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“A STUDY ON THE FINANCIAL PERFORMANCE OF

LAKSHMI VILAS BANK LTD., BY USING CAMELS RATING

SYSTEM”

MAJOR PROJECT REPORT

Submitted by

YUVARAJA.M

08BA113

Under the guidance of Dr.J.REEVES WESLEY

PROFESSOR

KSM

A project report submitted in partial fulfilment of the requirements for the award of

the degree of

“MASTER OF BUSINESS ADMINISTRATION”

2008-2010

SCHOOL OF MANAGEMENT

KARUNYA UNIVERSITY

COIMBATORE – 641 114

KARUNYA SCHOOL OF MANAGEMENT

KARUNYA UNIVERSITY

COIMBATORE - 641 114

CERTIFICATE

This is to certify that the project entitled “A STUDY ON THE FINANCIAL

PERFORMANCE OF LAKSHMI VILAS BANK LTD., BY USING CAMELS RATING

SYSTEM” is the bonafide work done by YUVARAJA.M, Register No:

08BA113and is submitted in partial fulfillment of the requirements for the degree

of Master of Business Administration of Karunya University.

Dr.C.SAMUEL JOSEPH Dr.J.REEVES WESLEY

(DIRECTOR IN - CHARGE) (PROFESSOR)

Place:

Date:

Viva-Voice Examination held on………………

…………………………. ……………………..

Internal Examiner External Examiner

DECLARATION

I YUVARAJA.M (Reg No: 08BA113) hereby declare that the project report

entitled “A STUDY ON THE FINANCIAL PERFORMANCE OF LAKSHMI VILAS

BANK LTD., BY USING CAMELS RATING SYSTEM” submitted in partial

fulfilment of the requirement for the award of the degree MASTER OF

BUSINESS ADMINISTRATION is a record of the original project work done

by me under the guidance of, Dr.J.REEVES WESLEY, Assistant professor

Karunya School of Management, Coimbatore. This project work has not formed

the basis for the award of any Degree/ Diploma/ Associate ship/ Fellowship of

similar titles to any candidate of any University.

Place: COIMBATRORE YUVARAJA.M

Date : (REG NO 08BA113)

Acknowledgement

This study would not be completed without acknowledging my sincere gratitude to those

who have helped me in my efforts to make this report possible in time. I express my gratitude to

each and every one of them who have extended their hand and guided me for the completion of

this report.

First of all, I thank ALMIGHTY GOD who has guided me in every step of the project work.

Again, I express my deep gratitude to Mr. C.SAMUEL JOSEPH, Director- in charge,

Karunya School Of Management. I accord with profound gratitude, my sincere thanks to all

other lectures for enabling me to complete my project work successfully

I am immensely grateful to my guide Dr.J.REEVES WESLEY, Faculty Guide, Karunya

School of Management who has been instructed for not only germinating the idea but also

nurturing the final report. But for his untiring assistance with facile pen and knowledge over the

subject, the task would have been indeed impossible.

I am also very much thankful to Mr. P. NARASIMHAN, Branch Manager, LAKSHMI

VILAS BANK, for allowing me to do the project with all the requirements and facilities.

My deep sense of gratitude to my Company Guide Mr. M.SREENIVASAN, Deputy

Manager, LAKSHMI VILAS BANK for his expert guidance and support provided in completion

of the research work.

Last but not least, I am grateful to my Parents, and friends who have supported me during

different phases of the project.

CONTENT

Contents Page no

1. INTRODUCTION & DESIGN OF THE STUDY 1.1 Theoretical background 1.2 Statement of the problem 1.3 Design of the study 1.4 Need for the study 1.5 review of literature 1.6 Chapter scheme

1-11

1 8 8 8 9 11

2. PROFILE 2.1 Industrial Profile

2.2 Company Profile

12-14

12

13

3. METHODOLOGY 3.1 Objectives 3.2 Data collection 3.3 Sample size 3.4 Tools of Analysis 3.4 Limitation

15-18

15 15 15 15 18

4. ANALYSIS AND INTERPRETATION

19-41

5. FINDINGS AND CONCLUSION 5.1 FINDINGS 5.2 SUGGESTION 5.3 CONCLUSIN

42-45

42 44 45

BIBLIOGRAPHY

46

LIST OF TABLES

TABLE NO NAME OF TABLE PAGE NO

TABLE 4.1 TABLE SHOWING CAPITAL ADEQUACY RATIO 20

TABLE 4.2 TABLE SHOWING NET NPA TO TOTAL ASSETS 21

TABLE 4.3 TABLE SHOWING NET NPA TO ADVANCE 22

TABLE 4.4 TABLE SHOWING PERCENTAGE CHANGE IN NPA 23

TABLE 4.5 TABLE SHOWING ADVANCE YIELD RATIO 24

TABLE 4.6 TABLE SHOWING TOTAL ADVANCE TO TOTAL DEPOSITS 25

TABLE 4.7 TABLE SHOWING PROFIT PER EMPLOYEE 26

TABLE 4.8 TABLE SHOWING BUSINESS PER EMPLOYEE 27

TABLE 4.10 TABLE SHOWING BRANCH PROFITABILITY 28

TABLE 4.11 TABLE SHOWING BRANCH PRODUCTIVITY 29

TABLE 4.12 TABLE SHOWING EARNINGS PER SHARE 30

TABLE 4.13 TABLE SHOWING ASSET UTILIZATION 31

TABLE 4.14 TABLE SHOWING SPREAD 32

TABLE 4.15 TABLE SHOWING PERCENTAGE GROWTH IN NET PROFIT 33

TABLE 4.16 TABLE SHOWING NON-INTEREST INCOME TO TOTAL INCOME 34

TABLE 4.17 TABLE SHOWING INTEREST INCOME TO TOTAL INCOME 35

TABLE 4.18 TABLE SHOWING LIQUID ASSETS TO DEMAND DEPOSITS 36

TABLE 4.19 TABLE SHOWING LIQUID ASSETS TO TOTAL DEPOSITS 37

TABLE 4.19 TABLE SHOWING LIQUID ASSETS TO TOTAL ASSETS 38

TABLE 4.20 TABLE SHOWING GOVT.SECURITIES TO TOTAL ASSETS 39

TABLE 4.21 TABLE SHOWING APPROVED SECURITIES TO TOTAL ASSETS 40

LIST OF CHARTS

CHART NO NAME OF CHARTS PAGE NO

CHART 4.1 CHART SHOWING CAPITAL ADEQUACY RATIO 20

CHART 4.2 CHART SHOWING NET NPA TO TOTAL ASSETS 21

CHART 4.3 CHART SHOWING NET NPA TO ADVANCE 22

CHART 4.4 CHART SHOWING PERCENTAGE CHANGE IN NPA 23

CHART 4.5 CHART SHOWING ADVANCE YIELD RATIO 24

CHART 4.6 CHART SHOWING TOTAL ADVANCE TO TOTAL DEPOSITS 25

CHART 4.7 CHART SHOWING PROFIT PER EMPLOYEE 26

CHART 4.8 CHART SHOWING BUSINESS PER EMPLOYEE 27

CHART 4.10 CHART SHOWING BRANCH PROFITABILITY 28

CHART 4.11 CHART SHOWING BRANCH PRODUCTIVITY 29

CHART 4.12 CHART SHOWING EARNINGS PER SHARE 30

CHART 4.13 CHART SHOWING ASSET UTILIZATION 31

CHART 4.14 CHART SHOWING SPREAD 32

CHART 4.15 CHART SHOWING PERCENTAGE GROWTH IN NET PROFIT 33

CHART 4.16 CHART SHOWING NON-INTEREST INCOME TO TOTAL INCOME 34

CHART 4.17 CHART SHOWING INTEREST INCOME TO TOTAL INCOME 35

CHART 4.18 CHART SHOWING LIQUID ASSETS TO DEMAND DEPOSITS 36

CHART 4.19 CHART SHOWING LIQUID ASSETS TO TOTAL DEPOSITS 37

CHART 4.19 CHART SHOWING LIQUID ASSETS TO TOTAL ASSETS 38

CHART 4.20 CHART SHOWING GOVT.SECURITIES TO TOTAL ASSETS 39

CHART 4.21 CHART SHOWING APPROVED SECURITIES TO TOTAL ASSETS 40

SYNOPSIS

I have done the analysis on the financial performance of the Lakshmi Vilas Bank Ltd., by

using CAMELS rating model. The ratios used in CAMELS model is capital adequacy ratio, Net

profit to total asset, net NPA to total advances, change in net NPA, Advance Yield Ratio, Total

Advance to total Deposits, Profit Per Employee, Business Per Employee, Branch Profitability,

Branch Productivity, Earnings per share, Asset Utilisation, Spread, % growth in Net Profit, Non

interest income to total income, Interest income to total income, Liquid assets to Demand

Deposits, Liquid assets to Total deposits, Liquid assets to Total assets, Govt. Securities to Total

assets, approved securities to Total assets.

