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CHAPTER - 1 BANKING INDUSTRY Introduction A bank is a financial institution that provides banking and other financial services to their  customers. A bank is generally understood as an institution which provides fundamental  banking services such as accepting deposits and providing loans. A banking system also referred as a system provided by the bank which offers cash management services for  customers, reporting the transactions of their accounts and portfolios, throughout the day.

History of Banking in India The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: PHASE I

- Early phase from 1786 to 1969 of Indian Indian Banks

PHASE II - Nationalizatio Nationalization n of Indian Banks Banks and up to 1991 PHASE III - Indian Financial & Banking Sector Reforms after 1991. PHASE I:

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. During the first  phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per  amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those day’s public has lesser confidence in the banks. As an aftermath deposit

 

mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to the traders.   PHASE II: 

Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the  banking

segment

in

India

under

Government

ownership.

The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: 1949: Enactment of Banking Regulation Act. 1955: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalization of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over 200 crore. After the nationalization of banks, the branches of the public sector bank India raised to approximately 800% in deposits and advances took a huge jump by 11,000%.Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about

the

sustainability

of

these

institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up  by

his

name

which

worked

for

the

liberalisation

of

banking

practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The

 

entire system became more convenient and swift. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.

Nationalization A significant milestone in Indian Banking happened in the late 1960s when the then Indira Gandhi government nationalized, on 19th July, 1969, 14 major commercial Indian banks, followed by nationalization of 6 more commercial Indian banks in 1980. The stated reason for the nationalization was more control of credit delivery. After this, until the 1990s, the nationalized banks grew at a leisurely pace of around 4%-also called as the Hindu growth of  the Indian economy. After the amalgamation of New Bank of India with Punjab National Bank, currently there are 59 nationalized banks in India . 

Liberalization  In the early 1990s the then Narasimha Rao government embarked on a policy of liberalization and gave licenses to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks like ICICI Bank and HDFC Bank. This move along with the rapid growth in the economy of India, kick started the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of   banks, namely, name ly, government governm ent banks, banks , private banks and foreign forei gn banks. However there the re had been a few hiccups for these new banks with many either being taken over like Global Trust Bank  while others like Centurion Bank have found the going tough. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%.

Current scenario  The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. Based on the projections made in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The

 

total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000 crores. That will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will be large additions to the capital base and reserves on the liability side. The Indian Banking Industry can be categorized into non-scheduled banks and scheduled  banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000 branches of Scheduled banks spread across India. As far as the present scenario is concerned the Banking Industry in India is going through a transitional phase. The Public Sector Banks(PSBs), which are the base of the Banking sector in India account for  more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with excessive Non Performing assets (NPAs), massive manpower and lack of modern technology. On the other hand the Private Sector Banks are making tremendous progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned they are likely to succeed in the Indian Banking Industry.

In the Indian Banking Ban king Industry some of the t he Private Sector Banks operating are IDBI Bank, ING Vyasa Bank ,SBI ,SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd. and banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank among Bank among others. ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd, Citibank are some of the foreign banks operating in the India

Future outlook   Total banking assets are expected to double and grow to $915 billion by 2015 - a CAGR of  15% $70 billion additional equity needed for growth plus Basel III compliance Mutual Funds: Assets Under Management (AUM) are expected to grow by 15% till 2015 Retail Finance is expected to grow at an annual rate of 18%, from $27.6 billion in 2003-04 to $64.2 billion by 2011-12.

 

Banking Structure in India  There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession, etc. On the basis of functions, the banking institutions in India may be divided into the following types:

RESERVE BANK OF INDIA

SCHEDULED BANKS

COMMERCIAL BANKS

PRIVATE BANKS (31)

OLD BANKS (23)

CO-OPERATIVE CO-OPERATI VE BANKS

URBAN CO-OPERATIVE (52)

STATE CO-OPERATIVE (16)

NEW BANKS (8)

PUBLIC SECTOR BANKS (27)

SBI AND ASSOCIATES (8)

NATIONALIZED BANKS (19)

Central Bank  

A bank which is entrusted with the functions of guiding and regulating the banking system of  a country is known as its Central bank. Such a bank does not deal with the general public. It acts essentially as Government’s banker; maintain deposit accounts of  all other banks and

 

advances money to other banks, when needed. The Central Bank provides guidance to other   banks whenever they face any problem. It is therefore known as the banker’s bank. The

Reserve Bank of India is the central bank of our country.   The Central Bank maintains record of Government revenue and expenditure under various heads. It also advises the Government on monetary and credit policies and decides on the interest rates for bank deposits and bank loans. In addition, foreign exchange rates are also determined by the central bank. Another important function of the Central Bank is the issuance of currency notes, regulating their circulation in the country by different methods. No other bank than the Central Bank can issue currency. Commercial Banks 

Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises. Now-a-days some of the commercial banks are also providing housing loan on a long-term basis to individuals. There are also many other functions of commercial banks, which are discussed later in this lesson.

Types of Commercial banks: Commercial banks are of three types i.e., Public sector banks,

Private sector banks and Foreign banks.

Public Sector Banks: These are banks where majority stake is held by the Government of  India or Reserve Bank of India. Examples of public sector banks are: State Bank of India,

Corporation Bank, Bank of Baroda and Dena Bank, etc. Private Sectors Banks: In case of private sector banks majority of share capital of the bank 

is held by private individuals. These banks are registered as companies with limited liability. For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, Vysya Bank, etc.

 

Foreign Banks: These banks are registered and have their headquarters in a foreign country

 but operate their branches branche s in our country. Some of the foreign fo reign banks operating in our country countr y are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlay’s Bank, etc. The number of fo reign banks

operating in our country has increased since the financial sector reforms of 1991. Development Banks

Business often requires medium and long-term capital for purchase of machinery and equipment, for using latest technology, or for expansion and modernization. Such financial assistance is provided by Development Banks. They also undertake other development measures like subscribing to the shares and debentures issued by companies, in case of under  subscription of the issue by the public. Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs) are examples of development banks in India. Co-operative Banks

People who come together to jointly serve their common interest often form a co-operative society under the Co-operative Societies Act. When a co-operative society engages itself in  banking business it is called a Co-operative Bank. The society has to obtain a license from the Reserve Bank of India before starting banking business. Any co-operative bank as a society is to function under the overall supervision of the Registrar, Co-operative Societies of  the State. As regards banking business, the society must follow the guidelines set and issued  by the Reserve Bank of India. Indi a. Types of Co-operative Banks

There are three types of co-operative banks operating in our country. They are primary credit societies, central co-operative banks and state co-operative banks. These banks are organized at three levels, village or town level, district level and state level. Primary Credit Societies: These are formed at the village or town level with borrower and

non-borrower members residing in one locality. The operations of each society are restricted to a small area so that the members know each other and are able to watch over the activities of all members to prevent frauds.

