AN EMPIRICAL STUDY ON THE FINANCIAL PERFORMANCE OF SBI & ITS

ASSOCIATES

Dr.S.Poornima1 & M.Ganeshwari2

1. HoD & Associate Professor, Department of Business Administration, PSGR Krishnammal College for Women.
2. Research Scholar, PhD, Department of Business Administration, PSGR Krishnammal College for Women.

ABSTRACT

The progression of an economy is significantly dependent upon deployment as well as optimum

utilization of resources and most importantly operational efficiency of the various sectors, of
which banking sector plays a very vital role. Banking sector helps in stimulation of capital
formation, innovation and monetization in addition to facilitation of monetary policy. It is
imperative to carefully evaluate and analyse the performance of banks to ensure a healthy
financial system and an efficient economy. The present study attempts to evaluate the
performance of State Bank & its group in India using CAMEL approach for a five year period
from 2011-2015.

INTRODUCTION

The roots of the State Bank of India lie in the first decade of the 19th century, when the Bank of
Calcutta, later renamed the Bank of Bengal, was established on 2 June 1806. The Bank of Bengal
was one of three Presidency banks, the other two being the Bank of Bombay (incorporated on 15
April 1840) and the Bank of Madras (incorporated on 1 July 1843). All three Presidency banks
were incorporated as joint stock companies and were the result of royal charters. These three
banks received the exclusive right to issue paper currency till 1861 when, with the Paper
Currency Act, the right was taken over by the Government of India. The Presidency banks
amalgamated on 27 January 1921, and the re-organised banking entity took as its name Imperial
Bank of India. The Imperial Bank of India remained a joint stock company but without
Government participation.
Camel model

The CELS ratings or Camels rating is a supervisory rating system originally developed in the
U.S. to classify a bank's overall condition. It's applied to every bank and credit union in the U.S.
(approximately 8,000 institutions) and is also implemented outside the U.S. by various banking
supervisory regulators.

The components of a bank's condition that are assessed:

 (C)apital adequacy
 (A)ssets
 (M)anagement Capability
 (E)arnings
 (L)iquidity (also called asset liability management)
 (S)ensitivity (sensitivity to market risk, especially interest rate risk)

Ratings are given from 1 (best) to 5 (worst) in each of the above categories.

REVIEW OF LITERATURE

Swindle.C.Sloan (2013), “Evaluate Regulatory effectiveness at Commercial Banks”,

Journal of Financial Services Research”, volume 9 Issue 2, ISSN 0920-8550: Examines the
influence of bank regulators on the improvement of capital of inadequately capitalized banks in
the United States in 1980s using the capital adequacy component of CAMEL rating system.
Response of banks on regulators' demands for greater capital; Comparison of capital regulation
between national banks and state-chartered banks; Quarterly change in primary book capital.

Mishra Ashwini Kumar & Sri Harsha (2015), “Analysing soundness in Indian
Banking”, Research journal of management sciences, volume 1(3), ISSN 2319-1171: The
objective of this paper is to analyze the performance of 12 public and private sector banks over a
period of eleven years (2000-2011) in the Indian banking sector. For this purpose, CAMEL
approach has been used and it is established that private sector banks are at the top of the list,
with their performances in terms of soundness being the best. Public sector banks like Union
Bank and SBI have taken a backseat and display low economic soundness in comparison.
 Dr. Mukund Sharma (2014), “Performance Evaluation of Indian Banking analysis”,
International Journal of Economic and Business Review, volume 2 Issue 3, ISSN 2347-
1998: The purpose of the study was to understand the extent of relationship between banking
financial position in Indian economy . Now a day banking sector is playing vital role in Indian
economy. But some parameter is decided for to check different method. Camel is one of the most
popular model of comparing the banks financial position .In this model we use different kind of
ratio which is direct effect on bank outcome. We can take decision for trying to get best result of
bank. Here we have to find out ratio and give the ranking through bank performance ratio for a
period of 1995-2000.

RESEARCH METHODOLOGY

CAMEL is a ratio-based model used to evaluate the performance of banks with the help of
different criteria, viz. Capital Adequacy, Asset Quality, Management Quality, Earnings and
Liquidity. The present study is a descriptive research study based on analytical research design.
Out of Indian public sector banks only State Bank group has been selected for the purpose of
present study. This group includes State Bank of India (SBI), State Bank of Bikaner and Jaipur
(SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala
(SBP), State Bank of Travancore (SBT) is taken for study. The data of the sample banks for a
period of 2011-2015 have been collected from the published annual reports of the banks. Fifteen
financial ratios have been used to assess the performance of banks.

OBJECTIVE OF THE STUDY

The main objective of the study is to analyze the financial position and performance of the State
bank group in India using CAMEL model.

HYPOTHESIS OF THE STUDY

There is no significant difference in performance of SBI and its subsidiaries as assessed by
CAMEL model.

ANALYSIS OF COMPONENTS OF CAMEL FRAMEWORK

 I. Capital Adequacy
The first component in CAMELS is capital. Bank Managers look at capital as the main
source of protection for depositors. A well-capitalized bank can absorb large losses without the
depositors losing their money. To make a good bank, bank managers should generate plenty of
bank’s capital, high Capital Adequacy Ratio (CAR), and conservative dividend policy.

