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UNIT 3: Performance Evaluation Parameters for Banks & Retail1Pravin Tungare - Indira Institute of Management PUNE2Pravin Tungare - Indira Institute of Management PUNE3.1 Performance Evaluation Parameters for Banks (a) Customer base of banks - Customer is an entity having business relationship with bank - Customer base depends on: 1. No. of branches 2. Variety of services provided 3. Quality of service provided 4. Use of technology by bank 5. Risk taking ability of bank 6. Benefits provided to customers 7. Brand equity of bank 8. Long term relationship maintained by bank 9. consistent good financial performance 10. contribution to economic growth Pravin Tungare - Indira Institute of Management PUNE3Customer base depends on type of relationship with customer 1. Depositing money with bank 2. Bank as a trustee 3. Collection of bills & cheques 4. Safe deposit lockers 5. Bank as indemnity holder - Customer base is classified on the basis of risk involved - Components of customer base: Individual minor/ Individual major/HUF/ Partnership firm Private Limited Companies/ Public Limited Companies/Trusts Co-operative societies/ Government & public departments - Specific separate rules for each category are framed by bank Administration, management & profitability depends on customer base & services provided by bank

Pravin Tungare - Indira Institute of Management PUNE4(b) Non Performing Assets (NPAs) - Asset which ceases to generate income for the bank - Loan/advance where 1. interest /principal overdue for > 90 days 2. O.D. or C.C. is out of order for > 90 days 3. Bills discounted is overdue for > 90 days 4. interest /principal overdue for 2crop seasons [ short duration crops] 5. interest /principal overdue for 1 crop season [ long duration crops] - Bank cannot take interest on NPA to income account - NPAs must be reported to RBI & disclosed Pravin Tungare - Indira Institute of Management PUNE5 - Types of NPAs: Category of NPA Type of Asset Less than 12 months Substandard asset

12 months or more Doubtful asset

Auditors/RBI identified loss Loss asset but amount not written offProvisions to be made for NPAs by bank 1. Loss assets are written off 2.Doubtful assets: Period of NPA up to 1 year 1 - 3 years > 3 years Provision 25% 40% 100% 3. Substandard assets: 15% of total outstanding- Lower the NPAs better is the performance of bank

Pravin Tungare - Indira Institute of Management PUNE6(c) Deposits accepted by BankDemand Deposits - Payable on demand - Low or no interest - Current/Savings/ Overdue & unclaimed deposits - Interest paid six monthly on savings deposit Time or Term Deposits - Time period 7 days to 120 months - Interest depends on duration & bank specific - Interest rate reduced if withdrawn before maturity - Interest cumulative on quarterly basis - TDS for interest more than Rs. 10,000 P.A. - Non transferrable Types of deposits: FD/ MIS/ QIS/ Short term/ Recurring Pravin Tungare - Indira Institute of Management PUNE7(d) Return on Investment (ROI) - Two components : ROA & ROE ROA = [Net Income] / [ AV. Total Assets] Interest income on assets (-) Interest Expenses on liabilities = Net Interest income (+) Non interest income (=) TOTAL REVENUE (a) Provision for loan losses (+) Non interest expense (=) TOTAL EXPENSES (b) Income Before Tax (a-b) (-) Income Tax Expenses (=) NET INCOME

Pravin Tungare - Indira Institute of Management PUNE8 - Following are the assets of bank (a) Cash - Cash in hand - Cash with RBI - Cash with other banks (b) Money at short notice When bank makes money available at short notice to other banks & Financial Institutions (FIs) for a short period of 1 to 14 days it is treated as asset (c) Investments made by bank in various securities (d) Loans & Advances: Money given to various entities as loans & advances (e) Other assets not covered above Pravin Tungare - Indira Institute of Management PUNE9 - Following are the liabilities of bank (a) Share Capital is the contribution of shareholders for starting a bank (b) Reserves are accumulated funds from undistributed profits (c) Deposits are the money owned by customers & therefore it is a liability of a bank * Current Deposits * Savings Deposits * Time Deposits * Other Deposits (d) Borrowings are money borrowed from RBI & other banks (e) Other liabilities not included above

Pravin Tungare - Indira Institute of Management PUNE10 Return on Equity (ROE) ROE = [ROA] x [Leverage Ratio] = [ROA] x [ Bank Assets / Bank Capital ] ROA can be improved by: (i) Employing optimum level of assets (ii) Getting maximum interest on loans & advances (iii) Investing in securities which give more yield (iv) Minimizing other assets such as buildings, furniture, ATM machines & other infrastructure facilities (v) Keeping NPAs to minimum level (vi) Borrowings should be at minimum cost (vii) Minimizing operating expenses - ROE is improved when ROA improves & leverage is maximum -There should be proper balance between risk & return

