A REPORT ON ORGANISATION STUDY AT KERALA STATE

FINANCIAL ENTERPRISES LTD

HEAD OFFICE, THRISSUR.

Prepared and submitted by

Jith E. G.

Submitted in partial fulfilment of the requirement for the award of the degree of
MASTER OF BUSINESS ADMINISTRATION
To the Cochin University of science and Technology

Under the guidance of

Prof Dr.M. Bhasi
Professor, Director
SCHOOL OF MANGEMENT STUDIES, CUSAT

SCHOOL OF MANAGEMENT STUDIES

COCHIN UNIVERSITY OF SCIENCE AND TECHNOLOGY
Kochi-682022, Kerala, India
2013-2015

CERTIFICATE
This is to certify that the A Report on Organisation Study at Kerala State
Financial Enterprises Ltd, Head Office, Thrissur is a bonafide record of
research work done by Mr. Jith E. G. in partial fulfilment of the requirement for
the award of Master of Business Administration of Cochin University of
Science and Technology. It is also ensure that this report has not framed the
basis for the award of any degree, diploma or such other titles or this report has
not been previously submitted for the award of any Degree, Diploma, Associate
ship, Fellowship or to any other university.

Director

Faculty Guide

DECLARATION
I, Mr. JITH E. G. student of School of Management Studies, hereby declare that
this project

entitled ORGANISATION STUDY AT KERALA STATE

FINANCIAL ENTERPRISES LTD is the bonefide record of original work

done by me under the guidance of Prof. Dr.M. BhasiProfessor, Director, School
of Management studies, Cochin University of Science and Technology and
submitted for the partial fulfilment of the requirement of the II semester MBA
degree. I also declare that this report has not been previously submitted for the
award of any Degree, Diploma, Associate ship, Fellowship or to any other
university.

DATE:

SIGNATURE OF THE STUDENT

PLACE:

JITH E. G.

ACKNOWLEDGMENT
First, I must thank God for giving me the strength to complete this study.
I have taken efforts in this study; however, it would not have been possible
without the kind support and help of many individuals and organisations. I
would like to extend my sincere thanks to all of them.
I am highly indebted to Prof. Dr. M. Bhasi for the guidance, constant
supervision and for providing necessary information regarding the study and
also for the support and patience in completing the study.
I would like to express my gratitude towards my parents & staff of KSFE Ltd
for their kind cooperation and encouragement which helped me in completing
the study, especially to Mr.Pankajakshan sir. I would like to express my special
gratitude and thanks to industry persons for giving me such attention and time.
My thanks and appreciations also go to my colleagues in developing the project
and people who have willingly helped me with their abilities.

CONTENTS

CHAPTER
NO.
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2
3
4
4.1
4.2
4.3
4.4
4.5
5
5.1
5.2
5.3
5.4
5.5
5.6
5.7
6
7

TITLE
INTRODUCTION
Introduction to the study
Significance of the study
Scope of the study
Statement of the problem
Objectives of the study
Methodology used
Method of data collection
Period of the study
Organisation of the report
INDUSTRY PROFILE
COMPANY PROFILE
Theoretical framework
Credit risk management
Factors affecting credit risk
Components of credit risk
Principles for the assessment of management
of credit risk
Credit analysis
Problem analysis and interpretation
Current ratio of ksfe ltd
Interest to expense ratio
Loan to deposit ratio
Debt to equity ratio
Interest coverage ratio
Return on investment
Return on total assets
Findings
Suggestions/ conclusion
Bibliography

PAGE NO
6
7
8
11
12
12
13
13
15
15
16
23
48
49
51
51
52
55
58
59
60
62
63
65
66
68
70
72
75

CHAPTER 1
INTRODUCTION

1.1 INTRODUCTION
Economic development which requires abundant capital investment in
different sectors of the economy depends up on the domestic savings. The
banking and non-banking institutions play a vital role in mobilizing and
canalizing the savings from the surplus sectors in the economy to the deficit
areas.
The Kerala State Financial Enterprises Limited, popularly known as KSFE, is a
Miscellaneous Non-Banking Financial Company. KSFE is fully owned by the
Government of Kerala and is one of the most profit-making public sector
undertakings of the state. It was created by the Government of Kerala with the
objective of providing an alternative to the private chit promoters in order to
bring in social control over the chit fund business, so as to save the public from
the clutches of unsecured private chit fund operators. KSFE has been registering
impressive profits every year, without fail since its inception. An important
point is that all the funds mobilised by KSFE through its various deposit
schemes and chitty are advanced wholly to the public in Kerala itself; whereas
other financial institutions and banks channel their deposits collected in Kerala
for advances outside the state.
In todays global economy, credit risk management is emerging as an essential
component of business and industry success. In the past this complex factor has
often been overlooked and misunderstood and many firms have paid the price
for not having credit risk management as a priority item in their business policy.
Credit risk management is a powerful intermediate level training tool to
understand credit risk and teach what the company can do to bring credit risk
under control.

Risk is the element of uncertainty or possibility of loss that prevail in any

business transaction in any place, in any mode and at any time. Credit risk may
be defined as the risk of default on the part of the borrower. The lender
always faces the risk of the counter party not repaying the loan or not making
the due payment in time. This uncertainty of repayment by the borrower is also
known as default risk.
Credit risk management is risk assessment that comes in an investment. Risk
often comes in investing and in the allocation of capital. The risk must be
assessed so as to derive a sound investment decision. And decision should be
made by balancing the risk and returns. Giving loan is a risky affair for bank
sometimes and certain risks may also come when banks offer securities and
other forms of investment. For assessing the risk, the company should plan
certain estimates, conduct monitoring, and performance analysis of the
company. Still progress has to be made for analysing the credits and
determining the probability of defaults and risk of losses. So credit risk
management becomes very important foot for the survival of financial
institutions.
Risks can come from uncertainty in financial markets, project failures, legal
liabilities, credit risk, accidents, natural causes etc. Through this internship at
KSFE I tried to conduct a deep study on the Risk management practices. The
internship is confined to 45 days based on the primary data obtained from the
head of various departments, the middle level managers and other staff. The
study covers in brief about the present position of the company.

1.2 SIGNIFICANCE OF THE STUDY

Kerala is considered to be the place of origin of certain unique financial
intermediaries like chit business in India. Chit fund is perhaps the oldest
indigenous financial Institutions.
8

Following are the significance of this study.

1. Measurement, control and monitoring of credit risk will help this institution
to attain the objective.
2. It helps to know how risk has changed and also for documenting overall risk
management.
3. Credit Risk Management is used to protect against loss or danger arising from
a risky activity.
4. This study helps to assess specific programs and to systematically reduce risk
to an acceptable level.
The outcome of the study titled Credit Risk Management of KSFE Ltd will be
highly helpful to the various parties those who are proposing to make an
investment decision in Kerala State Financial Enterprises Ltd. The investor can
make immediate judgment with respect to their area. It ensures the better
financial planning. Above all, the organization itself can proves its strength,
weakness, opportunities and threats through an effective control of credit risk. It
gives the management a broad idea about its past performance. And this in turn
will help them to take corrective measure, if they are not satisfied with their
performance in the past.

1.3 SCOPE OF THE STUDY

The scope of the study is limited to the evaluation of credit risk and a
general study on the schemes provided by KSFE Ltd to the general public. The
period of coverage being restricted to five years commencing from 2007-08 to
2011-12.The main objective of the study is to analyze credit risk and control the
credit default of Kerala State Financial Enterprises Ltd for five years. Various
techniques of credit risk analyses have been used for evaluating and interpreting
the credit to the company.
9

1.4STATEMENT OF THE PROBLEM

KSFE is a public sector undertaking fully owned by the government of Kerala
having a network of branches throughout the state. It had been inexistence since
the last 37 years and had celebrated the silver jubilee of their performance
during the year 1994. The company was formed with the intention of controlling
the growth of privately owned financial institutions, which have been engaged
in the exploitation of innocent subscribers in the name of chit funds. They have
also been charging higher rates of interest on the amount of credit advanced by
them to the needy public and appropriated substantial amount of profit. It is,
therefore, important to know whether the company has succeeded in offering
effective competition to the other privately owned chit and hire purchase
companies and attracting the needy with its efficient and sincere services.
An investor who is proposing to invest his funds with the company, he has to
analyze the prospects of that company in order to identify its strength and
weakness. An investor or an analyst the researcher has to analyze the financial
strength of the company through a detailed and comprehensive financial
analysis and credit control.

