CASH MANAGEMENT:-INDIAN OIL CORP.

CASE STUDY SUBMITTED BY AKSHIT JAIN

OVERALL SUMMARY OF CASE

This project seeks to evaluate the Cash Management & Banking System at Indian Oil Corporation along with a financial statement analysis in understanding the profitability, liquidity & efficiency of the firm.

The company uses system called Cash Management Product (CMP) to get information related to its cash information. This system performs the required function of speeding up the cash receipts and payments as well as provides for greater accountability which enables the management at the top to take efficient decisions in regards of the liquidity available.

State Bank of India (SBI) is one of the main bankers of Indian Oil and provides various facilities. HDFC is also among the bankers to Indian Oil and its customers. Indian Oil has around 500 locations around India which serve as an outlet for the finished products. Payments are made to these locations on a day to day basis. This project provides an understanding to the facilities provided by SBI to Indian Oil at various locations.

During the year 2007, Indian Oil started the concept of Electronic Collections (e – Collections) facility with a view of speeding up the payment procedures for the purchasing party wherein the delivery of the product can be taken within 15 – 30 minutes whereas in the case of physical payment, the delivery would take place only after clearing of the particular instrument. And lastly, a financial statement analysis of the firm so as to identify its financial strengths and weaknesses based on a ratio analysis model.

CASH MANAGEMENT SYSTEM

EARLIER

An organizations cash operating cycle is the complete process of utilizing its resources and converting them into income through trading activities. Prior to the establishment of the Cash Management Product module, the Indian Oil transactions took place through the conventional methods of Regional Cash Credit module. In the RCC module the SBI branches of various states dispersed over various locations would send the information of remittance of funds to the Regional office of SBI and they in turn would then forward that information to the SBI head office. However, in this module the lead-time on an average was 4-10 days depending on the accessibility of the location. The delay included 2-7 days for the transfer between the location and State Office SBI Branch to the Regional Office SBI Branch, and another 2-3 days from the Regional Office to the Head Office SBI Branch. Therefore, though a collection may be made on the 10th of any month the credit of such a collection may reflect only on the 14th - 20th of that month.

It is clearly evident that from such a long lead time in the transfer of funds, the cash requirements of Indian Oil and the interest figure in the income statement are affected directly by the length of the cycle. Hence to tackle this problem, Indian Oil’s primary banker, SBI, introduced the CASH MANAGEMENT PRODUCT (CMP) module

TODAY

Indian Oil, being a huge organization, has numerous transactions taking place through out the country. On an average at least 5000 transactions take place within one working day with an amount equivalent to Rs.500 crore. All of these transactions take place through banks and since SBI is the primary banker to IOC, it has established various facilities to oversee that the transitions take place smoothly.

The Credit Facilities provided by SBI to Indian Oil can be summarized as follows:

FUND BASED FACILITY

It is the amount of overdraft obtained from the Bank. At present the total overdraft limit of the corporation is controlled through the Main Cash Credit Facility.

NON FUND BASED FACILITY

These facilities are for pure banking convenience provided by the bank, so that the Corporation can carry out the Business transactions. Various Non Fund-Based facilities available include:

Performance/ Financial Bank Guarantee Facility Letter of Credit Facility - Inland Letter of Credit Facility - Import

HOW TRANSACTIONS TAKE EFFECT:

Undertaking the transactions at more than 500 places and giving effect in a single account of Mumbai branch is a very complicated process which involves a lot of supervision and most importantly to administer the various kind of accounts IOC has with SBI to run its operations. Each and every account has its own advantages towards company.

CASH FLOW FORECASTING

A key element of treasury management involves projections of inflows and outflows of cash the corporation. It also requires its constant updating on day to day basis for ensuring effective fund management.

