Analysis of SBI and BOB Performance

ECONOMIC AND FINANCIAL ANALYSIS OF SBI & BOB
[AUTHOR NAME] 1
ECONOMIC AND FINANCIAL ANALYSIS OF SBI AND BOB
BLACK BOOK PROJECT
JEETU MATTA

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Executive Summary
In this project explain Commercial Banking sectors in India which taken two
banks that's State Bank of India (SBI) & Bank Of Baroda (BOB) in which explain
different government norms, functions, types of risks and strategies regarding to
banks and also explain how the economics issues affect to Indian banking sector.
Public banks brought about structural change in the banking industry with the
commitment of the government to implement social control on banks to make them
realise the national goal of developing the economy.
The present study is an attempt to examine the performance level of different
banking groups’ viz. public, private and foreign on the basis of various financial
indicators which have been divided into four categories namely liquidity, expense,
profitability and productivity ratios. Impact of Mergers on Cost Efficiency Here an
attempt is made to investigate the factors, which affect the efficiency of commercial
banks in India.
In times of volatility and fluctuations in the market, financial institutions need to
prove their mettle by withstanding the market variations and achieve sustainability
in terms of growth and well as have a stable share value.
Explain with all fundamental ratios and technical to better understand about bank
profile or market capitalization and assets or net worth of firm
Effects of inflation and monetary policy on Indian currency which directly effects to
all banks which comes under India boundary

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INTRODUCTION OF BANK
Comparative Analysis on Banks &
Financial Institutions
INDEX
CHP
NO.
PARTICULARS
1
1.1
1.2
Introduction
Indian banking system
1
2
1.3 Types of bank 3
1.4 Types of bank account in india 5
1.5 Function of banks 6
1.6 Introduction of “SBI and BOB 11
2. 12
2.1 Introduction 12
2.2 Comparisons of Banks and Non-Banking Financial
Institution
12
2.3 List of major products offered by NBFCs in India 14
PAGE
NO.
1.

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Impact Of Merger On The Cost Efficiency
of Indian Commercial Banks
2.4 Liquidity and Profitability Analysis of Commercial
Banks in India
14
3. 15
3.1 Introduction 15
3.2 Data envelopment analysis 15
3.3 Bank Ownership Wise Analysis 16
3.4 Impact of Mergers on Cost Efficiency 16
3.5 Conclusion and Policy Implications 17
4.
Government policy and scheme on SBI and BOB
19
4.1 Monetary Policy 19
4.2 Fiscal Policy 22
4.3 Gold Deposit Scheme 24
4.4 Pradhan Mantri Jan Dhan Yojana (PMJDY 25
4.4 Public Provident Fund, (PPF): 26
5. Risk Management in SBI and BOB 29
5.1 Introduction 29
5.2 Credit risk 30

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5.3 Operating and Default risk 31
6. Effect of Bank Inflation on Commercial Bank 32
6.1 Forecasting Effect Of Inflation on Commercial Bank 33
6.2 Effect of Inflation on bank profitability 35
6.3 Impact on Net Asset Margin 36
7. Data Analysis 40
7.1 Ratio Analysis 40
7.2 Financial Ratios of BOB And SBI 43
7.3 Financial statement of “SBI” 44
7.4 Financial statement of “BOB” 46
7.5 Trend Analysis Bank of Baroda 48
7.6 Trend Analysis of State Bank Of India 49
8 Economic Analysis Of Commercial Bank In India 50
8.1 Macro and Micro Environment 50
8.2 Macroeconomics vs Microeconomics – Commonalities 53

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8.3 How does Micro Affect Macro? 55
9 CONCLUSION 57
10 REFERENCE 58

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CHAPTER: 1 INTRODUCTION OF BANK
1.1 INTRODUCTION
Indian economic environment is witnessing path breaking reform measures. The financial sector,
of which the banking industry is the largest player, has also been undergoing a metamorphic
change. This reform has not only influenced the productivity and efficiency of many of the Indian
Banks, bult has left everlasting footprints on the working of the banking sector in India. Certain
trends like growing competition, product innovation and branding, focus on strengthening risk
management systems, emphasis on technology have emerged in the recent past. Today the banking
industry is stronger and capable of withstanding the pressures of competition. While
internationally accepted prudential norms have been adopted, with higher disclosures and
transparency, Indian banking industry is gradually moving towards adopting the best practices in
accounting, corporate governance and risk management. The major role of banks is to collect
money from the public in the form of deposits and then along with its own funds to serve the
demands of the customers quickly, paying interest for the deposits and to meet out the expenses to
carry out its activities. For this purpose, banks maintain adequate liquidity and earn profits from
its activities. Profit is the main reason for the continued existence of every commercial
organization and profitability depicts the relationship of the absolute amount of profit with various
other factors. In any case, compared to other business concerns, banks in general have to pay much
more attention for balancing profitability and liquidity. Liquidity is required to meet out the prompt
demands of customers and profitability is required to meet out the expenses of banks. But both the
terms are contradictory in nature. If banks maintain more liquidity, their profitability decrease and
if they increase their profitability they will have to reduce their liquidity. In this way, banks act as
an engine for a business organization. So in the present study an attempt has been made to evaluate
the performance of different categories of banks viz. public, private and foreign bank groups in
India. For evaluating the performance, eleven financial ratios have been used. These ratios further
have been categorized into two categories viz. liquidity and profitability

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1.2 INDIAN BANKING SYSTEM:
Banking System in India or the Indian Banking System can be segregated into three distinct
phases:
A. Early Phase of Indian Banks, from 1786 to 1969: The first bank, namely Bank of
Bombay was established in 1720 in Bombay. Later on Bank of Hindustan was established in
Calcutta in 1770. General Bank of India was established in 1786. Bank of Hindustan carried on
the business till 1906
B. Nationalization of Banks and the Banking Sector Reforms, from 1969 to
1991: The number of banks in India in 1951 were the highest – 566. In 1960, RBI was empowered
to force the compulsory merger of the weak banks with the strong ones. This led to reduction in
the number of banks to 89 in 1969
C. New Phase of Indian Banking System, with the Reforms After 1991: On the
suggestions of Narasimha Committee, the Banking Regulation Act was amended in 1993 and thus
the gates for the new private sector banks were opened.
THE PRESENT STRUCTURE OF I NDIAN B ANKING S YSTEM:
1. PUBLIC SECTOR BANKS:
Currently, there are 27 Public Sector Banks in India including 19 Nationalized Banks (14+6 – 1
New Bank of India merged with PNB in 1993 + SBI which is not a nationalized bank + Five
Subsidiaries of SBI + IDBI + Bharatiya Mahila Bank – established under Parliament of India Acts).
State Bank of India and its 5 Associate Banks, together called State Bank Group (The names of
the 5 Associate Banks are: State Bank of Travancore (SBT), State Bank of Patiala (SBP), State
Bank of Hyderabad (SBH), State Bank of Mysore (SBM) and State Bank of Bikaner and Jaipur

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(SBBJ). The Union Cabinet approved the merger of the five subsidiaries; and Bharatiya Mahila
Bank Ltd with SBI on June 15, 2016 and the merger is under progress.
Regional Rural Banks (RRBs):
Previously these were 196 Regional Rural Banks sponsored by 27 State Cooperative Banks. As
on 31st March, 2013 due to mergers their number has come down from 196 to 64. The numbers
of branches of RRBs are 17856 as on 31 March 2013 covering 635 districts throughout the country.
Notably, currently there are 664 districts in India.
Development Banks:
These include Industrial Finance Corporation of India (IFCI) established in 1948, Export-Import
Bank of India (EXIM Bank) established in 1982, National Bank for Agriculture & Rural
Development (NABARD) established in 1982, and Small Industries Development Bank of India
(SIDBI) established on 2nd April, 1990
2. PRIVATE SECTOR BANKS:
(i) Private Banks and Foreign Banks: These include Private Banks and Foreign Banks in India.
Currently there are 23 banks operating in India in this category.
(ii) District Central Co-Operative Banks in India: As on 01.04.2016, there are 371 District
Central Cooperative Banks in India with maximum number of these located in U.P. (50) and
Madhya Pradesh (38).
1.3 TYPE OF THE BANK:
A. Saving Banks : Saving banks are established to create saving habit among the people. These
banks are helpful for salaried people and low income groups. The deposits collected from
customers are invested in bonds, securities, etc. At present most of the commercial banks carry the
functions of savings banks. Postal department also performs the functions of saving bank.
B. Commercial Banks: Commercial banks are established with an objective to help
businessmen. These banks collect money from general public and give short-term loans to

