body of the project

Risk and return of equity investments in banking sector

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1.1 INVESTMENT AN OVERVIEW:

Investment refers to the employment of funds with the aim of achieving additional

income or growth in value. The essential quality of an investment is that it involves

waiting for a reward. It involves the commitment of resources which have been saved or

put away from current consumption in the hope that its benefit will accrue in future.

Investment is the allocation of monetary resources to assets that are expected to yield

some gain or positive return over a given period of time. These assets range from safe

investment to risky investments. Investment in this form is called as Financial

Investments.

Investment has different meanings in finance and economics.

In economics, investment is related to saving and deferring consumption. Investment is

involved in many areas of the economy, such as business management and finance whether

for households, firms, or governments.

In finance, investment is putting money into something with the expectation of gain,

usually over a longer term. This may or may not be backed by research and analysis. Most

or all forms of investment involve some form of risk, such as investment in equities,

property, and even fixed interest securities which are subject, inter alia, to inflation risk.

In contrast putting money into something with a hope of short-term gain, with or without

thorough analysis, is gambling or speculation. This category would include most forms of

derivatives, which incorporate a risk element without being long-term homes for money,

and betting on horses. It would also include purchase of e.g. a company share in the hope of

a short-term gain without any intention of holding it for the long term.

Under the efficient market hypothesis, all investments with equal risk should have the

same expected rate of return: that is to say there is a trade-off between risk and expected

return. But that does not prevent one from investing in risky assets over the long term in the

hope of benefiting from this trade-off. The common usage of investment to

describe speculation has had an effect in real life as well. It reduced investor capacity to

discern investment from speculation, reduced investor awareness of risk associated with


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speculation, increased capital available to speculation, and decreased capital available to

investment.

In finance, investment is the application of funds to hold assets over a longer term in the

hope of achieving gains and/or receiving income from those assets. It generally does not

include deposits with a bank or similar institution. Investment usually involves

diversification of assets in order to avoid unnecessary and unproductive risk.

Investments are often made indirectly through intermediaries, such as pension

funds, banks, brokers, and insurance companies. These institutions may pool money

received from a large number of individuals into funds such as investment trusts, unit

trusts etc.to make large scale investments. Each individual investor then has an indirect or

direct claim on the assets purchased, subject to charges levied by the intermediary, which

may be large and varied.

1.1.1) Reasons to invest

One needs to invest to:

Earn return on idle resources,

Generate a specified sum of money for a specific goal in life

Make a provision for an uncertain future

One of the important reasons why one needs to invest wisely is to meet the cost of

Inflation. Inflation is the rate at which the cost of living increases.The cost of living is

simply what it costs to buy the goods and services you need to live. Inflation causes money

to lose value because it will not buy the same amount of a good or a service in the future as

it does now or did in the past. The aim of investments should be to provide are turn above

the inflation rate to ensure that the investment does not decrease in value.

1.1.2) FACTORS INFLUENCING INVESTMENT:

1. Increasing rate of taxation.

2. High interest rate.

3. High rate of inflation

4.


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1.1.3) TYPES OF INVESTMENT:

1. Short term investments

2. Long term investment

CLASSIFICATION OF INVESTMENTS

SHORT TERM LONG TERM

Savings Bank Account Post Office Savings

Money Market or Liquid Funds Public Provident Fund

Fixed Deposits with Banks Company Fixed Deposits

Securities (Shares, Bonds)

1.2) EQUITY INVESTMENT AN OVERVIEW:

Equity investment generally refers to the buying and holding of shares of stocks in the

stock market by individual and funds in anticipation of income from dividend and capital

gain as the value of the stock rises. It also sometimes refers to the acquisition of equity

participation in a private company or a company being created or newly created. In simple

terms, equity share is the total equity capital of a company divided into equal units of small

denominations, each called a share.

1.2.1 Need to issue shares to the public: Most companies are usually started privately by

their promoter(s). However, the promoters capital and the borrowings from banks and

financial institutions may not be sufficient for setting up or running the business over a long

term. So companies invite the public to contribute towards the equity and issue shares to

individual investors. The way to invite share capital from the public is through a Public

Issue. Simply stated, a public issue is an offer to the public to subscribe to the share capital


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of a company. Once this is done, the company allots shares to the applicants as per the

prescribed rules and regulations laid down by SEBI.

1.2.2 Reasons for investing in equities

When a person buys a share of a company he becomes a shareholder in that company.

Shares are also known as Equities. Equities have the potential to increase in value over

time. It also provides your portfolio with the growth necessary to reach your long term

investment goals. Research studies have proved that the equities have outperformed most

other forms of investments in the long term.

This may be illustrated with the help of following examples:

a) Over a 17year period between 1990 to 2007,Nifty has given an annualized return of 20

%.

b) In the last 15-20 years, the average return from equity was about 18 percent p.a.

c) Equities are considered the most challenging and the rewarding when compared to other

investment options.

d) Research studies have proved that investments in some shares with a longer tenure of

investment have yielded far superior returns than any other investment.

1.2.3 The average return on Equities in India

Since 1990 till date, Indian stock market has returned about 20% to investors on an average

in terms of increase in share prices or capital appreciation annually. Besides, that on

average stocks have paid 1.7%dividend annually. Dividend is a percentage of the face value

of a share that a company returns to its shareholders from its annual profits. Compared to

37 most other forms of investments, investing in equity shares offers the highest rate of

return, if invested over a longer duration.

1.2.4 Factors that influence the price of a stock:

Broadly there are two factors:

(1) Stock specific and


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(2) Market specific.

The stock-specific factor is related to peoples expectations about the company, its future

earnings capacity, financial health and management, level of technology and marketing

skills.

The market specific factor is influenced by the investors sentiment towards the stock

market as a whole. This factor depends on the environment rather than the performance of

any particular company. Events favorable to an economy, political or regulatory

environment like high economic growth, friendly budget, stable government etc. can fuel

euphoria in the investors resulting in a boom in the market.

On the other hand, unfavorable events like war, economic crisis, communal riots, minority

government etc. depress the market irrespective of certain companies performing well.

However, the effect of market-specific factor is generally short-term. Despite ups and

downs, price of a stock in the long run gets stabilized based on the stock specific factors.

Therefore, a prudent advice to all investors is to analyze and invest and not speculate in

shares.

Growth Stock v/s Value Stock

Growth Stocks:

In the investment world we come across terms such as Growth stocks, Value stocks etc.

Companies, whose potential for growth in sales and earnings are excellent, are growing

faster than other companies in the market or other stocks in the same industry are called the

Growth Stocks. These companies usually pay little or no dividends and instead prefer to

reinvest their profits in their business for further expansions.

Value Stocks: The task here is to look for stocks that have been overlooked by other

investors and which may have a hidden value. These companies may have been beaten

down in price because of some bad event, or may be in an industry that's not fancied by

most investors. However, even a company that has seen its stock price decline still has

assets to its name buildings ,real estate, inventories, subsidiaries, and so on. Many of these

assets still have value, yet that value may not be reflected in the stock's price. Investors


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look to buy stocks that are undervalued, and then hold those stocks until the rest of the

market realizes the real value of the company's assets.

1.2.5 Way to acquire equity shares

The investor can acquire equity share either by the following two ways,

1. Primary market

2. Secondary market

You may subscribe to issues made by corporates in the primary market. In the primary

market, resources are mobilized by the corporates through fresh public issues (IPOs) or

through private placements. Alternately, you may purchase shares from the secondary

market. To buy and sell securities you should approach a SEBI registered trading member

(broker) of a recognized stock exchange.

