Term Paper-II

Submitted to:

Prof Abhay Singh

Submittdby:

Ashish Kr. Srivastava (PGFB1109)

CAMEL ANALYSIS:
I) Capital Adequacy Capital adequacy reflects the overall financial position of a bank and also the ability of the management to meet the need for additional capital requirement. A. Capital Adequacy Ratio (CAR) CAR reflects the ability of a bank to deal with probable loan defaults. The RBI guidelines stipulate banks to maintain a CAR of minimum 9%. It is arrived at by dividing the Tier I and Tier II capital by risk-weighted assets. Tier I capital includes equity capital and free reserves. Tier II capital comprises subordinated debt of 5-7 year tenure. The stronger will be the bank if the CAR is higher.

TIER 1 CAPITAL -A) Equity Capital, B) Disclosed Reserves TIER 2 CAPITAL -A) Undisclosed Reserves, B)General Loss reserves, C)Subordinate Term Debts B. Debt-Equity Ratio (D/E) Debt-Equity Ratio is arrived at by dividing the total borrowings and deposits by shareholders net worth, which includes equity capital and reserves and surpluses. The Debt to Equity ratio is used for measuring solvency, and researching the capital structure of the bank. It indicates how much the bank is leveraged (in debt) by comparing what is owed to what is owned. In other words it measures the banks ability to borrow and repay money. The debt to equity ratio is closely watched by creditors and investors, because it reveals the extent to which bank management is willing to fund its operations with debt, rather than equity.

C. Advances to Assets (ADV/AST) This is the ratio of the Total Advances to Total Assets. Total Advances also include receivables. The value of Total Assets excludes the revaluations of all the assets. Capital Adequacy (2012) Capital Adequacy (2011) Capital Debt-Equity Advances to Capital Debt-Equity Advances to Adequacy Ratio Asset Ratio Adequacy Ratio Asset Ratio Ratio (%) (%) Ratio (%) (%) 12.43 20.51 74.61 13.35 22.94 68.93

Capital Adequacy Ratio: As we can see from the table above, BOMs CAR has decreased from 13.35% in 2011 to 12.43% in 2012 which seems to be unfavorable. The minimum CAR which banks have to maintain is 9% as per RBIs Guidelines. Bank of Maharastra has

maintained CAR above 9% hence BOI is still is in good condition as far as CAR is concerned. Debt-Equity Ratio: The Debt-Equity ratio of BOM is 20.51 in 2012 as compared to 22.94 in 2011. The debt-equity ratio should be as low as possible. Here we can say that the borrowings of the bank are very much higher than their deposits are concerned, which is a bad sign. We can interpret from the ratio that the BOM has worse debt-equity ratio because of higher borrowings and low deposits. Advances to Asset Ratio: An advance to Assets ratio is reflects a banks positions and risk taking ability in lending funds. A higher Advances/Asset ratio shows that the bank is aggressively lending fund and vice versa. A general perception has been that private sector banks are more aggressive lenders as compared to their public sector counterparts. In the table above, we can say that the BOMs Advances to Asset Ratio has increased from 68.93% in 2011 to 74.61% in 2012. It is clear that Bank has high risk taking ability, Hence Bank is better in Advances to Asset Ratio. II) Asset Quality The asset quality is to ascertain the proportion of non-performing assets as a percentage of the total assets .It also ascertains the NPA movement and the amount locked up in investments as a percentage of the total assets.

How to calculate NPAs: Gross NPA (Balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held).

