report on komal

7/29/2019 Report on komal

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Chap t e r 1

Research Met ho do log y

1.1 Objective of the Study

? The main objective is to evaluate the business and financial performance of major

Banks which are listed on BSE BANKEX so as to facilitate investment decisions and to

maximize return with the minimum risk.

? To create a virtual portfolio based on the fundamental analysis carried out.

1.2 Scope of the Study

This study only includes Banks that are listed in Bombay Stock Exchange. Moreover the result

of the study will be only based on fundamental analysis.

The data of last three years:-

2004-2005, 2005-2006, 2006-2007 are taken into consideration for the study.

1.3 Research Design

It is a descriptive research.

1.4 Sources of Data

Basic data like Balance sheet, P/L a/c etc. of the companies will be taken from the Prowess

software. Along with that the annual reports and websites of the companies will also be referred.

1.5 Sampling

The stocks selected are Banking Stocks which are listed in BSE - BANKEX

BSE BANKING SECTOR INDEX

BSE Bankex was launched with an objective of measuring the performance of banking sector

stocks listed on the Bombay Stock Exchange. Bankex has a base date of 1st January 2002 and

base value of 1000 points. Bankex constituents represent 90% of the total market capitalisation

of the banking sector on BSE.

The following companies we take which is come under the BSE- BANKING SECTOR INDEX :


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1. ALLAHABAD BANK

2. ANDHRA BANK

3. AXIS BANKI

4. VIJAYA BANK

5. UNION BANK

6. ORIENTAL BANK OF COMMERECE

7. BANK OF INDIA

8. CANARA BANK

9. HDFC BANK

10. ICICI BANK

11. INDIAN OVERSEAS BANK

12. KOTAK BANK

13. PUNJAB NATIONAL BANK

14. STATE BANK OF INDIA

15. BANK OF BARODA.

1.6 Method of analysis

? The major criteria for the study like Capital Adequacy Ratio,N/P growth, EPS, market

capitalization, current ratio etc. will be selected and all companies are compared as per

these criteria.

? The selected companies can also be compared on individual basis.? Finally weights are given to the selected ratios.

1.7 Benefits of the Study

This study will be helpful to take buy or sell decisions in the capital market. Thus overall this

study will be useful to,

? Investors

? Shareholders

? Students

? Researchers


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1.8 Limitations

? The major limitation of this study may be the uncertainty of the capital market. Due to the

current market volatility any prediction of the market can be proved wrong at any time.

? The other limitation may be the time horizon. As the study will be of short period of time,

it may lack with some important considerations.

Any sudden change in rules and regulations by the Government for running the Banks of the

country may affect the conclusion of this study.

1.9 Expected Contribution of the Study

This study will help an investor to decide whether to buy, sell or hold the stock. It will also create

a virtual portfolio that can be used by any investor who wants to invest in the Banking sector.


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Chap t e r 2

I nd i an Stock Mark e t

2.1 History of stock market

Stock market is a system through which company shares are traded. The equity market offers

investors an opportunity to participate in a company's success through an increase in its stock

price. With enhanced opportunity, however, the equity market usually carries greater risk than

debt markets. The Indian equity market focuses on the SENSEX. The other major component of

the Indian equity market is the NIFTY, a computerized system of brokers/dealers with no

physical trading space. The Indian equity market also comprises trading on the regional stock

exchanges.

The worldwide equity market grew rapidly in the late 20th century, rising from $1 trillion in

market capitalization in 1974 to $16 trillion in 1997 and today the size of the stock market is

estimated at about $51 trillion. The world derivatives market has been estimated at about $480

trillion face or nominal value, 30 times the size of the U.S. economy. and 12 times the size of

the entire world economy.

It must be noted though that the value of the derivatives market, because it is stated in terms of

notional values, and cannot be directly compared to a stock or a fixed income security, which

traditionally refers to an actual value. Many such relatively illiquid securities are valued as

marked to model, rather than an actual market price. The worldwide equity market benefited

from freer markets, government privatizations, and companies seeking an alternative to debt.

The working of stock exchanges in India started in 1875. BSE is the oldest stock market in

India. The history of Indian stock trading starts with 318 persons taking membership in Native

Share and Stock Brokers Association, which we now know by the name Bombay Stock

Exchange or BSE in short. In 1965, BSE got permanent recognition from the Government of

India.

National Stock Exchange comes second to BSE in terms of popularity. BSE and NSE represent

themselves as synonyms of Indian stock market. The history of Indian stock market is almost

the same as the history of BSE. The 30 stock sensitive index or Sensex was first compiled in

1986. The Sensex is compiled based on the performance of the stocks of 30 financially sound

benchmark companies.


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The unpredictable behavior of the market gave it a tag 'a volatile market.' Global investors

now ardently seek India as their preferred location for investment. Once viewed with skepticism,

stock market now appeals to middle class Indians also. Many Indians working in foreign

countries now divert their savings to stocks. This recent phenomenon is the result of opening up

of online trading and diminished interest rates from banks.

The stockbrokers based in India are opening offices in different countries mainly to cater the

needs of Non Resident Indians. The time factor also works for the NRIs. They can buy or sell

stock online after returning from their work places. The recent incidents that led to growing

interest among Indian middle class are the initial public offers announced by Tata Consultancy

Services, Maruti Udyog Limited, ONGC and big names like that.

Good monsoons always raise the market sentiments. A good monsoon means improved

agricultural produce and more spending capacity among rural folk. The bullish run of the stock

market can be associated with a steady growth of around 6 in GDP, the growth of Indian

companies to MNCs, large potential of growth in the fields of telecommunication, mass media,

education, tourism and IT sectors backed by economic reforms ensure that Indian stock market

continues its bull run.

2.3 Importance of stock market

Function and purpose

The stock market is one of the most important sources for companies to raise money. This

allows businesses to be publicly traded, or raise additional capital for expansion by selling

shares of ownership of the company in a public market. The liquidity that an exchange provides

affords investors the ability to quickly and easily sell securities. This is an attractive feature of

investing in stocks, compared to other less liquid investments such as rea l esta te .

History has shown that the price ofsharesand other assets is an important part of the dynamics

of economic activity, and can influence or be an indicator of social mood. Rising share prices,

for instance, tend to be associated with increased business investment and vice versa. Share

prices also affect the wealth of households and their consumption. Therefore, central banks

tend to keep an eye on the control and behavior of the stock market and, in general, on the

smooth operation of financial system functions. Financial stability is the raison d'tre of central

banks.


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Exchanges also act as the clearinghouse for each transaction, meaning that they collect and

deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to

an individual buyer or seller that the counterparty could default on the transaction.

The smooth functioning of all these activities facilitates economic growth in that lower costs

and enterprise risks promote the production of goods and services as well as employment. Inthis way the financial system contributes to increased prosperity.

Stock market index

The movements of the prices in a market or section of a market are captured in price indices

called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronext

indices. Such indices are usually market capitalization (the total market value of floating capital

of the company) weighted, with the weights reflecting the contribution of the stock to the index.

The constituents of the index are reviewed frequently to include/exclude stocks in order to

reflect the changing business environment.


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2.4 Bombay Stock Exchange

Bombay Stock Exchange

Mumbai Seyar Bazar

Type Stock Exchange

Location Mumbai, India

Owner Bombay Stock Exchange Limited

Key people Rajnikant Patel (CEO)

Currency INR

No. of listings 4,800

MarketCap US$ 1.61 trillion

Volume US$ 980 billion

Indexes BSE Sensex

Website www.bseindia.com


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BSE indices

The BSE SENSEX (also known as the BSE 30 index) is a value-weighted index composed of

thirty scrips, with the base April 1979 = 100. The set of companies which make up the index has

been changed only a few times in the last twenty years. These companies account for around

one-fifth of the market capitalization of the BSE.

