finacial project
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Project Report "Banking System" in India
Introduction of Banking
Banking regulation Act, 1949, defines banking as accepting for the purpose of lending or investment,
of deposits of money from the public, repayable on demands or otherwise and with draw able on
demand by cheques, draft or order otherwise.
Functions of Commercial Banks :
1. To change cash for bank deposits and bank deposits for cash.
2. To transfer bank deposits between individuals and or companies.
3. To exchange deposits for bills of exchange, govt. bonds, the secured and unsecured promises of
trade and industrial units.
4. To underwrite capital issues. They are also allowed to invest 5% of their incremental deposit
liabilities in shares and debentures in the primary and secondary markets.
5. The lending or advancing of money either upon securities or without securities.
6. The borrowing, raising or taking of money.
7. The collecting and transmitting of money and securities.
8. The buying and selling of foreign exchange including foreign bank notes.
Banking scene in India
The banking sector in India is passing through a period of structural change under the combine
impact of financial sector reforms, internal competition, changes in regulations, new technology
global competitive pressure and fast evolving strategic objectives of banks and their existing and
potential competitors. Until the last decade, banks were regarded largely as institutions rather akin to
public utilities. The market for banking services were oligopolies and Centralized while the market
place was regulated and banks were expected to receive assured spreads over their cost of funds. This
phenomenon, which was caricatured as 3-6-3 banking in the united states, meaning that banks accepte
deposits at 3%, lent at 6%, and went home at 3 p.m. to play golf, was the result of the sheltered
markets and administrated prices for banking products. Existence of entry barriers for new banks
meant that competition was restricted to existing players, who often operated as a cartel, even in areas
where the freedom to price their products existed.
The market place began to change for banks in India as a result of reforms of the financial sectors
initiated in the current decade. On account of policy measures introduce to infuse greater competitive
vitality in the system, the banking has entered in to a competitive phase. Competition has emerged no
only from within the banking system but also from non-banking institutions. Lowering of entry
barriers, deregulation of interest rates and growing sophistication of customers have made banking fa
less oligopolistic today. Introduction of capital adequacy and other prudential norms, freedom granted
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to enter into new turfs and greater overlap of functions between banks and non-banks have forced
banks to get out of their cozy little world and think of the future of the banking.
Emerging Environment of Banking in India
Full convertibility of rupee leading to free mobility of capital, which will mean virtual collapse of the
national borders for trade and capital flows.
Greater coordination between monetary, fiscal and exchanged rate policies for achieving the goals offaster and sustainable economic growth, macro-economic stability and export promotion.
Close integration of various financial markets such as money market, capital market and forex market
Removal of lowering of existing barriers of competitiveness, which are present today in the form of
quantitative instructions on certain imports protective custom duties, reservation of certain utilities for
the public sector.
Growing privatization and commercialization infrastructure sector.
Today, Banks customers are better informed, more sophisticated and discerning. They also have
a wide choice to choose from various banks and non-bank intermediaries. Their expectations are
soaring. This is particularly true for banks corporate clientele but also applies to customers from
personal segment.
This is changing profile of customers call for a shift from product-based approach to customer
based approach. A bank aiming at maximizing customer value must, of necessity, plan for
customized products. A combination of marketing skills and state-of-the-art technology should enable
to bank in maximizing its profits through customer satisfaction.
In the next millennium banks will have to be more and more cautions about customer service,
profitability, increased productivity, to keep face with changing banking scenario. As banks in Indi
prepare themselves for the millenium these are the shifts in the paradigm they are likely to experience
The 21st century may see the dawn of DARWINIAN BANKING. Only the banks could fulfill the
demands of markets and changing items would survive and prosper.
A word about SBI card
SBI Segment : Small business credit card (SBI credit card)
Preamble :
Small business units, retail traders, artisans, village industries, small-scale industrial units and tiny
units, professionals and self employed persons etc., contribute significantly to the growth of our
economy.The entrepreneur himself manages many of the units. Very often, these entrepreneurs
complain of procedural delay in sanctions and renewal of limits. They also find it difficult to cope wit
the demands for audited balance sheet and other statements sought by the bank from time to time for
availing credit facilities. With a view to providing hassle free financial supports to the above categori
of entrepreneurs who have shown commitment to run the unit successfully and who are dealing with
the banks for last two years satisfactorily, new and friendly credit product namely small business cred
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card scheme is designed. Under the scheme, cumbersome procedural aspects relating to reviews and
renewals, submission of balance sheet, stock statements and other statements are done with credit
delivery made simple and easy.
Purpose :
To meet the credit requirements of small business units, industrial unit, retail trader, artisan, Small
Scale Industry (SSI) and tiny units.
Eligibility :
A. Customers of the following segments with a satisfactory track record for the last two years enjoyin
credit facilities.
Small industrial units (SSI and tiny units including artisans)
Small retail traders (Under SBF)
Professional and self employed persons
Small business enterprise
B. Units who do not enjoy credit limit with us/other banks at present with excellent performance and
credential may be considered.
Quantum of loan :
Loan up to Rs. 5 Lakh can be sanctioned to eligible persons.
Assessment :
The small business credit card limit can be fixed as follows :
For small business, retail trader etc. 20% of the annual turnover declared for tax purpose or last
twelve months turnover in the operative accounts, whichever is higher.
In respect of parties with good track record, where sales tax returns are not available, the credit limits
may be decided taking into consideration the actual turnover in the accounts during the last two years
For professionals and self employed persons, 50% of their gross annual income as per IT
return shall be considered as the limit for issuing the SBI credit card. For small scale industrial units, tiny sector units the assessment norms in vogue as per the
Nayak Committee recommendations would continue.
Validity :
Credit card limit will be valid for a period of three years, subject to satisfactory conduct of the
accounts.
Annual review will be done based on conduct/operations of the A/cs. A major portion of the
sales turnover should have been routed through the accounts as revealed by the credit
summations.
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Repayment :
The working capital advance may be continued subject to that review every year provided the
credit summations in the account is not less than 50% of the projected sales turnover. If the
credit summations is less than 50% of projected sales turnover. The outstanding as on the due
date of review should be made repayable in suitable monthly installments.
The term loan is repayable in suitable installments with in a maximum period of five years.
In case of composite loans, only the term loan is repayable in installments up to a maximumperiod of five years.
Interest rate :
As per extent instructions issued from time to time relating the market segment.
Refinance :
No refinance is to be claim from SIDBI
Security :
Primary : Hypothecation of the stock in trade receivables, machinery, office equipment.
Collateral :
Under SSI-No collateral security as per existing guidelines of RBI.
User SBF :
Up to Rs. 25000/- No collateral security. Over Rs. 25000/- charge over movable/immovable property or third party granted.
However, in case of the excellent track record, sanctioning authority may waive collateral requiremen
Margins :
Up to Rs. 25000/- - NIL
Rs. 25001/- to Rs. 5,00,000/- - 20%
Documentation :
Documents as per extant instructions.
Credit Card - A Convenient Banking Product :
The credit card is a hassle free convenient banking product aimed at simplifying the credit
delivery mechanism. Cumbersome procedural aspects relating to reviews and renewals, submission
stock statement, balance sheet and other statements are done away with. The credit limit will be
worked as detail above.
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Small business credit card
Card No.
Name
Account No.
Tel. No.
Limit Rs.
Date of issue
Valid upto
.. (Branch Code)
Signature of the Brach Manager Card holders Photograph with signature
The borrower would be issued a photo card indicating sanctioned limit and validity of the limit(sample card)
Insurance :
Fixed assets/stock pledged/hypothecated to the bank be fully insured at least to the extent of th
bank interests.
