Sajini Project

A STUDY ON RATIO ANALYSIS OF FEDERAL BANK

FINANCE

Finance studies and addresses the ways in which

individuals, businesses, and organizations raise, allocate,

and use monetary resources over time, taking into account

the risks entailed in their projects. The term "finance" may

thus incorporate any of the following:

The study of money and other assets;

The management and control of those assets;

Profiling and managing project risks;

The science of managing money;

As a verb, "to finance" is to provide funds for business or

for an individual's large purchases (car, home, etc.).

The field of finance deals with the concepts of time,

money and risk and how they are interrelated. It also

deals with how money is spent and budgeted.

Finance works most basically through individuals and

business organizations depositing money in a bank. The

bank then lends the money out to other individuals or

corporations for consumption or investment, and charges

interest on the loans.

1 | P a g eINDIAN ACADEMY DEGREE COLLEGE

http://en.wikipedia.org/wiki/Business

http://en.wikipedia.org/wiki/Asset

http://en.wikipedia.org/wiki/Money

http://en.wikipedia.org/wiki/Risks

http://en.wikipedia.org/wiki/Factors_of_production

http://en.wikipedia.org/wiki/Businesses


The activity of finance is the application of a set of

techniques that individuals and organizations (entities) use

to manage their money, particularly the differences

between income and expenditure and the risks of their

investments.

An entity whose income exceeds its expenditure can lend

or invest the excess income. On the other hand, an entity

whose income is less than its expenditure can raise capital

by borrowing or selling equity claims, decreasing its

expenses, or increasing its income.

The lender can find a borrower, a financial intermediary,

such as a bank or buy notes or bonds in the bond market.

The lender receives interest, the borrower pays a higher

interest than the lender receives, and the financial

intermediary pockets the difference.

A bank aggregates the activities of many borrowers and

lenders. A bank accepts deposits from lenders, on which it

pays the interest. The bank then lends these deposits to

borrowers. Banks allow borrowers and lenders, of

different sizes, to coordinate their activity. Banks are thus

compensators of money flows in space.


http://en.wikipedia.org/wiki/Bond_market

http://en.wikipedia.org/wiki/Bank


A specific example of corporate finance is the sale of

stock by a company to institutional investors like

investment banks, who in turn generally sell it to the

public. The stock gives whoever owns it part ownership in

that company. If you buy one share of XYZ Inc, and they

have 100 shares outstanding (held by investors), you are

1/100 owner of that company. Of course, in return for the

stock, the company receives cash, which it uses to expand

its business in a process called "equity financing". Equity

financing mixed with the sale of bonds (or any other debt

financing) is called the company's capital structure.

Finance is used by individuals (personal finance), by

governments (public finance), by businesses (corporate

finance), as well as by a wide variety of organizations

including schools and non-profit organizations. In general,

the goals of each of the above activities are achieved

through the use of appropriate financial instruments, with

consideration to their institutional setting.

Finance is one of the most important aspects of business

management. Without proper financial planning a new

enterprise is unlikely to be successful. Managing money (a

liquid asset) is essential to ensure a secure future, both for

the individual and an organization


http://en.wikipedia.org/wiki/Business_management

http://en.wikipedia.org/wiki/Business_management

http://en.wikipedia.org/wiki/Corporate_finance

http://en.wikipedia.org/wiki/Corporate_finance

http://en.wikipedia.org/wiki/Public_finance

http://en.wikipedia.org/wiki/Personal_finance


Financial Management

Management of funds is an important aspect of financial

management. Management of funds acts as the primary

concern whether it may be in a business undertaking or in

an educational institution. Financial management, which is

simply meant dealing with management of money matters.

Meaning of Financial Management

By Financial Management we mean efficient use of

economic resources namely capital funds. According to

Phillippatus, "Financial management is concerned with the

managerial decisions that result in the acquisition and

financing of short term and long term credits for the firm".

Here it deals with the situations that require selection of

specific assets (or combination of assets), the selection of

specific problem of size and growth of an enterprise. Here

the analysis deals with the expected inflows and outflows

of funds and their effect on managerial objectives.

So the analysis simply states two main aspects of financial

management like procurement of funds and an effective

use of funds to achieve business objectives.



Procurement of funds:

As funds can be obtained from different sources so

procurement of funds is considered as an important

problem of business concerns. Funds procured from

different sources have different characteristics in terms of

risk, cost and control.

In the globalised competitive scenario mobilization of

funds plays a very significant role. Funds can be raised

either through domestic market or from abroad. Foreign

Direct Investment (FDI) as well as Foreign Institutional

Investors (FII) is two major sources of raising funds. The

mechanism of procurement of funds has to be modified in

the light of requirements of foreign investors.

Utilization of Funds:

Effective utilization of funds as an important aspect of

financial management avoids the situations where funds

are either kept idle or proper uses are not being made.

Funds procured involve a certain cost and risk. If the funds

are not used properly then running business will be too

difficult. In case of dividend decisions we also consider

this. So it is crucial to employ the funds properly and

profitably.



FINANCIAL STATEMENTS

Financial statements (or financial reports) are formal

records of the financial activities of a business, person, or

other entity. Financial statements provide an overview of

a business or person's financial condition in both short

and long term. All the relevant financial information of a

business enterprise presented in a structured manner and

in a form easy to understand, is called the financial

statements. There are four basic financial statements:

1. Balance sheet

It is also referred to as statement of financial

position or condition, reports on a company's

assets, liabilities, and Ownership equity at a given

point in time.

2. Income statement

It is also referred to as Profit and Loss statement

(or a "P&L"), reports on a company's income,

expenses, and profits over a period of time. Profit

& Loss account provide information on the

operation of the enterprise. These include sale and

the various expenses incurred during the

processing state.



3. Statement of retained earnings

It explains the changes in a company's retained

earnings over the reporting period.

4. Statement of cash flows

It reports on a company's cash flow activities;

particularly it’s operating, investing and financing

activities.

Financial statement analysis refers to an assessment of

the viability, stability and profitability of a business, sub-

business or project. It is performed by professionals who

prepare reports which are usually presented to top

management as one of their bases in making business

decisions. Based on these reports, management may:

Continue or discontinue its main operation or part

of its business;

Make or purchase certain materials in the

manufacture of its product;

Acquire or rent/lease certain machineries and

equipment in the production of its goods;

Issue stocks or negotiate for a bank loan to

increase its working capital;

Make decisions regarding investing or lending

capital.


http://en.wikipedia.org/wiki/Working_capital

http://en.wikipedia.org/wiki/Loan

http://en.wikipedia.org/wiki/Stocks

http://en.wikipedia.org/wiki/Project

http://en.wikipedia.org/wiki/Business


Parties Interested in Financial

Statement Analysis

Information contained in financial statements is useful to

different categories of users of financial data. Uses of

financial data for each of these are briefly described

below:

1. Management

Management of a company is interested in its

financial condition, profitability and progress. It

uses a number of methods, tools and techniques

available to it to analyze the financial data. Such

analysis is used by the management to exercise

control over the business and to make decisions to

run it more efficiently.

2. Shareholders

Shareholders are the suppliers of basic capital to

run the business. Such capital is exposed to all the

risks of ownership. Shareholders are interested in

the profitability, dividends declared and market

value of their holdings. In other words,

shareholders mainly analyse the profitability and

long term solvency of the company.



3. Creditors

Creditors include short-term creditors like

bankers, trade creditors and also long term credit

grantors like debenture-holders and financial

institutions, etc. All creditors are mainly interested

in the short term and long-term solvency of the

company. They are also interested in the

profitability because profit is viewed as the

primary source for payment of interest on loans

and debentures.

4. Purchaser of Business

Any person interested in the purchase of a going

concern analyses the financial statements to

determine its real value. It makes an assessment of

the financial and operating strengths and

weaknesses of the business.

5. Government

Financial statements are used by various

government departments like Income Tax, Sales

Tax, Excise Duty, etc. to determine the tax liability

of the company.



Types of Financial Statement Analysis

1. Internal and External Analysis .

When analysis in done on behalf of the

management who have access to the internal

accounting records of the firm, it is called internal

analysis. External analysis is done by outsiders like

shareholders, creditors, investors and potential

investors, government agencies, etc. who don't

have access to the detailed internal records of the

firm. Thus external analysis is dependent on the

published financial statements of the firm.

2. Horizontal and Vertical Analysis .

Horizontal analysis is that which covers financial

data of more than one year (may be up to 5 or 10

years). The figures for various years are presented

horizontally over a number of columns. Trend

percentage and comparative financial statements

are types of horizontal analysis. This type of

analysis is also called dynamic analysis. Vertical

analysis, also known as static analysis, covers a

period of one year only and analysis is made on the

basis of one set of financial statements. Common

size financial statements and ratio analysis are

techniques employed in vertical analysis.



Significance and Purposes of Financial Statement Analysis

Financial statement analysis performs the essential

function of converting mass data into useful information.

Such analysed financial information serves many and

varied purposes as described below:

1. Judging Profitability.

2. Judging Liquidity.

3. Judging Solvency.

4. Judging the Efficiency of Management.

5. Inter-firm Comparison.

6. Forecasting and Budgeting.

Tools of Financial Statements

In the analysis of financial statements, the analyst has

available a number of tools from which he has to choose

best suited for his specific purpose. The following are the

principal tools of analysis of financial statements.

I. Comparative Financial Statements.

II. Common-size Financial Statements.

III.Trend Percentages.

IV. Ratio Analysis.

Financial Ratio Analysis



Financial ratio analysis is the calculation and

comparison of ratios which are derived from the

information in a company's financial statements. The

level and historical trends of these ratios can be used to

make inferences about a company's financial condition,

its operations and attractiveness as an investment.

Financial ratios are calculated from one or more pieces of

information from a company's financial statements. For

example, the "gross margin" is the gross profit from

operations divided by the total sales or revenues of a

company, expressed in percentage terms. In isolation, a

financial ratio is a useless piece of information. In context,

however, a financial ratio can give a financial analyst an

excellent picture of a company's situation and the trends

that are developing.

A ratio gains utility by comparison to other data and

standards. Taking our example, a gross profit margin for a

company of 25% is meaningless by itself. If we know that

this company's competitors have profit margins of 10%,

we know that it is more profitable than its industry peers

which are quite favorable. If we also know that the

historical trend is upwards, for example has been

increasing steadily for the last few years, this would also



be a favorable sign that management is implementing

effective business policies and strategies.

Financial ratio analysis groups the ratios into categories

which tell us about different facets of a company's

finances and operations. An overview of some of the

categories of ratios is given below.

