TECHNIQUE OF PERFORMANCE BUDGETING IN PSBs

Transcription

1 CHAPTER - Ili TECHNIQUE OF PERFORMANCE BUDGETING IN PSBs

2 CHAPTER I/I TECHNIQUE OF PERFORMANCE BUDGETING SYSTEM (PBS) IN PRIVATE SECTOR BANKS (PSBs) BUDGETING MEANING AND SCOPE. The complexity of modern managerial problems has led to the development of those managerial tools, techniques and procedures which are commonly and collectively 1 referred to as "Scientific Management". The impact of this has been that all business enterprises, including service sector like banking,insurance, etc., have started formulating plans. Thus, planning is inherent and vibrant in the very nature of modern business conditions. The process of management consists of planning, organising, staffing, directing and controlling functions. Conceptually, planning precedes all other function of management. By means of planning, management decides the goal and directions of the organisation as also the ways 1. Man Mohan and Goyal, S.N., Principles of Management Accounting, Sahitya Bhawan, Agra, 1979, p. 22.

3 77 and means to achieve the pre determined goals most effectively. From the principles of modern scientific management as propounded by F.W.Tylor of USA as well as Henri Fayol of France, it can be concluded that the presetting of standards need not be restricted to certain departments, but could be applied to all the departments in an organisation uniformly. The management can be considered as efficient if it is able to attain all the objectives of an enterprise. It is effective when it accomplishes the objectives with minimum efforts and cost. In order to attain long range efficiency and effectiveness, management must chart out its course of action in advance. A systematic approach to facilitate effective management performance is profit 2 planning and control, or budgeting. Budgeting becomes therefore an integral part of management. 2. Srinivasan, N.P., Management Accounting, Sterling Publishers Private Ltd., 1988, p. 283.

4 78 BUDGET, BUDGETING AND BUDGETARY CONTROL: The term budget refers to a statement showing the quantities and monetary values, relating to specific period prepared in advance and indicating the future 3 policy to be pursued by the organisation. The system of business budgets, as prevalent in USA., has described as "a pre-determined detailed plan of action developed and distributed as a guide to current operation and as a partial basis for subsequent evaluation of performance". The term "Budgeting" refers to the process of preparing the budgets. The purpose of budgeting is to assess the extent of success of the management in their planning and the actions to be launched in case of deviations. Thus, the budget system is both a 'plan' as well as a 'control'. 3. Vinayakam, N., and Sinha, I.B., Management Accounting- Tools and Techniques, Himalaya Publishing House, 1988, p. 15.

5 79 The Institute of Cost and Management Accountant of England defined a Budget as."a financial and/or quantitative statement, prepared prior to a definite period of time, of the policy to be pursued during that period for the purpose of attaining a given objective", and Budgetary Control as " the establishment of departmental budgets relating to the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objectives of that policy, or to provide a firm basis for its revision". Rowland and William in their book entitled, "Budgeting for Management Control", has given the difference between budget, budgeting and budgetary control 4 as follows: "Budgets are the individual objectives of a department, etc., whereas budgeting may be said to be the act of building budgets. Budgetary control embraces all 4. Jain, S.P., and Narang, K.L., Cost Accounting, Kalyani Publishers, New Delhi Ludhiana, 1988, p

6 80 this and in addition includes the science of planning the budgets themselves and the utilisation of such budgets to effect an overall management tool for the business planning control". OBJECTIVES OF BUDGETS AND BUDGETARY CONTROL: The budgets and budgetary control systems are used to indulge in planning for the future in conformity with good business practice. They smooth out seasonal variations in production by developing new `fill in' products and thereby accomplishing one phase of economic planning. Co ordination among different departments can be ensured in an organisation, through consultation among the heads of the departments and mutual agreements on policy. The budgets and budgetary control system help in enhancing the operational efficiency of the divisions, departments and cost centres of a plant, and forecasting operating activities and financial position. They are also useful in imposing adequate and satisfactory norms of performances over the various activities of the unit, to

7 81 ensure that the valuable assets and resources of the enterprise are utilised most efficiently and effectively. They provide a firm assurance of earning the proper return on capital invested and prevent waste, reduce expenses and obtain the income desired. The budgetary control system aids in obtaining better control over the inventory, turnover as well as cash, and ensures economical use of capital. They centralise management control and enlist the co operation and commitment of organisational members to the achievement of the predetermined goals of the organisation. BUDGETARY CONTROL ORGANISATION: Budgets provide relevant control information to the management for future decisions and actions. With the budgetary system in existence, control of performance and evaluation of results become more purposeful and goal 5 oriented. In view of the fact that budgets and budgetary 5. Vinayakam, N., and Sinha, I.B., op.cit., p. 20.

