renu final project

8/6/2019 Renu Final Project

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A

PROJECT REPORT

ON

ANALYTICAL STUDY OF FINANCIAL POSITION OFBOIS CUSTOMERS FOR FINANCING WORKING

CAPITAL REQUIREMENTS

A detailed study done in

BANK OF INDIA

Submitted in partial fulfillment of the requirement for the award of degree of

Masters of Management Studies (MMS) under Mumbai University.

Submitted by

RENU R MAKHIJANIROLL NO: 87

BATCH: 2009-2011

Under the guidance of

Jayalaxmi P Salian

Bharati Vidyapeeths Institute of Management Studies & Research

Sector 8, CBD-Belapur, Navi Mumbai 400614


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ACKNOWLEDGEMENT

Quoting Pablo Picasso, Action is the foundational key to all success.

This is what I believe and I strongly adhere to it. Taking any action is not a simple task asits consequences have to be well thought of. This is the place where I would like to thankall the people who helped me take the appropriate actions and made this project a success.It gives me a sense of gratitude and pleasure in submitting a project report on -

WORKING CAPITAL FINANCE OF BANK OF INDIA

Proper guidance enables ordinary ones to achieve extra ordinary deeds .It is my fortunethat I am blessed with excellent guides Jayalaxmi P Salian- Senior Manager (Credit) atBank Of India and Aditya Sontakke College Mentor who constantly motivated and

provided me with valuable information required to continue developing this project.

Last but not the least I express my sincere acknowledgement to the college for providingme with excellent library resources and facilities to complete this project. This projectwork gave me an opportunity to learn more about Working Capital Finance and it turnedout to be a value addition to my knowledge as it was great working and analyzing liveand authentic data. It was a great learning experience.


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(i)

EXECUTIVE SUMMARY

Working capital refers to the administration of all aspects of current assets, namely cash,

marketable securities, debtors and stock (inventories) and current liabilities. The financialmanager must determine levels and composition of current assets. He must see that rightsources are tapped to finance current assets, and that current liabilities are paid in time.Working capital provides an adequate support for the smooth functioning of the normalbusiness operations of a company. The question then arises as to the determination of thequantum of investment in working capital that can be regarded as adequate. Therefore thequantum of investment in the current assets has to be made in a manner that it not onlymeets the needs of the forecasted sales but also provides a built-in cushion in the form ofsafety stocks to meet unforeseen contingencies arising out of the factors such as delays inarrival of raw materials, sudden spurts in sales demand etc.

There are many aspects of working capital finance, which make it an important functionof the financial manager:

Time: working capital finance requires much of the financial managers time.

Investment: working capital represents a large portion of the total investments inassets.

Significance: working finance has great significance for all firms but it is verycritical for small firms.

Growth: the need for working capital is directly related to the firms growth.

Investment in current assets represents a very significant portion of the total investment in

assets. Working capital is critical for all firms. A small firm may not have muchinvestment in fixed assets, but it has to invest to in current assets. Small firms in Indiaface a severe problem of collecting their debtors.

Bank Financing for Working Capital

The financing limits are granted based on assessment of the working capitalrequirement. The assessment factors include various characteristics such as the nature ofindustry, industry norms, actual level of activity for the previous year and the projectedlevel of activity for the subsequent year to arrive at the working capital requirement. Thebank financing limit is thereafter decided after factoring in margins on the different types

of current assets forming part of the working capital.The Bank Financing Limit is fixed on an annual basis. However, since such limit isprovided to meet specific requirements, utilizing the limits is subjected to the DrawingPower, which is decided on a monthly/ quarterly basis.


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The effective bank financing is therefore to the extent of the lower of:

Bank Financing Limit: Determined on an annual basis based on an assessment

of the current years projections and the actuals for the previous year.

Drawing Power: Linked to the quantum of current assets (and current liabilities)owned by the business with appropriate margins. Fixed on a monthly/ quarterly basis depending on the submission of Monthly/Quarterly Information Systemreturns indicating the position of the stock statement, receivables, Work inProgress, payables, etc.

Bank Financing (max. permissible) = Bank Financing Limit OR Drawing Power

whichever is less.

Banks have their own policies to assess the working capital of the firm to finance themwith the shortage. Bank of India adopts certain methods for financing their customersworking capital requirements. Banks normally provide Working Capital Finance by wayof advances against stocks and sundry debtors. Banks do not finance the full amount ofthe funds required for carrying inventories and receivables. Bank finance is normallyrestricted to the amount of funds locked up less a certain percentage of margins. Marginsare imposed with a view to have adequate stake of the promoter in the business both toensure his adequate interest in the business and to act as a bulwark against any shocks

that the business may sustain. The margins stipulated will depend on various factors likesaleability, whether imported or indigenous, quality durability, price fluctuations in themarket for commodity. There are certain recommendations from the committees for thebanks to finance the working capital needs of their clients.

It may, thus, be concluded that all precautions should be taken for the effective andefficient financing of working capital. The finance manager should pay regular attentionto the levels of current assets and the financing of current assets.


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(ii)

PLEASE PASTE HERE THE CERTIFICATE FROM THE BANK


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(iii)

PLEASE PASTE HERE THE CERTIFICATE FROM THE INSTITUTE


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(iv)

TABLE OF CONTENTS

PARTICULARS PAGE NO:

Acknowledgement (i)Executive summary (ii)Certificates (iii)Chapter 1: Introduction to Working Capital Finance

1.1 Definition of Working Capital1.2 Nature of Working Capital1.3 Means to finance Working Capital1.4 Need of Working Capital Management

1.5 Types of Working Capital1.6 Determinants of Working Capital1.7 Assessment of Working Capital Requirement1.8 Various Sources Used For Financing Working Capital1.9 Dangers of Inadequate Working Capital

1.10 Working Capital Ratios

Chapter 2: Introduction to the Industry

2.1 Introduction to the Banking Industry2.2 Structure

2.3 Opportunities & Challenges for Players2.4 Vision of Banks in India2.5 Consolidation of Banks in India2.6 Future Challenges of Banks in India

Chapter 3: Introduction to Bank Of India

3.1 Bank of India Brief Introduction3.2 About Bank of India3.3 Milestones Achieved by Bank of India3.4 Awards & Accolades

3.5 Highlights of Performance Q4FY09103.6 Investors Profile Chart3.7 Business Growth Trajectory Chart

Chapter 4: Research Methodology

4.1 Meaning4.2 Research Design


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4.3 Types of Data Collection4.4 Tools Used For The Project4.5 Objectives Of The Study

Chapter 5: Data Analysis & Interpretation

5.1 Case Study 15.2 Case Study 25.3 Case Study 3

Chapter 6: Conclusion, Limitations & Suggestions

6.1 Conclusion

6.2 Limitations6.3 Suggestions


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1.1 DEFINITION OF WORKING CAPITAL

Working Capital for any manufacturing unit means the total amount of circulating fundsrequired for the continuous operations of the unit on a going basis. The Working Capitalcomprises of:-

Amount for raw material of various kinds.

Amount for stock in process.

Amount for all finished goods in stores and in transit.

Amount for receivables or sundry debtors.

Other routine expenses.

1.2 NATURE OF WORKING CAPITAL

Working Capital Management is concerned with the problems that arise in attempting to

manage the Current Assets, the Current Liabilities and the interrelationship that existsbetween them.

(i) Current Assets :The term Current Assets refer to those assets which in the ordinary course of business can be, or will be, converted into cash within one year withoutundergoing a diminution in value and without disrupting the operations of thefirm. The major current assets are cash, marketable securities, accountsreceivable and inventory.

(ii) Current liabilities:

The term Current Liabilities refer to those liabilities which are intended, attheir inception, to be paid in the ordinary course of business, within a year, outof the current assets or earnings of the concern. The basic current liabilities areaccounts payable, bills payable, bank overdraft, and outstanding expenses.

The goal of Working Capital management is to manage the firms current assets andliabilities in such a way that a satisfactory level of working capital is maintained. This isso because if the firm cannot maintain a satisfactory level of working capital, it is likelyto become insolvent and may even be forced into bankruptcy. The current assets shouldbe large enough to cover its current liabilities in order to ensure a reasonable margin of

safety.


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1.3 MEANS TO FINANCE WORKING CAPITAL ARE AS FOLLOWS:

Credit available on purchases;

Short term bank borrowings

Surplus of long term funds over the long term uses(NWC)

1.4 NEED OF WORKING CAPITAL MANAGEMENT

The need for working capital (gross) or current assets cannot be overemphasized. Theobjective of financial decision making is to maximize the shareholders wealth andtherefore, it is necessary to generate sufficient profits. The extent to which profits can beearned will naturally depend, among other things, upon the magnitude of the sales. Asuccessful sales programme is, in other words, necessary for earning profits by any business enterprise. However, sales do not convert into cash instantly; there isinvariably a time- lag between the sale of goods and the receipt of cash. There is

therefore, a need for working capital in the form of current assets to deal with theproblem arising out of the lack of immediate realization of cash against goods sold.Therefore, sufficient Working Capital is necessary to sustain sales activity. Technically,this is referred to as the Operating or Cash Cycle. The Operating Cycle can be said to beat the heart of the need for Working Capital. The continuing flow from cash to suppliers,to inventory, to accounts receivable and back into cash is what is called the operatingcycle. In other words, the term cash cycle refers to the length of time necessary tocomplete the following cycle of events:

Conversion of cash into inventory;

Conversion of inventory into receivables;

Conversion of receivables into cash.

