Source: E-mail dt. 26 August 2011

A Study on Asset and Liability Management in Salem Co-operative Bank

Mrs. S.Sreekala

Research Scholar PSG College of Technology, Coimbatore- 641 004.

Dr. V.Santhi

Professor, Department of Humanities, PSG College of Technology,

Coimbatore- 641 004.

INTRODUCTION

ASSET AND LIABILITY MANAGEMENT

The Asset and liability management includes all deposits and advances, maturity of deposits and incremental assets and liabilities, etc. It is a decision making responsible for balance sheet planning from risk and return standpoint including the strategic management of liquidity, interest rate risks. The business and risk management strategy of the bank should ensure that the bank operates within the limited parameters set by the Board. Besides monitoring the risk levels of the bank, there should proper review the results and progress in realizationof the decisions made. In future business strategy decisions should be based on the banks current rate of interest. In respect of the funding policy, for instance, its responsibility would be to decide on source and liabilities mix or the assets sale. There should be efficient management of short term deposits, medium term deposits and long term deposits, loans and advances, borrowings and investments etc.

NEED OF ALM

  • ALM units create a properly aligned risk and return management process. The right mix between skills and risk appetite must be identified, expected outcomes of activities known and appropriate metrics established. The approach adopted needs to be aligned to the realities of the market the bank.
  • A bank needs to realize that the right level of asset and liability need to be committed to support the function.
  • Various techniques are used to examine the mismatch in a bank’s balance sheet and it can be a difficult process if not supported with adequate systems. Depending on systems and analytical support the ALM process will undertake a number of analysis designed to identify; static and dynamic mismatch.

OBJECTIVE OF THE STUDY

1. To study about the management of Assets and liabilities of the Salem District Central Co-operative Bank.

2. To study about the effectiveness and performance of the Bank.

3. To suggest measures for the improvement of Salem District Central Co-operative Bank.

RESEARCH METHODLOGY

RESEARCH DESIGN

The methodology used in the study is analytical and descriptive in nature where the researcher has to use facts (or) information already and study the characteristic of a particular group respectively and there by analyze to make a critical evaluation of the study.

TYPES OF DATA

SOURCES OF DATA

The researcher is primarily based on secondary data, with addition information gathered from the finance department. The main sources are company’s previous year’s annual reports and schedules.

DATA COLLECTION METHOD

SECONDARY DATA

The secondary data has been collected from the Annual Reports of the Salem District Central Co-operative Bank.

TOOLS USED FOR ANALYSIS OF DATA

The tools used for analyzing the financial position of the company are

1. RATIO Analysis

2. LEAST SQUARE ANALYSIS

3. CORRELATION

Ratio analysis is widely used tool of financial analysis. It can be used to compare the risk and return relationship of firms of different sizes.

It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined.

The term ratio refers to the numerical or quantitative relationship between two items/variables. This relationship can be expressed as percentage, fraction and proportion of numbers (1:4).

TYPES OF RATIO

Profitability Ratio

  • Operating profit Ratio
  • Net profit Ratio

Liquidity Ratio

  • Current ratio

Activity Ratio

  • Net profit to Net worth Ratio
  • Fixed Assets to Net worth Ratio
  • Net Profit to share capital Fund Ratio
  • Fixed Assets Ratio

Solvency Ratio

  • Proprietary Ratio
  • Cash to Current Asset Ratio
  • Cash to Current Liability Ratio
  • Cash to Share Holders fund Ratio