Apart from BSE SENSEX, which is the most popular stock index in India, BSE uses other stock

indices as well:

? BSE 500

? BSE 100

? BSE 200

? BSE PSU

? BSE MIDCAP

? BSE SMLCAP

? BSE BANKEX

? BSE Teck

? BSE Auto

? BSE Pharma

? BSE Fast Moving Consumer Goods (FMCG)

? BSE Consumer Durables

? BSE Metal


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2.5 National Stock Exchange Limited

National Stock Exchange Limited

Type Stock Exchange

Location Mumbai, India

Coordinates 193'37?N, 7251'35?E

Owner National Stock Exchange of India Limited

Key people Abhinay dutta Managing Director

Currency INR

No. of listings 1587

MarketCap US$ 1.46 trillion

Indexes

S&P CNX Nifty

CNX Nifty Junior

S&P CNX 500

Website www.nse-india.com

Indices

NSE also set up as index services firm known as India Index Services & Products Limited (IISL)

and has launched several stock indices, including:

? S&P CNX Nifty

? CNX Nifty Junior

? CNX 100 (= S&P CNX Nifty + CNX Nifty Junior)

? S&P CNX 500 (= CNX 100 + 400 major players across 72 industries)

? CNX Midcap (introduced on 18 July 2005 replacing CNX Midcap 200)


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2.6 Current Situation & Volatility

Year 2007 started on a strong note, but is ending on a mixed note. The US sub prime crisis is

far from over, and can drag the US economy into recession. Crude prices have surged, so have

many agriculture and other commodity prices at a time when the global economy is none to

strong. This will definitely have an impact on India, particularly on its export prospects.

Fortunately, India is more of an internal-consumption-driven economy. In the past few years, the

cream of growth has been investment-driven, too.

These factors provide strong support for sustained acceleration in the domestic economy. The

US Federal Reserve has cut rates thrice. This has led to a surge in forex inflows into emerging

markets like India and into commodities. Domestic inflation has moderated and is below 4%.Also, interest rates have already peaked. If they fall steeper from the current levels, it could

revive the auto sector and boost the profitability of the banking sector, particularly PSU banks,

through surge in investment income.

The surge on the Indian stock markets was powered by foreign institutional investors (FIIs).

Inflows from FIIs stood at US$ 17 billion in 2007. A majority of this was received in the later part

of the year. The main reason was the cutting of rates by the US Federal Reserve. With the US

market heading for a recession and the global economy for a slowdown, will foreign portfolio

investment decline, remain consistent or surge? With large global investment banking entities

reporting poor results of late, FII inflows are bound to reduce from such entities for now. India is

also witnessing one of the lengthiest capital expenditure cycles, which shows no signs of

easing. This experience has helped the domestic players to strengthen their overseas

businesses as well.


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2008 has begun with a bang. And how! The Bombay Stock Exchange (BSE) Sensitive Index

(Sensex) shaved off 3,222.1 points in six consecutive trading sessions between 14 and 21

January 2008. Though the fall was continuous on each of these days, 21 January turned to be a

typical Black Monday as the market went down intra-day by Equity Markets In India An

Overview 79 2,062.2 points, finally closing with 1,408.35 points off.

The carnage was not unique to India but was spread across the globe. In the year to 21

January 2008, only three of the 52 global equity markets gave positive returns in dollar terms,

according to the Broad Market Index provided by Standard & Poors/Citigroup Global Equity

Indices. These were Morocco, Jordan and Nigeria. On the other extreme, six markets

Luxembourg, Norway, Poland, Brazil, Iceland and Turkey witnessed over 20% fall. Thirty-

seven markets had a double-digit dip, while six markets witnessed single-digit decline. India lost

16.2% in dollar terms in this period.

It is becoming increasingly clear that the global economy is set to slow down. Sub-prime crisis

is just a symptom of the weaknesses in the US economy. A US recession will slow down the

global economy due to its global linkages. Starting the December 2007 quarter at a level of

17,291 points, the BSE Sensex kept on rising (with many corrections) throughout the quarter

and was up over 17% at the end of the quarter. When the December 2007 quarter results

started pouring in, the index shot up to a historic high of 21,207 points on 10 January 2008 and

then crashed like a, pack of card on fears of a US recession and huge write-offs by almost all

global banks and financial institutions on account of defaults in the sub-prime mortgage market.

This took a heavy toll on the Indian markets also. After closing at a historical high of 20,873.33

on 8 January 2008, the BSE Sensex tumbled by over 29% to 14,809.49 on 17 March 2008.

Fortunately, there was a relief rally, which talked up the Sensex past the16,000 levels to

16,371.29 on 28 March 2008. Still the market is nearly 22% lower from its peak.

There was sustained and heavy selling by foreign institutional investors (FIIs) in January 2007

as well as in February till date. From excessive inflows, the markets are now suffering from

excessive FII selling. Nevertheless, the Indian markets have managed Equity Markets In India

An Overview 80 to fare much better compared with other markets on good inflows from

domestic institutional investors.


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Investors realize how lonely they are during a market meltdown. Innovations in dissemination of

information ensure that the markets never sleep. Somewhere a market is reeling under the

impact of events unfolding in another part of the globe. Despite the availability of sophisticated

trading instruments to cushion risks, investors are either propelled on euphoria emanating at

one end or swept aside on a wave of pessimism stemming from another.

Institutional investors, went the conventional wisdom, collectively determine the course of the

markets. Not any more. If an aggressive investor such as Bear Stearns, allegedly sitting on a

pile of cash just 100 hours before its hasty rescue, could not foresee its fate, how are retail

investors to know that the chattering class, propounding the theory of decoupling of emerging

markets such as India and China even as Citigroup, Merrill Lynch and other blue-chip US

investment banks were writing off huge amounts of their exposure to paper backed by sub

prime mortgages, were as clueless as they were? Each crisis brings to the table its own

lessons.

We can not exactly judge the market, but we can analyze the fundamental of company and

some what predict the trend.


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Chap t e r 3

Fun dam ent a l Ana lys is Con cept

3.1 Introduction to Fundamental Analysis

Fundamental analysis is the examination of the underlying forces that affect the well being of

the economy, industry groups, and companies. As with most analysis, the goal is to derive aforecast and profit from future price movements. At the company level, Fundamental analysis

may involve examination of financial data, management, business concept and competition. At

the industry level, there might be an examination of supply and demand forces for the products

offered. For the national economy, Fundamental analysis might focus on economic data to

assess the present and future growth of the economy. To forecast future stock prices,

Fundamental analysis combines economic, industry, and company analysis to derive a stock's

current fair value and forecast future value. If fair value is not equal to the current stock price,

Fundamental analysts believe that the stock is either over or under valued and the market pricewill ultimately gravitate towards fair value. Fundamentalists do not heed the advice of the

random walkers and believe that markets are weak-form efficient. By believing that prices do not

accurately reflect all available information, Fundamental analysts look to capitalize on perceived

price discrepancies.


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3.2 General Steps to Fundamental Evaluation

Even though there is no one clear-cut method, a breakdown is presented below in the order an

investor might proceed. This method employs a top-down approach that starts with the overall

economy and then works down from industry groups to specific companies. As part of the

analysis process, it is important to remember that all information is relative. Industry groups are

compared against other industry groups and companies against other companies. Usually,

companies are compared with others in the same group. For example, a telecom operator (Idea)

would be compared to another telecom operator (Tata communication), not to an oil company

(ONGC).

1. Economic Forecast

First and foremost in a top-down approach would be an overall evaluation of the general

economy. The economy is like the tide and the various industry groups and individual

companies are like boats. When the economy expands, most industry groups and companies

benefit and grow. When the economy declines, most sectors and companies usually suffer.

Many economists link economic expansion and contraction to the level of interest rates. Interest

rates are seen as a leading indicator for the stock market as well. Below is a chart of the S&P

500 and the yield on the 10-year note over the last 30 years. Although not exact, a correlation

between stock prices and interest rates can be seen. Once a scenario for the overall economyhas been developed, an investor can break down the economy into its various industry groups.