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businessmen by way of cash credits, overdrafts, etc. Commercial banks provide various services
like collecting cheques, bill of exchange, remittance money from one place to another place.
C. Industrial Banks / Development Banks: Industrial / Development banks collect cash
by issuing shares & debentures and providing long-term loans to industries. The main objective of
these banks is to provide long-term loans for expansion and modernization of industries.
D. Land and mortgage Orland Development bank: Land Mortgage or Land
Development banks are also known as Agricultural Banks because these are formed to finance
agricultural sector. They also help in land development.
In India, Government has come forward to assist these banks. The Government has guaranteed the
debentures issued by such banks. There is a great risk involved in the financing of agriculture and
generally commercial banks do not take much interest in financing agricultural sector.
E. Indigenous bank : Indigenous banks means Money Lenders and Sahukars. They collect
deposits from general public and grant loans to the needy persons out of their own funds as well
as from deposits. These indigenous banks are popular in villages and small towns. They perform
combined functions of trading and banking activities. Certain well-known indian communities like
Marwaris and Multan even today run specialized indigenous banks
F. Central / Federal / National Bank: Every country of the world has a central bank. In
India, Reserve Bank of India, in U.S.A, Federal Reserve and in U.K, Bank of England. These
central banks are the bankers of the other banks. They provide specialised functions i.e. issue of
paper currency, working as bankers of government, supervising and controlling foreign exchange.
A central bank is a non-profit making institution. It does not deal with the public but it deals with
other banks. The principal responsibility of Central Bank is thorough control on currency of a
country.
G. Co-operative Bank: In India, Co-operative banks are registered under the Co-operative
Societies Act, 1912. They generally give credit facilities to small farmers, salaried employees,

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small-scale industries, etc. Co-operative Banks are available in rural as well as in urban areas. The
functions of these banks are just similar to commercial banks.
H. Exchange Banks: Hong Kong Bank, Bank of Tokyo, Bank of America are the examples of
Foreign Banks working in India. These banks are mainly concerned with financing foreign trade.
Following are the various functions of Exchange Banks :-
1. Remitting money from one country to another country,
2. Discounting of foreign bills,
3. Buying and Selling Gold and Silver, and
4. Helping Import and Export Trade
I.Trade Consumers Banks: Consumers bank is a new addition to the existing type of banks.
Such banks are usually found only in advanced countries like U.S.A. and Germany. The main
objective of this bank is to give loans to consumers for purchase of the durables like Motor car,
television set, washing machine, furniture, etc. The consumers have to repay the loans in easy
installments
1.4 TYPE OF BANK ACCOUNT IN INDIA:
• Current account: Current account is mainly for business persons, firms, companies,
public enterprises etc. and are never used for the purpose of investment or savings.
• Savings Account: Savings Account is meant for saving purposes. Any individual either
single or jointly can open a savings account. Most of the salaried persons, pensioners and
students use Savings Account.
• Recurring deposit account: Recurring deposit account or RD account is opened by
those who want to save certain amount of money regularly for a certain period of time and
earn a higher interest rate.
• Fixed Deposit account: In Fixed Deposit Account (also known as FD Account), a
particular sum of money is deposited in a bank for specific period of time.

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1.5 The Functions of Banks
These functions of banks are explained in following paragraphs of this article.
A. Primary Functions of Banks :
The primary functions of a bank are also known as banking functions. They are the main functions
of a bank.
These primary functions of banks are explained below.
1. Accepting Deposits are allowed subject to certain restrictions. This account is suitable to
salary and wage earners. This account can be opened in single name or in joint names.

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B. Fixed Deposits: Lump sum amount is deposited at one time for a specific period. Higher
rate of interest is paid, which varies with the period of deposit. Withdrawals are not allowed before
the expiry of the period. Those who have surplus funds go for fixed deposit.
C. Current Deposits: This type of account is operated by businessmen. Withdrawals are freely
allowed. No interest is paid. In fact, there are service charges. The account holders can get the
benefit of overdraft facility.
D. Recurring Deposits: This type of account is operated by salaried persons and petty traders.
A certain sum of money is periodically deposited into the bank. Withdrawals are permitted only
after the expiry of certain period. A higher rate of interest is paid.
2. Granting of Loans and Advances: The bank advances loans to the business community
and other members of the public. The rate charged is higher than what it pays on deposits. The
difference in the interest rates (lending rate and the deposit rate) is its profit.
The types of bank loans and advances are :-
a. Overdraft
b. Cash Credits
c. Loans
d. Discounting of Bill of Exchange
A. Overdraft: This type of advances are given to current account holders. No separate
account is maintained. All entries are made in the current account. A certain amount is sanctioned
as overdraft which can be withdrawn within a certain period of time say three months or so. Interest
is charged on actual amount withdrawn. An overdraft facility is granted against a collateral
security. It is sanctioned to businessman and firms.
B. Cash Credits: The client is allowed cash credit up to a specific limit fixed in advance. It can
be given to current account holders as well as to others who do not have an account with bank.
Separate cash credit account is maintained. Interest is charged on the amount withdrawn in excess

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of limit. The cash credit is given against the security of tangible assets and / or guarantees. The
advance is given for a longer period and a larger amount of loan is sanctioned than that of overdraft.
C. Loans: It is normally for short term say a period of one year or medium term say a period of
five years. Now-a-days, banks do lend money for long term. Repayment of money can be in the
form of installments spread over a period of time or in a lumpsum amount. Interest is charged on
the actual amount sanctioned, whether withdrawn or not. The rate of interest may be slightly lower
than what is charged on overdrafts and cash credits. Loans are normally secured against tangible
assets of the company.
D. Discounting of Bill of Exchange: The bank can advance money by discounting or by
purchasing bills of exchange both domestic and foreign bills. The bank pays the bill amount to the
drawer or the beneficiary of the bill by deducting usual discount charges. On maturity, the bill is
presented to the drawee or acceptor of the bill and the amount is collected.
B. Secondary Functions of Banks :
The bank performs a number of secondary functions, also called as non-banking functions.
These important secondary functions of banks are explained below.
1. Agency Functions:The bank acts as an agent of its customers. The bank performs a number
of agency functions which includes :-
a. Transfer of Funds
b. Collection of Cheques
c. Periodic Payments
d. Portfolio Management
e. Periodic Collections
f. Other Agency Functions

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A. Transfer of Funds:The bank transfer funds from one branch to another or from one place
to another.
B. Collection of Cheques:The bank collects the money of the cheques through clearing
section of its customers. The bank also collects money of the bills of exchange.
C. Periodic Payments:On standing instructions of the client, the bank makes periodic
payments in respect of electricity bills, rent, etc.
D. Portfolio Management:The banks also undertakes to purchase and sell the shares and
debentures on behalf of the clients and accordingly debits or credits the account. This facility is
called portfolio management.
E. Periodic Collections:The bank collects salary, pension, dividend and such other periodic
collections on behalf of the client.
F. Other Agency Functions:They act as trustees, executors, advisers and administrators on
behalf of its clients. They act as representatives of clients to deal with other banks and institutions.
2. General Utility Functions:The bank also performs general utility functions, such as :-
a. Issue of Drafts, Letter of Credits, etc.
b. Locker Facility
c. Underwriting of Shares
d. Dealing in Foreign Exchange
e. Project Reports
f. Social Welfare Programmes
g. Other Utility Functions
A. Issue of Drafts and Letter of Credits:Banks issue drafts for transferring money from
one place to another. It also issues letter of credit, especially in case of, import trade. It also issues
travellers' cheques.

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B. Locker Facility:The bank provides a locker facility for the safe custody of valuable
documents, gold ornaments and other valuables.
C. Underwriting of Shares:The bank underwrites shares and debentures through its
merchant banking division.
D. Dealing in Foreign Exchange:The commercial banks are allowed by RBI to deal in
foreign exchange.
E. Project Reports:The bank may also undertake to prepare project reports on behalf of its
clients.
G. Social Welfare Programmes:It undertakes social welfare programmes, such as adult
literacy programmes, public welfare campaigns, etc.
G. Other Utility Functions:It acts as a referee to financial standing of customers. It collects
creditworthiness information about clients of its customers. It provides market information to its
customers, etc. It provides travellers' cheque facility.

