Ê

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 V
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The banking sector has been undergoing a complex, but comprehensive phase of
restructuring since 1991, with a view to make it sound, efficient, and at the same time it is
forging its links firmly with the real sector for promotion of savings, investment and growth.
Although a complete turnaround in banking sector performance is not expected till the
completion of reforms, signs of improvement are visible in some indicators under the
CAMELS framework. Under this bank is required to enhance capital adequacy, strengthen
asset quality, improve management, increase earnings and reduce sensitivity to various
financial risks. The almost simultaneous nature of these developments makes it difficult to
disentangle the positive impact of reform measures.

In 1994, the RBI established the Board of Financial Supervision, which operates as a unit of
the RBI. The entire supervisory mechanism was realigned to suit the changing needs of a
strong and stable financial system. The supervisory jurisdiction of the BFS was slowly
extended to the entire financial system barring the capital market institutions and the
insurance sector. Its mandate is to strengthen supervision of the financial system by
integrating oversight of the activities of financial services firms. The BFS has also
established a sub-committee to routinely examine auditing practices, quality, and coverage.
In 1995, RBI had set up a working group under the chairmanship of Shri S. Padmanabhan to
review the banking supervision system. The Committee gave certain recommendations and
based on such suggestions a rating system for domestic and foreign banks based on the
international CAMELS model combining financial management and sensitivity to market
risks element was introduced for the inspection cycle commencing from July 1998. It
recommended that the banks should be rated on a five point scale (A to E) based on the lines
of international CAMELS rating model. CAMELS rating model measures the relative
soundness of a bank.

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 Obj  ÊÊ Ê
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ñÊ To study the strength of using CAMELS framework as a tool of Performance

evaluation for Commercial banks
ñÊ To describe the CAMELS model of ranking banking institutions, so as to analyze the
performance of various bank.



In the recent years the financial system especially the banks have undergone numerous
changes in the form of reforms, regulations & norms. The attempt here is to see how various
ratios have been used and interpreted to reveal a bank¶s performance and how this particular
model encompasses a wide range of parameters making it a widely used and accepted model
in today¶s scenario.

Ê 
Ê
ñÊ
ÊÑ Primary data was collected from the Banks¶ balance sheets and profit
and loss statements.
ñÊ  
ÊÑ Secondary data on the subject was collected from ICFAI journals,
Banks¶ annual reports and RBI website.

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 M  Ê
As long as the methodology is concerned, we have made use of a framework called
CAMELS FRAMEWORK. There are so many models of evaluating the performance of the
banks, but I have chosen the CAMELS Model for this purpose. I have gone through several
books, journals and websites and found it the best model because it measures the
performance of the banks from each parameter i.e. Capital, Assets, Management, Earnings,
Liquidity and Sensitivity to Market risks.

CAMELS evaluate banks on the following six parametersÑ-

‡Ê Capital Adequacy (CRAR)

‡Ê Asset Quality (GNPA)

‡Ê Management Soundness (MGNT)

‡Ê Earnings & profitability (ROA)

‡Ê Liquidity (LQD)

‡Ê Sensitivity to Market Risks (ȕ)

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 M
ÊM OÊ
During an on-site bank exam, supervisors gather private information, such as details on
problem loans, with which to evaluate a bank's financial condition and to monitor its
compliance with laws and regulatory policies. A key product of such an exam is a
supervisory rating of the bank's overall condition, commonly referred to as a CAMELS
rating. The acronym "CAMEL" refers to the five components of a bank's condition that are
assessedÑ Capital adequacy, Asset quality, Management, Earnings, and Liquidity. A sixth
component, a bank's Sensitivity to market risk was added in 1997; hence the acronym was
changed to CAMELS.

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CAMELS is basically a ratio-based model for evaluating the performance of banks. Various
ratios forming this model are explained belowÑ

Capital base of financial institutions facilitates depositors in forming their risk perception
about the institutions. Also, it is the key parameter for financial managers to maintain
adequate levels of capitalization.The most widely used indicator of capital adequacy is
capital to risk-weighted assets ratio (CRWA). According to Bank Supervision Regulation
Committee (The Basle Committee) of Bank for International Settlements, a minimum 9
percent CRWA is required. Thus, it is useful to track capital-adequacy ratios that take into
account the most important financial risks²foreign exchange, credit, and interest rate
risks²by assigning risk weightings to the institution¶s assets. A sound capital base
strengthens confidence of depositors. This ratio is used to protect depositors and promote the
stability and efficiency of financial systems around the world.

ÊÊ  ÊÊ
Ê
CRAR is a ratio of Capital Fund to Risk Weighted Assets. Reserve Bank of India prescribes
Banks to maintain a minimum Capital to risk-weighted Assets Ratio (CRAR) of 9 % with
regard to credit risk, market risk and operational risk on an ongoing basis, as against 8 %
prescribed in Basel documents.



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Total capital includes tier-I capital and Tier-II capital. Tier-I capital includes paid up equity
capital, free reserves, intangible assets etc. Tier-II capital includes long term unsecured
loans, loss reserves, hybrid debt capital instruments etc. The higher the CRAR, the stronger
is considered a bank, as it ensures high safety against bankruptcy.

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Asset quality determines the robustness of financial institutions against loss of value in the
assets. The deteriorating value of assets, being prime source of banking problems, directly
pour into other areas, as losses are eventually written off against capital, which ultimately
jeopardizes the earning capacity of the institution. With this backdrop, the asset quality is
gauged in relation to the level and severity of non-performing assets, adequacy of
provisions, recoveries, distribution of assets etc. Popular indicators include non-performing
loans to advances, loan default to total advances, and recoveries to loan default ratios.

One of the indicators for asset quality is the ratio of non-performing loans to total loans
(GNPA). The gross non-performing loans to gross advances ratio is more indicative of the
quality of credit decisions made by bankers. Higher GNPA is indicative of poor credit
decision-making.

