overall axisbank operations and assessment of working capital

KOMAL MAHESHWARI 14BSP2540 IBS, PUNE

1

A REPORT

ON

“Overall banking operations And Assessment of Working capital”

BY: KOMAL MAHESHWARI (14BSP2540)


2

A REPORT ON

―Overall banking operations And Assessment of Working capital”

By

KOMAL MAHESHWARI (14BSP2540)

Of

AXISBANK LTD.

A report submitted in partial fulfillment of the requirements of

PGPM Program of IBS PUNE

Distribution list: Company guide: Faculty guide: Mr. Pratik Pathak Prof. Vinod Lakhwani (Operations Head)

Date of Submission: May 29, 2015


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AUTHORISATION

This is to certify that this is a bona fide project report submitted in partial fulfilment of

the requirements of PGPM program of ICFAI Business School, Pune.

This report document titled ―Overall banking operations and Assessment of

Working capital‖ is a submission of work done by Komal Maheshwari.

This report has been formally submitted to Prof. Vinod Lakhwani,

IBS Ahmedabad.

And I have taken the special permission for to keep report copy with me, my faculty

guide and company guide.

This report has been verified and authenticated by:

KOMAL MAHESHWARI

IBS Pune


4

ACKNOWLEDGEMENTS

No task is a single man‘s effort. Any kind of job cannot be accomplished

without the assistance of others.

A precious debt of learning can be repaid only through gratitude. First and foremost I wish to express my gratitude to the almighty God with

whose grace and blessings I have been able to complete this work.

Sincere thanks to Mr. Pratik Pathak (Operations Head, Axis Bank) and

Mr. Neerav Vyas (Credit Analyst, Axis Bank), for providing me an opportunity to

work at Axis Bank, Vadodara; an organization of great esteem, for 14 weeks as

an Intern.

I thank my mentor Prof. Vinod Lakhwani for his guidance and motivation;

whose support helped me a lot in successful completion of the project.

I am very thankful to Mr.Vikas Shah (Branch Head) for their keen interest,

inspiration, guidance, continuous encouragement, valuable suggestions and

constructive criticism throughout the period of my Internship. I also thank other

employees who made my stay at Axis Bank a fruitful one.


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Last but not the least it would be unfair if I don‘t thank my parents and all my friends

for their active cooperation which was of great help during the course of my

Internship.

The time spent here provided me with lots of learning experiences which otherwise

would not have been possible. The internship provided me a great platform to put

theory into practice.

Regards,

KOMAL MAHESHWARI

14BSP2540

IBS Pune


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CONTENTS AUTHORISATION ..................................................................................................................................... 3

ACKNOWLEDGEMENTS ........................................................................................................................... 4

ABSTRACT ................................................................................................................................................ 8

LIST OF ILLUSTRATION ............................................................................................................................ 9

INTRODUCTION ..................................................................................................................................... 10

Objective of the Study:- .................................................................................................................... 10

Research Methodology:- ................................................................................................................... 11

Limitations of the study:- .................................................................................................................. 12

About Banking Industry: ................................................................................................................... 13

Types of banking: .......................................................................................................................... 14

About Axis bank: ............................................................................................................................... 16

Functions of Axis bank: ..................................................................................................................... 17

Axis bank’s organizational structure: ................................................................................................ 17

Axis Bank’s product:-......................................................................................................................... 18

How Axis borrow money? ................................................................................................................. 21

How Axis Bank generate Revenue? .................................................................................................. 21

Lending Money to the public:- .......................................................................................................... 22

Delivery channel in Axis Bank: ...................................................................................................... 23

Lending Money to Corporate:- ......................................................................................................... 23

What Is Working Capital?.................................................................................................................. 25

Operating Cycle Method ............................................................................................................... 25

Why We Need Working capital? ....................................................................................................... 27

What is Working capital finance? ..................................................................................................... 28

Data Required for Assessment of working capital Requirement:- ................................................... 31

RETAIL BANKING OPERATIONS IN AXIS BANK ....................................................................................... 32

Opening an account at Axis bank: ..................................................................................................... 32

Owner of Joint A/c: ........................................................................................................................... 33

Saving Account .................................................................................................................................. 34

Current Account: ............................................................................................................................... 37


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Various types of Account holder need documents and maintain rules relating to open Bank

Account Owner of personal A/c: ....................................................................................................... 40

Joint Stock Company: .................................................................................................................... 40

Public Limited company: ............................................................................................................... 41

Non-trading Organization: ............................................................................................................ 41

Closing of Bank Account:............................................................................................................... 42

Steps of Cash Management at Branch Level: ............................................................................... 43

ASSESSMENT OF WORKING CAPITAL FINANCE PROCESS ..................................................................... 47

Bank Credit as a Source of Meeting Working Capital Requirements: .............................................. 48

Amount of Assistance: .................................................................................................................. 48

Form of Assistance: ........................................................................................................................... 49

Assessment of Non-Fund Based Working Capital Facility:- .......................................................... 49

Assessment of Fund Based Working Capital Facility:- .................................................................. 58

Simplified Turnover Method (Nayak Committee) ........................................................................ 59

Chore Committee:- ....................................................................................................................... 62

PROCEDURE FOR WORKING CAPITAL FINANCE ................................................................................ 63

CREDIT SANCTION PROCESS:- ....................................................................................................... 63

CREDIT MONITORING ARRANGEMENT ............................................................................................. 68

CREDIT RATING MODEL ................................................................................................................ 69

SECURITY ........................................................................................................................................... 71

Hypothecation: ............................................................................................................................. 71

Mortgage:...................................................................................................................................... 71

Pledge:........................................................................................................................................... 72

Lien: ............................................................................................................................................... 72

BANKING ARRANGEMENTS ............................................................................................................... 73

CONSORTIUM BANKING ARRANGEMENT: .................................................................................... 73

MULTIPLE BANKING ARRANGEMENT:- ......................................................................................... 74

SYNDICATION:- .............................................................................................................................. 74

CONCLUSION ......................................................................................................................................... 75

BIBLIOGRAPHY ...................................................................................................................................... 76


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ABSTRACT

Banks play a critical role in the economic development of an economy. They are

important not only for economic growth but also financial stability. In an economy

banks has three major roles to play i.e. first, they fulfill the financing needs of the

corporate sector. Second, they cater to the needs of the vast number of household

savers, providing assured returns on their surplus funds while maintaining liquidity

and safeguarding them from financial risks. Third, they act as a support for

development of financial markets and its participants.

The main objective of the project was to study various types of working capital

Finance provided by banks to know details and the procedure of assessment of

working capital finance extended by banks. And other objective is to know day to day

operations done by banks and their products.

This report is divided into two parts:-

1) Retail Banking

2) Assessment of working Capital

This project considered various banking facilities for the working capital finance to

the industries. It covers almost important aspect relating to assessment & follow up

of working capital finance. After discussing the procedure followed by bank, for

assessing working capital requirement case studies have been given with necessary

data in the prescribed forms demonstrate the calculable done by bank to arrive at

maximum permissible bank finance. An inventory & receivables constitute the major

portion of the total working capital requirement. And moreover this report shows the

entire flow of saving and current account till account open what types of formalities to

be done by bank and customers to open an account and this report also shows

different types of products.


