“A STUDY ON STRENGTH OF USING CAMELS FRAMEWORK AS A TOOL OF

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TABLE OF CONTENT

SI No Particulars Page No

CHAPTER I Introduction

1.1 General Introduction

1.2 Objective of study

1.3 Scope of the study

1.4 Research methodology

1.5 Limitations

CHAPTER II Profiles

2.1 Industry profile

2.2 Company profile

CHAPTER III Theoretical review

3.1 Review of Literature

3.2 Empirical review

CHAPTER IV Data Analysis and Interpretation

4.1 Data Analysis and Interpretation

CHAPTERV Conclusions

5.1 Findings

5.2 Suggestions

5.3 Conclusions

Bibliography

Annexure

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1.1 GENERAL INTRODUCTION:

Finance is regarded as the lifeblood of a business enterprise. This is because in the

modern money-oriented economy, finance is one of the basic foundations for all kinds of

economic activities. It is the master key, which provides access to all the sources for being

employed in manufacturing and merchandising activities. It is rightly been said that business

needs money to make more money. However, it is also true that money begets more money,

only when it is properly managed. Hence, efficient management of every business enterprise

is closely linked with efficient management of its finances.

The banking sector has been undergoing a complex, but comprehensive phase of

restructuring since 1991, with a view to make it sound, efficient, and at the same time forging

its links firmly with the real sector for promotion of savings, investment and growth.

Although a complete turnaround in banking sector performance is not expected till the

completion of reforms, signs of improvement are visible in some indicators under the

CAMEL framework. Under this, bank is required to enhance capital adequacy, strengthen

asset quality, improve management, increase earnings and reduce sensitivity to various

financial risks. The almost simultaneous nature of these developments makes it difficult to

disentangle the positive impact of reform measures.

CAMELS Framework

Supervisory framework, consistent with international norms, covers risk-monitoring factors

for evaluating the performance of banks. This framework involves the analyses of six groups

of indicators reflecting the health of financial institutions. The indicators are as follows:

CAPITAL ADEQUACY

ASSET QUALITY

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MANAGEMENT SOUNDNESS

EARNINGS & PROFITABILITY

LIQUIDITY

SENSITIVITY TO MARKET RISK

The whole banking scenario has changed in the very recent past on the recommendations

of Narasimham Committee. Further BASELL II Norms were introduced to internationally

standardize processes and make the banking industry more adaptive to the sensitive market

risks. The fact that banks work under the most volatile conditions and the banking industry as

such in the booming phase makes it an interesting subject of study. Amongst these reforms

and restructuring the CAMELS Framework has its own contribution to the way modern

banking is looked up on now. The attempt here is to see how various ratios have been used

and interpreted to reveal a bank’s performance and how this particular model encompasses a

wide range of parameters making it a widely used and accepted model in today’s scenario.

1.2 OBJECTIVES OF THE STUDY

To understand the financial performance of the bank.

To understand the importance of rating banks in the competitive environment.

To find out how Capital adequacy, Asset quality, Management soundness,

Earnings & profitability, Liquidity and Systems & control affects the performance

of the bank.

To analyze the liquidity position of the bank.

To analyze the banks performance through CAMEL model and give suggestion for

improvement if necessary.

1.3 SCOPE OF THE STUDY

Performance evaluation of South Indian bank ltd based on various parameters of CAMELS rating system is useful for the banks as well as for those who deal with the bank in order to identify their weakness and take corrective measures. This also helps the prospective

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investors as they can evaluate the bank, based on this study and take decision about their investment

1.4. RESEARCH METHODOLOGY:

Research methodology is a systematic way to solve the problem. It is the description,

explanation and justification of various methods of conducting research. This idea deals with

the statement of the problem, research design, sample design, sources of data collection,

hypothesis and statistical tools used for the data analysis and interpretation. Research

methods helps in arriving at solutions by relating available data with unknown aspects of the

problem.

1.4.1. STATEMENT OF THE PROBLEM:

In the recent years the financial system especially the banks have undergone

numerous changes in the form of reforms, regulations & norms. CAMELS framework for the

performance evaluation of banks is an addition to this. The study is conducted to analyze the

strength of using CAMELS framework as a tool for performance evaluation of Southindian

Bank ltd.

14.2. TYPE OF RESEARCH

Descriptive research is used for the study. The major purpose descriptive research is

description of state of affairs as it exists at present.

1.4.3. METHOD OF DATA COLLECTION:

a) Primary Data:

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Primary data are those which are collected for the first time which is original in

character. They are collected directly and are reliable. In this study primary data are collected

by taking personal visit to the employees of the bank.

b) Secondary Data:

Secondary data is those which have already been collected by someone else.

Secondary data may collected from

1. Annual reports of the South Indian bank2. Bulletins 3. Periodicals4. News letters5. Internal reports of the bank

1.4.4 .TOOLS USED FOR ANALYSIS OF DATA:

Ratio analysis has been used as a tool for drawing conclusions. Percentage analysis

methods are also used for the analyzing the data. Along with that suitable tables and charts

were used to illustrate the trends and for easy interpretation.

1.4.5. PERIOD OF STUDY:

The study was done in South Indian Bank Ltd, pioneer from 03-09-2012 to 25-09-

2012.

1.5. LIMITATIONS OF THE STUDY

The accuracy and reliability of the study depends upon the correctness of

secondary data collected i.e. various kinds of reports of the bank.

There are lots of qualitative factors that affect the performance of the bank which

is out of the scope of this study.

The scope of the study is confined to South Indian Bank Ltd. only, as the model is

often used for comparative study between Banks.

The period of study is limited to 6 years only.

The method discussed pertains only to banks though it can be used for

performance evaluation of other financial institutions.

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2.1.INDUSTRY PROFILE

The Bank

The word bank means an organization where people and business can invest or

borrow money; change it to foreign currency etc. According to Halsbury “A Banker is an

individual, Partnership or Corporation whose sole pre-dominant business is banking, that is

the receipt of money on current or deposit account, and the payment of cheque drawn and the

collection of cheque paid in by a customer.’’

The Origin and Use of Banks

The Word ‘Bank’ is derived from the Italian word ‘Banko’ signifying a bench, which

was erected in the market-place, where it was customary to exchange money. The Lombard

Jews were the first to practice this exchange business, the first bench having been established

in Italy A.D. 808. Some authorities assert that the Lombard merchants commenced the

business of money-dealing, employing bills of exchange as remittances, about the beginning

of the thirteenth century.

About the middle of the twelfth century it became evident, as the advantage of coined

money was gradually acknowledged, that there must be some controlling power, some

corporation which would undertake to keep the coins that were to bear the royal stamp up to a

certain standard of value; as, independently of the ‘sweating’ which invention may place to

the credit of the ingenuity of the Lombard merchants- all coins will, by wear or abrasion,

become thinner, and consequently less valuable; and it is of the last importance, not only for

the credit of a country, but for the easier regulation of commercial transactions, that the

metallic currency be kept as nearly as possible up to the legal standard. Much unnecessary

trouble and annoyance has been caused formerly by negligence in this respect. The gradual

merging of the business of a goldsmith into a bank appears to have been the way in which

banking, as we now understand the term, was introduced into England; and it was not until

long after the establishment of banks in other countries-for state purposes, the regulation of

the coinage, etc. that any large or similar institution was introduced into England. It is only

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within the last twenty years that printed cheques have been in use in that establishment. First

commercial bank was Bank of Venice which was established in 1157 in Italy.

Origin of banking in India

The history of Indian banking industry begins from the performance of money lending

business by a small number of money lenders with limited financial resources and limited

area of operations and extends to the growth of large number of big commercial banks with

huge financial resources and diversified banking activities spread over all parts of the

country.

The history of Indian banking system can be considered under the following heads.

1. Banking Business in Ancient Times

In India, as early as Vedic period, banking, in the crudest from, existed. The books of

Manu contained reference regarding deposits, pledges and policy of loan and rate of interest.

True, banking on those days largely meant money lending and they did not know the

complicated mechanism of modern banking.

2. Banking in Pre-Independence period

During pre-Independence period, banking business was primarily carried on by

indigenous bankers and money lenders.

Indigenous bankers have been operated in India since very ancient times. No doubt,

indigenous banking was carried on by people of all castes. But it is generally the monopoly of

certain banking castes such as Martinis, Mewari’s, Jains, Gujarat is, Chatters etc. The

indigenous bankers are known by different names in different parts of the country.

Money lenders have existed side by side with indigenous bankers in our society. They

generally operated in villages. Money lenders are those persons who lend their own money

mainly for consumption or other domestic purposes. As they do not accept deposits from the

public, but merely lend their own funds, they are called money lenders not bankers.

The indigenous bankers and money lenders played a very important role in

development of banking in India. But the Britishers, i.e. the British Agency Houses in India,

could not make much use of their services on account of differences of language and banking

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practices. So, in the last quarter of 18th century, many British Agency Houses in India started

their own banks on modern pattern. This was the beginning of modern banking in India. The

earliest European bank started by the British Agency Houses in India in 1770 was the bank of

Hindustan. This was followed by other European banks, viz., the bank of Bengal in 1774 and

the General Bank of India 1786. However all the European banks were failed sooner or later

for various reasons. In order to cater the needs of the foreign rules, number of quasi

government banking institutions was established by the Britishers in the name of presidency

banks. They include the Presidency Bank of Bengal in 1806, the presidency bank of Bombay

in 1840 and presidency bank of Madras in 1846.

The Swadeshi movement in 1905 gave great stimulus to the starting of several Indian

joint stock banks. They include the Bank of India set up in 1806, the Bank of Baroda set up in

1908, the Central Bank of India Ltd set up in 1911 etc. But during 1913-17 most o these

banks failed.

The Imperial Bank of India, a privately owned commercial bank was formed on 27 th

January 1921 through the amalgamation of the Presidency Bank o Bengal, Bombay and

Madras. The Imperial Bank of India was allowed to perform both commercial banking

operations as well as some of the central banking functions.

The Reserve Bank of India also was established during the Pre- Independence period.

The RBI was set up on 1th April 1935 as the central bank of the country.

3. Development of Indian Banking Industry in the post-Independence Period

Before independence, the Indian banking industry had to pass through a series of

crises and bank failure. But after India attained independence, the situation is changed

completely. There has been a massive growth of banking system in the post independence

period. The various developments are as follows,

The Reserve Bank of India, the central bank of the country was nationalised on 1th

January 1949.

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The banking regulation act of 1949 was passed. This act has enlarged the control of

the RBI over the Indian banking system and has also introduced several regulating measures

for ensuring sound and balanced growth of the Indian banking industry.

The Imperial Bank of India was nationalised and converted in to the State Bank of

India on 11th July 1955. The information of the State Bank of India has led to considerable

development in the field of commercial banking.

Fourteen major Indian commercial banks were nationalised on 19th July 1969, and 6

more Indian commercial banks were nationalised on 15th April 1980.

Several regional rural banks were established to cater to the credit needs of rural

areas. Several Land development banks were set up to cater to the long term credit needs of

agriculturalists.

Besides the above the banking institutions, a number of special financial institution

were set up for meeting the specialist needs of certain sectors of the economy.

Today Indian banking system compromises public sector banks (which includes State bank of India and its associate banks called State bank group and 20 nationalised banks), private sector banks, co-operative banks, foreign banks and several development banks

CHALLENGES THE INDIAN BANKS FACE

It is by now well recognized that India is one of the fastest growing economies in the

world. Evidence from across the world suggests that a sound and evolved banking system is

required for sustained economic development. India has a better banking system in place vis

a vis other developing countries, but there are several issues that are needed to be ironed out.

INTEREST RATES

Interest rate risk can be defined as exposure of banks net interest income to adverse

moments in interest rates. A banks balance sheet consists mainly of rupee assets and

liabilities. Any move4ment in domestic interest rates is the main sources of interest rate risk.

Over the last few years the treasury departments of the banks have been responsible

for a sustainable part of profits made by bank. Between July 1997 and October 2003, as

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interest rates fell, the yield on ten year government bonds fell, from 13% to 4.9%. with yields

falling the banks make huge profits on their bond portfolios.

