Final Project

Risk and Returns Of Equity Investment On Banking Sector
INTRODUCTION
1.1 INVESTMENT AN OVERVIEW:
Investment is the employment of fund with the aim of achieving additional

income or growth in value. The essential quality of an investment is that it involves
‘waiting’ for a reward. It involves the commitment of resources which have been saved
or put away from current consumption in the hope that since benefit will accrue in future.
Investment is the allocation of monetary resources to assets that are expected to

yield some gain or positive return over a given period of time. These assets range from
safe investment to risky investments. Investment in this form is called as ‘Financial
Investments’.
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Why should one invest?
One needs to invest to:

 Earn return on your idle resources,
 Generate a specified sum of money for a specific goal in life
 Make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of
Inflation. Inflation is the rate at which the cost of living increases. The cost of living is
simply what it costs to buy the goods and services you need to live. Inflation causes
money to lose value because it will not buy the same amount of a good or a service in the
future as it does now or did in the past. The aim of investments should be to provide a
return above the inflation rate to ensure that the investment does not decrease in value.
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The Oxford College Of Business Management
FACTORS INFLUENCING INVESTMETN:
1. Increasing rate of taxation.

2. High interest rate.
3. High rate of inflation
TYPES OF INVESTMENTS:
1. Short term investment
2. Long term investments
CLASSIFICATION OF INVESTMENTS
SHORT TERM LONG TERM
Savings Bank Account Post Office Savings
Money Market or Liquid Funds Public Provident Fund
Fixed Deposits with Banks Company Fixed Deposits
Securities [Shares, Bonds]
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1.2 EQUITY INVESTMENT AN OVERVIEW:
Equity investment generally refers to the buying and holding of shares of stocks
on the stock market by individual and funds in anticipation of income from dividend and
capital gain as the value of the stock rises. It also sometimes refers to the acquisition of
equity participation in a private company or a company being created or newly created.
In simple terms, equity share is the total equity capital of a company is divided
into equal units of small denominations, each called a share.
Why do companies need to issue shares to the public?
Most companies are usually started privately by their promoter(s). However, the
promoters’ capital and the borrowings from banks and financial institutions may not be
sufficient for setting up or running the business over a long term. So companies invite the
public to contribute towards the equity and issue shares to individual investors. The way
to invite share capital from the public is through a ‘Public Issue’. Simply stated, a public
issue is an offer to the public to subscribe to the share capital of a company. Once this is
done, the company allots shares to the applicants as per the prescribed rules and
regulations laid down by SEBI.
Why should one invest in equities in particular?
When a person buys a share of a company he becomes a shareholder in that

company. Shares are also known as Equities. Equities have the potential to increase in
value over time. It also provides your portfolio with the growth necessary to reach your
long term investment goals. Research studies have proved that the equities have
outperformed most other forms of investments in the long term.
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This may be illustrated with the help of following examples:
a) Over a 15 year period between 1990 to 2005, Nifty has given an annualised return
of 17%.
b) In the last 15-20 years, the average return from equity was about 16 per cent pa.
c) Equities are considered the most challenging and the rewarding, when compared
to other investment options.
d) Research studies have proved that investments in some shares with a longer
tenure of investment have yielded far superior returns than any other investment.
However, this does not mean all equity investments would guarantee similar high
returns. Equities are high risk investments. The investor needs to study them carefully
before investing.
What has been the average return on Equities in India?
Since 1990 till date, Indian stock market has returned about 17% to investors on an
average in terms of increase in share prices or capital appreciation annually. Besides, that
on average stocks have paid 1.5% dividend annually. Dividend is a percentage of the face
value of a share that a company returns to its shareholders from its annual profits.
Compared to 37 most other forms of investments, investing in equity shares offers the
highest rate of return, if invested over a longer duration.
Which are the factors that influence the price of a stock?

Broadly there are two factors:
(1) Stock specific and
(2) Market specific.
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The stock-specific factor is related to people’s expectations about the company,

its future earnings capacity, financial health and management, level of technology and
marketing skills.
The market specific factor is influenced by the investor’s sentiment towards the
stock market as a whole. This factor depends on the environment rather than the
performance of any particular company. Events favorable to an economy, political or
regulatory environment like high economic growth, friendly budget, stable government
etc. can fuel euphoria in the investors, resulting in a boom in the market. On the other
hand, unfavorable events like war, economic crisis, communal riots, minority government
etc. depress the market irrespective of certain companies performing well. However, the
effect of market-specific factor is generally short-term. Despite ups and downs, price of a
stock in the long run gets stabilized based on the stock specific factors. Therefore, a
prudent advice to all investors is to analyse and invest and not speculate in shares.
What is meant by the terms Growth Stock / Value Stock?
Growth Stocks:
In the investment world we come across terms such as Growth stocks, Value
stocks etc. Companies, whose potential for growth in sales and earnings are excellent, are
growing faster than other companies in the market or other stocks in the same industry
are called the Growth Stocks. These companies usually pay little or no dividends and
instead prefer to reinvest their profits in their business for further expansions.
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Value Stocks:
The task here is to look for stocks that have been overlooked by other investors
and which may have a ‘hidden value’. These companies may have been beaten down in
price because of some bad event, or may be in an industry that's not fancied by most
investors. However, even a company that has seen its stock price decline still has assets
to its name - buildings, real estate, inventories, subsidiaries, and so on. Many of these
assets still have value, yet that value may not be reflected in the stock's price. Investors
look to buy stocks that are undervalued, and then hold those stocks until the rest of the
market realizes the real value of the company's assets.
How can one acquire equity shares?
The investor can acquire equity share either by the following two ways,
1. Primary market
2. Secondary market
You may subscribe to issues made by corporates in the primary market. In the primary
market, resources are mobilised by the corporates through fresh public issues (IPOs) or
through private placements. Alternately, you may purchase shares from the secondary
market. To buy and sell securities you should approach a SEBI registered trading member
(broker) of a recognized stock exchange.
 PRIMARY MARKET:
The primary market provides the channel for sale of new securities. Primary
market provides opportunity to issuers of securities; Government as well as Corporates,
to raise resources to meet their requirements of investment and/or discharge some
obligation. They may issue the securities at face value, or at a discount/premium and
these securities may take a variety of forms such as equity, debt etc. They may issue the
securities in domestic market and/or international market.
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 SECONDARY MARKET:
Secondary market refers to a market where securities are traded after being
initially offered to the public in the primary market and/or listed on the Stock Exchange.
Majority of the trading is done in the secondary market. Secondary market comprises of
equity markets and the debt markets.
1.3 RISK:
"Risk" is the investor's four-letter word. Everybody is risk-averse. Risk can be

defined as the chance that the expected or prospective advantage, gain, profit or return
may not materialize; that the actual outcome of investment may be less than the expected
outcome. Risk is composed of demand that brings in variation in return of income. The
main force contributing to risk is price.
The variance and standard deviations of return serve as the alternative statistical
measures of the risk of the security in absolute sense. Similarly covariance measures the
risk of the security relative to the other securities in a portfolio.
TYPES OF RISK:
1] Systematic risk and