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1.6 INTRODUCTION OF SBI AND BOB:
State Bank OF India is India’s largest bank with total assets of US$ 260 billion at September 31,
2009. The Bank has a network of 16,000 branches and about 3000ATMs in India and presence in
32 countries. SBI Bank offers a wide range of banking products and financial services to corporate
and retail customers through a variety of delivery channels and through its specialized subsidiaries
and affiliates in the areas of investment banking, life and non-life insurance, venture capital and
asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and
Canada, branches in the United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and
Dubai International Finance Centre and representative offices in United Arab Emirates, China,
South Africa, Bangladesh, Thailand, Malaysia and Indonesia. SBI Bank’s equity shares are listed
in India on Bombay Stock Exchange and the National Stock Exchange of India Limited.
Bank of Baroda is one of the most prominent banks in India, having its total assets as Rs. 1,43,146
Crores as on 31st of March 2007. The bank was founded by Maharaja Sayajirao Gaekwad III (also
known as Shrimant Gopalrao Gaekwad), the then Maharaja of Baroda on 20th of July 1908 with a
paid capital of Rs. 10 Lacs. From its introduction in a small building of Baroda, the bank has come
a long way to achieve its current position as one of the most important banks in India

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CHAPTER :2
Comparative Analysis on Banks & Financial Institutions
2.1 INTRODUCTION
A non-bank financial institution (NBFI ) is a financial institution that does not have a full banking
license or is not supervised by a national or international banking regulatory agency. NBFIs
facilitate bank-related financial services , such as investment , risk pooling , contractual savings,
andmarket brokering . Examples of these include insurance firms , pawn shops,cashier's check
issuers, check cashing locations, payday lending, currency exchanges, and microloan
organizations Alan Greenspan has identified the role of NBFIs in strengthening an economy, as
they provide "multiple alternatives to transform an economy's savings into capital investment
[which] act as backup facilities should the primary form of intermediation fail.Operations of non-
bank financial institutions are often still covered under a country's banking regulations .
2.2: Comparisons of Banks and Non-Banking Financial Institution:
Public banks brought about structural change in the banking industry with the commitment of the
government to implement social control on banks to make them realise the national goal of
developing the economy. The major segment of banking sector came under the control of the
government. Social control measures were also implemented such as priority sector lending
targets. This led to the massive expansion as a banking industry to borrowers across the country.
These developments created a strong network of public Sector banks meant to bring about a socio
economic transformation in the society. The share of credit to agriculture which constituted a small
portion for a long time improved significantly with the onset of lead bank scheme and district plan.
Indian banking sector have come a long way when it competitive and complex in nature. The
Implementation of Basel II has had a positive impact on the capital profile of the Public sector
banks. In base uniform risk rate was equally attached to all advances irrespective of degree of risk.

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In India number of Private banks increased and their financial operations also increased
considerably. Though the banking principles and rule and regulation followed were the same
between Public sector banks and private sector banks but the competition spirit in banking sector
increased to a greater extent with the result the advances and selection of borrowers varied with
the result the profitability and quality of the assets varied from public sector to the private sector,
Hence the study involved the comparison between the private sector and the public sector banks.
Private Banks charge high rate of interest and also issue large number of credit card to the
individual as compared to public sector bank risk
Cooperative banks are expected to support economically backward section of the society
especially in rural areas. The advance or finance provided to the borrowers may be to start new
business or for the purpose of agriculture or farmers. There is a study increase in the quantity of
advances but there should also be increase in the quality of advances and recovery. The study has
been conducted on Urban Scheduled bank situated. Since the number of cooperative bank is large
in number and they have been classified as Scheduled Urban Cooperative Bank, State cooperative
banks, District Cooperative Bank, Rural Cooperative banks, Local Cooperative Banks. Hence the
research study has been compared to Public banks, Private Banks along with Cooperative banks.
The Reserve Bank of India is more stringent in framing banking rules and regulations. Inspite of
the strict banking laws the cooperative banks are able to meet the required formalities. The
comparison is required to find out the scope of improvement in scheduled Urban Cooperative
banks so as to be as competitive as Public-Sector banks and Private sector banks Today schedule
Urban Cooperative banks are expected to support all sections of borrowers by financing them to
start a new business or for agricultural purpose the banks accepts deposits from the members and
lend money to needy persons. Since their main objective is to support priority sector, farmer,
agriculturist, SSI, artisans, small traders and salary earners. Recovery becomes difficult and leads
to NPA. Generally cooperative banks do not issue credit cards but they issue Kissan card which is
may prove to be doubtful debts
Non-Banking Finance Company is not a regular bank but they raise the capital through public
issues. Hence Reserve Bank of India is very stringent in passing rules and regulations. The Non-
Banking Financial Institution is more careful in lending loans. They prefer only collateral security
and also and along with collateral security they also insist on Guarantors. The research study

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involves those Non-Banking Finance who provides general loans. Some Non-Banking Finance
lend specific kind of loan which may not be appropriate to the research study. The comparison
enabled to bring about striking features of success on recovery proceedings and quality of the
assets with reduction in NPA or not.
2.3 List of major products offered by NBFCs in India:
Funding of commercial vehicles
Funding of infrastructure assets
Retail financing
Loan against shares
Funding of plant and machinery
2.4 Liquidity and Profitability Analysis of Commercial Banks in India:
The financial sector in India as well as the world over continues to be one of the primary engines
of economic growth. One of the key constituents of the financial sector in India is the banking
system. The important role played by the banks in the provision of intermediation services and the
capital formation process in an emerging economy such as India hardly needs to be emphasized.
Since the early 1990s, the structure of banking sector has significantly changed due to deregulation
and liberalization, goaccompanied by divestments of public banks. The developmentsare expected
to have important implications for operating performance and profitability in the banking system.
Therefore, from the point of view of both managerial and policy interest, it is extremely important
to know the efficiency levels of banking firms and their temporal behavior and which bank group
has performed better than others in this period of transition. The present study is an attempt to
examine the performance level of different banking groups’ viz. public, private and foreign on the
basis of various financial indicators which have been divided into four categories namely liquidity,
expense, profitability and productivity ratios.

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Chapter:3
Impact Of Merger On The Cost Efficiency of Indian Commercial
Bank
3.1 Introduction:
Mergers and acquisitions in Indian banking sector have initiated through the recommendations of
Narasimham committee II in 1998, when its report recommended a drastic reduction in the number
of public sector unit banks from the set of 27. The committee recommended that merger between
strong banks/ financial institutions would make for greater economic and commercial sense and
would be a case where the whole is greater than the sum of its parts and have a “force multiplier
effect”.
Mergers come with several benefits such as creation of synergies, economics of scale, cost
reduction, and quickly acquire new technologies, skills, markets, and resources. There are several
reasons for mergers the primary ones are deregulation and technology. Deregulation has given
banks opportunities to explore new business markets and mergers seem an attractive route to them.
Technology has helped rationalize costs and delivery channels. Therefore, technology and
deregulation have been considered as the drivers for bank mergers.
3.2 Data envelopment analysis:
DEA computes the efficiency of banks on the basis estimated piece-wise linear frontier made up
by a set of efficient banks. The banks that lie on the frontier are treated as best practice banks and
obtain efficiency score equal to one whereas the banks that do not lie on the frontier are relatively
inefficient and their efficiency score lie in the range of zero and one. The DEA approach
decomposed the CE into its two different components, TE (technical efficiency) and AE (allocative
efficiency). Technical efficiency reflects the ability of a firm to maximize output from a given set
of inputs whereas allocative efficiency reflects the ability of the firm to use these inputs in optimal
proportions, given their respective prices where the cost of production is minimum. Technical
efficiency implies that there is no waste in using inputs to produce specific quantity of output. A

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firm is said to be technically efficient when it cannot increase any output or decrease any input
without reducing the quantities of other outputs or inputs. Combing these twomeasures provides a
measure of cost efficiency. A firm is said to be cost efficient when it is both alloactively as well
as technically efficient.
3.3 Bank Ownership Wise Analysis:
The bank ownership wise analysis of average cost efficiency scores of Indian commercial banks
along with its two components technical efficiency (TE) and allocative efficiency (AE). It is
evident from the table that cost efficiency of private sector banks is 76.3 per cent followed by 73.4
percent of public sector banks during the entire study period. This indicates that the private sector
banks have the potential for cost saving by 23.7 per cent or in other words, private sector banks
have could use only 76.3 per cent of resources actually employed to produce the given level of
output. The table also indicates that public sector banks can cut their costs by 26.6 per cent to
become fully efficient banks and to capture the position of best practice frontier. The findings of
this study reported that private sector banks have performed better than public sector banks in cost
savings with the given state of technology. the decomposition of CE into its two components
clearly indicates that in each year allocatively inefficiency is always higher than technical
inefficiency. It implies that the dominant source of cost inefficiency among Indian commercial
banks is allocative inefficiency rather than technical inefficiency. It suggests that managers of
Indian banks are relatively good in using the minimum level of inputs at a given level of outputs
but they were not good in selecting the optimal mix of inputs at given prices
3.4 Impact of Mergers on Cost Efficiency:
Here an attempt is made to investigate the factors, which affect the efficiency of commercial banks
in India. The efficiency of banks is not only influenced by the merger activity, rather many
variables affect the efficiency ofbanks. Several bank and industry specific factors may influence a
particular bank‟s efficiency level. Some of these factors may be neither inputs nor outputs in the
production process, but rather circumstances faced by a particular bank (Sufian and Mazid, 2007).
It is apparent from the analysis that the efficiency scores differ among different banks in India.
The analysts, bank managers and policy makers are interested in determining whether their