LVB obtained its license from RBI in June 1958 and in August 1958 it became a

Scheduled Commercial Bank. During 1961-65 LVB took over nine Banks and raised its branch

network considerably. The Bank earned a Net profit of Rs. 50.30 Crores. The Net owned Funds

of the Bank reaches Rs. 453.70 Crores. With a fairly good quality of loan assets the Net NPA of

the bank was pegged at 1.24 % as on March 31, 2009. In order to increase their profitability have

done this analysis.

INTRODUCTON AND DESIOGN OF THE STUDY

1.1 THEORETICAL BACKGROUND

CAMELS system is used by the rating agencies also, for evaluating the performance of

the banks when banks opt for public issue, issue of bonds etc.such rating made by the rating

agencies help the investors to make an assessment of the current financial position of banks.

The developments in the financial sector have made the work of regulators difficult in

that, any disruption of the financial markets or financial infrastructure would have broader

economic ramifications. in this context reserve bank of India has been aware of the need for the

banks to establish a framework for identification, measuring, monitoring and control of risks

associated with their business.RBI then decided to implement the internationally accepted

„CAMELS‟ rating system for evaluating the performance of the banks.

The on-site examination ratings are treated as the most significant and reliable tool for

assessing the current financial condition of a banking institution. They also form the basis for

determining casual relationships between financial ratios calculated through off site analysis and

the actual rating assigned after on-site examination.

CAMELS system is used by the rating agencies also, for evaluating the performance of

the banks when banks opt for public issue, issue of bonds etc.such rating made by the rating

agencies help the investors to make an assessment of the current financial position of banks.

In short the growing complexity of the financial products and the operations of the banks

and financial institutions it is imperative for them to adopt risk identification, risk measurement

and risk management systems.

This is a system of evaluating the performance of a bank based on six parameters viz:

C-Capital Adequacy

A-Asset Quality

M-Management

E-Earnings Quality

L-Liquidity

S-Systems and Control

The CAMELS rating system is used by the rating agencies also, for evaluating

performance of banks when banks opt for public issue, issue of bonds etc.such a rating made by

the rating agencies help investors make an assessment of a current financial positions of banks.

Each component of CAMELS rating system is briefly explained below.

1. CAPITAL ADEQUACY:-

The ratio of capital funds in relation to a bank‟s deposits or its asset is a well recognized

and universally accepted measures of strength and stability of the institution. Capital helps to

establish a level of confidence sufficient to attract enough deposits to fund bank‟s operations and

act as a cushion to absorb unforeseen.. Capital asset ratio is crucial in assessing the credit rating

of banks in international market. The size of long to an individual borrower, lines of credit

enjoyed from foreign banks, exclusion of guarantees in support of international contracts is all

related to size of capital base.

For a long time, the ratio of capital to deposits was conceived as an ideal measure

adequacy. However, over the years the capital adequacy norms in terms of deposits ratio was

found to be inadequate in as much as that did not truly reflect the shock absorption capacity of

the banks. Hence it was modified in terms capital to asset ratio. The Basle committee on banking

regulations and supervisory practices appointed by the bank of international settlement (BIS) has

prescribed certain capital adequacy standards to be followed by commercial banks and most

countries for implementation have accepted these standards universally. The BIS standard seeks

to measure capital adequacy as the ratio of capital to risk weighted assets.

Under the system, the balance sheet assets and off-balance sheet exposure will be assigned

weights according to prescribed risk. The value of each asset shall be multiplied asset. Banks

have to maintain minimum capital funds equivalent to the prescribed ratio on an aggregate of

risk-weighted assets on an ongoing basis. at present the minimum stipulated CAR(capital

adequacy ratio) is 9%.in simple terms it means that for every risk-weighted asset of Rs 100/-

,banks have to maintain capital funds amounting to Rs 9/-.

Bank with higher CAR will get better rating as it indicates that the assets of the bank are

backed by a higher percentage of capital funds. For the purpose of rating, CAR of the bank will

be compared with those of the per group banks. The evaluation of capital adequacy should

include, but is not limited to a review of:

Bank growth experience, plans and future prospects

The volume of risk weighted assets

Financial strength of subsidiaries, parent agilities, and other potential sources of

additional capital

The risk exposure represented in off-balance sheet items.

Adequacy of loan loss reserve

Interest rate risk, concentration of credit risk and risks associated with non traditional

activities.

2. ASSET QUALITY

Assets of a bank are cash and balances with RBI, balances with banks and money at call

and short notice, investments in government and other securities, advances (including loans and

advance, bill purchased/discounted and other credit facilities), fixed assets and other assets.

Asset quality means quality of assets of the bank especially those of advances and investments.

Asset quality refers to the degree of financial strength and risk in a bank‟s assets typically

advances and investments. a comprehensive evaluation of asset quality is one of the most

important components in assessing the current condition and future viability of the bank. The

quality of the bank‟s assets impacts, in varying degrees, all components of a bank‟s financial

performance. Asset quality problems can diminish the liquidity inherent in the loan portfolio and

have a negative impact on the adequacy of the bank capital. Poor asset quality also reflects up on

management‟s competence. As a consequence, it is important for a director to put in place

policies to limits the bank‟s credit risk taking and to monitor the bank for compliance with

policies. To evaluate asset quality, they primarily look at the level of credit risk in the bank‟s

assets and try to make sure that borrowers will repay when their obligations are due to the bank.

Asset quality with regard to advances depends mainly on classification advances in

accordance with the prudential accounting norms of income recognition, asset classification and

provisioning, distribution pattern of advances to various sectors such as industry, trade etc; and

diversified credit portfolio with exposure to various types of industries, the securities backing for

advance, lending policies etc.

3. MANAGEMENT:-

The third factor in the acronym(the „hump‟ in the CAMELS rating. refers to the bank‟s

management quality. while the other factor can be quantified fairly easily from current financial

statement, management quality is somewhat elusive and subjective measure, yet one that is

crucial to institutional success.

Management‟s capabilities to identify, measure, monitor, and control the risk of an

institution‟s activities and to ensure a safe and sound and efficient operation in compliance with

applicable laws and regulations is reflected in this rating. The directors and senior management

are responsible for developing and implementing policies, procedures, and practices that

translate goals, objectives, and risk limits into prudent operating standards. Depending on the

nature and scope of an institution‟s activities, management practices may need to operating or

transaction, reputation, strategic, compliance legal and liquidity.

The evaluation of management should include, but it is not limited to, a view of:

Management‟s ability to plan for and respond to, risks that may arise from changing

business condition or the initiation of new activities or products.

Adequacies of, and conformance with, appropriate internal policies and control addressing

the operations and controls addressing the operations and risks of significant activities.

Accuracy, timeliness, and effectiveness of management information and risk monitoring

systems appropriate for the institution‟s size complexity, and risk profile.

