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6 .1 MAJOR FINDINGS
After the analysis of the data, research has identified the following flaws with the
credit management of the institution.
The researcher found that the percentage of loan sanction increased by 162
percentage and the application sanctioned amount is increased 266percentage .
but the number of applications has increased by almost 142 percentage during
the project period . This implies that the company has been giving out loan
amounts of higher denomination.
The major portion of recovery amount is the principal outstanding , the
principle outstanding increased by 171 percentage and the total interest
outstanding increased by almost 139 percentage . The total recovery amount
increased by 157 percentage during the project period
During the project period the borrowing of KFC is increased by 181
percentage and the amount of loans and advances given by the KFC is
increased by almost 221 percentage . This implies KFC raise fund for lending
other than the borrowings from outside agencies
Arrears to be recovered, which show the principal amount inclusive of
interest, increased every year until the year 2007-08. Since then KFC has
written off almost 150 crores of bad debts which has cleared a very large
portion of bad debts by which there has been significant reduction in the total
amount of arrears to be recovered.
The pattern of the percentage of recovery to disbursements shows that there
was a tremendous effort from KFC which help to increase percentage of
recovery .
The percentage of bad and doubtful debts to the loans and advances decreased
from 47% to 1.75% . This implies kfc made tremendous effort to avoid the bad
debts
NPA percent has lowered to almost 1.88
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The trend of Loans and Advances shows an increasing trend in extending
credit by KFC which in turn reflects in increased borrowings by KFC from
external sources.
The company resorts to remove bad and doubtful debts each year which shows
the inefficiency in receivables management or lack of a proper study on the
projects approved for disbursement of loans.
Financial restructuring for KFC is to write off all the accumulated losses out
of borrowed funds. This usually takes a hefty financial toll on the company.
The company has recorded profits due to writing off of almost Rs.105 crores
of accumulated losses. The return of asset ratio shows inconsistency because
of inconsistency in profitabity and revenue
The financial liquidity of the KFC not good during the project period . the
current ratio of KFC is not an ideal ratio in the past years . The current ratio of
the KFC is inconsistence, because inconsistency in revenue
The return of investment ratio and the return of asset ratio shows
inconsistency because of inconsistency in profitabity and revenue
The analysis of cash flow statements shows that interest payments have
increased but the receipt of interests have not made much of an improvement.
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6.2 DISCUSSION
Credit is a tool that allows a corporation to borrow money from organizations
to finance its operations, or to loan money to customers. There are many credit
management problems a corporation may face including having too much debt, not
paying debt and not collecting debt. A corporation must implement strategies to
manage its credit effectively, or it could face financial and operational problems
including downsizing or closure.
Incurring huge expenses on legal and collection procedures, not receiving
payments on time, incurring huge bad debts, difficulties in meeting operational
expenses and unable to meet the interest on borrowings of the firm, dissatisfaction of
customers etc. are the problems identified with the existing system of the institution.
The main problem lies in the fact that by the time the firm reacts to those mishaps it
will be too late and hence the firm has to bear huge bad debts and losses at the end.
To develop a new system, the working pattern of the existing system was studied and
this is pictorially represented in figure 7.1. In the existing system, institutions and
since the loans without giving much importance to project appraisal or industry study.
After the loans have been dispersed the institution waits till the repayment of the first
installment and by the time the default in payment occurs the debtors turn over period
might have gone above six months when the institution notices the default in
payment, he takes another 20 days to notify the customer to make the repayment
within a month. Again if the repayment is not done within the specified time limit, the
institution takes legal action against the customer. This result either in the collection
of the installment or may be added to the bad debts. Such a system results in time
loss, increasing expenses on receivables and also bad debts.
To do away with these flaws, it is almost necessary that a new efficient system
be introduced in the firm. The researcher has proposed a new system of receivables
management for the institution and this is pictorially represented in figure 8. The
important point here is that the new system starts working right from the first time
itself when applications for loans and advances received. The firm first scrutinises the
applications and contacts at the study on the projects of the clients. Based on this,
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decisions are made as whether to sanction it or not; and if sanctioned how much is to
be sanctioned. Disbursements are made accordingly to the different units (SSI and
non-SSI units. As soon as the disbursements are made the well-equipped follow-up
system starts working, right from the first month and then consecutively. The
customers are provided with awareness on their projects (technical knowledge and
innovation) and on how to meet the needs of the credit provisions provided to them.
Efforts are made to study the problem of the clients and accordingly changes are made
in the repayment procedures, such as extension of credit period, reduction in interest
rates etc. This can help the customers in making prompt payments. Providing festival
discounts also can encourage the customers. Following the above steps and making
calculative reductions in legal and collection costs will help the firm in increasing
savings. All these will lead to timely collections from the customers.