 

Central Co-operative Banks: These banks operate at the district level having some of the

 primary credit societies belonging b elonging to the same district dis trict as their members. These Th ese banks provide p rovide loans to their members (i.e., primary credit societies) and function as a link between the  primary credit societies and a nd state co-operative co-operativ e banks. State Co-operative Banks: These are the apex (highest level) co-operative banks in all the

states of the country. They mobilize funds and help in its proper channelization among various sectors. The money reaches the individual borrowers from the state co-operative  banks through the central centr al co-operative banks b anks and the primary credit societies. s ocieties. Specialised Banks: There are some banks, which cater to the requirements and provide

overall support for setting up business in specific areas of activity. EXIM Bank, SIDBI and  NABARD are examples of such banks. They engage themselves in some specific area or  activity and thus, are called specialized banks. Let us know about them.   Export Import Bank of India (EXIM Bank) : If you want to set up a business for exporting

 products abroad or importing products from foreign countries for sale in our country, EXIM  bank can provide you the required support supp ort and assistance. The bank grants loans loan s to exporters and importers and also provides information about the international market. It gives guidance about the opportunities for export or import, the risks involved in it and the competition to be faced, etc. Small Industries Development Bank of India (SIDBI): If you want to establish a small-

scale business unit or industry, loan on easy terms can be available through SIDBI. It also finances modernization of small-scale industrial units, use of new technology and market activities. The aim and focus of SIDBI is to promote, finance and develop small-scale industries. National Bank for Agricultural and Rural Development (NABARD): It is a central or 

apex institution for financing agricultural and rural sectors. If a person is engaged in agriculture or other activities like handloom weaving, fishing, etc. NABARD can provide credit, both short-term and long-term, through regional rural banks. It provides financial assistance, especially, to co-operative credit, in the field of agriculture, small-scale industries, cottage and village industries handicrafts and allied economic activities in rural areas.

 

Global Scenario Global Bank  has undergone a series of substantial changes in the last 10 years, starting with the

deregulation of the U.S. financial services industry in the late 1990s. Seeking to rapidly expand its  portfolio, the bank undertook a series of mergers and acquisitions. Global Bank now has over 200  branches across the western United States and offers a complete line of integrated financial services, including:

Core accounts. This includes savings and checking accounts. Lending. This includes credit cards, consumer loans (such as auto and line of credit),

mortgage, and home equity. Investing. This includes certificates of deposit, trust services, brokerage services (including

securities), annuities, individual retirement accounts, and mutual funds. Financial planning. This includes comprehensive financial planning services (including

retirement, education, and tax) and estate planning (including both future planning and plan execution services). The bank's profitability lags behind many of its competitors of similar size, but the chief executive officer (CEO) is actively exploring ways to substantially improve profitability in the future.

Improve cross-selling between services

A recent customer survey demonstrated that in many cases customers are unaware of the full suite of services offered by Global Bank. The CEO sees a significant opportunity to encourage existing customers to make use of additional, more profitable services. To this end, the CEO has tasked the chief technology officer (CTO) to explore ways technology can be used to promote cross-selling opportunities. Increase efficiency from branch offices

The mergers and acquisitions in Global Bank's recent history are also reflected in the branch office experience. Branch office workers must use a variety of different systems to perform customer service operations. This increases training costs for employees and results in slower  customer service in each branch. The CEO wants to provide more   efficient service in  branches, which he believes will result in lower training costs and greater satisfaction for   both the bank customers and staff.

 

Make one or more additional acquisitions

The CEO has determined that the fastest way to significantly increase market share is to further acquire financial businesses. He is also looking to use these acquisitions to shift the  portfolio of Global Bank to increase its focus on more profitable services. Through well chosen acquisitions, the CEO aims to increase both revenue and profitability in the medium term. Technology Objectives After meeting with the CEO, the CTO realizes that the following changes to the IT environment are necessary for Global Bank to meet its business objectives:

  Improve current application integration and simplify the integration of future



applications.

  Provide a single client application for branch office and call center employees.





  Provide a smart client application for the appraiser.

  The following section discusses each objective in more detail.



Improve Application Integration Integration The problem of application integration is at the core of many of the problems identified by the CEO. With technology from a number of different vendors, and a patchwork environment that has evolved over time, compromises have been necessary to get systems working quickly. This has resulted in high operations costs and difficulty in adding a dding new services in a cost-effective aand nd timely manner. To improve interoperability, one option would be to standardize on a single platform. However, the CTO is worried about the migration costs that would occur and recognizes that, with future acquisitions on the horizon, the problem is only likely to reoccur. Instead, the CTO decides the best solution is to focus on better application integration for the existing applications and providing a more standardized approach to application integration. In particular, the CTO wants to make it significantly easier to add and remove systems.

Provide a Single Client Application for Branch Office and Call Center Employees The CTO wants to develop a single application that the branch officers can use for all day-to-day  branch operations. This application would display an interface specific to the job role of the branch office employee, and it would be able to communicate with the bank's many different systems. The same application will also be used in the call centre located in Fargo, North Dakota.

 

The CTO believes that providing a single client application for branch employees will increase employee productivity and satisfaction, reduce data entry errors, reduce training costs, and decrease customer wait times in branches.

Provide a Smart Client Application for the Appraiser

After analyzing its loan processing time, the CTO determined it needs to provide a smart client application for its appraiser to use through the appraisal process. The bank employs appraisers to assess the value of different properties. The appraisers will use the smart client application to obtain assignments and to enter appraisal information. The appraiser can use the application in the office or at the property. When the appraiser is at a property, the application works in offline mode. After the appraiser connects to the centralized application, the appraisal information is synchronized with the bank systems.

Indian Scenario  The RBI took a few important steps to make the Indian Banking industry more robust and healthy. This includes de-regulation of savings rate, guidelines for new banking licenses and implementation of Basel Norm III. Since March 2002, Bankex (Index tracking the  performance of leading banking sector stocks) has grown at a compounded annual rate of  about 31%. After a very successful decade, a new era seems to have started for the Indian Banking Industry. According to a Mckinsey report, the Indian banking sector is heading towards being a high-performing sector. Bankex –  10 Year Performance 

India’s gross domestic product (GDP) growth will make the Indian banking industry the third

largest in the world by 2025. According to the report, the domestic banking industry is set for 

 

an exponential growth in coming years with its assets size poised to touch USD 28,500  billion by the turn of the 2025 2025 from the current asset size of USD 1,350 billion (2010)”. (2010)”.

Historical Performance of Bank  

If we look at 5 years historical performance of different types of players in the banking industry, public sector bank has grown its deposits, advances and business per employee by the highest rate  –  21.7%, 23% and 21.1% respectively. As far as net interest income is concerned, private banks are ahead in the race by reporting 24.2% growth, followed by public  banks (21.4%) and then by foreign banks (14.8%). Though the growth in the business per  employee and profit per employee has been the highest for public sector banks, in absolute terms, foreign banks have the highest business per employee as well as profit per employee. Bank group-wise performance

The business of all schedule commercial bank (SCBs) grew at a CAGR of around 22 per  cent, from Rs. 36,810 billion in 2005-06 to Rs.99,151 billion in 2010-11. Public sector banks, which includes State Bank of India and associates and Nationlised banks continued to remain major driver behind the overall growth of SCBs business constituting around 77 per cent share in total business in 2010-11. Investment of the Banking sector in government securities held in India recorded lower growth in 2010-11 as compared with the previous year in tune with the reduction in SLR requirement from 25 per cent to 24 per cent with effect from December 18, 2010.

 

Public sector Banks

The business of public sector banks grew at a CAGR of 23 per cent from Rs.27,286 billion in 2005-06 to Rs.73,786 billion in 2010-11, driven by CAGR of 24 per cent in advance and 22  per cent in deposits deposi ts during the same period. The share of o f advance in fund deployed remained almost flat at 62.4 per cent in 2010-11 (62.8 per cent in 2009-10), while the proportion of  investment in funds deployed declined to 25 per cent in 2010-11 from around 28 per cent in 2009-10, due to the accommodation of higher credit growth. Private sector banks

The business of private sector banks grew at a CAGR of 19.4 per cent from Rs.7,411 billion in 2005-06 to Rs.18,003 billion in 2010-11, driven by CAGR of 21 per cent in advance and 18.5 per cent in deposits during the same period. The share of advance in fund deployed increased to 59.6 per cent in 2009-10, while the proportion of investment in funds deployed declined to 31.6 per cent in 2010-11 from around 32.2 per cent in 2009-10. The segment stood second in term of the shares in total business at 18 per cent in 2010-11.   Foreign banks

The business of banks foreign grew at a CAGR of 15.6 per cent over the past five years, the lowest amongst all bank group, from Rs.2,113 billion in 2005-06 to Rs.4,362 billion in 201011, driven by CAGR of 16.2 per cent in deposits between 2005-06 and 2010-11. Advance grew at a CAGR of 15 per cent during the same period. The group had the lowest share of  around 4 per cent in total business of SCBs in 2010-11. 

