CHAPTER 1 INTRODUCTION

1 . 1 INTRODUCTION TO THE STUDY In todays scenario, the banking sector is one of the fastest growing sectors and a lot of funds are invested in Banks. Also todays banking system is becoming more complex. There are so many models of evaluating the performance of the banks, but I have chosen the CAMEL Model to evaluate the performance of the banks. It measures the performance of the banks from each parameter i.e. Capital, Assets, Management, Earnings and Liquidity. 1.1.1 CAMEL Framework CAMEL norms are the supervisory framework consisting of risk-monitoring factors used for evaluating the performance of banks. This framework involves the analysis of six groups of indicators reflecting the health of financial institutions. The indicators are as follows: C - Capital adequacy A - Asset quality M - Management soundness E - Earnings & profitability L - Liquidity

1.2 INDUSTRY PROFILE The whole banking scenario has changed in the very recent past on the recommendations of Narasimham Committee. Further BASEL II Norms were introduced to internationally standardize processes and make the banking industry more adaptive to the sensitive market risks. Amongst these reforms and restructuring the CAMELS Framework has its own contribution to the way modern banking is looked up on now. The attempt here is to see how various ratios have been used and interpreted to reveal a banks performance and how this particular model encompasses wide range of parameters making it a widely used and accepted model in todays scenario. The project attempts to analyze the performance of State bank of India on the basis of CAMELS model and gives suggestions on the basis of the finding of the analysis. The overall strategy of State bank of India is also studied to gain a better understanding of the working of the bank and to identify its strength and weakness.

1.2.1 BASEL II Accord It is the bank capital framework sponsored by the world's central banks designed to promote uniformity, make regulatory capital more risk sensitive, and promote enhanced risk management among large, internationally active banking organizations. The revised accord (Basel II) completely overhauls the 1988 Basel Accord and is based on three mutually supporting concepts, or "pillars, of capital adequacy. Basel II uses a "three pillars" concept: (1) Minimum capital requirements (addressing risk), (2) Supervisory review and (3) Market discipline to promote greater stability in the financial system.

1.2.1.1 The First Pillar The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk and market risk. Developed for each risk category by each individual bank. The first pillars are an explicitly defined regulatory capital requirement, a minimum capital-to-asset ratio equal to at least 8% of risk-weighted assets. Credit Risk can be calculated by using one of three approaches. 1. Standardized Approach 2. Foundation IRB (Internal Ratings Based) Approach 3. Advanced IRB Approach 1.2.1.2 The Second Pillar Second, bank supervisory agencies, such as the Comptroller of the Currency, have authority to adjust capital levels for individual banks above the 8% minimum when necessary. It deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. It gives banks a power to review their risk management system. 1.2.1.3 The Third Pillar The third supporting pillar calls upon market discipline to supplement reviews by banking agencies. The third pillar greatly increases the disclosures that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately. The new Basel Accord has its foundation on three mutually reinforcing pillars that allow banks and bank supervisors to evaluate properly the various risks that banks face and realign regulatory capital more closely with underlying risks.

1.3 COMPANY PROFILE

1.3.1 An overview of the State Bank of India

The origin of the State Bank of India goes back to the first decade of the nineteenth century with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three years later the bank received its charter and was re-designed as the Bank of Bengal. A unique institution, it was the first joint-stock bank of British India sponsored by the Government of Bengal. The Bank of Bombay (15 April 1840) and the Bank of Madras (1 July 1843) followed the Bank of Bengal. These three banks remained at the apex of modern banking in India till their amalgamation as the Imperial Bank of India on 27 January 1921. Primarily Anglo-Indian creations, the three presidency banks came into existence either as a result of the compulsions of imperial finance or by the felt needs of local European commerce and were not imposed from outside in an arbitrary manner to modernize India's economy. Their evolution was, however, shaped by ideas culled from similar developments in Europe and England, and was influenced by changes occurring in the structure of both the local trading environment and those in the relations of the Indian economy to the economy of Europe and the global economic framework. Establishment The establishment of the Bank of Bengal marked the advent of limited liability, joint-stock banking in India. So was the associated innovation in banking, viz. the decision to allow the Bank of Bengal to issue notes, which would be accepted for payment of public revenues within a restricted geographical area. This right of note issue was very valuable not only for the Bank of Bengal but also its two siblings, the Banks of Bombay and Madras. It meant an accretion to the capital of the banks, a capital on which the proprietors did not have to pay any interest. The concept of deposit banking was also an innovation because the practice of accepting money for safekeeping (and in some cases, even investment on behalf of the 4

clients) by the indigenous bankers had not spread as a general habit in most parts of India. But, for a long time, and especially up to the time that the three presidency banks had a right of note issue, bank notes and government balances made up the bulk of the investible resources of the banks. The three banks were governed by royal charters, which were revised from time to time. Each charter provided for a share capital, four-fifth of which were privately subscribed and the rest owned by the provincial government. The members of the board of directors, which managed the affairs of each bank, were mostly proprietary directors representing the large European managing agency houses in India. The rest were government nominees, invariably civil servants, one of whom was elected as the president of the board. Business The business of the banks was initially confined to discounting of bills of exchange or other negotiable private securities, keeping cash accounts and receiving deposits and issuing and circulating cash notes. Loans were restricted to Rs.one lakh and the period of accommodation confined to three months only. The security for such loans was public securities, commonly called Company's Paper, bullion, treasure, plate, jewels, or goods 'not of a perishable nature' and no interest could be charged beyond a rate of twelve per cent. Loans against goods like opium, indigo, salt woolens, cotton, cotton piece goods, mule twist and silk goods were also granted but such finance by way of cash credits gained momentum only from the third decade of the nineteenth century. All commodities, including tea, sugar and jute, which began to be financed later, were either pledged or hypothecated to the bank. Demand promissory notes were signed by the borrower in favor of the guarantor, which was in turn endorsed to the bank. Lending against shares of the banks or on the mortgage of houses, land or other real property was, however, forbidden.

