not limited to a review of:
Bank growth experience, plans and future prospects
The volume of risk weighted assets
Financial strength of subsidiaries, parent agilities, and other potential sources of
additional capital
The risk exposure represented in off-balance sheet items.
Adequacy of loan loss reserve
Interest rate risk, concentration of credit risk and risks associated with non traditional
activities.
2. ASSET QUALITY
Assets of a bank are cash and balances with RBI, balances with banks and money at call
and short notice, investments in government and other securities, advances (including loans and
advance, bill purchased/discounted and other credit facilities), fixed assets and other assets.
Asset quality means quality of assets of the bank especially those of advances and investments.
Asset quality refers to the degree of financial strength and risk in a bank‟s assets typically
advances and investments. a comprehensive evaluation of asset quality is one of the most
important components in assessing the current condition and future viability of the bank. The
quality of the bank‟s assets impacts, in varying degrees, all components of a bank‟s financial
performance. Asset quality problems can diminish the liquidity inherent in the loan portfolio and
have a negative impact on the adequacy of the bank capital. Poor asset quality also reflects up on
management‟s competence. As a consequence, it is important for a director to put in place
policies to limits the bank‟s credit risk taking and to monitor the bank for compliance with
policies. To evaluate asset quality, they primarily look at the level of credit risk in the bank‟s
assets and try to make sure that borrowers will repay when their obligations are due to the bank.
Asset quality with regard to advances depends mainly on classification advances in
accordance with the prudential accounting norms of income recognition, asset classification and
provisioning, distribution pattern of advances to various sectors such as industry, trade etc; and
diversified credit portfolio with exposure to various types of industries, the securities backing for
advance, lending policies etc.
3. MANAGEMENT:-
The third factor in the acronym(the „hump‟ in the CAMELS rating. refers to the bank‟s
management quality. while the other factor can be quantified fairly easily from current financial
statement, management quality is somewhat elusive and subjective measure, yet one that is
crucial to institutional success.
Management‟s capabilities to identify, measure, monitor, and control the risk of an
institution‟s activities and to ensure a safe and sound and efficient operation in compliance with
applicable laws and regulations is reflected in this rating. The directors and senior management
are responsible for developing and implementing policies, procedures, and practices that
translate goals, objectives, and risk limits into prudent operating standards. Depending on the
nature and scope of an institution‟s activities, management practices may need to operating or
transaction, reputation, strategic, compliance legal and liquidity.
The evaluation of management should include, but it is not limited to, a view of:
Management‟s ability to plan for and respond to, risks that may arise from changing
business condition or the initiation of new activities or products.
Adequacies of, and conformance with, appropriate internal policies and control addressing
the operations and controls addressing the operations and risks of significant activities.
Accuracy, timeliness, and effectiveness of management information and risk monitoring
systems appropriate for the institution‟s size complexity, and risk profile.
Adequacy of audits and internal controls to promote effective operations and reliable
financial and regulatory reporting, safeguard assets and ensure compliance with laws,
regulations, and internal policies.
The extent that the board and management and is affected by, or susceptible to, dominant
influence or concentration of authority.
Management‟s philosophy with respect to dividends.
Compensation standards, including safeguards to prevent against the payment of excessive
compensation
The accuracy of regulatory reports.
The overall performance of the institution and its risk profit.
4. EARNINGS QUALITY
The continued viability of a bank depends on its ability to earn an appropriate return on
its assets and capital. Good earnings performance enables a bank to fund its expansion, remain
competitive in the market, and replenish and/or increase its capital funds. The essential purpose
of bank earnings, both current and accumulated, is to provide for absorption of losses.
The earnings power of a bank is the initial safe guard against the risk of engaging in the
business of banking. Earnings therefore represent a bank‟s first line of defence against capital
duplication resulting from shrinkage in asset value.
The basic analytical tools available to evaluate the earnings quality are the financial
statements of the banks, internally prepared statements and supplementary schedules. Internally
prepared information is not in itself sufficient to adequately analyze the financial condition of the
bank. to properly understand and interpret financial and statistical data, the examiner should be
familiar with current national, regional and cyclical or seasonal factors .current knowledge of
such as that available in newspapers and industrial journals is important to the examiner in
adequately reviewing and analyzing a bank.
The evaluating of earnings should include a review of:
Quality and future prospects for core income.
The ability to cover Loses and maintains adequate capital including compliance with
minimum earnings standards.
The composition of earnings and sustainability of the various earnings components.
Peer group comparison
Vulnerability to interest rate and other market or price risks.
Compliance with laws and regulations relating to earnings and dividends
The effectiveness of management‟s budgeting process.
5. LIQUIDITY
Liquidity represents the ability to fund asset to meet obligations as they become due.
Liquidity is essential in all banks to compensate for expected and unexpected balance sheet
fluctuation and provide funds for growth. Liquidity risk is the risk of not being able to obtain
funds at reasonable price within a reasonable time period to meet obligations as they become
due. Because liquidity is critical to the ongoing viability of any bank, liquidity management is
among the most important activities that a bank conducts.
Liquidity factor is rated based on the quantum of liquid assets held by the bank availability of
funds to meet short term obligation and also cater to prompt credit disbursal, accessibility to
money and other external source of funds. Asset liability management system is to avoid
maturity mismatches etc.
By assuring a bank‟s ability to meet its liabilities as they come due, liquidity management
can reduce the probability of an irreversible adverse situation developing. Even in cases where a
crisis develops because of a problem elsewhere at an uncovering of fraud, or where a crisis
reflects generalized loss of confidence in financial institutions, the time available to a bank to
address the problem will be determined by its liquidity. Indeed, the importance of liquidity
transcends the individual institution, since a liquidity shortfall at a single institution can have
system wide repercussions. For this reason the analysis of liquidity requires bank managements
to measure not only the liquidity positions of banks on an ongoing basis but also to examine how
funding requirements are likely to evolve under crisis scenario.
5. SYSTEMS AND CONTROL
As observed by the Basel committee of banking supervision, internal control system
refers to the ongoing process by which an institution meets three key set of objectives;
operational, informational and compliance. Bank has strengthened the internal control system
through simplification of documentation procedures and revision in the audit procedures,
operational manuals and implementation of related strategies and monitoring of their efficiency.
A system of effective internal controls as a critical component of bank management and
foundation for the safe and sound operations of banking organization‟s system of strong internal
controls can help to ensure that the bank will comply with laws and regulations as well as
policies, plans, internal rules and procedures, and decrease the risk of unexpected losses or
damages to the bank reputation.
