AN ASSESSMENT OF INDIAN BANKING COMPANIES LISTED ON NATIONAL STOCK EXCHANGE BY PEARLS ANALYSIS
Synopsis submitted to the Madurai Kamaraj University in partial fulfillment of the requirements for the award of the Degree of DOCTOR OF PHILOSOPHY IN COMMERCE
Researcher Mrs.M.SHARMILA DEVI (Regn.No. - P4875)
Supervisor Dr.A.MUTHUMANI Assistant Professor, Postgraduate and Research Department of Commerce, Sri S.Ramasamy Naidu Memorial College (Autonomous), Sattur-626203
MADURAI KAMARAJ UNIVERSITY MADURAI – 625 021 TAMIL NADU, INDIA JANUARY 2019
AN ASSESSMENT OF INDIAN BANKING COMPANIES LISTED ON NATIONAL STOCK EXCHANGE BY PEARLS ANALYSIS
SYNOPSIS INTRODUCTION The banking sector plays a magnificent role in an economy for the smooth as well as efficient functioning of the different activities of the society. Finance is like blood to every form of activity. Finance is at the core of socio-economic growth trajectory of a society. The principal objective of Indian planning has been the attainment of growth with social justice and equity. To meet this growing need of finance, the demand for strengthening the banking system on sound footing gathered momentum during the early period of independence in India. Banking system occupies an important place in a nation’s economy and is indispensable in a modern society. The overwhelming role of finance in the economic development of a country is well recognized and forms the core of the money market in the economy. Generally, banks collect money from those who have spare money or who are saving it from their income as surplus and lend this money out to those who require it. This mechanism of providing finance is highly valuable and a bare necessity in any community. But the role of commercial banks is not only confined to savings and its transmission to those who are in a position to invest it in a profitable enterprise; but also an instrument of credit creation. The role of bank has been transformed as prime mover of economic change, particularly in developing countries. A distinguishing feature of Indian banking industry comprises a wide range of functions. The financial sector plays a major role in mobilization and allocation of financial savings from the net savers to the borrowers. Banks are the most important segment of the financial sector. The structure of the banking industry affects its performance and efficiency which in turn affects the banks’ ability to collect savings and channelize them into productive investment. The effective role of intermediation performed by banks adds gain to the real sector of the economy. In modern era, the process of globalization has imparted its huge influence on the Indian banking industry. In the post liberalization period, there was an urgent need to
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bring about structural changes in the Indian banking system so as to make it economically viable and competitively strong. Therefore, the Government of India has set up a High Level Committee with Mr.M.Narasimham, a former Governor of RBI, as chairman to examine all aspects relating to the structure, organization, functions and procedures of the financial system. Based on the recommendations of the Narasimham Committee, the first phase of Financial Sector Reforms was initiated in 1991. The second phase of Banking Sector Reforms was initiated in 1998.1 The major reform measures are Progressive reduction in Cash Reserve Ratio and Statutory Liquidity Ratio. Phasing out concessional rate of interest to priority sectors. Deregulation of interest rates. Introduction of prudential norms relating to capital adequacy, asset qualification, provisioning and income recognition. Setting up of new private sector banks with a view to induce greater competition and to improve operational efficiency of the banking system. Entry of foreign banks to open offices in India either as branches or as subsidiaries. Setting up of Lok Adalats, Debt Recovery Tribunals, Asset Reconstruction Companies, Settlement Advisory Committee, Corporate Debt Reconstructive Mechanism etc. for quick recovery / restructuring. Promulgation of Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act and its subsequent amendment to ensure creditor rights. Introduction of CAMELS supervisory rating system, move towards risk-based supervision, consolidated supervision of financial conglomerates, strengthening of off-site surveillance through control returns. Recasting of the role of statutory auditors, increased internal control through strengthening of internal audit. Setting up of INFINET as the communication backbone for the financial sector, introduction of Negotiated Dealing System (NDS) for screen-based trading in government securities and Real Time Gross Settlement (RTGS) System etc. As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalised and well-regulated. The financial and economic conditions in the country are far superior to any other country in the world. Credit, market and liquidity risk studies suggest that Indian banks are generally resilient and have withstood the global downturn
