CAPSTONE Report on A STUDY ON ASSET QUALITY OF SCHEDULED COMMERCIAL BANKS

Submitted To Dr.S.SIRISHA
Academic guide ITM B School, Warangal

Submitted By SUSHEELA MEENA WAR2011PGDM17FO36, ITM WARANGAL

ACADEMIC GUIDE CERTIFICATE

It is hereby certified that the project report on A STUDY ON ASSET QUALITY OF SCHEDULED COMMERCIAL BANKS , being

submitted by SUSHEELA MEENA student of the degree of post graduation diploma in management of Institute for technology and management, warangal which is affiliated to AICTE, is an original work carried out successfully under my guidance and supervision and that no part of this project has been submitted for any other degree/diploma. The sincerely efforts put in during the course of investigation is hereby acknowledged

ACADEMIC GUIDE Dr. S.SIRISHA ITM WARANGAL

DECLARATION

I SUSHEELA MEENA hereby declare that my project report entitled A STUDY ON ASSET QUALITY OF SCHEDULED COMMERCIAL BANKS submitted to ITM Business School, Warangal for the award of the degree Post Graduation Diploma in Management. I further declare that this report has not been submitted to any other organization, either in part or in full for any purpose.

SUSHEELA MEENA WAR2011PGDM17FO36, ITM WARANGAL

ACKNOWLEDGEMENT
I take this opportunity to express my deep sense of gratitude to all our friends and seniors who helped and guide me to complete this project successfully. I am highly grateful and indebted to our DIRECTOR MR. T. DAYAKAR RAO, project guide Dr.S.SIRISHA for their excellent and expert guidance in helping me in completion of the project report.

PREFACE
Unless the knowledge is applied in the practical field, it cant attain perfection and maturity. A project work is systematic and scientific study of real issues and problems with the application of management principles, concepts and skills. Management course is amalgamation of theoretical as well as practical exposure. Practical training is considered to be an essential part of all the professional institutions and those who are aspiring for Post Graduate Diploma in Management, on job training assumes even more significances.

The successful completion of this project was a unique experience for us because by visiting many place and interacting various person, I achieved a better knowledge about this project. The experience which I gained by doing this project was essential at this turning point of my carrier this project is being submitted which content detailed analysis of the research under taken by me.The research provides an opportunity to the student to devote her skills knowledge and competencies required during the technical session.

As an aspect of management education which has now developed as inseparable part of the curriculum as well as getting equal attention from recruiters, on job training is imparted to the students to acclimatize the student with the actual environment of business management

Contents
1. Executive summary 2. Introduction 3. Objectives 4. Research methodology Data sources Sample. Limitations of the study. 4. Review of Literature 5. Balance Sheet Operations of Scheduled Commercial Banks 6. Major Liabilities of SCB 7. Maturity Profile of Assets and Liabilities 8. Conclusion. 9. References.

EXECUTIVE SUMMARY
Commercial banks play an important role in the development of a country. A sound, progressive and dynamic banking system is a fundamental requirement for economic development. As an important segment of the tertiary sector of an economy, commercial banks act as the backbone of economic growth and prosperity by acting as a catalyst in the process of development. They inculcate the habit of saving and mobilize funds from numerous small households and business firms spread over a wide geographical area. The funds so mobilized are used for productive purposes in agriculture, industry and trade. Efficiency, Profitability and Growth of Scheduled Commercial Banks in India tested whether the establishment expense was a major expense, and (2) out of total expense which is met by scheduled commercial banks is more due to more number of employees.

Asset-Liability Management ALM technique aims to manage the volume, mix, maturity, rate sensitivity, quality and liquidity of the assets and liabilities as a whole so as to attain a predetermined acceptable risk-reward ratio. Profitability The word profitability is composed of two words Profit and Ability. Ability refers to the earning capacity or power of an enterprise to earn the profit. So, Profitability may be defined as the ability of a given investment to earn a return from its use. Profitability of a concern indicates the financial stability and the greater the possibility of profit-earning the easier it is to attract capital investment. The height of profitability depends on the ability of the management to deal intelligently and effectively to tide over risks and uncertainties through shifting them or hedging benefits, risks involved, policy decision etc This paper examines management of asset-liability in banking sector. The main objective of the study is to present the optimal mix of asset and liability of Scheduled Commercial Banks in India. The paper mainly discusses on the SBI Group, Nationalised Banks Group and Private Banks Group selected as the parameter. The increase in the profitability of a bank is always preceded by the composition of assets and liability. Hence, the following ratios are calculated to identify the optimal mix of asset and liabilities in relation to profitability, ratio analysis was used on the sample of 56 banks comprising SBI and its Associate Banks 8, Nationalized Banks group 19 and Private Banks group 29 for the ten years period. The findings suggest that SBI and its associate bank group were better performers as compared to Private Banks group and Nationalized banks group

