Chapter -1

Introduction

1
 INTRODUCTION TO FINANCIAL PERFORMANCE ANALYSIS

Financial Performance analysis (also referred to as financial statement analysis or

accounting 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 using ratios that make use of information
taken from financial statements and other reports. These reports 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;
 Other decisions that allow management to make an informed selection on various
alternatives in the conduct of its business.

Goals of Financial Performance analysis

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;
Both are based on the company's balance sheet, which indicates the financial condition of a
business as of a given point in time.

2
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 the income statement and the balance sheet, as well as other financial and non-financial
indicators.

Methods for Financial Performance

Financial analysts often compare financial ratios (of solvency, profitability, growth, etc.)

 Past Performance - Across historical time periods for the same firm (the last 5 years for
example),
 Future Performance - Using historical figures and certain mathematical and statistical
techniques, including present and future values, This extrapolation method is the main
source of errors in financial analysis as past statistics can be poor predictors of future
prospects.
 Comparative Performance - Comparison between similar firms.

These ratios are calculated by dividing a (group of) account balance(s), taken from the balance
sheet and / or the income statement, by another, for example:

n / equity = return on equity

Net income / total assets = return on assets

Stock price / earnings per share = P/E-ratio

Comparing financial ratios is merely one way of conducting financial analysis. Financial ratios
face several theoretical challenges:

 They say little about the firm's prospects in an absolute sense. Their insights about
relative performance require a reference point from other time periods or similar firms.

3
  One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least
two ways. One can partially overcome this problem by combining several related ratios to
paint a more comprehensive picture of the firm's performance.
 Seasonal factors may prevent year-end values from being representative. A ratio's values
may be distorted as account balances change from the beginning to the end of an
accounting period. Use average values for such accounts whenever possible.
 Financial ratios are no more objective than the accounting methods employed. Changes
in accounting policies or choices can yield drastically different ratio values.
 They fail to account for exogenous factors like investor behavior that are not based upon
economic fundamentals of the firm or the general economy (fundamental analysis)

Financial analysts can also use percentage analysis which involves reducing a series of figures as
a percentage of some base amounts. For example, a group of items can be expressed as a
percentage of net income. When proportionate changes in the same figure over a given time
period expressed as a percentage is known as horizontal analysis Vertical or common-size
analysis, reduces all items on a statement to a “common size” as a percentage of some base value
which assists in comparability with other companies of different sizes.

Another method is comparative analysis. This provides a better way to determine trends.
Comparative analysis presents the same information for two or more time periods and is
presented side-by-side to allow for easy analysis

The ratio analysis and industry analysis tools are very useful for individuals to instantly assess a
company or industry by making two basic types of comparisons. First, the analyst can compare a
present ratio with past (or expected) ratios for the organization to determine if there has been an
improvement or deterioration or no change over time. Second, the ratios of one organization may
be compared with similar organizations or with industry averages at the same point in time. This
is a type of "benchmarking" so that one may determine whether the organization is "average" in
performance or doing better or worse than others. For the professional, conducting such in-depth
analyses is critical, allowing an analyst to make an informed business or investment decision

4
 Need of Financial Performance for Company’s Board of Directors

Boards of Directors have the responsibility to evaluate the annual audit and to track the financial
successes or failures of the cooperative. This means the directors need to not only be able to read
the financials and see trends, but they also must be able to understand the underlying causes of
those trends. The board must be able to compare their cooperative financials to industry
benchmarks, peer performance, and company projections. They will then use this information to
build strategic plans and financial projections for the coming year.
Much of this analysis is “common sense” analysis. Directors should be able to scan the
cooperative’s financial statement and identify factors that impact each statement. The factors that
impact long-term growth are most important. The cooperative should pay particular attention to
the local savings (loss) of the cooperative. This means that the cooperative only looks at ratios
calculated from the earnings and expenses of the main cooperative, not the patronage received
from regional investments.

Once this “common sense” analysis is complete, the board can move on to a more in depth study
of the cooperative, utilizing “common size” analysis, peer analysis, and an in-depth ratio
analysis.

5
 Measurement of financial performance

Getting on top of financial measures of performance is an important part of running a growing

business, especially in the current economic climate. The key standard measures are:

 Gross profit margin - This measures how much money is made after direct costs of
sales have been taken into account, or the contribution as it is also known.
 Operating margin - The operating margin lies between the gross and net (see below)
measures of profitability. Overheads are taken into account, but interest and tax payments
are not. For this reason, it is also known as the EBIT (earnings before interest and taxes)
margin.
 Net profit margin - This is a much narrower measure of profits, as it takes all costs into
account, not just direct ones. So all overheads, as well as interest and tax payments, are
included in the profit calculation.
 Return on capital employed (ROCE) - This calculates net profit as a percentage of the
total capital employed in a business. This allows seeing, how well the money invested in
business is performing compared with other investments one could make with it, like
putting it in the bank.

Other key accounting ratios:

There are a number of other commonly used accounting ratios that provide useful measures of
business performance. These include:-

Liquidity ratios, which tells about the ability to meet the short-term financial obligations.

Efficiency ratios, which tells that how well firm is using its business assets.

Financial leverage or gearing ratios, which tells how sustainable exposure to long-term debt.

6
 FINANCIAL PERFORMANCE THROUGH RATIOS

Meaning: - A ratio is a simple Arithmetic expression of the relationship of one number to

another. It may be defined as the indicated quotient of two mathematical expressions.

Definition: -

“A Ratio is an expression of the quantitative relationship between two numbers”

According to Wixon, Kell and Bedford.

“A Ratio is the relation, of the amount, a, to another, b, expressed as the ratio of a to b; a:

b; or as a simple fraction, integer, decimal, fraction or percentage”

According to Kohler.

Ratio analysis is perhaps the most common method of financial analysis and it is this method on
which the most weight is placed. Ratio analysis provides a way cooperatives can high light
strengths, as well as problem areas, and positive/negative trends. It also allows for the company
to better compare to peer financial results and to industry benchmarks.
Benchmarks are considered to be acceptable financial results in the particular industry in which
the cooperative operates. The peer analysis shows how the company is doing compared to its
peers; however, if the industry is in a slump, it may make the financials look better than what it
is actually doing. A benchmark analysis shows the cooperative and its peers where the industry
should ideally be. Some of these ratios include:
• Efficiency and Turnover Ratios: includes accounts receivables turnover, inventory
turnover, and total assets to sales.
• Expense Ratios: includes personnel to gross income, fixed expenses to gross income, and
bad debt to credit sales.
• Profitability Ratios: includes local savings margin, local savings to local assets, return on
assets, and return on net worth.
• Debt Ratios: includes debt service coverage, debt to asset ratio, and local leverage.

7
 Use and significance of Ratio Analysis

Managerial use of Ratio analysis

1. Helps in decision making: - Financial Statements are prepared primarily for decision
making. But the information provided in the financial statement s is not an end itself and
no meaningful conclusion can be drawn from these statements alone. Ratio analysis helps
in decision making from the information provided in these financial statements.
2. Helps in Financial Forecasting: - Ratio Analysis is of much help in financial
forecasting and Planning. Planning is looking ahead and the ratios calculated for a
number of years work, as a guide for the future
3. Helps in Communicating: - The Financial strengths and the weaknesses of the firm are
communicated in a more easy and understandable manner by the use of ratios. The
information contained in the financial statements is conveyed in a meaningful manner to
the one for whom it is meant.
4. Helpful in Co-ordination:- Ratios even help in co-ordination which is of utmost
importance in effective business management. Better communication of efficiency and
weakness of an enterprise results in better co-ordination in the enterprise.
5. Helps in control: - Ration analysis even helps in making effective control of the
business. Standard ratios can be based upon Performa financial statements and variances
or deviations, f any, can be found by comparing the actual with the standards so as to take
a corrective action at the right time.
Utility to Investors/ Shareholders

An investor in the company will like to assess the financial position of the concern where he is
going to invest. His first interest will be the security of his investment and then a return in the
form of dividend or interest. For the first purpose he will try to assess the value of fixed assets
and the loans raised against them. The investor will feel satisfied only if the concern has
sufficient amount of assets. Long term solvency ratios will help him in assessing financial
position of the concern. Profitability ratios, on the other hand, will be useful to determine
profitability position.

