Question Paper

Integrated Case Studies – III (361) : January 2007

Case Study (100 Marks)
• This section consists of questions with serial number 1 - 9.
• Answer all questions.
• Marks are indicated against each question.

Read the case carefully and answer the following questions:

1. The new Basel Capital Accord is driving banks to adopt more comprehensive risk management systems. In this
context discuss how is Bank of Baroda geared to take care of various kinds of risk.
• (15 marks) < Answer >
2. Describe the salient features of Real Time Gross Settlement System?
• (10 marks) < Answer >
3. Describe RBI guidelines for restructuring assets. Evaluate debt restructuring mechanism of Bank of Baroda?
• (10 marks) < Answer >
4. Explaining the capital adequacy norms in detail, distinguish the items qualified for Tier-I and Tier-II Capital.
Does the Bank satisfy the required CAR as per the RBI guidelines?
• (10 marks) < Answer >
5. Using Annexure-1 and Annexure-2 determine the NDTL (Net Demand and Time Liabilities) and the CRR and
SLR to be maintained by Bank of Baroda.
• (15 marks) < Answer >
• 6. Discuss the financial position of Bank of Baroda.
• (10 marks) < Answer >
• 7. Discuss the NPA position of Bank of Baroda.
• (10 marks) < Answer >
• 8. Analyze the treasury and foreign exchange operations of the bank.
• (10 marks) < Answer >
• 9. Explain the Specialized Integration Treasury Branch (SITB) services of the bank.
• (10 marks) < Answer >
Bank of Baroda
“Bank of Baroda’s greatest strength is its uninterrupted profit and dividend
payments record”.
– Dr. Anil K. Khandelwal, Chairman and Managing Director
• Indian banking industry had the services of several leaders of extreme caliber. Leaders like
RK Talwar, (Chairman of State Bank of India in the 1970s), D N Ghosh (Chairman of State Bank of India in the
1980s), KR Rammoorthy (Chairman and Managing Director of Corporation Bank in the 1990s) were among those who
provided a new paradigm to the Indian banking industry. Leadership qualities are put to test in times when a bank has
perform well even after the exit of such leaders. This is particularly true in case of banking industry as it has been
observed that several banks have faltered after the exit of high caliber leaders. The untimely and tragic collapse of the
Global Trust Bank and its subsequent merger with the Oriental Bank of Commerce stands testimony to the failure of
an existing leader.
• On March 1, 2005, Mr. Anil Khandelwal was appointed the CMD of Bank of Baroda (BOB) for a three-year
term. Popularly known as AK, Mr. Khandelwal has a track record of being a consistent result-oriented leader. On 18th
June 2005, Mr. AC Mahajan was appointed the Executive Director of the bank for a five-year tenure. With such
leaders at the top management, level, BOB revealed a strong potential of being one of the top players in the Indian
banking sector. After a successful stint at the Dena Bank, AK brought in several measures such as – technology
upgradation, ATM expansions, providing better customized retail services and more visibility through the appointment
of brand ambassadors. Most Government banks are beleaguered with a parallel authority between the union and the
management. With better coordination among the senior management and the union, BOB has successfully doubled its
business in a matter of just four years.
HISTORY OF INDIAN BANKING
• The growth of modern commercial banking industry in India commenced with the establishment of Bank of
Bengal in 1786 in Calcutta. Three presidency banks were set-up in Madras, Bombay, and Calcutta and later limited
liability concept was introduced in 1860 resulting in the establishment of joint stock banks. In 1921, the three presidency
banks were combined to become a superlative power as the Imperial Bank of India for all the commercial banks, a
bankers’ bank and a banker to the government. The Reserve Bank of India (RBI) was establishment as the central bank
for the country marking the end of the quasi-central banking role of the Imperial Bank of India. All India Rural Credit
Survey Committee recommended the establishment of the RBI by taking over Imperial Bank of India to serve the
economy in general and to focus on the rural sector.
• As a result the State Bank of India (SBI) was established in 1955 and an act was passed in 1959 for enabling
SBI to take over eight former state-associate banks as its subsidiaries. Fourteen private banks were nationalized in the
year 1969 followed by 6 private banks in 1980. Since 1991, many financial reforms have been introduced that
substantially transformed the banking industry in India.
Overview
• Today RBI is the central regulatory, supervisory and monetary authority of India for its financial system. Many
financial intermediaries in the public and private sectors participate in India’s financial sector, that include:
• a. Commercial banks comprising:
• Public sector banks;
• Private sector banks; and
• Foreign banks.
• b. Cooperative banks;
• c. Long-term lending institutions;
• d. Non-banking finance companies, including housing finance companies;
• e. Other specialized financial institutions, and state-level financial institutions;
• f. Insurance companies; and
• g. Mutual funds.
• Till the early 1990s the financial system in India was very much under control – interest rates were
administered, formal and informal parameters governed asset allocation, and strict controls restricted entry into and
expansion within the financial sector. Economic reform program of Indian Government that began in 1991 has taken
over the financial sector. The first phase of the reform process began with the implementation of the recommendations
of the Committee on the Financial System, the Narasimham Committee I. The second phase of the reform process
began in 1999.
• Risk Management and Basel II
• Compared with past risks, banks are now facing different types of risks like – interest rate risk, liquidity risk,
and exchange risk in view of the dynamic nature of the financial market. While lending, they face credit risk that
includes default risk and portfolio risk. Operational risk is the other more important risk they face. In the process of
adopting the Basel II Accord, banks have been already required to take active measures in terms of risk management
systems, evaluation capital charges for operational risk and bringing about more transparency in financial reporting as
part of market discipline.
• The risk profile of the banks would decide their supervisory cycles; The RBI has adopted Risk Based
Supervision (RBS). Under this, a bank with higher risk rating will undergo more frequent supervisory reviews than the
one with lower risk rating. For the implementation of the Basel II Accord, the RBI indicated that it would adopt a
phased approach. From the year ended 31 March, 2005, the implementation of market risk systems would be
completed within two years, and credit and operational risk systems with effect from 31 March, 2007.
• RTGS Implementation in India
• India crossed a major milestone in the development of electronic payment systems; it complied with the
requirements framed by the Bank for International Settlements, with the execution of operations of the Real Time
Gross Settlement (RTGS) system from March 26, 2004. As of March 31, 2005, there are 95 direct participants in the
RTGS system.
• The salient features of the RTGS system are as follows:
• Payments are settled transaction-by-transaction for high value and retail payments;
• Settlement of funds is final and irrevocable;
• Settlement is done on a real time basis and the funds settled can be further used immediately;
• It is a fully secured system which uses digital signatures and public key infrastructure based inscription for safe
and secure message transmission;
• There is a provision for intra-day collaterized liquidity support for member banks to smoothen the temporary
mismatch of fund flows; and
• RTGS provides for transfer of funds relating to inter bank settlements as also for customer related fund transfers.
• Earlier, more than 75% inter bank transfers were settled through the Deferred Net Settlement Systems (DNSS)
based inter-bank clearing, but are now done through RTGS.
• Corporate Governance
• Banks, and banking regulators are showing interest to adopt good corporate governance practices for the overall
audit, supervision of banks and financial institutions in India. Banks in India now have an audit committee of the