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differences are significant or not in statistical sense. This can be done by using regression analysis.
As the efficiency scores derived from DEA model is bounded between 0 and 1, an application of
simple regression model may provide biased results and application of Tobit regression more
appropriate than simple regression model. However, Alexander and Jaforullah (2004) pointed out
that 100% efficiency or 0% inefficiency is a valid score and no higher (or lower) score is possible,
by definition. In this sense, the data are not truly censored at one (or 0), OLS is therefore quite
appropriate.
3.5 Conclusion and Policy Implications:
Applying, a non-parametric DEA approach, this is examine the cost, technical and allocative
efficiency of Indian banks over the period 1990-91-2007-08. This paper also investigated the
effects of mergers and acquisition on the cost efficiency of Indian Banks that have merged during
1991-92 to 2007-08. The findings of this study suggest that over the entire study period average
cost efficiency of public sector banks found to be 73.4 and for private sector banks is 76.3 percent.
Overall, results indicate that mergers led to higher level of cost efficiencies for the merging banks.
The decomposition of cost efficiency into its components suggests that technical efficiency has
been main source of efficiency gains from merger rather than allocative efficiency. Merger
between distressed and strong banks did not yield any significant efficiency gains to participating
banks. However, the forced merger among these banks succeeded in protecting the interest of
depositors of weak banks but stakeholders of these banks have not exhibited any gains from
mergers.
The empirical findings of this study suggest that trend of merger in Indian banking sector has so
far been restricted to restructuring of weak and financially distressed banks. The Government
should not be seen merger as a means of bailing out of weak banks. The empirical findings further
suggest that strong banks should not be merged with weak banks, as it will have adverse effect
upon the asset quality of the stronger banks. The need of the hour is that the strong banks should
be merged with strong banks to compete with foreign banks and to enter in the global financial
market. The Indian financial system requires very large banks to absorb various risks that have
been emerged from operating in local and global market. The prime factors for future mergers in

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Indian banking industry included the Basel –II environment, challenges of free convertibility and
requirement of large investment banks. Therefore, the Government and policy makers should be
more cautious in promoting merger as a way to reap economies of scale and scope

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Chapter: 4
Government policy and scheme on SBI and BOB
4.1 Monetary Policy:
Monetary policy also known as the credit policy, is the policy which is purely managedby our
Central bank of India (Reserve Bank of India) to control the money supply in theeconomy &
amount of credit in the economy.
Monetary policy is governed by RBI. Monetary policy through both monetary and non-monetary
measures influence savings, investment, output, income & price level in the economy.
To control the money supply RBI uses various instruments. Basically, RBI control these rates like
Bank Rates, MSF, Repo Rate, Reverse Repo rate, Cash Reserve ratio &Statutory liquidity ratio in
order to manage price stability in the economy & to achieve high economic growth.
OBJECTIVES:
The main aim of the monetary policy is Macro-Economic stability by maintaining price stability
and adequate flow of credit to the productive sectors of the economy.

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The Main important objectives of monetary policy are Price stability, Exchange Stability,
Neutrality of Money, Economic Development, etc.
1. Price Stability
It is one of the most important objectives of the monetary policy. RBI makes efforts to control
price stability through various monetary measures. Under price stability the fluctuations in prices
are to controlled to have positive impact on production, income and employment generation in the
economy. In absence of price stability, inflationary and deflationary conditions are generated in
the economy, which affects the various sectors of the economy.
2. Exchange stability
It is one of the traditional objective of the monetary policy. Exchange rate stability means to
minimise the rate of fluctuation in the value of a currency in respect to the value of another
currency. Stability in exchange rate will lead to outflow of money and encourage development of
international trade leading to favorable balance of payment situation.
3. Neutrality of Money
Neutrality of money means to keep the impact of charge in the quantity of money onvarious
elements like price, income, employment as constant. Neutrality of money does not mean that the
supply of money is perfectly inelastic and fixed but it means to control the effectiveness of money.
4. Economic development
In a developing economy monetary policy encourage economic development by attaining
equilibrium between money supply and demand. Economic development and the capital formation
are closely related and the monetary policy through its quantitative and qualitative measures
accelerating saving, investment and capital formation for rapid economic growth.
MEASURES OF MONETARY POLICY
a. Quantitative Measures
b. Qualitative Measures

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ROLES OF M ONETARY P OLICY
Monetary Policy cannot directly influence economic growth but it can prove conductive
environment that encourages growth through low and stable prices. When prices are stable people
can effectively plan to invest, save and consume. When there are indications of excess supply of
money and rising inflationary pressures the banks adopt the dear or restrictive monetary policy
through the contraction of credit.
On the other hand, when there is low money supply in the economy i.e. in the deflationary
situation, bank through cheap or expansionary money policy increase the supply of money in order
to stimulate domestic demand.
INSTRUMENTS O F MONETARY P OLICY
DIRECT INSTRUMENTS
Cash Reserve Ratio
Every bank Maintain a certain % of their total deposits with RBI in the form of Cash and Net
demand & Time liabilities. Current CRR is 4%. Every Bank has to pay the amount to RBI on every
15 Days.
Statutory Liquidity Ratio (SLR)
Every bank has to maintain a certain % of their total deposits in the form of (Gold +Cash + bonds
+ Securities) with themselves at the end of every business days. Current SLR is 20.75%.
INDIRECT INSTRUMENTS
Bank Rate
Bank rate is also termed as “Discount Rate” The rate through which RBI charges certain % for
providing money to other banks without any security for Long period of time for 90 Days &
Current Bank Rate is 6.75%.
MSF (Marginal Standing Facility)
MSF is the rate through which bank can borrow funds for Short time – Overnight basis. Current
MSF is 6.75%.
Repo Rate
Repo rate is the rate through which RBI lends money to commercial bank with security for Short

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period of time in the event of short fall of funds. Current Repo rate is 6.25%
Reverse Repo Rate
Reverse Repo rate is the rate through which Commercial Bank lends money to Central Bank of
India i.e. RBI, for Short period of time. Current reverse repo rate is 5.75%.
4.2 Fiscal Policy
Introduction
Fiscal policy is the use of government spending and taxation to influence the economy. Tax cuts
have a smaller effect on aggregate demand than increased government spending by which a
government adjusts its spending levels and tax rates to monitor and influence a nation's economy.
It is the sister strategy to monetary policy through which a central bank influences a nation's money
supply.
Instrument Of Fiscal Policy

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1. Budget
The budget of a nation is a useful instrument to assess the fluctuations in an economy. Different
budgetary principles have been formulated by the economists, prominently known as:
(1) Annual budget
(2) cyclical balanced budget and
(3) fully managed compensatory budget
2.Taxation
Taxation is a powerful instrument of fiscal policy in the hands of public authorities which greatly
affect the changes in disposable income, consumption and investment. An anti- depression tax
policy increases disposable income of the individual, promotes consumption and investment.
Obviously, there will be more funds with the people for consumption and investment purposes at
the time of tax reduction.
3.Public Expenditure
The active participation of the government in economic activity has brought public spending to
the front line among the fiscal tools. The appropriate variation in public expenditure can have more
direct effect upon the level of economic activity than even taxes.
4.Public Works
There are two forms of expenditure i.e., Public Works and ‘Transfer Payments. Public Works
according to Prof. J.M. Clark, are durable goods, primarily fixed structure, produced by the
government. They include expenditures on public works as roads, rail tracks, schools, parks,
buildings, airports, post offices, hospitals, irrigation canals etc
5.Public Debt
Public debt is a sound fiscal weapon to fight against inflation and deflation. It brings about
economic stability and full employment in an economy the government borrowing may assume
any of the following forms mentioned as under
a) Borrowing from Non-Bank Public
b) Borrowing from Banking System

