ravi

A Project Report

On

“A Comparative Study Between Oriental

Bank Of Commerce And State Bank Of India”

Submitted in the partial fulfillment of

Master of Business Administration (MBA)

(Session 2010-12)

Supervisor : S ubmitted By :

Mrs. Praveen Narang Name:Vikas Kumar Pandey

Roll No:

MBA IVth Sem.

Brij Mohan Institute of Management & Technology

Khalikpur, Yakubpur, Distt. Jhajjar, Near Farukhnagar, Gurgaon – 124103

(Affiliated to Maharshi Dayanand University, Rohtak)

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ACKNOWLEDEGEMENT

I would like to express my gratitude and sincere thanks to my Project Guide Mr.S. K. Rao,

Senior Manager of Oriental Bank of Commerce(Sec-14 Gurgaon) for instilling confidence in me

to carry out this study and giving me guidance, without which it would not have been possible to

undertake and complete this project.

I also wish to extend my gratitude, to respected Faculty Guide Mrs.

Praveen Narang, who helped me to complete this project. Their valuable suggestions helped me

at every step. I also acknowledge heartfelt gratitude for all those people who have made available

tons of information required for this Project.

Finally, I thank my MD University, Rohtak for making this experience of Summer

Training in an esteemed organization like Oriental Bank of Commerce.

Vikas Kumar Pandey

MBA (2010-12)

Roll No.-…………….

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Brij Mohan Institute of Management & Technology

Approved by AICTE, Ministry of HRD, Govt. of India

Affiliated to Maharishi Dayanand University (MDU), Rohtak

Yakubpur, Distt. Jhajjar, Near Farrukhnagar (Gurgaon),

Haryana

Ph. 0124-4057653, 322500, 09717098915, 09927025045

Fax: 011-66173969

E-mail: [email protected] Website: www.bimt.edu.in

Ref. No. BIMT/2012 Date __________

DECLARATION

I, Vikas Kumar Pandey Roll No. _________ Class MBA 4th Semester of the

BRIJMOHAN INSTITUTE OF MANAGEMENT & TECHNOLOGY,

KHALIKPUR Distt.JHAJJAR hereby declare that the Project entitled “Capital

Budgeting ”

is an original work and the same has not been submitted to any other Institute for

the award of any other degree. The interim report was presented to the Supervisor

on ___________ and the pre-submission presentation was made on ___________.

The feasible suggestions have been duly incorpated in consultation with the

Supervisor.

Countersigned

Signature of the Supervisor Signature of the Candidate

Forwarded by

Director/Principal of the Institute ~ 3 ~

http://www.bimt.edu.in/

mailto:[email protected]

Table of Contents

Introduction-Purpose..................................................................................................................6

Objectives...................................................................................................................................9

Literature Review.....................................................................................................................10

Research Methodology.............................................................................................................14

Origin And Causes Of The Global Recession.........................................................................15

Impact on The Indian Banking Sector.....................................................................................18

Indian Banking Sector remains a bright spot.......................................................................19

Experts view on Indian Banks and Recession......................................................................20

Indian Banking sector challenged by domestic, not global, factors ..................................... 22

Non-food bank credit...........................................................................................................23

The Performance of Banks in Economic recession in India....................................................26

A Comparative study between OBC and SBI..........................................................................29

Company’s Introduction...........................................................................................................29

Oriental Bank of Commerce (OBC)....................................................................................29

State Bank of India (SBI).....................................................................................................30

Data Analysis and Data Interpretation.....................................................................................33

Financial Statement..............................................................................................................33

Brief Analysis of OBC Balance Sheet:................................................................................34

Brief Analysis of OBC P&L Account:.................................................................................36

Financial Statement..............................................................................................................37

Brief Analysis of SBI Balance Sheet:..................................................................................38

Brief Analysis of SBI’s Profit & Loss A/c:........................................................................40

Common-size Financial Statement Analysis...........................................................................41

Trend Analysis.........................................................................................................................47

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Findings and Recommendations..............................................................................................48

“When US sneezes the world catches cold”........................................................................48

The Indian banking system as an islet of tranquillity in a sea of turbulence.......................48

The Comparative Study reveals...........................................................................................49

Conclusion................................................................................................................................51

References................................................................................................................................52

INTRODUCTION-PURPOSEINTRODUCTION-PURPOSE

In a globalized world no country can be an island, growth prospects of emerging economies have

been undermined by the cascading financial crisis with, of course, considerable variation across

countries. The late-2000s recession (or sometimes the Great Recession) is an economic recession

that began in the United States in December 2007 (and with much greater intensity since

September 2008, according to the National Bureau of Economic Research). It spread to much of

the industrialized world, and has caused a pronounced deceleration of economic activity. This

global recession has been taking place in an economic environment characterized by various

imbalances and was sparked by the outbreak of the financial crisis of 2007–2010. Although the

late-2000s recession has at times been referred to as "the Great Recession," The Global

Recession that began in December 2007 impacted the revenues and profitability of businesses

worldwide. Everywhere around the world is passing through a tough time especially the

developed countries. As most of the developed countries are officially in recessions having more

than two consecutive quarters of negative growth. Although there have been signs of

improvement but it is still not known at this stage how long is this going to last as this is perhaps

known as “The deepest recession in the post-second world war period”.

The fear of a recession looms over the United States. And as the saying goes, whenever the US

sneezes, the world catches a cold. This is evident from the way the Stock markets globally

crashed taking a cue from a probable recession in the US and a global economic slowdown. And

the Weakening of the American economy is bad news, not just for India, but for the rest of the

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world too. So what is a recession? A recession is a decline in a country's gross domestic product

(GDP) growth for two or more consecutive quarters of a year. A recession is also preceded by

several quarters of allowing down an economy which grows over a period of time tends to slow

down the growth as a part of the normal economic cycle. A recession normally takes place when

consumers lose confidence in the growth of the economy and spend less. This leads to a

decreased demand for goods and services which in turn leads to a decreased in production, lay-

off and a sharp rise in unemployment. Investors spend less as they fear stocks values will fall and

thus stock markets fall on negative sentiment. The Indian stock markets also crashed due to a

slowdown in the US economy. The Sensex crashed by nearly 13 per cent in just two trading

sessions in January 2008. The markets bounced back after the US Fed cut interest rates.

The World witnessed extreme tightening of liquidity, shortage of capital and a shaken confidence

leading to collapse and merger of several revered institutions. The Global Economy expanded by

3.2%. While the Advanced Economies expanded by 0.9%, the Emerging Economies expanded

by 6.1%. The World Economy has seen further downturn during 2009 with a growth rate of just

(-)1.3%, the first contraction in last 60 years. While Emerging Economies may be growing fairly

better at 1.6%, the growth rate of Developed Economies is significantly lower at (-)3.8%. World

trade as per WTO estimates is estimated to contract by about 9% which will further reduce

demand, put pressure on Corporate and add to unemployment. Clearly the crisis has moved from

the Financial Sector to the Real Sector taking the developed economies – USA, Europe and

Japan into recession. This has had a contagion effect on the rest of the world. It is expected that

the recession could be deeper and somewhat prolonged.

The impact of the financial crisis is felt by the developing economies as nearly all the countries

are witnessing slower growth. India too has been impacted by the crisis. The tumultuous

happenings the world over did have the effect on Indian economy. Despite Indian growth story

being largely domestic consumption and domestic investment driven, it got impacted. We saw

liquidity tightening in mid September 2008, a sudden curtailment of demand - especially for

exports and contraction in general economic activity. India’s growth rate in 2008-09 was 6.7

percent which is quite low. In 2008-2009 the first half escaped the impact of global recession,

but the next few quarters the impact was felt throughout the year.

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Globalisation spreads both prosperity and distress. The contagion works both ways. Financial

institutions around the world are the one that have been badly affected by the global recession.

Many banks fails and some are almost on the verge of collapse and frantic steps are undertaken

by respective governments to prop them up. The scar of the impact is still seen especially in the

US and other European countries and even in Asia like Japan.

Banks act as important players in the financial markets. They play a vital role in the economy of

a country. The Indian banking system is relatively insulated from the factors leading to the

turmoil in the global banking industry. Even as several top financial institutions and banks with

footprint across several countries have crumbled under the relentless onslaught of a global

financial turmoil. Citigroup still hangs on the brink. Bank of America is neck deep in trouble.

Governments everywhere are at their wits’ end in dealing with the financial crisis. And the

global recession still did not spare the Asian countries as well. Japanese companies and banks

were badly hit by this storm and the impact has touched the Indian banking system as well. It is

not that the Indian economy has been spared in the present crisis but the Indian situation is

different. In the US and Europe, the housing market collapsed and dragged down banks. The

two together have dragged down the real economy. In India, it is the real economy that got

impacted first — on account of exports and the drying up of overseas finance for many firms.

Banks are affected indirectly by the slowing down of the economy.

This project will be useful for students, investors, banks including SBI and OBC and for

everyone whoever is interested, to make a further research on global economy crises, or to have a

proper understanding about the impact the global recession has on the financial institutions

especially banks in India, giving more emphasises on the performance of Oriental Bank of

Commerce in comparison with State Bank of India the market leader in banking sector in India.

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OBJECTIVESOBJECTIVES

1. Origin and causes of global financial crisis.

2. Impact of Recession on Banks.

3. Performance of Banks during Recession.

4. Comparative study of the Performance of Oriental Bank of Commerce and State Bank of

India during recession.

