CHAPTER I – INTRODUCTION AND DESIGN OF THE

STUDY

1.1ABOUT THE STUDY

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 and can potentially alleviate the problems created by information asymmetries.
In any organization, the two important financial statements are the Balance sheet & Profit and
loss account of the business. Balance sheet is a statement of the financial position of an
enterprise at a particular point of time. Profit and loss account shows the net profit or net loss
of a company for a specified period of time. When these statements of the last few year of
any organization are studied and analyzed, significant conclusions may be arrived regarding
the changes in the financial position, the important policies followed and trends in profit and
loss etc. Analysis and interpretation of the financial statement has now become an important
technique of credit appraisal. The investors, financial experts, management executives and
the bankers all analyze these statements.
Though the basic technique of appraisal remains the same in all the cases but
the approach and the emphasis in analysis vary. A banker interprets the financial statement so
as to evaluate the financial soundness, stability, the liquidity position and the profitability or
the earning capacity of borrowing concern. Analysis of financial statement is necessary
because it help in depicting the financial position on the basis of past and current records.
Analysis of financial statement helps in making the future decision and strategies.
Therefore, it is very necessary for every organization whether it is a financial
company or manufacturing company to make financial statement and to analysis it. After duly
recognizing the importance of financial statement analysis, this topic has been chosen as the
focus of project. It analyses the financial statement of Indian Bank from 2008 to 2012.
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FINANCIAL STATEMENTS ANALYSIS:
After preparation of the financial statements(Balance Sheet and
Trading and Profit and Loss Account), one may be interested in analyzing the financial
statements with the help of different tools such as comparative statement, common size
statement, ratio analysis, trend analysis, etc. In this process a meaningful relationship is
established between two or more accounting figures for comparison.
Objectives:
 To explain the meaning, need and purpose of financial statement analysis;
 To identify the parties interested in analysis of financial statements;
 To explain the various techniques and tools of analysis of financial statements.

Financial Statement Analysis (Meaning and Purpose):

We know business is mainly concerned with the financial activities. In
order to ascertain the financial status of the business every enterprise prepares certain
statements, known as financial statements. Financial statements are mainly prepared for
decision making purposes. But the information as is provided in the financial statements is
not adequately helpful in drawing a meaningful conclusion. Thus, an effective analysis and
interpretation of financial statements is required.
Analysis means establishing a meaningful relationship between various
items of the two financial statements with each other in such a way that a conclusion is
drawn. By financial statements we mean two statements:
1. Profit and loss Account or Income Statement
2. Balance Sheet or Position Statement
These are prepared at the end of a given period of time. They are the
indicators of profitability and financial soundness of the business concern. The term financial
analysis is also known as analysis and interpretation of financial statements. It determines
financial strength and weakness of the firm. Analysis of financial statements is an attempt to
assess the efficiency and performance of the enterprise. Thus, the analysis and interpretation
of financial statements is very essential to measure the efficiency, profitability, financial
soundness and future prospects of the business units. Financial analysis serves the following
purposes:

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  Measuring the profitability
 Indicating the trend of achievement
 Assessing the growth potential of the business
 Comparative position in relation to other firms
 Assess overall financial strength
 Assess solvency of the firm

Techniques and Tools of Financial Statement Analysis:

Financial statements give complete information about assets, liabilities,
equity, reserves, expenses and profit and loss of an enterprise. They are not readily
understandable to interested parties like creditors, shareholders, investors etc. Thus, various
techniques are employed for analyzing and interpreting the financial statements. Techniques
of analysis of financial statements are mainly classified into three categories:
(I) Cross-sectional analysis
It is also known as inter firm comparison. This analysis helps in analyzing
financial characteristics of another similar enterprise in that accounting period.
(II) Time series analysis
It is also called as intra-firm comparison. According to this method, the
relationship between different items of financial statement is established, comparisons
are made and results obtained. The basis of comparison may be:
 Comparison of the financial statements of different years of the same business
unit.
 Comparison of financial statement of a particular year of different business
units.
(III) Cross-sectional cum time series analysis
This analysis is intended to compare the financial characteristics of two or
more enterprises for a defined accounting period. It is possible to extend such a
comparison over the year. This approach is most effective in analyzing of financial
statements.
The analysis and interpretation of financial statements is used to determine the financial
position. A number of tools or methods or devices are used to study the relationship between

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financial statements. However, the following are the important tools which are commonly
used for analyzing and interpreting financial statements: Ratio analysis, Comparative
financial statements, Common size statements, Trend analysis.

1.2ABOUT THE INDUSTRY

Evolution of the Indian Banking Industry:
The Indian banking industry has its foundations in the 18th century, and has had a
varied evolutionary experience since then. The initial banks in India were primarily traders’
banks engaged only in financing activities. Banking industry in the pre-independence era
developed with the Presidency Banks, which were transformed into the Imperial Bank of
India and subsequently into the State Bank of India. The initial days of the industry saw a
majority private ownership and a highly volatile work environment. Major strides towards
public ownership and accountability were made with nationalization in 1969 and 1980 which
transformed the face of banking in India. The industry in recent times has recognized the
importance of private and foreign players in a competitive scenario and has moved towards
greater liberalization.

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In the evolution of this strategic industry spanning over two centuries, immense
developments have been made in terms of the regulations governing it, the ownership
structure, products and services offered and the technology deployed. The entire evolution
can be classified into four distinct phases.

 Phase I- Pre-Nationalization Phase (prior to 1955)

 Phase II- Era of Nationalisation and Consolidation (1955-1990)

 Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial
Liberalisation (1990-2004)

 Phase IV- Period of Increased Liberalisation (2004 onwards)

Current Structure:

Currently the Indian banking industry has a diverse structure. The present structure of
the Indian banking industry has been analyzed on the basis of its organized status, business as
well as product segmentation.

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Organizational Structure:

The entire organized banking system comprises of scheduled and non-scheduled

banks. Largely, this segment comprises of the scheduled banks, with the unscheduled ones
forming a very small component. Banking needs of the financially excluded population is
catered to by other unorganised entities distinct from banks, such as, moneylenders,
pawnbrokers, micro financial institutions, NBFC and indigenous bankers.

Scheduled Banks:

A scheduled bank is a bank that is listed under the second schedule of the RBI Act,
1934. In order to be included under this schedule of the RBI Act, banks have to fulfill certain
conditions such as having a paid up capital and reserves of at least 0.5 million and satisfying
the Reserve Bank that its affairs are not being conducted in a manner prejudicial to the
interests of its depositors. Scheduled banks are further classified into commercial and
cooperative banks.

The basic difference between scheduled commercial banks and scheduled cooperative
banks is in their holding pattern. Scheduled cooperative banks are cooperative credit
institutions that are registered under the Cooperative Societies Act. These banks work
according to the cooperative principles of mutual assistance.

Scheduled Commercial Banks (SCBs):

Scheduled commercial banks (SCBs) account for a major proportion of the business of
the scheduled banks. As at end-March, 2009, 80 SCBs were operational in India. SCBs in
India are categorized into the five groups based on their ownership and/or their nature of
operations.

State Bank of India and its six associates (excluding State Bank of Saurashtra, which
has been merged with the SBI with effect from August 13, 2008) are recognised as a separate
category of SCBs, because of the distinct statutes (SBI Act, 1955 and SBI Subsidiary Banks
Act, 1959) that govern them.

Nationalised banks (10) and SBI and associates (7), together form the public sector
banks group and control around 70% of the total credit and deposits businesses in India. IDBI
ltd. has been included in the nationalised banks group since December 2004.

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 Private sector banks include the old private sector banks and the new generation
private sector banks- which were incorporated according to the revised guidelines issued by
the RBI regarding the entry of private sector banks in 1993. As at end-March 2009, there
were 15 old and 7 new generation private sector banks operating in India.

Foreign banks are present in the country either through complete branch/subsidiary
route presence or through their representative offices. At end-June 2009, 32 foreign banks
were operating in India with 293 branches. Besides, 43 foreign banks were also operating in
India through representative offices.

Regional Rural Banks (RRBs) were set up in September 1975 in order to develop the
rural economy by providing banking services in such areas by combining the cooperative
specialty of local orientation and the sound resource base which is the characteristic of
commercial banks.

RRBs have a unique structure, in the sense that their equity holding is jointly held
by the central government, the concerned state government and the sponsor bank (in the ratio

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50:15:35), which is responsible for assisting the RRB by providing financial, managerial and
training aid and also subscribing to its share capital.

Between 1975 and 1987, 196 RRBs were established. RRBs have grown in
geographical coverage, reaching out to increasing number of rural clientele. At the end of
June 2008, they covered 585 out of the 622 districts of the country. Despite growing in
geographical coverage, the number of RRBs operational in the country has been declining
over the past five years due to rapid consolidation among them. As a result of state wise
amalgamation of RRBs sponsored by the same sponsor bank, the number of RRBs fell to 86
by the end March of 2009.

Scheduled Cooperative Banks:

Scheduled cooperative banks in India can be broadly classified into urban credit
cooperative institutions and rural cooperative credit institutions. Rural cooperative banks
undertake long term as well as short term lending. Credit cooperatives in most states have a
three tier structure (primary, district and state level).