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6. Public Revenue
The government needs income for performing a variety of functions. The income of the
government which is obtained through sources such as taxes, grants, fees, and borrowings are
called public income or public revenue. Generally, government revenue implies the income
raised from the public by the state through taxes. There are various other non-tax sources of
public revenue such as taxes, price, fees, fines, scopeties, gifts, profits and special assessments.
4.3 Gold Deposit Scheme:
The gold deposit scheme announced by the Indian Finance Minister aims to draw out a part of
country' s vast gold holding in private hands and thus reducing India ' s dependence on importation
of gold. With approval from the Indian Central Bank, India ' s largest commercial bank ("SBI ")
plans to launch a gold deposit scheme (GDS) on November 15, 1999, whereby they will issue
interest bearing certificates against gold collected from households, temples and trusts.
This is a controversial development and merits an in - depth analysis. A lot can be said both in
favor of this scheme and against it. The Indian Finance Minister, backed by the Central Bank, has,
obviously, found value in this scheme. On the other side, there are many who believe that by
launching this scheme the government plans to speculate in the gold market from the short side. If
the POG rises sharply or if the Indian rupee devalues sharply against the US$ then the cost of
borrowing gold will have terrible consequences for the Indian financial system.
The salient features of the SBI ' s gold deposit scheme are:
1. Interest bearing certificates will be issued against gold deposits. Interest rate is likely to be about
3.5 % per annum.
2. Certificates will be redeemable in gold or rupee equivalent on maturity, at the discretion of the
depositor.
3. Minimum deposit – 200 grams of gold.
4. Certificates will be transferable by endorsement and delivery.
5. No capital gains tax, wealth tax or income tax on the deposits.

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6. Maturity – 3 to 7 years
7. Premature redemption in gold will be permitted after the minimum lock-in of 1 year.
8. SBI will give rupee loans against the certificates.
4.4 Pradhan Mantri Jan Dhan Yojana (PMJDY):
Pradhan Mantri Jan Dhan Yojana (PMJDY) is a nationwide scheme launched by Indian
government in August 2014. In this scheme financial inclusion of every individual who does not
have a bank account is to be achieved.
The scheme will ensure financial access to everyone who was not able to get benefits of many
other finance related government schemes. These financial services include Banking/ Savings &
Deposit Accounts, Remittance, Credit, Insurance, Pension which will be made available to all the
citizens in easy and affordable mod
According to the data issued by finance ministry, till September 2014 around 40 million (4 crores)
bank accounts have been opened under the Pradhan Mantri Jan Dhan Yojana since the scheme
launched.
However, there was another financial scheme (Swabian) launched earlier in which the target of
opening the bank accounts was for villages only. But in Pradhan Mantri Jan Dhan Yojna the entire
individuals irrespective of their area (rural or urban) can get a bank account without depositing
any amount if they fulfill other eligibility criteria. This scheme is very beneficial for the rural
population where banking services and other financial institution are rarely available.
Under the Jan Dhan Yojna anyone who is India citizen above age of 10 years and does not have
a bank account, can open the account with zero balance. Account can be opened in any bank branch
or Business Correspondent (Bank Mitr) outlet, specially designed for the purpose of opening the
accounts under this scheme. The scheme also provides facility of accidental insurance cover up to
rupees one lac without any charge for the account holder.

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The account holders under the Jan Dhan yojana will be given a RuPay debit card which can be
used at all ATMs for cash withdrawal and at most of the retail outlets for making transaction for
purchases.
Benefits of Pradhan Mantri Jan Dhan Yojana:
Life insurance under Pradhan Mantri Jan Dhan Yojana
Under the PMJDY scheme the account holders will be given worth Rs.30000 insurance coverage
if they comply with certain specification of the scheme which includes opening an account by
January 26, 2015 and having an accidental insurance PPF coverage of over Rs. 200000
Loan benefits under Pradhan Mantri Jan Dhan Yojana:
The account holder can take loan benefit of up to Rs.5000 from the bank after six months from
opening the account. Though the amount might seem insignificant for many but we have to realize
the scheme is directed mostly towards people below the poverty line and who are struggling
desperately to sustain their everyday living. The loan benefit can be a scintilla of hope for those
people who could utilize the loan amount and invest it in a more profitable outcome, particularly
in farming or other agricultural prospect.
Mobile banking facilities under Pradhan Mantri Jan Dhan Yojna below
Though the technology of using smart phones to conduct our bank transactions is not novel
anymore but the PMJDY scheme will allow its account holders to avail the same facilities of
checking balance and transferring funds through a normal cell phone which is more affordable to
the general economy. Hence PM Jan Dhan Yojana is indeed a prosperous venture and we certainly
hope the Prime Minister and the mass economy are both benefited through this new venture
4.5. Public Provident Fund, (PPF):
It is safe investment option with attractive returns that are fully exempted from Income Tax, then
a Public Provident Fund account is the one of the option. Public Provident Fund (PPF) is a long-
term, government-backed small savings scheme of the Central Government started with the
objective of providing old age income security to the workers in the unorganized sector and self-

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employed individuals as they do invest in Employee Provident Fund (EPF). Public Provident Fund
is an ideal vehicle for long term investment in debt category, an important retirement saving tool
for individuals, more so for those who are not salaried employees. This article covers Public
Provident Fund in detail, the investment amount, interest rate, power of compounding, who can
open, where can one open and more BOB
Interest Rate on PPF:
The interest on PPF is paid as per the rates declared by the Government from time to time. Earlier,
the rate of interest was notified every year before the beginning of a new financial year. The
government had moved to market-linked rates for small savings products, such as PPF, Kissan
Vikas Patras and Senior Citizens Savings Scheme, to link the returns to government bonds so that
these instruments do not eat into the bank deposit base. It is actually benchmarked to the 10-year
government bond yield and will be 0.25% higher than the average government bond yield. . he
PPF interest Rates since 1st April 1986 are given below organization
Period Interest Rate p.a.
01 April 1986 – 14 Jan 2000 12%
15 Jan 2000 – 28 Feb 2001 11%
01 March 2001 – 28 Feb 2002 9.50%
01 March 2002 – 28 Feb 2003 9.00%
01 March 2003 – 30 Nov 2011 8.00%
01 Dec 2011 – 31 March 2012 8.60%
01 April 2012 –31 March 2013 8.80%
01 April 2013 –31 March 2016 8.70%
01 April 2016 -30 Sep 2016 8.10%

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01 Oct 2016 -31 Mar 2017 8.0%
01 April 2017 -30 Jun 2017 7.9%

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CHAPTER: 5 Risk Management in SBI and BOB
Introduction:
Risk management in Indian banks is a relatively newer practice, but has already shown to increase
efficiency in governing of these banks as such procedures tend to increase the corporate
governance of a financial institution. In times of volatility and fluctuations in the market, financial
institutions need to prove their mettle by withstanding the market variations and achieve
sustainability in terms of growth and well as have a stable share value. Hence, an essential
component of risk management framework would be to mitigate all the risks and rewards of the

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products and service offered by the bank. Thus the need for an efficient risk management
framework is paramount in order to factor in internal and external risks.
5.1Credit risk:
Credit risk is arguably the most obvious risk to a bank. A bank's business model is basically
predicated on the idea that the large majority of lenders will repay their loans on time, but a certain
percentage will not. So long as the bank's estimates of repayment rates are accurate, or
conservative, there are few problems. When a bank fails to adequately estimate and price the rate
of losses, or when economic conditions change significantly, banks may face higher levels of bad
which can shrink the bank's capital reserves to an unacceptable level. Taken to the extreme, if a
bank underestimates the amount of credit losses it will incur, the bank can fail altogether.
Along with credit risk is concentration risk; the risk of having too much money lent out to certain
categories of borrowers. If all of a bank's mortgage lending was confined to a particular
neighborhood of a city, or a particular company's employees, there would be major risks to the
bank's capital if some sort of disaster where to hit that neighborhood, or if that company ran into
financial difficulties and laid-off many of those employees. More practically, concentration risk
for most commercial banks is measured by the type of lending (residential mortgage, multifamily
residential, construction, etc.) and the region of the borrowers.
5.2 Market risk:
As banks frequently hold investment securities on their balance sheet, they are vulnerable to
changes in the market value of those investments. As many banks hold significant percentages of
their reserves in debt instruments widely thought of as "safe," (including U.S. government bonds),
a sudden market decline in those securities could force banks to raise capital or pare back on
lending, to say nothing of the loss in shareholder equity from the investment losses
Creditks lend out the vast majority of the funds they receive as deposits, therefore, there is always
a risk that the bank will face a sudden rush of withdrawals that it cannot meet, with the cash it has
on hand. Banks cannot call in loans on demand and cannot legally forbid depositors from
withdrawing fund