PRIMARY MARKET:

The primary market provides the channel for sale of new securities. Primary Market

provides opportunity to issuers of securities; Government as well as Corporates, to raise

resources to meet their requirements of investment and/or discharge some obligation. They

may issue the securities at face value, or at a discount/premium and these securities may

take a variety of forms such as equity, debt etc. They may issue the securities in domestic

market and/or international market.

SECONDARY MARKET:

Secondary market refers to a market where securities are traded after being initially offered

to the public in the primary market and/or listed on the Stock Exchange. Majority of the

trading is done in the secondary market. Secondary market comprises of equity markets and

the debt markets.

1.3) RISK:

Risk, for most of us, refers to the likelihood that in lifes games of chance, we will receive

an outcome that we will not like. For instance, the risk of driving a car too fast is getting a


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speeding ticket, or worse still, getting into an accident. Websters dictionary, in fact,

defines risk as exposing to danger or hazard. Thus, risk is perceived almost entirely in

negative terms.

In finance, the definition of risk is both different and broader. Risk, as we see it, refers to

the likelihood that we will receive a return on an investment that is different from the return

we expected to make. Thus, risk includes not only the bad outcomes, i.e., returns that are

lower than expected, but also good outcomes, i.e., returns that are higher than expected. In

fact, we can refer to the former as downside risk and the latter is upside risk; but we

consider both when measuring risk.

Risk is a concept that denotes a potential negative impact to an asset or some characteristic

of value that may arise from some present process or future event. In everyday usage, risk

is often used synonymously with the probability of a known loss. Paradoxically, a probable

loss can be uncertain and relative in an individual event while having a certainty in the

aggregate of multiple events.

The variance and standard deviations of return serve as the alternative statistical measures

of the risk of the security in absolute sense. Similarly covariance measures the risk of the

security relative to the other securities in a portfolio.

1.3.1TYPES OF RISK:

1] Systematic risk and

2] Unsystematic risk

CLASSIFICATION OF RISK

Systematic risk Unsystematic risk

Market risk or Economic risk Business risk

Interest rate risk financial risk

Purchase power risk


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SYSTEMATIC RISK:

The systematic risk affects the entire market. Also known as "un-diversifiable risk"

or "market risk." Systematic risk is a risk of security that cannot be reduced through

diversification. This indicates that the entire market is moving in a particular

direction either downward or upward. The economic conditions, political situations

and sociological changes affect the security market.

Variability in a securitys total returns that is directly associated with overall

movements in the general market or economy is called systematic or market or

general risk. In other words, Systematic risk is the risk attributable to broad macro

factors affecting all securities.

Virtually all securities have some systematic risk, whether bonds or stocks, because

systematic risk directly encompasses the interest rate, market risk and inflation risk.

The investor cannot escape this part of risk, because no matter how well he or she

diversifies, the risk of the overall market cannot be avoided.

Systematic risk is non-diversifiable and is associated with securities market as well as the

economy, sociological, political and legal considerations of the price of all securities in the

economy. The effect of these factors is to put pressure on all securities in such a way that

the price of all stocks will move in the same direction. The following are the factors that

influence systematic risk,

The systematic risk is further sub-divided into-

Market Risk

Purchasing Power Risk

Interest Rate Risk

MARKET RISK: Market risk is referred to as stock variable due to change in investors

attitude and expectations. The investors reaction towards tangible events is the chief cause


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affecting market risk. Market risks cannot be eliminated while financial risk can be

reduced. Market risk includes such factors as business recessions, depressions and long-run

changes in consumption in the economy.

Jack Clark Francis has defined market risk as that portion of total variability of return

caused by the alternating forces of bull and bear markets. When the security index moves

upward with frequent irregular pauses for a significant period of time, it is known as bull

market. In the bull market, the index moves from a low level to the peak. Bear market is

just a reverse to the bull market; the index declines haltingly from the peak to a market low

point called trough for a significant period of time. During the bull and bear market more

than 80 per cent of the securities prices rise or fall along with the stock market indices.

The forces that affect stock market are tangible and intangible events. The tangible events

are real events such as earthquake, war, political uncertainty, an election year, illness or

death of president, and fall in the value of currency.

Intangible events are related to market psychology. The market psychology is affected

by the real events. But reactions to the tangible events become over reactions and they push

the market in a particular direction.

The market risk in equity shares is much greater than it is in bonds. Equity shares

value and prices are related in some fashion to earnings. Current and prospective dividends,

which are made possible by earnings, theoretically, should be capitalized at a rate that will

provide yields to compensate for the basic risks.

INTEREST RATE RISK:

The price of all securities rise or fall depending on the change in interest rates, the

longer the maturity period of a security, the higher the yield on an investment and lower the

fluctuations in prices.

Interest rates continuously change for bond, preference stock and equity stocks.

Interest rate risk can be reduced by diversifying in various kinds of securities and also

buying securities of different maturity dates.

A major source of risk to the holders of high quality bonds is changes in interest rates,


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commonly referred to an interest rate risk. These high- quality bonds are not subject to

either substantial business risk or financial risk.

If there is an increase in risk free rate of interest (i.e., MIBOR, interest rate on government

bonds and interest rate on treasury bills), then there would be definite shift in the funds

from low yielding bonds to high yielding bonds and from stocks to bonds.

Likewise, if the stock market is in a depressed condition, investors would like to shift their

money to the bond market, to have an assured rate of return. For example: The best

example is that in April 1996, most of the initial public offerings of many companies

remained undersubscribed but IDBI and IFC bonds were oversubscribed. The assured rate

of return attracted the investors from the stock market to the bond market.

PURCHASE POWER RISK:

Purchasing power risk is also known as inflation risk. This risk arises out if change in

the prices of goods and services and technically it covers both inflation and deflation

period. Therefore, in India, purchasing power risk is associated with inflation and rising

price in the economy.

The negative relation between equity valuations and expected inflation is found to be the

result of two effects: a rise in expected inflation coincides with both

(i) lower expected real earnings growth and

(ii) Higher required real returns.

A one percentage point increase in expected inflation is estimated to rise required real stock

returns about one percentage point, which on average would imply a 20 percent decline in

stock prices. But the inflation factor in expected real stock returns is also in long-term

Treasury yields; consequently, expected inflation has little effect on the long-run equity

premium.

Variations in the returns are caused also by the loss of purchasing power of currency.

Inflation is the reason behind the loss of purchasing power. Purchasing power risk is the

probable loss in the purchasing power of the returns to be received. The rise in price

penalizes the returns to the investor, and every potential rise in the price is a risk to the

investor.



UNSYSTEMATIC RISK:

Unsystematic risk is unique and peculiar to an industry or to a firm. Unsystematic risk

stems from managerial inefficiency, technological change in the production process,

availability of raw materials, change in the consumer preference, and labour problems. The

nature and magnitude of above factors differ from industry to industry, and company to

company.

Technological changes affect the information technology industry more than that of

consumer product industry. Thus, it differs from industry to industry. The changes in the

consumer preference affect the consumer products like television sets, washing machines,

refrigerators, etc more than they affect the iron and steel industry.

Unsystematic risk can be classified into two categories namely:

Business Risk

Financial Risk

Unsystematic risk is unique to a firm of industry. It does not affect an average investor.

Unsystematic risk is caused by factors like labour strike, irregular & disorganized

management policies and consumer preference. These factors are independent of the price

mechanism operating in the securities market. The following are the factors that influence

unsystematic risk.

