CHAPTER V FINANCIAL PERFORMANCE OF IDBI 5.1 Introduction 5.2 Resource Mobilisation 5.3 Analysis of Profitability 5.4 Ratio Analysis 5.5 Conclusion
23 5.1 INTRODUCTION After analysing the Operational performance of IDBI, the researcher has made an attempt to assess its financial performance from three points of view. They include: 1) Resource Mobilisation 2) Profitability 3) Analysis based on ratios. 5.2 RESOURCE MOBILISATION The Development Banks are expected to play a significant role in resource mobilisation in developing economics. Further, Development Finance Institutions (DFJ) are mainly meant to provide not the total finance required for development, but such marginal amount as would fill the gap in a given situation. Their role is that of a catalyst which serves to mobilise much larger capital from other sources." In an economy like ours, with 'indicative planning' and with a fairly significant private sector, development banks have a very important part to play.2 1. H.T. Paroksh, "Role of Development Banks in Asia", Commerce, November 1963, p.779. 2. T.V. Sethiiraman, Institutional Financing of Economic Development in India, Vikas Publications, Delhi, 197, p.32.
231 Hence one of the main tasks of Development bank is to mobilise adequate resources and deploy them among various investment channels according to plan priorities of the economy. IDBI which is one of the major development banks, raises finance through various sources. Mobilisation of resources becomes all the more complicated in case of IDBI which has to function within a regulated frame work. Poor and inadequate resources are bound to affect the profitability of IDBI in discharge of its responsibilities at regional levels. Hence, this part is meant to study the pattern of resource mobilisation by IDBI, under the following heads. i) Trends in resource structure: an aggregate view; ii) Trends in equity structure; iii) Trends in Debt Structure. 5.2.1 Trends in Resource Structure: An Aggregate View Data pertaining to the trends in resource structure of IDBI for the 1- year period, from 1987-88 to 1996-97 is furnished in Table 5.1.
I L) QN In N t N N 1 'r! H r9 cl!! 232 C'j ri 4 Nc N O N.- c CD 2 cq In In rn C\ ON j.. C\,N ' CN. _ N N - -1- -t N* - N N ell oc In r -r r In In In In CD o '2 - In In In oc ci N \ - - -f - -r _ r ' -re 2 9 Rt In ON - d \ c '- - t N N CIO In Do 6 cc ( I 1 C) If C\ - N - -- _ r- U 2 6 _ u cz H I).. V C#D c. Cl) U)cd ci) C) CO CO C) L I-. ) CD cn I-. ) C.) ) l- U + V cz V r C).,- EL C) - 2c ) DO-
233 The data provided in Table 5.1 would reveal the following: The Bank has raised its required funds mainly through debt. This is evident from the fact that, on an average of around 9 per cent of the resources is raised through debt and only 1 per cent of the resources is raised through equity. A major component of resource structure namely debt, has come down from 91.39 per cent in 1987-88 to 85.67 per cent in 1996-97. On the aggregate, the share of debt in total resources has also decreased by 5.72 per cent during the 1 -year period. 5.2.2 Trends in Owned Funds Structure Owned funds in the case of IDBI mainly consist of paid up equity share capital, reserve and surplus. The data showing trends in the owned funds structure of the Bank for the study period are provided in Table 5.2.
234 TABLE 5.2 Trends in Owned Funds Structure (Rs. in Crores) ('3,) As a Year Owned Funds Equity Share Reserve (5) As a Capital Percentage of and Percentage (2) Surplus (1) (2) (3) (4) (5) (6) 1987-88 1233.86 495. 4.12 738.86 59.88 1988-89 142.68 54. 38.1 88.68 61.99 1989-9 1747.51 637. 36.45 111.51 63.55 199-91 283.9 73. 33.75 138.9 66.25 1991-92 256.96 753. 3.4 1753.96 69.96 1992-93 2871.93 753. 26.22 2118.93 73.78 1993-94 3354.1 753. 22.45 261.1 77.55 1994-95 3742.1 5. 13.36 3242.1 86.64 1995-96 6334.4 648.58 1.24 5685.82 89.76 1996-97 7213.36 659.35 9.14 6554.1 9.86 rr r i - -- - 1,,. MaLIsucS; 1-UDIlsflecl by IUBI, 1996-97, p.121. made: From the data provided in the Table 5.2 the following observations are The share capital as percentage of owned funds has gradually declined from 4.12 per cent in 1987-88 to 9.14 per cent in 1996-97 indicating the dominance of reserve and surplus in the owners fund.