Now as yields go up with the rising inflation, bond yields go up and bond prices fall

as the debt market starts factoring a possible interest rate hike, the banks will have to set aside

funds to market their investment.

This will make it difficult to show huge profits from treasury operations. This concern

becomes much stronger because a substantial percentage of banks deposit remains invested in

government bonds.

Competition in retail banking

Theentry of new generation private sector banks has changed the entire scenario.

Earlier the household savings went into banks and the banks then lent out money to

corporate. Now they need sell banking. The consumer has never been so lucky with so many

banks offering so many products to choose from. With supply far exceeding demand it has

been a race to the bottom, with the banks undercutting one another. A lot of foreign banks

have already burnt their fingers in the retail game and have now decided to get out of a few

retail segments completely.

The urge to merge

In the recent past there has been a lot of talk about Indian Banks lacking in scale and

size. The State bank of India is the only bank from India to make it to the list of Top 100

banks, globally. Most of the PSBs are either looking to pick up a smaller bank or waiting to

be picked up by a larger bank.

The central government also seems to be game about and is seen to be encouraging

PSBs to merge or acquire other banks. Global evidence seems to suggest that even though

there is a great enthusiasm when companies merge or get acquired, majority of the

mergers/acquisitions do not really work.

THE BANKING REFORMS

In 1991, the Indian economy went through a process of economic liberalization,

which was followed up by the initiation of fundamental reforms in the banking sector in

1992. The banking reform package was based on the recommendations proposed by the

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Narasimham Committee Report (1991) that advocated a move to a more market oriented

banking system, which would operate in an environment of prudential regulation and

transparent accounting. One of the primary motives behind this drive was to introduce an

element of market discipline into the regulatory process that would reinforce the supervisory

effort of the Reserve Bank of India (RBI). Market discipline, especially in the financial

liberalization phase, reinforces regulatory and supervisory efforts and provides a strong

incentive to banks to conduct their business in a prudent and efficient manner and to maintain

adequate capital as a cushion against risk exposures. Recognizing that the success of

economic reforms was contingent on the success of financial sector reform as well, the

government initiated a fundamental banking sector reform package in 1992.

Banking sector, the world over, is known for the adoption of multidimensional

strategies from time to time with varying degrees of success. Banks are very important for the

smooth functioning of financial markets as they serve as repositories of vital financial

information and can potentially alleviate the problems created by information asymmetries.

From a central bank’s perspective, such high-quality disclosures help the early detection of

problems faced by banks in the market and reduce the severity of market disruptions.

Consequently, the RBI as part and parcel of the financial sector deregulation, attempted to

enhance the transparency of the annual reports of Indian banks by, among other things,

introducing stricter income recognition and asset classification rules, enhancing the capital

adequacy norms, and by requiring a number of additional disclosures sought by investors to

make better cash flow and risk assessments.

During the pre economic reforms period, commercial banks & development financial

Institutions were functioning distinctly, the former specializing in short & medium term

financing, while the latter on long term lending & project financing. Commercial banks were

accessing short term low cost funds thru savings investments like current accounts, savings

bank accounts & short duration fixed deposits, besides collection float.

Development Financial Institutions (DFIs) on the other hand, were essentially

depending on budget allocations for long term lending at a concessionary rate of interest. The

scenario has changed radically during the post reforms period, with the resolve of the

government not to fund the DFIs through budget allocations. DFIs like IDBI, IFCI & ICICI

had posted dismal financial results. Infect, their very viability has become a question mark.

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Now, they have taken the route of reverse merger with IDBI bank & ICICI bank thus

converting them into the universal banking system.

Major Recommendations by the Narasimham Committee on Banking

Sector Reforms

Strengthening Banking System

Capital adequacy requirements should take into account market risks in addition to the

credit risks.

In the next three years the entire portfolio of government securities should be marked

to market and the schedule for the same announced at the earliest (since announced in

the monetary and credit policy for the first half of 1998-99); government and other

approved securities which are now subject to a zero risk weight, should have a 5 per

cent weight for market risk.

Risk weight on a government guaranteed advance should be the same as for other

advances. This should be made prospective from the time the new prescription is put

in place.

Foreign exchange open credit limit risks should be integrated into the calculation of

risk weighted assets and should carry a 100 per cent risk weight.

Minimum capital to risk assets ratio (CRAR) be increased from the existing 8 per

cent to 10 per cent; an intermediate minimum target of 9 per cent be achieved by 2000

and the ratio of 10 per cent by 2002; RBI to be empowered to raise this further for

individual banks if the risk profile warrants such an increase. Individual banks'

shortfalls in the CRAR are treated on the same line as adopted for reserve

requirements, viz. uniformity across weak and strong banks. There should be penal

provisions for banks that do not maintain CRAR.

Public Sector Banks in a position to access the capital market at home or abroad be

encouraged, as subscription to bank capital funds cannot be regarded as a priority

claim on budgetary resources.

Asset Quality

An asset is classified as doubtful if it is in the substandard category for 18 months in

the first instance and eventually for 12 months and loss if it has been identified but

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not written off. These norms should be regarded as the minimum and brought into

force in a phased manner.

For evaluating the quality of assets portfolio, advances covered by Government

guarantees, which have turned sticky, be treated as NPAs. Exclusion of such

advances should be separately shown to facilitate fuller disclosure and greater

transparency of operations.

For banks with a high NPA portfolio, two alternative approaches could be adopted.

One approach can be that, all loan assets in the doubtful and loss categories should be

identified and their realisable value determined. These assets could be transferred to

an Assets Reconstruction Company (ARC) which would issue NPA Swap Bonds.

An alternative approach could be to enable the banks in difficulty to issue bonds

which could from part of Tier II capital, backed by government guarantee to make

these instruments eligible for SLR investment by banks and approved instruments by

LIC, GIC and Provident Funds.

The interest subsidy element in credit for the priority sector should be totally

eliminated and interest rate on loans under Rs. 2 lakhs should be deregulated for

scheduled commercial banks as has been done in the case of Regional Rural Banks

and cooperative credit institutions.

Prudential Norms and Disclosure Requirements

In India, income stops accruing when interest or instalment of principal is not paid

within 180 days, which should be reduced to 90 days in a phased manner by 2002.

Introduction of a general provision of 1 per cent on standard assets in a phased

manner be considered by RBI.

As an incentive to make specific provisions, they may be made tax deductible.

Systems and Methods in Banks

There should be an independent loan review mechanism especially for large borrowal

accounts and systems to identify potential NPAs. Banks may evolve a filtering

mechanism by stipulating in-house prudential limits beyond which exposures on

single/group borrowers are taken keeping in view their risk profile as revealed

through credit rating and other relevant factors.

Banks and FIs should have a system of recruiting skilled manpower from the open

market.

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Public sector banks should be given flexibility to determined managerial

remuneration levels taking into account market trends.

There may be need to redefine the scope of external vigilance and investigation

agencies with regard to banking business.

There is need to develop information and control system in several areas like better

tracking of spreads, costs and NPSs for higher profitability, , accurate and timely

information for strategic decision to Identify and promote profitable products and

customers, risk and asset-liability management; and efficient treasury management.

Structural Issues

With the conversion of activities between banks and DFIs, the DFIs should, over a

period of time convert them to bank. A DFI which converts to bank be given time to

face in reserve equipment in respect of its liability to bring it on par with requirement

relating to commercial bank.

Mergers of Public Sector Banks should emanate from the management of the banks

with the Government as the common shareholder playing a supportive role. Merger

should not be seen as a means of bailing out weak banks. Mergers between strong

banks/FIs would make for greater economic and commercial sense.

‘Weak Banks' may be nurtured into healthy units by slowing down on expansion,

eschewing high cost funds/borrowings etc.

The minimum share of holding by Government/Reserve Bank in the equity of the

nationalised banks and the State Bank should be brought down to 33%. The RBI

regulator of the monetary system should not be also the owner of a bank in view of

the potential for possible conflict of interest.

There is a need for a reform of the deposit insurance scheme based on CAMELs

ratings awarded by RBI to banks.

Inter-bank call and notice money market and inter-bank term money market should

be strictly restricted to banks; only exception to be made is primary dealers.

Non-bank parties are provided free access to bill rediscounts, CPs, CDs, Treasury

Bills, and MMMF.

RBI should totally withdraw from the primary market in 91 days Treasury Bills.

BASEL - II ACCORD

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Bank capital framework sponsored by the world's central banks designed to promote

uniformity, make regulatory capital more risk sensitive, and promote enhanced risk

management among large, internationally active banking organizations. The International

Capital Accord, as it is called, will be fully effective by January 2008 for banks active in

international markets. Other banks can choose to "opt in," or they can continue to follow the

minimum capital guidelines in the original Basel Accord, finalized in 1988. The revised

accord (Basel II) completely overhauls the 1988 Basel Accord and is based on three mutually

supporting concepts, or "pillars," of capital adequacy. The first of these pillars is an explicitly

defined regulatory capital requirement, a minimum capital-to-asset ratio equal to at least 8%

of risk-weighted assets. Second, bank supervisory agencies, such as the Comptroller of the

Currency, have authority to adjust capital levels for individual banks above the 9% minimum

when necessary. The third supporting pillar calls upon market discipline to supplement

reviews by banking agencies.

Basel II is the second of the Basel Accords, which are recommendations on banking

laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of

Basel II, which was initially published in June 2004, is to create an international standard that

banking regulators can use when creating regulations about how much capital banks need to

put aside to guard against the types of financial and operational risks banks face. Advocates

of Basel II believe that such an international standard can help protect the international

financial system from the types of problems that might arise should a major bank or a series

of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk

and capital management requirements designed to ensure that a bank holds capital reserves

appropriate to the risk the bank exposes itself to through its lending and investment practices.

Generally speaking, these rules mean that the greater risk to which the bank is exposed, the

greater the amount of capital the bank needs to hold to safeguard its solvency and overall

economic stability.

The final version aims at:

Ensuring that capital allocation is more risk sensitive,

Separating operational risk from credit risk, and quantifying both,

Attempting to align economic and regulatory capital more closely to reduce the

scope for regulatory arbitrage.

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While the final accord has largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic.

Basel II has largely left unchanged the question of how to actually define bank capital, which diverges from accounting equity in important respects. The Basel I definition, as modified up to the present, remains in place.

The Accord in operation

Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressing

risk), (2) supervisory review and (3) market discipline – to promote greater stability in the

financial system.

The Basel I accord dealt with only parts of each of these pillars. For example: with

respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner

while market risk was an afterthought; operational risk was not dealt with at all.

The First Pillar

The first pillar deals with maintenance of regulatory capital calculated for three major

components of risk that a bank faces: credit risk, operational risk and market risk. Other risks

are not considered fully quantifiable at this stage.

The credit risk component can be calculated in three different ways of varying degree

of sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB

stands for "Internal Rating-Based Approach".

For operational risk, there are three different approaches - basic indicator approach,

standardized approach and advanced measurement approach. For market risk the preferred

approach is VaR (value at risk).

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As the Basel II recommendations are phased in by the banking industry it will move

from standardized requirements to more refined and specific requirements that have been

developed for each risk category by each individual bank. The upside for banks that do

develop their own bespoke risk measurement systems is that they will be rewarded with

potentially lower risk capital requirements. In future there will be closer links between the

concepts of economic profit and regulatory capital.

Credit Risk can be calculated by using

1. Standardized Approach

2. Foundation IRB (Internal Ratings Based) Approach

3. Advanced IRB Approach

The standardized approach sets out specific risk weights for certain types of credit

risk. The standard risk weight categories are used under Basel 1 and are 0% for short term

government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages and

100% weighting on commercial loans. A new 150% rating comes in for borrowers with poor

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credit ratings. The minimum capital requirement (the percentage of risk weighted assets to be

held as capital) has remains at 8%.

For those Banks that decide to adopt the standardized ratings approach they will be

forced to rely on the ratings generated by external agencies. Certain Banks are developing the

IRB approach as a result.