Indians were the principal borrowers against deposit of Company's paper, while the business of discounts on private as well as salary bills was almost the exclusive monopoly of individuals Europeans and their partnership firms. But the main function of 5

the three banks, as far as the government was concerned, was to help the latter raise loans from time to time and also provide a degree of stability to the prices of government securities. Major change in the conditions A major change in the conditions of operation of the Banks of Bengal, Bombay and Madras occurred after 1860. With the passing of the Paper Currency Act of 1861, the right of note issue of the presidency banks was abolished and the Government of India assumed from 1 March 1862 the sole power of issuing paper currency within British India. The task of management and circulation of the new currency notes was conferred on the presidency banks and the Government undertook to transfer the Treasury balances to the banks at places where the banks would open branches. None of the three banks had till then any branches (except the sole attempt and that too a short-lived one by the Bank of Bengal at Mirzapore in 1839) although the charters had given them such authority. The State Bank of India was thus born with a new sense of social purpose aided by the 480 offices comprising branches, sub offices and three Local Head Offices inherited from the Imperial Bank. The concept of banking as mere repositories of the community's savings and lenders to creditworthy parties was soon to give way to the concept of purposeful banking sub serving the growing and diversified financial needs of planned economic development. Branches The corporate center of SBI is located in Mumbai. In order to cater to different functions, there are several other establishments in and outside Mumbai, apart from the corporate center. The bank boasts of having as many as 14 local head offices and 57 Zonal Offices, located at major cities throughout India. It is recorded that SBI has about 10000 branches, well networked to cater to its customers throughout India. ATM Services SBI provides easy access to money to its customers through more than 8500 ATMs in India. The Bank also facilitates the free transaction of money at the ATMs of State Bank 6

Group, which includes the ATMs of State Bank of India as well as the Associate Banks State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, etc. You may also transact money through SBI Commercial and International Bank Ltd by using the State Bank ATM-cum-Debit (Cash Plus) card. The eight banking subsidiaries are:

State Bank of Bikaner and Jaipur (SBBJ) State Bank of Hyderabad (SBH) State Bank of India (SBI) State Bank of Indore (SBIR) State Bank of Mysore (SBM) State Bank of Patiala (SBP) State Bank of Saurashtra (SBS) State Bank of Travancore (SBT)

1.3.2 Vision and Values Vision statement To be amongst most trusted power utility company of the country by providing environment friendly power on most cost effective basis, ensuring prosperity for its stakeholders and growth with human face. Values

Excellence in customer service Profit orientation Belonging and commitment to the bank.

1.3.3 Achievements/ recognition

Business Standard has been awarded the Banker of the Year Award to Shri O.P.Bhatt. 7

June 08 Awards & Recognitions CNN IBN Network 18 has selected Shri O.P.Bhatt as Indian of the Year Business 2007. Asian Centre for Corporate Governance & Sustainability and Indian Merchants Chamber has awarded the Transformational Leader Award 2007. State Bank of India ranked as NO.1 in the 4Ps B & M & ICMR Survey on India's Best Marketed Banks in August-2009. Shri Om Prakash Bhatt declared as one of the '25 Most Valuable Indians' By The Week Magazine For 2009. State Bank of India has been adjuged The Best Bank 2009 By Business India in August-2009. It bagged Most Preferred Bank and Most Preferred Brand for Home Loan at CNBC Awaaz Consumer Awards. It became the only Indian bank to get listed in the Fortune Global 500 List. SBI was at the 70th slot in the top 1000 bank survey by Banker Magazine. It was awarded Golden award for being among the two most trusted banks in India by Readers Digest. SBI is ranked 6th in the Economic Times Market Cap List. SBI ranked as no.1 in the 4Ps B & M & ICMR Survey on India's Best Marketed Banks (August-2009)

1.3.4 SWOT Analysis

STRENGTHS 8

SBI has 49% CASA deposits which is the highest among the banks. State bank of India has the history of great resource raising ability. Their CASA deposits are in advantage. The dependence on external resource is minimal.

WEAKNESSES

Stand alone Credit Ratings downgraded from C- to D+ (C denotes adequate intrinsic Financial Strength and D suggests Modest intrinsic financial strength, requiring outside support at times)

Ratings lowered due to SBIs Low Tier 1 Capital (7.6% as on June 11) below GOI

Committed Level of 8% and increasing high stressed asset quality (3.52% June11) it is estimating that stress case may go up to 12.07% under pessimistic conditions. Its a warning bell rather than disrupting Systematic Stability. OPPORTUNITIES The Banks/NBFC companies have been attempting to diversify their resources base by increasingly accessing the capital markets and secondary market for its resources. THREATS Advent of MNC banks Customer Relationship Management Private bank venturing into the rural

1.4 LITERATURE REVIEW CAMEL rating system (Keeley and Gilbert) This study uses the capital adequacy component of the CAMEL rating system to assess whether regulators in the 1980s influenced inadequately capitalized banks to 9

improve their capital. Using a measure of regulatory pressure that is based on publicly available information, he found that inadequately capitalized banks responded to regulators' demands for greater capital. This conclusion is consistent with that reached by Keeley (1988). Yet, a measure of regulatory pressure based on confidential capital adequacy ratings reveals that capital regulation at national banks was less effective than at statechartered banks. This result strengthens a conclusion reached by Gilbert (1991) Banks performance evaluation by CAMEL model (Hirtle and Lopez) Despite the continuous use of financial ratios analysis on banks performance evaluation by banks' regulators, opposition to it skill thrive with opponents coming up with new tools capable of flagging the over-all performance ( efficiency) of a bank. This research paper was carried out; to find the adequacy of CAMEL in capturing the overall performance of a bank; to find the relative weights of importance in all the factors in CAMEL; and lastly to inform on the best ratios to always adopt by banks regulators in evaluating banks' efficiency. In addition, the best ratios in each of the factors in CAMEL were identified. For example, the best ratio for Capital Adequacy was found to be the ratio of total shareholders' fund to total risk weighted assets. The paper concluded that no one factor in CAMEL suffices to depict the overall performance of a bank. Among other recommendations, banks' regulators are called upon to revert to the best identified ratios in CAMEL when evaluating banks performance. CAMEL model examination (Rebel Cole and Jeffery Gunther) To assess the accuracy of CAMEL ratings in predicting failure, Rebel Cole and Jeffery Gunther use as a benchmark an off-site monitoring system based on publicly available accounting data. Their findings suggest that, if a bank has not been examined for more than two quarters, off-site monitoring systems usually provide a more accurate indication of survivability than its CAMEL rating. The lower predictive accuracy for CAMEL ratings "older" than two quarters causes the overall accuracy of CAMEL ratings to fall substantially below that of off-site monitoring systems. The higher predictive accuracy of off-site systems derives from both their timeliness-an updated off-site rating is available for every bank in every quarter-and 10