Bank may waive insurance of assets for equipment against the fire and other risk up to
Rs.25000/-
Cover under credit guarantee scheme :
All eligible loan accounts sanctioned for small scale industries (other than services) would
qualify for cover under CGTFSI scheme (presently the scheme has been introduce in five circles on
pilot basis viz. New Delhi, Chandigarh, Lucknow, Patna & Hydrabad).
Operation :
Small business credit card accounts should be maintained in a separate ledger.
Cheque book should be issued and marked as small business credit card account.
Pass book should be issued for mall business credit card holders.
Stock statement waived.
Submission of audited balance sheet waived.
Borrower would be issued a small business credit card with photograph thereon. Cost of
photograph to be borne by banks.
IRAC norms would be applicable.
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Brief opinion report should be recorded. Marked inquiries should be made and recorded in the
opinion report and singed by the field officer/cash officer or officers not below that rank.
Units within a radius of 5 kilometers may be covered intensively for the issue of credit card.
This condition may be waived for such of those units already in the book of the branch.
Inspections :
Half-yearly inspection/monitoring to ensure the end user funds.
Sanction :
Required loan may be sanctioned with in a week after receipt of detailed information.
Control return after sanction may be sent to next higher authority for approval .
Scoring Model :
Loan would be sanctioned up to Rs. 5,00,000/- based on the simplified scoring model as given
in annexure- II. Those who are scoring less than 60% would not qualify for the loan.
Rationale :
New schemes for hassle free credit facilities to small borrower.
Automatic Teller Machine (ATM)
An ATM (Automatic Teller Machine) card is useful to a card holder as it helps him to withdraw
cash from banks even when they are closed. This can be done by inserting the card in the ATM
installed at various banks locations.
State Bank Cash Plus CARD
Signature Panel.
Magnetic Stripe
Features of State Bank Cash Plus Card
State Bank Cash Plus Card having the 19 digit.
Name of the card holders mention there on it.
In case of State Bank Cash Plus Card, there is no expiry period but for the old card, the date
after which your card needs to be renewed is the last day of the month indicated on your card.
Signature panel on which you must sign as soon as youre your card. It identifies the card as
your State Bank Card Plus Card.
The magnetic stripe, which contains encoded information.
ATM card possess pincode which having the 4 digit.
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Use of State Bank Cash Plus Card
We uses our State Bank Cash Plus Card for cash withdrawal from ATMs.
We uses it for making the payments for purchase made at the merchant establishments.
Significance of the Study
This study entitled comparative study of various credit schemes of SBI V/s other banks will b
helpful for bankers to maintain customers service policy, for customers while deciding theirfinancing needs and also helpful for other researchers for further research in the future.
SBI card provides customers with an option, in addition to the existing banking credit facilities
available. With an SBI card customers can enjoy hassle-free credit facilities.
This study would help us to know about the problems that are faced by the consumers during
transactions. It would also reveal the problems that are being faced by the bank employees while
dealing with customers and would also highlight the future prospect of SBI card.
Review of Existing Literature :
It is very essential to know whether the study has already been conducted before. If so, how and to
what extent ? And because of this scholar has to go through all the existing literature related to the
study. SBI Card, very limited studies have been conducted on the subject. Due to the time restrictions
scholar could seek advice from only the limited literature, which is available with the bank.
As the concept is completely under the control of various banks and RBI. So the information is
directly taken from these sources.
Conceptualization
As the concept includes two terms i.e. cash credit or working capital loans and terms loans. Therefore
both the terms are taken into consideration in the proposed study. Due to the privatization of banking
sector many big private players entered in this sector giving a tough competition to the existing
players. So, to face this stiff competition all the public sector banks have to review their functioning.
These aspects will be given importance in this project report.
The concept of SBI card, question crops in mind what is a SBI card, What is its shape and size,
what is its function. A SBI card is nothing but a identity card containing card holders photographs
with signature, card no. Name, A/c No. limit, validity period, branch code with signature of BranchManager.
http://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/comparative-study-of-various-credit-
schemes-of-SBI-Vs-other-banks/introduction-of-banking-system-india-ch1.htm
Retail means sale of goods in small quantities, it is concerned with buying of goods in small quantitie
from the wholesaler and selling them in small quantities to the ultimate consumers as per their
requirements. The person engaged in this trade is called the retailer. He acts as a link between the
http://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/comparative-study-of-various-credit-schemes-of-SBI-Vs-other-banks/introduction-of-banking-system-india-ch1.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/comparative-study-of-various-credit-schemes-of-SBI-Vs-other-banks/introduction-of-banking-system-india-ch1.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/comparative-study-of-various-credit-schemes-of-SBI-Vs-other-banks/introduction-of-banking-system-india-ch1.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/comparative-study-of-various-credit-schemes-of-SBI-Vs-other-banks/introduction-of-banking-system-india-ch1.htm -
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wholesaler and the customers. In retail trade goods are sold to the ultimate consumers for personal use
and for the use of the business in small quantities only. The retailer does not specialize in a particular
or a particular product. Rather he maintains a large variety of goods. Generally, sales are limited to a
and on a small scale.
MEANING OF BANKING
Banking has come to occupy a pivotal position in a nations economy. According to the modern
concept, banking is a business which not only deals with borrowings, lending and remittance of fundsbut also an important instrument for fostering economic growth.
The Banking Regulation Act 1949, defines the term banking as the accepting for the purpose
lending or investment of deposits of money from the public or otherwise and withdraw able by chequ
draft, order or otherwise. Thus, the essentials of banking are:
(1) There should be acceptance of deposited.
(2) Deposits should be from the public.
(3) Deposits should be repayable on demand or expiry of a term or after a specified periods.
(4) The purpose of deposits should be lending or investment.
Bank is an institution which deals in money and credit. It buys money from depositors and sell to th
borrowers. It is body of persons whether incorporated or not who carry on the business of banking.
bank may defined as a corporation or person which collects deposits from the public, repayable on
demand and which supplies and facilitates all kinds of exchanges.
RETAIL BANKING
Retail banking means mobilizing deposit form individuals and providing loan facilities to them
the form of home loans, auto loans, credit cards, etc, is becoming popular. This used to be considered
the banks as a tough proposition because of the volume of operations involved. But during the last cou
of years or so, banks seem to have realized that the only sustainable way to increase deposits is to loo
small and middle class consumer retail deposit and not the price sensitive corporate depositors. With
financial sector reforms gathering momentum, the banking system is facing increasing companies fro
non-banks and the capital market. More and more companies are tapping the capital market directly fo
finance. This is one of the main reasons for the banks to focus vigourously on the much ignored retail
deposits. Another reason is the current liquidity the margins are 1 to 2 percent above the prime rate; in
retail market they are 3to4 percent.
It is reported that Indian retail market has the potential to be second only to the USA. Nati
Readership Survey 5puts Indian households with monthly of over Rs. 5000 at 4.5 million. Accordin
the survey, the category of households with annual income of Rs. 2 lakhs and above is growing at the
of 30 per cent per annum. No winder, banks with vision and insight are trying to woo this market thro
a series of innovative additions to their products, services, technology and marketing methods. Fixed
unfixed Deposits, (cluster deposits which can be broken into smaller units to help meet deposi
overdraft without breaking up entirely), centralised database for any branch banking (whereby
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customer can access his account in any of the branches irrespective of where the account is maintain
room services (whereby the customers are visited at their residences offices to enable them to open
accounts), automatic teller machines, tele banking network, extended banking time, courier pickup
cheques and documents, etc are some of the privileges extended to the customers by the banks in
eagerness to cultivate the retail market. In short, in the bold new world of retail banking the custom
crowned as king.