Internal control consists of five inter related elements
Management oversight and control culture
Risk recognition and assessment
Control activities and suggestion of duties
Information and communication
Monitoring activities and correcting deficiencies
The effective functioning of these elements is essential to achieve a bank‟s
performance, information, and compliance objectives.
1.2 STATEMENT OF PROBLEM
Bank supervisory agencies are responsible for monitoring the financial conditions of
commercial banks and enforcing related legislation and regulatory policy. Although much of the
information needed to do so can be gathered from regulatory reports, on-site examinations are
needed to verify report accuracy and to gather further supervisory information. Much research
has explored the value of this private information, both to the bank supervisors and to the public
who monitor banks through the financial markets.
1.3 DESIGN OF THE STUDY
I am using CAMELS rating system to find the financial performance of the bank. RBI
only gave suggestions to use CAMELS rating model to find out the financial performance of the
bank.
1.4 NEED FOR THE STUDY
Understanding the financial soundness of a bank is very important. Financial soundness
is very important for any bank to meet their liabilities and to give the dividend to their
shareholders.
In order to understand the financial soundness LVB uses CAMELS rating. The 6
parameters namely capital adequacy, asset quality, management, earnings quality, systems and
control helps to find out the bank is financially sound or not. This study will help the bank to
identify their weakness and take corrective measures.
1.5 REVIEW OF LITERATURE
PADMANABHAN WORKING GROUP (1995), in this report on on-site supervision,
recommend for supervisory interventions and introduction of a rating methodology for banks on
the lines of CAMEL model with appropriate modification to suit Indian conditions. The working
group has recommended six factors- Capital Adequacy, Assets Quality, Compliance, Systems
and Control.
NARASIMHAM COMMITTEE (1998) made several important recommendations like
introduction of internationally accepted prudential norms relating to income recognition, assets
classification, provisioning and capital adequacy. Accordingly, a framework for the evaluation of
the current strength of the system and of the operations and performance of banks has been
provided by reserves bank‟s measuring rod of „CAMELS‟, which stands for Capital Adequacy,
Assets Quality, Management, Earnings, Liquidity and Internal Control Systems.
The main endeavour of CAMEL, system is to detect problems before they manifest
themselves. The RBI has instituted the mechanism for critical analysis before their boards to
provide an internal assessment of health of the bank. The analysis, which is made available to tht
RBI, forms a supplement to the system of off-site monitoring of banks. An efficient result-
oriented on-site inspection system requires an efficient follow up. The entire cycle of inspection
and follow-up action are now completed within maximum period of 12 months. Monitor able
action plan for rectification of irregularities/deficiencies noticed during the inspections within a
time frame is drawn up progress in implementing pursued with the bank concerned.
BARR AND SIMENS (1996) tried to predict bank failures in the US, using the data
from December 1984 to June 1987 using CAMEL model. They used technical efficiency
measure, using DEA in their prediction model. Along with their DEA results, which represent
management quality „M‟ in the CAMEL rating, they used financial ratios representing soundness
of Capital, Assets Quality, Earning and Liquidity. They found that the use of DEA efficiency
score in the regression increased the accuracy of classification results from 89% to 92.4% and
the new model was superior to the earlier early-warning models.
GODSE(1996) examined the application of new model CAMEL, i.e., Capital Adequacy, Assets
Quality, Management, Earning Quality, Liquidity, Systems and Control‟, for evaluating the
performance of banks.
RAO and DATTA (1998) made an attempt to derive rating based on CAMEL. In their study
based on five groups(C-A-M-E-l), 21 parameters in all were developed after deriving separate
rating for each parameter a combined rating was derived for all nationalized banks for the year
1998. the study found that corporation bank has the best rating followed by Oriental Bank of
Commerce, Bank of Baroda, Dena Bank, Punjab National Bank, etc. and the worst rating was
found to be of Indian Bank preceded by UCO bank, United Bank of India, Syndicate Bank and
Vijaya Bank.
PERSUNA (2004) analyzed the performance of Indian Banks adopting the CAMEL model. The
performance of 65 banks was studied for the period 2003-04.The author concluded that the
competition was tough and consumers benefited from it. Better services, innovative products,
better bargains are all greeting the Indian customers. The coming fiscal will improve to be a
transition phase for Indian banks, as they will have to align their strategic focus to increasing
interest rates.
VENI (2004) studied the capital adequacy requirement of banks and the measures adopted by
them to strengthen their capital ratios. The author highlighted that the rating agencies give
prominence to capital adequacy ratios of banks while rating the bank‟s certificate deposits, fixed
deposits and bonds. They normally adopt CAMEL Model for rating banks. Thus, Capital
Adequacy is considered as the key element of bank rating.
SATHISH JUNTUR SHARATH AND SUREENDER (2005) adopted CAMEL model to
assess the performance of Indian banks. The authors analyzed the performance of 55 banks for
the year 2004-05, using CAMEL Model. They concluded that the Indian banking system looks
sound and Information Technology will help the banking system grow in strength while going
into the future, Bank‟s initial Public offer will be hitting the market to increase their capital and
gearing up for the Basel II norms.
VERMA COMMITTEE REPORT ON WEAK BANKS
According to verma committee, weakness relate to three areas.operations,humanresources
and management, operational failures relate to high level of NPAs,slow decision making with
regard to fresh sanction of advances and compromise proposals, absence of cost control
measures, weak internal control and housekeeping, low level technology and competitive rates.
Under HR related issues, there are overstaffing, low productivity, high age profile, inadequate
training facilities, and lack if skills etchings the management area, the causes were short tenures
and frequent changes of top management, lack of support from board of Directors etc.
For the revival of the weak banks committee has made a number of suggestions. The
committee considered various options such as merger or closure of banks change in ownership or
privatization, narrow banking (shift from fresh lending activity to investment in government
securities) and a comprehensive operational and financial restructuring. After examining the pros
and cons of the above four options, the committee has found that the first three are not suitable in
the present circumstances and hence recommended a four dimensional comprehensive
restructuring programme
1.6 CHAPTER SCHEME
The study is divided into five chapters. The distribution of study is done in the following
chapter in the following manner:-
1. The first chapter contains an introduction about the study i.e. theoretical background,
Statement of the problem, design of the problem, need for the study, Review of
literature.
