INTRODUCTION

WHAT IS A BANK?
A bank is a financial institution and a financial intermediary
that accepts deposits and channels those deposits into
lending activities, either directly by loaning or indirectly
through capital markets.
A bank may be defined as an institution that accepts
deposits, makes loans, pays checks, and provides financial
services. A bank is a financial intermediary for the
safeguarding, transferring, exchanging, or lending of money.
A primary role of banks is connecting those with funds, such
as investors and depositors, to those seeking funds, such as
individuals or businesses needing loans. A bank is the
connection between customers that have capital deficits and
customers with capital surpluses.
Banks distribute the medium of exchange. Banking is a
business. Banks sell their services to earn money, and they
must market and manage those services in a competitive
field.
Banks are financial intermediaries that safeguard, transfer,
exchange, and lend money and like other businesses that
must earn a profit to survive. Understanding this
fundamental idea helps you to understand how banking
systems work, and helps you understand many modern
trends in banking and finance.
DEFINITION
Banking means "Accepting Deposits for the purpose of
lending or Investing of deposits of money from the public,
repayable on demand or otherwise and withdraw by cheque,
draft or otherwise."
-Banking Companies(Regulation) Act, 1949

ORIGIN OF THE WORD BANK

The word bank was taken Middle English from Middle French
barque, from Old Italian banco, meaning "table", from Old
High German banc, bank "bench, counter". Benches were
used as makeshift desks or exchange counters during the
Renaissance by Jewish Florentine bankers, who used to make
their transactions atop desks covered by green tablecloths.
The origin of the word bank is shrouded in mystery. According
to one view point the Italian business house carrying on
crude from of banking were called banchi bancheri"
According to another viewpoint banking is derived from
German word "Branck" which mean heap or mound.

ORIGIN OF BANKING
Its origin in the simplest form can be traced to the origin of
authentic history. After recognizing the benefit of money as a
medium of exchange, the importance of banking was
developed as it provides the safer place to store the money.
This safe place ultimately evolved in to financial institutions
that accepts deposits and make loans i.e., modern
commercial banks.

HISTORY OF BANKING IN INDIA: 3 PHASES OF INDIAN

BANKING SYSTEM
Without a sound and effective banking system in India it
cannot have a healthy economy. The banking system of India
should not only be hassle free but it should be able to meet
new challenges posed by the technology and any other
external and internal factors.
For the past three decades India’s banking system has several
outstanding achievements to its credit. The most striking is its
extensive reach; it is no longer confined to only metropolitans
or cosmopolitans in India. In fact, Indian banking system has
reached even the remote comers of the country. This is one
of the main reasons of India’s growth process.
Not long ago, an account holder had to wait for hours at the
bank counters for getting a draft or for withdrawing his own
money. Today, he has a choice, Gone are days when the most
efficient bank transferred money from one branch to other in
two days. Now it is simple as instant messaging or dial a
pizza. Money have become the order of the day.
PHASES OF INDIAN BANKING SYSTEM
PHASE I
The General Bank of India was set up in the year 1786. Next
came Bank of Hindustan and Bengal Bank. The East India
Company established Bank of Bengal (1809), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and
called it Presidency Banks.
These three banks were amalgamated in 1920 and Imperial
Bank of India was established which started as private
shareholders banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time
exclusively by Indians, Punjab National Bank Ltd. was set up
in 1894 with headquarters at Lahore. Between 1906 and
1913, Bank of India, Central Bank of India, Bank of Baroda,
Canara Bank, Indian Bank, and Bank of Mysore were set up.
Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks
also experienced periodic failures between 1913 and 1948.
There were approximately 1100 banks, mostly small. To
streamline the functioning and activities of commercial
banks, the Government of India came up with The Banking
Companies Act, 1949 which was later changed to Banking
Regulation Act 1949 as per amending Act of 1965 (Act No. 23
of 1965). Reserve Bank of
India was vested with extensive powers for the supervision of
banking in India as the Central Banking Authority.
During those day’s public has lesser confidence in the banks.
As an aftermath deposit mobilization was slow. Abreast of it
the savings bank facility provided by the Postal department
was comparatively safer. Moreover, funds were largely given
to traders.

PHASE II
Government took major steps in this Indian Banking Sector
Reform after independence. In1955, it nationalized Imperial
Bank of India with extensive banking facilities on a large scale
especially in rural and semi-urban areas. It formed State Bank
of India to act as the principal agent of RBI and to handle
banking transactions of the Union and State Governments all
over the country.
Seven banks forming subsidiary of State Bank of India was
nationalized in 1960 on 19th
July,1969, major process of nationalization was carried out. It
was the effort of the then Prime Minister of India, Mrs. Indira
Gandhi. 14 major commercial banks in the country was
nationalized.
Second phase of nationalization Indian Banking Sector
Reform was carried out in 1980 with seven more banks. This
step brought 80% of the banking segment in India under
Government ownership.
The following are the steps taken by the Government of India
to Regulate Banking Institutions in the country:-
 1949: Enactment of Banking Regulation Act.
 1955: Nationalisation of State Bank of India.
 1959: Nationalisation of SBI subsidiaries.
 1961: Insurance cover extended to deposits.
 1969: Nationalisation of 14 major banks.
  1971: Creation of credit guarantee corporation.
 1975: Creation of regional rural banks.
 1980: Nationalisation of 6 banks with deposits over 200
crore.
After the nationalisation the branches of the public
sector banks in India rose to approximately 800% and
deposits and advances took a huge jump by
11,000%.Banking in the sunshine of Government
ownership gave the public implicit faith and immense
confidence about the sustainability of these institutions.

PHASE III
This phase has introduced many more products and
facilities in the banking sector in its reforms measure. In
1991, under the chairmanship of M Narasimham, a
committee was set up by his name which worked for the
liberalization of banking practices.

The country is flooded with foreign banks and their ATM

stations. Efforts are being put to give a satisfactory
service to customers. Phone banking and net banking is
introduced. The entire system became more convenient
and swift. Time is given more importance than money.

The financial system of India has shown a great deal of

resilience. It is sheltered from any crisis triggered by any
external macroeconomics shock as other East Asian
Countries suffered. This is all due to a flexible exchange
rate regime, the foreign reserves are high, the capital
 account is not yet fully convertible, and banks and their
customers have limited foreign exchange exposure.

BANKING SYSTEM IN INDIA

Modern banking in India originated in the last decade of the
18th century. Among the first banks were the Bank of
Hindustan, which was established in 1770 and liquidated in
1829–32; and the General Bank of India, established in 1786
but failed in 1791.
The largest and the oldest bank which is still in existence is
the State Bank of India (S.B.I). It originated and started
working as the Bank of Calcutta in mid-June 1806. In 1809, it
was renamed as the Bank of Bengal. This was one of the
three banks founded by a presidency government, the other
two were the Bank of Bombay in 1840 and the Bank of
Madras in 1843.
The three banks were merged in 1921 to form the Imperial
Bank of India, which upon India's independence, became the
State Bank of India in 1955. For many years the presidency
banks had acted as quasi-central banks, as did their
successors, until the Reserve Bank of India was established in
1935, under the Reserve Bank of India Act, 1934.
In 1960, the State Banks of India was given control of
eight state-associated banks under the State Bank of
India (Subsidiary Banks) Act, 1959. These are now
called its associate banks. In 1969 the Indian
government nationalised 14 major private banks; one
of the big banks was Bank of India. In 1980, 6 more
private banks were nationalised.
The Indian banking sector is broadly classified into
scheduled and non-scheduled banks. The scheduled
banks are those included under the 2nd Schedule of
the Reserve Bank of India Act, 1934. The scheduled
banks are further classified into: nationalised banks;
State Bank of India and its associates; Regional Rural
Banks (RRBs); foreign banks; and other Indian private
sector banks. The term commercial banks refers to
both scheduled and non-scheduled commercial banks
regulated under the Banking Regulation Act, 1949.
Generally the supply, product range and reach of
banking in India is fairly mature-even though reach in
rural India and to the poor still remains a challenge.
The government has developed initiatives to address
this through the State Bank of India expanding its
branch network and through the National Bank for
Agriculture and Rural Development (NABARD) with
facilities like microfinance.

TYPES OF BANKS
Banks are classified into four categories:-
 Commercial Banks
 Small Finance Banks
 Payments Bank
 Co-operative banks

CLASSIFICATION
OF BANKING

COMMERCIAL SMALL FINANCE CO-OPERATIVE

PRIVATE BANKS
BANKS BANKS BANKS

URBAN CO-
PUBLIC SECTOR
OPERATIVE
BANKS
BANKS

STATE CO-
PRIVATE SECTOR
OPERATIVE
BANKS
BANKS

FOREIGN BANKS

RRB

(A) COMMERCIAL BANKS

Commercial Banks are regulated under the Banking
Regulation Act, 1949 and their business model is
designed to make profit. Their primary function is to
accept deposits and grant loans to the general public,
corporate and government. Commercial banks can be
divided into-
 Public sector banks
 Private sector banks
 Foreign banks
 Regional rural banks
 1. PUBLIC SECTOR BANKS
Public Sector Banks (PSBs) are a major type of bank in India,
where a majority stake (i.e. more than 50%) is held by a
government. The shares of these banks are listed on stock
exchanges. Here is a list of some Public Sector Banks.

Public Sector Banks (Government Shareholding %,

as of 1st April, 2019)

 Bank of Baroda (63.74%)

 Bank of India (87.0535%)
 Bank of Maharashtra (87.01%)
 Central Bank of India (88.02%)
 Indian Overseas Bank (91%)
 Punjab & Sind Bank (79.62%)
 State Bank of India (61.00%)
 UCO Bank (93.29%)

Being merged (Operational from 1st Apr '20)

 Canara Bank (72.55%) - Syndicate Bank (81.23%)

 Indian Bank (81.73%) - Allahabad Bank (79.41%)
 Punjab National Bank (70.22%) - Oriental Bank of
Commerce (77.23%) - United Bank of India
(92.25%)
 Union Bank of India (67.43%) - Andhra Bank
(84.83%) - Corporation Bank (84.96%)
 2. PRIVATE SECTOR BANKS
These include banks in which major stake or equity is held by
private shareholders. All the banking rules and regulations
laid down by the RBI will be applicable on private sector
banks as well. Given below is the list of private-sector banks
in India-

 HDFC BANK
 ICICI BANK
 AXIS BANK
 YES BANK
 INDUSIND BANK
 KOTAK MAHINDRA BANK
 DCB BANK
 BANDHAN BANK
 IDFC BANK
 CITY UNION BANK
 TAMILNAD MERCANTILE BANK
 NAINITAL BANK
 CATHOLIC SYRIAN BANK
 FEDERAL BANK
 JAMMU AND KASHMIR BANK
 KARNATAKA BANK
 DHANALAXMI BANK
 SOUTH INDIAN BANK
 LAKSHMI VILAS BANK
 RBL BANK

3. FOREIGN BANKS
A foreign bank is one that has its headquarters in a foreign
country but operates in India as a private entity. These banks
are under the obligation to follow the regulations of its home
country as well as the country in which they are operating.
Given below is the list of foreign banks operating in India –

 Citi Bank
 Standard Chartered Bank
 HSBC Bank
 Deutsche Bank
 Bank of Scotland
 Development Band of Singapore Bank(DBS)
 Barclays Bank
 The Bank of America
 The Bank of Bahrain and Kuwait
 Doha Bank

4. REGIONAL RURAL BANKS

These banks were established mainly to support the weaker
and lesser fortunate section of the society like marginal
farmers, laborers, small enterprises etc. they mainly operate
at regional levels at different states and may have branches in
urban areas as well. Their main features are:
1. Supporting rural and semi-urban region financially
2. Pension distribution and Wage disbursement of MGNREGA
workers
3. Added banking facilities like locker, cards-debit, and credit.
Rural banking in India started since the establishment of
banking sector in India. Rural Banks in those days mainly
focussed upon the agro sector. Regional rural banks in India
penetrated every corner of the country and extended a
helping hand in the growth process of the country.
SBI has 30 Regional Rural Banks in India known as RRBs. The
rural banks of SBI is spread in 13 states extending from
Kashmir to Karnataka and Himachal Pradesh to North East.
The total number of SBIs Regional Rural Banks in India
branches is 2349 (16%). Till date in rural banking in India,
there are 14,475 rural banks in the country of which 2126
(91%) are located in remote rural areas.
Apart from SBI, there are other few banks which functions for
the development of the rural areas in India. Few of them are
as follows:

1. NABARD
National Bank for Agriculture and Rural Development
(NABARD) is a development bank in the sector of
Regional Rural Banks in India. It provides and regulates
credit and gives service for the promotion and
development of rural sectors mainly agriculture, small
scale industries, cottage and village industries,
handicrafts. It also finance rural crafts and other allied
rural economic activities to promote integrated rural
development. It helps in securing rural prosperity and its
connected matters.

2. SYNDICATE BANK
 Syndicate Bank was firmly rooted in rural India as rural
banking and have a clear vision of future India by
understanding the grassroot realities. Its progress has
been abreast of the phase of progressive banking in
India especially in rural banks.

3. UNITED BANK
United Bank of India (UBI) also plays an important role in
regional rural banks. It has expanded its branch network
in a big way to actively participate in the developmental
of the rural and semi-urban areas in conformity with the
objectives of nationalisation.

(B) SMALL FINANCE BANKS

This is a niche banking segment in the country and is aimed
to provide financial inclusion to sections of the society that
are not served by other banks. The main customers of small
finance banks include micro industries, small and marginal
farmers, unorganized sector entities and small business units.
These are licensed under Section 22 of the Banking
Regulation Act, 1949 and are governed by the provisions of
RBI Act, 1934 and FEMA. Some of the Small Finance Banks
are:-
 Au Small Finance Bank
 Capital Small Finance Bank
 Fincare Small Finance Bank
 Equitas Small Finance Bank
 Esaf Small Finance Bank
 Suryoday Small Finance Bank
 Ujjivan Small Finance Bank
  Utkarsh Small Finance Bank
 Northeast Small Finance Bank
 Jana Small Finance Bank

(C) PAYMENTS BANK

Payments banks is a new model of banks conceptualised by
the Reserve Bank of India (RBI). These banks can accept a
restricted deposit, which is currently limited to ₹100,000 per
customer and may be increased further.[1] These banks
cannot issue loans and credit cards. Both current account and
savings accounts can be operated by such banks.
Payments banks can issue services like ATM cards, debit
cards, net-banking and mobile-banking. Bharti Airtel set up
India's first live payments bank. Here is a list of some of the
Payments bank:-
 Airtel Payments Bank
 India Post Payments Bank
 Fino Payments Bank
 Jio Payments Bank
 Paytm Payments Bank
 NSDL Payments Bank

(D) CO-OPERATIVE BANKS

Co-operative banks are registered under the Cooperative
Societies Act, 1912 and they are run by an elected managing
committee. These work on no-profit no-loss basis and mainly
serve entrepreneurs, small businesses, industries and self-
employment in urban areas. In rural areas, they mainly
finance agriculture-based activities like farming, livestock and
hatcheries.
Cooperative banking is retail and commercial banking
organized on a cooperative basis. Cooperative banking
institutions take deposits and lend money in most parts of
the world.
Cooperative banking, as discussed here, includes retail
banking carried out by credit unions, mutual savings banks,
building societies and cooperatives, as well as commercial
banking services provided by mutual organizations (such as
cooperative federations) to cooperative businesses.
They are of two types:
 Urban co-operative banks
 State co-operative banks

1. URBAN CO-OPERATIVE BANKS

Urban Co-operative Banks refer to the primary cooperative
banks located in urban and semi-urban areas. These banks
essentially lent to small borrowers and businesses
centered around communities, localities work place
groups.
According to the RBI, on 31st March, 2003 there were
2,104 Urban Co-operative Banks of which 56 were
scheduled banks. About 79% of these are located in five
states, – Andhra Pradesh, Gujarat, Karnataka, Maharashtra
and Tamil Nadu.
The term Urban Co-operative Banks (UCBs), though not
formally defined, refers to primary cooperative banks
located in urban and semi-urban areas. These banks, till
1996, were allowed to lend money only for non-
agricultural purposes. This distinction does not hold today.
These banks were traditionally centred around
communities, localities work place groups. They essentially
lent to small borrowers and businesses. Today, their scope
of operations has widened considerably. Here is a list of
some of the urban co-operative banks in India:
 Dombivli Nagari Sahakari Bank Ltd
 Saraswat Co-operative Bank
 Shamrao Vithal Co-operative Bank
 Solapur Janata Sahakari Bank
 Kalyan Janata Sahakari Bank
 Thane Bharat Sahakari Bank
 The Kapole Co-operative Bank
 TJSB Sahakari Bank
 Punjab & Maharashtra Co-operative Bank
 Janalaxmi Co-operative Bank

2. STATE CO-OPERATIVE BANKS

A State Cooperative Bank is a federation of the central

cooperative bank which acts as custodian of the
cooperative banking structure in the State. Its funds are
obtained from the social capital, deposits, loans and
overdrafts of the Reserve Bank of India. These banks do
not accept deposits from the general public.
State Co-operative banks are apex banks of co-operative
banks in each state. The State Co-operative banks are
registered under State Co-operative Societies Act
and licensed by RBI
Banks can also be classified on the basis of Scheduled
and Non-Scheduled Banks. It is essential for every
individual to check if they are holding their savings or
deposit account with a Scheduled Bank or Non-
Scheduled Bank. Scheduled Banks are also covered
under the depositor insurance program of Deposit
Insurance and Credit Guarantee Corporation (DICGC),
which is beneficial for all the account holders holding a
savings and fixed / recurring deposit account. Under
DICGC, bank deposits of up to Rs 1 lakh, including the
fixed, savings, current and recurring deposits, per
depositor per bank in the event of bank failure are
insured.
Here is a list of some of the State co-operative banks in
India:-

 The Maharashtra State Co-operative Bank Ltd

 The Madhya Pradesh Rajya Sahakari Bank
 The Karnataka State Co-operative Apex Bank Ltd
 The Kerala State Co-operative Bank
 Jharkhand State Co-operative Bank Ltd
 The Himachal Pradesh State Co-operative Bank Ltd
 The Haryana State Co-operative Apex Bank Ltd
 The Goa State Co-operative Bank Ltd
 Gujarat State Co-operative Bank Ltd
 The Delhi State Co-operative Bank Ltd
FACTS AND FIGURES

 Canara bank was the first Bank in India to be given an

ISO certification
 Punjab and Sind bank was the first Bank in Northern
India to get ISO 9002 certification for their selected
branches
 Punjab National bank was the first Indian Bank to have
been started solely with Indian capital
 South Indian bank was the first among the Private Sector
Banks in Kerala to become Scheduled Bank in 1946
under the RBI act
 State Bank of India was the India’s oldest,largest and the
most successful commercial bank offering the widest
possible rang of domestic,international and NRI products
and services,through its vast network in India and
overseas
 The Federal bank Ltd was India’s second largest Private
Sector Bank and is now the largest scheduled
commercial bank in India
 Imperial Bank of India was the bank which started as
Private Shareholders Banks,mostly European
shareholders
 Bank of India was the first Indian Bank to open a branch
outside India in London in 1946 and the first to open a
branch in continental Europe at Paris in 1974
  Allahabad bank is the oldest Public Sector Bank in India
having branches all over India and serving the customers
for the last 132 years
 Central Bank of India was the first Indian Commercial
Bank which was wholly owned and managed by Indians
 The State Bank of India was known as The Imperial Bank
of India prior to 1955

SERVICES OFFERED BY BANKS

In the modern world, banks offer a variety of services to
attract customers, However, some basic modern services
offered by the banks are discussed below:

 Advancing of Loans.
 Overdraft.
 Discounting of Bills of Exchange.
 Check/Cheque Payment
 Collection and Payment Of Credit Instruments
 Foreign Currency Exchange
 Consultancy.
 Bank Guarantee
 Remittance of Funds
 Credit cards
 ATMs Services
 Debit cards
 Home banking
 Online banking
 Mobile Banking
 Accepting Deposit
  Priority banking
 Private banking

1. ADVANCING OF LOANS
Banks are profit-oriented business organizations.
So they have to advance a loan to the public and generate
interest from them as profit.
After keeping certain cash reserves, banks provide short-
term, medium-term and long-term loans to needy borrowers.
Banks advance loans not only on the basis of the deposits of
the public rather they also advance loans on the basis of
depositing the money in the accounts of borrowers. In other
words, they create loans out of deposits and deposits out of
loans. This is called as credit creation by commercial banks.
Modern banks give mostly secured loans for productive
purposes. In other words, at the time of advancing loans,
they demand proper security or collateral. Generally, the
value of security or collateral is equal to the amount of loan.
This is done mainly with a view to recover the loan money by
selling the security in the event of non-refund of the loan.
At limes, banks give loan on the basis of personal security
also. Therefore, such loans are called as unsecured loan.
Banks generally give following types of loans and advances:

(i) Cash Credit: In this type of credit scheme, banks advance

loans to its customers on the basis of bonds, inventories and
other approved securities. Under this scheme, banks enter
into an agreement with its customers to which money can be
withdrawn many times during a year. Under this set up banks
open accounts of their customers and deposit the loan
money. With this type of loan, credit is created.

(ii) Demand loans: These are such loans that can be recalled
on demand by the banks. The entire loan amount is paid in
lump sum by crediting it to the loan account of the borrower,
and thus entire loan becomes chargeable to interest with
immediate effect.
(iii) Short-term loan: These loans may be given as personal
loans, loans to finance working capital or as priority sector
advances. These are made against some security and entire
loan amount is transferred to the loan account of the
borrower.

2. OVERDRAFT
Sometimes, the bank provides overdraft facilities to its
customers through which they are allowed to withdraw more
than their deposits. Interest is charged from the customers
on the overdrawn amount.
An overdraft occurs when money is withdrawn from a bank
account and the available balance goes below zero. In this
situation the account is said to be "overdrawn". If there is a
prior agreement with the account provider for an overdraft,
and the amount overdrawn is within the authorized overdraft
limit, then interest is normally charged at the agreed rate. If
the negative balance exceeds the agreed terms, then
additional fees may be charged and higher interest rates may
apply.

3. DISCOUNTING OF BILLS OF EXCHANGE

This is another popular type of lending by modern banks.
Through this method, a holder of a bill of exchange can get it
discounted by the bank, in a bill of exchange, the debtor
accepts the bill drawn upon him by the creditor (i.e., holder
of the bill) and agrees to pay the amount mentioned on
maturity.
After making some marginal deductions (in the form of
commission), the bank pays the value of the bill to the holder.
When the bill of exchange matures, the bank gets its
payment from the party, which had accepted the bill.
A bill of exchange is a written order once used primarily in
international trade that binds one party to pay a fixed sum of
money to another party on demand or at a predetermined
date. Bills of exchange are similar to checks and promissory
notes—they can be drawn by individuals or banks and are
generally transferable by endorsements.
If the drawer of the bill does not want to wait till the due date
of the bill and is in need of money, he may sell his bill to a
bank at a certain rate of discount. The bill will be endorsed by
the drawer with a signed and dated order to pay the bank.
The bank will become the holder and the owner of the bill.
After getting the bill, the bank will pay cash to the drawer
equal to the face value less interest or discount at an agreed
rate for the number of days it has to run. This process is
knowns as discounting of a bill of exchange.

4. CHEQUE PAYMENT
Banks provide cheque pads to the account holders. Account
holders can draw cheque upon the bank to pay money.Banks
pay for cheques of customers after formal verification and
official procedures.
A cheque, or check (American English; see spelling
differences), is a document that orders a bank to pay a
specific amount of money from a person's account to the
person in whose name the cheque has been issued. The
person writing the cheque, known as the drawer, has a
transaction banking account (often called a current, cheque,
chequing or checking account) where their money is held.
The drawer writes the various details including the monetary
amount, date, and a payee on the cheque, and signs it,
ordering their bank, known as the drawee, to pay that person
or company the amount of money stated.

5. COLLECTION AND PAYMENT OF CREDIT

INSTRUMENTS
In modern business, different types of credit instruments
such as the bill of exchange, promissory notes, cheques etc.
are used.
Banks deal with such instruments. Modern banks collect and
pay different types of credit instruments as the
representative of the customers.
The simplest form of a credit instrument is the promissory
note. A promissory note (or pro-note for short) is a written
promise from a buyer or a borrower to pay a certain sum of
money to the creditor or his order. It is what we call IOU (I
owe you), i.e., an acknowledgment of debt and an obligation
to repay. Here is a specimen of a promissory note:-

PROMISSORY NOTE
Rs. 5000 JUNE.1.1985
Two months after date, I promise to pay M/s Singh and Company
on order, the sum of Five Thousand Rupees only for value received with
interest at the rate of 5 percent.

STAMP Shyam lal

M/s Singh & Co

6. FOREIGN CURRENCY EXCHANGE

Banks deal with foreign currencies. As the requirement of
customers, banks exchange foreign currencies with local
currencies, which is essential to settle down the dues in the
international trade.
Foreign exchange, or forex, is the conversion of one country's
currency into another. In a free economy, a country's
currency is valued according to the laws of supply and
demand. In other words, a currency's value can be pegged to
another country's currency, such as the U.S. dollar, or even to
a basket of currencies. A country's currency value may also be
set by the country's government.
However, most countries float their currencies freely against
those of other countries, which keeps them in constant
fluctuation.

7. CONSULTANCY
Modern commercial banks are large organizations.
They can expand their function to a consultancy business. In
this function, banks hire financial, legal and market experts
who provide advice to customers regarding investment,
industry, trade, income, tax etc.

8. BANK GUARANTEE
Customers are provided the facility of bank guarantee by
modern commercial banks.
When customers have to deposit certain fund in
governmental offices or courts for a specific purpose, a bank
can present itself as the guarantee for the customer, instead
of depositing fund by customers.
A bank guarantee is a type of guarantee from a lending
institution. The bank guarantee means a lending institution
ensures that the liabilities of a debtor will be met. In other
words, if the debtor fails to settle a debt, the bank will cover
it. A bank guarantee enables the customer, or debtor, to
acquire goods, buy equipment or draw down a loan.
A bank guarantee is when a lending institution promises to
cover a loss if a borrower defaults on a loan. The guarantee
lets a company buy what it otherwise could not, helping
business growth and promoting entrepreneurial activity.
There are different kinds of bank guarantees, including direct
and indirect guarantees. Banks typically use direct guarantees
in foreign or domestic business, issued directly to the
beneficiary. Direct guarantees apply when the bank’s security
does not rely on the existence, validity, and enforceability of
the main obligation.

9. REMITTANCE OF FUNDS
Banks help their customers in transferring funds from one
place to another through cheques, drafts, etc.
A remittance refers to money that is sent or transferred to
another party. The term is derived from the word remit,
which means to send back. Remittances can be sent via a
wire transfer, electronic payment system, mail, draft, or
check.
Remittances can be used for any type of payment including
invoices or other obligations. But the term is typically used to
refer to money sent to family members back in a person's
home country.
Payment remittances are money transfers made by people to
another party. They can be made to satisfy an obligation such
as a bill payment or an invoice when someone shops online.
But they are most commonly made by a person in one
country to someone in another. Most remittances are made
by foreign workers to family in their home countries. They
may also be payments that are made to a business. The most
common way of making a remittance is by using an electronic
payment system through a bank or money transfer service.

10. CREDIT CARDS

A credit card is a thin rectangular slab of plastic issued by a
financial company, that lets cardholders borrow funds with
which to pay for goods and services. Credit cards impose the
condition that cardholders pay back the borrowed money,
plus interest, as well as any additional agreed-upon charges.
A credit card is cards that allow their holders to make
purchases of goods and services in exchange for the credit
card’s provider immediately paying for the goods or service,
and the cardholder promising to pay back the amount of the
purchase to the card provider over a period of time, and with
interest.
The credit company provider may also grant a line of credit
(LOC) to cardholders, enabling them to borrow money in the
form of cash advances. Issuers customarily pre-set borrowing
limits, based on an individual's credit rating. A vast majority
of businesses let the customer make purchases with credit
cards, which remain one of today's most popular payment
methodologies for buying consumer goods and services.
Credit cards feature higher annual percentage rates (APRs)
than other forms of consumer loans. Interest charges on the
unpaid balance charged to the card are typically imposed one
month after a purchase is made.

11. ATM SERVICES

An automated teller machine (ATM) is an electronic
telecommunications device that enables customers of
financial institutions to perform financial transactions,
such as cash withdrawals, deposits, transfer funds, or
obtaining account information, at any time and
without the need for direct interaction with bank staff.

ATMs are known by a variety of names, including

automatic teller machine (ATM) in the United States
(sometimes redundantly as "ATM machine"). In
Canada, the term automated banking machine (ABM)
is used, although ATM is also very commonly used in
Canada, and many Canadian organizations use ATM
over ABM. In British English, the terms cashpoint, cash
machine and hole in the wall are most widely used.
Other terms include any time money, cashline, nibank,
tyme machine, cash dispenser, cash corner, bankomat,
or bancomat.

Using an ATM, customers can access their bank

deposit or credit accounts in order to make a variety
of financial transactions, most notably cash
withdrawals and balance checking, as well as
transferring credit to and from mobile phones. ATMs
can also be used to withdraw cash in a foreign
country. If the currency being withdrawn from the
ATM is different from that in which the bank account
 is denominated, the money will be converted at the
financial institution's exchange rate. Customers are
typically identified by inserting a plastic ATM card (or
some other acceptable payment card) into the ATM,
with authentication being by the customer entering a
personal identification number (PIN), which must
match the PIN stored in the chip on the card (if the
card is so equipped), or in the issuing financial
institution's database.
ATMs replace human bank tellers in performing giving
banking functions such as deposits, withdrawals,
account inquiries. Key advantages of ATMs include:

 24-hour availability
 Elimination of labour cost
 Convenience of location

12. DEBIT CARDS

A debit card is a payment card that deducts money directly
from a consumer’s checking account to pay for a purchase.
Debit cards eliminate the need to carry cash or physical
checks to make purchases. In addition, debit cards, also called
check cards, offer the convenience of credit cards and many
of the same consumer protections when issued by major
payment processors like Visa or Mastercard.
Unlike credit cards, debit cards do not allow the user to go
into debt, except perhaps for small negative balances that
might be incurred if the account holder has signed up for
overdraft protection.
Debit cards serve a dual purpose: They allow the user to
withdraw money from his or her checking account through an
ATM or through the cash-back function many merchants offer
at the point of sale. In addition, they also allow the user to
make purchases.
Most debit cards require a Personal Identification Number
(PIN) to be used to verify the transaction.

13. HOME BANKING

Home banking is the process of completing the financial
transaction from one’s own home as opposed to utilizing a
branch of a bank.
It includes actions such as making account inquiries,
transferring money, paying bills, applying for loans, directing
deposits.
Home banking is the practice of conducting banking
transactions from home rather than at branch locations.
Home banking generally refers to either banking over the
telephone or on the internet (i.e. online banking). The first
experiments with internet banking started in the early 1980s,
but it did not become popular until the mid-1990s when
home internet access was widespread. Today, a variety of
internet banks exist which maintain few, if any, physical
branches.

14. ONLINE BANKING

Online banking is a service offered by banks that allows
account holders to access their account data via the internet.
Online banking is also known as “Internet banking” or “Web
banking.”
Online banking offers customers almost every service
traditionally available through a local branch including
deposits, transfers, and online bill payments. Virtually every
banking institution has some form of online banking,
available both on desktop versions and through mobile apps.
With online banking, consumers aren't required to visit a
bank branch to complete most of their basic banking
transactions. They can do all of this at their own convenience,
wherever they want—at home, at work, or on the go.
Online banking requires a computer or other device, an
internet connection, and a bank or debit card. In order to
access the service, clients need to register for their bank's
online banking service. In order to register, they need to
create a password. Once that's done, they can use the service
to do all their banking.
Banking transactions offered online vary by the institution.
Most banks generally offer basic services such as transfers
and bill payments. Some banks also allow customers to open
up new accounts and apply for credit through online banking
portals. Other functions may include ordering checks, putting
stop payments on checks, or reporting a change of address.
Online banking through traditional banks enable customers
to perform all routine transactions, such as account transfers,
balance inquiries, bill payments, and stop-payment requests,
and some even offer online loan and credit card applications.
Account information can be accessed anytime, day or night,
and can be done from anywhere.

15. MOBILE BANKING

Mobile banking (also known as M-Banking) is a term used for
performing balance checks, account transactions, payments,
credit applications and other banking transactions through a
mobile device such as a mobile phone or Personal Digital
Assistant (PDA).
This activity can be as simple as a bank sending fraud or
usage activity to a client’s cell phone or as complex as a client
paying bills or sending money abroad. Advantages to mobile
banking include the ability to bank anywhere and at any time.
Disadvantages include security concerns and a limited range
of capabilities when compared to banking in person or on a
computer.
Mobile banking is very convenient in today’s digital age with
many banks offering impressive apps. The ability to deposit a
check, to pay for merchandise, to transfer money to a friend
or to find an ATM instantly are reasons why people choose to
use mobile banking. However, establishing a secure
connection before logging into a mobile banking app is
important or else a client might risk personal information
being compromised.

16. ACCEPTING DEPOSIT

Accepting deposit from savers or account holders is the
primary function of a bank. Banks accept deposit from those
who can save money but cannot utilize in profitable sectors.
People prefer to deposit their savings in a bank because by
doing so, they earn interest.
Bank deposits consist of money placed into banking
institutions for safekeeping. These deposits are made to
deposit accounts such as savings accounts, checking accounts
and money market accounts. The account holder has the
right to withdraw deposited funds, as set forth in the terms
and conditions governing the account agreement.
The deposit itself is a liability owed by the bank to the
depositor. Bank deposits refer to this liability rather than to
the actual funds that have been deposited. When someone
opens a bank account and makes a cash deposit, he
surrenders the legal title to the cash, and it becomes an asset
of the bank. In turn, the account is a liability to the bank.
Various types of deposits are:
 Current account/Demand account
 Savings account
 Call deposit account

17. PRIORITY BANKING

Priority banking can include a number of various services, but
some of the popular ones include free checking, online bill
pay, financial consultation, and information.
Another tier of banking services provided to customers who
have been with the institution for a long period of time or
who conduct transactions that provide this type of benefit.
Priority banking can include a number of various services, but
some of the popular ones include free checking, online bill
pay, financial consultation and information. Priority banking
may also be offered as a promotional offer for new
customers.

18. PRIVATE BANKING

Personalized financial and banking services that are
traditionally offered to a bank’s digital, high net worth
individuals (HNWIs). For wealth management purposes,
HNWIs have accrued far more wealth than the average
person, and therefore have the means to access a larger
variety of conventional and alternative investments. Private
Banks aim to match such individuals with the most
appropriate options.
Private banking consists of personalized financial services and
products offered to the high-net-worth individual (HNWI)
clients of a retail bank or other financial institution. It
includes a wide range of wealth management services, and
all provided under one roof. Services include investing and
portfolio management, tax services, insurance, and trust and
estate planning.
While private banking is aimed at an exclusive clientele,
consumer banks and brokerages of every size offer it. This
offering is usually through special departments, dubbed
"private banking" or "wealth management" divisions.
Private banking includes common financial services like
checking and savings accounts, but with a more personalized
approach: A "relationship manager" or "private banker" is
assigned to each customer to handle all matters. The private
banker handles everything from the special like arranging a
jumbo mortgage to the mundane like paying bills. However,
private banking goes beyond CDs and safe deposit boxes to
address a client's entire financial situation. Specialized
services include investment strategy and financial planning
advice, portfolio management, customized financing options,
retirement planning, and passing wealth on to future
generations.
1. Dr. Jayesh Pravinchandra Vora, BBA,M.Com, Ph.D.
[November 2013] made a comparative study of financial
performance of Bank of Baroda and Punjab National Bank
from 2007-08-2011-12 and found that Punjab National
Bank is performing better than Bank of Baroda.

2. Ashwini Kumar Mishra. Al (2013) concluded that private

sector banks are at the top of the list with their
performance in terms of soundness being best and public
sector bank will head towards convergence faster than
private sector banks.

3. Dr. K. Madhusudhana Rao, Associate professor, L.

university, Green fields, Andhra Pradesh [June 2014] made
a comparative analysis on the performance of state Bank of
India and HDFC from 2008-09 to 2012-13 and found that
State Bank of India is performing well and sound than
HDFC but in context of deposits and expenditure both
State bank of India and HDFC has better managing
efficiency.

4. Pooja Sharma, Hantala, Assistant Professor, Department of

MBA,E-Max Group of Institutions Ambala[February 2014]
made a comparative analysis of the financial performance
of ICICI bank and State Bank of India from 2008-09 to 2012-
13 and found that State Bank of India is performing better
than ICICI bank as it is able to generate more loan from its
deposit to its customers.
5. Chidambram R. M and Alamelu (1994) in their study
entitled, “Profitability in Banks, a matter of survival”,
pointed out the problem of declining profit margins in the
Indian Public Sector Banks as compared to their private
sector counterparts. It was observed that in spite of similar
social obligations; almost all the private sector banks have
been registering both –high profits and high growth rate
with respect to deposits, advances and reserves as
compared to the public sector banks. Regional orientation,
better customer services, proper monitoring of advances
and appropriate marketing strategies are the secrets
behind the success of public of the private sector banks.

6. Das A.( 1997) in his paper on “Technical allocation and

Scale Efficiency of the Public Sector Banks in India” The
study found that there is decline in overall efficiency due to
fall in technical efficiency which was not offset by an
improvement in allocative efficiency. However, it is pointed
out that the deterioration in technical efficiency was
mainly on account of few nationalized banks.

7. S. and Verma, S. (1999) determined the factors influencing

the profitability of public sector banks in India by making
use of ratio of net profits as percentage of working funds.
They concluded that spread and burden play a major role
in determining the profitability of commercial banks.

8. Chandan, C.L. and Rajput, P.K.(2002) measured the

performance of bank on basis on the basis of profitability
analysis.
9. Deb and Kalpada (1998) in their study entitled, “Indian
Banking since Independence”, studied the growth of
banking in India covering the period from 1966-1987. The
analysis revealed that the structure of the banking system
changed considerable over the years. It was further
pointed out that the quantitative growth of the public
sector banks was no doubt significant in some of the areas,
but qualitative improvement, by and large lacked in desired
standards. In spite of substantial increase in deposit
mobilization, their share in national income continued to
be very low. It was concluded that the public sector banks
were neither guided by the consideration of returns nor
were they very much concerned with developmental
strategies.

10. Sangami M. (2002) in his study has suggested that the

position of operating cost can be improved with the
introduction of high level technology as well as by
improvement the per employee productivity.

11. Qamar, F (2003) in his paper examined commercial

banks in terms of endowment factors, risk factors, revenue
diversification, profitability and efficiency parameters.

12. .Uppal, R.K. and Kaur, R. (2007) emphasized that cost

should be properly managed to improve the profitability of
banks because the net profits were affected by the
increase or decrease in operating cost.
13. Chawla, A.S.(2006) made an attempt to analyze the
emerging trends in profits and profitability of four banks,
two each from public sector and private sector banks.

14. Sanjay J. Bhayani(2006) in his study, “Performance of

New India Private Banks: A Comparative Study”, analyzed
the performance of new private sector banks with the help
of CAMEL model. The study covered 4 leading private
sector banks- ICICI, HDFC, UTI and IDBI for a period of 5
years from 2000-01 to 2004-05.It is revealed that the
aggregate performance of IDBI Bank is best among all the
banks, followed by UTI.

15. Chowdari Prasad and K.S. Srinivasa Rao (2004) in their

paper, “Private Sector Banking in India- A SWOT Analysis”
studied the performance of all private sector banks. As per
the criteria selected like efficiency, financial strength,
profitability and size of scale, it is revealed that the private
sector banks are in position to offer cost effective, efficient
products and services to their customers using technology,
best utilization of human resources along with professional
management and corporate governance principles.

16. Samad (2007) in his paper entitled, “Comparative

Analysis of Domestic and Foreign Bank Operations in
Bangladesh” examines the operations of foreign and
domestic banks in the process of industrialization and
economic development of Bangladesh.
17. Shobana (2010) in his paper entitled, “Operational
Efficiency of Public Sector Banks in India- a Non-Parametric
Model” focuses on the operational efficiency of public
sector banks in India using a non-parametric model, which
measures the efficiency as a ratio of output index to input
index. The study concluded that out of 27 public sector
banks in India, only nine banks has achieved high level of
efficiency in its operations.

18. Devi (2017): in their paper entitled “A Study on the

Financial Comparison between SBI and ICICI with reference
to Chennai Annanagar Branch” examined the performance
of the banks from 2012-2017. Operating ratio, debt equity
ratio were taken as the variables. It was examine that
operating profit ratio of SBI was better than ICICI.
19.

20. Dr. Anurag. B. Singh and Priyanka Tandon (2012): in their

research paper entitled, “A comparative Study on Financial
Performance of State Bank of India and ICICI Bank”
examined the financial performance of SBI bank and ICICI
bank, Public sector and Private sector respectively. The
data used for this study was secondary in nature. The study
was conducted to determine the financial performance of
SBI and ICICI banks on the basis of ratios such as credit
deposit, net profit margin etc. The study was undertaken
from 2009 to 2014. In this study, it was found that SBI is
performing well and financially sound than ICICI bank but
 in context of deposits and expenditures, ICICI bank has
better managed than SBI bank.

21. Chaudhury and Singh (2012) analyzed the impact of the

financial reforms on the soundness of Indian Banking
through its impact on the asset quality. The study
identified the key players as risk management, NPA levels,
effective cost management and financial inclusion.

22. Gupta (2013) evaluated the performance of all 26 public

sector banks in India using CAMEL approach for a five year
period from 2009 to 2013 and concluded that there is a
significant difference in performance of all the public
sector banks assessed by CAMEL model.

23. Bodla and Verma (2006) assessed the performance of

SBI and ICICI bank through the CAMEL model for the
period 2004-05 and found out that although liquidity
position of both the banks did not differ significantly, ICICI
Bank has outperformed SBI in terms of assets quality,
earnings ability and management efficiency.

24. Sarker (2005) examined the CAMEL model for regulation

and supervision of Islamic banks by the central bank in
Bangladesh. The study enabled the regulators to get a
Shariah benchmark to supervise and inspect Islamic banks
and financial institutions from an Islamic perspective.
25. Prasuna (2003) analysed the performance of 65 Indian
banks for the year 2003-04 using CAMEL approach and
found that better service quality, innovative products and
better bargains were beneficial because of the prevailing
tough competition.

26. Kwan and Eisenbeis (1997) observed that Asset Quality

is commonly used as a risk indicator for financial
institutions, which also determines the reliability of capital
ratios. Their study indicated that financial capitalization
affects the operation of financial institution. More the
capital, higher is the efficiency.

27. Pai (2006) in his paper entitled “Trends in the Indian

Banking Industry: Analyses of Inter-regional Trends in
Deposits and Credits” reveals that the performance of
banks, as far as deposits and credits are concerned at two
point of time, has been largely similar. It was also observed
that private scheduled commercial banks had shown
superior performance. This would challenge the pre-
eminent position of the public sector banks. The regions
studied also reveal that their growths on these parameters,
at the two points in time, have been comparable between
themselves.

28. Bhayani et al. (2007) in their paper entitled “Role of

Transaction Cost in the Financial Performance of
Cooperative Banks” have attempted to investigate how the
proportion of transformation cost is higher than that of
transaction cost in the banks under study. Transaction cost
 plays an important role in the profitability of banks.
Therefore, if the management of co-operative banks tries
to reduce the transaction cost, it will improve their banks’
profitability.

29. Rajkumar (2007) in his paper entitled “The Earning

Performance of Private Sector Banks during 2005-2006”
reveals that the interest income over expenditure
increased to Rs. 13, 108 crores during 2005-06 from Rs.
10,006 Crores during 2004-05. The increased percentage
was 31. At the same time, the operating expenditure over
operating profit fell to Rs.817 crores during 2005-06 from
Rs.992 crores during 2004-05. The profitability ratios of all
the 28 private sector banks witnessed a positive trend
during the year. The highest profit earning private sector
bank was ICICI Bank.

30. A research paper authored by Yameen and Ahmad

(2015) entitled, “Impact of Corporate Governance Practices
on Financial Performance of Hindustan Petroleum
Corporation Limited”. They have tested the role corporate
governance practices for the improvement of the operating
performance, financial efficiency and shareholder’s wealth
in the organization. And, also found that that the corporate
governance has positive impact on the overall financial
performance of Hindustan Petroleum Corporation Limited.

31. A research paper written by Tirkeyi and Salem (2013)

entitled, “A Comparative Study of Financial Statement of
ICICI and HDFC through Ratio Analysis”, examined the
financial position with the use of different ratios. It was
fund that financial position of ICICI is much better than the
HDFC.
WHAT IS CURRENT RATIO?
The current ratio is a liquidity ratio that measures whether a
firm has enough resources to meet its short-term obligations.
It compares a firm's current assets to its current liabilities,
and is expressed as follows:
current assets
Current Ratio= current liabilities

The ideal current ratio is 2:1.

Object 5

A high current ratio indicates that a company is able to meet

its short-term obligations.
WHAT IS A QUICK RATIO?
In finance, the quick ratio, also known as the acid-test ratio is
a type of liquidity ratio, which measures the ability of a
company to use its near cash or quick assets to extinguish or
retire its current liabilities immediately. Quick assets
are current assets that can presumably be quickly converted
to cash at close to their book values. It can be expressed as
follows:
Quick assets
Quick ratio= Quick liabilities

Object 9

The higher the ratio, the more financially secure a company is

in the short term. On the other hand, a high or
increasing quick ratio generally indicates that a company is
experiencing solid top-line growth, quickly converting
receivables into cash, and easily able to cover its financial
obligations.
WHAT IS A DEBT-EQUITY RATIO?
The debt-to-equity (D/E) ratio is a leverage ratio that shows
how much a company's financing comes from debt or equity.
A higher D/E ratio means that more of a company's financing
is from debt versus issuing shares of equity. Banks tend to
have higher D/E ratios because they borrow capital in order
to lend to customers. They also have substantial fixed assets,
i.e., local branches, for example. It is expressed as follows:

Debt
Debt-Equity= Equity

Object 13
WHAT IS OPERATING MARGIN?
The operating margin ratio, also known as the operating
profit margin, is a profitability ratio that measures what
percentage of total revenues is made up by operating
income. In other words, the operating margin ratio
demonstrates how much revenues are left over after all the
variable or operating costs have been paid. Conversely, this
ratio shows what proportion of revenues is available to cover
non-operating costs like interest expense. It is expressed as
follows:
Operating income
Operating margin (%) = Net sales

Object 17

A higher operating margin is more favourable compared with

a lower ratio because this shows that the company is making
enough money from its ongoing operations to pay for its
variable costs as well as its fixed costs.
WHAT IS GROSS MARGIN RATIO?
Gross margin ratio is a profitability ratio that compares the
gross margin of a business to the net sales. This ratio
measures how profitable a company sells its inventory or
merchandise. In other words, the gross profit ratio is
essentially the percentage markup on merchandise from its
cost. This is the pure profit from the sale of inventory that can
go to paying operating expenses. It is expressed as follows:
Gross Margin
Gross Margin (%) = Net sales

Object 22

A company with a high gross margin ratios mean that the

company will have more money to pay operating expenses
like salaries, utilities, and rent.

WHAT IS NET PROFIT MARGIN?

Net profit margin is the percentage of revenue remaining
after all operating expenses, interest, taxes and preferred
stock dividends (but not common stock dividends) have been
deducted from a company's total revenue. It is expressed as
follows:
Net profit
Net Profit Margin (%) = Total revenue

Object 26

This is a pretty simple equation with no real hidden numbers

to calculate. Both of these figures are listed on the face of the
income statement: one on the top and one on the bottom.
A higher margin is always better than a lower margin because
it means that the company is able to translate more of its
sales into profits at the end of the period.

WHAT IS OPERATING CASHFLOW MARGIN?

Operating cash flow margin is a cash flow ratio which
measures cash from operating activities as a percentage of
sales revenue in a given period. Like operating margin, it is a
trusted metric of a company’s profitability and efficiency, and
its earnings quality. Operating cash flow margin measures
how efficiently a company converts sales into cash. It is
expressed as follows:
Operating Cash Flow = Net Income + Non-cash Expenses
(Depreciation and Amortization) + Changes in Working Capital

Object 29

Companies need positive free cash flow to survive and

expand. Cash is what allows a business to pay its expenses
and purchase assets. Cash flow margin is basically a return of
cash on sales. The bigger the margin/ratio, usually the better
the return.
WHAT IS RETURN ON NET WORTH RATIO?
The net worth ratio states the return that shareholders could
receive on their investment in a company, if all of the profit
earned were to be passed through directly to them. Thus, the
ratio is developed from the perspective of the shareholder,
not the company, and is used to analyze investor returns. The
ratio is useful as a measure of how well a company is utilizing
the shareholder investment to create returns for them, and
can be used for comparison purposes with competitors in the
same industry. It can be expressed as follows:

Net income
RONW= Shareholders equity

Object 34

WHAT IS RETURN ON LONG TERM FUNDS RATIO?

The net worth ratio states the return that shareholders could
receive on their investment in a company, if all of the profit
earned were to be passed through directly to them. Thus, the
ratio is developed from the perspective of the shareholder,
not the company, and is used to analyse investor returns. The
ratio is useful as a measure of how well a company is utilizing
the shareholder investment to create returns for them, and
can be used for comparison purposes with competitors in the
same industry. It is expressed as follows:
Operating profit
ROLTF (%) = Long term funds

Object 38

WHAT IS RETURN ON ASSETS RATIO?

The return on assets ratio, often called the return on total
assets, is a profitability ratio that measures the net income
produced by total assets during a period by comparing net
income to the average total assets. In short, this ratio
measures how profitable a company’s assets are. It can be
expressed as follows:
Net income
ROA = Average total assets

Object 42

The return on assets ratio measures how effectively a

company can earn a return on its investment in assets. It only
makes sense that a higher ratio is more favourable to
investors because it shows that the company is more
effectively managing its assets to produce greater amounts of
net income.

WHAT IS RETURN ON EQUITY?

The return on equity ratio or ROE is a profitability ratio that
measures the ability of a firm to generate profits from its
shareholders investments in the company. ROE is also and
indicator of how effective management is at using equity
financing to fund operations and grow the company. It can be
expressed as follows:
Net income
ROE = Shareholders equity

Object 46

Investors want to see a high return on equity ratio because

this indicates that the company is using its investors’ funds
effectively. Higher ratios are almost always better than lower
ratios, but have to be compared to other companies’ ratios in
the industry.
WHAT IS RETURN ON CAPITAL EMPLOYED RATIO?
Return on capital employed or ROCE is a profitability ratio
that measures how efficiently a company can generate profits
from its capital employed by comparing net operating profit
to capital employed. ROCE is a long-term profitability ratio
because it shows how effectively assets are performing while
taking into consideration long-term financing. This is why
ROCE is a more useful ratio than return on equity to evaluate
the longevity of a company. It can be expressed as follows:
Net operating profit
ROCE = Capital employed

Object 50

A higher ROCE ratio indicates a favourable ratio.

WHAT IS PROPRIETORY RATIO?

This ratio shows the proportion of total assets of a company
which are financed by proprietors’ funds. The proprietary
ratio is also known as equity ratio. It helps to determine the
financial strength of a company & is useful for creditors to
assess the ratio of shareholders’ funds employed out of total
assets of the company. It can be expressed as follows:
Shareholders funds
Proprietory ratio= Total assets

Object 54

A high proprietary ratio, therefore, indicates a strong

financial position of the company and greater security for
creditors. A low ratio indicates that the company is already
heavily depending on debts for its operations.

WHAT IS EARNING RETENTION RATIO?

The retention ratio, sometimes called the plowback ratio, is a
financial metric that measures the amount of earnings or
profits that are added to retained earnings at the end of the
year. In other words, the retention rate is the percentage of
profits that are withheld by the company and not distributed
as dividends at the end of the year. It can be expressed as
follows:
Retained earnings
Retention ratio = Net income

Object 58

Since companies need to retain some portion of their profits

in order to continue to operate and grow, investors value this
ratio to help predict where companies will be in the future.
Higher retention rates are not always considered good for
investors because this usually means the company doesn’t
give as much dividends.
WHAT IS FIXED ASSET TURNOVER RATIO?
The fixed asset turnover ratio is an efficiency ratio that
measures a companies return on their investment in
property, plant, and equipment by comparing net sales with
fixed assets. In other words, it calculates how efficiently a
company is a producing sales with its machines and
equipment. It can be expressed as follows:
Net sales
Fixed Assets T/O = ¿ assets− Accumulated Depriciation

Object 62

A high turnover indicates that assets are being utilized

efficiently and large amount of sales are generated using a
small amount of assets. A low turnover, on the other hand,
indicates that the company isn’t using its assets to their
fullest extent.

WHAT IS INTEREST SPREAD?

The net interest rate spread is the difference between the
average yield that a financial institution receives from loans
along with other interest-accruing activities and the average
rate it pays on deposits and borrowings. The net interest rate
spread is a key determinant of a financial institution’s
profitability (or lack thereof). It can be expressed as follows:
Interest spread = Interest Income rate- Interest Expense rate

Object 64

In simple terms, net interest rates spreads are like profit

margins. The greater the spread, the more profitable the
financial institution is likely to be.

WHAT IS CAPITAL ADEQUACY RATIO?

The capital adequacy ratio (CAR) is a measurement of a
bank's available capital expressed as a percentage of a bank's
risk-weighted credit exposures. The capital adequacy ratio,
also known as capital-to-risk weighted assets ratio (CRAR), is
used to protect depositors and promote the stability and
efficiency of financial systems around the world. It can be
expressed as follows:
Tier 1capital +Tier 2 capital
CAR = Risk weighted assets

Tier 1 capital includes equity capital, ordinary share capital,

intangible assets, and audited revenue reserves.
Tier 2 capital includes unaudited retained earnings,
unaudited reserves, and general loss reserves.

Object 68

Generally, a bank with a high capital adequacy ratio is

considered safe and likely to meet its financial obligations
WHAT IS CASH DEPOSIT RATIO?
Cash Deposit ratio (CDR) is the ratio of how much a bank
lends out of the deposits it has mobilised. It indicates how
much of a banks core funds are being used for lending, the
main banking activity. It can also be defined as Total of Cash
in hand and Balances with RBI divided by Total deposits.
 Object 70

WHAT IS FIXED CHARGE COVERAGE RATIO?

The fixed charge coverage ratio is a financial ratio that
measures a firm’s ability to pay all of its fixed charges or
expenses with its income before interest and income taxes.
The fixed charge coverage ratio is basically an expanded
version of the times interest earned ratio or the times
interest coverage ratio. It can be expressed as follows:

EBIT +¿ charges before Tax

FCCR = ¿ charges before Tax+ Interest

Object 75

Higher fixed cost ratios indicate a healthier and less risky

business to invest in or loan to. Lower ratios show creditors
and investors that the company can barely meet its monthly
bills.

WHAT IS LOAN TO DEPOSIT RATIO?

The loan-to-deposit ratio (LDR) is used to assess a
bank's liquidity by comparing a bank's total loans to its total
deposits for the same period. The LDR is expressed as a
percentage. If the ratio is too high, it means that the bank
may not have enough liquidity to cover any unforeseen fund
requirements. Conversely, if the ratio is too low, the bank may
not be earning as much as it could be. It can be expressed as
follows:
Total loans
LDR = Total deposits

Object 79

Typically, the ideal loan-to-deposit ratio is 80% to 90%.

WHAT IS OPERATING EXPENSE RATIO?

Operating ratio (also known as operating cost ratio or
operating expense ratio) is computed by dividing operating
expenses of a particular period by revenue made during that
period. Like expense ratio, it is expressed in percentage. It can
be expressed as follows:

Total operating expenses

Operating Expense ratio = Total income

Object 84

A lower OER is desired as it means that expenses are

minimized relative to revenue.

WHAT IS TIMES INTEREST EARNED RATIO?

The times interest earned ratio, sometimes called the interest
coverage ratio, is a coverage ratio that measures the
proportionate amount of income that can be used to cover
interest expenses in the future. It can be expressed as follows:
 Income before interest∧taxes
Times Interest Earned Ratio = Interest expense

Object 88

As you can see, creditors would favour a company with a

much higher times interest ratio because it shows the
company can afford to pay its interest payments when they
come due. Higher ratios are less risky while lower ratios
indicate credit risk.

WHAT IS NET INTEREST MARGIN?

The NIM ratio measures the profit a company makes on its
investing activities as a percentage of total investing assets.
Banks and other financial institutions typically use this ratio
to analyse their investment decisions and track the
profitability of their lending operations. This way they can
adjust their lending practices to maximize profitability. It can
be expressed as follows:
( Invstment Income−Interest Expenses)
NIM = Average earning assets

Object 92

If this ratio is a negative figure, then it indicates that the firm

or company has not been made effective investment
decisions. A positive figure, on the other hand, means that
the investment decisions were successful and the fund
manager or the company was profitable.
WHAT IS OTHER INCOME TO TOTAL INCOME RATIO?
Fee based income accounts for a major portion of a bank's
other income. A bank generates higher fee income through
innovative products and adapting the technology for
sustained service levels. This stream of revenue is not
depended on the bank's capital adequacy and consequently,
the potential to generate the income is immense. The higher
ratio indicates increasing proportion of fee-based income.
The ratio is also influenced by gains on government
securities, which fluctuates depending on interest rate
movement in the economy. It can be expressed as follows:
Other income
Other income to Total income ratio = Total income

Object 97

It shows how much percentage of income comprises of other

income.
WHAT IS EARNING PER SHARE?
Earning per share (EPS), also called net income per share, is a
market prospect ratio that measures the amount of net
income earned per share of stock outstanding. In other
words, this is the amount of money each share of stock
would receive if all of the profits were distributed to the
outstanding shares at the end of the year. Earnings per share
is also a calculation that shows how profitable a company is
on a shareholder basis. It can be expressed as follows:
Net income−Preferred dividends
EPS = No . of shares

Object 101

Earning per share is the same as any profitability or market

prospect ratio. Higher earnings per share is always better
than a lower ratio because this means the company is more
profitable and the company has more profits to distribute to
its shareholders.
WHAT IS DIVIDEND PER SHARE?
Dividend per share (DPS) is the sum of declared dividends
issued by a company for every ordinary share outstanding.
The figure is calculated by dividing the total dividends paid
out by a business, including interim dividends, over a period
of time by the number of outstanding ordinary shares issued.
A company's DPS is often derived using the dividend paid in
the most recent quarter, which is also used to calculate the
dividend yield. It can be expressed as follows:
Total equity dividend
DPS = No . of shares

Object 106

WHAT IS DIVIDEND PAYOUT RATIO?

The dividend payout ratio measures the percentage of net
income that is distributed to shareholders in the form of
dividends during the year. In other words, this ratio shows the
portion of profits the company decides to keep to fund
operations and the portion of profits that is given to its
shareholders. Investors are particularly interested in the
dividend payout ratio because they want to know if
companies are paying out a reasonable portion of net income
to investors. It can be expressed as follows:
DPS
DPR = EPS

Object 110

A consistent trend in this ratio is usually more important than

a high or low ratio. Conversely, a company that has a
downward trend of payouts is alarming to investors.

WHAT IS ENTERPRISE VALUE?

Enterprise value, also called firm value, is a business valuation
calculation that measures the worth of a company by
comparing its stock price, outstanding debt, and cash and
equivalents in the event of a company sale. In other words,
it’s a way to measure how much a purchasing company
should pay to buy out another company. A lot of times this is
called the takeover price because it’s amount of money
required to purchase 100 percent of a business and take it
over. It can be expressed as follows:
Enterprise value = Market capitalisation + Debt – Current cash

Object 112

WHAT IS PRICE TO BOOK RATIO?

The price to book ratio, also called the P/B or market to book
ratio, is a financial valuation tool used to evaluate whether
the stock a company is over or undervalued by comparing the
price of all outstanding shares with the net assets of the
company. In other words, it’s a calculation that measures the
difference between the book value and the total share price
of the company. It can be expressed as follows:
Market price per share
P/B Ratio = Book value per share

Object 116

For example, a P/B ratio above 1 indicates that the investors

are willing to pay more for the company than its net assets
are worth. If the market book ratio is less than 1, on the other
hand, the company’s stock price is selling for less than their
assets are actually worth. This company is undervalued for
some reason.

WHAT IS PRICE TO SALES RATIO?

The price to sales ratio, often called the P/S ratio or simply
Price/Sales, is a financial metric that measures the value
investors put on a company for each dollar of revenue
generated by the firm by comparing the stock price with total
revenue. This ratio is widely used because it states the
valuation of a company in context of one the easiest to
understand financial metric (i.e. revenue) from investor point
of view. It can be expressed as follows:
Market value per share
P/S Ratio = Earnings per share

Object 121

Generally, higher P/S ratio is better.