235 The proportion of reserves and surplus in owned funds capital had increased from 59.88 per cent in 1987-'88 to 9.86 per cent in 1996297. Tn July 1995, the Bank had its first public issue of shares. Hence, in the year 1995-96 there was an increase of Rs.148.58 crores in share capital over the year 1994-95. In the year 1996-97 there was a decline in the amount of share capital. 5.2.2 Trends in Debt Structure It is noted from the analysis of aggregate trends in resource structure of IDBI that the Bank has mainly depended on debt in the mobilisation of resources to meet its operational requirements. High dependence on debt, generally, makes a bank more conservative, less innovative and risk-averse in its lending operations. Moreover, the poor equity base of the bank does not allow it to take up the operations of underwriting and subscribing to the equity capital of industrial concerns on a larger scale. Against this back drop, an attempt is made here to analyse the trends in debt structure. The relevant data to examine the trends in debt structure of IDBI are furnished in Table 5.3.
H... 236 cc C71 In Ic ON C11 en rq -T C; CD In oc t Zg 'C CN In N c' N ' r C C CD N N C' N ri ri 'C C N -r : C' r :1: '- C - In r i -. C) c' \NrS C' C'a Cf r'i -1- In N r'i -7- 'Cci -- C' C : CN N - kn In N ri Irn In 'C t N / N fl 'C In cf) tn (ID kn In Q C (l oo Z C C CC ciz r C' N,ci 'C In, C C' N ci C) 'c 'C M. N 'C ci 'l r fl C 'C N N ') N ' C' ') N C' -i- C\N'Cd 'C CA - rs? N r. m C) C' N CD 3In C N ' C N N 'C 'C. N 'C c C Cci N N NC) '. N _C' C'? C In C' c In 'f. In CS -t N F3 ri C' C'N - C U 1) - - IC -i ( C).- Oo U a N r-
237 It can be observed from the Table 5.3 that issue of rupee bonds, borrowings from RBI, foreign currency borrowing, and deposits/bonds are the four major sources of debt on which the bank primarily depends for its resource requirements. Next to these resources, the bank is constantly depending on current liabilities and borrowings from the Government of India. The other sources of debt to the Bank include borrowings through ulisecured bonds, borrowings through capital bonds, borrowings from investment institutions and borrowings from other resources. It can be noted from Table 5.3 that the proportion of rupee bonds in total debt has shown consistently a declining trends (except in the year 199-91) during the study period. Its proportion in total debt has declined from 44.17 per cent in 1987-88 to 23. per cent in 1996-97. But it is interesting to note that the issue of rupee bonds shows an increasing trend during the study period. It was Rs.578452 lakhs during 1987-88 whereas it was Rs.991787 lakhs during 1996-97. During the year 1994-95, there were tight liquidity conditions and the competition arising from the deregulation of interest rates. Hence the Bank raised substantial resource from the market to meet its fund
r equirements Bulk of the rupee borrowings was raised from the market 238 through issue of various innovative instruments. Two new instruments the Omni-bond and Focus 1995 1 were introduced during the year 1994-95 The former is an inv entor-friendly instrument with maturity and return, within certain given range, dovetailed to investor's needs, while the latter is a fixed rate, seven-year maturity instrument with a call and put option at the end of the third and the fifth year. During the year 1995-96, the Bank had made another innovative instruments called "Flexi bonds". It was unsecured and redeemable bonds. The feature of the bond was the accent on raising resources from retail investors, which is expected to be a consistent feature in future resource raising. The second source of debt instrument is foreign currency borrowing. Its proportion to total debt had increased from 6.95 per cent in 1987-88 to 21.9 per cent in 1991-92, and thereafter it had marginally decreased to 2.85 per cent in 1992-93. Then there were fluctuations during the period from 1992-93 to 1996-97.
