A DISSERTATION ON “capital adequacy ratio on credit risk in Indian private bank, with special references to ICICI bank, HDFC bank and AXIS bank. Submitted to KURUKSHETRA UNIVERSITY, KURUKSHETRA In the partial fulfillment for the degree of Master of Business Administration (Session 2006-2008) Under the supervision of: Submitted by: MISS RUBY MITTAL VARUN JAIN SENIOR FACULTY, MBA Uni. Roll. ……….. TIMT Roll No. 1169/06 Regst. No. 03-DSK- 411
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A
DISSERTATION
ON
“capital adequacy ratio on credit risk in Indian private bank, with special
references to ICICI bank, HDFC bank and AXIS bank.
Submitted to
KURUKSHETRA UNIVERSITY, KURUKSHETRA
In the partial fulfillment for the degree ofMaster of Business Administration
(Session 2006-2008)Under the supervision of: Submitted by:MISS RUBY MITTAL VARUN JAINSENIOR FACULTY, MBA Uni. Roll. ………..
TIMT Roll No. 1169/06Regst. No. 03-DSK-411
Tilak Raj Chadha Institute of Management &Technology (Approved by AICTE & Affiliated to Kurukshetra University, Kurukshetra)
Yamuna Nagar-135001)
Executive Summary
To know about the Basel norms as well as their impact on the banking sector in India as these
norms are vary important for the banking industry of India as Indian banking faces the huge
credit, market an operation risk during their day to day operations.
Basel norms are going to be compulsory for Indian banks to be adopted by the end of
march 2008 and due to that the relevance of these norms have increases very high and Indian
banks have to understand the proper implications of the Basel norms provided by the bank
for international settlement’s committee for banking supervision.
Basel norms are earlier adopted by the ICICI bank and HDFC banks are the first Indian
banks to adopt the Basel norms of capital adequacy and they have their capital adequacy ratio
shown every year in their balance sheet according to the ranking and risk weighted provided
by the Basel committee for banking supervision to the assets of the bank
In India Basel norms are more important because of international banking situation as
International banking is facing the sub prime crisis due to credit and market risk so to
analyzing this risk in context of Indian banking is also very important.
AcknowledgementI take this opportunity to express my profound debts of gratitude and
obligation, to my esteemed guide Miss Rubby Mittal faculty of Tilak Raj
Chadha Institute of Mgt. & Technology, Yamuna Nagar, for her most valuable
help and creative suggestions at all stages of my work. Her learned advice and
guidance always kindled inspiration in the face of difficulties encountered in the
course of this research work.
I am also thankful to my mentor Dr vikas daryal, Director, Tilak Raj
Chadha Institute of Mgt. & Technology, Yamuna Nagar, for allowing me to
work on this project work and for his kind help always.
I am highly grateful to my all lecturers and dedicated staff of Tilak Raj
Chadha Institute of Mgt. & Technology, Yamuna Nagar for their kind help
from time to time.
.
(VARUN JAIN)
ContentsSerial No. Page No.
1. Certificate
2. Executive summary
3. Acknowledgement
4. Contents
5. Introduction
Profile of the study
Significance of the study
6. Objective of the study
7. Literature Review
8. Research Methodology
Sampling & Sample Design
Analytical Tools
Data Collection
Hypothesis Testing
Limitations of the study
9. Result & Discussions/Findings
10. Recommendation
11. Bibliography
12. Annexure
Industry profile
EVOLUTION OF BANKING IN INDIA
Modern banking in India could be traced back to the establishment of Bank of Bengal (Jan 2,
1809), the first joint-stock bank sponsored by Government of Bengal and governed by the
royal charter of the British India Government. It was followed by establishment of Bank of
Bombay (Apr 15, 1840) and Bank of Madras (Jul 1, 1843). These three banks, known as the
presidency banks, marked the beginning of the limited liability and joint stock banking in
India and were also vested with the right of note issue.
In 1921, the three presidency banks were merged to form the Imperial Bank of India, which
had multiple roles and responsibilities and that functioned as a commercial bank, a banker to
the government and a banker’s bank. Following the establishment of the Reserve Bank of
India (RBI) in 1935, the central banking responsibilities that the Imperial Bank of India was
carrying out came to an end, leading it to become more of a commercial bank. At the time of
independence of India, the capital and reserves of the Imperial Bank stood at Rs 118 mn,
deposits at Rs 2751 mn and advances at Rs 723 mn and a network of 172 branches and 200
sub offices spread all over the country.
In 1951, in the backdrop of central planning and the need to extend bank credit to the rural
areas, the Government constituted All India Rural Credit Survey Committee, which
recommended the creation of a state sponsored institution that will extend banking services
to the rural areas. Following this, by an act of parliament passed in May 1955, State Bank of
India was established in Jul, 1955. In 1959, State Bank of India took over the eight former
state-associated banks as its subsidiaries. To further accelerate the credit to fl ow to the rural
areas and the vital sections of the economy such as agriculture, small scale industry etc., that
are of national importance, Social Control over banks was announced in 1967 and a National
Credit Council was set up in 1968 to assess the demand for credit by these sectors and
determine resource allocations. The decade of 1960s also witnessed significant consolidation
in the Indian banking industry with more than 500 banks functioning in the 1950s reduced to
89 by 1969.
