A PROJECT RERORTON AN ANAIYILCAL STUDY OF CAPITAL STRUCTURE OF ICICI BANKCOMPARATIVE STUDY OF SBI AND ICICI BANKSSubmitted to

YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVESITY, NASHIKForIN PARTIAL FUFILMENT OF THE REQIREMENT FOR THE DEGREE OFMASTER OF BUSINESS ADMINSRATION

Submitted by

MR.RITESH SURESHRAO DESH PRN NO. 2010017754380941 M.B.A. Final Year(IN FINANCE MANAGEMENT)GuideMISS. MINAL D. DESHPANDEStudy CentreJAGADAMBA COLLEGE, NANDED(2013-14)

AN ANAIYILCAL STUDY OF CAPITAL STRUCTURE OF ICICI BANKCOMPARATIVE STUDY OF SBI AND ICICI BANKS

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ABSTRACT

Today business organizations use a range of alternatives for collecting the funds. Small and Big organizations used the way of collecting funds according to their paying capacity, degree of risk, size of capital, working system of the business etc. so, here in this paper the research paper, the researcher analyze the capital structure of two banks according to its convenience. Capital Structure is the Ratio of long-term sources of finance in the total capital of the firm includes 'Proprietor's Funds' and 'Borrowed Funds'(Proprietors Funds include equity capital, preference capital, reserves and surpluses retained earnings and Borrowed Funds include long-term debts such as loans from financial institutions, debentures etc. In this paper, the researcher has taken two banks viz. ICICI and SBI for making comparison of their debt and equity. By using, the technique of average and percentage the researcher have made the conclusion about the collection of funds of these banks. Lastly, some suggestions have given by the researcher which the banks can follow. Hence, the research may contribute in providing a new way to the banks for capital structure decision.

Keywords: Equity; Debts; Cost of Capital; Cost of Debts Banking reforms, Capitalization, Capital Structure, Debt-equity ratio, Earning Per Share, ICICI bank.

INTRODUCTION

The term 'Capital Structure' refers to the proportion between the various long-term sources of finance in the total capital of the firm includes 'Proprietor's Funds' and 'Borrowed Funds'(Proprietors Funds include equity capital, preference capital, reserves and surpluses retained earnings and Borrowed Funds include long-term debts such as loans from financial institutions, debentures etc. On the other hand, equity share capital is the most costlier source of finance (as return expected by equity shareholders is greater, than the interest on debentures and the dividend on preference shares) but these are least risky (as there is no fixed commitment to pay dividend and the return of equity capital). Preference share capital lies between debentures and equity .capital in terms of risk and cost. While choosing the source of finance a financial manager makes an attempt to ensure that risk as well as cost of capital is minimum for this purpose he has to answer the following questions:

1. How much amount should be raised through issue of equity? 2. How much amount should be raised through issue of preference share capital? 3. How much amount should be raised through debentures and other long-term debts?

The capital structure of bank is still relatively under-explored area in the banking literature. There is no clear understanding on how banks choose their capitalStructure and what factors influence their corporate financing behavior. It is seen that lending of large banks is less subject to changes in cash flow and capital. ItIs also seen that sifts in deposit supply affect lending at small banks that do not have access to the large internal capital market. The fact that large banks tend toDecrease their capital and increase their lending after merger. Due to these relevant aspect that the present study will try to provide indebt knowledge to theConcepts.