239 It can be seen from the Table that the proportion of borrowings from RBI in total debt had shown consistently a declining trend during the study period. Its proportion in total debt had declined from 24.52 per cent in 1987-88 to 6.22 per cent in 1996-97. Further it is found that from the year 199-91 onwards the borrowings from RBI to total borrowings were Continuously declining. Regarding Deposits/Bonds there was a continuous increase in the proportion of its deposits to total debt. Its proportion in total debt had increased from 7.24 per cent in 1987-'88 to 24.19 per cent in 1996-97. The other Source of debt is other liabilities which include current liabilities and provisions. Its proportion to total debt showed a fluctuating trend during the study period. Borrowing from Government of India was another source of debt. Its proportion to total debt was also fluctuating. The Bank had entered for the first time into the capital markets during 1991-92 with the issue of three types of unsecured bonds namely Deep
24 Discount Bonds, Regular Return Bonds and Double Option Bonds. During the years 1992-93 and 1993-94 it had launched another 3 types of unsecured bonds namely Term Discount Bonds, Step Discount Bonds and Regular Return Bonds. These bonds were given AAA rating by the credit Rating Infonnatjon Services of India Limited. (CRISIL), indicating highest safety with regard to timely payment of interest and principal. Because of this, its proportion to total debt was continuously increasing. Its proportion to total debt in 1991-92 was 1.89 per cent whereas it was 1.31 per cent in 1996-.'97. Further the total amounts raised through unsecured bonds were continuously increasing. Borrowing through unsecured bonds in 1991-92 was Rs.4846 lakhs but it was Rs.444571 lakhs in 1996-97. Regarding capital bonds, its proportion to total debt in 1987-88 was 1.93 per cent and it was only.1 per cent in 1996-97. During 1995-96 capital bonds were nil. The other sources of debt are borrowings from investment institutions and borrowings from other sources. The Bank did not find them as better
241 source of funds. As a result their proportion in total debt was only 1.5 per cent of the total debt. From the foregoing analysis of trends in debt structure of 1DB! it is seen that Rupee bonds constituted the major source of debt to the bank, followed by foreign currency borrowings, borrowings from RBI and deposits/bonds. They together account for 79.41 per cent of the total debt leaving the remaining 2.59 per cent to be constituted by various other sources of debt. The Bank is now actually taking steps, to increase public participation. The Bank should also make further attempts to attract private savings from the general public. 5.3 ANALYSIS OF PROFITABILITY 'Profitability' denotes the profit or surplus generating capacity of an enterprise and it is the net result of the different policies and practices followed by the enterprise from time to time. Profitability of an industry at macro-level, and that of an individual enterprise at micro-level, have obviously a direct bearing on their growth.. Profitabiliy induces optimum buoyancy in the entrepreneurs, managers, and prospective investors and
242 makes possible to raise funds on more favourable terms. An enterprie must, therefore, earn profits alteast to survive and grow, over a long period of time in the economic and competitive world. The word, 'profit' or 'Profitability' is more often than not, looked upon as a word of less relevance especially in the context of public sector corporations since it is wrongly presumed to be the maximisation of profits irrespective of social consequences. Hanson rightly stated that "Profit making on the part of public sector enterprises is good only if the enterprise is able to make its profits as a result of its efficiency and not through exploiting a monopoly position-. 3 It is also an unquestionable fact that every economic entity must generate enough profits or surplus to sustain its operations and to be able to serve the society in an efficient manner and also to contribute towards the social overheads for the welfare of the society, at large. Therefore, profitability in IDBI has been a necessity, if not an operational goal, and it is considered to be the best index of financial efficiency. 3. A.H. Hanson, "Public enterprises and Economic Development" Quoted by Lal and S.N.Srivastava in "Profit Strategy in Public Sector", Lok Udyog, Vol-111, No.2, February 197, p.32.
243 Many a time, the significance of improving the profitability in IDBI has been emphasised in the context of excessive reliance on borrowings. The Pressing short term goal, in respect of resource management that JDBJ is adderessing itself to, is that its revenue income, computed on cash basis, should yield a reasonable surplus after meeting all revenue expenses and that the recovery of principal dues should be large enough to finance the outgo of funds for debt anlortisation. 4 Profitability is thus, an area in which IDBI is expected to perform better in order to overcome the resource crisis in which they are caught because of increasing debt-service costs, and administrative overheads. It is now proposed to examine the Performance of JIDBI in terms of profitability during the period under review. To analyse the profitability of an enterprise many useful ratios are developed and they are generally referred to as 'profitability ratios'. 4. Report on Development Banking in India, Published by IDBI, 1979-8, p.44.
244 Profitability ratios are said to be the best measure of overall efficiency of an enterprise because they help in comparing return of value over and above the values put in the business with turnover or service carried on by the enterprise through its deployed assets.' These profitability ratios are generally computed in relation to 1) sales and 2) investment. To assess the profitability of IDBJ; the following two conventional ratios are applied: 1. Profit after tax to net-worth, 2. Profit after tax to total assets. 5.3.1 Profit After Tax (PAT) to Net-Worth Profit after tax to net-worth is measured by dividing the profit after tax by the net-worth. This ratio is an indicator of performance which explains the profitability in relation to net-worth of IDBI. 5. R.M. Srivastava, Fundamentals of Corporation Finance, Wisdom Publications, Allahabad, 1979, p.26.