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2. Industry Selection

In an expanding economy, then certain groups are likely to benefit more than others. An

investor can narrow the field to those groups that are best suited to benefit from the current or

future economic environment. If most companies are expected to benefit from an expansion,

then risk in equities would be relatively low and an aggressive growth-oriented strategy might be

advisable. A growth strategy might involve the purchase of technology, biotech, semiconductor

and cyclical stocks. If the economy is forecast to contract, an investor may opt for a more

conservative strategy and seek out stable income-oriented companies. A defensive strategy

might involve the purchase of consumer staples, utilities and energy-related stocks.

To assess a industry group's potential, an investor would want to consider the overall growth

rate, market size, and importance to the economy. While the individual company is still

important, its industry group is likely to exert just as much, or more, influence on the stock price.When stocks move, they usually move as groups; there are very few lone guns out there. Many

times it is more important to be in the right industry than in the right stock! The chart below

shows that relative performance of 5 sectors over a 7-month time frame. As the chart illustrates,

being in the right sector can make all the difference.


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3. Narrow with in the Industry Group

Once the industry group is chosen, an investor would need to narrow the list of companies

before proceeding to a more detailed analysis. Investors are usually interested in finding the

leaders and the innovators within a group. The first task is to identify the current business and

competitive environment within a group as well as the future trends. How do the companies rank

according to market share, product position and competitive advantage? Who is the current

leader and how will changes within the sector affect the current balance of power? What are the

barriers to entry? Success depends on an edge, be it marketing, technology, market share or

innovation. A comparative analysis of the competition within a sector will help identify those

companies with an edge, and those most likely to keep it.

4. Company Analysis

With a shortlist of companies, an investor might analyze the resources and capabilities within

each company to identify those companies that are capable of creating and maintaining a

competitive advantage. The analysis could focus on selecting companies with a sensible

business plan, solid management and sound financials.

? Business Plan

The business plan, model or concept forms the bedrock upon which all else is built. If the plan,

model or concepts stink, there is little hope for the business. For a new business, the questions

may be these: Does its business make sense? Is it feasible? Is there a market? Can a profit be

made? For an established business, the questions may be: Is the company's direction clearly

defined? Is the company a leader in the market? Can the company maintain leadership?

? Management

In order to execute a business plan, a company requires top-quality management. Investors

might look at management to assess their capabilities, strengths and weaknesses. Even thebest-laid plans in the most dynamic industries can go to waste with bad management.

Alternatively, even strong management can make for extraordinary success in a mature

industry. Some of the questions to ask might include: How talented is the management team?

Do they have a track record? How long have they worked together? Can management deliver

on its promises? If management is a problem, it is sometimes best to move on.


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? Financial Analysis

The final step to this analysis process would be to take apart the financial statements and come

up with a means of valuation. Below is a list of potential inputs into a financial analysis.

Accounts PayableAccounts Receivable

Acid Ratio

Amortization

Assets - Current

Assets - Fixed

Book Value

Brand

Business CycleBusiness Idea

Business Model

Business Plan

Capital Expenses

Cash Flow

Cash on hand

Current Ratio

Customer RelationshipsDays Payable

Days Receivable

Debt

Debt Structure

Debt:Equity Ratio

Depreciation

Derivatives-Hedging

Discounted Cash Flow

Dividend

Dividend Cover

Earnings

EBITDA

Economic Growth

Good WillGross Profit Margin

Growth

Industry

Interest Cover

International

Investment

Liabilities - Current

Liabilities - Long-termManagement

Market Growth

Market Share

Net Profit Margin

Pageview Growth

Pageviews

Patents

Price/Book ValuePrice/Earnings

PEG

Price/Sales

Product

Product Placement

Regulations

R & D

Revenues

Sector

Stock Options

Strategy

Subscriber Growth

Subscribers


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Equity

Equity Risk Premium

Expenses

Supplier Relationships

Taxes

Trademarks

Weighted Average Cost of Capital

The list can seem quite long and intimidating. However, after a while, an investor will learn what

works best and develop a set of preferred analysis techniques. There are many different

valuation metrics and much depends on the industry and stage of the economic cycle. A

complete financial model can be built to forecast future revenues, expenses and profits or an

investor can rely on the forecast of other analysts and apply various multiples to arrive at a

valuation. Some of the more popular ratios are found by dividing the stock price by a key value

driver.

Ratio

Price/Book Value

Price/Earnings

Price/Earnings/Growth

Price/Sales

Price/Subscribers

Price/Lines

Price/Page views

Price/net interest I/C

Company Type

Oil

Retail

Networking

B2B

ISP or cable company

Telecom

Web site Biotech

Banking

This methodology assumes that a company will sell at a specific multiple of its earnings,

revenues or growth. An investor may rank companies based on these valuation ratios. Those at

the high end may be considered overvalued, while those at the low end may constitute relatively

good value.

After all is said and done, an investor will be left with a handful of companies that stand out from

the pack. Over the course of the analysis process, an understanding will develop of which

companies stand out as potential leaders and innovators. In addition, other companies would be

considered laggards and unpredictable. The final step of the Fundamental analysis process is to

synthesize all data, analysis and understanding into actual picks.


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3.3 Strengths of Fundamental Analysis

? Long-term Trends

Fundamental analysis is good for long-term investments based on long-term trends, very long-

term. The ability to identify and predict long-term economic, demographic, technological or

consumer trends can benefit patient investors who pick the right industry groups or companies.

? Value Spotting

Sound Fundamental analysis will help identify companies that represent a good value. Some of

the most legendary investors think long-term and value. Fundamental analysis can help uncover

companies with valuable assets, a strong balance sheet, stable earnings, and staying power.

? Business Acumen

One of the most obvious, but less tangible, rewards of Fundamental analysis is the development

of a thorough understanding of the business. After such painstaking research and analysis, an

investor will be familiar with the key revenue and profit drivers behind a company. Earnings and

earnings expectations can be potent drivers of equity prices. Even some technicians will agree

to that. A good understanding can help investors avoid companies that are prone to shortfalls

and identify those that continue to deliver. In addition to understanding the business,Fundamental analysis allows investors to develop an understanding of the key value drivers and

companies within an industry. A stock's price is heavily influenced by its industry group. By

studying these groups, investors can better position themselves to identify opportunities that are

high-risk (tech), low-risk (utilities), growth oriented (computer), value driven (oil), non-cyclical

(consumer staples), cyclical (transportation) or income-oriented (high yield).

? Knowing Who's Who

Stocks move as a group. By understanding a company's business, investors can better position

themselves to categorize stocks within their relevant industry group. Business can change

rapidly and with it the revenue mix of a company. This happened to many of the pure Internet

retailers, which were not really Internet companies, but plain retailers. Knowing a company's

business and being able to place it in a group can make a huge difference in relative valuations.


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3.4 Weaknesses of Fundamental Analysis

? Time Constraints

Fundamental analysis may offer excellent insights, but it can be extraordinarily time-consuming.

Time-consuming models often produce valuations that are contradictory to the current price

prevailing on Dalal Street. When this happens, the analyst basically claims that the whole street

has got it wrong. This is not to say that there are not misunderstood companies out there, but it

is quite brash to imply that the market price, and hence Dalal street, is wrong.

? Industry/Company Specific

Valuation techniques vary depending on the industry group and specifics of each company. For

this reason, a different technique and model is required for different industries and different

companies. This can get quite time-consuming, which can limit the amount of research that can

be performed. A subscription-based model may work great for an Internet Service Provider

(ISP), but is not likely to be the best model to value an oil company.

? Subjectivity

Fair value is based on assumptions. Any changes to growth or multiplier assumptions can

greatly alter the ultimate valuation. Fundamental analysts are generally aware of this and usesensitivity analysis to present a base-case valuation, a best-case valuation and a worst-case

valuation. However, even on a worst-case valuation, most models are almost always bullish, the

only question is how much so. The chart below shows how stubbornly bullish many

Fundamental analysts can be.


