CHAPTER I – INTRODUCTION AND DESIGN OF THE STUDY1.1ABOUT THE STUDY Banking sector, the world over, is known for the adoption of multidimensional strategies from time to time with varying degrees of success. Banks are very important for the smooth functioning of financial markets as they serve as repositories of vital financial information and can potentially alleviate the problems created by information asymmetries. In any organization, the two important financial statements are the Balance sheet & Profit and loss account of the business. Balance sheet is a statement of the financial position of an enterprise at a particular point of time. Profit and loss account shows the net profit or net loss of a company for a specified period of time. When these statements of the last few year of any organization are studied and analyzed, significant conclusions may be arrived regarding the changes in the financial position, the important policies followed and trends in profit and loss etc. Analysis and interpretation of the financial statement has now become an important technique of credit appraisal. The investors, financial experts, management executives and the bankers all analyze these statements. Though the basic technique of appraisal remains the same in all the cases but the approach and the emphasis in analysis vary. A banker interprets the financial statement so as to evaluate the financial soundness, stability, the liquidity position and the profitability or the earning capacity of borrowing concern. Analysis of financial statement is necessary because it help in depicting the financial position on the basis of past and current records. Analysis of financial statement helps in making the future decision and strategies. Therefore, it is very necessary for every organization whether it is a financial company or manufacturing company to make financial statement and to analysis it. After duly recognizing the importance of financial statement analysis, this topic has been chosen as the focus of project. It analyses the financial statement of Indian Bank from 2008 to 2012. 1 FINANCIAL STATEMENTS ANALYSIS: After preparation of the financial statements(Balance Sheet and Trading and Profit and Loss Account), one may be interested in analyzing the financial statements with the help of different tools such as comparative statement, common size statement, ratio analysis, trend analysis, etc. In this process a meaningful relationship is established between two or more accounting figures for comparison. Objectives: To explain the meaning, need and purpose of financial statement analysis; To identify the parties interested in analysis of financial statements; To explain the various techniques and tools of analysis of financial statements. Financial Statement Analysis (Meaning and Purpose): We know business is mainly concerned with the financial activities. In order to ascertain the financial status of the business every enterprise prepares certain statements, known as financial statements. Financial statements are mainly prepared for decision making purposes. But the information as is provided in the financial statements is not adequately helpful in drawing a meaningful conclusion. Thus, an effective analysis and interpretation of financial statements is required. Analysis means establishing a meaningful relationship between various items of the two financial statements with each other in such a way that a conclusion is drawn. By financial statements we mean two statements: 1. Profit and loss Account or Income Statement 2. Balance Sheet or Position Statement These are prepared at the end of a given period of time. They are the indicators of profitability and financial soundness of the business concern. The term financial analysis is also known as analysis and interpretation of financial statements. It determines financial strength and weakness of the firm. Analysis of financial statements is an attempt to assess the efficiency and performance of the enterprise. Thus, the analysis and interpretation of financial statements is very essential to measure the efficiency, profitability, financial soundness and future prospects of the business units. Financial analysis serves the following purposes: 2 Measuring the profitability Indicating the trend of achievement Assessing the growth potential of the business Comparative position in relation to other firms Assess overall financial strength Assess solvency of the firm Techniques and Tools of Financial Statement Analysis: Financial statements give complete information about assets, liabilities, equity, reserves, expenses and profit and loss of an enterprise. They are not readily understandable to interested parties like creditors, shareholders, investors etc. Thus, various techniques are employed for analyzing and interpreting the financial statements. Techniques of analysis of financial statements are mainly classified into three categories: (I) Cross-sectional analysis It is also known as inter firm comparison. This analysis helps in analyzing financial characteristics of another similar enterprise in that accounting period. (II) Time series analysis It is also called as intra-firm comparison. According to this method, the relationship between different items of financial statement is established, comparisons are made and results obtained. The basis of comparison may be: Comparison of the financial statements of different years of the same business unit. Comparison of financial statement of a particular year of different business units. (III) Cross-sectional cum time series analysis This analysis is intended to compare the financial characteristics of two or more enterprises for a defined accounting period. It is possible to extend such a comparison over the year. This approach is most effective in analyzing of financial statements. The analysis and interpretation of financial statements is used to determine the financial position. A number of tools or methods or devices are used to study the relationship between 3 financial statements. However, the following are the important tools which are commonly used for analyzing and interpreting financial statements: Ratio analysis, Comparative financial statements, Common size statements, Trend analysis. 1.2ABOUT THE INDUSTRY Evolution of the Indian Banking Industry: The Indian banking industry has its foundations in the 18th century, and has had a varied evolutionary experience since then. The initial banks in India were primarily traders’ banks engaged only in financing activities. Banking industry in the pre-independence era developed with the Presidency Banks, which were transformed into the Imperial Bank of India and subsequently into the State Bank of India. The initial days of the industry saw a majority private ownership and a highly volatile work environment. Major strides towards public ownership and accountability were made with nationalization in 1969 and 1980 which transformed the face of banking in India. The industry in recent times has recognized the importance of private and foreign players in a competitive scenario and has moved towards greater liberalization. 4 In the evolution of this strategic industry spanning over two centuries, immense developments have been made in terms of the regulations governing it, the ownership structure, products and services offered and the technology deployed. The entire evolution can be classified into four distinct phases. Phase I- Pre-Nationalization Phase (prior to 1955) Phase II- Era of Nationalisation and Consolidation (1955-1990) Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial Liberalisation (1990-2004) Phase IV- Period of Increased Liberalisation (2004 onwards) Current Structure: Currently the Indian banking industry has a diverse structure. The present structure of the Indian banking industry has been analyzed on the basis of its organized status, business as well as product segmentation. 5 Organizational Structure: The entire organized banking system comprises of scheduled and non-scheduled banks. Largely, this segment comprises of the scheduled banks, with the unscheduled ones forming a very small component. Banking needs of the financially excluded population is catered to by other unorganised entities distinct from banks, such as, moneylenders, pawnbrokers, micro financial institutions, NBFC and indigenous bankers. Scheduled Banks: A scheduled bank is a bank that is listed under the second schedule of the RBI Act, 1934. In order to be included under this schedule of the RBI Act, banks have to fulfill certain conditions such as having a paid up capital and reserves of at least 0.5 million and satisfying the Reserve Bank that its affairs are not being conducted in a manner prejudicial to the interests of its depositors. Scheduled banks are further classified into commercial and cooperative banks. The basic difference between scheduled commercial banks and scheduled cooperative banks is in their holding pattern. Scheduled cooperative banks are cooperative credit institutions that are registered under the Cooperative Societies Act. These banks work according to the cooperative principles of mutual assistance. Scheduled Commercial Banks (SCBs): Scheduled commercial banks (SCBs) account for a major proportion of the business of the scheduled banks. As at end-March, 2009, 80 SCBs were operational in India. SCBs in India are categorized into the five groups based on their ownership and/or their nature of operations. State Bank of India and its six associates (excluding State Bank of Saurashtra, which has been merged with the SBI with effect from August 13, 2008) are recognised as a separate category of SCBs, because of the distinct statutes (SBI Act, 1955 and SBI Subsidiary Banks Act, 1959) that govern them. Nationalised banks (10) and SBI and associates (7), together form the public sector banks group and control around 70% of the total credit and deposits businesses in India. IDBI ltd. has been included in the nationalised banks group since December 2004. 