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well. Indian banking industry has recently witnessed the roll out of innovative banking models like payments and small finance banks. RBI’s new measures may go a long way in helping the restructuring of the domestic banking industry. The digital payment system in India has evolved the most among 25 countries with India’s Immediate Payment Service (IMPS) being the only system at level 5 in the Faster Payments Innovation Index (FPII).2 In August 2017, Global rating agency Moody's announced that its outlook for the Indian banking system is stable. In November 2017, Global rating agency Moody's upgraded four Indian banks from Baa3 to Baa2.3 The Indian banking system consists of 27 public sector banks, 21 private sector banks, 49 foreign banks, 56 regional rural banks, 1,562 urban cooperative banks and 94,384 rural cooperative banks, in addition to cooperative credit institutions. Public sector banks control more than 70 per cent of the banking system assets, thereby leaving a comparatively smaller share for its private peers. Banks are also encouraging their customers to manage their finances using mobile phones. The unorganised retail sector in India has huge untapped potential for adopting digital mode of payments, as 63 per cent of the retailers are interested in using digital payments like mobile and card payments, as per a report by Centre for Digital Financial Inclusion (CDFI). Enhanced spending on infrastructure, speedy implementation of projects and continuous of reforms are expected to provide further impetus to growth. All these factors suggest that India’s banking sector is also poised for robust growth as the rapidly growing business would turn to banks for their credit needs. Also, the advancements in technology have brought the mobile and internet banking services to the fore. The banking sector is laying greater emphasis on providing improved services to their clients and also upgrading their technology infrastructure, in order to enhance the customer’s overall experience as well as give banks a competitive edge. The digital payments revolution will trigger massive changes in the way credit is disbursed in India. Debit cards have radically replaced credit cards as the preferred payment mode in India, after demonetisation. Debit cards garnered a share of 88.86 per cent of the total card spending. 4 India’s digital lending stood at US$ 75 billion in FY18 and is estimated to reach US$ 1 trillion by FY2023 driven by the five-fold increase in the digital disbursements.5 Indian banking companies are increasingly focusing on adopting integrated approach to risk management. Banks have already embraced the international banking supervision accord of Basel II, and majority of the banks already meet capital
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requirements of Basel III, which has a deadline of March 31, 2019. Reserve Bank of India (RBI) has decided to set up Public Credit Registry (PCR) an extensive database of credit information which is accessible to all stakeholders. The government passed the Banking Regulation (Amendment) Bill 2017, which will empower RBI to deal with NPAs in the banking sector. The Insolvency and Bankruptcy Code (Amendment) Ordinance Bill, 2017 Bill has been passed and is expected to strengthen the banking sector. 6 The PCR will also include data form entities like market regulator SEBI, the corporate affairs ministry Goods and Service Tax Network (GSTN) and the Insolvency and Bankruptcy Board of India (IBBI) to enable the Banks and financial institutions to get degree profile of existing and prospective borrowers on a real time basis. STATEMENT OF THE PROBLEM The banking sector is the key driver of India’s economic growth. Increase in working population and growing disposable income will raise the demand of banking service. The banking sector in India ranks among the top six economies with a GDP of US$ 2,597 in 2017 and economy is forecasted to grow at 7.3 per cent in 2018. 7, while providing employment to a significant number of its territory sector workforce. More than 6.2 million people are employed in the companies either directly or indirectly, making it one of the biggest job creators in India and a mainstay of the national economy. Banking system remains focal point in the financial set up of any developing country. Banks are regarded as special in view of their specialized functions in the financial intermediation and payment system. Banking companies played an increasingly important role in nation’s economy, occupying a pivotal position in the organized money market; it has acquired a special place with its large network of branches, with its huge deposits and advances. Effect of financial stability or financial instability with the gradual change in the very concept of banking and with the entry of state in its administration, banking has assumed enormous importance as a subject of analysis and research. The success of economic growth of a country mainly depends on the effective performance of banks. Indian capital market is highly dependent on the growth and prosperity of banking sectors. In recent years, the Indian banking sector continued to experience deterioration in asset quality, which had a significant impact on their
