Financial Analysis of Ksfc

AN INTERNSHIP REPORT ON FINANCIAL ANALYSIS OF KSFC

CHAPTER – 1

INTRODUCTION

DEPARTMENT OF MANAGEMENT

CENTRAL UNIVERSITY OF KARNATAKA PAGE 1 OF 105


1.1 PROFILE OF DEVELOPMENT BANKING

The economic development of any country depends on the extent to which its financial system efficiently and effectively mobilizes and allocates resources. There are a number of banks and financial institutions that perform this function; one of them is the development bank Development banks are unique financial institutions that perform the special task of fostering the development of a nation, generally not undertaken by other banks.

Development Banks are financial agencies that provide medium and long-term financial assistance and act as catalytic agents in promoting balanced development of the country. They are engaged in promotion and development of industry, agriculture, and other key sectors. They also provide development services that can aid in the accelerated growth of an economy.

The objectives of development banks are as follows:

1) To serve as an agent of development in various sectors, such as industry, agriculture, and institutional trade.

2) To accelerate the growth of the economy.3) To allocate resources to high priority areas.4) To foster rapid industrialization, particularly in private sector, so as to provide

employment opportunities as well as higher production.5) To develop entrepreneurial skills.6) To promote the development of rural areas.7) To finance housing, small scale industries, infrastructure, and social utilities.

Evolution of Development Banks

The concept of development banking originated during the post Second World War period. Many countries of Europe were in the stage of industrial development and special financial institutions known as development banks were set to foster industrial growth. In the US, development financial institutions came into existence for special purposes such as economic rehabilitation and filling gaps in the traditional financing patterns. Not only developed countries, but also several underdeveloped countries in Asia, Africa, and Latin




America established special financial institutions to hasten the pace of industrialization and growth.

The International Bank for Reconstruction and Development (IBRD) known as the World Bank is the example of development bank at the international level. The major objective of the World Bank is to promote world development and perform the task of transfer of enormous financial and technical resources from the developed to developing countries.

The need for development financial institutions was felt strongly immediately after India attained independence. The country was in need of a strong capital goods sector to accelerate the pace of industrialization. The existing industries were in need of long-term funds for their reconstruction, modernisation, expansion, and diversification programmes while the new industries required enormous investments for setting up gigantic projects in the capital goods sector. However, there were gaps in the banking system and capital markets which needed to be filled to meet this enormous requirements of funds.

To fill these gaps, a new institutional machinery was devised – the setting up of special financial institutions, which would provide the necessary financial resources and know-how so as to foster the industrial growth of the country.

The first step towards building up a structure of development financial institutions was taken in 1948 by establishing the Industrial Financial Corporation of India (IFCI) Ltd. This institution was set up by an Act of Parliament with view to providing medium and long-term credit to units in the corporate sector and industrial concerns.

In view of the immensity of the task and size of the country, it was not possible for a single institution to cater to the financial needs of small industries spread in different states. Hence, the necessity for setting up regional banks to cater to the needs of small and medium enterprises was recognized. Accordingly, the State Financial Corporations Act was passed in 1951 for setting up State Financial Corporations (SFCs) in different states. By 1955-56, 12 SFCs were set up and by 1967-68, all the 18 SFCs now in operation came into existence. SFCs extend financial assistance to small enterprises.

Beginning with establishment of the industrial finance corporation of India, with effect from July 1, 1948, India has traversed a great deal in the sphere of development banking. In fact, it would not be wrong to say that in the field of development banking. In fact, it would not be wrong to say that in the field of development banking, India is fairly




advanced country, with a capacity for providing technical assistance to the less developed countries in establishing and running development banks.

1.2 STATE FINANCIAL CORPORATION

1.2.1 Profile of State Financial Corporation

For a vast country like India with a federal set up, it is quite obvious that development banks at the state level are necessary. This point was set forth in the report of the Central Banking Enquiry Committee more than six decades back. The idea of having special industrial financial institutions in the various states was revived at the time of establishment of the IFCI. State Financial Corporations (SFCs) set up in various states as regional institutes represent an attempt to diversify the structure of development banking in India so as to be able to cope up with the requirements of wider sections of industrial enterprise.

At present, there are 18 SFCs in the country. The states of Manipur, Meghalaya, Mizoram, Nagaland, Goa, Sikkim, Tripura, Uttarakhand, Chhattisgarh, Jharkhand, and the Union Territories except Delhi have yet to have their own SFC. The area of operations of a SFC is normally confined to one State/Union Territory, but, they can be extended to other States/Union Territories which do not have SFC of their own. The Assam SFC operates also in Manipur and Tripura. Chandigarh is served by SFC of Delhi, while Goa, Daman and Dieu by Maharashtra, Dadra and Nagar Haveli by Gujarat and Pondichery by Tamil Nadu SFC.

1.2.2 State Financial Corporations Act, 1951

At the time of the enactment of the Industrial Finance Bill in 1948, it was recognized that Industrial Financial Corporation would not be able to cater to the capital needs of small and medium industrial concerns scattered all over the country. The suggestions for the setting up of Provincial Finance Corporations were received from a large number of members in the Central Constituent Assembly.

When the Central Government discussed the proposal with the State Governments, they generally supported the idea but wanted a separate enactment with a view to promote uniformity and control in management. They considered it necessary in order to make it possible to incorporate in the Constitution, necessary provisions in regard to majority




control by Government, guaranteed by the State Government in regard to the repayment of principal, and payment of a minimum rate of dividend on the shares, restriction on distribution of profits and special powers for the enforcement of its claims and recovery of dues. Such a statue was also needed to coordinate the activities of the Central Government, State Governments, RBI and IFCI, with the activities of these Corporations.

While the proposal for the establishment of such Corporations was being examined by the RBI, IFCI, and the Central Government, Tamil Nadu Government took the lead and established Tamil Nadu Industrial Investment Corporation Ltd. under the Companies Act.

In September 1949, the Central Government issued a circular letter to all the State Governments and after incorporating their views in regard to the shape and structure of the proposed corporations, the Government introduced the State Financial Corporations Bill in the Parliament. The Bill was presented by Sh. C.D. Deshmukh, Minister of Finance on December 13, 1950 which was finally passed on September 28, 1951 and the State Financial Corporations Act came into force from August 1, 1952. This Act empowered the State Governments to establish financial corporations in their respective States. Provision was also made to bring within the scope of this Act, any institution already in existence, and concerned with the financing of industry. This was done at the instance of Tamil Nadu Government which wanted to bring within the scope of this Act, the Tamil Nadu Industrial Investment Corporation Ltd.

The first State Financial Corporation set up under the Act was the Punjab Financial Corporation which was established in Feb. 1953. Gradually, similar Financial Corporations were established in different States. In Karnataka, the State Financial Corporation was set up on March 30, 1959. At present, there are 18 State Financial Corporations functioning in different States and Union Territories.

1.2.3 Types of Financial Assistance

A SFC is authorized by Statue to provide different forms of financial assistance.

1) Granting loans or advances for periods not exceeding 20 years;

2) Subscribing to debentures repayable within twenty years;

3) Guaranteeing loans raised by industrial concerns either in the public market or from

scheduled or co-operative banks and repayable within 20 years;




4) Guaranteeing deferred payments due from any industrial concern for purchase of

capital goods within India;

5) Underwriting the issue of stocks, shares, bonds or debentures;

6) Subscribing to stocks, shares, bonds or debentures of industrial concerns from out of

the special capital.

SFCs Amendment Act, 1972 has empowered the SFCs to participate in the equity capital of weaker small and medium industrial undertakings. Since, June 1973, SFCs have also been authorized to meet the foreign exchange requirements of small and medium scale units. For this purpose, refinance facility is provided by the IDBI.

SFCs also act as the agent of the Central and State Governments, IDBI, IFCI, or any other financial institutions in matters concerned with the grant of loans or advances or subscription to debentures. Most of the IDBI schemes for assistance to small and medium sectors are operated through SFCs.

1.2.4 Financial Resources of State Financial Corporations

Initially, the Authorized Share Capital of a State Financial Corporation was required to be fixed by the concerned State Government within the limit of Rs.2 crore. But, subsequent Amendments authorized the SFCs to raise their Authorized Share Capital.

The share capital of the State Financial Corporation is subscribed by the respective State Governments, the Reserve Bank of India, Scheduled Commercial Banks, Co-operative Banks, Insurance Companies, Financial Institutions and private parties. In this connection, it may be noted that the maximum allotment to private parties cannot exceed 25% of the share capital of each corporation.

Besides, share capital, the financial resources of State Financial Corporations comprise:

1) Loans from the Reserve Bank of India

2) Loans from the State Government

3) Bonds and Debentures issued

4) Deposits from the Public

5) Refinance from the IDBI




6) Repayment of Loans Granted

7) Income from Investments

1.2.5 List of State Financial Corporations

At present, there are 18 SFCs in the country, 17 of which were set up under the SFCs Act 1951. Tamil Nadu Industrial Investment Corporation Ltd. set up in 1949 under the companies Act as Madras Industrial Investment Corporation also Functions as a Full- Fledged SFC. Various SFCs in the country are as follows:

1) Andhra Pradesh State Financial Corporation

2) Assam Financial Corporation

3) Bihar State Financial Corporation

4) Delhi Financial Corporation

5) Gujarat State Financial Corporation

6) Haryana Financial Corporation

7) Himachal Pradesh Financial Corporation

8) Jammu & Kashmir State Financial Corporation

9) Karnataka State Financial Corporation

10) Kerala Financial Corporation

11) Madhya Pradesh Financial Corporation

12) Maharashtra State Financial Corporation

13) Orissa State Financial Corporation

14) Punjab Financial Corporation

15) Rajasthan Financial Corporation

16) Tamil Nadu Industrial Investment Corporation Ltd.

17) Uttar Pradesh Financial Corporation

18) West Bengal Financial Corporation.




1.3 KARNATAKA STATE FINANCIAL CORPORATION

1.3.1 Profile of Karnataka State Financial Corporation

Karnataka State Financial Corporation is a State level financial institution established by the State Government in the year 1959 under the State Financial Corporations Act 1951 to meet mainly the long term financial needs of Micro, Small and Medium Enterprises (MSMEs) in the State of Karnataka.

Today, while the State economy is making rapid strides in the global market, KSFC is moving in tandem. As a pioneering and responsive financial institution, KSFC is fine-tuned to fulfill the plans and aspirations of entrepreneurs by extending all possible assistance.

In the 52 years of its existence, KSFC has contributed most significantly for the growth of SMEs, backward area development and promotion of first generation entrepreneurs. Its achievements in these areas are unparalleled. Since inception, KSFC has assisted more than 1.60 lakh units with cumulative sanction of more than Rs. 10,464 crore out of which about 50% is towards SMEs.

Amendments to SFCs Act provide wide-ranging scope in financial assistance and operational flexibility. Keeping this in view, KSFC has re-engineered itself to ensure utmost customer satisfaction with new energy, thrust and speed. In line with this, the Corporation has put in place comprehensive, client-friendly, need-based policies in the areas of credits and recoveries. Apart from setting standards of performance, these policies would also achieve the objective of transparent governance.




KSFC an ISO 9001:2000 certified organization is proud to have played a major role in the industrial development of the State. It is also the proud privilege of KSFC to have assisted many industries that are internationally recognized like INFOSYS and BIOCON.

1.3.2 Historical Background

In 1950, the Government of India circulated a draft bill for eliciting the views of the State Government and of the RBI. The SFCs bill was introduced in parliament in December 1950 and passed in 1951; it came into force on AUG 1, 1951.

The KSFC, which prior to November 1, 1973 was known as the Mysore State Financial Corporation, was established on March 30, 1959, that is to say, the last but one day of the financial year 1959-60. Although State Financial Corporations Act came into effect as far back as August 1, 1952, the then Government of Mysore established the Corporation several years later. In the Reserve Bank Report on Currency and Finance for the year 1955-56, it was stated that the Mysore Government have also decided to set up a financial corporation. However, this event happened four years later. It has not been possible to find out the reasons for the delay in the establishment of the corporation. On 1-11-1973, it was renamed as Karnataka State Financial Corporation.

The Authorized Share Capital was fixed by the Mysore Government at Rs. 2.00 crore out of which Rs.1.00 crore was fully paid up. The stake of the Government of Mysore in the Corporation was Rs.40.465 lakhs and that of the RBI was Rs.15.00 lakhs. The Authorized Share Capital of the Corporation now stands at Rs. 750 Crore. Sri. G. Mathias, I.A.S., was the first Chairman of the Board and Sri. M. Vasudeva Rao, I.A.S., was the first Managing Director.

In the first year of its operation, namely 1959-60, the Corporation sanctioned 11 loans for a total sum of Rs. 28.00 lakhs. A sum of Rs.13.01 lakhs (to be precise Rs.13,01,238) was disbursed during the year. Such was the humble beginning of the operations of the Corporation.

The financial results too were also miniscule. In its first year, the Corporation’s earnings aggregated to Rs. 3.33 lakhs of which only Rs. 4,037 was income from loans and advances to industrial units. The expenses of the Corporation for the year amounted to




Rs. 88,275. Thus, the Corporation made a net profit of Rs. 2,44,775 in the first year of its operation. Such is the story of the Corporation’s modest beginning.

Today, the Corporation has grown in leaps and bounds and has touched the operations of almost all the MSMEs in the State in some way or the other. Since inception, the Corporation has sanctioned over Rs. 10,464 crore to as many as 1,60,000 MSMEs in the State of Karnataka. Its operations grew many folds in the 80s and the 90s and for nearly two decades, the Corporation enjoyed complete dominance over all other SFCs and other industrial investment and development corporations in the country.

In the late 90s, the Corporation went through a correction mode. This coincided with the impact of globalization and liberalization on the MSMEs. Being the prima-dona for the MSMEs in the State, the Corporation had to take severe economic beating due to the fall of MSMEs in the State in the post liberalization era. However, with committed support of the major stakeholders, namely, the Government of Karnataka, and SIDBI, the Corporation bounced back to good health from the year 2003-04.

The Corporation, has so far, assisted small scale units, SC/ST beneficiaries, minority and backward class, women entrepreneurs and industries in backward areas. The contribution of KSFC for the overall industrial development in the state of Karnataka is quite significant not only in terms of amount of assistance, but also in the development of backward areas and weaker sections of the society.

In the year 2009, KSFC completed its 50th year of its formation and celebrated Golden Jubilee of the Corporation. The journey of 50 years of the Corporation was a memorable and successful one characterized by ups and downs.

1.3.3 Mission and Vision Statement

Mission Statement

“KSFC is committed to nurture, develop and service the SME sector through need based product and service.”

Vision Statement




“To be a premier financial institution in the country, by providing effective and efficient services to all sectors of people under one roof. Its vision is all for one & one for all”.

1.3.4 Objectives of KSFC

The objectives of KSFC are as follows:

1) To provide financial assistance in the form of term loans to tiny and ancillary units,

small and medium scale industries in Karnataka.

2) To encourage dispersal of industries to the backward areas to achieve balanced

growth of the industries.