BUSINESS RISK:

Business risk, which is sometimes called operating risk, is the risk associated with the

normal day-to-day operations of the firm. Business risk is concerned to Earnings before

interest and tax. Earnings before interest and taxes can be viewed as the operating profit of

the firm; that is, the profit of the firm before deducting financing charges and taxes.

Business risk represents the chance of loss and the variability of return created by a firms

uses of funds. The two components of business risk signify the chance that the firm will fail

because of the inability of the assets of the firm to generate a sufficient level of earnings

before interest and the variability of such earnings.



Every corporate organization has its own objectives and goals and aims at a particular

gross profit and operating income and also expects to provide a certain level of dividend

income to its shareholders. It also hopes to plough back some profit.

Business risk is also associated with risks directly affecting the internal environment of

the firm and those if circumstance beyond its control. The former is classified as internal

business risk and the latter as external business risk, within these two broad categories of

risk, the firm operations.

FINANCIAL RISK: Financial risk is created by the use of fixed cost securities (i.e., debt and preference

shares). Financial risk is the chance of loss and the variability of the owners return created

by a firms sources of funds. Financial risk is the chance of loss and the variability of the

owners return created by a firms sources of funds. The two components of financial risk

reflect the chance that the firm will fail because of the inability to meet interest and/ or

principal payments on debt, and the variability of earnings available to Equity holders

caused by fixed financing changes (i.e., interest expense and preferred dividends). In case

the firm does not employ debt, there will be no financial risk.

An important aspect of financial risk is the interrelationship between financial risk

and business risk. In effect, business risk is basic to the firm, but the firms risk can be

affected by the amount of debt financing used by the firm. Whatever be the amount of

business risk associated with the firm, the firms risk will be increased by the use of debt

financing. As a result, it follows that the amount of debt financing used by the firm should

be determined largely by the amount of business risk that the firm faces. If its business risk

is low, then it can use more debt financing without fear of default, or a marked impact on

the earnings available to the equity share holders. Conversely, if the firm faces, a lot of

business risk, then the use of a lot of debt financing may jeopardize the firms operations.

Financial risk in a company is associated with the method through which it plans its

financial structure. If the capital structure of a company tends to make earnings unstable,

the company may fail financially. How a company rises funds to finance its needs and

growth will have an impact on its future earnings and consequently on the stability of



earnings. Debt financing provides a low cost source of funds to a company, at the same

time providing financial leverage for the common stock holders.

1.4 RETURN:

A major purpose of investment is to set a return or income on the funds investment. On a

bond, an investor expects to receive interest. On a stock, dividends may be anticipated. The

investor may expect capital gains from some investments and rental income from house

property.

Return is the amount or rate of produce, proceeds, gain, fruit and profit which accrues to

an economic agent from an undertaking or enterprise or investment. It is a reward for and a

motivating force behind investment, the objective of which is usually to maximize return.

Return on a typical investment has two components; the basic one which is the periodic

cash or income receipts, and the other which is the appreciation or depreciation in the price

of value of the asset, called the capital gain or the capital loss. The capital gain is the

difference between the purchase price of the asset and the price at which it can be or is sold.

The income component is usually but not necessarily received in cash viz., stock dividend.

The total return on an investment thus can be defines as income plus/minus

appreciation/depreciation.

1.4.1)TYPES OF RETURN:

1. Internal rate of return

2. Expected return

3. Rate of return

4. Holding period return

INTERNAL RATE OF RETURN:

The internal rate of return (IRR) is a capital budgeting method used by firms to decide

whether they should make long-term investments. The IRR is the annualized effective

compounded return rate which can be earned on the invested capital, i.e. the yield on the

investment. A project is a good investment proposition if its IRR is greater than the rate of

return that could be earned by alternative investments (investing in other projects, buying



bonds, even putting the money in a bank account). The IRR should include an appropriate

risk premium. Mathematically, the IRR is defined as any discount rate that results in a net

present value of zero of a series of cash flows. In general, if the IRR is cost of capital, or

hurdle rate, the project will add value for the company greater than the project's.

EXPECTED RETURN:

The expected rate of return is the weighted average of all possible return multiplied by their

respective probabilities. Expected return is the estimation of the value of an investment,

including the change in price and any payments or dividends, calculated from a probability

distribution curve of all possible rates of return. In general, if an asset is risky, the expected

return will be the risk-free rate of return plus a certain risk premium, also called expected

value. The average of a probability distribution of possible returns, calculated by using the

following formula:

Expected Return:

RATE OF RETURN :

In finance, rate of return (ROR) or return on investment (ROI) is the ratio of money

gained or lost on an investment relative to the amount of money invested. The amount of

money gained or lost may be referred to as interest, profit/loss, gain/loss, or net

income/loss. The money invested may be referred to as the asset, capital, principal, or the

cost basis of the investment.

ROI is also known as rate of profit, rate of return or return. ROI is the return on a past or

current investment, or the estimated return on a future investment. ROI is usually given as a

percent rather than decimal value. However, ROI is most often stated as an annual or

annualized rate of return, and it is most often stated for a calendar or fiscal year Rate of

return for the given period is calculated by using the formula,

Annual income + (Ending price Beginning price)

Rate of return = --------------------------------------------------------------

Beginning price



HOLDING PERIOD RETURN:

Holding period yield (HPY) measures the total return an investment during a given or

designing time period in which the asset is held by the investor. It is to be noted that HPY

does not mean that the security is actually sold and the gain or loss is actually realized by

the investor. The concept of HPY is applicable whether one is measuring the realized return

or estimated the future return.

1.5 Definition of Bombay Stock Exchange (BSE):

The first and largest securities market in India, the Bombay Stock Exchange (BSE)

was established in 1875 as the Native Share and Stock Brokers' Association. Based in

Mumbai, India, the BSE lists over 6,000 companies and is one of the largest exchanges in

the world. The BSE has helped develop the country's capital markets, including the retail

debt market, and helped grow the Indian corporate sector.

In 1995 the BSE switched from an open-floor to an electronic trading system. Securities

listed by the BSE include stocks, stock futures, stock options, index futures, index options

and weekly options. The BSE's overall performance is measured by the Sensex, an index of

30 of the BSE's largest stocks covering 12 sectors.

1.5.1BSE Bankex:

Banking sector reforms such as fall in interest rates and enactments of securitization bill

have given a major fillip to Indian banking industry .These developments have significantly

impacted the performance of bank stocks and bank stocks have emerged as a major

segment in the equity markets.

The index named as Bankex is based on the free float methodology of index

construction. Bankex tracks the performance of the leading banking sector stocks listed on

the BSE. Twelve stocks, which represent 90 percent of the total market capitalization of all

banking sector stocks listed on BSE, are included in the index. The base date for Bankex is

1st January 2002 and the base value is 1000 points.

BSE BANKEX Index Bombay Stock Exchange Limited launched "BSE BANKEX Index"

on 23 June 2003. This index consists of major Public and Private Sector Banks listed on



BSE. The BSE BANKEX Index is displayed on-line on the BOLT trading terminals

nationwide

1.5.2 Objectives:

a. An Index to track the performance of listed equity of Banks.

b. A suitable benchmark for the Central Government to monitor its wealth on the bourses.

1.5.3FEATURES:

Bankex tracks the performance of the leading banking sectors stocks listed on the BSE.

Bankex is based on the free-float methodology of index construction

The base data for BANKEX is ist January 2002

The base value for BANKEX is 1000 points.

BSE has calculated the historical index value of BANKEX since ist januaury 2002.

14 stocks which represent 90 %of the total market capitalization of all banking

sectors listed on BSE are included in the Index.

The Index is disseminated on a real-time basis through BSE Online Trading

(BOLT) terminals.