Capital composition matters to most firms in free markets but there are differences. Companies in non-financial industries need capital mainly to supportFunding such as to buy property and to build or acquire production facilitates and equipment to pursue new areas of business. While this is also true for banks,Their main focus is somewhat different. By its very nature, banking is an attempt to manage multiple and seemingly opposing weeds Banks provide liquidity onDemand to depositors through the current account and extend credit as well as liquidity to their borrowers through lines of credit. Owing to these fundamentalRoles, banks have always been concerned with solvency and liquidity. Given the central role of market and credit risk in their core business, the success of banksDepend on their ability to identify assess, Monitor and mage these risks in sound and sophisticated way. The competitive and regulatory pressures are likely toReinforce the central strategic issue of capital and profitability and cost of equity capital in shaping banking strategy.In order to assess and manage risks banks must have effective ways of determining the appropriate amount of capital that is necessary to absorb unexpectedLosses arising from their market, credit and operational risk exposures. The profits that arise from various business activities of the banks need to be evaluatedRelative to the capital necessary to cover the associated risks. These two major links to capital risk as a basis to determine capital and the misplacement ofProfitability against risk-based capital allocations-explain the critical role of capital as a key component in the management of bank portfolio. The capitalStructure of bank is still relatively under-explored area in the banking literature. There is no clear understanding on how banks choose their capital structure andWhat factors influence their corporate financing behaviour it is seen that lending of large banks is less subject to changes in cash flow and capital. It is also seenThat sifts in deposit supply affect lending at small banks that do not have access to the large internal capital market. The fact that large banks tend to decreaseTheir capital and increase their lending after merger. Due to these relevant aspect that the present study will try to provide indebt knowledge to the concepts.Companys short and long term debt is considered when analyzing capital structure. A method of analyzing the impact of alternative possible capital structureChoices on a firms credit statistics and reported financial results, especially to determine whether the firm will be able to use projected tax shield benefits fully.There are different method of analyzing capital structure of the bank are ratios, trend analysis, common size statements, comparative statements. In this studyThe analysis of capital structure of state bank of India and ICICI Bank is done through ratios.

RESEARCH PROBLEM

The study is to find the different determinant of capital structure in the banking industry as it affects the whole form of the organization. So it is very important to have a clear idea about these factors and cost of different sources in the banking industry. So the problem in the study is to find out effective determinant of capital structure.

NEED AND SIGNIFICANCE OF THE PROJECT

Capital structure decision is one of the strategic decisions taken by the financial management. Considerable attention is required to decide the mix up of various sources of finance. A judicious and right capital structure decision reduces the cost of capital and increase the value of a firm while a wrong decision can adversely affect the value of the firm. As discussed earlier, various sources of finance differ in terms of risk and cost. Hence, there is utmost need of designing an appropriate capital structure. Capital structure decisions are of great significance due to the following reasons:

Capital structure determines the risk assumed by the firm. Capital structure determines the cost of capital of the firm. It affects the flexibility and liquidity of the firm.

It affects the control of owners on the firm.

OBJECTIVES OF THE STUDY

The objective of the study is to comparatively analyze the capital structure position of state bank of India and ICICI Bank. The above objective has beenApproached by analyzing the various ratios of the banks which include debt equity ratio, funded debt to capitalization ratio, solvency ratio, interest coverage ratio, capital gearing ratio, proprietary ratio. Other objectives are to examine the bank policy regarding capital structure and the effect of capital structure on theProfitability of the companies in relation of various ratiosThe area of the study had remained an unexplained field in India as for as in the depths study was concern; therefore the thesis will bridge the gap as it is usefulTo all these banks which are associated with the present study. This will also serve as a literature in the field of banking. It will also help the professionals,Academicians who have a better understanding of the relevance of capital structure of banks. The study covers the depths knowledge on the role of capitalStructure in banks which are fast changing fact of the economy.The importance of capital structure in banking companies become helpful in development of industries, as provision of rupee and foreign currency loans,Subscription to share and debentures, underwriting of share and debentures guaranteeing of deferred payments and loans are the important types of financialAssistance provided by institutions. Development of entrepreneurship through training and motivation, assistance in project identification feasibility of studiesAnd preparation of project reports, technical and managerial consultancy seed/risk capital assistance etc.The present study will be helpful for the society in view of various scheme as acceptance of deposits, provide facility of insurance mutual fund management,Long-term pension fund and provide consumer loan for various purpose as housing loan, car loan, educational loan etc. and it also provide electronic banking facilities which save the important time of consumer.

1. To conduct comparative study regarding to capital structure of SBI and ICICI. 2. To find out the cost of different financial sources of project financing. 3. To know the portion of debt and equity in capital structure. 4. To find out the overall cost of capital of SBI & ICICI

RESEARCH METHODOLOGY

In the present research the data is taken from the secondary sources. Research methodology explains and chooses the best (in terms of quality and economy)Way of doing it. The information and data for the research can be collected through primary as well as secondary sources i.e. published articles, journals, newsPapers, reports, books and websites. The profit & loss account and balance sheet of the State Bank of India and ICICI Bank for the last five years i.e. from 31stMarch 2005 to 31st March 2010 were studied to get the clear picture of the capital structure. The available data between these periods has been carefullyAnalyzed, interpreted and presented by studying the capital structure of State Bank of India and ICICI Bank. Commensurate with the objective of the study,Various tools of analysis have been employed in order to arrive at certain conclusions regarding Comparative analysis of capital structure of state bank of IndiaAnd ICICI Bank. Tabular analysis, percentage and graphs have been used for analysis of the data.

