Performance Evaluation of Sfcs: A Comparative Study of Pfc and Hfc

Prajnan, Vol. 20, No. 3, pp. 289-310, 1991

Posted: 31 Jan 2005

See all articles by Satya Prakash Singh

Satya Prakash Singh

Panjab University - Business School

Asha Arora

DAV Sr. Secondary School

Manoj Anand

Management Development Institute


The country is served by over 66 development banks with a wide network of branches supported by technical consultancy organisations with Industrial Development Bank of India acting as an apex institution for coordinating their diverse financing and promotional activities. These include 18 State Financial Corporations (SFCs). The strategies, policies and industrial promotional efforts of these corporations subserve the larger national objectives of rapid industrial growth, balanced regional development, self-reliance, employment generation and equitable distribution of income and means of production.

A fairly long experience of working and performance of SFCs is available. Quite a few attempts have been made to study the performance of SFCs.

A vast volume of secondary data on various aspects of performance of SFCs is available. Most important sources of secondary data are IDBI publications, viz. Operational Statistics, Report on development Banking, Performance of SFCs during Sixth Five Year Plan - A Statistical Profile and Annual Reports of SFCs.

An attempt has been made in the present study to evaluate the comparative operational and financial performance of the Punjab Financial Corporation (PFC) and the Haryana Financial Corporation (HFC). Both the corporations are guided by identical national objectives, and function under identical rules and regulations. Therefore, one would expect that the factors, which determine the supply side of development finance for two SFCs, are identical, except the management and economic and socio-political environment. Hence, there is a case for a comparison of the performance of two SFCs.

The operational performance has been measured over a period of 23 years from 1967-68 to 1989-90 in terms of the following variables: (a) total assistance sanctioned and disbursed; (b) assistance sanctioned and disbursed to small scale industries (SSI); and (c) assistance sanctioned and disbursed to backward areas (BW).

Total loans sanctioned and disbursed indicate contribution to industrialization and economic growth. Loans sanctioned and disburse to small scale industries indicate contribution to the objective of industrialization with employment generation and reduction of concentration of economic power. Assistance to backward areas contribute to correction of regional imbalance within each state. Thus, the above indicators are operational performance indicators in terms of the main objectives of the national economic policy.

Recovery of loans indicate the managerial performance in terms of, correct choice of projects which perform better, implementation and control. Overdues, likewise, are the inverse measure of managerial effectiveness. Total amounts of loan recovery and overdues reflect managerial effectiveness when taken as ratios of total demand and loans outstanding respectively. Thus, these indicators have been studied along with other financial ratios for financial performance, though these indicators also reflect to some extent operational performance.

Often, operational performance of SFCs is studied by measuring variables at current prices. Obviously, this distorts the temporal picture of performance. To make correction for such inflationary distortions, the data have been deflated by the all commodity whole sale price indices, with base 1970-71. The analysis has been done both in terms of current price and at 1970-71 prices. However, the broad conclusions have been by and large drawn only on the basis of constant prices.

To capture the trend precisely, best fit models have been chosen for each variable out of the following five models : (1) Y = a + bX; (2) Y = a + bX + cX2 ; (3) lnY = a + bX; (4) lnY= a + blnX; (5) Y= a +lnX, where ln stands for natural logarithm.

The criterion for choice has been primarily the value of coefficient of determination, R2. However, in some cases where a quadratic model improved R2 slightly at the cost of significance of b and /or c, a simpler non-quadratic model has been preferred.

For computing growth rates, equation (3) has been employed. To test the significance of coefficients, t-test has been applied.

IDBI evaluates the financial performance of SFCs in terms of the following seven ratios: (a) debt to equity ratio; (b) debt-service coverage ratio; (c) return on investment; (d) cost of borrowings; (e) administration cost as a percentage of average total assets; (f) recovery as a percentage of total demand; and (g) overdues as a percentage of loan outstanding. It many be mentioned that IDBI may be using these ratios, keeping in view their own organizational objectives. But to have a more comprehensive look, we have used seven additional well-known ratios. These 14 ratios have been classified into two categories: (a) solvency ratios; and (b) profitability ratios. The period of analysis is eleven years from 1978-79 to 1988-89.

To assess the solvency position of PFC and HFC, following six ratios have been computed and analyzed: (a) debt to equity ratios; (b) cost of borrowings; (c) debt service coverage ratio; (d) overdues as percentage of loans outstanding; (e) recovery as a percentage of total demand; and (f) share of net refinance in total business of SFCs.

To assess profitability of operations of PFC and HFC, following eight ratios have been computed and analyzed: (a) administration cost as a percentage of total income; (b) administration cost as a percentage of average total assets (c) interest on bonds, deposits and borrowings as a percentage of interest on loans and advances; (d) return on investment (ROI); (e) return on owners' investment (ROOI); (f) earnings per share; (g) dividend payout ratio; and (h) plough back to share holders equity.

There was a definite policy change regarding the system of accounting in SFCs in the year 1984-85 from accrual basis to cash basis. Therefore, the values of financial ratios, viz. Debt to equity ratio, debt service coverage ratio, administrative cost as a percentage of total income, interest on bonds deposits and borrowings as percentage of interest on loans and advances, ROI, ROOI, EPS, dividend pay out ratio, and plough back to share holders equity became incomparable over the entire period of the study. For these ratios, the computations and comparisons have been separately made for the period 1978-79 to 1983-84 and 1984-85 to 1988-89.

To test the significance of the difference between the financial performance of PFC and HFC on different criterion, Mann-Whitney's U-test has been applied.

The operational performance of PFC is better than that of HFC. PFC seems to have an edge over HFC with respect to overdues as percentage of loans outstanding and recovery performance. But, profitability of operations of HFC is better than that of PFC. This may be due to comparatively larger portion of PFC's total disbursements going to backward areas, where assistance is given at a concessional rate of interest.

This points to the hypothesis that the impact of unfavorable socio-economic environment of Punjab has been more than compensated by comparatively more entrepreneurship, and more effective management of PFC . Obviously, there is a need for a comprehensive study into managerial effectiveness in decision making, implementation and control for various SFC's and differential qualities of entrepreneurship drawing assistance from PFC on one hand and from HFC on the other.

The change in accounting system of two SFC's from accrual basis to cash basis from the accounting year 1984-85 is a step in the right direction. It prevents window-dressing in the financial results of SFCs. Prior to 1984-85, interest expense to interest-income ratio was quite low, depicting better profitability of operations, of SFCs, but the cash position of the two SFCs was critical, because of delay in collections of interest-income amount and high default ratios.

The results of this study indicates that of a more meaningful picture of the financial performance, SFCs and refinancing institutions like IDBI should calculate the operational performance at constant prices and not at current prices. This will take care of the distortions arising out of inflationary tendencies.

Keywords: Performance Evaluation, Financial Institutions, India

JEL Classification: G20, G21

Suggested Citation

Singh, Satya Prakash and Arora, Asha and Anand, Manoj, Performance Evaluation of Sfcs: A Comparative Study of Pfc and Hfc. Prajnan, Vol. 20, No. 3, pp. 289-310, 1991, Available at SSRN:

Satya Prakash Singh (Contact Author)

Panjab University - Business School ( email )

Sector 14
Sector 14
Chandigarh, 160014

Asha Arora

DAV Sr. Secondary School ( email )

Sector 8

Manoj Anand

Management Development Institute ( email )

Gurugram, Haryana 122001

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