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Analysis of Financial Structure of State Bank of India

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AN EMPIRICAL ANALYSIS OF FINANCIAL STRUCTURE OF STATE BANK OF INDIA

1Dr. Arti Gaur 2 Nancy Arora

Assistant Professor Research Scholar

 

Abstract

A financial structure is simply a means of describing the total scope of assets and types of financing that are employed as part of the overall financial operation of a business or other entity. Assessing the financial structure of a business or any bank is a key strategy in determining if the company/bank is financially stable. Since this approach encompasses a wider range of financial assets, the task of determining if the company is increasing or decreasing in overall worth is easier to manage. Taking the time to review the structure on a regular basis, such as monthly or quarterly, offers the benefit of identifying emerging trends that could be to the advantage or the detriment of the operation, and adjusting the asset management strategy in order to produce a desirable results. .This Research Paper makes a modest attempt to analysis the the financial structure which help to identify the shortcomings and inadequacy of the fund to raise profit during the study period and to study the causes and consequences of the various components of the financial statement in relation to the profitability of the bank. In this research paper we have also analyze the financial stability and overall performance of SBI and study the profitability of State Bank of India.

KEYWORDS: State Bank of India(SBI), Financial Structure, Profitability, Loan Fund, Working capital.

FINANCIAL STRUCTURE

The specific mixture of long–term debt and equity that a company uses to finance its operations. This financial structure is a mixture that directly affects the risk and value of the business. The main concern for the financial manager of the company is deciding how much money should be borrowed and the best mixture of debt and equity to obtain. The financial manager also has to find the least expensive sources of funds for the company to use . Financial structure is divided into the amount of the company's cash flow that goes to creditors and the amount that goes to shareholders. Each business will have a different mixture depending on its needs and expenses. Therefore, each company will have its own particular debt-equity ratio. For example, a company could issue bonds and use the proceeds to buy stock or it could issue stock and use the proceeds to pay its debt.

Financial statements are analysed by different parties for different purposed. The analysis is done from different angles. Accordingly, we can classify financial statement analysis into different categories as follows:

  1. On the basis of concerned parties

According to different parties concerned with the operation of the company, the financial statement analysis can be of two types:

  • External Analysis
  • Internal Analysis

External Analysis

When the analysis is undertaken by outside parties namely existing and prospective investors, suppliers, lenders, government agencies, customers etc., it is external financial statement analysis. These external parties do not have any access to the internal records of the company; nor do they have any scope to know the hidden accounting policy, if any, of the management. So, they have to depend almost entirely on the published financial statements and other additional information supplied by the management

Internal Analysis:

This analysis is undertaken by the management of the company to monitor its financial and operating performance. As the analysis is done by the party who has access to the internal records and policies, it is expected to be more effective and reliable.

2. On the basis of time period of the study

Based on the time period covered for the study, the financial statement analysis can be grouped into:

  • Horizontal Analysis
  • Vertical Analysis

(a) Horizontal Analysis:

This analysis refers to the study of past consecutive balance sheets, income statements or statements of cash flow at a time. The analysis can be made between two periods or over a series of periods. The relevant accounting numbers of all years of the study are presented horizontally in a statement over a number of columns each representing a year. Those figures can also be graphically presented. The figures of each year are compared with those of the base year i.e., the beginning year of the study. This analysis is also called ‘Dynamic Analysis’ as it covers several years for study. This analysis is very much effective for understanding the direction and trend of the organisation particularly when it is undertaken for several years. Comparative statements and trend analysis are two important tools that can be employed for horizontal analysis.

(b) Vertical Analysis:

When the analysis is restricted to the financial statements of one particular period only, it is known as vertical analysis of financial statements. In this analysis each item of a particular financial statement is expressed as percentage of a base figure selected from the same statement. It is also known as ‘Static Analysis’ as it concentrates solely on one year’s financial statement. Common-size statements and accounting ratios are two important tools used for vertical analysis. This analysis is very much useful for understanding the structural relationship of various items in a financial statement. Vertical analysis can also be done for studying the relationship within a set of financial statements at a point of time.

REVIEW OF LITERATURE

Sampath (1990) examined the factors influencing profitability of commercial banks. According to him, profit means the excess of total revenue over total expenses, where of profitability means the rate of return on working funds. Further he emphasized that profitability depends on certain factors like interest income, interest expenses and manpower expenses, other expenses and non-interest income.

Padna and Lall (1991) in their research work papers were presented of their views that improvement in profitability through the development of certain internal management techniques. They concluded that productivity deployment of funds, quality of advances, information system and organization setup and branch expansion are the factors which influence the profitability of banks to the great extent.

, and factoring services) with proper cost benefit analysis, to have maximum profitability.

Amandeep (1993) examined the trends in profits and profitability of 20 nationalized banks, by using the analytical tools, i.e. trend analysis, ratio analysis and concentration indices of the selected parameters. The study concluded that the efficient management of burden plays a significant role in the determination of profitability of banks.