245 TABLE 5.4 Profit After Tax to Networth (Rs. in Crores' Year Profit After Tax Net Worth Ratio 1988 29. 1233.86 16.94 1989 2.6 142.68 14.12 199 294.4 1747.51 16.85 1991 4.3 283.9 19.22 1992 474.2 256.96 18.92 1993 486.9 2871.93 16.95 1994 61.8 3354.1 18.21 1995 796.1 3742.1 21.27 1996 17.3 6334.4 15.9 1997 1144.2 7213.36 15.86 Source: IDBT's Operational Statistics Published by 1DB! 1996-97, pp. 121 and 122. The ratio of Profit after tax to net-worth varied between 14.12 per cent to 21.27 per cent during the study period. During the last two years, the ratios were only about 16 per cent. It was due to the increase in net-worth.
246 5.3.2 Profit After Tax to Total Assets This ratio is yet another indicator to analyse the profitability of the bank. It is measured by dividing profit after tax by the total assets of the Bank. They are presented in Table 5.5. TABLE 5.5 Profit After Tax to Total Assets (Rs. in Crores Year Profit After Tax lb/al Assets Ratio 1988 29. 14329.18 1.46 1989 2.6 17139.2 1.17 199 294.4 2418.54 1.44 1991 4.3 22768.4 1.76 1992 474.2 2841.25 1.69 1993 486.9 3183.14 1.57 1994 61.8 34588.31 1.77 1995 796.1 38161.51 2.9 1996 17.3 44371.56 2.27 1997 1144.2 5328.89 2.27 Source: IDBI's Operational Statistics Published by IDBI 1996-97, pp.] 2 and 122.
247 The Table 5.5 reveals that the ratio of profit after tax to total assets varied from 1.17 per cent to 2.27 per cent. It had steadily increased from 1.57 per cent in 1993-94 to 2.27 per cent in 1995-96. The PAT to total assets ratio in 1996-9.7 was more or less at the same level in the previous year. For a developmental Bank, like IDBI, the analysis of its profitability based on conventional ratios alone may not be an appropriate exercise. As such an attempt is made to examine its profitability with three critical factors/ratios, namely, Profit Margin, Asset Utilisation and Equity Multiplier. This profitability model is referred to as Return on Owned Funds Model, precisely called here after as ROOF Model of profitability. It can be expressed as follows: ROOF PMxAUxEM Where, PM = Profit Margin; AU = Asset Utilisation; EM = Equity Multiplier; and ROOF = Return on owned Funds.
248 The ROOF Model measures the profitability of the bank in terms of return on owned funds or net worth. The return on owned funds is considered to be an appropriate measure of the profitability in the context of IDBI, since, they are wider obligation to pay minimum guaranteed rate of dividend to the shareholders The ROOF model of profitability implies that the profitability of the bank depends on surplus made for every rupee of income generated by the assets, the efficiency in utilisation of assets in the generation of income, and the extent of equity multiplied into operating assets. It therefore, states that the return on owned funds is the end result of three critical factors, namely profit margin, asset utilisation, and equity multiplier. Any change in these factors will bring a change in the ROOF. The model helps to analyse the influence of these factors on profitability of the bank. It also aids in tracing out the weak-spots in the improvement of profitability over a period of time. These factors are again briefly explained below: 5.3.3 Profit Margin The profit margin is a modified version of net profit to sales ratio in the context of 1DB 1. it is measured by dividing the amount of net profit after tax
249 by the amount of gross total income generated by the Bank during an accounting year. It explains the amount of net profit made from every rupee of income generated from the assets utiised by the Bank. Higher the profit margin, the higher the profitability of the Bank in relation to its total income. The details showing the calculation of profit margin are shown in Table 5.6. TABLE 5.6 Computation of Profit Margin (Rs. in Lakhs) Year Profit After Taxes Gross Total Profit After Tax to Income Gross Total Income Percentage 1987-88 296 113528 18.41 1988-89 262 1463 19.28 1989-9 29437 167888 17.53 199-91 426 24681 19.56 1991-92 47488 25138 18.9 1992-93 4869 31428 16.15 1993-94 6177 358447 17.4 1994-95 7967 49282 19.45 1995-96 1728 51484 2.9 1996-97 114417 62662 18.99 Source: IDBI's Operational Statistics, Published by IDBI, p.122.