For the Indian banking industry, Jul 19, 1969, was a landmark day, on which nationalization
of 14 major banks was announced that each had a minimum of Rs 500 mn and above of
aggregate deposits. In 1980, eight more banks were nationalised. In 1976, the Regional Rural
Banks Act came into being, that allowed the opening of specialized regional rural banks to
exclusively cater to the credit requirements in the rural areas. These banks were set up jointly
by the central government, commercial banks and the respective local governments of the
states in which these are located.
Indian banking, which experienced rapid growth following the nationalization, began to face
pressures on asset quality by the 1980s. Simultaneously, the banking world everywhere was
gearing up towards new prudential norms and operational standards pertaining to capital
adequacy, accounting and risk management, transparency and disclosure etc. In the early
1990s, India embarked on an ambitious economic reform programme in which the banking
sector reforms formed a major part. The Committee on Financial System (1991) more
popularly known as the Narasimham Committee prepared the blue print of the reforms. A
few of the major aspects of reform included (a) moving towards international norms in
income recognition and provisioning and other related aspects of accounting (b)
liberalization of entry and exit norms leading to the establishment of several New Private
Sector Banks and entry of a number of new Foreign Banks (c) freeing of deposit and lending
rates (except the saving deposit rate), (d) allowing Public Sector Banks access to public
equity markets for raising capital and diluting the government stake,(e) greater transparency
and disclosure standards in financial reporting (f) suitable adoption of Basel Accord on
capital adequacy (g) introduction of technology in banking operations etc. The reforms led to
major changes in the approach of the banks towards aspects such as competition, profitability
and productivity and the need and scope for harmonization of global operational standards
and adoption of best practices. Greater focus was given to deriving efficiencies by
improvement in performance and rationalization of resources and greater reliance on
technology including promoting in a big way computerization of banking operations and
introduction of electronic banking.
The reforms led to significant changes in the strength and sustainability of Indian banking. In
addition to significant growth in business, Indian banks experienced sharp growth in
profitability, greater emphasis on prudential norms with higher provisioning levels, reduction
in the non performing assets and surge in capital adequacy. All bank groups witnessed sharp
growth in performance and profitability. Indian banking industry is preparing for smooth
transition towards more intense competition arising from further liberalization of banking
sector that was envisaged in the year 2009 as a part of the adherence to liberalization of the
financial services industry.
Banking Industry at a Glance
In the reference period of this publication (FY06), the number of scheduled commercial
banks functioning in India was 222, of which 133 were regional rural banks. There are
71,177 bank XIV offices spread across the country, of which 43 % are located in rural areas,
22% in semi-urban areas, 18% in urban areas and the rest (17 %) in the metropolitan areas.
The major bank groups (as defined by RBI) functioning during the reference period of the
report are State Bank of India and its seven associate banks, 19 nationalised banks and the
IDBI Ltd, 19 Old Private Sector Banks, 8 New Private Sector Banks and 29 Foreign Banks.
Indian Banking at a Glance
Number of Banks, Group Wise
Group Wise: Comparative Average
Bank Groups: Key Indicators
Introduction to banks
Axis bank
Axis Bank was the first of the new private banks to have begun operations in 1994, after the
Government of India allowed new private banks to be established. The Bank was promoted
jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I),
Life Insurance Corporation of India (LIC) and General Insurance Corporation Ltd. and other
four PSU companies, i.e. National Insurance Company Ltd., The New India Assurance
Company, The Oriental Insurance Corporation and United Insurance Company Ltd.
The Bank today is capitalized to the extent of Rs. 357.48 crore with the public holding (other
than promoters) at 57.03%.
The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai.
Presently, the Bank has a very wide network of more than 608 branch offices and Extension
Counters. The Bank has a network of over 2595 ATMs providing 24 hrs a day banking
convenience to its customers. This is one of the largest ATM networks in the country.
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.
Notwithstanding the immense benefits that Internet Banking brings, the Bank also has other
distribution channels. At the end of December 2007, the Bank increased its reach to 363
cities, towns and villages across the country through 608 Branches & Extension Counters and
2595 ATMs. The Bank offers a complete range of retail and corporate services, including
retail loans, corporate and business credit, forex and trade finance services, investment
banking, depository services and investment advisory services. Our deposit base currently
stands at over Rs. 68,000 crores with over 77 lakh accounts.
Our Mission And Values
Our Mission
Customer Service and Product Innovation tuned to diverse needs of individual and
corporate clientele.
Continuous technology up gradation while maintaining human values.
Progressive globalization and achieving international standards.
Efficiency and effectiveness built on ethical practices.
Core Values
Customer Satisfaction through
Providing quality service effectively and efficiently
"Smile, it enhances your face value" is a service quality stressed on
Periodic Customer Service Audits
Maximization of Stakeholder value
Success through Teamwork, Integrity and People
Promoters
Axis Bank Ltd. has been promoted by the largest and the best Financial Institution of the
country, UTI. The Bank was set up with a capital of Rs. 115 crore, with UTI contributing
Rs. 100 crore, LIC - Rs. 7.5 crore and GIC and its four subsidiaries contributing Rs. 1.5
crore each.