Share of Bank groups in SCBs - Total buiness (2005-06) 6% 20% Foreign Banks PSUs Private Banks 74%

 

Share of Bank groups in SCBs - Total buiness (2010-11) 4% 18% Foreign Banks PSUs Private Banks 78%

  Graphs of ROA, Net NPA and CAR in banking sector in Indian Scenario

In the last 5 years, foreign and private sector banks have earned significantly higher return on total assets as compared to their pubic peers. If we look at its trend, foreign banks show an overall decreasing trend, private banks an increasing trend and Public banks have been more or less stagnant. The net NPA of public sector bank was also significantly higher than that of   private and foreign banks at the end of FY11, which indicates the asset quality of public

 

Capit al Adequacy ratio was also very high for private p rivate and  banks is comparatively poor. The Capital foreign bank as compared to public banks. In conclusion, we could say that the current position of ROA, Net NPA and CAR of different kinds of players in the industry indicates that going ahead; public banks will have to face relatively more problems as compared to private and foreign banks.

SWOT analysis of banking sector Strength

  Indian banks have compared favorably on growth, asset quality and profitability with other 



regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period.

  Policy makers have made some notable changes in policy and regulation to help strengthen



the sector. These changes include strengthening prudential norms, enhancing the  payments system and integrating regulations between commercial and co-operative  banks.

  Bank lending has been a significant driver of GDP growth and employment. Extensive



reach: the vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country.

  In terms of quality of assets and capital adequacy, Indian banks are considered to have



clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. Weakness

  Public Sector Banks need to fundamentally strengthen institutional skill levels especially



in sales and marketing, service operations, risk management and the overall organizational performance ethic & strengthen human capital.

  Old private sector banks also have the need to fundamentally strengthen skill levels.



  The cost of intermediation remains high and bank penetration is limited to only a few



customer segments and geographies.

  Structural weaknesses such as a fragmented industry structure, restrictions on capital



availability and deployment, lack of institutional support infrastructure, restrictive labour  laws, weak corporate governance and ineffective regulations beyond Scheduled

 

Commercial Banks (SCBs), unless industry utilities and service bureaus.

  Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in



PSU banks below 51% thus choking the headroom available to these banks for raining equity capital.

  Impediments in sectoral reforms: Opposition from Left and resultant cautious approach



from the North Block in terms of approving merger of PSU banks may hamper their  growth prospects in the medium term. Opportunity

  The market is seeing discontinuous growth driven by new products and services that



include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations.

  With increased interest in India, competition from foreign banks will only intensify.



  Given the demographic shifts resulting from changes in age profile and household



income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks.

   New private banks b anks could reach the next level l evel of their growth in the Indian banking bank ing sector 



 by continuing co ntinuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means to grow and reaching the next level of performance in their  service platforms. Attracting, developing and retaining more leadership capacity

  Foreign banks committed to making a play in India will need to adopt alternative



approaches to win the “race for the customer” and build a val ue-creating customer 

franchise in advance of regulations potentially opening up post 2009.

  Reach in rural India for the private sector and foreign banks.



  Liberalization of ECB norms: The government also liberalised the ECB norms to permit



financial sector entities engaged in infrastructure funding to raise ECBs. This enabled  banks and financial institutions, which were earlier not permitted to raise such funds, explore this route for raising cheaper funds in the overseas markets.

  Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has allowed



them to raise perpetual bonds and other hybrid capital securities to shore up their capital. If the new instruments find takers, it would help PSU banks, left with little headroom for  raising equity.

 

Threats

  Threat of stability of the system: failure of some weak banks has often threatened the



stability of the system.

  Rise in inflation figures which would lead to increase in interest rates.



  Increase in the number of foreign players would pose a threat to the Public Sector Bank as



well as the private players.

 

CHAPTER - 2 AXIS BANK  Company profile Axis Bank India, the first bank to begin operations as new private banks in 1994 after the Government of India allowed new private banks to be established. Axis Bank was jointly  promoted by the Administrator Administrato r of the specified undertaking und ertaking of the

  Unit Trust of India (UTI-I)



  Life Insurance Corporation of India (LIC)



  General Insurance Corporation Ltd



Also with associates viz. National Insurance Company Ltd., The New India Assurance Company, The Oriental Insurance Corporation and United Insurance Company Ltd. Axis Bank in India today is capitalised with Rs. 232.86 Crores with 47.50% public holding other than promoters. It has more than 200 branch offices and Extension Counters in the country with over 1250 Axis Bank ATM proving to be one of the largest ATM networks in the country. Axis Bank India commits to adopt the best industry practices internationally to achieve excellence. Axis Bank has strengths in retail as well as corporate banking. By the end of December 2004, Axis Bank in India had over 2.7 million debit cards. This is the first bank  in India to offer the AT PAR Cheque facility, without any charges, to all its Savings Bank  customers in all the places across the country where it has presence. With the AT PAR cheque facility, customers can make cheque payments to any beneficiary at any of its existence place. The ceiling per instrument is Rs. 50,000/-.The latest offerings of  the bank along with Dollar variant is the Euro and Pound Sterling variants of the International Travel Currency Card. The Travel Currency Card is a signature based pre-paid travel card which enables traveler’s global access to their money in local currenc y of the visiting country

in a safe and convenient way. The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence. With a balance sheet size of Rs.2,85,628 crores as on 31st March 2012, Axis Bank is ranked 9th amongst all Indian scheduled banks. Axis Bank has achieved consistent growth and stable asset quality with a 5 year CAGR (2007-12) of 31% in Total Assets, 30% in Total Deposits, 36% in Total Advances and 45% in Net Profit.

 

Evolution UTI was established in 1964 by an Act of Parliament; neither did the Government of India own it nor contributes any capital. The RBI was asked to contribute one-half of its initial capital of Rs 5 crore, and given the mandate of running the UTI in the interest of the unitholders. The State Bank of India and the Life Insurance Corporation contributed 15 per cent of the capital each, and the rest was contributed by scheduled commercial banks which were not nationalized then. This kind of structure for a unit trust is not found anywhere else in the world. Again, unlike other unit trusts and mutual funds, the UTI was not created to earn  profits. In the course of nearly four decades of its existence, it (the UTI) has succeeded phenomenally in achieving its objective and has the largest share anywhere in the world of the domestic mutual fund industry.'' The emergence of a "foreign expert" during the setting up of the UTI makes an interesting story. The announcement by the then Finance Minister that the Government of India was contemplating the establishment of a unit trust caught the eye of  Mr. George Woods, the then President of the World Bank. Mr. Woods took a great deal of  interest in the Indian financial system, as he was one of the principal architects of the ICICI, in which his bank, First Boston Corporation Bank, had a sizeable shareholding. Mr. Woods offered, through Mr. B.K. Nehru, who was India's Executive Director on the World Bank, the services of an expert. The Centre jumped at the offer, and asked the RBI to hold up the finalization of the unit trust  proposals till the expert visited India. The only point Mr. Sullivan made was that the  provision to limit the ownership of units to individuals might result in unnecessarily unnecessa rily restricting the market for units. While making this point, he had in mind the practice in the US, where small pension funds are an important class of customers for the unit trusts. The Centre accepted the foreign expert's suggestion, and the necessary amendments were made in the draft Bill. Thus, began corporate investment in the UTI, which received a boost from the tax concession given by the government in the 1990-91 Budget. According to this concession, the dividends received by a company from investments in other companies, including the UTI, were completely exempt from corporate income tax, and provided the dividends declared by the investing company were higher than the dividends received.