Board of Directors that is entrusted with the job of overseeing the organization, operationalization and quality control
of the internal audit function. Disclosure levels in bank Balance Sheets have been enhanced, while measures have also
been initiated to strengthen corporate governance in banks.
• Consolidation
• Size matters for the banking sector and Indian banks are increasingly recognizing its importance. Their efforts
have received support from the publicly expressed views of the government for the consolidation of the Indian
banking sector. There were many issues of mergers and acquisitions and all are of financially distressed banks. Banks
saw consolidation as a means of attaining inorganic growth in size and meeting economies of scale and scope.
Government has its own policies in the process of consolidation of public sector banks and would not stand in the way
of mergers of the same, if the bank boards come up with the proposal of merger that would enhance the operational
efficiency based on synergies. The Government has provided tax breaks aimed at promoting mergers and acquisitions.
The Section 72(A) of the IT Act enables the obtaining company the benefit of “carry forward and set-off of
accumulated losses and unabsorbed depreciation” of the acquired entity, subject to specified conditions being fulfilled.
Accordingly, the act relating to the set-off and carry forward of loss and allowance for depreciation shall apply. It is
foreseen that the consolidation process in the public sector bank group is imminent. Banks will be required to attain
higher capital standards under Basel II and meet the force of competition by adoption of the extended universal
banking model.
• Company Profile
• On 20th of July 1908, Maharaja Sayajirao of Baroda founded the “Bank of Baroda Limited” with an initial paid
up capital of Rs.1 million. After independence, the bank with its 48 branches still remained more of a regional bank.
Between 1953-1958, 30 more branches were opened. The year 1953 witnessed the bank’s opening of its first overseas
branch in Kenya that was followed by three branches in Fiji, five more branches in Kenya, three in Uganda and one
each in London and Guyana. On 19th July 1969, the bank was rechristened as “Bank of Baroda”. The primary
objective of the bank was to serve the divergent needs of catering to the development of the economy, and to promote
the welfare of the people. Later, the bank established the Multi-Service Agency (MSA) model catering to urban micro
credit. In the year 1977, the bank initiated the “Gram Vikas Kendra” (GVK), an innovative model that aimed towards
integrated rural development. Exhibit 1 provides the key milestones attained by the bank over the years.
• Exhibit 1
Date Event
1908 Establishment of the Bank
1910 Opened its first branch in the city of Ahmedabad
1919 Opened its first branch in Mumbai City
1953 First international branch opened at Mombasa, Kenya
1958 The Hind Bank merged with BOB
1962 The New Citizen Bank Limited merged with BOB
1963 BOB acquire the Surat Banking Corporation
1964 The Umargoan Peoples’ Bank & Tamilnadu Central Bank merged with BOB
1984 Bank of Baroda launched its Credit Card Operations
1988 The Traders Bank Limited merged with BOB
1995 First bond issue of Rs.3,000 million
1996 First public issue of Rs.8,500 million
1999 Commenced operations as a depository.
Bareilly Corporation Bank merged.
2000 Appointed Arthur Andersen India Private Limited as risk management consultant
for setting up a Comprehensive Risk Management Architecture for the Bank.
Establishment of a separate Risk Management Department, headed by a General
Manager and specialized integrated treasury branch.
2002 The Benares State Bank Limited merged with BOB.
2004 The south Gujarat Local Area Bank merged with BOB.
Signed MOU with National Insurance Company Limited June 1, 2004 for selling
their non-life insurance products under corporate agency arrangement.
2005 Bank’s new logo launched.
Launched the IT Enabled Business Transformation Program and signed the
contract with Hewlett Packard in this regard.
Multicity cheque facility launched.
Upgradation to the Bank’s IT framework to ensure consonance with world-class
standards rolled out.
• Source: Annual Report, BOB.
Today, Bank of Baroda is one of the leading commercial banks in India. As on 30th June 2005, the company has 2,689
branches in India that are spread over the entire territorial boundaries of the country. Apart from this, the company also
has its presence in 19 countries across the globe. As on the same date, the company has a total workforce of over
39,305 personnel and boasts of over 25 million customers. Bank of Baroda was established way back in the year 1908
as a private bank; it later became a nationalized entity along with some other banks in the year 1969. The company
went for an initial public offer in the year 1996 whereby the Government shareholding of the bank went diluted to the
extent of 66.83%. Further, in 2005 the bank went again for a public offer whereby the Government stake was further
reduced to 53.81%. BOB is also the first bank to have been credited with corporate governance rating of “CGR-2”,
from ICRA that spoke very high of the corporate governance of the bank. The following Exhibit 2 provides the details
of the organizational structure of the bank.
• Exhibit 2
 • Source: Annual Report, Bank of Baroda.
• Services
• The bank’s business comprises primarily six lines of businesses, namely, (i) international operations, (ii) retail
financial services, (iii) business financial services, (iv) global treasury (v) rural financial services and (vi) Corporate
financial services include – services in areas of commercial banking products and services to corporate customers that
also includes medium-and-small businesses and Government entities. The bank’s products range from deposits, term
loans and advances from the acquisition purposes, construction and also improvement of assets. Apart from this, the
bank provides fee-based services such as: cash management and remittance related services. In addition to this, the
bank’s subsidiary BOB Caps provides a wide range of appraisal and merchant banking services. The bank’s
international banking operations way back to the year 1953 when the bank opened its first offshore branch in
Mombassa in Kenya. Today, the total number of overseas branches of the bank is 59 that provide the bank with a
diversity of customers. In the fiscal year 2005, the bank’s international operations made up for 15.47% and 9.28% of
its total business and total income respectively; this is significant when compared to the 14.78% and 7.74% figures
recorded in the fiscal 2004. The retail financial services are its major strength. The bank caters to the retail banking
needs of its customers both within the country and abroad. The branch network is especially strong in the states of
Gujarat, Maharashtra and Uttar Pradesh. Its deposit products, retail loans, depository services, and debit cards cater to
the financial needs of the bank huge customer base. The bank provides its business financial services to the small-and
medium-sized entities and also to the commercial enterprises. Such services include – deposits, loans and advances,
working capital finance, short-term corporate loans, project finance and cash management services. Its domestic
operations are well integrated through its Specialized Integrated Treasury Branch (SITB). The SITB facilitates the
bank in leveraging its arbitrage opportunities and ensures a better risk management and compliance. BOB focus is on
addressing the needs of the priority sector customers and offers several specialized products and services to them. The
rural financial service of the bank includes provisions of special offerings that extend credit facilities to small and
marginal-farmers, agricultural laborers and also cottage industry entrepreneurs. The success of its services stems
primarily out of the wide branch and ATM network. It also provides latest services like, Phone Banking and Internet
Banking. As on 31st August 2005, the bank’s Indian branch network comprised 1,170 rural, 539 semi-urban, 490
urban and 490 metropolitan branches all of which are either or almost completely computerized. Apart from this, all of
its overseas branches are completely computerized. Exhibit 3 and Exhibit 4 given below provides the summary
information relating to the bank’s operations as at the end of fiscal 2004 and fiscal 2005.
• Exhibit 3: Domestic
As at March 31, 2004 As at March 31, 2005