The operating cycle, which is a continuous process, is shown in the Fig. below


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Operating Cycle

Cash management

Identify the cash balance which allows for the business to meet day to dayexpenses but reduces cash holding costs.

Inventory management

Identify the level of inventory which allows for uninterrupted production butreduces the investment in raw materials - and minimizes reordering costs - andhence increases cash flow; see Supply chain management; Just In Time (JIT);Economic order quantity (EOQ); Economic production quantity

Receivables management

Identify the appropriate credit policy, i.e. credit terms which will attractcustomers, such that any impact on cash flows and the cash conversion cycle willbe offset by increased revenue and hence Return on Capital (or vice versa); seeDiscounts and allowances.

Short term financing

Identify the appropriate source of financing, given the cash conversion cycle: theinventory is ideally financed by credit granted by the supplier; however, it may benecessary to utilize a bank loan (or overdraft), or to "convert debtors to cash"

through "factoring".

Computation of Operating Cycle:-

Average Raw Material = (Opening Stock Of Raw Material + Closing Stock Of RawMaterial ) / 2 .

Raw Material Consumption Per Day = Total Raw Material ConsumptionNumber of Days

1. Raw Material Consumption = Average Raw MaterialRaw Material Consumption Per Day
http://en.wikipedia.org/wiki/Cash_managementhttp://en.wikipedia.org/wiki/Supply_chain_managementhttp://en.wikipedia.org/wiki/Just_In_Time_(business)http://en.wikipedia.org/wiki/Economic_order_quantityhttp://en.wikipedia.org/wiki/Economic_production_quantityhttp://en.wikipedia.org/wiki/Credit_(finance)http://en.wikipedia.org/wiki/Discounts_and_allowanceshttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Factoring_(finance)http://en.wikipedia.org/wiki/Cash_managementhttp://en.wikipedia.org/wiki/Supply_chain_managementhttp://en.wikipedia.org/wiki/Just_In_Time_(business)http://en.wikipedia.org/wiki/Economic_order_quantityhttp://en.wikipedia.org/wiki/Economic_production_quantityhttp://en.wikipedia.org/wiki/Credit_(finance)http://en.wikipedia.org/wiki/Discounts_and_allowanceshttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Factoring_(finance)


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Average Stock In Process = ( Opening Stock Of Work In Process + Closing Stock OfWork In Process ) / 2.Cost Of Production Per Day = Total Cost Of Production

No. Of Days

Average Stock Of Finished Goods = ( Opening Stock Of Finished Goods + ClosingStock Of Finished Goods ) / 2.

Cost Of Sales Per Day = Total Cost Of SalesNo Of Days

Average Receivables = Opening Receivables + Closing Receivables / 2

Sales Per Day = Total salesNo. Of Days

Operating Cycle = Total (1+2+3+4)

Assumption:- No. Of Days = 300 (For 1,2,3)

2. Work In Process = Average Stock In Process

Cost Of Production Per Day

4. Receivables = Average Receivables

Sales Per Day

3. Finished Goods = Average Stock Of Finished Goods

Cost Of Sales Per Day


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1.5 TYPES OF WORKING CAPITAL

I. ON THE BASIS OF CONCEPT

Gross Working Capital

Gross Working Capital, simply refers to the firm's total Current Assets includingCash, Marketable Securities, Accounts Receivable, and Inventory.

Net Working Capital

Net working capital or liquid surplus means the difference between current assets andcurrent liabilities. The desired level of net working capital should be higher than 1:1

to ensure sufficient liquidity and availability of working funds.

II. ON THE BASIS OF TIME

Permanent/Fixed Working capital

Business activity does not come to an end after the realisation of cash fromcustomers. For a company, the process is continuous and hence, the need for a regularsupply of working capital. However, the magnitude of working capital required is not

constant, but fluctuating. To carry on business, a certain minimum level of workingcapital is necessary on a continuous and uninterrupted basis. For all practicalpurposes, this requirement has to be met permanently as with other fixed assets. Thisrequirement is referred to as permanent or fixed working capital.

Temporary/Variable Working capital

Any amount over and above the permanent level of working capital is temporary,fluctuating or variable working capital. The position of the required working capital isneeded to meet fluctuations in demand consequent upon changes in production andsales as a result of seasonal changes.


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1.6 DETERMINANTS OF WORKING CAPITAL

The amount of working capital depends upon the following factors:-

1. Nature or Character of the Business

The nature and the working capital requirements of an enterprise are interlinked.While a manufacturing industry has a long cycle of operation of the workingcapital, the same would be short in an enterprise involved in providing services.The amount required also varies as per the nature, an enterprise involved inproduction would require more working capital than a service sector enterprise.

2. Size of the Business/Scale of Operations

The requirement of working capital fluctuates for seasonal business. The workingcapital needs of such businesses may increase considerably during the busyseason and decrease during the slack season. Ice creams and cold drinks have agreat demand during summers, while in winters the sales are negligible.

3. Production Policy

Each enterprise in the manufacturing sector has its own production policy, somefollow the policy of uniform production even if the demand varies from time totime, and others may follow the principle of 'demand-based production' in which production is based on the demand during that particular phase of time.Accordingly, the working capital requirements vary for both of them.


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4. Manufacturing Process/Length of Production Cycle

In a manufacturing business, the amount of working capital increases in directproportion to length of manufacturing process. Longer the manufacturing process,larger is the amount of working capital required.

5. Seasonal Variations

In certain industries raw material is not available throughout the year. Generally,during the peak season, a firm requires larger working capital than in the slackseason.

6. Working Capital Cycle

The length of the operating cycle determines the working capital of a company. Ifthe operating cycle is lengthy, then the amount of working capital required is largeand vice-versa.

7. Rate of Stock Turnover

There is a high degree of inverse co-relationship between the quantum of working

capital and the speed with which the sales are affected.

8. Credit Policy


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A concern that purchases its requirements on credit and sells its products/serviceson cash requires lesser amount of working capital as there is immediate cashgenerated from sales.

9. Business Cycles

During the boom period, larger amount of working capital is required due toincrease in sales, rise in prices, optimistic expansion of business, etc., and vice-versa.

10. Earning Capacity and Dividend Policy

Company with good earning capacity requires less working capital cash inflows.In case of high dividend paying firms more working capital is required, as

dividends are always paid in cash to the shareholders resulting in cash outflows.

Estimating Working Capital Requirements

In order to determine the amount of working capital needed by a firm, a number offactors viz. production policies, nature of business, length of manufacturing process,rapidity of turnover, seasonal fluctuations, etc. are to be considered by the financemanager


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1.7 ASSESSMENT OF WORKING CAPITAL REQUIREMENT

In terms of RBI instructions, the Working Capital requirement of a unit can be assessedby adopting any one of the following methods:-

i) Turnover Methodii) The method of lending on the basis of inventory and receivables (MPBF Method)

iii) Cash Budgeting Method

I. Turnover method

This would be applicable to all borrowers enjoying Fund Based Working Capital limitsup to and inclusive of Rs.5crores with the banking system. Under this method, theworking capital requirement will be computed on the basis of the 25% of the AnnualProjected Turnover/Sales of the borrowers. Out of this 25%, a minimum of 20% of theprojected turnover is to be provided by the bank as working capital limit and the rest 5%is to be contributed by the borrowers as their margin towards the working capital.This method of assessment of Working Capital has been recommended by NayakCommittee.

Example:-

1. Projected turnover 300 lakhs

2. Working capital requirement 300 * 25/100 = 75 lakhs(25% of projected turnover)

3. Bank finance for working capital 300 * 20/100 = 60 lakhs

(20% of projected turnover or OR

4/5 of working capital requirement) 75 * 4/5 = 60 lakhs

4. Margin money for working capital 300 * 5/100 = 15 lakhsfrom long term sources OR(5% of projected turnover or 75 * 1/5 = 15 lakhs1/5 of working capital requirement)


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Borrowers requiring Working Capital limits (Fund based) above Rs. 5crores frombanking sector may be given the choice to choose either the existing system of lendingbased on Holding Level of Inventory (MPBF) OR the Cash Budget System of Lending.

However, the decision to allow the borrower to switch over to Cash Budget Systemwould rest with the bank.

II. The method of lending on the basis of inventory and receivables

Banks have the freedom to determine the level of holding for inventory andreceivables for various industries. They may continue to accept those levels whichare in conformity with the past levels of holding of the borrower on the basis of actualfor last 2 years and also keeping in view the industry levels in general as advised bythe RBI from time to time. Deviations may be permitted by the sanctioning authority

on merits of each case by the sanctioning authority. The existing CMA data forms forassessment of limits and QIS Returns for monitoring of borrowers accounts whochoose this method may be continued in use.

Tandon Committee Recommendations

The key recommendations of Tandon Committee related to:a. Norms for current assetsb. Maximum permissible bank financec. Emphasis on loan systemd. Periodic information and reporting system

Emphasis on loan system

Tandon Committee suggested an information and reporting system, which was furtherimproved by the Chore committee. Its key components are as follows:

Quarterly Information System- Form 1- This gives the

i. Estimates of production sales for the current year and the ensuing quarterii. The estimates of current assets and liabilities for the ensuing quarter

Quarterly Information System- Form 2 - This gives the

i. The actual production and sales during the current year and for the latestcompleted year

ii. The actual current assets and liabilities for the latest completed quarter


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Half-yearly Operating statements- Form 3 -

This gives the actual operating performance for the half-year ended against theestimates for the same.