RETAIL BANKING-A COOL OASIS
To bankers struggling through the shifting sands of corporate credit, retail banking looks like a cool o
Corporate Credit, retail banking looks like a cool oasis. Corporate customers rely less on commercia
banks every day as other fund raising avenues present themselves. As this disintermediation takes pla
and competition shrinks margins, retail banking has gained an irresistible allure for banks because of
apparently higher margins and potential fir growth.
With their large branch networks, banks have secured sizeable deposits-23 percent of GDP. On the as
side, however, retail advances account for a mere seven per cent of total lending. The penetration of
products like car loans or credit cards is very low. With very few focused multi-line banks, non banksoften significant players in retail lending, as HDFC is in house loans. Yet, many non-banks lack the
minimum size to make the necessary investments and address the challenges of retail banking.
A large number of banks and non-banks have launched or relaunched retail products and are attempti
grow their share of the personal financial services market. Even the term lending institutions have dec
that they need to go retail to raise funds. Many organization like ICICI are betting that a large part of
future growth will come from retail customers.
Retail banking is much more than as opportunity to addressing dwindling margins. It is an imperativ
preserve profits and market positions. Customers now have many more personal financial optio
growing credit culture, a willingness to switch between financial services providers, and a deman
lower interest rates. As they witness these trends, banks realize that they cannot remain passive. The
private sector banks are making inroads in the markets they serve, while competition from non-ban
growing. In respect, older institutions need to revamp their distribution capabilities, cust
management capabilities, operating culture, compensation system and operations processing.
WEB IMPACT ON BANKS RETAIL REVENUES:
For all those gurus whove been predicting that the net will end the business of said banks, here
shocker.
Even in the SILICON valley-driven USA, Internet is not expected to have a major impact in banks r
revenues.
The reason: the absence of a convenient alternative at present to using cash.
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According to a report by moodys Investors service, at least in the intermediate term, the internet i
expected to impact large US banks core profitability or competitive position.
This is despite the despite business being the simple-most important profit source for most Amer
retail banks.
The core retail banking business of deposit taking will be sheltered form web-based competitors
margin shrinkage on this business.
Need for convenient access to physical locations coupled with the advantages of multiple del
channels like branch, ATM, telephone and computers, consumers need to leave money in transacti
accounts; customer inertia and the relatively limited cost savings available to consumers from
banking, are cited as the main factors supporting its view.
The moodys report, however, cautions that other consumer business such as residential mortgages,
loans and credit cards may be more vulnerable to web-based competitors.
However, most US banks have thin margins or low market shares in these businesses mitigating
impact, says the report made available to the Economic Times.
The rating agency is skeptical of banks ability to generate substantial incremental revenues from c
selling financial products to existing customers via the
Banks have to maintain a comprehensive and effective web based capability to maintain their compet
position, cautions moodys.
The need for customers to take frequent physical receipts, make convenient physical receipts, m
convenient physical delivery of cheques using ATMs, inhibition towards paying ATM charges for u
another banks ATM network by the consumer and time consuming, difficult and disruptive natu
switching accounts also contribute to the stickiness of retail deposits.
With low bank fees for individual transactions and relatively small bank deposits, the opportunity cos
in terms of interest income for customers is not material where the deposits are not large.
Banks offer convenience and choice and the web-based channels of banks have reported rapid grow
the number of customers by retaining current customers.
According to moodys a survey indicated that 35 per cent of Internet banking customer discon
because they dont find it convenient.
Customers prefer to use a variety of channels to conduct their banking which is why it remains to be
whether a business model based solely on internet banking will generate adequate returns and sustain
term competition against conventional banking systems.
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The advent of the internet could, however have a powerful effect on banks acquisition strategie
creating uncertainty about the value of purchasing large branch networks, the study says.
For some banks, however, the Internet could facilitate an increase in fee income by generating fees
Internet service arrangements like bill presentment and clearing.
However, if smart cards or stored value cards or other electronic cash substitute gain popul
alternatives could become more attractive to customers.
On the other hand, banks might be able to reduce costs of servicing the retail customers by moving t
over into a paperless environment.
Banks could introduce various incentives to the persuade customers to forego paper statements fo
basic savings account and credit card, says moodys.
THE RULES HAVE CHANGED
As the 1900s come to their close and we look eagerly towards the new millennium, a revolution thatchange the rules and every thing we have understood of the retail market, financial products and o
services. Economic boundaries are disappearing, and the global village is a reality where the r
customer will have a choice in a manner we may have never imagined.
Providers of retail products and services will battle for market and market share. It is battle that wi
fought at different levels and the real winner will be the customer, who will benefit from incre
competition through better products, distribution, technology, pricing, and post transaction service.
The quality and range of products will expand exponentially convenience of usage, customizatioindividual needs, and a host of other user-friendly add-ons will create a whole new frontie
applications. Companies will have to innovate and continuously upgrade their products. Anticipa
listening and responding to your customers needs, will be the buzz-words of this thrust.
Distribution will be the next key benchmark of success. The customer will demand (and therefor
provider will have to respond) for greater convenience of access to the product or service and all th
the best cost of delivery. Re-defined methods, the use of technology specifically the Internet
realigned strategies will drive this important criterion of success. Constraints of location, tim
accessibility etc will all be history. No matter how brilliant the product you have, your distribu
flexibility will be the customers selection parameter.
Again, quality of the product and responsive strategies for distribution will also have a link to p
Efficiencies on this front will be the next item on your report card. Through innovation in production
delivery and cost reduction strategies, the price to the customer will have to be at maximum benefit
intelligent customer will be ruthless with any price distortions, which as a consequence of inefficien
or market exploitation his cost benefit analysis will not allow for these variables.
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Would you prefer a product, which (hopefully) is never expected to need post sale service or one w
offers the best after sale service if required ? Clearly, the relationship with the customer starts with
transaction, does not and with it. Organisation we have to give equal importance to cost sale need
customers as the pitch made prior to the sale.
Technology will perhaps be the single largest driver of this detail thrust. The entire strategy will ev
around the absolute ability of the organisation to be at the cutting as edge of technology. We will ha
invest in technology far ahead of immediate needs and be able to anticipate the future direction at a we are perhaps not used to. Being able to keep abreast, but more importantly, being able to recogniz
immense potential that technology provides at all stages in the retail chain will be of param
importance. To leverage, exploit and link technology to your business will be the greatest challenge o
new millennium and I am convinced that the retail war will be won and lost on this one aspect, pu
because technology increasingly we influence on the entire chain in a retail business cycle.
Above all these, I would list attitude towards customer as the single point basis on determining the wi
of the race. Attitude to the customer will influence all the areas we have discussed and will en
excellence in each one of them. It is an intangible, it is not prescribed in a manual nor is it a quantifi
item in the balance sheet, but an organizations attitude to the customer will be the basis determina
success for any retail operation.
There are interesting and challenging times ahead the future promises a lot but will also m
extraordinary demands. The customer will be the most important aspect of your business and ultim
the winner of the retail war.
RISK INVOLVED IN RETAIL BUSINESS
There are of course, considerable risks in retail banking. They are :
(a) Databases on credit history are large.
(b) Collection mechanisms are poor.
(c) Investments in technology are large.
(d) Operating efficiency level needs to be very high.
(e) Unlike corporate banking, retail banking involves a large number of small accounts.
(f) Demands on processing capabilities are higher.
(g) Retail segment is not something you can get into overnight.
(h) The right systems and the right architecture needs to be put in place first.
PRODUCT RANGE OF RETAIL BANKING
New Private sector banks have great resource mobilizing and asset expansion capabilities which
cannot be undermined by the fact these banks volume. Which have taken decades of option for the ol
private sector bank to build. These bank are dominating the market with new product, service3 and
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ideas. Information technology has enabled many private banks are emerging strong in banking and
financial services with the marketing of new product and service based on technological capabilities.