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In order to meet sudden liquidity needs, most banks can call upon lending facilities with other
banks or the Federal Reserve. While capital is usually available for healthy banks, a sudden
simultaneous rush from multiple banks can increase short-term borrowing costs significantly. The
failure of a bank to properly administer its liquidity needs can significantly harm its profitability.
5.3 Operating Risk:
Banks are also vulnerable to the same sort of operating risk as any competitive enterprise.
Management may make mistakes regarding acquisitions, expansion, marketing or other policies,
and lose ground to rivals. In the case of banking, operating risk can have a longer tail than in other
industries. Banks may be tempted to underprice loans to garner market share, but underpriced
mortgage loans can hurt a bank for many years, and over-aggressive lending (lending to poor credit
risks) can threaten the survival of the bank itself.
Banks are also subject to legal risks pertaining to their lending activities. Banks are required to be
fair and unbiased in their lending, and are also required to disclose a range of information to
prospective borrowers, including the annual percentage rates, terms and total costs to the borrower.
Likewise, banks are subject to laws on usury and predatory lending. While the definitions of usury
and predatory lending arguably seem fairly clear, in practice they can be subjective; what banks
may consider a fair rate to compensate for the elevated risk of default, regulators or citizens groups
may deem excessive and predatory.
Default risk:
Commercial banks generally make most of their money on loans. Although banks screen
borrowers and analyze their financial position and ability to pay, commercial banks are still
susceptible to borrower default. When borrowers are unable to pay, they default on a loan, causing
the bank to lose money. Although a general analysis of a bank's loan portfolio will indicate a small
margin of default, widespread borrower default may jeopardize the solvency of a commercial bank

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CHAPTER: 6 Effect of Bank inflation On Commercial Bank
Introduction:
Inflation is a sustained increase in the general price level of goods and services in an economy
over a period of time. When the general price level rises, each unit of money buys fewer goods
and services. Inflation reflects a reduction in the purchasing power per unit of money.
occurs due to an imbalance between demand and supply of money, changes production and
distribution cost or increase in taxes on products. When economy experiences inflation, i.e. when
the price level of goods and services rises, the value of currency reduces. This means now each
unit of currency buys fewer goods and services.
It has its worst impact on consumers. High prices of day-to-day goods make it difficult for
consumers to afford even the basic commodities in life. This leaves them with no choice but to ask
for higher incomes. Hence the government tries to keep inflation under control. to its negative
effects, a moderate level of inflation characterizes a good economy. An inflation rate of 2 or 3%
is beneficial for an economy as it encourages people to buy more and borrow more, because during

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times of lower inflation, the level of interest rate also remains low. Hence the government as well
as the central bank always strive to achieve a limited level of inflation
6.1 Forecasting Effect Of Inflation on Commercial Bank:
when forecasted does not harms as much as wrong prediction or forecast can create. It is these
distributional effects (from lenders to borrowers) that makes Unanticipated Inflation more
dangerous than the anticipated one.
1. Anticipated Effects:
We can simply understand this phenomenon by its title “ANTICIPATED” , which means
Predicted or “ KNOWN”. Such a “PREDICTED INFLATION” does not cause enough harm to
the people since you can handle it by proper planning. For Example you know that the Price of
household products may increase for some known factor that has caused the prices of Inputs to
rise. As a result, you can take proper steps of saving enough for future to counter this effect.
Additional, when inflation is anticipated you can forecast your business progress as well. And
also the bank interest rate levels for borrowing which consequently leads to a sustained economy.
2.Unanticapted Effects:
Unanticipated or UNEXPECTED inflation may cause a lot of problems for people. You can trust
money because it loses its value. Also, lenders are at great risk when there is unexpected inflation.
Because your wealth is redistributed to the borrowers. So:
Lenders are losing more and borrowers are gaining as money loses its value.
Borrowers are in a winning state because nominal interest rates are consumed by Inflation. What
you are giving back to lender is not worth it should be.
Employers will benefit because they would be paying lower real wages and workers are at loss
because they would still receive lower real wage which means that their purchasing power will
decrease.
3. Some of the most important measures that must be followed to control
inflation are:

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1. Fiscal Policy: Reducing Fiscal Deficit
2. Monetary Policy: Tightening Credit
3. Supply Management through Imports
4. Incomes Policy: Freezing Wages.
1. Fiscal Policy: Reducing Fiscal Deficit:
Fiscal policy means how a Government raises its revenue and spends it. If the total
revenue raised by the Government through taxation, fees, surpluses from public undertakings is
less than the expenditure it incurs on buying goods and services to meet its requirements of
defence, civil administration and various welfare anddevelopmental activities, there emerges a
fiscal deficit in its budget.To check inflation the Government should try to reduce fiscal deficit. It
can reduce fiscal deficit by curtailing its wasteful and inessential expenditure. In India, it is often
argued that there is a large scope for scaling down non-plan expenditure on defence, police and
General Administration and on subsidies being provided on food, fertilizers and exports.
2. Monetary Policy: Tightening Credit:
Monetary policy refers to the adoption of suitable policy regarding interest rate and the availability
of credit. Monetary policy is another important measure for reducing aggregate demand to control
inflation. It affects the cost of credit through interest rate.The higher the rate of interest, the greater
the cost of borrowing from the banks.Other tools of monetary policy like SLR, CRR, Repo rate
,Reverse Repo rate, open market opertions are use to control inflation in the economy by draining
the liquidity from the market.
3. Supply Management through Imports:
To check the rise in prices of food-grains, edible oils, sugar etc., the Government has often taken
steps to increase imports of goods in short supply to enlarge their available supplies. When
inflation is of the type of supply-side inflation, imports are increased. To increase imports of goods
in short supply the Government reduces customs duties on them so that their imports become
cheaper and help in containing inflation.

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4. Incomes Policy: Freezing Wages:
Another anti-inflationary measure is the avoidance of wage increases. When cost of living rises
due to the initial rise in prices, workers demand higher wages to compensate for the rise in cost of
living. By freezing wages of the employee can helpful in controlling inflation.
6.2 Effect of Inflation on bank profitability:
Introduction:
There is moderate inflation and where inflation rate is lower than interest paid by banks to
depositors it is beneficial to the latter as there is no capital erosion.
However high inflation leads to increased rate of interest and business people suffer as they have
to pay higher rate of interest for their borrowings. The risk of loan default is more as inflation rises.
in rate of interest marginally affects banks as their spread is less. What they gain from high interest
they pass on major part of benefit to depositors.
However a lower interest rate will add to economic growth and beneficial to the economy, provided
inflation is under control. As interest rate falls both interest payable to depositors as well as interest
income received from borrowers come down
SBI cuts interest rate on savings bank deposits:
State Bank of India (SBI) has introduced a two-tier interest rate structure on savings bank deposits.
With effect from July 2017, a savings bank balance of over Rs 1 crore will earn an interest rate of
4% per annum (p.a.), while the ones with Rs 1 crore or less will earn an interest rate of Rs 3.5%
p.a. The move sent the stock soaring 4% in intra-day deals to Rs 313 levels on the Bombay Stock
Exchange (BSE).
“The decline in the rate of inflation and high real interest rates are primary considerations
warranting a revision in the rate of interest on saving bank deposits,” SBI said in a release.

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Savings bank deposits with SBI since June 2011, as with most other banks, earned an interest of
4%. For SBI, around 90% of the deposits came under less than Rs 1 crore category, SBI said in an
analyst concall
“The rate cut by the SBI on savings bank account is a strategic move by the bank aimed at
increasing profits. SBI has an above average CASA ratio of 45.58% for the year ended March 31
2017, which shows that it has large savings pool. This move will result in increasing its net interest
margins which are currently below standards at 2.84% for the quarter ended March 31, 2017. This
is purely a commercial move which will boost profitability and ratios for the bank,” says Jimeet
Modi, CEO, SAMCO Securities
6.2: IMPACT ON NET INTEREST MARGIN:
For SBI, the cut in deposit rates, analysts say, will be positive for its net interest margins (NIMs).
This premise, they say, is based on the fact that the cost of borrowings shall come down which
will get offsetted by the fall in lending rates, but the net net effect should be expansion in NIM for
SBI.
"With real rates expected to be subdued, based on the soft trend of inflation expected for the
coming fiscal, a cut of 50 bps will not spiral a downward trend in the outflows for SBI. The
management was categorical in stating that the flows received post demonetization, around 60%
have stayed with the bank, which gives the additional buffer, that the rate cut will not result in to
major outflows," says Siddharth Purohit, senior equity research Analyst for banking at Angel
Broking.
1. Ratio Analysis
1.1 Profitability Ratio
The most important ratio when it comes to banks and financial companies is the is Net Interest
Margin. It is the difference between the interest income generated and the amount of interest paid
out to their lenders (deposits), divided by total assets.

