MBA (F&B) - BATCH VI

CAMELS ANALYSIS FOR

SUBMITTED UNDER GUIDENCE OF
PROF. GOPALAKRISHNAN






SUBMITTED BY
SECTION 2





























Team Members Enrollment Number
SAUMYA KHARE
P301413CMG358
SONAM SHARMA
P301413CMG369
SONAM SHARMA
P301413CMG370
SAMEER GAIROLA
P301413CMG353
RAVI PRATAP SINGH TOMAR
P301413CMG342


EXECUTIVE SUMMARY

The banking sector has been undergoing a complex, but comprehensive phase of restructuring
since 1991, with a view to make it sound, efficient, and at the same time it is forging its links firmly
with the real sector for promotion of savings, investment and growth. Although a complete
turnaround in banking sector performance is not expected till the completion of reforms, signs of
improvement are visible in some indicators under the CAMELS framework. Under this bank is
required to enhance capital adequacy, strengthen asset quality, improve management, increase
earnings and reduce sensitivity to various financial risks. The almost simultaneous nature of these
developments makes it difficult to disentangle the positive impact of reform measures.

CAMELS Framework

CAMELS norms are the supervisory framework consisting of risk-monitoring factors used for
evaluating the performance of banks. This framework involves the analysis of six groups of
indicators reflecting the health of financial institutions. The indicators are as follows:
o CAPITAL ADEQUACY

o ASSET QUALITY

o MANAGEMENT SOUNDNESS

o EARNINGS & PROFITABILITY

o LIQUIDITY

o SENSITIVITY TO MARKET RISK

The whole banking scenario has changed in the very recent past on the recommendations of
Narasimham Committee. Further BASELL II Norms were introduced to internationally standardize
processes and make the banking industry more adaptive to the sensitive market risks. Amongst
these reforms and restructuring the CAMELS Framework has its own contribution to the way
modern banking is looked up on now. The attempt here is to see how various ratios have been
used and interpreted to reveal a banks performance and how this particular model encompasses
a wide range of parameters making it a widely used and accepted model in todays scenario.


The project attempts to analyse the performance of BANK OF INDIA on the basis of CAMELS
model and gives suggestions on the basis of the finding of the analysis. The overall strategy of
BANK OF INDIA is also studied to gain a better understanding of the working of the bank and to
identify its strength and weakness.




IV

CONTENT
CHAPTER 1: INTRODUCTION TO THE STUDY

1.1 INTRODUCTION TO THE BANKING REFORMS

1.2 INTRODUCTION TO BASEL II ACCORD

1.3 OBJECTIVE OF THE STUDY

1.4 SCOPE OF THE STUDY

1.5 METHODOLOGY OF STUDY

1.6 LIMITATION

CHAPTER 2: COMPANY PROFILE

2.1 BANK OF INDIA

CHAPTER 3: CAMELS FRAMEWORK

3.1 THE CAMELS FRAMEWORK

3.2 CAMELS RATING IN SUPERVISORY MONITORING OF BANKS

3.3 CAPITAL ADEQUACY

3.4 ASSET MANAGEMENT

3.5 MANAGEMENT SOUNDNESS

3.6 EARNINGS & PROFITABILITY

3.7 LIQUIDITY

3.8 SENSITIVITY TO MARKET RISK

CHAPTER 4: DATA ANALYSIS & INTERPRETATION

CHAPTER 5: FINDINGS, RECOMMENDATIONS & SUGGESTIONS
BIBLIOGRAPHY









V

LIST OF TABLES


Table 2.1 FINANCIAL INDICATORS


Table 2.2 PROFIT AMD LOSS ACCOUNT


Table 2.3 TYPES OF RESTRUCTURED LOANS


Table 2.4 PORTFOLIO BREAK-UP OF RESTRUCTURED LOANS


Table 2.5 SECTOR-WISE BREAK-UP OF RESTRUCTURED LOANS


Table 2.6 INVESTMENT PORTFOLIO


Table 4.1 CAPITAL ADEQUACY RATIO OF BANK OF INDIA ACCORDING
TO BASELL I

Table 4.2 CAPITAL ADEQUACY RATIO OF BANK OF INDIA ACCORDING
TO BASEL II

Table 4.3 GROSS NPA


Table 4.4 NET NPA


Table 4.5 ASSET TURNOVER RATIO


Table 4.6 RETURN ON ASSET


Table 4.7 CREDIT DEPOSIT RATIO
LIST OF GRAPHS

Graph No. 4.1 CAPITAL ADEQUACY RATIO


Graph No. 4.2 GROSS NPA


Graph No. 4.3 NET NPA


Graph No. 4.4 ASSET TURNOVER RATIO


Graph No. 4.5 RETURN ON ASSET


Graph No. 4.6CREDIT DEPOSIT RATION













VI






























CHAPTER ONE

INTRODUCTION TO BANKING REFORMS.

INTRODUCTION TO BASEL II ACCORDS.


























P a g e | 1

1.1 INTRODUCTION TO BANKING REFORMS

In 1991, the Indian economy went through a process of economic liberalization, which was
followed up by the initiation of fundamental reforms in the banking sector in 1992. The banking
reform package was based on the recommendations proposed by the Narsimhan Committee
Report (1991) that advocated a move to a more market oriented banking system, which would
operate in an environment of prudential regulation and transparent accounting. One of the primary
motives behind this drive was to introduce an element of market discipline into the regulatory
process that would reinforce the supervisory effort of the Reserve Bank of India (RBI). Market
discipline, especially in the financial liberalization phase, reinforces regulatory and supervisory
efforts and provides a strong incentive to banks to conduct their business in a prudent and efficient
manner and to maintain adequate capital as a cushion against risk exposures. Recognizing that
the success of economic reforms was contingent on the success of financial sector reform as well,
the government initiated a fundamental banking sector reform package in 1992.
Banking sector, the world over, is known for the adoption of multidimensional strategies
from time to time with varying degrees of success. Banks are very important for the smooth
functioning of financial markets as they serve as repositories of vital financial information. From a
central banks perspective, such high-quality disclosures help the early detection of problems
faced by banks in the market and reduce the severity of market disruptions. Consequently, the RBI
as part and parcel of the financial sector deregulation, attempted to enhance the transparency of
the annual reports of Indian banks by, among other things, introducing stricter income recognition
and asset classification rules, enhancing the capital adequacy norms, and by requiring a number
of additional disclosures sought by investors to make better cash flow and risk assessments.
During the pre economic reforms period, commercial banks & development financial
institutions were functioning distinctly, the former specializing in short & medium term financing,
while the latter on long term lending & project financing.
Commercial banks were accessing short term low cost funds through savings investments
like current accounts, savings bank accounts & short duration fixed deposits, besides collection
float. Development Financial Institutions (DFIs) on the other hand, were essentially depending on
budget allocations for long term lending at a concessionary rate of interest.
The scenario has changed radically during the post reforms period, with the resolve of the
government not to fund the DFIs through budget allocations. DFIs like IDBI, IFCI & ICICI had
posted dismal financial results. In fact, their very viability has become a question mark. Now they
have taken the route of reverse merger with IDBI bank & ICICI bank thus converting them into the
universal banking system.