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LITERATURE REVIEWLITERATURE REVIEW

Roberto Moro Visconti(2009) explains that he global recession which started in 2008 after

the subprime crisis and the unprecedented default or rescue of many financial institutions has

strongly affected the credibility of the international banking system, damaging also the real

economy. Due to this joint crisis, the credit crunch is severely affecting the economy in Western

globalized countries. Developing countries, not fully integrated with international markets, seem

less affected and local microfinance institutions might also allow for a further shelter against

recession, even if foreign support to donor driven NGOs or not fully independent microfinance

banks is slowing down and collection of international capital is harder and more expensive.

Intrinsic characteristics of microfinance, such as closeness to the borrowers, limited risk and

exposure and little if any correlation with international markets have an anti-cyclical effect. In

hard and confused times, it pays to be little, flexible and simple. C. Rangarajan(2009)

commented that the impact of the financial crisis is felt by the developing economies as well.

Growth is slowing down in all these countries. India‟s growth rate in 2008-09 was 6.7 per cent

as compared to 9 per cent in the previous year. Prospects for 2009-10 do not appear to be better.

While in 2008-09 the first half escaped the impact of global recession, in the current year the

impact will be felt throughout the year. Globalisation spreads both prosperity and distress. A.

Prasad and C. Panduranga Reddy(2009) The global financial crisis originated in United

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States of America. During booming years when interest rates were low and there was great

demand for houses, banks advanced housing loans to people with low credit worthiness on the

assumption that housing prices would continue to rise. Later, the financial institutions

repackaged these debts into financial instruments called Collateralized Debt Obligations and sold

them to investors world-wide. In this way the risk was passed on multifold through derivatives

trade. Surplus inventory of houses and the subsequent rise in interest rates led to the decline of

housing prices in the year 2006-07 which resulted in unaffordable mortgage payments and many

people defaulted or undertook foreclosure. The house prices crashed and the mortgage crisis

affected many banks, mortgage companies and investment firms world-wide that had invested

heavily in sub-prime mortgages. Different views on the reasons of the crisis include boom in the

housing market, speculation, high-risk mortgage loans and lending practices, securitization

practices, inaccurate credit ratings and poor regulation of the financial institutions. The financial

crisis has not only affected United States of America, but also European Union, U.K and Asia.

The Indian Economy too has felt the impact of the crisis to some extent. Though it is difficult to

quantify the impact of the crisis on India, it is felt that certain sectors of the economy would be

affected by the spill-over effects of the financial crisis. Alok Mishra(2009) examines that the

year 2008-09 saw a sharp downturn in economic scenario. It may be recalled that during 2007-

08, we had witnessed the eruption of sub-prime crisis, rise in prices of oil, gold and commodities

impacting both the Financial Sector and the Real Sector. The World witnessed extreme

tightening of liquidity, shortage of capital and a shaken confidence leading to collapse and

merger of several revered institutions. Clearly the crisis has moved from the Financial Sector to

the Real Sector taking the developed economies – USA, Europe and Japan into recession. This

has had a contagion effect on the rest of the world. It is expected that the recession could be

deeper and somewhat prolonged. The tumultuous happenings the world over did have the effect

on Indian economy. Despite India not being directly exposed to sub-prime markets and Indian

growth story being largely domestic consumption and domestic investment driven, it got

impacted. We saw liquidity tightening in mid September 2008, a sudden curtailment of demand -

especially for exports and contraction in general economic activity. K.Vidyakala,

S.Madhuvanthi, S.Poornima, (2009) commented that banks act as important players in the

financial markets. They play a vital role in the economy of a country. The Recession that began

in December 2007 impacted the revenues and profitability of businesses worldwide. We are in a

globalised world and no more immune to the things happening outside our country. Built on

strong financial fundamentals, strict vigil on risk appetite and firm monetary guidelines, Indian

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banks have proved among the most resilient and sound banking institutions in the world. But

there has been considerable divergence in the performance of the various banking institutions in

the country as also among the public, private and foreign banks operating in India. The Indian

banking system is relatively insulated from the factors leading to the turmoil in the global

banking industry. Going by the performance for the calendar year 2008, Indian public sector

banks have not only been able to weather the storm of global recession but have been able to

moderate its impact on the Indian economy as well, compared to its peers among the foreign and

private banks. The banking sector faces profitability pressures due to higher funding costs, mark-

to-market requirements on investment portfolios, and asset quality pressures due to a slowing

economy. But Indian banks’ global exposure is relatively small, with international assets at about

6 per cent of the total assets. The strong economic growth in the past, low defaulter ratio,

absence of complex financial products, regular intervention by central bank, proactive

adjustment of monetary policy and so called close banking culture has favoured the banking

industry in India in recent global financial turmoil. N.Sivasankaran, Dr.M.Kannadhasan

(2009) found that global economy has been undergoing a rough journey filled with tough

challenges caused by the economic meltdown originated by the sub-prime crisis. Though India is one

among the few countries that withstood the crisis with a relatively minimal damage at the macro

level, it is not completely free from the hits of the recession. There exist differences between the

services and manufacturing sector in their ability to manage the recession, however respondents

belonging to small, medium, and large industries do not exhibit differences in their ability to manage

the impact of recession. Choudhary Singh Hemendra Jr (2010) explains in this paper is

regarding the depth insight into economic recession and the reason and solutions for economic

recession. The world economic slowdown which had its epicenter in the developed economies

has now found its way into the developing economies also . One such reason is banks and their

loan policies which lead to subprime crises. The economy was at risk of a deep recession after

the dotcom bubble burst in early 2000; this situation was compounded by the September 11

terrorist attacks that followed in 2001. In response, central banks around the world tried to

stimulate the economy. They created capital liquidity through a reduction in interest rates. In

turn, investors sought higher returns through riskier investments. Lenders took on greater risks

too, and approved subprime mortgage loans to borrowers with poor credit. Consumer demand

drove the housing bubble to all-time highs in the summer of 2005, which ultimately collapsed in

August of 2006. The effect of crises as a ripple effect on the Indian economy. The leaders of

Europe's largest economies (England, France, Germany, Italy) held a meeting where they

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discussed better ways to monitor the world's markets and banks. They did not, however, push to

create a new regime of oversight, regulation and punitive action that would be directed at

financial fraudsters and their structured Ponzi-scams and in the end we discussed what steps

should be taken to improve the financial conditions of the country.so in toto we will study how

these banking institutions lead to economic crisis and what steps are required to protect the world

economy from facing the same crises again. Iyanatul Islam (2010) Starting in mid-2007, the

global financial crisis quickly metamorphosed from the bursting of the housing bubble in the US

to the worst recession the world has witnessed for over six decades. Through an in-depth review

of the crisis in terms of the causes, consequences and policy responses, this paper identifies four

key messages. Firstly, contrary to widely-held perceptions during the boom years before the

crisis, the paper underscores that the global economy was by no means as stable as suggested,

while at the same time the majority of the world's poor had benefited insufficiently from stronger

economic growth. Secondly, there were complex and interlinked factors behind the emergence of

the crisis in 2007, namely loose monetary policy, global imbalances, misperception of risk and

lax financial regulation. Thirdly, beyond the aggregate picture of economic collapse and rising

unemployment, this paper stresses that the impact of the crisis is rather diverse, reflecting

differences in initial conditions, transmission channels and vulnerabilities of economies, along

with the role of government policy in mitigating the downturn. Fourthly, while the recovery

phase has commenced, a number of risks remain that could derail improvements in economies

and hinder efforts to ensure that the recovery is accompanied by job creation. These risks pertain

in particular to the challenges of dealing with public debt and continuing global imbalances.

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RESEARCH METHODOLOGYRESEARCH METHODOLOGY

The study presently focuses on:

1. The origin and causes of global financial crisis

2. The impact of the crisis on the Indian Banking sector.

3. Performance of Indian banks during recession.

4. A Comparative study of the Performance of Oriental Bank of Commerce and State Bank

of India during recession.

The data for the study has been collected from secondary sources, which include Books, E-book,

various websites, Journals and some financial magazines.

The techniques for financial analysis that will be used to analyse and interpret the data to make a

study on the performance of Oriental bank of Commerce in comparison with State Bank of India

are:

1. Common Size Statement Analysis and

2. Trend analysis.

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ORIGIN AND CAUSES OF THE GLOBAL RECESSION.ORIGIN AND CAUSES OF THE GLOBAL RECESSION.

The global recession originated in the sub-prime mortgage crisis which surfaced nearly two years

ago in the United States. When interest rates are rising and home prices kept on falling, there was

a sharp jump in defaults and foreclosures. However, this would have remained as a purely

mortgage market crisis but for the fact that these sub-prime mortgages were securitized and

packaged into products that were rated as investment grade. Once doubts about these assets arose

they turned illiquid; it also became very hard to price them. As a result, it started affecting a host

of institutions which had invested in these products. These institutions were not confined to U.S.

alone.

1)

Boom in the Housing Market: Subprime borrowing was a major contributor to an

increase in house ownership rates and the demand for housing. This demand helped fuel

housing price increase and consumer spending. Some house owners used the increased

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property value experienced in housing bubble to re-finance their homes with lower

interest rates and take second mortgages against the added value to use the funds for

consumer spending. Increase in house purchases during the boom period eventually led to

surplus inventory of houses, causing house prices to decline, beginning in the summer of

2006.Easy credit, combined with the assumption that housing prices would continue to

appreciate, had encouraged many subprime borrowers to obtain adjustable-rate mortgages

which they could not afford after the initial incentive period. Once housing prices started

depreciating moderately in many parts of the U.S, re-financing became more difficult.

