February 8, 1999
All Scheduled Commercial Banks
As you are aware, the analysis of the financial position of banks as disclosed in the balance sheets is not being done in a systematic manner with a view to evaluating the critical parameters of performance and initiating appropriate corrective measures. Peer group comparison of performance parameters is also not attempted to evaluate the operational efficiency, strengths and weaknesses in performance of competitors. Further, in the absence of uniformity among banks in using various financial and nonfinancial parameters, the results are not always objective. It has, therefore, been decided that a uniform framework should be devised to enable banks to undertake focused scrutiny of the balance sheets to identify/analyse the key measures of returns and risks, assumed by banks and to demonstrate the relationship of returns and risks.
2. We enclose a format in which the balance sheet analysis has to be undertaken. The suggested framework is broadly divided into two parts Part I identifies the inputs and Part II indicates the various ratios, amounts, etc. which require detailed interpretation. The inputs and outputs are broadly classified on CAMEL basis. An attempt has also been made to measure the liquidity and interest rate risks assumed by banks.
3. Banks are, therefore, advised to analyse the balance sheets immediately on finalisation of their annual accounts as per the suggested framework and submit a memorandum to their Board of Directors. The copy of the note put up to the Board together with the analysis (in floppies), may be submitted to the OSMOS Division, Reserve Bank of India, Department of Banking Supervision, Central Office, Centre1, World Trade Centre, Cuffe Parade, Mumbai400 005, on a regular basis.
4. The mismatches in cash flows and interest rates may, however, be analysed from March 31, 2000, by which time the AssetLiability Management System would have stabilised.
5. Please acknowledge receipt.
C R. Muralidharan