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LIST OF ILLUSTRATION

Figure 1 Banks .................................................................................................................................... 15

Figure 2 Functions of Axis Bank ...................................................................................................... 17

Figure 3 Organizational Structure .................................................................................................... 17

Figure 4 Products ............................................................................................................................... 18

Figure 5 Delivery Channel ................................................................................................................ 23

Figure 7 Types of A/C ........................................................................................................................ 32

Figure 8 Saving a/c Process ............................................................................................................. 36

Figure 9 Need of Documents for current a/c .................................................................................. 37

Figure 10 Current a/c Process ......................................................................................................... 39

Figure 11 Assessment of WPF Process ......................................................................................... 47

Figure 12 Process for Issuing of Credit .................................................................................................. 54

Figure 13 PROCESS OF NEGOTIATION ................................................................................................... 55

Figure 14 PROCESS OF SETTELEMENT UNDER L/C ................................................................................ 56

Figure 15 Pre Sanction Process ............................................................................................................. 64

Figure 16 Post Sanction Process ........................................................................................................... 67

Table 1 Research Methodology .......................................................................................... 11

Table 2 Operating Cycle ..................................................................................................... 26

Table 3 Assessment of Limit of Letter of Guarantee ............................................................ 50

Table 4 Assessment of Limit of LC ...................................................................................... 58

Table 5 Example ................................................................................................................. 61

Table 6 Example ................................................................................................................. 61


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INTRODUCTION

Objective of the Study:-

To know the various types of working capital finance provided by banks.

To analyse in detail the procedure of assessment of working capital finance

Extended by bank.

To apply these procedure at a practical level with the help of case studies.

To know overall operations of Axis bank.


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Research Methodology:-

This is analytical research area where we analyses information with cause and its

effects relationship. This analysis leads to the simple conclusions of whether to lend

money to the institution for business.

Also if the money is lend then there is reality the norms are not always perfect and

hence it is essential to priorities stringent parameters and secondary parameters.

Research Type Analytical

Source of Data Primary and Secondary

Sample Unit Industries applying for loan

Sample Case studies

Sample Technique Allocation of Case

Analysis Tool used Financial Analysis

Table 1 Research Methodology

Primary Data:

Observation, Discussion with the manager.

The company profile, annual reports have been obtained from BOM.

Secondary Data:

Secondary data relating to the procedure of assessment of working capital

finance, old sanction proposals, RBI guidelines etc. have been sourced from

reference books.


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Limitations of the study:-

The data availability is proprietary, not readily shared for dissemination and is

highly confidential.

Assumptions and projections are based on current market conditions and

have not taken into account the price volatility.

Financial statements of the proposed project are subject to risks and

uncertainties that could cause actual results to differ materially from those

mentioned in the report. The risks and uncertainties include, but are not

limited to, the following:

1) Changes in Indian laws

2) Changes in Indian in global economic conditions

3) Changes in government regulations

4) Introduction of new technologies

The staff although are very helpful but are not able to give much of their time

due to their own work constraints.

The study is being done keeping in mind the policies of the Head Office.

Due to the on-going process of globalization and increasing competition, no

single model or method will suffice over a long period of time and constant up

gradation will be required.


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What is a Bank?

―A bank is a financial intermediary and MONEY creator that create money by lending

money to a borrower, thereby creating a corresponding deposit on the bank's

balance sheet. Lending activities can be performed directly by loaning or indirectly

through capital markets‖.

About Banking Industry:

The roots of the modern banking industry can be traced from the fourteenth century

in medieval Europe. Banking in India originated in the last decades of the 18th

century.

Banks act as payment agents by conducting checking or current accounts for

customers, paying cheques drawn by customers on the bank, and collecting

cheques deposited to customers' current accounts. Banks also enable customer

payments via other payment methods such as telegraphic transfer, EFT, POS, and

automated teller machine (ATM).

Banks play a critical role in the economic development of an economy. They are

important not only for economic growth but also financial stability. In an economy

banks has three major roles to play i.e. first, they fulfill the financing needs of the

corporate sector. Second, they cater to the needs of the vast number of household

savers, providing assured returns on their surplus funds while maintaining liquidity

and safeguarding them from financial risks. Third, they act as a support for

development of financial markets and its participants.

When we talk about banks, we are talking about several different types of financial

institutions, conducting different kinds of business. Some banks are very large and

carry out many different functions, others are more specialized. Some have

operated for hundreds of years and some have taken on new kinds of business

quite recently.


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Types of banking:

1) Retail Banking

2) Commercial Banking

3) Investment Banking

Retail banking:

Retail banks are the high street banks we are all familiar with. They take

deposits from individuals, provide saving facilities and pay interest on these

accounts. They also lend money to individuals, in the form of loans and

overdrafts, and charge interest on the money they lend. They provide a

range of other financial services.

Ex. Axis bank, HDFC bank etc.

Commercial banking :

Commercial banks, or divisions of banks, provide banking services to

businesses, from small companies through to corporate banking directed at

large corporations. They help companies raise finance to expand their

businesses and to maintain their cash flow by lending them money. They

provide a wide range of other financial services.

Ex. Axis bank, SBI bank, HDFC bank etc.


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Investment banking:

Investment banks distribute and underwrite (guarantee the sale of) share

and bond issues; they trade securities on the financial markets and advise

corporations on capital market activities such as mergers and

acquisitions. Investment banks originally developed in the USA and these

banks have now taken over many roles that were previously carried out by

UK merchant banks.

Ex. Goldman Sachs, HSBC, Lazard etc.

There are many Retail banks in India like:

Figure 1 Banks


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About Axis bank:

Axis Bank Limited (formerly UTI Bank) is the third largest private sector in India. It

offers financial services to customers segments covering large and Mid-Sized

corporates, MSME, Agriculture and Retail Businesses. Axis Bank has its

headquarters in Mumbai.

o In the year of 2014 Axis bank had revenue of US$5.3 billion, operating income

was US$1.5 billion, and Net Income was US$820 million. And Axis bank had

a network of 2402 branches and extension counters and 12922 ATMs. Axis

bank has the largest ATM network among private banks in India and it

operates an ATM at one of the world‘s highest sites at Thegu, Sikkim at a

height of 4023 meters (13,200 ft.) above sea level.

o The Bank has seven international offices with branches at Singapore, Hong

Kong, Dubai, Shanghai and Colombo and representative offices at Dubai and

Abu Dhabi, which focus on corporate lending, Trade finance.

As on 31 march 2014, Axis Bank had 37,901 Employees, out of which 7,117

employees were women. The bank incurred INR 26.7 billion on employee benefits

during the FY 2012-13. The average age of Axis Bank employees is 29 years.


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Functions of Axis bank:

Figure 2 Functions of Axis Bank

Axis bank’s organizational structure:

Figure 3 Organizational Structure


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Axis Bank’s product:-

Figure 4 Products

Credit card:

A credit card is a payment card issued to users as a system of a payment. It allows

the cardholder to pay for goods & services based on the holder‘s promise to pay for

them.