TABLE 1: Calculation of Operating Profit and Net Profit Ratio

OPERATING PROFIT RATIO / NET PROFIT RATIO
Income Year / Operating expense(Rs.in crore) / Income (Rs.in crore) / Ratio / Year / Net profit(Rs.in lakhs) / Income(Rs.in crore) / Ratio
2005-2006 / 10393 / 10398 / 0.99 / 2005-2006 / 5.3 / 10398 / 0.05
2006-2007 / 9056.6 / 9603.2 / 0.94 / 2006-2007 / 546.67 / 9603.2 / 5.69
2007-2008 / 11243 / 12387 / 0.91 / 2007-2008 / 1143.9 / 12387 / 9.23
2008-2009 / 16108 / 17010 / 0.95 / 2008-2009 / 901.93 / 17010 / 5.3
2009-2010 / 14752 / 16228 / 0.91 / 2009-2010 / 1475.7 / 16228 / 9.09

Source: Annual Report

TABLE : 1.2 CALCULATION OF CURRENT & NET PROFIT TO NET WORTH RATIO

CURRENT RATIO / NET PROFIT TO NET WORTH RATIO
YEAR / CURRENT ASSETS(Rs.in crore) / CURRENT LIABILITIES(Rs.in crore) / RATIO / YEAR / NET PROFIT(Rs.in lakhs) / NET WORTH(Rs.in crore) / RATIO
2005-2006 / 113509 / 106012 / 1.0707 / 2005-2006 / 5.3 / 118144.51 / 0.0044
2006-2007 / 102064 / 77098.4 / 1.323 / 2006-2007 / 546.67 / 125572.02 / 0.4353
2007-2008 / 123851 / 128127 / 0.966 / 2007-2008 / 1143.9 / 150666.52 / 0.759
2008-2009 / 175766 / 150664 / 1.166 / 2008-2009 / 901.93 / 179318.6 / 0.502
2009-2010 / 211142 / 179748 / 1.174 / 2009-2010 / 1475.67 / 213408.8 / 0.691

Source: Annual Report

TABLE1. 3 CALCULATION OF FIXED ASSETS TO NETWORTH AND NET PROFIT TO SHARE CAPITAL FUND RATIO

FIXED ASSETS TO NET WORTH RATIO / NET PROFIT TO SHARE CAPITAL FUND RATIO
YEAR / FIXED ASSETS(Rs.in crore) / SH. FUND(Rs.in crore) / RATIO / Year / Net profit(Rs.in lakhs) / Share capital(Rs.in crore) / Ratio
2005-2006 / 4635.6 / 2459.98 / 1.88 / 2005-2006 / 5.3 / 2460 / 0.22
2006-2007 / 23507.76 / 5673.24 / 4.14 / 2006-2007 / 546.67 / 5673 / 9.64
2007-2008 / 26815.71 / 9046.32 / 2.96 / 2007-2008 / 1143.9 / 9046 / 12.64
2008-2009 / 23918.65 / 12483.05 / 1.92 / 2008-2009 / 901.93 / 12483 / 7.23
2009-2010 / 23450.87 / 15703.88 / 1.49 / 2009-2010 / 1475.7 / 15704 / 9.4

Source: Annual Report

TABLE 1.4CALCULATIONS OF FIXED ASSETS RATIO AND PROPRIETORY RATIO

FIXED ASSETS RATIO / PROPRIETORY RATIO
YEAR / FIXED ASSETS(Rs.in crore) / LONG TERM FUND(Rs.in crore) / RATIO / YEAR / PROPRIETOR’S FUND(Rs.in crore) / TOTAL ASSETS(Rs.in crore) / RATIO
2005-2006 / 4635.6 / 2984.8 / 1.55 / 2005-2006 / 2459.98 / 118144.5 / 2.082
2006-2007 / 23507.76 / 19982.65 / 1.17 / 2006-2007 / 5673.24 / 125572 / 4.517
2007-2008 / 26815.71 / 20286.8 / 1.32 / 2007-2008 / 9046.32 / 150666.5 / 6.004
2008-2009 / 23918.65 / 20366.13 / 1.17 / 2008-2009 / 12483.05 / 179318.6 / 6.961
2009-2010 / 23450.87 / 21184.3 / 1.1 / 2009-2010 / 15703.88 / 213408.8 / 7.358

