Bank Management

PGDM
IIMC
2020
Praloy Majumder
1
Session Two

2
Poll 1

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Analysis of bank balance sheet

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 HDFC Bank As on March 31 ,2020 ( ITC Limited as on March 31, 2020 ( Rs crores )
Rs crores )
% of total % of total
Equity share 548.33 0.04% Equity share 1229.22 1.63%
Capital Capital
Reserves and 170437.70 11% Reserves and 62799.94 83.47%
Surplus Surplus
Share holders 170986.03 11.17% Share holders 64029.16 85.11%
fund fund
Deposits 1147502.29 74.98% Non current 2116.79 2.81%
liability
Borrowings 144628.54 9.45% Current liability 9089.41 12.08%
and provisions
Other liabilities 67394.40 4.40%
and provisions

Total Liabilities 1359525.23 88.83% Total Liabilities 11206.20 14.89%

Total Capital Total Capital

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and Liabilities 1530511.26 100.00% and Liabilities 75235.36 100.00%
 Analysis Liability Side…
• In Bank : Equity and reserve component is
much less than that of a manufacturing
company .
• In Bank : TOL is higher;
• Financial leverage is significantly higher in
case of a bank compared to that of a
manufacturing company .
• If the financial leverage is higher , the risk of
bank is also higher .

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 HDFC Bank As on March 31 ITC Limited as on
,2020 March 31, 2020
Rs crores % of total Rs crores % of total

Cash and 72205.12 4.72% Cash and 6843.27 9.10%

Bank with Bank
RBI
Balance with 14413.60 0.94% Investment 30630.61 40.71%
Banks
Investments 391826.66 25.60% Loans 4333.66 5.76%
Advances 993702.88 64.93% Receivable 2092.00 2.78%
Financial 1472148.26 96.19% Financial 43899.54 58.35%
Assets Assets
Fixed Asset 4431.92 0.29% Fixed Asset 23297.75 30.97%
Other Assets 53931.09 3.52% Inventories 8038.07 10.68%

Physical 58363.01 3.81% Physical 31335.82 41.65%

Assets Assets
Total Assets 1530511.27 100.00% Total Assets 75235.36 100.00%

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 Analysis Asset Side…
• Bank: Fixed asset part is significantly lower
compared to that of the manufacturing
company .
• Bank : Financial asset in the form of loans and
advances are significantly higher compared
to that of the manufacturing company .
• Bank : Financial Investment is also higher
compared to that of manufacturing company
.
• Bank’s assets are financial where reduction of
price can be much faster.
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 Off Balance Sheet Items …
• Besides the on balance sheet items i.e. Assets
and Liabilities , Banks do have large amount
of Off Balance Sheet Items
• In the case of Off Balance Sheet items, some
of them are traded and some of them are not
traded.
• For Off Balance sheet items risks are quite
high and this must be captured to contain the
risk.
• Off Balance Sheet non traded items are
associated with Credit Risk
• Off Balance Sheet traded items are associated
with mainly Market Risk
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 Complex Holding Structure
……
• Banks are holding lot of investments in their
books which is originated in the complex
structures
• This complex structure makes it very difficult
for the regulator to identify the risk and also
to quantify the risks
• This complex structure should be also be
addressed to contain the risk of the system
• The ring fencing strategy has to be adopted
to contain the risk :
– Study the recent draft guidelines of RBI
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 Process of Reducing the risk
Liability Side Asset Side Process
Impact Reduce the riskiness
Reduce the Risk of asset by proper
By Increasing the regulation : capital
Capital : market exposure ;
Capital Adequacy Reg concentration
Ratio ; ulati exposure ;
By Reducing the ons Marking the asset as
dependence on per market value ;
Short term Maintenance of
liability Liquid asset ;
ALM

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Players of Indian Banking
System

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Poll 2

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Different types of banks in
India

Banks

Small
Commercial Payment
Finance
Bank Bank
Bank

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 Commercial banks

Commercial
Bank

Public Private Foreign

Sector Bank Sector Bank Bank

SBI Nationalised Old New WOS Branches

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 Indian Banking System:
Commercial Bank

Indian Banking
System

Regional Rural Bank

Commercial Cooperative
&
Bank Bank
LAB

PSU Banks Private Bank Foreign Bank

SBI & Associates New

Nationalised Bank Old

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 Indian Banking Situation
• Commercial Banking in India is divided into
two types namely :
– Scheduled Banks and
– Non Scheduled Banks .
• Scheduled Bank -Bank registered under the
Second Schedule of the RBI Act.
– Participation in clearing
– Offering of non fund based product

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 Indian Banking Situation
• Ownership wise , Indian banking can be
segregated into the following :
– PSU Banks
– Private Banks
– Foreign Banks
• Under PSU Banks we have SBI Group and
Nationalized Banks .
– SBI groups consist of SBI and Associate Banks .
– Nationalized Banks are those banks where the
majority shareholding is in the hand of
government .

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 Indian Banking Situation
• Under the Private Sector banks we have two
types of Private Sector Banks.
– Old Private Sector banks
– New Private Sector banks
• Under the foreign banks, parent banks are the
foreign entity and they are treated as foreign
banks by the regulator .
• Banks at the localized level:
– Co Operative Banks , Local Area Bank and
Regional Rural Bank.

