Reference to State Bank of Mysore Finance Essay

A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses. Due to their critical status within the financial system and the economy generally, banks are highly regulated in most countries. Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for profit. They are generally subject to minimum capital requirements which are based on an international set of capital standards, known as the Basel Accords. The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472. The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank "bench, counter". Benches were used as desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths. One of the oldest items found showing money-changing activity is a silver Greek drachm coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon (350-325 BC) presented in the British Museum in London. The coin shows a banker's table (trapeza) laden with coins, a pun on the name of the city. In fact, even today in Modern Greek the word Trapeza means both a table and a bank.

HISTORY

The first banks were the merchants of the ancient world that made loans to farmers and traders that carried goods between cities. The first records of such activity, dates back to around 2000 BC in Assyria and Babylonia. Later, in ancient Greece and during the Roman Empire, lenders who were based in temples made loans but also added two important innovations: accepting deposits and changing money. During this period, there is similar evidence of the independent development of lending of money in ancient China and separately in ancient India. Banking, in the modern sense of the word, can be traced to medieval and early Renaissance Italy, to the rich cities in the north such as Florence, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. Perhaps the most famous Italian bank was the Medici bank, established by Giovanni Medici in 1397. The development of banking spread through Europe and a number of important innovations took place in Amsterdam during the Dutch Republic in the 16th century and in London in the 17th century. During the 20th century, developments in telecommunications and computing resulting in major changes to the way banks operated and allowed them to dramatically increase in size and geographic spread. The Late-2000s financial crisis saw significant number of bank failures, including some of the world's largest banks, and much debate about bank regulation. In ancient India during the Maurya dynasty (321 to 185 BC), an instrument called adesha was in use, which was an order on a banker desiring him to pay the money of the note to a third person, which corresponds to the definition of a bill of exchange as we understand it today. During the Buddhist period, there was considerable use of these instruments. Merchants in large towns gave letters of credit to one another.

BUSINESS MODEL

A bank can generate revenue in a variety of different ways including interest, transaction fees and financial advice. The main method is via charging interest on the capital it lends out to customers. The bank profits from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclical and dependent on the needs and strengths of loan customers and the stage of the economic cycle. Fees and financial advice constitute a more stable revenue stream and banks have therefore placed more emphasis on these revenue lines to smooth their financial performance. In the past 20 years American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions. First, this includes the Gramm-Leach-Bliley Act, which allows banks again to merge with investment and insurance houses. Merging banking, investment, and insurance functions allows traditional banks to respond to increasing consumer demands for "one-stop shopping" by enabling cross-selling of products (which, the banks hope, will also increase profitability). Second, they have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default on loans. This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise be denied credit. Third, they have sought to increase the methods of payment processing available to the general public and business clients. These products include debit cards, prepaid cards, smart cards, and credit cards. They make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with underdeveloped financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home).

STANDARD ACTIVITIES

Banks act as payment agents by conducting checking or current accounts for customers, paying check drawn by customers on the bank, and collecting checks deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire transfers or telegraphic transfer, EFTPOS, and automated teller machine (ATM). Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending. Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments. Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank account. Banks borrow most funds from households and non-financial businesses, and lend most funds to households and non-financial businesses, but non-bank lenders provide a significant and in many cases adequate substitute for bank loans, and money market funds, cash management trusts and other non-bank financial institutions in many cases provide an adequate substitute to banks for lending savings too.

RECENT DEVELOPMENT IN BANKING SECTOR

Universal Banking:

Universal banking refers to Financial Institution offering all types of financial services under one roof. Thus, for example, besides borrowing and lending for the long term, the development Financial Institutions will be able to borrow/lend for the short-term as well.

Multiple delivery channels:

Today the technology driven banks are finding various means to reduce costs and reach out to as many customers as possible spread over a diverse area. This has led to using multiple channels of delivery of their products.

1. ATM (Automatic Teller Machine):

An ATM is basically a machine that can deliver cash to the customers on demand after authentication. However, nowadays we have ATMs that are used to vend different FMCG products also. An ATM does the basic function of a banks branch, i.e., delivering money on demand. Hence setting of newer branches is not required thereby significantly lowering infrastructure costs. Cost reduction is however possible only when these machines are used. In India, the average cash withdrawal per ATM per day has fallen from 100 last year to 70 this year. Though the number of ATMs since last year, it is not in sync with number of cards issued. Also, there are many dormant cardholders who do not use the ATMs and prefer the teller counters. In spite of these odds, Indian banks are increasing the number of ATMs at a feverish pace. These machines also hold the keys to future operational efficiency.

