Introduction

The banking system in India has undergone significant changes during last 15
years. There have been new banks, new instruments, new windows, new
opportunities and, along with all this, new challenges. While deregulation has
opened up new vistas for banks to augment revenues, it has also entailed
greater competition and consequently greater risks. The traditional face of
banks as mere financial intermediaries has since altered and risk management
has emerged as the defining attribute.
Financial sector reforms introduced in the early 1990s as a part of the
structural reforms have touched upon almost all aspects of banking operations.
For a few decades preceding the onset of banking and financial sector reforms
in India, banks operated in an environment that was heavily regulated and
characterized by sufficient barriers to entry, which protected them against too
much competition. This regulated environment set in complacency in the
manner in which banks operated and responded to the customer needs. The
administered interest rate structure, both on the liability and the assets sides,
allowed banks to earn reasonable spread without much efforts. Despite this,
however, banks’ profitability was low and NPLs level was high, reflecting lack
of efficiency. Although banks operated under regulatory constraints in the form
of statutory holding of Government securities (statutory liquidity ratio or SLR)
and the cash reserve ratio (CRR) and lacked functional autonomy and
operational efficiency, the fact was that most banks did not operate efficiently.
While the broad objectives of the financial sector reforms, thus, were to
enhance efficiency and productivity, the process of reforms were initiated in a
gradual and properly sequenced manner so as to have a reinforcing effect. The
approach has been to consistently upgrade the financial sector by adopting the
international best practices through a consultative process. Financial sector
reforms were carried out in two phases. The first phase of reforms was aimed at
creating productive and profitable financial institutions operating within the
environment of operational flexibility and functional autonomy. The focus of
the second phase of financial sector reforms starting from the second-half of

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1990s has been on strengthening of the financial system consistent with the
movement towards global integration of financial services.
Financial Sector Reforms in India
The deregulation of interest rates constituted an integral part of financial sector
reforms. The interest rate regime has been largely deregulated with a view to
achieving better price discovery and efficient resource allocation. Banks now
have flexibility to decide their deposit and lending rate structures and manage
their assets and liabilities accordingly. At present, apart from interest rates on
savings deposits and NRI deposits on the deposit side, and export credit and
small loans up to Rs. 2 lakh on the lending side, all other interest rates have
been deregulated.
Indian banking system operated for a long time with high reserve
requirements both in the form of Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR). This was mainly to accommodate the high fiscal deficit
and its monetization. The efforts in the recent period have been to lower both
the CRR and SLR. The SLR has been gradually reduced from a peak of 38.5
per cent to 25 per cent. The CRR was reduced from its peak level of 15.0 per
cent maintained during 1989 to 1992 to 4.5 per cent of NDTL in June 2003.
Although the Reserve Bank continues to pursue its medium-term objective of
reducing the CRR, in recent years, on a review of macroeconomic and
monetary conditions, the CRR has been revised upwards to 6.0 per cent (to be
effective from March 3, 2007).
It has been the endeavor of the Reserve Bank to establish an enabling
regulatory framework with prompt and effective supervision, and development
of legal, technological and institutional infrastructure. Persistent efforts,
therefore, have been made towards adoption of international benchmarks, as
appropriate to Indian conditions. In 1994, a Board for Financial Supervision
(BFS) was constituted comprising select members of the Reserve Bank Board
with a variety of professional expertise to exercise 'undivided attention to
supervision' and ensure an integrated approach to supervision of commercial
banks and financial institutions. The Reserve Bank had instituted a state of-the-
art Off-site Monitoring and Surveillance (OSMOS) system for banks in 1995 as

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part of crisis management framework for Early Warning System (EWS) and as
a trigger for on-site inspections of vulnerable institutions. The scope and
coverage of off-site surveillance has since been widened to capture various
facets of efficiency and risk management of banks.
As a part of the financial sector reforms, the regulatory norms with
respect to capital adequacy, income recognition, asset classification and
provisioning have progressively moved towards convergence with the
international best practices. These measures have enhanced transparency of the
balance sheet of the banks and infused accountability in their functioning.
Besides sub-standard assets, provisioning has also been introduced for the
standard assets. Measures to reduce the levels of NPAs concentrated on
improved risk management practices and greater recovery efforts facilitated by
the enactment of Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest (SARFAESI) Act, 2002. Several other
channels of NPA management have also been instituted, including Debt
Recovery Tribunals, Lok Adalats (People’s court) and corporate debt
restructuring mechanism with separate schemes for small and medium
industries.
The minimum capital to risk assets ratio (CRAR), which was earlier
stipulated at eight per cent was revised to 9 per cent in 1999, which is one
percentage point above the international norm. As some banks in the public
sector were not able to comply with the CRAR stipulations, there was a need to
recapitalize them to augment their capital base. Banks were allowed to raise
capital from the market. In line with the amendment to incorporate market risk
in Basel I, separate capital charge for market risk was also introduced in 2004.
Accounting standards and disclosure norms were strengthened with a
view to improving governance and bringing them in alignment with the
international norms. The disclosure requirements broadly covered capital
adequacy, asset quality, maturity distribution of select items of assets and
liabilities, profitability, country risk exposure, risk exposures in derivatives,
segment reporting, and related party disclosures. In April 2005, commercial

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banks were advised to put in place business continuity measures, including a
robust information risk management system within a fixed time frame.
In view of the increasing degree of deregulation and exposure of banks
to various types of risks, the Reserve Bank initiated measures for further
strengthening and fine-tuning risk management systems in banks. The
guidelines on asset-liability management and risk management systems in
banks were issued in 1999 and Guidance Notes on Credit Risk Management
and Market Risk Management in October 2002 and the Guidance Note on
Operational risk management in 2005. In the Reserve Bank, the risk-based
approach to supervision has been adopted since 2003 and about 23 banks have
been brought under the fold of risk-based supervision (RBS) on a pilot basis.
On the basis of the feedback received from the pilot project, the RBS
framework is being reviewed.
As part of the reform programme, due consideration has been given to
diversification of ownership of banking institutions for greater market
accountability and improved efficiency. The public sector banks expanded their
capital base by accessing the capital market, which diluted the Government
ownership. To provide banks with additional options for raising capital funds
with a view to enabling smooth transition to the Basel II, the Reserve Bank in
January 2006, allowed banks to augment their capital funds by issue of
additional instruments.
With a view to enhancing efficiency and productivity through
competition, guidelines were laid down for establishment of new banks in the
private sector and the foreign banks have been allowed more liberal entry.
Since 1993, 12 new private sector banks have been set up. As a major step
towards enhancing competition in the banking sector, foreign direct investment
in the private sector banks is now allowed up to 74 per cent, subject to
conformity with the guidelines issued from time to time. The regulatory
framework in India, in addition to prescribing prudential guidelines and
encouraging market discipline, is increasingly focusing on ensuring good
governance through "fit and proper" owners, directors and senior managers of
the banks. Transfer of shareholding of five per cent and above requires

4
acknowledgement from the Reserve Bank and such significant shareholders are
required to meet rigorous ‘fit and proper' requirements. Banks have also been
asked to ensure that the nominated and elected directors are screened by a
nomination committee to satisfy ‘fit and proper' criteria. Directors are also
required to sign a covenant indicating their roles and responsibilities. The
Reserve Bank has issued detailed guidelines on ownership and governance in
private sector banks emphasizing diversified ownership.
The Reserve Bank released a roadmap for foreign banks articulating a
liberalized policy consistent with the WTO commitments in March 2005. The
roadmap is divided into two phases. During the first phase, between March
2005 and March 2009, foreign banks wishing to establish presence in India for
the first time could either choose to operate through branches or set up 100 per
cent wholly owned subsidiaries (WOS), following the one-mode presence
criterion. For new and existing foreign banks, it is proposed to go beyond the
existing WTO commitment of 12 branches in a year. During this phase,
permission for acquisition of shareholding in Indian private sector banks by
eligible foreign banks will be limited to banks identified by the Reserve Bank
for restructuring. The second phase is scheduled to commence from April 2009
after a review of the experience gained and after due consultation with all the
stakeholders in the banking sector. In this phase, three interconnected issues
would be taken up. First, rules for the removal of limitations on the operations
of the WOS and treating them at par with domestic banks, to the extent
appropriate, would be designed and implemented. Second, the WOS of foreign
banks, on completion of a minimum prescribed period of operation, may be
allowed to list and dilute their stake so that, consistent with the guidelines
issued on March 5, 2004, at least 26 per cent of the paid-up capital of the
subsidiary is held by resident Indians at all times. Third, during this phase,
foreign banks may be permitted to enter into merger and acquisition
transactions with any private sector bank in India, subject to the overall
investment limit of 74 per cent.
In recent years, comprehensive credit information, which provides
details pertaining to credit facilities already availed of by a borrower as well as

5
his payment track record, has become critical. Accordingly, a scheme for
disclosure of information regarding defaulting borrowers of banks and financial
institutions was introduced. In order to facilitate sharing of information related
to credit matters, a Credit Information Bureau (India) Limited (CIBIL) was set
up in 2000.
The Banking Ombudsman Scheme was notified by the Reserve Bank in
1995 to provide for a system of redressal of grievances against banks. The
scheme sought to establish a system of expeditious and inexpensive resolution
of customer complaints. The scheme was revised twice, first in 2002 and then
in 2006. At present, the scheme is being executed by Banking Ombudsman
(BO) appointed by the Reserve Bank at 15 centers covering the entire country.
The BO scheme covers all commercial banks and scheduled primary
cooperative banks. The scheme was revised recently which brought more
grounds of complaints within its ambit. An independent Banking Codes and
Standards Board of India was set up on the model of the UK in order to ensure
that comprehensive code of conduct for fair treatment of customers is evolved
and adhered to. With a view to achieving greater financial inclusion, since
November 2005, all banks need to make available a basic banking ‘no frills’
account either with ‘nil’ or very low minimum balances as well as charges that
would make such accounts accessible to vast sections of population. Banks
were urged to review their existing practices to align them with the objective of
‘financial inclusion’.
The smooth functioning of the payment and settlement system is a pre-
requisite for financial stability. The Reserve Bank, therefore, has taken several
measures from time to time to develop the payment and settlement system in
the country along sound lines. The Board for Regulation and Supervision of
Payment and Settlement Systems (BPSS), set up in March 2005 as a committee
of the Central Board of the Reserve Bank, is the apex body for giving policy
direction in the area of payment and settlement systems. Real time gross
settlement (RTGS) was operationalized on March 26, 2004. Its usage for
transfer of funds, especially for large values and for systemically important
purposes, has increased since then. With introduction of RTGS, whereby a final