the accuracy of the financial data on which they are based. Cole and Gunther conclude that off-site monitoring systems should continue to play a prominent role in the supervisory process, as acomplement to on-site examinations. Check the Risk taken by banks by CAMEL model The deregulation of the U.S. banking industry has fostered increased competition in banking markets, which in turn has created incentives for banks to operate more efficiently and take more risk. They examine the degree to which supervisory CAMEL ratings reflect the level of risk taken by banks and the risk-taking efficiency of those banks (i.e., whether increased risk levels generate higher expected returns). Their results suggest that supervisors not only distinguish between the risk-taking of efficient and inefficient banks, but they also permit efficient banks more latitude in their investment strategies than inefficient banks. Bank soundness - CAMEL ratings Indonesia (Kenton Zumwalt) This study uses a unique data set provided by Bank Indonesia to examine the changing financial soundness of Indonesian banks during this crisis. Bank Indonesia's nonpublic CAMEL ratings data allow the use of a continuous bank soundness measure rather than ordinal measures. In addition, panel data regression procedures that allow for the identification of the appropriate statistical model are used. They argue the nature of the risks facing the Indonesian banking community calls for the addition of a systemic risk component to the Indonesian ranking system. The empirical results show that during Indonesia's stable economic periods, four of the five traditional CAMEL components provide insights into the financial soundness of Indonesian banks. However, during Indonesia's crisis period, the relationships between financial characteristics and CAMEL ratings deteriorate and only one of the traditional CAMEL componentsearnings objectively discriminates among the ratings. CHAPTER 2 THE MAIN THEME OF THE PROJECT 2.1 NEED FOR THE STUDY 11

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

2.1.1.1 Capital Adequacy A Capital Adequacy Ratio is a measure of a bank's capital. It is expressed as a percentage of a banks risk weighted credit exposures. Also known as ""Capital to Risk Weighted Assets Ratio (CRAR). Capital adequacy is measured by the ratio of capital to risk-weighted assets (CRAR). A sound capital base strengthens confidence of depositors. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Capital base of financial institutions facilitates depositors in forming their risk perception about the institutions. Also, it is the key parameter for financial managers to maintain adequate levels of capitalization. Moreover, besides absorbing unanticipated shocks, it signals that the institution will continue to honor its obligations. The most widely used indicator of capital adequacy is capital to risk-weighted assets ratio (CRWA). According to Bank Supervision Regulation Committee (The Basel Committee) of Bank for International Settlements, a minimum 8 percent CRWA is required. Capital adequacy ultimately determines how well financial institutions can cope with shocks to their balance sheets. Thus, it is useful to track capital-adequacy ratios that take into account the most important financial risksforeign exchange, credit, and interest rate risksby assigning risk weightings to the institutions assets.

2.1.1.2 Asset Quality: Asset quality determines the robustness of financial institutions against loss of value in the assets. The deteriorating value of assets, being prime source of banking problems, directly pour into other areas, as losses are eventually written-off against capital, which ultimately jeopardizes the earning capacity of the institution. With this backdrop, the asset quality is gauged in relation to the level and severity of non-performing assets, 13

adequacy of provisions, recoveries, distribution of assets etc. Popular indicators include nonperforming loans to advances, loan default to total advances, and recoveries to loan default ratios. The solvency of financial institutions typically is at risk when their assets become impaired, so it is important to monitor indicators of the quality of their assets in terms of overexposure to specific risks, trends in nonperforming loans, and the health and profitability of bank borrowers especially the corporate sector. Share of bank assets in the aggregate financial sector assets: In most emerging markets, banking sector assets comprise well over 80 per cent of total financial sector assets, whereas these figures are much lower in the developed economies. Furthermore, deposits as a share of total bank liabilities have declined since 1990 in many developed countries, while in developing countries public deposits continue to be dominant in banks. In India, the share of banking assets in total financial sector assets is around 75 per cent, as of end-March 2008. There is, no doubt, merit in recognizing the importance of diversification in the institutional and instrument-specific aspects of financial intermediation in the interests of wider choice, competition and stability. However, the dominant role of banks in financial intermediation in emerging economies and particularly in India will continue in the medium-term; and the banks will continue to be special for a long time. In this regard, it is useful to emphasize the dominance of banks in the developing countries in promoting on-bank financial intermediaries and services including in development of debt-markets. Even where role of banks is apparently diminishing in emerging markets, substantively, they continue to play a leading role in non-banking financing activities, including the development of financial markets. One of the indicators for asset quality is the ratio of non-performing loans to total loans (GNPA). The gross non-performing loans to gross advances ratio is more indicative of the quality of credit decisions made by bankers. Higher GNPA is indicative of poor credit decision-making. NPA: Non-Performing Assets Advances are classified into performing and non-performing advances (NPAs) as per RBI guidelines. NPAs are further classified into sub-standard, doubtful and loss assets based on the criteria stipulated by RBI. An asset, including a leased asset, becomes nonperforming when it ceases to generate income for the Bank.

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2.1.1.3 Management Soundness Management of financial institution is generally evaluated in terms of capital adequacy, asset quality, earnings and profitability, liquidity and risk sensitivity ratings. In addition, performance evaluation includes compliance with set norms, ability to plan and react to changing circumstances, technical competence, leadership and administrative ability. In effect, management rating is just an amalgam of performance in the abovementioned areas. Sound management is one of the most important factors behind financial institutions performance. Indicators of quality of management, however, are primarily applicable to individual institutions, and cannot be easily aggregated across the sector. Furthermore, given the qualitative nature of management, it is difficult to judge its soundness just by looking at financial accounts of the banks. Nevertheless, total expenditure to total income and operating expense to total expense helps in gauging the management quality of the banking institutions. Sound management is key to bank performance but is difficult to measure. It is primarily a qualitative factor applicable to individual institutions. Several indicators, however, can jointly serveas, for instance, efficiency measures doas an indicator of management soundness. The ratio of noninterest expenditures to total assets (MGNT) can be one of the measures to assess the working of the management. . This variable, which includes a variety of expenses, such as payroll, workers compensation and training investment, reflects the management policy stance.