In the present scenario HDFC bank Ltd. is a fast emerging bank. It has 227branches throug
the India in Rewari city HDFC has one branch also and one ATMs.
Apart from the HDFC bank, the other bank like PNB, SBI which is included in study. These
are the public sector bank. SBI is the one bank in India. These two are also providing the retail ban
service.
Now the emergence of the retail concept of the banking customers are expecting more and b
services. To day customer prefer private banks because they can have personal relationship with the
personnel, with lesser hierachy and It is possible for these banks to forget closer ties with customers a
HDFC Bank provide the following service :-
1. Current A/C 2. Loan
3. Corporate Salary A/C 4. Online A/C
5. Debit Card 6. Phone Banking
7. Intercity/ Inter Branch Banking 8. Net Banking
9. Bill Pay
SBI & PNB Provides following services :-
Deposit
-Demand Deposit
Current Deposit
Saving Deposit
-Time Deposit
Fixed Deposit
Akshaya Deposit
Cumulative Deposit
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Pragati Deposit
Loan :-
Housing finance for individuals Car finance
Finance for consumer disables
Finance for Scooter/Motorcycles
Finance against future lease Rentols
Personal loan to pensioness
Personal loan to serving Army officers, Govt. & other Employees
Education loan scheme
Advance against life policy
Advance against bank deposits
- ATMs
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HDFCS RANGE OF PRODUCT
Current A/C:-
Under this account a person can deposit and with draw money as many times in a day a
wants . The regulars an average quarterly balance of the Rs. 10000 only .Besides the free ATM card
easy accessibility. Your first 50 cheque leave are o
Offered free. This can be as:-
Premium current account From any branch
HDFC bank Trade - Small business
HDFC bank plus.
Loans :- To Suits every need.
A loan is a specified amount sanctioned for a period of times. Loans are granted generally
against the security of assets or on the personal security of the borrower. The
borrowers may with draw the amount of the loan in lamp sum in instalment. Similarly it may be repay
in lump sum or in instalment.
HDFC bank provides following loan under the retail banking segment :-
Car Loan (For new and used cars).
Personal loan.
Loans against securities and two wheelers .
Consumer loan.
Car Loan :- Varity of finance schemes
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New Car loan :-
Loan amount : upto 90% Of car value
Tenure : 12 to 48 month
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Personal Loan :- For anything you have in mind
Holiday abroad
Wedding in the family
Higher education
No security or granter required
Loan amount: Rs. 25000 to Rs 10 lack
Tenure :12 to 48 months.
Eligibility : Salaried, individuals, self-employed doctors and CAS, CS, Engineers M.B.A.S
Two wheelers and Consumer loan :-
Whatever your dream, HDFC have a scheme
Two wheelers
Personal computer and AC
Durable like TV, Washing Machine, Refrigerator etc.
For HDFC bank A/C holders only.
Loan amount : Rs. 7000 to 1 lakh (Max 85% of product value)
Tenure : 6 to 36 months
Eligibility : Salaried and self employed individuals
Loan against securities - An overdraft facility
Loan amount Rs. 50000 to Rs. 20 lakh (upto 60%of market value of demand share)
Mutual Fund Rs. 50000 to Rs. 10 lakh
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LIC policy Rs.100000 onwards.
Corporate salary A/c:-
With HDFC banks corporate salary A/C, employees receive an array of rewards with
monthly pay cheque. All at no extra coast to organisation. E-age banking service from any where, at
time:-
Phone banking
Inter branch banking
Net banking
Bill payable
Free phone banking
Free mobile banking
Free demand draft
Free International debit card
Direct salary credit
Overdraft facility
Demote A/C
Joint A/C facility
Free Demand Draft
PHONE BANKING: HDFC bank provides phonebanking facility to its customers. With the help of
service customers can get their account detail, ask for a cheque book or a statement, open a fixed dep
transfer money within their own accounts, order a demand drafts, stop cheque payment etc. all by pho
INTERCITY/ INTERBRANCH BANKING: At HDFC you can access your account from any of
131 branches in 26 cities. So you can withdraw cash form another branch, through a self-cheque. You
deposit a local cheque in one branch and get it credited to your account in another city.
NETBANKING : Internet banking is just like normal banking, with a one big exception that you dhave to go to the bank for transactions. Instead you can access your account any time form any part o
world, and do so when you have the time ,and not when the bank is open. Through the net banking
can transfer funds within the same bank, open a fixed deposit, get a demand draft, make a TDS enq
request a stop payment of on a cheque, request for a new cheque book or even cheque your acc
balance.
BILLPAY : HDFC bank provides its customers to pay their mobile bills in some selected cities ove
phone as well as through their ATMs. In Mumbai you can pay BPL Mobile bills, in Delhi you can
Airtel bills and in Chennai you can pay RPG and Sky cell cellular bills through this facility. You can
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pay MTNL bills in Mumbai and Delhi and MSEB bills in Pune and Mumbai. It saves a lot of time , w
you spend in long queues or writing cheques.
Debit Cards
HDFC Banks International debit card provide seamless freedom and fiscal manageme
spending, both locally and globally.
The Debit and ATM Card, when issued as visa compliant cards, will give you the freedom to access
your savings or current at merchant location and ATMs.
Whenever you make payments, the amount will be instantly debited from your account.
present ATM cards allow you to access your account 24 hours a day, all through the year.
How does it work?
All you need to do is present your card to the merchant who will swipe it through the electr
terminal and enter the amount of your purchase. You only need to sign the transaction slip.
Your account will be automatically debited for the amount of your purchase. Your debit card
be used at any merchant location displaying the visa electronic logo or at any ATM displaying the c
logo of course, you can always use it any HDFC Bank ATM as a normal ATM card.
What if your Debit Card is lost or stolen?
If your card is lost or stolen, you are protected from fraudulent charges from the moment
report the loss to the bank.
Any transaction limit for the Debit Card?
For the safety of the card holders, the bank have a daily limit of Rs. 15000 at ATM, (at merc
location there is no transaction limit,) and this is subject to the available balance in your account.
SBI & PNB PRODUCT RANGE
Deposit
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Deposits accepted by bank may be categorised as demand deposit and time deposit.
Demand Deposit
Demand deposits are those deposits that can be withdrawn without notice. Bank undertake to r
such deposits as demand. The following types of deposit accounts are classified under Demand Depo
(a) Current Account
(b) Saving Account
Current Account :
Under this accounts, a person can deposit and with draw money as many times in a day as he
wants. Money can be withdrawn by issuing cheques. Current acount are remunerative type of deposit
accounts as no interest its payable on the credit balances outstanding in these accounts.
Saving Accounts :
This account is opened for the purpose of savings. Any purpose of savings. Any person includ
a minor can open this account by depositing a small sum of money. Saving Bank Account is subject t
restriction as to the number of withdrawal as also the amount of withdraw as also the amount of
withdrawal permitted by banks during any specified period. However there is no restriction on the num
and amount of deposits that can be made on any day. Balances in the Saving Bank Account cans inter
at rates as determined by RBI from time to time.
Time Deposit
Any deposit, which is repayable after a period of notice rather than repayable after a fixed da
period, is a time deposit or popularly called as term deposits. The following type of account in both b
are classified under Retail Time Deposits.