FINANCIAL RATIOS

LIQUIDITY SOLVENCY PERFORMANCE PROFITABILITY

CURRENT DEBT CAPITAL GROSS PROFIT RATIO EQUITY TURNOVER RATIO

RATIO RATIO QUICK NET PROFIT RATIO INTEREST FIXED ASSET RATIO COVERAGE TURNOVER

RATIO RATIO ABSOLUTE LIQUID OPERATING RATIO PROPRIETORY WORKING PROFIT RATIO CAPITAL RATIO TURNOVER RATIO FIXED ASSET

RATIO STOCK OPERATING TURNOVER RATIO RATIO CAPITAL GEARING RATIO



Leverage Ratios which show the extent that debt is used

in a company's capital structure.

Liquidity Ratios which give a picture of a company's

short term financial situation or solvency.

Operational Ratios which use turnover measures to show

how efficient a company is in its operations and use of

assets.

Profitability Ratios which use margin analysis and show

the return on sales and capital employed.

Solvency Ratios which give a picture of a company's

ability to generate cash flow and pay it financial

obligations.

It is imperative to note the importance of the proper

context for ratio analysis. Like computer programming,

financial ratio is governed by the GIGO law of "Garbage

In...Garbage Out!" A cross industry comparison of the

leverage of stable utility companies and cyclical mining

companies would be worse than useless. Examining a

cyclical company's profitability ratios over less than a full

commodity or business cycle would fail to give an

accurate long-term measure of profitability. Using

historical data independent of fundamental changes in a

company's situation or prospects would predict very little

about future trends.



For example, the historical ratios of a company that has

undergone a merger or had a substantive change in its

technology or market position would tell very little about

the prospects for this company.

Credit analysts, those interpreting the financial ratios from

the prospects of a lender, focus on the "downside" risk

since they gain none of the upside from an improvement in

operations. They pay great attention to liquidity and

leverage ratios to ascertain a company's financial risk.

Equity analysts look more to the operational and

profitability ratios, to determine the future profits that will

accrue to the shareholder.

Although financial ratio analysis is well-developed and the

actual ratios are well-known, practicing financial analysts

often develop their own measures for particular industries

and even individual companies. Analysts will often differ

drastically in their conclusions from the same ratio

analysis



PROFITABILITY RATIOS

Closely linked with income ratios are profitability ratios,

which shed light upon the overall effectiveness of

management regarding the returns generated on sales and

investment.

Gross Profit on Net Sales

Net Sales – Cost Of Goods Sold / Net Sales = Gross Profit

on Net Sales Ratio

Does your average markup on goods normally cover your

expenses, and therefore result in a profit? This ratio will

tell you. If your gross profit rate is continually lower than

your average margin, something is wrong! Be on the

lookout for downward trends in your gross profit rate. This

is a sign of future problems for your bottom line.

Note: This percentage rate can — and will — vary greatly

from business to business, even those within the same

industry. Sales, location, size of operations, and intensity

of competition are all factors that can affect the gross

profit ratio.



NET OPERATING PROFIT RATIOS

Net Profit on Net Sales

EAT/ Net Sales = Net Profit on Net Sales ratio

This ratio provides a primary appraisal of net profits

related to investment. Once your basic expenses are

covered, profits will rise disproportionately greater than

sales above the break-even point of operations.

EAT= earnings after taxes

Note: Sales expenses may be substituted out of profits for

other costs to generate even more sales and profits.

Net Profit to Tangible Net Worth

EAT / Tangible Net Worth = Net Profit To Tangible Net

Worth

This ratio acts as a complementary appraisal of net profits

related to investment. This ratio sizes up the ability of

management to earn a return.



Net Operating Profit Rate of Return

EBIT / Tangible Net Worth = Net Operating Profit Rate

Of Return

Your Net Operating Profit Rate of Return ratio is

influenced by the methods of financing you utilize. Notice

that this ratio employs earnings before interest and taxes,

not earnings after taxes. Profits are taken after interest is

paid to creditors. A fallacy of omission occurs when

creditors support total assets.

Note: If financial charges are great, compute a net

operating profit rate of return instead of return on assets

ratio. This can provide an important means of comparison.

Management Rate of Return

Operating Income / Fixed Assets – Net Working Capital

= Mgt. Rate of Return

This profitability ratio compares operating income to

operating assets, which are defined as the sum of tangible

fixed assets and net working capital.



This rate, which you may calculate for your entire

company or for each of its divisions or operations,

determines whether you have made efficient use of your

assets. The percentage should be compared with a target

rate of return that you have set for the business.

Earning Power Ratio

Net Sales / tangible Net Worth x EAT / Net Sales =

Earning Power Ratio

The Earning Power Ratio combines asset turnover with the

net profit rate. That is, Net Sales to Tangible Net Worth

(see "Income Ratios") multiplied by Net Profit on Net

Sales (see ratio above). Earning power can be increased by

heavier trading on assets, by decreasing costs, by lowering

the break-even point, or by increasing sales faster than the

accompanying rise in costs

LIQUIDITY RATIOS



While liquidity ratios are most helpful for short-term

creditors/suppliers and bankers, they are also important to

financial managers who must meet obligations to suppliers

of credit and various government agencies. A complete

liquidity ratio analysis can help uncover weaknesses in the

financial position of your business.

Current Ratio

Current Assets / Current Liabilities = Current Ratio

Popular since the turn of the century, this test of solvency

balances your current assets against your current

liabilities. The current ratio will disclose balance sheet

changes that net working capital will not.

Current Assets = net of contingent liabilities on notes

receivable

Current Liabilities = all debt due within one year of

statement data



Note: The current ratio reveals your business's ability to

meet its current obligations. It should be supplemented

with the other ratios listed below, however.

Quick Ratio

Quick assets / Current Liabilities = Quick Ratio

Also known as the "acid test," this ratio specifies whether

your current assets that could be quickly converted into

cash are sufficient to cover current liabilities. Until

recently, a Current Ratio of 2:1 was considered standard.

A firm that had additional sufficient quick assets available

to creditors was believed to be in sound financial

condition.

Note: The Quick Ratio assumes that all assets are of equal

liquidity. Receivables are one step closer to liquidity than

inventory. However, sales are not complete until the

money is in hand.

Quick Assets = Current Assets – Stock



Absolute Liquidity Ratio

Cash + Marketable securities / Current Liabilities =

Absolute Liquid Ratio

A subsequent innovation in ratio analysis, the Absolute

Liquidity Ratio eliminates any unknowns surrounding

receivables.

Note: The Absolute Liquidity Ratio only tests short-term

liquidity in terms of cash and marketable securities.

Receivables Turnover

Total Credit Sales / Average Receivables Owing =

Receivables Turnover Ratio

Another indicator of liquidity, Receivables Turnover Ratio

can also indicate management's efficiency in employing

those funds invested in receivables. Net credit sales, while

preferable, may be replaced in the formula with net total

sales for an industry-wide comparison.

Note: Closely monitoring this ratio on a monthly or

quarterly basis can quickly underscore any change in

collections.



WORKING CAPITAL RATIOS

The working capital ratio can give an indication of

the ability of your business to pay its bills. Generally a

working capital ratio of 2:1 is regarded as desirable. A

stronger ratio indicates a better ability to meet ongoing

and unexpected bills therefore taking the pressure off

your cash flow. Being in a liquid position can also have

advantages such as being able to negotiate cash discounts

with your suppliers. A weaker ratio may indicate that

your business is having greater difficulties meeting its

short-term commitments and that additional working

capital support is required.

Many believe increased sales can solve any business

problem. Often, they are correct. However, sales must be

built upon sound policies concerning other current assets

and should be supported by sufficient working capital.

There are two types of working capital: gross working

capital, which is all current assets, and net working capital,

which is current assets less current liabilities. Moody's

Investors Service has listed net working capital since

1922.



If you find that you have inadequate working capital, you

can correct it by lowering sales or by increasing current

assets through either internal savings (retained earnings) or

external savings (sale of stock). Following are ratios you

can use to evaluate your business's net working capital.

Working Capital Ratio

Use "Current Ratio" in the section on "Liquidity Ratios."

This ratio is particularly valuable in determining your

business's ability to meet current liabilities.

Working Capital Turnover

Net Sales / Net Working Capital = working Caoital

Turnover Ratio

This ratio helps you ascertain whether your business is

top-heavy in fixed or slow assets, and complements Net

Sales to Tangible Net Worth (see "Income Ratios"). A

high ratio could signal overtrading.

Note: A high ratio may also indicate that your business

requires additional funds to support its financial structure,

top-heavy with fixed investments.



Current Debt to Net Worth

Current Liabilities / Tangible Net Worth = Current Debt

To Net Worth

Your business should not have debt that exceeds your

invested capital. This ratio measures the proportion of

funds that current creditors contribute to your operations.

Note: For small businesses a ratio of 60 percent or above

usually spells trouble. Larger firms should start to worry at

about 75 percent.

Funded Debt to Net Working Capital

Long Term Debt / Net Working Capital =Funded debt To

Net Working Capital

Funded debt (long-term liabilities) = all obligations due

more than one year from the balance sheet date

Note: Long-term liabilities should not exceed net working

capital



LONG TERM ANALYSIS

Current Assets to Total Debt

Current Assets / Current + Long Term Debts = Current

Assets To Total Debts.

This ratio determines the degree of protection linked to

short- and long-term debt. More net working capital

protects short-term creditors.

Note: A high ratio (significantly above 100 percent) shows

that if liquidation losses on current assets are not

excessive, long-range debtors can be paid in full out of

working capital.

Total Debt to Net Worth

Current +Deferred Debt / Tangible Net Worth = Total

Debt To Net Worth

Rarely should your business's total liabilities exceed its

tangible net worth. If it does, creditors assume more risk

than stockholders. A business handicapped with heavy

interest charges will likely lose out to its better financed

competitors.



LEVERAGE RATIOS

This group of ratios calculates the proportionate

contributions of owners and creditors to a business,

sometimes a point of contention between the two parties.

Creditors like owners to participate to secure their margin

of safety, while management enjoys the greater

opportunities for risk shifting and multiplying return on

equity that debt offers.

Equity Ratio

Shareholders Equity / Total Capital Employed = Equity

Ratio

The ratio of common stockholders' equity (including

earned surplus) to total capital of the business shows how

much of the total capitalization actually comes from the

owners.

