ICICI Bank _Working Capital Management_ Amity

7/31/2019 ICICI Bank _Working Capital Management_ Amity

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ICICI BANK WORKING CAPITAL MANAGEMENT


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EXECUTIVE SUMMARY

With the economy surging, things are getting better in the Banking Industry. There are

plenty of changes occurs daily. According to Reserve bank of Indias banking review of

2004 2005 there was a notable pick up in demand from industry for investments and a

surge in exports. Evidently, the industrys focus now is on scaling up both domestically

and in markets abroad, widening the product and services port folio, and better using

technology to make banking more accessible and efficient. Most of researchers

conclusion is, Whether or not the sectors actually opens up in 2009, banks should use

that as an opportunity to get their growth strategies in place. Not Just through organic

growth, but growth through mergers and acquisition. What India need is not a large

number of small banks, but a small number of large banks.

As the RBIs deputy Governor, V.Leeladhar, said at Indian Banking Associations Jan

31 Seminar on Indian Banks and the Global change there is growing realization that

the ability to cope with possible downside risks would depend among others on the

soundness of the financial system and the strength of Individual participation.

India is still cagey about foreign investments in banks. Though a dramatic changes

sweeping through the industry for some years now in the rise of Indias Public sector

bank and private sector still it should fuel its grow to open up eyes towards open

market. In this scenario, While we look at the sensex breach the 10,000 level for

the first time it was yet another sign the India as a market for global liquidity had

arrived. When, We start co-relating the Gross Domestic product (GDP) growth of

emerging markets are supposed to reflect the health of the economy where India

emerges as a key player, India is arguably the best placed amongst the entire emerging

market lot.

Form the Investors point of view earning growth, price-earning multiplies and of course

the performance of the economy matters. In the second part, is a project on How does

the ICICI working capital management requirement fulfil? The paper begins by

analyzing the current scenario in the industry characterized by problems with

distribution, low investor awareness and concentration of corporate investors. In the

next section, a comparison of the Banking Industry with global standards reveals that

the industry still compares unfavourably with developed countries in terms of


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penetration, investor awareness and diversity of products and the extent of use of risk

management techniques. Further comparison reveals that the attitude of regulator

towards investor protection and the governance of banking industry are at par with

global standards. The paper then analysis the future expectations from the banking

industry in terms of increased investor awareness, product diversity and

improvement in penetration and distribution. Strategy adopted by ICICI bank for future

prospectus are Revisiting the old themes in a new year, Return of the static era,

Capital account convertibility and currency crisis, G-sec: Rates heading north, ICICI

Bank operates in a highly automated environment in terms of information technology

and communication systems. The entire bank's branches have connectivity which

enables the bank to offer speedy funds transfer facilities to its customers. Multi-branch

access is also provided to retail customers through the branch network and Automated

Teller Machines (ATMs).

Here the study is made of the financial analysis, the marketing management how

the marketing is done in order to achieve the organizational goals and objectives,

the study is done on the recruitment procedure followed by the bank and how they

maintain them. This report describes about the types of services provided by the

bank and their benefits on the part of the bank which type of additional benefitsthey provide to their costumers in order to maintain them and attract them to

invest more and more with the bank.


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CONTENT

ABSTRACT.....................................................................................................ii

SIGNATORY PAGE......................................................................................iii

TOPIC APPROVAL LETTER.......................................................................iv

ACKNOWLEDGMENT.................................................................................v

APPROVED THESIS SYNOPSIS...............................................................vii

INTRODUCTION .................................................................................................1

PROFILE..............................................................................................................25

LITERATURE REVIEW.....................................................................................41

RESEARCH METHODOLOGY.........................................................................57

FINDING AND ANALYSIS...............................................................................59

CONCLUSION....................................................................................................71

RECOMMENDATION.......................................................................................73

BIBLIOGRAPHY................................................................................................75

ANNEXURE QUESTIONNAIRE...................................................................76


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INTRODUCTION

HISTORY OF INDIAN BANKING

A bank is a financial institution that provides banking and other financial services. By

the term bank is generally understood an institution that holds a Banking Licenses.

