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  • 1. A Project Report On “A Comparative Study Between Oriental Bank Of Commerce And State Bank Of India” Submitted in the partial fulfillment of Master of Business Administration (MBA) (Session 2010-12)Supervisor : Submitted By :Mrs. Praveen Narang Name:Vikas Kumar Pandey Roll No: MBA IVth Sem. Brij Mohan Institute of Management & Technology Khalikpur, Yakubpur, Distt. Jhajjar, Near Farukhnagar, Gurgaon – 124103 (Affiliated to Maharshi Dayanand University, Rohtak) ~1~
  • 2. ACKNOWLEDEGEMENTI would like to express my gratitude and sincere thanks to my Project Guide Mr.S. K. Rao,Senior Manager of Oriental Bank of Commerce(Sec-14 Gurgaon) for instilling confidence in meto carry out this study and giving me guidance, without which it would not have been possible toundertake and complete this project. I also wish to extend my gratitude, to respected Faculty Guide Mrs.Praveen Narang, who helped me to complete this project. Their valuable suggestions helped meat every step. I also acknowledge heartfelt gratitude for all those people who have made availabletons of information required for this Project. Finally, I thank my MD University, Rohtak for making this experience of SummerTraining in an esteemed organization like Oriental Bank of Commerce. Vikas Kumar Pandey MBA (2010-12) Roll No.-……………. Brij Mohan Institute of Management & Technology ~2~
  • 3. Approved by AICTE, Ministry of HRD, Govt. of India Affiliated to Maharishi Dayanand University (MDU), Rohtak Yakubpur, Distt. Jhajjar, Near Farrukhnagar (Gurgaon), Haryana Ph. 0124-4057653, 322500, 09717098915, 09927025045 Fax: 011-66173969 E-mail: info@bimt.edu.in Website: www.bimt.edu.inRef. No. BIMT/2012 Date __________ DECLARATIONI, Vikas Kumar Pandey Roll No. _________ Class MBA 4th Semester of theBRIJMOHAN INSTITUTE OF MANAGEMENT & TECHNOLOGY,KHALIKPUR Distt.JHAJJAR hereby declare that the Project entitled “CapitalBudgeting ”is an original work and the same has not been submitted to any other Institute forthe award of any other degree. The interim report was presented to the Supervisoron ___________ and the pre-submission presentation was made on ___________.The feasible suggestions have been duly incorpated in consultation with theSupervisor.CountersignedSignature of the Supervisor Signature of the CandidateForwarded byDirector/Principal of the Institute ~3~
  • 4. Table of ContentsIntroduction-Purpose..................................................................................................................6Objectives...................................................................................................................................9Literature Review.....................................................................................................................10Research Methodology.............................................................................................................14Origin And Causes Of The Global Recession.........................................................................15Impact on The Indian Banking Sector.....................................................................................18 Indian Banking Sector remains a bright spot.......................................................................19 Experts view on Indian Banks and Recession......................................................................20 Indian Banking sector challenged by domestic, not global, factors.....................................22 Non-food bank credit...........................................................................................................23The Performance of Banks in Economic recession in India....................................................26A Comparative study between OBC and SBI..........................................................................29Company’s Introduction...........................................................................................................29 Oriental Bank of Commerce (OBC)....................................................................................29 State Bank of India (SBI).....................................................................................................30Data Analysis and Data Interpretation.....................................................................................33 Financial Statement..............................................................................................................33 Brief Analysis of OBC Balance Sheet:................................................................................34 Brief Analysis of OBC P&L Account:.................................................................................36 Financial Statement..............................................................................................................37 Brief Analysis of SBI Balance Sheet:..................................................................................38 Brief Analysis of SBI’s Profit & Loss A/c:........................................................................40Common-size Financial Statement Analysis...........................................................................41Trend Analysis.........................................................................................................................47Findings and Recommendations..............................................................................................48 “When US sneezes the world catches cold”........................................................................48 ~4~
  • 5. INTRODUCTION-PURPOSEIn a globalized world no country can be an island, growth prospects of emerging economies havebeen undermined by the cascading financial crisis with, of course, considerable variation acrosscountries. The late-2000s recession (or sometimes the Great Recession) is an economic recessionthat began in the United States in December 2007 (and with much greater intensity sinceSeptember 2008, according to the National Bureau of Economic Research). It spread to much ofthe industrialized world, and has caused a pronounced deceleration of economic activity. Thisglobal recession has been taking place in an economic environment characterized by variousimbalances and was sparked by the outbreak of the financial crisis of 2007–2010. Although thelate-2000s recession has at times been referred to as "the Great Recession," The GlobalRecession that began in December 2007 impacted the revenues and profitability of businessesworldwide. Everywhere around the world is passing through a tough time especially thedeveloped countries. As most of the developed countries are officially in recessions having morethan two consecutive quarters of negative growth. Although there have been signs ofimprovement but it is still not known at this stage how long is this going to last as this is perhapsknown as “The deepest recession in the post-second world war period”.The fear of a recession looms over the United States. And as the saying goes, whenever the USsneezes, the world catches a cold. This is evident from the way the Stock markets globallycrashed taking a cue from a probable recession in the US and a global economic slowdown. Andthe Weakening of the American economy is bad news, not just for India, but for the rest of theworld too. So what is a recession? A recession is a decline in a countrys gross domestic product(GDP) growth for two or more consecutive quarters of a year. A recession is also preceded byseveral quarters of allowing down an economy which grows over a period of time tends to slowdown the growth as a part of the normal economic cycle. A recession normally takes place whenconsumers lose confidence in the growth of the economy and spend less. This leads to adecreased demand for goods and services which in turn leads to a decreased in production, lay-off and a sharp rise in unemployment. Investors spend less as they fear stocks values will fall and ~5~
  • 6. thus stock markets fall on negative sentiment. The Indian stock markets also crashed due to aslowdown in the US economy. The Sensex crashed by nearly 13 per cent in just two tradingsessions in January 2008. The markets bounced back after the US Fed cut interest rates.The World witnessed extreme tightening of liquidity, shortage of capital and a shaken confidenceleading to collapse and merger of several revered institutions. The Global Economy expanded by3.2%. While the Advanced Economies expanded by 0.9%, the Emerging Economies expandedby 6.1%. The World Economy has seen further downturn during 2009 with a growth rate of just(-)1.3%, the first contraction in last 60 years. While Emerging Economies may be growing fairlybetter at 1.6%, the growth rate of Developed Economies is significantly lower at (-)3.8%. Worldtrade as per WTO estimates is estimated to contract by about 9% which will further reducedemand, put pressure on Corporate and add to unemployment. Clearly the crisis has moved fromthe Financial Sector to the Real Sector taking the developed economies – USA, Europe andJapan into recession. This has had a contagion effect on the rest of the world. It is expected thatthe recession could be deeper and somewhat prolonged.The impact of the financial crisis is felt by the developing economies as nearly all the countriesare witnessing slower growth. India too has been impacted by the crisis. The tumultuoushappenings the world over did have the effect on Indian economy. Despite Indian growth storybeing largely domestic consumption and domestic investment driven, it got impacted. We sawliquidity tightening in mid September 2008, a sudden curtailment of demand - especially forexports and contraction in general economic activity. India’s growth rate in 2008-09 was 6.7percent which is quite low. In 2008-2009 the first half escaped the impact of global recession,but the next few quarters the impact was felt throughout the year.Globalisation spreads both prosperity and distress. The contagion works both ways. Financialinstitutions around the world are the one that have been badly affected by the global recession.Many banks fails and some are almost on the verge of collapse and frantic steps are undertakenby respective governments to prop them up. The scar of the impact is still seen especially in theUS and other European countries and even in Asia like Japan.Banks act as important players in the financial markets. They play a vital role in the economy ofa country. The Indian banking system is relatively insulated from the factors leading to the ~6~