Some house owners were unable to re-finance their loans reset to higher interest rates and

payment amounts. Excess supply of houses placed significant downward pressure on

prices. As prices declined, more house owners were at risk of default and foreclosure.

2)

Speculation: Speculation in real estate was a contributing factor. During 2006, 22 per

cent of houses purchased (1.65 million units) were for investment purposes with an

additional 14 percent (1.07 million units) purchased as vacation homes. In other words,

nearly 40 per cent of house purchases were not primary residences. Speculators left the

market in 2006, which caused investment sales to fall much faster than the primary

market.

3)

High- Risk Mortgage Loans and Lending Practices: A variety of factors caused lenders

to offer higher-risk loans to higher-risk borrowers. The risk premium required by lenders

to offer a subprime loan declined. In addition to considering high-risk borrowers, lenders

have offered increasingly high-risk loan options and incentives. These high-risk loans

included “No Income, No Job and No Assets loans.” It is criticized that mortgage

underwriting practices including automated loan approvals were not subjected to

appropriate review and documentation.

4)

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Securitization Practices: Securitization of housing loans for people with poor credit- not

the loans themselves-is also a reason behind the current global credit crisis. Securitization

is a structured finance process in which assets, receivables or financial instruments are

acquired, pooled together as collateral for the third party investments (Investment Banks).

Due to securitization, investor appetite for mortgage-backed securities (MBS), and the

tendency of rating agencies to assign investment-grade ratings to MBS, loans with a high

risk of default could be originated, packaged and the risk readily transferred to others.

5)

Inaccurate Credit Ratings: Credit rating process was faulty. High ratings given by credit

rating agencies encouraged the flow of investor funds into mortgage-backed securities

helping finance the housing boom. Risk rating agencies were unable to give proper

ratings to complex instruments (Gregorio 2008). Several products and financial

institutions, including hedge funds, and rating agencies are largely if not completely

unregulated.

6)

Poor Regulation: The problem has occurred during an extremely accelerated process of

financial innovation in market segments that were poorly or ambiguously regulated –

mainly in the U.S. The fall of the financial institutions is a reflection of the lax internal

controls and the ineffectiveness of regulatory oversight in the context of a large volume

of non-transparent assets. It is indeed amazing that there were simply no checks and

balances in the financial system to prevent such a crisis and “not one of the so called

pundits” in the field has sounded a word of caution. There are doubts whether the

operations of derivatives markets have been as transparent as they should have been or if

they have been manipulated.

This current crisis in the US, the defaults on sub-prime mortgages (homeloan defaults) have led

to a major crisis in the US. Sub-prime is a high risk debt offered to people with poor credit

worthiness or unstable incomes. Major banks have landed in trouble after people could not pay

back loans .The housing market soared on the back of easy availability of loans. The realty sector

boomed but could not sustain the momentum for long, and it collapsed under the gargantuan

weight of crippling loan defaults. Foreclosures spread like wildfire putting the US economy on

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shaky ground. This, coupled with rising oil prices at $100 a barrel, slowed down the growth of

the economy.

In the present time, the whole world is witnessing the effects of global financial crisis. As a

result, it started affecting a host of institutions which had invested in these products. These

institutions were not confined to U.S. alone. Financial institutions in Europe and to a much lesser

extent in East Asia had such assets on their books. This crisis came on surface because of sub-

prime lending crisis in United States of America. The situation became more critical due to

bankruptcy of Lehman Brothers which was the fourth largest institutional bank of US and other

major financial institutions like Goldman Sachs, Washington Mutual, Citigroup, Bank of

America, Morgan M Stanley. Since then the Indian economy is also facing challenges of this

economic meltdown.

Every sector has been badly hit by this recession. Quite unfortunately, the Bombay Stock

Exchange came plummeting down from 21000 points to 8000 mark. The fast growing real sector

is also affected as the capital value of property is plummeting. Many construction projects are on

the brink of collapse because of liquidity crunch like proposed convention centre in New Delhi,

DLF mega-home project in West Bengal. The inflation scaled high on around 13% but right now

the case is even worse. The information technology sector also cannot be an exception in this

regard.

IMPACT ON THE INDIAN BANKING SECTOR.IMPACT ON THE INDIAN BANKING SECTOR.

Banks act as important players in the financial markets. They play a vital role in the economy of

a country. The Recession that began in December 2007 impacted the revenues and profitability

of businesses worldwide. The Indian banking system is relatively insulated from the factors

leading to the turmoil in the global banking industry. Even as several top financial institutions

and banks with footprint across several countries have crumbled under the relentless onslaught of

a global financial turmoil, Indian banks and institutions have come out relatively unscathed from

the recession. Built on strong financial fundamentals, strict vigil on risk appetite and firm

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monetary guidelines, Indian banks have proved among the most resilient and sound banking

institutions in the world.

Further, the recent tight liquidity in the Indian market is also qualitatively different from the

global liquidity crunch, which was caused by a crisis of confidence in banks lending to each

other. While the main causes of global stress are less relevant here, Indian banks do face

increased challenges due to domestic factors. The banking sector faces profitability pressures due

to higher funding costs, mark-to-market requirements on investment portfolios, and asset quality

pressures due to a slowing economy. CRISIL views the strong capitalization of Indian banks as a

positive feature in the current environment.

Indian banks’ global exposure is relatively small, with international assets at about 6 percent of

the total assets. Even banks with international operations have less than 11 percent of their total

assets outside India. The reported investment exposure of Indian banks to distressed international

financial institutions of about USD1 billion is also very small. The mark-to-market losses on this

investment portfolio, will, therefore, have only a limited financial impact. Indian banks’

dependence on international funding is also low.

Indian Banking Sector remains a bright spot.

Citigroup totters on the brink. Bank of America is neck deep in trouble. Governments

everywhere are at their wits’ end in dealing with the financial crisis. And yet little of this storm

has touched the Indian banking system.

It is not that the Indian economy has been spared in the present crisis. But the Indian situation is

different from that in the western world. In the US and Europe, the housing market collapsed and

dragged down banks. The two together have dragged down the real economy. In India, it is the

real economy that got impacted first — on account of exports and the drying up of overseas

finance for many firms. Banks are affected indirectly by the slowing down of the economy. The

direct impact of the crisis on the Indian banking system has been small because Indian banks do

not have big exposures to the subprime market. Indian banks are well placed to weather this

impact. This is not a contrarian view. The RBI itself exudes optimism about the outlook for

Indian banking in its latest Report on Trend and Progress in Banking.

At a time when the financial system across the globe is engulfed in a deep crisis, the Indian

banking system continues to show resilience. The underlying fundamentals of the Indian

economy would continue to underpin the robust performance of the banking sector which

remains profitable and well capitalized. There are good reasons for such optimism.

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1. Unlike in the west where credit supply has collapsed, credit grew at 25% in 2007-08 and

by 24% in the year to date. Banks may be expected to slow down credit growth in 2009-

10 given the uncertainties in the environment. But growth of around 20% is still an

impressive figure.

2. Spreads in the Indian banking system remain high in comparison with other banking

systems, although they declined for the second year in succession. The net interest

margin, an indirect measure of spread, was 2.4% in 2007-08. This is lower than the

spread of around 2.8% we had until 2005-06. But volume growth today is higher than in

most of the post-reform period. Higher volume growth should offset the decline in

spread. Besides, banks have learnt to boost revenues through non-interest income.

3. Non-performing assets (NPAs) are at an all-time low. The ratio of net NPAs to net

advances is down to 1%, down from 9% a decade ago.

4. Return on assets in the Indian banking system was 1% in 2007-08. This figure is a widely

accepted benchmark for performance in banking. We must expect a rise in NPAs and

higher provisions in 2008-09 and 2009-10. But banks stand to gain on their bond

portfolios as interest rates fall. So any decline in return on assets should be small.

Does this all sound too good to be true — the Indian banking system as an islet of tranquillity in

a sea of turbulence? One alarmist scenario is a big collapse in property prices — remember, the

rise in property prices here has been steeper than in the US or Europe. No fears, housing loans

are only around 10% of overall banking assets. Even if 20% of housing loans go bad, a figure we

have seen in the subprime crisis, the maximum impact would be a rise in NPA/asset ratio to 3%.

With an average capital adequacy ratio of 13%, banks are well placed to withstand an increase in

NPAs of this order. But even this is unlikely because banks finance around 70% of the white

component of housing loans. If we assume a black component of just 30% of the value of the

property, banks are protected against a decline in property prices of 50% from their present

levels. There is always the danger of one or two weak players having serious problems. But we

do have the capacity to contain systemic risk arising from such a situation. The broader lesson of

the Indian banking system emerging relatively unscathed in the present crisis should not be

ignored. Our unique approach to the issues of bank ownership and regulation, our reliance on

home-grown solutions, has served us well. The need for caution is to be made on several fronts.

However, there are two areas that do not receive the attention they merit. One is the need to

improve the quality and performance of public sector bank boards. The RBI has laid down ‘fit

and proper’ criteria for elected directors. It must extend these to all directors. It must also advise

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PSBs to increase the sitting fee from the disgraceful figure of Rs 5,000 — this pretence of

austerity is not helping anybody.