Debt to Equity Ratio

Long Term Debts / Shareholders Equity = Debt To

Equity Ratio


LIQUIDITY RATIOS

PERFORMAN-CE RATIOS

SOLVENCY RATIOS

ABSOLUTE LIQUID RATIO

QUICK RATIO

CURRENT RATIO INTEREST COVERAGE RATIO

WORKING CAPITAL TURNOVER RATIO

FIXED ASSET TURNOVER RATIO


A high ratio here means less protection for creditors. A

low ratio, on the other hand, indicates a wider safety

cushion (i.e., creditors feel the owner's funds can help

absorb possible losses of income and capital).

CHART SHOWING RATIOS CALCULATED IN BANKS

Classification of current assets of a bank.


RATIOS

NET PROFIT RATIO

OPERATING RATIO

PROFITABI-LITY RATIOS


Cash in Hand Advances Term Loan Interest Accrued

Contra Items: Bills for collection Acceptance & endorsement

Classification of current liabilities of a

bank.

Bills Payable Interest Accrued O/s Expense Accumulated Depreciation.

Contra Items: Bills for collection

Acceptance & endorsement

P&L Account

Classification of sales of a bank

Interest on loan and advances.

Interest on foreign exchange business.

Interest on demand bills.

Interest on pre shipment advance

Interest on advance inland bills purchased.

Interest on export bills.

Interest on draught affected loan.

Bills discounted.



Discount received under NBMS.

Discount received under IDBI schemes.

Interest recovered under NPA account.

Interest received on statutory advances.

IMPORTANCE OF RATIO ANALYSIS

Ratios are highly important profit tools in financial

analysis that help financial analysts implement plans that

improve profitability, liquidity, financial structure,

reordering, leverage, and interest coverage. Although

ratios report mostly on past performances, they can be

predictive too, and provide lead indications of potential

problem areas.

Ratio analysis is primarily used to compare a company's

financial figures over a period of time, a method

sometimes called trend analysis. Through trend analysis,

you can identify trends, good and bad, and adjust your

business practices accordingly. We can also see how your

ratios stack up against other businesses, both in and out of

your industry.

Financial ratios quantify many aspects of a business and

are an integral part of financial statement analysis.

Financial ratios are categorized according to the financial

aspect of the business which the ratio measures.



Liquidity ratios measure the availability of cash to pay

debt. Activity ratios measure how quickly a firm

converts non-cash assets to cash assets. Debt ratios

measure the firm's ability to repay long-term debt..

Profitability ratios measure the firm's use of its assets

and control of its expenses to generate an acceptable rate

of return. Market ratios measure investor response to

owning a company's stock and also the cost of issuing

stock.

There are several considerations we must be aware of

when comparing ratios from one financial period to

another or when comparing the financial ratios of two or

more companies.

If we are making a comparative analysis of a

company's financial statements over a certain period of

time, make an appropriate allowance for any changes in

accounting policies that occurred during the same time

span.

When comparing business with others in our industry,

allow for any material differences in accounting

policies between your company and industry norms.

When comparing ratios from various fiscal periods or

document.docxcompanies, inquire about the types of

accounting policies used. Different accounting methods

can result in a wide variety of reported figures.



Determine whether ratios were calculated before or

after adjustments were made to the balance sheet or

income statement, such as non-recurring items and

inventory or pro forma adjustments. In many cases,

these adjustments can significantly affect the ratios.

Carefully examine any departures from industry norms.

GOALS OF FINANCIAL RATIOS

1. Profitability - its ability to earn income and sustain growth

in both short-term and long-term. A company's degree of

profitability is usually based on the income statement, which

reports on the company's results of operations;

2. Solvency - its ability to pay its obligation to creditors and

other third parties in the long-term;

3. Liquidity - its ability to maintain positive cash flow, while

satisfying immediate obligations;

4. Stability- the firm's ability to remain in business in the long

run, without having to sustain significant losses in the

conduct of its business. Assessing a company's stability

requires the use of both the income statement and the

balance sheet, as well as other financial and non-financial

indicators.


http://en.wikipedia.org/wiki/Cash_flow

http://en.wikipedia.org/wiki/Income_statement


LIMITATIONS OF RATIO ANALYSIS

False accounting data gives false ratio

Limited use of single ratio.

Limited comparability.

Different meaning of different terms

Qualitative factors are ignored.

Ignores price level changes.

Lack of proper standards.

Ratios alone are not adequate for proper conclusion.

Incompetence and personal bias.

Window Dressing.



The Banking Sector.

History Of Banking In India

Without a sound and effective banking system in India it cannot

have a healthy economy. The banking system of India should

not only be hassle free but it should be able to meet new

challenges posed by the technology and any other external and

internal factors.

For the past three decades India's banking system has several

outstanding achievements to its credit. The most striking is its

extensive reach. It is no longer confined to only metropolitans

or cosmopolitans in India. In fact, Indian banking system has

reached even to the remote corners of the country. This is one of

the main reasons of India's growth process.

India has a well developed banking system. Most of the banks

in India were founded by Indian entrepreneurs and visionaries

in the pre-independence era to provide financial assistance to

traders, agriculturists and budding Indian industrialists. The

origin of banking in India can be traced back to the last decades

of the 18th century. The government's regular policy for Indian

bank since 1969 has paid rich dividends with the nationalization

of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the



bank counters for getting a draft or for withdrawing his own

money. Today, he has a choice. Gone are days when the most

efficient bank transferred money from one branch to other in

two days. Now it is simple as instant messaging or dials a pizza.

Money has become the order of the day.

The first bank in India, though conservative, was established in

1786. From 1786 till today, the journey of Indian Banking

System can be segregated into three distinct phases.

They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

Nationalization of Indian Banks and up to 1991 prior to Indian

banking sector Reforms.

New phase of Indian Banking System with the advent of Indian

Financial & Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as

Phase I, Phase II and Phase III.

Phase I

The General Bank of India was set up in the year 1786. Next



came Bank of Hindustan and Bengal Bank. The East India

Company established Bank of Bengal (1809), Bank of Bombay

(1840) and Bank of Madras (1843) as independent units and

called it Presidency Banks. These three banks were

amalgamated in 1920 and Imperial Bank of India was

established which started as private shareholders banks, mostly

Europeans shareholders.

In 1865 Allahabad Bank was established and first time

exclusively by Indians, Punjab National Bank Ltd. was set up in

1894 with headquarters at Lahore. Between 1906 and 1913,

Bank of India, Central Bank of India, Bank of Baroda, Canara

Bank, Indian Bank, and Bank of Mysore were set up. Reserve

Bank of India came in 1935.

During the first phase the growth was very slow and banks also

experienced periodic failures between 1913 and 1948. There

were approximately 1100 banks, mostly small. To streamline

the functioning and activities of commercial banks, the

Government of India came up with The Banking Companies

Act, 1949 which was later changed to Banking Regulation Act

1949 as per amending Act of 1965 (Act No. 23 of 1965).

Reserve Bank of India was vested with extensive powers for the

supervision of banking in India as the Central Banking

Authority.

During those days public has lesser confidence in the banks. As

an aftermath deposit mobilisation was slow. Abreast of it the



savings bank facility provided by the Postal department was

comparatively safer. Moreover, funds were largely given to

traders.

Phase II

Government took major steps in this Indian Banking Sector

Reform after independence. In 1955, it nationalised Imperial

Bank of India with extensive banking facilities on a large scale

especially in rural and semi-urban areas. It formed State Bank

of India to act as the principal agent of RBI and to handle

banking transactions of the Union and State Governments all

over the country.

Seven banks forming subsidiary of State Bank of India was

nationalized in 1960 on 19th July, 1969, major process of

nationalization was carried out. It was the effort of the then

Prime Minister of India, Mrs. Indira Gandhi. 14 major

commercial banks in the country was nationalized.

Second phase of nationalization Indian Banking Sector Reform

was carried out in 1980 with seven more banks. This step

brought 80% of the banking segment in India under

Government ownership.



The following are the steps taken by the Government of India to

Regulate Banking Institutions in the Country:

1949 : Enactment of Banking Regulation Act.

1955 : Nationalisation of State Bank of India.

1959 : Nationalisation of SBI subsidiaries.

1961 : Insurance cover extended to deposits.

1969 : Nationalisation of 14 major banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

1980 : Nationalisation of seven banks with deposits over 200

crore.

After the nationalisation of banks, the branches of the public

sector bank India rose to approximately 800% in deposits and

advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the

public implicit faith and immense confidence about the

sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in

the banking sector in its reforms measure. In 1991, under the

chairmanship of M Narasimham, a committee was set up by his

name which worked for the liberalisation of banking practices.



The country is flooded with foreign banks and their ATM

stations. Efforts are being put to give a satisfactory service to

customers. Phone banking and net banking is introduced. The

entire system became more convenient and swift. Time is given

more importance than money.

The financial system of India has shown a great deal of

resilience. It is sheltered from any crisis triggered by any

external macroeconomics shock as other East Asian Countries

suffered. This is all due to a flexible exchange rate regime, the

foreign reserves are high, the capital account is not yet fully

convertible, and banks and their customers have limited foreign

exchange exposure.

TYPES OF DEPOSITS AND SCHEMES

GENERALLY PROVIDED BY BANKS

Bank Fixed Deposits

Bank Fixed Deposits are also known as Term Deposits. In a

Fixed Deposit Account, a certain sum of money is deposited in



the bank for a specified time period with a fixed rate of interest.

The rate of interest for Bank Fixed Deposits depends on the

maturity period. It is higher in case of longer maturity period.

There is great flexibility in maturity period and it ranges from

15days to 5 years.

Current Account

Current Account is primarily meant for businessmen, firms,

companies, public enterprises etc. that have numerous daily

banking transactions. Current Accounts are cheque operated

accounts meant neither for the purpose of earning interest nor

for the purpose of savings but only for convenience of business

hence they are non-interest bearing accounts

Demat Account

Demat refers to a dematerialized account. Demat account is just

like a bank account where actual money is replaced by shares.

Just as a bank account is required if we want to save money or

make cheque payments, we need to open a demat account.

Recurring Bank Deposits

Under a Recurring Deposit account (RD account), a specific

amount is invested in bank on monthly basis for a fixed rate of

return. The deposit has a fixed tenure, at the end of which the

principal sum as well as the interest earned during that period is

returned to the investor.



Savings Bank Account

Savings Bank Accounts are meant to promote the habit of

saving among the citizens while allowing them to use their

funds when required. The main advantage of Savings Bank

Account is its high liquidity and safety.

Senior Citizen Saving Scheme 2004

The Senior Citizen Saving Scheme 2004 had been introduced

by the Government of India for the benefit of senior citizens

who have crossed the age of 60 years. However, under some

circumstances the people above 55 years of age are also eligible

to enjoy the benefits of this scheme.