6 Private sector banks include the old private sector banks and the new generation private sector banks- which were incorporated according to the revised guidelines issued by the RBI regarding the entry of private sector banks in 1993. As at end-March 2009, there were 15 old and 7 new generation private sector banks operating in India. Foreign banks are present in the country either through complete branch/subsidiary route presence or through their representative offices. At end-June 2009, 32 foreign banks were operating in India with 293 branches. Besides, 43 foreign banks were also operating in India through representative offices. Regional Rural Banks (RRBs) were set up in September 1975 in order to develop the rural economy by providing banking services in such areas by combining the cooperative specialty of local orientation and the sound resource base which is the characteristic of commercial banks. RRBs have a unique structure, in the sense that their equity holding is jointly held by the central government, the concerned state government and the sponsor bank (in the ratio 7 50:15:35), which is responsible for assisting the RRB by providing financial, managerial and training aid and also subscribing to its share capital. Between 1975 and 1987, 196 RRBs were established. RRBs have grown in geographical coverage, reaching out to increasing number of rural clientele. At the end of June 2008, they covered 585 out of the 622 districts of the country. Despite growing in geographical coverage, the number of RRBs operational in the country has been declining over the past five years due to rapid consolidation among them. As a result of state wise amalgamation of RRBs sponsored by the same sponsor bank, the number of RRBs fell to 86 by the end March of 2009. Scheduled Cooperative Banks: Scheduled cooperative banks in India can be broadly classified into urban credit cooperative institutions and rural cooperative credit institutions. Rural cooperative banks undertake long term as well as short term lending. Credit cooperatives in most states have a three tier structure (primary, district and state level). Non-Scheduled Banks: Non-scheduled banks also function in the Indian banking space, in the form of Local Area Banks (LAB). As at end-March 2009 there were only 4 LABs operating in India. Local area banks are banks that are set up under the scheme announced by the government of India in 1996, for the establishment of new private banks of a local nature; with jurisdiction over a maximum of three contiguous districts. LABs aid in the mobilisation of funds of rural and semi urban districts. Six LABs were originally licensed, but the license of one of them was cancelled due to irregularities in operations, and the other was amalgamated with Bank of Baroda in 2004 due to its weak financial position. Business Segmentation: The entire range of banking operations are segmented into four broad heads- retail banking businesses, wholesale banking businesses, treasury operations and other banking activities. Banks have dedicated business units and branches for retail banking, wholesale banking (divided again into large corporate, mid corporate) etc. 8 Retail Banking: It includes exposures to individuals or small businesses. Retail banking activities are identified based on four criteria of orientation, granularity, product criterion and low value of individual exposures. In essence, these qualifiers imply that retail exposures should be to individuals or small businesses (whose annual turnover is limited to Rs. 0.50 billion) and could take any form of credit like cash credit, overdrafts etc. Retail banking exposures to one entity is limited to the extent of 0.2% of the total retail portfolio of the bank or the absolute limit of Rs. 50 million. Retail banking products on the liability side includes all types of deposit accounts. Mortgages and loans (personal, housing, educational etc) are on the assets side of banks. It also includes other ancillary products and services like credit cards, demat accounts etc. The retail portfolio of banks accounted for around 21.3% of the total loans and advances of SCBs as at end-March 2009. The major component of the retail portfolio of banks is housing loans, followed by auto loans. Retail banking segment is a well-diversified business segment. Most banks have a significant portion of their business contributed by retail banking activities. The largest players in retail banking in India are ICICI Bank, SBI, PNB, BOI, HDFC and Canara Bank. Among the large banks, ICICI bank is a major player in the retail banking space which has had definitive strategies in place to boost its retail portfolio. It has a strong focus on movement towards cheaper channels of distribution, which is vital for the transaction intensive retail business. SBI’s retail business is also fast growing and a strategic business unit for the bank. Among the smaller banks, many have a visible presence especially in the 9 auto loans business. Among these banks the reliance on their respective retail portfolio is high, as many of these banks have advance portfolios that are concentrated in certain usages, such as auto or consumer durables. Foreign banks have had a somewhat restricted retail portfolio till recently. However, they are fast expanding in this business segment. The retail banking industry is likely to see a high competition scenario in the near future. Wholesale Banking: Wholesale banking includes high ticket exposures primarily to corporates. Internal processes of most banks classify wholesale banking into mid corporates and large corporates according to the size of exposure to the clients. A large portion of wholesale banking clients also account for off balance sheet businesses. Hedging solutions form a significant portion of exposures coming from corporates. Hence, wholesale banking clients are strategic for the banks with the view to gain other business from them. Various forms of financing, like project finance, leasing finance, finance for working capital, term finance etc form part of wholesale banking transactions. Syndication services and merchant banking services are also provided to wholesale clients in addition to the variety of products and services offered. Wholesale banking is also a well-diversified banking vertical. Most banks have a presence in wholesale banking. But this vertical is largely dominated by large Indian banks. While a large portion of the business of foreign banks comes from wholesale banking, their market share is still smaller than that of the larger Indian banks. A number of large private players among Indian banks are also very active in this segment. Among the players with the largest footprint in the wholesale banking space are SBI, ICICI Bank, IDBI Bank, Canara Bank, Bank of India, Punjab National Bank and Central Bank of India. Bank of Baroda has also been exhibiting quite robust results from its wholesale banking operations. Treasury Operations: Treasury operations include investments in debt market (sovereign and corporate), equity market, mutual funds, derivatives, and trading and forex operations. These functions can be proprietary activities, or can be undertaken on customer’s account. Treasury operations are important for managing the funding of the bank. Apart from core banking activities, which comprises primarily of lending, deposit taking functions and services; treasury income is a significant component of the earnings of banks. Treasury deals with the entire investment portfolio of banks (categories of HTM, AFS and HFT) and provides a range of products and services that deal primarily with foreign exchange, derivatives and securities. Treasury involves the front office (dealing room), mid office (risk management including 10 independent reporting to the asset liability committee) and back office (settlement of deals executed, statutory funds management etc). Other Banking Businesses: This is considered as a residual category which includes all those businesses of banks that do not fall under any of the aforesaid categories. This category includes para banking activities like hire purchase activities, leasing business, merchant banking, factoring activities etc. Products of the Banking Industry: The products of the banking industry broadly include deposit products, credit products and customized banking services. Most banks offer the same kind of products with minor variations. The basic differentiation is attained through quality of service and the delivery channels that are adopted. Apart from the generic products like deposits (demand deposits – current, savings and term deposits), loans and advances (short term and long term loans) and services, there have been innovations in terms and products such as the flexible term deposit, convertible savings deposit (wherein idle cash in savings account can be transferred to a fixed deposit), etc. Innovations have been increasingly directed towards the delivery channels used, with the focus shifting towards ATM transactions, phone and internet banking. Product differentiating services have been attached to most products, such as debit/ATM cards, credit cards, nomination and demat services. 11 Other banking products include fee-based services that provide non-interest income to the banks. Corporate fee-based services offered by banks include treasury products; cash management services; letter of credit and bank guarantee; bill discounting; factoring and forfeiting services; foreign exchange services; merchant banking; leasing; credit rating; underwriting and custodial services. Retail fee-based services include remittances and payment facilities, wealth management, trading facilities and other value added services. 1.3ABOUT THE COMPANY Indian Bank is an Indian state-owned financial services company headquartered in Chennai, India. It has 22,000 employees, 1923 branches and is one of the big public sector banks of India. It has overseas branches in Colombo, Sri Lanka, Singapore, and 229 correspondent banks in 69 countries. Since 1969 the Government of India has owned the bank, which celebrated its centenary in 2007. It is the only Indian Bank other than State Bank of India to feature in the List of Fortune 500 Companies in the World. A premier bank owned by the Government of India Established on 15th August 1907 as part of the Swadeshi movement Serving the nation with a team of over 18782 dedicated staff Total Business crossed Rs.2,11,988 Crores as on 31.03.2012 Operating Profit increased to Rs. 3,463.17 Crores as on 31.03.2012 Net Profit increased to Rs.1746.97 Crores as on 31.03.2012 Core Banking Solution(CBS) in all 1956 branches International Presence Overseas branches in Singapore , Colombo including a Foreign Currency Banking Unit at Colombo and Jaffna. 