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.
