Perfo
ormance anaalysis
Perform
mance analysis in banks iss carried out based on ceertain financial ratios. Perrformance analysis
consists of return an
nalysis, risk analysis
a
and capital
c
adequacy analysiss. The appro
oaches for retturn
analysis are return on
o equity anaalysis, matrixx analysis and data envelopment anaalysis.
Return on
o equity is computed
c
m
multiplying
return on asseets with equity multiplierr.
Profitability ratios in
ncluding breaak even yield
d ratio, return on advances and cost of
o funds ratio
o are
computeed to examin
ne profitabiliity performance of bankss. Operating efficiency off banks is asssessed
by the raatio of operaating incomee to working funds, fund based incom
me to operating income and
a fee
based in
ncome to opeerating incom
me.
Businesss efficiency iss assessed by the ratio of various cattegories of deposits to th
he total depo
osits and
depositss within Indiaa and outsidee India are expressed
e
as percentage of total depo
osits. Employyee
efficienccy is assessed
d by computting businesss per employyee, profit peer employee,, administrattive
expensee per employyee, depositss per employyee and advaances per em
mployee.
Branch eefficiency is assessed
a
thrrough operatting income per
p branch, net profit peer branch,
administtrative expen
nse per bran
nch, depositss per branch and advance
es per branch.
Risk anaalysis consistss of computaation and analysis of cred
dit risk, markket risk, operating risk, in
nterest
rate riskk and exchange rate risk. By computin
ng the standard deviation and beta of
o respective income
stream for
f a specificc duration, w
we can examine operatingg risk. By exaamining the ratio
r
of gross and
net non performing assets to thee total loans and advancees credit riskk can be evalluated.
d funds such as cash and governmentt securities and cash
Liquidityy risk is assesssed by comparing liquid
with oth
her banks. Market risk is analyzed by computing price
p
risk of assets
a
and in
nterest rate risk.
r
Capital aadequacy analysis is thro
ough computting capital adequacy
a
rattio wherein Tier
T I and Tier II
capital aare related to
o risk weightted assets.
Branch Performance
P
e Analysis
Branch b
banking is en
ncouraged to
o stabilize baanking system
m and to induce healthy competition
n among
branchees. There are several typees of branche
es such as ru
ural, urban, small
s
size, larrge size and medium
size bran
nches.
The stan
ndards for asssessing bran
nch performaance are set in terms of operational
o
e
efficiency,
seervice
quality and
a profitabiility of the brranches. Ope
erational efficiency is asssessed by examining the manner
in which
h the branch resources arre utilized to
o maximize outcome.
o
OPERATTIONAL EFFIC
CIENCY OF A BRANCH
Service q
quality is exaamined by an
nalyzing reliaability, respo
onsiveness, assurance,
a
em
mpathy and tangible
facilitiess at the branch.
OBJECTIIVE AND PER
RCEIVED MEA
ASURES OF QUALITY
Q
Profitability of the branch is exam
mined by analyzing the efficiency
e
of revenue gen
nerating reso
ources.
PROFITA
ABILITY EFFIC
CIENCY MOD
DEL
a
for assessing ban
nk performan
nce identifies the driverss of performaance for
Data envvelopment analysis
a branch
h besides ideentifying the efficiency leevel of branches in comparison to eacch other.
Rating of Ban
nks
Rating of
o banks is aim
med at enco
ouraging bettter performaance, effectivve supervisio
on, identifyin
ng
weaknessses and for better risk management
m
t. Performan
nce rating maay be carried
d out by interrnal
methods or through external ageencies.
t basis of their
t
profile, capital adeq
quacy, resource strength, asset qualitty,
Banks arre rated on the
profitability, liquidityy, risk profilee and servicee quality.
MELS, probab
bility of failu
ure and conseequences givven
Risk takking in banks is assessed through CAM
failure aapproaches. CAMELS
C
mod
del considers capital adeequacy, assett quality, maanagement quality,
q
earningss, liquidity an
nd sensitivityy to market risk.
r
Under th
he structured approach an
a index of supervisory
s
a
attention
is computed
c
byy multiplyingg
probability of failure
e with impact of consequ
uences given failure.
PROBAB
BILITY OF FAILURE
SUPERV
VISORY ATTENTION
o banks help
ps in improving supervisio
on and regulation, identification of high
h risk
Risk based grading of
operatio
ons and need
d for inspection and investigation.
Corporate Governance in Banks
Bank closures, Financial frauds and regulatory failures across the world led to review of governance
structure and practices in banks. At global level these initiatives caused the formation of Cadbury
Committee in U.K., laid down on the basis of OECD Principles of Corporate Governance and Basel
Committee. In India, several expert committees such as K.M.BirlaCommittee, Narayana Murthy
Committee, Naresh Chandra Committee have recommended the implementation of corporate
governance norms suggested by them. RBI norms, Basel Committee recommendations and IFRS
requirements aim at improving corporate governance practices in banks.
Corporate governance norms streamlines provisions relating to minority shareholders, shareholder
protection, Board structure, Board committees, audit committee responsibilities and disclosure
practices. All banking companies have been directed to adopt corporate governance norms in India.
In order to improve effective Board function the Board structure has been reviewed to include larger
proportion of independent directors. If the chairman is a non executive director Board should have
independent directors to the extent of one third of the total membership. If the chairman is not a
non executive director, the board should have fifty percent of independent directors. Besides Board
should constitute nomination committee, remuneration committee and audit committee to assist
the Board to carry out its functions.
Audit committee should have a non executive chairman and its members must have knowledge of
finance.
The bank is required to lay down systems and procedures for risk assessment and reporting. Audit
committee has to review adequacy of internal control systems and risk management procedures.
Corporate governance norms lay a great emphasis on quality of audit reports.
The annual reports of the banks should have a separate section dealing with corporate governance
reporting. The disclosure practices in banks are required to confirm to IFRS requirements,
international standards on auditing and institute of chartered accountant of India standards.
By laying down corporate governance norms for banks, it is expected to bring greater openness,
accountability, transparency, responsibility and risk management.
Questions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
What are the factors to be considered for assessing financial performance of a bank?
Describe the framework for bank performance assessment.
What are the parameters for assessing branch performance?
Discuss the methods of assessing return, risk and capital adequacy in banks.
Explain how data envelopment analysis can be applied to a bank.
Explain the need for rating banks.
What are the factors to be considered for rating of bank performance?
Explain CAMELS model of rating banks.
Discuss the importance of improving governance in banks.
Explain the new framework of corporate governance for banks as per the recommendations
of expert committees.
11. Discuss the role of audit committee in corporate governance of banks.
12. Discuss how the Board performance can be improved through corporate governance norms.