Efficiency Indexes in Resource Mobilisation – A Study of Andhra Prdesh State Financial Corporation

Abstract

The capital structure represents the mix of different sources of long-term funds in the total capitalization. Optimal capital structure is a financing-mix which maximizes the firms’ value/the shareholders’ wealth or minimizes its overall cost of capital. An appropriate capital structure helps as the basis for sound operations of a State Financial Corporation. The resource mix of APSFC mainly consists of equity share capital, reserves, bonds and debentures, refinancing from the IDBI and the RBI and loans in lieu of share capital, etc. Linking the borrowing powers with equity as per the provisions of the SFCs Act helps in the potentiality of the Corporation in lending operations. The Corporation heavily depends on debt finance by issuing bonds and debentures. A high degree of debt component in capital structure increases the risk and may lead to financial distress in adverse times. A high cost of funds employed makes very difficult to improve the profitability of the Corporation. Normally, the cost of bond financing of the Corporation is cheaper as compared to raising funds through equity because interest on debt is allowed as an expense for tax purposes. Therefore, a good and complete exercise on resource planning for short-term as well as long-term periods is a need of utmost importance to the Corporation in order to cater to the growing financial needs of industrial concerns. The present paper focuses on measuring the efficiency of the Corporation in its resource mobilization. Some important aspects like, resource mobilization, like, trends in resources and sanctions by the Corporation, cost of various sources of funds, cost of debt funds, weighted average cost of capital (LME-Index) and equity multiplier. At the end of the analysis some viable and useful suggestions are offered to tone up the performance of the Corporation for efficient funds management by the APSFC.

Keywords: Cost of equity, Cost of debt, Refinance, Efficiency Index, Equity Multiplier, Weighted average Cost of Capital

JEL Classification: G32, G33