nse etfs performance: sharpe’s (vs) extended...

Volume 4, Number 3, July – September’ 2015

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International Journal of Applied Financial Management Perspectives © Pezzottaite Journals. 1817 |P a g e

NSE ETFs PERFORMANCE: SHARPE’S (VS) EXTENDED SHARPE’S RATIO

Dr. M. Swathy1

ABSTRACT

This paper evaluates the performance of selected eight Equity and five Gold Exchange Traded Funds (ETFs) listed on

National Stock Exchange of India [NSE]. We compare the performance of ETFs by applying Sharpe’s Ratio and Extended

Sharpe’s Ratio over a period of four years extending from 1/4/2009 to 31/3/2013. ETFs need to track the performance of their

benchmark index / asset, since they are passive investment financial instruments. Extended Sharpe’s Ratio is a performance

measure that identifies the performance of an ETF in comparison to its benchmark index or asset. We observe from the study

that five Equity ETFs outperform and three underperform when compared to their benchmarks performance, whereas among

the Gold ETFs three underperform, one outperforms and one exactly performs when compared to their benchmarks

performance.

KEYWORDS

Extended Sharpe’s Ratio, Exchange Traded Funds, National Stock Exchange of India etc.

INTRODUCTION

ETFs are mutual fund schemes that are listed and traded like a stock on the exchange. An ETF is a hybrid financial product,

bearing the twin features of a stock and a mutual fund. Like a stock, it can be traded on a stock exchange, and like a mutual fund,

it behaves like a diversified portfolio. ETFs are passive investment products they invest in exactly the same securities, and in the

same proportions, as a market index such as “CNX NIFTY”. It is called passive because portfolio managers do not make

decisions about which securities to buy and sell; the managers merely follow the same methodology of constructing a portfolio as

the market index. The managers' goal is to replicate the performance of an index as closely as possible. In this study, we evaluate

the performance of Equity and Gold ETFs traded in India using Sharpe’s and Extended Sharpe’s Ratio / Measure. Sharpe’s Ratio

indicates the risk adjusted performance of the fund. A fund with a higher Sharpe’s ratio implies that the fund has a better risk

adjusted excess return over the risk free return than that of another fund with a lower Sharpe’s ratio. Investors rely on this measure

in order to study the performance of equity schemes. Unlike Mutual Fund schemes, ETFs need to track the performance of its

benchmark index or asset so Extended Sharpe’s Ratio is a modified measure where it indicates the funds risk adjusted excess

return over its benchmarks return.

REVIEW OF LITERATURE

M. Jayadev (1996), in this paper an attempt is made to evaluate the performance of two growth-oriented mutual funds

(Mastergain and Magnum Express) based on monthly returns compared to benchmark returns. For this purpose, risk adjusted

performance measures suggested by Jenson, Treynor and Sharpe are employed. It is found that, Mastergain has performed better

according to Jenson and Treynor measures and based on Sharpe ratio its performance is not up to the benchmark. The

performance of Magnum Express is poor based on all these three measures. However, Magnum Express is well diversified and

has reduced its unique risk, whereas Mastergain did not. These two funds are found to be poor in earning better returns either

adopting marketing or in selecting underpriced securities. It can be concluded that, the two growth oriented funds have not

performed better in terms of total risk and the funds are not offering advantages of diversification and professionalism to the

investors. Stijn Zweegers (2010), the extended Sharpe ratios of the ETFs are directly tested to the extended Sharpe ratios of the

mutual funds. Both investment strategies did not outperform the benchmark according to the extended Sharpe ratio, since the

average ratios both are negative. The actively managed mutual funds did however outperform the passively managed ETFs

according to a T-test with a significance level of five percent. Meaning that according to the extended Sharpe ratio, investing in

mutual funds would have been better over the evaluation period than investing in ETFs. Given that, the mutual funds give a better

return relative to their risk. Mutual funds did not significantly outperform the benchmark according to the Jensen’s alpha since

they have a negative average alpha tested at a significance level of five percent or less. The overall managers’ goal is not

accomplished. However, the mutual fund managers did significantly outperform the alternative investing strategy, ETFs. The T-

test shows a significant outperforming with a significance level of five percent. The overall conclusion of this papers research is

that the active mutual funds managers outperformed the passive ETFs managers. P. Natarajan and M. Dharani (2010), Nifty

BeES is the first Exchange Traded Funds in the Indian Capital Market and its daily returns are compared to benchmark returns.

The Researcher found out that Nifty BeES, overperforrmed their benchmark while they endorsed their investors with lesser risk

than the standard deviation of the Nifty Index. Further, this paper analyses the relationship between portfolio returns and market

1Professor, Princeton P.G. College of Management, Telangana, India, [email protected]

mailto:[email protected]





returns by using Simple Regression Model. The Researcher discovered that returns of the Nifty BeES for price was not related to

the index returns, but returns of the Nifty BeES for NAV was related to the index returns. This was due to the price of the Nifty

BeES in the secondary market being based on supply and demand while NAV of the Nifty BeES was based on the underlying

index. Finally, this paper examined the observed deviation between returns of the Nifty BeES and Nifty Index. Applying three

methods, the Researcher concluded that the average tracking error fluctuates from approximately 0.59% to 0.907% for price and

0.049% to 0.549% for NAV. Not all the methods, which were used in this study for calculating tracking error, produced the same

results. During the study period of 6 years, portfolio returns of the Nifty BeES beat the market returns and hence it can be

considered as one of the investment products in the promising Indian capital market. Prashanta Athma and Raj Kumar (2011),

the study covers the trends and progress of ETFs and Index Funds in India and to evaluate the performance of ETFs vis-à-vis

Index Funds in India. The study is based on secondary data and covering the period of five years from 2005 to 2009 for the

purpose of evaluating performance of select ETFs and Index Funds in India. Since inception, the data has been collected for

analyzing trends and progress of ETFs and Index funds in India. The parameters for evaluating the performance are Net Asset

Value, Risk, Return, Expenses Ratio, Tracking Error, Reward to Variability and Differential Return. The statistical tools like

Standard Deviation, Beta, Alpha, R-squared and Sharpe Ratio are used for data analysis. It is concluded that ETFs have given

better opportunity for the small investors in terms of diversified portfolio with a small amount of money; low expense ratio,

reduced tracking error, lower risk and volatility as compared to Index Funds. The ETFs can become a best investment alternative,

provided, awareness is created among the investors. Alok Goyal and Amit Joshi (2011)37, this paper studies the financial

performance, variations and analyses the risk behaviour of the selected Gold ETFs in comparison of NSE. The data for this has

been taken from the NSE website. The period taken for the study is March 2008 to November 2010. Analysis is made by using

financial tools like Sharpe’s index, Treynor’s ratio by calculating alpha, beta and standard deviation of the selected funds. Swati

Garg & Dr. Y. P. Singh (2013), this paper empirically compares the performance of two competitive financial instruments

available to Indian investors, namely Exchange Traded Funds (ETFs) and Index Funds. A set of five ETFs and Index Funds that in

pairs track the same benchmark indices has been analyzed in this study over a period ranging from June 2006 to December 2009.

The analysis demonstrates better performance of ETFs in terms of their replication strategy, tracking ability as well as

performance effectiveness over long-term investment horizon. However, there is an evidence of potential disadvantage of ETFs

from very short-term investor‘s point of view.

RESEARCH OBJECTIVES

To evaluate the performance of NSE ETFs by applying Sharpe’s and Extended Sharpe’s Ratio.

RESEARCH METHODOLOGY

Data: For this study, the Daily Trading Values of ETFs listed on National Stock Exchange of India [NSE] were collected for a

period of four years from [1/4/2009 to 31/3/2013]. Data had been collected from NSE India website and Fund website’s. The

ETFs were selected for the study based on their inception; all Equity and Gold ETFs listed on or before 01/04/2009 were included

for the study. The details of the sample are given below in Table 1.

Table-1: Sample ETFs Listed On NSE

S. No. ETF Underlying Benchmark Date of Listing

EQUITY ETFs:

1 NIFTYBEES CNX Nifty 8-Jan-02

2 JUNIORBEES CNX Junior Nifty 6-Mar-03

3 BANKBEES CNX Bank Nifty 4-Jun-04

4 PSUBNKBEES CNX PSU Bank Index 1-Nov-07

5 KOTAKPSUBK CNX PSU Bank Index 16-Nov-07

6 RELBANK CNX Bank Nifty 27-Jun-08

7 QNIFTY CNX Nifty 18-Jul-08

8 SHARIABEES CNX Shariah Index 1-Apr-09

GOLD ETFs:

9 GOLDBEES Spot Gold 19-Mar-07

10 GOLDSHARE Spot Gold 17-Apr-07

11 KOTAKGOLD Spot Gold 8-Aug-07

12 RELGOLD Spot Gold 26-Nov-07

13 QGOLDHALF Spot Gold 28-Feb-08

Sources: Authors Compilation





METHODOLOGY USED

Closing trading prices on a daily basis for a four-year period were applied as inputs for calculating the average returns on ETFs.

Public Sector Bank Fixed Deposit Rate had been assumed as a proxy for Risk Free Rate. The Volatility of ETF Returns is treated

as Standard Deviation or Total Risk on ETF. Using the above inputs Sharpe’s and Extended Sharpe’s Ratio were calculated by

applying the below formulas.

Sharpe’s Ratio

Ri - Rf

SRi = ______

Si

Where,

Ri is the historic mean or average return on ETF-i over the interval considered,

Si is the historic standard deviation of the return on ETF-i over the interval considered and

Rf is the average risk-free rate over the interval.*Public Sector Banks FD Rate on 5 year deposits as on 1/4/2009 had

been considered as risk free rate.

Extended Sharpe’s Ratio

Ri - Rb

ESRi = ______

Si

Where,

Ri is the historic mean return on ETF-i over the interval considered,

Si is the historic standard deviation of the return on ETF-i over the interval considered and

Rb is the average return of benchmark over the interval.

The Sharpe’s ratio is a simple measure to compare portfolios. The one with the highest Sharpe’s ratio is the best performing

portfolio. It measures the average return per unit of risk. An easier way to compare a fund with its benchmark is through the

Extended Sharpe’s Ratio. The risk free rate will then be replaced by the rate of the underlying benchmark in the formulae. Now,

the fund is directly tested against the underlying benchmark’s return.

Extended Sharpe’s Ratio outcome higher than zero means the fund outperformed its benchmark, if it is zero it is performing same

as its benchmark whereas if it is less than zero it is underperforming compared to its benchmark.

ANALYSIS AND INTERPRETATION

Table-2: Sharpe’s Ratio (vs.) Extended Sharpe’s Ratio

S. No. ETF Benchmark Sharpe’s Ratio Extended Sharpe’s Ratio

EQUITY ETF’S

1 NIFTYBEES CNX NIFTY 0.054 -0.002

2 QNIFTY CNX NIFTY 0.065 0.008

3 JUNIOR BEES CNX NIFTY JUNIOR 0.068 -0.001

4 BANKBEES CNX BANK 0.067 -0.001

5 RELBANK CNX BANK 0.06 0.009

6 KOTAKPSUBK CNX PSU BANK 0.043 0.005

7 PSUBANKBEES CNX PSU BANK 0.044 0.001

8 SHARIAHBEES CNX NIFTY SHARIAH 0.035 0.002

GOLD ETF’S

9 GOLDBEES SPOT GOLD PRICE 0.075 0.001

10 GOLDSHARE SPOT GOLD PRICE 0.072 -0.003

11 KOTAKGOLD SPOT GOLD PRICE 0.073 -0.003

12 RELGOLD SPOT GOLD PRICE 0.076 -0.003

13 QGOLDHALF SPOT GOLD PRICE 0.08 0






From Table-2, we observe that the Extended Sharpe’s Ratio for 5 Equity ETFs is greater than zero which implies that they had

outperformed their benchmarks and 3 Equity ETFs Extended Sharpe’s Ratio is below zero which implies that they had

underperformed compared to their benchmarks, but the deviation from zero is less for “NIFTYBEES”, “JUNIORBEES”,

“BANKBEES”, “PSUBANKBEES” and “SHARIAHBEES” that shows their nearness to benchmark tracking ability.

Chart-1


Chart-2


From Charts 1 and 2 we observe that “QNIFTY” and “RELBANK” reported highest deviation from zero, whereas

“RELBANK” is the ETF recording the highest returns, which implies that the returns could be due to some interference of the

fund manager or partial deviation from the underlying benchmark portfolio.

Among the Gold ETFs “GOLDBEES” had outperformed the benchmark “QGOLDHALF” exactly performed with the

benchmark and the other three “GOLDSHARE”, “KOTAKGOLD”, “RELGOLD” underperformed its benchmark, but the

deviation from zero is least for “GOLDBEES” and “QGOLDHALF” which makes them better performers than the other 3 Gold

ETFs.

CONCLUSION

Exchange Traded Funds need to perform on line with its benchmark, if value of Extended Sharpe’s Ratio is zero it is a good

indicator of ETF tracking its benchmark index or asset. Lower the deviation from zero better the performance of the ETF.

Sharpe’s Ratio’s numerator is the difference between the return on the portfolio and return on risk free asset, whereas Extended

Sharpe’s Ratio considers the difference between the return on the portfolio and return on the benchmark index or asset, whereby it

helps us to track the Excess Returns earned by the ETF over its Benchmark’s Return.

-0.004

-0.002

0

0.002

0.004

0.006

0.008

0.01

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1 2 3 4 5 6 7 8

EQUITY ETFs

EXTENDED SHARPE RATIO

-0.0035

-0.003

-0.0025

-0.002

-0.0015

-0.001

-0.0005

0

0.0005

0.001

0.0015

GO

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9 10 11 12 13

GOLD ETFs

EXTENDED SHARPE RATIO





We conclude that among “NIFTYBEES” and “QNIFTY” tracking “CNX NIFTY INDEX” Sharpe’s Ratio is comparatively

high for “QNIFTY” whereas deviation from zero in case of Extended Sharpe’s Ratio is also high which implies that the two

methods are showing difference in ranking of ETFs, in order to choose the right ETF both the methods have to be studied

simultaneously to resolve any conflicts in ranking, for example “KOTAKPSUBK” and “PSUBANKBEES” tracking “CNX

PSUBANK INDEX” had recorded same Sharpe’s Ratio but the deviation from zero in case of Extended Sharpe’s Ratio is low for

“PSUBANKBEES” which makes it a better performer than its competitor “KOTAKPSUBK”.

REFERENCES

1. M., Jayadev. (1996). Mutual Fund Performance: An Analysis of Monthly Returns. Finance India, X(1), 73–84.

2. Stijn, Zweegers. (2010). The Active Management Issue ETFs versus Mutual Funds. Bachelor thesis finance.

3. P., Natarajan, & M., Dharani. (2010). Nifty Benchmark Exchange Traded Scheme (Nifty BeES– A Promising

Investment Product. Smart Journal of Business Management Studies, 6(1), 63-69.

4. Prashantha, Athma, & K., Raj Kumar. (2011). Etf Vis-À-Vis Index Funds: An Evaluation. APJRBM, 2(1), 188-205.

5. Swati, Garg, & Y., P. Singh. (2013). An Empirical Comparison of ETFs and Index Funds Performance in India.

International Journal of Applied Financial Management Perspectives © Pezzottaite Journals, 2(3).

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http://www.researchgate.net/publication/228228521_Evaluating_the_Performance_and_the_Trading_Charact...

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INVESTORS ATTITUDE TOWARDS VARIOUS TAX SAVING SCHEMES

Dr. A. Vinayagamoorthy2 S. Vijayakumari3

ABSTRACT

The investor’s preference towards various tax saving schemes (under various sections of Income Tax, Act 1961). The tax

saving schemes in which investors have invested, to identify patterns of investment in tax saving schemes. Data required

identifying the historical growth of investment in different tax saving schemes. Tax is always a concern for the individuals for

more than one reason. Some do not want to give tax while others want to minimize the amount to be paid. Latter is legal and

is referred to as tax planning. It is suggested that government and financial institutions educate people about tax planning in

general and tax saving schemes to achieve that in particular.

KEYWORDS

Investors Preference, Patterns of Investment, Savings Schemes in India Income-Tax Act 1961, Various Tax Saving

Schemes etc.

INTRODUCTION

The direct tax, which is paid by an individual to the central government of India, is known as Income Tax. It is imposed on our

income and plays a vital role in the economic growth and stability of our country. For years, the government is generating revenue

through this tax system. The study is about an investor’s centric analysis of various tax saving schemes available in India. As in

other countries, India also has an established system of Taxation. In case of individual taxation, government has offered few

schemes in which the investments are not subjected to tax liability. It is as per government policy and is liable to change over

time. From government side intention is to channel investments in desired avenues and give benefits to the investors. These

benefits vary from scheme to scheme.

SAVING SCHEMES IN INDIA

Savings has an important place in the mobilization of resources for development expenditure because the investors would not only

get back their money, but also some interest and they would therefore prefer to lend money in this way instead of paying it as

outright tax. Further, in a developing economy in which there will be always surplus money available with some sectors to the

extent that the savings are tapping the money available for circulation is taken away and to that extent pressure on prices and

inflationary trend is reduced. So therefore, savings have a very important role to play in the sphere of economy.


Karthikeyan (2001) has conducted research on Small Investors' Perception on Post Office Saving Schemes and found that there

was a significant difference among the four age groups, in the level of awareness for Kisan Vikas Patra (KVP), National Savings

Schemes (NSS), and Deposit Scheme for Retired Employees (DSRE), and the overall score confirmed that the level of awareness

among investors in the old age group was higher than in those of the young age group. No difference was observed between male

and female investors except for the NSS and KVP. Out of the factors analyzed, necessities of life and tax benefits were the two

major ones that influence the investors both in semi-urban and urban areas. The Majority (73.3 per cent) of investors of both semi-

urban and urban areas were very much willing to

Somasundaram (1998) invest in small savings schemes in future provided they have more for savings. It has found that bank

deposits and chit funds were the best-known modes of savings among investors and the least known modes the Unit Trust of India

(UTI) schemes and plantation schemes. Attitudes of investors were highly positive and showed their intention to save for a better

future.

Securities, Exchange Board of India (SEBI), and NCAER (2000), 'Survey of Indian Investors' has reported that safety and

liquidity were the primary considerations, which determined the choice of an asset. Ranked by an ascending order of risk

perception fixed deposit accounts in bank were considered very safe, followed by gold, units of UTI-US64, fixed deposits of non-

government companies, mutual funds, equity shares, and debentures.

2Professor of Commerce, Periyar University, Tamil Nadu, India, [email protected] 3Research Scholar, Department of Commerce, Periyar University, Tamil Nadu, India, [email protected]







OBJECTIVES OF STUDY

To study investors’ preference towards various tax saving schemes.

To identify patterns of investment in tax saving schemes.

To describe the reasons for investment in tax saving schemes.

To rank various taxes saving instruments based on investor’s preference.

To assess the awareness level about tax saving schemes.

To assess the proportion of investors based on the nature of expected benefits.

To study the ways investors keep themselves updated about tax saving schemes.

SCOPE OF STUDY

The study would attempt to provide an insight to the understanding of the attitude of investors towards tax saving schemes and

would aim by providing a foundation for marketing strategies for organizations involved in selling the concerned schemes. The

study could also be reference for further analysis in related concepts.

METHODOLOGY USED

The type of study is descriptive. Primary data and Secondary data are collected with help of questionnaire. Sampling method is

Non-Probability Convenient Sampling. The sample units to be chosen for the study would be identified without specific

consideration for the actual size of the population. Hence, it would be difficult to ascertain any probability that each population

item would have to be chosen for the sample. Hence, a non-probability sample would be the one considered for the study.

LIMITATIONS OF STUDY

The study will include only 100 respondents, whose opinions are to be analyzed. Thus, it is possible that the study

would limit to the sample itself and perhaps not beyond it.

The opinion of the respondents might be based on various uncontrollable factors such as present economic scenario and

peoples mind set up as well as government regulations, which are liable to change causing an indirect effect on the

opinion. Thus, this study is time bound.

The study will include investors of the only Salem city of Tamil Nadu, so it may not be possible largely to generalize it

for other cities.

INVESTORS AWARENESS AND BEHAVIOR OF SAVING SCHEMES

The concept of "investor awareness" refers to the stage wherein a prospective investor is conscious of and is having the

knowledge of the existence of an investment product or avenue for his consideration to place the savings. Awareness is a

continuing process by which investors come to learn about the investment particulars. In certain cases, they try to know about the

modes clearly and eventually adopt it or reject it. Awareness is commonly described as the first step in the process of investment.

The investors are aware of the existence of numerous investment modes; their inquisitiveness stimulates them to seek more

information. After becoming well versed of investment models, the investor turns to evaluating each channel by making

comparison with each other. At last, the investor decides to make an investment in an advantageous mode or modes. Thus,

awareness creates an attitude in investor towards investment channels

An understanding of the small investor’s behavior constitutes the focal point for evolving suitable and effective strategies for

development of securities markets in any country. The investor behavior needs to be studied and analyzed from the dimensions

like - What motivates a small investor making an investment. How frequently he prefers to make the investment. In whose name

the investor would like to hold the investment. In this context, an attempt is made to study and analyze the behavior of investors in

terms of the motives of investments, periodicity of investments, factors influencing the investment decisions, and methods of

evaluation of the investments.

VARIOUS TAX SAVINGS SCHEMES

Public Provident Fund

Public Provident Fund Or Generally Called As PPF Is Saving Scheme For Employees In Various Governments, Public And

Private Sector Organizations For Income Tax Saving In India. The Government Has Set Limit For Saving Ranging From A

Minimum Of Rs. 500 To The Maximum Of Rs. 70,000. The Government Pays A Rate Of Interest At 8%. This Can Be Opened In

Any Public Sector Banks Like SBI And Others.





National Savings Certificates (NSC)

National savings certificates or NSC is yet another saving scheme for tax saving on income in India. The investment in this

scheme starts from a minimum of Rs 100 a rate of interest of 8%. A person investing in this scheme can avail income tax benefit

under the Income Tax Act, 1961 section 88 for the amount invested.

Post Office Scheme (POS)

This is one of the best and most used schemes in India for income tax saving in India. A person can join in this scheme any time

of the year and the account can be operated either single or jointly.

Kisan Vikas Patra (KVP)

Kisan vikas patra or kvp as known is a scheme, which is for income tax saving in India where a person’s investment gets doubled

in 8 years earlier it was 5 years. A person can invest a minimum of Rs 100 and under income tax act, 1961.

Dividend

As per the income tax act 1961 any person can claim income tax benefit from the income earned from dividends which from the

UTI, shares and mutual funds.

Equity Linked Savings Schemes (ELSS)

Equity Linked Savings Schemes (ELSSs) are similar to the normal equity diversified schemes that invest across the board and

market segments. Features that differentiate ELSS from an open-ended equity diversified scheme are a tax saving benefit

(deductions under Sec 80C) and a lock-in period of three years, which are explained hereunder. In addition, one can invest in these

schemes in small amounts through a Systematic Investment Plan (see last issue for details) and begin with a small font size to add

to this expense (i.e. Entry/exit load) of investing in an ELSS is similar to any other equity scheme. Popularly called E. L. S. S.,

this is a kind of mutual fund that comes within the Income Tax Act Section 80 C. With a minimum investment period of 3 years,

this investment option helps one be exempted from income tax payment and offers an exemption of maximum INR. 100, 000 in a

financial year as well. The interest rate depends on the performance of this scheme in an interest given year. However, if it does

well, then it is more likely to increase even rate of P. P. F.

Mutual Fund

The investment in Equity Linked Tax Saving Mutual Funds is eligible for deduction under section 80 C of the Income Tax Act.

These funds usually have a lock-in period of minimum three years. The income earned on mutual funds is exempted from Income

Tax in the hands of investors.

Tax Rebate

Tax Rebate Such a rebate is actually the deduction calculated on the tax, which is computed over one's annual income. Under

Section 88 of the Act, certain rebates are allowed. Apart from the different tax saving schemes, one can get a rebate at the rate of

20% of the payment, deposit or investment made on a maximum amount of INR 60,000. Under the Section 88 B, a rebate of INR.

15,000 are given to a senior citizen of the country (65 years of age or more) irrespective of his income. However, the Section 88 C

grants a woman assesses an extra rebate of INR 5, 000.

Health Premiums

Popular as Mediclaim Policies, which are a form of health insurance, comes within the Section 80 D of the country's Income Tax

Act. Applicable even on the proprietor firm's cheques, these policies offer a maximum deduction of INR. 35,000. This deduction

is calculated in addition to any other tax saving done as per the Section 80 C. The total amount of INR 35,000 can be divided as

follows:

INR 15, 000: Premium for policies on spouse, children or self,

INR 15, 000: Premium towards policies for dependent parents, who are non-senior citizens,

INR 15, 000: Premium for dependent senior citizens,

Besides saving your income tax, these policies even help you deal with your or your family's health related problems with

ease during any emergency situation.





Tuition Fee

Covered under the Indian I. T. Act Section 80 C, payment made towards the education of children is even exempted from one's

yearly income tax. Being a part of Section 80 C, one can get a maximum exemption of up to INR 100,000 per financial year.

Tuition fee for school, college and university as well as coaching fee for varied competitive exams are considered under this

policy. However, just two children are considered for such a kind of tax exemption

Unit Linked Insurance Plans

Covered by the Income Tax Act's Section 80 C.U.L.I.P. is a unique blend of investment and insurance that gives a tax exemption

of INR 100,000 per year. Here, the premium, which is being paid by a customer, is deducted with initial charges while the rest of

the amount is invested. Such a plan can be of the following three kinds: Aggressive ULIPs where one can invest 80% to 100% in

equities. The rest can be invested in debt instruments though. Balanced ULIPs where an individual can invest 40% to 60% in

equities Conservative ULIPs, which allows one to invest up to 20 % in equities

Senior Citizen Saving Schemes (SCSS)

It provides assured returns for Senior Citizens. The Principal amount is safe as Government backs them

Interest rates are at 9.2% per annum.

Interest is paid at the end of every quarter. This is one of the best investment options to save tax for Senior Citizens, as

they would get quarterly interest.

The maximum investment limit is Rs 15 Lakhs.

Interest earned is taxable like any other fixed deposit scheme.

Rajiv Gandhi Equity Saving Scheme (RGESS)

RGESS offers tax benefits for first time investors who are earning up to Rs 12 Lakhs per annum. Maximum investment is Rs

50,000. Such amount can be invested in BSE100 stocks or RGESS Mutual funds. 50% of such invested amount qualifies for tax

benefit u/s 80C. Means if you invest Rs 50,000 in BSE 100 stocks or RGESS Mutual funds for the first time, you would get tax

exemption of Rs 25,000 for the first time and only one time. Means you can get the maximum tax benefit of Rs 7,725 (30% tax

bracket). Returns are not guaranteed as the investment is made in stocks and RGESS mutual funds.

CONCLUSION

Tax is always a concern for the individuals for more than one reason. Some do not want to give tax while others want to minimize

the amount to be paid. The Latter is legal and is referred to as tax planning.

Tax planning is not a simple and standard process. In fact, it is a complex collection of measures available to reduce one’s own tax

incidence. Further, the tax saving options or schemes or deductions provided as per Income-Tax Act, 1961 are huge in number

that further complicates the process. Thus, tax planning has evolved into an intellectual activity.

One of the ways to plan the tax incidence for individuals is to invest in some avenues where the government gives relaxation for

various tax schemes. However, this again is not as simple as it may sound to be. Investments in these avenues do not give the

same advantage to all the individuals in the same manner

Individuals are not always aware of all the technical details about the scheme, which they chose for investment. They might

choose a particular scheme for one benefit while being ignorant about other schemes, which provide same or better benefits with

better terms.

In the absence of critical information, investors end up taking decisions, which yield less than potential benefits for them. So with

information comes awareness and with awareness comes thirst for more information and information in right format at the right

time with right people ensures quality decision making which triggers a virtuous cycle where everything turns out to be nicely

synchronized and productive.

REFERENCES

1. Singhania, K. Vinod, & Singhania, Kapil. Income Tax & Wealth Tax. Taxmann’s Publication (A.Y. 2012-13).

2. Employees How to Save Income Tax (21st Edition). Taxmann’s Publication.





3. Singhania, K. Vinod, & Singhania, Monica. Income Tax (47th Edition). Taxmann’s Publication. (A.Y. 2012-13).

4. M., B. Kadkol. Income Tax Text Book (35th Edition). Renuka Prakashan. (A.Y 2012-13).

5. Savings Schemes in India. Retrieved from http://www.tax4india.com/saving-schemes-in-india/saving-schemes-in

india.html

6. Income Tax in India. Retrieved from http://www.tax4india.com/income-tax-india/income-tax-india.html

7. Amendments in Finance Act 2012. Retrieved from http://icmai.in/upload/Students/Circulars/Amendments-Direct-Tax-

2012.pdf

8. Retrieved from http://www.taxexemption.in/tax-saver.html

9. Retrieved from http://business.mapsofindia.com/india-tax/tax-saving-options-in-india.html

10. Retrieved from http://www.freepatentsonline.com/article/Paradigm/238426580.html

11. Retrieved from http://www.citehr.com/318077-various-income-tax-saving-schemes-provident-fund.html

12. Retrieved from http://www.indiastudychannel.com/resources/103397-Tips-on-How-to-save-Income-Tax-in-India.aspx

13. Retrieved from http://myinvestmentideas.com/2015/01/best-tax-saving-investment-options-in-india-for-2015/

14. Retrieved from http://www.caclubindia.com/forum/saving-schemes-in-india-98545.asp

15. Retrieved from http://rupnagar.nic.in/html/smallsaving.htm

16. Retrieved from http://finance.oriyaonline.com/equity_linked_schemes.html

17. Retrieved from

http://www.academia.edu/6352859/A_STUDY_ON_THE_INVESTMENT_PERSPECTIVES_OF_THE_SALARIED_

STRATA_AT_COI...

18. Retrieved from http://finotax.com/itp/itp

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http://www.tax4india.com/income-tax-india/income-tax-india.html

http://icmai.in/upload/Students/Circulars/Amendments-Direct-Tax-2012.pdf

http://icmai.in/upload/Students/Circulars/Amendments-Direct-Tax-2012.pdf

http://www.taxexemption.in/tax-saver.html

http://business.mapsofindia.com/india-tax/tax-saving-options-in-india.html

http://www.freepatentsonline.com/article/Paradigm/238426580.html

http://www.citehr.com/318077-various-income-tax-saving-schemes-provident-fund.html

http://www.indiastudychannel.com/resources/103397-Tips-on-How-to-save-Income-Tax-in-India.aspx

http://myinvestmentideas.com/2015/01/best-tax-saving-investment-options-in-india-for-2015/

http://www.caclubindia.com/forum/saving-schemes-in-india-98545.asp

http://rupnagar.nic.in/html/smallsaving.htm

http://finance.oriyaonline.com/equity_linked_schemes.html

http://www.academia.edu/6352859/A_STUDY_ON_THE_INVESTMENT_PERSPECTIVES_OF_THE_SALARIED_STRATA_AT_COI

http://www.academia.edu/6352859/A_STUDY_ON_THE_INVESTMENT_PERSPECTIVES_OF_THE_SALARIED_STRATA_AT_COI

http://finotax.com/itp/itp





A STUDY ON PERFORMANCE OF UNIT-LINKED INSURANCE PLANS (ULIP)

VS EQUITY LINKED SAVINGS SCHEME (ELSS) OFFERED BY MUTUAL FUND

R. Uppily4

ABSTRACT

The main objective of the study is to compare the ELSS and ULIP schemes of different mutual fund and insurance companies

in India. Secondary data has been used for the analysis. The researcher selected three Mutual fund ELSS schemes and three

ULIP products for the study. The performances of all the products were tested for their dependency on the performance of

stock market using Hypothesis. Correlation with t-Test was used for testing the Hypothesis. All the schemes have a positive

correlation with Sensex and they move in the direction of the index. Annualized ROR and CAGR were used as tools for Data

Analysis and from the study it is observed that, The ELSS products provides good returns to investors compared to ULIP

products. Further, It was observed that Axis Long term equity fund has given double the return of Sensex in the 3-year term

from April 2012 to March 2015 (Axis long-term equity 34.38% and Sensex 17.31%). The challenges faced by ULIP schemes

were also analyzed and Suggestions provided for the factors which investor should look into before investing in a fund.

Looking at the performance and the outcome of the data analysis it is suggested to invest in ELSS schemes if investor is

looking to save tax, accumulate wealth, and take a Term plan for insurance cover.

KEYWORDS

ELSS, ULIP, Returns, NAV, CAGR, Absolute Return etc.

INTRODUCTION

ELSS and ULIPs are two different products that serve different purposes. While ULIP is a mix of life insurance and investment

offered by life insurance companies, ELSS is an equity fund. Both are tax-saving instrument under section 80 C under the income

tax act. Unit Linked Insurance Plans unlike a pure insurance policy gives investors the benefits of both insurance and investment

under a single integrated plan. ELSS is a mutual fund scheme that pools the money from investors and uses it to invest in various

securities according to a pre-specified investment objective. It has a 3-year lock in period and provides tax saving under 80 C of

the income tax act.

Table-1


4Deputy Vice President, TPP & CFD Operations, IndusInd Bank, Tamil Nadu, India, [email protected]







Karuna (2009) highlighted on ‘Relevance of ULIPs as a good investment tool’ to observe traditional life insurance plans offered

by LIC took care of only the insurance needs of people. However, with the ever-changing demands of customers a new product

called ULIP was launched which combines the benefits of insurance, investment and tax benefits. The author observed that ULIPs

were better suited to investors who have 15-20 years as their time horizon to spread the expense over the longer period and reap

the benefits.

Divya Y. Lakhani (2011) had conducted a research study to identify the relation between returns and Sensex, investors’

preference for ULIP and Equity, growth and penetration of ICICI Prudential and the performance of some of its ULIP schemes.

The major finding of this study was that the NAV for equity based fund options moves in tandem with Sensex while for debt

based fund options it is not much affected by the movement of Sensex.

The above studies have analyzed the performance of ULIP schemes with the index. This study analyses the ULIP schemes with

selected ELSS schemes and the index and suggest investor on how to select an instrument suitable to his financial goal.

NEED FOR STUDY

To compare and analyses the features of ULIP and ELSS schemes,

To compare ULIP and ELSS schemes and identify the return generated by the schemes,

To analyses the return generated by ULIP and ELSS schemes in comparison with index,

To analyses the factors which has helped the scheme to generate higher returns,

To suggest a suitable product to the investor based on the requirement.

OBJECTIVE OF THE STUDY

To compare the ULIPs of different life insurers and ELSS schemes in terms of return generated,

To analyses whether ULIP and ELSS schemes performance is influenced by the index.


The present study has been conducted based on secondary data and descriptive in nature. The required secondary data for the

study was collected through different websites, annual reports, magazines and company reports. The researcher selected three

Mutual fund ELSS schemes and three ULIP products for the study. The sample has been selected based on convenient sampling

method. To make the analysis meaningful Annualized Rate of Returns, CAGR and Correlation were applied for analyzing the

data. Hypothesis testing was done using at 99 percent confidence level or 1 percent level of significance.

Schemes Selected

The followings schemes are selected for the research:

ELSS Schemes

1 Axis Long Term Equity Fund – Growth

2 Reliance Tax Saver (ELSS) Fund – Growth

3 Birla Sun Life Tax Relief 96 – Growth


ULIP Schemes

1 ICICI PRU Assure Wealth - Super blue-chip fund

2 Kotak frontline equity fund

3 HDFC Wealth Builder blue-chip fund


DATA ANALYSIS AND RESULTS

Table-2: Monthly Closing NAV of Selected ULIPs and ELSS and Sensex for the period April 2012 to March 2015

Month AXIS MF Reliance MF Birla MF ICICI ULIP KOTAK ULIP HDFC ULIP Sensex

12-Apr 12.8 21.6 10.05 10.04 10.45 9.48 17318.81

12-May 12.09 20.28 9.45 9.36 9.83 8.89 16218.53

12-Jun 12.81 21.14 10.04 9.96 10.54 9.67 17429.98

12-Jul 12.84 21.13 10.05 9.84 10.55 9.58 17236.18

12-Aug 13.14 21.08 10.2 9.75 10.45 9.57 17429.56

12-Sep 14.26 23.25 11.07 10.53 11.35 10.52 18762.74





12-Oct 14.1 23.1 11.01 10.34 11.21 10.36 18505.38

12-Nov 14.77 23.94 11.49 10.91 11.78 10.81 19339.9

12-Dec 14.82 24.68 11.88 10.96 11.94 11.08 19426.71

13-Jan 14.7 24.14 11.79 11.11 12.13 11.21 19894.98

13-Feb 14.08 22.24 11.05 10.66 11.42 10.42 18861.54

13-Mar 14.16 21.42 11 10.61 11.31 10.21 18835.77

13-Apr 14.83 22.93 11.43 10.95 11.8 10.69 19504.18

13-May 15.36 23.02 11.53 11.02 11.98 10.7 19760.3

13-Jun 14.85 21.89 11.28 10.81 11.68 10.22 19395.81

13-Jul 14.66 20.16 10.97 10.61 11.58 9.79 19345.7

13-Aug 14.05 19.53 10.61 10.08 11.04 9.39 18619.72

13-Sep 14.72 20.65 11.14 10.61 11.61 9.88 19379.77

13-Oct 16.14 22.72 12.16 11.35 12.67 10.82 21164.52

13-Nov 16.72 23.53 12.31 11.13 12.43 10.73 20791.93

13-Dec 17.26 25.53 12.96 11.38 12.61 11.06 21170.68

14-Jan 16.79 23.89 12.34 11.13 12.2 10.58 20513.85

14-Feb 17.79 24.78 12.83 11.43 12.62 10.92 21120.12

14-Mar 19.17 28.6 13.7 12.03 13.32 11.8 22386.27

14-Apr 19.28 28.87 13.57 12.08 13.32 11.91 22417.8

14-May 21.24 34.4 15.08 13.11 14.65 13.21 24217.34

14-Jun 23 38.51 16.38 13.89 15.56 14.02 25413.78

14-Jul 23.9 37.62 16.52 14.12 15.57 14.04 25894.97

14-Aug 25.15 39.72 17.25 14.66 16.24 14.58 26638.11

14-Sep 25.95 42.16 17.84 14.73 16.36 14.76 26630.51

14-Oct 27.09 44.42 18.4 15.45 17.23 15.43 27865.83

14-Nov 28.35 46.35 19.6 15.87 17.83 15.89 28693.99

14-Dec 28.69 46.73 20.03 15.33 17.52 15.57 27499.42

15-Jan 30.44 49.34 21.68 16.48 18.91 16.44 29182.95

15-Feb 30.76 49.9 21.85 16.77 19.11 16.55 29220.12

15-Mar 31.06 48.73 21.73 16.25 18.56 16.1 27957.49

Sources: AMFI Website, Insurance Company Websites and BSE Website

Table-3: Return and Performance Comparison of ULIP Schemes,

ELSS Schemes and Sensex for the period April 2012 to March 2015


SensexAxis

MF

Reliance

MF

Birla

MF

ICICI

ULIP

Kotak

ULIP

HDFC

ULIP

CAGR 17.31 34.38 31.15 29.31 17.41 21.10 19.33

SensexAxis

MF

Reliance

MF

Birla

MF

ICICI

ULIP

Kotak

ULIP

HDFC

ULIP

Year 1 8.76 10.62 -0.84 9.45 5.68 8.21 7.67

Year 2 0.01 8.71 5.44 10.49 10.03 9.56 10.33

Year 3 24.71 61.09 68.79 60.13 34.52 39.39 35.20

For 3 years 61.43 142.69 125.59 116.22 61.85 77.58 69.90

SensexAxis

MF

Reliance

MF

Birla

MF

ICICI

ULIP

Kotak

ULIP

HDFC

ULIP

No of years 3 3 3 3 3 3 3

Negative Return Observations 0 0 1 0 0 0 0

Median Return (%) 8.76 10.62 5.44 10.49 10.03 9.56 10.33

Average Return (%) 11.16 26.81 24.46 26.69 16.74 19.05 17.73

Max Return (%) 24.71 61.09 68.79 60.13 34.52 39.39 35.20

Minimum Return (%) 0.01 8.71 -0.84 9.45 5.68 8.21 7.67

Standard Deviation (%) 12.53 29.70 38.52 28.97 15.55 17.62 15.19

Absolute returns - Year wise

Absolute returns - Observations

CAGR





Chart-1: NAV Growth of Selected ULIPs and ELSS Schemes


Chart-1 shows the NAV growth of Mutual fund Schemes and life insurance schemes for the period April 2012 to March

2015. From the graph, it is clear that NAV of all the products are in increasing trend.

Chart-2: CAGR Return Comparison of ULIPs and ELSS Schemes


Chart-2 shows the comparison of CAGR of the selected Sensex, Mutual fund Schemes and life insurance schemes for

the period April 2012 to March 2015. From the graph, it is clear that product of Axis mutual fund has clearly outperformed

with a CAGR of 34.38% followed by Reliance mutual fund with 31.35%. All the schemes have outperformed Sensex.

Hypothesis Testing

Chi Square test is applied and if p-value is less than 0.05, accept the alternative hypothesis and reject the null

hypothesis.

Hypothesis-1 H10: Performance of the Sensex has no influence on Axis Mutual Fund Performance.

H11: Performance of the Sensex has influence on Axis Mutual Fund Performance.

Table-4: Correlation between Sensex and Axis Mutual Fund Product


Note: **Correlation is significant at the 0.01 level (2 -tailed)

0.00

10.00

20.00

30.00

40.00

50.00

60.00

AXIS MF

Reliance MF

Birla MF

ICICI ULIP

KOTAK ULIP

HDFC ULIP

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

Sensex Axis MF Reliance

MF

Birla

MF

ICICI

ULIP

Kotak

ULIP

HDFC

ULIP

Sensex

Axis MF

Reliance MF

Birla MF

ICICI ULIP

Kotak ULIP

HDFC ULIP

Sensex Axis MF

Pearson Correlation 1 0.988**

Sig. (2 tailed) 0.000N 36 36

Pearson Correlation 0.988** 1

Sig. (2 tailed) 0.000

N 36 36

Sensex

Axis MF





Null Hypothesis is rejected; the performance of Axis Mutual Fund Product is dependent on the market performance.

Hypothesis 2

H20: Performance of the Sensex has no influence on Reliance Mutual Fund Performance.

H21: Performance of the Sensex has influence on Reliance Mutual Fund Performance.

Table-5: Correlation between Sensex and Reliance Mutual Fund Product



Null Hypothesis is rejected; the performance of Reliance Mutual Fund Product is dependent on the market performance.

Hypothesis 3 H30: Performance of the Sensex has no influence on Birla Mutual Fund Performance.

H31: Performance of the Sensex has influence on Birla Mutual Fund Performance.

Table-6: Correlation between Sensex and Birla Mutual Fund Product



Null Hypothesis is rejected; the performance of Birla Mutual Fund Product is dependent on the market performance.

Hypothesis 4 H40: Performance of the Sensex has no influence on ICICI ULIP Performance.

H41: Performance of the Sensex has influence on ICICI ULIP Performance.

Table-7: Correlation between Sensex and ICICI ULIP Product



Sensex Reliance MF


Sig. (2 tailed) 0.000N 36 36



N 36 36

Sensex

Reliance

MF

Sensex Birla MF


Sig. (2 tailed) 0.000N 36 36



N 36 36

Sensex

Birla MF

Sensex ICICI ULIP


Sig. (2 tailed) 0.000N 36 36



N 36 36

Sensex

ICICI

ULIP





Null Hypothesis is rejected; the performance of ICICI Insurance ULIP Product is dependent on the market performance.

Hypothesis 5 H50: Performance of the Sensex has no influence on Kotak ULIP Performance.

H51: Performance of the Sensex has influence on Kotak ULIP Performance.

Table-8: Correlation between Sensex and Kotak ULIP Product



Null Hypothesis is rejected; the performance of Kotak Insurance ULIP Product is dependent on the market performance.

Hypothesis 6 H60: Performance of the Sensex has no influence on HDFC ULIP Performance.

H61: Performance of the Sensex has influence on HDFC ULIP Performance.

Table-9: Correlation between Sensex and HDFC ULIP Product



Null Hypothesis is rejected; the performance of HDFC Insurance ULIP Product is dependent on the market performance.

FINDINGS

All the ELSS category funds CAGR have outperformed the ULIP schemes and the Sensex, Axis Long term equity fund

has given double the return of Sensex in the 3-year term from April 2012 to March 2015 (Axis long-term equity 34.38%

and Sensex 17.31%)

All the schemes have a positive correlation with Sensex and they move in the direction of the index.

In 1 year Reliance Tax save fund (April 2013 to March 2014) has given negative absolute returns but the growth of this

fund is phenomenal in the third year.

The maximum absolute return provided by the fund is 68.79% (Reliance Tax saver fund during the period April 2014 –

March 2015) and least is by the same fund (-8.84%)

Average absolute return of the funds ranges from 16 to 26% when compared to Sensex average return of 11 %

Amount would have doubled in 3 years if you have invested in Axis, Reliance or Birla Mutual fund schemes.

An investment amount of 100000 in April 2012 would have become the following in March 2015.

Sensex Kotak ULIP


Sig. (2 tailed) 0.000N 36 36



N 36 36

Sensex

Kotak

ULIP

Sensex HDFC ULIP


Sig. (2 tailed) 0.000N 36 36



N 36 36

Sensex

HDFC

ULIP





Chart-3

Note: In the above chart, it is assumed that amount invested is 100000 (for ULIP the insurance component is not considered)


Discounting the factor that ULIP provide insurance cover, when we compare the funds invested in the market ELSS funds has

performed better than ULIP (on the investment front). This is because of the below challenges faced by ULIP schemes:

Challenges Faced by ULIP Schemes

Corpus is not huge to manage,

Problem faced in churning the portfolio,

Passive fund management,

Lack of quality fund managers,

Lack of transparency in sales,

Longer duration periods,

Switching option from equity debt creates redemption pressure on fund manager,

Funds in ULIP schemes are not fully invested and cash portion is retained.

The scheme return depends on various factors such as:

Scheme size,

Number of stocks in portfolio,

Category of fund whether Large, Mid or Small cap,

Fund manager experience,

Fund Manager being active in churning the stocks,

Redemption pressure,

Flow of additional funds into the scheme by way of fresh purchase.

SUGGESTIONS

Investor should analyse the purpose of his investment, if it is for tax saving with wealth accumulation then he should

select mutual fund ELSS schemes as they outperform ULIP schemes in terms of returns.

They can very well opt for a Term plan to take care of their life insurance cover.

ULIP schemes must analyses the reason for the schemes performing lower than ELSS schemes when it comes to stock

market investment and must take corrective actions.

REFERENCES

1. Retrieved from www.amfiindia.com

2. Retrieved from www.bseindia.com

3. Retrieved from www.iciciprulife.com

0

50000

100000

150000

200000

250000

Axis ELSS Reliance

ELSS

Birla ELSS ICICI

ELSS

Kotak

ELSS

HDFC

ELSS

242689225591 216219

161853177580 169902

www.amfiindia.com

www.bseindia.com

www.iciciprulife.com





4. Retrieved from www.hdfclife.com

5. Retrieved from www.insurance.kotak.com

6. Retrieved from www.mutualfundsindia.com

7. Punithavathy, Pandian. Security Analysis and Portfolio Management (1st Edition). Vikas Publications.

8. Shashidharan, K. Kutty. (2008). Managing Life Insurance. New Delhi: Prentice Hall of India Private Limited.

9. Gupta, S. P. (2006). Statistical Methods. New Delhi: Sultan Chand & Sons.

10. Retrieved from http://www.garph.co.uk/IJARMSS/Aug2013/10.pdf

11. Retrieved from

http://www.academia.edu/5450633/A_STUDY_ON_PERFORMANCE_OF_UNIT-

LINKED_INSURANCE_PLANS_ULIP_OFFERED_B...

12. Retrieved from

http://www.academia.edu/1616652/A_Study_of_Unit_Linked_Insurance_Plans_of_ICICI_Prudential_Life_Insu...

13. Retrieved from http://apjor.com/files/1372136300.pdf

14. Retrieved from http://www.studymode.com/essays/Ulip-1367311.html

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www.hdfclife.com

www.insurance.kotak.com%20

www.mutualfundsindia.com

http://www.garph.co.uk/IJARMSS/Aug2013/10.pdf

http://www.academia.edu/5450633/A_STUDY_ON_PERFORMANCE_OF_UNIT-LINKED_INSURANCE_PLANS_ULIP_OFFERED_B

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THE EXPLANATORY POWER OF GIDDENS’S STRUCTURATION THEORY

IN EXPLAINING THE STRUCTURE SIDE OF THE SOURCES OF

LAND TAX ARREARS IN MALAYSIA

Dr. Ismail Omar5 Dr. Muhammad Yussuf Al-Fahmey Abdul Rahim6

ABSTRACT

Land tax revenue is a source of income to the government. Unfortunately, there are huge land tax arrears that affect the

government expenditures in developing countries. Therefore, it is significant to examine sources of land tax arrears to

overcome the problems of land revenue collection thereof. The paper seeks to study sources of land tax areas from the

conceptual approach of the structuration viewpoint. According to Giddens, there are two elements of structuration that plays

important roles in shaping and restricting human decision making and economic activities. On the one hand, there is structure

that consisting of ideas, regulations and resources that may guide or control human decisions. On the other hand, there is

agency which consisting of human behaviour that may initiate and/or restrict their decision and actions. Using the

structuration viewpoint, emphasizing on the structure side only, primary and secondary data were collected empirically and

analysed qualitatively. The findings show that these elements of structure side that are responsible for the reasons of land tax

arrears in the case studies.

KEYWORDS

Structuration Theory, Land Tax Arrears, Malaysia etc.

INTRODUCTION

In Malaysia, quit rent is a tax that a registered proprietor must pay to the State Authority in certain amount annually in return for

alienated land (National Land Code, 1965). The issue of quit rent arrears is one of the issues that receives central attention in the

revenue management particularly at the State level. Among the factors that caused quit rent arrears may be due to the inefficient

administration of the land offices or the non-payment by the arrears quit rent taxpayers or both. The aim of the paper is to identify

the sources of quit rent arrears utilizing the Structuration Theory embedding structure and agency as an inductive approach

employed within the case study area of the State of Perak, Malaysia.

THE STRUCTURATION THEORY

Structuration theory sought to strike a balance between structure and agency approach in explaining social phenomenon (Giddens,

1984). The approach is a product of philosophers who believed that “the social system and the individual actors are equally

important in the explanation of social phenomena” (Maziah, 1994; Moos and Dear, 1986). A structure is “a recursively organized

rules and resources that individuals draw upon and reconstitute in their day-to-day activities. It is this virtual existence of the

structure that makes up the system (Moos and Dear, 1986). The structuration provides the overall framework where the social

system works. “The condition governing the continuity or transformation of structures and therefore the reproduction of systems is

structuration” (Moos and Dear, 1986). The concept of agency means the individual agent or the actor. The individual is regarded

as active, knowledgeable and reasoning person. There are three important things happen during the interaction of an agent. It is

called a model of action where they perform the act of reflexive monitoring of action (intention), rationalization of action (reason)

and motivation for action (motive) (Allan, 2006). It is the power, the agent possesses, which enables him to act differently. The

model of action the agents used during interaction is called as the strategic conduct of the actor (Giddens, 1984).

In structuration theory, social structures consist of rules and resources. There are two kinds of rules i.e. normative rules and codes

of signification. Giddens refers rules in the forms of tacit or discursive, informal or formal and weakly or strongly sanctioned

(Allan, 2006). Normative rules are rules that govern behaviour. Signification codes are rules through which meaning is produced. It is the historical and cultural rules that lead us to give different interpretation of a circumstance over time.

There are also two kinds of resources: the authoritative and allocative (Allan, 2006). Authoritative resources are made up of things

like techniques or technologies of management, organizational position and expert knowledge (non-material resources). Allocative resources come from the control of material goods or the material world (material resources). In short, resources are the

5Associate Professor, Department of Real Estate, Faculty of Geoinformation and Real Estate, Universiti Teknologi Malaysia,

[email protected] 6Department of Real Estate, Faculty of Geoinformation and Real Estate, Universiti Teknologi Malaysia, [email protected]







control of people and supplies (Allan, 2006). Structures exist as recursively organized rules and resources that individuals draw

upon and reconstitute in their day-to-day activities (Moos and Dear, 1986). This reproduced feature of social system is termed as

institutional analysis (Giddens, 1984). This governs the next interaction and thus social reproduction of life takes place. The agent,

due to his power, contributes not only in the production but also in the reproduction of the system as a whole.

Furthermore, structuration theory explains the interaction of agent, structure and system. The greater the ability of agents to

understand social relations within the society, the greater is his ability to interact effectively and the more power he can use to

exercise. The structure in the social system acts as both enabling and constraining factor towards agent’s action. Thus, the

importance of both agent and structure is explained in the concept of duality of structure and not dualism. Giddens (1984) does not

seek dualism in the structuration theory that gives dominance of one aspect over the other.

METHODOLOGY - THE CASE STUDY

This is an embedded single case study as it has sub-units of analysis. The main unit of analysis is the State of Perak (one of 14

States in Malaysia). The sub-units are mainly, the institution (government agency) i.e. the land offices while, individuals (people)

i.e. the arrears quit rent taxpayers. These sub-units of analysis provide an illustrative example of how they affect the Perak quit

rent system. The sources of quit rent arrears are identified through the indicators of efficiency and fairness, which are measured in

the structure and agency, respectively. Therefore, the data used are of two types. The first group of data belongs to the structure

level. While, the second group of data are those in relations to the agency. However, the study focuses on structure viewpoint on

the aspect of agency exploration on the sources of quit rent arrears.

The land administrators are sought on their opinions and experiences on the eight indicators of efficiency of a tax system as stated

by Vlassenko (2001). Based on these indicators, it allows the researcher to gain knowledge on the sources of quit rent arrears. The

responses from these groups of respondents on these indicators are evaluated based on structuration theory whether or not the

important concepts of rule, resource of the structure and the intention, reason and motive of the agency have affected the quit rent

arrears collection. The State of Perak has 10 major districts with 17 land offices. The land offices as state apparatus are the main

government agencies that run matters relating to land including its revenue in particular the quit rent collection. From the

sampling frame of 17 land offices in the state, only nine are selected through maximum variation sampling. Indeed, the

demographic variables of these respondents in terms of age, level of education, working experiences, and current position held

public service awards received as well as their involvements in the land revenue collection, in particular and land administration,

in general varied from each other. In terms of data presentation, the above primary data were analyzed and presented using

narrative direct and indirect quotations, charts, graphs, figures and tables. The data are presented as an organized, compressed

assembly of information so that conclusions could be drawn analytically.

ANALYSIS, DISCUSSION AND FINDINGS

Figure 1.0 shows the total land tax arrears collected in relation to total quit rents arrears targeted from 1999 to 2008 in the case

study areas. The average differences that contributed to the land tax areas were about RM15 million per year that shows the

significance of the study.

Figure-1: Total Quit Rent Arrears Collected in Relation to Total Quit Rent Arrears Targeted from 1999 to 2008

(Source: MYAF Abdul Rahim and Ismail Omar, 2012)


(RM

in

mil

lio

n)

Year QR Arrears Collected Quit Rent Arrears Targetted





Structure

As structure is represented by the systems of generative rules and resources, firstly, the analysis on the sources of quit rent arrears

would be elaborated from the aspect of rules. This section discusses the structural rules. These rules can be formal or informal in

nature. Formal rules include policies, bureaucratic rules, laws etc., while informal rule covers the cultural rules.