NATIONALISATION OF BANKS

IN INDIA

The nationalisation of banks in India took place in 1969 by

Mrs. Indira Gandhi the then prime minister. It nationalised

14 banks then. These banks were mostly owned by

businessmen and even managed by them.

Central Bank of India


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Bank of Maharashtra

Dena Bank

Punjab National Bank

Syndicate Bank

Canara Bank

Indian Bank

Indian Overseas Bank

Bank of Baroda

Union Bank

Allahabad Bank

United Bank of India

UCO Bank

Bank of India

Befor the steps of nationalisation of Indian banks, only

State Bank of India (SBI) was nationalised. It took place in

July 1955 under the SBI Act of 1955.

Nationalisation of Seven State Banks of India (formed

subsidiary) took place on 19th July, 1960.

The State Bank of India is India's largest commercial bank

and is ranked one of the top five banks worldwide. It

serves 90 million customers through a network of 9,000

branches and it offers -- either directly or through

subsidiaries -- a wide range of banking services.

The second phase of nationalisation of Indian banks took


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place in the year 1980. Seven more banks were

nationalised with deposits over 200 crores. Till this year,

approximately 80% of the banking segment in India were

under Government ownership.

After the nationalisation of banks in India, the branches of

the public sector banks rose to approximately 800% in

deposits and advances took a huge jump by 11,000%.

1955 : Nationalisation of State Bank of India.

1959 : Nationalisation of SBI subsidiaries.

1969 : Nationalisation of 14 major banks.

1980 : Nationalisation of seven banks with deposits over

200 crores.

FINANCIAL AND BANKING SECTOR

REFORMS

The last decade witnessed the maturity of India's financial

markets. Since 1991, every governments of India took major steps

in reforming the financial sector of the country. The important

achievements in the following fields is discussed under separate

heads:



A. Financial markets

B. Regulators

C. The banking system

D. Non-banking finance companies

E. The capital market

F. Mutual funds

G. Overall approach to reforms

H. Deregulation of banking system

I. Capital market developments

J. Consolidation imperative

Financial Markets

In the last decade, Private Sector Institutions played an important

role. They grew rapidly in commercial banking and asset

management business. With the openings in the insurance sector for

these institutions, they started making debt in the market.

Competition among financial intermediaries gradually helped the

interest rates to decline. Deregulation added to it. The real interest

rate was maintained. The borrowers did not pay high price while



depositors had incentives to save. It was something between the

nominal rate of interest and the expected rate of inflation.

Regulators

The Finance Ministry continuously formulated major policies in the

field of financial sector of the country. TheGovernment accepted the

important role of regulators. The Reserve Bank of India (RBI) has

become more independant. Securities and Exchange Board of India

(SEBI) and the Insurance Regulatory and DevelopmentAuthority

(IRDA) became important institutions. Opinions are also there that

there should be a super-regulator for the financial services sector

instead of multiplicity of regulators.

The Banking System

Almost 80% of the business are still controlled by Public Sector

Banks (PSBs). PSBs are still dominating the commercial banking

system. Shares of the leading PSBs are already listed on the stock

exchanges.

The RBI has given licences to new private sector banks as part of the

liberalisation process. The RBI has also been granting licences to

industrial houses. Many banks are successfully running in the retail

and consumer segments but are yet to deliver services to industrial



finance, retail trade, small business and agricultural finance.The PSBs

will play an important role in the industry due to its number of

branches and foreign banks facing the constrait of limited number

of branches. Hence, in order to achieve an efficient banking system,

the onus is on the Government to encourage the PSBs to be run on

professional lines.

Development Of Finance Institutions

FIs's access to SLR funds reduced. Now they have to approach the

capital market for debt and equity funds. Convertibility clause no

longer obligatory for assistance to corporate sanctioned by term-

lending institutions.

DFIs such as IDBI and ICICI have entered other segments of

financial services such as commercial banking, asset management and

insurance through separate ventures. The move to universal banking

has started.

Non-Banking Finance Companies

In the case of new NBFCs seeking registration with the RBI, the

requirement of minimum net owned funds, has been raised to Rs.2

crores.

Until recently, the money market in India was narrow and



circumscribed by tight regulations over interest rates and participants.

The secondary market was underdeveloped and lacked liquidity.

Several measures have been initiated and include new money

market instruments, strengthening of existing instruments and

setting up of the Discount and Finance House of India (DFHI).

The RBI conducts its sales of dated securities and treasury bills

through its open market operations (OMO) window. Primary dealers

bid for these securities and also trade in them.

The DFHI is the principal agency for developing a secondary market

for money market instruments and Government of India treasury bills.

The RBI has introduced a liquidity adjustment facility (LAF) in

which liquidity is injected through reverse repo auctions and liquidity

is sucked out through repo auctions.

On account of the substantial issue of government debt, the gilt-

edged market occupies an important position in the financial set- up.

The Securities Trading Corporation of India (STCI), which started

operations in June 1994 has a mandate to develop the secondary

market in government securities.

Long-term debt market: The development of a long-term debt market

is crucial to the financing of infrastructure. After bringing some order

to the equity market, the SEBI has now decided to concentrate on the

development of the debt market. Stamp duty is being withdrawn at

the time of dematerialisation of debt instruments in order to



encourage paperless trading.

The Capital Market

The number of shareholders in India is estimated at 25 million.

However, only an estimated two lakh persons actively trade in

stocks. There has been a dramatic improvement in the country's stock

market trading infrastructure during the last few years. Expectations

are that India will be an attractive emerging market with tremendous

potential.

Unfortunately, during recent times the stock markets have been

constrained by some unsavoury developments, which has led to retail

investors deserting the stock markets.

Mutual Funds

The mutual funds industry is now regulated under the SEBI (Mutual

Funds) Regulations, 1996 and amendments thereto. With the

issuance of SEBI guidelines, the industry had a framework for the

establishment of many more players, both Indian and foreign players.

The Unit Trust of India remains easily the biggest mutual fund

controlling a corpus of nearly Rs.70,000 crores, but its share is going



down. The biggest shock to the mutual fund industry during recent

times was the insecurity generated in the minds of investors

regarding the US 64 scheme. With the growth in the securities

markets and tax advantages granted for investment in mutual fund

units, mutual funds started becoming popular.

The foreign owned AMCs are the ones which are now setting the

pace for the industry. They are introducing new products, setting new

standards of customer service, improving disclosure standards and

experimenting with new types of distribution.

The insurance industry is the latest to be thrown open to competition

from the private sector including foreign players. Foreign companies

can only enter joint ventures with Indian companies, with

participation restricted to 26 per cent of equity. It is too early to

conclude whether the erstwhile public sector monopolies will

successfully be able to face up to the competition posed by the new

players, but it can be expected that the customer will gain from

improved service.

The new players will need to bring in innovative products as well as

fresh ideas on marketing and distribution, in order to improve the low

per capita insurance coverage. Good regulation will, of course, be

essential.



Overall Approach To Reforms

The last ten years have seen major improvements in the working of

various financial market participants. The government and the

regulatory authorities have followed a step-by-step approach, not a

big bang one. The entry of foreign players has assisted in the

introduction of international practices and systems. Technology

developments have improved customer service. Some gaps however

remain (for example: lack of an inter-bank interest rate benchmark,

an active corporate debt market and a developed derivatives market).

On the whole, the cumulative effect of the developments since 1991

has been quite encouraging. An indication of the strength of the

reformed Indian financial system can be seen from the way India was

not affected by the Southeast Asian crisis.

However, financial liberalisation alone will not ensure stable

economic growth. Some tough decisions still need to be taken.

Without fiscal control, financial stability cannot be ensured. The fate

of the Fiscal Responsibility Bill remains unknown and high fiscal

deficits continue. In the case of financial institutions, the political

and legal structures have to ensure that borrowers repay on time the

loans they have taken. The phenomenon of rich industrialists and

bankrupt companies continues. Further, frauds cannot be totally

prevented, even with the best of regulation. However, punishment

has to follow crime, which is often not the case in India.



Deregulation Of Banking System

Prudential norms were introduced for income recognition, asset

classification, provisioning for delinquent loans and for capital

adequacy. In order to reach the stipulated capital adequacy norms,

substantial capital were provided by the Government to PSBs.

Government pre-emption of banks' resources through statutory

liquidity ratio (SLR) and cash reserve ratio (CRR) brought down in

steps. Interest rates on the deposits and lending sides almost entirely

were deregulated.

New private sector banks allowed to promote and encourage

competition. PSBs were encouraged to approach the public for

raising resources. Recovery of debts due to banks and the Financial

Institutions Act, 1993 was passed, and special recovery tribunals set

up to facilitate quicker recovery of loan arrears.

Bank lending norms liberalized and a loan system to ensure better

control over credit introduced. Banks asked to set up asset liability

management (ALM) systems. RBI guidelines issued for risk

management systems in banks encompassing credit, market and

operational risks.

A credit information bureau being established to identify bad risks.

Derivative products such as forward rate agreements (FRAs) and



interest rate swaps (IRSs) introduced.

Capital Market Developments

The Capital Issues (Control) Act, 1947, repealed, office of the

Controller of Capital Issues were abolished and the initial share

pricing were decontrolled. SEBI, the capital market regulator was

established in 1992.

Foreign institutional investors (FIIs) were allowed to invest in Indian

capital markets after registration with the SEBI. Indian companies

were permitted to access international capital markets through euro

issues.

The National Stock Exchange (NSE), with nationwide stock trading

and electronic display, clearing and settlement facilities was

established. Several local stock exchanges changed over from floor

based trading to screen based trading.

Private Mutual Funds Permitted

The Depositories Act had given a legal framework for the

establishment of depositories to record ownership deals in book entry

form. Dematerialisation of stocks encouraged paperless trading.

Companies were required to disclose all material facts and specific

risk factors associated with their projects while making public issues.



To reduce the cost of issue, underwriting by the issuer were made

optional, subject to conditions. The practice of making preferential

allotment of shares at prices unrelated to the prevailing market prices

stopped and fresh guidelines were issued by SEBI.

SEBI reconstituted governing boards of the stock exchanges,

introduced capital adequacy norms for brokers, and made rules for

making client or broker relationship more transparent which included

separation of client and broker accounts.

Buy Back Of Shares Allowed

The SEBI started insisting on greater corporate disclosures. Steps

were taken to improve corporate governance based on the report of a

committee.

SEBI issued detailed employee stock option scheme and employee

stock purchase scheme for listed companies.

Standard denomination for equity shares of Rs. 10 and Rs. 100 were

abolished. Companies given the freedom to issue dematerialised

shares in any denomination.