Non-Scheduled Banks:

Non-scheduled banks also function in the Indian banking space, in the form of Local
Area Banks (LAB). As at end-March 2009 there were only 4 LABs operating in India. Local
area banks are banks that are set up under the scheme announced by the government of India
in 1996, for the establishment of new private banks of a local nature; with jurisdiction over a
maximum of three contiguous districts. LABs aid in the mobilisation of funds of rural and
semi urban districts. Six LABs were originally licensed, but the license of one of them was
cancelled due to irregularities in operations, and the other was amalgamated with Bank of
Baroda in 2004 due to its weak financial position.

Business Segmentation:

The entire range of banking operations are segmented into four broad heads- retail
banking businesses, wholesale banking businesses, treasury operations and other banking
activities. Banks have dedicated business units and branches for retail banking, wholesale
banking (divided again into large corporate, mid corporate) etc.

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Retail Banking:

It includes exposures to individuals or small businesses. Retail banking activities are

identified based on four criteria of orientation, granularity, product criterion and low value of
individual exposures. In essence, these qualifiers imply that retail exposures should be to
individuals or small businesses (whose annual turnover is limited to Rs. 0.50 billion) and
could take any form of credit like cash credit, overdrafts etc. Retail banking exposures to one
entity is limited to the extent of 0.2% of the total retail portfolio of the bank or the absolute
limit of Rs. 50 million. Retail banking products on the liability side includes all types of
deposit accounts. Mortgages and loans (personal, housing, educational etc) are on the assets
side of banks. It also includes other ancillary products and services like credit cards, demat
accounts etc.

The retail portfolio of banks accounted for around 21.3% of the total loans and
advances of SCBs as at end-March 2009. The major component of the retail portfolio of
banks is housing loans, followed by auto loans. Retail banking segment is a well-diversified
business segment. Most banks have a significant portion of their business contributed by
retail banking activities. The largest players in retail banking in India are ICICI Bank, SBI,
PNB, BOI, HDFC and Canara Bank.

Among the large banks, ICICI bank is a major player in the retail banking space
which has had definitive strategies in place to boost its retail portfolio. It has a strong focus
on movement towards cheaper channels of distribution, which is vital for the transaction
intensive retail business. SBI’s retail business is also fast growing and a strategic business
unit for the bank. Among the smaller banks, many have a visible presence especially in the

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auto loans business. Among these banks the reliance on their respective retail portfolio is
high, as many of these banks have advance portfolios that are concentrated in certain usages,
such as auto or consumer durables. Foreign banks have had a somewhat restricted retail
portfolio till recently. However, they are fast expanding in this business segment. The retail
banking industry is likely to see a high competition scenario in the near future.

Wholesale Banking:

Wholesale banking includes high ticket exposures primarily to corporates. Internal

processes of most banks classify wholesale banking into mid corporates and large corporates
according to the size of exposure to the clients. A large portion of wholesale banking clients
also account for off balance sheet businesses. Hedging solutions form a significant portion of
exposures coming from corporates. Hence, wholesale banking clients are strategic for the
banks with the view to gain other business from them. Various forms of financing, like
project finance, leasing finance, finance for working capital, term finance etc form part of
wholesale banking transactions. Syndication services and merchant banking services are also
provided to wholesale clients in addition to the variety of products and services offered.

Wholesale banking is also a well-diversified banking vertical. Most banks have a

presence in wholesale banking. But this vertical is largely dominated by large Indian banks.
While a large portion of the business of foreign banks comes from wholesale banking, their
market share is still smaller than that of the larger Indian banks. A number of large private
players among Indian banks are also very active in this segment. Among the players with the
largest footprint in the wholesale banking space are SBI, ICICI Bank, IDBI Bank, Canara
Bank, Bank of India, Punjab National Bank and Central Bank of India. Bank of Baroda has
also been exhibiting quite robust results from its wholesale banking operations.

Treasury Operations:

Treasury operations include investments in debt market (sovereign and corporate),

equity market, mutual funds, derivatives, and trading and forex operations. These functions
can be proprietary activities, or can be undertaken on customer’s account. Treasury
operations are important for managing the funding of the bank. Apart from core banking
activities, which comprises primarily of lending, deposit taking functions and services;
treasury income is a significant component of the earnings of banks. Treasury deals with the
entire investment portfolio of banks (categories of HTM, AFS and HFT) and provides a range
of products and services that deal primarily with foreign exchange, derivatives and securities.
Treasury involves the front office (dealing room), mid office (risk management including

10
independent reporting to the asset liability committee) and back office (settlement of deals
executed, statutory funds management etc).

Other Banking Businesses:

This is considered as a residual category which includes all those businesses of

banks that do not fall under any of the aforesaid categories. This category includes para
banking activities like hire purchase activities, leasing business, merchant banking, factoring
activities etc.

Products of the Banking Industry:

The products of the banking industry broadly include deposit products, credit
products and customized banking services. Most banks offer the same kind of products with
minor variations. The basic differentiation is attained through quality of service and the
delivery channels that are adopted. Apart from the generic products like deposits (demand
deposits – current, savings and term deposits), loans and advances (short term and long term
loans) and services, there have been innovations in terms and products such as the flexible
term deposit, convertible savings deposit (wherein idle cash in savings account can be
transferred to a fixed deposit), etc. Innovations have been increasingly directed towards the
delivery channels used, with the focus shifting towards ATM transactions, phone and internet
banking. Product differentiating services have been attached to most products, such as
debit/ATM cards, credit cards, nomination and demat services.

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Other banking products include fee-based services that provide non-interest income to the
banks. Corporate fee-based services offered by banks include treasury products; cash
management services; letter of credit and bank guarantee; bill discounting; factoring and
forfeiting services; foreign exchange services; merchant banking; leasing; credit rating;
underwriting and custodial services. Retail fee-based services include remittances and
payment facilities, wealth management, trading facilities and other value added services.

1.3ABOUT THE COMPANY

Indian Bank is an Indian state-owned financial services company

headquartered in Chennai, India. It has 22,000 employees, 1923 branches and is one of the
big public sector banks of India. It has overseas branches in Colombo, Sri Lanka, Singapore,
and 229 correspondent banks in 69 countries. Since 1969 the Government of India has owned
the bank, which celebrated its centenary in 2007. It is the only Indian Bank other than State
Bank of India to feature in the List of Fortune 500 Companies in the World.

A premier bank owned by the Government of India

 Established on 15th August 1907 as part of the Swadeshi movement
 Serving the nation with a team of over 18782 dedicated staff
 Total Business crossed Rs.2,11,988 Crores as on 31.03.2012
 Operating Profit increased to Rs. 3,463.17 Crores as on 31.03.2012
 Net Profit increased to Rs.1746.97 Crores as on 31.03.2012
 Core Banking Solution(CBS) in all 1956 branches

International Presence
 Overseas branches in Singapore , Colombo including a Foreign Currency Banking
Unit at Colombo and Jaffna.
 240 Overseas Correspondent banks in 70 countries

Diversified banking activities - 3 Subsidiary companies

 Indbank Merchant Banking Services Ltd
 IndBank Housing Ltd.

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  IndFund Management Ltd

A front runner in specialised banking

 97 Forex Authorised branches inclusive of 1 Specialised Overseas Branch at Chennai
exclusively for handling forex transactions arising out of Export, Import, Remittances
and Non Resident Indian business
 62 Special SME Branches extending finance exclusively to SSI units

PROFILE

INDIAN BANK

Type Public Company

Traded As BSE:523465
NSE:INDIANB
Industry Banking and Financial services

Founded 1907
Headquarter Chennai, Tamil Nadu, India
s
Key people T.M.Bhasin(Chairman & MD)
Revenue IncreaseINR211,988 crore(US$42.29
billion) (2011)
Net income IncreaseINR12,745 crore(US$2.54 billion)
(2011)
Total assets IncreaseINR121,841 crore(US$223.81
billion) (2011)
Employees 19,632
Website www.indianbank.in
Tagline/Sloga Your tech friendly bank
n
USP High end banking technology support
Target group International banking
Positioning Complete banking solutions

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Leadership in Rural Development
 Pioneer in introducing Self Help Groups and Financial Inclusion Project in the
country
 Award winner for Excellence in Agricultural Lending from Honourable Union
Minister for Finance
 Best Performer Award for Micro-Finance activities in Tamil Nadu and Union Territory
of Puducherry from NABARD
 Established 7 specialized exclusive Microfinance branches called "Microsate" across
the country to cater the needs of Urban poor through SHG (Self Help Group)/JLG
(Joint Liability Group) concepts
 A special window for Micro finance viz., Micro Credit Kendras are functioning in 44
Rural/Semi Urban branches
 Harnessing ICT (Information and Communication Technology) for Rural
Development and Inclusive Banking
 Provision of technical assistance and project reports in Agriculture to entrepreneurs
through Agricultural Consultancy & Technical Services (ACTS)

A pioneer in introducing the latest technology in Banking

 100% Core Banking Solution(CBS) Branches
 100% Business Computerisation
 1280 Automated Teller Machines(ATM)
 24 x 7 Service through 89000 ATMs under shared network
 Internet and Tele Banking services to all Core Banking customers
 e-payment facility for Corporate customers
 Cash Management Services • Depository Services
 Reuter Screen, Telerate, Reuter Monitors, Dealing System provided at Overseas
Branch, Chennai.