25 It may be seen from the Table 5.6 that ratio of profit margin has shown wide flucatatjons It can be noted that the ratio was good during 1987-881 1988-89, 199-91, 1991-92, 1994-95 1 1995-96 and 1996-97, varying between 18 per cent and 2 per cent. It precisely suggests relatively, a better performance of the Bank in terms of earning of net profits during these years. In the year 1992-93 1 the profit margin was only around 16 per cent. 5.3.4 Asset Utilisation Index Effective utilisation of assets ensures better operation results in case of any financial institution. Utilisation of assets is generally measured in terms of amount of turnover achieved or income generated from the Utilisation of the assets in the operation of a financial institution. Based on this understanding, to know the operational efficiency of IDBI, an Index, namely, 'Asset Utilisation index' (AUI) was constructed. The AUI is expressed as follows: Where, la, la la 1 AUI= Wa 1 + Wa2+_ - WOa A1 A2 A OA la = Income generated from an Asset. Value of an asset.
251 Wa Weiglitage given to an asset, being its proportion to the total value of assets. 1 = Miscellaneous Income, OA = Value of miscellaneous assets, and (A l = Loans and advances; A 2 Bills discounting A3 = Investment; A4 Deposits with Banks; and A 5 = Consideration receivable from SIDBI). It is noted from the above equation that the AUI is measured based on the incomes earned from the utilisation of various assets and the proportion of those assets to the total assets. In other words, it is the weighted average of the incomes generated from the utilisation of different assets of the bank. The value of the Index so arrived indicates the efficiency of the Bank in the utilisation of assets in its operations. A higher value of Index means a higher efficiency in utilisation of assets by the Bank. The Index also helps to find out the assets which are effectively used in the business, largely contributing to the income of the Bank. The figures relating to the calculation of AUI are furnished in Table 5.7.
252 - \O ( C' Q r o C' N C' 'o '1 N 'r r- C\ C14 11 2 ± V tr C' co N N N N I I I ' (1 - N N - Ci C ra Q tf' NC14 N cn N v- tr N 1- N N CD N N O N- '- C' C' C C C ' C' C' N N ' ' '- - 1 ' 't tr N II ' NO ' O >' -o C/) (I) U I f ' ON CO ' ' tf' -z- ' N r N 'r C ' N 4-. 1 ' Lr, m Ln N N ' 1 ' N - ' ' r ' If) If) If) \o ' N CO ' N r 'l tf) 1 r- ' C' C' C' C' C' C' C' C' ON C' ' ' ' ' 1) U -a rj)
253 It may be noted from Table 5.7 that the value of AUT steadily increased from 7.956 in 1988 to 11.987 in 1997 except in the year 1992. The trend in AUT suggests that the efficiency of the bank in utilisation of assets has shown a steady improvement. 5.3.5 Equity Multiplier Equity Multiplier (EM) is the index of efficiency used to examine the efficiency of the Bank in resource mobilisation. It reveals the Bank's efficiency in resource management from the point of view of size. It is calculated by dividing the total operating assets by the amount of equity funds or net worth of the Bank. It precisely indicates the efficiency of the Bank in multiplying its equity into total operating assets. As such the higher the value of multiplier the higher the efficiency, and the lower the value, the lower the efficiency in the use of equity funds. Equity multiplier is measured in the following manner: Where, EM = (TONE) TOA = Total Operating Assets:
254 E = Equity capital or net worth and EM = Equity Multiplier. To calculate the value of Equity Multiplier, the net total assets are considered the total operating assets and they are divided by the amount of equity funds consisting of paid-up share capital and reserves. The data relating to Equity Multiplier are furnished in Table 5.8.
255 N S.r (N 'o CD lr ON N 't - SCD m O S (N (N -3, t (N N- d ( (fl N C N- \C n in c -c- C) Q\ (fl C) m N N N C) (fl C \C in in C) Q (N C) N- N in C) (N N E ) CD \ C) C) C) C) t (.-) ) C) N C) N- - (N N (N r I(j N C N f C C (N ) C) C) C) C) N It S N > C \O O rfl ) S N (fl z a) -j (J) I- ca a) cr1 a) oel - ocn o
256 It can be seen frorn Table 5.8 that Equity Multiplier slowly declined during the study period particularly after 1992. The value of EM declined from 11.613 in 1987-88 to 6.977 by the end of March, 1997 and it indicates that the efficiency of the Bank in the use of equity funds had declined during the study period. 5.3.6 Roof Model Of Profitability The combined effect of the above three critical factors implies that a minimum amount of equity funds, should be multiplied into a larger amount of total operating assets, and their effective utilisation has to be assured in the operations to generate maximum income, and lead to a maximum net profit after all commitments, in order to show a higher return on owned funds. Any adverse change in these factors may adversely affect the profitability of the Bank. After having noted the underlying principles of the Roof Model of profitability, it is now proposed to examine the profitability of the Bank during the period under study.