This new system proposed by the researcher will bring tremendous results to the
institution and also will help to reap profits.
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PRESENT RECEIVABLES MANAGEMENT MODEL OF THE FIRM
DTP=195 days
1 month 1 month 20 days
FIGURE 6.1
Collection
Bad debt
Legal
action
Non
payment
Notification
send
Default
payment
Loan
application
recived
sanction
Loan
disbursed
100%
Non
SSI
unit
SSI
unit
Time for
payment of
first
instalment
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PROPOSED RECEIVABLES MANAGEMENT MODEL OF THE FIRM
2 week
3 days waiting period
1 week
FIGURE 6.2
Loan
application
received
Prior notification by
SMS or email
Loan
disbursed
Bad debt
Collection
Initiate
recovery
proceeding
Non
payment
Legal
notice
Notice
send by
registered
post
Non
payment
Notification
send by SMS,
email and
telephone call
through
automated
system
Immediate alert to
the receivable
management
department
Default
payment
SSI unit
Non SSI
unit
Use of insurance on claim of
money scheme of insurance
companies
sanction
Technical, industrial
and scope of project
in future
Project
appraisal
team
Time for
payment of
1
st
instalment
Hand over to debt
collecting agencies
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6.2.1 EXPLANATION OF THE NEW PROPOSED SYSTEM
New Financial services offered by other financing companies can be integrated into
the system they are Factoring and Credit Insurance.
[Link] FACTORING
Factoring is a financial transaction whereby a business job sells its accounts
receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for
immediate money with which to finance continued business. Factoring differs from a
bank loan in three main ways. First, the emphasis is on the value of the receivables
(essentially a financial asset), not the firms credit worthiness. Secondly, factoring is
not a loan it is the purchase of a financial asset (the receivable). Finally, a bank loan
involves two parties whereas factoring involves three.
It is different from forfaiting only in the sense that forfaiting is a transaction-
based operation involving exporters in which the firm sells one of its transactions,
while factoring is a Financial Transaction that involves the Sale of any portion of the
firm's Receivables.
Factoring is a word often misused synonymously with invoice discounting -
factoring is the sale of receivables, whereas invoice discounting is borrowing where
the receivable is used as collateral.
The three parties directly involved are: the one who sells the receivable, the
debtor, and the factor. The receivable is essentially a financial asset associated with
the debtor's liability to pay money owed to the seller (usually for work performed or
goods sold). The seller then sells one or more of its invoices (the receivables) at a
discount to the third party, the specialized financial organization (aka the factor), to
obtain cash. The sale of the receivables essentially transfers ownership of the
receivables to the factor, indicating the factor obtains all of the rights and risks
associated with the receivables. Accordingly, the factor obtains the right to receive the
payments made by the debtor for the invoice amount and must bear the loss if the
debtor does not pay the invoice amount. Usually, the account debtor is notified of the
sale of the receivable, and the factor bills the debtor and makes all collections. Critical
to the factoring transaction, the seller should never collect the payments made by the
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account debtor, otherwise the seller could potentially risk further advances from the
factor.
There are three principal parts to the factoring transaction;
a.) The advance, a percentage of the invoice face value that is paid to the seller
upon submission,
B.) The reserve, the remainder of the total invoice amount held until the
payment by the account debtor is made and
C.) The fee, the cost associated with the transaction which is deducted from
the reserve prior to it being paid back the seller.
Sometimes the factor charges the seller a service charge, as well as interest
based on how long the factor must wait to receive payments from the debtor. The
factor also estimates the amount that may not be collected due to non-payment, and
makes accommodation for this when determining the amount that will be given to the
seller. The factor's overall profit is the difference between the price it paid for the
invoice and the money received from the debtor, less the amount lost due to non-
payment.
(A) Different types of Factoring
1. Disclosed and Undisclosed
2. Recourse and Non recourse
A single factoring company may not offer all these services.
Disclosed
In disclosed factoring client's customers are notified of the factoring agreement.
Disclosed type can either be recourse or non recourse.
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Undisclosed
In undisclosed factoring, client's customers are not notified of the factoring
arrangement. Sales ledger administration and collection of debts are undertaken by the
client himself. Client has to pay the amount to the factor irrespective of whether
customer has paid or not. But in disclosed type factor may or may not be responsible
for the collection of debts depending on whether it is recourse or non recourse.
Recourse factoring
In recourse factoring, client undertakes to collect the debts from the customer. If the
customer doesnt pay the amount on maturity, factor will recover the amount from the
client. This is the most common type of factoring. Recourse factoring is offered at a
lower interest rate since the risk by the factor is low. Balance amount is paid to client
when the customer pays the factor.