3) To provide equipment leasing, hire purchase, working capital assistance and

assistance for research and development related activities.

4) To identify entrepreneurs throughout the state.

5) To provide enterprise development programs to women engineering and technical

professionals and agriculturists.

6) To conduct district level industrial seminars.

7) To identify new projects and help local people to set up industries.

8) To develop databank on industrial units.

9) To conduct special survey on industrial opportunities.

1.3.5 Quality Objective

The managing director, other executives and staff of the organization are committed to ensuring that the system is effective in achieving quality and satisfying customers both now and in the future. With this end in view, KSFC will strive continually to improve




upon their products, service, and quality management system. KSFC have set measurable quality objectives, which will be measured against and reported upon at regular intervals. The Quality Objectives set are as follows:

To ensure satisfaction through team-work and professional management.

To extend effective guidance through entrepreneurs for successful accomplishment

of their business venture.

To provide good quality of service on a continued basis to the satisfaction of the

customer.

To attain specified level of performance every year and ensure compliance with

statutory and regulatory requirements.

To encourage everyone in the organization to upgrade and enhance their skill and

knowledge with appropriate training for improving quality of service to the

entrepreneur.

1.3.6 Functions of KSFC

According to Section 25 of SFCs Act, 1951, the functions of KSFC are as follows:

1) It grants loans or advances to, or subscribes to debentures of an industrial concern.

2) It guarantees, on such terms and conditions as may be agreed upon ,

Loans raised by industrial concerns, which are repayable within a period not

exceeding 20 years, and are floated in the public market.

Loans raised by industrial concerns from scheduled banks or state co-operative

banks or other financial institutions.

3) It guarantees, on such terms and conditions as may be agreed upon, differed

payments due from any industrial concerns in connection with its purchase of capital

goods within India.

4) It underwrites the issue of the stock, shares, bonds or debentures by industrial

concerns.




5) It transfers, for consideration, any instruments relating to loans and advances granted

by it to industrial concerns.

6) It acts as an agent of the Central Government, or the State Government, or the IDBI,

or the SIDBI, or the IFCI or any other financial institutions notified by the Central

Government in respect of any matter connected with, or arising out of, the grant of

loans or advances to an industrial concern, or subscription to debentures of an

industrial concern or relating to the business of the IDBI, SIDBI, IFCI or any other

financial institutions.

7) It subscribes to, purchases, the stock, shares, bonds or debentures of an industrial

concern.

8) It retains as part of its assets, any stock, shares, bonds or debentures, which it may

acquire by subscription or in fulfillment of its underwriting liabilities and it disposes

of the stock shares, bonds, or debentures so acquired.

9) It accepts or discounts promissory notes and bills of exchange drawn or endorsed by

industrial concerns or any person selling capital goods.

10) It undertakes research and surveys dealing with marketing or investment activities

and undertakes techno-economic studies or other activities in connection with the

development of any industry.

11) It provides technical and administrative assistance to an industrial concern.

12) It acts as the trustee for the holders of debenture or other securities.

13) It provides leasing, sub-leasing, hire-purchase and factoring services.

14) It provides export related credit and services.

15) It undertakes money market related activities.

16) It undertakes asset management activity.

17) It promotes, forms, conducts, and assists the companies, subsidiaries, co-operative

societies, trusts, or such other associations of persons as it may deem it fit, in the

promotion, formation, or conduct of companies.




18) It opens or confirms or endorses letter of credit and negotiates or collects bills and

other documents drawn hereunder. It provides consultancy and merchant banking

services.

1.3.7 Activities Eligible for Financial Services

KSFC is a financial super market. It extends all types of financial assistance in the form of long-term loans, short-term loans (in the form of working capital term loans and corporate loans) and other financial services. KSFC’s assistance covers almost all types of industrial and service sectors.

The SFCs' Act prescribes broadly the types of activities, which are eligible for financial assistance from the Corporation. The Act also provides for SIDBI to include newer areas of activities for financial assistance from time to time. This apart, the Corporation has also evolved its own schemes under broad guidelines of SFCs' Act depending upon market potential. The activities which are eligible for financial assistance from the Corporation are grouped into following three broad categories:

1) Activities as listed out in the SFCs' Act;

2) Activities specifically permitted by SIDBI;

3) Activities formulated by the Corporation.

1.3.7.1 Activities as Listed out in the SFCs' Act

The State Financial Corporations (Amendment) Act, 2000, provides the list of activities which can be covered under the list of industrial concerns engaged or to be engaged in:

1) Manufacture, preservation or processing of goods;

2) Mining or development of mines;




3) Hotel industry;

4) Transport of passenger or goods by road or by water or by air (or

by rope-way or by lift);

5) Generation or distribution of electricity or any other form of power;

6) Maintenance, repair, testing or servicing of machinery of any description or vehicles

or motor boats or trailers or tractors or vessels;

7) Assembling, repairing or packing any article with the aid of machinery or power;

8) Setting up or development of an industrial area or industrial estate;

9) Fishing or providing shore facilities for fishing or maintenance thereof;

10) Providing weigh bridge facilities;

11) Providing engineering, technical, financial management, marketing of other services

or facilities for industry;

12) Providing medical, health care or other allied services;

13) Providing software or hardware services relating to information technology,

telecommunications or electronics including satellite linkage and audio or visual

cable communication;

14) Setting up or development of tourism related facilities including amusement parks,

convention centers, restaurants, travel and transport (including those at airports),

tourist service agencies and guidance and counseling services to the tourists;

15) Construction;

16) Development, construction and maintenance of roads;

17) Providing commercial complex facilities and community centers including

conference halls;

18) Floriculture;

19) Tissue culture, fish culture, poultry farming, breeding and hatcheries;




20) Service industry, such as altering, ornamenting, polishing, finishing, oiling, washing,

cleaning or otherwise treating or adapting any article or substance with a view to its

use sale transport, delivery or disposal;

21) Research and development of any concept technology, design, process or product

whether in relation to any of the matter aforesaid, including any activities approved

by the Small Industries Bank; or

22) Such other activities as may be approved by the SIDBI;

1.3.7.2 Activities Specifically Permitted by SIDBI

1) Construction / buying of ready-built showrooms and sales out-lets

(only fixed assets are eligible for financing, items kept for sale are

not eligible for financing);

2) Construction / buying of ready-built area for establishing

departmental stores and shopping malls (only fixed assets are

eligible for financing, items kept for sale are not eligible for

financing);

3) Setting up of Medical Stores (only fixed assets are eligible for

financing, items kept for sale are not eligible for financing);

4) Setting up of vocational training centers for imparting technical

knowledge to entrepreneurs for setting up and running units

efficiently and to produce quality goods;

5) Setting up entertainment industry including production of films.

1.3.7.3 Activities Formulated by the Corporation




SL. NO.

ACTIVITIES / SCHEMES FOR FINANCIAL

ASSISTANCE

Objective/ Purpose




1. General Scheme

For establishment of new Tiny/SSI/MSI/ Service Units

and for Expansion/Modernization/Diversification of

Existing Units.

2.

Assistance To Construction/

Infrastructure Related

Activities

For establishing Commercial Complexes, Residential

Apartments, Development of Residential Layouts,

Group Housing, Industrial Estates, Software Parks,

Godowns, Warehouses, Acquisition of Ready built

Offices/New Office Building, Sales Outlets/Showrooms

and other infrastructure projects like Flyovers, Bridges

etc and Construction, Development and Maintenance of

Roads.

3.Assistance To Hotels/

Restaurants

For setting up of Medium and Star Category Standard

Hotels in the State Capital, District and Taluk HQ,

Important Tourist Centres. The Hotels should have

Boarding, Lodging and Restaurant Facilities and

Building Plan approved by Local Authorities.

Assistance for Mobile Canteens is also available.

4.Assistance To Tourism

Related Activities

Setting up of amusement parks, Convention Centres,

Travel and Transport, Tourist Service Agencies and

Restaurants.

5.

Assistance To

Doctors/Nursing

Homes/Hospitals/Electro

Medical Equipments

For setting up Clinics, Nursing Homes, Hospitals, and

for acquiring Electro- Medical Equipment.

6.Assistance To

Entertainment Industry

For construction and purchase of cinema halls and

multiplexes, production of short TV serials and feature

films, software for visual media publicity.

7. Single Window Scheme

To provide loan both for fixed assets and working

capital to tiny and small scale units whose project cost

does not exceed Rs. 35 lakhs and working capital




requirement does not exceed Rs. 15 lakhs.

8. Corporate Loan Scheme

Short term loans to the existing Successful Units who

require urgent Working Capital Funds either to meet gap

in the Working Capital requirements or funds required

for executing the rush of orders and also for meeting

statutory dues to government like payment of income

tax, sales tax excise duty etc. This loan is also

considered for developing/expanding new markets and

opening LC for purchase of new equipments till a term

loan is sanctioned and released.

9.Rehabilitation For Sick

Industrial Units

Assistance for Rehabilitation of potentially viable Sick

Units.

10.Assistance To Qualified

Professionals

Assistance for qualified Professionals, management,

accounting, medical architects, engineers, veterinary for

setting up of business enterprises, private practice and

consultancy services in their line of expertise.

11.

A.M.A.R.A (Assistance For

Marketing Related

Activities)

Assistance to small and medium scale existing units

with good track record to undertake various activities

necessary to increase their sales in the domestic and

foreign markets and to create physical marketing

infrastructure.

12.Acquisition Of Existing

Enterprises

Assistance to existing Units with good track record for

acquisition of existing assets. (Plant and Machinery of

reputed make with minimum of 10 years and

Industrial/Commercial properties with a minimum of 20

years of residual life.

13.Small Road Transport

Operators (SRTOs)

Assistance to Small Road Transport Operators to meet

expenditure towards cost of Chassis, Body Building,

Initial Taxes, Insurance etc.

14. Assistance For Acquiring Assistance to individuals, firms and companies for




Private Vehiclesacquisition of vehicles like cars, vans, Omni buses,

tractors etc.

15.Acquisition Of ISO 9000

Series Certification

Assistance to existing industrial concerns in the SSI

sector having a good track record, to meet expenses on

consultancy, documentation, audit certification fees,

equipment and calibrating instruments required for

acquisition of ISO certification.

16. Financing Of DG Sets

Assistance for acquisition of DG sets/installation and

construction of dg set etc. Assistance for acquisition of

generators for purpose of hiring vehicles, trailers, DG

sets and accessories also available.

17. Office Automation

Assistance to existing units with good track record to

acquire items like PCs, Printer, Copier, Fax Machine,

Telephone etc.

18. Training Institution

Assistance to existing units with successful track record

for setting up In-House Training Facilities including

Construction of Building, acquisition of Furniture,

Equipments etc.

Table 1.1 Activities Formulated by KSFC

1.3.8 Schemes of KSFC

KSFC offers a number of schemes to suit the varied needs of its clients. A brief description of the schemes is given below:

1.3.8.1 Credit Linked Capital Subsidy Scheme (CLCSS)

Objective: The objective of the scheme is to facilitate technology upgradation of Micro and Small Enterprises (MSEs) in specified products / sub-sectors by providing 15% capital subsidy for induction of proven technologies approved under the scheme.




The list of products / sub-sectors covered under the scheme is as per the approval of the Governing and Technology Approval Board (GTAB) constituted under this scheme.

Eligible Borrowers: Sole proprietary concerns, partnerships, co-operative societies, private and public limited companies.

1.3.8.2 Technology Upgradation for Textile Industries

Objective: To provide encouragement to textile industrial units (including units in the cotton ginning and pressing sectors) in taking up technology upgradation and to modernize their production facilities.

Eligible Borrowers: Sole proprietary concerns, partnerships, co-operative societies, private and public limited companies in textile and cotton ginning and pressing industries.1.3.8.3 Interest Subsidy Scheme for Scheduled Caste / Tribe Entrepreneurs

Objective: Interest subsidy in respect of loans availed by SC/ST entrepreneurs.

Eligible Borrowers: The Scheme is applicable only to the loan availed by the scheduled caste/tribe entrepreneurs. The promoters should be first generation entrepreneurs.

1.3.8.4 Privileged Entrepreneurs' Scheme

Objective: To meet short term funds requirements of the existing units which are under thrust / normal sectors of lending policy of the Corporation.

Eligible Borrowers: Proprietary concern, partnership firm, private and public limited companies

1.3.8.5 Assistance to Construction Activity (Term Loans)

Objective: To provide assistance to the construction activity sector. The assistance under this scheme is provided for construction of building, interior decorating, air conditioning, providing lift and communication facility, any other facility connected with the construction activity, formation of residential layouts. The following are covered under the scheme:

Construction of commercial complex;




Construction of godowns and warehouses;

Construction / buying of ready built show rooms and sales outlets;

Construction of residential apartments / group housing;

Creation of infrastructure for professional educational institutions;

Construction of industrial estates;

Establishment of software parks;

Formation of residential layouts.

Eligible Borrowers: Individuals, firms, companies and other eligible constitutions.

1.3.8.6 General Corporate Loan Scheme

Objective: The objective of the scheme is to extend short term loans to the existing successful units who require urgent working capital funds either to meet the gap in the working capital requirements or funds required for executing the rush of orders. This loan is also considered for developing / expanding new markets and opening LC for purchase of new equipments till a term loan is sanctioned and released by the financial institutions. The Corporation also extends corporate loan for meeting the statutory dues to the Government like payment of Income Tax, Sales Tax, and Excise Duty etc.

Eligible Borrowers: Existing units eligible for financial assistance Criteria from KSFC under the SFCs' Act, 1951 are eligible to be covered under the scheme.

1.3.8.7 Loan Scheme for Construction of Roads

Objective: For acquiring capital goods, equipment including road rollers, asphalting units, concrete mixtures, tippers, excavators, surveying and other supporting equipment towards development, maintenance and construction of roads.

Eligible Borrowers: Any reputed civil contractors / firms / companies.

1.3.8.8 Single Window Scheme




Objective: The objective of the scheme is to provide timely and adequate working capital assistance to micro, small and medium enterprises (MSME) along with term loan for fixed assets for entrepreneurs setting up new projects by KSFC.

Eligible Borrowers: All new MSMEs engaged in the manufacture or production, processing or preservation of goods i.e., manufacturing enterprises where the total venture outlay (including working capital requirements) does not exceed Rs.100.00 lakhs.

1.3.8.9 Working Capital Term Loan – For Existing Units

Objective: The objective of the scheme is to provide timely and adequate working capital assistance to the existing micro, small and medium enterprises (MSME) which have availed term loans earlier from the Corporation, having proven track record.

Eligible Borrowers: Existing MSMEs engaged in the manufacture or production, processing or preservation of goods i.e., manufacturing enterprises, which have availed term loans earlier from the Corporation, having proven track record. The existing units which have availed the WCTL under the SWS earlier from the Corporation are also eligible for additional WCTL. Availing a term loan is not a pre-condition for granting eligible WCTL under the scheme. The unit should be in existence with a minimum period of operation of three years. The unit should be working profitably and net worth should be positive. The units enjoying term loan / working capital loan from other commercial banks / financial institutions are not eligible under the scheme.