For the study, the following ratios have been used to measure capital adequacy:
 Capital Adequacy ratio
 Debt equity ratio
 Coverage ratio
The following is the analysis of the various ratios used to measure capital adequacy
TABLE 1: CAMEL RATINGS (2011-15) : CAPITAL ADEQUACY

Banks Capital Adequacy Debt-Equity ratio Coverage Ratio Group Rank

Ratio
Avg Rank Avg Rank Avg Rank Avg Rank
SBI 12.64 2 12.60 6 30.52 2 18.59 2
SBBJ 12.14 3 15.32 4 26.44 4 17.97 6
SBH 12.68 1 17.51 2 24.86 5 18.35 4
SBM 12.12 4 13.62 5 30.04 3 18.58 3
SBP 11.85 6 17.07 3 23.84 6 17.58 5
SBT 11.89 5 18.39 1 31.18 1 20.48 1

ANALYSIS AND INTERPRETATION

On the basis of group averages of five sub-parameters of capital adequacy, It is found that SBT
ranked on the top position with highest CAR of 20.48 followed by SBI (18.59) and SBM (18.58).
SBBJ scored the lowest position.

II. Asset Quality

A second component in CAMELS is assets quality which is a major part of bank managers.
Asset quality determines the healthiness of financial institutions against loss of value in the
assets as asset impairment risks the solvency of the financial institutions. For the study, the
following ratios have been used to measure asset quality:
 Net Npa to Net advance
 Total investment to Total asset
 Net NPA to Total Assets
The following is the analysis of the various ratios used to measure asset quality.
TABLE 2: CAMEL RATINGS (2011-15) : Asset Quality

Banks Net Npa to Net Total investment Net Npa to Total Group Rank
Advance to Total asset asset
Avg Rank Avg Rank Avg Rank Avg Rank
SBI 23.271 0.018 5 8.445
2.041 1 4 4
SBBJ 21.874 7.987
2.064 4 6 0.023 2 6
SBH 24.835 8.895
1.828 5 3 0.024 1 3
SBM 25.200 9.170
2.292 2 2 0.021 3 2
SBP 21.995 4 8.090
0.020
2.246 3 5 5
SBT 25.985 9.252
0.011 6
1.761 6 1 1

ANALYSIS AND INTERPRETATION

On the basis of group averages of five sub-parameters of asset quality, it is found that SBM
ranked on the top position with 0.854 followed by SBP (0.831) and SBBJ (0.766). SBT scored
the lowest position.

III. Management quality

Management is the third component in CAMELS rating system. A good bank need experienced
management, integrity, technical and managerial skills well spread, clear and logical business /
sales strategy, size and market reputation, good training, good internal / external communication,
and good customer care in their management performance to enhance good reputation in banking
management system. For the study, the following ratios have been used to measure Management
quality:
 Loans Turnover ratio
 Interest Income / Total Funds
 Net Profit / Total Funds

The following is the analysis of the various ratios used to measure Management quality.

TABLE 3: CAMEL RATINGS (2011-15) : Management Quality

Banks Loans Turnover Interest Income to Net profit to Total Group Rank
ratio Total Funds Funds
Avg Rank Avg Rank Avg Rank Avg Rank
SBI 0.772 2 2.950 6
0.124 6 7.956 6
SBBJ 0.891 1 3.374 1
0.132 3 9.120 2
SBH 0.552 6 3.315 2
0.128 4 9.261 1
SBM 3 3.251 3
0.136 1 8.981 3 0.634
SBP 0.607 5 4
0.126 5 8.946 5 3.226
SBT 0.608 4 3.206 5
0.134 2 8.876 4

ANALYSIS AND INTERPRETATION

On the basis of group averages of 3 sub-parameters of Management Quality, it is found that
SBBJ ranked on the top position with 3.37 followed by SBH (3.31). SBI scored the lowest
position.

IV. Earning ability / Profitability Ratio

Earning is a component which indicates the profitability. High ROA and ROE, always profitable
year after year, stable income stream, and few exceptional items are the indicators for high
earnings acceptable by the banks. For the study, the following ratios have been used to measure
Earning ability/ Profitability ratio:
 Return on Asset
  operating profit to total asset
 Interest Income to Total Income

The following is the analysis of the various ratios used to measure Earning ability/
Profitability ratio.

TABLE 4: CAMEL RATINGS (2011-15) : Earning ability/ Profitability ratio

Banks Return on Asset Operating profit Interest income to Group Rank

to total asset total income
Avg Rank Avg Rank Avg Rank Avg Rank
SBI 1
0.778 3 0.019 1 1.613 0.803 3
SBBJ 2 2
0.924 2 0.014 5 1.532 0.823
SBH 4 1
0.992 1 0.016 3 1.475 0.827
SBM 4
0.661 4 0.017 2 1.487 3 0.721
SBP 5 5
0.648 5 0.015 4 1.397 0.687
SBT 6 6
0.608 6 0.013 6 1.365 0.662

ANALYSIS AND INTERPRETATION

On the basis of group averages of 3 sub-parameters of Earning ability it is found that SBH
ranked on the top position with 0.87 followed by SBBJ (0.82) and SBI (0.80). SBT scored the
lowest position.