2. Net Banking:

Net banking means carrying out banking transactions via the Internet. Thus the need for a branch is completely eliminated by technology. Also this can view his account details transaction history, order drafts, electronically make payments, transfer funds, check his account position and electronically communicate with the bank through the internet for which he may have wanted to visit the bank branch. Net banking helps a bank spread its reach to the entire world at a fraction of the cost.

3. Phone Banking:

This means carrying out of banking transaction through the telephone. A customer can call up the banks helpline or phone banking number to conduct transaction like transfer of funds, making payments , checking of account balances, ordering cheques etc,. This also eliminates the customer of the need to visit the bank's branch.

4. Mobile Banking:

Banks can now help a customer conduct certain transactions through the Mobile phone with the help of technologies like WAP, SMS, etc., this helps a bank to combine the internet and leverage it to cut costs and at the same time provide its customer the convenience. Thus it can be seen that Tech savvy banks are tapping all the above alternative channels to cut costs improve customer satisfaction.

TYPES OF BANKS

RETAIL BANKING:

Retail banking is one that deals directly with individuals and small businesses.

BUSINESS BANKING:

Business banking is one that provides services to mid market business.

CORPORATE BANKING:

Corporate banking is one that is directed at large business entities.

PRIVATE BANKING:

Private banking is one that provides wealth management services to high net worth individuals and families.

INVESTMENT BANKING:

Investment banking is one relating to activities on the financial markets.

NON PROFIT ORGANISATIONS:

These are the banks that are owned by the government and whose main objective is not to earn profit but help the society.

ABOUT SUBJECT

INTRODUCTION TO FINANCE

Finance is the life blood of business. It is rightly termed as the science of money. Finance is very essential for the smooth running of the business. Finance controls the policies, activities and decisions of every business.

DEFINITION:

"FINANCE is that business activity which is concerned with the organization and conversion of capital funds in meeting financial needs and overall objectives of a business enterprise"

-Wheeler

Finance is one of the major elements, which activates the overall growth of the economy. Finance is the lifeblood of economic activity. A well knit financial system directly contributes to the growth of the economy. An efficient financial system calls for the effective performance of financial institutions, financial instruments and financial markets.

FINANCE FUNCTION

Finance function can be classified into 4 types. They are:

Investment Decision

One of the most important finance functions is to intelligently allocate capital to long term assets. This activity is also known as capital budgeting. It is important to allocate capital in those long term assets so as to get maximum yield in future. Following are the two aspects of investment decision Evaluation of new investment in terms of profitability Comparison of cut off rate against new investment and prevailing investment. Since the future is uncertain therefore there are difficulties in calculation of expected return. Along with uncertainty comes the risk factor which has to be taken into consideration. This risk factor plays a very significant role in calculating the expected return of the prospective investment. Therefore while considering investment proposal it is important to take into consideration both expected return and the risk involved. Investment decision not only involves allocating capital to long term assets but also involves decisions of using funds which are obtained by selling those assets which become less profitable and less productive. It wise decisions to decompose depreciated assets which are not adding value and utilize those funds in securing other beneficial assets. An opportunity cost of capital needs to be calculating while dissolving such assets. The correct cut off rate is calculated by using this opportunity cost of the required rate of return (RRR).

Financial Decision

Financial decision is yet another important function which a financial manger must perform. It is important to make wise decisions about when, where and how should a business acquire funds. Funds can be acquired through many ways and channels. Broadly speaking a correct ratio of an equity and debt has to be maintained. This mix of equity capital and debt is known as a firm's capital structure. A firm tends to benefit most when the market value of a company's share maximizes this not only is a sign of growth for the firm but also maximizes shareholders wealth. On the other hand the use of debt affects the risk and return of a shareholder. It is more risky though it may increase the return on equity funds. A sound financial structure is said to be one which aims at maximizing shareholders return with minimum risk. In such a scenario the market value of the firm will maximize and hence an optimum capital structure would be achieved. Other than equity and debt there are several other tools which are used in deciding a firm capital structure.

Dividend Decision

Earning profit or a positive return is a common aim of all the businesses. But the key function a financial manger performs in case of profitability is to decide whether to distribute all the profits to the shareholder or retain all the profits or distribute part of the profits to the shareholder and retain the other half in the business. It's the financial manager's responsibility to decide a optimum dividend policy which maximizes the market value of the firm. Hence an optimum dividend payout ratio is calculated. It is a common practice to pay regular dividends in case of profitability. Another way is to issue bonus shares to existing shareholders.

Liquidity Decision

It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm's profitability, liquidity and risk all are associated with the investment in current assets. In order to maintain a tradeoff between profitability and liquidity it is important to invest sufficient funds in current assets. But since current assets do not earn anything for business therefore a proper calculation must be done before investing in current assets. Current assets should properly be valued and disposed of from time to time once they become non profitable. Currents assets must be used in times of liquidity problems and times of insolvency.