240 Overseas Correspondent banks in 70 countries Diversified banking activities - 3 Subsidiary companies Indbank Merchant Banking Services Ltd IndBank Housing Ltd. 12 IndFund Management Ltd A front runner in specialised banking 97 Forex Authorised branches inclusive of 1 Specialised Overseas Branch at Chennai exclusively for handling forex transactions arising out of Export, Import, Remittances and Non Resident Indian business 62 Special SME Branches extending finance exclusively to SSI units PROFILE INDIAN BANK Type Traded As Industry Founded Headquarter s Key people Revenue Net income Total assets Employees Website Tagline/Sloga n USP Target group Positioning Public Company BSE:523465 NSE:INDIANB Banking and Financial services 1907 Chennai, Tamil Nadu, India T.M.Bhasin(Chairman & MD) IncreaseINR211,988 crore(US$42.29 billion) (2011) IncreaseINR12,745 crore(US$2.54 billion) (2011) IncreaseINR121,841 crore(US$223.81 billion) (2011) 19,632 www.indianbank.in Your tech friendly bank High end banking technology support International banking Complete banking solutions 13 Leadership in Rural Development Pioneer in introducing Self Help Groups and Financial Inclusion Project in the country Award winner for Excellence in Agricultural Lending from Honourable Union Minister for Finance Best Performer Award for Micro-Finance activities in Tamil Nadu and Union Territory of Puducherry from NABARD Established 7 specialized exclusive Microfinance branches called "Microsate" across the country to cater the needs of Urban poor through SHG (Self Help Group)/JLG (Joint Liability Group) concepts A special window for Micro finance viz., Micro Credit Kendras are functioning in 44 Rural/Semi Urban branches Harnessing ICT (Information and Communication Technology) for Rural Development and Inclusive Banking Provision of technical assistance and project reports in Agriculture to entrepreneurs through Agricultural Consultancy & Technical Services (ACTS) A pioneer in introducing the latest technology in Banking 100% Core Banking Solution(CBS) Branches 100% Business Computerisation 1280 Automated Teller Machines(ATM) 24 x 7 Service through 89000 ATMs under shared network Internet and Tele Banking services to all Core Banking customers e-payment facility for Corporate customers Cash Management Services • Depository Services Reuter Screen, Telerate, Reuter Monitors, Dealing System provided at Overseas Branch, Chennai. History: Early Formation and Expansion: In the last quarter of 1906, Madras (now Chennai) was hit by the worst financial crisis the city was ever to suffer Of the three best-known British commercial names in 19th century Madras, one crashed; a second had to be resurrected by a distress sale; and the third had to be bailed out by a benevolent benefactor. 14 Arbuthnot & Co, which failed, was considered the soundest of the three. Parry's (now EID Parry), may have been the earliest of them and Binny & Co.'s founders may have had the oldest associations with Madras, but it was Arbuthnot, established in 1810, that was the city's strongest commercial organization in the 19th Century. A key figure in the bankruptcy case for Arbuthnot's was the Madras lawyer, V. Krishnaswamy Iyer; he went on to organize a group of Chettiars that founded Indian Bank. Annamalai and Ramaswami Chettiar founded Indian Bank (IB)on 15 August 1907. IB began its international expansion in 1932 when it opened a branch in Colombo. A branch in Jaffna followed three years later, but this was not successful and Indian Bank closed it in 1939. Just before World War II reached the region, Indian Bank opened a branch in 1940, in Rangoon (Yangon). The next year it closed the Rangoon branch, but opened branches in Singapore (where future branch manager KB Pisharody(1915–1998) started his career in the same year), and in Kuala Lumpur, Ipoh, and Penang. The rapid advance of the Japanese Army forced IB to close all its branches in Malaya and Singapore. Although the Japanese forces did not reach Ceylon, IB closed the Colombo branch in 1942. Post-Independence of India: After the war, IB reopened its Malayan and Singapore branches. Then in 1948 it reopened its branch in Colombo. The 1960s saw IB expand domestically as it acquired Mannargudi Bank (est. 1932) and Salem Bank (est. 1925). Then on 19 July 1969 the Government of India nationalized 14 top banks, including Indian Bank. In 1973 Indian Bank, Indian Overseas Bank, and United Commercial Bank established United Asian Bank Berhad in response to a new banking law in Malaysia that prohibited foreign government banks from operating in the country. International expansion continued in 1978 with IB becoming a technical adviser to PT Bank Rama in Indonesia, the result of the merger of PT Bank Masyarakat and PT Bank Ramayana. Two years later, IB, Bank of Baroda, and Union Bank of India established IUB International Finance, a licensed deposit taker in Hong Kong. Each of the three banks took an equal share in the joint venture. 15 In 1987, Indian Babk bought in two more acquisitions when it rescued Bank of Tanjore, based in Tamil Nadu. A multi-crore scam was exposed in 1992, where then chairman M. Gopalakrishnan lent loan to small corporates and exporters from the south amounting to 1,300 crore. The amount was never paid back by the borrowers. Bank of Baroda bought out its partners in IUB International Fininance in Hong Kong in 1998. Apparently this was a response to regulatory changes following Hong Kong’s reversion. IUB became Bank of Baroda (Hong Kong), a restricted license bank. Products and Services: Featured Products/ services/ schemes NRI- Foreign Exchange IB Swarna mudra schemes ASBA (for IPO’s) Wealth Management services Supreme Current Account Educational loans Centralized Pension Processing Interest Subsidy for educational loans Financial inclusion plan All premium services Insurance services CMS plus E payment of direct taxes E payment of indirect taxes Other valuable services Loans for agriculture Loans for Small And Medium Enterprises Personal loans Special Schemes for Self Help Groups. 16 These are some of the products and services rendered by Indian Bank. It also offers four types of accounts and selling gold to the public. 1.4 NEED FOR THE STUDY The analysis of financial statements of Indian Bank is an attempt to assess the efficiency and performance of the company. To assess the efficiency and performance of the company it is necessary 1. To know earnings capacity of the company i.e., the profitability of the company. 2. To have a view of the company’s efficiency. 3. To know the comparative position in relation to previous year. 4. To have an idea about financial strength of the company. 5. To know the solvency of the company. 1.5 OBJECTIVES OF THE STUDY The main objectives of this study are the following:- 17 To study about INDIAN BANK and its related aspects like its products & services, history, organizational structure, subsidiary companies etc. To analyse the financial statement i.e Profit & Loss account and Balance sheet of INDIAN BANK. To learn about Profit & Loss Account, Balance-sheet and different type of Assets& Liabilities. To portray the financial position of INDIAN BANK with the help of balance sheet and profit and loss account. To evaluate the financial soundness, stability and liquidity of INDIAN BANK. 1.6 RESEARCH METHODOLOGY Research methodology is a way to systematically solve the research problems. It is necessary to know not only the research methods/ techniques but also the methodology. 18 Research methodology is a scientific study of various steps that are adopted in research problem. Research: Research can be defined as the search for knowledge, or as any systematic investigation, with an open mind, to establish novel facts, usually using a scientific method. The primary purpose for applied research is discovering, interpreting, and the development of methods and systems for the advancement of human knowledge on a wide variety of scientific matters of our world and the universe. Research Design: A design is used to structure the research, to show how all of the major parts of the research project. Research design can be thought of as the structure of research- it is the “glue” that holds all of the elements in a research project together. We often describe a design using a concise notation that enables us to summarize a complex design structure efficiently. Research Type: Descriptive Research Descriptive research is used to obtain information concerning the current status of the phenomena to describe “what exists” with respect to variables or conditions in a situation. Descriptive research, also known as statistical research, describes data and characteristics about the population or phenomena being studied. Descriptive research answers the questions who, what, where, when and how. In short descriptive research deals with everything that can be counted and studied. The methodology involved in this design is mostly qualitative in nature producing descriptive data. Period of Study: The study is related to the period from 2012-2013. Types of Data: 19 While deciding about the method of data collection to be used for the study, the researcher kept in mind for two types of data. They are: a) Primary Data b) Secondary Data a) Primary data In this study primary data is not required. b) Secondary data The secondary data are those financial statements which are collected from the company. Research Instrument: In this study the research, the researcher has used secondary data i.e., Annual Report if Indian Bank as research instrument. Research Presentation: After analysis of data, using various statistical techniques the findings and suggestions are presented in the form of a report. To assist the understanding on findings and suggestion of the study, various other details ranging from objective, need and research methodology to the detailed presentation analysis is included in the report. 