Project Report: Management Accounting

Management Accounting & Performance Measures

In
Indian Banks & Financial Institutions

Submitted to:
Prof. Archana Patro
Assistant Professor
Indian Institute of Management Rohtak
Rohtak 124001, Haryana, India

Submitted by: ePGPx.01. Group 10

Group Members:
Achla Jha - ePGPX01.025
Upendra Parimi – ePGPX01.036
Prosenjit Routh - ePGPX01.037
Dhruv Nigam - ePGPX01.042
Datta Pawar - ePGPX01.054
Manoranjan Singh - ePGPX01.060

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 Table of Contents

1. Objective ............................................................................................................................................................. 3
2. Research Approach ............................................................................................................................................. 3
3. Performance Measurement of BFIs in Indian Market ......................................................................................... 3
3.1. Bank A – Performance Measurement ................................................................................................................. 3
3.2. Bank B – Performance Measurement ................................................................................................................. 4
3.3. Bank C – Performance Measurement ................................................................................................................. 5
3.4. Bank D – Performance Measurement ................................................................................................................. 6
3.5. Summarized view of Performance Management in Indian Banks and FI’s ........................................................ 7
4. Observation - Use of Management Accounting .................................................................................................. 8
5. Conclusion .......................................................................................................................................................... 9

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1. Objective
In manufacturing & service organization, Performance measurement is one of the key focus areas and
Management Accounting plays a vital role in measuring the financial and non-financial parameters of an
organization.
We have done an in-depth study on how Management Accounting helps to measure the performance
parameters of Indian financial institutions. This paper discusses the role of Management Accounting in
measuring the financial & non-financial parameters of Indian banking institutions.
Some of the key aspects answered in this paper are
1.1. The approaches of Management Accounting used in Indian banks for measuring to financial and
non- financial performances
1.2. Measuring of non-financial factors & indicators and methods used
1.3. Limitations with current practice of management, root cause & probable resolution measure using
Management Accounting techniques

2. Research Approach
The approach adopted for this research can be broadly classified in 3 major aspects
2.1. Data gathering
2.1.1. Identified 4 leading banks & financial institutes classified under different banking categories
2.1.2. A set of relevant data collected from primary and secondary sources
2.1.3. A collection of surveys & interviews conducted with the management & leadership team of
the identified banks & financial institutes on their management accounting practices for
measurement of both financial and non-financial performance.
2.2. Data Analysis
2.2.1. A detailed analysis of gathered data has been performed
2.2.2. A meaningful comparison of the role of management accounting in the identified banking &
financial institutions have been performed
2.2.3. Based on the analyzed facts, a set of pattern/model has been prepared
2.3. Observation & Conclusion
2.3.1. Based on the analyzed facts a set of potential conclusions on Management Accounting
practices have been drawn

3. Performance Measurement of BFIs in Indian Market

Based on the analysis of the gathered data set, the observations & findings of the performance
measurement in identified banks & financial institutions are detailed as below

3.1. Bank A – Performance Measurement

It is a leading and established a commercial bank, having a very large network of branches across different
cities/towns/villages in India.
This bank considers the performance measurement with high importance and measures the financial
performance of its different sections on a regular basis.

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Some of the critical methods/models used for such measurements are
 Activity-based cost management (ABCM)
 Benchmarking
 Balance scorecard
 Performance pyramid

Performance measurement of Bank A

Description Financial PM Non-financial PM
Importance High High
Application of MA systems All functions Regularly
Model/methods of PM Benchmarking, Balance Benchmarking, Balance
scorecard, performance scorecard, performance
pyramid and ABCM pyramid and ABCM
Satisfaction High Medium
Improvement Existing models are Existing models are
competent competent (costly due to data
gathering)

The scope of improvements in the Current Approach

 Financial Performance Measurement
o Need to add more focus on risk-analysis
o More in-depth analysis of Customer and product profitability
 Non-Financial Performance Measurement
o At present, the non-financial performance measurements are done as moderately less
emphasized one. More emphasis needs to be given on non-financial performance
measurements.
o TQM needs to be made supportive of Non-Financial Performance Measurement

3.2. Bank B – Performance Measurement

It is a leading investment bank in India. This bank considers the performance measurement with medium
importance and measures the financial performance primarily the parameters around sales &promotion
departments, which causes gaps in their measurements.