Introduction.
Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this Second Schedule to the schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches.The scheduled commercial banks in India comprise of State bank of India and its associates (8), nationalised banks (19), foreign banks (45), private sector banks (32) . To start with, performance in terms of profitability is a benchmark for an enterprise including the banking industry. However, increasing NPAs have a direct impact on profitability of banks as legally banks are not allowed to book income on such accounts and at the same time banks are forced to make provision on such assets as per the Reserve Bank of India (RBI) guidelines on Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date.Due to the improvement in the payment and settlement systems, recovery climate, up gradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001. Subsequent guidelines issued by RBI in line with international best practices in accordance with Basel standards ,the prudential norms for income recognition ,asset classification ,capital adequacy and provisioning in commercial banks has been introduced. Commercial banks play an important role in the development of a country. A sound, progressive and dynamic banking system is a fundamental requirement for economic development. As an important segment of the tertiary sector of an economy, commercial banks act as the backbone of economic growth and prosperity by acting as a catalyst in the process of development. They inculcate the habit of saving and mobilize funds from numerous small households and business firms spread over a wide geographical area. The funds so mobilized are used for productive purposes in agriculture, industry and trade

Objectives
The main objective of the study is

. To determine the balance operations of scheduled commercial banks. To determine the performance of the banks . To determine asset liability mismatches.

Research Methodology
One of the most important users of research methodology is that it helps in identifying the problem, collecting, analyzing the required information data and providing an alternative solution to the problem.

Data sources:
The research data is collected from various websites of banks, journals etc. It is secondary data and is used to analyse the performance of scheduled commercial banks compared to other banks.

Sample:
The data is collected from RBI and other websites. The banking statistics that are needed to calculate the performance and quality of assets of commercial banks.

Limitations of the study

1.The study is made to find performance of banks. 2. This Study used only some factors to analyze the factors effecting asset quality of scheduled commercial banks.. 3.The data is represented in the form of tables and graphs. 4. We also studied the impact of NPAs on various banks Review of literature As banking system plays a pivotal role in the economic development of a nation A number of studies have been conducted in India which examined the financial performance of the commercial banks. To mention, a few of these are Divatia and Venkatachalam (1978), Kulkarni (1979), Sheshadari(1980), Varde and Singh (1981), angadi (1983), Desai (1983),Subramaniam (1984), Devadas (1986), Vashistha (1987). Banking Commission (1972) reviewed bank operating methods, analyzed profitability and examined various aspects of banking have influence upon the productivity of banks and banking system. S.G. Shah (1979)1 while discussing the profitability of banks disfavoured the attitude of banks that higher profitability can result from increased spread and that innovations have a team spirit and improvement in the management for improving bank profitability

Balance Sheet Operations of Scheduled Commercial Banks

Balance sheet expansion slowed down led by muted growth in deposits as well as loans and advances Consolidated balance sheet of SCBs grew at a slower pace during 2011-12 as compared with the previous year. On the liabilities side, the deceleration in growth was broad-based with the major items of liabilities, i.e., capital, deposits and borrowings, registering moderation in growth. On the assets side, the slowdown was mainly attributed to deceleration in growth of loans and advances, reflecting the slowdown in all key segments of domestic macro-economy. Reflecting the deceleration in the balance sheet of public sector banks, their share in total assets of the banking system dipped marginally during 2011-12. Notwithstanding this, Indian banking sector remained broadly public in nature with public sector banks accounting for more than two-thirds of total assets of all scheduled commercial banks, as at end-March 2012 Item Public sector 1 Capital 2 183 SBI group 3 12 NB As at end-March 2012 Private sector 5 171 48 Old PS 6 13 NewPS Foreign banks 7 35 8 406 All SCB 9 637