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It is similar to the gross margin of non-financial companies. An ideal financial company should
have NIM above 3%
Net Interest Margin = (Interest Earned - Interest Expended) / Total Assets
1.2 Return on Assets and Return on Equity
Return on assets tells you what percentage of every dollar invested in the business was returned as
profit. It simply shows how effective the company is at using those assets to generate profit. Avoid
investing in a financial company whose ROA is below 1%.
Return on equity measures the percentage of profit we make for every dollar of equity invested in
the company. Ideally a financial company should have an ROE above 10%.
Return on Assets = (Net Income - Preferred Dividend) / Total Assets Return on Equity
= (Net Income - Preferred Dividend) / Shareholder's Equity)
1.3 Liquidity Ratio
Loan to Deposit Ratio - Bank of Baroda
Loan to Deposit ratio (Credit to deposit) also known as LTD is commonly used to assess the bank's
liquidity. It is calculated by dividing the bank's total loans(advances) by its total deposits. If the
ratio is too high, it means the bank might not have enough liquidity to cover any unforeseen fund
requirements. LTD above 100% is not healthy. If customers begin to pull deposits, the bank might
be suddenly strapped for cash.
Loan to Deposit ratio = Loans and advances / Deposits * 100
1.4 Financial Leverage Ratio
Financial leverage ratio also known as financial leverage or leverage is a measure of how much
assets a company holds relative to its equity. A high leverage ratio means that the company is using
debt and other liabilities to finance its assets. Leverage is a double-edged sword. The most obvious
risk of leverage is that it multiplies losses. A bank that borrows too much money might face
bankruptcy during a business downturn, while a less-levered bank might survive. A financial

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leverage ratio above 10 is aggressive. The leverage ratio of Lehman Brothers in 2007 was 30, no
wonder it declared bankruptcy during the downturn.
Financial leverage ratio = Total Assets / Shareholder Equity
1.5 Borrowings to Net worth Ratio
The higher the ratio, the greater risk will be associated with the firm. A lower ratio generally
indicates greater long-term financial safety. A firm with a low borrowing/networth ratio usually
has greater flexibility to borrow in the future. A highly leveraged company has a limited debt
capacity and the huge debt becomes a huge
liability during a recession. Total borrowings include long-term debt, short-term debt and bank
overdraft. Borrowings to Net worth above 150% is not healthy.
Borrowings to Net worth = Borrowings / Shareholder Equity
1.6 Net NPA Ratio & Provision for Non-Performing Assets
NPA ratio is used to measure the asset quality of the bank's loan books. NPA are those assets for
which interest is overdue for more than 3 months. Net NPA ratio above 1% is not healthy. If the
NPA ratio for the last 10 years stays below 1% then that is a sign of good management.
Keep an eye on Bank of Baroda's total provision for non-performing assets. Nothing eats away at
a bank's profits more than loan loss provisions. A huge spike up is not a good sign.
Financial Ratios of BOB And SBI
Financial Statement of State Bank of India (SBI)
Bank of Baroda Financial Statement (BOB)
Trend Analysis
1. Bank of Baroda

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Bank of Baroda has Closed at 165.00 with a NEGATIVE SLOPE of -0.46 and has Closed ABOVE
the Trend Line Value of 160.86. As per the Trend Line Analysis, Bank of Baroda is in NUETRAL
trend over the period and is a HOLD with a Trend Line SUPPORT at 160.86.
2. State Bank of India
State Bank of India has Closed at 291.60 with a NEGATIVE SLOPE of -0.19 and has Closed
ABOVE the Trend Line Value of 282.4. As per the Trend Line Analysis, State Bank of India is in
NUETRAL trend over the period and is a HOLD with a

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CHAPTER: 7
Financial Analysis
7.1. Ratio Analysis
1.1 Profitability Ratio
The most important ratio when it comes to banks and financial companies is the is Net Interest
Margin. It is the difference between the interest income generated and the amount of interest paid
out to their lenders (deposits), divided by total assets.
It is similar to the gross margin of non-financial companies. An ideal financial company should
have NIM above 3%
Net Interest Margin = (Interest Earned - Interest Expended) / Total Assets
1.2 Return on Assets and Return on Equity
Return on assets tells you what percentage of every dollar invested in the business was returned as
profit. It simply shows how effective the company is at using those assets to generate profit. Avoid
investing in a financial company whose ROA is below 1%.
Return on equity measures the percentage of profit we make for every dollar of equity invested in
the company. Ideally a financial company should have an ROE above 10%.
Return on Assets = (Net Income - Preferred Dividend) / Total Assets Return on Equity
= (Net Income - Preferred Dividend) / Shareholder's Equity)

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1.3 Liquidity Ratio
Loan to Deposit Ratio - Bank of Baroda
Loan to Deposit ratio (Credit to deposit) also known as LTD is commonly used to assess the bank's
liquidity. It is calculated by dividing the bank's total loans(advances) by its total deposits. If the
ratio is too high, it means the bank might not have enough liquidity to cover any unforseen fund
requirements. LTD above 100% is not healthy. If customers begin to pull deposits, the bank might
be suddenly strapped for cash.
Loan to Deposit ratio = Loans and advances / Deposits * 100
1.4 Financial Leverage Ratio
Financial leverage ratio also known as financial leverage or leverage is a measure of how much
assets a company holds relative to its equity. A high leverage ratio means that the company is using
debt and other liabilities to finance its assets. Leverage is a double-edged sword. The most obvious
risk of leverage is that it multiplies losses. A bank that borrows too much money might face
bankruptcy during a business downturn, while a less-levered bank might survive. A financial
leverage ratio above 10 is aggressive. The leverage ratio of Lehman Brothers in 2007 was 30, no
wonder it declared bankruptcy during the downturn.
Financial leverage ratio = Total Assets / Shareholder Equity
1.5 Borrowings to Networth Ratio
The higher the ratio, the greater risk will be associated with the firm. A lower ratio generally
indicates greater long-term financial safety. A firm with a low borrowing/networth ratio usually
has greater flexibility to borrow in the future. A highly leveraged company has a limited debt
capacity and the huge debt becomes a huge liability during a recession. Total borrowings include

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long-term debt, short-term debt and bank overdraft. Borrowings to Networth above 150% is not
healthy.
Borrowings to Net worth = Borrowings / Shareholder Equity
1.6 Net NPA Ratio & Provision for Non-Performing Assets
NPA ratio is used to measure the asset quality of the bank's loan books. NPA are those assets for
which interest is overdue for more than 3 months. Net NPA ratio above 1% is not healthy. If the
NPA ratio for the last 10 years stays below 1% then that is a sign of good management.
Keep an eye on Bank of Baroda's total provision for non-performing assets. Nothing eats away at
a bank's profits more than loan loss provisions. A huge spike up is not a good sign.

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7.2: Financial Ratios of BOB And SBI

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7.3: Financial statement of “SBI”

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7.4: Financial statement of “BOB”

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7.5: Trend Analysis Bank of Baroda
Bank of Baroda has Closed at 165.00 with a NEGATIVE SLOPE of -0.46 and has Closed ABOVE
the Trend Line Value of 160.86. As per the Trend Line Analysis, Bank of Baroda is in NUETRAL
trend over the period and is a HOLD with a Trend Line SUPPORT at 160.86.

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7.6: Trend Analysis of State Bank Of India
State Bank of India has Closed at 291.60 with a NEGATIVE SLOPE of -0.19 and has Closed
ABOVE the Trend Line Value of 282.4. As per the Trend Line Analysis, State Bank of India is in
NUETRAL trend over the period and is a HOLD with a Trend Line SUPPORT at 282.4 .

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CHAPTER: 8 Economic Analysis Of Commercial Bank In India
8.1: MACRO & MICRO ENVIRONMENTS
For any decisions, there are number of factors which influences the decisions. The factors which
influences the decision are also termed as its environment. The environment can be internal, can
be controlled by the organization. Micro specific to industry and is different for different industry
and Macro generic in nature and is intended for business environment.
Micro
environment factor closed to business that have a direct impact on its business operation and
success. The main object of analysis is a commercial activity of each individual Bank. However,
the subjects of analysis there may be both commercial banks and their counterparties, including
Central Bank, other credit institutions, audit firms, actual and potential customers and
correspondents, and other physical and legal persons. In this context, are defined the different
directions and criteria of analysis. Methods of analysis of the balance should be the same for
comparison the resulting data analysis.