1.5 OBJECTIVES OF THE STUDY

1. To study about the organization KSFE ltd.
2. To know more about credit risk management.
3. To know about the tools used for evaluating credit.
4. To know whether credit risk management is effective in KSFE.

10

1.6 METHODOLOGY USED

According to Clifford Woody, Research comprises of defining and
redefining problems, formulating hypothesis, collecting, organizing and
evaluating data, making deductions and research conclusions and at last
carefully testing conclusions to determine whether they fit the formulation of
hypothesis. Research methodology is a science that can be used to solve the
research problems and helps the investigator to do the research effectively. It
provides various steps that can be adopted by the researcher in studying his
research problems. It explains why we are using a particular method and why
we are not using another so that research results are capable of being evaluated
either by the researcher or by others.
Research methodology is a way to systematically solve the research problem. It
may be understood as a science of studying how research is done scientifically.
In it we study the various steps that are generally adopted by a researcher in
studying his research problem along with the logic behind them. Itis necessary
for the researcher to know not only the research methods but also the research
methodology,
The study titled CREDIT RISK MANAGEMENT OF KSFE LTD isanalytical
and descriptive in nature. The financial performance of the companyis analysed,
interpreted and suggestions are given.

1.7 METHOD OF DATA COLLECTION

Research is based upon various types of information. The more valid is
the source of information, the reliable are conclusions .Therefore research
presupposes knowledge of kinds and sources of information. Different types of
researches require different types of information. For collecting the information,

11

the researcher should keep in mind two types of data collection such as primary
and secondary.
Both primary data and secondary data are used for the study. Primary data has
been collected through suggestion, opinions and discussions with the officials of
the organizations. The study was carried out in the accounts departments of the
organizations. The data for the purpose of the study is mainly based on the
Secondary sources of data i.e., audited financial statements of the company. The
KSFE Ltd, Head office at Thrissur has been taken as the centre of data
collection.
The study is largely based on the data provided in the published financial
statements of the company. The study is a kind of extensive analysis and review
of the basic financial documents of the company. This study makes extensive
use of secondary data collected in the form of audited reports and other
financial details. This being an analytical study based on published data and so
data collected were analysed through various ratios. Further the information
compiled was updated by detailed discussions with the top financial officials of
the company, to get appraised of the various methodologies and practices
undertaken in order to control the ow of cash of the company.
In this study secondary data were obtained from various sources like
organization records, websites, magazines, books, etc. All the required details
about the origin of KSFE growth and organizational setup werecollected from
the secondary sources.
The analytical tools are used for the analysis of the collected data. Forthe data
analysis and interpretation tables,charts, percentage analysis and ratio analysis
are used.

12

1.8 PERIOD OF THE STUDY

The study covers the financial statement analysis of the company for five years
2007-08 to 2011-12.

1.9 ORGANIZATION OF THE REPORT

13

CHAPTER 2
INDUSTRY PROFILE

14

The financial institution can be broadly classified into two categories

1) Banking institution
2) Non-banking financial institution.
Sec 45 (1) of RBI Act defines non-banking financial institution as any
institution carrying on the business of a financial institutions constitutes a
heterogeneous group of financial intermediaries other than commercial and
cooperative banks. They form an important segment of financial institution.
They raise funds from public directly and indirectly, and lend these to their
ultimate spenders. As banking institutions were found insufficient to meet the
ever increasing demands of the corporate sector, nonbanking financial
institutions were set up supplement the effort of these banking institutions. Non
baking financial institutions play in important role in channelizing the scarce
financial resources and economic development of a country.
The financial system in the country comprises various institutions engaged in
the financial market of the countrys economy. These institutions includes the
all India level financial institutions like IFCL, IDBI, ICICI, NABARD and the
investment institutions like SFC, SIDC etc. And the hire purchase companies,
investment and loan companies, mutual benefits and finance companies etc.
Thus in the financial system, NBFCs do play important role and occupy
significant positions.
NBFCs have emerged as substantial contributors to the Indian economic growth
by supplementing the efforts of banks and other development financial
institutions. The NBFCs are also known as finance companies, loan companies,
finance corporations etc.
KSFE is a Miscellaneous Non-Banking Financial company. A Non-Banking
Financial Company (NBFC) is a company registered under the Companies Act,
15

1956and is engaged in the business of loans and advances, acquisition of

hares /stocks/ bonds/ debenture issued by Government or local authority or
other securities of like marketable nature, leasing, hire- purchase, insurance
business, chit business but does not include any institution whose
principal business is that of agriculture activity, industrial activity, sale/
purchase/construction of immovable property. A non-banking institution which
is a company and which has its principal business of receiving deposits under
any scheme or arrangement or any other manner, or lending in any manner is
also a non-banking financial company. NBFC are doing functions as in to that
of banks; however there are a few differences.
NBFC cannot accept demand deposits. (Demand deposits are funds

deposited at a depository institution that are payable on demand -immediately or within a very short period.)
It is not a part of the payment and settlement system and as such cannot

issue cheques to its customers.

Deposit insurance facility of DICGC is not available for NBFC

depositors unlike in case of banks. Chit companies as defined in clause

(b) of Section 2 of the Chit Funds Act, They are regulated by respective
state governments.

While making deposits with a NBFC, the following aspects should be borne in
mind:
Public deposits are unsecured.
A proper deposit receipt which should, besides the name of the
depositor/s state the date of deposit, the amount in words and figures, rate
of interest payable and the date of maturity should be insisted. The receipt
shall be duly signed by an officer authorized by the company in that
behalf.
16

 The Reserve Bank of India does not accept any responsibility or

guarantee about the present position as to the financial soundness of the
company or for the correctness of any of the statements or representations
made or opinions expressed by the company and for repayment
of deposits/discharge of the liabilities by the company.
A robust banking and financial sector is critical for activating the economy and
facilitating higher economic growth. Financial intermediaries like NBFCs have
a definite and very important role in the financial sector, particularly in a
developing economy like ours. They are a vital link in the system. After
the proliferation phase of 1980s and early90s, the NBFCs witnessed
consolidation and now the number of NBFCs eligible to accept deposits is
around 600, down from 40000 in early 1990s. The number of asset financing
NBFCs would be even lower, around 350, the rest are investment and loan
companies. Almost 90% of the asset financing NBFCs are engaged in financing
transportation equipments and the balance are in financing equipments
for infrastructure projects. The role of non-banking sector in both manufacturing
and services sector is significant and they play the role of an intermediary by
facilitating the flow of credit to end consumers particularly in transportation,
SMEs and other unorganized sectors. NBFCs due to their inherent strengths in
the areas of fast and easy access to market information for credit appraisal, a
well - trained collection machinery, close monitoring of individual borrowers &
personalized attention to each client as well as minimum overhead costs, are in
a better position to cater to these segments.
Now, unlike in the past, NBFCs are very well regulated and supervised. Just like
banks they are required to be registered with RBI, follow stringent prudential
norms prescribed by RBI in the matters of capital adequacy, credit/investment
norms, asset-liability management, income recognition, accounting standards,
17

asset classification, provisioning for NPA and several disclosure requirements.