2. The second chapter deals with industrial profile, company profile
3. Third chapter deals with Research methodology i.e. objectives, data collection
method, sample size, tools of analysis, limitation.
4. Fourth chapter deals with analysis and interpretation.
5. Fifth chapter deals with findings, suggestion, conclusion and bibliography.
CHAPTER II
2.1 INDUSTRIAL PROFILE
A bank is a financial organization licensed by a government. Its primary activities
include providing financial services to customers while enriching its investors. Many financial
activities were allowed over time. The financial services are increasingly becoming cross border
activity with availability of wide range of products and services to customers. Their business
strategies are changing to take care of the need of customers for asset management, investment
banking, broking activity, insurance business and securities and share transactions.
Indian banks can be broadly classified into nationalized banks/public sector banks,
private banks and foreign banks. Currently, India has 88 scheduled commercial banks (SCBs)-28
public sector banks, 29 private banks and 31 foreign banks. They have a combined network of
over 53000 branches and 17000 ATMS. According to a report by ICRA Limited, a rating
agency, the public sector banks hold over 75 percent of total assets of the banking industry, with
the private and foreign banks holding 18.2% and 6.5% respectively.
With the growth in the Indian economy expected to be strong for quite some time
especially in its services sector, the demand for banking services especially retail banking,
mortgages and investment services are expected to be strong. The focus of the statutory
regulation of commercial banks by RBI in India until the early 1990s was mainly on licensing,
administration of minimum capital requirements, pricing of services including administration of
interest rates on deposits as well as credit, reserves and liquid asset requirements. In the
circumstances, the supervision had to focus essentially on solvency issues.
Banks are the most significant players in the Indian financial market. . Dominated
by the public sector, banking industry has so far acted as an efficient partner in the growth and
development of the country. New private sector banks brought the necessary towards higher
utilization of technology, improved customer service and innovate products. Inspire of their
sheer size, public sector banks proved to be surprisingly nimble and flexible to meet the
emerging needs of customers. As the body responsible for bank supervision, RBI has played its
part in ensuring that banks are in tune with international standards and norms. Today, the Indian
banking sector is as competitive and healthy as any in the world.
2.2 COMPANY PROFILE
The Lakshmi Vilas Bank Limited (LVB) was founded eight decades ago (in 1926)
by seven people of Karur under the leadership of Shri V.S.N. Ramalinga Chettiar, mainly to
cater to the financial needs of varied customer segments. The bank was incorporated on
November 03, 1926 under the Indian Companies Act, 1913 and obtained the certificate to
commence business on November 10, 1926, The Bank obtained its license from RBI in June
1958 and in August 1958 it became a Scheduled Commercial Bank. During 1961-65 LVB took
over nine Banks and raised its branch network considerably. To meet the emerging challenges in
the competitive business world, the bank started expanding its boundaries beyond Tamil Nadu
from 1974 by opening branches in the neighboring states of Andhra Pradesh, Karnataka, Kerala,
Maharashtra, Madhya Pradesh, Gujarat, West Bengal, Uttar Pradesh, Delhi and Pondicherry.
Mechanization was introduced in the Head office of the Bank as early as 1977. At present, with a
network of 249 branches,3 satellite branches and 6 extension counters, spread over 14 states and
the union territory of Pondicherry, the Bank's focus is on customer delight, by maintaining high
standards of customer service and amidst all these new challenges, the bank is progressing
admirably. LVB has a strong and wide base in the state of Tamil Nadu, one of the progressive
states in the country, which is politically stable and has a vibrant industrial environment. LVB
has been focusing on retail banking, corporate banking and banc assurance. The Bank's business
crossed Rs. 12,606 Crores as on March 31, 2009. The Bank earned a Net profit of Rs. 50.30
Crores. The Net owned Funds of the Bank reaches Rs. 453.70 Crores. With a fairly good quality
of loan assets the Net NPA of the bank was pegged at 1.24 % as on March 31, 2009
VISION
To be a sound and dynamic banking entity providing financial services of
excellence with Pan India presence.
MISSION
To develop a range of quality financial services and products to create value for
customers, shareholders and the society; to motivate people to achieve excellence in performance
leading to sustained profitable growth and build a vibrant organization.
OBJECTIVES OF LAKSHMI VILAS BANK
• Carrying on the business of accepting deposits of money on current account or otherwise
subject to withdrawal by cheque, draft or order and to carry on the business of banking in
all its branches and departments.
• Contracting for public and private loans and negotiating and issuing the same.
• The borrowing, raising or taking up of money, the lending or advancing of money either
upon or without security, the drawing, mapping, discounting, buying, selling, and dealing
in a bullion and foreign exchange dealing in other instruments like share, bond etc…
FUNCTIONS OF LAKSHMI VILAS BANK
The various functions of the bank can be classified as:
1. Primary functions :
• Accepting deposits
• Making loans and advances
2. Secondary functions :
• Agency functions
• General utility functions
COMPANY LOGA
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hails from.
• A glimmer of lights from ochre gold, the circle of kumkum where all good things hold.
CHAPTER III
METHODOLOGY
3.1 OBJECTIVES
• To find out the capital adequacy, which reflects the overall financial condition of bank
• To find out the asset quality of the bank (NPA)
• To measure the management efficiency of the bank
• To find out earning and liquidity of the bank
• To find out the effectiveness of system and control
3.2 DATA COLLECTION METHOD
Secondary Data are those data, which are already collected by some other person.
Sources for collecting secondary data were annual reports; periodically published accounts of
banks, Journals, Magazines, Company Website and Official Website.
3.3 SAMPLE SIZE
Sample size is 6 years annual report. The study conducted for the year 2003-2004 to
2008-2009.
3.4 TOOLS OF ANALYSIS
Tools used to analyse the performance of the bank is CAMELS MODEL.