1.3.8.10 Line of Credit for Purchase of Raw Materials

Objective: To provide timely and adequate working capital assistance in the form of WCTL to MSMEs for purchase of raw materials from KSSIDC.

Eligible Borrowers: Sole Proprietorship, Partnerships, Co-operative Societies, Private and Public Limited Companies etc., engaged in the manufacture / production, processing or preservation of goods.

1.3.8.11 Assistance for Marketing Related Activities




Objective: To provide financial assistance to small & medium scale units to undertake various activities necessary to increase their sales in domestic and foreign markets and to create physical marketing infrastructure.

Eligible Borrowers: Existing units (at least for two years) with good track record (no default to any financial institutions / bank and asset classified as ‘standard’ by bank) and has sound financial position and has positive net worth & earned profit in last two years). Existing or new units with good track record & sound financial position are eligible for assistance under the scheme for establishing permanent exhibition or trade centres.

1.3.8.12 Acquisition of Existing Assets and Enterprises

Objective: To extend financial assistance for taking over of existing assets / enterprises.

Eligible Borrowers: Individuals, partnership firms, private & public limited companies, co-operative societies etc., engaged in respective activities eligible for assistance from the Corporation and in existence for minimum period of 2 years with good track record.1.3.8.13 Assistance to Entertainment Industry

Objective: The objective of the scheme is to provide financial assistance for the construction / purchase of cinema halls, multiplexes, production of short TV serials, software for visual media publicity and feature films.

Eligible Assets: Assistance under the scheme is available for meeting the expenditure on construction / purchase of buildings for multiplexes and cinema halls (the land cost will not be eligible for financing), purchase of capital equipments for multiplexes, cinema halls and software for visual media publicity and for production of TV Serials.

1.3.8.14 Assistance to Tourism Related Activities

Objective: To provide financial assistance for setting up of Amusement Parks, Convention Centres, Hotels & Restaurants, Travel and Transport and Tourist Services Agencies, and Mobile Canteen / Catering Services.

Eligible Borrowers: Sole proprietorships, partnerships, co-operative societies, private / public limited companies. Hotels and Restaurants which are located on highways and small towns which cater to the needs of tourists will also be considered for assistance. The restaurant should have a minimum area of 50 Sq. Meters (500 Sq.ft.). The Hotels




should have Boarding, Lodging and Restaurant Facilities and Building Plan approved by Local Authorities.

1.3.8.15 Assistance to Doctors / Qualified Medical Practitioners

Objective: For purchase of the premises / renovation of the existing premises, acquiring fixed assets like furniture, computers, office automation, ambulance, car / van, interiors and medicare related equipment required for a clinic.

Eligible Borrowers: Doctors / medical practitioners with a bachelor’s degree in any branch of medicine from recognized institute / university for setting of clinic. People holding bachelor degree in radiology, bio-physics and bio-technology, with at least 5 years experience and a certificate of practice from a relevant authority, qualified veterinary doctors are also eligible for assistance. The promoters should be an income tax payee for last 2 years.

1.3.8.16 Assistance to Nursing Home / Hospitals

Objective: For establishment of new and expansion / modernization of existing nursing homes and hospital. Loan is available for land, building and equipment for diagnostic, monitoring the therapeutic use, air conditioners, ambulance etc.

Eligible Borrowers: Qualified medical practitioners or entrepreneurs employing qualified doctors to run the hospital / nursing homes are eligible for assistance. The project must be backed by expert of a post graduate doctor on full time basis.

1.3.8.17 Assistance for Acquiring Electro Medical Equipment

Objective: For procurement of new electro medical and related equipment with accessories like CT scanners, Endoscopy, Gastroscopy, X-ray etc., Loan is also available for establishing diagnosis laboratories.

Eligible Borrowers: Hospitals, Nursing homes and medical practitioners with relevant qualification in general medicine, dentistry, radiology etc., and entrepreneurs employing qualified doctors are eligible for assistance for acquiring electro medical equipment for their professional use.




1.3.8.18 Scheme for Small Road Transport Operators

Objective: To meet expenditure towards cost of chassis, body building, initial taxes and insurance for acquiring transport vehicles.

Eligible Borrowers: Small road transport operators.

1.3.8.19 Acquisition of ISO 9000 Series Certification

Objective: The purpose of assistance will be towards meeting the expenses on consultancy, documentation, audit, certification fees, equipment and calibrating instruments for getting the certification.

Eligible Borrowers: Existing industrial concerns in the SSI sector which are in operation for a period of 4 years and working profitably for the last 2 years and regular in repayment to financial institutions/ banks are eligible for assistance.

1.3.8.20 Financial Assistance to Food Processing Industries

Objective: To encourage Food Processing Industries to take up technology upgradation / setting up of new unit / modernization of existing units.

Eligible Borrowers: Individuals, Firms, Co-operatives, Companies and PSUs. Units are eligible for a grant / financial assistance of 25% of the cost of plant & machinery and civil works (subject to reducing the cost of ineligible items prescribed by the Ministry) subject to maximum of Rs.50.00 lakhs. Sanctions under the scheme to women, SC /STs are given priority. The schemes shall cover specified sectors for activities leading to value addition and shelf life enhancement.

1.3.8.21 Rental Discounting Scheme

Objective: To provide financial assistance on the strength of the rent earned by non-residential properties located within the city and municipal limits of Bangalore, Mangalore, Hubli, Dharwad, Gulbarga, Shimoga, Bhadravathi, Mysore and Belgaum and earning gross rent earned of not less than Rs.25,000/- per month from eligible tenants of the premises. The properties located outside the Bangalore City Corporation limits will also be considered on case to case basis depending on the location and infrastructural




advantages enjoyed and rent earned. The tenants occupying the building should be reputed multi-national companies, nationalized and private sector banks, all India financial institutions, insurance companies, profit making public and private sector companies which are in existence for a minimum period of 5 years and earned profits etc.

Eligible Borrowers: Proprietary concerns, partnership firms, private / public limited companies, trusts and co-operative societies are eligible for assistance.

1.3.8.22 Scheme for Financing Energy Saving Projects

Objective: To promote energy saving MSMEs by providing financial assistance thereby contributing to environmental improvement and economic development in the State.

Eligible Borrowers: Sole proprietary concerns, partnerships, co- operative societies, private and public limited companies etc. Existing units should have a satisfactory track record of past performance and sound financial position & should not be in default to institutions/banks. The loans sanctioned by the Corporation on or after 01.08.2008 are eligible for finance. Loans availed for installation of energy saving equipment/under Credit Linked Subsidy Scheme (CLCSS) are also eligible to be covered under the scheme.

1.3.8.23 General Scheme

Objective: To extend financial assistance for new MSMEs service sectors and for expansion, modernization, diversification etc., by the existing units.

Eligibility Criteria: Projects which are eligible to be financed as per the SFCs' Act, are covered under General Scheme of the Corporation.

1.3.8.24 Scheme for Micro Finance Activity

Objective: Micro Credit or Micro finance refers to extending small loans to very poor families for self employment projects that generate income, allowing them to care for themselves and their families. The distinctive feature of this concept is empowerment of women financially. The Women will be organized into Self Help Groups (SHGs) and Joint Liability Group (JLGs) and will be involved in productive activities through micro finance.




The purpose is to create a national network of strong, viable and sustainable Micro Finance Institutions (MFIs) from the informal and formal financial sector to provide micro finance services to the poor, especially women.

Eligibility: The Constitution of the MFI should be Registered Non-Banking Financial Company (NBFC). It should be in existence for at least five years and / or should have a demonstrated track record of running a successful micro-credit programme at least for the last three years. The MFI should have been rated by mainstream rating agencies such as CRISIL/CARE/ICRA/M-CRIL etc. with acceptable investment grade rating. The rating should be valid and should not be less than 6 months old. It should have been extended term loan by SIDBI. The MFI should have been making cash profits for at least last two years. The MFI should have only women members as its client. The MFI should have achieved minimum outreach of 3000 members.

1.3.8.25 Composite Loan Scheme

Objective: This scheme is essentially designed to meet the complete financial requirement of rural artisans for acquiring equipment as well as for meeting working capital needs of the project.

Eligible Borrowers: Artisans, village and cottage industries in the tiny sector can take advantage in this loan scheme. Under this loan scheme loans up to Rs. 50,000/- at nil margin (zero margin) is available for units proposed in places where the population does not exceed 5 lakhs. Out of the assistance, up to Ts. 10,000/- is earmarked for construction of shed/ building for the project.

1.3.8.26 Disabled Entrepreneurs Loan Scheme

Objective: This scheme is for rehabilitation of disabled persons, who intend to establish rural, cottage or small units. Financial assistance up to 100% is available without any stipulation on the population of the place of the unit. The maximum loan assistance is Rs. 50,000/- for acquisition of plant, machinery and working capital needs of the unit.




Eligible Borrowers: Blind, deaf and orthopedically handicapped persons can take advantage of this loan scheme for setting up of their enterprise.

1.3.8.27 Equipment Finance Loan Scheme

Objective: The assistance is available for acquiring original equipments/ capital goods both indigenous and imported for meeting the expansion/ diversification/ modernization/ balancing equipments needs of the unit. The loans under this scheme are sanctioned expeditiously say in a day to two.

Eligible Borrowers: This scheme is available for existing SSI/ medium scale sector/ units working on profitable lines having good track record. The unit should be in existence of 4 years.

1.3.8.28 Mahila Udyama Nidhi Loan Scheme

Objective: This scheme is meant for extending financial assistance to first generation women entrepreneurs to set up new SSI units. This scheme provides equity type of assistance along with term loan. The equity type of assistance is termed as soft seed capital.Eligibility: The women entrepreneurs who seek assistance under this scheme should possess managerial and technical skill to run the unit and they shall be the chief promoter

of the proposed unit.

1.3.8.29 Hire Purchase Scheme

Objective: KSFC introduced Hire Purchase scheme which provides a fast easy alternative to ready cash. Under this scheme finance is available for procuring vehicles, machinery and equipments.

Eligibility: Industrial concerns which are in commercial production for atleast 2 years and have earned net profits and are regular in their repayments to financial institutions/ banks can avail assistance. Professionals and commercial transport operators can also avail the assistance. The units requiring hire purchase assistance may approach equipment lease finance and Hire Purchase department.

1.3.8.30 Non-Convertible Debentures




Objective: This scheme was introduced to subscribe the private placement of the debentures issued by the corporate entities. The proceeds of this debenture issue should be utilized by the companies to meet their long term working capital and capital expenditure.

Eligibility Criteria: The Companies getting the assistance should fall under the relevant provisions of SFCs' Act with regard to eligibility for such assistance. It should have been in production for at least 3 years and earned profits. and should not be in default to financial institutions or banks. Funds raised through issue of debentures should be utilized to meet long term working capital margin and up to 50% on capital expenditure.

1.3.8.31 Ex-Serviceman Loan Scheme:

This scheme is available for ex-serviceman / widows of ex-servicemen to set up small industrial units, acquire transport vehicles, set up hotel/ tourism related activities for gaining self employment.

1.3.8.32 Scheme for Office Automation And Training Institutes

Financial assistance can be availed for automation of existing firms and companies having successful track record for preceding 3 years. Items that can be considered for finance are PCs, copies, fax machine, telephone system etc. Minimum promoter’s contribution will be 25%.

Reputed companies can avail loans for setting up in-house training facilities for their executives. Term loan facilities is provided for construction of building, acquisition of furniture, equipments etc. Minimum promoter's contribution is 25% and debt equity ratio will be 2:1.

1.3.8.33 Scheme for Ready Built Office / Construction of New Office Building

Firms and companies which have been in operation for at least 5 years with a successful track record for preceding 3 years are eligible for assistance (scheme applicable to Bangalore city only).




1.3.8.34 Acquisition of Land / Building / Commercial Space

Individuals, firms and companies are eligible for assistance for acquiring industrial plots/ commercial land as a part of projects that can be financed by KSFC. Assistance can also be extended for acquiring ready built commercial space in a multistoried complex for the purpose of setting up hotels and restaurants or other activities that can be financed by KSFC.

1.3.8.35 National Equity Fund Scheme

This scheme provides equity type of assistance up to Rs. 2.50 lakhs to small entrepreneurs for existing and new projects in the tiny, small scale, service sectors and for rehabilitation of potentially viable sick SSI units. Assistance from NEF helps the small scale units in strengthening their equity base.

1.3.8.36 Qualified Professionals Loan Scheme

The Qualified professionals in the fields of management, accountancy, medicine, veterinary, architecture and engineering are provided financial assistance for setting up business enterprises/ private practice/ consultancy units under this scheme. Both new and existing professional entrepreneurs are eligible for financial assistance.

1.3.8.37 Foreign Letter Of Credit

KSFC has been operating the scheme of opening Foreign Letter of Credit for importing the capital goods through commercial bank exclusively for its borrowers since 1995. The scheme is operated in the Hire Purchase & Financial Services department of head office.

1.3.8.38 Loan Scheme for Construction Activity




Objective: To provide financial assistance to property developers, construction companies and firms for construction of group housing, commercial complexes, software parks and infrastructure projects like roads, flyovers, bridges etc.

Eligible Borrowers: Individuals (contractors), firms and companies who have been in operation for at least 5 years and have proven profit record for at least previous 3 years and should not be in default with commercial banks / financial institutions; the net worth comprising of equity and reserves and surplus should not exceed Rs.20.00 crore; the project cost should not exceed Rs.20.00 crore.

1.3.9 Other Financial Services

KSFC also renders other financial services apart from the schemes mentioned above. The services which it offers are given below:

1.3.9.1 General Insurance

KSFC has entered into a strategic alliance with IFFCO-TOKIO General Insurance Company to market the Non Life Insurance Products. This would enable the clients of KSFC to have credit and the insurance under one roof. The premium tariffs applicable are same as the other insurance companies and at no extra service charges. An exclusive Insurance Cell with well trained staff is in operation at Head Office. The details of the general perils covered are:




Fire

Earth quake

Burglary

Machine breakdown

Marine

Cash safe / transit

Fidelity guarantee

Household Insurance

Personal Accident Cover

Medical Insurance

Vehicle Insurance

Bankers Indemnity

Trade and Office

Electronic Equipment.

Travel Insurance.

1.3.9.2 Life Insurance

KSFC has entered into strategic alliance with Life Insurance Corporation of India, the largest and oldest Life Insurance Corporation of the country, to market its Life Insurance Products. The Corporation will help the customers in identifying the tailor made policies suitable for their future financial needs and extend professional service from procurement of policies to settlement of claims/payment on maturity to the customers. The clients of KSFC can avail, as welfare measures to cover critical illness risks / death risks of their employees and also avail Group Gratuity schemes to cover their statutory liabilities and obtain tax exemptions on premiums paid.

The services are available at no extra cost at Head Office and at all the branches of the Corporation situated in the district head quarters. The Corporation believes that Life




insurance is not only an investment decision but also a risk protection. The key persons of the ventures who have availed the loans from KSFC can avail special policies to protect against the risk of burden of debt in case of happening of any unfortunate event to the key person. KSFC do have well trained staff for servicing the clients of life insurance at Head Office as well as Branch Office.