History:

Early Formation and Expansion:

 In the last quarter of 1906, Madras (now Chennai) was hit by the worst financial crisis
the city was ever to suffer Of the three best-known British commercial names in 19th
century Madras, one crashed; a second had to be resurrected by a distress sale; and the
third had to be bailed out by a benevolent benefactor.
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  Arbuthnot & Co, which failed, was considered the soundest of the three. Parry's (now
EID Parry), may have been the earliest of them and Binny & Co.'s founders may have
had the oldest associations with Madras, but it was Arbuthnot, established in 1810,
that was the city's strongest commercial organization in the 19th Century.

 A key figure in the bankruptcy case for Arbuthnot's was the Madras lawyer, V.
Krishnaswamy Iyer; he went on to organize a group of Chettiars that founded Indian
Bank. Annamalai and Ramaswami Chettiar founded Indian Bank (IB)on 15 August
1907.

 IB began its international expansion in 1932 when it opened a branch in Colombo. A

branch in Jaffna followed three years later, but this was not successful and Indian
Bank closed it in 1939. Just before World War II reached the region, Indian Bank
opened a branch in 1940, in Rangoon (Yangon).

 The next year it closed the Rangoon branch, but opened branches in Singapore (where
future branch manager KB Pisharody(1915–1998) started his career in the same year),
and in Kuala Lumpur, Ipoh, and Penang.

 The rapid advance of the Japanese Army forced IB to close all its branches in Malaya
and Singapore. Although the Japanese forces did not reach Ceylon, IB closed the
Colombo branch in 1942.

Post-Independence of India:

 After the war, IB reopened its Malayan and Singapore branches. Then in 1948 it
reopened its branch in Colombo.

 The 1960s saw IB expand domestically as it acquired Mannargudi Bank (est. 1932)
and Salem Bank (est. 1925). Then on 19 July 1969 the Government of India
nationalized 14 top banks, including Indian Bank.

 In 1973 Indian Bank, Indian Overseas Bank, and United Commercial Bank
established United Asian Bank Berhad in response to a new banking law in Malaysia
that prohibited foreign government banks from operating in the country.

 International expansion continued in 1978 with IB becoming a technical adviser to PT

Bank Rama in Indonesia, the result of the merger of PT Bank Masyarakat and PT
Bank Ramayana.

 Two years later, IB, Bank of Baroda, and Union Bank of India established IUB
International Finance, a licensed deposit taker in Hong Kong. Each of the three banks
took an equal share in the joint venture.

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  In 1987, Indian Babk bought in two more acquisitions when it rescued Bank of
Tanjore, based in Tamil Nadu.

 A multi-crore scam was exposed in 1992, where then chairman M. Gopalakrishnan

lent loan to small corporates and exporters from the south amounting to 1,300 crore.
The amount was never paid back by the borrowers.

 Bank of Baroda bought out its partners in IUB International Fininance in Hong Kong
in 1998. Apparently this was a response to regulatory changes following Hong Kong’s
reversion. IUB became Bank of Baroda (Hong Kong), a restricted license bank.

Products and Services:

 Featured Products/ services/ schemes

 NRI- Foreign Exchange

 IB Swarna mudra schemes

 ASBA (for IPO’s)

 Wealth Management services

 Supreme Current Account

 Educational loans

 Centralized Pension Processing

 Interest Subsidy for educational loans

 Financial inclusion plan

 All premium services

 Insurance services

 CMS plus

 E payment of direct taxes

 E payment of indirect taxes

 Other valuable services

 Loans for agriculture

 Loans for Small And Medium Enterprises

 Personal loans

 Special Schemes for Self Help Groups.

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These are some of the products and services rendered by Indian Bank. It also offers four types
of accounts and selling gold to the public.

1.4 NEED FOR THE STUDY

The analysis of financial statements of Indian Bank is an attempt to assess
the efficiency and performance of the company.
To assess the efficiency and performance of the company it is necessary
1. To know earnings capacity of the company i.e., the profitability of the company.
2. To have a view of the company’s efficiency.
3. To know the comparative position in relation to previous year.
4. To have an idea about financial strength of the company.
5. To know the solvency of the company.

1.5 OBJECTIVES OF THE STUDY

The main objectives of this study are the following:-

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  To study about INDIAN BANK and its related aspects like its products &
services, history, organizational structure, subsidiary companies etc.

 To analyse the financial statement i.e Profit & Loss account and Balance sheet of
INDIAN BANK.

 To learn about Profit & Loss Account, Balance-sheet and different type of
Assets& Liabilities.

 To portray the financial position of INDIAN BANK with the help of balance sheet
and profit and loss account.

 To evaluate the financial soundness, stability and liquidity of INDIAN BANK.

1.6 RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the research problems. It is

necessary to know not only the research methods/ techniques but also the methodology.

18
Research methodology is a scientific study of various steps that are adopted in research
problem.

Research:
Research can be defined as the search for knowledge, or as any systematic
investigation, with an open mind, to establish novel facts, usually using a scientific method.
The primary purpose for applied research is discovering, interpreting, and the development of
methods and systems for the advancement of human knowledge on a wide variety of
scientific matters of our world and the universe.

Research Design:
A design is used to structure the research, to show how all of the major parts of
the research project. Research design can be thought of as the structure of research- it is the
“glue” that holds all of the elements in a research project together. We often describe a
design using a concise notation that enables us to summarize a complex design structure
efficiently.

Research Type:
Descriptive Research
Descriptive research is used to obtain information concerning the current status of
the phenomena to describe “what exists” with respect to variables or conditions in a situation.
Descriptive research, also known as statistical research, describes data and characteristics
about the population or phenomena being studied. Descriptive research answers the questions
who, what, where, when and how. In short descriptive research deals with everything that can
be counted and studied. The methodology involved in this design is mostly qualitative in
nature producing descriptive data.

Period of Study:
The study is related to the period from 2012-2013.

Types of Data:

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 While deciding about the method of data collection to be used for the study, the
researcher kept in mind for two types of data. They are:
a) Primary Data
b) Secondary Data
a) Primary data
In this study primary data is not required.
b) Secondary data
The secondary data are those financial statements which are collected from the company.

Research Instrument:
In this study the research, the researcher has used secondary data i.e., Annual
Report if Indian Bank as research instrument.

Research Presentation:
After analysis of data, using various statistical techniques the findings and
suggestions are presented in the form of a report. To assist the understanding on findings and
suggestion of the study, various other details ranging from objective, need and research
methodology to the detailed presentation analysis is included in the report.

1.7 LIMITATION OF THE STUDY

However, the study is also hedged with some limitations. This study is based
on the secondary data. Naturally, the study would have the weakness of this type of data.
 Financial statement analysis tools have some inherent limitations of financial
statements. This study has also suffered from those limitations.

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  The nature of financial statements is historical. Here, analysis and interpretation are
made on those historical data, which tells only about the past performance and the
financial weakness of the bank.
 Change in accounting procedure by a firm often makes ratio analysis misleading.
 The analysis and interpretation are based on secondary data contained in the published
annual reports of Indian Bank for the study period.
 The study of financial performance can be only a means to know about the financial
condition of the company and cannot show a through picture of the activities of the
company.
 Further, the conclusions drawn from the study are applicable only to the Indian Bank
and not for other banks.

CHAPTER II - REVIEW OF LITERATURE

In the history of FRA it is common that professional journals and academic

papers do not recognize each other. An early paper on financial ratio distributions was
published in Management Accounting by Mecimore (1968)(1). It is interesting to recognize
that all ingredients of modern distribution analysis already appear incumbent in Mecimore's
21
paper. Using descriptive statistical measures (average and relative deviations from the
median) he observes cross-sectional non-normality and positive skewness for twenty ratios in
a sample of randomly selected forty-four Fortune-500 firms.

The paper most often referred to in literature as the seminal paper in this field is,
however, the much later published article by Deakin (1976) (2). His chi-square findings reject
(with one exception) the normality of eleven financial ratios in a sample of 1114 Compustat
companies for 1954-72. Less extreme deviations from normality were observed when square-
root and logarithmic transformations were applied, but normality was still not supported.
Likewise, while not statistically significantly, industry grouping made the distributions less
non-normal. Concomitant results are obtained by Lee (1985) (3) using a stronger test
(Kolmogorov-Smirnov) for a different set of data.

Bird and McHugh (1977) (4) adopt an efficient Shapiro-Wilk small-sample test for the
normality of financial ratios for an Australian sample of five ratios over six years. Like
Deakin they find in their independent study that normality is transient across financial ratios
and time. They also study the adjustment of the financial ratios towards industry means
which is a different area of FRA research. Bougen and Drury (1980) (5) also suggest non-
normality based on a cross-section of 700 UK firms.

