Topic chosen for study The title of the study is An EMPIRICAL STUDY ON CAPITAL TO RISK ASSETS RATIO of urban co-operative bank ltd Perinthalmanna
Need of the study: The study of CRAR analysis of UCBP ltd will enable as to know the financial position, of UCBP ltd. The study also reveals the performance of the UCBP ltd and also its prospects.
Objectives of the study: The main objectives of the research are as following: To explain the importance of risk assets ratio to analyze the performance of the firm. To analyze the current financial condition of the firm. To compare the present ratios with past ratios of the firm. To interpret the ratios to identify the strengths and weakness of the organization. Scope of the study: The scope is limited to published information received from annual reports. The study covers secoP&L a/c and balance sheet items only. The study covers a period of three financial years ranging from 2010-11 to 2012-13. This is so because CRAR prescribes practical standards, for each element of the study.
METHODOLOGY ADOPTED There are two types of data collection method which are being used in this research: PRIMARY DATA SECONDARY DATA 1. Collection of Primary data: Primary data is that type of data which includes the first hand information which is being collected during the course of training through observations and discussion with departmental heads, accountants, assistants and office. Direct interaction Observations
2. Collection of Secondary Data: Secondary data means data that are already available i.e., they refer to the data which have already been collected and analyzed by someone else. When the researcher utilizes the secondary data, then he has to look into various sources from where he can obtain them. In this case he is certainly not confronted with the problems are usually associated with the collection of the original data secondary data may either be published data or unpublished data. Here in this research, I collected the secondary data from the Books, journals, annual reports and prospects of the company, internet etc Interpretation of the result has been done on graphical representation through bar graphs. LITERATURE REVIEW
Limitations of the study: The study was limited to finding the selected ratios only. The study depends on the published data and documents such as balance sheet and income statements. It was difficult to obtain confidential data from the concern department with a view point of confidentiality. The time period of the project is restricted for short period.
Research Design: Research design means a search of facts, answers to question and solution to the problems. It is a prospective investigation. Research is a systematic logical study of an issue or problem through scientific method. It is a systematic and objective analysis and recording of controlled observation that may lead to the development of generalization, principles, resulting in prediction and possibly ultimate control of events. Research design is the arrangement of conditions for the collection and analysis of data in manner that aims to combine relevance to the research purpose with relevance to economy. There are various designs, which are descriptive and helpful for analytical research.
Chapter 3
THE THEORETICAL BACKGROUND OF THE STUDY Section 5 of Banking Regulation Act, 1949 defines banking as accepting, for the purpose of lending or investment of money from the public repayable on demand or otherwise, and withdraw able by cheque, draft, order or otherwise. It can be seen from above definition that major functions of the banks are accepting deposits, lending the resources mobilized and investing to meet statutory requirements/surplus funds. The process of lending and investment associated with several risks like credit risk, interest rate risk, foreign exchange risk, liquidity risks, operational risk etc. In view of the above risks and rapid global integration of the world financial sector mainly banking sector, supervisory authorities of group of ten countries (G 10) namely CANADA, FRANCE, GERMANY, ITALY, JAPAN, NETHERLANDS, SWEDEN, SWITZERLAND, USA and UK felt the requirement of a global supervision and regulation. These countries worked for a regulatory frame work and the governors of the above G 10 countries signed the accord titled (INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT AND CAPITAL STANDARDS) in july 1988 at the bank of international settlements (BIS), Basle, Switzerland which came to known as BASLE COMMITTEE RECOMMENDATIONS and adopted a capital adequacy frame work for internationally active commercial banks. Two fundamental objectives of this convergence are; - 1 The new framework should serve to strengthen the soundness and stability of international banking. 2 Frame work should be fair and have a high degree of consistency in its applications to banks in different countries with a view to diminishing an existing source of competitive inequality among international banks.