Stocks forming part if the BANKEX along with the particulars of their free-float

adjusted market capitalization are listed below.

Stocks Constituting Bankex

UTI Bank Ltd

Kotak Mahindra Bank

UCO Bank

Indian Overseas Bank

Jammu & Kashmir Bank

Vijaya Bank

Allahabad Bank Ltd

Centurion Bank Ltd

Indusind Bank Ltd

Karnataka Bank Limited

Federal Bank Ltd

Karnataka Bank Ltd

Yes Bank Ltd

IDBI Bank Ltd

1.5.4Maintenance of BSE Indices:

One of the important aspects of maintaining continuity with the past is to update the base

year average. The base year value adjustment ensures that replacement of stocks in Index,

additional issue of capital and other corporate announcements like 'rights issue' etc. do not

destroy the historical value of the index. The beauty of maintenance lies in the fact that

adjustments for corporate actions in the Index should not affect the index values.

The BSE Index Cell does the day-to-day maintenance of the index within the broad index

policy framework set by the BSE Index Committee. The BSE Index Cell ensures that all

BSE Indices maintain their benchmark properties by striking a delicate balance between

frequent replacements in index and maintaining its historical continuity.



2.1 LITERATURE REVIEW

The review for the purpose of the study is done by means of collecting information

from different sources.

Risk Sensitivity of Bank Stocks in Malaysia: Empirical Evidence Across the

Asian Financial Crisis

By: Hooy, Chee Wooi; Tan, Hui Boon; Nassir, Annuar Md (September 2004)

This research article examines the sensitivity of commercial banks' stock

excess returns to their volatility and financial risk factors, measured by interest rates

and exchange rates, across the recent Asian financial crisis. In general, we found

that there were no significant differences among Malaysian commercial banks in

their risk exposure prior to and during the Asian financial crisis. The introduction of

selective capital controls, a fixed exchange rate regime and a forced banking

consolidation program, however, had increased the risk exposure of both large and

small domestic banks. The effects of these risk factors were significantly detected in

both large and small banks.

Risk And Return In Banking: Evidence From Banking Stock Returns

By: Jonathan.A.Neuberger (November 1990)

In the research article titled suggests that bank stock risks changed significantly

during the 1980s.The returns on these stocks became increasingly sensitive to

factors that influence overall stock market returns. At the same time, bank stocks

were increasingly insensitive to change in interest rates. While these results add to

our knowledge of bank stock risks and returns.

Common Risk Factors in Bank Stocks published in JEL Classifications

By:James W. Kolari, Texas A&M University(2006)

This research article provides evidence on the risk factors that are priced in

bank equities. Alternative empirical models with precedent in the nonfinancial asset

pricing literature are tested, including the single-factor CAPM, three-factor Fama-



French model, and ICAPM. Our empirical results indicate that an unconditional

two-factor ICAPM model that includes the stock market excess return and shocks to

the slope of the yield curve is useful in explaining the cross section of bank stock

returns. However, we find no evidence that firm specific factors such as size and

book-to-market ratios are priced in bank stock returns. We also provide evidence

that shocks to the default spread are priced in a conditional version of the two-factor

ICAPM model. These results have a number of practical implications for event

studies of banking firms, estimation of bank cost of capital and investment

performance, as well as regulatory initiatives to utilize market discipline to evaluate

bank risk under Basel II.

An Analysis Of Commercial Bank Common Stock Returns

By: J. Van Fenstermaker ; R. Phil Malone ; Stanley R. Stansell (1998)

In this research article - J. Van Fenstermaker ; R. Phil Malone ; Stanley R.

Stansell analyses for the first time a continuous index of returns on commercial

bank common stocks listed in a specific market. The index is constructed from a

unique set of historical data and is calculated on a weighted and unweighted basis,

first including and then excluding dividends. A measure of volatility is calculated

annually.

The results indicate that the dividend component of holding period returns is very

important. Including dividends, average returns were 6.0% for the century;

excluding dividends, average returns were 0.1%. Excess returns were calculated

using two different measures of a riskless rate of return. Cumulative excess returns

for the first half of the nineteenth century were negative. Real returns were

calculated, and found to be generally positive over the century.

Examining the effects of significant economic and political events on bank

common stock returns, we find that the War of 1812, the Civil War, and the

National Banking System had a significant impact on bank stock returns. Several

economic panics, several depressions, the First and Second Banks of the United

States, the Embargo of 1807, and the Suffolk Bank had no measureable impact.



Understanding Distribution Pattern of Banking Sector Prices in Indian Stock Market

By: Praloy, Sooraj, Archana

This paper comes out with the understanding of the different distributions that might

explain the stock price returns of banking companies and hence should also help in

predicting future movement for fund manager. The Indian stock market prices, which have

been mostly tracked and understood by various techniques, were assumed to follow the

normal distribution properties. The pattern of stock price returns of different companies

was assumed to fit the same normal Gaussian distribution in analyzing their properties in

most of the studies. Prediction of future movements with their probabilities was also

calculated and the various graphs also interpreted. The hierarchies of the distributions,

which will best fit the stock price returns, were also analysed by conducting suitable tests.

Stable distributions which handle skewed data with heavy tails were read and understood in

detail and their various forms analyzed alongside their parameters. The parameters with

their values were interpreted and the top three distributions for each of the companies

explained. The research generates that burr, dagum, log logistic and Cauchy distribution are

almost common factors in fitting the data values.

Equity Returns in the Banking Sector in the Wake of the Great Recession and the

European Sovereign Debt Crisis

By: Jorge A. Chan-Lau, Estelle X. Liu, and Jochen M. Schmittmann (july 2012)

The successive realization of two major crises since 2008 has eroded banks

earnings prospects owing partly to tight funding conditions and potential large losses from

sovereign debt holdings of European countries undergoing significant duress. While it is

difficult for banks to insulate completely from major shocks affecting global economic

conditions, our analysis suggest that banks with a stronger capital base have been better

able to cope with major stresses, a fact priced in their equity prices. Increased reliance on

deposits rather than short-term wholesale funding could help banks to withstand negative

shocks better, as our results suggest that lower loan to deposit ratios are reflected in a better

equity return performance.



Risk-Return Relationship in Equities: Evidence from the Automobile and

Sector of the Nigerian Stock Exchange

By: E. Chuke Nwude (Vol 3, No 6, 2012)

It is hereby recommended that the investors in the Nigerian Stock Exchange(NSE)

will find the betas helpful in assessing systematic risk and understanding the impact market

movements can have on the return expected from a share of Nigerian automobile/tyre

stocks. For example, if the market is expected to provide a 10% rate of return over the next

year, Dunlop and R.T Briscoe stocks with average beta of -2.01 and 1.51 respectively

would be expected to experience a decrease (in Dunlop) and an increase (in RT Briscoe) in

return of approximately -20.1% and 15.1% respectively over the same period. Decreases in

market returns are also translated into decreasing security returns, and this is where the risk

lies. In the preceding example, if the market is expected to experience a negative return of

10%, then the Dunlop with a beta of -2.01 should experience 20.1% decrease in its return.

Stocks having less than 1 will, of course, be less responsive to changing returns in the

market, and therefore are considered less risky.

2.2 TITLE OF THE STUDY:

A STUDY ON RISK AND RETURN OF EQUITY INVESTMENTS IN BANKING

SECTOR

2.3 STATEMENT OF THE PROBLEM:

The study was conducted to analyze the investors behavior towards the banking

stocks. It also evaluate the performance of banking share stock mainly to

identification of required rate of return and risk of a particular stock based upon

different risk elements prevailing in the market and other Economic Factors.

