CHAPTER I – INTRODUCTION AND DESIGN OF THE STUDY

1.1ABOUT THE STUDY

Banking sector, the world over, is known for the adoption of multidimensional

strategies from time to time with varying degrees of success. Banks are very important for the

smooth functioning of financial markets as they serve as repositories of vital financial

information and can potentially alleviate the problems created by information asymmetries. In

any organization, the two important financial statements are the Balance sheet & Profit and loss

account of the business. Balance sheet is a statement of the financial position of an enterprise at a

particular point of time. Profit and loss account shows the net profit or net loss of a company for

a specified period of time. When these statements of the last few year of any organization are

studied and analyzed, significant conclusions may be arrived regarding the changes in the

financial position, the important policies followed and trends in profit and loss etc. Analysis and

interpretation of the financial statement has now become an important technique of credit

appraisal. The investors, financial experts, management executives and the bankers all analyze

these statements.

Though the basic technique of appraisal remains the same in all the cases but the

approach and the emphasis in analysis vary. A banker interprets the financial statement so as to

evaluate the financial soundness, stability, the liquidity position and the profitability or the

earning capacity of borrowing concern. Analysis of financial statement is necessary because it

help in depicting the financial position on the basis of past and current records. Analysis of

financial statement helps in making the future decision and strategies.

Therefore, it is very necessary for every organization whether it is a financial

company or manufacturing company to make financial statement and to analysis it. After duly

recognizing the importance of financial statement analysis, this topic has been chosen as the

focus of project. It analyses the financial statement of Indian Bank from 2008 to 2012.

FINANCIAL STATEMENTS ANALYSIS:

After preparation of the financial statements(Balance Sheet and Trading

and Profit and Loss Account), one may be interested in analyzing the financial statements with

the help of different tools such as comparative statement, common size statement, ratio analysis,

trend analysis, etc. In this process a meaningful relationship is established between two or more

accounting figures for comparison.

Objectives:

To explain the meaning, need and purpose of financial statement analysis;

To identify the parties interested in analysis of financial statements;

To explain the various techniques and tools of analysis of financial statements.

Financial Statement Analysis (Meaning and Purpose):

We know business is mainly concerned with the financial activities. In

order to ascertain the financial status of the business every enterprise prepares certain statements,

known as financial statements. Financial statements are mainly prepared for decision making

purposes. But the information as is provided in the financial statements is not adequately helpful

in drawing a meaningful conclusion. Thus, an effective analysis and interpretation of financial

statements is required.

Analysis means establishing a meaningful relationship between various items

of the two financial statements with each other in such a way that a conclusion is drawn. By

financial statements we mean two statements:

1. Profit and loss Account or Income Statement

2. Balance Sheet or Position Statement

These are prepared at the end of a given period of time. They are the indicators

of profitability and financial soundness of the business concern. The term financial analysis is

also known as analysis and interpretation of financial statements. It determines financial strength

and weakness of the firm. Analysis of financial statements is an attempt to assess the efficiency

and performance of the enterprise. Thus, the analysis and interpretation of financial statements is

very essential to measure the efficiency, profitability, financial soundness and future prospects of

the business units. Financial analysis serves the following purposes:

Measuring the profitability

Indicating the trend of achievement

Assessing the growth potential of the business

Comparative position in relation to other firms

Assess overall financial strength

Assess solvency of the firm

Techniques and Tools of Financial Statement Analysis:

Financial statements give complete information about assets, liabilities,

equity, reserves, expenses and profit and loss of an enterprise. They are not readily

understandable to interested parties like creditors, shareholders, investors etc. Thus, various

techniques are employed for analyzing and interpreting the financial statements. Techniques of

analysis of financial statements are mainly classified into three categories:

(I) Cross-sectional analysis

It is also known as inter firm comparison. This analysis helps in analyzing

financial characteristics of another similar enterprise in that accounting period.

(II) Time series analysis

It is also called as intra-firm comparison. According to this method, the

relationship between different items of financial statement is established, comparisons are

made and results obtained. The basis of comparison may be:

Comparison of the financial statements of different years of the same business

unit.

Comparison of financial statement of a particular year of different business units.

(III) Cross-sectional cum time series analysis

This analysis is intended to compare the financial characteristics of two or more

enterprises for a defined accounting period. It is possible to extend such a comparison over

the year. This approach is most effective in analyzing of financial statements.

The analysis and interpretation of financial statements is used to determine the financial position.

A number of tools or methods or devices are used to study the relationship between financial

statements. However, the following are the important tools which are commonly used for

analyzing and interpreting financial statements: Ratio analysis, Comparative financial

statements, Common size statements, Trend analysis.