Half-yearly Funds Flow Statement- Form 3 B -

This gives the sources and the uses of funds for the half-year ended against the

estimates for the same.

METHODS OF LENDING:

Like many other activities of the banks, method and quantum of short-term financethat can be granted to a corporate was mandated by the Reserve Bank of India till1994. This control was exercised on the lines suggested by the recommendationsof a study group headed by Shri Prakash Tandon.

The study group headed by Shri Prakash Tandon, the then Chairman of PunjabNational Bank, was constituted by the RBI in July 1974 with eminent personalitiesdrawn from leading banks, financial institutions and a wide cross-section of theIndustry with a view to study the entire gamut of Bank's finance for working

capital and suggest ways for optimum utilisation of Bank credit. This was the firstelaborate attempt by the central bank to organise the Bank credit. The report of thisgroup is widely known as Tandon Committee report.

Most banks in India even today continue to look at the needs of the corporates in

the light of methodology recommended by the Group.

As per the recommendations of Tandon Committee, the corporates should bediscouraged from accumulating too much of stocks of current assets and should

move towards very lean inventories and receivable levels. The committee evensuggested the maximum levels of Raw Material, Stock-in-process and FinishedGoods which a corporate operating in an industry should be allowed to accumulateThese levels were termed as inventory and receivable norms. Depending on thesize of credit required, the funding of these current assets (working capital needs)of the corporates could be met by one of the following methods:


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First Method of Lending :

Banks can work out the working capital gap, i.e. total current assets less currentliabilities other than bank borrowings (called Maximum Permissible BankFinance or MPBF) and finance a maximum of 75 per cent of the gap; the balance

to come out of long-term funds, i.e., owned funds and term borrowings. Thisapproach was considered suitable only for very small borrowers i.e. where therequirements of credit were less than Rs.10 lacks

Second Method of Lending :

Under this method, it was thought that the borrower should provide for aminimum of 25% of total current assets out of long-term funds i.e., owned fundsplus term borrowings. A certain level of credit for purchases and other current

liabilities will be available to fund the build up of current assets and the bank willprovide the balance (MPBF). Consequently, total current liabilities inclusive ofbank borrowings could not exceed 75% of current assets. RBI stipulated that theworking capital needs of all borrowers enjoying fund based credit facilities ofmore than Rs. 10 lacs should be appraised (calculated) under this method.

Third Method of Lending :

Under this method, the borrower's contribution from long term funds will be to

the extent of the entire CORE CURRENT ASSETS, which has been defined bythe Study Group as representing the absolute minimum level of raw materials,process stock, finished goods and stores which are in the pipeline to ensurecontinuity of production and a minimum of 25% of the balance current assetsshould be financed out of the long term funds plus term borrowings.(This method was not accepted for implementation and hence is of only

academic interest).

Maximum Permissible Bank Finance:

The Tandon Committee had suggested 3 methods for determining the maximumpermissible bank finance (MPBF).

The methods for determining the MPBF are described below:


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Method 1- MPBF= 0.75(CA-CL)Method 2- MPBF= 0.75(CA)-CLMethod 3- MPBF= 0.75(CA-CCA)-CL

III. Cash Budget System

Customers enjoying working capital limits in excess of Rs. 5crores will be givenoption to adopt the Cash Budgeting method at the discretion of the bank. In case suchborrowers choose the cashbudget system of lending, they have to satisfy the bank that they have the necessaryinfrastructure in place to submit the required information periodically in time. Thescope of internal MIS should be satisfactory and commensurate with the level ofoperations. The borrower must have a finance professional and computerizedenvironment.

Comparative Chart of Three methods of lending

Turnover Method

(Nayak Committee)*

(A)

MPBF

method

(Tandon

Committee)

(B)

Cash Budgeting

Method

(C)

Working Capital upto Rs

5crores

Applicable in case of Working

Capital required above Rs.

5crores

Basis Projected Annual Turnover-assuming production/businesscycle of 3months

Inventory andreceivableholding levels

Peak level cashdeficit

To whom

applicable

Fund based & NFB w/c creditlimits upto & inclusive of Rs.5crores from the bankingsystem

Borrowers having WorkingCapital limits (fund based andnon fund based) above Rs.5crores from the banking system.

Note: Borrowers given option tochoose between B & C but thedecision to allow the switch overby borrower to cash budgetsystem would be purely at banksdiscretion.Further, borrowers opting for cashbudgeting method should satisfy


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the bank about their having thenecessary infrastructure in placeto submit the required informationperiodically in time.

Computation of

limit

20% of projected annual

turnover

Tandons II

Method ofLending(Levels to beon conformitywith past orindustry asmay beadvised fromtime to timeby RBI andalso

borrowersslevel ofactivity)

Peak level cash

deficit will be thelevel of totalW.C finance.

Margin/Borrower

s contribution

5% of Projected AnnualTurnover

25% ofCurrentAssets

Debt equity ratioof 3:1 andCurrent Ratio ofminimum 1.33:1

Applicable in case of w/c requiredabove Rs. 5crores

Details/Data to be

obtained/other

requirements

For w/c limit(Less than Rs.

10 lakhs)

Past 3 years sales, gross profit,net profit etc.Projections of the above forthe current year.Sales TaxReturns/Declarations/Assessment Orders, whereverapplicable*Sales & Purchases details ofthe relevant period.

Stocks of Book Debtsstatements.Credit summation to becommensurate with reportedsales.Periodical inspections.

For w/c limits > Rs 10 lakhs

CMA Data

Operating

statementBalance sheetactual for last2 years,estimates forcurrent year &projection fornext year.Analysis ofB/S data asabove.

Computationof MPBF.Funds flowStatement.

QIS Data

Projection fornext quarter at

Projected Cash

Budget

Statement(annual) comprising ofprojectedreceipts andpayments for thenext 12 monthson account of:-a)Businessoperationb)Non- Businessoperation

c)Cash flowfrom capitalaccountsd)Sundry items

Projected cash

flow for next

quarter


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and more upto and inclusive

of Rs 5 crores

Operating statement in FormNo. IIAnalysis of Balance Sheet in

Form No.IIIAudited balance sheet for past3years

least a weekin advance.Actual for lastquarter within2 weeks after

ending.Operatingstatement forthe last halfyear(actual)within 6weeks afterhalf yearlyclosure.

Monthly

selectOperational

Data(MSOD)

Quarterly

summary of

cash book

pertaining to

previousquarter(actual)

certified by

FCA within 2

weeks of

closure.

MSOD

* Turnover Method of assessment of Working Capital assumes operating cycle of90days. However, where the operating cycle is longer, Banks have to provide the financein excess of 20% of the projected annual turnover based on the borrowers requirementsof working capital computed as per traditional method.(MPBF method/On the basis ofholding level)

1.8 THE VARIOUS SOURCES USED FOR FINANCING THE WORKING

CAPITAL ARE AS FOLLOWS:

1. Working Capital Advance by Commercial Banks2. Short- Term Loans from Financial Institutions3. Commercial paper,4. Factoring

Working Capital Advance by Commercial Banks:

The various aspects of this source of finance are:a) Application and processingb) Sanction and Terms of conditionc) Forms of bank financed) Nature of security


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e) Margin amount

Application and Processing:A customer seeking an advance is required to submit an appropriate application formand there are three different types of application form for different categories of

advances. The information furnished in the application form covers , the name andaddress of the borrower and his establishments, the details of borrowers business, thenature and amount of security offered. The application form has to be supported byvarious ancillary statements like financial statements and financial projections of thefirm.

Sanction and Terms and Conditions:Once the application is duly processed , it is put up for sanction to the appropriateauthority.

Forms of Bank Finance:

Working Capital advance is provided by commercial banks in three primary ways

i. Cash credit against hypothecation of Stocks and Book Debtsii. Loans

iii. Bills discounting

Cash Credit:

Under a cash credit or overdraft arrangement, a pre-determined limit for borrowing isspecified by the bank. The borrower can draw as often as required provided theoutstanding do not exceed the cash credit/overdraft limit. The borrower also enjoys thefacility of repaying the amount, partially or fully, as and when he desires. Interest ischarged only on the running balance, not only on the limit sanctioned.

Loans:

These are advances of fixed amounts which are credited to the current account of theborrower or released to him in cash. The borrower is charged with interest on the entire

loan amount, irrespective of how much he draws. In this respect this system differsmarkedly from the overdraft or cash credit arrangement wherein interest is payable onlyon the amount actually utilized. Loans are payable either on demand or in periodicalinstallments.

Discount of Bills:


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A bill arises out of a trade transaction. The seller of goods draws the bill on the purchaser.The bill may be either clean or documentary and may be payable on demand or after ausance period which does not exceed 90 days. On acceptance of the bill by the purchaser,the seller offers it to the bank for discount. When the bank discounts the bill it realizes thefunds to the seller. The bank presents the bill to the purchaser and gets its payments.