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Ê Ê
Ê
Advances are classified into performing and non-performing advances (NPAs) as per RBI
guidelines. NPAs are further classified into sub-standard, doubtful and loss assets based on
the criteria stipulated by RBI. An asset, including a leased asset, becomes non-performing
when it ceases to generate income for the Bank.

An NPA is a loan or an advance whereÑ

1.Ê Interest and/or installment of principal remains overdue for a period of more than 90
days in respect of a term loan;
2.Ê The account remains "out-of-order'' in respect of an Overdraft or Cash Credit
(OD/CC);
3.Ê The bill remains overdue for a period of more than 90 days in case of bills purchased
and discounted;
4.Ê A loan granted for short duration crops will be treated as an NPA if the installments
of principal or interest thereon remain overdue for two crop seasons; and
5.Ê A loan granted for long duration crops will be treated as an NPA if the installments
of principal or interest thereon remain overdue for one crop season.

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The Bank classifies an account as an NPA only if the interest imposed during any quarter is
not fully repaid within 90 days from the end of the relevant quarter. This is a key to the
stability of the banking sector. There should be no hesitation in stating that Indian banks
have done a remarkable job in containment of non-performing loans (NPL) considering the
overhang issues and overall difficult environment. For 2008, the net NPL ratio for the Indian
scheduled commercial banks at 2.9 per cent is ample testimony to the impressive efforts
being made by our banking system. In fact, recovery management is also linked to the
banks¶ interest margins. The cost and recovery management supported by enabling legal
framework hold the key to future health and competitiveness of the Indian banks. No doubt,
improving recovery-management in India is an area requiring expeditious and effective
actions in legal, institutional and judicial processes.

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Management of financial institution is generally evaluated in terms of capital adequacy,
asset quality, earnings and profitability, liquidity and risk sensitivity ratings. In addition,
performance evaluation includes compliance with set norms, ability to plan and react to
changing circumstances, technical competence, leadership and administrative ability. In
effect, management rating is just an amalgam of performance in the above-mentioned areas.

Sound management is one of the most important factors behind financial institutions¶
performance. Indicators of quality of management, however, are primarily applicable to
individual institutions, and cannot be easily aggregated across the sector. Furthermore, given
the qualitative nature of management, it is difficult to judge its soundness just by looking at
financial accounts of the banks.

Nevertheless, total expenditure to total income and operating expense to total expense helps
in gauging the management quality of the banking institutions. Sound management is key to
bank performance but is difficult to measure. It is primarily a qualitative factor applicable to
individual institutions. Several indicators, however, can jointly serve²as, for instance,
efficiency measures do-as an indicator of management soundness.

The ratio of non-interest expenditures to total assets (MGNT) can be one of the measures to
assess the working of the management. . This variable, which includes a variety of expenses,
such as payroll, workers compensation and training investment, reflects the management
policy stance.


Ê Ê demonstrate how efficiently the company uses its assets and how
efficiently the company manages its operations.

Ê
Ê
Indicates the relationship between assets and revenue.

XÊ Companies with low profit margins tend to have high asset turnover, those with high
profit margins have low asset turnover - it indicates pricing strategy.
XÊ This ratio is more useful for growth companies to check if in fact they are growing
revenue in proportion to sales.

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 Ê 
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Ê
This ratio is useful to determine the amount of sales that are generated from each rupee of
assets. As noted above, companies with low profit margins tend to have high asset turnover,
those with high profit margins have low asset turnover.

Earnings and profitability, the prime source of increase in capital base, is examined with
regards to interest rate policies and adequacy of provisioning. In addition, it also helps to
support present and future operations of the institutions. The single best indicator used to
gauge earning is the Return on Assets (ROA), which is net income after taxes to total asset
ratio.

Strong earnings and profitability profile of banks reflects the ability to support present and
future operations. More specifically, this determines the capacity to absorb losses, finance its
expansion, pay dividends to its shareholders, and build up an adequate level of capital.
Being front line of defense against erosion of capital base from losses, the need for high
earnings and profitability can hardly be overemphasized. Although different indicators are
used to serve the purpose, the best and most widely used indicator is Return on Assets
(ROA). However, for in-depth analysis, another indicator Net Interest Margins (NIM) is also
used. Chronically unprofitable financial institutions risk insolvency. Compared with most
other indicators, trends in profitability can be more difficult to interpret-for instance,
unusually high profitability can reflect excessive risk taking.

O   
Ê
Ê 

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as
to how efficient management is at using its assets to generate earnings. Calculated by
dividing a company's annual earnings by its total assets, ROA is displayed as a percentage.
Sometimes this is referred to as "return on investment".

ROA tells what earnings were generated from invested capital (assets). ROA for public
companies can vary substantially and will be highly dependent on the industry. This is why

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when using ROA as a comparative measure, it is best to compare it against a company's
previous ROA numbers or the ROA of a similar company.

The assets of the company are comprised of both debt and equity. Both of these types of
financing are used to fund the operations of the company. The ROA figure gives investors
an idea of how effectively the company is converting the money it has to invest into net
income. The higher the ROA number, the better, because the company is earning more
money on less investment. For example, if one company has a net income of $1 million and
total assets of $5 million, its ROA is 20%; however, if another company earns the same
amount but has total assets of $10 million, it has an ROA of 10%. Based on this example,
the first company is better at converting its investment into profit. When you really think
about it, management's most important job is to make wise choices in allocating its
resources. Anybody can make a profit by throwing a ton of money at a problem, but very
few managers excel at making large profits with little investment.