Net NPAs to Total Assets (NNPAs/TA) It is a measure of the quality of assets in a situation where the management has not provided for loss on NPAs. Net NPAs to Net Advances (NNPAs/NA) Net NPAs are Gross NPAs net of provisions on NPAs and suspense account. Percentage change in Net NPAs This measure gives the movement in Net NPAs in relation to Net NPAs in the previous year. The higher the reduction in Net NPA levels, the better it is for the bank. Asset Quality (2012) Asset Quality (2011) Net NPAs to Net NPAs to Percentage Net NPAs to Net NPAs to Percentage Net change in Net Total Assets Net change in Net Total Assets Advances NPAs (%) Advances NPAs (%) (%) (%) 1.72 1.72 13.8 0.99 1.76 28.66

Asset Quality: An NPA (Non Performing Assets) is an asset, including a leased asset, becomes non-performing when it ceases to generate income from the bank. The Net NPAs to Total Assets ratio indicates us how much Non Performing Assets the bank has to their Total Assets in balance sheet. It is believed that lower the better for the banks in the case of Asset Quality Ratios. The Net NPAs to Total Assets of BOM has increased from 0.99 to 1.72 in 2011 and 2012 respectively which is not a good indication for the bank. The Net NPAs to Net Advances Ratio indicates how much Non-performing assets the bank has to their Total Advances. The Net NPAs to Net Advances (%) is reduced from 1.76% to 1.72% for Bank of Maharastra in 2011 and 2012 respectively. Here BOM is in better than previous year in maintaining their NPAs to Net Advances (%) are concerned. The Third Ratio i.e. Percentage change in Net NPAs for BOM is 13.8% in year 2012 while the Percentage change in Net NPAs for the previous year was 28.66%. Hence we can say Bank of Maharastra is in better position as far as controlling of Increase in NPAs on a yearly basis. III) Management Efficiency Refers to the efficiency of the Management in managing the bank, in all the ratios higher the better: Total Advances to Total Deposits (TA/TD) This ratio measures the efficiency of the management in converting the deposits available with the bank (excluding other funds like equity capital, etc.) into advances. Profit per Employee (PPE) This measures the efficiency of the employee. It is arrived at by dividing the net profit of the bank by total number of employees. Higher the ratio means higher the efficiency of the management. Return on Net Worth (RoNW) It is a measure of the profitability of a bank. The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a bank generates with the money shareholders have invested. Management Efficiency (2012) Management Efficiency (2011) Total Advances Profit Per Return on Net Total Profit Per Return on to Total Employee Worth (%) Advances to Employee Net Worth Deposits (%) (Rs.in Crore) Total (Rs.in Crore) (%) Deposits (%) 78.58 0.05 9.97 73.1 0.043 10.23

From the table above, we can say that the Bank is better able to convert its Advances to Deposits this year as compared to last one. The Ratio of Total Advances to Total Deposits (%) has increased by 73.1% in 2011 to 78.58% in 2012 for Bank of Maharastra.

Profit per employee of BOM is good as a PSU bank. The profit per employee of BOM is 0.043 in 2011 but it increased to .05 in 2012 which shows that the management has become more efficient this year. Return on net worth is reduced a bit from 10.23% in 2011 to 9.97% in 2012. On the whole we can say that Bank of Maharastra is good in management efficiency as a PSU bank.

IV) Earnings Efficiency: Much of a banks income is earned through non-core activities like investments, treasury operations, and corporate advisory services and so on. Percentage Growth in Net Profit It is the percentage change in net profit over the previous year. Net Interest Margin (NIM) Net Interest Margin (NIM) is defined as the difference between interest earned and interest expended as a proportion of average total assets. Interest income includes dividend income. Interest expended includes interest paid on deposits, loans from RBI, and other short-term and long-term loans. Non-interest Income/Working Funds (NII/WF) This measures the income from operations other than lending as a percentage of working funds. Working funds: These are total resources (total liabilities or total assets) of a bank as on a particular date. Total resources include capital, reserves and surplus, deposits, borrowings, other liabilities and provision. A high AWF (Avg. Working Fund) shows a banks total resources strength. There is a school of theory which maintains that working funds are equal to aggregate deposits plus borrowing. However, more pragmatic view in consonance with capital adequacy calculations is, to include all resources and not just deposits and borrowings.

