1. INTRODUCTION BUSINESS FINANACE Business finance refers to money and credit employed in business.

It involves procurement and utilization of funds so that business firms may be able to carry out their operations effectively and efficiently. The following characteristics of business finance will make its meaning clearer:(i) Business finance includes all types of funds used in business. (ii) Business finance is needed in all types of organisations large or small, manufacturing or trading. (iii) The amount of business finance differs from one business firm to another depending upon its nature and size. It also varies from time to time. (iv) Business finance involves estimation of funds. It is concerned with raising funds from different sources as well as investment of funds for different purposes. Need and Importance Business finance is required for the establishment of every business organisation. With the growth in activities, financial needs also grow. Funds are required for the purchase of land and building, machinery and other fixed assets. Besides this, money is also needed to meet day-today expenses e.g. purchase of raw material, payment of wages and salaries, electricity bills, telephone bills etc. You are aware that production Continues in anticipation of demand. Expenses continue to be incurred until the goods are sold and money is recovered. Money is required to bridge the time gap between production and sales. Besides producers, may be necessary to change the office set up in order to install computers. Renovation of facilities can be taken up only when Adequate funds are available 1.2 SIGNIFICANCE OF STUDY NON BANKING FINANCIAL INSTITUTIONS The financial sector in any economy consists of several intermediaries. Apart from banking entities, there are investment intermediaries (such as mutual funds, hedge funds, pension funds, and so on), risk transfer entities (such as insurance companies), information and analysis providers (such as rating agencies, financial advisers, etc), investment banks, portfolio managers and son.
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All such entities that offer financial services other than banking, may be broadly called non-banking financial institution. What is banking? banking is commonly understood to mean taking the deposits withdrawable on demand or notice that is , banks can hold peoples deposits and promise to pay them on demand . There are variety of other entities that may accept deposit hence ,acceptance of deposits is not the essence of banking In India, the term non banking financial companies acquires a new meaning , and huge significance .The meaning of the term is such entities which are not banks ,and yet carry lending activities almost at par with banks. They may also accept deposit however , these deposit are term deposit and not call deposit. The significance of non banking financial companies in India lies in the massive capabilities of NFBSs short of acceptance of call deposit and remittance function ,NFBCs can virtually do everything that a bank can . compared to this disability , the ease of entry and lightness of regulation applicable to NFBCs makes its tremendous focus of interest , particularly for foreign investors wanting to enter Indias financial sector For instance , it is possible to hold 100% foreign ownership of NFBCs ,while in the case of banks ,there are serious caps It is possible to either start an NFBC or buy on of the 17000-odd companies many of which are formed for sale . On the other hand ,getting a banking license requires a real penance 1.3 STATEMENT OF PROBLEM Financial sector plays an indispensable role in the overall development of a country. The most important constituent of this sector is the financial institutions, which act as a conduit for the transfer of resources from net savers to net borrowers, that is, from those who spend less than their earnings to those who spend more than their earnings. The financial institutions have traditionally been the major source of long-term funds for the economy. These institutions provide a variety of financial products and services to fulfil the varied needs of the commercial sector. Besides, they provide assistance to new enterprises, small and medium firms as well as to the industries established in backward areas. Thus, they have helped in reducing regional disparities by inducing widespread industrial development. The Government of India, in order to provide adequate supply of credit to various sectors of the economy, has evolved a well developed structure of financial
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institutions in the country. These financial institutions can be broadly categorised into All India institutions and State level institutions, depending upon the geographical coverage of their operations. At the national level, they provide long and medium term loans at reasonable rates of interest. They subscribe to the debenture issues of companies, underwrite public issue of shares, guarantee loans and deferred payments, etc. Though, the State level institutions are mainly concerned with the development of medium and small scale enterprises, but they provide the same type of financial assistance as the national level institutions. 1.4 OBJECTIVE OF THE STUDY
1. Study on credit management system in the organisation

2. To study the various services offered by the KFC 3. Study in the inconsistency in the profitability of the organisation 4. Suggestion and recommendations so as to accommodate a better credit management system in the organisation 1.5 RESEARCH METHODOLOGY RESEARCH Research could be defined as the careful investigation or inquiry especially through the search of new facts in any branch of knowledge. 1.5.1 Nature of Research The research is of descriptive in nature as we are going deep into the entrusted topic credit management in Kerala Financial Corporation. 1.5.2. Data is collected mainly from two sources. A)Primary data Data which is primarily collected or fresh hand data is called so. Here we are collecting data through direct contact with the respondents i.e; customers by enquiring them on various related facts. B)Secondary data:

It refers to already published data. I am depending a great extend on KFC annual report, financial magazines, viz: investor India, Outlook, journals as well as e-data (google). 1.5.3.Tools for data collection Data is collected mainly through analysing the annual reports of Kerala Financial Corporation. 1.5.4. Sample Design & Population Population consists of the last 5 year data regarding monitoring and disbursement in Kerala Financial Corporation 1.5.5. Tools for Analysis Ratio analysis , percentage analysis, cash flow are used as the main tool for analysis.

1.5.6.Tools for projection of findings The findings are projected first of all in a tabular manner and then either a graph / chart is used for further explanation.

1.6 LIMITATIONS The major limitation of the study is that only one organisation is taken in to consideration , comparison with other organization is not done Historical aspects is given much importance
Only last five years data are taken in to consideration

The limitation of time constraint existed 1.7 CHAPTERISATION The report deals with chapters as follows.

CHAPTER.1 - Introduction to the study: - Objectives, Scope, Research methodology, Tools for analysis, Tools for projection of findings and limitation of the study.

CHAPTER. 2 - Review of Related Literature: - Deals with

Industrial profile, Company profile and Product profile & subject details.
CHAPTER.3 - Analysis and Interpretation: - Analysis and

interpretation of the data collected.

CHAPTER.4 - Findings of the study. CHAPTER.5 Discussions:

To develop a new system

CHAPTER.6 Suggestion: - Provided to solve the problems

identified.

CHAPTER 7 -Conclusion of the study.

2.1 CREDIT MANAGEMENT Credit means delaying payment for goods or services you have already received until a later date.

Credit management is the process for controlling and collecting payments from your customers . A good credit management system will help you to reduce the amount of capital tied up with the debtors (people who owe you money) and minimise your exposure to bad debts Credit management is concerned with making sure that organisations, who buy goods or services on credit, or individuals who borrow money, can afford to do so and that they pay their debts on time. Good credit management is vital to your cash flow .it is possible to be profitable on proper and but lack the cash to countinue operating your business Credit jobs exist within any industry sector e.g. manufacturing, distribution, retail, telecoms, utilities, local authority, financial services, and within any size company from SMEs (Small, Medium Enterprises) to large corporate. You could also work for a company specialising in credit management services e.g. debt collection agency, credit insurance company, credit reference agency. You can work in trade credit (business to business) or consumer credit (business to consumer). Customers can be based in the UK only or globally. Key responsibilities within credit roles include risk assessment, billing, query resolution, account reconciliation, debt collection and taking legal action when payments are overdue. 2.2 PRINCIPLES OF CREDIT MANAGEMENT Joseph L. Wood is of the opinion, "The purpose of any commercial enterprise is the earning of profit, credit in itself is utilized to increase sale, but sales must return a profit. The primary objective of management or receivables should not be limited to expansion of sales but should involve maximization of overall returns on investment. So, receivables management should not be confined to mere collection or receivables within the shortest possible period but is required to focus due attention to the benefitcost trade-off relating to numerous receivables management. In order to add profitability, soundness and effectiveness to receivables management, an enterprise must make it a point to follow certain well-established and duly recognized principles of credit management."The first of these principles relate to the allocation of authority pertaining to credit and collections of some specific management. The second principle puts stress on the selection of proper credit terms. The third principles emphasizes a through credit investigation before a decision on granting a credit is taken. And the last principle touches upon the establishment of sound collection
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policies and procedures. In the light of this quotation the principles of receivables management can be stated as: 1. Allocation or Authority The determination of sound and effective credit collection policies management. The efficiency of a credit management in formulation and exestuation of credit and collection policies largely depends upon the location of credit department in the organizational structure f the concern. The aspect of authority allocation can be viewed under two concepts. As per the first concept, it is placed under the direct responsibility of chief finance officer for it being a function primarily financed by nature. Further, credit and collection policies lay direct influence on the solvency of the firm. "For these reasons the credit and collection function should be placed under the direct supervision of the individuals who are responsible for the firm's financial position." "There are other who suggest that business firms should strictly enforce upon their sales departments the principles that sales are insolate until the value thereof is realsied Those favoring this aspect plead to place the authority of allocation under the direct charge of the marketing executive or the sales department. To conclude "the reasonability to administer credit and collections policies may be assigned either to a financial executive or to a marketing executive or to both of them jointly depending upon the organizational structure and the objectives of the firm."9 2. Selection of Proper Credit Terms The receivables management of an enterprise is required to determine the terms and conditions on the basis of which trade credit can be sanctioned to the customers are of vital importance for an enterprise. As the nature of the credit policy of an enterprise is decided on the basis of components of credit policy. These components include; credit period, cash discount and cash discount period. In practice, the credit policy of firms, vary within the range of lenient and stringent. A firm that tends to grant long period credits and its debtors include even those customers whose financial position is doubtful. Such a firm is said to be following lenient credit policy. Contrary to this, a firm providing credit sales for a relatively short period of time that too on highly selective basis only to those customers who are financially strong and have proven their credit worthiness is said to be following stringent credit policy. 3. Credit Investigation A firm if desires to maintain effective and efficient receivables management of receivables must undertake a thorough investigation before deciding to grant credit to a customer. The investigation is required to be carried on with respect to the credit
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worthiness and financial soundness of the debtors, so as to prevent the receivables for falling into the category of bad debts later on at the time of collection. Credit investigation is not only carried on beforehand. But in the case of firms practicing liberal credit policy such investigation may be required to be conducted when a debtors fails to make payments of receivables due on him even after the expiry of credit sale so as to save doubtful debts from becoming bad debts. 4. Sound Collection Policies and Procedures Receivables management is linked with a good degree of risk. As a few debtors are slow payers and some are non-payers. How-so-ever efficient and effective a receivables management may be the element of risk cannot be avoided altogether but can be minimized to a great extent, it is for this reason the essence of sound collection policies and procedures arises. A sound collection policy aims at accelerating collection form slow payer and reducing bad debts losses. As a good collection polices ensures prompt and regular collection by adopting collection procedures in a clear-cut sequence. 2.3 OBJECTIVES OF CREDIT MANAGEMENT The objective of receivables management is to promote sales and profit until that is reached where the return on investment in further finding of receivable is less than the cost of funds raised to finance that additional credit (i.e., cost of capital). The primary aim of receivables management vet in minimizing the value of the firm while maintaining a reasonable balance between risk (in the form of liquidity) and profitability. The main purpose of maintain receivables is not sales maximization not is for minimization of risk involved by way of bad debts. Had the main objective being growth of sales, the concern, would have opened credit sales for all sort of customers. Contrary to this, if the aim had been minimization of risk of bad debts, the firm would not have made any credit sale at all. That means a firm should indulge in sales expansion by way of receivables only until the extent to which the risk remains within an acceptably manageable limit. All in all, the basic target of management of receivables is to enhance the overall return on the optimum level of investment made by the firm in receivables. The optimum investment is determined by comparing the benefits to be derived from a particular level of investment with the cost of maintaining that level. The costs involve not only the funds tied up in receivables, but also losses from accounts that do not pay. The latter arises from extending credit too