Derivatives trading starts with index options and futures. A system of

rolling settlements introduced. SEBI empowered to register and

regulate venture capital funds. The SEBI (Credit Rating Agencies)

Regulations, 1999 issued for regulating new credit rating agencies as

well as introducing a code of conduct for all credit rating agencies

operating in India.

Consolidation Imperative

Another aspect of the financial sector reforms in India is the

consolidation of existing institutions which is especially applicable to

the commercial banks. In India the banks are in huge quantity. First,

there is no need for 27 PSBs with branches all over India. A number

of them can be merged. The merger of Punjab National Bank and

New Bank of India was a difficult one, but the situation is different

now. No one expected so many employees to take voluntary

retirement from PSBs, which at one time were much sought after

jobs.

Private sector banks will be self consolidated while co-operative and

rural banks will be encouraged for consolidation, and anyway play

only a niche role.

In the case of insurance, the Life Insurance Corporation of India is a

behemoth, while the four public sector general insurance companies



will probably move towards consolidation with a bit of nudging. The

UTI is yet again a big institution, even though facing difficult times,

and most other public sector players are already exiting the mutual

fund business. There are a number of small mutual fund players in

the private sector, but the business being comparatively new for the

private players, it will take some time.

We finally come to convergence in the financial sector, the new

buzzword internationally. Hi-tech and the need to meet increasing

consumer needs is encouraging convergence, even though it has not

always been a success till date. In India organisations such as IDBI,

ICICI, HDFC and SBI are already trying to offer various services to

the customer under one umbrella.

This phenomenon is expected to grow rapidly in the coming years.

Where mergers may not be possible, alliances between organizations

may be effective. Various forms of bancassurance are being

introduced, with the RBI having already come out with detailed

guidelines for entry of banks into insurance. The LIC has bought into

Corporation Bank in order to spread its insurance distribution

network. Both banks and insurance companies have started entering

the asset management business, as there is a great deal of synergy

among these businesses. The pensions market is expected to open

up fresh opportunities for insurance companies and mutual funds.

It is not possible to play the role of the Oracle of Delphi when a vast

nation like India is involved. However, a few trends are evident, and



the coming decade should be as interesting as the last one.

RESERVE BANK OF INDIA (RBI)

The central bank of the country is the Reserve Bank of India

(RBI). It was established in April 1935 with a share capital of

Rs. 5 crores on the basis of the recommendations of the

Hilton Young Commission. The share capital was divided

into shares of Rs. 100 each fully paid which was entirely

owned by private shareholders in the beginning. The

Government held shares of nominal value of Rs. 2,20,000.

Reserve Bank of India was nationalized in the year 1949. The

general superintendence and direction of the Bank is entrusted

to Central Board of Directors of 20 members, the Governor

and four Deputy Governors, one Government official from

the Ministry of Finance, ten nominated Directors by the

Government to give representation to important elements in

the economic life of the country, and four nominated

Directors by the Central Government to represent the four



local Boards with the headquarters at Mumbai, Kolkata,

Chennai and New Delhi.

Local Boards consist of five members each Central

Government appointed for a term of four years to represent

territorial and economic interests and the interests of co-

operative and indigenous banks.

The Reserve Bank of India Act, 1934 was commenced on

April 1, 1935. The Act, 1934 (II of 1934) provides the

statutory basis of the functioning of the Bank.

The Bank was constituted for the need of following:

To regulate the issue of banknotes

To maintain reserves with a view to securing monetary

stability and

To operate the credit and currency system of the country

to its advantage.

FUNCTIONS OF RESERVE BANK OF

INDIA

The Reserve Bank of India Act of 1934 entrust all the

important functions of a central bank the Reserve Bank of

India.



Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the

Bank has the sole right to issue bank notes of all

denominations. The distribution of one rupee notes and

coins and small coins all over the country is undertaken by

the Reserve Bank as agent of the Government. The assets

of the Issue Department were to consist of not less than

two-fifths of gold coin, gold bullion or sterling securities

provided the amount of gold was not less than Rs. 40

crores in value. The remaining three-fifths of the assets

might be held in rupee coins, Government of India rupee

securities, eligible bills of exchange and promissory notes

payable in India. Since 1957, the Reserve Bank of India is

required to maintain gold and foreign exchange reserves of

Ra. 200 crores, of which at least Rs. 115 crores should be

in gold. The system as it exists today is known as the

minimum reserve system.

Banker to Government

The second important function of the Reserve Bank of

India is to act as Government banker, agent and adviser.

The Reserve Bank is agent of Central Government and of

all State Governments in India excepting that of Jammu



and Kashmir. The Reserve Bank has the obligation to

transact Government business, via. to keep the cash

balances as deposits free of interest, to receive and to

make payments on behalf of the Government and to carry

out their exchange remittances and other banking

operations. It acts as adviser to the Government on all

monetary and banking matters.

Bankers' Bank and Lender of the Last Resort

The Reserve Bank of India acts as the bankers' bank.

According to the provisions of the Banking Companies

Act of 1949, every scheduled bank was required to

maintain with the Reserve Bank a cash balance equivalent

to 5% of its demand liabilites and 2 per cent of its time

liabilities in India. By an amendment of 1962, the

distinction between demand and time liabilities was

abolished and banks have been asked to keep cash reserves

equal to 3 per cent of their aggregate deposit liabilities.

The minimum cash requirements can be changed by the

Reserve Bank of India.

The scheduled banks can borrow from the Reserve Bank

of India on the basis of eligible securities or get financial

accommodation in times of need or stringency by

rediscounting bills of exchange. Since commercial banks

can always expect the Reserve Bank of India to come to



their help in times of banking crisis the Reserve Bank

becomes not only the banker's bank but also the lender of

the last resort.

Controller of Credit

The Reserve Bank of India is the controller of credit i.e. it

has the power to influence the volume of credit created by

banks in India. It can do so through changing the Bank

rate or through open market operations. According to the

Banking Regulation Act of 1949, the Reserve Bank of

India can ask any particular bank or the whole banking

system not to lend to particular groups or persons on the

basis of certain types of securities. Since 1956, selective

controls of credit are increasingly being used by the

Reserve Bank.

Every bank will have to get the permission of the Reserve

Bank before it can open a new branch. Each scheduled

bank must send a weekly return to the Reserve Bank

showing, in detail, its assets and liabilities. This power of

the Bank to call for information is also intended to give it

effective control of the credit system. The Reserve Bank



has also the power to inspect the accounts of any

commercial bank.

As supreme banking authority in the country, the

Reserve Bank of India, therefore, has the following

powers :

(a) It holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through

quantitative and qualitative controls.

(c) It controls the banking system through the system of

licensing, inspection and calling for information.

(d) It acts as the lender of the last resort by providing

rediscount facilities to scheduled banks.

Custodian of Foreign Reserves

The Reserve Bank of India has the responsibility to

maintain the official rate of exchange. According to the

Reserve Bank of India Act of 1934, the Bank was required

to buy and sell at fixed rates any amount of sterling in lots

of not less than Rs. 10,000. The rate of exchange fixed

was Re. 1 = sh. 6d. Since 1935 the Bank was able to



maintain the exchange rate fixed at lsh.6d. though there

were periods of extreme pressure in favor of or against

the rupee. After India became a member of the

International Monetary Fund in 1946, the Reserve Bank

has the responsibility of maintaining fixed exchange rates

with all other member countries of the I.M.F.

Besides maintaining the rate of exchange of the rupee, the

Reserve Bank has to act as the custodian of India's reserve

of international currencies. The vast sterling balances were

acquired and managed by the Bank. Further, the RBI has

the responsibility of administering the exchange controls

of the country.

Supervisory functions

In addition to its traditional central banking functions, the

Reserve bank has certain non-monetary functions of the

nature of supervision of banks and promotion of sound

banking in India. The Reserve Bank Act, 1934, and the

Banking Regulation Act, 1949 have given the RBI wide

powers of supervision and control over commercial and

co-operative banks, relating to licensing and

establishments, branch expansion, liquidity of their assets,

management and methods of working, amalgamation,

reconstruction, and liquidation. The RBI is authorized to



carry out periodical inspections of the banks and to call for

returns and necessary information from them. The

supervisory functions of the RBI have helped a great deal

in improving the standard of banking in India to develop

on sound lines and to improve the methods of their

operation.

Promotional functions

With economic growth assuming a new urgency since

Independence, the range of the Reserve Bank's functions

has steadily widened. The Bank now performs a variety of

developmental and promotional functions, which, at one

time, were regarded as outside the normal scope of central

banking. The Reserve Bank was asked to promote banking

habit, extend banking facilities to rural and semi-urban

areas, and establish and promote new specialised financing

agencies. Accordingly, the Reserve Bank has helped in the

setting up of the IFCI and the SFC; it set up the Deposit

Insurance Corporation in 1962, the Unit Trust of India in

1964, the Industrial Development Bank of India also in

1964, the Agricultural Refinance Corporation of India in

1963 and the Industrial Reconstruction Corporation of

India in 1972.



FEDERAL BANK

Federal Bank is a private sector bank in India. The head office

of this prestigious bank is located at Aluva, Kerala. By 2008,

the Federal Bank India had successfully introduced 671

branches and 681 ATMs across the nation. In the month of

March of 2008 alone, the bank had opened 26 branches across

11 Indian States.

BUSINESS PHILOSOPHY

Growth is essential to keep an organisation live and vibrant.

Organisations grow only when its roots are firmly planted on a

ground of strong business philosophy. A strong sense of

‘purpose’ drive organisations forward and a sound philosophy

fuels this advance.

Federal Bank is a notable player amongst the commercial banks

in the country. Bank professes a set of values that are being

nurtured over the years and these have become the principles of

the organisation.



The Bank envisions an all-round prosperity to all the

stakeholders - customers, shareholders, employees and

associates. We practice and propagate with excellence, in all

spheres of activities.

Strategic alliances and diversification paths are adopted;

making sure that the ultimate goal is achieved - To be a Bank of

world-class standards.

A Bank that is respected by both its customers and competitors

alike would never dare to overlook a very important asset – the

employees. A well-trained, well-informed and happy work

force with strong work ethics is sure to result in success with no

precedents. The Bank is reaping the benefits of an HRD policy

that aimed at developing a ‘WE’ attitude among the employees.

Our employees are an energetic set of people with

unfathomable skill, energy and commitment.

Capitalising on our core competencies and smart sizing our

operations, we are prepared to meet any challenge that may

come our way and utilise opportunities the banking industry has

to offer in the days to come. Every action conveys our message,

we are - Your Perfect Banking Partner.



HISTORY OF FEDERAL BANK INDIA

Federal Bank Limited was founded as Travancore Federal Bank

Limited in the year 1931, with an authorized capital of Rs.