Credit card allows customers a continuing balance of debt.

Axis bank gives 50 days credit limit to the customers. If any circumstance he is able

to pay on time he will be charged 2.6% of amount.

There are mainly 5 types of cards.

1. The card for travel-fans

2. Power of signature

3. The card for entertainment-fans.

4. The customizable card for choosy-fans.

5. The card for self-employed.


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Accounts:

A bank account is a financial amount between a bank customer and a financial

institution. Account can be deposit a/c or credit a/c or other type of a/c offered by

financial institutes. The financial transaction which have occurred within a given

period of time on a bank account are reported to the customer on a bank statement

and the balance of the account at any point in time is the financial position of the

customer with the institution.

A fund that a customer has entrusted to a bank and from which the customer can

make withdrawals. Bank account may have a positive or credit balance where the

bank owes money to the customer or a negative or debit balance where the

customer owes the bank money.

Types of account:

1. Saving account

2. Current account

3. Salary account

Corporate banking:

Corporate banking is the area of finance dealing with the sources of funding and the

capital structure of corporation and actions that managers take to increase the value

of the firm. The primary goal of corporate banking is to provide funding to companies

o they can maximize the profit.

While providing finance to companies they check all the history and their forecasting.

Companies present net profit Government policies. These things done with the help

of the CRISIL rating. CRISIL suggests maximum permissible bank finance (MPBF)

according to that rating and with the help of MPBF bank gives finance to banks.


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Insurance:

Insurance is the equitable transfer of the risk of a loss from one entity to another in

exchange for payment. It is a form of risk management primarily used to hedge

against the risk of a contingent uncertain loss. In the Axis bank Max life insurance is

a company selling the insurance the insured or policy holder is the person or entity

buying the insurance policy.

The amount of money to be charged a certain amount of insurance Isa called as a

policy.

Ex. Max life insurance is selling one policy its name is ―monthly guaranteed income‖

in which customer is required to pay yearly 50,000/- for 12 years and he/she will get

monthly income guaranteed income from 13 years onwards of 6000/- per month and

at the end of 18 years he will get double of premium.

The age of person should be under 58.

Mortgage loan:

Mortgage loan is used by purchasers of real property to raise money to buy the

property to be existing property owners to raise funds for any purpose. If the

customer is not able to repay the loan then bank can sell his/her property.


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How Axis borrow money?

Banks borrow money by accepting funds deposited on current accounts, by

accepting term deposits, and by issuing debt securities such as banknotes and

bonds. Banks lend money by making advances to customers on current accounts, by

making installment loans, and by investing in marketable debt securities and other

forms of money lending.

How Axis Bank generate Revenue?

A bank can generate revenue in a variety of different ways including interest,

transaction fees and financial advice. The main method is via charging interest on

the capital it lends out to customers. The bank profits from the differential between

the level of interest it pays for deposits and other sources of funds, and the level of

interest it charges in its lending activities. Profitability from lending activities has been

cyclical and dependent on the needs and strengths of loan customers and the stage

of the economic cycle. Fees and financial advice constitute a more stable revenue

stream and banks have therefore placed more emphasis on these revenue lines to

smooth their financial performance. Banks have expanded the use of risk-based

pricing from business lending to consumer lending, which means charging higher

interest rates to those customers that are considered to be a higher credit risk and

thus increased chance of default on loans. This helps to offset the losses from bad

loans, lowers the price of loans to those who have better credit histories, and offers

credit products to high risk customers who would otherwise be denied credit.


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Lending Money to the public:-

Lending money is one of the two major activities of any Bank. Banks accept

deposit from public for safe-keeping and pay interest to them. They then lend

this Money to earn interest on this money. In a way, the Banks act as

intermediaries between the people who have the money to lend and those who

have the need for money to carry out business transactions. The difference

between the rate at which the interest is paid on deposits and is charged on

loans, is called the "spread".

Banks lend money in various forms and they lend for practically every activity.

Loans are given against or in exchange of the ownership (physical or

constructive) of various types of tangible items. Some of the securities against

which the Banks lend are:-

1) Commodities

2) Debts

3) Financial Instruments

4) Real Estate

5) Automobiles

6) Consumer durable goods

7) Documents of title


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Delivery channel in Axis Bank:

Figure 5 Delivery Channel

Lending Money to Corporate:-

The Bank provides holistic funding solution to the supply chain of corporates.

Products under this segment cater to the funding needs of supply chain members

and increase operational efficiency of the entire chain. The service delivery is

through a technology platform designed to increase transactional convenience for

the corporate.

The following models of channel Finance are designed to cater to the supply chain‘s

Finance needs:

Dealer Financing: This product is designed to provide Finance facility to the

dealers or distributors of a particular corporate exclusively for their purchases

made from that Corporate. The facility gives an easy access to finance the

dealers or distributors and helps a Corporate in strengthening its distribution

network.


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Factoring of Receivables: Factoring facility involves the purchase of

accounts receivable in a trade transaction. The seller gets instantaneous

liquidity and the buyer gets credit at an affordable cost. This form of credit

helps the corporate in boosting its sales and managing the receivables

efficiently.

Vendor Finance: The product is designed to provide Finance to vendors of a

particular Corporate against supplies made to the corporate. It aids the cash

flow of a vendor and helps to improve the overall supply chain's performance

and reliability. Corporates can use this facility to develop a strong and reliable

vendor base.

Rent Receivable Financing: These products are designed for companies

involved in renting out goods like computer hardware, furniture, construction

equipment etc. to other companies. The loans are advanced against future

rent receivables.


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What Is Working Capital?

Working capital is defined as the total amount of funds required for day to day

operation of a unit. It can also be referred as the current asset holding of an

enterprise. It is often classified as gross working capital (GWC) and net working

capital (NWC). Working capital finance is utilized for operating purposes, resulting in

creation of current assets (such as inventories and receivables). This is in contrast to

term loans which are utilized for establishing or expanding a manufacturing unit by

the acquisition of fixed assets.

Gross Working Capital refers to the fund required for financing total current assets

of a business unit. Net working capital no other hand is the difference between

current assets and current liabilities (including bank borrowings) that is nothing but

the surplus of long term sources over long term uses as such it is known as the liquid

surplus available in a unit that can be either positive or negative. A positive NWC is

always desirable because of the fact that it provides not only margin for the working

capital requirement but also improves ability of the borrower to meet its short term

liabilities.

Operating Cycle Method

Every business unit has an operating cycle which indicates that a unit procures ‗raw

material‘ from its funds, convert into ‗stock in process‘ which again is converted into

‗finished goods‘ which can be sold for cash and thus transformed into ‗fund‘.

Alternatively it can be sold on credit and on realization thereof gets converted into

fund.

Thus every rupee invested in current assets at the beginning of the cycle comes

back to the promoter with the profit element added, after the lapse of a specific

period of time. This length of time is known as operating cycle or working capital

cycle.


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In order to keep the operating cycle going on, certain level of current assets are

always required, the total of which gives the amount of total working capital required.