  
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An adequate liquidity position refers to a situation, where institution can obtain sufficient
funds, either by increasing liabilities or by converting its assets quickly at a reasonable cost.
It is, therefore, generally assessed in terms of overall assets and liability management, as
mismatching gives rise to liquidity risk. Efficient fund management refers to a situation
where a spread between rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is
maintained. The most commonly used tool to evaluate interest rate exposure is the Gap
between RSA and RSL, while liquidity is gauged by liquid to total asset ratio.

Initially solvent financial institutions may be driven toward closure by poor management of
short-term liquidity. Indicators should cover funding sources and capture large maturity
mismatches. The term liquidity is used in various ways, all relating to availability of, access
to, or convertibility into cash.
XÊ An institution is said to have liquidity if it can easily meet its needs for cash either
because it has cash on hand or can otherwise raise or borrow cash.
XÊ A market is said to be liquid if the instruments it trades can easily be bought or sold
in quantity with little impact on market prices.
XÊ An asset is said to be liquid if the market for that asset is liquid.

The common theme in all three contexts is cash. A corporation is liquid if it has ready access
to cash. A market is liquid if participants can easily convert positions into cash²or
conversely. An asset is liquid if it can easily be converted to cash. The liquidity of an
institution depends onÑ
ñÊ the institution's short-term need for cash;
ñÊ cash on hand;
ñÊ available lines of credit;
ñÊ the liquidity of the institution's assets;
ñÊ The institution's reputation in the marketplace²how willing will counterparty is to
transact trades with or lend to the institution?

The liquidity of a market is often measured as the size of its bid-ask spread, but this is an
imperfect metric at best. More generally, Kyle (1985) identifies three components of market
liquidityÑ
XÊ Tightness is the bid-ask spread;
XÊ Depth is the volume of transactions necessary to move prices;
XÊ Resiliency is the speed with which prices return to equilibrium following a large
trade.

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Examples of assets that tend to be liquid include foreign exchange; stocks traded in the
Stock Exchange or recently issued Treasury bonds. Assets that are often illiquid include
limited partnerships, thinly traded bonds or real estate.

Cash maintained by the banks and balances with central bank, to total asset ratio (LQD) is
an indicator of bank's liquidity. In general, banks with a larger volume of liquid assets are
perceived safe, since these assets would allow banks to meet unexpected withdrawals.

 Ê ÊÊis a tool used to study the liquidity position of the bank. It is calculated
by dividing the cash held in different forms by total deposit. A high ratio shows that there is
more amounts of liquid cash with the bank to met its clients cash withdrawals.

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It refers to the risk that changes in market conditions could adversely impact earnings and/or
capital.

Market Risk encompasses exposures associated with changes in interest rates, foreign
exchange rates, commodity prices, equity prices, etc. While all of these items are important,
the primary risk in most banks is interest rate risk (IRR), which will be the focus of this
module. The diversified nature of bank operations makes them vulnerable to various kinds
of financial risks. Sensitivity analysis reflects institution¶s exposure to interest rate risk,
foreign exchange volatility and equity price risks (these risks are summed in market risk).
Risk sensitivity is mostly evaluated in terms of management¶s ability to monitor and control
market risk.

Banks are increasingly involved in diversified operations, all of which are subject to market
risk, particularly in the setting of interest rates and the carrying out of foreign exchange
transactions. In countries that allow banks to make trades in stock markets or commodity
exchanges, there is also a need to monitor indicators of equity and commodity price risk.

Sensitivity to Market Risk is a recent addition to the ratings parameters and reflects the
degree to which changes in interest rates, exchange rates, commodity prices and equity
prices can affect earnings and hence the bank¶s capital. It is measured by " Ê#%$

1.Ê ȕ <1, depicts that changes in the firm are less than the changes in the market. Less
Sensitive
2.Ê ȕ =1, depicts that there is equivalent change in the firm with the changes in the
market Equally Sensitive.
3.Ê ȕ >1, depicts that changes in the firm are more than the changes in the market.
Highly Sensitive.

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The word bank means an organization where people and business can invest or borrow
money; change it to foreign currency etc. According to Halsbury ³A Banker is an individual,
Partnership or Corporation whose sole pre-dominant business is banking, that is the receipt
of money on current or deposit account, and the payment of cheque drawn and the collection
of cheque paid in by a customer.¶¶

 ÊO
Ê
Ê& ÊÊ"
Ê

The Word µBank¶ is derived from the Italian word µBanko¶ signifying a bench, which was
erected in the market-place, where it was customary to exchange money. The Lombard Jews
were the first to practice this exchange business, the first bench having been established in
Italy A.D. 808. Some authorities assert that the Lombard merchants commenced the
business of money-dealing, employing bills of exchange as remittances, about the beginning
of the thirteenth century.

About the middle of the twelfth century it became evident, as the advantage of coined
money was gradually acknowledged, that there must be some controlling power, some
corporation which would undertake to keep the coins that were to bear the royal stamp up to
a certain standard of value; as, independently of the µsweating¶ which invention may place to
the credit of the ingenuity of the Lombard merchants- all coins will, by wear or abrasion,
become thinner, and consequently less valuable; and it is of the last importance, not only for
the credit of a country, but for the easier regulation of commercial transactions, that the
metallic currency be kept as nearly as possible up to the legal standard. Much unnecessary
trouble and annoyance has been caused formerly by negligence in this respect. The gradual
merging of the business of a goldsmith into a bank appears to have been the way in which
banking, as we now understand the term, was introduced into England; and it was not until
long after the establishment of banks in other countries-for state purposes, the regulation of
the coinage, etc. that any large or similar institution was introduced into England. It is only
within the last twenty years that printed cheques have been in use in that establishment. First
commercial bank was Bank of Venice which was established in 1157 in Italy.