  • 7. turmoil in the global banking industry. Even as several top financial institutions and banks withfootprint across several countries have crumbled under the relentless onslaught of a globalfinancial turmoil. Citigroup still hangs on the brink. Bank of America is neck deep in trouble.Governments everywhere are at their wits’ end in dealing with the financial crisis. And theglobal recession still did not spare the Asian countries as well. Japanese companies and bankswere badly hit by this storm and the impact has touched the Indian banking system as well. It isnot that the Indian economy has been spared in the present crisis but the Indian situation isdifferent. In the US and Europe, the housing market collapsed and dragged down banks. Thetwo together have dragged down the real economy. In India, it is the real economy that gotimpacted first — on account of exports and the drying up of overseas finance for many firms.Banks are affected indirectly by the slowing down of the economy.This project will be useful for students, investors, banks including SBI and OBC and foreveryone whoever is interested, to make a further research on global economy crises, or to have aproper understanding about the impact the global recession has on the financial institutionsespecially banks in India, giving more emphasises on the performance of Oriental Bank ofCommerce in comparison with State Bank of India the market leader in banking sector in India. ~7~
  • 8. OBJECTIVES1. Origin and causes of global financial crisis.2. Impact of Recession on Banks.3. Performance of Banks during Recession.4. Comparative study of the Performance of Oriental Bank of Commerce and State Bank of India during recession. ~8~
  • 9. LITERATURE REVIEWRoberto Moro Visconti(2009) explains that he global recession which started in 2008 afterthe subprime crisis and the unprecedented default or rescue of many financial institutions hasstrongly affected the credibility of the international banking system, damaging also the realeconomy. Due to this joint crisis, the credit crunch is severely affecting the economy in Westernglobalized countries. Developing countries, not fully integrated with international markets, seemless affected and local microfinance institutions might also allow for a further shelter againstrecession, even if foreign support to donor driven NGOs or not fully independent microfinancebanks is slowing down and collection of international capital is harder and more expensive. ~9~
  • 10. Intrinsic characteristics of microfinance, such as closeness to the borrowers, limited risk andexposure and little if any correlation with international markets have an anti-cyclical effect. Inhard and confused times, it pays to be little, flexible and simple. C. Rangarajan(2009)commented that the impact of the financial crisis is felt by the developing economies as well.Growth is slowing down in all these countries. India‟s growth rate in 2008-09 was 6.7 per cent ascompared to 9 per cent in the previous year. Prospects for 2009-10 do not appear to be better.While in 2008-09 the first half escaped the impact of global recession, in the current year theimpact will be felt throughout the year. Globalisation spreads both prosperity and distress. A.Prasad and C. Panduranga Reddy(2009) The global financial crisis originated in UnitedStates of America. During booming years when interest rates were low and there was greatdemand for houses, banks advanced housing loans to people with low credit worthiness on theassumption that housing prices would continue to rise. Later, the financial institutionsrepackaged these debts into financial instruments called Collateralized Debt Obligations and soldthem to investors world-wide. In this way the risk was passed on multifold through derivativestrade. Surplus inventory of houses and the subsequent rise in interest rates led to the decline ofhousing prices in the year 2006-07 which resulted in unaffordable mortgage payments and manypeople defaulted or undertook foreclosure. The house prices crashed and the mortgage crisisaffected many banks, mortgage companies and investment firms world-wide that had investedheavily in sub-prime mortgages. Different views on the reasons of the crisis include boom in thehousing market, speculation, high-risk mortgage loans and lending practices, securitizationpractices, inaccurate credit ratings and poor regulation of the financial institutions. The financialcrisis has not only affected United States of America, but also European Union, U.K and Asia.The Indian Economy too has felt the impact of the crisis to some extent. Though it is difficult toquantify the impact of the crisis on India, it is felt that certain sectors of the economy would beaffected by the spill-over effects of the financial crisis. Alok Mishra(2009) examines that theyear 2008-09 saw a sharp downturn in economic scenario. It may be recalled that during2007-08, we had witnessed the eruption of sub-prime crisis, rise in prices of oil, gold andcommodities impacting both the Financial Sector and the Real Sector. The World witnessedextreme tightening of liquidity, shortage of capital and a shaken confidence leading to collapseand merger of several revered institutions. Clearly the crisis has moved from the FinancialSector to the Real Sector taking the developed economies – USA, Europe and Japan intorecession. This has had a contagion effect on the rest of the world. It is expected that therecession could be deeper and somewhat prolonged. The tumultuous happenings the world over ~ 10 ~
  • 11. did have the effect on Indian economy. Despite India not being directly exposed to sub-primemarkets and Indian growth story being largely domestic consumption and domestic investmentdriven, it got impacted. We saw liquidity tightening in mid September 2008, a suddencurtailment of demand - especially for exports and contraction in general economic activity.K.Vidyakala, S.Madhuvanthi, S.Poornima, (2009) commented that banks act as importantplayers in the financial markets. They play a vital role in the economy of a country. TheRecession that began in December 2007 impacted the revenues and profitability of businessesworldwide. We are in a globalised world and no more immune to the things happening outsideour country. Built on strong financial fundamentals, strict vigil on risk appetite and firmmonetary guidelines, Indian banks have proved among the most resilient and sound bankinginstitutions in the world. But there has been considerable divergence in the performance of thevarious banking institutions in the country as also among the public, private and foreign banksoperating in India. The Indian banking system is relatively insulated from the factors leading tothe turmoil in the global banking industry. Going by the performance for the calendar year 2008,Indian public sector banks have not only been able to weather the storm of global recession buthave been able to moderate its impact on the Indian economy as well, compared to its peersamong the foreign and private banks. The banking sector faces profitability pressures due tohigher funding costs, mark-to-market requirements on investment portfolios, and asset qualitypressures due to a slowing economy. But Indian banks’ global exposure is relatively small, withinternational assets at about 6 per cent of the total assets. The strong economic growth in thepast, low defaulter ratio, absence of complex financial products, regular intervention by centralbank, proactive adjustment of monetary policy and so called close banking culture has favouredthe banking industry in India in recent global financial turmoil. N.Sivasankaran,Dr.M.Kannadhasan (2009) found that global economy has been undergoing a rough journeyfilled with tough challenges caused by the economic meltdown originated by the sub-prime crisis.Though India is one among the few countries that withstood the crisis with a relatively minimaldamage at the macro level, it is not completely free from the hits of the recession. There existdifferences between the services and manufacturing sector in their ability to manage the recession,however respondents belonging to small, medium, and large industries do not exhibit differences intheir ability to manage the impact of recession. Choudhary Singh Hemendra Jr (2010) explainsin this paper is regarding the depth insight into economic recession and the reason and solutionsfor economic recession. The world economic slowdown which had its epicenter in the developedeconomies has now found its way into the developing economies also . One such reason is banksand their loan policies which lead to subprime crises. The economy was at risk of a deep ~ 11 ~
  • 12. recession after the dotcom bubble burst in early 2000; this situation was compounded by theSeptember 11 terrorist attacks that followed in 2001. In response, central banks around the worldtried to stimulate the economy. They created capital liquidity through a reduction in interestrates. In turn, investors sought higher returns through riskier investments. Lenders took ongreater risks too, and approved subprime mortgage loans to borrowers with poor credit.Consumer demand drove the housing bubble to all-time highs in the summer of 2005, whichultimately collapsed in August of 2006. The effect of crises as a ripple effect on the Indianeconomy. The leaders of Europes largest economies (England, France, Germany, Italy) held ameeting where they discussed better ways to monitor the worlds markets and banks. They didnot, however, push to create a new regime of oversight, regulation and punitive action that wouldbe directed at financial fraudsters and their structured Ponzi-scams and in the end we discussedwhat steps should be taken to improve the financial conditions of the country.so in toto we willstudy how these banking institutions lead to economic crisis and what steps are required toprotect the world economy from facing the same crises again. Iyanatul Islam (2010) Starting inmid-2007, the global financial crisis quickly metamorphosed from the bursting of the housingbubble in the US to the worst recession the world has witnessed for over six decades. Through anin-depth review of the crisis in terms of the causes, consequences and policy responses, thispaper identifies four key messages. Firstly, contrary to widely-held perceptions during the boomyears before the crisis, the paper underscores that the global economy was by no means as stableas suggested, while at the same time the majority of the worlds poor had benefited insufficientlyfrom stronger economic growth. Secondly, there were complex and interlinked factors behind theemergence of the crisis in 2007, namely loose monetary policy, global imbalances,misperception of risk and lax financial regulation. Thirdly, beyond the aggregate picture ofeconomic collapse and rising unemployment, this paper stresses that the impact of the crisis israther diverse, reflecting differences in initial conditions, transmission channels andvulnerabilities of economies, along with the role of government policy in mitigating thedownturn. Fourthly, while the recovery phase has commenced, a number of risks remain thatcould derail improvements in economies and hinder efforts to ensure that the recovery isaccompanied by job creation. These risks pertain in particular to the challenges of dealing withpublic debt and continuing global imbalances. ~ 12 ~
