Chapter 09 financial statment analysis of banks


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Chapter 09 financial statment analysis of banks

  2. 2. ASSETS OF COMMERCIAL BANKS <ul><li>Mainly following are the Assets :- </li></ul><ul><ul><li>Cash in hand </li></ul></ul><ul><ul><li>Balances with RBI </li></ul></ul><ul><ul><li>Balances with banks in India </li></ul></ul><ul><ul><li>Money at call and short notice </li></ul></ul><ul><ul><li>Balances with banks outside India </li></ul></ul><ul><ul><li>Investments – </li></ul></ul><ul><ul><ul><li>Investments in India </li></ul></ul></ul><ul><ul><ul><li>Investments outside India </li></ul></ul></ul><ul><ul><li>Advances – </li></ul></ul><ul><ul><ul><li>Type-wise </li></ul></ul></ul><ul><ul><ul><li>Security-wise </li></ul></ul></ul><ul><ul><ul><li>Sector-wise </li></ul></ul></ul><ul><ul><li>Fixed Assets </li></ul></ul><ul><ul><li>Other Assets </li></ul></ul>
  3. 3. LIABILITIES OF COMMERCIAL BANKS <ul><li>Capital </li></ul><ul><li>Reserves and Surplus </li></ul><ul><ul><li>Statutory Reserves </li></ul></ul><ul><ul><li>Capital Reserves </li></ul></ul><ul><ul><li>Share Premium </li></ul></ul><ul><ul><li>Investments Fluctuations Reserves </li></ul></ul><ul><ul><li>Revenue and other Reserves </li></ul></ul><ul><ul><li>Balance of Profit </li></ul></ul><ul><li>Deposits </li></ul><ul><ul><li>Type-wise </li></ul></ul><ul><ul><li>Location-wise </li></ul></ul><ul><li>Borrowings </li></ul><ul><li>Other liabilities </li></ul><ul><li>Other liabilities </li></ul>
  4. 4. BANK PERFORMANCE INDICATORS <ul><li>Solvency of bank depends not only on stability value of its Performing Assets and also on size of capital accounts </li></ul><ul><li>Ratio of capital funds to bank assets – universally accepted measure of strength and stability of bank </li></ul><ul><li>Functions of bank Capital </li></ul><ul><ul><li>Link between financial markets and bank's profitability </li></ul></ul><ul><ul><li>Return on capital indicates how well a bank's programmes may be sustained </li></ul></ul><ul><ul><li>Provides cushion against temporary losses and signal that bank has a basis of continuity </li></ul></ul><ul><ul><li>Generally less than 10% of Assets </li></ul></ul>
  5. 5. ASSESSMENT OF BANK ASSETS <ul><li>Capital Adequacy Ratio – </li></ul><ul><li>Minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 9 % ongoing basis </li></ul><ul><li>Subjected to Prudential Floor (as % of minimum capital requirement computed as per current (Basel I) framework for credit and market risks) </li></ul><ul><li>Capital funds are broadly classified as Tier 1 and Tier 2 capital </li></ul><ul><ul><li>Tier 1 – PUC, Free Reserves, Innovative perpetual debt instruments </li></ul></ul><ul><ul><li>Tier II - Revaluation reserves, General provisions and loss reserves, </li></ul></ul><ul><li>Tier 2 capital shall not exceed 100 % of Tier 1 capital </li></ul><ul><li>Deduction from Tier I - Intangible assets and losses in the current period and those brought forward from previous periods </li></ul>
  6. 6. RISK ADJUSTED CAPITAL REQUIREMENTS <ul><li>Adoption of Capital Adequacy norms, Prudential norms for income recognition and provision for bad debts </li></ul><ul><li>Risk Weighted Assets Ratio approach to Capital considered more equitable </li></ul><ul><li>Integration of on-balance sheet and off-balance sheet exposure in to capital ratio provide risk sensitivity and skills to manage risks in prudent manner </li></ul><ul><li>Intangible assets and losses in the current period and those brought forward from previous periods should be deducted from Tier 1 capital </li></ul><ul><li>Loans and advances to bank’s own staff which are fully covered by superannuation benefits and/or mortgage of flat/ house - 20 % risk weight. </li></ul><ul><li>Capital Charge for Credit Risk - rating assigned by eligible external credit rating agencies </li></ul>
  7. 7. FUNDED RISK ASSETS <ul><li>Cash balances with RBI, other banks, money at call or short notice </li></ul><ul><li>Claims on other banks (Certificate of Deposit) </li></ul><ul><li>Other investments </li></ul><ul><li>Loans and Advances </li></ul><ul><li>Loans guaranteed by CG/SG </li></ul><ul><li>Loans granted to PSU </li></ul><ul><li>Premises, Furniture and other fixtures </li></ul><ul><li>Bills Purchased and discounted and other credit facilities </li></ul><ul><li>Off-balance Sheet Items - Conversion factor is used to calculate Risk Exposure </li></ul>