2. Reserves and Surplus Deposits Demand Deposits Savings Bank Deposits Term Deposits Borrowings Other Liabilities and Provisions Total Liabilities/Assets Cash and Balances with RBI Balances with Banks and Money at Call and Short Notice Investments Government Securities (a+b) a) In India b) Outside India Other Approved Securities Non-Approved Securities Loans and Advances

3,373 3,844 12,140 34,036 4,618 2,186 2,800 1,760 15,041 12,580 12,494 85 10 2,451

1,061 1,197 4,537 8,317 1,588 1,002 791 482 4,173 3,513 3,494 19 0.2 660

2,312 35,970 2,647 7,604 25,719 3,030 1,184 42,668 2,009 1,278 10,868 9,067 9,000 67 9.7 1791 27,263

1,545 1,659 2,729 2,584 855 706 366 3,474 3,468 5.6 0.2 1,786

266 258 578 198 114 167 71 785 785 0.2 308

1,279 8,587 1,401 2,152 5,035 2,386 741 13,028 538 295 4,166 2,688 2,683 5.6 0.01 1,478 7,363

531 801

5,449 6,303

50,020 14,050

11,746 3,159

2,771 64,537 419 15,289 1,551 42,945 1,199 929 232 312 8,401 3,970 3,737 2,437

7,358 2,323

60,380 17,712

16,778 3,750

5,836 82,994

5,260 1,093

2,005 22,305 1,376 17,429 1,376 17,338 629 91 10 4,866

38,783 11,520

9,664 2,301

2,298 50,746

Bills Purchased and Discounted Cash Credits, Overdrafts, etc. Term Loans Fixed Assets Other Assets

2,307 16,085 20,391 383 1,613

888 4,958 5,674 74 672

1,419 11,127 14,717 309 941

357

113

244 1,740 5,380 107 558

257

2,922

2,860 1,120 6,447 1,068 134 649 27 91

1,099 20,044 942 27,780 50 939 567 3,201

Interpretation.
The percentage of share of bank groups in total liabilities to assets of scheduled commercial banks is same in nationalized banks but it has increased slightly in old and new private sector banks and foreign banks compared to 2011.

Major Liabilities of SCBs 1.Deposits grew at a subdued pace

Item

PUSB PUSB2 201011 2 40.7 19.3 18.4 11.3 22.1 18.2 26.4 201112 3 -4.2 24.4 14.4 -6.3 12.1 18.2 16.4

PSB

PSB2 OPSB OPSB2 NPSB NPSB2 201011 6 7.9 18.7 14.9 12.2 14 15.5 26.4 201112 7 -4.2 18.5 19.6 6.5 16.3 22.1 80.3 201011 8 4.1 15.4 24.6 19.2 25.8 25.8 24.4 201112 9 1.7 14.9 16.3 4 19.9 18.6 36.4

FB

FB2

ASCB ASCB2 201011 12 21.3 18.2 18.3 12.3 21.8 18.2 27.1 201112 13 8 20.8 14.9 -1.8 13.1 18.6 24.4

1 1. Capital 2. Reserves and Surplus 3. Deposits 3.1. Demand Deposits 3.2. Savings Bank Deposits 3.3. Term Deposits 4. Borrowings 5. Other Liabilities and Provisions Total Liabilities/Assets 1. Cash and Balances with RBI 2. Balances with Banks and Money at Call and Short Notice 3. Investments 3.1 Government Securities 3.2 Other Approved Securities 3.3 NonApproved Securities 4. Loans and Advances 4.1 Bills Purchased and Discounted 4.2 Cash Credits, Overdrafts, etc. 4.3 Term Loans 5. Fixed Assets 6. Other Assets

2010- 201111 12 4 5 5.1 15.9 21.9 18.1 23 22.5 24.5 15.5 17.1 4.4 19.1 19.7 38.9

2010- 201111 12 10 11 15.1 18.8 3.7 6.8 8.8 0.6 36.1 15.6 15.7 15.1 9.9 5.6 21 29.1