CAMELS
CAPITAL ADEQUACY (C)
CAPITAL ADEQUACY RATIO (CAR)
Capital Adequacy Ratio (CAR) = Capital fund * 100
Capital fund: Capital fund consists of two parts viz, Tier 1 capital and Tier 2 capital
ASSET QUALITY (A) 1. NET NPA TO TOTAL ASSETS
Net NPA / Total Assets
2. NET NPA TO TOTAL ADVANCES
Net NPA / Total Advances
3. CHANGE IN NET NPA
% change in Net NPA = current years NPA- previous years NPA * 100
Previous years NPA
4. ADVANCE YIELD RATIO
INTEREST INCOME ON ADVANCES / ADVANCES
MANAGEMENT (M)
1. TOTAL ADVANCE TO TOTAL DEPOSITS
Total Advance / Total Deposits * 100
2. PROFIT PER EMPLOYEE
PAT / no. Of Employees
3. BUSINESS PER EMPLOYEE
Total Advances + Total deposits / No. Of Employees
4. BRANCH PROFITABILITY
Gross profit / No of branches
5. BRANCH PRODUCTIVITY
Total Advances + Total deposits / No. Of Branches
6. EARNINGS PER SHARE
Net profit / no of Equity share
7. ASSET UTILIZATION
Total Income / Total Asset
EARNING QUALITY (E)
1. SPREAD
Interest Income + Interest Expended / Total Assets
2. % OF GROWTH IN NET PROFIT
Current year NET Profit- previous year Net profit * 100
Previous year net profit
3. NON INTEREST INCOME TO TOTAL INCOME
Non Interest income / Total Income * 100
4. NON INTEREST INCOME TO TOTAL INCOME
Interest income / Total Income * 100
LIQUIDITY (L)
1. LIQUID ASSET TO TOTAL DEPOSIT
Liquid Asset / Total Deposit
2. LIQUID ASSET TO DEMAND DEPOSIT
Liquid Asset / DEMAND Deposit
3. LIQUID ASSET TO TOTAL ASSETS
Liquid Asset / Total Assets
4. GOVT. SECURITIES TO TOTAL ASSETS
Govt. Securities / Total Assets
5. APPROVED SECURITIES TO TOTAL ASSETS
Approved Securities / Total Assets
3.6 LIMITATION
The study was based on the annual reports furnished by the company.
The study uses only the secondary data for analysis
The accuracy and reliability of this report depends upon the correctness of the secondary
data collected.
CHAPTER IV
ANALYSIS AND INTERPRETATION
ANALYSIS
Analysis is the process of breaking a complex topic or substance into smaller parts to
gain a better understanding of it. Financial statement analysis (or financial analysis) refers to an
assessment of the viability, stability and profitability of a business, sub-business or project.
Data analysis is a process of gathering, modelling, and transforming data with the goal of
highlighting useful information, suggesting conclusions, and supporting decision making.
i) Capital Adequacy (C)
ii) Asset Quality (A)
iii) Management (M)
iv) Earnings Quality (E)
v) Liquidity (L)
vi) Systems and Control (S)
CAPITAL ADEQUECY(C)
Capital adequacy ratio is used to evaluate, how LAKSHMI VILAS BANK meets its
capital adequacy requirements.
CAPITAL ADEQUACY RATIO (CAR)
The idea of capital adequacy norms is that the long run source of finance in a bank should
be a decent % of the assets of the banker after considering their risk realization. As per the
prudential norm, all Indian scheduled commercial banks as well as foreign banks operating in
India are required to achieve 9% capital adequacy ratio.
Capital Adequacy Ratio (CAR) = Capital fund * 100
Capital fund: Capital fund consists of two parts viz, Tier 1 capital and Tier 2 capital
a) Tier 1 capital provides the most permanent and readily available support to bank against
unexpected losses. Tier 1 capital comprises the aggregate of paid up capital, statutory
reserves, and other disclosed reserves including share premium and capital reserves
arising out of surplus on sale of assets, as reduced by, Equity investment in subsidiaries,
intangible assets, current and brought forward losses.
b) Tier 2 capitals comprises elements that are less permanent in nature or are less readily
available than those comprising tier 1 capital. The elements comprising Tier 2 capital are
as follows.
TABLE-1
CAPITAL ADEQUACY RATIO
CHART-1
CAPITAL ADEQUACY RATIO
INFERENCE
Above table shows on, the minimum CAR as per RBI norms is 9%. During the last five
years, LVB is in a position to maintain more than this requirement.
13.79
11.3210.79
12.43 12.73
10.09
0
2
4
6
8
10
12
14
16
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
CAR
CAR
YEAR Tire-1 Tire -2 CAR
2003-2004 8.49% 5.30% 13.79
2004-2005 5.67% 5.65% 11.32
2005-2006 6.94% 3.85% 10.79
2006-2007 9.93% 2.50% 12.43
2007-2008 10.53% 2.20% 12.73
2008-2009 8.63% 1.46% 10.09
ASSET QUALITY (A)
The quality of loans is the most crucial aspects that decide the health of banks. The
following important ratios are used to measure the asset quality of LVB
NET NPA TO TOTAL ASSETS
Net NPA are gross NPAs net of provisions on NPAs and interest in suspense account.
This ratio shows the percentage of NPA with regard to Total assets. Increase in such percentage
indicates decrease in quality.
TABLE 4.2
NET NPA TO TOTAL ASSETS Year Net NPA Total assets Percentage
2003-2004 1094800000 38213506000 2.86
2004-2005 1150500000 40533818000 2.84
2005-2006 555900000 49193808000 1.13
2006-2007 569500000 58267814000 0.98
2007-2008 595200000 65206041000 0.91
2008-2009 648500000 83172547000 0.78
CHART-2 NET NPA TO TOTAL ASSETS
INFERENCE
There has been a decreasing trend in the Net NPAs to Total Assets from 2003-04 to
2008-09. This shows the bank has to reduce their Net NPAs by giving out more advances to
improve its performance.
2.86 2.84
1.13 0.98 0.910.78
0
0.5
1
1.5
2
2.5
3
3.5
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
NET NPA TO ADVANCES
Net NPA as a percentage of advances is the most standard measure of asset quality. As
loans and advances is an important asset of the bank, it is very significant to relate
nonperforming assets to advances. As per international norms, a ratio of 1% is considered to be
tolerable.
TABLE 4.3
NET NPA TO ADVANCE
Year Net NPA Total advances Percentage
2003-2004 1094800000 20387040000 5.37
2004-2005 1150500000 23177114000 4.96
2005-2006 555900000 29528197000 1.88
2006-2007 569500000 36127030000 1.58
2007-2008 595200000 38587875000 1.54
2008-2009 648500000 52458289000 1.24
CHART 3
NET NPA TO ADVANCE
INFERENCE
The percentage of Net NPA to advances shows a decreasing trend from 2003- 04 to
2008-09. But still the bank has to work on reducing the Net NPA s so as to improve the asset
quality of the bank.