Non-existence of State Tax Policy on Quit Rent

Almost 90 per cent (88.8%, n=8) of the respondents reported there is no state tax policy on quit rent. Respondents C and I were in

the opinion that the state was still sufficient in its budget allocation to finance its expenditure. Inadequacy of state financing could

be simply overcome by depending on the federal allocations and borrowings. The dependency on the federal government, thus,

result in the inefficiency of the state government to collect tax particularly the quit rent arrears. Respondents D and E that the

setting up of the committee at the State Authority proved unhelpful as it was not activated under the previous government further

supported this. Most of the actions taken by the government to increase the level of quit rent arrears collection, in fact, were ad

hoc in nature according to respondents F.

Furthermore, there was no centralized effort towards having a specific policy on quit rent. Respondent H felt that the central

agency in the state land administration might be facing possibly several administrative constraints as well as assuming that it is the

obligation of the federal government to formulate one. However, respondents B and G were in different stances. Admitting the

fact that there was no policy and there is a need for that, respondent B argued that the policy is merely for guidance and continuity

in terms of setting the basis of assessment of the tax base and rate in the future, for instance. In support of that, respondent G

stated, the laws of the NLC 1965 and the Perak Land Rules 1966 are very clear in providing guidelines, for instance, in terms of

the period of revision of the tax bases and tax rates etc. In fact, according to him, the real issue to overcome the increasing level of

quit rent arrears is only through enforcement.

Sufficiency of the National Land Code 1965 and Perak Land Rule 1966

On the contrary, the sources of quit rent arrears is not contributed by the existing laws either the National Land Code 1965 or the

Perak Land Rules 1966. Those laws, particularly, the sections on quit rent including the enforcements are said to be very much

clear and adequate. Generally, all respondents (100%, n=9) admitted this fact. However, these laws are not wholeheartedly

implemented due to four major constraints namely: resources, commitment, procedure and knowledge. Briefly, in terms of

resources, the land office lacked of human resources in terms of quality and numbers as suggested by respondents A and F. Furthermore, there was no firm commitment in the execution of the laws. There would be no arrears at all if continuous efforts

were taken from the start as respondent B and C insisted. Thirdly, in terms of rigid and time consumed procedure. For respondent

D, if the enforcement action by the land office was challenged in the court of law, that would involve a long process and consume

a large amount of time to reach a verdict. Thus, he would prefer action merely to the stage of administrative reminder.

Respondent I asserted that the cost of tax compliance of the quit rent taxpayers towards procedure is higher than the amount of tax

imposed. Similarly, respondent E stated the rigidity of arrears fee formula in Perak eventually leads to a financial burden to the

arrears quit rent taxpayers as compared to quit rent taxpayers in other states. Respondent G highlighted that the understanding of

enforcement sections was merely limited to 6A and 8A forms whereas other enforcement sections i.e. the failure for the non-

updating of address by the quit rent taxpayers could be taken action. In summary, the laws are more than enough that it is non-

executable according to respondent C.

Short of Guidelines on Arrears Settlement

Based on the analysis, almost 90 per cent (88.8%, n=8) of the respondents, generally, agreed that there was no specific guideline

prepared by the land offices to facilitate the arrears settlement for the arrears quit rent taxpayers in the State of Perak. There was

no centralized effort to produce a specific guideline. As such, in encouraging quit rent arrears payment, according to respondent

D, the land offices relied merely on its officers and staffs initiatives and creativity. In most occasions, respondents C and E stated

that the special relief such as remission and installment payment for those in financial difficulties were not publicized, as it would

later cause problem to the administration itself later on. Respondent H and I were in the same opinion stressed that if guidelines of

arrears settlement that inform about remission and installment payment were made, most probably, the arrears quit rent taxpayers

would take advantage of the system by not making payment at all, in the first place.

Inappropriate Tax Procedures

There are nine respondents (22.2%) expressed their dissatisfactions. Firstly, in the remission procedures, respondent H argued that

the arrears quit rent taxpayers usually complained on the high arrears fee rate. It is not that they do not want to pay the quit rent

arrears but they want the arrears fee to be abolished or reduced. As highlighted only by this respondent, there was a delay in the





approval process. For any increase or decrease of the amount of quit rent, it requires the approval, which underwent a long

process. Secondly, the same respondent also argued that there were limitations in the notice servicing. There was no rule and

procedure that allowed the land office notices to be served by other than the notice server. This indeed limited legally the land

office revenue staff to go on the ground to remind the 6A form and collect arrears from the arrears quit rent taxpayers.

Lack of Written Tax Strategies

A tax organization has to have its own tax strategies that cover its tax vision, mission and client charter. Out of nine, five

respondents (55.5%) firmly stated that there was no written vision, mission and client charter in the collection of arrears in their

respective land offices. By these tax strategies, it guides the land office to perform the work more effectively and efficiently based

on the available resources.

Respondent G has always reminded his subordinates to collect as much arrears as they can. In achieving this, however, his

mission was not so ambitious and aggressive as his office has limited human resources. Furthermore, it is not merely depending

on the land office but the arrears quit rent taxpayers should also play their roles in the arrears issue. Respondent E seemed to put

his land office target of arrears collection at 25 per cent similar to the one projected. Similarly, respondent F conveyed his

unwritten tax strategies in the arrears collection through several departmental meetings to remind his subordinates on the issue.

Hence, at the operational level of the land office, it is observed that there was no significant emphasis of written tax strategies on

the arrears collection.

Cultural Influence in Tax Payment

Culture, which is part of social rule, is present in society, and accordingly influences the arrears collection. Seven respondents

(77.7%) unanimously agreed that the role of culture of the Malays, Chinese and the Indians imposed certain values towards tax

payment. These three races have different cultural orientations in tax payment as explained below. Similarly, the culture of

payment of the corporate taxpayers is also elaborated in the final part. The Chinese has a unique culture in quit rent payment. Due

to that, those in arrears are rarely found from the Chinese community. Seven respondents (77.7%) indicated that the Chinese were

good and punctual taxpayers as they were not only felt compelled to abiding by the tax payment period, acknowledging the

historical facts but also realizing the implications of disobeying the laws of the day (Respondents C, D, E, G and H). However, the

Malays are completely different in the quit rent payment. According to respondent H, those that formed the highest percentage of

quit rent arrears were the Malays. There are several points that best explained the culture of the Malays, in contrast to the Chinese,

in the tax payment: the secured feelings of obtaining the special privilege status as bumiputera, non-prioritization of tax payment

in the household spending and the consideration of quit rent arrears not as debts.

However, the culture of large or corporate quit rent taxpayers towards tax payment is also worth analysis. All respondents agreed

that the “culture” that shaped the tax payment for this group of taxpayers was principally due to financial factor. If they made

profits, then it was not a problem for them to pay the quit rent. However, if there were a downturn in the economy, they would not

be able to pay tax thus; they accumulated arrears from year to year until the economy recovers.

The Aspects of Resources

On the aspect of resources, it is further divided into two basic realms according to the theory: authoritative and allocative. Under

the authoritative resources, it includes the techniques, technologies of management, organizational position and expert knowledge

etc., which are analyzed as follows:

Lack of Leadership Role

Another source of quit rent arrears is the lack of leadership roles. These two public servants are the main figures in setting the

direction of the land office. According to seven respondents (77.7%), the lack of leadership on the part of those officers can be

seen in terms of lack of knowledge, job focus as well as commitment on land revenue matters. However, the fact is that as

elaborated by respondent B, those administrative circulars were merely written documents, which were not read, at all by most of

the land administrators. Thus, they did not possess a concrete knowledge from their own readings, understandings and

interpretations of how to tackle the issue accordingly. Because of that, there was no proper control, guidance and monitoring over

the subordinates to overcome the increasing level of arrears. From organizational perspective, according to respondent E, there

was no supervision and motivation from the DO as the controlling officer.

Lack of Quality of Human Resources

In terms of human resources, the main concern is the quality of the staffs particularly the level of knowledge. This was raised up

by some of the respondents (44.4%, n=4). The severe implication of lack of knowledge on the part of the staffs was committing





mistake in the rent revision process that result to unnecessary high rent rate for certain titles. When payment was not made

annually by the arrears quit rent taxpayers, the amount of arrears kept accumulating on a miscalculated basis. Generally, the staffs

failed to apply appropriate rent rate to title with the nil condition, miscalculated the rate for residential title on size basis than lot

basis, failed to determine applicable rent rate due to complicated conditions of the old titles etc. Respondent A stated that most of

the staffs were only concerned on the routine work of collecting revenue without possessing an in-depth knowledge of the tax

laws and its rationality.

The other three respondents were in agreed with the idea, sought to explain the reason for the lack of knowledge. Respondent F

observed that it was mostly due to movement of employees especially the lower ranking where some being promoted and others

being transferred. Within a period of 10 years until the next rent revision, the experience of the senior Revenue Unit staffs was no

longer available to assist those new ones in the rent revision activities. Consequently, to respondent B, he was facing problem with

most of his new staffs who did not know how to take enforcement action through 6A and 8A forms. Respondent E further

attributed the weak level of ability of the new staffs to comprehend the various issues, laws, rules and procedures on land revenue

as contributing to the lack of knowledge as well.

Seven respondents (77.7%) revealed that such a problem did occur in their work places. For instance, respondent B again

mentioned that in certain sub-district land offices, the title registration from qualified to final is not always in a substantial

number, say only 10 final titles registered in a month. It was found by respondent C that between the Registration and Revenue

Units of the same departmental head, there was also problem of coordination. What more now in certain districts these units are

now under two different heads as stated by respondent I. Again, cooperation is a problem because of unpleasant attitude towards

each other. The implication is that, failure to update; the system would keep the same old information of the title though there is

now the data integration process according to respondent C.

In certain land offices, the temporary staffs dominated most of the revenue staffs. Those of the permanent were assigned to the

collection counters, as it is the requirement of the financial procedure. Respondent H disappointingly described that the

appointment of the temporary staffs did not help much in her revenue section as they come and go when they got permanent job

later on.

Failure of the ICT Systems

The failure of the ICT was also seen by almost all respondents (88.8%, n=8) as contributing to the sources of quit rent arrears. From the data analysis, the failure in the ICT is categorized into several issues. Respondent A mentioned that in most cases, the

quit rent taxpayers’ complaint was that payment they made online was not recorded in the system when they rechecked in the land

offices (Respondents A, C, E and G). The other issue identified is that of the several difficulties faced in the data integration

activities (Respondents C, D and E). As the first section dealt with authoritative resources, this section offers an analysis on the

allocative resources. Under the allocative resources, it includes the allocation of human, financial, physical, information resources

etc. analyzed as follows:

Insufficient Numbers of Human Resources

All respondents (100%, n=9) addressed the insufficient numbers of employees from various groups of services as part of the

constraints in administering the tax collection. With such insufficiency, various activities planned in tax collection were merely

left on papers immaterialized (Respondents A, D, F and H). It was observed by respondent F that there was always a lack of

manpower in the quit rent collection mainly in the land offices. To him, the state government should more concentrate on this

revenue management not only at the central level but also at the lower level. The insufficiency of staff at the lower level would

slacken the Revenue Unit operation and ultimately, the state would suffer revenue losses.

From the analysis, there is also one interesting point noted. Respondent C strongly stated his point on the reform efforts of the

land office. To him, there were no significant changes in the strength of land office’s staffing, in particular, for a long period when

compared to other government departments such as ministries that underwent several reforms. This was very much disappointing

for the land office as its responsibility and burden of workload as the backbone to the state administration were becoming bigger. Respondent B argued that this significant lack of manpower was the main problem inherited by the state particularly the land

offices.

Inadequacy of Financial Resources

More than 50 per cent (55.5%, n=5) of the respondent argued that financial resources is one of the factors indirectly contributing

to arrears. Generally, the land offices suffer from the inadequacy of the operating allocation. This is very much apparent in the

amount for operating allocation approved by the State Financial Office lesser than required by the land offices.





Respondent H argued that in most cases, although the high amount of quit rent collected in previous year was taken into account

for budget approval but still the operating allocation approved was very little. She further expressed her disappointment, as her

land office was regarded as a sub-district land office, though the sub-district area and its collection equals to a main district, when

it came to the financial approval and staff deployment.

In terms of individual staff performance, respondent F stated that when the government wanted to put a stop to the arrears issue,

various activities have to take place including taking enforcement actions, activating outdoor collection to name a few. Respondent A argued, the limited overtime allowance has restricted the extra working hours of the staffs. Besides, the limited

transportation claims also limited the movements of the staffs and, accordingly, affect the collection. Indeed, it is more on money

that makes money that matters here.

Deficiency of Physical Resources

Another constraint is related to physical resources. In the context of the analysis, the respondents mainly to the office space and

equipment’s refer physical resources. Almost 80 percent (77.7%, n=7) of the respondents suggested that the limited office space

and the usage of old version computers have caused discomforts and difficulties in the arrears collection. Respondent A argued

that the office space for the Revenue Unit was obviously still small though he has only three clerks attached to it. Respondents D,

H and G unanimously stated that the existing Revenue Unit office spaces in their offices did not provide any comfort at all.

Respondent G further described, due to limitation of space to keep tax records, his Revenue Unit has to occupy a storeroom too. All these, according to respondent F, imposed psychological problem to the staffs, indirectly. With such a congested place, it did

not motivate the staffs towards hardworking, consequently, it affects their work performances.

Passive Dissemination of Tax Information

More than 50 per cent (55.5%, n=5) of the respondents blamed that other reason for quit rent arrears as due to information

resource. Information is important for the state especially in the construction of intention, reason and motive of the arrears quit

rent taxpayers to achieve intended outcome. However, it was found that the state land administration was not actively pursuing the

efforts on providing tax information to the quit rent taxpayers.

Respondent H acknowledged the previous 2008 campaign that included a competition to attract the involvement of the quit rent

taxpayers. Printed documents such as leaflets and banners put up in every land offices were also not enough to attract the attention

of the public (Respondents I and E). Respondent I claimed that the present period of rent revision was actually not known to the

public. It was a psychological issue, as gradual increase of a period of five years might be acceptable compared to 10 years. The

issue is that there is a lack of dissemination of tax information that has created opposition in the arrears quit rent taxpayers

towards any changes in the tax system particularly in the rent rate.

CONCLUSION

In conclusion, Giddens provides fundamentals in explaining reasons for land tax arrears in the case study areas. The empirical

study in the case study is confined on the structure side only; a complete set of evident is limited. However, the findings indicated

that organizational rules and resources as well as individuals’ intentions, reasons and motives are the main sources of quit rent

arrears in the case study. The sources of quit rent arrears from the institutional behavior factors are related to tax policy, laws,

guidelines, procedures, strategies, human resources, information, administrative will, ICT, leadership, physical resources,

financial resources and enforcement. Those structural rules and resources must be accompanied with the agent’s intention, reason

and motive within the tax environment play considerable role in the quit rent arrears collection. Actually, these structural rules and

resources are interacting and so they are influencing each other in the process of revenue collection. Therefore, the structure level

analysis indeed evaluates and complementing in explaining the sources of quit rent arrears alongside the agents’ behaviour.

REFERENCES

1. Allan, K. (2006). Contemporary Social and Sociological Theory – Visualizing Social Worlds. California Pine Forge

Press.

2. Giddens, A. (1984). The Constitution of Society: Outline of the Theory of Structuration. California: University of

California Press.

3. Maziah, Ismail. (1994). The Office Development Process in Kuala Lumpur: An Application of the Structure and

Agency Approach (Unpublished Doctoral Thesis). University of Aberdeen.





4. Moos, A. I., & Dear, M. J. (1986). Structuration Theory in Urban Analysis: 1. Theoretical Exegesis. Environmental and

Planning A, 18, 231-252.

5. Muhammad, Yussuf Al-Fahmey, Abdul, Rahim, & Ismail, Omar. (2012). Sources of Land Tax Arrears – A Literature

Review, Mass Appraisal and Valuation Symposium, Universiti Teknologi Malaysia, Jalan Semarak, Kuala Lumpur,

11-12th July.

6. (1965). National Land Code. Malaysian Government Press.

7. Vlassenko, I. (2001). Evaluation of the Efficiency and Fairness of British, French and Swedish Property Tax Systems.

Property Management, 19(5), 384-416.

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A STUDY ON FINANCIAL STATUS OF CERAMIC TILES LIMITED

Dr. A. Morarji7 R. Saroja Devi8

ABSTRACT

The present study of the research entitled “financial status” was conducted at ceramic tiles ltd. Ceramic Tiles today have

become an integral part of home improvement. It can make a huge difference to the way your interiors and outdoors look and

express. The Indian tile industry, despite an overall slowdown of the economy continues to grow at a healthy 15% per annum.

India ranks in the top 3 list of countries in terms of tile production in the world. With proper planning and better quality

control our exports (presently insignificant) contribution can significantly increase. The detail regarding the history and

accounting a policy of the company was collected through discussion with the company officials. The study was based on

secondary data from records, reports and profile of the organization. The present study has been organized into five chapters.

The first chapter deals with financial performance objectives and limitations study. The main objective is financial

performance of the company for five financial years. The researchers used the following tools like, ratio analysis, correlation,

ANOVA. The data financial years i.e. from 2010 to 2014 were collected and used in the present study. The main aim of this

study is to study the financial performance analysis of the company.

KEYWORDS

Financial Performance, Ratio, Tiles, Growth, Accounting, Ceramics etc.

INTRODUCTION

Ceramic Tiles today have become an integral part of home improvement. It can make a huge difference to the way your interiors

and outdoors look and express. The Indian tile industry, despite an overall slowdown of the economy continues to grow at a

healthy 15% per annum. Investments in the last 5 years have aggregated over Rs. 5000 crores. The overall size of the Indian

ceramic tile industry is approximately Rs 18,000 crore (FY12). The production during 2011-12 stood at approx. 600 million

square meters. The Indian tile industry is divided into organized and unorganized sector. The organized sector comprises of

approximately 14 players. The current size of the organized sector is about Rs 7,200 Crores. The unorganized sector accounts for

nearly 60% of the total industry bearing testimony of the growth potential of this sector. India ranks in the top 3 list of countries in

terms of tile production in the world. With proper planning and better quality control our exports (presently insignificant)

contribution can significantly increase. Apart from their decorative looks, Ceramic Tiles are primarily hygiene products and that is

how our broad spectrum of consumers views the product. This is evident from its varied usage from bathrooms and kitchens in

average Indian households to medical centers, labs, milk booths, schools, public conveniences, shopping malls and numerous

other centers; which dot our day-to-day life. A ceramic tile is a "utility product" and that remains our promotional slogan. Popular

housing projects are increasingly switching over to Ceramic Tiles moving away from the traditional use mosaic and even granite

or marble, owing to several factors viz. ease in laying ability, versatility, low price and hygiene. Nevertheless, this decorative

aspect of a Ceramic Tiles has forever been in the forefront. Heavy churning out of bolder and colorful designs by the industry are

testament to the fact that most households regard a ceramic tile as an "adornment" for an otherwise "drab look" of their age-old

floorings or an unfurnished wall.

A ceramic tile as a product segment has grown to a sizeable chunk today at approximately 680 Millions Square meters production

per annum. However, the potential seems to be great, particularly as the housing sector, retail, IT & BPO sectors have been

witnessing an unprecedented boom in recent times. The key drivers for the ceramic tiles in India are the boom in housing sector

coupled by government policies fuelling strong growth in housing sector. The retail boom in the Indian economy has also

influenced the demand for higher end products.

Overall the bullish growth estimates in the Indian economy has significantly influenced the growth of the Indian Ceramic tile

industry. The main product segments are the Wall tile, Floor tile, Vitrified tile and Industrial tile segments. The market shares (in

value terms) are 20%, 23% 50%, and 7% respectively for Wall, Floor, Vitrified, and Industrial tiles. The tiles are available in a

wide variety of designs, textures and surface effects. They cater to tastes as varied from rustics to contemporary marble designs in

super glossy mirror finishes. Both, traditional methods of manufacturing (tunnel) and the latest single fast firing methods are

deployed in manufacturing.

7Associate Professor Department of Corporate Secretaryship, School of Management Alagappa University, Tamil Nadu, India,

[email protected] 8Research Scholar, Department of I.B. & Commerce, Alagappa University, Tamil Nadu, India, [email protected]







Some of the latest trends in manufacturing methods can be seen in India. The industry also enjoys the unique distinction of being

highly indigenous with an abundance of raw materials, technical skills, infrastructural facilities despite being fairly capital

intensive. Over 5,50,000 people are employed in the sector. Out of this, 50,000 people are directly employed and 5, 00,000 are

indirectly associated. The potential is huge considering the per capita consumption of ceramic tiles in India. Currently it is at 0.50

square meters per person in comparison to over 2 square meters per person for like countries like China, Brazil and Malaysia. As a

foreign exchange earner or a global player, Indian Tile industry has captured the attention of the world in the ceramic tiles

segment. To compete internationally, our plants must be geared up to large units currently operating in China and Turkey is driven

by economies of scale. These will also help us in lowering our cost of production significantly. In addition, infrastructural support

is a key factor that determines the speed of growth. Better infrastructure will bring in better growth in terms of consistency and

sustenance. Freight, supply of power and gas remains the key cost-related issues affecting the industry. Availability, consistent

supply and reasonable rates are extremely important for the growth of the ceramic tile industry. In addition, the prevailing

anomalies pertaining to Basic Customs Duty on import of ceramic tiles from China and raw materials imported from abroad need

to be corrected to prevent dumping of tiles from China. Rural thrust should be enhanced by favorable excise duty and MRP

structure

STATUS OF THE INDUSTRY

The ceramic tiles industry in India has followed similar trends internationally which have been characterized by excess capacities

and falling margins. Countries like Malaysia, Thailand, Indonesia, Sri Lanka and Vietnam are setting up their own plants. China

has emerged as a major competitor. Producers from Spain and Italy have the advantage of lower transportation costs while

exporting to USA and Germany. In India, the per capita consumption is as low as 0.50 square meters per person compared to

China (2.6 square meters per person), Europe (5 to 6 square meters per person) or Brazil (3.4 square meters per person). Rising

disposable incomes of the growing middle class and 40 million units of housing shortage hold out a great potential.

A major change that took over the ceramic tiles industry, was the introduction of vitrified and porcelain tiles. These new entrant

product types are said to be the tiles of the future. Internationally these tiles are already the major sellers. These categories of

products account for Almost 50% of total tile sales by value in this industry. These new products and the conventional wall &

floor tiles have together made the organized industry grow to a formidable Rs. 7,200 crores industry. This coupled with a spate of

expansions by many players make the industry look very promising in the future.

The Indian Industry has developed an export market although at the lower end. In volume, it constitutes less than half a percent of

the global market. (Presently India does not figure in the list of major exporting countries). However, this reality could change as

Indian exports are rising at an accelerating growth annually. The top-end of the global export market is presently dominated by

China (36.8%) and Italy (15.1%).

SCOPE OF STUDY

The study is based on the accounting information of Ceramic Tiles ltd. This study covers the period 2010-2014 for analyzing for

financial statements. The scope of study involves the various factors that effect of the financial status of the company. These

studies find out the operational status of the organization. This data 5 years are taken into account for the study. This performance

is compared within the periods. This study find out the area where Ceramic Tiles ltd can improve current ratio, quick ratio etc.

Table-1: Ceramic Tiles Industry Statistics

1. World production: 11913 Million sq. mtr

2. India's Share: 750 Million sq. mtr

3. World ranking (in production): 3

4. Per capita consumption: 0.50 sq. mtr

5. Global Industry Growth Rate: 11%

6. Growth Rate (India Domestic Market): 15%

7. National Player's Turnover (India): Rs. 8600 crores

a). Glazed Wall Tile share: 45%

b). Glazed Floor Tile share: 8%

c). Polished Vitrified Tile share: 40%

d). Glazed Vitrified Tiles: 7%

8. Regional Player's Turnover: Rs 12900 crores

9. National Sector:

a). Share of Production: 40%

b). Number of units: 14





10. Regional Sector:

a). Share of Production: 60%

b). Number of units: 200 (approx.) (70% based in Gujarat )

11. Job Potential: 50,000 direct & 500,000 indirect

12. Export 40 million sq. m

13. Imports 45 million sq. m

14. Investments in last 6 years: Rs. 6000 crores


OBJECTIVES OF STUDY

To compare and analysis the financial statements for the past five financial years.

To know the profitability, activity, solvency financial stability position of ceramic tiles ltd.


Data Collection: The study is based on secondary data taken from the annual reports of selected company and development of

industries have been collected mainly from the books and magazine relating to the published paper, report, article and from the

various newspapers research reports published by industry and various websites.

Selection Sample: The population of the study consists of all types of the companies having different nature of industries. As the

study is to be carried out by the individual researcher, it is not easy to select all the companies as samples for the study. So,

selection based upon growth aspect of companies from Indian industry in present scenario.

Period of the Study: The present study mainly intended to examine the financial performance of companies five year.

CURRENT RATIO OF SELECTED CERAMICS COMPANIES

The current ratio is one of the most commonly used ratios to test the short-term financial strength of a company. If effectively

assesses the working position of the company. The current ratio should be table.1 shows that calculated values of current ratio of

the selected ceramics companies:

Current Assets

Current Ratio = ---------------------------

Current Liability

Hypothesis

Set-1: Ho - There is no significant difference between the values of current ratio of the selected ceramics companies

Set-2: Ho - There is no significant difference in the values of current ratio of the selected ceramics companies during the different

years.

Table-2: Current Ratio of Selected Ceramics Companies

S.

No

Year /

Company

Kajaria Hsil Somany Asian

Granite

Nicto Cera

Orient Murudesher Euro Restile

1 2010 1.27 1.41 1.20 3.09 1.58 1.28 1.47 3.45 2.66 1.68

2 2011 0.89 1.41 1.45 3.17 1.78 1.45 1.62 3.78 0.99 1.12

3 2012 1.01 1.26 1.25 2.76 1.06 1.13 1.54 4.26 1.09 0.66

4 2013 0.99 1.51 1.20 2.72 3.87 1.94 1.39 4.35 0.54 0.42

5 2014 0.96 1.38 1.15 2.68 1.00 1.70 1.28 5.24 0.09 0.25

MEAN 1.02 1.39 1.25 2.88 1.85 1.5 1.46 4.21 1.07 0.82

S.D 0.14 0.89 0.11 0.22 1.17 0.32 0.13 0.67 0.97 0.58

CO.V 14.14 6.42 9.38 7.90 63.13 21.63 9.02 16.11 90.47 70.06






The table-2 shows that analysis of current ratio of selected ceramics companies during the study period. The highest mean value

of current ratio is MURUDESHER 4.21 followed by Asian Granite 2.88 ceramics and NICTO 1.85 during the study period.

Among the selected ceramics Companies has lowest mean value RESTILE in current ratio while NICTO 1.17 and HSIL 0.89

suffered from largest standard deviation in current ratio during the study period of 2011 to 2014.

Table-3: ANOVA - Current Ratio of Selected ceramics Companies

Source of Variation SS DF MS P-Value F-Value

Within Rows 0.992092 4 0.248023 0.723351 0.723351

Between Columns 48.6996 9 5.411067 4.86E-10 15.78119

Error 12.34371 36 0.342881 - -

Total 62.0354 49 - - -


Note: Level of Significant= 0.05

Result

Set-1: Ho The table value of F at 5% for v1=4, v2=36 since the calculated value is less than the table value the null hypothesis is

accepted. Hence, the values of current ratio of the selected ceramics Companies differ significantly from each other.

Set-2: Ho The calculated value of F is 15.78 the table value of f at 5% for v1=9, v2=36 is 1.96. Since the calculated value, less

than the table value the Ho is rejected. Hence the value of differ current ratio significantly during the period.

Table-4: Correlation - Current Ratio of Selected ceramics Companies

Correlations

Nicto Kajaria Hsil Somany Asian

Granite

Cera

Sanitaryware


Nicto

P. C. 1 -.880* .248 .102 .706 -.127 -.428 .716 -.837 .664

Sig. (2-tailed) .049 .688 .871 .183 .839 .472 .173 .077 .221

N 5 5 5 5 5 5 5 5 5 5

Kajaria

P. C. -.880* 1 -.568 .071 -.472 .125 .648 -.732 .966** -.910*

Sig. (2-tailed) .049 .318 .910 .422 .841 .237 .159 .007 .032

N 5 5 5 5 5 5 5 5 5 5

Hsil

P. C. .248 -.568 1 .012 -.456 -.089 -.372 -.081 -.510 .857

Sig. (2-tailed) .688 .318 .985 .440 .887 .537 .897 .380 .064

N 5 5 5 5 5 5 5 5 5 5

Somany

P. C. .102 .071 .012 1 -.048 .824 .804 -.288 -.098 -.075

Sig. (2-tailed) .871 .910 .985 .939 .086 .101 .638 .875 .904

N 5 5 5 5 5 5 5 5 5 5

Asian

Granite

P. C. .706 -.472 -.456 -.048 1 -.030 -.269 .858 -.496 .064

Sig. (2-tailed) .183 .422 .440 .939 .962 .661 .063 .395 .919

N 5 5 5 5 5 5 5 5 5 5

Cera

Sanitaryware

P. C. -.127 .125 -.089 .824 -.030 1 .705 -.106 -.125 -.149

Sig. (2-tailed) .839 .841 .887 .086 .962 .183 .865 .842 .812

N 5 5 5 5 5 5 5 5 5 5

Orient

P. C. -.428 .648 -.372 .804 -.269 .705 1 -.623 .496 -.620

Sig. (2-tailed) .472 .237 .537 .101 .661 .183 .261 .395 .264

N 5 5 5 5 5 5 5 5 5 5

Murudesher

P. C. .716 -.732 -.081 -.288 .858 -.106 -.623 1 -.748 .426

Sig. (2-tailed) .173 .159 .897 .638 .063 .865 .261 .146 .474

N 5 5 5 5 5 5 5 5 5 5

Euro

P. C. -.837 .966** -.510 -.098 -.496 -.125 .496 -.748 1 -.855

Sig. (2-tailed) .077 .007 .380 .875 .395 .842 .395 .146 .065

N 5 5 5 5 5 5 5 5 5 5

Restile

P. C. .664 -.910* .857 -.075 .064 -.149 -.620 .426 -.855 1

Sig. (2-tailed) .221 .032 .064 .904 .919 .812 .264 .474 .065

N 5 5 5 5 5 5 5 5 5 5

Note: *Correlation is significant at the 0.05 level (2-tailed).

**Correlation is significant at the 0.01 level (2-tailed).

PC = Pearson Correlation






The table shows that the correlation between Current Ratio of Selected ceramics Companies during the 2010 to-2014. The

correlation between KAJARIA and other companies of r = .966 and significant is 0.007. This indicates that KAJARIA and other

companies are not independent to each other. The correlation between EURO and other companies of r=.966 and significant is

0.007. This indicates that EURO and other companies are not independent to each other. Here the value of r is 0.966 so it is

considered a strong correlation.

PROPRIETARY RATIO OF SELECTED CERAMICS COMPANIES

The proprietary ratio (also known as the equity ratio) is the proportion of shareholders equity to total assets, and as such provides

a rough estimate of the amount of capitalization currently used to support a business. If the ratio is high, this indicates that a

company has a sufficient amount of equity to support the functions of the businessman probably has room in its financial structure

to take on additional debt, if necessary. The proprietary ratio should be table.2 shows that calculated values of proprietary ratio of

the selected ceramics companies.

Proprietary Fund

Proprietary Ratio = --------------------------------

Tangible Assets

Hypothesis

Set-1: Ho - There is no significant difference between the values of proprietary ratio of the selected ceramics companies.

Set-2: Ho - There is no significant difference in the values of proprietary ratio of the selected ceramics companies during the

different years.

Table-5: Proprietary Ratio of Selected Ceramics Companies

S.

No

Year /

Company


Granite

Nicto Cera

Sanitaryware


1 2010 0.41 0.50 0.34 0.60 0.52 0.76 0.50 0.58 0.20 0.78

2 2011 0.44 0.64 0.35 0.60 0.48 0.74 0.56 0.67 0.28 0.73

3 2012 0.61 0.56 0.45 0.57 0.45 1.07 0.48 0.68 0.14 0.69

4 2013 0.67 0.54 0.51 0.57 0.17 0.76 0.49 0.69 0.03 0.64

5 2014 0.85 0.54 0.63 0.53 0.09 0.84 0.53 0.71 -4.80 0.52

MEAN 0.59 0.56 0.45 0.57 0.34 0.83 0.51 0.66 -0.83 0.67

S.D 0.18 0.05 0.12 0.02 0.19 0.13 0.03 0.05 2.22 0.09

CO.V 30.14 9.31 26.3 5.01 57.64 16.47 6.39 7.55 -267.61 14.7


The table- 5 implies that analysis of Proprietary Ratio of selected Ceramics companies during the study period. The highest mean

value Proprietary ratio is CERA SANITARYWARE 0.83 followed by MURUDESHER 0.66 ceramics and KAJARIA 0.59 during

the study period. Among the selected ceramics Companies has lowest mean value EURO -0.83 in Proprietary ratio while EURO

2.22 and RESTILE 0.99 suffered from largest standard deviation in Proprietary Ratio during the study period of 2010-11 to 2013-

2014.

Table-6: ANOVA- Proprietary Ratio of Selected Ceramics Companies

Source of Variation SS DF MS P-Value F-Value

Within Rows 2.336053 3 0.778684 0.351486 1.143931

Between Columns 10.59 8 1.32375 0.099329 1.944663

Error 16.26308 24 0.680709 - -

Total 29.263.8 35 - - -


Note: Level of significant= 0.05

Result:

Set-1: Ho The table value of F at 5% for v1=3, v2=24 since the calculated value is less than the table value the null hypothesis is

accepted. Hence, the values of Proprietary ratio of the selected ceramics Companies differ significantly from each other.

Set-2: Ho The calculated value of F is 1.94 the table value of f at 5% for v1=9, v2=36 is 1.96. Since the calculated value, less

than the table value the Ho is accepted. Hence the value of differ Proprietary ratio significantly during the period.





DEBT-EQUITY RATIO OF SELECTED CERAMICS COMPANIES

Debt equity ratio is greatest of the financial strength of a company. The ratio shows how much of the firm’s assets are financed by

debt and equity. The debt equity ratio indicates how much the company leveraged by comparing what is owned. It measures a

company ability to borrow and repay money. A high debt equity ratio could indicate that the company is over leveraged and low

ratio indicates that the company is less leveraged. The debt-equity ratio should be table.3 shows that calculated values of debt-

equity ratio of the selected ceramics companies.

Debt

Debt-Equity Ratio = -----------------------

Equity

Hypothesis

Set-1: Ho - There is no significant difference between the values of debt-equity ratio of the selected ceramics companies.

Set-2: Ho - There is no significant difference in the values of debt-equity ratio of the selected ceramics companies during the

different years.

Table-7: Debt-Equity Ratio of Selected Ceramics Companies

S.

No

Year /

Company


Granite

Nicto Cera

Sanitaryware


1 2010 2.31 1.61 3.65 0.96 1.35 0.96 1.94 0.86 4.40 0.43

2 2011 2.2 1.09 3.67 0.95 1.72 0.93 2.47 0.63 3.48 0.59

3 2012 1.72 1.31 2.87 1.22 2.57 0.77 1.81 0.59 5.41 0.75

4 2013 1.36 1.31 2.69 1.44 5.23 0.37 1.89 0.57 -35.02 1.05

5 2014 0.78 1.38 1.89 1.42 15.43 0.78 1.82 0.50 -14.73 1.74

MEAN 1.67 1.34 2.95 1.19 5.26 0.76 1.98 0.63 -7.29 0.91

S.D 0.62 0.18 0.74 0.24 5.88 0.23 0.27 0.13 17.59 0.52

CO.V 37.55 13.90 25.13 19.86 111.86 30.88 13.88 21.7 -241.28 56.62


The table- 7 implies that analysis of Debt-Equity Ratio of selected Ceramics companies during the study period. The highest mean

value Proprietary ratio is NICTO 5.26 followed by SOMANY 2.95 ceramics and KAJARIA 1.67 during the study period. Among

the selected ceramics Companies has lowest mean value EURO -7.29 in Debt-Equity Ratio while euro17.59 and NICTO 5.88

suffered from largest standard deviation in Debt Equity Ratio during the study period of 2010-11 to 2013-2014.

Table-8: ANOVA- Debt Equity Ratio of Selected Ceramics Companies

ANOVA

Source of Variation SS DF MS F P-Value

Rows 105.9608 4 26.49019 0.747027 0.566449

Columns 462.3618 9 51.37354 1.44874 0.204653

Error 1276.59 36 35.46084

Total 1844.913 49


Note: Level of significant= 0.05

Result

Set-1: Ho - The table value of F at 5% for v1=4, v2=36 since the calculated value is less than the table value the null hypothesis is

accepted. Hence, the values of Debt Equity Ratio of the selected ceramics Companies differ significantly from each other.

Set-2: Ho - The calculated value of F is 1.94 the table value of f at 5% for v1=9, v2=36 is 1.96. Since the calculated value, less

than the table value the Ho is accepted. Hence the value of differ Debt Equity Ratio significantly during the period.





CONCLUSION

Efficient management of finance is very important for the success of an enterprise. The financial performance is very dynamic

term. The subject matter of financial performance has been changing very rapidly in present time greater importance is given to

financial performance. Therefore, hence an attempt is made by me to compare the finance performance of the selected units i.e.

KAJARIA CERAMIC, HSIL, SOMANY CERAMICS, EURO CERAMICS, ASIAN GRANITO INDIA, CERA

SANITARYWARE, NITCO, MURUDESHWAR CERAMICS, ORIENT BELL, And RESTILE CERAMICS. While

analysis financial performance or the selected units, we include the analysis of working capital, analysis of fixed assets and

analysis of profitability.

Financial performance is an importance standard to measure a company operational and financial efficiency. This aspect must

from part of the company’s strategic and operational thinking. Efforts should constantly be made to improve the financial

position. This will yield greater efficiencies and improve investors’ satisfaction.

REFERENCES

1. Peer, Mohamed. Akbar Batch Research Methodology.

2. S., N. Maheswari . Management Accounting and Financial Control. New Delhi: Sultan Chand and Sons.

3. Gupta, S. P. Statistical Method. New Delhi: Sultha Chand & Sons.

4. Black, J. T., & Kohser, R. A. (2012). DeGarmo's Materials and Processes in Manufacturing, pp. 226. Wiley.

ISBN 978-0-470-92467-9.

5. Carter, C. B., & Norton, M. G. (2007). Ceramic materials: Science and engineering. Springer, pp. 3 & 4. ISBN: 978-0-

387-46271-4.

6. Henry, George Liddell, & Robert Scott. A Greek-English Lexicon, on Perseus Digital Library.

7. Carter, C. B., & Norton, M. G. (2007). Ceramic materials: Science and engineering. Springer, pp. 20 & 21. ISBN 978-

0-387-46271-4.

8. Agrawal. Financial Sector Reforms in India. New Delhi: Deep & Deep Publication.

9. Chopra, K. Profitability and Productivity in Public Sector. Jalandher: ABS Publications.

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16. Retrievd from http://www.shivazzatiles.com/industry.php

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...

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https://en.wikipedia.org/wiki/Special:BookSources/978-0-470-92467-9







http://www.icctas.com/ceramic-tiles-industry-in-india.htm

http://www.academia.edu/3625012/An_Organizational_Study_at_H_and_R_Johnson_I_Ltd

http://www.lotusceramics.com/aboutvetri1.html

http://www.ukessays.com/essays/business/industry-analysis-of-indian-ceramics-profits-and-challenges-

http://www.icctas.com/chairmans-message.htm

http://aeon-india.com/Ceramic-in-india.aspx

http://www.shivazzatiles.com/industry.php

http://www.academia.edu/7261160/A_COMPARATIVE_STUDY_OF_FINANCIAL_PERFORMANCE_OF_SAIL_AND_TATA_STEEL_

http://www.academia.edu/7261160/A_COMPARATIVE_STUDY_OF_FINANCIAL_PERFORMANCE_OF_SAIL_AND_TATA_STEEL_

http://www.slideshare.net/AlexanderDecker/an-analysis-on-contribution-of-bancassurance-on-financial-

http://www.slideshare.net/AlexanderDecker/an-analysis-on-contribution-of-bancassurance-on-financial-

http://www.aipma.org.in/notice/Speech_-_02.02.15-1.docx





20. Retrievd from

http://www.academia.edu/13844890/A_Comparative_Study_on_Financial_Performance_of_Tata_Steel_Ltd_and_...

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23. Retrievd from http://www.researchmanuscripts.com/may2012/22.doc

24. Retrievd from

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http://www.academia.edu/13844890/A_Comparative_Study_on_Financial_Performance_of_Tata_Steel_Ltd_and_

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http://www.icctas.com/ceramic-tiles-industry-statistics.htm

http://www.researchmanuscripts.com/may2012/22.doc

http://www.streetdirectory.com/travel_guide/21808/corporate_matters/how_to_improve_working_capital_m

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IMPACT OF LEVERAGE ON PROFITABILITY: AN EMPIRICAL STUDY

Gurnam Singh Rasoolpur9

ABSTRACT

The present empirical paper makes an attempt to study the impact of leverage on profitability through a case of Ceat Ltd. from

the tyres & tubes industry of the Indian corporate sector by comparing rate of return on net assets (ROIbt2 & ROIat2) with cost

of debt (Kdbt & Kdat) on before and after tax basis during the period under study which covers a time period of ten years

extending from the year 1982-83 to 1991-92 for the purpose of our study. Thus, the present empirical study is confined to Ceat

Ltd. from the tyres & tubes industry of the Indian corporate sector, which is lying in the top ten companies of tyres & tubes

industry of the Indian corporate sector on the basis of sales for the year 1991-92. The study reveals that debt-equity ratio2 has

been varying from 35.48 percent in the 1987-88 to 70.75 percent in the year 1991-92 during the period under study, whereas,

aggregate debt-equity ratio2 of the company is worked out 58.11 percent during the period under study. It is found that

preference share capital does not exist for the company during the study period. Therefore, debt-equity ratio and leverage

ratio are same during the period under study. It is found that cost of debt on before and after tax basis (Kdbt & Kdat) has been

varying from 22 percent in year 1982-83 to 10 percent in the year 1991-92 with declining trend during the period under study,

whereas, aggregate cost of debt on before and after tax basis (Kdbt & Kdat) of the company is worked out 13.41 percent and

9.79 percent, respectively, during the period under study. It is found that rate of return on net assets on before tax basis

(ROIbt2) has been varying from 8 percent in the year 1984-85 to 29 percent in the year 1987-88 with declining and

fluctuations while the rate of return on net assets on after tax basis (ROIat2) has been varying from 25 percent in the year

1982-83 to 7.20 percent in the year 1984-85 with declining and fluctuations during the period under study. It is observed that

rate of return total networth on before tax basis (RONbt) has been varying from 2 percent in the year 1984-85 to 35 percent in

the year 1987-88 with declining and fluctuations while rate of return total networth on after tax basis (RONat) has been

varying from 29 percent in the year 1982-83 to 1.80 percent in the year 1984-85 with declining and fluctuations during the

period under study. Thus, it is concluded that the company is enjoying favourable leverage with regard to use of debt during

seven out of ten years under study. Consequently, rate of return on total networth (RONbt & RONat) is higher than cost of debt

(Kdbt & Kdat) and rate of return on net assets (ROIbt2 & ROIat2) on before and after tax basis in the above said seven years

under study. It means that use of debt in the capital structure of the company has positive impact on the profitability of the

company during seven out of ten years under study, which consequently is contributing to the total networth of the company,

which ultimately is benefitting to the equity shareholders of the company. However, on aggregate basis, the company has also

been experiencing favourable leverage with regard to use of debt on before and after tax basis during the period under study.

It is also found that spread and net gain are positive when leverage impact is positive and vice-versa during the period under

study. It is also found that effective tax rate born by the company is not high during the period under study.

KEYWORDS

Return on Net Assets, Return on Total Networth, Cost of Debt etc.

INTRODUCTION

The use of the fixed charges funds, such as debt and preference capital along with the owner’s equity in the capital structure is

described as financial leverage or trading on equity. It is generally measured by the ratio called debt-equity ratio. This ratio

indicates the relationship between the borrowed funds and owners’ funds in the capital structure of a company. The primary aim

of corporate management is to maximize shareholders’ value and the value of a firm in a legal and ethical manner. So, a financial

manager would consider a number of factors to set an optimal capital structure for a firm giving considerable weight to earning

rate, collateral value of assets, age, cash flow coverage ratio, non-debt tax shield, size (net sales), dividend payout ratio, debt

service ratio, cost of borrowing, corporate tax rate, current ratio, growth rate, operating leverage and uniqueness (selling

cost/sales) etc. “A company can finance its investments through debts/or equity. The company may also use preference capital.

The rate of interest on debt is fixed irrespective of the company’s rate of return on assets. The company has a legal binding to pay

interest on debt. The rate of preference dividend is fixed, but preference dividends are paid when the company earns profits. The

common shareholders are entitled to the residual income. That is, earnings after interest and taxes (less preference dividends)

belong to them. The rate of equity is not fixed and depends on the dividend policy of the company” (Pandey, I. M., 2010, p 317-

18). The choice between debt and equity to finance a firm’s assets involves a trade-off between risk and return (Pandey, Chotigeat

& Ranjit, 2000). The excessive use of debt may endanger the survival of a firm, while a conservative use of debt may deprive the

firm in leveraging return to equity owners. Therefore, in order to increase the advantage of debt capital and at the same time to

9Associate Professor (Commerce), P.G. Department of Commerce & Business Management, Guru Nanak College, Punjab, India,

[email protected]






save the firm from the financial and other risks, it is desirable to have a reasonable debt equity mix in the total capital structure.

Thus, the decision regarding debt equity mix in the capital structure of a firm is of critical importance and has to be approached

with a great care. Every time when funds have to be procured, the financial manager weighs the pros and cons of various sources

of finance and selects the most advantageous sources keeping in view the target capital structure. Thus, the capital structure

decision is a continuous one and has to be taken whenever a firm needs additional finances. As the objective of a firm should be

directed towards the maximization of the value of the firm, the capital structure, or leverage, decision should be examined from

the point of view of its impact on the value of the firm. If capital structure or financing decision, a firm can affect the value of the

firm would like to have a capital structure, which maximizes the market value of the firm. Therefore, the financial manager should

plan an optimum capital structure for his company. The optimum capital structure is obtained when the market value per share is

maximum. Capital structure is the mix of debt, equity and preference securities that are used to finance a company’s assets.

However, the choice between debt and equity from the point of view of shareholders and lenders is an important one and it will be

useful to list the special advantages of either form of capital relative to the other.

Deductibility of the interest on debt before computing profits charge to tax, as against payment of dividends out of

profits after tax, implies an effective lowering of the tax rate on a firm more or less in proportion to the extent to which

debt is substituted for equity in the company is financing pattern.

The greater use of debt, where the interest rate is lower than the average rate of return on the investment, increases the

net return to equity shareholders.

Higher debt does not impair the control of shareholders over the enlarged operations of the firm.

Debt is cheaper source of finance, cost of debt is lower than cost of preference share capital as well as equity share

capital because debt holders’ first claim on the firm’s assets at time of its liquidation, payment of interest before any

dividend is paid to preference and equity shareholders, and interest is an item chargeable to profits of a firm.

However, it is not desirable to resort to excessive debt financing because the excessive proportion of debt in the capital structure

increases the financial risks of the firm. This is because debt being a contractual obligation. The same along with interest must be

paid out ultimately. Any failure in doing so shall result in technical insolvency if not a real one. Further, the use of debt capital

will not automatically improve the overall return of the firm. It will increase the return if the firm’s rate of return on assets is

higher than the cost of debt capital. Therefore, in order to increase the advantage of debt capital and at the same time to save the

firm from the financial and other risks, it is desirable to have a reasonable debt equity mix in the total capital structure. Thus, the

decision regarding debt equity mix in the capital structure of a firm is of critical one and has to be approached with a great care

initially at the time of promotion and, subsequently, whenever funds have to be raised to finance investments by the firm.

OBJECTIVES OF STUDY

The present study has been undertaken with the following objectives:

To measure the extent of debt-equity ratio of Ceat Ltd. from the tyres & tubes industry of the Indian corporate sector.

To measure the extent of leverage ratio of Ceat Ltd. from the tyres & tubes industry of the Indian corporate sector.

To examine the impact of leverage on the profitability of Ceat Ltd. from the tyres & tubes industry from the Indian

corporate sector.

DATA SOURCE & SAMPLE SIZE

For studying the impact of leverage on profitability, Ceat Ltd. from the tyres & tubes industry is selected. The study covers a

period of ten years extending from the year 1982-83 to 1991-92 for meeting the objectives. The company is lying in the top ten

companies of tyres & tubes industry of the Indian corporate sector based on sales for the year 1991-92 for the purpose of this

study. For conducting the present study, data has been compiled from the different volumes of the Bombay Stock Exchange

Official Directory.


In the present study, adequate efforts have been made to examine the impact of leverage on profitability through a case of Ceat

Ltd. from tyres & tubes industry of the Indian corporate sector. To analyses the results, analysis of empirical section is organized

into four parts. In the first part, analysis of debt-equity ratio and leverage ratio is done. The second part explains the analysis of

return on investment and cost of debt on before tax basis. The third part gives details of the analysis of return on investment and

cost of debt on after tax basis. In the fourth part, impact of debt on return on total networth is presented. The company does not

have preference share capital during the study period. In this study, debt-equity ratio and leverage ratio will be same. Therefore,

use of debt along with owner’s equity will constitute leverage for our empirical work, which further means that use of debt and

leverage has same meaning over here. In this work, profitability means return on total networth over the period under study.

Return on net total assets, which is calculated and is shown in the research methodology, is supplementary information, which





further means that it is not a part for approaching and reaching to the conclusions of the main study. To analyses the data, the

following ratios along with simple statistical tools like tables, percentages, etc. have been used for achieving the objectives of

present study.

Debt-Equity Ratio: It can be calculated in the following manner

Debt-Equity Raio1 = Term Debt+Short Term Loans & 𝐴𝑑𝑣𝑎𝑛𝑐𝑒𝑠

Total Networthx100

Debt-Equity Raio2 = Term Debt+Short Term Loans & 𝐴𝑑𝑣𝑎𝑛𝑐𝑒𝑠

Term Debt+Short Loans & 𝐴𝑑𝑣𝑎𝑛𝑐𝑒𝑠+𝑇𝑜𝑡𝑎𝑙 𝑁𝑒𝑡𝑤𝑜𝑟𝑡hx100

Leverage Ratio: It can be calculated in the following manner

Leverage Raio1 = Term Debt+Short Term Loans & 𝐴𝑑𝑣𝑎𝑛𝑐𝑒𝑠+𝑃𝑟𝑒𝑓 Share 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Equity Networthx100

Leverage Raio2 = Term Debt+Short Term Loans & 𝐴𝑑𝑣𝑎𝑛𝑐𝑒𝑠+𝑃𝑟𝑒𝑓 Share 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Term Debt+Short Term Loans & 𝐴𝑑𝑣𝑎𝑛𝑐𝑒𝑠+𝑃𝑟𝑒𝑓 Share 𝐶𝑎𝑝𝑖𝑡𝑎𝑙+Equity Networthx100

Return on Total Networth: It is calculated in the following manner

Return on Total Networth on Before Tax Basis (RONbt) = Pre Tax Profits

Total Networthx100

Return on Total Networth on After Tax Basis (RONat) = Profits after Interest & Taxes

Total Networthx100

Return on Net Total Assets: It is calculated in the following manner

Return on Net Total Assets on Before Tax Basis (ROIbt1) = Earnings Before Intt.& Taxes

Net Total Assetsx100

Return on Net Total Assets on After Tax Basis (ROIat1) = ROIbt1(1-t)

Return on Net Assets: It is calculated in the following manner

Return on Net Assets on Before Tax Basis (ROIbt2) = Earnings Before Interest & Taxes

Net Assetsx100

Return on Net Assets on After Tax Basis (ROIat2) = ROIbt2(1-t)

Cost of Debt: The following formula is used to calculate the cost of debt

Cost Debt on Before Tax Basis (Kdbt) = Total Interest Charges

Total Intt.Bearing Debt Both Long Term & 𝑆hort 𝑇𝑒𝑟𝑚x100

Cost of Debt on After Tax Basis (Kdat) = Kdbt(1-t)

Net Gain: The following is the formula for calculating the Net Gain

Net Gain on Before Tax Basis = Return on Total Networth (RONbt) - Return on Net Assets (ROIbt)

Net Gain on After Tax Basis = Return on Total Networth (RONat) - Return on Net Assets (ROIat)

Spread: The following is the formula for calculating the Spread





Spread on Before Tax Basis = Return on Net Assets (ROIbt) - Cost of Debt (Kdbt)

Spread on After Tax Basis = Return on Net Assets (ROIat) - Cost of Debt (Kdat)

Effective Tax Rate (t): It is calculated in the following manner:

Effective Tax Rate (t) = Provision for Taxes

Pre−Tax Profitsx100

Here Term Debt plus Short Term Loans & Advances comprise of debentures, long-term loans and short-term loans & advances.

Total Networth includes equity share capital, preference share capital, capital reserves including share premium and other

reserves & surplus less intangible assets. Intangible Assets include preliminary expenses, expenses on issue of shares and

debentures, goodwill, technical know-how charges, drawings & designs, patents, trademarks and copyright. While computing

total networth usually accumulated losses are deducted from the aggregate of paid up share capital plus reserves & surplus.

However, in the present study in addition to accumulated losses, goodwill, trademark, patents, & copyright have also been

deducted. It is so because separate amount of accumulated losses is not available in the Bombay Stock Exchange Official

Directory. Total networth has been also adjusted for the accounting year 1988-89 due to the change in the length of accounting

year from 1st of April to 31st of March in the next year. Depreciation, interest charges and profits and/or losses have been

changed proportionately.

EMPIRICAL RESULTS

(1) Analysis of Debt-Equity Ratio and Leverage Ratio

As revealed by table 1, debt-equity ratio2 has been varying from 35.48 percent in the 1987-88 to 70.75 percent in the year 1991-92

during the study period. For seven out of ten years under study, it has been below 60 percent. Beginning from the year 1982-83, it

has been declining upto the year 1987-88 from 52.32 percent to 35.48 percent excepting for the year 1983-84 when it is 61.46

percent, subsequently, it starts rising and touches the level of 70.75 percent in the year 1991-92 during study period. It is highest,

i.e. 70.75 percent, in the year 1991-92 due to the higher interest bearing debt raised by the company. It is lowest, i.e. 35.48

percent, because of higher profits earned by the company. On aggregate basis, aggregate debt-equity ratio2 of the company is

worked out 58.11 percent during the study period. Preference share capital does not exist for the company during the study period.

Therefore, debt-equity ratio and leverage ratio are same during the period under study. Thus, the company is having same debt-

equity ratio and leverage ratio experience over the study period.