Fixed Deposit
Apshaya Deposit
Cumulative Deposit
Pragati Deposit
Fixed Deposit :-
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Fixed Deposit where the depositor makes a lumpsum deposit where the depositors mak
lumpsum deposit at one time for a fixed period and receive payment there of on Maturity with interes
Apshaya Deposit :-
Apshaya Deposit is a reinvestment deposit Scheme where the depositors makes a lump
deposit at one time for a fixed period and receive payment there of on Maturity with interes
WORKING CAPITAL - Meaning of Working Capital
Capital required for a business can be classified under two main categories via,
1) Fixed Capital
2) Working Capital
Every business needs funds for two purposes for its establishment and to carry out its day- to-da
operations. Long terms funds are required to create production facilities through purchase of fixe
assets such as p&m, land, building, furniture, etc. Investments in these assets represent that part
firms capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are als
needed for short-term purposes for the purchase of raw material, payment of wages and other day to
day expenses etc.
These funds are known as working capital. In simple words, working capital refers to that pa
of the firms capital which is required for financing short- term or current assets such as casmarketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolving fa
and are being constantly converted in to cash and this cash flows out again in exchange for oth
current assets. Hence, it is also known as revolving or circulating capital or short term capital.
CONCEPT OF WORKING CAPITAL
There are two concepts of working capital:
1. Gross working capital
2. Net working capital
The gross working capital is the capital invested in the total current assets of the enterprises curren
assets are those
Assets which can convert in to cash within a short period normally one accounting year.
CONSTITUENTS OF CURRENT ASSETS
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1) Cash in hand and cash at bank
2) Bills receivables
3) Sundry debtors
4) Short term loans and advances.
5) Inventories of stock as:
a. Raw material
b. Work in process
c. Stores and spares
d. Finished goods
6. Temporary investment of surplus funds.
7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities.
In a narrow sense, the term working capital refers to the net working. Net working capital
the excess of current assets over current liability, or, say:
NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.
Net working capital can be positive or negative. When the current assets exceeds the curre
liabilities are more than the current assets. Current liabilities are those liabilities, which ar
intended to be paid in the ordinary course of business within a short period of normally on
accounting year out of the current assts or the income business.
CONSTITUENTS OF CURRENT LIABILITIES
1. Accrued or outstanding expenses.
2. Short term loans, advances and deposits.
3. Dividends payable.
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4. Bank overdraft.
5. Provision for taxation , if it does not amt. to app. Of profit.
6. Bills payable.
7. Sundry creditors.
The gross working capital concept is financial or going concern concept whereas net working capital
an accounting concept of working capital. Both the concepts have their own merits.
The gross concept is sometimes preferred to the concept of working capital for the following reasons:
1. It enables the enterprise to provide correct amount of working capital at correct time.
2. Every management is more interested in total current assets with which it has to operat
then the source from where it is made available.
3. It take into consideration of the fact every increase in the funds of the enterprise woul
increase its working capital.
4. This concept is also useful in determining the rate of return on investments in workin
capital. The net working capital concept, however, is also important for following reasons:
It is qualitative concept, which indicates the firms ability to meet to its operatin
expenses and short-term liabilities.
IT indicates the margin of protection available to the short term creditors.
It is an indicator of the financial soundness of enterprises.
It suggests the need of financing a part of working capital requirement out of th
permanent sources of funds.
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CLASSIFICATION OF WORKING CAPITAL
Working capital may be classified in to ways:
o On the basis of concept.
o On the basis of time.
On the basis of concept working capital can be classified as gross working capital and ne
working capital. On the basis of time, working capital may be classified as:
Permanent or fixed working capital.
Temporary or variable working capital
PERMANENT OR FIXED WORKING CAPITAL
Permanent or fixed working capital is minimum amount which is required to ensure effectiv
utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has t
maintain a minimum level of raw material, work- in-process, finished goods and cash balance. Th
minimum level of current assts is called permanent or fixed working capital as this part of working
permanently blocked in current assets. As the business grow the requirements of working capital als
increases due to increase in current assets.
TEMPORARY OR VARIABLE WORKING CAPITAL
Temporary or variable working capital is the amount of working capital which is required to meet th
seasonal demands and some special exigencies. Variable working capital can further be classified a
seasonal working capital and special working capital. The capital required to meet the seasonal need o
the enterprise is called seasonal working capital. Special working capital is that part of working capit
which is required to meet special exigencies such as launching of extensive marketing for conductin
research, etc.
Temporary working capital differs from permanent working capital in the sense that is required fo
short periods and cannot be permanently employed gainfully in the business.
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL
SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining th
solvency of the business by providing uninterrupted of production.
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Goodwill: Sufficient amount of working capital enables a firm to make prompt paymen
and makes and maintain the goodwill.
Easy loans: Adequate working capital leads to high solvency and credit standing ca
arrange loans from banks and other on easy and favorable terms.
Cash Discounts: Adequate working capital also enables a concern to avail cash discoun
on the purchases and hence reduces cost.
Regular Supply of Raw Material: Sufficient working capital ensures regular supp
of raw material and continuous production.
Regular Payment Of Salaries, Wages And Other Day TO Da
Commitments: It leads to the satisfaction of the employees and raises the morale of i
employees, increases their efficiency, reduces wastage and costs and enhances production an
profits.
Exploitation Of Favorable Market Conditions: If a firm is having adequa
working capital then it can exploit the favorable market conditions such as purchasing i
requirements in bulk when the prices are lower and holdings its inventories for higher prices.
Ability To Face Crises: A concern can face the situation during the depression.
Quick And Regular Return On Investments: Sufficient working capital enabl
a concern to pay quick and regular of dividends to its investors and gains confidence of th
investors and can raise more funds in future.
High Morale: Adequate working capital brings an environment of securities, confidenc
high morale which results in overall efficiency in a business.
EXCESS OR INADEQUATE WORKING CAPITAL
Every business concern should have adequate amount of working capital to run its busine
operations. It should have neither redundant or excess working capital nor inadequate nor shortage
of working capital. Both excess as well as short working capital positions are bad for any businesHowever, it is the inadequate working capital which is more dangerous from the point of view o
the firm.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL
1. Excessive working capital means ideal funds which earn no profit for the firm an
business cannot earn the required rate of return on its investments.
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2. Redundant working capital leads to unnecessary purchasing and accumulation
inventories.
3. Excessive working capital implies excessive debtors and defective credit policy whic
causes higher incidence of bad debts.
4. It may reduce the overall efficiency of the business.
5. If a firm is having excessive working capital then the relations with banks and oth
financial institution may not be maintained.
6. Due to lower rate of return n investments, the values of shares may also fall.
7. The redundant working capital gives rise to speculative transactions
DISADVANTAGES OF INADEQUATE WORKING CAPITAL
Every business needs some amounts of working capital. The need for working capital arises due to thtime gap between production and realization of cash from sales. There is an operating cycle involve
in sales and realization of cash. There are time gaps in purchase of raw material and production
production and sales; and realization of cash.
Thus working capital is needed for the following purposes:
For the purpose of raw material, components and spares.
To pay wages and salaries
To incur day-to-day expenses and overload costs such as office expenses.
To meet the selling costs as packing, advertising, etc.
To provide credit facilities to the customer.
To maintain the inventories of the raw material, work-in-progress, stores and spares an
finished stock.
For studying the need of working capital in a business, one has to study the business under varyin
circumstances such as a new concern requires a lot of funds to meet its initial requirements such a
promotion and formation etc. These expenses are called preliminary expenses and are capitalize
The amount needed for working capital depends upon the size of the company and ambitions of i
promoters. Greater the size of the business unit, generally larger will be the requirements of th
working capital.
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The requirement of the working capital goes on increasing with the growth and expensing of th
business till it gains maturity. At maturity the amount of working capital required is called norm
working capital.
There are others factors also influence the need of working capital in a business.