 

The result was a phenomenal increase in corporate investment which accounted for 57 per  cent of the total capital under US-64 scheme. Because of high liquidity the corporate sector  used the UTI to park its liquid funds. This added to the volatility of the UTI funds. The corporate lobby which perhaps subtly opposed the establishment of the UTI in the public sector made use of it for its own benefits later. The Government-RBI power game started with the finalization of the UTI charter itself. The RBI draft of the UTI charter stipulated that the Chairman will be nominated by it, and one more nominee would be on the Board of  Trustees. While finalizing the draft Bill, the Centre changed this stipulation. The Chairman was to be nominated by the Government, albeit in consultation with RBI. Although the appointment was to be made in consultation with the Reserve Bank, the Government could appoint a person of its choice as Chairman even if the Bank did not approve of him.

Business description The Bank's principal activities are to provide commercial banking services which include merchant banking, direct finance, infrastructure finance, venture capital fund, advisory, trusteeship, forex, treasury and other related financial services. The Bank has 463 branches and 263 extension counters throughout India.

Vision and values Vision 2015

To be the preferred financial solutions provider excelling in customer delivery through insight, empowered employees and smart use of technology Core Values

  Customer Centricity



  Ethics



  Transparency



  Teamwork 



  Ownership



 

CSR of the company Axis Bank has set up a Trust  –  the Axis Bank Foundation (ABF)to (ABF)to channel its philanthropic initiatives. The Foundation has committed itself to participate in various socially relevant endeavours with a special focus on poverty alleviation, providing sustainable livelihoods, education of the underprivileged, healthcare, sanitation etc. The Bank contributes up to one  per cent of its net profit annually a nnually to the Foundation Foundatio n under its CSR initiatives. The Foundation aims to provide one million sustainable livelihoods to the underprivileged in some of the most backward regions of the country in the next five years, with 60% of the  beneficiaries being bein g women. The Foundation nurtures nurtur es / supports NGOs working in the ar areas eas of  education health and development of underprivileged and special children. The Foundation also supports various projects to impart vocational training to the underprivileged youth. The Foundation supports the Lifeline Foundation for providing high level trauma care and rural medical relief in the states of Maharashtra, Kerala, Gujarat and Rajasthan. The Foundation also supports projects in skill development, water harvesting and low-cost agricultural practices to enhance farm yield.

Board of Directors  Name

Designation

Dr. Adarsh Kishore

Chairman

Mrs. Shikha Sharma

MD and CEO

Mr. K N Prithiviraj

Director 

Mr. V R Kundinya

Director 

Mr. S B Mathur

Director 

Mr. Prasad Menon

Director 

Mr. Rabindranath Bhattacharya

Director 

Mr. Samir Barua

Director 

Mr. A K Dasgupta

Director 

Mr. Som Mittal

Director 

Mrs. Ireena Vittal

Director 

Mr. V Srinivasan

ED, Corporate Banking

Mr. Somnath Sengupta

ED, Corporate Centre

 

Shareholding pattern (As on March 31, 2012): Sr. No.

Shareholder/Category Shareholder/Ca tegory No. of shares held

A

Promoters

1

SUUTI

2

LIFE

97,224,373 INSURANCE 37,868,816

CORPORATION

% shareholding

22.76 8.87

OF

INDIA 3

GENERAL

7,050,000

1.65

INDIA 3,786,078

0.89

INSURANCE CORPORATION

OF

INDIA 4

THE

NEW

ASSURANCE COMPANY LIMITED 5

 NATIONAL

3,287,000

0.77

ORIENTAL 1,380,312

0.32

INSURANCE COMPANY LIMITED 6

THE

INSURANCE COMPANY LIMITED 7

UNITED

INDIA 1,171,373

0.27

INSURANCE COMPANY LIMITED Total

promoter

151,767,952

35.53

shareholding A B

Domestic shareholders

8

Indian FIs and Banks

6,021,923

1.41

9

Indian MFs

18,108,421

4.24

10

Indian bodies corporate

31,560,234

7.39

11

Indian residents

32,212,279

7.54

 

Total

domestic

87,902,857

20.58

shareholding B C

Foreign shareholders

12

FIIs

148,775,084

34.83

13

FDI (GDR)

37,731,208

8.83

14

Foreign Bodies - DR

36,401

0.01

15

Foreign Banks/Foreign 36,089

0.01

Employees 16

Foreign Nationals

100

0

17

 NRIs

905,942

0.21

187,484,824

43.89

427,155,633

100

Total

Foreign

shareholding C Total - A+B+C %

 

CHAPTER - 2 BASEL II BASEL II accord proposes getting rid of the old risk weighted categories that treated all corporate borrowers the same replacing them with limited number of categories into which  borrowers would be assigned based on assigned credit system. Greater use of internal credit system has been allowed in standardized and advance scheme, against the use of external rating. The new proposals avoid sole reliance on the capital adequacy benchmarks and explicitly recognize the importance of supervisory review and market discipline in maintaining sound financial system. Basel II compliance and risk management in bank go hand in hand. The industry is gearing up to implement the standard. Under the current system, the balance sheet items are assigned prescribed ratio (at present 9%) on the aggregate of the risk weighted assets and other assets on ongoing basis. Basel II aims to build on solid foundation of prudent capital regulation, supervision, and market discipline and to further risk and financial stability. Implementation of new framework will require substantial commitment on the part of field functionaries. Objective of Basel II

  To strengthen international banking system



  Bank must attain solvency relative to their risk profile



  Supervisor should review each bank’s own risk assessment and capital strategies



  Bank should maintain excess of minimum capital



  Regulators would intervene at an early stage



 



Possibility of rewarding banks with better risk management systems   Each bank has suitable risk management framework and the expected level of capital



The benefits of the Basel II

  Improved risk management



  Business expansion and better allocation of resources



  More rational pricing



  Higher credit rating



  Lower capital charges



  Grater transparency   Stronger competitive position





 

An overview of the Basel II accord is as under Pillar 1

Pillar 2

Pillar 3

Minimum capital Requirement

Supervisory Review

Market Discipline

1.  Capital for credit risk 

  Standardised approach

  International

Rating

2.  Core disclosure and

assessment





risk  1.  Enhance disclosure

1.  Evaluation

based 2.  Ensure soundness and integrity

approach

of

banks

internal

  Advance

assess the adequacy

o

2.  Capital for market risk  

  Standardised method



process

3.  Ensure

  Maturity method

of minimum capital 4.  Prescribed

3.  Capital for operational risk  

differential

capital

  Basic indicator approach

where necessary i.e.

  Standarised approach

where

  Advance

 processes are slack  





measurement

submission  

maintenance

  Duration method



annually

of capital

o

o

disclosure

to 3.  Semi

  Foundation

o

supplementary

internal

approach

Key Concepts of Basel II

  Threats posed by risk asset held by the banks are to be counter balanced not only through



holding prescribe minimum capital but also be supplemented by effective supervisory review of capital adequacy plus accepted market discipline implying public disclosure. These constitute the three pillars of the Basel II accord.