Table-1: Debt-Equity Ratio of Ceat Ltd

Year Debt-Equity Ratio1 = 𝐓𝐞𝐫𝐦 𝐃𝐞𝐛𝐭 + 𝐒𝐡𝐨𝐫𝐭 𝐓𝐞𝐫𝐦

𝐋𝐨𝐚𝐧𝐬 𝐚𝐧𝐝 𝐀𝐝𝐯𝐚𝐧𝐜𝐞𝐬𝐓𝐨𝐭𝐚𝐥 𝐍𝐞𝐭𝐰𝐨𝐫𝐭𝐡

(In Times)

Debt-Equity Ratio2 =

𝐓𝐞𝐫𝐦 𝐃𝐞𝐛𝐭 + 𝐒𝐡𝐨𝐫𝐭 𝐓𝐞𝐫𝐦𝐋𝐨𝐚𝐧𝐬 𝐚𝐧𝐝 𝐀𝐝𝐯𝐚𝐧𝐜𝐞𝐬

𝐓𝐞𝐫𝐦 𝐃𝐞𝐛𝐭 + 𝐒𝐡𝐨𝐫𝐭 𝐓𝐞𝐫𝐦 𝐋𝐨𝐚𝐧𝐬

𝒂𝒏𝒅 𝑨𝒅𝒗𝒂𝒏𝒄𝒆𝒔 + 𝐓𝐨𝐭𝐚𝐥 𝐍𝐞𝐭𝐰𝐨𝐫𝐭𝐡

× 𝟏𝟎𝟎

(Percentage)

1982-83 1.0972 52.32

1983-84 1.5947 61.46

1984-85 0.6709 40.15

1985-86 0.5931 37.23

1986-87 0.5592 35.86

1987-88 0.5500 35.48

1988-89 0.5836 36.85

1989-90 1.4622 59.39

1990-91 2.2897 69.60

1991-92 2.4193 70.75

Ceat Ltd. 1.3874

Aggregate Basis

58.11

Aggregate Basis

Sources: Compiled from the Bombay Stock Exchange Official Directory, Vol. 31(iii), p. 27900.





Table-2: Leverage Ratio of Ceat Ltd

Year Leverage Ratio1 = 𝐓𝐞𝐫𝐦 𝐃𝐞𝐛𝐭 + 𝐒𝐡𝐨𝐫𝐭 𝐓𝐞𝐫𝐦

𝐋𝐨𝐚𝐧𝐬 𝐚𝐧𝐝 𝐀𝐝𝐯𝐚𝐧𝐜𝐞𝐬+𝐏𝐫𝐞𝐟 𝐒𝐡𝐚𝐫𝐞 𝐂𝐚𝐩𝐢𝐭𝐚𝐥

𝐄𝐪𝐮𝐢𝐭𝐲 𝐍𝐞𝐭𝐰𝐨𝐫𝐭𝐡

(In Times)

Leverage Ratio2 =

𝐓𝐞𝐫𝐦 𝐃𝐞𝐛𝐭 + 𝐒𝐡𝐨𝐫𝐭 𝐓𝐞𝐫𝐦𝐋𝐨𝐚𝐧𝐬 𝐚𝐧𝐝 𝐀𝐝𝐯𝐚𝐧𝐜𝐞𝐬+𝐏𝐫𝐞𝐟 𝐒𝐡𝐚𝐫𝐞 𝐂𝐚𝐩𝐢𝐭𝐚𝐥

𝐓𝐞𝐫𝐦 𝐃𝐞𝐛𝐭 + 𝐒𝐡𝐨𝐫𝐭 𝐓𝐞𝐫𝐦 𝐋𝐨𝐚𝐧𝐬𝒂𝒏𝒅 𝑨𝒅𝒗𝒂𝒏𝒄𝒆𝒔 + 𝑷𝒓𝒆𝒇 𝑺𝒉𝒂𝒓𝒆 𝑪𝒂𝒑𝒊𝒕𝒂𝒍

+𝐄𝐪𝐮𝐢𝐭𝐲 𝐍𝐞𝐭𝐰𝐨𝐫𝐭𝐡

× 𝟏𝟎𝟎

(Percentage)

1982-83 1.0972 52.32

1983-84 1.5947 61.46

1984-85 0.6709 40.15

1985-86 0.5931 37.23

1986-87 0.5592 35.86

1987-88 0.5500 35.48

1988-89 0.5836 36.85

1989-90 1.4622 59.39

1990-91 2.2897 69.60

1991-92 2.4193 70.75

Ceat Ltd. 1.3874

Aggregate Basis

58.11

Aggregate Basis


(2) Analysis of Return on Investment and Cost of Debt on Before Tax Basis

Return on Net Total Assets on Before Tax Basis (ROIbt1)

As revealed by table 3, rate of return on net total assets on before tax basis (ROIbt1) has been varying from 5 percent in year 1984-

85 to 19 percent in the year 1987-88 during the period under study. During seven out of ten years under study, the rate of return on

net total assets on before tax basis (ROIbt1) has been below 13 percent. Overall, it has been declining with fluctuations over the

period under study. It is highest, i.e. 19 percent, in the year 1987-88 due to excellent production of tyres inspite of continued

increase in prices and inadequate supply of raw materials, increased exports and well market conditions. It is lowest, i.e. 5 percent,

in the year 1984-85 caused by the disappointing working results due to difficult conditions in the industry and decreased earnings

before interest and taxes. On aggregate basis, the rate of return on net total assets on before tax basis (ROIbt1) is worked out 11.65

percent during the study period.

Return on Net Assets on Before Tax Basis (ROIbt2)

As revealed by table 3, rate of return on net assets on before tax basis (ROIbt2) has been varying from 8 percent in year 1984-85 to

29 percent in the year 1987-88 during the period under study. During six out of ten years under study, rate of return on net assets

on before tax basis (ROIbt2) has been below 20 percent. Overall, it has been declining with fluctuations over the period under

study. It was highest, i.e. 29 percent, in the year 1987-88 due to the highest rate of return on net total assets on before tax basis

(ROIbt1) caused by reasons mentioned earlier such as improved production and exports, and well market conditions. It is lowest,

i.e. 8 percent, in the year 1984-85 due to the lower rate of return on net total assets on before tax basis (ROIbt1) caused by reasons

mentioned earlier such as disappointing working results. On aggregate basis, the rate of return on net assets on before tax basis

(ROIbt2) is worked out 25.26 percent during the study period.

Table-3: Impact of Debt on Return on Total Networth In Ceat Ltd

(Before Tax Basis)

Year Return on Total Assets

ROIbt1= 𝐄𝐁𝐈𝐓

𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬 𝐱𝟏𝟎𝟎

(Percentage)

Return on Net Assets

ROIbt2= 𝐄𝐁𝐈𝐓

𝐍𝐞𝐭 𝐀𝐬𝐬𝐞𝐭𝐬 𝐱𝟏𝟎𝟎

(Percentage)

Cost of Debt

Kdbt= 𝐓𝐨𝐭𝐚𝐥 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭

𝐓𝐨𝐭𝐚𝐥 𝐃𝐞𝐛𝐭 𝐱𝟏𝟎𝟎

(Percentage)

Return on Total Networth

RONbt= 𝐏𝐫𝐞 𝐓𝐚𝐱 𝐏𝐫𝐨𝐟𝐢𝐭𝐬

𝐓𝐨𝐭𝐚𝐥 𝐍𝐞𝐭𝐰𝐨𝐫𝐭𝐡 𝐱𝟏𝟎𝟎

(Percentage)

1982-83 11 25 22 29

1983-84 7 13 15 12

1984-85 5 8 17 2






Cost of Debt on Before Tax Basis (Kdbt)

As revealed by table 3, cost of debt on before tax basis (Kdbt) has been varying from 22 percent in year 1982-83 to 10 percent in

the year 1991-92 during the period under study. During six out of ten years under study, cost of debt on before tax basis (Kdbt) has

been below 19 percent. Overall, it has been declining over the period under study. On aggregate basis, aggregate cost of debt on

before tax basis (Kdbt) of the company is worked out 13.41 percent during the period under study.

Return on Total Networth on Before Tax Basis (RONbt)

As revealed by table 3, rate of return on total networth on before tax basis (RONbt) has been varying from 2 percent in the year

1984-85 to 35 percent in the year 1987-88 during the period under study. During six out of ten years under study, rate of return on

total networth on before tax basis (RONbt) has been below 20 percent. Overall, it has been declining with fluctuations over the

period under study excepting for the years 1987-88 and 1988-89 when it is 35 percent and 31 percent respectively. It is highest,

i.e. 35 percent, in the year 1987-88 due to the highest rate of return on net total assets (ROIbt1) as well as net assets (ROIbt2) on

before tax basis and highest excess gap of rate of return on net assets (ROIbt2) over cost of debt (Kdbt) on before tax basis. It is

lowest, i.e. 2 percent, in the year 1984-85 due to the lowest rate of return on net total assets (ROIbt1) as well as net assets (ROIbt2)

on before tax basis and highest excess gap of cost of debt (Kdbt) over rate of return on net assets (ROIbt2) on before tax basis. On

aggregate basis, the rate of return on total networth on before tax basis (RONbt) is worked out 20.35 percent during the study

period.

(3) Analysis of Return on Investment and Cost of Debt on After Tax Basis

Return on Net Total Assets on After Tax Basis (ROIat1)

As revealed by table 4, effective tax rate has been below 52 percent during the period under study. The rate of return on net total

assets on before tax basis (ROIbt1) has been varying from 5 percent in the year 1984-85 to 19 percent in the year 1987-88 while the

rate of return on net total assets on after tax basis (ROIat1) has been varying from 4.50 percent in the year 1984-85 to 12 percent in

the year 1989-90 during the period under study. During seven out of ten years under study, rate of return on net total assets on

after tax basis (ROIat1) has been below 10 percent. Overall, it has been declining with fluctuations over the period under study

excepting for the year 1989-90 when it is 12 percent. It is highest, i.e. 12 percent, in the year 1889-90 due to the nonexistence of

tax liability and the higher rate of return on net total assets on before tax basis (ROIbt1). It is lowest, i.e. 4.50 percent, in the year

1984-85 due to the lowest rate of return on net total assets on before tax basis (ROIbt1) on account of earlier mentioned reasons

such as disappointing working results. On aggregate basis, the rate of return on net total assets on after tax basis (ROIat1) is

worked out 8.50 percent during the study period.

1985-86 12.95 20.22 21.02 19.75

1986-87 17 26 21 29

1987-88 19 29 19 35

1988-89 17 26 18 31

1989-90 12 16 14 19

1990-91 11 15 12 19

1991-92 9 11 10 12

Ceat Ltd. 11.65

Aggregate Basis

25.26

Aggregate Basis

13.41

Aggregate Basis

20.35

Aggregate Basis

Table-4: Impact of Debt on Return on Total Networth in Ceat Ltd

(After Tax Basis)

Year Return on Total

Assets

ROIat1=ROIbt1(1-t)

(Percentage)

Return on Net Assets

ROIat2=ROIbt2(1-t)

(Percentage)

Cost of Debt

Kdat=Kdbt(1-t)

(Percentage)

Return on Total Networth

RONat= 𝐏𝐫𝐨𝐟𝐢𝐭𝐬 𝐚𝐟𝐭𝐞𝐫 𝐈𝐧𝐭𝐭 & 𝑇𝑎𝑥𝑒𝑠

𝐓𝐨𝐭𝐚𝐥 𝐍𝐞𝐭𝐰𝐨𝐫𝐭𝐡 𝐱𝟏𝟎𝟎

(Percentage)

1982-83* 11=11 25=25 22=22 29

1983-84* 7=7 13=13 15=15 12

1984-85 5(1-.10)=4.50 8(1-.10)=7.20 17(1-.10)=15.30 1.80

1985-86 12.95(1-.52)=6.22 20.22(1-.52)=9.71 21.02(1-.52)=10.09 9.48

1986-87 17(1-.43)=10 26(1-.43)=15 21(1-.43)=12 17






Note: *No tax liability has been occurred for the years 1982-83, 1983-84, 1989-90 & 1991-92.

Return on Net Assets on After Tax Basis (ROIat2)

As revealed by table 4, rate of return on net assets on before tax basis (ROIbt2) has been varying from 8 percent in the year 1984-

85 to 29 percent in the year 1987-88 while the rate of return on net assets on after tax basis (ROIat2) has been varying from 25

percent in the year 1982-83 to 7.20 percent in the year 1984-85 during the period under study. During seven out of ten years under

study, rate of return on net assets on after tax basis (ROIat2) has been below 15 percent. Overall, it has been declining with

fluctuations over the period under study. It is highest, i.e. 25 percent, in the year 1982-83 due to the higher rate of return on net

assets on before tax basis (ROIbt2) and nonexistence of tax liability. It is lowest, i.e. 7.20 percent, in the year 1984-85 due to the

lowest rate of return on net assets on before tax basis (ROIbt2) caused by earlier mentioned reasons. On aggregate basis, the rate of

return on net assets on after tax basis (ROIat2) is worked out 11.91 percent during the study period.

Cost of Debt on After Tax Basis (Kdat)

As revealed by table 4, cost of debt on before tax basis (Kdbt) has been varying from 22 percent in year 1982-83 to 10 percent in

the year 1991-92 while cost of debt on after tax basis (Kdat) has been varying from 22 percent in year 1982-83 to 10 percent in the

years 1990-91 and 1991-92 over the period under study. During six out of ten years under study, cost of debt on after tax basis

(Kdat) has been below 12 percent. Overall, it has been declining over the period under study. On aggregate basis, aggregate cost of

debt on after tax basis (Kdat) of the company is worked out 9.79 percent during the period under study.

Return on Total Networth on After Tax Basis (RONat)

As revealed by table 4, rate of return on total networth on before tax basis (RONbt) has been varying from 2 percent in the year

1984-85 to 35 percent in the year 1987-88 while rate of return on total networth on after tax basis (RONat) has been varying from

29 percent in the year 1982-83 to 1.80 percent in the year 1984-85 during the period under study. During nine out of ten years

under study, rate of return on total networth on after tax basis (RONat) has been below 20 percent. Overall, it has been declining

with fluctuations over the period under study and witnesses a deep decline in the year 1984-85 when it is 1.80 percent. It is

highest, i.e. 29 percent, in the year 1982-83 due to the higher rate of return on net total assets (ROIbt1) as well as net assets

(ROIbt2) on before tax basis and excess gap of rate of return on net assets (ROIbt2) over cost of debt (Kdbt) on before tax basis. The

tax liability does not occur in this year for the company. It is lowest, i.e. 1.80 percent, in the year 1984-85 due to the lowest rate of

return on net total assets (ROIat1) as well as net assets (ROIat2) on after tax basis and highest excess gap of cost of debt (Kdat) over

rate of return on net assets (ROIat2) on after tax basis. On aggregate basis, the rate of return on total networth on after tax basis

(RONat) is worked out 14.86 percent during the study period.

(4) Impact of Debt on Return on Total Networth:

Tables 3, 4 and 5 show the effect of use and cost of debt (Kdbt & Kdat) on rate of return on total networth (RONbt & RONat) on

before and after tax basis for a period of ten year from the year 1982-83 to 1991-92. Comparison of cost of debt (Kdbt & Kdat)

with rate of return on net assets (ROIbt2 & ROIat2) on before and after tax basis shows that latter has been higher than former for

all the years under study excepting for the years 1983-84, 1984-85 and 1985-86. This leads to conclude that the company has been

enjoying favourable leverage with regard to use of debt during seven out of ten years under study. Consequently, rate of return on

total networth (RONbt & RONat) has been higher than cost of debt (Kdbt & Kdat) and rate of return on net assets (ROIbt2 & ROIat2)

on before and after tax basis in the above said seven years under study. It means that use of debt in the capital structure of the

company has positive impact on the profitability of the company during seven out of ten years under study, which consequently is

contributing to the total networth of the company, which ultimately is benefitting to the equity shareholders of the company.

Leverage created through debt by the company is not generating risk for the company in the above said seven years under study

because Ceat Ltd. is able to cover the cost of debt (Kdbt & Kdat) on before and after tax basis from the rate of return on net assets

(ROIbt2 & ROIat2) on before and after tax basis in the above said seven years under study. As revealed by tables 3 and 4, on

aggregate basis, the company has also been experiencing favourable leverage with regard to use of debt on before and after tax

basis during the period under study. Further details regarding spread and net gain on before and after basis have been in table 5.

Due to favourable impact of leverage by using debt in the capital structure of the company, spread between rate of return on net

1987-88 19(1-.43)=11 29(1-.43)=17 19(1-.43)=11 20

1988-89 17(1-.41)=10 26(1-.41)=15 18(1-.41)=11 18

1989-90* 12=12 16=16 14=14 19

1990-91 11(1-.17)=9 15(1-.17)=12 12(1-.17)=10 16

1991-92* 9=9 11=11 10=10 12

Ceat Ltd. 11.65(1-.27)=8.50

Aggregate Basis

16.31(1-.27)=11.91

Aggregate Basis

13.41(1-.27)=9.79

Aggregate Basis

20.35(1-.27)=14.86

Aggregate Basis





assets (ROIbt2 & ROIat2) and cost of debt (Kdbt & Kdat) on before and after tax basis, and net gain calculated by deducting rate of

return on net assets (ROIbt2 & ROIat2) from rate of return on total networth (RONbt & RONat) on before and after basis have been

positive in the above said seven years under study. Spread and net gain are negative when leverage impact is negative during the

remaining three years under study.


Supplementary Information: Figures in brackets in column 2 & 6 indicate Spread between Rate of Return on Net Total Assets

& Cost of Debt on before & after tax basis and figures in brackets in column 4 & 8 indicate Net Gain on before & after tax basis

on Net Total Assets respectively.

SUMMARY AND CONCLUSIONS

In the present study, adequate efforts have been made to examine the impact of leverage on profitability through a case of Ceat

Ltd. from tyres & tubes industry of the Indian corporate sector which covers a time period of ten years extending from the year

1982-83 to 1991-92 where the company is lying in the top ten companies of the tyres & tubes industry of the Indian corporate

sector on the basis of sales for the year 1991-92 for the purpose of our study. The following are the conclusions and findings of

the present study.

It is observed that debt-equity ratio2 has been varying from 35.48 percent in the 1987-88 to 70.75 percent in the year

1991-92 during the period under study, whereas, aggregate debt-equity ratio2 of the company is worked out 58.11

percent during the period under study.

It is found that cost of debt on before and after tax basis (Kdbt & Kdat) has been varying from 22 percent in year 1982-83

to 10 percent in the year 1991-92 with declining trend during the period under study, whereas, aggregate cost of debt on

before and after tax basis (Kdbt & Kdat) of the company is worked out 13.41 percent and 9.79 percent, respectively,

during the period under study.

It is observed that the rate of return on net total assets on before tax basis (ROIbt1) has been varying from 5 percent in

the year 1984-85 to 19 percent in the year 1987-88 while the rate of return on net total assets on after tax basis (ROIat1)

has been varying from 4.50 percent in the year 1984-85 to 12 percent in the year 1989-90 during the period under study.

Overall, rate of return on net total assets on before and after tax basis (ROIbt1 & ROIat1) is declining with fluctuations

over the study period. On aggregate basis, the rate of return on net total assets on before and after tax basis (ROIbt1 &

ROIat1) is worked out 11.65 percent and 8.50 percent, respectively, during the study period.

It is found that rate of return on net assets on before tax basis (ROIbt2) has been varying from 8 percent in the year 1984-

85 to 29 percent in the year 1987-88 while the rate of return on net assets on after tax basis (ROIat2) has been varying

from 25 percent in the year 1982-83 to 7.20 percent in the year 1984-85 during the period under study. Overall, rate of

return on net assets on before and after tax basis (ROIbt2 & ROIat2) is declining with fluctuations over the study period.

On aggregate basis, the rate of return on net assets on before and after tax basis (ROIbt2 & ROIat2) is worked out 25.26

percent 11.91 percent, respectively, during the study period.

Table-5: Analysis of Spread and Gain in Ceat Ltd

(1)

Before Tax Basis

(2) (3) (4)

(5)

After Tax Basis

(6) (7) (8)

Year

Spread

Between

ROIbt2 & Kdbt

(ROIbt2-Kdbt)

(%age)

Debt

Impact

Net Gain

(RONbt -

ROIbt2 )

(%age)

Debt-

Equity

Ratio2

(%age)

Spread

between

ROIat2 & Kdat

(ROIat2-Kdat)

(%age)

Debt

Impact

Net Gain

(RONat-ROIat2)

(%age)

1982-83 3(-11) Favourable 4(18) 52.32 3(-11) Favourable 4(18)

1983-84 -2(-8) Unfavourable -1(5) 61.46 -2(-8) Unfavourable -1(5)

1984-85 -9(-12) Unfavourable -6(-3) 40.15 -8.10(-10.80) Unfavourable -5.40(-2.70)

1985-86 -.80(-8.07) Unfavourable -.47(6.80) 37.23 -.38(-3.87) Unfavourable -.23(3.26)


1987-88 10(0) Favourable 6(16) 35..48 6(0) Favourable 3(9)





Ceat Ltd. 2.90(-1.76) Favourable 4.04(8.70) 58.11 2.12(-1.29) Favourable 2.95(6.36)





It is observed that rate of return on total networth on before tax basis (RONbt) has been varying from 2 percent in the

year 1984-85 to 35 percent in the year 1987-88 while rate of return on total networth on after tax basis (RONat) has been

varying from 29 percent in the year 1982-83 to 1.80 percent in the year 1984-85 during the period under study. Overall,

rate of return on total networth on before tax basis (RONbt) has been declining with fluctuations excepting for the years

1987-88 and 1988-89 when it is 35 percent and 31 percent respectively while rate of return on total networth on after tax

basis (RONat) has also been declining with fluctuations over the period under study. On aggregate basis, the rate of

return on total networth on before and after tax basis (RONbt & RONat) is worked out 20.35 percent and 14.86 percent,

respectively, during the study period.

It is observed that the company is enjoying favourable leverage with regard to use of debt during seven out of ten years

under study. Consequently, rate of return on total networth (RONbt & RONat) is higher than cost of debt (Kdbt & Kdat)

and rate of return on net assets (ROIbt2 & ROIat2) on before and after tax basis in the above said seven years under study.

It is also found that spread and net gain are positive when leverage impact is positive and, spread and net gain are

negative when leverage impact is negative during the period under study. On aggregate basis, spread on before and after

tax basis is worked out 2.90 percent and 2.12 percent, respectively, while net gain on before and after tax basis is

worked out 4.04 percent and 2.95 percent, respectively, during the period under study.

It is found that leverage created through debt by the company is not generating risk for the company in the above said

seven years under study because Ceat Ltd. is able to cover the cost of debt (Kdbt & Kdat) on before and after tax basis

from the rate of return on net assets (ROIbt2 & ROIat2) on before and after tax basis in the above said seven years under

study.

It is also found that effective tax rate born by the company is not high during the period under study. On aggregate

basis, effective tax rate born by the company is 27 percent during the study period.

Thus, it is concluded that the company is enjoying favourable leverage with regard to use of debt during seven out of ten years

under study. Consequently, rate of return on total networth (RONbt & RONat) is higher than cost of debt (Kdbt & Kdat) and rate of

return on net assets (ROIbt2 & ROIat2) on before and after tax basis in the above said seven years under study. It means that use of

debt in the capital structure of the company has positive impact on the profitability of the company during seven out of ten years

under study, which consequently is contributing to the total networth of the company, which ultimately is benefitting to the equity

shareholders of the company. Leverage created through debt by the company is not generating risk for the company in the above

said seven years under study because Ceat Ltd. is able to cover the cost of debt (Kdbt & Kdat) on before and after tax basis from

the rate of return on net assets (ROIbt2 & ROIat2) on before and after tax basis in the above said seven years under study. However,

on aggregate basis, the company has also been experiencing favourable leverage with regard to use of debt on before and after tax

basis during the period under study. Due to favourable impact of leverage by using debt in the capital structure of the company,

spread between rate of return on net assets (ROIbt2 & ROIat2) and cost of debt (Kdbt & Kdat) on before and after tax basis, and net

gain calculated by deducting rate of return on net assets (ROIbt2 & ROIat2) from rate of return on total networth (RONbt & RONat)

on before and after basis have been positive in the above said seven years under study. Spread and net gain are negative when

leverage impact is negative during the remaining three years under study.

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MICRO FINANCE: CREDIT DELIVERY METHODS

T. Sita Ramaiah10

INTRODUCTION

The main idea behind microfinance is that poor people, who can provide no collateral, should have access to some sort of

financial services. Microfinance began with micro credit: the provision of small loans to very poor families to help them engage in

productive and self-sustaining activities. Since the successful initiation of formalized micro credit in the 1980 is a number of other

complementary services have popped up around the globe, including micro savings, micro insurance etc.

WHAT IS MICROFINANCE?

Microfinance is the supply of loans, savings, and other basic financial services to the pool.

As these financial services usually involve small amounts of money - small loans, small savings, etc. - the term "microfinance"

helps to differentiate these services from those which formal banks provides.

Why are they small? Someone who does not have a lot of money is not likely to want or be able to take out a 50,000 loan, or be

able to open a savings account with an opening balance of 1,000.

It is easy to imagine poor people do not need financial services, but when you think about it, they are using these services already,

although they might look a little different.

Poor people save all the time, although mostly in informal ways. They invest in assets such as gold, jewelry, domestic animals,

building materials, and things that can be easily exchanged for cash. They may set aside corn from their harvest to sell later. They

bury cash in the garden or stash it under the mattress. They participate in informal savings groups where everyone contributes a

small amount of cash each day, week, or month, and is successively awarded the pot on a rotating basis. Some of these groups

allow members to borrow from the pot as well. The poor also give their money to neighbors to hold or pay local cash collectors to

keep it safe.

However widely used, informal savings mechanisms have serious limitations. It is not possible, for example, to cut a leg off a goat

when the family suddenly needs a small amount of cash. In-kind savings are subject to fluctuations in commodity prices,

destruction by insects, fire, thieves, or illness (in the case of livestock). Informal rotating savings groups tend to be small and

rotate limited amounts of money. Moreover, these groups often require rigid amounts of money at set intervals and do not react to

changes in their members' ability to save. Perhaps most importantly, the poor are more likely to lose their money through fraud or

mismanagement in informal savings arrangements than are depositors in formal financial institutions.

The poor rarely access services through the formal financial sector. They address their need for financial services through a

variety of financial relationships, mostly informal.

MICROFINANCE PROVIDERS

Microfinance Institutions

A microfinance institution (MFI) is an organization that provides microfinance services. MFIs range from small non-profit

organizations to large commercial banks.

Historical context can help explain how specialized MFIs developed over the last few decades. Between the 1950s and 1970s,

governments and donors focused on providing subsidized agricultural credit to small and marginal farmers, in hopes of raising

productivity and incomes. During the 1980s, micro-enterprise credit concentrated on providing loans to poor women to invest in

tiny businesses, enabling them to accumulate assets and raise household income and welfare. These experiments resulted in the

emergence of nongovernmental organizations (NGOs) that provided financial services for the poor. In the 1990s, many of these

institutions transformed themselves into formal financial institutions in order to access and on-lend client savings, thus enhancing

their outreach.

10 Head, Department of Management Studies, Krishnaveni Engineering College For Women, Andhra Pradesh, India,

[email protected]






CREDIT DELIVERY METHODS

MFI’s use two basic methods in delivering financial services to their clients. These are:

Group Method

This is one of the most common methodologies for providing micro-finance. Group method primarily involves a group of

individuals, which becomes the basic unit of operation for the MFIs. As we have discussed earlier, MFIs have to provide collateral

free loans, group methodologies help in creating social collateral (peer pressure) that can effectively substitute physical collateral.

Group becomes a basic unit with which MFIs deal. The advantage of group methodology is that:

Groups are trained to own joint responsibility for loans that are taken by individuals in the group.

Groups ensure repayments from all individuals in that group and in case of a default

Groups functions as the forum where the credit discipline and other related issues are discussed

Group may have to jointly own the responsibility of defaults and pay on behalf of defaulting client

Group also help credit appraisal and provide opinion on creditworthiness of each individual in the group.

Groups methodology also helps in controlling cost

This ensures that even without taking any physical collateral, the MFI is able to manage its credit risk (loan related risk).

MFIs actually deliver the financial service at the client’s location, which could be a village in rural areas or a colony/slum in urban

area. Having a group helps the MFIs in getting all clients at one spot rather than visiting each individual’s house. This helps the

MFI in increasing the efficiency of staff and controlling the cost. Group methodology creates a forum where individuals come and

discuss, can provide opinion, and exert social pressure.

The advantage of Group methodology can easily be appreciated by the fact if the MFI employee has to visit each individual house

in isolation, it would be very difficult. Also in the absence of a group, if a client refuses to pay there is no forum where such a case

can be discussed or there is no method through which the MFI can exert pressure on the client.

Group methodology is also important because in case of larger loan defaults a financial institutions can take recourse o legal

action but in small loans, legal recourse is not an economically sound option. An MFI who may have an outstanding or Rs

3,000 at default cannot apply legal pressure, as the cost of recovery through that method can be higher than the amount to be

recovered itself.

Moreover, the clients that the MFIs are dealing with are generally poor and may face genuine problems at times. Rather than

taking an aggressive/legal approach, which such vulnerable clients it is always better to have more constructive and collective

approach, which is provided by the Groups.

Due to the various advantages, as indicated above provided by groups, this methodology is widely accepted and used in micro-

finance across the world.

Self-help Group and Joint Liability Groups (Grameen model and its variants) are Two Common Credit Delivery Models in

India Self –Help Groups (SHGs)

Self-help Group concept has its origin in India. SHGs are now considered very important bodies in rural development and are

therefore found in almost all parts of the country and their number is still rapidly growing. SHGs are formed by Non-Government

Organizations as well as Government agencies and are used as channels for various development programmes.

A Self-Help Group is an association of generally up to 20 members (not exceeding 20 members), preferably from the same socio-

economic background. SHGs are facilitated by Government agencies or NGOs for members to come together for discussing and

solving their common problems either financial or social through mutual help. An SHG can be all-women group, all-men group,

or even a mixed Group. However, it has been the experience that women’s groups perform better in all the important activities of

SHGs. Mixed group is not preferred in many of the places, due to the presence of conflicting interests.

FEATURES OF SHGS

Recognized by Government: SHGs are well recognized and accepted by government, SHGs can open bank accounts in the name

of SHG. They can also receive government grants and funds for development activities.





SHGs are Social Intermediaries: SHGs do not restrict their functions only to financial transactions. SHGs are often involved in

many social activities. There are example where SHGs have taken up social issues and fought against social evils like alcoholism,

violence, against women, dowry, getting into village politics and being elected as Sarpanch.

Books of Accounts: SHGs maintain their own books of accounts. These are simple books to keep records of their savings, loans

income and expenditures. Strong SHGs also make their Balance sheets and Income statements.

Have Office Bearers: SHGs gave a structure where there is a Group President, Secretary and Treasure. The group elects them.

SHGs are more autonomous as they decide their own rules and regulations.

SHGs mobilize thrift and rotate it internally.

SHGs can hold bank account and can borrow from banks and other financial institutions.

SHGs are groups, which are more autonomous. While they are involved in financial transactions, their role is not just

restricted to it. SHGs are also involved in various social issues.

As more SHGs are formed, they have started federating themselves into clusters and clusters in turn as SHG Federations. The

Federations are able to channelize funds to the SHGs and help in improving the managing and financial skills of SHGs.

JOINT LIABILITY GROUP – GRAMEEN MODEL

Grameen model is based on the concept of joint liability. It is the brainchild of Prof. Muhammad Yunus, founder of Grameen

Bank in Bangladesh. Grameen model is the most accepted and prevalent micro-finance delivery model in the world today. Many

MFIs have accepted the model as it has high focus on standardization and discipline.

Graeme model, as mentioned, is a joint liability group model. Here five-member groups are formed and eight such groups form a

Center. Hence, in a full-capacity Center there are 40 members (8x5). However, over the years, people have experimented with

Centers of different sizes and now there are variations of 5-8 groups within a Center. Center is the operational unit for the MFI,

which means that MFI deals with a Center as a whole.

Meetings also take place only at the Central level and individual groups do not meet. Group meetings take place only in front of

the Field staff of the MFI. A Grameen model is focused on financial transactions and other social issues are generally not

discussed. The Group and Center are Joint liability Groups, which means that all members are jointly responsible (‘liable’) for the

repayment. MFI recovers full money from Center, if any member has defaulted: the group members have to pool in money to

repay to the MFI. If Group members are unable to do it, Center as whole has to contribute and share the responsibility.

Features of Grammen Model

The group meeting take place every week,

Interest rate are charged on flat basis,

MFI staff conducts the meeting,

All transactions take place only in Center meetings.

Grameen model is focused on providing financial services to the clients and hence there is an emphasis on standardization and

discipline. The model suggests weekly meeting for frequent interaction with the clients to reduce credit risk. The meetings are

conducted for carrying out the financial transactions only. The meetings are conducted systematically in a short time and other

social issues are not discussed. Flat interest is charged again for making the system standardized. In flat rate system, installment

size of repayment remains small for all weeks and hence is convenient and easier to explain. In addition, it is easy to break the

loan installment into the principal and interest component.

The SHG and Grameen model have originated with two different approaches. SHG model has been developed with holistic view

of development and empowerment of society where financial transactions are only one part of it. While Grameen model is

specifically focused on providing financial services to the low-income clients.

Joint Liability Groups (JLG)

Grameen model is a particular form of joint liability Group but in India, there are other forms of Joint liability Groups as well.

MFIs, particularly in urban areas, form JLGs of five-members. These are group of individuals coming together to borrow from the

financial institution. They share responsibility (“liability”) and stand as guarantee for each other. There is a Group Leader in such

JLGs; many MFIs prefer such group in urban business areas. Such JLGs do not hold periodic meetings.





Typically, members are shopkeepers from same locality. These forms of JLGs are somewhere between Group and Individual

lending methods. While lending in such JLGs is to individual members small JLGs still provide some sort of comfort to the MFIs.

In addition, collection can be done from a single point, generally from the Group leader rather than going to each individual. As in

urban areas shopkeepers do not have time to hold meeting, these JLGs do not meet.

Individual Method

MFIs are also increasingly providing loans to individuals. In Individual lending method, MFIs provide loans to an individual

based on his/her own personal credit worthiness. Individual lending is more prevalent with clients who generally need bigger size

loans and have the capacity to produce guarantee and generate enough comfort to the MFI. MFIs generally base their decision on

personal knowledge of the client, his/her reputation among peers and society, client’s income sources and business position. MFIs

also ask for individual guarantors or take post-dated cheques from clients. Individual guarantors come from friends or relatives

well known to the borrower and who are ready to take liability of repaying the loan, should the borrower fail to do so. If the loan

is significantly larger, then MFIs may also take some collateral security.

CONCLUSION

Microfinance is not a solution to all the world’s problems, but seems to be effective in encouraging entrepreneurship, increasing

the income of the poorest and helping them to build viable businesses. The sector is booming and there has never been so much

attention given to this sector. Furthermore, there seems to be a great deal of opportunity for young professionals.

REFERENCES

1. Manjula, Bolthajjira Chengappa. Micro-Finance and Women Empowerment: Role of Non-Government Organizations.

2. K., Rajendran, & R., P. Raya. (2010). Impact of Micro Finance - An empirical Study on the Attitude of SHGLeaders in

Vellore District (Tamil Nadu, India). Global Journal of Finance and Management, 2(1), 59-68. ISSN: 0975 -6477.

3. Ranjula, Bali Swaina, & Fan, Yang Wallentin. (2009, September). Does microfinance empower women Evidence from

self-help groups in India. International Review of Applied Economics, 23(5), 541–556.

4. Pillai, J. K. (1995). Women and Empowerment, pp. 23-24. New Delhi: Gyan Publishing House.

5. Rahman, A. (1999). Micro-credit Initiatives for Equitable and Sustainable Development: Who Pays?. World

Development, 27(1), 67-82.

6. Retrieved from http://indiamicrofinance.com/credit-delivery-methodologies-microfinance-institutions.html

7. Retrieved from http://www.fundsforngos.org/latest-funds-for-ngos/dfids-global-poverty-action-fund-impact-window-

fun...

8. Retrieved from http://www.kiva.org/about/microfinance

9. Retrieved from http://opportunity.net/kenya/home-2/about-microfinance

10. Retrieved from http://kindly.in/about-field-partner.html

11. Retrieved from http://www.erasepoverty.org/how-it-works/what-microfinance/providers

12. Retrieved from http://www.kakisafrica.co.ke/index.php/microfinance/examination-fees

13. Retrieved from http://kakisafrica.co.ke/index.php/what-is-group-lending

14. Retrieved from http://www.gdrc.org/icm/cgap-mfindustry.html

15. Retrieved from http://indiamicrofinance.com/y/credit-delivery-methodologies

16. Retrieved from http://megselfhelp.gov.in/faqs.htm

17. Retrieved from http://drdachamba.org/Schemes/SHGs/main.htm

*****

http://indiamicrofinance.com/credit-delivery-methodologies-microfinance-institutions.html

http://www.fundsforngos.org/latest-funds-for-ngos/dfids-global-poverty-action-fund-impact-window-fun

http://www.fundsforngos.org/latest-funds-for-ngos/dfids-global-poverty-action-fund-impact-window-fun

http://www.kiva.org/about/microfinance

http://opportunity.net/kenya/home-2/about-microfinance

http://kindly.in/about-field-partner.html

http://www.erasepoverty.org/how-it-works/what-microfinance/providers

http://www.kakisafrica.co.ke/index.php/microfinance/examination-fees

http://kakisafrica.co.ke/index.php/what-is-group-lending

http://www.gdrc.org/icm/cgap-mfindustry.html

http://indiamicrofinance.com/y/credit-delivery-methodologies

http://megselfhelp.gov.in/faqs.htm

http://drdachamba.org/Schemes/SHGs/main.htm





A CRITICAL EVALUATION OF FDI FLOWS IN INDIA

Dr. Shalini Singh11 Rahul12

ABSTRACT

Foreign direct investment plays a very important role in India. India has been attracting FDI especially during post reform as

1991. Our present focus is on the FDI trends during 1990-91 to 2013-14, and the effect of FDI on selected economic

indicators as trade, GDP, Foreign Exchange Reserve and Exchange rate are considered. Further, the trends of FDI inflow

into the country are projected for a period of five years from 2013-14 to 2020-21 using linear regression.

KEYWORDS

FDI, FII, FEMA, MIGA, FIPB etc.

INTRODUCTION

Economic reform has been witnessing an immense surge of FDI inflows during the past two decades. During the period, India was

under great debt, to overcome such financial crisis Indian government open the gates of foreign investment, to invest in India.

Further, Government has played an important role as a policy maker on Foreign Direct Investment. The policy framework has

gradually opened up its markets through economic reforms by reducing government controls on foreign trade and investments.

FDI up to 100% is allowed under the automatic route in all activities/ sectors except the following, which will require approval of

the Government Activities/ items that require an industrial license. Further, stabilization policies and structural reforms have also

concerned.


Athreye and Kapur (2001) have recently emphasized that since the contribution of FDI to domestic capital formation is quite

small, growth led FDI is more likely than FDI-led growth. A similar conclusion arises from an empirical study by Dua and

Rasheed (1998), which finds that industrial production in India, has had a unidirectional positive Granger-Causal impact on

inward FDI flows (both approval and actual), thus inferring that economic activity is an important determinant of attracting FDI

inflows in India, and not vice-versa.

Borensztein, et al. (1998) reveals that FDI has a net crowding-in effect on domestic private and public investment thus advancing

overall economic growth, the finding is not unambiguous. Lipsey (2000), past FDI inflows are not a significant positive influence

on the current period’s investment ratio. Balasundaram Maniam and Amitiava Chatterjee (1998), studied on the determinants of

US foreign investment in India; tracing the growth of US FDI in India and the changing attitude of the Indian Government

towards it as a part of the liberalization programme.

Nagesh Kumar (2001) concluded that the magnitudes of inflows have recorded impressive growth, as they are still at a small level

compared to the country’s potential. Balasubramanyam V.N. and Vidya Mahambre (2003), concluded that FDI is very good

means for the transfer of technology and knowhow to the developing countries. Birendra Kumar and Surya Dev (2003) with the

data available in the Indian context showed that the increasing trend in the absolute wage of the worker does not deter the

increasing flow of FDI.

Laura Alfaro (2003) finds that FDI flows into the different sectors of the economy (namely primary, manufacturing and services)

exert different effects on economic growth. Sebastin Morris (2004) has discussed the determinants of FDI over the regions of a

large economy like India. Peng Hu (2006) analyses various determinants that influence FDI inflows in India, which include

economic growth, domestic demand, currency stability, Government policy and labour force availability against other countries

that are attracting FDI inflows.

Chandana Chakraborty and Peter Nunnenkamp (2008) said that booming foreign direct investment in post reform India is widely

believed to promote economic growth. Chew Ging Lee (2009) has pointed out that GDP per capita has a positive effect on FDI

inflows in the long run. Shiralashelti A.S. and S.S. Huger (2009) have made a comparison of FDI inflows during pre and post

liberalization period, country-wise, sector-wise and region-wise. Subash Sasidharan and Vinish Kathuria (2011) examine the

11 Post-Doctoral Fellow (UGC), Department of Economics, Banaras Hindu University, Uttar Pradesh, India,

[email protected] 12Assistant Professor, Department of Commerce, D.A.V. P.G. College, Uttar Pradesh, India, [email protected]







relationship between FDI and R&D of the domestic firms in the post-liberalization regime. Recent researches attempt to analyze

the impacts of FDI on host country’s economy and competitiveness of firms, empirical results show that the consequence is

different. Banga (2005) demonstrates that FDI, trade and technological progress have differential impact on wages and

employment. Rajit kumar Sahoo (2005) has pointed out that FDI has a direct and indirect impact and on a certain particular

sectors of the economy. Jaya Gupta (2007) attempted to review the change in sectoral trends in India due to FDI inflows since

liberalization.

DATA AND VARIABLES

The objective of this paper is to explore the impact of FDI between Trade, Foreign Exchange Reserve, Exchange Rate, and GDP

at factor cost in India using the financial year data for the period 1990-91 to 2013-14. The variable of this study as trade by adding

export and import measured in Rs. Crore and total investment added by foreign direct investment and financial institutional

investor measured in US million dollars. All necessary data for the sample period are obtained from the Handbook of Statistics on

Indian Economy, 2013-14 published by Reserve Bank of India.

Methodology Used

For calculating projected values of FDIs, the linear regression model has been used. The equation of a straight line is as under:

Y= a + bx

Where, Y= dependent variable,

a = intercept,

b = slope,

x = independent variable,

Here, Y = Total FDI inflows,

x = Trade, GDP at Factor Cost, Foreign Exchange Reserve, Exchange Rate.

Hypothesis of Study

FDI inflows show a positive trend over the period from 1991 to 2014.

Impact of FDI on selected economic indicators is positive.

OBJECTIVES OF STUDY

To know the flow of foreign direct investment in India

To study the impact of foreign direct investment on economic indicators in India.

To make projections of foreign direct investment in India.

FDI POLICY IN INDIA

During the colonial era, East India Company came to India and invested foreign capital to India. Further, British companies set up

their units in different sectors for production with their own economic and business interest. At the time of independence, foreign

investment was one of fear and distrusts due to previous exploitative role played by the Britishers. The legal and constructional

framework governing FDI in India consisted of a complex jumble of legislative enactment and policy directions designed

primarily for the regulation of domestic investment. Therefore, government policy towards FDI is important for economic

development. After independence, India followed a cautious and selective approach while formulating FDI Policy in view of the

dominance of ‘import substitution policy of industrialization’. The FDI policy prior to 1991 was characterized by de-licensing of

some of the industrial rules and promotion of Indian manufacturing exports as well as emphasizing on modernization of industries

through liberalized imports of capital goods and technology. This was supported by trade liberalization measures in the form of

tariff reduction and shifting of large number of items from import licensing to OGL (Sahoo, Natraj and Dash, 2014).

In 1991-2000, a positive and friendly FDI policy was a part of the government reform’s agenda. During the period 1990-1992,

there was severe balance of payment crisis, political uncertainty, and increase in India’s external debt. As a result, credit rating

agencies lowered India’s rating in both long-term and short-term borrowing: India had difficulty in borrowing from the

international market; and there was outflow of foreign currency deposits kept in India by non-resident Indians (NRIs). The

industrial approval system in all industries was abolished except in 18 strategic or environmentally sensitive industries. In 34 high

priority industries, FDI up to 51% was approved automatically if certain norms are satisfied. Trading companies engaged





primarily in export activities were also allowed up to 51% foreign equity. To attract FDI in the energy sector, 100% foreign equity

was permitted in the power generation. A new package for 100% export oriented projects and companies in EPZs were

announced. Existing companies (FIPB) were also allowed to raise foreign equity levels to 51% for proposed expansion in priority

industries. Furthermore, MIGA (Multilateral Investment Guarantee Agency) promotes FDI into developing countries by ensuring

investors against political risk (RBI, 2012). As a part of reform process preceding the introduction of Foreign Exchange

Management Act (FEMA), the neutrality condition attached to the overseas direct investment was done away with in 1999. The

scope for outward FDI, however expanded significantly after the introduction of the FEMA in June 2000.In the year 2000, a

paradigm shift occurred, where except for a negative list, all the remaining activities were placed under the automatic route. A

long with multi-brand retailing and civil aviation, hiking FDI equity from 49 to 75% in broadcasting services, the disinvestment of

four PSUs and a hike in diesel prices announced as strong signals. The government intention in pushing big-bang reforms to

attract FDI into India (Sahoo, Natraj and Dash, 2014). On 20th September 2012, Government has taken a final decision and

opened 51% FDI in multi-brand retail sector (Teli, 2014).

Table-1: FDI Flows in India (Amount in US Dollar)

Year Direct Foreign

Investments

(US $ Million

Foreign Portfolio

Investments

(US $ Million)

Total Foreign

Investment Inflows

(US $ Million)

1990-91 97 6 103

1991-92 129 4 133

1992-93 315 244 559

1993-94 586 3567 4153

1994-95 1314 3824 5138

1995-96 2144 2748 4892

1996-97 2821 3312 6133

1997-98 3557 1828 5385

1998-99 2462 -61 2401

1999-2000 2155 3026 5181

2000-01 3272 2510 5862

2001-02 4734 1952 6686

2002-03 3217 944 4161

2003-04 2388 11356 13744

2004-05 3713 9287 13000

2005-06 3034 12494 15528

2006-07 7693 7060 14753

2007-08 15893 27433 43326

2008-09 22372 -14030 8342

2009-10 17966 32396 50362

2010-11 11834 30293 42127

2011-12 22061 17170 39231

2012-13 19819 26891 46711

2013-14 21564 4822 26386


Table 1 depicts FDI inflows in India from 1990-91 to 2013-14. Where, FDI was only 97 US $ million in the year 1990-91, during

this period foreign investments into India were restricted and allowed moderately in few sectors. The total amount of the foreign

investment inflow the period as 1997-98 had amounted to US $ 3557 million due to expanded list of industries or sectors which

were opened up for foreign equity participation. This was followed by relaxation of various rules, regulations and introduction of

various policies by the government to promote the FDI inflows (Anitha, 2012).Foreign investment inflows declined to the level of

US $ 2462 million in the year 1998-99. Further FDI declined as US $ 2155 million in 1999-2000. Several reasons had responsible

for the declining trend of the FDI flows and slow down of the Indian economy due to the mild recession in US and global

economy. Another responsible factor was unfavourable external economic factors such as the financial crisis of South-East Asia.

In 2003-04 FDI inflow were declined to US $ 2388 million. This fall in flow of FDI into the country was due to the Global

economic recession. Then, from 2004-05 onwards, there has been steady increase in the flow of FDI into the country with US $

21564 million in 2013-14. In the table 1, total FDI inflow is nothing but the direct foreign investment added to foreign portfolio

investment. As table 1, the portfolio investment was only 6 US $ million in 1990-91 raised to 3824 million 1994-95 but declined

the year 1998-99 showing -61 US $ million. Further, it rose to 3026 US $ million in 1999-2000. This investment increased to

27433 US $ million in 2007-08 but declined to -14030 US $ million in 2008-09, it is expected to come to 26891 US $ million in

2012-13.





Table-2: Showing Projections of Foreign Investment in India (in US $ million)

Year Direct Foreign Investment Foreign Portfolio Investment Total Foreign Investment

2014-15 19324.707 19394.1 38721.014

2015-16 20286.883 20315.4 40604.372

2016-17 21249.06 21236.7 42487.73

2017-18 22211.236 22158 44371.088

2018-19 23173.413 23079.2 46254.446

2019-20 24135.589 24000.5 48137.804

2020-21 25097.766 24921.8 50021.161


From table 2 observed that direct investment and foreign portfolio investment have projected to be raised making total inflows to

50,021 US $ million at the end of the year 2020-21.

Table-3: Foreign Direct Investment inflows and Related Economic Indicators in India

Year Direct Foreign

Investments

(US $ Million)

Total

Trade

Foreign

Exchange

Reserves

Average

Exchange

Rate

GDP (At

Current

Prices)

1990-91 97 42217.7 5834 17.9428 5318.13

1991-92 129 37275.9 9220 24.4737 6135.28

1992-93 315 40418.8 9832 30.6488 7037.23

1993-94 586 45544.5 19254 31.3655 8179.61

1994-95 1314 54984.9 25186 31.3986 9553.85

1995-96 2144 68470.2 21687 33.4498 11185.86

1996-97 2821 72602.1 26423 35.4999 13017.88

1997-98 3557 76490.9 29367 37.1648 14476.13

1998-99 2462 75607.4 32490 42.0706 16687.39

1999-2000 2155 86493.1 38036 43.3327 18582.05

2000-01 3272 95096.8 42281 45.6844 20007.43

2001-02 4734 95240 54106 47.6919 21752.6

2002-03 3217 114132 76100 48.3953 23438.64

2003-04 2388 141992 112959 45.9516 26258.19

2004-05 3713 195053 141514 44.9315 29714.64

2005-06 3034 252256 151622 44.2735 33905.03

2006-07 7693 312149 199179 45.2849 39532.76

2007-08 15893 414343 309723 40.241 45820.86

2008-09 22372 488991 251985 45.917 53035.67

2009-10 17966 467124 279057 47.4166 61089.03

2010-11 11834 620905 304818 45.5768 72488.6

2011-12 22061 795283 294398 47.9229 83916.91

2012-13 19819 791137 292046 54.4099 93888.76

2013-14 21564 762702.9 304223 60.5019 104728.1


Table-4: Results of Correlation Analysis

Variable Correlation Coefficient ( r )

FDI Inflows and GDP at factor cost 0.912504

FDI inflows and Total Trade 0.933377

FDI inflows and Foreign Exch. Reserves 0.911997

FDI inflows and Exch. Rate 0.64774


Above table, indicate that there is a high correlation between FDI and other related economic indicators as it was hypothecated.





CONCLUSION

FDI plays an important role in the development of a country through transfer of technology, strengthening infrastructure, raising

production and generating new employment opportunities. India has huge market size, availability of skilled human resources,

sound economic policy, abundant and diversified natural resources attract FDI. Further, it has substantially increased the flow of

FDI into the country after 1991. Even in recent global crisis, FDI inflows showed increasing trend as well as portfolio investment.

FDI and Portfolio investment both are expected to grow in coming years. It was hypothecated that the FDI and Portfolio

investment show a positive trend during the period from 1990-91 to 2013-14. From the above analysis, hypothesis has to be

accepted. Correlation analysis results indicated that there is a very high correlation between the foreign direct investment and

other related economic indicators as it was hypothecated.

REFERENCES

1. Shiralashetti, A. S., & Huger, S. S. (2009). ICFAI Journal of Managerial Economics, VII(1), 261-271.

2. Athreye, S., & Kapur, S. (2001). Private Foreign Investment in India: Pain or Panacea?. The World Economy, 24, 399-

424.

3. Balasubramanyam. V. N., & Vidya, Mahambre. (2003). Foreign Direct Investment in India (Working Paper No.

2003/001). Lancaster University Management School: Department of Economics. International Business Research

Group.

4. Maniam, Balasundaram, & Chatterjee, Amitiava. (1998). The Determinants of US Foreign Investments in India:

Implications and Policy Issue. Managerial Finance, 24(7), 55-62.

5. Banga, R. (2005). Impact of Liberalisation on Wages and Employment in Indian Manufacturing Industries (Working

Paper No. 153). New Delhi: ICRIER.

6. Nayak, Birendra Kumar, & Dev, Surya. (2003). Low Bargaining Power of Labour Attracts Foreign Direct Investment in

India. Social Science Research Network No. 431060.

7. Borensztein, E., J., De Gregorio, & J., Lee (1995). How Does Foreign Direct Investment Affect Growth? Journal of

International Economics, 45, 45-135.

8. Borensztein, E., J. De Gregorio, & J-W., Lee (1998). How does Foreign Direct Investment Affect Economic Growth.

Journal of International Economics, 45, 115-35.

9. Chakraborty, Chandana, & Nunnenkamp, Peter. (2008). Economic Reforms, Foreign Direct Investment and Economic

Growth in India: A Sector level Analysis. World Development, 36(7), 1192-1212.

10. Chew, Ging Lee. (2009). Foreign Direct Investment, Pollution and Economic Growth: Evidence from Malaysia. Applied

Economics, (41), 1709-1716.

11. Dua, P., & A., I. Rasheed. (1998). Foreign Direct Investment and Economic Activity in India. Indian Economic

Review, 33, 153-168.

12. Gupta, Jaya. (2007). Globalisation and Indian Economy: Sector wise analysis of FDI inflows.

13. Laura, Alfaro. (2003). Foreign Direct Investment and Growth: Does the Sector Matter? (Working Paper Harvard

Business School).

14. Lipsey, R. (2000). Inward FDI and Economic Growth in developing countries. Transnational Corporations, 9, 67-95.

15. Kumar, Nagesh. (2001). Liberalisation and Changing Patterns of FDI. Has India’s relative attractiveness as a host of

FDI improved?. Economic Development in India, 79-99.

16. Peng, Hu. (2006). India’s Suitability for Foreign Direct Investment (Working Paper No. 553), International Business

with Special Reference to India. University of Arizona.

17. Sahoo, Rajih Kumar. (2005). Foreign Direct Investment and Growth of Manufacturing Sector: An Empirical Study

on Post Reforms India (Doctoral Thesis). University of Mysore.





18. Sebastin, Morris. (2004). A study of the Regional Determinants of Foreign Direct Investment in India, and the case

of Gujrat (Working Paper No. 2004/03/07). Indian Institute of Management.

19. Teli, R. B. (2014). A Critical Analysis of Foreign Direct Investment inflows in India. Procedia-Social and Behavioral

Sciences, 133, 447-455.

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34. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=431060

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http://www.researchgate.net/publication/264500427_INTERNATIONAL_JOURNAL_OF_RESEARCH_IN_MANAGEMENT__S

http://www.academia.edu/7330646/10120140502003

http://www.researchgate.net/publication/262641582_A_Critical_Analysis_of_Foreign_Direct_Investment_I

http://www.researchgate.net/publication/228511082_Attracting_Foreign_Direct_Investment_(FDI)_to_Indi

http://www.usc.es/economet/reviews/aeid9217.pdf

http://www.academia.edu/5370747/Foreign_Direct_Investment_in_India_Regulatory_Framework_Issues_and_C

http://www.researchgate.net/publication/228321113_Low_Bargaining_Power_of_Labour_Attracts_FDI_in_Ind

http://www.slideshare.net/soumeetsarkar/foreign-capital

http://www.academia.edu/11022151/Sustainable_Development_by_Encouraging_Foreign_Direct_Investment_in

http://www.ijhssi.org/papers/v2(2)/version-4/A220111.pdf

http://www.tmu.ac.in/gallery/viewpointsdcip2013/pdf/track2/T206.pdf

http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.428.7004

http://www.researchgate.net/publication/279200679_Role_of_FDI_inflow_in_Indian_Growth_Perspective

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FABLES OF FINANCIAL INCLUSION IN INDIA: NEW INITIATIVES

Dr. Jyoti Paul13 Kanika Bajaj14

ABSTRACT

Financial inclusion is the delivery of financial services at affordable costs to vast sections of disadvantaged and low-income

groups (for example "no frill accounts"). Even after decades of independence the vast section of society is still deprived of

banking, insurance and pension services. The future of financial inclusion looks bright. Hope that the purpose of inclusive

growth is reaped by the new schemes in banking as well as pension and insurance sector. The long run impact of schemes is

yet to be identified but if the things are implemented in true spirit rather than just being on paper, they are going to have a

manifold inclusive impact. There is a huge scope to penetrate and the paper unfolds all such recent initiatives taken by

Government of India and traces the progress of various schemes in respect of financial inclusion.