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CONSUMER BUYING BEHAVIOUR:
Since SBI has a large number of banking outlets all over the nation, its consumers do transactions
to a great extent.
MARKETING RESEARCH (SALES FORECASTING):
As of August, 27 2012, the consensus format amongst 48 polled investment analysts covering SBI
advises investors to hold their position in the company. The previous consensus forecast advised
that SBI would outperform the market. Share Price Forecast-the 45 analysts offering 12-month
price target s for SBI have a median target of 2121 with a high estimate of 2881 pts.
BASES AND LEVELS OF SEGMENTATION:
Segmentation: To identify groups of buyers within a market place, which are distinguished by
varying needs and behavior.
BASES:
➢ Geographic: eg: Biometric ATM
➢ Demographic: eg: Kissan Credit Card
➢ Behavioral: eg: Saving Banks Account
➢ Psychographic: Credit Card, Platinum Card, Smart Card, Vishwa Yatra
LEVELS:
➢ Local Marketing: Tailored to the needs and wants of local customer groups.
➢ Mass Marketing: Done through Radio, Television and Newspapers.
➢ Niche Marketing: Meant for the elite class (Platinum Cards)

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➢ Segment Marketing: Recognizes that buyers differ in needs, perceptions and buying
behavior.
TARGETING DONE BY SBI and BOB
➢ Product Specialization: Car/Auto Loans, Consortium Advances
➢ Market Specialization: Home Loans
➢ Full Market Specialization: Home Loans, Education Loans
POSITIONING:
Positioning strategies can be conceived &developed in a variety of ways. It can be derived from
the object attributes, competition, application, the types of consumers involved, or the
characteristics of the product class.
Strategies based on: -
1.Customer benefits 2.Pricing
3.Applications. 4.Product Process
5.Product Class. 6.Cultural Symbols
7.Competitors
Some of the Positional Strategies taken by SB and BOB are of the following:
1.Launched new products and services to enhance its image as a customer friendly Bank.
2.SBI has also entered into several alliances and tie-ups with automobile insurance,mutual
fund,project finance and medical equipment companies.
3.Marketing initiatives to improve its reach,eg:aggressive marketing through print and television
media.

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8.2: Macroeconomics vs Microeconomics – Commonalities:
The following section will surely help you appreciate economics a lot more with many interesting
concepts that one comes across, than just know the commonalities between the two.
The basics – Demand and Supply Relationship
The basic rationale is that ‘assuming all other factors remaining the same/equal,’ the quantity
demanded decreases as price increases and the quantity demanded increases as price decreases
(inverse relationship). All other factors remaining the same, the quantity supplied increases as price
increases and the quantity supplied decreases as price decreases (direct relationship). This
relationship between demand and supply attains the ‘state of equilibrium’ or the optimal
relationship when the quantity demanded and quantity supplied are equal. When they aren’t equal,
what arises is either a shortage or excess which gets adjusted to achieve equilibrium again.
Macroeconomics vs Microeconomics

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The graph above looks complex isn’t it? Honestly….it isn’t. The graph is a depiction of the concept
of ‘Equilibrium’, the vertical axis (Y-axis) representing ‘Quantity’ both demanded and supplied
whereas the horizontal axis (X-axis) represents the ‘Price’ of the product/service. The explanation
below should make it simpler for you!
A higher price set by sellers would cause a surplus of stock (Surplus/Excess Quantity supplied)
forcing them to lower prices (from Surplus Prices to the Equilibrium Price) to match the
corresponding demand. A lower price set by sellers would cause a shortage of stock (Shortage of
Quantity supplied) forcing prices to go up (from the Shortage Price to the Equilibrium Price) to
keep pace with the corresponding demand.
[Note: By ‘higher’ and ‘lower’ prices, we mean the price relative to the ‘Equilibrium Price’ – that
which a buyer should ideally bid/buy for (OR) the price relative to that which a seller should ideally
ask/offer.]
This is a fundamental law that governs economics and daily life, be it macro or micro economics.
Whether equilibrium is attained always, the dynamics beyond demand and supply is a totally
different topic!
How does Macro affect Micro?
Let’s assume the nation’s Central Bank cuts the policy interest rate (a macro impact) by 100 basis
points (100 bps = 1%). This should ideally lower the borrowing costs of commercial banks with
the Central Bank, helping lower their deposit rate, thus giving room to lower the rate on the loans
they make to individuals and corporate. This is expected to cause a rise in borrowings aka ‘credit
growth’ given cheaper access to credit and therefore greater investment helping corporate invest
in new assets, projects, expansion plans etc. which are developments on the micro front. This is
just one of several examples where macro policies and decisions affect the micro economy.
Additional examples can include:

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Income tax changes;
➢ Changes in subsidies;
➢ Currency related policies (ex: China depegging the Yuan/Renminbi to the US
Dollar) amongst others;
➢ Unemployment rates in the economy could help understand how many jobs a
company might create amongst other factors
8.3: How does Micro Affect Macro?
One of the multiple factors that set macro policies is the condition of the micro economy. To
continue with the earlier example of the Central Bank given that they have lowered their policy
rates, they observe the borrowing and investment patterns of corporates, individuals and
households. These behavioural patterns can help determine whether the Central Bank should cut
rates further if the outlook is weak, keep rates on hold or increase them if the outlook is picking
up or shooting up.
Additional examples include the following:
➢ The Consumer Price Index (CPI) is determined by taking surveys of individuals
and retailers based on their spending patterns where the outcome results in a certain
‘percentage figure’ which is indicative of the rate of inflation. This figure is considered a
key determinant for the Central Bank to set policy interest rates.
The spending behavior of individuals is a microeconomic variable.
➢ Taking a deep dive into the US Federal Reserve and in particular the US economy,
news would tell us that a major factor influencing their policy decisions is the payroll
numbers or the wage growth which is part of the micro economy.
➢ A key concept in Microeconomics is that of ‘Opportunity Cost’ i.e., the cost
incurred by not choosing the second-best alternative given the choices are mutually
exclusive (one choice eliminates the others). In other words, it is the marginal benefit one

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could derive by choosing the second best comparable alternative to achieve the same
purpose given that the choices are mutually exclusive. On a more philosophical note, this
has some roots in the concept of ‘’ Example: You are a 5 year old kid and have $5 with
you to choose between an ice-cream and Swiss chocolate which cost $5 and $4 respectively
(would a 5 year old kid really care if it were a Swiss chocolate? I doubt he’d know its
specialty. Who knows?). Let’s say that the kid chooses the chocolate over the ice-cream
just to spoil our clichéd assumption that a kid would always choose the ice-cream! He
relishes the chocolate until he sees his friend relishing the ice-cream. The kid then tries to
weigh the costs of his decision to go for the chocolate.

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CONCLUSION
The Main important objectives of this project to understand the monetary policy are Price stability,
Exchange Stability, Neutrality of Money, Economic Development, etc. According to fundamental
and technical analysis banking sector in India are best part of investment as compared to compared
securities in stock market.
According to economic factor which directly affects the commercial bank that is inflation, change
in GDP, change of political leaders etc. It will help us to understand various strategies and scheme
and product which come under banks how the customer can get the benefit of that schemes such
loan, saving account, Fixed Deposits etc.
Risk management department is most important department of Indian banking sector which they
facing different types risk such credit risk, default risk, market risk, operating risk. SBI cuts interest
rate on savings bank deposits State Bank of India (SBI) has introduced a two-tier interest rate
structure on savings bank deposits. With effect from July 2017, a savings bank balance of over Rs
1 crore will earn an interest rate of 4% per annum (p.a.), while the ones with Rs 1 crore or less will
earn an interest rate of Rs 3.5% p.a. The move sent the stock soaring 4% in intra-day deals to Rs
313 levels on the Bombay Stock Exchange (BSE).

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REFERENCE
Bibliography
1. Money, Banking Finance in India- (R.K Uppal)
2. Indian Banking Sectors (Essay & Issues)- (M.S Gupta & J.B Singh)
3. Banking and Economic Awareness- (Rakesh Kumar)
4. Marketing Economic and Banking - (Dezi Kamari)
5. Money Banking and Finance- (N. K Sinha)
Webliography
❖ https://www.rbi.org.in
❖ www.bankofbaroda.com
❖ https://www.sbi.co.in
❖ www.banknetindia.com
❖ https://business.mapsofindia.com
❖ www.indiapress.org
❖ www.allbankingsolutions.com
❖ www.banknetindia.com
❖ www.economic times.com

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