5.37 4.96
1.88 1.58 1.54 1.24
0
1
2
3
4
5
6
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
CHANGE IN NET NPA
This measure gives the movement in Net NPAs on year basis. This is calculated using the
formula given below
% change in Net NPA = current years NPA- previous years NPA * 100
Previous years NPA
TABLE 4.4
% CHANGE IN NET IN NET NPA
Year Current year NPA
Previous year NPA NET NPA *100 % of change
2003-2004 1094800000 1254800000 -160000000 -16000000000 -12.75
2004-2005 1150500000 1094800000 55700000 5570000000 5.09
2005-2006 555900000 1150500000 -594600000 -59460000000 -51.68
2006-2007 569500000 555900000 13600000 1360000000 2.45
2007-2008 595200000 569500000 25700000 2570000000 4.51
2008-2009 648500000 595200000 53300000 5330000000 8.95 CHART 4
% CHANGE IN NET IN NET NPA
INFEERENCE
The NPA of the bank has been reducing from 2003-04 to 2007-08. The lowest value was
in the year 2005-06 with only -594600000. But in the year 2008-09 the value has increased
to53300000. This value has to be reduced inorder to improve the asset quality of the bank.
-60.00
-50.00
-40.00
-30.00
-20.00
-10.00
0.00
10.00
20.00
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
ADVANCE YIELD RATIO
Yield on advance, is another important ratio, which helps us to measure the quality of
advances. Here yield means interest income received on the advances of the bank. Increase in
advance yield ratio is an indicator of sound asset quality.
TABLE 4.5
ADVANCE YIELD RATIO
Year INTEREST INCOME ON ADVANCES ADVANCES %
2003-2004 1805712000 20387040000 8.86
2004-2005 1868532000 23177114000 8.06
2005-2006 2166688000 29528197000 7.34
2006-2007 3121274000 36127030000 8.64
2007-2008 3789847000 38587875000 9.82
2008-2009 5179197000 52458289000 9.87
CHART 5
ADVANCE YIELD RATIO
INFERENCE
The advance yield ratio of the bank has been steadily increasing for the past four years.
This shows the favourable position of asset quality of bank.
8.868.06
7.348.64
9.82 9.87
0
2
4
6
8
10
12
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
MANAGEMENT (M)
Management is the most important ingredient that ensures sound functioning of banks.
With increased competition in the Indian banking sector, efficiency and effectiveness have
become the rule as banks constantly strive to improve the productivity of their employees. The
ratio in this segment measures the efficiency and effectiveness of management.
TOTAL ADVANCE TO TOTAL DEPOSITS
This ratio measures the efficiency of the management in converting deposits into
advances. The deposits include demand deposits, saving deposits, term deposits and deposits of
other banks.
TABLE 5.6
TOTAL ADVANCE TO TOTAL DEPOSITS
Year Advances Deposits Percentage
2003-2004 20387040000 32958191000 61.86
20042005 23177114000 34959251000 66.30
2005-2006 29528197000 43363800000 68.09
2006-2007 36127030000 50198723000 71.97
2007-2008 38587875000 56184882000 68.68
2008-2009 52458289000 73609030000 71.27
CHART 6
TOTAL ADVANCE TO TOTAL DEPOSITS
INFERENCE
To improve the efficeincy the bank has to give out more advances from the deposits.
56
58
60
62
64
66
68
70
72
74
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
PROFIT PER EMPLOYEE This ratio is another indicator that decides the efficiency of the management. The ratio is
calculated by dividing PAT by the total number of employees. Higher the ratio is higher the
efficiency of management.
TABLE 4.7
PROFIT PER EMPLOYEE
Year Profit after Tax EMPLOYEES Profit per employee
2003-2004 410485000 1946 210937.82
2004-2005 33444000 1928 17346.47
2005-2006 224702000 1873 119969.03
2006-2007 175843000 1926 91299.58
2007-2008 252691000 2078 121602.98
2008-2009 502953000 2433 206721.33
CHART 7
PROFIT PER EMPLOYEE
INFERENCE
The profit per employee has been showing unstable profit.
0.00
50000.00
100000.00
150000.00
200000.00
250000.00
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
BUSINESS PER EMPLOYEE
This ratio also shows the efficiency of the management. It is arrived at by dividing total
business by total number of employees. Business includes the sum of total advances and deposits
in a particular year. An increase in business per employee is an indicator of efficient.
TABLE 4.8
BUSINESS PER EMPLOYEE
Year Advances Deposits Total No. Employees
Business per employee
2003-2004 20387040000 32958191000 53345231000 1946 27412760.02
2004-2005 23177114000 34959251000 58136365000 1928 30153716.29
2005-2006 29528197000 43363800000 72891997000 1873 38917243.46
2006-2007 36127030000 50198723000 86325753000 1926 44821263.24
2007-2008 38587875000 56184882000 94772757000 2078 45607679.02
2008-2009 52458289000 73609030000 126067319000 2433 51815585.29
CHART 8
BUSINESS PER EMPLOYEE
INFERENCE
The business per employee has been showing a steady increase from 2003-04 to
2008-09. This increasing trend in business per employee indicates sound management of the
bank.
27412760.0230153716.29
38917243.46
44821263.24 45607679.02
51815585.29
0
10000000
20000000
30000000
40000000
50000000
60000000
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
BRANCH PROFITABILITY
As profitability is n indicator of the efficiency of the management, this ratio is very
significant. It shows the efficiency of various branches of the bank.
TABLE 4.9
BRANCH PROFITABILITY
Year Gross Profit No of Branches Branch Profitability
2003-2004 410485000 224 1832522.32
2004-2005 33444000 225 148640.00
2005-2006 224702000 227 989876.65
2006-2007 175843000 236 745097.46
2007-2008 252691000 239 1057284.52
2008-2009 502953000 251 2003796.81
CHART 5.9
BARNCH PROFITABILITY
INFERENCE
Branch profitability of LVB was 989876 in the year 2005-06. In the year 2006-07
the branch profitabilty has reduced to 7,45,097. Then it gratually increased to over the next three
years and is currently at 20,03,796. It is an indicator of efficient.
1832522.32
148640
989876.65
745097.46
1057284.52
2003796.81
0
500000
1000000
1500000
2000000
2500000
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
BRANCH PRODUCTIVITY
This ratio shows the business per branch. Business means the sum of advances and
deposits. Higher branch productivity is an evidence of effective management.