Number Deposits Advances Number Deposits Advances
Geographic
of (Rs. in (Rs. in of (Rs. in (Rs. in
Distribution
branches million) million) branches million) million)
Northern India 479 110,324 45,847 483 131,858 58,889
North-Eastern 25 4,900 1,639 25 5,610 2,153
India
Eastern India 250 47,644 23,371 255 51,420 28,444
 Central India 693 110,055 35,283 692 119,013 40,174
Western India 984 310,453 167,035 984 335,155 201,714
Southern India 261 60,087 39,350 261 66,866 45,081
Total 2,692 643,463 312,525 2,700 709,922 376,455
• Source: Annual Report, BOB.
• During the period from April 2005 to June 2005, BOB had consolidated the branch operations on account of
which the operations of 11 of our branches were merged with other branches.
• Exhibit 4: International
As at March 31, 2004 As at March 31, 2005
Deposits Advances Deposits Advances
Type Countries Number (Rs. in (Rs. in Countries Number (Rs. in (Rs. in
million) million) million) million)
Branches 10 38 86,209 65,809 10 38 103,412 78,836
Subsidiaries 6 16 10,511 4,414 7 17 11,840 5,484
Total 16 54 96,720 70,223 17 55 115,252 84,320
• Source: Annual Report, BOB.
• Treasury Operations
• BOB had been successful in establishing dedicated desks at the specialized integrated treasury branch, which
headed by professionals with considerable experience. Apart from the regular activities of managing funds and
liquidity, the domestic operations of the bank includes handling commercial papers, certificates of deposits,
government securities, treasury bills, bonds and debentures, equities and various other derivatives along with various
other financial instruments. As on 30th June 2005, 39.94% of the bank’s net demand and time liabilities consisted of
Government and other approved securities; the same day, the bank maintained 4.82% of its net demand and time
liabilities in its current account with the central bank. Both these figures were in consonance with the RBIs’ stipulated
guidelines. BOB’s treasury is the central point for the market risk management for the bank. The treasury undertakes
liquidity management by seeking to maintain a tradeoff level of liquidity while complying with the Cash Reserve
Ratio (CRR) and Statutory Liquidity Ratio (SLR). Exhibit 5 given below provides the details of the allocation of the
bank’s investment portfolio as at the end of fiscal 2003, 2004 and 2005.
• Exhibit 5
March 31, 2003 March 31, 2004 March 31, 2005
In Rs. In Rs. In Rs.
Securities % % %
million million million
SLR
Government Securities 211,664.90 74.59 271,898.21 75.41 278,611.40 79.90
Approved Securities 14,603.45 5.15 13,956.92 3.87 13,136.58 3.77
Subsidiaries and Joint 2,360.00 0.83 2,547.33 0.71 2,536.17 0.73
Ventures
Sub total 228,628.35 80.57 288,402.46 79.99 294,284.15 84.40
Non-SLR
Recap Bonds 1,820.00 0.64 1,820.00 0.50 1,820.00 0.52
Bonds and debentures 44,000.73 15.51 45,096.45 12.51 37,195.72 10.67
Shares 4,120.80 1.45 5,171.39 1.43 5,286.66 1.52
Commercial Paper, 5,203.41 1.83 20,068.14 5.57 10,107.20 2.90
Mutual Funds and Others
Sub total 55,144.94 19.43 72,155.98 20.01 54,409.58 15.60
Total (Domestic) 283,773.29 100.00 360,558.44 100.00 348,693.73 100.00
Outside India 18,020.54 19,629.66 22,050.68
Total 301,793.83 380,188.10 370,744.41
• Source: Annual Report, BOB.
• Exhibit 6
 (Rs. in million)
Three
Three
Months
Fiscal Fiscal Fiscal Months
Particulars ended
2003 2004 2005 Ended
June 30,
June 30, 2005
2004
Business Segment Revenue(1):
Treasury Operations 35,049 42,902 40,855 10,801 9,367
Other Operations 38,543 35,759 36,507 8,429 9,453
Total Revenue 73,592 78,661 77,362 19,230 18,820
• Note: (1) Segment revenue represents revenue from external customers.
• Source: Annual Report, BOB.
•
• Foreign Exchange Operations
• Bank of Baroda has global presence and is thus credited as a leading foreign exchange dealers in the country.
The state of the art dealing room at the SITB, Mumbai, takes care of much of its foreign exchange activities that in
turn facilitate the bank to act as a market maker in both the spot and forward markets and also in the foreign swap
markets. The services offered by the bank include hedging foreign currency risk by providing forward covers and
various other derivatives products. BOB generally enters into foreign exchange and derivatives transactions for its
customers and also on their own account. BOB is also enabled with the SWIFT mechanism for worldwide inter-bank
communication at 97 of its foreign exchange branches in India and abroad. SWIFT provides international money
transfers to be carried out more accurately and also with greater speed. Exhibit 7 given below shows BOB’s Forex
turnover till 30th June 2005.
• Exhibit 7
March 31, March 31, March 31, March 31, June 30,
2002 2003 2004 2005 2005
Particulars
(Rs. (Rs. (Rs. (Rs. (Rs.
in million) in million) in million) in million) in million)
Merchant Turnover 57,279 177,860 337,533 417,286 102,960
Interbank Turnover 221,523 953,204 1,440,238 1,691,352 532,962
Total 278,802 1,131,064 1,777,771 21,086,38 635,922
• Source: Annual Report, BOB.
• Risk Management
• In today’s corporate scenario, risk management plays a crucial role in the success of an organization. Bank of
Baroda too lays a special emphasis on the management and control of risk management. In any financial services
company, there exists primarily three kinds of risks namely – credit risk, market risk and operational risk. BOB has an
effective risk management framework that takes care of all these kinds of risks. The bank flows a flexible and dynamic
risk management module that enables it to keep pace with the changing risk management profile. Since the year 2001,
the bank has successfully implemented an internal risk management system headed by the bank’s General Managers.
Over the years, this has evolved into sophisticated and effective risk management tool for the bank’s business whereby
the complete responsibility for managing the risk lies with the sub-committee of the bank’s board. Apart from this, the
bank also has a Credit Policy Committee, Asset Liability Management (ALM) Committee and Operational Risk
Management Committee that takes care of the various kinds of risks at different levels.
• Credit Risk
• It goes beyond saying that credit risk forms an integral part of banking business that normally arises out of the
diminution of the credit quality of the borrower or the counter-party involved and the risk that the parties concerned
will default on the contractual repayment under the advance. There are four different credit management cells that
work together to (i) identify, (ii) measure, (iii) monitor and (iv) control the bank’s credit risk exposure. These cells are
– the Corporate Research Cell, Portfolio Cell, Credit Review Cell and Economic Forecasting Cell. The bank maintains
credit exposure ceilings as a part of prudential measure as stipulated by the RBI norms. This is primarily aimed
towards improving the risk management and avoiding the concentration of credit risks. Exhibit 8 provides the bank’s
credit exposure ceilings as on 31st March 2005.
• Exhibit 8
Particulars Rs. in Million
1. Tier I Capital (Eligible element) 39,542.30
2. Tier II Capital (Eligible element) 21,222.80
3. Total Capital Funds 60,765.10
4. Single Borrower Exposure Limit 9,114.80
15% of the total capital funds for AAA, A & A as per new rating
model and A – & A as per old rating model.
5. Single Borrower Exposure Limit 7,595.60
12.5% of the total capital funds for BBB as per new rating model
and B+ as per old rating model.
6. Single Borrower Exposure Limit 6,076.50
10% of the total capital funds for below BBB as per new rating
model and below B+ as per old rating model.
7. Single Borrower Exposure Limit in case of Infrastructure 12,153.00
advances (20% of the total capital funds)
8. Group Borrower Exposure Limit (40% of the total capital funds) 24,306.00
9. Substantial Exposure (600% of the capital funds) 364,590.60
• Source: Draft Red Herring Prospectus, Bank of Baroda.
• As per the RBI guidelines, BOB’s credit exposure ceilings are fixed to its capital adequacy standards. As per
the standards set, the bank introduced a risk based single borrower exposure that is linked to the credit rating of the
borrower. Exhibit 9 given below provides a summary of the same.
• Exhibit 9
Maximum Single Maximum Single
Credit Rating of
Borrower Exposure Borrower Exposure
the Account
Ceilings Ceiling for Infrastructure
AAA, AA, A 15% of capital fund 20% of capital fund
BBB 12.5% of capital fund 17.5% of capital fund
Below BBB 10% of capital fund 15% of capital fund
