Ujian Tengah Semester Review Jurnal Inter Nirmala(Metod Bu Dwi)

IJMRR/ May 2013/ Volume 3/Issue 5/Article No-11/2914-2922 No-11/2914-2922

ISSN: 2249-7196

INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH AND REVIEW

MEASURING PERFORMANCE OF BANKS USING CAMELS MODEL: A COMPARATIVE STUDY OF CBI AND IB. 1

2

Seema Mishra* , Dr. Kirti Agarwal 1 Research Scholar, Pacific University, Udaipur, India. 2 Supervisor, Director, ITERC, Ghaziabad, India. ABSTRACT

The banking sector’s performance is seen as the replica of economic activities of the nation as a healthy banking system acts as the bedrock of social, economic and industrial growth of a nation. Banking institutions in our country have been assigned a significant role in financing the process of planned economic growth Sound financial health of a bank is the guarantee not only to its depositors but is equally significant for the shareholders, employees and whole economy as well. As a sequel to this maxim, efforts have been made from time to time, to measure the financial position of each bank and manage it efficiently and effectively. In this paper, an effort has been made to evaluate the financial performance of the two major banks operating in India .This evaluation has been done by using CAMEL Parameters, the latest model of financial analysis. Keywords: financial performance, commercial banks, capital Adequacy, asset quality, management capability, earnings analysis, liquidity analysis. INTRODUCTION

In this era of liberalization, Privatization and globalization banking sector has become backbone of Indian economy now a day’s banking sector being an integral part of Indian financial system has undergone dramatic changes reflecting the ongoing economic and financial sector reforms. Two decades have elapsed since the initiation of banking sector reforms in India. Over this period, the banking sector has experienced a paradigm shift. Hence, it is high time to make performance appraisal of this sector. Accordingly, a framework for framework for the evaluation of the current strength of the system, and of operations and the performance of the banks has has been provided by Reserve Bank’s Bank’s measuring rod of ‘CAMELS’ which stands for capital adequacy, assets quality, management efficiency, earning quality, liquidity and internal control systems. As efficient banking systems contribute in an extensive way for higher economic growth in any country, studies in this nature are very important for policy makers, industry leaders and many others who are reliant on the banking sector. The banking sector has been undergoing a complex, but comprehensive phase of restructuring since 1991, with a view to make it sound, efficient, and at the same time forging its links firmly with the real sector for promotion of savings, investment and growth.RBI had set up a working group headed by Shri.S.Padmanabhan to take fresh look at banking supervision during 1995. It suggested method for on-site supervision and subsequent rating of banks by RBI. The committee suggested that supervision of banks should focus on defined parameters of soundness, financial, managerial and operational efficiency. Accordingly, it recommended *Corresponding Author

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IJMRR/ May 2013/ Volume 3/Issue 5/Article No-11/2914-2922

ISSN: 2249-7196

that the banks should be rated on 5 point scale of A to E, widely on the lines of international CAMELS rating model. It is considered as the best available methods for evaluating book performance and healthy position of the bank since it considered all area of banking operations. The fact that banks work I under the most volatile conditions and the banking industry as such in the booming phase makes it an interesting subject of study. Amongst these reforms and restructuring the CAMELS rating system has its own contribution to the way modern banking is looked up on now. Banking sector has playing vital role in development of Indian agriculture and industries. At presently Banking has become Important part of economy & society. Banking industry which was highly regulated in pre-reform period is reorienting itself to face new challenges emerging in the financial sector globally. Basis factors responsible for performance of public sectors banks were stringent regulation, poor recovery process and above all lack of competition. BANKING SECTOR REFORM

The banking sector reform initiated in 1992 sought to improve the bank efficiency through entry deregulation, branch delicensing, deregulation of interest rate and allowing the public & private sector banks to raise the equity capital from the capital market. One of the major reasons for allowing public sector banks to access capital market is to support the recapitalization needs of these banks. The Reserve Bank of India has estimated that given the present growth rate of the economy and the extent of capital adequacy norms, the public sector banks would need Rs.100 billion of additional capital in the coming five years (Jalan 2000). The two possible sources of capital infusion are by governmental infusion of funds and/or allowing the banks to access the capital market. BANKS IPOs

An initial public offering (IPO) or stock market launch, IPO is the first sale of stock by a company to the public. One of the major steps in this direction was allowing the public sector banks to go for IPOs, which would dilute the government ownership and bring these banks under market discipline. The policy in favor of banks raising capital through IPO was enacted in 1992. Since then some of the public sector and private banks have gone for IPOs. The IPO literature, on the other hand points toward presence of underperformance of newly listed companies in the developed and developing countries. Considering the importance of sound banking system for resource allocation and smooth functioning of the economy a detail analysis of pricing and performance of banks that went public over the last decade is of paramount importance. Many of the public and private sector banks took the IPO route to collect funds in the 1990s. In view of the evidences of perverse underperformance of the IPOs in general (as documented in the IPO literature) and considering the importance of the banking sector in overall development process, this study devotes itself to a detailed analysis of IPO from the banking sector. The underlying structures of the public sector banks differ considerably from their private counterpart. So, it is of considerable interest to evaluate the changes in the public sector banks vis-à-vis their private counterpart(s) in the post IPO era. OBJECTIVES

The main objectives of the study are as follows :

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ISSN: 2249-7196

(i) to analyse the financial performance of the banks under study; (ii) to undertake the factors which have led to the current financial performance RESEARCH METHODOLOGY

For the purpose of the present study, the research instrument used is the CAMEL Model which is the recent innovation in the area of financial performance evaluation of banks. The model is explained as under: CAMEL parameters

This system was adopted in India since 1995 at the suggestion of Mr. Padmanabhan, Governor RBI. Under this system the rating of individual banks is done along five key parameters. CAMEL is basically ratio based model for evaluating the performance of banks. It is a management tool that measures Capital Adequacy, Assets Quality, efficiency of Management, quality of Earnings and Liquidity of financial institutions. The present study adopts analytical and descriptive research design. The data of the sample banks for a period of 2008-2012 have been collected from the annual reports published by the banks. The study is based on twelve ratios of the variables relating to capital adequacy, assets quality, management efficiency, earnings quality and liquidity. Sample of the study

The present study seeks to evaluate the financial performance of the two nationalized bank (central bank of india and Indian bank) . These two banks were purposely selected for the study, keeping in view that these two banks released their IPO’s in the same year that is 2007. Data and tools

The study is mainly based on secondary data drawn from the annual reports of the respective banks. This data is related to 5 years (2008-2012). For analysis of the data, two important statistical tools viz. Mean and standard deviation has been used to arrive at conclusions in a scientific way. The study is primarily based on secondary data. A plethora of data hasbeen collected from the following sources. 1. IBA-Bulletins annual issues and monthly i ssues 2 Statistical tables relating to banks in India 3. Reserve Bank of India monthly bulletins and annual reports. A brief discussion on the ratios considered in the analysis is presented as follows CAPITAL ADEQUACY

1. Capital Adequacy Ratio (CAR) 2. Debt-Equity ratio (D/E) 3. Coverage ratio ASSET QUALITY

1. Net NPA / Net advances


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2. Total investment / Total assets MANAGEMENT QUALITY

1. Return on net worth 2. Business per Employee 3. Profits per Employee EARNINGS QUALITY

1. NIM to Total assets 2.Interest income\ Total Income 3. Non Interest income\ Total Income LIQUIDITY

1. Liquid Assets/Total Deposits 2. Liquid Assets/Total Assets LITERATURE REVIEW WORLD WIDE STUDY ON BANK PERFORMANCE Usman et al (2009) conduct a study on banking efficiency dynamic with financial sector reforms effect. They took the data set of 20 commercial banks of Pakistan and measure the efficiency using Data Envelopment Analysis Malmquist productivity index of total factor productivity (TFP) from 1990-2005. Al-Obaidan(2008) suggest that larger banks are more efficient then small banks in the gulf region. Jahangir,Shill and Haque (2007) Stated that the traditional measure of profitability through stockholders equity is quite different in banking industry from any other sector of business where loan–to-deposit ratio works as very good indicator of banks profitability as it depicts the status of assts-liability management of banks. Tarawneh(2006) found that the bank with higher total capital, deposits, credits, or total assets does not always means that has better profitability performance. Fadxlan Sufian (2006) applied DEA window analysis approach to examine the long term trend in the efficiency of 29 Singapore banking group during the period of 1993-2000. X.Chen et all (2005) applies frontier analysis (X-efficiency) using DEA to examine the cost, technical and locative efficiency of 43 Chinese banks over the period 1993-2000. Chien-Ta(Bruce)(2004) Used a new approach of performance evaluation,grey relation analysis(GRA),which is a concept borrowed from the study of industry and is increasingly applied to commerce.GRA is used to evaluate the realative performance of three of Australia’s major banks. Maghyereh (2003) Jordian undertook major financial sector liberalization starting in the early of 1990’s.The effect of these reform on the efficiency of the banking sector is evaluated. Choudhary (2002) observed that the banking industry of Bangladesh is a mixed one comprising nationalized, private and foreign commercial banks many efforts have been made to explain the performance of these banks. Bassett and Brady’s (2002) study found that small banks grew more rapidly than large banks from 1985-2001 with profitability remains at a higher level. Siddique and Islam (2001) pointed out that the commercial banks, as a


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whole, are performing well an contributing to the economical development of the country. Bashir (2000) examines the determinants of Islamic banks performance across eight Middle Eastern countries from 1993-1998 period. Ruggier (2001,2004) discussed the application of DEA in education sector, Vassiloglou and Giokas (1990),Zenios et al.(1999) and Rouatt (2003) discussed various application of DEA in banking sector to improve the performance. INDIAN STUDIES ON BANK PERFORMANCE N.Ganeshan Examine the performance (operational efficiency of 30 state cooperative banks SCB’s in India for the financial year 2002-2003 and 2003-2004.The DEA is used to find the efficiency of SCB’s. Ashok Nag & Amit Moitra applies the artificial intelligence technique of self organizing map (SOM) for analyzing the performance trajectory of public s ector banks in India. P.Ganeshan examines the determinants of profitability of PSB’s in India by an empirical estimation of profit function model. Sangeet & Shubpreet (2006) made an attempt to review the performance of banking sector in India during post reforms period. Singh (1990), in his research study titled, “Productivity in Indian Banking Industry”, discussed the trends and changes in the productivity with particular attention on employee and branch productivity in the Indian banking industry. Ramamurthy (1998) , in his technical paper on the profitability and productivity in Indian banking stated that the banking structure and profitability structure of the banking system across the country have a bearing on the profitability of the banks. When banks are considered as groups in terms of big, medium and small, bigger banks have greater scope for economies of scale. Kewaljeet (1999) in his article, “Profitability Performance of Nationalised Banks: Some Issues”, made an attempt to analyze the profitability performance of State Bank of Patiala keeping in mind the changing economic reward. Malhotra (1999) in her study, “Banking Sector Reforms: Experience of PSBs”, has analyzed the performance of PSBs as a result of banking sector reforms. The study is divided into two parts. In the first part, a brief review of banking reforms has been made. In the second part, the researcher has discussed the impact of banking sector reforms on PSBs, after dividing the reform period of 1992-98 into two phases. STUDIES RELATED TO CAMEL FRAMEWORK Rao and Datta (1998) made an attempt to derive rating based on CAMEL. In their study, based on these five groups (C-A-M-E-L), 21 parameters in all were developed. After deriving separate rating for each parameter, a combined rating was derived for all nationalized banks (19) for the year 1998. The study found that Corporation Bank has the best rating followed by Oriental Bank of Commerce, Bank of Baroda, Dena Bank, Punjab National Bank, etc. And the worst rating was found to be of Indian Bank preceded by UCO Bank, United Bank of India, Syndicate Bank and Vijaya Bank. Prasuna (2004) analyzed the performance of Indian banks by adopting the CAMEL Model. The performance of 65 banks was studied for the period 2003-04. The author concluded that the competition was tough and consumers benefited from it. Better services quality, innovative products, better bargains are all greeting the Indian customers. The coming fiscal will prove to be a transition phase of Indian banks, as they will have to align their strategic focus to increasing interest rates. Veni (2004) studied the capital adequacy requirement of banks and the measures adopted by them to strengthen their capital ratios. The author highlighted that t he rating agencies give prominence to Capital


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Adequacy Ratios of banks while rating the bank’s certificate of deposits, fixed deposits and bonds. They normally adopt CAMEL Model for rating banks. Thus, Capital Adequate is considered as the key element of bank rating. Satish et al. (2005) adopted CAMEL model to assess the performance of Indian banks. The authors analyzed the performance of 55 banks for the year 2004-05.using CAMEL Model. They concluded that the Indian banking system looks sound and Information Technology will help the banking system grow in strength while going into future. Banks’ initial public offers (IPOs) will be hitting the market to increase their capital and gearing up for the Basel-II norms. Bodla and Verma (2006), in their paper, made an attempt to examine and compare the performance of two largest banks of India SBI, a public sector bank; and ICICI a private sector bank - through CAMEL Model. Two supervisory rating models based on CAMEL (Capital Adequacy, Assets Quality, Management, Earning, Liquidity, Systems and Controls) and CACS (Capital Adequacy, Assets Quality, Compliance, Systems and Controls) factors for ranking the Indian and foreign banks have been operating. These models have been worked out on the recommendation of Padamanabhan Working Group (1995). Satish and Bharathi (2006) revealed that the Indian banking system has come a long way since independence going through different phases of nationalization and liberalization and is now preparing itself for the very critical phase. Globalization. The liberalization phase brought out the best in the industry inducing competition among banks. During this period, banks were re -structured, shed the flab of overemployment, embraced technology, ventured into new business a nd re-branded themselves to cater over-demanding customers Sisodiya et al. (2007) adopted CAMEL model to assess the performance of Indian banks. The authors analyzed 67 banks for the year 2006-07. On the basis of composite ranking of all the selected banks, they selected 10 CAMEL topper banks under public sector, private sector and foreign banks category. They concluded that with the buoyancy in the overall economy led by robust corporate performance, the banking sector reported sterling performance. Sisodiya et al. (2008), in their article titled, “Indian Banking Industry: Sustaining the Growth Momentum” revealed that the banking sector in India has once again come out with another fiscal of robust performances. .The authors ranked banks on the basis of the famous CAMEL (Capital Adequacy, Assets Quality, Management, Earning and Liquidity) rating. They analyzed 68 banks for the year 2007-08. On the basis of ranking of each measure of CAMEL Model, they selected five banks under Capital Adequacy winner (PSU banks), Assets Quality winner (Private sector banks), Management Efficiency winner (PSU banks), Earning Quality winner (Private sector banks) and Liquidity winner (PSU banks). Sisodiya and Pemmaraju (2009), in their article said that the Indian banking has shown remarkable resilience even amidst the worst ever financial catastrophe that hit the global economy about a year ago and caused the collapse of several financial giants They have ranked the banks on the basis of CAMEL rating. Banks have been classified into three categories based on their ownership group, viz. public sector banks (PSBs), private sector banks and foreign banks. They analyzed 66 banks for the year 2008-09. Maheshwara Reddy K.V.N.Prasad(2011) In this paper an attempt is made to discuss the financial performance of selected regional rural banks during post reorganization period. To measure the financial soundness of selected sample banks, the CAMEL Model which is an appropriate technique is adopted. Prasad K. V. N(2012) Evaluating Indian banking sector is not an easy task. This paper evaluate the performance of banking sector by CAMEL model which measures the Copyright © 2012 Published by IJMRR. All rights reserved

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ISSN: 2249-7196

performance of banks from each of the important parameter like Capital Adequacy, Assets Quality, Management Efficiency, Earning Quality and Liquidity. After deciding the model this study chosen all public sector banks and thirteen private sector banks for study. Results shown that there is no significant difference between performance of public and private sector banks. STUDIES RELATED TO IPO’S Jay R. Ritter (1991) was the first to document evidences of underperformance as another empirical anomaly present in the IPO market. Using a sample of 1526 companies that went public in U.S.A. during 1975 to1984, he showed that in the long run IPO firms significantly under-performed as compared to the already listed firms Loughran and Ritter (1995) tried to address the unresolved issues of Ritter’s (1991) paper and shed more light on the issue of long run under-performance of IPOs by taking a longer time horizon (1970-90) and found evidences of perverse underperformance on the basis of stock returns. Jain & Kini (1994) , on the other hand, concentrated on accounting data of IPO firms to evaluate their post issue operating performance. They found that IPO firms exhibit substantial decline in the post issue operating performance over a period of six years (extending from the year prior to the IPO). Another study by Mikkelson et al. (1997) considered a sample of 283 U.S. IPOs in the years 1980-83. Their study also supported the earlier findings and showed that operating performance of the IPO firms deteriorated in the first ten years after going public. Chun & Smith (2000) found support of IPO underperformance from an emerging economy, Korea. Their study showed that profitability declined for the Korean firms in the initial years after IPO. RESULT

CAR of CBI is better then IB, Debt\equity ratio should be less so Indian bank is holding it less then CBI. .In terms of asset quality CBI is better then IB. On the basis of management quality we can conclude that CBI is managing better then IB. In terms of earning quality IB is performing better. In terms of liquidity both the banks are comparatively equivalent. CONCLUSION

Banking sector in Indian has given a positive and encouraging responses to the financial sector reforms. Entry of new private banks and shaken up Public sector banks to competition. The financial sector reforms have brought India financial system closer to global standards. With the India increasingly getting integrated with the global financial world, the Indian banking sector has a still long way to go to catch up with their counter parts. REFERENCES

1. Ahmed Ujalil HH, Farooq S. Efficiency Dynamics and Financial Reforms,Pakistan institute of development economice (PIDE), Islamabad Pakistan international Research Journal of Finance and Economics, 2009. 2. Al-Obaiden, Abdullah M. Optimal bank size:the case of the gulf cooperation council countries. European journals of economics, Finance and Administrative Sciences 2008; 11: 31-43.


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3. Bashir A. Assesing the performance of Islamic banks:Some evidence from the middle east. th Paper presented at the ERF 8 meeting in Jordian, 2003. 4. Chen XG, Skully M, Brown K. Banking Efficiency in China:Application of DEA to Preand Post-Deregulation Eras: 1993-2000. China Economic Review 2005; 16: 229-245. 5. Chien-Ta (Bruce) Ho. Performance evaluation of Australia’s Major banks. Asian Review of Accounting 2004; 12(1): 19-33. 6. Chowdhury A. Politics, Society and Financial Sector Reform in Bangladesh. International Journal of Social Economies, 29(12), 963-988.Development 2004-05”,Chartered Financial Analyst,Special Issue,Oct 2002; 6-29. 7. Jahangir N, Shill S, Haque MAJ. Examination of Profitability i n the Context of Bangladesh Banking Industry. ABAC Journal 2007; 27(2). 8. Jain BA, Kini O. The post issue operating performance of IPO firms. Journal of Finance 1994; 49(5): 1699-1726. 9. Kapil S, Kanwal N, Nagar KN. Bench Marking Performance of Indian Public Sector Commercial Banks. Indian Journal of Accounting 2003; XXXIV(1): 24-28. 10. Kumbhakar CS, Subrata S. Deregulation,ownership and productivity growth in the banking industry:Evidence from india, 2002. 11. Loughran T, Ritter JR. The new issues puzzle. Journal of Finance 1995; 50(1): 23-51. 12. Maghyereh A. The Effect of Financial Liberalization on the, Efficiency of Financial Institutions: The Case of Jordanian Commercial Banks, Social Science Research Network, Oct. 2003. 13. Mikkelson, Wayne H, Megan PM. Shah K. Ownership and operating performance of companies that go public. Journal of Financial Economics 1997; 44(3): 281-307. 14. Ganeshan N. A study on the performance analysis of the state cooperative banks in india. Prajanan vxxxiv(4); 2005-2006. 15. Ganeshan P. Determinants profit and profitability of PSB’s in india: A profit function approach. Journal of financial management and analysis 2001; 14(1): 27-37. 16. Rao S, Datta L. Benchmarking in Banking: A CAMEL Approach Resilience. Chartered Financial Analyst, Special Issue, October 1998; 26-52. 17. Ritter, Jay R. The long run performance of initial public offerings. Journal of finance 1991; 46: 3-27. 18. Arora S, Kaur S. Financial performance of Indian banking sector in post reform era. The Indian journal of commerce 2006; 59(1). 19. Satish D, Bala BY. Indian Banking Coming of Age, 2006. 20. Sisodiya AS, Bala BY, Moghal I. Indian Banking Industry: Sustaining the Growth Momentum. Chartered Financial Analyst, Special Issue, October 2008; 34-61. 21. Sufian F. Trends in the efficiency of Singapore’s commercial banking group. A nonstochastic frontier DEA window analysis approach, 2006. 22. Tarawneh M. A comparison of financial performance in the banking sector: some evidence from Omani commercial bank. International Research Journal of Finance and Economics 2006; 3: 101-112. 23. Varde VS, Singh SP. Monitoring profitability of bank branches. Journal of Indian institute of bankers 1981; 52(2).


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24. Vassiloglou M, Giokas D. A study of the relative efficiency of the bank branches:An application of the DEA. Journal of the operational Research society 1990; 41(7): 591-597.

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Ujian Tengah Semester Review Jurnal Inter Nirmala(Metod Bu Dwi)

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