1.7 LIMITATION OF THE STUDY However, the study is also hedged with some limitations. This study is based on the secondary data. Naturally, the study would have the weakness of this type of data. Financial statement analysis tools have some inherent limitations of financial statements. This study has also suffered from those limitations. 20 The nature of financial statements is historical. Here, analysis and interpretation are made on those historical data, which tells only about the past performance and the financial weakness of the bank. Change in accounting procedure by a firm often makes ratio analysis misleading. The analysis and interpretation are based on secondary data contained in the published annual reports of Indian Bank for the study period. The study of financial performance can be only a means to know about the financial condition of the company and cannot show a through picture of the activities of the company. Further, the conclusions drawn from the study are applicable only to the Indian Bank and not for other banks. CHAPTER II - REVIEW OF LITERATURE In the history of FRA it is common that professional journals and academic papers do not recognize each other. An early paper on financial ratio distributions was published in Management Accounting by Mecimore (1968)(1). It is interesting to recognize that all ingredients of modern distribution analysis already appear incumbent in Mecimore's 21 paper. Using descriptive statistical measures (average and relative deviations from the median) he observes cross-sectional non-normality and positive skewness for twenty ratios in a sample of randomly selected forty-four Fortune-500 firms. The paper most often referred to in literature as the seminal paper in this field is, however, the much later published article by Deakin (1976) (2). His chi-square findings reject (with one exception) the normality of eleven financial ratios in a sample of 1114 Compustat companies for 1954-72. Less extreme deviations from normality were observed when squareroot and logarithmic transformations were applied, but normality was still not supported. Likewise, while not statistically significantly, industry grouping made the distributions less non-normal. Concomitant results are obtained by Lee (1985) (3) using a stronger test (Kolmogorov-Smirnov) for a different set of data. Bird and McHugh (1977) (4) adopt an efficient Shapiro-Wilk small-sample test for the normality of financial ratios for an Australian sample of five ratios over six years. Like Deakin they find in their independent study that normality is transient across financial ratios and time. They also study the adjustment of the financial ratios towards industry means which is a different area of FRA research. Bougen and Drury (1980) (5) also suggest nonnormality based on a cross-section of 700 UK firms. The results indicating non-normality of financial ratio distributions have led researchers into looking for methods of restoring normality to warrant standard parametric statistical analyses. Frecka and Hopwood (1983) (6) observe that removing outliers and applying transformations in a large Compustat sample covering 1950-79 restored normality in the same financial ratios as tackled by Deakin (1976) (7). They point out that if the ratios follow the gamma distribution, the square root transformation makes the distribution approximately normal. The gamma distribution is compatible with ratios having a technical lower limit of zero. There is, however, a certain degree of circularity in their approach, since instead of identifying the underlying causes of the outliers they employ a mechanistic statistical approach to identify and remove the outliers from the tails of the financial ratio distributions. A varying and often a considerable number of outliers has to be removed for different financial ratios in order to achieve normality. The empirical results are supported by later papers such as So (1987). Ezzamel, Mar-Molinero and Beecher (1987) (8) and Ezzamel and Mar-Molinero (1990)(9) review and replicate the earlier analyses on UK firms with a particular emphasis on small samples and outliers, respectively. One of the avenues taken is to study new industries. Kolari, McInish and Saniga (1989)(10) take on the distribution of 22 financial ratios in banking. Buckmaster and Saniga (1990) (11) report on the shape of the distributions for 41 financial ratios in a Compustat sample of more than a quarter million observations. Foster (1978)(12) points out the outlier problem in FRA. Later, he presented in Foster (1986)(13) a list of alternatives for handling outliers in FRA. The list includes deleting true outliers, retaining the outlier, adjusting the underlying financial data, winsorizing that is equating the outliers to less extreme values, and trimming by dropping the tails. Foster also puts forward accounting, economic and technical reasons for the emergence of outliers in FRA. While improving the statistical results trimming and transformations can pose a problem for the theoretical rigor in FRA research. Instead of deleting or adjusting the observations McLeay (1986a)(14) proposes using a better fitting distribution with fat tails for making statistical inferences in FRA. He seeks for a best fitting t-distribution for a crosssection of 1634 UK and Irish firms. Also his empirical results confirm non-normality. The best-fitting (in the maximum-likelihood sense) t-distribution varies across financial ratios (the t-distribution can be considered a family of distributions defined by its degrees of freedom). McLeay (1986b)(15) also tackles the choice between equally weighted and value weighted aggregated financial ratios in terms of ratio distributions on a sample of French firms. Also the results by Martikainen (1991)(16) demonstrate that normality can be approached by other procedures than removing outliers. In a sample of 35 Finnish firms, four ratios and fifteen years about half of the non-normal distributions became normal if economy-wide effects were first controlled for using the so-called Accounting-index model. Martikainen (1992) (17) uses a time-series approach to 35 Finnish firms in turn observing that controlling for the economy factor improves normality. Typically, many later papers tackle the same basic question of ratio distributions using different samples and expanding on the methodologies. Buijink and Jegers (1986) (18) study the financial ratio distributions from year to year from 1977 to 1981 for 11 ratios in Belgian firms corroborating the results of the earlier papers in the field. Refined industry classification brings less extreme deviation from normality. They also point to the need of studying the temporal persistence of cross-sectional financial ratio distributions and suggest a symmetry index for measuring it. Virtanen and Yli-Olli (1989) (19) studying the temporal behavior of financial ratio distributions observe in Finnish financial data that the business cycles affect the cross-sectional financial ratio distributions. 23 The question of the distribution of a ratio format variable (financial ratio) has been tackled mathematically as well as empirically. Barnes (1982) (20) shows why the ratio of two normally distributed financial variables does not follow the normal distribution (being actually skewed) when ratio proportionality does not hold. Tippett (1990)(21) models financial ratios in terms of stochastic processes. The interpretation in terms of implications to financial ratio distributions are not, however, immediately evident, but the general inference is that "normality will be the exception rather than the rule". Because of these results bringing forward the significance of the distributional properties of financial ratios many later papers report routinely about the distributions of financial ratios in connection with some other main theme. Often these themes are related to homogeneity and industry studies such as Ledford and Sugrue (1983) (22). The distributional properties of the financial ratios also have a bearing in testing proportionality as can be seen, for instance, in McDonald and Morris (1984) (23). In a bankruptcy study Karels and Prakash (1987)(24) put forward that in applying the multivariate methods (like discriminant analysis) the multivariate normality is more relevant than the (univariate) normality of individual financial ratios. They observe that deviations from the multivariate normality are not as pronounced as the deviations in the earlier univariate studies. Watson (1990) (25) examines the multivariate distributional properties of four financial ratios from a sample of approximately 400 Compustat manufacturing firms for cross-sections of 1982, 1983 and 1984. Multivariate normality is rejected for all the four financial ratios. Multivariate normality is still rejected after applying Box's and Cox's modified power transformations. However, when multivariate outliers are removed, normality is confirmed. Multivariate normality has particular bearing on research using multivariate methods, for example on bankruptcy prediction. It also has implications on univariate research, since while univariate normality does not imply multivariate normality, the opposite is true. Susan Ward (2008) (26) emphasis that financial analysis using ratios between key values help investors cope with the massive amount of numbers in company financial statements. For example, they can compute the percentage of net profit a company is generating on the funds it has deployed. All other things remaining the same, a company that earns a higher percentage of profit compared to other companies is a better investment option. Jonas Elmerraji (2005) (27) tries to say that ratios can be an invaluable tool for making an investment decision. Even so, many new investors would rather leave their decisions to 24 fate than try to deal with the intimidation of financial ratios. The truth is that ratios aren't that intimidating, even if you don't have a degree in business or finance. Using ratios to make informed decisions about an investment makes a lot of sense, once you know how use them. ` REFERENCE 1. Mecimore, C.D. (1968), "Some empirical distributions of financial ratios", Management Accounting 50/1, 13-16. 