• Source: Annual Report, BOB.
• Market Risk
• Market risk is another kind of risk that is inherent in the business of any financial service providing company. It
is the risk that arises out of the changes in the market variables such as – interest rates, exchange rates and other asset
prices. The main objective of managing market risk is to prevent excessive exposure of the earnings and equity to loss
and also to reduce the exposure to the volatility that is inherently present in various financial instruments like
securities, foreign exchange contracts, equity and derivative instruments as well as Balance Sheet or structural
positions. Primarily, the risk that the bank faces as a financial intermediary is interest rate risk due to its asset and
liability management activities. The market risks that the bank is exposed to relates to foreign exchange risk on its
foreign currency positions, liquidity or funding risk and price risk on its trading portfolios. The ALM committee looks
after the overall management of market risk in the bank. The following are the main responsibilities the committee
shoulders:
• Determining the pricing of products for the bank’s deposits and advances.
• Estimating the maturity profiles and the mix of incremental assets and liabilities.
• Framing future strategies for the bank after considering the future interest rate scenario.
• Bringing in an effective transfer pricing.
• Regular reviewing of the return on asset ratios.
• As stated earlier the bank has successfully implemented the SITB facility since October 2001 equipped with the
latest technologies that coordinate the activities of money market, investments and foreign exchange functions. Apart
from this, the SITB also monitors the interest rate risk on a continuous basis. The following are the primary
responsibilities that rest with the SITB:
• Ensuring that there is complete compliance with the various regulatory and prudential requirements.
• Managing liquidity of the bank.
• Providing efficiency to the delivery channels.
• Occupying a major position in the debt market.
• Acting as a major market maker in the foreign exchange market.
• Foreign Exchange Risk
• BOB conducts extensive foreign exchange operations that include trading and also taking positions in various
currencies both proprietary and also on behalf of its clients. As a result of these, a portion of the market risk that the
bank is exposed to are foreign exchange risk resulting due to adverse exchange rate movements during a period in
which the bank may have an open position in any combination of foreign currencies. In order to determine the market
risk position resulting out of foreign exchange operations, BOB uses combination measurement techniques that are
both static and dynamic in nature.
• i. The static analyses measures the market risk exposure of the foreign exchange product positions by
comparing the Value at Risk (VaR) positions both as an individual and on a portfolio basis. The VaR method is
used in order to assess the losses that would culminate on the trading positions due to the variations in currency
exchange rates for a particular given confidence level within a specified period of time. The bank manages the
foreign exchange market risk exposures by computing VaR at 95%, 97.5% and 99% confidence level for 1-day
and 10-day time spans.
• ii. The dynamic analysis seeks to measure the market risk exposure of the bank’s foreign exchange
products by estimating the potential future profits and losses and tries to capture the effect of both the current
and the future events that can occur during the said period. Through the stress testing analysis of a series of
potential stress scenarios, the bank measures market risk exposures. Once the bank carries out the static and the
dynamic analyses, it sets parameter and limits that are designed to prevent its foreign exchange operations from
violating predetermined market risk exposures. In the case of the VaR analysis, determining the limits
facilitates the bank in preventing exposures to risk that are not in accordance to its risk return profile.
• Operational Risk
• BOB faces operational risk mainly due to inadequate or failed internal process, people and systems or any
external events. The bank has successfully established systems and procedures that are available upto the branch level
in the form of books of instructions and circulars that cover different kinds of its activities. In an effort to monitor the
operational risk, the bank has created the Operational Risk Management Committee (ORMC) under the overall
supervision of the sub-committee of the board on ALM and Risk Management.
• Financial Health
• As on 31st March 2005, BOB’s total income decreased by 1.79% from Rs.81,822.32 million in fiscal 2004 to
Rs.80,354.35 million in fiscal 2005 and its total expenditure increased by 1.08% from Rs.55,910.73 million in fiscal
2004 to Rs.56.515.69 million in fiscal 2005. The bank’s operating profit decreased by 8.0% from Rs.25,911.58 million
in fiscal 2004 to Rs.23,838.67 million in fiscal 2005. The net profit also decreased by 28.21% from Rs.10,447.19
million in fiscal 2004 to Rs.7,500.19 million in fiscal 2005. The net interest income of BOB increased by 16.15% from
Rs.26,628.88 million in fiscal 2004 to Rs.30,929.87 million in fiscal 2005.
• Exhibit 10
Year ended March 31,
Particulars 2004 2005
(in Rs. million) (in Rs. million)
Interest income 63,581.94 66,576.37
 Interest expense 36,953.06 35,646.50
Net interest income 26,628.88 30,929.87
• Various components of interest income:
•
• Exhibit 11
Year ended March 31,
Particulars 2004 2005
(in Rs. million) (in Rs. million)
Interest and Discount on advances/bills 29,108.24 30,231.10
Income on Investment 29,996,44 30,891.73
Interest on balance with RBI and other Inter Bank Lending 2,079.04 2,450.49
Others 2,398.22 3,003.05
Total interest income 63,581.94 66,576.37
• Source: Annual Report, BOB.
• Operating profit before provisions and contingencies decreased from Rs.25,911.58 million in
fiscal 2004 to Rs.23,838.67 million in fiscal 2005. This decrease was due to reduction in operating profit of the Parent
Company. As a percentage of total income, the operating profit also decreased from 31.67% in fiscal 2004 to 29.67%
in fiscal 2005. BOB has the record of being a consistent dividend payer. In the fiscal year 2005, the bank declared
marginally less dividend as compared to the previous fiscal.
• Exhibit 12
(in Rupees)
Particulars FY 2005 FY 2004 FY 2003 FY 2002 FY 2001
Face value of Equity Share 10.00 10.00 10.00 10.00 10.00
(per share)
Interim Dividend on Equity Shares 527.88 879.79 592.00 Nil Nil
(in Rs. million)
Final Dividend on Equity Shares 938.45 1,026.42 1,184.00 1,184.00 1,184.00
(in Rs. million)
Total Dividend on Equity Shares 1,466.33 1,906.21 1,776.00 1,184.00 1,184.00
(in Rs. million)
Dividend rate (%) 50.00 65.00 60.00 40.00 40.00
Dividend tax (in Rs. million) 203.23 244.22 151.70 Nil 120.77
• Source: Annual Report, BOB.
• As on March 31, 2005, BOB’s Gross Non-Performing Asset (GNPA) as a percentage of gross advances was
7.3% and its Net Non-Performing Assets (NNPA) as a percentage of net advances were 1.45% (considering floating
provisions). The bank defines net NPAs as gross NPAs less its loan loss provision, Deposit Insurance and Credit
Guarantee Corporation/Export Credit Guarantee Corporation (DICGC/ECGC) claims received and held, Amount of
Interest Suspense held, Amount of Suit filed sundry Deposit received and held, and the amount of floating provisions.
The bank has kept such provisions for 81.35% of the gross non-performing loans, as on 31-3-2005. As of March 31,
2005, 43.66% of the gross NPAs were from priority sector advances. The maximum NPAs is in textile and chemicals
industries that stood at 14.86% and 11.86%, respectively, of total gross domestic NPAs as on 30-6-2005.
• Exhibit 13
31-3-2001 31-3-2002 31-3-2003
NPAs NPAs NPAs
Particulars
Amt NPAs as % of Amt NPAs as % of Amt NPAs as % of
Adv. Adv. Adv.
Gross Advances 296588 41857 14.11 362391 44893 12.39 37820 941679 11.023
Interest 3608 3608 4022 422 3619 3567
Suspense
 DICGC/ECGC 415 415 615 615 608 608
claims received
and held
SFSD held 601 591 596 581 453 453
Provisions 17757 17757 20528 20528 20048 20048
(as per RBI)
Other
Adjustments
Floating 1212 1212 2498 2498 4019 4019
Provisions
Total Deductions 23593 23583 28259 28244 28747 28695
Net Adv 272995 18274 6.693 34132 16649 4.98 34946 212984 3.723
(for Net NPA %)
Unapplied
Interest
Not Available Not Available 21367
(Domestic
NPAs)