2.1.1.4 Earnings & Profitability Earnings and profitability, the prime source of increase in capital base, is examined with regards to interest rate policies and adequacy of provisioning. In addition, it also helps to support present and future operations of the institutions. The single best indicator used to gauge earning is the Return on Assets (ROA), which is net income after taxes to total asset ratio. Strong earnings and profitability profile of banks reflects the 15

ability to support present and future operations. More specifically, this determines the capacity to absorb losses, finance its expansion, pay dividends to its shareholders, and build up an adequate level of capital. Being front line of defense against erosion of capital base from losses, the need for high earnings and profitability can hardly be overemphasized. Although different indicators are used to serve the purpose, the best and most widely used indicator is Return on Assets (ROA). However, for in-depth analysis, another indicator Net Interest Margins (NIM) is also used. Chronically unprofitable financial institutions risk insolvency. Compared with most other indicators, trends in profitability can be more difficult to interpretfor instance, unusually high profitability can reflect excessive risk taking. ROA-Return on Assets An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment". ROA tells what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company. The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company.

The ROA gives investors an idea of how effectively the company is converting the money it has to invest in tone income. The higher the ROA number, the better, because the company is earning more money on less investment. For example, if one company has a net income of $1 million and total assets of $5 million, its ROA is 20%; however, if another company earns the same amount but has total assets of $10 million, it has an ROA of 10%. Based on this example, the first company is better at converting its investment into 16

profit. When you really think about it, management's most important job is to make wise choices in allocating its resources. Anybody can make a profit by throwing at on of money at a problem, but very few managers excel at making large profits with little investment. 2.1.1.5 Liquidity An adequate liquidity position refers to a situation, where institution can obtain sufficient funds, either by increasing liabilities or by converting its assets quickly at a reasonable cost. It is, therefore, generally assessed in terms of overall assets and liability management, as mismatching gives rise to liquidity risk. Efficient fund management refers to a situation where a spread between rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is maintained. The most commonly used tool to evaluate interest rate exposure is the Gap between RSA and RSL, while liquidity is gauged by liquid to total asset ratio. Initially solvent financial institutions may be driven toward closure by poor management of short-term liquidity. Indicators should cover funding sources and capture large maturity mismatches. The term liquidity is used in various ways, all relating to availability of, access to, or convertibility into cash. Resiliency is the speed with which prices return to equilibrium following a large trade. Examples of assets that tend to be liquid include foreign exchange; stocks traded in the Stock Exchange or recently issued Treasury bonds. Assets that are often illiquid include limited partnerships, thinly traded bonds or real estate.

Cash maintained by the banks and balances with central bank, to total asset ratio (LQD) is an indicator of bank's liquidity. In general, banks with a larger volume of liquid assets are perceived safe, since these assets would allow banks to meet unexpected withdrawals. Credit deposit ratio is a tool used to study the liquidity position of the bank. It is calculated by dividing the cash held indifferent forms by total deposit. A high ratio shows

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that there are more amounts of liquid cash with the bank to meet its clients cash withdrawals. 2.1.1.6 Sensitivity to Market Risk It refers to the risk that changes in market conditions could adversely impact earnings and/or capital. Market Risk encompasses exposures associated with changes in interest rates, foreign exchange rates, commodity prices, equity prices, etc. While all of these items are important, the primary risk in most banks is interest rate risk (IRR), which will be the focus of this module. The diversified nature of bank operations makes them vulnerable to various kinds of financial risks. Sensitivity analysis reflects institutions exposure to interest rate risk, foreign exchange volatility and equity price risks (these risks are summed in market risk). Risk sensitivity is mostly evaluated in terms of managements ability to monitor and control market risk. Banks are increasingly involved in diversified operations, all of which are subject to market risk, particularly in the setting of interest rates and the carrying out of foreign exchange transactions. In countries that allow banks to make trades in stock markets or commodity exchanges, there is also a need to monitor indicators of equity and commodity price risk.

2.1.1.7 Interest Rate Risk Basics In the most simplistic terms, interest rate risk is a balancing act. Banks are trying to balance the quantity of reprising assets with the quantity of reprising liabilities. For example, when a bank has more liabilities reprising in a rising rate environment than assets reprising, the net interest margin (NIM) shrinks. Conversely, if your bank is asset sensitive

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in a rising interest rate environment, your NIM will improve because you have more assets reprising at higher rates. An extreme example of a reprising imbalance would be funding 30-year fixed-rate mortgages with6-month CDs. You can see that in a rising rate environment the impact on the NIM could bed evastating as the liabilities reprise at higher rates but the assets do not. Because of this exposure, banks are required to monitor and control IRR and to maintain a reasonably well-balanced position. Liquidity risk is financial risk due to uncertain liquidity. An institution might lose liquidity if its credit rating falls, it experiences sudden unexpected cash outflows, or some other event causes counterparties to avoid trading with or lending to the institution. A firm is also exposed to liquidity risk if markets on which it depends are subject to loss of liquidity. Liquidity risk tends to compound other risks. If a trading organization has a position in an illiquid asset, its limited ability to liquidate that position at short notice will compound its market risk. Suppose a firm has offsetting cash flows with two different counterparties on a given day. If the counterparty that owes it a payment defaults, the firm will have to raise cash from other sources to make its payment. Should it be unable to do so, it too we default. Here, liquidity risk is compounding credit risk. Accordingly, liquidity risk has to be managed in addition to market, credit and other risks. Because of its tendency to compound other risks, it is difficult or impossible to isolate liquidity risk. In all but the most simple of circumstances, comprehensive metrics of liquidity risk don't exist. Certain techniques of asset-liability management can be applied to assessing liquidity risk. If an organization's cash flows are largely contingent, liquidity risk may be assessed using some form of scenario analysis. Construct multiple scenarios for market movements and defaults over a given period of time. Assess day-today cash flows under each scenario. Because balance sheets differed so significantly from one organization to the next, there is little standardization in how such analyses are implemented.

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Regulators are primarily concerned about systemic implications of liquidity risk. Business activities entail a variety of risks. For convenience, we distinguish between different categories of risk: market risk, credit risk, liquidity risk, etc. Although such categorization is convenient, it is only informal. Usage and definitions vary. Boundaries between categories are blurred. A loss due to widening credit spreads may reasonably be called a market loss or a credit loss, so market risk and credit risk overlap. Liquidity risk compounds other risks, such as market risk and credit risk. It cannot be divorced from the risks it compounds. An important but somewhat ambiguous distinguish is that between market risk and business risk. Market risk is exposure to the uncertain market value of a portfolio. Business risk is exposure to uncertainty in economic value that cannot be marked-to market. The distinction between market risk and business risk parallels the distinction between marketvalue accounting and book-value accounting. The distinction between market risk and business risk is ambiguous because there is a vast "gray zone" between the two. There are many instruments for which markets exist, but the markets are illiquid. Mark-to-market values are not usually available, but mark-to model values provide a more-or-less accurate reflection of fair value. The decision is important because firms employ fundamentally different techniques for managing the two risks. Business risk is managed with along-term focus. Techniques include the careful development of business plans and appropriate management oversight. Book-value accounting is generally used, so the issue of day-to-day performance is not material.