Besides this, RBI also supervises the functioning of NBFCs by globally, which
has helped it grow and become an essential part of the financial sector for
accelerated economic growth conducting annual on-site audits through its
officials. Such rigorous regulatory framework ensures that NBFCs function
properly and follow all the guidelines of RBI. Thus in all respect the monitoring
of NBFCs is similar to or in some case more stringent than banks. The role of
NBFCs in creation of productive national assets can hardly be undermined. This
is more than evident from the fact that most of the developed economies in the
world have relied heavily on lease finance route in their developmental process,
e.g., lease penetration for asset creation in the US is as high as 30% as against
3-4% in India. A conducive and enabling environment has been created for the
NBFC industry of the countries. This is not the case in our country. It is,
therefore, obvious that the development process of the Indian economy shall
have to include NBFCs as one of its major constituents with a very significant
role to play. In fact,RBIslatest report titled Report on trends on progress
of banking in India 2002-2003" observes:Not
Withstanding their diversity, NBFCs are characterized by their ability to provide
niche financial services in the Indian economy. Because of their relative
organizational flexibility leading to a better response mechanism, they are often
able to provide tailor-made services relatively faster than banks and financial
institutions. This enables them to build up a clientele that ranges from small
borrowers to establish corporate. While NBFCs have often been leaders in
financial innovations, which are capable of enhancing the functional efficiency
of the financial system, instances of unsustainability, often on account of high
rates of interest on their deposits and periodic bankruptcies, underscore the need
for reinforcing their financial viability.
Thereach and volume of chit funds business, which has become an integral part
of the non-banking financial sector of Kerala, has been on the rise in recent
18

years. A measure of the phenomenon can be had from the fact that between
1997-98 and 2002-03, the number of chits registered in the formal sector was
more than 45,000 with a total capital turnover of Rs.360crore.According to a
study by a working group constituted by the State Planning Board, about-two
thirds of these chits were registered in Thiruvananthapuram and Ernakulam
districts with 43 per cent and 23 per cent, respectively Similarly, it was found
that there were 5,996 money-lending institutions in the organized sector in the
State as on March 2004 with the four southern districts of Thiruvananthapuram,
Kollam, Pathanamthitta and Alappuzha accounting for more than half of them.
Against this, there were only 3,376 commercial bank branches in the State. The
population covered per money-lending institution is 5,590 as compared to 9,431
per commercial bank branch. A case study conducted by the working group in
Kannur district revealed that there were 139 money-lending institutions in the
formal sector, of which 45 per cent were registered after 2001. The annual
business turnover of these institutions worked out to Rs.13.57 core. Of these
institutions, around 70 percent had business turnover of less than Rs.5 lakh and
only five per cent had turnover of more thanRs.50 lakh. A survey in
Thiruvananthapuram district showed that around 15 per cent of them
moneylenders accepted deposits at interest rates of between 7 and 12 per cent,
while a majority of them extended loans at rates between 10 and 20 per cent on
security of gold. The major depositors were non-resident Indians and most
of the

borrowers

were

ordinary

workers,

government

employees

and businessmen. And the major defaulters were farmers. A primary survey
among selected unregistered money-lending institutions in Kollam and
Kottayam districts by the Department of Economics and Statistics found that 50
per cent of them operated their business in own buildings, while some others

were operating straight from the cash bag. The securities against which loans
19

were given included gold, cheques, promissory notes and land documents. The
working group is of the view that the money-lending institutions have been
thriving due to the inability of the conventional banking sector to accommodate
more people due to high operating cost. At the same time, bulk lending for
micro credit can help redeem the situation to a large extent. Kerala State
Financial Enterprises (KSFE) is the Government-owned, the dominant chits
player in the State. There were several private chit fund companies providing
financial services. It has a great prospect in nearby future and aiming to be
competitive with other banks in Kerala.

20

CHAPTER 3
DESCRIPTION OF
ORGANISATION

21

Kerala State Financial Enterprises Ltd.

The Kerala state Financial Enterprises Ltd popularly known as KSFE
fully owned by the Government of Kerala and is the first public sector company
to conduct the chit business in the whole of India. It is miscellaneous Non banking financial company. It was incorporated on 6th November, 1969 with its
registered office in Thrissur. It has an authorized capital of Rs.25 Lakhs divided
in to 25000 equity shares of Rs. 100 each and a paid up capital of Rs. 2 Lakhs as
initial contribution from Govt .of Kerala.
At the incorporation stage of KSFE, the total number of employees was
45 and number of branches was 10. Today with over 40 years of functioning
KSFE is having more than 350 branches and 7 regional offices in Kerala. There
were 5100 above employees in the company. More than 20 Lakhs customers are
connected with KSFE.
With a view to overcome the threats of efficient customer service by I
Financial Institution like banks, non- banking financial institutions and other
local chitty institution with their computerized environment, the company
decided (1999) to go in for complete automation to be implemented in 3 phases
starting with the front office automation of its branch offices. The company
selected (July 2000) Accel ltd for analyzing the business requirement, preparing
feasibility study of the project and for developing the application software for
the front office automation of the branch offices.

22

The branch automation software developed by Accel Ltd; installed at the

2 branches, viz Thrissur Main (Nov 2001) and Kesavadasapuram (Aug 2002 )
was accepted by the company on 17th June 2004 after testing and was rolled out
of 12 out of 269 branches as on May 2007. The branch automation software
(BAs) in use the co has been developed in Red Hat Linux Enterprises edition 3
with Visual Basic as front end and ORACLE 91/10 g as back end.

The corporate office of KSFE is at Thrissur. It has 7 regional offices

1. Thiruvanathapuram
2. Kollam
3. Ernakulam
4. Thrissur
5. Kozhikode
6. Kottayam
7. Kannur

ORIGIN OF KSFE
Kerala Govt. during 1967 took a policy decision chitties kuris should be
the chitty/ kuris business being what it is, there existed ample scope for
exploitation of the ignorance, in difference and gullibility of the needy people
by unscrupulous promoters, who organized financial institution in the name of
chitti/ kuris fund in order to mobilize fluid resources in their own interest and
appropriate for themselves substantial profit accrued of such organizations.
23

Govt. wanted to introduce a check on the unbridled growth of such financial

institution with a view to safeguard the interest of the general |[ public and at the
same time to channelize the savings so consolidated for productive purpose.
With these objectives, Govt. appointed a special officer in the year 1967 to
prepare a comprehensive scheme for starting chitties and kuris under
Government control. The special officer presented his report on recommending
strongly the entry of Govt. in the field of chitties and kuris. Though the
recommendation was for conducting the business as an adjunct of the
Registration Department. Government. However, took a different view and
decided to bring within the purview of Government control not only chitties/
kuris but also some other financial transactions for which socialization was felt
necessary. Hire purchase financing and insurance were the new areas suggested
for inclusion within the ambit of the proposed organization. According Govt.
decided to organize a public sector undertaking with the name 'The Kerala State
Financial Enterprises Limited' for the purpose of conducting chitty, hire
purchase and Insurance business under Government control.
This apart, the Govt. of Kerala had a progressive vision for generating
non - revenue income thought such public sector undertakings. Thus KSFE Ltd
was incorporated as a Govt. company on 6th Nov 1969 with its head office at
Thrissur with the objective of serving as a discipline factor to private chit funds.
The first Board of Directors was constituted as per Go (RE) 4876/69 dated 26 th
Nov, 1969.
A striking point is that all the funds mobilized by KSFE throught its
various deposit schemes and chitties are advanced wholly to the public in
Kerala itself. Whereas other financial institution and banks channel their I
deposits collected in Kerala for advanced outside the stately
KSFE pays to the Govt. of Kerala crores of rupees every year by way of:
24

 Guarantee commission

Service charges

Dividend

Up to 31/03/08 amount of Rs. 240 crores has been paid on the above head
of account. Therefore, financially and services wise, KSFE contributes
immensely towards the Kerala economy.

