HOW OLD ARE DEBT WAIVER SCHEMES?

Loan waiver schemes of the Government have always attracted adverse notice especially from well-meaning bankers, though no one registers similar protests when dues from the high and mighty like a ‘healthy’ politician heading a sick business known as Itrup Group are compromised.

Looking at Loan Waiver Schemes, we observe only the tip of the iceberg- less than 10% of the whole. Concealment of the submerged 90% has shades of a Capitalist Conspiracy, not conceived consciously by human perpetrators, but by a self-perpetuating System. We explain that in detail below, but how many know this: Waiver of Agricultural Loans finds honorable mention in two of the most well-known ancient administrative codes unearthed, namely the Hammurabi Code of 1772 BC and Rosetta Stone Inscription of 196 BC…can you beat that!? Plus ça change, plus c'est la même chose- the more things change more they remain the same, you know…

Analysing the problem objectively, let’s see RBI statistics of 31^st March 2013, giving sectoral percentages of NPA in the respective sectors’ total loan: Industry 16%, Services 10%, Retail 5.5%, Agriculture 8.2%. The figures of NPA include written off NPA, so that Agriculture’s percentage cannot be questioned on ground of waivers. Thus holding Agriculture Debt Relief as a causative factor in low recovery rates is absurd. Just find out how many farmers committed suicide last year and how many darlings of Indian business did that. The activity called agriculture has such miserable returns, in spite being a basic human necessity, that the Government and the Society has to periodically write off agricultural debts in order to prevent these sections from rising in revolt. Maoist nightmares of the wilier amongst Indian politicians...You may not be aware of the disaffection, or may not have felt the under-currents, but just rise over the cacophony of media wisdom, and you’ll be left aghast at our blindness. Common wisdom is but the sum total of what the entrenched sections of society want us to believe. One day all News Channels will blare in unison about the meager defence-spend of India (though India is the largest arms importer in the comity of nations), one day about firing across the LOC, the third day about sartorial preferences of Modi and another day about the impending pregnancy of a movie starlet.…Obviously, if it’s a felicitous chorus, it has to be orchestrated by invisible hands…

One small voice drowned in the Chorus is that of an International Society called the Committee for the Cancellation of the Third World Debt (the CADTM -Comité pour l’annulation de la dette du Tiers Monde), headed by Dr. Eric Toussaint, Belgian Social scientist and a critic of World Bank. They are a party to the multi-billion dollar Argentine Sovereign Debt Case being fought in a New York Court against NML Capital and others. Can some hedge funds stake claim to known and unknown  resources of an entire society because a General once came under the influence of the Fund? The EPW carries an article on the case in the 27-05-2014 issue in the HT Parekh Finance Column which says:

"A series of events since the early 1980s have pushed developing countries to restructure their economies and integrate themselves with global markets. These policy shifts have made them highly vulnerable to external changes. One such story is that of Argentina which from the mid-1970s has gone from crisis to crisis and is now facing legal pressure from US holders of old Argentine debt."

Eric Toussaint who spearheads the CADTM is deep into the subject of debt (not into debt) and has documented the history thereof. In his article ‘The Long Tradition of Debt Cancellation in Mesopotamia and Egypt from 3000 to 1000 BC’ he talks about the periodic cancellation of debts owed by farmers and temple societies, giving references from the historical Hammurabi’s Code.  He writes:

 “ If peasants were unable to pay off their debts, they could also find themselves reduced to the condition of serfs or slaves; indebtedness could also lead to members of their family being made slaves. In order to ensure social peace and stability, and especially to prevent peasants’ living conditions from deteriorating, the authorities periodically cancelled all debt and restored peasants’ rights.” (sounds like yesterday's newspaper)

The debt cancellation proclamations spelt out the manner in which the private lenders were to be compensated, how the decrees were to be enforced etc. A money-lender refusing to part with property title evidence, even though the debt had been repaid in full was to be put to death…

The foregoing paragraphs possibly speculate about the motives of the rulers behind debt cancellation, which could be seen as calculated to assist propagation of an unjust social system. This article was not at all meant to speculate and adjudicate on the ideological merits of the historical cancellation of debt. What is said about debt by us above may point to the ideological inclination of the writer, but the following truth holds regardless of anybody’s inclinations: that you’d be horribly wrong if you believe that the Indian Government commits an unprecedented travesty of financial justice when it gives a hand to the farmer for cleaning up whatever measly and contemptible little personal balance-sheet she has. Globally, the State, whatever its ideology, has been acknowledging for 5000 years, the fact that farmers periodically require loan subsidy, given the adverse circumstances under which they produce, or are compelled by society to produce, sustenance essential to our survival. 