20.9 19.2

-6.8 14.1

21 21.5

20.6 20

-0.7 14.9

13.5 21.4

25.6 23.5

21.8 19.6

16.3 12.8

21.3 18.8

20 19.2

3.9 15.5

30.1 9.3

-20.5 40.7

13.5 -18.2

-18.1 15.6

7.4 -31.3

-7.9 80.4

15.2 -16

-20.8 6.5

6.3 33.2

14.2 13.8

25.4 6

-18.5 32.4

9.9 7.4

12.6 16.2

19.2 9.1

24.6 32

11 6.3

18 21.5

21.7 10.1

26.5 35.4

3.9 -4.7

21.1 22.9

11.3 6.6

16 19.6

-43.4

-65.1

-71.4

-78.8

-82.2

-65

74.8

-97.6

-57.1

-100

-45.1

-65.6

23.9 22.3

-2.2 17.4

41 26.1

12.5 21.2

24.9 19.8

10 24.6

45 28.1

13 20.1

28.1 19.8

17.5 17.6

29.8 22.9

5.1 18.1

30.3 24 20.3 4.9 33.9

25.8 17.9 16.1 5.9 15.3

20.2 41.2 21.1 26.8 21.6

8.2 27.6 19.3 3 35.5

10.3 23.4 17.8 6.5 12

14.7 33.3 17.7 6.9 28

25 54.6 21.8 32.8 23.4

5.5 24.2 19.6 2.1 36.8

10.2 27.1 14.9 2 13.5

9.6 18.4 18.9 1.2 21.1

26.6 26.2 20.3 9.1 25

21.8 19.2 16.9 4.8 20.7

As at end-March 2012, deposits constituted more than three-fourths of the total liabilities of the banking sector. Deposits grew at a slower rate than the previous year, which mainly emanated from contraction of demand deposits as well as slower growth of savings bank deposits. On the other hand, growth in term deposits accelerated. Going forward, the slowdown in demand and savings banks deposit mobilisation, which are the least cost sources of funds, could put downward pressure on profitability of Indian banks.

2.Proportion of CASA deposits in total deposits declined

The CASA ratio is the ratio of deposits in the current and savings accounts of a bank to its total deposits. A high CASA ratio indicates that a higher portion of the banks deposits come from current and savings accounts. This means that the bank is getting money at low cost, since no interest is paid on the current accounts and the interest paid on savings account is usually low. Current and Saving Accounts are demand deposits and therefore pay lower interest rates compared to term deposits where the rates are higher. Thus higher CASA ratio means that more of the money deposited in the bank is in the demand deposits i.e. the CASA, thus bank is getting the money at lower cost.

As at end-March 2012, CASA deposits formed almost one-third of total deposits of SCBs. Bank group-wise analysis of composition of deposits revealed that foreign banks had the highest proportion of CASA deposits followed by new private sector banks. This could be partly explained by the fact that number of private sector banks revised their savings bank deposits rates upwards after the deregulation of savings bank interest rate in October 2011

Interpretation
The share of current and savings account (CASA) deposits in total deposits declined during 2011-12 due to the decline in demand deposits as well as slowdown in savings bank deposit mobilisation.

Maturity Profile of Assets and Liabilities

Maturity mismatch continued to persist with proportion of short-term liabilities registering an increase. The persistent mismatch in the average maturity profile of assets with that of liabilities has been a concern for Indian banking sector in recent years. The proportion of short-term liabilities registered an increase Bank Group-wise Maturity Profile of Select Liabilities/Assets (As at end -March) (Per cent to total under each item Liabilities/assets PUSB PSB OPSB NPSB FB All SCBs 2011 12 48.5 30.4 7.8 13.4 46.1 13.8 10.2 29.9 2012 13 50 26.3 8 15.7 52.6 11.7 12.5 23.2

2011 1 I. Deposits a) Up to 1 year b) Over 1 year and up to 3 years c) Over 3 years and upto 5 years d) Over 5 years II. Borrowings a) Up to 1 year b) Over 1 year and up to 3 years c) Over 3 years and upto 5 years d) Over 5 years III Loans and Advances a) Up to 1 year b) Over 1 year and up to 3 years c) Over 3 years and upto 5 years d) Over 5 years IV. Investments a) Up to 1 year b) Over 1 year and up to 3 years c) Over 3 years and upto 5 years d) Over 5 years 18.1 12.7 14.4 54.8 36 36.3 10.9 16.8 39.9 12.5 12.3 35.3 48.2 28.6 8.1 15.1 2