Adequacy of audits and internal controls to promote effective operations and reliable

financial and regulatory reporting, safeguard assets and ensure compliance with laws,

regulations, and internal policies.

The extent that the board and management and is affected by, or susceptible to, dominant

influence or concentration of authority.

Management‟s philosophy with respect to dividends.

Compensation standards, including safeguards to prevent against the payment of excessive

compensation

The accuracy of regulatory reports.

The overall performance of the institution and its risk profit.

4. EARNINGS QUALITY

The continued viability of a bank depends on its ability to earn an appropriate return on

its assets and capital. Good earnings performance enables a bank to fund its expansion, remain

competitive in the market, and replenish and/or increase its capital funds. The essential purpose

of bank earnings, both current and accumulated, is to provide for absorption of losses.

The earnings power of a bank is the initial safe guard against the risk of engaging in the

business of banking. Earnings therefore represent a bank‟s first line of defence against capital

duplication resulting from shrinkage in asset value.

The basic analytical tools available to evaluate the earnings quality are the financial

statements of the banks, internally prepared statements and supplementary schedules. Internally

prepared information is not in itself sufficient to adequately analyze the financial condition of the

bank. to properly understand and interpret financial and statistical data, the examiner should be

familiar with current national, regional and cyclical or seasonal factors .current knowledge of

such as that available in newspapers and industrial journals is important to the examiner in

adequately reviewing and analyzing a bank.

The evaluating of earnings should include a review of:

Quality and future prospects for core income.

The ability to cover Loses and maintains adequate capital including compliance with

minimum earnings standards.

The composition of earnings and sustainability of the various earnings components.

Peer group comparison

Vulnerability to interest rate and other market or price risks.

Compliance with laws and regulations relating to earnings and dividends

The effectiveness of management‟s budgeting process.

5. LIQUIDITY

Liquidity represents the ability to fund asset to meet obligations as they become due.

Liquidity is essential in all banks to compensate for expected and unexpected balance sheet

fluctuation and provide funds for growth. Liquidity risk is the risk of not being able to obtain

funds at reasonable price within a reasonable time period to meet obligations as they become

due. Because liquidity is critical to the ongoing viability of any bank, liquidity management is

among the most important activities that a bank conducts.

Liquidity factor is rated based on the quantum of liquid assets held by the bank availability of

funds to meet short term obligation and also cater to prompt credit disbursal, accessibility to

money and other external source of funds. Asset liability management system is to avoid

maturity mismatches etc.

By assuring a bank‟s ability to meet its liabilities as they come due, liquidity management

can reduce the probability of an irreversible adverse situation developing. Even in cases where a

crisis develops because of a problem elsewhere at an uncovering of fraud, or where a crisis

reflects generalized loss of confidence in financial institutions, the time available to a bank to

address the problem will be determined by its liquidity. Indeed, the importance of liquidity

transcends the individual institution, since a liquidity shortfall at a single institution can have

system wide repercussions. For this reason the analysis of liquidity requires bank managements

to measure not only the liquidity positions of banks on an ongoing basis but also to examine how

funding requirements are likely to evolve under crisis scenario.

5. SYSTEMS AND CONTROL

As observed by the Basel committee of banking supervision, internal control system

refers to the ongoing process by which an institution meets three key set of objectives;

operational, informational and compliance. Bank has strengthened the internal control system

through simplification of documentation procedures and revision in the audit procedures,

operational manuals and implementation of related strategies and monitoring of their efficiency.

A system of effective internal controls as a critical component of bank management and

foundation for the safe and sound operations of banking organization‟s system of strong internal

controls can help to ensure that the bank will comply with laws and regulations as well as

policies, plans, internal rules and procedures, and decrease the risk of unexpected losses or

damages to the bank reputation.

Internal control consists of five inter related elements

Management oversight and control culture

Risk recognition and assessment

Control activities and suggestion of duties

Information and communication

Monitoring activities and correcting deficiencies

The effective functioning of these elements is essential to achieve a bank‟s

performance, information, and compliance objectives.

1.2 STATEMENT OF PROBLEM

Bank supervisory agencies are responsible for monitoring the financial conditions of

commercial banks and enforcing related legislation and regulatory policy. Although much of the

information needed to do so can be gathered from regulatory reports, on-site examinations are

needed to verify report accuracy and to gather further supervisory information. Much research

has explored the value of this private information, both to the bank supervisors and to the public

who monitor banks through the financial markets.

1.3 DESIGN OF THE STUDY

I am using CAMELS rating system to find the financial performance of the bank. RBI

only gave suggestions to use CAMELS rating model to find out the financial performance of the

bank.

1.4 NEED FOR THE STUDY

Understanding the financial soundness of a bank is very important. Financial soundness

is very important for any bank to meet their liabilities and to give the dividend to their

shareholders.

In order to understand the financial soundness LVB uses CAMELS rating. The 6

parameters namely capital adequacy, asset quality, management, earnings quality, systems and

control helps to find out the bank is financially sound or not. This study will help the bank to

identify their weakness and take corrective measures.

1.5 REVIEW OF LITERATURE

PADMANABHAN WORKING GROUP (1995), in this report on on-site supervision,

recommend for supervisory interventions and introduction of a rating methodology for banks on

the lines of CAMEL model with appropriate modification to suit Indian conditions. The working

group has recommended six factors- Capital Adequacy, Assets Quality, Compliance, Systems

and Control.

NARASIMHAM COMMITTEE (1998) made several important recommendations like

introduction of internationally accepted prudential norms relating to income recognition, assets

classification, provisioning and capital adequacy. Accordingly, a framework for the evaluation of

the current strength of the system and of the operations and performance of banks has been

provided by reserves bank‟s measuring rod of „CAMELS‟, which stands for Capital Adequacy,

Assets Quality, Management, Earnings, Liquidity and Internal Control Systems.

The main endeavour of CAMEL, system is to detect problems before they manifest

themselves. The RBI has instituted the mechanism for critical analysis before their boards to

provide an internal assessment of health of the bank. The analysis, which is made available to tht

RBI, forms a supplement to the system of off-site monitoring of banks. An efficient result-

oriented on-site inspection system requires an efficient follow up. The entire cycle of inspection

and follow-up action are now completed within maximum period of 12 months. Monitor able

action plan for rectification of irregularities/deficiencies noticed during the inspections within a

time frame is drawn up progress in implementing pursued with the bank concerned.

BARR AND SIMENS (1996) tried to predict bank failures in the US, using the data

from December 1984 to June 1987 using CAMEL model. They used technical efficiency

measure, using DEA in their prediction model. Along with their DEA results, which represent

management quality „M‟ in the CAMEL rating, they used financial ratios representing soundness

of Capital, Assets Quality, Earning and Liquidity. They found that the use of DEA efficiency

score in the regression increased the accuracy of classification results from 89% to 92.4% and

the new model was superior to the earlier early-warning models.

GODSE(1996) examined the application of new model CAMEL, i.e., Capital Adequacy, Assets

Quality, Management, Earning Quality, Liquidity, Systems and Control‟, for evaluating the

performance of banks.

RAO and DATTA (1998) made an attempt to derive rating based on CAMEL. In their study

based on five groups(C-A-M-E-l), 21 parameters in all were developed after deriving separate

rating for each parameter a combined rating was derived for all nationalized banks for the year

1998. the study found that corporation bank has the best rating followed by Oriental Bank of

Commerce, Bank of Baroda, Dena Bank, Punjab National Bank, etc. and the worst rating was

found to be of Indian Bank preceded by UCO bank, United Bank of India, Syndicate Bank and

Vijaya Bank.

PERSUNA (2004) analyzed the performance of Indian Banks adopting the CAMEL model. The

performance of 65 banks was studied for the period 2003-04.The author concluded that the

competition was tough and consumers benefited from it. Better services, innovative products,

better bargains are all greeting the Indian customers. The coming fiscal will improve to be a

transition phase for Indian banks, as they will have to align their strategic focus to increasing

interest rates.