2.2 SCOPE OF THE STUDY

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2.3 OBJECTIVE OF STUDY To evaluate the financial performance of State Bank of India by using CAMELS model technique. To analyze three banks to get the desired results by using CAMEL as a tool of measuring performance.

To analyze the banks performance through CAMEL model and give suggestion for improvement if necessary.

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2.4 LIMITATIONS OF STUDY

Time and resources constraints. The study was completely done on the basis of ratios calculated from the balance sheets. It has not been possible to get a personal interview with the top management employees of SBI. It has not been possible to get sensitive real data on actual CAMELS analysis performed by the RBI on State bank of India.

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2.5 RESEARCH METHODOLOGY

Research Methodology is a way to systematically solve the research problem. It may be understood as a science of studying how the research has to be done scientifically. From this we analyze and study the various steps that ate generally adopted by the research and study the research problem along with the logic behind them.

RESEARCH Research is common parlance refers to search for knowledge. One can also define research as a scientific and systematic search for pertinent information on a specific topic.

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RESEARCH DESIGN Research Design is a framework or plan for a study that guides the collection and analysis of the data. A research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. The design used in the study is quantitative and analytical.

METHOD OF DATA COLLECTION The period for evaluating performance through CAMELS in this study is four years, i.e. from financial year 2008-09 to 2010-11. The data is collected from various sources as follows. Primary data: A Primary data is a data, which is collected for the first time for a particular interest to have more information. Primary data was collected from the company balance sheets and company profit and loss statements and interaction with the employees of State Bank of India. Secondary data: Secondary data are those which have already been collected by someone else and which have already passed through the statistical processes. Secondary data on the subject was collected from Business journals, Business dailies, company prospectus, company annual reports and RBI websites.
TOOLS USED The tools used are

CAMEL Analysis Trend Analysis Comparative Analysis 24

Trend Analysis Trend Analysis is the practice of collecting information and attempting to spot a pattern, or trend, in the information. In some fields of study, the term "trend analysis" has more formally-defined meanings. Although trend analysis is often used to predict future events, it could be used to estimate uncertain events in the past. Considering the base year as 2008.

2.6 DATA ANALYSIS AND INTERPRETATION

ANALYSIS Analysis is the process of placing the data in the ordered form, combining them with the existing information and extracting the meaning from them. Only analysis brings out the information from the data.

INTERPRETATION Interpretation is the process of relating various factors with other information. It brings out the relation between the findings to the research objectives and hypothesis framed for the study in the beginning. 25

STATISTICAL TOOLS To analyze the data the following tools were applied: CAMEL Analysis Trend Analysis Comparative Analysis

2.6.1 CAMEL Analysis Table no: 2.6.1.1 Capital Risk Adequacy Ratio Capital risk adequacy ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Capital Risk Adequacy Ratio= Capital fund of the bank/ Risk weighted assets*100 Year 2007 2008 2009 2010 2011 Source: Secondary Data Chart: 2.6.1.1 Capital adequacy ratio 26 Capital Fund (Tier 1 and Tier 2) 4882.29 10368 2339.92 4882.27 3399.45 Risk weighted asset 72761 82148 33918.87 25376.24 Ratio % 14.25 13.39 13.40 14.39

Interpretation: Capital risk adequacy ratio has reduced from the year 2009 to 2011 from 14.25 % to 11.98%. It is expressed as a percentage of a bank's risk weighted credit exposures.

TABLE NO 2.6.1.2 Debt to Equity Ratio Debt to Equity Ratio(%) = (Borrowings / Total Shareholders Equity) Years 2008 2009 2010 2011 Total liability 721526 964432 10534 12237 Share holders equity 6583266.4 7528743.1 86415 85159 Debt Equity ratio% 10.96 12.81 12.19 14.37

Source: Secondary Data Chart: 2.6.1.2 Debt to Equity Ratio

27

Interpretation: The debt equity ratio has increased from 2008 to 2009 and decreased and again increased in the year 2011 from 10.91 % (2008) to 14.37 % (2011).

TABLE NO 2.6.1.3 Advances to assets ratio Advances to assets ratio (%) = (Advance /total asset)

Year

Advances

Total asset 721,526 964,432 1,053,413 1223736

Advances to assets ratio% 57.76 56.25 60.0 61.8

2008 416,768 2009 542,503 2010 631,914 2011 756,719 Source: Secondary Data

Chart: 2.6.1.3 Advances to assets ratio 28

Interpretation: The advance to asset ratio has seen decrease from 2008 to 2009 but then increased from 56.25 % to 61.8 % steadily in 2011.

TABLE NO 2.6.1.4 Govt.securities to Total investments ratio Govt.securities to Total investments ratio (%) = Govt securities / Total investments Year G-sec Total investments 189,501 275,953 285,790 295600 G-sec to investments ratio 74.26 81.98 79.32 78.05

5435.71 2008 4849.32 2009 226217 2010 104018398 2011 100218617 Source: Secondary Data

Chart: 2.6.1.4 Govt.securities to Total investments ratio

29

Interpretation: The govt.securities to investment ratio increases from 2008 to 2009 as74.26% to 81.98% and decreases in the next two years from 79.32% to 78.05%.

A-ASSET QUALITY TABLE NO 2.6.1.5 Gross NPA ratio Gross NPA ratio(%) = (Gross NPA/Total Loan) Year Gross NPA 2007 158.89 2009 179.13 2010 12347 2011 25326 Source: Secondary Data 30 Total loan 4222.7 5494.4 4048.19 7721.34 Gross NPA ratio 3.04 2.86 3.05 3.28

Chart: 2.6.1.5 Gross NPA ratio

Interpretation: The asset quality ratio has decreased from 3.045 to 2.86% in the first two years but has increased in the last two year from 3.05% to 3.28% from 2010 to 2011.