31-3-2004 31-3-2005 31-3-2006

Particulars NPAs NPAs NPAs
Amt NPAs as % of Amt NPAs as % of Amt NPAs as % of
Adv. Adv. Adv.
Gross Advances 78334 39799 10.52 455291 33218 7.30 467826 33714 7.21

Interest 3221 3221 2983 2983 2897 2897

Suspense
DICGC/ECGC 449 449 510 510 493 493
claims received
and held
SFSD held 385 385 342 342 334 334
Provisions 18134 18134 17322 17322 17496 17497
(as per RBI)
Other 137 130 133
Adjustments
Floating 7190 7190 5864 5864 6020 6020
Provisions
Total 29516 29379 27151 27021 21373 27240
Deductions
Net Adv 48818 10420 2.99 428140 6197 1.45 440453 6474 1.47
(for Net NPA %)
Unapplied 18752 13986 14430
Interest
(Domestic
NPAs)

• The central bank has separate guidelines for restructured assets. A fully secured standard asset can be
restructured by rescheduling the principal or interest payments; but it must be separately disclosed as a restructured
asset during the year of restructuring. Sub-standard assets that have been restructured are also eligible to be upgraded
to the “standard assets” category only after a specified period, which is one year after the date when first payment of
interest or of principal, whichever is earlier, falls due, subject to satisfactory performance during the period. Added to
this, in order to create an institutional mechanism for the restructuring of corporate debt, the RBI has also created a
Corporate Debt Restructuring (CDR) system in 2003. The objective of this framework is to provide a more timely and
transparent mechanism for the restructuring of corporate debts of viable entities facing financial difficulties. Exhibit 14
given below provides a summary of the bank’s assets restructured during the periods concerned:
• Exhibit 14
• (Rs. in million)
RESTRICTED ASSETS
31-3-2003 31-3-2004 31-3-2005
CDR Restructured Assets
Standard Assets 1,504.10 5,752.50 4,819.20
Substandard Assets 0.00 133.80 132.30
Doubtful Assets 0.00 1,887.20 0.00
Loss Assets 0.00 0.00 0.00
Total CDR Restructured Assets 1,504.10 7,773.50 4,951.50
Other Restructured Assets
Standard Assets 6,746.60 2,452.60 2,409.30
Substandard Assets 82.50 695.70 243.40
Doubtful Assets 0.00 1,220.60 115.00
Total Other Restructured Assets 6,829.10 4,368.90 2,767.70
Total Restructured Assets for the year 8,333.20 12,142.40 7,719.20
• Source: Annual Reprot, BOB.

Exhibit 15: Sector-wise Analysis of Gross Non-Performing Assets

Particulars June 05 March 05 March 04

SECTORS GR-ADV GRNPA GRNPA% GR-ADV GRNPA GRNPA% GR-ADV GRNPA GRNPA%
Agriculture 51593.30 4509.60 8.74 44403.30 4451.80 10.03 30193.80 5096.00 16.88
SSI 36538.80 5805.60 15.89 37140.00 5827.50 15.69 35106.90 6246.00 17.79
Others 48894.50 3845.00 7.87 48614.00 3522.70 7.25 41231.20 3773.50 9.15
Total PS 137026.60 14161.20 10.33 130157.30 13802.00 10.60 106531.90 15115.50 14.19

Large and Med Industries 116735.60 13726.20 11.76 113647.50 13631.40 11.99 95902.30 18883.70 19.69

Trade and Others 62638.90 3691.00 5.89 71105.00 3524.40 4.96 59017.00 3706.50 6.28
PSUs 68591.80 656.60 0.96 61545.30 657.10 1.07 51073.70 283.80 0.56
Total NPS 247966.30 18073.80 7.29 246297.80 7812.90 7.23 205993.00 22874.00 11.10
Domestic Advances 384992.90 32235.00 8.37 376455.10 31614.90 8.40 312524.90 37989.50 12.16
Intl Advances 82833.30 1478.80 1.79 78836.10 160.32 2.03 65809.10 1809.10 2.75
Gross Total Adv. 467826.20 33713.80 7.21 455291.20 33218.10 7.30 378334.00 39798.60 10.52

Particulars March 03 March 02 March 01

SECTORS GR-ADV GRNPA GRNPA% GR-ADV GRNPA GRNPA% GR-ADV GRNPA GRNPA %

Agriculture 31989.60 5916.40 18.49 26877.80 6460.40 24.04 25867.10 6525.60 25.23
SSI 34587.40 7363.70 21.29 32837.40 7863.40 23.95 32354.70 7317.10 22.62
Others 33513.60 3457.30 10.32 26199.20 3971.00 15.16 21542.30 3641.40 16.90
Total PS 100091.00 16737.40 16.72 85914.40 18294.80 21.29 79764.10 17484.10 21.92
 Large and Med Industries 96113.90 17809.00 18.53 97680.90 19323.40 19.78 58093.00 16255.60 27.98

Trade and Others 51671.10 4263.10 8.25 50101.20 4425.80 8.71 65492.70 4793.90 7.32
PSUs 63627.70 290.10 0.46 70497.90 510.80 0.72 51228.30 557.10 1.09
Total NPS 211413.00 22362.20 10.58 218980.00 24260.00 11.08 174814.00 21606.60 12.36
Domestic Advances 311503.00 39099.60 12.55 304894.40 42554.80 13.96 254578.10 39090.70 15.36
Intl Advances 66705.40 2579.40 3.87 57497.00 2336.10 4.07 42009.60 2766.50 6.59
Gross Total Adv. 378209.00 41679.00 11.02 362391.40 44692.90 12.39 296587.70 41857.20 14.11

• Source: Annual Report, BOB.

•
• The bank’s growth over the last three fiscal years and the three months ended June 30, 2005 has been financed
by a combination of cash generated from operations, increases in its customer deposits, and borrowings.
• Exhibit 16
• (Rs. in million)
Three Months Three Months
Fiscal Fiscal Fiscal
Particulars ended ended
2003 2004 2005
June 30, 2004 June 30, 2005
Cash Flow from Operations (16,813.36) 6,270.20 24,495.71 (3,911.14) 15,922.71
Cash Flow from Investment (1,062.78) (1,096.17) (1,279.09) (704.42) (1,238.76)
Activities
Cash Flow Financing Activities (3,426.97) (676.93) (3,342.72) 2,598.94 (417.52)
Net Changes in Cash and Cash (21,303.10) 4,497.10 19,873.91 (2,016.61) 14,266.43
Equivalents

• Source: Annual Report, BOB.

• The net cash from operating activities stood at Rs.–16,813.36 million, Rs.6,270.20 million and Rs.24,495.71
million, in fiscal 2003, 2004 and 2005, respectively, and Rs.–3,911.14 million and Rs.15,922.71 million in the three
months ended June 30, 2004 and 2005 respectively. The net cash from operating activities reflects interest received
during the period from advances and investments and other income and non-cash charges such as depreciation and
provisions (mainly for non-performing and standard assets) made during the period, as well as adjustments for cash
charges. In addition, the net cash from operating activities reflects changes in operating assets and liabilities, including
investments, advances, deposits and borrowings, as well as other assets and liabilities. Change in borrowings reflects
only short-term borrowings and not Tier II Bonds, which are included in financing activities. BOB’s net cash flow
from investing activities was Rs.–1,062.78 million and Rs.–1,096.17 million in fiscal 2003 and 2004 respectively. Net
cash from investing activities was Rs.–1,279.09 million in fiscal 2005. Net cash flow from investing activities was
Rs.–704.42 million and Rs.–1,238.76 million during the three months ended June 30, 2004 and 2005, respectively. The
net cash used in investing activities reflects investments consisting of the purchase of fixed assets and investments in
its subsidiaries and associates. Net cash flow from investing activities reflects dividends received from its subsidiaries
and associates. During the three months ended June 30, 2005, the bank made a total investment of Rs.1,084.73 million
in two of its subsidiaries, namely BOBCARDS and NBL and the net cash from financing activities was Rs.–3,426.97
million,
Rs.–676.93 million and Rs.–3,342.72 million, in fiscal 2003, 2004 and 2005, respectively, and Rs.2,598.94 million and
Rs.–417.52 million for the three months ended June 30, 2004 and 2005, respectively. The net cash from financing
activities fluctuated primarily due to payment of dividends and corporate tax related to dividends and interest on the
Tier II Bonds. The bank’s net cash from financing activities reflects cash received from the issuance of the Tier II
Bonds. BOB issued Rs.3,000 million Tier II Bonds in the first quarter of fiscal 2004.
• The Road Ahead
• As seen from the various data, BOB relies heavily on its treasury income and as such it recorded lower
operating growth. But the bank enjoys a very good credit rating. One can safely say that the leadership will deliver in
years to come. The bank faces hurdles in its inability to grow its business, in the higher interest rate risk and in its slow
moving technology implementation plan.
All these issues are being addressed and continuously reviewed by the bank. With improvement in the asset quality in
the industry as a result of the general revival of the economy and the efforts undertaken by banks, the difference
between the book value and adjusted Book Value (adjusted for net NPLs and restructured standard loans) is
narrowing; for example, for BOB in FY2002 ABV was 54% of the reported BV, the difference narrowed to 80% in
FY2005 and one can expect the bank to deliver better results in years ahead.
• Annexure – 1
• (Rs. in crore)