1.3.9.3 UTI Mutual Fund Products

KSFC has entered into MOU with UTI MF for distributing UTI MF products. UTI Mutual Fund is one of the leading Mutual Fund in the country. It has got more than Rs.38,358.00 crore worth of assets under its management. It has got more than 40 schemes of offer, suitable for short term long term investments in the category of debt funds, balance funds and equity linked schemes. The individuals, co-operative societies, private limited companies, charitable trusts and PF trusts, co-operative banks can invest their investible surplus in the UTI Mutual Fund Products.

The Corporation has got professionally trained persons to guide in the investment process of UTI Mutual Fund at Head Office and Branch Offices. The service carries no extra charges.

1.3.9.4 Monitoring Agency

As per SEBI guidelines any company which is issuing more than Rs. 500 crore shares for subscription by the public, has to appoint a monitoring agency. KSFC is a notified agency for this. The work involves inspection of the books of accounts and physical assets of the company every six months, until the completion of the project to verify and certify that the proceeds of the issue are utilised towards the objects of the issue declared in the prospectus. The companies planning to issue IPOs can utilise the services of Corporation for Monitoring Agency assignment as per SEBI guidelines.

1.3.9.5 Infrastructure Development




Infrastructure is an integral part of the services sector and plays a crucial role in the industrial development. With rapid growth of the economy in recent years, the importance and urgency of infrastructure development has increased. Recognising this, the Corporation as part of diversification, has taken up infrastructure development projects with public / private participation.

The Corporation has been initially focusing on identifying valuable lands in the prime localities in and around Bangalore City owned by various government departments / governmental agencies / registered societies / trusts etc., exploring suitable infrastructure development on joint venture basis. In respect of such joint venture projects, the Corporation takes care of all the financial tie-ups for development of these properties. The expected income out of different revenue models will be shared with the owners of the properties in appropriate ratio on mutually agreeable terms and Corporation understanding the after studying economics / viability.

The proposed joint venture projects will be of world class and state of art technology. It could be IT park, shopping mall, commercial complex, SEZ, etc., depending upon the location of the property and commercial potentiality of the place. This new activity will ensure sustained cash flow for the concerned owner of the property as well for KSFC by way of rentals and other earnings which will be mutually beneficial to both the institutions.

A separate infrastructure development department is created for this purpose and is fully functional.

1.3.10 Lending Policy – Norms and Parameters

The Corporation formulates lending policy at the beginning of each financial year. The loans are given based on the lending policy of the Corporation. The lending policy covers various aspects like the group exposure, thrust sectors, sectors in the negative list, promoters’ contribution, security margin, collateral security norms etc. The industrial policies of the State and Central Government are also taken into account while formulating the lending policy of the Corporation.




Policy on Minimum Loan Size: The policy on the minimum loan size of Rs.5.00 lakhs is applicable for all activities except medical and veterinary doctors where minimum limit is Rs.2.00 lakhs.

The minimum size of the loan for others is reduced to Rs.2.00 lakhs in case of existing units going in for expansion / modernisation.

Promoters' Contribution: The minimum promoter’s contribution as the percentage of the total project cost prescribed in various schemes varies between 22.5% and 33.3% depending on the location of the project, various schemes of SIDBI operated by the Corporation, class of entrepreneur etc. The following norm may be followed while sanctioning the loan:

PARTICULARSMINIMUM PERCENTAGE

ON PROJECT COST

Backward district / regions 20%

Non-backward district / regions 22.5%

NEF / MUN Scheme 10%

RSR Flexible

DG Set loan 10%

Table 1.2: Promoter’s Contribution

Debt Equity Ratio: The Corporation adopts the norms for Debt Equity Ratio as per the guidelines issued by the Small Industries Development Bank of India from time to time.

Present Norms:

LOAN LIMIT/SCHEME DEBT-EQUITY RATIO

Upto Rs.10.00 lakhs 3:1




Above Rs.10.00 lakhs 2:1RSR Scheme FlexibleModernisation Scheme Projects – 4 : 1

Overall – 2 :1Additional Loans ( within overall limit)

Projects – 2 : 1Overall – 2 :1

Residential Apartment Projects 1:1Residential Layout formation 1 : 1

Table 1.3: Debt- Equity Ratio

Debt Service Coverage Ratio (DSCR): The repayment period of loan is fixed by the Corporation with due regard to the cash generation & profitability of the project. For this purpose, average DSCR ranging between 1.5:1 and 2:1 has been accepted as reasonable. In projects involving mainly land / building such as commercial complexes, software technology parks, industrial estates, hotels etc., with assured income, the DSCR can be relaxed up to 1.25: 1.00. The DSCR indicates the ability of the project to service the debts during the currency of the loan.

Repayment Period: The repayment period of the term loan varies between 3 to 8 years including moratorium period of maximum 2 years depending on the period of implementation. In respect of corporate loan, the maximum repayment period is 36 months including six months moratorium.

Security: In addition to the primary security i.e., assets financed by the Corporation, collateral security as per the lending policy of the Corporation is insisted. The collateral security requirement depends upon the type of project, location, sector, quality of primary assets etc.

1.3.11 Purpose and Limit of AssistanceBeing a term lending agency, Corporation extends financial assistance normally for creation of fixed assets in the form of land, building, plant & machinery and miscellaneous assets required for the project.

However, the Corporation also extends short or medium term loans in the form of working capital term loan and corporate loan to meet the urgent working capital




requirements of the new and existing units. The Corporation extends financial assistance for creation of fixed assets as also working capital for current assets under single window type of assistance in deserving cases. KSFC extends financial assistance for establishing new units as well as for expansion / diversification / modernization of the existing units.

Limit of Accommodation

The following is the maximum limit of loan that could be availed by the entrepreneurs:

CATEGORY MAXIMUM LOAN

Proprietary / Partnership Rs.200.00 lakhsCorporate bodies (both private / public Ltd), and registered co-operative societies

Rs.500.00 lakhs

Table 1.4 Limit of Loan

Notes

In respect of new units / existing units operating successfully, maximum limit can

be extended upto Rs.800.00 lakhs for category – (i) and Rs.2000.00 lakhs for

category – (ii).

In respect of category (ii) the financial assistance can be granted provided paid up

capital and free reserves do not exceed Rs.30.00 crore.

If the requirement of funds for the project is substantial and cannot be extended by

the Corporation alone, then the requirement of loan for such projects can be met in

consortium with other Financial Institutions.

1.3.12 Procedure for Availing Financial Assistance

A special cell viz., Entrepreneurial Guidance (EG) Section headed by an Asst. Gen. Manager operates at the Head Office of the Corporation to guide the entrepreneurs in respect of various schemes operated by the Corporation, loan facility available, terms of assistance etc.




A brief project profile / report will have to be given by the promoters soon after they approach the concerned Branch Manager / AGM (EG) at HO with the loan proposal. The project report will also be prepared by the Branch Manager / AGM (EG) in consultation with customer. The project report so prepared will be countersigned by the concerned entrepreneurs for having given consent for the same. Towards this, a nominal fee (non-refundable) will be charged as detailed below:

PARTICULARSFEE PER PROJECT

PROFILE

For loans upto Rs. 25.00 lakhs Rs.1,000/-For loans between Rs.25.00 lakhs and Rs.50.00 lakhs

Rs.2,000/-

For loans above Rs.50.00 lakhs Rs.3,000/-

Table 1.5 Fee Structure

In respect of project proposals where the project cost is less than Rs.500.00 lakhs, the concerned Branch Manager in respect of Branch Office / AGM (EG) in respect of HO shall accept the proposals without placing it before PCC. Only such proposals where the project cost is Rs.500.00 lakhs and above will be placed before the Project Clearance Committee Meeting at Head Office.

After receipt of the project profile (vide annexure -II) along with the bio-data and net worth details (vide Annexure-III), the main promoters are called for discussion with the committee and after discussions, if the project is found support worthy the application is issued. A set of three applications is issued. The duly filled applications have to be submitted in duplicate along with various enclosures as per checklist given in the application form. One application may be retained by the entrepreneur for reference. The other two application form will have to be submitted along with the applicable processing fee.The following are the fee structure prevailing at present.

Application processing fee ½ % of the loan amount

Upfront fee:

Small Scale Enterprises and others ½ % of the loan amount




Medium Scale Enterprises 1% of the loan amount

Table: 1.6 Fee Structure

The upfront fee will have to be paid at the time of legal documentation or before availing the first disbursement of the loan amount.

The application processing fee and upfront fee are non refundable. However, in case the loan application is rejected, refund upto a maximum of 75% of processing fees paid is allowed on a case to case basis.

Legal Fee: In addition to the above, documentation fee for legal scrutiny of the title deeds, execution of hypothecation and mortgage deed etc., at 0.1% of loan amount is being charged. The EG department after scrutinizing the application and the enclosures submitted, draws the receipt for the processing fee paid and forwards the application to the Credit Department through General Manager (Credits). The Credit Department appraises the project and disburses funds after the sanction of loan and will monitor the implementation of the project till the project is completed and final disbursement made.

Entrepreneurs are advised to contact the Deputy General Manager (Credits) for processing of the loan applications.

The Credit Department is also provided with legal officers for legal scrutiny of the documents and documentation thereafter i.e., after the loan is sanctioned and terms and conditions of sanction are accepted by the promoters. The above is the procedure in brief for availing the financial assistance from the Corporation. For further details the promoters are advised to personally contact the following officers.

Assistant General Manager (EG)

Deputy General Manager (Credits)Promoters are also advised to meet the General Manager (Credits), if they have any problem or for seeking any clarification.

In the Branch Offices, promoters are advised to meet the Branch Managers to discuss their projects and to finalize the proposals.

1.3.13 Interest Rate Structure




Interest Rate Table (Term Loans) Effective From 01.02.2010

SL. NO.

CATEGORY OF BORROWERS/LOANS

INTEREST RATES (IN %) FOR LOANS

UPTO RS.1 CRORE

ABOVE RS.1 CRORE

1.

a. All Term Loans (including WCTL) to MSMEs,

b. Acquisition of ISO accreditation,

c. SRTOs and Acquisition of private vehicles,

d. Tourism related activities: Amusement parks, Restaurants,

Travel & Transport, Tourist Service Agency, Hotels &

Restaurants, Mobile Canteen/Catering, Resorts, Service

Apartments,

e. Health Care Services: Assistance to Doctors/Qualified

Medical Practitioners, Nursing Homes/Hospitals, Electro

Medical Equipment.

f. Assistance to qualified professionals: Management

Professionals, Medical Professionals, Accounting

Professionals, Architects & Engineers, Veterinary Clinics.

g. DG Sets, Mobile Generators,

h. Godown / Warehouse & Convention centers.

i. Office Automation

j. Training Institutions.

13.50 13.50

2. a. Construction / Buying Commercial Complexes,

b. Construction activities like Residential Apartments, Villas,

Group housing, Lay out formation/Property Development

c. Shopping Complexes,

d. Industrial Estates, IT Software Parks,

e. Ready built office space, Construction/Buying Ready built

show rooms and Sales outlets, Development, Maintenance

15.50 15.50




and Construction of Roads/Infrastructure Projects.

f. Professional Education Institutes.

g. CORPORATE LOANS TO ABOVE ACTIVITIES (under

Sl. No. 2)

3.

a. Corporate loans,(excluding Corporate loans to activities at

Sl. No. 2), AMARA scheme, Bridge loans , Finance to

existing assets,

b. Entertainment industry (including Cinema

Theatre/Multiplex, Production of feature films, TV serials,

Dubbing/ Recording, Software for visual media publicity).

15.00 15.00

4. Privileged Entrepreneurs Scheme 14.50 14.50

5. Scheme for Energy Saving Projects (SESP) for MSMEs 14.50 14.50

TABLE 1.7: INTEREST RATE STRUCTURE

1.3.14 Achievements of the Corporation

In the 52 years of its existence, KSFC has contributed most significantly for the growth of SMEs, backward area development and promotion of first generation entrepreneurs. Its achievement in these areas is unparalleled. Its achievements can be summarized as follows:




Since its inception, KSFC has assisted more than 1.60 lakh units with cumulative

sanction of more than Rs. 10400 crore out of which about more than 50% is towards

SMEs.

Introduction of more than 30 loan assistance scheme for extending assistance to all

sections of the society.

Introduction of loan assistance for getting ISO 9000 certification for Export Oriented

Units.

Commendation by IDBI as one of the best SFCs of the country.

The premier position among all SFCs of the country with regard to sanctions and

recovery.

Establishment of 29 branches and 7 zonal offices across the state.

KSFC an ISO 9001:2000 certified organization is proud to have played a major role

in the industrial development of the State.

It is the proud privilege of KSFC to have assisted many industries that are

internationally recognized like INFOSYS and BIOCON.




CHAPTER – 2

ORGANISATION STRUCTURE

OF KSFC

2.1 ORGANISATIONAL STRUCTURE OF KSFC

KSFC has extensive network, offices encompassing entire Karnataka. KSFC services every nook and corner of Karnataka with its network of 7 Zonal Offices, 3 Super ‘A’ Grade Branch Offices, 12 ‘A’ Grade Branch Offices and 14 ‘B’ Grade Branch Offices




with an empowered and decentralized administrative system. It is the only term lending financial institution in the Karnataka with such a widespread network.

Chairman, Board of Directors and the Managing Director, appointed by the State Government, make policy decision and prepare road map to KSFC. The day to day administration is monitored by Managing Director .The head office has various departments to render services to the customers. KSFC has two Executive Directors (FINANACE AND OPERATION) and 6 General Managers-Corporate Planning, Credits, Internal Audit, Zonal, Administration and Asset Reconstruction. At the senior management level, DGMs’, AGMs’, with a legal advisor and two additional legal advisors are functioning. Mangers and Deputy Managers execute the policies at the middle level. Zonal Offices and Super ‘A’ Grade Branches are headed by DGMs’. All ‘A’ Grade Branches are headed by AGMs’. Managers head all ‘B’ Grade Branches.