8
 Utility to creditors:-

The creditors or suppliers extend short term credit to the concern. They are interested to know
whether financial position of the concern warrants their payments at a specified time or not. The
concern pays short term creditors out of its current assets. If the current assets are quite sufficient
to meet current liabilities then the creditors will not hesitate in extending credit facilities.

Utility to employees

The employees are also interested in the financial position of the concern especially profitability.
Their wage increases and amount of fringe benefits are related to the volume of profits earned by
the concerns. The employees make use of information available in financial statements. Various
profitability ratios relating to gross profit, operating profit, net profit etc enables employees to
put forward their viewpoint for the increase of wages and other benefits.

Utility to Government:-

Government is interested to know the overall strengths of the industry. Various financial
statements published by industrial units are used to calculate ratios for determining short term,
long term and overall financial position of the concerns. Profitability indexes can also be
prepared with the help of ratios. Government may base its future policies on the basis of
industrial information available from various units.

9
 Explanation of Ratios

In the following paragraphs there are some of the more commonly used financial ratios, and how
they interrelate. At the end of this paper is a supplement that provides calculations for these
ratios as well as the benchmarks associated with that ratio.

Efficiency and Turnover Ratios

Efficiency and Turnover ratios measure how efficient a company is at collecting accounts
receivables and rotating inventory. These ratios measure how well a cooperative is using its
resources or if improvements could be made. The main ratios, as listed earlier, measure: how
efficiently a cooperative is spending its money relative to how much money it is making, and
how efficiently the cooperative is using its assets to generate sales.
Accounts Receivable Aging
The accounts receivables turnover ratio (also called accounts receivable aging) measures how
often accounts are paid off in a year. The benchmark for this ratio is usually 30 days, meaning
that on average, members pay off their accounts every month. However, this will vary with the
credit terms of the cooperative. Another benchmark that is more universal is that no more than
20 percent of accounts should be more than 60 days old, and no more than 5 percent should
exceed the maximum days allowed by your credit policy.
Accounts receivables aging can be improved by tightening the credit policy, placing historically
troublesome accounts on a cash only policy, collecting past due accounts (by legal means if
necessary for accounts that are unreasonably overdue), and writing off those doubtful accounts
that the manager feels will never be paid off.
Inventory Turnover Ratio
Inventory turnover is another important issue because it reflects the number of times the
inventory is sold out during the year. Management can discover sales trends, and what “dead
inventory” items he/she is carrying by paying close attention to the inventory that is being sold
out. The inventory turnover ratio measures the overall effectiveness of an inventory system.
Reducing overall inventory levels, getting dead items out of the warehouse, and coordinating
inventory between branches can improve it. Another more popular option is to increase sales
through smart marketing. If this option can be accomplished, the cooperative can improve
inventory turnover as well as other crucial ratios based on sales.

10
Total Assets to Total Sales
The total assets to total sales ratio measures whether a cooperative is efficiently using its assets
to generate sales. Like the expense to sales ratio, it can be improved by increasing sales or by
reducing unproductive assets. Most cooperatives have a “dead horse” asset that is kept, either
because the members want to keep it or it provides a valuable service to the rest of the
cooperative. Whatever the reason, these kinds of unproductive assets should be re-configured or
removed because they put a drain on the cooperative’s profitability and productivity.
Fixed Assets
Cooperative is over invested in long term investments including plant equipment. This ratio can
be improved by selling equipment or increasing sales. It is determined by sales divided by total
assets.
Expense Ratio
Expense ratios measure the expense of the company for the past year. By using local ratios, the
cooperative can remove the variability produced by the ups and downs of regional patronage
refunds. It also prevents the cooperative from looking worse than it actually is, due to weak joint
ventures, extraordinary losses, and regional stock write-downs.
Fixed Expenses to Gross Income
The fixed expenses to gross income ratio measures whether or not coop are appropriate given the
cooperative’s size (as measured by sales). It can be improved by either increasing sales or
decreasing expenses. A decreasing trend in this ratio is better because it means your expenses are
decreasing relative to your sales.
Personnel to Gross Income
The personnel to gross income ratio is a measure of how efficiently the personnel of the
cooperative are being used. Human capital is a key part of a successful cooperative. The best
people should be in the right positions where they can be the most productive. This ratio can be
improved by reducing overtime of employees who are “milking the clock,” reducing
unproductive employees, or encouraging productivity and margins without removing any
employees.

11
Bad Debt to Credit Sales
The bad debt to credit sales measures the ultimate cost of the cooperative’s credit policy. This
preferably averages less than a quarter of a percent. Many cooperatives charge an allowance for
bad debts each year, then adjust for the actual amount. Bad debt expense estimate can be best
calculated by averaging the actual amount of several years.
Profitability Ratio
Profitability measures do exactly what they say; they measure the profitability of the company
for the past year and give indicators of how to further improve local profitability. A key term is
that these financial ratios are local numbers. By using local ratios the cooperative can remove the
variability produced by the ups and downs of regional patronage refunds. It also prevents the
cooperative from looking worse than it actually is, due to weak joint ventures, extraordinary
losses, and regional stock write-downs.
Return on Assets and Return on Equity
Return on assets is another measure that takes into account local assets and their relation to
profits. It indicates whether or not local assets are being used efficiently and can be improved by
reducing unproductive assets. Similarly, return on equity (or return on net worth) compares the
pre-tax profit to total net worth. This is a measurement of how your cooperative is providing
returns to your member/owners. It can be improved by increasing profits or by changing your
debt structure.
Return on Local Equity
Return on local equity is calculated as pre-tax profits less dividends received from regional
cooperatives as a ratio of local equity. Local equity is calculated as total equity less investments
in regional cooperatives which are outside of the control of the local manager and board.
As you can see, all of these formulas are interrelated. The primary theme of profitability ratios is
how your local cooperative is efficiently using its assets to generate profits and returns to
members. You will notice these same themes of improving profits, local savings, and controlling
local debt throughout the next set of ratios.
Debt Ratios

12
The debt ratios measure the solvency of your cooperative. The debt to assets ratio is another
useful ratio, but will not be discussed in depth at this time. The two most important debt ratios
are the debt service coverage ratio and local leverage.
Liquidity Measures
Our final category of ratios is the liquidity measures. These measures look at the cash position of
the company and how well the company can generate cash flows. The working capital ratio is the
primary liquidity ratio at work here and is the one that will most often be used in the debt
guidelines by lenders.
Working Capital
Working capital measures the capital that a company has on hand at any time to deal with any
unexpected expenses. Like the local leverage ratio, guidelines for a cooperative’s working capital
are usually set forth in the loan documents of the company’s primary lender. The working capital
ratio can be improved by reducing accounts receivable, reducing short term debt, retaining a
greater portion of allocated savings and avoiding financing long term assets with current
liabilities. The working capital is an easy ratio to calculate, but it is a hard ratio to change. For
this reason, it should be watched closely and tracked by the cooperative to assure that the
working capital stays at a healthy level.

