INTRODUCTION TO THE STUDY

Financial statement is that statement which provides information on the firm’s

position at a point in time and its operation over a period of time.

Financial statement contains information about the wealth of the organization,

which if well analyzed and interpreted can provide valuable insight into firm’s
performance and its operations. Analysis of financial statement is of interests
to lenders, investor’s, owners, outsiders, shareholders and others.

Due to ongoing advancements in technology, new legislation, and other

innovation, the field of finance is rapidly changing. Introduction to finance
develops the three components of finance in an interactive framework that is
consistent with the responsibilities of all- financial professionals, managers,
intermediaries, and investors in today's economy. In the last decade, the
academic study of finance has experienced an infusion of new concept and
quantitative methodologies that pace it among the most sophisticated and
growing areas of business and economics.

New developments in the traditional areas of finance theory of rational

investor portfolio choice, interpretation and determination of security prices,
efficient corporate decision making has been approached from the perspective
of a single integrating paradigm derived from economic theory.

In our present day economy finance is defined as provision of money at a time

when it is required. Every enterprise whether it is big, medium or small needs
finance to carry out its operation and to achieve its target. Infact finance is so
indispensable today that it is rightly said to be lifeblood of enterprise without
adequate finance no enterprise can possibly accomplish it objectives

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The importance of corporation finance has arisen because of the fact that
present day business activities are predominantly on a company or corporate
form of organization. The advent of corporate enterprises has resulted into:
• the increase in size and influence of the business enterprise
• wide distribution of corporate ownership
• separation of ownership and management
These factors have increased the importance of finance.

AIMS OF FINANCE

• Acquiring sufficient funds

• Proper utilization of funds
• Increasing profitability Maximizing firms value
• Estimating financial requirements
• Deciding capital structure
• Selecting a source of finance
• Selecting a pattern of investment
• Proper cash management
• Implementing financial control
• Proper use of surplus

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BUSINESS FINANCE

Business finance is the activity, which is concerned with the acquisition and
conservation of capital funds in meeting the financial requirements and
overall objectives of the firm. Business finance deals primarily with raising,
administering and disbursing funds by private own business units operating in
non- financial fields of industry. To sum up in simple words we can say that
financial management as practiced by business firms can be called corporation
finance or business finance.

FINANCIAL STATEMENTS

Financial statements (or financial reports) are formal records of a business'

financial activities. It is a collection of data organized according to logical and
consistent accounting procedures. These statements provide an overview of a
business' profitability and financial condition in both short and long term.

A sound understanding of financial statements helps you:

• Identify unfavorable trends and tendencies in your business's operations
(for example, the unhealthy buildup of inventory or accounts receivable)
before the situation becomes critical.
• Monitor your cash flow requirements on a timely basis, and identify
financing needs early.
• Monitor important indicators of financial health (for example, liquidity
ratios, efficiency ratios, profitability ratios, and solvency ratios).

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• Monitor periodic increases and decreases in wealth (specifically, owners'
or stockholders' equity).
• Monitor your performance against your financial plan, if you have
developed one.

 Definition

According to John N. Myer “the financial statements provide a summary of

the accounts of a business enterprise, the balance sheet reflecting the assets
and liabilities and the income statement showing the results of operations
during a certain period”

 Objectives of financial statement

The primary objective of financial statements is to assist in decision making.

The Accounting Principles Board of America (APB) states the following other
objectives:

• To provide reliable financial information about economic resources and

obligations of a business firm.
• To provide other needed information about changes in such economic
resources and obligations.
• To provide reliable information about changes in net resources (resources
less obligations) arising out of business activities.
• To provide financial information that assists in estimating the earning
potentials of business.

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• To disclose, to the extent possible, other information related to the
financial statements that is relevant to the needs of the users of these
statements.

 Types of financial statements

Generally Accepted Accounting Principles (GAAP) specify that a complete

set of financial statements must include:

• Balance Sheet

The American Institute of Certified Public Accountants defines Balance Sheet

as, “A tabular statement of summary of balances (debits and credits) carried
forward after an actual and constructive closing of books of account and kept
according to principles of accounting.”

The purpose of the balance sheet is to show the resources that the company
has, i.e., its assets, and from where those resources come from, i.e. its
liabilities and investments by owners and outsiders. The balance sheet shows
all the assets owned by the concern and all the liabilities and claims it owes to
owners and outsiders. The Companies Act, 1956 has prescribed a particular
form for showing assets and liabilities in the balance sheet for companies
registered under this act.

• Income Statement (Profit and Loss Account)

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Income statement is prepared to determine the operational position of the
concern. It is a statement of revenues earned and the expenses incurred for
earning that revenue. If there is excess of revenues over expenditures it will
show a profit and if the expenditures are more than the income then there will
be a loss. The income statement may be prepared in the form of a
Manufacturing Account to find out the cost of production, in the form of
Trading Account to determine gross profit or gross loss, in the form of a Profit
and Loss Account to determine net profit or net loss. A statement of Retained
Earnings may also be prepared to show the distribution of profits.

• Statement of Changes in Owners’ Equity (Retained Earnings)

The term owner’s equity refers to the claims of the owners of the business
(shareholders) against the assets of the firm. It consists of two elements
i) Paid-up share capital, i.e. the initial amount of funds invested by the
Shareholders
ii) retained earnings or reserves and surplus representing undistributed
Profits.

The statement of changes in owners’ equity simply shows the beginning

balance of each owner’s equity account, the reasons for increases and
decreases in each, and its ending balance. A statement of retained earnings is
also known as Profit and Loss Appropriation Account or Income Disposal
Statement. As the name suggests it shows appropriations of earnings. The
balance in this account will show the amount of profit retained in hand and
carried forward.

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• Statement of Changes in Financial Position.

The basic financial statements, that is; the balance sheet and the profit and
loss account or income statement of a business reveal the net effect of the
various transactions on the operational and financial position of the company.
But there are many transactions that do not operate through profit and loss
account. Thus, for a better understanding another statement called statement
of changes in financial position has to be prepared to show the changes in
assets and liabilities from the end of one period to the end of another point of
time. The objective of this statement is to show the movement of funds
(working capital or cash) during a particular period.

The statement of changes in financial position may take any of the following
two forms:

i) Funds Flow Statement: The funds flow statement is designed to analyse

the changes in the financial condition of a business enterprise between two
periods. The word ‘Fund’ is used to denote working capital. This statement
will show the sources from which the funds are received and the uses to which
these have been put. This statement helps the management in policy
formulation and performance appraisal.

ii) Cash Flow Statement: A statement of changes in the financial position of

a firm on cash basis is called Cash Flow Statement. It summarises the causes
of changes in cash position of a business enterprise between dates of two
balances sheets. This statement is very much similar to the statement of
changes in working capital, that is; funds flow statement. A cash flow

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statement focuses attention on cash changes only. It describes the sources of
cash and its uses.

 Characteristics of ideal financial statement

The financial statements are prepared with a view to depict financial position
of the concern. The financial statements should be prepared in such a way that
they are able to give a clear and orderly picture of the concern. The ideal
financial statements have the following characteristics:

• Depict True Financial Position: The information contained in the

financial statements should be such that a true and correct idea is taken
about the financial position of the concern. No material information should
be withheld while preparing these statements.

• Effective Presentation: The financial statements should be presented in a

simple and lucid way so as to make them easily understandable. A person
who is not well versed with accounting terminology should also be able to
understand the statements without much difficulty. This characteristic will
enhance the utility of these statements.

• Relevance: Financial statements should be relevant to the objectives of the

enterprise. This will be possible when the person preparing these
statements is able to properly utilise the accounting information. The
information which is not relevant to the statements should be avoided,
otherwise it will be difficult to make a distinction between relevant and
irrelevant data.

• Attractive: The financial statements should be prepared in such a way that

important information is underlined so that it attracts the eye of the reader.

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• Easiness: Financial statements should be easily prepared. The balances of
different ledger accounts should be easily taken to these statements. The
calculation work should be minimum possible while preparing these
statements. The size of the statements should not be very large. The
columns to be used for giving the information should also be less. This
will enable the saving of time in preparing the statements.

• Comparability: The results of financial analysis should be in a way that

can be compared to the previous years statements. The statement can also
be compared with the figures of other concerns of the same nature.
Sometimes budgeted figures are given along with the present figures. The
comparable figures will make the statements more useful. The comparison
of figures will enable a proper assessment for the working of the concern.

• Analytical Representation: The information should be analysed in such a

way that similar data is presented at the same place. A relationship can be
established in similar type of information. This will be helpful in analysis
and interpretation of data.

• Brief: If possible, the financial statements should be presented in brief.

The reader will be able to form an idea about the figures. On the other
hand, if figures are given in details then it will become difficult to judge
the working of the business.

 Importance of financial statements

The financial statements are mirror which reflects the financial position and
operating strength or weakness of the concern. These statements are useful to

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management, investors, creditors, bankers, workers, government and public at
large. Following major uses of financial statements:

• As a report of stewardship.
• As a basis for fiscal policy.
• To determine the legality of dividends.
• As guide to advise dividend action.
• As a basis for the granting of credit.
• As informative for prospective investors in an enterprise
• As a guide to the value of investment already made.
• As an aid to government supervision.
• As a basis for price or rate regulation.
• As a basis for taxation.

 Users of Financial Statements

Financial statements are used by a diverse group of parties, both inside and
outside a business. Generally, these users are:

Internal Users: are owners, managers, employees and other parties who are
directly connected with a company.

• Owners and managers require financial statements to make important

business decisions that affect its continued operations. Financial analysis

are then performed on these statements to provide management with a

more detailed understanding of the figures. These statements are also used
as part of management's report to its stockholders, as it form part of its
Annual Report.

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• Employees also need these reports in making collective bargaining
agreements (CBA) with the management, in the case of labor unions or for
individuals in discussing their compensation, promotion and rankings.

External Users: are potential investors, banks, government agencies and

other parties who are outside the business but need financial information
about the business for a diverse number of reasons.

• Prospective investors make use of financial statements to assess the

viability of investing in a business. Financial analysis are often used by
investors and is prepared by professionals (Financial Analysts), thus
providing them with the basis in making investment decisions.

• Financial institutions (banks and other lending companies) use them to

decide whether to grant a company with fresh working capital or extend
debt securities (such as a long-term bank loan or debentures) to finance
expansion and other significant expenditures.

• Government entities (Tax Authorities) need financial statements to

ascertain the propriety and accuracy of taxes and other duties declared and
paid by a company.

• Media and the general public are also interested in financial statements for
a variety of reasons.

 Limitations of financial statements

The following are the main limitations of the financial statements:

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• Interim and not final reports: Financial statements do not depict the
exact position and are essentially interim reports. The exact position can
be only known if the business is closed.

• Lack of precision and definiteness: Financial statements may not be

realistic because these are prepared by following certain basic concepts
and conventions.

• Lack of objective judgement: Financial statements are influenced by the

personal judgement of the accountant. He may select any method for
depreciation, valuation of stock, amortization of fixed assets and treatment
of deferred revenue expenditure. Such judgement if based on integrity and
competency of the accountant will definitely affect the preparation of the
financial statements.

• Record only monetary facts: Financial statements disclose only

monetary facts, that is; those transactions are recorded in the books of
accounts which can be measured in monetary terms. Those transactions
which cannot be measured in monetary terms such as, conflict between
production manager and marketing manager may be very important for a
business concern but not recorded in the business books.