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settlement of individual inter-bank fund transfers is effected on a gross real
time basis during the processing day, a major source of systemic risk in the
financial system has been reduced substantially.
A risk free payments and settlements system in government securities
and foreign exchange was established by the Clearing Corporation of India
Limited (CCIL), which is set up by banks. CCIL acts as the central counter
party (CCP) for all the transactions and guarantees both the securities and funds
legs of the transaction. Under the DvPIII mode of settlement that has been
adopted, both the securities leg and the fund leg are settled on a net basis. The
settlement through CCIL has thus reduced the gross dollar requirement by
more than 90 per cent. A screen-based negotiated quote-driven system for
dealings in the call/notice and the term money market (NDS-CALL) has been
launched by the CCIL in September 18, 2006. The introduction of NDS-CALL
helps in enhancing transparency, improving price discovery and strengthening
market microstructure.
Impact of Financial Sector Reforms in India
Banks have been accorded greater discretion in sourcing and utilization of
resources, albeit in an increasingly competitive environment. The outreach of
the Indian banking system has increased in terms of expansion of
branches/ATMs. In the post-reform period, assets/liabilities of banks have
grown consistently at a high rate. The financial performance of banks also
improved as reflected in their increased profitability. Net profit to assets ratio
improved from 0.49 per cent in 2000-01 to 1.13 per cent in 2003-04. Although
it subsequently declined to 0.88 per cent in 2005-06, it was still significantly
higher than that in the early 1990s. Banks have been successful in weathering
the impact of upturn in interest rate cycle through increasing diversification of
their income. Though banks had to incur huge expenditures on upgradation of
information technology, the restructuring of the workforce in public sector
banks helped them cut down the staff cost and increase in business per
employee.
Another welcome development has been the sharp reduction in non-
performing loans (NPLs). Both gross and net NPLs started to decline in

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absolute terms since 2002-03. Gross NPLs as percentage of gross advances,
which were above 15 per cent in the early 1990s, are now less than 3 per cent.
This distinct improvement in asset quality may be attributed to the improved
recovery climate underpinned by strong macroeconomic performance as well
as several institutional measures initiated by the Reserve Bank/Government
such as debt recovery tribunals, Lok Adalats, scheme of corporate debt
restructuring in 2001, the SARFAESI Act in 2002.
Since 1995-96, the banking sector, on the whole, has been consistently
maintaining CRAR well above the minimum stipulated norm. The overall
CRAR for scheduled commercial banks increased from 8.7 per cent at end-
March 1996 to 12.3 per cent at end-March 2006. The number of banks not
complying with the minimum CRAR also declined from 13 at end-March 1996
to just two by end-March 2006. Improved capital position stemmed largely
from the improvement in profitability and raising of capital from the market,
though in the initial stages the Government had to provide funds to recapitalize
weak public sector banks.
Even though public sector banks continue to dominate the Indian
banking system, accounting for nearly three-fourths of total assets and income,
the increasing competition in the banking system has led to a falling share of
public sector banks, and increasing share of the new private sector banks,
which were set up around mid-1990s. It is clear that we are at the beginning of
this new phase in the Indian banking with competitive pressure, both domestic
and external, catching up and the need for banks to continuously reassess and
reposition themselves in their business plans.

Future Challenges for Indian Banks

A few broad challenges facing the Indian banks are: threats of risks from
globalization; implementation of Basel II; improvement of risk management
systems; implementation of new accounting standards; enhancement of
transparency and disclosures; enhancement of customer service; and
application of technology.

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• Globalization – a challenge as well as an opportunity— The waves of
globalization are sweeping across the world, and have thrown up several
opportunities accompanied by concomitant risks. Integration of domestic
market with international financial markets has been facilitated by
tremendous advancement in information and communications technology.
There is a growing realization that the ability of countries to conduct
business across national borders and the ability to cope with the possible
downside risks would depend, inter alia, on the soundness of the financial
system. This has necessitated convergence of prudential norms with
international best practices as well consistent refinement of the
technological and institutional framework in the financial sector through a
non-disruptive and consultative process.
• Opening up of the Capital Account— The Committee on Fuller Capital
Account Convertibility (Chairman: Shri S.S. Tarapore) observed that under
a full capital account convertibility regime, the banking system would be
exposed to greater market volatility, and this necessitated enhancing the risk
management capabilities in the banking system in view of liquidity risk,
interest rate risk, currency risk, counter-party risk and country risk that arise
from international capital flows. The potential dangers associated with the
proliferation of derivative instruments – credit derivatives and interest rate
derivatives also need to be recognized in the regulatory and supervisory
system. The issues relating to cross-border supervision of financial
intermediaries in the context of greater capital flows are just emerging and
need to be addressed.
• Basel II implementation— The Reserve Bank and the commercial banks
have been preparing to implement Basel II, and it has been decided to allow
banks some more time in adhering to new norms. As against the deadline of
March 31, 2007 for compliance with Basel II, it was decided in October
2006 that foreign banks operating in India and Indian banks having
presence outside India would migrate to the standardized approach for
credit risk and the basic indicator approach for operational risk under Basel
II with effect from March 31, 2008, while all other scheduled commercial

9
 banks are required to migrate to Basel II by March 31, 2009. It is widely
acknowledged that implementation of Basel II poses significant challenge to
both banks and the regulators. Basel II implementation may also be seen as
a compliance challenge. But at the same time, it offers two major
opportunities to banks, viz., refinement of risk management systems; and
improvement in capital efficiency. The transition from Basel I to Basel II
essentially involves a move from capital adequacy to capital efficiency.
This transition in how capital is used and how much capital is needed will
become a significant factor in return-on equity strategy for years to come.
The reliance on the market to assess the riskiness of banks would lead to
increased focus on transparency and market disclosure, critical information
describing the risk profile, capital structure and capital adequacy. Besides
making banks more accountable and responsive to better-informed
investors, these processes enable banks to strike the right balance between
risks and rewards and to improve the access to markets. Improvements in
market discipline also call for greater coordination between banks and
regulators.
• Improving Risk Management Systems— Basel II has brought into focus
the need for a more comprehensive risk management framework to deal
with various risks, including credit and market risk and their inter-linkages.
Banks in India are also moving from the individual silo system to an
enterprise-wide risk management system. While the first milestone would
be risk integration across the entity, the next step would entail risk
aggregation across the group both in the specific risk areas as also across
the risks. Banks would, therefore, be required to allocate significant
resources towards this endeavor. In India, the risk-based approach to
supervision is also serving as a catalyst to banks’ migration to the integrated
risk management systems. However, taking into account the diversity in the
Indian banking system, stabilizing the RBS as an effective supervisory
mechanism is another challenge.
• Corporate Governance— To a large extent, many risk management failures
reflect a breakdown in corporate governance which arise due to poor

10
 management of conflict of interest, inadequate understanding of key
banking risks, and poor Board oversight of the mechanisms for risk
management and internal audit. Corporate governance is, therefore, the
foundation for effective risk managements in banks and, thus, the
foundation for a sound financial system. Therefore, the choices which banks
make when they establish their risk management and corporate governance
systems have important ramifications for financial stability. Banks may
have to cultivate a good governance culture building in appropriate checks
and balances in their operations. There are four important forms of
oversight that should be included in the organizational structure of any bank
in order to ensure appropriate checks and balances:
(i) oversight by the board of directors or supervisory board;
(ii) oversight by individuals not involved in the day-to-day running of
the various business areas;
(iii) direct line supervision of different business areas; and
(iv) independent risk management, compliance and audit functions. In
addition, it is important that key personnel are fit and proper for their
jobs. Furthermore, the general principles of sound corporate
governance should also be applied to all banks, irrespective of their
unique ownership structures.
• Implementation of New Accounting Standards— Derivative activity in
banks has been increasing at a brisk pace. While the risk management
framework for derivative trading, which is a relatively new area for Indian
banks (particularly in the more structured products) is an essential pre-
requisite, the absence of clear accounting guidelines in this area is a matter
of significant concern. The World Bank’s ROSC on Accounting and
Auditing in India has commented on the absence of an accounting standard
which deals with recognition, measurement and disclosures pertaining to
financial instruments. The Accounting Standards Board of the Institute of
Chartered Accountants of India (ICAI) is considering issue of Accounting
Standards in respect of financial instruments. These will be the Indian
parallel to International Accounting Standards 32 and 39. The proposed

11
 Accounting Standards will be of considerable significance for financial
entities and could, therefore, have implications for the financial sector. The
formal introduction of these Accounting Standards by the ICAI is likely to
take some time in view of the processes involved. In the meanwhile, the
Reserve Bank is considering the need for banks and financial entities
adopting the broad underlying principles of IAS 39. Since this is likely to
give rise to some regulatory/prudential issues, all relevant aspects are being
comprehensively examined. The proposals in this regard would, as is
normal, be discussed with the market participants before introduction.
Adoption and implementation of these principles are likely to pose a great
challenge to both the banks and the Reserve Bank.
• Supervision of financial conglomerates— The financial landscape is
increasingly witnessing entry of some of the bigger banks into other
financial segments like merchant banking, insurance etc. Emergence of
several new players with diversified presence across major segments makes
it imperative for supervision to be spread across various segments of the
financial sector. In this direction, an inter-regulatory Working Group was
constituted with members from RBI, SEBI and IRDA. The framework
proposed by the Group is complementary to the existing regulatory
structure wherein the individual entities are regulated by the respective
regulators and the identified financial conglomerates are subjected to
focused regulatory oversight through a mechanism of inter-regulatory
exchange of information. As a first step in this direction, an inter-agency
Working Group on Financial Conglomerates (FC) comprising the above
three supervisory bodies identified 23 FCs and a pilot process for obtaining
information from these conglomerates has been initiated. The complexities
involved in the supervision of financial conglomerates are a challenge not
only to the Reserve Bank of India but also to the other regulatory agencies,
which need to have a close and continued coordination on an on-going
basis. In view of increased focus on empowering supervisors to undertake
consolidated supervision of bank groups and since the Core Principles for
Effective Banking Supervision issued by the Basel Committee on Banking