KSFE AT GLANCE :
TYPE:PUBLIC SECTOR
OWNED BY:GOVT. OF KERALA
FOUNDED: 6THNOV 1969
HEAD OFFICE: THRISSUR
NO. OF BRANCHES: ABOVE 415
CHAIRMAN: P.T.JOSE
MANAGING DIRECTOR: P. RAJENDRAN
INDUSTRY: FINANCE
PAID UP CAPITAL: 20 CRORES COVERED
BUSINES TURNOVER: 15000 CRORES
EMPLOYEES: 5100 ABOVE

OBJECTIVES OF THE COMPANY

The objectives of the company are listed in the Memorandum of Association of
the company. The important objectives are as follows:

25

 To start, conduct, promote, manage and carry on the business of chitties

in India or elsewhere.
To promote, undertake, organize, conduct, manage and carry on the
business of general and miscellaneous insurance of any kind in India or
elsewhere.
To start, promote, conduct, operate, carry on and manage the business of
dealers, agents and traders under hire purchase system of articles,
vehicles, machinery ,materials goods and tools, of all capital goods and
consumer goods and property of all nature and description for personal,
domestic, office, commercial, industrial and community use and
consumption as a business of the Company or as agents of the
Government, State or Central or anybody or organization there under or
of any other Company.
To start, promote, conduct, operate and carryon the business for providing
financial assistance for the constructions of new building and for the
repairs, renewals, alteration, additions, or modification of existing
building and for self-employment schemes.
To advance money on the security of gold and other valuable securities.
Besides these objects, there are many other objects, which is incidental or
ancillary to the main objects such as to advance, deposit with or lend
money, securities, property or to receive loans or grants or concession of
any nature or deposits from Banks, Government or Governmental
organizations or others.

MISSION OF THE COMPANY

The mission of KSFE is the well-being of the public by its different products
like chitties, loans, deposits etc. for the welfare of the society. The chitties are
come under the Kerala Chitties Act 1975,which brought into force with effect
26

from 25th august 1975. The Act is to give adequacy and safety to the funds of the
society and give good return to them. It also ensures lesser rate of interest for
their loans and advances.

VISION OF THE COMPANY

The vision of Kerala State Financial Enterprises is to become a significant
player in the financial services sector by: Providing a whole range of quality services and products.
Adopting technology and benchmark standards in customer service and
performance.
Spreading our wings beyond the borders of Kerala, on a global level.
Retaining the pre-eminent role in Chitty business.
Continuing focus on extending resources to the Govt. of Kerala.
Sustaining commitment to the weaker sections of society, as the
neighbourhood institution for support, trust and security.

FUTURE PLANS OF THE COMPANY

The government is taking appreciable steps to widen the business activity of
KSFE and to reach every category of people. The future plans of the company
include the following: Making KSFE a fully computerized Company
Opening more and more new branches, including chitty units to establish
its presence in all major centres and backward areas, aiming at effective
rural penetration.

27

 Introducing value additions in chitty schemes - for coping with the fierce
competition in the financial market, for more popularity and widening
our customer base.
Acting as the collection agent for KSEB, KWA, etc., throughout the state.
To construct a multi-storied building in KSFE's own premises in
Kakkanad, Cochin and to house among others a Staff Training
College for itself.
Introduction of new schemes like Education loan, Agriculture overdraft
and cumulative deposit schemes.
Expanding its door collection facility to loan accounts and deposit
schemes suitably, this is expected to create considerable employment
opportunities as part of its social objective.
Introduction of chitties with simultaneous draw and auction which can be
offered as an incentive to regular customers for whom it will be a great
attraction, particularly for those with saving attitude.
Introduction ofDaily/Weekly draw/auction chitties, which is expected to
have a wide scope among traders, will raise the Company's market
share considerably.
Enter the arena of Credit/Debit Card business - immediately after branch
networking the Company plans to launch the 'Debit Card' business.
Starting of Virtual Branch through net worked computer systems for the
benefit of NRIs particularly Malayalees in the Gulf & other countries is
on the anvil. This will obviate the need for "brick and mortar branches"
and will enable customers who have internet access, to transact with the
Company through virtual branches.

ACHIEVEMENTS AND AWARDS

28

KSFE is the number one non-banking financial company in Kerala. KSFE bags
PRAVASI BHARATHI (KERALA)SHREYAS AWARD for the year 2010.
KSFE is selected for the award on the basis of overall performance of the
company.

WORK FLOW MODEL

This is the work flow adopted by KSFE at the time of receiving the deposits or
lending loans to their customers.
Customers: customers approach the KSFE with the intentions of depositing the
amount and get returns out of it. The customers also approaching KSFE for
getting loans like vehicle loans, passbook loans etc. So the customers will be
looking for business plan which pays highest rate of return or lowest rate of
interest. Different options are providing by KSFE to the customers like chitty,
sugama deposits, fixed deposit etc.
Lending money and accepting deposits: as like banks, KSFE also providing
money to the customers by the way of different loans like chitty loans, gold
loans, passbook loan, trade financing, flexi trade loan etc. the returns are
comparatively higher and because the effective returns are really higher than the
published interest rates, because of monthly payment of interest (in case of all
other institutions, the interest is paid quarterly). KSFE accepts deposits from
customers by the way of chitty, sugama deposit, fixed deposit etc. The customer
can introduced either by any existing customer or an employee of the KSFE, the
customer has to provide necessary documents like ration card or any license for
address, age, and income proof.
Application review and documentation: once the customer fills all the necessary
documents, the manager reviews the application; KSFE tries to verify the
authenticity of the documents furnished.

29

Decision making: after verifying the documents the manager takes decision on
the customer whether they have to provide loans or accept deposits.
Deposit completed or loans sanctioned: the final stage of the process money
deposit will be in the account of customers. the annual interest rate in case of
deposits from the public is 7% per annum. Interest for chitty price money
deposits is 8% per annum. Due to the monthly payment of interest, the effective
rate will be higher than this rate. Senior citizen will get 7.25 % for fresh deposit
and 8% for price money deposits. Normally 75% of fixed deposit amount can be
availed as loan. This facility is called fixed deposit loan.

PRODUCT PROFILE
CHITTY THE PILLAR PRODUCT OF KSFE

Chitty is a unique scheme incorporating the aspects of a recurring deposit and

an advance scheme. In chitty, the subscriber has an opportunity to bid and avail
of advance which amounts to a certain percentage of the total denomination of
the chitty (sala), whereas in recurring deposit the advance can be availed only
30

on the paid up amount. In case bidding is delayed due to draw of lots in the
initial instalments, one can resort to availing of chitty loan, which is a loan that
"bridges" the gap between the need of the subscriber for money and the delay in
the chitty getting prized.

BASIC INFO ABOUT CHITTY

A Chitty is conducted by a person or an institution and this entity is called the
foreman. In the case of KSFE Chitties, KSFE is the foreman. A chitty is
basically a contract between the foreman and the Subscribers. As per the
contract, each subscriber agrees to remit a fixed amount of money every month
for a number of months. The number of tickets enrolling in a chitty will be
equal to the number of months for which the remittance have to be made or the
duration of chitty in months.
The total of the periodic subscription, called the chitty amount, will be given out
as Prizemoney to the person who bids by allowing for the maximum
reduction in the prize money. The maximum reduction possible is 25% as per
the prevailing Chitty Act and if there is more than one subscriber interested in
bidding

at

25%

reduction,

the

numbers

of

the

such

bidders

will be put to a draw. Thus each subscriber gets an opportunity to receive the pri
ze money onceduring the tenure of the chitty. All the promoters have to
contribute the periodic subscription till the end of the chitty.
New chitty loan:
Though an advance aspect is built into the chitty scheme, it cannot be denied
that subscriber will have to wait for some time to avail the benefit of getting the
ticket prized. NCL is introduced to bridge the gap between the real need of the
subscriber and the uncertain point of time in future, when the ticket gets prized.