1.2 BASEL II ACCORD

It is the bank capital framework sponsored by the world's central banks designed to
promote uniformity, make regulatory capital more risk sensitive, and promote enhanced risk
management among large, internationally active banking organizations. The International Capital
Accord, as it is called, will be fully effective by January 2008 for banks active in international
markets. Other banks can choose to "opt in," or they can continue to follow the minimum capital
guidelines in the original Basel Accord, finalized in 1988. The revised accord (Basel II) completely
overhauls the 1988 Basel Accord and is based on three mutually supporting concepts, or "pillars,"
of capital adequacy. The first of these pillars is an explicitly defined regulatory capital requirement,
a minimum capital-to-asset ratio equal to at least 8% of risk-weighted assets. Second, bank
supervisory agencies, such as the Comptroller of the Currency, have authority to adjust capital
levels for individual banks above the 8% minimum when necessary. The third supporting pillar
calls upon market discipline to supplement reviews by banking agencies.
Basel II is the second of the Basel Accords, which are recommendations on banking laws
and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II,
which was initially published in June 2004, is to create an international standard that banking
regulators can use when creating regulations about how much capital banks need to put aside to
guard against the types of financial and operational risks banks face. Advocates of Basel II believe
that such an international standard can help protect the international financial system from the
types of problems that might arise should a major bank or a series of banks collapse. In practice,
Basel II attempts to accomplish this by setting up rigorous risk and capital management
requirements designed to ensure that a bank holds capital reserves appropriate to the risk the
bank exposes itself to through its lending and investment practices. Generally speaking, these
rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the
bank needs to hold to safeguard its solvency and overall economic stability.
The final version aims at:

1. Ensuring that capital allocation is more risk sensitive;

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

3. Attempting to align economic and regulatory capital more closely to reduce the scope for
regulatory arbitrage.
While the final accord has largely addressed the regulatory arbitrage issue, there are still areas

where regulatory capital requirements will diverge from the economic. Basel II has largely left
unchanged the question of how to actually define bank capital, which diverges from accounting

equity in important respects. The Basel I definition, as modified up to the present, remains in
place.
The Accord in operation

Basel II uses a "three pillars" concept (1) minimum capital requirements (addressing
risk), (2) supervisory review and (3) market discipline to promote greater stability in
the financial system.

The Three Pillars of Basel II

The Basel I accord dealt with only parts of each of these pillars. For example: with respect
to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market
risk was an afterthought; operational risk was not dealt with at all.






























The First Pillar

The first pillar deals with maintenance of regulatory capital calculated for three major
components of risk that a bank faces: credit risk, operational risk and market risk. Other risks are
not considered fully quantifiable at this stage. The credit risk component can be calculated in three
different ways of varying degree of sophistication, namely standardized approach, Foundation IRB
and Advanced IRB. IRB stands for "Internal Rating-Based Approach". For operational risk, there
are three different approaches - basic indicator approach or BIA, standardized approach or TSA,
and advanced measurement approach or AMA. For market risk the preferred approach is VaR
(value at risk). As the Basel 2 recommendations are phased in by the banking industry it will move

from standardized requirements to more refined and specific requirements that have been
developed for each risk category by each individual bank. The upside for banks that do develop
their own bespoke risk measurement systems is that they will be rewarded with potentially lower
risk capital requirements. In future there will be closer links between the concepts of economic
profit and regulatory capital.


Credit Risk can be calculated by using one of three approaches

1. Standardized Approach

2. Foundation IRB (Internal Ratings Based) Approach

3. Advanced IRB Approach

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

The standard risk weight categories are used under Basel 1 and are 0% for short term
government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages and 100%
weighting on commercial loans. A new 150% rating comes in for borrowers with poor credit
ratings. The minimum capital requirement( the percentage of risk weighted assets to be held as
capital) remains at 8%. For those Banks that decide to adopt the standardized ratings approach
they will be forced to rely on the ratings generated by external agencies. Certain Banks are
developing the IRB approach as a result.
The Second Pillar

The second pillar deals with the regulatory response to the first pillar, giving regulators
much improved 'tools' over those available to them under Basel I. It also provides a framework for
dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration
risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord combines under the
title of residual risk. It gives banks a power to review their risk management system.
The Third Pillar

The third pillar greatly increases the disclosures that the bank must make. This is designed
to allow the market to have a better picture of the overall risk position of the bank and to allow the
counterparties of the bank to price and deal appropriately. The new Basel Accord has its
foundation on three mutually reinforcing pillars that allow banks and bank supervisors to evaluate
properly the various risks that banks face and realign regulatory capital more closely with
underlying risks. The first pillar is compatible with the credit risk, market risk and operational risk.
The regulatory capital will be focused on these three risks. The second pillar gives the bank
responsibility to exercise the best ways to manage the risk specific to that bank. Concurrently, it
also casts responsibility on the supervisors to review and validate banks risk measurement

models. The third pillar on market discipline is used to leverage the influence that other market
players can bring. This is aimed at improving the transparency in banks and improves reporting.
1.3 STATEMENT OF PROBLEM

The study is conducted to analyse BANK OF INDIA on the basis of CAMELS model.

1.4 OBJECTIVE OF STUDY

To evaluate the strength of BANK OF INDIA by using CAMELS model technique.

1.5 RESEARCH METHODOLOGY

The area of survey is BANK OF INDIA.

DATA SOURCE:

Primary Data: Primary data was collected from the company balance sheets and company
profit and loss statements and interaction with the employees of BANK OF INDIA.
Secondary Data: Secondary data on the subject was collected from Business journals,
Business dailies, company prospectus, company annual reports and RBI websites.
1.6 LIMITATIONS OF STUDY

Time and resources constraints.


The study was completely done on the basis of ratios calculated from the balance sheets.
It has not been possible to get a personal interview with the top management employees of
BANK OF INDIA.

It has not been possible to get sensitive real data on actual CAMELS analysis performed by
the RBI on BANK OF INDIA.




















CHAPTER TWO
COMPANY PROFILE




2.1 INTRODUCTION

BANK OF INDIA, previously called UTI Bank, was the first of the new private banks
to have begun operations in 1994, after the Government of India allowed new private banks
to be established. The Bank was promoted jointly by the Administrator of the Specified
Undertaking of the Unit Trust of India (UTI-I), Life Insurance Corporation of India (LIC), General
Insurance Corporation Ltd., National Insurance Company Ltd., The New India Assurance
Company, The Oriental Insurance Corporation and United Insurance Company Ltd. UTI-I holds a
special position in the Indian capital markets and has promoted many leading financial
institutions in the country. The bank changed its name to BANK OF INDIA in April 2007 to
avoid confusion with other unrelated entities with similar name. Shikha Sharma was named as
the bank's managing director and CEO on 20 April 2009 after the banks chairman, P.J. Nayak,
stepped down in August after a stint of nine-and-a-half years.
The Bank today is capitalized to the extent of Rs. 358.97 crores with the public holding
(other than promoters) at 57.59%.As on the year ended March 31, 2009 the Bank had a total
income of Rs. 8801 crores and a net profit of Rs 581.45 crores.
2.2 Branch Network

At the end of March 2009, the Bank has a very wide network of more than 835 branch
offices and Extension Counters. Total number of ATMs went up to 3595. The Bank has loans now
(as of June 2007) account for as much as 70 per cent of the banks total loan book of Rs 2,00,000
crore. In the case of BANK OF INDIA, retail loans have declined from 30 per cent of the total loan
book of Rs 25,800 crore in June 2006 to around 23 per cent of loan book of Rs.41,280 crore (as of
June
2007). Even over a longer period, while the overall asset growth for BANK OF INDIA has been
quite high and has matched that of the other banks, retail exposures grew at a slower pace. If
the sharp decline in the retail asset book in the past year in the case of BANK OF INDIA is part of a
deliberate business strategy, this could have significant implications (not necessarily negative) for
the overall future profitability of the business. Despite the relatively slower growth of the retail
book over a period of time and the outright decline seen in the past year, the banks fundamentals
are quite resilient. With the high level of mid-corporate and wholesale corporate lending the bank
has been doing, one would have expected the net interest margins to have been under greater
pressure. The bank, though, appears to have insulated such pressures. Interest margins, while they
have declined from the 3.15 per cent seen in 2003-04, are still hovering close to the 3 per cent
mark.
2.3 Risk and earnings perspective

