Presented by: Parima Benani (11104) Kelvin Christian (11108) Siddharth Gandhi (11114) Sahil Shah (11137) Mitesh

Dhoriya (11113) Suhag Prajapati

Banks Financial Statements

PARIMA BENANI

Reserve Requirements Sources of Bank Funds

Uses of Bank Funds Credit Delivery and Legal aspects of lending Credit Monitoring, Sickness & Rehabilitation

KELVIN CHRISTIAN SIDDHARTH GANDHI

SAHIL SHAH MITESH DHORIYA SUHAG PRAJAPATI

A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. Objective
The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.

They typically include four basic financial statements, accompanied by a management discussion and analysis, 1) Balance Statement 2) Income Statement 3) Statement of Retained Earnings 4) Statements of Cash Flow

The acronym "CAMEL" refers to the five parameters of a bank's condition that are assessed: 1.Capital adequacy 2. Asset quality 3. Management 4. Earnings 5. Liquidity Ratings are assigned for each component in addition to the overall rating of a bank's financial condition. The ratings are assigned on a scale from 1 to 5.

Debt-Equity ratio is arrived at by dividing Total borrowings and Deposits by Net Worth. Net Worth includes equity capital, preference capital, reserves and surplus less revaluation reserves and miscellaneous expenses not written off. Debt-Equity Ratio = Debt / Equity 100

Total Advances also includes receivables. The value of Total Assets is excluding revaluation of all the assets.

Advances to Assets = (Total Advances / Total assets) 100

It is a measure of the quality of assets in a situation where the management has not provided for loss on NPAs. The lower the ratio, the better the quality of advances.

Net NPAs to Total Assets = Gross NPAs / Total Assets X 100

This ratio used as a tool to measure the percentage of total assets locked up in investments, which by conventional definitional, doesnt form part of the core income of a bank.

Total Investments to Total Assets = Total Investments / Total Assets 100

Management is the most important ingredient that ensures sound functioning of banks. With increased competition in the Indian banking sector, efficiency and effectiveness have become the rule as banks constantly strive to improve the productivity of their employees. The parameters used to assess the quality of management gives the measurement of the efficiency and effectiveness of management.

The ratios of this segment are: Net Profit per Employee Business per Employee Return on Net Worth

It is arrived at by dividing the Net profit earned by the bank by total number of employees. Higher the ratio, higher will be the efficiency of management. Net Profit per Employee = Net Profit / No. of Employee

It is arrived at by dividing total business by total number of employees. Business includes the sum total advances and deposits in a particular year. Business per Employee = Total Business / No. of Employee

It is a measure of the profitability of a company. PAT is expressed as a percentage of Average Net Worth. RONW = Net Profit / Net Worth X 100

The business of banking is all about borrowing and lending money. Timely repayment of deposits is of crucial importance to avoid a run on a bank. Hence, banks have to ensure that they always maintain enough liquidity. Through mandatory Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR), RBI ensures that banks maintain ample liquidity. It contains the following:
Liquid Assets to Demand Deposits Liquid Assets to Total Deposits Liquid Assets to Total Assets

This ratio measures the ability of a bank to meet demand from demand deposits in a particular year. Liquid assets include cash in hand, balance with RBI, balance with other banks (both in India and abroad), and money at call and short notice. Liquid Assets to Demand Deposits = Liquid Assets / Demand Deposits

Liquid Assets include cash in hand, balance with RBI, balance with other banks (both in India and abroad), and money at call and short notice and capital work in progress. Total Deposits include demand deposits, saving deposits, term deposits and deposits of other financial institutions.

Liquid Assets to Total Deposits = Liquid Assets / Total Deposits

Liquid Assets as measured as percentage of Total Assets. Liquid Assets to Total Assets = Liquid Assets / Total Assets

Bank lending and money supply are related by some multiple to the level of bank reserves Federal Reserve exercises control over bank lending and money supply by altering the level of reserves in the system and influencing the deposit creation multiplier Fed accomplishes these objectives by changing the reserve requirements and by changing the actual amount of reserves held

1. 2.

Reserve Requirements: Requirements regarding the amount of funds that banks must hold in reserve against deposits made by their customers. This money must be in the bank's vaults or at the closest Federal Reserve bank. Purpose of Reserve Requirements: Safeguard the publics deposits. Give the central bank a powerful tool.

Federal Reserve Act of 1913 Banking Act of 1980 Garn-St. Germaine Depository Institutions Act of 1982 All depository institutions - whether members of the Federal Reserve System or not - are subject to the Feds reserve requirement. Reserves are vault cash and deposits at the Fed
Do no earn interest

 Transactions-Account

Reserve Requirement Applied to deposits over a two-week period:

A banks average reserves over the period ending every other Wednesday must equal the required percentage of its average deposits in the two-week period ending Monday, two days earlier.