STATE BANK OF INDIA-PROFILE

The State Bank of India was constituted on 1st July 1955, pursuant to the State Bank of India Act, 1955 (the "SBI Act") for the purpose of creating a state partneredAnd state-sponsored bank integrating the former Imperial Bank of India. In 1959, the State Bank of India (Subsidiary Banks) Act was passed, enablingThe Bank to take over eight former state associated banks as its subsidiaries.The Bank is India's largest bank, with approximately 9,000 branches in India and 54 international offices. Its Associate Banks have a domestic network of around4,600 branches, with strong regional ties. The Bank also has subsidiaries and joint ventures outside India, including Europe, the United States, Canada, Mauritius,Nigeria, Nepal, and Bhutan. The Bank has the largest retail banking customer base in India.The Bank is engaged in corporate banking for many of India's most significant corporate and institutions, including State-owned enterprises, as well as providingBanking services to commercial, agricultural, industrial and retail customers throughout India. The Bank services its most important corporate customers,Including certain state-owned enterprises, through its Corporate Banking Group, and its other customers, including other large corporations and State-ownedEnterprises, small scale industries, agriculture and personal banking customers through its National Banking Group. The National Banking Group also providesFinancial services to the Government and the state governments, including tax collection and payment services. The Bank is engaged in international banking andHave foreign operations in 28 countries with a global network of 54 branches.The Bank has a presence in diverse segments of the Indian financial sector, including asset management, factoring and commercial services, insurance, and creditCards and payment services.The Authorized Share Capital of the Company is Rs.25, 0000,000 (Rupees Twenty Five Crores Only) divided into 25, 00,000 (Twenty Five Lakhs) Equity Shares ofRs.100/- each (Rupees One Hundred Only) with powers to the Company acting through its Directors to increase, reduce or modify its capital and to divide all orany of the shares in the capital of the Company, for the time being, classify and reclassify such shares from shares of one class into shares of other class orclasses and to attach thereto respectively such preferential, deferred, qualified, or other special rights, privileges, conditions or restrictions as may beDetermined by the Company in accordance with the Articles of Association of the Company, and to vary, modify or abrogate any such rights, privileges,Conditions or restrictions in such manner and by such persons as May, from the time being, be permitted under the provisions of the Articles of Association ofThe Company or legislative provisions, for the time being in force in that behalf.

ICICI BANK-PROFILE

ICICI Bank limited is major banking and financial services organization in India. The bank is the second largest bank in India and the largest private sector bank inIndia by market capitalization. They are publicly held banking company engaged in providing a wide range of banking and financial services including commercialBanking and treasury operations. The bank and their subsidiaries offer a wide range of banking and financial services including commercial banking, retailBanking, project and corporate finance, working capital finance, insurance, venture capital and private equity, investment banking, broking and treasuryProducts and services. They offer through a variety of delivery channels and through their specialized subsidiaries in the area of investment banking, life andNon-life insurance, venture capital and assets management.The bank has a network of 2035 branches and about 5518 ATMs in India and presence in 18 countries. They have subsidiaries in the United Kingdom, Russia andCanada, branches in United States, Singapore, Bahrain, Hong-Kong, Srilanka, Qatar and Dubai International finance centre and representative offices in UnitedArab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium and Germany.The bank equity shares are listed in India on Bombay Stock Exchange and National stock exchange of India Limited and their American Depository Receipts(ADRs) are listed on NYSE. The bank is first Indian banks listed NYSE.In September 12, 2003 the bank incorporated ICICI bank Canada as a 100 % subsidiary company. In May 2005, the bank acquired the entire paid- up capital ofInvestitsionno-Kreditny Bank, a Russian bank with their registered office in Balabanovo in the Kaluga region and a branch in Moscow. Thus, IKB became aSubsidiary of bank with effect from May 19, 2005. In August, 2005, the bank acquired additional 6% equity share capital of Prudential ICICI Assets Managementcompany limited and Prudential ICICI Trust Limited from Prudential Corporation Holdings Limited and thus these two companies became the subsidiaries of theBank. During the year 2006-07 ICICI bank Canada incorporated ICICI health management insurance as a subsidiary company. In April 2007, Sangli bank LimitedMerged with the bank with effect from April 19, 2007. In 2007 June, the bank entered into an agreement with networking solution provider GTL Limited to leaseOut their call centers facility at Mahape worth of around Rs 100 crore for a period of 25 years. During the year 2007-08 the bank increased their branches andExtension counters from 755 Nos to 1262 Nos including the additional of about 200 branches through the merger of Sangli bank. They increased their ATMNetwork from 3271 ATMs to 3881 ATMs. They launched the mobile banking service enabling a wide range of banking transaction using the mobile phones.During the year 2008-09, bank increased their branches and extensions counter from 1262 Nos to 1419 Nos. They also received license for 580 additional