The world financial system has witnessed a considerable economic reform in the last few years and hence the BASLE committee decided to introduce a new capital adequacy framework. The new capital framework consists of three pillars. 1. Minimum capital requirements 2. A supervisory review process 3. The effective use of market discipline MINIMUM CAPITAL REQUIREMENT: With an objective of securing soundly based and consistent capital ratios, the target or standard ratio of capital to weighted risk assets was set as 8% of which the core capital element would be 4%.
A SUPERVISORY REVIEW PROCESS: This will seek to ensure that a banks capital position is consistent with its overall risk profile. This pillar also stressed on the importance of banks management in developing an internal capital assessment and setting targets for building capital.
THE EFFECTIVE USE OF MARKET DISCIPLINE: This will encourage the role of market participants in encouraging banks to hold adequate capital. Based on the BASLE committee recommendation RBI has introduced capital to risk assets ratio (CRAR) system to strengthen the capital base of banks for commercial banks in the year 1993. The fundamental objectives behind this principle are:
To strengthen the soundness and stability of banking system in INDIA The framework should be fair and have high degree of consistence in application to banks operating at different levels. The concept of minimum capital to risk assets ratio (CRAR) has been developed to ensure that banks can absorb a reasonable level of loss. Capital adequacy ratio determines the capacity of the bank in terms of meeting the several risks associated with its operations and the time liabilities. A bank capital is the cushion for potential losses and there by application of minimum CRAR protects the interest of depositors and promotes stability and efficiency of the financial system. The Urban co-operative banks can perform the same banking functions as commercial banks and are exposed to similar risks in their operation. In view of this High power committee on urban co-operative banks (HPC) constituted by the RBI in the year may 1999 suggested various measures to augment capital base of urban co-operative banks. Based on the HPC recommendations, RBI has decided to implement CRAR norms to urban co-operative banks in a phased manner with effect from 31 march 2002 over a period of three years as under:
AS ON SCHEDULED CO- OPERATIVE BANKS NON-SCHEDULED URBAN CO-OPERATIVE BANKS 31 st march 2002 8% 6% 31 st march 2003 9% 7% 31 st march 2004 As applicable to commercial banks
9% 31 st march 2005 As applicable to commercial banks As applicable to commercial banks
DEFINITION OF CRAR: Capital adequacy ratio is defined as the ratio of banks capital to its Risk Weighted Assets.
Capital base (capital fund) CRAR = _________________________________ x 100 Risk weighed Assets
CAPITAL FUNDS: The capital funds can be segregated into two groups namely TIER 1 and TIER2 TIER 1 CAPITAL: This is also known as core capital and provides the most permanent and readily available support to bank against unexpected losses. This would include the following: 1. Paid up share capital collected from regular members of the bank having voting power. 2. Statutory and other disclosed free reserves (mainly reserve fund and building fund). 3. Capital reserve representing surplus arising out of sale proceeds of assets. 4. Any surplus in profit and loss account that is after appropriation towards dividend payable, education fund, other funds whose utilization is defined and asset loss if any. NOTE: intangible assets brought forward and current losses deficit in NPA provisions etc, will be deducted from tier 1 capital.
TIER 2 CAPITALS: This would include the following: 1. Undisclosed reserves. 2. Revaluation reserves at discount of 55%. 3. Investment fluctuation reserves. 4. Surplus provisions/loss reserves maximum 1.25% of weighted risk assets. 5. Hybrid debt capital instruments. 6. Sub ordinate debt limited to 50% of tier 1 capital. NOTE: 1) at present urban co-operative banks do not issue hybrid debt capital instruments/subordinate debt, however there is no bar on issuing such instruments subject to : a. Provisions of respective state co-operative Act / multi state co-operative Act. b. Prior approval from reserve bank of India for the issue instruments. c. Tier 2 capital should not exceed tier 1 capital et any point of time. RISK WEIGHTED ASSETS: All assets created by the bank carry an element of risk. It is obvious that all assets whether fund based or off-balance sheet items are weighted with a particular risk factor and compared against the capital to determine the capital adequacy ratio. RBI has given different percentage weight to various types of assets appearing in balance sheet. The value of each asset item shall be multiplied by the relevant weights to arrive at risk-adjusted values of assets and off-balance sheet items. The sum total of all risk adjusted values of assets will be taken into account for arriving at capital to risk assets ratio (CRAR).