Banks failing to meet the requirement are subject to penalties

 Effect

of Lowering the Reserve Requirement Automatically increases all banks excess reserves Increases demand deposit through multiple lending However, the ultimate impact depends on banks desire to make loans element of discretion Expands the money supply

Effect of Raising the Reserve Requirement Decrease banks excess reserves and may force them to take steps to correct a deficit reserve position Restrains lending and deposit creation Contracts the money supply

Even without legal reserve requirements, banks would still need to hold cash reserves as vault cash or on deposit with Federal Reserve
Cash to meet customer withdrawals Balances at Fed to clear checks Without legal reserve requirements, the multiplier relationship between reserves and money supply would fluctuate considerably

Deposits
Payment deposits Term deposits

Non-deposits
CP Borrowings from foreign funds

Primary source Creation of assets Parameters to base fund requirement

Maturity Cost Tax Regulatory Market conditions

Deposit Insurance Deposit pricing

Key aspects
Service costs Volume & cost v/s profits Investment avenues CRM Promotional pricing

Pricing mechanism
Cost plus margin Market penetration pricing Conditional pricing Upscale target pricing Relationship pricing

Bonds vs. deposits

Banks are holder of bonds & makers of deposits Impact on performance in opposite direction Deposits can have maturity date & also on demand

Reasons for relying on non deposits

High inflation High interest rate

Funding gap
Projected credit deposit flow

Indian scenario

Modes of Credit delivery

Priority sector lending Credit facility for small scale industry Lending to NBFCs Credit to agricultural sector Flow of credit to MSMEs

What is cash credit? What is overdrafts? What is bills finance? How pricing of loans is made?

Introduction Banks Role as Financial Intermediaries

Gains from Lending

Who needs Credit? Features of Bank Credit

Surplus Sectors

Financial System

Deficit Sectors

Invest Cash Get Securities

Financial Markets

Get Cash Give Securities

Invest Cash Get Deposits

Financial Intermediaries

Get Cash Give loans

Types of Lending
Fund based lending Most direct form of lending Supported by prime/collateral securities Non fund based lending No Funds outlay for bank at time of agreement LC BGs Asset based lending Emerging category Securitization Project Finance Short term loans Maturity less than a year Financing Working Capital (WC) Long term loans Maturity more than a year to max 10 years Purpose is the acquisition of assets Revolving Credits

Risk involved in Lending so Bank should have Control Managers Should objectively evaluate Risk-Return trade-offs Credit decisions impact profitability of banks

It is not at all easy

Trade off: increase portfolio and maintain loan quality Despite of information availability; Still Credit decisions are judgmental

Constituents of Credit Process

The loan policy
Loan objectives Volume and mix Credit Administration

Loan evaluation procedure

Credit Files Business Developments and initial recommendations Broad steps to credit analysis Building a credit files

Project and financial appraisals

Quantitative analysis Due diligence Risk assessment Making the recommendations

Constituents of Credit Process

Credit Delivery and Administration

Loan Documentation
Terms and Conditions of lending Conditions Precedent Representations and Warranties Affirmative Covenants Negative Covenants Events of Defaults Updating the credit file and follow up Credit review and monitoring

Financing appraisals for credit decisions

Financial Ratio Analysis

Common Size ratio comparisons

Cash flow analysis

Different types of loans and their features

Types of Loans

Loans for working capital

Loans for capital expendit ure and industria l credit

Loan Syndication

Loans for agriculture

Project Finance

Loans to Consumer: Retail Lending

Non fund based credit

Loan pricing and customer profitability Analysis

Step 1: Arrive at Cost of Funds

Step 2: Determine servicing cost for the customer

Step 3: Assess default risk and enforceability of security

Step 4: Fixing the profit margin

What are unsecured loans ? What are secured loans ? Security and their features:
Ensure adequate margin Easy marketability Documentation

Pledge Hypothecation Assignment Lien Mortgage

Hypothecation Who holds the goods Transfer of interest

Pledge With bank/ constructive possession To bank

Mortgage

Borrower Not done; bank has certain rights over goods Constructive With consent of Borrower Mfg. Goods, present & future debts, immovable plant &

With owner

To bank Constructive Through intervention of court

Delivery of goods/property Enforcement of security Types of goods

Actual Bank can sell and recover dues

Existing goods

Immovable property

What is assignment? What is bankers lien? What is Right of Set-off?