Branches from RBI.

The bank is committed to using its effort to adopt technology to achieve efficiency in its business operations. The bank is moving towards centralized databaseUsing enhanced technology to credit it "CBS". The CBS will enable on time, real time transaction processing and provide live interface to a multitude ofTechnology delivery channels.The Authorized Share Capital of the Company is Rs.1275 Crores but issued capital is Rs.1152.71 crore divided into 115271442 Equity Shares of Rs.100/- each(Rupees One Hundred Only) with powers to the Company acting through its Directors to increase, reduce or modify its capital and to divide all or any of theShares in the capital of the Company, for the time being, classify and reclassify such shares from shares of one class into shares of other class or classes and toattach thereto respectively such preferential, deferred, qualified, or other special rights, privileges, conditions or restrictions as may be determined by theCompany in accordance with the Articles of Association of the Company, and to vary, modify or abrogate any such rights, privileges, conditions or restrictions inSuch manner and by such persons as May, from the time being, be permitted under the provisions of the Articles of Association of the Company or legislativeProvisions, for the time being in force in that behalf.

ANALYSIS OF THE STUDY

The finding is achieved after analyzing the following capital structure ratios of State Bank of India (SBI) and ICICI Bank. These ratios are as follows: Five years analysis of debt equity ratio Five years analysis of funded debt to total capitalization ratio Five years analysis of solvency ratio Five years analysis of interest coverage ratio Five years analysis of capital gearing ratio Five years analysis of earning per shareThe financial position of the firms can be studied and analyzed in two perspectives i.e., the short term financial position and long term financial position. TheLong term financial position, its composition and implications have been considered.The long term source of funds for any firms comprise of the shareholders funds and long term.

Resources of funds may consist of the following:

The Preference share capital. The equity share capital. The accumulated profit The long term debt.

The debt position of the firm indicates the amount of loans and borrowings used in generating profits. If the raised from debts earn more than the cost of theseFunds, then the surplus ultimately belongs to the equity shareholders. As the debt involves firms commitment to pay interest over the long run and eventuallyto repay the principles amount, the financial analyst, the debt lender, the preference shareholders and the management will all pay close attention to theDegree of indebtedness and capacity of the firm to serve the debt. The more the debt a firm use, the higher is the profitability that the firm may be unable toFulfill its commitments towards its debt lenders. The position of the debt and its implications can be analyzed in two different ways:

As degree of indebtedness.

As the ability to service the debt.

MEASURES OF THE DEGREE OF INDEBTEDNESS

The measures of identifying the degree of indebtedness attempt to establish the relationship of the total liabilities or only long term liabilities with theShareholders funds or total assets of the firm.

REVIEW OF LITERATURE

(1963) used a better Var. measure in his Ph.D. thesis. Although the measure is different from Markowitzs diagonal covariance matrix, it helped Sharpe to propose capital asset pricing model (CAPM). There were innovations in 1970s and 1980s in the financial markets as well as in every field of human life. The effect of these innovations was the rising of leverage. As this was the case, firms had a tendency to find new ways to manage risk. This in turn leads new measures of risk Kalish (III) and Gilbert (1973) studied the impact of size and organizational form of the commercial bank on its efficiency. Cost and output of the banks were collected for this purpose. They used 898 commercial banks that look part in the .Federal Reserve's Functional Cost Analysis Program in 1968. Banks were categorized into unit banks, branch banks and holding company subsidiaries on the basis of their organizational form and the amount of assets they had. The minimum average cost (AC) al which bank of the same size and organizational form can operate is called as technical efficiency of the bank while the excess AC of the bank over minimum AC represents the operational inefficiency of the bank.