1.2ABOUT THE INDUSTRY

Evolution of the Indian Banking Industry:

The Indian banking industry has its foundations in the 18th century, and has had a varied

evolutionary experience since then. The initial banks in India were primarily traders’ banks

engaged only in financing activities. Banking industry in the pre-independence era developed

with the Presidency Banks, which were transformed into the Imperial Bank of India and

subsequently into the State Bank of India. The initial days of the industry saw a majority private

ownership and a highly volatile work environment. Major strides towards public ownership and

accountability were made with nationalization in 1969 and 1980 which transformed the face of

banking in India. The industry in recent times has recognized the importance of private and

foreign players in a competitive scenario and has moved towards greater liberalization.

In the evolution of this strategic industry spanning over two centuries, immense developments

have been made in terms of the regulations governing it, the ownership structure, products and

services offered and the technology deployed. The entire evolution can be classified into four

distinct phases.

Phase I- Pre-Nationalization Phase (prior to 1955)

Phase II- Era of Nationalisation and Consolidation (1955-1990)

Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial

Liberalisation (1990-2004)

Phase IV- Period of Increased Liberalisation (2004 onwards)

Current Structure:

Currently the Indian banking industry has a diverse structure. The present structure of the

Indian banking industry has been analyzed on the basis of its organized status, business as well

as product segmentation.

Organizational Structure:

The entire organized banking system comprises of scheduled and non-scheduled banks.

Largely, this segment comprises of the scheduled banks, with the unscheduled ones forming a

very small component. Banking needs of the financially excluded population is catered to by

other unorganised entities distinct from banks, such as, moneylenders, pawnbrokers, micro

financial institutions, NBFC and indigenous bankers.

Scheduled Banks:

A scheduled bank is a bank that is listed under the second schedule of the RBI Act,

1934. In order to be included under this schedule of the RBI Act, banks have to fulfill certain

conditions such as having a paid up capital and reserves of at least 0.5 million and satisfying the

Reserve Bank that its affairs are not being conducted in a manner prejudicial to the interests of

its depositors. Scheduled banks are further classified into commercial and cooperative banks.

The basic difference between scheduled commercial banks and scheduled cooperative

banks is in their holding pattern. Scheduled cooperative banks are cooperative credit institutions

that are registered under the Cooperative Societies Act. These banks work according to the

cooperative principles of mutual assistance.

Scheduled Commercial Banks (SCBs):

Scheduled commercial banks (SCBs) account for a major proportion of the business of the

scheduled banks. As at end-March, 2009, 80 SCBs were operational in India. SCBs in India are

categorized into the five groups based on their ownership and/or their nature of operations.

State Bank of India and its six associates (excluding State Bank of Saurashtra, which has

been merged with the SBI with effect from August 13, 2008) are recognised as a separate

category of SCBs, because of the distinct statutes (SBI Act, 1955 and SBI Subsidiary Banks Act,

1959) that govern them.

Nationalised banks (10) and SBI and associates (7), together form the public sector banks

group and control around 70% of the total credit and deposits businesses in India. IDBI ltd. has

been included in the nationalised banks group since December 2004.

Private sector banks include the old private sector banks and the new generation private

sector banks- which were incorporated according to the revised guidelines issued by the RBI

regarding the entry of private sector banks in 1993. As at end-March 2009, there were 15 old and

7 new generation private sector banks operating in India.

Foreign banks are present in the country either through complete branch/subsidiary route

presence or through their representative offices. At end-June 2009, 32 foreign banks were

operating in India with 293 branches. Besides, 43 foreign banks were also operating in India

through representative offices.

Regional Rural Banks (RRBs) were set up in September 1975 in order to develop the

rural economy by providing banking services in such areas by combining the cooperative

specialty of local orientation and the sound resource base which is the characteristic of

commercial banks.

RRBs have a unique structure, in the sense that their equity holding is jointly held by

the central government, the concerned state government and the sponsor bank (in the ratio

50:15:35), which is responsible for assisting the RRB by providing financial, managerial and

training aid and also subscribing to its share capital.

Between 1975 and 1987, 196 RRBs were established. RRBs have grown in

geographical coverage, reaching out to increasing number of rural clientele. At the end of June

2008, they covered 585 out of the 622 districts of the country. Despite growing in geographical

coverage, the number of RRBs operational in the country has been declining over the past five

years due to rapid consolidation among them. As a result of state wise amalgamation of RRBs

sponsored by the same sponsor bank, the number of RRBs fell to 86 by the end March of 2009.