Thus total working capital can be obtained by assessing the level of various

components of current assets.

The operating cycle is therefore measured in terms of days of average inventory held

for every major category of working capital components.

Stages Time Value

I Raw Material Holding Period Value of RM

consumed during

the period

II Stock in Process Time taken in

converting RM into

FG

RM +

Manufacturing

expenses during the

period (cost of

production)

III Finished Goods Holding period of

FG before being

sold

RM + mfg. exp. +

adm. Overheads for

the period (cost of

sales)

IV Receivables Credit allowed to

buyer

RM + mfg. exp .+

adm. Exp. + profit

for the period

(Sales)

Table 2 Operating Cycle


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Why We Need Working capital?

The need of gross working capital or current assets cannot be overemphasized. The

object of any business is to earn profits. The main factor affecting the profits is the

magnitude of sales of the business. But the sales cannot be converted into cash

immediately. There is a time lag between the sale of goods and realization of cash.

There is a need of working capital in the form of current assets to fill up this time lag.

Technically, this is called as operating cycle or working capital cycle, which is the

heart of need for working capital. This working capital cycle can be described in the

following words. If the company has a certain amount of cash, it will be required for

purchasing the raw material though some raw material may be available on credit

basis. Then the company has to spend some amount for labour and factory

overheads to convert the raw material in work in progress, and ultimately finished

goods. These finished goods when sold on credit basis get converted in the form of

sundry debtors. Sundry debtors are converted in cash only after the expiry of credit

period. Thus, there is a cycle in which the originally available cash is converted in the

form of cash again but only after following the stages of raw material, work in

progress, finished goods and sundry debtors. Thus, there is a time gap for the

original cash to get converted in form of cash again. Working Capital needs of

company arise to cover the requirement of funds during this time gap, and the

quantum of working capital needs varies as per the length of this time gap.


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What is Working capital finance?

A manufacturing concern needs finance not only for acquisition of fixed assets but

also for its day-to-day operations. It has to obtain raw materials for processing, pay

wage bills & other manufacturing expenses, store finished goods for marketing &

grant credit to the customers. It may have to pass through the following stages to

complete its operating cycle.

Conversion of cash into raw materials – raw material procured on credit, cash may

have to be paid after a certain period.

1. Conversion of raw materials into stock in process.

2. Conversion of stock in process into finished goods.

3. Conversion of finished goods into receivables/debtors or cash.

4. Conversion of receivables/debtors into cash.

A non-manufacturing trading concern may not require raw material for their

processing, but it also needs finance for storing goods & providing credit to its

customers.

Similarly a concern engaged in providing services, it may not have to keep

inventories but it may have to provide credit facility to its customers. Thus all

enterprises engaged in manufacturing or trading or providing services require

finance for their day-to-day operations, the amount required to finance day-to-day

operation is called working capital & the assets & liabilities are created during the

operating cycle are called current assets & current liabilities. The total of all the

current assets is called gross working capital & the excess of current assets over

current liabilities is called net working capital.


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When entrepreneurs for financing working capital requirements approach the banks,

the bank has to examine the viability of the project before agreeing to provide

working capital for it. Financial institutions & bank while providing term loan finance

to unit for acquisition of fixed assets does a detailed viability study. They have to

ensure that the project will generate sufficient return on the resources invested in it.

The viability of a project depends on technical feasibility, marketability of the

products, at a profitable price, availability of financial resources in time & proper

management of the unit. In brief the project should satisfy the tests of technical,

commercial, financial & managerial feasibility.

Proper co-ordination amongst banks & financial institution is necessary to judge the

viability of a project & to provide working capital at appropriate time without any

delay. If a unit approaches banks only for working capital requirement & no viability

study has been done earlier which is done at the time of providing term loans, a

detailed viability study is necessary before agreeing to provide working capital

finance.

In the view of scarcity of bank credit, its increasing demand from various sectors of

economy & its importance in the development of economy, bank should provide

working capital finance according to production requirements. Therefore it is

necessary to make a proper assessment of total requirement of the working capital,

which depends on the nature of the activities of an enterprise & the duration of its

operating cycle. It has to be ensured that the unit will have regular supply of raw

material to facilitate uninterrupted production. The unit should be able to maintain

adequate stock of finished goods for smooth sales operation. The requirement of

trade credit, facilities to be given by the unit to its customers should also be

assessed on the basis of practice prevailing in the particular industry/trade which

assessing above requirements, it should also be ensured that carrying cost of

inventories & duration of credit to customers are minimized.


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After assessing the total requirement of working capital, a part of working capital

requirement should be financed for the long term & partly by determining maximum

permissible bank finance.


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Data Required for Assessment of working capital Requirement:-

For assessing the working capital needs of an organization, bank follows CMA

(Credit Monitoring Arrangement). It is required by banks and other financial

institutions, to introspect or study the minutes of balance sheet and other financial

statements of a body corporate for financing their projects. In other words it is the

detailed explanation of the balance sheet and other financial ratios of the firm or any

other corporate.

The CMA includes analysis of following six documents:

i) Existing and proposed banking arrangements

ii) Operating statement

iii) Analysis of Balance Sheet

iv) Build-up of current assets and current liabilities

v) Calculation of MPBF (Maximum Permissible Bank Finance)

vi) Fund Flow Statement


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RETAIL BANKING OPERATIONS IN AXIS BANK

Opening an account at Axis bank:

The depositors served as the basic source of deposit that leads to form the funds to

lend loans to others. A transaction with a depositor is launched with the opening of

account in the bank. I was informed that various types of Bank Accounts are opened

in the bank, that is to say,

Figure 6 Types of A/C

I have learned till now two accounts Currents and saving till the opening of that

account. Entire process of both is below. First we will understand process of saving

account.


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Owner of Joint A/c:

When two or more persons open an account jointly, it is called a joint A/c and

such account holders are termed as joint A/c holder. While maintaining, the following

rules and regulations are followed:

The joint account holders or any one of them authorized to operate the A/c

may open either a joint account.

The joint account holders are equally liable for repayment of debt taken from

the bank.

If after the death of an owner, if at least two of them are alive, then the money

is withdrawn from the A/c through cheque and new A/c is opened for the alive

persons and the money is deposited to the A/c.

According to the rules of our country is case of joint A/c by husband and wife,

the husband is considered as the owner of that A/c.

Usually the client is required to deposit at least 10,000/- in saving and

10,000/- in Current Account.

The Banker therefore provides the customer with a pay in slip book, a

chequebook and a passbook.


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Saving Account:

As the name indicates this account is meant for saving purpose, any

individual either single or joint can open a saving account.

In the accounts one has to maintain minimum balance as low as 10,000/-. In

saving a/c number of financial transaction are restricted.

Interest rates are higher when compared to current account. Any cash

transaction of 10 lakh and above in a year will be informed to the IT

department.

In case if you do many transactions and issuing of cheques in saving account

banks have all the rights to question you on income and reason for

transaction.

Axis Bank pays interest quarterly at the rate of 4% p.a. on daily balance basis

in your Savings Account.