Experts view on Indian Banks and Recession

There is a saying many Indians have heard from their grandmothers: “Spend only as much as you

earn.” It now seems that this piece of advice, apparently firmly ingrained in an average Indian

mindset, has helped the survival of the Indian banking system which, experts and politicians

maintain with increasing confidence, has emerged unscathed from the global economic

meltdown. According to some experts, this mindset is at the basis of the so-called conservative

Indian mode of banking. Economic journalist and author Paranjoy Guha Thakurta says:

“Understanding why we managed to save ourselves from the global financial meltdown is fairly

simple and sociological as well. In India our grandmothers used to say, spend only as much as

you earn. In America people were doing the opposite. But in India it appears, people paid heed to

their grandma’s advice.” Indian banks have not just survived the crisis but appear to have

emerged even stronger from the recession and even gone ahead and posted reasonable profits in

the year 2008-2009. But do generally sensible borrowing practices explain why Indian banks

emerge even stronger in such hard times?

Executive Director of one of Indian’s biggest public-sector banks, Bank of Baroda, RK Bakshi,

says: “Due credit should be given to the Reserve Bank of India (RBI). Being the apex bank of

the country, it managed the monetary policies quite efficiently. When inflation was on the rise,

RBI strengthened its hold over the markets and increased interest rates. But immediately after the

fall of Lehman Brothers, RBI reduced the interest rates to increase liquidity in the markets. RBI

also ensured that inter-bank transactions were not affected during this economic crunch, which in

effect led to smooth payments and money transfers.”

The conservative mode in which the Indian banks have operated since their nationalization in the

late 60s and early 70s appears to be an important reason why they did not loose out in the after-

effects of the global liquidity crunch following the collapse of Lehman Brothers. Proving the

early scares wrong, not just the public sector banks but also the private banks of India remained

unaffected by the recessionary spirals.

Rana Kapoor, Founder-Chairman of one of the fastest-growing private banks in India, Yes Bank,

echoes this view: “The customer — private or corporate — can very well see for himself that the

Government of India and even the RBI has never differentiated amongst the public-sector or

private banks. We realized this especially during recession times that the common man in India

~ 20 ~

did not differentiate between governments or a private bank and his trust remained as before. The

private banks on their part have also followed the RBI banking guidelines which paid off very

well.”

A balanced and conservative approach, plus the ever watchful eyes of the Governments Reserve

bank of India – these factors have been critical in helping to save Indian banking and monetary

institutions following the seismic events of last September. RBI guidelines limit Indian banking

forays into foreign portfolio investment. Banks can not lend beyond an unsecured capital and

their investments in the share markets are also controlled by the RBI.

Another important factor is the limit over the Indian banks’ use of foreign capital. As a result of

this constraint, in an economic meltdown situation, when foreign companies start withdrawing

capital, the Indian banks remained unaffected. Bank of Baroda’s Executive Director RK Bakshi

adds: “Banks like us which have foreign operations in more than 75 countries, also have to

follow the RBI foreign banking guidelines. In effect, although we are banking in foreign

countries, our basic policies emerge from home. And that’s the reason why in India also, we

managed to curtail our non-performing assets.”

Not very long ago, many critics spoke about the need for privatization of the Indian banking

sector, especially the public-sector banks. But these voices seem to have faded away during

recession. Paranjoy Guha Thakurta feels that stability of the government banks and customers’

faith in them played an important role in delaying a complete privatization of the banking sector:

“In times of economic liberalization and globalization, everyone wanted to bring reputed foreign

banks in Indian markets. But after the fall of Lehman-like numerous institutions no-one even

remembers this debate.” As leading global powers announce deadlines to come out of the

recessionary phase, more and more people are acknowledging the fact that careful monetary

policies by the Government of India saved Indian banking institutions from contracting the

‘meltdown virus’. The Indian banking industry on its own part has also realized that having a

strict watchdog like the Reserve Bank paid rich dividends in times of one the biggest economic

crisis the world has ever witnessed. That, but also that old grandma advice to only spend what

you earn, of course.

Indian Banking sector challenged by domestic, not global, factors

The reasons for tight liquidity conditions in the Indian market in recent weeks of the global

meltdown are quite different from the factors driving the global liquidity crisis. Some reasons

~ 21 ~

include large selling by Foreign Institutional Investors (FIIs) and subsequent Reserve Bank of

India (RBI) interventions in the foreign currency market, continuing growth in advances, and

earlier increases in cash reserve ratio (CRR) to contain inflation. RBI’s recent initiatives,

including the reduction in CRR by 150 basis points from October 11, 2008, cancellation of two

auctions of government securities, and confidence-building communication, have already begun

easing liquidity pressures. The strong capitalization of Indian banks, with an average Tier I

capital adequacy ratio of above 8 per cent, is a positive feature in their credit risk profile.

Nevertheless, Indian banks do face challenges in the current Indian economic environment,

marked by a slower gross domestic product growth, depressed capital market conditions, and

relatively high interest rate regime. The profitability of Indian banks is expected to remain under

pressure due to increased cost of borrowing, declining interest spreads, and lower fee income due

to slowdown in retail lending. Profit levels are also likely to be impacted by mark-to-market

provisions on investment portfolios and considerably lower profit on sale of investments, as

compared with previous years. Moreover, those Indian

banks considering accessing the capital markets for shoring up capital adequacy may be forced to

curtail growth plans, if capital markets remain depressed. While these challenges will play out

over the medium term, CRISIL expects the majority of Indian banks’ ratings to remain

unaffected, as they continue to maintain healthy capitalization, enjoy strong system support and

benefits of government ownership in the case of public sector banks.”

Non-food bank credit

Contradicting the general trends of the economy, the extension of non-food bank credit has

grown faster in calendar year 2008 against the previous year. The same has been the case with

regard to the flow of resources to the commercial sector, which includes non-food bank credit,

investment on shares/bonds/debentures and commercial paper issued by public/private sector

companies. Despite this visible growth in credit extension by banks, there was a perception of

decelerating credit growth to the Indian economy as a whole during 2008. This slow down in

credit extension could be primarily attributed to reduced flow of funds from non-bank sources

such as financial institutions, NBFCs and resources mobilised from the capital markets and by

way of external commercial borrowings — ADR, GDR, FCCB, foreign direct investments —

and other forms of short-term credit. In fact, resource flow from these sources had dipped by

over 30 per cent during 2008, while flow from the banking sector had increased by close to 30

per cent. The review of the Monetary Policy by the RBI for the third quarter of 2008-09 said:

“There has been a noticeable variation in credit expansion across bank groups. Expansion of

~ 22 ~

credit by public sector banks was much higher this year than in the previous year, while credit

expansion by foreign and private sector banks was significantly lower”.

Due to globalization, the Indian economy cannot be insulated from the present financial crisis in

the developed economies. The development in the U.S financial sector has affected not only

America but also European union, U.K and Asia. The Indian banking too has felt the impact of

the crisis though not to the same extent. The ongoing crisis will have an adverse impact on some

of the Indian banks. Some of the Indian banks have invested in derivatives which might have

exposure to investment bankers in U.S.A. However, Indian banks in general, have very little

exposure to the asset markets of the developed world. Effectively speaking, the Indian banks and

financial institutions have not experienced the kind of losses and write-downs that banks and

financial institutions in the Western world have faced. Indian banks have very few branches

abroad. Our Indian banks are slightly better protected from the financial meltdown, largely

because of the greater role of the nationalized banks even today and other controls on domestic

finance. Strict regulation and conservative policies adopted by the Reserve Bank of India have

ensured that banks in India are relatively insulated from the travails of their western counterparts.

As financial markets around the world are uncertain and unsettled, the contagion spread to

emerging economies and to India too. Both the government and the Reserve Bank of India

responded to the challenge in close coordination and consultation. The main plank of the

government response was fiscal stimulus while the Reserve Bank's action comprised monetary

accommodation and counter cyclical regulatory forbearance. The Indian banking sector has not

been affected in the same way the banking sectors abroad has been affected for reasons already

explained. However, there is the impact of the drying up of liquidity because of the fall in

reserves. The inability of Indian firms to raise funds abroad, including trade credit, puts pressure

on the domestic banking system for more credit. It is, in this context, one must view the actions

of the Reserve Bank in expanding liquidity. The Government of India has also taken many

reconciliatory actions to bring the situation into normal. The RBI has made so many changes in

its monetary policy. In fact, the RBI has increased the bank rate and CRR(cash reserve ratio) rate

so that the inflation may come down. The Indian Government has even proposed many bailout

plans to bring more liquidity in the Indian market. The Global Reession had a lesser impact on

the Indian Banking sector because of its domestic market structure. Many Indian companies are

appearing on global platform to participate in the corporate restructuring i.e. merging and

acquisitioning. Although, the banking sector has also been affected by the meltdown but in

comparison to other nations the Indian banks are performing quite well. A report "Opportunities

~ 23 ~

in Indian Banking Sector", by market research company, RNCOS, forecasts that the Indian

banking sector will grow at a healthy compound annual growth rate (CAGR) of around 23.3 per

cent till 2011.