8 82 control are not only accounting exercises but as well a tool of management at all levels, it is necessary for the system of budgetary control to be effectively organised and the same is possible when the following steps are taken for establishing the system. 1. Installation of Budget Centres: A budget centre is located within the framework of the organisation. It is a centre or department or a 6 segment of an organisation for which budgets are prepared. Budget centre must be clearly demarcated to facilitate the formulation of various budgets with the help of the heads of the departments concerned. 2. Maintenance of Proper Accounting Records: A "chart of accounts" in conformity with budget centres should be so maintained as to facilitate recording and analysis of information required for the operation of the "feed back" for the management. 6. Srinivasan, N.P., op.cit., p. 287.

9 83 3. Budget Education: This represents the educational aspect of the budgetary control system. The briefing of employees of a concern on the usefulness and limitations of the very concept of budgeting should be done on a continuous basis. All the personnel connected with budgets must be wellaquainted with the targets fixed individually for them as well as with the overall budgetary goals so that they may be conscious of their role in the accomplishment of the targets. 4. Organisation Chart: An organisation chart highlights the functional responsibilities of each member of the management team thereby making it possible for him to know his position in the organisation hierarchy as also his relationship to other members. Each official in the organisation knows precisely whom he should obey and whom he can command in the day to day administration.

10 84 5. Establishment of Budget Committee: The appointment of one person in charge of the whole budgetary system is quite common in small sized concern. But in larger organisations, it is customary to appoint a budget committee comprising of managing director, or the manager as chairman, the managers of various departments and one more person generally designated as "Budget Officer", who carries out the administrative work relating to the budget. Though individual circumstances affect the actual composition of the committee, it has often been found advisable to include other officials, such as the advertising manager, the chief engineer, the purchasing agent, etc. The main functions of the Budget Committee are: a) To formulate general policies of management in relation to the budgetary system; b) To issue directives relating to budget requirements to all concerned; c) To furnish historical data needed by the departmental managers for forecasting; d) To give proper advice in the preparation of budgets;

11 85 e) To receive and review budgets and suggest amendments and revision, as required; f) To accord final approval for all the functional budgets submitted; g) To formulate the Master Budget after the functional budgets have been cleared; h) To prepare budget summaries wherever needed; i) To lo cate deviations of actual results from the budgeted ones; j) To recommend corrective actions wherever required; and k) To co ordinate the budgetary programme. The Chief Duties of the Budget Director or Budget Officer, who is responsible for the budget programme, are as follows: a) To arrange for all meetings of the budget committee; b) To arrange the preliminary programme for the compilation of the various budgets; c) To ensure the provision of essential information needed for budget preparation through proper channel; d) To prepare schedules showing the requirements of the estimates and their collection on the stipulated dates; e) To accumulate preliminary budget data in worksheet and schedule form; f) To co ordinate the preliminary budget data of all divisions and departments; g) To prepare revised budget schedules;

12 86 h) To set up daily, weekly or monthly budget reports with budgeted figures only; i) To review the periodic budget reports after the actual figures have been inserted therein; J) To obtain detailed explanations and causes for any deviations between the budgeted and actual results; k) To confer with the divisional and departmental executives with respect to the results shown in periodic budget reports; 1) To deliberate with the Board of Directors, or other immediate head, with respect to policies to be pursued as a result of review and interpretation of the budget reports. 6. Preparation of Budget Manual: To facilitate the formulation of budgets, it becomes necessary to streamline the procedures involved therein. These procedures are arranged in logical sequence by means of a budget manual. A budget manual as defined by the Institute of Cost and Work Accountants, London, isfla document which sets out the responsibilities of persons engaged in the routine of and the forms and records required for budgetary control".