Equity investment includes high risk at the same time it earns higher return

unusually high returns may not be sustainable. Since the banking industry is under the

control of Reserve Bank of India (RBI), it is adversely used as the tool to control the

external problems like inflation, interest rate, money supply, etc., Because of this,

there is a high instability in the share price that reduces the real investors interest. So



investors are short selling their holdings with respect to the market fluctuation to keep

away them from the loss of investment.

This study is structured to analyze the performance of the selected shares in the

banking industry to reveal the risk and return in a particular period of time and the

investors perception towards the Banking industry.

2.4 SCOPE OF THE STUDY:

The scope of the study has been limited to the analysis of the investors behavior

and the performance of banking sector ten leading banks by using the risk

measurement tools like Beta, Alpha and Standard Deviation methods. The study is

specifically focused on to reveal the investors interest and expectations on the

banking stocks and the actual return earned by the stocks in a particular period of

time. The risk and return factors are calculated by using the available market data

(purely historical).

2.5 OBJECTIVES OF THE STUDY

1. To entrap the investors awareness on the banking sector stocks, the level of

expected return and risk in the changing economy.

2. To know what are the factors are going to affect to investor in selecting equity.

3. To Analyze the Risk and Return of banking sector Stock with the bankex index

4. To Test the Variability between Variables, Such as variance of returns co-

relations standard deviation.

5. To suggest improvise suggestion regarding banking sector investment.

2.6 HYPOTHESIS:

Based on the above objectives following are the hypotheses formulated to test in

this research study.

2.6.1 Null and alternative Hypothesis

H0: there is no significant relation between the banking and non-banking

equity.



H1: there is a significant relation between the banking and non-banking

equity.

2.7 STATISTICAL PROCEDURE:

The research has been done by using the following statistical techniques used are:

A) Return: - A return is a measurement of how much an investment has

increased or decreased in value over any given time period.

Todays price Yesterdays price

Security return = --------------------------------------------* 100

Yesterdays price

B) Standard Deviation: Standard deviation is applied to the annual rate of

return of an investment to measure the investment's volatility. It is also

known as historical volatility.

The standard deviation can be calculated by using the following formula,

Standard Deviation () = P (Ri-E(Ri))

C) Variance: The variance is a somewhat abstract measure of the variability in

a set of data. Unlike the variability the standard deviation can be easily

conceptualized by plotting it along with the individual points in the set. It is

easy to visualize the standard deviation in this way along with the data set.

Variance () = Pi (Ri-E(Ri) )

D) Correlation: The correlation is used to find the relation between stocks and

the market, it also find the strength of the linear association between two

variables. The correlation will range from +1 to -1 to indicate whether the

relationship is positive or negative. A correlation of 1 shows a perfect

correlation and a correlation of 0 shows no correlation. The formula is:

E)



E) Beta: The coefficient measures the asset's non-diversifiable risk, also

called systematic risk or market risk. The most important part of the

equation is () beta. It is used to describe the relationship between the

stocks return and market indexs return. A 0.5 beta indicates that the

market index changes of 1% was reflected by a 0.5% price change in

stocks. Similarly, a 1.5% beta would reflect that whenever the market

index rose or fell by 1%, the stock would rise and fall by 1.5%.

NXY - X y

= ..

NX (X)

F) Alpha :- It measures risk-adjusted performance, factoring in the risk

due to the specific security, rather than the over all market. A high value

for alpha implies that the stock has performed better than would have

been expected given its beta .

ALPHA () = Y ( * x)

2.8)RESEARCH METHODOLOGY

A) Sample Size:

Ten banking and three non-banking equity are selected for analysis.

B) Sampling technique:

The sampling technique adopted for the study is simple random sampling. It is the

primary probability sampling design. A process that not only give to each element a

chance of being included in the sample but also makes the selection of every

possible combination of cases in the desire size equally.

C) Sources of data collection:

The data for the present study is drawn from secondary sources.



SECONDARY DATA:

Secondary data refers to those data that has already been collected and analyzed by

someone else. In this study secondary data is collected from various sources like:

Internet

Journals and business magazines

Newspapers

D) Analysis of Data:

Data collected is analysed with the help of various financial tools.

Software used for data analysis:

EXCEL SPREADSHEET

2.9 STATISTICAL ANALYSIS

The statistical methods to be used for data analysis in this study are

Descriptive statistics, regression and t-test.

Regression :Statistical approach used to forecast change in a

dependent variable on the basis of change in one or more

independent variables

T-test: this tool is used for testing the hypothesis i.e whether we have

to accept the null hypothesis (Ho) or alternative hypothesis (H1) via

t-stat and t-critical value.

2.10LIMITATIONS OF THE STUDY:

Although the study covers a lot of information, there are some limitations as

mentioned below:

Statistics taken from the websites may not be exact and correct.

The findings and conclusions made during the study may not be a long time

appraisal because of high volatility in stock market.



3.1 Revolution in Indian banking Sector:

Indian banking is the lifeline of the nation and its people. Banking has helped in developing

the vital sectors of the economy. The sector has translated the hopes and aspirations of

millions of people into reality. But to do so, it has had to control miles and miles of difficult

terrain, suffer the indignities of foreign rule and the pangs of partition. Today, Indian banks

can confidently compete with modern banks of the world .Before the 20th century, usury,

or lending money at a high rate of interest, was widely prevalent in rural India. Entry of

Joint stock banks and development of Cooperative movement have taken over a good deal

of business from the hands of the Indian money lender, who although still exist, have lost

his menacing teeth.

In the Indian Banking System, Cooperative banks exist side by side with commercial banks

and play a supplementary role in providing need-based finance, especially for agricultural

and agriculture-based operations including farming, cattle, milk, hatchery, personal finance

etc. along with some small industries and self-employment driven activities.

Generally, co-operative banks are governed by the respective co-operative acts of state

governments. But, since banks began to be regulated by the RBI after 1stMarch 1966, these

banks are also regulated by the RBI after amendment to the Banking Regulation Act 1949.

The Reserve Bank is responsible for licensing of banks and branches, and it also regulates

credit limits to state co-operative banks on behalf of primary co-operative banks for

financing SSI units.

Banking in India originated in the first decade of 18th century with The General Bank of

India coming into existence in 1786. This was followed by Bank of Hindustan. Both these

banks are now defunct. After this, the Indian government established three presidency

banks in India. The first of three was the Bank of Bengal, which obtains charter in 1809, the

other two presidency bank, viz., the Bank of Bombay and the Bank of Madras, were

established in 1840 and 1843, respectively. The three presidency banks were subsequently

amalgamated into the Imperial Bank of India (IBI) under the Imperial Bank of India Act,

1920 which is now known as the State Bank of India.



A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta

operations in the 1850s. At that point of time, Calcutta was the most active trading port,

mainly due to the trade of the British Empire, and due to which banking activity took roots

there and prospered. The first fully Indian owned bank was the Allahabad Bank, which was

established in 1865.

By the 1900s, the market expanded with the establishment of banks such as Punjab

National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai both of which

were founded under private ownership. The Reserve Bank of India formally took on the

responsibility of regulating the Indian banking sector from 1935. After Indias

independence in 1947, the Reserve Bank was nationalized and given broader powers.

As the banking institutions expand and become increasingly complex under the impact of

deregulation, innovation and technological up gradation, it is crucial to maintain balance

between efficiency and stability. During the last 30 years since nationalization tremendous

changes have taken place in the financial markets as well as in the banking industry due to

financial sector reforms. The banks have shed their traditional functions and have been

innovating, improving and coming out with new types of services to cater emerging needs

of their .