FINANCIAL MANAGEMENT

Meaning of Financial Management:

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

DEFINITION:

" Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operation"

Joseph & Massie

Scope or Elements:

Investment decisions includes investment in fixed assets (called as capital budgeting). Investments in current assets are also a part of investment decisions called as working capital decisions. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two: Dividend for shareholders- Dividend and the rate of it has to be decided. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.

OBJECTIVES OF FIANANCIAL MANAGEMENT

The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be- To ensure regular and adequate supply of funds to the concern. To ensure adequate returns to the shareholders, this will depend upon the earning capacity, market price of the share and expectations of the shareholders. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost. To ensure safety on investment, i.e., funds should be invested in safe ventures so that adequate rate of return can be achieved. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.

FUNCTIONS OF FINANCIAL MANAGEMENT:

Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programs and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise. Determination of capital composition: Once the estimation has been made, the capital structure has to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties. Choice of sources of funds: For additional funds to be procured, a company has many choices like- Issue of shares and debentures Loans to be taken from banks and financial institutions Public deposits to be drawn like in form of bonds. Choice of factor will depend on relative merits and demerits of each source and period of financing. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible. Disposal of surplus: The net profits decisions have to be made by the finance manager. This can be done in two ways: Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus. Retained profits - The volume has to be decided which will depends upon expansion, innovational, diversification plans of the company. Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw materials, etc. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

FINANCIAL ANALYSIS

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 statement is required. Financial 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: Profit and loss account or Income Statement Balance Sheet or Position Statement The term financial analysis is also known as analysis and interpretation of financial statements. It refers to establishing meaningful relationship between various items of the two financial statements (income and position statement). It determines the financial strength and weakness of the firm. Analysis of financial statements is an attempt to assess the efficiency and performance of an 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: Measuring the profitability Indicating the trend of achievements Assessing the growth potential of business Comparative position in relation to other firms

COMPARATIVE STATEMENT

Comparative study of financial statements is the comparison of the financial statements of the business with the previous year's financial statements. It enables identification of weak points and applying corrective measures. Practically, two financial statements are prepared in comparative form for analysis purpose.

COMPARATIVE BALANCE SHEET:

The comparative balance sheet shows the different assets and liabilities of the firm on different dates to make comparison of balances from one date to another. The comparative balance sheet has two columns for the data of original balance sheets. A third column is used to show change (increase / decrease) in figures. The fourth column may be added for giving percentages of increase or decrease. While interpreting comparative Balance Sheet the interpreter is expected to study the following aspects: Current financial position and liquidity position Long term financial position Profitability of the concern

TREND ANALYSIS

Trend analysis seeks out and examines systematic historical patterns in financial statements or other quantitative data. Such analysis of data overtime can vary from primarily descriptive techniques to more complex cause and effect methods. This module minimizes discussions of cause and effect analysis and focuses on the descriptive methods of trend analysis and two closely related analytical techniques- fluctuation analysis and common size statements analysis. Trend analysis usually involves choosing one fiscal period and then expressing subsequent quantities as a percentage of the data associated with this base period. In the case of an income statement, changes in all items could be assessed in relation to the base period. Significant changes can then be investigated further. Trend analysis is valuable when one wants to use historical data to predict future values or to calculate expected values for comparison to actual current values. Trend analysis is also useful for identifying unexpected variances that may indicate strategic or operational changes or entity weaknesses worthy of additional exploration and analysis.

TREND ANALYSIS =

NEXT YEAR - CURRENT YEAR / CURRENT YEAR *100

CHAPTER - 2

RESEARCH STUDY

TITLE OF THE STUDY:

A study on the "FINANCIAL PERFORMANCE - COMPARATIVE TREND ANALYSIS OF STATE BANK OF MYSORE (SBM)"

INTRODUCTION:

Finance

Finance is the life blood of business. It is rightly termed as the science of money. Finance is very essential for the smooth running of the business. Finance controls the policies, activities and decisions of every business.

DEFINITION:

"FINANCE is that business activity which is concerned with the organization and conversion of capital funds in meeting financial needs and overall objectives of a business enterprise"

-Wheeler

Finance is one of the major elements, which activates the overall growth of the economy. Finance is the lifeblood of economic activity. A well knit financial system directly contributes to the growth of the economy. An efficient financial system calls for the effective performance of financial institutions, financial instruments and financial markets.