While account opening process within 10 days customer will get chequebook,

passbook and debit card to their residence. With the help of chequebook

he/she can withdraw money whenever he/she wants

Passbook gives you your all transactions that you have done.

If customer exceed limit of transaction means if he does transaction more

than 5 then he/she will be charged for 230/- .


35

In case of salary account if salary does not credit for consecutive three

months then the account is considered as saving account and minimum

balance maintenance is required.


36

Figure 7 Saving a/c Process


37

Current Account:

Figure 8 Need of Documents for current a/c

-LLP agreement and

Certificate of

incorporation & PAN

card


38

Current account mainly for persons, firms, organization etc. this is useful

when a person does a number of business transactions on daily basis

While there is no interest paid on amount held in the account. There is no limit

on number of transactions. In the accounts one has to maintain minimum

balance as low as 10,000/-.

While account opening process within 10 days customer will get chequebook,

passbook and debit card to their residence. With the help of chequebook

he/she can withdraw money whenever he/she wants

Passbook gives you your all transactions that you have done.

If customer exceed limit of transaction means if he does transaction more

than 5 then he will be charged for 750/- .

The procedure relating to C. D. account is summarized below.

Person intending to open a Bank Account shall apply in a prescribed

form, duly filled in.

He will put at least three specimen signatures in the signature card

supplied by the bank and given two passport size photograph.

Application form shall be dully verified by a competent officer.

Bank officer shall carefully check specimen signature of the client and

verify the genuine of the introducer.

After these formalities Officer proceed for next step that steps are

below:


39

Figure 9 Current a/c Process


40

Various types of Account holder need documents and maintain rules relating

to open Bank Account Owner of personal A/c:

If any person opens account in his own name and maintain it, he will be termed

as the owner of personal A/c. He has to maintain the bank A/c. Nobody for him can

maintain the A/c. The necessary documents require opening personal A/c, which is

discussed above.

Joint Stock Company:

While opening an account in the name of a company, the Banker must satisfy

himself about the following:

The name of the company, the shareholders name and addresses.

Whether the company is registered or not.

If there is any change among the shareholders, it must be informed to the

bank.

All the shareholders are equally liable for the repayment debt taken from the

bank.


41

Public Limited company:

While opening an account in the name of public limited company the Banker should

take the following particulars:

The application for opening an account

Naming the person who is authorized by the managing director or managing

committee to operate the bank A/c.

Specimen signature of the customer.

Certified copy of constitution and memorandum of the company

List of directors and their signature certified by chairman

Scrutiny the financial condition, nature of business of the company

The company is liable for the repayment of debt taken from the bank.

Non-trading Organization:

Clubs, societies, charitable and religious institutions not engaged in trading

activities can open their accounts in the bank. According to the constitution of

this institution one or more employee authorized to operate the bank A/c can

operate the A/c. If the institutions are not registered, Bank Account cannot be

opened.


42

Closing of Bank Account:

The relationship between a Banker and his customer is a contractual one

and may be terminated by either of them by giving notice of his intention to the other

person. The rights and obligation of a Banker in this regard is as follows:

If a customer directs the Banker to close his account.

On receipt of the notice of the death of a customer.

If a Banker receives a notice regarding the insanity of his customer.

On receipt of a Garnishee order from the court.

Fixed account is closed automatically after the specified date.


43

Steps of Cash Management at Branch Level:

The cash receipts procedure, as I found, is summarized below:

Cash Receipt:

Pay-in-slip or credit voucher are given to the cash counter for depositing cash.

Cash deposit section checks the title if account, its number, amount in words

and figures in the pay-in-slip or credit voucher.

Cash receiving officer after receiving the cash giving records/denomination of

the currency on the back of the voucher shall enter the particulars of the

voucher in the cash receiving book under progressive serial number & puts

his signature putting the date stamp both on counter foil & pay-in-slip voucher.

Then he will pass it on to the officer- in-charge of cash section for his

signature along with the register

The officer will then detach pay-in-slip from the counter foil and return it to the

receiving officer along with the register.

The officer sends the pay-in-slip/ credit voucher to the deposit section in case

of pay-in-slips and credit vouchers to the respective section to which it relates.

Cahier and cash-in-charge puts signature on the book at time of closing cash.


44

Cash Payment:

Generally cheques, D.D, pay order and cash deposit voucher etc. are

received from customer and institutions.

The formalities are given below:

The instrument is checked for any discrepancy, posting and cancellation

Specimen signature of cancellation officer should be available

Cash is counted and the denomination of notes are written on the reverse of

the instrument

Cash is paid to the bearer of the instrument

Particulars of the instruments are entered in paying cash book

Paid instruments are kept with the paying officer

Cancellation Of cheque:

The cancellation officer shall keep the specimen signature card under his

personal custody.

All specimen signature cards will be kept in serial order.

In case of difference of signature, cheques shall not be passed.

Officer shall not pass any cheque unless it is posted against the account and

initialled by the ledger keeper.

The cancellation shall be made waving a red line across the signature of the

drawers of the cheque.

The cancellation shall sign in full using red ink the drawer‘s signature.


45

Cash Balancing:

The entire cash related employees ensure the balancing of cash on daily

basis:

All cash register written in words and signed

Checking agreed with each other

Preparing cash position memo

Writing cash Balance book

Checking all registers and signing

Ensuring that Balance is correct.

Preparing cash cum daybook.

Checking cash in hand:

Cash should be checked as per cash balance which is showing in system.

Counting the loose cash entirely also coin

Petty cash

Prize bond stick

Late paid cash/Scrutiny instrument

Surplus cash if any pass voucher


46

Cash safe keeping:

All the custodians of cash must ensure overnight safe keeping of cash at

branch level. Counted cash to keep under following precaution:

Iron safe condition

Strong room as per specification

Lodgement of keys

Maintain safe limit

Excess over limit disposal


47

ASSESSMENT OF WORKING CAPITAL FINANCE

PROCESS

Figure 10 Assessment of WPF Process


48

Bank Credit as a Source of Meeting Working Capital Requirements:

While bank credit is considered as a major source of meeting the working capital

requirement of the industry, the banks have to consider the following factors before

meeting their requirements.

A. What should be the amount of working capital assistance?

B. What should be the form in which working capital assistance may be

extended?

C. What should be the security that should be obtained for extending the working

capital assistance?

Amount of Assistance:

To obtain the bank credit for meeting the working capital requirements, the company

will be required to estimate the working capital requirements and will be required to

approach the banks along with the necessary supporting data. On the basis of the

estimates submitted by the company, the bank may decide the amount of assistance

which may be extended, after considering the margin requirements. This margin is to

provide the cushion against the reduction in the value of security. If the company

fails to fulfil its obligations, the bank may be required to realize the security for

recovering the dues.

Margin money is meant to take care of the possible reduction in the value of security.

The percentage of margin money may depend upon the credit standing of the

company, fluctuations in the price of security or the directives of Reserve Bank of

India from time to time.