13 87 7. Determination of the 'Key factor': Any factor which dominates business operations and proves to be an obstacle in the achievement of the targeted figures contained in the functional budgets, is called, "the key factor". The key factor is also known as `limiting', `governing' or `principal budget' factor. It serves as the starting point for the preparation of the budget. After the determination of the key factor, the relevant budget is first prepared and integrated with other reconciled budgets. The relative impact of these factors are studied with the help of graphs, linear programming, operations research, etc., even at the time of preparation of budgets. 8. Determination of the level of activity: Another requisite in the budgetary control is the determination of the normal level of activity, i.e., the level that the company is expected to achieve. This will be decided after taking into consideration the prospects of improving the net probability of the product. This level of activity is very essential in production

14 88 planning, since it decides material and labour requirements as well as production overheads recoveries on the basis of machine hour rates. 9. Budget Periods One of the pre conditions for the actual preparation of the budget is to determine the span for which the budget is to be formulated. When static budget plan is adopted, the budget period is usually the fiscal year. The budget is prepared for a period of one year as a Master Budget which is subdivided into quarters and in turn broken down into individual months. Where flexible budgets are adopted, the budget period is always one year. PROCESS OF BUDGETARY CONTROL= As the systems of budgets and budgetary control are closely interconnected, the latter operates on the foundation of the organisation for budgets. The exercise involved in the operation of a system of budgetary control are:

15 89 1. Establishment of budgetary targets: Every system of control requires the setting up of a goal for achievement and, under budgetary control, targets for expenditure. are fixed for every aspect of business activity through the various functional budgets. Thus, these budgets in effect represent the starting point of budgetary control. 2. Measurement of performance: In every business activity performance is measured in terms of expenditure actually incurred thereon. But. the measurement of performance in many cases involves qualitative considerations which tend to make the exercise a little subjective. 3. Comparison of performance: The third step in the process of budgetary control is to maintain a check on actual performance by comparing the same with the budgetary targets laid down and this only provides the element of control in the entire exercise. Such a control is exercised by a supervisor

16 90 over the subordinates under his jurisdiction through various summaries and reports available to him in accordance with a system of budget reporting. 4. Initiation of corrective action: This is the last step of the budgetary control exercise which completes the control cycle. It takes the form of adapting a budgetary operation to its planned target after deviations have been sensed. Where there is no deviation either way from the target, control process is completed by the first three steps only but, where the discrepancy between planned and actual performance arises control process is not deemed to have been completed with out corrective action. TYPES OF BUDGETS: 1. ACCORDING TO TIME: The budgets can be classified into three types such as long term, short term and current budgets according to time. The long term budgets related to the period of 5 to 10 years, short term budgets 1 to 2 years and that of current budgets one month or more according to the current conditions prevailing.

17 91 2. ACCORDING TO FUNCTIONS: The budgets can be classifed into sales budget, selling & distribution cost budget, production budget, production cost budget, purchase budget, personnel budget, research budget, cash budget, plant utilisation budget, office and administration cost budget and capital budget on the basis of functions. These budgets correspond and remain co terminous with a particular function of the business. Master budget integrates all these functional budgets. 3. ACCORDING TO FLEXIBILITY: The budgets can be classifed into fixed and flexible budgets on the basis of flexibility. In the fixed budgets, the total amount of cost involved would remain constant irrespective of the level of activity. But per unit cost would change with a change in the level of activity. In the flexible budgets, per unit cost would remain the same and the total cost would change with a change in the level of activity.

18 92 4. ZERO BASE BUDGETING (ZBB); It is a new approach to budgeting. It is defined as an "operating planning and budgeting process which requires each manager to justify his entire budget in detail from scratch (hence zero base) and shifts the burden of proof to each manager to justify why he should 7 spend any money at all". This approach requires that all activities should be identified in "decision packages" which should be evaluated by systematic analysis and 8 ranked in order of importance. ZBB is a tech nique designed to revitalise budgeting. It was Pyhrr who designed its offical basic framework in 1970 and successfully developed, implemented and popularised its wider use in the private sector. He is, therefore, rightly termed as the "Father of Zero Base 7.Peter,A.Pyhrr, Zero Base Budgeting, Wiley, Newyork, Srinivasan, N.P., op.cit., p. 325.