leniently. A brief inference of objectives of management of receivables may be given as under: To attain not maximum possible but optimum volume of sales. To exercise control over the cost of credit and maintain it on a minimum possible level. To keep investments at an optimum level in the form or receivables. To plan and maintain a short average collection period. Granting of credit and its proper and effective management is not possible without involvement of any cost. These costs are credit administrative expenses bad debts losses, opportunity costs etc. As mentioned before these costs cannot be possibly eliminated altogether but should essentially be regulated and controlled. Elimination of such costs simply mean reducing the cost of zero i.e. no credit grant is permitted to the debtors. In that case firm would no doubt escape form incurring there costs yet the other face of coin would reflect that the profits foregone on account of expected rise in sales volume made on credit amounts much more than the costs eliminated. Thus, a firm would fail to materialize the objective of increasing overall return of investment. The period goal of receivables management is to strike a golden mean among risk, liquidity and profitability turns out to be effective marketing tool. As it helps in capturing sales volume by winning new customers besides retaining to old ones. 2.4 ASPECT OF CREDIT POLICY The discharge of the credit function in a company embraces a number of activities for which the policies have to be clearly laid down. Such a step will ensure consistency in credit decisions and actions. A credit policy thus, establishes guidelines that govern grant or reject credit to a customer, what should be the level of credit granted to a customer etc. A credit policy can be said to have a direct effect on the volume of investment a company desires to make in receivables. A company falls prey of many factors pertaining to its credit policy. In addition to specific industrial attributes like the trend of industry, pattern of demand, pace of technology changes, factors like financial strength of a company, marketing organization, growth of its product etc. also influence the credit policy of an enterprise. Certain considerations demand greater attention while formulating the credit policy like a product of lower price should be sold to customer bearing greater credit risk. Credit of smaller amounts
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results, in greater turnover of credit collection. New customers should be least favored for large credit sales. The profit margin of a company has direct relationship with the degree or risk. They are said to be inter-woven. Since, every increase in profit margin would be counterbalanced by increase in the element of risk. As observed by Harry Gross, "Two very important considerations involved in incurring additional credit risk are: the market for a company's product and its capacity to satisfy that market. If the demand for the seller's product is greater than its capacity to produce, then it would be more selective in granting credit to its customers. Conversely, if the supply of the product exceeds the demand, the seller would be more likely to lower credit standards with resulting greater risk. Such a conditions would appear in case of a company having excess capacity coupled with high profitability and increased sales volume. Credit policy of every company is at large influenced by two conflicting objectives irrespective of the native and type of company. They are liquidity and profitability. Liquidity can be directly linked to book debts. Liquidity position of a firm can be easily improved without affecting profitability by reducing the duration of the period for which the credit is granted and further by collecting the realized value of receivables as soon as they fails due. To improve profitability one can resort to lenient credit policy as a booster of sales, but the implications are: 1. Changes of extending credit to those with week credit rating. 2. Unduly long credit terms. 3. Tendency to expand credit to suit customer's needs; and 4. Lack of attention to over dues accounts.

2.5 DETERMINATION OF CREDIT POLICY The evaluation of a change in a firm's credit policy involves analysis of: 1. Opportunity cost of lost contribution. 2. Credit administration cost and risk of bad-debt losses. Above Figure shows that contrary relationship that exists between the two costs. If a company adopts stringent credit policy, there occurs considerable reduction in the level of profitability (shown by curve AB) by the liquidity position stands story
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(represented by CD Curve). However, the firm losses in terms of contribution due to higher opportunity cost resulting form lost sales. Yet, the credit administrative cost & risk of bad debt losses are quite low. Contrary to this, a company resorting to liberal credit policy has it profitability curve AB rising above liquidity curve CD disclosing that its profitability level is quiet high but the problem of liquidity becomes evident as a result of heavy investment in receivables due to increased sales. Besides this, the opportunity costs of such a firm declines as the firm raptures lost contribution. But the credit administrative costs increase as more accounts are to be handled and also there is rise in risk of bad debt losses. The point E in the figure denotes the state of equilibrium between profitability curve (AB) and Liquidity curve (CD) depicting that the operating profits are maximum. So, point E provides the firm with an appropriate credit policy determined by tradeoff between opportunity costs and credit administrative cost and bad debt losses. As a matter of fact, point E may not necessarily be representative of optimum credit policy. Optimum credit policy does not mean the point at which balance between liquidity and profitability can be maintained. Instead, an optimum credit policy is one that maximizes the firm's is achieved when marginal rate of return i.e. incremental rate of return on investment becomes equal to marginal cost of capital i.e. incremental cost of funds used to finance the investment. The incremental rate of return is obtained by dividing incremental investment in receivables. While the incremental cost of funds, is the rate of return expected by firm granting the credit. This rate of return is not equal to borrowing rate. As in case of firm following loose credit policy, higher rate of return means higher risk of invest in A/c's receivables due to slow paying and defaulting accounts. To sum up, in order to achieve the goal of maximizing the value of the firm the evaluation of investment in receivables accounts should involve the following four steps: 1. Estimation of incremental operating profit, 2. Estimation of incremental investment in accounts receivables, 3. Estimation of the incremental rate of return of investment, 4. Comparison of incremental rate of return with the required rate of return. The reality, it is rather a different task to establish an optimum credit policy as the best combination of variables of credit policy is quite difficult to obtain. The
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important variables of credit policy should be identified before establishing an optimum credit policy. The three important decisions variables of credit policy are: 1. Credit terms, 2. Credit standards, and 3. Collection policy. 1. Credit Terms Credit terms refer to the stipulations recognized by the firms for making credit sale of the goods to its buyers. In other words, credit terms literally mean the terms of payments of the receivables. A firm is required to consider various aspects of credit customers, approval of credit period, acceptance of sales discounts, provisions regarding the instruments of security for credit to be accepted are a few considerations which need due care and attention like the selection of credit customers can be made on the basis of firms, capacity to absorb the bad debt losses during a given period of time. However, a firm may opt for determining the credit terms in accordance with the established practices in the light of its needs. The amount of funds tied up in the receivables is directly related to the limits of credit granted to customers. These limits should never be ascertained on the basis of the subjects own requirements, they should be based upon the debt paying power of customers and his ledger record of the orders and payments. There are two important components of credit terms which are detailed below:- (A) Credit period and (B) Cash discount terms (A) Credit period According to Martin H. Seiden, "Credit period is the duration of time for which trade credit is extended. During this time the overdue amount must be paid by the customers. The credit period lays its multi-faced effect on many aspects the volume of investment in receivables; its indirect influence can be seen on the net worth of the company. A long period credit term may boost sales but its also increase investment in receivables and lowers the quality of trade credit. While determining a credit period a company is bound to take into consideration various factors like buyer's rate of stock turnover, competitors approach, the nature of commodity, margin of profit and availability of funds etc. The period of credit diners form industry to industry. In practice, the firms of same industry grant varied credit period to different individuals. as most of such firms decide upon the period of credit to be allowed to a customer on the basis of his financial position in addition to the nature of commodity, quality involved in transaction, the difference in the economic status of customer that may considerably influence the credit period. The general way of expressing credit period of a firm is to coin it in terms of net date that is, if a firm's credit terms are "Net 30", it means that the customer is expected to repay his credit obligation within 30 days.
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Generally, a free credit period granted, to pay for the goods purchased on accounts tends to be tailored in relation to the period required for the business and in turn, to resale the goods and to collect payments for them. A firm may tighten its credit period if it confronts fault cases too often and fears occurrence of bad debt losses. On the other side, it may lengthen the credit period for enhancing operating profit through sales expansion. Anyhow, the net operating profit would increase only if the cost of extending credit period will be less than the incremental operating profit. But the increase in sales alone with extended credit period would increase the investment in receivables too because of the following two reasons: (i) Incremental sales result into incremental receivables, (ii) The average collection period will get extended, as the customers will be granted more time to repay credit obligation. Determining the options credit period, therefore, involves locating the period where marginal profit and increased sales are exactly off set by the cost of carrying the higher amount of accounts receivables. (B) Cash Discount Terms The cash discount is granted by the firm to its debtors, in order to induce them to make the payment earlier than the expiry of credit period allowed to them. Granting discount means reduction in prices entitled to the debtors so as to encourage them for early payment before the time stipulated to the i.e. the credit period. According to Theodore N. Beckman, "Cash discount is a premium on payment of debts before due date and not a compensation for the so called prompt payment,'*2 Grant of cash discount beneficial to the debtor is profitable to the creditor as well. A customer of the firm i.e. debtor would be realized from his obligation to pay Soon that too at discounted prices. On the other hand, it increases the turnover rate of working capital and enables the creditor firm to operate a greater volume of working capital. It also prevents debtors from using trade credit as a source of working capital. Cash discount is expressed is a percentage of sales. A cash discount term is accompanied by (a) the rate of cash discount, (b) the cash discount period, and (c) the net credit period. For instance, a credit term may be given as "1/10 Net 30" that mean a debtor is granted 1 percent discount if settles his accounts with the creditor before the tenth day starting from a day after the date of invoice. But in case the debtor does not opt for discount he is bound to terminate his obligation within the credit period of thirty days. Change in cash discount can either have positive or negative implication and at times both. Any increase in cash discount would directly increase the volume of credits sale. As
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the cash discount reduces the price of commodity for sale. So, the demand for the product ultimately increase leading to more sales. On the other hand, cash discount lures the debtors for prompt payment so that they can relish the discount facility available to them. This in turn reduces the average collection period and bad debt expenses thereby, brining about a decline in the level of investment in receivables. Ultimately the profits would increase. Increase in discount rate can negatively affect the profit margin per unit of sale due to reduction of prices. A situation exactly reverse of the one stated above will occur in case of decline in cash discount. As pointed out by N.K. Agarwal, 'we market out or products through established dealers. If sometimes payment is not received within the credit period, it is just not possible to deny discount as it would spoil business relations. Yet, the management of business enterprises should always take note of the point that cash discount, as a percentage of invoice prices, must not be high as to have an uneconomic bearing on the financial position of the concern. It should be seen in this connection that terms of sales include net credit period so that cash discount may continue to retain its significance and might be prevented from being treated by the buyers just like quantity discount. To make cash discount an effective tool of credit control, a business enterprise should also see that is allowed to only those customers who make payments at due date. And finally, the credit terms of an enterprise on the receipt of securities while granting credit to its customers. Credit sales may be got secured by being furnished with instruments such as trade acceptance, promissory notes or bank guarantees. 2. Credit Standards Credit standards refers to the minimum criteria adopted by a firm for the purpose of short listing its customers for extension of credit during a period of time. Credit rating, credit reference, average payments periods a quantitative basis for establishing and enforcing credit standards. The nature of credit standard followed by a firm can be directly linked to changes in sales and receivables. In the opinion of Van Home, "There is the cost of additional investment in receivables, resulting from increased sales and a slower average collection period.14 A liberal credit standard always tends to push up the sales by luring customers into dealings. The firm, as a consequence would have to expand receivables investment along with sustaining costs of administering credit and bad-debt losses. As a more liberal extension of credit may cause certain customers to the less conscientious in paying their bills on time. Contrary, to these strict credit standards would mean extending credit to financially sound customers only. This saves the firm from bad debt losses and the firm has to
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spend lesser by a way of administrative credit cost. But, this reduces investment in receivables besides depressing sales. In this way profit sacrificed by the firm on account of losing sales amounts more than the cost saved by the firm. Prudently, a firm should opt for lowering its credit standard only up to that level where profitability arising through expansion in sales exceeds the various costs associated with it. That way, optimum credit standards can be determined and maintained by inducing tradeoff between incremental returns and incremental costs. Analysis of Customers The quality of firm's customers largely depends upon credit standards. The quality of customers can be discussed under too main aspects; average collection period and default rate. (i) Average Collection Period: It is the time taken by customers bearing credit obligation in materializing payment. It is represented in terms of the number of days, for which the credit sales remains outstanding. A longer collection period always enlarges the investment in receivables. (ii) Default Rate: This can be expressed in terms of debt-losses to the proportion of uncontrolled receivables. Default rate signifies the default risk i.e. profitability of customers failure to pay back their credit obligation. There are three Cs of credit termed as 1. character, 2. 3. capacity condition