2] Unsystematic risk
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CLASSIFICATION OF RISK
Systematic risk Unsystematic risk
Market risk or Economic risk Business risk
Interest rate risk Financial risk
Purchase power risk
 SYSTEMATIC RISK:
Systematic risk is non-diversifiable and is associated with securities market as

well as the economy, sociological, political and legal considerations of the price of all
securities in the economy. The effect of these factors is to put pressure on all securities in
such a way that the price of all stocks will move in the same direction. The following are
the factors that influence systematic risk,
MARKET RISK:
Market risk is referred to as stock variable due to change in investor’s attitude and
expectations. The investor’s reaction towards tangible events is the chief cause affecting
‘market risk.’ Market risks cannot be eliminated while financial risk can be reduced.
Market risk includes such factors as business recessions, depressions and long-run
changes in consumption in the economy.
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INTERSET RATE RISK:
The price of all securities rise or fall depending on the change in interest rates,
the longer the maturity period of a security, the higher the yield on an investment and
lower the fluctuations in prices.
Interest rates continuously change for bond, preference stock and equity stocks.
Interest rate risk can be reduced by diversifying in various kinds of securities and also
buying securities of different maturity dates.
PURCHASE POWER RISK:
Purchasing power risk is also known as inflation risk. This risk arises out if
change in the prices if goods and services and technically it covers both inflation and
deflation period. Therefore, in India, purchasing power risk is associated with inflation
and rising price in the economy.
 UNSYSTEMATIC RISK:
Unsystematic risk is unique to a firm of industry. It dose not affect an average

investor. Unsystematic risk is caused by factors like labour strike, irregular disorganized
management policies and consumer preference. These factors are independent of the
price mechanism operating in the securities market. The following are the factors that
influence unsystematic risk,
BUSINESS RISK:
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Ever corporate organization has its own objectives and goals and aims at a
particular gross profit and operating income and also expects to provide a certain level of
dividend income to its shareholders. It also hopes to plough back some profit.
Business risk is also associated with risks directly affecting the internal
environment of the firm and those if circumstance beyond its control. The former is
classified as internal business risk and the latter as external business risk, within these
two broad categories of risk, the firm operations.
FINANCIAL RISK:
Financial risk in a company is associated with the method through which it plans
its financial structure. If the capital structure of a company tends to make earnings
unstable, the company may fail financial. How a company rises funds to finance its needs
and growth will have an impact on its future earnings and consequently on the stability of
earnings. Debt financing provides a low cost source of funds to a company, at the same time
providing financial leverage for the common stock holders. As long as the earnings of the
company are higher that the cost of barrowed funds the earnings per share of common
stock are increased.
TOOLS TO MEASURE RISK:
 Beta
 Alpha
 Standard deviation and variance
 Covariance
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BETA:
The most important part of the equation is β of beta. It is used to describe

the relationship between the stock’s return and market index’s return. The
percentages changes in the price of the stock are regressed against the percentage
changes in the price of a market index. A 0.5 beta indicates that the market index
changes of 1% was reflected by a 0.5% price change in stocks. Similarly, a 1.5%
beta would reflect that whenever the market index rose or fell by 1%, the stock
would rise and fall by 1.5%.
Beta is referred to as systematic risk to the market and +E the unsystematic

risk. Beta is useful piece of information both for individual stock as well as
portfolios, but as a measure of risk; it is better used in the analysis of portfolios.
Beta value can be calculated by using the following formula,
N∑XY - ∑X∑y
β = --------------------------
N∑X2 – (∑X) 2
ALPHA:
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The size of the alpha exhibits the stock’s unsystematic return and its
average return independent of the market’s return. If alpha gives a positive value,
it is a healthy sign but alpha’s expected value is zero.
ALPHA (α) = Y – (β * x)
STANDARD DEVIATION AND VARIANCE:
The most useful method for calculating variability is the standard deviation and
variance. The standard deviation is a statistical measure of the dispersion or uncertainty
in a random variable. Risk arises out of variability. Standard deviation measures risk for
both individual assets and for portfolio. It measures the total variation return about
expected return. The standard deviation can be calculated by using the following
formula,
Standard Deviation (σ) = ∑ Pі (Ri-E(R)) ²
The variance is a somewhat abstract measure of the variability in a set of data.

Unlike the variability the standard deviation can be easily conceptualized by plotting it
along with the individual points in the set. It is easy to visualize the standard deviation in
this way along with the data set.
Variance (σ²) = √ ∑ Pi (R-E(R) ²)
CO-VARIANCE:
While standard deviation is an excellent measure for calculation o risk of

individual stocks, it has limitations as a measure of a total portfolio. With the correlation
of risk if individual stocks, it has its limitation as a measure of a total portfolio. With the
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correlation, the co-variance approach should also be considered when there are two or
three stocks on the portfolio. Co-variance can be used to achieve the highest portfolio
expected return for a pre-determined portfolio variance level or the lowest portfolio
return.
An individual security’s expected return and variance express return and risk for
portfolios of stocks, the expected return is the weighted average of the return on the
individual securities.
1.4 RETURN:
A major purpose of investment is to set a return or income on the funds

investment. On a bond an investor expects to receive interest. On a stock, dividends may
be anticipated. The investor may expect capital gains from some investments and rental
income from house property.
Return is the amount or rate of produce, proceeds, gain, fruit and profit which
accrues to an economic agent from an undertaking or enterprise or investment. It is a
reward for and a motivating force behind investment, the objective of which is usually to
maximize return.
Return on a typical investment has to components; the basic one which is the
periodic cash or income receipts, either inters toe dividend; and the other which is the
appreciation or depreciation in the price of value of the asset, called the capital gain or
the capital loss. The capital gain is the difference between the purchase price of the asset
and the price at which it can be or is sold. The income component is usually but not
necessarily received in cash viz., stock dividend. The total return on an investment thus
can be defines as income plus/minus appreciation/depreciation.
TYPES OF RETURN:
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1. Internal rate of return

2. Expected return
3. Rate of return
4. Holding period return
 INTERNAL RATE OF RETURN:
The internal rate of return (IRR) is a capital budgeting method used by firms to
decide whether they should make long-term investments. The IRR is the annualised
effective compounded return rate which can be earned on the invested capital, i.e. the
yield on the investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternative investments (investing in other
projects, buying bonds, even putting the money in a bank account). The IRR should
include an appropriate risk premium. Mathematically the IRR is defined as any discount
rate that results in a net present value of zero of a series of cash flows. In general, if the
IRR is cost of capital, or hurdle rate, the project will add value for the company greater
than the project's.
 EXPECTED RETURN:
The expected rate of return is the weighted average of all possible return
multiplied by their respective probabilities. Expected return is the estimation of the value
of an investment, including the change in price and any payments or dividends,
calculated from a probability distribution curve of all possible rates of return. In general,
if an asset is risky, the expected return will be the risk-free rate of return plus a certain
risk premium, also called expected value. The average of a probability distribution of
possible returns, calculated by using the following formula:
Expected Return:
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 RATE OF RETURN :
In finance, rate of return (ROR) or return on investment (ROI) is the ratio of

money gained or lost on an investment relative to the amount of money invested. The
amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or
net income/loss. The money invested may be referred to as the asset, capital, principal, or
the cost basis of the investment.
ROI is also known as rate of profit, rate of return or return. ROI is the return on a
past or current investment, or the estimated return on a future investment. ROI is usually
given as a percent rather than decimal value... However, ROI is most often stated as an
annual or annualized rate of return, and it is most often stated for a calendar or fiscal year
Rate of return for the given period is calculated by using the formula,
Annual income + (Ending price – Beginning price)

Rate of return = --------------------------------------------------------------
Beginning price
 HOLDING PERIOD RETURN:
Holding period yield (HYP) measures the total return an investment during a
given or designing time period in which the asset is held by the investor. It is to be noted
that HYP dose not mean that the security is actually sold and the gain or loss is actually
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realized by the investor. The concept of HYP is applicable whether one is measuring the
realized return or estimated the future return.
DESIGN OF STUDY
2.1 RESEARCH DESIGN:
Research design is the formal way to show the method and procedures which is
used to collect the information to analyse the problem.
2.2 TITLE OF THE STUDY:
“A STUDY ON RISK AND RETURNS OF EQUITY INVESTMENT ON BANKING