KEYWORDS

Financial Inclusion, India, PMJDY, MUDRA, Credit Guarantee Fund etc.

INTRODUCTION

Financial products are crucial for existence in today’s society. The prerequisite of having access to financial products can also be

assumed against the decline of social welfare provision, which makes it increasingly necessary for individuals to make their own

provision against risk (Lederle, 2007). This importance of financial products necessitates the rise of financial inclusion. Financial

inclusion is the delivery of financial services at affordable costs to vast sections of disadvantaged and low-income groups (for

example "no frill accounts"). Even after decades of independence the vast section of society is still deprived of banking, insurance

and pension services. There is a huge scope to penetrate and the paper unfolds all such recent initiatives taken by Government of

India and traces the progress of various schemes in this regard.

OBJECTIVES OF STUDY

To understand the concept of financial inclusion in India

To review the recent initiatives in inclusion with respect to banking, insurance and pension sector

To trace the development of various schemes of financial inclusion and review the progress

Financial Inclusion: The Concept

Financial inclusion implies delivery of financial services to the low-income groups especially the excluded sections of the

population with the provision of equal opportunities. The main issue is to provide the neglected sections with better living

opportunities and income by penetrating such financial products. Few definitions are:

According to the Planning Commission (2009), “Financial inclusion refers to universal access to a wide range of financial services

at a reasonable cost. These include not only banking products but also other financial services such as insurance and equity

products.”

Government of India (2008) defines Financial inclusion as the process of ensuring access to financial services and timely and

adequate credit where needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost.

As per the Rangarajan Committee report (2008) Financial Inclusion is defined “as the process of ensuring access to financial

services and timely and adequate credit where needed by vulnerable groups such as the weaker sections and low income groups at

an affordable cost”.

According to Chakraborty (2011), “Financial inclusion is the process of ensuring access to appropriate financial products and

services needed by all sections of society including vulnerable groups such as weaker sections and low income groups at an

affordable cost in a fair and transparent manner by mainstream institutional players.”

13Assistant Professor (Commerce), Dyal Singh College, University of Delhi, New Delhi, India, [email protected] 14Assistant Professor, Dyal Singh College, University of Delhi, New Delhi, India, [email protected]








A brief review of literature has been prepared from the extant work for the purpose of this study. Various studies have focused on

diverse definitions, issues and challenges of financial inclusion in India and across the globe. This study fills the gap as it reviews

all the new initiatives taken by the Government in the area of financial inclusion in banking, insurance and pension schemes. A

brief review is as follows:

Shankar (2011) in his doctoral work has evaluates the contribution of microfinance programs in promotion of financial inclusion

in India. To sustain financial inclusion, group microfinance members should graduate to individual financial services. The thesis

therefore also explores the environment in which such graduation could take place. The thesis analyzed appropriate regulatory

framework for the microfinance sector. The study has implications for policymakers at the national and state level, microfinance

providers, members and funding agencies. The thesis findings also suggest that there is considerable scope for policy relevant

empirical research on microfinance in India.

Singh (2014) in the paper aims to focus on utilizing the existing resources such as Mobile phones, Banking Technologies, India

Post Office, Fair Price Shops and Business Correspondents (BCs) thereby making it more efficient and user friendly for the

interest of the rural population as well as the formal sector.

Garg and Agarwal (2014) attempts to understand financial inclusion and its importance for overall development of society and

Nation’s economy. This study focuses on approaches adopted by various Indian banks towards achieving the ultimate goal of

financial inclusion for inclusive growth in India and analyses of past years progress and achievements.

Damodaran in his paper titled “Financial Inclusion: Issues and Challenges” discusses the role of financial inclusion in the

economy and how the different stakeholders play an important role in developing the whole initiative.

The previous researches have not evaluated the progress of the new schemes launched by the Government. This paper attempts to

cover this gap and discuss the schemes and their progress in respect of financial inclusion indicators.

Financial Inclusion in India

The reasons for financial exclusion have been the motivators for the Government to start and review various financial inclusion

initiatives. The prime reasons should be known first before discussion of various initiatives in India. Kempson and Whyley (2000)

presented six reasons of financial exclusion:

Physical Access Exclusion: This is because of closure of local banks or buildings societies and lack of transport

facilities to reach these places.

Access Exclusion: This exclusion is because of people being denied a financial product, as they are perceived to be high

risks.

Condition Exclusion: This is when certain conditions are attached to products as a result making them inaccessible to

certain sections.

Price Exclusion: this is because of prime reason that the product is unaffordable.

Marketing Exclusion: this is because sales and marketing is targeted on certain groups at the expense of others.

Self-Exclusion: It occurs when people do not by themselves want to buy certain financial product because of fear of

awareness, temptation, risk etc.

Because of these reasons, the term “financial inclusion” came up in 2005 in the Annual Policy statement. The banks at that time

were asked to examine their existing practices and align them with the objective of financial inclusion. Financial inclusion again

featured later in 2005 when K.C. Chakraborthy, the chairman of Indian Bank, used it. Mangalam became the first village in India

where all households were provided banking facilities. Norms were relaxed for people intending to open accounts with annual

deposits of less than Rs. 50,000. General credit cards (GCCs) were issued to the poor and the disadvantaged with a view to help

them access easy credit. In January 2006, the Reserve Bank permitted commercial banks to make use of the services of non-

governmental organizations (NGOs/SHGs), micro-finance institutions, and other civil society organizations as intermediaries for

providing financial and banking services. These intermediaries could be used as business facilitators or business correspondents

by commercial banks. In India, RBI has initiated several measures to achieve greater financial inclusion, such as facilitating no-

frills accounts and GCCs for small deposits and credit. Some of these initial steps are:





Opening of No-frills Accounts: Basic banking no-frills account is with nil or very low minimum balance as well as charges that

make such accounts accessible to vast sections of the population. Banks have been advised to provide small overdrafts in such

accounts.

Relaxation on Know-Your-Customer (KYC) Norms: KYC requirements for opening bank accounts were relaxed for small

accounts in August 2005; thereby simplifying procedures by stipulating that introduction by an account holder who has been

subjected to the full KYC drill would suffice for opening such accounts

Business Correspondents (BCs): RBI has permitted banks to engage business facilitators (BFs) and BCs as intermediaries for

providing financial and banking services since 2006. The BC model allows banks to provide doorstep delivery of services,

especially cash in-cash out transactions, thus addressing the last-mile problem.

Use of ICT: Banks have been advised to make effective use of information and communications technology (ICT), to provide

doorstep-banking services through the BC model where even illiterate customers can operate the accounts by using biometrics,

thus ensuring the security of transactions and enhancing confidence in the banking system. For example, Eko uses ICT in India for

financial inclusion. It provides a low cost infrastructure powered by innovation and technology to enable instant, secure and

convenient financial transactions. Eko leverages existing retail shops, telecom connectivity and banking infrastructure to extend

branchless banking services to the common person. Eko also collaborates with institutions to offer payment, cash collection and

disbursal services. Customers can walk-in to any Eko counter (retail outlet) to open a savings account, deposit & withdraw cash

from the account, send money to any part of the country, receive money from any part of the world, buy mobile talk-time or pay

for a host of services. A low cost mobile phone acts as the transaction device for retailers and customers. Performing a transaction

only requires numeric literacy for number dialing. It has created an excellent transaction platform called ‘SimpliBank’ that is used

by multiple partners.

GCC: With a view to helping the poor and the disadvantaged with access to easy credit, banks have been asked to consider

introduction of a general-purpose credit card facility up to Rs. 25,000 at their rural and semi-urban branches. The objective of the

scheme is to provide hassle-free credit to banks’ customers based on the assessment of cash flow without insistence on security,

purpose or end use of the credit. This is in the nature of revolving credit entitling the holder to withdraw up to the limit

sanctioned.

Simplified branch authorization: To find a discourse to uneven spread of bank branches, in December 2009, domestic

scheduled commercial banks were permitted to freely open branches in tier III to tier VI centers with a population of less than

50,000 under general permission, subject to reporting. In the northeastern states and Sikkim, domestic scheduled commercial

banks can now open branches in rural, semi-urban and urban centers without the need to take permission from RBI in each case,

subject to reporting.

Opening of branches in unbanked rural centers: Banks have been mandated to allocate at least 25% of the total number of

branches to be opened during a year to unbanked rural centers.

FINANCIAL INDICATORS OF PROGRESS

Table-1: ATM Network

Number of ATMs of Public Sector Banks (PSBs)

As on Off-site ATMs On-site ATMs Total ATMs

31.03.2011 19739 29756 49495

31.03.2012 24181 34012 58193

31.03.2013 29411 40241 69652

31.03.2014 44504 65920 110424

31.12.2014 50247 74463 124710

Sources: RBI

Number of ATMs of Scheduled Commercial Banks (SCBs)

As on Off-Site ATMs On-site ATMs Total ATMs

31.03.2011 33823 40690 74513

31.03.2012 48141 47545 95686

31.03.2013 58254 55760 114014

31.03.2014 76676 83379 160055

31.12.2014 83290 93119 176409

Sources: RBI





Indicators clearly show that the number of ATMs of PSBs and SCBs have more than doubled since 2011 to 2014. This increase in

ATMs clearly shows improvement in the area of financial inclusion.

Table-2: Branch Network of SCB branches in the country in past 4 years

As on 31st March Rural Semi Urban Urban Metropolitan Total

2011 33927 23079 17606 16238 90850

2012 36540 25816 18855 17246 98457

2013 39794 28511 19900 18062 106267

2014 45152 31433 21428 19187 117200

Dec 31, 2014 47278 32756 22373 19887 122294

Sources: RBI

Another indicator of Financial Inclusion is the branch network. The Number of SCBs has risen especially in case of rural SCBs.

Now even the presence of foreign bank can be felt in rural areas, though nationalized banks have their largest presence in such

areas.

NEW INITIATIVES

Banking

Credit Guarantee Fund

The Budget of March 2012 has focused to set up Credit Guarantee Funds for Education Loans, Skill Development and to expand

the scope of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to operate all credit guarantee schemes. A

corpus contribution of Rs. 3500 crore for a period of five years beginning from [email protected] crore in the initial year, which

will be stepped up by Rs.100 crore each year for guaranteeing education loans. Further, for guaranteeing skill development loans,

total corpus of Rs.1000 crore with contribution of Rs. 500 crore each in FY2014 & FY2015.

Credit Guarantee Fund Scheme for Education Loans (CGSEL)

As of March 2013, there were 25,09,465 education loan accounts with a total outstanding of Rs.53,520 crore. Over 5% of student

loans outstanding had turned bad, up from 2% in 2008. The proposal to create the fund is an outcome of a request from state-

owned banks after the government pressurized them to provide education loans even if they are not very lucrative. The

government's viewpoint is that no child should miss an opportunity to pursue studies due to lack of financial resources. Banks

have witnessed 5-10 per cent of their education loan portfolios turning bad. Most defaults in this space are related to loans of up to

Rs 4 lakh wherein, as per the government's mandate, banks are not allowed to seek any collateral. The government fears banks

may shy away from giving loans to students if the rate increases. This has prompted it to consider creating a credit guarantee fund.

To administer the Credit Guarantee Fund Scheme for Educational Loans, it is proposed to establish a Credit Guarantee Fund. The

scheme shall be called the Credit Guarantee Fund Scheme for Education Loans (CGSEL). The Scheme shall be confined to

guaranteeing Educational Loans sanctioned by Member Banks of Indian Banks Association (IBA) or Government of India may

direct other Banks / Financial Institutions as. Government of India, through Ministry of Human Resource Development, as Settlor

shall establish a Fund for guaranteeing loans sanctioned under the Education Loan Scheme. Corpus contribution shall be made

upfront by the Settlor to the Fund each year. Deficit, if any, in the overall operations of the scheme shall be made good by the

Government of India through budgetary grant to the Fund. The proposal targets coverage of guarantees for approx. Rs. 75000

crore for education loans over a period of five years with Rs.10000 crore in the first year of operations and 20% growth rate in

subsequent years.

Credit Guarantee Fund for Skill Development

The biggest constraint in ascending vocational courses is that there has been non‐availability of credit from formal channels. To

address this issue, National Council on Skill Development set up a committee to come up with a draft policy on making skill

training eligible for credit support. Therefore, the Indian Banks’ Association (IBA) has approved a ‘Model Loan Scheme for

Vocational Education and Training’ where member banks can finance an amount varying from INR 20,000 to INR 1,50,000

depending on the duration of the course.

The scheme shall be called the Credit Guarantee Fund Scheme for Skill Development (CGSSD). The Scheme shall be confined to

guaranteeing Skill Development Loans sanctioned by Member Banks of Indian Banks Association (IBA) or Government of India

may direct other Banks / Financial Institutions as. In case of default and invocation of claim, the Fund shall settle the claims after





due diligence and 75% of the guaranteed amount shall be payable as first installment and the balance, if any, shall be paid after

conclusion of recovery proceedings and ascertaining the net / final loss incurred by the lending institution. The extent of guarantee

cover shall be 75%. For skill development loans, it is estimated to cover approx. Rs.2500 crore in the first year.

National Credit Guarantee Trustee Company (NCGTC)

Managing the working and operations of Fund Trusts which are in existence (MSEs and low cost housing) and proposed

(Education Loans and Skill Development) demands creation of separate and individual operational set-ups comprising

infrastructural support, manpower, IT platform, Premises, etc. As the activities of these Funds are quite similar, the existing set-up

of CGTMSE can be leveraged for operation / implementation of all credit guarantee schemes by expanding its scope instead of

having individual operational set-ups for each Fund. This would act as a single point operational entity for all credit guarantee

schemes. This would be a cost effective and better alternative to achieve operational efficiencies and economies of scale through

sharing of various resources. It is further proposed that the Trust Deed of CGTMSE be suitably modified and the Trust be

renamed as “National Credit Guarantee Trust (NCGT)”, to enable it to operate / implement credit guarantee schemes including

MSEs, Low cost housing, Education Loans, Vocational courses / Skill Development and such other credit guarantee schemes that

may be introduced from time to time.

Micro Units Development and Refinance Agency (MUDRA) Bank

Small business is having enormous business opportunities. According to NSSO Survey (2013), there are 5.77 crore small business

units, mostly individual proprietorship. Most of these 'own account enterprises' (OAE) are owned by people belonging to

Scheduled Caste, Scheduled Tribe or Other Backward Classes. They get very little credit and that too mostly from non-formal

lenders, or friends and relatives. Providing access to institutional finance to such micro/small business units will in tune help in

GDP growth and in opening up new employment opportunities. The Non Corporate Small Business Sector (NCSBS) accounts for

a large share of industrial units. They feed large local and international value chains as well as domestic consumer markets as

suppliers, manufacturers, contractors, distributors, retailers and service providers. The gross value addition of this sector is 6.28

lakh crore annually.

MUDRA stands for Micro Units Development & Refinance Agency Ltd., is a new institution set up by Government of India on

08.04.2015 for development and refinancing activities relating to micro units. The drive behind creation of MUDRA is to provide

funding to the non-corporate small business sector. MUDRA would be accountable for refinancing all Last Mile Financiers such

as Non-Banking Finance Companies of various types engaged in financing of small businesses, Societies, Trusts, Section 8

Companies [formerly Section 25], Co-operative Societies, Small Banks, Scheduled Commercial Banks and Regional Rural Banks

which are in the business of lending to micro/small business entities engaged in manufacturing, trading and services activities.

The Bank would collaborate with State/regional level financial intermediaries to provide finance to Last Mile Financier of small /

micro business enterprises.

The definition of micro unit for the purposes of MUDRA's activities should not be related with MSME or any other Act. For the

purpose of units covered under MUDRA, micro units or Non- Corporate Small Business Segment (NCSBS) comprising millions

of proprietorship / partnership firms running as small manufacturing units, shopkeepers, fruits/vegetable sellers, hair cutting

saloon, beauty parlours, transporters, truck operators, hawkers, co-operatives or body of individuals, food service units, repair

shops, machine operators, small industries, artisans, food processors, self-help groups, professionals and service providers etc. in

rural and urban areas with financing requirements of less than 10 lakh. Formal or institutional architecture has not been able to

reach out to them to meet the financial requirements of this sector. They are largely self-financed or rely on personal networks or

moneylenders. MUDRA will help these micro units in this regard.

Pradhan Mantri MUDRA Yojana - MUDRA shall have three categories of products named ‘Shishu’, ‘Kishor’ and Tarun’ to

signify the stage of growth / development and funding needs of the beneficiary micro unit / entrepreneur and also provide a

reference point for the next phase of graduation / growth to look forward to:

Shishu: Covering loans upto Rs. 50,000/-

Kishor: covering loans above Rs. 50,000/- and up to Rs.5.00 lakh

Tarun: covering loans above Rs.5.00 lakh and up to Rs.10.00 lakh

Pradhan Mantri Jan Dhan Yojna (PMJDY)

PMJDY targeting comprehensive financial inclusion has been launched by PM on 28th August 2014. The bank account opened

under PMJD is a zero balance account and customers are not required to maintain any minimum balance. A Rupay Kisan Debit

Card will be issued which can be used to withdraw money from ATM’s and free accident insurance up to Rs 2 Lakh will be

provided for those who open their bank account within 100 days of scheme being launched. Further, an overdraft facility of Rs





5000 will be provided after six months of opening the account at the discretion of the bank only if your account has been active

and seen a lot transactions. The over-draft limit, which is like a short-term loan, can be increased up to Rs 15,000 if the repayment

is prompt. The scheme has seen an overwhelming response and 18096130 numbers of accounts have been opened in a week,

which has set a Guiness World record.

Table-3: Pradhan Mantri Jan - Dhan Yojana (Accounts Opened As on 05.08.2015)

(All Figures in Crores)

S.

No.

Number of Accounts Number of

Rupay Debit

Cards

Balance

in

Accounts

% of Zero

Balance

Accounts Rural Urban Total

1 Public Sector

Bank

7.48 6.16 13.64 12.54 17273.12 45.75

2 Rural Regional

Bank

2.65 0.46 3.11 2.27 3684.56 48.55

3 Private Banks 0.41 0.28 0.7 0.62 1075.01 45.71

Total 10.55 6.9 17.45 15.43 22032.68 46.25

Sources: http://www.pmjdy.gov.in/account-statistics-country.aspx

Insurance

The Insurance Laws (Amendment) Bill, 2008

The Insurance Laws (Amendment) Bill, 2008, which proposed amendments in the Insurance Act, 1938, the General Insurance

Business (Nationalization) Act, 1972 and the Insurance Regulatory and Development Authority (IRDA) Act, 1999 was introduced

in the Rajya Sabha on the 22nd December 2008. The proposed amendments were aimed at removing archaic and redundant

provisions in the legislations and incorporating certain provisions to provide IRDA with flexibility to discharge its functions more

effectively. The Bill could, however, not be taken up by the House and has been referred to a Select Committee of the Rajya

Sabha.

Varishtha Pension Bima Yojana (VPBY) as a pension scheme for senior citizens

The revived Varishtha Pension Bima Yojana (VPBY) was formally launched by the Finance Minister on 14.08.2014 and was

open during the window stretching from 15th August, 2014 to 14th August, 2015 for the benefit of citizens aged 60 years and

above. The scheme will be administered by LIC. The subscription to the scheme is likely to create a corpus of more than Rs.

10,000 crore, and would thus be a significant source of resource mobilization for the development of the country. Pension would

be on immediate annuity basis in monthly, quarterly, half-yearly or annual mode, varying, respectively, between Rs. 500 to 5000

(monthly), Rs. 1500 to 15,000 (quarterly), Rs. 3000 to Rs. 30,000 (half-yearly) and from Rs. 6,000 to Rs. 60,000 (annually),

depending on the amount subscribed and the option exercised. The payout implies an assured return of 9% on monthly payment

basis, which amounts to an annualized return of 9.38%. 2477 beneficiaries have registered and total amount received is 74.52

crore.

Pradhan Mantri Jeevan Jyoti Bima Yojana

Highlights of The Pradhan Mantri Jeevan Jyoti Bima Yojana are:

Eligibility: Available to people in the age group of 18 to 50 and having a bank account. People who join the scheme

before completing 50 years can, however, continue to have the risk of life cover up to the age of 55 years subject to

payment of premium.

Premium: Rs 330 per annum to be auto-debited in one installment.

Payment Mode: The payment of premium will be directly auto-debited by the bank from the subscribers account.

Risk Coverage: Rs. 2 Lakh in case of death for any reason.

Terms of Risk Coverage: A person has to opt for the scheme every year. He can also prefer to give a long-term option

of continuing, in which case his account will be auto-debited every year by the bank.





Pradhan Mantri Suraksha Bima Yojana

Highlights are:

Eligibility: Available to people in age group 18 to 70 years with bank account.

Premium: Rs 12 per annum

Payment Mode: The premium will be directly auto-debited by the bank from the subscribers account. This is the only

mode available.

Risk Coverage: For accidental death and full disability – Rs 2 Lakh and for partial disability – Rs 1 Lakh.

Eligibility: Any person having a bank account and Aadhaar number linked to the bank account can give a simple form

to the bank every year before 1st of June in order to join the scheme. Name of nominee to be given in the form.

Terms of Risk Coverage: A person has to opt for the scheme every year. He can also prefer to give a long-term option of

continuing in which case his account will be auto-debited every year by the bank.

Pension Reforms

Extension of SWAVALAMBAN Scheme until 2016-17 renamed to Atal Pension Yojna

The Government has started the co-contributory Pension Scheme – Swavalamban – from September 2010 where an unorganized

sector employee contributing between Rs 1000 and Rs 12,000 per annum for retirement savings is eligible to receive a matching

contribution of Rs 1000 per annum from the Government. As of February 2012, NPS Lite had over 8 lakh subscribers enrolled

and over 5 lakh subscriber eligible under Swavalamban. As of May 2012, the number of enrolments under NPS Lite has increased

to 11 lakh. The new pension scheme with better features has replaced the existing pension scheme (Swavalamban Yojana NPS

Lite) which is targeted at workers of the unorganized sector. All subscribing workers below the age of 40 would be eligible for

pension of up to Rs 5,000 per month on attainment of 60 years of age. The scheme has been renamed as Atal Pension Yojna.

Table-4: Summary of APY/PMJJBY/PMSBY as on 14-08-2015

Gross Enrolment Reported by Banks, subject to verification of Eligibility of Applicants

as per Rules, and Availability of Funds for Auto Debit of Premium etc.

Scheme

Name

Rural_Male Rural_Female Urban_Male Urban_Female Grand

Total

APY 129,320 79,675 260,762 184,052 653,809

PMJJBY 8,698,773 5,282,662 8,597,967 4,852,821 27,432,223

PMSBY 25,330,035 15,388,736 25,627,738 14,893,789 81,240,298

Grand Total 34,158,128 20,751,073 34,486,467 19,930,662 109,326,330


Inclusion Schemes: A Critique

Though there is lot of furor over the new financial inclusion schemes, there have been both pros and cons related to them. Firstly,

banks were directed to approach financial inclusion not as a social task but “as a business opportunity”. Banks were invigorated to

develop viable financial products for the poor that would also ensure adequate profits. Secondly, private microfinance institutions

(MFIs) were actively encouraged to expand financial inclusion. Therefore, financial inclusion measures were turned into a

marvelous business. In the 2000s, the average interest rates on lending by private MFIs were between 24 and 36 per cent per

annum. The MFI mirage finally was revealed in 2010 and the private MFI model of financial inclusion stands thoroughly

discredited. Thirdly, host of controversies surrounded the BC model. To promote this model in 2010, the RBI permitted the

appointment of “for-profit companies” as BCs. Pervasive Corruption among BCs topped the primary reason for its criticism.

Lastly, the DBT scheme also has its share of critique. The Aadhaar project faced stiff resistance from citizens’ groups owing to its

indirect compulsoriness and lack of legal backing and the fear of privacy violations. Secondly, the biometric technology used to

authenticate beneficiaries at the BC level recorded high error rates, rising sometimes up to 25-30 per cent.





PMJDY as Continuity: The introduction of the Aadhaar-linked DBT scheme in 2012 gave a wholly new dimension to the UPA’s

financial inclusion policy. The assumption was that routing cash benefits through banks would force beneficiaries to register for

Aadhaar and open Aadhaar-linked bank accounts, which are open to its own set of criticism relating to security issues of

information. The Modi government has just renamed the Swabhimaan scheme as PMJDY, extended the scheme to urban areas

and made certain concrete announcements on adding insurance products to the scheme. Secondly, both the Swabhimaan campaign

and the PMJDY rely on the failed BC model. However, according to a recent RBI survey, about 47 per cent of the BCs were

actually “untraceable”. The Modi government’s plan is to make the BC model viable by (a) raising the salaries of BCs to at least

Rs. 5,000 a month; and (b) increasing the commission to BCs. However, the results are yet to be seen.

CONCLUSION AND RECOMMENDATIONS

The schemes introduced have achieved tremendous success as can be seen from the data provided. PMJDY has set a Guinness

Record for maximum opening of Bank accounts by any scheme. The future of financial inclusion looks bright. Hope that the

purpose of inclusive growth is reaped by these schemes in banking as well as pension and insurance sector. The long run impact

of schemes is yet to be identified but if the things are implemented in true spirit rather than just being on paper, they are going to

have a manifold inclusive impact. The poor and unreached sections as per financial inclusion is concerned will not only be banked

but also be insured and will have regular source of income post retirement. It is too early a stage to comment at length on

advantages that schemes will bring in, but it is certain that they will be a game changer in the area of financial inclusion in future.

Banks and other institutions have to overcome the obstacles of financial illiteracy and try to streamline the processes so that these

schemes do not merely help people to have an initial opening rather sustain this mere opening and remain active in the schemes.

Financial inclusion schemes will enrich the economy and we look forward to reduce the financial divide between rich and poor.

The “need for protection of information” and “the possibility of tampering with stored biometric information” is the issues, which

the Government has to look upon before linking every such measure with a UID number. Further, as there is no data protection

statute in the country one has to be concerned about any kind of violation of human rights in the process.

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FINANCIAL INCLUSION IN INDIA: A STUDY OF THE LINKAGE

BETWEEN ECONOMIC GROWTH AND FINANCE

Dr. Manoj P. K.15

ABSTRACT

However, Indian economy has been growing at a fast rate in the ongoing reforms era as evidenced a GDP growth rate of

about 8 percent since the early 2000s. There has been an almost steady growth over the years in spite of sub-5 percent growth

rate noted in a few years, and for 2013-14, it is 6.8 percent. For 2014-15, the Government of India estimates it at a still higher

level of 7.4 percent. While the GDP growth during the period 1991-2001 was 5.7 percent while the same during 2001-2011

was 7.7 percent. The projections of GDP growth rate for the next fiscal 2015-16 by most of the agencies are about 8 percent,

and accordingly Indian economy could look forward for better growth prospects from 2015-16 and beyond. In spite of the

good prospects for the economy as a whole and service sector in particular, the issue of ‘Inclusive Growth’ or ‘Distributive

justice’ is a question mark in India. In this situation, ‘Financial Inclusion’ has assumed vital significance as a tool for

ensuring equitable, balanced and hence sustainable growth. In the above context, this paper studies the linkage between

economic growth and finance in the Indian context

KEYWORDS

Economic Growth, Formal Financial Sector, Financial Inclusion, Poverty etc.

INTRODUCTION

Indian economy has been growing at a fast rate in the ongoing reforms era as evidenced by an average GDP growth rate of about 8

percent since the beginning of this century. There has been an almost steady growth over the years in spite of sub 5 percent

growth rate noted in a few years, e.g.2012-13 (4.8 percent). For 2013-14 it is 6.8 percent and for 2014-15 it is estimated at a still

higher level of 7.4 percent (Government of India, Economic Survey 2014-15, p.A4) [1]. While the GDP growth during the period

1991-2001 was 5.7 percent while the same during 2001-2011 was 7.7 percent. The projections of GDP growth rate for the next

fiscal 2015-16 by most of the agencies are above 8 percent, and upto 9 percent; and accordingly Indian economy could look

forward for better growth prospects from 2015-16 and beyond. However, in spite of the above positive developments, there are

growing apprehensions regarding the inclusiveness of India’s economic growth process and imbalance that is observed in the

relative growth rates of the three major sectors. Services sector in India has been growing fast right from the 1950s and based on

the latest statistics (as of 2014-15), services sector accounts for 56.10 percent (2004-05 series) and 49.6 percent (2011-12 series)

of the GDP of the country (Government of India, Economic Survey 2014-15, Vol. II, p.3) [1]. In spite of the good prospects for the

economy as a whole and service sector in particular, the issue of ‘Inclusive Growth’ or ‘Distributive justice’ is a question mark in

India. So also is the issue of growing s the issue of the fast declining share of the primary sector (viz. Agriculture and allied

activities) towards the country’s GDP which is at the level of 17.9 percent (2004-05 series) and 18.7 percent (2011-12 series) as

against fast growing trend in services sector at about 50 percent or more as already noted above.

RELEVANCE AND SIGNIFICANCE OF STUDY

The process of economic growth must strive to encompass participation from all sections. In India, inclusive growth has always

been a priority. The agenda of inclusive growth is reflected in the kind of policies and regulations that the policymaking and

regulating institutions have been developing over the past decade. Recognizing this, the Eleventh Five Year Plan has explicitly

stated ‘inclusive growth’ as its objective. The twelvth five- year plan has also given much emphasis on inclusiveness in all

aspects. Growth needs to be sufficiently inclusive if its benefits have to be shared among all or else the growth process itself shall

be jeopardized and derailed. Inclusive growth means broad based growth; it decreases the rapid growth rate of poverty in a

country and increases the involvement of people into the growth process of the country. Inclusive growth by its very definition

implies an equitable allocation of resources with benefits incurred to every section of the society. Financial Inclusion has the

potential to contribute substantially towards ‘inclusive growth’. The observation by Kofi Annan, the Former UN Secretary-

General is relevant here and is as follows: “The stark reality is that most poor people in the world still lack access to sustainable

financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude

people from full participation in the financial sector. Together we can and must build inclusive financial sectors that help people

improve their lives”.

15 Assistant Professor, Department of Applied Economics, Cochin University of Science and Technology, Kerala, India,

[email protected]






Building an inclusive financial sector for serving the asset-poor households, marginalized communities, including micro

entrepreneurs, etc. who stay at the lower rung of the economic and social stratification is a key task of policy. Providing

sustainable business and employment opportunity to the entrepreneurial class at the bottom of the pyramid require finance. World

Bank report states, “Financial inclusion, or broad access to financial services, is defined as an absence of price or non price

barriers in the use of financial services.” Reserve Bank of India, has defined Financial Inclusion in these words, “Financial

Inclusion is the process of ensuring access to appropriate financial products and services needed by all sections of the society in

general and vulnerable groups such as weaker sections and low income groups in particular at an affordable cost in a fair and

transparent manner by mainstream institutional players.” The Reserve Bank of India (RBI) has, therefore, formulated the policy of

financial inclusion with a view to provide banking services at an affordable cost to the disadvantaged and low-income groups.

OBJECTIVES OF STUDY

To make an overall study the concept of ‘Financial Inclusion’ and its relevance in India;

To study the linkage between economic growth and finance with special reference to India and to examine the measures

taken by RBI for enhancing financial inclusion.

To make suggestions for effective scaling up of financial inclusion for equitable growth.

FINANCIAL INCLUSION: CONCEPT AND ITS RELEVANCE IN INDIA

Financial inclusion is the process of ensuring access to appropriate financial products and services needed by vulnerable groups

such as weaker sections and low-income groups at an affordable cost in a fair and transparent manner by mainstream institutional

players. Financial inclusion has become one of the most critical aspects in the context of inclusive growth and development. The

importance of an inclusive financial system is widely recognized in policy circles and has become a policy priority in many

countries. Several countries across the globe now look at financial inclusion as the means to more comprehensive growth, wherein

each citizen of the country is able to use earnings as a financial resource that can be put to work to improve future financial status

and adding to the nation’s progress.

The need for financial inclusion may be considered from various perspectives. These include, (i) Economic objectives – for

equitable growth in all sections of the society; (ii) Mobilisation of savings – mobilization of household savings and effective

channelization of it for capital formation, (iii) Larger market for the financial system – to serve the need of the larger sections of

the society and opening up of new avenues for the new players in the financial sector; (iv) Social objectives – poverty eradication

and bridging up the gap between the weaker section of the society ,sources of livelihood and means of income which can be

generated if they get loans and advances.

In an emerging economy like India, financial inclusion becomes a question of both access to financial products and the knowledge

about their fairness and transparency. Many people who fall in the unbanked category are not adequately informed about the

nature of the financial services that might be available to them. Having proper delivery systems and information sharing

mechanisms are important for promoting financial inclusion. In India Financial Inclusion first featured in 2005, when it was

introduced by KC Chakraborthy, the chair of Indian Bank. Mangalam Village became the first village in India where all

households were provided banking facilities. Norms were relaxed for people intending to open accounts. In January 2006, RBI

permitted commercial banks to make use of NGOs/SHGs and other civil society organizations as intermediaries for providing

financial and banking services.

The banking sector has taken a lead role in promoting financial inclusion. There has been in multi-fold increase in the number of

back branches, especially in rural areas; the branch network was around 8,000 in 1969 and now it is more than 89,000, spread

across the length and breadth of the country. These initiatives for strengthening financial inclusion are yet to have a substantial

impact on the lives of the excluded population. Over half the Indian population is unbanked. Only about 55 percent of the

population in the country has deposit account and around 9 percent have credit accounts with banks. According to data from

Reserve Bank of India (RBI), India is the home to largest number of unbanked families (more than 145 million). The RBI has

observed that out of 600,000 habitations in the country, only about 5 percent have a commercial bank branch. Also only about 57

percent of the population across the country has bank account; there is only one bank branch per 14,000 people. The total number

of villages in the country is estimated to be around six lakhs, but the number of scheduled commercial banks (SCBs) and Regional

Rural Banks (RRBs) stand at only 33,495. A recent directive from Reserve Bank of India has acknowledged the need of stepping

up opening of branches in rural areas to improve banking penetration and financial inclusion. There has been a consistent increase

in the penetration of banking services in India in recent years. However, the rate of increase in the penetration of banking services

in the rural and semi-urban areas has been much lower than that in the urban areas. Further, penetration of banking services has

been lower in the central, eastern and northeastern regions of the country compared to the more developed northern, southern and

western regions. The disadvantaged section of the population in each country usually fails to have access to the services of formal

financial institutions. This ‘financial exclusion’ in India leads to the loss of GDP to the extent of one percent, as per the

computation by the RBI.





LINKAGE BETWEEN FINANCE AND ECONOMIC GROWTH

The process of economic growth must strive to encompass participation from all sections of society. Prolonged and persistent

deprivation of banking services to a large segment of the population leads to a decline in investment and has the potential to fuel

social tension causing social exclusion. An important outcome of New Economic Policy was deregulation of financial sector in

order to facilitate the development of money and capital market (Figure-I).

Figure I: Transmission Mechanism that links Finance and Economic Growth


The market frictions include information cost and transaction cost. This is linked to financial market; the variety of financial

functions undertaken by various institutions opens up different channels of growth. For this, there is the need of capital

accumulation and technological innovation. All this ultimately takes the economy to economic growth and to the rails of

development. India has, for a long time, recognized the social and economic imperatives for broader financial inclusion and has

made an enormous contribution to economic development by finding innovative ways to empower the poor. Starting with the

nationalization of banks, priority sector lending requirements for banks, lead bank scheme, establishment of regional rural banks

(RRBs), service area approach, self-help group-bank linkage programme, etc., multiple steps have been taken by the Reserve

Bank of India (RBI) over the years to increase access to the poorer segments of society.

A financial inclusion survey was conducted by World Bank team in India between April-June, 2011 that included face-to-face

interviews of 3,518 respondents. The sample excluded the northeastern states and remote islands representing approximately 10

per cent of the total adult population. The results of the survey suggest that India lags behind developing countries in opening

bank accounts, but is much closer to the global average when it comes to borrowing from formal institutions. In India, 35 per cent

of people had formal accounts versus the global average of 50 per cent and the average of 41 per cent in developing economies.

The table given below shows the key statistics on financial inclusion in India.

Table-I: Financial Inclusion in India vis-à-vis World (in Percent)

Share with an

Account at a

Formal Financial

Institution

Adults Saving in

the Past Year

Adults Originating

a New Loan in

the Past Year

Adults

With a

Credit

Card

All

Adults

Poorest

Income

Women Using a

Formal

Account

Using a

Community

Based Method

From a Formal

Financial

Institution

From

Family or

Friends

India 35 21 26 12 3 8 20 2

World 50 38 47 22 5 9 23 15

Sources: World Bank, Financial Inclusion Data, Global Findex 2014

In India, both supply-side and demand side barriers have both been recognized as responsible for low level of access to financial

services. Supply side constraints like poor banking infrastructure, low resource base of credit purveying institutions, security

based lending procedures, lengthy and cumbersome formalities, low level of financial literacy, etc., are still dominant in the

sector. Scores of demand side factors such as inadequate human capital, skewed distribution of land including lack of proper land

reforms, presence of large section of landless labourers, poor state of physical infrastructure , underdeveloped social capital (gram

panchayat, local administration, commodity cooperatives, etc), low productivity leading to low level of profitability, poor

linkages, poor risk mitigation mechanism, etc., in the country have adverse effects on the expansion of coverage of institutional

credit.





Measures taken by GOI and RBI for Broader Financial Inclusion

The RBI is adopting a number of approaches towards achieving financial inclusion (Figure II). These approaches include the

following:

Figure-II: RBI’s Approach towards Financial Inclusion


Product Based Approach: RBI has been proactive, liberal and supportive while making policies to enable financial institutions to

come up with innovative products for enabling a common person to get the benefit of the financial inclusion plan.

No-Frills Account (NFAs): Intoduced by RBI in Nov 2005 to provide access to basic banking services by financially excluded

peoples.Banks open accounts with zero balance or very minimum balance requirement for the under-privileged.

Kisan Credit Cards (KCCs): Issue of smart cards (1992) to the farmers for providing timely and adequate credit support from

single window banking system for their farming needs

General Purpose Credit Cards (GCC): Credit up to Rs. 25000/- is given without any collateral requirement for rural and semi-

urban people based on assessment of household cash flows

Saving Account with Overdraft Facility: Banks have been advised to provide OD facility in saving account and small ODs in No-

frills accounts. This would help the customer to get easy access to the credit at lower rates.

SHG-Bank Linkage Programme: One of the early attempts of financial inclusion during the period of economic reforms in India

has been the launching of the Pilot Project on SHG-Bank Linkage in February 1992 by NABARD. It proved to be a revolutionary

programme for alleviating poverty through capacity building and empowerment of the rural poor, especially women. Microcredit

either extended directly or through any intermediary is reckoned as part of bank’s priority sector lending. The SHG-Bank Linkage

Programme provides opportunities for the rural poor to participate in the development process. It is cost effective, and ensures that

more and more people are brought. The banks involve themselves with a group of local people with the idea of enabling them to

pool up their savings. The bank provides the framework, accounting services and support to the group to manage their deposits

and lending.

Business Facilitators (BF)/Business Correspondents (BC): Effective use of ICT (Information and communication Technology)

makes the BCs/BFs technologically empowered to provide the last mile delivery of financial products and services. They can

effectively bridge the gap between the service seekers and the service providers.

Regulatory Approach - Relaxation on Know-Your-Customer (KYC) norms: KYC norms for opening bank accounts were relaxed

for small accounts in August 2005; thereby simplifying procedures by stipulating that introduction by an account holder who has

been subjected to the full KYC drill would suffice for opening such accounts. The banks were permitted to take any evidence as to

the identity and address of the customer to their satisfaction. Small accounts can be opened based on an introduction from another

account holder who has satisfied all the KYC norms.

Simplified Bank Savings Account Opening: To ease the opening of account by the poorer sections, street hawkers and other

migratory labours of the society.

Bank Branch Authorization: RBI has permitted banks to open branches without taking authorization. This would speed up the

drive for financial inclusion.





Technology Based Approach: These include Mobile banking, ATM based banking, Branchless banking, Aadhar enabled payment

services and the like. Such services are on the rise with the advances of ICT.

Knowledge Based Approaches: Financial education, financial inclusion and financial stability are three elements of an integral

strategy to empower people to make effective use of the financial services network. While financial inclusion works from supply

side, financial education feeds the demand side by promoting awareness among people regarding the needs and benefits of

financial services offered by banks and other institutions.

CONCLUDING REMARKS

Financial inclusion has become one of the most critical aspects in the context of inclusive growth and development. The

importance of an inclusive financial system is widely recognized in policy circles and has become a policy priority in many

countries. Several countries across the globe now look at financial inclusion as the means to more comprehensive growth, wherein

each citizen of the country is able to use earnings as a financial resource that can be put to work to improve future financial status

and adding to the nation’s progress. Initiatives for financial inclusion have come from financial regulators, governments and the

banking industry. The banking sector has taken a lead role in promoting. However illiteracy, low income savings and lack of bank

branches in rural areas continue to be a roadblock to financial inclusion in many states and there is inadequate legal and financial

structure. For long-term sustainability of the economic growth, it is essential to bring about a ‘Financial Tripod’ with financial

inclusion, financial literacy and financial education, as its three legs-all these three being mutually interdependent and interrelated

to each other (Figure III).

Figure-III: The Financial Tripod


To sum up financial inclusion is the road that India needs to travel toward becoming a global player. Financial access will attract

global market players to our country and that will result in increasing employment and business opportunities. Inclusive growth

will act as a source of empowerment and allow people to participate more effectively in the economic and social process. While

the efforts by the RBI so far have been commendable, so more thrust is required in this regard, for which some suggestions are as

follows:

Added thrust on ICT-based tools for financial inclusion. This will go hand in hand with the Government’s latest policy

of ‘Digital India’.

Apart from promotion of ICT adoption by banks, the services of BFs / BCs should also be scaled up for enhanced

financial inclusion.

Financial education is of paramount significance for any financial inclusion initiative to progress fast, because it one of

the legs of the financial tripod, the other two being financial inclusion itself and financial stability.

Alternative and emerging models of financing like microfinance be promoted by the RBI.

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COMPARATIVE ANALYSIS OF AXIS BANK AND KOTAK MAHINDRA BANK

WITH REFERENCE TO NPA, PROFIT AND ADVANCES

Kanika Arora16 Sachin Rohatgi17 Dr. Preeti Sharma18

ABSTRACT

A well-built banking sector is significant for a prosperous economy. In a bank dominated economy such as India, the quality

of assets of the banks is a crucial indicator of the financial health of the banking sector and hence, has important implications

for the stability of the overall financial system. The loan portfolio held by banks mirrors the level of credit risk and efficiency

in the allocation of bank funds. The general perception about a bank’s health is greatly determined by the level of non-

performing assets (NPAs) held in its books. It is, therefore, not surprising that the current spurt in NPAs in banks has been

drawing a lot of attention of the policy makers and academicians alike.

The gross non-performing asset (GNPA) ratio inched to 4.45 per cent as on March 15 this year, as compared to 4.1 per cent

in March 2014, and the NNPAs have climbed up from 2.2 per cent in March 2014 to 2.36% this year according to the latest

data released by the Reserve Bank of India (RBI). According to credit rating firm CRISIL (dated May 13, 2015), the gross

NPAs ratio of banks are slated to grow at 0.20 percent to 4.5 percent by March 2016. In this direction, present paper is

undertaken to make the comparison of NPAs between Axis Bank and Kotak Mahindra Bank. NPAs have been analyzed using

Ratio method and selected statistical tool such as t-test.

KEYWORDS

Non-Performing Assets (NPAs), Advances, Ratio, Gross NPA, Net NPA etc.

INTRODUCTION

NPA is defined as a loan or an advance where payment of interest or repayment of installment of principal (in case of term loans)

or both remains unpaid for a certain period. In India, the definition of NPAs has changed over time. According to the Narasimham

Committee Report (1991), those assets (advances, bills discounted, overdrafts, cash credit etc.) for which the interest remains due

for a period of four quarters (180 days) should be considered as NPAs. Subsequently, this period was reduced, and from March

31, 2004 onwards when interest or principle payments due to a bank remains unpaid for more than 90 days, the entire bank loan

automatically turns a non performing asset. An NPA is defined as a loan asset, which has ceased to generate any income for a

bank whether in the form of interest or principal repayment. Non-performing assets are problematic for financial institutions since

they depend on interest payments for income. Hence, NPA’s are negative assets for a bank and only contribute to the loss.

Classification of NPA’s

Banks are required to classify non-performing assets further into three categories based on the period for which the asset has

remained non-performing and the realisability of the dues. (i) Sub-standard, (ii) Doubtful and (iii) Loss. Broadly, a substandard

asset is one which has been classified as NPA for a period less than or equal to 12 months (earlier it was 18 months). All those

assets which are considered as non-performing for period of more than 12 months (earlier it was 18 months) are called as

Doubtful Assets. All those assets that cannot be recovered are called as Loss Assets.

Gross NPA and Net NPA

The NPA may be Gross NPA or Net NPA. In simple words, Gross NPA is the sum total of all loan assets that are classified as

NPAs as per RBI guidelines as on the Balance Sheet date.

Gross NPA reflects the quality of the loans made by banks.

Gross NPAs Ratio = Gross NPAs

Gross Advances

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs.

16Assistant Professor, Amity Global Business School, Noida, India, [email protected] 17Assistant Professor, Amity Global Business School, Noida, India, [email protected] 18Assistant Professor, Amity Global Business School, Noida, India, [email protected]








Net NPA shows the actual burden of banks.

Net NPAs = Gross NPAs – Provisions

Gross Advances - Provisions

The Reserve Bank of India defines Gross NPA as the amount outstanding in the borrowable account, in books of the bank other

than the interest, which has been recorded and not debited, to the borrowable account. Net NPAs is the amount of Gross NPAs

less (1) interest debited to borrowal and not recovered and not recognized as income and kept in interest suspense (2) amount of

provisions held in respect of NPAs and (3) amount of claim received and not appropriated. In simple words, Gross NPA is the

amount, which is outstanding in the books, regardless of any interest recorded and debited. However, Net NPA is Gross NPA less

interest debited to borrowal account and not recovered or recognized as income.

IMPLICATIONS OF THE NPAS ON BANKS

The most important implication of the NPA is that a bank can neither credit the income nor debit the loss, unless either recovered

or identified as loss. If a borrower has multiple accounts, all accounts would be considered NPA if one account becomes NPA.

At macro level, NPAs have stifled the supply line of credit to the potential borrowers, thereby having a deleterious effect on

capital formation and arresting the economic activity in the country. At the micro level, the unsustainable level of NPAs has

eroded the profitability of banks through reduced interest income and provisioning requirements, besides restricting the

recycling of funds leading to serious asset liability mismatches. Mounting menace of NPA has raised the cost of credit, made

banks more adverse to risk, squeezed genuine small and medium enterprise from accessing competitive credit, and has

throttled their enterprising spirits as well.

The impact of NPAs on the profitability of the banks is summarized in the following points:

Diminishes Earning Capacity of the Assets: NPAs tends to diminish the earning capacity of the assets employed in

the business leading to lower return on assets.

Blocks 100% Capital: As NPAs carry risk weight of 100% and block capital of the bank; it adversely affects the

capital adequacy ratio of the bank.

Additional Cost Incurred: As the banks carry NPA, they need to incur additional cost in Cost of Capital Adequacy,

Cost of funds in NPAs, operating cost of monitoring and recovering NPAs.

Decreases EVA: Cumulative loan loss provision on NPA is considered as capital and because of being treated as capital

the cost of capital increases. This decreases EVA.

Low Return on Advances: Due to NPAs, return on advances shows a lesser figure than actual return on “Standard

Advances”. The reason for the same is that returns are calculated on weekly average total advances including NPAs.

Effect on Return on Assets: NPAs decreases earning capacity of the assets and because of this, ROA gets affected.

Research Objectives

To compare the Profit to NPA ratio of Axis Bank and Kotak Mahindra Bank.

To compare the NPA to Loan Disbursed ratio of Axis Bank and Kotak Mahindra Bank.


Research Hypothesis

Null Hypothesis - H01: There is no significance difference between the Profits to NPA ratios of the two banks. (Ho: μ1-μ2=0)

Null Hypothesis - H02: There is no significance difference between NPA to Loan disbursed ratios of the two banks. (Ho: μ1-

μ2=0)

Sources of Data Collection

The present study is based on secondary data collected from the annual reports of the two banks (Axis Bank and Kotak Mahindra

Bank).

Sample Size

The data of NPA, Net profit and Advances (loan disbursed) have been taken for the banks for 4 years (i.e. from 2011-12 to 2014-

15).

Research Tool Applied

For the current study, t-test (two samples with unequal variances) has been applied.





ANALYSIS AND INTERPRETATION

Testing of Hypothesis 1

Null Hypothesis - H01: There is no significance difference between the Profits to NPA ratios of the two banks. (Ho: μ1-μ2=0)

Table-1

Axis Bank Kotak Mahindra Bank

Year NPA Net Profit Profit to NPA NPA Net Profit Profit to NPA

2012 206.9 4,242.21 20.506 10.7 1085.053 101.406

2013 587.1 5,179.43 8.82 143.92 1360.7172 9.455

2014 753 6,217.67 8.257 301.33 1502.52 4.986

2015 963.8 7,357.82 7.637 177.79 1865.98 10.495


Table-2

Group Statistics

GROUP N Mean Std. Deviation Std. Error Mean

NPAPRR AXIS Bank 4 11.3050 6.15300 3.07650

Kotak Bank 4 31.5855 46.60831 23.30416


The above table gives the descriptive statistics for each of the two banks. The average NPA to Profit ratio is 11.30 in case of Axis

Bank while it is 31.58 in case of Kotak Mahindra Bank with a standard deviation of 6.15 and 46.60 respectively. The table shows

the difference in the NPA to Profit ratio of the two banks.

Table-3: Independent Samples Test

Levene's Test

for Equality

of Variances

t-test for Equality

of Means

F Sig. t d.f. Sig.

(2-tailed)

Mean

Difference

Std. Error

Difference

95% Confidence

Interval of the

Difference

Lower Upper

NPAP

RR

Equal variances

assumed 6.597 .042 -.863 6 .421 -20.28050 23.50635 -77.79847 37.23747

Equal variances

not assumed

-.863 3.105 .450 -20.28050 23.50635 -93.68318 53.12218


In above table, the significance (p value) of Levene's test is .042. This value is less than (0.05), and then the null hypothesis that

the variability of the two groups is equal can be rejected, implying that the variances are unequal. As per above table, assuming

unequal variances, the t value is 0.863. (We can ignore the sign of t for a two-tailed t-test.). At 5% significance level the value of t

statics (-0.862) falls in the rejection region. So the null hypothesis will be rejected.

Testing of Hypothesis 2

Null Hypothesis - H02: There is no significance difference between the NPA to loan disbursed ratios of the two banks. (Ho: μ1-

μ2=0)

Table-4

Axis Bank Kotak Mahindra Bank

Year NPA

Loan

Disbursed

NPA to loan

Disbursed (%) NPA

Loan

Disbursed

NPA to loan

Disbursed (%)

2012 206.88 27,371.71 0.755816863 10.7 9749.92 0.10974449

2013 587.12 27,206.42 2.158020151 143.92 9389.75 1.532735163

2014 752.99 33,100.80 2.27483921 301.33 4558.65 6.610070964

2015 963.78 51,016.27 1.889161978 177.79 13133.08 1.353757078






Table-5

Group Statistics

GROUP N Mean Std. Deviation Std. Error Mean

NPAADVANCE AXIS Bank 4 1.7695 .69479 .34739

Kotak Bank 4 2.4016 2.87615 1.43808


The above table gives the descriptive statistics for each of the two banks. The average NPA to loan disbursed ratio is 1.76 in case

of Axis Bank while it is 2.40 in case of Kotak Mahindra Bank with a standard deviation of 0.69 and 2.87 respectively. The table

shows the difference in the NPA to loan disbursed ratio of the two banks.

Table-6: Independent Samples Test

Levene's

Test

for Equality

of Variances

t-test for Equality of Means

F Sig. t d.f. Sig.

(2-tailed)

Mean

Difference

Std. Error

Difference

95% Confidence

Interval of the

Difference

Lower Upper

NPAADV

ANCE

Equal variances

assumed 4.069 .090 -.427 6 .684 -.63212 1.47944 -4.25218 2.98794

Equal variances

not assumed

-.427 3.349 .695 -.63212 1.47944 -5.07464 3.81040


In above table, the significance (p value) of Levene's test is .09. This value is more than (0.05), and then the null hypothesis that

the variability of the two groups is equal can be accepted, implying that the variances are equal. As per above table, assuming

equal variances, the t value is 0.427 (We can ignore the sign of t for a two tailed t-test.). At 5% significance level, the value of t

statics (-0.427) falls in the rejection region. So the null hypothesis will be rejected.

CONCLUSION

From the above discussion it can be said that the Average Profit to NPA ratio and the Average NPA to Loan Disbursed ratio is

comparatively high in case of Kotak Mahindra Bank but the variance is comparatively high (of Mahindra Bank) in

comparison to Axis Bank.

To conclude, Indian banks should take care to ensure that they give loans to credit worthy customers. In this context the dictum,

“Prevention is always better than cure” acts as the golden rule to reduce NPA’s.

The future of banks would be based on their capability to continuously build good quality assets in an increasingly competitive

environment and maintaining capital adequacy and stringent prudential norms. Reduction of NPAs in banking sector should be

treated as national priority item to make the Indian Banking system more strong, vibrant and geared to meet the challenges of

globalization.

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A STUDY ON IMPACT OF MACRO-ECONOMIC VARIABLES

ON INDIAN STOCK MARKET VOLATILITY

Simran Waraich19 Amanjot Kaur Sodhi20

ABSTRACT

Stock prices and their volatility have now become the widespread features of securities markets. The growing linkages of stock

market indices with inflation, liquidity, growth rate, crude oil prices, exchange rates etc. have given volatility a new

dimension - influence of macroeconomic variables. This research paper revisits the relationship between stock price and some

key macro-economic variables in India for the period 2010-2015 using quarterly time series data.

KEYWORDS

Stock Market, Stock Prices, Volatility, Liquidity, Macroeconomic Variables etc.

INTRODUCTION

In the year 1991, the government of India initiated the process of economic reforms. The deregulation of the Indian economic

system led to a tremendous change in the Indian capital market. Since then the Indian Capital Market has undergone metamorphic

reforms. Indian Capital Market is now being known amongst the most transparent, well-organized and clean markets across the

world. Stock market has gained significant importance from the economy point of view. It is a key driver of the economy’s

financial development and growth.

The Indian Stock Market has always exhibited dramatic movements. Form 3,739.69 points on 31st March 1999, Bombay Stock

Exchange (BSE) Sensitivity Index (SENSEX) had reached to...level points in March, 2015. At times, the stock prices have

appeared too volatile to be justified by changes in fundamentals. In the recent past, there have been perceptions that volatility in

the market has gone up; Inter and Intra-day volatility. According to a comprehensive analysis undertaken by SEBI - the volatility

has not gone up much in the recent past, as it has been perceived. Indian stock market provides a very high rate of return and

comparatively moderate volatility. Efficiency of Indian market appear to have improved in the past few years owing to contraction

in settlement cycles, introduction of derivative products, improvement in corporate governance practices etc. In addition, the stock

market is in many ways influenced by the domestic and international macroeconomic fundamentals. According to Aggarwal

(1981), “the rising indices in the stock markets cannot be taken to be a leading indicator of the revival of the economy in India and

vice-versa”. On the contrary, Shah and Thomas (1997) supported the idea that stock prices are a minor, which reflect the real

economy. Many more researchers have studied the interaction of share market returns and the macroeconomic variables and all

studies provide different conclusions.