13
 Introduction to Banking Industry

Indian Banking Industry:

Banking in India originated in the first decade of 18th century with The General Bank of India
coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are
now defunct. The oldest bank in existence in India is the State Bank of India being established as
"The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks like
Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was
the most active trading port, mainly due to the trade of the British Empire, and due to which
banking activity took roots there and prospered. The first fully Indian owned bank was the
Allahabad Bank, which was established in 1865.

By the 1900s, the market expanded with the establishment of banks such as Punjab National
Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded
under private ownership. The Reserve Bank of India formally took on the responsibility of
regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve
Bank was nationalized and given broader powers.

Nationalization

By the 1960s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy. At the same time, it has emerged as a large employer, and a
debate has ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-

14
then Prime Minister of India expressed the intention of the GOI in the annual conference of the
All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization."

15
The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden,
and the GOI issued an ordinance and nationalized the 14 largest commercial banks with effect
from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described
the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance,
the Parliament passed the Banking Companies (Acquition and Transfer of Undertaking) Bill, and
it received the presidential approval on 9th August, 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The stated
reason for the nationalization was to give the government more control of credit delivery. With
the second dose of nationalization, the GOI controlled around 91% of the banking business of
India. After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to
the average growth rate of the Indian economy.

Liberalization

In the early 1990s the then Narasimha Rao government embarked on a policy of liberalization
and gave licences to a small number of private banks, which came to be known as New
Generation tech-savvy banks, which included banks such as UTI Bank (now re-named as Axis
Bank) (the first of such new generation banks to be set up), ICICI Bank and HDFC Bank. This
move, along with the rapid growth in the economy of India, kick started the banking sector in
India, which has seen rapid growth with strong contribution from all the three sectors of banks,
namely, government banks, private banks and foreign banks.The next stage for the Indian
banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment,
where all Foreign Investors in banks may be given voting rights which could exceed the present
cap of 10%, at present it has gone up to 49% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used
to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave
ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this
led to the retail boom in India. People not just demanded more from their banks but also received
more.

16
17
Current Situation

Currently (2007), banking in India is generally fairly mature in terms of supply, product range
and reach-even though reach in rural India still remains a challenge for the private sector and
foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to
have clean, strong and transparent balance sheets relative to other banks in comparable
economies in its region. The Reserve Bank of India is an autonomous body, with minimal
pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage
volatility but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some time-especially in
its services sector-the demand for banking services, especially retail banking, mortgages and
investment services are expected to be strong. One may also expect M&as, takeovers, and asset
sales.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak
Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed
to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any
stake exceeding 5% in the private sector banks would need to be vetted by them.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is
with the Government of India holding a stake), 29 private banks (these do not have government
stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks.

They have a combined network of over 53,000 branches and 17,000 ATMs. According to a
report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total
assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5%
respectively.1

1
www.finance.indiabizclub.com

18
The growth in the Indian Banking Industry has been more qualitative than quantitative and it is
expected to remain the same in the coming years. Based on the projections made in the "India
Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts
that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets
of all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000 crores. That
will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in
2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during
the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95
and 2002-03. It is expected that there will be large additions to the capital base and reserves on
the liability side.

Category of Banks

The Banks are gernally categorized in two parts.

(a) Public Sector Banks (b) Private Sector Banks

The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks.
Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000
branches of Scheduled banks spread across India. As far as the present scenario is concerned the
Banking Industry in India is going through a transitional phase.

The Public Sector Banks (PSBs), which are the base of the Banking sector in India account for
more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with
excessive Non Performing assets (NPAs), massive manpower and lack of modern technology.
On the other hand the Private Sector Banks are making tremendous progress. They are leaders in
Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned
they are likely to succeed in the Indian Banking Industry.

19
In the Indian Banking Industry some of the Private Sector Banks operating are IDBI Bank, ING
Vyasa Bank, SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd. and banks
from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank,
Allahabad Bank among others. ANZ Grindlays Bank, ABN-AMRO Bank, American Express
Bank Ltd, Citibank are some of the foreign banks operating in the Indian Banking Industry. 2

Impact of Banks on Economy

Banks have influenced economies and politics for centuries. Historically, the primary purpose of
a bank was to provide loans to trading companies. Banks provided funds to allow businesses to
purchase inventory, and collected those funds back with interest when the goods were sold. For
centuries, the banking industry only dealt with businesses, not consumers. Commercial lending
today is a very intense activity, with banks carefully analysing the financial condition of their
business clients to determine the level of risk in each loan transaction.

A bank generates a profit from the differential between the level of interest it pays for deposits
and other sources of funds, and the level of interest it charges in its lending activities. This
difference is referred to as the spread between the cost of funds and the loan interest rate. In
recent history, investors have demanded a more stable revenue stream and banks have therefore
placed more emphasis on transaction fees, primarily loan fees but also including service charges
on array of deposit activities and ancillary services (international banking, foreign exchange,
insurance, investments, wire transfers, etc

The name bank derives from the Italian word banco "desk/bench", used during the Renaissance
by Florentines bankers, who used to make their transactions above a desk covered by a green
tablecloth.[citation needed] However, there are traces of banking activity even in the babylonian
times, and indeed a book about the history of banking is named : Banking, from Babylon to Wall
Street.

2
www.mapsofindia.com

20
 Services offered by Banks

Although the basic type of services offered by a bank depends upon the type of bank and
the country, services provided usually include:

Taking deposits from their customers and issuing current (UK) or checking (US)
accounts and savings accounts to individuals and businesses.
Extending loans to individuals and businesses.
Cashing cheques.
Facilitating money transactions such as wire transfers and cashier's checks.
Issuing credit cards, ATM cards, and debit cards.
Storing valuables, particularly in a safe deposit box.
Cashing and distributing bank rolls and financial advisory services.
Pension & retirement planning.

Financial transactions can be performed through many different channels:

A branch, banking centre or financial centre is a retail location where a bank or financial
institution offers a wide array of face to face service to its customers.
ATM is a computerized telecommunications device that provides a financial institution's
customers a method of financial transactions in a public space without the need for a
human clerk or bank teller.
Mail is part of the postal system which itself is a system wherein written documents
typically enclosed in envelopes, and also small packages containing other matter, are
delivered to destinations around the world.
Telephone banking is a service provided by a financial institution which allows its
customers to perform transactions over the telephone.
Online banking is a term used for performing transactions, payments etc. over the
Internet through a bank, credit union or building society's secure website.3

3
www.indiabizclub.com

21
State Bank of India

22
 HISTORY OF STATE BANK OF INDIA

The roots of the State Bank of India rest in the first decade of 19th century, when the Bank of
Calcutta, later renamed the Bank of Bengal, was established on 2 June 1806. The Bank of Bengal
and two other Presidency banks, namely, the Bank of Bombay (incorporated on 15 April 1840)
and the Bank of Madras (incorporated on 1 July 1843). All three Presidency banks were
incorporated as joint stock companies, and were the result of the royal charters. These three
banks received the exclusive right to issue paper currency in 1861 with the Paper Currency Act,
a right they retained until the formation of the Reserve Bank of India. The Presidency banks
amalgamated on 27 January 1921, and the reorganized banking entity took as its name Imperial
Bank of India. The Imperial Bank of India continued to remain a joint stock company.