(1990) analyzed technical, scale and locative efficiencies in U.S. banking by using non parametric frontier approach on a sample of 3.22 independent banks. According to them, major contributor to the low score of overall efficiency was technical inefficiency in the banking units as compared to al locative inefficiency.

(1991) stated that rapid changes in financial service industries make it important to determine the efficiency of financial institutions. Banks play an important role in the financial markets of the developing countries and it is very important to evaluate whether banks operate efficiently or not. There are many research studies that try to look into the efficiency of banks operating within a country and across the countries. These studies can be differentiated on the basis of used methodologies, considered variables, type and number of banks included in the sample.

(1992) evaluated the relative efficiency of bank branches of the largest commercial bank in Saudi Arabia by means of Data Envelopment Analysis (DEA) for the improvement of the utilization of available resources at branch level more efficiently. They applied DEA methodology on fifteen branches of the bank located in the Eastern province of Saudi Arabia. One year actual input-output data of the bank was used for the study. Eight inputs and seven output factors were identified at branch level on the basis of consultation and personal interview with the administrators of the several banks.DEA enabled them to identify three inefficient branches out of fifteen banks branches under consideration.

(1993) investigated the relationship of concentration of decision management and control in one person on the cost efficiency level of the bank and returns on assets. On the basis of their study, they found that the banks whose chairman of the board and CEO were the same person had significantly less efficiency than those banks that possessed not similar governance structure and concluded that performance was affected by top management structure.

(1994) justified the privatization of Turkish public banks on the grounds of efficiency improvement. For the study, they used the stochastic cost techniques for the analysis of performance difference between public and private banks. After analysis, they found a statistically non significant inefficiency difference between private and public banks. So on the basis of statistically insignificant inefficiency difference; they favoured the privatization of public banks.

(1995) propounded that there have always been controversies among finance scholars when it comes to the subject of capital structure. So far, researchers have not yet reached a consensus on the optimal capital structure of firms by simultaneously dealing with the agency problem. This paper provides a brief review of literature and evidence on the relationship between capital structure and ownership structure. The paper also provides theoretical support to the factors (determinants) which affects the capital structure. (2001) elaborated that there have been many definitions of risk over years. The literature on risk is comprehensive. Origin of the word risk can be traced back to Latin, through the French risqu and the Italian risco. Risk concept is firstly seen in ancient Italian maritime trade. It was defined as the combination of chance or uncertainty to mean the loss of ships and cargo on the seas. Merchants used a term risk because of uncertainty they faced.

(2002) Firms having high risk exposure, rely more on the cash flow than the others. Financial distress is main reason for this proposal. Facing high risk signals the financial weakness of the firms. Once they are financially weak today it is very probable that they are weak in the future. These firms need more external funds to survive. They need these funds to sustain their obligations. But it is not very easy for these firms to find the needed funds because of having financing premium. Firms should carry the burden of higher costs of external funding than before. These firms are also in the risk of losing chances of profitable investments. As a consequence, these firms are more cash-flow dependent.

(2004) made a comparative analysis of commercial banks in India and Pakistan during 1988-1998. To measure technical efficiency, they used Data Envelopment Analysis and employed two input-output specifications for efficiency measurement. In one specification (loan based model), operating and interest expenses were used as inputs while loans and advances (along investment) were considered as outputs of the commercial bank. In second specification (income based model), operating and interest expenses were considered as inputs while interest and non interest income worked as outputs of the commercial bank. They decomposed technical efficiency into pure technical efficiency and scale efficiency. From analysis, they found that the efficiency score in loan based model was much higher as compared to the income based model. At the same time, results also indicated the presence of space for improvement in the efficiency of banks in these countries.

(2005) examined the efficiency of banking sector of Indian sub-continent over the period 1993 to 2001. An output oriented DCA is used for the estimation of the efficiency of banks. Two outputs, i.e. interest income and non-interest income and two inputs i.e. interest expenses and non-interest expenses were used for DEA specification to estimate the efficiency of banks under variable returns to scale. To estimate the impact of bank characteristics, macroeconomic indicators and financial structure variables on estimated efficiency score, they used to bit model).