Non recourse factoring
In non recourse factoring, factor undertakes to collect the debts from the customer.
Balance amount is paid to client at the end of the credit period or when the customer
pays the factor whichever comes first. The advantage of non recourse factoring is that
continuous factoring will eliminate the need for credit and collection departments in
the organization.
Factoring Companies in India
Canbank Factors Limited
SBI Factors and Commercial Services Pvt. Ltd
The Hongkong and Shanghai Banking Corporation Ltd
Foremost Factors Limited
Global Trade Finance Limited
Export Credit Guarantee Corporation of India Ltd
Citibank NA, India
Small Industries Development Bank of India (SIDBI)
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Standard Chartered Bank
[Link] CREDIT INSURANCE
Credit insurance is a term used to describe both business credit insurance
(a.k.a. trade credit insurance) and consumer credit insurance, e.g., credit life
insurance, credit disability insurance (a.k.a. credit accident and health insurance), and
credit unemployment insurance,
The easy way to differentiate between these two types of insurance is:
* Business credit insurance is credit insurance that businesses purchase to insure
payment of credit extended by the business (their accounts receivable).
* Consumer credit insurance is credit insurance that consumers purchase to insure
payment of credit extended to the consumer (insurance pays lender or finance
company).
Credit insurance or trade credit insurance (also known as business credit
insurance) is an insurance policy and risk management product that covers the
payment risk resulting from the delivery of goods or services. Trade credit insurance
usually covers a portfolio of buyers and pays an agreed percentage of an invoice or
receivable that remains unpaid as a result of protracted default, insolvency or
bankruptcy. Trade credit insurance is purchased by business entities to insure their
accounts receivable from loss due to the insolvency of the debtors. This product is not
available to individuals.
The costs (called a "premium") for this are usually charged monthly, and are
calculated as a percentage of sales of that month or as a percentage of all outstanding
receivables.
Trade credit insurance insures the payment risk of companies, not of individuals.
Policy holders require a credit limit on each of their buyers for the sales to that buyer
to be insured. The premium rate is usually low and reflects the average credit risk of
the insured portfolio of buyers.
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In addition, credit insurance can also cover single transactions or trade with only one
buyer.
Credit insurance takes care of the risk of payment of the organizations and not
of the individuals. To get insured, the holders of the policy should have a credit limit
on each of the buyers. For Credit insurance, the rate of premium is kept low. It
combines both Credit Life Insurance and Trade Credit Insurance.
Credit insurance involves trade with a single buyer. The concept of this
insurance was first incepted in the nineteenth century. During the time of first and
second World Wars, the idea was conceived in the Western Europe. The various
companies that were developed during this time offered credit insurance to the
individuals.
If the borrower of the loan dies or gets disabled then the insurance will pay the
loan off. Trade Credit Insurance covers the risk of the payment during the time of
delivery of services and goods. Private individuals are not provided with the facilities
of this product.
Premium is charged monthly against the issuance of the credit insurance. This
insurance is a business driven by broker, who helps in the creation of market
competition among the policy holders for better premium and policy wordings.
Credit Insurance is the best way to manage credit risk in a cost effective way
for any organization. It provides financial assistance during the time of any credit
risks and overdue payments during domestic trade or exports. Before granting covers
for the insurance various terms and conditions need to be fulfilled.
Credit insurance is one of the important types of insurance that covers risk against the
following:
* Trade Receivables
* Portfolio
* Business-to-Business Transactions
* Short Term Credit Risk
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Credit insurance offers a number of benefits, which are available in the form of
* Risk Mitigation
* Efficient collection of debts
* Complements credit management of the seller
* Enables development of new markets against protection provided
* Expert since buyers are analyzed for credit worthiness
The major Credit Insurance providers in India are ICICI Lombard and The New India
Assurance.
6.2.3 NEW MODEL
KFC has to create a special task force or specialised project appraisal team
whom are well equipped with the latest analysing technologies/softwares, expert
panel from different industries, dedicated team to find out the latest innovations in the
industry etc. This specialised project appraisal team has to deeply investigate into the
projects profitability and scope factors in the existing industry. The team has to
thoroughly study the future scope for this project and also make sure that the products
that the new unit is going to produce will be competitive enough.
When a loan application comes to KFC the same has to be forwarded to this
task force who will analyse the project and will give out their suggestions and
recommendations on the received application. Based on a report of this task force the
loan approving officer has to set up a date on which the proposed projects promoter
will be called upon and will be discussed with the recommendations of the appraisal
committee.