257 Table 5.9 furnishes the data regarding the three critical factors, namely, profit margin, asset utilisation and equity multiplier and the resultant values of the Roof for the study period. TABLE 5.9 Roof Model of Prnfifflh;I;t, Year Profit Margin Asset (%) Utilisation ('9'o,) Equity RoofPMx Multiplier AU x EM () 1988 18.41 7.956 11.613 17.1 1989 19.28 6.12 12.64 14.19 199 17.53 8.99 11.684 16.59 1991 19.56 9.71 1.93 19.39 1992 18.9 8.996 11.185 19.2 1993 16.15 9.566 1.823 16.72 1994 17.4 1.394 1.312 18.26 1995 19.45 1.622 1.198 21.7 1996 2.9 11.265 7.5 15.85 1997 18.99 11.987 6.977 15.88 Source: Tables 5.6, 5.7 and 5.8.
258 An analysis of the table would reveal the following: The profitability Positi on of the Bank was good during 1991, 1992 and 1995 with 19 per cent. A further analysis of the three critical factors, viz profit margin, asset utilisation index and equity multiplier, reveals that all the three factors have shown growth during 1991, 1992 and 1995 and hence the Roof increased at a faster rate during this period. During the year 1989 because of the decrease of Asset Utilisation Index, the value of the Roof had fallen to the lowest lever of 14.19 per cent. 5.4 RATIO ANALYSIS Ratio analysis is a powerful tool of financial analysis. A ratio is "The indicated quotient of mathematical expression and a relationship between two or more things-6. To evaluate the financial conditions and performance of the Bank, ratios are employed. The performance of a bank is evaluated by comparing the present ratios with the past ratios. When financial ratios over 6. F.L. Man and L. Marriam Websters New Collegiate Dictionary, Merriam - Webster Inc., Publishers, Massachetis, U.S.A., 1977, p.958.
259 the period of time are compared, it gives an indication of the direction of change and reflects whether the finn's financial position and performance have improved, deteriorated or remained constant over a time. Here only current ratios are compared with past ratios. To critically assess and ascertain the efficiency of the Bank, the following ratios were employed: 1. Growth in Assets 2. Capital Adequacy Ratio 3. Debt-equity Ratio 5.4.1 Growth in Assets The rate of growth in total assets is one of the selected indicators which indicates the performance of the Bank in expanding its size of business. It is presented in Table 5.1.
26 TABLE 5.1 Growth in Act Year Assets J?jnLakhs Rate of Growth jn IAssets (% 1987-88 1432918 -- 1988-89 171392 19.61 1989-9 241854 19.13 199-91 227684 11.51 1991-92 284125 23.16 1992-93 31839 1.85 1993-94 3458831 11.28 1994-95 3816151 1.33 1995-96 4437156 16.27 1996-97 532889 13.43 S uperational Statistics", Published by IDBI, p. 12. The average annual growth in assets of IDBI has been around 15 per cent as a whole during the study period. IDBI had wide fluctuations in growth rate of its assets. It had registered a better growth rate in 1991-92 and a lower growth rate in 1994-95. From these observations, it is clear that the performance of the bank in terms of growth in assets was satisfactory.
261 5.4.1.1 Asset Quality As the Balance Sheet of a bank is to reflect actual financial health of that bank, there has to be a proper system of recognition of income classification of assets and provisioning for bad debts on a prudential basis. The Narashimhan Committee which was appointed to identify the causes for the deterioration in the financial health of the banking system had pointed out certain suggestions regarding adoption by banks and financial institutions of capital adequacy norms and uniform accounting practices particularly with regard to income recognition and provisions against doubtful debts. it was implemented in April 1992. The Narashimhan Committee recommended that a policy of, 7 Income-recognition should be objective and based on record of recovery rather than on any subjective consideration, that classification of assets of banks should be done on the basis of objective criteria which would ensure a uniform and consistent application of the norms, and that provisioning should be made on the basis of classification of assets into 7. Reserve Bank of India Bulletin (Supplement), Published by R & D, RBI, January 1993, p.54.