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 Supervision have underscored consolidated supervision as an independent
principle, the Reserve Bank had introduced, as an initial step, consolidated
accounting and other quantitative methods to facilitate consolidated
supervision. The components of consolidated supervision include,
consolidated financial statements intended for public disclosure,
consolidated prudential reports intended for supervisory assessment of risks
and application of certain prudential regulations on group basis. In due
course, consolidated supervision as introduced above would evolve to cover
banks in mixed conglomerates, where the parent may be non-financial
entities or parents may be financial entities coming under the jurisdiction of
other regulators.
• Application of Advanced Technology— The role of technology in banking
in creating new business models and processes, in maintaining competitive
advantage, in enhancing quality of risk management systems in banks, and
in revolutionizing distribution channels, cannot be overemphasized.
Recognizing the benefits of modernizing their technology infrastructure,
banks are taking the right initiatives. While doing so, banks have four
options to choose from: they can build a new system themselves, or buy
best of the modules, or buy a comprehensive solution, or outsource. A
further challenge which banks face in this regard is to ensure that they
derive maximum advantage from their investments in technology and avoid
wasteful expenditure which might arise on account of uncoordinated and
piecemeal adoption of technology; adoption of inappropriate/ inconsistent
technology and adoption of obsolete technology. A case in point is the
implementation of core banking solution by some banks without assessing
its scalability or adaptability to meet Basel II requirements.
• Financial Inclusion— While banks are focusing on the methodologies of
meeting the increasing demands placed on them, there are legitimate
concerns with regard to the banking practices that tend to exclude rather
than attract vast sections of population, in particular pensioners, self-
employed and those employed in unorganized sector. While commercial
considerations are no doubt important, banks have been bestowed with

13
 several privileges, especially of seeking public deposits on a highly
leveraged basis, and consequently they should be obliged to provide
banking services to all segments of the population, on equitable basis.
Further, experience has shown that consumers’ interests are at times not
accorded full protection and their grievances are not properly attended to.
Feedback received reveals recent trends of levying unreasonably high
service/user charges and enhancement of user charges without proper and
prior intimation. It is in this context that the Governor, Reserve Bank of
India had mentioned in the Annual Policy Statement 2005-06 that RBI will
take initiatives to encourage greater degree of financial inclusion in the
country; setting up of a mechanism for ensuring fair treatment of
consumers; and effective redressal of customer grievances.
With the increasing levels of globalization of the Indian banking industry,
evolution of universal banks and bundling of financial services, competition in
the banking industry will intensify further. The banking industry has the
potential and the ability to rise to the occasion as demonstrated by the rapid
pace of automation which has already had a profound impact on raising the
standard of banking services. The financial strength of individual banks, which
are major participants in the financial system, is the first line of defense against
financial risks. Strong capital positions and balance sheets place banks in a
better position to deal with and absorb the economic shocks.

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 REVIEW OF LITERATURE AND PROBLEM
STATEMENT

Basel II accord is already put in vogue for implementation by March 2007. The
accord stands on three pillars: (a) Risk Management (b) Supervisory Function
(c) Discipline. The supervisory strategy in India at present comprises both off-
site surveillance and on-site inspections and control system internal to banks. A
detailed off-site surveillance system based on ‘prudential’ supervisory
reporting framework on a quarterly basis covering capital adequacy, asset
quality, loan concentration, operational results and connected lending has been
made operational. This is combined with a verification of prudent practices and
financial condition of banks through on-site examination. The approach to on-
site inspection of banks in accordance with the recommendations of the
Padmanabhan Working Group (1995) has been adopted from the cycle of
inspections commencing July 1997. It focuses on the mandated aspects of

15
solvency, liquidity, financial and operational health, based on a modified
version of the CAMEL model viz., CAMELS, which evaluate banks’ Capital
Adequacy, Assets Quality, Management Efficiency, Earnings, Liquidity and
Systems and Control, shedding the audit elements under the existing inspection
system.

Padmanabhan Working Group (1995), on On-Site Supervision in its

report recommended for supervisory interventions and introduction of a rating
methodology for banks on the lines of CAMEL model with appropriate
modification to suit Indian conditions. The Working Group has recommended
six rating factors namely Capital Adequacy, Assets, Quality, Management,
Earnings, Liquidity, Systems and Control (i.e. CAMELS) and for Foreign
Banks four rating factors namely Capital Adequacy, Assets Quality,
Compliance, Systems and control (i.e. CACS). Narasimham Committee (1998)
made several important recommendations like introduction of internationally
accepted prudential norms relating to income recognition, asset classification,
provisioning and capital adequacy. Accordingly, a framework for the
evaluation of the current strength of the system and of the operations and
performance of banks has been provided by Reserve Bank’s measuring rod of
“CAMELS” which stands for Capital Adequacy, Assets Quality, Management,
Earnings, Liquidity and Systems & Control.

The main endeavor of CAMEL system is to detect problems before they

manifest themselves. RBI has instituted this mechanism for critical analysis of
the balance sheet of banks themselves and presentation of such analysis before
their boards to provide an internal assessment of the health of the bank. The
analysis, which is made available to RBI, forms a supplement to the system of
off-site monitoring of banks. An efficient result-oriented on-site inspection
system requires an efficient follow-up. The entire cycle of inspection and
follow-up action are now completed within a maximum period of twelve
months. Monitorable action plan for rectification of irregularities/deficiencies
noticed during the inspection within a tine frame is drawn up and progress in
implementation pursued with the concerned bank.

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 Thus the present supervisory system in banking sector is a substantial
improvement over the earlier system in terms of frequency, coverage and focus
as also the tools employed. Nearly one-half of the Basel Core Principles for
effective banking supervision has already been adhered to and the remaining is
at a stage of implementation. Two Supervisory Rating Models based on
CAMELS(Capital Adequacy, Assets Quality, Management, Earnings,
Liquidity and Internal Control Systems) and CACS (Capital Adequacy, Assets
Quality, Compliance and Systems)factors for rating on Indian commercial
banks and Foreign banks operating in India respectively, have been worked out
on the lines recommended by the Padmanabhan Working Group (1995). These
ratings would enable the Reserve Bank to identify the banks whose condition
warrants special supervisory attention.

To build a conceptual framework for the application of CAMEL Model

we may draw on the following literature:

Barr and Siems (1996) tried to predict bank failures in US, using the data from
December 1984 to June 1987 using CAMEL Model. They used technical
efficiency measure using DEA in their prediction model. Along with their DEA
results, which represent Management Quality ‘M’ in the CAMEL Rating, they
used financial ratios representing soundness of Capital, Assets Quality,
Earnings and Liquidity. They found that using the DEA Efficiency Score in the
regression increased the accuracy of the classification results 89% to 92.4%
and the new model was superior to the earlier early-warning models.

Godse (1996) examined the application of the new Model CAMELS i.e.
“Capital Adequacy, Assets Quality, Management, Earnings, Liquidity and
Systems and Control” for evaluating the performance of banks.

Rao and Datta (1998) made an attempt to derive rating based on CAMEL. In
their study, based on these five groups (C-A-M-E-L), in all 21 parameters were
developed. After deriving separate rating for each parameter a combined rating
was derived for all nationalized banks (19) for the year 1998. The study found
that Corporation Bank has the best rating followed by Oriental Bank of

17
Commerce, Bank of Baroda, Dena Bank and Punjab National Bank etc. And
the worst rating was found to be of Indian Bank preceded by UCO Bank,
United Bank of India, Syndicate Bank and Vijaya Bank.

Prasuna (2004) analyzed the performance of Indian banks by adopting

CAMEL Model. The performance of 65 banks was studied for the period 2003-
04. The author concluded that the competition is tough and consumers are
benefited from it. Better services quality, innovative products, better bargains
are all greeting the Indian customers. The coming fiscal will prove to be a
transition phase for Indian banks, as they will have to align their strategic focus
to increasing interest rates.

Veni (2004) studied the Capital Adequacy requirement of banks and the
measures adopted by them to strengthen their capital ratios. The author
highlighted that the rating agencies give prominence to Capital Adequacy
Ratios of banks while rating the banks’ certificate of deposits, fixed deposits
and bonds. They normally adopt CAMEL Model for rating banks. Thus Capital
Adequacy is considered as key element of bank rating.

Satish, Jutur and Surender (2005) adopted CAMEL model to assess the
performance of Indian banks. The authors analyzed the performance of 55
banks for the year 2004-05 by using CAMEL Model. They concluded that the
Indian banking system looks sound and Information Technology will help the
banking system grow in strength going into future. Banks’ Initial Public Offer
will be hitting the market to increase their capital and gearing up for the Basel
II norms.

On making review of the previously conducted studies, it is clear that

they used CAMEL Model for ranking/rating of the banks on the basis of their
financial performance. In the light of above, the present Project Report entitled
“Analysis of Financial Performance of Banks through CAMEL Model: A
Case Study of J & K Bank, ICICI Bank, HDFC Bank and YES Bank” has
been conducted.

18
 RESEARCH METHODOLOGY

OBJECTIVES OF THE STUDY

Main objectives

• To analyze and evaluate the financial performance of banks by using the

parameters of CAMEL Model.
• To compare and rank the banks on the basis of the CAMEL’s
parameters.