Pursuant to the provisions of the State Bank of India Act (1955), the Reserve Bank of India,
which is India's central bank, acquired a controlling interest in the Imperial Bank of India. On 30
April 1955 the Imperial Bank of India became the State Bank of India. The Govt. of India
recently acquired the Reserve Bank of India's stake in SBI so as to remove any conflict of
interest because the RBI is the country's banking regulatory authority.

In 1959 the Government passed the State Bank of India (Subsidiary Banks) Act, enabling the
State Bank of India to take over eight former State-associated banks as its subsidiaries. On Sept
13, 2008, State Bank of Saurashtra, one of its Associate Banks, merged with State Bank of India.

SBI has acquired local banks in rescues. For instance, in 1985, it acquired Bank of Cochin in
Kerala, which had 120 branches. SBI was the acquirer as its affiliate, State Bank of Travancore,
already had an extensive network in Kerala.

23
 ASSOCIATE BANKS OF STATE BANK OF INDIA

There are six associate banks that fall under SBI, and together these six banks constitute the State
Bank Group. All use the same logo of a blue keyhole and all the associates use the "State Bank
of" name followed by the regional headquarters' name. Originally, the then seven banks that
became the associate banks belonged to princely states until the government nationalized them
between October, 1959 and May, 1960. In tune with the first Five Year Plan, emphasizing the
development of rural India, the government integrated these banks into State Bank of India to
expand its rural outreach. There has been a proposal to merge all the associate banks into SBI to
create a "mega bank" and streamline operations. The first step along these lines occurred on 13
August 2008 when State Bank of Saurashtra merged with State Bank of India, which reduced the
number of state banks from seven to six. Furthermore on 19th June 2009 the SBI board approved
the merger of its subsidiary, State Bank of Indore, with itself. SBI holds 98.3% in the bank, and
the balance 1.77% is owned by individuals, who held the shares prior to its takeover by the
government.

The acquisition of State Bank of Indore will help SBI add 470 branches to its existing network of
11,448. Also, following the acquisition, SBI’s total assets will inch very close to the Rs 10-lakh
crore mark. Total assets of SBI and the State Bank of Indore stood at Rs 998,119 crore as on
March 2009.

GROWTH OF STATE BANK OF INDIA

State Bank of India has often acted as guarantor to the Indian Government, most notably during
Chandra Shekhar's tenure as Prime Minister of India. With 11,448 branches and a further 6500+
associate bank branches, the SBI has extensive coverage. State Bank of India has electronically
networked all of its branches under Core Banking System (CBS). The bank has one of the largest
ATM networks in the region. More than 8500 ATMs across India. The State Bank of India has
had steady growth over its history, though it was marred by the Harshad Mehta scam in 1992. In
recent years, the bank has sought to expand its overseas operations by buying foreign banks. It is
the only Indian bank to feature in the top 100 world banks in the Fortune Global 500 rating and
various other rankings.

24
 INTERNATIONAL PRESANCE OF SBI

The bank has 92 branches, agencies or offices in 32 countries. It has branches of the parent in
Colombo, Dhaka, Frankfurt, Hong Kong, Johannesburg, London and environs, Los Angeles,
Male in the Maldives, Muscat, New York, Osaka, Sydney, and Tokyo. It has offshore banking
units in the Bahamas, Bahrain, and Singapore, and representative offices in Bhutan and Cape
Town.

SBI operates several foreign subsidiaries or affiliates. In 1990 it established an offshore bank,
State Bank of India (Mauritius). It has two subsidiaries in North America, State Bank of India
(California), and State Bank of India (Canada). In 1982, the bank established its California
subsidiary, named State Bank of India (California), which now has eight branches - seven
branches in the state of California and one in Washington DC which was recently opened on
23rd November, 2009. The seven branches in the state of California are located in Los Angeles,
Artesia, San Jose, Canoga Park, Fresno, San Diego and Bakersfield. The Canadian subsidiary too
dates to 1982 and has seven branches, four in the greater Toronto area, and three in British
Columbia.

In Nigeria, SBI operates as INMB Bank. This bank began in 1981 as the Indo-Nigerian Merchant
Bank and received permission in 2002 to commence retail banking. It now has five branches in
Nigeria.

In Nepal SBI owns 50% of Nepal SBI Bank, which has branches throughout the country. In
Moscow SBI owns 60% of Commercial Bank of India, with Canara Bank owning the rest. In
Indonesia it owns 76% of PT Bank Indo Monex.

State Bank of India already has a branch in Shanghai and plans to open one up in Tianjin.

25
 TRANSFORMATION JOURNEY IN STATE BANK OF INDIA

The State Bank of India, the country’s oldest Bank and a premier in terms of balance sheet size,
number of branches, market capitalization and profits is today going through a momentous phase
of Change and Transformation – the two hundred year old Public sector behemoth is today
stirring out of its Public Sector legacy and moving with an ability to give the Private and Foreign
Banks a run for their money.

The bank is entering into many new businesses with strategic tie ups – Pension Funds, General
Insurance, Custodial Services, Private Equity, Mobile Banking, Point of Sale Merchant
Acquisition, Advisory Services, structured products etc – each one of these initiatives having a
huge potential for growth.

The Bank is forging ahead with cutting edge technology and innovative new banking models, to
expand its Rural Banking base, looking at the vast untapped potential in the hinterland and
proposes to cover 100,000 villages in the next two years.
 
It is also focusing at the top end of the market, on whole sale banking capabilities to provide
India’s growing mid / large Corporate with a complete array of products and services. It is
consolidating its global treasury operations and entering into structured products and derivative
instruments. Today, the Bank is the largest provider of infrastructure debt and the largest
arranger of external commercial borrowings in the country. It is the only Indian bank to feature
in the Fortune 500 list.

The Bank is changing outdated front and back end processes to modern customer friendly
processes to help improve the total customer experience. With about 8500 of its own 10000
branches and another 5100 branches of its Associate Banks already networked, today it offers the
largest banking network to the Indian customer. The Bank is also in the process of providing
complete payment solution to its clientele with its over 8500 ATMs, and other electronic
channels such as Internet banking, debit cards, mobile banking, etc.

26
 EVOLUTION OF SBI

The origin of the State Bank of India goes back to the first decade of the nineteenth century
with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three years later the
bank received its charter and was re-designed as the Bank of Bengal (2 January 1809). A
unique institution, it was the first joint-stock bank of British India sponsored by the
Government of Bengal. The Bank of Bombay (15 April 1840) and the Bank of Madras (1 July
1843) followed the Bank of Bengal. These three banks remained at the apex of modern
banking in India till their samalgamation as the Imperial Bank of India on 27 January 1921.

Primarily Anglo-Indian creations, the three presidency banks came into existence either as a
result of the compulsions of imperial finance or by the felt needs of local European commerce
and were not imposed from outside in an arbitrary manner to modernise India's economy. Their
evolution was, however, shaped by ideas culled from similar developments in Europe and
England, and was influenced by changes occurring in the structure of both the local trading
environment and those in the relations of the Indian economy to the economy of Europe and
the global economic framework.

27
 Awards and Recognitions

Awards and Recognition: In 2008-09

State Bank of India is the country' premier financial institution. It is a crucial wheel in the
economy with the ability to move markets. SBI has produced many stalwarts, and its chairman
Om Prakash Bhatt stands out among them. For Bhatt has put the bank on a high growth path.