Devil in the Fine Print

Mankind has a funny relationship with the Written Word. For some lucky chaps, it is no more important than a buffalo (bhains barabar). We have reproduced at the end, an interesting poster designed for a past ‘International Literacy Day’.

You’ll find a number of ‘written-word’ jokes prevalent among journalists. Naturally so, they eat, live and breathe the written word. One anecdote goes like this: At a party, Professor Simon enters into an argument over the identity of the farthest planet, with another reveller, who unbeknownst to the Professor, is a sub-editor in the leading local daily. The Sub has insisted that the planet is  not Pluto, but Uranus. Deciding to trick his adversary, a few editions hence, the Sub publishes an anonymous report, describing Uranus as the planet farthest from the Sun. Sure enough, Professor Simon reads the article, and apologises to the Sub over phone, stating that he had now read the correct name in the ‘Paper’- Uranus.

Then there is the contrary version as well. A thief steals into a mansion, and reaches for the safe, which has a solid steering-wheel handle, with the words “To open turn clock-wise” boldly inscribed over it. That’s unfortunately a safety contraption, and sets off a huge alarm, the moment the thief complies. Caught, the boy rues to the police about the below-belt tactics, and vows never to trust the written word again!

Well, what we intended to write today was a serious article about the hazards of not reading every word of a document you’d put your signature to. This is, of course, in the context of Banking. “Read the whole file from its front to label the trade-mark on the back”, one of our ex-bosses used to say, and sure we never took the trouble of emulating him till we came to grief one day.

In the Indian finance world, during an expansionary phase of the economy, the banker is nagged again and again by Corporates, “for issuing an NOC to cede pari passu charge or second charge on the securities” held by the original bankers, right? It is common for banks eager to lend, to approach with fixed tenure ‘Corporate Loan’ proposals, all companies with an acceptable rating. Needless to say, ‘Consultants’ will play their own roles. The economy being in an expansionary phase, the stock markets will be booming with due assistance from Merchant Bankers, because Capital will be required for expansion and for leveraging loans. Moreover, the Corporate Loan is liable to be treated as NWC or long-term resource for the purpose of working capital loans. In such a scenario, existing Companies will be tempted to make some easy money by playing the secondary market, and therefore banks flush with funds have lots of takers, who naturally demand some security. In the case of loans running into hundreds of crores, bank branches have to approach their respective Boards repeatedly for approval. Back in the early 2000s in the country’s commercial capital, when we headed a bank branch with fund-based loan portfolio approximating $ 2.00 bn., such requests accounted for half the agenda of our Board meetings. That was till Banks started appointing Security Trustees from among FIs, flavour of the decade being The World’s Local Bank (TWLB), apparently the best at deception, with its FII+Local pedigree….

The main lenders in the market, that is the Public Sector Banks, naturally tend to be rigid,  and a bit slow on the uptake, and there is lot of heart-burn as the applicant Companies can miss the stock market bus, it’s so touch and go. Of course, I* * * * Ind could step in with a Clean Loan, but for a Price…

So…this company A Ltd. one day out of the blue, appointed TWLB as the Security Trustee. Naturally, TWLB had no stake in the loaning arrangements. A Ltd. has a huge security base, at least on paper, and was one of the companies prone to the said requests. The next Consortium Meeting meant for fresh documentation was arranged at the best starred hotel near the airport strategically, to ensure that bankers from outside Mumbai came and went back same day, allowing them only a jiffy in the city. That is, they were not in a position to apply their minds to the tomes of papers dumped before them. Those days the only bank which insisted that draft of documents be made available to them for legal vetting allowing reasonable time, was UTI Bank aka Axis Bank. In the case of A Ltd., unfortunately, AXIS was not a member of the lending arrangement. We were, of course officials of the Chabiwala Bank, having little time to get quintals of documents vetted, relying upon the sense of fairplay of the Trustees. Fairplay is the forte of our Bank. The fourteen participating banks had 2 representatives each, thirteen being ‘follower’ or non-leader banks, and one leader bank. The main document was supposed to be signed by the Leader, which they would do any day, being in cahoots, and the ‘follower’ banks are really to sign two documents, bestowing authority upon the Leader to sign the main document. All signs of resistance melted once each banker was served with a gold plated Cross pen costing a few thousands. Our assistants faithfully signed the authority documents, and we left.