Management Team

List of Board of Directors

SL.NO. NAME DESIGNATION

1. Sri.Kaushik Mukherjee, I.A.S., Chairman &



SRI L. V. NAGARAJAN, IAS, CHAIRMAN, KSFC

MADAN GOPAL M, IAS, MD, KSFC


Managing Director

2. Sri. M.Madan Gopal I.A.S Managing Director

3. Sri.B.R. Prem Kumar DIRECTOR

4. Sri. S.D Burde DIRECTOR

5. Sri. V. Madhavan Nair, I.A.S., DIRECTOR

6. Sri. Gurdeep Singh Dang DIRECTOR

7. Sri. Sat Pal DIRECTOR

8. Sri. C. Basavegowda DIRECTOR

9. Sri. G.S. Doreswamaiah DIRECTOR

10. Sri. H.V.S. Krishna DIRECTOR

Table 2.1 List of Board of Directors

Executive Committee

SL.NO. NAME DESIGNATION

1. Sri. M. Madan Gopal, I.A.S. Chairman

2. Sri. B.R. Prem Kumar Member

3. Sri. S.D. Burde Member

4. Sri. Gurdeep Singh Dang Member

5. Sri. Sat Pal Member

6. Sri. C. Basavegowda Member

7. Sri. G.S. Doreswamaiah Member

Table 2.2 List of Executive Members

Organisation Structure Chart




Chart 2.1 Organisation Structure of KSFC

Abbreviations for the various short forms used in the organizational chart



Managing Director

EDFinance

DGM Controller

AGM Treasury

AGM IT

AGM

AGM DTC

ED Operation

AGMSUMD

GM Internal Audit

AGM Head office Internal

Audit

AGM IA Cell

Mysore

AGM IA Cell

Dharwad

AGM IA Cell

Raichur

Manager PGC

GM Administration

Manager Personnel

Manager Disciplinary

Cell

Manager Administration

Manager Secretarial

Administration

Manager 180 Cell


EA: Executive Assistant

ED: Executive Director

GM: General Manager

AGM: Assistant General Manager

IA: Internal Audit

HP: Hire purchase

IT: Information Technology

AR: Asset Reconstruction

SUMD: Sick Unit Monitoring Cell Division

BD & CR: Business Development & Credit Research

Type of Organisation Structure

KSFC follows functional form of organization structure. Under, functional organization, men with special abilities to perform specific function will be employed and the benefit of specialization will be enjoyed by the organization. This will certainly lead to organizational balance by using the services of specialists in the required functions.

Advantages of Functional Organization

Functional form of organization structure offers the following advantages:

1) This method gives full scope for division of labour and specialization and therefore,

enables the concern to derive all the advantages of specialization.

2) The most important advantage of functional organization is the extensive use of the

expert knowledge of the specialists. Planning and execution of the work becomes

scientific because it is entrusted to the experts in that field.

3) It reduces the burden of executives as they are not required to perform too many

duties.




4) The system promotes co-operation as there is little or no scope for ‘one man’ control

in the organization.

Disadvantages of Functional Organization

This form of organization structure suffers from the following disadvantages:

1) The principle of unity of command is ignored under this system.

2) It is difficult to achieve co-ordination between the specialists and team-spirit among

workers.

3) The overhead expenditure increases considerably because of multiplicity of

specialists.

2.2 RESPONSIBILITY AND AUTHORITY OF KEY PERSONNEL OF KSFC

Following job descriptions are made for the officers, AGMs and above level:

2.2.1 Managing Director

Managing Director is the chief executive officer of KSFC responsible for overall strategies, policies, resources and operation of the business. He is the authority for implementing the directives of the board and also the disciplinary authority; as such he

leads KSFC quality initiatives.

Responsibility and Authority of Managing Director

1) Setting the targets for various performance parameters & their accomplishment

through suitable operational strategies

2) Empowered to carry out executive function including quality system either

independently or through delegation of authority.

3) In addition to the above he is responsible and authorized

To define & review the quality policy and quality objective of KSFC.




To define and develop the organizational structure, defining authorities&

responsibilities of personnel and their inter relationship.

To provide adequate material and human resource.

To appoint management representative.

To conduct management reviews.

2.2.2 Executive Director (Finance)

1) Managing the affairs pertaining to the finance and treasury.

2) Managing the affairs pertaining to all Branches and Zones, HO, Internal Audit

functions.

3) Inspection of BOs and Review of operational performance of all BOs and other

related departments in HO on monthly basis and submit reports & necessary

guidelines, policies etc.,

4) Any other matters related to above departments / BOs.

5) He shall report to Managing Director.

6) Effective implementation of Quality System in his functional areas including :-

Review of Quality Objectives.

Documents and Data Control.

Verification plan and their measurement.

Control of nonconforming services & Products.

Corrective and Preventive Action.

Process Control & its validation.

Control of Quality Records.

Quality Management Review.

2.2.3 Executive Director (Operations)

1) Carrying out business operations as per the targets set for different performance

parameters.




2) Managing the affairs pertaining to entrepreneurial guidance, business development,

Sanctions, disbursement, Recovery of Moneys from all HO case, BD & CR, Asset

Reconstruction, HP&FS, FSD, Administration / Personnel, Legal (HO) departments

& Industry Revival Group (IRG) Cell.

3) Issuing operational guidelines / policies.

4) Review of operational performances of related departments on monthly basis and

submit reports.

5) He shall report to Managing Director.

6) Effective implementation of Quality System in his functional areas including :-

Review of Quality Objectives.

Documents and Data Control.

Verification plan and their measurement.

Control of nonconforming services & Products.

Corrective and Preventive Action.

Process Control & its validation.



2.2.4 General Manager (Credits)

1) Matters pertaining to sanctions, disbursement and monitoring at HO under authority

delegated from time to time.

2) Supervision of functioning of Credits department. HO.

3) Appraising the project of specific category and recommending sanction of loans to

the sanctioning authority.

4) Release of sanctioned loan as per contract.

5) Transfer of loan file to recovery after final release of loan.

6) Assisting management in monitoring the policies / guidelines.




7) He shall report to Executive Director (O).

8) Effective implementation of the Quality System in their functional areas.

2.2.5 General Manager (Asset Reconstruction)

1) Overall In charge of AR & HP&FS Sections.

2) Matters pertaining to Recovery from non-accrued assets, including DC / DC(T)

3) Periodical review of the work of section heads.

4) Investigation of personal properties, attachments obtaining decrees filing EP etc.,

5) Conducting sale negotiation under SARFAESI.

6) Monitor & Review of all court cases of AR & HP&FS section including writ

petitions, personal guarantee involved decreed EP etc.,

7) One Time Settlement proposals from both BOs & HO in respect of DC & MR cases.

Assisting management to form the policies / guidelines & Conducting DRC meetings

at HO and other default review meetings.

8) Ensuring attachment of personal properties.

9) He shall report to Executive Director (Operations).

10) Effective implementation of quality system in the functional areas.

2.2.6 General Manager (Recovery)

1) Effective and Efficient functioning of the recovery portfolio.

2) Approving authority for reschedule/rephasement of the instalment during

implementation stage.

3) Approving authority for rehabilitation.

4) Monitor & review of recoveries

5) Review of related departments on monthly basis

6) Any other matter included his department

7) He shall report to Executive Director (O).




8) Effective implementation of quality system in the functional areas of recovery

departments including;

Document & Data Control.


Control of Non Conforming Products

Corrective & Preventive action.


Review of functional level Quality Objectives.

2.2.7 General Manager (Personnel & Administration)

1) Managing the affairs pertaining to Administration and Personnel and Disciplinary

wing.

2) Selection and getting approval and periodic assessment of subcontractors for

maintenance relating to office equipment, buildings air conditioning, generators,

transport vehicles, furniture, computers, communication system etc.,

3) All establishment matters.

4) Procurement of office equipment, stationery and consumables.

5) Matters pertaining to staff welfare.

6) HRD, Recruitment, Disciplinary, Career Development Administration, Expenditure

control etc.,

7) Implementation of HR policies.

8) All other matters related to above departments.

2.2.8 General Manager (Zones)

1) Effective and efficient functioning of branch offices (North and South) in respect of;

2) Business Development.

3) Entrepreneurial Guidance

4) Enquiry handling




5) Handling of Application.

6) Appraisal of Projects.

7) Sanction and disbursement of loans.

8) Recovery of loan.

9) Inspection of BOs as per direction

10) Assisting management in modifying policies / guidelines

11) Ensuring achievements set targets of BOs coming under his Jurisdiction

12) He shall report to Executive Director (F).

2.3 AREA OF OPERATION

KSFC services the nook and corner of Karnataka with its extensive network of 7 zonal offices, 3 super “A” grade branch offices, and 14 “B” grade branch offices with an empowered and decentralized administrative system. It is the only term lending financial institution in the state of Karnataka with such a widespread network.

The area of operation covers the entire State of Karnataka. KSFC has Branches in all the district head quarters. The industrial units / service sectors established or to be established within the State are only eligible for assistance. The Branch Offices of the Corporation are adequately delegated with powers of sanction and disbursement. Generally, requirements of financial assistance upto Rs.100.00 lakhs are handled by the concerned Branch Office itself. If the requirement of loan is more than Rs.100.00 lakhs, the entrepreneurs will have to approach Head Office.

Head Office

KSFC’s Head Office is located at,

M/s Karnataka State Financial Corporation,“KSFC BHAVAN”#1/1 Timmaiah Road,Near Antonment Railway Station,Bangalore -560052,Tel: 22250130,Web: www.ksfc.in




Super ‘A’ Grade Branches

M.G Road Branch, Bengaluru

Jayanagar Branch, Bengaluru

Rajajinagar Branch, Bengaluru

‘A’ Grade Branches

Bengaluru Rural

Belgaum

Bellary

Dharwad

Gulbarga

Hassan

Kolar

Mandya

Mangalore

Mysore

Tumkur

Udupi

‘B’ Grade Branches

Bagalkot

Bidar

Bijapur

Chamarajanagar




Chitradurga

Davanagere

Gadag

Haveri

Karwar

Koppal

Madikeri

Raichur

Shimoga

Zonal Branches

Bengaluru Rural

Belgaum

Davanagere

Dharwad

Gulbarga

Mangalore

Mysore




CHAPTER – 3

DEPARTMENTS OF KSFC




3.1 DEPARTMENTS OF KSFC

Department is a specialized functional area within an organization or a division, such as accounting, marketing, planning. Generally every department has its own manager and chain of command. KSFC has classified its various activities and has assigned these activities to different departments. It has the following departments.

3.1.1 Recovery Department

Collection of amounts due is termed as Recovery. Recovery of money is one of the major sources of the funds for the corporation. The health of the corporation is judged by the extent of recovery that it can effect. The repayment period is generally fixed up to 7-8 years with a moratorium period of 1-2 years for sound viable project.

Head Office has two Recovery Departments called Recovery-1 and Recovery-2. R-1 looks after the Bangalore cases, R-2 looks after the outside Bangalore cases. It has also two Deputy General Managers to look after recovery works for Bengaluru and other than Bengaluru cases. The total recovery during the year 2010-11 stood at Rs. 586.71 crore as compared to Rs. 554.94 crore made in the previous year.

3.1.2 Legal Department

Legal Department in Head Office is a centralized department mainly to act as a facilitator and interface with various departments of the Corporation in all the operational activities of the Corporation namely legal inputs for appraisal and for recovery in case of default in repayment or breach of contract, safe custody of records, files and security of documents is ensured. It is one of the important departments in the organization. Whenever an individual person or an individual concern applies for the loan, this department will scrutinize the documents. It creates proper securities. If the borrower does not pay proper interest, then, this department will issue legal notice, suit files etc.



http://www.businessdictionary.com/definition/chain-of-command.html

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http://www.businessdictionary.com/definition/division.html

http://www.businessdictionary.com/definition/organization.html

http://www.businessdictionary.com/definition/functional-area.html


3.1.3 ISO Cell

ISO performs the following functions:

Documentation of quality management system.

Issue and control of ISO document.

Arranging for required ISO training program for personnel.

Conducting internal quality audit once in 3 months.

Co-ordination between M/s Bureau of Indian Standards, Bangalore for conduct of

renewal audits. (Re-certification).

3.1.4 Management Information System (MIS) Department

MIS department performs the following functions:

It prepares annual corporate budget and fixes the target in key operational areas.

It collects weekly and monthly performance from each branch office and head office

and furnishes the performance reports to the management for taking appropriate

decisions.

It furnishes performance of the corporation to SIDBI on monthly, quarterly, and

annual basis.

It furnishing information to government’s Department of Industries and Commerce.

It prepares operational statistics of the Corporation.

3.1.5 Secretary Department

It facilitates smooth functioning of the management (Board, Executive Committee), conducts board meetings & executive committee meetings, renders services to the share holders, and places important matters before the board to facilitate policy making for efficient working of the corporation.

3.1.6 Credit Department




It performs the following functions:

It collects the data from the loan applicants.

It verifies the data.

It appraises the project in terms of its financial, technical, and marketing, feasibility.

Based on the viability of the project, it recommends the loan.

3.1.7 Personnel, Administration and Training Department


It frames HR policies

Training and development

Recruitment, transfer and promotions

The corporation has classified employees as class-A, class-B, class-C employees.

Class-A consist of executives directors, general managers deputy general managers, assistant general managers, managers and deputy mangers Class – B consist of assistant managers, assistants, stenographers, Typist and clerks. Class – C consist of drivers, daffedars, peons etc.

The corporation has unique combination of professionals on its pay-rolls - CAs, CFAs, MBAs, MAs, MCOMs, LLBs, M.TECHs, BEs, PhDs, etc., thus, diversity in its human resources is one of the great strength and asset of the corporation.

3.1.8 Hire Purchase and Financial Services

The fee based and financial services activities such as underwriting of public issue, issue management, pre-issue project appraisal and project report preparation are under taken by hire purchase and financial department at head office.

3.1.9 Library




KSFC have full- fledged special library with collection of books on finance, industries, banking etc. Library maintains data bank on industrial updates. It also contains KSFC news, magazines, various special journals related to finance, management, technology, banking, etc., annual reports of KSFC and other SFCs, different daily news papers.

3.1.10 Controller Department

It is one of the biggest departments in the organization. It consists of 4 departments, they are Accounting-1, Accounting-2, Accounting-3, Accounting-4, and its functions are as follows:

To ensure timely issue of cheques to the customers.

A-l department is concerned with passing the various bills such as TA, DA, customer

bill, etc.

A-2 department deals with maintainace of customer A/c, loan A/c, etc where in all

disbursements are entered into the ledger.

A-3 department deals with cash. It is concerned with actual receipt of cash and

writing of cash book.

A-4 department deals with consolidation of accounts of all the

branches/reconciliation of fund transfer.

This department is also concerned with preparation of P&L a/c and Balance Sheet.

3.1.11 Information Technology Department

The functions and advantages of Information technology Department are as follows:

It helps in maintaining and updating the records of the data of customers.

The effective use of IT in accounting and all operational aspects of the corporation.




Improved customer service.

Improvement in communication through advanced technology.

Better control over decentralized operation.

3.1.12 Asset Reconstruction Department


This department handles chronic default cases, and cases where suits are filed for

further recovery.

This department is also engaged in the task of liquidating assets which are seized/

taken over as per the power conferred on KSFC u/s 29 of the SFCs Act.

It ensures recovery of loan installments with interest and other applicable charges.

3.1.13 Sec-29 Department

The objective of this department is to help recovery of long pending loans under SEC-29 of SFCs Act, pertaining to branch offices where the loan sanctioned is Rs 25 lakhs or more and assets taken over U/S 29 will be bought for sale through Negotiation Committee which is headed by ED (F).

The sale of assets will be finalized and branches will be advised to complete the sale process wherever the sale of assets is approved by competent authority.

3.1.14 Internal Audit Department

The Internal Audit Department is located at Head Office with internal audit cell at Mysore, Dharwad, and Raichur. This department performs the following functions:




The department conducts audit of corporation covering all the areas of sanction,

disbursement, recovery, finance and accounts, legal documentation, and general

administration etc.