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? Analyst Bias

The majority of the information that goes into the analysis comes from the company itself.

Companies employ investor relations managers specifically to handle the analyst community

and release information. When it comes to massaging the data or spinning the announcement,

CFOs and investor relations managers are professionals. Only buy-side analysts tend to

venture past the company statistics. Buy-side analysts work for mutual funds and money

managers. They read the reports written by the sell-side analysts who work for the big

brokers.These brokers are also involved in underwriting and investment banking for the

companies. Even though there are restrictions in place to prevent a conflict of interest, brokers

have an ongoing relationship with the company under analysis. When reading these reports, it is

important to take into consideration any biases a sell-side analyst may have. The buy-side

analyst, on the other hand, is analyzing the company purely from an investment standpoint for a

portfolio manager. If there is a relationship with the company, it is usually on different terms. In

some cases this may be as a large shareholder.

? Definition of Fair Value

When market valuations extend beyond historical norms, there is pressure to adjust growth and

multiplier assumptions to compensate. If Dalal Street values a stock at 50 times earnings and


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the current assumption is 30 times, the analyst would be pressured to revise this assumption

higher. There is an old Dalal Street adage: the value of any asset (stock) is only what someone

is willing to pay for it (current price). Just as stock prices fluctuate, so too do growth and

multiplier assumptions.

However, because so many companies were and are losing money, it has become popular tovalue a business as a multiple of its revenues. This would seem to be OK, except that the

multiple was higher than the PE of many stocks! Some companies were considered bargains at

30 times revenues.

3.5 End Note

Fundamental analysis can be valuable, but it should be approached with caution. If you are

reading research written by a sell-side analyst, it is important to be familiar with the analyst

behind the report. We all have personal biases, and every analyst has some sort of bias. There

is nothing wrong with this, and the research can still be of great value. Learn what the ratings

mean and the track record of an analyst before jumping off the deep end. Corporate statements

and press releases offer good information, but they should be read with a healthy degree of

skepticism to separate the facts from the spin. Press releases don't happen by accident; they

are an important PR tool for companies. Investors should become skilled readers to weed out

the important information and ignore the hype.


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Chap t e r 4

Analy s is o f Global Econom y

Global output rose by 5.2% in 2007, led by China (11.4%), India (9.2%), and Russia (8.1%). The

14 other successor nations of the USSR and the other old Warsaw Pact nations again

experienced widely divergent growth rates; the three Baltic nations continued as strong

performers, in the 8%-10% range of growth. From 2007 to 2008 growth rates slowed in all the

major industrial countries except for the United Kingdom (3.1%). Analysts attribute the

slowdown to uncertainties in the financial markets and lowered consumer confidence.

Worldwide, nations varied widely in their growth results.

Externally, the nation-state, as a bedrock economic-political institution, is steadily losing control

over international flows of people, goods, funds, and technology. Internally, the central

government often finds its control over resources slipping as separatist regional movements -

typically based on ethnicity - gain momentum, e.g., in many of the successor states of the

former Soviet Union, in the former Yugoslavia, in India, in Iraq, in Indonesia, and in Canada.

Externally, the central government is losing decision making powers to international bodies,

notably the EU. In Western Europe, governments face the difficult political problem of

channeling resources away from welfare programs in order to increase investment and

strengthen incentives to seek employment. The addition of 80 million people each year to an

already overcrowded globe is exacerbating the problems of pollution, desertification,underemployment, epidemics, and famine. Because of their own internal problems and

priorities, the industrialized countries devote insufficient resources to deal effectively with the

poorer areas of the world, which, at least from an economic point of view, are becoming further

marginalized. The introduction of the euro as the common currency of much of Western Europe

in January 1999, while paving the way for an integrated economic powerhouse, poses economic

risks because of varying levels of income and cultural and political differences among the

participating nations.


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The terrorist attacks on the US on 11 September 2001 accentuated a growing risk to global

prosperity, illustrated, for example, by the reallocation of resources away from investment to

anti-terrorist programs. The opening of war in March 2003 between a US-led coalition and Iraq

added new uncertainties to global economic prospects. After the initial coalition victory, the

complex political difficulties and the high economic cost of establishing domestic order in Iraq

became major global problems that continued through 2007-08.

GDP (purchasing power parity): GWP (gross world product): $65.61 trillion (est)

GDP (official exchange rate): GWP (gross world product): $54.62 trillion (est.)

GDP - real growth rate:5.2% (est.)

GDP - per capita (PPP): $10,000 (est.)

GDP - composition by sector: agriculture: 4%

industry: 32%

services: 64% (est.)

Labor force:3.131 billion (est.)

Labor force - by occupation: agriculture: 40.2%

industry: 20.5%

services: 39.3% (est.)

Unemployment rate:

30% combined unemployment and underemployment in many non-industrialized countries;

developed countries typically 4%-12% unemployment (2007 est.)

Inflation rate (consumer prices):

developed countries 1% to 4% typically; developing countries 5% to 20% typically; national

inflation rates vary widely in individual cases, from declining prices in Japan to hyperinflation in

one Third World country (Zimbabwe); inflation rates have declined for most countries for the last

several years, held in check by increasing international competition from several low wage

countries (est.)

Investment (gross fixed): 22.7% of GDP (est.)

Industries:

Dominated by the onrush of technology, especially in computers, robotics, telecommunications,

and medicines and medical equipment; most of these advances take place in OECD nations;

only a small portion of non-OECD countries have succeeded in rapidly adjusting to these

technological forces; the accelerated development of new industrial (and agricultural)

technology is complicating already grim environmental problems


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Industrial production growth rate: 5% (est.)

Oil - production: 78.9 million bbl/day (est.)

Oil - consumption: 80.29 million bbl/day (est.)

Exports: $14.01 trillion f.o.b. (est.)

Exports - commodities:

the whole range of industrial and agricultural goods and services

top ten - share of world trade: electrical machinery, including computers 14.8%; mineral fuels,

including oil, coal, gas, and refined products 14.4%; nuclear reactors, boilers, and parts 14.2%;

cars, trucks, and buses 8.9%; scientific and precision instruments 3.5%; plastics 3.4%; iron and

steel 2.7%; organic chemicals 2.6%; pharmaceutical products 2.6%; diamonds, pearls, and

precious stones 1.9% (est.)

Exports - partners: US 15%, Germany 7.4%, China 5.9%, France 4.6%, UK 4.5%, Japan 4.4%

Imports: $13.91 trillion f.o.b. (est.)

Imports - commodities:

the whole range of industrial and agricultural goods and services top ten - share of world trade:see listing for exports

Imports - partners: China 9.8%, Germany 8.8%, US 8.5%, Japan 5.6%, France 4

Market value of publicly traded shares: $43.64 trillion (est.)


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Chap t e r 5

Ana lysi s o f I nd ian Econom y

5.1 Introduction

The economy of India, measured in USD exchange-rate terms, is the twelfth largest in the

world, with a GDP of around $1 trillion (2008). It recorded a GDP growth rate of 9.0% for the

fiscal year 20072008 which makes it the second fastest big emerging economy, after China, in

the world. At this rate of sustained growth many economists forecast that India would, over the

coming decades, have a more pronounced economic effect on the world stage. Despite this

phenomenal rate of growth, India's large population has a per capita income of $4,542,

measured by PPP, and $1,089, measured in nominal terms (estimate).The World Bank

classifies India as a low-income economy.

India's economy is diverse, encompassing agriculture, handicrafts, textile, manufacturing, and a

multitude of services. Although two-thirds of the Indian workforce still earn their livelihood

directly or indirectly through agriculture, services are a growing sector and play an increasingly

important role in India's economy. The advent of the digital age, and the large number of young

and educated populace fluent in English, is gradually transforming India as an important 'back

office' destination for global outsourcing of customer services and technical support. India is a

major exporter of highly-skilled workers in software and financial services, and softwareengineering. Other sectors like manufacturing, pharmaceuticals, biotechnology,

nanotechnology, telecommunication, shipbuilding, aviation , tourism and retailing are showing

strong potentials with higher growth rates.