It was then noticed by the existing lenders, that A Ltd. stopped approaching with their regular requests. We made discreet enquiries with ‘Consultants’ who confirmed that the Company was merrily raising hundreds of crores from various banks. Then do they not require NOC for creation of charge, or are they all clean loans, we wondered.

The secret was like this: the main document signed on behalf of ‘follower’ banks by the Leader bank contained a clause which authorised the Company to approach anyone for a Corporate Loan and that all the lenders ‘hereby’  agreed that they had No Objection to ceding pari passu or second charge to the incoming lender!  Before the meeting, the Main Document had been forwarded to the email addresses of each member bank, and who goes to an old old site mentioned on your visiting card really? Really clever on part of TWLB!

MORAL: Believe in the Conspiracy Theories, check all email addresses, and read every scrap  of paper that falls is you hand. Including BEST tickets, wrappers, and leave applications submitted by staff. Readers interested in knowing the ' staff accountability' part are assured that the job we do is too complex for HR people or our superiors to understand. As on date none other than  the writer and reader of this blog, and the perpetrators of the con know about the affair. 

RETAIL INVESTOR- LIFE'S DIFFICULT AT BOTTOM OF PYRAMID

People are looking for you!

Plenty of investment advice is available today in the form of books, blogs and bhashan for anyone who cares. The space taken up by the Investment Experts in the media is directly proportional to the rise in the SENSEX or NIFTY or Dow Jones. Buy this or buy that is the usual refrain. This is usually the exact time when the retail investor should exit the market and buy an asset like a car or a house which has some day to day utility to the person. This is a hypothesis the writer has formed after observing investment cycles or better said, ‘asset trading cycles’. I shall now try to convince the reader on the logical basis of this contrarian view.

Basically, whatever the commodity or asset, may be gold or stock, one is leveraging on a commodity called information. We, loosely speaking the middle classes, or the salariat, are at the bottom of the investment pyramid. The information on basis of which we are to act is second hand or third hand. Naturally the person who gains most is one who engineers the events. The investment magazines which supply ‘tips’ are back-numbers by the date they are out of the press. Investment is not our bread and butter, and one just expects to make some good money like the ones above us in the pyramid have already made, knowing at the back of the mind that risks are high. In a sense, the Investment Gurus or the brokers or the traders are like owners of casinos in Las Vegas or today, Bahamas or Manila, and the retail investor is like the tourist who has to face the Pro~s and should not mind losing a few hundred dollars. It’s not that they are smarter than us—only that they are sharks, and basically they are following their dharma! To come back to the contents of the italicized sentence above, what is implied is that the retail investor exists at the fag end of the information pyramid, and his entrée is designed to materialize at a time when the Professionals are all set to offload their stocks and count their money all the way to the bank, to be kept in the locker, not in an account!  

But unfortunately, every frenzied investment phase comes to an end in a scam, and the scam is the result of the greed of the RI, whose appetite has been whetted, and some unfortunate retail investors end up losing their everything. They are so to say, ‘left holding the baby’, or in crude Hindi, they are the ones who are the ultimate topi pehnne waale. In the following paragraphs, we intend to study various ramifications and implications of the theory regarding passing on the baby or topi to the RI.

People have heard the phrase popularized by the late Padma Bhushan Sri. Coimbatore Krishnarao Prahalad, better known as  Prof. C. K. Prahalad, “fortune at the bottom of the pyramid”. What it means is that the people at the very bottom of a consumer pyramid far outstrip in numbers the more affluent people at the top, and when those at the bottom combine, their purchasing power multiplies to many times of that of the affluent sections at the top of the pyramid. An example that readily comes to one’s mind is the market for pre-paid mobile recharges. Kunal Shah, the promoter of the fast growing ‘Firstcharge’ has this to state about the telcom market in India:

98% of the Indian mobile telephony market is prepaid. As per data, about 15-20 million people recharge their phones every-day, mostly through offline channels. We sense huge opportunity here as internet penetration in increasing and about 5% of people use internet banking for transactional purposes.

That illustration is given only to demonstrate the immense financial importance of the retail segment, who, individually will be looked by the affluent sections with disdain, but as a class, command respect with Marketing Gurus.