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profitability and their capacity to support credit growth. In response to mounting delinquent loans of banks, and in order to align the resolution process with the Insolvency and Bankruptcy Code (IBC) 2016,8 the framework for resolution of stressed assets was revised, and the previous schemes were withdrawn. Further, the various processes and input constraints that were embedded in earlier regulatory schemes for restructuring were removed. Therefore, it is high time to evaluate the performance of Indian banking companies. In this backdrop, the present study seeks to assess the financial stability and non performing assets of top five banking companies and furthermore they are taken for analysis on the basis of their weightage in the CNX bank index. The researcher used PEARLS technique developed by WOCCU (World Council for Credit Unions, USA)9 to evaluate various aspects of a company’s operating and financial performance such as its protection, effective financial structure, asset quality, rates of return and cost, liquidity and signs of growth to assesses the financial stability of the selected banking companies. The trend of these ratios over time is studied to check whether they are improving or deteriorating and also the ratios are compared across different companies in the same sector to see how they stack up, and to get an idea of comparative valuations. OBJECTIVES OF THE STUDY In line with the statement of the problem as above, the following are the specific objectives of the study 1. To check how the selected banking companies achieve the standard goals of PEARLS. 2. To compare all the selected banking companies on the basis of PEARLS analysis to discover the best performing bank. 3. To appraise the interrelationships among the PEARLS ratios of selected banking companies. 4. To examine how the selected banking companies achieve the standard level of non-performing assets (NPAs) prescribed by benchmark of RBI. 5. To assess the position of non-performing assets (NPAs) of the selected banking companies and also to examine the grades for ratios of NPA. 6. To construct suitable suggestions based on research findings to improve the effectiveness and efficiency of the banks.
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SCOPE OF THE STUDY The present study is very ample. So the PEARLS analysis is taken into consideration for the purpose of evaluation and analysis of financial stability and performance of the selected banking companies. This research is specifically limited to top five banking companies listed on National Stock Exchange under the CNX bank index. The banking companies taken for analysis on the basis of their weightage are as follows HDFC Bank Ltd, ICICI Bank Ltd, Kotak Mahindra Bank Ltd, State Bank of India and IndusInd Bank Ltd. Here, the researcher has analysed the selected banking companies on the basis of six parameters of PEARLS i.e. Protection, Effective Financial Structure, Asset Quality, Rates of Return and Costs, Liquidity and Signs of Growth. OPERATIONAL DEFINITIONS OF THE CONCEPTS Net Value of Assets When the sum of total of net block (gross block – depreciation) is added to the total net current assets (total current assets – total current liabilities) the result obtained is called Net value of assets. Share Holders Fund Share holders fund includes the total equity capital, reserves and surplus of the selected company during the study period. Net Loans The net loan is calculated by adding a secured and unsecured loan. Liquid Investment Investment made for very short period i.e. current investments is called liquid investment. It is computed by summing up the bank savings accounts and liquidity reserves deposited in either the National Association or regulatory body is divided by the amount invested in those areas. Financial Investments Investment done by the company in other company’s shares, government and other approved securities, mutual fund units, certificate of deposits, debentures, bonds, subsidiaries or joint ventures etc is called financial investment. Liquid Investment Income
Liquid investment income is the income earned from the current investments.
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Financial Investment Income Financial investment income is the income received from mutual fund investments, certificate of deposits, debentures and bonds, investment in other company’s shares and security etc. Non Financial Investments Non financial investment includes investments made in physical value like schools, supermarkets, pharmacies, gold, real estates and residential development projects. Savings Deposits Savings deposits are the combination of the Cash and Bank Balance at the end of the bank’s financial year. External Credits External credit contains loans taken by the institution from other higher financing agencies for financing its long term or short term requirements. Here, External credit includes secured and unsecured loans. Member Share Capital Member Share Capital is the share capital of the company at the end of the financial year. Institutional Capital Institutional Capital contains all types of Reserves of the Institution. Here, Reserves include General Reserves, Capital Reserves etc for the Current year. Non-Earning Assets Non-Earning Assets Includes the Assets of the organization which does not earn any direct Revenue for the institution. Here, Non – Earning Assets contains Cash and Bank Balance, Bills Receivables and Debtors etc. Other Income Other Income is the income received from other than Mutual Fund Investments, investment in other company’s shares and security, etc. Proposed Dividend Proposed dividend for a particular year is taken as numerator. Proposed Dividend is taken from the Balance sheet of the respective company during the period under review.
