SAJMMR

Volume 1, Issue 1 (October, 2011)

ISSN 2249-877X

P ublis he d b y: S out h A s ia n A c ade m ic R es e arc h J our nals

SAJMMR:
South Asian Journal of Marketing & Management Research AN APPRAISAL AND POLICY ANALYSIS OF FINANCIAL MANAGEMENT IN INDIA
DR. ANGREJ SINGH*; PRIYANKA MISHRA**; NIDHI MISHRA*** *Associated Professor, Department of Economics, Upadhi Mahavidhalaya, PBT, India. **Research Scholar, Department of Economics, Upadhi Mahavidhalaya, PBT, India. ***Research Scholar, Department of Economics, Upadhi Mahavidhalaya, PBT, India. ABSTRACT Financial management project is essential information needed by those who manage, implement and supervise projects including government oversight agencies and financing institutions. The borrower country, lenders and donors community that funds have been used efficiently and for the purposes intended. The evaluation of the risks associated with project financial management system and identified in the larger government system .Financial management risks identified in the CFAA and CPFA. KEYWORDS: Financial data, Corruption bank projects, Track records, Project management report, Project appraisal document.
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INTRODUCTION It has been observed that, according to the Bank Policy and Procedures ,all project appraised from July 1, 1998 onwards are required to have a financial management specialists (FMS) as a member of the project cycle. The FMS is required to review the project financial management system including the project’s ability to produce a project management report (PMR).Ideally, the assessment should begin during early stages of project preparation and should take into account any Country Financial Accountability Assesment (CFAA) that may have been produced. Early action enables the timely identification and introduction of system changes and/or development where necessary. South Asian Academic Research Journals http://www.saarj.com

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SAJMMR

Volume 1, Issue 1 (October, 2011)

ISSN 2249-877X

Country Financial Accountability Assesment provide for a review of the private and public sector financial management systems of the country and the regulatory frame work . Focus on the country helps identify those countries with specific financial management capacity building needs serves as a mechanism for building appropiate technical assistance into the leading portfolio. CFAA’s also provide a framework in which the requirements of project financial mangement can be better understood. It identifies major issues affecting financial management in the country ans any departures from international standards. CFAA’s are important because they provide the context ,without which an assesment of the financial management system of a project lacks country ---specific underplanning. Specifically ,the CFAA can provide information on topics such as the strength of the local accounting profession ,the nature of accounting auditing standards ,the capacity of the supreme audit institution, and the quality and reliability of government accounting.Such detail provides a good basis for assessing project financial management systems.It is therefore , recommended that those who assest project financial management system refer to the CFAA , as well as to the country Assistance Strategy (CAS) which may also raise relevant issues. Assessment of the project financial management system may comprise features of both review and design ,the financial management system depends ,on the nature of the project and of its implementing entity ,which could be self-standing project implementing unit (PIU) , a government ministry department or agency or a commercial entity ,where a project is implemented by a government department or agency ,its likely that the projects will use the government’s standard financial management .A review of this system would be best carried out as a part of a CFAA , so that the project review can be limited to those aspects which are project specific .However, where a CFAA does not exits ,the review should cover inter relationships between the financial management systems of the project and of government. Institutional strengthning can take several years to achieve .The best way to achieve this is to address not only the needs of the project but also those of the wider environment in which it is located .An exclave or ring fence approach , provides only for the financial management needs of the project while ignoring the needs of the larger environment .Treating the project and its accounting system.,procedures and controls as separate may help in the short-term to achieve acceptable standards for the project .But in the longer term ,ring fencing is likely to be inaffective .Therefore ,when planning ,technical assistance ,attention should also be given to financial management system is a priority. Before assessing the project financial management system ,the FMS ,working with the task team leader (TL) , acquires a thorough understanding of the project concept including its objectives, components ,costs , implementing ,agencies ,cost-sharing arrangements and procurement profile. Starting with the fundamentals premise that sounds financial management is essential for project success , the FMS looks for a system that is able to provide timely and reliable information give warning of problems in projects implementation and allow borrower and Bank staff to monitor the project’s progress toward its agreed objectives: Does the PIU have available an adequate number and mix of skilled and experienced financial management staff. South Asian Academic Research Journals http://www.saarj.com