TABLE NO 2.6.1.6 Net NPA ratio Net NPA ratio (%)= (Net NPA/ Total Loan) Year Net NPA 2008 7424.33 2009 9552 2010 10870.17 2011 12347 Source: Secondary Data 31 Total Loan 4170.97 5336.31 6319 7574.85 Net NPA ratio 1.78 1.79 1.72 1.63

Chart: 2.6.1.6 Net NPA ratio

Interpretation: The net NPA ratio has increased from the year 2008 to 2009 as 1.78 to 1.79 Again it has decreased from 2010 to 2011 to 1.63.

M-MANAGEMENT QUALITY TABLE NO 2.6.1.7 Total Advance to Total Deposit Ratio

Total Advance to Total Deposit Ratio = (Total Advance/ Total Deposit)* 100

Year

Total Advance

Total Deposit

Total Advance to Total Deposit Ratio

32

2008 2009 2010 2011 Source: Secondary Data

416,768 542,503 631,914 756719

537,403 742,073 804,116 933932

77.55 73.10 78.58 81.02

Chart: 2.6.1.7 Total Advance to Total Deposit Ratio

Interpretation: The net total advance to total deposit ratio has decreased from the year 2008 to 2009 from 77.55%. Then increased from 78.58% to 81.02% in the year 2010 to 2011. TABLE NO 2.6.1.8 Business per employee ratio

Business per employee ratio (%) = Total Income / No.of Employees Year 2008 2009 Total Income 58,348 76,479 33 No.of Employees 179205 205896 Business per employee ratio 3.26 3.71

2010 85,962 2011 96,329 Source: Secondary Data

200299 222933

4.30 4.36

Chart: 2.6.1.8 Business per employee ratio

Interpretation: Business per employee ratio kept on increasing from 2008 to 2011 from 3.26% to 4.36%.

TABLE NO 2.6.1.9 Profit per employee ratio Profit per employee ratio (%) = Net Profit / No.of Employees Year 2008 2009 2010 2011 Net Profit 6,729 9,121 9,166 7,370 34 No.of Employees 179205 205896 200299 222933 Profit per employee ratio 3.75 4.43 4.58 3.30

Source: Secondary Data

Chart: 2.6.1.9 Profit per employee ratio

Interpretation: Profit per employee ratio increased from 2008 to 2010 as 3.75% to 4.58% and decreased in the year 2011 as3.30%.

E-EARNING PERFORMANCE TABLE NO 2.6.1.10 Dividend Payout Ratio Dividend Payout Ratio = (dividend / net profit) Year 2008 dividend 1,357 35 Net profit 6,729
Dividend Payout Ratio

20.17

2009 1,841 2010 1,904 2011 1,905 Source: Secondary Data

9,121 9,166 7,370

20.18 20.77 25.85

Chart: 2.6.1.10 Dividend Payout Ratio

Interpretation: Dividend payout ratio increased continuously from 2008 to 2011 from 20.17% to 25.85%

TABLE NO 2.6.1.11 Return on Assets

Return on Assets (%) = Net Income after Tax x 100/ Average Total Assets Year 2008 Net income 6,729 36 Total assets 721,526 Return on assets 1.02

2009 9,121 2010 9,166 2011 8,264 Source: Secondary Data Chart: 2.6.1.11 Return on Assets

964,432 1,053,413 1223736

1.04 0.87 0.7

Interpretation: The return on asset ratio has increased from 2008 to 2009 from 1.02% to1.04% .Then decreased from 0.87% to 0.7% from 2010 to 2011.

37

TABLE NO 2.6.1.12 Return on Equity Return on Equity (%) = Net Income after Tax x 100/ Average Total Equity Funds Year Net income 2008 6729.12 2009 9121.23 2010 9166.05 2011 7370.35 Source: Secondary Data Total equity fund 631.47 634.88 634.88 635 Return on equity 10.65 14.36 14.43 11.6

Chart: 2.6.1.12 Return on Equity

Interpretation: The return on equity ratio has seen a increase from the year 2008 to 2009 from 10.65% to 14 .36% whereas it has reduced in the next year and decreased from 2010 to 2011 from 14.435 to 11.60%.

38

TABLE NO 2.6.1.13 Liquidity asset to Total Asset Ratio

Liquidity asset to Total Asset Ratio (%) = Liquidity Asset/ Total Asset Year Liquidity asset to Total Asset Ratio Total Asset 721,526 964,432 1,053,413 1223736 Liquidity asset to Total Asset Ratio 7.58 6.13 6.20 8.07

2008 54673.84 2009 59120.58 2010 65408.6 2011 98817.45 Source: Secondary Data

Chart: 2.6.1.13 Liquidity asset to Total Asset Ratio

Interpretation: Liquidity asset to total asset ratio decreased from 7.58% to 6.13% in the year 2008 to 2009 and then increased from 2010 to 2011 from 6.2% to 8.07%.

TABLE NO 2.6.1.14 Liquidity asset to Total Deposit Ratio 39

Liquidity asset to Total Deposit Ratio (%) = Liquidity Asset/ Total deposit Year Liquidity asset Total Deposit 537,403 742,073 804,116 933932 Liquidity asset to Total Deposit Ratio 10.17 7.97 8.13 10.58

2008 54673.84 2009 59120.58 2010 65408.6 2011 98817.45 Source: Secondary Data

Chart: 2.6.1.14 Liquidity asset to Total Deposit Ratio

Interpretation: Liquidity asset to total deposit ratio decreased from 10.17% to 7.97% in the year 2008 to 2009 and increased in the year 2011 to 10.58%.

2.6.2 TREND ANALYSIS 40

Table no 2.6.2.1 Balance sheet of State bank of India PARTICULARS

Liabilities: Total share capital Equity share capital Reserves Net worth Deposits Borrowings Total debt Other liabilities & provisions Total liabilities Assets Cash&balance with RBI Balance with banks,money at call Advance Investment Gross block Accumulated depreciation Net block Capital work in progress other assets 100 100 100 100 100 100 100 100 100 107.78 306.67 130.17 145.62 115.74 116.75 113.86 112.46 84.95 110.34 71.42 116.48 103.56 113.73 112.96 115.20 112.04 93.05 154.01 81.62 119.75 103.65 111.47 113.53 107.63 112.55 124.68 100 100 100 100 100 100 100 100 100 100.54 100.54 118.41 118.18 138.08 103.84 135.08 132.80 133.66 0 0 113.96 113.80 108.36 191.78 113.90 72.57 109.23 100.01 100.01 98.48 98.54 116.14 116.07 116.14 131.09 116.17

2008

2009

2010

2011

Total assets

100

133.66

109.23

116.17

Interpretation: 41

The cash balance of State bank of India is in increasing trend. Investment is in fluctuating trend i.e. increases and decreases. Share capital increases and goes to zero and then again increases. Reserves is fluctuating, it increases and again decreases. The total asset of the bank is fluctuating. The total liabilities also increase and then again decrease and increase again.