  The underlying implication of the new accord is greater risk sensitive, it embodies three



 principles of   –  – flexibility, menu of approaches and incentives for better risk management.

  Banks with advanced risk management tools would be permitted to use their own internal



credit system for evaluating credit risk by process of internal based rating (IRB) approach. The use of this approach will subject to approval by the supervisory based on standards established by the committee.

  The new accord intends to cover all types of risks to which banks are exposed in addition



to credit risk.

 

Basel II accord Pillar 1

Specifies new standards for minimum capital requirements requirements along with the methodology methodolog y for assigning risk weights on the basis of credit risk + market risk + operational risk

Pillar 2

Enlarges the role of banking supervisors give them power to review the bank’s

risk management system. Pillar 3

Defines standards and requirements for higher disclosure by banks on capital adequacy, asst quality and other risk management processes.

THE THREE PILLAR APPROACH  

The capital framework proposed in the New Basel Accord consists of three pillars, each of  which reinforces the other. The first pillar establishes the way to quantify the minimum capital requirements, in complemented with two qualitative pillars, concerned with organizing the regulator’s supervision and establishing market discipline through public

disclosure of the way that banks implement the Accord. Determination of minimum capital requirements remain the main part of the agreement, but the proposed methods are more risk  sensitive and reflect more closely the current situation on financial markets.

 

 

CREDIT RISK

STANDARIZED APPROACH

INTERNAL RATING BASED APPROACH

FOUNDATION IRB

SECURITIZATION APPROACH

ADVANCE IRB

First Pillar: Minimum Capital Requirement Requirement

The first pillar establishes a way to quantify the minimum capital requirements. While the new framework retains both existing capital definition and minimal capital ratio of 8% some major changes have been introduced in measurement of the risks. The main objective of  Pillar I is to introduce greater risk sensitivity in the design of capital adequacy ratios and, therefore, more flexibility in the computation of bank ’s ’s individual risk. This will lead to  better pricing of Risks. Capital Adequacy Ratio signifies the amount of regulatory capital to be maintained by a bank  to account for various risks inherent in the banking system. The Capital Adequacy ratio is measured as: Total Regulatory Capital (unchanged) = Bank’s Capital (minimum 8%)  Credit Risk + Market Risk +Operational Risk  Regulatory capital is defined as the minimum capital, banks are required to hold by the regulator, i.e.”The amount of capital a bank must have.” It is the summation of Tier I and Tier II capital.

 

1.  Credit Risk 

The changes proposed to the measurement of credit risk are considered to have most far reaching implications. Basel II envisages two alternative ways of measuring credit risk. The Standardized Approach

The standardized approach is conceptually the same as the present Accord, but more risk  sensitive. The bank allocates a risk-weight to each of its assets and off-balance-sheet  positions and produces prod uces a sum of risk weighted asset values. value s. Individual Individ ual risk weights currently current ly depend on the board category of borrower (i.e sovereigns, banks or corporate). Under the new Accord, the risk weights are to be refined by reference to a rating provided by an external credit assessment institution that meets strict standards. The internal Ratings Based Approach (IRB)

Under the IRB approach, distinct analytical frameworks will be provided fro different types of loan exposures. The framework allows for both a foundation method in which a bank  estimate the probability of default associated with each borrower, and the supervisors will supply the other inputs and an advanced IRB approach, in which a bank will be permitted to supply other necessary inputs as well. Under both the foundation and advanced IRB approaches, the range of risk weights will be far more diverse than those in the standardized approach, resulting in greater risk sensitivity The Risk Components include measures of:

  Probability of default (PD)   Loss Given default (LGD)





  Exposure at default (EAD)



  Effective Maturity (M)



 

Proposed Risk weight Scale: Mapping Process: Credit

AAA

to A+ to A-

Assessment AASovereign

BBB

to BB+ to B-

Below B-

Unrated

BBB-

0%

20%

50%

100%

150%

100%

Option 1

20%

50%

100%

100%

150%

100%

Option 2a

20%

50%

50%

1005

150%

50%

Option 2b

205

20%

20%

505

150%

20%

Corporate

20%

100%

+0

150%

(Govt. central  banks) Claims on the banks

100%

Option 1 =Risk weights based on risk weight of the country Option 2a = Risk weight based on assessment of individual Bank. Option 2b = Risk weight based on assessment of individual banks with claim of original maturity of less tan 6 months Retail Portfolio = 75% Claims secured by residential property = 35%  NPA’S = If specific provision is less than 20% = 150% 

If specific provision is more than 20% = 100% 2.  Operational Risk:

Basel II Accord set a capital requirement for operational risk. It defines operational risk as “the risk of direct or indir ect ect loss resulting from inadequate or failed internal  processes, people and systems or from external events”. Banks will be able to choose

 between three ways of calculating the capital charge for operational risk  –  the Basic Indicator Approach, the Standardized Approach and the advanced measurement Approaches.

 

The Second Pillar: Supervisory Review Process

The supervisory review process requires supervisors to ensure that each bank has sound internal processes in place to assess the adequacy of its capital based on a thorough evaluation of its risks. Supervisors would be responsible for evaluating how well banks are assessing their capital adequacy needs relative to their risks. This internal process would then  be subject to supervisory supervis ory review and intervention, interventi on, where appropriate. The Third Pillar: Market Discipline

The third pillar of the new framework aims to bolster market discipline through enhanced disclosure by banks. Effective disclosure is essential to ensure that market participants can  better underst and bank’s risk profiles and the adequacy of their capital positions. The new framework sets out disclosure requirements and recommendations in several areas, including the way a bank calculates its capital adequacy and its risk assessment methods. The core set of disclosure recommendations applies to all banks, with more detailed requirements for  supervisory recognition of internal methodologies from credit risk, credit risk mitigation techniques and asset securitization.

 

CHAPTER - 3 LITERA LITERATURE TURE REVIEW A review of literature is a critical analysis of a segment of published body of knowledge. This studies and latest update on Banking Sector has been a base for this research.

2.1 Are Indian banks up to these challenges? (September 13, 2012 Outlook Arena)

 – 

 

What came first, the chicken or the egg? Philosophers have been debating this question for years and the answer still remains a mystery. A similar but no less challenging question is unfolding in the  Indian banking sector   currently. Can the banking system grow without signals that GDP growth the is improving? Or should banks continue lending to try and stimulate the economy? Well, the usual thumb rule is that banking sector growth is 2.5 x GDP growths. So if the economy is growing at 7%, the banking space should grow by around 17-18%. But, now with India seeing a number of GDP growth

downgrades,

this

figure

for

credit

growth

can

have

a

wide

range.

We recently attended an event hosted at the Indian Merchant's Chamber on the "Current Trends and the Unfolding Banking Scenario". Mr Krishna Kumar, Managing Director & Group Executive of   National Banking and Whole Time Director of  State Bank of India (SBI) was the speaker at the event. According to him, with Europe in a debt crisis and the US stagnating, sta gnating, India continues to remain a growth driver. It has favourable demographics and a number of infrastructure and retail lending opportunities. However, there are a number of challenges on the ground that needs to be addressed, especially

by

the

financial

services

sector.