19 93 9 Budgeting". The process of ZBB involves the following steps; a) Determination of the objectives of budgeting; b) Determination of the extent to which the ZBB is to be introduced; C) Development of decision units; d) Development of decision packages; e) Review and ranking of decision packages; and f) Preparation of budgets. Thus, ZBB is a technique whereby each programme, whether new or existing must be justified in its entirety each time a new budget is formulated. PERFORMANCE BUDGETING SYSTEM (PBS): RATIONALE OF THE PBS: In the past, commercial banks in India did not have the system of planning their business from the grass root level. However, attempts have been made by a few banks to make use of modern management tools and techniques. But 9. Maheswari, S.N., Principles of Management Accounting, Sultan Chand & Sons, 1988, p. c.62.

20 94 the exercise did not go to the extent of installing a well integrated system of Performance Budgeting. During the pre social control period and pre nationalisation period, banks plan their business in terms of fixed targets to be achieved, i.e., target oriented approach. The method followed was that the executives in the Head Office/Central Office would fix the targets for deposits after considering the various factors like the growth over a period of time, current state of the economy, future course of the economic, social and political changes. Once this exercise was over, the Head Office would issue a circular to all the Zonal/Regional offices giving a particular targeted growth rate of deposits for the next year under plan. The Regional/Zonal Managers, in turn, would pass on copies of these circulars to their Divisional Offices and Branches. The deposit plan of the branch is taken to be complete with the flow of this circular from Head Office to the Branches. Regarding advances, the commercial banks in India have been operating within the framework of short term 10 plans for the busy season and the slack season. The 10. Singh, S., Performance Budgeting for Commercial Banks in India, Macmillan, Madras, 1977, p. 1.

21 95 lending operation was considered primarily the responsibility of the Head Office and they used to have some sort of a target of lending within the constraints of the liquidity ratio. Mobilising the deposits from their command area and remitting the same to the Head Office for lending was the only work of branches. After Social Control, the demands on the banking system increased. To cope up with the aspirations of the people, adhoc targets came to be fixed for lending to agriculture, small scale industry, transport operators, self employed persons, exports, small borrowers and other priority sectors. But the branches were not given any freedom and the targets were fixed by the top management only. Thus, it was realised that each bank should have a Performance Budgeting System to translate its objectives into feasible action programmes and to ensure that such programmes are implemented and the objectives realised. In view of the defects existed in the system of fixing targets of deposits and ad hoc targets for lending to priority sectors, it has been decided to instal a well-

22 96 integrated system of Performance Budgeting by each bank at each level of management based on planning the business from the grass roots, i.e., the bank branches. HISTORICAL BACKGROUND OF THE SYSTEM: EVOLUTION: Officially, the term "Performance budget" was first coined by the HOOVER COMMISSION in 1949 when they recommended that "the whole budgetary concept of the Federal Government (USA) should be refashioned by the adoption of a budget based on functions, activities and 11 projects, and designated a Performance Budget". Since then, the form and content of Performance Budgeting have undergone considerable changes, eg., integration of accounting and budgeting functions, provision of information on cost of accomplishment and inclusion of selected productivity measures. The significance of Programme and Performance Budgeting for developing 11. Burkhead, J.,Government Budgeting, John Wiley & Sons Inc., USA, 1949, p. 135.

23 97 countries was highlighted by the United Nations 12 Organisation (UNO) in 1955 and In India, the 20th Report of the Estimates Committee ( ) of the Government of India emphasised the need for the adoption of Performance-cum-Programme Budgeting and recommended that "Performance Budgeting should be the goal which should be reached gradually and by progressive stages with out any serious budgeting dislocation especially in the case of large-scale development 13 activities". The seventy-third Report of the Estimates Committee on the preparation of Budget Estimates reiterated the need for adopting performance-cum-programme 14 estimates by the public industrial undertakings. After 12. Government Budgeting and Economic Planning in Developing Countries, UNO, New York, 1966, p th Report of the Estimates Committee ( ), 2nd Lok Sabha Secretariat, 1959, p rd Report of the Estimates Committee on Preparation of Budget Estimates of Public Undertakings and Presentation of their Annual Report and Accounts to Parliament, New Delhi, 2nd Lok Sabha, Government of India, 1960, pp. 3-4.