CRR Trend

2007-11 %

SLR Trend

1997-11 %

Bank Rate Trend

2008-2011 %

23-Dec-07 5.2525-Oct-97 25 23-Dec-08 6

06-Jan-08 5.523-Dec-07 25 08-Nov-09 6

17-Feb-08 5.7508-Nov-09 24 07-Nov-11 6

03-Mar-08 607-Nov-11 25

28-Apr-08 6.5

04-Aug-08 7

10-Nov-08 7.5

26-Apr-09 7.75

10-May-09 8

19-Jul-09 8.75

30-Aug-09 9

11-Oct-09 7.5

11-Oct-09 6.5

~ 24 ~

25-Oct-09 6

08-Nov-09 5.5

17-Jan-10 5

13-Feb-11 5.5

27-Feb-11 5.75

24-Apr-11 6

THE PERFORMANCE OF BANKS IN ECONOMIC RECESSIONTHE PERFORMANCE OF BANKS IN ECONOMIC RECESSION

IN INDIAIN INDIA

Global Recession had an impact in most of the Indian banks as there was a decline in profits of

some of the major banks including some public sector banks like Punjab National Bank, Bank of

India, State Bank of India and Bank of Baroda as they had an exposure to the instruments issued

by Lehman and Merrill Lynch. It wasn’t just the private bank ICICI, although the latter posted

the maximum losses due to their exposure. However, if we take the overall the Banking sector in

India, there is nothing to worry as heavy regulation coupled with the tendency of banks to be

cautious (more than regulations stipulated) has protected the Indian banking industry. Even

ICICI can easily handle the loss it has suffered. Under the sector of Information Technology

Strangely it is those top IT companies with a lot of business abroad and in the US which are a

safer bet because all their eggs are not in one basket. They also have more reserves. However the

impact of loss of business will continue to be felt.

There has been considerable divergence in the performance of the various banking institutions in

the country as also among the public, private and foreign banks operating in India. Going by the

performance for the calendar year 2008, Indian public sector banks have not only been able to

weather the storm of global recession but have been able to moderate its

impact on the Indian economy as well, compared to its peers among the foreign and private

banks. Figures put out by the Reserve Bank of India suggests that banking activity in the country

~ 25 ~

continued unabated during the first phase of recession, thanks to the better than expected

performance of public sector banks. This was while the assets and liabilities of both foreign and

private sector banks dipped during the corresponding period last year. But public sector banks

seem to have more than made up for the shortfall from foreign and private sector banks and the

growth inflow of bank resources to the diverse sectors of the Indian economy has continued

unabated.

Banks Recruits during Recession

While thousands of people worldwide have been handed over pink slips as a part and parcel of

the global slowdown, Indian public sector banks still have jobs many. Indian public sector banks

like State Bank of India, Union Bank of India, Syndicate Bank, Central Bank, Andhra Bank,

Corporation Bank, Punjab National Bank and NABARD. It was reported that Union Bank are

planning to hire more than 4000 officers and 1000 clerks this year. State Bank of India has

bigger plans. By year end it plans to recruit 20,000 clerical staffs and around 5000 officers.

Although recession has hit many other sectors, manpower is still a necessity in the public

banking sector. The requirements of extending credit to primary sectors, and expansion plans of

many banks into the rural market make this an essential move. According to industry estimates

around 40, 000 people was already hired in the current fiscal year as opposed to 15,000 last year.

Ironically, job seekers who earlier sought private and foreign banks for its lucrative salary

packages, now has been writing tests to get through the public sector banks. Job security seems

to the priority of the hour.

Deposit accretion

~ 26 ~

This credit expansion by the banking sector was also reflected in the deep divergence in the pace

of growth in deposits among the banks. It was only the public sector banks which could maintain

the pace of growth in deposit accretion at 24.2 per cent. Deposit accretion in foreign banks fell

sharply from 34 to 12 per cent and for private sector banks from 27 to 13 per cent. Backed by the

steady pace of growth in deposits, the growth in public sector banks disbursal also grew quite

significantly. Meanwhile, there was a deceleration in credit extension by foreign and private

sector banks during 2008.

Banks Profit, Even in This Recession

The banks are doing so well in this time of recession. The 4 reasons that big banks are able to

beat the recession and rake in the profits are:

1. Underwriting increases provide investment banks with more income as businesses go to

investment banks. Banks that do the underwriting collect fees, and if they actually make

the loans, they also collect the interest.

2. Trading revenue is also up as investors try to play the market, getting in when prices are

low and trading to take profits on the rallies. Many of the big banks (like Goldman) do

over the counter trades, so they get commissions as well.

~ 27 ~

3. Less competition is the result of failed banks and takeovers. This means a bigger piece

of the pie for those banks that are left.

4. Retail banking has been providing a boost. People still need a place to keep their money.

With a lower Fed funds rate, they can pay less in interest to their savings customers,

while still charging between 5% and 10% interest (more for credit cards) on loans they

make. That difference is resulting in profitability.

A COMPARATIVE STUDY BETWEEN OBC AND SBIA COMPARATIVE STUDY BETWEEN OBC AND SBI

COMPANY’S INTRODUCTIONCOMPANY’S INTRODUCTION

Oriental Bank of Commerce (OBC)

Oriental Bank of Commerce, established on 19 February, 1943, in Lahore (then a city of

British India, and currently in Pakistan), is one of the public sector banks in India. Oriental Bank

of Commerce made a modest beginning under its Founding Father, Late Rai Bahadur Lala Sohan

Lal, the first Chairman of the Bank. Within four years of coming into existence, the Bank had to

face the holocaust of partition. Branches in the newly formed Pakistan had to be closed down

and the Registered Office had to be shifted from Lahore to Amritsar. Late lala Karam Chand

Thapar, the then Chairman of the Bank, in a unique gesture honoured the commitments made to

the depositors from Pakistan and paid every rupee to its departing customers. The foundation of

customer service thus laid has ever since remained Oriental Bank's prime philosophy and has

been nurtured well as a legacy by all its successors, year after year. The Bank has witnessed

many ups and downs since its establishment. It has seen many upheavals in the 66 years of its

existence and on every trying situation; it has emerged successful. The period of 1970-76 is said

to be the most challenging phase in the history of the Bank. At one time profit plummeted to

Rs.175, that prompted the owner of the bank, the Thapar House, to sell / close the bank. Then

~ 28 ~

employees and leaders of the Bank came forward to rescue the Bank. The owners were moved

and had to change their decision of selling the bank and in turn they decided to improve the

position of the bank with the active cooperation and support of all the employees. Their efforts

bore fruits and performance of the bank improved significantly. This was the turning point in the

history of the bank. The bank was nationalized on 15th April, 1980. At that time total working of

the bank was Rs.483 crores having 19th position among the 20 nationalised banks. Within a

decade the bank turned into one of the most efficient and best performing banks of India. The

bank has progressed on several fronts, such as crossing the Business Mix mark of Rs.1.50 lacs

crores, achievement of 100% CBS, reorienting of lending strategy through Large & Mid

Corporates and establishment of new wings viz., Rural Development and Retail & Priority

Sector. The Bank has to its utmost credit lowest staff cost with highest productivity in the Indian

banking industry.

OBC has a network of 530 branches and 505 ATM's spread throughout India, out of which 490

branches offer centralized banking solutions. With High Capital Adequacy Ratio, Oriental Bank

of Commerce is known be a consistent profit-making bank. It offers various services and

products, like current/ savings account, general loans, educational loans, agricultural loans, etc,

for the benefit of customers. For its effective services, the National Institute of Bank

Management (NIBM) rated OBC Bank as "Customer Friendly" Bank.

State Bank of India (SBI)

The evolution of State Bank of India can be traced back to the first decade of the 19th century. It

began with the establishment of the Bank of Calcutta in Calcutta, on 2 June 1806. The bank was

redesigned as the Bank of Bengal, three years later, on 2 January 1809. It was the first ever joint-

stock bank of the British India, established under the sponsorship of the Government of Bengal.

Subsequently, the Bank of Bombay (established on 15 April 1840) and the Bank of Madras

(established on 1 July 1843) followed the Bank of Bengal. These three banks dominated the

modern banking scenario in India, until when they were amalgamated to form the Imperial Bank

of India, on 27 January 1921.

An important turning point in the history of State Bank of India is the launch of the first Five

Year Plan of independent India, in 1951. The Plan aimed at serving the Indian economy in

general and the rural sector of the country, in particular. Until the Plan, the commercial banks of

the country, including the Imperial Bank of India, confined their services to the urban sector.

~ 29 ~

Moreover, they were not equipped to respond to the growing needs of the economic revival

taking shape in the rural areas of the country. Therefore, in order to serve the economy as a

whole and rural sector in particular, the All India Rural Credit Survey Committee recommended

the formation of a state-partnered and state-sponsored bank.

The All India Rural Credit Survey Committee proposed the take over of the Imperial Bank of

India, and integrating with it, the former state-owned or state-associate banks. Subsequently, an

Act was passed in the Parliament of India in May 1955. As a result, the State Bank of India (SBI)

was established on 1 July 1955. This resulted in making the State Bank of India more powerful,

because as much as a quarter of the resources of the Indian banking system were controlled

directly by the State. Later on, the State Bank of India (Subsidiary Banks) Act was passed in

1959. The Act enabled the State Bank of India to make the eight former State-associated banks

as its subsidiaries. .

The State Bank of India emerged as a pacesetter, with its operations carried out by the 480

offices comprising branches, sub offices and three Local Head Offices, inherited from the

Imperial Bank. Instead of serving as mere repositories of the community's savings and lending to

creditworthy parties, the State Bank of India catered to the needs of the customers, by banking

purposefully. The bank served the heterogeneous financial needs of the planned economic

development. .