31

Pass book loan:

To provide quick loan to non- prized subscribers to meet the urgent needs on the
security of paid up subscriptions in the chitties.
Consumer/Vehicle loan:
With the object of providing advance facilities for acquisition of consumer
durables, vehicles the company offers CVL facility for owning motor vehicles
and home appliances such as TV, fridge, furniture, two wheelers, computers,
cars etc on diminishing rate of interest and on easy repayment plans
Special car loans:
This scheme is introduced to provide loans for purchase of new four wheelers
upto a maximum of 85% of the on the road cost to salaried persons having a
net monthly pay exceeding Rs. 10000 and self employed Professionals
Businessmen IT professional having an average annual total income
exceeding Rs.2 lakhs for the 3 previous years, with repayment period of 60
months (maximum) at a monthly diminishing rate of 12% -12.5% depending on
the period of repayment opted. Employees of the company can also avail loans
under the scheme on special conditions.
New housing finance scheme:
Under the scheme finance is available up to 5 lakh at the rate 10.25% and up to
10 lakh at the rate 10.50 % (On yearly diminishing rate) for purchase of site,
construction dwelling houses,and extension of existing building on easy
repayable terms.
Fixed deposits:
The Company provides an attractive opportunity to the public o deposit
profitably and safely through its Fixed Deposit Schemes which offers attractive
32

interest rates. The repayment of deposits mobilized by the company is

guaranteed by the Government of Kerala. Loan up to 75% of the deposit amount
on the security of the deposits is a speciality of this scheme.
Loan on fixed deposits:
This scheme is indented to provide quick loan to depositors againsttheir fixed
deposits.
Short term Deposit:
The Company accepts deposits from public for short term periods giving
attractive competitive interest. The deposits are guaranteed by the Government
of Kerala.
Chitty Security Deposit in Trust:
Under this scheme chitty prize money is accepted as security against future
liability, repayable with interest on termination of the chitty or on furnishing
adequate security by the subscriber whichever is earlier. Chitty Security Deposit
in Trust offers high rate of interest.
Sugama Deposit:
The scheme envisages maintenance of personal accounts in the name of
individuals, associations, etc in which deposits and withdrawals are permitted.
The repayment of deposits and interest thereon (5.5% at present) are guaranteed
by the Government of Kerala.
Sugama (Akshaya) OD Facility:
This is an overdraft facility provided through the sugama accounts to
Government employees belonging to salary recovery enforceable group. The
scheme is available for company employees on special conditions.

33

Gold Loan:
Under the Gold Loan Scheme, short term advances granted are up to Rs. 3 lakhs
for a maximum period of six months with the facility to renew up to two years
subject to conditions.
Reliable Customer Loan:
Under this scheme financial assistance up to Rs.5 lakhs (on the security as per
the General norms) is provided to the general public. The amount of loan is to
be repaid within a period of 36 to 48 months, depending on the loan amount, at
reasonable rate of interest.
Trade Finance:
This scheme is to provide financial assistance to small and medium traders,
businessmen, stamp vendors, lottery agents and the like for supplementing their
working capital requirements.
Flexi Trade Loan:
This scheme envisages financial assistance up to Rs. 10 lakhs with overdraft
facility to traders, businessmen subject to conditions.
Western Union Money Transfers Services:
This is a venture entered into by the Company with M/s Paul Merchants, leaders
in the business of money transfer, for providing additional financial services to
the public. With the network of over 269 branches of KSFE, Malayalees who
have their earning members spread out the world can receive money almost at
their door steps within seconds.
34

Mangalya Loan:
The scheme provides permanent KSFE employees with loan/advance for
meeting marriage expenses of self or their children.
Corporate Agencies:
As per the memorandum of association of the company, insurance business is
also included among the main objects to be pursued by the company.
Accordingly, as part of business diversification Company had entered into tie up
agreements with two leading public sector Companies i.e. Life Insurance
Corporation of India and National Insurance Company Ltd. for doing Life
Insurance and General Insurance business by acting as Corporate Agents of
these two companies.

ORGANISATION STRUCTURE

35

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ORGANISATION CHART

36

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DEPARTMENT PROFILE
37

A) The different departments of the Head Office are the following:

i. Business Department:This is headed by General Manager (Business) who is responsible for all
business activities of the Company.
ii.Finance Department:This department is headed by the General Manager (Finance). The main
functionsof this department are planning, budgeting and control, compilation of
accounts, reconciliationand preparation of annual accounts, and controlling
Deposit Schemes of the Company etc.
iii. Administration Department:This is headed by the DGM P& HR to be in charge of personnel administration,
salary, industrial relations, man power planning etc.
iv. Secretarial Department:This department is headed by the Company Secretary who is responsible for
the functions conferred on him by theCompanys Act, 1956.
v. General Administration Department:This department is headed by one of the senior officers of the Company who
will be responsible for the General Administration including purchase, printing
etc.

vi. Legal Department:-

38

This department is headed by AGM (Legal) who is responsible for all day to
day legal matters.
vii.Internal Audit Department :This department is headed by the DGM (IA&V) assisted by seventeen audit
teams to exercise internal check and control. All the above Department Heads
report directly to the Managing Director.
B) The different departments of the Regional Office:
The activities of the Regional Managers are grouped functionally as well as
scheme wise. They are mainly responsible for the proper and also healthy
functioning of the Branches and
to be in charge of the overall growth and development of the Branches under
theirjurisdiction.The Regional Managers report directly to the General Manager
Business and the GeneralManager Finance for the respective functions and to
the Managing Director relating to the other functions. The functional
departments of the Regional Office are Business, Accounts, and default; which
corresponds to respective departments with focus on operational aspects
The different departments at Units level
At the base level the Units are graded into three categories viz.
(i) Major Branches having a chitty sala of Rs.70 lakhs and above.
(ii) Medium Branches having a chitty sala of Rs.40 lakhs and above and
(iii) Small Branches having a chitty sala of below Rs.40 lakhs.
A Unit Head viz. the Manager, heads each Unit and its activities are grouped
under

Assistant

Manager(s)/ Deputy

Manager(s). The

Unit Heads

report directly to the Regional Manager and to the Departmental Heads in the
Head Office on matters pertaining to the departments concerned. In exceptional
39

circumstances the Unit Heads can report directly to the General Manager
(Business)/ General Manager (Finance) and Managing Director.
The different departments in the unit are as follows:
1)Collection Department

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Important functions of collection department are:

Receive money from customers
Give receipt to customers
Ensuring proper document for every receipt
Entry of transactions in the books.
Internal checking
Maintain effective coordination with accounting department
Preparing periodic collection report
Sending collection agents to collect money.
To arrange for the preparation of chitty balance sheets and its filing.
An assistant manager will be the head of this department.
She/he monitors all activities relatingto receipt of cash and has the
responsibility of ensuring that there are no mistakes or fraudscommitted during
transactions. Major decisions relating to the receipts of funds are taken by
40

theAM Collection. All staff in the collection department should report to

him/her. She/he delegates responsibility to the staff under him/her.
2) Accounts Department

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Important functions of accounts department are,

To be responsible for the remittance of daily cash collection (including
the Money Order collection) and cheques in to the bank on the date of
collection itself or latest by the nextworking day.
To ensure once in every fifteen days that the cheques sent for collection
are either realized or dishonoured and the entries in the Cheque Sent for
Collection Register arecomplete in every respect.
To ensure the writing up of the Main Cash Book, to sign it and to check
the postings of General Ledger and to be responsible for the accuracy of
the postings.
To examine all the documents concerned with the payment of prize
amount and other
Payments and ensure that they are generally in order and in particular
ensure that all theamounts mentioned in the documents are accurate.