The Second Pillar

The second pillar deals with the regulatory response to the first pillar, giving

regulators much improved 'tools' over those available to them under Basel I. It also provides a

framework for dealing with all the other risks a bank may face, such as systemic risk, pension

risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the

accord combines under the title of residual risk. It gives banks a power to review their risk

management system.

The Third Pillar

The third pillar greatly increases the disclosures that the bank must make. This is

designed to allow the market to have a better picture of the overall risk position of the bank

and to allow the counterparties of the bank to price and deal appropriately.

The new Basel Accord has its foundation on three mutually reinforcing pillars that

allow banks and bank supervisors to evaluate properly the various risks that banks face and

realign regulatory capital more closely with underlying risks. The first pillar is compatible

with the credit risk, market risk and operational risk. The regulatory capital will be focused

on these three risks. The second pillar gives the bank responsibility to exercise the best ways

to manage the risk specific to that bank. Concurrently, it also casts responsibility on the

supervisors to review and validate banks’ risk measurement models. The third pillar on

market discipline is used to leverage the influence that other market players can bring. This is

aimed at improving the transparency in banks and improves reporting.

2.2.COMPANY PROFILE AND HISTORY

1929 - South Indian Bank was established at Trichur, Kerala State. The Bank transacts

general banking business of every description. The bank was selected by RBI to open and

operate a currency - chest on its behalf. This facility was to help the bank to reduce

considerably their cash holdings.

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1963 - The Bank took over the assets and liabilities of the Kshemavilasam Banking Co.,

Ltd., Trichur, and the AmbatBankPrivate Ltd., Chittur, Cochin.

1964 - The Following banks were taken over: Public Bank, Ltd.,Pudukad;Subarban Bank (P)

Ltd., Trichur; Vijaya Lakshmi Bank (P) Ltd., N.Parur; Chalakudy Bank, Ltd., Chalakudy;

MukkattukaraCatholicBank, Ltd., Mukkattukara; Assyrian Charities Banking Co., Ltd.,

Trichur; Catholic Syrian Christian Bank, Ltd., Kanjany; Malabar Bank, Ltd., Trichur;

Bharatha Union Bank, Ltd., Trichur; Kozhuvanal Bank, Ltd., Kozhuvanal.

1987 - 19,200 No. of equity shares issued at par. Arrears: Rs42,375.

1988 - 42,000 No. of equity shares issued at par. Arrears: Rs9,41,355.

1989 - 91,800 No. of equity shares issued at par. Arrears: Rs12,95,978.

1990 - The Bank made an entry into merchant banking activities bysupporting underwriting

to 99 New Issues.

1992 - 75,26,140 No. of Equity shares issued equity sharessubdivided.

1993 - The Bank extended underwriting support.- 4,73,860 No. of equity shares issued.

1994 - The Bank extended underwriting support to 17 issue of Rs 459lakhs. - 37,00,000 No.

of Equity shares issued.

1996 - The Bank did not underwrite any issue due to depressed andlistless primary market.

Bank acted as bankers for 12 issuesascompared to 47 issues during the previous year.

2000 - Credit Rating and Information Services of India has downgraded

the ratings assigned to the Bank to `BBB-' from `BBB+'.

2001 - The Bank has launched its comprehensive and centralised banking solution,Sibertech,

which will run on Finacle platform provided by Infosys Technologies of Bangalore. - The

South Indian Bank one of the leading private sectorbanks in Kerala, has entered into new

alliances with three exchange houses in theGulf.

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2002 -Ties up with insurance player for the distribution of the products of the insurance

company. -Sarvashri P M Manuel and Tony John Alaptt gave their resignations from the

Board -Changes in the Board:Sarvashri Jose Pottokaran and Thommy P Chakola, Directors

give their resignation . Mr A S NarayanaMoorthy has been co-opted as director on the Board.

Mr. John Chakola has been co-opted as Director on the Board in place of Mr. Thommy P

Chakola.-Offers VRS named as 'The South Indian Bank Employees VoluntaryRetirement

Scheme - 2002' to all permanent eligible employees of the bank. -Reduces the rate of interest

on housing loans to 10.5% for loans upto Rs.10 lakh and 11% for loans exceeding Rs.10 lakh.

-Sets up an ATM in Kovai, which is its first online ATM outside its home, kerala.-Enters into

a new rupee draft drawing agreement with Union Exchange of Co of Doha, Qatar.

2003-The Board accepts the resignation of Mr P M Udhuppu, Director of the Bank. -

Launches its Internet Banking Facility, Sibernet, to provide betterservices for customers. -

Recovers Rs.4 crs from Coimbatore region recovery camp in the first 4 months of the current

financial year. -Enters into an agreement with master Card International to LaunchMaestro ,

the global ATM - Debit card. -Opens up three more branches with on-line ATM's at

Chandigarh(Punjab), Panchukula(Haryana), PaschimVihar (Delhi). -Ties up with leading

private hospitals and nursing home throughout India in order to push its new introduced

medical loan scheme under SIB Life line. -Launches Financial assistance programme for

medical treatment 'SIBLifeline'-SIB decides Rs 38-45 price band for rights issue -Dr. V A

Joseph has joined the Bank as Executive Director w.e.f December 04, 2003. He will be a

whole-time executive of the Bank.However, he will not be a Director on the Board of the

Bank. - Thrissur-based South Indian Bank unveiled its 401st branch at R.V. Centre, East

Nada, Guruvayur, on December 10, 2003. The branch was inaugurated by

MrAppukutanNambiar, Chairman, GuruvayurDevaswom -The South Indian Bank has

introduced two products for fast and hassle-free transfer of money from abroad, in association

with UAE Exchange Company Ltd and Wall Street Finance Ltd.

2004 -SIB introduces life insurance product -SIB inks pact with Dubai exchange house -

South Indian Bank kicks off RTGS operations -SIB partners with Al Razouki

2005-South Indian Bank ties up with Bahrain Financing

2006 -Franklin Templeton inks pact with SIB -SIB to roll out co-branded Citi credit card -

The South Indian Bank Ltd. has appointed Dr N.J. Kurian as an Additional Director on the

21 | P a g e

Board of Directors of the Bank at theBoard Meeting held on May 23, 2007 pursuant to

section 260 of the Companies Act,1956.

2008 -The Company has issued Bonus Shares in the Ratio of 1:4.

2009 - South Indian Bank (SIB) has signed an agreement with Life Insurance Corporation of India for the distribution of life insurance products. Under the agreement, LIC will offer its life insurance products to the customers of South Indian Bank. - South Indian Bank has rolled out a savings bank product for womencalled 'SIB Mahila', which is linked with recurring deposit, provides 10 technological products/services for free including house-to-house travel insurance for Rs 50,000 and an accident insurance cover for Rs 1 lakh.

2010 - The South Indian Bank (SIB) has inked a MoU with the HattonNational Bank (HNB) for the exchange of expertise and services.

Vision To emerge as the most preferred bank in the country in terms of brand, values, principles with core competence in fostering customer aspirations, to build high quality assets leveraging on the strong and vibrant technology platform in pursuit of excellence and customer delight and to become a major contributor to the stable economic growth of the nation.

Mission To provide a secure, agile, dynamic and conducive banking environment to customers with commitment to values and unshaken confidence, deploying the best technology, standards, processes and procedures where customer convenience is of significant importance and to increase the stakeholders’ value.

South Indian bank Bank Board of Directors

Sri AmitabhaGuha, ( Chairman)

Dr. V.A. Joseph,( Managing director & chief executive officer)

Sri Jose alapatt

Sri Paul chalissery

Dr. N . J. Kurian

Sri Mohan . E. alapatt

Sri K . Thomas Jacob

22 | P a g e

Sri H .sureshPrabhu

TOP MANGEMENTExcicutive director

Sri Abraham Thariyan

Sri CheryanVarkey

GENERAL MANAGERSSri M .S. Mani

Sri Joseph George Kavalam

Sri K.S. Krishan

Sri A. G. Varughese

DEPUTY GENERAL MANAGERSSri P.J. Jacob

Sri K.C. Francis

Sri Roy Alex Vilangupara

Sri C.J.Jose Mohan

Sri John Thomas

Sri P.K. Kochanthony

Sri Abraham K George

Sri N.A. Murali

Sri T.J .Raphael

Sri Francischacko

Sri Vijayakumar .N

Sri Krishnaparasad .R

23 | P a g e

CFO & COMPANY SECRETARYSri K.S.Krishnan .A.C.A , A.C.S

Awards and regaganitation

South Indian Bank Bags Special Award from IDRBT for Banking Technology Excellence

The best “Asian Banking Web Site” award from Asian Banking & Finance Magazine

Award for the best bank in asset quality among all private sector banks in India

BEST BANK AWARD TO SOUTH INDIAN BANK

SOUTH INDIAN BANK BAGGED THE BEST WEB SITE AWARD FROM KMA

BUSINESSWORLD INDIA’s BEST BANK 2010 AWARD  to SOUTH INDIAN BANK

South Indian Bank Bags Technology Excellence Award 2010 from IDRBT

South Indian Bank bags two prestigious D&B Bank Awards

South Indian Bank Bags Technology Excellence Award 2011-12 from IDRBT

3.1.THEORETICAL REVIEW:

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Introduction to CAMELS models

During an on-site bank exam, supervisors gather private information, such as details onproblem

loans, with which to evaluate a bank's financial condition and to monitor itscompliance with

laws and regulatory policies. A key product of such an exam is asupervisory rating of the bank's

overall condition, commonly referred to as a CAMELSrating. This rating system is used by the

three federal banking supervisors (the FederalReserve, the FDIC, and the OCC) and other

financial supervisory agencies to provide a convenient summary of bank conditions at the time

of an exam.

The acronym "CAMEL" refers to the five components of a bank's condition that are assessed:

Capital adequacy, Asset quality, Management, Earnings, and Liquidity. A sixthcomponent, a

bank's Sensitivity to market risk was added in 1997; hence the acronymwas changed to

CAMELS.Ratings are assigned for eachcomponent in addition to the overall rating of a bank's

financial condition. The ratings areassigned on a scale from 1 to 5. Banks with ratings of 1 or 2

are considered to presentfew, if any, supervisory concerns, while banks with ratings of 3, 4, or 5

present moderateto extreme degrees of supervisory concern.

In 1994, the RBI established the Board of Financial Supervision (BFS), which operates as a

unit of the RBI. The entire supervisory mechanism was realigned to suit the changing needs of a

strong and stable financial system. The supervisory jurisdiction of the BFS was slowly extended

to the entire financial system barring the capital market institutions and the insurance sector. Its

mandate is to strengthen supervision of the financial system by integrating oversight of the

activities of financial services firms. The BFS has also established a sub-committee to routinely

examine auditing practices, quality, and coverage.

In addition to the normal on-site inspections, Reserve Bank of India also conducts off-site

surveillance which particularly focuses on the risk profile of the supervised entity. TheOff-site

Monitoring and Surveillance System (OSMOS) were introduced in 1995 as anadditional tool for

supervision of commercial banks. It was introduced with the aim tosupplement the on-site

inspections. Under off-site system, 12 returns (called DSBreturns) are called from the financial

institutions, which focus on supervisory concernssuch as capital adequacy, asset quality, large

credits and concentrations, connectedlending, earnings and risk exposures (viz. currency,

liquidity and interest rate risks).

In 1995, RBI had set up a working group under the chairmanship of Shri S. Padmanabhanto

25 | P a g e

review the banking supervision system. The Committee certain recommendations andbased on

such suggestions a rating system for domestic and foreign banks based on theinternational

CAMELS model combining financial management and systems and controlelements was

introduced for the inspection cycle commencing from July 1998. Itrecommended that the banks

should be rated on a five point scale (A to E) based on thelines of international CAMELS rating

model.

All exam materials are highly confidential, including the CAMELS. A bank's CAMELSrating

is directly known only by the bank's senior management and the appropriatesupervisory staff.

CAMELS ratings are never released by supervisory agencies, even on alagged basis. While

exam results are confidential, the public may infer such supervisoryinformation on bank

conditions based on subsequent bank actions or specific disclosures.Overall, the private

supervisory information gathered during a bank exam is not disclosedto the public by

supervisors, although studies show that it does filter into the financialmarkets.