Such strong emphasis and focus on lending also does not appear to have had any
deleterious impact on the overall asset quality. The banks non-performing loans are even now,



after five years of extremely rapid asset build-up, below 1 per cent of its total loans. From a
medium-term perspective, it appears that BANK OF INDIA could be charting out a niche for itself in
the private bank space. It appears to be following a business strategy quite different from the high-
volume and commodity-style approach of other private players like ICICI Bank and HDFC Bank.
That strategy also has its pluses in terms of the relatively higher margins in some segments of the
retail business and the in-built credit risk diversification (and mitigation) achieved through a widely
dispersed retail credit portfolio. But, as indicated above, BANK OF INDIA has been to able to
maintain the quality of its loan portfolio despite the concentrated nature of wholesale corporate
lending.
Table 2.1

Financial Indicators


Table 2.2

Profit & Loss Account


2.4 Net Interest Income (NII)

The Bank registered a 25% yoy growth in Q4 in its Net Interest Income of Rs. 1,032.60
crores as against Rs. 828.43 crores in Q4 of the preceding year. The industry-wide slowdown in
the growth of CASA deposits and the steep rise in the cost of funds in the third quarter resulted in
slower growth in NII. Against this backdrop, the Bank did well to register a growth of 43% in NII
which rose from Rs. 2,585.35 crores in 2007-08 to Rs. 3,686.21 crores in 2008-09. The advances
of the Bank grew to Rs. 81,556.77 crores as at end March09 from Rs. 59,661.14 crores as at end
March08, a growth of 37% yoy, while investments rose to Rs. 46,330.35 crores from Rs.
33,705.10 crores a year earlier, a growth of 37% yoy.

2.5 Improving Margins driven by reduction in cost of funds

The Net Interest Margin (NIM) for Q4 increased to 3.37%, up by 25 basis points from the
NIM of 3.12% in the preceding quarter, Q3, but lower than the NIM of 3.93% for Q4 of the
preceding year. The growth in NIM was on account of a reduction in the cost of funds once the
money markets stabilized towards the end of the previous quarter, accompanied by a rebound in
low cost deposits from the previous quarter. The NIM for FY 2008-09 was 3.33%, as against
3.47% in FY 2007-08. The daily average cost of funds was 6.64% in Q4, 27 basis points lower
than that in Q3 (6.91%), but higher than 5.82% in Q4 of the preceding year, FY 2007-08. The cost
of funds for FY 2008-09 was 6.50%, up from 6.02% for FY 2007- 08 and is reflective of the general
increase of interest rates in the economy in the earlier part of the last financial year. The share of
low cost deposits - Savings Bank and Current Accounts was 43% as at end March09 as
compared to 46% as at end March08 and 38% as at end December08. Savings Bank deposits
registered a growth of 29% yoy, from Rs. 19,982 crores as at end March08 to Rs. 25,822 crores
as at end March09. The daily average Saving Bank balances over the year grew by 42% yoy.
Current Account deposits grew by 24% yoy, from Rs. 20,045 crores as at end March08 to Rs.
24,822 crores as at end March09. The daily average Current Account balances over the year
grew by 24% yoy.
2.6 Fee Income

Fee Income registered a significant growth of 42% yoy, rising to Rs. 664.40 crores in Q4 as
compared to Rs. 468.21 crores in Q4 of the preceding year, FY 2007-08. For FY 2008-09, the Fee
Income grew to Rs. 2,447.35 crores as compared to Rs. 1,494.85 crores in the preceding year FY
2007-08, a growth of 64% yoy.

2.7 Trading Profits

The Bank generated Rs. 166.16 crores of Trading Profits in Q4, as compared to Rs. 44.64
crores in Q4 of the preceding year 2007-08, a growth of 272% yoy. The share of Trading Profits to

the Operating Revenue increased from 3.22% in Q4 of the preceding year FY 2007-08 to 8.85% in
Q4 FY 2008-09. Trading Profits during FY 2008-09 grew by 47% yoy to Rs. 373.86 crores, as
compared to the Trading Profits of Rs. 253.59 crores in FY 2007-08. Trading Profits during FY
2008-09 constituted 5.68% of the Operating Revenue, as against 5.79% in FY 2007-08.

2.8 Cash Management Services

Under Cash Management Services, the Bank handled a cash remittance throughput of Rs.

3,60,318 crores in Q4 as compared to a throughput of Rs. 2,61,012 crores in the preceding
quarter Q3 and significantly higher than the throughput of Rs 2,12,394 crores during Q4 of the
preceding year, a growth of 70% yoy. In FY 2008-09, the Bank registered a total remittance
throughput of Rs.10, 83,004 crores from 4,852 clients as compared to Rs. 7,46,286 crores from
3,193 clients in the preceding financial year, a growth of 45% yoy.

2.9 Placement / Syndication and Project Advisory

The Bank maintained its No.1 rank as Debt Arranger as assessed by Prime Database for
the 9 months ended December08. Further, in the Bloomberg league table for India Domestic
Bonds, the Bank has been ranked No.1 for the quarter ended March09. The Bank was the
arranger for syndication of debt aggregating Rs 27,206 crores during Q4 of FY 2008-09 as
compared to Rs. 24,533 crores during the previous quarter, Q3 and substantially higher than Rs.
17,210 crores in Q4 of the preceding year, a growth of 58% yoy. For FY 2008-09, the Bank has
syndicated debt amounting to Rs. 69,062 crores as compared to Rs. 57,327 crores in the
preceding year FY 2007-08, a growth of 20% yoy. The Bank continues to strengthen its focus on
project advisory services.
2.10 Growing Retail Business

The Bank's retail business continued to show strong growth. The number of Savings Bank
accounts grew from 61.64 lakhs as at end March08 to 76.18 lakhs as at end March09, thereby
creating a buoyancy in Savings Bank deposit balances.
Retail Asset Products: Retail advances grew from Rs. 13,592 crores as at end March'08 to Rs.

16,052 crores as at end March'09, a growth of 18% yoy. Retail Advances account for 20% of the
total Advances of the Bank as at end March'09. The Bank has set up 64 Retail Asset Centres
(RACs) for focussed retail lending.
Card products: The Bank's International Debit Card issuance has risen to 118 lakhs debit cards
as at end March09 as compared to 87 lakh cards as at end March08. The Bank had over 5,
33,000 Credit Cards in force as at end March09. The Bank has an installed base of over 1, 15,000

Electronic Data Capture (EDC) machines as at end March09.

Wealth Advisory Services and Third Party Products: The Bank offers Wealth Advisory
Services and Mohur - Gold Coins and bars - through its select branches, and Personal Investment
Products including Mutual Funds, Life Insurance products in association with Metlife India,
General Insurance products in association with Bajaj Allianz Insurance, and Online trading
accounts in association with Geojit Securities.
2.11 Prudent NPA Management

The Net NPAs and the Gross NPAs as proportions of Net and Gross Customer Assets were
at 0.35% and 0.96% respectively as at end March09 as compared to 0.39% and 0.90% as at end
December08, and 0.36% and 0.72% as at end March08. The Bank has in recent years written off
impaired assets aggressively. The provisions held together with accumulated write-offs, as a
proportion of Gross NPAs and accumulated write-offs, amount to 85.31% at end March09. If the
accumulated write-offs are excluded, then the provisions held as a proportion of Gross NPAs
amount to 63.56% as at end March09.
2.12 Disclosures on loans restructured during the year

During the year, the Bank restructured loans aggregating to Rs. 996.17 crores, taking the
cumulative total of loans restructured till 31st March 2009 to Rs. 1,625.87 crores (of which Rs.
22.06 crores comprise loans restructured a second time, in terms of the Reserve Bank of India
dispensation). This constitutes 1.74% of gross customer assets (GCA), as compared to 1.11% at
the end of December 2008 and 0.92% at the end of March 2008. The table below provides further
details and indicates that at end March 2009, 1.06% of gross customer assets had been
restructured with just a principal deferment facility, without any interest rate concessions. This
amounts to 61% of the total restructured assets. The diminution in fair value against the
restructured loans amounted to Rs. 65 crores and has been provided for.
Table 2.3

Types of Restructured Assets


40% of the assets restructured during the year were either under the CDR mechanism or under
multiple bank lending facilities. The portfolio-wise breakup of loans restructured during the year is
as follows.