Letter of Credit:

A letter of credit is an arrangement whereby a bank helps its customer to obtain creditfrom its suppliers. When a bank opens a letter of credit in favour of its customer for somespecific purchases, the bank undertakes the responsibility to honour the obligation of itscustomer, should the customer fail to do so. This is an indirect form of financing asagainst overdraft, cash credit, loans, and bill discounting which are direct forms offinancing. But in direct financing the bank assumes risk as well as provides financing.

Security:

For working capital advances, commercial banks seek security either in the form of

hypothecation or in the form of pledge.

Margin Amount:

Banks do not provide 100% finance. They insist that the customer should bring a portionof the required finance in the form of Capital /Owned Fund to ensure promoters stakein the business. This portion is known as margin amount.

1.9 DANGERS OF INADEQUATE WORKING CAPITAL:

i. It is not possible for it to utilize production capacity fully for want of workingcapital.

ii. A company may not be able to take advantage of cash discount facilities.iii. A company may not be able to take advantage of profitable business

opportunities.iv. A company may not increase its cash sales and may have to restrict activities

to credit sales only.v. A company may have to borrow funds at exorbitant rates of interest.

vi. Low liquidity would positively threaten the solvency of time business. Thecredit worthiness of the company is likely to be jeopardized because of lack of

liquidity.

1.10WORKING CAPITAL RATIOS:

The various Working Capital Ratios are:

Current Ratio

Quick Ratio


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Stock Turnover Ratio

Debtors Turnover Ratio

Interest Coverage Ratio

Profitability Ratios

Current Ratio:

It shows the short term financing position of the business. This ratio measures the abilityof the business to pay its current liabilities.

Current ratio = Current Assets / Current Liabilities

Quick Ratio:

It is calculated to work out the liquidity of a business. This ratio measures the ability ofthe business to pay its current liabilities in a real way.

Quick ratio = Quick assets / Current Liabilities

Stock Turnover Ratio:

This ratio provides guidelines to the management while framing stock policy. Itmeasures how fast the stock is moving through the firm and generating sales. It helps tomaintain a proper amount of stock to fulfill the requirements of the concern. A properinventory turnover makes the business to earn a reasonable margin of profit.

Stock turnover ratio = Cost of goods sold / Average stock

Debtors Turnover Ratio:

This ratio indicates the efficiency of the concern to collect the amount due from debtors.It determines the efficiency with which the trade debtors are managed. Higher the ratio,better it is as it proves that the debts are being collected very quickly.

Debtors turnover ratio = Credit Sales / Average Debtors

Interest coverage ratio:

A ratio used to determine how easily a company can pay interest on outstanding debt. Theinterest coverage ratio is calculated by dividing a company's earnings before interest and taxes(EBIT) of one period by the company's interest expenses of the same period.


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Interest Coverage ratio = EBIT / Interest Expense

The lower the ratio, the more the company is burdened by debt expense. When a company'sinterest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable.An interest coverage ratio below 1 indicates the company is not generating sufficient revenues tosatisfy interest expenses.

Profitability Ratios:

Return on Sales (Profit Margin) Ratio

This ratio measures the profits after taxes on the year's sales. The higher this ratio,the better prepared the business is to handle downtrends brought on by adverseconditions. This ratio is calculated using the following formula:

Return on Assets (ROA) Ratio

This ratio shows the after tax earnings of assets and is an indicator of how profitablea company is. Return on assets ratio is the key indicator of the profitability of acompany. It matches net profits after taxes with the assets used to earn such profits.A high percentage rate will tell you the company is well run and has a healthy return

on assets. This ratio is calculated using the following formula:

Net Profit After Taxes / Total Assets

Return on Net Worth Ratio

This ratio measures the ability of a company's management to realize an adequatereturn on the capital invested by the owners in the company. This ratio is calculatedusing the following formula:

Net Profit After Taxes / Net Worth

Net Profit After Taxes / Net Sales


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2.1 INTRODUCTION TO THE BANKING INDUSTRY

Banking in India has a long and elaborate history of more than 200 years. The beginningof this industry can be traced back to1786, when the countrys first bank, Bank ofBengal, was established.But the industry changed rapidly and drastically, after thenationalization of banks in 1969. As a result, the public sector banks beganexperiencing numerous positive changes and enormous growth. Then came the much-talked-about liberalization and economic reforms that allowed banks to explore newbusiness opportunities and not just remain constrained to generating revenues from mereborrowing and lending. This provided the Indian banking scenario a remarkable faceliftthat only continues to get better with time. However, even today, despite the foray offoreign banks in the country, nationalized banks continue to be biggest lenders in

the country. This is primarily due to the size of the banks and the penetration of the

networks

Bank may be defined as a financial institution which is engaged in the business of

keeping money for savings and checking accounts or for exchange or for issuing loans

and credit etc. A set of services intended for private customers and characterized by a

higher quality than the services offered to retail customers. The essential function of a

bank is to provide services related to the storing of deposits and the extending of credit.


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Basic function may include Credit collection, Issuer of banking notes, Depositor of

money and lending loans. Now a days banking is not in its traditional way, with the

advancement of technology its focusing on more comfort of customer providing

services such as

online banking investment banking

electronic banking

internet banking

pc banking /mobile banking

e-banking

The importance of banking sector is immense in the progress and prosperity of any State

or country. The economic progress and prosperity comes from the well-rounded

development and an impeccable banking management. Banks in general, governmental

and private, have eased our financial transactions, security, and facilitated the funding forestablishing a business or industry.

2.2 STRUCTURE

The Indian banking system can be classified into nationalized banks, private banks andspecialized banking institutions. The industry is highly fragmented with 30 bankingunits contributing to almost 50% of deposits and 60% of advances. The Reserve Bankof India is the foremost monitoring body in the Indian Financial sector. It is a centralizedbody that monitors discrepancies and shortcomings in the system.
http://www.google.co.in/search?hl=en&oi=definer&q=define:online+banking&defl=enhttp://www.google.co.in/search?hl=en&oi=definer&q=define:investment+banking&defl=enhttp://www.google.co.in/search?hl=en&oi=definer&q=define:electronic+banking&defl=enhttp://www.google.co.in/search?hl=en&oi=definer&q=define:internet+banking&defl=enhttp://www.google.co.in/search?hl=en&oi=definer&q=define:pc+banking&defl=enhttp://www.google.co.in/search?hl=en&oi=definer&q=define:e-banking&defl=enhttp://www.google.co.in/search?hl=en&oi=definer&q=define:online+banking&defl=enhttp://www.google.co.in/search?hl=en&oi=definer&q=define:investment+banking&defl=enhttp://www.google.co.in/search?hl=en&oi=definer&q=define:electronic+banking&defl=enhttp://www.google.co.in/search?hl=en&oi=definer&q=define:internet+banking&defl=enhttp://www.google.co.in/search?hl=en&oi=definer&q=define:pc+banking&defl=enhttp://www.google.co.in/search?hl=en&oi=definer&q=define:e-banking&defl=en


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Industry estimates indicate that out of 274 commercial banks operating in the

country, 223 banks are in the public sector and 51 are in the private sector. Theseprivate sector banks include 24 foreign banks that have begun their operations here. Thespecialized banking institutions that include cooperatives, rural banks, etc. form a part ofthe nationalized banks category.

Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks(that is with the Government of India holding a stake), 30 private banks (these do nothave government stake; they may be publicly listed and traded on stock exchanges) and38 foreign banks. They have a combined network of over 53,000 branches and 49,000ATMs. According to a report by ICRA Limited, a rating agency, the public sector bankshold over 75 percent of total assets of the banking industry, with the private and foreignbanks holding 18.2% and 6.5% respectively
http://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Automated_teller_machinehttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Automated_teller_machine


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II.3 OPPORTUNITIES AND CHALLENGES FOR PLAYERS

The bar for what it means to be a successful player in the banking sector has been raised.Four challenges must be addressed before success can be achieved. First, the market isseeing discontinuous growth driven by new products and services that include

opportunities in credit cards, consumer finance and wealth management on the retail side,and in fee-based income and investment banking on the wholesale banking side. Theserequire new skills in sales & marketing, credit and operations. Second, banks will nolonger enjoy windfall treasury gains that the decade-long seculardecline in interest rates provided. This will expose the weaker banks. Third, withincreased interest in India, competition from foreign banks will only intensify. Fourth,given the demographic shifts resulting from changes in age profile and householdincome, consumers will increasingly demand enhanced institutional capabilities andservice levels from banks.

II.4 VISION OF BANKS IN INDIA

The banking scenario in India has already gained all the momentum, with the domesticand international banks gathering pace. The focus of all banks in India has shifted theirapproach to 'cost', determined by revenue minus profit. This means that all the resourcesshould be used efficiently to better the productivity and ensure a win-win situation. Tosurvive in the long run, it is essential to focus on cost saving. Previously, banks focusedon the 'revenue' model which is equal to cost plus profit. Post the banking reforms, banksshifted their approach to the 'profit' model, which meant that banks aimed at higher profitmaximization.

II.5 CONSOLIDATION OF BANKS IN INDIA

If the banking industry in India got opened up for more international competition, Indiawould see a large number of global banks controlling huge stakes of the banking entitiesin the country. The overseas banking units would bring along with it capital, technology,and management skills. This would lead to higher competition in the banking frontier andensure greater efficiency. The FDI norms in the banking sector would give more leverageto the Indian banks.Thus, a consolidation phase in the banking industry in India is expected in the near futurewith mergers and acquisitions gathering more pace. One might also see mergers betweenpublic sector banks or public sector banks and private banks. Credit cards, insurance arethe next best strategic places where alliances can be formed.