24 , the Working Group on Performance Budgeting set up by the Study Team on Financial Administration of the Administrative Reforms Commission (ARC) appointed by the Government of India, submitted a Report on the feasibility of the introduction of the Performance Budgeting in India. The ARC endorsed the Working Group's Report and the Government, both at the Centre and States, accepted 15 to implement it in stages. This recommendation has since been accepted and this was a milestone in the budgetary history of India. As a supplementary budget for , the Government of India submitted to parliament, 16 performance budgets for 32 of its departments. While introducing the technique of Performance Budgeting in India, it was expected that the tools for administrative decision making will be sharpened by gradually increasing the use of new managerial techniques, as aforementioned. 15. Administrative Reforms Commission, Report on Finance, Accounts and Audit, Government of India, New Delhi, 1968, p Handa,K.L., Programme and Performance Budgeting, Uppal Publishing House, New Delhi, 1979, p. 5.

25 99 PBS IN INDIA: In India, the Parliamentary form of Government provides some advantage in the implemen tation of the techniques of Programme and Performance Budgeting. But, the extent of sophistication which may be achieved in the operation of the techniques of Programme and Performance Budgeting depends on the availability of and the capacity to afford the various supporting aids like computers. It also significantly depends on the existence of an adequate information system. As remarked by M.J.K. Thavaraj: "Decision-making at the different levels of the organisation hierarchy will have to be supported by an efficient system of information and communication. A rational review of the order of priorities, allocation of resources and the structure of responsibilities will be possible only when the requisite cost and work data are 17 made available at appropriate levels of decision-making". 17. Thavaraj, M.J.K., "Movement for Performance Budgeting in India", in Readings in Performance Budgeting, M.J.K. Thavaraj and K.B. Iyer (eds.), Research Publications, New Delhi, p. 93.

26 100 Performance Budgeting offers great potentialities for management and may be profitably employed in India. The various compoments of Performacne Budgeting, and its supporting systems include the following: a) Formulation of objectives; b) Programme/activity classification; c) Norms, yardsticks and standards; d) Accounting classification; e) Management Accounting; f) Decentralised responsibility structure; g) Delegation of financial powers; and h) Reporting and review of performance. The system as introduced by Government of India and also followed by the State Governments, requires preparation of a performance budget for each agency or 18 department on the basis of its objectives and functions. The format adopted in the government for framing such a 18. Handa, R.L., op.cit., p. 222.

27 101 budget consists of four parts, viz., i) Introduction; ii) Overall Performance; Pcriyar Univ rsity e- / Librz.ry. iii) Financial Requirements; and iv) Explanation of Financial Requirements. The structure and contents of each part are indicated in the guidelines and instructions issued by the Ministry of Finance, (Budget Division) Government of India from time to time. PBS IN COMMERCIAL BANKS: Prior to the period of nationalisation of major 14 banks in July 19, 1969, banks had their business planned by the method of "targeting", wherein the top management made the decisions and the divisions and branches became "target takers". But, this "top to bottom" approach suffered from several inherent defects. As this approach did not take into account the local environment, but reflected only the desires of the top management, the targets fixed proved to be unattainable. As the banks

28 102 had the main objective as profit maximisation, very high targets were often fixed on a "do or die" basis which had failed to consider realities and social priorities. The targets fixed were also restricted to a few parameters such as deposit mobilisation for lending to a few select sectors and the like. Further, the people actually responsible for implementing the planned targets viz., grass root level personnel (Branch Managers) were not involved and considered. Both the banking industry as well as the Government felt the sheer need for involving those achievers even in the planning stage. In 1972, the Banking Commission in its Report had recommended various management tools, including the introduction of planning and budgetary control systems, in 19 order to increase the operational efficiency of the banks. Also, in 1972, the Ministry of Finance (Banking Department) of the Government of India advised the public sector banks to prepare annual plans for the year 1973, and to 19. Report of the Banking Commission, 1972, pp