SUUTI - Shareholding 27.21%
Erstwhile Unit Trust of India was set up as a body corporate under the UTI Act, 1963,
with a view to encourage savings and investment. In December 2002, the UTI Act, 1963
was repealed with the passage of Unit Trust of India (Transfer of Undertaking and
Repeal) Act, 2002 by the Parliament, paving the way for the bifurcation of UTI into 2
entities, UTI-I and UTI-II with effect from 1st February 2003. In accordance with the Act,
the Undertaking specified as UTI I has been transferred and vested in the Administrator of
the Specified Undertaking of the Unit Trust of India (SUUTI), who manages assured
return schemes along with 6.75% US-64 Bonds, 6.60% ARS Bonds with a Unit Capital of
over Rs. 14167.59 crores.
The Government of India has currently appointed Mr K. N. Prithviraj as the Administrator
of the Specified undertaking of UTI, to look after and administer the schemes under UTI -
I, where Government has continuing obligations and commitments to the investors, which
it will uphold.
ICICI bank
ICICI Bank is
India's second-
largest bank
with total
assets of Rs.
3,767.00
billion (US$
96 billion) at
December 31,
2007 and
profit after tax
of Rs. 30.08
billion for the
nine months
ended
December 31,
2007. ICICI
Bank is
second
amongst all the companies listed on the Indian stock exchanges in terms of free float market
capitalization*. The Bank has a network of about 955 branches and 3,687 ATMs in India and
presence in 17 countries. ICICI Bank offers a wide range of banking products and financial
services to corporate and retail customers through a variety of delivery channels and through
its specialised subsidiaries and affiliates in the areas of investment banking, life and non-life
insurance, venture capital and asset management. The Bank currently has subsidiaries in the
United Kingdom, Russia and Canada, branches in Unites States, Singapore, Bahrain, Hong
Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in
United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia.
Our UK subsidiary has established a branch in Belgium.
ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National
Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on
the New York Stock Exchange (NYSE).
History
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial
institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was
reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering
in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of
Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by
ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at
the initiative of the World Bank, the Government of India and representatives of Indian
industry. The principal objective was to create a development financial institution for
providing medium-term and long-term project financing to Indian businesses. In the 1990s,
ICICI transformed its business from a development financial institution offering only project
finance to a diversified financial services group offering a wide variety of products and
services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In
1999, ICICI become the first Indian company and the first bank or financial institution from
non-Japan Asia to be listed on the NYSE.
After consideration of various corporate structuring alternatives in the context of the
emerging competitive scenario in the Indian banking industry, and the move towards
universal banking, the managements of ICICI and ICICI Bank formed the view that the
merger of ICICI with ICICI Bank would be the optimal strategic alternative for both entities,
and would create the optimal legal structure for the ICICI group's universal banking strategy.
The merger would enhance value for ICICI shareholders through the merged entity's access
to low-cost deposits, greater opportunities for earning fee-based income and the ability to
participate in the payments system and provide transaction-banking services. The merger
would enhance value for ICICI Bank shareholders through a large capital base and scale of
operations, seamless access to ICICI's strong corporate relationships built up over five
decades, entry into new business segments, higher market share in various business
segments, particularly fee-based services, and access to the vast talent pool of ICICI and its
subsidiaries. In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the
merger of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal
Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. The
merger was approved by shareholders of ICICI and ICICI Bank in January 2002, by the High
Court of Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at
Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI
group's financing and banking operations, both wholesale and retail, have been integrated in
a single entity.
HDFC bank
The Housing Development Finance Corporation Limited (HDFC) was amongst the first to
receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in
the private sector, as part of the RBI's liberalisation of the Indian Banking Industry in 1994.
The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its
registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled
Commercial Bank in January 1995
HDFC is India's premier housing finance company and enjoys an impeccable track record in
India as well as in international markets. Since its inception in 1977, the Corporation has
maintained a consistent and healthy growth in its operations to remain the market leader in
mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC
has developed significant expertise in retail mortgage loans to different market segments and
also has a large corporate client base for its housing related credit facilities. With its
experience in the financial markets, a strong market reputation, large shareholder base and
unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian
environment.
HDFC Bank was incorporated in August 1994, and, currently has an nationwide network of
746 Branches and 1647 ATM's in 329 Indian towns and citiesThe authorised capital of
HDFC Bank is Rs.450 crore (Rs.4.5 billion). The paid-up capital is Rs.311.9 crore (Rs.3.1
billion). The HDFC Group holds 22.1% of the bank's equity and about 19.4% of the equity is
held by the ADS Depository (in respect of the bank's American Depository Shares (ADS)
Issue). Roughly 31.3% of the equity is held by Foreign Institutional Investors (FIIs) and the
bank has about 190,000 shareholders. The shares are listed on the The Stock Exchange,
Mumbai and the National Stock Exchange. The bank's American Depository Shares are listed
on the New York Stock Exchange (NYSE) under the symbol "HDB