Earnings Efficiency (2012) Net Percentage Growth in Interest Net Profit Margin (%) (%) 29.41 2.33

Earnings Efficiency (2011) Non Interest Percentage Net Interest Income/Working Growth in Margin (%) Fund (%) Net Profit (%) 1.43 8.43 2.93

Non Interest Income/Working Fund (%) 1.45

A banks earnings quality reflects its profitability and sustainability of the same. From the table above, we can directly say that the Earning Efficiency of BOM has increased. The Percentage growth in Net Profit of BOM has increased from 8.43% in 2011 to 29.41% 2012. We can say that BOM for the year 2012 is better performed than the last year. Net Interest Margin (NIM) is basically Interest Earned minus Interest Expended on the proportion of Total Assets. The NIM (%) of the bank has reduced from 2011 to 2012. The NIM (%) of BOM is reduced from 2.93% in 2011 to 2.33% in 2012. It is clear that the

interest earned by these bank is reduced or we can say the interest expended on deposits and borrowings has increased due to this the NIM (%) has reduced. The non interest income is the income which is earned by the bank other than lending (core) activity. The Non interest income/working fund (%) ratio measures the income from operations other than lending as a percentage of working funds. From the table above, we can interpret that BOMs Non Interest Income/Working Fund (%) is reduced from 1.45% in 2011 to 1.43% in 2012. On the whole BOM is a good in earning efficiency as far as Non Interest Income/Working Fund (%) is concerned.

V) Liquidity: Liquid Assets/Demand Deposits (LA/DD) This account allows you to "demand" your money at any time, unlike a term deposit, which cannot be accessed for a predetermined period (the loan's term). This ratio measures the ability of a bank to meet the demand from demand deposits in a particular year. Higher ratio is better for banks. A demand deposit or bank money refers to the funds held in demand deposit accounts in commercial banks. These account balances are usually considered money and form the greater part of the money supply of a country.

Liquid Assets/Total Assets (LA/TA) Liquid Assets include cash in hand, balance with RBI, balance with other banks (both in India and abroad), and money at call and short notice. The ratio is arrived by dividing liquid assets by total assets. Higher the ratio better it is. G-secs/Total Assets (G-Sec/TA) This ratio measures the proportion of risk-free liquid assets invested in G-Secs as a percentage of the assets held by a bank and is arrived at by dividing liquid assets by total assets. Higher ratio indicates well for the bank.

Liquidity (2012) Liquid Liquid Assets/Demand Assets/Total Deposits (%) Assets (%) 78 9

Liquidity (2011) GLiquid Liquid Secs/Total Assets/Demand Assets/Total Assets (%) Deposits (%) Assets (%) 22 94.27 10.82

GSecs/Total Assets (%) 23.46

Liquidity is the ability of the bank to meet its financial obligations. A high liquidity ratio indicates a banks comfort level vis--vis its ability to manage its obligations, both short-term as well as long-term. Liquidity of a bank can be measured using metrics such as Liquid Assets (LA) to Total Deposits (TD) and LA to Total Assets (TA), G-Sec to Total Assets, etc.

In Demand Deposit basically the customer can withdraw the money without any prior notice to depository, it is exactly opposite of term deposit where customer has to give proper notice, and follow the procedure to break the term deposit. We can see from the table that the liquid assets to demand deposits (%) of BOM have reduced from 94.27% to 78% in 2011 and 2012 respectively. We can say Bank is able to maintain its liquid assets are to demand deposits in greater percentage. We can see from the table that both the banks ratio is decreasing from year 2011 to 2012. BOM has reduced the figure from 10.82% in 2011 to 9% in 2012 BOM has reduced the fund kept in G-Secs from 2011 to 2012 still BOM has maintained an adequate level as far as this ratio is concerned.