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' Ê"DDVÊ OMÊ
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In 1991, the Indian economy went through a process of economic liberalization, which was
followed up by the initiation of fundamental reforms in the banking sector in 1992. The
banking reform package was based on the recommendations proposed by the Narasimham
Committee Report (1991) that advocated a move to a more market oriented banking system,
which would operate in an environment of prudential regulation and transparent accounting.
One of the primary motives behind this drive was to introduce an element of market
discipline into the regulatory process that would reinforce the supervisory effort of the
Reserve Bank of India (RBI). Market discipline, especially in the financial liberalization
phase, reinforces regulatory and supervisory efforts and provides a strong incentive to banks
to conduct their business in a prudent and efficient manner and to maintain adequate capital
as a cushion against risk exposures. Recognizing that the success of economic reforms was
contingent on the success of financial sector reform as well, the government initiated a
fundamental banking sector reform package in 1992.
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Banking sector, the world over, is known for the adoption of multidimensional strategies
from time to time with varying degrees of success. Banks are very important for the smooth
functioning of financial markets as they serve as repositories of vital financial information
and can potentially alleviate the problems created by information asymmetries. From a
central bank¶s perspective, such high-quality disclosures help the early detection of
problems faced by banks in the market and reduce the severity of market disruptions.
Consequently, the RBI as part and parcel of the financial sector deregulation, attempted to
enhance the transparency of the annual reports of Indian banks by, among other things,
introducing stricter income recognition and asset classification rules, enhancing the capital
adequacy norms, and by requiring a number of additional disclosures sought by investors to
make better cash flow and risk assessments.

[SourceÑ RBI Website]

Ê
Ê
Ê

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Ê
"
Ê ÊÊOÊ
Ê
Bank capital framework sponsored by the world's central banks designed to promote
uniformity, make regulatory capital more risk sensitive, and promote enhanced risk
management among large, internationally active banking organizations. The International
Capital Accord, as it is called, will be fully effective by January 2008 for banks active in
international markets. Other banks can choose to "opt in," or they can continue to follow the
minimum capital guidelines in the original Basel Accord, finalized in 1988. The revised
accord (Basel II) completely overhauls the 1988 Basel Accord and is based on three
mutually supporting concepts, or "pillars," of capital adequacy. The first of these pillars is an
explicitly defined regulatory capital requirement, a minimum capital-to-asset ratio equal to
at least 8% of risk-weighted assets. Second, bank supervisory agencies, such as the
Comptroller of the Currency, have authority to adjust capital levels for individual banks
above the 9% minimum when necessary. The third supporting pillar calls upon market
discipline to supplement reviews by banking agencies.
Basel II is the second of the Basel Accords, which are recommendations on banking laws
and regulations issued by the Basel Committee on Banking Supervision. The purpose of
Basel II, which was initially published in June 2004, is to create an international standard
that banking regulators can use when creating regulations about how much capital banks
need to put aside to guard against the types of financial and operational risks banks face.
Advocates of Basel II believe that such an international standard can help protect the
international financial system from the types of problems that might arise should a major
bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting
up rigorous risk and capital management requirements designed to ensure that a bank holds
capital reserves appropriate to the risk the bank exposes itself to through its lending and
investment practices.
Ê
Ê
Ê

Ê
[SourceÑ RBI Website]

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Ê
Ê
 Ê
Ê 
ÊÊÊ
1.Ê Ensuring that capital allocation is more risk sensitive;
2.Ê Separating operational risk from credit risk, and quantifying both;
3.Ê Attempting to align economic and regulatory capital more closely to reduce the
scope for regulatory arbitrage.
Ê
While the final accord has largely addressed the regulatory arbitrage issue, there are still
areas where regulatory capital requirements will diverge from the economic.

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

 ÊÊ
Ê 

Basel II uses a "three pillars" concept
ñÊ minimum capital requirements (addressing risk),
ñÊ supervisory review and
ñÊ market discipline ± to promote greater stability in the financial system.

The Basel I accord dealt with only parts of each of these pillars. For exampleÑ with respect
to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while
market risk was an afterthought; operational risk was not dealt with at all.

 ÊÊ

The first pillar deals with maintenance of regulatory capital calculated for three major
components of risk that a bank facesÑ credit risk, operational risk and market risk. Other
risks are not considered fully quantifiable at this stage.

The credit risk component can be calculated in three different ways of varying degree of
sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB
stands for "Internal Rating-Based Approach".

For operational risk, there are three different approaches - basic indicator approach,
standardized approach and advanced measurement approach. For market risk the preferred
approach is VaR (value at risk).

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As the Basel II recommendations are phased in by the banking industry it will move from
standardized requirements to more refined and specific requirements that have been
developed for each risk category by each individual bank. The upside for banks that do
develop their own bespoke risk measurement systems is that they will be rewarded with
potentially lower risk capital requirements. In future there will be closer links between the
concepts of economic profit and regulatory capital.

Credit Risk can be calculated by using one of three approachesÑ

1. Standardized Approach
2. Foundation IRB (Internal Ratings Based) Approach
3. Advanced IRB Approach

The standardized approach sets out specific risk weights for certain types of credit risk. The
standard risk weight categories are used under Basel 1 and are 0% for short term
government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages and

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100% weighting on commercial loans. A new 150% rating comes in for borrowers with poor
credit ratings. The minimum capital requirement (the percentage of risk weighted assets to
be held as capital) has remains at 8%.

For those Banks that decide to adopt the standardized ratings approach they will be forced to
rely on the ratings generated by external agencies. Certain Banks are developing the IRB
approach as a result.

 Ê 
Ê
Ê

The second pillar deals with the regulatory response to the first pillar, giving regulators
much improved 'tools' over those available to them under Basel I. It also provides a
framework for dealing with all the other risks a bank may face, such as systemic risk,
pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk,
which the accord combines under the title of residual risk. It gives banks a power to review
their risk management system.