2.6.3 COMPARATIVE ANALYSIS OF SBI,ICICI AND HDFC 42

Table no: 2.6.3.1 Capital Adequacy Ratio

PARTICULARS SBI ICICI HDFC Source: Secondary Data

2008 13.47% 13.97% 13.60%

2009 14.25% 15.53% 15.10%

2010 13.39% 19.41% 17.40%

2011 11.98% 19.54% 16.22%

Chart: 2.6.3.1 Capital Adequacy Ratio

Interpretation: Capital Adequacy Ratio of SBI increased from 13.47% to 14.25% and again goes on decreases to 11.98% in the year 2011. ICICI is increasing from 13.97% to 19.54% in the year from 2008 to 2011. HDFC is increased from 13.60% to 17.40% in the year 2008 to 2010 and again decreased to 16.22% in the year 2011.

Table no: 2.6.3.2 Gross NPA Assets 43

PARTICULARS SBI ICICI HDFC Source: Secondary Data Chart: 2.6.3.2 Gross NPA Assets

2008 3.04 3.3 1.3

2009 2.84 4.32 1.98

2010 3.05 5.06 1.43

2011 3.41 5.41 1.67

Interpretation: Gross NPA asset of SBI decreased from 3.04% to 2.84% in the year 2008 to 2009 and again increased to 3.41%. ICICI keeps on increasing in nonperforming asset from 3.3% to 5.41%. HDFC is fluctuating i.e. increases and decreases from 2008 to 2011.

Table no: 2.6.3.3 Net NPA Assets 44

PARTICULARS SBI ICICI HDFC Source: Secondary Data

2008 1.78 1.12 0.5

2009 1.76 2.09 0.6

2010 1.72 2.12 0.5

2011 1.91 2.41 1.32

Chart: 2.6.3.3 Net NPA Assets

Interpretation: Net NPA asset of SBI keeps on decreases for the first two years and increased to 1.91% in the year 2011. ICICI NPA keeps on increasing. HDFC is fluctuating i.e. decreases and increases to 1.32%

Table no: 2.6.3.4 Total advance to Total deposit Ratio

PARTICULARS

2008 45

2009

2010

2011

SBI ICICI HDFC Source: Secondary Data

6.32 5.61 5.18

7.2 5.14 5

7.26 4.6 4.24

7.24 3.55 4.65

Chart: 2.6.3.4 Total advance to Total deposit Ratio

Interpretation: Total advance to total deposit ratio of SBI is increases from 6.32% to 7.26% in the year 2008 to 2010 and decreased to 7.24%. ICICI keeps on decreasing from 5.61% to 3.55%. HDFC decreases from 5.18% to 4.24% and increases to 4.65% in the year 2011.

Table no: 2.6.3.5 Asset turnover Ratio

PARTICULARS SBI

2008 126.62 46

2009 143.77

2010 144.37

2011 116.07

ICICI HDFC Source: Secondary Data

39.39 46.2

33.76 52.9

36.14 67.6

44.73 84.4

Chart: 2.6.3.5 Asset turnover Ratio

Interpretation: Asset turnover ratio of SBI is fluctuating from 126.62% to 116.07% in the year 2008 to 2011 and decreases to 116.97%. ICICI is also fluctuating i.e. decreases and increases from 39.39% to 44.73%.HDFC keeps on increasing from 46.2% to 84.4% in the year 2008 to 2011.

Table no: 2.6.3.6 Net profit margin

PARTICULARS

2008 47

2009

2010

2011

SBI ICICI HDFC Source: Secondary Data

11.65 10.51 12.82

12.03 9.74 11.35

10.54 12.17 14.76

8.55 15.91 16.09

Chart: 2.6.3.6 Net profit margin

Interpretation: Net profit ratio of SBI is fluctuating i.e. increases and decreases from 11.65% to 8.55%.ICICI net profit if fluctuating ,decreased and increased from 10.51% to 15.91%.HDFC is fluctuating i.e. decreases and increases from 12.82% to 16.09%.

Table no: 2.6.3.7 Return on Asset

PARTICULARS

2008 48

2009

2010

2011

SBI ICICI HDFC Source: Secondary Data

1.01 1.12 1.42

1.04 0.98 1.42

0.88 1.13 1.45

1.37 1.23 1.82

Chart: 2.6.3.7 Return on Asset

Interpretation: Return on asset of SBI is fluctuating, it increases and decreases from 2008 to 2011 as 1.01% to 1.37%. ICICI if fluctuating ,it decreases and increases from 1.12% to 1.23%.HDFC remains constant for two years as 1.42% and increases from 1.45% to 1.82%.

Table no: 2.6.3.8 Assessing Liquidity

PARTICULARS SBI ICICI

2008 77.55 92.3 49

2009 73.11 99.98

2010 78.58 89.7

2011 81.03 95.91

HDFC Source: Secondary Data

62.74

69.24

75.17

76.7

Chart: 2.6.3.8 Assessing Liquidity

Interpretation: Assessing the liquidity ratio of SBI is in fluctuating flow i.e. decreases from 73.11% and increases to 78.58%. ICICI liquidity also fluctuates i.e. increases, decreases and again increases to 95.91% in the year 2011. HDFC liquidity is increases from 62.74% to 76.7% in the year 2008 to 2011.

2.6.4 FINDINGS

Capital risk adequacy ratio has reduced from the year 2009 to 2011 from 14.25 % to 11.98%. It is expressed as a percentage of a bank's risk weighted credit exposures. 50

The debt equity ratio has increased from 2008 to 2009 and decreased and again increased in the year 2011 from 10.91 % (2008) to 14.37 % (2011).

The advance to asset ratio has seen decrease from 2008 to 2009 but then increased from 56.25 % to 61.8 % steadily in 2011.