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SAJMMR

Volume 1, Issue 1 (October, 2011)

ISSN 2249-877X

Does the internal control system ensure the conduct of an orderly and efficient payment and procurement process and proper recording and safe guarding of assests and resources. Is the accounting system able produce financial reports that show budgeted and actual expenditures for the quarters and for the year to date. Are financial data linked to measure of output of the projects , and Is an independent ,qualified auditor in place to review the project internal controls and reporting requirements. Every efforts should be made to harmonize the accounting classification and headings in the projects charts of accounts with those used by government or incase of implementation by a revenue- earning entity,with its classification and headings .Frequantly , government internal control systems prove to be adequate ,but the accounting system cannot provide the level of information required for project ,even though this may result in an accounting system running parallel to that required by the government .More detail on the design and assessment of a financial management system. The assessment is the evaluation of the risks associated with the project financial management system and/or identified in the larger government system .As most sysytems have some inadequates ,it is important that the FMS and other member f the Task team together apply experienced and professional judgement to this aspect .The risks and their likely impact on the project should be evaluated from both fiduciary and management viewpoints.If the adequacies are found to be minor ,the system can be certified as ready for PMR- based disbursement ussing Annex 4A of the LIH , f major, Annex 4B or 4C applies. Assessing the risks involved and their materiality helps in choosing the appropiate course of action with respect to the project financial management system .The following are important for assessing the extent of risks :--Financial management risks identified in the CFAA or CPFA. Track record of the implementing agency with other bank projects. Level of corruption as indicated by the corruption perception index of transparency International or by other means. Reports of the supreme audit institutions. Timeliness and reliability of government accounts . Strength of internal control system in the public sector , and Overall level of accountability and transparency concerning the use of public funds. It is important that controls and other initiatives be considered to mitigate the likely impact , if the risks identified are significant.Remedial actions to address identified South Asian Academic Research Journals http://www.saarj.com

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SAJMMR

Volume 1, Issue 1 (October, 2011)

ISSN 2249-877X

weakness and/or to enhance system development ,including actions to enable the project to develop a PMR, should be agreed between the borrower and the bank and listed in a time-bound action plan .This plan estabilishing the path for developing the financial mangement systems of the project.As the project progresses through preparation ,appraisal and implementation the plan is updated reflecting problems encountered and progress made .To ensure its coherence and continuing relevance the plan should be :--Attached to the report on the assessment of the financial management system Included in the project implementation plan and in the project files. Referred to in the loan agreement and Attached to the minute of negotiations. The Task Team with the FMS playing a leading role is responsible for monitoring financial management aspects of the action plan , ensuring that all the actions affecting eligibility for the PMR- based disbursement .The action plan must be treated as a living document it is reviewed and discussed with the borrower periodically .Staff associated with the project including operations and the loan department should be kept informed of material issues arising from the monitoring of the plan. PROJECT MANAGEMENT REPORT (PMR) The project management and supervision are easier and more effective when a project is able to produce regular progress reports .Large entities typically report on, and consider their progress every week on month .Using annual reports for this purpose is quite realistic because by the time the information is available ,its usefullness has long since expired .The typical period for reporting discussed is quaterly .For project managers to be able to consider project progress from quarter , would in most cases be a considerable improvement on the current status.In response to borrower requests the bank has developed a standard form of project management reports (PMR).The PMR comprises financial reports ,progress and procurement reports.The design and main features of the PMR are supported by the models .This models should be followed closely to facilitate comparison and to enable electronic submission ,processing and disbursement .Normally , the PMR is the basis for the Bank’s disbursement of its share of project financing .However , it must be prepared within the framework of an acceptable financial management system and submitted in an acceptable format .The design of the PMR provides the flexibility to adapt to specific borrower ,cofinancier and other project paticipants needs. Ideally , the same set of PMR’s should meet the needs of the borrower , the bank , and the other cofinanciers. PROJECT APPRAISAL DOCUMENT (PAD) The PAD updates and elaborates on the PCD. It summarises the assessments by the task team of various aspects of the proposed operation and identifies areas of special concern.It is therefore of great importance as a source of information in the design and review of financial management South Asian Academic Research Journals http://www.saarj.com

