MEASURING PERFORMANCE OF AMRITSAR DISTRICT CENTRAL COOPERATIVE BANK IN TERMS OF CAPITAL ADEQUACY: A PARAMETER OF CAMEL MODEL Dr. Sukhmani Waraich 1, Anu Dhawan 2 1 Assistant Professor, K.C.L.I.M.T., Jalandhar (India) 2 Research Scholar, Punjab Technical University, Jalandhar (India) ABSTRACT Capital is considered as reflection of inner strength of a bank. It is free of cost source of funds. Capital serves as a cushion to absorb unexpected losses and helps in maintaining depositors confidence in the banking system. It is an important parameter of CAMEL Model to evaluate the performance of banks. In the present study, an attempt has been made to analyse the performance of Amritsar District Central Cooperative Bank (DCCB) in terms of capital adequacy. For the purpose of study, secondary data for eight years (2006-2013) has been taken from annual reports of these banks and from Comparative Statistics of State and Central Cooperative Banks of Punjab published by Punjab State Cooperative Bank Ltd, Chandigarh. For analysis of data, mathematical and statistical tools i.e. ratio analysis, mean, compound annual growth rate, time series analysis and t test have been applied. It has been found that Amritsar DCCB had capital adequacy ratio less than the recommended rate of Reserve Bank of India (RBI). The performance of Amritsar DCCB was not upto the mark in terms of capital adequacy. Immediate remedial measures are needed to improve the condition of bank. Keywords: Capital, Capital Adequacy Ratio, Cooperative Banks, Tier I Capital And Risk Weighted Assets. I. INTRODUCTION Bank as a financial intermediary needs resources to operate successfully as an engine of economic growth. In banks, the sources of funds comprise share capital and reserves (owned funds), deposits (time and demand deposits), borrowings and other liabilities. In banking industry, composition of resources plays a major role in its profitability. Therefore, banks always try to finance their operations from the sources having minimum cost share. Capital is one of the sources with zero cost. Capital plays an important role from the inception of a bank and throughout its functioning life (Hempel et al, 1990). Capital performs the function of enabling the establishment of a banking industry by supplying the funds necessary to acquire the physical and human resources that comprises it. It is also critical to the perpetuation of a banking entity in its capacity as an ongoing concern. Banks also collect funds in the form of deposits i.e. demand deposits and time deposits which are deployed by bankers in loans and advances. Banks run a considerably greater risk of losses resulting from borrower defaults, 33 P a g e
rendering some of their assets partly or entirely irrecoverable. Banks are considered as the custodian of depositors money. They have to maintain the depositors confidence that their deposits and assets are safe from various types of risks and losses. Therefore banks should create their assets (advance loans) with utmost care so that they might not become bad i.e. their recovery should not fail. And if there is any loss due to sticky loans, banks are expected to absorb the losses from the normal earnings. But there may be some unanticipated losses which cannot be absorbed by normal earnings (Olalekan and Adeyinka, 2013). In that case Capital serve as a cushion to absorb unexpected performance shocks and inspires depositors confidence while devoting stability and efficiency of financial system. Moreover, besides absorbing unanticipated shocks, it signals that the institution will continue to honour its obligations (Srivastva et.al, 2011). Therefore, bank regulators have considered the maintenance of adequate capital as an important element for maintaining safety and soundness of individual banks (Nachane et.al., 2000). Capital adequacy is a reflection of the inner strength of a bank. The basic philosophy for the concept of adequate capital is based on the three aspects namely strengthening of institutions structure, protecting the depositors against the risk to which a bank may be exposed and maintaining general confidence in the banking system (Adhikary, 1988). Capital adequacy is the product of the Basel Committee on Banking Supervision (BCBS). BCBS initiated Basel I norms in 1988, considered to be the first move towards risk-weighted capital adequacy norms. In 1996 BCBS amended the Basel I norms and in 1999 it initiated a complete revision of the Basel I framework, to be known as Basel II. Consequent upon the recommendations of the Narasimham Committee on Financial Sector Reforms, a capital to risk-weighted assets system was introduced for banks in India since April 1992, largely in conformity with international standards (Nachane, 2000). Under this system, the balance sheet assets, non-funded items and other off-balance sheet