  • 13. ~ 13 ~
  • 14. RESEARCH METHODOLOGYThe study presently focuses on: 1. The origin and causes of global financial crisis 2. The impact of the crisis on the Indian Banking sector. 3. Performance of Indian banks during recession. 4. A Comparative study of the Performance of Oriental Bank of Commerce and State Bank of India during recession.The data for the study has been collected from secondary sources, which include Books, E-book,various websites, Journals and some financial magazines.The techniques for financial analysis that will be used to analyse and interpret the data to make astudy on the performance of Oriental bank of Commerce in comparison with State Bank of Indiaare: 1. Common Size Statement Analysis and 2. Trend analysis. ~ 14 ~
  • 15. ORIGIN AND CAUSES OF THE GLOBAL RECESSION.The global recession originated in the sub-prime mortgage crisis which surfaced nearly two yearsago in the United States. When interest rates are rising and home prices kept on falling, there wasa sharp jump in defaults and foreclosures. However, this would have remained as a purelymortgage market crisis but for the fact that these sub-prime mortgages were securitized andpackaged into products that were rated as investment grade. Once doubts about these assets arosethey turned illiquid; it also became very hard to price them. As a result, it started affecting a hostof institutions which had invested in these products. These institutions were not confined to U.S.alone. 1) Boom in the Housing Market: Subprime borrowing was a major contributor to an increase in house ownership rates and the demand for housing. This demand helped fuel housing price increase and consumer spending. Some house owners used the increased property value experienced in housing bubble to re-finance their homes with lower interest rates and take second mortgages against the added value to use the funds for consumer spending. Increase in house purchases during the boom period eventually led to surplus inventory of houses, causing house prices to decline, beginning in the summer of 2006.Easy credit, combined with the assumption that housing prices would continue to appreciate, had encouraged many subprime borrowers to obtain adjustable-rate mortgages which they could not afford after the initial incentive period. Once housing prices started depreciating moderately in many parts of the U.S, re-financing became more difficult. Some house owners were unable to re-finance their loans reset to higher interest rates and payment amounts. Excess supply of houses placed significant downward pressure on prices. As prices declined, more house owners were at risk of default and foreclosure. ~ 15 ~
  • 16. 2) Speculation: Speculation in real estate was a contributing factor. During 2006, 22 per cent of houses purchased (1.65 million units) were for investment purposes with an additional 14 percent (1.07 million units) purchased as vacation homes. In other words, nearly 40 per cent of house purchases were not primary residences. Speculators left the market in 2006, which caused investment sales to fall much faster than the primary market.3) High- Risk Mortgage Loans and Lending Practices: A variety of factors caused lenders to offer higher-risk loans to higher-risk borrowers. The risk premium required by lenders to offer a subprime loan declined. In addition to considering high-risk borrowers, lenders have offered increasingly high-risk loan options and incentives. These high-risk loans included “No Income, No Job and No Assets loans.” It is criticized that mortgage underwriting practices including automated loan approvals were not subjected to appropriate review and documentation.4) Securitization Practices: Securitization of housing loans for people with poor credit- not the loans themselves-is also a reason behind the current global credit crisis. Securitization is a structured finance process in which assets, receivables or financial instruments are acquired, pooled together as collateral for the third party investments (Investment Banks). Due to securitization, investor appetite for mortgage-backed securities (MBS), and the tendency of rating agencies to assign investment-grade ratings to MBS, loans with a high risk of default could be originated, packaged and the risk readily transferred to others.5) ~ 16 ~
  • 17. Inaccurate Credit Ratings: Credit rating process was faulty. High ratings given by credit rating agencies encouraged the flow of investor funds into mortgage-backed securities helping finance the housing boom. Risk rating agencies were unable to give proper ratings to complex instruments (Gregorio 2008). Several products and financial institutions, including hedge funds, and rating agencies are largely if not completely unregulated. 6) Poor Regulation: The problem has occurred during an extremely accelerated process of financial innovation in market segments that were poorly or ambiguously regulated – mainly in the U.S. The fall of the financial institutions is a reflection of the lax internal controls and the ineffectiveness of regulatory oversight in the context of a large volume of non-transparent assets. It is indeed amazing that there were simply no checks and balances in the financial system to prevent such a crisis and “not one of the so called pundits” in the field has sounded a word of caution. There are doubts whether the operations of derivatives markets have been as transparent as they should have been or if they have been manipulated.This current crisis in the US, the defaults on sub-prime mortgages (homeloan defaults) have ledto a major crisis in the US. Sub-prime is a high risk debt offered to people with poor creditworthiness or unstable incomes. Major banks have landed in trouble after people could not payback loans .The housing market soared on the back of easy availability of loans. The realty sectorboomed but could not sustain the momentum for long, and it collapsed under the gargantuanweight of crippling loan defaults. Foreclosures spread like wildfire putting the US economy onshaky ground. This, coupled with rising oil prices at $100 a barrel, slowed down the growth ofthe economy. In the present time, the whole world is witnessing the effects of global financial crisis. As aresult, it started affecting a host of institutions which had invested in these products. Theseinstitutions were not confined to U.S. alone. Financial institutions in Europe and to a much lesserextent in East Asia had such assets on their books. This crisis came on surface because of sub- ~ 17 ~
  • 18. prime lending crisis in United States of America. The situation became more critical due tobankruptcy of Lehman Brothers which was the fourth largest institutional bank of US and othermajor financial institutions like Goldman Sachs, Washington Mutual, Citigroup, Bank ofAmerica, Morgan M Stanley. Since then the Indian economy is also facing challenges of thiseconomic meltdown.Every sector has been badly hit by this recession. Quite unfortunately, the Bombay StockExchange came plummeting down from 21000 points to 8000 mark. The fast growing real sectoris also affected as the capital value of property is plummeting. Many construction projects are onthe brink of collapse because of liquidity crunch like proposed convention centre in New Delhi,DLF mega-home project in West Bengal. The inflation scaled high on around 13% but right nowthe case is even worse. The information technology sector also cannot be an exception in thisregard. IMPACT ON THE INDIAN BANKING SECTOR.Banks act as important players in the financial markets. They play a vital role in the economy ofa country. The Recession that began in December 2007 impacted the revenues and profitabilityof businesses worldwide. The Indian banking system is relatively insulated from the factorsleading to the turmoil in the global banking industry. Even as several top financial institutionsand banks with footprint across several countries have crumbled under the relentless onslaught ofa global financial turmoil, Indian banks and institutions have come out relatively unscathed fromthe recession. Built on strong financial fundamentals, strict vigil on risk appetite and firmmonetary guidelines, Indian banks have proved among the most resilient and sound bankinginstitutions in the world.Further, the recent tight liquidity in the Indian market is also qualitatively different from theglobal liquidity crunch, which was caused by a crisis of confidence in banks lending to eachother. While the main causes of global stress are less relevant here, Indian banks do faceincreased challenges due to domestic factors. The banking sector faces profitability pressures dueto higher funding costs, mark-to-market requirements on investment portfolios, and asset quality ~ 18 ~
  • 19. pressures due to a slowing economy. CRISIL views the strong capitalization of Indian banks as apositive feature in the current environment.Indian banks’ global exposure is relatively small, with international assets at about 6 percent ofthe total assets. Even banks with international operations have less than 11 percent of their totalassets outside India. The reported investment exposure of Indian banks to distressed internationalfinancial institutions of about USD1 billion is also very small. The mark-to-market losses on thisinvestment portfolio, will, therefore, have only a limited financial impact. Indian banks’dependence on international funding is also low.Indian Banking Sector remains a bright spot.Citigroup totters on the brink. Bank of America is neck deep in trouble. Governmentseverywhere are at their wits’ end in dealing with the financial crisis. And yet little of this stormhas touched the Indian banking system.It is not that the Indian economy has been spared in the present crisis. But the Indian situation isdifferent from that in the western world. In the US and Europe, the housing market collapsed anddragged down banks. The two together have dragged down the real economy. In India, it is thereal economy that got impacted first — on account of exports and the drying up of overseasfinance for many firms. Banks are affected indirectly by the slowing down of the economy. Thedirect impact of the crisis on the Indian banking system has been small because Indian banks donot have big exposures to the subprime market. Indian banks are well placed to weather thisimpact. This is not a contrarian view. The RBI itself exudes optimism about the outlook forIndian banking in its latest Report on Trend and Progress in Banking.At a time when the financial system across the globe is engulfed in a deep crisis, the Indianbanking system continues to show resilience. The underlying fundamentals of the Indianeconomy would continue to underpin the robust performance of the banking sector whichremains profitable and well capitalized. There are good reasons for such optimism. 1. Unlike in the west where credit supply has collapsed, credit grew at 25% in 2007-08 and by 24% in the year to date. Banks may be expected to slow down credit growth in 2009-10 given the uncertainties in the environment. But growth of around 20% is still an impressive figure. 2. Spreads in the Indian banking system remain high in comparison with other banking systems, although they declined for the second year in succession. The net interest ~ 19 ~