5000. Federal Bank Limited in its entire span of customer

services has seen both ups and downs. The bank started with an

auction-chitty business along with other banking transactions

related to agriculture and industry.

It was established at Nedumpuram, a place near Tiruvalla, in

Central Travancore (a princely state later merged into Kerala),

under Travancore Company's Act. Thirteen years later, in 1944,

Shri K P Hormis and his close relatives /friends took over the

controlling interest in the bank. The following year, the paid-up

capital of the bank went up to 71,000. A new Board of

Directors was constituted and the bank also incorporated new

Articles of Association. Its registered office shifted to Aluva, in

Ernakulam district of Kerala.



Subsequently, Federal Bank came with its branches in

Angamally (1946) and Perumbavoor (1947). However, it came

with a massive expansion plan in the years 1975 and 1976 by

opening 53 and 42 branches respectively. From that time till

today, the bank has continued to incorporate the effective

changes to ensure smooth banking experience for its customers.

With the opening of its first branch at Aluva, Travancore

Federal Bank commenced its business. It was in the Board

Meeting of March 1947 that the name of the bank was changed

to Federal Bank Limited. After a gap of 12 years i.e. in 1959,

the bank was licensed under Sec. 22 of the Banking Companies

Act 1949, after which it floated several kuries and launched

various deposit schemes. In 1964, it took over the liabilities of

Chalakudy Public Bank Ltd. (Chalakudy), Cochin Union Bank

Ltd. (Trichur) and Alleppey Bank Ltd. (Alleppey).

In the next five year, Federal Bank took over St.George Union

Bank Ltd. Puthenpally (1965) and Marthandom Commercial

Bank Ltd. Trivandrum (1968). In 1970, it became a Scheduled

Bank. Two years later, it became an authorized dealer in

Foreign Exchange. Thereafter, Federal Bank came in an

expansion mode and opened 53 branches in 1975 and 42

branches in 1976. In 1984, Federal Bank set up an Agricultural

Finance Department in its head office, improving its

performance in the field of agricultural and priority sector

lending.



The year 1985 saw Federal Bank opening a Personnel and

Industrial Relations Department and a Computer Department.

Four year later, the bank had entered the arena of Merchant

Banking Operations. In 1993, ICICI group was roped in as a

shareholder, through private placement.

VISION AND MISSION

Vision

Develop into a stronger and more efficient and profitable

financial institution with a growing share of the market,

providing an expanding range of products and services to a

growing clientele within and outside the country, adopting best

industry practices and employing contemporary technology,

and be counted among the top private banks in the country.

Mission

Devote balanced attention to the interests and expectations of

stakeholders, and in particular:

Shareholders: Achieve a consistent annual post-tax return of at

least 20% on net worth.

Employees: Develop in every employee a high degree of pride

and loyalty in serving the Bank.

Customers: Meet and even exceed expectations of target

customers by delivering appropriate products and services,



employing, as far as feasible, the single-window and 24-hour-

seven-day-week concepts, leveraging strengthened branch

infrastructure, ATMs, and other alternative distribution

channels, cross-selling a range of products and services to meet

customer needs varying over time, and ensuring the highest

standards of service at all times

Future:

We are the fourth largest bank in India in terms of capital base

and can easily boast of a Capital Adequacy Ratio of 19.11%,

one of the highest in the industry. This along with the existence

in a highly regulated environment has helped the bank to tide

over the recession with minimum impact to its financial

stability.

In fact we have been expanding organically over the past few

months. We believe in extending our reach to our customers by

making our services available to all, 24x7. We have over 690

ATMs and 669 Branches across India in addition to the

Representative Office at Abu Dhabi that serves as a nerve

centre for the NRI customers in UAE.

TECH-SAVVY BANK

It was in the year 2000 that Federal Bank started the Any



Where Banking (ABB) service, in Bangalore, followed by the

Depository Services, in association with NSDL. The same year,

Internet Banking 'FedNet' was launched, with the Federal

Millennium CD being just in tow.

With the start of 2001, the bank saw the launch of Wide Area

Network, connecting Regional Offices at Mumbai, Bangalore,

Chennai, Ernakulam and Chennai F & I with Head Office. The

following year, all the branches of the bank were fully

computerized (using FedSoft).

In 2002, Federal Bank started the installation of switch for

networking all the ATMs. Soon enough, it introduced FedAlerts

and FedMobile, with real-time transaction alerts and

customizable options.

Two years later, a call centre was set up by the bank, attached

to the Systems and Technology Department, and co-branded

credit cards were launched, in association with ICICI Bank. Not

much time later, Federal Bank claimed the distinction of

becoming the first traditional bank with networked branches,

having 100 percent connectivity.

PIONEERING PRODUCTS BY FEDERAL BANK

INDIA



Depository Services

Debit Cards

General Insurance Products in association with United

India Insurance

Export Credit Insurance Products in association with

ECGC

Express Remittance Facility from Abroad - FEDFAST

Cash -On- Line Express Cash Remittance

Life Insurance Products in association with IDBI Fortis

Lock Box Service for US-based NRIs

Cash Management Services

Merchant Banking Services

E-shopping Payment gateway

BSNL Bill Payment

Easy Pay- On-line fee payment system

Online LIC Insurance Payment

Online Kiosks for customers

Online Railway Reservation System

PIONEERING SERVICES BY FEDERAL BANK

INDIA

In its attempt to serve customers with the best and to provide

them an easy means of banking, Federal Bank in India has

come up with many first of its kind services and products that

re-defined the entire banking scenario of India.These are:



Launched Internet Banking Service via FedNet among all

the traditional banks in India

Made its branches automated

Inter-connected all its branches

Started Electronic Telephone Bill Payment

Introduced e-shopping payment gateway

Offered Mobile Alerts and Mobile Banking service

Devised a way for Express Remittance Facility from

Abroad

Provided RTGS facility in all its branches

THE FIRSTS

First traditional bank in India to launch Internet Banking

Service (FedNet)

First traditional bank in India to have all its branches

automated

First and the only traditional bank in India to have all its

branches inter-connected

First bank to launch Electronic Telephone Bill Payment

in India

First and only one of the older banks with e-shopping

payment gateway

First traditional bank in India introduce Mobile Alerts

and Mobile Banking service



First bank in India to implement an Express Remittance

Facility from Abroad

First bank in India to provide RTGS facility in all its

branches.

The Bank has been following prudent business policy throughout.

The underlying principles of this policy are efficient cost structure,

competitive pricing, asset quality, retention of existing customer

base and expanding the company’s reach to new areas and new

customer segments. The Bank aims to balance the multiple

objectives of rewarding shareholders with cash dividends and of

retaining capital to support future growth and to add further value

to the shareholders. The Bank added 67 new branches crossing the

600 mark and opened 141 new ATM centers. As on March 31,

2008, the total number of branches and ATM centers of the Bank

increased to 603 and 532 respectively, as against 536 and 391 of

last financial year.

CREDIT RATING OF BANK’S DEPOSITS AND

DEBT INSTRUMENTS

The rating factors in the long standing track record of the bank,

high level of capitalization aided by the successful GDR issue and

internal accruals, strong solvency position, higher profitability and

improving risk management systems and technology orientation.



SHORT TERM DEPOSITS AND CERTIFICATE OF

DEPOSIT: P1+ BY CRISIL

This rating’ P’ indicates that the degree of safety regarding timely

payment on the instrument is very strong.

The "+" (plus) sign for ratings reflects a comparatively higher

standing within the category.

LONG TERM DEBT: AA BY CARE

Instruments with this rating are considered to offer high safety for

timely servicing of debt obligations. Such instruments carry very

low credit risk.

LONG TERM DEBT - AA – (IND) BY FITCH

'AA' national ratings denote a comparatively low credit risk

relative to other issuers or issues in the country.

The credit risk inherent in these financial commitments differs

only slightly from the country's highest rated issuers or issues.

SOCIAL BANKING

At Federal Bank, we believe that Business exists in the society and any

business requires social sanction for its survival and growth and

organisations should have a social commitment, as they owe their existence

to the society. All our social and mass banking initiatives are towards

fulfilling such social commitments.



Following measures are already initiated by us towards this direction.

Launching of ‘Samrudhi’ Scheme through which the entire banking

needs of the residents of selected villages (Grama Panchayats) are met

by implementing various schemes of the Bank, so that these villages

can be developed into model villages. These model villages are

experimental samples for our innovations in Rural Banking and would

help the Bank to demonstrate the effectiveness of its Rural Banking

strategies and the Bank’s social commitment by showcasing these

villages.

Setting up a Training & Guidance Centre at Vythiri in Wayanad

District in collaboration with YMCA.

Bank has launched the “Federal Ashwas Trust” and opened three

“Federal Ashwas Financial Literacy and Credit Counseling Centers”

in association with Gandhi Smaraka Grama Seva Kendram, the only

NGO from Kerala figuring among the CRISIL top 50 MFIs in India.

Bank has launched “Federal Prathyasha Loan Scheme” to provide

credit to distressed poor / Small and Marginal farmers to prepay their

debt to informal sector against collateral or group security

IT ENABLED FINANCIAL INCLUSION

Kisan Credit Card (KCC) accounts - This is a

comprehensive scheme of the Bank to extend adequate and

timely support to the farmers. This aims at financial inclusion



of small and marginal farmers. It is ATM enabled with “Federal

Haritha Card”

RUBBER PRODUCER’S SOCIETIES

With an aim to help the small rubber growers, the Bank has

implemented a scheme for extending working capital finance to

well run Rubber Producers’ Societies promoted by the Rubber

Board. The scheme is designed to achieve financial independence

of RPS, resulting in overall development and economic growth of

small rubber growers. More than 1000 societies representing

nearly a lakh of Small Rubber Growers have benefited by the

scheme so far.

FOR THE ORPHANS

SOS Children’s Village

SOS Children’s Villages of India is an NGO working with children. They

provide long term family like care to children who lost their parents. Every

child who comes to SOS Children’s Village receives a ‘mother’, brothers



and sisters, a home and all opportunities to grow into happy and successful

adults. SOS has been working in 132 countries with SOS-Kinderdorf

International as the umbrella organisation that was established in 1964. At

present there are 38 children’s villages spread across the country. Bank is

proud to have associated with SOS (2006) in constructing a ‘Learning

Centre’ at the Choondy Unit, 4 Kms from Aluva. It was constructed

over an area of 1076 sq. ft.