Banks have been given greater freedom to frame their own policies. Rapid advancement of

technology has contributed to significant reduction in transaction costs, facilitated greater

diversification of portfolio and improvements in credit delivery of banks. Prudential norms,

in line with international standards, have been put in place for promoting and enhancing the

efficiency of banks. The process of institution building has been strengthened with several

measures in the areas of debt recovery, asset reconstruction and securitization,

consolidation, convergence, mass banking etc. Despite this commendable progress, serious

problem have emerged reflecting in a decline in productivity and efficiency, and erosion of

the profitability of the banking sector. There has been deterioration in the quality of loan

portfolio which, in turn, has come in the way of banks income generation and

enchancement of their capital funds. Inadequacy of capital has been accompanied by



inadequacy of loan loss provisions resulting into the adverse impact on the depositors and

investors confidence. The Government, therefore, set up Narasimham Committee to look

into the problems and recommend measures to improve the health of the financial system.

The massive and speedy expansion and diversification of banking has not been without its

strains. The banking industry is entering a new phase in which it will be facing increasing

competition from non-banks not only in the domestic market but in the international

markets also. With the emergence of new private banks, the private bank sector has become

enriched and diversified with focus spread to the wholesale as well as retail banking. The

existing banks have wide branch network and geographic spread, whereas the new private

banks have the clout of massive capital, lean personnel component, the expertise in

developing sophisticated financial Products and use of state-of-the-art technology.

Gradual deregulation that is being ushered in while stimulating the competition would also

facilitate forging mutually beneficial relationships, which would ultimately enhance the

quality and content of banking. In the final phase, the banking system in India will give a

good account of itself only with the combined efforts of cooperative banks, regional rural

banks and development banking institutions which are expected to provide an adequate

number of effective retail outlets to meet the emerging socio-economic challenges during

the next two decades.

The electronic age has also affected the banking system, leading to very fast electronic fund

transfer. However, the development of electronic banking has also led to new areas of risk

such as data security and integrity requiring new techniques of risk management.

Cooperative (mutual) banks are an important part of many financial systems. In a number

of countries, they are among the largest financial institutions when considered as a group.

Moreover, the share of cooperative banks has been increasing in recent years; in the sample

of banks in advanced economies and emerging markets analyzed in this paper, the market

share of cooperative banks in terms of total banking sector assets increased from about9

percent in mid-1990s to about 14 percent in 2004.



3.2) Industry scenario of Indian Banking Industry:

The growth in the Indian Banking Industry has been more qualitative than quantitative and

it is expected to remain the same in the coming years. Based on the projections made in

the" India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the

report forecasts that the pace of expansion in the balance-sheets of banks is likely to

decelerate.

The Indian Banking industry, which is governed by the Banking Regulation Act of India,

1949 can be broadly classified into two major categories, nonscheduled banks and

scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks.

In terms of ownership, commercial banks can be further grouped into nationalized banks,

the State Bank of India and its group banks, regional rural banks and private sector banks

(the old/ new domestic and foreign). These banks have over 67,000 branches spread across

the country .The Public Sector Banks (PSBs), which are the base of the Banking sector in

India account for more than 78 per cent of the total banking industry assets. Unfortunately

they are burdened with excessive Non Performing assets (NPAs),massive manpower and

lack of modern technology. On the other hand the Private Sector Banks are making

tremendous progress. They are leaders in Internet banking, mobile banking, phone banking,

ATMs. As far as foreign banks are concerned they are likely to succeed in the Indian

Banking Industry.

In the Indian Banking Industry some of the Private Sector Banks operating are IDBI Bank,

ING Vyasa Bank, SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd. and

banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank,

Oriental Bank, Allahabad Bank among others. ANZ Grindlays Bank, ABN-AMRO Bank,

American Express Bank Ltd, Citibank are some of the foreign banks operating in the Indian

Banking Industry.

As far as the present scenario is concerned the Banking Industry in India is going through a

transitional phase. The first phase of financial reforms resulted in the nationalization of 14

major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in

turn resulted in a significant growth in the geographical coverage of banks. Every bank had

to earmark a minimum percentage of their loan portfolio to sectors identified as priority



sectors. The manufacturing sector also grew during the 1970s in protected environs and

the banking sector was a critical source. The next wave of reforms saw the nationalization

of 6 more commercial banks in 1980. Since then the number of scheduled commercial

banks increased four-fold and the number of bank branches increased eight-fold.

After the second phase of financial sector reforms and liberalization of the sector in the

early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete with

the new private sector banks and the foreign banks .The new private sector banks first made

their appearance after the guidelines permitting them were issued in January 1993. Eight

new private sector banks are presently in operation. These banks due to their late start have

access to state-of-the-art technology, which in turn helps them to save on manpower costs

and provide better services.

3.3)Current Scenario of Indian banking system:

The industry is currently in a transition phase. On the one hand, the public sector banks

(PSBs),which are the mainstay of the Indian Banking system are in the process of shedding

their flab in terms of excessive manpower, excessive non-Performing Assets (NPAs) and

excessive governmental equity, while on the other hand the private sector banks are

consolidating themselves through mergers and acquisitions. PSBs, which currently account

for more than 78 percent of total banking industry assets are saddled with NPAs (a mind-

boggling Rs 830 billion in 2000), falling revenues from traditional sources, lack of modern

technology and a massive workforce while the new private sector banks are forging ahead

and rewriting the traditional banking business model by way of their sheer innovation and

service.

The PSBs are of course currently working out challenging strategies even as 20 percent of

their massive employee strength has dwindled in the wake of the successful Voluntary

Retirement Schemes (VRS) schemes.

The private players however cannot match the PSBs great reach great size and access to

low cost deposits. Therefore one of the means for them to combat the PSBs has been



through the merger and acquisition (M& A) route. Over the last two years, the industry has

witnessed several such instances Private sector Banks have pioneered internet banking,

phone banking, anywhere banking, mobile banking, debit cards, Automatic Teller

Machines (ATMs) and combined various other services and integrated them into the

mainstream banking arena, while the PSBs are still grappling with disgruntled employees in

the aftermath of successful VRS schemes.

Meanwhile the economic and corporate sector slowdown has led to an increasing number

of banks focusing on the retail segment. Many of them are also entering the new vistas of

Insurance. Banks with their phenomenal reach and a regular interface with the retail

investor are the best placed to enter into the insurance sector. Banks in India have been

allowed to provide fee-based insurance services without risk participation, invest in an

insurance company for providing infrastructure and services support and set up of a

separate joint venture insurance company with risk participation.

3.4)Challenges Facing by Banking Industry:

The bank marketing is than an approach to market the services profitability. It is a device to

maintain commercial viability. The changing perception of bank marketing has made it a

social process. The significant properties of the holistic concept of management and

marketing has made bank marketing a device to establish a balance between the

commercial and social considerations, often considered to be opposite of each other. A

collaboration of two words banks and marketing thus focuses our attention on the

following:

* Bank marketing is a managerial approach to survive in highly competitive market as well

as reliable service delivery to target customers.

* It is a social process to sub serve social interests.

* It is a fair way of making profits

* It is an art to make possible performance-orientation.

* It is a professionally tested skill to excel competition.



3.5) Emerging players/Users of Banking Services:

The emerging trends in the level of expectation affect the formulation of marketing mix.

Innovative efforts become essential the moment it finds a change in the level of

expectations. There are two types of customers using the services of banks, such as general

customers and the industrial customers.