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS
1. NATURE OF BUSINESS: The requirements of working is very limited
public utility undertakings such as electricity, water supply and railways because they off
cash sale only and supply services not products, and no funds are tied up in inventories an
receivables. On the other hand the trading and financial firms requires less investment
fixed assets but have to invest large amt. of working capital along with fixed investments.
2. SIZE OF THE BUSINESS: Greater the size of the business, greater is th
requirement of working capital.
3. PRODUCTION POLICY: If the policy is to keep production steady b
accumulating inventories it will require higher working capital.
4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time th
raw material and other supplies have to be carried for a longer in the process wi
progressive increment of labor and service costs before the final product is obtained. S
working capital is directly proportional to the length of the manufacturing process.
5. SEASONALS VARIATIONS: Generally, during the busy season, a fir
requires larger working capital than in slack season.
6. WORKING CAPITAL CYCLE: The speed with which the working cyc
completes one cycle determines the requirements of working capital. Longer the cycle larg
is the requirement of working capital.
DEBTORS
CASH FINISHED GOODS
RAW MATERIAL WORK IN PROGRESS
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7. RATE OF STOCK TURNOVER: There is an inverse co-relationship between th
question of working capital and the velocity or speed with which the sales are affected.
firm having a high rate of stock turnover wuill needs lower amt. of working capital a
compared to a firm having a low rate of turnover.
8. CREDIT POLICY: A concern that purchases its requirements on credit and sales i
product / services on cash requires lesser amt. of working capital and vice-versa.
9. BUSINESS CYCLE: In period of boom, when the business is prosperous, there is nee
for larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion o
business, etc. On the contrary in time of depression, the business contracts, sales declin
difficulties are faced in collection from debtor and the firm may have a large amt. of workin
capital.
10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall requi
large amt. of working capital.
11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earnin
capacity than other due to quality of their products, monopoly conditions, etc. Such firm
may generate cash profits from operations and contribute to their working capital. Th
dividend policy also affects the requirement of working capital. A firm maintaining a stead
high rate of cash dividend irrespective of its profits needs working capital than the firm th
retains larger part of its profits and does not pay so high rate of cash dividend.
12. PRICE LEVEL CHANGES: Changes in the price level also affect the working capit
requirements. Generally rise in prices leads to increase in working capital.
Others FACTORS: These are:
Operating efficiency.
Management ability.
Irregularities of supply.
Import policy.
Asset structure.
Importance of labor.
Banking facilities, etc.
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MANAGEMENT OF WORKING CAPITAL
Management of working capital is concerned with the problem that arises in attempting t
manage the current assets, current liabilities. The basic goal of working capital management
to manage the current assets and current liabilities of a firm in such a way that a satisfactor
level of working capital is maintained, i.e. it is neither adequate nor excessive as both th
situations are bad for any firm. There should be no shortage of funds and also no workin
capital should be ideal. WORKING CAPITAL MANAGEMENT POLICES of a firm hasgreat on its probability, liquidity and structural health of the organization. So working capit
management is three dimensional in nature as
1. It concerned with the formulation of policies with regard to profitability, liquidity an
risk.
2. It is concerned with the decision about the composition and level of current assets.
3. It is concerned with the decision about the composition and level of current liabilities.
WORKING CAPITAL ANALYSIS
As we know working capital is the life blood and the centre of a business. Adequate amount o
working capital is very much essential for the smooth running of the business. And the mo
important part is the efficient management of working capital in right time. The liquidit
position of the firm is totally effected by the management of working capital. So, a study changes in the uses and sources of working capital is necessary to evaluate the efficiency wit
which the working capital is employed in a business. This involves the need of working capit
analysis.
The analysis of working capital can be conducted through a number of devices, such as:
1. Ratio analysis.
2. Fund flow analysis.
3. Budgeting.
1. RATIO ANALYSIS
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A ratio is a simple arithmetical expression one number to another. The technique of rat
analysis can be employed for measuring short-term liquidity or working capital position of
firm. The following ratios can be calculated for these purposes:
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio
4. Inventory turnover.
5. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio of current liabilities to tangible net worth.
2. FUND FLOW ANALYSIS
Fund flow analysis is a technical device designated to the study the source from whicadditional funds were derived and the use to which these sources were put. The fund flo
analysis consists of:
a. Preparing schedule of changes of working capital
b. Statement of sources and application of funds.
It is an effective management tool to study the changes in financial position (working capita
business enterprise between beginning and ending of the financial dates.
3. WORKING CAPITAL BUDGET
A budget is a financial and / or quantitative expression of business plans and polices to b
pursued in the future period time. Working capital budget as a part of the total budge tin
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process of a business is prepared estimating future long term and short term working capit
needs and sources to finance them, and then comparing the budgeted figures with actu
performance for calculating the variances, if any, so that corrective actions may be taken
future. He objective working capital budget is to ensure availability of funds as and needed, an
to ensure effective utilization of these resources. The successful implementation of workin
capital budget involves the preparing of separate budget for each element of working capita
such as, cash, inventories and receivables etc.
ANALYSIS OF SHORT TERM FINANCIAL POSITION OR TEST O
LIQUIDITY
The short term creditors of a company such as suppliers of goods of credit and commerci
banks short-term loans are primarily interested to know the ability of a firm to meet i
obligations in time. The short term obligations of a firm can be met in time only when it
having sufficient liquid assets. So to with the confidence of investors, creditors, the smootfunctioning of the firm and the efficient use of fixed assets the liquid position of the firm mu
be strong. But a very high degree of liquidity of the firm being tied up in current asset
Therefore, it is important proper balance in regard to the liquidity of the firm. Two types o
ratios can be calculated for measuring short-term financial position or short-term solvenc
position of the firm.
1. Liquidity ratios.
2. Current assets movements ratios.
A) LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its current obligations as and when thes
become due. The short-term obligations are met by realizing amounts from current, floating
circulating assts. The current assets should either be liquid or near about liquidity. The
should be convertible in cash for paying obligations of short-term nature. The sufficiency oinsufficiency of current assets should be assessed by comparing them with short-ter
liabilities. If current assets can pay off the current liabilities then the liquidity position
satisfactory. On the other hand, if the current liabilities cannot be met out of the current asse
then the liquidity position is bad. To measure the liquidity of a firm, the following ratios ca
be calculated:
1. CURRENT RATIO
2. QUICK RATIO
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3. ABSOLUTE LIQUID RATIO
1. CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure of general liquidity and i
most widely used to make the analysis of short-term financial position or liquidity of a firm.
is defined as the relation between current assets and current liabilities. Thus,
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITES
The two components of this ratio are:
1) CURRENT ASSETS
2) CURRENT LIABILITES
Current assets include cash, marketable securities, bill receivables, sundry debtors, inventori
and work-in-progresses. Current liabilities include outstanding expenses, bill payabl
dividend payable etc.
A relatively high current ratio is an indication that the firm is liquid and has the ability to pa
its current obligations in time. On the hand a low current ratio represents that the liquidit
position of the firm is not good and the firm shall not be able to pay its current liabilities time. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the curren
liabilities is considered to be satisfactory.
CALCULATION OF CURRENT RATIO
(Rupees in crore)
e.g.
Year 2006 2007 2008
Current Assets 81.29 83.12 13,6.57
Current Liabilities 27.42 20.58 33.48
Current Ratio 2.96:1 4.03:1 4.08:1
Interpretation:-
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As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of th
company for last three years it has increased from 2006 to 2008. The current ratio of compan
is more than the ideal ratio. This depicts that companys liquidity position is sound. Its curre
assets are more than its current liabilities.