262 different categories. The banks are required to classify the assets into four broad groups, namely, 1. Standard Assets 2. Sub-standard Assets 3. Doubtful assets and 4. Loss Assets On the above basis IDBI had classified the assets from the year 1992293. Their performance is presented in Table 5.11. TABLE 5.11 Classification of Assets (in Percentage) C1assJicaiioiz 1992-93 1993-94 1994-95 1995-96 1996-9 7 Standard 92.5 93 92.2 9.6 89.7 Assets Sub-standard 3.1 5 4.1 6.4 7. Assets Doubtful 4.3 2 3.7 3. 3.2 Loss Assets.1 - - - 1. 1 1. 1. 1. Source: Annual Reports of IDBI, from 1992-93 to 1996-97.
263 The Table 5.11 reveals that during 1992-93, the non-perfonning assets which consisted of Sub-standard assets, Doubtful assets and Loss assets of IDBI was 7.5 per cent. Only in 1992-93, there was.1 per cent loss assets. In 1993-94, the non-performing Assets of IDBI was 7 per cent whereas in 1994-951) it was 7.8 per cent., In 1995-96 the non-performing assets was 9.4 per cent. It was slightly 1.6 per cent higher than in the year 1994-95. The rise in the level of non-performing assets is mainly due to the revision in the tightened guidelines asset classification of IDBI. But the non-performing assets are adequately covered by the provisions made by the bank. The nonperforming assets of IDBI in 1996-97 were further increased to 1.3 per cent. The marginal deterioration in asset quality was due to serious liquidity problems faced by units in certain industry segments oil of sluggish industrial conditions. But the Bank had made full provisions/write-off in respect of all its non-performing assets as per RBI norms. From the above observations, it is clear that the Bank has more performing assets. Even for non-performing assets also, necessary provisions have been made.
264 5.4.1.2 Asset Concentration For managing the risks inherent in long-term lending, it has been the Bank's policy to spread its assistance over different industry/promoter groups. According to the norms for asset concentration followed by the Bank, exposure to any single company is kept below 25 per cent of the bank's net-worth, while exposure to a single "business group" is kept within 5 per cent of the bank's net-worth and total exposure to an industry is maintained within 15 per cent of the bank's outstanding portfolio. The asset concentration was kept well within the prudential norms mentioned above from 1992-93 to 1994-95. But in 1995-96, as against the above norms, the largest exposure to any single company formed 9.6 per cent and to a single business group formed 13.9 per cent of Bank's net worth. Further, the Bank's exposure to its ten largest borrowers fornied 1.5 per cent of its portfolio, while its exposure to the top ten business groups formed 13.4 per cent of its portfolio. The Bank's
265 exposure to an industry was also well below the norm of 15 per cent of its portfolio. During 1996-97, the larger exposure to any single company formed 9.6 per cent and to a single business group 15.6 per cent of the Bank's net-worth. The Bank's exposure to its ten larger borrowers formed 13.3 per cent of its portfolio, while its exposure to the top ten business groups constituted 19.5 per cent of is portfolio. Further the Bank's exposure to an industry was also well below the norm of 15 per cent of its portfolio. 5.4.2 Capital Adequacy Ratio In order to strengthen the capital base of banks, in the light of the Basle Committee frame work on capital adequacy norms and the recommendation of the Narasimbam Committee, the Reserve Bank, introduced in April 1992, a risk-weighted assets ratio systeni as the basis for assessment of capital for banks (including foreign banks) in India as a capital adequacy measure. Under the proposed system, the balance sheet assets, non-funded items and other off - balance sheet exposures, were assigned weights according to the prescried risk weights and banks had to maintain ail unimpaired minimum
266 capital funds equivalent to the prescribed ratio on the aggregate of the riskweighted assets and other exposures on an ongoing basis. Indian banks with branches abroad were expected to achieve the norm of 8 per cent, as early as possible and in any case by March 31, 1994. Foreign banks operating in India had to achieve this norm by March 31,1993. Other banks had to achieve a capital adequacy norm of 4 per cent (Tier I or core capital having been set at not less than 5 per cent of the total capital) by March 31, 1993 and the 8 per cent norm by March 31 J 996.8 The total of Tier II elements was limited to a maximum of 1 per cent of total of Tier I elements for the purpose of compliance with the norms. The norm was extended upto 31 March 1997. The capital adequacy ratio of IDBI is presented in Table 5.12. 8. Reserve Bank of India Bulletin (Supplement), Published by R & D, RBI, January 1993, p.54.