The results indicating non-normality of financial ratio distributions have led

researchers into looking for methods of restoring normality to warrant standard parametric
statistical analyses. Frecka and Hopwood (1983) (6) observe that removing outliers and
applying transformations in a large Compustat sample covering 1950-79 restored normality
in the same financial ratios as tackled by Deakin (1976) (7). They point out that if the ratios
follow the gamma distribution, the square root transformation makes the distribution
approximately normal. The gamma distribution is compatible with ratios having a technical
lower limit of zero. There is, however, a certain degree of circularity in their approach, since
instead of identifying the underlying causes of the outliers they employ a mechanistic
statistical approach to identify and remove the outliers from the tails of the financial ratio
distributions.

A varying and often a considerable number of outliers has to be removed for

different financial ratios in order to achieve normality. The empirical results are supported by
later papers such as So (1987). Ezzamel, Mar-Molinero and Beecher (1987) (8) and Ezzamel
and Mar-Molinero (1990)(9) review and replicate the earlier analyses on UK firms with a
particular emphasis on small samples and outliers, respectively. One of the avenues taken is
to study new industries. Kolari, McInish and Saniga (1989)(10) take on the distribution of

22
financial ratios in banking. Buckmaster and Saniga (1990) (11) report on the shape of the
distributions for 41 financial ratios in a Compustat sample of more than a quarter million
observations.

Foster (1978)(12) points out the outlier problem in FRA. Later, he presented in
Foster (1986)(13) a list of alternatives for handling outliers in FRA. The list includes deleting
true outliers, retaining the outlier, adjusting the underlying financial data, winsorizing that is
equating the outliers to less extreme values, and trimming by dropping the tails. Foster also
puts forward accounting, economic and technical reasons for the emergence of outliers in
FRA. While improving the statistical results trimming and transformations can pose a
problem for the theoretical rigor in FRA research. Instead of deleting or adjusting the
observations McLeay (1986a)(14) proposes using a better fitting distribution with fat tails for
making statistical inferences in FRA. He seeks for a best fitting t-distribution for a cross-
section of 1634 UK and Irish firms. Also his empirical results confirm non-normality. The
best-fitting (in the maximum-likelihood sense) t-distribution varies across financial ratios (the
t-distribution can be considered a family of distributions defined by its degrees of freedom).
McLeay (1986b)(15) also tackles the choice between equally weighted and value weighted
aggregated financial ratios in terms of ratio distributions on a sample of French firms. Also
the results by Martikainen (1991)(16) demonstrate that normality can be approached by other
procedures than removing outliers. In a sample of 35 Finnish firms, four ratios and fifteen
years about half of the non-normal distributions became normal if economy-wide effects
were first controlled for using the so-called Accounting-index model. Martikainen (1992) (17)
uses a time-series approach to 35 Finnish firms in turn observing that controlling for the
economy factor improves normality.

Typically, many later papers tackle the same basic question of ratio distributions
using different samples and expanding on the methodologies. Buijink and Jegers (1986) (18)
study the financial ratio distributions from year to year from 1977 to 1981 for 11 ratios in
Belgian firms corroborating the results of the earlier papers in the field. Refined industry
classification brings less extreme deviation from normality. They also point to the need of
studying the temporal persistence of cross-sectional financial ratio distributions and suggest a
symmetry index for measuring it. Virtanen and Yli-Olli (1989) (19) studying the temporal
behavior of financial ratio distributions observe in Finnish financial data that the business
cycles affect the cross-sectional financial ratio distributions.

23
 The question of the distribution of a ratio format variable (financial ratio) has
been tackled mathematically as well as empirically. Barnes (1982) (20) shows why the ratio of
two normally distributed financial variables does not follow the normal distribution (being
actually skewed) when ratio proportionality does not hold. Tippett (1990)(21) models financial
ratios in terms of stochastic processes. The interpretation in terms of implications to financial
ratio distributions are not, however, immediately evident, but the general inference is that
"normality will be the exception rather than the rule".

Because of these results bringing forward the significance of the distributional

properties of financial ratios many later papers report routinely about the distributions of
financial ratios in connection with some other main theme. Often these themes are related to
homogeneity and industry studies such as Ledford and Sugrue (1983) (22). The distributional
properties of the financial ratios also have a bearing in testing proportionality as can be seen,
for instance, in McDonald and Morris (1984) (23). In a bankruptcy study Karels and Prakash
(1987)(24) put forward that in applying the multivariate methods (like discriminant analysis)
the multivariate normality is more relevant than the (univariate) normality of individual
financial ratios. They observe that deviations from the multivariate normality are not as
pronounced as the deviations in the earlier univariate studies.

Watson (1990) (25) examines the multivariate distributional properties of four financial
ratios from a sample of approximately 400 Compustat manufacturing firms for cross-sections
of 1982, 1983 and 1984. Multivariate normality is rejected for all the four financial ratios.
Multivariate normality is still rejected after applying Box's and Cox's modified power
transformations. However, when multivariate outliers are removed, normality is confirmed.

Multivariate normality has particular bearing on research using multivariate methods, for
example on bankruptcy prediction. It also has implications on univariate research, since while
univariate normality does not imply multivariate normality, the opposite is true.

Susan Ward (2008) (26) emphasis that financial analysis using ratios between key
values help investors cope with the massive amount of numbers in company financial
statements. For example, they can compute the percentage of net profit a company is
generating on the funds it has deployed. All other things remaining the same, a company that
earns a higher percentage of profit compared to other companies is a better investment
option.
Jonas Elmerraji (2005) (27) tries to say that ratios can be an invaluable tool for making
an investment decision. Even so, many new investors would rather leave their decisions to

24
fate than try to deal with the intimidation of financial ratios. The truth is that ratios aren't that
intimidating, even if you don't have a degree in business or finance. Using ratios to make
informed decisions about an investment makes a lot of sense, once you know how use them. `

REFERENCE
1. Mecimore, C.D. (1968), "Some empirical distributions of financial ratios",
Management Accounting 50/1, 13-16.

2. Deakin, E.B. (1976), "Distributions of financial accounting ratios: some empirical

evidence", Accounting Review, January 1976, 90-96.

3. Lee, C.-W.J. (1985), "Stochastic properties of cross-sectional financial data", Journal

of Accounting Research 23/1, 213-227.

4. Bird, R.G., and McHugh A.J. (1977), "Financial ratios - an empirical study", Journal
of Business Finance and Accounting 4/1, 29-45.

5. Bougen, P.D., and Drury, J.C. (1980), "U.K. statistical distributions of financial ratios,
1975", Journal of Business Finance and Accounting 7/1, 39-47.

6. Frecka, T.J., and Hopwood, W.S. (1983), "The effects of outliers on the cross-
sectional distributional properties of financial ratios", Accounting Review 58/1, 115-
128.

7. Deakin, E.B. (1976), "Distributions of financial accounting ratios: some empirical

evidence", Accounting Review, January 1976, 90-96.

8. Ezzamel, M., Mar-Molinero, C., and Beecher, A. (1987), "On the distributional
properties of financial ratios", Journal of Business Finance and Accounting 14/4, 463-
481.

9. Ezzamel, M., Brodie, J., and Mar-Molinero, C. (1990), "The distributional properties
of financial ratios in UK manufacturing companies", Journal of Business Finance and
Accounting 17/1, 1-29.

10. Kolari, J., McInish, T.H., and Saniga, E.M. (1989), "A note on the distribution types
of financial ratios in the commercial banking industry", Journal of Banking and
Finance 13/3, 463-471.

11. Buckmaster, D., and Saniga E. (1990), "Distributional forms of financial accounting
ratios: Pearsons's and Johnson's taxonomies", Journal of Economic and Social
Measurement 16, 149-166.

25
12. Foster, G. (1978), Financial Statement Analysis. Prentice-Hall, first ed.

13. Foster, G. (1986), Financial Statement Analysis. Prentice-Hall, 2nd ed.

14. McLeay, S. (1986a), "Students’t and the distribution of financial ratios", Journal of
Business Finance and Accounting 13/2, 209-222.

15. McLeay, S. (1986b), "The ratio of means, the means of ratios and other benchmarks:
an examination of characteristics financial ratios in the French corporate sector",
Finance, The Journal of the French Finance Association 7/1, 75-93.

16. Martikainen, T. (1991), "A note on the cross-sectional properties of financial ratio
distributions", Omega 19/5, 498-501.

17. Martikainen, T. (1992), "Time-series distributional properties of financial ratios:

empirical evidence from Finnish listed firms", European Journal of Operational
Research 58/3, 344-355.

18. Buijink, W., and Jegers, M. (1986), "Cross-sectional distributional properties of

financial ratios in Belgian manufacturing industries: aggregation effects and
persistence over time", Journal of Business Finance and Accounting 13/3, 337-363.

19. Virtanen, I., and Yli-Olli, P. (1989), "Cross-sectional and time-series persistence of
financial ratio distributions; Empirical evidence with Finnish Data", European
Institute for Advanced Studies in Management, Working paper 89-04, Brussels.