The research also proposes that every month one day should be kept for
serving this purpose. That day the panel should be present to express their views and
opinions on that project which will have to be discussed over and suggestions from
industry experts will be sought.
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This will ensure that the loans given out from KFC will be profitable business.
The researchers new system also requires a new automated computer to
monitor and track payments and the reminder service which will prior to the
installment payment date notify the loanee that the payment should be made on the
installment at the coming date.
If there is default in the payment of the installment, the new automated system
will notify the receivables management department of the default which in turn the
officers will send personal SMS, e-mail which will be a preset format stating the
amount to be paid and the date of skip payment. Also the officers will have to call the
defaulter and ask him to make the payment.
If no favourable responses received from the defaulter, a notice in the
registered post should be posted to the defaulter. Within two weeks, if the defaulter
doesn't pay a legal notice should be sent to the defaulter.
If the defaulter makes payment it will go into the collections, otherwise a debt
collection agency should be given the contract of KFC to collect all the debts
pertaining to that financial year.
Research also proposes integration of factoring and credit insurance into the
KFC's receivable management system.
Credit insurance should be taken for each and every loan that has been given
out by KFC, KFC and the credit insurance company should have a tie up. The usage
of credit insurance will help KFC to get back its disbursed money. The advantages of
credit insurance have been mentioned above.
Factoring is the new service offered by the financial institutions which can be
used by KFC to sell its receivables and thereby receive partial amount of debt to be
received and the remaining amount which will be given to KFC by the factoring
company within a stipulated period of time mentioned in the contract.
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6.3 SUGGESTION
In light of the analysis and results, the researcher puts forward the following
recommendations:
The institution is recommended to set up an advanced project appraisal team
which can advise the firm in granting loans to eligible people. The project
appraisal team will also act as a screening process where projects which have
scope and innovativeness will be selected for loan disbursement. This will
help the firm also smoother recovery of the principal and interest and thereby
maintain a smooth flowing in its operations.
A new automated payment notification system which will inform the loanee
about the payment which is coming in the upcoming date. These automated
system also will act as a management information system whereby this
receivables management department be notified of the defaults made by the
customers. The system also will have the facility to e-mail and SMS to
customers about their loan defaults. This will make sure that that customers
are well aware of their loan payments due.
The researcher also recommends having tie ups with factoring companies
which will ensure that the firm collection of its debts upto 70% success.
Factoring is also a method to collect those bad debts which otherwise have to
be written off. As factoring comes at a price which is lesser compared to the
actual debt being written off.
Research also recommends setting up of an alliance with insurance company
which provides credit insurance. Credit insurance helps the company to get
back its money in case the customer is incapable of being that debt. The credit
insurance requires premiums to be paid each month which can be collected
from the customer itself which would form part of installments paid by him
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each month. This is a new method now being used by private financial
companies which can also be used by KFC.
KFC should cut down on its loan approvals or disbursements for at least two
years and try to recover those debts which are otherwise going to be written
off. Also KFC should rewrite its guidelines on loan policies, which will ensure
that particular types of customers who have credit rating or has a good past
credit record.
Provide motivational credits, by waiving the interests and increasing credit
period, which would help to reduce arrears. Customers who have been making
their payments on time should also be given relaxation in terms of interest
payments or some lowered percentage of interest for the next loan he's going
to take.
KFC should also try to market its financial services for people who are very
relevant in industry or business which are very successful and are growing.
Innovation project have to encouraged
Work in progress has to be thoroughly monitored to ensure no misleading of
funds occurs.
A bench-marking strategy needs to be adopted.
NRIs have the capacity to pay the allotted credits than the general public.
While sanctioning and recovering the loans, no discount offers should be
provided to them.
KFC should also try to advertise more and make the general public are aware
of the good financial services provided by KFC so that KFC will have more
loan applications from the public from its screening can be done so as to
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maintain a good level of business while keeping the bad debts at a minimal
percentage.
The legal and collection department should be strengthened.
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6.4 CONCLUSION
The project has been completed within the framework of the objectives of the study.
Researcher has analysed the collected data and this has helped to identify the flaws
prevailing in the existing credit management system of the firm. Heavy expenses
incurred for legal and collection procedures, customers not making payment on time,
the firm is unable to meet its operating needs etc. were all the problems identified.
To do in every these problems and to lead the firm profitably, the researcher
has proposed a new system. By inculcating the new system the firm can reduce its
expenses on receivables, motivate customers to make prompt payments, get timely
collections, reduce bad debts and losses can make its operating needs. The new
system can improve the efficiency of credit management by almost 70%. Researcher
has also given his findings and recommendations which substantiate the new system.