Scheduled Cooperative Banks:

Scheduled cooperative banks in India can be broadly classified into urban credit

cooperative institutions and rural cooperative credit institutions. Rural cooperative banks

undertake long term as well as short term lending. Credit cooperatives in most states have a three

tier structure (primary, district and state level).

Non-Scheduled Banks:

Non-scheduled banks also function in the Indian banking space, in the form of Local

Area Banks (LAB). As at end-March 2009 there were only 4 LABs operating in India. Local area

banks are banks that are set up under the scheme announced by the government of India in 1996,

for the establishment of new private banks of a local nature; with jurisdiction over a maximum of

three contiguous districts. LABs aid in the mobilisation of funds of rural and semi urban districts.

Six LABs were originally licensed, but the license of one of them was cancelled due to

irregularities in operations, and the other was amalgamated with Bank of Baroda in 2004 due to

its weak financial position.

Business Segmentation:

The entire range of banking operations are segmented into four broad heads- retail

banking businesses, wholesale banking businesses, treasury operations and other banking

activities. Banks have dedicated business units and branches for retail banking, wholesale

banking (divided again into large corporate, mid corporate) etc.

Retail Banking:

It includes exposures to individuals or small businesses. Retail banking activities are

identified based on four criteria of orientation, granularity, product criterion and low value of

individual exposures. In essence, these qualifiers imply that retail exposures should be to

individuals or small businesses (whose annual turnover is limited to Rs. 0.50 billion) and could

take any form of credit like cash credit, overdrafts etc. Retail banking exposures to one entity is

limited to the extent of 0.2% of the total retail portfolio of the bank or the absolute limit of Rs. 50

million. Retail banking products on the liability side includes all types of deposit accounts.

Mortgages and loans (personal, housing, educational etc) are on the assets side of banks. It also

includes other ancillary products and services like credit cards, demat accounts etc.

The retail portfolio of banks accounted for around 21.3% of the total loans and advances

of SCBs as at end-March 2009. The major component of the retail portfolio of banks is housing

loans, followed by auto loans. Retail banking segment is a well-diversified business segment.

Most banks have a significant portion of their business contributed by retail banking activities.

The largest players in retail banking in India are ICICI Bank, SBI, PNB, BOI, HDFC and Canara

Bank.

Among the large banks, ICICI bank is a major player in the retail banking space which

has had definitive strategies in place to boost its retail portfolio. It has a strong focus on

movement towards cheaper channels of distribution, which is vital for the transaction intensive

retail business. SBI’s retail business is also fast growing and a strategic business unit for the

bank. Among the smaller banks, many have a visible presence especially in the auto loans

business. Among these banks the reliance on their respective retail portfolio is high, as many of

these banks have advance portfolios that are concentrated in certain usages, such as auto or

consumer durables. Foreign banks have had a somewhat restricted retail portfolio till recently.

However, they are fast expanding in this business segment. The retail banking industry is likely

to see a high competition scenario in the near future.

Wholesale Banking:

Wholesale banking includes high ticket exposures primarily to corporates. Internal

processes of most banks classify wholesale banking into mid corporates and large corporates

according to the size of exposure to the clients. A large portion of wholesale banking clients also

account for off balance sheet businesses. Hedging solutions form a significant portion of

exposures coming from corporates. Hence, wholesale banking clients are strategic for the banks

with the view to gain other business from them. Various forms of financing, like project finance,

leasing finance, finance for working capital, term finance etc form part of wholesale banking

transactions. Syndication services and merchant banking services are also provided to wholesale

clients in addition to the variety of products and services offered.

Wholesale banking is also a well-diversified banking vertical. Most banks have a

presence in wholesale banking. But this vertical is largely dominated by large Indian banks.

While a large portion of the business of foreign banks comes from wholesale banking, their

market share is still smaller than that of the larger Indian banks. A number of large private

players among Indian banks are also very active in this segment. Among the players with the

largest footprint in the wholesale banking space are SBI, ICICI Bank, IDBI Bank, Canara Bank,

Bank of India, Punjab National Bank and Central Bank of India. Bank of Baroda has also been

exhibiting quite robust results from its wholesale banking operations.

Treasury Operations:

Treasury operations include investments in debt market (sovereign and corporate), equity

market, mutual funds, derivatives, and trading and forex operations. These functions can be

proprietary activities, or can be undertaken on customer’s account. Treasury operations are

important for managing the funding of the bank. Apart from core banking activities, which

comprises primarily of lending, deposit taking functions and services; treasury income is a

significant component of the earnings of banks. Treasury deals with the entire investment

portfolio of banks (categories of HTM, AFS and HFT) and provides a range of products and

services that deal primarily with foreign exchange, derivatives and securities. Treasury involves

the front office (dealing room), mid office (risk management including independent reporting to

the asset liability committee) and back office (settlement of deals executed, statutory funds

management etc).