VENI (2004) studied the capital adequacy requirement of banks and the measures adopted by

them to strengthen their capital ratios. The author highlighted that the rating agencies give

prominence to capital adequacy ratios of banks while rating the bank‟s certificate deposits, fixed

deposits and bonds. They normally adopt CAMEL Model for rating banks. Thus, Capital

Adequacy is considered as the key element of bank rating.

SATHISH JUNTUR SHARATH AND SUREENDER (2005) adopted CAMEL model to

assess the performance of Indian banks. The authors analyzed the performance of 55 banks for

the year 2004-05, using CAMEL Model. They concluded that the Indian banking system looks

sound and Information Technology will help the banking system grow in strength while going

into the future, Bank‟s initial Public offer will be hitting the market to increase their capital and

gearing up for the Basel II norms.

VERMA COMMITTEE REPORT ON WEAK BANKS

According to verma committee, weakness relate to three areas.operations,humanresources

and management, operational failures relate to high level of NPAs,slow decision making with

regard to fresh sanction of advances and compromise proposals, absence of cost control

measures, weak internal control and housekeeping, low level technology and competitive rates.

Under HR related issues, there are overstaffing, low productivity, high age profile, inadequate

training facilities, and lack if skills etchings the management area, the causes were short tenures

and frequent changes of top management, lack of support from board of Directors etc.

For the revival of the weak banks committee has made a number of suggestions. The

committee considered various options such as merger or closure of banks change in ownership or

privatization, narrow banking (shift from fresh lending activity to investment in government

securities) and a comprehensive operational and financial restructuring. After examining the pros

and cons of the above four options, the committee has found that the first three are not suitable in

the present circumstances and hence recommended a four dimensional comprehensive

restructuring programme

1.6 CHAPTER SCHEME

The study is divided into five chapters. The distribution of study is done in the following

chapter in the following manner:-

1. The first chapter contains an introduction about the study i.e. theoretical background,

Statement of the problem, design of the problem, need for the study, Review of

literature.

2. The second chapter deals with industrial profile, company profile

3. Third chapter deals with Research methodology i.e. objectives, data collection

method, sample size, tools of analysis, limitation.

4. Fourth chapter deals with analysis and interpretation.

5. Fifth chapter deals with findings, suggestion, conclusion and bibliography.

CHAPTER II

2.1 INDUSTRIAL PROFILE

A bank is a financial organization licensed by a government. Its primary activities

include providing financial services to customers while enriching its investors. Many financial

activities were allowed over time. The financial services are increasingly becoming cross border

activity with availability of wide range of products and services to customers. Their business

strategies are changing to take care of the need of customers for asset management, investment

banking, broking activity, insurance business and securities and share transactions.

Indian banks can be broadly classified into nationalized banks/public sector banks,

private banks and foreign banks. Currently, India has 88 scheduled commercial banks (SCBs)-28

public sector banks, 29 private banks and 31 foreign banks. They have a combined network of

over 53000 branches and 17000 ATMS. According to a report by ICRA Limited, a rating

agency, the public sector banks hold over 75 percent of total assets of the banking industry, with

the private and foreign banks holding 18.2% and 6.5% respectively.

With the growth in the Indian economy expected to be strong for quite some time

especially in its services sector, the demand for banking services especially retail banking,

mortgages and investment services are expected to be strong. The focus of the statutory

regulation of commercial banks by RBI in India until the early 1990s was mainly on licensing,

administration of minimum capital requirements, pricing of services including administration of

interest rates on deposits as well as credit, reserves and liquid asset requirements. In the

circumstances, the supervision had to focus essentially on solvency issues.

Banks are the most significant players in the Indian financial market. . Dominated

by the public sector, banking industry has so far acted as an efficient partner in the growth and

development of the country. New private sector banks brought the necessary towards higher

utilization of technology, improved customer service and innovate products. Inspire of their

sheer size, public sector banks proved to be surprisingly nimble and flexible to meet the

emerging needs of customers. As the body responsible for bank supervision, RBI has played its

part in ensuring that banks are in tune with international standards and norms. Today, the Indian

banking sector is as competitive and healthy as any in the world.

2.2 COMPANY PROFILE

The Lakshmi Vilas Bank Limited (LVB) was founded eight decades ago (in 1926)

by seven people of Karur under the leadership of Shri V.S.N. Ramalinga Chettiar, mainly to

cater to the financial needs of varied customer segments. The bank was incorporated on

November 03, 1926 under the Indian Companies Act, 1913 and obtained the certificate to

commence business on November 10, 1926, The Bank obtained its license from RBI in June

1958 and in August 1958 it became a Scheduled Commercial Bank. During 1961-65 LVB took

over nine Banks and raised its branch network considerably. To meet the emerging challenges in

the competitive business world, the bank started expanding its boundaries beyond Tamil Nadu

from 1974 by opening branches in the neighboring states of Andhra Pradesh, Karnataka, Kerala,

Maharashtra, Madhya Pradesh, Gujarat, West Bengal, Uttar Pradesh, Delhi and Pondicherry.

Mechanization was introduced in the Head office of the Bank as early as 1977. At present, with a

network of 249 branches,3 satellite branches and 6 extension counters, spread over 14 states and

the union territory of Pondicherry, the Bank's focus is on customer delight, by maintaining high

standards of customer service and amidst all these new challenges, the bank is progressing

admirably. LVB has a strong and wide base in the state of Tamil Nadu, one of the progressive

states in the country, which is politically stable and has a vibrant industrial environment. LVB

has been focusing on retail banking, corporate banking and banc assurance. The Bank's business

crossed Rs. 12,606 Crores as on March 31, 2009. The Bank earned a Net profit of Rs. 50.30

Crores. The Net owned Funds of the Bank reaches Rs. 453.70 Crores. With a fairly good quality

of loan assets the Net NPA of the bank was pegged at 1.24 % as on March 31, 2009

VISION

To be a sound and dynamic banking entity providing financial services of

excellence with Pan India presence.

MISSION

To develop a range of quality financial services and products to create value for

customers, shareholders and the society; to motivate people to achieve excellence in performance

leading to sustained profitable growth and build a vibrant organization.

OBJECTIVES OF LAKSHMI VILAS BANK

• Carrying on the business of accepting deposits of money on current account or otherwise

subject to withdrawal by cheque, draft or order and to carry on the business of banking in

all its branches and departments.

• Contracting for public and private loans and negotiating and issuing the same.

• The borrowing, raising or taking up of money, the lending or advancing of money either

upon or without security, the drawing, mapping, discounting, buying, selling, and dealing

in a bullion and foreign exchange dealing in other instruments like share, bond etc…

FUNCTIONS OF LAKSHMI VILAS BANK

The various functions of the bank can be classified as:

1. Primary functions :

• Accepting deposits

• Making loans and advances

2. Secondary functions :

• Agency functions

• General utility functions

COMPANY LOGA

The new logo unit depicts the following,

• Red is for the values, Pure and Strong. Red is for Truth that can do no wrong.

• Gold is the land of prosperity where we all belong, the abode of wealth where happiness

hails from.

• A glimmer of lights from ochre gold, the circle of kumkum where all good things hold.

CHAPTER III

METHODOLOGY

3.1 OBJECTIVES

• To find out the capital adequacy, which reflects the overall financial condition of bank

• To find out the asset quality of the bank (NPA)

• To measure the management efficiency of the bank

• To find out earning and liquidity of the bank

• To find out the effectiveness of system and control

3.2 DATA COLLECTION METHOD

Secondary Data are those data, which are already collected by some other person.

Sources for collecting secondary data were annual reports; periodically published accounts of

banks, Journals, Magazines, Company Website and Official Website.

3.3 SAMPLE SIZE

Sample size is 6 years annual report. The study conducted for the year 2003-2004 to

2008-2009.