2. Deakin, E.B. (1976), "Distributions of financial accounting ratios: some empirical evidence", Accounting Review, January 1976, 90-96. 3. Lee, C.-W.J. (1985), "Stochastic properties of cross-sectional financial data", Journal of Accounting Research 23/1, 213-227. 4. Bird, R.G., and McHugh A.J. (1977), "Financial ratios - an empirical study", Journal of Business Finance and Accounting 4/1, 29-45. 5. Bougen, P.D., and Drury, J.C. (1980), "U.K. statistical distributions of financial ratios, 1975", Journal of Business Finance and Accounting 7/1, 39-47. 6. Frecka, T.J., and Hopwood, W.S. (1983), "The effects of outliers on the crosssectional distributional properties of financial ratios", Accounting Review 58/1, 115128. 7. Deakin, E.B. (1976), "Distributions of financial accounting ratios: some empirical evidence", Accounting Review, January 1976, 90-96. 8. Ezzamel, M., Mar-Molinero, C., and Beecher, A. (1987), "On the distributional properties of financial ratios", Journal of Business Finance and Accounting 14/4, 463481. 9. Ezzamel, M., Brodie, J., and Mar-Molinero, C. (1990), "The distributional properties of financial ratios in UK manufacturing companies", Journal of Business Finance and Accounting 17/1, 1-29. 10. Kolari, J., McInish, T.H., and Saniga, E.M. (1989), "A note on the distribution types of financial ratios in the commercial banking industry", Journal of Banking and Finance 13/3, 463-471. 11. Buckmaster, D., and Saniga E. (1990), "Distributional forms of financial accounting ratios: Pearsons's and Johnson's taxonomies", Journal of Economic and Social Measurement 16, 149-166. 25 12. Foster, G. (1978), Financial Statement Analysis. Prentice-Hall, first ed. 13. Foster, G. (1986), Financial Statement Analysis. Prentice-Hall, 2nd ed. 14. McLeay, S. (1986a), "Students’t and the distribution of financial ratios", Journal of Business Finance and Accounting 13/2, 209-222. 15. McLeay, S. (1986b), "The ratio of means, the means of ratios and other benchmarks: an examination of characteristics financial ratios in the French corporate sector", Finance, The Journal of the French Finance Association 7/1, 75-93. 16. Martikainen, T. (1991), "A note on the cross-sectional properties of financial ratio distributions", Omega 19/5, 498-501. 17. Martikainen, T. (1992), "Time-series distributional properties of financial ratios: empirical evidence from Finnish listed firms", European Journal of Operational Research 58/3, 344-355. 18. Buijink, W., and Jegers, M. (1986), "Cross-sectional distributional properties of financial ratios in Belgian manufacturing industries: aggregation effects and persistence over time", Journal of Business Finance and Accounting 13/3, 337-363. 19. Virtanen, I., and Yli-Olli, P. (1989), "Cross-sectional and time-series persistence of financial ratio distributions; Empirical evidence with Finnish Data", European Institute for Advanced Studies in Management, Working paper 89-04, Brussels. 20. Barnes, P. (1982), "Methodological implications of non-normally distributed financial ratios", Journal of Business Finance and Accounting 9/1, 51-62. 21. Tippet, M. (1990), "An induced theory of financial ratios", Accounting and Business Research 21/81, 77-85. 22. Ledford, M.H., and Sugrue, P.K. (1983), "Ratio analysis: application to U.S. motor common carriers", Business Economics, September 1983, 46-54. 23. McDonald, B., and Morris, M.H. (1984), "The statistical validity of the ratio method in financial analysis: an empirical examination", Journal of Business Finance and Accounting 11/1, 89-97. 24. Karels, G.V., and Prakash, A.J. (1987), "Multivariate normality and forecasting of business bankruptcy", Journal of Business Finance and Accounting 14/4, 573-593. 25. Watson, C.J. (1990), "Multivariate distributional properties, outliers, and transformation of financial ratios", Accounting Review 65/3, 682-695. 26. Susan Ward (2008), Article “Financial Ratio Analysis for Performance Check”. 26 27. Jonas Elmerraji (2005), Article “Analyze Investments Quickly With Ratios” CHAPTER III – ANALYSIS AND INTERPRETATION 3.1 FINANCIAL STATEMENTS: Financial statements are summaries of the operating, financing, and investment activities of a business. Financial statements should provide information useful to both investors and creditors in making credit, investment, and other business decisions. And this usefulness means that investors and creditors can use these statements to predict, compare, and evaluate the amount, timing, and uncertainty of potential cash flows. In other words, financial statements provide the information needed to assess a company‘s future earnings and therefore the cash flows expected to result from those earnings. The term financial statement includes at four basic statements, accompanied by a management discussion and analysis: The balance sheet The balance sheet is a summary of the assets, liabilities, and equity of a business at a particular point in time—usually the end of the firm‘s fiscal year. The balance 27 sheet is also known as the statement of financial condition or the statement of financial position. The income statement An income statement is a summary of the revenues and expenses of a business over a period of time, usually one month, three months, or one year. This statement is also referred to as the profit and loss statement. It shows the results of the firm‘s operating and financing decisions during that time. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time. 3.2 COMPARATIVE FINANCIAL STATEMENT: Comparative financial statement is a tool of financial analysis that depicts change in each item of the financial statement in both absolute amount and percentage term, taking the item in preceding accounting period as base. Comparison and analysis of financial statements may be carried out using the following tools: 1. Comparative Balance Sheet: The comparative balance sheet shows increase and decrease in absolute terms as well as percentages, in various assets, liabilities and capital. A comparative analysis of balance sheets of two periods provides information regarding progress of the business firm. The main purpose of comparative balance sheet is to measure the short- term and longterm solvency position of the business. 2. Comparative Income Statement: Comparative income statement is prepared by taking figures of two or more than two accounting periods, to enable the analyst to have definite knowledge about the 28 progress of the business.Compartative income statements facilitate the horizontal analysis since each accounting variable is analysed horizontally. Comparative Balance Sheet of Indian Bank from 2008-2009 to 2011-2012 (Rs. in crores) 2011-2012 Absolut % of PARTICULAR S 2008-2009 Absolute % of change chang e 2009-2010 Absolute % of change 2010-2011 Absolut % of change e change change e change change Capital and liabilities: Capital Reserves and surplus Deposits Borrowings Other Liabilities and Provisions 1925.14 43.9 1136.19 18.02 21.56 80.37 1.52 1248.99 17576.52 1143.01 360.46 16.78 19.92 119.39 9.17 1280.33 14999.62 2772.49 648.45 14.73 14.18 132 15.11 11535.88 18.90 15645.83 (752.46) (58.64) 426.58 905.5 30.51 58.97 Total Assets: Cash and balances with RBI Balances with 13614.06 (221.36) 19.31 (3.44) 17267.57 849.14 20.53 13.67 20328.98 (182.78) 20.05 (2.59) 19700.89 (559.07) 16.19 (8.13) 132.36 38.94 580.24 29 122.87 631.89 60.04 810.12 48.10 banks, Money at call Investments Advances Fixed Assets Capital WIP Other Assets Total 885.5 4.04 5467.76 23.98 6515.43 11626.57 29.18 10680.85 20.75 13103.78 1055.8 197.77 (32.1) (2.02) (6.82) (0.85) (15.68) 17.44 381.62 33.3 136.04 9.44 (295.75) (17.74) 234.19 13614.06 19.31 17267.57 20.53 20328.98 23.05 21.09 (0.44) 151.29 18.27 20.05 3192.27 9.18 15073.69 20.03 74.69 4.82 (50.04) (90.47) 1159.23 76.45 19700.89 16.19 Interpretation: Deposits and Advances are the main liability and asset of a banking company. Every banking company likes to increase the both items. For the past five years i.e., 20082012 there is no change in the share capital. Deposits are increasing at a decreasing rate. During 2008-2009 it increases by 18.90% and in 2009-2010 it increases by 21.56% but thereafter it increases by 19.92% in 2010-2011 and 14.18% in 2011-2012. This represents deposits are repaid during those years. During 2008-2009 borrowings decreases by 58.64%. It means borrowings are repaid. And thereafter are increases at increasing rate. Cash and balances with RBI are decreases during 2011-2012. This is due to decreases in CRR by RBI. Balances with other banks, Money at call are increases during the past five years. Advances are increases at a decreasing rate. During 2008-2009 it increases by 29.18% and 21.09% in 2010-2011 and 20.03% in 2011-2012. Investments are the second major asset of the banking company. Investments are increases at an increasing rate. But during 2011-2012 it increases only by 9.18% . Fixed assets are fluctuating due to disposal of assets, depreciation rates and revaluation of assets. Other assets are increases after a slight decrease in 2009-2010. 30 Comparative Income Statement of Indian Bank from 2008-2009 to 20112012 (Rs. in crores) 2011-2012 Absolute change 2870.29 50.27 2920.56 % of change 30.66 4.25 27.70 PARTICULAR S 2008-2009 Absolute % of change 2009-2010 Absolute % of 2010-2011 Absolute % of change change 32.61 (3.04) 26.49 1026.73 138.28 1165.01 change change 15.03 13.35 14.81 1503.97 8.17 1512.14 change 19.14 0.70 16.74 Income: Interest Earned Other Income Operating Income Expenditure: Interest Expended Operating Expenses Total Expenses Operating Profit Provisions & Contingencies Net profit for the year Extra ordinary items Profit brought forward Total P & L A/c 1679.55 (32.45) 1647.1 1062.74 (321.08) 741.66 905.44 668.87 236.58 33.64 (18.35) 15.11 69.13 222.23 23.45 331.36 693.56 1024.92 140.09 (169.59) 309.67 7.85 48.54 18.14 6.32 (17.49) 24.87 771.74 517.61 1289.35 222.79 63.7 159.08 16.95 24.39 19.32 9.46 7.96 10.23 2488.4 299.73 2788.13 132.43 912.4 41.2 8.30 46.73 11.35 35.01 5.14 10.56 2.40 3.57 240.15 4.42 22.04 1.83 311.5 2.17 23.43 1.82 160.9 2.11 9.81 0.82 33.72 0.93 1.87 31 Interpretation: For banking company the major income and expenditure are interest income and interest expenses. The interest incomes are increases by 32.61% in 2008-2009, 19.14% in 2010-2011 and 30.66% during 2011-2012. The interest expenses are also increases by 7.85% in 2009-2010 and 46.73% during 2011-2012. This is due to increases in borrowings. The net profits for the year are increases at a decreasing rate. This is because of the increases in expenses than increases in income. 