  8. 8. INCOME STATEMENT <ul><li>Interest Income </li></ul><ul><li>Other Income </li></ul><ul><li>Operating Income (OI) </li></ul><ul><li>Interest Expenses </li></ul><ul><li>Employee Expenses </li></ul><ul><li>OPBDT/OPBT </li></ul><ul><li>Extraordinary / Prior period </li></ul><ul><li>Tax </li></ul><ul><li>PAT </li></ul><ul><li>Dividend </li></ul>
  9. 9. INCOME RECOGNITION POLICY <ul><li>Policy of income recognition - objective and based on the record of recovery </li></ul><ul><li>Income from NPA - receipt basis </li></ul><ul><li>Interest on advances   against term deposits, NSCs, IVPs, KVPs and Life policies  - taken to income account on the due date, provided adequate margin is available </li></ul><ul><li>Finance income on leased asset - accrual basis </li></ul><ul><li>Categories of NPAs i. Sub­standard Assets ii. Doubtful Assets iii. Loss Assets </li></ul><ul><li>Provisioning Norms - Primary responsibility of is that of the auditors </li></ul>
  10. 10. LOANS AND ADVANCES – REGULATORY PROVISIONS <ul><li>Loans and advances shall not include </li></ul><ul><ul><li>loans or advances against Govt securities, LIC policies; FD; facilities like bills purchased/discounted; purchase of cheques, other non-fund based facilities like acceptance/co-acceptance of bills, opening of L/Cs and issue of guarantees, purchase of debentures, credit/overdraft facility extended by settlement bankers to NSCCL/ CCIL; loans or advances to the Agricultural Finance Corporation Ltd; </li></ul></ul><ul><ul><li>Specifically exempted by RBI </li></ul></ul>
  11. 11. RESTRICTIONS <ul><li>STATUTORY RESTRICTIONS - Advances against bank's own shares, bank's Directors holding substantial interest </li></ul><ul><li>REGULATORY RESTRICTIONS </li></ul><ul><li>Loans for Buy-back of Securities </li></ul><ul><li>Restriction on loans and advances to </li></ul><ul><ul><li>Directors/Relatives – with RBI prior approval </li></ul></ul><ul><ul><li>Senior officers/Relatives </li></ul></ul><ul><ul><li>Industries Producing/Consuming Ozone Depleting Substances (ODS) </li></ul></ul><ul><ul><li>Sensitive Commodities </li></ul></ul><ul><li>Prohibited </li></ul><ul><ul><li>commission to staff members </li></ul></ul><ul><ul><li>loans against partly paid shares, FDRs other banks </li></ul></ul><ul><ul><li>Certain activities undertaken by NBFCs </li></ul></ul><ul><ul><li>Bank Finance to Equipment Leasing Companies </li></ul></ul><ul><ul><li>Bullion/Primary gold, & Ornaments </li></ul></ul>
  12. 12. CAMEL RATINGS <ul><li>Performance Evaluation Technique used by most banks across the world </li></ul><ul><li>undertakes all the important criteria, i.e. (CAMEL) </li></ul><ul><ul><li>Capital </li></ul></ul><ul><ul><li>Assets </li></ul></ul><ul><ul><li>Management </li></ul></ul><ul><ul><li>Earnings; and </li></ul></ul><ul><ul><li>Liquidity </li></ul></ul><ul><li>Internal supervisory tool for evaluating - soundness of banks and for identifying those banks which require special supervisory attention or concern </li></ul>
  13. 13. CAMEL Ratings (Contd.) <ul><li>Recommended by Padmanabhan Committee (1995) - rated on a five point scale (A to E) </li></ul><ul><li>Evaluation Parameters (Ratios) </li></ul><ul><li>a) Capital Adequacy : Capital to Risk-Weighted Assets (CRAR). A sound capital base strengthens confidence of depositors </li></ul><ul><li>Asset Quality : Non-Performing Loans to Total loans (GNPA). Indicative of quality of Bankers` credit decisions. Higher GNPA is indicative of poor credit decision-making </li></ul><ul><li>Management : Non-interest expenditures to total assets (MGNT) . Measures working of the management. Expenses, such as payroll, workers compensation and training investment, reflects the management policy stance . </li></ul>
  14. 14. <ul><li>( d) Earnings : Return on Asset ratio </li></ul><ul><li>(e) Liquidity : Cash maintained by banks and balances with RBI, to Total Asset ratio (LQD) </li></ul><ul><li>It is an indicator of bank's liquidity. Banks with a larger volume of liquid assets are perceived safe, allow banks to meet unexpected withdrawals. </li></ul><ul><li>(f) Systems and Control </li></ul><ul><li>RATING SYMBOLS </li></ul><ul><li>A - Bank is sound in every respect </li></ul><ul><li>B - Bank is fundamentally sound but with moderate weaknesses </li></ul><ul><li>C - financial, operational or compliance weaknesses that give cause for supervisory concern </li></ul><ul><li>D - Serious or immoderate finance, operational and managerial weaknesses that could impair future viability </li></ul><ul><li>E - critical financial weaknesses and there is high possibility of failure in the near future. </li></ul>