Let us now look at the significance and the behaviour of the class we are labelling ‘retail investor’ here. When a rally starts, to begin with, it is fragile and unpredictable, but it acquires strength and depth when retail investors throw in their hats in big numbers. This can be likened to the arrivals of hundreds of birds to a tree under which the shikari has strewn tasty morsels, and patiently lies in wait for more and more birds to arrive, so that his chances of a bagging a good quarry multiply. Let us have a look at something more concrete, the actual numbers.

According to Moneycontrol estimates, today there are 2.45 crore retail stock-market investors in India. It is likely that active investors in gold will be much in excess of the number, and let us assume for the sake of simplicity, that is 5 crores only. Of course there is lot of overlap.

If half of that number buys only 10 gm. of gold in one year, the quantity bought will be 250 tonnes, which is approximately 30 % of the country’s annual gold imports. This is only the spending of the middle classes and less affluent sections, and shows the power of the people at the bottom of the pyramid, when they act in consonance. It can therefore safely be said that retail investors are very important for a rally having depth.

Now see the following graphs of gold prices, nominal and inflation-adjusted, for 48/49 year-end figures. The graph is available in various forms on many sites, but this one is crisp and clear, and is taken from A. Damodaran, who is Professor of Finance in Stern School of Business, New York University.

A PICTURE SAYS AS MUCH AS A 1000 WORDS

It can be seen that 3 year after the last prominent peak was achieved by gold in 1980, the nominal prices fell to less than half. Inflation-adjusted prices have a habit of diving deeper, as per the green bar chart below the line in the same picture. We were already in the service of the Bank by 1980, and remember the misery that befell society on account of the fall in gold and silver, and the frauds that occurred in Banks due to the crash. You will today find numerous reports of Jewellery frauds in the press.

A similar cycle of retail rush ending in periodic massive crashes can be seen in the stock market also.

The investors who survive the crash discover that there is no free lunch, and that the investment in Bank FD is the best combination of safety and returns, particular in the Indian context where the monetary authority RBI tries to ensure a post inflation positive return, topped by instant liquidity. To extend the analogy of the shikari and birds, the stage comes when the shikari fires pellets at the birds, some birds fall prey, and the rest fly away, vowing never to return to the bloody tree. Fortunately, the losses are spread over crores of people and society somehow manages to swallow them.

After a decade, a new and upbeat crop of young people more affluent then their parents  comes up and the stage is set for the same or some-new-some-old shikaris to attract a fresh crop of birds. And so on,… like the cycles described in Upanishads.

Similar cycles are noticed in Terrorism (10 year cycles), and as my friend Raj points out, in the behaviour of young political agitators- witness student uprisings occurring periodically in our country (Nav Nirman Movement- Gujarat; AASU- Assam; Jaiprakash Movement- Bihar; Anna Hazare- Delhi, etc., etc…) The lily white boys join the old gangs and nobody remembers that Lalooji and Mahantoji used to be anti-corruption activists.

The analogy of birds and shikari is universally applicable and we would only advise enthusiasts that while investing in the risk-laden assets, it is best to keep an eye on the finger of the shikari on the trigger!

HANDLING FEAR OF RISK- (I)

In the area of Credit, decision-taking has its own special place. There are some professions which call for taking decisions and some which don't. For example a teacher may have to take very few decisions. Decisions of doctors and officers in charge of law and order and security could result in fatalities or damage of reputation, but they cannot wriggle out of a situation that demands decision, though Collectors have been dismissed for failing to fire, just as they have been dismissed for ordering firing, and Commandants Court Martialled for inaction. In general, one can avoid taking decisions if there are no structured or precise guidelines for the decision taker and there is a scope for getting the benefit of doubt. For example, an SP can say that he didn't order his people to open fire on rioters as he apprehended greater violence in such case. But this is a one-off scope, and in case of shirkers, a definite pattern is bound to emerge. 