RESEARCH DESIGN & METHODOLOGY

STATEMENT OF THE PROBLEM

This particular topic titled “a study of the ratio

analysis” of the banking sector with special

reference to Federal Bank of India (Regional Head

Office) is selected as a subject of the project to

gain a better understanding about the functioning

of commercial banks and their operations. “Federal

Bank” is selected as the center to study the

variables as its one of the oldest private sector

bank. The study of the ratio analysis will help us to



gain a better & practical knowledge of the various

financial ratios and their utility in regard to the

operations of the financial institutions and thereby

help us to suggest the institution desirable

measures to better up the performance of the

institution.

OBJECTIVE

To gain a better understanding of the practical aspect of

the topic.

To analysis the feasibility of the operations of the banking

institution studied.

To find out the various figures of the operating and

profitability index of the banking institution.

To measure the performance of the institution comparing

the worked out ratio with the standard ratios.



To suggest desirable measures to better up the

performance based on the deviation of the actual from the

desired.

CHAPTER SCHEME

Chapter 1: Introduction to the topic:

meaning & definition of finance; financial management; financial ratio analysis; types of ratios; importance of

ratio; limitations of financial ratio analysis.

Chapter 2: Industry Profile:

the banking sector; nationalization of banks in India;

scheduled commercial banks; banking sector reforms;

development of financial institutions; financial markets;

capital markets; mutual funds; reserve bank of India;

functions of RBI.



Chapter 3: Company Profile:

introduction of Federal Bank; the history of Federal Bank;

the vision and mission statement; products and services of

Federal Bank; the firsts; credit rating of the bank deposits

and schemes; social banking

Chapter 4: Research Design & Methodology:

statement of the problem; objectives; chapter schemes;

sources of data; limitations; conclusion.

Chapter 5: Analysis & Interpretation:

Calculated ratio chart; current ratio; debt equity ratio,

fixed assets ratio; current assets to fixed assets ratio;

equity multiplier ratio; return on total assets ratio, non

interest income ratio; interest income ratio; graphs

showing comparison of last three financial years; analysis

of ratios comparing three financial years; interpretation of

the findings.

Chapter 6: Findings:

Results of various ratios calculated; the actual

performance position; deviation from desired or idle

position.



Chapter 7: Suggestions:

Suggested measures for the undesirable ratios; measures to

be adopted for bettering up the performance.

Chapter 8: Conclusion:

Winding up of the project; completion of the study.

Bibliography:

Reference books; referred sites; authors of the referred

books.

SOURCES OF DATA

Database can be classified into two categories,

which are:

Primary data and secondary data.

Primary data: The data originally collected from

“Federal Bank (Regional Head Office)” and its

agents through direct interview.



Secondary data: various pamphlets, articles were

collected, various websites, annual reports to study

the financial position of “The Federal

Bank(Regional Head Office)”

LIMITATIONS

The study process was dealt with some inevitable

problems. Some of the valid limitations of the project

work are dotted as under:

The calculation of ratio analysis was a difficult

practice as all the listed ratios were not found as the

studied institution was a banking firm and its

records are not of regular format.

The bank could not provide certain information for

the project work as it was highly confidential in

nature.

The time duration taken to complete the project was

quite long.



ANANLYSIS AND INTERPRETATION

1.RETURN ON CAPITAL EMPLOYED

Return on capital employed ratio=Net Profit /Net capital

employed

Table.1

Table showing Net Profit, net capital employed and return on

capital employed ratio for year ending 2007, 2008 and 2009:

Particulars 2006-2007 2007-2008 2008-2009

Net profit 2927328 3680538 5004936

Capital employed 15022078 39256972 43258758

Return on capital employed 0.19 0.09 0.12

Graph 1.a

CHART REPRESENTING NET PROFIT AND

CAPITAL EMPLOYED



2006-2007

2007-2008

2008-2009

0

5000000

10000000

15000000

20000000

25000000

30000000

35000000

40000000

45000000

Net profit Capital employed

Graph 1.b

CHART REPRESENTING RETURN ON

CAPITAL EMPLOYED RATIO

2006-2007

2007-2008

2008-2009

0 1000000 2000000 3000000 4000000 5000000 6000000

Net profit

INTERPRETATION



The return on capital employed ratio of the bank

for the year 2006-2007 is 0.19. It decreased in the

year 2007-2008 to 0.09 and consequently increased

over the following year 2008-2009 to 0.12.

2. FIXED ASSETS RATIO

Fixed Assets Ratio=Fixed Asset/Capital Employed

Table 2:

Table showing fixed assets, capital employed and fixed asset

ratio for year ending 2007, 2008 and 2009:

Particulars 2006-2007 2007-2008 2008-2009

Fixed assets 1860995 2328398 2807797


Fixed assets/

Capital employed

0.12 0.06 0.06

Graph 2.a

CHART REPRESENTING FIXED ASSETS

AND CAPITAL EMPLOYED



2006-2007

2007-2008

2008-2009

020000000

4000000060000000

Capital employed

Fixed assets

Graph 2.b

CHART REPRESENTING FIXED ASSETS

RATIO

2006-2007 2007-2008 2008-2009

Fixed assets/ Capital em-ployed

0.12 0.06 0.06

0.01

0.03

0.05

0.07

0.09

0.11



INTERPRETATION:

The fixed assets ratio of the bank for the year

2006-2007 is 0.12. It decreased in the year 2007-

2008 to 0.06 and remains the same even in the

following year 2008-2009.

3.NET INTEREST MARGIN RATIO

Net Interest Margin Ratio=Interest Income

/ Total Assets

Table.3

Table showing interest income, total assets and Net

Interest margin ratio for year ending 2007, 2008 and

2009:

Particulars 2006-2007 2007-2008 2008-2009

Interest income 18014558 25154442 33153762

Total assets 250899325 325064570 388508646

Net Interest ratio 0.07 0.08 0.09

Graph 3.a



CHART REPRESENTING INTEREST

INCOME AND TOTAL ASSETS

2006-2007

2007-2008

2008-2009

0 100000000 200000000 300000000 400000000

Total assets

Interest income

Graph 3.b

CHART REPRESENTING NET INTEREST

MARGIN RATIO

2006-2007 2007-2008 2008-20090

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

0.1

Net Interest ratio

INTERPRETATION:



The net interest margin ratio of the bank for the

year 2006-2007 is 0.07. It decreased in the year

2007-2008 to 0.08 and consequently increased over

the following year 2008-2009 to0.09.

4.INTEREST EXPENSE ON DEPOSITS

RATIO

Interest expense on deposits ratio=Interest

Expense/Deposits

Table.4

Table Showing Interest Expense, Deposits And

Interest Expense On Deposits Ratio For Year Ending

2007, 2008 And 2009:

Particulars 2006-2007 2007-2008 2008-2009

Interest expense 10849583 16474249 19999238

Deposits 215844402 259133558 321981915

Interest expense on deposits 0.05 0.06 0.06

Graph 4.a:




EXPENSE AND DEPOSITS

2006-2007 2007-2008 2008-20090

5000000

10000000

15000000

20000000

25000000

0

50000000

100000000

150000000

200000000

250000000

300000000

350000000

Interest expense

Deposits

Graph 4.b:


EXPENSE ON DEPOSITS RATIO

2006-2007

2007-2008

2008-2009

4% 6% 8%

5%

6%6%

Interest expense on deposits



INTERPRETATION:

The interest expense on deposits of the bank for the

year 2008-2009 is 0.06. It remains the same in the

year 2007-2008 consequently decreased over the

following year 2006-2007 to 0.05.

5.EARNINGS PER SHARE RATIO

Earnings per share ratio=Net Profit after tax

and depreciation /No. of Equity shares

Table.5

Table showing Net Profit after tax and depreciation, No. of

Equity shares and Earnings per share ratio for year ending

2007, 2008 and 2009:

Particulars 2006-2007 2007-2008 2008-2009

Net Profit 2927328 3680538 5004936

No. of Equity Shares 101868 113539 171033

Earnings per share ratio 28.74 32.42 29.26

Graph 5.a



CHART REPRESENTING NET PROFIT AND

NUMBER OF EQUITY SHARES

2006-2007 2007-2008 2008-2009

Net Profit

No. of Equity Shares

Graph 5.b

CHART REPRESENTING EARNINGS PER

SHARE RATIO

2006-2007 2007-2008 2008-200926

27

28

29

30

31

32

33

Earnings per share ratio



INTERPRETATION:

The earnings per share ratio of the bank for the

year 2006-2007 is 28.74. It increased in the year

2007-2008 to 32.42 and consequently decreased

over the following year 2008-2009 to 29.26.

6. RETURN ON ASSETS RATIO

Return On Assets Ratio=Net Operating Income

/Total Assets

Table.6:

Table Showing Net Operating Income, Total Assets And

Return On Assets Ratio For Year Ending 2007, 2008 And

2009:

Particulars 2006-2007 2007-2008 2008-2009

Net operating income 6357938 8230942 13020401

Total assets 250899325 325064570 388508646

Return on assets ratio 0.025 0.025 0.03

Graph 6.a



CHART REPRESENTING NET OPERATING

INCOME AND TOTAL ASSETS

2006-2007

2007-2008

2008-2009

0

50000000

100000000

150000000

200000000

250000000

300000000

350000000

400000000

Net op-erat-ing in-

come

Net operating income

Total assets

Graph 6.b

CHART REPRESENTING RETURN ON

ASSETS RATIO

2006-2007 2007-2008 2008-20090.022

0.023

0.024

0.025

0.026

0.027

0.028

0.029

0.03

0.031

Return on assets ratio



INTERPRETATION:

The earnings per share ratio of the bank for the year

2006-2007 is 0.025. It remains the same in the year

2007-2008 at 0.025 and consequently increased over the

following year 2008-2009 to 0.03

7. EQUITY RATIO

Equity Ratio=Share holder’s Equity/Capital Employed

Table 7:

Table showing Share holder’s Equity/Capital

Employed and Equity ratio for year ending 2007, 2008 and

2009:

Particulars 2006-2007 2007-2008 2008-2009

Shareholder’s Equity 856033 1710334 1710334


Equity Ratio 0.06 0.04 0.04

Graph 7.a

CHART REPRESENTING CAPITAL

EMPLOYED AND SHARE HOLDER’S EQUITY



2006-2007 2007-2008 2008-20090

5000000100000001500000020000000250000003000000035000000400000004500000050000000

Capital employed

Shareholder’s Equity

Graph 7.b

CHART REPRESENTING EQUITY RATIO

2006-2007 2007-2008 2008-20090

0.01

0.02

0.03

0.04

0.05

0.06

Equity Ratio

INTERPRETATION:



The equity ratio of the bank for the year 2006-2007

is 0.06. It decreased in the year 2007-2008 to 0.04

and continues to remain the same over the

following year 2008-2009.