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SAJMMR

Volume 1, Issue 1 (October, 2011)

ISSN 2249-877X

systems Given that the PAD covers a wide range of issues ,the level of detail on financial management issues ---needs to be balanced against the requirements of the documents as a whole . Summary information on financial management should be included in the PAD with detail included in annexes and in a separate financial management report. The following should be included :--A brief summary of the major points arising from the review of the project’s financial management system (budgeting,accounting, internal control ,auditing and report) including issues of staffing . A statement of opinion on whether the projects financial management system meets the minimum requirements for board presentation.where it is not adequate , the statement should enumerate steps to be taken for it to be considered adequate ,distinguishing between actions to be taken before and after board prsentation , including any proposed legal convenants regarding necessary financial management actions. A statement of opinion on the extent to which the project’s financial management system is able to produce a PMR .It is cannot produce a PMR , a summary should be prepared of the action plan necessary to improve the capacity of the system and a timetable for its achievement including necessary legal convenants . A statement with report to the selection and appointment of auditors , and The tittle, date and location of the report arising from the review of the project financial management system . BANKING POLICY AND TRENDS During the current financial year , the focus of on-going reforms in the banking sector was on the soft interest rate regime , increasing operational efficiency of banks ,strengthing regulatory mechanisms and on technological upgradation .As a step ,towards a softer interest rate regime ,RBI in its Annual policy statements had advised banks to introduce flexible interest rate system for new deposits , announces a maximum spread over PLR for all advances other than consumer credit and to review the present maximum spread over PLR and reduce then wherever they are unreasonably high.The union budget for 2002-2003 proposed setting up of a pilot assest reconstruction company to conduct auctions of non-performing assets (NPA’s) in the banking sector, and also to develop a market for securities loans. According , a pilot a assest reconstrution company was set up by ICICI .The enactment of “securitisation , Reconstruction of financial Assets and enforcement of security interest Act, 2002” marks a watershed in the process of on-going economic reforms. This act enables the setting up of asset management companies for addresing the problems of non-performing assets of banks and financial institution. Under the act , an asset management company is authorised to acquire assets of any bank or bank institutions by issuing a debentureor bond or anyother security for consideration agreed upon with such company and the bank or the financial institution .In case of non-performing South Asian Academic Research Journals http://www.saarj.com

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SAJMMR

Volume 1, Issue 1 (October, 2011)