Stock Market Volatility: Many factors like expected corporate earnings, interest rates, monetary flows, political stability and

liquidity within the banking system, drive stock prices. All these factors have the power to roil the stock markets. Merton Miller

(1991) the winner of the 1990 Nobel Prize in economics - writes in his book Financial Innovation and Market Volatility - “By

volatility public seems to mean days when large market movements, particularly down moves, occur. These precipitous market

wide price drops cannot always be traced to a specific news event. Nor should this lack of smoking gun be seen as in any way

anomalous in market for assets like common stock whose value depends on subjective judgment about cash flow and resale prices

in highly uncertain future. The public takes a more deterministic view of stock prices; if the market crashes, there must be a

specific reason.”

Macro-Economic Variables: The characteristics that describe a macro economy are usually referred to as the macroeconomic

variables. Macroeconomics is the study of the economy as a whole. It examines the cyclical moments and trends in economy wide

phenomenon, such as unemployment, inflation, economic growth, money supply, budget deficits and exchange rates etc. These

variables are pertinent to a broad economy at the national level and affect a large population rather than a few select individuals.

These are the key indicators of economic performance and are closely monitored by governments, businesses and consumers.

This research paper tries to explore whether the movement of Bombay Stock Exchange and National Stock Exchange’s indices is

the result of some selected macroeconomic variables. The study considers macroeconomic variables as Index of Industrial

production (IIP), Wholesale price Index (WPI), Cash Reserve Ratio (CRR), US Dollar Price (USD into INR), Crude Oil Prices,

Gross Domestic Product (GDP) and Bombay Stock Exchange’s and National Stock Exchange’s indices in the form of SENSEX

19Assistant Professor, Chandigarh Business School of Administration, Punjab, India, [email protected] 20Assistant Professor, Chandigarh Business School of Administration, Punjab, India, [email protected]







and Nifty CNX, NSE by using quarterly data spanning from April, 2010 to March, 2015. In the study ADF test and Regression

analysis have been used to see the effect of macroeconomic variables on BSE and NSE Indices.


In the past decades, many academicians, policy makers, practitioners and investors have attempted to foresee the relationship

between stock markets movement and macroeconomic variables. Several empirical studies have been undertaken to examine the

effect of macroeconomic variables on the stock prices.

Mukherjee and Naka (1995) by applying vector error correction model studied the relationship between Japanese Stock Market

on one hand and money supply, inflation, exchange rate and real economic activity and concluded that co integration indeed

existed; Pethe and Karnik (2000) studied the data for a period of 5 years to examine the relationship between stock market

indices and macro-economic variables. The study reveals the weak causality running from IIP to share price indices and the state

of economy had affected stock prices.

Naka, Mukherjee and Tufte (2001) studied the relationship between BSE Sensex and macroeconomic variables, which were IIP,

CPI, money market rates, and money supply from the period 1960 to 1995. The study concluded that five variables were co-

integrated and there exist long-term relationship among these variables by applying VECM. It was also concluded that domestic

inflation was most severe deterrent to stock performance; Ray and Vani (2003) applied VAR model and artificial neural network

to study stock market fluctuations and real economic factors in Indian stock market. A significance influence was found for fiscal

deficit and foreign investment in explaining stock market movement.

Gay, Robert D(2008) investigated the time-series relationship between stock market index prices and the macroeconomic

variables of exchange rate and oil price for Brazil, Russia, India, and China (BRIC) using the Box-Jenkins ARIMA model.

Although no significant relationship was found between respective exchange rate and oil price on the stock market index prices of

either BRIC country. In addition, there was no significant relationship found between present and past stock market returns,

suggesting the markets of Brazil, Russia, India, and China exhibit the weak form of market efficiency.

Ahmed (2008) analyzed the relationships between stock prices and macroeconomic variables vis-a-vis IIP, FDI, Exports, money

supply, exchange rate and interest rate. The study reveals that stock prices in India lead the economic activity except movement of

interest rates. Indian stock market seems to be influenced not only by performance but also by expected potential performances;

Sharma and Mahendru (2010) studied the impact of macroeconomic variables on stock prices. Multiple regression models were

used to study the impact. His study reveals that exchange rate and gold prices affect the stock prices while inflation and foreign

exchange reserves do not influence the stock prices.

Bayezid Ali Mohammad (2011) investigates the impact of changes in selected microeconomic and macroeconomic variables on

stock returns at Dhaka Stock Exchange. A Multivariate Regression Model computed on Standard OLS Formula has been used to

estimate the relationship. It was found that inflation and foreign remittance have negative influence and industrial production

index; market P/Es and monthly percent average growth in market capitalization have positive influence on stock returns;

Tripathi, Parashar & Jaiswal (2014) examined the impact of macroeconomic variables on different sectoral indices. It was

concluded that amongst all macroeconomic variables only Foreign Institutional Investment affects all sectoral indices however

rest of the macroeconomic variables selectively affect different indices in India.

Singh Anamika (2014), the purpose of the study was to examine the monetary policy impact on market volatility ARCH Model

had proven that NIFTY volatility is being influenced whenever monetary policy announced. CRR and SLR are negatively

correlated with market indices while Repo rate and Reverse Repo Rate are positively correlated; Ramanujam and Leela (2014)

analyzed the long-term relationship between CNX NIFTY and macroeconomic variables that is Exchange rate, index of industrial

production and GDP. Results reveals that GDP and exchange rate affect all NIFTY stock prices whereas negative correlation

exist between stock prices and index of industrial production.


With a view to accomplish the pre-determined objective of this research, different set of techniques and tests have been adopted.

ADF test is used to find the stationarity or non-stationarity variables of data series. Inferential statistics technique is used to infer

the results by using different methods like linear regression analysis, which create a mathematical model that can be used to

predict the values of a stock price of Bombay stock exchange indices based upon the values of macroeconomic variables. In other

words, we use the model to predict the value of Y when we know the value of X. Here, we used the sign-f to analysis the overall

significance of the sample regressions and t- test and p-value to check the individual significance of the macroeconomic variables.





OBJECTIVE OF STUDY

Studying the impact of Macroeconomic variables on Indian stock market. BSE SENSEX and NSE-CNX NIFTY have been

considered as representing Indian stock market.


Reliability: This study is based on the analysis of the secondary data that has been collected.

Accuracy: The result & conclusion of this study might not be accurate due to reliability of the secondary data &

limitation on the variables selected & the time span considered.

Time: A time span of only 5 years has been considered for examining the relation between macroeconomic variables

and Indian stock market.

Limited Variables: This study mainly focuses on selected independent variables, which may not completely represent

the macroeconomic variables.

DATA ANALYSIS

Table 1.1 presents the summary of data of all the variables and the indices w.e.f. April 2010 to March 2015 on quarterly basis.

Table-1.1: Summary of the Data Collected

Qu

art

er

Year

BS

E-S

ense

x

(ba

se 1

978

-

79

=1

00

)

CN

X N

ifty

(ba

se 1

995

= 1

00

) WPI

IIP

(b

ase

20

04

-

05

=1

00

)

CRR

(Avg.)

US $

into

INR

Crude Oil

Prices

(Rs. per

barrel)

GDP (Rs in Cr.

at market

price (at

current price)

Q1 Jun-10 17274.31 5178.5 139.2 157 5.96 45.72 3560.47 1762793

Q2 Sep-10 18549.18 5542.82 141.4 159.2 6 46.66 3510.08 1808963

Q3 Dec-10 20101.23 6040.92 144.2 166.7 6 45.32 3830.54 2079416

Q4 Mar-11 18594.01 5574.02 148.5 179 6 45.89 4511.91 2224454

Q1 Jun-11 18668.18 5601.31 152.5 167.9 6 45.28 4922.42 2067324

Q2 Sep-11 17399.57 5229.64 155.1 164.3 6 46.22 4717.38 2078195

Q3 Dec-11 16482.43 4948.89 157.2 168.7 6 51.51 5249.71 2345626

Q4 Mar-12 17203.26 5209.2 159.7 180.1 5.25 51.08 5648 2483801

Q1 Jun-12 16805.44 5098.4 164 167.5 4.75 54.57 5545.32 2315032

Q2 Sep-12 17639.79 5345.67 167.3 165 4.67 55.12 5674.05 2317116

Q3 Dec-12 18919.41 5753.07 168.7 172.2 4.33 54.2 5512.3 2637519

Q4 Mar-13 19495.19 5899.66 170.4 184.1 4.08 54.27 5690.6 2750952

Q1 Jun-13 19304.3 5848.78 172 165.8 4 55.81 5553.43 2546935

Q2 Sep-13 19326.12 5739.053 178.4 168.1 4 62.26 6682.62 2658622

Q3 Dec-13 20701.55 6153.127 180.6 170.9 4 61.92 6489.06 3002683

Q4 Mar-14 21093.49 6276.63 179.6 183.3 4 61.74 6408.32 3146833

Q1 Jun-14 23847.4 7126.91 181.8 173.3 4 59.82 6359.73 2980178

Q2 Sep-14 26230.65 7839.211 185.8 170.3 4 60.59 6083.53 3080059

Q3 Dec-14 27478.13 8226.68 181.2 174.2 4 61.97 4609.25 3166327

Q4 Mar-15 28268.08 8644.087 176.3 189.5 4 62.32 3218.25 3314644


Checking Stationarity

Stationarity as a condition for the time series data was checked individually for all the variables. For the purpose unit root test was

applied with augmented dickey fuller unit root test and the results have been stated in table 1.2. The results indicate the t statistics

and p value of Augmented Dickey Fuller Unit Root Test of the level at which each variable was found stationary.





Table-1.2: ADF Level

Variable Null Hypothesis Variables Found To

Be Stationary At:

Augmented Dickey Fuller

Unit Root Test Statistics

t- statistics P value

BSE-Sensex H0: BSE-Sensex has a unit root 1st difference, none -2.582467 0.0131

CNX Nifty H0: CNX Nifty has a unit root 1st difference, none -2.531118 0.0147

WPI H0: WPI has a unit root 1st difference, trend

and intercept

-4.125576 0.0241

IIP H0: IIP has a unit root 1st difference, none -11.00585 0.0000

CRR H0: CRR has a unit root Level, none -2.270263 0.0259

US $ into INR H0: US $ into INR has a unit root 1st difference, none -3.811202 0.0007

Crude oil Prices H0: Crude oil Prices has a unit root 2nd difference, none -6.215605 0.0000

GDP H0: GDP has a unit root 1st difference, intercept -5.271572 0.0008


Regression Analysis

(A) Effect of various economic indicators on BSE SENSEX

To study the effect of various economic indicators including WPI, IIP, CRR, US $ into INR, Crude oil Prices and GDP on BSE

Sensex multiple regression technique has been applied. The following regression equation was used depending upon the level at

which each variable was found stationary.

D(BSE_SENSEX) C D(WPI) D(IIP) CRR D(US_$ _INR) D(CRUDE_OIL_PRICES,2) D(GDP)

The results shown in table 1.3 as below were obtained:

Table-1.3: Simple Regression between Δ SENSEX and Macroeconomic Variables

Dependent Variable: D(BSE_SENSEX)

Method: Least Squares

Date: 07/23/15 Time: 21:23

Sample (adjusted): 12/01/2010 3/01/2015

Included observations: 18 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 4394.307 1128.420 3.894212 0.0025

CRR -770.0113 243.3252 -3.164537 0.0090

D(CRUDE_OIL_PRICES,2) 0.580357 0.461140 1.258527 0.2343

D(GDP) 0.003969 0.002108 1.883072 0.0864

D(IIP) -76.13359 44.10515 -1.726184 0.1123

D(US_$_INTO_INR) -355.7803 105.1494 -3.383570 0.0061

D(WPI) -33.96646 98.91269 -0.343398 0.7378

R-squared 0.683518 Mean dependent var 539.9389

Adjusted R-squared 0.510891 S.D. dependent var 1157.035

S.E. of regression 809.1874 Akaike info criterion 16.51524

Sum squared resid 7202627. Schwarz criterion 16.86150

Log likelihood -141.6372 Hannan-Quinn criter. 16.56298

F-statistic 3.959514 Durbin-Watson stat 1.642749

Prob(F-statistic) 0.023417


Interpretation

Significance of Independent Variables

To check whether the independent variables WPI, IIP, CRR, US $ into INR, Crude oil Prices and GDP significantly influence the

dependent variable i.e. BSE SENSEX, the null hypothesis taken was:

H0: variables WPI, IIP, CRR, US $ into INR, Crude oil Prices and GDP are insignificantly explaining the variations in BSE

SENSEX





As shown in table 1.3 amongst all variables CRR and US $ into INR have a p value less than .05 which means we cannot accept

the null hypothesis and we can conclude that CRR and US $ into INR have been found to be significantly influencing the

dependent variable i.e. BSE SENSEX. All other variables have a p value >.05 which means we accept the null hypothesis that the

variables WPI, IIP, Crude oil Prices and GDP do not influence the dependent variable i.e. BSE SENSEX

Checking the Model Efficiency

The adjusted R square as given in table 1.3 is .510891 which means 51.08% of change in BSE SENSEX is caused by the

independent variables WPI, IIP, CRR, US $ into INR, Crude oil Prices and GDP taken together and the rest 48.92% change is due

to other variables beyond the preview of the study.

Checking the Model Fitness

H0: Model is not a good fit/ model is insignificantly explaining the dependent variable i.e. BSE SENSEX. The f statistics and p

value as given in table 4 indicates the model fitness. Since p value = 0.023417 which is less than .05 we cannot accept the null

hypothesis which means model is significantly explaining the dependent variable i.e. BSE Sensex.

(B) Effect of various Economic Indicators on CNX NIFTY

Taking CNX NIFTY as dependent variable and various economic indicators including WPI, IIP, CRR, US $ into INR, Crude oil

Prices and GDP as the independent variables the regression analysis was done and following result(as shown in table 1.4) were

obtained

Table-1.4: Simple Regression between Δ SENSEX and Macroeconomic Variables

Dependent Variable: D(CNX_NIFTY)

Method: Least Squares

Date: 07/23/15 Time: 21:32

Sample (adjusted): 12/01/2010 3/01/2015

Included observations: 18 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 1296.664 349.1000 3.714306 0.0034

CRR -216.2761 75.27765 -2.873045 0.0152

D(CRUDE_OIL_PRICES,2) 0.184746 0.142663 1.294982 0.2218

D(GDP) 0.001187 0.000652 1.820575 0.0960

D(IIP) -23.51090 13.64484 -1.723062 0.1128

D(US_$_INTO_INR) -115.2357 32.53012 -3.542430 0.0046

D(WPI) -24.66022 30.60068 -0.805872 0.4374

R-squared 0.691445 Mean dependent var 172.2926

Adjusted R-squared 0.523142 S.D. dependent var 362.5214

S.E. of regression 250.3388 Akaike info criterion 14.16881

Sum squared resid 689364.7 Schwarz criterion 14.51506

Log likelihood -120.5193 Hannan-Quinn criter 14.21655

F-statistic 4.108339 Durbin-Watson stat 1.507475

Prob(F-statistic) 0.020738

Interpretation

CRR and US $ into INR found to be significantly influencing the dependent variable i.e. CNX NIFTY.

Economic indicators including WPI, IIP, Crude oil Prices and GDP have been found to be insignificantly influencing

CNX NIFTY.

52.31% of change in CNX NIFTY is caused by the independent variables WPI, IIP, CRR, US $ into INR, Crude oil

Prices and GDP taken together and the rest 47.79% change is due to other variables beyond the preview of the study.

As p value of F statistics is less than .05 we can conclude that model is a good fit i.e. model is significantly explaining

the dependent variable i.e. CNX NIFTY.

CONCLUSION

The results of this study should not be treated as conclusive. There are other important factors like cost of equity capital, asset

valuation, industry analysis, a firm's management and operational efficiency etc., that account for any changes in the stock prices.

Any investor while making investment decisions must consider all relevant factors and sources of information.





REFERENCES

1. Aggarwal, R. (1981). Exchange Rates and Stock Prices: A study of U.S Capital Market under Floating Exchange Rates,

Akron Business and Economic review, 7-12.

2. Ahmed S. (2008). Aggregate Economic Variables and Stock Markets in India. International Research Journal Of

Finance and Economics, 14.

3. Bayezid, Ali Mohammad. (2011, May). Impact of Micro and Macroeconomic Variables on Emerging Stock Market

Return: A Case on Dhaka Stock Exchange (DSE). Interdisciplinary Journal of Research in Business, 1(5), 08-16.

4. Chen, Roll, & S., Ross. (1986). Economic forces and Stock Market. Journal of Business, 59, 383-403.

5. Gay, Robert D. (2008, March). Effect of Macroeconomic Variables On Stock Market Returns For Four Emerging

Economies: Brazil, Russia, India, And China. International Business & Economics Research Journal, 7(3).

6. Mukherjee, T. K., & Naka. (1995). Dynamic Relations between the Macroeconomic Variables and Japanese Stock

Market-An Application of a Vector Error Correction Model. Journal of Empirical Research, 18, 223-237.

7. Pethe, A., & Karnik, A. (2000). Do Indian stock markets matter?-Stock Market Indices and Macro Economic Variables.

Economic and Political Weekly, 349-356.

8. Ray, P., & Vani, V. (2003). What moves Indian Stock Market: A study on a linkage with Real Economy in the post

reform era (Working Paper), 1-19. Kolkata: National Institute of Management.

9. Ramanujam, V., & Leela, L. (2014). The effect of Macroeconomic Variables on Stock Prices in Emerging Stock

Market: Empirical Evidence from India. Indian Journal of Applied Research, 4(6).

10. Sharma, Gagandeep, & Mandeep, Mahendru. (2010). Impact of Macro-Economic Variables on Stock Prices In India.

Global Journal of Management and Business Research, 10(7).

11. Singh, Anamika. (2014, October). A Study of Monetary Policy Impact on Stock Market Returns. IRJA-Indian

Research Journal, 1(5).

12. Sanningammanavara, K. Kumar Kiran, & Rakesh. (2014). Macro-Economic Forces and Indian Stock Market: An

Empirical Relation. International Journal of Commerce, Business and Management, 3(3).

13. Tripathi, L. K., Prashar, & Arpan, Swati Jaiswal. (2014). Impact of Macroeconomic Variables on Sectoral Indicies in

India. Pacific Business Review International, 6(12).

14. Quarterly data of cash reserve ratio, exchange rate (US dollar price) was taken from Reserve Bank of India (RBI)

database site. Retrieved from http://dbie.rbi.org.in/

15. Bombay stock exchange indices were taken from Bombay Stock exchange Limited site. Retrieved from

http://www.bseindia.com/

16. National Stock Exchange Indices were taken from the National Stock Exchange Limited site. Retrieved from

http://www.nseindia.com/

17. Quarterly Index of industrial production, wholesale price index, GDP was taken from Central Statistical Office site. Retrieved from http://mospi.nic.in/Mospi_New/site/home.aspx

18. Quarterly crude oil prices data was taken index mundi site. Retrieved from http://www.indexmundi.com/india/

19. Retrieved from

http://www.academia.edu/8066365/A_Study_of_the_Effect_of_Macroeconomic_Variables_on_Stock_Market_Ind...

20. Retrieved from

http://www.researchgate.net/publication/268435848_Impact_of_Micro_and_Macroeconomic_Variables_on_Eme...

http://dbie.rbi.org.in/

http://www.bseindia.com/

http://www.nseindia.com/

http://mospi.nic.in/Mospi_New/site/home.aspx

http://mospi.nic.in/Mospi_New/site/home.aspx

http://www.indexmundi.com/india/

http://www.indexmundi.com/india/

http://www.academia.edu/8066365/A_Study_of_the_Effect_of_Macroeconomic_Variables_on_Stock_Market_Ind

http://www.researchgate.net/publication/268435848_Impact_of_Micro_and_Macroeconomic_Variables_on_Eme





21. Retrieved from

http://www.researchgate.net/publication/263620295_The_Impact_of_Macroeconomic_Variables_on_Stock_Pri...

22. Retrieved from

http://www.academia.edu/1368026/Impact_of_Micro_and_Macroeconomic_Variables_on_Emerging_Stock_Market...

23. Retrieved from

http://www.researchgate.net/publication/277474665_A_Comprehensive_(Micro_and_Macro)_Determination_of...

24. Retrieved from http://stats.stackexchange.com/questions/64612/how-do-you-interpret-results-from-unit-root-tests-wit...

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(sd/-)

(Editor-In-Chief)


Editor-In-Chief




(Mobile): +91-09419216270 – 71

[email protected]

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http://www.researchgate.net/publication/263620295_The_Impact_of_Macroeconomic_Variables_on_Stock_Pri

http://www.academia.edu/1368026/Impact_of_Micro_and_Macroeconomic_Variables_on_Emerging_Stock_Market

http://www.researchgate.net/publication/277474665_A_Comprehensive_(Micro_and_Macro)_Determination_of

http://stats.stackexchange.com/questions/64612/how-do-you-interpret-results-from-unit-root-tests-wit







AN ANALYSIS ON THE PAYMENT OF PROPERTY TAX AND REBATE

UNDER THE NEW SCHEME WITH RESPECT TO BANGALORE DISTRICT

Selvi S.21 Dr. Justin Nelson Michael22

INTRODUCTION

Property tax is a tax that an owner of property is liable to pay on the value of property being taxed. Property Tax in India is levied

on residents by local municipal authorities to upkeep the basic civic Services in the city. Throughout the world, property taxes are

commonly employed as the main source of locally generated revenue. In Bangalore, property taxes are collected under New SAS.

When SAS was introduced in Bangalore, there was lot of transparency and determining and paying of tax was made easy. The

present study is to analyze the variables that influence the payment of property tax and availing of rebate.

STATEMENT OF PROBLEM

It is generally felt that when there is increase or decrease in the number of earning members in the family the tax paid or payable

will be prompt. This also results in the early payment of tax and enjoys the rebate facilities provided by the government. There

are no much study so far done to give clarity on the subject, therefore the researcher has undertaken in order to know whether the

number of earning members in the family influences the early payment of tax and avail rebate. An exploratory research has been

conducted wherein a structured questionnaire was administered to collect responses from 108 property owners based on cluster

based convenience sampling. The data so collected has been analyzed in this chapter in order of the objective of the study.


Gosh Debjani (April 2008) in his study entitled, “ Best practices on property tax reforms in India”, published by Ministry of

Urban Development, Government of India examined the problems associated with the present system of property tax assessment,

and suggested a framework to formulate a reform strategy. There has been slow growth in revenue from property tax, which is the

major source of revenue for most of the Urban Local Bodies. Such revenue can be increased by establishing a simple, transparent,

non-discretionary and equitable property tax regime. Sample of 13 cities were considered and both primary and secondary data

were collected. The study identified the two common method of assessment of property tax are Annual Ratable Value and Capital

Valuation system.

Prasad Krishna (January 2009) in his article entitled “A year of financial slowdown for Bruhat Bangalore Mahanagara

Palike”, published in The Hindu Newspaper highlighted the reasons for the financial crunch faced by BBMP. The year 2008 was

a year of financial slowdown for BBMP as two of its major sources of revenue, property tax and advertisement tax hits the ground

due to lack of clarity about the procedure for assessment and collection, on the part of the State Government due to the

controversies arising over adoption of a people friendly system for collection of property tax, the State Government would not

collect the estimated amount of Rs 605 crore. In addition, the tax from advertisement reduced drastically after the Government of

Karnataka decided to ban hoardings and reduce irregularities surrounding sanctions and granting of advertisement licenses.

BBMP expected to generate Rs 91 crore for the year 2008-09, but failed to do so. The BBMP had also expected to generate at

least Rs 10 crore through fines or penalties by regularizing unauthorized construction sites under Akrama-Sakrama scheme, but

this scheme also turned out to be a failure as the Karnataka Government failed to come out with the improved version of the

scheme.

RESEARCH DESIGN

Research design provides the glue that holds the research project together. A design is used to structure the research to show how

all of the major parts of the research project, methods of assignment to work together to try to address the central research

questions.

Type of Research: Descriptive and Analytical research is the most appropriate for this study. The descriptive research studies are

those studies, which is concerning the characteristics of a group.

Tools for Data Collection: Primary data is used in this study. Structured questionnaires were delivered directly to individual to

collect the information.

21Assistant Professor, Kristu Jayanti College, Karnataka, India, [email protected] 22Associate Professor, Kristu Jayanti College, Karnataka, India, [email protected]







The Research Objectives Pursued are:

To bring out the significant relationship between the number of earning members in the family & increase in property

tax payable

To understand the relationship between the number of earning members in the family and early payment of tax to avail

the rebate.

Sample Size: Empirical data for this study were gathered from the property owners from different zones in Bangalore district. In

total 278 surveys were circulated and a response of 108 were received; signifying a response rate of 38.8 % Respondents

predominantly were from different clusters of various zones and a total 10 questions in the questionnaire were given to analyze the

respondents willing ness to pay tax on time and avail tax rebate.


The study observes the following limitations. Not all the zones were included while the study was undertaken. Bangalore is a vast

district with around 8 zones; therefore, collection of data was not possible from all the clusters in the zone. This may however lead

to biased inferences.

DATA ANALYSIS

Data is analyzed from the response given by the respondents across the zones, initially data is tabulated and the responses are put

the form of charts and results are arrived using statistical tool Chi-Square Test.

Table-1


Table-2






Table-3


Table-4


The number of residential property owned will have an effect on the tax burden. The response with regard to the number of

residential property owned has been tabulated below:

Table-5






Table-6


Table-7


Table-8






The respondents who have paid the property tax early could claim a rebate of 5%. They were enquired, if they had made an early

payment to determine the acceptance level of the new scheme.

Table-9


Table-10


It can be inferred from the table and graph that 75 which is 69.4% of the respondents paid their property tax early to earn a rebate

of 5% and 33 which is 30.6% of the respondents did not pay their property tax early.

Table-11






Table-12


FINDINGS

The following are the findings, which are made from the study:

Majority of the respondents (81.28%) were from working class and fall in the income category of 3-7Lakhs.

Majority of them had one or two earning members in the family.

46.3% of the respondents believe that the increase in property tax payable is because of the change in zonal location

whereas 34.3% are not sure if the increase is due to change in zonal classification

There is significant relationship between the number of earning members in the family and increase in property tax

payable under new scheme majority of them responded that the tax liability has been increased under the new scheme.

There is significant relationship between the number of earning members in the family and early payment of tax to avail

rebate of 5%, because the family with more working members has paid the tax on the specified date to avail 5% rebate.

SUGGESTIONS

As the study conducted is on the earning members in the family and its influence on the increase is tax, payable helps one to

understand that the liability of tax has increased. This does not mean that the earnings members in the family have decreased or

increased. Further to prompt the property owners to pay tax before the deadline, initiatives may be undertaken to increase the

rebate percentage as not all are keen in making the payment of tax and not all are willing to enjoy the privileges. Taxpayers are

willing to pay tax anytime during the year as the rebate percentage is too low.

CONCLUSION

The property owners have accepted the new scheme of Self-Assessment Scheme. The new scheme has brought in lot of

transparency and it is simple to understand. There has been change in the method of assessment, zonal location, depreciation rate

etc. these changes have both positive and negative impact on the property owners.

REFERENCES

1. Kothari, C. R. (2003). Research Methodology, pp. 26-50. New Delhi: Himalaya Publishers.

2. Srivastava, U. K. (et. Al.). (2000). Quantitative Techniques For Management Decisions (2nd Edition), pp. 26-80. New

Delh: New Age International (P) Limited.

3. Aggarwal, Y. P. Statistical Methods (Revised Edition), pp.186-200. New Delhi: Sterling Publications (P) Limited.

4. Alan, Bryman (et. Al.). (2011). Business Research Methods’ (3rd Edition), pp. 372-374. Oxford University Press.

5. (1997). Water and Sewerage Project Report. Ahmedabad: Ahmedabad Municipal Corporation. Gujarat. ·

6. Bagchi, Amaresh. (1993). Financing Urban local Governments- Issues and Approaches. New Delhi: National Institute

of Public Finance and Policy (NIPFP) Occasional Paper, NIPFP.

7. Bagchi, S. (1999). Myth of Empowering Urban Local Bodies. Economic and Political Weekly, XXXIV(37).

8. Bagchi, S. (1999). Financing and Cost Recovery of Urban Water Supply and Sanitation: A Case Study ofSurat City.

Urban India, XIX(2).

9. Bagchi, S. (2000). Haryana- Elected City Governments: Sm vival at Stake. Economic and Political Weekly,

XXXV(37).

10. Gosh, Debjani. (2008, April). Best practices on property tax reforms in India. Ministry of Urban Development,

Government of India.

*****





RECENT TRENDS IN FINANCIAL MANAGEMENT

IN DEVELOPING SMALL BUSINESS ENTERPRISES

Manmohan Tiwari23 Dr. K. Sirisha24

ABSTRACT

Business concern needs finance to meet their requirements in the economic world. Any kind of business activity depends on

the finance. Hence, it is called as lifeblood of business organization. Whether the business concerns are big or small, they

need finance to fulfill their business activities. In the modern world, all the activities are concerned with the economic

activities and very particular to earning profit through any venture or activities. The entire business activities are directly

related with making profit. Finance may be defined as the art and science of managing money. It includes financial service

and financial instruments. Finance also is referred as the provision of money at the time when it is needed. Finance function is

the procurement of funds and their effective utilization in business concerns. Main aim of any kind of economic activity is

earning profit. A business concern is also functioning mainly for earning profit. Profit is the measuring techniques to

understand the business efficiency of the concern. Profit maximization is also the traditional and narrow approach, which

aims at, maximizes the profit of the concern. Being an entrepreneur and managing your business finances is not an easy

combination of roles to take on. Yet, the earlier you start, the better it is.

They say everything comes at a price, and this is so true in the case of businesses where you need investments to earn your

profits. Getting your investment capital together is perhaps the most daunting task while starting a new venture. In addition,

this is where venture capitalists can come to your rescue. You must optimize your plans of attracting professional investment

in accordance with your business structure and practice. Presently, venture capital is one of the simplest routes of putting

your investment together.

KEYWORDS

Financial Management, Challenges, Small Business Enterprises, Venture Capitalists etc.

INTRODUCTION

Business concern needs finance to meet their requirements in the economic world. Any kind of business activity depends on the

finance. Hence, it is called as lifeblood of business organization. Whether the business concerns are big or small, they need

finance to fulfill their business activities. In the modern world, all the activities are concerned with the economic activities and

very particular to earning profit through any venture or activities. The entire business activities are directly related with making

profit. (According to the economics concept of factors of production, rent given to landlord, wage given to labour, interest given

to capital and profit given to shareholders or proprietors), a business concern needs finance to meet all the requirements. Hence,

finance may be called as capital, investment, fund etc., but each term is having different meanings and unique characters.

Increasing the profit is the main aim of any kind of economic activity.

Finance may be defined as the art and science of managing money. It includes financial service and financial instruments. Finance

also is referred as the provision of money at the time when it is needed. Finance function is the procurement of funds and their

effective utilization in business concerns.

The concept of finance includes capital, funds, money, and amount. However, each word is having unique meaning. Studying and

understanding the concept of finance become an important part of the business concern.

According to Oxford dictionary, the word ‘finance’ connotes ‘management of money’. Webster’s Ninth New Collegiate

Dictionary defines finance as “the Science on study of the management of funds’ and the management of fund as the system that

includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities.

According to the Encyclopedia of Social Sciences, “Corporation finance deals with the financial problems of corporate

enterprises. These problems include the financial aspects of the promotion of new enterprises and their administration during early

development, the accounting problems connected with the distinction between capital and income, the administrative questions

23 Assistant Professor, Department of MBA, Swarna Bharathi Institute of Science and Technology, Telangana, India,

[email protected] 24 Assistant Professor, Department of MBA, Swarna Bharathi Institute of Science and Technology, Telangana, India,

[email protected]







created by growth and expansion, and finally, the financial adjustments required for the bolstering up or rehabilitation of a

corporation which has come into financial difficulties”.

Financial management is an integral part of overall management. It is concerned with the duties of the financial managers in the

business firm. The term financial management has been defined by Solomon, “It is concerned with the efficient use of an

important economic resource namely, capital funds”. The most popular and acceptable definition of financial management as

given by S.C. Kuchal is that “Financial Management deals with procurement of funds and their effective utilization in the

business”.

Howard and Upton: Financial management “as an application of general managerial principles to the area of financial decision-

making.

Weston and Brigham: Financial management “is an area of financial decision-making, harmonizing individual motives and

enterprise goals”.

Joshep and Massie: Financial management “is the operational activity of a business that is responsible for obtaining and

effectively utilizing the funds necessary for efficient operations. Thus, Financial Management is mainly concerned with the

effective funds management in the business. In simple words, Financial Management as practiced by business firms can be called

as Corporation Finance or Business Finance.

OBJECTIVES OF FINANCIAL MANAGEMENT

Effective procurement and efficient use of finance lead to proper utilization of the finance by the business concern. It is the

essential part of the financial manager. Hence, the financial manager must determine the basic objectives of the financial

management. Objectives of Financial Management may be broadly divided into two parts such as:

Profit Maximization

Main aim of any kind of economic activity is earning profit. A business concern is also functioning mainly for earning profit.

Profit is the measuring techniques to understand the business efficiency of the concern. Profit maximization is also the traditional

and narrow approach, which aims at, maximizes the profit of the concern. Profit maximization consists of the following important

features.

Profit maximization is also called as cashing per share maximization. It leads to maximize the business operation for

profit maximization.

Ultimate aim of the business concern is earning profit; hence, it considers all the possible ways to increase the

profitability of the concern.

Profit is the parameter of measuring the efficiency of the business concern. Therefore, it shows the entire position of the

business concern.

Profit maximization objectives help to reduce the risk of the business.

Favourable Arguments for Profit Maximization

The following important points are in support of the profit maximization objectives of the business concern:

Main aim is earning profit.

Profit is the parameter of the business operation.

Profit reduces risk of the business concern.

Profit is the main source of finance.

Profitability meets the social needs also.

Unfavourable Arguments for Profit Maximization

The following important points are against the objectives of profit maximization:

Profit maximization leads to exploiting workers and consumers.

Profit maximization creates immoral practices such as corrupt practice, unfair trade practice, etc.

Profit maximization objectives leads to inequalities among the stakeholders such as customers, suppliers, public

shareholders, etc.





Drawbacks of Profit Maximization

Profit maximization objective consists of certain drawback also:

It is vague: In this objective, profit is not defined precisely or correctly. It creates some unnecessary opinion regarding

earning habits of the business concern.

It ignores the time value of money: Profit maximization does not consider the time value of money or the net present

value of the cash inflow. It leads certain differences between the actual cash inflow and net present cash flow during a

particular period.

It ignores risk: Profit maximization does not consider risk of the business concern. Risks may be internal or external

which will affect the overall operation of the business concern.

Wealth Maximization

Wealth maximization is one of the modern approaches, which involves latest innovations and improvements in the field of the

business concern. The term wealth means shareholder wealth or the wealth of the persons those who are involved in the business

concern. Wealth maximization is also known as value maximization or net present worth maximization. This objective is a

universally accepted concept in the field of business.

Favourable Arguments for Wealth Maximization

Wealth maximization is superior to the profit maximization because the main aim of the business concern under this

concept is to improve the value or wealth of the shareholders.

Wealth maximization considers the comparison of the value to cost associated with the business concern. Total value

detected from the total cost incurred for the business operation. It provides extract value of the business concern.

Wealth maximization considers both time and risk of the business concern.

Wealth maximization provides efficient allocation of resources.

It ensures the economic interest of the society.

Unfavourable Arguments for Wealth Maximization

Wealth maximization leads to prescriptive idea of the business concern but it may not be suitable to present day

business activities.

Wealth maximization is nothing, it is also profit maximization, and it is the indirect name of the profit maximization.

Wealth maximization creates ownership-management controversy. Management alone enjoys certain benefits.

The ultimate aim of the wealth maximization objectives is to maximize the profit.

Wealth maximization can be activated only with the help of the profitable position of the business concern.

ROLE OF STRATEGY IN THE BUSINESS

Why Your Financial Strategy is Essential for Your Business

Being an entrepreneur and managing your business finances is not an easy combination of roles to take on. Yet, the earlier you

start, the better it is. Small businesses in India do not spend adequate time to manage their finances early on, and this does create

an issue for the survival of these businesses. However, more and more businesses are realizing its significance and trying to tackle

this problem head on.

How Small Businesses manage their Company’s Finances

When Intuit India commissioned a survey on small businesses, and asked around 350 small businesses about the company’s

priorities and what they could have done differently, they came up with some interesting answers. Around 78% wished to improve

their financial management skills in the financial year. Nearly 75% of small business owners we spoke to are prioritizing

investment in financial management for better visibility and control of their business. In addition, almost 75% of small businesses

understand the need to educate themselves on financial management – from the point of view of areas of investments, and the

associated areas of impact. This trend is seen even among companies that have been in existence for a few years, and is certainly

not just an issue faced by the new companies alone.





When Managing Finances on Time Matter

Being an entrepreneur and managing your business finances is not an easy combination of roles to take on. Yet, the earlier you

start, the better it is.Small businesses in India do not spend adequate time to manage their finances early on, and this does create

an issue for the survival of these businesses. However, more and more businesses are realizing its significance and trying to tackle

this problem head on.

Therefore, what stops business owners from taking an active interest in financial management early on? This is a key cultural

barrier. Traditionally businesses have depended on CA’s and accountants to take care of their financial requirements. Conversely,

the accountants commonly have limited access to business processes and objectives. Fallout is that accountants and bookkeepers

often retrofit generic accounting tools into the business. This often limits the business for opportunities to be flexible and agile in

financial management processes.

Small business owners need to acknowledge the fact that adopting financial tools does not necessarily mean scaling down the role

of an accountant, but in truth, it enhances the productivity of the accountant.

When asked why they needed to spend more time with financial management now vs. when they started up, around 92% of them

have cited business expansion as the reason for getting their finances in shape. Some other reasons cited are more invoicing

(71%), aggressive marketing (64%), and more customers than expected (63%).

54% of business owners felt that the first year of operations was the most difficult because they did not invest in financial

management. The majority said they eventually had to invest time in understanding the financials of a larger, more complex

business.

Accounting: From Support Function to Strategic Advantage

Defining a financial management goal at the onset of your business makes a lot of sense for a business owner. What you see is

what you believe, and what you believe is what you work for.

Intuit India’s Vice President and Managing Director, Nikhil Arora, said, ‘Small businesses need to understand the importance of

having clear visibility of their finances, only then will they be able to make informed decisions for the betterment of their business.

Visibility enables business owners to incorporate better tools and processes into their existing systems. If executed well financial

management will evolve from a mere support function to a strategic advantage.’

Therefore, here are some starting points for small biz owners:

At the end of financial year, take stock of your finances,

At the beginning of the new financial year, check if you have the right tools to check financial health,

Set new financial goals for the new financial year,

First three years are important to set your financial management vision,

Financial planning at the right time can take your business ahead, so don’t sit on taking those firm decisions,

Invest in technology. Cloud, with its ease of access and low cost, can be the right partner for your small company.

For an insightful journey of being a small biz entrepreneur, read our white paper, Financial Management – An Essential Tool for a

Healthy Business.

The white paper, commissioned by Intuit India, reveals essential data on financial management trends and practices amongst small

business in India. “Financial Management – An Essential Tool for a Healthy Business,” represents data collected via qualitative

and quantitative interviews with 350 Indian small businesses. The small businesses researched have a full-time employee strength

ranging from one to 99 and annual revenue falling in the range of less than INR 60 crores.

FIVE MOST IMPORTANT FINANCIAL MANAGEMENT TRENDS FOR SMALL BUSINESSES

Amongst the various challenges that small business owners face, one of the most important ones is the efficient management of

finances. While starting a business, revenue fluctuations are common and owners struggle to have a steady income. Rising

manpower costs and spends on technology add to the burden of managing finances better. To ease up their life, small business

owners can follow the below financial management tips which will help them to sail through initial finance-related challenges and

even help them foresee them. Tapping into the latest technological solutions at the earliest will prove helpful and business owners

should not ignore them.

http://www.intuit.in/





Cloud Computing Solutions

Latest reports suggest that more and more small businesses are adopting for finance management solutions available on

cloud due to the many free or low-cost options available and lower barriers to entry. The trend is fast catching on as

spending on technology is proving to be far more affordable instead of hiring more people.

Managing bills and finances in it is a complicated task and can get stressful as well. Many companies are seeing the

opportunity to help small business in this area. There are several accounting software available on cloud which help in

not only sorting out the finances better but also help in taking effective business decisions.

Supply Chain Management

To efficiently manage supply chain, small business owners should ensure that there is tight supervision in the process and

sees to it that they rule out the possibilities of intermediaries who may add up to the extra costs. Efficient supply chain

management would be more prevalent to B2C. Such businesses should reassess the supply chain process from time to

time.

Being Prepared for Risky Times

The global financial crisis in 2008 has taught businesses to be prepared for all possible type of risks. Hence, risk

assessments should be an integral part of business and finance planning. Small businesses should be extremely careful

while managing cash flow and ensure they have a risk strategy in place in case there is any turbulence in the business

environment.

Go Paperless

One can be surprised with the amount of saving one can do by deciding to go paperless. Will it not only ensure cost

reduction in the business but will also help you do your bit for the environment. Clients will love to collaborate with

businesses, which are more aware of the societal and environmental needs.

Latching on to BYOD trend

It is unlikely that the Bring Your Own Device (BYOD) bug has not bitten new businesses. Smart entrepreneurs are using

and promoting the use of gadgets like smartphones; tablets during work hours, which help them, close on things faster.

An AMI report states that spending on smart phones in India among SMBs increased steadily. According to AMI’s 2013

India SMB ICT & Cloud Services Tracker Overview, 55% of small businesses and 43% of medium sized businesses

currently have BYOD policies implemented. The report also states that SMBs enjoy several cost benefits with the

implementation of such policies. These include cost savings on hardware, increased employee productivity, as they are

able to access their devices anytime anywhere.

FOUR NEW TRENDS TO ATTRACT VENTURE CAPITALISTS

They say everything comes at a price, and this is so true in the case of businesses where you need investments to earn your profits.

Getting your investment capital together is perhaps the most daunting task while starting a new venture. In addition, this is where

venture capitalists can come to your rescue. You must optimize your plans of attracting professional investment in accordance

with your business structure and practice. Presently, venture capital is one of the simplest routes of putting your investment

together. Attracting venture capitalists to invest in your business, however, is not a piece of cake and you must be aware of certain

administrative control these capitalists will inevitably exert on your venture. However, keeping the willingness of venture

capitalists in undertaking high-risk ventures, there are a few points to be kept in mind to almost surely attracting them to invest in

yours.

Propose Your Business and Showcase Your Team

The first thing to keep in mind is creating an impressive value proposition. Your business must be unique enough to stand out

among the thousands of start-ups being born every day. Determining consumer interest is something many of these capitalists will

look at and putting forth a sample output of your business can be intriguing for them. You must also keep track of your market

opportunities since it will be a big issue for the venture capitalists in deciding whether to invest in your business or not. Prahar

Shah, CEO of Mobee, emphasizes the relevance of recognizing your market potential. Future profit is a basic thing any business

personnel will look into.





Along with your business plan, however, investors will also be looking out for a team of professionals that are capable of

executing the business motives and achieving the targeted goals. Besides taking your venture forward, a team of diversely talented

individuals with strong essences of passion, tenacity, and commitment is sure to attract many an investor to dabble in your

venture.

Promote Your Product

Discussing the potential of investing in your research and development is a strict no-no. Capitalists will only be interested in

investing in a product that is ready for the market. You must defend your product or service as filling a specific market void and

capable of disrupting present market trends to your advantage. Keep your arguments factual while explaining the various aspects

of your products or services. Make a professional presentation, discussing aspects such profitability, repeatability, non-replicable

nature and market sustainability.

Create a Buzz

We all know the benefits of networking. Networking also acts as a great tool for attracting elusive capital. Get talking with expats

and professionals from the industry you will venture. Promote your new venture subtly and create a buzz for your forthcoming

developments. Listen for relevant industry conversations that might be taking place on the digital space. In that light, small-scale

digital promotions are a great way to get people talking about your business. Television coverage or a mention in print journalism

can also help you catch the eyes of potential investors.

Start Small. Dream Big

Let us face it. Investors are always on the lookout for the next big thing. Do not target or even expect your dream capital to walk

up to your door. Start with smaller investments and slowly build up to your dream brand. Promote the social and cultural impacts

of your venture – these are factors venture capitalists will be keeping an eye out for. Your business venture must be grounded in

reality but preferably break into pop market trend.

Your new business is like a baby you put everything within your capabilities to nurture and nourish. The right kind of capital and

investment can make or break your dreams. Putting together an appropriate business model and proper investment are definitely

the most crucial factors in deciding the fate of your success.

REFERENCES

1. C., Paramasiva, & T., Subramanyam. (2013). Recent trends and challenges in Financial Management. New age

International Publications Limited.

2. Sudharshan, Reddy. (2013). Financial Management (3rd Revised Edition). Himalaya Publishing House Limted.

3. Chandra, Hariharan iyer. (2014). Financial Management Recent trends in Practical Application. International book

Publishers Private Limited.

4. Brian, Finch. (2014). Effective Financial Management Cresting. New Delhi: Success Source Books Publishers Private

Limited.

5. Retrieved from http://www.slideshare.net/sandeepkumarbondre/financial-management-wwwaccfilecom

6. Retrieved from http://newagepublishers.com/samplechapter/001683.pdf

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8. Retrieved from http://www.quickbooks.in/r/money-finance/small-beginnings-big-possibilities/

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20. Retrieved from http://www.intuit.in/html/time-to-finacial-health.html

21. Retrieved from http://janechiang.com/financial-management.html

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(Mobile): +91-09419216270 – 71

[email protected]

[email protected]

http://mvn.edu.in/mvnlms/mod/book/view.php?id=974

http://www.quickbooks.in/r/money-finance/5-financial-management-trends-for-small-businesses/

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http://www.bms.co.in/profit-maximization/

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http://mvn.edu.in/mvnlms/mod/book/view.php?id=971

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http://janechiang.com/financial-management.html

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https://relivingmbadays.wordpress.com/2013/04/28/objective-of

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http://www.dnaindia.com/money/report-85-small-business-owners-start-with-personal-savings-survey-208

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http://economictimes.indiatimes.com/small-biz/money/financial-management-critical-for-small-business

http://www.fisme.org.in/newsletters/Jan01_2015/

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http://www.ami-partners.com/blog/2013/06/04/lower-cost-mobile-phones-outpace-mobile-phone-giants-in-

http://www.franchiseindia.com/entrepreneur/article/features/ecosystem/latest/2/

http://www.mbaknol.com/financial-management/financial-management-definition-and-its-features/

http://www.ukessays.com/essays/finance/relative-merit-demerit-alternative-goals-of-finance-function-







A COMPREHENSIVE STUDY ON ROLE OF MICRO-FINANCE IN MSE’S

WITH SPECIAL REFERENCE TO DHARWAD DISTRICT IN KARNATAKA STATE

Abhinandan N.25 Dr. A. M. Kadakol26

ABSTRACT

Easy access to micro credit is significantly associated with small business survival. Easy access to microfinance is closely

associated with cordial relationship and regular contact with loan/field officer as well as regular participation in

microfinance. The appropriateness of loan size, proper utilization of loan given and a good repayment plan schedule are the

factors that make micro credit worthwhile for small business operators. This Research Paper focuses its attention on

investigating the effects of micro financing on small business survival, growth and expansion in Dharwad District. It intends

to contribute to the array of literature written by different scholars on Microfinance and MSEs development. Despite its

increasing roles, access to credit by MSEs remains one major constraint. This shows that micro finance activities are relevant

for the growth and development of Micro and Small-scale enterprises.

KEYWORDS

Micro-Credit, Micro-Finance, Small Scale Enterprises, Dharwad District etc.

INTRODUCTION

The economic development of any country depends upon the existence of a well-developed financial system. This is because the

finance and the other financial service required for the overall development of a country by providing an effective financial

system. Finance is basic to any economic activity, dealing with monetary transactions, for the deposits and advances with a

guarantee, for the depositors to repay the deposits as agreed upon. The basic philosophy of rural finance is the dispensation of

loans at a concessional rate through administrative control targeting the rural people engaged either in agricultural or non-

agricultural activities. However, it is felt that a large number of poverty-stricken people constitute a significant number remain the

ambit of institutional finance. In order to give a new approach to rural finance National Bank for Agricultural and Rural

Development (NABARD) had introduced the ‘self-help groups’ in 1992. This new approach in other words is known as micro

credit. In a country like India, where capital is scarce and unemployment is widespread, growth of Micro and small scale

industries is vital in order to achieve a balanced economic growth. Poverty and unemployment are two burning problems of the

country today. Micro and Small Scale Enterprises (MSEs) solves these two problems by providing employment, with lower

investments. The strength of MSEs lies in their wide spread dispersal in rural, semi-urban and urban areas, fostering

entrepreneurial base, shorter gestation period. Having recognized the significance of small-scale industries, the Government of

India has set up various institutions at different levels central, state, and local pursuing the policy of promotion and protection of

industries since independence.

MICROFINANCE

“The poor themselves can create a poverty-free world…. Credit can create self-employment instantaneously. Why wait for others

to create a job for you?” –Muhammad Yunus.

Micro finance is a form of financial services for entrepreneurs and small businesses lacking access to banking and related services.

The two main mechanisms for the delivery of financial services to such clients are:

Relationship-based models, is based on banking for individual entrepreneurs and small businesses; and

Group-based models, where several entrepreneurs come together to apply for loans and other services as a group.

The beginning of the Micro-finance movement is mostly closely associated with the economist Mohammed Yunus, who in the

early 1970’s was a professor in Bangladesh. In the midst of a countrywide famine, he began making small loans to poor families

in neighboring villages in an effort to break their cycle of poverty. The German technical agency, then called GTZ, took many

Indian officials from the Government of India (GOI), the Reserve Bank of India (RBI) and the National Bank for Agriculture and

Rural Development (NABARD) to Indonesia to show them the possibilities of lending to the poor through groups. In order to

enhance access to credit to the poor, since the mid-1980s, NGOs started experimenting with credit groups, like AWAKE,

25Research Scholar, Kousali Institute of Management Studies, Karnataka University, Karnataka, India, [email protected] 26 Associate Professor, Kousali Institute of Management Studies, Karnataka University, Karnataka, India,

[email protected]







MYRADA, SKS, an NGOs in Karnataka, Tamil Nadu, Andhra Pradesh since 1986 and PRADAN in Rajasthan since 1987, began

setting up Self Help Groups (SHGs) for encouraging savings and credit and training rural women. In 1992, the RBI approved a

pilot project of linking SHGs to banks, which eventually led to the SHG-Bank linkage program (SBLP) in 1996. The SBLP

received major policy and promotional support, both from the central and various state governments. It was scaled up nationwide

through support from NABARD and World Bank loans. By March 2011, around 7.46 million SHGs around India have been

linked with banks in what is the world’s single largest microfinance program.

Today microfinance is widely accepted as a “miracle cure” for eradication of poverty and other livelihoods, support services,

natural resource management, unemployment, malnutrition, ill health, disability, indebtedness. Micro-finance is a type of a

banking service that provide small-size financial services to all segments of the rural and urban population to unemployed or low

income individuals or groups who would otherwise have no other means of gaining financial services.

LITERATURE REVIEW

The challenges faced by small and medium enterprises (SMEs) in India are majorly that of financing. The vast majority of micro

and small enterprises (MSEs) in developing countries are located in industrial clusters, and the majority of such clusters have yet

to see their growth take off.

MSME Development Organization (The Small Industries Development Organization (SIDO)), headed by the Additional Secretary

& Development commissioner (Micro, Small and Medium Enterprises), is one of the apex bodies of the Government of India,

Ministry of Micro, Small and Medium Enterprises, to assist the Government in formulation of policies and programmes, projects

schemes, etc., for the promotion and development of Micro, Small and Medium Enterprises in the country and also coordinating

and monitoring the implementation of these policies and programmes etc. Promotion and development of Micro, Small and

Medium Enterprises is primarily the responsibility of the States and Union Territories (UTs) and the role of the Central

Government (including the MSME Development Organization (formerly known as SIDO)) in this field is to aid and assist the

States/UTs in this endeavor.

Micro credit consists of small loans provided to micro enterprises. Microcredit dates back in the 19th century when moneylenders

were informally performing the role now played by financial institutions. The informal financial institutions constitute; village

banks, cooperative credit unions, state owned banks, and social venture capital funds to help the poor. More recently,

commentators have commented on the critical role of micro-credit in achieving the Millennium Development Goals, since they

mobilize rural savings and have simple and straightforward procedures that originate from local cultures and are easily understood

by the populace. These funds are to provide credit the informal sector SMEs in developing countries. The number of the poor is

whooping to a larger extent but ironically, the number of Micro finance Institutions catering to them is handful. Microfinance is

not just about giving micro credit to the poor rather it is an economic development tool whose objective is to assist poor to

alleviate poverty and become self-dependent. Micro and Small Scale Enterprises use credit/loans from micro finance institutions

(MFI) to finance their business operations and others use the credit to set up business.

Craig, Mcintosh, and Bruce, Wydich (2004) “Competition and Microfinance” talks about competition between microfinance in

developing countries have increasing drastically over last decade. This paper shows borrower began to obtain multiple loans,

creating negative externality that leads to less favourable equilibrium loan contracts for all borrowers and also compared different

countries competition and performance by using longitudinal research. This method has used nominal variables using lambda

method.

Anthony, J., Ody and David, de., Ferranti. (2007) Beyond Microfinance: Getting Capital to Small and Medium Enterprises to

Fuel Faster Development. It differentiated Small and medium-sized enterprises (SMEs) to fuel faster development and has given

various suggestions on new options that will emerge for meeting SMEs' financial needs, including commercial banks moving

"down-market," micro-credit institutions moving "up-market," and creative application of venture capital investing ideas has been

stated in this article.

Abiola, Babajide (2012), this paper investigates the “effects of microfinance on micro and small business growth in Nigeria”.

The objectives are to examine the effects of different loan administration practices on small business growth criteria and, to

examine the ability of Microfinance-Banks (MFBs) towards transforming micro-businesses to formal small-scale enterprises. The

paper employed panel data and multiple regression analysis to analyze randomly selected enterprises by microfinance banks in

Nigeria. The paper recommends a recapitalization of the Microfinance banks to enhance their capacity to support small business

growth and expansion.

Prof. Vinayak, Gopal, Patil (2011), this paper discuses regarding microfinance - its nature, objectives, framework, principles,

challenges and opportunities with the reference to Indian context. The microfinance – which is becoming more important financial





institutions with the intention to provide the credit facilities and the supportive services to the needy people, community,

especially empowering the women.

Raj, M., Desai, and Shareen, Joshi (2013) “Collective Action and Community Development Evidence from Self-Help Groups in

Rural India” aim to promote social cohesion through a mixture of education, access to finance, and linkages to wider development

programs. This paper has compared to women in control villages, treated women were also more likely to participate in household

decisions and engage in civic activities and recent effort to expand official support to SHGs under the National Rural Livelihood

Mission.

Shahidur, R., Khandker, and Hussain, A., Samad, (2013), this paper using several data to investigates microcredit programs,

which have been operating in rural Bangladesh for over 20 years. Both descriptive and econometric analyses show that

microcredit programs helped participants earn higher income, consume more, and thereby lifted many of them out of poverty.

This paper concludes that poverty reduction, in particular the reduction of extreme poverty, due to microcredit intervention can be

as high as 9 per cent of the total poverty reduction over the last decade in Bangladesh.

Susy, Cheston, and Lisa, Kuhn, Publication by UNIFEM this paper focuses primarily on group-lending methodologies, to

acknowledge that empowerment can take place through individual lending as well and encourage further research in that area.