that estimate the likelihood of default and its effect on the firms' management credit standards. Two more Cs have been added to the three Cs they are capital and collateral. All the five Cs of credit are discussed below in brief. (iii) Character: Character means reputation of debtor for honest and fair dealings. It refers to the free will or desire of a debtor of a firm to pay the amount of receivables within the stipulated time i.e. credit period. In practice, the moral of customer is considered important in valuation of credit. The character of customer losses its importance if the receivable is secured by way of appropriate and adequate security. (iv) Capacity: Capacity refers to the experience of the customers and his demonstratal ability to operate successfully. It is the capacity particularly financial ability of a
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customer to borrow from other sources in orders discharges his obligations to honors contract of the firm. (v) Capital; Capital refers to the financial standing of a customer. Capital acts as a guarantee of the customers' capacity to pay. But, it should be noted that a customer may be capable of paying by means of borrowing even if his capital holding are scarce. (vi) Collateral: Collaterals are the assets that a customer readily offers to the creditor (i.e. firm granting credit) as a security, which should be possessed by the firm in the event of non-payment by the customer. A firm should be particular with regards to the real worth of assets offered to it as collateral security (vii) Conditions: Conditions refer to the prevailing economic and other conditions, which can place their favorable or unfavorable impact on the ability of customer to pay. A firm must ensure that its customers have completely and accurately furnished with the above stated information. As a matter of precaution a firm should carry out credit investigation on its own level. This involves two basic steps: The first step involves obtaining credit information from internal and external source. Internal sources includes filling up various documents (pertaining to the financial details of the credit applicants) and records (that fulfill formalities related with extension of credit) of a concern. The external sources of information are financial statements, bank references, sales representatives' report, past experience of the concern etc. The second step involves analysis of credit information obtained in respect of the applicant for deciding the grant of credit as well as its quantum. A concern is free to adopt any procedure that suits its needs and fulfill the desired requirements, as there are no established procedures for analysis of information. But, it must be born in mind that the analysis procedure shall be competent enough to suit both the qualitative and quantitative aspects of the applicant. Qualitative aspect refers to customer's character, goodwill and credit worthiness. While the quantitative aspect is based on the factual information available from the applicants finances statements, his past records and the like factors. As a matter of fact the ultimate decision of credit extension and the

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volume of credit depend upon the subjective interpretations of his credit standing.

No doubt, credit investigation involves cost. So, it shall be conducts as per the requirements of the situations. But the fact cannot be ignored that a credit decision taken in the absence of adequate and proper investigation to save costs related with such investigation proves much more costly due to bad debts, excessive collection costs etc. Thus, credit investigation is justified on such grounds. A firm can thereby, gainfully empty such information in classifying the customers in accordance with their credit-worthiness and estimate the probable default risk. This shall also be referred to while formulating the credit standards of business enterprises.

2.6 INDUSTRY PROFILE NATIONAL LEVEL INSTITUTIONS A wide variety of financial institutions have been set up at the national level. They cater to the diverse financial requirements of the entrepreneurs. They include all India development banks like IDBI, SIDBI, IFCI Ltd, IIBI; specialised financial institutions like IVCF, ICICI Venture Funds Ltd, TFCI ; investment institutions like LIC, GIC, UTI; etc.
1. All-India Development Banks (AIDBs):- Includes those development banks

which provide institutional credit to not only large and medium enterprises but also help in promotion and development of small scale industrial units.
Industrial Development Bank of India (IDBI) Industrial Finance Corporation of India Ltd (IFCI Ltd) Small Industries Development Bank of India (SIDBI)

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2. Specialised Financial Institutions (SFIs):- are the institutions which have

been set up to serve the increasing financial needs of commerce and trade in the area of venture capital, credit rating and leasing, etc.
IFCI Venture Capital Funds Ltd (IVCF) ICICI Venture Funds Ltd 3. Investment

Institutions:- are

the

most

popular

form

of

financial

intermediaries, which particularly catering to the needs of small savers and investors. They deploy their assets largely in marketable securities.
Life Insurance Corporation of India (LIC) Unit Trust of India (UTI) General Insurance Corporation of India (GIC)

STATE LEVEL FINANCIAL CORPORATIONS Several financial institutions have been set up at the State level which supplement the financial assistance provided by the all India institutions. They act as a catalyst for promotion of investment and industrial development in the respective States. They broadly consist of 'State financial corporations' and 'State industrial development corporations'.

State Financial Corporations (SFCs) :- are the State-level financial institutions which play a crucial role in the development of small and medium enterprises in the concerned States. They provide financial assistance in the form of term loans, direct subscription to equity/debentures, guarantees, discounting of bills of exchange and seed/ special capital, etc. SFCs have been set up with the objective of catalysing higher investment, generating greater employment and widening the ownership base of industries. They have also started providing assistance to newer types of business activities like floriculture, tissue culture, poultry farming, commercial complexes and services related to engineering, marketing, etc. There are 18 State Financial Corporations (SFCs) in the country
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2.7 COMPANY PROFILE KERALA FINANCIAL CORPORATION Travancore Cochin Financial Corporation was established on 01.12.1953, under the State Financial Corporations Act, 1951. This was later renamed as Kerala Financial Corporation (KFC) consequent to the reorganization of states in 1956. KFC has its head quarters at Thiruvananthapuram. For nearly 25 years, KFC functioned only with two district offices at Kozhikode and Ernakulam. The growing volume of business necessitated opening up of more offices. Now KFC has 16 branch offices in the entire district. There are Zonal offices of KFC at Kozhikode, Ernakulam and Thiruvananthapuram. The Corporation is the first PSU in Kerala and first SFC in India to initiate Corporate Social Responsibility activity. KFC A Developmental Financing Institution and Industrial Facilitator 100% Committed to Kerala for the Industrial Development. The provisions of SFCs Act 1951 as amended in 2000 control and guide the functions of Corporations. The main objective of KFC is the rapid industrialization of the state by extending financial assistance to Micro, Small and Medium Enterprises in manufacturing and service sector. SFCs Act empowers KFC to formulate suitable loan schemes for setting up of new units and for the expansion / modernization / diversification of existing units in both manufacturing and service sectors since inception KFC has disbursed over Rs. 3000 Crores to more than 40,000 projects, spread over the length and breadth of the State. The Corporation has now emerged as a financial supermarket giving the customers a wide range of products and services. The Corporation is one of the best State Financial Corporations in the country with a competent tech savvy team of professional at the core of services. All along our constant endeavor has been to bring a sharper focus on the requirements of our customers and to provide the highest levels of service. KFC now means more than short-term loans. Corporation also provides Working Capital finance and Short Term Finance apart from schemes focused at the weaker sections of the society. Modernization schemes for SSIs, Special schemes for Resorts, Hospitals, and TV Serial Production etc are some of the innovative schemes introduced to suit changing customer requirements. KFC has also set up KFC Consultancy Division with a view to render excellent Consultancy Services to our
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Clients as a Total Solution provider. KFC has also has made a small beginning to nurture and develop a new managerial cadre that can dream, envision and create a new future by starting the KFC Training Division. They offer training programmes, which are at par, with the programmes offered by any institutions of advanced learning in India. 2.8 ELIGIBLE SECTORS The Kerala Financial Corporation finance the loan requirements of micro ,small and medium enterprises. The sectors eligible for corporations support will include broadly the following

