1. FINANCIAL STATEMENTS ANALYSIS OF BANKS

2. ASSETS OF COMMERCIAL BANKS

Mainly following are the Assets :-

• Cash in hand

• Balances with RBI

• Balances with banks in India

• Money at call and short notice

• Balances with banks outside India

• Investments

• • Investments in India

• • Investments outside India

• Advances

• • Type-wise

• • Security-wise

• • Sector-wise

• Fixed Assets

• Other Assets

3. LIABILITIES OF COMMERCIAL BANKS

Capital

Reserves and Surplus

• Statutory Reserves

• Capital Reserves

• Share Premium

• Investments Fluctuations Reserves

• Revenue and other Reserves

• Balance of Profit

Deposits

• Type-wise

• Location-wise

Borrowings

Other liabilities

Other liabilities

4. BANK PERFORMANCE INDICATORS

Solvency of bank dependsnot only on stability value of itsPerforming Assetsand also on size ofcapital accounts

Ratio of capital funds to bank assets universally accepted measure of strength and stability of bank

Functions of bank Capital

• Link between financial markets and bank's profitability

• Return on capital indicates how well a bank's programmes may be sustained

• Provides cushion against temporary losses and signal that bank has a basis of continuity

• Generally less than 10% of Assets

5. ASSESSMENT OF BANK ASSETS

Capital Adequacy Ratio

Minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 9 % ongoing basis

Subjected to Prudential Floor (as % of minimum capital requirement computed as per current (Basel I) framework for credit and market risks)

Capital funds are broadly classified as Tier 1 and Tier 2 capital

• Tier 1 PUC, Free Reserves, Innovative perpetual debt instruments

• Tier II - Revaluation reserves, General provisions and loss reserves,

Tier 2 capital shall not exceed 100 % of Tier 1 capital

Deduction from Tier I - Intangible assets and losses in the current period and those brought forward from previous periods

6. RISK ADJUSTED CAPITAL REQUIREMENTS

Adoption of Capital Adequacy norms, Prudential norms for income recognition and provision for bad debts

Risk Weighted Assets Ratio approach to Capital considered more equitable

Integration of on-balance sheet and off-balance sheet exposure in to capital ratio provide risk sensitivity and skills to manage risks in prudent manner

Intangible assets and losses in the current period and those brought forward from previous periods should be deducted from Tier 1 capital

Loans and advances to banks own staff which are fully covered by superannuation benefits and/or mortgage of flat/ house - 20 % risk weight.

Capital Charge for Credit Risk - rating assigned by eligible external credit rating agencies

7. FUNDED RISK ASSETS

Cash balances with RBI, other banks, money at call or short notice

Claims on other banks (Certificate of Deposit)

Other investments

Loans and Advances

Loans guaranteed by CG/SG

Loans granted to PSU

Premises, Furniture and other fixtures

Bills Purchased and discounted and other credit facilities

Off-balance Sheet Items- Conversion factor is used to calculate Risk Exposure

8. INCOME STATEMENT

Interest Income

Other Income

Operating Income (OI)

Interest Expenses

Employee Expenses

OPBDT/OPBT

Extraordinary / Prior period

Tax

PAT

Dividend

9. INCOME RECOGNITION POLICY

Policyof income recognition- objective and based on the record of recovery

Income from NPA- receipt basis

Interest on advances against term deposits, NSCs, IVPs, KVPsand Life policies - taken to income account on the due date, provided adequate margin isavailable

Finance income on leased asset- accrual basis

Categories of NPAs i. Substandard Assets ii. Doubtful Assets iii. Loss Assets

Provisioning Norms- Primaryresponsibilityof isthat of the auditors

10. LOANS AND ADVANCES REGULATORY PROVISIONS

Loans and advancesshall not include

• loans or advances against Govt securities, LIC policies; FD; facilities like bills purchased/discounted; purchase of cheques, other non-fund based facilities like acceptance/co-acceptance of bills, opening of L/Cs and issue of guarantees, purchase of debentures, credit/overdraft facility extended by settlement bankers to NSCCL/ CCIL; loans or advances to the Agricultural Finance Corporation Ltd;

• Specifically exempted by RBI

11. RESTRICTIONS

STATUTORY RESTRICTIONS - Advances against bank's own shares, bank's Directors holding substantial interest

REGULATORY RESTRICTIONS

Loans for Buy-back of Securities

Restriction on loans and advances to

• Directors/Relatives with RBI prior approval

• Senior officers/Relatives

• Industries Producing/Consuming Ozone Depleting Substances (ODS)

• Sensitive Commodities

Prohibited

• commission to staff members

• loans against partly paid shares, FDRs other banks

• Certain activities undertaken by NBFCs

• Bank Finance to Equipment Leasing Companies

• Bullion/Primary gold, & Ornaments

12. CAMEL RATINGS

Performance Evaluation Techniqueused by most banks across the world

undertakes all the important criteria, i.e. (CAMEL)

• Capital

• Assets

• Management

• Earnings; and

• Liquidity

Internal supervisory tool for evaluating- soundness of banks and for identifying those banks which require special supervisory attention or concern

13. CAMEL Ratings (Contd.)

Recommended by Padmanabhan Committee (1995) - rated on afivepoint scale (A to E)

Evaluation Parameters (Ratios)

a) Capital Adequacy:Capital to Risk-Weighted Assets(CRAR). A sound capital base strengthens confidence of depositors

Asset Quality:Non-Performing Loans to Total loans(GNPA). Indicative of quality of Bankers` credit decisions. Higher GNPA is indicative of poor credit decision-making

Management :Non-interest expenditures to total assets(MGNT) . Measures working of the management. Expenses, such as payroll, workers compensation and training investment, reflects the management policy stance .

14.

( d) Earnings :Return on Asset ratio

(e) Liquidity:Cash maintainedby banks and balances with RBI,to Total Asset ratio(LQD)

It is an indicator of bank's liquidity. Banks with a larger volume of liquid assets are perceived safe, allow banks to meet unexpected withdrawals.

(f) Systems and Control

RATING SYMBOLS

A -Bank is sound in every respect

B - Bank is fundamentally sound but with moderate weaknesses

C - financial, operational or compliance weaknesses that give cause for supervisory concern

D - Serious or immoderate finance, operational and managerial weaknesses that could impair future viability

E - critical financial weaknesses and there is high possibility of failure in the near future.