This method uses quantitative data and finds more data that would differentiate between the types of impacts are expected from

different types of microfinance delivery mechanisms and methodologies, but it has found very little.

Dr. Rizwana, Bashir, Prof. Shafiq-ur-Rehman, and Prof. Atif, Hassan (2013) the purpose of conducting this research is to

study and investigate the growth prospects of microfinance programs in Pakistan to eradicate poverty. In this research,

methodology includes primary as well as secondary data analysis. For collection of primary data research tool used is

questionnaire and it covers the data collection period of 2006 to 2008. Equal importance is given to both qualitative and

quantitative data.

OBJECTIVES OF STUDY

To study the significance of Micro financing to the survival of MSEs in Dharwad District.

To study the influence of Micro Financing on expansion of MSEs in Dharwad District.

DATA COLLECTION & ANALYSIS

Selection of Organization: 25 MSE’s are selected in Dharwad District for the study based on Convenient sampling Sampling population: As many as 100 samples were included as part of data for the study. These samples were

collected from top, middle management executives & at supervisory level from micro credit institutions and new

business start-up in Dharwad.

Data collection: An exhaustive questionnaire was prepared and data was collected with regard to employee retention

and loyalty.

Stages of Data Collection

Figure-1: Stages of Data Collection


An exhaustive empowerment questionnaire was put to test. Several micro credit institutions and new business start-up , micro

credit and business survival, micro credit institution and business growth, collateral and micro credit angles were probed and a

total of nearly 15 odd areas were identified, which were apt, valid and relevant on five point scale, viz: Strongly agree; Agree;

can’t say; Disagree; and strongly disagree. Such areas put to test includes understanding the system of analytics within the

organisations, level of adoption , communication process adopted, decision making process, delegation and shared responsibility,

power distribution, degree of trust & loyalty, employee participation and the like were put to test.





Hypothesis

H0 – Micro financing makes no significant contribution to the survival of MSEs in Dharwad District. H1 – Micro financing makes significant contribution to the survival of MSEs in Dharwad District. H0 – Micro financing does not have the capability to influence the expansion capacity of MSEs in Dharwad District. H2 – Micro financing does have the capability to influence the expansion capacity of MSEs in Dharwad District.

Table-1: Reliability Statistics

Cronbach's Alpha N of Items

.82 15


The Cronbach alpha value is .78, which says questionnaire is Good (Low stakes testing)

ANALYSIS & INTERPRETATION

The Data collected has been primarily tabulated & Master table was prepared,

Sample was tested for reliability using Cronbach’s alpha,

Percentage analysis is the basic tool for analysis,

Regression analysis a statistical process for estimating the relationships among variables is used.

Table-2: Model Summary-1

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .788a .620 .619 .594

Note: a. Predictors: (Constant), Have you ever obtained a loan from micro credit institutions?


Dependent Variable (X): Micro credit institution had once saved my business from folding up Independent Variable(Y): Have

you ever obtained a loan from micro credit institutions?

R2, the Coefficient of Determination, tells how many points fall on the regression line. In Model Summary 1 – 0.62 means that

62% of the variation of y-values around the mean is explained by the x-values. In other words, 62% of the values fit the model.

H0: Micro financing makes no significant contribution to the survival of MSEs in Dharwad District. H1: Micro financing makes significant contribution to the survival of MSEs in Dharwad District.

Alternate Hypothesis is accepted.

Table-3: Model Summary-2

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .810a .657 .655 .525

Note: a. Predictors: (Constant), Have you ever obtained a loan from micro credit institutions?


Dependent Variable(X): I borrow from micro finance banks to expand my business when necessary

Independent Variable(Y): Have you ever obtained a loan from micro credit institutions?

H0 – Micro financing does not have the capability to influence the expansion capacity of MSEs in Dharwad District. H2 – Micro financing does have the capability to influence the expansion capacity of MSEs in Dharwad District.

Alternate Hypothesis is accepted.


This study was carried out in Dharwad District.

Sample size was 100, Further more research can be done on larger population.





CONCLUSION

The main aim of this study is to investigate the effects of micro financing on small business survival, growth and expansion in

Dharwad District. This study comprising of financial and non – financial products, offered by the Microfinance Banks on micro

and small enterprise growth, survival, productivity and performance in Dharwad region. This study has been able to show the

relationships that exist between microcredit institutions and SMEs development in Dharwad District of Karnataka. It is then

necessary for microcredit institutions, SMEs and government to work together for the best interest of development of SMEs and

Indian economy in general.

Micro financing does have the capability to influence the expansion capacity of MSEs in Dharwad District. Micro financing makes significant contribution to the survival of MSEs in Dharwad District.

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TECHNICAL ANALYSIS OF SELECTED PHARMACEUTICAL COMPANIES OF INDIA

Nikhil Kaushik27 Dr. Madhur Raj Jain28

ABSTRACT

Technical analysis is the study of forecasting stock prices for future and is aimed to generate returns. Financial analyst

decides the time of entry and exit in the security market. Technical analysis relates to factors affecting the supply and demand

of stocks. It helps us in understanding the true value of shares and in knowing whether the shares are undervalued or

overvalued. Technical analysis market indicators would help the investor to identify major market turning points.

Although the academicians were uncertain about the practicality of technical analysis, this method was widely used by

practitioners in the industry owing to the increasing applicability in forecasting price trends. Many researchers point towards

the importance of technical analysis coupled with fundamental analysis for the industry and the company in predicting price

trends effectively.

The current research study was carried out on the top 6 pharmaceutical companies stock prices (based on market

capitalization) taken on a daily basis for the last five years (April 2010 to March 2015). Moving Average Convergence and

Divergence (MACD), Rate of Change (ROC) and Relative Strength Index (RSI) were some of the technical tools used for

analyzing daily closing price and Sensex (BSE 100). Mix trends were obtained from the study. Results suggest that investing in

the current period for long-term purpose requires fundamental analysis along with technical analysis.

KEYWORDS

Technical Analysis, Pharmaceutical Companies, Moving Average Convergence and Divergence (MACD), Rate of

Change (ROC), Relative Strength Index (RSI) etc.

INTRODUCTION

In the world of stock analysis, fundamental and technical analysis is akin to opposite sides of a coin. These two techniques are

used for researching and forecasting future prices of stocks. Fundamental analysis is valuation of stock through financial and

economic information to predict stock price movements. Financial and economic information include company's financial reports,

and non-financial information such as demand for products manufactured by the company, industry comparisons, economic

condition of the country, changes in government policies, etc. On the other hand, technical analysis is the method of forecasting

future prices of stocks based on past price movements. These decisions are made by applying simple rules to historical price

information. For example, technical trading rule might suggest buying a currency if its exchange rate price increases more than

one percent from its value five days earlier. Such rules are being much used by traders in stock, commodity and foreign exchange

markets. Technical methods came into existence back in 1700 but Dow Theory proposed by Wall Street Journal editors Charles

Dow and William Peter Hamilton popularized them in the late nineteenth and the early twentieth centuries.

Technical analysis was widely used by practitioners but academicians have been uncertain about the practicality of technical

analysis. This behavior could be explained due to firstly, the lack of theoretical basis, secondly, the ruling out of profitability from

technical trading by assumption of random walk model by earlier theoretical studies, and thirdly, the mixed and inconclusive

nature of earlier empirical findings, such as of Cowles (1933) and Fama and Blume (1966). Recently, however, Brock et al (1992)

and Lo et al (2000) found strong evidence of profitability in technical trading based on large amount of data and much elaborate

strategies.

Fundamental analysis was the prominent investment method that was used in the past. Analysts are now using technical analysis

as an investment method by the arrival of high-speed computers has made technical analysis easier. Many large investment firms

use black box trading, or computer modeling, to determine their entry and exit points.

In technical analysis, top seven tools which are in practice are, on-balance volume indicator (OBV), accumulation/distribution line

(A/D line), average directional index (ADX), Aroon Indicator, moving average convergence divergence (MACD), relative

strength index (RSI) and stochastic oscillator. These tools are used to get a vision of supply and demand of securities in the

market.

27Research Scholar, FPM, Indian Institute of Forest Management, Madhya Pradesh, India, [email protected] 28Assistant Professor, Indian Institute of Forest Management, Madhya Pradesh, India, [email protected]







LITERATURE REVIEW

Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. Technical analysis uses

statistics generated by market activities like stock’s past prices or volume to predict future price movements. Conversely,

fundamental analysis looks at economic factors to forecast price movements of stocks in future. Suresh A.S. (2015) tried to

emphasize the importance of fundamental and technical analysis in Indian stock market. In fundamental analysis, author stressed

investors to known about macro-economic environment and development of the country, future prospects of the industry to which

the firm belongs and projected performance of the company. As far as technical analysis is concerned, author advised few tools

like line chart, bar chart, point and figure chart, trend chart, moving average analysis, relative strength, resistance and support

levels, break-out theory, head and shoulders pattern, double top and bottom formation to predict future stock prices.

Fundamental analysis was the only investment method that was given any sincerity in the past. Now that has changed as the

arrival of high-speed computing has made technical analysis easier. Many large investment firms use black box trading, or

computer modeling, to determine their entry and exit points. However, it was found that financial managers are not able to use

right tools to analyze future market trends. Shirur S. (2013) stated the reason why finance managers arrive at wrong decisions like

the subprime crisis. The reason explained by author was, investors are dealing with the fundamental analysis issues while the tools

used are applicable for technical analysis. The author also suggested that instead of segregating risk into systematic and

unsystematic risk, it should be segregated into bankruptcy and liquidity risk, to determine the true value of the company, which

helps investors to determine in which security to invest.

Lo A. W., Mamaysky H. and Wang J. (2000) tried to assess the effectiveness of technical analysis by studying U.S. stocks from

1962 to 1996. Authors proposed new approaches to evaluating the efficacy of technical analysis such as nonparametric kernel

regression. They found that technical analysis provide incredible information about the stocks over the time period, but technical

analysis can be improved by using automated algorithms such as head-and-shoulders and rectangles chart patterns.

Several studies are conducted by researchers based on the technical analysis to predict price movements of securities of different

sectors in Indian stock market. Upadhyay, A., Bandyopadhyay, G., Dutta, A. (2012) tried to find out those stocks which are

outperforming in Indian Stock Market with the help of Multinomial Logistic Regression (MLR). The securities were categorize

into three, good, average and poor by using seven financial ratios, book value (BV), PBIDT/Sales (PBIDTS), earnings per share

(EPS), percentage change in operating profit (OP), percentage change in net sales (NS), price to cash earnings per share

(PECEPS), price to book value (PEBV) as selection criteria to determine the performance of securities in stock market. Sample

study was of top 30 companies in terms of market capitalization of four years, which are actively traded at Indian Stock Exchange,

and it was found 17 companies were categorize as good.

In another study, Franklin N. R. B. (2012) talked about buying and selling decisions of stocks of few selected Indian Banks. Study

is based on secondary data for the year 2010 for five banks, Axis Bank, State Bank of India, ICICI Bank, HDFC Bank and Punjab

National Bank. Author used 2 technical analysis tools, moving average, support and resistance level for predicting future prices of

these banks. Author analyzed that all these five banks must perform well in next two coming years in Indian stock market. As

Information Technology was one of the fasting growing sectors in India, Pandya H. (2013) tried to analyze few IT companies with

the support of technical analysis. Data was collected for five leading IT companies: HCL, INFOSYS, MPHASIS, WIPRO and

TCS, which were listed in both BSE and NSE for two financial years, April, 2010 to March, 2012. The major tools and techniques

used in this study are: line chart, column chart, stock (candlestick) chart, exponential moving average (EMA), moving average

convergence divergence (MACD), relative strength index (RSI) and rate of change (ROC). After analyzing the data collected it

was found that these five IT companies have less fluctuations in stock prices as compared to other IT companies so invest in these

companies will be more beneficial.

Chordia T., Sarkar A. and Subrahmanyam A. (2005) tried to determine common factors, which drives liquidity and volatility in

stock and bond market over the period 1991 through 1998 in New York Stock Exchange (NYSE). It was suggested that past

volatility and liquidity were the most important variables in forecasting future liquidity. Other two factors, which explained the

forecasting of both stock and bond market liquidity were unexpected loosening of monetary policy and innovations to bond fund

flows. It was found that Friday is the lowest-liquidity day of the week for both markets and liquidity tends to be higher during the

months from July to September.


This is a descriptive research based study carried out using on secondary data. Top 6 pharmaceutical companies were selected

based on market capitalization namely, Sun Pharmaceutical Inds. Ltd., Lupin Ltd., Dr. Reddy's Laboratories Ltd., Cipla Ltd.,

Aurobindo Pharma Ltd. and Cadila Healthcare Ltd. Daily closing price of stock for a time of 5 years from April 2010 to March

2015 was collected from Prowess 4.15 database of CMIE. Moving Average Convergence and Divergence (MACD), Rate of

Change (ROC) and Relative Strength Index (RSI) were used as technical tools to analyze the collected data.





MACD is one of the most renowned indicators in technical analysis specifying both trends and momentum behind a security. The

indicator comprises of two exponential moving averages (EMA), covering two different times, which help to measure momentum

in the security. Short-term momentum is compared with long-term momentum to determine future movements of security to get

an idea about the security’s performance. MACD in the study is 5-day exponential moving averages less 10-day exponential

moving averages. Positive MACD indicates that the 5-day EMA is above the 10-day EMA. Positive values of MACD increase as

the shorter EMA diverges further from the longer EMA.

Calculating MACD

(i) Calculate a 5 day EMA of closing prices

(ii) Calculate a 10 day EMA of closing prices

(iii) Subtract the longer EMA in (ii) from the shorter EMA in (i)

𝐸𝑀𝐴𝑛 = 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒𝑛

2

𝑇𝑖𝑚𝑒 𝑃𝑒𝑟𝑖𝑜𝑑 + 1+ 𝐸𝑀𝐴𝑛−1(1 −

2

𝑇𝑖𝑚𝑒 𝑃𝑒𝑟𝑖𝑜𝑑 + 1)

ROC measures percentage price change over a given time period which fluctuates above and below zero. In this study, 5-day

percentage price change is measured over five year time. The bigger the difference between the current price and the price 5 days

ago, the higher the value of the ROC. When percentage price change is positive (bullish), the indicator is above 0, and when

percentage price change is negative (bearish), the indicator is below 0. RSI is used to understand velocity and magnitude of

directional price movements of stocks. The index computes momentum as the ratio of higher closes to lower closes. It further

illustrates that a higher RSI relates to stronger positive changes while a lower RSI to stronger negative changes in stocks. RSI

calculation is based on 5 days period.

RSI = 100 − 100

1 + RS

RS = Average Gain

Average Loss

Where, RS = relative strength

Average Gain = [(Previous Average Gain) ∗ 4 + Current Gain]

5

Average Loss = [(Previous Average Loss) ∗ 4 + Current Loss]

5

INTERPRETATION AND ANALYSIS

MACD and Closing Price Analysis

Figure-1: MACD and Closing Price Curves based on Calculations


Initially, MACD line of Cadila Healthcare Ltd. showed upward trend from April 2010 to January 2011 but afterward it showed

bearish trend for next 21 months. Again, from November 2013 to November 2014, it showed upward trend and reached its highest

-60

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0

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500

1000

1500

2000

19-Apr-10 19-Apr-11 19-Apr-12 19-Apr-13 19-Apr-14

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sin

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MACD





value in November 2014. However, after November 2014, MACD line again showed downward trend and it touched its lowest

point in February 2015. Overall MACD line shows upward trend. In comparison to MACD, Close price showed higher degree of

upward trend and it was not following the MACD completely, although there were some occasions when closing price showed

upward trend but MACD was at downward trend and vice-versa. MACD curve of Sun Pharmaceutical Inds. is quite stable, except

in November 2010 and July 2013 where it showed downward trend. In case of Lupin Ltd. also, it showed downward trend in the

months August 2010 and September 2010, except that it has steady MACD curve. Dr. Reddy's Laboratories Ltd. and Cipla Ltd.

showed fluctuations in MACD curve from August 2014 to February 2015, while Aurobindo Pharma Ltd. displayed downward

trend in January 2011 and February 2011.

ROC and Sensex Analysis

Figure-2: ROC and Sensex Curves Based on Calculations


ROC curve of Cadila Healthcare Ltd. revealed upward trend at the beginning but depicted downward trend after January 2011

remaining in the same state for 22 months. It showed some bearish and bullish trend during this time and reached close to its top

most point in July 2012. Then it started moving up at the end of 2013 and reached its highest point in November 2014 however,

slipped downward in December 2014 and then touched its lowest point in February 2015. Many up down fluctuations were

observed in Sensex, and then it went upward in next years. From the starting Sensex curve was upward to MACD curve and

reached its utmost point in January 2015.

Sun Pharmaceutical Inds Ltd. ROC curve was quite stable throughout 5 years, gaining highest point on September 2013 and

lowest point at August 2011. Lupin Ltd. followed similar pattern as Sun Pharmaceutical Inds. Ltd. but there was a steep fall in

ROC curve in August 2011. Dr. Reddy's Laboratories Ltd. showed upward trend in the year 2010 but it the next year it had

downward trend. After 2011, it showed upward trend in next three years except a sharp fall in ROC curve on May 2014. Cipla

Ltd. had high fluctuations in its ROC curve (unstable) having several unexpected difficulties. Aurobindo Pharma Ltd. trailed

similar pattern as that of Lupin Ltd. but it had a steep decline in February 2010 in ROC curve.

RSI and Sensex Analysis

Figure-3: RSI and Sensex Curves based on Calculations


-15.00

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0

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SENSEX

ROC

0

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100

120

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5000

10000

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SENSEX

RSI





Initially RSI line of Cadila Healthcare Ltd. showed downward trend from April 2010 to February 2012. After a month, it showed

upward trend for 12 months from March 2012 to February 2013 and it attained its peak in July 2012. It started declining and

moved down to its lowest point in March 2013 and after that, RSI could not gain any upward trend. Sun Pharmaceutical Inds Ltd.

showed downward trend in RSI curve throughout five-year time, similar pattern was followed by Lupin Ltd., and Aurobindo

Pharma Ltd. Dr. Reddy's Laboratories Ltd. showed high fluctuation in RSI curve and reached its highest and lowest point on May

2014 and July 2014 respectively. Cipla Ltd. indicated upward trend in contrast with Sun Pharmaceutical Inds. Ltd., Lupin Ltd. and

Aurobindo Pharma Ltd., which showed downward trend throughout five year.

CONCLUSION

Technical analysis of top 6 pharmaceutical companies reflect mix trends and guide investors about the future trends. MACD and

closing price curves follow each other throughout the 5-year period in all 6 companies. Curve is stable throughout the time except

few down trends. As charts of Relative Strength Index and Sensex are compared, it is found that Sun Pharmaceutical Inds. Ltd.,

Dr. Reddy's Laboratories Ltd., Cipla Ltd. and Cadila Healthcare Ltd. show opposite characteristics. Most of the time, in a period

of 5 years there is an opposite trend and high level of volatility is seen in Relative Strength Index curve, which point towards

downward trend in the market.

ROC of Sun Pharmaceutical Inds. Ltd., Lupin Ltd., Cadila Healthcare Ltd. and Aurobindo Pharma Ltd. display high level of

volatility. Mostly, this curve shows positive intent, which means it, is bullish in nature. ROC curve for other two companies are

found to be stable, this clearly indicate towards less activity on buying and selling front. It can be concluded that technical

analysis indicates downward trend currently, which means companies are moving downward in a low range, indicating towards

correction in the prices. Investing at this point of time for a long-term purpose requires fundamental analysis.

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multinomial logistic regression. Journal of Business Studies Quarterly, 3(3), 16-39.

13. Retrieved from https://research.stlouisfed.org/wp/2011/2011-001.pdf

https://research.stlouisfed.org/wp/2011/2011-001.pdf





14. Retrieved from http://www.investopedia.com/slide-show/tools-of-the-trade/

15. Retrieved from http://www.ijcst.com/ijmbs/research1/chitra.pdf

16. Retrieved from http://www.ciitresearch.org/dl/index.php/aiml/article/view/AIML012014004

17. Retrieved from http://www.springerprofessional.de/038---belief-fusion-of-predictions-of-industries-in-chinas-stock-...

18. Retrieved from

http://www.managementparadise.com/ROSS%20the%20ERUDITE/documents/23234/study-on-technical-analysis-a...

19. Retrieved from http://www.iexplain.org/calculate-macd/

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http://www.springerprofessional.de/038---belief-fusion-of-predictions-of-industries-in-chinas-stock-

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CHALLENGES OF IMPROVEMENT IN INDIA’ FISCAL SITUATION

Kanchan Singh29

ABSTRACT

The fiscal situation of India is worrisome. The problem is largely structural and not cyclical. The slow growth of economy has

contributed to the deterioration in 2011-12. The government at centre and state level is facing with formidable challenge of

fiscal deficit. There are disparities in fiscal performance of the states. While government tried to revive the economy through

restructuring programmes for achieving fiscal consolidation. However, these programmes have not being effectively

implemented at the centre as well as states level. Thus, a programme should draw lessons from the past and design a plan for

the centre as well as the states.

KEYWORDS

Fiscal Deficit, Revenue Deficit, Tax Revenue, Public Debt etc.

INTRODUCTION

India is a one of the fastest growing economy in the world. In 2008-09, the finance minister had stated in his speech “it is widely

acknowledged that the fiscal position of the country has improved tremendously”. However, the situation has change and the

fiscal deficit in country has reached unprecedented level. The government claimed that breaching of the fiscal targets was mainly

due to the global economy slowdown. World economic growth was 3.9 percent in 2011, 3.1 percent in 2012 and 3.0 percent in

2013.

In budget 2014-15, The Global Risks 2014 report has mapped 31 global risks. Of highest concern are ten risks that include fiscal

crisis, structurally high unemployment or underemployment, income disparity, governance failure, food crisis, and political and

social instability. On the other hand, fiscal performance has shown a sharp deterioration since 1990-91 by Indian states and ending

with a fiscal crisis [World Bank, 2005].

Most of the buoyant sources of revenue are in the purview of central government. However, the fiscal responsibilities in meeting

huge expenditure remained with state government. These factors have created acute problem for the fiscal adjustment in the states.

The aggregate picture of all states has shown the vast interstate differences in fiscal performance. The gravest sign of fiscal

imbalance has been apparently the growing revenue deficit, a serious structural malady arising from faster growth of current

expenditure than current revenue.

In order to understand how much additional fiscal stimulus can be given, it is important to understand the nature of the fiscal

imbalance in the country. This paper attempts to analysis of the fiscal situation in the country. The trends of fiscal imbalance will

analysis at centre and state level. It will examine the effort of fiscal consolidation by government since Fiscal Responsibility and

Budget Management (FRBM) at the centre level and Fiscal Responsibility Act (FRA) in the states. This paper is divided into five

section including introduction second section describes the fiscal situation of India during 1990-91to2011-12. Third section deals

with finance of centre level. The state level fiscal situation is present in fourth section. Last section shows that effort of

government at both level for stabilizing fiscal situation and conclusion.

FISCAL SITUATION IN INDIA SINCE 1990-91

The sharp deterioration in fiscal situation at centre and state level has shown in 1990-91. There were many factors to contribute in

this deterioration such as pay and pension revision, large subsidies, huge interest payment and so on. The gross tax revenue of the

centre relative to GDP declined from 8.2 percent in 2001-01to in 2011-12. Interest payment as a ratio of central revenue increased

from 40.3 percent to percent at the same period. Revenue expenditure is exceeding from revenue receipt. On the other hand,

Capital expenditure decreased during 1990-91 to 2011-12. All these factors have created the worst fiscal imbalance in 2011-12

with the revenue and fiscal deficit as a ratio of GDP at 2.9 percent and 7.2percent respectively.

29Research Scholar, Department of Economics, F.S.S., B.H.U., Uttar Pradesh, India, [email protected]






Table-1: Fiscal indicators of Centre and State Government

State Centre Combine

Revenue

Deficit

Primary

Deficit

Fiscal

Deficit

Revenue

Deficit

Primary

Deficit

Fiscal

Deficit

Revenue

Deficit

Primary

Deficit

Fiscal

Deficit

1990-91 -0.87 1.7 3.2 -3.2 2.8 4.1 -4.1 -4.8 9.1

2000-01 -2.31 1.6 3.9 -4.0 o.90 5.0 -6.1 -3.3 8.9

2008-09 0.28 0.53 2.3 -4.5 2.57 5.9 -4.2 -3.2 8.2

2010- 11 0.21 0.40 2.1 -3.3 1.79 5.8 -5.63 -2.3 6.8

2011-12 0.47 0.59 2.2 -3.4 1.91 5.1 -2.98 -2.5 7.2

Sources: Planning Commission, CSO (2012-13)

The table shows improvement in revenue deficit, it declined from 6.1 percent in 2000-01 to 2.9 percent in 2011-12. The aggregate

fiscal deficit in 2000-01 has estimated at about 8.9 percent, which decreased at 7.2 percent in 2011-12. However, it shows a

marginal improvement at centre and state level. In fact, reduction in fiscal and revenue deficit has lagged behind which set under

the target of FRBM at centre. According to the fiscal restructuring plan recommended by the TFC, the central and state

governments taken together were required to phase out the revenue deficits and bring down the consolidated fiscal deficit to 6% of

GDP. The plan envisaged the central government compressing the deficit to 3% of GDP and the consolidated deficit of the states

to be reduced to3 percent.

TREND IN CENTRAL FINANCE

Both the central and state governments contributed to the progress in fiscal consolidation until 2007-08 broadly in equal measure,

although, the improvement in the state finances itself was, to a considerable extent, due to higher tax devolution and grants from

the central government. Analysis shows that during the past decade the fiscal deficit of the central government was the highest in

2001-02 at 6.2%. Similarly, the revenue deficit of the central government was the highest in 2001-02 at 4% of GDP. In subsequent

years, there was a steady reduction in both revenue and fiscal deficits and the reduction was sharper after the FRBMA was passed

in August 2003. The fiscal deficit relative to GDP declined from 6.2% in 2001-02 to 2.7% in 2007-08 further to 5.7% in 2011-12.

Similarly, the revenue deficit was reduced from 4.4% in 2001-02 to 4.5% in 2008-09 and further to 4.3% in 2011-12. The fiscal

slippage in 2011-12 was due to lower realization in direct tax revenues and under provisioning of subsidies. Recognizing the need

for funding the higher levels of outgo on subsidies because of elevated levels of global crude oil prices, higher provision was

made for the same in Budget 2012-13. However, as part of the fiscal consolidation process, the Budget also announced the intent

to restrict expenditure on central subsidies to fewer than 2 per cent of GDP. The continued high levels of global crude oil prices

and domestic pressures were manifested in persistent inflation, which necessitated keeping interest rates high, had their impact on

aggregate demand (both consumption and investment). Although the budget estimate for 2012-13 shows that the revenue and

fiscal deficits relative to GDP would be contained at 3.4% and 4.6%, respectively, the revised estimates for the year show that the

revenue deficits would increase to 4.3% and fiscal deficit would increase to 5.7%. The indications are that the revenue receipts

would be even lower than shown in the revised estimates. Thus, both revenue and fiscal deficits of the central government as

ratios of GDP declined steadily from 2001-02, and the decline was much sharper since 2008-09, but again it increased by 5.8% in

2010-11. Notably, it was the sharp increase in the tax revenues, particularly in direct taxes, that led to the appreciable reduction in

the revenue deficit. In fact, the center’s gross tax revenues as a ratio of GDP increased by 4.4 percentage points between 2001-02

and 2008-09 of which a 10.8% in 2008-09, which it decrease with 10.4% since 2010-11. The share of direct tax as a percentage of

GDP has increased with 5.9 percent in 2008-09, which decrease with 5.8 %in 2010-11. The share of indirect tax has 5.6%, which

decrease with 4.4% at the period.

Table-2: Trends in Central Finance

%of GDP

(2008-09)

%of GDP

(2011-12)

Deterioration in

2011-12 over 2008-09

Revenue Receipt 9.60 8.37 1.23

Tax Revenue 7.87 7.02 0.85

Non Tax Revenue 1.72 1.36 0.36

Revenue Expenditure 3.41 3.04 0.37

Interest Payment 3.41 3.04 0.37

Subsidies 2.20 2.43 0.23

Defense Expenditure 1.30 1.15 0.15

Capital Outlay 1.60 1.77 0.17

Total Expenditure 15.70 14.53 1.17

Sources: Planning Commission, CSO (2012-13)





The table shows deterioration in central finance between 2008-09 to 2011-12. Revenue receipt is decrease with 1.23% during this

period. However, tax revenue and non-tax revenue has declined. Interest payment show improvement with 0.37% during the same

period. However, improvement of revenue receipt is greater than total expenditure. The main factor that has contributed to the

growth of direct taxes was the institution of the Tax Information Network (TIN) in 2003-04 and entrusting this task to the

National Security Depository Ltd (NSDL).1 The important lesson from this is that the government can mobilize substantial

additional revenues if only it strengthens the information system of union excise and customs duties, entrusting the task to a

competent information technology company rather than continuing with the depleted National Informatics Centre (NIC) which

does not have the capacity to institute the information system required for the effective enforcement of these taxes. However,

under-provision in the budget estimates results in poor planning and implementation of expenditures and contributes to low

productivity of public spending. The above analysis indicates that the government failed to achieve the adjustment as envisaged in

the FRBMA, particularly in containing the expenditures and protecting capital expenditures. Whatever adjustment was achieved

was attributable mainly to the increase in tax revenues arising mainly from improvement in computerized information system and

to some extent, reduction in the interest rates.

TREND OF STATE FINANCE

The aggregate picture of all the states has shown a sharp deterioration in fiscal health since 1990s. For all the states, the year

1987-88 saw the emergence of a deficit on revenue account. The states’ revenue deficit as percent of GDP has raised in1997-98

with 3 percent due to the impact of fifth pay commission recommendation. The twelfth finance commission was draw up a fiscal

restructuring plan for fiscal consolidation. According to its recommendation, each of the states was required to phase out its

revenue deficit and contain the fiscal deficit at 3% of GSDP. The commission recommended debt restructuring and a write off

scheme to the states linked to passing of fiscal responsibility legislation and compression of revenue and fiscal deficits.

However, the state has shown a steady improvement in their fiscal health. Until 2010-11, the aggregate revenue deficits of the

states as a ratio of GSDP declined from 2.3percent in 2003-04 to a surplus of about 0.2 percnt in 2007-08. This 2.8 percentage

point improvement in the revenue deficit helped to reduce the fiscal deficit by 2.1 percentage points and increase the capital outlay

by about 0.9% point (Table 4). Thus, the states taken together were able to generate revenue surplus of about half a percent and

reduced their fiscal deficit to a little over 2% of GDP, which is 1 percentage point more than that was recommended in the fiscal

restructuring plan of the TFC. In addition, they could increase the capital outlay by about 1 percentage point of GDP. Surely,

fiscal consolidation in the states until 2007-08 has helped them to cope better with the economic slowdown.

Table-3: Trend in State Finance

2008-09 2010-11 Improvement

Revenue Deficit % 0.28 0.21 0.7

Fiscal Deficit % 2.26 2.06 0.20

Revenue Receipt 651910.13 932291.41 280381.33

Own Tax Revenue % 5.51 6.14 0.63

Own Non Tax Revenue 55441.44 63481.32 8039.88

Grants 1269441.33 169398.32 4245386

Revenue Expenditure 636208.91 915930.03 179711.12

Interest Payment 97637.10 127618.87 29981.77

Capital Outlay 1426.3 2316.2 286.2

Net Lending 49.0 217.3 89.2

Sources: State Finance in RBI (2011-12)

The contribution of own tax revenue was 5.51percent and tax devolution and grant form centre in improvement of revenue. Own

tax revenues of the state governments increased by 0.7 percentage point during the period and a close examination shows that

much of the increase is attributable to the introduction of value added tax (VAT) to replace the cascading type sales tax in April

2005. Of course, buoyant economy, rationalization of stamp duties and a boom in the real estate market also resulted in a

significant increase in stamp duties and state excise duties as well. The economic slowdown and the reduction in excise duties is

likely to shrink the VAT base of the states and with the housing market under severe strain, there could be a significant

deceleration in the states’ own revenues after 2008-09. On the expenditure side, there are marginal improvements. The economic

slowdown has adversely affected state finance. Almost, all the states have shown improvement in fiscal situation in 2010-11 as

compared to 2008-09. However, there are the large variation in growth of SDP and fiscal performance among given states. Goa,

Maharashtra, UP, Orissa shows declined their SDP’s growth whereas Gujarat, Rajasthan show improvement. In the case of fiscal

deficit, all states have shown improvement except Maharashtra. In 2008-09, Punjab and Rajasthan show revenue deficit but it turn

surplus in revenue account of the states in 2011-12. It increased in only Punjab with 0.41% deterioration.





Table-4: Fiscal Consolidations of States

Growth of SDP at Constant

Price

Fiscal Deficit Revenue Deficit

2008-

09

2011-

12

Deterioration

2011-12 over

2008-09

2008-

09

2011-

12

Deterioration

2011-12 over

2008-09

2008-

09

2011-

12

Deterioration

2011-12 over

2008-09

Goa 10.02 9.39 0.36 -3.60 -2.09 1.49 0.40 -0.83 0.07

Gujarat 6.78 8.53 1.75 -2.60 -1.64 0.51 0.22 0.31 0.11

Maharashtra 12.58 8.54 4.04 -1.86 -3.28 0.24 0.74 -0.18 0.56

Punjab 5.85 5.94 0.09 -3.84 -2.37 0.56 -2.22 -2.63 0.41

Bihar 12.11 13.26 1.10 -1.76 -0.87 0.61 3.41 1.96 1.45

Rajasthan 9.04 6.11 2.93 -3.02 -2.73 2.15 -0.36 0.81 0.45

Uttar

Pradesh

6.99 6.88 0.13 -4.61 -2.73 1.88 0.42 1.17 0.75

Orissa 7.75 4.92 2.83 -0.01 -.29 0.28 2.53 2.60 0.07

Sources: Planning Commission, CSO 2012-13

IMPROVEMENT OF FISCAL PERFORMANCE OF STATES

Given the difficult fiscal situation in India, state’s performances are good. They generated revenue surplus and succeed to

reducing their fiscal deficit. However, there are divergences in other fiscal indicators across the states. Goa is a one of the highest

per capita NSDP with Rs. 112602, UP is one of the lower per capita NSDP with Rs. 13178. Thus divergence of tax GSDP ratio

between higher with 7.42% to lower with 4.98% for given states. On the other hand, debt as a percentage of GSDP is high in UP

with 36%. The variation of own tax revenue among the states are vary with 4.98% to 7.42%. Interest payment is high in Gujarat

and its lower in Bihar with 7.4% as a ratio revenue receipt.

Table-5: Fiscal performance Indicators in States (2010-11)

Per Capita

NSDP(Rs)

Tax GSDP

Ratio

Debt

(%of GSDP)

Interest Payment /

Revenue Receipt

Goa 112602 6.38 28.48 12.2

Gujarat 57508 6.85 26.96 17.4

Maharashtra 64951 7.02 18.14 14.4

Punjab 46951 7.42 32.06 23.9

Bihar 46422 4.98 24.57 8.9

Rajasthan 28851 6.08 25.57 13.8

Uttar Pradesh 13178 6.88 36.08 11.8

Orissa 24184 5.76 19.67 6.4

Sources: Planning Commission, CSO 2012-13

At the centre level, NIC does not able to create the information for implementing a complex tax like VAT. VAT does not cover

services, so the centre government as well as state government appointed the Empowered Committee of State Finance Minister for

recommendations of GST.

CONCLUSION

This discussion shows that the fiscal health of India is very critical. It is very clear that the problem is structural. Much of the

problem arisen with failure of fiscal restructuring plan. Indian government implemented FRBM act since 2003. Revenue deficits

are determined by the interplay of expenditures and revenues, both tax and non-tax. Too often, attention is focused only on

expenditure side and revenue side is neglected. Increasing non-tax revenue requires that public sector services be appropriately

priced, which may be difficult, as the present society has got used to the subsidized education, health, food items etc. The FRBM

Act required the government to reduce revenue deficit to zero by .March 2009, but it increased to 4.4% of GDP during 2008-09 &

further to 5.1% in 2009-10. Thus, critics point out that the targets set for deficit reduction are unrealistic. Today, the levels of

capital expenditures by the government are miserably low in India. These capital expenditures increase the efficiency and

productivity of private investment and thus contribute to the development process in the country. If Revenue Deficit is to be

reduced to zero and GFD to 2% of GDP as per the requirement of FRBM bill, it is the capital expenditure, which will be scarified

and thus will hinder further development of the country.





The decline growth rates of economy contribute to deterioration in fiscal situation. There is a marginal improvement in subsidies

and loan waiver since 2011-12 of course, the tax GDP declined in 2008-09 but in 2011-12, it show improvement. Thus, India

faced the challenge of fiscal deficit. Therefore, the government needs to more consider about its fiscal framework.

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11. (2002). Final Report of the Task Force on Direct and Indirect Taxes. Government of India.

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XXXIV(19), 1115-1125.

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http://docslide.us/documents/fiscal-responsibility-and-budget-management-frbm-act-2003.html

http://kalyan-city.blogspot.com/2011/03/fiscal-responsibility-and-budget.html

http://www.imaginmor.com/economy-of-india.html





FINANCIAL INNOVATIONS: A BOON FOR FINANCIAL INCLUSION

Kanchan Kathial30

ABSTRACT

In recent years, developing countries witnessed many changes in financial sector. Financial innovations help in financial

inclusion in developing countries. This paper aims to study the recent financial innovations and their role in financial

inclusion in India. The 50% of population in India is live below the international poverty line. Financial markets provide

number of financial products like- mobile banking, micro insurance, microfinance, and micro credit to such poor population

for their financial growth. Now-a-days there are 22 million active mobile banking customers in India. Many institutes and

companies provide the facility of micro financing and micro insurance to low income households. The study concludes that the

financial sectors of country are growing rapidly with the help of financial innovations. There are certain financial products

provided by the financial markets to financially excluded people, which help in their financial inclusion. Government also

announces and working on the new financial schemes for the financial inclusion in country.

KEYWORDS

Financial Innovations, Financial Inclusions, Micro-Finance etc.

INTRODUCTION

Financial innovations help in financial inclusion in developing countries. There is ample macroeconomic evidence suggesting that

the development of a country is strongly correlated with the development of financial sectors (see e.g. Banerjee and Duo (2005).

In India large proportion of population live in poverty and they are not able to use financial services provided by the financial

sectors. To provide financial facility available for poor at all levels of income, therefore financial innovation may be the only way

(Avias, 2014). There are certain financial products provided by the financial markets for poor, which helps in financial inclusion

of poor population in India. There is a huge scope for bringing in innovative financial products in the Indian capital market with

the advent of technology and deregulation of capital market (Sethi, 2013). Financial markets introduced number of financial

products to low income people. Greenbaum and Haywood (1973) reviewed the history of American financial market and argued

that the growth of wealth is the determinant of demand of financial innovation.

WHAT IS FINANCIAL INNOVATION?

Financial innovation has been an important part of the capital markets. Financial innovation process includes creation of new

financial techniques, financial instruments, financial technologies, financial institutes and markets by rebinding the same

characteristics in different trends which suits with the changing needs of issuers and investors. Financial innovation includes new

financial instruments, new decision processes and criteria, cultivation of new markets for financial instruments, new

organizational and managerial practices and new institutions (Bhatt, 1995). In other way, financial innovation is making of new

approaches for financial industries. The purpose of financial innovation is providing the financial products to low income groups

with the help of new financial techniques and methods. Frame and White (2004) defined financial innovation as - representing

something new that reduces costs, reduces risks, or provides an improved product/service/instrument that better satisfies

participants’ demands (Frame and White, 2004:118).

Type of Innovations

There are various types of financial innovations are as follows:

1. Product Innovation: Product innovations include the introduction of new financial products such as- credit,

deposit, insurance, leasing, hire purchase etc.

2. Institutional Innovations: Institutional innovations have their effect on financial sector as a whole relate to changes in

business structures, to the establishment of new types of financial intermediaries, or to changes in the legal and

supervisory framework.

30Junior Research Fellow, Department of University School of Applied Management (USAM), Punjabi University, Panjab, India,

[email protected]






3. Process Innovations: It includes the introduction of new business processes leading to increased efficiency, market

expansion etc.

FINANCIAL INCLUSION

Financial inclusion leads to availability of financial services to low income groups of society and to financially excluded sections.

The growing financial system in developing countries aimed at including new consumers to the financial system through financial

inclusion programs. Financial inclusion enable banks to channelize the savings of the unserved population of the country and

offers new business avenues for lending to this group. Financial inclusion is an innovative concept, which makes alternative

techniques to promote the banking habits of poor people. Financial inclusion leads to the extension of banking services to poor

population. Today India may boast of 7-8 percent GDP growth but still 50 percent of the population lives below the international

poverty line.

OBJECTIVE OF STUDY

The main objective of this paper is to study the recent financial innovations and their role in financial inclusion in India.


This section provides the review of previous studies:

Avais (2014) reviewed in this paper the impact of innovative financial products on financial inclusion of poor people. The author

studied that innovative financial product can play a vital role in socio-economic change in the rural society and able to remove

poverty in rural areas. The study concludes that there is a substantial gap between demand and supply of financial services to

poor according to their need and accessibility. The author suggested that special awareness camps are arranged for the poor

people to learn the use of technology for cheaper financial services.

Sharma (2011) examines the role and effect of financial innovation on rural and agricultural prosperity and suggesting the ways

to improve the same. The study found that innovations related to micro finance growing in rural India. The study concludes that

innovations play a vital role in modernization of agriculture and rural India.

Singh et. al., (2011) studied in their paper the usage pattern of various banking tools and evaluates preventive measures which the

respondents take against frauds. For the purpose, data was collected from 50 respondents. The study pointed out that IT products

change the face of Indian banking sector. The study revealed that innovations were beneficial for both customer as well as banker.

These innovations prevent customers and banker from fraudulent transactions and dealings. This paper concluded that financial

market turned into a buyer’s market. Banks are now bloomed into one-stop Supermarkets.

The review of various literature shows that innovations in financial sectors lead to financial growth of country. Financial

innovations help in reduction of poverty.


This research uses secondary data collected from various relevant papers, articles, journals, books and from various sites like RBI,

N.A.B.A.R.D., and I.R.D.A. Data analysis is done because of content analyses method.

Current Financial Innovations in India

Following are the some financial innovations that take their part in financial inclusion in India.

Mobile Banking

Mobile banking is one of the latest innovations in telecommunications and it enables the new launch method for banking services.

Through mobile banking, a customer can conduct a number of financial transactions through mobile phones or tablets. Now the

days in India, banks are racing to use this latest technology to reduce their operational cost and increase customer base (Peterson,

2009). Mobile banking provides various services to its customer’s like:

Short Message Service Banking (SMS)

Inter Bank Mobile Payment Service Banking (IMPS)

Wireless Application Protocol Based Mobile Banking Service (WAP)





Table-I: Growth of Mobile Bank Users in India, Volume and Value Year 2010-2013

Sources: https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=760#4

The PM Modi’s recent “Digital India Project, 2014” aimed that every Indian has a smart phone by 2019. The project seeks to

transform India into connected economy. Mobile banking has a recent growing trend in India. Table - 1 represents that the

volume of mobile banking has been increased by 108.53% (53.30 million in 2012-2013 vis-à-vis 25.56 million in 2011-2012) and

value by 228.94% (Rs. 59.90 billion in 2012-2013 vis-à-vis Rs. 18.21 billion in 2011-2012) respectively. Now a days there are

approximately 350 to 550 million unique mobile subscribers and near about 22 million active mobile banking customers in India.

MICROFINANCE

The beginning of the micro finance movement in India could be traced to the self-help group (SHG) - bank linkage program

(SBLP) started as a pilot project in 1992 by National Bank for Agricultural and Rural Development (NABARD) (Reserve Bank of

India, Report on Currency and Finance, 2006-08). According to the eighty fourth report of standing committee on finance (2013-

2014). There are many societies, companies, trusts and bodies corporate, banks including commercial banks RRBs and co-

operative banks, primary agricultural credit societies, SHGs linked to banks and MFIs that include NBFCs, and such other

institutions which are engaged in providing microfinance services to the poor households as a complementary to the banking

system. Microfinance helps in providing various financial facilities to low income households, economically weaker sections,

small and marginal farmers and women, (in rural, semi urban areas), and small enterprises lacking access to banking and related

services. The Reserve Bank, NABARD and SIDBI have also taken a range of initiatives to provide a momentum to the micro

finance movement in India. Micro finance in India operates through two channels:

SHGs - Bank Linkage Program (SBLP),

Micro Finance Institutions (MFIs),

Table-II (a): Progress under Microfinance - Bank Loans Disbursed and Outstanding to SHGs,

Agency-wise position as on 31st March 2014

Sources: https://www.nabard.org/uploads/STMT%20II.pdf

Table-II (b): Progress under Microfinance - Bank Loans Disbursed and Outstanding to MFIs,

Agency-wise position as on 31st March 2014

Sources: https://www.nabard.org/uploads/STMT%20II.pdf

Year

Number of Users

(Millions)

Volume

(Millions)

Value

(Billions Rs)

2010 -2011 5.96 6.85 6.14

2011 -2012 12.96 (117.45%) 25.56 (273.139%) 18.21 (196.58%)

2012 -2013 22.51 (73.69%) 53.30 (108.53%) 59.90 (228.94%)

S.

No.

Name of the Agency Loan Disbursed to SHGs

by Banks During the Year

Total outstanding Bank

Loans against SHGs

Amount in lakhs

Number of

SHGs

Loans

Disbursed

Number of SHGs Loan

Outstanding

1. Commercial banks 7,67,253.00 16,03,749.35 25,01,264.00 29,38,841.31

2. Regional rural Banks 3,33,420.00 6,28,813.35 12,27,563.00 11,04,894.99

3. Cooperative Banks 2,65,748.00 1,69,173.14 4,68,511.00 2,49,016.10

Total 13,66,421.00 24,01,735.85 41,97,338.00 42,92,752.40

Sr.

No

Name of the Agency Loans disbursed by Banks/FI

to MFIs during the year

Bank Loans Outstanding

against MFIs as on 31st March 2014

Number of MFIs Amount in lakhs Number of MFIs Amount in lakhs

1. Commercial Banks 484.00 946,882.62 2,197.00 1,430,757.17

2. Regional Rural Banks 16.00 16,317.73 124.00 22,199,.76

3. Cooperative Banks 4.00 448.12 17.00 796.76

Sub Total 504.00 963,648.47 2338.00 1,453,753.69

4. SIDBI 41.00 64,601.00 84.00 197,989.79

Total 545.00 1,028,249.47 2,422.00 1,651,743.48





Table-II (a): Shows that the total amount of Bank Loans disbursed and outstanding during the year 2013-14 is Rs. 24,017.35

crore in 1,336,421.00 SHGs and Rs. 429,27.52 crore in 4,197,338 SHGs. Commercial banks have contribute on large extent to

Disbursed bank loan up to Rs. 16,037.49 crore in 767,253.00 SHGs and Loan outstanding Rs. 29,388.41 crore in 2,501,264 SHGs

during the year 2013-14.

Table-II (b): Represents the progress under microfinance. Bank Loans disbursed and outstanding to MFIs during the year 2013-

14 is Rs. 10,282.49 crore in 545.00 MFIs and Rs. 16,517.43 crore in 2,422.00 MFIs as on 31st march 2014. SIDBI has also

contributed in loan disbursed and loan outstanding by Rs. 64,601 crore in 41 MFIs and Rs. 1,979.89 crore in 84 MFIs.

Commercial banks have contributed to increased number of bank loan disbursed Rs. 9,468.82 crore in 484 MFIs and Loan

outstanding 14,307.57crore in 2,197 MFIs during the year 2013-14.

MICRO INSURANCE

Micro insurance is another financial innovation in India. Micro insurance provides for low-income people by variety of insurers,

which run in accordance with generally accepted insurance principles and funded by premiums (Parvathi, G, 2012). Micro

insurance regulations, IRDA 2005 provide a platform to distribute insurance products, which are affordable to rural and urban

poor and to enable micro insurance to be integral part of country’s wider insurance system.

Table-III: New Business under Micro Insurance Portfolio for 2013- 2014

Amount in Lakhs

Sources: IRDA, Annual Report 2013-2014

Intermediaries: Micro- insurance business is done through the following intermediaries:

Non-Government Organizations,

Self-Help Groups,

Micro-Finance Institutions.

IRDA has formulated the micro insurance regulations. On 3rd April, 2013 the authority had issued a circular permitting some

entities like district co-operative banks, Regional rural banks, etc., who are banking correspondents to be appointed as micro

insurance agents with a view to facilitating better penetration of micro insurance business.

Table-III represents that the individual new business premium stood at Rs. 95.65 crore for 27.67 lakhs new policies, the group

new business premium accounted for Rs. 141.76 crore covering 1.31 crore lives under micro insurance segment in 2013-2014. In

a portfolio LIC provides significant contribution to this business that is 86.35 crore of new business premium under 22.05 lakh

policies and Rs. 125.81crore of group premium covering 1.18 crore lives.

Micro Insurance Products in India

Officially, there are 23 registered micro insurance products filed by 15 insurance companies in India. Micro insurance products in

India can be classified into four different types:

Products registered as micro insurance products;

Rural and social products not registered as micro insurance products;

Community based products in partnership with insurance companies; and

Independent community based micro insurance products.

A micro insurance agent may work with One Life Insurance Company and one General Insurance Company. In addition to this, a

Micro Insurance Agent may also work with Agriculture Insurance Company of India for distributing micro insurance products

of crop insurance and with any one of the standalone life insurance companies for distribution of their health insurance products.

Insurer

Individual Group

Policies Premium Schemes Premium Lives Covered

Private 561339 929.29 164.00 1595.23 12,91,741

LIC 22,05,820 8,635.77 5292.0 12,581.45 1,18,87,303

Industry Total 27,67,159 9,565.06 5,456.00 14,176.68 1,31,79,044

http://www.business-standard.com/search?type=news&q=Crop+Insurance





PARADHAN MANTRI JAN DHAN YOJANA (PMJDY)

Prime minister of India Shri Narendra Modi recently announced a new scheme “Jan Dhan Yojana” on Independence Day 2014 at

Red fort. The objective of this scheme is ensuring access to various financial services like: 1) Availability of basic saving bank

account, 2) Access to need based credit, 3) Remittance facility, 4) Insurance and pension to financially excluded sections i.e.

weaker sections and low-income groups. The scheme envisages universal access to banking facilities with one basic account for

every household, access to credit insurance and pension facility. In addition, the beneficiary would get RuPay debit card having

inbuilt accident insurance covers of Rs. 1 lakh. Pradhan Mantri Jan- Dhan Yojana is a national mission on financial inclusion.

Table-IV represents that the total number of accounts open in rural and urban area banks under PMJDY as on 19.08.2015 is 17.74

crore out of which 10.74 crore bank accounts open in rural areas and 7 crore bank accounts in urban areas. The total number of

Rupay debit cards provided by banks is 15.65 crore with 45.32 percent of accounts open with zero balance. Public sector bank

provides significant contribution to the progress of this scheme with 13.86 crore-bank accounts in rural and urban areas. This

scheme is a national mission on financial inclusion.

Table-IV: Pradhan Mantri Jan - Dhan Yojana (Accounts Opened As on 19.08.2015)

Amount in Crore


Financial innovation schemes provide various financial products to low income groups for their financial growth. There are

certain financial products provided by the financial markets to financially excluded people, which help in financial inclusion of

poor population in India.

CONCLUSION

Financial innovation is making new approaches for financial industries. Today India may boast of 7-8 percent GDP growth but

still 50 percent of the population lives below the international poverty line. Financial markets provide number of financial

products like- mobile banking, micro insurance, microfinance, and micro credit to such poor population for their financial growth.

Mobile banking is considered as a new era in banking. Now-a-days, there are 22 million active mobile banking customers in India.

There are many societies, companies, trusts and bodies corporate, banks (including commercial banks RRBs and co-operative

banks), primary agricultural credit societies, SHGs linked to banks and MFIs that include NBFCs and such other institutions that

are engaged in providing financial services to the poor households. Govt. has also taken certain initiative in financial sector for the

financial inclusion in the country.

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No.

Sector

Number of Accounts Number of

Rupay

Debit cards

Balance in

Accounts

% of Accounts

With Zero Balance

(In Lacs)

Rural

Urban

Total

1. Public Sector Banks 7.61 6.25 13.86 12.07 17758.39 44.95

2. Regional Rural Banks 2.71 0.46 3.17 2.33 3807.15 47.00

3. Private Banks 0.42 0.29 0.7 0.62 1081.8 45.71

Total 10.74 7 17.74 15.65 22647.35 45.32

http://www.pmjdy.gov.in/account-statistics-country.aspx

http://ezinearticles.com/





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https://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=AR&mid=11.

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financial-services

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26. Retrieved from http://www.governancenext.com/digital-india/

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*****

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http://articles.economictimes.indiatimes.com/2014-08-25/news/53205445_1_digital-india-india-today-financial-services





https://www.nabard.org/english/home.aspx

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http://www.sbank.in/2012/11/financial-inclusion-for-essay-writing.html





AN EVALUATION OF FINANCIAL PERFORMANCE OF

STATE ROAD TRANSPORT CORPORATIONS: A CASE STUDY OF

THE ANDHRA PRADESH STATE ROAD TRANSPORT CORPORATION

Dr. G. V. Chalam31 Nohmman Ali32

ABSTRACT

Among the various financial techniques to analyze the performance of any business organization, the ratio analysis is most

appropriate to evaluate the financial performance of the business concern, since it examines the performance of the business

organization in different dimensions. As every organization has to conduct its activities on “Business Principles” and profit is

an index of performance and the best utilization of financial resources. This would be good not only to the organization but to

the society at large to allow the business concerns to earn a reasonable return on the investment made, so as to provide the

benefits of growth and expansion to serve the needs of the travelling public. Against this background, an attempt is made in

this paper to evaluate the performance of the public utility organization, whose financial performance is measured in

commercial perspective and is usually considered as a criterion of estimating the efficiency of an enterprise, whether it is a

public or private. Now, the present study is made to evaluate the financial performance in terms of revenue and cost structure

analysis of the state road transport corporation. Another important factor that affects the profitability of the selected

organization is the social obligations of the corporation to deserving sections of the society should also be analyzed.

Thus, the present study also analyses the impact of social obligations on the financial performance of the corporation. The

major findings of the analysis are: The debt equity ratio has not maintained the standard norm during the study period,

because of the higher proportions of debt and correspondingly the absence of capital contributions from the participating

governments. Further, during the period of study, there was a shortage of working capital. The analysis of advance and

deposits revealed that the corporation was liberal to meet the needs of the staff as the advances to staff and others constituted

a major part of the total advances and deposits of the corporation. Since the total receivables of the corporation have

gradually increased during the period of study, it should speed-up its recovery from various parties. The major impact on the

profitability of the corporation can be seen mainly due to the policies of the government, like hike in MV Taxes, non-

reimbursement of concessions adopted during the initial period of study and due to the frequent hike in the prices of HSD oil

and other inputs. As a social obligation, the corporation has been spending sizeable amounts of funds on concessional travel

facilities to different sections of the society. The cumulative impact of these concessions was experienced by the corporation in

the form of losses during the study period.

KEYWORDS

Techniques of Financial Analysis, Ratio Analysis, Social Obligations, Working Capital, Debt-equity Ratio, Current

Ratio, Quick Ratio, EPK, CPK etc.