(2006) compared the productive efficiency of Islamic and conventional banks in Malaysia. They used stochastic frontier function approach to estimate the efficiency of banks to compare their relative performance. For the study, 34 banks were selected and data about these banks were obtained from the annual reports of the banks and the directory of the association of banks in Malaysia from 1993 to 2000. Their results showed insignificant difference in terms of cost efficiency between Islamic and conventional banks but Islamic banks did marginally better than conventional banks while cost efficiency difference was significant (al 5% level of significance) between foreign and local banks. They found no relationship between ownership and efficiency. However, their study related inefficiency of the bank with its size in a non linear way.

(2007) used DBA to analyze the technical, allocate and cost efficiency of 16 Greek cooperative banks over the period 2000 to 2004. Following intermediation approach, fixed assets, deposits and number employees were considered as inputs of the banks while loans, liquid assets and investments were considered as outputs of the banks. Estimated yearly average cost efficiency score for cooperative banks ranged from 0.802 to 0.836 in their study. According to them, major source of cost inefficiency was allocating inefficiency present in banks. After the estimation of efficiency, they used tobil model to find out the influence of the internal and external factors on its efficiency. From estimated to bit model, among bank specific variables, they found positive impact of equity to assets, number of ATMs, loans to assets and assets of the bank on the estimated efficiency of banks. Company Profile.

Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan shareholders. And Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canada Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized. Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership.

The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:

1949: Enactment of Banking Regulation Act. 1955: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalization of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over 200 crore. After the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%.

Phase III

This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money.

History of ICICI Ltd

ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. State Bank of India. The Bank is actively involved since 1973 in non-profit activity called Community Services Banking. All our branches and administrative offices throughout the country sponsor and participate in large number of welfare activities and social causes. Our business is more than banking because we touch the lives of people anywhere in many ways. 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.

Special Features of State Bank of India

1. There schemes meet the customer varied needs. 2. Nominal services processing charges. 3. Loan at competitive rates. 4. Interest charges on reducing balance only instead of annual balance. 5. Interest is compounded quarterly risk.

6. No penalty for repayment of loans.

RESEARCH METHODOLOGY

In Research Methodology we study the various steps that are generally adopted by researcher in studying his research problem along with the logic behind them. Research Methodology includes:

Research Design

The research design used is descriptive between capital structure and cost of capital of ICICI and SBI. The study is descriptive because already a wide literature is present on this topic.

SCOPE OF THE STUDY The area of the Study is two banks SBI and ICICI to make a comparison between the capital Structure. In fact, the research design is the conceptual structure within which research conducted. It constitutes the blue print for the collection, measurement and analysis. This research is of Explanatory & analytical in nature. In explanatory & analytical research we have sufficient data on the concept and research material. Because many researcher have been done the work on the concept.

METHODS OF COLLECTING DATA

Since the report required studying the theoretical as well as practical aspects of Project Finance, the books have provided in the theoretical aspects of the study. To get the latest information, Internet was also used as a medium at various stages. The data for the project report has been collected from the secondary sources.

ANALYSIS AND INTERPRETATION

The large size of the dominant market position of the bank has helped it to build up a loan portfolio which is well diversified across industries as well as region thus cushioning the impact of problems in certain industries moreover the increased focus on its top clients and the size of relationship banking approach subsequent to the formation of the corporate accounting groups (CAG) has helped the bank in retaining its top clients and also increasing them share of business from them.

Capital Structure of SBI and ICICI

The capital structure which maximize the value of firm, minimize the cost of capital is called optimum capital structure. In Millions

Bank

SBI ICICI

Year Sources Equity Debt Equity Debt.

2008 6314.70 517274.11 11126.79 656484.34

2007 5262.99 397033.35 8993.44 512560.26

2006 5262.99 306412.44 8898.34 385219.14

Interpretation

It is clear from the study that debt and equity used by ICICI is more than SBI. Debt and equity used by ICICI more than SBI. Debt used by ICICI and SBI at increasing rate, also equity used by ICICI & SBI bank at increasing rate.

Comparison of Equity Capital

Equity capital is owners capital and most costly source of finance but least risky then the preference and debt source of finance

1 20062 20073 2008

Interpretation

It is clear from the study that equity used by ICICI is more than SBI. The equity used by ICICI and SBI at increasing rate. Equity capital is owners capital it means a good indicator for health of an organization.

Comparison of Debt

Debt are least costly source of finance because the rate of interest is lower than the rate of dividend and interest paid on debenture is deducted from the profit while calculating the taxes but these are most risky.