India followed a socialist-inspired approach for most of its independent history, with strict

government control over private sector participation, foreign trade, and foreign direct

investment. However, since the early 1990s, India has gradually opened up its markets through

economic reforms by reducing government controls on foreign trade and investment. The

privatisation of publicly owned industries and the opening up of certain sectors to private and

foreign interests has proceeded slowly amid political debate.

India faces a fast-growing population and the challenge of reducing economic and social

inequality. Poverty remains a serious problem, although it has declined significantly since

independence. Official surveys estimated that in the year 2004-2005, 27% of Indians were poor.


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Economy of India

Currency 1 Indian Rupee (INR) (? ) = 100 Paisa

Fiscal year April 1March 31

Trade

organizations

WTO, SAFTA

Statistics

GDP (PPP) $5.21 trillion (PPP) (2008 est.) (3rd)

GDP growth 9.6% (2006/07)

GDP per capita $1,089 (nominal); $4,543 (PPP) [2]

GDP by sector Agriculture: 19.9%, industry: 19.3%, services: 60.7% (2006 est.)

Inflation (CPI) 3.5% (2008 est.)

Population

below poverty

line

25% (2002 est.) [3]

Labor force 509.3 million (2006 est.)

Labor force

by occupation

agriculture: 60%, industry: 12%, services: 28% (2003)


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Unemployment 7.8% (2006 est.)

Main industries textiles, chemicals, food processing, steel, transportation equipment,

cement, mining, petroleum, machinery, software, services

External

Exports $125 billion (Financial Year 2006-2007)

Export goods textile goods, gems and jewelry, engineering goods, chemicals,

leather manufactures, services

Main export

partners

US 18%, the People's Republic of China 8.9%, UAE 8.4%, UK 4.7%,

Hong Kong 4.2% (2005)

Imports $187.9 billion f.o.b. (2006 est.)

Import goods crude oil, machinery, gems, fertilizer, chemicals

Main import

partners

the People's Republic of China 7.2%, US 6.4%, Belgium 5.1%,

Singapore 4.7%, Australia 4.2%, Germany 4.2%, UK 4.1% (2005)

Public finances

Public debt $132.1 billion (2006 est.)

Revenues $109.4 billion (2006 est.)

Expenses $143.8 billion; including capital expenditures of $15 billion (2006 est.)


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5.2 Sectors

1. Agriculture

India ranks second worldwide in farm output. Agriculture and allied sectors like forestry, logging

and fishing accounted for 16.6% of the GDP in 2007, employed 60% of the total workforce and

despite a steady decline of its share in the GDP, is still the largest economic sector and plays a

significant role in the overall socio-economic development of India. Yields per unit area of all

crops have grown since 1950, due to the special emphasis placed on agriculture in the five-year

plans and steady improvements in irrigation, technology, application of modern agricultural

practices and provision of agricultural credit and subsidies since Green revolution in India.

However, international comparisons reveal that the average yield in India is generally 30% to

50% of the highest average yield in the world.

The low productivity in India is a result of the following factors:

? Illiteracy, general socio-economic backwardness, slow progress in implementing land

reforms and inadequate or inefficient finance and marketing services for farm produce.

? The average size of land holdings is very small (less than 20,000 m) and is subject to

fragmentation, due to land ceiling acts and in some cases, family disputes. Such small

holdings are often over-manned, resulting in disguised unemployment and low

productivity of labour.

? Adoption of modern agricultural practices and use of technology is inadequate,

hampered by ignorance of such practices, high costs and impracticality in the case of

small land holdings.

? Irrigation facilities are inadequate, as revealed by the fact that only 52.6% of the land

was irrigated in 200304, which result in farmers still being dependent on rainfall,

specifically the Monsoon season. A good monsoon results in a robust growth for the

economy as a whole, while a poor monsoon leads to a sluggish growth. Farm credit is

regulated by NABARD, which is the statutory apex agent for rural development in the

subcontinent.


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2. Industry

India is fourteenth in the world in factory output. They together account for 27.6% of the GDP

and employ 17% of the total workforce. However, about one-third of the industrial labour force is

engaged in simple household manufacturing only.

Economic reforms brought foreign competition, led to privatisation of certain public sector

industries, opened up sectors hitherto reserved for the public sector and led to an expansion in

the production of fast-moving consumer goods.

Post-liberalisation, the Indian private sector, which was usually run by oligopolies of old family

firms and required political connections to prosper was faced with foreign competition, including

the threat of cheaper Chinese imports. It has since handled the change by squeezing costs,

revamping management, focusing on designing new products and relying on low labour costs

and technology.

34 Indian companies have been listed in the Forbes Global 2000 ranking for 2008.

3. Services

India is fifteenth in services output. It provides employment to 23% of work force, and it is

growing fast, growth rate 7.5% in 19912000 up from 4.5% in 195180. It has the largest share

in the GDP, accounting for 55% in 2007 up from 15% in 1950. Business services (information

technology, informa tion tec hnology ena bled services, business proc ess outsourc ing ) are

among the fastest growing sectors contributing to one third of the total output of services in

2000. The growth in the IT sector is attributed to increased specialisation, availability of a large

pool of low cost, but highly skilled, educated and fluent English-speaking workers. On the

supply side and on the demand side, increased demand from foreign consumers interested in

India's service exports or those looking to outsource their operations. Ind ia 's IT ind ustry,

despite contributing significantly to its ba lance of payments, accounted for only about 1% of

the total GDP or 1/50th of the total services.


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4. Banking and finance

The Indian money market is classified into: the organised sector (comprising private, public and

foreign owned commercial banks and cooperative banks, together known as scheduled banks);

and the unorganised sector (comprising individual or family owned indigenous bankers or

money lenders and non-banking financial companies (NBFCs)). The unorganised sector and

microcredit are still preferred over traditional banks in rural and sub-urban areas, especially for

non-productive purposes, like ceremonies and short duration loans.

Prime Minister Indira Gandhi nationalised 14 banks in 1969, followed by six others in 1980, and

made it mandatory for banks to provide 40% of their net credit to priority sectors like agriculture,

small-scale industry, retail trade, small businesses, etc. to ensure that the banks fulfill their

social and developmental goals. Since then, the number of bank branches has increased from

10,120 in 1969 to 98,910 in 2003 and the population covered by a branch decreased from63,800 to 15,000 during the same period. The total deposits increased 32.6 times between 1971

to 1991 compared to 7 times between 1951 to 1971. Despite an increase of rural branches,

from 1,860 or 22% of the total number of branches in 1969 to 32,270 or 48%, only 32,270 out of

5 lakh (500,000) villages are covered by a scheduled bank.

Since liberalisation, the government has approved significant banking reforms. While some of

these relate to nationalised banks (like encouraging mergers, reducing government interference

and increasing profitability and competitiveness), other reforms have opened up the banking

and insurance sectors to private and foreign players.


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Chap t e r 6

I n t roduc t i on t o Bank ing Secto r

6.1 History of Banking in India

Without a sound and effective banking system in India it cannot have a healthy economy. The

banking system of India should not only be hassle free but it should be able to meet new

challenges posed by the technology and any other external and internal factors.

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

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

now defunct. The oldest bank in existence in India is the State Bank of India being established

as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks like

Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta

was the most active trading port, mainly due to the trade of the British Empire, and due to which

banking activity took roots there and prospered. The first fully Indian owned bank was the

Allahabad Bank, which was established in 1865.

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

Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded

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

regulating the Indian banking sector from 1935. After India's independence in 1947, the ReserveBank was nationalized and given broader powers.

For the past three decades India's banking system has several outstanding achievements to its

credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or

cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners

of the country. This is one of the main reasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends with the

nationalization of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or

for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient

bank transferred money from one branch to other in two days. Now it is simple as instant

messaging or dials a pizza. Money has become the order of the day.