32 3.3 TREND ANALYSIS: Trend percentage is very useful in making comparative study of the financial statements for a number of years. These indicate the direction of movement over a long tine and help an analyst of financial statements to form an opinion as to whether favorable or unfavorable tendencies have developed. This helps in future forecasts of various items. For calculating trend percentages any year may be taken as the ‘base year’. Each item of base year is assumed to be equal to 100 and on that basis the percentage of item of each year calculated. Trend Percentage of Indian Bank Balance Sheet from 2008-2009 to 20112012 PARTICULARS Capital and liabilities: Capital Reserves and surplus Deposits Borrowings Other Liabilities and Provisions Total Assets: Cash and balances with RBI Balances with banks, Money at call Investments Advances Fixed Assets Capital WIP Other Assets Total Trend Percentage (Base year 2008) 2008 2009 2010 2011 2012 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 144 119 41 131 119 97 139 104 129 298 84 109 119 100 170 145 75 133 144 110 310 129 156 292 406 89 144 100 198 173 164 145 173 107 496 159 189 291 1020 105 173 100 228 198 380 167 201 98 734 173 227 305 97 186 201 Interpretation: Deposits increases to Rs.1,20,803.80 crores in 2012 from Rs.1,05,804.18 crores in 2011. In 2008, it was only Rs.61,045.95 crores. Borrowings decreases in 2009 and thereafter increases at increasing rate. Advances and Investments are also increased, in the last five years. 33 Fixed assets increase as well as decreases in the last five years. This is due to change in depreciation rates and revaluation of assets. Finally in 2012, the capital WIP decreases at a greater amount. It is also a good sign for efficient work management. Trend Percentage of Indian Bank Income Statement from 2008-2009 to 2011-2012 PARTICULARS Income: Interest Earned Other Income Operating Income Expenditure: Interest Expended Trend Percentage (Base year 2008) 2008 2009 2010 2011 2012 100 100 100 100 34 133 97 127 134 153 110 145 144 182 111 170 169 238 115 217 247 Operating Expenses Total Expenses Operating Profit Provisions & Contingencies Net profit for the year Extra ordinary items Profit brought forward Total P & L A/c 100 100 100 100 100 100 100 82 115 169 322 124 104 122 121 136 180 266 154 107 151 151 162 197 287 170 109 165 168 219 207 317 174 110 169 Interpretation: Interest income as well as other income increases in the last five years. Interest Expenses increased from Rs.3159.08 crores in 2008 to Rs.7813.32 crores in 2012. The Net profit increased to Rs.1755.27 crores in 2012 compared to the previous years profit. 3.4 CASH-FLOW STATEMENT: A cash – flow statement is a statement showing inflows (receipts) and outflows (payments) of cash during a particular period. In other words, it is a summary of sources and applications of each during a particular span of time. The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. These non-cash transactions include depreciation or write-offs on bad debts or credit losses to name a few. The cash flow statement is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Non-cash activities are usually reported in footnotes. The cash flow statement is intended to provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances provide additional information for evaluating changes in assets, liabilities and equity 35 improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods indicate the amount, timing and probability of future cash flow. Cash Flow Statement of Indian Bank PARTICULARS Net Profit Before Tax Net Cash (used in) From Operating Activities Net Cash (used in)/from Investing Activities Net Cash (used in)/from Financing Activities Net (decrease)/increase In Cash and Cash Equivalents Opening Cash & Cash Equivalents Closing Cash & Cash Equivalents 2008 1008.74 2238.64 (95.28) (188.28) 1955.07 4817.75 6772.82 (Rs. In Crores) 2009 2010 2011 1245.32 1554.99 1714.07 382.66 1700.03 (193.09) (99.06) (372.61) (89) 6772.82 6683.82 (101.95) (168.70) 1429.38 6683.82 8113.20 (127.55) 769.75 449.11 8113.20 8562.31 2012 1746.97 (1957.18) (144.71) 2352.94 251.05 8562.31 8813.36 Interpretation: 36 It is revealed that the cash flow from operating activities is in negative in 2011 and 2012. This is due to increase in Interest Expenses and Extra ordinary loss of Rs.8.30 crores in 2012. The cash flows of the bank are in a good condition. In 2012 the cash flow from financing activities increased at high level. It is a good sign. 3.5 RATIO ANALYSIS: Ratio analysis is such a significant technique for financial analysis. It indicates relation of two mathematical expressions and the relationship between two or more things. Financial ratio is a ratio of selected values on an enterprise's financial statement. There are many standard ratios used to evaluate the overall financial condition of a corporation or other organization. Financial ratios are used by managers within a firm, by current and potential stockholders of a firm, and by a firm‘s creditor. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. Values used in calculating financial ratios are taken from balance sheet; income statement and the cash flow of company, besides Ratios are always expressed as a decimal value, such as 0.10, or the equivalent percent value, such as 10%. Essence of ratio analysis: Financial ratio analysis helps us to understand how profitable a business is, if it has enough money to pay debts and we can even tell whether its shareholders could be happy or not. Financial ratios allow for comparisons: 1. between companies 2. between industries 3. between different time periods for one company 4. between a single company and its industry average Ratio analysis tells us whether the business 37 1. is profitable? 2. Has enough money to pay its bills and debts? 3. Could be paying its employees higher wages, remuneration or so on? 4. is able to pay its taxes? 5. Is using its assets efficiently or not? 6. has a gearing problem or everything is fine? 7. Is a candidate for being bought by another company or investor? Methodology: The present study of Banks is based on CAMEL Methodology, which evaluates each and every component that is of prime importance from the functioning of the Bank's perspective. The model examines the efficiency of banks among these important parameters like Capital Adequacy, Asset Quality, Management, Earnings Quality and Liquidity of the Indian Bank. CAMEL Model: The CAMEL approach was developed by bank regulators in the United States as a means of measurement of the financial condition of a financial institution. (Uniform Financial Institutions Rating System established by the Federal Financial Institutions Examination Council). RBI too analysis the banks performance through CAMEL methodology. The acronym CAMEL stands for: Capital Adequacy Asset Quality Management Earnings (Profitability) Liquidity & Funding CAMEL analysis requires: 38 financial statements (the last three years and interim statements for the most recent 12-month period) cash flow projections portfolio aging schedules funding sources information about the board of directors operations/staffing Macroeconomic information. Analysis: I)Capital Adequacy Capital adequacy reflects the overall financial position of a bank and also the ability of the management to meet the need for additional capital requirement. Capital Adequacy Ratio (CAR) CAR reflects the ability of a bank to deal with probable loan defaults. The RBI guidelines stipulate banks to maintain a CAR of minimum 9%. It is arrived at by dividing the Tier I and Tier II capital by risk-weighted assets. Tier I capital includes equity capital and free reserves. Tier II capital comprises subordinated debt. The stronger will be the bank if the CAR is higher. Formula: CAR=Tier 1 Capital +Tier 2 Capital/ Risk Weighted Assets 39 TIER 1 CAPITAL -A) Equity Capital, B) Disclosed Reserves TIER 2 CAPITAL -A) Undisclosed Reserves, B)General Loss reserves, C)Subordinate Term Debts Where Risk can either be weighted assets (a) or the respective national regulator's minimum total capital requirement. Debt-Equity Ratio (D/E) Debt-Equity Ratio is arrived at by dividing the total borrowings and deposits by shareholders' net worth, which includes equity capital and reserves and surpluses. The Debt to Equity ratio is used for measuring solvency, and researching the capital structure of the company. It indicates how much the company is leveraged (in debt) by comparing what is owed to what is owned. Formula: Debt-Equity Ratio=Debt/Equity In other words it measures the company's ability to borrow and repay money. The debt to equity ratio is closely watched by creditors and investors, because it reveals the extent to which company management is willing to fund its operations with debt, rather than equity. C) Advances to Assets (ADV/AST) This is the ratio of the Total Advances to Total Assets. Total Advances also include receivables. The value of Total Assets excludes the revaluations of all the assets. Formula: Advances To Assets=Total Advances/Total Assets*100 40 Interpretation: TABLE FOR CAPITAL ADEQUACY RATIOS Ratio 2008 2009 2010 2011 2012 Capital Adequacy Ratio(%) 12.90 13.98 12.71 13.56 13.47 Debt/Equity Ratio 13.37 13.32 13.06 13.40 13.12 Advances To Assets(%) 56.50 61.18 61.30 61.82 63.87 Capital Adequacy Ratio (CAR): It is revealed that the, CAR is increased from 12.90% in 2008 to 13.98% in 2009 which seems to be good. But in 2010 it falls to 12.71%. Again in 2011 it increased to 13.56% and 13.47% in 2012. The minimum CAR which banks have to maintain is 9% as per RBI's Guidelines. The bank has maintained CAR above 9%. So, it has better ability to deal with probable loan defaults. 