 Ê Ê
Ê

The third pillar greatly increases the disclosures that the bank must make. This is designed
to allow the market to have a better picture of the overall risk position of the bank and to
allow the counterparties of the bank to price and deal appropriately. The new Basel Accord
has its foundation on three mutually reinforcing pillars that allow banks and bank
supervisors to evaluate properly the various risks that banks face and realign regulatory
capital more closely with underlying risks. The first pillar is compatible with the credit risk,
market risk and operational risk. The regulatory capital will be focused on these three risks.
The second pillar gives the bank responsibility to exercise the best ways to manage the risk
specific to that bank. Concurrently, it also casts responsibility on the supervisors to review
and validate banks¶ risk measurement models. The third pillar on market discipline is used
to leverage the influence that other market players can bring. This is aimed at improving the
transparency in banks and improves reporting.

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State Bank of India is the largest banking and financial services company in India, by almost
every parameter - revenues, profits, assets, market capitalization, etc. The bank traces its
ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the
Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. The
Government of India nationalized the Imperial Bank of India in 1955, with the Reserve
Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the
Government took over the stake held by the Reserve Bank of India.

SBI provides a range of banking products through its vast network of branches in India and
overseas, including products aimed at NRIs. The State Bank Group, with over 16,000
branches, has the largest banking branch network in India. With an asset base of $260 billion
and $195 billion in deposits, it is a regional banking behemoth. It has a market share among
Indian commercial banks of about 20% in deposits and advances, and SBI accounts for
almost one-fifth of the nation's loans. The total assets of the Bank increased by 9.23% from
Rs.9,64,432.08 crores at the end of March 2009 to Rs.10,53,413.73 crores as at end March
2010. The Bank¶s aggregate liabilities (excluding capital and reserves) rose by 8.93% from
Rs.9,06,484.38 crores on 31st March 2009 to Rs.9,87,464.53 crores on 31st March 2010.

 Ê 
 Ê
Ê

[SourceÑ Annual Report, 2009-10]

SBI has tried to reduce over-staffing by computerizing operations and "golden handshake"
schemes that led to a flight of its best and brightest managers. These managers took the
retirement allowances and then went on to become senior managers in new private sector

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banks. The State bank of India is the 29th most reputed company in the world according to
Forbes.


 Ê
Ê

[SourceÑ Annual Report, 2009-10]

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ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is a major
banking and financial services organization in India. It is the 4th largest bank in India and
the largest private sector bank in India by market capitalization. The bank also has a network
of 1,700+ branches (as on 31 March 2010) and about 4,721 ATMs in India and presence in
19 countries, as well as some 24 million customers (at the end of July 2007). ICICI Bank is
also the largest issuer of credit cards in India. ICICI Bank's shares are listed on the stock
exchanges at Kolkata and Vadodara, Mumbai and the National Stock Exchange of India
Limited; its ADRs trade on the New York Stock Exchange (NYSE).

[SourceÑ Annual Report, 2009-10]

The Bank is expanding in overseas markets and has the largest international balance sheet
among Indian banks. ICICI Bank now has wholly-owned subsidiaries, branches and
representatives offices in 19 countries, including an offshore unit in Mumbai. This includes
wholly owned subsidiaries in Canada, Russia and the UK (the subsidiary through which the
Hi SAVE savings brand is operated), offshore banking units in Bahrain and Singapore, an
advisory branch in Dubai, branches in Belgium, Hong Kong and Sri Lanka, and
representative offices in Bangladesh, China, Malaysia, Indonesia, South Africa, Thailand,
the United Arab Emirates and USA. Overseas, the Bank is targeting the NRI (Non- Resident
Indian) population in particular.

c


  ÊÊ

Ê  ÊÊÊ Ê"
ÊÊ Ê"Ê  
Ê
Ê" ÊÊ
Ê" ÊÊ

[SourceÑ Annual Report, 2009-10]

Profit before provisions and tax increased by 9.0% from Rs. 89.25 billion in fiscal 2009 to
Rs. 97.32 billion in fiscal 2010 primarily due to an increase in treasury income from Rs.
4.43 billion in fiscal 2009 to Rs. 11.81 billion in fiscal 2010 and a 16.8% decrease in non-
interest expenses from Rs. 70.45 billion in fiscal 2009 to Rs. 58.60 billion in fiscal 2010,
offset, in part, by a 3.0% decrease in net interest income from Rs. 83.67 billion in fiscal
2009 to Rs. 81.14 billion in fiscal 2010 and a 13.4% decrease in fee income from Rs. 65.24
billion in fiscal 2009 to Rs. 56.50 billion in fiscal 2011.

c


'Ê
Ê
HDFC Bank was incorporated in the year of 1994 by Housing Development Finance
Corporation Limited (HDFC), India's premier housing finance company. It was among the
first companies to receive an 'in principle' approval from the Reserve Bank of India (RBI) to
set up a bank in the private sector.The Bank commenced its operations as a Scheduled
Commercial Bank in January 1995 with the help of RBI's liberalization policies.

In a milestone transaction in the Indian banking industry, Times Bank Limited (promoted by
Bennett, Coleman & Co. / Times Group) was merged with HDFC Bank Ltd., in 2000. This
was the first merger of two private banks in India. As per the scheme of amalgamation
approved by the shareholders of both banks and the Reserve Bank of India, shareholders of
Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank.