20. Barnes, P. (1982), "Methodological implications of non-normally distributed financial

ratios", Journal of Business Finance and Accounting 9/1, 51-62.

21. Tippet, M. (1990), "An induced theory of financial ratios", Accounting and Business
Research 21/81, 77-85.

22. Ledford, M.H., and Sugrue, P.K. (1983), "Ratio analysis: application to U.S. motor
common carriers", Business Economics, September 1983, 46-54.

23. McDonald, B., and Morris, M.H. (1984), "The statistical validity of the ratio method
in financial analysis: an empirical examination", Journal of Business Finance and
Accounting 11/1, 89-97.

24. Karels, G.V., and Prakash, A.J. (1987), "Multivariate normality and forecasting of
business bankruptcy", Journal of Business Finance and Accounting 14/4, 573-593.

25. Watson, C.J. (1990), "Multivariate distributional properties, outliers, and

transformation of financial ratios", Accounting Review 65/3, 682-695.

26. Susan Ward (2008), Article “Financial Ratio Analysis for Performance Check”.

26
 27. Jonas Elmerraji (2005), Article “Analyze Investments Quickly With Ratios”

CHAPTER III – ANALYSIS AND INTERPRETATION

3.1 FINANCIAL STATEMENTS:

Financial statements are summaries of the operating, financing, and investment
activities of a business. Financial statements should provide information useful to both
investors and creditors in making credit, investment, and other business decisions. And this
usefulness means that investors and creditors can use these statements to predict, compare,
and evaluate the amount, timing, and uncertainty of potential cash flows.
In other words, financial statements provide the information needed to assess a
company‘s future earnings and therefore the cash flows expected to result from those
earnings. The term financial statement includes at four basic statements, accompanied by a
management discussion and analysis:
 The balance sheet
The balance sheet is a summary of the assets, liabilities, and equity of a
business at a particular point in time—usually the end of the firm‘s fiscal year. The balance

27
sheet is also known as the statement of financial condition or the statement of financial
position.
 The income statement
An income statement is a summary of the revenues and expenses of a business
over a period of time, usually one month, three months, or one year. This statement is also
referred to as the profit and loss statement. It shows the results of the firm‘s operating and
financing decisions during that time.
The purpose of the income statement is to show managers and investors
whether the company made or lost money during the period being reported. The important
thing to remember about an income statement is that it represents a period of time. This
contrasts with the balance sheet, which represents a single moment in time.

3.2 COMPARATIVE FINANCIAL STATEMENT:

Comparative financial statement is a tool of financial analysis that depicts change
in each item of the financial statement in both absolute amount and percentage term, taking
the item in preceding accounting period as base. Comparison and analysis of financial
statements may be carried out using the following tools:

1. Comparative Balance Sheet:

The comparative balance sheet shows increase and decrease in absolute

terms as well as percentages, in various assets, liabilities and capital. A comparative analysis
of balance sheets of two periods provides information regarding progress of the business
firm. The main purpose of comparative balance sheet is to measure the short- term and long-
term solvency position of the business.

2. Comparative Income Statement:

Comparative income statement is prepared by taking figures of two or

more than two accounting periods, to enable the analyst to have definite knowledge about the

28
progress of the business.Compartative income statements facilitate the horizontal analysis
since each accounting variable is analysed horizontally.

Comparative Balance Sheet of Indian Bank from 2008-2009 to 2011-2012

(Rs. in crores)
PARTICULAR 2008-2009 2009-2010 2010-2011 2011-2012
S
Absolute % of Absolute % of Absolut % of Absolut % of
change chang change change e change change e change change
e
Capital and
liabilities:
Capital
Reserves and 1925.14 43.9 1136.19 18.02 1248.99 16.78 1280.33 14.73
surplus
Deposits 11535.88 18.90 15645.83 21.56 17576.52 19.92 14999.62 14.18
Borrowings (752.46) (58.64) 426.58 80.37 1143.01 119.39 2772.49 132
Other Liabilities 905.5 30.51 58.97 1.52 360.46 9.17 648.45 15.11
and Provisions

Total 13614.06 19.31 17267.57 20.53 20328.98 20.05 19700.89 16.19

Assets:
Cash and (221.36) (3.44) 849.14 13.67 (182.78) (2.59) (559.07) (8.13)
balances with
RBI
Balances with 132.36 38.94 580.24 122.87 631.89 60.04 810.12 48.10

29
banks, Money at
call
Investments 885.5 4.04 5467.76 23.98 6515.43 23.05 3192.27 9.18
Advances 11626.57 29.18 10680.85 20.75 13103.78 21.09 15073.69 20.03
Fixed Assets 1055.8 197.77 (32.1) (2.02) (6.82) (0.44) 74.69 4.82
Capital WIP (0.85) (15.68) 17.44 381.62 33.3 151.29 (50.04) (90.47)
Other Assets 136.04 9.44 (295.75) (17.74) 234.19 18.27 1159.23 76.45
Total 13614.06 19.31 17267.57 20.53 20328.98 20.05 19700.89 16.19

Interpretation:

 Deposits and Advances are the main liability and asset of a banking company. Every
banking company likes to increase the both items. For the past five years i.e., 2008-
2012 there is no change in the share capital.
 Deposits are increasing at a decreasing rate. During 2008-2009 it increases by 18.90%
and in 2009-2010 it increases by 21.56% but thereafter it increases by 19.92% in
2010-2011 and 14.18% in 2011-2012. This represents deposits are repaid during those
years.
 During 2008-2009 borrowings decreases by 58.64%. It means borrowings are repaid.
And thereafter are increases at increasing rate.
 Cash and balances with RBI are decreases during 2011-2012. This is due to decreases
in CRR by RBI.
 Balances with other banks, Money at call are increases during the past five years.
 Advances are increases at a decreasing rate. During 2008-2009 it increases by 29.18%
and 21.09% in 2010-2011 and 20.03% in 2011-2012.
 Investments are the second major asset of the banking company. Investments are
increases at an increasing rate. But during 2011-2012 it increases only by 9.18% .
 Fixed assets are fluctuating due to disposal of assets, depreciation rates and
revaluation of assets.
 Other assets are increases after a slight decrease in 2009-2010.

30
 Comparative Income Statement of Indian Bank from 2008-2009 to 2011-
2012

(Rs. in crores)
PARTICULAR 2008-2009 2009-2010 2010-2011 2011-2012
S
Absolute % of Absolute % of Absolute % of Absolute % of
change change change change change change change change
Income:
Interest Earned 1679.55 32.61 1026.73 15.03 1503.97 19.14 2870.29 30.66
Other Income (32.45) (3.04) 138.28 13.35 8.17 0.70 50.27 4.25
Operating 1647.1 26.49 1165.01 14.81 1512.14 16.74 2920.56 27.70
Income
Expenditure:
Interest 1062.74 33.64 331.36 7.85 771.74 16.95 2488.4 46.73
Expended
Operating (321.08) (18.35) 693.56 48.54 517.61 24.39 299.73 11.35
Expenses
Total Expenses 741.66 15.11 1024.92 18.14 1289.35 19.32 2788.13 35.01
Operating Profit 905.44 69.13 140.09 6.32 222.79 9.46 132.43 5.14
Provisions & 668.87 222.23 (169.59) (17.49) 63.7 7.96 912.4 10.56
Contingencies
Net profit for 236.58 23.45 309.67 24.87 159.08 10.23 41.2 2.40
the year
Extra ordinary 8.30
items
Profit brought 3.57 4.42 1.83 2.17 1.82 2.11 0.82 0.93
forward
Total P & L A/c 240.15 22.04 311.5 23.43 160.9 9.81 33.72 1.87

31
Interpretation:
 For banking company the major income and expenditure are interest income and
interest expenses. The interest incomes are increases by 32.61% in 2008-2009,
19.14% in 2010-2011 and 30.66% during 2011-2012.
 The interest expenses are also increases by 7.85% in 2009-2010 and 46.73% during
2011-2012. This is due to increases in borrowings.
 The net profits for the year are increases at a decreasing rate. This is because of the
increases in expenses than increases in income.

32
3.3 TREND ANALYSIS:
Trend percentage is very useful in making comparative study of the financial
statements for a number of years. These indicate the direction of movement over a long tine
and help an analyst of financial statements to form an opinion as to whether favorable or
unfavorable tendencies have developed. This helps in future forecasts of various items. For
calculating trend percentages any year may be taken as the ‘base year’. Each item of base
year is assumed to be equal to 100 and on that basis the percentage of item of each year
calculated.

Trend Percentage of Indian Bank Balance Sheet from 2008-2009 to 2011-

2012
Trend Percentage (Base year 2008)
PARTICULARS 2008 2009 2010 2011 2012
Capital and liabilities:
Capital 100 100 100 100 100
Reserves and surplus 100 144 170 198 228
Deposits 100 119 145 173 198
Borrowings 100 41 75 164 380
Other Liabilities and Provisions 100 131 133 145 167

Total 100 119 144 173 201

Assets:
Cash and balances with RBI 100 97 110 107 98
Balances with banks, Money at call 100 139 310 496 734
Investments 100 104 129 159 173
Advances 100 129 156 189 227
Fixed Assets 100 298 292 291 305
Capital WIP 100 84 406 1020 97
Other Assets 100 109 89 105 186
Total 100 119 144 173 201

Interpretation:
 Deposits increases to Rs.1,20,803.80 crores in 2012 from Rs.1,05,804.18 crores in
2011. In 2008, it was only Rs.61,045.95 crores.
 Borrowings decreases in 2009 and thereafter increases at increasing rate.
 Advances and Investments are also increased, in the last five years.