3.5.1) General Users:

Persons having an account in the bank and using the banking facilities at the terms and

conditions fixed by a bank are known as general users of the banking services. Generally,

they are the users having small sized and less frequent transactions or availing very limited

services of banks.

3.5.2) Industrial Users:

The industrialists, entrepreneurs having an account in the bank and using creditfacilities

and other services for their numerous operations like establishments and expansion,

mergers, acquisitions etc. of their businesses are known as industrial users. Generally, they

are found a few but large sized customers.

3.6) Challenges to Indian Banking:

The banking industry in India is undergoing a major change due to the advancement in

Indian economy and continuous deregulation. These multiple changes happening in series

has a ripple effect on banking industry which is trying to be organized completely,

regulated sellers of market to completed deregulated customers market.

3.6.1) Deregulation:

This continuous deregulation has given rise to extreme competition with greater autonomy,

operational flexibility, and decontrolled interest rate and liberalized norms and policies for

foreign exchange in banking market. The deregulation of the industry coupled with

decontrol in the interest rates has led to entry of a number of players in the banking



industry. Thereby reduced corporate credit off which has resulted in large number of

competitors battling for the same pie.

3.6.2) Modified New rules:

As a result, the market place has been redefined with new rules of the game. Banks are

transforming to universal banking, adding new channels with lucrative pricing and freebees

to offer. New channels squeezed spreads, demanding customers better service, marketing

skills heightened competition, defined new rules of the game pressure on efficiency. Need

for new orientation diffused customer loyalty. Bank has led to a series of innovative

product offerings catering to various customer segments, specifically retail credit.

3.6.3.) Efficiency:

Excellent efficiencies are required at banker's end to establish a balance between the

commercial and social considerations Bank need to access low cost funds and

simultaneously improve the efficiency and efficacy. Owing to cutthroat competition in the

industry, banks are facing pricing pressure; have to give thrust on retail assets.

3.6.4) Diffused customer loyalty:

Attractive offers by MNC and other nationalized banks, customers have become more

demanding and the loyalties are diffused. Value added offerings bound customers to change

their preferences and perspective. These are multiple choices; the wallet share is reduced

per bank with demand on flexibility and customization. Given the relatively low switching

costs; customer retention calls for customized service and hassle free, flawless service

delivery.

3.6.5) misaligned mindset: These changes are creating challenges, as employees are made

to adapt to changing conditions. The employees are resisting to change and the seller

market mindset is yet to be changed. These problems coupled with fear of uncertainty and



control orientation. Moreover banking industry is accepting the latest technology but

utilization is far below from satisfactory level.

3.6.6) Competency gap:

The competency gap needs to be addressed simultaneously otherwise there will be missed

opportunities. Placing the right skill at the right place will determine success. The focus of

people will be doing work but not providing solutions, on escalating problems rather than

solving them and on disposing customers instead of using the opportunity to cross sell.

3.7)Strategic options to cope with the challenges:

Dominant players in the industry have embarked on a series of strategic and tactical

initiatives to sustain leadership. The major initiatives incorporate:

a) Focus on ensuring reliable service delivery through Investing on and implementing right

technology..

b) Leveraging the branch networks and sales structure to mobilize low cost current and

savings deposits.

c) Making aggressive forays in the retail advances segments of home and personal loans.

d) Implementing initiatives involving people, process and technology to reduce the fixed

costs and the cost per transaction.

e) Focusing on fee based income to compensate foe squeezed spread.

f) Innovating products to capture customer 'mind share' to begin with and later the wallet

share.

g) Improving the asset quality as Basel II norms.

The banking environment of today is rapidly changing and the rules of yesterday no longer

applicable. The corporate and the legal barriers that separate the various banking,

investment and insurance sectors are less well defined and the cross-over are increasing. As

a consequence the marketing function is also changing to better support the bank in this

dynamic market environment. The key marketing challenge today is to support and advice

on the focus positioning and marketing resources needed to deliver performance on the

banking products and services. Marketing, as an investment advisor, is about defining 4Ps



and implementing key strategic initiatives to Market segments, increasingly redefined,

relevant micro-segments to survive and flourish in the highly competitive market

3.8) Technology in Banking

Technology will bring fundamental shift in the functioning of banks. It would not

only help them bring improvements in their internal functioning but also enable

them to provide better customer service. Technology will break all boundaries and

encourage cross border banking business.

Banks would have to undertake extensive Business Process Re- Engineering and tackle

issues like

a) How best to deliver products and services to customers

b) designing an appropriate organizational model to fully capture the benefits of

technology and business process changes brought about.

c) How to exploit technology for deriving economies of scale and how to create cost

efficiencies, and

d) How to create a customer - centric operation model.

Entry of ATMs has changed the profile of front offices in bank branches.

Customers no longer need to visit branches for their day to day banking

transactions like cash deposits, withdrawals, cheque collection, balance enquiry etc.

E-banking and Internet banking have opened new avenues in convenience

banking. Internet banking has also led to reduction in transaction costs for banks

to about a tenth of branch banking.

Technology solutions would make flow of information much faster, more accurate

and enable quicker analysis of data received. This would make the decision making

process faster and more efficient. For the Banks, this would also enable

development of appraisal and monitoring tools which would make credit

management much more effective. The result would be a definite reduction in

transaction costs, the benefits of which would be shared between banks and

customers.



While application of technology would help banks reduce their operating costs in

the long run, the initial investments would be sizeable. IT spent by banking and

financial services industry in USA is approximately 7%of the revenue as against

around 1% by Indian Banks. With greater use of technology solutions, we expect

IT spending of Indian banking system to go up significantly.

One area where the banking system can reduce the investment costs in technology

applications is by sharing of facilities. We are already seeing banks coming

together to share ATM Networks. Similarly, in the coming years, we expect to see

banks and FIs coming together to share facilities in the area of payment and

settlement, back office processing, data-warehousing, etc. While dealing with

technology, banks will have to deal with attendant operational risks. This would be

a critical area the Bank management will have to deal with in future.

The present Payment and Settlement systems such as Structured Financial

Messaging System (SFMS),Centralized Funds Management System(CFMS),

Centralized Funds Transfer System (CFTS) and Real Time Gross Settlement

System (RTGS) will undergo further fine-tuning to meet international standards.

Needless to add, necessary security checks and controls will have to be in place. In

this regard, Institutions such as IDRBT will have a greater role to play.

3.8) Rural and Social Banking Issues:

Since the second half of 1960s, commercial banks have been playing an important

role in the socio-economic transformation of rural India. Besides actively

implementing Government sponsored lending schemes ,Banks have been providing

direct and indirect finance to support economic activities. Mandatory lending to the

priority sectors has been an important feature of Indian banking. The Narasimham

committee had recommended for doing away with the present system of directed

lending to priority sectors in line with liberalization in the financial system. There

commendations were, however, not accepted by the Government. In the prevailing



political climate in the country any drastic change in the policy in this regard appears

unlikely.

The banking system is expected to reorient its approach to rural lending. Going

Rural could be the new market mantra. Rural market comprises74% of the

population, 41% of Middle class and 58% of disposable income. Consumer growth is

taking place at a fast pace in 17113 villages with a population of more than 5000. Of

these, 9989 villages are in 7States, namely Andhra Pradesh, Bihar, Kerala,

Maharashtra, Tamilnadu ,Uttar Pradesh and West Bengal. Banks approach to the

rural lending will be guided mainly by commercial considerations in future.

Commercial Banks, Co-operatives and Regional Rural Banks are the three major

segments of rural financial sector in India. Rural financial system, in future has a

challenging task of facing the drastic changes taking place in the banking sector,

especially in the wake of economic liberalization. There is an urgent need for rural

financial system to enlarge their role functions and range of services offered so as to

emerge "one stop destination for all types of credit requirements of people in

rural/semi-urban centres.