Four pillars of focus for banks: 

Basel III: The Basel III requirements will be a new challenge for Indian banks to meet. As

 per these international in ternational regulations, regula tions, banks need to maintain main tain a minimum total capital (including a capital conservation buffer) of 11.5% of risk weighted assets by FY18. As per RBI estimates, Indian banks would require additional capital of Rs 5 trillion to meet Basel-III norms by March 31, 2018. These projections are based on the conservative assumption that  banks will show a uniform growth of 20% per p er year. Public sector banks will need an infusion from the government, their majority shareholder. Reserve Bank of India (RBI) Governor D Subbarao, stated that the Center would need to infuse Rs 900 billion in PSU banks in order to maintain its current shareholding after the new norms come into force. If it is willing to reduce its stake in these banks to 51%, the burden may come down to Rs 700 billion. But,

 

this is still a tough task for a government facing twin deficits. Indian banks are currently adequately capitalized (FY12 CRAR - 14.3%). However as they grow in size more capital would be required. Asset quality deteriorating: The economic slowdown, elevated interest rates and mass

restructurings of state electricity boards (SEBs) and airlines all caused asset quality to sharply deteriorate for the banking sector. State run banks were the worst affected in this regard. The gross Non Performing Assets (NPAs) of the public sector banks (PSBs) increased sharply to 3.2% of gross advances at the end of FY12 from 2.3% at the end of FY11. In net terms, their  ratio went up to 1.5% from 1% over the same period as can be seen in the chart below. Agri, SME and MSME accounts are seeing stress. Plus the iron and steel, mining, and textile sectors have all been seeing pressure in making their interest payments.

Source: RBI Annual report

What is worrying is that the restructured standard advances of the PSBs increased to 5.7% of  gross advances by at the end of FY12 from 4.2% a year ago. If macro stress remains in the system this year, the RBI expects the gross NPA ratios for all banks to increase to 3.7-4.1% at the end of FY13 from 2.9% at the end of FY12. The ability to maintain good asset quality in a tough environment will really separate the men from the boys in the banking space. Falling Net Interest Margins (NIMs): NIMs are a measure of operating of operating profitability of a

 bank. On account of higher cost of funds, NIMs reported a decline in FY12. Banking NIMs thus decreased from 3.14% in FY11 to 3.07% in FY12. This was on account of slower CASA accretion and higher growth in term deposits (FDs). This growth in FDs was on account of  higher deposit rates in the system on the back of RBI's monetary tightening. Accordingly

 

Return on Equity of banks posted a slight decline from 13.7% to 13.6% during the same  period and the Return on Assets stayed constant at 1.1%. However, in the long run the  banking sector's NIMs are expected to normalize. According to a report by the Boston Consulting Group (BCG) the Indian banking sector's NIMs are expected to reduce to 2% by 2020. Financial Inclusion: It is indeed unfortunate to note that in India 40-45% of the rural

 populace does not have access to banking channels. Thus they are forced to borrow from moneylenders at usurious rates. Microfinance Institutions (MFIs) (MFIs)were were established to help  plug the gap; however they were also als o impacted by adverse regulations in Andhra And hra Pradesh in 2011 and still haven't fully recovered. But yet, the need for the penetration of formal banking into smaller townships cannot be underscored. India also fares poorly in respect of credit cards, outstanding mortgage, health insurance, adult origination of new loans, mobile  banking, etc. The new challenge for banks would be to cover villages with a population  below 2,000 as well as to expand exp and the scope of the busin business ess correspondent model. model . Conclusion 

Well going forward the banking sector is sector is expected to have a tough time managing 18-20% credit growth in light of slowing GDP growth. Plus containing gross NPAs below 2% will also be a huge challenge as it is an issue affecting the economy at large. Certain large industries such as mining, textile, iron and steel, power, airlines etc are all seeing stress. However on the retail front auto and home loans are seeing robust growth. Infrastructure financing also remains a challenge as the country needs to build new roads,  ports, airports, etc and repair its aging ones. o nes. This requires invest investments ments that need to come from the banking space. A new structure needs to be put in place to address the issue of sectoral caps, risk averseness and asset liability mismatches. A few other challenges could be the issue of new banking licenses and the advent of competition. Consolidation in the space may also be required as there are a number of smaller banks in the system. SBI has already merged

three

of

its

associate

banks,

with

5

still

remaining

to

be

merged.

Technology is also said to be the way forward with India seeing a mobile and internet revolution and more traditional banks need to accept the same. Human resources is also another challenge as 40-50% of PSU banking staff is expected to retire over the next few years. Plus attrition in the banking sector used to be low with staff staying in the same bank  for their entire career. Stickiness is however low among new employees, thus the realignment

 

of HR policies along with employee needs is required. But while there are a lot of challenges on the ground we believe that the banking sector can meet them head-on as they have done in the past. We hope to see a fresh face of banking in India.

2.2 Banking Sector Analysis Report (November 6, 2012  –  Sector Info equitymaster.com) The global financial system is still far away from a full recovery on account of a slowdown in the US economy, the soft landing in China and the Euro debt crisis. The Indian banking sector has been relatively well shielded by the central bank and has managed to sail through most of the crisis. But, currently in light of slowing domestic GDP growth, persistent inflation, asset quality concerns and elevated interest rates, the investment cycle has been wavering in the country. The cost of borrowings was higher on account of the various monetary tightening measures undertaken by the central bank. People preferred to park their funds in higher yielding fixed deposits rather than current or savings account (CASA).  CASA accretion slowed for most  banks which whi ch led to a higher cost of funds. funds . The savings bank b ank account accou nt rate was deregulated deregulat ed by the RBI, however most banks continue to hold the rate at 4%. Apart from streamlining their processes through technology initiatives such as ATMs, telephone banking, online banking and web based products, banks also resorted to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee based income. They are also looking at various financial inclusion initiatives in order to spread the use of financial services among India’s large unbanked

 population.   Financial year 2012

The RBI had to revise its target for credit growth in FY12 a number of times given the external environment. From starting off with a prediction of 19% credit growth in May 2011, the central bank brought this estimate down to 16% in January 2012. Finally non-food credit growth came in at around 17% in FY12 compared to 21.5% in FY11. Against a backdrop of  GDP growth deceleration, weak IIP data and persistent inflation banks became more risk  averse to lending credit. This deceleration also reflects banks’ risk aversion in face of rising

 NPAs and increased leverage levera ge of corporate balance sheets. sh eets.

 

Credit growth decelerated across all bank groups during 2011-12 ranging between 16.3% in the case of public sector banks and 19.7% for private sector banks. The comparable figures for the previous year were 21% and 24.7% respectively. The RBI’s has not yet rolled back its aggressive interest rate policy and rates continue to be

elevated. The repo rate currently stands at 8%, with the reverse repo rate at 7%. While inflation continues to remain high the RBI has refrained from any further hikes in order to address the slowdown in growth. It may ease rates once inflation comes under control. Growth on the deposit front however remained relatively low coming in at around 13% YoY in FY12; this was as against an RBI target of 17%. Fixed deposits saw good growth, while demand deposits saw a deceleration on lower yields. The outstanding credit-deposit ratio rose from 74.5% FY11 to 76.7% in FY12.

Source: RBI In the retail portfolio, while home loans grew by 12% YoY, while vehicle loans grew by 20%. Overall other personal loans enjoye d a much smaller growth of 8% YoY due to bank’s reluctance towards uncollateralized credit. Credit card outstanding grew by 13% YoY.   Indian banks, however, saw lower levels of money supply, and deposits as a percentage of  GDP in FY12 as compared to that in FY11 on account of the uncertain economic environment. However credit as a % of GDP was higher as GDP growth slowed.