Pravin Tungare - Indira Institute of Management PUNE11(e) Spread Spread = [ Av. Interest rate received on assets] (-) [Av. Interest rate paid on liabilities] Higher the spread more are the profits & better is the performance of bank (f) Financial inclusion - Delivery of financial services at affordable costs to low income sections of society - Prime objective of financial inclusion is the availability of banking & payment services to entire population - Goals of financial inclusion as per UN are: Access at a reasonable cost for all households to a full range of financial services sound and safe institutions governed by proper regulations financial and institutional sustainability competition to ensure choice and affordability for clients Pravin Tungare - Indira Institute of Management PUNE12Initiatives by RBIOpening of NO- Frill AccountsRelaxation on KYC normsEngage business correspondentsUse of technologyAdoption of Electronics Benefit Transfer (EBT)Introduction of General purpose Credit Card (GCC)Simplified branch authorizationOpening branches in unbanked rural centers-Challenges of financial inclusionDifficulties for banks to expand their business to remote areasLack of quality staff in remote areasWorking in remote areas is tough & costlyLack of awareness of banking in remote areasTechnological backwardness

Pravin Tungare - Indira Institute of Management PUNE13(g) Credit Appraisal - Essential for deciding eligibility & quantum of loan by bank - Criteria fixed by bank to decide creditworthiness of borrower - Creditworthiness assures repayment capacity of borrower - Norms to decide creditworthiness differs from bank to bank, type of loan & type of customer - For individual loan amount depends on three ratios Installment to income ratio Fixed obligation to income ratio Loan amount to asset to be purchased- For corporate viability of project assessed on : Technical/Commercial/Economical/Social parametersFor working capital loan bank uses Tandon committee norms or Comprehensive risk rating & scoring model prescribed by RBI For long term loan bank uses general company & it management information & financial ratios affecting companys loan serving capability Pravin Tungare - Indira Institute of Management PUNE14(h) Investments by bank - Investment as per CRR & SLR norms - CRR is cash kept with RBI - SLR is investment :with RBI in excess of CRR/Gold/ T-Bills/ Government bonds - Investments are shown under following 5 heads 1. Government Securities 2. Shares 3. Debentures & Bonds 4. Investment in subsidiaries & joint ventures 5. OthersPravin Tungare - Indira Institute of Management PUNE153.2 Performance Evaluation Parameters for Retail (a) Meaning of merchandising - Essence of retail - Process of making products available to end customer - Planning for: Marketing right merchandise At right place At right time In in right quantities At right place - Measuring performance of merchandise is necessary to know performance of the products as per target Pravin Tungare - Indira Institute of Management PUNE16(b) Methods of analyzing merchandise performance 1. ABC Analysis - Three categories of items A items can never be out of stock B items can be occasionally out of stock C items can be deleted from stock - Analysis can be done at any level of merchandise - Important performance measure used is contribution margin - Contribution = [Net Sales] - [COGS] - [Other variable expenses] - Three categories on the basis of contribution margin A items 5% in quantity giving 80% contribution B items 15% in quantity giving 15% contribution C items 80% in quantity giving 5% contribution - Three categories on the basis of sales quantity A items 5% in quantity giving 70% of sale B items 10% in quantity giving 20% of sale C items 85% in quantity giving 10% contribution

Pravin Tungare - Indira Institute of Management PUNE17Analysis allows Maximum concentration on products giving more profitability Minimum efforts on products giving insignificant contribution2. Sell Through Analysis Comparison between actual & planned sales to decide: Whether early markdown are required or Whether more merchandise are required to satisfy demand3. Multiple Attribute Method Step 1: Make a list issues for decision making Step 2: Give importance weights to each attribute Step 3: Make judgment of each brands performance on each issue Step 4: Combine importance & performance scores Step 5: Add all to arrive at the brand scores Pravin Tungare - Indira Institute of Management PUNE184. Gross Margin Return On Investment (GMROI) - An inventory profitability evaluation ratio which analyzes ability of firm to turn inventory into cash above the cost of inventory - GMROI = Gross Margin Av. Inventory Cost - GMROI > 1 means firm is selling merchandise above cost GMROI < 1 means firm is selling merchandise below cost - GMROI = [Sales] - [COGS] - It is a merchandising planning & decision making tool - It focuses more on ROI rather on sales as basis for merchandise decision