Source: Annual Report

TABLE 1. 6 CALCULATION OF CASH TO CURRENT ASSETS AND CURRENT LIABILITIES RATIO

CASH TO CURRENT ASSETS RATIO / CASH TO CURRENT LIABILITIES RATIO
Year / Cash & bank balance(Rs.in crore) / Current assets(Rs.in crore) / Ratio / Year / Cash & bank balance(Rs.in crore) / Current Liability(Rs.in crore) / Ratio
2005-2006 / 22080.97 / 113508.9 / 0.19 / 2005-2006 / 22080.97 / 106012 / 0.21
2006-2007 / 24276.14 / 102064.26 / 0.23 / 2006-2007 / 24276.14 / 77098.38 / 0.31
2007-2008 / 33333.76 / 123850.8 / 0.26 / 2007-2008 / 33333.76 / 128126.9 / 0.26
2008-2009 / 48760.96 / 175766 / 0.27 / 2008-2009 / 48760.96 / 150664.1 / 0.32
2009-2010 / 49706.22 / 211142.22 / 0.23 / 2009-2010 / 49706.22 / 179748.4 / 0.27

Source: Annual Report

TABLE1. 5 CALCULATION OF CURRENT ASSETS TO SHARE HOLDERS FUND RATIO

CURRENT ASSETS TO PROPRIETORS FUND RATIO
Year / Current assets(Rs.in crore) / Share hol.Fund(Rs.in crore) / Ratio
2005-2006 / 113508.9 / 2459.98 / 46.14
2006-2007 / 102064.26 / 5673.24 / 17.99
2007-2008 / 123850.8 / 9046.32 / 13.69
2008-2009 / 175766 / 12483.05 / 14.08
2009-2010 / 211142.22 / 15703.88 / 13.44

Source: Annual Report

LEAST SQUARE ANALYSIS

FORMULAE:

Least square (y) = a + bx

a = y

n

b = XY

X

TABLE 2 CALCULATION OF LEAST SQUARE METHOD

YEAR / NET PROFIT (Y)(Rs.in lakhs) / X / X / XY
2005-06 / 5.3 / -2 /
4 / -10.6
2006-06 / 546.67 / -1 / 1 / -546.67
2007-07 / 1143.9 / 0 / 0 / 0
2008-08 / 901.93 / 1 / 1 / 901.93
2009-9 / 1475.67 / 2 / 4 / 2951.34

EXPANSION

a = y

n

= 4073.47 = 814.69

5

b = XY = 3296= 329.6

X 10

FORECASTING FOR THE FUTURE NET PROFIT

YEAR / Y = a + bx / NET PROFIT(Rs.in lakhs)
2010-2010 / 814.69 + 329.6 (3) / 1803.49
2011-2011 / 814.69 + 329.6 (4) / 2133.09
2012-2012 / 814.69 + 329.6 (5) / 2462.69
2013-2013 / 814.69 + 329.6 (6) / 2792.29
2014-2014 / 814.69 + 329.6 (7) / 3121.89

TABLE 3.1 CALCULATION OF CORRELATION BETWEEN NETPROFIT TO TOTAL ASSETS

YEAR / NET PROFIT(X) (Rs.in lakhs) / TOTAL ASSETS (Y) (Rs in crore) / X / Y / XY
2005-2006 / 5.30 / 118,144.50 / 28.09 / 13,958,122,880.25 / 626,165.85
2006-2007 / 546.67 / 125,572.00 / 298,848.09 / 15,768,327,184.00 / 68,646,445.24
2007-2008 / 1,143.90 / 150,666.50 / 1,308,507.21 / 22,700,394,222.25 / 172,347,409.35
2008-2009 / 901.93 / 179,318.60 / 813,477.72 / 32,155,160,305.96 / 161,732,824.90
2009-2010 / 1,475.67 / 213,408.80 / 2,177,601.95 / 45,543,315,917.44 / 314,920,963.90
4,073.47 / 787,110.40 / 4,598,463.06 / 130,125,320,509.90 / 718,273,809.23