 

 

Source: RBI Most private sector banks had a relatively better outing in FY12. Increased pricing power  helped some of these banks sustain their net interest margins. Plus they were also able to sustain their asset quality.  Net non performing assets (NPAs) in the system increased from 0.9% in FY11 to 1.2% in FY12. However for PSU banks this ratio increased from 1% in FY11 to 1.5% in FY12. Increased provisioning affected the profitability of the banks in question. Prospects

Basel III is a new challenge that banks in India and overseas will have to surmount. It will be a challenge to deploy the same safely and profitably in the event of persistence of economic slowdown. The government was able to re-capitalize a few PSU banks in FY12, including the much needed infusion for State Bank of India. According to RBI estimates, Indian banks would require additional capital of Rs 5 trillion to meet Basel-III norms by March 31, 2018. In 2011-12, agriculture loan target was Rs 4.5 trillion, and Rs 4.8 trillion was disbursed. For  2012-13, the target has been set at Rs 5.8 trillion. Financial inclusion initiatives also need to  be taken care of as India fares very poorly poorl y on this regard as half h alf the population pop ulation does d oes not have h ave access to banking services.  New banking licenses are expected to be issued by the RBI to private sector players. However, these licenses will only be awarded to certain players meeting strict requirements on the capital, exposures, and corporate governance front. Lots of players including NBFCs, industrial houses, microfinance companies etc are all vying for this coveted license. There

 

has so far been no progress on this issue since the RBI issued draft guidelines in August 2011. However, growth is still a concern for the banking sector in FY12 on account of a sustained slowdown in the economy as well as reduced demand for credit on account of the current high interest rate environment. The central bank expects credit growth to come in at 17%, with deposit growth at 16% for FY13. Asset quality concerns are also an issue especially in the power, textile, and mining space.   In the year 2012-13 so far, there has been a easing of liquidity and monetary conditions. The  policy rate was cut by 0.5% in April. In addition there has been liquidity infusions through open market operations export credit refinance. The 1% Statutory Liquidity Ratio (SLR) reduction in August and the  further 25 bps cut in the CRR  is expected to further ease liquidity and encourage banks to increase loans and advances. The SLR and CRR stand at 23% and 4.25% respectively currently.

2.3 Economic Survey 2011-12: Banking system to become stronger (March 16, 2012  –  By K R Kamath, Chairman, Punjab National Bank) The Economic Survey notes that the Indian Banking System has successfully passed through the various phases of reforms and has also faced the stress tests posed by the global financial turmoil in the recent past. This suggests that the Indian financial system has become even stronger. The financials of the  banking system s ystem have grown in size as well as in quality. qualit y. There were some important imp ortant reforms also along in the year such as the deregulation of interest rates on Saving Bank Deposits and NRE deposits. The banks have complied with the regulatory requirements and also been proactive in adopting to the changes which are coming their way in the emerging banking space, both in domestic and international fronts. The Economic Survey tabled by the government also notes that the banking system has  become more mor e transparent trans parent with the t he adaptation adapt ation of the base rate method meth od of setting interest rates on loans which has also helped in better transmission of monetary policy to the ultimate consumer of banking services. (Under the base rate system, each bank has to set its base rate to which all the lending is supposed to be benchmarked.

 

Bank loans cannot be priced below this rate. In the earlier system of benchmark prime lending rate, banks would provide bulk of the loans below this rate.) The Survey notes that the Indian banking system is intensively linked to the global financial market but at the same time because of the prudent regulation it has been insulated from the risks emanating from global turmoil etc. The Euro area affected financial markets for the greater part of the year, with the contagion of  Greece's sovereign debt problem spreading to India and other economies by way of higher  than-normal levels of volatility. The survey projects scenario for the banks to remain prepared to tackle issues like risk and liquidity management and enhancing skills for proactively identifying these situations. It notes the pursuance of Financial Stability and Development Council (FSDC) for greater  stability and inters regulatory coordination in India. There are various emerging strong pillars in the shape of new institutions that find mention in the survey eg Financial Action Task Force, Financial Sector Legislative Reforms Commission. These we feel will certainly add to the strength of our banking system. In the analysis contained in the Survey what emerges is that the Banking System in our  country has undergone transformation from being a conduit of resources for the economic development of the country to the role of leading the economy in global financial space with greater confidence. To conclude, the adaptability of Indian Banking System and its preparedness to meet the emerging challenges is getting proved once again as it braves the current scenario of  moderation in growth, higher inflation and emanating global threats from Euro debt crisis and low US economic growth. The resilience will improve further with the new capital regime under Basel III that will include deleveraging, creating capital conservation buffer and counter cyclical capital requirements. The environment will be more demanding with the already enhanced external commercial borrowing limits and more liberalization awaited to boost FDI and Infrastructure development in the country. The journey is challenging yet interesting with the expansionary agenda before the financial system.

 

2.4 A bright future for Indian banking (December 25, 2012  –   Mahua Venkatesh and Zehra Kazmi, Hindustan Times) A decade ago, transferring money from your account to a family member's would have meant a visit to the nearest bank branch, a long queue and a few days-long wait. Today, you can use your mobile phone to make the same transaction instantly. Innovations such as automatic bill payment, cash transfer through mobile phones and online  banking have ensured that customers no longer have to make pilgrimages to bank branches. Passbook entries have been replaced by hassle-free e-statements; ATMs facilitate easy withdrawals and payments. Most importantly, banks have been able to ensure that all these transactions are safe and secure. Banking in India has rapidly innovated to keep up with the times. Banks today are competing heavily with each other, offering low rates on housing loans, credit cards to anyone who answers those annoying tele-marketers and freebies for existing customers. So, how do they stack up against each other? The HT-MaRS Bank and Credit Card Satisfaction Survey 2012 ranked banks according to customers' satisfaction across various categories. According to the results, India's secondlargest private bank, HDFC, emerged as the winner, dethroning 2010's champion, Axis Bank  (which slipped to third place). ICICI Bank moved up one place from the previous survey to the second position. Though private sector banks may have got the top spots, ahead of public sector ones, when it comes to satisfying consumers, the top 10 list features more state-owned  banks. Bank of Baroda bested b ested the t he mammoth mammot h State Bank of India, improving impro ving drastically dras tically from its 12th position in 2010 by landing l anding the fourth position over-all, over -all, becoming the best government-run bank. The survey ranked banks across five parameters, namely account opening, bank staff, branch facilities, turnaround time and account-related services. Each parameter had various attributes on which customers were asked to score their banks. Compared to 2010, there has been a marked increase in over-all satisfaction scores. Indian Bank, Indian Overseas Bank and Canara Bank fell out of the top ten while relative newbies such as Kotak Mahindra Bank and Yes Bank, which featured nowhere in the 2010 list have

 

inched into the results. Results vary from town to town, but residents of Chandigarh seem the most satisfied with their banks, stamping their approval with a high score of 829 points. Changes ahead The contours of the banking industry in India is set to change in the coming years with Parliament passing the much awaited Banking Laws Amendment Bill last week. The passage of the bill paves the way for the Reserve Bank of India to come out with final guidelines on issuing new bank licenses. This not only means more banks, but the style of operation is also expected to be different, with the upgradation of technology. At present, over 70% of the market lies with the public sector banks but the government is now geared up to open the sector to more foreign players while setting up new private banks in the country which would help in bringing more people under the banking net. Several  business houses including Aditya Birla Group, the Tatas and Reliance have evinced interest in entering the Indian banking space. Besides the corporate houses, even non-banking financial corporations can now convert themselves into full-fledged banks. While allowing more banks to be set up, to encourage healthy competition in the market, the government could also look at consolidating the public sector banks with a view to creating mega-banking entities which could face up to stiff competition from others. Evolution The government under late Prime Minister Indira Gandhi nationalised 14 commercial banks in 1969. The second dose of nationalisation happened in 1980 when 6 more commercial  banks were nationalised. n ationalised. The move, according to the government then, was to t o provide more control of credit delivery. In 1993, the government merged New Bank of India with Punjab  National Bank. The Narasimha Rao government in the 1990s embarked on a policy of  liberalisation, providing licenses to several private banks, which came to be known as the new generation banks. With liberalisation and changing economic dynamics in the country, the UPA government is now keen to open up the sector to more private and foreign players. "The dynamics were different pre-liberalisation and they are very different today and we must move with the times," a senior finance ministry official, who did not wish to be identified, said.