Manufacturing sector All manufacturing activities including processing and preservation . Service sector Transport, Marketing, IT Parks, Hospitals, Pathological Laboratories Medical Equipments ,Professional like Doctors And Architects ,Etc Hospitality sector Hotels, Lodges, Restaurants, Convention Center/Seminar Hall, Tourist Resort,Amusement Park, Etc., as the need for this sector is being incresingly felt as a promotional support for state industrial /business growth Marketing Commercial Complex, Construction Of Godown, Input Suppliers/Venders, Stockist: as they provide important backward and forward linkage Micro-finance institution Well run MFIs : as funding them in an indirect mode of assisting self help groups and promoting finance inclusion Infrastructure Basic requirment that form the engines of economic growth (inspire the setting up or development of industrial area , industrial estate,IT park, Roads,etc. Training institute etc Power sector Power genaraation/distribution including alternate sources of power like windmills and solar energy as they provide pollution- free addisanal powers as also help tax-saving plans
20

particulars

cap(Rs.in crores for a unit for group 30

private/public Limited companies/corporation/ co-operative socity partnership firm/proprietary concerns and trusts

20

12

MAXIMUM FINANCIL ASSISTANCE GIVEN TO A UNIT

TABLE 2.1 2.9 VARIOUS LOANS SCHEMES IN KERALA FINANCIAL

CORPORATION 2.9.1 Loan Schemes The Corporation would endeavor to extend comprehensive services including term loan, working capital and special schemes that may be required for benefit of the SME sector. The Interest and principal are to be paid in monthly rests for all schemes. The extent of financing is based on the type of the project and credit rating. There are 32 schemes, each of these applicable according to the nature and financial requirement of concerned project. Interest rates, extent of financing and maximum period of loans are given below

21

Sl.N o.

Sche me Code

Name of scheme

Promoter contributi on

Debt y (DE R) for the proje ct

Intere gross to PLR+ +

Rebate Interest Effecti for promp payme nt reducti on based on credit rating ve rate after rebate and deducti on

Equit st rate

Ratio linked t

TL

Scheme for Term Loan for industrial activities a) General 33.34% 2:1 15.50 % b1) Small/Medi um enterprises in Manufactur ing Sector (existing loans) b2) Small/Medi um enterprises in Manufactur ing Sector (First disburseme
22

2.00%

1.00%

12.50%

33.34%

2:1

15.50 %

3.50%

1.00%

11.00%

33.34%

2:1

15.50 %

2.00%

1.00%

12.50%

TABLE 2.2

Limits of financial assistance: Registered companies (private or public) and co-operative societies can be given loans up to Rs 20 crores and others (partnership or proprietor) up to Rs 8 crores The Corporation can give financial assistance to all types of industries for manufacturing/service activities the unit (existing/new) should necessarily be in Kerala.

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2.9 .4 Sp eci 2.9.2 Micro finance al Pa The micro credit programme of the Corporation is aimed at delivering credit to Self ck Help Groups (SHGs) through Micro Finance Institutions (MFIs). The guidelines for ag assistance under this scheme are as follows: e Eligibility to N the MFI has been in existence for at least five years and/or it has a demonstrated i) R track record of running a successful micro-credit programme at least for the last three Ks years. However, any new MFI desirous of initiating a micro credit programme may also be considered for assistance if it has been promoted and managed by experienced KF micro finance professionals with experience of at least three years in micro credit; C off ii) the MFI has achieved minimum outreach of 3000 poor members (through ers individual lending/SHGs/partner NGOs or MFIs) or demonstrates the capability to spe this scale within a period of next twelve months or so; reach cia iii) it should choose clients irrespective of class, creed and religion and its activities l should be secular in nature; pa iv) it maintains a satisfactory and transparent accounting, MIS and internal audit ck system or is willing to adopt such practices with KFC assistance; ag v) e it has a relatively low risk portfolio or has a definite plan to further improve its recovery performance. to N Types of eligible intermediaries R i) Societies registered under Societies Act, 1860 or similar State Acts; ii) Trusts Ks Registered under Public Trust Act, 1920 or similar Acts; iii) Companies registered ret under the Companies Act, 1956 including Section 25 Companies; iv) Non Banking urn Finance Companies providing financial services to the poor; v) Specialized and other ing Co-operatives such as Mutually Aided Co-Operative Societies etc.; vi) Any other type ho of institutions that offer micro finance and related services may be considered on me merit. job Lending channels les MFIs may on-lend directly to SHGs/individuals or route their assistance through their s partner NGOs and MFIs. They may also adopt any other lending channel so as to du effectively reach financial assistance to the poor clients. e to Eligible activities the on goi
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ng ec on om ic 2.9.5 Special package for Women Entrepreneur rec offers special scheme to Women Entrepreneurs of the state. The salient features KFC essthe scheme are as follows: of ion for per ma ne nt set up on or aft er 1.7 2.10 KERALA FINANCIAL CORPORATION SPCIAL SCHEMES .20 07. 2.10.1 Scheme of Energy Saving Projects . N R Ks ca n ch oo se fro 2.10.2 Assistance to Micro Enterprises m The corporation supports Micro Enterprise mainly to help the first generation an enterprise with confessional rates of interest of 7%. The upper limit for y finance is Rs 25 lakhs of our 2.10.3 Credit Delivery In Cluster loa n sch em es
25

An additional interest reduction of 1% shall be given. Subject to the condition that the effective rate of interest is not less than 12.5%. All other parameters have to be complied with. Ceiling of financial assistance under this scheme will be Rs. 50 lakhs. Only enterprises owned and administered by woman entrepreneur/ entrepreneurs having 100% financial interest shall be eligible under this scheme.

In view of

the growing need for energy saving and importance of

conservation, the Corporation has formulated a special scheme to promote energy saving measures in SMEs by providing financial assistance for the implementation of energy saving device /projects . As per the scheme Energy Management Centre (EMC) has to recommended the proposal for consideration. The effective interest rate under the scheme is kept at 5% P.A and no processing fee will be charged. An upper loan limit of Rs 200 lakh has been fixed for such support

ed on the ir are a of int The MSME sector in Kerala is highly diversified in terms of industry segments and geological terrain. A large segment of MSMEs operate in cluster which have developed at a certain different geographical location due to various factors like historical availability of certain skill craftsmanship in the location, proximity of raw material or customer, etc . MSME located in the clusters have similar characteristics and face similar challenges. Corporation credit linked interventions involve providing financial assistance to MSME units in clusters through special dispensation using customised products and process keeping view their needs and requirements 2.10.4 Customer Relation and Consultancy Service Business Development Department and Consultancy Division offers arrange of services to the customers who are interested in setting up units in different parts of Kerala . Guidance in the form of Assistance in Project planning, Liaison with other organisation ,etc are provided . Customer Relation Managers, at the Branch and the Head office, provide the client with excellent escort services making the process simple and hassle free . KFC also take up agency services for mutual fund, insurance, credit rating etc through SBI Mutual Fund, LIC Mutual Fund, New India Assurance Company Ltd , CRISIL & SMERA

2.11 REFERENCES: 1. Joy, O.M.: Introduction to Financial Management (Madras: Institute for Financial Management and Research, 1978), P.210. 2. Robert N. Anthony: Management Accounting, Op. Cit., P.291 3. Prasanna Chandra: Financial Management, Op. Cit., P.291 4. Harry Gross: Financing for Small & Medium sized Business, Op. Cit., P.80 5. Joseph L. Wood: Business Finance Hand Book, "Credit & Collection" in Doris Lillian (Ed.), (New York: Prentice Hall, 1953), P.243 6. R.K. Mishra: Problems of Working Capital Op. Cit, P.94 7. C.R. Cook: Credit Policies-Impact on Sales & Profit Cost & Management, (Hemilton, Ontario, Canada, Volume 37, October, 1963, P.387

26

8. Edward T. Curtis: Credit Department Organization & Operations, (New York: American Management Association Inc., Research Study No. 34, 1959), PP.14-17, 9. R.J. Chambers: Financing Management (Sydney: The Law Book Co., Ltd., 1967), PP.273-274 10. Harry Gross: Op. Cit., P.84 11. Martin H. Seiden: The Quality of Trade Credit, (New York: National Bureau of Economic Research, 1964), P.39 12. Beckman, T.N.: Op. Cit., P.208 13. Agarwal, N.K.: Management of Working Capital, Op. Cit., P.54 14. James C. Van Home: Op. Cit., PP.116-117 15. I.M. Pandey : Op. Cit., P.381 16. R.K. Mishra: Op. Cit., P.99 17 . Abilash Viswanathan ; Financial Restructuring and Receivables management ,P.66 18. Rthod Amith K ; a study on Gurath State Financial Corporation , P.21 19. Sandeep Arrora; financial project report ,P.42