SECTOR”
2.3 REVIEW OF LITERATURE:
Econometric Estimation of Systematic Risk of Nifty-Fifty Constituents

Of the Indian Stock Market
By: A.V.Lakshmi Narayana
Introduction
This study deals with assessment of systematic risk of equity stocks, which is an
Important issue in the modern theory of finance and has received the attention of a
number of financial theorists over the past three and a half decades. Empirical research
on this issue has, in general, been carried out in various countries, where daily quotes of
stock prices are available electronically in the form of comprehensive data files.
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Estimation problems particularly arising from infrequent trading of stocks could be

studied in detail, only with the availability of such comprehensive data inclusive of those
infrequently traded stocks. With the advent of internet technology in India, such authentic
data files have recently become available to researchers, which has facilitated the present
study.
Nature of the Problem
In financial econometrics, systematic risk of investing in any stock is generally

represented by the slope coefficient, b in the market model Rt = a + b M t + et …….(1.1)
where, Rt and M t represent true returns on an equity stock and on the market portfolio
(or a stock market index) respectively; a, the intercept term and et, the random error at
time t. Given a sample of observations of prices and traded values of any market index,
the returns-variables Rt and Mt are generated from them. Using these values, unbiased
estimates of b’s can be obtained by the classical method of Ordinary Least Squares(OLS),
provided the error structure satisfies the standard OLS assumptions.
Methodology
Three approaches to estimation:
Prior to the Dimson(1979) study, there were attempts by other researchers in the
literature to assess market risk of less frequently traded stocks, which can be categorized
into three approaches. The first approach takes into account the lagged market returns as
additional independent variables in the market model (1.1).2 In the second approach,
whenever there is a gap in trading period, returns are computed for infrequently traded
stocks on a trade-to-trade basis and, in the same manner, returns of the market index are
also computed. Then the market model is estimated using the OLS method.3 In the third
approach, Scholes and Williams(1977) combined the two and used the current and lagged
market returns as explanatory variables to estimate the market model. Dimson’s method
is a generalization of these three approaches, which provides a general framework to
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address the question why the classical market model yields biased estimates of betas,
when some stocks are infrequently traded, and attempts to remedy the problem.
Summary, conclusions of the study:
In conclusion, it may be pointed out that the unbiased estimates of betas obtained
in this study indicate that there seems to be a strong possibility for the existence of a
weak relationship between risk and return in the Indian stock market, and that portfolio
mangers of Indian stock market may make note of results of this exercise for a prudent
decision making.
Source: Nseindia.com
2.4 STATEMENT OF PROBLEM:
Investment includes risk, but the risk may not be same for all the investments, it
will vary according to the return expected from the investment. Generally equity
investment includes high risk at the same time it earns higher return unusually high
returns may not be sustainable. The risk is influenced by two ways that is, internal risk
and external risk in which the former risk is controllable and the later is uncontrollable.
“Since the banking industry is under the control of Reserve Bank of India (RBI) it
is adversely used as the tool to control the external problems like inflation, interest rate,
money supply, etc., Because of this, there is a high instability in the share price that
reduces the real investor’s interest and boosting up the speculators to make more profit by
using the variations as a tool.(Ex: On April 2 the NSE Bank index shows a -5.84% in
single day because of the government policy to increase the Cash Reserve Ratio).So
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investors are short selling their holdings with respect to the market fluctuation to keep
away them from the loss of investment.”
By considering the above problem this study is structured to analyse the

performance of the selected shares in the banking industry to reveal the risk and return in
a particular period of time and the investors perception towards the industry was
collected by the way of questionnaire that shows the level of interest in investing banking
stocks, their expected return and risk. Therefore the above problem is stated as “A Study
on Risk and Returns of Equity Investment on Banking Sector”
2.5 OBJECTIVES OF THE STUDY:
 To reveal the investors about the performance of banking company

shares and the return and risk status over a period of time.
 To trap the investor’s interest on the banking sector stocks, the level
of expected return and risk in the changing economy.
 To identify, measure, monitor and manage risk in the equity

investment on banking sector.
 To make clear about the market influence on the share price and
return.
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2.6 SCOPE OF THE STUDY:
The scope of the study has been limited to analysis the investor’s behavior and the
performance of banking sectors by using the questioner, risk measurement tools like
Beta, Alpha and Standard Deviation methods. The scope of the study is specifically
focused on to reveal the investor’s interest and expectation showing on the banking
stocks and the actual return earned by the stocks in a particular period of time.
2.7 METHODOLOGY:
Sample Size:
Sample size is limited to 100 investors randomly. A process that gives each
element in the population an equal chance of being included in the sample selects these
samples.
Sample Frame:
Investors are randomly taken as the sample and framed for the purpose of the
study.
Sampling technique:
The sampling technique adopted for the study is simple random sampling; it is the
primary probability sampling design. A process that not only give to each element chance
of being include in the sample but also makes the selection of every possible combination
of cases in the desire size equally likely selected a random sample.
Sources of data collection:
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The data from the present study is drawn from both primary and secondary
sources.
Primary data is drawn from in depth discussion with the investors and survey has
been gone through questionnaire and schedules.
Secondary data is collected from publishers such as books, company annual

reports and website. The secondary data is used for the collection of information for
review of literature and questionnaire and interview schedule are used for primary data
collection from the respondents.
Primary sources:
 Questionnaire
 Financial adviser
Secondary sources:
 Internet
 Journals and business magazines
 Newspapers
Tools of data collection:
Data can be collected by using different tools such as questionnaire, observation,

interview, and schedules. Questionnaire is used as a tool of data collection. A detailed
questionnaire was constructed; the items in the questionnaire elicited all required
information derived from the objectives of study.
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A questionnaire consists of a number of questions printed in a definite order or a

form in certain salutations the schedules may be handed over to the respondents and the
interview may get these filled in his presence offering necessary explanations with
reference to the questions if and when necessary.
Analysis of Data:
To analyses the collected data there will be usage of tables and graph method.
2.8 LIMITATION OF THE STUDY:
 Sample size of questionnaire is limited to 100 respondents on security investors.
 The study is limited to Banking sector.
 Time constrain to the study is very less.
 The study is restricted only to investment in equity sector.
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CHAPTER SCHEME:
Chapter 1 – Introduction:
This chapter includes an introduction to the broad area of the topic chosen,
like impact of welfare measures on job satisfaction.
Chapter 2 – Research Design:
This chapter provides a plan of the study which include statement of the
problem, need for study review of the literature, objectives, operational definition of
concepts, scope, methodology, limitations and an overview of chapter scheme.
Chapter 3 – Profile of the Company:
This chapter contains a complete profile including history, nature of

business, growth prospectus and regulator to the industry.
Chapter 4 – Data Analysis and Interpretation:
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This chapter provides an analysis of the data with required interpretation.