41

 To ensure satisfactory maintenance of accounts in the branch, arrange the

preparation of all statements/ schedules relating to the accounts and
to render all returns relating toAccounts to the Head Office/ Regional
Office.
To ensure timely completion of annual accounts and related statements.
3)General Administration Department

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Important functions of general administration department are,
To initiate action for the starting of chitties in the Branch and to arrange
the release of Advertisements.
To assist the Manager in canvassing subscribers as and when necessary.
To take steps for the payment of prize money to the prized subscriber on
the due date, if the subscriber has furnished adequate security for the
payment of future subscriptions and to intimate the fact to the prized
subscribers.
To verify the genuineness/ liability of the subscribers/ sureties.
To be responsible for the entire personnel administration of the Branch
for the proper maintenance of Attendance Register, Casual Leave
Register and other leave
42

accounts, personal files, service records/ books , provident fund records, l

oans, advances and its repayment etc.

4) Default follow up Department

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Important functions of default follow up department are

Monitoring of default on a current basis in all schemes of the company.
Initiating necessary follow up action including RR, in cases of chronic
default.
Timely preparations of default statements

5)Special Gold Loan Department

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Important functions of special gold loan department are

Speedy and efficient disbursal of Gold Loan
Safe custody of ornaments pledged.
43

 Default monitoring of the Gold Loan scheme

Initiating auction steps in cases of chronic default.
Preparation of periodic schedules

6) Systems Department
AI
s
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tm
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Important functions of special gold loan department are,

Speedy and efficient disbursal of Gold Loan
Safe custody of ornaments pledged.
Default monitoring of the Gold Loan scheme
Initiating auction steps in cases of chronic default.
Preparation of periodic schedules.
KSFE is passing through the infancy stages of its computerization process. The
unit levelsystems department is now formed on an ad-hoc basis. There is no
exclusive assistant manager provided for this function. Generally, any one of the
assistant managers who is in charge of collection/ accounts/ default is given
additional responsibility to supervise this function. He is required to look after
issues related to software / hardware / data entry errors etchant at the same time
extent a helping hand to other general activities of the branch.
Important functions of systems department are,
Ensure smooth functioning of all the computer systems.
Reporting software errors/bugs to Head Office.
44

 Timely reporting of hardware failures to the Vendor/AMC Company.

Taking data backups at the prescribed intervals.
Providing information and assistance to other employees in matters
related to system.

SWOTANALYSIS
Strength
Better customer relation.
Good products and services.
Reasonable repayment period.
Better customer satisfaction.
Government owned Company.
Variety of services other than chitties.
Variety of chitty schemes and several other facilities associated with
chitties.
Works similar to banks.
Branches throughout Kerala.
Skilled employees selected through public examinations
A relatively younger work force.
Transparency in operations.
Updated website gives information about new developments in all
branches.
Tie up with insurance and western union money helps to attract
morecustomers.
It uses effective advertising campaigns.

45

Weakness
Lack of marketing activities.
Lack of computer knowledge of workers.
It has the limitations of NBFCs.
Still main business area is on chitties and not yet able to grow in
other services.
Lack of fieldwork in marketing.
Opportunities
Improve marketing activities.
Introduce a disaster recovery system.
Expansion of small-scale industries in the state.
Rising middle class.
Rise in income.
Saving thirst increases.
Ensuring more participation of NRI families in the schemes of KSFE.
Developing rural areas provide an opportunity to increase customer base.
Threats
Tough Competition.
Policies of Reserve Bank.

46

CHAPTER 4
THEORETICAL
FRAMEWORK

47

4.1 CREDIT RISK MANAGEMENT

Risk management is the identification, assessment and prioritization
ofrisks followed by coordinated and economical application of resources to
minimize, monitorand control the probability and/or impact of
unfortunateevents or to maximize the realization of opportunities. Risks can
come fromuncertainty in financial markets, project failure, legal liabilities,
credit risk, accidents, natural causes and disasters as well as deliberate attacks
from an adversary.
DEFNITION
Credit risk is the risk of loss due to a debtors non- payment of a loan orother
line of credit (either principal or interest (coupon) or both). The defaultevents
include a delay in repayments, restructuring of borrower repayments
andborrower repayments.
Financial and non-financial institutions are often faced with risks that aremostly
of financial nature. These institutions must balance risks as well returns. For a
bank to have a large consumer base, it must offer loan productsthat are
reasonable enough. However, if the interest rates in loan products are too low,
the bank will suffer from losses. In terms of equity, a financial institution must
have substantial amount of capital on its reserve, but not too much that it misses
investment revenue and not too little that it leads itself to financialinstability and
to the risk of regulatory noncompliance.
Credit risk, a major risk faced by banksand NBFCs is inherent to any business
of lending funds to individuals, corporate, trade, industry, agriculture, transport
or banks/ financial institutions. It is defined as the possibility of losses
associatedwith a diminution in the credit quality of the borrowers or counter
48

parties. In a bankcredit portfolio, losses stem from outright default due to

inability or unwillingnessof borrowers/counterparty to meet their commitments,
as also due to the riskinherent in the nature of business activity and
environment.
Significant resources and sophisticated programs are used to analyze
andmanage risk. Some companies run a credit risk department whose job is
toassess the financial health of their customers and extent credit (or
not)accordingly. They may use in house programs to advice on avoiding,
reducing and transferring risk. They also use third party provided intelligence.
Companies like Standard & poors, Moodys, Fitch Ratings and Dun
&Bradstreet provide such information for a fee.
Most lenders employ their own models (credit scorecards) to rankpotential and
existing customers according to risk, and then apply appropriate strategies. With
products such as unsecured personal loans or mortgages,lenders charge a higher
price for higher risk customers and vice versa. Withrevolving products such as
credit cards and overdrafts, risk is controlled through the setting of credit limits.
Some products also require security, most commonly in the form of property.
Credit scoring models also form a part of the framework used by banks
orlending institutions grant credit to clients. For corporate & quantitative
sectionsoutlining various aspects of the risk including but not limited to
operating experience management expertise, asset quality, leverage and
liquidityratios respectively. Once this information has been fully reviewed by
credit officers & credit committees, the lenders provide the funds subject to the
terms and conditions presented within the contract.
Credit risk relating to borrower(s) may arise due to non-payment of
principal or interest amount; non-payment of guarantee or letter of credit
liabilities on devolvement; In case of export business non receipt of
49

proceedsagainst bills financed; in case of security trading funds or securities

settlementare not affected; in case of cross border-exposure the funds are not
receiveddue to seizure or restrictions imposed by the sovereign and so on. As
regardsrisks related to the business activity financed, these may include
obsolescenceof technology or products design, competition, inadequate supply
of inputs, lack of infrastructural facilities, government rules/regulations and so
on.
In addition, financial institution may also face risks caused by aconcentration of
their credit portfolio in certain types of loan facilities like overdrafts; cash credit
term loans, lease or hire purchase finance and so on.Further, the concentration
risk may be caused due to high exposure in a singleor group on borrowers or in
a specific economic or industrial sector.
4.2 FACTORS AFFECTING CREDIT RISK

Industrial or Economic Climate

Government policies
Availability of Infrastructure
Financial strength of borrower
Management capabilities
Collateral coverage
Nature of product

4.3 COMPONENTS OF CREDIT RISK

Default Risk- is measured by the probability of default occurring during a
given period of time.
Exposure Risk- generated by the uncertainty associated with
futureamounts at risk.
Recovery Risk- depends upon the type of default and numerous factors.
To manage and assess the risks faced by financial and non- financial
institutions, it is important to make certain estimates, conduct monitoring and
50

perform reviews of the performance of the institutions. However,because

institutions are into lending and investing practices, it is relevant tomake
reviews on loans and to scrutinize and analyze portfolios. Loan reviewsand
portfolio analysis are crucial in determining the credit and investment risks.