27

3.1 STATISTICAL TOOLS AND TECHNIQUES Facts and figures about any phenomenon are called statistics . Statistics is the body of methods of obtaining and analysing data in order to base decisions on them. It is a brand of scientific method used in dealing with phenomena that can be described numerically either by counts or by measurements. Thus the work statistics refers either by counts or by measurements. Thus the work statistics refers either to quantitative information or to the method dealing with quantitative information. The methods by which statistical data are analysed are called statistical methods. Although the term is sometimes used more closely to cover the subject statistics as a whole. Statistical methods are applicable a very large number of fields. Statistics is widely employed as a tool in the analysis of problems in natural, physical and social science. That statistical tools and techniques are used by the researcher for the purpose of analysis of data. Tools and techniques used are given below: Bar diagrams-are the most convincing and appealing ways in which statistical results may be present is through diagrams and graphs. There are numerous ways in which data can be graphically represented. Bar diagrams are commonly used for data analysis. There are different types of bar diagrams. Those used by the researcher as follows: Sub divided bar diagrams: these diagrams are used to represent various parts of the whole. While constructing such a diagram, the various competences in each bar should be In the same order. To distinguish between the different components, it is useful to use different shades of colours. Index or key should be given explaining these differences. Multiple bar diagrams: in a multiple bar diagrams two or more sets of interrelated data are represented. Since more than one phenomenon is represented, different shades, colours, dots or crossings are used to distinguish between the bars. Wherever the comparison between two or more related variables is made, multiple bar diagrams are preferred

28

DATA ANALYSIS The following tables and data shows the result of the analysis done by the researcher from the data collected. Analysis is done by using the tools and techniques explained previously. TABLE 3.1.1: ANALYSIS OF THE RECEIPTS OF APPLICATION Year Application received no Application received amount Application sanctioned no Application sanctioned amount

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

541 567 619 855 769

22406 28246 43658 79947 59698

461 526 580 759 747

13583 24557 34910 61593 50739

29

FIGURE : 3.1.1 CHART SHOWING ANALYSIS OF THE RECEIPTS OF APPLICATION

From the above table and chart it is seen that the number of applications received each year from 2006-2007 has been shown increasing trend as well as the loan amounts requirement fell significantly from 2006 to 2011 after which the loan requirement has tremendously increased. Highest number of applications received and the highest amount sanctioned is in the year 2009-2010

TABLE 3.1.2 : ANALYSIS OF DISBURSEMENTS BY THE FIRM DURING 2006-07 Applications Year 2006-07 2007-08 2008-09 2009-10 2010-11 Received No. 541 567 619 855 769 Applications Received Amount 22406 28246 43658 79947 56998 FIGURE : 3.1.2 ANALYSIS OF DISBURSEMENTS BY THE FIRM DURING 2006-11 Applications Sanctioned No 461 526 580 759 747 Applications Sanctioned Amount 13583 24557 34910 61593 50739 Disbursement Amount 9725 18643 29394 41953 44636

30

The amount of disbursements made during 2006-07 to 2010-11 shows it increasing trend in loan disbursals. The highest amount disbursed is during 2010-11. KFC has increased disbursals amount significantly after the 2006-07 .

TABLE 3.1.3: ANALYSIS OF RECOVERY FROM 2006 TO 2011 Year 2006-07 2007-08 2008-09 2009-10 2010-11 Principal Recovery 11449 13715 17821 16386 19645 Interest 8459 8466 9104 9412 11744 Total 19908 22181 26925 25798 31389

FIGURE 3.1.3 : ANALYSIS OF RECOVERY FROM 2006 TO 2011

It is seen from the table and the diagram that the total amount recovered every year, which is principal amount includes half the interest showing a increasing trend in 2006 to 2008 then again in 2008 the principal recovered had increased but then in 2009-10 the principal recovery has again decreased and it is increased in the 2010-11 financial year . This shows that KFC has been improvising their methods to recover principal amounts from their customers but then also the methods used are not that much effective. We can see that their amount of interest received from the last five years (2006-2011) showed an increasing trend. The total recovery has not shown any significant changes in the past 5 years.

TABLE 3.1.4 : ANALYSIS OF ARREARS DURING 2006-2011 year 2006-07 principal 23684 interest 51566 total 75250

31

2007-08 2008-09 2009-10 2010-11

20182 826 3625 1904

56062 6915 1126 2448

76244 7741 4751 4352

FIGURE 3.1.4: ANALYSIS OF ARREARS DURING 2006-11

Arrears to be recovered, which show the principal amount inclusive of interest, increased in the last years until 2007-08. Since then KFC has written off almost 150 crores of bad debts which has cleared a very large portion of bad debts by which there has been significant reduction in the total amount of arrears to be recovered. This shows the customers repaying the borrowed loans in timely manner has significantly been going down. This shows that there has to be new mechanism to be introduced by which KFC can successfully get the arrears of each year within a specified time period. TABLE 3.1.5 : PERCENTAGE OF RECOVERY TO DISBURSMENT Year Disbursement Recovery Percentage Of Recovery To Disbursement 2006-07 2007-08 2008-09 2009-10 2010-11 9725 18643 29394 41953 44636 19908 22181 26925 25798 31389 204.71 118.98 91.6 61.49 70.32

FIGURE 3.1.5 COMPARISION OF RECOVERY AND DISBURSMENT

KFC disburses almost 70% amount of loan requirement. The recovery of the same is a hefty task for KFC because each year more loans are sanctioned and more amounts
32

are dispersed. By looking at the pattern of the percentage of recovery to disbursements shows that a tremendous effort from KFC which yielded 204 percentage recovery after which the recovery percentage shows a steep declining trend. This means that each year KFC has to borrow more funds. The recovery of an year also includes the disbursals from previous years. From the about table can understand that the recovery efforts have not yielded much of a success. TABLE 3.1.6: ANALYSIS OF BORROWINGS TO LOANS AND ADVANCES 2006-11 (AMT 0000) YEAR BORROWINGS LOANS & ADVANCES RATIO OF BORROWING S TO LOANS & ADVANCES 2006-07 2007-08 2008-09 2009-10 2010-11 42420 43211 53360 57651 76790 50957 .82 50826 .85 58981 .90 88869 .64 112481 .68

33

FIGURE 3.1.6 : CHART SHOWING RELATION OF BORROWINGS AND LOANS & ADVANCES

The Kerala Financial Corporation borrow money mainly from RBI(Reserve Bank of India) and raise capital from issue of its bond refinance from SIDBI(Small Industries Development Bank of India),subsidies from cetral and the state government and refinance from IDBI(Industrial Development Bank of India). The trend of Loans and Advances show s an increasing trend in extending credit by KFC which in turn reflects in increased borrowings by KFC from external sources mentioned above. KFC has to meet capital requirements of a large portion of the society but the problem is the repayment capacity of the people

TABLE 3.1.7: ANALYSIS OF INTEREST RECEIVABLES ON LOANS AND ADVANCES OF THE COMPANY FROM 2006-2011 YEAR LOANS& ADVANCES INTEREST ON LOANS & ADVANCES % OF INTEREST ON LOANS AND ADVANCES

2006-07

50957

8390

16.46

34

2007-08 2008-09 2009-10 2010-11

50826 58981 88869 112481

8292 10192 14131 16598

16.31 17.28 15.9 14.75

FIGURE 3.1.7: INTEREST RECEIVABLES ON LOANS AND ADVANCES OF THE COMPANY FROM 2006-2011

From the analysis of the above table and chart the loans and advances given by the corporation goes on increasing . The highest amount of interest collections was in the year 2010-11 which constituted 14.75% of interest collections as to loans and advances in the same year and the highest percentage of interest collected in 2008-09. For the past 5years an average of 16.14% is the interest collections each year. The highest amount of loans and advances given out by the company was in the year 2010-11 which amounts to 112 crores. The performance of KFC in terms of interest collections has not been that much satisfactory when compared to the amount of loans and advances given out each year.

TABLE 3.1.8 PERCENTAGE OF BAD & DOUBTFUL DEBTS TO LOANS & ADVANCES YEAR LOANS& ADVANCES 2006-07 2007-08 2008-09 50957 50826 58981 BAD AND DOUBTFUL DEBTS 23920 14410 8038 % BAD & DOUBTFUL DEBTS TO LOANS & ADVANCES 46.94 28.35 13.62

35

2009-10 2010-11

88869 112481

1991 1974

2.24 1.75

FIGURE 3.1.8 BAD & DOUBTFUL DEBTS TO LOANS & ADVANCES

The percentage of bad and doubtful debts of sanctioned loans and advances showing decreasing tendency. The percentage of bad and doubtful debts comes down every financial year. The average percentage of bad and doubtful debts is 18.58 percentages. The highest percentage was in the year 2006-07. The lowest was in the year 2010-11. In the last three years percentage of bad and doubtful debts goes decreasing. It means that KFC take lot of effort to collect the debts TABLE 3.1.9 ANALYSIS OF LOANS& ADVANCES AND NPA OF THE COMPANY year loans &advances 2006-07 2007-08 2008-09 2009-10 50957 50826 58981 82830
36

NPA amount

% NPA

23920 14410 8038 1991

48.52% 28.35% 13.63% 2.40%

2010-11

76970 FIGURE 3.1.9

1975

1.88%

ANALYSIS OF LOANS& ADVANCES AND NPA OF THE COMPANY

For KFC in the year 2006-07 recorded the highest percentage of NPA to loans and advances which stood at 48.52%. Since that year NPA percentage fell to almost 1.88 by the year 2010-11. The decreasing tendency of net NPA shows that the KFC made tremendous effort to recover the loan amounts

TABLE 3.1.10 ANALYSIS OF PROFITABILITY YEAR 2006-07 2007-08 2008-09 2009-10 2010-11 NET PROFIT 440 -2815 1170 2114 3334

FIGURE 3.1.10 ANALYSIS OF NET PROFIT

A crucial part of an organisation is the profit making capacity. KFC is a non banking financial company so profit making is difficult task. For the last years the company reported profits totalling to 4 crore. The following year in 2007-08 the company reported an hefty 28 crore loss. This was on account of increasing amounts receivables in the company. The financial restructuring which took in the year 200837

09 where the company removed Rs.105 crores of bad debt from its accounts. Which resulted in the profitability of the company in the year 2008-09 and followed by 21 crore profits in the year 2009-10 and the company earned a profit of 33 crore in the current financial year 2010-11