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Operating Expenses Non interest expenses are the operating expenses which includes a variety of operating cost incurred by banking firms during a particular financial year. Non-Performing Assets When an asset which cease to generate income for 90 days and above those assets are called as Non-Performing Assets Gross NPA Gross NPA is the total of sub-standard advances, doubtful assets and loss assets. Net NPA Net NPAs are those type of NPAs in which the bank has deducted the provision made for NPAs. Standard Assets Standard assets are those assets ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer. If asset fails to be in category of standard asset that is amount due more than 90 days then it is NPA. Sub-Standard Assets Sub-standard asset is one which has been classified as NPA for a period not exceeding 12 months. Doubtful Assets This asset is one which has remained as NPAs for more than one year. Loss Assets A loss asset is one which is considered uncollectable and of such little value that its continuance as a bankable asset is not warranted-although there may be some salvage or recovery value. Also, these assets would have been identified as “loss assets” by the bank or internal or external auditors or the RBI inspection but the amount would not have been written-off wholly. Net Advances The amount of principal outstanding is gross advance and the principal together with outstanding interest is net advance on a particular day.
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Gross Advances "Gross advance" means the sum payable to the payee or for the payee's account as consideration for transfer of structured settlement payment rights before any reductions for transfer expenses or other deductions to be made from such consideration. Problem Asset The Problem assets ratio shows the proportion of Gross NPA to total asset Depositor’s Safety Ratio Due to awareness among depositors towards safety of their money deposited in a bank they are forced to study the proportion of standard assets of the bank to the outside liabilities, mostly consisting of their deposits. Provision Ratio The provision ratio is used to determine the safety measures adopted by the bank in case an account slip into the non performing category. Slippage Ratio Slippage ratio is calculated as the addition of gross NPAs during the year as a percentage of outstanding standard assets of the previous year. It is an important indicator of asset quality and also indicates the degree of deterioration of loan assets of the bank. NPA Reduction Reduction of NPAS means recovery of stressed assets through Lok Adalat, DRT, SARFAESI Act proceedings, filing civil suits etc for reducing NPAs. NPA Accretion Gross NPAs of the banking system continues to rise and there were signs of stress in restructured portfolio of banks. HYPOTHESES OF THE RESEARCH The researcher has framed the following hypotheses for the study There is no significant difference in PEARLS ratios in the selected banking companies during the study period. There is no significant interrelationship among PEARLS ratios of the selected banking companies during the study period. There is no significant difference in Non-Performing Asset ratios of the selected banking companies.
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METHODOLOGY The main source of data used for the study is secondary, derived from the published annual reports of selected units and also the data are collected from the journals, reports on trend, progress of banking in India and web sites of relevant banking companies. PERIOD OF THE STUDY This study covers a period of ten years for the period from 2009-10 to 2017-18. SAMPLING DESIGN All Indian banking companies listed on National Stock Exchange is formed a Universe for the present study. Out of the universe, the researcher has identified five banks which constitute the CNX Bank Index of NSE. Out of the total ten banking companies constitute the CNX Bank index, the top five banking companies on the basis of their weightage on the index (81.99) have been selected for analysis. The name, ISIN code, listing date and the weightage of selected banking companies is presented in Table I 10 TABLE I Selected Banking Companies with Listing Date, ISIN Code and their Weightage in CNX Bank Index S.No Name of Companies ISIN Code Listing Date Weightage (%) 1 HDFC Bank Ltd INE040A01026 08-Nov-1995 35.95 2 ICICI Bank Ltd INE090A01021 17-Sep-1997 15.06 3 Kotak Mahindra Bank Ltd INE237A01028 20-Dec-1995 14.60 4 State Bank of India INE062A01020 01-Mar-1995 8.20 5 IndusInd Bank ltd INE095A01012 -- 8.18 Total 81.99 Source: www.nseindia.com TOOLS FOR THE STUDY The overall progress of the selected banking companies has been analysed with the help of secondary data. The data collected from the annual report of the selected banking companies, were entered and classified for analysis. The tools used for the analysis of the present study are divided into two parts namely A) Pearls Analysis B) Statistical Analysis. They are discussed as follows
