The Hindu Business Line : Balance-sheet approach to complement traditional analysis

INTERNATIONAL finance is the focus of chapter 3 of the UN's World Economic and Social Survey 2004: Trends and Policies in the World Economy from Academic Foundation (www.academicfoundation.com). There is a string of positive developments that the book speaks of — such as the recovery of global growth, improved prospects for stability, and sustained low interest rates. "The improvement in investor sentiment towards emerging markets was reflected in the falling cost of borrowing," though the fall reversed in the first half of 2004.

Ever heard of PRSP? It's Poverty Reduction Strategy Paper — "a document that describes a country's near-term economic and social programmes to promote sustainable growth and reduce poverty". PRSP process must be integrated with the decision-making process and the Budget, advises the UN.

A section is devoted to `continuing reform of the international financial architecture' where what comes on top is crisis prevention. Here, the major focus was on "the early identification of vulnerabilities."

New incidents of corporate fraud and mismanagement renewed concerns about corporate financial reporting, auditing and governance, especially in developed countries, notes the publication.

The IMF uses a balance-sheet approach to complement traditional analysis of flow variables, such as current-account and fiscal balance. One learns that this approach looks at stocks and structures of assets and liabilities, and helps detect currency mismatches (a predominance of liabilities denominated in foreign currency over assets denominated in national currency).

"As balance-sheet analysis is very data-intensive, establishing the necessary database will take much time and effort in many emerging economies," notes the UN. "Besides, like the liquidity management framework and financial soundness indicators, the balance-sheet approach requires further analytical work." This may be an area where the ICAI can contribute its wisdom.

Useful read for the macro-minded.

Why not use account name as code

KRISHNA and Bharati have written Develop an Accounting Package Using VB, from VK Publishers (www.vkinfotek.com). The book begins with the basics of networking where the authors explain terms such as client, server, topologies, OSI (Open Systems Interconnection), NIC or network interface card and so on.

Then, you establish `the network environment' armed with inputs on DNS, IP addressing, DHCP server, domain levels and so forth. Install SQL server in chapter 3, and then move on to securing the database by creating logins and granting permissions. Part IV is where the book introduces accounting concepts, especially for the computer engineers. The authors guide the reader step by step in creating master files using Visual Basic.

Why not use the account name as code is a question that Krishna and Bharati pose, and then answer as follows:

"Account names might not be unique and can change. Although SQL Server 2000 has new features such as cascading updates that can handle changes to the account name, each account name update would task the database with additional activity. Because the rows of the Accounts table are referenced by transactions, each account name change would entail a number of changes in the TranTable as well."

A book you can byte off!

Less NPAs and no growth?

THE foremost critical issue in the banking sector is "the shying away from wholesale lending except where prime corporates are concerned," declares Regulation of Financial Intermediaries in Emerging Markets, edited by T. T. Ram Mohan, Rupa Rege Nitsure and Mathew Joseph, from Response Books (www.indiasage.com).

By practising an extreme form of risk aversion, it may be possible for banks to reduce NPAs, note the editors, and wonder if such a preoccupation is consistent with long-term performance. Another issue is corporate governance in public sector banks.

Impact of finance on growth runs primarily through total factor productivity, and not through the savings rate or physical capital formation, according to another chapter.

And on external governance and bank profitability, a cross-country analysis is dealt with in yet another chapter, where the authors conclude, "Better accounting practices, more stringent external audits, greater financial statement transparency, and external rating and credit monitoring, enhance bank profitability."

Don't miss towards the end of the book a detailed analysis of NPAs in commercial banks, explaining the severity of the problem using regression analysis.

"The most significant result is that fixed cost of banks, which is largely the personnel cost, is highly significant in explaining the severity of NPAs and has the desired sign in public sector, private and foreign banks."

Worthy addition to finance literature.

BooksOfAccount@TheHindu.co.in

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