• Historical in nature: These statements are drawn after the actual

happening of the events. They attempt to present a view of the past
performance and have nothing to do with the accounting for the future.

Modern management is forward looking but these statements do not

directly help them in making future estimates and taking decisions for the
future.

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• Artificial view: These statements do not give a real and correct report
about the worth of the assets and their loss of value as these are shown on
historical cost basis. Thus, these statements provide artificial view as
market or replacement value and the effect of the changes in the price level
are completely ignored.

• Scope of manipulations: These statements are sometimes prepared

according to the needs of the situation or the whims of the management. A
highly efficient concern may conceal its real profitability by disclosing
loss or minimum profit whereas an inefficient concern may declare
dividend by wrongly showing profit in the profit and loss account. For this
under or over valuation of inventory, over or under charge of depreciation,
excessive or inadequate provision for anticipated losses and other such
manipulations may be resorted to.

• Inadequate information: There are many parties who are interested in the
information given in the financial statements but their objectives and
requirements differ. The financial statements as prepared under the
provisions of the Companies Act, 1956, fail to meet the needs of all. These
are mainly prepared to safeguard the interest of shareholders.

FINANCIAL ANALYSIS

The term ‘financial analysis’ also known as analysis and interpretation of

financial statements, refers to the process of determining financial strengths

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and weaknesses of the firm by establishing strategic relationship between the
items of balance sheet, profit and loss account and other operative data.
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The purpose of financial analysis is to diagnose the information contained in
financial statements so as to judge the profitability and financial soundness of
the firm. It is an attempt to determine:
• The significance and meaning of the financial statement data so that
forecast may be made of the future earnings.
• Ability to pay interest and debt maturities (both current and long term).
• Profitability of a sound business policy.
• The operational efficiency of the concern as a whole and of its various
parts or departments.
• The comparative study in regard to one firm with another firm or one
department with another department

 Types of financial statement analysis

Different types of financial statements analysis can be made on the basis of:

• According to the nature of the analyst and the material used by him.
On this basis, the financial analysis can be external and internal analysis:

External Analysis: It is made by those persons who are not connected with
the enterprise. They do not have access to the enterprise. They do not have
access to the detailed record of the company and have to depend mostly on
published Statements. Such type of analysis is made by investors, credit
agencies, governmental agencies and research scholars.

Internal Analysis: The internal analysis is made by those persons who have
access to the books of accounts. They are members of the organization.

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Analysis of financial statements or other financial data for managerial purpose
is the internal type of analysis. The internal analyst can give more reliable
result than the external analyst because every type of information is at his
disposal.

• According to the objectives of the analysis. On this basis the analysis

can be long-term and short-term analysis.

Long-term Analysis: This analysis is made in order to study the long-term

financial stability, solvency and liquidity as well as profitability and earning
capacity of a business concern. The purpose of making such type of analysis
is to know whether in the long-run the concern will be able to earn a
minimum amount which will be sufficient to maintain a reasonable rate of
return on the investment so as to provide the funds required for
modernisation, growth and development of the business and to meet its costs
of capital.

Short-term Analysis: This is made to determine the short-term solvency,

stability and liquidity as well as earning capacity of the business. The purpose
of this analysis is to know whether in the short run a business concern will
have adequate funds of readily available to meet its short-term requirements
and sufficient borrowing capacity to meet contingencies in the near future.
This analysis is made with reference to items of current assets and current
liabilities (working capital analysis).

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• According to the modus operandi of the analysis. On this basis, the
analysis may be horizontal analysis and vertical analysis.

Horizontal (or Dynamic) Analysis: This analysis is made to review and

analyse financial statements of a number of years and, therefore, based on
financial data taken from several years. This is very useful for long-term trend
analysis and planning. Comparative financial statement is an example of this
type of analysis.

Vertical (or Static) Analysis: This analysis is made to review and analyse the
financial statements of one particular year only. Ratio analysis of the financial
year relating to a particular accounting year is an example of this type of
analysis.

 Techniques (devices or methods) of financial analysis

The following techniques can be used in connection with analysis and

interpretation of financial statements:

• Comparative financial statements

The comparative financial statements are statements of the financial position

at different periods of time. The elements of financial position are shown in a
comparative form so as to give an idea of financial position at two or more
periods. The statements of two or more periods are prepared to show absolute
data of two or more years, increases or decreases in absolute data in value and
in terms of percentages. The two comparative statements are:

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i) Comparative Balance Sheet: the comparative balance sheet analysis is the
study of the trend of the same items, group of items and computed items in
two or more balance sheets of the same business enterprise on different dates.

ii) Comparative Income Statement: the comparative income statement gives

the results of the operations of a business. It gives an idea of the progress of a
business over a period of time.

• Trend percentage analysis

Trend analysis is an important tool of horizontal financial analysis. This

analysis enables to know the changes in the financial function and operating
efficiency between the time period chosen. By studying the trends of each
item we can know the direction of changes and based upon the direction of
changes, the opinions can be formed. These trend ratios may be compared
with industry in order to know the strong or weak points of a concern.

• Common size statement

Common size financial statements are those in which figures reported are
converted to some common base. Vertical analysis is required for an
interpretation of underlying causes of changes over a period of time. For this,
items in the financial statements are presented as percentages or ratios to total
of the items and a common base for comparison is provided. Common size
statements may be used for

i) Common Size Balance Sheet: a statement in which balance sheet items

are expressed as the ratio of each asset to total assets and the ratio of each
liability is expressed as a ratio of total liabilities.

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ii) Common Size Income Statement: the items in income statement can be
shown as percentages of sales to show the relation of each item to sales. A
significant relationship can be established.

• Funds Flow Statement (or Analysis)

This statement is prepared in order to reveal clearly the various sources where
from the funds are procured to finance the activities of a business concern
during the accounting period and also brings to highlight the uses to which
these funds are put during the said period.

• Cash Flow Statement (or Analysis)

This statement is prepared to know clearly the various items of inflow and
outflow of cash. It is an essential tool for short-term financial analysis and is
very helpful in the evaluation of current liquidity of a business concern. It
helps the business executives of a business in the efficient cash management
and internal financial management.

• Statement of Changes in Working Capital (Net Working Capital

Analysis)

This statement is prepared to know the net change in working capital of the
business between two specified dates. It is prepared from current assets and
current liabilities of the said dates to show the net increase or decrease in
working capital.

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• Ratio Analysis

It is done to develop meaningful relationship between individual items or

group of items usually shown in the periodical financial statements published
by the concern. An accounting ratio shows the relationship between the two
inter-related accounting figures as gross profit to sales, current assets to
current liabilities, loaned capital to owned capital etc. Ratios should not be
calculated between the two unrelated figures as it will not serve any useful
purpose.

Limitations of Financial Statement Analysis

Analysis of financial statements is a very important device but the person

using this device must keep in mind its limitations. The following are the
main limitations of the analysis:

• Historical nature of financial statements: The basic nature of these

statements is historical, that is; relating to the past period. Past can never
be a precise and infallible index of the future and can never be hundred per
cent helpful for the future forecast and planning.

• No substitute for judgement: Analysis of financial statements is a tool

which can be used profitably by an expert analyst but may lead to faulty
conclusions if used by unskilled analyst. The results of analysis, thus,
should not be taken as judgements or conclusions.

• Reliability of figures: The reliability of analysis depends on reliability of

the figures of the financial statements under scrutiny. The entire working

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 of analysis will be vitiated by manipulations in the income statement,
window dressing in the balance sheet, questionable procedures adopted by
the accountant for the valuation of fixed assets and such other factors.

• Single year analysis is not much valuable and useful: The analysis of
these statements relating to a single year only will have limited use and
value. It will not be advisable to depend fully on such analysis. Analysis
should be extended over a number of years so that the results may be
compared to draw meaningful conclusions.

• Results may have different interpretation: The results or indications

derived from the analysis of these statements may be differently
interpreted by different users. For example, a high current ratio may suit
the banker, a

supplier of goods or the short-term lender but it may be index of

inefficiency of the management due to non-utilisation of funds.

• Change in accounting methods: Analysis will be effective if the figure

derived from the financial statements are comparable. Due to change in
accounting methods (i.e., depreciation method, or method of valuation of
stock), the figures of the current period may have no comparable base,
then the whole exercise of analysis will become futile and will be of little
value.

• Pitfalls in inter-firm comparison: When different firms are adopting

different procedures, records, objectives, policies and different items under
similar headings, comparison will become more difficult. If done, it will
not provide reliable basis to assess the performance, efficiency,
profitability and financial condition of the firm as compared to industry as
a whole.

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• Price level changes reduce the validity of the analysis: The continuous
and rapid changes in the value of money, in the present day economy, also
reduce the validity of the analysis. Acquisition of assets at different levels
of prices make comparison useless as no meaningful conclusions can be
drawn from a comparative analysis of such items relating to several
accounting periods.

• Shortcoming of the tool of analysis: There are different tools of analysis

available to the analyst. Which tool is to be used in a particular situation
depends on the skill, training, intelligence and expertise of the analyst. If
wrong tool is used, it may give misleading results and may lead to wrong
conclusions or inferences which may be harmful to the interest of
business.

FINANCIAL RATIO ANALYSIS

Financial ratio analysis is the calculation and comparison of ratios which

are derived from the information in a company's financial statements. The
level and historical trends of these ratios can be used to make inferences about
a company's financial condition, its operations and attractiveness as an
investment.

When you compare changes in your business's ratios from period to period,
you can pinpoint improvements in performance or developing problem areas.
By comparing your ratios to those in other businesses, you can see
possibilities for improvement in key areas. A number of sources, including

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many trade or business associations and organizations, provide data for
comparison purposes; they are also available from commercial services.

USE AND SIGNIFICANCE OF RATIO ANALYSIS

The ratio analysis is one of the most powerful tools of financial analysis. The
use of ratios is not confined to financial managers only. There are different
parties interested in the ratio analysis for knowing the financial position of a
firm for different purposes. The supplier of goods on credit, banks, financial
institutions, investors, shareholders and management all make use of ratio
analysis as a tool in evaluating the financial position and performance of a
firm for granting credit, providing loans or making investments in the firm.
With the use of ratio analysis one can point out whether the condition of the
firm is strong, good, questionable or poor. The conclusions can also be drawn
as to whether the performance of the firm is improving or deteriorating. Thus,
ratios have wide applications and are of immense use today.

• Managerial Uses of Ratio Analysis

i) Ratio analysis helps in making decisions from the information

provided in these financial statements.
ii) It helps in financial forecasting and planning.
iii) The financial strength and weakness of a firm are communicated in a
more easy and understandable manner by the use of ratios.
iv) Ratios even help in co-ordination which is of utmost importance
ineffective.
v) Ratio analysis even helps in making effective control of the business.
vi) These are so many other uses of the ratio analysis. It is an essential
part of the budgetary control and standard costing.

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• Utility to Shareholders/Investors

An investor in the company will like to assess the financial position of the
concern where he is going to invest. His first interest will be the security of
his investment and then a return in the form of dividend or interest. For the
first purpose he will try to asses the value of fixed assets and the loans raised
against them. The investor will feel satisfied only if the concern has sufficient
amount of assets. Long-term solvency ratios will help him in assessing
financial position of the concern. Profitability ratios, on the other hand, will
be useful to determine profitability position. Ratio analysis will be useful to
the investor in making up his mind whether present financial position of the
concern warrants further investment or not.

• Utility to Creditors
The creditors or suppliers extend short-term credit to the concern. They are
interested to know whether financial position of the concern warrants their
payments at a specified time or not. The concern pays short- term creditors
out

of its current assets. If the current assets are quite sufficient to meet current
liabilities then the creditor will not hesitate in extending credit facilities.
Current and acid-test ratios will give an idea about the current financial
position of the concern.

 Utility to Employees

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The employees are also interested in the financial position of the concern
especially profitability. Their wage increases and amount of fringe benefits
are related to the volume of profits earned by the concern. The employees
make use of information available in financial statements. Various
profitability ratios relating to gross profit, operating profit, net profit, etc.
enable employees to put forward their viewpoint for the increase of wages and
other benefits.

 Utility to Government

Government is interested to know the overall strength of the industry. Various

financial statements published by industrial units are used to calculate ratios
for determining short-term, long-term and overall financial position of the
concerns. Profitability indexes can also be prepared with the help of ratios.
Government may base its future policies on the basis of industrial information
available from various units. The ratios may be used as indicators of overall
financial strength of public as well as private sector. In the absence of the
reliable economic information, governmental plans and policies may not
prove successful.

CLASSIFICATIONS OF RATIO

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Ratios may be classified from the point of view of financial management or
objective
• Liquidity Ratios.
• Capital Structure Ratios.
• Turnover Ratios.
• Profitability Ratios.

LIQUIDITY RATIOS (Short Term Solvency)

‘Liquidity’ means ability of a firm to meet its current liabilities. The liquidity
ratios, therefore, try to establish a relationship between current liabilities,
which are the obligations soon becoming due and current assets, which
presumably provide the source from which these obligations will be met. The
failure of a company to meet its obligation due to lack of adequate liquidity
will result in bad credit ratings, loss of creditor’s confidence or even in law
suits against the company. The following ratios are commonly used to
indicate the liquidity of business:

i) Current Ratio (Working Capital Ratio)

This ratio is most commonly used to perform the short-term financial analysis.
Also known as the working capital ratio, this ratio matches the current assets
of the firm to its current liabilities.

Formula:
Current ratio = Current Assets/Current Liabilities

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Current assets include cash in hand and at bank, readily marketable securities,
bills receivable, debtors less provision for bad and doubtful debts, stock in
trade, prepaid expenses, any other asset which, in the normal course of
business will be converted in cash in a year’s time.
Current Liabilities include all obligations maturing within a year, such as
sundry creditors, bills payable, bank overdraft, income tax payable, dividends
payable, outstanding expenses, provision for taxation and unclaimed
dividends.

Significance and Objective: Current ratio throws good light on the short-
term financial position and policy. It is an indicator of a firm’s ability to
promptly meet its short-term liabilities. A relatively high current ratio
indicates that the firm is liquid and has the ability to meet its current
liabilities. On the other hand, a relatively low current ratio indicates that the
firm will find it difficult to pay its bills. Normally a current ratio of 2 : 1 is
considered satisfactory. In other words, current assets should be twice the
amount of current liabilities A very high current ratio is also not desirable
because it indicates idleness of funds which is not a sign of efficient financial
management.

ii) Quick Ratio

This ratio is also known as acid test ratio or liquid ratio. It is a more severe
test of liquidity of a company. It shows the ability of a business to meet its
immediate financial commitments. It is used to supplement the information
given by the current ratio.

Formula:
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 Quick ratio = Quick (or Liquid) Assets/Quick Liabilities

The quick assets include cash, debtors (excluding bad debts) and securities
which can be realised without difficulty. Stock is not included in quick assets
for the purpose of this ratio. Similarly prepaid expenses are also excluded as
they cannot be converted into cash.
Liquid or quick liabilities refer to all current liabilities except bank overdraft.

Significance and Objective: When quick ratio is used along with current
ratio, it gives a better picture of the firm’s ability to meet its short-term
liabilities out of its short-term assets. This ratio is of great importance for
banks and financial institutions. Generally a quick ratio of 1 :1 is considered
to represent a satisfactory current financial position. On account of a low
ratio, the business may find itself in serious financial difficulties.

iii) Absolute Liquid Ratio

This is also known as super quick ratio or cash ratio.

Formula:
Absolute Liquidity ratio =
(Cash + Short term marketable securities)/Current liabilities

In calculating this ratio, both inventories and receivables are deducted from
current assets to arrive at absolute liquid assets such as cash and easily
marketable investments in securities.

27
Significance and Objective: Higher the ratio, the higher is the cash
liquidity. A low ratio is not a serious matter because the company can always
borrow from the bank for short term requirements.

CAPITAL STRUCTURE RATIOS OR GEARING RATIOS (Long

Term Solvency)

Capital structure Ratios are also known as gearing ratios or solvency ratios or
leverage ratios. These are used to analyse the long term solvency of any
particular business concern. There are two aspects of long term solvency of a
firm:
 Ability to repay the principal amount when due.
 Regular payment of interest.
Important Capital Structure ratios are:

i) Debt-Equity Ratio
This ratio attempts to measure the relationship between long term debts and
shareholders’ funds. In other words, this ratio measures the relative claims of
long term creditors on the one hand and owners on the other hand, on the
assets of the company.

Formula:
Debt Equity ratio = Long term debts/Shareholders’ funds

Long term debts include debentures, long term loans, say from financial
institutions.
Shareholders’ funds on the other hand include share capital (both equity and
preference) and accumulated profits in the form of general reserve, capital
reserve, and any other fund that belongs to the shareholders. Past accumulated

28
losses and deferred expenditure like preliminary expenses should be deducted
while computing shareholders’ funds.

Significance and Objectives: This ratio shows the relative amount of funds
supplied to the company by outsiders and by owners. A low debt equity ratio
implies a greater claim of owners on the assets of the company than the
creditors. On the other hand, a high debt equity ratio indicates that the claims
of the creditors are greater than those of the owners. The debt equity ratio of
1: 1 is generally acceptable. The lower the ratio, the less the company has to
worry in meeting its fixed obligations. This ratio also indicates the extent to
which a company has to depend upon outsiders for its financial requirements.

ii) Proprietary Ratio

This is a variant of debt equity ratio. It measures the relationship between
shareholders’ funds and total assets.

Formula:
Proprietary ratio = Shareholders’ funds/Total assets

Shareholders’ funds comprise of ordinary share capital, preference share

capital and all items of reserves and surplus.
Total assets include all tangible assets and only those intangible assets which
have a definite realisable value.

Significance and objective: Proprietary ratio shows the extent to which

shareholders own the business and thus indicates the general financial strength
of the business. The higher the proprietary ratio, the greater the long term
stability of the company and consequently greater protection to creditors.
However, a very high proprietary ratio may not necessarily be good because if

29
funds of outsiders are not used for long term financing, a firm may not be able
to take advantage of trading on equity.

iii) Interest Coverage Ratio (Fixed Charges Cover)

This ratio indicates whether the business earns sufficient profit to pay
periodically the interest charges.

Formula:
Interest Coverage ratio =
Earnings before tax and interest (EBIT)/Fixed interest charges

Significance and Objective: This ratio is very important from lender’s point
of view because it indicates the ability of a company to pay interest out of its
profits. This ratio also indicates the extent to which he profits of the company
may decrease without in any way affecting its ability to meet its interest
obligations. The standard for this ratio for an industrial company is that
interest charges should be covered six to seven times.

iv) Debt to Total Funds Ratio

This ratio shows the relationship between debts and total funds employed in
the business.

Formula:
Debts to Total Funds ratio = Debt/Total Funds

The term debt includes long term loans and current liabilities like sundry
creditors, bills payable, bank overdraft, outstanding expenses etc.

30
Total funds employed includes shareholders’ funds, long tem loans and
current liabilities.

Significance and Objectives: This ratio shows the proportion of funds

supplied by outsiders in the total funds employed in the business. The lower
this ratio, the better it is for creditors because they are more secure and vice-

versa, higher this ratio it gives a feeling of insecurity to the creditors. In other
words, a high ratio of debts to total funds employed is a danger signal for
creditors. This ratio also serves the purpose of indicating the possibility of
raising additional loans.

v) Capital Gearing Ratio

This is the ratio between the fixed interest bearing securities und equity share
capital.

Formula:
Capital gearing ratio = Fixed income securities/Equity share holders fund

Fixed income securities include debentures and preference share capital.

Significance and Objectives: a company is highly geared if this ratio is

more than one. If it is less than one, it is low geared. If the ratio is exactly one,
it is evenly geared. A highly geared company has the advantage of trading on
equity.

TURNOVER RATIOS (Performance Ratios or Activity Ratios)

31
Turnover ratios are used to indicate the efficiency with which assets and
resources of the firm are being utilised. These ratios are known as turnover
ratios because they indicate the speed with which assets are being converted
or turned over into sales. These ratios, thus, express the relationship between
sales
and various assets. A higher turnover ratio generally indicates better use of
capital resources which in turn has a favourable effect on the profitability of
the firm. Important turnover ratios are:

i) Inventory turnover Ratio (Stock Turnover Ratio)

This ratio is calculated by dividing the cost of goods sold by average

inventory.
It establishes the relationship between the cost of goods sold during a given
period and the average amount of stock carried during the period.

Formula:
Inventory Turnover ratio = Cost of goods sold/Average Stock (Inventory)

Where, Cost of goods sold = Sales - Gross profit

Cost of goods sold = Opening stock +Purchases + Carriage inward
and
other direct expenses - Closing stock
Average Stock = 1/2 (Opening stock + Closing stock)

Significance and Objectives: Inventory or stock turnover ratio indicates

the efficiency of a firm’s management. This ratio gives the rate at which
stocks are converted into sales and then into cash. A low inventory turnover
ratio is an indicator of dull business, accumulation of inventory, over

32
investment in inventory or unsaleable goods etc. Generally speaking, a high
stock turnover ratio is considered better as it indicates that more sales are
being produced by each rupee of investment in stock but a higher stock
turnover ratio may not always be an indicator of favourable results. It may be
the result of a very low level of stock which results in frequent out-of-stock
positions. Such a situation prevents the company from meeting customers’
demands and the company cannot earn maximum profits.

ii) Debtors Turnover Ratio (Receivables Turnover Ratio)

This ratio indicates the relationship between net credit sales and trade debtors.
It shows the rate at which cash is generated by the turnover of debtors.

Formula:
Debtors Turnover ratio = Credit Sales/Average Debtors

The term debtors includes trade debtors and bills receivables. Doubtful debts
are not deducted from debtors. Moreover, debtors that do not arise from
regular sales should be excluded.

Significance and Objectives: The significance of this ratio lies in the fact
that debtors constitute one of the important items of current assets and this
ratio indicates as to how many days’ average sales are tied up in the amount
of debtors. The efficiency of debt collection is also indicated by this ratio. A
higher debtors turnover ratio indicates that debts are being collected more
quickly. Changes in this ratio show the changes in the company’s credit
policy or changes in its ability to collect from its debtors.

33
iii) Fixed Assets Turnover Ratio

This ratio indicates the efficiency with which the firm is utilising its
investments in fixed assets such as plant and machinery, land and building etc.

Formula:
Fixed Assets Turnover = Sales (or Cost of Sales)/Net Fixed Assets

The term net fixed assets means depreciated value of fixed assets.

Significance and Objectives: Generally speaking, a high ratio indicates

efficient utilization of fixed assets in generating sales and a low ratio may
signify that the firm has an excessive investment in fixed assets.

iv) Working Capital Turnover Ratio

This ratio indicates the efficiency or inefficiency in the utilisation of working’
capital in making sales.

Formula:
Working Capital Turnover ratio = Sa1es/Net working Capital

The term net working capital means current assets minus current liabilities.

Significance and Objective: A high working capital turnover ratio shows the
efficient utilisation of working capital in generating sales. A low ratio, on the
other hand, may indicate excess of net working capital. This ratio thus shows
whether working capital is efficiently utilised or not.

v) Capital Turnover Ratio

34
This ratio shows the relationship between cost of sales (or sales) and the total
capital employed.

Formula:
Capital Turnover ratio = Cost of Sales (or Sales)/Total capital employed

The term capital employed includes the long term liabilities and total of
shareholders funds. From this are deducted non-operating assets (e.g.,
investments) and fictitious assets like preliminary expenses, discount on the
issue of shares, debits balance of Profit and Loss Account, etc.

Significance and Objectives: This ratio shows the efficiency with which
capital employed in a business is used. A high capital turnover ratio indicates
the possibility of greater profit and a low capital turnover ratio is a sign of
insufficient sales and possibility of lower profits.

vi) Creditors Turnover Ratio

This ratio also known as Payables Turnover Ratio, measures the relationship
between credit purchases and average accounts payable.

Formula:
Creditors turnover ratio = Net credit purchases/Average accounts
payable

Accounts payable include creditors and bills payable.

PROFITABILITY RATIOS

Every business should earn sufficient profits to survive and grow over a long
period of time. Infact efficiency of a business is measured in terms of profits.

35
Profitability ratios are calculated to measure the efficiency of a business.
Profitability of a business may be measured in two ways
• Profitability in relation to sales
• Profitability in relation to investment.
If a company is not able to earn a satisfactory return on investment, it will not
be able to pay a reasonable return to its investors and the survival of the
company may be threatened. These ratios are:

i) Gross Profit Ratio (Gross Profit Margin)

This ratio expresses the relationship between gross profit and sales.

Formula:
Gross Profit ratio = (Gross profit/Net sales) x 100

Net sales means sales minus sales returns.

Gross profit is sales minus cost of goods sold.

Significance and Objectives: Gross profit ratio indicates the average

margin on the goods sold. It shows whether the selling prices are adequate or
not. It also indicates the extent to which selling prices may be reduced without
resulting in losses.
A low gross profit ratio may indicate a higher cost of goods sold due to higher
cost of production. It may also be due to low selling prices. A high gross
profit ratio, on the other hand, indicates relatively lower cost and is a sign of
good management.

ii) Net Profit Ratio (Net Profit Margin)

36
This is the ratio of net profit to net sales.

Formula:
Net Profit ratio = (Net profit/Net sales) x 100

In calculating the net profit, all non- operating expenses and losses (e.g. loss
on sale of old assets, provision for legal damages etc.) are deducted and all
non-operating incomes (e.g. dividend income, interest received on
investments etc.) are added. Some accountants deduct income tax also for
calculating the net profit.

Significance and Objectives: The net profit ratio is the overall measure of a
firm’s ability to turn each rupee of sales into profit. It indicates the efficiency
with which a business is managed. A firm with a high net profit ratio is in an
advantageous position to survive in the face of rising cost of production and
falling selling prices. Where the net profit ratio is low, the firm will find it
difficult to withstand these types of adverse conditions.

Comparison of net profit ratio with other firms in the same industry or with
the previous years will indicate the scope for improvement. This will enable
the firm to maximize its efficiency.

iii) Operating Ratio

This is also an important profitability ratio. This ratio explains the relationship
between cost of goods sold and operating expenses on the one hand and net
sales on the other.

Formula:
37
Operating ratio =
[(Cost of goods sold + operating expenses)/Net sales] x 100

Significance and Objective: The operating ratio is the yardstick to measure

the efficiency with which a business is operated. It shows the percentage of
net sales that is absorbed by cost of goods sold and operating expenses. A
high operating ratio is considered unfavourable because it leaves a smaller
margin of profit to meet non-operating expenses. On the other hand, a lower
operating ratio is considered a good sign.

iv) Return on investment (ROI) or return on capital employed

This is the most important test of profitability of a business. It measures the

overall, profitability. It is ascertained by comparing profit earned and capital
(or funds) employed to earn it.

Formula:
ROI = (profit before interest and taxes/Capital employed) x 100

Significance and Objective: ROl is the only ratio which measures

satisfactorily the overall performance of a business from the point of view of
profitability. This ratio indicates how well the management has utilised the
funds supplied by the owners and creditors. In other words, this ratio is
intended to measure the earning power of the net assets of the business. The
higher the ROI, the more efficient the management is considered to be in

38
using the funds available. In fact, this ratio can also be advantageously used in
judging the performance efficiency of different firms in different industries.
Management also uses this ratio for decision making purposes.

v) Return of Equity capital

This ratio establishes the relationship between the net profit available to
equity shareholder and the amount of capital invested by them.

Formula:
Return on Equity Capital =
(NAT/Equity shareholders funds) x 100
Where, NAT = Net profit after interest, taxes and preference dividend
Net profit for the purpose of this ratio is taken after dividend payable to
preference shareholders, if any. Equity shareholders funds include equity
capital, reserves and other undistributed profits.

Significance and Objectives: This ratio shows the profit percentage

for equity shareholders. A high rate of return on equity shareholders funds is
favoured by investors and a higher market valuation is placed on such shares.
This ratio is used for inter-firm comparison to judge the comparative
profitability of different firms.

vi) Earning Per Share (EPS)

This ratio measures the earnings per equity share that is, it measures the
profitability of the firm on a per share basis.

39
Formula:

Earning per share =

(Net profit after taxes - Preference dividend)/No. of equity shares

EPS is one of the most commonly quoted and widely publicized ratio.

vii) Dividend Pay-out Ratio (Or Pay-out Ratio)

It indicates the percentage of equity share earnings distributed as dividends to

equity shareholders.

Formula:
Dividend Pay-out ratio = Dividend per share/Earning per share (EPS)

viii) Dividend Yield Ratio

Dividend is declared by a company as a percentage of par value or paid up

value or a specific amount per equity share.

Formula:
Dividend Yield Ratio =
Dividend per equity share/Market price per equity share

This ratio is important for those investors who make investment decisions for
the purpose of earning a reasonable yield on the amount of investment.

ix) Price Earning Ratio (P/E Ratio)

40
This ratio is the market price of shares expressed as multiple of earning per
share (EPS).

Formula:
P/E ratio = Market price per equity share/Earning per share

This ratio guides investors to decide whether to buy shares of a company or

not.

Limitations of Accounting Ratios

Ratio analysis is very important in revealing the financial position and

soundness of the business. But, in spite of its advantages, it has some
limitations which restrict its use. These limitations should be kept in mind
while making use of ratio analysis for interpreting the financial statements.
The following are the main limitations of accounting ratios:

 False results if based on incorrect accounting data: Accounting ratios

can be correct only if the data (on which they are based) are correct.
Sometimes, the information given in the financial statements is affected by
window dressing, i.e., showing position better than what actually is. For
example, if inventory values are inflated or depreciation is not charged on
fixed assets, not only will one have an optimistic view of profitability of
the concern but also of its financial position. So the analyst must always be
on the lookout for signs of window dressing, if any.

 No idea of probable happenings in future: Ratios are an attempt to make

an analysis of the past financial statements; so they are historical

41
 documents. Now-a-days keeping in view the complexities of the business,
it is important to have an idea of the probable happenings in future.

 Variation in accounting methods: The two firms’ results are comparable

with the help of accounting ratios only if they follow the same accounting
methods or bases. Comparison will become difficult if the two concerns
follow the different methods. Comparison of financial statements of such
firms by means of ratios is bound to be misleading.

 Price level changes: Changes in price levels make comparison for various
years difficult. For example, the ratio of sales to total assets in 2006 would
be much - than in 1986 due to rising prices, fixed assets being shown at
cost and not at market price.

 Only one method of analysis: Ratio analysis is only a beginning and

gives just a fraction of information needed for decision-making. Therefore,
to have a comprehensive analysis of financial statements, ratios should be
used along with other methods of analysis.

 No common standards: It is very difficult to lay down a common

standard for comparison because circumstances differ from concern to
concern and the nature of each industry is different.

 Different meanings assigned to the same term: Different firms, in order

to calculate ratio may assign different meanings. For example, profit for
the purpose of calculating a ratio may be taken as profit before charging
interest and tax or profit before tax but after interest or profit after tax and
interest. This may affect the calculation of ratio in different firms and such
ratio when used for comparison may lead to wrong conclusions.

42
 Ignores qualitative factors: Accounting ratios are tools of quantitative
analysis on1y. But sometimes qualitative factors may surmount the
quantitative aspects. The calculations derived from the ratio analysis under
such circumstances may get distorted.

 No use if ratios are worked out for insignificant and unrelated figures:
Accounting ratios may be worked for any two insignificant and unrelated
figures as ratio of sales and investment in government securities. Such
ratios may be misleading. Ratios should be calculated on the basis of cause
and effect relationship.

RESEARCH METHODOLOGY

INTRODUCTION

43
Finance and its functions plays very major role in determining the profitability
and stability of the business. Most of the studies in India on business finance
have laid more stress in comparing financial results of public and private
sector undertaking vis-à-vis profitability. The current study undertaken at
ALLAHABAD BANK is to find out and evaluate its financial performance.
The purpose was also to closely examine the relationship between various
financial elements, which may be compared to the prescribed standards and
norms.

A research design is purely and simply the framework or plan for a study that
guides the collection and analysis of data. It is a blue print that if followed in
completing a study. A good research design has the characteristics, viz., and
problem definition, specific methods of data collection and analysis, time
required for research project and the estimate of expenses of to be incurred.

The three basic types of research design viz.,

• Exploratory
• Descriptive
• Casual or experimental

Running a business means taking decisions all the time. Some of these
decisions have short term consequences, however affects the long term
prospects of business. Whatever the nature of the decision, a common thread
is the nature of the information. Information is needed to increase your
charges of making the best decisions and this study guides the decision maker.

TITLE OF THE STUDY

44
A study of “ANALYSIS OF FINANCIAL PERFORMANCE OF
ALLAHABAD BANK”

STATEMENT OF THE PROBLEM

Financial soundness in terms of solvency, liquidity, leverage, profitability and

earning capacity are the main objectives of any organization. Each and every
organization strives to be financially sound. The financial position of a
business concern depends on the growth it attains in every aspect of the
concern. The financial statements clearly reveal the growth of the company
over a number of years. But it is difficult to analyze and take important
decisions only by studying the financial statements without any comparison.
In order to facilitate comparison and take strategic and managerial decisions
analytical techniques are required to study the financial statements.

Accounting ratios or Ratio Analysis establishes relationship between closely

related Financial Statements. If the items appearing in the Financial
Statements are to be really meaningful and useful, they should be analyzed in
such a way that one item can be compared with another. Ratio Analysis is one
of the tools available to analyze the Financial Statements.

Hence, this Project Report contains analysis of Financial Statements through

Comparative Balance sheets, Statement of Cash Flow, Comparative Profit &
Loss Accounts some of the Ratio Analysis and their interpretation.

SCOPE OF THE STUDY

45
The study is concentrated mainly on understanding and analyzing the
financial statements based in the annual reports of 2008 and 2009 of
ALLAHABAD BANK with reference to Comparative Balance sheets,
Statement of Cash Flow, Comparative Profit & Loss Accounts some of the
Ratio Analysis and their interpretation.

METHODOLOGY

The Hypothesis that was framed for study relating to banks’ financial
performance is the following:

 Financial performance of Allahabad bank has shown constant

improvement & rise in profits.

 Financial performance of Allahabad bank is not constant but it is

fluctuating.

The Data was collected from associated literature, banking journals,

observations, questionnaire and other inputs, from related experts. The
method and examination of records were widely used in framing this report.

46
OBJECTIVES OF THE STUDY

The following are the objectives of the study:

• The primary objective of the study is to analyze the financial statements,

profit and loss account and the balance sheet of the company.
• To understand the efficiency of the company.
• Assess the profitability of the concern.
• To study the solvency, liquidity and long-term financial position of the
concern.
• To interpret the financial statement with the help of accounting ratios
derived from financial statements.
• To make suggestions out of the findings of the study.

SOURCES OF DATA

PRIMARY DATA

Primary data is that data or information collected for the first time and which
not have been collected from any other sources. Primary data is called first
hand data/information.

The primary data was collected with great care keeping in mind the research
objective.

Primary data was collected in the form of :

• I visited ALLAHABAD BANK during my field work and met with the
manager.

47
• The data was gathered by the medium of detailed discussions with
officials of the bank to understand the problems of the requirement.

SECONDARY DATA

Secondary data is any data that have been gathered earlier for the same
purpose.

 Fact sheet published by the bank.

 Annual repots of the bank.
 Newspaper.
 Magazines etc.
 Internet etc.

48
LIMITATIONS OF THE STUDY

• This study extensively uses the data provided in the financial reports. If
there is any window dressing, the findings could be misleading.
• This being an academic study, it suffers from time and cost constraints.
• No other company is the same sector has been considered to evaluate the
ratio standards.
• It’s purely a theoretical study.
• Lastly different individuals interpret the ratios in a different manner.
• Some information could not be collected as it is confidential.

METHOD OF PROCESSING AND ANALYSIS OF DATA

Research design specific for this study including following:-

 Selection of the study period.

 Collection of information from various journals to understand the

industrial background of study.
 Identification of means of financing sources over the study period.
 Collection of banks specific literature that is annual report for the study
period.
 Analysis or tabulated data to recognize the financial position or location
of the firm.
 Finally forwarding recommendations and conclusions to the firm.

49
CHAPTER SCHEME

1. INTRODUCTION

This chapter talks about the theory behind financials performance evaluation
major techniques of evaluation contribution in the field and what the study
attempting to achieve.

2. RESEARCH METHEDOLOGY OF THE STUDY

The design of the study sated the research design, sources of data, sampling
plan, fieldwork, data processing analysis plan, and assumptions regarding
methodology are discussed here. The study overview as well as the studies
limitations is also discussed here.

3. BACKGROUND OF THE STUDY

This chapter throws light on origin and of the industry as a whole, its present
status and major players in the industry.

4. PROFILE OF THE ORGANIZATION

This chapter views the origin and growths of Allahabad bank its business
activities, percent status, objectives and the profile of the organization.

5. DISCUSSION OF FINDINGS

50
In this chapter data collected is complied, tabulated process and analyzed. The
statistical techniques for the construction of graphs and diagram are used to
present data.

6. CONCLUSION AND RECOMMEDATIONS

This chapter contains the summary of finding and suggestion made to increase
the profitability.

COMPANY PROFILE

51
INTRODUCTION TO THE BANKING
DEFINITION

The Indian Banking Regulation Act 1949 has defined the term “Banking”
under section 5 (1) (b) as accepting for the purpose of lending or investment,
of deposits of money from public, repayable on demand or otherwise, and
withdrawl by cheque, draft, order or otherwise.”

ORIGIN OF THE BANKING

The term bank is supposed to be derived from banco, the Italian word for
bench, the Lombard Jews in Italy having benches in the market-place where
they exchanged money and bills. When a banker failed, his bench was broken
by the people, and he was called a bankrupt.

This derivation of the term, however, is probably wrong. "The true original
meaning of banco,"says Macleod,” is a heap, or mound, and this word was
metaphorically applied to signify a common fund, or joint stock, formed by
the contributions of a multitude of persons."

A brief account of the first banking operations in Venice will dispel the haze
enveloping this subject. In 1171 the financial condition of Venice was strained
in consequence of the wars in which the people were engaged. The great
council of the republic finally determined to raise a forced loan. Every citizen
was obliged to contribute the hundredth part of his possessions to the State,
receiving therefore interest at the rate of five per cent. The public revenues
were mortgaged to secure the interest, and commissioners were appointed to
pay the interest to the fund holders and to transfer the stock. The loan had
several names in Italian, Compera, Mutuo, but the most common was Monte,

52
a joint stock fund. Afterward, two more loans were contracted, and in
exchange for the money contributed by the citizens, the commissioners gave
stock certificates bearing interest, and which could be sold and transferred.

EVALUATION OF BANKING IN INDIA

Banking in India originated in the last decades of the 18th century. The first
banks were The General Bank of India which started in 1786, and the Bank of
Hindustan, both of which are now defunct. The oldest bank in existence in
India is the State Bank of India, which originated in the Bank of Calcutta in
June 1806, which almost immediately became the Bank of Bengal. This was
one of the three presidency banks, the other two being the Bank of
Bombay and the Bank of Madras, all three of which were established under
charters from the British East India Company. For many years the Presidency
banks acted as quasi-central banks, as did their successors. The three banks
merged in 1921 to form the Imperial Bank of India, which, upon India's
independence, became the State Bank of India.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed
in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad
Bank, established in 1865 and still functioning today, is the oldest Joint Stock
bank in India. It was not the first though. That honor belongs to the Bank of
Upper India, which was established in 1863, and which survived until 1913,
when it failed, with some of its assets and liabilities being transferred to
the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton

to Lancashire from the Confederate States, promoters opened banks to finance

53
trading in Indian cotton. With large exposure to speculative ventures, most of
the banks opened in India during that period failed. The depositors lost money
and lost interest in keeping deposits with banks. Subsequently, banking in
India remained the exclusive domain of Europeans for next several decades
until the beginning of the 20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s.

The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and
another in Bombay in 1862; branches in Madras and Pondichery, then a
French colony, followed. HSBC established itself in Bengal in 1869. Calcutta
was the most active trading port in India, mainly due to the trade of the British
Empire, and so became a banking center.

The first entirely Indian joint stock bank was the Oudh Commercial Bank,
established in 1881 in Faizabad. It failed in 1958. The next was the Punjab
National Bank, established in Lahore in 1895, which has survived to the
present and is now one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through
a relative period of stability. Around five decades had elapsed since the Indian
Mutiny, and the social, industrial and other infrastructure had improved.
Indians had established small banks, most of which served particular ethnic
and religious communities.

COMMERCIAL BANKS

Commercial Banks in India are broadly categorized into Scheduled

Commercial Banks and Unscheduled Commercial Banks. The Scheduled
Commercial Banks have been listed under the Second Schedule of the
Reserve Bank of India Act, 1934. The selection measure for listing a bank

54
under the Second Schedule was provided in section 42 of the Reserve Bank of
India Act, 1934

The modern Commercial Banks in India cater to the financial needs of

different sectors. The main functions of the commercial banks are transferring
of funds, acceptance of deposits, offering those deposits as loans for the
establishment of industries, purchase of houses, equipments, capital
investment purposes etc.

The banks are allowed to act as trustees. On account of the knowledge of

the financial market of India the financial companies are attracted towards
them to act as trustees to take the responsibility of the security for the
financial instrument like a debenture.

The Indian Government presently hires the commercial banks for various
purposes like tax collection and refunds, payment of pensions etc.

FUNCTIONS OF COMMERCIAL BANK

The functions of commercial banks are divided into two categories:

1) PRIMARY FUNCTION.

2) SECONDARY FUNCTION INCLUDING AGENCY FUNCTION.

 PRIMARY FUNCTION.

The primary functions of a commercial bank include:

55
 a) Accepting deposits.
b) Granting loans and advances.

a) Accepting deposits.

The most important activity of a commercial bank is to mobilize deposits

from the public. People who have surplus income and savings find it
convenient to deposit the amounts with banks. Depending upon the nature of
deposits, funds deposited with bank also earns interest. Thus, deposits with
the bank grow along With the interest earned. If the rate of interest is higher,
public are motivated to deposit more funds with the bank. There is also safety
of funds deposited with the bank.

b) Granting loans and advances.

The second important function of a commercial bank is to grant loans and

advances. Such loans and advances are given to members of the public and to
the business community at a higher rate of interest than allowed by banks on
various deposit accounts. The rate of interest charged on loans and advances
varies depending upon the purpose, period and the mode of repayment. The
difference between the rate of interest allowed on deposits and the rate
charged on the Loans is the main source of a bank’s income.

i) Loans

A loan is granted for a specific time period. Generally, commercial banks

grant short-term loans. But term loans, that is, loan for more than a year, may
also be granted. The borrower may withdraw the entire amount in lump sum

56
or in installments. However, interest is charged on the full amount of loan.
Loans are generally granted against the security of certain assets. A loan may
be repaid either in lump sum or in installments.

ii) Advances

An advance is a credit facility provided by the bank to its customers. It differs

from loan in the sense that loans may be granted for longer period, but
advances are normally granted for a short period of time. Further the purpose
of
granting advances is to meet the day to day requirements of business. The rate
of interest charged on advances varies from bank to bank. Interest is charged
only on the amount withdrawn and not on the sanctioned amount.

MODES OF SHORT TERM FINANCIAL ASSISTANCE

Banks grant short-term financial assistance by way of cash credit, overdraft

and bill discounting.

a) Cash Credit

57
Cash credit is an arrangement whereby the bank allows the borrower to draw
amounts upto a specified limit. The amount is credited to the account of the
customer. The customer can withdraw this amount as and when he requires.
Interest is charged on the amount actually withdrawn. Cash Credit is granted
as per agreed terms and conditions with the customers.

b) Overdraft

Overdraft is also a credit facility granted by bank. A customer who has a

current account with the bank is allowed to withdraw more than the amount of
credit balance in his account. It is a temporary arrangement. Overdraft facility
with a specified limit is allowed either on the security of assets, or on personal
security, or both.

c) Discounting of Bills

Banks provide short-term finance by discounting bills, that is, making

payment of the amount before the due date of the bills after deducting a
certain rate of discount. The party gets the funds without waiting for the date
of maturity of the bills. Incase any bill is dishonored on the due date, the bank
can recover
the amount from the customer.

 SECONDARY FUNCTION INCLUDING AGENCY

FUNCTION.

Besides the primary functions of accepting deposits and lending money,

banks perform a number of other functions which are called secondary
functions. These are as follows –

58
 a) Issuing letters of credit, travellers cheques, circular notes etc.

b) Undertaking safe custody of valuables, important documents, and

securities by providing safe deposit vaults or lockers.

c) Providing customers with facilities of foreign exchange.

d) Transferring money from one place to another; and from one branch to
another branch of the bank.

e) Standing guarantee on behalf of its customers, for making payments

for purchase of goods, machinery, vehicles etc.

f) Collecting and supplying business information.

g) Issuing demand drafts and pay orders.

h) Providing reports on the credit worthiness of customers.

ROLE OF THE BANKS

Banks provide funds for business as well as personal needs of individuals. They play
a significant role in the economy of a nation:

 It encourages savings habit amongst people and thereby makes funds

available for productive use.

59
 It acts as an intermediary between people having surplus money and
those requiring money for various business activities.

 It facilitates business transactions through receipts and payments by

cheques instead of currency.

 It provides loans and advances to businessmen for short term and long-
term purposes.

 It also facilitates import export transactions.

 It helps in national development by providing credit to farmers, small-

scale industries and self-employed people as well as to large business
houses which lead to balanced economic development in the country.

 It helps in raising the standard of living of people in general by providing

loans for purchase of consumer durable goods, houses, automobiles, etc.

60
ABOUT ALLAHABAD BANK

The Oldest Joint Stock Bank of the Country, Allahabad Bank was founded on
April 24, 1865 by a group of Europeans at Allahabad. At that juncture
Organized Industry, Trade and Banking started taking shape in India.

Allahabad Bank is oldest nationalized Bank with rich experience in extending

various banking solutions to its valued clients since 1865. Their consistent
track record of growth with profit provides the confidence of meeting all your
Banking requirements.

In 1991 the bank commenced its wholly-owned subsidiary All Bank Finance
for merchant banking. In June 2006 the bank opened its first representative
office at Shenzhen, China and same year it rolled out first branch under CBS.

Currently the bank serves customers across 110 cities with network 6 zonal
offices, 2227 branches (including one in Hong Kong) and 221 ATMs.

Allahabad Bank is well spread out in India and recently opened first
International Branch at Hong Kong. Bank has also arrangements with
correspondents at various important overseas locations, which will ensure
extending to all our NRI customers rich banking experience.

61
PRODUCTS AND SERVICES OFFERED BY THE BANK :

PRODUCTS

I. Deposit Products
 Flexi-fix Deposit
 Rs.5 Banking
 All Bank Tax Benefit Term Deposit Scheme
 All Bank Premium SB Account
 All Bank Mahila Sanchay Account
 All Bank Vikash SB Account
 All Bank Premium Current Account
 Current Plus Deposit Scheme
 Sishu Mangal Deposit Scheme

II. Retail Credit Products

 All Bank Housing Finance Scheme

 All Bank Educational Loan Scheme
 All Bank Car Finance Scheme
 All Bank Saral Loan Scheme
 Personal Loan Scheme for Pensioners
 Personal Loan Scheme for Doctors/ Medical Practitioners
 Loan against NSC/ KVP
 All Bank Property Loan
 All Bank Furnishing Loan
 All Bank Gold Loan Scheme
 All Bank Mobike Scheme
 Overdraft Facility in Savings Bank Account
 All Bank Abhusan Scheme

62
  All Bank Trade Scheme
 AllBank Gyan Dipika Scheme
 Allabnk Reverse Mortgage Scheme

III. Other Credit Products

 Kisan Credit Card

 Kisan Shakti Yojana
 AllBank-Expo

SERVICES

 All Ayushman Bima Yojana

 Cash Management Services
 Depository Services
 Visa Debit Cum ATM Card
 Real Time Gross Settlement (RTGS)
 National Electronic Funds Transfer (NEFT)
 Gold Card Scheme for Exporters
 Charter for MSMEs
 Government Business
 Regional MSME Care Centres

The Oldest Joint Stock Bank of the Country, Allahabad Bank was founded on
April 24, 1865 by a group of Europeans at Allahabad. At that juncture
Organized Industry, Trade and Banking started taking shape in India. Thus,
the History of the Bank spread over three Centuries - Nineteenth, Twentieth
and Twenty-First.

63
MILESTONES

Nineteenth Century

April 24, 1865

The Bank was founded at the confluence city of Allahabad by a group of
Europeans.

Twentieth Century

1920’s

The Bank became a part of P & O Banking Corporation's group with a bid
price of Rs.436 per share,

1923’s

The Head Office of the Bank shifted to Calcutta on Business considerations.

July 19, 1969

Nationalized along with 13 other banks, Branches - 151 Deposits - Rs.119

crores, Advances - Rs.82 crores.

October, 1989

United Industrial Bank Ltd. merged with Allahabad Bank.

1991’s

64
Instituted All Bank Finance Ltd., a wholly owned subsidiary for Merchant
Banking.

Twenty-First Century

October, 2002

The Bank came out with Initial Public Offer (IPO), of 10 crores share of face
value Rs.10 each, reducing Government shareholding to 71.16%.

April, 2005

Follow on Public Offer (FPO) of 10 crores equity shares of face value Rs.10
each with a premium of Rs.72, reducing Government shareholding to 55.23%.

June, 2006

The Bank Transcended beyond the National Boundary, opening

Representative Office at Shenzen, China.

Oct, 2006

Rolled out first Branch under CBS.

February, 2007

The Bank opened its first overseas branch at Hong Kong.

March 2007

Bank's business crossed Rs.100,000 crores mark.

65
2008

 Allahabad Bank announces special package for housing loan & MSME
borrowers
 Allahabad Bank revises Interest rates on FCNR and NRE Deposits.
 Allahabad bank cuts Benchmark Prime Lending Rate (BPLR) by 75
basis points

 Allahabad Bank- Diwali Bonanza – 11% On Term Deposits

 Allahabad Bank crosses Rs.125000 crore business

 Allahabad bank increases interest rates on deposits

 Allahabad Bank Chairman Calls On Hon’ble Union Finance Minister
 Allahabad bank keeps housing, personal, education, car/auto loans
unaffected by BPLR increase
 Allahabad Bank Maintains Its Surge Forward
 Allahabad bank completes Debt Waiver exercise
 Allahabad bank increases BPLR and Deposit interest rates
 Allahabad Bank Launches Debt Waiver Scheme
 Allahabad Bank Presents Powerful Performance and Spectacular
Results
 Allahabad Bank cuts benchmark prime lending rate (BPLR) by 25
basis points
 Hon'ble Union Finance Minister opens 2154th branch of Allahabad
Bank at Pudukkottai, Tamil Nadu
 Allahabad Bank cuts interest on housing loans By 25 basis points
 Allahabad Bank cuts Deposit as well as Lending rates
 Allahabad Bank steady on growth path

66
2009

 Deposits registered Growth of 25.39 % (YOY)

 Gross Credit up by 24.51% (YOY)
 Total Business soared by 25.03 % (YOY)
 Operating Profit surged by 47 % (YOY)
 Provision Coverage Ratio increased to 88.29 %
 Capital Adequacy Ratio surges to 15%.
 Book Value per share mounts to Rs. 152.72.
 Net NPA reduced to 0.35 % from 0.82% last year.
 Bank has geared up CBS implementation and 961
Branches/Offices covering 81.02 % of the Bank’s business have been
brought within the network.

 Internet Banking, SMS Banking, e-Payment of Taxes made available

through all CBS Branches.

 Instant ATM-cum Debit Card facility launched for the customers of

CBS Branches. Bank has installed 211 ATMs facilitating more than
5.80 lacs ATM –cum-Debit Cardholders of our Bank.

 Bank is offering RTGS/NEFT fund transfer facility through its all CBS
Branches in which funds can be transferred to any of 61000 Bank
Branches across the country.RTGS/NEFT facility has also been
extended through Internet Banking.

 Online Payment Gateway Services launched by the Bank for its

Customers to make online payments at the billers’ site with instant
debit from their accounts.

67
 PROFILE

 Date of Establishment 24-04 1865

 Revenue 1454.33 (USD in Millions)

 Corporate Address
2 Netaji Subhas Road,
Kolkata-700001,
West Bengal,
www.allahabadbank.in

MANAGEMENT DETAILS

 Chairperson - J P Dua

 Managing Director- J P Dua

 LIST OF DIRECTORS

 Shri Debabrata Sarkar

Executive Director

 Shri M.R. Nayak

Executive Director

 Smt. Sukriti Likhi

Government Nominee Director

68
 Shri Mohammad Tahir
RBI Nominee Director

 Shri K. K. Dogra
Officer Employee Director

 Shri P. V. Gudireddy
Part Time Non - Official Director
 Shri P. V. Gudireddy
Part Time Non - Official Director

 Dr. Vasant Baburao Kaujalgi

Shareholder Director

 Dr. Shakeel Uz Zaman Ansari

Part Time Non - Official Director

 Smt Joginder Kaur

Part Time Non - Official Director

REGISTRAR & SHARE TRANSFER AGENT

M/S MCS LTD.

77/2A, Hazra Road,
Kolkata-700029

BUSINESS OPERATIONS

Bank - Public

69
FINANCIALS

 Total Income - Rs. 85066.521 Million (year ending Mar 2009)

 Net Profit - Rs. 7685.981 Million (year ending Mar 2009)

 Company Secretary Dina Nath Kumar

BANKERS AUDITORS

 M/s Venkat & Rangaa

 M/s Sudit K Parekh & Co
 M/s M.R. Narain & Co.
 M/s S. Ghose & Co.
 M/s K.M. Agarwal & Co.

COMPETITORS DETAILS

 STATE BANK OF INDIA

70
  CANARA BANK
 HDFC BANK
 ICICI
 VIJAY BANK
 UTI
 PUNJAB NATIONAL BANK
 DENA BANK
 SYNDICATE BANK

BANKS VISION AND MISSION

Vision

To put the Bank on a higher growth path by building a Strong Customer-base

through Talent Management, induction of State-of-the-art Technology and through
Structural Re-organization.

MissionTo ensure anywhere and any time banking for the customer with latest
state-of-the-art technology and by developing effective customer centric relationship
and to emerge as a world-class service provider through efficient utilization of
Human Resources and product innovation.

ANALYSIS OF DATA & INTERPRETATION

Comparative Balance sheets as on 31st March 2008 and

31st March 2009

71
 (Rs in 000)
Particulars As on As on Increase/ %
31-03-2008 31-03-2009 Decrease change

A. Capital & Liabilities

1. Capital 4,467,000 4,467,000 0 Negligible
2.Reserves & 47,743,491 54,052,497 63,09,006 13.2%
Surplus
3. Deposits 716,163,831 849,717,887 13,35,54,056 18.6%
4. Borrowings 17,919,987 9,370,367 (85,49,620) (47.70)%
5.Other
Liabilities & 43,098,927 58,872,328 (15773401) (36.59)%
Provisions
6.Total 829,393,236 976,480,079 147086843 17.7%

Liabilities

B. Assets
1.Cash &
Balance
62,888,552 51,153,786
with RBI
(11,734,766) (18.7)%
2. Balance with
banks & 7,532,410 15,213,849
Money at call &
Short Notice 7,681,439 102%
3. Investments 234,002,500 296,510,497 62,507,997 26.71%
4. Advances 497,204,661 588,017,634 90,812,973 18.26%
5. Fixed Assets 10,714,676 11,097,519 382,843 3.53%
6. Other Assets 17,050,437 14,486,794 (2,563,643) (15)%
7. Total Assets 976,480,079 829,393,236 (147,086,843) (15.1)%

Analysis Based on Comparative Balance Sheets

1) Capital & Liabilities

1) The total issued capital as at 31-03-2009 is Rs. 4,467,000,000 divided
into 2,467,000,000 equity shares of Rs.10 each held by central

72
 government and 2,000,000,000 equity Shares of Rs.10/- each held by
Public & Others. The bank’s authorized capital is Rs. 150,00,00,000.
The bank has issued approximately 9.5% of its authorized capital. It is
observed that there has been no change in the called-up capital. An
amount of Rs.6,000 towards allotment money has been collected in the
year 2008-2009 from the public. The share of central government in
paid-up capital stood at Rs 246700000 which is approximately 55.23%
of the paid-up capital. The balance of 44.77% is held by the public.
2) It is observed that during the year 2008-2009 the amount of reserves
and surplus has gone up by 13.2%. There has been no change in share
premium account. Transfers to statutory reserves and capital reserves
have increased during the year 2008-2009 by approximately 44% while
transfer to general reserve has dropped by 66%.
3) Deposits during the year 2008-2009 have grown by 18.6%%.Savings
bank deposits has grown by 13.71% and stood at Rs. 227,743,903
thousands. Deposits from banks and others has grown by 21.32% and
stood at Rs. 555,742,363 thousands.

4) The borrowings during the year 2008-2009 have gone down by

47.70%. Borrowings from outside India have gone down by a massive

36.59% during the year 2008-2009. On the other hand borrowings

from RBI has been cleared in 2006-2007. Borrowings from banks and
other institutions in India have gone down by 100% from Rs.
12,850,000,000. Borrowings from outside India are increased to Rs.
8,628,446,000 from 4,813,745,000. All the borrowings are non-
secured.

73
 5) Other liabilities, which include bills payable, and interest outstanding
has gone up 26.78% during the year 2008-2009. Outstanding interest
stood at Rs.3,241,705,000 during the year 2008-2009.

6) The total liabilities during 2008-2009 have increased by approximately

36.5%. It is important to note here that there was no change in share
capital, hence indicating that liabilities other than capital have gone up
during the year 2008-2009.
Assets
1) The cash and balance with RBI has deccreased by around 20.32%
during the year 2008-2009. The cash in hand, which has increased, by
Rs.3,94,608,000 stood at Rs.35,98,070,000 by 12.32%. Balance with
Banks in Current Accounts has decreased by 7.07% during the year
2008-2009.

2) The balances with banks and money at call and short notice is nil
during the year 2008-2009. The balances with banks in India in current
accounts and other deposits accounts have marginally decreased by Rs.
1294210 at 24.15%. There is no money at call and short notice in India
or outside India. The balances with banks outside India in current
accounts and other deposits accounts have increased to 171.98%. It is
important to note that there was Rs. 1,749,734,000 balance in current
accounts with banks outside India during the year 2007-2008, but stood
at around Rs.4,759,000,000 during 2008-2009.
3) Investments during the year 2008-2009 have marginally gone up by
26.71 % and stood at Rs. 296,510,497,000 . Provision for depreciation
on investments has increased in the year 2008-2009 by 33.62% and so
increase in gross investment. It is worth noting that around 72.12% of
the total investment is in government securities in the year 2008-2009

74
 while investment in shares is only 0.86%. Investment in debentures and
bonds in the year 2008-2009 has dropped 24.17% comparatively.
4) Advances during the year 2008-2009 have gone up by 18.26%. Term
loans comprise 55.56% of the total advances while cash credits,
overdrafts and loan repayable on demand comprise 41.32%. A majority
78% of advances is secured by tangible assets while unsecured
advances have gone up by 31.57% during the year 2008-2009.
There are no advances outside India while in India, advances in priority
and public sector account for 46.76%.
5) Investment in fixed assets during the year 2008-2009 has gone up by
3.57%. During 2008-2009, premises to the tune of Rs. 9,390,680,000
and other fixed assets including furniture fixtures of Rs.785,318,000
were added. The total accumulated depreciation as on 31-03-09 stood
at Rs.4,096,300,000.
6) Other assets have gone down by 15% during the year 2008-2009. Other
assets include outstanding interest and comprise around 32% of the
total. There has been a increase in outstanding interest in the year
2008-2009 as compared to 2007-2008. The inter-office adjustments is
nil for both the year.
7) The total assets during 2008-2009 have gone down approximately by
15%.

75
 Comparative Profit & Loss Accounts for the year ended
31st March 2008 and 31st March 2009

(Rs in 000)
Particulars 31-03- 31-03- Increase/ %
Decrease change
2008 2009
A. Income
1. Interest earned 61,712,159 73,647,278 11,935,119 19.34%
2. Other income 9,647,573 11,419,243 1,771,670 18.36%
B. Expenditure
1. Interest expended 44,988,795 52,060,613
7,071,818 15.72%
2.Operating 2,418,550 20.89%

76
expenses 11,575,834 13,994,384
3. Provision and 5,047,679 11,325,543
Contingencies 6,277,864 124.4%
C. Net Profit (A – 7,685,981 9,747,424

B) 2,061,443 26.82%
Total Income 85,066,521 71,359,732 (13,706,789) (16.1%)
Total 77,380,540 61,612,308

Expenditure (15,768,232) (20.4%)

Analysis Based on Comparative Profit and Loss Account

A) Income

1) The total interest earned during the year 2008-2009 has gone up by
19.34%. Income on investments has increased by only 10.78% though
it may be observed that an investment during the year 2008-2009 has
gone up by 26.71%.
2) There is an increase of 18.36% in other income during the year 2008-
2009. Income from commission, exchange and brokerage has gone up
by 24.78%, while income from subsidiaries has decreased by a massive
74%.

B) Expenditure

1) There is an increase in interest expended during 2008-2009 it has gone

up by around 15.72%. During 2008-2009 the interest paid on deposits
has up by approximately 13.46% during the year 2008-2009
2) Operating expenses during 2008-2009 have gone up by around
20.89%. Payment to employees and directors fees is Rs. 10,290,000 of

77
 the operating expenses, advertisement and publicity expenses has gone
down by 7.67% during 2008-2009 while law charges have gone down
by 22.17%.

C) Net Profits
The net profits have shown an increase of approximately 26.82% during
2008-2009.

Statement of Cash Flow for the year ended 31st March 2008

(Rs. in ‘000)
Particulars Rs. Year ended
31-03-07
A. Cash flow from operating activities 7032660
B. Cash flow from investing activities (683038)
C. Cash flow from financing activities (14651653)
D. Balances at the beginning of the

year

Cash and Balances with the RBI 40679399

Balances with Banks and Money at

49419687
Call 8740288
E. Balances at the end of the year

Cash and Balances with the RBI 62888552

Balances with Banks and Money at 7532410 70420962

Call
Total cash flow during the year 21001275

(A+B-C) or (D-E)

78
Statement of Cash Flow for the year ended 31st March 2009

(Rs. in ‘000)
Particulars Rs. Year ended
31-03-07
A. Cash flow from operating activities (23853)
B. Cash flow from investing activities (946030)
C. Cash flow from financing activities (3083444)
D. Balances at the beginning of the

year

Cash and Balances with the RBI 62888552

Balances with Banks and Money at 7532410 70420962

Call
E. Balances at the end of the year

Cash and Balances with the RBI 51153786

Balances with Banks and Money at 15213849 66367635

Call
Total cash flow during the year (4053327)

(A+B-C) or (D-E)

79
RATIO ANALYSIS

Ratio analysis is widely used of financial analysis. It is defined as the

systematic use of ratio interpreter statement so that strength and weakness of a
firm as well as the historical performance and correct condition, can be
determined.

Single most important technique of financial analysis in which quantities are

converted into ratios for meaningful comparisons, with past ratios and ratios
of other firms in the same or different industries.
Ratio analysis determines trends and exposes strengths or weaknesses of a
firm.

TYPES OF RATIO

1. Short term Solvency Ratio

2. Long term Solvency Ratio
3. Turn-over Ratio
4. Profitability Ratio

1. SHORT TERM SOLVENCY RATIO

These are the Ratio, which measures, the short-term solvency of

financial position of the firm. These Ratios are calculated to comment upon
the short term paying capacity of a concern or the firm’s ability to current
obligations

80
The various types are: -
a) Current Ratio
b) Quick Ratio

a) CURRENT RATIO
It may be defined as the relationship current liabilities. The Ratio is a
measure of the general liquidity of the Bank for a short period of time.
Current Assets (CA)
Current Ratio = -----------------------------------------
Current Liabilities (CL)

CURRENT RATIO

YEAR 2007-08 2008-09

567,625,623 654,385,269
Total current asset

Total current liabilities

734,083,818 859,088,254

Current Ratio 0.77 0.76

81
 0 .7 7

0.768

0.766

0.764
2 0 0 7 -0 8
0.762
2 0 0 8 -0 9
0 .7 6

0.758

0.756

0.754
C u rre n t R a tio

Interpretation:
As conventional rules, a current ratio of 2:1 or more is considered
satisfactory. The higher the current ratio, the greater the margin of safety, the
larger the amount of current assets in relation to current liabilities, the more
the items ability to meet its current obligations.

b) QUICK RATIO

It can be defined as the relationship between quick or liquid assets and

current or liquid liabilities .An assets is said to be liquid if it can be converted

82
and cash with in a short period without loss of value. Quick assets include all
current assets except stock and prepaid expenses.

Quick/Liquid Assets
Quick Ratio = ------------------------------------------
Current Liabilities

YEAR 2007-08 2008-09

567,625,623 654,385,269
Total current asset

Total current liabilities

734,083,818 859,088,254

Current Ratio 0.77 0.76

QUICK RATIO

83
0 .7 7

0 .7 6 8

0 .7 6 6

0 .7 6 4
2 0 0 7 -0 8
0 .7 6 2
2 0 0 8 -0 9
0 .7 6

0 .7 5 8

0 .7 5 6

0 .7 5 4
C u rre n t R a t io

84
Interpretation:
By conversion a quick ratio of 1:1 is considered satisfactory. It is
considered that if quick assets equal to current liabilities, then the concern can
meet its obligations.

CAPITAL STRUCTURES AND LONG TERM SOLVENCY

RATIO

Debt

Debt –Equity Ratio = ------------------------

Equity

Total Liabilities
Solvency ratio = -----------------------------------
Total Assets

85
 Year 2007-08 2008-09
17,919,987 9,370,367
Debt
Equity 4,467,000 4,467,000

Total Assets 976,480,079 829,393,236

829,393,236 976,480,079
Total Liabilities

YEAR 2007-08 2008-09

Debt-Equity RATIO 4.01 2.09
Solvency Ratio 1.17 0.84

Comments:
Debt-Equity Ratio is decreased from 2007-08(4.01) March 2008-2009
(2.09) as the ratio has been decreased by 47.70%, from Rs. 1792 cr. to 932 cr.
It shows that the Bank financial position is becoming more sound as it is
crossing every financial year.

86
 There is fall in the ratio but all the time it always maintain the ratio
which is above standard (2:1) so, we can that solvency position is not bad at
all.

4 .5
4
3 .5
3
2 .5 D e b t - E q u it y R A T IO
2 S o lve n c y R a t io

1 .5
1
0 .5
0
2 0 0 7 -0 8 2 0 0 8 -0 9

1) RETURN ON EQUITY RATIO

Return on Equity Ratio indicates the profitability of owner’s investment.

Net Profit

87
 Return on Equity Ratio = --------------------- X 100
Equity

Particulars 2007-08 2008-09

7,685,981 9,747,424
Net Profit
4,467,000 4,467,000
Equity
Ratio 58.12% 45.83%

Interpretation:
With compared to the figures of the year 2007-08, there has been fall of
profit to total equity during the year 2008-09. So, the overall position of the
bank is not favorable at all. Its position was good in the year 2007-08.
Ratio

60.00%

50.00%

40.00%

30.00% Ratio

20.00%

10.00%

0.00% 88
2007-08 2008-09
 1. RETURN ON INVESTMENT RATIO
This ratio indicates profitability according to the total money invested

Net Profit
Return on Investment Ratio = ---------------------------- X100
Investments

Rs. In thousand

Particulars 2007-08 2008-09

Net Profit 7,685,981 9,747,424
Investments 234,002,500 296,510,497
Ratio 3.284 3.287

Interpretation:
The above study shows on upward trend in the ratio in the year 2008-09 as
compared to 2007-08, which is same so it’s a good sign for the bank.

89
 R a t io

3 .2 9 %

3 .2 9 %

3 .2 9 %
R a t io
3 .2 8 %

3 .2 8 %

3 .2 8 %
2 0 0 7 -0 8 2 0 0 8 -0 9

RETURN ON CAPITAL EMPLOYED RATIO

90
 EBIT
Return on Capital Employed Ratio = -------------------------------X100
Capital Employed

Rs. In thousand

Year
2007-08 2008-09
85,066,521 71,359,732
EBIT

Capital Employed
786,294,309 917,607,751

Year

2007-08 2008-09

Return Capital

10.81% 7.77%

Interpretation:
The Return on Capital has been very low in the year 2008-09 as
compared to previous year that is 2007-08. The higher the Return on capital
means higher the soundness of the bank. In the year 2007-08, Return on
Capital is 10.81 in the next year 2008-09 (7.77%) decreased little.

91
 R e t u r n C a p it a l

1 2 .0 0 %

1 0 .0 0 %

8 .0 0 %

6 .0 0 % R e t u rn C a p it a l

4 .0 0 %

2 .0 0 %

0 .0 0 %
2 0 0 7 -0 8 2 0 0 8 -0 9

NET PROFIT TO TOTAL INCOME

The bank net profit as compared to the total income of the

bank is depicted with this ratio of net profit to total income.

92
 Net Profit
Net Profit to Total Ratio = ----------------------------------- X100
Total Income

Rs. In thousand

Particular
2007-08 2008-09
7,685,981 9,747,424
Net Profit

85,066,521 71,359,732
Total Income

Ratio
9.03% 13.65%

Ratio

Interpretation:
14.00%

The Net Profit of the bank has increased from 9.03% in the year 2007-
12.00%
08 to 13.65% in the year 2008-09. But there has been steady growth rate of
10.00%
net profit from the year 2007-08. So, increase in the net profit is good at all
8.00%
for the bank. Ratio

6.00%

4.00%
93
2.00%

0.00%
2007-08 2008-09
 2. NET PROFIT TO TOTAL DEPOSIT RATIO
The ratio illustrates the profit, which is earned with respect to the
deposit made.
Net Profit
Net Profit to Total Deposit Ratio = -------------------------------------- X100

Total Deposits

Rs. In thousand

94
 Particulars
2007-08 2008-09
7,685,981 9,747,424
Net Profit

716,163,831 849,717,887
Total Deposit

Ratio

1.07% 1.14%

Interpretation:
The above ratio shows a increase in the net profit respective of a
steady growth of deposits.

95
 R a t io

1 .1 4 %

1 .1 2 %

1 .1 0 %
R a t io
1 .0 8 %

1 .0 6 %

1 .0 4 %

1 .0 2 %
2 0 0 7 -0 8 2 0 0 8 -0 9

96
FINDINGS & RECOMENDATIONS:

1. The authorized capital of the Bank is Rs.1500 crores divided into equity
shares of Rs 10 each.
2. The Bank has issued and subscribed capital of Rs.446.7 crores. The capital
was last raised during 2004-2005.
3. The share of central government of India is 55.23% of the paid-up capital.
The balance of 44.77% is held by the public. The bank has no amount due
towards allotment money.
4. The total foreign shareholding (NRI and FIIs) as at 31st March 2009 was
8.8%, which is within the stipulated level of 20% of the total paid-up
capital of the Bank.
5. During 2008-2009, reserves and surplus went up by 13.2% and it was
Rs. 47,743,491,000 as at 31st March 2009.
6. The net worth of the Bank was Rs.1521.38 crores as on 31st March 2009.
7. The total deposit stood at Rs. 84,971 crores at the end of 2009.
8. In 2008-2009, the deposits grew by 18.6%.
9. A majority 56% of the deposits have a maturity of over 1 year and below 3
years. Only 2% of the deposits have a maturity period of 5 years and
above.
10. The Bank’s share in the total deposits of Scheduled Commercial
Banks (SCBs) stood at 25.40% at the end of 2009 stood at 386.38 crores.
12) The Bank’s cost of deposit came down to 5.49% for the year
2008-2009 from 6.99% for the year 2007-2008.
13) Borrowings during the year 2008-2009 went down by 47.70%.
14) Borrowings from outside India went up by massive 79.25% during
2006-2007 and stood at Rs.882.84 crores as at 31st March 2007.
15)The entire borrowings of the Bank, both from within India as

97
 well as outside India are un-secured.
16)A major 47% of the borrowings have a maturity period of 91 to
180 days. Only 3% of the borrowings have maturity of over 1
year and below 3 years.
17) The total liabilities during 2008-2009 went up by 17.7%.There
was no change in share capital, hence indicating that liabilities
other than capital have gone up.
18) The cash in hand which was Rs.6288.86 crores at the end of 2008
went down to Rs.5115.38 crores as on 31st March 2009.
19) The Bank’s balance with RBI in Current Accounts decreased by
20.32% during 20082009
20) The balances with Banks outside India in Current Accounts and
other deposit accounts gone up by 412.79% during 2008-2009.
21) The Bank does not have money at call and short notice with
Banks or other institutions in India or outside India.
22) Investments increased by 26.61% during 2008-2009.
23) A majority 62% of the investments have maturity period of over
5 years. Around 11% of the investments are short term with
maturity below 1 year.
24) Around 71.70% of the Bank’s investments is in government
securities while only .89% of the total investment is in Equity
shares.
25) The average yield on investments during 2008-2009 stood at
9.33%.

98
 CONCLUSIONS:

The topic “AN ANALYSIS OF THE FINANCIAL STATEMENT OF

ALLAHABAD BANK” was undertaken to study in detail regarding
the banking function and financial statement analysis.

After having conducted by the analysis for the first objective i.e. the study and
analysis of ALLAHABAD BANK has the tremendous improvement
achievement done by ALLAHABAD BANK. After completing 100 years
ALLAHABAD BANK has achieved tremendous results in short period of
span. This shows in short period time it will number one in banking sector.
Nearly 95% of customers are satisfied. Taking overall into account we can say
that good services are offered to customer.

The one of the main objective is service, the service offered by

ALLAHABAD BANK to the customer in terms of ATM, Clearance, Locker
facility, e- Cheque facility, etc. these are facilities given by the bank in all
facility they doing well compared to the other bank.

As far as the main concerned is Market Potentiality for ALLAHABAD

BANK. It is observed form the analysis that the bank can expand its market
by few changes and improving advertisement. By reviving the interest rates,
reducing the margins etc. bank can considerably attract new customers.

Thus from this analysis it is seen that the overall performance of the
institution is profitable. And in this stiff era of competition by making some

99
minutes changes the bank a successfully maintain and improve its market
position.
ANNEXURE

Tenor Existing Interest Rate p.a. Revised Interest Rate p.a. (%)
(%)
For For Rs. For For below For Rs. 1 cr For Rs.10
below 1 cr to Rs.10 cr Rs. 1 cr to less than cr& above
Rs. 1 cr less than & above (w.e.f. Rs. 10 cr (w.e.f.
Rs. 10 cr 23.11.09) (w.e.f. 18.11.09)
18.11.09)
7 days NA 1.50 1.50 NA 1.50 1.50
to
14 days
15 days 3.00 2.00 2.00 3.00 2.00 2.00
to
29 days
30 days 3.00 2.25 2.25 3.00 2.25 2.25
to
45 days
46 days 4.00 2.75 2.75 4.00 2.75 2.75
to
60 days
61 days 4.00 2.75 2.75 4.00 2.75 2.75
to
90 days
91 days 5.25 3.25 3.25 5.00 3.25 3.25
to
179 days
180 days to 6.00 4.25 4.25 5.50 4.25 4.25
269 days
270 days to 6.00 5.00 5.00 5.50 5.00 5.00
364 days
1 year 7.00 5.75 5.75 6.50 6.00 6.00
to
less than
2 years
2 years 7.00 5.75 5.75 6.75 5.50 5.50
to
less than
3 years

100
 3 years 7.25 5.50 5.50 7.00 5.50 5.50
to
less than
5 years
5 yrs and 7.50 5.50 5.50 7.25 5.50 5.50
upto 10 yrs

The above rates will be applicable for fresh deposits and renewal of deposits
and rates are subject to revision at any time.

As part of our Centenary year celebrations, Senior Citizens are offered an

additional rate of 0.75% over and above the mentioned rates for deposits with
maturity period above 91 days. These rates are applicable to deposits opened /
renewed after March 12, 2008.

101
PENAL RATE OF INTEREST FOR PREMATURE WITHDRAWAL OF
DOMESTIC TERM DEPOSITS

Period of Deposit
1.Amount of DepositPenal Premature Any amount
Rate of Interest closure of
term
Non Resident (External) Rupee Savings Deposit Account (NRE-SB)
deposits for
reinvestmen
Interest tRate % p.a.
in our
(unchanged since
bank 18.11.2005)
N 15 days and upto 1 (one) 3.50Any No penal rate to be
o year* amount charged
p
Non Resident (External) Rupee Term Deposit Account (NRE)
e from 01.03.2010
With effect
n
al
ra
Period Existing rate % p.a. Revised Rate % p.a.
te w.e.f 1st February, w.e.f 1st March,
to 2010 2010
b
1 year
e to less than 2 2.60 2.59
yearsc
h to less than 3
2 years 2.91 2.83
yearsar
g
3 years
e only 3.53 3.44
d
2.
3. All others All others 1 % penal interest to
be charged

The above rates are applicable to fresh deposits and for renewal of deposits only.

These rates are subject to change without notice and the depositors will be advised
of the current rates on the date of deposit. The depositors may contact:

FOREIGN DEPARTMENT HEAD OFFICE

14, India Exchange Place,2nd Floor,

Kolkata-700 001.
Telephone:(033)22316703,6704,6706
FAX:(033)2231-702.
E- MAIL ID : hofd.allbank@gmail.com 102
103