2. QUICK RATIO
Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be defineas the relationship between quick/liquid assets and current or liquid liabilities. An asset is sai
to be liquid if it can be converted into cash with a short period without loss of value.
measures the firms capacity to pay off current obligations immediately.
QUICK RATIO = QUICK ASSETS
CURRENT LIABILITES
Where Quick Assets are:
1) Marketable Securities
2) Cash in hand and Cash at bank.
3) Debtors.
A high ratio is an indication that the firm is liquid and has the ability to meet its curren
liabilities in time and on the other hand a low quick ratio represents that the firms liquidit
position is not good.
As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quic
assets are equal to the current liabilities then the concern may be able to meet its short-term
obligations. However, a firm having high quick ratio may not have a satisfactory liquidit
position if it has slow paying debtors. On the other hand, a firm having a low liquidity positio
if it has fast moving inventories.
CALCULATION OF QUICK RATIO
e.g. (Rupees in Crore)
Year 2006 2007 2008
Quick Assets 44.14 47.43 61.55
Current Liabilities 27.42 20.58 33.48
Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1
Interpretation :
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A quick ratio is an indication that the firm is liquid and has the ability to meet its curre
liabilities in time. The ideal quick ratio is 1:1. Companys quick ratio is more than ideal rati
This shows company has no liquidity problem.
3. ABSOLUTE LIQUID RATIO
Although receivables, debtors and bills receivable are generally more liquid than inventorie
yet there may be doubts regarding their realization into cash immediately or in time. Sabsolute liquid ratio should be calculated together with current ratio and acid test ratio so as t
exclude even receivables from the current assets and find out the absolute liquid asset
Absolute Liquid Assets includes :
ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS
CURRENT LIABILITES
ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.
e.g. (Rupees in Crore)
Year 2006 2007 2008
Absolute Liquid Assets 4.69 1.79 5.06
Current Liabilities 27.42 20.58 33.48
Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1
Interpretation :
These ratio shows that company carries a small amount of cash. But there is nothing to b
worried about the lack of cash because company has reserve, borrowing power & long term
investment. In India, firms have credit limits sanctioned from banks and can easily draw cash
B) CURRENT ASSETS MOVEMENT RATIOS
Funds are invested in various assets in business to make sales and earn profits. Th
efficiency with which assets are managed directly affects the volume of sales. The better thmanagement of assets, large is the amount of sales and profits. Current assets movement ratio
measure the efficiency with which a firm manages its resources. These ratios are calle
turnover ratios because they indicate the speed with which assets are converted or turned ov
into sales. Depending upon the purpose, a number of turnover ratios can be calculated. Thes
are :
1. Inventory Turnover Ratio
2. Debtors Turnover Ratio
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3. Creditors Turnover Ratio
4. Working Capital Turnover Ratio
The current ratio and quick ratio give misleading results if current assets include high amount o
debtors due to slow credit collections and moreover if the assets include high amount of slo
moving inventories. As both the ratios ignore the movement of current assets, it is important t
calculate the turnover ratio.
1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO :
Every firm has to maintain a certain amount of inventory of finished goods so as to me
the requirements of the business. But the level of inventory should neither be too high n
too low. Because it is harmful to hold more inventory as some amount of capital
blocked in it and some cost is involved in it. It will therefore be advisable to dispose th
inventory as soon as possible.
INVENTORY TURNOVER RATIO = COST OF GOOD SOLD
AVERAGE INVENTORY
Inventory turnover ratio measures the speed with which the stock is converted into sale
Usually a high inventory ratio indicates an efficient management of inventory becaus
more frequently the stocks are sold ; the lesser amount of money is required to financ
the inventory. Where as low inventory turnover ratio indicates the inefficie
management of inventory. A low inventory turnover implies over investment
inventories, dull business, poor quality of goods, stock accumulations and slow movin
goods and low profits as compared to total investment.
AVERAGE STOCK = OPENING STOCK + CLOSING STOCK
2
(Rupees in Crore)
Year 2006 2007 2008
Cost of Goods sold 110.6 103.2 96.8
Average Stock 73.59 36.42 55.35
Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times
Interpretation :
These ratio shows how rapidly the inventory is turning into receivable through sales. I
2007 the company has high inventory turnover ratio but in 2008 it has reduced to 1.75 time
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This shows that the companys inventory management technique is less efficient as compar
to last year.
2. INVENTORY CONVERSION PERIOD:
INVENTORY CONVERSION PERIOD = 365 (net working days)
INVENTORY TURNOVER RATIO
e.g.
Year 2006 2007 2008
Days 365 365 365
Inventory Turnover Ratio 1.5 2.8 1.8
Inventory Conversion Period 243 days 130 days 202 days
Interpretation :
Inventory conversion period shows that how many days inventories takes to convert fro
raw material to finished goods. In the company inventory conversion period is decreasin
This shows the efficiency of management to convert the inventory into cash.
3. DEBTORS TURNOVER RATIO :
A concern may sell its goods on cash as well as on credit to increase its sales and a liber
credit policy may result in tying up substantial funds of a firm in the form of trade debtor
Trade debtors are expected to be converted into cash within a short period and are included i
current assets. So liquidity position of a concern also depends upon the quality of trad
debtors. Two types of ratio can be calculated to evaluate the quality of debtors.
a) Debtors Turnover Ratio
b) Average Collection Period
DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)
AVERAGE DEBTORS
Debtors velocity indicates the number of times the debtors are turned over during a yea
Generally higher the value of debtors turnover ratio the more efficient is the management o
debtors/sales or more liquid are the debtors. Whereas a low debtors turnover ratio indicate
poor management of debtors/sales and less liquid debtors. This ratio should be compared wi
ratios of other firms doing the same business and a trend may be found to make a bett
interpretation of the ratio.
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AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR
2
e.g.
Year 2006 2007 2008
Sales 166.0 151.5 169.5
Average Debtors 17.33 18.19 22.50
Debtor Turnover Ratio 9.6 times 8.3 times 7.5 times
Interpretation :
This ratio indicates the speed with which debtors are being converted or turnover in
sales. The higher the values or turnover into sales. The higher the values of debtors turnove
the more efficient is the management of credit. But in the company the debtor turnover ratio
decreasing year to year. This shows that company is not utilizing its debtors efficiency. No
their credit policy become liberal as compare to previous year.
4. AVERAGE COLLECTION PERIOD :
Average Collection Period = No. of Working Days
Debtors Turnover Ratio
The average collection period ratio represents the average number of days for which
firm has to wait before its receivables are converted into cash. It measures the quality o
debtors. Generally, shorter the average collection period the better is the quality of debtors as
short collection period implies quick payment by debtors and vice-versa.
Average Collection Period = 365 (Net Working Days)
Debtors Turnover Ratio
Year 2006 2007 2008
Days 365 365 365
Debtor Turnover Ratio 9.6 8.3 7.5
Average Collection Period 38 days 44 days 49 days
Interpretation :
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The average collection period measures the quality of debtors and it helps
analyzing the efficiency of collection efforts. It also helps to analysis the credit policy adopte
by company. In the firm average collection period increasing year to year. It shows that th
firm has Liberal Credit policy. These changes in policy are due to competitors credit policy.
5. WORKING CAPITAL TURNOVER RATIO :
Working capital turnover ratio indicates the velocity of utilization of net workincapital. This ratio indicates the number of times the working capital is turned over in th
course of the year. This ratio measures the efficiency with which the working capital
used by the firm. A higher ratio indicates efficient utilization of working capital and
low ratio indicates otherwise. But a very high working capital turnover is not a goo
situation for any firm.
Working Capital Turnover Ratio = Cost of Sales
Net Working Capital
Working Capital Turnover = Sales
Networking Capital
e.g.