29 103 take steps concurrently to introduce Performance Budgeting, with special emphasis on priority sector 20 lending. This was done in pursuance of a suggestion made at the meeting of the Regional Consultation Committee for the Northern Region, held at Chandigarh in October 1972, for accelerating the tempo of efforts to channalise credit to priority sector so that each bank can set its own targets at different levels emanating from the lowest rung of the organisation viz., branches. Further, in May 1972 and April 1973, at the top management seminars sponsored by the National Institute of Bank Mangement (NIBM), it was decided to introduce Performance Budgeting in all commercial Banks. The Productivity, Efficiency and Profitability (PEP) Committee set up by the RBI, in its Report in 1977, also stressed the need for performance budgeting in banks in the following words: "The Performance Budget helps the management to proceed along the projected goals and the 20. Singh, S., op.cit., p. 2.

30 104 performance evaluation at monthly or quarterly intervals indicates the deviation and corrective action that could 21 be initiated". Thus, in 1972, the Performance Budgeting System was at first introduced by one of the major commercial banks in the country, viz., State Bank of India for energising the tempo of efforts to channalise credit to the priority sectors. Subsequently, it was introduced in other banks also. During 1973, all the public sector banks had completed preliminary work for introducing annual planning and performance budgeting. From 1974 onwards, most of the public sector banks and some of the private sector ranks have adopted this system. At present, all the PSBs, irrespective of their size, are following the PBS in slow and steady phases, widening its scope and coverage to all divisions and branches. 21. Report of the Committee on Productivity, Efficiency and Profitability of Commercial Banks in India, RBI, 1977, pp

31 105 ORGANISATIONAL STRUCTURE OF PSBs: The organisational structure of almost all PSBs in India is line-cum-functional in nature. The line organisation of banks is either three-tier or two-tier system and the same can be observed from the chart 3.1. Chart: 3.1 THREE-TIER SYSTEM TWO-TIER SYSTEM Head Office (Managing Director/ Chairman) Head Office (Managing Director/ Chairman) Divisional Offices (Divisional Managers) Branch Offices (Branch Managers) Branch Offices (Branch Managers)

32 106 The functional organisation of the PSBs can be understood with the help of the chart 3.2. Charts 3.2 Managing Director/Chairman i General Manager, I Deputy General Manager Advances Legal Personnel 1 Assistant General Manager I Advances Legal Inspection Personnel / Manager Planning & Development 1 Deposits & Accounts I Advances Inspection Legal Chief Officers Planning& Deposits& Advances Legal Personnel Inspection Development Accounts 1 Recoveries I

33 107 OBJECTIVES OF PBS: At present all the P9Bs are following the PBS and the main objectives of the system are as follows: a) To prepare an operational business plan from the grass root level; b) To work out the financial and manpower implications of the bank; c) To enable the Branch Manager to be acquainted with the operations relating to the planning and monitoring of the performance of the branch; d) To enable the Divisional Manager to have effective control on the performance of the branches; e) To identify strength and weaknesses and to initiate correctives at all levels of management. f) To improve the involvement of different levels of management of the bank in setting up of targets; and g) To evaluate the performance and to improve the communication between different levels.

34 108 STEPS INVOLVED IN PBS AS FOLLOWED IN PSBs: The overall process of PBS as followed in PSBs in India comprises two phases. They are I. Preparation and finalisation of the Budget; and II. Review or monitoring of the Performance. I. PREPARATION AND FINALISATION OF THE BUDGET: a) ENUNCIATION OF OBJECTIVES AND HEAD OFFICE POLICY GUIDELINES: With a view to provide a perspective for detailed planning, necessary to decide broadly the direction and pace at which the bank wants to progress over a period of time. This is the function of top management which defines, the broad objectives and goals. The process of PBS commences with the top management formulating the broad business strategy and business policy guidelines after taking into consideration a number of factors viz., RBI's directives regarding monetary and credit policy, Government's banking policy and the likely changes therein, prospects of the banking industry as a whole, economic, social and political environment, etc.