CAMELS ratings in the supervisory monitoring of banks

Several academic studies have examined whether and to what extent private

supervisoryinformation is useful in the supervisory monitoring of banks. With respect to

predictingbank failure, Barker and Holdsworth (1993) find evidence that CAMEL ratings

areuseful, even after controlling for a wide range of publicly available information about

thecondition and performance of banks. Cole and Gunther (1998) examine a similar questionand

find that although CAMEL ratings contain useful information, it decays quickly. Forthe period

between 1988 and 1992, they find that a statistical model using publiclyavailable financial data

is a better indicator of bank failure than CAMEL ratings that aremore than two quarters old.

Hirtle and Lopez (1999) examine the usefulness of past CAMEL ratings in assessing banks'

current conditions. They find that, conditional on current public information, the private

supervisory information contained in past CAMEL ratings provides further insight into bank

current conditions, as summarized by current CAMEL ratings. The authors find that, over the

period from 1989 to 1995, the private supervisory information gathered during the last on-site

exam remains useful with respect to the current condition of a bank for up to 6 to 12 quarters (or

1.5 to 3 years). The overall conclusion drawn from academic studies is that private supervisory

information, as summarized by CAMELS ratings, is clearly useful in the supervisory monitoring

of bank conditions.

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CAMELS ratings in the public monitoring of banks

Another approach to examining the value of private supervisory information is to examine

its impact on the market prices of bank securities. Market prices are generally assumed to

incorporate all available public information. Thus, if private supervisory information were found

to affect market prices, it must also be of value to the public monitoring of banks.

Such private information could be especially useful to financial market participants, given

the informational asymmetries in the commercial banking industry. Since banks fund projects

not readily financed in public capital markets, outside monitors should find it difficult to

completely assess banks' financial conditions. In fact, Morgan (1998) finds that rating agencies

disagree more about banks than about other types of firms. As a result, supervisors with direct

access to private bank information could generate additional information useful to the financial

markets, at least by certifying that a bank's financial condition is accurately reported.

The direct public beneficiaries of private supervisory information, such as that contained in

CAMELS ratings, would be depositors and holders of banks' securities. Small depositors are

protected from possible bank default by FDIC insurance, which probably explains the finding

by Gilbert and Vaughn (1998) that the public announcement of supervisory enforcement

actions, such as prohibitions on paying dividends, did not cause deposit runoffs or dramatic

increases in the rates paid on deposits at the affected banks. However, uninsured depositors

could be expected to respond more strongly to such information. Jordan, et al., (1999) find that

uninsured deposits at banks that are subjects of publicly-announced enforcement actions, such

as cease-and-desist orders, decline during the quarter after the announcement.

The holders of commercial bank debt, especially subordinated debt, should have the most

in common with supervisors, since both are more concerned with banks' default probabilities

(i.e., downside risk). As of year-end 1998, bank holding companies (BHCs) had roughly $120

billion in outstanding subordinated debt. DeYoung, et al., (1998) examine whether private

supervisory information would be useful in pricing the subordinated debt of large BHCs. The

authors use an econometric technique that estimates the private information component of the

CAMEL ratings for the BHCs' lead banks and regresses it onto subordinated bond prices. They

conclude that this aspect of CAMEL ratings adds significant explanatory power to the

regression after controlling for publicly available financial information and that it appears to be

incorporated into bond prices about six months after an exam. Furthermore, they find that

27 | P a g e

supervisors are more likely to uncover unfavourable private information, which is consistent

with managers' incentives to publicize positive information while de-emphasizing negative

information. These results indicate that supervisors can generate useful information about banks,

even if those banks already are monitored by private investors and rating agencies. The market

for bank equity, which is about eight times larger than that for bank subordinated debt, was

valued at more than $910 billion at year-end 1998. Thus, the academic literature on the extent to

which private supervisory information affects stock prices is more extensive. For example,

Jordan, et al., (1999) find that the stock market views the announcement of formal enforcement

actions as informative. That is, such announcements are associated with large negative stock

returns for the affected banks. This result holds especially for banks that had not previously

manifested serious problems.

Focusing specifically on CAMEL ratings, Berger and Davies (1998) use event study

methodology to examine the behaviour of BHC stock prices in the eight-week period following

an exam of its lead bank. They conclude that CAMEL downgrades reveal unfavourable private

information about bank conditions to the stock market. This information may reach the public in

several ways, such as through bank financial statements made after a downgrade. These results

suggest that bank management may reveal favourable private information in advance, while

supervisors in effect force the release of unfavourable information.

Berger, Davies, and Flannery (1998) extend this analysis by examining whether the

information about BHC conditions gathered by supervisors is different from that used by the

financial markets. They find that assessments by supervisors and rating agencies are

complementary but different from those by the stock market. The authors attribute this

difference to the fact that supervisors and rating agencies, as representatives of debt holders, are

more interested in default probabilities than the stock market, which focuses on future revenues

and profitability. This rationale also could explain the authors' finding that supervisory

assessments are much less accurate than market assessments of banks' future performances.

In summary, on-site bank exams seem to generate additional useful information beyond

what is publicly available. However, according to Flannery (1998), the limited available

evidence does not support the view that supervisory assessments of bank conditions are

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CAMELS is basically a ratio-based model for evaluating the performance of banks.

Each component of CAMELS model is briefly explained below.

C- Capital Adequacy:

Capital base of financial institutions facilitates depositors in forming their risk

perception about the institutions. Also, it is the key parameter for financial managers to

maintain adequate levels of capitalization. Moreover, besides absorbing unanticipated shocks,

it signals that the institution will continue to honour its obligations. The most widely used

indicator of capital adequacy is capital to risk-weighted assets ratio (CRWA). According to

Bank Supervision Regulation Committee (The Basle Committee) of Bank for International

Settlements, a minimum 9 percept CRWA is required.

Capital adequacy ultimately determines how well financial institutions can cope with

shocks to their balance sheets. Thus, it is useful to track capital-adequacy ratios that take into

account the most important financial risks—foreign exchange, credit, and interest rate risks—

by assigning risk weightings to the institution’s assets. A sound capital base strengthens

confidence of depositors. This ratio is used to protect depositors and promote the stability and

efficiency of financial systems around the world.

The following ratios measure capital adequacy:

1. Capital Risk Adequacy Ratio

2. Debt Equity Ratio

A – Asset Quality:

Asset quality determines the healthiness of financial institutions against loss

of value in theassets. The weakening value of assets, being prime source of banking

problems, directlypour into other areas, as losses are eventually written-off against capital,

which ultimatelyexpose the earning capacity of the institution. With this backdrop, the asset

quality isgauged in relation to the level and severity of non-performing assets, adequacy

ofprovisions, recoveries, distribution of assets etc. Popular indicators include

29 | P a g e

nonperformingloans to advances, loan default to total advances, and recoveries to loan

default ratios.

The solvency of financial institutions typically is at risk when their assets become

impaired,so it is important to monitor indicators of the quality of their assets in terms of

overexposureto specific risks, trends in nonperforming loans, and the health and profitability

of bankborrowers— especially the corporate sector. Share of bank assets in the aggregate

financialsector assets: In most emerging markets, banking sector assets comprise well over 80

percent of total financial sector assets, whereas these figures are much lower in the

developedeconomies. Furthermore, deposits as a share of total bank liabilities have declined

since1990 in many developed countries, while in developing countries public deposits

continueto be dominant in banks. In India, the share of banking assets in total financial sector

assetsis around 75 per cent, as of end-March 2008. There is, no doubt, merit in recognizing

theimportance of diversification in the institutional and instrument-specific aspects of

financialintermediation in the interests of wider choice, competition and stability. However,

thedominant role of banks in financial intermediation in emerging economies and

particularlyin India will continue in the medium-term; and the banks will continue to be

“special” for along time. In this regard, it is useful to emphasize the dominance of banks in

the developingcountries in promoting non-bank financial intermediaries and services

including indevelopment of debt-markets. Even where role of banks is apparently

diminishing inemerging markets, substantively, they continue to play a leading role in non-

bankingfinancing activities, including the development of financial markets.One of the

indicators for asset quality is the ratio of non-performing loans to total loans.Higher ratio is

indicative of poor credit decision-making.

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NPA: Non-Performing Assets:

Advances are classified into performing and non-performing advances (NPAs) as per

RBIguidelines. NPAs are further classified into sub-standard, doubtful and loss assets based

onthe criteria stipulated by RBI. An asset, including a leased asset, becomes

nonperformingwhen it ceases to generate income for the Bank.

An NPA is a loan or an advance where:

Interest and/or instalment of principal remains overdue for a period of more than 90

days in respect of a term loan;

The account remains "out-of-order'' in respect of an Overdraft or Cash Credit

(OD/CC);

The bill remains overdue for a period of more than 90 days in case of bills purchased

and discounted;

A loan granted for short duration crops will be treated as an NPA if the instalments

of principal or interest thereon remain overdue for two crop seasons; and

A loan granted for long duration crops will be treated as an NPA if the instalments of

principal or interest thereon remain overdue for one crop season.

The Bank classifies an account as an NPA only if the interest imposed during any quarter

is not fully repaid within 90 days from the end of the relevant quarter. This is a key to the

stability of the banking sector. There should be no hesitation in stating that Indian banks have

done a remarkable job in containment of non-performing loans (NPL) considering the

overhang issues and overall difficult environment.

The following ratios are necessary to assess the asset quality.

1. Net NPA to Total Advances

2. Net NPA to Total Asset

3. Gross NPA to Total Advances

4. Advance Yield Ratio

5. Total investment to Total Asset

6. % change in Net NPA

M – Management:

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Management of financial institution is generally evaluated in terms of capital

adequacy,asset quality, earnings and profitability, liquidity and risk sensitivity ratings. In

addition,performance evaluation includes compliance with set norms, ability to plan and react

tochanging circumstances, technical competence, leadership and administrative ability.

Sound management is one of the most important factors behind financial

institutions’performance. Indicators of quality of management, however, are primarily

applicable toindividual institutions, and cannot be easily aggregated across the sector.

Furthermore,given the qualitative nature of management, it is difficult to judge its soundness

just bylooking at financial accounts of the banks.

Nevertheless, total advance to total deposit, business per employee and profit per

employeehelps in gauging the management quality of the banking institutions. Several

indicators,however, can jointly serve—as, for instance, efficiency measures do—as an

indicator ofmanagement soundness.

The ratios used to evaluate management efficiency are described asunder:

1. Total Advances to Total Deposits

2. Profit per Employee

3. Business per Employee

4. Return on Net worth

E – Earning & Profitability:32 | P a g e

Earnings and profitability, the prime source of increase in capital base, is examined

withregards to interest rate policies and adequacy of provisioning. In addition, it also helps

tosupport present and future operations of the institutions.Strong earnings and profitability

profile of banks reflects the ability to support present and future operations. More

specifically, this determines the capacity to absorb losses, financeits expansion, pay dividends

to its shareholders, and build up an adequate level of capital.Being front line of defence

against erosion of capital base from losses, the need for highearnings and profitability can

hardly be overemphasized.

However, for in-depth analysis, another indicator Interest Income to Total Income and

Other income to Total Income is also in used. Compared with most other indicators, trends in

profitability can be more difficult to interpret—for instance, unusually high profitability can

reflect excessive risk taking. The following ratios try to assess the quality of income in terms

of income generated by core activity – income from landing operations.

1. Spread to Total Asset

2. % growth in Net profit

3. Dividend payout ratio

4. Interest income to Total income

5. Net profit to Average Asset

6. Noninterest income to Total Income

7. Operating profit by Average Working fund

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L – Liquidity:

An adequate liquidity position refers to a situation, where institution can obtain

sufficient funds, either by increasing liabilities or by converting its assets quickly at a

reasonable cost. It is, therefore, generally assessed in terms of overall assets and liability

management, as mismatching gives rise to liquidity risk. Efficient fund management refers to

a situation where a spread between rate sensitive assets (RSA) and rate sensitive liabilities

(RSL) is maintained. The most commonly used tool to evaluate interest rate exposure is the

Gap between RSA and RSL, while liquidity is gauged by liquid to total asset ratio.