Year 2006 2007 2008
Sales 166.0 151.5 169.5
Networking Capital 53.87 62.52 103.09
Working Capital Turnover 3.08 2.4 1.64
Interpretation :
This ratio indicates low much net working capital requires for sales. In 2008, th
reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the company requires 6
paisa as working capital. Thus this ratio is helpful to forecast the working capital requireme
on the basis of sale.
INVENTORIES
(Rs. in Crore
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Year 2005-2006 2006-2007 2007-2008
Inventories 37.15 35.69 75.01
Interpretation :
Inventories is a major part of current assets. If any company wants to manage its workin
capital efficiency, it has to manage its inventories efficiently. The graph shows that inventor
in 2005-2006 is 45%, in 2006-2007 is 43% and in 2007-2008 is 54% of their current assetThe company should try to reduce the inventory upto 10% or 20% of current assets.
CASH BNAK BALANCE :
(Rs. in Crore
Year 2005-2006 2006-2007 2007-2008
Cash Bank Balance 4.69 1.79 5.05
Interpretation :
Cash is basic input or component of working capital. Cash is needed to keep the busines
running on a continuous basis. So the organization should have sufficient cash to meet variou
requirements. The above graph is indicate that in 2006 the cash is 4.69 crores but in 2007
has decrease to 1.79. The result of that it disturb the firms manufacturing operations. In 200
it is increased upto approx. 5.1% cash balance. So in 2008, the company has no problem fo
meeting its requirement as compare to 2007.
DEBTORS :
(Rs. in Crore
Year 2005-2006 2006-2007 2007-2008
Debtors 17.33 19.05 25.94
Interpretation :
Debtors constitute a substantial portion of total current assets. In India it constitute on
third of current assets. The above graph is depict that there is increase in debtors. It represen
an extension of credit to customers. The reason for increasing credit is competition an
company liberal credit policy.
CURRENT ASSETS :
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(Rs. in Crore
Year 2005-2006 2006-2007 2007-2008
Current Assets 81.29 83.15 136.57
Interpretation :
This graph shows that there is 64% increase in current assets in 2008. This increase arise because there is approx. 50% increase in inventories. Increase in current assets shows th
liquidity soundness of company.
CURRENT LIABILITY :
(Rs. in Crore
Year 2005-2006 2006-2007 2007-2008
Current Liability 27.42 20.58 33.48
Interpretation :
Current liabilities shows company short term debts pay to outsiders. In 2008 the curre
liabilities of the company increased. But still increase in current assets are more than i
current liabilities.
NET WOKRING CAPITAL :
(Rs. in Crore
Year 2005-2006 2006-2007 2007-2008
Net Working Capital 53.87 62.53 103.09
Interpretation :
Working capital is required to finance day to day operations of a firm. There should be a
optimum level of working capital. It should not be too less or not too excess. In the compan
there is increase in working capital. The increase in working capital arises because th
company has expanded its business.
RESEARCH METHODOLOGY
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The methodology, I have adopted for my study is the various tools, which basically analyze criticall
financial position of to the organization:
I. COMMON-SIZE P/L A/CII. COMMON-SIZE BALANCE SHEET
III. COMPARTIVE P/L A/C
IV. COMPARTIVE BALANCE SHEET
V. TREND ANALYSIS
VI. RATIO ANALYSIS
The above parameters are used for critical analysis of financial position. With the evaluation of eachcomponent, the financial position from different angles is tried to be presented in well and systematic
manner. By critical analysis with the help of different tools, it becomes clear how the financial
manager handles the finance matters in profitable manner in the critical challenging atmosphere, the
recommendation are made which would suggest the organization in formulation of a healthy and
strong position financially with proper management system.
I sincerely hope, through the evaluation of various percentage, ratios and comparative analysis,
the organization would be able to conquer its in efficiencies and makes the desired changes.
ANALYSIS OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
Financial statement is a collection of data organized according to logical and consistent accounting
procedure to convey an under-standing of some financial aspects of a business firm. It may show
position at a moment in time, as in the case of balance sheet or may reveal a series of activities over a
given period of time, as in the case of an income statement. Thus, the term financial statements
generally refers to the two statements
(1) The position statement or Balance sheet.
(2) The income statement or the profit and loss Account.
OBJECTIVES OF FINANCIAL STATEMENTS:
According to accounting Principal Board of America (APB) states
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The following objectives of financial statements: -
1. To provide reliable financial information about economic resources and obligation of a business
firm.
2. To provide other needed information about charges in such economic resources and obligation.
3. To provide reliable information about change in net resources (recourses less obligations) missing
out of business activities.
4. To provide financial information that assets in estimating the learning potential of the business.
LIMITATIONS OF FINANCIAL STATEMENTS:
Though financial statements are relevant and useful for a concern, still they do not present a final
picture a final picture of a concern. The utility of these statements is dependent upon a number of
factors. The analysis and interpretation of these statements must be done carefully otherwise
misleading conclusion may be drawn.
Financial statements suffer from the following limitations: -
1. Financial statements do not given a final picture of the concern. The data given in these statements
is only approximate. The actual value can only be determined when the business is sold or liquidated.
2. Financial statements have been prepared for different accounting periods, generally one year, durin
the life of a concern. The costs and incomes are apportioned to different periods with a view to
determine profits etc. The allocation of expenses and income depends upon the personal judgment of
the accountant. The existence of contingent assets and liabilities also make the statements imprecise.
So financial statement are at the most interim reports rather than the final picture of the firm.
3. The financial statements are expressed in monetary value, so they appear to give final and accurate
position. The value of fixed assets in the balance sheet neither represent the value for which fixed
assets can be sold nor the amount which will be required to replace these assets. The balance sheet is
prepared on the presumption of a going concern. The concern is expected to continue in future. So
fixed assets are shown at cost less accumulated deprecation. Moreover, there are certain assets in the
balance sheet which will realize nothing at the time of liquidation but they are shown in the balance
sheets.
4. The financial statements are prepared on the basis of historical costs Or original costs. The value of
assets decreases with the passage of time current price changes are not taken into account. Thestatement are not prepared with the keeping in view the economic conditions. the balance sheet loses
the significance of being an index of current economics realities. Similarly, the profitability shown by
the income statements may be represent the earning capacity of the concern.
5. There are certain factors which have a bearing on the financial position and operating result of the
business but they do not become a part of these statements because they cannot be measured in
monetary terms. The basic limitation of the traditional financial statements comprising the balance
sheet, profit & loss A/c is that they do not give all the information regarding the financial operation o
the firm. Nevertheless, they provide some extremely useful information to the extent the balance shee
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mirrors the financial position on a particular data in lines of the structure of assets, liabilities etc. and
the profit & loss A/c shows the result of operation during a certain period in terms revenue obtained
and cost incurred during the year. Thus, the financial position and operation of the firm.
FINANCIAL STATEMENT ANALYSIS
It is the process of identifying the financial strength and weakness of a firm from the available accounting data andfinancial statements. The analysis is done
CALCULATIONS OF RATIOS
Ratios are relationship expressed in mathematical terms between figures, which are connected with
each other in some manner.
CLASSIFICATION OF RATIOS
Ratios can be classified in to different categories depending upon the basis of classification
The traditional classification has been on the basis of the financial statement to which th
determination of ratios belongs.
These are:-
Profit & Loss account ratios
Balance Sheet ratios
Composite ratios
Project Description :
Title : Project Report on Working Capital Management
Pages : 73
Description : Project Report on Working Capital Management, Working capital analysis, Working
Capital Management - Meaning & Concept, working capital Classification, Importance, Advantages
and Disadvantages of Working Capital, Factors determining the working capital requirements & Ratio
Analysis
Category : Project Report for MBA
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