Table’s graphs and charts are used wherever necessary.
Chapter 5 – Summary of Findings, Conclusions and Recommendations:
This chapter provides major findings, conclusion and offer

recommendations based on the findings.
PROFILE OF THE ECONOMY
3.1 Indian Economy an Overview:
India's economy is on the fulcrum of an ever increasing growth curve. With

positive indicators such as a stable 8-9 per cent annual growth, rising foreign exchange
reserves of close to US$ 180 billion, a booming capital market with the popular "Sensex"
index topping the majestic 14,000 mark, the Government estimating FDI flow of US$ 12
billion in this fiscal, and a more than 35 per cent surge in exports, it is easy to understand
why India is a leading destination for foreign investment.
Economic Survey 2006-07 says:
The advance estimates of gross domestic product (GDP) for 2006-07, released by
the Central Statistical Organization, places the growth of GDP at factor cost at constant
(1999-2000) prices in the current year at 9.2 per cent. While services maintained its
vigorous growth performance, there were distinct signs of sustained improvements on the
industrial front. The overall macroeconomic fundamentals are robust, particularly with
tangible progress towards fiscal consolidation and a strong balance of payments position.
With an upsurge in investment, the outlook is distinctly upbeat.
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The growth rate has been spurred by the manufacturing sector, which has logged
an 11.3 per cent rise in Q1 '06-07, according to the GDP data released by the Central
Statistical Organisation. It was 10.7 per cent in the corresponding period of the last fiscal
year. The GDP numbers come just weeks after the monthly IIP growth figures have
touched 12.4 per cent.
Agriculture, which accounts for nearly a quarter of the GDP, has also grown by a
healthy 3.4 per cent, unchanged from the corresponding period of last fiscal.
Other propellers of GDP growth for the first quarter this fiscal have been the trade,
hotels, transport and communications sector which grew by 9.5 per cent and construction,
which grew by 13.2 per cent. In the corresponding period of last fiscal, these sectors grew
by 11.7 per cent and 12.4 per cent, respectively.
Some highlights:
India has more billionaires than China. This year there were 15 billionaires in
China but last year in India, there were 20 billionaires, according to the Forbes magazine.
India has emerged as the world's fastest growing wealth creator, thanks to a buoyant
stock market and higher earnings.
A number of Indian companies surpassed last year's net profit in just six months
of the current fiscal, reflecting an accelerated growth in corporate earnings.
Forty-four per cent of Top 100 Fortune 500 companies are present in India. With its
manufacturing and services sector on a searing growth path, India’s economy may soon
touch the coveted 10 per cent growth figure.
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India is one of the most powerful military and economic powers of the world.
India, the world's largest democracy, has the world's second highest population of about 1
billion.
Fundamental strengths of India:
A strong, vibrant and growing economy Self-sufficiency in agriculture

Well developed banking system and
Buoyant industrial growth (0.6% in 1991 to
financial markets
almost 10% in 2007)
High domestic savings and investment

World's Biggest Democracy
rates
Comfortable balance of payments
Strong and mature private sector
situation
High exports growth rate Low inflation
Strong legal and accounting system Established independent judiciary
Large and diversified infrastructure and industry A free and vibrant press
Use of English as the link language Current account convertibility
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PROFILE OF THE INDUSTRY
3.2 HISTORY OF BANKING SECTOR IN INDIA:
Banking in India originated in the first decade of 18th century with The General
Bank of India coming into existence in 1786. This was followed by Bank of Hindustan.
Both these banks are now defunct. The oldest bank in existence in India is the State Bank
of India being established as "The Bank of Bengal" in Calcutta in June 1806. A couple of
decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the
1850s. At that point of time, Calcutta was the most active trading port, mainly due to the
trade of the British Empire, and due to which banking activity took roots there and
prospered. The first fully Indian owned bank was the Allahabad Bank, which was
established in 1865.
The first deals with the history part since the dawn of banking system in India.
Government took major step in the 1969 to put the banking sector into systems and it
nationalised 14 private banks in the mentioned year. This has been elaborated in
Nationalisationof Banks in India. The last but not the least explains about the scheduled
and unscheduled banks in India. Section 42 (6) (a) of RBI Act 1934, lays down the
condition of scheduled commercial banks.
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By the 1900s, the market expanded with the establishment of banks such as
Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both
of which were founded under private ownership. The Reserve Bank of India formally
took on the responsibility of regulating the Indian banking sector from 1935. After India's
independence in 1947, the Reserve Bank was nationalized and given broader powers.
INDIAN BANKING SYSTEM:
The banking system has three tiers. These are the scheduled commercial banks;
the regional rural banks which operate in rural areas not covered by the scheduled banks;
and the cooperative and special purpose rural banks.
NATIONALISATION:
The next significant milestone in Indian Banking occurred on July 19, 1969 when
the then Indira Gandhi government nationalized the 14 largest commercial banks. A
second nationalization of 6 more commercial banks followed in 1980. The stated reason
for the nationalisation was to give the government more control of credit delivery. After
this, until the 1990s, the nationalised banks grew at a leisurely pace of around 4%, closer
to the average growth rate of the Indian economy.
LIBERALISATION:
In the early 1990s the then Narasimha Rao government embarked on a policy of
liberalisation and gave licences to a small number of private banks, which came to be
known as New Generation tech-savvy banks, which included banks such as UTI Bank
28
(the first of such new generation banks to be set up), ICICI Bank and HDFC Bank. This
move, along with the rapid growth in the economy of India, kickstarted the banking
sector in India, which has seen rapid growth with strong contribution from all the three
sectors of banks namely government banks, private banks and foreign banks.
The next stage for the Indian banking has been setup with the proposed relaxation
in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be
given voting rights which could exceed the present cap of 10% at present it has gone up
to 49% with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this
time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of
functioning. The new wave ushered in a modern outlook and tech-savvy methods of
working for traditional banks. All this led to the retail boom in India. People not just
demanded more from their banks but also received more.
CURRENT SCENARIO:
Currently (2007), overall, banking in India is considered as fairly mature in terms

of supply, product range and reach-even though reach in rural India still remains a
challenge for the private sector and foreign banks. Even in terms of quality of assets and
capital adequacy, Indian banks are considered to have clean, strong and transparent
balance sheets-as compared to other banks in comparable economies in its region. The
Reserve Bank of India is an autonomous body, with minimal pressure from the
government. The stated policy of the Bank on the Indian Rupee is to manage volatility-
without any stated exchange rate-and this has mostly been true.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its
stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an
investor has been allowed to hold more than 5% in a private sector bank since the RBI
announced norms in 2005 that any stake exceeding 5% in the private sector banks would
need to be vetted by them.
29
Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector

banks (that is with the Government of India holding a stake), 29 private banks (these do
not have government stake; they may be publicly listed and traded on stock exchanges)
and 31 foreign banks. They have a combined network of over 53,000 branches and
17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector
banks hold over 75 percent of total assets of the banking industry, with the private and
foreign banks holding 18.2% and 6.5% respectively.
RESERVE BANK OF INDIA (RBI):
The Reserve Bank of India (RBI) is the central bank of India, and was established
on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act,
1934. Since its inception, it has been headquartered in Mumbai. Though originally
privately owned, RBI has been fully owned by the Government of India since
nationalization in 1949.
Classification of RBIs functions:
The monetary functions also known as the central banking functions of the RBI
are related to control and regulation of money and credit, i.e., issue of currency, control
of bank credit, control of foreign exchange operations, banker to the Government and to
the money market. Monetary functions of the RBI are significant as they control and
regulate the volume of money and credit in the country.
Equally important, however, are the non-monetary functions of the RBI in the
context of India's economic backwardness. The supervisory function of the RBI may be
regarded as a non-monetary function (though many consider this a monetary function).
The promotion of sound banking in India is an important goal of the RBI, the RBI has
been given wide and drastic powers, under the Banking Regulation Act of 1949 - these
30
powers relate to licensing of banks, branch expansion, liquidity of their assets,

management and methods of working, inspection, amalgamation, reconstruction and
liquidation. Under the RBI's supervision and inspection, the working of banks has greatly
improved. Commercial banks have developed into financially and operationally sound
and viable units. The RBI's powers of supervision have now been extended to non-
banking financial intermediaries. Since independence, particularly after its nationalisation
1949, the RBI has followed the promotional functions vigorously and has been
responsible for strong financial support to industrial and agricultural development in the
country.
The Bank was constituted for the need of following:
To regulate the issue of banknotes