3.4 TOOLS OF ANALYSIS

Tools used to analyse the performance of the bank is CAMELS MODEL.

CAMELS

CAPITAL ADEQUACY (C)

CAPITAL ADEQUACY RATIO (CAR)

Capital Adequacy Ratio (CAR) = Capital fund * 100

Capital fund: Capital fund consists of two parts viz, Tier 1 capital and Tier 2 capital

ASSET QUALITY (A) 1. NET NPA TO TOTAL ASSETS

Net NPA / Total Assets

2. NET NPA TO TOTAL ADVANCES

Net NPA / Total Advances

3. CHANGE IN NET NPA

% change in Net NPA = current years NPA- previous years NPA * 100

Previous years NPA

4. ADVANCE YIELD RATIO

INTEREST INCOME ON ADVANCES / ADVANCES

MANAGEMENT (M)

1. TOTAL ADVANCE TO TOTAL DEPOSITS

Total Advance / Total Deposits * 100

2. PROFIT PER EMPLOYEE

PAT / no. Of Employees

3. BUSINESS PER EMPLOYEE

Total Advances + Total deposits / No. Of Employees

4. BRANCH PROFITABILITY

Gross profit / No of branches

5. BRANCH PRODUCTIVITY

Total Advances + Total deposits / No. Of Branches

6. EARNINGS PER SHARE

Net profit / no of Equity share

7. ASSET UTILIZATION

Total Income / Total Asset

EARNING QUALITY (E)

1. SPREAD

Interest Income + Interest Expended / Total Assets

2. % OF GROWTH IN NET PROFIT

Current year NET Profit- previous year Net profit * 100

Previous year net profit

3. NON INTEREST INCOME TO TOTAL INCOME

Non Interest income / Total Income * 100

4. NON INTEREST INCOME TO TOTAL INCOME

Interest income / Total Income * 100

LIQUIDITY (L)

1. LIQUID ASSET TO TOTAL DEPOSIT

Liquid Asset / Total Deposit

2. LIQUID ASSET TO DEMAND DEPOSIT

Liquid Asset / DEMAND Deposit

3. LIQUID ASSET TO TOTAL ASSETS

Liquid Asset / Total Assets

4. GOVT. SECURITIES TO TOTAL ASSETS

Govt. Securities / Total Assets

5. APPROVED SECURITIES TO TOTAL ASSETS

Approved Securities / Total Assets

3.6 LIMITATION

The study was based on the annual reports furnished by the company.

The study uses only the secondary data for analysis

The accuracy and reliability of this report depends upon the correctness of the secondary

data collected.

CHAPTER IV

ANALYSIS AND INTERPRETATION

ANALYSIS

Analysis is the process of breaking a complex topic or substance into smaller parts to

gain a better understanding of it. Financial statement analysis (or financial analysis) refers to an

assessment of the viability, stability and profitability of a business, sub-business or project.

Data analysis is a process of gathering, modelling, and transforming data with the goal of

highlighting useful information, suggesting conclusions, and supporting decision making.

i) Capital Adequacy (C)

ii) Asset Quality (A)

iii) Management (M)

iv) Earnings Quality (E)

v) Liquidity (L)

vi) Systems and Control (S)

CAPITAL ADEQUECY(C)

Capital adequacy ratio is used to evaluate, how LAKSHMI VILAS BANK meets its

capital adequacy requirements.

CAPITAL ADEQUACY RATIO (CAR)

The idea of capital adequacy norms is that the long run source of finance in a bank should

be a decent % of the assets of the banker after considering their risk realization. As per the

prudential norm, all Indian scheduled commercial banks as well as foreign banks operating in

India are required to achieve 9% capital adequacy ratio.

Capital Adequacy Ratio (CAR) = Capital fund * 100

Capital fund: Capital fund consists of two parts viz, Tier 1 capital and Tier 2 capital

a) Tier 1 capital provides the most permanent and readily available support to bank against

unexpected losses. Tier 1 capital comprises the aggregate of paid up capital, statutory

reserves, and other disclosed reserves including share premium and capital reserves

arising out of surplus on sale of assets, as reduced by, Equity investment in subsidiaries,

intangible assets, current and brought forward losses.

b) Tier 2 capitals comprises elements that are less permanent in nature or are less readily

available than those comprising tier 1 capital. The elements comprising Tier 2 capital are

as follows.

TABLE-1

CAPITAL ADEQUACY RATIO

CHART-1

CAPITAL ADEQUACY RATIO

INFERENCE

Above table shows on, the minimum CAR as per RBI norms is 9%. During the last five

years, LVB is in a position to maintain more than this requirement.

13.79

11.3210.79

12.43 12.73

10.09

0

2

4

6

8

10

12

14

16

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

CAR

CAR

YEAR Tire-1 Tire -2 CAR

2003-2004 8.49% 5.30% 13.79

2004-2005 5.67% 5.65% 11.32

2005-2006 6.94% 3.85% 10.79

2006-2007 9.93% 2.50% 12.43

2007-2008 10.53% 2.20% 12.73

2008-2009 8.63% 1.46% 10.09

ASSET QUALITY (A)

The quality of loans is the most crucial aspects that decide the health of banks. The

following important ratios are used to measure the asset quality of LVB

NET NPA TO TOTAL ASSETS

Net NPA are gross NPAs net of provisions on NPAs and interest in suspense account.

This ratio shows the percentage of NPA with regard to Total assets. Increase in such percentage

indicates decrease in quality.

TABLE 4.2

NET NPA TO TOTAL ASSETS Year Net NPA Total assets Percentage

2003-2004 1094800000 38213506000 2.86

2004-2005 1150500000 40533818000 2.84

2005-2006 555900000 49193808000 1.13

2006-2007 569500000 58267814000 0.98

2007-2008 595200000 65206041000 0.91

2008-2009 648500000 83172547000 0.78

CHART-2 NET NPA TO TOTAL ASSETS

INFERENCE

There has been a decreasing trend in the Net NPAs to Total Assets from 2003-04 to

2008-09. This shows the bank has to reduce their Net NPAs by giving out more advances to

improve its performance.

2.86 2.84

1.13 0.98 0.910.78

0

0.5

1

1.5

2

2.5

3

3.5

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

NET NPA TO ADVANCES

Net NPA as a percentage of advances is the most standard measure of asset quality. As

loans and advances is an important asset of the bank, it is very significant to relate

nonperforming assets to advances. As per international norms, a ratio of 1% is considered to be

tolerable.

TABLE 4.3

NET NPA TO ADVANCE

Year Net NPA Total advances Percentage

2003-2004 1094800000 20387040000 5.37

2004-2005 1150500000 23177114000 4.96

2005-2006 555900000 29528197000 1.88

2006-2007 569500000 36127030000 1.58

2007-2008 595200000 38587875000 1.54

2008-2009 648500000 52458289000 1.24

CHART 3

NET NPA TO ADVANCE

INFERENCE

The percentage of Net NPA to advances shows a decreasing trend from 2003- 04 to

2008-09. But still the bank has to work on reducing the Net NPA s so as to improve the asset

quality of the bank.

5.37 4.96

1.88 1.58 1.54 1.24

0

1

2

3

4

5

6

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

CHANGE IN NET NPA

This measure gives the movement in Net NPAs on year basis. This is calculated using the

formula given below

% change in Net NPA = current years NPA- previous years NPA * 100

Previous years NPA

TABLE 4.4

% CHANGE IN NET IN NET NPA

Year Current year NPA

Previous year NPA NET NPA *100 % of change

2003-2004 1094800000 1254800000 -160000000 -16000000000 -12.75

2004-2005 1150500000 1094800000 55700000 5570000000 5.09

2005-2006 555900000 1150500000 -594600000 -59460000000 -51.68

2006-2007 569500000 555900000 13600000 1360000000 2.45

2007-2008 595200000 569500000 25700000 2570000000 4.51

2008-2009 648500000 595200000 53300000 5330000000 8.95 CHART 4

% CHANGE IN NET IN NET NPA

INFEERENCE

The NPA of the bank has been reducing from 2003-04 to 2007-08. The lowest value was

in the year 2005-06 with only -594600000. But in the year 2008-09 the value has increased

to53300000. This value has to be reduced inorder to improve the asset quality of the bank.