TABLE 4.10
BRANCH PRODUCTIVITY
Year Advances Deposits Total No. Branches
Branch Productivity
2003-2004 20387040000 32958191000 53345231000 224 238148352.7
2004-2005 23177114000 34959251000 58136365000 225 258383844.4
2005-2006 29528197000 43363800000 72891997000 227 321110118.9
2006-2007 36127030000 50198723000 86325753000 236 365787089
2007-2008 38587875000 56184882000 94772757000 239 396538732.2
2008-2009 52458289000 73609030000 1.26067E+11 251 502260235.1
CHART 10
BRANCH PRODUCTIVITY
INFERENCE
The branch productivity has been showing a steady increase from 238148352 in
the year 2003-04 to 502260235 in 2008-09. This increasing trend in branch productivity
indicates sound management of bank.
238148352.7
258383844.4321110118.9
365787089396538732.2
502260235.1
0
10000000
20000000
30000000
40000000
50000000
60000000
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
EARNING PER SHARE
The earning Per Share measures the quantum of earnings available to the equity investors
on their investment. It is an important measure that an equity investor would be using to evaluate
the commitment of the management toward s the owners of the bank.
TABLE 4.11
EARNING PER SHARE
Year Net Profit No of Equity Share EPS
2003-2004 410485000 11508902 35.67
2004-2005 33444000 11508902 2.91
2005-2006 224702000 19534569 11.50
2006-2007 175843000 48789555 3.60
2007-2008 252691000 48772189 5.18
2008-2009 502953000 48776176 10.31
CHART 11
EARNING PER SHARE
INFERENCE
The Earning Per Share value shows an increasing trend from 3.60 in the year
2006-07 to 10.31 in 2008-09. This increasing trend in Earning Per Share for last three years
indicates sound management of the bank.
35.67
2.91
11.50
3.60 5.18
10.31
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
ASSET UTILIZATION TABLE 4.12
ASSET UTILIZATION
Year Total Income Total Assets Asset Utilization
2003-2004 3728168000 38213506000 0.10
2004-2005 3365242000 40533818000 0.08
2005-2006 3681272000 49193808000 0.07
2006-2007 4749858000 58267814000 0.08
2007-2008 5885351000 65206041000 0.09
2008-2009 7646004000 83172547000 0.09
CHART 12
ASSET UTILIZATION
INFERENCE
The asset utilization of the bank has been going steady. This shows that the bank has to
improve upon its asset utilization by increasing the income.
0.10
0.08 0.070.08 0.09 0.09
0.00
0.02
0.04
0.06
0.08
0.10
0.12
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
EARNING QUALITY (E)
SPREAD
It is the difference between interest income and interest expended as a percentage of total
assets. Interest expended includes interest paid on deposits, loans from RBI and other short term
and long term loans. Spread indicates a bank‟s ability to withstand pressure on margins nad the
higher the spread, the better.
TABLE 4.13
SPREAD
Year Interest Income Interest Expended Spread Total Assets Spread as a Percentage of total assets
2003-2004 2859544000 2025139000 834405000 38213506000 2.18
2004-2005 2982042000 1915357000 1066685000 40533818000 2.63
2005-2006 3220564000 2165640000 1054924000 49193808000 2.14
2006-2007 4291789000 2991798000 1299991000 58267814000 2.23
2007-2008 5060576000 3819250000 1241326000 65206041000 1.90
2008-2009 6576111000 5040718000 1535393000 83172547000 1.85
CHART 13
SPREAD
INFERENCE
The spread shows a mixed trend from 2.18% in 2003-04 to 1.85% in 2008-09 signifying
a decrease in the net interest income. The spread is highest in the year 2004-05 with a percentage
of 2.63%
2.18
2.63
2.14 2.231.90 1.85
0.00
0.50
1.00
1.50
2.00
2.50
3.00
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
PERCENTAGE GROWTH IN NET PROFIT
Net profits are obtained after deducting income tax and if net profit is not sufficient, the
firm shall not be able to achieve a satisfactory return on its investment. Growth in net profit helps
the bank to face adverse economic conditions.
TABLE 4.14
PERCENTAGE GROWTH IN NET PROFIT
year current year Net profit
previous year Net Profit NET PROFIT *100
% Growth in NP
2003-2004 410485000 341633000 68852000 6885200000 20.15
2004-2005 33444000 410485000 -377041000 -37704100000 -91.85
2005-2006 224702000 33444000 191258000 19125800000 571.88
2006-2007 175843000 224702000 -48859000 -4885900000 -21.74
2007-2008 252691000 175843000 76848000 7684800000 43.70
2008-2009 502953000 252691000 250262000 25026200000 99.04
CHART 14
PERCENTAGE GROWTH IN NET PROFIT
INFEERENCE
The percentage growth of net profit was maximum the year 2005-06 with
571.88% and later it shows a decrease in the Net Profit Percentage. The bank has to work on
increasing the netprofit.
-200.00
-100.00
0.00
100.00
200.00
300.00
400.00
500.00
600.00
700.00
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
NON INTEREST INCOME TO TOTAL INCOME This measures income from operations, other than lending as a percentage of total
income. Non-interest income is the total income earned by the bank excluding income on
advances, deposits with RBI and income on investments.
TABLE 4.15
NONINTEREST INCOME TO TOTAL INCOME
year Non Interest income Total income Percentage
2003-2004 2859544000 3728168000 76.70
2004-2005 2982042000 3365242000 88.61
2005-2006 3220564000 3681272000 87.49
2006-2007 4291789000 4749858000 90.36
2007-2008 5060576000 5885351000 85.99
2008-2009 6576111000 7646004000 86.01 CHART 15
NONINTEREST INCOME TO TOTAL INCOME
INFERENCE
The higher ratio of non interest income indicates the increasing the proposition of
income. This indicates that Non Interest Income was important in the year 2003-04
23.30
11.3912.51
9.64
14.01 13.99
0.00
5.00
10.00
15.00
20.00
25.00
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
INTEREST INCOME TO TOTAL INCOME TABLE 4.16
INTEREST INCOME TO TOTAL INCOME
year Interest income Total income Percentage
2003-2004 2859544000 3728168000 76.70
2004-2005 2982042000 3365242000 88.61
2005-2006 3220564000 3681272000 87.49
2006-2007 4291789000 4749858000 90.36
2007-2008 5060576000 5885351000 85.99
2008-2009 6576111000 7646004000 86.01 CHART 16
INTEREST INCOME TO TOTAL INCOME
INFERENCE
Income from the interest is higher than the total income. It shows the lending efficiency
of the bank.