 STATE BANK OF INDIA Ranked as NO.1 in the 4Ps B & M & ICMR Survey on
INDIA'S BEST MARKETED BANKS (August-2009)

 SHRI OM PRAKASH BHATT DECLARED AS ONE OF THE "25 MOST

VALUABLE INDIANS" BY THE WEEK MAGAZINE FOR 2009 (Published in
August-2009 Issue)

28
29
 ASSOCIATE BANKS OF SBI AND IT’s BUSINESS

State Bank of India has the following six Associate Banks (ABs) with controlling interest
ranging from 75% to 100%.
 State Bank of Bikaner and Jaipur (SBBJ)
 State Bank of Hyderabad (SBH)
 State Bank of Indore (SBIr)
 State Bank of Mysore (SBM)
 State Bank of Patiala (SBP)
 State Bank of Travancore (SBT)

PRODUCTS AND SERVICES

Centralized banking system

•100% of the business is on CBS

•11,400 SBI Branches: 4500 Associate Bank Branches

•84 Foreign Branches across 32 countries

•200 Million Accounts: 35 Million transactions per day

Delivery Channels

•8500 ATMs : Over 2 million transactions per day

•Total Debit Cards: 30 Million

Growth

•Scalable architecture, ready for both organic and inorganic growth

•Technical merger of State Bank of Saurashtra with SBI was accomplished overnight.

30
Activities:
State Bank of India offers its products and services in domains like -

 Personal Banking.
 NRI Services.
 Agriculture.
 International.
 Corporate.
 SME.
 Domestic Treasury.

State Bank of India Services offers the following products through its well managed, efficient
and deep-rooted network:

 Domestic Treasury.  E-Pay.

 SBI Vishwa Yatra Foreign Travel  E-Rail.
Card.  RBIEFT.
 Broking Services  Safe Deposit Lockers.
 Revised Service Charge.  Gift Cheques.
 ATM Services.  MICR Codes.
 Internet Banking.  Foreign Inward Remittances

R Sridharan has taken over as the managing director (MD) and group executive  (associates and
subsidiaries) of State Bank of India, from December 5, 2008.

He is a graduate from Madras University and joined as a probationary officer in 1972. Before
taking over as MD, Sridharan was the deputy MD of the bank, looking after the non-banking
subsidiaries. Earlier, he was the MD and CEO of SBI Capital Markets, a subsidiary of SBI.

31
Apart from these, Sridharan has held assignments in SBI's international division and has also
served as advisor to the Ministry of Finance, government of India

32
HDFC BANK

33
HISTORY

Housing Development Finance Corporation Limited, more popularly known as HDFC Bank Ltd,
was established in the year 1994, as a part of the liberalization of the Indian Banking Industry by
Reserve Bank of India (RBI). It was one of the first banks to receive an 'in principle' approval
from RBI, for setting up a bank in the private sector. The bank was incorporated with the name
'HDFC Bank Limited', with its registered office in Mumbai. The following year, it started its
operations as a Scheduled Commercial Bank. Today, the bank boasts of as many as 1412
branches and over 3275 ATMs across India.
Amalgamations
In 2002, HDFC Bank witnessed its merger with Times Bank Limited (a private sector bank
promoted by Bennett, Coleman & Co. / Times Group). With this, HDFC and Times became the
first two private banks in the New Generation Private Sector Banks to have gone through a
merger. In 2008, RBI approved the amalgamation of Centurion Bank of Punjab with HDFC
Bank. With this, the Deposits of the merged entity became Rs. 1,22,000 crore, while the
Advances were Rs. 89,000 crore and Balance Sheet size was Rs. 1,63,000 crore.
Tech-Savvy
HDFC Bank has always prided itself on a highly automated environment, be it in terms of
information technology or communication systems. All the braches of the bank boast of online
connectivity with the other, ensuring speedy funds transfer for the clients. At the same time, the
bank's branch network and Automated Teller Machines (ATMs) allow multi-branch access to
retail clients. The bank makes use of its up-to-date technology, along with market position and
expertise, to create a competitive advantage and build market share.

34
Capital Structure

At present, HDFC Bank boasts of an authorized capital of Rs 550 crore (Rs5.5 billion), of this
the paid-up amount is Rs 424.6 crore (Rs.4.2 billion). In terms of equity share, the HDFC Group
holds 19.4%. Foreign Institutional Investors (FIIs) have around 28% of the equity and about
17.6% is held by the ADS Depository (in respect of the bank's American Depository Shares
(ADS) Issue). The bank has about 570,000 shareholders. Its shares find a listing on the Stock
Exchange, Mumbai and National Stock Exchange, while its American Depository Shares are
listed on the New York Stock Exchange (NYSE), under the symbol 'HDB'.
Products & Services

Personal Banking  Rupee Savings Accounts

 Rupee Current Accounts
 Savings Accounts  Rupee Fixed Deposits
 Salary Accounts  Foreign Currency Deposits
 Current Accounts  Accounts for Returning Indians
 Fixed Deposits  Quick remit (North America, UK,
 Demat Account Europe, Southeast Asia)
 Safe Deposit Lockers  India Link (Middle East, Africa)
 Loans  Cheque Lockbox
 Credit Cards  Telegraphic / Wire Transfer
 Debit Cards  Funds Transfer through Cheques /
 Prepaid Cards DDs / TCs
 Investments & Insurance  Mutual Funds
 Forex Services
 Payment Services
 Net Banking
 InstaAlerts
 Mobile Banking
 Insta Query
 ATM
 Phone Banking

NRI Banking

35
36
 DEEPAK PAREKH HDFC CHAIRMAN

Deepak Parekh is the Chairman of Housing Development Finance Corporation, India's leading

housing finance company. A pioneer in mortgage finance, he has enabled scores of
Indian middle class people to own their houses or apartments through affordable loans. He is
based in Mumbai.[1]

A Chartered Accountant, Deepak Parekh began his career with Ernst & Young Management
Consultancy Services in New York. After returning to India, he worked with Grindlays Bank and
also Chase Manhattan Bank as its assistant representative for South Asia. Parekh joined HDFC
in 1978. He was promoted to Managing Director in 1985 and appointed as Chairman in 1993. He
was instrumental in making the HDFC one of India's premier housing finance institutions.
Parekh also became the Non-Executive Chairman of Infrastructure Development Finance
Company Ltd (IDFC), a Government of India enterprise for infrastructure projects in 1997. He is
also the Non-Executive Chairman of Glaxo India Ltd & Burroughs Wellcome (India) Ltd and on
the Board of Castrol India Limited, Hindustan Unilever, Siemens Ltd, Mahindra & Mahindra,
Indian Hotels Company and SingTel. Mr. Parekh is also extremely supportive of youth
leadership and thus is a proactive advisory board member of the world's largest student driven
organization AIESEC India.

Parekh has been a member of various Committees set up by the Government of India. He was
appointed Chairman of the high level expert committee formed to recommend measures for
strengthening the Unit Scheme in 1964. The Reserve Bank of India appointed him Chairman of
the Advisory Group for Securities Market Regulation, which was tasked to compare the level of
adherence to international standards in India with that in other countries. He was also Chairman
of the Expert Committee constituted by the Ministry of Power to look into the reform efforts in
the power sector.
OBJECTIVES OF THE STUDY
1. To study the performance of banks.

2. To study about the factors affecting the financial performance.

37
Chapter-2
38
 Review
of
Literature

Review of Literatures

39
Large number of studies has been conducted to analyze the financial performance of the Banks.
Following is review of important studies.