2012 2011 2012 3 49.6 25.3 8.5 16.6 45.4 12.2 15.2 27.2 4 46.1 38.6 6.1 9.1 42.4 16.2 9.8 31.6 5 48.7 30 5.7 15.7 50.3 11.8 12.5 25.4

2011 6 45.3 40.6 8.5 5.6 54.5 12.5 11.4 21.6

2012 7 48.1 39.2 6.9 5.8 63.7 13.4 7.8 15.1

2011 8 46.4 37.9 5.2 10.4 41.7 16.4 9.7 32.2

2012 2011 2012 9 48.9 26.6 5.2 19.3 49.2 11.7 12.9 26.2 10 63.7 27.3 8.9 78.8 14.7 2.1 4.4 11 61.8 29.8 8.3 0.1 84.5 9.2 2.7 3.5

34.3 37.4 11 17.3

37.6 36.4 11.4 14.5

35.2 37.1 11.3 16.4

41.9 38.4 9.9 9.8

44 36.1 9.1 10.8

36.3 35.8 11.9 16

32.4 37.4 12 18.2

68.1 17 4.2 10.7

67.4 15.5 4.5 12.5

37.8 35.4 10.7 16.1

35.9 36.3 10.8 17

20.1 12.6 14.2 53.1

36.6 22.7 10 30.7

42.5 17.3 9.2

28.7 12.2 11.7

30.3 12.2 13

38.8 25.6 9.5

45.7 18.6 8.2

79.9 14.2 3.4 2.5

76.6 12.9 5.2 5.3

27.5 15 12.4 45

30.4 13.7 12.2 43.7

31 47.3 44.4 26.1 27.5 (Per cent to total under each item

Interpretation
The percentage of short time liabilities has increased in 2012 and short time assets has decreased .The percentage of long term assets was high in 2010 and it has decreased in 2012.

Consequent to the slowdown in net profit, RoA and RoE dipped marginally
During 2011-12, two major indicators of profitability, RoA and RoE dipped marginally compared with the previous year, mainly reflecting the slowdown in net profit caused by increased interest expenditure .

Return on Assets and Return on Equity of SCBs Bank Group-wise (Per cent)
Bank group /year Return on assets 201011 Public sector banks Nationalised banks* SBI Group Private sector banks Old private sector banks New private sector banks Foreign banks All SCBs 0.96 1.03 0.79 1.43 1.12 1.51 1.75 1.1 201112 0.88 0.88 0.89 1.53 1.2 1.63 1.76 1.08 Return on equity 201011 16.9 18.19 14.11 13.7 14.11 13.62 10.28 14.96 201112 15.33 15.05 16 15.25 15.18 15.27 10.79 14.6

Notes: 1. Return on Assets for a group is obtained as weighted average of return on assets of individual banks in the group, being the proportion of total assets of the bank as percentage to total assets of the group. 2. Return on Equity = Net profit/average of capital and reserves and surplus for current and previous year. 3. * Nationalised banks include IDBI Bank Ltd

Interpretation
Return on assets and return on equity has decreased from 2011 to 2012.Banks are utilizing their assets to pay their funds. Profitability of Indian Banks? A Du Pont Analysis for Bank Groups Profitability of banks facilitates many aspects, which includes, inter alia, enhancing the ability of banks to mobilise resources from the capital market, as well as better management of nonperforming assets. In addition, sound profitability of banks enhances their ability to augment the financial inclusion process. During the pre-liberalisation period, banks in India were operating in a rather tight regulatory environment. After liberalisation, Indian banks operated in a less regulated environment in terms of interest rate liberalisation, reduction in reserve requirements, and entry deregulation. In addition, with the advent of complex financial products, banks business has expanded in recent years beyond the traditional financial intermediation process. Also, off-balance sheet exposure of banks has witnessed a significant increase in recent years. Against this backdrop, it is important to analyse the main sources of profitability of Indian banks. In recent years, significant variation in profitability has been observed among bank groups. It was observed that, generally profitability of foreign banks was higher than that of other bank groups. Some past studies on profitability of Indian banks concluded that higher profitability of foreign banks could be attributed to their access to low cost CASA deposits, diversification of income as well as higher other income. During 2011-12, foreign banks accounted for close to 12 per cent of the total net profit of SCBs. As against this, their share in total assets of Indian banking sector stood at 7 per cent In order to understand the sources of profitability across bank groups, RoE analysis and Du Pont analysis have been carried out taking the bank group-wise data for 2011-12. The RoE analysis decomposes the profitability of banks into two components, i.e., profitability of bank assets, as captured by RoA and leverage, captured by the ratio of total average assets to total average equity. Further, decomposition of RoE suggests that banks profitability can be associated with higher return from assets or higher leverage or both. There are some studies which focused on the possibility of getting a higher RoE by substitution of equity capital with lower cost long-term debt. While higher return on assets is always considered good, a higher leverage ratio exposes bank to the risk of insolvency