Satyamurthy (1994) in his study clarified the concepts of profits, profitability and productivity applicable to the banking industry. It was organized by the bank managements that the pressure on the profitability was more due to the factors beyond their control. He suggested the technique of ratio analysis to evaluate the profit and profitability performance of banks.

Saleem (1995) studied the strategic reforms of banking sector and revealed that Indian financial system is characterized by predominance of public sector units and high degree of regulations, motivated mainly by socio-economic considerations. The major issues related to international competitiveness consist of financial soundness, operational efficiency, viability and profitability.

RESEARCH METHODOLOGY

Research objectives

  • To analyze the financial structure which help to identify the shortcomings and inadequacy of the fund to raise profit during the study period.
  • To analyze the financial stability and overall performance of SBI.

Statistical analysis

The present study is based on the secondary data extracted from balance sheets of SBI from year 2008 to 2012.The collected data were analysed by using statistical tools. The trends and growth rate of State Bank of India was analysed with the help of financial tools. And techniques used namely correlation and regression analysis. In order to get results software SPSS has been used. Charts and figures had been prepared for presenting and simplifying the process of analysis.

DATA ANALYSIS

A company’s capital structure determination constitutes a difficult decision that involves several antagonistic features . Profitability is the main factor for consideration at the time of designing the capital structure of a firm. In this Paper we examine the extent to which growth determines the capital structure of SBI. It is done by examining some component of capital structure in relation to SBI and then testing the results empirically.

Capital structure of SBI

Capital structure consists of share capital i.e. Equity shares, Preference shares, Reserve & Surplus and Loan Funds. The trend of capital structure is analysed in three parts shareholder’s funds, loan funds, and capital employed.

Table : 1 Shareholder’s fund of SBI (Rs in crore )

Year

Share capital

Reserve & surplus

Share holder’s fund

Changes (in times )

2008

631.47

48401.19

49032.66

 

2009

634.88

57947.70

57947.70

0.18

2010

634.88

65314.32

65949.20

0.14

2011

635.00

64351.04

64986.04

-0.015

2012

671.04

83280.16

83951.20

0.29

Average

641.454

63858.882

64373.36

0.15

Source : Computed from Balance sheets of SBI ( 2008 to 2012 )

         

Figure 1: Trend of shareholder’s Fund (Rs in crore )

Interpretation:

The table 1 depict that the share capital of SBI increased in 2009 due to issue of new equity share then in 2010 the share capital remains same, but in a next year 2011 share capital again increased then in 2012 the share capital shows again increasing trend. Reserve & surplus shows increasing trend but in year 2011 a decline come in reserve & surplus but after that it shows again increasing trend .shareholder’s funds also shows increasing trend but in year 2011 a decline comes in shareholder’s funds due to decline comes in reserve & surplus but after that it shows again increasing trend. Increase in reserve & surplus also causes increase in shareholder’s fund resulting in change on shareholder’s fund by 0.18 times. Overall trend is satisfactory.

Table : 2 loan funds of SBI (Rs in crore )

Year

Loans

Loan funds

Changes (in times )

2008

537,403.94

589,131.35

 

2009

742073.13

795786.81

0.35

2010

804116.23

907127.83

0.14

2011

933932.81

1053501.77

0.16

2012

1043647.36

1170652.93

0.11

average

812234.694

903240.138

0.19

Source : Computed from Balance sheets of SBI ( 2008 to 2012 )

       

Figure : 2 loan Funds of SBI ( Rs in crore )

Interpretation:

Table 2 shows that the loan funds of SBI .The table shows continuous increasing trend in the loan amount .In year 2008 the loan funds are 589,131.35 and in 2009 it increased to RS 795786.81 then in 2010 it increase to 907127.83 and in 2011 it increase to1053501.77 due to increase in rupee loans .Then in 2012 it increase to 1170652.93. The average of loan funds is 903240.138.

Table : 3 Capital employed of SBI (Rs in crore )

Year

Shareholder’s funds

Loan funds (unsecured)

Capital employed

Changes ( in times )

2008

49032.66

589131.35

638164.02

 

2009

57947.70

792073.13

853734.51

0.34

2010

65949.20

907127.83

973077.04

0.14

2011

64986.04

1053501.77

1118487.81

0.15

2012

83951.20

1170652.93

1254604.15

0.12

Average

64373.36

902497.402

967613.506

0.19

Source : Computed from Balance sheets of SBI ( 2008 to 2012 )

         

Figure: 3 capital structure of SBI ( Rs in crore )

Interpretation:

Table3 shows that the solvency position of SBI was not good as the proportion of Shareholder’s fund and loan funds is 1:2 (approx), which shows that a bigger part of the capital was financed by loan funds. Financial Position of SBI is not satisfactory as loan amount is increasing at a fast rate. The changes in the capital employed are mainly affected by changes in loan funds.