1. Financial Performance of Banks in India

By: - Singla Harish Kumar

This Paper deals with how financial management plays a crucial role in the growth of Banking. It
is with examining the profitability position of the selected sixteen banks (BANKEX-based) for a
period of five years (2000-01 to 2006-2007). The study reveals that the profitability position of
selected banks was sustained at the moderate rate. With respect to debt equity position it was
evident that the companies were maintaining 1:1 ratio, through at one point of time it was very
high. Interest coverage ratio was continuously increasing, which indicate the company’s ability
to meet the interest obligations. Capital adequacy ratio was constant over a period of time.
During the study period, it was observed that the return on net worth had a negative correlation
with the debt equity ratio. Interest income to working funds also had a negative association with
interest coverage ratio and the Non-Performing Assets (NPA) to net advance was negatively
correlated with interest coverage ratio.4

2. The Performance of Indian Banks during Financial Liberalization

By:-Spong Kenneth, Sullivan Richard

This paper provides new empirical evidence on the impact of financial liberalization on the
performance of Indian commercial banks. The analysis focuses on examining the behavior and
determinants of bank intermediation costs and profitability during the liberalization period. The
empirical results suggest that ownership type has a significant effect on some performance
indicators and that the observed increase in competition during financial liberalization has been
associated with lower intermediation costs and profitability of the Indian banks.

4
Singla Harish Kumar, Financial Performance of Banks in India. The ICFAI Journal of Bank
Management. Vol.7, No 1,pp.50-62, February 2008
Available at SSRN:http://ssrn.com/abstract=1088577

40
Methodology: - Rank Correlation

Conclusion:-Data analysis of this study revealed that the ranking of Omani commercial banks
based on their total deposits, total credits, total assets, and total shareholders’ equity is ranked as:
Bank Muscat (BM) is considered to be the first one, National Bank of Oman (NBO) is in the
second rank, Omani International Bank (OIB) is the third, Bank Dhofar (BD) is the fourth, and
the last rank is for Alliance Housing Bank (AHB).

Based on the reported ranking it is concluded that the bank with higher predictors of total assets,
credits, deposits, or shareholder equity does not always mean that it has better profitability
performance.

3. A Comparison of Financial Performance in the Banking Sector

By:-Tarawmeh Medhat
This paper concludes that financial performance of banks and other financial institutions has
been measured using a combination of financial ratios analysis, benchmarking, measuring
performance against budget or a mix of these methodologies ( Avkiran, 1995 ). The financial
statements of corporations in Oman that published commonly contain a variety of financial ratios
designed to give an indication of the corporation's performance.
As it known in accounting literature, there are limitations associated with use of some financial
Ratios. In this research, however, ROA ratio with interest income size are used to measure the
Performance of Omani commercial banks. Asset management, the bank size, and operational
efficiency are used together to investigate the relationships among them and the financial
performance. Simply stated, much of the current bank performance literature describes the
objective of financial organizations as that of earning acceptable returns and minimizing the risks
taken to earn this return (Hempel G. Coleman, 1986). There is a generally accepted relationship
between risk and return, that is, the higher the risk the higher the expected return. Therefore,
traditional measures of bank performance have measured both risks and returns.
The increasing competition in the national and international banking markets, the change over
towards monetary unions and the new technological innovations herald major changes in
banking environment, and challenge all banks to make timely preparations in order to enter into
new competitive financial environment. (Spathis, and Doumpos, 2002) investigated the

41
effectiveness of Greek banks based on their assets size. They used in their study a multi criteria
methodology to classify Greek banks according to the return and operation factors, and to show
the differences of the banks profitability and efficiency between small and large banks. (Chien
Ho, and Song Zhu, 2004) showed in their study that most previous studies concerning Company
performance evaluation focus merely on operational efficiency and operational effectiveness
which might directly influence the survival of a company. By using an innovative two-stage data
envelopment analysis model in their study, the empirical result of this study is that a company
with better efficiency does not always mean that it has better effectiveness. A paper in the title of
efficiency, customer service and financing performance among Australian financial institutions
(Elizabeth Duncan, and Elliott, 2004) showed that all financial performance measures as interest
margin, return on assets, and capital adequacy are positively correlated with customer service
quality scores.5
4. The Financial Performance of Pakistani Islamic bank during 1999-2006
By:- Rashid Hassan
In the wake of meteoric growth of banking industry in Pakistan, Islamic banking has captured 2
percent market share in only three-year period. To evaluate this progress, attempt has been made
to measure and analyze the performance of Islamic banks in Pakistan during the 1999 and
2006.In this compendious analysis it has been evaluated intertemporal and interbank
performance of Islamic bank (Meezan bank). To actualize this objective, analysis has been made
in four major areas of financial ratios i.e. profitability, liquidity, risk and solvency and
community development. Mean, standard deviation, T-test and F-test has been used to test the
significance of the results of the analysis.

The basic source of data for this paper is annual reports of banks. This study finds out that not
only Islamic banks are less profitable than the conventional banks in Pakistan, but the basic
modes of Islamic banking, Mudharabah and Musharakah, are not popular in Pakistan.6

Methodology and data: Ratios.

5
Medhat Tarawneh Faculty of Business Sohar University Soha Sultanate of Oman
6
HASSAN RASHID Affiliation PhD Scholar at Mohammad Ali Jinnah University, Islamabad

42
Conclusion:-Due to the known certainty about the profits in the short run conventional banks
can maximize their profits. Interest based banks can determine profits in the long run through
hedging. On the other hand, there is no such scope to know the cost of funds beforehand. The
depositors are paid a portion of bank’s profits the volume of which is extremely uncertain. The
Islamic banks could face hardship in profit base if profit rate expected by the depositors is not
realized. Islamic banks are expected to calculate their rate of return on PLS deposits periodically.

5. Increasing needs of Financial Performance in Banking Sector

By: - International Research Journal of Finance and Economics - Issue 3 (2006)
The banking sector is considered to be an important source of financing for most businesses. The
Common assumption, which underpins much of the financial performance research and
discussion, is that increasing financial performance will lead to improved functions and activities
of the organizations. The subject of financial performance and research into its measurement is
well advanced within finance and management fields. It can be argued that there are three
principal factors to improve financial performance for financial institutions; the institution size,
its asset management, and the operational efficiency. To date, there have been little published
studies to explore the impact of these factors on the financial performance, especially the
commercial banks. This study proposes that there are measurable linkages among bank's size,
asset management, the operational efficiency, and the financial performance. The purpose of this
study is to analyze the financial data of Omani commercial banks for the financial periods 1999-
2003. in addition, to examine the relationships among measures such as bank's size, operational
efficiency, asset management, return on assets ( ROA), interest income, and to discuss their
impact on the bank's performance. Financial analysis is used to quantitatively examine the
differences in performance among commercial banks in Oman, and the banks are ranked based
on their financial measures and performance for each bank.
Therefore, the objectives of this study are to classify the commercial banks in Oman on the
basis of their financial characteristics as a guide line for future development, and to assess their
financial performance. In order to evaluate the internal performance of a commercial bank,
financial indicators are constructed from the bank financial statements. Financial ratios like
ROA, asset utilization, and operational efficiency are calculated, also, measures as assets size,
and the interest income size are used to assess the performance of a commercial bank. However,
it is hypothesized for this study that 102 International Research Journal of Finance and

43
Economics - Issue 3 (2006) there exist positive correlations among return on assets, asset
management, operational efficiency, bank size, and the interest income size. In addition, there
exist an impact of asset management, operational efficiency, and the bank's size on the financial
performance of the bank. Thus, this study is organized as follows: the next section following the
introduction discusses the relevant literature. The third section defines the banking sector in
Oman. Methodology of the study is described in fourth section. The fifth section provides details
of the results and analysis of the available data, and the final section presents the main
conclusions.7
6. Financial Ratio Analysis for Cooperatives