Table 2.4

Portfolio-wise Break-up of Restructured Loans


The sector-wise breakup of loans restructured during the year is as follows:

Table 2.5

Sector wise Break-up of Restructured Loans





2.13 Investment Portfolio

The book value of the Banks investment portfolio as of 31st March 2009 was Rs. 46,330
crores, of which Rs. 27,723 crores was in government securities while Rs. 18,607 crores was in
other investments including corporate bonds, equities, preference shares, mutual funds etc. 87%
of the government securities have been classified in the Banks HTM category while 98% of the
corporate bond portfolio has been classified in the HFT and AFS categories. The distribution of the
investment portfolio in the three categories as well as the modified duration in each category was
as follows.

Table 2.5

Investment Portfolio


2.14 Network Expansion

The Bank has a wide presence through its 835 Branches & Extension Counters and 3,595

ATMs across 515 cities and towns. During the year the Bank added 164 Branches & Extension

Counters and 831 ATMs. During Q4 it added 86 Branches and 424 ATMs.

2.15 International Business

The Bank has five international offices branches at Singapore, Hong Kong and Dubai (at
the DIFC) and Representative Offices in Shanghai and Dubai - with focus on corporate lending,
trade finance, syndication, investment banking, risk management and liability businesses. The
total assets under overseas operations amounted to US$ 2.30 billion as at end March09 as
compared to US$ 1.66 billion as at end March08, a growth of 39% yoy.
2.16 Capital & Net Worth:

The Net Worth of the Bank was Rs. 9,757 crores as at end March09 as compared to Rs.

8,449 crores a year earlier, a growth of 15% yoy. The Capital Adequacy Ratio for the Bank was at

13.69%, as at end March09, as compared to 13.73% as at end March08. The Tier - I capital
amounted to 9.26% as at end March09 as against 10.17% as at end March08.
























CHAPTER THREE


CAMELS FRAMEWORK




3.1 The CAMELS FRAMEWORK

During an on-site bank exam, supervisors gather private information, such as details on
problem loans, with which to evaluate a bank's financial condition and to monitor its compliance
with laws and regulatory policies. A key product of such an exam is a supervisory rating of the
bank's overall condition, commonly referred to as a CAMELS rating. The acronym "CAMEL" refers
to the five components of a bank's condition that are assessed: Capital adequacy, Asset quality,
Management, Earnings, and Liquidity. A sixth component, a bank's Sensitivity to market risk , was
added in 1997; hence the acronym was changed to CAMELS. (Note that the bulk of the academic
literature is based on pre- 1997 data and is thus based on CAMEL ratings.) Ratings are assigned
for each component in addition to the overall rating of a bank's financial condition. The ratings are
assigned on a scale from 1 to 5. Banks with ratings of 1 or 2 are considered to present few, if any,
supervisory concerns, while banks with ratings of 3, 4, or 5 present moderate to extreme degrees
of supervisory concern. In 1994, the RBI established the Board of Financial Supervision (BFS),
which operates as a unit of the RBI. The entire supervisory mechanism was realigned to suit the
changing needs of a strong and stable financial system. The supervisory jurisdiction of the BFS
was slowly extended to the entire financial system barring the capital market institutions and the
insurance sector. Its mandate is to strengthen supervision of the financial system by integrating
oversight of the activities of financial services firms. The BFS has also established a sub-
committee to routinely examine auditing practices, quality, and coverage. In addition to the normal
on-site inspections, Reserve Bank of India also conducts off-site surveillance which particularly
focuses on the risk profile of the supervised entity. The Off-site Monitoring and Surveillance
System (OSMOS) was introduced in 1995 as an additional tool for supervision of commercial
banks. It was introduced with the aim to supplement the on-site inspections. Under off-site system,
12 returns (called DSB returns) are called from the financial institutions, wich focus on supervisory
concerns such as capital adequacy, asset quality, large credits and concentrations, connected
lending, earnings and risk exposures (viz. currency, liquidity and interest rate risks). In 1995, RBI
had set up a working group under the chairmanship of Shri S. Padmanabhan to review the
banking supervision system. The Committee certain recommendations and based on such
suggestions a rating system for domestic and foreign banks based on the international CAMELS
model combining financial management and systems and control elements was introduced for the
inspection cycle commencing from July 1998. It recommended that the banks should be rated on a
five point scale (A to E) based on the lines of international CAMELS rating model. All exam
materials are highly confidential, including the CAMELS. A bank's CAMELS rating is directly
known only by the bank's senior management and the appropriate supervisory staff. CAMELS



ratings are never released by supervisory agencies, even on a lagged basis. While exam results
are confidential, the public may infer such supervisory information on bank conditions based on
subsequent bank actions or specific disclosures. Overall, the private supervisory information
gathered during a bank exam is not disclosed to the public by supervisors, although studies show
that it does filter into the financial markets.
3.2 CAMELS ratings in the supervisory monitoring of banks

Several academic studies have examined whether and to what extent private supervisory
information is useful in the supervisory monitoring of banks. With respect to predicting bank failure,
Barker and Holdsworth (1993) find evidence that CAMEL ratings are useful, even after controlling
for a wide range of publicly available information about the condition and performance of banks.
STUDY BY COLE & GUNTHER
Cole and Gunther (1998) examine a similar question and find that although CAMEL ratings
contain useful information, it decays quickly. For the period between 1988 and 1992, they find that
a statistical model using publicly available financial data is a better indicator of bank failure than
CAMEL ratings that are more than two quarters old.
STUDY BY HIRTLE & LOPEZ

Hirtle and Lopez (1999) examine the usefulness of past CAMEL ratings in assessing banks'
current conditions. They find that, conditional on current public information, the private supervisory
information contained in past CAMEL ratings provides further insight into bank current conditions,
as summarized by current CAMEL ratings. The authors find that, over the period from 1989 to
1995, the private supervisory information gathered during the last on-site exam remains useful
with respect to the current condition of a bank for up to 6 to 12 quarters (or 1.5 to 3 years).
The overall conclusion drawn from academic studies is that private supervisory information, as
summarized by CAMELS ratings, is clearly useful in the supervisory monitoring of bank conditions.
CAMELS ratings in the public monitoring of banks
Another approach to examining the value of private supervisory information is to examine
its impact on the market prices of bank securities. Market prices are generally assumed to
incorporate all available public information. Thus, if private supervisory information were found to
affect market prices, it must also be of value to the public monitoring of banks. Such private
information could be especially useful to financial market participants, given the informational
asymmetries in the commercial banking industry. Since banks fund projects not readily financed in
public capital markets, outside monitors should find it difficult to completely assess banks' financial
conditions. In fact, Morgan (1998) finds that rating agencies disagree more about banks than
about other types of firms. As a result, supervisors with direct access to private bank information

could generate additional information useful to the financial markets, at least by certifying that a
bank's financial condition is accurately reported. The direct public beneficiaries of private
supervisory information, such as that contained in CAMELS ratings, would be depositors and
holders of banks' securities.
STUDY BY GILBERT & VAUGHN

Small depositors are protected from possible bank default by insurance, which probably
explains the finding by Gilbert and Vaughn (1998) that the public announcement of supervisory
enforcement actions, such as prohibitions on paying dividends, did not cause deposit runoffs or
dramatic increases in the rates paid on deposits at the affected banks. However, uninsured
depositors could be expected to respond more strongly to such information.
STUDY BY JORDAN

Jordan, et al., (1999) find that uninsured deposits at banks that are subjects of publicly-
announced enforcement actions, such as cease-and-desist orders, decline during the quarter after
the announcement. The holders of commercial bank debt, especially subordinated debt, should
have the most in common with supervisors, since both are more concerned with banks' default
probabilities (i.e., downside risk).
STUDY BY DE YOUNG