76.70
88.61 87.49 90.36
85.99 86.01
65.00
70.00
75.00
80.00
85.00
90.00
95.00
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
LIQUIDITY (L) The business of banking is all about borrowing and lending money. Timely repayment of
deposits is of crucial importance to avoid a run on a bank. Investors are extremely sensitive and
they rushed the bank to withdraw money at the slightest hint of trouble. Hence banks have to
ensure that they maintain enough liquidity.
LIQUID ASSETS TO DEMAND DEPOSITS
The ratio measures the ability of a bank to meet demand from demand deposits in a
particular year. Liquid assets include cash in hand, balance with RBI, balance with other banks
and money at call and short notice.
TABLE 4.17
LIQUID ASSETS TO DEMAND DEPOSITS
Year Liquid asset Demand asset Percentage
2003-2004 2801253000 4099944000 68.32
2004-2005 3542377000 4269962000 82.96
2005-2006 4634000000 4530844000 102.28
2006-2007 6414605000 5069179000 126.54
2007-2008 6149029000 5591944000 109.96
2008-2009 8814131000 4920769000 179.12
CHART 17
LIQUID ASSETS TO DEMAND DEPOSITS
INFERENCE
Liquid assets as a percentage of demand deposits are one of the important measures of
liquidity position of a bank. The percentage of liquid assets to demand assets in 2003-04was
68.3282.96
102.28
126.54 109.96
179.12
0.00
50.00
100.00
150.00
200.00
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
68.32% which was the lowest in these six years at present the ratio is at 179.12%, indicating
good liquidity position.
LIQUID ASSETS TO TOTAL DEPOSITS
Here liquid assets are measured as a percentage of total deposits. Total deposits include
demand deposits, saving deposits, term deposits and deposits of their financial institutions. As
deposits are the major liability of any bank, it is significant to relate liquid assets to total
deposits.
TABLE 4.18
LIQUID ASSETS TO TOTAL DEPOSITS
Year Liquid asset Total deposits Percentage
2003-2004 2801253000 32958191000 8.50
2004-2005 3542377000 34959251000 10.13
2005-2006 4634000000 43363800000 10.69
2006-2007 6414605000 50198723000 12.78
2007-2008 6149029000 56184882000 10.94
2008-2009 8814131000 73609030000 11.97 CHART 18
LIQUID ASSETS TO TOTAL DEPOSITS
INFERENCE
In 2003-04, the percentage of liquid assets to total deposits was 8.50%, after
which there was a steady increase upto 12.78%. At present it maitains a value of 11.97% which
is quite satisfactory.
8.50
10.1310.69
12.78
10.94
11.97
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
LIQUID ASSETS TO TOTAL ASSETS
Here liquid assets are measured as a percentage of total assets. An asset is said to be
liquid if it can be converted into cash within short period of time without loss of value. Higher
the percentage of liquid assets more will be banks ability to meet its liabilities in time.
TABLE 4.19
LIQUID ASSETS TO TOTAL ASSETS
Year Liquid asset Total asset Percentage
2003-2004 2801253000 38213506000 7.33
2004-2005 3542377000 40533818000 8.74
2005-2006 4634000000 49193808000 9.42
2006-2007 6414605000 58267814000 11.01
2007-2008 6149029000 65206041000 9.43
2008-2009 8814131000 83172547000 10.60
CHART 19
LIQUID ASSETS TO TOTAL ASSETS
INFERENCE
The percentage of liquid assets to total assets shows an increasing trend in the first four
years. This indicates that the liquidity of the bank is in favourable position.
7.33
8.74
9.42
11.01
9.4310.60
0.00
2.00
4.00
6.00
8.00
10.00
12.00
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
GOVERNMENT SECURITIES TO TOTAL ASSETS This ratio measures proposition of risk free liquid assets invested in Govt. securities as a
percentage of the asset held by a bank and is arrived at by dividing investment in Govt. securities
by total assets.
TABLE 4.20
GOVERNMENT SECURITIES TO TOTAL ASSETS
Year Govt. securities Total asset Percentage
2003-2004 10840136000 38213506000 28.37
2004-2005 10704248000 40533818000 26.41
2005-2006 11676901000 49193808000 23.74
2006-2007 11873998000 58267814000 20.38
2007-2008 15540890000 65206041000 23.83
2008-2009 16742322000 83172547000 20.13
CHART 20
GOVERNMENT SECURITIES TO TOTAL ASSETS
INFERENCE
The percentage of government securities to total assets has been showing a
decreasing trend for the last four years. The present ratio is at 20.13%. This decreasing trend
indicates that the bank has good liquidity of funds.
28.3726.41
23.74
20.38
23.83
20.13
0.00
5.00
10.00
15.00
20.00
25.00
30.00
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
APPROVED SECURITIES TO TOTAL ASSETS
Approved securities are investments made in state associated bodies like electricity
boards, housing boards, corporation bonds and share use of regional rural banks.
TABLE 4.21
APPROVED SECURITIES TO TOTAL ASSETS
Year Approved securities
Total asset Percentage
2003-2004 287658000 38213506000 0.75
2004-2005 168851000 40533818000 0.42
2005-2006 168851000 49193808000 0.34
2006-2007 158902000 58267814000 0.27
2007-2008 136502000 65206041000 0.21
2008-2009 95482000 83172547000 0.11 CHART 21
APPROVED SECURITIES TO TOTAL ASSETS
INFERENCE
Even though approved securities are not as liquid and secured when compared to
Govt. securities, they also provide sufficient liquidity for the bank. LVB investment in approved
securities shows a decreasing trend. The percentage of approved securities to total assets were
.75% in 2003-04 and it reduced gradually and reached at .11% in 2008-09.
0.75
0.42
0.340.27
0.21
0.11
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
The ratio of Liquid Assets to Demand Deposits and Liquid Assets to Total Assets are 11.97%
and 10.60% respectively in the year 2008-09. Government securities also play a major role in the
liquidity of a bank. So it is always necessary for banks to maintain a reasonable amount in
government securities, too much liquidity affects the returns of the bank. By analyzing the data
we can come to conclusion that LVB maintaining proper balance between earnings and liquidity
of the bank.
Systems and control (S)
A system of strong internal controls can help to ensure that the goals and objectives of a
banking organisation will be met, that the bank will achieve long term profitability targets, and
maintain reliable financial and managerial reporting. Such a system can regulate plans, internal
rules and procedures and decrease the risk of unexpected losses or damage to the banks
reputation.