Specific objective

• To review the relevant research and literature on the subject.

SCOPE AND LIMITATIONS OF THE STUDY

• The scope of this study shall be restricted to the selected Private

Commercial Banks (i.e. J & K Bank, ICICI Bank, HDFC Bank, YES
Bank) operating in the valley for the sake of data accessibility and
convenience.

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 • The study shall be restricted to a time horizon of five years only i.e.
from 2004-05 to 2008-09.

METHODOLOGY ADOPTED

The analysis of financial performance of banks’ has been judged on the

basis of CAMEL Model suggested by RBI and BASEL for all banks for the
purpose of analysis of their financial performance.

In 1994, the RBI established the Board of Financial Supervision (BFS),

which operates as a unit of the RBI. The entire supervisory mechanism was
realigned to suit the changing needs of a strong and stable financial system.
The supervisory jurisdiction of the BFS was slowly extended to the entire
financial system barring the capital market institutions and the insurance sector.
Its mandate is to strengthen supervision of the financial system by integrating
oversight of the activities of financial services firms. The BFS has also
established a sub-committee to routinely examine auditing practices, quality,
and coverage.

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

conducts off-site surveillance which particularly focuses on the risk profile of
the supervised entity. The Off-site Monitoring and Surveillance System
(OSMOS) were introduced in 1995 as an additional tool for supervision of
commercial banks. It was introduced with the aim to supplement the on-site
inspections. Under off-site system, 12 returns (called DSB returns) are called
from the financial institutions, which focus on supervisory concerns such as
capital adequacy, asset quality, large credits and concentrations, connected
lending, earnings and risk exposures (viz. currency, liquidity and interest rate
risks).

In 1995, RBI had set up a working group under the chairmanship of Shri
S. Padmanabhan to review the banking supervision system. The Committee
made certain recommendations and based on such suggestions a rating system
for domestic and foreign banks based on the international CAMEL model
combining financial management and systems and control elements was
introduced for the inspection cycle commencing from July 1998. It

20
recommended that the banks should be rated based on the lines of international
CAMEL rating model. CAMEL evaluates banks on the basis of following
parameters:

1. Capital Adequacy: Capital Adequacy is important for a bank to maintain

depositors’ confidence and preventing the bank from going bankrupt.
Capital is seen as a cushion to protect depositors and promote the stability
and efficiency of financial system around the world. Capital Adequacy
reflects the overall financial condition of the banks and also the ability of
the management to meet the need for additional capital it also indicates
whether the bank has enough capital to absorb unexpected losses. Capital
Adequacy ratios act as indicators of banks’ leverage. Higher CRAR reveals
lower Credit Risk of the banks. If the banks have more risky assets on its
portfolio, the capital will be lower implying greater Credit Risk Exposure.
The ratios suggested to measure Capital Adequacy under CAMEL Model
are:
• Capital Adequacy Ratio (CRAR): Capital adequacy is measured by the
ratio of capital to risk-weighted assets (CRAR). A sound capital base
strengthens confidence of depositors and prevents the bank from going
bankrupt. The banks are required to maintain the Capital Adequacy
Ratio (CRAR) as specified by RBI from time to time. As per the latest
RBI norms, the banks in India should have a CRAR of 9% that is
arrived at by dividing the sum of Tier-I, Tier-II &Tier-III capital by
aggregate of Risk Weighted Assets (RWA). Symbolically:

CRAR = (Tier-I + Tier-II + Tier-III)/RWA

Tier-I Capital includes equity capital and free reserves.

Tier-II Capital comprises of subordinate debt of 5-7 years tenure,

revaluation reserves, general provisions and loss reserves, hybrid debt
capital instruments and undisclosed reserves and cumulative perpetual
preference shares.

Tier-III Capital comprises of short-term subordinate debt.

21
 The higher the CRAR, the stronger the bank, as it ensures high safety
against bankruptcy.

• Debt-Equity Ratio: This ratio indicates the degree of leverage of a bank.

It indicates how much of the bank business is financed through debt and
how much is financed through equity. It is arrived by dividing total
borrowing and shareholders net worth which includes equity capital and
Reserves & Surplus.
It indicates how much times are debt to equity. Higher ratio indicates
less protection for the creditors and depositors of the bank. This ratio is
calculated as:
D.E.R = Total Debt/Equity
• Advances to Assets Ratio: This ratio shows the aggressiveness of bank
in lending funds which ultimately results in better profitability. This
ratio is arrived at by dividing Advances by Assets. It indicates how
much proportion or percentage of Total Assets is utilized in the form of
Advances. Higher ratio means that there are more advances as the
proportion of total assets. Advancing being the core function of banks so
higher ratio of Advances/Assets is preferred to a lower one. This ratio is
calculated as:
Advances to Assets Ratio = Advances/Assets
• Government Securities to Total Investments: The percentage of
investment in Government Securities is a very important indicator which
shows the risk taking ability of a bank. It indicates a bank’s strategy as
being High Profit-High Risk or Low Profit-Low Risk. It also gives view
as to the availability of alternative investment opportunities.
Government securities are generally considered as the most safe debt
instrument, which as a result carries the lowest return. Since
Government securities are risk free, the higher the Government
Securities to Total Investments ratio, the lower the risk involved in a
bank’s investments. This ratio is calculated as:

Govt. Securities to Total Inv. Ratio = Inv. in Govt. Securities/Total Inv

22
1. Assets Quality: Asset Quality is one of the most critical areas in
determining the overall condition of the bank. The primary factor effecting
overall Asset Quality is the quality of the loan portfolio and the credit
administration program. Loans are usually the largest of the asset items and
can also carry the greatest amount of potential risk to the bank’s capital
account. Securities can often be a large portion of the assets and also have
identifiable risks. Other items which impact a comprehensive review of
asset quality are other real estate, other assets, off-balance sheet items and
to a lesser extent, cash and due from accounts, and premises and fixed
assets. The Asset Quality rating reflects the quantity of existing and
potential credit risk associated with the loan and investment portfolios,
other estate owned, and other assets, as well as off-balance sheet
transactions. The ability of management to identify, measure, monitor and
control credit risk is also reflected here. The quality of assets is an
important parameter to gauge the strength of the bank. The main motto
behind measuring the Asset Quality is to ascertain the component of Non-
Performing Assets (NPA) as a percentage of Total Assets. These NPAs
should be considered against not just Total Assets but also against the
Advances because NPAs primarily arise from Advances. This indicates
what type of Advances the bank has made to generate interest income.
Thus, Asset Quality indicates the type of the debtors of the bank. The ratios
suggested to measure Assets Quality under CAMEL Model are:
• Gross NPAs to Gross Advances:
• Gross NPAs to Net Advances:
• Net NPAs to Net Advances: This ratio is the most standard measure of
Assets Quality. This ratio measures Net NPAs as a percentage of Net
Advances. Net NPAs are Gross NPAs net of provisions on NPAs and
interest in suspense account.
• Total Investments to Total Assets: This ratio indicates the
aggressiveness of banks in investing rather than lending. It is the ratio of
Total Investments to Total Assets. It highlights alternative avenues for
parking funds. Higher ratio means lack of credit take-off in economy

23
 and much proportion of total assets is invested in investments that
should not be the case with banks because the primary business of the
banks is to lend. This ratio indicates how much proportion or percentage
of total assets is in the form of investments.

Total Inv. to Total Assets Ratio = Total Investments/Total Assets

• Net NPAs to Total Assets: This ratio indicates the efficiency of the bank
in assessing credit risk and to an extent recovering the debts. This ratio
is arrived at by dividing the Net NPAs by Total Assets. Net NPAs are
calculated by adjusting provisions against Gross NPAs. Lower ratio
indicates the better performance of banks.
1. Management Efficiency: Management Efficiency is another important
parameter of the CAMEL Model. The ratios in this segment involve
subjective analysis to measure the efficiency and effectiveness of
management. The management of the bank takes crucial decisions
depending on its risk perception. It sets vision & goals for the organization
and sees that it achieves them. This parameter is used to evaluate
management efficiency so as to assign premium to better quality banks and
discount poorly managed ones. The ratios suggested to measure
Management Efficiency under CAMEL Model are:
• Total Advances to Total Deposits Ratio: This ratio measures the
efficiency and effectiveness of the management in converting the
available deposits with the bank into advances (excluding other funds
like equity capital, etc) Total Deposits include Saving Deposits, Term
Deposits, Demand Deposits and deposits of other banks. Total Advances
also include the receivables. This ratio should be higher because the core
business of the banks is to convert deposits into advances and
investments (secondary).

Advances to Total Deposits Ratio = Total Advances/Total Deposits

• Business per Employee: This ratio shows the productivity and

efficiency of human resources of the bank. It is used as a tool to measure
the efficiency of all the employees of bank in generating business for the
24
 bank. It is arrived at by dividing the total business by total number of
employees. Higher ratio indicates the better performance and vice-versa.
By business we mean the sum of Total Deposits and Total Advances in
particular year.
• Profit per Employee: This ratio shows the surplus earned per employee.
It is arrived at by dividing the Profit after Tax (PAT) earned by the bank
by Total number of employees. Higher ratio indicates efficient,
competent and proficient management.
Profit per Employee = Profit after Tax/Total number of Employees
1. Earning Quality & Profitability: The quality of earnings is very important
criterion which determines the ability of a bank to earn consistently. It
basically determines the profitability of the banks. It also explains the
sustainability and growth in earnings in the future. This parameter has
gained importance in the light of the argument that much of a bank’s
income is earned through activities like investments, treasury operations,
corporate advisory services and so on. The ratios suggested to measure
Earnings and Profitability under CAMEL Model are:
• Spread to Total Assets:
• Net Profit to Total Assets:
• Interest Income to Total Income: Interest Income is a basic source
of revenue for banks. The Interest Income to Total Income Ratio
indicates the ability of the bank in generating income from its
lending. In other words, this ratio measures the income from lending
operations as a percentage of the total income generated by bank in a
year. Interest Income includes Interest on Advances, Discount on
Bills, Income from Investments, Interest on Deposits with RBI and
Other Inter-Bank Funds.