exposures are assigned weights according to the prescribed risk weights. Banks have to maintain unimpaired minimum capital funds equivalent to the prescribed ratio on the aggregate of the risk weighted assets and other exposures on an ongoing basis (Datar and Banerjee, 2004). Risk-weighted assets are the total of all assets held by the bank weighted by credit risk, operational risk and market risk. The basic idea to incorporate capital adequacy ratio is to increase the responsibility of the shareholders for the risk, not allowing them to assign a portion of the earnings of investors from riskier projects, reducing the possibility of leverage and credit multiplier. For the purpose of measuring capital adequacy, capital is split into two categories: Tier I capital and Tier II capital. Tier I capital is most reliable source of capital referred as core capital which absorbs losses without a bank required to cease trading and thus provides more of protection to its depositors.the elements of Tier I capital includes paid-up capital (ordinary shares), statutory reserves, disclosed free reserves, Perpetual Noncumulative Preference Shares (PNCPS) subject to laws in force from time to time, Innovative Perpetual Debt Instruments (IPDI) and capital reserves representing surplus arising out of sale proceeds of asset. Tier II capital is also known as supplementary capital which absorbs losses in the event of winding up and thus provides lesser degree of protection to its depositors. The elements of Tier II capital include undisclosed reserves, revaluation reserves, general provisions and loss reserves, hybrid capital instruments, subordinated debt and investment reserve account. But tier II should be limited to a maximum of 100 percent of total Tier I for the purpose of compliance with the norms. 34 P a g e
II. COOPERATIVE BANKS AND CAPITAL ADEQUACY In cooperative banks, share capital is the important and permanent source of funds but some peculiar features are associated with this source of funds. Legally, co-operatives banks are voluntary organizations established by people for their economic good practically these banks are organised by government as a tool of state policy to provide basic requirements to the poorest strata of society. The main objective of these cooperative banks is to provide credit its members at a reasonable cost and to maximize return on equity remains secondary. As profitability of these banks is lower so investors do not prefer to invest in Share Capital of these organisations. Therefore, contribution to Share Capital has been made mandatory for borrowers of these organisations. Every borrower has to contribute a fixed percentage of the amount to be borrowed in shares of the co-operative society from which he borrows. In Punjab, share linkage was five per cent which has been reduced to 2.5 percent w. e. f. July 2002 (Govt. of Punjab, 2002). This does make it difficult for the cooperative banks to have a large capital base and in the present times when capital adequacy is becoming a major issue in banks, cooperatives may in the conventional industry sense be undercapitalized. Earlier these provisions of capital adequacy was not mandatory for central cooperative banks but after realizing the importance of capital adequacy, the RBI issued directives where by each cooperative bank has to meet the capital adequacy standard of 9% in a phased manner over a period of three years. The capital adequacy standards for district cooperative banks should be 7% ongoing basis up to March 31, 2015 and 9% up to 31 st march 2017 ( RBI circular No.RPCD.RCB.BC.73 /07.51.012/2013-14). III. LITERATURE REVIEW A lot of studies have been conducted on various aspects of banking and cooperatives. A few of them has been discussed below. AUTHOR NAME YEAR OUTCOMES Baral, K. J. 2005 It was concluded that Health of joint venture banks is better than that of the other commercial banks. Bodla and Verma 2006 SBI had an edge over its counterpart ICICI in terms of Capital Adequacy. However, the vice versa was true regarding assets quality, earning capacity and management efficiency. The liquidity position of both the banks was sound and did not differ significantly Singh, B. 2006 The position of an average DCCB in Punjab was far better than the position of an average DCCB at the national level with regards to overdues, witnessing a better recovery performance than its peers at all India level Study concluded that both Punjab National Bank and Jammu and Kashmir Sangmi, M. and Nazir, 2010 Bank were financially viable as both had adopted prudent policies of T. financial management. The study assessed that commercial banks were strong in terms of capital Singh and Vyas 2009 adequacy and there was significant difference in capital adequacy of State Bank of India and its associates and foreign banks operating in India. 35 P a g e