Other Banking Businesses:

This is considered as a residual category which includes all those businesses of banks

that do not fall under any of the aforesaid categories. This category includes para banking

activities like hire purchase activities, leasing business, merchant banking, factoring activities

etc.

Products of the Banking Industry:

The products of the banking industry broadly include deposit products, credit products

and customized banking services. Most banks offer the same kind of products with minor

variations. The basic differentiation is attained through quality of service and the delivery

channels that are adopted. Apart from the generic products like deposits (demand deposits –

current, savings and term deposits), loans and advances (short term and long term loans) and

services, there have been innovations in terms and products such as the flexible term deposit,

convertible savings deposit (wherein idle cash in savings account can be transferred to a fixed

deposit), etc. Innovations have been increasingly directed towards the delivery channels used,

with the focus shifting towards ATM transactions, phone and internet banking. Product

differentiating services have been attached to most products, such as debit/ATM cards, credit

cards, nomination and demat services.

Other banking products include fee-based services that provide non-interest income to the

banks. Corporate fee-based services offered by banks include treasury products; cash

management services; letter of credit and bank guarantee; bill discounting; factoring and

forfeiting services; foreign exchange services; merchant banking; leasing; credit rating;

underwriting and custodial services. Retail fee-based services include remittances and payment

facilities, wealth management, trading facilities and other value added services.

 1.3ABOUT THE COMPANY

Indian Bank is an Indian state-owned financial services company

headquartered in Chennai, India. It has 22,000 employees, 1923 branches and is one of the big

public sector banks of India. It has overseas branches in Colombo, Sri Lanka, Singapore, and 229

correspondent banks in 69 countries. Since 1969 the Government of India has owned the bank,

which celebrated its centenary in 2007. It is the only Indian Bank other than State Bank of India

to feature in the List of Fortune 500 Companies in the World.

A premier bank owned by the Government of India

Established on 15th August 1907 as part of the Swadeshi movement

Serving the nation with a team of over 18782 dedicated staff

Total Business crossed Rs.2,11,988 Crores as on 31.03.2012

Operating Profit increased to Rs. 3,463.17 Crores as on 31.03.2012

Net Profit increased to Rs.1746.97 Crores as on 31.03.2012

Core Banking Solution(CBS) in all 1956 branches

International Presence

Overseas branches in Singapore , Colombo including a Foreign Currency Banking Unit at

Colombo and Jaffna.

240 Overseas Correspondent banks in 70 countries

Diversified banking activities - 3 Subsidiary companies

Indbank Merchant Banking Services Ltd

IndBank Housing Ltd.

IndFund Management Ltd

A front runner in specialised banking

97 Forex Authorised branches inclusive of 1 Specialised Overseas Branch at Chennai

exclusively for handling forex transactions arising out of Export, Import, Remittances

and Non Resident Indian business

62 Special SME Branches extending finance exclusively to SSI units

PROFILE

INDIAN BANK

Type Public Company

Traded As BSE:523465

NSE:INDIANB

Industry Banking and Financial services

Founded 1907

Headquarters Chennai, Tamil Nadu, India

Key people T.M.Bhasin(Chairman & MD)

Revenue IncreaseINR211,988 crore(US$42.29 billion)

(2011)

Net income IncreaseINR12,745 crore(US$2.54 billion) (2011)

Total assets IncreaseINR121,841 crore(US$223.81 billion)

(2011)

Employees 19,632

Website www.indianbank.in

Tagline/Slogan Your tech friendly bank

USP High end banking technology support

Target group International banking

Positioning Complete banking solutions

Leadership in Rural Development

Pioneer in introducing Self Help Groups and Financial Inclusion Project in the country

Award winner for Excellence in Agricultural Lending from Honourable Union Minister

for Finance

Best Performer Award for Micro-Finance activities in Tamil Nadu and Union Territory of

Puducherry from NABARD

Established 7 specialized exclusive Microfinance branches called "Microsate" across the

country to cater the needs of Urban poor through SHG (Self Help Group)/JLG (Joint

Liability Group) concepts

A special window for Micro finance viz., Micro Credit Kendras are functioning in 44

Rural/Semi Urban branches

Harnessing ICT (Information and Communication Technology) for Rural Development

and Inclusive Banking

Provision of technical assistance and project reports in Agriculture to entrepreneurs

through Agricultural Consultancy & Technical Services (ACTS)

A pioneer in introducing the latest technology in Banking

100% Core Banking Solution(CBS) Branches

100% Business Computerisation

1280 Automated Teller Machines(ATM)

24 x 7 Service through 89000 ATMs under shared network

Internet and Tele Banking services to all Core Banking customers

e-payment facility for Corporate customers

Cash Management Services • Depository Services

Reuter Screen, Telerate, Reuter Monitors, Dealing System provided at Overseas Branch,

Chennai.