41 Debt-Equity Ratio: The Debt equity ratio is 13.12 in 2012 as compared to 13.40 in 2011. The Debt equity ratio should be as low as possible. The borrowings of the bank are less than their deposits are concerned which is a good sign. So, I interpret from the ratio that the bank is better in terms of debt equity ratio because of lower borrowings and high deposits. 42 43 Advances to Asset Ratio: An advance to Assets ratio is reflects a bank's positions and risk taking ability in lending funds. A higher Advances/Asset ratio shows that the bank is aggressively lending fund and vice versa. In the table above, the advances to asset ratio has increased from 61.82% in 2011 to 63.87% in 2012. It is clear that the bank has good risk taking ability. 44 II) Asset Quality The asset quality is to ascertain the proportion of non-performing assets as a percentage of the total assets .It also ascertains the NON PERFORMING ASSET movement and the amount locked up in investments as a percentage of the total assets. How to calculate non performing assets: Gross non performing asset - (Balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held). A) Net Non Performing Assets to Total Assets (NNPAs/TA) It is a measure of the quality of assets in a situation where the management has not provided for loss on non performing assets. Formula: 45 Net non performing asset to Total Assets=Net non performing asset/total assets*100 B) Net Non Performing Assets To Net Advances (NNPA/NA) Net non performing assets are Gross non performing assets net of provisions on non performing assets and suspense account. Formula: Net non performing asset to Net Advances=Net non performing asset/Net Advances*100 C) Percentage change in Net Non Performing Assets This measure gives the movement in Net non performing assets in relation to Net non performing assets in the previous year. The higher the reduction in Net non performing asset levels, the better it is for the bank. Formula: Percentage Change in non performing asset=Change in Net non performing asset/Base year’s Net non performing asset *100 46 Interpretation: TABLE FOR ASSET QUALITY RATIOS Ratio 2008 2009 2010 2011 2012 Net Non Performing Assets to Total Assets(%) 0.14 0.11 0.14 0.33 0.85 Net Non Performing Assets to Net Advances(%) 0.24 0.18 0.23 0.53 1.33 Percentage Change in Net Non Performing Assets(%) (4.44) (3.87) 54.50 173.10 201.44 Asset Quality: An non performing asset (Non Performing Assets) is an asset, including a leased asset, becomes non-performing when it ceases to generate income from the bank. The Net non performing assets to Total Assets ratio indicates us how much Non Performing Assets the bank has to their Total Assets in balance sheet. It is believed that lower the better for the banks in the case of Asset Quality Ratios. Net Non Performing Assets to Total Assets: The Net non performing asset to total assets has increased from 0.14% in 2010 to 0.33% in 2011 and 0.85% in 2012 which is not a good indication for the bank. 47 Net Non Performing Assets to Net Advances: The Net non performing asset to Net Advances is increased from 0.53% to 1.33 in 2011 and 2012 respectively which is not good for the bank. 48 Percentage Change in Net Non Performing Assets: The Percentage change in Net non performing assets is increased from 54.50 in 2010 to 173.10 in 2011 and 201.44 in 2012. It is not good sign for the bank. 49 50 III) Management Efficiency Refers to the efficiency of the Management in managing the bank, in all the ratios higher the better: A) Total Advances to Total Deposits (TA/TD) This ratio measures the efficiency of the management in converting the deposits available with the bank (excluding other funds like equity capital, etc.) into advances. Formula: Total Advances to Total Deposits=Total Advances/Total Deposits*100 B) Profit per Employee (PPE) This measures the efficiency of the employee. It is arrived at by dividing the net profit of the bank by total number of employees. Higher the ratio means higher the efficiency of the management. Formula: Profit Per Employee=Net Profit/Total number of employees C) Return on Net Worth (RONW) It is a measure of the profitability of a bank. The amount of net income 51 returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity*100 Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock). Shareholder's equity does not include preferred shares. It is also known as "Return on net worth" (RONW). Interpretation: TABLE FOR MANAGEMENT EFFICIENCY RATIOS Ratio 2008 2009 2010 2011 2012 Total Advances to Total Deposits(%) 65.26 70.91 70.44 71.12 74.77 Profit Per Employee(Rs. In Crores) 4.91 6.23 7.92 8.88 9.30 Return on Net worth(%) 24.51 52 23.35 23.74 21.50 18.73 Total Advances to Total Deposits: I observed that Bank is better able to convert its Advances to Deposits. Because the ratio is increased from 71.12% to 74.77% in 2011 and 2012 respectively. If it will be increased more, than it may be risky for bank. Profit per Employee: Profit per employee of the bank has increased from 8.88 crores in 2011 to 9.30 crores in 2012. It means the efficiency of the employees is good. 53 54 Return on Net Worth: Return on net worth is reduced from 23.74% to 21.50% and to 18.73% in 2010, 2011, 2012 respectively. It shows there is a reduction in profit. 55 IV) Earnings Efficiency: Much of a bank's income is earned through non-core activities like investments, treasury operations, and corporate advisory services and so on. A) Percentage Growth in Net Profit It is the percentage change in net profit over the previous year. Formula: Percentage Growth in Net profit=Change in Net profit/Base year’s Net profit *100 56 B) Net Interest Margin (NIM) Net Interest Margin (NIM) is defined as the difference between interest earned and interest expended as a proportion of average total assets. Interest income includes dividend income. Interest expended includes interest paid on deposits, loans from RBI, and other short-term and long-term loans. Formula: Net Interest Margin=(Interest earned-Interest expended)/Average of Total assets*100 C) Non-interest Income/Working Funds (NII/WF) This measures the income from operations other than lending as a percentage of working funds. Working funds: These are total resources (total liabilities or total assets) of a bank as on a particular date. Total resources include capital, reserves and surplus, deposits, borrowings, other liabilities and provision. A high AWF (Avg. Working Fund) shows a bank's total resources strength. There is a school of theory which maintains that working funds are equal to aggregate deposits plus borrowing. However, more pragmatic view in consonance with capital 57 adequacy calculations is, to include all resources and not just deposits and borrowings. Formula: Non Interest Income/Working funds=Non interest income/Working funds*100 Interpretation: TABLE FOR EARNINGS EFFICIENCY RATIOS Ratio 2008 2009 2010 2011 2012 Percentage Growth in Net profit(%) 32.77 23.45 24.87 10.2 1.9 Net Interest Margin(%) 3.45 3.54 3.55 3.75 3.43 Non Interest/Working Funds(%) 1.74 1.35 1.26 1.05 0.92 58 Percentage Growth in Net Profit: The bank's earnings quality reflects its profitability and sustainability of the same. I conclude that the Earning Efficiency of the Indian Bank is poor. The Percentage growth in net profit has reduced from 10.2% to 1.9% in 2011 and 2012 respectively. 59 60 Net Interest Margin: Net Interest Margin (NIM) is basically Interest Earned minus Interest Expended on the proportion of Total Assets. The NIM (%) of the company has reduced from 3.75% to 3.43% in 2011 and 2012 respectively. It is clear that the interest earned by these banks is reduced or the interest expended on deposits and borrowings has increased due to this the NIM (%) has reduced. 61 Non-interest Income/Working Funds: The non interest income is the income which is earned by the bank other than lending (core) activity. The Non interest income/working fund (%) ratio measures the income from operations other than lending as a percentage of working funds. It is observed that bank’s Non Interest Income/Working Fund (%) is reduced from 1.05% in 2011 to 0.92% in 2012 This is mainly because Indian Bank is not concentrating on other banking activities like Merchant Banking, Investment Banking, Private Equity, and Underwriter. 62 V) Liquidity: A) Liquid Assets/Demand Deposits (LA/DD) 63 This account allows you to "demand" your money at any time, unlike a term deposit, which cannot be accessed for a predetermined period (the loan's term). This ratio measures the ability of a bank to meet the demand from demand deposits in a particular year. Higher ratio is better for banks. A demand deposit or bank money refers to the funds held in demand deposit accounts in commercial banks. These account balances are usually considered money and form the greater part of the money supply of a country. Formula: Liquid Assets to Demand Deposits=Liquid Assets/Demand Deposits*100 B) Liquid Assets/Total Assets (LA/TA) 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. The ratio is arrived by dividing liquid assets by total assets. Higher the ratio better it is. Formula: Liquid Assets to Total Assets=Liquid Assets/Total Assets*100 Interpretation: TABLE FOR LIQUIDITY RATIOS Ratio 2008 2009 2010 2011 2012 Liquid Assets/Demand Deposits(%) 143.04 64 126.29 122.47 132.96 126.52 Liquid Assets/Total Assets(%) 9.61 7.95 8 7.03 6.23 Liquidity is the ability of the bank to meet its financial obligations. A high liquidity ratio indicates a bank's comfort level vis-à-vis its ability to manage its obligations, both short-term as well as long-term. Liquidity of a bank can be measured using metrics such as Liquid Assets (LA) to Demand Deposits (DD) and LA to Total Assets (TA). Liquid Assets/Demand Deposits: In Demand Deposit basically the customer can withdraw the money without any prior notice to depository, it is exactly opposite of term deposit where customer has to give proper notice, and follow the procedure to break the term deposit. It is revealed that the liquid assets to demand deposits (%) of the bank have reduced from 132.96% to 126.52% in 2011 and 2012 respectively. So, I conclude Indian Bank is able to maintain its liquid assets are to demand deposits in greater percentage. 