In 2008 HDFC Bank acquired 
 
Ê"
ÊÊ

jbÊtaking its total branches to more
than 1,000. The amalgamated bank emerged with a strong deposit base of around Rs.
1,22,000 crore and net advances of around Rs. 89,000 crore. The balance sheet size of the
combined entity is over Rs. 1,63,000 crore. The amalgamation added significant value to
HDFC Bank in terms of increased branch network, geographic reach, and customer base,
and a bigger pool of skilled manpower

Ê  Ê

[SourceÑ Annual Report, 2009-10]

c



 [SourceÑ Annual Report, 2009-10]

HDFC Bank Ltd. is a major Indian financial services company based in Mumbai,
incorporated in August 1994, after the Reserve Bank of India allowed establishing private
sector banks. The Bank was promoted by the Housing Development Finance Corporation, a
premier housing finance company (set up in 1977) of India. HDFC Bank has 1,412 branches
and over 3,295 ATMs, in 528 cities in India, and all branches of the bank are linked on an
online real-time basis. The Bank posted total income and net profit of Rs. 19,980.5 crores
and Rs. 2,948.7 crores respectively for the financial year ended March 31, 2010 as against
Rs. 19,622.9 crores and Rs. 2,245.0 crores respectively in the previous year.

c


The Industrial Development Bank of India Limited commonly known by its acronym IDBI
is one of India's leading public sector banks and 4th largest Bank in overall ratings. RBI
categorized IDBI as an "other public sector bank". It was established in 1964 by an Act of
Parliament to provide credit and other facilities for the development of the fledgling Indian
industry. It is currently 10th largest development bank in the world in terms of reach with
1210 ATMs, 720 branches and 486 centers.

Some of the institutions built by IDBI are the National Stock Exchange of India (NSE), the
National Securities Depository Services Ltd (NSDL), the Stock Holding Corporation of
India (SHCIL), the Credit Analysis & Research Ltd, the Export-Import Bank of India (Exim
Bank), the Small Industries Development bank of India(SIDBI), the Entrepreneurship
Development Institute of India, and IDBI BANK, which today is owned by the Indian
Government, though for a brief period it was a private scheduled bank. The Industrial
Development Bank of India (IDBI) was established on July 1, 1964 under an Act of
Parliament as a wholly owned subsidiary of the Reserve Bank of India. In 16 February 1976,
the ownership of IDBI was transferred to the Government of India and it was made the
principal financial institution for coordinating the activities of institutions engaged in
financing, promoting and developing industry in the country. Although Government
shareholding in the Bank came down below 100% following IDBI¶s public issue in July
1995, the former continues to be the major shareholder (current shareholdingÑ 52.3%).

During the four decades of its existence, IDBI has been instrumental not only in establishing
a well-developed, diversified and efficient industrial and institutional structure but also
adding a qualitative dimension to the process of industrial development in the country. IDBI
has played a pioneering role in fulfilling its mission of promoting industrial growth through
financing of medium and long-term projects, in consonance with national plans and
priorities. Over the years, IDBI has enlarged its basket of products and services, covering
almost the entire spectrum of industrial activities, including manufacturing and services.
IDBI provides financial assistance, both in rupee and foreign currencies, for green-field
projects as also for expansion, modernization and diversification purposes. In the wake of
financial sector reforms unveiled by the government since 1992, IDBI evolved an array of
fund and fee-based services with a view to providing an integrated solution to meet the
entire demand of financial and corporate advisory requirements of its clients

c


 

Ê'  Ê

[SourceÑ Annual Report, 2009-10]

c


Axis Bank, formally UTI Bank, is a financial services firm that had begun operations in
1994, after the Government of India allowed new private banks to be established. The Bank
was promoted jointly by the Administrator of the Specified Undertaking of the Unit Trust of
India (UTI-I), Life Insurance Corporation of India (LIC), General Insurance Corporation
Ltd., National Insurance Company Ltd., The New India Assurance Company, The Oriental
Insurance Corporation and United India Insurance Company UTI-I holds a special position
in the Indian capital markets and has promoted many leading financial institutions in the
country. The bank changed its name to Axis Bank in April 2007 to avoid confusion with
other unrelated entities with similar name.

After the Retirement of Mr. P. J. Nayak, Shikha Sharma was named as the bank's managing
director and CEO on 20 April 2009. As on the year ended March 31, 2009 the Bank had a
total income of Rs 13,745.04 crore (US$ 2.93 billion) and a net profit of Rs. 1,812.93 crore
(US$ 386.15 million). On February 24, 2010, Axis Bank announced the launch of 'AXIS
CALL & PAY on atom', a unique mobile payments solution using Axis Bank debit cards.
Axis Bank is the first bank in the country to provide a secure debit card-based payment
service over IVR. Axis Bank is one of the Big Four Banks of India, along with ICICI Bank,
State Bank of India and HDFC Bank Branch Network At the end of March 2009, the Bank
has a very wide network of more than 835 branch offices and Extension Counters. Total
number of ATMs went up to 3595. The Bank has loans now (as of June 2007) account for as
much as 70 per cent of the bank¶s total loan book of Rs 2,00,000 crore. In the case of Axis
Bank, retail loans have declined from 30 per cent of the total loan book of Rs 25,800 crore
in June 2006 to around 23 per cent of loan book of Rs.41,280 crore (as of June 2007). Even
over a longer period, while the overall asset growth for

Axis Bank has been quite high and has matched that of the other banks, retail exposures
grew at a slower pace. The bank, though, appears to have insulated such pressures. Interest
margins, while they have declined from the 3.15 per cent seen in 2003-04, are still hovering
close to the 3 per cent mark.

c


Ê
[SourceÑ Annual Report, 2009-10]

c


 Ê  Ê

[SourceÑ Annual Report, 2009-10]

Ê
Ê

c


Ê
Ê
Ê
Ê
Ê
Ê

Ê
Ê

Ê
Ê

c



 Ê ())* )+Ê ())+ ),Ê ()), )-Ê ())- ).Ê ()). /)Ê
"Ê         

Ê"
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"Ê"
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0Ê"
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[SourceÑ Annual Reports of respective Banks and CMIE Database, 2011]

Ê
Ê
Ê

c


 Ê
Ê
Ê

Ê
Ê
Reserve Bank of India prescribes Banks to maintain a minimum Capital to risk weighted
Assets Ratio (CRAR) of 9 percent with regard to credit risk, market risk and operational risk
on an ongoing basis, as against 8 percent prescribed in Basel Documents. Capital adequacy
ratio of the ICICI Bank was well above the industry average of 13.97% t. CAR of HDFC
bank is below the ratio of ICICI bank. HDFC Bank¶s total Capital Adequacy stood at
15.26% as of March 31, 2010. The Bank adopted the Basel 2 framework as of March 31,
2009 and the CAR computed as per Basel 2 guidelines stands higher against the regulatory
minimum of 9.0%.