-60.00

-50.00

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

ADVANCE YIELD RATIO

Yield on advance, is another important ratio, which helps us to measure the quality of

advances. Here yield means interest income received on the advances of the bank. Increase in

advance yield ratio is an indicator of sound asset quality.

TABLE 4.5

ADVANCE YIELD RATIO

Year INTEREST INCOME ON ADVANCES ADVANCES %

2003-2004 1805712000 20387040000 8.86

2004-2005 1868532000 23177114000 8.06

2005-2006 2166688000 29528197000 7.34

2006-2007 3121274000 36127030000 8.64

2007-2008 3789847000 38587875000 9.82

2008-2009 5179197000 52458289000 9.87

CHART 5

ADVANCE YIELD RATIO

INFERENCE

The advance yield ratio of the bank has been steadily increasing for the past four years.

This shows the favourable position of asset quality of bank.

8.868.06

7.348.64

9.82 9.87

0

2

4

6

8

10

12

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

MANAGEMENT (M)

Management is the most important ingredient that ensures sound functioning of banks.

With increased competition in the Indian banking sector, efficiency and effectiveness have

become the rule as banks constantly strive to improve the productivity of their employees. The

ratio in this segment measures the efficiency and effectiveness of management.

TOTAL ADVANCE TO TOTAL DEPOSITS

This ratio measures the efficiency of the management in converting deposits into

advances. The deposits include demand deposits, saving deposits, term deposits and deposits of

other banks.

TABLE 5.6


Year Advances Deposits Percentage

2003-2004 20387040000 32958191000 61.86

20042005 23177114000 34959251000 66.30

2005-2006 29528197000 43363800000 68.09

2006-2007 36127030000 50198723000 71.97

2007-2008 38587875000 56184882000 68.68

2008-2009 52458289000 73609030000 71.27

CHART 6


INFERENCE

To improve the efficeincy the bank has to give out more advances from the deposits.

56

58

60

62

64

66

68

70

72

74

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

PROFIT PER EMPLOYEE This ratio is another indicator that decides the efficiency of the management. The ratio is

calculated by dividing PAT by the total number of employees. Higher the ratio is higher the

efficiency of management.

TABLE 4.7

PROFIT PER EMPLOYEE

Year Profit after Tax EMPLOYEES Profit per employee

2003-2004 410485000 1946 210937.82

2004-2005 33444000 1928 17346.47

2005-2006 224702000 1873 119969.03

2006-2007 175843000 1926 91299.58

2007-2008 252691000 2078 121602.98

2008-2009 502953000 2433 206721.33

CHART 7

PROFIT PER EMPLOYEE

INFERENCE

The profit per employee has been showing unstable profit.

0.00

50000.00

100000.00

150000.00

200000.00

250000.00

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

BUSINESS PER EMPLOYEE

This ratio also shows the efficiency of the management. It is arrived at by dividing total

business by total number of employees. Business includes the sum of total advances and deposits

in a particular year. An increase in business per employee is an indicator of efficient.

TABLE 4.8


Year Advances Deposits Total No. Employees

Business per employee

2003-2004 20387040000 32958191000 53345231000 1946 27412760.02

2004-2005 23177114000 34959251000 58136365000 1928 30153716.29

2005-2006 29528197000 43363800000 72891997000 1873 38917243.46

2006-2007 36127030000 50198723000 86325753000 1926 44821263.24

2007-2008 38587875000 56184882000 94772757000 2078 45607679.02

2008-2009 52458289000 73609030000 126067319000 2433 51815585.29

CHART 8


INFERENCE

The business per employee has been showing a steady increase from 2003-04 to

2008-09. This increasing trend in business per employee indicates sound management of the

bank.

27412760.0230153716.29

38917243.46

44821263.24 45607679.02

51815585.29

0

10000000

20000000

30000000

40000000

50000000

60000000

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

BRANCH PROFITABILITY

As profitability is n indicator of the efficiency of the management, this ratio is very

significant. It shows the efficiency of various branches of the bank.

TABLE 4.9

BRANCH PROFITABILITY

Year Gross Profit No of Branches Branch Profitability

2003-2004 410485000 224 1832522.32

2004-2005 33444000 225 148640.00

2005-2006 224702000 227 989876.65

2006-2007 175843000 236 745097.46

2007-2008 252691000 239 1057284.52

2008-2009 502953000 251 2003796.81

CHART 5.9

BARNCH PROFITABILITY

INFERENCE

Branch profitability of LVB was 989876 in the year 2005-06. In the year 2006-07

the branch profitabilty has reduced to 7,45,097. Then it gratually increased to over the next three

years and is currently at 20,03,796. It is an indicator of efficient.

1832522.32

148640

989876.65

745097.46

1057284.52

2003796.81

0

500000

1000000

1500000

2000000

2500000

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

BRANCH PRODUCTIVITY

This ratio shows the business per branch. Business means the sum of advances and

deposits. Higher branch productivity is an evidence of effective management.

TABLE 4.10

BRANCH PRODUCTIVITY

Year Advances Deposits Total No. Branches

Branch Productivity

2003-2004 20387040000 32958191000 53345231000 224 238148352.7

2004-2005 23177114000 34959251000 58136365000 225 258383844.4

2005-2006 29528197000 43363800000 72891997000 227 321110118.9

2006-2007 36127030000 50198723000 86325753000 236 365787089

2007-2008 38587875000 56184882000 94772757000 239 396538732.2

2008-2009 52458289000 73609030000 1.26067E+11 251 502260235.1

CHART 10

BRANCH PRODUCTIVITY

INFERENCE

The branch productivity has been showing a steady increase from 238148352 in

the year 2003-04 to 502260235 in 2008-09. This increasing trend in branch productivity

indicates sound management of bank.

238148352.7

258383844.4321110118.9

365787089396538732.2

502260235.1

0

10000000

20000000

30000000

40000000

50000000

60000000

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

EARNING PER SHARE

The earning Per Share measures the quantum of earnings available to the equity investors

on their investment. It is an important measure that an equity investor would be using to evaluate

the commitment of the management toward s the owners of the bank.

TABLE 4.11

EARNING PER SHARE

Year Net Profit No of Equity Share EPS

2003-2004 410485000 11508902 35.67

2004-2005 33444000 11508902 2.91

2005-2006 224702000 19534569 11.50

2006-2007 175843000 48789555 3.60

2007-2008 252691000 48772189 5.18

2008-2009 502953000 48776176 10.31

CHART 11

EARNING PER SHARE

INFERENCE

The Earning Per Share value shows an increasing trend from 3.60 in the year

2006-07 to 10.31 in 2008-09. This increasing trend in Earning Per Share for last three years

indicates sound management of the bank.

35.67

2.91

11.50

3.60 5.18

10.31

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

ASSET UTILIZATION TABLE 4.12

ASSET UTILIZATION

Year Total Income Total Assets Asset Utilization

2003-2004 3728168000 38213506000 0.10

2004-2005 3365242000 40533818000 0.08

2005-2006 3681272000 49193808000 0.07

2006-2007 4749858000 58267814000 0.08

2007-2008 5885351000 65206041000 0.09

2008-2009 7646004000 83172547000 0.09

CHART 12

ASSET UTILIZATION

INFERENCE

The asset utilization of the bank has been going steady. This shows that the bank has to

improve upon its asset utilization by increasing the income.

0.10

0.08 0.070.08 0.09 0.09

0.00

0.02

0.04

0.06

0.08

0.10

0.12

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

EARNING QUALITY (E)

SPREAD

It is the difference between interest income and interest expended as a percentage of total

assets. Interest expended includes interest paid on deposits, loans from RBI and other short term

and long term loans. Spread indicates a bank‟s ability to withstand pressure on margins nad the

higher the spread, the better.