Projection is done in two stages:

Monthly --- by 7th of every month Rolling --- by 22nd of every month for 15 days of next month

For effective forecasting, managers at Indian oil require credible information from multiple sources. The sources of information for daily updation of accruals and refinement of projections can be given as follows:

Cash Management Product- Through downloading data from CMS Service Providers. Web-banking / emails from banks. Regional Collection Centers - through emails / telephone from:

All 4 regions of marketing division Refinery division Pipeline division Assam oil division

Information is received from networks spread all over India.

SBI

570 collection centers with SBI in 250 locations most of the centers have CMP (Cash Management Product) facility.

460 total withdrawal account with SBI about 150 special withdrawal account with the facility of transferring the balance at the end of the day to the centralized cash credit account with SBI, Mumbai.

HDFC (Initiative for Alternate Banking Arrangement)

30 collection centers in North India. All the centers have CMP (Cash Management Product) facility

1 withdrawal Account in Delhi

FROM THE FIGURES IN EXHIBIT IV &V IT IS CONCLUDED

The major problem or bottleneck faced by the cash management department is the huge variance between the budgeted receivables and the actual accruals. The prime reasons why variances occur are:

Debtors failing to make a payment on time. Delay in clearance of payment from banks. Over estimation of receivables. Problems of clearance through the electronic modes of payment. Extra Ordinary state of affairs

.

FROM FIGURES IN EXHIBIT VI IT IS CONCLUDED

REASONS FOR VARIATION IN COLLECTIONS OF Rs. (6.62) BILLIONS

Loss of Market Share Aviation O/s realization in March 2010 – Indian Airlines – Rs. 4.42Billions Grant from ONGC under RGGLV scheme – Rs.0.48 billions Revolving Credit Policy given to ROs lead to shifting of collection to next month

REASONS FOR VARIATION IN MISCELLANEOUS HEAD OFFICE PAYMENTS OF Rs. 0.50 BILLIONS

Interest on WXDL loans & Adhoc Interest for March – Rs. 0.04 billions

Equity contribution to Indian Oil Petronas on 31st march – Rs. 0.06 billions Payment to airport authority of India by - Rs. 0.07 billions Payment to Lubrizol (against 1 crore in Feb) - Rs. 0.05 billions Demurrage, Freight, charter hire payment by import section – Rs. 0.9 billions. Misc increased payments in leiu of March closing by LPG & capital assets section – Rs.

0.8 billions.

OTHER IMPORTANT TERMS USED IN CASE

CASH MANAGEMENT PRODUCT

CMP is a facility provided by SBI, whereby the collections and withdrawals from the branches all over India are transferred via electronic mode to the Cash Credit Account in Mumbai.

E-COLLECTION MODELS ELECTRONIC FUNDS TRANSFER

Electronic Funds Transfer (EFT) is a method in which the money is transferred from one bank account to other bank account in without the paper cheque and paper money. The transaction is done at bank ATM or using Credit Card or Debit card. In RBI-EFT system you authorize the bank to transfer money from your bank account to other bank account that is called as beneficiary account.

NATIONAL ELECTRONIC FUNDS TRANSFER

NEFT This is a better version of RBI-EFT system. In RBI-EFT there is a limit in location, whereas in NEFT there is no geographical location problem and only requires both the bank to be NEFT enabled system. Under NEFT, the transfer takes place either on the same day or on the next day, depending on the time of instructions given. NEFT is on net settlement basis that is to say that it processes transaction in batches involves four settlement cycles a day 9.30 am, 10.30 am, 12 pm and 4 pm.

REAL TIME GROSS SETTLEMENT

RTGS is an instantaneous funds-transfer system, wherein the money is transferred on a ‘real time’ basis and hence, happens in a real time mode. With this system you can transfer

money to other bank account with maximum 2 hours. In this system there is a limit that you have to transfer money only above Rs 1 lakh and for money below Rs 1 Lakh transactions, banks are instructed to offer the NEFT facility to their customers. This is because; RTGS is mainly used for high value clearing. As of now, customers can use the RTGS facility only up to 3.30 pm and inter-bank transactions are possible up to 5 pm