HDFC CAR is gradually increased over the last 5 year and the capital adequacy ratio of
Axis bank is the increasing by every 2 year. SBI has maintained its CAR around in the range
of 11 % to 14 %. But IDBI should reconsider their business as its CAR is falling YOY (year
on year). Higher the ratio the banks are in a comfortable position to absorb losses. So ICICI
and HDFC are the strong one to absorb their loses.

c



 Ê ())* )+Ê ())+ ),Ê ()), )-Ê ())- ).Ê ()). /)Ê
"Ê            
Ê"
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'Ê"
Ê       
  
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Ê   
  
    


0Ê"
Ê        
    

VD



 



  


 



    

[SourceÑ Annual Reports of respective Banks]

c



Ê
Ê

Ê
Ê
VÊD
Ê
Ê
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by
banks. It consists of all the non standard assets like as substandard, doubtful, and loss assets.

It can be calculated with the help of following ratioÑ

SBI maintained its GNPA to 3% which is very good sign of performances as SBI is the
largest lender in INDIA. HDFC¶s GNPA is quite good as it is low with compared to ICICI
and SBI but in 2008-09 GNPA rises. The reason may be economic crises. AXIS bank has
lowest GNPA which shown its management ability. ICICI has the highest GNPA in banking
industry and rising YOY (year on year).

c



 Ê ())* )+Ê ())+ ),Ê ()), )-Ê ())- ).Ê ()). /)Ê
"Ê          
Ê"
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'Ê"
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"Ê"
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0Ê"
Ê 
        

DD








 


 



    

[SourceÑ Annual Reports of respective Banks]

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 Ê

ÊÊÊ
Ê
D ÊD
Ê
Ê
Net NPAs are those type of NPAs in which the bank has deducted the provision regarding
NPAs. D
 D 
 

     Ê Since in India, bank balance sheets
contain a huge amount of NPAs and the process of recovery and write off of loans is very
time consuming, the provisions the banks have to make against the NPAs according to the
central bank guidelines, are quite significant. That is why the difference between gross and
net NPA is quite high.

It can be calculated by followingÑ

AXIS Bank has least Net NPA and ICICI has highest NNPA among group. HDFC shown its
management quality as it maintained its NNPA YOY (year on year). SBI has to keep NNPA
below. IDBI has successful to control NNPA YOY.

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 Ê ())* )+Ê ())+ ),Ê ()), )-Ê ())- ).Ê ()). /)Ê
"Ê          
Ê"
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0Ê"
Ê   
       

 Ê 
 



 




 

 
 



    

[SourceÑ Calculated from balance sheets of respective banks]

c


 Ê
Ê
Ê
 Ê  
 Ê ÊIt indicates the relationship between assets and revenue. The
formula for calculating this ratio is as followsÑ
Ê

Ê
Ê
Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue
- the higher the number the better.

From the above information, it is clear that the asset turnover ratio of axis bank is increasing
every year and highest in comparison with its peers. It shows the bank¶s efficiency in using
its assets to generate high revenue. SBI, ICICI and HDFC are its major competitors showing
almost same trend but differ in quantum.

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 Ê ())* )+Ê ())+ ),Ê ()), )-Ê ())- ).Ê ()). /)Ê
"Ê 
  
      
Ê"
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'Ê"
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0Ê"
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O
 


 
 
  
  

 
 



    

[  ÊAnnual Reports and CMIE Database, 2011]

c


 Ê
Ê
Ê
  
Ê
Ê ÊÊ
Where asset turnover tells an investor the total sales for each $1 of assets, returnÊon assets,
or ROA for short, tells an investor how much profit a companyÊ generated for each $1 in
assets. The return on assets figure is also a sure-fire wayÊ to gauge the asset intensity of a
business. ROA measures a company¶s earningsÊin relation to all of the resources it had at its
disposal (the shareholders¶ capitalÊplus short and long-term borrowed funds).

Thus, it is the most stringent andÊexcessive test of return to shareholders. If a company has
no debt, the return onÊassets and return on equity figures will be the same. HDFC has shownÊ
remarkable ROA over 5 years but AXIS bank will attract more eyes as its ROAÊincreases for
last 5 year. SBI¶s ROA is slightly low as compared to HDFC;Êreason is the SBI has highest
assets in Indian bank industry that¶s why its ROAÊ is low as compared to AXIS bank and
HDFC bank. IDBI is out performed inÊ ROA but ICICI¶s ROA is quite enough to attract
investors. Its rise and fallÊalternatively YOY.Ê

c



 Ê ())* )+Ê ())+ ),Ê ()), )-Ê ())- ).Ê ()). /)Ê
"Ê      
 

Ê"
Ê 
   




'Ê"
Ê 
      
"Ê"
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0Ê"
Ê 
 
  
  
   






 



  


 



    

[SourceÑ Annual Reports of respective Banks]

Ê
Ê

c


Ê

Ê
Ê
It is the proportion of loan-assets created by banks from the deposits received. The higher
the ratio, the higher the loan-assets created from deposits.