To maintain reserves with a view to securing monetary stability and
To operate the credit and currency system of the country to its advantage
Functions of Reserve Bank of India:
The Reserve Bank of India Act of 1934 entrust all the important functions of a
central bank the Reserve Bank of India.
Banker to Government:
The second important function of the Reserve Bank of India is to act as

Government banker, agent and adviser. The Reserve Bank is agent of Central
Government and of all State Governments in India excepting that of Jammu and Kashmir.
The Reserve Bank has the obligation to transact Government business, via, to keep the
cash balances as deposits free of interest, to receive and to make payments on behalf of
the Government and to carry out their exchange remittances and other banking
31
operations. The Reserve Bank of India helps the Government - both the Union and the
States to float new loans and to manage public debt. The Bank makes ways and means
advances to the Governments for 90 days. It makes loans and advances to the States and
local authorities. It acts as adviser to the Government on all monetary and banking
matters.
Controller of Credit:
The Reserve Bank of India is the controller of credit i.e. it has the power to
influence the volume of credit created by banks in India. It can do so through changing
the Bank rate or through open market operations. According to the Banking Regulation
Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking
system not to lend to particular groups or persons on the basis of certain types of
securities. Since 1956, selective controls of credit are increasingly being used by the
Reserve Bank.
As supreme banking authority in the country, the Reserve Bank of India,

therefore, has the following powers:
(a) It holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through quantitative and qualitative controls.
(c) It controls the banking system through the system of licensing, inspection and calling
for information.
(d) It acts as the lender of the last resort by providing rediscount facilities to scheduled
banks.
MAJOR BANKS IN INDIA:
32
In India the banks are being segregated in different groups. Each group has their
own benefits and limitations in operating in India. Each has their own dedicated target
market. Few of them only work in rural sector while others in both rural as well as urban.
Many even are only catering in cities. Some are of Indian origin and some are foreign
players.
The RBI has shown certain interest to involve more of foreign banks than the
existing one recently. This step has paved a way for few more foreign banks to start
business in India.
MAJOR BANKS IN INDIA
ABN-AMRO Bank Abu Dhabi Commercial Bank

American Express Bank Andhra Bank
Allahabad Bank Bank of Baroda
Bank of India Bank of Maharastra
Bank of Punjab Bank of Rajasthan
Bank of Ceylon BNP Paribas Bank
Canara Bank Catholic Syrian Bank
Central Bank of India Centurion Bank
China Trust Commercial Bank Citi Bank
City Union Bank Corporation Bank
Dena Bank Deutsche Bank
Development Credit Bank Dhanalakshmi Bank
Federal Bank HDFC Bank
HSBC ICICI Bank IDBI Bank
Indian Bank Indian Overseas Bank
IndusInd Bank ING Vysya Bank
Jammu & Kashmir Bank JPMorgan Chase Bank
Karnataka Bank Karur Vysya Bank
Laxmi Vilas Bank Oriental Bank of Commerce
Punjab National Bank Punjab & Sind Bank
Scotia Bank South Indian Bank
Standard Chartered Bank State Bank of India (SBI)
33
State Bank of Bikaner & Jaipur State Bank of Hyderabad

State Bank of Indore State Bank of Mysore
State Bank of Saurastra State Bank of Travancore
Syndicate Bank Taib Bank
UCO Bank Union Bank of India
United Bank of India United Bank Of India
United Western Bank UTI Bank
Vijaya Bank
Primary Data Analysis:
The data collected through the survey has been put to analysis using percentage.
The basis of this analysis is the interview schedule design to collect the various responses
from the customer.
Table No. 4.1

Table showing the Gender of the respondents
Gender Number of respondents Percentage

Male 83 83
Female 17 17
Total 100 100
Analysis:
The above table indicates that 83% of the respondents are male and 17% of the
respondents are female.
Inference:
The majority of the respondents are Male.
34
Gender of the respondents
90 83
80
70
60
50
40
30
17
20
10
0
Male Female
% of the respondents
35
Table No. 4.2

Table showing the age group of the respondents
Age group Number of respondents Percentage

Below 20 0 0
20 – 30 43 43
30 – 40 32 32
40 – 50 15 15
Above 50 10 10
Total 100 100
Analysis:
The above table reveals that, 43% of the respondents belong to the age group of
above 20 – 30 years, 32% of the respondents belong to the age group of 30 – 40 years,
15% of the respondents belong to the age group of 40 – 50 years and 10% of the
respondents belong to the age group of above 50 years.
Inference:
Majority of the respondents belong to the age group of above 20 – 30 years.
36
Age group of the respondents
50
43
40
32
30
20 15
10
10
0
0
Below 20 20 – 30 30 – 40 40 – 50 Above 50
37
Table No. 4.3

Table showing the educational qualification of the respondents
Educational qualification Number of respondents Percentage

PUC 12 12
Graduation 28 28
Post – Graduation 46 46
Professional 14 14
Total 100 100
Analysis:
The above table shows that 46% of the respondents are Post – Gradate degree
holders, 28% of the respondents are Under Gradate degree holders, 14% of the
respondents are Professionals and 12% of the respondents are PUC.
Inference:
The majority of the respondents are Post – gradate degree holders.
Educational qualification of the respondents
46
28
12 14
Professional
PUC
Graduation
Graduation
Post –
38
Table No. 4.4

Table showing the occupation of the respondents
Occupation Number of respondents Percentage

Employed 34 34
Self employed 35 35
Not employed 24 24
Retired 7 7
Total 100 100
Analysis:
The above table shows that 35% of the respondents are self employed, 34% of the
respondents are employed, 24% of the respondents are not employed and 7% of the
respondents are retired.
Inference:
The majority of the respondents are self employed and employed.
39
Occupation of the respondents
7%
34%
24%
35%
Employed Self employed Not employed Retired
40
Table No. 4.5

Table showing the annual income of the respondents
Annual income Number of respondents Percentage

Less than 1 lakh 27 27
1 - 3 lakhs 45 45
3 - 5 lakhs 20 20
More than 5 lakhs 8 8
Total 100 100
Analysis:
The above table reveals that, 45% of the respondents belong to the annual income
of 1 -3 lakhs, 27% of the respondents belong to the annual income of less than 1lakhs,
20% of the respondents belong to the annual income of 3 - 5 lakhs and 8% of the
respondents belong to the annual income of more than 5 lakhs.
Inference:
The majority of the respondent’s annual income is 1 – 3 lakhs.
41
Annual income of the respondents
50 45
40
27
30
20
20
8
10
0
Less than 1 1 - 3 lakhs 3 - 5 lakhs More than 5
lakh lakhs
Table No. 4.6

42
Table showing the annual savings of the respondents
Occupation Number of respondents Percentage

Less than Rs.10,000 16 16
Rs.10,001 – Rs.25,000 44 44
Rs.25,001 – Rs.75,000 30 30
Rs.75,001 & above 10 10
Total 100 100
Analysis:
The above table shows that, 44% of the respondents are saving Rs.10,001–
Rs.25,000 annually, 30% of the respondents are saving Rs.25,001 – Rs.75,000 annually,
16% of the respondents are saving less than Rs.10,000 annually and 10% of the
respondents are saving Rs.75,000 & above annually.
Inference:
The majority of the respondents annual savings is Rs. 10001 – Rs.25,000.
43
Annual savings of the respondents
10% 16%
Less than Rs.10,000

Rs.10,001 – Rs.25,000
30%
Rs.25,001 – Rs.75,000
Rs.75,001 & above
44%
Table No. 4.7

Table showing the stream of investment which yield high returns
44
Stream of investment Number of respondents Percentage