Branches

The corporate center of SBI is located in Mumbai. In order to cater to different functions, there

are several other establishments in and outside Mumbai, apart from the corporate center. The

bank boasts of having as many as 14 local head offices and 57 Zonal Offices, located at major

cities throughout India. It is recorded that SBI has about 10000 branches, well networked to cater

to its customers throughout India. .

ATM Services .

SBI provides easy access to money to its customers through more than 8500 ATMs in India. The

Bank also facilitates the free transaction of money at the ATMs of State Bank Group, which

includes the ATMs of State Bank of India as well as the Associate Banks – State Bank of

~ 30 ~

Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, etc. You may also transact

money through SBI Commercial and International Bank Ltd by using the State Bank ATM-cum-

Debit (Cash Plus) card. .

Subsidiaries

The State Bank Group includes a network of eight banking subsidiaries and several non-banking

subsidiaries. Through the establishments, it offers various services including merchant banking

services, fund management, factoring services, primary dealership in government securities,

credit cards and insurance. .

The eight banking subsidiaries are:

State Bank of Bikaner and Jaipur (SBBJ)

State Bank of Hyderabad (SBH)

State Bank of India (SBI)

State Bank of Indore (SBIR)

State Bank of Mysore (SBM)

State Bank of Patiala (SBP)

State Bank of Saurashtra (SBS)

State Bank of Travancore (SBT

~ 31 ~

DATA ANALYSIS AND DATA INTERPRETATIONDATA ANALYSIS AND DATA INTERPRETATION

Financial Statement

Oriental Bank of

Commerce

Balance Sheet Rs. in Cr.

Mar '07 Mar '08 Mar '09 Mar '10 Mar '11

Capital and Liabilities:

Total Share Capital 250.54 250.54 250.54 250.54 250.54

Equity Share Capital 250.54 250.54 250.54 250.54 250.54

Share Application

Money 0 0 0 0 0

Preference Share

Capital 0 0 0 0 0

Reserves 4,920.24 5,349.77 5,525.36 6,201.81 7,069.98

Revaluation Reserves 0 0 0 951.1 917.43

Net Worth 5,170.78 5,600.31 5,775.90 7,403.45 8,237.95

Deposits 50,197.46 63,995.97 77,856.70 98,368.85 1,20,257.59

Borrowings 876.43 622.62 1,839.84 721.96 4,887.03

Total Debt 51,073.89 64,618.59 79,696.54 99,090.81 1,25,144.62

Other Liabilities &

Provisions 2,692.71 3,717.38 5,232.89 6,088.34 4,048.43

Total Liabilities 58,937.38 73,936.28 90,705.33 1,12,582.60 1,37,431.00

Assets

~ 32 ~

Cash & Balances with

RBI 4,263.22 5,336.09 7,322.25 6,879.89 8,086.79

Balance with Banks,

Money at Call 1,262.48 2,173.12 2,892.49 5,345.24 6,513.11

Advances 33,577.24 44,138.47 54,565.83 68,500.37 83,489.30

Investments 16,817.57 19,808.36 23,950.68 28,488.95 35,785.32

Gross Block 848.28 901.58 970.31 2,062.88 2,138.53

Accumulated

Depreciation 467.43 526.6 587.55 680.34 756.56

Net Block 380.85 374.98 382.76 1,382.54 1,381.97

Capital Work In

Progress 3.32 7.7 4.7 1.31 12.08

Other Assets 2,632.69 2,097.55 1,586.61 1,984.28 2,162.43

Total Assets 58,937.37 73,936.27 90,705.32 1,12,582.58 1,37,431.00

Contingent Liabilities 8,855.00 10,546.59 15,251.46 24,340.88 37,571.20

Bills for collection 4,596.59 11,786.72 7,065.87 8,562.69 13,952.26

Book Value (Rs) 206.39 223.53 230.54 257.54 292.19

Brief Analysis of OBC Balance Sheet:

From the above balance sheet, we saw that the Equity share capital for the last 5 years remains

the same, which shows that the bank did not issue any new equity shares. The reserves of the

bank is increasing which means that the bank is increasing the retain earnings. Net worth of the

bank increases and we saw that the deposits of the bank also increase. The total debts of the bank

increases in which the bank have to meet the increasing total assets.

Cash and balances increases sharply in the year 2009 because of the increase in the CRR in the

year 2010 which is the RBI initiative combat Recession. Balance with banks also increases,

Advances increases sharply from 2010 onwards which shows that the bank is increasing

financing loans facilities after the falling of the CRR from 9% in August 2009 to 5% in January

2010. The bank also increases its investments which shows that the bank is expanding. Other

assets decreases in 2009 and 2010 but increases in 2011.

~ 33 ~

Oriental Bank of

Commerce

Profit & Loss account in Rs. Cr.


Income

Interest Earned 4,118.92 5,164.90 6,838.18 8,856.47 10,257.13

Other Income 290.06 365.57 139.93 1,071.32 1,200.04

Total Income 4,408.98 5,530.47 6,978.11 9,927.79 11,457.17

Expenditure

Interest expended 2,513.85 3,473.58 5,156.17 6,859.97 7,349.69

Employee Cost 500.46 520.86 549.37 756.16 971.29

Selling and Admin

Expenses 222.4 123.93 85.05 496.97 915.7

Depreciation 75.52 71.82 75.05 80.3 86.19

Miscellaneous Expenses 539.57 759.47 759.26 828.97 999.62

Preoperative Exp

Capitalised 0 0 0 0 0

Operating Expenses 971.16 879.23 890.14 1,553.42 2,217.57

Provisions &

Contingencies 366.79 596.85 578.59 608.98 755.23

Total Expenses 3,851.80 4,949.66 6,624.90 9,022.37 10,322.49


557.16 580.81 353.22 905.42 1,134.68

~ 34 ~

Net Profit for the Year

Extraordionary Items -19.84 0 0 0 0

Profit brought forward 0.94 0.88 0.42 0.51 0.83

Total 538.26 581.69 353.64 905.93 1,135.51

Preference Dividend 0 0 0 0 0

Equity Dividend 112.74 117.75 117.75 182.89 227.99

Corporate Dividend Tax 15.81 18.52 20.01 31.08 38.75

Per share data (annualised)

Earning Per Share (Rs) 22.24 23.18 14.1 36.14 45.29

Equity Dividend (%) 45 47 47 73 91

Book Value (Rs) 206.39 223.53 230.54 257.54 292.19

Appropriations

Transfer to Statutory

Reserves -540.67 161 104 670.12 517.19

Transfer to Other Reserves 949.5 284.01 111.37 21.01 351

Proposed

Dividend/Transfer to Govt 128.55 136.27 137.76 213.97 266.74

Balance c/f to Balance

Sheet 0.88 0.42 0.51 0.83 0.58

Total 538.26 581.7 353.64 905.93 1,135.51

Brief Analysis of OBC P&L Account:

From the Profit and loss Account we can see that the Net profit of the bank decline in the year

2009 but significantly increases in the year 2010 and 2011. We also see percentage increase in

Interest earned from 2007 to 2009 is much lower than the interest expended during these years.

Other income which is mostly of fee based income from services rendered by the bank shows a

decline in the year 2009 and then increased in year ending March 2010 and March 2011.

~ 35 ~

Financial Statement

State Bank of

India

Balance Sheet ------------------- in Rs. Cr. -------------------


Capital and Liabilities:

Total Share

Capital 526.3 526.3 526.3 631.47 634.88

Equity Share

Capital 526.3 526.3 526.3 631.47 634.88

Share Application

Money 0 0 0 0 0

Preference Share

Capital 0 0 0 0 0

Reserves 23,545.84 27,117.79 30,772.26 48,401.19 57,312.82

Revaluation

Reserves 0 0 0 0 0

Net Worth 24,072.14 27,644.09 31,298.56 49,032.66 57,947.70

Deposits 3,67,047.53 3,80,046.06 4,35,521.09 5,37,403.94 7,42,073.13

Borrowings 19,184.31 30,641.24 39,703.34 51,727.41 53,713.68

Total Debt 3,86,231.84 4,10,687.30 4,75,224.43 5,89,131.35 7,95,786.81

Other Liabilities 49,578.89 55,538.17 60,042.26 83,362.30 1,10,697.57

~ 36 ~

& Provisions

Total Liabilities 4,59,882.87 4,93,869.56 5,66,565.25 7,21,526.31 9,64,432.08


Assets

Cash & Balances

with RBI 16,810.33 21,652.70 29,076.43 51,534.62 55,546.17

Balance with

Banks, Money at

Call 22,511.77 22,907.30 22,892.27 15,931.72 48,857.63

Advances 2,02,374.45 2,61,641.53 3,37,336.49 4,16,768.20 5,42,503.20

Investments 1,97,097.91 1,62,534.24 1,49,148.88 1,89,501.27 2,75,953.96

Gross Block 6,691.09 7,424.84 8,061.92 8,988.35 10,403.06

Accumulated

Depreciation 4,114.67 4,751.73 5,385.01 5,849.13 6,828.65

Net Block 2,576.42 2,673.11 2,676.91 3,139.22 3,574.41

Capital Work In

Progress 121.27 79.82 141.95 234.26 263.44

Other Assets 18,390.71 22,380.84 25,292.31 44,417.03 37,733.27

Total Assets 4,59,882.86 4,93,869.54 5,66,565.24 7,21,526.32 9,64,432.08

Contingent

Liabilities 1,31,325.40 1,91,819.34 2,59,536.57 7,36,087.59 6,14,603.47

Bills for

collection 44,794.10 57,618.44 70,418.15 93,652.89 1,52,964.06

Book Value (Rs) 457.39 525.25 594.69 776.48 912.73

Brief Analysis of SBI Balance Sheet:

From the above balance sheet, we saw that the Equity share capital for the last 3 years remains

the same, which shows that the bank did not issue equity shares in these years but we can see an

increase in share capital in the year 2009 and even in 2010, which shows that the bank issues

~ 37 ~

new equity share in the market. The reserves of the bank is increasing which means that the bank

is increasing the retain earnings. Net worth of the bank increases and we saw that the deposits of

the bank also increase. The total debts of the bank increases in which the bank have to meet the

increasing total assets.