Interest Income to Total Income = Interest Income/Total Income

• Non-Interest Income to Total Income: This ratio measures the

income from operations other than lending as a percentage of Total
Income. Non-Interest Income is the Income earned by the banks

25
 excluding income on advances and deposits with RBI. Non-Interest
Income includes Commission, Exchange, Brokerage, Profit on
Redemption & Sale of Investment (Less loss on Investments), Profit
on Sale of Land, Buildings & Other Assets, Profit on Exchange
Transactions (Less Loss on Exchange Transactions), Income earned
by way of Dividends etc. from Subsidiaries, Companies and/or Joint
Ventures abroad/in India and Miscellaneous Income.

Non- Interest Income to Total Income = Non-Interest Income/Total Income

• Earnings per Share: This ratio measures the profitability of the firm
on per Equity Share basis. This ratio measures the earnings available
to an equity shareholder on a per share basis.
• Return on Assets: The Return on Assets of a company determines its
ability to utilize the Assets employed in the company efficiently and
effectively to earn a good return. This ratio measures the percentage
of profits earned per rupee of Assets and thus is a measure of
efficiency of the company in generating profits on its Assets. Higher
ratio will indicate efficiency of management in employing its funds
efficiently and economically. It is calculated as:
ROA = Net Profit / Total Assets
• Profit Margin Ratio: The profit margin of a company determines its
ability to withstand competition and adverse conditions like rising
costs, falling prices or declining sales in future. This ratio measures
the percentage of net profit to total income and thus is a measure of
efficiency of the company.
PMR = Net Profit / Total Income
• Burden to Total Income:
1. Liquidity: Liquidity is very important for any organization dealing with
money. But it is also noteworthy that Liquid Assets earn less return. Banks
have to take proper care in hedging liquidity risk while at the same time
ensure that a good percentage of funds are invested in higher return
generating investments, so that banks can generate profits while at the same

26
time provide liquidity to the depositors. So there must be a proper balance
between liquidity and profitability. Among assets cash investments are most
liquid of a bank’s assets. In general, banks with a larger volume of liquid
assets are perceived safe, since these assets would allow banks to meet
unexpected withdrawals. The ratios suggested to measure Liquidity under
CAMEL Model are:
• Liquid Assets to Total Assets: This ratio measures the percentage of
Total Assets kept in the form of Liquid Assets. Liquid Assets include
Cash-in-hand, Balance with Reserve Bank of India, Balance with
banks in India and abroad and Money at call and Short Notice. Total
Assets comprise of all Assets held by the bank. It is well known that
Liquidity reduces Profitability. Liquid Assets are able to earn less
return or some part of it earns no return which will condense the
overall profitability of the bank. Banks should try to keep the liquid
assets not more than the requirements and try to invest more and
more to heighten the profitability of the bank. This ratio is calculated
as:
Liquid Assets to Total Assets = Liquid Assets / Total Assets
• Government Securities to Total Assets:
• Liquid Assets to Demand Deposits:
• Liquid Assets to Total Deposits: This ratio shows the ability of a
bank to honor its obligations efficiently, effectively and
economically. This ratio measures the liquidity available to a bank.
Liquid Assets include Cash-in-hand, Balance with Reserve Bank of
India, Balance with banks in India and abroad and Money at call and
Short Notice. Total Deposits include Saving Deposits, Term
Deposits, Demand Deposits and deposits of other banks. This ratio is
calculated as:
Liquid Assets to Total Deposits = Liquid Assets/ Total Deposits
It tells us how much percentage of Demand Deposits is kept in the
form of Liquid Assets. But it is also true that there is an inverse
relation between Liquidity and Profitability. In other words, more

27
 liquidity will reduce the profitability because Liquid Assets are not
able to earn more return.

BRIEF PROFILE OF BANKS UNDER STUDY

THE JAMMU AND KASHMIR BANK

28
 The origin of Jammu and Kashmir Bank Limited, more commonly
referred to as J&K Bank, can be traced back to the year 1938, when it was
established as the first state-owned bank in India. The bank was incorporated
on 1st October 1938 and it was in the following year (more precisely on 4th
July 1939) that it commenced its business, in Kashmir (India). It was initially
set up as a semi-State Bank, with its capital being contributed by State as well
as the public under the control of State Government.
Jammu and Kashmir Bank had to face serious problems in 1947 i.e. at
the time of independence. With the partition of India into India and Pakistan,
two out of the total ten branches of the bank, namely the ones in Muzaffarabad
and Mirpur, fell to the other side of the line of control (now Pak Occupied
Kashmir), along with cash and other assets. At that point of time, in keeping
with the extended Central laws of the state, J&K Bank was categorized as a
Government Company, as per the provisions of Indian Companies Act 1956.
It was in the year 1971 that Jammu and Kashmir Bank was granted the
status of a 'Scheduled Bank'. Five years later, it was declared as "A" Class
Bank, by the Reserve Bank of India (RBI). As the years passed on, the bank
started achieving more and more success. Today, it boasts of more than 500
branches across the country. It was only recently that Jammu and Kashmir
Bank became a 10 billion dollar company. Governed by the Companies Act
and Banking Regulation Act of India, it is regulated by RBI and SEBI. It finds
a listing on the National Stock Exchange (NSE) and Bombay Stock Exchange
(BSE) as well. It has a track record of uninterrupted profits and dividends for
four decades. The J&K Bank is rated P1+, indicating the highest degree of
safety by Standard & Poor and CRISIL.
Jammu & Kashmir Bank is the only Bank in the country with majority
ownership vested with a state government – the Government of Jammu &
Kashmir. It is the sole banker to the Government of Jammu & Kashmir.
J&K Bank functions as a universal bank in Jammu & Kashmir and as a
specialized bank in the rest of the country. It is also the only private sector bank
designated as RBI’s agent for banking business, and carries out the banking
business of the Central Government, besides collecting central taxes for CBDT.

29
 J&K Bank follows a two-legged business model whereby it seeks to
increase lending in its home state which results in higher margins despite
modest volumes, and at the same time, seeks to capture niche lending
opportunities on a pan-India basis to build volumes and improve margins.
J&K Bank operates on the principle of ‘socially empowering banking’
and seeks to deliver innovative financial solutions for household, small and
medium enterprises.
Unique Characteristics & Services
• J&K Bank carries out banking business of the Central Government
• Inspite of a government equity holding of 53 per cent, Jammu &
Kashmir Bank (J&K Bank) is regarded as a private sector bank.
• J&K Bank is the one and only banker and lender of last resort to the
Government of J&K
• Plan and non-plan funds, taxes and non-tax revenues are routed through
the J&K Bank
• J&K Bank claims the distinction of being the only private sector bank
that has been designated as agent of RBI for banking.
• The services of J&K Bank are utilized for the purposes of disbursing the
salaries of Government officials
• J&K Bank collects taxes pertaining to Central Board of Direct Taxes, in
Jammu & Kashmir.
Products & Services
Support Services
• Anywhere Banking
• Internet Banking
• SMS Banking
• ATM Services
• Debit Cards
• Credit Cards
• Merchant Acquiring
Depository Services
• Demat Account

30
 • Other Services
Third Party Services
• Mutual Funds
• Insurance Services - Life & Non Life
• Remittance Services
Cash Management Services
• Real Time Gross Settlement (RTGS)
• National Electronic Fund Transfer (NEFT)

ICICI BANK
ICICI Bank was started as a wholly owned subsidiary of ICICI Limited,
an Indian financial institution, in 1994. Four years later, when the company
offered ICICI Bank's shares to the public, ICICI's shareholding was reduced to
46%. In the year 2000, ICICI Bank offered made an equity offering in the form
of ADRs on the New York Stock Exchange (NYSE), thereby becoming the
first Indian company and the first bank or financial institution from non-Japan
Asia to be listed on the NYSE. In the next year, it acquired the Bank of Madura

31
Limited in an all-stock amalgamation. Later in the year and the next fiscal year,
the bank made secondary market sales to institutional investors.
With a change in the corporate structure and the budding competition in
the Indian Banking industry, the management of both ICICI and ICICI Bank
were of the opinion that a merger between the two entities would prove to be an
essential step. It was in 2001 that the Boards of Directors of ICICI and ICICI
Bank sanctioned the amalgamation of ICICI and two of its wholly-owned retail
finance subsidiaries, ICICI Personal Financial Services Limited and ICICI
Capital Services Limited, with ICICI Bank. In the following year, the merger
was approved by its shareholders, the High Court of Gujarat at Ahmedabad as
well as the High Court of Judicature at Mumbai and the Reserve Bank of India.
ICICI Bank has its equity shares listed in India on Bombay Stock
Exchange and the National Stock Exchange of India Limited. Overseas, its
American Depositary Receipts (ADRs) are listed on the New York Stock
Exchange (NYSE). ICICI Bank has a wide network both in India and abroad.
The Bank has a network of 2,009 branches and about 5,219 ATMs in India.
ICICI Bank has made its presence felt in 18 countries, United States,
Singapore, Bahrain, and Hong Kong, Sri Lanka, Qatar and Dubai International
Finance Centre and representative offices in United Arab Emirates, China,
South Africa, Bangladesh, Thailand, Malaysia and Indonesia. The Bank
proudly holds its subsidiaries in the United Kingdom, Russia and Canada out of
which, the UK subsidiary has established branches in Belgium and Germany.
The bank is rated AAA by Credit Analysis & Research Limited
(CARE), CRISIL Limited and Investment Information and Credit Rating
Agency (ICRA). Japan Credit Rating Agency (JCRA) BBB+1. The Bank
received several awards during fiscal 2009, including the “Excellence in
Business Model Innovation” by Asian Banker, “Best Bank in SME financing
(Private Sector)” by Dun & Bradstreet, “Best Transaction Bank in India “by
Triple A, “Best Trade Finance Bank in India” by Triple A, “Best Cash
Management Bank in India” by Triple A, “Best Domestic Custodian in India”
by Triple A, “Best Cash Management Bank in India” by Triple A, “Rural