ISSN 2249-877X

debts , a secured creditor is entitled to serve a notice to the borrower to discharge his liabilitin the stipulated time will entitle the secured creditor to take possession of secured assets , take over the management of the assets and to point any person to manage the secured.Borrower can prefer an appeal with the Debts Recovery Tribunal after depositing 75 percent of the amount claimed by the secured creditor. The secured creditor is entitled to enforce any security interest createdin its favour without the intervention of courts or Tribunals .The legislation puts in place a long overdue legal framework without attendants delays for the recovery of NPA’s without attendants delays for the recovery of NPAs in case of secured credits . However, for realising the benefits of this legislation ,banks and financial insitutions have to build up expertise and put in place systems to ensure that assests taken over are kept in running condition till they fetch a good price. RBI is considering broad guidelines to be adopted by banks and financial institutions for framing a fair practises code “ for lender’s liability with the approval of their boards .The RBI guidelines are based on the recommendations of the working group on Lender’s Liability Laws constituted by the government of India. The main features of these guidelines are listed below :--Loan application forms should be comprehensive to include information about processing fees , other charges etc. A system should be devised for acknowleding the reciept of all applications and verifying them with in a reasonable period of time . In case of rejection of any loan application , reasons for such rejection should be conveyed in writing . Lenders should ensure that there is proper assessment of credit requirements of borrowers .Terms and conditions governing credit facilities should be arrived at after negotiation by the lending institution and the borrower and these should be recorded in writing. The loan agreement should clearly specify the liability of lenders to borrowers in regard to allowing drawings beyond the sanctional limits . Lenders should give reasonable notice to borrowers before recall/accelerate payment or performance under the agreement. REFERENCE Bajaj,R.,Chairman,(1997) Draft code on corporate Industry. governance ,Confederation of Indian taking decisions to

Barua,S.K., V .Raghunathan ,J.R. Varma and N. Venkiteswaran (1994), “Analysis of the Indian Security Industry : Market for Debt “ ,Vikalpa,19(3),p 3-22. International Monetary Fund (1993) , International Capital Markets Part II : Systemic Issues in International Finance ,Washington. South Asian Academic Research Journals http://www.saarj.com

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Volume 1, Issue 1 (October, 2011)

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McKinnon ,R.I.(1973) ,Money and Capital in Economic Development ,Washington,the Brookings Institutions. Ministry of Finance (1991),Report of the Committee on the Financial System (Narasimham Committee),New Delhi ,Government of India. Ministry of Finance (1993a),Economic Reforms :Two Years After and the Tasks Ahead ,New Delhi,Government of India. Ministry of Finance(1993b),Public Sector Commercial Banks and Financial Sector Reforms:Rebuilding for a Better Future ,New Delhi,Governemnt of India. Raghunathan,V. and Varma ,J.R.(1997),”Rerating the Ratings “,Buisness Today ,December 721, 1997, 144-149. Shaw,E.S. (1973) Financial Deepening in Economic Development ,New York ,Oxford University Press. Standard and Poor (1997),”Financial System Stress and Sovereign Credit Risk”.Standard and Poor’s Credit Week ,December 10,1997. Sunderarajan,V. and Tomas J.T. Balino (1991),Banking Crises :Cases and Issues ,Washington ,International Monetary Fund. Varma ,J.R.(1992),” Commercial Banking;New Vistas and New Priorities”,paper presented at the seminar on Reforming Commercial Banking ,November 25, 1992,at Ministry of Finance ,New Delhi. Varma ,J.R. (1996a),”Bond Valuation and the Pricing of Interest rate Options in India “,ICFAI Journal of Applied Finance ,2(2),July 1996,161-176. Varma ,J.R.(1996b),”Financial Sector Reforms: The Unfinished Agenda”,Paper presented at the seminar on Economic Reforms :The Next Step at Rajiv Gandhi Institute for Contemporary Studies ,New Delhi ,October 2-4, 1996. Varma ,J.R.(1997),”Corporate Governance in Shareholder”,IIMB Management Review ,9(4),5-16. India:Disciplining the Dominant

Varma ,J.R. and Vivek Moorthy (1996),”Debt Market Reform : The Missing Ingredient “,Economic Times ,August 2,1996. JOURNALS/REPORTS 1. Foreign Trade Review (Quaterly). 2. The Economist Weekly . 3. Buisness Standard,Daily. South Asian Academic Research Journals http://www.saarj.com

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SAJMMR

Volume 1, Issue 1 (October, 2011)

ISSN 2249-877X

4. Financial Express,Daily. 5. IMF survey ,Fortnightly. 6. Economic Times ,Daily. 7. International Trade Forum ,Quaterly. 8. Craftcils,Monthly 9. Financial Express 10. Economic Survey of India 11. Economy India ,National Magazine,Delhi

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