To come to Banking and Finance, while the mistakes of a Doctor are buried or  cremated, in the case of Finance professionals, they result is monetary losses which could be staggering. In case of Public Sector, there is a big brother called CVC sitting with a pairs of binoculars. One naturally compares the figure of possible loss with his/her salary, and that is the beginning of the trouble. Human nature being what it is, the new executive, or the unwilling executive shies away from decision taking until and unless he is trained ad prepared by the organisation and superiors in assessing risk, and indicating what is a permissible risk from the point of view of the 'Objectives'. Some organisations set up very precise goals for monitoring. For instance a colleague joined a Foreign Bank at apex level and the MOU stipulated that at the end of 3 years, the NPA should be 1%, failing which the contract would not be renewed. The implication was that he will be fired also if the NPA remained less that 1%, as that would lead the Bank to conclude that the quest for business growth as per the risk appetite of  the particular Bank had remained unfulfilled at the CEO's hand. However the risk philosophy of your organisation will never be, or can never be, spelt out in algorithmic -fashion and the responsibility for assessing the same has been cast on you and me only. No one has the exact answers, not even the Chairman. But what is the fun in being in high finance and not taking calculated risk?

The writer was also quite risk averse at the onset of his career, and has changed beyond recognition now. You'll be surprised that not a small role in our taking heart was paid by a humble tribe, that of the Barber (the word is considered impolite now, but for want of another word conveying spontaneity, it had to be retained). Just see the guts each and every worker in a saloon has (for 'he', substitute 'she' mutatis mutandis):       

The various operations in the saloon could be a haircut, dyeing or a shave or a massage.The staple is of course the haircut. While the lead time could be an hour, the haircut per se is a fifteen to thirty minute affair, depending primarily upon the hair length, the texture, the curl level, the dense-ness, the desired style, and the final desired length of the hair. As our barber friends have confided, around half of the clients of an established saloon are permanent, and the rest, floating. In the case of permanent clients, the difficulty occurs only on the first occasion, which should be obvious, for if the hair is ruined on the first occasion, the client will never become permanent.

The first-timer or the stray client will mutter a terse ‘short’, ‘medium’ or ‘just trim’. Here comes the first decision then. What’s short? How short is short, and how short is long? The personality of the client also comes into play here. Normally the client will not pick up a quarrel with the barber.Hair will always grow and bounce back. Ghar ki kheti, as they say in Hindi. Thus while the risks are limited, the fear in the barber’s mind is real and he should always be tense, but he has got used to the scene. He could for instance, hurt the client and make a Paul Gauguin out of him. The client could be narcissistic, he could be finicky, or he could be indifferent to his looks, unless he is married. The corollary is that the barber as a tribe is chatty and friendly, so that the client is kept in good humour.

As the hair-cut operation progresses, he anxiously looks at the client. Both the client and the barber have a continuous feed-back in the shape of the mirror, which is a boon, but could easily be a handicap. Monitoring is a heavy exercise in corporate management, and many a disaster could be camouflaged, but this negative benefit is absent here. Goldfish have no hiding place, as the title of an old James Hadley Chase book goes. Again some clients could be disinterested in the mirror’s feed-back, but the barber has to be on his toes, literally.

They say while driving, one carries out 32 operations simultaneously. The barber’s job is no less daunting.

Now, the spotlight is on the client again. He has always had a past and measures the barber against some acquired benchmark. The barber tries to anticipate things. Dedicated barbers seek directions, but mostly they will not, and that is the strength of the community- they plump for independent decision making. Too many directions could cause complications in the process which is after all to last a quarter hour, and the time of those who ‘stand and wait’ is also important.

Now comes the most difficult part. The barber tries to imagine what the cut looked like when the client had descended from the chair last time. He has to decide what scissors to be used when, when to use the narrow end of the comb, whether and how many times the hair should be sprayed with the mist of water, whether to use the hair-mower. He will have to balance the hair mass on both sides of the head, so as to ensure symmetry. The beauty of the skill set of the barber is that the multi-dimensional risks matrix is handled end-to-end , from the beginning of the operation, to its conclusion, without a spill-over or a take-off phase , and seamlessly, and very, very fast.

The final product then has to agree with the self-image that resides in the mind of the client. The rear of the head is innocuous, and then savvy barber will always hold a mirror at the back of the client and coax out a 'goooood...!'. But although the client can tell a good job from a bad one, esp. after he reaches home, he is neither concerned with, nor has an awareness of what the process is like. All that he is concerned is the fruit, and not the methodology of growing or rearing the fruit.

It requires guts to be a barber. For many, the face is the fortune, and to take chances with the fortune of a stranger, who puts his fate (till the next haircut becomes due) squarely in another hand requires real strength of purpose and character. Any senior manager of a bank should definitely appreciate the man. In a bureaucratic set up, had the Bank been a saloon, the employee would have first ‘put up a note”, and waited for its disposal. Certainly a Committee or a ‘Working Group’ would have to be constituted. One would love to find out whether and how these skills brush off upon their day to day life of the barber

To generalise, excellence is not restricted or dictated by profession or caste, but of the dedication to the thing in your hands, however significant or insignificant. Sincerity will rub off on whatever profession you will follow.