32
Marketing programme of the year,” award by WOW Event & Experiential
Marketing Award.
Unique Characteristics & Services
• ICICI Bank is committed to expanding delivery of financial services in
India’s hinterland, enabling our villages to participate in our nation’s
progress.
• Through access to credit, ICICI Bank strives to fulfill the housing
dreams of our nation’s prospering populace.
• ICICI Bank leverages information technology as a strategic tool to gain
competitive advantage and to improve productivity and efficiency of the
organisation.
• ICICI Bank has established a tradition of best practices in corporate
governance.
• ICICI Bank has formulated a Whistle Blower Policy for the ICICI
Group. In terms of this policy, employees of ICICI Bank and its group
companies are free to raise issues, if any, on breach of any law, statute
or regulation by the Bank and on the accounting policies and procedures
adopted for any area or item and report them to the Audit Committee
through specified channels.
• The Board of Directors has approved a Group Code of Business
Conduct and Ethics for Directors and employees of the ICICI Group.
The Code aims at ensuring consistent standards of conduct and ethical
business practices across the constituents of the ICICI Group.
• ICICI Bank has always viewed Corporate Social Responsibility (CSR)
as integral to its core mission of delivering value to its stakeholders.
Products & Services
Personal Banking
• Deposits
• Salary Accounts
• Savings Accounts
• Current Accounts
• Fixed Deposits

33
 • Loans

• Credit Cards

• Debit Cards

• Prepaid Cards

• Forex Services

• Payment Services

• NetBanking

• InstaAlerts

• MobileBanking

• InstaQuery

• ATM

• PhoneBanking

• Investments & Insurance

• Demat Services
• Wealth Management
NRI Banking
• Money Transfer
• Bank Accounts
• Investments
• Property Solutions
• Insurance
• Loans
Rural Banking
Depository Services
• Demat Account
• Other Services
Third Party Services
• Mutual Funds
• Insurance Services - Life & Non Life

34
 • Remittance Services
Cash Management Services
• Real Time Gross Settlement (RTGS)
• National Electronic Fund Transfer (NEFT)

HDFC BANK

Housing Development Finance Corporation Limited, more popularly known as

HDFC Bank Ltd, was established in the year 1994, as a part of the
liberalization of the Indian Banking Industry by Reserve Bank of India (RBI).
It was one of the first banks to receive an 'in principle' approval from RBI, for
setting up a bank in the private sector. The bank was incorporated with the
name 'HDFC Bank Limited', with its registered office in Mumbai. HDFC Bank
commenced operations as a Scheduled Commercial Bank in January 1995.
HDFC Bank was incorporated in August 1994, and, currently has a nationwide
network of 1,725 Branches and 4,232 ATM's in 779 Indian towns and cities.

35
 In 2002, HDFC Bank witnessed its merger with Times Bank Limited (a
private sector bank promoted by Bennett, Coleman & Co. / Times Group).
With this, HDFC and Times became the first two private banks in the New
Generation Private Sector Banks to have gone through a merger. In 2008, RBI
approved the amalgamation of Centurion Bank of Punjab with HDFC Bank.
With this, the Deposits of the merged entity became Rs. 1,22,000 crore, while
the Advances were Rs. 89,000 crore and Balance Sheet size was Rs. 1,63,000
crore.

HDFC Bank has always prided itself on a highly automated

environment, be it in terms of information technology or communication
systems. All the braches of the bank boast of online connectivity with the other,
ensuring speedy funds transfer for the clients. At the same time, the bank's
branch network and Automated Teller Machines (ATMs) allow multi-branch
access to retail clients. The bank makes use of its up-to-date technology, along
with market position and expertise, to create a competitive advantage and build
market share.

At present, HDFC Bank boasts of an authorized capital of Rs 550 crore

(Rs5.5 billion), of this the paid-up amount is Rs 424.6 crore (Rs.4.2 billion). In
terms of equity share, the HDFC Group holds 19.4%. Foreign Institutional
Investors (FIIs) have around 28% of the equity and about 17.6% is held by the
ADS Depository (in respect of the bank's American Depository Shares (ADS)
Issue). The bank has about 570,000 shareholders. Its shares find a listing on the
Stock Exchange, Mumbai and National Stock Exchange, while its American
Depository Shares are listed on the New York Stock Exchange (NYSE), under
the symbol 'HDB'.

The Bank has its deposit programs rated by two rating agencies – Credit
Analysis & Research Limited (CARE) and Fitch Ratings India Private Limited.
The Bank’s Fixed Deposit programme has been rated ‘CARE AAA (FD)’
[Triple A] by CARE, which represents instruments considered to be “of the
best quality, carrying negligible investment risk”. CARE has also rated the
bank’s Certificate of Deposit (CD) programme “PR 1+” which represents

36
“superior capacity for repayment of short term promissory obligations”. Fitch
Ratings India Pvt. Ltd. (100% subsidiary of Fitch Inc.) has assigned the “tAAA
( ind )” rating to the Bank’s deposit programme, with the outlook on the rating
as “stable”. This rating indicates “highest credit quality” where “protection
factors are very high”. The Bank also has its long term unsecured, subordinated
(Tier II) Bonds rated by CARE and Fitch Ratings India Private Limited and its
Tier I perpetual Bonds and Upper Tier II Bonds rated by CARE and CRISIL
Ltd. CARE has assigned the rating of “CARE AAA” for the subordinated Tier
II Bonds while Fitch Ratings India Pvt. Ltd. has assigned the rating
“AAA(ind)” with the outlook on the rating as “stable”. CARE has also
assigned “CARE AAA [Triple A] for the Banks Perpetual bond and Upper Tier
II bond issues. CRISIL has assigned the rating “AAA/Stable” for the Bank’s
perpetual Debt programme and Upper Tier II Bond issue. In each of the cases
referred to above, the ratings awarded were the highest assigned by the rating
agency for those instruments.

The Bank has received awards and gained recognition from leading
domestic and international organizations during the fiscal 2008-09. Some of
them are Euromoney Annual Survey: The Best local Bank (also ranked 1st in
Relationship Management and 2nd in private banking services overall),
Business India: Best Bank 2008, Forbes Asia: One of the Fab 50 Companies in
Asia Pacific, Nasscom IT User Award 2008: Best IT Adoption in the Banking
Sector, Asian Banker Excellence in Retail Financial Services: Best Retail Bank
2008, Asiamoney: Best Local Cash Management Bank Award, Microsoft &
Indian Express Group: Security Strategist Award 2008, World Trade Center
Award of Honour.

Unique Characteristics & Services

• The Bank has adopted the Whistle Blower Policy pursuant to which
employees of the Bank can raise their concerns relating to the fraud,
malpractice or any other activity or event which is against the interest of
the Bank or society as a whole.

37
 • The Bank believes in adopting and adhering to the best recognised
corporate governance practices and continuously benchmarking itself
against each such practice.
• As its operations have grown, the bank has retained its focus on various
areas of corporate sustainability that impact the socio-economic
ecosystem that bank is part of. HDFC Bank’s focus in the area of
corporate sustainability includes social sustainability & social welfare
and financial inclusion.
• All the Directors and senior management personnel have affirmed
compliance with the Code of Conduct / Ethics as approved and adopted
by the Board of Directors.
• The Bank is committed to making a positive impact across the local
communities it is present in and the society at large. The bank has
initiated a number of programs to encourage economic, social and
educational development within the communities that it operates; while
at the same time contributing to several grass root level development
programs across these geographies.
• Under its health care project, the bank has provided financial assistance
to a number of villages for the construction of basic sanitation facilities.
• HDFC Bank lists 'people’ as one of its stated values. The Bank believes
in empowering its employees and constantly takes various measures to
achieve this.
• The Credit Approval Committee approves credit exposures, which are
beyond the powers delegated to executives of the Bank. This facilitates
quick response to the needs of the customers and speedy disbursement
of loans.
Products & Services

Personal Banking

• Salary Accounts
• Savings Accounts
• Current Accounts

38
 • Fixed Deposits

• Demat Account

• Safe Deposit Lockers

• Loans

• Credit Cards

• Debit Cards

• Prepaid Cards

• Investments & Insurance

• Forex Services

• Payment Services

• NetBanking

• InstaAlerts

• MobileBanking

• InstaQuery

• ATM

• PhoneBanking
NRI Banking

• Rupee Savings Accounts

• Rupee Current Accounts

• Rupee Fixed Deposits

• Foreign Currency Deposits

• Accounts for Returning Indians

• Quickremit (North America, UK, Europe, Southeast Asia)

• IndiaLink (Middle East, Africa)

• Cheque LockBox

• Telegraphic / Wire Transfer

39
 • Funds Transfer through Cheques / DDs / TCs

• Mutual Funds

• Private Banking

• Portfolio Investment Schemes

• Loans

• Payment Services

• NetBanking

• InstaAlerts

• MobileBanking

• InstaQuery

• ATM

• PhoneBanking

Depository Services
• Demat Account
• Other Services
Third Party Services
• Mutual Funds
• Insurance Services - Life & Non Life
• Remittance Services
Cash Management Services
• Real Time Gross Settlement (RTGS)
• National Electronic Fund Transfer (NEFT)

40
YES BANK
YES BANK, India’s new age private sector Bank, headquartered in Mumbai, is
a private Greenfield Indian bank promoted by Mr. Rana Kapoor and Mr. Ashok
Kapur in 2004 with the financial support of Rabobank Nederland, the world's
only AAA rated private Bank, and three respected global institutional private
equity investors, CVC Citigroup, AIF Capital and ChrysCapital. The bank was
granted license on May 24 2004 and the bank launched its banking operations
in August 2004.
YES BANK offers banking and financial solutions. YES Bank has been
conceived in the spirit of professional entrepreneurship, with an unstinted
commitment to establish a high quality, technology driven, state-of-the-art
private Indian Bank catering to 'Emerging India'. YES BANK is the only

41
Greenfield license awarded by the RBI in the last 15 years, associated with the
finest pedigree investors. YES BANK has fructified into a “full service”
commercial Bank that has steadily built Corporate and Institutional Banking,
Financial Markets, Investment Banking, Corporate Finance, Business and
Transaction Banking, Retail and Wealth Management business lines across the
country, and is well equipped to offer a range of products and services to
corporate and retail customers.