49

Form of Assistance:

After deciding the amount of overall assistance to be extended to the company, the

bank can disburse the amount in any of the following forms

1) Non-Fund Based Lending

2) Fund Based Lending

Non-Fund Based Lending:-

In case of Non-Fund Based Lending, the lending bank does not commit any physical

outflow of funds. As such, the funds position of the lending bank remains intact. The

Non-Fund Based Lending can be made by the banks in two forms:-

1) Bank Guarantee

2) Letter of Credit

Assessment of Non-Fund Based Working Capital Facility:-

Bank Guarantee:-

A contract of guarantee can be defined as a contract to perform the promise, or

discharge the liability of a third person in case of his default. The contract of

guarantee has three principal parties as under:

Principal debtor: The person who has to perform or discharge the liability and for

whose default the guarantee is given.


50

Principal creditor: The person to whom the guarantee for due fulfilment of

contract by principal debtor. Principal creditor is also sometimes referred to

as beneficiary.

Guarantor or Surety: The person who gives the guarantee.

Bank provides guarantee facilities to its customers who may require these facilities

for various purposes. The guarantees may broadly be divided in two categories as

under:

Financial guarantees: Guarantees to discharge financial obligations to the

customers.

Performance guarantees: Guarantees for due performance of a contract by

customers.

Assessment of Limit of Letter of Guarantee

Outstanding Bank Guarantee as per

audited balance sheet

A

Add bank guarantee required during the

period

B

Less estimated maturity or cancellation of

bank guarantee during the period

C

Requirement of bank guarantee D = A + B - C

Table 3 Assessment of Limit of Letter of Guarantee


51

Bills Co-Acceptance:

It is same as letter of credit. The difference is that the letter of credit is

accepted by buyer as well by co-accepting bank.

Deferred Payment Guarantee (DPG):

A deferred payment guarantee is a contract under which a bank promises to

pay the supplier the price of machinery supplied by him on deferred terms, in

agreed instalments with stipulated interest in the respective due dates, in case

of default in payment thereof by the buyer. As far as the buyer of the plant and

machinery is concerned, it serves the same purpose as term loan. The

advantage to the buyer is that he is benefited to the extent of savings in

interest charges accruing on account of opting equipment financing under

instalment payment system less the guarantee.


52

Letter of Credit:

Letter of credit (LC) is a method of settlement of payment of a trade transaction and

is widely used to finance purchase of raw material, machinery etc. It contains a

written undertaking by the bank on behalf of the purchaser to the seller to make

payment of a stated amount on presentation of stipulated documents and fulfilment

of all the terms and conditions incorporated therein. Letters of credit thus offers both

parties to a trade transaction a degree of security. The seller can look forward to the

issuing bank for payment instead of relying on the ability and willingness of the buyer

to pay.

Parties to a Letter of Credit

1. Applicant/Opener: It is generally the buyer of the goods who gets the letter of

credit issued by his banker in favor of the seller. The person on whose behalf

and under whose instructions the letter of credit is issued is known as

applicant/ opener of the credit.

2. Opening bank/issuing bank: The bank issuing the letter of credit.

3. Beneficiary: The seller of goods in whose favour the letter of credit is issued.

4. Advising Bank: Notification regarding issuing of letter of credit may be directly

sent to the beneficiary by the opening bank. It is, however, customary to

advise the letter of credit through sane other bank operating at the

place/country of seller. The bank which advises the letter of credit to the

beneficiary is known as advising bank.


53

5. Confirming Bank: A letter of credit substitutes the credit worthiness of the

buyer with that of the issuing bank. It may sometimes happen especially in

import trade that the issuing bank itself is not widely known in the exporter's

country and exporter is not prepared to rely on the L/C opened by that bank.

In such cases the opening bank may request other bank usually in the country

of exporter to add its confirmation which amounts to an additional undertaking

being given by that bank to the beneficiary. The bank adding its confirmation

is known as confirming bank. The confirming bank has the same liabilities

towards the beneficiary as that of opening bank.

6. Negotiating Bank: The bank that negotiates the documents drawn under letter

of credit and makes payment to beneficiary.

The function of advising bank, confirming bank and negotiating bank may be

undertaken by a single bank only.

Letter of Credit Mechanism:-

Any business/industrial venture will involve purchase transactions relating to

machine/other capital goods and raw material etc., and also sale transactions

relating to its products. The customer may be an applicant for a letter of credit for his

purchases while be the beneficiary under other letter of credit for his sale

transaction.


54

The complete mechanism of a letter of credit may be divided in three parts as under:

1) Issuing of Credit: Letter of credit is always issued by the buyer's bank

(issuing bank) at the request and on behalf and in accordance with the

instructions of the applicant. The letter of credit may either be advised directly

or through some other bank. The advising bank is responsible for

transmission of credit and verifying the authenticity of signature of issuing

bank and is under no commitment to pay the seller. The advising bank may

also be required to add confirmation and in that case will assume all the

liabilities of issuing bank in relation to the beneficiary as stated already. Refer

to diagram given below for complete process of issuance of credit.

Figure 11 Process for Issuing of Credit


55

2) Negotiation of Documents by beneficiary:- On receipt of letter of credit, the

beneficiary shall arrange to supply the goods as per the terms of L/C and

draw necessary documents as required under L/C. The documents will then

be presented to the negotiating bank for payment/acceptance as the case

may be. The negotiating bank will make the payment to the beneficiary and

obtain reimbursement from the opening bank in terms of credit. The entire

process of negotiation is diagrammatically represented as under:

Figure 12 PROCESS OF NEGOTIATION


56

3) Settlement of Bills Drawn under Letter of Credit by the opener: The last

step involved in letter of credit mechanism is retirement of documents

received under L/C by the opener. On receipt of documents drawn under L/C,

the opening bank is required to closely examine the documents to ensure

compliance of the terms and conditions of credit and present the same to the

opener for his scrutiny. The opener should then make payment to the opening

bank and take delivery of documents so that delivery of goods can be

obtained by him. This aspect of L/C transaction is represented as under:

Figure 13 PROCESS OF SETTELEMENT UNDER L/C


57

Types of Letter of Credit:

Letter of credit may be divided in two broad categories as under:

A. Revocable letter of credit. This may be amended or cancelled without

prior warning or notification to the beneficiary. Such letter of credit will

not offer any protection and should not be accepted as beneficiary of

credit.

B. Irrevocable letter of credit. This cannot be amended or cancelled

without the agreement of all parties thereto. This type of letter of credit

is mainly in use and offers complete protection to the seller against

subsequent development against his interest.

Letter of credit may provide drawing of documents on following two bases:

A. Delivery against payment (DP): In this case documents are

delivered against payment. The beneficiary is paid as soon as the

paying bank or borrower‗s bank has determined that all necessary

documents are in order.

B. Delivery against acceptance (DA): In this case documents are

delivered against acceptance. The borrower pays after certain due

date of payment specified.