Capital and Liabilities:

Bank Of Baroda Mar 2001 Mar 2002 Mar 2003 Mar 2004 Mar 2005

12 mths 12 mths 12 mths 12 mths 12 mths

Capital 294.34 294.34 294.34 293.27 293.27

Authorised capital 1500 1500 1500 1500 1500
Issued equity capital 296 296 296 296 296
Paid-up equity capital 294.34 294.34 294.34 293.27 293.27
Preference capital 0 0 0 0 0

Share capital deposit with RBI 0 0 0 0 0

Bonus equity capital 0 0 0 0 0

Reserves & surplus 3061.93 3533.42 4092.63 4836.39 5333.23

Free reserves 1915.41 1983.93 2036.12 2071.18 2403.59
Share premium reserves 737.31 737.32 737.35 738.76 738.77
Other free reserves 1178.1 1246.61 1298.77 1332.42 1664.82
Specific reserves 1146.52 1549.49 2056.51 2765.21 2929.64
Revaluation reserves 0 0 0 0 0
Accumulated losses 0 0 0 0 0

Deposits 54070.44 61804.47 66441.41 72967.32 81333.46

Demand deposits 5709.69 6328.01 6039.45 6771.64 6871.09
Saving deposits 12184.88 14047.07 16419.42 19780.21 22776.93
Term deposits 36175.87 41429.39 43982.54 46415.47 51685.44
Deposits of financial institutions 0 0 0 0 0

Demand deposits from banks 495.05 440.53 551.01 476.58 391.44

Term deposits from bank 2765.95 3643.01 2196.54 2923.37 3194.02
Deposits outside India 6201.65 7272.33 7039.83 8620.99 10341.23

Borrowings 2051.62 1892.65 1825.33 2375.11 3140.83

Capital and Liabilities:

Bank Of Baroda Mar 2001 Mar 2002 Mar 2003 Mar 2004 Mar 2005
12 mths 12 mths 12 mths 12 mths 12 mths
RBI 0 140 0 0 0
Banks 1.46 166.54 12.26 9.18 281.16
Short term bank borrowings 1.46 166.54 12.26 9.18 281.16
 Financial institutional borrowings 850.16 386.11 613.07 225.45 354.88
Debentures & bonds 0 0 0 0 0
Government 0 0 0 0 0
Foreign borrowings 0 0 0 640.48 1004.79
Other borrowings 1200 1200 1200 1500 1500

Secured borrowings 0 385.01 613.07 225.45 0

Total foreign currency borrowings 0 0 0 0 0

Deferred tax liabilities 0 0 0 0 0

Other liabilities & provisions 3843.71 3385.19 3770.87 4635.31 4562.19

Current liabilities 3768.78 3087.77 3393.63 3705.59 3696.55
Bills payable 701.83 1004.17 1255.77 1032.09 1453.41
Inter office adjustment 0 0 0 308.27 0
Interest accured / due 0 0 0 0 0
Others current liabilities 3066.95 2083.6 2137.86 2365.23 2243.14
Share application money 0 0 0 0 0
Provisions 74.93 297.42 377.24 929.72 865.64
Tax provision 0 0 0 0 0
Dividend provision 0 0 0 0 0
Dividend tax provision 0 0 0 0 0
Dimunition of investment 0 0 0 0 0
Other provisions 74.93 297.42 377.24 929.72 865.64

Total liabilities 63322.04 70910.07 76424.58 85108.66 94664.24

Contingent liabilties
Bills for collection 3931.76 4310.3 4227.34 4831.01 6200.98
Bills discounted 0 0 0 0 0
Endorsement obligation 2121.69 1985.94 2527.22 2753.78 3567.29
Disputed taxes 0 0 0 0 0
Letters of credit 0 0 0 0 0
Total guarantees 3450.57 3260.92 3485.06 3358.37 3863.18
Forward exchange contracts 13313.44 8874.82 17616.15 22309.3 23662.8
Future lease rent payable 0 0 0 0 0
•
•
• Annexure – 2
• (Rs. in crore)
Assets:
Bank Of Baroda Mar 2001 Mar 2002 Mar 2003 Mar 2004 Mar 2005
12 mths 12 mths 12 mths 12 mths 12 mths

Cash & bank balance 12436.36 8947.41 6817.1 7266.83 9254.2

Cash in hand 354.55 328.35 417.89 402.02 397.23
Bank balance 1581.61 1366.44 1160.54 1911.44 2347.79
Current account 247.66 203.35 149.98 149.83 479.5
Deposit account 878.95 1163.09 400.56 687.61 468.29
Money at call 455 0 610 1074 1400
 Balance outside India 6484.97 4999.9 2190.73 2298.6 4194.09
Current account 414.38 342.8 265.77 234.67 342.63
Deposit account 2212.2 1360.19 386.28 584.48 1477.45
Money at call 3858.39 3296.91 1538.68 1479.45 2374.01
Balance with RBI 4015.23 2252.72 3047.94 2654.77 2315.09

Investments 19857.12 23833.14 30179.39 38018.79 37074.44

Government securities 12051.9 15361.94 22028.61 28088.61 29007.85
Approved securities 1648.17 1596.42 1460.35 1395.69 1313.66
Assisted companies (FI specific) 0 0 0 0 0
Subsidiaries / associates 287.84 347.83 366.93 429.73 355.45
Other companies 299.21 331.87 412.08 517.14 528.67
Mutual funds 0 0 0 0 0
Debentures / PSU bonds 3299.74 3834.27 4400.07 4509.64 3719.57
Others 2270.26 2360.81 1511.35 3077.98 2149.24
Investments outside India 1394.61 1946.43 1802.05 1962.97 2216.17
Quoted investment 0 0 0 0 0
Market value of quoted investment 0 0 0 0 0

Advances & loans 27420.68 33662.99 35348.07 35600.88 43400.38

Bills receivables 0 0 0 0 0
Short term / demand advances 16654.13 19601.52 19536.56 18393.6 21809.57
Term advances 9231.01 12059.24 13472.86 14710.91 17597.14
Assisted companies (FI specific) 0 0 0 0 0
Institutions & banks 0 0 0 0 0
Other advances 1535.54 2002.23 2338.65 2496.37 3993.67
Foreign currency advances 0 0 0 0 0
Secured advances 24705.11 29907.07 30889.49 28501.49 36808.48
Unsecured advances 2715.57 3755.92 4458.58 7099.39 6591.9
Advances to priority sector 6660.45 7675.73 9176.21 9925.42 12265.8
Advances to public sector 3400.39 5784.76 5159.83 3576.66 4338.31
Assets:
Bank Of Baroda Mar 2001 Mar 2002 Mar 2003 Mar 2004 Mar 2005
12 mths 12 mths 12 mths 12 mths 12 mths
Deferred tax assets 0 0 0 0 0