History:

Early Formation and Expansion:

In the last quarter of 1906, Madras (now Chennai) was hit by the worst financial crisis the

city was ever to suffer Of the three best-known British commercial names in 19th century

Madras, one crashed; a second had to be resurrected by a distress sale; and the third had

to be bailed out by a benevolent benefactor.

Arbuthnot & Co, which failed, was considered the soundest of the three. Parry's (now

EID Parry), may have been the earliest of them and Binny & Co.'s founders may have

had the oldest associations with Madras, but it was Arbuthnot, established in 1810, that

was the city's strongest commercial organization in the 19th Century.

A key figure in the bankruptcy case for Arbuthnot's was the Madras lawyer, V.

Krishnaswamy Iyer; he went on to organize a group of Chettiars that founded Indian

Bank. Annamalai and Ramaswami Chettiar founded Indian Bank (IB)on 15 August 1907.

IB began its international expansion in 1932 when it opened a branch in Colombo. A

branch in Jaffna followed three years later, but this was not successful and Indian Bank

closed it in 1939. Just before World War II reached the region, Indian Bank opened a

branch in 1940, in Rangoon (Yangon).

The next year it closed the Rangoon branch, but opened branches in Singapore (where

future branch manager KB Pisharody(1915–1998) started his career in the same year),

and in Kuala Lumpur, Ipoh, and Penang.

The rapid advance of the Japanese Army forced IB to close all its branches in Malaya and

Singapore. Although the Japanese forces did not reach Ceylon, IB closed the Colombo

branch in 1942.

Post-Independence of India:

After the war, IB reopened its Malayan and Singapore branches. Then in 1948 it

reopened its branch in Colombo.

The 1960s saw IB expand domestically as it acquired Mannargudi Bank (est. 1932) and

Salem Bank (est. 1925). Then on 19 July 1969 the Government of India nationalized 14

top banks, including Indian Bank.

In 1973 Indian Bank, Indian Overseas Bank, and United Commercial Bank established

United Asian Bank Berhad in response to a new banking law in Malaysia that prohibited

foreign government banks from operating in the country.

International expansion continued in 1978 with IB becoming a technical adviser to PT

Bank Rama in Indonesia, the result of the merger of PT Bank Masyarakat and PT Bank

Ramayana.

Two years later, IB, Bank of Baroda, and Union Bank of India established IUB

International Finance, a licensed deposit taker in Hong Kong. Each of the three banks

took an equal share in the joint venture.

In 1987, Indian Babk bought in two more acquisitions when it rescued Bank of Tanjore,

based in Tamil Nadu.

A multi-crore scam was exposed in 1992, where then chairman M. Gopalakrishnan lent

loan to small corporates and exporters from the south amounting to 1,300 crore. The

amount was never paid back by the borrowers.

Bank of Baroda bought out its partners in IUB International Fininance in Hong Kong in

1998. Apparently this was a response to regulatory changes following Hong Kong’s

reversion. IUB became Bank of Baroda (Hong Kong), a restricted license bank.

Products and Services:

Featured Products/ services/ schemes

NRI- Foreign Exchange

IB Swarna mudra schemes

ASBA (for IPO’s)

Wealth Management services

Supreme Current Account

Educational loans

Centralized Pension Processing

Interest Subsidy for educational loans

Financial inclusion plan

All premium services

Insurance services

CMS plus

E payment of direct taxes

E payment of indirect taxes

Other valuable services

Loans for agriculture

Loans for Small And Medium Enterprises

Personal loans

Special Schemes for Self Help Groups.

These are some of the products and services rendered by Indian Bank. It also offers four types of

accounts and selling gold to the public.

1.4 NEED FOR THE STUDY

The analysis of financial statements of Indian Bank is an attempt to assess the

efficiency and performance of the company.

To assess the efficiency and performance of the company it is necessary

1. To know earnings capacity of the company i.e., the profitability of the company.

2. To have a view of the company’s efficiency.

3. To know the comparative position in relation to previous year.

4. To have an idea about financial strength of the company.

5. To know the solvency of the company.