58

Assessment of Limit of Letter of Credit

Annual Raw Material

Consumption

A

Annual Raw Material

Procurement through ILC/

FLC

B

Monthly Consumption C

Usance D

Lead Time E

Total Time F = D + E

LC Time Required G = F * C

Table 4 Assessment of Limit of LC

Assessment of Fund Based Working Capital Facility:-

While public sector banks in India are nominally independent entities they are

subject to intense regulation by the Reserve Bank of India (RBI). This includes rules

about how much the bank should lend to individual borrowers—the so-called

―maximum permissible bank finance‖. There are multiple methods as suggested by

different committees from time to time. We have discussed following

recommendations by three committees:


59

Simplified Turnover Method (Nayak Committee)

This method of assessing working capital requirement of a firm is given by “Nayak

Committee”. The committee headed by Mr. P.R. Nayak examined the adequacy of

institutional credit to SSI sector and gave its recommendations which are as under:

Under this method, bank credit for working capital purposes for borrowers

requiring fund based limits up to Rs. 5 crore for SSI borrowers and Rs. 2 crore

in case of other borrowers, may be assessed at minimum of 25% of the

projected annual turnover of which should be provided by the borrower (i.e.

minimum margin of 5% of the annual turnover to be provided by the borrower)

and balance 4/5th (i.e. 20% of the annual turnover) can be extended by way of

working capital finance.

The projected turnover or output value may be interpreted as projected gross

sales which will include excise duty also.

Since the bank finance is only intended to support the need based

requirement of a borrower, if the available NWC (net long term surplus funds)

is more than 5%of the turnover the former should be reckoned for assessing

the extent of bank finance.


60

Maximum Permissible Banking Finance Method (Tandon Committee )

A committee headed by Mr. P.L. Tandon, ex-chairman of PNB, was constituted

with view to suggest improvement in the existing ash credit system. It submitted

its report on guidelines for follow up of credit in August 1974, suggesting three

methods of lending. These are as follows:

1st Method of Lending: 75% of the working capital gap (WCG = Total

current assets – Total current liabilities other than bank borrowings) is

financed by the bank and the balance 25% of the WCG considered as margin

is to come out of long term source i.e. owned funds and term borrowings. This

will give rise to a minimum current ratio of 1.17:1. The difference of 0.17 (=

1.17 – 1) represents the borrower‗s margin which is known as Net Working

Capital (NWC).

2nd Method of Lending: Bank will finance maximum up to 75% of total

current assets (TCA) and borrower has to provide a minimum of 25% of total

current assets as the margin out of long term sources. This will give a

minimum current ratio of 1.33:1.

a) 3rd Method of Lending: This is same as 2nd method of lending, but

excluding core current assets from total assets and the core current assets

are financed out of long term funds of the company. The term ―core current

assets‖ refers to the absolute minimum level of investment in current assets,

which is required at all times to carry out minimum level of business activity.

The current ratio is further improved to 1.79:1.


61

EXAMPLE:

Current Liabilities Current Assets

Creditors for

purchase

100 Raw material 200

Other current

liability

50 Stock in process 20

Bank

Borrowings

200 Finished Goods 90

Receivables 50

Other current assets 10

350 370

Table 5

1st Method 2nd Method 3rd Method

Total CA 370 Total CA 370 Total CA 370

Less Total

CL - Bank

Borrowing

150 Less 25% of

CA

92 Less Core CA

from long term

sources

95

WCG 220 278 275

25% of

WCG from

long term

sources

55 Less Total CL -

Bank

Borrowings

150 Less 25% from

long term

sources

Total CL - Bank

Borrowings

69

150

MPBF 165 MPBF 128 MPBF 56

Current

Ratio

1.17:1 Current Ratio 1.33:

1

Current Ratio 1.79:1

Table 6


62

Chore Committee:-

The R.B.I constituted, in April 1979, a working group under the chairmanship

of Sri K.B Chore, to review the system of cash credit with the particular

reference to the gap between sanctioned limit and the extent of their

utilization. It was also asked to suggest alternative type of credit facilities

which would ensure greater credit discipline and enable the banks to relate

the credit limits to increase in output or other productive activities.

The committee recommended assessment of working capital requirements

have to be mandatorily assessed based on 2nd method of lending suggested

by Tandon Committee except for sick/Units under rehabilitation.

As such, the banks are presently assessing need based WC financing under 2nd

Method of lending.

b) Cash Budget System

In case of tea, sugar, construction companies, film industries and service sector

requirement of finance may be at the peak during certain months while the sale

proceeds may be realised throughout the year to repay the outstanding in the

account. Therefore, credit limits are fixed on the basis of projected monthly cash

budgets to be received before beginning of the season.

Branches should follow the procedure/guidelines issued from time to time through

various Circulars for financing tea, sugar, construction companies, film industries

and service sector.


63

PROCEDURE FOR WORKING CAPITAL FINANCE

CREDIT SANCTION PROCESS:-

The revised credit process is introduced with a view of reducing the time lag in

the sanction of credit besides clearly delineating the areas of responsibilities of

various functionaries. As per this the revised process is divide into two

components that is Pre sanctioning and Post sanctioning.

In the pre sanctioning it is the only time that the bank can take due assessment

and precautions to make sure that the investments are done for the benefit of the

bank. The post sanctioning is the follow of the payment. In case the payment

defaults then the account will go into NPA in stages and the bank is then said to

scrutinize the said account.

PRE SANCTION PROCESS:-

Obtain loan application

When a customer required loan he is required to complete application form and

submit the same to the bank also the borrower has to be submit the required

information along with the application form.


64

Figure 14 Pre Sanction Process

The information, which is generally required to be submitted by the borrower

along with the loan application, is under: -

Audited balance sheets and profit and loss accounts for the previous three

year(in case borrower already in the business)

Estimated balance sheet for current year.

Projected balance sheet for next year.

Profile for promoters/directors, senior management personnel of the

company.

In case the amount of loan required by borrower is 50 lacs and above he

should be submit the CMA Report


65

Examine for preliminary appraisal

RBI guidelines. Policies

Prudential exposure norms and bank lending policy

Industry exposure restriction and related risk factors.

Compliance regarding transfer of borrowers accounts from one bank to another bank

Government regulation / legislation impact on the industry

Acceptability of the promoter and applicant status with regards to other unit to industries.

Arrive at the preliminary decision.

Examine/analysis /assessment

Financial statement (in the prescribed forms) refers figure WC cycle & BS assessment thumb rules.

Financial ratio & Dividend policy.

Depreciation method

Revaluation of fixed assets.

Records of defaults (Tax, dues etc.)

Pending suits having financial implication (Customs, excise etc.)

Qualifications to balance sheet auditors remarks etc.

Trend in sales and profitability and estimates /projection of sales.


66

Production capacities and utilization: past & projected production efficiency and cost.

Estimated working capital gap W.R.T acceptable build-up of inventory/receivables/other current assets and bank borrowing patterns.

Assess MPBF –determine facilities required

Assess requirement of off balance sheet facilities viz.L/cs,B/gs etc.

Management quality, competence, track records

Company‘s structure and system

Market shares of the units under comparison.

Unique feature

Profitability factors

Inventory/Receivable level

Capacity utilization

Capital market perception.