Other assets / stocks 4.36 4.29 3.82 5.71 5.06

Receivables 2276.25 3256.77 3036.82 3230.15 4069.35

Accrued income 865.91 989.57 988.74 1081.66 1103.91
Non-banking assets 0 0 0 0 0
Inter office adjustments 100.71 953.81 578.19 0 554.25
Advance payment of tax 860.02 846.83 837.14 1025.9 812.83
Other recievables 449.61 466.56 632.75 1122.59 1598.36
Future lease rent receivable 0 0 0 0 0

Gross fixed assets 1151.13 1273.56 1391.16 1561.08 1707.68

Less: cumulative depreciation 504.07 581.18 693.84 745.81 846.87
Net fixed assets 647.06 692.38 697.32 815.27 860.81
Land & building 587.61 624.6 706.65 845.28 892.44
 Revalued assets 0 0 0 0 0

Intangible/ DRE not written off 680.21 513.09 342.06 171.03 0

Intangible assets (goodwill, etc.) 0 0 0 0 0
DRE not written off 680.21 513.09 342.06 171.03 0
VRS expenses not written off 680.21 513.09 342.06 171.03 0
Other misc. expenses not written off 0 0 0 0 0

Total assets 63322.04 70910.07 76424.58 85108.66 94664.24

• References
• 1. Business Today
• 2. The Hindubusiness Line
• 3. Business Standard
• 4. www.bankofbaroda.com
• 5. www.sharekhan.com
• 6. www.myiris.com
• 7. www.moneycontrol.com