267 TABLE 5.12 Capital Adequacy Ratio (in Percentage) Year TJEJ?-J Iota! 1993-94 11.2 14.1 1994-95 1.4 12.4 1995-96 15.1 15.9 1996-97 14.7 14.7 Source: [DBI, Annual Report, 1996-97, p.1. It has been stipulated by RBI that Financial Institutions should achieve a minimum capital adequacy ratio of 4 per cent by March 1993 and 8 per cent by March 1996. The Table 5.12 shows that the bank's capital adequacy ratio as on March 31, 1994 was 14.1 per cent which was already above the norm prescribed by RBI. In the year 1994-95, also the Bank's capital adequacy continued to be comfortable, despite capital restructuring effected in October 1994. The Capital Adequacy Ratio (CAR) as on March 31, 1995 was 12.4 per cent including Tier 1 ratio at 1.4 per cent as against the RBI stipulation of 4 per cent for Tier I and 8 per cent for the total (CAR).
268 The Bank's Capital Adequacy improved significantly during 1995-96 mainly due to the inflow of funds through its equity issue. The Capital Adequacy Ratio (CAR) as on March 31, 1996 was 15.9 per cent, (12.4% in 1994-95), while the Tier I Ratio stood at 15.1 per cent (1.4% in 1994-95), as against the RBI stipulation of 4 per cent for Tier I and 8 per cent for total Capital Adequacy Ratio. The Bank continued to maintain sound Capital Adequacy Ratio (CAR) based on the calculation of risk-weighted assets as per RBI norms. The CAR as at the end of March 1997 1 was 14.7 per cent (15.9% in 1995-96), while the Tier I CAR also worked out to 14.7 per cent (15.1% in 1995-96), against the RBI stipulation of 8 per cent of total CAR and 4 per cent for Tier I CAR. From the foregoing analysis, it is observed that the Bank had sound Capital Adequacy Ratio as against the RBI stipulation. 5.4.3 Debt-Equity Ratio While discussing the sources of finance of IDBI, there is a pertinant question about the limits prescribable regarding the extent to which the banks can raise funds through debt.
269 As a result of convention or statutory obligation, commercial banks have to maintain certain reserves to match their liabilities. There should be a fixed proportion in between debt and equity. In some cases, instead of prescribing a fixed proportion between debt and equity, a ceiling is imposed on the maximum amount of total borrowings. The principle underlying such prescriptions is the prevention of excessive debt. Different Expert Bodies have recommended different Debt-equity ratios for institutions. The foreign experts who had assisted the deliberations of the Indian Central banking Enquiry Committee were in favour of 2:1 ratio for the industrial bank of India, while the World bank suggested a ratio of 3:1 for the banks in Iran, India, Pakistan and Turkey which it helped to set up. 9 In actual practice, a large variety of D.E. ratios was to be observed in the capitalisation of development banks. Debt Equity Ratio of IDBI was arrived at by dividing the amount of total outside borrowings by equity capital and reserve. Table 5.13 gives the required data. 9. V. Lakshniana Rao, Op.cit., p.7.
27 TABLE 5.13 Debt-equity Ratio (Rs. in Crores) Year Debt Equity Debt-Equity Rs. Rs. Ratio 1988 1395.32 1233.86 1.61 1989 15718.52 142.68 11.6 199 18671.3 1747.51 1.68 1991 2685.31 283.9 9.93 1992 25532.99 256.96 1.18 1993 28211.21 2871.93 9.82 1994 31234.22 3354.1 9.31 1995 34419.62 3742.1 9.2 1996 3837.16 6334.4 6. 1997 43115.53 7213.36 5.98 Source: IDBI's Operational Statistics Published by IDBI 1996-97, p.121. The debt-equity ratio of IDBI during the study period reveals that neither the very cautious ratio suggested by the foreign experts (2:1) nor the little more liberal one suggested by the World Bank (3:1) mentioned earlier, was being adopted by IDBI. The ratio prevailing appeared to be rather on the
271 higher side. The fact that the banks depended heavily on the debt for augumenting their resources, had inflationary implications and it needed serious consideration..a welcome sign was that, there had been a significant decrease in the D.E. ratio in the recent years although it continued to be far higher than the I1O1fl5 suggested by the financial experts. 5.5 CONCLUSION Regarding resource mobilisation, the Bank was depending upon debt to a greater extent. Out of the total resources nearly 9 per cent was in the form of debt capital in almost all the years during the study period. The Bank can very well think of raising additional funds through the issue of equity shares. For further analysis Roof Model of profitability has been used. In addition to that capital adequacy ratio, Debt-Equity ratio, Return on Net-worth and total assets have been used. Debt-Equity ratio clearly indicates the over dominance of debt in the capital structure of the Bank. The capital adequacy ratio showed a better position than the norms prescribed by the RBI.