INTRODUCTION

Analysis and Interpretation of financial statements are necessary to assess the financial performance of an organization through

full diagnosis of the profitability and financial soundness of the organization. According to Myers, “Financial Statement Analysis

is largely a study of relationship among the various financial factors in a business as disclosed by a single set of statements and the

study of the trend of these factors as shown in a serious of statements”.

FINANCIAL ANALYSIS

Financial analysis can be classified into different categories depending upon the material used, and the modus operandi.

According to the material used, it can be further classified into two types:

External Analysis: Those who are outsiders for the business do this analysis. The term outsiders include investors,

credit agencies, government agencies and other creditors who have no access to the internal records of the company.

These persons mainly depend upon the published financial statements. Their analysis serves only a limited purpose. The

31 Department of Commerce & Business Administration, Acharya Nagarjuna University, Andhra Pradesh, India,

[email protected] 32Research Scholar, Department of Commerce & Business Administration, Acharya Nagarjuna University, Andhra Pradesh, India,

[email protected]







position of these analyses has improved in recent times on account of increased governmental control over companies

and governmental regulations requiring more detailed disclosure of information by the companies in their financial

statements.

Internal Analysis: Persons who have access to the books of account do this analysis and other information related to

the business. Such an analysis can therefore, be done by executives and employees of the organization or by officers

appointed for this purpose by the government or the court under powers vested in them. The analysis is done depending

upon the objective to be achieved through this analysis.

According to the modus operandi, financial analysis can also be of two types:

Horizontal Analysis: In case of this type of analysis, financial statements for a number of years are reviewed and

analyzed. The current year’s figures are compared with the standard or base year. The analysis statement usually

contains figures for two or more years and the changes are shown regarding each item from the base year usually in the

form of percentage. Such an analysis gives the management considerable insight into levels and areas of strength and

weakness. Since this type of analysis is based on the data from year to year rather than on one date, it is also termed as

‘Dynamic Analysis’.

Vertical Analysis: In case of this type of analysis a study is made of the quantitative relationship of the various items in

the financial Statements on a particular date. For example, the ratios of different items of costs for a particular period

may be calculated with the sales for that period. Such an analysis is useful in comparing the performance of several

companies in the same group, or divisions or departments in the same company. Since this analysis depends on the data

for one period, this is not very conducive to a proper analysis of the company’s financial position. It is also called ‘Static

Analysis’ as it is frequently used for referring to ratios developed on one date or for one accounting period. It is to be

noted that both analyses – vertical and horizontal can be done simultaneously also. For example, the Income Statement

of a company for several years may be given. Horizontally, it may show the change in different elements of cost and

sales over a number of years. On the other hand, vertically it may show the percentage of each elements of cost to sales.

TECHNIQUES OF FINANCIAL ANALYSIS

A financial analyst can adopt one or more of the following techniques/ tools to examine the financial performance of an

organization.

Figure-1


Among the said techniques, the ratio analysis is most appropriate to assess the financial performance of the business concern,

since it examines the performance of the business organization in different dimensions. Therefore, the studies of this type are used

the ratio technique to evaluate the financial performance of the organizations.


Satyannarayana, Y., (1976) in a comprehensive study of major State Transport Undertakings in India, analyzed itemized costs and

performance of the STUs and ultimately suggested a management control system to harness the performance of the STUs. Krishna

R. R. (1977) in his study on debt-equity ratio in road transport corporations in Tamil Nadu and found that the debt-equity ratio in

almost all the selected road transport corporations in Tamilnadu has shown an upward trend during the period of study. He

suggested that the STUs, which are under social obligation to ply buses on uneconomic routes in remote areas and to invest more

funds to the corporation, should liberally be contributed in the form of equity or to convert a portion of their debt as share capital

to strengthen its equity base and to reduce the imbalance in the capital structure. Walters (1979) in his study attempted to establish

a relationship with respect to profitability and costs of buses of different sizes, and inferred that there was no evidence of scale of





economies in large buses. Satyannarayana J (1985) undertook a study on the performance of the APSRTC by examining the cost-

fare relationships and operational performance, capital structure and financial policies. Viswanatham, V. (1986), in his study on

finances of public enterprises analyzed the performance of the APSRTC in terms of deployment of funds, physical and operational

performance, cost-fare relationship which have a bearing on the finances and improving the overall performance of the

corporation. He suggested that the corporation should attempt to make a proper study of the lose making routes and evolving a

suitable machinery to ensure the financial health of the organization is not jeopardized.

Srinivas Prasad and Mohd Akbar Ali Khan (1996), in their study attempted to examine the financial implications of the social

obligations entertained by the APSRTC. The study concluded that the net effect of the social obligations would be the increasing

dependence of the corporation on the participating governments not only the increasing dependence of the corporation on the

participating governments not only for financing the replacement and expansion but also the cost of meeting the social

obligations. The study suggested various measures like quantifying the actual kilometers operated on bad surface roads to estimate

the extent of losses of the APSRTC, which has been incurring losses due to the wide variations in the cost of operation on

different types of roads.

Reddy RVS (1999), in his study on social objectives and finances of STUs’ suggested that the APSRTC as an instrument of social

policy is required to provide transport sometimes even below the operating costs on purely social considerations to certain classes

of consumers in certain inaccessible areas. He also made a comment that the presence of the social objectives in reducing the

surpluses available directly affect the financial performance and indirectly influence the size of the internal finances available for

financing the expansion programs of the corporation. Therefore, the study suggested that at least the amount of financial

implications because of social obligations should be reimbursed by the government to facilitate an objective study of the

corporation’s performance and contribution to the society. Rama Chandraiah C., and A.K. Patnaik (2003), in their study on the

state eroding public sector profitability- The case study of the APSRTC analyzed how several political and economic policies of

the state are responsible for the erosion of financial performance of the APSRTC. According to them, the two main strategies used

by the government to undermine the APSRTC are the positions of discriminatory motor vehicle tax on its own transport sector

and ignoring illicit operations by the private operators. From the review of the earlier studies, it is opined that many of these studies have been conducted on the financial performance of

the state road transport undertakings in general. Further, most of the studies were conducted on the financial performance without

comparing the cost-revenue relationships of different variables to know the cause and effect of the situation to understand and to

improve the performance of the undertakings. Therefore, based on this background the present study is an improvement over the

earlier studies by analyzing the cost-revenue relationships and the impact of social obligations and running the busses in the

uneconomical routes on the financial performance of the corporation.

OBJECTIVES AND METHODOLOGY OF STUDY

Against this background, an attempt is made to analyze the financial performance of the APSRTC as it reveals how efficient is the

corporation in utilizing its financial resources and achieving its objectives. Further, it also analyzes the impact of social

obligations and the policy of running the busses in the uneconomical routes. The study covers a period of 10 years from 2002-03

to 2011-2012. The study is based mainly on secondary data, which was collected from the various annual reports of the

corporation and other administrative reports.

ANALYSIS OF FINANCIAL PERFORMANCE OF THE SELECT CORPORATION

A ratio is an arithmetical relationship between two numerical values. The financial ratio analysis is a study of ratios between

various items or groups of items in the financial statements of an organization. The financial ratios have been classified in several

ways. For the present purpose, they are divided into three broad categories to study the following areas, which are as follows:

Working Capital Analysis

This is more important in the context of a public utility organization because a very important reason for losses or low level of

profits of the public enterprises in India was the ineffective and inefficient utilization of working capital. Working capital

management involves the relationship between a firm’s short-term assets and its short-term liabilities. The goal of working capital

management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing

short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts

receivable and payable, and cash. A very common and popular method of calculating working capital is to find out the difference

between current assets and current liabilities. Algebraically:

Net Working Capital = Current Assets – Current Liabilities





In this context, it is important to mention that current assets must exceed current liabilities and thus only there can be working

capital. If the current liabilities exceed current assets, there is no working capital, but a working capital deficit. A study of working

capital is an important aspect of financial management because; it affects the liquidity position, inventories, and the profitable

status of an organization. Hence, an attempt is made in this paper to study the working capital position of the APSRTC by

analyzing its current assets and current liabilities.

Working Capital Management in APSRTC

The Working Capital along with current ratio of the corporation can be seen from the Table-1 over the period of study. The trend

reveals that there was a working capital shortage for all nine years during the period of study except in 2011-12 it was Rs. 28

crores. Such situation arises either due to sudden decline in the current assets or unexpected rise in the current liabilities. The table

shows that the current liabilities of the corporation increased from Rs. 404 crores in 2002-03 to Rs. 2849 crores in 2011-12, an

increase of 704 percent over the study period. Whereas, the current assets of the corporation showed an increase of 1332 percent,

that is from Rs. 215 crores in 2002-03 to Rs. 2877 crores in 2011-12.

According to an official of APSRTC, the main reason for this tendency was due to the increase in the credit period and decrease in

the inventory levels. Generally, APSRTC provides concessional travel to various parties. On the request of the corporation, the

Government accepted for 50 percent of reimbursement of concessions from 2002-03. However, due to the stringent financial

position, the corporation also requested the Government for 100 percent reimbursement against motor vehicle taxes. However, the

Government Order is awaited. In such a situation, the corporation should try to decrease the current liabilities to some extent, so

that it leads to improvement in the working capital position of the APSRTC.

Table-1: Working Capital of the APSRTC during 2002-12 (Rs. in Crores)

Year Current Assets Current Liabilities Net Working Capital Current Ratio

2002-03 215.98 404.29 -188.31 0.53

2003-04 311.76 385.90 -74.14 0.81

2004-05 455.08 609.38 -154.31 0.75

2005-06 319.33 617.51 -298.18 0.52

2006-07 634.00 1134.93 -500.92 0.56

2007-08 864.31 1163.99 -299.68 0.74

2008-09 1197.55 1418.72 -221.16 0.84

2009-10 1596.72 2255.62 -658.90 0.71

2010-11 2240.50 2367.69 -127.19 0.95

2011-12 2877.88 2849.39 28.49 1.01

Sources: Annual Accounts, APSRTC

Note: Working Capital = Current Assets - Current Liabilities

Current Ratio = Current Assets /Current Liabilities

(a) Current Ratio

Current ratio is generally an acceptable measure of short term solvency as it indicates the extent to which the claim of short term

creditors are covered by assets that are likely to be converted into cash in a period corresponding to the maturity of the claim. The

ratio is important to the short-term creditors since it gives an indication of the corporation’s ability to meet its current obligations.

Table-1 also explains the current ratio of the APSRTC. The table reveals that the current ratio of the APSRTC fluctuated from a

maximum of 1.01 in 2011-12 to 0.52 in 2005-06. During the period of study, the ratio is less than the standard norm of 2:1. This

fluctuating trend in the current ratio reflects an unsatisfactory financial position, which may be due to the accumulation of current

liabilities for the reasons explained earlier. The conservative ratio of 2:1 is not suitable to the road transport industry as the STUs

produce service rather than tangible physical goods, no conversion period to account for the time lag between the raw material

stage and the finished product stage arises which needs to be financed by working capital. Yet inventory like spare parts has to be

maintained which requires working capital account receivable which constitute an important element of working capital in normal

business are not a significant feature in the case of STUs in view of the fact that STU receipts are by and large cash receipts. Since

all the operations of the corporation are based mainly on the cash flow basis, the rule of thumb (2:1) cannot be expected in case of

APSRTC.

Analysis of Current Assets

The analysis of current assets is of major importance to internal and external analysis because of its close relationship with the

current day-to-day operations of a business. The main components of current assets in the APSRTC are inventories, advances and

deposits, receivables, cash and bank balances etc. Each of these has been analyzed exclusively in the following pages.





(i) Advances and Deposits

As seen from Table-2, the percentage of advances and deposits to total assets, with a declining range of between 26.58 in 2002-03

and 4.97 per cent in 2011-12 during the period of study. Advances given to staff for various purposes have been the main

component of advances and deposits of the corporation. It has increased from Rs. 48 crores in 2002-03 to Rs. 130 crores in 2011-

12, with some fluctuations during the middle of the study period. In 2006-07, this proportion has increased due to the revision of

wages to the extent of Rs. 70 crores. Another item of importance was the advances to the suppliers of stores oils and chassis,

which has increased from Rs. 1 crore in 2002-03 to Rs. 61 crores in 2010-11, because of the increase in the purchase of vehicles.

The deposits with the state government and local authorities are also visible, which has been rather small because the corporation

has very little to spare for deposits due to its tight cash position.

Table-2: Composition of Advances & Deposits of the APSRTC during 2002-12 (Rs. in Crores)

Year

Advances to

Staff and

Officers

Advances to

Suppliers of

Stores Oil and

Chasis

Deposits with

State

Government

and Local

bodies

Total

Advances and

Deposits

Total Current

Assets

Percent of

Advances &

Deposits to

Total Assets

2002-03 48.50 1.19 7.71 57.40 215.98 26.58

2003-04 44.18 3.67 8.44 56.29 311.76 18.06

2004-05 44.43 1.72 8.67 54.82 455.07 12.05

2005-06 41.79 1.42 7.90 51.11 319.33 16.00

2006-07 70.46 25.99 8.16 104.61 634.00 16.50

2007-08 47.80 11.55 6.53 65.88 864.31 7.62

2008-09 49.50 13.63 7.86 70.98 1197.55 5.93

2009-10 43.32 2.71 8.06 54.09 1596.72 3.39

2010-11 52.28 61.89 8.19 122.36 2240.50 5.46

2011-12 130.64 3.76 8.72 143.13 2877.88 4.97


The above analysis reveals that the corporation was liberal to meet the needs of the staff as the advances to staff and others

constituted a major part of the total advances and deposits of the corporation. The proportion of advances and deposits of the

corporation to the total current assets has been considerably high, which has a considerable impact on the working capital. Thus,

the corporation should try to minimize the advances.

(ii) Cash and Bank Balances

Considerable amount of either cash or bank balance is necessary for running the day-to-day operations of an under taking

smoothly. Keeping too much of cash in spare may also prove costly. On the other hand, an undertaking has to keep its goodwill

through timely paying the creditors and suppliers. Therefore, systematic cash management is very important because any

mismanagement may lead to the total failure of the business. Cash is the most vital and important component of working capital

and is the key determinant of the efficiency of working capital management. The adequacy of cash available to meet the needs is

the most essential aspect but at the same time, retention of higher cash balances also involves costs. Table-3 depicts the data

pertaining to cash and bank balances of the APSRTC. The total amount of cash and bank balances has varied considerably from

year to year and no peculiar trend is visible from the analysis. The total amount of cash balances, which was Rs. 54 crores in

2002-03, increased to Rs. 168 crores in 2004-05 and came down sharply to Rs. -20 crores in 2010-11 and again increased to Rs. 5

crores in 2011-12. There has been a wide fluctuation in the cash and bank balances during the period of study.

Table-3: Composition of Cash & Bank Balances of the APSRTC during 2002-12 (Rs. in Crores)

Year Cash

Balances

Cash at

Bank-

Current

Accounts

Cash at

Banks

- Deposits

Drawing

A/c

Total Cash

and Bank

balances

Total

Current

Assets

Percent of

Cash and Bank

balances to total

Current Assets

2002-03 12.02 2.21 0 40.75 54.98 215.98 25.46

2003-04 7.69 -1.11 0 35.21 41.79 311.76 13.40

2004-05 16.78 97.05 0.20 34.56 168.28 455.07 36.98

2005-06 11.76 -7.20 0 30.61 35.17 319.33 11.01

2006-07 12.89 1.63 0 0.00 14.51 634.00 2.29





2007-08 12.90 -11.47 0 17.61 19.04 864.31 2.20

2008-09 12.20 -3.83 0 13.58 21.95 1197.55 1.83

2009-10 54.61 -54.56 0 1.96 1.22 1596.72 0.08

2010-11 14.59 -36.03 0 9.67 -20.89 2240.50 -0.93

2011-12 16.53 -11.47 0 1.59 5.86. 2877.88 0.20


These fluctuations in the money position have mainly taken place due to a number of externalities that are outside the purview of

the corporation. It has to operate in critical situation in which neither the prices of inputs nor the prices of services are within its

control. The table also carries the composition of the cash and bank balances o the corporation. To draw an inference based on

data is difficult because the trend is fluctuating in almost all types of balances. The fluctuations in cash balances might also be due

to the non-payment of salaries in the month of March, which is automatically reflected in the next year’s balances, that leads to

increase in the cash balances. The percentage of the cash and bank balances of 2 percent at the end of 2007-08 was not adequate to

meet the day-to-day operational expenses and to meet the obligations of short-term creditors. Therefore, it may be assumed that

due to the deficiency of cash balances, APSRTC could not meet the current liabilities, which adversely affected the working

capital during the period of study.

Analysis of Current Liabilities

Current liabilities of APSRTC include the purchase liabilities, revenue liabilities, deposits and other current liabilities. The total

current liabilities as is shown in Table-4, even though fluctuated to some extent, have increased from Rs. 404 crs in 2002-03 to

Rs. 2849 crs in 2011-12. The revenue liabilities constituted the major part of the current liabilities, where the percentage of this

component to total liabilities was 77 per cent in 2007-08. This was due to the nonpayment of MV Taxes to the Government, which

was adjusted against the concessions. Another reason for the increase in the revenue liabilities was due to the inclusion of the

amount of Motor Vehicle Accident Claims in the current liabilities. As per Motor Vehicles Act, there is provision for accident

compensation. However, the amount will be lying in current liabilities until the actual payment is made. The amount of revenue

liabilities also includes the interest payable on loans, pay and allowances to the staff, the major factor that contributes to the

increase in the revenue liabilities.

Table-4: Composition of Current Liabilities of the APSRTC during 2002-12 (Rs. in crores)

Year Revenue

Liabilities

Purchase

Liabilities Deposits

Other Current

Liabilities

Total Current

Liabilities

2002-03 257.54 26.40 63.36 56.98 404.29

2003-04 210.59 45.59 70.27 59.45 385.90

2004-05 409.40 60.75 75.61 63.63 609.38

2005-06 434.45 27.22 87.46 68.37 617.51

2006-07 875.38 78.28 107.35 73.91 1134.93

2007-08 891.81 66.10 126.20 79.88 1163.99

2008-09 1108.81 70.65 150.75 88.51 1418.72

2009-10 1925.93 66.30 182.84 80.54 2255.62

2010-11 1935.63 165.07 178.06 88.93 2367.69

2011-12 2407.21 120.59 223.19 98.41 2849.39


Deposits constitute the second major item in the current liabilities. It has increased from Rs. 63.36 crores in 2002-03 to Rs. 223.19

crores in 2011-12. The increasing trend of the deposits reveals the fact that the corporation depends mainly on the deposits of the

outsiders and employees. The purchase liabilities shows a fluctuating trend, where it has increased from Rs. 26.40 crores in 2002-

03 to Rs.120.59 crores in 2011-12. This increase in the amount may be due to the non-payment of dues by the APSRTC. Other

current liabilities include revenue scrap suspense, non-departmental recoveries, and provisions. This amount also increased from

Rs. 56.98 crores in 2002-03 to Rs. 98.41 crores in 2011-12. The increase was due to the non-payment of the amounts by the staff

under various schemes such as, Provident Fund, LIC, Cooperative credit society etc. Thus, the foregoing analysis reveals that the

current liabilities constituted a major amount in the working capital structure, which resulted in the deficit in the working capital.

(b) Quick Ratio

One defect of the current ratio is that it fails to convey any information on the composition of the current assets of a firm. The

quick ratio is a measure of more liquidity designed to overcome the defect of the current ratio. In order to have a more refined

measure of liquidity, the ratio between quick assets and current liabilities in the form of quick ratio may be calculated. This ratio is





a better test of financial strength of a corporation than the current ratio as it given no consideration to inventory. As it indicates the

cash flow position of a concern in the short term, it is very useful in forecasting and managing the cash position. The quick ratio of

the corporation can be seen from Table-5. The quick ratio fluctuated between 0.43 in 2002-03 and 0.98 in 2011-12. During the

remaining period of study, it has not reached the standard norm of 1:1 due to the reasons explained earlier. Hence, the liquidity

position of APSRTC is not satisfactory, there is still scope for improvement, and this can be made by the application of relevant

techniques of working capital management.

Table-5: Quick Ratio of the APSRTC during the period 2002-12 (Rs. in Crores)

Year Current Assets Inventories Quick Assets* Current Liabilities Quick Ratio**

2002-03 215.98 43.12 172.86 404.29 0.43

2003-04 311.76 45.71 266.05 385.90 0.69

2004-05 455.07 60.83 394.24 609.38 0.65

2005-06 319.33 63.63 255.70 617.51 0.41

2006-07 634.00 73.56 560.44 1134.93 0.49

2007-08 864.31 75.64 788.67 1163.99 0.68

2008-09 1197.55 81.54 1116.02 1418.72 0.79

2009-10 1596.72 77.60 1519.12 2255.62 0.67

2010-11 2240.50 87.47 2153.04 2367.69 0.91

2011-12 2877.88 93.25 2784.62 2849.39 0.98


Note: *Quick Assets = Current Assets – Inventories

**Quick Ratio = Quick Assets / Current Liabilities

In order to have a clearer picture of the working capital position, an attempt is made to analyze the current assets and current

liabilities.

CAPITAL STRUCTURE ANALYSES

The capital structure analysis of an organization can be examined by calculating the advantage ratios. These advantage ratios are

the measure of the relative claims of creditors and owners against the firm’s assets. A high ratio shows that the claims of creditors

are greater than those of owners. A low ratio, on the other hand, implies a greater claim of owners than creditors. From the

creditor’s viewpoint, it represents a satisfactory capital structure of the business since a high proportion of equity provides a larger

margin of safety for them. For this purpose, debt equity ratio is calculated by dividing debt by equity. Even though debt equity

ratio is important in analyzing the capital structure of APSRTC, an analysis of the magnitude and stability of cash flows relative to

fixed charges is also extremely important in determining the appropriate capital structure for the firm. To analyze the debt

capacity of the corporation, the times interest earned ratio and debt service coverage ratio are calculated.

Debt-Equity Ratio

Debt-equity ratio is one of the measures adapted to make-up the capital structure of public enterprise. This ratio indicates the

financial stability of a firm and represents the proportion of the owner’s funds in the business. The general norm for debt equity

ratio is 2:1. It implies that for every one-rupee equity, the firm may raise two rupees debt, which means that creditors have

doubled the stake of owners in the business. However, a debt equity ratio of 1:1 is in order for a public utility like a passenger

transport. The proportion of debt should not be high as to affect the equity interest of the government in State Transport

Corporations. In case of the APSRTC, as seen from the table-6 that from 2002-03, the debt equity ratio has been increasing even

then the ratio was not nearer to the prescribed norm. Even though the ratio was not nearer to the prescribed norm, the corporation

has been able to convince the banks in getting the credit. The high beat in debt equity ratio implies that, on one hand, there has

been increase in the borrowed funds of the APSRTC from 2002-03. Further, there were no contributions from participating

governments to meet the increased capital needs of the corporation.

Table-6: Debt Equity Ratio of the APSRTC during 2002-12 (Rs. in Crores)

Year Contributions from participating

Government / Equity Debt Debt Equity Ratio

1 2 3 =(2)/(1)

2002-03 201.27 821.84 4.08

2003-04 201.27 1040.98 5.17

2004-05 201.27 1325.89 6.59





2005-06 201.27 1157.00 5.75

2006-07 201.27 1095.69 5.44

2007-08 201.27 1299.74 6.46

2008-09 201.27 1404.47 6.98

2009-10 201.84 1558.24 7.72

2010-11 201.84 2520.41 12.49

2011-12 201.84 3806.22 18.86


Times Interest Earned Ratio

In computation of these ratios, Earnings before Interest and Taxes (EBIT) will be used as a rough measure of the cash flow

available to cover the debt service obligations. The most widely used coverage ratio is times interest earned ratio, which is simply,

EBIT*

Times Interest Earned Ratio = -------------------------------

Interest on debt

This ratio is very important from the lender’s point of view. It indicates whether the corporation would earn sufficient profits to

pay periodically the interest charges. Although generalization about what is an appropriate interest coverage ratio is difficult,

financial experts usually are concerned when the ratio gets much below 3:1. The higher the number the more secure the lender is

in respect of his periodical interest income. A higher interest coverage ratio means that the firm can easily meet its interest burden

even if profits before interest and taxes suffer a considerable decline. A low interest coverage ratio, on the contrary, may result in

financial embarrassment under the same situation.

Table-7: Coverage Ratio of the APSRTC during 2002-12 (Rs. in Crores)

Year Interest on Loans (1) Earnings Before Interest (2) Coverage Ratio (2) / (1)

2002-03 96.63 -342.59 -3.55

2003-04 105.15 -323.93 -3.08

2004-05 102.90 -440.24 -4.28

2005-06 84.35 -463.29 -5.49

2006-07 76.12 -410.63 -5.39

2007-08 58.59 -395.79 -6.76

2008-09 116.14 -564.45 -4.86

2009-10 114.62 -514.55 -4.49

2010-11 145.80 -317.40 -2.18

2011-12 272.64 -585.31 -2.15


The table-7 shows the coverage ratio of the APSRTC in terms of times interest earned ability from 2002-03 to 2011-12. It reveals

that the ratio is in the negative trend for 10 years during the period of study. The average times interest earned ratio of - 4.22 of

APSRTC indicates its inability to cover interest payments, as it has incurred losses during most of the study period. It should be

noted that the above ratio tells nothing about the built-in ability of APSRTC to meet principal payments on its debts.

Debt Service Coverage Ratio

In computation of these ratios debt-service coverage ratio, Earnings before Interest and Taxes (EBIT) plus depreciation will be

used as a measure of the cash flow available to cover the interest and principal amount to be paid as an obligation. Therefore, it is

the amount of cash flow available to meet annual interest and principal payments on debts. Normally the ideal ratio should be over

1. A ratio of less than 1 would mean a negative cash flow. It is calculated as:

EBIT* + Depreciation

Debt Service Coverage Ratio = --------------------------------------------

Interest + Principal Payment

Table-8 reveals that the debt service coverage ratio was more than 1 from 2002-03 to 2007-08. It has shown a declining trend,

where it is less than 1 since the corporation experienced losses continuously during that period.





Table-8: Service Coverage Ratio of the APSRTC during 2002-12 (Rs. in Crores)

Year

Net Profit

(1)

Interest on

Loans (2)

Depreciation

(3)

Repayment

(4)

Total of

Numerator

A=(1+2+3)

Total of

Denominator

B=(2+4)

DSCR

(A/B)

2002-03 -181.67 96.63 1506.93 152.08 1421.89 248.71 5.72

2003-04 -42.02 105.15 1585.67 183.11 1648.79 288.26 5.72

2004-05 -224.85 102.90 1615.17 235.91 1493.21 338.81 4.41

2005-06 -42.78 84.35 1606.80 434.47 1648.37 518.81 3.18

2006-07 -111.82 76.12 1726.89 561.88 1691.18 638.00 2.65

2007-08 135.67 58.59 1843.53 278.75 2037.78 337.34 6.04

2008-09 110.78 116.14 1905.68 3126.27 2132.60 3242.41 0.66

2009-10 -514.55 114.62 1796.64 751.32 1396.71 865.93 1.61

2010-11 -317.40 145.80 1919.80 1087.35 1748.20 1233.14 1.42

2011-12 -585.31 272.64 1905.12 2503.96 1592.45 2776.60 0.57

Average 3.20


PROFITABILITY ANALYSIS

Profit making is the fundamental objective of private enterprise; hence, profitability is the yardstick for judging the efficiency of

such undertaking. The question arises whether the same yardstick should be applied in case of state undertakings also. Profit as an

objective for public sector can be justified as the profits of public sector go to augment the revenue of the state and to the extent;

profits of the public sector are always for public welfare unlike that of private sector where individual welfare is the supreme

motto. It is rightly observed that profits of public enterprises are the propeller of socialist administration. It is not sufficient if they

function at a no profit no loss basis. Further, in view of the policies followed by the participating Governments, and particularly,

by the State Government, both in its capacity as the owner and as the custodian of public interest, it can be said that a coalition

between the government and management exists, which is responsible for the profitability to be at a sub-optimum.

As the organization has to conduct its activities on ‘Business Principles’, profit is an index performance and the best utilization of

financial resources. Further profits help growth and growth itself generate more profits. This would be good not only to the state

road transport corporation, but to the society at large to allow the organization to earn a reasonable return on the investment made,

so as to provide the benefits of growth and expansion to serve the needs of the travelling public.

In the light of the above discussion, the profitability is measured in terms of return on capital employed and is usually considered

as a criterion of estimating the efficiency of an enterprise, whether, public or private. Now, an attempt is made to evaluate the

financial performance in terms of revenue and cost structure analysis of the corporation. Another important factor that affects the

profitability of the APSRTC, the social obligations of the corporation to deserving sections of the society should also be analyzed. The importance of the study of the social obligations and its impact lies in the fact that the economic viability of the corporation is

adversely affected and consequently financial performance is adversely affected. Thus, the present study also analyses the impact

of social obligations on the financial performance of the corporation.

Revenue and Cost Analysis of the APSRTC

Though, the RTC Act 1950 states that a STU should follow business principles, the various decisions imposed by the Government

does not allow the corporation to function in this direction. At present, the corporation is running the buses on all motorable roads

in the Andhra Pradesh, which has resulted in running on 65 per cent uneconomic routes. Another obstacle to the revenues of the

corporation is the increase in the illegal private operators that operate on the notified routes of the corporation. The impact of

above said operations has been increasing in the corporation, thus leading to financial burden on the corporation.

The corporation, as a part of its social obligation extends concessions to various sections of society, is now looking up to the

Government for the reimbursement of concessions. When the economy is booming with a visible increase in the number of people

travelling, the APSRTC is facing a very dismal and grim situation. It is necessary, under this situation, to study the factors that are

responsible for the turned out of a profit-making unit in to a loss-making unit. Hence, an attempt is made to study the profile of

profits and losses of the corporation.

Revenue Analysis

Total revenue derived from all the sources constitutes ‘Gross Revenue’ or ‘Total Revenue’. Total Revenue is divided into two

components: (i) Traffic Revenue: Revenue realized from transportation of passengers and incidental revenue related to





transportation of passengers like charges for accompanied luggage, reservation charges, charges for transport parcels constitutes

traffic revenue. (ii) New Traffic Revenue: Revenue from other sources not directly related to transportation of passengers like fee

for advertisement on buses, shelters, tickets, cloak room charges, rent from property and other miscellaneous items constitutes

non-traffic revenue.

Operating Revenue or traffic revenue account for more than 96 percent of the total revenue of the corporation revealing the

significant size of this item and its ability to influence the final determination of the result of operations. The major item of

operating revenue is the revenue from the actual fare collections. Thus the actual fare collections can improve either with better

scheduling, better kilometers obtained, better load factor or with revision of fares. Table -9 shows the revenue per kilometer

during the period of study of the APSRTC. It reveals that the loss per bus kilometer was 81 paise in 2002-03. The profit per bus

kilometer was 54 paise in 2007-08 and 41 paise in 2008-09. Thereafter, it ranged a loss between 1.86 paise in 2009-10 and 2.04

paise in 2011-12.

Cost Analysis

In the present world, organizations have become cost conscious, since cost components have a great impact on the financial health

of any enterprise. A clear understanding of costs and their behavior in the corporation is a necessary pre-requisite for the effective

financial management of any enterprise. Revenue and cost generally affect the growth, profitability and survival of any

organization. Profits can be enhanced by either increasing revenues or decreasing costs, or if both of them increase side by side,

then the revenue must rise at a faster rate than the cost.

To evaluate the complete financial performance, it is necessary to analyze the different elements of costs in order to examine those

cost components that contribute to the profit/loss of the corporation. The total costs have been divided into operating costs and

non-operating costs. Operating costs include various expenses incurred on conducting the regular operations of the corporation. The operating costs are analyzed both in absolute as well as per kilometer. A study of the absolute amounts would help to

understand the various items of costs in terms of actual amounts spent and in analyzing the size of increases that took place during

the period under study. The study of costs on per kilometer basis sharpens the focus on the items of costs after incorporating

whatever effect an improvement in the efficiency of management has had in this area. Operating Costs are influenced by a large

number of factors, both internal and external including the continuous rise in the prices of various input factors, expansion of

traffic operation and the inefficiency of the personnel. The published accounts of the corporation have adopted the following

functional classification of grouping of items.

Table-9 also shows the cost ratio, which is more than 1 when the corporation is incurring losses and less than 1 when it is earning

profits. The expense ratio is an indicator of the soundness of financial management. The ratio should be low enough to leave

sufficient margin to give a fair return on capital investment.

Table-9: Revenue and Cost Analysis of the APSRTC

Year Revenue Cost Profit/Loss Expenses

Ratio Total

(Rs. in lakhs)

EPK

(paise)

Total

(Rs. in lakhs)

CPK

(paise)

Total

(Rs. in lakhs)

Per KM

(paise)

2879.60 12.88 3061.27 13.69 -181.67 -0.81 1.06

2003-04 3117.90. 13.76 3163.17 13.96 -42.02 -0.19 1.01

2004-05 3215.76 13.83 3440.62 14.80 -224.86 -0.97 1.07

2005-06 3676.37 15.44 3719.15 15.62 -42.78 -0.18 1.01

2006-07 4187.38 17.11 4299.20 17.57 -111.82 -0.46 1.03

2007-08 4457.54 17.59 4321.87 17.05 135.67 0.54 0.97

2008-09 5039.52 18.84 4928.74 18.43 110.78 0.41 0.98

2009-10 5206.26 18.78 5720.82 20.64 -514.55 -1.86 1.10

2010-11 6145.69 21.23 6463.09 22.34 -317.40 -1.10 1.05

2011-12 6749.92 23.51 7335.23 25.54 -585.31 -2.04 1.09


SOCIAL OBLIGATIONS AND PROFITABILITY

The public enterprises have come to be regarded as an important vehicle to achieve the socio-economic objectives. The need for

public enterprises arises out of the fundamental day of the state to work for the welfare of the people. Public enterprises also

increase the economic welfare of the people by adjusting production to social needs. It may be used as a means for the equitable

distribution of social product, which forms the very basis of the general welfare of the society. Thus, the impact of presence of

social objectives will be more significant in view of the public sector public utility nature of the corporation.





Social obligations are those obligations/responsibilities to follow lines of action or make decisions, which are desirable in terms of

objectives and values of the society. The State Road Transport Corporation, as an instrument of social policy, is required to

provide transport sometimes even below the operating costs on purely social considerations to certain classes of consumers or in

certain inaccessible areas. Thus, the social objectives have a significant place as they inevitably influence the operations and

financial results of the corporation. The general duty of the corporation that it shall exercise its powers progressively to provide an

efficient, adequate, economical and properly coordinated system of road transport services, by implication, involves dilution of

business principles in actual practice. However, the guiding spirit of business principles is essential, for without that guideline it

will be difficult to provide efficient and economic transport.

According to Section 30 of the RTC Act 1950, “after making provisions for payment of interest and dividend under Section 28

and for depreciation and other funds under section 29, a corporation may utilize such percentage of its net profits as may be

specified in this behalf by the state government for the provision of amenities to the passengers using the road transport services,

welfare of labour employed by the corporation and for such other purposes as may be prescribed by the Government.

Section 19 (1) of the Act gives power to the corporation to authorize the issue of passes to its employees and other commuters

either free of cost or at concessional rates and on such conditions as it may seem fit to impose. Besides these sections 34 of the

Act states that the State Government may after consultation with the corporation established by such governments, may give

general instructions to be followed by the corporation. A comprehensive look at the provisions given in the Act reveal; that, on

one land, the Road Transport Corporations have to function on business principles, which means earning at last a reasonable rate

of profit and on the other hand, if wants SRTUs to take up social responsibilities. This involves incurring higher social costs by

taking up measures such as, free and concessional travel facility to some sections of society, operation on uneconomic routes and

so on. These social costs have resulted in to financial drain of SRTUs and thereby affected their financial viability. Besides this,

the state governments are not compensating the entire cost of the social responsibilities undertaken by the corporations.

The presence of social obligations lowers the already low level of profits and results in increasing dependence of the corporation

on the Governments. Consequently, the corporation loses its image, as its ability to continue to serve efficiently will be adversely

affected. In this sense, there is an urgent need for quantifying the losses incurred on account of various social obligations imposed,

so that the public, on one hand, and the corporation and the Government on the other hand, are kept fully aware of the financial

burden of social obligations on the corporation. In this context, it is proposed to study the social obligations, undertaken by

APSRTC that forms a part of non-operating revenue and there by its impact on the financial performance of the corporation. Since

the data in this area was not available in a uniform manner for a specific period, analysis was limited to the extent of the data

available.

The APSRTC is committed to fulfill various social obligations towards various groups in the society. Since these obligations will,

have their impact on the financial performance of the corporation, it is proposed to discuss the obligations carried out by the

corporation, like concessional travel to various classes of commuters, and operating buses on uneconomic routes.

CONCESSIONAL TRAVEL FACILITIES

The corporation is looked at as an instrument of social policy, and is required to provide transport sometimes even below the

operating costs on purely social considerations. It became the responsibility of the corporation to provide huge concessions to

fulfill the political promises of the Governments who always try for implementing agenda for their own survival and pro-poor

image to perpetuate them in power. It is in this context, APSRTC has been extending various concessional travel facilities to

different sections of the society as a social responsibility. The corporation has been incurring losses because of these concessions. However, these amounts of losses are not reflected in the profit and loss account of the corporation. With the result, the public is

not aware about the total burden of such concessions and its influences on the financial performance of the corporation. At

present, the following are groups that are being provided these concessions:

Free bus passes to all the students below 12 years of age to travel from school to residence and back.

Free travel facility to all girl students up to an upper age limit of 28 years, studying X class and below, where the facility

is extended for travel by ordinary services up to a maximum distance of 20 kms in rural areas and 22 kms in

cities/towns.

The students studying in the colleges located in cities/towns are issued with slab rated quarterly route bus passes for a

minimum slab of 4 kms to 22 kms maximum.

Students above 12 years of age studying in various schools/colleges are issued for travel up to a maximum distance of

35 kms in case of students of colleges / higher educational institutions and up to 20 kms in respect of high school

students.

Corporation also issues Special Monthly General Bus Tickets in cities/towns to the students who are studying job-

oriented course.





Corporation operates exclusive buses to special schools/colleges, where the number of student utilizing the facility is not

less than 60.

Corporation is issuing passes to the physically handicapped, mentally retarded, blind, deaf and dumb persons to travel

free by the buses operating in cities/towns. In case of services operating in rural areas, they are allowed 50 per cent

concession in normal fares.

The NGOs are being issued monthly general bus passes for travel in cities to enable them to attend their duties.

Youth attending the interview conducted by the government agencies like PPSC, DSC are issued free bus passes.

Monthly route passes have been introduced in the services operating in the major cities/towns in the state.

The corporation is allowing all the MLAs, their spouses, and MPs hailing from the A.P. to travel free by all its services.

Fee bus passes to all the freedom fighters of A.P., who crossed 65 years of age and receiving pension from either the

A.P. state government or central government.

As a welfare measure to the employees of the corporation, all the children of employees studying in schools/colleges are extended

all types of student bus passes at an additional concession of 75 per cent over the rates of bus passes charged to other students.

While obligations like concessions to students, journalists, NGOs, freedom fighters and MLAs have been thrust upon the

corporation by the Government as policy decision, other obligations like concessional travel to physically handicapped, and others

have been undertaken by the corporation itself on humanitarian grounds. Thus, the corporation has been overburdened because of

the above said concessions. Since the data on the amount of concessions based on above categorization was unavailable, the study

was limited to the total amount of concessions provided by the corporation. Table - 10 reveals the number of concessions issued

and the revenue loss because of these concessions.

According to the information from the officials of the corporation, it was revealed that the student community received the highest

proportion of these concessions, followed by physically challenged persons. Thus, there was an alarming increase in the number

of concessions during the study period and the major beneficiaries, being students. The same trend can be observed in case of the

amount of concessions also. The total concessional passes, which was Rs. 276 crores in 2002-03, rose up to Rs. 747 crores in

2011-12. Thus, the huge amounts of concessions are provided to the students and the corporation basing on the policy directions

of the Government is doing this. If the desire of the Government is to provide these concessions to the students at large, it should

also bear the burden of the same. However, the corporation is being overburdened because of these concessions and thus the

impact of the same can be seen in the profitability of the corporation.

Table-10: Amount of Revenue foregone due to Concessions in APSRTC during the Period of Study

Year Value of Concessions (Rs. in Crores) Profit/Loss

2002-03 276 -181.67

2003-04 304 -42.02

2004-05 335 -224.85

2005-06 378 -42.78

2006-07 410 -111.82

2007-08 4344 135.67

2008-09 469 110.78

2009-10 5404 -514.55

2010-11 698 -317.40

2011-12 747 -585.31

Sources: Operations Department, APSRTC

The corporation has been providing these concessions since a long time. Its impact was not felt so long as the corporation is

making profits. However, when it started incurring continuous losses, the corporation attributed its losses to these concessions. Further the corporation is now in such a situation, that it can neither afford the burden in providing concessions nor can it

withdraw these concessions abruptly, which may lead to opposition from various sections of the society. The government has

been reimbursing 50percent of the concessions from 2002-03 by way of adjusting the amount towards the MV Tax payable by the

corporation. As these concessions proved a mounting pressure on the organization and upon the request of the corporation, the

Government of AP has agreed to reimburse 100percent of these concessions in the year 2005-06. Rs. 1223 crores is the amount to

be reimbursed to the APSRTC for the concessional travel facilities from 2005-06 to 2007-08. Government has released Rs. 39

crores towards the NGO passes for the above period. Rs. 743 crores is the motor vehicle tax payable by APSRTC, which has been

adjusted against the total amount of concessional travel facilities to be reimbursed by the state government. Rs. 378 crores have

already released by the government and that balance of Rs. 141 crores is to be released to APSRTC. Had the Government took

this decision of reimbursement earlier in 2000 itself, the corporation would have been in a comfortable and healthy position. Thus,

the impact of these concessions on the overall profitability of the corporation can be analyzed.





OPERATION OF BUSES ON UNECONOMIC ROUTES

Another important obligation that affects the profitability of the corporation is the operation of buses on uneconomic routes in the

interest of the public. The RTC Act 1950 stipulates that RTCs should conduct their operations on business principles. In this

context, the corporation need not operate buses on routes that prove to be uneconomical. However, the public sector public utility

character of the passenger transport organization and further the monopoly nature of the organization make it essential for the

corporation to operate services in uneconomic routes. This situation arises partly because of the policy of nationalization pursued

by the corporation.

In APSRTC, the division of routes into economic and uneconomic is based on A-B-C-D analysis.

‘A’ class routes are those, which give revenue more than the total average cost.

‘B’ class routes are those, which give revenue more than 80 per cent average fixed cost and total average variable cost.

‘C’ class routes are those, which give revenue more than 50 per cent and below 80percent of the average fixed cost and

total average variable cost.

‘D’ class routes re those, which give revenue below 50 per cent of the average fixed cost and total average variable cost.

B, C, D routes are treated as uneconomic or un-remunerative routes. These roués contribute to less than 60 per cent occupancy

ratio of the corporation. Table -11 provides the data regarding the number of buses and routes where occupancy ratio is less than

60 per cent. Since the data on this aspect was not available for all the years of study, the analysis is taken up from the year 2002-

03 onwards. Similarly, for want of information on the revenue loss because of these uneconomic routs, the analysis was limited

only to the number of routes.

Table -11: Statistical Data on Uneconomic Routes of APSRTC during the period 2002-12

Year Less than 50 Percent

Occupancy Ratio

Less than 51-60 percent

Occupancy Ratio Total

Routes Buses Routes Buses Routes Buses

2002-03 1656 (26) 2544 2836(36) 5827 8249 18006

2003-04 2138 (26) 3517 2888(36) 6215 8099 17967

2004-05 2189 (27) 3692 2841(35) 6406 8047 18289

2005-06 1180(15) 1832 2203(29) 4797 7597 18246

2006-07 774(11) 1144 2047(28) 4223 7366 18565

2007-08 471 (6) 640 1679(22) 2963 7551 18893

Sources: MIS Section, APSRTC

Note: Figure in Parenthesis indicates the percentage to total routes

As seen from the table, APSRTC currently operates 18893 buses covering 7551 routes. In 2002-03, 54 percent of the total routes

are uneconomic and in 2004-05, the total uneconomic routes were 62 per cent of the total routes. This has come down in the

subsequent years, and as on March 2008, the total uneconomic routes accounted to 28 percent of the total routes. The main

reasons for the decline in the number of uneconomic routes were increase in the profitable routes, and thereby the difference in

buses redistributing to other routes, which are profitable, makes the number of uneconomic routes lesser. Sometimes, there are

certain routes where there is no possibility of attaining minimum occupancy ratio; those routes will be withdrawn from the

operations.

FINDINGS AND SUGGESTIONS

The following are the conclusions that can be observed from the capital structure of the APSRTC.

The debt equity ratio has not attained the standard norm of 2:1 during the study period, because of the higher

proportions of debt and correspondingly the absence of capital contributions from the participating governments.

During the period of study, there was a shortage of working capital. There was a continuous shortage from 2002-2012,

until the end of the study period. The current ratio of the APSRTC fluctuated from a maximum of 0.53 in 2002-03 to 1.01 in 2011-12. During the period

of study, the ratio is less than the standard norm of 2:1. This fluctuating trend in the current ratio reflects an

unsatisfactory financial position.

The quick ratio fluctuated between 0.43 in 2002-03 and 0.98 in 2011-12. The ratio has not reached the standard norm of

1:1 during the period of study.





The analysis of advance and deposits reveals that the corporation was liberal to meet the needs of the staff as the

advances to staff and others constituted a major part of the total advances and deposits of the corporation. The

proportion of advances and deposits of the corporation to the total current assets has been considerably high, which has

a considerable impact on the capital.

The total amount of cash and bank balances has varied considerably from year to year and no peculiar trend is visible

from the analysis. It may be assumed that due to the deficiency of cash balances, APSRTC could not meet the current

liabilities, by which the working capital was adversely affected during the period of study.

The total receivables have gradually increased during the period of study, with some fluctuations during the period of

study. The corporation should speed up its recovery from various parties. However, the fact is that some receivables are

unavoidable and the corporation cannot avoid them.

The revenue liabilities constituted the major part of the current liabilities, where the percentage of this component to

total liabilities was 77 per cent in 20008. This was due to the nonpayment of MV Taxes to the Government, as the

amount was adjusted against the concessions.

The corporation-experienced losses during the major period of study, due to the reasons analyzed in the chapter and

enjoyed profits for two years.

The major impact on the profitability of the corporation can be seen mainly due to the policies of the government like

hike in MV Taxes, non-reimbursement of concessions, adopted during the initial period of study and due to the frequent

hike in the prices of HSD oil and other inputs.

As a social obligation, the corporation has been spending sizeable amounts of funds on concessional travel facilities to

different sections of the society. The corporation in the form of losses experienced the cumulative impact of these

concessions during the study period.

Operation of buses on uneconomical routs is also one of the social obligations of the corporation that lead to decline in

the profitability of the organization.

REFERENCES

1. Agarwal, R. S. (2003, March). Impact of Government Policies on commercial viability of State Transport Undertakings.

The Management Accountant.

2. Allen, J. E. (1980, January). Covering the Cost of Public Transport. Journal of Transport Management.

3. Bagade, M. V. (1999, January). Key Result Areas for Cost Control in STUs. Indian Journal of Transport Manager.

4. Dalvi, M. Q., & Srinivasan, R. C. (1983, January). Productivity in Road Transport. Journal of Transport Management.

5. D., K. Kulshrestha. (1989). Management of State Road Transports in India. New Delhi: Mittal Publications.

6. Kontan, Rama Rao. (1996, June). Rural Bus Transport Operations of APSRTC- A study of their impact on the socio-

economic development of rural households in Visakhapatnam District (Abstract of Doctoral Dissertation). Finance

India, X(2).

7. Krishna, R. R. (1977, July). Debt Equity Ratio in Public Enterprises-A Study of selected Road Transport Corporations

in Tamilnadu. Indian Journal of Transport Management.

8. Mahesh, Chand. Performance Appraisal of Public Road Transport Undertakings. Bangalore: A Case Study of

K.S.R.T.C.

9. Mensinkai, K. S. (2003, April-June). Success Story of North West Karnataka Road Transport Corporation. Indian

Journal of Transport Management.

10. Mezavi, Ali R. (1978). Performance, Problems, and Prospects of State Transport Undertakings in India. Central

Institute of Road Transport.

11. Mohammed, Akbar Ali Khan. (1990). Financial Management of SRTCs in India. New Delhi: Anmol Publications.

12. Rajeshwari, Gundam. (1998). Public Sector Performance of State Road Transport Corporation-A Case study of

Andhra Pradesh. New Delhi: A.P. H. Publishing Corporation.

13. Rama, Chandraiah C., & A., K. Patnaik. (2003, October). The State Eroding Public Sector Profitability-The case of

APSRTC (Working paper No. 52). Hyderabad: Centre for Economic and Social Studies.





14. Reddy, R. V. S. (1999, February). Social Objectives and Finances of STUs-The case of APSRTC. Indian Journal of

Transport Management.

15. Satyannarayana, J. (1985). The Working of APSRTC. New Delhi: Concept Publishing Company.

16. Satyannarayana. Y., Management Planning and Control Systems in State Transport Undertakings, Unpublished

Doctoral Dissertation submitted to Pune University, 1976.

17. Sec 28(1) of the RTC Act.

18. Srinivas, Prasad T., & Mohd., Akbar Ali Khan. (1996, June). Impact of Social Obligations on the financial performance

of STUs- A Case study of APSRTC” Indian Journal of Transport Management.

19. Gupta, Sudakrishna. (2005, September-December). Physical Performance of State Passenger Transport System. A case

study of CSTC. Artha Vijnana, XL.VIL. (3-4).

20. Viswanatham, V. (1986). Finances of Public Enterprises. Delhi: B.R. Publishing Corporation.

21. Walters, A. A. (1979, April). Costs and Scale of Bus Services (World Bank Staff Working paper, No. 325). Washington

D.C.: World Bank.

22. *There will be no tax component in APSRTC as the Supreme Court, in its judgment dt. 07-03-86 affirmed the

decision of the A.P. High Court treating the corporation as Charitable Institution.

23. Retrieved from http://en.wikipedia.org/wiki/Working_capital#Calculation

24. Retrieved from http://en.wikipedia.org/wiki/Working_capital#Working_capital_cycle

25. Retrieved from http://en.wikipedia.org/wiki/Working_capital

26. Retrieved from http://www.yourarticlelibrary.com/financial-management/ratio-analysis-meaning-classification-and-

lim...

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MICRO FINANCE PROGRAM: A CASE STUDY OF SHGs FOR

WOMEN EMPOWERMENT IN BARDOLI REGION

Dhara Patel33 Dr. Bhavesh Vanparia34

ABSTRACT

To study the performance of SHG’s in Bardoli region, to analyze women empowerment psychologically, economically, and

socially, to examine the social benefit derived by the member, to offer suggestion for the betterment of women empowerment.

The study research design is descriptive in nature. The aim of study is to increase the growth of rural women through

microfinance and empowerment and promote self – sufficiency and development of poor women. From this study the micro

finance programme through SHG linkage is concerned with empowerment of group members those who joined the programme

in particular and the community itself. It is observed from the study, in indicator of “entitlement” element in which ability to

challenge societal power relation ranks first followed by sub-indicator of right to equitable share of resource, and right to

equitable share of inherent property. In indicator of participation ranks second followed by the sub-indicator of level of

influencing decision, level of acceptance of responsibility. In indicator of leadership ranks third followed by sub indicator of

duty consciousness, and sense of responsibility. In indicator autonomy and self-reliance ranks fourth followed by sub

indicators of freedom of action, absence of unsolicited decision-making. Therefore, it is obvious that SHG have a positive

impact on women members particularly in empowering them. In fine Self Help Groups is undoubtedly considered as an

empowerment model.

KEYWORDS

Microfinance, Women empowerment, Self Help Group etc.

INTRODUCTION

Microfinance institutions as many microfinance institutions target only women, to empower them. Here in this paper a small

effort has been made on the empowerment of women through the tool Micro-finance. Investing in women brings about a

multiplier effect. Stories of women who not only are better off economically because of access to financial services, but also who

are empowered as well. Simply getting cash into the hands of women (by way of working capital) can lead to increased self-

esteem, control and empowerment by helping them achieve greater economic independence and security, which in turn gives them

the chance to contribute financially to their households and communities because women "tend to keep nothing back for

themselves they contribute decisively to the well -being of their families" (Susy Cheston and Lisa Kuhn, 2002). Self Help Group

by mobilizing women around thrift and credit activities have resulted in economic self-reliance there by changing their social

attitude and status in the family and society SHG has emerged as a key programming strategy for most of the women development

activities.

About Microfinance

The term micro finance is of recent origin and is commonly used in addressing issues related to poverty alleviation, financial

support to micro entrepreneurs, gender development etc. There is, however, no statutory definition of micro finance. The taskforce

on supportive policy and Regulatory Framework for Microfinance has defined microfinance as "Provision of thrift, credit and

other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to

raise their income levels and improve living standards". The term "Micro" literally means "small". However, the task force has

not defined any amount. However as per Micro Credit Special Cell of the Reserve Bank Of India, the borrowed amounts up to

the limit of Rs.25000/- could be considered as micro credit products and this amount could be gradually increased up to

Rs.40000/- over a period of time which roughly equals to $500 - a standard for South Asia as per international perceptions.

Challenges to Empowerment through Microfinance

While the empowering potential of microfinance programmes remains strong, the evidence of challenges, ineffectiveness and

limitations of the potential is equally compelling. Although microfinance has the ability to empower women, the connection is not

straightforward or easy to make. Significant research and much anecdota evidence suggests that this link is certainly not automatic

(Hunt and Kasynathan 2001, 2002; Kabeer 1998; Mayoux 1998). Just handing money to women and giving them access to

financial assets and resources creates a new set of challenges for women, thus balancing the experience of empowerment with the

33Assistant Professor, Faculty of Business and Management, UT University, Gujarat, India, [email protected] 34Assistant Professor, Tolani Institute of Management Studies, Gujarat, India, [email protected]







experience of extra burdens. Others argue more strongly that access to microcredit actually affects women's empowerment

experience negatively by leading to a certain kind of disempowerment. Yet another set of analyses indicates that the goals of

microfinance and its empowering potential are intrinsically of conflicting natures. The argument is that focusing on women's

empowerment leads to dilution of efficiency and sustainability of MFIs, and these results in reluctance to focus on women's

empowerment when designing their systems and programmes. Impressive literature exists that records the challenges and gaps

between the goals challenges emanate in the economic, politico-organizational, ideological and cultural domains within which

microfinance institutions and microcredit lending programmes are embedded. This section discusses the multidimensionality of

these challenges.

Economic and Political - Organizational Challenges

The central issue here is whether the economic goals of efficiency and sustainability of MFIs are rationally compatible with the

goals of empowerment. There are arguments pro and con. Those who support a finding of compatibility have argued that targeting

women is in fact more judicious, because: (i) women's repayment rates are higher than men's; (ii) women are more cooperative;

and (iii) awareness of what clients have and what they need - and empowering them - can actually increase sustainability, because

MFIs can offer loans that are appropriate and sustainable (Cheston and Kuhn 2002).In the views and experience of Damian von

Stauffenberg, founder and chairman of Micro Rate, the first rating agency to specialize in microfinance, "MFIs which concentrate

exclusively on women may place ideological goals ahead of technical competence. Whether this is true remains to be proven". A

related argument is that: MFIs fear that building empowering elements into their programmes will threaten their financial

sustainability ratios and limit their access to funds from major bilateral and multilateral donor agencies. Many donor agencies'

funding criteria focus primarily on outreach and institutional sustainability criteria and do not 'reward' programmes that are able to

demonstrate greater and more sustainable impact on their clients. The incentive structures lead many MFIs to consider including

programme elements intentionally empowering for women as 'extras' or 'luxuries' rather than as an integral part of their

programme design and goals. - Cheston and Kuhn 2002 While there are certain studies showing that better lives can be built by

integrating microfinance programmes with programmes such as education and health (Dunford 2001, 2) - certain microcredit

programmes such as WWF in India and Women's World Banking in the Dominican Republic do combine empowerment goals

with goals of 3 Quoted in Cheston and Kuhn (2002).