Chowdhury, S 2011 Reddy, K.S 2012 Devanadhen, K. 2013 Mamun, A. L 2013 Olalekan, A.and Adeyinka, S. 2013 It was found that ICICI ranked first under the CAMEL analysis followed by HDFC bank. The last position under CAMEL analysis was occupied by Union bank It was found that public sector banks had significantly improved indicating positive impact of the reforms in liberalizing interest rates, rationalizing directed credit and Investments and increasing competition. It was found that in overall ranking the Andhra Bank secured the first place followed by Corporation Bank and HDFC Bank. Axis Bank and ICICI Bank were ranked 6th and 14th respectively. Central Bank of India stood last in the overall performance; and SBI (largest public sector bank) exhibited better performance than ICICI Bank (largest private sector bank) it was concluded that Prime Bank Limited had performed well in terms of capital adequacy. It was suggested to bank to increase it equity contribution substantially. Study revealed the effect of capital adequacy on profitability of Nigerian banks in india. It was concluded that there was significant positive correlation between capital and profitability of bnaks IV. OBJECTIVE OF STUDY The main objective of the present study is to examine the capital adequacy of Amritsar District Central Cooperative Bank Ltd (DCCB). V. RESEARCH METHODOLOGY In the present study an effort is made to evaluate the financial performance of The Amritsar Central Cooperative Bank Ltd. through CAMEL Model. For the purpose of study, secondary data was drawn from annual reports of the bank and from Comparative Statistics of State and Central Cooperative Banks of Punjab published by Punjab State Cooperative Bank Ltd, Chandigarh. For analysis of data, mathematical and statistical tools i.e. ratio analysis, mean, compound annual growth rate, time series analysis and t test have been applied. VI. ANALYSIS AND RESULTS To analyse capital adequacy of Amritsar DCCB, trends in Tier I capital, Tier II Capital, risk weighted assets (RWA) and Capital Adequacy Ratio (CAR) had been studied. 6.1 Trends in Tier I Capital of Amritsar Dccb On perusal of table 1, it is revealed that on average, Amritsar DCCB had tier I capital of Rs 632.35 lacs. It had recorded insignificant growth at the compound rate of 6.87 percent with ups and down in the tier I capital during the period of study. The tier I capital was Rs 1014.88 lacs in the 2005-06 and then declined continuously for five years and reached Rs. -495.12 lacs in 2009-10 due to heavy accumulated losses. After this Tier I capital 36 P a g e
continuously increased till the last year of study and arrived at Rs 1615.90 lacs in 2012-13. On the basis of trend equations, it can be predicted that Tier I capital would further increase to Rs 1639.36 lacs and Rs 2042.16 lacs in the year 2016-17 and 2019-20 respectively. 6.2 Trends in Tier Ii Capital of Amritsar Dccb Table 1 shows that Tier II Capital of Amritsar DCCB registered growth of 58.25 percent compounded annually which indicated continuous growth in tier II capital throughout the period of study. It had mean tier II capital of Rs 512.21 lacs. In the initial year of study, tier II capital was Rs 70.51 lacs and rose to Rs 1253.42 lacs in the last year of study i.e. 2012-13. Tier II capital would be Rs 1867.77 lacs and Rs 2409.87 lacs in the year 2016-17 and 2019-20, if the same trend persists. Table 1: Trends in the capital parameters of Amritsar DCCB Capital As on 31st Total Risk Weighted Adequacy Tier I to March-> Tier I Tier II Capital assets (RWA) Ratio RWA Rs in Rs In Lacs lacs Rs In Lacs Rs In Lacs % % 2006 1014.88 70.51 1085.39 33355.16 3.25 3.04 2007 982.68 82.47 1065.15 36436.95 2.92 2.70 2008-387.36 91.33-296.03 43169.07-0.69-0.90 2009-495.12 447.60-47.52 46418.92-0.10-1.07 2010-194.90 456.16 261.26 48266.08 0.54-0.40 2011 1045.66 458.38 1504.04 52511.53 2.86 1.99 2012 1477.09 1240.23 2717.32 60818.80 4.47 2.43 2013 1615.90 1253.42 2869.32 66636.78 4.31 2.42 Mean 632.35 512.51 1144.87 48451.66 2.20 1.28 CAGR 6.87 58.25 14.90 10.03 4.08-3.19 t- value 1.02 5.47 2.09* 15.07 1.02 0.15 P-Value 0.00 0.00 0.08 0.00 0.00 0.00 Future Trend 2017 1639.36 1867.77 3507.13 82804.79 4.55 1.60 2020 2042.16 2409.87 4452.03 96546.05 5.49 1.74 Source: computed from annual reports of Amritsar DCCB, * significant at 5 % level 6.3 Trends in Total Capital of Amritsar Dccb Growth in Total capital was observed at the compound annual rate of 14.90 percent which was significant also with mean total capital of Rs 1144.87 lacs. Total capital declined continuously for first four years of study and reached to Rs -47.52 lacs in 2008-09 due to decreased Tier I capital and then increased to Rs 2869.32 in the last 37 P a g e