Initially solvent financial institutions may be driven toward closure by poor

management of short-term liquidity. Indicators should cover funding sources and capture

large maturity mismatches. The term liquidity is used in various ways, all relating to

availability of, access to, or convertibility into cash. An institution is said to have liquidity if

it can easily meet its needs for cash either because it has cash on hand or can otherwise raise

or borrow cash. A market is said to be liquid if the instruments it trades can easily be bought

or sold in quantity with little impact on market prices. An asset is said to be liquid if the

market for that asset is liquid.

The common theme in all three contexts is cash. A corporation is liquid if it has ready

access to cash. A market is liquid if participants can easily convert positions into cash— or

conversely. An asset is liquid if it can easily be converted to cash.

The liquidity of an institution depends on:

The institution's short-term need for cash;

Cash on hand;

Available lines of credit;

The liquidity of the institution's assets;

The institution's reputation in the marketplace.

The ratios suggested to measure liquidity under CAMELS Model are as follows:

1. Liquidity Assets to Total Assets

2. Liquidity Assets to Total Deposits

3. Govt. securities to Total Assets

4. Approved securities to Total Assets

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5. Liquidity Assets to Demand Deposits

S – Sensitivity to Market Risk:

It refers to the risk that changes in market conditions could adversely impact

earningsand/or capital. Market Risk encompasses exposures associated with changes in

interestrates, foreign exchange rates, commodity prices, equity prices, etc. While all of these

itemsare important, the primary risk in most banks is interest rate risk (IRR), which will be

thefocus of this module. The diversified nature of bank operations makes them vulnerable

tovarious kinds of financial risks. Sensitivity analysis reflects institution’s exposure to

interestrate risk, foreign exchange volatility and equity price risks (these risks are summed

inmarket risk).

Risk sensitivity is mostly evaluated in terms of management’s ability to monitor and

controlmarket risk. Banks are increasingly involved in diversified operations, all of which

aresubject to market risk, particularly in the setting of interest rates and the carrying out

offoreign exchange transactions. In countries that allow banks to make trades in stock

marketsor commodity exchanges, there is also a need to monitor indicators of equity

andcommodity price risk.

Interest Rate Risk Basics:

In the most simplistic terms, interest rate risk is a balancing act. Banks are trying to

balancethe quantity of reprising assets with the quantity of reprising liabilities. For example,

whena bank has more liabilities reprising in a rising rate environment than assets reprising,

thenet interest margin (NIM) shrinks. Conversely, if your bank is asset sensitive in a

risinginterest rate environment, your NIM will improve because you have more assets

reprising athigher rates.

Liquidity risk is financial risk due to uncertain liquidity. An institution might lose

liquidityif its credit rating falls, it experiences sudden unexpected cash outflows, or some

other eventcauses counterparties to avoid trading with or lending to the institution. A firm is

alsoexposed to liquidity risk if markets on which it depends are subject to loss of liquidity.

Liquidity risk tends to compound other risks. If a trading organization has a position

in anilliquid asset, its limited ability to liquidate that position at short notice will compound

35 | P a g e

itsmarket risk. Suppose a firm has offsetting cash flows with two different counterparties on

agiven day. If the counterparty that owes it a payment defaults, the firm will have to raise

cash from other sources to make its payment. Should it be unable to do so, it too we default.

Here, liquidity risk is compounding credit risk.

Accordingly, liquidity risk has to be managed in addition to market, credit and other

risks. Because of its tendency to compound other risks, it is difficult or impossible to isolate

liquidity risk. In all but the most simple of circumstances, comprehensive metrics

ofliquidityrisk don't exist. Certain techniques of asset-liability management can be applied to

assessing liquidity risk. If an organization's cash flows are largely contingent, liquidity risk

may be assessed using some form of scenario analysis. Construct multiple scenarios for

market movements and defaults over a given period of time. Assess day-today cash

flowsunder each scenario. Because balance sheets differed so significantly from one

organizationto the next, there is little standardization in how such analyses are implemented.

Regulators are primarily concerned about systemic implications of liquidity risk.

Businessactivities entail a variety of risks. For convenience, we distinguish between

differentcategories of risk: market risk, credit risk, liquidity risk, etc. Although such

categorization isconvenient, it is only informal. Usage and definitions vary. Boundaries

between categoriesare blurred. A loss due to widening credit spreads may reasonably be

called a market loss or a credit loss, so market risk and credit risk overlap. Liquidity risk

compounds other risks,such as market risk and credit risk. It cannot be divorced from the

risks it compounds.

An important but somewhat ambiguous distinguish is that between market risk and

businessrisk. Market risk is exposure to the uncertain market value of a portfolio. Business

risk isexposure to uncertainty in economic value that cannot be mark-to-market. The

distinctionbetween market risk and business risk parallels the distinction between market-

valueaccounting and book-value accounting. The distinction between market risk and

businessrisk is ambiguous because there is a vast "gray zone" between the two. There are

manyinstruments for which markets exist, but the markets are illiquid. Mark-to-market values

arenot usually available, but mark-to-model values provide a more-or-less accurate

reflectionof fair value. Do these instruments pose business risk or market risk? The decision

is important because firms employ fundamentally different techniques for managing the two

risks.

36 | P a g e

Business risk is managed with a long-term focus. Techniques include the careful

development of business plans and appropriate management oversight. Book-

valueaccounting is generally used, so the issue of day-to-day performance is not material.

Thefocus is on achieving a good return on investment over an extended horizon. Market risk

ismanaged with a short-term focus. Long-term losses are avoided by avoiding losses from

oneday to the next. On a tactical level, traders and portfolio managers employ a variety of

riskmetrics —duration and convexity, the Greeks, beta, etc.—to assess their exposures.

Theseallow them to identify and reduce any exposures they might consider excessive. On a

morestrategic level, organizations manage market risk by applying risk limits to traders'

orportfolio managers' activities. Increasingly, value-at-risk is being used to define and

monitorthese limits. Some organizations also apply stress testing to their portfolios.

3.2. EMPIRICAL REVIEW:

3.2.1 CAMEL rating system (Keeley and Gilbert)

This study uses the capital adequacy component of the CAMEL rating system to

assesswhether regulators in the 1980s influenced inadequately capitalized banks to improve

theircapital. Using a measure of regulatory pressure that is based on publicly

availableinformation, he found that inadequately capitalized banks responded to regulators'

demandsfor greater capital. This conclusion is consistent with that reached by Keeley (1988).

Yet, a measure of regulatory pressure based on confidential capital adequacy ratings

revealsthat capital regulation at national banks was less effective than at state-chartered

banks. Thisresult strengthens a conclusion reached by Gilbert (1991)

3.2.2 Banks performance evaluation by CAMEL model (Hirtle and Lopez)

Despite the continuous use of financial ratios analysis on banks performance

evaluation bybanks' regulators, opposition to it skill thrive with opponents coming up with

new toolscapable of flagging the over-all performance ( efficiency) of a bank. This research

paperwas carried out; to find the adequacy of CAMEL in capturing the overall performance

of abank; to find the relative weights of importance in all the factors in CAMEL; and lastly

toinform on the best ratios to always adopt by banks regulators in evaluating

banks'efficiency.

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In addition, the best ratios in each of the factors in CAMEL were identified. For

example,the best ratio for Capital Adequacy was found to be the ratio of total shareholders'

fund tototal risk weighted assets. The paper concluded that no one factor in CAMEL suffices

todepict the overall performance of a bank. Among other recommendations, banks'

regulatorsare called upon to revert to the best identified ratios in CAMEL when evaluating

banksperformance.

3.2.3 CAMEL model examination (Rebel Cole and Jeffery Gunther)

To assess the accuracy of CAMEL ratings in predicting failure, Rebel Cole and

JefferyGunther use as a benchmark an off-site monitoring system based on publicly available

accounting data. Their findings suggest that, if a bank has not been examined for more

thantwo quarters, off-site monitoring systems usually provide a more accurate indication

ofsurvivability than its CAMEL rating. The lower predictive accuracy for CAMEL

ratings"older" than two quarters causes theoverall accuracy of CAMEL ratings to fall

substantiallybelow that of off-site monitoring systems.

The higher predictive accuracy of off-site systems derives from both their timeliness-

anupdated off-site rating is available for every bank in every quarter-and the accuracy of

thefinancial data on which they are based. Cole and Gunther conclude that off-site

monitoringsystems should continue to play a prominent role in the supervisory process, as

acomplement to on-site examinations.

3.2.4 Check the Risk taken by banks by CAMEL model

The deregulation of the U.S. banking industry has fostered increased competition in

bankingmarkets, which in turn has created incentives for banks to operate more efficiently

and takemore risk. They examine the degree to which supervisory CAMEL ratings reflect the

levelof risk taken by banks and the risk-taking efficiency of those banks (i.e., whether

increasedrisk levels generate higher expected returns). Their results suggest that supervisors

not onlydistinguish between the risk-taking of efficient and inefficient banks, but they also

permitefficient banks more latitude in their investment strategies than inefficient banks.

3.2.5 Bank soundness - CAMEL ratings – Indonesia (Kenton Zumwalt)

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This study uses a unique data set provided by Bank Indonesia to examine the

changingfinancial soundness of Indonesian banks during this crisis. Bank Indonesia's non-

publicCAMEL ratings data allow the use of a continuous bank soundness measure rather

thanordinal measures. In addition, panel data regression procedures that allow for

theidentification of the appropriate statistical model are used.

They argue the nature of the risks facing the Indonesian banking community calls for

theaddition of a systemic risk component to the Indonesian ranking system. The

empiricalresults show that during Indonesia's stable economic periods, four of the five

traditionalCAMEL components provide insights into the financial soundness of Indonesian

banks.However, during Indonesia's crisis period, the relationships between

financialcharacteristics and CAMEL ratings deteriorate and only one of the traditional

CAMELcomponents—earnings—objectively discriminates among the ratings.

3.2.6 CAMELs and Banks Performance Evaluation (Muhammad Tanko)

Despite the continuous use of financial ratios analysis on banks performance

evaluation bybanks' regulators, opposition to it skill thrive with opponents coming up with

new toolscapable of flagging the over-all performance ( efficiency) of a bank. This research

paperwas carried out; to find the adequacy of CAMEL in capturing the overall performance

of abank; to find the relative weights of importance in all the factors in CAMEL; and lastly

toinform on the best ratios to always adopt by banks regulators in evaluating

banks'efficiency. The data for the research work is secondary and was collected from the

annualreports of eleven commercial banks in Nigeria over a period of nine years (1997 -

2005).

The purposive sampling technique was used. The findings revealed the inability of eachfactor in CAMEL to capture the holistic performance of a bank. Also revealed, was therelative weight of importance of the factors in CAMEL which resulted to a call for a changein the acronym of CAMEL to CLEAM. In addition, the best ratios in each of the factors inCAMEL were identified. The paper concluded that no one factor in CAMEL suffices todepict the overall performance of a bank. Among other recommendations, banks' regulatorsare called upon to revert to the best identified ratios in CAMEL when evaluating banksperformance

DATA ANALYSIS AND INTERPRETATION:

4.1.Capital Adequacy

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Capital adequacy ratio is used to evaluate, how south Indian bank ltd meets its capital adequacy requirements.

4.1.1 Capital Adequacy Ratio (CAR)

The idea of capital adequacy norms is that the long run source of finance in a bank should be

a descent % of the assets of the bank after considering their risk realization. As per the

prudential norms, all Indian scheduled commercial banks as well as foreign banks operating

in India are required to achieve 9% capital adequacy ratio by 31thmarch 2000.

CAR= Capital Fund / Risk weighted assets and off balance sheet items*100

Capital fund in the formula are bifurcated in to two parts viz, Tier I and Tier II capital.

Table -Capital Adequacy Ratio (Basel I)

Year 2008 2009 2010 2011 2012Tier –I 12.08% 12.44% 11.89% 10.60% 9.60%

Tier – II 1.72% 1.45% 2.84% 2.57% 2.04%

CAR 13.8% 13.89% 14.73% 13.35% 11.64%

Graph -Capital Adequacy Ratio (Basel I)

2008 2009 2010 2011 20120.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

Series 3

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Interpretation:Reserve Bank of India prescribes Banks to maintain a minimum Capital to risk-

weighted Assets Ratio (CRAR) of 9 % withregard to credit risk, market risk and operational

risk on an ongoing basis, as prescribed in Basel I documents.