Equity 70 70
Bonds 4 4
Mutual funds 20 20
Combination of all 6 6
Total 100 100
Analysis:
The above table reveals that, 70% of the respondents are saying that investing in
equity will yield high return, 20% of the respondents are saying that investing in mutual
funds will yield high return, 6% of the respondents are saying that investing in
combination of all will yield high return and 4% of the respondents are saying that
investing in bonds will yield high return.
Inference:
The majority of the respondents are saying that investing in equity will yield high
return.
45
Stream of investment which yield high return
70
60
50
40 70
30
20
20
10 6
4
0
Equity Bonds Mutual funds Combination
of all
Table No. 4.8

Table showing whether the respondents have invested in banking shares
46
Particulars Number of respondents Percentage

Yes 57 57
No 43 43
Total 100 100
Analysis:
The above table reveals that, 57% of the respondents have invested in banking
shares and 43% of the respondents have not invested in banking shares.
Inference:
The majority of the respondents are invested in banking shares.
Whether invested in banking shares
57
60
43
50
40
30
20
10
0
Yes No
Table No. 4.9

Table showing the amount invested in banking shares by the respondents
47
Investments Number of respondents Percentage

Less than Rs. 10000 14 25
Rs. 10001- 25000 28 49
Rs. 25001- 50000 10 17
More than RS. 50000 5 9
Total 57 100
Analysis:
The above table shows that, 49% of the respondents invested in banking shares
between Rs.10,001– Rs.25,000, 25% of the respondents are invested in banking shares
less than Rs. 10,000, 17% of the respondents are invested in banking shares between
Rs.25,001 – Rs. 50,000 and 9% of the respondents are invested in banking shares for
more than Rs. 50,000.
Inference:
The majority of the respondents are invested in banking shares between Rs.
10,001 – 25,000.
48
Amount invested in banking shares
Less than Rs. 10000

9%
25%
17% Rs. 10001- 25000
Rs. 25001- 50000
49% More than RS. 50000
Table No. 4.10
49
Table showing the expected return on the banking shares in a period of one year by
the respondents
Expected Return Number of respondents Percentage

0 – 15% 14 25
15 – 30% 27 47
30 – 45% 16 28
Total 57 100
Analysis:
The above table shows that, 47% of the respondents are expecting a return of 15-
30%, 28% of the respondents are expecting a return of 30-45% and 25% of the
respondents are expecting a return of 0-15%.
Inference:
The majority of the respondents are expecting a return of 15-30%.
50
The expected return on the banking shares
50 47
40
28
30 25
20
10
0
0 – 15% 15 – 30% 30 – 45%
Table No. 4.11
51
Table showing the expected risk level on bank shares by the respondents
Expected Risk Number of respondents Percentage

Low 4 7
Medium 22 39
High 31 54
Total 57 100
Analysis:
The above table shows that, 54% of the respondents are expecting a high level of
risk, 39% of the respondents are expecting a medium level risk and 7% of the
respondents are expecting a low level of risk.
Inference:
The majority of the respondents are expecting high and medium level of risk by
investing in banking shares.
52
The expected risk level on bank shares
7%
Low
Medium
54% 39% High
Table No. 4.12

Table showing the maximum holding period of bank shares by the respondents
53
Period of investment Number of respondents Percentage

0 – 6 months 8 14
6 – 12 months 9 16
1 – 3 years 27 47
3 years & above 13 23
Total 57 100
Analysis:
The above table shows that, 47% of the respondents are holding the banking
shares for a period of 1-3 years, 23% of the respondents are holding the banking shares
for a period of more than 3 years, 16% of the respondents are holding the banking shares
for a period of 6-12 months and 14% of the respondents are holding the banking shares
for a period of 0-6 months.
Inference:
The majority of the respondents are holding the banking shares for 1-3 years.
54
The maximum holding period of investment
50 47
45
40
35
30
25 23
20 % of the respondents
16
14
15
10
5
0
0–6 6 – 12 1–3 3 years
months months years & above
Table No. 4.13
Table showing the respondents view on government policy affect on banking shares
55

Yes 49 86
No 8 14
Total 57 100
Analysis:
The above table reveals that, 86% of the respondents are saying that government
policy is influencing the banking shares and 14% of the respondents are saying that
government policy is not influencing the banking shares.
Inference:
The majority of the respondents are saying that government policy is influencing
the banking shares.
56
Banking shares affected by government policy
86
100
80
60
40
14
20
0
Yes No
Table No. 4.14
57
Table showing the respondents view on government measure to save investors

interest

Yes 37 65
No 20 35
Total 57 100
Analysis:
The above table reveals that, 65% of the respondents are saying that government
is caring to save the investors interest and 35% of the respondents are saying that
government is not caring to save the investors interest.
Inference:
The majority of the respondents are saying that government is taking care to save
the investors interest.
58
Government caring for investor's interest
70
60
50
40 65
30
35
20
10
0
Yes No
Secondary data analysis:
59
The study was conducted by considering both primary and secondary data, for the
secondary data a group of ten banks were selected on the basis of high market
capitalisation and a performance analysis is done to measure the risk and returns form the
selected shares for a period of one year. For data analysis the following measuring tools
has been used,
Security return:
The actual return is the realized return on the investment in a particular period of
time. Here the actual return is calculated for a period of one year the formula to calculate
the return is given below,
Today’s price – Yesterday’s price

Today’s security return = --------------------------------------------
Yesterday’s price
Summation of all day’s return will give the security return for a particular period.
Beta:
Beta describes the relationship between the stocks return and the index return.
Beta is represented by the symbol β, it is considered to measure the systematic risk. Beta
is calculated by using the following formula,
N∑XY - ∑X∑y X= Index return

β = -------------------------- Y= Security return
N∑X2 – (∑X) 2 N= No of days
60
Alpha:
It indicates that the stock return is independent of the market return. A positive
value of alpha is healthy sign; alpha is calculated by using the following formula,
ALPHA (α) = Y –( β*x)

Note: In the above formula
Y = mean of security
X = mean of market return
Correlation:
Correlation co-efficient measures the nature and the extent of relationship

between the stock market index return and the stock return in a particular period. The
following formula can be used to find the correlation,
n∑XY – (∑X) (∑Y)

Correlation(r) = -------------------------------------------
√n∑X²- (∑X)² – √n∑Y² - (∑Y)²
Note: In the above formula

X= Index return
Y= Security return
N= No of days
4.15 TABLE SHOWING THE PERFORMANCE ANALYSIS OF BANK OF

BARODA SHARE FOR A PERIOD OF ONE YEAR
61
RETURN - .41 %
BETA 0.50%
ALPHA 0.02%
VARIANCE 10%
STANDARD DEVIATION 3.1%
CORRELATION 28%
Analysis:
Return: The actual return for the period of one year is calculated by -.41 per cent.
Beta: It describes the relationship between the stocks return and the individual return. In
the above case beta indicates a 1 per cent change in NSE index return would cause .5 per
cent change in the Bank of Baroda stock return.
Alpha: It indicates that the stock return is independent of the market return, in the above
case it shows a 0.2 per cent that shows the stock may earn positive return.
Variance: The variance is a somewhat abstract measure of the variability in a set of data;
here the variance is calculated as 10 per cent.
Standard Deviation: The standard Deviation for a period of one year is calculated as
3.1 per cent.
Correlation: The Correlation is 28 per cent. This means 28 per cent of the stock return
and mark return are Co-related, because they are moving in the same direction and
remaining 72 per cent are moving in the opposite direction.
Inference:
62
From the analysis we came to know that the share has earned a negative return
with less beta value that shows the investment earned a less return with less risk.
Graph showing risk and return
30.00% 28.00%
25.00%
20.00%
15.00%
10%
10.00%
5.00% 3.10%
-0.41% 0.50% 0.02%
0.00%
CORRELATION
RETURN
BETA
DEVIATION
ALPHA
STANDARD
-5.00% VARIANCE
4.16 TABLE SHOWING THE PERFORMANCE ANALYSIS OF CANARA BANK