35 109 The respective functional department made analysis of the aforesaid factors at the head office and this study forms the basis for evolving policy guidelines and drafting the annual business plan. The draft business plan prepared by the functional departments at the Head Office are discussed with Chairman/Managing Director and subsequently the current year's specific objectives are set up. The Head Office policy guidelines are thoroughly discussed in a conference with Divisional/Regional Manager before they are handed down to the Regional/Divisional offices and Branch offices. b) REGIONAL POLICY GUIDELINES: The next step followed by the PSBs is that of framing the regional policy guidelines to facilitate branches to prepare branch budgets. The regional policy guidelines are prepared in view of the Head Office policy guidelines and after a keen scrutiny of the regional, economic and environmental factors and the practical constraints encountered by that particular region, while throwing light on the regional priorities.

36 110 c) PREPARATION AND FINALISATION OF THE BRANCH BUDGET: A branch budget is a blueprint of what the branch would desire to do during the forthcoming year for which 22 the programmes have been drawn. It implies that the performance budget for the branch includes planning, organising and directing the efforts of the branch staff towards the achievement of the planned business. The steps involved in preparing a performance budget at the branch level are as fallows; i) Scanning the environment: The branch management is provided with the corporate and divisional policy guidelines to prepare its Performance Budget. A micro level study is conducted by the branch about the environment, competition and the potential at the local level. The concept of "Command Area" needs to be explained which only refers to the geographical areas where the branch can effectively operate. This area has to be identified in consultation with the Divisional 22. Mampilly, Paul., "Performance Budget at the Branch Level", PraJnan, Jan. 1977, 2(2), p. 267.

37 111 Manager. The identification of command area avoids duplication of financing by different branches of the same bank. Further, the command area does not restrict or prohibit operations of the branch beyond its limits. The market segmentation followed to divide the customers based on agriculture, small industries, commercial, institutional and individuals/professions, improves the ability of the management to respond quickly to the changing conditions of the market segments and to serve the needs of the distinct category of customers. Ii) Compiling `Branch Profile': In order to secure uniformity at the branch level and to find out the critical areas, a standardised format for collecting and compiling economic and environmental data may be provided. At present, each PSB is having its own format and it should standardise the format used to collect the data in order to have all the required information in a compact form, viz., Branch Environmental Data Sheet also known as 'Branch Profile' (See Appendix 3.1). The branch would prepare the Branch Profile, after conducting an impressionistic survey of the potential of each market

38 112 segment of the command area. For preparing the branch profile, the branch manager collects information from agricultural experts, chambers of commerce, the district statistical officer, Municipal/Panchayat Officials, transport operators and industrialists. iii) Preparation of Branch Draft Budget: As a next step, the branch manager prepares draft branch budget after giving due consideration to the policy guidelines from the head office and divisional office, the past performance of the branch, the command area profile, potentials existing in the command area and the expectations of the divisional office and head office. The branch manager has to plan deposits, advances, manpower, capital expenditure, profits and accordingly he prepares the draft branch budget (See Appendix-3.2) with all the components aforementioned. The draft budget would consist of annual targets which are split into quarterly/monthly targets taking into consideration the seasonal fluctuations in the frequency of transactions.

39 113 iv) Finalisation of branch budget: Each branch would * send its draft branch budget to the divisional office for review and approval.usually, there exists gap between the divisional manager's target and branch manager's target. In order to bridge the gap, a meeting between the branch managers and divisional managers is held to finalise the branch targets in accordance with the corporate targets and consequently, the revision, expansion and finalisation of the branch budget are thoroughly discussed taking into account the past performance, potentials suggested by the command area of the branches, environmental conditions, etc. As rightly pointed out by A.S. Puri, "An ideal settlement process recognises the planning gaps that usually exist between branch manager and regional manager. It calls for a free and frank dialogue between the regional manager and the individual branch managers with a clear awareness, on the part of both, of the constraints under which they have to work and of the goals to be

40 reached". Ultimately, on the basis of revised branch budgets, the branch managers prepare the final branch budgets. (See Appendix 3.3). d) PREPARATION OF THE DIVISIONAL DRAFT BUDGET: After the receipt of final branch budget from the respective branch managers, the divisional manager consolidates all those branch budgets for preparing divisional draft budget. While preparing the divisional draft budget, apart from the consolidation of the branch budgets, the divisional manager includes the estimates of administrative cost for maintaining the divisional office. e) FINALISATION OF DIVISIONAL BUDGET: The divisional draft budgets prepared by the divisional managers are sent to the head office. The gap may exist between the divisional budgets and the head 23. Puri, A.S., "Performance Budgeting System", IBA Bulletin, November 1979, p. 10.