3.2 RATIO ANALYSIS The Balance Sheet and the Statement of Income are essential, but they are only the starting point for successful financial management. Apply Ratio Analysis to Financial Statements to analyze the success, failure, and progress of your business. Ratio Analysis enables the business owner/manager to spot trends in a business and to compare its performance and condition with the average performance of similar businesses in the same industry. To do this compare your ratios with the average of businesses similar to yours and compare your own ratios for several successive years, watching especially for any unfavorable trends that may be starting. Ratio analysis may provide the all-important early warning indications that allow you to solve your business problems before your business is destroyed by them. Balance Sheet Ratio Analysis Important Balance Sheet Ratios measure liquidity and solvency (a business's ability to pay its bills as they come due) and leverage (the extent to which the business is dependent on creditors' funding). They include the following ratios: Liquidity Ratios

38

These ratios indicate the ease of turning assets into cash. They include the Current Ratio, Quick Ratio, and Working Capital. Current Ratios The Current Ratio is one of the best known measures of financial strength. It is figured as shown below: Current Ratio = Total Current Assets / Total Current Liabilities The main question this ratio addresses is: "Does your business have enough current assets to meet the payment schedule of its current debts with a margin of safety for possible losses in current assets, such as inventory shrinkage or collectable accounts?" A generally acceptable current ratio is 2 to 1. But whether or not a specific ratio is satisfactory depends on the nature of the business and the characteristics of its current assets and liabilities. The minimum acceptable current ratio is obviously 1:1, but that relationship is usually playing it too close for comfort. If you feel your business's current ratio is too low, you may be able to raise it by: Paying some debts. Increasing your current assets from loans or other borrowings with a maturity of more than one year. Converting non-current assets into current assets. Increasing your current assets from new equity contributions. Putting profits back into the business.

Quick Ratios The Quick Ratio is sometimes called the "acid-test" ratio and is one of the best measures of liquidity. It is figured as shown below: Quick Ratio = Cash + Government Securities + Receivables / Total Current Liabilities The Quick Ratio is a much more exacting measure than the Current Ratio. By excluding inventories, it concentrates on the really liquid assets, with value that is fairly certain. It helps answer the question: "If all sales revenues should disappear, could my business meet its current obligations with the readily convertible `quick' funds on hand?"
39

An acid-test of 1:1 is considered satisfactory unless the majority of your "quick assets" are in accounts receivable, and the pattern of accounts receivable collection lags behind the schedule for paying current liabilities. Working Capital Working Capital is more a measure of cash flow than a ratio. The result of this calculation must be a positive number. It is calculated as shown below: Working Capital = Total Current Assets - Total Current Liabilities Bankers look at Net Working Capital over time to determine a company's ability to weather financial crises. Loans are often tied to minimum working capital requirements. A general observation about these three Liquidity Ratios is that the higher they are the better, especially if you are relying to any significant extent on creditor money to finance assets. Leverage Ratio This Debt/Worth or Leverage Ratio indicates the extent to which the business is reliant on debt financing (creditor money versus owner's equity): Debt/Worth Ratio = Total Liabilities / Net Worth Generally, the higher this ratio, the more risky a creditor will perceive its exposure in your business, making it correspondingly harder to obtain credit. Income Statement Ratio Analysis Return on Assets Ratio This measures how efficiently profits are being generated from the assets employed in the business when compared with the ratios of firms in a similar business. A low ratio in comparison with industry averages indicates an inefficient use of business assets. The Return on Assets Ratio is calculated as follows: Return on Assets = Net Profit Before Tax / Total Assets Return on Investment (ROI) Ratio The ROI is perhaps the most important ratio of all. It is the percentage of return on
40

funds invested in the business by its owners. In short, this ratio tells the owner whether or not all the effort put into the business has been worthwhile. If the ROI is less than the rate of return on an alternative, risk-free investment such as a bank savings account, the owner may be wiser to sell the company, put the money in such a savings instrument, and avoid the daily struggles of small business management. The ROI is calculated as follows: Return on Investment = Net Profit before Tax / Net Worth These Liquidity, Leverage, Profitability, and Management Ratios allow the business owner to identify trends in a business and to compare its progress with the performance of others through data published by various sources. The owner may thus determine the business's relative strengths and weaknesses.

DATA ANALYSIS 3.2.1 TABLE SHOWING CURRENT RATIO OF KFC FOR THE PAST 5 YEARS year 2006-07 2007-08 2008-09 2009-10 2010-11 ANALYSIS The Higher the ratio of working capital (current assets-current liabilities), the higher will be the liquidity of the business. Thus working capital can be considered as the measure of liquidity. The current ratio was 1.60 in the year 2006-07, which was below ideal. It decrese to 0.79 in 2007-08.it was 14.65 in 2008-09 which was a great increase and highest among the 5 years and was also not a comfortable ratio. The ratio was reduced to 0.78 in 2009-10 and again decreased to 0.37 in 2010-11 financial year As mentioned above current ratio is used to measure the liquidity position of the concern and thus reflects the short term solvency of the concern.
41

current asset 33621 23319 141306 10416 7684

current liability 21013 29231 9644 13353 20651

ratio=current asset/current liability 1.60 0.79 14.65 0.78 0.37

INTERPRETATION The conclusion drawn only on the basis of current ratio is illusory. In the year 2006-2007, the concern has a good liquidity position which was slightly above the ideal. Compared to 2006-07, the ratio shows a decline from 1.60 to 0.79 .In the balance sheet of KFC it shows that overall current assets and overall current liability also increases. But increase in current liability is more than increase in current assets that's why the current ratio increases even though there is increase in current assets. Current liability increases in the year 2007-08. In the year 2008-09,there is large increase in current assets than current liability when compared to the previous years.That might be the reason behind increase in current ratio in the year 2008-09 The financial restructuring which took in the year 2008-09 where the company removed Rs.105 crores of bad debt from its accounts. Which resulted in the increasing of current ratio The current ratio was low in the last two year than that of 2008-09 .This might be due to decrease in cash or bank balances of that years when compared to the 2008-09 financial year. 3.2.2 TABLE SHOWING RETURN OF ASSET RATIO OF KFC FOR THE PAST 5 YEARS year 2006-07 2007-08 2008-09 2009-10 2010-11 net profit before tax 12537 -10290 76295 46646 61697 Total asset 665205 661779 775148 941866 1195285 Ratio 0.018 -0.015 0.098 0.049 0.051

ANALYSIS

42

The return of asset ratio was 0.018 in the year 2006-07.It became -0.015 in the next year. This increases to 0.098 in 2008-09. In 2009-10 it come down to 0.049 .In the year2010-11 the ratio increased to 0.051 INTERPRETATION Here in the balance sheet of KFC it is showed clearly that the amount of return of asset to the total asset shows increasing tendency in the last two years. It is highest in the year 0.098 and lowest in the year 2007-08. As this ratio adds significance in case of a manufacturing concern, it is not that important in case of a service industry. This measures how efficiently profits are being generated from the assets employed in the business. A low ratio indicates an inefficient use of business assets.

3.2.3 TABLE SHOWING RETURN OF INVESTMENT OF KFC FOR THE PAST 5 YEARS year 2006-07 2007-08 2008-09 2009-10 2010-11 ANALYSIS The return of investment ratio was 0.078 in the year 2006-07.It became -0.064 in the next year. This increases to 1.030 in 2008-09. In 2009-10 it come down to 0.288.In the year2010-11 the ratio increased to 0.302 net profit before tax 12537 -10290 76295 46646 61697 net worth 159064 159064 74060 204060 204060 Ratio 0.078 -0.064 1.030 0.228 0.302

INTERPRETATION

43

Here in the balance sheet of KFC it is showed clearly that the amount of return of asset to the total asset shows increasing tendency in the last two years. It is highest in the year 0.098 and lowest in the year 2007-08. The ROI is perhaps the most important ratio of all. It is the percentage of return on funds invested in the business by its owners. In short, this ratio tells the owner whether or not all the effort put into the business has been worthwhile. If the ROI is less than the rate of return on an alternative, risk-free investment such as a bank savings account, the owner may be wiser to sell the company, put the money in such a savings instrument, and avoid the daily struggles of small business management

3.3 CASH FLOW STATEMENT

44

Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation. Cash flow can e.g. be used for calculating parameters:

to determine a project's rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return and net present value.

to determine problems with a business's liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash even while profitable.

as an alternative measure of a business's profits when it is believed that accrual accounting concepts do not represent economic realities. For example, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares or raising additional debt finance.

cash flow can be used to evaluate the 'quality' of income generated by accrual accounting. When net income is composed of large non-cash items it is considered low quality.

to evaluate the risks within a financial product, e.g. matching cash requirements, evaluating default risk, re-investment requirements, etc.

Cash flow is a generic term used differently depending on the context. It may be defined by users for their own purposes. It can refer to actual past flows or projected future flows. It can refer to the total of all flows involved or a subset of those flows. Subset terms include net cash flow, operating cash flow and free cash flow. ANALYSIS OF SOURCES AND APPLICATIONS OF CASH FLOW

STATEMENT OF THE COMPANY FROM 2008-09 TO 2009-10

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Sl No.