The top management agrees to the fact that the non-financial performance measurement is equally
essential, but they used to perform those activities occasionally. Some of the vital non-financial
parameters to be measured are
 Customer satisfaction
 Response turn around
 Service quality
 On-time service

Some of the key methods/models used for such measurements are

 Balance Scorecard (BSC)
 Benchmarking
 service-process type

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But the bank uses the benchmarking process on a very narrowly defined range, and due to that, it fails to
play an effective role. Also, the service-process type approach used for NFPM does not become effective
as their products are few and distinctive.

Performance measurement of Bank B

Description Financial PM Non-financial PM
Importance Medium Medium
Application of MA systems Partly Seldom
Model/methods of PM BSC Benchmarking and Process
type
Satisfaction Medium low
Improvement Competent model needed Competent model needed

The scope of improvements in the Current Approach

 Financial Performance Measurement
o Need to continue practice BSC, but from a broader perspective, across more departments.
o Need to bring in further clarity in their financial performance measurements, to improve the
accuracy of their performance measurement.
 Non-Financial Performance Measurement
o The non-financial performance measurements need to be done on a regular basis.
o The benchmarking process should be practiced on a wider range

3.3. Bank C – Performance Measurement

It is a sizeable co-operative bank, having key concerns about making it more profitable and achieve a better
competitive position.

This bank measures both financial & non-financial performance as a practice, but it is not very effective as
there are lots of gap in the tools/approach the bank C has adopted.

For NFPM they use benchmarking approach where the comparisons are made with other co-operative
banks, not with best performing bank. Along with different non-financial parameters, Bank C as a co-
operative bank prefers to put additional focus on measuring “commitment to clients” parameter.

Some of the key methods/models used for such measurements are

 Benchmarking
 Customer survey

Performance measurement of Bank C

Description Financial PM Non-financial PM
Importance Medium High
Application of MA systems partly Very Seldom
Model/methods of PM Customer survey and bench Customer survey and bench
marking marking
Satisfaction low Low
Improvement Cost effective model New model and low cost

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The scope of improvements in the Current Approach
 Financial Performance Measurement
o Balance Score Card (BSC) approach needs to be adopted
o More in-depth analysis of Customer and product profitability needs to be done
o The adopted model needs to be more cost-effective

 Non-Financial Performance Measurement

o The current approach needs to be more optimized and improved, at a low cost
o As part of benchmarking approach, comparisons need to be made with the best performing
banks in the market (irrespective of its type) needs to be Customer survey should be more
focused in line with the objective & vision of the organization
o Customer survey should be more focused in line with the objective & vision of the organization

3.4. Bank D – Performance Measurement

It is a leading housing financing organization, having stable branch network across different cities in
India. This financial organization considers the performance measurement with high importance and
measures the financial performance of its various sections on a regular basis. But at present, their
performance management approach is not integrated, which is essential for better effectiveness of
performance management.

Along with the financial parameter, the organization regularly measures its non-financial parameters such
as
 Customer satisfaction,
 Service excellence
 Obligation to customers
 on-time service

Some of the key methods/models used for such measurements are

 Benchmarking
 Surveys

Performance measurement of Bank D

Description Financial PM Non-financial PM
Importance High High
Application of MA systems Most of the functions Regularly
Model/methods of PM Benchmarking Benchmarking and surveys
Satisfaction/problems Medium Medium
Improvement Integrated model needed Competent model needed –
(cost worries) cost focus