The govt.securities to investment ratio increases from 2008 to 2009 as74.26% to 81.98% and decreases in the next two years from 79.32% to 78.05%.

The asset quality ratio has decreased from 3.045 to 2.86% in the first two years but has increased in the last two year from 3.05% to 3.28% from 2010 to 2011.

The net NPA ratio has increased from the year 2008 to 2009 as 1.78 to 1.79 again it has decreased from 2010 to 2011 to 1.63.

The net total advance to total deposit ratio has decreased from the year 2008 to 2009 from 77.55%. Then increased from 78.58% to 81.02% in the year 2010 to 2011.

Business per employee ratio kept on increasing from 2008 to 2011 from to 4.36%.

3.26%

Profit per employee ratio increased from 2008 to 2010 as 3.75% to 4.58% and decreased in the year 2011 as3.30%.

Dividend payout ratio increased continuously from 2008 to 2011 from 20.17% to 25.85%

The return on asset ratio has increased from 2008 to 2009 from 1.02% to1.04% .Then decreased from 0.87% to 0.7% from 2010 to 2011.

The return on equity ratio has seen a increase from the year 2008 to 2009 from 10.65% to 14 .36% whereas it has reduced in the next year and decreased from 2010 to 2011 from 14.435 to 11.60%.

51

Liquidity asset to total asset ratio decreased from 7.58% to 6.13% in the year 2008 to 2009 and then increased from 2010 to 2011 from 6.2% to 8.07%.

Capital Adequacy Ratio of SBI increased from 13.47% to 14.25% and again goes on decreases to 11.98% in the year 2011. ICICI is increasing from 13.97% to 19.54% in the year from 2008 to 2011. HDFC is increased from 13.60% to 17.40% in the year 2008 to 2010 and again decreased to 16.22% in the year 2011.

Gross NPA asset of SBI decreased from 3.04% to 2.84% in the year 2008 to 2009 and again increased to 3.41%. ICICI keeps on increasing in nonperforming asset from 3.3% to 5.41%. HDFC is fluctuating i.e. increases and decreases from 2008 to 2011.

Net NPA asset of SBI keeps on decreases for the first two years and increased to 1.91% in the year 2011. ICICI NPA keeps on increasing. HDFC is fluctuating i.e. decreases and increases to 1.32%

Total advance to total deposit ratio of SBI is increases from 6.32% to 7.26% in the year 2008 to 2010 and decreased to 7.24%. ICICI keeps on decreasing from 5.61% to 3.55%. HDFC decreases from 5.18% to 4.24% and increases to 4.65% in the year 2011.

Asset turnover ratio of SBI is fluctuating from 126.62% to 116.07% in the year 2008 to 2011 and decreases to 116.97%. ICICI is also fluctuating i.e. decreases and increases from 39.39% to 44.73%.HDFC keeps on increasing from 46.2% to 84.4% in the year 2008 to 2011.

Net profit ratio of SBI is fluctuating i.e. increases and decreases from 11.65% to 8.55%.ICICI net profit if fluctuating ,decreased and increased from 10.51% to 15.91%.HDFC is fluctuating i.e. decreases and increases from 12.82% to 16.09%.

Return on asset of SBI is fluctuating, it increases and decreases from 2008 to 2011 as 1.01% to 1.37%. ICICI if fluctuating ,it decreases and increases from 1.12% to 1.23%.HDFC remains constant for two years as 1.42% and increases from 1.45% to 1.82%. 52

Assessing the liquidity ratio of SBI is in fluctuating flow i.e. decreases from 73.11% and increases to 78.58%. ICICI liquidity also fluctuates i.e. increases, decreases and again increases to 95.91% in the year 2011. HDFC liquidity is increases from 62.74% to 76.7% in the year 2008 to 2011.

CHAPTER 3 SUGGESTIONS AND CONCLUSION 3.1 SUGGESTIONS To further optimize Capital Adequacy 53

Export Credit Covered under ECGC(those which are not covered earlier) to reduce the capital requirement by Rs.10-14 Bn

SME activities up to Rs.10 mn under Credit Guaranteed Fund Trust for MSME can be increased from current Rs.310 bn to Rs. 650-700 bn. Hence any loans losses would be borne by Guarantor.

Hopeful of capital infusion by Dec2011 or latest by March 2012 which will increase Tier 1 ratio 9%

3.2 CONCLUSION

ANNEXURE

54

FINDINGS Currently SBIs Tier 1 capital position has remained lower than of 8% SBIs Tier 1 Capital stood comfortable level of 9.57% until Q4 FY10. However in March 11, SBIs pension Liability amounting Rs.7900 Crs. Was taken through its capital account, thus resulting in the bank Tier 1 capital declining below 8% to 7.77% and further by 17 bps to 7.6% in June 11. The non-performing assets of SBI is the highest among public sector banks with few exceptions. The economic slowdown lack of coal for power projects, poor investments in infrastructure by Government can also affect the asset quality.

CRAMEL Model

Capital Adequacy

It is obvious that a Bank/Finance companies should keep more capital in reserves for riskier assets. 55

The reported capital adequacy is in compliance with RBI requirements. Banks minimum 9%(tier 1 capital %) and NBFC deposit taking 12% to 15% from March 12 Basel norms suggest CAR of 8%. RBI as proposed CAR of 9%by 2012. CAR is one of the main criteria taken for rating. Banking industry keeps 15-20%capital normally. Tier 1 capital is equity & reserves. Tier 2is Bonds of five years and above. The rest is mobilized as resource. Cash with RBI as Zero risk. Personal loans without security as175% risk. In case of govt. banks management is not a concern.

Resource Raising Ability The raising a resource funds is like a raw material to the Banks/ Finance company. Reverse Repo, Call money, CDS,CASA, Bonds ,Other Borrowings

Management The quality of a companys management, its business strategies and ability and track record in responding to changes in market conditions form a central input in the credit assessment. In the evaluation , the parentage of the organization is also important. Shareholding Pattern & Structure Market Share , Risk Management Systems ,Experience of Key Employees As SBI is owned by the Government , the management co-related to the Government. SBI has 59% shareholding by the Government and has long history. The market share of SBI is 17% as a whole and among Public Sector Banks it is 27%. SBI is a representative of all Indian Banks and the Government. Earnings

56

Distribution of Income basket. It is important for both shareholders and Bond holders. Key Ratios Return on Net worth Return on Average Assets Interest Spread PAT to total income

57

58