The Internal Audit Department at HO is functioning as a nodal office and

coordinating the works of internal auditors and the audit committee of the board.

3.1.15 Treasury Department

It mobilizes the funds at competitive cost to meet the requirements of KSFC promptly and services the funds raised.

3.1.16 Business Development and Credit Research Department

BD & CR department conducts business promotional activities to enhance business opportunities and to explore the possibilities of extending financial assistance. The department undertakes following activities:

To design viable schemes based on the market and customer requirements.

The department carries out the advertisement & publicity assignment and printing of

promotional materials.

The department brings out KSFC news and in house magazine of corporation.

Follow–up with successful entrepreneurs to provide financial assistance for

expansion/ diversification.

3.1.17 Entrepreneurs Guidance Department

The department undertakes following activities:

To have interface with existing and potential customers and extend them necessary

guidance to get financial assistance from the corporation.

The entrepreneurs who approach for availing a loan in the corporation are given

proper guidance in their respective business field.




To create a good volume of business for corporation with its lending policies with an

intention to create a qualitative portfolio.

3.1.18 Customer Grievance Cell

It is a government owned institution and it is accountable to the public. Every 1st Saturday of the month, meeting is conducted to address the cases reported to Public Grievances Cell.

3.1.19 Financial Services Department

An exclusive insurance cell with well trained staff is operated at HO.

The corporation has entered into a tie up with IFCO-TOKIO general insurance

products. The corporation commenced these services from 27/02/2002.

The corporation has also taken up marketing life insurance product of LIC.

As per SEBI guidelines, IPOs of more than Rs 500 crores needs to be monitored by

way of appointing monitoring agency. The corporation is appointed to perform this

task. It has now been listed in SEBI as “Monitoring Agency”. This activity will be

taken up as fee based activity.

All these activities are undertaken by Financial Services Department.




CHAPTER – 4

DATA ANALYSIS AND

INTERPRETATION




4.1 MEANING OF FINANCIAL ANALYSIS

Financial Statements Analysis is an analysis which critically examines the relationship between various elements of the Financial Statements. It focuses on the evaluation of past operations as revealed by the analysis of basic statements. It is a process of scanning Financial Statements for evaluating the relationship between the items as disclosed in these. It is an important means of assessing past performance and forecasting and planning future performance. The analysis simplifies, summarizes and systematizes the monotonous figures.

4.2 MEANING OF RATIO ANALYSIS

Analysis of Financial Statements with the help of ‘Ratio’ is termed as ‘Ratio Analysis’. Ratio Analysis is a widely used tool of Financial Analysis. It can be used to compare the risk and return relationships of firms of different sizes. It is defined as the systematic use of ratio to interpret the Financial Statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined.

4.3 OBJECTIVES OF RATIO ANALYSIS

Following are the important objectives of Ratio Analysis




1) To provide the necessary basis for Inter-period and Inter-firm Comparison.

2) To help in providing a part of information needed in the process of decision-making.

3) To focus on facts on a comparative basis and facilitate drawing of conclusions

relating to the performance of a firm.

4) To evaluate the performance of a firm in determining the important aspects of a

business such as liquidity, solvency, operational efficiency, overall profitability

capital gearing, etc.

5) To throw light on the degree of efficiency in the management and the effectiveness in

the utilization of its assets.

6) To provide the way for effective control of the enterprise in the matter of achieving

the physical and monetary targets.

7) To help management in discharging its basic functions like forecasting, planning, co-

ordination, communication, control, etc.

8) To promote co-ordination among the departments and the staff by the study of

performance and efficiency of each department.

9) To point out the financial condition of business whether it is strong, questionable, or

poor and enables the management to take necessary steps.

10) To act as an index of the efficiency of an enterprise.

4.4 CLASSIFICATION OF RATIOS

Accounting Ratios may be classified as under:

1) Traditional Ratios

2) Functional Ratios

4.4.1 Traditional Ratios

Traditional Accounting Ratios are classified on the basis of the origin of the figures used in the accounting ratios, i.e. on the basis of the Financial Statements from which ratios are derived. The following ratios are usually included in this type of classification.




4.4.1.1 Balance Sheet Ratios or Financial Ratios

Ratios calculated from the different items as appearing in the Balance Sheet of a concern are called Balance Sheet Ratios, e.g. Current Ratio, Liquid Ratio, Proprietary Ratio, Debt-equity Ratio, and so on.

4.4.1.2 Profit & Loss Account Ratios or Operating Ratios

Ratios calculated from the different items as appearing in the Profit & Loss Account of a concern are called Profit & Loss Account Ratios or operating Ratio, e.g. Gross Profit Ratio, Net Profit Ratio, Operating Ratio.

4.4.1.3 Mixed Ratios or Composite Ratios

Ratios calculated, taking some items as appearing in the Balance Sheet and taking some items as appearing in Profit & Loss Account, are called Mixed Ratios or Composite Ratios, e.g. Return on Net Worth, Return on Investment (ROI), Capital Turnover Ratio, etc.

4.4.2 FUNCTIONAL RATIOS

The other way of classifying the ratios in on the basis of functions they perform, what they indicate, symptoms or characteristics, namely, liquidity, profitability, financial stability and turnover relationship, etc. This classification assumes greater significance because it distinctly the different aspects of business performance and helps the various users of Financial Statements to take guard of their interest. For instance, short-term creditors are interested to evaluate the liquidity position by analyzing the liquidity ratios, while long-term creditors and investors are interested in the solvency and profitability position of the organization and as such they study the solvency and profitability ratios. The following ratios are included in this classification.

1) Liquidity Ratios

2) Leverage Ratios




3) Profitability Ratios

4) Activity/Efficiency Ratios

4.4.2.1 Liquidity Ratios

Liquidity Ratios are those ratios which are computed to evaluate the capacity of the company to pay off its short-term liabilities. These ratios indicate the short-term financial position of the company by relating short-term resources with short-term obligations. These ratios are basically used by the short-term creditors, viz. suppliers, bankers, lenders, employees and all others who are interested in the recovery of money due to them. Short-term creditors focus their attention on the liquidity of the company.

The most common ratios which indicate the extent of liquidity or lack of it are as follows:

Current Ratio

This ratio is also called ‘Working Capital Ratio’. It is used to assess the short-term financial position of the business concern. In other words, it is a measure of the company’s short-term solvency, i.e. its ability to meet its short-term obligations. It matches the total current assets of the company against its current liabilities.

As a measure of short-term solvency, it indicates the rupees of current assets available for each rupee of current liability. Apparently, the higher the current ratio, the more protected are the short-term creditors and vice -versa. Conventionally, a current ratio of 2:1 (current assets twice of current liabilities) is satisfactory. The Formula for computation of current ratio is given below:

Current Assets ¿Current Assets

Current Liablities

Where,

Current Assets = Cash in Hand + Cash at Bank + Short-term Investments + Bills Receivable + Debtors + Short-term Loans & Advances + Inventory + Prepaid Expenses.




Current Liabilities = Creditors + Bills Payable + Bank Overdraft + Provision for Taxation + Proposed Dividend + Unclaimed Dividend + Payment Received in Advance + Outstanding Expenses + Other Liabilities Payable within One Year.

Current Ratio of KSFCTable 4.1 Showing Current Ratio of KSFC:

(Rs. in Lakhs)

YEAR CURRENT ASSETS

CURRENT LIABILITIES

CURRENT RATIO

2005-06 34,534.03 12,434.02 2.782006-07 19,612.14 7,816.77 2.512007-08 27,933.61 18,900.97 1.482008-09 23,712.52 9,292.14 2.552009-10 18,690.25 9,453.41 1.982010-11 29,196.75 10,345.30 2.82

CHART 4.1 Showing Current Ratio of KSFC:

2005-06 2006-07 2007-08 2008-09 2009-10 2010-110

0.51

1.52

2.53

CURRENT RATIO

YEARS

RA

TIO

S

Analysis and Interpretation

The Current Ratios for a period of six years of Karnataka State Financial Corporation are presented in Table 4.1. The current ratio of KSFC was 2.78:1 in 2005-06 which declined to 1.48:1 in 2007-08. Thereafter, it again rose to 2.82:1 in 2010-11.




A close look at the table and the chart reveals that Current Ratios of Corporation have been above the ideal ratio, which is 2:1, during the study period except in the year 2007-08. It is an indication of a sound liquidity position of the Corporation.

A Current Ratio of 2.78:1 in 2005-06 implies that for every one rupee of current liabilities, current assets of 2.7 rupees were available to meet them. The protection available to the short-term creditors declined in 2007-08 to 1.48. However, current assets were 2.55, 1.98 and 2.82 times of current liabilities in 2008-09, 2009-10 and 2010-11 respectively. An analysis of these figures reveals that the Corporation is able to meet its short-term obligations in full.

Although KSFC has better short-term solvency position, a higher current ratio of more than 2:1 may be regarded as an inefficient working capital management. Therefore, it should have a reasonable current ratio.

Super Quick Ratio:

This ratio is also called, “Cash Position Ratio” or “Cash Ratio” or “Absolute Liquidity Ratio”. This ratio establishes the relationship between super quick assets and current liabilities. It may be used by banks and financial institutions who are very much interested in lending short-term loans to companies for a period of not more than three months. Generally, an absolute liquid ratio of 0.5:1 is considered as an ideal ratio. This ratio is computed with the help of the following formula.

Super-Quick Ratio ¿SuperQuick AssetsCurrent Liabilities

Where,

Super Quick Assets = Cash in Hand + Cash at Bank + Marketable Securities

TABLE 4.2 Showing Super Quick Ratio of KSFC:

(Rs. In Lakhs)

YEAR SUPER QUICK ASSETS

CURRENT LIABILITIES

SUPER QUICK RATIO




2005-06 11,563.87 12,434.02 0.932006-07 4,871.07 7,816.77 0.622007-08 4,995.99 18,900.97 0.262008-09 6,498.37 9,292.14 0.72009-10 6,979.35 9,453.41 0.742010-11 3,651.58 10,345.30 0.35

CHART 4.2 Showing Super Quick Ratio of KSFC:

2005-06 2006-07 2007-08 2008-09 2009-10 2010-110

0.2

0.4

0.6

0.8

1

SUPER QUICK RATIO

YEARS

RA

TIO

S

Analysis and Interpretation: The Super Quick Ratios of KSFC over a period of six years are presented in the Table 4.2. The Super Quick Ratio of KSFC was 0.93 in 2005-06. It declined to 0.62 in 2006-07. These ratios are well above the ideal ratio which is 0.5:1. It suggests that the Corporation




was having sufficient cash and bank balances at its disposal to meet its current liabilities. The ratio deteriorated in the year 2007-08. The decline in the ratio was due to more increase in the current liabilities than the super quick assets. The ratio showed an upward trend in the next two years. Again, it declined to 0.35:1.

The analysis of these figures reveals that the corporation has maintained sufficiently high amount of cash and bank balances than what is usually considered as ideal, over the years barring 2007-08 and 2010-11. The ratios in 2007-08 and 2010-11 were 0.26:1 and 0.35:1 respectively which suggest that cash and bank balances were not sufficient to meet the short-term obligations.

4.4.2.2 Leverage/Solvency/Capital Structure Ratios

The second category of financial ratios is Leverage or Capital Structure Ratios. The long-term lenders/creditors would judge the soundness of a firm on the basis of the long-term financial strength measured in terms of its ability to assure the long-term lenders with regard to a) periodic payment of interest during the period of the loan and b) repayment of principal on maturity or in predetermined instalments at due dates.

There are, thus, two aspects of the long-term solvency of a firm: a) ability to repay the principal when due and b) regular payment of the interest. Accordingly, there are two different, but mutually dependent and interrelated, types of leverage ratios. First, ratios are based on the relationship between borrowed funds and owner’s capital. These ratios are computed from the Balance Sheet and reflect the relative / stake of owners and creditors in financing the assets of the firm. In other words, such ratios reflect the safety margin to the long-term creditors. The second category of such ratios is based on the Income Statement and shows the number of times the fixed obligations are covered by earnings before interest and taxes. In other words, they indicate the extent to which a fall




in operating profits is tolerable in that the ability to repay would not be adversely affected.

Following are some important leverage ratios

Debt to Equity Ratio

The relationship between borrowed funds and owners capital is a popular measure of the long-term financial solvency of a firm. This relationship is shown by the Debt-Equity Ratio. This ratio indicates the relative proportions of debt and equity in financing the assets of a firm. It reveals the extent to which debt financing has been used in the business. It discloses to the creditors the extent of their in interest being covered by the net worth by the company. It can be computed by using the following formula.

Debt-Equity Ratio ¿ Total Debt (Outsider s ' Fund)

Shareholder s' Funds

Where,

Total Debt Debentures + Term Loans + Loans on Mortgage + Loans from Financial = Institutions + Other Long-Term Loans + Redeemable Preference Share Capital + All Current Liabilities.

Shareholders’ Funds Equity Share Capital + Irredeemable Preference Share Capital + = Capital Reserves + Retained Earnings + Any Earmarked Surplus Like Provision for Contingencies etc. – Fictitious Assets (Goodwill, Preliminary Expenses).

TABLE 4.3 Showing Debt-Equity Ratio of KSFC

(Rs. In Lakhs)

YEAR TOTAL DEBT

SHAREHOLDERS' FUNDS

DEBT-EQUITY RATIO

2005-06 1,90,155.54 12,892.55 14.752006-07 1,73,719.56 12,892.55 13.472007-08 1,75,960.85 33,108.24 5.31




2008-09 1,72,155.17 58,054.77 2.972009-10 1,76,040.01 70,732.82 2.492010-11 1,96,015.74 72,588.68 2.7

CHART 4.3 Showing Debt-Equity Ratio of KSFC

2005-06 2006-07 2007-08 2008-09 2009-10 2010-1102468

10121416

DEBT-EQUITY RATIO

YEARS

RA

TIO

S


The Debt-Equity Ratios of KSFC have been presented in Table 4.3. It can be seen from the table that the increase in shareholders’ funds has been more than the increase in total debt. It is seen from the table that there has been continuous decline in the quantum of debt proportion from 14.75:1 in 2005-06 to 2.49:1 in 2009-10. However, a marginal rise in Debt-Equity Ratio was seen at the end of the study period.

The Debt-Equity Ratio indicates the margin of safety to the creditors. A ratio of 14.75:1 implies that for every 14.75 rupees of outside liability, the firm has only one rupee of owners’ capital. It has serious implications from creditors’ point of view because owners are putting up relatively less money of their own. However, KSFC reduced the proportion of debt in its capital structure over a period of time by issuing more shares. At the end of the study period, the Debt-Equity Ratio of KSFC was 2.7:1 which is quite an improvement over 2005-06’s ratio. Yet, it is not a satisfactory ratio.