  • 20. margin, an indirect measure of spread, was 2.4% in 2007-08. This is lower than the spread of around 2.8% we had until 2005-06. But volume growth today is higher than in most of the post-reform period. Higher volume growth should offset the decline in spread. Besides, banks have learnt to boost revenues through non-interest income. 3. Non-performing assets (NPAs) are at an all-time low. The ratio of net NPAs to net advances is down to 1%, down from 9% a decade ago. 4. Return on assets in the Indian banking system was 1% in 2007-08. This figure is a widely accepted benchmark for performance in banking. We must expect a rise in NPAs and higher provisions in 2008-09 and 2009-10. But banks stand to gain on their bond portfolios as interest rates fall. So any decline in return on assets should be small.Does this all sound too good to be true — the Indian banking system as an islet of tranquillity ina sea of turbulence? One alarmist scenario is a big collapse in property prices — remember, therise in property prices here has been steeper than in the US or Europe. No fears, housing loansare only around 10% of overall banking assets. Even if 20% of housing loans go bad, a figure wehave seen in the subprime crisis, the maximum impact would be a rise in NPA/asset ratio to 3%.With an average capital adequacy ratio of 13%, banks are well placed to withstand an increase inNPAs of this order. But even this is unlikely because banks finance around 70% of the whitecomponent of housing loans. If we assume a black component of just 30% of the value of theproperty, banks are protected against a decline in property prices of 50% from their presentlevels. There is always the danger of one or two weak players having serious problems. But wedo have the capacity to contain systemic risk arising from such a situation. The broader lesson ofthe Indian banking system emerging relatively unscathed in the present crisis should not beignored. Our unique approach to the issues of bank ownership and regulation, our reliance onhome-grown solutions, has served us well. The need for caution is to be made on several fronts.However, there are two areas that do not receive the attention they merit. One is the need toimprove the quality and performance of public sector bank boards. The RBI has laid down ‘fitand proper’ criteria for elected directors. It must extend these to all directors. It must also advisePSBs to increase the sitting fee from the disgraceful figure of Rs 5,000 — this pretence ofausterity is not helping anybody. ~ 20 ~
  • 21. Experts view on Indian Banks and RecessionThere is a saying many Indians have heard from their grandmothers: “Spend only as much as youearn.” It now seems that this piece of advice, apparently firmly ingrained in an average Indianmindset, has helped the survival of the Indian banking system which, experts and politiciansmaintain with increasing confidence, has emerged unscathed from the global economicmeltdown. According to some experts, this mindset is at the basis of the so-called conservativeIndian mode of banking. Economic journalist and author Paranjoy Guha Thakurta says:“Understanding why we managed to save ourselves from the global financial meltdown is fairlysimple and sociological as well. In India our grandmothers used to say, spend only as much asyou earn. In America people were doing the opposite. But in India it appears, people paid heed totheir grandma’s advice.” Indian banks have not just survived the crisis but appear to haveemerged even stronger from the recession and even gone ahead and posted reasonable profits inthe year 2008-2009. But do generally sensible borrowing practices explain why Indian banksemerge even stronger in such hard times?Executive Director of one of Indian’s biggest public-sector banks, Bank of Baroda, RK Bakshi,says: “Due credit should be given to the Reserve Bank of India (RBI). Being the apex bank ofthe country, it managed the monetary policies quite efficiently. When inflation was on the rise,RBI strengthened its hold over the markets and increased interest rates. But immediately after thefall of Lehman Brothers, RBI reduced the interest rates to increase liquidity in the markets. RBIalso ensured that inter-bank transactions were not affected during this economic crunch, which ineffect led to smooth payments and money transfers.”The conservative mode in which the Indian banks have operated since their nationalization in thelate 60s and early 70s appears to be an important reason why they did not loose out in the after-effects of the global liquidity crunch following the collapse of Lehman Brothers. Proving theearly scares wrong, not just the public sector banks but also the private banks of India remainedunaffected by the recessionary spirals.Rana Kapoor, Founder-Chairman of one of the fastest-growing private banks in India, Yes Bank,echoes this view: “The customer — private or corporate — can very well see for himself that theGovernment of India and even the RBI has never differentiated amongst the public-sector orprivate banks. We realized this especially during recession times that the common man in Indiadid not differentiate between governments or a private bank and his trust remained as before. Theprivate banks on their part have also followed the RBI banking guidelines which paid off verywell.” ~ 21 ~
  • 22. A balanced and conservative approach, plus the ever watchful eyes of the Governments Reservebank of India – these factors have been critical in helping to save Indian banking and monetaryinstitutions following the seismic events of last September. RBI guidelines limit Indian bankingforays into foreign portfolio investment. Banks can not lend beyond an unsecured capital andtheir investments in the share markets are also controlled by the RBI.Another important factor is the limit over the Indian banks’ use of foreign capital. As a result ofthis constraint, in an economic meltdown situation, when foreign companies start withdrawingcapital, the Indian banks remained unaffected. Bank of Baroda’s Executive Director RK Bakshiadds: “Banks like us which have foreign operations in more than 75 countries, also have tofollow the RBI foreign banking guidelines. In effect, although we are banking in foreigncountries, our basic policies emerge from home. And that’s the reason why in India also, wemanaged to curtail our non-performing assets.”Not very long ago, many critics spoke about the need for privatization of the Indian bankingsector, especially the public-sector banks. But these voices seem to have faded away duringrecession. Paranjoy Guha Thakurta feels that stability of the government banks and customers’faith in them played an important role in delaying a complete privatization of the banking sector:“In times of economic liberalization and globalization, everyone wanted to bring reputed foreignbanks in Indian markets. But after the fall of Lehman-like numerous institutions no-one evenremembers this debate.” As leading global powers announce deadlines to come out of therecessionary phase, more and more people are acknowledging the fact that careful monetarypolicies by the Government of India saved Indian banking institutions from contracting the‘meltdown virus’. The Indian banking industry on its own part has also realized that having astrict watchdog like the Reserve Bank paid rich dividends in times of one the biggest economiccrisis the world has ever witnessed. That, but also that old grandma advice to only spend whatyou earn, of course.Indian Banking sector challenged by domestic, not global, factorsThe reasons for tight liquidity conditions in the Indian market in recent weeks of the globalmeltdown are quite different from the factors driving the global liquidity crisis. Some reasonsinclude large selling by Foreign Institutional Investors (FIIs) and subsequent Reserve Bank ofIndia (RBI) interventions in the foreign currency market, continuing growth in advances, andearlier increases in cash reserve ratio (CRR) to contain inflation. RBI’s recent initiatives, ~ 22 ~
  • 23. including the reduction in CRR by 150 basis points from October 11, 2008, cancellation of twoauctions of government securities, and confidence-building communication, have already beguneasing liquidity pressures. The strong capitalization of Indian banks, with an average Tier Icapital adequacy ratio of above 8 per cent, is a positive feature in their credit risk profile.Nevertheless, Indian banks do face challenges in the current Indian economic environment,marked by a slower gross domestic product growth, depressed capital market conditions, andrelatively high interest rate regime. The profitability of Indian banks is expected to remain underpressure due to increased cost of borrowing, declining interest spreads, and lower fee income dueto slowdown in retail lending. Profit levels are also likely to be impacted by mark-to-marketprovisions on investment portfolios and considerably lower profit on sale of investments, ascompared with previous years. Moreover, those Indianbanks considering accessing the capital markets for shoring up capital adequacy may be forced tocurtail growth plans, if capital markets remain depressed. While these challenges will play outover the medium term, CRISIL expects the majority of Indian banks’ ratings to remainunaffected, as they continue to maintain healthy capitalization, enjoy strong system support andbenefits of government ownership in the case of public sector banks.”Non-food bank creditContradicting the general trends of the economy, the extension of non-food bank credit hasgrown faster in calendar year 2008 against the previous year. The same has been the case withregard to the flow of resources to the commercial sector, which includes non-food bank credit,investment on shares/bonds/debentures and commercial paper issued by public/private sectorcompanies. Despite this visible growth in credit extension by banks, there was a perception ofdecelerating credit growth to the Indian economy as a whole during 2008. This slow down incredit extension could be primarily attributed to reduced flow of funds from non-bank sourcessuch as financial institutions, NBFCs and resources mobilised from the capital markets and byway of external commercial borrowings — ADR, GDR, FCCB, foreign direct investments —and other forms of short-term credit. In fact, resource flow from these sources had dipped byover 30 per cent during 2008, while flow from the banking sector had increased by close to 30per cent. The review of the Monetary Policy by the RBI for the third quarter of 2008-09 said:“There has been a noticeable variation in credit expansion across bank groups. Expansion ofcredit by public sector banks was much higher this year than in the previous year, while creditexpansion by foreign and private sector banks was significantly lower”. ~ 23 ~