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II.6 FUTURE CHALLENGES OF BANKS IN INDIA

The Indian banks are hopeful of becoming a global brand as they are the major source offinancial sector revenue and profit growth. The financial services penetration in India

continues to be healthy, thus the banking industry is also not far behind. As a result ofthis, the profit for the Indian banking industry will surely surge ahead. The profit pool ofthe Indian banking industry is probable to augment from US$ 4.8 billion in 2005 to US$20 billion in 2010 and further to US$ 40 billion by 2015. This growth and expansion pacewould be driven by the chunk of middle class population. The increase in the number ofprivate banks, the domestic credit market of India is estimated to grow from US$ 0.4trillion in 2004 to US$ 23 trillion by 2050. Third largest banking hub of the globe by2040 - that vision is not too far away.


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Relationships beyond banking

3.1 BANK OF INDIA-BRIEF INTRODUCTION

ESTABLISHED 7th September, 1906

LOCATION Mumbai, Maharashtra

SIZE Fourth Largest Public Sector Bank

Total Business Rs 401078 Crores as on 31st March 2010

REACH Pan India network of 3200+ Branches

TECHNOLOGY All Branches on CBS (Core Banking System Platform)

HUMAN RESOURCE 32000+ Dedicated Employees

3.2 ABOUT BANK Of INDIA

Bank of India is a premier and one of the oldest commercial banks in India, withpresence all over India as also in all time zones of the world. The Bank has a glorioushistory dating back to the early years of this century. The Bank was founded inSeptember 1906 and has all along maintained a position of pride among the top 5commercial banks in the country. In July 1969, Bank of India was nationalized along with13 other large Indian commercial banks. Since then, the Bank has made enormouscontribution to India's efforts towards agricultural and rural development, industrialdiversification and modernization and export development. Keeping pace with financial

sector reforms in India, the bank has ventured into Merchant Banking, Mutual Funds,Housing Finance, Custodial & Depository through it's subsidiaries.

Today the Bank has over branches spread all over India and 27 branches/representativeoffices/subsidiaries/joint ventures etc. spread in 13 countries, spanning all time zones.The International business accounts for over 20% of Bank's total business. Bank of Indiabelieves in "Total Package Approach" to meet all the financial and non-financialrequirements of its customers.


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Entrepreneurs are not only assisted in establishing their projects, but are also helped inday-to-day operations by providing necessary working capital finance either on its own orthrough syndication. The Bank also provides guarantees, letters of credit, remittancefacilities, supplier's credit, forward cover, advisory services for hedging exchange

rate and interest rate risks, trade information reports, bankers' opinion reports on

buyers and sellers, industry status reports and prospects, etc. In the new era ofeconomic and financial sector reforms leading to progressive liberalization andglobalization of the Indian market, Bank of India is poised to further its position as amarket leader and innovator in financial services. The Bank looks at the new competitionemerging in the Indian banking and financial sector as an opportunity to improve it'scustomer servicing capability and overall performance. All the Branches are now underCBS environment.

BOI came out with an IPO in 1997. BOI provides a wide range of banking products andfinancial services to corporate and retail customers. The bank provides specializedservices for businesses (dealing in foreign exchange), NRIs, Merchant Banking, etc.

Apart from this, it also has specialized branches that deal in Asset Recovery, Hi-techAgricultural Finance, Lease Finance, SME Branches catering exclusively to needs ofSME clientele, Corporate Banking Branches to take care of the Corporate, Treasury andSmall Scale Industries. The bank has diversified into offering products (and services)such as mutual funds, venture capital, depository services, bullion trading and creditcards. BOI is a leading player in retail banking. It was the first nationalized bank toestablish a fully computerized branch and an ATM facility in India. It has a strongnetwork of approximately 270 branches that provide export credit. BOI is among the topbanks in India that provide export credit to industries such as Diamond Export. The bankis among those that have been offering banker services to the Bombay Stock Exchangeand are managing the latters clearing house since 1921. The Bank of India has initiatedmany services to meet the worldwide needs of its clients and leverage its domesticbanking strengths. The bank has a global presence through its branches in London,Tokyo, New York, Paris, Hong Kong, Singapore, etc. It is also listed in India on theBombay Stock Exchange and the National Stock Exchange of India Limited.

Offshore Credit Services

The Bank of India has a locally incorporated branch in the UK. Apart from retail services,it also provides cross-border loans to joint ventures and wholly owned subsidiaries ofIndian companies. This helps these Indian companies to secure loans, allowing them toincrease their presence in the EU. The bank facilitates Indian companies in raising tradefinance, letters of credit or project finance for their business ventures in the EU. This hasenabled the banks growth, since many Indian companies are venturing in the EU.

Technology Implementation

The Bank of India has been the leading bank in India to adopt new technologies toprovide better services to its consumers. The bank has been able to offer high-qualitytechnology-based products and services to its customers. This has assisted it in tapping


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the EU market. The bank has successfully integrated technology to support applicationssuch as tele-banking, internet banking, signature retrieval system, fax on demand, remoteaccess terminal services for its corporate clients. It has also put in place effectivemonitoring and control mechanisms to provide efficient services to its customers.Recently, the Bank launched its Mobile Banking Services formally in the august presence

of Dy. Governor, RBI, Dr. K C Chakraborty.

Leveraging Special Services

The Bank of India is strategically targeting Non- Resident Indians (NRIs). It facilitatesNRIs in their personal financial services needs such as remitting money to India. Thebank provides NRIs the facility of transferring funds to BOI accounts in India in anefficient and cost-effective manner. Since the EU has a substantial Indian population, the bank has grown rapidly and has been successful in the EU. It offers personal andcorporate banking services as well as specialist services, including forex dealings, loansyndications, etc, to its customers in the EU. BOI is planning to increase its presence in

the EU by opening new branches and offering complete financial services to itscustomers, including guidance for entering the market, loans, remittances, etc. BOI hasplans to open a branch in Antwerp (Belgium) to cater to the requirements of diamondmerchants, traders and in this segment BOI is market leader in India. BOI will have 9branches in the EU to service its customers. BOI also plans to enhance its services toIndian companies that are investing in the UK. It has plans to assist them in generatingcorporate and project finance for their investments abroad. It plans to increase its focuson other diversified services, apart from banking services such as venture capital,merchant banking, etc. The bank also hopes to leverage IT technology and developquality products and services for increasing its reach and gaining competitive advantage.

3.3 MILESTONES ACHIEVED BY BANK OF INDIA

1906: Group of eminent businessmen establishes the Bank1946: Opening of London Branch First-ever Indian bank to open a branch overseas


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1950: Opening of Tokyo Branch First Indian bank to open a branch in Japan

1969: Nationalization along with 13 other banks branch network: Indian: 207 &Foreign: 12

1989: Established BOI Shareholding Ltd. a JV with Bombay Stock Exchange (BSE) tomanage clearing house of BSE

1997: Launched maiden IPO Government shareholding diluted to 76.53%2003: Ranked as Indias Most Trusted Service Brand consecutively for 3 years by ACNielsen ORG-MARG

2004: Ranked 25thamong Indias Top 500 companies by D & B

2007: Surpassed landmark of INR 10 bn in net-profits



3.4 AWARDS & ACCOLADES

The second Most Trusted Brands (MTB), 2009 under PSU category 2009

NDTV Profit Business Leadership Awards 2009 for Best PSU Bank

Outlook money NDTV Profit Awards 2009 Best Education Loan Provider Runner up

Best Bank under Banking Category by Dun & Bradstreet Rolta Corporate Awards 2009

FE-EY Most Efficient Public Sector Bank Awards 2010 by Dalal Street

Second best performance award in lending to Micro & Small Enterprises sector by the Government of India.

The gist of the performance of the Bank as at 31.03.2010 is given below -

Performance as on 31.03.2010 (Rs. In Crores, Except %)

Deposits 2297 Operating Profit 4705


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62

Growth 21% Net Profit 1741

Advances

168491 Gross NPA Ratio 2.85%

Growth 18% Net NPA Ratio 1.31%

Business Mix

401078 Provision Coverage 65.51%

Growth 20%Earnings Per Share

(Rs.) 33.15

Growth Return on Equity

14.76%

Book value per Share

(Rs) 236.84

Capital Adequacy Ratio (Basel-II)

12.94%

3.5 HIGHLIGHTS OF PERFORMANCE Q4FY0910

Global business mix reaches INR 4011 bn (USD 89.33bn)

Total assets: INR 2750 bn (USD 61.25 bn)

International business constitutes ~17.28% of total business

3236 branches including 29 branches/offices overseas

Market cap: INR 194.71 bn (USD 4.36 bn) as on 05.05.2010

Raised INR 10 bn in July & August 2009 (Upper Tier II bonds)

Raised INR 3.25 bn in December 2009 (IPDI Bonds)

Raised INR 10bn in January 2010 (Upper Tier II bonds)

Bank of India announced its performance result for Q4 of 2009-10 and for the fullyear 2009-10 following the approval by its Board of Directors on May 7, 2010.

The Bank crossed milestone of Rs.4,00,000 Cr. of Business Mix.

CASA Deposits grew by Rs.13,206 Cr. (a growth rate of 27%) touching a level of Rs.61,843 Cr.; improved from 30.70% to 31.75%.