65 Liquid Assets/Total Assets: The bank has maintained lower liquid assets to total assets in the past five years. It is observed that the bank’s ratio is decreasing from 7.03% to 6.23% in 2011 and 2012 respectively. 66 CHAPTER IV -FINDINGS Comparative Statement: There are five types of liabilities in a bank. Among that, the most important liabilities are Deposits and Borrowings. The growth rate of deposits portfolio is decreasing. During 2008-09, it has increased by 18.90%, and in 2009-10 it increased by 21.56% but in 2011-12 it increased by only 14.18%. Here the growth should be compared to overall banking sector. (This is because the deposits are repaid and increase in new customers are low.) The borrowings are increases at increasing rate. In 2008-09 it decreases by 58.64%. It means the borrowings are repaid. But in 2011-12, it increases by 132%. The most important and major assets for a bank, are advances and investments. It is observed that the advances are increased at a marginal level. Investments are 67 increased significantly. But in 2011-12 it increases by 9.18% only. Here compare the growth rate with overall Industrial Production. The major income and expenses in a bank is interest earned and interest expenses. Both the interest earnings and interest expenses are fluctuating. But the interest expenses is increased significantly. This is because of increased in borrowings. Only in 2011-12 there was a extraordinary loss of Rs.8.30 crores. This is because of fluctuations in the rate of foreign currencies. Trend Analysis: The deposits are increased marginally. But the borrowings are increased tremendously. Both Advances and investments are increased marginally. The interest earned are increased marginally. But the interest expenses are increased at tremendously. So, the net profit increases slowly. Cash Flow Statement: Cash flow statement shows the inflow and outflow of a cash for a particular period. It is observed that the bank is good at maintaining the flows of cash. Ratio Analysis: I)Capital Adequacy Ratios: It is observed that, the bank has better ability to deal with proable loan defaults because the capital adequacy ratio is higher. And also the bank’s ability to borrow and repay the money is also good because the debt equity ratio is low. Though the advances to assets ratio has increased in the last five years, it is revealed that the bank has good risk taking ability. II)Asset Quality Ratios: Generally asset quality ratio should be reduced as compared to the previous years. But, the bank’s asset quality ratios are increased which is not a good sign. 68 From the year 2010 to 2012, the non performing assets are increased which is not good sign. III)Management Efficiency Ratios: Higher the management efficiency ratios means higher the efficiency of the management. It is found that the advances to deposits ratio and profit per employee are increased which is a good sign. It means the employee’s efficiency is good, and the bank is better able to convert its advances to deposits. But the return on net worth is reduced from 23.74% to 21.50% and to 18.73% in 2010,2011,2012 respectively. IV)Earnings Efficiency Ratios: Overall, the bank’s earnings efficiency is not satisfactory. Because all the earnings efficiency ratios are reduced in the last five years. V)Liquidity Ratios: These ratios measures the ability of the bank to meet its short term requirements. Higher the ratio better it is. The bank is able to maintain its liquidity position. 69 CHAPTER V – SUGGESTIONS AND CONCLUSIONS 5.1SUGGESTIONS AND RECOMMENDATIONS Some of the recommendation and suggestion are as follows: The Reserve Bank of India issued prudential norms for banking companies. According to that more non performing assets may leads to bankruptcy. Hence, the bank tries to reduce its non performing assets to a extent. The prime motive of any type of business is to earn profits. For banking company, rendering financial services and earning profits are the primary objectives. As a nationalized bank, it also has the same objectives. The growth rate of profits is decreasing. So, the bank tries to improve its profits. For that the bank needs to concentrate on both core and non core banking activities. The major income for any financial institution is interest income. A banking company will get more interest income only when it lends money for the productive purposes. Advances are the major assets of a banking company. The bank tries to increase the advances because it is the core business of a bank. Increase in advances pays a way to increase in interest income which automatically increases the profits of the bank. Every company must try to control their borrowings. Because more borrowings leads to increase their interest expenses which reduces their profits. At the same time, low borrowings are also not good for the company. Here, the borrowings are increasing to an extent. So, the bank shall try to reduce the borrowings which automatically reduce the interest expenses to a certain extent. Deposits are of two types. One is term deposits and the other is demand deposits. The important source of funds for bank is deposits. More deposits means the bank are attracting the customers. The bank provides advances against his/her deposits to the needy person. This provides the bank to get interest income as well as safety for its funds. So, the bank needs to increase its deposits. 70 The bank has to focus on work than the work achieved. It means the bank has to work to attract the new customers and rendering all types of financial services. As compared to its competitors, the bank has low number of branches and ATMs. It is a major disadvantage to the bank. Due to low number of branches and ATM, both the customers and bank may feel uncomfortable to contact and render services. So, the bank has to increase its number of branches and ATMs. Nowadays competition takes in every sector. In banking sector, the competition is high. In general, a both good and bad product needs advertisement. Advertisements pursue the people to buy. Other banks are giving continues advertisements about their services to the public. So, the bank has to promote its services through advertisements which increase the new customers. 5.2 CONCLUSION 71 The balance-sheet along with the income statement is an important tool for investors and many other parties who are interested in it to gain insight into a company and its operation. The balance sheet is a snapshot at a single point of time of the company’s accounts- covering its assets, liabilities and shareholder’s equity. The purpose of the balance-sheet is to give users an idea of the company’s financial position along with displaying what the company owns and owes. It is important that all investors know how to use, analyze and read balancesheet. Profit & Loss account tells the net profit and net loss of a company and its appropriation. In the case of INDIAN Bank, during fiscal 2012, the bank continued to grow and diversify its assets base and revenue streams. Bank supports agriculture sector more by giving loans under various schemes. The comparative statement of profit & loss account shows the increases and decreases in the items of profit & loss account and balance sheet during 2008 to 2012. It shows that all items are increased mostly but increase in this year is less than as compared to increase in previous year except few items. Trend analysis of profit & loss account and balance sheet shows the percentage change in items of profit & loss account and balance sheet i.e. percentage change during 2008 to 2012. It shows that all items are increased mostly but increase in this year is less than as compared to increase in previous year except few items. In profit & loss account, all items like interest income, non-interest income, interest expenses, operating expenses, operating profit, net profit is increased but in mostly cases it is less than from previous year but in some items like interest income, interest expenses percentage increase is more. Some items like tax, depreciation is decreased. Similarly in balance sheet all items like advances, cash, liabilities, deposits, and borrowings are increased. Percentage increase in some item is more than previous year and in some items it is less. 72 Ratio analysis of financial statement shows that the bank is good in risk taking ability, dealing proable loan defaults, ability to borrow and repay money, management efficiency and liquidity. But the bank is just fair in maintaining asset quality and profitability. The cash flow statement shows that net increase in cash generated from financing activities is much more than the previous year but cash generated from investing activities is negative in all the five years. The cash generated from operating activities is negative in the last two years. There is increase of Rs.251.05 crores in cash & cash equivalents from previous year. Therefore analysis of cash flow statement shows that cash inflow is more than the cash outflow in INDIAN Bank. Thus, the ratio analysis and trend analysis and analysis of cash flow statement and comparative statement shows that INDIAN Bank’s financial position is fair. Bank’s profitability is increasing but not at high rate. Bank’s liquidity position is good because bank invests more in liquid assets than the current assets. The INDIAN Bank needs to pay attention on commercial activities like promoting more schemes for industrial customers etc. Bank’s position is stable. 73 BIBLIOGRAPHY Books Referred: Accountancy. R.K. Mittal, A.K.Jain. Financial Management- Theory and Practice. Shashi.K.Gupta, R.K. Sharma. P.N. VARSHNEY “Banking Law And Practices” Sultan Chand & Sons SUNDRAM & VARSHNEY “Banking, Theory Law And Practices” Sultan Chand & Sons DR. S. N. MAHESHWARI “Principles Of Accounting” Sultan Chand & Sons Advanced Accounting, revised edition june 2010-ICAI Internet websites: www.indianbank.in www.moneycontrol.com www.money.rediff.com www.wikipedia.org www.google.com www.scribd.com www.managementparadise.com www.rbi.org.in 74
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