8. DEPOSITS TO TOTAL LIABILITIES

RATIO

Deposits to total liabilities=Long term debt/ total

liabilities

Table.8

Table showing Deposits, total liabilities and Deposits to total

liabilities ratio for year ending 2007, 2008 and 2009:

Particulars 2006-2007 2007-2008 2008-2009

Deposits 215844402 259133558 321981915

Total liabilities 250899325 325064570 388508646

Deposits to total

liabilities ratio

0.86 0.79 0.83

Graph 8.a

CHART REPRESENTING DEPOSITS AND

TOTAL LIABILITIES



2006-2007 2007-2008 2008-20090

50000000

100000000

150000000

200000000

250000000

300000000

350000000

400000000

450000000

Deposits Total liabilities

Graph 8.b

CHART REPRESENTING DEPOSITS TO

TOTAL LIABILITIES RATIO

2006-2007 2007-2008 2008-20090.74

0.76

0.78

0.8

0.82

0.84

0.86

0.88

Deposits to total liabilities ratio

INTERPRETATION:



The deposits to total liabilities ratio of the bank for the

year 2006-2007 is 0.86. It decreased in the year 2007-

2008 to 0.79 and consequently increased over the

following year 2008-2009 to 0.83.

9. INTEREST EARNED ON TOTAL

INCOME

Interest earned on total income= Interest earned/total

income

Table.9

Table showing Interest earned, total income and Interest

earned percentage of total income ratio for year ending 2007,

2008 and 2009:

Particulars 2006-2007 2007-2008 2008-2009

Interest earned 18014558 25154442 33153762

Total income 21040417 29104311 38311515

Interest earned on total

income

0.86 0.86 0.87

Graph 9.a




EARNED AND TOTAL INCOME

2006-2007 2007-2008 2008-20090

5000000

10000000

15000000

20000000

25000000

30000000

35000000

40000000

Interest earned

Total income

Graph 9.b


EARNED ON TOTAL INCOME RATIO

2006-2007 2007-2008 2008-20090.854

0.856

0.858

0.86

0.862

0.864

0.866

0.868

0.87

Interest earned percentage of total income

INTERPRETATION:



The interest earned on total income ratio of the bank for

the year 2006-2007 is 0.86. It remains the same in the

year 2007-2008 and increased a bit to 0.87 in the year

2008-2009.

10. OTHER INCOME ON TOTAL

INCOME

Other income on total income= Other income/total

income

Table.10

Table showing Other income, total income and Interest earned on

total income ratio for year ending 2007, 2008 and 2009:

Particulars 2006-2007 2007-2008 2008-2009

Other income 5157753 3949869 3025859

Total income 21040417 29104311 38311515

Interest earned on total

income ratio

0.25 0.14 0.08

Graph 10.a



CHART REPRESENTING OTHER INCOME AND

TOTAL INCOME

2006-2007 2007-2008 2008-2009

Other income 5157753 3949869 3025859

Total income 21040417 29104311 38311515

2500000

7500000

12500000

17500000

22500000

27500000

32500000

37500000

Graph 10.b

CHART REPRESENTING OTHER

INCOME ON TOTAL INCOME RATIO

2006-200753%

2007-200830%

2008-200917%

INTERPRETATION:



The other income percentage of total income ratio of

the bank for the year 2006-2007 is 025. It in the year

2007-2008, it decreased to 0.14 and further decreased to

0.08 in the year 2008-2009.

11. INTEREST EARNED ON ADVANCES

RATIO

Interest Earned On Advances Ratio= Interest

Earned/Advances

Table.11

Table showing interest earned, advances and interest earned

on advances ratio for year ending 2007, 2008 and 2009:

Particulars 2006-2007 2007-2008 2008-2009

Interest earned 18014558 25154442 33153762

Advances 148991002 189046616 223918752

Interest earned on

advances

0.12 0.13 0.15

Graph 11.a


EARNED AND ADVANCES



2006-2007

2007-2008

2008-2009

0 100000000 200000000 300000000

18014558

25154442

33153762

148991002

189046616

223918752

Interest earned Advances

Graph 11.b


EARNED ON ADVANCES


2006-20072007-20082008-2009


INTERPRETATION:

The interest earned on advances ratio of the bank

for the year 2006-2007 is 0.12. It in the year

2007-2008, it increased to 0.13 and further

increased to 0.15 in the year 2008-2009.

Findings

The return on capital employed ratio of the bank is consecutively

increasing over the years 2006-2009 though there is a

considerable decrease in the year 2007-2008.

The fixed assets ratio of the bank has considerably decreased

for the period 2006-2009. The Return on Assets ratio of the

bank for the years 2006-2008 remains constant and increases

slightly in 2008-2009.

The net interest margin ratio of the bank for the year 2006-2009

has increased and the interest earned on total income has

improved consecutively over the years 2006-2009.

The interest expense on deposits ratio of the bank shows almost

a constant figure from the years 2007-2009 which was earlier

lesser in the year 2006-2007. The Interest earned on advances

ratio also shows an increase.



The other income on total income ratio of the bank has slightly

decreased over the years 2006-2009.

The equity ratio has considerably decreased over the years

2006-2009.

The deposits to total liabilities ratio shows that there is a

decrease in 2007-2008 but later improved from 2008-2009.

The earnings per share of the bank shows an increase over the

years 2006-2008 but consecutive decrease over the following

year 2008-2009.

SUGGESTIONS

The project work will be concluded providing the necessary

suggestion for various findings. The analysis and interpretation

are made based on the comparison of the various financial ratios

done in a banking sector.

Hereby the methodology aims at the successful conclusion of the

project to meet the objective of the study. The following

suggestions were found and would render beneficial on

application.

The Federal Bank has to utilize effectively the capital it

has collected by investing into various avenues of its

operations so as to earn a return and thereby improving the

current status of the Capital Employed.



The Federal Bank can invest more on fixed assets. The

bank can continue to follow the same methods for

maintaining the return on assets.

The net interest margin can be maintained as such and the

interest percentage of total income shows an improvement

indicating that the bank can continue to follow the same.

The bank has to concentrate on other incomes like

commission, exchange and brokerage; net profit/loss on

sale of investments, revaluation of investments land,

buildings & other assets, foreign exchange transactions;

income earned by way of dividends; miscellaneous income

etc.

Interest earned on advances position seems to be good and

the organization and continues with the same.

Since return on capital employed has affected the bank’s

returns, the equity ratio has also considerably decreased

over the years. The bank is advised to improve over it’s

equity.



The deposits to total liabilities show a decrease and this

has a direct effect deposits resulting in the increase of total

liabilities. The bank has to work on this and increase

deposits from the public to get away with this situation.

Thus, the overall performance of The Federal Bank is

satisfactory.

Conclusion

The overall performance of The Federal Bank is satisfactory.

Although it can also concentrate on investing more into fixed

assets and other incomes as these avenues must be improved.

The bank should see to it that its deposits and equity are

increased considerably or else there are chances that its position

may fall.

The bank’s personnel have always been courteous enough in

lending their valuable time and information in helping me

conduct my project work. Though the project was a bit tedious as

it was related to the banking sector where ratios collected may

not pertain to those of the industry and were quite tough finding



them, the seniors of the bank had tremendously helped me in

coming up with valuable help.

The entire project work was but an experience that will surely

take me a long way through both in my career and further job

avenues.

ANNEXURE 1.1

CITIES WITH THE HIGHEST

NATIONALISED BANKS IN INDIA



ANNEXURE 1.2

CITIES WITH THE HIGHEST NUMBER OF

COMMERCIAL BANKS IN INDIA



PROFIT AND LOSS ACCOUNTAS ON 31 st MARCH 2007

PARTICULARS AMOUNT(RS ‘000S)

I. INCOME



Interest earned 18014558Other income 3025859Total 21040417

II. EXPENDITUREInterest expended 10849583Operating expenses 4061006Provisions & contingencies 3202500Total 18113089

III. PROFIT/LOSS Net profit for the year 2927328Add Profit b/f from Previous Year 134645

3061973IV. APPROPRIATIONS Transfer to Revenue Reserve 1302100Transfer to Statutory Reserve 731900Transfer to Capital Reserve 156405Transfer to Investment Fluctuation Reserve 146400Transfer to Special Reserve 180000Provision for proposed dividend 342400Provision for Dividend Tax 58200Balance carried over to Balance Sheet 144568TOTAL 3061973

BALANCE SHEET AS ON 31 st MARCH 2007

LIABILITIES AMOUNT(Rs ‘000s)

ASSETS AMOUNT(Rs ‘000s)



Capital 856033 Cash & balances with reserve bank of India

12315427

Reserves & surplus

14166045 Balances with banks & money at call and short notice

10815953

Deposits 215844402 Investments 70326621

Borrowings 7702077 Advances 148991002

Other liabilities & provisions

12330768 Fixed assets 1860995

Other assets 6589327

TOTAL 250899325 TOTAL 250899325

Contingent liabilities

129606897

Bills for collection

5247452

PROFIT AND LOSS ACCOUNT AS ON 31 st MARCH 2008


I. INCOMEInterest earned 25154442



Other income 3949869Total 29104311



3825106IV. APPROPRIATIONS Transfer to Revenue Reserve 1317400Transfer to Statutory Reserve 920200Transfer to Capital Reserve 276800Transfer to Investment Fluctuation Reserve 184100Transfer to Contingency Reserve 0Transfer to Special Reserve 180000Provision for proposed dividend 684100Provision for Dividend Tax 116300Balance carried over to Balance Sheet 146206TOTAL 3825106




23556928




Reserves & surplus


3897935

Deposits 259133558Investments 100265949

Borrowings 7919519Advances 189046616


18754521Fixed assets 2328398


TOTAL 325064570 TOTAL 325064570


133159264


8165673

PROFIT AND LOSS ACCOUNT AS ON 31 st MARCH 2009


I. INCOMEInterest earned 33153762Other income 5157753



Total 38311515



5151142IV. APPROPRIATIONS Transfer to Revenue Reserve 1972500Transfer to Statutory Reserve 1251200Transfer to Capital Reserve 297500Transfer to Investment Fluctuation Reserve 0Transfer to Contingency Reserve 300000Transfer to Special Reserve 110000Provision for proposed dividend 855200Provision for Dividend Tax 145400Balance carried over to Balance Sheet 219342TOTAL 5151142







22143952

Reserves & surplus


12226992

Deposits 321981915 Investments 121189662

Borrowings 7489351 Advances 223918752


15778622 Fixed assets 2807797


TOTAL 388508646 TOTAL 388508646


75882823


7888166


Sajini Project

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