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The first bank in India, though conservative, was established in 1786. From 1786 till today, the

journey of Indian Banking System can be segregated into three distinct phases. They are as

mentioned below:

? Early phase from 1786 to 1969 of Indian Banks? Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms.

? New phase of Indian Banking System with the advent of Indian Financial & Banking

Sector Reforms after 1991.

Scenario of Bank as per Phase I, Phase II and Phase III.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan andBengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay

(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These

three banks were amalgamated in 1920 and Imperial Bank of India was established which

started as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National

Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of

India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore

were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic failures

between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline

the functioning and activities of commercial banks, the Government of India came up with The

Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per

amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive

powers for the supervision of banking in india as the Central Banking Authority.

During those days public has lesser confidence in the banks. As an aftermath deposit

mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department

was comparatively safer. Moreover, funds were largely given to traders.


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Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In

1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale

specially in rural and semi-urban areas. It formed State Bank of india to act as the principal

agent of RBI and to handle banking transactions of the Union and State Governments all overthe country.

Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July,

1969, major process of nationalisation was carried out. It was the effort of the then Prime

Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was

nationalised.

Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with

seven more banks. This step brought 80% of the banking segment in India under Governmentownership.

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

the Country:

? 1949 : Enactment of Banking Regulation Act.

? 1955 : Nationalisation of State Bank of India.

? 1959 : Nationalisation of SBI subsidiaries.

? 1961 : Insurance cover extended to deposits.

? 1969 : Nationalisation of 14 major banks.

? 1971 : Creation of credit guarantee corporation.

? 1975 : Creation of regional rural banks.

? 1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India rose to

approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the

sunshine of Government ownership gave the public implicit faith and immense confidence aboutthe sustainability of these institutions.


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Phase III

This phase has introduced many more products and facilities in the banking sector in its reforms

measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his

name which worked for the liberalisation of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a

satisfactory service to customers. Phone banking and net banking is introduced. The entire

system became more convenient and swift. Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from any crisis

triggered by any external macroeconomics shock as other East Asian Countries suffered. This

is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is

not yet fully convertible, and banks and their customers have limited foreign exchange

exposure.

6.2 Types of banks

Banks' activities can be divided into retail banking, dealing directly with individuals and small

businesses; business banking, providing services to mid-market business; corporate banking,

directed at large business entities; private banking, providing wealth management services to

High Net Worth Individuals and families; and investment banking, relating to activities on the

financial markets. Most banks are profit-making, private enterprises. However, some are owned

by government, or are non-profits.

Central banks are normally government owned banks, often charged with quasi-regulatory

responsibilities, e.g. supervising commercial banks, or controlling the cash interest rate. They

generally provide liquidity to the banking system and act as Lender of last resort in event of a

crisis.

Types of retail banks

Commercial bank: the term used for a normal bank to distinguish it from an investment bank.

After the Great Depression, the U.S. Congress required that banks only engage in banking

activities, whereas investment banks were limited to capital market activities. Since the two no

longer have to be under separate ownership, some use the term "commercial bank" to refer to a


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bank or a division of a bank that mostly deals with deposits and loans from corporations or large

businesses.

? Community Banks: locally operated financial institutions that empower employees to

make local decisions to serve their customers and the partners.

? Community development banks: regulated banks that provide financial services andcredit to under-served markets or populations.

? Postal savings banks: savings banks associated with national postal systems.

? Private banks: manage the assets of high net worth individuals.

? Offshore banks: banks located in jurisdictions with low taxation and regulation. Many

offshore banks are essentially private banks.

? Savings bank: in Europe, savings banks take their roots in the 19th or sometimes even

18th century. Their original objective was to provide easily accessible savings products

to all strata of the population. In some countries, savings banks were created on public

initiative, while in others socially committed individuals created foundations to put in

place the necessary infrastructure. Nowadays, European savings banks have kept their

focus on retail banking: payments, savings products, credits and insurances for

individuals or small and medium-sized enterprises. Apart from this retail focus, they also

differ from commercial banks by their broadly decentralised distribution network,

providing local and regional outreach and by their socially responsible approach to

business and society.

? Building societies and Landesbanks: conduct retail banking.

? Ethical banks: banks that prioritize the transparency of all operations and make only

what they consider to be socially-responsible investments.

? Islamic banks: Banks that transact according to Islamic principles.

Types of investment banks

? Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for

their own accounts, make markets, and advise corporations on capital markets activitiessuch as mergers and acquisitions.

? Merchant banks were traditionally banks which engaged in trade financing. The modern

definition, however, refers to banks which provide capital to firms in the form of shares

rather than loans. Unlike venture capital firms, they tend not to invest in new companies.


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Both combined

? Universal banks, more commonly known as a financial services company, engage in

several of these activities. For example, First Bank (a very large bank) is involved in

commercial and retail lending, and its subsidiaries in tax-havens offer offshore banking

services to customers in other countries. Other large financial institutions are similarly

diversified and engage in multiple activities. In Europe and Asia, big banks are very

diversified groups that, among other services, also distribute insurance, hence the term

bancassurance is the term used to describe the sale of insurance products in a bank.

The word is a combination of "banque or bank" and "assurance" signifying that both

banking and insurance are provided by the same corporate entity.

In India the banks are being segregated in different groups. Each group has their own benefits

and limitations in operating in India. Each has their own dedicated target market. Few of themonly work in rural sector while others in both rural as well as urban. Many even are only catering

in cities. Some are of Indian origin and some are foreign players.

All these details and many more is discussed over here. The banks and its relation with the

customers, their mode of operation, the names of banks under different groups and other such

useful informations are talked about.

With years, banks are also adding services to their customers. The Indian banking industry is

passing through a phase of customers market. The customers have more choices in choosingtheir banks. A competition has been established within the banks operating in India.

With stiff competition and advancement of technology, the services provided by banks has

become more easy and convenient. The past days are witness to an hour wait before

withdrawing cash from accounts or a cheque from north of the country being cleared in one

month in the south.

This section of banking deals with the latest discovery in the banking instruments along with the

polished version of their old systems.


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6.3 Reserve Bank of India (RBI)

The central bank of the country is the Reserve Bank of India (RBI). It was established in April

1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton

Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which

was entirely owned by private shareholders in the begining. The Government held shares ofnominal value of Rs. 2,20,000.

Reserve Bank of India was nationalised in the year 1949. The general superintendence and

direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor

and four Deputy Governors, one Government official from the Ministry of Finance, ten

nominated Directors by the Government to give representation to important elements in the

economic life of the country, and four nominated Directors by the Central Government to

represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New

Delhi. Local Boards consist of five members each Central Government appointed for a term of

four years to represent territorial and economic interests and the interests of co-operative and

indigenous banks.

The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of

1934) provides the statutory basis of the functioning of the Bank.

The Bank was constituted for the need of following:

? To regulate the issue of banknotes

? To maintain reserves with a view to securing monetary stability and

? To operate the credit and currency system of the country to its advantage.


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6.4 Banking Structure


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6.5 Opportunities and Challenges for Players

The bar for what it means to be a successful player in the sector has been raised. Four

challenges must be addressed before success can be achieved. First, the market is seeing

discontinuous growth driven by new products and services that include opportunities in credit

cards, consumer finance and wealth management on the retail side, and in fee-based incomeand investment banking on the wholesale banking side.

These require new skills in sales & marketing, credit and operations. Second, banks will no

longer enjoy windfall treasury gains that the decade-long secular decline in interest rates

provided. This will expose the weaker banks. Third, with increased interest in India, competition

from foreign banks will only intensify. Fourth, given the demographic shifts resulting from

changes in age profile and household income, consumers will increasingly demand enhanced

institutional capabilities and service levels from banks.