RESULT: Though the bank has been successful in increasing its deposits but to further improve upon such situation it can introduce some new and attractive schemes for public. Such schemes can be in the form of higher rate of interest and shorter maturity period for FDs etc. Net interest is increasing in 2011 but decreasing in 2012. Thus there is no stability in growth of bank. Bank should reduce or make it competitive the interest on loans to make it attractive. The bank is having a greater reliance on debt capital. The increasing reliance on external equities may prove hazardous in the long run. So in order to remedy this situation bank should increase its focus on internal equities and other sources of internal financing.

VARIOUS ASPECTS OF CREDIT RISK MANAGEMENT:

Policy & Strategy The Bank has been following a conservative risk philosophy. The important aspects of the risk philosophy are embodied in various policies, circulars, guidelines etc. The business objectives and the strategy of the bank is decided taking into account the profit considerations, the level of various risks faced, level of capital, market scenario and competition. The Bank is conscious of its asset quality and earnings and judiciously matches profit maximization with risk control. The Bank has put in place the following policies approved by the Board. Lending & Loan Review Policy. Risk Management Policy Credit Risk Mitigation Techniques & Collateral Management Investment Management Policy & Investment Risk Management Policy The Lending & Loan Review Policy, Risk Management Policy documents define organizational structure, role and responsibilities and, the processes and tools whereby the credit risks carried by the Bank can be identified, quantified and managed within the framework that the Bank considers consistent with its mandate and risk appetite. The policies prescribe various prudential and exposure limits, collateral standards, financial benchmarks for the purpose of credit risk management. The policy on Credit Risk Mitigation Techniques & Collateral Management lays down the details of eligible collaterals for credit risk mitigation under Basel II framework. The Investment Management Policy & Investment Risk Management Policy forms an integral part of credit risk in the Bank. Organizational Structure for Credit Risk Management The organizational structure of the Bank for Credit Risk Management function has the Board of Directors at the apex level that has the overall oversight of management of risks. The Risk Management Committee of the Board (RMC) devises the policy and strategy for integrated risk management. At operational level, the Credit Risk Management Committee (CRMC) manages the credit risk. The main functions of the CRMC include implementation of the credit risk policy approved by the Board, monitoring credit risk on a bank wide basis and ensure adherence to threshold risk limits approved by the Board / Risk management Committee. The Integrated Risk Management Department is headed by the Chief Risk Officer of General Manager rank. Systems / Process / tools for Credit Risk Management Credit Appraisal standards: The Bank has in place proactive credit risk management practices like consistent standard for the credit origination, maintenance and documentation for all credit exposures including off balance sheet items. Systems of periodic reviews, periodic inspections and collateral management systems are in place. Exposure Limits: Credit risk limits including single / group borrower limits, substantial exposure limits, exposure limits in respect of sectors / industries are in place. The exposure vis--vis the limits are monitored.