r = 0.863

TABLE 3.2 CALCULATION OF CORRELATION BETWEEN NETWORTH TO TOTAL ASSETS

YEAR / NET WORTH(X) / TOTAL ASSETS(Y) / X2 / Y2 / XY
2005-2006 / 118,144.51 / 118,144.50 / 13,958,125,243.14 / 13,958,122,880.25 / 13,958,124,061.70
2006-2007 / 125,572.02 / 125,572.00 / 15,768,332,206.88 / 15,768,327,184.00 / 15,768,329,695.44
2007-2008 / 150,666.52 / 150,666.50 / 22,700,400,248.91 / 22,700,394,222.25 / 22,700,397,235.58
2008-2009 / 179,318.60 / 179,318.60 / 32,155,160,305.96 / 32,155,160,305.96 / 32,155,160,305.96
2009-2010 / 213,408.80 / 213,408.80 / 45,543,315,917.44 / 45,543,315,917.44 / 45,543,315,917.44
Total / 787,110.45 / 787,110.40 / 130,125,333,922.33 / 130,125,320,509.90 / 130,125,327,216.12

r = 0.999

FINDINGS:

  1. Table1.1 Operating Profit shows that the ratio was fluctuating and decreasing every year except 2008-09.

ii) Net profit is very low in the year 2005-06 The net profit has been gradually increased in the year 2007-08. except 2008-09 it has further decreased.

  1. Table 1.2 Shows that the current ratio of the firm is below the standard i.e., 2:1. There is 1:1 ratio for the bank. It shows that there is less liquidity position as specified in the table

ii) Net Profit to Net worth ratio is gradually increasing trend.

  1. Table 1.3 Fixed to Networth ratio is fluctuating every year. Only 2006-07 showing positive trend

ii)Net Profit to Share Capital Fund is declining except 2006-07 and 07-08

  1. Table 1.4 Fixed Asset Ratio shows that declining trend except 2007-08

ii)Proprietary ratio has been increased every year, the debt equity ratio increased which indicates reduction in risk.

  1. Table 1.5 shows that current asset have been maintained in the year 2005-06 and it has decreased every year.
  2. Table 1.6 Cash to Current asset ratio is fluctuating and also decreasing except 2007-08 and 2008-09.

Cash to Current Liability ratio shows that increasing trend except 2007-08 and 2009-10.

  1. Table no 2 The Net Profit is in good position. According to the least square method the Net Profit is expected to increase.
  2. Table 3.1 Correlation between Net profit to Total Assets which shows a reasonably strong positive correlation.
  3. Table 3.2 Correlation between Networth to Total Assets shows that is a strong positive correlation.

SUGGESTIONS:

  • The current ratio of the bank does not meet the standard ratio. It would be suggested that the bank to take necessary steps to increase the current assets of the bank.
  • Operating profit ratio shows that the expenses are higher than income. It is suggested that the bank can reduce the avoidable expenses
  • It is suggested that the bank can increase the current account holders from the public. These funds can be utilized by the bank and increase their income without any payment of interest to the current account holders
  • The Net Profit of the bank in the year 2005-06 was very low, which have been is now increased in the year 2009-10.. It is suggested to increase the net profit of the bank which would the risk of suffering from loss
  • The Net Profit, and Total asset correlated positively they should maintain the same in future.
  • The investments are made in government securities with low revenue. The bank invest huge amount in these securities which is suggested to reduce the level of investments
  • The bank has to do their major transaction with cash, so it has to be increased

Conclusion

The bank’s performance is satisfactory. In some area they are lacking in banking position. If they improve their customer service and technology they will come up with the standard level. . According to the least square method the Net Profit is expected to increase next five year. This study reveals the findings and recommendations which would be useful for the development and improvement to the bank.

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