6.6 Current trend in banking

Currently (2007), banking in India is generally fairly mature in terms of supply, product range

and reach-even though reach in rural India still remains a challenge for the private sector and

foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered

to have clean, strong and transparent balance sheets relative to other banks in comparable

economies in its region. The Reserve Bank of India is an autonomous body, with minimalpressure from the government. The stated policy of the Bank on the Indian Rupee is to manage

volatility but without any fixed exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-especially in

its services sector-the demand for banking services, especially retail banking, mortgages and

investment services are expected to be strong. One may also expect M&As, takeovers, and

asset sales.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is

with the Government of India holding a stake), 29 private banks (these do not have government

stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They

have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by

ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of

the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.


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Chap t e r 7

I n t roduc t i on & Ra t i o Anal ysi s o f Bank s

7.1. Allahabad Bank

The Oldest Joint Stock Bank of the Country, Allahabad Bank was founded in April 24th of the

year 1865 at the confluence city of Allahabad by a group of Europeans. At that occasion

Organized Industry, Trade and Banking started taking shape in India. Thus, the History of the

Bank spread over three Centuries - namely Nineteenth Twentieth and Twenty-First

In Twentieth Century, The Bank became a part of P & O Banking Corporation's group with a bid

price of Rs.436 per share in 1920. The Head Office of the Bank was shifted to Calcutta on

business considerations during the year of 1923. The Bank crossed its century year in 1965. In

July 19th of the year 1969, Allahabad Bank was nationalized (with 151Branches - Rs.119 crores

of Deposits and Rs.82 crores of Advances) along with 13 other banks. United Industrial Bank

Ltd was merged with the bank in October of the year1989. The Bank made a foray into

merchant banking activity in 1984 and subsequently instituted AllBank Finance Ltd as a wholly

owned subsidiary for Merchant Banking in the year of 1991

The Official Language Implementation Committee of Calcutta awarded the Rajbhasha Shield tothe Bank as Second Prize for its best performance for the year 1991. During the year 1995, The

Bank had entered into an MOU with the Small Industries Development Bank of India (SIDBI) for

financing small-scale industrial units. In 1996, The Bank had set up Information Technology

Centre to provide in-depth computer training to Officers at Calcutta and Lucknow. Consequent

to the SEBI Rules and Regulation the company surrendered its merchant banking registration in

1998 and got it registered as a Non Banking Financial Company (NBFC) with Reserve Bank of

India (RBI).

In the same year of 1998, the bank had received permission from the RBI for gold trading.

Allahabad Bank has entered into an arrangement, informally though, with IDBI and ICICI in

regard to funding of infrastructure projects. During the year 1999, Allahabad Bank has launched

two new schemes to increase the pace of credit off take and in the same period TATA

Consultancy Services (TCS) has entered into a contract with Bank for implementing the

Integrated Standard Banking System (ISBS), a branch mechanisation package at 60 branches.


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The Bank bagged three major core sector clients, namely the National Thermal Power

Corporation (NTPC), Power Grid Corporation and Indian Railway Finance Corporation Ltd

(IRFC).

In Twenty-First Century, Allahabad Bank has launched its new personal loan scheme for

pensioners in the year of 2001. As at October of the year 2002, the bank came out with Initial

Public Offer (IPO) of 10 crores share of face value Rs.10 each, reducing Government

shareholding to 71.16% and in the same year 2002, Allahabad has tied up with National

Institute of Banking Management, Crisil and Earnst & Young for development of HRM, risk

Management and general business strategy. The Bank has seized the commercial assets of the

Guarantors of Ramolene Fabrics (P) Ltd in 2003 at Mumbai and signed a Memorandum of

Understanding (MoU) with Corporation Bank for mutual sharing of their ATM Network. The Bank

has entered into an MOU in the year of 2004 with the Export Credit Guarantee Corporation of

India (ECGC) for distribution of their products to the exporters.

UTI Mutual Fund and Allahabad Bank on April 5, 2004 announced a strategic tie-up for

distribution of UTI MF schemes. During April of the year 2005, the bank made Follow on Public

Offer (FPO) of 10 crores equity shares of face value Rs.10 each with a premium of Rs.72,

reducing Government shareholding to 55.23%. The Bank has signed MoU with Mahindra

Gujarat Tractor Ltd in the identical year 2005 for financing Hindustan brand tractor under special

finance scheme. Allahabad Bank transcended beyond the National Boundary, Allahabad bank

had opened a representative office at Shenzen, China in June 2006. In October of the same

year 2006, the bank rolled out its first branch under Core Banking Services (CBS). During

February of the year 2007, The Bank opened its first overseas branch at Hong Kong. During the

calendar year of 2007, 100 more branches opened throughout the country, the total number of

branches were stirred from 2042 to 2142 of which rural are 983 (46%), semi-urban 402 (19%),

urban 450 (21%) and metropolitan 307 (14%).

Allahabad Bank has opened its 2154th branch in at Pudukkottai, Tamil Nadu during March of

the year 2008. The Bank has 211 ATM's and Card members can now have access at over16500 ATM's all across the country under National Financial Switch. One of the premier

nationalised banks of the country, Allahabad Bank has commenced the process of

implementing the Agricultural Debt Waiver and Debt Relief Scheme-2008 in June of the year

2008.


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The Bank has improved its performance and established its visibility and strong presence in the

market. The Bank is steadily moving at a faster pace to consolidate its position in the coming

days introducing extensive computerization to ensure the state-of-the-art service comfort for its

customers. The Bank has already in hand 116 authorizations for opening of new branches.

Bank's plan is to expand in areas where the Bank's presence is not very much visible now and

where business potentiality is good.

Ratios:

1. Capital adequacy ratio

Year 2005 2006 2007Capital Adequacy Ratio 12.5 13.4 12.5

Capital Adequacy Ratio

12.5

13.4

12.5

12

12.2

12.4

12.6

12.8

13

13.2

13.4

13.6

2005 2006 2007

Year

Percentage

Capital adequacy ratio shows the ratio of a banks capital to its risk-weighted assets. it

determines the capacity of a bank in terms of meeting the liabilities and other risks such as

credit risks, operational risks ets. Here it is 12.5 ,13.4and 12.5 in 2005,2006,& 2007 respectively

.it reduces in 2006 due to hike in beta(risk) as compare to 2005 & increase in 2007.but bank is

capable in meeting its liabilities as& when arises.

2. Dividend Payout Ratio

Year 2005 2006 2007

Dividend Payout Ratio 95.99% 253.04% 178.65%


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Dividend Payout Ratio

253.04%

178.65%

95.99%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

300.00%

2005 2006 2007

Year

Percentage

DPR measures what a bank payout to investors in the form of dividend. Here, bank pays

95.99%, 253.04% and 178.65% in 2005, 2006 &2007resp. they use general reserve for the

purpose of dividend distribution. It reduces the reserve every year because bank declared more

then the EPS.

3. Current assets & Saving account

Year 2005 2006 2007

CASA Proportion 2.04 2.44 2.80

CASA Proportion

2.04

2.44

2.80

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2005 2006 2007

Year

Proportion

It shows relationship between current assets& saving accounts. This ratio is useful for the

investors to know the abilities of bank to pay out their liabilities as& when arises. It presents


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liquidity of bank. here it 2.04, 2.44 and 2.80 and6.09respe.it decreases every year due to

decrease in current assets as compare to saving account.. It shows banks liquidity position

which induces investors to invest in bank.

4. Credit deposit ratio

Year 2005 2006 2007

Credit Deposit Ratio 51.89% 60.10% 69.34%

Credit Deposit Ratio

60.10%

69.34%

51.89%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

2005 2006 2007

Year

Percentage

It shows relationship between credit given & deposit received. Higher the ratio, better utilization

of available deposits which directly increase the profit of the bank. Here it is 51.89, 60.10 and

69.34 % in 2005, 2006, & 2007.it increases every year which shows that bank use its fund

efficiently. It increases interest income.