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As many as 31.5 lakhs Saving Bank accounts and 1.17 lakhs current accounts opened during the year. Customer base improves by over 10%.

Domestic network touched 3207 branches and 820 ATMs. 186 branches and 320 ATMs were inaugurated during the year.

28 specialized Mid Corporate Banking Branches were opened.

Syndication desk reactivated and projects involving outlay of close to Rs. 10,000 Cr. processed.

To aid credit delivery, online Credit Application Processing System (CAPS)introduced.

Bank achieved 100% CBS status.

MTN programme of US$ 500 million concluded at a fine rate amidst immense

investor enthusiasm.

Global Remittance Centre for facilitating NRE remittances from across the world was opened in Mumbai.

To facilitate control and monitoring Computer Aided Audit Tool (CAAT) launched.

Manpower planning put on fast track and as many as 2650 employees promoted and 27200 staff members trained. Plans for recruitment of over 4500 staff finalized.

3.6 INVESTORS PROFILE (CHART)


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RESEARCH METHODOLOGY

1.1 MEANING

Research methodology is a way to systematically solve the research problem. It may be

understood as a science of studying how research is done systematically. In that varioussteps, are generally adopted by a researcher in studying his problem along with the logicbehind them.It is important for the researcher to know not only the research method but also know themethodology. The procedures by which the researcher goes about his work of describing,explaining and predicting phenomenon is called methodology. Methods comprise of theprocedures used for generating, collecting and evaluating data. All this means that it isnecessary for the researcher to design his methodology for his problem as the same maydiffer from problem to problem.Data collection is important step in any project and success of any project will be largelydepend upon now much accurate you will be able to collect and how much time, money

and effort will be required to collect that necessary data, this is also important step. Datacollection plays an important role in research work. Without proper data available foranalysis you cannot do the research work accurately.

In research design we decide about:

Type of data

From whom to get data

How to analyze data

How to make report

4.2 RESEARCH DESIGN

STEP 1 - To study the Financial Statements of Bank Of Indias Clients.

STEP 2 Data analysis of working capital of Bank of Indias Clients.

STEP 3 Analysis of Balance Sheet, working capital financing and ratios of Bank Of

Indias Clients.

4.3 TYPES OF DATA COLLECTION

There are two types of data collection methods available:-

Primary data collection

Secondary data collection

1) Primary data collection method


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The primary data is that data which is collected fresh or first hand, and for first timewhich is original in nature. Primary data can be collected through personal interview,questionnaire etc. to support the secondary data.

2) Secondary data collection method

The secondary data are those which have been already collected and stored. Secondarydata are easily available from records, journals, annual reports of the company etc. It willsave time, money and efforts to collect the data. Secondary data also made availablethrough trade magazines, balance sheets, books etc.

This project is based on secondary data collected through Balance sheets and AnnualReports of the Banks clients. But primary data collection had limitations in view of theconfidentiality the Bank is required to maintain of its Clients. Thus the project is basedon secondary information collectedthrough Annual Reports of the Banks clients, supported by various books and internet

sites. The data collection was aimed at studying the Working Capital finance of theBanks clients.

4.4 TOOLS USED FOR THE PROJECT

While making the project file various tools were used. These tools helped in doing thework. These are:-

Microsoft Word

Various analysis tools like Charts, Pie Graphs, tables

4.5 OBJECTIVES OF THE STUDY

Study of working capital finance is important because unless the working capital isfinanced effectively, monitored efficiently, planned properly and reviewed periodically atregular intervals the bottlenecks of any company cannot be removed to earn profits andincrease its turnover. With this primary objective of the study, the following furtherobjectives are framed for a depth analysis.

To study how Bank of India finances working capital requirements of the firms.

To study the optimum level of current assets and current liabilities of the Banks

Clients. To study the liquidity position through various working capital related ratios.

To study the different components of working capital and its impact on the performance of the firm.

To estimate the working capital requirement of Banks Clients

To study the operating and cash cycle of the Banks Clients


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5.1 Case Study 1

Following is the Analysis of Balance Sheet of M/s ABC PVT. LTD

Amount- Rs in Crores

M/s ABC PVT.LTD, MUMBAI

ANALYSIS OF BALANCE SHEET

AS PER BALANCE SHEET AT

LIABILITIES

Last 2 years

Current

Year

Audited Audited Estimates

31.03.200

931.03.201

0 31.03.2011

1 2 3

CURRENT LIABILITIES

1. Short term Borrowings

(incl. Bills purchased discounted

and any excess borrowings on

repayment basis

a) From applicant bank 39.53 35.00 35.0

b) From other banks

c) Of which BP and BDSUB-TOTAL (A) 39.53 35.00 35.0

2. Short term borrowings from others

3. Deposits (maturing within one year)

4. Sundry Creditors ( Trade) 1.82 1.75 1.2

5. Other Creditors

5.a. Creditors for expenses

b.Creditors for Machinery 0.47 0 0

6. Advances/progress payment from 2.14 2 2.7

customers/deposits from dealers etc.,

7. Interest and other charged accrued but

not due for payment.8. Provisions for taxation 0 6.5 6.5

9. Dividend Payable

10.Other statutory liabilities 0 0.75 0.7

(due within one year)

11.Instalments of Term Loans/deferred 19.72 19.72 19.7

payment credits/debentures/redeemable

preference shares(due within one year).


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12.Other current liabilities and provisions 0.4 0.55 0.4

(due within one year) Major items to be

specified individually.

SUB-TOTAL (B) 24.55 31.27 31.4

13. TOTAL CURRENT LIABILITIES 64.08 66.27 66.4

(Total of items 1 to 12)

TERM LIABILITIES

14. Debentures (not maturing within

one year)

15. Redeemable preference shares

(not maturing within one year, but

of maturity not exceeding 12 years)

16. Term Loans (exclusive of 102.76 83.04 63.3

instalments payable within one year)17. Deferred payment credit

(exclusive of instalments payable

within one year)

18. Term Deposits/Unsecured Loans(repayable after 100.26 75 55.0

one year)

19. Other term liabilities(Auto Loan) 4 3.25 2.

20. TOTAL TERM LIABILITIES 207.02 161.29 120.8

(total of items 14 to 19)

21. TOTAL OUTSIDE LIABILITIES 271.10 227.56 187.2

( item 13 + item 20)

NET WORTH

22. Share capital & Application Money 53.84 53.84 53.8

23. Preference Share Capital

(maturing after 12 years)

23 a Capital Reserve 37.20 37.20 37.2

24. GENERAL RESERVE 10.02 33.44 66.4

25. Development Rebate Reserve

26. Share Premium

27. Surplus or Deficit in P& L a/c

28. NET WORTH 101.06 124.48 157.5( total of items 22 to 27)

29. TOTAL LIABLITIES 372.16 352.04 344.7


ASSETS

31.03.2009

31.03.2010 31.03.2011

CURRENT ASSETS


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30. Cash and Bank Balance 1.47 1.65 2.6

31. Investment (Other than long

term investment e.g. Sinking fund,

Gratuity fund, etc.FDR

32.a) Receivables other than deferred 42.3 65.5 72.5and export receivables (incl. Bills

purchased & discounted by bankers)

32.b) Export receivables incl., bills

purchased and discounted by bankers

32.c) Interest Subsidy Receivable 13 2.45 2.2

33. Instalments of deferred receivables


34. Inventory

a) Raw materials (incl, stores and

other items used in mfg., process)

b) Stocks in Trade 28.12 32.50 35.5c) Finished Goods 26.8 28.5 30.

d) Other consumable spares

35. Advances to suppliers of raw

materials and stores/spare parts

consumables

36. Advance payment of taxes 0 4.5 7.

37. Other current assets ( Major

items to be specified individually)

38. TOTAL CURRENT ASSETS 111.69 135.1 150.9

( total of items 30 to 37)

FIXED ASSETS

39. Gross Block (Land & Building

Machinery, Construction in progress 265.16 265.16 265.1

40. Depreciation to date 45.35 76.92 103.1

41. NET BLOCK 219.81 188.24 161.9

(item 39 - item 40)

OTHER NON-CURRENT ASSETS

42. Investment/Book-debts, Deposits 0.85 0.85 0.8

which are not current assets.

1. A) Investment in subsidiary 30.82 24 26.Companies/affiliations etc.,

B) Deposits & Other assets 8.99 3.85 4.

2. Advances to suppliers of capital goods/spares andcontractors for capital expenditure

3. A) Deferred receivables (other

than those maturing within one year)

B) Others


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43. Non consumable stores & spares

44. Other Misc. Assets

(incl., dues from debtors)

45. TOTAL NON-CURRENT ASSETS 40.66 28.70 31.8

( total of items 42 to item 44)

46. INTANGIBLE ASSETS 0.00 0.00 0.0(Patents, goodwill, preliminary and formation expenses,Bad/doubtful debts not provided for)

47. TOTAL ASSETS 372.16 352.04 344.7

(totals of items 38,41,45 & 46)

Check

48. TANGIBLE NETWORTH 101.06 124.48 157.5

(item 28 - item 46)

49. NET WORKING CAPITAL 47.61 68.83 84.

(item 38 - item 13)

50. CURRENT RATIO 1.74 2.04 2.2

(item 38 / item 13 )51. DEBT EQUITY RATIO 2.68 1.83 1.1

(item 21 / item 48 )

52.PROFITABILITY % 1.46 5.14 7.