year of study i.e. 2012-13. The future estimate shows that this capital would further increase to Rs 3507.13 lacs and Rs 4452.03 lacs in 2016-17 and 2019-20, if the same conditions prevail. 6.4 Trend in Risk Weighted Assets of Amritsar Dccb Amritsar DCCB, as shown in table 1, had mean risk weighted assets of Rs 48451.66 lacs and registered growth in RWA is 10.03 percent compounded annually during the period of study. The RWA rose to Rs 66636.78 lacs in 2012-13 from Rs 33355.16 lacs in 2005-06. It can be predicted that in the year 2016-17 and 2019-20, RWA would increase to Rs 82804.79 lacs and Rs 96546.05 lacs respectively, if the same trend prevail. Table 2: Different Ratios showing Capital Adequacy of Amritsar DCCB As on 31st March-> Tier I to RWA Capital Adequacy Ratio % % 2006 3.04 3.25 2007 2.70 2.92 2008-0.90-0.69 2009-1.07-0.10 2010-0.40 0.54 2011 1.99 2.86 2012 2.43 4.47 2013 2.42 4.31 Mean 1.28 2.20 CAGR -3.19 4.08 t- value 0.15 1.02 P-Value 0.00 0.00 Future Trend 2017 1.60 4.55 2020 1.74 5.49 6.5 Trends in Tier I Capital To Risk Weighted Assets of Amritsar Dccb Table 2 shows that tier I to risk weighted assets ratio showed insignificant and declining trend at the compound annual rate of 3.19 percent with mean ratio of 1.28 percent. The ratio declined to -0.40 percent in 2012-13 from 3.04 percent in 2005-06 and then after rose continuously till last year of study and reached at 2.42 percent in 2012-13. On the basis of trend equations, it can be predicted that if the same conditions prevail, the ratio would be 1.60 percent in 2016-17 and 1.74 percent in 2019-20 the ratio is very low and bank has to take drastic steps to match the statutory requirement of capital adequacy ratio. 6.6 Trends in Capital Adequacy Ratio of Amritsar Dccb As depicted in table 2, on an average, capital adequacy ratio (CAR) of Amritsar DCCB was 2.20 percent during the period of study. The CAR was 3.25 percent in 2005-06 and declined till the year 2008-09 and reached at - 0.10 percent in 2008-09. Then ratio was increased continuously and rose to 1.31 percent in the last year of study i.e. 2012-13. Growth in capital adequacy ratio was significant at the rate of 4.08 percent compounded annually. 38 P a g e
If the same conditions prevail, it can be estimated that this ratio would further increase to 4.55 percent and 5.49 percent in the year 2016-17 and 2019-20 respectively. VII. FINDINGS From the analysis of above table, it is clear that the Amritsar DCCB had CAR less than the recommended rate of Reserve Bank of India (RBI) i.e. 7 percent. The capital adequacy of Amritsar DCCB was in negative i.e. -0.69 and -0.10 percent in the year 2007-08 and 2008-09 respectively. The main cause of negative capital adequacy ratio was incurring of huge losses by the Amritsar DCCB in these years. The Apex Bank had provided financial assistance of Rs 11 crores to Amritsar DCCB to strengthen its financial position which is to be refunded. After wards the capital adequacy ratio of Amritsar DCCB has increased. But the percentage increase in Tier I capital is less than the percentage increase in risk weighted assets. It had invested more money in reckless investments. Therefore, still Amritsar DCCB had not attained the recommended rate of 7 percent. VIII. CONCLUSIONS From the analysis and study of above table, it can be concluded that performance of Amritsar DCCB in terms of capital adequacy was not upto mark. Capital adequacy ratio of this DCCB was very less than the required rate of RBI i.e. 7 percent which is a matter of serious concern. So there is a great need to take immediate action to alleviate this situation. IX. SUGGESTIONS Bank should make efforts to increase its capital base or reduce its risk weighted assets by recovering sticky loans. Keeping in view its importance for rural sector (especially in credit disbursement for crop production) government should contribute to its share capital so that capital adequacy ratio may be increased as per RBI recommendations. Public sector enterprises should be allowed to contribute to these banks capital. Bank should issue perpetual debt instruments to enhance its Tier II capital. REFERENCES [1]. Adhikary, G. P. (1988), Capital Adequacy of Banks in the SEACEN countries : An overview of The South East Asian Central Banks, Research and Training Centre, Kuala Lumpur, Malaysia. [2]. Baral, K. J. ( 2005), Health Check-up of Commercial Banks in the Framework of CAMEL: A Case Study of Joint Venture Banks in Nepal, Journal of Nepalese Business Studies, 2(1), pp 41-55 [3]. Bodla, B. S. and Verma, R. (2006), Evaluating Performance of Banks through Camel Model: A Case Study of SBI and ICICI, The ICFAI Journal of Bank Management, 5(3), pp. 49-63, Hyderabad. [4]. Chowdhury, S. (2011), An Inquiry Into The Financial Soundness of Commercial Banks In India Using CAMEL Approach, Journal on Banking, Financial and Insurance Research,1( 7), pp. 88-121, Yamunanagar. 39 P a g e
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