As of year-end 1998, bank holding companies (BHCs) had roughly $120 billion in
outstanding subordinated debt. De Young, et al., (1998) examine whether private supervisory
information would be useful in pricing the subordinated debt of large BHCs. The authors use an
econometric technique that estimates the private information component of the CAMEL ratings for
the BHCs' lead banks and regresses it onto subordinated bond prices. They conclude that this
aspect of CAMEL ratings adds significant explanatory power to the regression after controlling for
publicly available financial information and that it appears to be incorporated into bond prices
about six months after an exam. Furthermore, they find that supervisors are more likely to uncover
unfavorable private information, which is consistent with managers' incentives to publicize positive
information while de-emphasizing negative information. These results indicate that supervisors
can generate useful information about banks, even if those banks already are monitored by private
investors and rating agencies.
The market for bank equity, which is about eight times larger than that for bank
subordinated debt, was valued at more than $910 billion at year-end 1998. Thus, the academic
literature on the extent to which private supervisory information affects stock prices is more
extensive. For example, Jordan, et al., (1999) find that the stock market views the announcement
of formal enforcement actions as informative. That is, such announcements are associated with

large negative stock returns for the affected banks. This result holds especially for banks that had
not previously manifested serious problems.
STUDY OF BERGER AND DAVIES

Focusing specifically on CAMEL ratings, Berger and Davies (1998) use event study
methodology to examine the behavior of BHC stock prices in the eight-week period following an
exam of its lead bank. They conclude that CAMEL downgrades reveal unfavorable private
information about bank conditions to the stock market. This information may reach the public in
several ways, such as through bank financial statements made after a downgrade. These results
suggest that bank management may reveal favorable private information in advance, while
supervisors in effect force the release of unfavorable information. Berger, Davies, and Flannery
(1998) extend this analysis by examining whether the information about BHC conditions gathered
by supervisors is different from that used by the financial markets. They find that assessments by
supervisors and rating agencies are complementary but different from those by the stock market.
The authors attribute this difference to the fact that supervisors and rating agencies, as
representatives of debt holders, are more interested in default probabilities than the stock market,
which focuses on future revenues and profitability. This rationale also could explain the authors'
finding that supervisory assessments are much less accurate than market assessments of banks'
future performances.
In summary, on-site bank exams seem to generate additional useful information beyond what is
publicly available. However, according to Flannery (1998), the limited available evidence does not
support the view that supervisory assessments of bank conditions are uniformly better and more
timely than market assessments.
3.3 Capital Adequacy

Capital base of financial institutions facilitates depositors in forming their risk perception
about the institutions. Also, it is the key parameter for financial managers to maintain adequate
levels of capitalization. Moreover, besides absorbing unanticipated shocks, it signals that the
institution will continue to honor its obligations. The most widely used indicator of capital adequacy
is capital to risk-weighted assets ratio (CRWA). According to Bank Supervision Regulation
Committee (The Basel Committee) of Bank for International Settlements, a minimum 8 percent
CRWA is required. Capital adequacy ultimately determines how well financial institutions can cope
with shocks to their balance sheets. Thus, it is useful to track capital-adequacy ratios that take into
account the most important financial risksforeign exchange, credit, and interest rate risksby
assigning risk weightings to the institutions assets.

A Capital Adequacy Ratio is a measure of a bank's capital. It is expressed as a
percentage of a bank's risk weighted credit exposures. Also known as ""Capital to Risk Weighted
Assets Ratio (CRAR). Capital adequacy is measured by the ratio of capital to risk-weighted assets
(CRAR). A sound capital base strengthens confidence of depositors. This ratio is used to protect
depositors and promote the stability and efficiency of financial systems around the world.


3.4 Asset Quality:

Asset quality determines the robustness of financial institutions against loss of value in the
assets. The deteriorating value of assets, being prime source of banking problems, directly pour
into other areas, as losses are eventually written-off against capital, which ultimately jeopardizes
the earning capacity of the institution. With this backdrop, the asset quality is gauged in relation to
the level and severity of non-performing assets, adequacy of provisions, recoveries, distribution of
assets etc. Popular indicators include nonperforming loans to advances, loan default to total
advances, and recoveries to loan default ratios. The solvency of financial institutions typically is at
risk when their assets become impaired, so it is important to monitor indicators of the quality of
their assets in terms of overexposure to specific risks, trends in nonperforming loans, and the
health and profitability of bank borrowers especially the corporate sector. Share of bank assets
in the aggregate financial sector assets: In most emerging markets, banking sector assets
comprise well over 80 per cent of total financial sector assets, whereas these figures are much
lower in the developed economies. Furthermore, deposits as a share of total bank liabilities have
declined since 1990 in many developed countries, while in developing countries public deposits
continue to be dominant in banks. In India, the share of banking assets in total financial sector
assets is around 75 per cent, as of end-March 2008. There is, no doubt, merit in recognising the
importance of diversification in the institutional and instrument-specific aspects of financial
intermediation in the interests of wider choice, competition and stability. However, the dominant
role of banks in financial intermediation in emerging economies and particularly in India will
continue in the medium-term; and the banks will continue to be special for a long time. In this
regard, it is useful to emphasise the dominance of banks in the developing countries in promoting
non-bank financial intermediaries and services including in development of debt-markets. Even
where role of banks is apparently diminishing in emerging markets, substantively, they continue to
play a leading role in non-banking financing activities, including the development of financial
markets. One of the indicators for asset quality is the ratio of non-performing loans to total loans
(GNPA). The gross non-performing loans to gross advances ratio is more indicative of the quality
of credit decisions made by bankers. Higher GNPA is indicative of poor credit decision-making.

NPA: Non-Performing Assets

Advances are classified into performing and non-performing advances (NPAs) as per RBI
guidelines. NPAs are further classified into sub-standard, doubtful and loss assets based on the
criteria stipulated by RBI. An asset, including a leased asset, becomes nonperforming when it
ceases to generate income for the Bank.


An NPA is a loan or an advance where:

1. Interest and/or installment of principal remains overdue for a period of more than 90 days in
respect of a term loan;
2. The account remains "out-of-order'' in respect of an Overdraft or Cash Credit (OD/CC);

3. The bill remains overdue for a period of more than 90 days in case of bills purchased and
discounted;
4. A loan granted for short duration crops will be treated as an NPA if the installments of principal
or interest thereon remain overdue for two crop seasons; and
5. A loan granted for long duration crops will be treated as an NPA if the installments of principal
or interest thereon remain overdue for one crop season.
The Bank classifies an account as an NPA only if the interest imposed during any quarter is not
fully repaid within 90 days from the end of the relevant quarter. This is a key to the stability of the
banking sector. There should be no hesitation in stating that Indian banks have done a remarkable
job in containment of non-performing loans (NPL) considering the overhang issues and overall
difficult environment. For 2009, the unchanged net NPL ratio in comparison to the previous year
for the Indian scheduled commercial banks at 2.9 per cent is ample testimony to the impressive
efforts being made by our banking system. In fact, recovery management is also linked to the
banks interest margins. The cost and recovery management supported by enabling legal
framework hold the key to future health and competitiveness of the Indian banks. No doubt,
improving recovery-management in India is an area requiring expeditious and effective actions in
legal, institutional and judicial processes.
3.5 Management Soundness

Management of financial institution is generally evaluated in terms of capital adequacy,
asset quality, earnings and profitability, liquidity and risk sensitivity ratings. In addition,
performance evaluation includes compliance with set norms, ability to plan and react to changing
circumstances, technical competence, leadership and administrative ability. In effect, management
rating is just an amalgam of performance in the above-mentioned areas. Sound management is
one of the most important factors behind financial institutions performance. Indicators of quality of

management, however, are primarily applicable to individual institutions, and cannot be easily
aggregated across the sector. Furthermore, given the qualitative nature of management, it is
difficult to judge its soundness just by looking at financial accounts of the banks. Nevertheless,
total expenditure to total income and operating expense to total expense helps in gauging the
management quality of the banking institutions. Sound management is key to bank performance
but is difficult to measure. It is primarily a qualitative factor applicable to individual institutions.
Several indicators, however, can jointly serveas, for instance, efficiency measures doas an
indicator of management soundness. The ratio of non-interest expenditures to total assets
(MGNT) can be one of the measures to assess the working of the management. . This variable,
which includes a variety of expenses, such as payroll, workers compensation and training
investment, reflects the management policy stance. Efficiency Ratios demonstrate how efficiently
the company uses its assets and how efficiently the company manages its operations.
Asset Turnover Ratio = Revenue/ Total Assets
Indicates the relationship between assets and revenue.
Things to remember
Companies with low profit margins tend to have high asset turnover, those with high profit
margins have low asset turnover - it indicates pricing strategy.
This ratio is more useful for growth companies to check if in fact they are growing revenue
in proportion to sales.
Asset Turnover Analysis:

This ratio is useful to determine the amount of sales that are generated from assets. As
noted above, companies with low profit margins tend to have high asset turnover, those with high
profit margins have low asset turnover.
Earnings & Profitability

Earnings and profitability, the prime source of increase in capital base, is examined with
regards to interest rate policies and adequacy of provisioning. In addition, it also helps to support
present and future operations of the institutions. The single best indicator used to gauge earning is
the Return on Assets (ROA), which is net income after taxes to total asset ratio. Strong earnings
and profitability profile of banks reflects the ability to support present and future operations. More
specifically, this determines the capacity to absorb losses, finance its expansion, pay dividends to
its shareholders, and build up an adequate level of capital. Being front line of defense against
erosion of capital base from losses, the need for high earnings and profitability can hardly be
overemphasized. Although different indicators are used to serve the purpose, the best and most
widely used indicator is Return on Assets (ROA). However, for in-depth analysis, another indicator

Net Interest Margins (NIM) is also used. Chronically unprofitable financial institutions risk
insolvency. Compared with most other indicators, trends in profitability can be more difficult to
interpretfor instance, unusually high profitability can reflect excessive risk taking.
ROA-Return on Assets

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as
to how efficient management is at using its assets to generate earnings. Calculated by dividing a
company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this
is referred to as "return on investment".
The formula for return on assets is:

ROA tells what earnings were generated from invested capital (assets). ROA for public companies
can vary substantially and will be highly dependent on the industry. This is why when using ROA
as a comparative measure, it is best to compare it against a company's previous ROA numbers or
the ROA of a similar company. The assets of the company are comprised of both debt and equity.
Both of these types of financing are used to fund the operations of the company. The ROA figure
gives investors an idea of how effectively the company is converting the money it has to invest into
net income. The higher the ROA number, the better, because the company is earning more money
on less investment. For example, if one company has a net income of $1 million and total assets
of $5 million, its ROA is 20%; however, if another company earns the same amount but has total
assets of $10 million, it has an ROA of 10%. Based on this example, the first company is better at
converting its investment into profit. When you really think about it, management's most important
job is to make wise choices in allocating its resources. Anybody can make a profit by throwing a
ton of money at a problem, but very few managers excel at making large profits with little
investment
3.6 Liquidity

An adequate liquidity position refers to a situation, where institution can obtain sufficient funds,
either by increasing liabilities or by converting its assets quickly at a reasonable cost. It is,
therefore, generally assessed in terms of overall assets and liability management, as mismatching
gives rise to liquidity risk. Efficient fund management refers to a situation where a spread between
rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is maintained. The most commonly
used tool to evaluate interest rate exposure is the Gap between RSA and RSL, while liquidity is
gauged by liquid to total asset ratio. Initially solvent financial institutions may be driven toward
closure by poor management of short-term liquidity. Indicators should cover funding sources and
capture large maturity mismatches. The term liquidity is used in various ways, all relating to
availability of, access to, or convertibility into cash.

An institution is said to have liquidity if it can easily meet its needs for cash either because

it has cash on hand or can otherwise raise or borrow cash.

A market is said to be liquid if the instruments it trades can easily be bought or sold in
quantity with little impact on market prices.
An asset is said to be liquid if the market for that asset is liquid.

The common theme in all three contexts is cash. A corporation is liquid if it has ready
access to cash. A market is liquid if participants can easily convert positions into cash or
conversely. An asset is liquid if it can easily be converted to cash.
The liquidity of an institution depends on:

The institution's short-term need for cash;
Cash on hand;
Available lines of credit;

The liquidity of the institution's assets;

The institution's reputation in the marketplacehow willing will counterparty is to transact
trades with or lend to the institution?
The liquidity of a market is often measured as the size of its bid-ask spread, but this is an
imperfect metric at best. More generally, Kyle (1985) identifies three components of market
liquidity:

Tightness is the bid-ask spread;


Depth is the volume of transactions necessary to move prices;


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

Examples of assets that tend to be liquid include foreign exchange; stocks traded in the
Stock Exchange or recently issued Treasury bonds. Assets that are often illiquid include
limited partnerships, thinly traded bonds or real estate.
Cash maintained by the banks and balances with central bank, to total asset ratio (LQD) is an
indicator of bank's liquidity. In general, banks with a larger volume of liquid assets are perceived
safe, since these assets would allow banks to meet unexpected withdrawals. Credit deposit ratio
is a tool used to study the liquidity position of the bank. It is calculated by dividing the cash held in
different forms by total deposit. A high ratio shows that there is more amounts of liquid cash with
the bank to met its clients cash withdrawals.


3.7 Sensitivity to Market Risk

It refers to the risk that changes in market conditions could adversely impact earnings
and/or capital. Market Risk encompasses exposures associated with changes in interest rates,

foreign exchange rates, commodity prices, equity prices, etc. While all of these items are
important, the primary risk in most banks is interest rate risk (IRR), which will be the focus of this
module. The diversified nature of bank operations makes them vulnerable to various kinds of
financial risks. Sensitivity analysis reflects institutions exposure to interest rate risk, foreign
exchange volatility and equity price risks (these risks are summed in market risk). Risk sensitivity
is mostly evaluated in terms of managements ability to monitor and control market risk. Banks are
increasingly involved in diversified operations, all of which are subject to market risk, particularly in
the setting of interest rates and the carrying out of foreign exchange transactions. In countries that
allow banks to make trades in stock markets or commodity exchanges, there is also a need to
monitor indicators of equity and commodity price risk.
Interest Rate Risk Basics

In the most simplistic terms, interest rate risk is a balancing act. Banks are trying to balance
the quantity of repricing assets with the quantity of repricing liabilities. For example, when a bank
has more liabilities repricing in a rising rate environment than assets repricing, the net interest
margin (NIM) shrinks. Conversely, if your bank is asset sensitive in a rising interest rate
environment, your NIM will improve because you have more assets repricing at higher rates.
An extreme example of a repricing imbalance would be funding 30-year fixed-rate mortgages with