4.4 PRINCIPLES FOR THE ASSESSMENT OF MANAGEMENT OF

CREDIT RISK
A. Establishing an appropriate credit risk environment.
Principle 1: The board of directors should have responsibility for approving
andperiodically reviewing the credit risk strategy and significant credit risk
policies of the institution. The strategy should reflect the banks tolerance for
risk and level ofprofitability the bank expects to achieve for incurring various
credit risks.
Principle 2: Senior management should have responsibility for implementing
the credit risk strategy approved by the board of directors and for developing
policiesand procedures for identifying, measuring, monitoring and controlling
credit risk. Such policies and procedures should address credit risk in all of the
companys activities and at both the individual credit and portfolio levels.
Principle 3:Institutions should identify and manage credit risk inherent in all
products and activities and should ensure that the risks of products and activities
new to them are subject to adequate procedures and controls before being
introduced or undertaken and approved in advance by the boardof directors or
its appropriate committee.

B. Operating under a sound credit granting process.

51

Principle 4:Institutions must operate under sound, welldefined creditgranting

criteria. These criteria should include a thorough understanding of the
borroweror counter party as well as the purpose and structure of the credit and
its source of repayment.
Principle 5:Companies should establish overall credit limits at the level of
individualborrowers and counterparties and groups of connected counterparties
thataggregate in a comparable and meaningful manner and different types of
exposures,both in the banking and trading book and also on and off the balance
sheet.
Principle 6: Companies should have a clearly established process in place for
approving new credits as well as the extension of existing credits.
Principle 7: All extensions of credit must be made on an arm's length basis.
Inparticular, credits to related companies and individuals must be monitored
with particular care and other appropriate steps taken to control or mitigate the
risks of connected lending.
C. Maintaining an appropriate credit administration, measurement and
monitoring process.
Principle 8: Enterprises should have in place a system for the ongoing
administration of their various credit risk-bearing portfolios.
Principle 9:Companies must have in place a system for monitoring the
condition of individual credits, including determining the adequacy of
provisions and reserves.
Principle 10: Enterprises should develop and utilize internal risk rating systems
in managing credit risk. The rating system should be consistent with the nature,
size and complexity of a companys activities.

52

Principle 11: Companies must have information systems and analytical

techniques that enable management to measure the credit risk inherent in all onand off balance sheet activities. The management information system should
provide adequate composition of the credit portfolio, including identification of
any concentrations of risk.
Principle 12: Enterprises must have in place a system for monitoring the
overall composition and quality of the credit portfolios.
Principle 13: Concerns should take into consideration potential future changes
in economic conditions when assessing individual credits and their credit
portfolios and should assess their credit risk exposures under stressful
conditions.

D. Ensuring adequate controls over credit risk.

Principle 14: Companies should establish a system of independent ongoing
credit review and the results of such reviews should be communicated directly
to the Board of Directors and senior management.
Principle 15:Enterprises must ensure that the credit-granting function is being
properly managed and that credit exposures are within levels consistent with
prudential standards and internal limits. Enterprises should establish and enforce
internal controls and other practices to ensure that exceptions to policies,
procedures and limits are reported in a timely manner to the appropriate levels
of management.
Principle 16: Companies must have a system in place for managing problem
credits and various other workout situations.

53

E. The role of supervisors.

Principle 17: Supervisors should require that companies have an effective
system in place to identify measure, monitor and control credit risk as part of an
overall approach to risk management. Supervisors should conduct an
independent evaluation of a companys strategies, policies, practices and
procedures related to the granting of credit and the ongoing management of the
portfolio. Supervisors should consider setting prudential limits to restrict
companys exposures to single borrower or groups of connected counterparties.

4.5 CREDIT ANALYSIS

Credit Analysis involves obtaining credit information and evaluation ofcredit
applicants.
Besides establishing credit standards a firm should develop procedures for
evaluating credit applicants. The second aspect of credit policies of a rm is
Credit analysis and investigation. Two basic steps are involved in the credit
investigation process,
a. Obtaining credit information
b. Analysis of credit information
It is on the basis of credit analysis that the decisions to grant credit to a
customer as well as the quantum of credit would be taken.

Obtaining Credit Information

54

The first step of credit analysis is obtaining credit information on which tobase
the evaluation of a customer. The sources of information broadlyspeaking are
internal and external.
Internal:Usually, firms require-their customers to fill various forms and
documents giving details about financial operation. They are also required to
furnish trade references with whom the firms can have contacts to judge the
suitability of the customer for credit. This type of information is obtained from
internal source of credit information. Another internal source of credit
information is derived from the records of the firms contemplating an extension
of credit. It is likely that a particular customer/applicant must have enjoyed
credit facility in the past. In that case, the firm would have information on the
behavior of the applicant in terms of the historical payment pattern. This type of
information may not be adequate and may therefore have to be supplemented by
information from other sources.
External:The availability of information from external sources to assess the
credit worthiness of customer depends upon the development of institutional
facilities and industry practices.
Financial statements
One external sources of credit information is the published financial statements
that are the balance sheet and the profit and loss account. The financial
statements contain very useful information. They throw light on an applicants
financial viability, liquidity, protability and debt capacity, although the
financial statements do not directly reveal the past payment record of the
applicant, they are very helpful in assessing the overall financial position of a
firm which significantly determines its credit standing.
Analysis of credit information

55

Once the credit information has been collected from different sources, it should
be analysed to determine the credit worthiness of the applicant. Although there
are no established procedures to analyse the information, the firm should devise
one to suit its needs. The analysis should cover two aspects.
a. Qualitative
b. Quantitative

Credit risk is most simply defined as the potential that a firm borrower or
counterparty will fail to meet its obligations in accordance with agreed terms.
The goal of credit risk management is to maximize a firms risk adjusted rate of
return by maintaining credit risk exposure within acceptable parameters. The
firm needs to manage the credit risk inherent in the entire portfolio as well as
the risk in individual credits or transactions. The effective management of credit
risk is a critical component of a comprehensive approach to risk management
and essential to the long-term success of any organization.

56

CHAPTER 5
PROBLEM ANALYSIS
AND INTERPRETATION

57

Analysis and Interpretation

Analysis and interpretation of data has an important role to play in the research
study. Only after the analysis of data, management can look forward to the
decision making process, which is the catalyst for the growth of the
organisation. Charts and diagrams are the major tools for representing analysed
data.

5.1 CURRENT RATIO OF KSFE LTD

Current ratio is defined as the ratio of current assets and current liabilities. It
shows the relationship between total current assets and current liabilities.
Current ratio is also called working capital ratio.

Current Ratio=

CurrentA ssets
CurrentLiabilities

Table 5.1

YEAR

2007 2008
2008 2009
2009 2010
2010 2011
2011 2012
Source: Annual Report

(Rs. In lakhs)
CURRENT

CURRENT

ASSETS

LIABILITIES

RATIO

396059.62
502510.58
691911.56
828365.10
1003873.86

197921.23
263979.01
379473.32
497915.45
980357.45

2.00
1.90
1.82
1.66
1.02

58

Figure 5.1

CURRENT RATIO
2.5
2
1.5
1
0.5
0
2008

2009

2010

2011

2012

Interpretation: Current ratio measures of general liquidity and is mostly used

to make analysis of liquidity of a firm. A ratio equal or near to the rule of thumb
of 2:1 i.e. current asset double the current liabilities are considered to be
satisfactory. The KSFE has current ratio of 1.66 in the year 2011, but it
decreased to 1.02 in 2012. It shows a decreasing trend. Current liabilities shows
an increasing trend. The highest ratio is in the year 2008 and the lowest in the
year 2012. Thus companys liquidity position is not that much satisfactory.