5. P/E ratio

Year 2005 2006 2007

P/E Ratio 3.30 5.41 4.77


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P/E Ratio

3.30

5.41

4.77

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2005 2006 2007

Year

Proportion

It shows the relationship between market value of per share & EPS. It is beneficial for the

investors to know about what should be the price of the bank share. Here it 3.3, 5.41, & 4.77 in

2005, 2006, & 2007 respectively. It increased in 2006 due to heavy investment in stock market

& reduced in 2007 due to not favoring the banking sector by the investors

6. Net interest income growth

Year 2005 2006 2007

Net Interest Income Growth 25.63% 15.65% 10.99%

Net Interest Income Growth

25.63%

15.65%

10.99%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2005 2006 2007

Year

Percentage

It shows the growth in the interest income of the bank. It is main source of income of the bank.

Higher the ratio, better for the bank. Here it is 25.63%, 15.65%, & 10.99% in 2005, 2006,


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&2007.the ratio increases rapidly in 2006 due to increase in credit growth which leads to rise in

the profit. In 2007 it reduce due to increased in other exp.

7. Interest income to interest expense

Year 2005 2006 2007Interest Income to Interest Expense 1.75 1.72 1.56

Interest Income to Interest Expense

1.751.72

1.56

1.45

1.50

1.55

1.60

1.65

1.70

1.75

1.80

2005 2006 2007

Year

Propor

tion

It shows the interest income arises from the advance made by the bank as against the interestgiven to the depositors. Higher the ratio better is the position of the bank. Here it is 1.75, 1.72,

1.56 in 2005, 2006, & 2007.it is down slightly during 2006 which did not create any big

difference. Buy reduced sharply in 2007. It reduced the profit

8. Net interest margin

Year 2005 2006 2007

Net Interest Margin 3.42% 3.14% 2.85%


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Net Interest Margin

3.14%

2.85%

3.42%

2.50%

2.60%

2.70%

2.80%

2.90%

3.00%3.10%

3.20%

3.30%

3.40%

3.50%

2005 2006 2007

Year

Percenta

ge

This ration shows us to the total interest income in comparison of avg assets .which wasdecreased every year because in comparison of assets the interest income was very less

increased. The ratio in 2005, 2006 and 2007 like 3.42%, 3.14%, & 2.85%

9. Advance growth

Year 2005 2006 2007

advance growth 37.87% 37.81% 41.66%

Advances Growth

37.87% 37.81%

41.66%

35.00%

36.00%

37.00%

38.00%

39.00%

40.00%

41.00%

42.00%

2005 2006 2007

Year

Percentage

This ratio show the growth in the advances (credit, loan).it is very important because it is the

main source of income as far as bank is concern. here it is 37.87%, 37.81%, & 41.66% in 2005,


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2006, &2007 respectively .it reduces in 2006 due to increase in investment in govt. securities

which proves safe as compare to market risk &in 2007 it increased due to easy credit policy

adopted by the bank.

10. Deposit growth

Year 2005 2006 2007Deposit growth 29.50% 18.98% 22.77%

Deposit Growth

29.50%

18.98%

22.77%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

2005 2006 2007

Year

Percenta

ge

It shows the growth in deposits of the bank in current year as compare to the previous year. It is

very important that deposits are increase so that funds are available with the bank to make

advances. Higher the ratio, good for the bank. Here it is 29.50%, 18.98%, & 22.77% in 2005,

2006, &2007. It decreased in 2006 due to heavy rush towards the stock market. In 2007 it

increased due to attractive schemes.

11. Net profit growth

Year 2005 2006 2007

net profit growth 16.92% 30.33% 6.23%


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Net Profit Growth

30.33%

6.23%

16.92%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

2005 2006 2007

Year

Percenta

ge

It shows the increase or growth in net profit of the bank. Higher the ratio, better is the position of

the bank.here, it is 16.92%, 30.33% & 6.23% in 2005, 2006, & 2007 respectivly. During the year

2006, the ratio has been increased rapidly due to increase in interest income. It decreases in

2007 because of decrease in interest income & increase in interest exp.

12. Return on Equity

Year 2005 2006 2007

ROE 156.3% 158.1% 167.9%

Return on Equity (ROE)

156.27%

167.93%

158.08%

150.00%

155.00%

160.00%

165.00%

170.00%

2005 2006 2007

Year

Percentage

This ratio measured how efficiently a bank uses its capital to produce earnings. Here it is

156.27%, 158.08% & 167.93% in 2005, 2006, &2007 respectively .it increase every year due to

proper utilization of available funds .here there is increase in interest income & reduces in

interest exp.


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7.2 Andhra Bank

Founded by Dr Bhogaraju Pattabhi Sitaramaiah in Nov. 1923, Andhra Bank started its

operations at Machilipatnam, Andhra Pradesh. It was nationalised in Apr. 1980. At time of

nationalisation the bank was ranked as largest private sector bank and had to its credit,

implementation of concepts like Lead Banking Responsibility & Priority Sector

Lending. .

The bank, which was one of the pioneers in introducing the Visa cards in the country, achieved

the autonomy status in April 1998. The bank has successfully introduced facilities like credit

cards, Kissan credit cards, lobby banking, automated teller machines (ATMs) at various centres

across the country, insurance-linked savings bank scheme and corporate terminals to facilitate

corporate clients to access their accounts from their office.

The bank came out with a public issue of 15 crore equity shares of Rs 10 each at par

aggregating Rs 150 crore in Feb. 2001. The issue was mainly to augment the capital base of

the bank in order to meet its future capital adequacy requirements and also to augment its long-

term resources.

The Bank has been ranked No. 1 in the State of Andhra Pradesh for linking /financing the

maximum number of Self Help Gps(SHGs) and conferred to the Best Performance Award by

NABARD.

During 2005-06, the Bank made Follow-on Public Offer of 8.5 crore Equity Shares of Rs.10/-

each for cash at a premium of Rs.80/- per share through Book Building Route. The Bank also

launched Mobile-ATM first of its kind in the state of Andhra Pradesh.

During 2006-07, the Bank opened 76 branches and 114 ATMs, with this at the end of 31st

March, 2007, the Bank had 1930 Delivery Channels consisting of 1289 Branches, 99 extension

counters, 37 Satellite Offices and 505 ATMs.


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Ratios:

1. Capital adequacy ratio

Year 2005 2006 2007Capital Adequacy Ratio 12.1 14 11.3

Capital Adequacy Ratio

11.3

14

12.1

0

2

4

6

8

10

12

14

16

2005 2006 2007

Year

Percentage

Capital adequacy ratio shows the ratio of a banks capital to its risk-weighted assets. It

determines the capacity of a bank in terms of meeting the liabilities and other risks such as

credit risks, operational risks ets.

Here it is 12.1 14 &11.3 in 2005, 2006, & 2007 resp.it increase in 2006 due to decrease in beta(risk) as compare to 2005.but bank is capable in meeting its liabilities as& when arise.

2. Dividend Payout Ratio

Year 2005 2006 2007

Dividend Payout Ratio 115.36% 349.64% 183.76%


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Dividend Payout Ratio

115.36%

349.64%

183.76%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

300.00%

350.00%

400.00%

2005 2006 2007

Year

Percenta

ge

DPR measures what a bank payout to investors in the form of dividend. Here, bank pays

115.36% 349.64%, & 183.76% in 2005, 2006 &2007resp. They use general reserve for the

purpose of dividend distribution. it reduces the reserve every year because bank declared more

then the EPS.

3. Current assets & Saving account

Year 2005 2006 2007

CASA Proportion 2.96 3.14 3.10

CASA Proportion

2.96

3.14

3.10

2.85

2.90

2.95

3.00

3.05

3.10

3.15

3.20

2005 2006 2007

Year

Proportion


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It shows relationship between current assets& saving accounts. This ratio is useful for the

investors to know the abilities of bank to pay out their liabilities as& when arises. it presents

liquidity of bank. Here it is 2.96 3.14 &3.10 respe.it rises every year due to increase in depo

report on komal

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