By:- Oklahoma Cooperative Extension Fact Sheets

A financial issue that your cooperative is dealing with today may be the result of a trend that
began several months or years ago. By closely tracking financial ratios, understanding why they
are important, and looking for trends in your company you can prevent a small problem from
becoming a major issue for the cooperative. Every director uses common sense analysis in
looking at these financials; however, to really understand the financials a director must also use
common size analysis, peer analysis, ratio analysis, and benchmarks.
If directors still have questions regarding financial analysis of the cooperative, there are
resources available to further explain it. Auditors and bankers are more than happy to help in
creating a stronger cooperative financially. The Bill Fitzwater Chair at Oklahoma State
University can answer questions or attend a board retreat to provide a more detailed explanation.
Regional cooperatives also have staff members whose job is financial analysis. A free software

7
International Research Journal of Finance and Economics - Issue 3 (2006)

44
program “Financial Ratio Analysis for Cooperatives” is available from Oklahoma State
University.

Conclusion
Today’s cooperative director is faced with a changing business form and members that demand
transparency in the cooperatives financials. As the ambassadors of the members, it is the duty of
directors to provide this transparency and watch for damaging financial trends. Below is a
supplement that provides the calculations for the major ratios that were discussed here as well as
some benchmarks. Please review it and direct any additional questions to one of the sources
mentioned earlier. 8

7. Securitization and Bank Performance

By:- Sarkisyan Anna , Casu Barbara , Clare Andrew , Thomas Steve

   Theory suggests that securitization provides financial institutions with an opportunity to lower
the cost of funding; improve credit risk management and increase profitability. In practice, as
evidence during the recent crisis, it might lead to adverse consequences through a number of
indirect channels. Therefore, the net impact of securitization on bank performance is ambiguous.
This study aims to evaluate whether banks improve their performance through the use of
securitization markets by applying a propensity score matching approach. In other words, we
build a counterfactual group of banks to assess what would have happened to the securitizing
banks had they not securitized. Using US commercial banking data from 2001 to 2008,
univariate analysis indicates that securitizing banks are, on average, more profitable institutions,
with higher credit risk exposure and higher cost of funding. However, the propensity score
matching analysis does not provide evidence of significant causal effects of securitization on the
performance of banks. Therefore, securitization does not seem to outperform alternative funding,
8
Reference:- Oklahoma Cooperative Extension Fact Sheets

http://osufacts.okstate.edu

45
risk management and profitability improvement techniques. Our evidence raises important
questions about banks motives for increasing securitization activities and consequent
implications for banking systems.9

8) The Effects of Bank Regulations, Competition, and Financial Reforms on Banks’

Performance

By:- Omran Mohammed Naceur Samy Ben     

In this paper, we examine the influence of bank regulation, concentration, and financial and
institutional development on commercial bank margins and profitability across a broad selection
of Middle East and North Africa (MENA) countries. We cover the 1989-2005 period and control
for a wide array of macroeconomic, financial, and bank characteristics. The empirical results
suggest that bank-specific characteristics, in particular bank capitalization and credit risk, have a
positive and significant impact on banks’ net interest margin, cost efficiency, and profitability.
As for the impact macroeconomic and financial development indicators bear on bank
performance, we conclude that these variables have no significant impact on net interest margins,
except for inflation. However, inflation shocks seem to be passed mainly through the deposit
rates and this type of transmission means that banks bear the entire negative cost of inflation.
Also, the results suggest that banks lower their operating costs in a well-developed banking
sector environment (as confirmed by the negative and statistically significant coefficient of the
bank development variable in the cost efficient regression models). Furthermore, the stock
market development variable is always positive and significant in all specifications, suggesting
that banks operating in a well-developed stock market environment tend to have greater profit
opportunities. Regulatory and institutional variables seem to have an impact on bank
performance as the results suggest that corruption increases the cost-efficiency and net-interest
margins while an improvement of the law and order variable decreases the cost of efficiency.

9
City University London - Sir John Cass Business School , October 19, 2009

46
 Chapter-3
Research Methodology

47
 RESEARCH METHODOLOGY

Research is a common parlance refers to a search for knowledge. One can also
define research as a scientific & systematic search for pertinent information on a
specific topic. Infect, research is an art of scientific investigation.

PURPOSE OF RESEARCH

To recognize the various types of information which are necessary for the
study of comparative analysis of Financial Performance of Banks.
Collection of data from various sites and Banks to analyze the Financial
Performance of the Banks.

For understanding, various reports, magazines and Brochures are studied.

The study is also conducted with the help of:-

Balance Sheet Analysis.

Ratio Analysis.

STEP 1: STUDYING THE POLICIES, PROCEDURES AND STANDARDS

FOLLOWED BY BANKS FOR FINANCIAL PERFORMANCE ANALYSIS:

The first step was to study the various policies, procedures & standards followed
by Banks to determine the Financial Performance.

STEP 2: DATA COLLECTION:

Data can be classified into-

Primary Data.
Secondary Data.

48
Primary Data:-
Depending upon the nature of the Problem, Primary data can be collected through
various methods. In this study, Personal interaction with senior officials of Banks
to know about the performance, were conducted.

Secondary Data:-
In Secondary Data collection, the data is collected with the help of annual reports,
manuals and balance sheets available on Bank’s official sites and from other sites
as well.
EPORT WRITING AND PRESENTATIONS:-

The report includes charts and graphical presentation of data.

Sources Used:-
 Internet website.
 Books of Financial Management.
 Annual Reports of Banks.
 Bank Brochures.
Research Design: - Descriptive Research Design

Sample Technique: - Ratio Analysis Method

Survey Period: - 2008-2009

Tools of Data:-Profitability Ratio, Activity Ratio, Liquidity Ratio, Long Term

Solvency Ratio etc.

Data Interpretation: - Diagrams and Charts.

49
 Chapter-4
Data Presentation
&
Interpretation

50
 Ratio Analysis

“A Ratio is the relation, of the amount, a, to another, b, expressed as the ratio of a to b; a:

b; or as a simple fraction, integer, decimal, fraction or percentage”

According to Kohler.

Ratio analysis is perhaps the most common method of financial analysis and it is this method on
which the most weight is placed. Ratio analysis provides a way cooperatives can high light
strengths, as well as problem areas, and positive/negative trends. It also allows for the company
to better compare to peer financial results and to industry benchmarks.
Benchmarks are considered to be acceptable financial results in the particular industry in which
the cooperative operates. The peer analysis shows how the company is doing compared to its
peers; however, if the industry is in a slump, it may make the financials look better than what it
is actually doing. A benchmark analysis shows the cooperative and its peers where the industry
should ideally be.

Following are the Ratios to be used for evaluation of Financial Performance

Short Term Financial Position Ratios:-

Current Ratio: - Current Assets

Current Liabilities

Particulars SBI HDFC

Ratio 5.8:1 1.05:1
7
6 5.8

5
4
3
2
1.05
1
0
SBI HDFC

Current Ratio

51
Interpretation:-As the Rule of thumb of Current ratio is 2:1.The high Current Ratio of SBI
indicates that the Bank’s position is more liquid than HDFC Bank and has the ability to pay its
Current obligations on time.