END OF QUESTION PAPER

 Suggested Answers
Integrated Case Studies – III (361) : January 2007
Case Study
1. Bank of Baroda lays a special emphasis on the management and control of risk management. Since the year
2001, the bank has successfully implemented an internal risk management system headed by the bank’s
General Managers. Over the years, this has evolved into sophisticated and effective risk management tool
for the bank’s business whereby the complete responsibility for managing the risk lies with the sub-
committee of the bank’s board. Apart from this, the bank also has a Credit Policy Committee, Asset
Liability Management (ALM) Committee and Operational Risk Management Committee that takes care of
the various kinds of risks at different levels
Credit Risk
There are four different credit management cells that work together to (i) identify, (ii) measure, (iii)
monitor and (iv) control the bank’s credit risk exposure. These cells are – the Corporate Research Cell,
Portfolio Cell, Credit Review Cell and Economic Forecasting Cell.
The bank maintains credit exposure ceilings as a part of prudential measure as stipulated by the RBI norms.
This is primarily aimed towards improving the risk management and avoiding the concentration of credit
risks. Exhibit 8 provides the bank’s credit exposure ceilings as on 31st March 2005.
The market risks that the bank is exposed to relates to foreign exchange risk on its foreign currency
positions, liquidity or funding risk and price risk on its trading portfolios. The ALM committee looks after
the overall management of market risk in the bank. The following are the main responsibilities the
committee shoulders:
• Determining the pricing of products for the bank’s deposits and advances.
• Estimating the maturity profiles and the mix of incremental assets and liabilities.
• Framing future strategies for the bank after considering the future interest rate scenario.
• Bringing in an effective transfer pricing.
• Regular reviewing of the return on asset ratios.
Foreign Exchange Risk
BOB conducts extensive foreign exchange operations that include trading and also taking positions in
various currencies both proprietary and also on behalf of its clients. As a result of these, a portion of the
market risk that the bank is exposed to are foreign exchange risk resulting due to adverse exchange rate
movements during a period in which the bank may have an open position in any combination of foreign
currencies. In order to determine the market risk position resulting out of foreign exchange operations,
BOB uses combination measurement techniques that are both static and dynamic in nature.
Operational Risk
BOB faces operational risk mainly due to inadequate or failed internal process, people and systems or any
external events. The bank has successfully established systems and procedures that are available upto the
branch level in the form of books of instructions and circulars that cover different kinds of its activities. In
an effort to monitor the operational risk, the bank has created the Operational Risk Management Committee
(ORMC) under the overall supervision of the sub-committee of the board on ALMM and Risk Management
< TOP >
2. The salient features of the RTGS system are as follows:
• Payments are settled transaction-by-transaction for high value and retail payments;
• Settlement of funds is final and irrevocable;
• Settlement is done on a real time basis and the funds settled can be further used immediately;
• It is a fully secured system which uses digital signatures and public key Infrastructure based
inscription for safe and secure message transmission;
• There is a provision for intra-day collaterized liquidity support for member banks to smoothen the
 temporary mismatch of fund flows; and
• RTGS provides for transfer of funds relating to inter bank settlements as also for customer related
fund transfers.
Earlier, more than 75% inter bank transfers were settled through the Deferred Net Settlement Systems
(DNSS) based inter-bank clearing, but are now done through RTGS.
• < TOP >
3. The central bank has separate guidelines for restructured assets. A fully secured standard asset can be
restructured by rescheduling the principal or interest payments; but it must be separately disclosed as a
restructured asset during the year of restructuring. Sub-standard assets that have been restructured are also
eligible to be upgraded to the “standard assets” category only after a specified period, which is one year
after the date when first payment of interest or of principal, whichever is earlier, falls due, subject to
satisfactory performance during the period. Added to this, in order to create an institutional mechanism for
the restructuring of corporate debt, the RBI has also created a Corporate Debt Restructuring (CDR) system
in 2003. The objective of this framework is to provide a more timely and transparent mechanism for the
restructuring of corporate debts of viable entities facing financial difficulties. Exhibit 14 given below
provides a summary of the bank’s assets restructured during the periods concerned:
(Rs. in million)
RESTRICTED ASSETS
31-3-2003 31-3-2004 31-3-2005
CDR Restructured Assets
Standard Assets 1,504.10 5,752.50 4,819.20
Substandard Assets 0.00 133.80 132.30
Doubtful Assets 0.00 1,887.20 0.00
Loss Assets 0.00 0.00 0.00
Total CDR Restructured Assets 1,504.10 7,773.50 4,951.50
Other Restructured Assets
Standard Assets 6,746.60 2,452.60 2,409.30
Substandard Assets 82.50 695.70 243.40
Doubtful Assets 0.00 1,220.60 115.00
Total Other Restructured Assets 6,829.10 4,368.90 2,767.70
Total Restructured Assets for the year 8,333.20 12,142.40 7,719.20
< TOP >
4. The Basle committee has defined capital in two tiers Tier –I and Tier-II. While Tier-1 capital is the core
capital which provides the most permanent and readily available support against unexpected losses, Tier-II
capital will consist of elements that are not permanent in nature or not readily available.
Tier-I capital consists of equity capital, statutory reserves and other disclosed free reserves, capital reserves
representing surplus arising out of sale proceeds of assets will not be reckoned for this purpose. Equity
investment in subsidiaries, intangible assets, and losses in the current period and those brought forward
from previous periods will be deducted from Tier –I Capital
Tier-II consists undisclosed reserves and cumulative perpetual preference shares often have characteristics
similar to equity and disclosed reserves. The elements have capacity to absorb losses and can be included in
capital, if they represent accumulation of post tax profits and are not encumbered by any unknown liability
and should not be routinely used for absorbing normal loan or operating losses. Cumulative perpetual
preferences should be fully paid-up and should not contain clauses which permit redemption by the holder.
Capital Adequacy of the Bank = (Tier I + Tier II) * 100 / (Bank Risk Exposure)
= 60765.10/423836.5 = 14.33692
The current CAR requirement by banks according to RBI guidelines is 9%, therefore the capital adequacy
requirement is satisfied.
< TOP >
5.
Liabiliites
 Mar Mar Mar Mar Mar
Bank Of Baroda
2001 2002 2003 2004 2005
Capital 294.34 294.34 294.34 293.27 293.27
Reserves & surplus 3061.93 3533.42 4092.63 4836.39 5333.23
Demand deposits from banks 3261 4083.54 2747.55 3399.95 3585.46
Other deposits 54070.44 61804.47 66441.41 72967.32 81333.46
Borrowings
RBI 0 140 0 0 0
other banks 1.46 166.54 12.26 9.18 281.16
Other borrowings 1200 1200 1200 1500 1500
Other Liabilities 3843.71 3385.19 3770.87 4635.31 4562.19
Assets
Cash in hand 354.55 328.35 417.89 402.02 397.23
Money at call 455 0 610 1074 1400
Balance with RBI 4015.23 2252.72 3047.94 2654.77 2315.09
Bank Balance 1126.61 1366.44 550.54 837.44 947.79
Current account 247.66 203.35 149.98 149.83 479.5
Deposit account 878.95 1163.09 400.56 687.61 468.29
Investments 19857.12 23833.14 30179.39 38018.79 37074.44
Advances 27420.68 33662.99 35348.07 35600.88 43400.38
fixed assets 647.06 692.38 697.32 815.27 860.81
Other assets 4.36 4.29 3.82 5.71 5.06
Borrowing from banks 1.46 166.54 12.26 9.18 281.16
Deposits from banks 3261 4083.54 2747.55 3399.95 3585.46
Liabilities to the banking system 3262.46 4250.08 2759.81 3409.13 3866.62
Other deposits 54070.44 61804.47 66441.41 72967.32 81333.46
Other Liabilities 3843.71 3385.19 3770.87 4635.31 4562.19
Liabilities to others 57914.15 65189.66 70212.28 77602.63 85895.65
Bank Balance 1126.61 1366.44 550.54 837.44 947.79
Money at call 455 0 610 1074 1400
Assets with Banking Systems 1581.61 1366.44 1160.54 1911.44 2347.79
1680.85 2883.64 1599.27 1497.69 1518.83
NDTL
(Net Demand and Time Liabilities 59595 68073.3 71811.55 79100.32 87414.48
Reserves & surplus 3061.93 3533.42 4092.63 4836.39 5333.23
CRR (3% of NDTL) 1787.85 2042.20 2154.35 2373.01 2622.43
SLR = 25 % NDTL 14898.75 17018.33 17952.89 19775.08 21853.62
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6. Financial Health
As on 31st March 2005, BOB’s total income decreased by 1.79% from Rs.81,822.32 million in fiscal 2004
to Rs.80,354.35 million in fiscal 2005 and its total expenditure increased by 1.08% from Rs.55,910.73
million in fiscal 2004 to Rs.56.515.69 million in fiscal 2005. The bank’s operating profit decreased by
8.0% from Rs.25,911.58 million in fiscal 2004 to Rs.23,838.67 million in fiscal 2005. The net profit also
decreased by 28.21% from Rs.10,447.19 million in fiscal 2004 to Rs.7,500.19 million in fiscal 2005. The
net interest income of BOB increased by 16.15% from Rs.26,628.88 million in fiscal 2004 to Rs.30,929.87
million in fiscal 2005.
Operating profit before provisions and contingencies decreased from Rs.25,911.58 million in
fiscal 2004 to Rs.23,838.67 million in fiscal 2005. This decrease was due to reduction in operating profit of
the Parent Company. As a percentage of total income, the operating profit also decreased from 31.67% in
fiscal 2004 to 29.67% in fiscal 2005. BOB has the record of being a consistent dividend payer. In the fiscal
year 2005, the bank declared marginally less dividend as compared to the previous fiscal.
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7. As on March 31, 2005, BOB’s Gross Non-Performing Asset (GNPA) as a percentage of gross advances
was 7.3% and its Net Non-Performing Assets (NNPA) as a percentage of net advances were 1.45%
(considering floating provisions). The bank defines net NPAs as gross NPAs less its loan loss provision,
Deposit Insurance and Credit Guarantee Corporation/Export Credit Guarantee Corporation
(DICGC/ECGC) claims received and held, Amount of Interest Suspense held, Amount of Suit filed sundry
Deposit received and held, and the amount of floating provisions. The bank has kept such provisions for
81.35% of the gross non-performing loans, as on 31-3-2005. As of March 31, 2005, 43.66% of the gross
NPAs were from priority sector advances. The maximum NPAs is in textile and chemicals industries that
stood at 14.86% and 11.86%, respectively, of total gross domestic NPAs as on 30-6-2005.
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8. BOB had been successful in establishing dedicated desks at the specialized integrated treasury branch,
which headed by professionals with considerable experience. Apart from the regular activities of managing
funds and liquidity, the domestic operations of the bank includes handling commercial papers, certificates
of deposits, government securities, treasury bills, bonds and debentures, equities and various other
derivatives along with various other financial instruments. As on 30th June 2005, 39.94% of the bank’s net
demand and time liabilities consisted of Government and other approved securities; the same day, the bank
maintained 4.82% of its net demand and time liabilities in its current account with the central bank. Both
these figures were in consonance with the RBIs’ stipulated guidelines. BOB’s treasury is the central point
for the market risk management for the bank. The treasury undertakes liquidity management by seeking to
maintain a tradeoff level of liquidity while complying with the Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR). Exhibit 5 given provides the details of the allocation of the bank’s investment
portfolio.
Foreign Exchange Operations
Bank of Baroda has global presence and is thus credited as a leading foreign exchange dealers in the
country. The state of the art dealing room at the SITB, Mumbai, takes care of much of its foreign exchange
activities that in turn facilitate the bank to act as a market maker in both the spot and forward markets and
also in the foreign swap markets. The services offered by the bank include hedging foreign currency risk by
providing forward covers and various other derivatives products. BOB generally enters into foreign
exchange and derivatives transactions for its customers and also on their own account. BOB is also enabled
with the SWIFT mechanism for worldwide inter-bank communication at 97 of its foreign exchange
branches in India and abroad. SWIFT provides international money transfers to be carried out more
accurately and also with greater speed. Exhibit 7 given below shows BOB’s Forex turnover till 30th June
2005.
Exhibit 7
March 31,
March 31, 2003 March 31, 2004 March 31, June 30,
2002
(Rs. in million) (Rs. in million) 2005 2005
(Rs. in million)
Merchant Turnover 57,279 17,7860 337,533 417,286 102,960
Interbank Turnover 221,523 953,204 1,440,238 1,691,352 532,962
Total 278,802 1,131,064 1,777,771 21,086,38 635,922
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9. The SITB facilitates the bank in leveraging its arbitrage opportunities and ensures a better risk management
and compliance is in place. BOB focus is on addressing the needs of the priority sector customers and
offers several specialized products and services to them. The rural financial service of the bank includes
provisions of special offerings that extend credit facilities to small and marginal-farmers, agricultural
laborers and also cottage industry entrepreneurs. The success of its services stems primarily out of the wide
branch and ATM network. It also provides latest services like, Phone Banking and Internet Banking. As on
31st August 2005, the bank’s Indian branch network comprised 1,170 rural, 539 semi-urban, 490 urban and
490 metropolitan branches all of which are either completely or almost completely computerized. Apart
from this, all of its overseas branches are completely computerized. Exhibit 3 given below provides the
summary information relating to the bank’s operations as at the end of fiscal 2004 and fiscal 2005.
• The SITB also monitors the interest rate risk on a continuous basis. The following are the primary
responsibilities that rest with the SITB:
• Ensuring that there is complete compliance with the various regulatory and prudential requirements.
• Managing liquidity of the bank.
• Providing efficiency to the delivery channels.
• Occupying a major position in the debt market.
• Acting as a major market maker in the foreign exchange market.
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