6-month CDs. You can see that in a rising rate environment the impact on the NIM could be
devastating as the liabilities reprice at higher rates but the assets do not. Because of this
exposure, banks are required to monitor and control IRR and to maintain a reasonably well-
balanced position.
Liquidity risk is financial risk due to uncertain liquidity. An institution might lose liquidity if its
credit rating falls, it experiences sudden unexpected cash outflows, or some other event causes
counterparties to avoid trading with or lending to the institution. A firm is also exposed to liquidity
risk if markets on which it depends are subject to loss of liquidity. Liquidity risk tends to compound
other risks. If a trading organization has a position in an illiquid asset, its limited ability to liquidate
that position at short notice will compound its market risk. Suppose a firm has offsetting cash flows
with two different counterparties on a given day. If the counterparty that owes it a payment
defaults, the firm will have to raise cash from other sources to make its payment. Should it be
unable to do so, it too we default. Here, liquidity risk is compounding credit risk.
Accordingly, liquidity risk has to be managed in addition to market, credit and other risks.
Because of its tendency to compound other risks, it is difficult or impossible to isolate liquidity risk.
In all but the most simple of circumstances, comprehensive metrics of liquidity risk don't exist.
Certain techniques of asset-liability management can be applied to assessing liquidity risk. If an

organization's cash flows are largely contingent, liquidity risk may be assessed using some form of
scenario analysis. Construct multiple scenarios for market movements and defaults over a given
period of time. Assess day-today cash flows under each scenario. Because balance sheets
differed so significantly from one organization to the next, there is little standardization in how such
analyses are implemented.
Regulators are primarily concerned about systemic implications of liquidity risk. Business
activities entail a variety of risks. For convenience, we distinguish between different categories of
risk: market risk, credit risk, liquidity risk, etc. Although such categorization is convenient, it is only
informal. Usage and definitions vary. Boundaries between categories are blurred. A loss due to
widening credit spreads may reasonably be called a market loss or a credit loss, so market risk
and credit risk overlap. Liquidity risk compounds other risks, such as market risk and credit risk. It
cannot be divorced from the risks it compounds.
An important but somewhat ambiguous distinguish is that between market risk and
business risk. Market risk is exposure to the uncertain market value of a portfolio. Business risk is
exposure to uncertainty in economic value that cannot be marked-tomarket. The distinction
between market risk and business risk parallels the distinction between market-value accounting
and book-value accounting. The distinction between market risk and business risk is ambiguous
because there is a vast "gray zone" between the two. There are many instruments for which
markets exist, but the markets are illiquid. Mark-to-market values are not usually available, but
mark-to model values provide a more-or-less accurate reflection of fair value. Do these
instruments pose business risk or market risk? The decision is important because firms employ
fundamentally different techniques for managing the two risks. Business risk is managed with a
long-term focus. Techniques include the careful development of business plans and appropriate
management oversight. book-value accounting is generally used, so the issue of day-to-day
performance is not material. The focus is on achieving a good return on investment over an
extended horizon. Market risk is managed with a short-term focus. Long-term losses are avoided
by avoiding losses from one day to the next. On a tactical level, traders and portfolio managers
employ a variety of risk metrics duration and convexity, the Greeks, beta, etc.to assess their
exposures. These allow them to identify and reduce any exposures they might consider excessive.
On a more strategic level, organizations manage market risk by applying risk limits to traders' or
portfolio managers' activities. Increasingly, value-at-risk is being used to define and monitor these
limits. Some organizations also apply stress testing to their portfolios.

































CHAPTER FOUR

DATA ANALYSIS
AND
INTERPRETATION
















Now each parameter will be taken separately & discussed in detail.



4.1 CAPITAL ADEQUACY:

Capital adequacy ratio is defined as






where Risk can either be weighted assets ( ) or the respective national regulator's minimum total
capital requirement. If using risk weighted assets,





The percent threshold (8% in this case, a common requirement for regulators conforming to
the Basel Accords) is set by the national banking regulator.
Two types of capital are measured: tier one capital, which can absorb losses without a bank being
required to cease trading, and tier two capital, which can absorb losses in the event of a winding-
up and so provides a lesser degree of protection to depositors.
Table 4.1

CAPITAL ADEQUACY RATIO OF BANK OF INDIA ACCORDING TO
BASEL I

Particulars 2004 2005 2006 2007 2008 2009
BANK OF
INDIA
11.21% 12.66% 11.08% 11.57% 13.73% 13.91%

Table 4.2

CAPITAL ADEQUACY RATIO OF BANK OF INDIA ACCORDING TO
BASEL II

Particulars 2008 2009

BANK OF INDIA 13.99% 13.69%


































Graph 4.1

Capital Adequacy of BANK OF
INDIA



16.00%

14.00%

12.00%

10.00%

8.00%
Basel I
Basel II
6.00%

4.00%

2.00%

0.00%
2004 2005 2006 2007 2008 009




The increase in capital adequacy over the past 4 years has shown the tightening of capital
adequacy norms by the RBI. A 13.69% capital adequacy ratio shows that Axis bank is in a
comfortable position to absorb the losses and inspires confidence in investors.


4.2 ASSET QUALITY

Tables showing the Gross NPA and Net NPA of BANK OF INDIA

Gross NPA

Table 4.3

Gross NPA
Particulars 2004 2005 2006 2007 2008 2009
BANK OF
INDIA
.83% 1.14% 1.69% 1.99% 2.93% 1.09%































There is a reduction in the NPAs because of the banks sound management practices and
prudent principles of lending. The Bank has created total provisions (excluding provisions for tax)
of Rs. 939.68 crores against Rs. 579.64 crores in the previous year. The Bank has provided Rs.
732.21 crores towards non-performing assets against Rs. 322.69 crores in the previous year,
while the provision for standard assets was Rs. 105.50 crores against Rs. 153.46 crores in the
previous year. The Bank has also provided Rs. 65.46 crores towards restructuring of assets. The
Bank continued to maintain the generally high quality of its assets and net NPAs, as the
percentage of net customer assets declined from the previous year level of 0.36% to 0.35% in
2008-09. The business expansion plans of the Bank need to be backed by adequate capital.
During the year under review, the Bank has raised capital of Rs. 1,700 crores by way of
subordinated bonds (unsecured redeemable non-convertible debentures) qualifying as Tier II
capital. The raising of this non-equit capital has helped the Bank continue its growth strategy and
has strengthened its capital adequacy ratio. The Bank is well capitalized with the capital adequacy
ratio as at the end of the year at 13.69%, substantially above the benchmark requirement of 9%
stipulated by Reserve Bank of India. Of this Tier I Capital amounted to 9.26%, as against 10.17%
last year, while Tier II Capital was at 4.43%.
4.3 MANAGEMENT SOUNDNESS
Asset Turnover Ratio
Table 4.5

Asset Turnover Ratio
Particulars 2004 2005 2006 2007 2008 2009
BANK OF
INDIA
3.565 3.01% 4.00% 4.97% 6.32% 7.78%

Graph 4.4


Asset Turnover Ratio

9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
Asset Turnover Ratio
3.00%
2.00%
1.00%
0.00%
2004 2005 2006 2007 2008 2009


During 2008-09, the yield on earning assets increased by 37 basis points to 9.73% from

9.36% which, however, was offset by an increase in cost of funds by 48 basis points. During

2008-09, the net interest margin (NIM) declined by 14 basis points to 3.33% from 3.47% in the
previous year. On a quarter-on-quarter basis, the NIM was 3.35%, 3.51%, 3.12% and 3.37% in
Q1, Q2, Q3 and Q4 respectively.

4.4 EARNINGS & PROFITABILITY
ROA Return on Asset
Table 4.6

Return on Asset
Particulars 2004 2005 2006 2007 2008 2009
BANK OF
INDIA
1.27% 1.21% 1.18% 1.10% 1.24% 1.44%


Graph 4.5


ROA

1.60%
1.40%
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
2004 2005 2006
ROA
2007 2008 2009


Net Interest Income is up 42.58% to Rs. 3686.21 crores in the year 2008-09. So the
increase in returns resulted in an increase in ROA. Fee & Other Income went up 63.63% to Rs.
2523.02 crores. The cost of funds for BANK OF INDIA is cheaper as CASA accounts for almost
63% of total deposits.
4.5 LIQUIDITY

Credit Deposit Ratio
Particulars 2004 2005 2006 2007 2008 2009
BANK OF
INDIA
43.63% 47.40% 52.79% 59.85% 65.94% 68.89%


Graph 4.6



80.00%

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%



















2004 2005
Credit Deposit Ratio
















2006 2007 2008



















2009

Credit Deposit Ratio



BANK OF INDIA has been improving its liquidity in the past 5 years. It allows the bank to
adopt itself effectively to internal and external changes. Sufficient liquidity will help it to sustain its
growth
momentum and absorb any deterioration in asset quality that may result
challenging macro environment.