Debt to Total Tangible Assets Ratio

The Debt-Total Tangible Assets Ratio indicates the proportion of total tangible assets financed by total debt. Symbolically, it is equal to:

Debt-Total Assets Ratio ¿ Total Debt

TotalTangible assets

Where,

Total Tangible Assets = Total Assets – (Goodwill + Preliminary Expenses + Accumulated Losses)

TABLE 4.4 Showing Debt-Total Tangible Assets Ratio Of KSFC

(Rs. In Lakhs)

YEAR TOTAL DEBT

TOTAL TANGIBLE ASSETS

DEBT-TOTAL TANGIBLE ASSETS

RATIO

2005-06 1,90,155.54 1,42,720.56 1.332006-07 1,73,719.56 1,26,520.87 1.372007-08 1,75,960.85 1,55,194.58 1.132008-09 1,72,155.17 1,72,351.35 0.992009-10 1,76,040.01 1,89,210.39 0.932010-11 1,96,015.74 2,13,229.12 0.92

CHART 4.4 Showing Debt-Total Tangible Assets Ratio of KSFC




2005-06 2006-07 2007-08 2008-09 2009-10 2010-110

0.4

0.8

1.2

1.6

DEBT-TOTAL TANGIBLE ASSETS RATIO

YEARS

RA

TIO

S


It is observed from the table and the chart that the Debt to Total Tangible Assets Ratios of KSFC revealed a declining trend during the study period except during 2006-07. The ratio was 1.33 in 2005-06 which signifies that 1.33 rupees of debt is covered by one rupee of tangible assets. This is undesirable from the point of creditors/lenders as there is no sufficient margin of safety available to them. There was a slight increase in the ratio in 2006-07. However, the mid and lower part of the study period revealed an altogether downward trend in the ratio values. This is a welcome change as the margin of safety available to the creditors/lenders has increased over the years.

On the whole, there have been desirable changes in the ratio values from the perspective of creditors/lenders. However, the debt holders are still at high risk because of low margin of safety.

Proprietary Ratio

This ratio is called ‘Equity Ratio’ or ‘Owners Fund Ratio’ or ‘Shareholders Equity Ratio’. This ratio points out the relationship between the shareholders’ funds and total tangible assets. In other words, it indicates the proportion of total assets financed by owners. The formula for this ratio may be written as follows:




Proprietary Ratio ¿ Shareholder s' Funds

TotalTangible Assets×100

TABLE 4.5 Showing Proprietary Ratio of KSFC

(Rs. in Lakhs)

YEARSHAREHOLDERS

' FUNDSTOTAL TANGIBLE

ASSETSPROPRIETARY

RATIO (%)2005-06 12,892.55 1,42,720.56 92006-07 12,892.55 1,26,520.87 10.22007-08 33,108.24 1,55,194.58 21.32008-09 58,054.77 1,72,351.35 33.72009-10 70,732.82 1,89,210.39 37.42010-11 72,588.68 2,13,229.12 34

CHART 4.5 Showing Proprietary Ratio of KSFC:

2005-06 2006-07 2007-08 2008-09 2009-10 2010-1105

10152025303540

PROPRIETARY RATIO

YEARS

RA

TIO

S

Analysis and Interpretation The Proprietary Ratios of KSFC over a period of six years are presented in tabular and graphical form. The Proprietary Ratio of KSFC was 9% in 2005-06 which indicates that shareholders’ funds form only 9% of total tangible assets employed in the business. From creditors’ point of view, it is alarming for them because it indicates more of creditors’ funds and less of shareholders’ funds in the total tangible assets of the company.




A marginal increase in Proprietary Ratio was registered in the next year. A significant rise in Proprietary Ratio was seen from 9% in 2005-06 to 37.4 % in 2009-10. This rise was partly due to increase in the amount of reserves and surplus and the issue of additional share capital The rise in the ratio implies corresponding increase in the security to the creditors as more shareholders’ funds are available as safety of margin. Thereafter, the ratio declined to 34%.

The analysis of these figures reveals that there has been appreciable improvement in the Proprietary Ratio of KSFC during the period of study. However, creditors are still exposed to more risk. Usually, a Proprietary Ratio of 50% is regarded as safe.

Fixed Assets to Proprietors’ Funds Ratio

This is also known as Fixed Assets to Net Worth Ratio. It establishes the relationship between fixed assets and shareholders’ funds. The main object of calculating this ratio is to ascertain the percentage of owners’ funds invested in fixed assets. This is an indicator of the efficiency of the management regarding formulation of financial planning. It can be calculated as follows:

Fixed Assets to Proprietors’ funds Ratio ¿ ¿ Assets

Shareholder s' Funds×100

Where,Fixed Assets = Total Fixed Assets - Depreciation

TABLE 4.6 Showing Fixed Assets to Proprietors’ Funds Ratio of KSFC

(Rs. in Lakhs)

YEAR FIXED ASSETS

SHAREHOLDERS' FUNDS

FIXED ASSETS TO PROPRIETORS' FUNDS RATIO (%)

2005-06 821.85 12,892.55 6.372006-07 748.21 12,892.55 5.80




2007-08 6155.17 33,108.24 18.592008-09 6094.41 58,054.77 10.502009-10 6011.58 70,732.82 8.502010-11 5280.52 72,588.68 7.27

CHART 4.6 Showing Fixed Assets to Proprietors’ Funds Ratio of KSFC

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

0.00

5.00

10.00

15.00

20.00

FIXED ASSETS TO PROPRIETORS' FUNDS RATIO

YEARS

RA

TIO

S


It is observed from the table and the chart that the Fixed Assets to Proprietors’ Funds Ratio of KSFC revealed a fluctuating trend during the study period. A thorough scrutiny of the ratio values reveals that there was a downward trend in upper part of the study period, that is, 2005-06 and 2006-07. There was a rise in the ratio in 2007-08. There was again a declining trend during the latter part of the study period.

A ratio of 6.37% implies that 6.37% of shareholders’ funds are sunk into the fixed assets which constitute the revenue earning capacity of a business. There was a dip in the ratio in the next year. This was mainly due to the decrease in the value of fixed assets. The Ratio increased to 18.59 in 2007-08 which was the highest during the study period. In the last three years, the value of fixed value decreased as a result of which there was also a decline in the ratio.

On the whole, the Corporation has used very less amount of shareholders’ funds in making investment in the fixed assets especially in the latter part of the study period.




Capital Gearing Ratio

This ratio is also known as “Capital Structure Ratio” or Leverage Ratio”. It is used to analyze capital structure of the company. It establishes the relationship between fixed interest, dividend bearing securities and equity shareholders’ funds. It is an indicator of the degree of risk involved in the total capital employed in the business. It can be calculated as follows:

Capital Gearing Ratio = ¿ Interest∧Dividend bearing Funds

Equity Shareholder s ' Funds

Where,

Fixed Interest and Dividend bearing Funds = Preference Share Capital + Debentures + Long-Term Loans Equity Shareholders’ Funds = Equity Share Capital + Reserves and Surplus – {Goodwill + Preliminary Expenses + Profit and Loss A/c (Dr.)}.

TABLE 4.7 Showing Capital Gearing Ratio of KSFC

(Rs. in Lakhs)

YEAR FIXED INTEREST AND DIVIDEND BEARING

FUNDS

EQUITY SHAREHOLDERS'

FUNDS

CAPITAL GEARING

RATIO2005-06 1,77,726.52 12,892.55 13.792006-07 1,66,147.79 12,892.55 12.892007-08 1,57,059.88 33,108.24 4.742008-09 1,62,872.03 58,054.77 2.812009-10 1,66,586.60 70,732.82 2.362010-11 1,85,670.44 72,588.68 2.56

CHART 4.7 Showing Capital Gearing Ratio of KSFC:




2005-06 2006-07 2007-08 2008-09 2009-10 2010-1102468

10121416

CAPITAL GEARING RATIO

YEARS

RA

TIO

S


Table 4.7 shows the Capital Gearing Ratio of KSFC for the study period. The Capital Gearing Ratio of the KSFC reflected a downward trend during the study period except during 2010-11 which recorded a marginal increase in the ratio as compared to the previous year.

The ratio was 13.79:1 in 2005-06. It signifies that for every 13.79 rupees of non-owners’ funds one rupee of owners’ funds is available in the capital structure of KSFC. It shows the KSFC’s heavy dependence on outsiders’ funds which bear fixed charges. It also shows the amount of security available to non-owners’ funds which is very meager in this case (one rupee for every 13.79 rupees). However, the Corporation has been able to reduce the proportion of non-owners’ funds to owners’ funds either by repaying the debt or raising more funds through shares. It is a healthy sign because it allows KSFC to operate flexibly.

The Capital Gearing Ratio of KSFC was 2.56 which is slightly higher than the previous year’s ratio. This is a significant improvement over 2005-06’s figure. But, creditors/lenders are still exposed to risk because their funds are more than the owners’ funds. This is undesirable from their view point.

Interest Coverage Ratio




This ratio establishes the relationship between the amount of net profits or earnings before the deduction of interest, taxes and fixed interest charges. This ratio is used as a yardstick for the lenders to know whether the business concern is able to pay its fixed interest charges on long-term loans periodically. Interest Coverage Ratio is calculated with the help of the following formula:

Interest Coverage Ratio = EBIT∨Operating Profits

¿ Interest Charges

Where,

EBIT or PBIT = Earnings or Profits before Interest and Taxes

TABLE 4.8 Showing Interest Coverage Ratio of KSFC

(Rs. in Lakhs)

YEAR EBIT FIXED INTREST CHARGES

INTEREST COVERAGE RATIO

2005-06 17,676.17 16,780.62 1.052006-07 15,886.75 14110.66 1.132007-08 20,453.21 13,634.01 1.502008-09 13,127.48 16,667.20 0.792009-10 15,246.00 13,706.49 1.112010-11 17,729.21 14,391.03 1.23

CHART 4.8 Showing Interest Coverage Ratio of KSFC




2005-06 2006-07 2007-08 2008-09 2009-10 2010-110.000.200.400.600.801.001.201.401.60

INTEREST COVERAGE RATIO

YEARS

RA

TIO

S


Table 4.8 shows the Interest Coverage Ratio values of the Karnataka State Financial Corporation during the study period. In 2005-06 Re. 1.05 was available for every one rupee of fixed interest charges. It does not provide a sufficient margin of safety to the debt holders because even a slight decline in its earnings would hamper KSFC’s ability to offer assured payment of interest to the lenders.

The further analysis of the figures reveals that Interest Coverage Ratio remained at or below 1.50:1. The highest ratio was 1.50:1 which occurred in 2007-08 and the lowest was 0.79:1 which occurred in 2008-09. This was the year when KSFC incurred loss. On the whole, it can be said that earnings available to the lenders are not sufficient. Usually a coverage of six to seven times is desirable from lenders’ point of view.

4.4.2.3 PROFITABILITY RATIOS

Profit is the difference between revenue and expenditure over a period of time. It refers to the absolute quantum of profits, whereas profitability refers to the ability to earn profits. Profitability ratios are the ratios which are computed to evaluate the performance and efficiency of the business concern. Profitability Ratios are used by the management, owners, creditors and employees. Equity shareholders employ these ratios because they are very much interested in knowing capital appreciation of their investment and dividend per share. Management employs profitability ratios to assess the operational performance




of the business concern. They are used by the creditors to ascertain the margin of safety available to them. Profitability ratios are the test of wages and fringe benefits to the employees. Following are the important profitability ratios:

Return on Assets (ROA)

Here, the profitability ratio is measured in terms of the relationship of between net profits and assets. The ROA may also be called ‘profit to assets ratio’. It is calculated to measure the productivity of total assets. It is calculated using the following formula:

Return on Assets = Net Profit after Interest∧TaxTotal Assets−Fictitious Assets

×100

The term fictitious assets include preliminary expenses, deferred revenue expenditure, discount on issue of shares and debentures, debit balance of Profit and Loss Account and other losses shown on the assets side of the Balance Sheet.

TABLE 4.9 Showing Return on Assets of KSFC

(Rs. in Lakhs)

YEAR NET PROFIT AFTER INTEREST AND TAX

TOTAL TANGIBLE ASSETS

RETURN ON ASSETS

2005-06 526.17 1,42,720.56 0.362006-07 1295.37 1,26,520.87 1.022007-08 6216.74 1,55,194.58 4.012008-09 -3984.09 1,72,351.35 (-2.31)2009-10 296.15 1,89,210.39 0.152010-11 2187.14 2,13,229.12 1.03




CHART 4.9 Showing Return on Assets of KSFC:

2005-06 2006-07 2007-08 2008-09 2009-10 2010-110

0.51

1.52

2.53

3.54

4.5

RETURN ON ASSETS

YEARS

RA

TIO

S


Table 4.9 visualizes the net profit after interest and tax as a percentage of total tangible assets. The Return on Assets over the years has shown fluctuating trend throughout the study period. In the initial three years, that is, 2005-06, 2006-07 and 2007-08 the ratio values showed a rising trend which were 0.36, 1.02 4.01 respectively. In 2008-09, ROA showed a negative value of 2.31. This is due to the loss that KSFC sustained in that year. However, KSFC recovered from it very soon and registered net profit in the next two years.

The analysis of the ratio values reveals that the income generated by the tangible assets has been very modest during the study period. In other words, the investment made in tangible assets is not justified by the amount of income generated. Return on Investment

Return on Investment is also known as ‘Return on Capital Employed’ or ‘Overall Profitability Ratio’. It is calculated by establishing the relationship between the operating profit earned and capital employed. It is an indicator of the earning capacity of the capital invested in the business. It shows efficiency of the business as a whole. This ratio is calculated by using the following formula:




Return on Investment = OperatingProfitsCapital Employed

×100

Where,

Capital Employed = Equity Share Capital + Preference Share Capital + Reserves and Surplus + Debentures and Long-Term Loans – (Fictitious Assets + Intangible Assets + Investments outside the Business).

(Or)

Capital Employed = Proprietors Funds + long-Term Loans.

TABLE 4.10 Showing Return on Investment of KSFC

(Rs. in Lakhs)

YEAR EBIT CAPITAL EMPLOYED

RETURN ON INVESTMENT

2005-06 17,676.17 1,29,971.29 13.62006-07 15,886.75 1,18,579.19 13.42007-08 20,453.21 1,20,922.45 16.912008-09 13,127.48 1,27,783.65 10.272009-10 15,246.00 1,26,877.61 12.022010-11 17,729.21 1,56,272.35 11.35

CHART 4.10 Showing Return on Investment of KSFC

2005-06 2006-07 2007-08 2008-09 2009-10 2010-1102468

1012141618

RETURN ON INVESTMENT

YEARS

RA

TIO

S





The Return on Investment of KSFC is presented in Table 4.10. It is seen from the table and chart that the ratio values depicted a fluctuating trend throughout the study period. It ranged from 10.27, the lowest, in 2008-09 to 16.91, the highest, in 2007-08.

The Return on Investment was 13.6 in 2005-06 which implies that the Corporation was able to earn Rs.13.6 on Rs.100 investment. It can be considered as reasonably satisfactory level of return. The return slightly declined in the next year. The Corporation earned Rs.16.91 on Rs.100 investment which was the highest during the study period as well. In the subsequent years, KSFC earned a reasonable rate of return on its investment. In the last year of the study period there was a decline in the rate of return which is not a good sign for KSFC.