The scope of improvements in the Current Approach

 Financial Performance Measurement
o The more integrated model needs to be adopted
o Financial performance needs to be measured for all departments/sections of the organization
 Non-Financial Performance Measurement
o More emphasize needs to be provided on NFPM
o Current Benchmarking model needs to be transformed into a more competent model

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3.5. Summarized view of Performance Management in Indian Banks and FI’s

Bank Bank Bank C Bank D

A B
Description Commercial bank Investment bank Co-operative NBFC
# of employees 18200 1825 750 2103
The average 18.9 45 9 13
growth rate in
the last 3
years
Importance High Medium Medium High
of
measuring
performance
Practices of Used in all Partly Used in most Used in most
PM in the functions (Originatio of the of the
organisation ns, functions functions
underwriting etc.)
Models/method Benchmarking, BSC Customer Benchmarking
s to measure Balance survey
performance scorecard,
in the performance
organization pyramid and
ABCM
Problems with Low Medium High Medium
PM
Ways to Use integrated TC and BSC to be Use Alternative
overcome PM model implemente competent models to be
PM d effectively model explored
Importance of High (due to CSR) Medium High High
measuring NFP
Frequency Regularly Seldom Very seldom Regularly
of NFP
measurement
The targeted Customer Customer Customer Social
scope of NFP satisfaction, convenienc satisfaction, wellbeing,
customer e, commitment commitment,
retention, quality, Satisfaction , and social customer
commitment, on- , quality, wellbeing satisfaction,
time service rural customer
delivery, rural & obligations retention
social obligations
Models/method Benchmarki Benchmarki Survey Benchmarking
s to measure ng, ng, process
NFP performance type
pyramid and
ABCM

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 Satisfaction Medium Low Low Medium
with
measurement
of
NFP
Improvements Existing models Need to Model to be Need to
of NFP are well understand identified implement a
methods equipped and competent
implement a model
competent
model

4. Observation - Use of Management Accounting

Management Accounting (MA) is widely used in most of the banks & financial institutes in India, but
primarily for the Financial Performance Measurement (FPM), not for the Non-Financial Performance
Measurement (NFPM); the focus for NFPM is very insignificant and not on a regular basis. For overall
performance improvement of Indian banks & financial institutions, there is a need for precise
measurement of both Financial & Non-Financial Performance Measurement (FPM & NFPM) and
Management Accounting (MA) methods & techniques can be used to measure performance.

As part of our analysis, it has been in Indian banks benchmarking PM technique is most extensively used.
Out of the four different types of banking & financial institutions we worked closely, we found that two
of them measure both financial and Non- financial performance (FP & NFP) using benchmarking
technique and comparing the analysis facts with other similar kinds of organizations. Also, the secondary
data we have explored provides identical findings.
Some of the observations/findings are
 In current practice, benchmarking is not done against the best performing organization, instead
prefers to compare against similar kinds of organizations, even if its performance is not at the top
level (like cooperative bank prefers to benchmark against another co-operative bank0
 Indian Banking & Financial Institutions (BFIs) more concerned about their domestic market and
they do not show interest for the need of benchmarking their performance against foreign banking
& financial institutions.
 As part of the NFPM, it has been observed that Customer satisfaction is the most significant
aspect to be measured and it has a direct impact on financial performance.
 Another key non-financial performance parameter is quality service in BFIs which in turn helps to
gain better customer satisfaction and establish the brand reputation.
 Commitment to clients & stakeholders and on-time service also plays an important role in
improving the overall performance of the banking & financial institutions.
 NFP are measured in leading commercial bank due to corporate social reporting (CSR) requirements
identified by the organization.

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5. Conclusion

Based on the objective and strategy of Indian Banking & Financial institutions, emphasize Non-Financial
Performance (NFP) Parameters may differ, but NFP measurement plays an important role to guarantee
profit for competitive advantages. The management of Indian BFIs prefers to adopt “profit-driven NFP
measures,” and some of them prefer to maintain “long-term competitive advantages (LTCA)” by ensuring
profit in the long term. Along with these, there are also some independent NFPs which are not linked to
organization profitability.