Financial Analysis

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 statement is required. Financial 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: Profit and loss account or Income Statement Balance Sheet or Position Statement The term financial analysis is also known as analysis and interpretation of financial statements. It refers to establishing meaningful relationship between various items of the two financial statements (income and position statement). It determines the financial strength and weakness of the firm. Analysis of financial statements is an attempt to assess the efficiency and performance of an 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: Measuring the profitability Indicating the trend of achievements Assessing the growth potential of business Comparative position in relation to other firms

Research Design

A Research Design is a logical and systematic plan prepared for directing a research study. It specifies the objectives of the study, the methodology and the techniques to be adopted for achieving the objectives. It constitutes the blueprint for the collection, measurement and analysis of data. It is "the plan, structure, and strategy of investigation conceived so as to obtain answers to research questions." A research design is the program that guides the investigator in the process of collecting, analyzing and interpreting observation. It provides a systematic plan of procedure for the researcher to follow. It is indispensable for a research project.

STATEMENT OF PROBLEM:

Banks contribute to the economic development of the country. The current study has been undertaken to analyze the financial strength and stability of State Bank of Mysore, to suggest remedies wherever possible, so as to set the bank's progress on the right path and to see if it is able to achieve its objectives. This analysis is also critical and essential to study. This will provide direct benefit to the company.

OBJECTIVES OF THE STUDY:

To study the financial performance of the bank. To study the trends in the previous four years. To find out the profitability of the Bank. data for this from the bank To provide appropriate solutions to problems that exists.

SCOPE OF THE STUDY:

This study is conducted at State Bank of Mysore, Bangalore. The current study is conducted with the help of published annual reports of the bank of the years 2008-2012. The study gives an idea about the present financial position of the bank.

HYPOTHESIS TESTING:

OPERATIONAL DEFINITIONS:

METHODOLOGY OF STUDY:

Review of Literature

Purpose

In this project work secondary data are used as a basis of analysis. In this study the financial performance of State Bank of Mysore, only past financial statements like Balance Sheet is studied. The current study has been undertaken to analyze the functioning and financial performance of the bank over the past years and suggest remedies wherever possible so as to set the banks progress on the right path and to see if it is able to achieve its objectives.

Method of Review

In this project the method used was the 4 year annual report of State Bank of Mysore to analyze the trends in the previous years. In order to get the information regarding the bank and its operations, internet was used. The bank's web address also helped to collect information regarding the country wide operations.

Benefits of the Literature

It facilitates to know types of secondary data, advantages of secondary data. It also helps to know the following: Topic on which similar research has been done Purpose of the earlier similar research Conclusion derived from the earlier research It facilitates to know how this research is different from the earlier one Helped in making this research more specific and precise thereby enabling to analyze the problem systematically.

Data Collection Method

The sources of data in this study are basically secondary in nature. Secondary data published by State Bank of Mysore is used for the study. Secondary data was collected from annual reports, other brochures and website of the bank.

Reference Period

A Reference Period of four years has been taken for the analysis i.e., 2008-2009, 2009-2010, 2010-2011, and 2011-2012. By conducting an analysis on a 4 year span, it provides a wider coverage on the operations of the bank and techniques can be brought about in a more effective manner.

SAMPLING PLAN AND SAMPLE SIZE:

This will not apply for the study as it is a finance topic, more dependent on secondary data.

PLAN OF ANALYISIS:

Techniques Used

Trend Analysis Comparative statements

LIMITATIONS OF THE STUDY:

The study is limited to banking sector. Time period is one of the limitations of the study. Secondary data is used mainly for the study. Therefore, the limitations of secondary data are applicable to this study as well. The study is limited to the financial performance of State Bank of Mysore. The research was conducted to get an overall view of the firm; as such it was not possible to probe deep into the subject.

CHAPTER SCHEME:

INTRODUCTION - This chapter mentions about information on the Industry - Bank and the Subject - Finance. RESEARCH STUDY - This chapter contains the blue print of the entire project. Research Design is the arrangement of conditions for the collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. It includes all the 10 steps in research design. Introduction, statement of problem, objectives of the study, scope of the study, hypothesis, operational definitions, methodology and sources of data, sampling design, plan of analysis and tools for collection of data, limitations of the study, overview of chapter scheme. COMPANY PROFILE - This chapter includes an overview of the company - Origin and development, products and services, competitors, organizational structure. DATA ANALYSIS AND INTERPRETATION - This chapter includes the comparative trend analysis made from the secondary data obtained from the company such as the company guide and brochures. With the help of tables and graphs, interpretations were made. Tables and graphs of capital, reserves & surplus, deposits, borrowings, other liabilities & provisions, total liabilities, cash & balance with RBI, balances with bank & money at call, investments, advances, fixed assets, other assets, total assets, contingent liability, bills for collection, equity paid up, net worth, capital employed, sales, PBT, PAT, EPS, dividend. FINDINGS, SUGGESTIONS AND CONCLUSION - This is the last chapter in the research project which contains summary of findings for the study. Based on the analysis and interpretation, conclusions and suggestions are finally given by the researcher in this chapter.

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