SHARE FOR A PERIOD OF ONE YEAR
63
RETURN -18.23%
BETA 1.27%
ALPHA -.13%
VARIANCE 9.9%
CORRELATION 71%
Analysis:
Return: The actual return for the period of one year is calculated by -18.23 per cent.
the above case beta indicates a 1 per cent change in NSE index return would cause 1.27
per cent per cent change in the Canara Bank stock return.
case it shows a -.13 per cent that shows the stock may earn negative return.
here the variance is calculated as 9.9 per cent.
3.15 per cent.
Inference:
64
with high beta value, so the share price is highly affected by the market sensitivity that
made loss in the investment.
Graph showing the risk and return
CORRELAT ION
ST ANDARD DEVIAT ION
VARIANCE
ALP HA
BET A
RET URN
-20.00%
-10.00%0.00% 10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%
RET UR VARIAN ST AND CORRE

BET A ALPHA
N CE ARD LAT IO
-18.23% 1.27% -0.13% 9.90% 3.15% 71%
4.17 TABLE SHOWING THE PERFORMANCE ANALYSIS OF FEDERAL

BANK SHARE FOR A PERIOD OF ONE YEAR
65
RETURN 18.29%
BETA 1.11%
ALPHA 0.02%
VARIANCE 9.1%
STANDARD DEVIATION 3%
CORRELATION 65%
Analysis:
Return: The actual return for the period of one year is calculated by 18.29 per cent.
per cent per cent change in the Federal bank stock return.
Standard Deviation: The standard Deviation for a period of one year is calculated as 3
per cent.
Inference:
66
From the analysis we came to know that the share has earned a good return with
high beta value that shows the investment earned a high return with high risk.
70.00% 65%
60.00%
50.00%
40.00%
30.00%
18.29%
20.00% 9.10%
10.00% 1.11% 0.02% 3%
0.00%
ALPHA
DEVIATION
BETA
CORRELATION
RETURN
STANDARD
VARIANCE
4.18 TABLE SHOWING THE PERFORMANCE ANALYSIS OF HDFC BANK

67
RETURN 27.76%
BETA 0.82%
ALPHA 0.08%
VARIANCE 5.6%
CORRELATION 61%
Analysis:
per cent per cent change in the HDFC bank stock return.
per cent.
Inference:
68
high beta value that shows the investment earned a high return with high risk.
70.00% 61%
60.00%
50.00%
40.00%
27.76%
30.00%
20.00%
10.00% 5.60% 2.30%
0.82% 0.08%
0.00%
ALPHA
BETA
DEVIATION
CORRELATION
STANDARD
RETURN
VARIANCE
4.19 TABLE SHOWING THE PERFORMANCE ANALYSIS OF ICICI BANK

69
RETURN 44.27%
BETA 0.92%
ALPHA 0.14%
VARIANCE 5.8%
CORRELATION 68%
Analysis:
the above case beta indicates a 1 per cent change in NSE index return would cause .92
per cent change in the ICICI Bank stock return.
2.4 per cent.
Inference:
70
less beta value that shows the investment earned a high return with less risk.
80.00% 68%
70.00%
60.00%
50.00% 44.27%
40.00%
30.00%
20.00%
5.80% 2.40%
10.00% 0.92% 0.14%
0.00%
ALPHA
BETA
DEVIATION
CORRELATION
RETURN
STANDARD
VARIANCE
4.20 TABLE SHOWING THE PERFORMANCE ANALYSIS OF J & K BANK

71
RETURN 44.61 %
BETA 0.71%
ALPHA 0.15%
VARIANCE 7.3%
CORRELATION 47%
Analysis:
per cent change in the J & K Bank stock return.
2.7 per cent.
Inference:
72
less beta value that shows the investment earned a high return with less risk.
50.00% 44.61% 47%

45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00% 7.30%
10.00% 2.70%
5.00% 0.71% 0.15%
0.00%
ALPHA
BETA
DEVIATION
CORRELATION
STANDARD
RETURN
VARIANCE
4.21 TABLE SHOWING THE PERFORMANCE ANALYSIS OF ORIENTAL

BANK SHARE FOR A PERIOD OF ONE YEAR
73
RETURN - 12 %
BETA 1.02%
ALPHA -0.09%
VARIANCE 8.3%
CORRELATION 63%
Analysis:
Return: The actual return for the period of one year is calculated by -12 per cent.
per cent change in the Oriental Bank stock return.
case it shows a -0.09 per cent that shows the stock may earn positive return.
2.9 per cent.
Inference:
74
with high beta value, so the share price is highly affected by the market sensitivity that
made loss in the investment.
CORRELAT ION 63%
ST ANDARD DEVIAT ION 2.90%
VARIANCE 8.30%
ALPHA -0.09%
BET A 1.02%
-12% RET URN
-20% -10% 0% 10% 20% 30% 40% 50% 60% 70%
4.22 TABLE SHOWING THE PERFORMANCE ANALYSIS OF PNB BANK

75
RETURN 9.06 %
BETA .96%
ALPHA -0.01%
VARIANCE 8.3%
CORRELATION 66%
Analysis:
per cent change in the PNB Bank stock return.
case it shows a -0.01 per cent that shows the stock may earn positive return.
2.6 per cent.
Inference:
76
less beta value that shows the investment earned favorable return with less risk.
graph showing risk and return
70.00% 66%
60.00%
50.00%
40.00%
30.00%
20.00%
9.06% 8.30%
10.00% 0.96% -0.01% 2.60%
0.00%
ALPHA
DEVIATION
CORRELATION
BETA
RETURN
STANDARD
VARIANCE
-10.00%
4.23 TABLE SHOWING THE PERFORMANCE ANALYSIS OF SBIN BANK

77
RETURN 8.98%
BETA .88%
ALPHA 0%
VARIANCE 5%
CORRELATION 69%
Analysis:
per cent change in the SBIN Bank stock return.
case it shows a 0 per cent that shows the stock may earn positive return.
2.25 per cent.
Inference:
78
From the analysis we came to know that the share has earned a favorable return
with less beta value that shows the investment earned a return with less risk.
80.00% 69%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00% 8.98%
10.00% 5% 2.25%
0.88% 0%
0.00%
ALPHA
BETA
DEVIATION
CORRELATION
RETURN
STANDARD
VARIANCE
4.24 TABLE SHOWING THE PERFORMANCE ANALYSIS OF UTI BANK

79
RETURN 43.39%
BETA 0.98%
ALPHA 0.13%
VARIANCE 9%
STANDARD DEVIATION 3%
CORRELATION 58%
Analysis:
per cent change in the UTI Bank stock return.
per cent.
Inference:
80
From the analysis we came to know that the share has earned a high return with
less beta value that shows the investment earned a good return during a period of one
year with less risk.
70.00%
58%
60.00%
50.00% 43.39%
40.00%
30.00%
20.00% 9%
10.00% 0.98% 0.13% 3%
0.00%
ALPHA
DEVIATION
CORRELATION
BETA
STANDARD
RETURN
VARIANCE
SUMMRY OF FINDINGS, CONCLUSIONS AND SUGGESTIONS:
81
5.1 Findings:
It is to be noted that this project is on “RISK AND RETURNS OF EQUITY