TABLE 4.13

SPREAD

Year Interest Income Interest Expended Spread Total Assets Spread as a Percentage of total assets

2003-2004 2859544000 2025139000 834405000 38213506000 2.18

2004-2005 2982042000 1915357000 1066685000 40533818000 2.63

2005-2006 3220564000 2165640000 1054924000 49193808000 2.14

2006-2007 4291789000 2991798000 1299991000 58267814000 2.23

2007-2008 5060576000 3819250000 1241326000 65206041000 1.90

2008-2009 6576111000 5040718000 1535393000 83172547000 1.85

CHART 13

SPREAD

INFERENCE

The spread shows a mixed trend from 2.18% in 2003-04 to 1.85% in 2008-09 signifying

a decrease in the net interest income. The spread is highest in the year 2004-05 with a percentage

of 2.63%

2.18

2.63

2.14 2.231.90 1.85

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

PERCENTAGE GROWTH IN NET PROFIT

Net profits are obtained after deducting income tax and if net profit is not sufficient, the

firm shall not be able to achieve a satisfactory return on its investment. Growth in net profit helps

the bank to face adverse economic conditions.

TABLE 4.14


year current year Net profit

previous year Net Profit NET PROFIT *100

% Growth in NP

2003-2004 410485000 341633000 68852000 6885200000 20.15

2004-2005 33444000 410485000 -377041000 -37704100000 -91.85

2005-2006 224702000 33444000 191258000 19125800000 571.88

2006-2007 175843000 224702000 -48859000 -4885900000 -21.74

2007-2008 252691000 175843000 76848000 7684800000 43.70

2008-2009 502953000 252691000 250262000 25026200000 99.04

CHART 14


INFEERENCE

The percentage growth of net profit was maximum the year 2005-06 with

571.88% and later it shows a decrease in the Net Profit Percentage. The bank has to work on

increasing the netprofit.

-200.00

-100.00

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

NON INTEREST INCOME TO TOTAL INCOME This measures income from operations, other than lending as a percentage of total

income. Non-interest income is the total income earned by the bank excluding income on

advances, deposits with RBI and income on investments.

TABLE 4.15

NONINTEREST INCOME TO TOTAL INCOME

year Non Interest income Total income Percentage

2003-2004 2859544000 3728168000 76.70

2004-2005 2982042000 3365242000 88.61

2005-2006 3220564000 3681272000 87.49

2006-2007 4291789000 4749858000 90.36

2007-2008 5060576000 5885351000 85.99

2008-2009 6576111000 7646004000 86.01 CHART 15

NONINTEREST INCOME TO TOTAL INCOME

INFERENCE

The higher ratio of non interest income indicates the increasing the proposition of

income. This indicates that Non Interest Income was important in the year 2003-04

23.30

11.3912.51

9.64

14.01 13.99

0.00

5.00

10.00

15.00

20.00

25.00

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

INTEREST INCOME TO TOTAL INCOME TABLE 4.16

INTEREST INCOME TO TOTAL INCOME

year Interest income Total income Percentage

2003-2004 2859544000 3728168000 76.70

2004-2005 2982042000 3365242000 88.61

2005-2006 3220564000 3681272000 87.49

2006-2007 4291789000 4749858000 90.36

2007-2008 5060576000 5885351000 85.99

2008-2009 6576111000 7646004000 86.01 CHART 16

INTEREST INCOME TO TOTAL INCOME

INFERENCE

Income from the interest is higher than the total income. It shows the lending efficiency

of the bank.

76.70

88.61 87.49 90.36

85.99 86.01

65.00

70.00

75.00

80.00

85.00

90.00

95.00

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

LIQUIDITY (L) The business of banking is all about borrowing and lending money. Timely repayment of

deposits is of crucial importance to avoid a run on a bank. Investors are extremely sensitive and

they rushed the bank to withdraw money at the slightest hint of trouble. Hence banks have to

ensure that they maintain enough liquidity.

LIQUID ASSETS TO DEMAND DEPOSITS

The ratio measures the ability of a bank to meet demand from demand deposits in a

particular year. Liquid assets include cash in hand, balance with RBI, balance with other banks

and money at call and short notice.

TABLE 4.17


Year Liquid asset Demand asset Percentage

2003-2004 2801253000 4099944000 68.32

2004-2005 3542377000 4269962000 82.96

2005-2006 4634000000 4530844000 102.28

2006-2007 6414605000 5069179000 126.54

2007-2008 6149029000 5591944000 109.96

2008-2009 8814131000 4920769000 179.12

CHART 17


INFERENCE

Liquid assets as a percentage of demand deposits are one of the important measures of

liquidity position of a bank. The percentage of liquid assets to demand assets in 2003-04was

68.3282.96

102.28

126.54 109.96

179.12

0.00

50.00

100.00

150.00

200.00

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

68.32% which was the lowest in these six years at present the ratio is at 179.12%, indicating

good liquidity position.

LIQUID ASSETS TO TOTAL DEPOSITS

Here liquid assets are measured as a percentage of total deposits. Total deposits include

demand deposits, saving deposits, term deposits and deposits of their financial institutions. As

deposits are the major liability of any bank, it is significant to relate liquid assets to total

deposits.

TABLE 4.18


Year Liquid asset Total deposits Percentage

2003-2004 2801253000 32958191000 8.50

2004-2005 3542377000 34959251000 10.13

2005-2006 4634000000 43363800000 10.69

2006-2007 6414605000 50198723000 12.78

2007-2008 6149029000 56184882000 10.94

2008-2009 8814131000 73609030000 11.97 CHART 18


INFERENCE

In 2003-04, the percentage of liquid assets to total deposits was 8.50%, after

which there was a steady increase upto 12.78%. At present it maitains a value of 11.97% which

is quite satisfactory.

8.50

10.1310.69

12.78

10.94

11.97

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

LIQUID ASSETS TO TOTAL ASSETS

Here liquid assets are measured as a percentage of total assets. An asset is said to be

liquid if it can be converted into cash within short period of time without loss of value. Higher

the percentage of liquid assets more will be banks ability to meet its liabilities in time.

TABLE 4.19


Year Liquid asset Total asset Percentage

2003-2004 2801253000 38213506000 7.33

2004-2005 3542377000 40533818000 8.74

2005-2006 4634000000 49193808000 9.42

2006-2007 6414605000 58267814000 11.01

2007-2008 6149029000 65206041000 9.43

2008-2009 8814131000 83172547000 10.60

CHART 19


INFERENCE

The percentage of liquid assets to total assets shows an increasing trend in the first four

years. This indicates that the liquidity of the bank is in favourable position.

7.33

8.74

9.42

11.01

9.4310.60

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

GOVERNMENT SECURITIES TO TOTAL ASSETS This ratio measures proposition of risk free liquid assets invested in Govt. securities as a

percentage of the asset held by a bank and is arrived at by dividing investment in Govt. securities

by total assets.

TABLE 4.20

GOVERNMENT SECURITIES TO TOTAL ASSETS

Year Govt. securities Total asset Percentage

2003-2004 10840136000 38213506000 28.37

2004-2005 10704248000 40533818000 26.41

2005-2006 11676901000 49193808000 23.74

2006-2007 11873998000 58267814000 20.38

2007-2008 15540890000 65206041000 23.83

2008-2009 16742322000 83172547000 20.13

CHART 20

GOVERNMENT SECURITIES TO TOTAL ASSETS

INFERENCE

The percentage of government securities to total assets has been showing a

decreasing trend for the last four years. The present ratio is at 20.13%. This decreasing trend

indicates that the bank has good liquidity of funds.