V. Liquidity Ratio
Liquidity is the fifth component in CAMELS analysis system. Liquidity indicates the
ability of a bank to quickly meet its obligation without a loss. Banks must have available liquid
assets which can quickly be converted into cash, or they must be able to raise funds on very short
notice to meet an obligation. For the study, the following ratios have been used to measure
Liquidity ratio:
 liquid assets to assets
  Government securities to assets
 current ratio
The following is the analysis of the various ratios used to measure Liquidity ratio.

TABLE 5: CAMEL RATINGS (2011-15) : Liquidity ratio

Banks Capital Adequacy Debt-Equity ratio Coverage Ratio Group Rank

Ratio
Avg Rank Avg Rank Avg Rank Avg Rank
SBI 5
7.082 2 18.169 6 3.280 6 9.5108
SBBJ
7.716 1 20.413 4 2.330 4 10.153 2
SBH 3
5.542 4 22.087 2 2.754 2 10.128
SBM 6
4.713 6 21.510 3 2.298 5 9.507
SBP 1
6.0757 3 19.361 5 5.699 1 10.378
SBT 4
5.466 5 21.579 1 2.486 3 9.844

ANALYSIS AND INTERPRETATION

On the basis of group averages of five sub-parameters of Liquidity ratio it is found that SBP
ranked on the top position 10.37 followed by SBBJ (10.15) and SBH (10.12). SBM scored the
lowest position.
COMPOSITE RANKING (OVERALL PERFORMANCE)

TABLE 6: Composite Rating

Bank C A M E L Average Rank
SBI 18.59 8.445 2.950 5
0.803 9.510 8.059
SBBJ 17.97 7.987 3.374 4
0.823 10.153 8.061
SBH 18.35 8.895 3.315 2
0.827 10.128 8.303
SBM 18.58 9.170 3.251 3
0.721 9.507 8.245
SBP 17.58 8.09 6
3.226 0.687 10.378 7.992
SBT 9.252 1
20.48 3.206
0.662 9.844 8.688
Test for normality
For testing the normality of data, hypothesis is proposed as population distribution is normal. For
this, Kolmogorov – Smirnov test is applied.
Kolmogorov- Smirnov test
Bank Statistic df P-value
SBI 0.485 5 0.973
SBBJ 0.395 5 0.998
SBH 0.435 5 0.992
SBM 0.509 5 0.958
SBP 0.369 5 0.999
SBT 0.543 5 0.929

The results highlighted that calculated P- values are greater than the chosen alpha level of 0.05
for all banks, which means data are normally distributed.
ANOVA Result

Source of Sum of Square Degree of Mean square F-value

variation Freedom
Between group 106522.14 5 21304.43 0.99

Within group 514483.58 24 21436.82

Total 621005.72 29

The results of ANOVA test highlighted the calculated values of F-ratio is less than the tabulated
values (for 5, 24 d.f. at 5% level of significance is 2.64). It means there is no statistically
significant difference between the mean values of CAMEL ratios and we do not reject the null
hypothesis. It signifies that there is no significant difference in performance of SBI and its
subsidiaries assessed by CAMEL model.

Result:
The application of CAMEL model to SBI & its group for the period 2011 to 2015 allows us to
obtain a ranking of banks. We applied Capital adequacy, debt equity, coverage ratio to analyze
the capital adequacy parameter, net npa to net advance, total investment to total asset, Net NPA
to Total Assets to analyze the assets quality parameter, Loans Turnover, Interest Income / Total
Funds, Net Profit / Total Funds for analyzing management quality parameter, return on assets,
operating profit to total asset, Interest Income to Total Income to analyze earnings ability and
liquid assets to assets, govt sec to assets, Current ratio to analyze liquidity ability. Results
obtained from the analyze of different ratios show that SBT is the best ranked with a CAMEL
average of 6.973 followed by SBH (6.663), SBBJ(6.617), SBM (6.582), SBP(6.540) and
SBI(6.523).
Reference:
 Gupta, PK. (2014), An analysis of Indian public sector banks using CAMEL approach.
IOSR Journal of Business and Management, 16, 94-102.
 Barr, R.S. Killgo, K.A., Siems, T.F., Zimmel, S. (2002), Evaluating the Productive
Efficiency and Performance of U.S. Commercial Banks. Engineering Management, 28(8),
3-25.
 Siva, S., Natarajan, P. (2011), CAMEL Rating Scanning (CRS) of SBI Groups. Journal of
Banking Financial Services and Insurance Research, 1(7), 1-17.
 Sangmi, MD & Nazir, T 2010, ‘Analyzing Financial Performance of Commercial Banks
in India: Application of CAMEL Model’, Pakistan Journal of Commerce and Social
Science, vol. 4, no. 1, pp. 40-55.
 Siva, S., Natarajan, P. (2011), CAMEL Rating Scanning (CRS) of SBI Groups. Journal of
Banking Financial Services and Insurance Research, 1(7), 1-17.