Consider Bank X which has deposits worth Rs. 100 crores and a credit-deposit ratio of 60
per cent. That means Bank X has used deposits worth Rs. 60 crores to create loan-assets.
Only Rs. 40 crores is available for other investments.

Now, the Indian government is the largest borrower in the domestic credit market. The
government borrows by issuing securities (G-secs) through auctions held by the RBI. Banks,
thus, lend to the government by investing in these G-secs. And Bank X has only Rs. 40
crores to invest in G-secs. If more banks like X have lesser money to invest in G-Secs, what
will the government do? After all, it needs to raise money to meet its expenditure.

If the money so released is large, ``too much money will chase too few goods'' in the
economy resulting in higher inflation levels. This would prompt investors to demand higher
returns on debt instruments. HDFC, SBI and AXIS bank has CDR in equal range from last 5
year. IDBI has highest CDR all 5 year but good thing is that is gradually fall YOY. ICICI
bank¶s CDR is slightly higher than SBI , AXIS and HDFC but it also maintained its CDR
YOY.

c



 Ê ())* )+Ê ())+ ),Ê ()), )-Ê ())- ).Ê ()). /)Ê
"Ê          
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0Ê"
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[SourceÑ CMIE Database, 2011]

c



" Ê#%$Ê
Ê
Sensitivity to Market Risk is a recent addition to the ratings parameters and reflects the
degree to which changes in interest rates, exchange rates, commodity prices and equity
prices can affect earnings and hence the bank¶s capital. It is measured by Beta (ȕ). Beta (ȕ)
is a measure of systematic risk of a company. Risk profile of a company incorporates two
kinds of RisksÑ
(a)Ê Unsystematic Risk, and
(b)ÊSystematic Risk

This systematic risk is non-diversifiable risk and is measured by ȕ (beta). The value of beta
can be calculated by following formulaÑ

Ê
Ê
Where, 0 is an independent variable (e.g., BSE Sensex), 1 is a dependant
variable (Stock of a company) and
is no. of observations.

From the analysis it is clear that, ICICI Bank is most sensitive among other banks. SBI is
almost equally sensitive while HDFC Bank is less sensitive with changes in the Market. The
stock of ICICI bank is highly volatile and that of HDFC is least volatile.

c


Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê

Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê
Ê

c


Ê
Ê
Ê

Ê
Ê
Ê
Ê
Ê  ÊÊ
HDFC BANK has shown best performance in  as its gradually rising YOY and IDBI¶s
decreasing YOY. IDBI should reconsider their business tactics.

 Ê2 Ê

VÊD
ÊAXIS bank has least GNPA and ICICI has highest among peers.
D Ê D
Ê AXIS Bank again performed better than others and ICICI has maintained its
position. SBI has rise in NNPA over the GNPA.

M
 
Ê

Ê

 Ê 
 ÊAsset turnover measures a firm's efficiency at using its assets in generating
sales or revenue - the higher the number the better. The asset turnover ratio of AXIS Bank is
increasing every year and highest in comparison with its peers. SBI, ICICI and HDFC are its
major competitors showing almost same trend but differ in quantum.Ê
Ê


Ê
Ê
bÊ
  
Ê 
Ê  Ê HDFC tops the group and IDBI again at last but this tie IDBI shown
consistent performance as compared to ICICI having higher ROA.

 Ê
 Ê  Ê Ê HDFC maintains its CDR and tops the group. IDBI again on worst
side but good thing is that it¶s decreasing YOY.


ÊÊM ÊÊÊ
" Ê#%$Ê ICICI Bank with beta > 1 is highly sensitive while HDFC Bank is least sensitive
among its peers since its beta<1. SBI on the other hand is equally sensitive to market
changes.

c


 Ê
Ê
Ê
ßÊ The Asset Quality of ICICI Bank is not good as represented by its GNPA & NPA.
Suitable measures like KYC should be undertaken to identify credit worthiness of
borrowers.
ßÊ IDBI Bank has to improve its efficiency for optimum utilization of its assets as their
asset turnover ratio is very less. New and efficient plans, methods and techniques
should be devised.
ßÊ The Earnings of ICICI and IDBI are very less in comparison to their competitors.
They should invest in growth and income generating securities. They also need to
revise their portfolio.
ßÊ ICICI Bank should find more avenues to hedge risks as the market is very sensitive
to risk of any type.

In today¶s scenario, the banking sector is one of the fastest growing sectors and a lot of
funds are invested in Banks. Also today¶s banking system is becoming more complex. So, I
thought of evaluating the performance of the banks. There are so many models available for
this purpose, but I have chosen the CAMELS Model to evaluate the performance of the
banks. I have gone through several books, journals and websites and found it the best model
because it measures the performance of the banks from each parameter i.e. Capital, Assets,
Management, Earnings, Liquidity and Sensitivity to Market risk.

This report makes an attempt to examine and compare the performance of the five different
Commercial banks of India. Data is collected from reliable sources. They were then
interpreted and analyzed with the help of significant ratios. All the ratios being calculated in
order to determine the strength and weaknesses of the sample banks. The findings are
justified with the interpretation and analysis and on that basis appropriate suggestions are
given to the banks to improve upon some parameters which are major part of their financial
performance.

c


Ê

Ê
Ê
Ê
"Ê
ñÊ Financial Markets and Institutions by L.M. Bhole
ñÊ Kothari, C.R., ³Research MethodologyÑ Methods and Techniques´,Wishwa
Publication, Delhi

M Êb 3Ê()//Ê

 b Ê4 Ê

Ê
httpÑ//www.rbi.org
httpÑ//www.statebankofindia.com
httpÑ//www.icicibank.com
httpÑ//www.hdfcbank.com
httpÑ//www.idbi.com
httpÑ//www.idbibank.com
httpÑ//www.moneycontrol.com
httpÑ//www.rbidocs.rbi.org

c