PARTICULARS

2010-11

2009-10

2008-09

1 Cash flow from Operating activities Interest and other Revenue receipts (A) Interest and other Financial charges paid (B) Payment to employees and Administrative expenses (C) Operating profit before changes in operating assets (A-B-C) Increase in operating assets (Loans & Advances) Net cash from operating activities before Income Tax Income tax paid Net cash from operating activities after Tax (x) 2 Cash flow from Investment Activities Interest received on deposits/Investments in M/F Purchase of Fixed Assets Proceeds from Sale of Fixed Assets Increase/Decrease in other assets (Net) Increase/Decrease in other liabilities (Net) Net Cash from Investment Activities (Y) 3 Cash Flow from Financing activities Share Capital from State Government 791.3 Long term borrowings (Refinance from SIDBI) Repayment of Long Term Borrowings
46

15,577.77 -5660.84 -3,872.44 5,660.84 -23,612.29 -17,951.45 -1,568.28 -19,519.73

15,523.90 -4,929.98 -2,237.38 8,356.54 -27,639.64 -19,283.10 -233 -19,516.10

9,454.00 -4,139.00 -3,575.00 1,740.00 -11,439.00 -9,699.00 -9,699.00

63.63 -93.72 19.5 -419.19 521.8 92.02

54.19 -24.81 -34.62 140.76 135.52

145 -21 16 -566 -1,215.00 -1,641.00

15,000.00

16,000 -20,181.79

20,988.52 -14,696.94

16,000.00 -7,861.00

From the analysis of cash flow statements of 2008-09 to 2009-10 it shows that there has been a reasonable increase in the interest and revenue receipts to the extent of 61%. Which shows operational efficiency of KFC has been improved. The next year a nominal amount increase in the total amount, it shows operational efficiency of KFC come down comparing to the previous year . But looking at the net cash from operating activities it shows a trend of almost -50% compared to 08-09. In the year 2010-11 only a nominal increase the cash flows from operating activities. It is The interest received from investing activities has increased in 2009-10 years .the next year it is decreased by almost 68%. The net cash from financing activities decreased in 2009-10 compared to 2008-09 and it is increased in the financial year 2010-11.but the cash or cash equivalent at the end of financial year goes on decreasing

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MAJOR FINDINGS After the analysis of the data, research has identified the following flaws with the credit management of the institution.

The researcher found that the percentage of loan sanction increased by 162 percentage and the application sanctioned amount is increased 266percentage . but the number of applications has increased by almost 142 percentage during the project period . This implies that the company has been giving out loan amounts of higher denomination. The major portion of recovery amount is the principal outstanding , the principle outstanding increased by 171 percentage and the total interest outstanding increased by almost 139 percentage . The total recovery amount increased by 157 percentage during the project period

During the project period the borrowing of KFC is increased by 181 percentage and the amount of loans and advances given by the KFC is increased by almost 221 percentage . This implies KFC raise fund for lending other than the borrowings from outside agencies

Arrears to be recovered, which show the principal amount inclusive of interest, increased every year until the year 2007-08. Since then KFC has written off almost 150 crores of bad debts which has cleared a very large portion of bad debts by which there has been significant reduction in the total amount of arrears to be recovered. The pattern of the percentage of recovery to disbursements shows that there was a tremendous effort from KFC which help to increase percentage of recovery . The percentage of bad and doubtful debts to the loans and advances decreased from 47% to 1.75% . This implies kfc made tremendous effort to avoid the bad debts NPA percent has lowered to almost 1.88 The trend of Loans and Advances shows an increasing trend in extending credit by KFC which in turn reflects in increased borrowings by KFC from external sources.

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The company resorts to remove bad and doubtful debts each year which shows the inefficiency in receivables management or lack of a proper study on the projects approved for disbursement of loans. Financial restructuring for KFC is to write off all the accumulated losses out of borrowed funds. This usually takes a hefty financial toll on the company. The company has recorded profits due to writing off of almost Rs.105 crores of accumulated losses. The return of asset ratio shows inconsistency because of inconsistency in profitabity and revenue The financial liquidity of the KFC not good during the project period . the current ratio of KFC is not an ideal ratio in the past years . The current ratio of the KFC is inconsistence, because inconsistency in revenue The return of investment ratio and the return of asset ratio shows inconsistency because of inconsistency in profitabity and revenue The analysis of cash flow statements shows that interest payments have increased but the receipt of interests have not made much of an improvement.

5.1 DISCUSSION Credit is a tool that allows a corporation to borrow money from organizations to finance its operations, or to loan money to customers. There are many credit
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management problems a corporation may face including having too much debt, not paying debt and not collecting debt. A corporation must implement strategies to manage its credit effectively, or it could face financial and operational problems including downsizing or closure. Incurring huge expenses on legal and collection procedures, not receiving payments on time, incurring huge bad debts, difficulties in meeting operational expenses and unable to meet the interest on borrowings of the firm, dissatisfaction of customers etc. are the problems identified with the existing system of the institution. The main problem lies in the fact that by the time the firm reacts to those mishaps it will be too late and hence the firm has to bear huge bad debts and losses at the end. To develop a new system, the working pattern of the existing system was studied and this is pictorially represented in figure 5.1. In the existing system, institutions and since the loans without giving much importance to project appraisal or industry study. After the loans have been dispersed the institution waits till the repayment of the first installment and by the time the default in payment occurs the debtors turn over period might have gone above six months when the institution notices the default in payment, he takes another 20 days to notify the customer to make the repayment within a month. Again if the repayment is not done within the specified time limit, the institution takes legal action against the customer. This result either in the collection of the installment or may be added to the bad debts. Such a system results in time loss, increasing expenses on receivables and also bad debts.

To do away with these flaws, it is almost necessary that a new efficient system be introduced in the firm. The researcher has proposed a new system of receivables management for the institution and this is pictorially represented in figure 8. The important point here is that the new system starts working right from the first time itself when applications for loans and advances received. The firm first scrutinises the applications and contacts at the study on the projects of the clients. Based on this, decisions are made as whether to sanction it or not; and if sanctioned how much is to be sanctioned. Disbursements are made accordingly to the different units (SSI and non-SSI units. As soon as the disbursements are made the well-equipped follow-up system starts working, right from the first month and then consecutively. The customers are provided with awareness on their projects (technical knowledge and
50

innovation) and on how to meet the needs of the credit provisions provided to them. Efforts are made to study the problem of the clients and accordingly changes are made in the repayment procedures, such as extension of credit period, reduction in interest rates etc. This can help the customers in making prompt payments. Providing festival discounts also can encourage the customers. Following the above steps and making calculative reductions in legal and collection costs will help the firm in increasing savings. All these will lead to timely collections from the customers. This new system proposed by the researcher will bring tremendous results to the institution and also will help to reap profits.

PRESENT RECEIVABLES MANAGEMENT MODEL OF THE FIRM

DTP=195 days
Time for payment of first Default instalmen paymen t

51 Loan application Collecti Bad recived on Legal sancti action on Loan Non disburse d paymen 100%

Non SSI Notificatio SSI unit n send unit

1 month

1 month

20 days

FIGURE 5.1

PROPOSED RECEIVABLES MANAGEMENT MODEL OF THE FIRM

Loan applicatio n received Notification Project SSI unit send by SMS, appraisal Loan email and Notice sanctio 52 team Technical, Use of disburse Initiate telephone send by insurance on n industrial and claim d money through of recovery Lega call Non register Bad debt Non Non SSI Collection scope of project scheme proceedi l automated payme of insurance ed post payment unit in future

Prior notification by SMS or email

Time for Immediate payment Default alert to the of 1st payment receivable instalmen management

2 week

3 days waiting period

1 week
Hand over to debt collecting agencies

FIGURE 5.2 5.2 EXPLANATION OF THE NEW PROPOSED SYSTEM New Financial services offered by other financing companies can be integrated into the system they are Factoring and Credit Insurance.

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5.2.1

Factoring Factoring is a financial transaction whereby a business job sells its accounts

receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables (essentially a financial asset), not the firms credit worthiness. Secondly, factoring is not a loan it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three. It is different from forfaiting only in the sense that forfaiting is a transactionbased operation involving exporters in which the firm sells one of its transactions, while factoring is a Financial Transaction that involves the Sale of any portion of the firm's Receivables. Factoring is a word often misused synonymously with invoice discounting factoring is the sale of receivables, whereas invoice discounting is borrowing where the receivable is used as collateral. The three parties directly involved are: the one who sells the receivable, the debtor, and the factor. The receivable is essentially a financial asset associated with the debtor's liability to pay money owed to the seller (usually for work performed or goods sold). The seller then sells one or more of its invoices (the receivables) at a discount to the third party, the specialized financial organization (aka the factor), to obtain cash. The sale of the receivables essentially transfers ownership of the receivables to the factor, indicating the factor obtains all of the rights and risks associated with the receivables. Accordingly, the factor obtains the right to receive the payments made by the debtor for the invoice amount and must bear the loss if the debtor does not pay the invoice amount. Usually, the account debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections. Critical to the factoring transaction, the seller should never collect the payments made by the account debtor, otherwise the seller could potentially risk further advances from the factor. There are three principal parts to the factoring transaction; a.) The advance, a percentage of the invoice face value that is paid to the seller upon submission,
54

B.) The reserve, the remainder of the total invoice amount held until the payment by the account debtor is made and C.) The fee, the cost associated with the transaction which is deducted from the reserve prior to it being paid back the seller.

Sometimes the factor charges the seller a service charge, as well as interest based on how long the factor must wait to receive payments from the debtor. The factor also estimates the amount that may not be collected due to non-payment, and makes accommodation for this when determining the amount that will be given to the seller. The factor's overall profit is the difference between the price it paid for the invoice and the money received from the debtor, less the amount lost due to nonpayment. 5.2.1.1 Different types of Factoring 1. Disclosed and Undisclosed 2. Recourse and Non recourse A single factoring company may not offer all these services. Disclosed In disclosed factoring client's customers are notified of the factoring agreement. Disclosed type can either be recourse or non recourse.