Credit Approval Grids: Credit Approval Grids have been constituted at various levels covering very large branches / Regional offices / Central Office for considering fresh / existing proposals with or without enhancement. A structure namely, New Business Group (NBG) is in place at Central Office level for considering in-principle approval for taking up fresh credit proposal above a specified cut-off. Sanctioning Powers: The Bank follows a well-defined multi-layered discretionary power structure for sanction of loans. Higher sanctioning powers are delegated to sanctioning authorities for sanctioning loans and advances to better rated customers in line with RBI guidelines. Credit Risk Rating and Appraisal Process: The Bank manages its credit risk through continuous measuring and monitoring of risks at each obligor (borrower) and portfolio level. The Bank has in place an internal credit risk rating framework and well established standardized credit appraisal / approval processes. Credit risk rating enables the Bank to accurately assess the risk in a credit proposition and take a decision to accept or reject the proposal based on the risk appetite of the Bank. It also enables risk pricing of credit facilities for risk return trade off. The Bank has developed and put in place credit risk rating models for retail loans also. The Bank has in-house developed software for undertaking credit risk rating put on the Wide Area Network (WAN) of the Bank facilitating instant access by the Branches / Field Offices for undertaking credit risk rating of borrowers. As a measure of robust credit risk management practices, the Bank has in place a framework for approval of credit risk ratings. Rating for every borrower is reviewed at least once in a year. Credit portfolio quality is monitored by undertaking bi-annual credit risk rating for high value exposures and inferior rated borrowers. Credit risk rating, as a concept, has been well internalized in the Bank. Loan review Mechanism: The objectives of the Loan Review Mechanism in place in the Bank are: To ensure that credit decisions by various authorities are in conformity with the Banks Lending Policy and delegated lending powers. To ensure that stipulated terms & conditions of sanction are complied with and various post sanction follow up, monitoring and supervision measures prescribed by the Bank are adhered to. To ensure that all credit facilities are reviewed / renewed well in time so as to revise the risk perception and take necessary corrective action if necessary, immediately. To aim at achieving maintenance of standard assets quality and improvement in nonperforming assets (NPAs) so as to have a favorable impact on profitability of the Bank through prevention / reduction / up gradation of NPAs. To assess the health of credit portfolio of the Bank and to apprise the Top Management about the same from time to time. Checks and balances viz. separation of credit risk management from credit sanctions, system of assigning credit risk rating, vetting of ratings, mechanism to price credit facilities depending of risk rating of customer, credit audit etc. are in place. Minimum entry level rating benchmarks are stipulated. A suitable mechanism is in place to monitor aggregate exposure on other banks and country exposures. A diversified credit portfolio is maintained and a system to conduct regular analysis of portfolio so as to ensure ongoing control of credit concentration is in place.

Loans past due and Impaired: The regulatory guidelines are adhered to in respect of income recognition, asset classification and provisioning, the Bank considers following categories of loans and advances as Nonperforming Assets, wherein: Interest and/or installment of principal remain 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/Cash Credit (OD/CC) The bill remains overdue for a period of more than 90 days in the case of Bills Purchased and Discounted. In case of agricultural advances, interest and/or installment of principal remains overdue for 2 crop seasons (in respect of short duration crops) & 1 crop season (in respect of long duration crops). Any amount receivable that remains overdue for a period of more than 90 days in respect of other accounts. Interest charged during any quarter is not serviced fully within 90 days from the end of the quarter. Out of Order status: An account is treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'. Overdue: Any amount due to the bank under any credit facility is overdue if it is not paid on due fixed ky the bank.

CAPITAL MANAGEMENT:
The Capital Structure of the Bank comprises Equity, Preference shares, Reserves & Surplus and Innovative Perpetual Bonds. The Government of India has infused capital in the banks during the current year as under: The Government of India (GOI) has infused Rs. 588 Crore through Perpetual NonCumulative Preference Shares (PNCPS). Consequently the bank has allotted 5880 PNCPS @ ` 10,00,000 per PNCP each on 12/08/2010. The coupon on PNCPS is benchmark to REPO rate with spread of 100 basis points to be readjusted annually based on the prevailing Repo rate on the relevant date. The GOI further infused Rs.352.00 Crore through equity shares in March 2011, which was approved in the Extra-ordinary General meeting, held on 23.03.2011, by the equity shareholders through special resolution passed. The allotment of equity shares were made on 26.03.2011 to the Government of India at Rs.68.76 per share (Face value of ` 10.00 per share plus `58.76 premiums per share) as per SEBI guidelines regarding issue of equity shares on preferential basis. Consequently, 5,11,92,553 equity shares of Rs.10/- each were allotted to the Government of India and percentage share of Government of India in equity increased

from 76.77% to 79.24%. The bank has also received premium of Rs.300.81 crore (Rs. 58.76 per share) on allotment of equity to Government of India . The Bank has issued Innovative Perpetual Bonds (Tier 1 capital) and also other bonds eligible for inclusion in Tier 2 capital.