33
  Fixed assets increase as well as decreases in the last five years. This is due to change
in depreciation rates and revaluation of assets.
 Finally in 2012, the capital WIP decreases at a greater amount. It is also a good sign
for efficient work management.

Trend Percentage of Indian Bank Income Statement from 2008-2009 to

2011-2012
Trend Percentage (Base year 2008)
PARTICULARS 2008 2009 2010 2011 2012
Income:
Interest Earned 100 133 153 182 238
Other Income 100 97 110 111 115
Operating Income 100 127 145 170 217
Expenditure:
Interest Expended 100 134 144 169 247

34
Operating Expenses 100 82 121 151 168
Total Expenses 100 115 136 162 219
Operating Profit 100 169 180 197 207
Provisions & Contingencies 100 322 266 287 317
Net profit for the year 100 124 154 170 174
Extra ordinary items
Profit brought forward 100 104 107 109 110
Total P & L A/c 100 122 151 165 169

Interpretation:
 Interest income as well as other income increases in the last five years.
 Interest Expenses increased from Rs.3159.08 crores in 2008 to Rs.7813.32 crores in
2012.
 The Net profit increased to Rs.1755.27 crores in 2012 compared to the previous years
profit.

3.4 CASH-FLOW STATEMENT:

A cash – flow statement is a statement showing inflows (receipts) and

outflows (payments) of cash during a particular period. In other words, it is a summary of
sources and applications of each during a particular span of time. The cash flow statement
includes only inflows and outflows of cash and cash equivalents; it excludes transactions that
do not directly affect cash receipts and payments. These non-cash transactions include
depreciation or write-offs on bad debts or credit losses to name a few. The cash flow
statement is a cash basis report on three types of financial activities: operating activities,
investing activities, and financing activities. Non-cash activities are usually reported in
footnotes.

The cash flow statement is intended to

 provide information on a firm's liquidity and solvency and its ability to change cash
flows in future circumstances

 provide additional information for evaluating changes in assets, liabilities and equity

35
  improve the comparability of different firms' operating performance by eliminating
the effects of different accounting methods

 indicate the amount, timing and probability of future cash flow.

Cash Flow Statement of Indian Bank

(Rs. In Crores)
PARTICULARS 2008 2009 2010 2011 2012
Net Profit Before Tax 1008.74 1245.32 1554.99 1714.07 1746.97
Net Cash (used in) From 2238.64 382.66 1700.03 (193.09) (1957.18)
Operating Activities
Net Cash (used in)/from (95.28) (99.06) (101.95) (127.55) (144.71)
Investing Activities
Net Cash (used in)/from (188.28) (372.61) (168.70) 769.75 2352.94
Financing Activities
Net (decrease)/increase In Cash 1955.07 (89) 1429.38 449.11 251.05
and Cash Equivalents
Opening Cash & Cash 4817.75 6772.82 6683.82 8113.20 8562.31
Equivalents
Closing Cash & Cash 6772.82 6683.82 8113.20 8562.31 8813.36
Equivalents

Interpretation:

36
  It is revealed that the cash flow from operating activities is in negative in 2011 and
2012.
 This is due to increase in Interest Expenses and Extra ordinary loss of Rs.8.30 crores
in 2012.
 The cash flows of the bank are in a good condition. In 2012 the cash flow from
financing activities increased at high level. It is a good sign.

3.5 RATIO ANALYSIS:

Ratio analysis is such a significant technique for financial analysis. It indicates
relation of two mathematical expressions and the relationship between two or more things.
Financial ratio is a ratio of selected values on an enterprise's financial statement. There are
many standard ratios used to evaluate the overall financial condition of a corporation or other
organization. Financial ratios are used by managers within a firm, by current and potential
stockholders of a firm, and by a firm‘s creditor. Financial analysts use financial ratios to
compare the strengths and weaknesses in various companies. Values used in calculating
financial ratios are taken from balance sheet; income statement and the cash flow of
company, besides Ratios are always expressed as a decimal value, such as 0.10, or the
equivalent percent value, such as 10%.

Essence of ratio analysis:

Financial ratio analysis helps us to understand how profitable a business is, if it has
enough money to pay debts and we can even tell whether its shareholders could be happy or
not.
Financial ratios allow for comparisons:
1. between companies
2. between industries
3. between different time periods for one company
4. between a single company and its industry average

Ratio analysis tells us whether the business

37
1. is profitable?
2. Has enough money to pay its bills and debts?
3. Could be paying its employees higher wages, remuneration or so on?
4. is able to pay its taxes?
5. Is using its assets efficiently or not?
6. has a gearing problem or everything is fine?
7. Is a candidate for being bought by another company or investor?

Methodology:

The present study of Banks is based on CAMEL Methodology, which evaluates each and
every component that is of prime importance from the functioning of the Bank's perspective.
The model examines the efficiency of banks among these important parameters like Capital
Adequacy, Asset Quality, Management, Earnings Quality and Liquidity of the Indian Bank.

CAMEL Model:

The CAMEL approach was developed by bank regulators in the United States as a
means of measurement of the financial condition of a financial institution. (Uniform
Financial Institutions Rating System established by the Federal Financial Institutions
Examination Council). RBI too analysis the banks performance through CAMEL
methodology.

The acronym CAMEL stands for:

 Capital Adequacy

 Asset Quality

 Management

 Earnings (Profitability)

 Liquidity & Funding

CAMEL analysis requires:

38
  financial statements (the last three years and interim statements for the most recent
12-month period)

 cash flow projections

 portfolio aging schedules

 funding sources

 information about the board of directors

 operations/staffing

 Macroeconomic information.

Analysis:

I)Capital Adequacy

Capital adequacy reflects the overall financial position of a bank and also the ability of the
management to meet the need for additional capital requirement.

Capital Adequacy Ratio (CAR)

CAR reflects the ability of a bank to deal with probable loan defaults. The RBI
guidelines stipulate banks to maintain a CAR of minimum 9%. It is arrived at by dividing the
Tier I and Tier II capital by risk-weighted assets. Tier I capital includes equity capital and
free reserves. Tier II capital comprises subordinated debt. The stronger will be the bank if the
CAR is higher.

Formula:

CAR=Tier 1 Capital +Tier 2 Capital/ Risk Weighted Assets

39
TIER 1 CAPITAL -A) Equity Capital, B) Disclosed Reserves

TIER 2 CAPITAL -A) Undisclosed Reserves, B)General Loss reserves, C)Subordinate Term
Debts

Where Risk can either be weighted assets (a) or the respective national regulator's minimum
total capital requirement.

Debt-Equity Ratio (D/E)

Debt-Equity Ratio is arrived at by dividing the total borrowings and deposits by

shareholders' net worth, which includes equity capital and reserves and surpluses. The Debt
to Equity ratio is used for measuring solvency, and researching the capital structure of the
company. It indicates how much the company is leveraged (in debt) by comparing what is
owed to what is owned.

Formula:

Debt-Equity Ratio=Debt/Equity

In other words it measures the company's ability to borrow and repay money. The
debt to equity ratio is closely watched by creditors and investors, because it reveals the
extent to which company management is willing to fund its operations with debt, rather than
equity.

C) Advances to Assets (ADV/AST)

This is the ratio of the Total Advances to Total Assets. Total Advances also include
receivables. The value of Total Assets excludes the revaluations of all the assets.

Formula:

Advances To Assets=Total Advances/Total Assets*100

40
Interpretation:

TABLE FOR CAPITAL ADEQUACY RATIOS

Ratio 2008 2009 2010 2011 2012

Capital Adequacy Ratio(%) 12.90 13.98 12.71 13.56 13.47

Debt/Equity Ratio 13.37 13.32 13.06 13.40 13.12

Advances To Assets(%) 56.50 61.18 61.30 61.82 63.87

Capital Adequacy Ratio (CAR):

It is revealed that the, CAR is increased from 12.90% in 2008 to 13.98% in

2009 which seems to be good. But in 2010 it falls to 12.71%. Again in 2011 it increased to
13.56% and 13.47% in 2012. The minimum CAR which banks have to maintain is 9% as per
RBI's Guidelines. The bank has maintained CAR above 9%. So, it has better ability to deal
with probable loan defaults.

41
Debt-Equity Ratio:

The Debt equity ratio is 13.12 in 2012 as compared to 13.40 in 2011. The Debt
equity ratio should be as low as possible. The borrowings of the bank are less than their
deposits are concerned which is a good sign. So, I interpret from the ratio that the bank is
better in terms of debt equity ratio because of lower borrowings and high deposits.