4.6 SWOT ANALYSIS OF BANK OF INDIA
from increasingly

1. STRENGTH


Extremely Competitive And Profitable Banking Franchise
Banking Services Include Corporate Credit, Retail Banking, Business

Markets, Treasury And International Banking.
Banking, Capital


Sound Technological Platform With Centralized Database And Operations


Retail Banking Savings Bank Deposits Grew To Rs. 25,822 Cr. On 31st March 2009 from

Rs. 19,982 Cr. As On 31st Mar

h 2008 Showing a Year on Year Growth Of 29%.

Corporate Banking: Current Account deposits grew by 24% yoy, from Rs. 20,045 crores as

at end March08 to Rs. 24,822 crores as at end March09.

Support of various Promoters


Strong technology

Total Deposits Rs 1,17,374 crore


Net Advances Rs 81,557 crore


Net NPA 0.35%


Capital Adequacy Ratio 13.69%


2. WEAKNESS

Not having Image UTI (fraud)

Higher cost

Customer service


Market Capitalization Very Low




3. OPPORTUNITY


Large retail and corporate market

Wide scope in rural India

Other Activity (Non Banking Activity)

People are become more service oriented




4. THREAT

Other better Saving, investment option available (like Insurance, Mutual fund, Real-estate,
Gold)

Government Rules And Regulation


Very high competition with Private sector (ICICI Bank, HDFC bank) or public sector

(BOB, PNB) Bank.


Capital Market slow-down

Rising Rates

Future Market Trends


























CHAPTER FIVE: SUMMARIES

FINDING
RECOMMENDATIONS
CONCLUSION




5.1 FINDINGS


CAPITAL ADEQUACY:

The bank is maintaining a capital adequacy ratio, which is above the minimum requirement and
also above industry average. BASEL II norm prescribes a capital adequacy ratio of 9%, while
Axis Bank is maintaining a capital adequacy ratio of almost above 12% for last three
consecutive years. In 2007 the bank had a CAR of 11.57%. in 2008 it was 13.73% and in 2009
it was 13.69%(according to BASEL II).



ASSETS:

For last three years the bank has shown a remarkable decrease in the NPA level, which
indicate the bank has less bad assets and constantly the level of these bad assets are also
decreasing. In 2007 the net NPA was 1.39%, while it came down to 1.20% in 2008 and in 2009
NPA level was down to .40%.




MANAGEMENT:

Professional management and prudent practices followed by the bank helped in raising the
asset turnover ratio from 3.565% in 2004 to 7.78% in 2009. It can be observed that there is a
100% increase in asset turnover ratio within last five years and it talks about the efficiency of
the management.



EARNINGS:

The earnings of BANK OF INDIA have been average and for last six years the ROA of the
bank stands at about 1.2%. There is an increase in the ROA from 1.24% in 2008 to 1.44% in
2009, but this change is not a remarkable one.



LIQUIDITY:

From the analysis of credit - deposit ratio it is quite clear that BANK OF INDIA is comparatively
more liquid than previous years. The liquidity position improved from 43.63% in 2004 to
68.89% in
2009. The credit deposit ratio of last year was 65.94% and it stood at 68.89% in this year.



5.2 SUGGESTION

The bank should adapt itself quickly to the changing norms.

The system is getting internationally standardized with the coming of BASELL II accords
so the Indian banks and BANK OF INDIA should strengthen internal processes so as to
cope with the standards.
Though the NPA level of BANK OF INDIA has gone down significantly, but still the bank
should look after its risk management techniques and should try to reduce it further.
Since the bank increased the amount of investment in the market, it should find more

avenues to hedge risks as the market is very sensitive to risk of any type.

The bank Should have a good appraisal system and proper follow up to ensure the bank
is above risk.
5.3 CONCLUSION

BANK OF INDIA is the third largest private sector bank. It has shown tremendous growth
over the past 5 years. It has been quite remarkable that it has also managed to contain NPAs
and adhere to the strict guidelines of RBI over such a long period. BANK OF INDIA has been
able to withstand the acid test of CAMELS model.
However it should not rest on its laurels. It is highly dependent on corporate lending and
should therefore attempt to diversify to take advantage of the growing affluence of the
Indian middle class by giving more focus to retail lending. It should also gear up for BASEL
II norms which are imminent in the near future. It should also strive for disruptive innovative
banking practices to beat other stronger competitors, both in the domestic as well as
international arena.
All in all, BANK OF INDIA is a bank with sound fundamentals which is growing at a really fast
pace but there are challenges which it must prepare itself for to sustain and succeed.
As a great man once said

I have miles to go before I sleep,

I have miles to go before I sleep

BIBLIOGRAPHY

BOOKS REFERRED

Kothari, C.R.,(2010),Research Methodology: Methods and Techniques, Wishawa

Publication, Delhi.

Srivastava, R.M., Nigam, Divya.,(2010),Management of Indian Financial Institutions,
Himalaya Publication House.
Gupta, K. Shashi, Sharma, R.K., Gupta Neeti., (2010), Financial Management, Kalyani

Publication.

Pannerselvam., (2009), Research Methodology, PHI.

Reed, Edward, W., (2009), Commercial Bank Management, Harper and Row New York.

Grosse, H.D., (2009), Management Policies of Commercial Banks, PHI.

Jadhav, Narendra., (2009), Challenges to Indian Banking: Competition, Globalisation and

Financial Markets, Mc Millan India.

Crosse, Howard.,(2009), Management Policies for Commercial Banks, PHI.

Reserve Bank of India, Various Reports, RBI Publication, Mumbai.



JOURNALS REFERRED

RBI Publication, (December 2009), Supervision of the Indian Financial System, RBI.

Economist Intelligent Unit, (June 2009), Bank Compliance: Controlling Risk and Improving

Effectiveness, The Economist.

Gopinath, Shyamala., (28 February 2010), Pursuit of Capital markets: The Missing

Perspectives, FEDAI Annual Conference, Kenya.

Forbes Team., (23 September 2009), BANK OF INDIA, Forbes India.

Sreedhar, R., (December 2009), Challenges Before the Big Boys of Banking Industry, The

Analyst.

Kamath, K.V., (February 2010), Current status and Challenges of Indian banking

Industry, Yojana.

Sreenathan, N., (11 January 2010), BANK OF INDIA - Growing Stronger and Better,
Outlook.

Business

Nirmal Bang Team., (February 2010), Indian Banking fortnightly report.

NEWSPAPERS REFERED

Sehgal, Karan., (28 September 2008), BANK OF INDIAs growth rate faster than Other
Banks, The Economics Times.

ET Bureau., (17 October 2009), BANK OF INDIA Recasts Business into Four Strategic
Units, The Economics Times.
Bureau., (14 December 2009), Fitch Upgrades Axis Bank long-term Rating, Business

Line.

Kannan, Shobha., (18 March 2009), Axis Bank to Curtail Personal Loan Portfolio,
Business.
Bureau., (13 July 2009), Rise in Non-interest Income lifts BANK OF INDIA Q1 net 70%,
Business

Line.

Bureau., BANK OF INDIA to Stay Focused on Corporate Loans, Business World.

Mohan, Raghu., (19 December 2009), Fastest Growing Large: Racing to the Lead,
Business World.
Naveen, K., (20 September 2009), BANK OF INDIA Shines, Business Standard.

Sathe, N., (21 December 2009), War Among Banks, Mint.

Lewis, T., (17 November 2009), BANK OF INDIA to Diversify, The Financial Express.

WEBSITES REFERRED

http://www. stock- picks- focus.com/axis-bank.html

http://www. basel2implementation.com/pillars.htm

http://www. BANK OF INDIA.com

http://www. allbankingsolution.com/camels.htm

http://www. shkfd.com.hk/glossary/eng/RA.htm

http://www. wikiinvest.com/CAPITAL ADEQUACY RATION

http://www. answers.com/topic/besel ii

http://www. rbi.org

http://www. moneycontrol.com

http://www. moneyvidya.com

http://www. investorpedia.com

http://www. rediffmoney.com

http://www. yahoo.com/finance

http://www. google.com/finance

http://www. indiainfoline.com

http://www. arthamoney.com