5.2 INTEREST TO EXPENSE RATIO

59

Interest ratio indicates that percentage of income generated against the expense
incurred during a period of time.
Interest to Expense Ratio =

interest Received
Expense

*100

Table 5.2

(Rs. In lakhs)
INTEREST

YEAR

2007 2008
2008 2009
2009 2010
2010 2011
2011 - 2012
Source: Annual report

RECEIVED

EXPENSES

RATIO

19850.72
23887.68
32038.67
36452.42
41338.05

33332.85
40152.19
55715.55
66452.06
79522.49

59.55
59.49
57.50
54.85
51.98

Figure 5.2

INTEREST TO EXPENSE RATIO

62
60
58
INTEREST TO EXPENSE
RATIO

56
54
52
50
48
2008

2009

2010

2011

60

2012

From the above table and graph it is clear that the ratio is decreasing. As this
ratio shows a decreasing trend it signifies that the performance of the company
is not satisfactory. There should be more control over the expenditure for
achieving cost benefit.

5.3 LOAN TO DEPOSIT RATIO

Loan is the source of income generated by the financial institution. And a
deposit is the tool for maximising revenue using the better possible alternatives.
Loan to deposit ratio reveals that how effectively the fund is utilized and shows
the operational efficiency of the organisation.
Loans

Loan to Deposit Ratio = Deposit

Table 5.3

YEAR

2007 2008
2008 2009
2009 2010
2010 2011
2011 - 2012
Source: Annual report

(Rs. In lakhs)

LOANS

DEPOSITS

RATIO

305174.70
395969.01
539226.35
676347.71
817526.07

186779.63
225135.84
295573.79
311936.78
369564.41

1.63
1.76
1.82
2.16
2.21

Figure5 .3

61

LOAN TO DEPOSIT RATIO

2.5
2
1.5

LOAN TO DEPOSIT RATIO

1
0.5
0
2008

2009

2010

2011

2012

Ratio from the above calculations shows how effectively the funds are utilized.
In the year 2012 it shows effective utilisation of funds (216) and lowest in the
year 2009(163).
5.4 DEBT TO EQUITY RATIO
Debt to Equity ratio is the most important ratio to test the solvency of a firm.
This ratio indicates the relative proportion of debt and equity in financing the
assets of a firm. The ratio brings out the extent to which the firm is dependent
on outsiders for its existence and indicates the proportion of the owners stake in
the business. A high ratio means that claims of creditors are greater than
owners funds. Excessive liabilities tend to cause insolvency. This is the most
unfavourable situation for a banker, as he may gain the position of just one
among the many creditors of the company.

It is calculated as follows:

62

Debt to Equity Ratio =

debt
Equity

Table 5.4

(Rs. In lakhs)

YEAR

2007 2008
2008 2009
2009 2010
2010 2011
2011 2012
Source: Annual report

DEBT

EQUITY

RATIO

187597.49
225950.36
297290.90
313560.21
369774.61

11429.48
13443.32
16786.67
19112.85
25920.19

16.41
16.81
17.71
16.40
14.26

Figure 5.4
20
18
16
14
12
10

DEBT TO EQUITY RATIO

8
6
4
2
0
2008

2009

2010

2011

2012

Interpretation:
The graph shows relative proportion of debt and equity in financing the assets
of a firm. From the year 2009 to 2012 it shows a more or less stable ratio.
63

5.5 INTEREST COVERAGE RATIO

It tells the analysts the extent to which the firms current earnings are able to
meet current interest payments. When this ratio is high it shows that the
business would earn sufficient profits to pay the interest charges periodically. A
low interest coverage ratio may result in financial embarrassment. Interest
coverage ratio used to test the solvency of the firm. These ratios measure the
capacity of the firm to pay interest on loans and debentures regularly.
EBIT

Interest Coverage Ratio = INTEREST

Table 5.5

YEAR

2007 2008
2008 2009
2009 2010
2010 2011
2011 - 2012
Source: Annual report

(Rs. In lakhs)

EBIT

INTEREST

RATIO

1507.45
3126.14
3679.35
5222.08
5207.25

13797.64
17595.82
23827.20
24502.97
28667.92

0.11
0.18
0.15
0.21
0.18

Figure 5.5

64

INTEREST COVERAGE RATIO

0.25
0.2
0.15

INTEREST COVERAGE RATIO

0.1
0.05
0
2008

2009

2010

2011

2012

Higher the ratio stronger is the ability of company to pay interest. Low ratio
may be indicating excessive use of debt. Here the ratios are below 1 and it
indicates that the company is not generating sufficient revenue to satisfy interest
expenses.

5.6 RETURN ON INVESTMENT

The ROI is the key factor of profitability of a business. It matches the operating
profit with the assets, which earn this profit. Efficient utilization of assets will
have a relatively high return, while a less efficient use will have a low return.
Higher profitability implies greater cushion to debt holders.

It is calculated to know the profit earned on its investments. ROI measures the
overall profitability of the firm and it establishes the relationship between profit
or return and investment. It is computed as follows:
65

Return on Investment =

Net profit
Capital employed

* 100

Table 5.6

(Rs.in lakhs)
CAPITAL

YEAR

2007 2008
2008 2009
2009 2010
2010 2011
2011 - 2012
Source: Annual report

NET PROFIT

EMPLOYED

RATIO

543.85
1247.82
3811.32
2794.17
7275.32

11429.48
13443.32
16786.20
19112.85
25920.19

4.75
9.28
22.70
14.62
28.06

Figure 5.6

RETURN ON INVESTMENT
30
25
20
RETURN ON INVESTMENT
15
10
5
0
2008

2009

2010

2011

2012

In the year 2012 company had the highest return on investment ratio (28.06) and
lowest in the year 2008 (4.75).

5.7 RETURN ON TOTAL ASSETS

66

It is an indicator of earning potential of total asset of the concern. It is also

expressed in percentages. It establishes the relationship between the net profit
and total asset which includes both current assets and fixed assets. The formula
is as follows:

Return on total assets =

EBIT
TOTAL ASSETS

Table 5.7

YEAR

2007 2008
2008 2009
2009 2010
2010 2011
2011 2012
Source: Annual report

(Rs.in lakhs)

EBIT

TOTAL ASSETS

RATIO

1507.45
3126.14
3979.23
5222.08
5207.25

396948.21
503372.69
693550.31
830588.51
1006277.65

0.38
0.62
0.57
0.62
0.51

Figure 5.7

67

RETURN ON TOTAL ASSETS

0.7
0.6
0.5
RETURN ON TOTAL ASSETS

0.4
0.3
0.2
0.1
0
2008

2009

2010

2011

2012

From the above table it is clear that the company had the highest return on
assets ratio in the year 2009 and 2011 and the lowest in the year 2008. The
company is witnessing a gradual decrease in return on total asset ratio in each
year.

68

CHAPTER 6
LIMITATIONS OF THE STUDY
AND CONCLUSION

69

LIMITATIONS OF THE STUDY

Credit risk management is the area of strategic decision making, the
institution makes the disclosure of the concerned data only to a limited
extent.
The study is entirely based on numerical figures and no qualitative factors
are taken in to consideration for the purpose of the study.
Lack of time is a limiting factor.
The study is limited for a period of 5 years, hence the result can be
applied for that period only.
The study is limited to the Head Office of KSFE so that it cannot be
generalized.
The company didnt provide the datas published of the last two years
2012-13 and 2013-14, its a major blow to the perfection of this study.
Busy work schedule of officials.

CONCLUSION
The analysis of credit risk management of the Kerala State Financial Enterprises
from the financial year 2007 to 2012 reveals that the organisation is achieving
sustainable performance to a certain limit. But the datas of the year 2012 are not
satisfactory. It is the only successful Government owned Non-Banking financial
institution in Kerala. KSFE ensures equitable distribution of wealth and reduces
the impact of interest in the economy like inflation and instability in the
economy. KSFE is a helping hand to the State Government as it helps to raise
lot of fund to the Government Treasury. The success of the firm greatly depends
on the efficient management of assets and liabilities.

BIBLIOGRAPHY
70

Annual reports (2007-08 to 2011-12) of KSFE ltd.

www.books.google.co.in
www.ksfe.com
Financial Management I M Pandey

71