During the last 5years, South Indian Bank is in a position to maintain more than this

minimum requirement. In 2008 it was 13.8% and shows an increasing trend up to 2010. Then

2011 onwards it shows a decreasing trend. The reason of increase the ratio of CAR in 2010

is the bank has raised capital.Higher the ratio the bank has in a comfortableposition to absorb

losses.

Capital adequacy ratio of South Indian bankBank (as per Basel II norms),

Table 4.2 - Capital Adequacy Ratio (Basel II)

Year 2008 2009 2010 2011 2012Tier -I 13.22% 12.42% 11.27% 11.54

Tier -II 1.54% 2.97% 2.74% 2.46

CAR 14.76% 15.39% 14.01% 14%

Graph -Capital Adequacy Ratio (Basel II)

2008 2009 2010 2011 20120.13

0.135

0.14

0.145

0.15

0.155

0.16

Series 3

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Interpretation:Reserve Bank of India prescribes Banks to maintain a minimum Capital to risk-weighted

Assets Ratio (CRAR) of 9 % with regard to credit risk, market risk and operational risk on an

on-going basis, as prescribed in Basel II documents.

Capital adequacy ratio of the South Indian Bank was well with 15.39% for the year

2010, above the level prescribed by RBI. Even though it has dropped to 14% in 2012, the

Bank is maintaining the prescribed level.

4.1.2.Debt Equity Ratio

This ratio indicates the degree of leverage of a bank. It indicates how much of the

bankbusiness is financed through debt and how much through equity. This is calculated as the

proportion of total asset liability to net worth. ‘Outside liability’ includes total borrowing,

deposits and other liabilities. ‘Net worth’ includes equity capital and reserve and surplus.

Higher the ratio indicates less protection for the creditors and depositors in the banking

system.

Debt Equity Ratio =Borrowings/ (Share Capital + reserves)

Table - Debt Equity Ratio

Year 2008 2009 2010 2011 2012Borrowings 27.5851 257.0104 330.9637 290.3468 588.1921

Share capital

90.4052 113.0065 113.0065 113.0065 113.3749

Reserves 1070.5764 1190.9975 1371.7089 1732.1525 2054.1082

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Ratios 0.023 0.19 0.22 0.15 0.27

Graph -Debt Equity Ratio

2008 2009 2010 2011 20120

0.05

0.1

0.15

0.2

0.25

0.3

Series 3

Interpretation:The Debt to Equity Ratio measures how much money a bank should safely be able

toborrow over long periods of time. Generally, any bank that has a debt to equity ratio of

over40% to 50% should be looked at more carefully to make sure there are no

liquidityproblems.

. Debt Equity ratio of South Indian Bank during 2008 to 2012 is very low (safe

period).In 2012 shows higher and decrease to 0.15 in 2011. Therefore the bank is able to

keep the liquidity position

4.2ASSET QUALITY

Asset quality determines the healthiness of financial institutions against loss of value

in theassets. The weakening value of assets, being prime source of banking problems,

directlypour into other areas, as losses are eventually written-off against capital, which

43 | P a g e

ultimatelyexpose the earning capacity of the institution. The following importance ratios are

used to measure the asset quality of south Indian bank Bank Ltd,

The following ratios are necessary to assess the asset quality.

4.2.1 Net NPA to Total Asset

Net NPAs are gross NPAs net of provisions on NPAs and interest in suspense

account. This ratio shows the percentage of non-performing asset with regard to Total Asset.

Increase in such percentage indicates decrease in asset quality.

Net NPA As percentage to Total Asset = Net NPA/ Total Asset

Table -Net NPA As percentage to Total Asset

Year 2008 2009 2010 2011 2012

Net NPA 33.97 134.31 61.57 60.02 76.51

Total asset 17089.9298 20383.5219 25534.0446 32820.2205 40370.0586

Ratios .0019 .0065 .0024 .0018 .0018

Graph -Net NPA As percentage to Total Asset

2008 2009 2010 2011 20120

0.001

0.002

0.003

0.004

0.005

0.006

0.007

Series 3

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Interpretation:The ratio of Net NPAs to Total Asset in 2008 was .0019 ,and increasing in 2009,after

decreasing,. This indicates that the South Indian Bank is able to manage the NPAs to Total

Asset. Decreasing trend over the last six years indicates increase in the asset quality.

4.2.2 Net NPA to Total Advances

Net NPAs reflect the performance of banks. A high level of NPAs suggests high

probability of a large number of credit defaults that affect the profitability and net-worth of

banks andalso wear down the value of the asset.Loans and advances usually represent the

largest asset of most of the banks. It monitors thequality of the bank’s loan portfolio. The

higher the ratio, the higher the credits risk.

Net NPA to Total Advances = Net NPA/ Total Loan

Table -NetNPA to Total Advances

Year 2008 2009 2010 2011 2012

Net NPA 33.97 134.31 61.57 60.02 76.51

Advances 10453.7496 11852.0274 15822.9174 20488.7333 27280.7364

Ratios .0032 0.011 .0038 .0029 .0028

Graph -NPA to Total Advances

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2008 2009 2010 2011 20120

0.002

0.004

0.006

0.008

0.01

0.012

Series 3

Interpretation: During 2008 the ratios of Net NPAs to Total Advance s was .0032.and increasing in 2009

after decreasing. . This indicates that the bank is able to manage the credit risk. Lower the

ratio, lower the credit risk.

4.2.3 Gross NPA to Total Advances

This ratio is used to check whether the bank's gross NPAs are increasing quarter on

quarteror year on year. If it is, indicating that the bank is adding a fresh stock of bad loans.

Itwould mean the bank is either not exercising enough caution when offering loans or is

toolax in terms of following up with borrowers on timely repayments.

Gross NPA to Total Advances = Gross NPA/ Total Loan

Table – Gross NPA to Total Advances

Year 2008 2009 2010 2011 2012

Gross NPA 188.48 260.56 211.00 230.34 267.16

Total loan 10453.7496 11852.0274 15822.9174 20488.7333 27280.7364

Ratios 0.018 0.021 0.013 0.011 .0097

Graph - Gross NPA to Total Advances

46 | P a g e

2008 2009 2010 2011 20120

0.005

0.01

0.015

0.02

0.025

Series 3

Interpretation:In 2008, South Indian Bank’s gross NPA is 0.018 and it has decreased to .0097 till

2012. It means this ratio is decreased year by year from 2008to 2012 because of Bank

efficiency in recovering the outstanding dues. But then, we can say that a bank's business is

making loans and world over, some percentage of the loans always turn bad.

4.2.4 Advances Yield Ratio

Yield on advances, is another important ratio, which helps us to measure the quality

of advances. Here yield means interest income received on the advances of the bank.

Increases in advance yield ratio is an indicator of sound asset quality.

Advances Yield Ratio = Interest income on advances / Total advances

Table -Advances Yield Ratio

Year 2008 2009 2010 2011 2012

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Interest income on advances

960.5668 1270.9026 1518.6247 1930.0200 2868.0781

Total advances

10453.7496 11852.0274 15822.9174 20488.7333 27280.7364

Ratios 0.091 0.107 0.095 0.094 0.105

Graph- Advances Yield Ratio

2008 2009 2010 2011 20120.08

0.085

0.09

0.095

0.1

0.105

0.11

Series 3

Interpretation:Advance yield ratio of South Indian Bank in 2008 was 0.091 , and then reached the

highest value in 2009.then decreasing.

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4.2.5 Percentage change in Net NPA

This measure gives the movement in Net NPAs on year-on-year basis. This is

calculated using the following formula given below.

% change in Net NPAs = CurrentyearsNPA−PreviousyearsNPA

PreviousyearsNPA *100

Table -% change in Net NPAs

Year 2008 2009 2010 2011 2012

Current year NPA

33.97 134.31 61.57 60.02 76.51

Previous year NPA

77.81 33.97 134.31 61.57 60.02

Ratios -56.3% 295.3% -54.1% -2.5% 27.4%

Graph -% change in Net NPAs

49 | P a g e

2008 2009 2010 2011 2012

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

300.00%

350.00%

Series 3

Interpretation:

The ratios change in NPA becomes negative during 2008 ,2010 and 2011. In 2012 it

was 27.4 % .

4.2.6 Total Investment to Total Asset

This ratio is used as a tool to measures the ratios of total assets locked up in

investments. Total investments to total assets indicate the extent of deployment of assets in

investments as against advances. The higher level of investment indicates the lack of credit

off-take in the market.

Table - Total Investment to Total Asset

Year 2008 2009 2010 2011 2012

Total interest

4572.2249 6075.2032 7155.6127 8923.7722 9399.8742

Total asset 17089.9298 2038.35219 25534.0446 32820.2205 40370.0586

Ratios 0.26 2.98 0.28 0.27 0.23

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Graph - Total Investment to Total Asset

2008 2009 2010 2011 20120

0.5

1

1.5

2

2.5

3

3.5

Series 3

Interpretation:Total investment to total assets ratio shows a mixed trend. The highest ratio of 2.98

recorded in the year 2009 and the lowest ratio of 0.23 in the year 2012. When compared with

the last five years South Indian Bank has maintained around the investment to Total Assets.

4.3.MANAGEMENT SOUNDNESS

Management is the most important ingredient that ensures sound functioning of

banks. With increased competition in the Indian banking sector, efficiency and effectiveness

have become the rule as banks constantly strive to improve the productivity of their

employees. The ratios in this segment measure the efficiency and effectiveness of

management.

The ratios used to evaluate management efficiency are described asunder:

4.3.1 Total Advance to Total Deposits

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This ratio measures the efficiency and ability of the banks management in converting

thedeposits available with the banks (excluding other funds like equity capital, etc.) into

highearning advances. Total deposits include demand deposits, saving deposits, term deposit

anddeposit of other bank. Total advances also include the receivables.

Total Advance to Total Deposits=Total Advance/ Total Deposit

Table - Total Advance to Total Deposits

Year 2008 2009 2010 2011 2012Total advances

10453.7496 11852.0274 15822.9174 20488.7333 27280.7364

Total deposit 15156.1215 18092.3322 23011.5241 29721.0752 36500.5348Ratios 0.68 0.65 0.68 0.68 0.74

Graph - Total Advance to Total Deposits

2008 2009 2010 2011 20120.6

0.62

0.64

0.66

0.68

0.7

0.72

0.74

0.76

Series 3

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Interpretation: This ratio shows the effective investment of the bank through advancing the

loans against accepting the loan. Over the last three years Total advance to Total Deposit

ratio shows a increasing trend. This shows good sign for the bank, if it would have increased

more, then it may be turned out to be risky for the bank.

4.3.2 Profit per Employee

This ratio shows the surplus earned per employee. It is arrived at by dividing profit

after taxearned by the bank by the total number of employee. The higher the ratio shows

better management efficiency.

Profit per Employee =Profit after Tax/ No. of Employees

Table 4.11- Profit per Employee

Year 2008 2009 2010 2011 2012PAT 151.6235 194.7526 233.7605 292.5641 401.6560

Number of employee

4223 4809 5613 5619 5879

Ratios 0.035 0.040 0.041 0.051 0.068

Graph - Profit per Employee

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2008 2009 2010 2011 20120

0.01

0.02

0.03

0.04

0.05

0.06

0.07

Series 3

Interpretation:

Profit per employee of the bank even though increased from 0.035 in 2008 to 0.068

in 2012. . This indicates that the management of the bank maximum efficiently utilizing its

employees.

4.3.3.Business per Employee

Revenue per employee is a measure of how efficiently a particular bank is utilizing

itsemployees. Ideally, a bank wants the highest business per employee possible, as it

denoteshigher productivity. In general, rising revenue per employee is a positive sign that

suggests the bank is finding ways to squeeze more sales/revenues out of each of its

employee.