41 115 office budgets. In order to correct this gap, a conference is held, wherein the divisional managers have a thorough discussion with the chairman/managing director and the chief officers of the functional departments at the head office. Further, during the course of this conference, the divisional budgets are modified/revised in accordance with the changed directives issued by the RBI. This process of finalising the divisional budget is called "Macro level Matching" as it matches the head office desires with the divisional potentials, strengths and weaknesses, and opportunities and threats. Ultimately, the divisional managers prepare the final divisional budgets on the basis of expansion/reductions/ modifications discussed in the course of conference. f) CORPORATE/BANK LEVEL BUDGET: The finalised divisional budgets sent by the divisional managers are first consolidated and the performance budget of the bank as a whole is prepared after taking into account the administrative cost in toto and income received from investments. The Planning and

42 116 Development Department at the Head Office prepares this consolidated performance budget of the bank. The budget is analysed critically by the same department and its observations and comments are annexed to the budget. The budget so analysed is then forwarded to the Board of Directors/top management for necessary consideration, review and approval. After scrutiny, the board may suggest any modification and the same is introduced in the bank budget. Similar changes are accommodated in the divisional and branch budgets. This completes the exercise of preparing the Performance Budget of the bank as a whole. (See Appendix 3.4). II.REVIEW OF PERFORMANCE: The second and the most important phase of the PBS is to review periodically the performance in relation to the budget and to analyse the variances observed during the period. The branch managers are required to send monthly/quarterly Performance Review Reports (See appendix-3.5) to the controlling division, which, in turn, consolidates these reports and send the Performance Report

43 117 of the division to the head office. In these reports the branch managers explain the identified areas needed to be streamlined, causes for the variations and the correctives that could be taken, to monitor the performance of the bank along the desired lines. Usually, the review of performance of branches would be made in the review meeting of the branch managers with the divisional managers. Likewise, the review of the performance of the divisions takes place in a conference of the divisional managers with the chairman/ managing director and the chief officers of the functional departments at the head office. At these review meetings, the required correctives are decided upon, to match the head office aspirations with the actual progress made. The use of Performance Review Reports at all levels depends on its timely compilation, submission and analysis. The importance of time factor is felt at the branch level where the branch management has direct control. Further, timely compilation and submission of Branch Performance Review Reports also facilitate immediate correctives at the Divisional level.

44 118 Another aspect that decides the efficacy of Performance Review Report is the approach with which it is studied and analysed at various levels. The performance review report analyst should note that the Performance Review is not a fault finding exercise and it is basically a self evaluation exercise aimed at identifying the controllable factors and drawing upon the findings to decide on a future course of action. These reports can also be helpful to find out some of the slips in the policy decisions and to highlight the changes required to be effected in the policy to achieve the predetermined goals without strains. The visits made by the Divisional Office executives and Head Office executives to the Branches also have considerable impact on the performance of the branches. (See Appendix 3.6 and 3.7) The technique of Performance Budgeting has an important role to play in planning the business of the bank. The introduction of the system and its implementation presupposes certain basic infrastructural facilities which obviously do not exist up to the extent

45 119 required, in the PSBs. The system also demands systematic analysis of the economic conditions and the relevant and accurate data which are not easily available. The resistance from the conservative bankers and co ordination between various levels may also pose a problem. However, all these problems remain for a short period and can be tackled with a careful exercise by the people involved. According to Sri. R.N.Malhotra, Former Governor of RBI, "A bank must have a satisfactory growth in its deposits. It should meet the prescribed reserve requirements and fulfil the criteria for lending to the priority sectors. Having fulfilled these requirements, if a bank shows good profitability after making requisite provisions for bad and doubtful debts, its performance 24 can be regarded as creditable". Thus, the PBS would certainly be instrumental in planning and effectively monitoring the operations of the modern banks, which grow in size vigorously. 24. Excerpts from speech delivered by Sri.R.N.Malhotra, Former Governor, RBI on August 7, 1987 at Tenth Public Sector Bank Economists Meet.