42
43
Advances to Asset Ratio:

An advance to Assets ratio is reflects a bank's positions and risk taking ability in
lending funds. A higher Advances/Asset ratio shows that the bank is aggressively lending
fund and vice versa. In the table above, the advances to asset ratio has increased from
61.82% in 2011 to 63.87% in 2012. It is clear that the bank has good risk taking ability.

44
II) Asset Quality

The asset quality is to ascertain the proportion of non-performing assets as a

percentage of the total assets .It also ascertains the NON PERFORMING ASSET
movement and the amount locked up in investments as a percentage of the total assets.

How to calculate non performing assets:

Gross non performing asset - (Balance in Interest Suspense account +

DICGC/ECGC claims received and held pending adjustment + Part payment
received and kept in suspense account + Total provisions held).

A) Net Non Performing Assets to Total Assets (NNPAs/TA)

It is a measure of the quality of assets in a situation where the management has not
provided for loss on non performing assets.

Formula:

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 Net non performing asset to Total Assets=Net non performing asset/total assets*100

B) Net Non Performing Assets To Net Advances (NNPA/NA)

Net non performing assets are Gross non performing assets net of provisions on non
performing assets and suspense account.

Formula:

Net non performing asset to Net Advances=Net non performing asset/Net

Advances*100

C) Percentage change in Net Non Performing Assets

This measure gives the movement in Net non performing assets in relation to Net
non performing assets in the previous year. The higher the reduction in Net non
performing asset levels, the better it is for the bank.

Formula:

Percentage Change in non performing asset=Change in Net non performing asset/Base

year’s Net non performing asset *100

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Interpretation:

TABLE FOR ASSET QUALITY RATIOS

Ratio 2008 2009 2010 2011 2012

Net Non Performing Assets to Total 0.14 0.11 0.14 0.33 0.85
Assets(%)

Net Non Performing Assets to Net 0.24 0.18 0.23 0.53 1.33
Advances(%)

Percentage Change in Net Non (4.44) (3.87) 54.50 173.10 201.44

Performing Assets(%)

Asset Quality:

An non performing asset (Non Performing Assets) is an asset, including a

leased asset, becomes non-performing when it ceases to generate income from the bank. The
Net non performing assets to Total Assets ratio indicates us how much Non Performing
Assets the bank has to their Total Assets in balance sheet. It is believed that lower the better
for the banks in the case of Asset Quality Ratios.

Net Non Performing Assets to Total Assets:

The Net non performing asset to total assets has increased from 0.14% in 2010 to
0.33% in 2011 and 0.85% in 2012 which is not a good indication for the bank.

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Net Non Performing Assets to Net Advances:

The Net non performing asset to Net Advances is increased from 0.53% to 1.33
in 2011 and 2012 respectively which is not good for the bank.

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Percentage Change in Net Non Performing Assets:

The Percentage change in Net non performing assets is increased from 54.50 in
2010 to 173.10 in 2011 and 201.44 in 2012. It is not good sign for the bank.

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50
III) Management Efficiency

Refers to the efficiency of the Management in managing the bank, in all the ratios
higher the better:

A) Total Advances to Total Deposits (TA/TD)

This ratio measures the efficiency of the management in converting the deposits available
with the bank (excluding other funds like equity capital, etc.) into advances.

Formula:

Total Advances to Total Deposits=Total Advances/Total Deposits*100

B) Profit per Employee (PPE)

This measures the efficiency of the employee. It is arrived at by dividing the net
profit of the bank by total number of employees. Higher the ratio means higher the efficiency
of the management.

Formula:

Profit Per Employee=Net Profit/Total number of employees

C) Return on Net Worth (RONW)

It is a measure of the profitability of a bank. The amount of net income

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returned as a percentage of shareholders equity. Return on equity measures a corporation's
profitability by revealing how much profit a company generates with the money shareholders
have invested.

ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity*100

Net income is for the full fiscal year (before dividends paid to common stock
holders but after dividends to preferred stock). Shareholder's equity does not include
preferred shares. It is also known as "Return on net worth" (RONW).

Interpretation:

TABLE FOR MANAGEMENT EFFICIENCY RATIOS

Ratio 2008 2009 2010 2011 2012

Total Advances to Total Deposits(%) 65.26 70.91 70.44 71.12 74.77

Profit Per Employee(Rs. In Crores) 4.91 6.23 7.92 8.88 9.30

Return on Net worth(%) 24.51 23.35 23.74 21.50 18.73

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Total Advances to Total Deposits:

I observed that Bank is better able to convert its Advances to Deposits. Because
the ratio is increased from 71.12% to 74.77% in 2011 and 2012 respectively. If it will be
increased more, than it may be risky for bank.

Profit per Employee:

Profit per employee of the bank has increased from 8.88 crores in 2011 to 9.30
crores in 2012. It means the efficiency of the employees is good.

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54
Return on Net Worth:

Return on net worth is reduced from 23.74% to 21.50% and to 18.73% in 2010,
2011, 2012 respectively. It shows there is a reduction in profit.

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IV) Earnings Efficiency:

Much of a bank's income is earned through non-core activities like investments,

treasury operations, and corporate advisory services and so on.

A) Percentage Growth in Net Profit

It is the percentage change in net profit over the previous year.

Formula:

Percentage Growth in Net profit=Change in Net profit/Base year’s Net profit *100

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B) Net Interest Margin (NIM)

Net Interest Margin (NIM) is defined as the difference between interest earned and
interest expended as a proportion of average total assets. Interest income includes dividend
income. Interest expended includes interest paid on deposits, loans from RBI, and other
short-term and long-term loans.

Formula:

Net Interest Margin=(Interest earned-Interest expended)/Average of Total assets*100

C) Non-interest Income/Working Funds (NII/WF)

This measures the income from operations other than lending as a percentage of
working funds.

Working funds:

These are total resources (total liabilities or total assets) of a bank as on a

particular date. Total resources include capital, reserves and surplus, deposits, borrowings,
other liabilities and provision. A high AWF (Avg. Working Fund) shows a bank's total
resources strength.

There is a school of theory which maintains that working funds are equal to aggregate
deposits plus borrowing. However, more pragmatic view in consonance with capital

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adequacy calculations is, to include all resources and not just deposits and borrowings.

Formula:

Non Interest Income/Working funds=Non interest income/Working funds*100

Interpretation:

TABLE FOR EARNINGS EFFICIENCY RATIOS

Ratio 2008 2009 2010 2011 2012

Percentage Growth in Net profit(%) 32.77 23.45 24.87 10.2 1.9

Net Interest Margin(%) 3.45 3.54 3.55 3.75 3.43

Non Interest/Working Funds(%) 1.74 1.35 1.26 1.05 0.92

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Percentage Growth in Net Profit:

The bank's earnings quality reflects its profitability and sustainability of the same.
I conclude that the Earning Efficiency of the Indian Bank is poor. The Percentage growth in
net profit has reduced from 10.2% to 1.9% in 2011 and 2012 respectively.

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60
Net Interest Margin:

Net Interest Margin (NIM) is basically Interest Earned minus Interest Expended
on the proportion of Total Assets. The NIM (%) of the company has reduced from 3.75% to
3.43% in 2011 and 2012 respectively. It is clear that the interest earned by these banks is
reduced or the interest expended on deposits and borrowings has increased due to this the
NIM (%) has reduced.

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Non-interest Income/Working Funds:

The non interest income is the income which is earned by the bank other than
lending (core) activity. The Non interest income/working fund (%) ratio measures the
income from operations other than lending as a percentage of working funds. It is observed
that bank’s Non Interest Income/Working Fund (%) is reduced from 1.05% in 2011 to 0.92%
in 2012 This is mainly because Indian Bank is not concentrating on other banking activities
like Merchant Banking, Investment Banking, Private Equity, and Underwriter.

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V) Liquidity:

A) Liquid Assets/Demand Deposits (LA/DD)

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 This account allows you to "demand" your money at any time, unlike a term
deposit, which cannot be accessed for a predetermined period (the loan's term). This ratio
measures the ability of a bank to meet the demand from demand deposits in a particular year.
Higher ratio is better for banks. A demand deposit or bank money refers to the funds held
in demand deposit accounts in commercial banks. These account balances are usually
considered money and form the greater part of the money supply of a country.

Formula:

Liquid Assets to Demand Deposits=Liquid Assets/Demand Deposits*100

B) Liquid Assets/Total Assets (LA/TA)

Liquid Assets include cash in hand, balance with RBI, balance with other banks
(both in India and abroad), and money at call and short notice. The ratio is arrived by
dividing liquid assets by total assets. Higher the ratio better it is.

Formula:

Liquid Assets to Total Assets=Liquid Assets/Total Assets*100

Interpretation:

TABLE FOR LIQUIDITY RATIOS

Ratio 2008 2009 2010 2011 2012

Liquid Assets/Demand Deposits(%) 143.04 126.29 122.47 132.96 126.52

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Liquid Assets/Total Assets(%) 9.61 7.95 8 7.03 6.23

Liquidity is the ability of the bank to meet its financial obligations. A high
liquidity ratio indicates a bank's comfort level vis-à-vis its ability to manage its obligations,
both short-term as well as long-term. Liquidity of a bank can be measured using metrics such
as Liquid Assets (LA) to Demand Deposits (DD) and LA to Total Assets (TA).