INVESTMENT ON BANKING SECTOR“was carried out to analyse the performance of
the banking sector stocks and to know the investors response on investment in this
industry. Though the analysis are completed the following findings have been made,
• Most of the inventors feel the equity investment yields a high return than other
investments.
• Form the analysis we found that the majority of the investors have invested in
banking shares.
• As we observe majority of the investors feel that the investment in banking sector
includes high risk.
• The investors have a preference to hold the bank stocks for a medium term of 1-3
years.
• The investors feel that the government policy has more impact on the share price.
• A considerable number of respondents feel that the government is not saving the
interest of the investors.
• Form the performance analysis done on the selected shares it is noted that most of
the shares earned a high return by over coming the market risk that shows the growth
prospectus of the banking sector.
5.2 Conclusion:
82
This study has dealt with the risk and returns on equity investment on banking
sector reveals that the investors are in a critical dilemma in respect of taking correct
decision on investing in banking sector since the industry is influenced by the market
very much but at the same time some shares are performed extremely well in spite of
market influence.
As the study was undertaken by considering both primary and secondary data it is
clear that the investing in banking shares includes high risk at the same time it earns
extremely high return which is revealed by the performance analyses on selected banking
shares and the investor’s perception on the banking industry is also in a favour position
that was known by the survey result that most of the investors are invested in banking
shares and the they are expecting a high return with high and medium term of risk. Hence
this study was undertaken.
5.3 Suggestions:
The following are the suggestions proposed after carrying the study,
Investment:
Since equity investment yields high return the investors are suggested to invest
regularly and invest for long term to earn maximum returns with minimum risk.
Long term investment:
Since the Indian economy is growing rapidly there will be a good return in the
banking sector investments, so it is suggested to hold the shares for a long term of more
that 5 years.
Risk minimizing;
83
To be safer it is suggested to take the advisers help to take the correct decision
and to keep constant watch on the states of economy to grow the investment.
Growth prospectus:
The banking industry is having the highest growth opportunity in the near future,
since banking plays an important role in the economic development. As we know Indian
economy is growing at a constant growth of 9% it is expected that banking will be
highest performer in the up coming years.
Measures by Government:
The government has to take measures to save the interest of the investors while
framing the policy. Since all the Indian banks are functioning under the regulation of
central bank (RBI) the government policy will have direct impact on bank shares, so it is
be noted by SEBI to control the volatility in the share price.
84
Bibliography:
Bhole.L.M, Financial Institutions and Markets (4th Edition chap 2 page: 2.1-2.17 Tata
McGraw-Hill Publishing Company Limited)
Prasanna Chandra Financial management (6th Edition Tata McGraw-Hill

Publishing Company Limited)
Punithavathy Pandian security analysis and portfolio management (Vikash publishing

house pvt ltd)
Website referred in Internet:
WWW.Nseindia.com
WWW.Bseindia.com
WWW.RBI.org
WWW.SEBI.com
WWW.Riskmatrics.com
85
I am G.Selva Kumar studying in IV semester MBA in The Oxford College of

Business management studies, doing a survey on “A Study on Risk and Returns of Equity
Investment on Banking Sector”, so I request you to fill this questionnaire. Your opinion
will be kept confidential and will not be disclosed to anybody, and is used for academic
purpose only.
QUESTIONNAIRE
Kindly fill up the following questionnaire.

1. Name :
2. Gender:  Male  Female
3. Age
 Less than 20  20 – 30  31 – 40  41 – 60
 More than 60
4. Educational qualification
 PUC  Graduation  Post-Graduation
 Professional  Others (Please Specify) …………..
5. Occupation
 Employed
 Self employed
 Not employed
 Retired
86
6. Annual income (in Rs.)

 Less than 1 lakh
 1 – 3 lakhs
 3 – 5 lakhs
 More than 5 lakhs
7. Annual savings (in Rs.)

 Less than Rs 10,000
 Rs 10,000 – 25,000
 Rs 25,001 – 75,000
 Rs 75,001 & above
8. In which stream of investment you can expect a high return?
 Equity
 Bonds
 Mutual funds
 Combination of all
9. Have you invested in banking shares?
Yes
No
10. If yes, how much you have invested?
 Less than Rs 10,000

 Rs 10001- 25000
 Rs 25001- 50000
 More than Rs 50000
87
11. What is your expected return on the banking shares in a period of one year?
 0-15%  15-30%  30-45%
12. What is the expected risk level on bank shares?
 Low  Medium  High
13. What is the maximum period of your investment?
 0-6 months
 6-12 months
 1-3 years
 3years or above
14. Do you think banking shares are affected by government policy?
Yes  No
15. Dose the investor’s interest is taken care by the government?
Yes  No
THANK YOU FOR SPENDING YOUR VALUABLE TIME
88

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Risk and Returns Of Equity Investment On Banking Sector

1.1 INVESTMENT AN OVERVIEW:

Investment is the employment of fund with the aim of achieving additional

Investment is the allocation of monetary resources to assets that are expected to

One needs to invest to:

FACTORS INFLUENCING INVESTMETN:

1. Increasing rate of taxation.

SHORT TERM LONG TERM

Savings Bank Account Post Office Savings

Money Market or Liquid Funds Public Provident Fund

Fixed Deposits with Banks Company Fixed Deposits

Securities [Shares, Bonds]

1.2 EQUITY INVESTMENT AN OVERVIEW:

Why do companies need to issue shares to the public?

Why should one invest in equities in particular?

When a person buys a share of a company he becomes a shareholder in that

This may be illustrated with the help of following examples:

What has been the average return on Equities in India?

Which are the factors that influence the price of a stock?

The stock-specific factor is related to people’s expectations about the company,

What is meant by the terms Growth Stock / Value Stock?

How can one acquire equity shares?

"Risk" is the investor's four-letter word. Everybody is risk-averse. Risk can be

1] Systematic risk and

Systematic risk Unsystematic risk

Market risk or Economic risk Business risk

Interest rate risk Financial risk

Purchase power risk

Systematic risk is non-diversifiable and is associated with securities market as

INTERSET RATE RISK:

PURCHASE POWER RISK:

Unsystematic risk is unique to a firm of industry. It dose not affect an average

TOOLS TO MEASURE RISK:

The most important part of the equation is β of beta. It is used to describe

Beta is referred to as systematic risk to the market and +E the unsystematic

STANDARD DEVIATION AND VARIANCE:

Standard Deviation (σ) = ∑ Pі (Ri-E(R)) ²

The variance is a somewhat abstract measure of the variability in a set of data.

Variance (σ²) = √ ∑ Pi (R-E(R) ²)

While standard deviation is an excellent measure for calculation o risk of

A major purpose of investment is to set a return or income on the funds

1. Internal rate of return

 INTERNAL RATE OF RETURN:

In finance, rate of return (ROR) or return on investment (ROI) is the ratio of

Annual income + (Ending price – Beginning price)

 HOLDING PERIOD RETURN:

2.1 RESEARCH DESIGN:

2.2 TITLE OF THE STUDY:

“A STUDY ON RISK AND RETURNS OF EQUITY INVESTMENT ON BANKING

2.3 REVIEW OF LITERATURE:

Econometric Estimation of Systematic Risk of Nifty-Fifty Constituents

Estimation problems particularly arising from infrequent trading of stocks could be

Nature of the Problem

In financial econometrics, systematic risk of investing in any stock is generally

Three approaches to estimation:

Summary, conclusions of the study:

2.4 STATEMENT OF PROBLEM:

By considering the above problem this study is structured to analyse the

2.5 OBJECTIVES OF THE STUDY:

 To reveal the investors about the performance of banking company

 To identify, measure, monitor and manage risk in the equity

2.6 SCOPE OF THE STUDY:

Sources of data collection: