“ANALYSIS OF FINANCIAL STATEMENT OF INDIAN BANK AND

COMMENT ON AUDIT REPORT OF 2012-13, 2013-14, 2014-15”

FINAL DRAFT SUBMITTED IN THE FULFILLMENT OF THE COURSE

TITLED-

ACCOUNTING AND AUDIT

SUBMITTED TO- SUBMITTED BY-

Mr. KAMESHWAR PANDEY NAME: AMOL VERMA
FACULTY OF ACCOUNTING AND AUDIT COURSE: B.B.A, LL.B (Hons.)
ROLL NO: 1813
SEMESTER: 1st
SESSION- 2017-2022

CHANAKYA NATIONAL LAW UNIVERSITY NYAYA NAGAR,

MITHAPUR, PATNA-800001

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 DECLARATION

I, hereby, declare that the work reported in the B.B.A., LL.B (Hons.) Project Report entitled
“Analysis of financial statement of Indian bank and comment on audit report of 2012-
13, 2013-14, 2014-15” submitted at Chanakya National Law University is an authentic
record of my work carried out under supervision of Mr Kameshwar Pandey. I have not
submitted this work elsewhere for any other degree or diploma. I am fully responsible for the
contents of my project report.

SIGNATURE OF CANDIDATE
NAME OF CANDIDATE: AMOL VERMA
CHANAKYA NATIONAL LAW UNIVERSITY
SESSION- 2017-2022

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 ACKNOWLEDGEMENT

I would like to thank my faculty Mr. Kameshwar Pandey whose guidance helped me a lot
with structuring my project.
I owe the present accomplishment of my project to my friends, who helped me immensely
with materials throughout the project and without whom I couldn’t have completed it in the
present way.
I would like to extend my gratitude to my parents and all those unseen hands that helped me
out at every stage of my project.

THANK YOU,
NAME: Amol Verma
COURSE: B.B.A., LL.B. (Hons.)
ROLL NO: 1813
SEMESTER – 1st
SESSION- 2017-2022

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 TABLE OF CONTENTS

S.No. Particulars Page No.

1. INTRODUCTION 5

2. MEANING OF FINANCIAL STATEMENT ANALYSIS 7-9

3. EVOLUTION OF THE INDIAN BANKING INDUSTRY 10-17

4. ACCOUNTING AND ITS CONCEPTS 18-41

4.1. -ACCOUNTING CONCEPTS AND ACCOUNTING CONVENTIONS 20-23

4.2 -METHOD OF ACCOUNTING 24-27

4.3 -CASH SYSTEM OF ACCOUNTING AND ACCRUAL SYSTEM OF 28-29

ACCOUNTING

4.4 -TYPES OF ACCOUNTS 30-31

4.5 -BOOK OF ORGINAL ENTRY AND LEDGER 32-33

4.6 -CONCEPT OF TRIAL BALANCE AND CONCEPT OF PROFIT AND 34-37

LOSS ACCOUNT

4.7 -CONCEPT OF BALANCE SHEET 38

4.8 -USERS OF FINANCIAL STATEMENTS 39-40

4.9 -LIMITATIONS OF FINANCIAL STATEMENTS 41

5 ABOUT THE COMPANY 42-47

6. FINANCIAL STATEMENT ANALYSIS OF INDIAN BANK 48-55

6.1 - COMPARATIVE BALANCE SHEET OF INDIAN BANK FOR THE 48-49

YEARS OF 2012-13 ,2013-14, 2014-15

6.2 - COMPARATIVE INCOME STATEMENT OF INDIAN BANK FROM 50

2012-2013 TO 2014-15

6.3 -TREND ANALYSIS 51-53

6.5 -CASH FLOW STATEMENT 54-55

7 RATIO ANALYSIS 56-70

8 COMMENT ON AUDIT REPORT 71-74

9 CONCLUSION 75

10 BIBLIOGRAPHY 76

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INTRODUCTION:

Banking sector, the world over, is known for the adoption of multidimensional strategies
from time to time with varying degrees of success. Banks are very important for the smooth
functioning of financial markets as they serve as repositories of vital financial information
and can potentially alleviate the problems created by information asymmetries. In any
organization, the two important financial statements are the Balance sheet & Profit and loss
account of the business. Balance sheet is a statement of the financial position of an enterprise
at a particular point of time. Profit and loss account shows the net profit or net loss of a
company for a specified period of time. When these statements of the last few year of any
organization are studied and analyzed, significant conclusions may be arrived regarding the
changes in the financial position, the important policies followed and trends in profit and loss
etc. Analysis and interpretation of the financial statement has now become an important
technique of credit appraisal. The investors, financial experts, management executives and
the bankers all analyze these statements.

Though the basic technique of appraisal remains the same in all the cases but
the approach and the emphasis in analysis vary. A banker interprets the financial statement so
as to evaluate the financial soundness, stability, the liquidity position and the profitability or
the earning capacity of borrowing concern. Analysis of financial statement is necessary
because it help in depicting the financial position on the basis of past and current records.
Analysis of financial statement helps in making the future decision and strategies.

Therefore, it is very necessary for every organization whether it is a financial

company or manufacturing company to make financial statement and to analysis it. After
duly recognizing the importance of financial statement analysis, this topic has been chosen as
the focus of project. It analyses the financial statement of Indian Bank from 2008 to 2012.

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AIMS AND OBJECTIVES-

 To study the financial statements of Indian bank for period 2012-13, 2013-14 and
2014-15.
 To comment critically on Financial statements derived from analyzing the financial
statements of a period of 3 years of the company.

RESEARCH METHODOLOGY:

The researcher will be relying on Doctrinal method of research to complete the project.

.LIMITATIONS OF THE STUDY-

Time was a very big limitation while making of this project. The researcher had limited
period of time and computation of data was a bit hectic task.

SOURCES OF DATA:

The researcher has used both primary as well as secondary sources to complete the project.

1. Primary sources include books related to Financial Accounting.

2. Secondary sources include all the financial data of the company and websites related to
Financial Accounting.

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MEANING OF FINANCIAL STATEMENT ANALYSIS:

After preparation of the financial statements(Balance Sheet and Trading and Profit and Loss
Account), one may be interested in analyzing the financial statements with the help of
different tools such as comparative statement, common size statement, ratio analysis, trend
analysis, etc. In this process a meaningful relationship is established between two or more
accounting figures for comparison.

Objectives:

 To explain the meaning, need and purpose of financial statement analysis;

 To identify the parties interested in analysis of financial statements;
 To explain the various techniques and tools of analysis of financial statements.

Financial Statement Analysis (Meaning and Purpose):

We know business is mainly concerned with the financial activities. In order to ascertain the
financial status of the business every enterprise prepares certain statements, known as
financial statements. Financial statements are mainly prepared for decision making purposes.
But the information as is provided in the financial statements is not adequately helpful in
drawing a meaningful conclusion. Thus, an effective analysis and interpretation of financial
statements is required.

Analysis means establishing a meaningful relationship between various

items of the two financial statements with each other in such a way that a conclusion is
drawn. By financial statements we mean two statements:

1. Profit and loss Account or Income Statement

2. Balance Sheet or Position Statement
These are prepared at the end of a given period of time. They are the
indicators of profitability and financial soundness of the business concern. The term financial
analysis is also known as analysis and interpretation of financial statements. It determines
financial strength and weakness of the firm. Analysis of financial statements is an attempt to
assess the efficiency and performance of the enterprise. Thus, the analysis and interpretation
of financial statements is very essential to measure the efficiency, profitability, financial
soundness and future prospects of the business units. Financial analysis serves the following
purposes:

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  Measuring the profitability
 Indicating the trend of achievement
 Assessing the growth potential of the business
 Comparative position in relation to other firms
 Assess overall financial strength
 Assess solvency of the firm
 Techniques and Tools of Financial Statement Analysis:
Financial statements give complete information about assets, liabilities,
equity, reserves, expenses and profit and loss of an enterprise. They are not readily
understandable to interested parties like creditors, shareholders, investors etc. Thus, various
techniques are employed for analyzing and interpreting the financial statements. Techniques
of analysis of financial statements are mainly classified into three categories:

(I) Cross-sectional analysis

It is also known as inter firm comparison. This analysis helps in analyzing
financial characteristics of another similar enterprise in that accounting period.

(II) Time series analysis

It is also called as intra-firm comparison. According to this method, the
relationship between different items of financial statement is established, comparisons
are made and results obtained. The basis of comparison may be:

 Comparison of the financial statements of different years of the same business

unit.
 Comparison of financial statement of a particular year of different business
units.
(III) Cross-sectional cum time series analysis
This analysis is intended to compare the financial characteristics of two or
more enterprises for a defined accounting period. It is possible to extend such a
comparison over the year. This approach is most effective in analyzing of financial
statements.

The analysis and interpretation of financial statements is used to determine the financial
position. A number of tools or methods or devices are used to study the relationship between
financial statements. However, the following are the important tools which are commonly

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used for analyzing and interpreting financial statements: Ratio analysis, Comparative
financial statements, Common size statements, Trend analysis.

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Evolution of the Indian Banking Industry:

The Indian banking industry has its foundations in the 18th century, and has had a
varied evolutionary experience since then. The initial banks in India were primarily traders’
banks engaged only in financing activities. Banking industry in the pre-independence era
developed with the Presidency Banks, which were transformed into the Imperial Bank of
India and subsequently into the State Bank of India. The initial days of the industry saw a
majority private ownership and a highly volatile work environment. Major strides towards
public ownership and accountability were made with nationalization in 1969 and 1980 which
transformed the face of banking in India. The industry in recent times has recognized the
importance of private and foreign players in a competitive scenario and has moved towards
greater liberalization.

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In the evolution of this strategic industry spanning over two centuries, immense
developments have been made in terms of the regulations governing it, the ownership
structure, products and services offered and the technology deployed. The entire evolution
can be classified into four distinct phases.

 Phase I- Pre-Nationalization Phase (prior to 1955)

 Phase II- Era of Nationalisation and Consolidation (1955-1990)
 Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial
Liberalisation (1990-2004)
 Phase IV- Period of Increased Liberalisation (2004 onwards)

Current Structure:

Currently the Indian banking industry has a diverse structure. The present structure of
the Indian banking industry has been analyzed on the basis of its organized status, business as
well as product segmentation.

Organizational Structure:

The entire organized banking system comprises of scheduled and non-scheduled

banks. Largely, this segment comprises of the scheduled banks, with the unscheduled ones
forming a very small component. Banking needs of the financially excluded population is
catered to by other unorganised entities distinct from banks, such as, moneylenders,
pawnbrokers, micro financial institutions, NBFC and indigenous bankers.

Scheduled Banks:

A scheduled bank is a bank that is listed under the second schedule of the RBI Act,
1934. In order to be included under this schedule of the RBI Act, banks have to fulfill certain
conditions such as having a paid up capital and reserves of at least 0.5 million and satisfying
the Reserve Bank that its affairs are not being conducted in a manner prejudicial to the
interests of its depositors. Scheduled banks are further classified into commercial and
cooperative banks.

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 The basic difference between scheduled commercial banks and scheduled cooperative
banks is in their holding pattern. Scheduled cooperative banks are cooperative credit
institutions that are registered under the Cooperative Societies Act. These banks work
according to the cooperative principles of mutual assistance.

Scheduled Commercial Banks (SCBs):

Scheduled commercial banks (SCBs) account for a major proportion of the business of
the scheduled banks. As at end-March, 2009, 80 SCBs were operational in India. SCBs in
India are categorized into the five groups based on their ownership and/or their nature of
operations.

State Bank of India and its six associates (excluding State Bank of Saurashtra, which
has been merged with the SBI with effect from August 13, 2008) are recognised as a separate
category of SCBs, because of the distinct statutes (SBI Act, 1955 and SBI Subsidiary Banks
Act, 1959) that govern them.

Nationalised banks (10) and SBI and associates (7), together form the public sector
banks group and control around 70% of the total credit and deposits businesses in India. IDBI
ltd. has been included in the nationalised banks group since December 2004.

Private sector banks include the old private sector banks and the new generation
private sector banks- which were incorporated according to the revised guidelines issued by
the RBI regarding the entry of private sector banks in 1993. As at end-March 2009, there
were 15 old and 7 new generation private sector banks operating in India.

Foreign banks are present in the country either through complete branch/subsidiary
route presence or through their representative offices. At end-June 2009, 32 foreign banks
were operating in India with 293 branches. Besides, 43 foreign banks were also operating in
India through representative offices.

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 Regional Rural Banks (RRBs) were set up in September 1975 in order to develop the
rural economy by providing banking services in such areas by combining the cooperative
specialty of local orientation and the sound resource base which is the characteristic of
commercial banks.

RRBs have a unique structure, in the sense that their equity holding is jointly held
by the central government, the concerned state government and the sponsor bank (in the ratio
50:15:35), which is responsible for assisting the RRB by providing financial, managerial and
training aid and also subscribing to its share capital.

Between 1975 and 1987, 196 RRBs were established. RRBs have grown in
geographical coverage, reaching out to increasing number of rural clientele. At the end of
June 2008, they covered 585 out of the 622 districts of the country. Despite growing in
geographical coverage, the number of RRBs operational in the country has been declining

13
over the past five years due to rapid consolidation among them. As a result of state wise
amalgamation of RRBs sponsored by the same sponsor bank, the number of RRBs fell to 86
by the end March of 2009.

Scheduled Cooperative Banks:

Scheduled cooperative banks in India can be broadly classified into urban credit
cooperative institutions and rural cooperative credit institutions. Rural cooperative banks
undertake long term as well as short term lending. Credit cooperatives in most states have a
three tier structure (primary, district and state level).

Non-Scheduled Banks:

Non-scheduled banks also function in the Indian banking space, in the form of Local
Area Banks (LAB). As at end-March 2009 there were only 4 LABs operating in India. Local
area banks are banks that are set up under the scheme announced by the government of India
in 1996, for the establishment of new private banks of a local nature; with jurisdiction over a
maximum of three contiguous districts. LABs aid in the mobilisation of funds of rural and
semi urban districts. Six LABs were originally licensed, but the license of one of them was
cancelled due to irregularities in operations, and the other was amalgamated with Bank of
Baroda in 2004 due to its weak financial position.

Business Segmentation:

The entire range of banking operations are segmented into four broad heads- retail
banking businesses, wholesale banking businesses, treasury operations and other banking
activities. Banks have dedicated business units and branches for retail banking, wholesale
banking (divided again into large corporate, mid corporate) etc.

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Retail Banking:

It includes exposures to individuals or small businesses. Retail banking activities are

identified based on four criteria of orientation, granularity, product criterion and low value of
individual exposures. In essence, these qualifiers imply that retail exposures should be to
individuals or small businesses (whose annual turnover is limited to Rs. 0.50 billion) and
could take any form of credit like cash credit, overdrafts etc. Retail banking exposures to one
entity is limited to the extent of 0.2% of the total retail portfolio of the bank or the absolute
limit of Rs. 50 million. Retail banking products on the liability side includes all types of
deposit accounts. Mortgages and loans (personal, housing, educational etc) are on the assets
side of banks. It also includes other ancillary products and services like credit cards, demat
accounts etc.

The retail portfolio of banks accounted for around 21.3% of the total loans and
advances of SCBs as at end-March 2009. The major component of the retail portfolio of
banks is housing loans, followed by auto loans. Retail banking segment is a well-diversified
business segment. Most banks have a significant portion of their business contributed by
retail banking activities. The largest players in retail banking in India are ICICI Bank, SBI,
PNB, BOI, HDFC and Canara Bank.

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 Among the large banks, ICICI bank is a major player in the retail banking space
which has had definitive strategies in place to boost its retail portfolio. It has a strong focus
on movement towards cheaper channels of distribution, which is vital for the transaction
intensive retail business. SBI’s retail business is also fast growing and a strategic business
unit for the bank. Among the smaller banks, many have a visible presence especially in the
auto loans business. Among these banks the reliance on their respective retail portfolio is
high, as many of these banks have advance portfolios that are concentrated in certain usages,
such as auto or consumer durables. Foreign banks have had a somewhat restricted retail
portfolio till recently. However, they are fast expanding in this business segment. The retail
banking industry is likely to see a high competition scenario in the near future.

Wholesale Banking:

Wholesale banking includes high ticket exposures primarily to corporates. Internal

processes of most banks classify wholesale banking into mid corporates and large corporates
according to the size of exposure to the clients. A large portion of wholesale banking clients
also account for off balance sheet businesses. Hedging solutions form a significant portion of
exposures coming from corporates. Hence, wholesale banking clients are strategic for the
banks with the view to gain other business from them. Various forms of financing, like
project finance, leasing finance, finance for working capital, term finance etc form part of
wholesale banking transactions. Syndication services and merchant banking services are also
provided to wholesale clients in addition to the variety of products and services offered.

Wholesale banking is also a well-diversified banking vertical. Most banks have a

presence in wholesale banking. But this vertical is largely dominated by large Indian banks.
While a large portion of the business of foreign banks comes from wholesale banking, their
market share is still smaller than that of the larger Indian banks. A number of large private
players among Indian banks are also very active in this segment. Among the players with the
largest footprint in the wholesale banking space are SBI, ICICI Bank, IDBI Bank, Canara
Bank, Bank of India, Punjab National Bank and Central Bank of India. Bank of Baroda has
also been exhibiting quite robust results from its wholesale banking operations.

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Treasury Operations:

Treasury operations include investments in debt market (sovereign and corporate),

equity market, mutual funds, derivatives, and trading and forex operations. These functions
can be proprietary activities, or can be undertaken on customer’s account. Treasury
operations are important for managing the funding of the bank. Apart from core banking
activities, which comprises primarily of lending, deposit taking functions and services;
treasury income is a significant component of the earnings of banks. Treasury deals with the
entire investment portfolio of banks (categories of HTM, AFS and HFT) and provides a range
of products and services that deal primarily with foreign exchange, derivatives and securities.
Treasury involves the front office (dealing room), mid office (risk management including
independent reporting to the asset liability committee) and back office (settlement of deals
executed, statutory funds management etc).

Other Banking Businesses:

This is considered as a residual category which includes all those businesses of

banks that do not fall under any of the aforesaid categories. This category includes para
banking activities like hire purchase activities, leasing business, merchant banking, factoring
activities etc.

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DEFINITION OF ACCOUNTING:

Accounting or accountancy is the measurement, processing, and communication of financial

information about economic entities[1][2]such as businesses and corporations. The modern
field was established by the Italian mathematician Luca Pacioli in 1494[3]. Accounting, which
has been called the "language of business", measures the results of an organization's
economic activities and conveys this information to a variety of users, including investors,
creditors, management, and regulators. Practitioners of accounting are known as accountants.
The terms "accounting" and "financial reporting" are often used as synonyms.

Accounting can be divided into several fields including financial accounting, management
accounting, external auditing, tax accounting and cost accounting. Accounting information
systems are designed to support accounting functions and related activities. Financial
accounting focuses on the reporting of an organization's financial information, including the
preparation of financial statements, to external users of the information, such as investors,
regulators and suppliers; and management accounting focuses on the measurement, analysis
and reporting of information for internal use by management. The recording of financial
transactions, so that summaries of the financials may be presented in financial reports, is
known as bookkeeping, of which double-entry bookkeeping is the most common system.

Accounting is facilitated by accounting organizations such as standard-setters, accounting

firms and professional bodies. Financial statements are usually audited by accounting
firms,and are prepared in accordance with generally accepted accounting principles (GAAP).
GAAP is set by various standard-setting organizations such as the Financial Accounting
Standards Board (FASB) in the United States and the Financial Reporting Council in the
United Kingdom. As of 2012, "all major economies" have plans to converge towards or adopt
the International Financial Reporting Standards (IFRS).

1
Needles, Belverd E.; Powers, Marian (2013). Principles of Financial Accounting. Financial Accounting Series
(12 ed.). Cengage Learning.
2
Accounting Research Bulletins No. 7 Reports of Committee on Terminology (Report).
3
DIWAN, Jaswith. ACCOUNTING CONCEPTS & THEORIES. LONDON: MORRE. pp. 001–002. id#
94452.

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CONCEPT OF BOOK KEEPING:

Bookkeeping is the recording of financial transactions, and is part of the process of

accounting in business.[4] Transactions include purchases, sales, receipts, and payments by an
individual person or an organization/corporation. There are several standard methods of
bookkeeping, such as the single-entry bookkeeping system and the double-entry bookkeeping
system, but, while they may be thought of as "real" bookkeeping, any process that involves
the recording of financial transactions is a bookkeeping process.

Bookkeeping is usually performed by a bookkeeper. A bookkeeper (or book-keeper) is a

person who records the day-to-day financial transactions of a business. He or she is usually
responsible for writing the daybooks, which contain records of purchases, sales, receipts, and
payments. The bookkeeper is responsible for ensuring that all transactions whether it is cash
transaction or credit transaction are recorded in the correct daybook, supplier's ledger,
customer ledger, and general ledger; an accountant can then create reports from the
information concerning the financial transactions recorded by the bookkeeper.

The bookkeeper brings the books to the trial balance stage: an accountant may prepare the
income statement and balance sheet using the trial balance and ledgers prepared by the
bookkeeper.

4
Weygandt; Kieso; Kimmel (2003). Financial Accounting. Susan Elbe. p. 6. ISBN 0-471-07241-9.

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ACCOUNTING CONCEPTS:

There are a number of conceptual issues that one must understand in order to develop a firm
foundation of how accounting works. These basic accounting concepts are as follows:

 Accruals concept. Revenues are recognized when earned, and expenses are recognized
when assets are consumed. This concept means that a business may recognize sales,
profits and losses in amounts that vary from what would be recognized based on the
cash received from customers or when cash is paid to suppliers and employees.
Auditors will only certify the financial statements of a business that have been
prepared under the accruals concept.
 Conservatism concept. Revenues are only recognized when there is a reasonable
certainty that they will be realized, whereas expenses are recognized sooner, when
there is a reasonable possibility that they will be incurred. This concept tends to result
in more conservative financial statements.
 Consistency concept. Once a business chooses to use a specific accounting method, it
should continue using it on a go-forward basis. By doing so, the financial statements
prepared in multiple periods can be reliably compared.
 Economic entity concept. The transactions of a business are to be kept separate from
those of its owners. By doing so, there is no intermingling of personal and business
transactions in a company's financial statements.
 Going concern concept. Financial statements are prepared on the assumption that the
business will remain in operation in future periods. Under this assumption, revenue
and expense recognition may be deferred to a future period, when the company is still
operating. Otherwise, all expense recognition in particular would be accelerated into
the current period.
 Matching concept. The expenses related to revenue should be recognized in the same
period in which the revenue was recognized. By doing this, there is no deferral of
expense recognition into later reporting periods, so that someone viewing a company's
financial statements can be assured that all aspects of a transaction have been recorded
at the same time.
 Materiality concept. Transactions should be recorded when not doing so might alter
the decisions made by a reader of a company's financial statements. This tends to result
in relatively small-size transactions being recorded.

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ACCOUNTING CONVENTIONS:

An accounting convention is a common practice used as a guideline when recording a

business transaction. It is used when there is not a definitive guideline in the accounting
standards that govern a specific situation. Thus, accounting conventions serve to fill in the
gaps not yet addressed by accounting standards.

As the range and detail of accounting standards continue to increase, there are fewer areas in
which accounting conventions can still be used. However, a large number of accounting
conventions are needed in industry-specific accounting, since many of these areas have not
yet been addressed by the accounting standards.

Accounting conventions are a necessary part of the accounting profession, since they result in
transactions being recorded in the same way by multiple organizations. This allows for the
reliable comparison of the financial results, financial position, and cash flows of many
organizations.

Accounting conventions may change over time to reflect shifts in the preponderance of
general opinion regarding how to deal with a transaction.

TYPES OF ACCOUNTING CONVENTIONS:

1. Conservatism:

According to this convention, accounts follow the rule "anticipate no profit but provide for all
possible losses", while recording business transactions. In other words, the Accountant
follows the policy of "playing safe". On account of this convention, the inventory is valued at
cost or market price whichever is less! Similarly a provision is made for possible bad and
doubtful debts out of current year's profits. This concept affects principally the category of
current assets.

The convention of conservation has been criticized these days as it goes against the
convention of full disclosure. It encourages the accountant to create secret reserves (e.g. by
creating excess provision for bad and doubtful debts, depreciation etc.), and the financial

21
statements do not show a true and fair view of state of affairs of the business.

2. Full Disclosure:

According to this convention the users of financial statements (proprietors, creditors and
investors) are informed of any facts necessary for the proper interpretation of the statements.
Full disclosure may be made either in the body of financial statements, or in notes
accompanying the statements. Significant financial events occurring after the balance sheet
date, but before the financial statements have been issued to outsiders require full disclosure.

The practice of appending notes to the financial statements (such as about contingent
liabilities or market value, of investments or law suits against the company is in pursuant to
the convention of full disclosure.

3. Consistency:

This convention states that once an entity has decided on one method, it should use the same
method for all subsequent events of the same character unless it has a sound reason to change
methods. If an entity made frequent changes in the manner of handling a given class of events
in the accounting records, comparison of its financial statements for one period with those of
another period would be difficult.

Consistency, as used here, has a narrow meaning. It refers only to consistency over time, not
to logical consistency at a given moment of time. For example fixed assets are recorded at
cost, but inventories are recorded at the lower of their cost or market value. Some people
argue that this is inconsistent. Whatever the logical merits of this argument, it does not
involve the accounting concept of consistency. This convention does not mean that the
treatment of different categories of transactions must be consistent with one another but only
that transactions in a given category must be treated consistently from one accounting period
to the next.

4. Materiality:

The term materiality refers to the relative importance of an item or an event. An item is
"material" if knowledge of the item might reasonably influence the decisions of users of
financial statements. Accountants must be sure that all material items are properly reported in

22
the financial statement.

However, the financial reporting process should be cost-effective - that is, the value of the
information should exceed the cost of its preparation. In short, the convention of materiality
allows accountants to ignore other accounting principles with respect to items that are not
material. An example of the materiality convention is found in the manner in which most
companies account for low-cost plant assets, such as pencil sharpness or wastebaskets.
Although the matching concept calls for depreciating plant assets over their useful life, these
low-cost items usually are charged immediately to an expense account the resulting
"distortion" in the financial statement is too small to be of any importance. Materiality is a
concept or convention within auditing and accounting relating to the importance/significance
of an amount, transaction, or discrepancy.[5]

5
Reasonable Investor(s), Boston University Law Review, available at: http://ssrn.com/abstract=2579510

23
METHOD OF ACCOUNTING:

DOUBLE ENTRY SYSTEM OF ACCOUNTING:

The double entry system of accounting or bookkeeping means that every business transaction
will involve two accounts (or more). For example, when a company borrows money from its
bank, the company's Cash account will increase and its liability account Loans Payable will
increase. If a company pays $200 for an advertisement, its Cash account will decrease and its
account Advertising Expense will increase.

Double entry also allows for the accounting equation (assets = liabilities + owner's equity) to
always be in balance. In our example involving Advertising Expense, the accounting equation
remained in balance because expenses cause owner's equity to decrease. In that example, the
asset Cash decreased and the owner's capital account within owner's equity also decreased.

A third aspect of double entry is that the amounts entered into the general ledger accounts as
debits must be equal to the amounts entered as credits.

Every business transaction causes at least two changes in the financial position of a business
concern at the same time - hence, both the changes must be recorded in the books of
accounts. This concept is explained on Analysis of Business Transaction page. Otherwise, the
books of accounts will remain incomplete and the result ascertained therefore will be
inaccurate. For example, we buy machinery for $100,000. Obviously, it is a business
transaction. It has brought two changes - machinery increases by $100,000 and cash
decreases by an equal amount. While recording this transaction in the books of accounts, both
the changes must be recorded. In accounting language these two changes are termed as "a
debit change" and "a credit change" The detail about these terms is given under the topic
account. Thus we see that for every transaction there will be two entries - one debit entry and
another credit entry. For each debit there will be a corresponding credit entry of an equal
amount. Conversely, for every credit entry there will be a corresponding debit entry of an
equal amount. So, the system under which both the changes in a transaction are recorded

24
together - one change is debited, while the other change is credited with an equal amount - is
known as double entry system.

Locus Pacioli, an Italian wrote a first book on double entry system in 1494. It is regarded as
the best and the only scientific method of accounting system universally accepted throughout
the world. It has been built on well defined rules and principles which is the foundation of
modern accountancy.

The fundamental principle of double entry system lies in analyzing the two changes (parties)
involved in business transactions and properly recording of both the changes in the books of
accounts. There is no exception to this principle. If a complete picture of the transactions is to
be reflected through books of accounts, the double entry system must be duly observed.
Otherwise the books of accounts will fail to provide complete information and the very
objective of accounting will be defeated.

Successive Processes of the Double Entry System:

Following are the successive processes of the double entry system:

Journal:

First of all, transactions are recorded in a book known as journal. Read more about journal.

Ledger:

In the second process, the transactions are classified in a suitable manner and recorded in
another book known as ledger. Read more about ledger.

Trial Balance:

In the third process, the arithmetical accuracy of the books of account is tested by means of
trial balance. Read more about trial balance.

Final Accounts:

In the fourth and final process the result of the full year's working is determined through final
accounts.

25
Advantages:

Double entry system is acknowledged as the best method of accounting in the modern world.
Following are the main advantages of double entry system:

1. Under this method both the aspects of each and every transaction are recorded. So it is
possible to keep complete account.
2. Since both the aspects of a transaction are recorded, for each debit there must be a
corresponding credit of an equal amount. Therefore, total debits must be equal to total
credits. In fact, it is possible to verify the arithmetical accuracy of the books of
accounts by ascertaining whether the two sides become equal or not through a process
known as trial balance.
3. Under this system profit and loss account can be prepared easily by taking together all
the accounts relating to income or revenue and expenses or losses and thereby the
result of the business can be ascertained.
4. A balance sheet can be prepared by taking together all the accounts relating to assets
and liabilities and thereby the financial position of the business can be assessed.
5. Under this system mistakes and deflections can be detected - this exerts a moral
pressure on the accountant and his staff.

Disadvantages:

Despite so may advantages of the system, double entry system has some disadvantages which
are as follows:

1. Under this method each transaction is recorded in books in two stages (journal and
ledger) and two sides (debit and credit). This results in increase of number and size of
books of account and creation of complications.
2. It involves time, labour and money. So it is not possible for small concerns to keep
accounts under this system.
3. It requires expert knowledge to keep accounts under this system.
4. As the system is complex, there is greater possibility of committing errors and
mistakes.

26
SINGLE ENTRY SYSTEM OF ACCOUNTING:

A single entry system records each accounting transaction with a single entry to the
accounting records, rather than the vastly more widespread double entry system. The single
entry system is centred on the results of a business that are reported in the income statement.
The core information tracked in a single entry system is cash disbursements and cash
receipts. Asset and liability records are usually not tracked in a single entry system; these
items must be tracked separately. The primary form of record keeping in a single entry
system is the cash book, which is essentially an expanded form of a check register, with
columns in which to record the particular sources and uses of cash, and room at the top and
bottom of each page in which to show beginning and ending balances.

The most significant problems associated with a single entry system include:

 Assets. Assets are not tracked, so it is easier for them to be lost or stolen.
 Audited financial statements. It is impossible to obtain an audit opinion on the
financial results of a business using a single entry system; the information must be
converted to a double entry format for an audit to even be a possibility.
 Errors. It is much easier to make clerical errors in a single entry system, as opposed to
the double entry system, where separate entries to different accounts must match.
 Liabilities. Liabilities are not tracked, so you need a separate system for determining
when they are due for payment, and in what amounts.
 Reporting. There is much less information available upon which to construct the
financial position of a business, so management may not be fully aware of the
performance of the business.

Single entry systems are strictly use for manual accounting systems, since all computerized
systems utilize the double entry system instead.

It is generally possible for a trained accountant to reconstruct a double entry-based set of

accounts from single entry accounting records, though the time required may be substantial.
By doing so, you can then reconstruct the balance sheet and statement of cash flows.

27
CASH SYSTEM OF ACCOUNTING AND ACCRUAL SYSTEM OF
ACCOUNTING:

CASH ACCOUNTING:

Cash accounting is an accounting method where receipts are recorded during the period they
are received, and expenses are recorded in the period in which they are actually paid. Cash
accounting is one of the two forms of accounting. The other is accrual accounting, where
revenue and expenses are recorded when they are incurred. Small businesses often use cash
accounting because it is simpler and more straightforward, and it provides a clear picture of
how much money the business actually has on hand. Corporations, however, are required to
use accrual accounting under generally accepted accounting principles.

Also called cash-basis accounting.

BREAKING DOWN 'Cash Accounting'

Under a cash accounting system, if Company A receives $10,000 for the sale of 10 computers
from Company B on Nov. 2, the accountant records the sale as having occurred on Nov. 2.
The fact that Company B placed the order for the computers on Oct. 5 is irrelevant, because it
did not pay for them until they were delivered on Nov. 2. Under accrual accounting, by
contrast, the accountant would have recorded Company A as having received the $10,000 on
Oct. 5, even though no cash had changed hands yet.

Likewise, under cash accounting, companies record expenses when they actually pay them,
not when they incur them. If Company C hires Company D for pest control on Jan. 15 but
doesn't pay the invoice until Feb. 15, the expense would not be recognized until Feb. 15
under cash accounting. Under accrual accounting, however, the expense would be recorded in
the books on Jan. 15.

A drawback of cash accounting is that it may not provide an accurate picture of liabilities that
have been incurred but not yet paid for, so the business might appear to be better off than it
really is. At the same time, cash accounting means that a business that has just completed a

28
large job for which it is awaiting payment may appear to be less successful than it really is,
because it has expended the materials and labour for the job but not yet reaped the rewards.

ACCRUAL SYSTEM OF ACCOUNTING:

With the accrual method, income and expenses are recorded as they occur, regardless of
whether or not cash has actually changed hands. An excellent example is a sale on credit. The
sale is entered into the books when the invoice is generated rather than when the cash is
collected. Likewise, an expense occurs when materials are ordered or when a workday has
been logged in by an employee, not when the check is actually written. The downside of this
method is that you pay income taxes on revenue before you've actually received it. The
accrual method records income items when they are earned and records deductions when
expenses are incurred.[6]

6
Treas. Reg., 26 C.F.R. § 1.446-1(c)(1)(ii)

29
TYPES OF ACCOUNTS:

All the accounting heads used in an organisational accounting system are divided into three
kinds/types. Every account head should be capable of being classified under one of the three
kinds/types.

PERSONAL ACCOUNTS:
The elements or accounts which represent persons and organisations.

 Mrs. Vimla a/c - representing Mrs. Vimla a person.

 M/s Bharat & Co a/c - representing M/s Bharat & Co, an organisation.
 Capital a/c - representing the owner of the business, a person or organisation.
 Bank a/c - representing Bank, an organisation.

REAL ACCOUNTS:

The elements or accounts which represent tangible aspects.

 Cash a/c - representing cash which is tangible.

 Goods/Stock a/c - representing Stock which is tangible.
 Furniture a/c - representing Furniture which is tangible.

Tangible

 Perceptible by the senses especially the sense of touch

 having physical substance and intrinsic monetary value
 palpable
 real
 touchable

In the initial stages of learning accounting, we assume real accounts to be those representing
tangible elements. This is because all the elements that we deal with at this stage have that
characteristic.

There is no hard and fast rule that all assets should be tangible.

30
Eg : Goodwill of an organisation is an intangible asset.

There are many other ways the terms Real accounts and the term asset can be interpreted and
understood. For now, please, stick to the simple understanding that assets are tangible aspects
and are thus identified as real accounts.

NOMINAL ACCOUNTS:

The elements or accounts which represent expenses, losses, incomes, gains.

 Salaries a/c - representing expenditure on account of salaries, an expense.

 Interest received a/c - representing income on account of interest, an income.
 Loss on sale of Asset a/c - representing the loss incurred on sale of assets, a loss.

We do not come across such accounts till a later stage of our learning. For now,
please, assume that such accounts exist.

 Profit on sale of Asset a/c - representing the profit made on sale of assets, a gain.

We do not come across such accounts till a later stage of our learning. For now,
please, assume that such accounts exist.

Every Account head belongs to one of the three types

Any element or account head used in an organisational accounting system would belong to
one of these types. It should be either a personal account or real account or a nominal
account. No element can fall under two types.

We use this property to identify the nature of an account sometimes. Where an account
cannot be classified under two types, it should be the third type.

 Nominal accounts are accounts other than Personal and Real accounts
 Real accounts are accounts other than Personal and Nominal accounts
 Personal accounts are accounts other than Real and Nominal accounts

31
BOOK OF ORIGINAL ENTRY:

The flow of accounting information from the time a transaction takes place to its recording in
the ledger may be illustrated as follows:

Business Transaction

Business Document Prepared

Entry Recorded in Journal

Entry Posted to Ledger

The initial record of each transaction is evidenced by a business document such as invoice,
cash, voucher etc. Transactions are first recorded in journal and there after posted to two or
three concerned accounts in the ledger.

The word journal has been derived from the French word "Jour" Jour means day. So, journal
means daily. Transactions are recorded daily in journal and hence it has named so. As soon as
a transaction takes place its debit and credit aspects are analyzed and first of all recorded
chronologically (in the order of their occurrence) in a book together with its short description.
This book is known as journal. Thus we see that the most important function of journal is to
show the relationship between the two accounts connected with a transaction. This facilitates
writing of ledger. Since transactions are first of all recorded in journal, so it is called book of
original entry or prime entry or primary entry or preliminary entry, or first entry.

LEDGER:

The book in which accounts are maintained is called ledger. Generally, one account is
opened on each page of this book, but if transactions relating to a particular account are
numerous, it may extend to more than one page. All transactions relating to that account are
recorded chronologically. From journal each transaction is posted to at least two concerned

32
accounts - debit side of one account and credit side of another account. Remember that, if
there are two accounts involved in a journal entry, it will be posted to two accounts in the
ledger and if the journal entry consists of three accounts (compound entry) it will be posted to
three different accounts in the ledger. The process of transferring information from journal to
ledger accounts is known as posting. The goal of all transactions is ledger. Ledger is known
as the destination of entries in journal but it must be remembered that transactions cannot be
recorded directly in the ledger - they must be routed through journal. This concept is
illustrated below:

Transaction

Journal

Ledger

So, the books in which all the transactions of a business concern are finally recorded in the
concerned accounts in a summarized form is called ledger.

Characteristics of Ledger Account:

The ledger has the following main characteristics:

1. It has two identical sides - left hand side (debit side) and right hand side (credit side).
2. Debit aspect of all the transactions are recorded on the debit side and credit aspects of
all the transactions are recorded on credit side according to date.
3. The difference of the totals of the two sides represents balance. The excess of debit
side over credit side indicates debit balance, while excess of credit side over debit side
indicates the credit balance. If the two sides are equal, there will be no balance.
4. Generally the balance is drawn at the year end and recorded on the lesser side to make
the two sides equal. This balance is known as closing balance.
5. The closing balance of the current year becomes the opening balance of the next year.

33
CONCEPT OF TRIAL BALANCE:

Trial Balance is a list of closing balances of ledger accounts on a certain date and is the first
step towards the preparation of financial statements. It is usually prepared at the end of an
accounting period to assist in the drafting of financial statements. Ledger balances are
segregated into debit balances and credit balances. Asset and expense accounts appear on the
debit side of the trial balance whereas liabilities, capital and income accounts appear on the
credit side. If all accounting entries are recorded correctly and all the ledger balances are
accurately extracted, the total of all debit balances appearing in the trial balance must equal to
the sum of all credit balances.

Purpose of a Trial Balance

 Trial Balance acts as the first step in the preparation of financial statements. It is a
working paper that accountants use as a basis while preparing financial statements.
 Trial balance ensures that for every debit entry recorded, a corresponding credit entry
has been recorded in the books in accordance with the double entry concept of
accounting. If the totals of the trial balance do not agree, the differences may be
investigated and resolved before financial statements are prepared. Rectifying basic
accounting errors can be a much lengthy task after the financial statements have been
prepared because of the changes that would be required to correct the financial
statements.
 Trial balance ensures that the account balances are accurately extracted from
accounting ledgers.
 Trail balance assists in the identification and rectification of errors.

Example

Following is an example of what a simple Trial Balance looks like:

ABC LTD
Trial Balance as at 31 December 2011
Debit Credit
Account Title
$ $

34
Share Capital 15,000
Furniture & Fixture 5,000
Building 10,000
Creditor 5,000
Debtors 3,000
Cash 2,000
Sales 10,000
Cost of sales 8,000
General and Administration Expense 2,000

Total 30,000 30,000

CONCEPT OF PROFIT AND LOSS ACOUNT:

The account through which annual net profit or loss of a business is ascertained, is called
profit and loss account. Gross profit or loss of a business is ascertained through trading
account and net profit is determined by deducting all indirect expenses (business operating
expenses) from the gross profit through profit and loss account. Thus profit and loss account
starts with the result provided by trading account.

The particulars required for the preparation of profit and loss account are available from the
trial balance. Only indirect expenses and indirect revenues are considered in it. This account
starts from the result of trading account (gross profit or gross loss). Gross profit is shown on
the credit side of the profit and loss account and gross loss is shown on the debit side of this
account. All indirect expenses are transferred on the debit side of this account and all indirect
revenues on credit side. If the total of the credit side exceeds the debit side, the result is "net
profit" and if the total of the debit side exceeds the total of the credit side, the result is net
loss. As the net profit or net loss of a certain accounting period is determined through profit
and loss account, so its heading is:

Name of Business
Profit and Loss Account for the year ended 31.12.2005
(if accounting period ends on 31.12.2005)
35
The following is a specimen of profit and loss account

Name of Business
Profit and Loss Account for the year ended .....

$ $

Trading A/C Trading A/C

Gross profit (transferred) ----- Gross profit (transferred) -----

Office and Administration

----- Interest received -----
Expenses:

Salaries ----- Rent received -----

Rent, rates, taxes ----- Discount received -----

Postage & telegrams ----- Dividend received -----

Office electric charges ----- Bad debts recovered -----

Provision for discount on

Telephone charges ----- -----
creditors

Printing and stationary ----- Miscellaneous revenue -----

Selling and Distribution Net loss - transferred to capital

-----
Expenses: A/C

Carriage outward -----

Advertisement -----

Salesmen's salaries -----

Commission -----

Insurance -----

Traveling expenses -----

Bad debts -----

36
Packing expenses -----

Financial and Other Expenses:

Depreciation -----

Repair -----

Audit fee -----

Interest paid -----

Commission paid -----

Bank charges -----

Legal charges -----

Net profit - transferred to capital

-----
A/C

37
CONCEPT OF BALANCE SHEET:

A balance sheet is a financial statement that summarizes a company's assets, liabilities and
shareholders' equity at a specific point in time. These three balance sheet segments give
investors an idea as to what the company owns and owes, as well as the amount invested by
shareholders.

The balance sheet adheres to the following formula:

Assets = Liabilities + Shareholders' Equity

BREAKING DOWN 'Balance Sheet'

The balance sheet gets its name from the fact that the two sides of the equation above – assets
on the one side and liabilities plus shareholders' equity on the other – must balance out. This
is intuitive: a company has to pay for all the things it owns (assets) by either borrowing
money (taking on liabilities) or taking it from investors (issuing shareholders' equity).

For example, if a company takes out a five-year, $4,000 loan from a bank, its assets –
specifically the cash account – will increase by $4,000; its liabilities – specifically the long-
term debt account – will also increase by $4,000, balancing the two sides of the equation. If
the company takes $8,000 from investors, its assets will increase by that amount, as will its
shareholders' equity. All revenues the company generates in excess of its liabilities will go
into the shareholders' equity account, representing the net assets held by the owners. These
revenues will be balanced on the assets side, appearing as cash, investments, inventory, or
some other asset.

Assets, liabilities and shareholders' equity are each comprised of several smaller accounts that
break down the specifics of a company's finances. These accounts vary widely by industry,
and the same terms can have different implications depending on the nature of the business.
Broadly, however, there are a few common components investors are likely to come across.

38
USERS OF FINANCIAL STATEMENTS:

There are many users of the financial statements produced by an organization. The following
list identifies the more common users of financial statements, and the reasons why they need
this information:

 Company management. The management team needs to understand the profitability,

liquidity, and cash flows of the organization every month, so that it can make
operational and financing decisions about the business.
 Competitors. Entities competing against a business will attempt to gain access to its
financial statements, in order to evaluate its financial condition. The knowledge they
gain could alter their competitive strategies.
 Customers. When a customer is considering which supplier to select for a major
contract, it wants to review their financial statements first, in order to judge the
financial ability of a supplier to remain in business long enough to provide the goods
or services mandated in the contract.
 Employees. A company may elect to provide its financial statements to employees,
along with a detailed explanation of what the documents contain. This can be used to
increase the level of employee involvement in and understanding of the business.
 Governments. A government in whose jurisdiction a company is located will request
financial statements in order to determine whether the business paid the appropriate
amount of taxes.
 Investment analysts. Outside analysts want to see financial statements in order to
decide whether they should recommend the company's securities to their clients.
 Investors. Investors will likely require financial statements to be provided, since they
are the owners of the business, and want to understand the performance of their
investment.
 Lenders. An entity loaning money to an organization will require financial statements
in order to estimate the ability of the borrower to pay back all loaned funds and
related interest charges.
 Rating agencies. A rating agency will need to review the financial statements in order
to give a credit rating to the company as a whole or to its securities.
 Suppliers. Suppliers will require financial statements in order to decide whether it is
safe to extend credit to a company.

39
 Unions. A union needs the financial statements in order to evaluate the ability of a
business to pay compensation and benefits to the union members that it represents.

40
LIMITATIONS OF FINANCIAL STATEMENTS:

Dependence on historical costs. Transactions are initially recorded at their cost. This is a
concern when reviewing the balance sheet, where the values of assets and liabilities may
change over time. Some items, such as marketable securities, are altered to match changes in
their market values, but other items, such as fixed assets, do not change. Thus, the balance
sheet could be misleading if a large part of the amount presented is based on historical costs.
Inflationary effects. If the inflation rate is relatively high, the amounts associated with
assets and liabilities in the balance sheet will appear inordinately low, since they are not
being adjusted for inflation. This mostly applies to long-term assets.
Intangible assets not recorded. Many intangible assets are not recorded as assets. Instead,
any expenditures made to create an intangible asset are immediately charged to expense. This
policy can drastically underestimate the value of a business, especially one that has spent a
large amount to build up a brand image or to develop new products. It is a particular problem
for startup companies that have created intellectual property, but which have so far generated
minimal sales.
Based on specific time period. A user of financial statements can gain an incorrect view of
the financial results or cash flows of a business by only looking at one reporting period. Any
one period may vary from the normal operating results of a business, perhaps due to a sudden
spike in sales or seasonality effects. It is better to view a large number of consecutive
financial statements to gain a better view of ongoing results.
Not always comparable across companies. If a user wants to compare the results of
different companies, their financial statements are not always comparable, because the
entities use different accounting practices. These issues can be located by examining the
disclosures that accompany the financial statements.

Subject to fraud. The management team of a company may deliberately skew the results
presented. This situation can arise when there is undue pressure to report excellent results,
such as when a bonus plan calls for payouts only if the reported sales level increases.

41
ABOUT THE COMPANY

Indian Bank is an Indian state-owned financial services company headquartered in Chennai, India. It
has 22,000 employees, 1923 branches and is one of the big public sector banks of India. It has
overseas branches in Colombo, Sri Lanka, Singapore, and 229 correspondent banks in 69 countries.
Since 1969 the Government of India has owned the bank, which celebrated its centenary in 2007. It is
the only Indian Bank other than State Bank of India to feature in the List of Fortune 500 Companies in
the World.

A premier bank owned by the Government of India

 Established on 15th August 1907 as part of the Swadeshi movement

 Serving the nation with a team of over 18782 dedicated staff
 Total Business crossed Rs.2,11,988 Crores as on 31.03.2012
 Operating Profit increased to Rs. 3,463.17 Crores as on 31.03.2012
 Net Profit increased to Rs.1746.97 Crores as on 31.03.2012
 Core Banking Solution(CBS) in all 1956 branches

International Presence

 Overseas branches in Singapore , Colombo including a Foreign Currency Banking Unit at

Colombo and Jaffna.
 240 Overseas Correspondent banks in 70 countries

Diversified banking activities - 3 Subsidiary companies

 Indbank Merchant Banking Services Ltd

 IndBank Housing Ltd.
 IndFund Management Ltd

A front runner in specialised banking

 97 Forex Authorised branches inclusive of 1 Specialised Overseas Branch at Chennai

exclusively for handling forex transactions arising out of Export, Import, Remittances and
Non Resident Indian business

42
 PROFILE

INDIAN BANK

Type Public Company

Traded As BSE:523465

NSE:INDIANB

Industry Banking and Financial services

Founded 1907

Headquarters Chennai, Tamil Nadu, India

Key people T.M.Bhasin(Chairman & MD)

Revenue IncreaseINR211,988 crore(US$42.29 billion) (2011)

Net income IncreaseINR12,745 crore(US$2.54 billion) (2011)

Total assets IncreaseINR121,841 crore(US$223.81 billion) (2011)

Employees 19,632

Website www.indianbank.in

Tagline/Slogan Your tech friendly bank

USP High end banking technology support

Target group International banking

Positioning Complete banking solutions

Leadership in Rural Development

 Pioneer in introducing Self Help Groups and Financial Inclusion Project in the country

43
  Award winner for Excellence in Agricultural Lending from Honourable Union Minister for
Finance
 Best Performer Award for Micro-Finance activities in Tamil Nadu and Union Territory of
Puducherry from NABARD
 Established 7 specialized exclusive Microfinance branches called "Microsate" across the
country to cater the needs of Urban poor through SHG (Self Help Group)/JLG (Joint Liability
Group) concepts
 A special window for Micro finance viz., Micro Credit Kendras are functioning in 44
Rural/Semi Urban branches
 Harnessing ICT (Information and Communication Technology) for Rural Development and
Inclusive Banking
 Provision of technical assistance and project reports in Agriculture to entrepreneurs through
Agricultural Consultancy & Technical Services (ACTS)

A pioneer in introducing the latest technology in Banking

 100% Core Banking Solution(CBS) Branches

 100% Business Computerisation
 1280 Automated Teller Machines(ATM)
 24 x 7 Service through 89000 ATMs under shared network
 Internet and Tele Banking services to all Core Banking customers
 e-payment facility for Corporate customers
 Cash Management Services • Depository Services
 Reuter Screen, Telerate, Reuter Monitors, Dealing System provided at Overseas Branch,
Chennai.

History:

Early Formation and Expansion:

 In the last quarter of 1906, Madras (now Chennai) was hit by the worst financial crisis
the city was ever to suffer Of the three best-known British commercial names in 19th

44
 century Madras, one crashed; a second had to be resurrected by a distress sale; and the
third had to be bailed out by a benevolent benefactor.
 Arbuthnot & Co, which failed, was considered the soundest of the three. Parry's (now
EID Parry), may have been the earliest of them and Binny & Co.'s founders may have
had the oldest associations with Madras, but it was Arbuthnot, established in 1810,
that was the city's strongest commercial organization in the 19th Century.
 A key figure in the bankruptcy case for Arbuthnot's was the Madras lawyer, V.
Krishnaswamy Iyer; he went on to organize a group of Chettiars that founded Indian
Bank. Annamalai and Ramaswami Chettiar founded Indian Bank (IB)on 15 August
1907.
 IB began its international expansion in 1932 when it opened a branch in Colombo. A
branch in Jaffna followed three years later, but this was not successful and Indian
Bank closed it in 1939. Just before World War II reached the region, Indian Bank
opened a branch in 1940, in Rangoon (Yangon).
 The next year it closed the Rangoon branch, but opened branches in Singapore (where
future branch manager KB Pisharody(1915–1998) started his career in the same year),
and in Kuala Lumpur, Ipoh, and Penang.
 The rapid advance of the Japanese Army forced IB to close all its branches in Malaya
and Singapore. Although the Japanese forces did not reach Ceylon, IB closed the
Colombo branch in 1942.

Post-Independence of India:

 After the war, IB reopened its Malayan and Singapore branches. Then in 1948 it
reopened its branch in Colombo.
 The 1960s saw IB expand domestically as it acquired Mannargudi Bank (est. 1932)
and Salem Bank (est. 1925). Then on 19 July 1969 the Government of India
nationalized 14 top banks, including Indian Bank.
 In 1973 Indian Bank, Indian Overseas Bank, and United Commercial Bank
established United Asian Bank Berhad in response to a new banking law in Malaysia
that prohibited foreign government banks from operating in the country.
 International expansion continued in 1978 with IB becoming a technical adviser to PT
Bank Rama in Indonesia, the result of the merger of PT Bank Masyarakat and PT
Bank Ramayana.

45
  Two years later, IB, Bank of Baroda, and Union Bank of India established IUB
International Finance, a licensed deposit taker in Hong Kong. Each of the three banks
took an equal share in the joint venture.
 In 1987, Indian Babk bought in two more acquisitions when it rescued Bank of
Tanjore, based in Tamil Nadu.
 A multi-crore scam was exposed in 1992, where then chairman M. Gopalakrishnan
lent loan to small corporates and exporters from the south amounting to 1,300 crore.
The amount was never paid back by the borrowers.
 Bank of Baroda bought out its partners in IUB International Fininance in Hong Kong
in 1998. Apparently this was a response to regulatory changes following Hong
Kong’s reversion. IUB became Bank of Baroda (Hong Kong), a restricted license
bank.

Products and Services:

 Featured Products/ services/ schemes

 NRI- Foreign Exchange
 IB Swarna mudra schemes
 ASBA (for IPO’s)
 Wealth Management services
 Supreme Current Account
 Educational loans
 Centralized Pension Processing
 Interest Subsidy for educational loans
 Financial inclusion plan
 All premium services
 Insurance services
 CMS plus
 E payment of direct taxes
 E payment of indirect taxes
 Other valuable services
 Loans for agriculture
 Loans for Small And Medium Enterprises

46
  Personal loans
 Special Schemes for Self Help Groups.

These are some of the products and services rendered by Indian Bank. It also offers four
types of accounts and selling gold to the public.

47
 FINANCIAL STATEMENTS OF INDIAN BANK FOR THE YEAR

2012-13, 2013-14, 2014-15

Comparative Balance Sheet of Indian Bank for the years from 2012-2013, 2013-2014
and 2014-2015

PARTICULARS 2012-2013 2013-2014 2014-2015

Absolute % of Absolute % of Absolute % of

change change change change change change

Capital and
liabilities:

Capital

Reserves and surplus 1925.14 43.9 1136.19 18.02 1248.99 16.78

Deposits 11535.88 18.90 15645.83 21.56 17576.52 19.92

Borrowings (752.46) (58.64) 426.58 80.37 1143.01 119.39

Other Liabilities and 905.5 30.51 58.97 1.52 360.46 9.17

Provisions

Total 13614.06 19.31 17267.57 20.53 20328.98 20.05

Assets:

Cash and balances with (221.36) (3.44) 849.14 13.67 (182.78) (2.59)
RBI

Balances with banks, 132.36 38.94 580.24 122.87 631.89 60.04

Money at call

48
Investments 885.5 4.04 5467.76 23.98 6515.43 23.05

Advances 11626.57 29.18 10680.85 20.75 13103.78 21.09

Fixed Assets 1055.8 197.77 (32.1) (2.02) (6.82) (0.44)

Capital WIP (0.85) (15.68) 17.44 381.62 33.3 151.29

Other Assets 136.04 9.44 (295.75) (17.74) 234.19 18.27

Total 13614.06 19.31 17267.57 20.53 20328.98 20.05

49
 Comparative Income Statement of Indian Bank from

2012-2013 to 2014-2015

PARTICULARS 2012-2013 2013-2014 2014-2015

Absolute % of Absolute % of Absolute % of

change change change change change change

Income:

Interest Earned 1679.55 32.61 1026.73 15.03 1503.97 19.14

Other Income (32.45) (3.04) 138.28 13.35 8.17 0.70

Operating Income 1647.1 26.49 1165.01 14.81 1512.14 16.74

Expenditure:

Interest Expended 1062.74 33.64 331.36 7.85 771.74 16.95

Operating Expenses (321.08) (18.35) 693.56 48.54 517.61 24.39

Total Expenses 741.66 15.11 1024.92 18.14 1289.35 19.32

Operating Profit 905.44 69.13 140.09 6.32 222.79 9.46

Provisions & 668.87 222.23 (169.59) (17.49) 63.7 7.96

Contingencies

Net profit for the 236.58 23.45 309.67 24.87 159.08 10.23
year

Extra ordinary items

Profit brought 3.57 4.42 1.83 2.17 1.82 2.11

forward

Total P & L A/c 240.15 22.04 311.5 23.43 160.9 9.81

50
3.3 TREND ANALYSIS:
Trend percentage is very useful in making comparative study of the financial
statements for a number of years. These indicate the direction of movement over a long tine
and help an analyst of financial statements to form an opinion as to whether favourable or
unfavourable tendencies have developed. This helps in future forecasts of various items. For
calculating trend percentages any year may be taken as the ‘base year’. Each item of base
year is assumed to be equal to 100 and on that basis the percentage of item of each year
calculated.

Trend Percentage of Indian Bank Balance Sheet from 2012-2013 to 2014-

2015

Trend Percentage (Base year 2012)

PARTICULARS 2012 2013 2014 2015

Capital and liabilities:

Capital 100 100 100 100

Reserves and surplus 100 144 170 198

Deposits 100 119 145 173

Borrowings 100 41 75 164

Other Liabilities and Provisions 100 131 133 145

Total 100 119 144 173

Assets:

Cash and balances with RBI 100 97 110 107

Balances with banks, Money at call 100 139 310 496

Investments 100 104 129 159

Advances 100 129 156 189

Fixed Assets 100 298 292 291

51
Capital WIP 100 84 406 1020

Other Assets 100 109 89 105

Total 100 119 144 173

Interpretation:

 Borrowings decreases in 2013 and thereafter increases at increasing rate.

 Advances and Investments are also increased, in the last four years.
 Fixed assets increase as well as decreases in the last four years. This is due to change
in depreciation rates and revaluation of assets.

52
 Trend Percentage of Indian Bank Income Statement from 2012-2013to
2014-2015

Trend Percentage (Base year 2012)

PARTICULARS 2012 2013 2014 2015

Income:

Interest Earned 100 133 153 182

Other Income 100 97 110 111

Operating Income 100 127 145 170

Expenditure:

Interest Expended 100 134 144 169

Operating Expenses 100 82 121 151

Total Expenses 100 115 136 162

Operating Profit 100 169 180 197

Provisions & Contingencies 100 322 266 287

Net profit for the year 100 124 154 170

Extra ordinary items

Profit brought forward 100 104 107 109

Total P & L A/c 100 122 151 165

Interpretation:

 Interest income as well as other income increases in the last four years.
 Operating expenses increased from the year 2014-15.

53
3.4 CASH-FLOW STATEMENT:

A cash–flow statement is a statement showing inflows (receipts) and

outflows (payments) of cash during a particular period. In other words, it is a summary of
sources and applications of each during a particular span of time. The cash flow statement
includes only inflows and outflows of cash and cash equivalents; it excludes transactions that
do not directly affect cash receipts and payments. These non-cash transactions include
depreciation or write-offs on bad debts or credit losses to name a few. The cash flow
statement is a cash basis report on three types of financial activities: operating activities,
investing activities, and financing activities. Non-cash activities are usually reported in
footnotes.

The cash flow statement is intended to

 provide information on a firm's liquidity and solvency and its ability to change cash
flows in future circumstances
 provide additional information for evaluating changes in assets, liabilities and equity
 improve the comparability of different firms' operating performance by eliminating
the effects of different accounting methods
 Indicate the amount, timing and probability of future cash flow.

54
CASH FLOW STATEMENT OF INDIAN BANK:

(Rs. In Crores)

PARTICULARS 2012 2013 2014 2015

Net Profit Before Tax 1008.74 1245.32 1554.99 1714.07

Net Cash (used in) From Operating Activities 2238.64 382.66 1700.03 (193.09)

Net Cash (used in)/from (95.28) (99.06) (101.95) (127.55)

Investing Activities

Net Cash (used in)/from Financing Activities (188.28) (372.61) (168.70) 769.75

Net (decrease)/increase In Cash and Cash Equivalents 1955.07 (89) 1429.38 449.11

Opening Cash & Cash Equivalents 4817.75 6772.82 6683.82 8113.20

Closing Cash & Cash Equivalents 6772.82 6683.82 8113.20 8562.31

Interpretation:

 It is revealed that the cash flow from operating activities is in negative in and 2015.
 This is due to increase in Interest Expenses.
 The cash flows of the bank are in a good condition. In 2015 the cash flow from
financing activities increased at high level. It is a good sign.

55
RATIO ANALYSIS:
Ratio analysis is such a significant technique for financial analysis. It indicates
relation of two mathematical expressions and the relationship between two or more things.
Financial ratio is a ratio of selected values on an enterprise's financial statement. There are
many standard ratios used to evaluate the overall financial condition of a corporation or other
organization. Financial ratios are used by managers within a firm, by current and potential
stockholders of a firm, and by a firm‘s creditor. Financial analysts use financial ratios to
compare the strengths and weaknesses in various companies. Values used in calculating
financial ratios are taken from balance sheet; income statement and the cash flow of
company, besides Ratios are always expressed as a decimal value, such as 0.10, or the
equivalent percent value, such as 10%.

Essence of ratio analysis:

Financial ratio analysis helps us to understand how profitable a business is, if it has
enough money to pay debts and we can even tell whether its shareholders could be happy or
not.
Financial ratios allow for comparisons:
1. between companies
2. between industries
3. between different time periods for one company
4. between a single company and its industry average.

Ratio analysis tells us whether the business

1. is profitable?
2. Has enough money to pay its bills and debts?
3. Could be paying its employees higher wages, remuneration or so on?
4. is able to pay its taxes?
5. Is using its assets efficiently or not?
6. has a gearing problem or everything is fine?
7. Is a candidate for being bought by another company or investor?

56
Methodology:
The present study of Banks is based on CAMEL Methodology, which evaluates each and
every component that is of prime importance from the functioning of the Bank's perspective.
The model examines the efficiency of banks among these important parameters like Capital
Adequacy, Asset Quality, Management, Earnings Quality and Liquidity of the Indian Bank.

CAMEL Model:

The CAMEL approach was developed by bank regulators in the United States as a
means of measurement of the financial condition of a financial institution. (Uniform
Financial Institutions Rating System established by the Federal Financial Institutions
Examination Council). RBI too analysis the banks performance through CAMEL
methodology.

The acronym CAMEL stands for:

 Capital Adequacy
 Asset Quality
 Management
 Earnings (Profitability)
 Liquidity & Funding

CAMEL analysis requires:

 financial statements (the last three years and interim statements for the most recent 12-month
period)
 cash flow projections
 portfolio aging schedules
 funding sources
 information about the board of directors
 operations/staffing
 Macroeconomic information.

57
 Analysis:

I)Capital Adequacy

Capital adequacy reflects the overall financial position of a bank and also the ability of the
management to meet the need for additional capital requirement.

Capital Adequacy Ratio (CAR)

CAR reflects the ability of a bank to deal with probable loan defaults. The RBI
guidelines stipulate banks to maintain a CAR of minimum 9%. It is arrived at by dividing the
Tier I and Tier II capital by risk-weighted assets. Tier I capital includes equity capital and
free reserves. Tier II capital comprises subordinated debt. The stronger will be the bank if
the CAR is higher.

Formula:

CAR=Tier 1 Capital +Tier 2 Capital/ Risk Weighted Assets

TIER 1 CAPITAL -A) Equity Capital, B) Disclosed Reserves

TIER 2 CAPITAL -A) Undisclosed Reserves, B) General Loss reserves, C) Subordinate

Term Debts

Where Risk can either be weighted assets (a) or the respective national regulator's minimum
total capital requirement.

Debt-Equity Ratio (D/E)

Debt-Equity Ratio is arrived at by dividing the total borrowings and deposits by

shareholders' net worth, which includes equity capital and reserves and surpluses. The Debt
to Equity ratio is used for measuring solvency, and researching the capital structure of the
company. It indicates how much the company is leveraged (in debt) by comparing what is
owed to what is owned.

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Formula:

Debt-Equity Ratio=Debt/Equity

In other words it measures the company's ability to borrow and repay money. The
debt to equity ratio is closely watched by creditors and investors, because it reveals the
extent to which company management is willing to fund its operations with debt, rather than
equity.

C) Advances to Assets (ADV/AST)

This is the ratio of the Total Advances to Total Assets. Total Advances also
include receivables. The value of Total Assets excludes the revaluations of all the assets.

Formula:

Advances To Assets=Total Advances/Total Assets*100

Interpretation:

TABLE FOR CAPITAL ADEQUACY RATIOS

Ratio 2012 2013 2014 2015

Capital Adequacy Ratio (%) 12.90 13.98 12.71 13.56

Debt/Equity Ratio 13.37 13.32 13.06 13.40

Advances To Assets (%) 56.50 61.18 61.30 61.82

Capital Adequacy Ratio (CAR):

It is revealed that the, CAR is increased from 12.90% in 2012 to 13.98% in

2013 which seems to be good. But in 2014 it falls to 12.71%. Again in 2015 it increased to
13.56%. The minimum CAR which banks have to maintain is 9% as per RBI's Guidelines.

59
The bank has maintained CAR above 9%. So, it has better ability to deal with probable loan
defaults.

Debt-Equity Ratio:

The Debt equity ratio is 13.40 in 2015. The Debt equity ratio should be as low
as possible. The borrowings of the bank are more than their deposits are concerned which is
not a good sign. So, I interpret from the ratio that the bank needs to improve in terms of
debt equity ratio because of high borrowings and low deposits.

Advances to Asset Ratio:

An advance to Assets ratio is reflects a bank's positions and risk taking ability in
lending funds. A higher Advances/Asset ratio shows that the bank is aggressively lending
fund and vice versa. In the table above, the advances to asset ratio has increased from
61.30% in 2014 to 61.82% in 2015. It is clear that the bank has good risk taking ability.

60
II) Asset Quality

The asset quality is to ascertain the proportion of non-performing assets as a

percentage of the total assets .It also ascertains the NON PERFORMING ASSET
movement and the amount locked up in investments as a percentage of the total assets.

How to calculate non-performing assets:

Gross non performing asset - (Balance in Interest Suspense account +

DICGC/ECGC claims received and held pending adjustment + Part payment
received and kept in suspense account + Total provisions held).

A) Net Non Performing Assets to Total Assets (NNPAs/TA)

It is a measure of the quality of assets in a situation where the management has not
provided for loss on non performing assets.

Formula:

Net non performing asset to Total Assets=Net non performing asset/total assets*100

B) Net Non Performing Assets To Net Advances (NNPA/NA)

Net non performing assets are Gross non-performing assets net of provisions on non
performing assets and suspense account.

Formula:

Net non performing asset to Net Advances=Net non performing asset/Net

Advances*100

C) Percentage change in Net Non Performing Assets

This measure gives the movement in Net non performing assets in relation to Net
non performing assets in the previous year. The higher the reduction in Net non
performing asset levels, the better it is for the bank.

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Formula:

Percentage Change in non-performing asset=Change in Net non performing asset/Base

year’s Net non performing asset *100

Interpretation:

TABLE FOR ASSET QUALITY RATIOS

Ratio 2012 2013 2014 2015

Net Non Performing Assets to Total 0.14 0.11 0.14 0.33

Assets (%)
Net Non Performing Assets to Net 0.24 0.18 0.23 0.53
Advances (%)
Percentage Change in Net Non (4.44) (3.87) 54.50 173.10
Performing Assets (%)

Asset Quality:

An non performing asset (Non Performing Assets) is an asset, including a

leased asset, becomes non-performing when it ceases to generate income from the bank. The
Net non performing assets to Total Assets ratio indicates us how much Non Performing
Assets the bank has to their Total Assets in balance sheet. It is believed that lower the better
for the banks in the case of Asset Quality Ratios.

Net Non Performing Assets to Total Assets:

The Net non performing asset to total assets has increased from 0.14% in 2012 to
0.33% in 2015 which is not a good indication for the bank.

62
Net Non Performing Assets to Net Advances:

The Net non performing asset to Net Advances is increased from 0.23% in 2014 to 0.53
in 2015 respectively which is not good for the bank.

Percentage Change in Net Non Performing Assets:

The Percentage change in Net non performing assets is increased from 54.50 in 2014 to
173.10 in 2015. It is not good sign for the bank.

63
III) Management Efficiency

Refers to the efficiency of the Management in managing the bank, in all the ratios
higher the better:

A) Total Advances to Total Deposits (TA/TD)

This ratio measures the efficiency of the management in converting the deposits available
with the bank (excluding other funds like equity capital, etc.) into advances.

Formula:

Total Advances to Total Deposits=Total Advances/Total Deposits*100

B) Profit per Employee (PPE)

This measures the efficiency of the employee. It is arrived at by dividing the net
profit of the bank by total number of employees. Higher the ratio means higher the efficiency
of the management.

Formula:

Profit Per Employee=Net Profit/Total number of employees

C) Return on Net Worth (RONW)

It is a measure of the profitability of a bank. The amount of net income

returned as a percentage of shareholders equity. Return on equity measures a corporation's
profitability by revealing how much profit a company generates with the money shareholders
have invested.

ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity*100

Net income is for the full fiscal year (before dividends paid to common stock
holders but after dividends to preferred stock). Shareholder's equity does not include
preferred shares. It is also known as "Return on net worth" (RONW).

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Interpretation:

TABLE FOR MANAGEMENT EFFICIENCY RATIOS

Ratio 2008 2009 2010 2011

Total Advances to Total Deposits (%) 65.26 70.91 70.44 71.12

Profit Per Employee (Rs. In Crores) 4.91 6.23 7.92 8.88

Return on Net worth (%) 24.51 23.35 23.74 21.50

Total Advances to Total Deposits:

I observed that Bank is better able to convert its Advances to Deposits. Because the ratio is
increased from 70.44% to 71.12% in 2014 and 2015 respectively. If it will be increased
more, than it may be risky for bank.

Profit per Employee:

Profit per employee of the bank has increased from 7.92 crores in 2014 to 8.88 crores in
2015. It means the efficiency of the employees is good.

Return on Net Worth:

Return on net worth is reduced from 23.74% to 21.50% in 2014 and 2015 respectively. It
shows there is a reduction in profit.

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IV) Earnings Efficiency:

Much of a bank's income is earned through non-core activities like investments,

treasury operations, and corporate advisory services and so on.

A) Percentage Growth in Net Profit

It is the percentage change in net profit over the previous year.

Formula:

Percentage Growth in Net profit=Change in Net profit/Base year’s Net profit *100

B) Net Interest Margin (NIM)

Net Interest Margin (NIM) is defined as the difference between interest earned and
interest expended as a proportion of average total assets. Interest income includes dividend
income. Interest expended includes interest paid on deposits, loans from RBI, and other
short-term and long-term loans.

Formula:

Net Interest Margin=(Interest earned-Interest expended)/Average of Total assets*100

C) Non-interest Income/Working Funds (NII/WF)

This measures the income from operations other than lending as a percentage of
working funds.

Working funds:

These are total resources (total liabilities or total assets) of a bank as on a

particular date. Total resources include capital, reserves and surplus, deposits, borrowings,
other liabilities and provision. A high AWF (Avg. Working Fund) shows a bank's total
resources strength.

66
There is a school of theory which maintains that working funds are equal to aggregate
deposits plus borrowing. However, more pragmatic view in consonance with capital
adequacy calculations is, to include all resources and not just deposits and borrowings.