Business per Employee =Total Income/ No. of Employees

Table 4.12- Business per Employee

Year 2008 2009 2010 2011 2012Total income 1433.8175 1851.1936 2144.1812 2642.7106 3830.4953

Number of employee

4223 4809 5613 5619 5879

Ratios o.339 0.384 0.382 0.470 0.651

Graph - Business per Employee

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2008 2009 2010 2011 20120

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Series 3

Interpretation:Similar to Profit per Employee, Business per Employee of South Indian Bank also

shows an increasing trend from 2008 to 2012. It indicates the inefficacy of the bank in the

field of productivity.

4.3.4 Return on Net worth

This ratio is one of the most important ratios used to measuring the overall efficiency

of the firm. This ratio is one of great importance to the present and prospective share holders

as well as the management of the company. As this ratio how well the resources of a firm are

being used, higher the ratio, better are the results. This is calculated using the following

formula.

Return on Net worth = Profit after tax(PAT )

Net wort∨share holders fundX 100

Table 4.13- Return on Net worth

Year 2008 2009 2010 2011 2012PAT 151.6235 194.7526 233.7605 292.5641 401.6560Net worth 1160.9816 1304.0040 1484.7154 1845.1590 2167.4831Ratios 13.05% 14.93% 15.74% 15.85% 18.53%

Graph - Return on Net worth

55 | P a g e

2008 2009 2010 2011 20120.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

Series 3

Interpretation:Return on net worth is a measure of the profitability of the company. As profitability

directly relates to the efficiency of the management. Return on Net worth of the bank during

2008 was 13.05 and shows an increasing trend up to 2012. So it is clear that during the last

years the bank efficiently utilizing its resources.

4.4. EARNINGS & PROFITABILITY Earnings and profitability, the prime source of increase in capital base, is examined

withregards to interest rate policies and adequacy of provisioning. In addition, it also helps

tosupport present and future operations of the institutions. The single best indicator used

togauge earning is the Return on Assets (ROA), which is net income after taxes to total

assetratio

The following ratios try to assess the quality of income in terms of income generated

by core activity – income from landing operations.

4.4.1 Spread to Total Asset

It is the difference between the interest income and interest expended as percentage of

total assets. Interest expended includes interest paid on deposits. Spread indicates a bank`s

ability to with stand pressure on margins and higher the spread, the better.

Total asset = ( interest income – interestExpended / total asset)*100

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Table -Spread to Total Asset

Year 2008 2009 2010 2011 2012Interest Income

1291.2348 1686.9219 1935.7210 2446.0166 3583.4253

Interest Expended

915.0979 1164.0380 1367.4284 1654.9152 2561.6857

Spread 376.1369 522.8839 568.2926 791.1014 1021.7396

Total Assets 17089.9298 20383.5219 22534.0466 32820.2205 40370.0586

Ratios 2.20% 2.56% 2.52% 2.41% 2.53%

Graph - Spread to Total Asset

2008 2009 2010 2011 20122.00%

2.10%

2.20%

2.30%

2.40%

2.50%

2.60%

Series 3

Interpretation:South indian Bank shows highest spread of 2.56% in the year 2009. In 2011 it is

2.41% and shows a decreasing trend . In the years 2012, the ratio shows an increasing trend.

The low spread situation is an indicator of the inefficiency of the management, but in the

current year the ratio shows an upward trend indicating the management efficiency.

4.4.2. % Growth in Net profit

Net profits are obtained after deducting income tax and if net profit is not sufficient,

the firm shall not be able to achieve a satisfactory return on investment. Growth in net profit

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helps the bank to face adverse economic conditions. Percentage growth in net profit can be

found out by using the following formula

.

% Growth in Net profit = CurrentyearsNP−PreviousyearsNP

PreviousyearsNPX 100

Table - % Growth in Net profit

Year 2007 2008 2009 2010 2011 2012Net profit

104.1176 151.6235 194.7526 233.7605 292.5641 401.6560

Ratios --------------- 45.6% 28.4% 20.0% 25.1% 37.2%

Graph - % Growth in Net profit

2008 2009 2010 2011 20120.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

Series 3

Interpretation:The percentage growth in Net profit shows a mixed trend over the past years. In 2008

the ratio was 45.6% and increasing ratio of 37.2%.in the year 2012.

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4.4.3.Dividend payout ratio

Dividend payout ratio shows the percentage of profit shared with the shareholders.

The more the ratio will increase the goodwill of the bank in the share market.

Dividend payout ratio = Dividend/ Net profit

Table - Dividend payout ratio

Year 2008 2009 2010 2011 2012

Dividend 27.1216 33.9019 45.2026 56.5033 68.0971

Net profit 151.6235 194.7526 233.7605 292.5641 401.6560

Ratios 0.17 0.17 0.19 0.19 0.16

Graph - Dividend Payout Ratio

2008 2009 2010 2011 20120.145

0.15

0.155

0.16

0.165

0.17

0.175

0.18

0.185

0.19

0.195

Series 3

nterpretation: In South indian Bank, the average ratio during the four years . They have paid highest

dividend in the year 2008. In the year 2012 they paid low dividend.

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4.4.4 Interest income to Total Income

Interest income is a basic source of revenue for banks. The interest income total

income indicates the ability of the bank in generating income from its lending. In other

words, thisratio measures the income from lending operations as a percentage of the total

incomegenerated by the bank in a year. Interest income includes income on advances,

interest ondeposits with the RBI, and dividend income.

Interest income to Total Income = Interest Income/ Total Income

Table - Interest income to Total Income

Year 2008 2009 2010 2011 2012Interest income

1291.2348 1686.9219 1935.7210 2446.0166 3583.4253

Total income

1433.8175 1851.1936 2144.1812 2642.7106 3830.4953

Ratios 0.900 9.111 0.902 0.925 0.935

Graph - Interest income to Total Income

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2008 2009 2010 20110

1

2

3

4

5

6

7

8

9

10

Series 3

Interpretation: The interest income to total income ratios is increasing in 2009,afterinterst income to total

income ratios is decreasing.

4.4.5 Net profit to Average Asset

Net profit to average asset indicates the efficiency of the banks in utilizing their assets

in generating profits. A higher ratio indicates the better income generating capacity of

theassets and better efficiency of management. It is arrived at by dividing the net profit

byaverage assets, which is the average of total assets in the current year and previous

year.Thus, this ratio measures the return on assets employed. Higher ratio indicates

betterearning potential in the future.

Net profit to Average Asset = Net Profit/ Average Asset

Table 4.18- Net profit to Average Asset

Year 2008 2009 2010 2011 2012

Net profit 151.6235 194.7526 233.7605 292.561 401.6560

Avg asset 15371.2544 18736.72585 22958.78325 29177.13255 32820.2205

Ratios .0098 0.0103 0.0101 0.0100 0.0122

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Graph - Net profit to Average Asset

2008 2009 2010 2011 20120

0.002

0.004

0.006

0.008

0.01

0.012

0.014

Series 3

Interpretation:In South indian Bank the ratio is continuously increase year by year from .000986 in

2008 to 0.0122 in the year 2012. This indicates the efficiency of utilization of assets in

generating revenue is very high.

4.4.6 Operating profit to Average working fund

This ratio indicates how much a bank can earn from its operations net of the operating

expenses for every rupee spent on working funds. Average working funds are the

totalresources (total assets or total liabilities) employed by a bank. It is daily average of

totalassets/ liabilities during a year. The higher the ratio, the better it is. This ratio determines

theoperating profits generated out of working fund employed. The better utilization of

thefunds will result in higher operating profits. Thus, this ratio will indicate how a bank

hasemployed its working funds in generating profits.

Operating profit to Average working fund = Operating Profit/ Average Working Fund

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Table - Operating profit to Average working fund

Year 2008 2009 2010 2011 2012Operating profit 358.6787 270.6523 410.5714 525.2631 651.5175Avgworkingfund

1104.29725 5881.1725 1936.32865 19238.1777 17316.57265

Ratios 0.324 0.046 0.027 0.027 0.037

Graph - Operating - profit to Average working fund

2008 2009 2010 2011 20120

0.05

0.1

0.15

0.2

0.25

0.3

0.35

Series 3

Interpretation:Earning reflect the growthcapacity and the financialhealth of the bank. Highearnings

signify high growthprospects. The ratio Operating profit to average working fund shows an

upward trend till the year 2008, The higher the ratio indicates better performance.

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4.4.7.Non Interest Income to Total Income

Fee based income account for a major portion of the bank’s other income. The bank

generates higher fee income through innovative products and adapting the technology

forsustained service levels. The higher ratio indicates increasing proportion of fee-

basedincome. The ratio is also influenced by gains on government securities, which

fluctuatesdepending on interest rate movement in the economy.

Non Interest Income to Total Income= Other Income/ Total Income

Table - Non Interest Income to Total Income

Year 2008 2009 2010 2011 2012Other income

124.5801 164.2717 208.4602 196.6940 247.0700

Total income 1433.8175 1851.1936 2144.1812 2642.7106 3830.4953Ratios 0.086 0.088 0.097 0.074 0.064

Graph -Non Interest Income to Total Income

2008 2009 2010 2011 20120

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

0.1

Series 3

Interpretation: By comparing the last five years data of south indian Bank, non interest income

contribution to total income reaches to a maximum of 0.097. From last two years the ratio

shows a decreasing trend.

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4.5. LIQUIDITYThe business of banking is all about borrowing and lending money. Timely

repayment of deposits is of crucial importance to avoid a run on a bank. Investors are

extremely sensitive and they rush to the bank to withdraw money at the slightest hint of

trouble. Hence banks have to ensure that they always maintain liquidity. Through mandatory

SLR and CRR, RBI ensures that banks maintain ample liquidity.

The liquidity of an institution depends on:

4.5.1.Liquidity Asset to Total Asset

Liquidity for a bank means the ability to meet its financial obligations as they come

due. Bank lending finances investments in relatively illiquid assets, but it fund its loans with

mostly short term liabilities. Thus one of the main challenges to a bank is ensuring its own

liquidity under all reasonable conditions. Liquid assets include cash in hand, balance with the

RBI, balance with other banks (both in India and abroad), and money at call and short notice.

Total asset include the revaluations of all the assets. The proportion of liquid asset to total

asset indicates the overall liquidity position of the bank.

Liquidity Asset to Total Asset = Liquidity Asset/ Total Asset

Table - Liquidity Asset to Total Asset

Year 2008 2009 2010 2011 2012Liquid asset 12156.3984 13887.8879 17810.5901 22954.8594 29921.275Total asset 17089.9298 20383.5219 22534.0466 32820.2205 40370.0586Ratios 0.711 0.681 0.790 0.699 0.741

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Graph - Liquidity Asset to Total Asset

2008 2009 2010 2011 20120.62

0.64

0.66

0.68

0.7

0.72

0.74

0.76

0.78

0.8

Series 3

Interpretation:The ratio of Liquid asset to Total Assets shows an increasing trend up to the year

2010 and 2012.

4.5.2 Liquidity Asset to Total Deposits

This ratio measures the liquidity available to the deposits of a bank. Total deposits

includedemand deposits, savings deposits, term deposits and deposits of other financial

institutions.Liquid assets include cash in hand, balance with the RBI, balance with other

banks (both inIndia and abroad), and money at call and short notice.

Liquidity Asset to Total Deposits = Liquidity Asset/ Total Deposit

Table - Liquidity Asset to Total Deposits

Year 2008 2009 2010 2011 2012Liquid assset 12156.3984 13887.8879 17810.5901 22954.8594 29921.275Total deposit

15156.1215 18092.3322 23011.5241 29721.0752 36500.5348

Ratios 0.80 0.76 0.77 0.77 0.81

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Graph - Liquidity Asset to Total Deposits

2008 2009 2010 2011 20120.73

0.74

0.75

0.76

0.77

0.78

0.79

0.8

0.81

Series 3

Interpretation;The percentage of Liquid Asset to Total Deposits is showing a mixed trend. During

2008 –2009 the ratio shows and decreasing increasing trend.