THE RISK WEIGHTS ALLOTED TO EACH OF THE ASSETS AND OFF-BALANCE SHEET ITEMS: Particular Risk weight (%) I. BALANCES
i. Cash (including foreign currency notes) Balances with RBI 0 ii. Balances in current account with UCBs 20 iii. Balances in current account with other banks 20 II. INVESTMENTS
i. Investment in Central Government Securities 2.5 ii. Investment in Other Approved Securities guaranteed by Central Government 2.5 iii. Investment in Other Approved Securities guaranteed by State Government 2.5 iv. Investment in Other Securities where payment of interest and repayment of principal are guaranteed by Central Govt. (include investment in Indira/Kisan Vikas Patras and investments in bonds & debentures where payment of interest and repayment of principal is guaranteed by Central Govt.) 2.5 v. Investment in Other Securities where payment of interest and repayment of principal are guaranteed by State Govt. (include investments in bonds & debentures where payment of interest and repayment of principal is guaranteed by Central Govt.) 2.5 or 100 (if State Govt. is in default) vi. Investment in Other Approved Securities where payment of interest and repayment of principal is not guaranteed by Central / State Govt./s 22.5 vii. Investment in Govt. guaranteed securities of government undertakings which do not form part of the approved market borrowing Program 22.5 viii. Claims on commercial banks, District Central Cooperative Banks 20 ix. Claims on other Urban Cooperative Banks 20 x. Investments in bonds issued by All India Public financial Institutions 22.5 xi. Investments in bonds issued by Public Financial Institutions for their Tier-II Capital 102.5 xii. All Other Investments 102.5 III. LOANS AND ADVANCES i. Loans guaranteed by Govt of India 0 ii. Loans guaranteed by State Govt 0 iii. Loans guaranteed by State Govts. Where guarantee has been invoked and the concerned State Govt has remained in default 100 iv. Loans granted to PSUs of GOI 100 v. Housing Loans to individuals against mortgage of residential housing property
50 vi. Gold Loan upto Rs. 1 lakh 50 vii. Gold Loan above Rs. 1 lakh 125 viii. Other Loans and Advances a) Secured
100 b) Consumer & personal loan 125 ix. Leased Assets 100 x. Advances covered by DICGC / ECGC (only for amount covered by DICGC /ECGC not for entire amount outstanding) 50 xi. Advances for term deposits, Life policies, NSCs, IVPs and KVPs where adequate margin is available 0 subject to adequate margin xii. Loans to Staff of banks, which are fully covered by superannuation benefits and mortgage of flat / house 20 IV. MONEY AT CALL AND SHORT NOTICE 20 V. PREMISES, FURNITURE AND FIXTURE 100 VI. OTHER ASSETS
i) Interest Due on Govt. Securities 0 ii)Accrued Interest on CRR, if any 0 iii ) Accrued Interest on loans & advances 100 iV ) Overdue Interest Reserve 0 V ) Accrued Interest on FD with bank 20 Vi) )All Other Assets (including branch adjustments, non-banking assets, etc.) 100 VIII. MARKET RISK ON OPEN POSITIONS - i. Market Risk on Foreign Exchange Open Position (For Authorized Dealers only) 100 ii. Market Risk on Gold Open Position 100
ANALYSIS AND INTERPRETATION OF DATA
Financial Analysis: Financial analysis is the analysis of financial statement of a company to assess its financial health and soundness of its management. Financial statement analysis involves a study of the financial statements of a company to ascertain its prevailing state and the reasons thereof. Such a study would enable the public and the investors to ascertain whether one company is more profitable than the other and also to state and factors that are probably responsible.