Formula:

Non Interest Income/Working funds=Non-interest income/Working funds*100

Interpretation:

TABLE FOR EARNINGS EFFICIENCY RATIOS

Ratio 2012 2013 2014 2015

Percentage Growth in Net profit (%) 32.77 23.45 24.87 10.2

Net Interest Margin (%) 3.45 3.54 3.55 3.75

Non Interest/Working Funds (%) 1.74 1.35 1.26 1.05

Percentage Growth in Net Profit:

The bank's earnings quality reflects its profitability and sustainability of the same.
I conclude that the Earning Efficiency of the Indian Bank is poor. The Percentage growth in
net profit has reduced from 24.87% to 10.2% in 2014 and 2015 respectively.

Net Interest Margin:

Net Interest Margin (NIM) is basically Interest Earned minus Interest Expended on the
proportion of Total Assets. The NIM (%) of the company has increased from 3.55% to
3.75% in 2014 and 2015 respectively. It is clear that the interest earned by these banks is
increased or the interest expended on deposits and borrowings has reduced due to this the

67
NIM (%) has increased.

Non-interest Income/Working Funds:

The non interest income is the income which is earned by the bank other than
lending (core) activity. The Non interest income/working fund (%) ratio measures the
income from operations other than lending as a percentage of working funds. It is observed
that bank’s Non Interest Income/Working Fund (%) is reduced from 1.05% in 2011 to 0.92%
in 2012 This is mainly because Indian Bank is not concentrating on other banking activities
like Merchant Banking, Investment Banking, Private Equity, and Underwriter.

68
 V) Liquidity:

A) Liquid Assets/Demand Deposits (LA/DD)

This account allows you to "demand" your money at any time, unlike a term
deposit, which cannot be accessed for a predetermined period (the loan's term). This ratio
measures the ability of a bank to meet the demand from demand deposits in a particular year.
Higher ratio is better for banks. A demand deposit or bank money refers to the funds held
in demand deposit accounts in commercial banks. These account balances are usually
considered money and form the greater part of the money supply of a country.

Formula:

Liquid Assets to Demand Deposits=Liquid Assets/Demand Deposits*100

B) Liquid Assets/Total Assets (LA/TA)

Liquid Assets include cash in hand, balance with RBI, balance with other banks
(both in India and abroad), and money at call and short notice. The ratio is arrived by
dividing liquid assets by total assets. Higher the ratio better it is.

Formula:

Liquid Assets to Total Assets=Liquid Assets/Total Assets*100

Interpretation:

TABLE FOR LIQUIDITY RATIOS

Ratio 2008 2009 2010 2011

Liquid Assets/Demand Deposits (%) 143.04 126.29 122.47 132.96

Liquid Assets/Total Assets (%) 9.61 7.95 8 7.03

69
Liquidity is the ability of the bank to meet its financial obligations. A high liquidity ratio
indicates a bank's comfort level vis-à-vis its ability to manage its obligations, both short-term
as well as long-term. Liquidity of a bank can be measured using metrics such as Liquid
Assets (LA) to Demand Deposits (DD) and LA to Total Assets (TA).

Liquid Assets/Demand Deposits:

In Demand Deposit basically the customer can withdraw the money without any prior notice
to depository, it is exactly opposite of term deposit where customer has to give proper notice,
and follow the procedure to break the term deposit. It is revealed that the liquid assets to
demand deposits (%) of the bank have increased from 122.47% to 132.96% in 2014 and
2015 respectively. So, I conclude Indian Bank is not able to maintain its liquid assets are to
demand deposits in greater percentage.

Liquid Assets/Total Assets:

The bank has maintained lower liquid assets to total assets in the past four years. It is
observed that the bank’s ratio is decreasing from 8% to 7.03% in 2014 and 2015 respectively.

70
 COMMENT ON AUDIT REPORT

Management’s Responsibility for the Financial Statements

2. Management is responsible for the preparation of these financial statements in accordance

with the provisions of the Banking Regulation Act, 1949, requirements of Reserve Bank of
India and applicable Accounting Standards issued by the Institute of Chartered Accountants
of India (“ICAI”). This responsibility includes the design, implementation and maintenance
of internal control relevant to the preparation of the financial statements that are free from
material misstatement, whether due to fraud or error

Auditor’s Responsibility

3. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the Standards on Auditing issued by the Institute
of Chartered Accountants of India. Those Standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free from material misstatements.

4. An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor's
judgement, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the Bank's preparation and fair presentation of the
financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purposes of expressing an opinion on the effectiveness of the
Bank's internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of the accounting estimates made by management, as
well as evaluating the overall presentation of the financial statements.

5. We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.

Opinion

6. In our opinion, as shown by books of the Bank and to the best of our information and
according to the explanations given to us:

(a) the Balance Sheet, read with the notes thereon is a full and fair Balance Sheet containing
all the necessary particulars, is properly drawn up so as to exhibit a true and fair view of state
of affairs of the Bank

(b) the Profit and Loss Account, read with the notes thereon shows a true balance of profit, in
conformity with accounting principles generally accepted in India, for the year covered by the
account ; and

(c) the Cash Flow Statement gives a true and fair view of the cash flows for the year ended on
that date.

Report on Other Legal and Regulatory Requirements

71
7. The Balance Sheet and the Profit and Loss Account have been drawn up in accordance
with Section 29 of Banking Regulation Act, 1949.

8. Subject to the limitations of the audit indicated in paragraph 1 to 5 above and as required
by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980, and
subject also to the limitations of disclosures required therein, we report that:

a. We have obtained all the information and explanations, which to the best of our knowledge
and belief, were necessary for the purposes of our audit and have found them to be
satisfactory.

b. The transactions of the Bank, which have come to our notice, have been within the powers
of the Bank, and

c. The returns received from the offices and branches of the Bank have been found adequate
for the purposes of our audit.

Comparative Statement:

 There are five types of liabilities in a bank. Among that, the most important liabilities
are Deposits and Borrowings. The growth rate of deposits portfolio is decreasing.
During 2012-13, it has increased by 18.90%, and in 2013-14 it increased by 21.56%.
Here the growth should be compared to overall banking sector. (This is because the
deposits are repaid and increase in new customers are low.)
 The borrowings are increases at increasing rate. In 2012-13 it decreases by 58.64%. It
means the borrowings are repaid.
 The most important and major assets for a bank, are advances and investments. It is
observed that the advances are increased at a marginal level. Investments are
increased significantly.
 The major income and expenses in a bank is interest earned and interest expenses.
Both the interest earnings and interest expenses are fluctuating. But the interest
expenses is increased significantly. This is because of increased in borrowings.

Trend Analysis:

 The deposits are increased marginally. But the borrowings are increased
tremendously.
 Both Advances and investments are increased marginally.

72
  The interest earned are increased marginally. But the interest expenses are increased
at tremendously. So, the net profit increases slowly.

Cash Flow Statement:

 Cash flow statement shows the inflow and outflow of a cash for a particular period. It
is observed that the bank is good at maintaining the flows of cash.

Ratio Analysis:

I)Capital Adequacy Ratios:

 It is observed that, the bank has better ability to deal with proable loan defaults
because the capital adequacy ratio is higher.
 And also the bank’s ability to borrow and repay the money is also good because the
debt equity ratio is low.
 Though the advances to assets ratio has increased in the last five years, it is revealed
that the bank has good risk taking ability.

II)Asset Quality Ratios:

 Generally asset quality ratio should be reduced as compared to the previous years.
But, the bank’s asset quality ratios are increased which is not a good sign.
 From the year 2014 to 2015, the non performing assets are increased which is not
good sign.

III)Management Efficiency Ratios:

 Higher the management efficiency ratios means higher the efficiency of the
management. It is found that the advances to deposits ratio and profit per employee
are increased which is a good sign. It means the employee’s efficiency is good, and
the bank is better able to convert its advances to deposits.

73
  But the return on net worth is reduced from 23.74% to 21.50% in 2014,2015
respectively.

IV)Earnings Efficiency Ratios:

 Overall, the bank’s earnings efficiency is not satisfactory. Because all the earnings
efficiency ratios are reduced in the last five years.

V)Liquidity Ratios:

 These ratios measures the ability of the bank to meet its short term requirements.
Higher the ratio better it is.The bank is able to maintain its liquidity.

74
 CONCLUSION:

 The balance-sheet along with the income statement is an important tool for investors
and many other parties who are interested in it to gain insight into a company and its
operation. The balance sheet is a snapshot at a single point of time of the company’s
accounts- covering its assets, liabilities and shareholder’s equity. The purpose of the
balance-sheet is to give users an idea of the company’s financial position along with
displaying what the company owns and owes. It is important that all investors know
how to use, analyze and read balance-sheet. Profit & Loss account tells the net profit
and net loss of a company and its appropriation.
 The comparative statement of profit & loss account shows the increases and decreases
in the items of profit & loss account and balance sheet during 2012 to 2015.
 Trend analysis of profit & loss account and balance sheet shows the percentage
change in items of profit & loss account and balance sheet i.e. percentage change
during 2012 to 2015. It shows that all items are increased mostly but increase in this
year is less than as compared to increase in previous year except few items. In profit
& loss account, all items like interest income, non-interest income, interest expenses,
operating expenses, operating profit, net profit is increased but in mostly cases it is
less than from previous year but in some items like interest income, interest expenses
percentage increase is more. Some items like tax, depreciation is decreased. Similarly
in balance sheet all items like advances, cash, liabilities, deposits, and borrowings are
increased. Percentage increase in some item is more than previous year and in some
items it is less.
 Thus, the ratio analysis and trend analysis and analysis of cash flow statement and
comparative statement shows that INDIAN Bank’s financial position is fair. Bank’s
profitability is increasing but not at high rate. Bank’s liquidity position is good
because bank invests more in liquid assets than the current assets. The INDIAN Bank
needs to pay attention on commercial activities like promoting more schemes for
industrial customers etc. Bank’s position is stable.

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BIBLIOGRAPHY –

The researcher consulted following things while making the project.

PRIMARY SOURCES:-

1) BOOKS

(a) ACCOUNTING - D.K GOEL, RAJESH GOEL, SHELLY GOEL

(b) ANALYSIS OF FINANCIAL ACCOUNTING – T.S GREWAL
(c) FUNDAMENTALS OF ACCOUNTING – HENRY LUNG

SECONDARY SOURCES:-

2) WEBSITES

1. http://www.foster.washington.edu
2. https://www.accountingtools.com
3. http://cms.sinhgad.edu
4. https://www.accountingcapital.com
5. https://www.en.wikipedia.org
6. http://accounting-simplified.com
7. https://accountlearning.blogspot.in

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