Financial analysis

Table 4: financial ratios of SBI ( In times )

Year

Debt ratio

Proprietary

ratio

Debt equity ratio

Current ratio

Current assets to total assets

Return on assets

Earning per share

2008

0.82

0.09

10.96

0.07

0.73

0.87

106.56

2009

0.82

0.09

12.81

0.04

0.71

0.95

143.67

2010

0.86

0.09

12.19

0.04

0.72

0.87

144.37

2011

0.86

0.08

14.37

0.04

0.75

0.60

116.07

2012

0.88

0.09

12.43

0.05

0.76

0.87

174.15

Average

0.85

0.088

12.55

0.048

0.73

0.83

136.9

Source : Computed from Balance sheets of SBI ( 2008 to 2012 )

               

Interpretation:

Table 4 shows the different financial ratios, which help in determining the financial position of SBI. Debt ratio shows the participation of loan funds in total assets .On an average the debt ratio is 0.85 times, which is higher than the standard. The highest debt ratio was 0.88 in year 2012, and the lowest was 0.82 in year 2008 and 2009 which is not ideal situation. As proprietary ratio is also calculated on the basis of total assets, it does not depict the ideal position. highest and lowest proprietary ratios were 0.09 times in 2008,2009,2010 and in 2012 and 0.08 times in 2011.Debt equity ratio of the bank was on an average 12.55 times , which is an adverse situation, as it should be 0.50 times (1:1). The above analysis does not show good solvency position of the bank. Average current ratio was 0.048 in SBI which is lower than ideal current ratio i.e (2:1) it shows bank put less capital in current assets and liabilities are more. The average return on assets is 0.83 and ranges between 0.60 to 0.95 and the average Earnings per share is 136.9. Proprietary ratio indicates that the assets of SBI are not increasing as ratio is same for almost 4 years except in year 2011.

SUGGESTIONS

On the basis of the results, some suggestions may be given to overcome the problems engulfing the bank:

  • The company should reach an optimum level of capital mix. For this purpose the bank should redesign its capital structure, such that it can gain maximum profit at minimum risk.
  • Financial position is become unstable. The bank only concentrate on current assets but not in fixed assets. They should concentrate on financial position too.
  • Cash position is not stable the bank have to be concentrate on holding the cash position.
  • The bank can attract shareholders by providing best service to them .
  • Interest expended and operating expenses is very high, it will affect profit of the bank. So the bank can concentrate on reducing the expenses of the bank.
  • The bank can increase its cash position by increasing providing various schemes for deposits

Materialization of the above suggestions is expected to increase the profitability by maintaining appropriate capital structure, leverage and working capital in state bank of India.

References

  • Sampath, S.J. (1990), “Monitoring the Variables Determining the Profitability of Banks,” Banking for better Profitability, Vol. 3, No. 2, pp. 691-699.
  • Panda, J. and Lall, G.S. (1991), “A Critical Appraisal on the Profitability of Commercial Banks,” Indian Journal of Banking and Finance, Vol.5, No.2, pp. 40-44.
  • Amandeep (1991), Profits and Profitability of Indian Nationalized Banks, A Ph.D. Thesis submitted to UBS, Punjab University, Chandigarh.
  • Amandeep (1993): “Profits and Profitability of Indian Nationalized Banks,” Ph.D Thesis, Punjab University, Chandigarh
  • Satyamurthy, B., (1994), “A Study on Interest Spread in Commercial Banks in India,” Working Paper, Vol. 21, No.2, pp. 81-92.
  • Krishna, R. R. (1996), “Profitability Analysis: An Overview”, Indian Banking: Today and Tomorrow, September
  • Ramamurthy, K. R. (1998), “Profitability and Productivity in Indian Banking”,Chartered Financial Analyst, February, pp.53-54.
  • Sarker, J., Sarker, S., and Bhaumik, S.K., (1999), “Does Ownership Always Matter? – Evidence from the Indian Banking Industry,” Journal of Comparative Economics, Vol.26, No. 2, pp. 262-281.
  • Sarker, P.C. and Abhiman Das, (199&), “Development of Composite Index of Banking Efficiency: The Indian Case,” RBI Occasional Papers, Vol. 18, No. 4, pp. 22-28
  • Ram Mohan, T. T. (2002), “Deregulation and Performance of Public Sector Banks”, EPW, February, pp.393-397.
  • CRISIL (2002), “Profitability of Banks: A Study Conducted by CRISIL”.
  • Jain, V. (2006), “Ratio Analysis: An Effective Tool for Performance Analysis in Banks”,PNB Monthly Review, November, pp.27-29.
  • Saikrishna, K .(2006), “Commercial Banks in India: Challenges Ahead”, Professional Banker, September, pp.48-53.
  • Ramudu, J.; and Rao, D. (2006), “A Fundamental Analysis of Indian Banking Industry”, The ICFAI Journal of Bank Management, Vol.5, No.4, pp.68-79.

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