53.INTEREST COVERAGE RATIO 3.30 8.03 12.

COMMENTS ON THE FINANCIAL POSITION:

From the financial position of the company, we may offer comments / our observations /

interpretation as under:-

Capital/ Tangible Networth : Capital of the firm is 53.84crores which is constantas on 31.03.2009 and 31.03.2010. It is estimated to remain the same as on 31.03.2011.Tangible Networth is showing an increasing trend. It was 101.06crores as on31.03.2009 and 124.48crores as on 31.03.2010 which is favourable because itrepresents the liquidation proceeds a company would fetch if it shut down and soldoff all its assets. It is estimated to further increase to 157.50 as on 31.03.2011.

Sales. Sales of the company are showing an increasing trend. It was 456.47croresas on 31.03.2009 and increased to 524.94crores as on 31.03.2010. Considering the past trend, the estimated/projected sales may be accepted as reasonable andachievable.

Gross Profit/ Net Profit : Gross Profit/ Net Profit of the firm are indicating anincreasing trend. The researcher observed that the Bank justified the increasing trendin profit/profitability view of the increasing sales. Considering the past trend, theestimated/projected Gross/Net Profit and the profitability is also justified.


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RATIOS:

Current Ratio : Current Ratio at 1.74 as on 31.03.2009 and 2.04 as on 31.03.2010is above the Bench mark level which indicates a positive sign. However, the same isestimated to increase to 2.27 as on 31.03.2011.

Debt Equity Ratio : Debt Equity Ratio of the firm at 2.68 as on 31.03.2008 isfavourable, and the ratio has improved in the subsequent years andestimated/projected to further improve, Bank has accepted the same.

Interest Coverage Ratio: Interest Coverage ratio is 3.30 as on 31.03.2009 which is

favourable. It is necessary to have interest coverage of at least 1/1 to indicate acompany can pay its bills. However the same has improved to 8.03 as on 31.03.2010and estimated to further increase to 12.36 as on 31.03.2011

Profitability Ratio: Profitability% was 1.46 as on 31.03.2009 and has increased to5.14 as on 31.03.2010 which is acceptable as it indicates the ability to earn profit. It isestimated to further increase to to 7.04 as on 31.03.2011

The overall financial position of the firm can be considered satisfactory.

ASSESSMENT OF WORKING CAPITAL: (MPBF METHOD)In the instant case, the Company has not requested for any enhancement of the WorkingCapital Finance. It is a request for renewal of the existing Working Capital limit of Rs35.00crores. Since the request for Working Capital is more than 500.00lakh, theassessment of Working Capital is done on the basis of MPBF Method as per TandonCommittee recommendations

The firm has projected sales of Rs.577.43crores for FY 2011. Considering the salesturnover in the earlier years, the projected sales appear reasonable and achievable.


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Following is the Computation of Operating Cycle of M/s ABC PVT. LTD

(in days)

2009 2010 2011

Raw Material Consumption 150 150 150

Work In Process 19 20 21

Finished Goods 23 18 18

Receivables 28 37 44

Less S. Creditors 1.82 1.75 1.25Operating Cycle 218 223 234


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Following is the computation of Working Capital Assessment of M/s ABC PVT, Ltd

under MPBF Method:-

COMPUTATION OF MAXIMUM PERMISSIBLE BANK FINANCE FOR WORKINGCAPITAL

Name: M/s ABCPVT.

LTD

Amount Rs in Crores

Last 2 years Current Year

Audited Audited Estimates

31.03.2009 31.03.2010 31.03.2011

1.Total Current

Assets

111.69 135.10 150.92

2.Other CurrentLiabilities (Otherthan bankborrowings)

24.55 31.27 31.42

3.Working CapitalGap (WCG) (1-2)

87.14 103.83 119.50

4.25% of TotalCurrent Assets (asrequired under IIndMethod)

27.92 33.78 37.73

5.Actual / ProjectedNet WorkingCapital

47.61 68.83 84.50

6.Item 3 minus Item4

59.22 70.06 81.77

7.Item 3 minus Item5

39.53 35.00 35.00

8.MaximumPermissible BankFinance (Item 6 or 7whichever is lower)

39.53 35.00 35.00

9.Excess borrowingsrepresentingshortfall in NetWorking Capital

0.00 0.00 0.00


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5.2 Case Study 2

Following is the Analysis of Balance Sheet of M/s XYZ PVT. LTD


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Amount- Rs in Lakhs

M/s XYZ PVT. LTD, MUMBAI



LIABILITIES

Audited Audited Audited Audited Estimated Projectio

31.3.2007 31.3.2008 31.3.2009 31.3.2010 31.3.2011 31.3.20

CURRENT LIABILITIES


(incl. Bills purchased discounted


repayment basis

a) From applicant bank

b) From other banks

c) Of which BP and BD

SUB-TOTAL (A) 0.00 0.00 0.00 0.00 0.00 0.

2. Short term borrowings fromothers

3. Deposits (maturing within oneyear)

4. Sundry Creditors ( Trade) 8.08 8.8 43.95 47.46 51.26 55

5. Other Creditors

6. Advances/progress payment from

customers/deposits from dealers etc.,

7. Interest and other charged accruedbut

not due for payment.

8. Provisions for taxation

9. Dividend payable.

10.Other statutory liabilities(due within one year)

11.Instalments of TermLoans/deferred

paymentcredits/debentures/redeemable

preference shares(due within oneyear).

12.Other current liabilities andprovisions 0.33 0.35 1.37 1.43 1.48 1

(due within one year) Major items to

bespecified individually.

SUB-TOTAL (B) 8.41 9.15 45.32 48.89 52.74 56

13. TOTAL CURRENT

LIABILITIES 8.41 9.15 45.32 48.89 52.74 56


TERM LIABILITIES

14. Debentures (not maturing within

one year)

15. Redeemable preference shares(not maturing within one year, but


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From the financial position of the company, it may offer comments / our observations /interpretation as under:

Capital : Capital of the firm is indicating a study growth due to plough back ofprofit/ retention of profit in the business, which may be considered as a positiveaspect of the company. It is estimated to increase to Rs.47.85lakhs as on 31.03.2011and projected at Rs.81.38lakhs as on 31.03.2012. The researchers observation s thatwherever the Capital is estimated/ projected to increase, the Bank normally stipulatesobtention of CAs Certificate to confirm the same.

Sales : Sales of the company has almost doubled and it was at Rs.524.55lakhs as

on 31.03.2009 on YoY basis. The Bank analyses the reason for increase/ decrease insale and accordingly incorporates in the comments. Besides, Bank also seeks properreasoning/justification for the estimated/projected increase in sales.

Gross Profit/ Net Profit : Gross Profit/ Net Profit as also the profitability of thefirm is indicating an increasing trend. The researcher observed that the Bank justifiedthe increasing trend in profit/profitability view of the increasing sales. Consideringthe past trend, the estimated/projected Gross/Net Profit and the profitability is alsojustified.

RATIOS Current Ratio : Current Ratio at 1.17 as on 31.03.2008 and 1.39 as on 31.03.2009is a little more than the Bench mark level. However, the same is estimated to improveto 1.76 and 2.27 as on 31.03.2011 and 31.03.2012 respectively. The reason given bythe Bank for accepting the lower Current Ratio as on 31.03.2008 is that the firm hadto resort to purchases on credit to meet the increasing demand for supply of materials.On the other hand, realization of Debtors was slow, which adversely affected theCurrent Ratio.

Debt Equity Ratio : Debt Equity Ratio of the firm at 4.94 as on 31.03.2008though unfavourable, since the ratio has improved in the subsequent years and

estimated/projected to further improve, Bank has accepted the same. Nevertheless,Bank also stipulated to obtain a stamped undertaking from the firm that theunsecured loans will be retained in the business during the currency of Bank

finance.

Interest Coverage Ratio: Interest Coverage ratio is 7.01 as on 31.03.2009 and11.55 as on 31.03.2010 which is favourable. It is necessary to have an interestcoverage of at least 1/1 to indicate a company can pay its bills. It is estimated to furtherincrease to 18.86 as on 31.03.2011 and 28.36 as on 31.03.2012.


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Profitability Ratio: Profitability% is showing an increasing trend. It was 1.61 ason 31.03.2009 and has increased to 2.50 as on 31.03.2010 which is acceptable as itindicates the ability to earn profit. It is estimated to further increase to 3.60 as on31.03.2011 and 4.58 as on 31.03.2012

The overall financial position of the firm can be considered satisfactory.

ASSESSMENT OF WORKING CAPITAL: (TURNOVER METHOD)

The firm has requested for Working Capital limit of Rs.50.00lakhs. Since the request forWorking Capital is less than Rs.500.00lakhs, the assessment of Working Capital is doneon the basis of Turnover Method as per Nayak Committee recommendations

The firm has projected sales of Rs.798.00lakhs for FY 2012. Considering the salesturnover in the earlier years, the projected sales appear reasonable and achievable. TheWorking Capital requirement of the firm is assessed at Rs.127.17 as under on the basis ofTurnover method. limits upto Rs.500.00lakhs.