• LVB has a strong and active board of directors. Their activities include (1)
periodic discussions with management concerning the effectiveness of the internal
control system, (2) a timely review of evaluations of internal controls made by
management, internal auditors, and (3) periodic efforts to ensure that management
has appropriately followed up on recommendations and concerns expressed by
auditors and supervisory authorities on internal control weakness.
• Senior management ensures that staffs are properly compensated and their
training and skills periodically updated.
• Adequate information and effective communication are essential to the proper
functioning of a system of internal control. In LVB there is a well documented
and communicated organisational structure that clearly shows effective
communication through the organisation and this ensures compliance with an
established internal control systems.
FINDINGS
• Capital adequacy reflects the overall financial condition of the bank and also the ability
of the management to meet the needs for additional capital. As per the prudential norm,
all Indian schedule commercial bank are required to achieve 9 percent of capital
adequacy ratio. LVB is able to achieve, more than this minimum requirement of 9
percent. This helps the bank to establish a level of confidence sufficient to absorb
unforeseen losses.
• Nonperforming assets are advanced or borrower accounts which do not generate income
for the bank. Its percentage with regard to advances is reducing year by year. The
percentage of net NPAs to advances in 2003-04 was 5.37 percent but it was reduced to
1.24 percent in 2008-09. It was made on account of vigorous recovery steps and due to
the additional provision made, bank is able to reduce its NPA and maintain the quality of
assets.
• Yield on advance shows a mixed trend. In' 2003-04 it was 8.86percent. Thereafter it is
increased to 9.87 percent 2008-09. The main reason for decrease in yield on advances is
intense competition in the banking sector. To meet this challenge the banking products
and services have become more competitive and they are being perceived as
commodities. To leverage competitive environment, they are reducing interest rate to
increase customer base. This affects yield on advances.
• Total advances of LVB are around 71 percent of its total deposits. This indicates
management's efficiency to convert deposits to advance. Advances are the main source of
income of the bank and thus efficiency of the management depends upon their ability to
increase these assets.
• Labour productivity is an indicator of long term variability of banks. It is measured in
terms of Business per Employee and Profit per Employee. In LVB, Profit per Employee
is highly decreased to Rs .17346 in 2004-05 because of lower net profit. Thereafter it is
increased to Rs 206721 in 2008-09. Increasing profit per employee shows the efficiency
of the management. Business per employee shows an increasing trend. This indicates
efficiency of the management. Profitability and business of bank is highly increased
through increasing employee base, which shows increasing labour productivity.
• Branch profitability and branch productivity are also used as an indicator of efficiency of
the management by analyzing last 6 years data of the LVB, branch profitability shows a
decreasing trend up to 2004-05 because of the decrease in the gross profit of the bank.
But in 2007-08 branch profitability is increased to Rs.1057284 due to increase in the
gross profit. In 2008-09 it is increased to Rs.2003796.
• Earnings per share are also used to measure the efficiency of the management. It
measures quantum of earnings available to the equity investors on their investment. By
analyzing, the last six years data of the bank, net profit of the bank has shown
proportionately increased with the growth in the equity shares. So the management is able
to increase earnings per share of the bank. This indicates the efficiency of the
management.
• Interest income of LVB is increasing year by year. It shows their lending pattern.
• Net profit of LVB shows a steady increase from Rs.410485000in 2003-04 to 502953000
in 2008-09. The total business as well as Net income of the bank has increased. This
indicates efficient management of the bank.
5.2 SUGGESTIONS
At present the minimum capital adequacy ratio as per RBI norms is 9percent and LVB's
capital adequacy ratio in 2007-08 is 10.09 percent. By comparing the CAR of peer group
of banks, LVB's CAR is low. Since bank's asset base is increasing but bank's capital base
is remaining the same. So bank may issue an additional capital in order to increase the
CAR of the bank. Last month they increased their capital by issuing shares.
NPA adversely affects the asset quality of the bank. During the year 2006-07, the
percentage of net NPAs to advances - of the bank was 1.24 percent. The bank has to take
aggressive recovery steps to reduce NPAs to minimum level for maintaining better asset
quality of the bank.
At present interest income is a major source of income for LVB. In order to increase the
portion of the non interest income of the bank, LVB has to concentrate more on Para
banking activities such as insurance, portfolio management, mutual funds, investment
banking.
In order to improve the labour productivity, LVB has to concentrate more on training and
executive development programme in accordance with technological changes.
Non-interest income is less than the interest income; the bank has to concentrate on non-
interest income also.
In order to improve the profit per employee, the management has to use man power
effectively by giving more training.
5.3 CONCLUSION
Indian banking sector is an exciting phase of string, healthy competition. And increasing
size of the banking pie itself indicates that there is a lot of untapped potential in the market for
banking. The CAMELS rating system assesses different aspects of commercial banks operations
to determine the soundness of its condition. The performance of the LVB is evaluated using
various parameters, such as Capital adequacy, asset quality, Management, Earnings quality,
Liquidity and system and control. By analyzing the last six year data, it is found that LVB is
founded to make improvements in their capital adequacy ratio in order to meet its liabilities in
future. Decreasing trend in NPA is an evidence of sound asset quality as profitability is directly
related with the efficiency of management. Branch profitability and profit per employee and such
other parameters are used here to assess the quality of management and most of these parameters
indicate a favourable situation. The net profit of the bank is very low in the year 2004-05 that is
Rs 33444000. It adversely affects income of the bank. Thereafter bank is making healthy
improvements in net profit of the bank. The inspection and vigilance dept. of LVB ensures that
all branches of the bank compulsory adhere to the systems and procedures put in place for its
operations. Thus overall performance of LVB is efficient and competitive.
BIBLOGRAPHY
BOOKS
S.N. Mahaeswari - 2005 - Financial Management – Vikas Publishing House, New Delhi
ARTICLES
Padmanabhan working Group (1995) introduction of rating methods for banks using CAMELS
model financial service research
Narasimham committee (1998) introduction of international accepted prudential norms based on
camels‟ model
Barr and Simens (1996) predict bank failure in US using CAMELS model
Godse (1996) application of new camel model
Persuna (2004) performance of Indian banks adopting camels
Veni (2004) study to measure capital ratios
Sathishjuntur, sharath and surrender (2005) CAMELS model to assess the performance of Indian
banks