Undisclosed In undisclosed factoring, client's customers are not notified of the factoring arrangement. Sales ledger administration and collection of debts are undertaken by the client himself. Client has to pay the amount to the factor irrespective of whether customer has paid or not. But in disclosed type factor may or may not be responsible for the collection of debts depending on whether it is recourse or non recourse. Recourse factoring In recourse factoring, client undertakes to collect the debts from the customer. If the customer doesnt pay the amount on maturity, factor will recover the amount from the
55

client. This is the most common type of factoring. Recourse factoring is offered at a lower interest rate since the risk by the factor is low. Balance amount is paid to client when the customer pays the factor. Non recourse factoring In non recourse factoring, factor undertakes to collect the debts from the customer. Balance amount is paid to client at the end of the credit period or when the customer pays the factor whichever comes first. The advantage of non recourse factoring is that continuous factoring will eliminate the need for credit and collection departments in the organization. Factoring Companies in India Canbank Factors Limited SBI Factors and Commercial Services Pvt. Ltd The Hongkong and Shanghai Banking Corporation Ltd Foremost Factors Limited Global Trade Finance Limited Export Credit Guarantee Corporation of India Ltd Citibank NA, India Small Industries Development Bank of India (SIDBI) Standard Chartered Bank 5.2.2 CREDIT INSURANCE Credit insurance is a term used to describe both business credit insurance (a.k.a. trade credit insurance) and consumer credit insurance, e.g., credit life insurance, credit disability insurance (a.k.a. credit accident and health insurance), and credit unemployment insurance, The easy way to differentiate between these two types of insurance is: * Business credit insurance is credit insurance that businesses purchase to insure payment of credit extended by the business (their accounts receivable). * Consumer credit insurance is credit insurance that consumers purchase to insure payment of credit extended to the consumer (insurance pays lender or finance company).

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Credit insurance or trade credit insurance (also known as business credit insurance) is an insurance policy and risk management product that covers the payment risk resulting from the delivery of goods or services. Trade credit insurance usually covers a portfolio of buyers and pays an agreed percentage of an invoice or receivable that remains unpaid as a result of protracted default, insolvency or bankruptcy. Trade credit insurance is purchased by business entities to insure their accounts receivable from loss due to the insolvency of the debtors. This product is not available to individuals. The costs (called a "premium") for this are usually charged monthly, and are calculated as a percentage of sales of that month or as a percentage of all outstanding receivables. Trade credit insurance insures the payment risk of companies, not of individuals. Policy holders require a credit limit on each of their buyers for the sales to that buyer to be insured. The premium rate is usually low and reflects the average credit risk of the insured portfolio of buyers. In addition, credit insurance can also cover single transactions or trade with only one buyer. Credit insurance takes care of the risk of payment of the organizations and not of the individuals. To get insured, the holders of the policy should have a credit limit on each of the buyers. For Credit insurance, the rate of premium is kept low. It combines both Credit Life Insurance and Trade Credit Insurance. Credit insurance involves trade with a single buyer. The concept of this insurance was first incepted in the nineteenth century. During the time of first and second World Wars, the idea was conceived in the Western Europe. The various companies that were developed during this time offered credit insurance to the individuals. If the borrower of the loan dies or gets disabled then the insurance will pay the loan off. Trade Credit Insurance covers the risk of the payment during the time of delivery of services and goods. Private individuals are not provided with the facilities of this product.

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Premium is charged monthly against the issuance of the credit insurance. This insurance is a business driven by broker, who helps in the creation of market competition among the policy holders for better premium and policy wordings. Credit Insurance is the best way to manage credit risk in a cost effective way for any organization. It provides financial assistance during the time of any credit risks and overdue payments during domestic trade or exports. Before granting covers for the insurance various terms and conditions need to be fulfilled. Credit insurance is one of the important types of insurance that covers risk against the following: * Trade Receivables * Portfolio * Business-to-Business Transactions * Short Term Credit Risk Credit insurance offers a number of benefits, which are available in the form of * Risk Mitigation * Efficient collection of debts * Complements credit management of the seller * Enables development of new markets against protection provided * Expert since buyers are analyzed for credit worthiness The major Credit Insurance providers in India are ICICI Lombard and The New India Assurance.

5.3

NEW MODEL KFC has to create a special task force or specialised project appraisal team

whom are well equipped with the latest analysing technologies/softwares, expert panel from different industries, dedicated team to find out the latest innovations in the industry etc. This specialised project appraisal team has to deeply investigate into the
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projects profitability and scope factors in the existing industry. The team has to thoroughly study the future scope for this project and also make sure that the products that the new unit is going to produce will be competitive enough. When a loan application comes to KFC the same has to be forwarded to this task force who will analyse the project and will give out their suggestions and recommendations on the received application. Based on a report of this task force the loan approving officer has to set up a date on which the proposed projects promoter will be called upon and will be discussed with the recommendations of the appraisal committee. The research also proposes that every month one day should be kept for serving this purpose. That day the panel should be present to express their views and opinions on that project which will have to be discussed over and suggestions from industry experts will be sought. This will ensure that the loans given out from KFC will be profitable business. The researchers new system also requires a new automated computer to monitor and track payments and the reminder service which will prior to the installment payment date notify the loanee that the payment should be made on the installment at the coming date. If there is default in the payment of the installment, the new automated system will notify the receivables management department of the default which in turn the officers will send personal SMS, e-mail which will be a preset format stating the amount to be paid and the date of skip payment. Also the officers will have to call the defaulter and ask him to make the payment. If no favourable responses received from the defaulter, a notice in the registered post should be posted to the defaulter. Within two weeks, if the defaulter doesn't pay a legal notice should be sent to the defaulter. If the defaulter makes payment it will go into the collections, otherwise a debt collection agency should be given the contract of KFC to collect all the debts pertaining to that financial year. Research also proposes integration of factoring and credit insurance into the KFC's receivable management system.
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Credit insurance should be taken for each and every loan that has been given out by KFC, KFC and the credit insurance company should have a tie up. The usage of credit insurance will help KFC to get back its disbursed money. The advantages of credit insurance have been mentioned above. Factoring is the new service offered by the financial institutions which can be used by KFC to sell its receivables and thereby receive partial amount of debt to be received and the remaining amount which will be given to KFC by the factoring company within a stipulated period of time mentioned in the contract.

6.1 SUGGESTION In light of the analysis and results, the researcher puts forward the following recommendations:

The institution is recommended to set up an advanced project appraisal team which can advise the firm in granting loans to eligible people. The project appraisal team will also act as a screening process where projects which have scope and innovativeness will be selected for loan disbursement. This will help the firm also smoother recovery of the principal and interest and thereby maintain a smooth flowing in its operations. A new automated payment notification system which will inform the loanee about the payment which is coming in the upcoming date. These automated system also will act as a management information system whereby this receivables management department be notified of the defaults made by the customers. The system also will have the facility to e-mail and SMS to customers about their loan defaults. This will make sure that that customers are well aware of their loan payments due.
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 The researcher also recommends having tie ups with factoring companies which will ensure that the firm collection of its debts upto 70% success. Factoring is also a method to collect those bad debts which otherwise have to be written off. As factoring comes at a price which is lesser compared to the actual debt being written off.
Research also recommends setting up of an alliance with insurance company

which provides credit insurance. Credit insurance helps the company to get back its money in case the customer is incapable of being that debt. The credit insurance requires premiums to be paid each month which can be collected from the customer itself which would form part of installments paid by him each month. This is a new method now being used by private financial companies which can also be used by KFC.

KFC should cut down on its loan approvals or disbursements for at least two years and try to recover those debts which are otherwise going to be written off. Also KFC should rewrite its guidelines on loan policies, which will ensure that particular types of customers who have credit rating or has a good past credit record. Provide motivational credits, by waiving the interests and increasing credit period, which would help to reduce arrears. Customers who have been making their payments on time should also be given relaxation in terms of interest payments or some lowered percentage of interest for the next loan he's going to take. KFC should also try to market its financial services for people who are very relevant in industry or business which are very successful and are growing. Innovation project have to encouraged

61

 Work in progress has to be thoroughly monitored to ensure no misleading of funds occurs. A bench-marking strategy needs to be adopted.
NRIs have the capacity to pay the allotted credits than the general public.

While sanctioning and recovering the loans, no discount offers should be provided to them.
KFC should also try to advertise more and make the general public are aware

of the good financial services provided by KFC so that KFC will have more loan applications from the public from its screening can be done so as to maintain a good level of business while keeping the bad debts at a minimal percentage. The legal and collection department should be strengthened.

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7.1 CONCLUSION The project has been completed within the framework of the objectives of the study. Researcher has analysed the collected data and this has helped to identify the flaws prevailing in the existing credit management system of the firm. Heavy expenses incurred for legal and collection procedures, customers not making payment on time, the firm is unable to meet its operating needs etc. were all the problems identified. To do in every these problems and to lead the firm profitably, the researcher has proposed a new system. By inculcating the new system the firm can reduce its expenses on receivables, motivate customers to make prompt payments, get timely collections, reduce bad debts and losses can make its operating needs. The new system can improve the efficiency of credit management by almost 70%. Researcher has also given his findings and recommendations which substantiate the new system.

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64

BILOGRAPHY

REFERENCES TEXT BOOKS 1. M. PAndy, Financial Management, UBS Publishers and Distributors LTD., India. 2. Prasanna Chandra. Project: Planning, Analysis, Selection, Implementations and Review, Tata Mc Graw-Hill Publishing Company LTD., India 3. H.R Machiraju. Indian Financial Systems, UBS Publishers and Distributors LTD., India. C.R Kothari: Research Methodology-Methods and Technique, New Age International Private LTD. M.Y Khan & P.K. Jain, Financial Management-Text and Problems, Tata Mc Graw-Hill Publishing Company LTD., India REFERENCE JOURNALS Annual Report of the company 2006-2011 The Chartered Accountant 2005

REFERENCE WEBSITES http://kfc.org/ http://business.mapsofindia.com/insurance/credit-insurance.html http://en.wikipedia.org/wiki/Factoring_%28finance%29 http://www.gccrisk.com/global_commercial_credit_news_information_article _insuring_receivables.php http://www.wikigroaning.com/debt-insurance.html

APPENDIX
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BALANCE SHEET AS ON 31.03.2011 RS in lakhs as at 31.03.2011 SOURCES OF FUND SHAREHOLDERS FUND Share Capital Share Capital Advance Reserves And Surplus Loan Fund Secured Loan Bond Deferred Tax Liabilities Other Liabilities Provisions TOTAL APLLICATION OF FUND Cash And Bank Balance Loans And Advances Investment Fixed Assets Other Asset TOTAL 768.47 112481.4 185 275.98 5817.7 119528.55 70861.96 6108 500.63 2065.17 10256.56 119528.55 20406 791.3 8538.93

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