Interpretation It is clear from the study that debt used by ICICI is more than SBI. The debt used by ICICI and SBI at increasing rate.

State Bank of India Debt-Equity Ratio = Debt EquityAbhinav International Monthly Refereed Journal of Research in Management & Technology

In %age Bank SBI ICICI

Year Sources Cost of Equity Cost of Debt Cost of Equity Cost of Debt.

2008 2.05 61.73 3.950 35.77

2007 1.34 59.05 2.93 31.92

2006 1.34 65.79 2.47 24.92

Ke = DPS MP100 DPS = Dividend per share MP = Market Price

Kd = I NP100 I = Interest NP = Net Proceed

SBI Bank

2008 Ke = 21.501047100= 2.05 2006-2007 Ke = 141047100= 1.34 2008 Kd = 319290.77517274.11100= 61.73 2007 Kd = 234368.21397033.35100=59.03 2006 Kd = 201592.89 306412.44100=65.79

ICICI Bank

2008 Ke = 13.65346100=3.95 2007 Ke = 10.13346100=2.93 2006 Ke = 8.53346100=2.47 2008 Kd = 234842.97656484.39100= 35.77 2007 Kd = 163584.94512560.20100= 31.92 2006 Kd = 95974.48385219.14100=24.92

Comparison of Cost of Capital

Cost of capital is minimum rate of return that firm must earn on the equity financed position of an investment project in order to leave unchanged the market price of the shareYear Debt Equity Ratio

Interpretation

It is clear from the study that Cost of equity of ICICI is more than SBI. On the basis of study it is clear that cost of debt of SBI is more than ICICI and cost of equity of ICICI is more than SBI and cost of debt is decreasing and cost of equity is increasing in SBI and cost of debt is increasing and cost of equity is also increasing in ICICI

Cost of Debt

The firm borrows the fund from the financial institute or public for a specific period of time at a specific rate of interest.

Interpretation From the above table, It is clear that cost of debt of SBI is more than ICICI. Overall Cost of Capital of ICICI

Year Source Book Value

Weight Cost %age Weighted Average cost

2006Equity8898.340.022572.470.055

Debt385219.140.977424.9224.35

Total394117.4824.40

2007Equity8893.440.01722.930.505

Debt51252560.260.982631.9231.366

Total521553.731.871

2008Equity11126.790.01663.9500.0658

Debt656484.340.9833335.7735.17

Total667611.1335.239

Overall Cost of Capital of SBI

SourceBook valueWeightCost% ageWeighted Average cost

Year

2006Equity5262.990.016881.340.0226

Deb306412.440.983165.7964.678

Total311675.4364.70

2007Equity5262.990.013081.340.0175

Deb397033.350.986959.0358.256

Total402296.3458.27

2008Equity6314.700.012062.05340.0247

Deb517274.110.987961.7360.98

Total523588.8135.23961.004

Comparison of Overall cost of Capital of SBI & ICICI

Year Overall Cost of Capital of ICICI

Overall Cost of Capital of SBI

2006 24.40 64.70

2007 31.87 58.27

2008 35.239 61

Interpretation

It is clear from the study that overall cost of capital of ICICI is increasing per year, cost of capital is decreasing per year and overall cost of capital of ICICI is less than SBI

FINDINGS AND CONCLUSIONS The cost of capital of SBI is decreasing per year and cost of capital of ICICI is increasing. On the basis of study conclude that ICICI is better than SBI because it continue to focus decreasing the cost of capital as compared to SBI

ICICI have the better capital structure than SBI.

Cost of debt of SBI is more than ICICI.

Cost of equity of ICICI is more than SBI.

Cost of equity of SBI & ICICI is increasing per year.

Cost of debt of ICICI is increasing & SBI is decreasing.

Overall cost of capital of ICICI is increasing per year.

Overall cost of capital of SBI is decreasing per year.

RECOMMENDATION

Public bank should improve their capital structure.

Private sector bank should try to reduce their overall cost of capital.

Determinant of capital structure should be considered while forming capital structure.

Bank should have liquidity in their capital structure

Timely review of their capital structure is necessary in banking industry

Timely review of their cost of capital of different sources (debt, equity) is necessary in banking industry

REFERENCES

Websites

1. www.sbi.com

2. www.icici.com