Return on Ordinary Shareholders’ Equity

While there is no doubt that the preference shareholders are also owners of a firm, the real owners are the ordinary shareholders who bear all the risk, participate in management and are entitled to all the profits remaining after all outside claims including preference dividends are met in full. The profitability of a firm from the owners’ point of view should, therefore, be assessed in fitness of things, in terms of the return to the ordinary shareholders. The ratio under reference serves this purpose. It relates net profit, finally available to equity shareholders, to the capital employed by them. It is calculated as follows:

Return on Ordinary Shareholders’ Equity

= Net Profit after Interest ,Tax∧Preference Dividend

Ordinary S hareholder s' Equity×100

Ordinary Shareholders’ Equity = Equity Share Capital + Reserves and Surplus – (Miscellaneous Expenses + Debit Balance of Profit and Loss Account).




TABLE 4.11 Showing Return on Shareholders’ Equity of KSFC (Rs. in Lakhs)

YEAR NET PROFIT AFTER INTEREST

AND TAX

ORDINARY SHAREHOLDERS'

EQUITY

RETURN ON SHAREHOLDERS'

EQUITY2005-06 526.17 12,892.55 0.0412006-07 1295.37 12,892.55 0.1002007-08 6216.74 33,108.24 0.1882008-09 -3984.09 58,054.77 -0.0692009-10 296.15 70,732.82 0.0042010-11 2187.14 72,588.68 0.030

CHART 4.11 Showing Return on Shareholders’ Equity of KSFC

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

-0.100

-0.050

0.000

0.050

0.100

0.150

0.200

0.250

RETURN ON SHAREHOLDERS' EQUITY

YEARS

RA

TIO

S


The Return on Ordinary Shareholders’ Equity Ratio of the KSFC for the last six years is presented in Table and Chart 4.11. The ratio values showed a fluctuating trend during the study period. A close look at the figures reveals that the ratio values depicted an increasing trend in the first three years. The fourth year of the study period recorded a negative return which is because of the loss incurred in that year. Thereafter, there was a marginal increase in the ratio values.




In 2005-06, the ratio was 0.041 which indicates that the Corporation earned Re.0.041 on Rs.100 investment by the ordinary shareholders. This is very unsatisfactory level of return to the equity shareholders who are the owners of the Corporation. In the next two years there was a little increase in the level of return, which was very insignificant. In 2008-09 there was negative return. In 2009-10, the Corporation made little progress. Again, in the last year of the study period, the return declined. This is not a healthy sign.

On the whole, the return to equity shareholders is not at all considered to be satisfactory.

Earnings Per Share (EPS)

Earnings per Share (EPS) measures the profit available to the equity shareholders on a per share basis, that is, the amount they can get on every share held. It is calculated by dividing the profits available to the equity shareholders by number of outstanding shares. The profits available to the ordinary shareholders are represented by net profits after tax and preference dividend. Thus,

EPS = Net Profit after Interest ,Tax ,∧Preference Dividend

Number of Ordinary SharesOutstanding

TABLE 4.12 Showing Earnings Per Share of KSFC

(Rs. in Lakhs)

YEAR EAIT NO. OF ORDINARY SHARES OUTSTANDING

EARNINGS PER SHARE

2005-06 526.17 97,84,550 0.00005382006-07 1,295.37 97,84,550 0.00013242007-08 6,216.74 97,84,550 0.00063542008-09 -3917.39 1,23,05,060 -0.00031842009-10 296.15 5,09,05,750 0.00000582010-11 2187.14 6,19,05,750 0.0000353




CHART 4.12 Showing Earnings Per Share of KSFC:

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

-0.0004

-0.0002

0

0.0002

0.0004

0.0006

0.0008

EARNINGS PER SHARE

YEARS

RA

TIO

S


The Earnings per Share values of the KSFC for the study period are depicted in the above table and chart. It can be observed from the above table and chart that the Corporation is not maintaining the EPS uniformly and at a higher level during the study period. This is mainly due to negative or low income generated in certain years. The Corporation is not able to generate even one rupee per share. The income generated is not justifying the contribution made by the shareholders. On the whole, the EPS of the Corporation is not considered to be satisfactory.

4.4.2.4 Activity/Efficiency Ratios

Activity ratios make use of purchases and sales while calculating various ratios. But, KSFC is neither a trading company nor a manufacturing company. Hence, the question of purchases and sales does not arise in the case of KSFC. Therefore, the activity/efficiency ratios cannot be calculated for KSFC.




4.5 RESEARCH METHODOLOGY

4.5.1 Research Methodology

The detailed methodology adopted for carrying out the present study is outlined below. The methodology discusses elaborately the type of research objectives and scope of the study, sources and collection of data, period of study and the techniques used for the study. The limitations of the study are also included in this section.

4.5.2 Title of the Study

Financial Analysis of KSFC

4.5.3 Type of Research

The present study is analytical in nature as it attempts to make use of facts or information

already available and analyze these to make a critical evaluation of the information.

4.5.4 Objectives of the Study

Given the significant role played by KSFC in the development of MSMEs, it is felt necessary to examine the financial performance and position of KSFC. An attempt has been made to evaluate the financial performance and position of Karnataka State Financial Corporation and offer constructive suggestions for improving the performance of the organization. Apart from this primary objective, following secondary objectives have also been set out to be achieved in this study.

1) To ascertain the reasons that led to the formation of KSFC.

2) To ascertain the contribution made by KSFC to the economic and social development

of Karnataka.

3) To get the practical knowledge of working of the organization.

4) To study the organization structure of the company.

5) To study the various departments working in KSFC.




6) To study the various products and services offered by KSFC to serve the needs of

different segments of the society.

7) To identify the strengths and weaknesses internal to the organization and explore the

opportunities and threats external to the organization.

4.5.5 Scope of the Study

The Karnataka State Financial Corporation (KSFC) has been selected as a sample unit for the present study. The scope of the study is limited to the analysis of accounting figures over a period of six years, that is, from 2005-06 to 2010-11. It involves a comparison of the ratios of KSFC over time, that is, present ratios are compared with the past ratios of KSFC itself. It indicates the direction of change in the performance – improvement, deterioration or constancy over the years.

To draw the conclusions, a number of mathematical, financial and technical tools and techniques have been used in this study. The analysis has been carried out basically to know the working of the organization and to ascertain the financial strengths and weaknesses of the Corporation.

4.5.6 Sources of Data Collection

The data for the present study has been collected mainly from secondary sources. For this purpose, books, journals, reports and websites have been referred to collect the data and information on SFCs ACT, 1951 and KSFC. Further, the annual reports of KSFC have been utilized to get the pertinent information on the physical and financial performance of the organization.

Apart from these, an attempt has been made to collect the information from primary source, that is, unstructured telephonic interview with the KSFC authority, to get the information required in the study.

4.5.7 Period of the Study

The period for the present study covers six years from 2005-06 to 2010-11.




4.5.8 Tools and Techniques of Analysis:

The data collected from the financial statements of the sample unit is analyzed with the help of various tools and techniques. The use and significance of these tools and techniques applied in the present study are described below.Ratio Analysis:

Ratio Analysis is claimed to be a widely used tool of financial analysis. It is the principal technique used in judging the operational and financial performance of the business enterprise. The analysts, through ratio analysis, can examine not only the performance of the concerned unit but also make a comparison with other units operating in the similar field to find out the strengths and weaknesses of the organization.

The technique of ratio analysis involves five steps, namely, formulation of objective, collection of data, computation of ratio, comparison of ratio with the standard one and the interpretation and conclusion. The last two steps, i.e. the comparison, interpretation and conclusion require careful study and sound judgement on the part of the analysts because there is no clear cut standard for each and every ratio and the interpretation of ratio values is based on careful thought as to the kind of insight the analysts wish to obtain.

While, studying the financial performance and position of KSFC, it is felt to study various important ratios falling under the category of liquidity, leverage and profitability.

Other Tools:

Apart from financial techniques, diagrammatic and graphic representations are made to provide a simplified way of presenting the data for vivid understanding of trends and relationships.

4.5.9 Limitations of the Study:

The below mentioned are the constraints under which study is carried out.

1) This research being the first research of researcher, errors might have crept in.




2) The study is based mainly on secondary data collected from the published reports,

financial statements of the sample unit and also from different books. Therefore, the

limitations entailing in the secondary data and financial statements will exist in the

study.

3) As the present study deals with a single unit, the inter-firm comparison cannot be

made and hence, its actual performance in comparison to the other SFCs remains

unanswered.

4) The study adopts the analysis through Ratios. Since ratio itself has many loop holes,

the study also resembles the defects present in the ratio analysis.

5) Ratios are stated in numbers. These numbers are objective. But, such numbers are

interpreted by analysts. Hence, according to personal bias, same ratio may be

interpreted differently by different analysts.

6) The results obtained from the analysis of six years’ figures cannot be generalized.




CHAPTER – 5

SWOT ANALYSIS




5.1 SWOT ANALYSIS

SWOT Analysis is a strategic planning method to evaluate the Strengths, Weaknesses, Opportunities and Threats involved in a business.

POSITIVE FACTORS NEGATIVE FACTORS

INT

ER

NA

LE

XT

ER

NA

L

5.2 SWOT ANALYSIS OF KSFC

5.2.1 Strengths

1. Government Organization

KSFC was established under state Financial Corporation Act-1951, by the government. The state government has more than 90% of the stake holding, and hence, has gained public confidence.




2. Wide Network Coverage

KSFC has branches all over the state. There are branches in every district so that the people can have a better access to the corporation and avail the assistance they need.

3. Well Qualified and Dedicated Human Resources

KSFC’s managers and personnel are competent to perform their assigned task and have the ability to resolve any problems either directly or in consultation with the other functional executives. The corporation has unique combination of professionals on its pay-rolls- CAs, CFAs, MBAs, MAs, MCOMs, LLBs, M.TECHs, BEs, PhDs, etc. thus diversity in its human resources is one of the great strength and asset of the corporation.

4. Diversified Facilities

KSFC not only provides term loans and assistance to small and medium scale industries but also deals with mutual funds, insurance and also provides other services.

5. Quality service

The managing director and other executives end staff of the organization are committed to ensuring that the system is effective in achieving quality and satisfying customer both now and in the future.

6. Availability of all financial services under one roof.

7. KSFC is one of few SFCs in the country which is earning profits.

5.2.2 Weaknesses

1. Higher Interest Rates

Interest rates are costlier when compared to nationalized and private banks and view of this it is difficult for the organization to attract good customer.

2. Inadaptability

Changing the policy adopted may be difficult to the organization, because it is a statutory corporation with lots of government control.




3. Outdated System

KSFC still follows an outdated credit appraisal system.

4. Long Procedure

The procedure taken in executing some schemes is very long.

5. Accumulated Losses

KSFC has a huge accumulated loss in its Balance Sheet. This prevents KSFC from paying dividend to shareholders.

6. Low Earnings

The Corporation has not been able to earn sufficient profit to provide a margin of safety to the lenders. The investment made in the tangible assets is not justified by the amount of income that KSFC is able to generate. 5.2.3 Opportunities

1) Development in infrastructure sector

2) The rate of growth of economy also provides an opportunity to extend the financial

assistance to an increasing trend.

5.2.4 Threats

1) Private Banks like ICICI, HDFC and commercial banks are very aggressive in

financing loans by reducing their lower interest rate and processing time in their

corporate finance.

2) Some corporations like IDFC are focusing their operations only on particular area

like infrastructure.

3) Commercial banks are coming up with new innovative ideas for increasing the loan

amount.




CHAPTER – 6

FINDINGS, SUGGESTIONS AND

CONCLUSION




FINDINGS

Prior to providing assistance to a new unit an intensive study is done on the

technical feasibility and financial liability of the proposed project by appropriate

expertise in the field.

KSFC has norms to decide the repayment period for a loan. Apart from this cash

generation capacity of the proposed project is considered to fix up actual repayment

period.

KSFC provides guidelines to the borrowers, and supervise/monitor the progress of a

project and makes follow up during the period of project implementation.

KSFC offers a number of schemes with different features to meet the varied needs

and requirements of the clients.

A borrower can avail financial assistance under more than one scheme and can take

additional loan before repaying the previous loan. But this depends upon the

existing loan transactions with the corporation.

KSFC services the nook and corner of Karnataka with its extensive network of 7

zonal offices, 3 super “A” grade branch offices, and 14 “B” grade branch offices.

The corporation is effectively utilizing its human resources.

Findings from Financial Analysis

KSfc has huge accumulated losses in its Balance Sheet.

The liquidity position of KSFC has been found to be very satisfactory as represented

by Current Ratio and Super Quick Ratio.




KSFC is heavily relying on debt as a source of funds as represented by Debt-Equity

Ratio.

KSFC strengthened its capital structure recently by issuing more shares which

allows it to operate flexibly.

The Corporation has not been able to earn sufficient profit to provide a margin of

safety to the lenders.

The investment made in the tangible assets is not justified by the amount of income

that KSFC is able to generate.

The amount of earnings available to the equity shareholders is very meager.




SUGGETIONS

KSFC should upgrade its system/technique of credit appraisal by imparting training

to its staff.

In KSFC interest rates are high compared to the other commercial banks. They

should be revised.

The government control should be minimized and working should be done as in a

private company.

Targets should be set to the recovery officers and a special incentive should be

provided to those officers who achieve their targets.

It was observed that Current Ratio and Super Quick Ratio in certain years were found

to be above the standard ratio. Hence, it is recommended that KSFC should try to

reduce working capital and keep it at the required level.

The EPS is much below the desirable ratio. Hence, there is an urgent need to raise the

earnings so that equity shareholders are suitability rewarded.




Conclusion

Karnataka State Financial Corporation which was established in 1959 has significantly contributed to the growth of SMEs backward are development and promotion of first generation entrepreneurs. It has assisted more than 1.60 lakh units with cumulative sanction more than Rs. 10,064 crore.

KSFC offers a number of schemes to serve the different needs of its clients. It has introduced more than 30 loan assistance schemes for extending assistance to all sections of the society. It has branches all over the state. There are branches in every district so that the people can have a better access to the corporation and avail the assistance they need.

To assess the financial performance and financial condition of KSFC, its financial statements were studied and analyzed with the help of ratios. It was observed that KSFC maintained current assets more than what are usually considered as standard during the study period. As far as its solvency position is concerned, it was found that KSFC’s assets were insufficient to honour its long term obligations. However, a close observation of the figures of the last years of the study period reveals that it made a good progress. With regard to its profitability, it can be said that revenue or income generated by the KSFC was not sufficient to justify the amount of investment made in the business. The earnings available to the equity shareholders were also too marginal.

On the whole, it can be concluded that though the financial results were not appreciable in the initial years of the study period, it was able to improve upon its performance over the subsequent years. But, it still needs to raise its performance standards so that obligations of lenders are met as and when they become due for payment and equity shareholders are suitably are rewarded.