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PEARLS Analysis PEARLS is a set of financial ratios or indicators that help to standardize terminology between institutions. In total, there are 44 quantitative financial indicators that facilitate an integral analysis of the financial condition of any financial institution.11 So, the researcher used PEARLS analysis to assess the financial stability and performance of the selected banking companies. The PEARLS system is uniquely different. Each letter of the name "PEARLS" looks at a different, but critical aspect of the credit union. There are six components under the PEARLS analysis namely Protection, Effective financial structure, Asset quality, Rates of return and costs, Liquidity and Signs of Growth. The each six components of PEARLS analysis has a sub ratios which are elaborately explained in the third chapter with its purpose, formulas and standard goals. Statistical Analysis The data were analysed by using Statistical techniques such as Percentage analysis, Mean, Two way ANOVA Test, One way ANOVA Test, Tukey’s HSD (Honestly Significant Difference) Test and Multiple Correlation of Coefficient Test has been used to assess the financial performance of the selected banking companies with the help of Statistical Package for Social Sciences (SPSS). In order to test the significant difference in the PEARLS ratios, gross NPAs ratio, net NPAs ratio, problem asset ratio, depositor’s safety ratio, provision ratio, slippage ratio, sub standard ratio, doubtful asset ratio, loss asset ratio, NPAs reduction ratio and NPAs accretion ratio between the years and among the selected banking companies, the two way ANOVA has been used. In order to test the significant interrelationship among the ratios of HDFC, ICICI, Kotak Mahindra, State Bank of India and IndusInd during the study period is tested not only with the help one way ANOVA but also with the help of Tukey’s HSD (Honestly Significant Difference). Multiple Correlation co-efficient is used to ascertain the various interrelationships among the ratios of HDFC, ICICI, Kotak Mahindra, State Bank of India and IndusInd during the study period.
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CHAPTER SCHEME The present study captioned, “An assessment of Indian banking companies listed on National Stock Exchange by PEARLS Analysis” has been branched into seven chapters as given below: The First Chapter presents the introduction and design of the study in detail. It comprises of introduction, statement of the problem, objectives of the study, scope of the study, operational definition and concepts, hypotheses of the study, methodology, period of the study, sampling design, tools for analysis and chapter scheme. The Second Chapter deals with the review of literature. The Third Chapter covers the conceptual frame work of PEARLS analysis in detail. It also includes the importance of each component with their standard goals given by WOCCU. It also includes the calculative formula of each of the component of PEARLS. The Fourth Chapter is the key chapter of the study. It includes the detailed analysis of selected Indian banking companies through PEARLS analysis. The Fifth Chapter examines with the interrelationships among the PEARLS ratios. Here the researcher tries to find out the degree of interrelationships among all the ratios with the help of some statistical tools. The Sixth Chapter attempts to identify the position of Non-Performing Assets of the selected banking companies. It discusses the concept of NPA and its importance in banking sector, asset classification, NPA management rating model, Standardized benchmarks of RBI and NPA rating grades of the selected banking companies. The Seventh Chapter represents is the summary of the findings and it offers suitable suggestions based on the findings of the study.
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REFERENCES 1. https://www.thehindubusinessline.com 2. http://www.bfls.in/concept/ 3. https://www.thehindu.com/business/Economy/moodys-lifts-indias-rating-to- baa2/article20496664.ece 4. Report of Indian Banking Industry as on August 2018 according to reserve bank of India. 5. Report of FIS. 6. https://economictimes.indiatimes.com/news/economyindicators 7. https://www.thehindubusinessline.com 8. https://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1233 9. https://www.woccu.org/documents/pearls_monograph 10. https://www.nseindia.com/content/indices/ind_nifty_bank.pdf. 11. https://www.woccu.org/documents/pearls_monograph.
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