67

POST SANCTION PROCESS:-

Supervision and follow up: - Sanction credit limit of working capital requirement after proper assessment of

proposal is alone not sufficient. Close supervision and follow up are equally essential

for safety of bank credit and to ensure utilization of fund lend. A timely action is

possible only close supervision and followed up by using following techniques.

Monthly stock statement

Inspection of stock

Scrutiny of operation in the account

Quarterly/half quarterly statements.

Under information system

Annual audited report

Figure 15 Post Sanction Process


68

CREDIT MONITORING ARRANGEMENT

Consequent upon the withdrawal of requirement of prior authorization under the

erstwhile credit authorization scheme (CAS) and introduction of a system of post

sanction scrutiny under credit monitoring arrangement (CMA) the database forms

have been recognized as CMA database. The revised forms for CMA database

as drawn up by the sub-committee of committee of directions have come into use

from 1st April 1991.

The existing forms prescribed for specified industries continue to remain in force.

With a view to imparting uniformity to the appraisal system, database from all

borrowers including SSI units enjoying working capital limits of Rs. 50 lacs and

more from the banking system should be obtained.

The revised sets of forms have been separately prescribed for industrial

borrowers and traders/merchant exporters. The details of forms are as under: -

Form 1: - particulars of the existing/proposed limit from the banking system.

Form 2: -Operating statement.

It contains data relating to gross sales, net sales, cost of raw material, power and

fuel, etc.

It gives the operating profit and the net profit figures.

Form 3: - Analysis of balance sheet.

It is complete analysis of various items of last year‘s balance sheet; current years

estimate and following year‘s projection are given in this form.


69

Form 4: - Comparative statement of current asset and liabilities.

Details of various items of current asset and current liabilities are given.

The figures in this form must tally with those in form III.

Form 5: - Computation of maximum permissible bank finance for working capital.

The calculation of MPBF is done in this form to obtain the fund based credit limits

to be granted to the borrower.

Form 6: - Fund flow statement

It provides the details of fund flow from long term sources and uses to indicate

whether they are sufficient to meet the borrower‘s long term requirements.

CREDIT RATING MODEL

The various risk faced by any company may be broadly classified as follows:

Industry Risk:

It covers the industry characteristic, compensation, financial data etc.

Company/ business risk:

It considers the market position, operating efficiency of the company etc.

Project risk: It includes the project cost, project implementation risk, post project

implementation etc.


70

Management risk: It covers the track record of the company, their attitude towards risk, propensity

for group transaction, corporate governance etc.

Financial risk: Financial risk includes the quality of financial statements, ability of the company

to raise capital, cash flow adequacy etc.


71

SECURITY

Banks need some security from the borrowers against the credit facilities

extended to them to avoid any kind of losses. Securities can be created in

various ways. Banks provide credit on the basis of the following modes of

security from the borrowers.

Hypothecation:

Under this mode of security, the banks provide credit to borrowers against the

security of movable property, usually inventory of goods. The goods

hypothecated, however, continue to be in possession of the owner of the goods

i.e. the borrower. The rights of the banks depend upon the terms of the contract

between borrowers and the lender. Although the bank does not have the physical

possession of the goods, it has the legal right to sell the goods to realize the

outstanding loans.

Hypothecation facility is normally not available to new borrowers.

Mortgage:

It is the transfer of a legal / equitable interest in specific immovable property for

securing the payment of debt. It is the conveyance of interest in the mortgaged

property. This interest terminated as soon as the debt is paid. Mortgages are

taken as an additional security for working capital credit by banks.


72

Pledge:

The goods which are offered as security are transferred to the physical

possession of the lender. An essential prerequisite of pledge is that the goods are

in the custody of the bank. Pledge creates some kind of liability for the bank in

the sense that ‗Reasonable care‘ means care, which a prudent person would take

to protect his property. In case of non-payment by the borrower, the bank has the

right to sell the goods.

Lien:

The term lien refers to the right of a party to retained goods belonging to other

party until a debt due to him is paid. Lien can be of two types viz. Particular lien

i.e. A right to retain goods until a claim pertaining to these goods are fully paid,

and General lien, Which is applied till all dues of the claimant are paid. Banks

usually enjoyed general lien.


73

BANKING ARRANGEMENTS

Working capital is made available to the borrower under the following

arrangements;

Consortium Banking Arrangement:

RBI till 1997 made it obligatory for availing working capital facilities beyond a

limit (Rs 500 million in 1997), through the consortium arrangement. The

objective of the arrangement was to jointly meet the financial requirement of

big projects by banks and also share the risks involved in it.

While it consortium arrangement is no longer obligatory, some borrowers

continue to avail working capital finance under this arrangement. The main

features of this arrangement are as follows;

Bank with maximum share of the working capital limits usually takes the role

of ‗lead bank‘.

Lead bank, independently or in consultation with other banks, appraise the

working capital requirements of the company.

Banks at the consortium meeting agree on the ratio of sharing the assessed

limits.

Lead bank undertakes the joint documentation on behalf of all member banks.

Lead bank organizes collection and dissemination of information regarding

conduct of account by borrower.


74

Multiple Banking Arrangement:-

Multiple banking is an open arrangement in which no banks will take the

lead role.

Most borrowers are shifting their banking arrangement to multiple banking

arrangements. The major features are:-

Borrower needs to approach multiple banks to tie up entire requirement of

working capital.

Banks independently assessed the working capital requirements of the

borrower.

Banks, independent of each other, do documentation, monitoring and

conduct of the account

Borrowers deals with all financing banks individually.

Syndication:-

A syndicated credit is an agreement between two or more lenders to provide a

borrower credit facility using common loan agreement. It is internationally

practiced model for financing credit requirements, wherein banks are free to

syndicate the credit limit irrespective of quantum involved. It is similar to a

consortium arrangement in terms of dispersal of risk but consist of a fixed

repayment period.


75

CONCLUSION

The requirement of working capital finance is ever increasing.

Loans and advances formed a major portion of the current assets of the firm

because of which the working capital gap is large.

The bank prefers to use the second method of lending working capital under

the MPBF rather than evolving their own method.

In most of the cases, hypothecation and/or mortgage are used to create

securities for the banks.

Bank has their own internal credit rating procedure to rate the clients

(Borrowers).

After doing the assessment of the financial indicators it is up to the judgment

of the top management of the bank to sanction such loan. The very decision

could be against the assessment result.

If the company is with bank from inception stage then they are given

preference, as credible and loyal party over their financial indicators.

There is a stiff competition to the nationalized banks from the foreign

investors as their lending rates are much lower than nationalized banks.

Today the foreign investors are very big threat to business and its existence.

Bank of Maharashtra has kept a conservative look to banking.


76

BIBLIOGRAPHY

INTERNET SITES: http://www.banknetindia.com

http://www.AxisBank.com

http://www.indiamarkets.com

http://www.businessfinance.com

http://www.banknetindia.com/

http://www.indiamarkets.com/

overall axisbank operations and assessment of working capital

Economy & Finance

komal maheshwari ibs

ibs ahmedabad

project report

report document

axis bank

overall banking operations

assessment of working

pratik pathak operations