Quick Ratio: - Quick Assets

Current liabilities

Particulars SBI HDFC

Quick Ratio 0.94:1 1.2:1

1.4
1.2
1.2
1 0.94
0.8
0.6
0.4
0.2
0
SBI HDFC

Quick Ratio

Interpretation: - As the Rule of Thumb of this Ratio is 1:1. So the Quick Ratio of HDFC bank
is satisfactory than SBI. So the Bank has ability to pay its short term obligations as when they
become due.

Absolute Liquid Ratio: - Absolute Liquid Assets

Current Liabilities

Particulars SBI HDFC

Ratio .50:1 .77:1

52
 0.9
0.8 0.77
0.7
0.6
0.5
0.5
0.4
0.3
0.2
0.1
0
SBI HDFC

Absolute Liquid Ratio

Interpretation: - As the Rule of thumb of this Ratio is .5:1.The Ratio of HDFC Bank is
satisfactory because it has more liquidity to pay its Liabilities.

CURRENT ASSET MOVEMENT RATIO:

Working Capital Turnover Ratio: - Cost of Sales

Net working Capital

Particulars SBI HDFC

Ratio .12:1 2.56:1

53
 3
2.56
2.5
2
1.5

1
0.5
0.12
0
SBI HDFC

Working Capital Turnover Ratio

Interpretation: - The Working Capital Turnover Ratio of HDFC is satisfactory which indicates
the efficient use of Working Capital than SBI Bank.

Debtor Turnover Ratio: - Net Credit Annual sales

Average Trade Debtors

Particulars SBI HDFC

Ratio 1.7:1 .45:1

Debtor turnover Ratio

Debtor turnover Ratio
1.7

0.45

SBI HDFC

Interpretation: - The Debtor Turnover Ratio of HDFC is satisfactory which indicates the
efficient use of Working Capital than SBI.

Creditor Turnover ratio: - Net Credit annual Purchase

Average Trade Creditors

Particulars SBI HDFC

Ratios .11:1 .03:1

54
 Creditors Turnover Ratio
Creditors Turnover Ratio
0.11

0.03

SBI HDFC

Interpretation: - The Creditor Turnover Ratio of HDFC is satisfactory which indicates that the
Bank has ability to convert their trade debtors into cash within shorter period.

Long Term Financial Position:

Debt Equity Ratio: - Outsiders’ fund

Shareholders’ Funds

Particulars SBI HDFC

Ratio 3.2:1 1.74:1

3.5 3.2
3
2.5
2 1.74
1.5
1
0.5
0
SBI HDFC

Debt Equity Ratio

Interpretation: - The ratio of HDFC Bank is preferable as it has low outsider funds than SBI.

Solvency Ratio: - Total Liability to outsider

Total Assets

Particulars SBI HDFC

Ratio 1.06:1 .14:1

55
 Solvency Ratio
Solvency Ratio
1.06

0.14

SBI HDFC

Interpretation: - As this ratio indicates the relationship between the total liabilities to outsiders
to total assets of a firm. So according to data the Ratio of HDFC Bank is satisfactory.

Fixed asset Net worth Ratio: - Fixed Asset (after Depreciation)

Shareholders Fund

Particulars SBI HDFC

Ratio 3.8:1 1.2:1

Fixed asset to net Worth Ratio

Fixed asset to net Worth Ratio
3.8

1.2

SBI HDFC

Interpretation: - It shows the extent to which shareholders funds are sunk into the Fixed Assets.
So the Ratio of HDFC Bank is better as the shareholder have sufficient funds to raise the
Working Capital.

Proprietary or Equity Ratio: - Shareholder Funds

Total Assets

Particulars SBI HDFC

Ratio 12.66:1 11.98:1

56
 Current asset to Properitory Fund Ratio
Current asset to Properitory Fund Ratio
12.66

11.98

SBI HDFC

Interpretation: - As this Ratio indicates how much proprietor’s funds are invested in Current
assets. So the ratio of SBI is favorable.

Profitability Ratios:

Gross Profit Ratio: - Gross Profit* 100

Net Sales

Particulars SBI HDFC

Percentage 89.59% 116.53%

Gross Profit Ratio

Gross Profit Ratio
116.53%
89.50%

SBI HDFC

Interpretation: - As this Ratio shows the relationship of Gross Profit to Net sales. So the Gross
Profit of HDFC Bank is better.

57
Operating Ratio: - Operating cost* 100

Net sales

Particulars SBI HDFC

Percentage 36% 42%

Operating Ratio
Operating Ratio
42%

36%

SBI HDFC

Interpretation: - This Ratio shows the Relationship between Cost of Goods sold and other
operating expenses on the one hand and with sale on the other hand. So the ratio indicates that
SBI is better higher ratio is favorable.

Net Profit Ratio: - Net Profit after Tax* 100

Net Sales

Particulars SBI HDFC

Percentage 22% 34%

Net Profit Ratio

Net Profit Ratio
34%
22%

SBI HDFC

Interpretation: -Net Profit of HDFC is better than SBI as it indicates the efficiency of the
management in selling and distribution and other activities.

58
Earnings Per share: - Net Profit after tax –Pref. Dividend.

No. of Equity shares

Particulars SBI HDFC

Ratio 64 52

Earning Per Share ratio

Earning Per Share ratio
64
52

SBI HDFC

Interpretation: - The earning per share of SBI bank is higher than HDFC bank. So higher is
preferable.

59
Chapter-5
Conclusion
Annexure
And
References

60
Conclusion

In this analysis it shown the above that most of the times HDFC is giving

more satisfaction to the customer in any matter. HDFC providing new

things to customers on time to time and they are more innovative then SBI.

HDFC provides many thing which SBI is lower than that like customer

attending , proper keep the customer update about new things, update

about new policies or product, professionalism. As far as network and

belief in concern then SBI have huge advantage over the HDFC. SBI also

never charge any hidden cost or any price from the account. While most of

the private banks deduct the money from their customer’ account for any

kind reason. That’s why most of the people prefer Public sector banks and

they trust them as well .Because of huge network of customer, Government

support,control by Government , stability, many Government enterprise

have already joined with SBI like school teacher’s salary, Provident fund,

Pension and many more things which show us the why SBI having this kind

of reputation in banking sector.

61
Annexure

PERSONAL DETAILS:

Name Mr./Mrs./Miss__________________________

Address____________________________________

___________________________________________

Phone No. __________________________________

Email ______________________________________

Occupation

a) Government Employee b) Private Employee

c) Self Employed d) Student e) Housewife

Your monthly household income

a) Less than 15000 b) 15001-25000 c)25001 and above

Please give some references of people who you know are trading/investing in stocks:

1. _________________________________

2. _________________________________

62
Q1. Where do you open a account?

ii. SBI and its associates

iii. HDFC

iv. Any other.

Q2. Which bank is more secure?

i. SBI

ii. HDFC

iii. Other

Q3. Which banks give more return?

i. SBI

ii. HDFC

iii. Other

Q4. Are you satisfied with services of bank?

i. Yes

ii. No

63
Q5. Your open account decisions are influenced by

i. Oneself

ii. Broker

iii. Market Research

iv. Friends/Relatives

v. An other

Q6. Are you satisfied with company services?

i. Yes ii. No

Q7. What are the factors which you considered before opening account in a particular bank?

i. Financial Position

ii. Current Market Position

iii. Goodwill

iv. Future Prospects

v. Any others.

64
References

en.wikipedia.org/wiki/State_Bank_of_India

scribd

wiki hdfc

www.hdfcbank.com/

business standard

www.sbioahc.com/Business%20company_files%5CCirculars%5CAssn
%202009%5CCircular%20No.39.pdf

65