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 New Development
• Two new commercial banks are given
licenses :
– Bandhan Bank
– IDFC Bank
• 11 Payment bank licenses have been
given to improve the payment process
• Small banks licenses are also awarded
to 12 new players.
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 Payment Banks
• Technology enabled services
• Can change the banking deposit pattern
significantly
• Traditional big banks can loose deposits
from depositors
• Using technology can be lowering of
operational cost

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 Payment Banks
• Can only take deposits to the tune of Rs
1,00,000/-
• Can not lend
• Can invest the deposit to government of
India securities
• Can cross sell lot of products to increase
income

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 Payment Banks
• Can work as a lead generator for the
existing bank due to superior
technology back up
• Mandatory investment in Government
Securities can release the fund from the
commercial bank and thus investment
in the infrastructure can take place
• Can cross sell many other products
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 Small Finance Banks
• Small banks would lend to the micro
and small enterprise
• Small banks can take the business of the
traditional banks and thus can impact
the profitability of the traditional banks
• Traditional way of lending can lead to
bad assets of small banks
• Innovative ways of lending can create
lot of opportunities
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Market share

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Financial statement of banks

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Poll 3

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Balance sheet of bank

Equity
Net fixed
asset
Borrowing Investment
Loans and
advances
Deposit Other assets
Cash and
Bank
Other RBI Balance
liabilities

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 Sources of fund from bank

Bank’s fund

Owned Fund Outside Liability

Sub ordinate Borrowing

Borrowing
Capital Tier I Debt Deposits From Central Other liabilities
From Bank
Tier II Bank

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 Composition of sources of
fund of different banks
Small Finance
PSU Bank Private Bank Foreign Bank Bank
% % % %
Capital 0.50% 0.40% 7.36% 5.04%
Reserves and
surplus 5.37% 9.96% 9.15% 6.97%
Demand deposit 5.44% 9.77% 16.27% 2.34%
Savings deposit 27.55% 19.74% 5.63% 8.67%
Term deposit 50.52% 41.66% 33.16% 47.86%
Total deposit 83.50% 71.16% 55.06% 58.87%
Borrowings 7.49% 14.63% 14.35% 25.58%

Other liabilities
and provisions 3.13% 3.84% 14.08% 3.54%

Why Owned fund is higher for Foreign Bank and Small Finance Bank ?
Why borrowing is higher for Private Bank Foreign Bank and Small Finance Bank ?
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Compositions of utilised fund
of different banks in India
PSU Bank Private Bank Foreign Bank Small Finance Bank
% % % %

Cash and
Bank with RBI 4.49% 3.90% 3.18% 2.79%

Cash and
Bank with
other bank 3.54% 3.30% 8.62% 4.85%
Investments 26.59% 23.02% 36.28% 17.90%
Loans and
advances 58.31% 62.80% 37.54% 71.22%
Fixed Assets 1.06% 0.68% 0.42% 1.50%
Other Assets 6.02% 6.29% 13.96% 1.75%

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 Income statement ..…
• Bank’s source of revenue :
– Interest Income ( II)
– Non Interest Income ( OI)
– Securities Gain ( SG)
• Bank’s expenses include :
– Interest Expenses ( IE)
– Non Interest Expenses ( OE)
– Provision for Loan Losses ( PLL)
– Security Losses ( -SG)
– Taxes ( T)

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 Income statement ..…

• Net Interest Income ( NII) = II-IE

– NII= yiAi- cjLj
• Burden = OE-OI
• Efficiency Ratio = (OE)/[II+OI]
• NI = NII- Burden – PLL+SG-T

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 Important ratios
• Burden ratio = (Non Interest expenses- Non
interest income)/ATA
• Efficiency Ratio = Non Interest Income/ (
NII+Non Interest Income )
• Credit Deposit Ratio = Loans and Advances /
Total Deposit ;
• CASA % = Current Account and Savings
Account Amount / Total Deposit ;
• Net Interest Margin = Net Interest Income /
ATA
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 Gross NPA
Particulars Amount
1 Standard Advances
2 Gross NPA
3 Gross Advances ( 1+2)
4 Gross NPA as a % of Gross Advances
5 Deductions
i) Provisions held in NPA account as per Regulatory Norms and above

ii) DICGC/ECGC Claims received but not adjusted

iii) Part payment received but kept in suspense account

iv) Balance in sundries account ( Interest capitalization – restructured account ) in

case of NPA account
v) Floating provisions

vi) Provisions in lieu of diminution in the fair value of restructured accounts

classified as NPA
vii) Provisions in lieu of diminution in the fair value of restructured accounts
classified as Standard asset

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6 Net Advances ( 3-5)
 Gross NPA
Particulars Amount
7 Net NPA ( 2-5)
8 Net NPA % ( 7/6)
Provision coverage Ratio
I Gross NPA + Technical /Prudential Write off
II Sum total
Specific provisions

Provisions in lieu of diminution in the fair value of restructured accounts

classified as NPA
Technical Write Off

Part payment received but kept in suspense account

Floating provisions not used as Tier II

DICGC/ECGC Claims received but not adjusted

Provision Coverage Ratio ( II/ I) *100

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 Implications
Higher capital Higher capital Lower capital
adequacy ratio adequacy ratio adequacy ratio

Higher NIM Higher NIM Lower NIM

Higher GNPA
Low GNPA and Low GNPA and and Lower
Low NNPA Low NNPA NNPA

Lower PCR Higher PCR Higher PCR

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Bank Transaction , bank
profitability and fin tech

Increase in income Decrease in Expenses

How fintech can help banks to achieve the above ?

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Bank’s four new revenue
generating areas

Wealth Management Retail Lending

Digital and
Analytics Capability

Transaction Banking SME Lending

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Bank Transaction , bank
profitability and fin tech

Increase in income Decrease in Expenses

How fintech can help banks to achieve the above ?

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