RoE Analyis of Profitability: 2011-12

Bank Group Return Profitability of on equity assets 16 0.91 15.05 0.87 15.18 15.27 10.79 1.15 1.57 1.75 Leverage Capital to

SBI group Nationalised banks Old private sector banks New private sector banks Foreign banks

asset ratio 17.58 0.07 17.37 0.4 13.23 9.72 6.15 0.35 0.27 6.95

Interpretation
The higher RoE for the SBI group and nationalised banks was associated with a higher leverage ratio, while for new private sector banks, the higher RoE was attributable to higher profitability of assets and lower leverage. Among the bank groups, foreign banks had the highest return from assets as well as the lowest leverage ratio. The capital to assets ratio, as calculated for various bank groups using balance sheet data, further corroborates the findings of RoE analysis. As at endMarch 2012, this ratio was highest for foreign banks, indicating their better capital position vis--vis other bank groups.

Du Pont analysis
Du Pont analysis decomposes profitability of banks into two components, viz., asset utilisation and cost management. Asset utilisation is captured by the total income net of interest expenditure and provisions/contingencies as percentages of average total assets. The ratio of operating expenses to average total assets indicates how efficiently a bank is using its resources and is thus termed as a parameter to understand the efficiency of cost management by banks. Better profit of banks can be attributed to better asset utilisation or better cost management or both simultaneously...

Du Pont Analysis of Profitability: 2011-12

Bank Group SBI group Nationalised banks Old private sector banks New private sector banks Foreign banks Asset Utilisation 2.85 2.35 3.06 3.81 4.27 Cost Management 1.94 1.48 1.91 2.24 2.52

Interpretation
According to the results of Du Pont analysis, foreign banks registered the highest RoA among bank groups, mainly on account of better asset utilisation, though their operating expenses to assets ratio was also higher when compared to other bank groups. This result corroborates the findings of past literature according to which foreign banks higher profitability could be attributed to better fund management practices

Soundness Indicators
All scheduled commercial banks in India have become Basel II compliant as per the standardised approach with effect from April 1, 2009. For migrating to advanced approaches of Basel II, the Reserve Bank issued separate set of guidelines and the applications received from banks for migration to advanced approaches of Basel II are at various stages of examination with the Reserve Bank. Parallel to this process, the Reserve Bank came out with the final guidelines for implementation of Basel III in May 2012. The guidelines issued by the Reserve Bank will become effective from January 1, 2013. Against this backdrop, it is important to examine the existing capital position and other soundness indicators of Indian banks in order to assess banks preparedness to migrate to the more advanced regulatory approaches

Capital Adequacy
This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. Capital to Risk-Weighted Assets Ratio under Basel I and II Bank Group-wise (As at end-March) (percent)
Bank Group 1 Public sector banks Nationalised banks* SBI group Private sector banks Old private sector banks New private sector banks Foreign banks Scheduled commercial banks 2011 2 11.78 12.15 11.01 15.15 13.29 15.55 17.71 13.02 Basel I 2012 3 11.88 11.84 11.97 14.47 12.47 14.9 17.31 12.94 2011 4 13.08 13.47 12.25 16.46 14.55 16.87 16.97 14.19 Basel II 2012 5 13.23 13.03 13.7 16.21 14.12 16.66 16.74 14.24

Note: *: Includes IDBI Bank Ltd. Source: Based on off-site returns submitted by banks CRAR under both Basel I and II remained well above the stipulated norm The capital to risk-weighted assets ratio (CRAR) remained well above the stipulated 9 per cent for the system as a whole as well as for all bank groups during

2011-12, indicating that Indian banks remained well-capitalised. Also, the CRAR (Basel II) at the system-level improved marginally compared with the previous year Tier I capital constituted more than 70 per cent of capital funds of banks The component-wise breakup of capital funds indicated that Tier I capital accounted for more than 70 per cent of the total capital of Indian banks both under Basel I and II, reflecting the sound capital position of banks. As at end-March 2012, the core CRAR stood well above the stipulated minimum of 6 per cent . Component-wise Capital Adequacy of SCBs (As at end-March) Amount in ` billion
Item 1. Capital funds (i+ii) i) Tier I capital ii) Tier II capital 2. Risk-weighted assets 3. CRAR (A as % of B) of which: Tier I Tier II Basel I 2011 6,745 4,765 1,980 51,807 13 9.2 3.8 INCREASE %INCREASE 2012 7,810 5,685 2,124 60,375 12.9 9.4 3.5 1065 920 144 8568 0.1 0.2 0.3 15.79 19.3 7.27 16.54 0.77 2.17 7.89 Basel II 2011 6,703 4,745 1,958 47,249 14.2 10 4.1 INCREASE %INCREASE 2012 7,780 5,672 2,109 54,623 14.2 10.4 3.9 1077 927 151 7374 0 0.4 0.2 16.07 19.54 7.71 15.61 0 4 4.88

Interpretation
As at end-March 2012, the majority of public sector banks had Tier I capital adequacy ratio within the range of 8 to 12 per cent

Slippage ratio deteriorated, though recovery ratio witnessed an improvement In addition to an increase in gross NPAs at the system-level, fresh accretion of NPAs, as captured by the slippage ratio also increased during 2011-12 compared with the previous year. However, on a positive note, the recovery ratio of the banking sector witnessed an improvement during the year. During 2011-12, the written-off ratio was significantly lower as compared with the previous year At the bank group level, the accretion to NPAs as captured by the slippage ratio was higher in the case of public sector banks and foreign banks. However, their recovery performance was also better than private sector banks. Among various bank groups, new private sector banks relied more on writing off NPAs as a measure to contain their NPAs

Net NPAs increased significantly In sync with the acceleration in growth of gross NPAs as well as a lower provisioning coverage, net NPAs registered higher growth. Net NPA ratio was on a higher side for public sector banks, as compared with private sector and foreign banks . NPAs became stickier, with proportion of substandard as well as doubtful assets in gross advances registering an increase Apart from an increase in NPAs, the deterioration in asset quality was also evident in the form of rising substandard/doubtful assets as a percentage of gross advances. Increase in these two categories of NPAs as percentage of gross advances indicated that NPAs became stickier

Sr. No.

Bank group

Year

Standard assets Amount

1 2 1 Public sector banks 1.1 Nationalised banks** 1.2 SBI Group 2 Private sector banks 2.1 Old private sector banks 2.2 New private sector banks 3 Foreign banks 4 Scheduled commercial banks

3 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012

4 32,718 38,255 22,900 26,910 9,818 11,345 7,936 9,629 1,836 2,287 6,100 7,342 1,943 2,284 42,596 50,168

Sub-standard Doubtful assets Loss assets assets Per cent* Amount Per Amount Per Amount Per cent* cent* cent* 5 6 7 8 9 10 11 97.8 350 1 332 1 65 0.2 97 98.1 97.5 97 95.9 97.8 98.1 98 98.2 97.7 98.1 97.5 97.3 97.8 97.2 623 218 402 132 221 45 52 13 18 33 34 19 21 414 695 1.6 0.9 1.5 1.3 1.9 0.6 0.5 0.7 0.8 0.5 0.4 0.9 0.9 0.9 1.3 490 193 268 139 222 108 104 18 17 90 87 21 22 461 617 1.2 0.8 1 1.4 1.9 1.3 1.1 1 0.7 1.4 1.2 1.1 0.9 1.1 1.2 60 32 21 33 39 29 29 6 7 22 22 11 20 104 109 0.2 0.1 0.1 0.3 0.3 0.4 0.3 0.3 0.3 0.4 0.3 0.5 0.8 0.2 0.2

Bank Lending to Infrastructure and Asset-Liability Mismatches In a developing country like India, infrastructure plays a crucial role in sustaining the growth momentum of the country. According to the Approach Paper of 12th Five-Year Plan, the investment requirements in the infrastructure sector are estimated to be around `45 trillion during the 12th Plan period. This implies that infrastructure investment to GDP ratio needs to increase from about 8 per cent during 2011-12 to 10 per cent by 2016-17. However, investment in infrastructure development bears some special significance for the financial sector of the country as these investments are typically lump

sum and involving long gestation, thus having implications for asset liability management. Apart from this, infrastructure projects are often subject to procedural delays and thus expose the lender to the risk of non-realisation of return in time. During the last few years, the total credit extended by the SCBs to infrastructure segment increased within a range of 4043 per cent. Also, infrastructure accounted for almost 15 per cent of total non-food gross bank credit in recent years. As against this, there was an increase in short-term liabilities of the banking sector during recent years. The asset-liability mismatch (ALM), calculated as the gap between proportion of short-term deposits and borrowings (with maturity up to one year) and proportion of short-term credit and investments (with maturity up to one year) also witnessed an upward trend in recent year. In order to understand the possible impact of infrastructure lending on asset liability mismatches of the banking sector, a regression analysis was carried out taking the ALM as dependent variable, and credit to infrastructure as percentage of total non-food gross bank-credit and proportion of term deposits in total deposits, as explanatory variables. While increased proportion of term deposits is expected to increase the stability of balance sheet and thus reduce asset liability mismatches, increase in infrastructure lending could further exacerbate the asset-liability mismatches. Recognising the possible adverse impact of infrastructure financing by banks on their asset-liability management, the Reserve Bank has taken certain measures in recent years such as permitting banks to enter into take out financing arrangement with IDFC/other FIs. Going forward, there is a need to conduct detailed impact analysis of the effect of infrastructure lending on asset liability mismatches of banks. Also, there is a need to make infrastructure projects commercially viable, apart from strengthening the corporate bond market, which would reduce the dependence on banks for infrastructure funds

Result of Regression Analysis

Sample period: 2004-2012 Coefficients Intercept Proportion of term deposits Proportion of infrastructure credit R Square Adjusted R Square 30.43 -0.31 0.38 0.68 0.58 Standard Error 17.27 0.27 0.12 Durbin-Watson statistic: 2.3 t-Stat 1.76* -1.14* 3.17**

SUGGESTIONS:
The banks should make every endeavour to enhance customer satisfaction. They should try to improve quality service through effective staff training, service monitoring, orientation and recognition programmes . Banks should offer the customer what he wants rather than offering what they have in stock, for, every customer has a different need.
The manufacturing sector has been hit in the recent years due to limitations of the banks in their lending pattern.

Studies on credit deposit ratio of private banks group and nationalized bank group which are in operation a couple of years only. Because of these limitations, there are sectors like handicrafts, hospitality, construction and tourism industry making profit, though are not exploited. For self employment projects which there will be more entrepreneurs who will be more job generators rather than job seekers.

CONCLUSION
Collectively, our results provide some weak evidence that shows the inherent weaknesses in banking sector. NPA is an important factor that still prevails as an alarming signal for banking growth and survival. We propose further study in this direction, aims to propose models to improve the efficiency of the banking sector .Banks should take suitable measures to reduce the NPAs and increase their profits. The banks should focus on improving their performance by reducing their bad debts by avoiding loans converting into Npas.

Deterioration in asset quality of banks remains a concern

The deterioration in asset quality, as evident by a steep rise in NPAs for banks in general, and public sector banks in particular, has emerged as a serious concern. Moreover, fresh accretion to NPAs, as captured by the slippage ratio witnessed an increase. Further, the provisioning coverage ratio declined. Though banks aggressively resorted to restructuring of advances, in the long-run it may have implications for asset quality, in case, significant proportion of these restructured advances turn into bad loans.

Need to closely monitor impact of infrastructure lending on asset-liability mismatch

The liquidity condition of banks remained under stress, reflecting structural issues as well as the policy environment prevailing during 2011-12. Though credit to infrastructure registered slower growth, it continued to account for almost one-third of total bank credit to industry. Large exposure to long-gestation infrastructure projects could further exacerbate the maturity mismatch prevailing in the banking sector. Going forward, Indian banking sector needs careful monitoring .

References
www.rbi.com.