Cash and balances increases sharply in the year 2009 because of the increase in the CRR in the

year 2009 which is the RBI initiative combat Recession. We can see that the balance with banks

in the year 2008 and especially in 2009 declines maybe because the bank have to reduce the

savings in other banks to deposit with the RBI due to the increase in the CRR in 2009. Advances

increases sharply from 2009 onwards which shows that the bank is increasing financing loans

facilities after the falling of the CRR from 9% in August 2009 to 5% in January 2010.

State Bank of India

Profit & Loss

account ----------------- in Rs. Cr. -------------------


Income

Interest Earned 32,428.00 35,794.93 39,491.03 48,950.31 63,788.43

Other Income 7,119.90 7,388.69 7,446.76 9,398.43 12,691.35

Total Income 39,547.90 43,183.62 46,937.79 58,348.74 76,479.78

Expenditure

Interest

expended 18,483.38 20,159.29 23,436.82 31,929.08 42,915.29

Employee Cost 6,907.35 8,123.04 7,932.58 7,785.87 9,747.31

Selling and Admin

Expenses 2,634.64 1,853.32 3,251.14 4,165.94 5,122.06

Depreciation 752.21 729.13 602.39 679.98 763.14

Miscellaneous

Expenses 6,465.82 7,912.15 7,173.55 7,058.75 8,810.75

Preoperative Exp

Capitalised 0 0 0 0 0

Operating 11,278.18 11,872.89 13,251.78 14,609.55 18,123.66

~ 38 ~

Expenses

Provisions &

Contingencies 5,481.84 6,744.75 5,707.88 5,080.99 6,319.60

Total Expenses 35,243.40 38,776.93 42,396.48 51,619.62 67,358.55


Net Profit for the

Year 4,304.52 4,406.67 4,541.31 6,729.12 9,121.23

Extraordionary

Items 0 0 0 0 0

Profit brought

forward 0.34 0.34 0.34 0.34 0.34

Total 4,304.86 4,407.01 4,541.65 6,729.46 9,121.57

Preference

Dividend 0 0 0 0 0

Equity Dividend 657.87 736.82 736.82 1,357.66 1,841.15

Corporate

Dividend Tax 93.75 103.34 125.22 165.87 248.03

Per share data (annualised)

Earning Per Share

(Rs) 81.79 83.73 86.29 106.56 143.67

Equity Dividend

(%) 125 140 140 215 290

Book Value (Rs) 457.39 525.25 594.69 776.48 912.73

Appropriations

Transfer to

Statutory

Reserves 3,552.89 3,566.51 3,682.15 5,205.69 6,725.15

Transfer to Other

Reserves 0.01 0 -2.88 -0.1 306.9

Proposed

Dividend/Transfer

to Govt 751.62 840.16 862.04 1,523.53 2,089.18

Balance c/f to

Balance Sheet 0.34 0.34 0.34 0.34 0.34

~ 39 ~

Total 4,304.86 4,407.01 4,541.65 6,729.46 9,121.57

Brief Analysis of SBI’s Profit & Loss A/c:

From the Profit and loss Account we can see that the Net profit of the bank increases decline in

the year 2009 but significantly increases in the year 2010 and 2011. We also see percentage

increase in Interest earned from 2007 to 2009 is much lower than the interest expended during

these years. Other income which is mostly of fee based income from services rendered by the

bank shows a decline in the year 2009 and then increased in year ending March 2010 and March

2011.

COMMON-SIZE FINANCIAL STATEMENT ANALYSISCOMMON-SIZE FINANCIAL STATEMENT ANALYSIS

Since size of the companies compared will be different, we need to bring them on certain

common scale. For instance, SBI is several times more than OBC, Comparison is possible only if

we are able to reduce the financial statements into percentage basis. This is called ‘common size

financial statement analysis’. The common size financial statement expresses each items of the

balance sheet or profit and loss statement as a percentage of total assets or net sales respectively

and is calculated on yearly basis.

ORIENTAL BANK OF COMMERCE STATE BANK OF INDIA

Interest earned Interest earned

Year

in Rs. Cr.

Percentage Year

in Rs. Cr.

PercentageAmount

Total

Income Amount

Total

Income

2006 4118.92 4408.98 93.42 2006 35794.93 43183.62 82.89

2007 5164.90 5530.47 93.39 2007 39491.03 46937.79 84.13

2008 6838.18 6978.11 97.99 2008 48950.31 58348.74 83.89

2009 8856.47 9927.79 89.21 2009 63788.43 76479.78 83.41

~ 40 ~

Interpretation:

As income earned is an important source of income for the banks, from the profit and loss

account of Oriental Bank of Commerce and State bank of India, the percentage of income earned

of OBC from the year 2006 increases much more than the declining interest earned percentage of

SBI. The reason could be that SBI has got more branches abroad than OBC which might have

been affected as there had been more default in payments including interests from foreign

funding of assets. Another reason could be because SBI has got more deposits than OBC, and

with the increasing CRR an important step taken by the RBI to counter the impact of recession in

the year 2008, could have impacted the lending practices of SBI in offering loans and advances,

hence a decline in interest earned even of OBC in 2009.


Interest expended Interest expended

Year

in Rs. Cr.

Percentage Year

in Rs. Cr.

PercentageAmount

Total

Expenses Amount

Total

Expenses

2006 2513.85 3851.80 65.26 2006 20159.29 38776.93 51.99

2007 3473.58 4949.66 70.18 2007 23436.82 42396.48 55.28

2008 5156.17 6624.90 77.83 2008 31929.08 51619.62 61.85

2009 6859.97 9022.37 76.03 2009 42915.29 67358.55 63.71

~ 41 ~

Interpretation:

It is natural that banks spend large amount towards interest expenditure. Oriental Bank of

Commerce expenditure increases much more higher than State Bank of India especially in the

year 2008 and 2009, and an increasing trend is witnessed in both of the bank’s interest

expenditure on account of general increased in interest rates in the market during 2008.


Employee Cost Employee Cost

Year

in Rs. Cr.

Percentage Year

in Rs. Cr.

PercentageAmount

Total

Expenses Amount

Total

Expenses

2006 500.46 3851.80 12.99 2006 8123.04 38776.93 20.95

2007 520.86 4949.66 10.52 2007 7932.58 42396.48 18.71

2008 549.37 6624.90 8.29 2008 7785.87 51619.62 15.08

2009 756.16 9022.37 8.38 2009 9747.31 67358.55 14.47

~ 42 ~

Interpretation:

Looking at the figures above, we can see that the percentage of employee cost of SBI is much

higher than that of OBC, the reason must be that SBI is having more employees than that of

OBC and in addition to that, we can see that the percentage of employee’s cost in both of the

banks is actually minimum in 2008 and 2009. This implies that both the banks are applying a

cost control strategy or maybe both banks are recruiting less in 2008 compare to other years due

to the impact of the global recession.


Selling and administration expenses Selling and administration expenses

Year

in Rs. Cr.

Percentage Year

in Rs. Cr.

PercentageAmount

Total

Expenses Amount

Total

Expenses

~ 43 ~

2006 222.40 3851.80 5.77 2006 1853.32 38776.93 4.78

2007 123.93 4949.66 2.50 2007 3251.14 42396.48 7.67

2008 85.05 6624.90 1.28 2008 4165.94 51619.62 8.07

2009 496.97 9022.37 5.51 2009 5122.06 67358.55 7.60

Interpretation:

The selling and administration expenses of OBC has come down from 5.77 percent in 2006 to a

minimum of 1.28 percent in 2008, while we witness an opposite strategy applied by SBI where

the maximum percentage of selling and administration is seen in the year 2008 at 8.07 percent.

Here we can say that maybe both banks are using different strategy to tackle the impact of the

global financial crises, while OBC is trying to cut down Selling and administration expenses as a

strategy to control cost but SBI is using a different strategy by increasing its selling and

administration cost to take advantage of the market share of troubled foreign banks operating in

India and even abroad.


Operating expenses Operating expenses

~ 44 ~

Year

in Rs. Cr.

Percentage

Yea

r

in Rs. Cr.

PercentageAmount

Total

Expenses Amount

Total

Expenses

2006 971.16 3851.80 25.21 2006 11872.89 38776.93 30.62

2007 879.23 4949.66 17.76 2007 13251.78 42396.48 31.26

2008 890.14 6624.90 13.44 2008 14609.55 51619.62 28.30

2009 1553.42 9022.37 17.22 2009 18123.66 67358.55 26.91

Interpretation:

The operation expenditure of both the banks clearly shows the importance of cost control

especially in the year 2008 where the impact of Global economic meltdown is maximum, but we

can see OBC operating expenses started increasing whereas SBI still cut down its operating cost

to play safe in the fragile market.