28.3726.41

23.74

20.38

23.83

20.13

0.00

5.00

10.00

15.00

20.00

25.00

30.00

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

APPROVED SECURITIES TO TOTAL ASSETS

Approved securities are investments made in state associated bodies like electricity

boards, housing boards, corporation bonds and share use of regional rural banks.

TABLE 4.21


Year Approved securities

Total asset Percentage

2003-2004 287658000 38213506000 0.75

2004-2005 168851000 40533818000 0.42

2005-2006 168851000 49193808000 0.34

2006-2007 158902000 58267814000 0.27

2007-2008 136502000 65206041000 0.21

2008-2009 95482000 83172547000 0.11 CHART 21


INFERENCE

Even though approved securities are not as liquid and secured when compared to

Govt. securities, they also provide sufficient liquidity for the bank. LVB investment in approved

securities shows a decreasing trend. The percentage of approved securities to total assets were

.75% in 2003-04 and it reduced gradually and reached at .11% in 2008-09.

0.75

0.42

0.340.27

0.21

0.11

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

The ratio of Liquid Assets to Demand Deposits and Liquid Assets to Total Assets are 11.97%

and 10.60% respectively in the year 2008-09. Government securities also play a major role in the

liquidity of a bank. So it is always necessary for banks to maintain a reasonable amount in

government securities, too much liquidity affects the returns of the bank. By analyzing the data

we can come to conclusion that LVB maintaining proper balance between earnings and liquidity

of the bank.

Systems and control (S)

A system of strong internal controls can help to ensure that the goals and objectives of a

banking organisation will be met, that the bank will achieve long term profitability targets, and

maintain reliable financial and managerial reporting. Such a system can regulate plans, internal

rules and procedures and decrease the risk of unexpected losses or damage to the banks

reputation.

• LVB has a strong and active board of directors. Their activities include (1)

periodic discussions with management concerning the effectiveness of the internal

control system, (2) a timely review of evaluations of internal controls made by

management, internal auditors, and (3) periodic efforts to ensure that management

has appropriately followed up on recommendations and concerns expressed by

auditors and supervisory authorities on internal control weakness.

• Senior management ensures that staffs are properly compensated and their

training and skills periodically updated.

• Adequate information and effective communication are essential to the proper

functioning of a system of internal control. In LVB there is a well documented

and communicated organisational structure that clearly shows effective

communication through the organisation and this ensures compliance with an

established internal control systems.

FINDINGS

• Capital adequacy reflects the overall financial condition of the bank and also the ability

of the management to meet the needs for additional capital. As per the prudential norm,

all Indian schedule commercial bank are required to achieve 9 percent of capital

adequacy ratio. LVB is able to achieve, more than this minimum requirement of 9

percent. This helps the bank to establish a level of confidence sufficient to absorb

unforeseen losses.

• Nonperforming assets are advanced or borrower accounts which do not generate income

for the bank. Its percentage with regard to advances is reducing year by year. The

percentage of net NPAs to advances in 2003-04 was 5.37 percent but it was reduced to

1.24 percent in 2008-09. It was made on account of vigorous recovery steps and due to

the additional provision made, bank is able to reduce its NPA and maintain the quality of

assets.

• Yield on advance shows a mixed trend. In' 2003-04 it was 8.86percent. Thereafter it is

increased to 9.87 percent 2008-09. The main reason for decrease in yield on advances is

intense competition in the banking sector. To meet this challenge the banking products

and services have become more competitive and they are being perceived as

commodities. To leverage competitive environment, they are reducing interest rate to

increase customer base. This affects yield on advances.

• Total advances of LVB are around 71 percent of its total deposits. This indicates

management's efficiency to convert deposits to advance. Advances are the main source of

income of the bank and thus efficiency of the management depends upon their ability to

increase these assets.

• Labour productivity is an indicator of long term variability of banks. It is measured in

terms of Business per Employee and Profit per Employee. In LVB, Profit per Employee

is highly decreased to Rs .17346 in 2004-05 because of lower net profit. Thereafter it is

increased to Rs 206721 in 2008-09. Increasing profit per employee shows the efficiency

of the management. Business per employee shows an increasing trend. This indicates

efficiency of the management. Profitability and business of bank is highly increased

through increasing employee base, which shows increasing labour productivity.

• Branch profitability and branch productivity are also used as an indicator of efficiency of

the management by analyzing last 6 years data of the LVB, branch profitability shows a

decreasing trend up to 2004-05 because of the decrease in the gross profit of the bank.

But in 2007-08 branch profitability is increased to Rs.1057284 due to increase in the

gross profit. In 2008-09 it is increased to Rs.2003796.

• Earnings per share are also used to measure the efficiency of the management. It

measures quantum of earnings available to the equity investors on their investment. By

analyzing, the last six years data of the bank, net profit of the bank has shown

proportionately increased with the growth in the equity shares. So the management is able

to increase earnings per share of the bank. This indicates the efficiency of the

management.

• Interest income of LVB is increasing year by year. It shows their lending pattern.

• Net profit of LVB shows a steady increase from Rs.410485000in 2003-04 to 502953000

in 2008-09. The total business as well as Net income of the bank has increased. This

indicates efficient management of the bank.

5.2 SUGGESTIONS

At present the minimum capital adequacy ratio as per RBI norms is 9percent and LVB's

capital adequacy ratio in 2007-08 is 10.09 percent. By comparing the CAR of peer group

of banks, LVB's CAR is low. Since bank's asset base is increasing but bank's capital base

is remaining the same. So bank may issue an additional capital in order to increase the

CAR of the bank. Last month they increased their capital by issuing shares.

NPA adversely affects the asset quality of the bank. During the year 2006-07, the

percentage of net NPAs to advances - of the bank was 1.24 percent. The bank has to take

aggressive recovery steps to reduce NPAs to minimum level for maintaining better asset

quality of the bank.

At present interest income is a major source of income for LVB. In order to increase the

portion of the non interest income of the bank, LVB has to concentrate more on Para

banking activities such as insurance, portfolio management, mutual funds, investment

banking.

In order to improve the labour productivity, LVB has to concentrate more on training and

executive development programme in accordance with technological changes.

Non-interest income is less than the interest income; the bank has to concentrate on non-

interest income also.

In order to improve the profit per employee, the management has to use man power

effectively by giving more training.

5.3 CONCLUSION

Indian banking sector is an exciting phase of string, healthy competition. And increasing

size of the banking pie itself indicates that there is a lot of untapped potential in the market for

banking. The CAMELS rating system assesses different aspects of commercial banks operations

to determine the soundness of its condition. The performance of the LVB is evaluated using

various parameters, such as Capital adequacy, asset quality, Management, Earnings quality,

Liquidity and system and control. By analyzing the last six year data, it is found that LVB is

founded to make improvements in their capital adequacy ratio in order to meet its liabilities in

future. Decreasing trend in NPA is an evidence of sound asset quality as profitability is directly

related with the efficiency of management. Branch profitability and profit per employee and such

other parameters are used here to assess the quality of management and most of these parameters

indicate a favourable situation. The net profit of the bank is very low in the year 2004-05 that is

Rs 33444000. It adversely affects income of the bank. Thereafter bank is making healthy

improvements in net profit of the bank. The inspection and vigilance dept. of LVB ensures that

all branches of the bank compulsory adhere to the systems and procedures put in place for its

operations. Thus overall performance of LVB is efficient and competitive.

BIBLOGRAPHY

BOOKS

S.N. Mahaeswari - 2005 - Financial Management – Vikas Publishing House, New Delhi

ARTICLES

Padmanabhan working Group (1995) introduction of rating methods for banks using CAMELS

model financial service research

Narasimham committee (1998) introduction of international accepted prudential norms based on

camels‟ model

Barr and Simens (1996) predict bank failure in US using CAMELS model

Godse (1996) application of new camel model

Persuna (2004) performance of Indian banks adopting camels

Veni (2004) study to measure capital ratios

Sathishjuntur, sharath and surrender (2005) CAMELS model to assess the performance of Indian

banks

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