Barring commercial banks, the other rural financial institutions have a weak structural

base and the issue of their strengthening requires to be taken up on priority. Co-

operatives will have to be made viable by infusion of capital. Bringing all cooperative

institutions under the regulatory control of RBI would help in better control and

supervision over the functioning of these institutions. Similarly Regional Rural banks

(RRBs) as a group need to be made structurally stronger. It would be desirable if

NABARD takes the initiative to consolidate all the RRBs into a strong rural

development entity.

Small Scale Industries have, over the last five decades, emerged as a major

contributor to the economy, both in terms of employment generation and share in

manufactured output and exports. SSIs account for 95% of the industrial units and



contribute about 40% of the value addition in the manufacturing sector. There are

more than 32 lac units spread all over the country producing over 7500 items and

providing employment to more than 178 lac persons. The employment generation

potential and favourable capital-output ratio would make small scale sector remain

important for policy planners.

Removal of quantitative restrictions on a large number of items under the WTO and

opening up of Indian market to greater international competition have thrown both

challenges and opportunities for the SSI sector. Low capital base and weak

management structure make these units vulnerable to external shocks, more easily.

However the units which can adopt to the changing environment and show

imagination in their business strategy will thrive in the new environment.

Instead of following the narrow definition of SSI, based on the investment in fixed

assets, there is a move to look at Small and Medium Enterprises (SME) as a group for

policy thrust and encouragement. For SMEs, banks should explore the option of E-

banking channels to develop web-based relationship banking models, which are

customer-driven and more cost-effective. Government is already considering

legislation for the development of SME sector to facilitate its orderly growth.

In the next ten years, SME sector will emerge more competitive and efficient and

knowledge-based industries are likely to acquire greater prominence. SMEs will be

dominating in industry segments such as Pharmaceuticals, Information Technology

and Biotechnology. With SME sector emerging as a vibrant sector of the Indian

economy, flow of credit to this sector would go up significantly. Banks will have to

sharpen their skills for meeting the financial needs of this segment. Some of the

Banks may emerge as niche players in handling SME finance.



MAJOR BANKS IN INDIA:

Nationalized Banks Private Sector Banks

Indian Overseas Bank Axis Bank

Indian Bank HDFC Bank

State Bank Of Hyderabad Yes Bank

Corporation Bank ICICI Bank

Andhra Bank Centurion Bank Punjab

Bank Of India Kotak Mahindra Bank

Bank Of Baroda Indusind Bank

Canara Bank KarurVysya Bank

Oriental Bank Of

Commerce

Federal Bank

Union Bank Of India City Union Bank

Vijaya Bank Tamilnadu Mercantile Bank

Allahabad Bank Bank Of Rajasthan

State Bank Of Mysore South Indian Bank

Punjab & Sind Bank Jammu & Kashmir Bank

Syndicate Bank ING Vysya Bank

State Bank Of Travancore Karnataka Bank

State Bank Of Bikaner &

Jaipur

Development Credit Bank

Punjab National Bank Lakshmi Vilas Bank

IDBI Bank Catholic Syrian Bank

Bank Of Maharashtra Foreign Banks

State Bank Of Patiala Bank Of America

State Bank Of Indore HSBC

Dena Bank Standard Chartered Bank

United Bank Of India Citibank

Central Bank Of India Deutsche Bank

State Bank Of India Bank Of Nova Scotia

State Bank Of Saurashtra ABN Amro Bank

UCO Bank BNP Paribas

American Express Bank



1) Axis bank:

Type

Private sector bank

Industry Banking, Financial services

Founded

1994 (As UTI Bank)

Headquarters

Mumbai, Maharashtra, India

Key people

Adarsh Kishore(chairman),Shikhasharma(MD &

CEO)

Products

Credit cards, consumer banking, corporate banking,

finance and insurance, investment banking, mortgage

loans, private banking, private equity, wealth

management

Revenue

274.82 billion (US$5 billion) (2012)

Net income

42.19 billion (US$767.86 million) (2012)

Logo

Axis Bank Limited is an Indian financial services firm headquartered in Mumbai,

Maharashtra. It had begun operations in 1994, after the Government of India allowed new

private banks to be established. The Bank was promoted jointly by the Administrator of the

Specified Undertaking of the Unit Trust of India (UTI-I), Life Insurance Corporation of



India (LIC), General Insurance Corporation Ltd., National Insurance Company Ltd., The

New India Assurance Company, The Oriental Insurance Corporation and United India

Insurance Company UTI-I holds a special position in the Indian capital markets and has

promoted many leading financial institutions in the country.

As on the year ended 31 March 2012, Axis Bank had operating revenue of 134.37 billion

and a net profit of 42.42 billion.

Axis Bank (erstwhile UTI Bank) opened its registered office in Ahmedabad and corporate

office in Mumbai in December 1993. The first branch was inaugurated in April 1994 in

Ahmedabad by Dr. Manmohan Singh, then the Honorable Finance Minister. The Bank, as

on 31 March 2012, is capitalized to the extent of Rest. 4.132 billion with the public

holding (other than promoters and GDRs) at 54.08%.

Network: The Bank's Registered Office is situated in Ahmedabad and its Central Office is

located at Mumbai. The Bank has an extensive network of more than 1600 branches

(including 169 Service Branches/CPCs as on 31 March 2012). The Bank has a network of

over 10000 ATMs (as on 31 March 2012.Axis Bank operates one of the worlds highest

ATM sites at Thegu, Sikkim (at a height of 13,200 feet above sea level) and has the largest

ATM network among private banks in

International Branches

Singapore

Hong Kong

Dubai

Shanghai

Abu Dhabi

Colombo



2) HDFC bank:

Type

Private sector bank

Industry Banking, Financial services

Founded

August 1994

Headquarters

Mumbai, Maharashtra; India

Key people

Mr Aditya Puri (MD)

Products

Credit cards, consumer banking, corporate banking,

finance and insurance, investment banking,

mortgage loans, private banking, private equity,

wealth management

Revenue

US$ 6.487 billion (2012)

Net income

US$ 1.451 billion (2012)

Logo

HDFC Bank Limited is an Indian financial services company based in Mumbai,

Maharashtra that was incorporated in August 1994. HDFC Bank is the fifth or sixth largest

bank in India by assets and the first largest bank by market capitalization as of November 1,

2012. The bank was promoted by the Housing Development Finance Corporation, a

premier housing finance company (set up in 1977) of India. As on December 2012, HDFC



Bank has 2,776 branches and 10,490 ATMs, in 1,399 cities in India, and all branches of the

bank are linked on an online real-time basis.

HDFC Bank was incorporated in 1994 by Housing Development Finance Corporation

Limited (HDFC), India's largest housing finance company. It was among the first

companies to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set

up a bank in the private sector. The Bank started operations as a scheduled commercial

bank in January 1995 under the RBI's liberalization policies.

Times Bank Limited (owned by Bennett, Coleman & Co The Times Group) was merged

with HDFC Bank Ltd., in 2000. This was the first merger of two private banks in India.

Business focus

HDFC Bank deals with three key business segments. - Wholesale Banking Services, Retail

Banking Services and Treasury. It has entered the banking consortia of over 50 corporates

for providing working capital finance, trade services, corporate finance, and merchant

banking. It is also providing sophisticated product structures in areas of foreign exchange

and derivatives, money markets and debt trading And Equity research.

Distribution network

HDFC Bank is headquartered in Mumbai and as of