 

2.5 Axis Bank Q3 net up 22% at Rs 1,347 crore (January 15, 2013  –   Business Today) Private sector lender Axis Bank has reported 22 per cent increase in net profit at Rs 1,347.22 crore for third quarter ended December 31, 2012. The bank had posted a net profit of Rs 1,102.27 crore for the same quarter of last financial year, it said in a filing to the Bombay Stock Exchange. Total income of the bank increased to Rs 8,580.30 crore during the October-December  quarter, from Rs 7,206.77 crore in the year-ago period. For the first nine months of 2012-13, the bank has clocked 22 per cent rise in net profit, to Rs 3,624.28 crore, from Rs 2,964.94 crore in the same period of the previous fiscal. The bank reported a total income of Rs 24,678.96 crore in the first three quarters, compared to Rs 19,766.93 crore in the same period last financial year. The perusal of the review reveals that the Banking sector and axis bank has grown over the years. Banking sector has potential for growth but there are few barriers also so the growth of the sector is going to be stagnant.

 

CHAPTER - 4 VALUATION Financials of AXIS Bank  Balance Sheet March 2012

March 2011

March 2010

12 months

12 months

12 months

Capital and Liabilities:

In Rs. crore

Total Share Capital

413.20

410.55

405.17

Equity Share Capital

413.20

410.55

405.17

Share Application Money

0.00

0.00

0.00

Preference Share Capital

0.00

0.00

0.00

Interest Contribution Settler

0.00

0.00

0.00

Preference Share Application Money

0.00

0.00

0.00

Employee Stock Option

0.00

0.00

0.17

Reserves

22,268.51

18,484.06

15,583.76

Revaluation Reserves

0.00

0.00

0.00

Net Worth

22,681.71

18,894.61

15,989.10

Deposits

219,987.68

189,166.43

141,278.66

Borrowings

34,071.67

26,267.88

17,169.55

Total Debt

254,059.35

215,434.31

158,448.21

Minority Interest

0.00

0.00

0.00

Policy Holders Funds

0.00

0.00

0.00

Group Share in Joint Venture

0.00

0.00

0.00

Other Liabilities & Provisions

8,675.44

8,237.73

6,149.35

Total Liabilities

285,416.50

242,566.65

180,586.66

Cash & Balances with RBI

10,702.92

13,886.16

9,473.88

Balance with Banks, Money at Call

3,231.31

7,522.49

5,734.54

Advances

169,759.54

142,407.83

104,343.12

Investments

92,921.44

71,787.55

55,876.55

Gross Block Accumulated Depreciation

3,612.76 1,408.44

3,455.94 1,185.99

2,127.60 948.99

Assets

 

Net Block

2,204.32

2,269.95

1,178.61

Capital Work In Progress

79.82

22.96

57.38

Other Assets

6,517.16

4,669.70

3,922.59

Minority Interest

0.00

0.00

0.00

Group Share in Joint Venture

0.00

0.00

0.00

Total Assets

285,416.51

242,566.64

180,586.67

Contingent Liabilities

449,977.02

429,071.06

301,742.05

Bills for collection

64,895.87

57,400.80

35,756.32

 

Profit and Loss Statement March 2012

March 2011

March 2010

12 months

12 months

12 months

In Rs. crore Income Interest Earned

21,994.90

15,154.86

11,639.05

Other Income

5,487.19

4,671.45

3,964.21

Total Income

27,482.09

19,826.31

15,603.26

Interest expended

13,969.18

8,588.61

6,632.63

Employee Cost

2,254.02

1,745.80

1,359.79

Selling and Admin Expenses

2,503.60

2,426.88

2,455.85

Depreciation

348.15

293.69

237.87

Miscellaneous Expenses

4,188.63

3,426.66

2,438.98

Preoperative Exp Capitalised

0.00

0.00

0.00

Operating Expenses

6,960.32

5,815.60

5,119.43

Provisions & Contingencies

2,334.08

2,077.43

1,373.06

Total Expenses

23,263.58

16,481.64

13,125.12

Net Profit for the Year

4,218.51

3,344.67

2,478.14

Minority Interest

0.00

0.00

0.00

Share Of P/L Of Associates

-1.27

4.77

0.00

Share Of Associates

4,219.78

3,339.91

2,478.14

Extraordinary Items

0.00

0.00

0.00

Profit brought forward

4,864.45

3,371.63

2,328.95

Total

9,082.96

6,716.30

4,807.09

Preference Dividend

0.00

0.00

0.00

Equity Dividend

770.26

670.48

567.47

Corporate Dividend Tax

0.00

0.00

0.00

Earning Per Share (Rs)

102.09

81.47

61.16

Equity Dividend (%)

0.00

0.00

0.00

Expenditure

 Net P/L After Minority Interest &

Per share data (annualised)

 

Book Value (Rs)

548.92

460.26

394.60

Transfer to Statutory Reserves

1,112.46

836.95

867.43

Transfer to Other Reserves

1.06

339.66

0.56

Proposed Dividend/Transfer to Govt.

770.26

670.48

567.47

Balance c/f to Balance Sheet

7,200.45

4,864.45

3,371.63

Total

9,084.23

6,711.54

4,807.09

Appropriations

 

Book Value  Book value = Total assets – Total liabilities* / Number of outstanding shares *(Total Debt + Other Liabilities & Provisions)

Book value as on March 31, 2012 = 285,416.51 - 262,734.79 / 41.32 = 548.92 Book value as on March 31, 2011 = 242,566.64 - 223,672.04 / 41.055 = 460.26 Book value as on March 31, 2010 = 180,586.67 - 164,597.56 / 40.52 = 394.60

Linkages between Book Value and Market Value Calculation of regression regression coefficient

Year

Market

Book 

X- X  =

Y- Y  =

Value

Value



Y

X^2

Y^2

X*Y

2010

1169.10

394.6

-70.45

-73.33

4963.20

5376.80

5165.86 516 5.86

2011

1403.65

460.26

164.10

-7.67

26928.81

58.78

-1258.10

2012

1145.90

548.92

-93.65

80.99

8770.32

6559.92

-7585.03

=

Y  =

0

0

 X  ^2 =

1239.55

467.93

 X 

X- X  = r σx / σy (Y- Y  ) r σx / σy =

 X  * Y  / Y ^2  

= -3677.26 / 11995.5

= 0.31

40662.34

Y ^2 =  X  * Y  = 11995.5

-3677.26

 

Substituting the values we get  X-1239.55= 0.31 (Y- 467.93) X= 1239.55+ 0.31Y- 9.36

X= 1230.19 + 0.31Y For year 2010

For years 2011

For year 2012

X = 1230.19 + 0.31 (394.60)

X = 1230.19 + 0.31 (460.26)

X = 1230.19 + 0.31 (548.92)

X = 1352.52

X = 1372.87

X = 1400.36

Market trend line 1410 1400 1400.36

1390 1380 1370

1372.87

Market Value

1360 1350 1352.52 1340 1330 1320 1

2

3

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