Following is the computation of Working Capital Assessment of M/s XYZ PVT, Ltd

under Turnover Method:-

Name: M/sXYZ PVT. LTD

Amount-Rs in lakhs

31.3.2007

31.3.2008

31.3.2009

31.3.2010 31.3.2011 31.3.2012

a) Gross Sales 162.52 221.41 524.55 603.24 693.72 797.78b)

25% of GrossSales

40.63 55.35 131.14 150.81 173.43 199.45

c) 5% of GrossSales

8.13 11.07 26.23 30.16 34.69 39.89

d)

Actual/ProjectedNet WorkingCapital

2 3.41 7.58 18.85 39.99 72.28


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e) (b-c) 32.5 44.28 104.91 120.65 138.74 159.56

f) (b-d) 38.63 51.94 123.56 131.96 133.44 127.17

g)

PermissibleBank Finance(Lower of e & f)

32.5 44.28 104.91 120.65 133.44 127.17

It may be gauged from the above that the Working Capital requirement of the firm worksout to more than Rs.50.00lakh. However, the firm has requested for Working Capitallimit of Rs.50.00lakhs only and hence the Bank has proposed sanction of Working capitallimit of Rs.50.00lakhs. The researcher observed that the firm is having sufficient NWC totake care of the shortfall and the Bank has also commented about this aspect in theassessment note..


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5.3 Case Study 3 Following is the Analysis of Balance Sheet of M/s PQR, PVT. LTD

Amount-Rs in Lakhs

M/s PQR PVT. LTD,

MUMBAI



LIABILITIES

31.3.2007 31.3.2008 31.3.2009 31.3.2010 31.3.2011 31.3.2012

CURRENT LIABILITIES


(incl. Bills purchaseddiscounted


repayment basis

a) From applicantbank 76.4 174.37 400.00 400.00 500 50

b) From other banks

c) Of which BP and

BDSUB-TOTAL (A) 76.40 174.37 400.00 400.00 500.00 500.0

2. Short term borrowingsfrom others

3. Deposits (maturing withinone year)

4. Sundry Creditors ( Trade) 267.79 204.52 142.39 239.17 293.42 303.2

5. Other Creditors

6. Advances/progresspayment from

customers/deposits fromdealers etc.,

7. Interest and other chargedaccrued but

not due for payment.

8. Provisions for taxation 38.72 73.58 67.4 78.73 96.99 117.3

9. Dividend payable.

10.Other statutory liabilities


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11.Instalments of TermLoans/deferred 66.72 66.72 38.76

paymentcredits/debentures/redeemable

preference shares(due withinone year).

12.Other current liabilitiesand provisions 46.45 28.39 53 76 92 10

(due within one year)( Majoritems to be

specified individually.)

SUB-TOTAL (B) 352.96 306.49 329.51 460.62 521.16 524.6

13. TOTAL CURRENT

LIABILITIES 429.36 480.86 729.51 860.62 1021.16 1024.6


LIABILITIES

31.03.2007

31.03.2008

31.03.2009

31.03.2010

31.03.2011 31.03.2012

TERM LIABILITIES

14. Debentures (not maturingwithin

one year)

15. Redeemable preferenceshares

(not maturing within oneyear, but

of maturity not exceeding 12years)

16. Term Loans(exclusive ofinstalments payable within 0 0 105.48 38.76 0 0

one year)

17. Deferred payment credit

(exclusive of instalmentspayable within one year)

18. Term Deposits(repayableafter one year)

19. Loan from familymembers 408.85 420.83 245.83 233.42 133.42

20. TOTAL TERM

LIABILITIES 408.85 420.83 351.31 272.18 133.42

(total of items 14 to 19)

21. TOTAL OUTSIDE 838.21 901.69 1080.82 1132.80 1154.58 1024.6


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LIABILITIES


NET WORTH

22. Partners' Capital 0.08 0.08 0.08 0.08 0.08 0.0

23. Partners Current A/c 132.44 239.47 309.05 423.98 611.94 763.4

24. General Reserve25. Development RebateReserve

26. Other Reserves(excluding provisions)

27. Surplus or Deficit in P& La/c

28. NET WORTH 132.52 239.55 309.13 424.06 612.02 763.5


29. TOTAL LIABLITIES 970.73 1141.24 1389.95 1556.86 1766.6 1788.1


ASSETS

31.03.2007

31.03.2008

31.03.2009

31.03.2010

31.03.2011 31.03.2012

CURRENT ASSETS

30. Cash and Bank Balance 3.05 11.43 16.22 17.16 20.21 23.4

31. Investment (Other thanlong

term investment e.g. Sinkingfund,

Gratuity fund, etc.,FDR)

31.a)Govnt and other TrusteeSecurities)

31.b)Fixed Deposits withbanks (less or upto 1 year) 20.34 57.3

32.a) Receiveable other thandeferred 255.21 330.94 340.37 360.52 552.97 594.8

and export receivables (incl.Bills

purchased & discounted bybankers)

32.b) Export receivables incl.,bills

purchased and discounted bybankers

33. Instalments of deferredreceivables


34. Inventory


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a) Raw materials (incl.,storesand

other items used in mfg.,process)

(i)Imported

(ii)Indigenous 263.04 268.11 575 716.99 741.99 731.9b) Stocks in Trade

c) Finished Goods

d) Other consumable spares

35. Advances to suppliers ofraw

materials and stores/spareparts

consumables

36. Advance payment of taxes

37.Loans & Advances -duties

& taxes 110.58 100.72 112.33 142.35 157.23 168.838. TOTAL CURRENT

ASSETS 652.22 768.50 1043.92 1237.02 1472.4 1519.1


FIXED ASSETS

39. Gross Block (Land &Building

Machinery, Construction inProgress,etc.) 452.31 527.1 527.1 527.1 527.1 527

40. Depreciation to date 139.53 160.09 186.81 212.99 238.65 263.7

41. NET BLOCK 312.78 367.01 340.29 314.11 288.45 263.3

(item 39 - item 40)

ASSETS

31.03.2007

31.03.2008

31.03.2009

31.03.2010

31.03.2011 31.03.2012

OTHER NON-CURRENT

ASSETS

42. Investment/Book-debts,Deposits

which are not current assets.

1. A) Investment insusidiary

Companies/affiliations etc.,

B) Others 5.74 5.74 5.74 5.74 5.74 5.7

2. Advances to suppliersof captial goods/spares andcontractors for capitalexpenditure

3. A) Deferred receivables(other


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than those maturing withinone year)

B) Others

43. Non consumable stores &spares

44. Other Misc. Assets(incl., dues from debtors)

45. TOTAL NON-

CURRENT ASSETS 5.74 5.74 5.74 5.74 5.74 5.7

( total of items 47 to item 49)

46. INTANGIBLE ASSETS 0.00 0.00 0.00 0.00 0

(Patents, goodwill, preliminary and formationexpenses, Bad/doubtful debtsnot provided for)

47. TOTAL ASSETS 970.73 1141.24 1389.95 1556.87 1766.6 1788.1

(totals of items 38,41,45 &46)

48. TANGIBLE

NETWORTH 132.52 239.55 309.13 424.06 612.02 763.5

(item 28 - item 46)

49. NET WORKING

CAPITAL 222.86 287.64 314.41 376.4 451.24 494.5

(item 38 - item 13)

50. CURRENT RATIO 1.52 1.60 1.43 1.44 1.44 1.4

(item 38 / item 13 )

51. DEBT EQUITY RATIO 6.33 3.76 3.50 2.67 1.89 1.3

(item 21 / item 48 )52. PROFITABILITY % 3.72 3.57 4.79 5.76 7.18 8.7

53. INTEREST

COVERAGE RATIO 6.72 5.95 6.25 6.90 9.85 13.8


From the financial position of the company, it may offer comments / our observations /interpretation as under:-

Capital/ Tangible Networth : Capital of the firm is 0.08lakhs which is constantas on 31.03.2009 and 31.03.2010. It is estimated & projected to remain the same as on31.03.2011 & 31.03.2012.


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Tangible Networth is showing an increasing trend. It was 309.13lakhs as on31.03.2009 and 424.06 lakhs as on 31.03.2010 which is favourable because itrepresents the liquidation proceeds a company would fetch if it shut down and soldoff all its assets. It is estimated to further increase to 612.02 lakhs as on 31.03.2011and projected at 763.57lakhs as on 31.03.2012.

Sales. Sales of the company is showing an increasing trend. It was 1815.31lakhsas on 31.03.2009 and increased to 2494.23lakhs as on 31.03.2010. The Bank analysesthe reason for increase/ decrease in sale and accordingly, incorporates in thecomments. Besides, Bank also seeks proper reasoning/justification for theestimated/projected increase in sales.

Gross Profit/ Net Profit : Gross Profit/ Net Profit of the firm is indicating anincreasing trend. The researcher observed that the Bank justified the increasing trendin profit/profitability view of the increasing sales. Considering the past trend, the

estimated/projected Gross/Net Profit and the profitability is also justified.

RATIOS

Current Ratio : Current Ratio at 1.43 as on 31.03.2009 and 1.44 as on 31.03.2010is above the Bench mark level which indicates a positive sign. However, the same isprojected to increase to 1.48 as on 31.03.2012.

Debt Equity Ratio :: Debt Equity Ratio of the firm at 3.50 as on 31.03.2009though unfavourable, since the ratio has improved in the subsequent years andestimated/projected to further improve, Bank has accepted the same. Nevertheless,Bank also stipulated to obtain a stamped undertaking from the firm that the

unsecured loans will be retained

renu final project

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