The Bank has adopted international best practices, the highest standards
of service quality and operational excellence, with innovative state-of-the-art
technology, and offers comprehensive banking and financial solutions to all its
valued customers. A key strength and differentiating feature of YES BANK is
its knowledge driven approach, which goes beyond the traditional realm of
banking, and helps adoption of a diagnostic and prescriptive approach towards
superior product structuring.

The bank has a network of 150 fully operational retail branches across
the country, 2 National Operating Centers and over 200 ATMs.

YES BANK has a vision to champion ‘Responsible Banking’ in India

where the concepts of Corporate Social Responsibility and Sustainability are
embedded in the DNA of the organization and integrated in its Business Focus.
YES BANK is committed to adding long term value to society, to differentiate
itself in the marketplace based on a strong 'sustainability mandate' and to build
in flexibility and openness as part of its core strategy. The Bank has engaged
with global thought leadership forums like the Clinton Global Initiative (CGI),
Triple Bottom Line Investing (TBLI) and Tallberg Forum. YES BANK has
recently become the first Indian Bank to become a signatory with the United
Nations Environment Programme (Financial Initiative).

Unique Characteristics & Services

• YES Bank has been recognized among the world’s 25 ‘Unsung’
innovative companies by the most prestigious publication— Business
Week. The survey was conducted by a team of senior executives from
Boston Consultancy Group (BCG) across the world.

42
 • YES Bank was ranked as no. 1 bank (balance sheet size < INR 24,000
crore) in the Business Today-KPMG Best Banks Annual Survey 2008.
• YES Bank is focusing to become the bank for Emerging India, catering
to the vast banking needs of corporate and retail communities.
• One of the head-starts that YES BANK had over competition is the
absence of legacy systems. YES BANK’s state-of-the-art technology
and product platform is flexible, scalable and adaptable and is aimed at
delivering solutions that take into account the present and future needs
of customers.
• A key strength and differentiating feature of YES BANK is its
knowledge driven approach, which goes beyond the traditional realm of
banking, and helps adoption of a diagnostic and prescriptive approach
towards superior product structuring.
Products & Services
Personal Banking

• Salary Accounts
• Savings Accounts
• Current Accounts
• Fixed Deposits

• Demat Account

• Safe Deposit Lockers

• Loans

• Credit Cards

• Debit Cards

• Payment Services

• NetBanking

• InstaAlerts

• MobileBanking

• InstaQuery

43
 • ATM

• PhoneBanking
Third Party Services
• Remittance Services
Cash Management Services
• Real Time Gross Settlement (RTGS)
• National Electronic Fund Transfer (NEFT)

DATA ANALYSIS

44
 Capital Adequacy

Capital Adequacy Ratio

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 15.15 12.14 13.24 12.80 13.46 13.36
ICICI Bank 11.78 13.35 11.69 14.92 15.92 13.53
HDFC Bank 12.16 11.41 13.08 13.60 15.09 13.07
YES Bank 18.81 16.43 13.6 13.6 16.6 15.81

45
Capital Adequacy Ratio shows the ability of a bank to bear loses and ability to
pay its creditors in case of insolvency. The banks are required to maintain the
Capital Adequacy Ratio (CRAR) as specified by RBI from time to time. As per
the latest RBI norms, the banks in India should have a CRAR of 9%. Higher
CRAR reveals lower Credit Risk of the banks. If the banks have more risky
assets on its portfolio, the capital will be lower implying greater Credit Risk
Exposure. In case of J & K Bank, the ratio shows a decline of 3.01% in 2005-
06 as compared to 2004-05 but there in an increase of 1.1% from 2005-06 to
2006-07 and again a decrease of 0.44% in 2007-08 but an increase of 0.66%
2008-09. In case of ICICI Bank, the ratios indicate an increase of 1.577% in
2005-06 but a decrease of 1.66% from 2005-06 to 2006-07. In 2007-08 there is
an increase of 3.23% and an increase of 1% in 2008-09. The CRAR of HDFC
Bank has declined from 12.16% in 2004-05 to 11.41% 2005-06 and shown an
increase of 1.67% and 0.52% in 2006-07 and 2008-09 respectively. There is an
increase of 1.49% in 2008-09 taking the average CRAR of HDFC Bank to
13.07%. YES Bank is having highest average ratio of 15.81% which is 6.81%
more than prescribed requirements (i.e. 9%). The other three banks i.e. J & K
Bank, ICICI Bank and HDFC Bank are almost at the same level as far as
average CRAR is concerned. This ratio also shows the financial health and
soundness of bank.

From the ratios calculated above, it is clear that the banks under study
have succeeded in maintaining CRAR above the required level(i.e. 9%), the
higher CRAR of all the banks reveal that the Credit Risk Exposure of the banks
under study are low and these banks are adopting a more conservative approach
in monitoring their asset portfolio.

46
Debt-Equity Ratio

(Figures in times)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 13.66 13.70 13.26 13.18 13.37 13.43
ICICI Bank 11.99 10.14 12.97 7.54 6.60 9.85
HDFC Bank 10.38 12.87 13.18 10.51 11.11 11.61
YES Bank 4.89 6.27 13.11 11.87 13.10 9.86

The Debt-Equity ratio indicates the degree of leverage of banks. It indicates

how much of the bank business is financed through debt and how much
through equity. The above ratios reveal that, in case of J & K Bank this ratio
has increased by 0.04 times from 2004-05 to 2005-06, declined by 0.44 times
from 2005-06 to 2006-07, declined by 0.08 times from 2006-07 to 2007-08
and again increased by 0.19 times in 2008-09 taking the average to 13.43 times.
In the case of ICICI Bank this ratio has declined 1.85 times in 2005-06 as
compared to 2004-05 but again increased 2.83 times from 2005-06 to 2006-07

47
followed by a decline of 5.43 times in 2007-08 and again followed by an
decline of 0.94 times in 2008-09 leading to an average of 9.85 times. In the
case of HDFC Bank this ratio has increased from 10.38 times to 12.87 times in
2005-06 leading to an increase of 2.49 times in the year 2005-06 in Debt-
Equity ratio of the bank, followed by an increase of 0.31 times from 2005-06 to
2006-07. The year 2006-07 is followed by a decline in the ratio by 2.67 times
in 2007-08 drowning the ratio to 10.51 times. In the year 2008-09, the ratio has
again increased to 11.11 times from 10.51 times in 2007-08 registering an
increase of 0.6 times in 2008-09. This fluctuation in the ratio leads to an
average of 11.61 times. In case of YES Bank, this ratio has shown an
increasing trend from 2004-05 to 2005-06 and from 2005-06 to 2006-07. The
ratio has increased from 4.89 times to 6.27 times in 2005-06 thereby showing
an increase of 0.89 times in 2005-06 as compared to the ratio of 2004-05,
increased by 6.84 times in the year 2006-07. The year 2006-07 is followed by a
decline of 1.24 times in Debt-Equity ratio in 2007-08. The ratio has increased
by 1.23 times in 2008-09 averaging the ratio to 9.85 times.

Advances to Assets Ratio

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 47.15 54.75 59.62 57.64 55.52 54.93
ICICI Bank 54.51 56.36 56.82 56.43 57.55 56.33
HDFC Bank 49.71 47.70 51.45 47.62 53.99 50.09
YES Bank 59.53 57.83 56.64 55.53 54.16 56.73

48
This ratio indicates aggressiveness of banks in lending funds which ultimately
results in better profitability. Higher ratio of Advances/Assets is preferred to a
lower one. The above data and graph reveal that, in the case of J & K Bank,
this ratio has shown an increase of 7.6% from 2004-05 to 2005-06 and an
increase of 4.87% from 2005-06 to 2006-07 but a decline of 1.98% from 2006-
07 to 2007-08 and again a decline of 2.12% from 2007-08 to 2008-09. In the
case of ICICI Bank this ratio has shown an increase of 1.85% from 2004-05 to
2005-06 and again an increase of 0.46% from 2005-06 to 2006-07 followed by
a decline of 0.39% from 2006-07-to 2007-08 and again followed by an increase
of 1.12% from 2007-08 to 2008-09 leading to an average of 56.33% . In the
case of HDFC Bank this ratio has shown a decrease of 2.01% from 2004-05 to
2005-06 followed by an increase of 3.75% from 2005-06 to 2006-07, again
followed by a decrease of 3.83% from 2006-07 to 2007-08 and an increase of
6.37% from 2007-08 to 2008-09. In the case of YES Bank, this ratio has shown
a declining trend in all the five years. The ratio has decreased by 1.7% from
2004-05 to 2005-06, 1.19% from 2005-06 to 2006-07, 1.11% from 2006-07 to
2007-08 and 1.37% from 2007-08 to 2008-09. On an average YES Bank has
more average advances (i.e. 56.73%), which is more than the average advances
of the other three banks.

49
Government Securities to Total Investments Ratio

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 64.05 70.54 74.82 79.20 70.84 71.89
ICICI Bank 68.31 64.11 74.14 67.75 61.59 67.18
HDFC Bank 58.02 69.14 73.76 64.24 88.82 70.80
YES Bank 68.05 60.14 70.04 70.60 65.76 66.91

This ratio indicates the proportion of Total Investment invested in Government

Securities. This ratio is an important indicator which shows the risk taking
ability of a bank. It indicates a bank’s strategy as being high profit-high risk or
low profit-low risk. It also gives a view as to the availability of alternative
investment opportunities. Government Securities are generally considered as

50
the most safe debt instrument, which as a result carries lower return. In case of
J & K Bank, this ratio has witnessed an increase of 6.49% in 2005-06, 4.82% in
2006-07 and 4.38% in 2007-08 followed by a decrease of 8.36% in 2008-09
and taking the average to 71.89%. In the case of ICICI Bank this ratio varies
between 61.59% and 74.14%, showing a decline of 4.2% in 2005-06, an
increase of 10.03% in the year 2006-07 followed by a decline of 6.39% in
2007-08 and a decline of 6.16% in 2008-09. In the case of HDFC Bank, this
ratio has shown an increase of 11.12% in 2005-06 followed by an increase of
4.62% in the year 2006-07. The ratio declines in 2007-08 by 9.52% but
increases in 2008-09 by 24.58%, thus leading to an average of 70.80%. In the
case of YES Bank the ratio varies between 60.14 and 70.60. The ratio
decreases by 7.91% in 2005-06 followed by an increase of 9.9% in 2006-07
and an increase of 0.56% in 2007-08. There is a decline of 4.84% in 2008-09.
As compared to other banks, J & K Bank is leading with the highest average
investment in the Government Securities.

Assets Quality

Gross NPAs to Gross Advances

(Figures in %age)
Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average
J&K Bank 2.75 2.55 2.92 2.55 2.65 2.68

51
 ICICI Bank 3.02 1.51 2.10 3.34 4.39 2.87
HDFC Bank 1.69 1.32 1.32 1.34 1.98 1.53
YES Bank 0 0 0 0.11 0.68 0.16

Gross NPAs to Net Advances

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 2.75 2.55 2.94 2.57 2.67 2.70
ICICI Bank 3.03 1.42 1.95 3.01 3.62 2.61
HDFC Bank 1.72 1.45 1.40 1.42 2 1.60
YES Bank 0 0 0 0.11 0.68 0.16

Net NPAs to Net Advances

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

52
 J&K Bank 1.41 0.92 1.13 1.07 1.38 1.18
ICICI Bank 1.65 0.72 1.05 1.55 2.09 1.41
HDFC Bank 0.24 0.44 0.43 0.47 0.63 0.44
YES Bank 0 0 0 0.09 0.33 0.08

Total Investments to Total Assets

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 37 34 25.80 26.73 28.48 30.40
ICICI Bank 30.11 28.46 26.47 27.88 27.17 28.01
HDFC Bank 37.62 38.63 33.50 37 32.01 35.75
YES Bank 30.90 32.43 27.67 30 31.07 30.41

53
Net NPAs to Total Assets

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 0.66 0.50 0.67 0.62 0.76 0.64
ICICI Bank 1.18 0.43 0.58 0.89 1.21 0.85
HDFC Bank 0.12 0.21 0.22 0.22 0.34 0.22
YES Bank 0 0 0 0.05 0.17 0.04

Management Efficiency

Total Advances to Total Deposits

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 53.21 61.67 67.80 66.04 63.42 62.43
ICICI Bank 91.57 88.54 84.97 92.30 99.98 91.47

54
 HDFC Bank 70.32 62.84 68.73 63.03 69.42 66.87
YES Bank 114.77 82.71 76.51 71.05 76.71 84.35

Business per Employee

(Figure in Rs. Crores)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 4.35 5.16 5.85 5.96 5.00 5.26
ICICI Bank 8.8 9.05 10.27 10.08 11.54 9.95
HDFC Bank 8.06 7.58 6.07 5.06 4.46 6.25
YES Bank 6.88 8.48 5.31 6.83 9.88 7.48

Profit per Employee

55
 (Figure in Rs. Crores)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 0.02 0.03 0.04 0.05 0.05 0.04
ICICI Bank 0.11 0.10 0.09 0.10 0.11 0.10
HDFC Bank 0.09 0.07 0.06 0.05 0.04 0.06
YES Bank -0.02 0.09 0.04 0.06 0.11 0.05

Earning Quality & Profitability

Spread to Total Assets

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 2.43 2.51 2.68 2.47 2.65 2.55
ICICI Bank 1.69 1.87 1.19 1.83 2.20 1.76
HDFC Bank 3.46 3.46 4.06 3.92 4.04 3.79
YES Bank 1.41 2.12 1.54 1.95 2.23 1.85

56
Net Profit to Total Assets

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 0.47 0.66 0.96 1.10 1.08 0.85
ICICI Bank 1.19 1.01 0.90 1.04 0.99 1.02
HDFC Bank 1.29 1.18 1.25 1.19 1.23 1.23
YES Bank -0.29 1.33 0.85 1.18 1.33 0.88

Interest Income to Total Income

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 94.16 92.76 92.22 90.85 92.42 92.48
ICICI Bank 73.36 77.38 79.50 77.75 80.35 77.67
HDFC Bank 82.61 79.93 81.96 80.99 82.60 81.62
YES Bank 62.26 65.60 75.12 78.71 82.16 72.77

57
Non-Interest Income to Total Income

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 5.84 7.24 7.78 9.15 7.58 7.52
ICICI Bank 26.64 26.62 20.50 22.25 19.65 23.13
HDFC Bank 17.39 20.07 18.04 19.01 17.40 18.32
YES Bank 37.74 34.40 24.88 21.29 17.84 27.23

Earnings Per Share

(Figures in Rupees)

58
 Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average
J&K Bank 23.74 36.48 56.62 74.27 84.54 55.13
ICICI Bank 27.55 32.49 34.84 39.39 33.76 33.61
HDFC Bank 22.92 27.92 36.29 46.22 52.85 37.24
YES Bank -0.24 2.20 3.46 7.02 10.24 4.54

Return on Assets

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 0.47 0.67 0.96 1.09 1.09 0.86
ICICI Bank 1.59 1.30 1.09 1.12 0.98 1.22
HDFC Bank 1.47 1.38 1.33 1.32 1.28 1.36
YES Bank -0.29 2.13 1.44 1.54 1.60 1.28

59
Profit Margin Ratio

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 7.05 9.61 13.33 13.44 12.67 11.22
ICICI Bank 15.63 13.74 10.75 10.50 9.71 12.07
HDFC Bank 17.77 15.55 13.58 12.82 11.44 14.23
YES Bank -7.81 19.08 12.06 12.01 12.46 9.56

Burden to Total Assets

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 1.96 1.84 1.72 1.37 1.57 1.69
ICICI Bank 0.50 0.86 1.02 0.79 1.21 0.87
HDFC Bank 2.16 2.28 2.81 2.73 2.81 2.56
YES Bank 1.71 0.79 0.69 0.77 0.90 0.97

60
 Liquidity

Liquid Assets to Total Assets

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 13.01 8.64 12.61 13.54 14.00 12.36
ICICI Bank 7.71 6.58 10.77 9.51 7.90 8.49
HDFC Bank 8.70 9.41 9.91 11.10 9.56 9.74
YES Bank 4.14 5.18 11.64 9.58 8.40 7.78

Govt. Securities to Total Assets

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 23.68 24.00 19.30 21.20 20.18 21.67
ICICI Bank 20.55 19.43 19.63 18.88 16.71 19.04

61
 HDFC Bank 21.83 26.71 24.71 23.78 28.44 25.09
YES Bank 21.02 19.50 19.39 21.17 20.43 21.30

Liquid Assets to Demand Deposits

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 116.00 75.96 103.86 103.31 114.04 102.63
ICICI Bank 100.72 111.41 173.66 154.06 138.53 135.68
HDFC Bank 42.08 46.90 45.66 51.38 61.78 49.56
YES Bank 741.47 71.63 310.86 165.72 157.63 289.46

62
Liquid Assets to Total Deposits

(Figures in %age)

Bank 2004-05 2005-06 2006-07 2007-08 2008-09 Average

J&K Bank 14.68 9.74 14.34 15.52 15.98 14.05
ICICI Bank 12.95 10.32 16.10 15.56 13.72 13.73
HDFC Bank 12.31 12.40 13.40 14.73 12.30 13.03
YES Bank 8.00 7.41 15.73 12.26 11.89 11.06

RANKING OF BANKS IN TERMS OF CAMEL’S

KEY FINANCIAL RATIOS
The ranks have been assigned on the basis of the average of each ratio
calculated for the period of 2004-05 to 2008-09.

RANK
S.NO. RATIO J&K ICICI HDFC YES
BANK BANK BANK BANK

Capital Adequacy

1. Capital Adequacy Ratio 3 2 4 1

*2. Debt-Equity Ratio 4 1 3 2

63
3. Advances to Assets Ratio 3 2 4 1

Government Securities to
4. 1 3 2 4
Total Investments

Assets Quality

Gross NPAs to Gross

*5. 3 4 2 1
Advances

*6. Gross NPAs to Net Advances 4 3 2 1

*7. Net NPAs to Net Advances 3 4 2 1

Total Investments to Total

8. 3 4 1 2
Assets

*9. Net NPAs to Total Assets 3 4 2 1

Management Efficiency

Total Advances to Total

10. 4 1 3 2
Deposits Ratio

11. Business per Employee 4 1 3 2

12. Profit per Employee 4 1 2 3

Earning Quality &

Profitability

13. Spread to Total Assets

14. Net Profit to Total Assets 4 2 1 3

Interest Income to Total

15. 1 3 2 4
Income
Non-Interest Income to Total
16. 4 2 3 1
Income

17. Earnings Per Share 1 3 2 4

18. Return on Assets 4 3 1 2

19. Profit Margin Ratio 3 2 1 4

64
20. Burden to Total Income

Liquidity

21. Liquid Assets to Total Assets 1 3 2 4

Government Securities to
22. 2 4 1 3
Total Assets
Liquid Assets to Demand
23. 3 2 4 1
Deposits
Liquid Assets to Total
24. 1 2 3 4
Deposits

65