Note: On the body of 'Risk Management' Theory and relevance of VaR etc, to us,... another day...so long!

CMA- Part 2: Arithmetics

As you know, the CMA format was evolved or got evolved for the purpose of Working Capital Assessment. The idea is that the unit's figures for a year/ on a date in Company Act format (designed for the shareholders/tax authorities/ statutory requirements etc.) is to be transmuted to a format conducive to Bank Lending. The CMA is filled up and signed by the applicant's representative and is to be checked by us. That's convenient to the lazy DO but initially it's best to try to fill up a big and complicated report into the CMA form- may be Reliance This or That Ltd. or Infosys, just for the fun. The totals, that is size, of the BS will be different as in the earlier form, current liabilities are netted out of current assets. Classification will differ, for instance instalments of term loan payable next year are to be shown as CL in CMA, while in the statutory format, outside debt is either classified as secured or unsecured, noting to do with tenure. To a small extent, the classification will be subjective also. The three step assessment will start hereafter in the Assessment format. 

Nowadays the computer based package will generate ratios automatically but that implies that you are going by the subjective, or basically motivated classification of the company- they'll try to classify in order to inflate the current asset or understate the CL, or inflate the NWC. Best is to reclassify the CMA into a format that is used as a standard format and in our bank is often called the A form. The following two tables represent a company's P/L as per CMA and as per form A. The classification is the same as the CMA has also been filled in by the banker. 

Essentially, what has been done is that the topline has been converted from Sales to Production. Ratio analysis is to be done based upon Production based figures, as the total year's expenses on various heads including profit (operating) will add up to production, so that if you want to find RMC %, the '100' is the Production and not Sales. This is because on the one hand, some goods produced this year may be left unsold  and figure in BS as closing stocks, likely to be sold next year, i.e. will form not form part of this year's sales, whereas the expenses would be incurred this year. It could be the other way round also, goods produced last year, put in BS and sold this year.

In other words, given sales figure for say 2012-13, to arrive at production figures, one has to find out whether some goods produced but unsold in 2011-12 have been sold in 2012-13, in which case the production of 2012-13 will be less to 'that extent' than the Sales of 2012-13. It could be the other way round also. That is, some goods produced in 2012-13 may be left unsold, and the Sales will be less to 'that extent' than the Production.

The figure 'that extent'  is called 'Net Inventory' and is arrived at by deducting the red figures from the green ones. In the first case the NI will be negative , and in the second case, positive. It's represented here in yellow.

Operating Statement
4 YEAR CONSEQ.
Sales
Total Gross Sales	112.15	184.97	281.50	450.40
Less : Excise Duty
Net Sales (1-2)	112.15	184.97	281.50	450.40
Jobwork receipts
Total net Sales	112.15	184.97	281.50	450.40
Growth in sales		65%	52%	60%
Cost of Sales
a. Raw Material (Imported )	38.50	63.53	100.24	161.10
b. Raw material (Indigenous)	15.61	25.02	40.10	65.51
c. Stores & Spares (Imported)	0.60	1.20	1.56	2.00
d. Stores & Spares (Indigenous)	0.40	0.50	0.70	0.90
Power & Fuel	0.50	0.50	0.60	0.60
Direct Labour	15.63	25.78	35.23	59.55
Repairs and maintenance
Other Mfg. Expenses
Depreciation	3.00	3.75	5.25	6.00
Sub Total	74.24	120.28	183.68	295.66
Add: Opening Stock in Process	0.00	0.00	0.00	0.00
Sub Total	74.24	120.28	183.68	295.66
Deduct : Closing Stock in Process
Cost of Production	74.24	120.28	183.68	295.66
Add: Opening Stock of Finished Goods	0.00	12.30	18.42	23.60
Sub Total	74.24	132.58	202.10	319.26
Deduct : Closing Stock OF Finished Goods	12.30	18.42	23.60	36.80
Sub Total ( Total Cost of Sales)	61.94	114.16	178.50	282.46
Gross profit	50.21	70.81	103.00	167.94
Gross Profit/ Sales	44.77%	38.28%	36.59%	37.29%
Selling Expenses	8.22	6.00	9.02	17.12
Administrative Expenses	18.86	28.71	43.78	70.66
Sub Total	89.02	148.87	231.30	370.24
Operating Profit before interest	23.13	36.10	50.20	80.16
a. Interest on CC.	0.00	0.00	0.00	0.00
b.Interest on TL	0.00	0.00	0.00	0.00
c.Other interests	0.00	0.00	0.00	0.00
Total Interest	0.00	0.00	0.00	0.00
Operating Profit after Interest	23.13	36.10	50.20	80.16
Other non operating Incomes
a.Interest/Dividend/Royalties etc..
b. Other Income
Sub Total	0.00	0.00	0.00	0.00
Deduct other non operating expenses
a.Interest/Dividend/Royalties etc..	6.00	6.60	7.20	7.80
b. Other Expenses	0.50	0.50	0.54	0.90
c.Intangibles written off  -1
Sub Total	6.50	7.10	7.74	8.70
Net of other non operating Income/Expenses	(6.50)	(7.10)	(7.74)	(8.70)
Profit before Tax /Loss (PBT)	16.63	29.00	42.46	71.46
Provision for Taxes	5.49	9.57	14.01	23.58
Net Profit/Loss (PAT)	11.14	19.43	28.45	47.88
Cash Accruals	14.14	23.18	33.70	53.88
Dividend paid + IT on Dividend		5.00	16.14
Retained Profit	11.14	14.43	12.31	47.88
26.a Transferred to Reserve	11.14	14.43	12.31	47.88