Liquid Assets/Demand Deposits:

In Demand Deposit basically the customer can withdraw the money without
any prior notice to depository, it is exactly opposite of term deposit where customer has to
give proper notice, and follow the procedure to break the term deposit. It is revealed that the
liquid assets to demand deposits (%) of the bank have reduced from 132.96% to 126.52% in
2011 and 2012 respectively. So, I conclude Indian Bank is able to maintain its liquid assets
are to demand deposits in greater percentage.

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Liquid Assets/Total Assets:

The bank has maintained lower liquid assets to total assets in the past five years.
It is observed that the bank’s ratio is decreasing from 7.03% to 6.23% in 2011 and 2012
respectively.

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 CHAPTER IV -FINDINGS
Comparative Statement:
 There are five types of liabilities in a bank. Among that, the most important liabilities
are Deposits and Borrowings. The growth rate of deposits portfolio is decreasing.
During 2008-09, it has increased by 18.90%, and in 2009-10 it increased by 21.56%
but in 2011-12 it increased by only 14.18%. Here the growth should be compared to
overall banking sector. (This is because the deposits are repaid and increase in new
customers are low.)

 The borrowings are increases at increasing rate. In 2008-09 it decreases by 58.64%. It

means the borrowings are repaid. But in 2011-12, it increases by 132%.

 The most important and major assets for a bank, are advances and investments. It is
observed that the advances are increased at a marginal level. Investments are

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 increased significantly. But in 2011-12 it increases by 9.18% only. Here compare the
growth rate with overall Industrial Production.

 The major income and expenses in a bank is interest earned and interest expenses.
Both the interest earnings and interest expenses are fluctuating. But the interest
expenses is increased significantly. This is because of increased in borrowings.

 Only in 2011-12 there was a extraordinary loss of Rs.8.30 crores. This is because of
fluctuations in the rate of foreign currencies.

Trend Analysis:
 The deposits are increased marginally. But the borrowings are increased
tremendously.

 Both Advances and investments are increased marginally.

 The interest earned are increased marginally. But the interest expenses are increased at
tremendously. So, the net profit increases slowly.

Cash Flow Statement:

 Cash flow statement shows the inflow and outflow of a cash for a particular period. It
is observed that the bank is good at maintaining the flows of cash.

Ratio Analysis:
I)Capital Adequacy Ratios:

 It is observed that, the bank has better ability to deal with proable loan defaults
because the capital adequacy ratio is higher.

 And also the bank’s ability to borrow and repay the money is also good because the
debt equity ratio is low.

 Though the advances to assets ratio has increased in the last five years, it is revealed
that the bank has good risk taking ability.

II)Asset Quality Ratios:

 Generally asset quality ratio should be reduced as compared to the previous years.
But, the bank’s asset quality ratios are increased which is not a good sign.

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  From the year 2010 to 2012, the non performing assets are increased which is not
good sign.

III)Management Efficiency Ratios:

 Higher the management efficiency ratios means higher the efficiency of the
management. It is found that the advances to deposits ratio and profit per employee
are increased which is a good sign. It means the employee’s efficiency is good, and
the bank is better able to convert its advances to deposits.

 But the return on net worth is reduced from 23.74% to 21.50% and to 18.73% in
2010,2011,2012 respectively.

IV)Earnings Efficiency Ratios:

 Overall, the bank’s earnings efficiency is not satisfactory. Because all the earnings
efficiency ratios are reduced in the last five years.

V)Liquidity Ratios:

 These ratios measures the ability of the bank to meet its short term requirements.
Higher the ratio better it is.

 The bank is able to maintain its liquidity position.

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 CHAPTER V – SUGGESTIONS AND CONCLUSIONS
5.1SUGGESTIONS AND RECOMMENDATIONS
Some of the recommendation and suggestion are as follows:

 The Reserve Bank of India issued prudential norms for banking companies.
According to that more non performing assets may leads to bankruptcy. Hence, the
bank tries to reduce its non performing assets to a extent.

 The prime motive of any type of business is to earn profits. For banking company,
rendering financial services and earning profits are the primary objectives. As a
nationalized bank, it also has the same objectives. The growth rate of profits is
decreasing. So, the bank tries to improve its profits. For that the bank needs to
concentrate on both core and non core banking activities.

 The major income for any financial institution is interest income. A banking company
will get more interest income only when it lends money for the productive purposes.
Advances are the major assets of a banking company. The bank tries to increase the
advances because it is the core business of a bank. Increase in advances pays a way to
increase in interest income which automatically increases the profits of the bank.

 Every company must try to control their borrowings. Because more borrowings leads
to increase their interest expenses which reduces their profits. At the same time, low
borrowings are also not good for the company. Here, the borrowings are increasing to
an extent. So, the bank shall try to reduce the borrowings which automatically reduce
the interest expenses to a certain extent.

 Deposits are of two types. One is term deposits and the other is demand deposits. The
important source of funds for bank is deposits. More deposits means the bank are
attracting the customers. The bank provides advances against his/her deposits to the
needy person. This provides the bank to get interest income as well as safety for its
funds. So, the bank needs to increase its deposits.

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  The bank has to focus on work than the work achieved. It means the bank has to work
to attract the new customers and rendering all types of financial services.

 As compared to its competitors, the bank has low number of branches and ATMs. It is
a major disadvantage to the bank. Due to low number of branches and ATM, both the
customers and bank may feel uncomfortable to contact and render services. So, the
bank has to increase its number of branches and ATMs.

 Nowadays competition takes in every sector. In banking sector, the competition is

high. In general, a both good and bad product needs advertisement. Advertisements
pursue the people to buy. Other banks are giving continues advertisements about their
services to the public. So, the bank has to promote its services through advertisements
which increase the new customers.

5.2 CONCLUSION

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The balance-sheet along with the income statement is an important tool for investors and
many other parties who are interested in it to gain insight into a company and its operation.
The balance sheet is a snapshot at a single point of time of the company’s accounts- covering
its assets, liabilities and shareholder’s equity. The purpose of the balance-sheet is to give
users an idea of the company’s financial position along with displaying what the company
owns and owes. It is important that all investors know how to use, analyze and read balance-
sheet. Profit & Loss account tells the net profit and net loss of a company and its
appropriation.

In the case of INDIAN Bank, during fiscal 2012, the bank continued to grow and diversify its
assets base and revenue streams. Bank supports agriculture sector more by giving loans under
various schemes.

The comparative statement of profit & loss account shows the increases and decreases in the
items of profit & loss account and balance sheet during 2008 to 2012. It shows that all items
are increased mostly but increase in this year is less than as compared to increase in previous
year except few items.

Trend analysis of profit & loss account and balance sheet shows the percentage change in
items of profit & loss account and balance sheet i.e. percentage change during 2008 to 2012.
It shows that all items are increased mostly but increase in this year is less than as compared
to increase in previous year except few items. In profit & loss account, all items like interest
income, non-interest income, interest expenses, operating expenses, operating profit, net
profit is increased but in mostly cases it is less than from previous year but in some items like
interest income, interest expenses percentage increase is more. Some items like tax,
depreciation is decreased. Similarly in balance sheet all items like advances, cash, liabilities,
deposits, and borrowings are increased. Percentage increase in some item is more than
previous year and in some items it is less.

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Ratio analysis of financial statement shows that the bank is good in risk taking ability, dealing
proable loan defaults, ability to borrow and repay money, management efficiency and
liquidity. But the bank is just fair in maintaining asset quality and profitability.

The cash flow statement shows that net increase in cash generated from financing activities is
much more than the previous year but cash generated from investing activities is negative in
all the five years. The cash generated from operating activities is negative in the last two
years. There is increase of Rs.251.05 crores in cash & cash equivalents from previous year.
Therefore analysis of cash flow statement shows that cash inflow is more than the cash
outflow in INDIAN Bank.

Thus, the ratio analysis and trend analysis and analysis of cash flow statement and
comparative statement shows that INDIAN Bank’s financial position is fair. Bank’s
profitability is increasing but not at high rate. Bank’s liquidity position is good because bank
invests more in liquid assets than the current assets. The INDIAN Bank needs to pay attention
on commercial activities like promoting more schemes for industrial customers etc. Bank’s
position is stable.

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BIBLIOGRAPHY

Books Referred:

 Accountancy. R.K. Mittal, A.K.Jain.

 Financial Management- Theory and Practice. Shashi.K.Gupta, R.K. Sharma.
 P.N. VARSHNEY “Banking Law And Practices” Sultan Chand & Sons
 SUNDRAM & VARSHNEY “Banking, Theory Law And Practices” Sultan Chand &
Sons
 DR. S. N. MAHESHWARI “Principles Of Accounting” Sultan Chand & Sons
 Advanced Accounting, revised edition june 2010-ICAI

Internet websites:

 www.indianbank.in
 www.moneycontrol.com
 www.money.rediff.com
 www.wikipedia.org
 www.google.com
 www.scribd.com
 www.managementparadise.com
 www.rbi.org.in

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