~ 45 ~

TREND ANALYSISTREND ANALYSIS

Trend analysis shows the level of growth that banks have achieved over the years on each

component of financial statements. Suppose a bank shows a growth rate of 20% in total income

but its cost has increased by 26%, then its profitability is affected. One can perform such analysis

by observing the trends on each one of financial parameters.

Trend Analysis

Parameters

Oriental Bank of Commerce State Bank of India

2006 2007 2008 2009 2006 2007 2008 2009

Total Income 100 125 158 225 100 109 135 177

Total Expenditure 100 129 172 234 100 109 133 174

Net Profit 100 104 63 163 100 103 153 207

Interpretation:

From the above Trend analysis of selected parameters derived from the P&L account we saw

that in OBC the growth rate of Total Income is 25%, 58% and 125% in the year 2007, 2008 and

2009 respectively which is lower than the growth rate of total expenditure which is 29%, 72%,

134% in the year 2007, 2008 and 2009. This growth rate of Income which is lower than that of

expenditure affected the Net profit of the bank as we can see a decrease in the profit especially in

the year 2008 because of the vast difference of growth of income and the growth of expenditure

during this year.

Comparing to SBI the growth of income in the year 2007, 2008 and 2009 is increasing to 9%,

35% and 77% which is higher than the growth of expenditure which is 9%, 33% and 74% in the

year 2007, 2008 and 2009 respectfully. Hence we saw a higher and increasing profit of 3%, 53%

and 107% in the year 2007, 2008 and 2009 respectfully.

~ 46 ~

FINDINGS AND RECOMMENDATIONS FINDINGS AND RECOMMENDATIONS

“When US sneezes the world catches cold”.

The global financial crisis originated in United States of America. During booming years when

interest rates were low and there was great demand for houses, banks advanced housing loans to

people with low credit worthiness on the assumption that housing prices would continue to rise.

Later, the financial institutions repackaged these debts into financial instruments called

Collateralized Debt Obligations and sold them to investors world-wide. In

this way the risk was passed on multifold through derivatives trade. Surplus inventory of houses

and the subsequent rise in interest rates led to the decline of housing prices in the year 2006-07

which resulted in unaffordable mortgage payments and many people defaulted or undertook

foreclosure. The house prices crashed and the mortgage crisis affected many banks, mortgage

companies and investment firms world-wide. Different views on the reasons of the crisis include

boom in the housing market, speculation, high-risk mortgage loans and lending practices,

securitization practices, inaccurate credit ratings and poor regulation of the financial institutions.

The financial crisis has not only affected United States of America, but also European Union,

U.K and Asia. The Indian Economy too has felt the impact of the crisis to some extent.

The Indian banking system as an islet of tranquillity in a sea of turbulence.

It is not that the Indian economy has been spared in the present crisis. But the Indian situation is

different from that in the western world. In the US and Europe, the housing market collapsed and

dragged down banks. Banks are affected indirectly by the slowing down of the economy. The

direct impact of the crisis on the Indian banking system has been small because Indian banks do

not have big exposures to the subprime market. At a time when the financial system across the

globe is engulfed in a deep crisis, the Indian banking system continues to show resilience. The

underlying fundamentals of the Indian economy would continue to underpin the robust

performance of the banking sector which remains profitable and well capitalized. The inability of

Indian firms to raise funds abroad, including trade credit, puts pressure on the domestic banking

~ 47 ~

system for more credit. It is, in this context, one must view the actions of the Reserve Bank in

expanding liquidity.

Global Recession had an impact in most of the Indian banks as there was a decline in profits of

some of the major banks including some public sector banks. While thousands of people

worldwide have been handed over pink slips as a part and parcel of the global slowdown, Indian

public sector banks still have jobs many as banks still recruits during recession. The credit

expansion by the banking sector was also reflected in the deep divergence in the pace of growth

in deposits among the banks. Banks still manages to profit even in this recession period. Banks

are doing so well in this time of recession. The five reasons that big banks are able to beat the

recession and rake in the profits are: Underwriting increases, retail trading revenue, less

competition and boost retail banking.

The Comparative Study reveals

From the Brief Analysis of the Balance Sheet and Profit and loss A/c of OBC and SBI we found:

1. The reserves of the OBC bank is increasing which means that the bank is increasing the

retain earnings in-spite of increasing CRR in 2007-2008.

Even the reserves of the bank is increasing which means that the bank is increasing the

retain earnings.

2. Cash and balances in both banks increases sharply in the year 2008 because of the

increase in the CRR in the year 2008 which is the RBI initiative combat Recession.

3. We can see that the balance with banks in SBI in the year 2007 and especially in 2008

declines maybe because the bank have to reduce the savings in other banks to deposit

with the RBI due to the increase in the CRR in 2008. Advances increases sharply from

the year 2008 onwards which shows that the bank is increasing financing loans facilities

only after the falling of the CRR from 9% in August 2008 to 5% in January 2009 in both

banks.

4. OBC and SBI bank also increases its investments which show that the bank is expanding

in-spite the global meltdown. Other assets of OBC decreases in 2008 and 2009 but

increases in 2011.

~ 48 ~

5. Net profit of both the banks OBC and SBI decline in the year 2008 but significantly

increases in the year 2010 and 2011.

6. Other income of both the banks, which is mostly of fee based income from services

rendered by the bank shows a decline in the year 2009 and then increased in year ending

March 2010 and March 2011.

From the common size analysis we found that:

1. The percentage of income earned of OBC from the year 2006 increases much more than

the declining interest earned percentage of SBI because SBI has got more branches

abroad than OBC which might have been affected as there had been more default in

payments including interests from foreign funding of assets also could be because SBI

has got more deposits than OBC, and with the increasing CRR an important step taken by

the RBI to counter the impact of recession in the year 2008, could have impacted the

lending practices of SBI in offering loans and advances.

2. Oriental Bank of Commerce expenditure increases much more higher than State Bank of

India especially in the year 2008 and 2009, and an increasing trend is witnessed in both

of the bank’s interest expenditure on account of general increased in interest rates in the

market during 2008.

3. We can see that the percentage of employee cost of SBI is much higher than that of OBC,

the reason must be that SBI is having more employees than that of OBC and in addition

to that, we can see that the percentage of employee’s cost in both of the banks is actually

minimum in 2008 and 2009. This implies that both the banks are applying a cost control

strategy or maybe both banks are recruiting less in 2008 compare to other years due to the

impact of the global recession.

4. The selling and administration expenses of OBC has come down in 2008, while we

witness an opposite strategy applied by SBI where the maximum percentage of selling

and administration is seen in the year 2008. Here both banks are using different strategy

to tackle the impact of the global financial crises, while OBC is trying to cut down

Selling and administration expenses as a strategy to control cost but SBI is using a

different strategy by increasing its selling and administration cost to take advantage of the

market share of troubled foreign banks operating in India and even abroad.

5. The operation expenditure of both the banks clearly shows the importance of cost control

especially in the year 2008.

~ 49 ~

CONCLUSIONCONCLUSION

While Banks around the world are in turbulence, we should also be aware and know that the

prudential norms adopted by the Indian banking system and the better regulatory framework

adopted by the RBI in the country have helped the banking system remain stronger even during

the global slowdown. There is an apprehension among the customers and the people in the

country about the strength of the banking system. The money of the people is safe in Indian

banks including Oriental Bank of Commerce unlike the western banks. The Indian banking

system has the rule which has taught the sector not to have greed. In the end, the banking

industry is likely to be just fine. While some individual banks went down, and continue to

struggle, the financial sector as a whole is doing okay, and is likely to recover from this recession

without trouble. Hopefully, these profits mean that the banks will be more willing to help other

companies that need access to credit.

~ 50 ~

REFERENCES REFERENCES

(i) Books

Chandra, P. (2007), Financial Analysis of Banks in Managing Finance, 3rd Ed. New Delhi: Tata

McGraw-Hill Publishing Company Ltd., pp.45-60.

(ii) Electronic Books

Mishra, Alok. K. (2009) Chairman’s message to Share Holders.

[available at: http://obc.co.in viewed on 08/03//2012]

(iii)Journal Articles

Rangarajan. C (2009) The International Financial Crisis and Its Impact on India. The Analyst

Magazine, Vol 32, No 04, pp. 9-30

(iv) Web Sites

Prasad. A and Panduranga Reddy C(2009) Global Financial Crisis and Its Impact on India.

[available at: http://ssrn.com/sol2/papers.cfm?abstract_id=1423454]

Visconti. R. M. (2009) Global Recession and Microfinance in Developing Countries: Threats

and Opportunities.


~ 51 ~

http://ssrn.com/sol2/papers.cfm?abstract_id=1423454

http://ssrn.com/sol2/papers.cfm?abstract_id=1423454

Hemendra Jr. Choudhary Singh(2009) Economic Recession and Banking Reforms - Causes and

Solution [available at: http://ssrn.com/sol6/papers.cfm?abstract_id=5785979]

Vidyakala. k, Madhuvanthi.S, Poornima S, (2009) Recession in the Indian banking sector.


Islam Iyanatul (2010) The Great Recession of 2008-2009: Causes, Consequences and Policy

Responses. [available at: http://ssrn.com/sol45/papers.cfm?abstract_id=3567579]

~ 52 ~

ravi

Economy & Finance

oriental bank of commerce

project guide

financial statement

indian banking sector

state bank of india

vikas kumar pandey mba

state bank of indiasubmitted

indian banks