CONVERTED TO PRODUCTION TOPLINE FOR RATIO ANALYSIS

	YEAR 1		YEAR 2		YEAR 3		YEAR 4
	Absolute	Percent	Absolute	Percent	Absolute	Percent	Absolute	Percent
Net Sales	112.15		184.97		281.50		450.40
Net Inventory	12.30		6.12		5.18		13.20
PRODUCTION	124.45	100	191.09	100	286.68	100	463.60	100
Raw material consumed	55.61	44.68	90.75	47.49	143.20	49.95	230.11	49.64
Direct Expenses	15.63	12.56	25.78	13.49	35.23	12.29	59.55	12.85
Admnistrative Expenses	18.86	15.15	28.71	15.02	43.78	15.27	70.66	15.24
Selling Expenses	8.22	6.61	6.00	3.14	9.02	3.15	17.12	3.69
Interest	6.00	4.82	6.60	3.45	7.20	2.51	7.80	1.68
Bank charges	0.50	0.40	0.50	0.26	0.54	0.19	0.90	0.19
Depreciation	3.00	2.41	3.75	1.96	5.25	1.83	6.00	1.29
Net profit from operations	16.63	13.36	29.00	15.18	42.46	14.81	71.46	15.41
Other income	0.00		0.00		0.00		0.00
Other non operational expenses	0.00		0.00		0.00		0.00
Net profit before tax (11+12-13)	16.63		29.00		42.46		71.46
Tax	5.49		9.57		14.01		23.58
Net profit after tax	11.14		19.43		28.45		47.88
Dividend
Carried to BS	11.14		19.43		28.45		47.88

Net inventory= ( closing FG+closing SIP ) less (opening FG+opening SIP )

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Hereafter will be discussed why a ratio may have changed, whether it's for the good or worse, whether we can deduce anything from the changes, what needs to be done, or what other information is to be sought to protect our interest. For example when the RMC/Production ratio suddenly drops by say 20/30 %, it's likely that the unit is not getting its own orders and is doing job-work. The factors may be internal and external and you then need to personally check the stock statement against the unit's books, and you'll find that the goods never figured in the books, as they belonged to another company's books. Your loan is thus unsecured and irregular and you'd better do something.

We leave ratio trend analysis to the next post. 

EXERCISE:

Please try to formulate your responses to the following observations of the Statutory Auditor- it may happen to you this year:

(i) The stock statement of ABC Ltd. as on 31.03.2012 shows a  level of stocks that is different from that in the Audited Balance Sheet as on 31.03.2012. So, the account holder is indulging in manipulation...

(ii) If you deduct unpaid creditors from the stocks, the account will be short of DP and will be unsecured to an extent, maybe fully....

(iii) Account was technically irregular (outstanding exceeds DP) in otherwise good unit. Basically due to delay in granting enhancement. 90 day delinquency on 31.03.2013. However, before date of statutory audit, the the account is regularised by normal and healthy credits. Auditor asks you to classify it as NPA.