  • 24. Due to globalization, the Indian economy cannot be insulated from the present financial crisis inthe developed economies. The development in the U.S financial sector has affected not onlyAmerica but also European union, U.K and Asia. The Indian banking too has felt the impact ofthe crisis though not to the same extent. The ongoing crisis will have an adverse impact on someof the Indian banks. Some of the Indian banks have invested in derivatives which might haveexposure to investment bankers in U.S.A. However, Indian banks in general, have very littleexposure to the asset markets of the developed world. Effectively speaking, the Indian banks andfinancial institutions have not experienced the kind of losses and write-downs that banks andfinancial institutions in the Western world have faced. Indian banks have very few branchesabroad. Our Indian banks are slightly better protected from the financial meltdown, largelybecause of the greater role of the nationalized banks even today and other controls on domesticfinance. Strict regulation and conservative policies adopted by the Reserve Bank of India haveensured that banks in India are relatively insulated from the travails of their western counterparts.As financial markets around the world are uncertain and unsettled, the contagion spread toemerging economies and to India too. Both the government and the Reserve Bank of Indiaresponded to the challenge in close coordination and consultation. The main plank of thegovernment response was fiscal stimulus while the Reserve Banks action comprised monetaryaccommodation and counter cyclical regulatory forbearance. The Indian banking sector has notbeen affected in the same way the banking sectors abroad has been affected for reasons alreadyexplained. However, there is the impact of the drying up of liquidity because of the fall inreserves. The inability of Indian firms to raise funds abroad, including trade credit, puts pressureon the domestic banking system for more credit. It is, in this context, one must view the actionsof the Reserve Bank in expanding liquidity. The Government of India has also taken manyreconciliatory actions to bring the situation into normal. The RBI has made so many changes inits monetary policy. In fact, the RBI has increased the bank rate and CRR(cash reserve ratio) rateso that the inflation may come down. The Indian Government has even proposed many bailoutplans to bring more liquidity in the Indian market. The Global Reession had a lesser impact onthe Indian Banking sector because of its domestic market structure. Many Indian companies areappearing on global platform to participate in the corporate restructuring i.e. merging andacquisitioning. Although, the banking sector has also been affected by the meltdown but incomparison to other nations the Indian banks are performing quite well. A report "Opportunitiesin Indian Banking Sector", by market research company, RNCOS, forecasts that the Indian ~ 24 ~
  • 25. banking sector will grow at a healthy compound annual growth rate (CAGR) of around 23.3 percent till 2011. SLR Trend Bank Rate Trend CRR Trend 1997-11 % 2008-2011 % 2007-11 % 25-Oct-97 25 23-Dec-08 6 23-Dec-07 5.25 23-Dec-07 25 08-Nov-09 6 06-Jan-08 5.5 08-Nov-09 24 07-Nov-11 6 17-Feb-08 5.75 07-Nov-11 25 03-Mar-08 6 28-Apr-08 6.5 04-Aug-08 7 10-Nov-08 7.5 26-Apr-09 7.75 10-May-09 8 19-Jul-09 8.75 30-Aug-09 9 11-Oct-09 7.5 11-Oct-09 6.5 25-Oct-09 6 08-Nov-09 5.5 17-Jan-10 5 13-Feb-11 5.5 27-Feb-11 5.75 24-Apr-11 6 ~ 25 ~
  • 26. THE PERFORMANCE OF BANKS IN ECONOMIC RECESSION IN INDIAGlobal Recession had an impact in most of the Indian banks as there was a decline in profits ofsome of the major banks including some public sector banks like Punjab National Bank, Bank ofIndia, State Bank of India and Bank of Baroda as they had an exposure to the instruments issuedby Lehman and Merrill Lynch. It wasn’t just the private bank ICICI, although the latter postedthe maximum losses due to their exposure. However, if we take the overall the Banking sector inIndia, there is nothing to worry as heavy regulation coupled with the tendency of banks to becautious (more than regulations stipulated) has protected the Indian banking industry. EvenICICI can easily handle the loss it has suffered. Under the sector of Information TechnologyStrangely it is those top IT companies with a lot of business abroad and in the US which are asafer bet because all their eggs are not in one basket. They also have more reserves. However theimpact of loss of business will continue to be felt.There has been considerable divergence in the performance of the various banking institutions inthe country as also among the public, private and foreign banks operating in India. Going by theperformance for the calendar year 2008, Indian public sector banks have not only been able toweather the storm of global recession but have been able to moderate itsimpact on the Indian economy as well, compared to its peers among the foreign and privatebanks. Figures put out by the Reserve Bank of India suggests that banking activity in the countrycontinued unabated during the first phase of recession, thanks to the better than expectedperformance of public sector banks. This was while the assets and liabilities of both foreign andprivate sector banks dipped during the corresponding period last year. But public sector banksseem to have more than made up for the shortfall from foreign and private sector banks and thegrowth inflow of bank resources to the diverse sectors of the Indian economy has continuedunabated. ~ 26 ~
  • 27. Banks Recruits during RecessionWhile thousands of people worldwide have been handed over pink slips as a part and parcel ofthe global slowdown, Indian public sector banks still have jobs many. Indian public sector bankslike State Bank of India, Union Bank of India, Syndicate Bank, Central Bank, Andhra Bank,Corporation Bank, Punjab National Bank and NABARD. It was reported that Union Bank areplanning to hire more than 4000 officers and 1000 clerks this year. State Bank of India hasbigger plans. By year end it plans to recruit 20,000 clerical staffs and around 5000 officers.Although recession has hit many other sectors, manpower is still a necessity in the publicbanking sector. The requirements of extending credit to primary sectors, and expansion plans ofmany banks into the rural market make this an essential move. According to industry estimatesaround 40, 000 people was already hired in the current fiscal year as opposed to 15,000 last year.Ironically, job seekers who earlier sought private and foreign banks for its lucrative salarypackages, now has been writing tests to get through the public sector banks. Job security seemsto the priority of the hour.Deposit accretion ~ 27 ~
  • 28. This credit expansion by the banking sector was also reflected in the deep divergence in the paceof growth in deposits among the banks. It was only the public sector banks which could maintainthe pace of growth in deposit accretion at 24.2 per cent. Deposit accretion in foreign banks fellsharply from 34 to 12 per cent and for private sector banks from 27 to 13 per cent. Backed by thesteady pace of growth in deposits, the growth in public sector banks disbursal also grew quitesignificantly. Meanwhile, there was a deceleration in credit extension by foreign and privatesector banks during 2008.Banks Profit, Even in This RecessionThe banks are doing so well in this time of recession. The 4 reasons that big banks are able tobeat the recession and rake in the profits are: 1. Underwriting increases provide investment banks with more income as businesses go to investment banks. Banks that do the underwriting collect fees, and if they actually make the loans, they also collect the interest. 2. Trading revenue is also up as investors try to play the market, getting in when prices are low and trading to take profits on the rallies. Many of the big banks (like Goldman) do over the counter trades, so they get commissions as well. 3. Less competition is the result of failed banks and takeovers. This means a bigger piece of the pie for those banks that are left. 4. Retail banking has been providing a boost. People still need a place to keep their money. With a lower Fed funds rate, they can pay less in interest to their savings customers, while still charging between 5% and 10% interest (more for credit cards) on loans they make. That difference is resulting in profitability. ~ 28 ~
  • 29. A COMPARATIVE STUDY BETWEEN OBC AND SBI COMPANY’S INTRODUCTIONOriental Bank of Commerce (OBC)Oriental Bank of Commerce, established on 19 February, 1943, in Lahore (then a city ofBritish India, and currently in Pakistan), is one of the public sector banks in India. Oriental Bankof Commerce made a modest beginning under its Founding Father, Late Rai Bahadur Lala SohanLal, the first Chairman of the Bank. Within four years of coming into existence, the Bank had toface the holocaust of partition. Branches in the newly formed Pakistan had to be closed downand the Registered Office had to be shifted from Lahore to Amritsar. Late lala Karam ChandThapar, the then Chairman of the Bank, in a unique gesture honoured the commitments made tothe depositors from Pakistan and paid every rupee to its departing customers. The foundation ofcustomer service thus laid has ever since remained Oriental Banks prime philosophy and hasbeen nurtured well as a legacy by all its successors, year after year. The Bank has witnessedmany ups and downs since its establishment. It has seen many upheavals in the 66 years of itsexistence and on every trying situation; it has emerged successful. The period of 1970-76 is saidto be the most challenging phase in the history of the Bank. At one time profit plummeted toRs.175, that prompted the owner of the bank, the Thapar House, to sell / close the bank. Thenemployees and leaders of the Bank came forward to rescue the Bank. The owners were movedand had to change their decision of selling the bank and in turn they decided to improve theposition of the bank with the active cooperation and support of all the employees. Their effortsbore fruits and performance of the bank improved significantly. This was the turning point in thehistory of the bank. The bank was nationalized on 15th April, 1980. At that time total working ofthe bank was Rs.483 crores having 19th position among the 20 nationalised banks. Within adecade the bank turned into one of the most efficient and best performing banks of India. Thebank has progressed on several fronts, such as crossing the Business Mix mark of Rs.1.50 lacscrores, achievement of 100% CBS, reorienting of lending strategy through Large & MidCorporates and establishment of new wings viz., Rural Development and Retail & PrioritySector. The Bank has to its utmost credit lowest staff cost with highest productivity in the Indianbanking industry. ~ 29 ~
  • 30. OBC has a network of 530 branches and 505 ATMs spread throughout India, out of which 490branches offer centralized banking solutions. With High Capital Adequacy Ratio, Oriental Bankof Commerce is known be a consistent profit-making bank. It offers various services andproducts, like current/ savings account, general loans, educational loans, agricultural loans, etc,for the benefit of customers. For its effective services, the National Institute of BankManagement (NIBM) rated OBC Bank as "Customer Friendly" Bank.State Bank of India (SBI)The evolution of State Bank of India can be traced back to the first decade of the 19th century. Itbegan with the establishment of the Bank of Calcutta in Calcutta, on 2 June 1806. The bank wasredesigned as the Bank of Bengal, three years later, on 2 January 1809. It was the first ever joint-stock bank of the British India, established under the sponsorship of the Government of Bengal.Subsequently, the Bank of Bombay (established on 15 April 1840) and the Bank of Madras(established on 1 July 1843) followed the Bank of Bengal. These three banks dominated themodern banking scenario in India, until when they were amalgamated to form the Imperial Bankof India, on 27 January 1921.An important turning point in the history of State Bank of India is the launch of the first FiveYear Plan of independent India, in 1951. The Plan aimed at serving the Indian economy ingeneral and the rural sector of the country, in particular. Until the Plan, the commercial banks ofthe country, including the Imperial Bank of India, confined their services to the urban sector.Moreover, they were not equipped to respond to the growing needs of the economic revivaltaking shape in the rural areas of the country. Therefore, in order to serve the economy as awhole and rural sector in particular, the All India Rural Credit Survey Committee recommendedthe formation of a state-partnered and state-sponsored bank.The All India Rural Credit Survey Committee proposed the take over of the Imperial Bank ofIndia, and integrating with it, the former state-owned or state-associate banks. Subsequently, anAct was passed in the Parliament of India in May 1955. As a result, the State Bank of India (SBI)was established on 1 July 1955. This resulted in making the State Bank of India more powerful,because as much as a quarter of the resources of the Indian banking system were controlleddirectly by the State. Later on, the State Bank of India (Subsidiary Banks) Act was passed in1959. The Act enabled the State Bank of India to make the eight former State-associated banksas its subsidiaries. . ~ 30 ~
  • 31. The State Bank of India emerged as a pacesetter, with its operations carried out by the 480offices comprising branches, sub offices and three Local Head Offices, inherited from theImperial Bank. Instead of serving as mere repositories of the communitys savings and lending tocreditworthy parties, the State Bank of India catered to the needs of the customers, by bankingpurposefully. The bank served the heterogeneous financial needs of the planned economicdevelopment. .BranchesThe corporate center of SBI is located in Mumbai. In order to cater to different functions, thereare several other establishments in and outside Mumbai, apart from the corporate center. Thebank boasts of having as many as 14 local head offices and 57 Zonal Offices, located at majorcities throughout India. It is recorded that SBI has about 10000 branches, well networked to caterto its customers throughout India. .ATM Services .SBI provides easy access to money to its customers through more than 8500 ATMs in India. TheBank also facilitates the free transaction of money at the ATMs of State Bank Group, whichincludes the ATMs of State Bank of India as well as the Associate Banks – State Bank ofBikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, etc. You may also transactmoney through SBI Commercial and International Bank Ltd by using the State Bank ATM-cum-Debit (Cash Plus) card. .SubsidiariesThe State Bank Group includes a network of eight banking subsidiaries and several non-bankingsubsidiaries. Through the establishments, it offers various services including merchant bankingservices, fund management, factoring services, primary dealership in government securities,credit cards and insurance. . ~ 31 ~
  • 32. The eight banking subsidiaries are: • State Bank of Bikaner and Jaipur (SBBJ) • State Bank of Hyderabad (SBH) • State Bank of India (SBI) • State Bank of Indore (SBIR) • State Bank of Mysore (SBM) • State Bank of Patiala (SBP) • State Bank of Saurashtra (SBS) • State Bank of Travancore (SBT ~ 32 ~
  • 33. DATA ANALYSIS AND DATA INTERPRETATIONFinancial Statement Oriental Bank of Commerce Balance Sheet Rs. in Cr. Mar 07 Mar 08 Mar 09 Mar 10 Mar 11Capital and Liabilities:Total Share Capital 250.54 250.54 250.54 250.54 250.54Equity Share Capital 250.54 250.54 250.54 250.54 250.54Share ApplicationMoney 0 0 0 0 0Preference ShareCapital 0 0 0 0 0Reserves 4,920.24 5,349.77 5,525.36 6,201.81 7,069.98Revaluation Reserves 0 0 0 951.1 917.43Net Worth 5,170.78 5,600.31 5,775.90 7,403.45 8,237.95Deposits 50,197.46 63,995.97 77,856.70 98,368.85 1,20,257.59Borrowings 876.43 622.62 1,839.84 721.96 4,887.03Total Debt 51,073.89 64,618.59 79,696.54 99,090.81 1,25,144.62Other Liabilities &Provisions 2,692.71 3,717.38 5,232.89 6,088.34 4,048.43Total Liabilities 58,937.38 73,936.28 90,705.33 1,12,582.60 1,37,431.00AssetsCash & Balances withRBI 4,263.22 5,336.09 7,322.25 6,879.89 8,086.79Balance with Banks,Money at Call 1,262.48 2,173.12 2,892.49 5,345.24 6,513.11Advances 33,577.24 44,138.47 54,565.83 68,500.37 83,489.30Investments 16,817.57 19,808.36 23,950.68 28,488.95 35,785.32Gross Block 848.28 901.58 970.31 2,062.88 2,138.53AccumulatedDepreciation 467.43 526.6 587.55 680.34 756.56Net Block 380.85 374.98 382.76 1,382.54 1,381.97Capital Work InProgress 3.32 7.7 4.7 1.31 12.08Other Assets 2,632.69 2,097.55 1,586.61 1,984.28 2,162.43Total Assets 58,937.37 73,936.27 90,705.32 1,12,582.58 1,37,431.00Contingent Liabilities 8,855.00 10,546.59 15,251.46 24,340.88 37,571.20Bills for collection 4,596.59 11,786.72 7,065.87 8,562.69 13,952.26Book Value (Rs) 206.39 223.53 230.54 257.54 292.19 ~ 33 ~
  • 34. Brief Analysis of OBC Balance Sheet:From the above balance sheet, we saw that the Equity share capital for the last 5 years remainsthe same, which shows that the bank did not issue any new equity shares. The reserves of thebank is increasing which means that the bank is increasing the retain earnings. Net worth of thebank increases and we saw that the deposits of the bank also increase. The total debts of the bankincreases in which the bank have to meet the increasing total assets.Cash and balances increases sharply in the year 2009 because of the increase in the CRR in theyear 2010 which is the RBI initiative combat Recession. Balance with banks also increases,Advances increases sharply from 2010 onwards which shows that the bank is increasingfinancing loans facilities after the falling of the CRR from 9% in August 2009 to 5% in January2010. The bank also increases its investments which shows that the bank is expanding. Otherassets decreases in 2009 and 2010 but increases in 2011. Oriental Bank of Commerce Profit & Loss account in Rs. Cr. Mar 07 Mar 08 Mar 09 Mar 10 Mar 11IncomeInterest Earned 4,118.92 5,164.90 6,838.18 8,856.47 10,257.13Other Income 290.06 365.57 139.93 1,071.32 1,200.04 ~ 34 ~
  • 35. Total Income 4,408.98 5,530.47 6,978.11 9,927.79 11,457.17ExpenditureInterest expended 2,513.85 3,473.58 5,156.17 6,859.97 7,349.69Employee Cost 500.46 520.86 549.37 756.16 971.29Selling and AdminExpenses 222.4 123.93 85.05 496.97 915.7Depreciation 75.52 71.82 75.05 80.3 86.19Miscellaneous Expenses 539.57 759.47 759.26 828.97 999.62Preoperative ExpCapitalised 0 0 0 0 0Operating Expenses 971.16 879.23 890.14 1,553.42 2,217.57Provisions &Contingencies 366.79 596.85 578.59 608.98 755.23Total Expenses 3,851.80 4,949.66 6,624.90 9,022.37 10,322.49 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11Net Profit for the Year 557.16 580.81 353.22 905.42 1,134.68Extraordionary Items -19.84 0 0 0 0Profit brought forward 0.94 0.88 0.42 0.51 0.83Total 538.26 581.69 353.64 905.93 1,135.51Preference Dividend 0 0 0 0 0Equity Dividend 112.74 117.75 117.75 182.89 227.99Corporate Dividend Tax 15.81 18.52 20.01 31.08 38.75Per share data (annualised)Earning Per Share (Rs) 22.24 23.18 14.1 36.14 45.29Equity Dividend (%) 45 47 47 73 91Book Value (Rs) 206.39 223.53 230.54 257.54 292.19AppropriationsTransfer to StatutoryReserves -540.67 161 104 670.12 517.19Transfer to Other Reserves 949.5 284.01 111.37 21.01 351ProposedDividend/Transfer to Govt 128.55 136.27 137.76 213.97 266.74Balance c/f to BalanceSheet 0.88 0.42 0.51 0.83 0.58Total 538.26 581.7 353.64 905.93 1,135.51 ~ 35 ~
  • 36. Brief Analysis of OBC P&L Account:From the Profit and loss Account we can see that the Net profit of the bank decline in the year2009 but significantly increases in the year 2010 and 2011. We also see percentage increase inInterest earned from 2007 to 2009 is much lower than the interest expended during these years.Other income which is mostly of fee based income from services rendered by the bank shows adecline in the year 2009 and then increased in year ending March 2010 and March 2011.Financial Statement State Bank of India Balance Sheet ------------------- in Rs. Cr. ------------------- Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Capital and Liabilities: Total Share Capital 526.3 526.3 526.3 631.47 634.88 Equity Share Capital 526.3 526.3 526.3 631.47 634.88 ~ 36 ~
  • 37. Share ApplicationMoney 0 0 0 0 0Preference ShareCapital 0 0 0 0 0Reserves 23,545.84 27,117.79 30,772.26 48,401.19 57,312.82RevaluationReserves 0 0 0 0 0Net Worth 24,072.14 27,644.09 31,298.56 49,032.66 57,947.70Deposits 3,67,047.53 3,80,046.06 4,35,521.09 5,37,403.94 7,42,073.13Borrowings 19,184.31 30,641.24 39,703.34 51,727.41 53,713.68Total Debt 3,86,231.84 4,10,687.30 4,75,224.43 5,89,131.35 7,95,786.81Other Liabilities& Provisions 49,578.89 55,538.17 60,042.26 83,362.30 1,10,697.57Total Liabilities 4,59,882.87 4,93,869.56 5,66,565.25 7,21,526.31 9,64,432.08 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10AssetsCash & Balanceswith RBI 16,810.33 21,652.70 29,076.43 51,534.62 55,546.17Balance withBanks, Money atCall 22,511.77 22,907.30 22,892.27 15,931.72 48,857.63Advances 2,02,374.45 2,61,641.53 3,37,336.49 4,16,768.20 5,42,503.20Investments 1,97,097.91 1,62,534.24 1,49,148.88 1,89,501.27 2,75,953.96Gross Block 6,691.09 7,424.84 8,061.92 8,988.35 10,403.06AccumulatedDepreciation 4,114.67 4,751.73 5,385.01 5,849.13 6,828.65Net Block 2,576.42 2,673.11 2,676.91 3,139.22 3,574.41Capital Work InProgress 121.27 79.82 141.95 234.26 263.44Other Assets 18,390.71 22,380.84 25,292.31 44,417.03 37,733.27Total Assets 4,59,882.86 4,93,869.54 5,66,565.24 7,21,526.32 9,64,432.08ContingentLiabilities 1,31,325.40 1,91,819.34 2,59,536.57 7,36,087.59 6,14,603.47Bills forcollection 44,794.10 57,618.44 70,418.15 93,652.89 1,52,964.06 ~ 37 ~
  • 38. Book Value (Rs) 457.39 525.25 594.69 776.48 912.73Brief Analysis of SBI Balance Sheet:From the above balance sheet, we saw that the Equity share capital for the last 3 years remainsthe same, which shows that the bank did not issue equity shares in these years but we can see anincrease in share capital in the year 2009 and even in 2010, which shows that the bank issuesnew equity share in the market. The reserves of the bank is increasing which means that the bankis increasing the retain earnings. Net worth of the bank increases and we saw that the deposits ofthe bank also increase. The total debts of the bank increases in which the bank have to meet theincreasing total assets.Cash and balances increases sharply in the year 2009 because of the increase in the CRR in theyear 2009 which is the RBI initiative combat Recession. We can see that the balance with banksin the year 2008 and especially in 2009 declines maybe because the bank have to reduce thesavings in other banks to deposit with the RBI due to the increase in the CRR in 2009. Advancesincreases sharply from 2009 onwards which shows that the bank is increasing financing loansfacilities after the falling of the CRR from 9% in August 2009 to 5% in January 2010. State Bank of India Profit & Loss account ----------------- in Rs. Cr. ------------------- Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Income Interest Earned 32,428.00 35,794.93 39,491.03 48,950.31 63,788.43 Other Income 7,119.90 7,388.69 7,446.76 9,398.43 12,691.35 Total Income 39,547.90 43,183.62 46,937.79 58,348.74 76,479.78 Expenditure Interest expended 18,483.38 20,159.29 23,436.82 31,929.08 42,915.29 Employee Cost 6,907.35 8,123.04 7,932.58 7,785.87 9,747.31 Selling and Admin Expenses 2,634.64 1,853.32 3,251.14 4,165.94 5,122.06 Depreciation 752.21 729.13 602.39 679.98 763.14 Miscellaneous Expenses 6,465.82 7,912.15 7,173.55 7,058.75 8,810.75 ~ 38 ~
  • 39. Preoperative ExpCapitalised 0 0 0 0 0OperatingExpenses 11,278.18 11,872.89 13,251.78 14,609.55 18,123.66Provisions &Contingencies 5,481.84 6,744.75 5,707.88 5,080.99 6,319.60Total Expenses 35,243.40 38,776.93 42,396.48 51,619.62 67,358.55 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09Net Profit for theYear 4,304.52 4,406.67 4,541.31 6,729.12 9,121.23ExtraordionaryItems 0 0 0 0 0Profit broughtforward 0.34 0.34 0.34 0.34 0.34Total 4,304.86 4,407.01 4,541.65 6,729.46 9,121.57PreferenceDividend 0 0 0 0 0Equity Dividend 657.87 736.82 736.82 1,357.66 1,841.15CorporateDividend Tax 93.75 103.34 125.22 165.87 248.03Per share data (annualised)Earning Per Share(Rs) 81.79 83.73 86.29 106.56 143.67Equity Dividend(%) 125 140 140 215 290Book Value (Rs) 457.39 525.25 594.69 776.48 912.73AppropriationsTransfer toStatutoryReserves 3,552.89 3,566.51 3,682.15 5,205.69 6,725.15Transfer to OtherReserves 0.01 0 -2.88 -0.1 306.9ProposedDividend/Transferto Govt 751.62 840.16 862.04 1,523.53 2,089.18Balance c/f toBalance Sheet 0.34 0.34 0.34 0.34 0.34Total 4,304.86 4,407.01 4,541.65 6,729.46 9,121.57 ~ 39 ~
  • 40. Brief Analysis of SBI’s Profit & Loss A/c:From the Profit and loss Account we can see that the Net profit of the bank increases decline inthe year 2009 but significantly increases in the year 2010 and 2011. We also see percentageincrease in Interest earned from 2007 to 2009 is much lower than the interest expended duringthese years. Other income which is mostly of fee based income from services rendered by thebank shows a decline in the year 2009 and then increased in year ending March 2010 and March2011.COMMON-SIZE FINANCIAL STATEMENT ANALYSISSince size of the companies compared will be different, we need to bring them on certaincommon scale. For instance, SBI is several times more than OBC, Comparison is possible only ifwe are able to reduce the financial statements into percentage basis. This is called ‘common sizefinancial statement analysis’. The common size financial statement expresses each items of thebalance sheet or profit and loss statement as a percentage of total assets or net sales respectivelyand is calculated on yearly basis. ORIENTAL BANK OF COMMERCE STATE BANK OF INDIA Interest earned Interest earned in Rs. Cr. in Rs. Cr. Total TotalYear Amount Income Percentage Year Amount Income Percentage2006 4118.92 4408.98 93.42 2006 35794.93 43183.62 82.892007 5164.90 5530.47 93.39 2007 39491.03 46937.79 84.132008 6838.18 6978.11 97.99 2008 48950.31 58348.74 83.892009 8856.47 9927.79 89.21 2009 63788.43 76479.78 83.41 ~ 40 ~
  • 41. Interpretation:As income earned is an important source of income for the banks, from the profit and lossaccount of Oriental Bank of Commerce and State bank of India, the percentage of income earnedof OBC from the year 2006 increases much more than the declining interest earned percentage ofSBI. The reason could be that SBI has got more branches abroad than OBC which might havebeen affected as there had been more default in payments including interests from foreignfunding of assets. Another reason could be because SBI has got more deposits than OBC, andwith the increasing CRR an important step taken by the RBI to counter the impact of recession inthe year 2008, could have impacted the lending practices of SBI in offering loans and advances,hence a decline in interest earned even of OBC in 2009. ORIENTAL BANK OF COMMERCE STATE BANK OF INDIA Interest expended Interest expended in Rs. Cr. in Rs. Cr. Total TotalYear Amount Expenses Percentage Year Amount Expenses Percentage2006 2513.85 3851.80 65.26 2006 20159.29 38776.93 51.992007 3473.58 4949.66 70.18 2007 23436.82 42396.48 55.282008 5156.17 6624.90 77.83 2008 31929.08 51619.62 61.852009 6859.97 9022.37 76.03 2009 42915.29 67358.55 63.71 ~ 41 ~
  • 42. Interpretation:It is natural that banks spend large amount towards interest expenditure. Oriental Bank ofCommerce expenditure increases much more higher than State Bank of India especially in theyear 2008 and 2009, and an increasing trend is witnessed in both of the bank’s interestexpenditure on account of general increased in interest rates in the market during 2008. ORIENTAL BANK OF COMMERCE STATE BANK OF INDIA Employee Cost Employee Cost in Rs. Cr. in Rs. Cr. Total TotalYear Amount Expenses Percentage Year Amount Expenses Percentage200 200 6 500.46 3851.80 12.99 6 8123.04 38776.93 20.95 200 200 7 520.86 4949.66 10.52 7 7932.58 42396.48 18.71 200 200 8 549.37 6624.90 8.29 8 7785.87 51619.62 15.08 200 200 9 756.16 9022.37 8.38 9 9747.31 67358.55 14.47 ~ 42 ~
  • 43. Interpretation:Looking at the figures above, we can see that the percentage of employee cost of SBI is muchhigher than that of OBC, the reason must be that SBI is having more employees than that ofOBC and in addition to that, we can see that the percentage of employee’s cost in both of thebanks is actually minimum in 2008 and 2009. This implies that both the banks are applying acost control strategy or maybe both banks are recruiting less in 2008 compare to other years dueto the impact of the global recession. ORIENTAL BANK OF COMMERCE STATE BANK OF INDIA Selling and administration expenses Selling and administration expenses in Rs. Cr. in Rs. Cr. Total Total Year Amount Expenses Percentage Year Amount Expenses Percentage 2006 222.40 3851.80 5.77 2006 1853.32 38776.93 4.78 2007 123.93 4949.66 2.50 2007 3251.14 42396.48 7.67 ~ 43 ~
  • 44. 2008 85.05 6624.90 1.28 2008 4165.94 51619.62 8.07 2009 496.97 9022.37 5.51 2009 5122.06 67358.55 7.60Interpretation:The selling and administration expenses of OBC has come down from 5.77 percent in 2006 to aminimum of 1.28 percent in 2008, while we witness an opposite strategy applied by SBI wherethe maximum percentage of selling and administration is seen in the year 2008 at 8.07 percent.Here we can say that maybe both banks are using different strategy to tackle the impact of theglobal financial crises, while OBC is trying to cut down Selling and administration expenses as astrategy to control cost but SBI is using a different strategy by increasing its selling andadministration cost to take advantage of the market share of troubled foreign banks operating inIndia and even abroad. ORIENTAL BANK OF COMMERCE STATE BANK OF INDIA Operating expenses Operating expenses in Rs. Cr. in Rs. Cr. Total Yea Total Year Amount Expenses Percentage r Amount Expenses Percentage 2006 971.16 3851.80 25.21 2006 11872.89 38776.93 30.62 ~ 44 ~
  • 45. 2007 879.23 4949.66 17.76 2007 13251.78 42396.48 31.26 2008 890.14 6624.90 13.44 2008 14609.55 51619.62 28.30 2009 1553.42 9022.37 17.22 2009 18123.66 67358.55 26.91Interpretation:The operation expenditure of both the banks clearly shows the importance of cost controlespecially in the year 2008 where the impact of Global economic meltdown is maximum, but wecan see OBC operating expenses started increasing whereas SBI still cut down its operating costto play safe in the fragile market. ~ 45 ~
  • 46. TREND ANALYSISTrend analysis shows the level of growth that banks have achieved over the years on eachcomponent of financial statements. Suppose a bank shows a growth rate of 20% in total incomebut its cost has increased by 26%, then its profitability is affected. One can perform such analysisby observing the trends on each one of financial parameters. Trend Analysis Oriental Bank of Commerce State Bank of India Parameters 2006 2007 2008 2009 2006 2007 2008 2009Total Income 100 125 158 225 100 109 135 177Total Expenditure 100 129 172 234 100 109 133 174Net Profit 100 104 63 163 100 103 153 207Interpretation:From the above Trend analysis of selected parameters derived from the P&L account we sawthat in OBC the growth rate of Total Income is 25%, 58% and 125% in the year 2007, 2008 and2009 respectively which is lower than the growth rate of total expenditure which is 29%, 72%,134% in the year 2007, 2008 and 2009. This growth rate of Income which is lower than that ofexpenditure affected the Net profit of the bank as we can see a decrease in the profit especially inthe year 2008 because of the vast difference of growth of income and the growth of expenditureduring this year.Comparing to SBI the growth of income in the year 2007, 2008 and 2009 is increasing to 9%,35% and 77% which is higher than the growth of expenditure which is 9%, 33% and 74% in theyear 2007, 2008 and 2009 respectfully. Hence we saw a higher and increasing profit of 3%, 53%and 107% in the year 2007, 2008 and 2009 respectfully. ~ 46 ~
  • 47. FINDINGS AND RECOMMENDATIONS“When US sneezes the world catches cold”.The global financial crisis originated in United States of America. During booming years wheninterest rates were low and there was great demand for houses, banks advanced housing loans topeople with low credit worthiness on the assumption that housing prices would continue to rise.Later, the financial institutions repackaged these debts into financial instruments calledCollateralized Debt Obligations and sold them to investors world-wide. Inthis way the risk was passed on multifold through derivatives trade. Surplus inventory of housesand the subsequent rise in interest rates led to the decline of housing prices in the year 2006-07which resulted in unaffordable mortgage payments and many people defaulted or undertookforeclosure. The house prices crashed and the mortgage crisis affected many banks, mortgagecompanies and investment firms world-wide. Different views on the reasons of the crisis includeboom in the housing market, speculation, high-risk mortgage loans and lending practices,securitization practices, inaccurate credit ratings and poor regulation of the financial institutions.The financial crisis has not only affected United States of America, but also European Union,U.K and Asia. The Indian Economy too has felt the impact of the crisis to some extent.The Indian banking system as an islet of tranquillity in a sea of turbulence.It is not that the Indian economy has been spared in the present crisis. But the Indian situation isdifferent from that in the western world. In the US and Europe, the housing market collapsed anddragged down banks. Banks are affected indirectly by the slowing down of the economy. Thedirect impact of the crisis on the Indian banking system has been small because Indian banks donot have big exposures to the subprime market. At a time when the financial system across theglobe is engulfed in a deep crisis, the Indian banking system continues to show resilience. Theunderlying fundamentals of the Indian economy would continue to underpin the robustperformance of the banking sector which remains profitable and well capitalized. The inability ofIndian firms to raise funds abroad, including trade credit, puts pressure on the domestic bankingsystem for more credit. It is, in this context, one must view the actions of the Reserve Bank inexpanding liquidity. ~ 47 ~
  • 48. Global Recession had an impact in most of the Indian banks as there was a decline in profits ofsome of the major banks including some public sector banks. While thousands of peopleworldwide have been handed over pink slips as a part and parcel of the global slowdown, Indianpublic sector banks still have jobs many as banks still recruits during recession. The creditexpansion by the banking sector was also reflected in the deep divergence in the pace of growthin deposits among the banks. Banks still manages to profit even in this recession period. Banksare doing so well in this time of recession. The five reasons that big banks are able to beat therecession and rake in the profits are: Underwriting increases, retail trading revenue, lesscompetition and boost retail banking.The Comparative Study revealsFrom the Brief Analysis of the Balance Sheet and Profit and loss A/c of OBC and SBI we found: 1. The reserves of the OBC bank is increasing which means that the bank is increasing the retain earnings in-spite of increasing CRR in 2007-2008. Even the reserves of the bank is increasing which means that the bank is increasing the retain earnings. 2. Cash and balances in both banks increases sharply in the year 2008 because of the increase in the CRR in the year 2008 which is the RBI initiative combat Recession. 3. We can see that the balance with banks in SBI in the year 2007 and especially in 2008 declines maybe because the bank have to reduce the savings in other banks to deposit with the RBI due to the increase in the CRR in 2008. Advances increases sharply from the year 2008 onwards which shows that the bank is increasing financing loans facilities only after the falling of the CRR from 9% in August 2008 to 5% in January 2009 in both banks. 4. OBC and SBI bank also increases its investments which show that the bank is expanding in-spite the global meltdown. Other assets of OBC decreases in 2008 and 2009 but increases in 2011. ~ 48 ~
  • 49. 5. Net profit of both the banks OBC and SBI decline in the year 2008 but significantly increases in the year 2010 and 2011. 6. Other income of both the banks, which is mostly of fee based income from services rendered by the bank shows a decline in the year 2009 and then increased in year ending March 2010 and March 2011.From the common size analysis we found that: 1. The percentage of income earned of OBC from the year 2006 increases much more than the declining interest earned percentage of SBI because SBI has got more branches abroad than OBC which might have been affected as there had been more default in payments including interests from foreign funding of assets also could be because SBI has got more deposits than OBC, and with the increasing CRR an important step taken by the RBI to counter the impact of recession in the year 2008, could have impacted the lending practices of SBI in offering loans and advances. 2. Oriental Bank of Commerce expenditure increases much more higher than State Bank of India especially in the year 2008 and 2009, and an increasing trend is witnessed in both of the bank’s interest expenditure on account of general increased in interest rates in the market during 2008. 3. We can see that the percentage of employee cost of SBI is much higher than that of OBC, the reason must be that SBI is having more employees than that of OBC and in addition to that, we can see that the percentage of employee’s cost in both of the banks is actually minimum in 2008 and 2009. This implies that both the banks are applying a cost control strategy or maybe both banks are recruiting less in 2008 compare to other years due to the impact of the global recession. 4. The selling and administration expenses of OBC has come down in 2008, while we witness an opposite strategy applied by SBI where the maximum percentage of selling and administration is seen in the year 2008. Here both banks are using different strategy to tackle the impact of the global financial crises, while OBC is trying to cut down Selling and administration expenses as a strategy to control cost but SBI is using a different strategy by increasing its selling and administration cost to take advantage of the market share of troubled foreign banks operating in India and even abroad. ~ 49 ~
  • 50. 5. The operation expenditure of both the banks clearly shows the importance of cost control especially in the year 2008. CONCLUSIONWhile Banks around the world are in turbulence, we should also be aware and know that theprudential norms adopted by the Indian banking system and the better regulatory frameworkadopted by the RBI in the country have helped the banking system remain stronger even duringthe global slowdown. There is an apprehension among the customers and the people in thecountry about the strength of the banking system. The money of the people is safe in Indianbanks including Oriental Bank of Commerce unlike the western banks. The Indian bankingsystem has the rule which has taught the sector not to have greed. In the end, the bankingindustry is likely to be just fine. While some individual banks went down, and continue tostruggle, the financial sector as a whole is doing okay, and is likely to recover from this recessionwithout trouble. Hopefully, these profits mean that the banks will be more willing to help othercompanies that need access to credit. ~ 50 ~
  • 51. REFERENCES(i) BooksChandra, P. (2007), Financial Analysis of Banks in Managing Finance, 3rd Ed. New Delhi: TataMcGraw-Hill Publishing Company Ltd., pp.45-60.(ii) Electronic Books Mishra, Alok. K. (2009) Chairman’s message to Share Holders.[available at: http://obc.co.in viewed on 08/03//2012](iii)Journal ArticlesRangarajan. C (2009) The International Financial Crisis and Its Impact on India. The AnalystMagazine, Vol 32, No 04, pp. 9-30(iv) Web SitesPrasad. A and Panduranga Reddy C(2009) Global Financial Crisis and Its Impact on India.[available at: http://ssrn.com/sol2/papers.cfm?abstract_id=1423454] ~ 51 ~
  • 52. Visconti. R. M. (2009) Global Recession and Microfinance in Developing Countries: Threatsand Opportunities.[available at: http://ssrn.com/sol67/papers.cfm?abstract_id=1668684]Hemendra Jr. Choudhary Singh(2009) Economic Recession and Banking Reforms - Causes andSolution [available at: http://ssrn.com/sol6/papers.cfm?abstract_id=5785979]Vidyakala. k, Madhuvanthi.S, Poornima S, (2009) Recession in the Indian banking sector.[available at: http://ssrn.com/sol76/papers.cfm?abstract_id=6986009]Islam Iyanatul (2010) The Great Recession of 2008-2009: Causes, Consequences and PolicyResponses. [available at: http://ssrn.com/sol45/papers.cfm?abstract_id=3567579] ~ 52 ~