4.5.3 Government security Total Asset

Government Securities are the most liquid and safe investments. This ratio measures

the government securities as a proportion of total assets. Banks invest in government

securitiesprimarily to meet their SLR requirements, which are around 25% of net demand

and timeliabilities. This ratio measures the risk involved in the assets hand by a bank.

Government security Total Asset = Government Securities/ Total Asset

Table - Government security Total Asset

Year 2008 2009 2010 2011 2012Govt security

3590.2573 4047.1298 5624.5960 6790.0294 8213.1853

Total asset 17089.9298 20383.5219 22534.0466 32820.2205 40370.0586Ratios 0.21 0.19 0.24 0.22 0.20

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Graph - Government security to Total Asset

2008 2009 2010 2011 20120

0.05

0.1

0.15

0.2

0.25

Series 3

Interpretation: Govt. securities are more secured and always enjoy a ready market. By comparing the

last five year data we can ascertain that South Indian bank has made investments in Govt.

securities around 0.25 of its total asset.

4.5.4. Approved securities to Total Asset

Approved securities are investments made in state associated bodies like electricity

boards, housing boards, and corporation bonds. This ratio measuresthe Approved Securities

as a proportion of Total Assets.

Approved securities to Total Asset = Approved Securities/ Total Asset

Table - Approved securities to Total Asset

Year 2008 2009 2010 2011 2012Approved 28.0053 20.2410 16.3665 12.6808 _

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securityTotal asset 17089.9298 20383.5219 22534.0466 32820.2205 40370.0586Ratios 00016 000099 000072 000038

Graph - Approved securities to Total Asset

2008 2009 2010 2011 20120

10

20

30

40

50

60

70

80

90

100

Series 3

Interpretation:

Approved securities include securities other than governmentsecurities. Here the ratio

of Approved securities to Total Asset shows an increasing trend till the year 2009. The lowest

ratio recorded in the year 2008.

4.5.5. Liquidity Asset to Demand deposits

This ratio measures the ability of a bank to meet the demand from deposits in a

particular year. Demand deposits offer high liquidity to the depositor and hence banks have to

invest these assets in a highly liquid form.

Liquidity Asset to Demand deposits = Liquidity Asset/ demand Deposit

Table - Liquidity Asset to Demand deposits

Year 2008 2009 2010 2011 2012Liquidity asset

12156.3984 13887.8879 17810.5901 22954.8594 29921.275

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Demand deposit

773.1236 845.5271 1051.8782 1201.4891 1261.8203

Ratios 15.7 16.4 16.9 19.10 23.7

Graph - Liquidity Asset to Demand deposits

2008 2009 2010 2011 20120

5

10

15

20

25

Column1

Interpretation:The ratio shows the power of liquidity asset against total demand deposits. It means

what part of the demand deposits can be easily converted into monetary form inneed.

4.6. SENSITIVITY TO MARKET RISK

It refers to the risk that changes in market conditions could adversely impact earnings

and/or capital. Market Risk encompasses exposures associated with changes in interstates,

foreign exchange rates, commodity prices, equity prices, etc. While all of these items are

important, the primary risk in most banks is interest rate risk (IRR), which will be the focus

of this module. The diversified nature of bank operations makes them vulnerable tovarious

kinds of financial risks. Sensitivity analysis reflects institution’s exposure to interest rate risk,

foreign exchange volatility and equity price risks (these risks are summed in market risk).

Some key issues under this are as follows;

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Internal Control Systems

Like the central banks in developed supervisory regimes, RBI also has started placing

anincreasing reliance on professional accountants in the assessment of internal

controlsystems of the banks and non-bank financial institutions. Over the period,

theresponsibilities of auditors have been delineated not only to make the audit more

detailedbut also to make them accountable. The methodology and processes used to

generateavailable data as certified by audit profession would improve the reliability of

financialstatements as regards their conformity with national accounting and disclosure

standards.

Another area of crucial importance is strengthening of internal control systems in

banks.The Reserve Bank has, over the years, emphasised the need for having an

effectiveinternal control system in banks. Banks have also been advised to introduce the

system ofConcurrent Audit in major and specialized branches. As a result, all commercial

bankshave introduced concurrent audit since 1993 by using external auditors as a

majorresource. The banks are now required to set up Audit Committees to follow up on

thereports of the statutory auditors and inspection by RBI. Similarly, immediate action

iswarranted on reconciliation of inter branch accounts which if left unreconciled,

isfraughtwith grave risks. Substantial progress has been made by banks in reconciliation of

theoutstanding entries, and BFS reviews the progress in this area at quarterly intervals.

Technology is the key

The decade of 90s has witnessed a sea change in the way banking is done in

India.Technology has made tremendous impact in banking. Anywhere banking and

anytimebanking has become a reality. This has thrown new challenges in the banking sector

andnew issues have started cropping up which is going to pose certain problems in the

nearfuture.

Challenges of Retail banking

First, retention of customers is going to be a major challenge. Thus, banks need to

emphasise retaining customers and increasing market share.

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Second, rising indebtedness could turn out to be a cause for concern in the future.

India's position, of course, is not comparable to that of the developed world where household

debt as a proportion of disposableincome is much higher. Such a scenario creates high

uncertainty.

Third, information technology poses both opportunities and challenges. Even with

ATM machines and Internet Banking, many consumers still prefer the personal touch of their

neighbourhood branch bank. Technology has made it possible to deliver services throughout

the branch bank network, providing instant updates to checking accounts and rapid

movement of money for stock transfers. However, this dependency on the network has

brought IT departments’ additional responsibilities and challenges in managing, maintaining

and optimizing the performance of retail banking networks.

South Indian bank :

Risk management is a key focus area at south indian Bank and viewed as astrategic

tool for competitive advantage. In the Indian context south Indian Bank has been

doingpioneering work in this area by setting a specialized risk management group within the

Bank.

Chart Structure of the Risk Management function in the Bank

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5.1.FINDINGSOF THE STUDY

1. Capital adequacy reflects the overall financial condition of the bank and also

the ability of the management to meet the need for additional capital. The committee

on Banking Regulations and Supervisory Practices (Basel Committee) released

framework on stringent capital standard to be adopted by banks worldwide. As per

prudential norm all Indian scheduled commercial banks are required to achieve 9%

capital adequacy ratio by 31-3-2000. South Indian Bank is able to achieve more than

this minimum requirement of 9% in all the years. This helps the bank to establish a

level of confidence sufficient to absorb unforeseen losses.

2. The debt equity ratio of the bank during the last year shows above 50%.This

indicates that the bank`s liquidity position is under threat and it also adversely affect

the bank`s long term borrowings.

3. Nonperforming assets is advances or borrowable accounts which do not generate

income for the bank. Its percentage with regarded to advances is showing a decreasing

trend indicating that the bank is able to manage the credit risk. NPAs to total asset

ratio also indicates increased asset quality.

4. The Gross NPA ratio has registered declining trend over the past five years. It shows

bank efficiency in recovering the outstanding dues. But then, we can say that a bank's

business is making loans and world over, some percentage of the loans always turn

bad.

5. Yield on advances shows a increasing trend.

6. Total advance of the South Indian Bank is around 65% of its total deposits. This

indicates management efficiency to convert deposits to advances. Advances are the

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main source of income of the bank and thus the efficiency of the management

depends upon their ability to increase these assets.

7. The return on net worth shows a increasing trend, This indicates that growth in net

profit is not proportionate to the growth in net worth, and so the bank has to use its

resources more efficiently.

8. Interest income of south IndianBank is increasing year by year.

9. Net profit of the bank shows an increasing trend, but at the same time the percentage

growth in net profit is not as good when compared to the situation up to the year 2011.

10. Liquidity of any bank depends upon its investments in government securities

and other approved securities. Government securities and other approved securities

are more liquid and safe.

.

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5.2.SUGGESTIONS

1. At present the minimum capital adequacy ratio as per RBI norms is 9% and

South Indian Bank keep the minimum requirement. But the average capital adequacy

ratio of the private sector banks is above 14%. Therefore South Indian Bank must take

all necessary steps to improve its CAR, at least to the level of industry average.

2. The studies shown that management of NPAs rather than elimination is prudent.

The banks should maintain a 0% NPA by always lending and investing or creating

quality assets which earn returns by way of interest and profits.

3. In the financial world products can’t be differentiated for long, because these are

relatively easy to copy. So operating excellence, understanding the customer and

developing a rapport with them have become inevitable. South indian Bank has to

take this aspect in to consideration.

4. Higher return on net worth indicates better utilization of the owner’s funds and

higher productivity. It is an index to know whether the owners are getting satisfactory

return on their investment. In the case of South Indian Bank the return on net worth

shows a decreasing trend. So bank has to take steps to make remains in its return on

net worth

5. Opening up of a financial sector results in the presence of global and

multinational banks in the Indian market. These banks will bring with them a huge

capital, modern technology and tested management skills. Indian banks required to

compete with these financial giants. This makes South Indian Bank to gear up to

international best practices and standards. And it also inevitable to consolidate grow

in scale and strength to compete with world class banks.

6. Banking industry is highly information intensive. So South Indian Bank should

try to make effective use of information technology. To give maximum information to

customers very easly.

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7. The percentage of Non-Interest income to Total Income shows a decreasing

trend over the last three years. Depending only on interest income is unhealthy in

today`s competitive scenario. Therefore banks needs to increase its non-interest

income by adopting new fee based services.

8. The bank should concentrate to improve proportion between interest income to total

income.

9. The bank should concentrate starting more braches in rural area

Bank Rating:

The ratings are assigned on a scale from A to E. Banks with ratings of A or B are considered to present few, if any, supervisory concerns, while banks with ratings of C, D, or E present moderate to extreme degrees of supervisory concern.

Rating Symbol

Rating symbol indicates

A Bank is sound in every respect

B Bank is fundamentally sound but with moderate weaknesses

Cfinancial, operational or compliance weaknesses that give cause for supervisory concern.

Dserious or immoderate finance, operational and managerial weaknesses that could impair future viability

ECritical financial weaknesses and there is high possibility of failure in the near future.

From the past five years study, the rating given to the south Indian Bank is “B” .i.e. the bank has financial, operational or compliance weakness that give cause for supervisory concern. The bank should be safe in the areas like Capital Adequacy, Asset Quality, and Liquidity. The Management soundness and Earnings are the key areas that the bank should need supervisory concern.

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5.3.CONCLUSION

The banking sector in India has undergone remarkable changes since the economic

reforms were initiated in 1991-92. The opening of the banking sector to private as well as

foreign banks has been a major milestone in the history of the industry. As a result, a host of

new generation private sector banks have entered in the scene. This along with the

permission to foreign banks to expand their operation in the country has galvanized the

domestic banking sector. The South indian Bank is in an existing phase of strong, healthy

competition.

Now a day, there have been active efforts within the Indian banks to differentiate

themselves from other banks through product innovation, customer-centric services,

rationalization of service charges, and simplified procedure for documentation etc. Earlier

people talk about foreign banks, nationalized banks, and private sector banks. But now, they

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talk about bad banks, good and better banks. This necessitates banks to identify their strength

and weakness.

Here comes the importance of rating of performance. And in this study performance

of South indian Bank is evaluated using various parameters such as Capital adequacy, Assets

Quality , Management soundness, Earnings quality, Liquidity and Sensitivity to

market risk. By analyzing last six years data, it is found that Southindian Bank is

maintaining the capital adequacy ratio and decreasing trend of NPAs is an evidence of

improving the asset quality. The bank also enjoys adequate liquidity.

The future vision of the South indian Bank should be oriented towards the labour intensive growth which would help in making available employment opportunities and will thus promote social justice and inclusive growth in the country in the coming years

BIBLIOGRAPHY

Websites

1. www.rbi.org.in

2. www.allbankingsolutions.com

3. www.economictimes.indiatimes.com

4. www.southindianbank.com

Books and Journals:

1. Kothari C.R, Research Methodology, New Delhi, New age international (p) limited.

2. Potti L.R, Research Methodology, Thiruvananthapuram, Yamuna Publications.

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3. “Indian Finance System” by BhartiPathak

4. Annual reports of the south indian bankbank

5. The ICFAI Journal of “Bank Management” Vol. V, No.3, August 2006

Annexure

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