Ideological Challenges

A topic to be discussed here is whether the concept of empowerment and women's empowerment is an integral part of a given

society or is an imported phenomenon that is borrowed and imposed from the West on the East. Since the primary interest of

microfinance institution (MFI) is financial sustainability, introducing empowerment issues is not only incompatible with their

goals; it is also an additional agenda in which MFIs would avoid investing. Although governments and organizations such as the

Self Employed Women's Association (SEWA) and Working Women's Forum (India) (WWF) in India have mobilized women for

a long time to fight for women's rights, it does make it easier for MFIs to avoid an empowerment agenda - as it sometimes

mutually suits the MFIs and other stakeholders such as national governments. Indeed, there are reports that the MFI turmoil in

Andhra Pradesh is more due to government politicians' and officials' vested interests and lack of concern for women's

empowerment (Bellman 2010).

Cultural Challenges

The biggest cultural constraint on women's empowerment through microfinance programmes doing research is the culture of

patriarchy pervasive throughout Asia. The patriarchal culture is dynamic and thus exercises constraints in different contexts, in

varied forms and at various stages in the empowerment process. These include bargaining power and the ability to make decisions

on economic issues within the household, ability to make decisions outside the household, control over loans, building of social

networks, responsibility for household chores, and power over one's time and physical and emotional health and energy.

Table-1

S. No. Empowerment

Indicators

Sub-Indicators of Empowerment

(A) Indicators of

participation Level of influencing decision,

Saving decision,

Household decision,

Children's education decision,

Able to deal with financial crisis of the family,

Level of acceptance of responsibility / consequence of decision making,

Providing material, labor, at work place,

No responsibility at work place,





(B) Indicator

of Leadership Sense of devotion of work,

Duty consciousness,

Able to deal with financial crisis at work place,

Seriousness about work,

Sense of responsibility,

Children education fees,

Household decision,

Payment of electricity bill,

(C) Indicators of

Autonomy and

Self-reliance

Freedom of action,

Family planning,

Income generating programs,

Saving decision,

Absence of unsolicited decision making,

Participate in activity outside the home,

Doesn't have selling property right,

Participate in activity outside the home,

Doesn't have selling property right,

(D) Indicators of

Entitlement Right to equitable share of resource,

Land distribution,

Land and house to women's name,

Joint ownership of land between men and women,

Right to equitable share of inherent property like Cow, Goat, Buffalo,

women and men inherit property equally and selling power of those property,

Right to equitable excess to resource,

Equal excess in house,

Access to personal health care.


Indicator of participation

According to Holcombe (1995), "participation is an essential ingredient of empowerment. Empowerment represents sharing

control, the entitlement and ability to participate. To influence decision, as on the allocation of resources". Participation includes

influencing decision, project / programme implementation, accepting responsibility and bearing consequences of decision. It is a

very crucial element of empowerment in the context of NGO initiate programmes. For example, in view of limited resource and

its allocation, participation brings in the possibility of equity into its distribution (Holcombe 1995). The participatory nature of the

organization or the external agency is best seen among those that involve the target group at the design and implementation stage.

Indicator of Autonomy and Self-reliance

Autonomy and self-reliance refer to freedom of action, the possession of critical elements to effectively and efficiently undertake

desired activity, development of sense of self and vision of the future, and absence of unsolicited influence in decision-making. It

is not self-sufficiency. Higher the level of autonomy, more the chances for the individual or the group to be empowered.

Indicator of Entitlement

Entitlement means right to equitable share of resource in the home, village and society at large. Resource is considered in broader

sense, i.e., wealth or meanse of producing wealth. It includes physical infrastructure, technology and finance.

Indicator of Leadership

Leadership means to lead something; it refers to duty consciousness, sense of responsibility in the home and at work place.


Problem Statement

"The role of microfinance program under SHG's for women empowerment in Bardoli region".





Research Design

There are three types of research design, which are following: a) Exploratory research design, and b) Descriptive research design.

Objectives of Study

Primary Objective

To study the role of microfinance in women empowerment.

Secondary Objectives

To study the performance of SHG is in Bardoli rural region.

To analyze the empowerment of women psychologically, economically and socially

To examine the social benefit derived by the member.

To offer suggestion for the betterment of women's empowerment.

Source of Data Collection Method

Both Primary and secondary data collection method is using in this research:

Primary Data: Primary data collect through questionnaire survey.

Secondary Data: Secondary data collect from Bank.

Method of Data Collection

Prepare questionnaire and used for collect data from the rural women members in bardoli region who engaged in micro enterprises

through microfinance.

Sample Size: 50 Sample have been collected for the research from rural women.

Statistical Tools: Mean, Stander deviation, Liker scale are used for the analysis of data.

Limitation of Study

The study is confined with rural area of Bardoli hence the result may not be applicable to urban area SHG member.

The data is collect only from those who engaged in income generating activities.

We cannot apply this research on other bank in Bardoli.

DATA ANALYSIS

Overall Impact

Variables covering the impact of micro finance through SHG on psychological, economic and managerial aspects of women

members of SHGs were identified. These variables are identified and selected from the survey of literature. The measurement was

on Liker scale and scores were assigned for each statement. A high score of 4 was given to strongly agreed responses and low

score of 1 was given to strongly disagreed statements. Analysis of the impact on SHG members on the Indicators of participation,

Indicators of leadership, Autonomy and Self-reliance, entitlement, i.e. empowerment variables are presented in the following

table.

Table-2

S. No. Empowerment Variables Mean Std.

Deviation

Rank

I. Indicator of Participation

(Level of influencing decision) 1.39 2

1 Saving decision 1.7 0.46291005

2 Household decision 1.36 0.484873221

3 Children's education decision 1.4 0.606091527

4 Able to deal with financial crisis of the family 1.12 0.328260723





(Level of acceptance of responsibility /

consequence of decision making)

2.96 1

1 Providing material, labor, at work place 1.42 0.498569382

2 No responsibility at work place 4.5 0.505076272

II. Indicators of leadership

(Duty consciousness) 1.53 2

1 Sense of devotion of work 1.9 0.46291005

2 Able to deal with financial crisis at work

place 1.6 0.494871659

3 Seriousness about work 1.08 0.274047516

(sense of responsibility) 2.2 1

1 Children's education fees 1.54 0.613121821

2 Household expense 1.28 0.453557368

3 Payment of electricity bill 3.78 1.250142849

III. Indicators of autonomy and self-reliance

(Free of action) 1.49 2

1 Family planning 1.8 0.404061018

2 Income generating programs 1.26 0.443087498

3 Saving decision 1.42 0.498569382

(Absence of unsolicited decision making ) 1.81 1

1 Participate in activity outside the home 1.16 0.421852087

2 Doesn't have selling property right 2.46 0.97331749

IV. Indicators of Entitlement

(Right to equitable share of resource) 3.44 1

1 Land distribution 3.88 0.824126006

2 Land and house to women's name 4.1 0.735402153

3 Joint ownership of land between men and

women 3.72 1.143571205

4 Vehicles 2.04 1.159873

(Right to equitable share of inherent

property)

1.37 2

1 Cow, Goat, Buffalo 1.52 0.50467205

2 Women and men inherit property equally and

have selling power those property 1.22 0.418451958

(Right to equitable excess to resource) 1.33 3

1 Equal access in house 1.62 0.490314351

2 Access to personal health care 1.04 0.197948664


Interpretation

It is observed from the above table it is seen that indicator of participation include the variables of level of influencing in decision

and level of acceptance of responsibility / consequence of decision making in which the second variable the level of acceptance of

responsibility / consequence of decision making ranks first follow by indicator of participation. Therefore, it affects more in this

indicator camper to second variable. In second indicator that is indicator of leadership, it includes the variables of duty

consciousness and sense of responsibility in which the second indicator that is sense of responsibility ranks first camper to the

second variable. Therefore, it seen that second variable impact more in the indicator of leadership.

In third indicator that is indicator of autonomy and self-reliance it include the variables of free of action and absence of unsolicited

decision making in which the variable of free of action ranks first followed by the indicator of autonomy and self-reliance.

Therefore, it indicates that first variable impact more in this indicator compare to second variable.

In indicator of entitlement it include the variable of Right to equitable share of resource, Right to equitable share of inherent

property, Right to equitable excess to resource in which first variable ranks first because it shows the high average in this

indicator. Therefore, it affects more. Second variable ranks second so it seen that it affect more than the third variable. Impact on

the different variable and self-exploratory from their individual mean and standard deviation.





FINDINGS

From the analysis following mean findings are drawn:

Indicators of Participation

Table-3

No. Variable Mean

A Level of influencing decision 1.39

B Level acceptance of responsibility / consequence of decision making 2.96


It is observed from the above table it is seen that indicator of participation include the variables of level of influencing in decision

and level of acceptance of responsibility / consequence of decision making in which the second variable the level of acceptance of

responsibility / consequence of decision making ranks first follow by indicator of participation. The average of level of

influencing in decision is 1.39 means respondents are highly agree with this variable and it impact more on women empowerment.

While the average of level of acceptance of responsibility / consequence of decision-making is 2.96 means it shows neutral affect

in women empowerment through micro finance.

Indicators of Leadership

Table-4

No. Variable Mean

A Duty consciousness 1.53

B Sense of responsibility 2.2


It observe from the above table second indicator that is indicator of leadership it include the variables of duty consciousness and

sense of responsibility in which the second indicator that is sense of responsibility ranks first camper to the second variable. The

average of duty consciousness is 1.53 means respondents are agree with this variable. While the average of sense of responsibility

is, 2.2 it is also shows that respondents are agree with this variable so the indicator of leadership contribute more in women

empowerment.

Indicators of Autonomy and Self-Reliance

Table-5

No. Variable Mean

A Freedom of action 1.49

B Absence of unsolicited decision making 1.81


It observe from the above table third indicator that is indicator of autonomy and self-reliance it include the variables of free of

action and absence of unsolicited decision making in which the variable of absence of unsolicited decision making ranks first

followed by the indicator of autonomy and reliance. The average of freedom of action is 1.49. While the average of absence of

unsolicited decision-making is, 1.81 it shows that respondents are agree in both variables, so it contributes more in women

empowerment.

Indicators of Entitlement

Table-6

No. Variable Mean

A Right to equitable share of resource 3.44

B Right to equitable share of inherent property 1.37

C Right to equitable excess to resource 1.33






It observe from the above table indicator of entitlement it include the variable of Right to equitable share of resource, Right to

equitable share of inherent property, Right to equitable excess to resource in which first variable ranks first because it shows the

high average in this indicator. Because the average of right to equitable share of resource is 3.44 it mean that respondents are

disagree with this variable. While the average of right to equitable share of inherent property is 1.37 it indicate that respondents

are highly agree with this variable. In addition, average of right to equitable excess to resource is 1.33 it indicates that the

respondents are highly agreed with variable. Therefore, second variable is also impact more in micro finance compare to third

variable.

CONCLUSION

From the study the following conclusion are made:

The rural area Self Help Groups are performing well. Thus, it can be concluded from the above study that microfinance is playing

a vital role in the social, psychological as well as economic empowerment of people in India. Microfinance loan availement and

its productive utilization found to be having a profound role and impact on poor people empowerment. Microfinance has the

potential to have a powerful impact on the women empowerment. Although microfinance is not always empowering all women,

most women do experience some degree of empowerment as a result. Empowerment is a complex process of change that is

experienced by all individuals somewhat differently. Strengthening women's financial base and economic contribution to their

families and communities plays a role in empowering them. In some cases, access to credit may be the only input needed to start

women on the road to empowerment. However, entitlement deeply rooted in microfinance for women empowerment. It permeates

all aspects of our lives from our family to our communities, from our personal dreams and aspirations to our economic

opportunities. It gives the right to equitable share of resource, Right to equitable share of inherent property, Right to equitable

excess to resource to women. Therefore, it gives right to equitable share of resource in the home, village and society at large.

Resource is considered in broader sense, i.e., wealth or means of producing wealth. It includes physical infrastructure, technology

and finance. So, this study conclude that now a day’s women are financially strong and micro finance also give the right to the

women in home, village, and society at larger.

By indicator of participation, affect more on women empowerment. So, now women are take in saving decision, household

decision and children's education decision. They are also able to deal with financial crisis of the family. According to the study

whenever the doing the job they take the responsibility and organization provide material, labor at work place. By indicator of

leadership now, women are able to deal with financial crisis at work place and women are serious about their work. By indicator

of anatomy and self-reliance women are participate in family planning, income generating program and saving decision. Now

women are more educated and literate so they perform the activity outside the home.

RECOMMENDATIONS

Considering the findings of the study and if the quality of the SHGs is taken into care, the role of SHGs towards empowerment

will undoubtedly improve. The following suggestions are prescribed in this connection:

Literacy and numeric training is needed for the poor women to benefit from the micro-credit schemes.

Training in legal literacy, rights and gender awareness are important complements to micro-credit for the empowerment

of women. The members should be given necessary training and guidance for the successful operation of the group.

The bank should advance adequate credit to the SHG according to their needs.

REFERENCES

1. Perways, Alam, & Mohammed, Nizamuddin. (2012, October – December). Role of microfinance and self-help group

in women empowerment, 1(2). ISSN(P): 2279-0918, (0): 2279-0926.

2. Das, Sanjay Kanti. (2012, April – June). Micro Finance and Women Empowerment: Does Self Help Group Empowers

Women?. IJMBS, 2(2). ISSN: 2230-9519 (Online) | ISSN: 2231-2463 (Print).

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Commerce, Hemwati Nandan Bahuguna Garhwal University, Srinagar Garhwal Uttarakhand, India. ISSN: 2305-1825

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21. Retrieved from http://www.isical.ac.in/~wemp/Papers/PaperAnantaBasudevSahooAndSandhyaRaniDas.doc

*****

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Pezzottaite Journals invite research to go for publication in other titles listed with us. Invitations are for:

International Journal of Applied Services Marketing Perspectives.

International Journal of Entrepreneurship & Business Environment Perspectives.

International Journal of Organizational Behaviour & Management Perspectives.

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International Journal of Information Technology & Computer Sciences Perspectives.

International Journal of Logistics & Supply Chain Management Perspectives.

International Journal of Trade & Global Business Perspectives.

www.ruralfinance.org

http://www.ebbf.org/women.htm10

http://www.academia.edu/10758587/Enabling_poor_rural_people_to_overcome_poverty_Womens_empowerment_a

http://www.researchgate.net/publication/256047355_Role_of_Micro_Finance__Self_Help_Groups_in_Women_E

http://www.ijmbs.com/22/sanjay.pdf

http://www.academia.edu/1185408/Empowerment_of_Women_through_Microfinance

http://www.researchgate.net/profile/Mohammed_Nizamuddin/publication/256047355_Role_of_Micro_Finance_

http://www.isical.ac.in/~wemp/Papers/PaperTiyasBiswas.doc

http://www.isical.ac.in/~wemp/Papers/PaperAnantaBasudevSahooAndSandhyaRaniDas.doc





ROLE OF CREATIVE ACCOUNTING IN FINANCIAL SCANDALS:

AN EXPLORATORY STUDY OF SOME HIGH PROFILE COMPANIES

Dr. Prerna Jain35 Dr. Anurodh Godha36

ABSTRACT

Creative accounting is considered an art to manipulate the financial accounts, while remaining within the jurisdiction of

accounting laws and rules to reflect what the management wants to tell the stakeholders instead of showing the actual position

of the company. Due to the increasing level of competition , dearth of sustain in the market, loopholes in accounting standard

and other regulations creative accounting practice is prevailing in companies. Excessive use of creative accounting led to the

downfall of numerous high profile companies. The objective of the study is to make creative accounting as clear as possible

with the help of review of studies conducted, to highlight the reasons for using creative accounting practices, to study major

scandals for ‘tactics to follow’ and ‘lessons learned’ and to provide suggestions. Finally, it is concluded that it is not possible

to stop the use of creative accounting practice completely because of involvement of managers, auditors and due to loopholes

in regulatory framework but misuse of creative accounting can be reduced by using corporate governance practices.

KEYWORDS

Creative Accounting, Scandals, Financial Reporting, Corporate Governance etc.

INTRODUCTION

The accountants of joint stock companies prepare financial statements and accounting reports, which have taken on a public

character; they have become basic data for the investors, employees, consumers, financial institutions, regulators and the

Government. The accountant must ensure that all material information about which an average prudent investor ought to

reasonably be informed and which will not mislead the users of information, must be disclosed fully, fairly and in very clear

terms. Due to many reasons, the books and ledgers presented by accountancy may have errors. It was thought that the fraud both

internal as well as external has to be detected by the auditors through their periodic audit. Now it is clear that auditors can only

check for the compliance of a company’s books to generally accepted accounting principles, auditing standards and company

policies.

In this era of cutthroat competition, it becomes very important for every business to find new and innovative ways of running the

business and one of the new ways is creative accounting as this assist management in accomplishing personal goals. In this new

system of accounting, the preparers of accounts and reports try to find out the loopholes in accounting rules to reflect what the

management wants to tell the stakeholders. Managers may choose to exploit their privileged position by managing financial

reports in their own favour.

OBJECTIVES OF STUDY

This paper aims:

To make creative accounting as clear as possible with the help of review of studies conducted.

To study major scandals for ‘tactics to follow’ and ‘lessons learned’.

To highlight the motives and techniques used for falsifying accounts, and

To give recommendations and suggestions.


Naser (1993) considered that freedom in the choice of methods regarding various accounting entries like calculation of

depreciation, valuation of stock etc. allows the managers to temper with the results by taking advantage of the rules.

Schipper (1989) found that creative accounting practice involves the intervention in financial reporting by concealment of various

data about the company so it is not giving true and fair view about the performance of the company. He suggested that in long run

this kind of practice will reduce the confidence of investors and they can switch off from the company.

35Lecturer, Department of ABST, Government College, Rajasthan, India, [email protected] 36 Assistant Professor & Deputy Director, School of Commerce and Management, Vardhman Mahaveer Open University,

Rajasthan, India, [email protected]







Jameson (1988) proved that certain entries in accounting procedure involve an unavoidable degree of estimation, prediction and

judgement. Therefore, Preparers of accounts can select any approach for misrepresentation and manipulation of accounts.

Dilip (2006) conducted a research on failure of world giant Enron and found that the company’s audit committee, board of

directors and the auditing firm Arthur Andersen totally failed to meet their responsibility which led to an historical collapse at

international level.

Griffiths (1986) observed that every company under study involved in manipulating its profits. It is the biggest con trick, which

has been used by the companies, and this deception is very legitimate but it is very unethical conduct of companies.

Barnea et al. (1976) observed that with the help of creative accounting companies could manage their earnings in short run which

appears to be attractive but it will have long-term implications, which may lead to the collapse of the company.

Above studies show that creative accounting can be considered positive as well as negative tool or just like a weapon. When the

new techniques are introduced to refine the existing accounting system it can be of great benefit to the users but mishandling can

cause harm also. Thus, it is not that creative accounting solutions are always wrong; it is the intent and the magnitude of the

disclosure, which determines its true nature and justification. Present study conceptually reviews this innovative concept; critically

examines this new tool, and highlights examples of Indian companies and companies from international arena, which used this

practice to get benefit during difficult time or to manipulate their accounts.

DEFINITIONS OF CREATIVE ACCOUNTING

A trick by which purposeful intervention is done in reported figures to obtain the predestined results can be termed as creative

accounting.

In the words of L. Griffiths, “Every company in the country is fiddling its profits. Every set of published accounts is based on

books, which have been gently cooked or completely roasted. The figures, which are fed twice a year to the investing public, have

all been changed in order to protect the guilty. It is the biggest con trick since the Torjan horse..... In fact, this deception is all in

perfect good taste. It is very legitimate. It is creative accounting”.

According to K. Naser, “Creative accounting is the transformation of financial accounting figures from what they actually are to

what preparer desires by taking advantage of the existing rules and/or ignoring some or all of them”.

Copeland defined creative accounting “Involves the repetitive selection of accounting measurement or reporting rules in a

particular pattern, the effect of which is to report a stream of income with a smaller variation from trend than would otherwise

have appeared”. Thus, Creative accounting is considered an art to manipulate the financial accounts, while remaining within the

jurisdiction of accounting laws and rules to reflect what the management wants to tell the stakeholders instead of showing the

actual position of the company.

Many terms has been used to describe this practice of changing in facts from what they actually are like cooking the books,

massaging the numbers, financial engineering, cosmetic accounting, big bath accounting, window dressing etc. Some of the

common labels are explained as follows (Sources: The Financial Number Game by Charles W. Mulford & Eugene E. Comiskey,

2002 (John Wiley & Sons):

Aggressive Accounting: A forceful and intentional choice and application of accounting principles done in effort to

achieve desired results, typically higher earnings, whether the practices followed are in accordance with GAAP or not.

Earning Management: The active manipulation of earnings toward a predetermined target, which may be set by

management, a forecast made by analysts or an amount that is consistent with a smoother more suitable earnings stream.

Income Smoothing: A form of earnings management designed to remove peaks and valleys from a normal earnings

series, including steps to reduce and ‘store’ profits during good years for use during slower years.

Fraudulent Financial Reporting: Intentional misstatement or omissions of amounts or disclosures in financial

statements, done to deceive financial statements users, which are determined to be fraudulent by an administrative, civil,

or criminal proceeding.

Creative Accounting Practices: Any and all steps used to play the financial numbers game, including the aggressive

choice and application of accounting principles, fraudulent financial reporting and any steps taken towards earnings

management or income smoothing.





CREATIVE ACCOUNTING: SOME CASE STUDIES

Financial statement fraud has significantly increased vagueness and instability in safety and liquidity of both capital and debt

market. Top-level management commits accounting fraud to obscure true financial performance, to safeguard personal status and

boost personal income and gain. Middle and lower level management misrepresent statements to hide their poor performance or to

get bonus and increment. Excessive use of creative accounting led to the downfall of numerous high profile companies.

Collingwood reported on how a change in accounting method boosted K -Mart’s quarterly figure by some $ 160 million, by a

happy coincidence, distracting attention from the company slipping back to being the largest retailer in the USA. Grover gave an

example of US film industry, which claimed huge expenses against successful movie to lower the remuneration of writers,

producers and actors. US SEC fined Microsoft heavily for using manipulative revenue recognition policy. To hide substantial

profits, to avoid complacency and to report smoothed earnings to its shareholder it recognized only a small percentage as revenue

at the time of sale and remaining amount was kept as provision for further after sales service. Thus, major scandals must be

studied for ‘tactics to follow’ and ‘lessons learned’ to lessen the incidents of such scandals in future. We have taken following

examples to show that the use of creative accounting practices lead to the collapse of the company:

World Com Scandal World Com was one of the biggest success stories of the 1990s. World Com admitted in March 2002 that it would have to restate

its financial results to account for billions of dollars in improper bookkeeping. Company overstated its cash flow by booking $ 3.8

billion in operating expenses as capital expenses and its founder received $400 million in off-the-books loans. It agreed to pay $

500m to SEC, the highest fine ever imposed by the regulator. The original figure of $ 1.5 billion was scaled down as company

declared itself bankrupt.

Enron Scandal

Enron Corporation was formed in July 1985. In just 15 years, it grew to be America’s seventh largest company, employing 21000

staff in more than 40 countries. Fortune magazine named it the most innovative company in America six years in a row. Its

scandal was discovered in 2001. Enron used creative tactics to lie about its profits (earnings manipulation), used off-the-books

partnerships to conceal $ 1 billion in debt and to inflate profits, imposed quarterly earnings targets for each of the company’s

business unit based on EPS goals and not on true forecasts, manipulated reserve accounts to maintain the appearance of continual

earnings, structured earnings through fraudulent inflation of assets values, manipulated California energy market, bribed foreign

governments to win contracts abroad, used make-to-market accounting and created Special Purpose Entities to move assets and

liabilities of the balance sheet. Apart from this, senior managers were charged with insider trading and indicted. Company filed

for chapter 11, bankruptcy, its auditor Andersen was convicted of obstruction of justice for destroying Enron documents.

PARMALAT

PARMALAT was founded in 1961. It was a leading multinational Italian dairy and food corporation company. However, in 2003

its frauds came under scanner, when it failed to place bonds worth up to EUR 500m with investors. The company had made

several investment disasters and fake transactions, used a scanning machine to forged Bank of America document, showed net

profit of EUR 252 million by not complying with accounting standards and to hide these facts it performed accounting fraud of $

20 billion. The company had taken some debts, which were not disclosed in the account books, and to pay off the debt liabilities,

it had no funds and subsequently went into administration in December 2003.

Health South Corporation

Health South Corporation, a leading healthcare service provider was founded in 1984 in Alabama, USA. What was the scandal

here? In 2003, it was discovered that to meet investor’s expectations the company overstated its income by some $ 1.4 billion. It

was also revealed that from 1996, the company was engaged in fraudulent accounting practices and overstated its revenues by as

much as 4700 percent.

Xerox Corporation

In June 2000, it was discovered that Xerox Corporation has falsified its financial statements for five years to boost income by

some $ 6.4 billion and improperly posted revenues before they were actually made.

Kanebo Japan

Kanebo was a cosmetics and textile giant incorporated in 1887. In 2003, a major accounting fraud of Kanebo was revealed which

was measured as the largest fraud in Japan. Over a period of five years, using creative tactics the profit was inflated by $ 2 billion.

Waste Management Inc

Waste Management Inc, a foremost U.S. company offering environmental services and services for waste management, was

founded in 1894 in Houston, Texas. In 2002, company’s scandal came into exposure. The tactics used by the company was

understatement of depreciation expense on the company’s property and equipment and thus income was inflated by $ 1.7 billion.





Bank of Credit and Commerce International Bank of Credit and Commerce International was founded in 1972. It was a major international bank operating in 78 countries with

30000 employees. In 1991, it was closed as it was involved in the largest scandal in the financial history with more than $ 20

billion. More than $ 13 billion funds were unaccounted. Other allegations against bank imposed include use of bribery, money

laundering and smuggling, sale of nuclear technology and support of terrorism.

Satyam Computer Services Limited

Satyam Computer Services Limited, once a ‘rising star’ in Indian outsourcing IT industry was founded by Raju brothers in

Hyderabad in 1987. It was an example of India’s growing success. Satyam won many prestigious awards like Global Peacock

Award, Leader in India in Corporate Governance and Accountability etc. In 2007 Ernst & Young awarded, Mr. Raju with the

‘Entrepreneur of the year award. From 2003-2008 the company grew measurably. Its compound growth rate was 35%, earning per

share grew with more than 40% compound rate and share price grew by over 300% over that period.

On 7th January 2009 Ramlinga Raju confessed a fraud of R. 7800 crore, consequently they were arrested for cheating, breach of

trust, forgery and criminal conspiracy as criminals under IPC. Mr. Raju and the company’s global head of internal audit used a

number of fraudulent tactics. They overstated assets, overstated income to meet analyst expectations, used deceptive accounting

practices, falsified bank accounts to inflate balance sheet, created fake accounts of customers to generate fake invoices to inflate

revenues, issued ESPOs to those who helped in preparing fake bills , obtained loans with forged documents and used many more

tricks to satisfy their greed and ambitions. Interesting fact is that global auditing firm Pricewaterhouse Cooper audited firm’s

books for nearly 9 years but did not uncover the frauds, while Merrill Lynch discovered the fraud in merely 10 days. Thus,

loopholes in accounting policies and rules, unethical conduct of Raju brothers, questionable role of auditors, inactive board of

directors, diligent role of bankers and ineffective whistle blower policy are the major reasons for collapse of Satyam.

Table-1: Summary of Companies with Nature of Creativity Used

Company Nature of Creativity

World Com Inflated revenue by using improper bookkeeping, charged operating expenses as capital

expenses, received off-the-books loans

Enron Lied about its profits (earnings manipulation), used off-the-books partnerships, imposed

quarterly earnings targets based on EPS goals and not on true forecasts, manipulated reserve

accounts, structured earnings through fraudulent inflation of assets values, manipulated

California energy market, bribed foreign governments, used make-to-market accounting and

created Special Purpose Entities to move assets and liabilities of the balance sheet, used insider

trading.

PARMALAT

Entered fake transactions, used scanning machine to forged documents, showed increased net

profit by not complying with accounting standards, performed accounting fraud.

Bank of Credit and

Commerce International

Unaccounted funds, used bribery, money laundering and smuggling, sale of nuclear technology

and support of terrorism.

Health South Corporation Overstated income, engaged in fraudulent accounting practices, overstated revenues by as

much as 4700 percent.

Xerox Corporation

Falsified financial statements for five years to boost income and improperly posted revenues

before they were actually made.

Kanebo Japan

Over a period of five years, using creative tactics the profit was inflated by $ 2 billion.

Waste Management Inc

Understated depreciation expense on the company’s property and equipment and thus income

was inflated by $ 1.7 billion.

Satyam Computer

Services Limited

overstated assets, overstated income to meet analyst expectations, used deceptive accounting

practices, falsified bank accounts, created fake accounts of customers to generate fake

invoices, issued ESPOs to those who helped in preparing fake bills , obtained loans with

forged documents.


REWARDS OF THE MANAGING PROFITS AND FINANCIAL POSITION

Although many financial scandals have taken place due to the use of fraudulent accounting practice even though companies are

still using this practice to prepare and present financial reports. According to a report, over 1000 companies listed on Bombay

Stock Exchange have not filled the corporate governance compliance certificate, a necessary condition for continuing to be a

listed company in India. Nobel Research Report submits that 50 good market size companies are indulged in creative accounting

practices. This report highlights the common manipulation in accounting records in following headings:





Revenue Manipulation,

Expense Manipulation,

Cash Manipulation,

Booking Fictitious Sales, and

Recording Revenues ahead of Time

Due to the increasing level of competition , dearth of sustain in the market, loopholes in accounting standard and other regulations

creative accounting practice is prevailing in companies. Teoh, Welch and Wong (1998) found in their study that firms manage

earnings prior to seasoned equity offers and IPOs, According to Healy and Whalen (1999) major motivations for managing

earnings are public offering, executive compensation and financial liabilities. Beidleman (1973) discussed the positive effects of

income smoothing on expectations, securities valuation and some element of risk reduction. Burgstahker and Eames (1998)

proved that firms manage earnings to meet financial analysts’ forecasts. Stolowy and Breton (2000) suggested that minimization

of cost of capital, minimization of political cost and maximization of manager’s wealth, are the major objectives for earning

management. Mulford and Comiskey (2002) summed up objectives and benefits of using this practice as follows:

Table-2

Category The objectives and benefits companies trying to achieve

Share-Price Effect Higher share price

Reduced share price volatility

Increased firm value

Lower cost of equity capital

Increased value of stock options

Borrowing Cost Effects Improve credit rating

Lower borrowing costs

Relax or less stringent financial covenants

Management performance Evaluation Effects Increase in bonuses based on profits/ share price

Political cost Effects Decrease in regulations

Avoidance of higher taxes

Sources: The Financial Number Game by Charles W. Mulford & Eugene E. Comiskey, 2002 (John Wiley & Sons)

Thus, major motivations to use creative accounting can be summed up as follows:

To meet internal targets set by higher management with respect to share prices, profits and sales.

To meet expectations of employees, suppliers, customers.

To show steady income stream to impress investors.

To do window dressing before an IPO, acquisition or before taking a long term loan.

To get benefit in terms of tax relaxation.

To match reported earnings with the forecasted earnings.

To distract attention from unwelcome news.

To get government assistance.

TECHNIQUES OF CREATIVE ACCOUNTING

Accounting standards and policies do not cover every aspect of business transactions besides considerable latitude is available for

managerial discretion, which gives legal lag to the users of creative accounting. All the techniques of creative accounting revolve

around the basic principle of debiting and/or crediting an inappropriate account. Further by misusing of accounting policies or by

changing accounting policies managers can alter their profit figure or show false picture of financial reports. Business

organizations may quite validly, change their accounting policies. Fox (1997) reported how accounting policies in some

companies are designed within the normal accounting rules to match reported earnings to profit forecasts. These can be used in the

following ways:

Make over/under valuation of closing stock: It can do over/under valuation of its closing stock, which will result in

over/under statement of assets in the balance sheet and under/over statement of cost of goods sold in the income

statement. For example, Laribee Wire Manufacturing Company recorded phantom inventory and carried other inventory

at distended values, which is used by the company as collateral security in borrowing some $130 million from six banks.

Create over/under provisions or reserves: It can make over provisions or reserves when revenues are high to bring

down it to the normal level, the level that can easily be maintained in future years. Similarly, in critical time it can

ignore making provisions to overstate the profit.





Charge an expense as an asset or vice versa : It can charge an expense as an asset to improve current profits or

alternatively, an asset may be treated as an expense to bring down the current profit.

Charge all expenses in one bad year: If management thinks a particular year as bad /poor profitability year, they can

lump all the expenses in that year to ignore impact on future profits.

Enter artificial transactions: Use of artificial transactions like sale of an asset at current price to show profits and

buying it back at current cost can be entered to manipulate balance sheet and profit figures.

Change depreciation rate/amount: It can decide not to provide depreciation or to provide less than the due amount of

depreciation on fixed assets to overstate the profit and overstate the value of asset in the balance sheet. On the other

hand, to show higher expense in the income statement and to understate the value of an asset in the balance sheet

depreciation at higher rate or for full year can be charged though used for a short period.

Misuse autonomy in deciding useful life of an asset: The estimation of the useful life of an asset to calculate

depreciation is done within the company and this gives lots of opportunity to the accountant to make judgement

according to the requirement.

Misuse materiality concept : Misuse of materiality concept like purchase price of an asset up to a certain limit can be

treated as expense though its benefits is likely to be spread over several years to lower the profits.

Misuse revenue recognition concept: Misuse of revenue recognition concept like advance amount received for supply

of goods in future can be transferred to sales account, which will show higher profits and understatement of liabilities in

the balance sheet.

Make subsidiary/joint venture: At the time of investment in subsidiary equity method can be used to conceal the true

performance. Using this method the investment can be recorded at cost and subsequently adjusted to reflect the share of

profit or loss and dividend received. This method limits the information available to investors. Similarly, a company can

overstate interest coverage to change the advantage ratio.

Under estimate contingent liabilities: Companies by under estimating materiality of contingent liabilities or ignoring

to record can overstate their net income or shareholders equity.

Under value pension obligations: Pension obligations are the present value of future payments earned by the

employees. A company by changing few assumptions regarding these funds, using pension accounting, changing

discounting rate etc. can increase the expected return to boost net income.

Manipulate news releases: Companies often seeking to increase their earning power manipulate their balance sheet,

which can be used to obtain more easily line of credit at low interest rates, easily issue debt financing, or issuing bonds

on better terms. Similarly, when a company misses estimates it can use a number of tricks to pull the wool over the

investor’s eyes. Some tricks are:

Pronouncing good news to offset bad news,

Enhancing preferred news,

Burying bad news by using phrases,

Showing bad news near the bottom of the report,

Buying back to make shares attractive.

CONCLUSIONS AND RECOMMENDATIONS

Creative accounting means finding loopholes in the accounting regulations and using them to manipulate the accounts. This

practice has emerged as a serious problem for the regulators as it distorts the reality and does not depict true and fair view about

the financial performance of the company. Companies are forced and under pressure of performing well and lack of awareness of

investors are the major motivators of creative accounting. However, these frauds affect organizations in financial, operational as

well as in psychological areas. In fact, devastating impacts like financial loss, loss of goodwill and reputation and hammered

customers relations can be seen. In short, run it appears to be attractive and beneficial but it has long-term implications. Through

the case studies, we come to know that excessive use of creative accounting practices can lead to the serious corporate failure. All

the parties like stockholders, creditors, employees, investors, depositors and auditors suffer in one way or other.





In the end, we give following suggestions to curb the impact of fraudulent accounting:

However, it is not possible to control the use of creative accounting practice completely because of involvement of

managers as well as auditors and due to loopholes in regulatory framework but misuse of creative accounting can be

reduced by using corporate governance practices. C Jean (2011) studied the impact of corporate governance on Chinese

companies and showed a decrease in earning management after the regulation of code of corporate governance.

By making CSR compliance as mandatory provision, by prohibiting political funding, by installing efficient

whistleblowers system the use of creative accounting practices can be diminished.

Auditor can play an important role in detection and prevention of creative accounting practices. If they find excessive

interference by dominant owner, lack of sound internal control, high degree of centralisation in the hands of CFO such

conditions must be mentioned in their report. Secondly, involvement of auditors can be reduced by appointing more

than one auditor in rotation. Making ethics for auditors and giving complete freedom to them, use of creative accounting

can be minimised.

Changes in regulations as well as in accounting standards, compulsory appointment of independent director, use of new

reporting practices like forensic accounting or triple bottom line reporting and fixation of responsibility of managers for

bad position are the ways by which impacts of fraudulent accounting can be reduced.

By carefully checking existence of artificial entities, close examining related party transactions, imposing heavy duty in

case of not following government regulation, introducing quick trial and fast investigation, stiff penalties and exemplary

punishment, use of fraudulent practices can be curbed.

Finally, proper system for investor’s education about financial terms which companies can use in different

situations/circumstances and its impact on financial position of the company must be introduced.

REFERENCES

1. Barnea, A., Ronen, J., & Sadan, S. (1976). Classificatory Smoothing of Income with Extraordinary Items. The

Accounting Review, 110-122.

2. Basilico, E., Grove, H., & Patelli, L. (2012). Asia’s Enron: Satyam. Journal of Forensic & Investigative Accounting,

4(2), 142-160.

3. Beidleman, C. R. (1973). Income Smoothing: The Role of Management. Accounting Review, 48(4), 653-667.

4. Collingwood, H. (1991). Why K- Mart is good, news is not. Business Week, Volume 40.

5. Dilip, K. S. Creative Accounting in Bangladesh and Global Perspectives.

6. Elisabeta, B. D., & Beattrice, V. A. (2010). Creative Accounting- Players and Their Gains and Losses. Annals of

Faculty of Economics, 1(2), 813-819.

7. Ernst, & Young. (2009). Detecting Financial Statement Fraud: What Every Manager Needs to Know. E & Y LLP, pp. 1-

8. London.

8. Gherai, D. S., & Balaciu, D. E. (2011). From Creative Accounting Practices and Enron Phenomenon to the Current

Financial Crisis. Annalea Universities Apulensis Series Oeconomica, 1(13), 34-41.

9. Griffiths, L. (1986). Creative Accounting, pp. 202. London: Sidgwick & Jackson.

10. Grover, R. (1991). Curtains for Tinsel Town Accounting. Business Week, Volume 35.

11. Jameson, M. (1988). Practical Guide to Creative Accounting. London: Kong Page.

12. Jean, C. (2011). The Impact of the Corporate Governance Code on Earnings Management: Evidence from Chinese

Listed Companies. In EFMA Symposium, pp. 1-62.





13. Merchant, K. A., & Rockness. (1994.). The Ethics of Managing Earnings: An Empirical Investigation. Journal of

Accounting and Public Policy, 13, 79-94.

14. Mulford, C. W. ,& Comiskey, E. E. (2002). The Financial Number Game. John Wiley & Sons.

15. Naser, K. (1993). Creative Financial Accounting: Its Nature and Use, pp. 272. Hemel Hempstead, Prentice Hall.

16. Rajput, M. S. (2014). Creative Accounting: Some Aspects. International Journal of Business and Administration

Research Review, 2(4), 193-199.

17. Renu, Aggarwal, A. (2014). Creative Accounting: A Negative Aspect of Accounting. International Journal of Applied

Research and Studies, 3(50), 1-8.

18. Shah, S., Butt, S., & Tariq, Y. B. (2011). Use or Abuse of Creative Accounting Techniques. International Journal of

Trade, Economics and Finance, 2(6), 531-536.

19. Schipper, K. (1989). Commentary: Earning Management. Accounting Horizons, pp. 91-102.

20. Teodora, C. A., & Nicolae, B. (2009). Study Regarding the Ethics and Creativity in the Financial Accounting activity,

pp. 844-849.

21. Yadav, B. (2014). Creative Accounting: An Empirical Study from Professional Prospective. International Journal of

Management and Social Science Research, 3(1), 38-53.

22. Retrieved from www.ey.com

23. Retrieved from www.indiainfoline.com

24. Retrieved from http://www.academia.edu/5820596/Creative_Accounting_A_Literature_Review

25. Retrieved from http://www.studymode.com/essays/Creative-Accounting-66321124.html

26. Retrieved from http://ijbarr.com/downloads/2014/vol2-issue4/24.pdf

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29. Retrieved from http://en.wikipedia.org/wiki/Accounting_ethics#History

30. Retrieved from http://www.econ.upf.edu/docs/papers/downloads/749.pdf

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http://ijbarr.com/downloads/2014/vol2-issue4/24.pdf

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DOES MERGER BE PROLIFIC? A STUDY OF SELECTED INDIAN BANKS

Ritesh Patel37 Mitesh Patel38

ABSTRACT

Banking Industry plays an important role in the economic development of India. For strengthening structure of banks, merger

is adopted. This study is undertaken with an objective to check improvement in financial performance of banks after merger.

This study is undertaken on selected 4 banks where 2 banks are private sector banks and 2 public sector banks. For this study,

data of 10 years, i.e. 5 years before merger and 5 years after merger are considered. A comparison between pre and post-

merger financial performance in terms of net profit margin, return on net worth, return on long-term fund and return on

assets is done. This Study is undertaken by applying Mean score and paired sample t-test. For IDBI Bank, merger has

improved financial performance where as for other banks merger remain somewhat beneficial as par as financial

performance is concern. Overall impact of merger and acquisition is positive on Indian banking sector. It can be concluded

that merger between the two banks is beneficial for Indian banks. Merger does not resulted in improvement of financial

performance of any bank. This study is useful to investors and depositors to take their investment decisions.

KEYWORDS

Merger, Financial Performance, Public Sector Banks, Private Sector Banks, Profitability etc.

INTRODUCTION

Indian Banking industry is very important for development of economy. For strengthening structure of banks, merger is adopted.

This study is undertaken with an objective to check improvement in financial performance of banks before & after merger. Many

authors have carried work on merger with respect to financial performance. This paper is contributing towards the comparison of

financial performance of Banks. This paper is give an outcome that how merger can be beneficial for a bank that is beneficial or

lossful. Normally, merger in Indian banking industry is done to gain market share, geographical or operational level expansion,

Increase branch network, to improve performance of poor performer banks etc. Below given table 1 shows various merger happen

in Indian banking industry.

Table-1: Merger & Acquisition in Indian Banking Industry

S. No. Name of the Transferor Bank Name of the Transferee Bank Date of Merger

1 Bank of Bihar Ltd State Bank of India November 8, 1969

2 National Bank of Lahore Ltd. State Bank of India February 20, 1970

3 Miraj State Bank Ltd. Union Bank of India July 29, 1985

4 Lakshmi Commercial Bank Ltd Canara Bank August 24, 1985

5 Bank of Cochin Ltd State Bank of India August 26, 1985

6 Hindustan Commercial Bank Punjab National Bank December 19, 1986

7 Traders Bank Ltd. Bank of Baroda May 13, 1988

8 United Industrial Bank Ltd. Allahabad Bank October 31, 1989

9 Bank of Tamilnadu Ltd. Indian Overseas Bank February 20, 1990

10 Bank of Thanjavur Ltd. Indian Bank February 20, 1990

11 Parur Central Bank Ltd. Bank of India February 20, 1990

12 Purbanchal Bank Ltd. Central Bank of India August 29, 1990

13 New Bank of India Punjab National Bank September 4, 1993

14 Bank of karad Ltd Bank of India 1993-1994

15 Kashi Nath Seth Bank Ltd. State Bank of India January 1, 1996

16 Bari Doab Bank Ltd Oriental Bank of commerce April 8, 1997

17 Punjab Co-operative Bank Ltd. Oriental Bank of commerce April 8, 1997

18 Bareilly Corporation Bank Ltd Bank of Baroda June 3, 1999

19 Sikkim Bank Ltd Union Bank of India December 22, 1999

20 Times Bank Ltd. HDFC Bank Ltd February 26, 2000

21 Bank of Madura Ltd. ICICI Bank Ltd. March 10, 2001

37Assistant Professor, S. V. Institute of Management, Gujarat, India, [email protected] 38Assistant Professor, S. V. Institute of Management, Gujarat, India, [email protected]







22 ICICI Ltd ICICI Bank Ltd May 3, 2002

23 Benares State Bank Ltd Bank of Baroda June 20, 2002

24 Nedungadi Bank Ltd. Punjab National Bank February 1, 2003

25 South Gujarat bank ltd. Bank of Baroda June 25, 2004

26 Global Trust Bank Ltd. Oriental Bank of commerce August 14, 2004

27 IDBI Bank Ltd. IDBI Ltd April 2, 2005

28 Bank of Punjab Ltd. Centurion Bank Ltd October 1, 2005

29 Ganesh bank of kurundwad ltd Federal Bank Ltd September 2, 2006

30 United Western Bank Ltd. IDBI Ltd. October 3, 2006

31 Bharat Overseas Bank Ltd. Indian Overseas Bank March 31, 2007

32 Sangli Bank Ltd. ICICI Bank Ltd. April 19, 2007

33 Lord Krishna Bank Ltd. Centurion bank of Punjab August 29, 2007

34 Centurion Bank of Punjab Ltd. HDFC Bank Ltd. May 23, 2008

35 The Bank of Rajasthan ICICI Bank Ltd August 13, 2010

36 ING Vysya Bank Kotak Mahindra Bank Year 2015

Sources: Compiled by Researchers from various Banking Progress Report of RBI

LITERATURE REVIEW

On scanning the past studies on merger, we came to know that researchers have found merger profitable as well as lossful. Many

researchers have found that financial performance in post-merger situation has improved. For instance, Waegelein et al (2003) has

applied regression model to check the financial performance of merger firm in post-merger era & found that that there is

improvement in post-merger operating financial performance measured by industry return on assets for the full sample. Azeem et

al (2011) have analysed Merger and Acquisitions in the Indian Banking Sector in Post Liberalization Regime by taking data from

year 2000 to 2010. Researchers have adopted Mean score, Standard deviation, Pairt-test for study purpose & found that Banks

able to generate higher net profits after the merger in order to justify the decision of merger undertaken by the management to the

shareholders. Goyal et al (2012) has undertaken a Case Study of merger of ICICI Bank with other financial institutions.

Researcher has found that from merger of various financial institutions in itself, ICICI Bank Ltd.; emerge as market leader in

private sector banking. Devarajappa et al (2012) has examined case of mergers between HDFC Bank and Centurion Bank of

Punjab by taking data from year 2005 to 2011.Researcher has applied Mean score, Standard deviation and Paired t-test as

analytical tools to examine financial performance after merger & found that after the merger the financial performance of the

banks have improved. Jahanzaib et al (2013) has analysed the efficiency of Pakistani banks in pre & post-merger situation by

studying data from year 2001 to 2007. Researcher has used correlation, regression and DEA Model to study data & from that, they

found that efficiency & effectiveness of banks has improved but improvement in effectiveness is lesser as compare to efficiency.

Few Financial Ratios has shown improvement after merger.

In contrast to this, many researchers have found merger as negative outcome, for example, Leepsa et al. (2012) has studied Post

merger financial performance of selected Indian manufacturing firms by taking data from year 2003 to 2007. Researcher has

applied Paired t-test to study post-merger performance & founds that there is not much significant improvement in financial ratios

after merger, which put a question mark on the motive behind mergers & merger does not result in fulfilling objectives.

Muhammad et al (2014) have analysed the post-merger financial performance of banking sector in Pakistan by taking data from

year 2002 to 2011. Researchers have adopted mean score as analytical tools to compare pre & post-merger performance. From

study, it was founds that after the merger there is a decrease in the financial performance of selected firm.


Research Objectives

This study is carried out to fulfil various objectives such as to evaluate the banks performance before and after merger, to analyse

the financial strength of the selected Indian Banks based on key financial ratios & to analyse the performance of banks after

merger in terms of return on capital employed.

Research Design

The research design in this study is descriptive research design as this study assists the decision maker in determining, evaluating,

and selecting the best course of action to take decision in a given situation. In conclusive, it is causal research design that is used

to obtain evidence of cause and effect relationships.





Sample & Data Selection

For the present study, four banks have been selected. They are IDBI Bank, Indian Overseas Bank, ICICI Bank & HDFC Bank.

The basic data for this current study has been collected from the Internet, Books, Journals and Electronic database Ace Equity

portal.

DATA ANALYSIS & INTERPRETATION

IDBI Bank

Table-1: Profitability Ratios of IDBI Bank Before & After Merger

Profitability Ratio Pre-Merger Post-Merger

Net Profit Margin 7.21 7.54

Return on Long Term Fund 88.14 126.72

Return on Net Worth 7.15 10.78

Return on Assets 105.78 118.92


Net profit Margin of IDBI bank before merger is 7.21, which is increased after merger up to7.54. Return on Long Term Fund of

IDBI bank before merger is 88.14%, which is increased after merger up to 126.72%. Return on Net Worth of IDBI bank before

merger is 7.15, which is increased after merger up to 10.78. Return on Assets of IDBI bank before merger is 105.78%, which is

increased after merger up to 118.92%. Therefore, merger has positive effect on the profitability of IDBI bank.

Indian Overseas Bank

Table-2: Profitability Ratios of Indian Overseas Bank Before & After Merger







Net profit Margin of Indian Overseas bank before merger is 11.77, which is decreased after merger up to 11.23. Return on Long

Term Fund of Indian Overseas bank before merger is 156.84%, which is decreased after merger up to 130.99%. Return on Net

Worth of Indian Overseas bank before merger is 28.61, which is decreased after merger up to 20.21. Return on Assets including

Revaluations of Indian Overseas bank before merger is 40.41%, which is increased after merger up to 116.5%. Only, Return on

Assets has positive effect on the profitability of Indian Overseas bank. All other ratios reflate negative effect of merger.

ICICI Bank

Table-3: Profitability Ratios of ICICI Bank Before & After Merger







Net profit Margin of ICICI bank before merger is 12.69, which is decreased after merger at 11.80.Return on Long Term Fund of

ICICI bank before merger is 76.87%, which is decreased after merger up to 57.86%. Return on Net Worth of ICICI bank before

merger is 15.65, which is decreased after merger up to 9.37. Return on Assets of ICICI bank before merger is 185.88%, which is

increased after merger up to 414.85%. Therefore, Return on Assets makes the positive effect on the profitability of ICICI bank.

All other ratios stimulate negative effect of merger.





HDFC Bank

Table-4: Profitability Ratios of HDFC Bank Before & After Merger







Net profit Margin of HDFC bank before merger is 15.85, which is decreased after merger up to 14.2. Return on Long Term Fund

of HDFC bank before merger is 67.2%, which is increased after merger up to 67.37%. Return on Net Worth of HDFC bank before

merger is 23.04, which is decreased after merger up to 15.12. Return on Assets before merger is 138.13%, which is increased after

merger up to 362.4%. So, Return on Assets and Return on long term Fund shows positive effect on the profitability whereas Net

Profit Margin and Return on Net Worth demonstrate negative effect of merger.

HYPOTHESIS TESTING

Table-5: Paired Sample t-test for IDBI Bank

S. No. Null Hypothesis P Value t Critical Value Outcome

1 There is a significant difference in Net Worth of IDBI Bank in

pre and post-merger time.

0.022 3.18 H0 is accepted.

2 There is a significant difference in Total Assets of IDBI Bank in



3 There is a significant difference in Total Income of IDBI Bank

in pre and post-merger time.


4 There is a significant difference in Net Profit Margin of IDBI

Bank in pre and post-merger time.



Table-6: Paired Sample t-test for Indian Overseas Bank


1 There is a significant difference in Net Worth of Indian

Overseas Bank in pre and post-merger time.


2 There is significant difference in Total Assets of Indian

overseas Bank in pre and post-merger time.


3 There is significant difference in Total Income of Indian



4 There is a significant difference in Net Profit Margin of Indian




Table-7: Paired Sample t-test for ICICI Bank


1 There is a significant difference in Net Worth of ICICI Bank in



2 There is a significant difference in Total Assets of ICICI Bank



3 There is a significant difference in Total Income of ICICI Bank



4 There is a significant difference in Net Profit Margin of ICICI








Table-8: Paired Sample t-test for HDFC Bank


1 There is a significant difference in Net Worth of HDFC Bank in



2 There is a significant difference in Total Assets of HDFC Bank



3 There is a significant difference in Total Income of HDFC Bank



4 There is a significant difference in Net Profit Margin of HDFC




CONCLUSION

Merger and Acquisition is useful tool for growth and expansion in Indian banking sector. It is helpful for survival of weak banks

by merging into larger bank. This study shows the impact of M&A in the Indian banking sector and researcher took four banks for

the study as sample to examine that merger led to a profitable situation or not.For this a comparison between pre and post-merger

performance in terms of net profit margin, return on net worth, return on long term fund and return on assets is undertaken. For

IDBI Bank merger has improved financial performance where as for other banks merger remain somewhat beneficial as par as

financial performance is concern. Overall impact of merger and acquisition is positive on the Indian banking sector. So, it can be

concluded that merger between the two banks is beneficial for Indian banks.

REFERENCES

1. Abbas, Qamar, Ahmed Imran Hunjra, Rashid Saeed, and Muhammad Shahzad Ijaz. (2014). "Analysis of Pre and Post

Merger and Acquisition Financial Performance of Banks in Pakistan." Information Management and Business

Review 6 (4), pp. 177.

2. Devarajappa, S. (2012). "Mergers in Indian banks: a study on mergers of HDFC bank ltd and centurion bank of

Punjab ltd." International Journal of Marketing, Financial Services & Management Research. 1(9), pp. 33-42.

3. Dr. G. Naresh, D. S. (2011). Analysis of Performance of Disinvested Public Sector Enterprises using DEA Approach.

Indian Journal of Finance, 5 (12).

4. Goyal, K. A., and Vijay Joshi. (2012). "Merger and Acquisition in Banking Industry: A Case Study of ICICI Bank

Ltd." International Journal of Research in Management, 2 (2), pp. 30-40.

5. Hakro, Ahmed Nawaz, and Muhammad Akram. (January, 2009) "Pre-Post performance assessment of privatization

process In Pakistan." International Review of Business Research. 5 (1), pp. 70-86.

6. Khan, Azeem Ahmad. (2011). "Merger and Acquisitions (M&As) in the Indian banking sector in post liberalization

regime." International Journal of Contemporary Business Studies. 2(11), pp. 31-45.

7. Leepsa, N. M., and Chandra Sekhar Mishra. (2012). "Post merger financial performance: a study with reference to

select manufacturing companies in India." International Research Journal of Finance and Economics, 83 (83), pp.

6-17.

8. Patel, Ritesh. (2014). "Pre-Merger and Post-Merger Financial & Stock Return Analysis: A Study with reference to

selected Indian Banks." Asian Journal of Research in Banking and Finance, 4 (12), pp. 1-9.

9. Ramaswamy, K. P., and James F. Waegelein. (2003). "Firm financial performance following mergers." Review of

Quantitative Finance and Accounting, 20 (2), pp. 115-126.

10. Sultan, Jahanzaib, Arfan Ali, and Asif Saeed. (2013). "A Comparison of Technical Efficiency of Performance of

Different Banks Before and After Merger: A Study of Pakistan Banking Industry." Journal of Economics and

Sustainable Development , 4 (9), pp. 113-126.





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17. Retrieved from http://www.uou.ac.in/people/dr-gagan-singh

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