Banking licenses are granted by financial supervision authorities and provide rights to

conduct the most fundamental banking services such as accepting deposits and making

loans. There are also financial institutions that provide certain banking services without

meeting the legal definition of a bank, a so-called Non-bank. Banks are a subset of the

financial services industry.

The word bankis derived from the Italian banca, which is derived from German and

means bench. The terms bankrupt and "broke" are similarly derived from banca rotta,

which refers to an out of business bank, having its bench physically broken.

Moneylenders in Northern Italy originally did business in open areas, or big open

rooms, with each lender working from his own bench or table.

Typically, a bank generates profits from transaction fees on financial services or the

interest spread on resources it holds in trust for clients while paying them interest on the

asset. Development of banking industry in India followed below stated steps.

Banking in India has its origin as early as the Vedic period. It is believed that

the transition from money lending to banking must have occurred even before

Manu, the great Hindu Jurist, who has devoted a section of his work to deposits

and advances and laid down rules relating to rates of interest.

Banking in India has an early origin where the indigenous bankers played a very

important role in lending money and financing foreign trade and commerce.

During the days of the East India Company, was the turn of the agency houses

to carry on the banking business. The General Bank of India was first Joint

Stock Bank to be established in the year 1786. The others which followed were

the Bank Hindustan and the Bengal Bank.

In the first half of the 19th century the East India Company established three

banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bankof Madras in 1843. These three banks also known as Presidency banks were


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amalgamated in 1920 and a new bank, the Imperial Bank of India was

established in 1921. With the passing of the State Bank of India Act in 1955 the

undertaking of the Imperial Bank of India was taken by the newly constituted

State Bank of India.

The Reserve Bank of India which is the Central Bank was created in 1935 by

passing Reserve Bank of India Act, 1934 which was followed up with the

Banking Regulations in 1949. These acts bestowed Reserve Bank of India (RBI)

with wide ranging powers for licensing, supervision and control of banks.

Considering the proliferation of weak banks, RBI compulsorily merged many of

them with stronger banks in 1969.

The three decades after nationalization saw a phenomenal expansion in the

geographical coverage and financial spread of the banking system in the

country. As certain rigidities and weaknesses were found to have developed in

the system, during the late eighties the Government of India felt that these had

to be addressed to enable the financial system to play its role in ushering in a

more efficient and competitive economy. Accordingly, a high-level committee

was set up on 14 August 1991 to examine all aspects relating to the structure,

organization, functions and procedures of the financial system. Based on the

recommendations of the Committee (Chairman: Shri M. Narasimham), a

comprehensive reform of the banking system was introduced in 1992-93. The

objective of the reform measures was to ensure that the balance sheets of banks

reflected their actual financial health. One of the important measures related to

income recognition, asset classification and provisioning by banks, on the basis

of objective criteria was laid down by the Reserve Bank.

The introduction of capital adequacy norms in line with international standards has

been another important measure of the reforms process.

1. Comprises balance of expired loans, compensation and other bonds such as National

Rural Development Bonds and Capital Investment Bonds. Annuity certificates are

excluded.


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2. These represent mainly non- negotiable non- interest bearing securities issued to

International Financial Institutions like International Monetary Fund, International

Bank for Reconstruction and Development and Asian Development Bank.

3. At book value.

4. Comprises accruals under Small Savings Scheme, Provident Funds, Special Deposits

of Non- Government

In the post-nationalization era, no new private sector banks were allowed to be

set up. However, in 1993, in recognition of the need to introduce greater

competition which could lead to higher productivity and efficiency of the

banking system, new private sector banks were allowed to be set up in the

Indian banking system. These new banks had to satisfy among others, the

following minimum requirements:

(i) It should be registered as a public limited company;

(ii) The minimum paid-up capital should be Rs 100 crore;

(iii) The shares should be listed on the stock exchange;

(iv) The headquarters of the bank should be preferably located in a centre

which does not have the headquarters of any other bank; and

(v) The bank will be subject to prudential norms in respect of banking

operations, accounting and other policies as laid down by the RBI. It

will have to achieve capital adequacy of eight per cent from the very

beginning.

A high level Committee, under the Chairmanship of Shri M.

Narasimham, was constituted by the Government of India in

December 1997 to review the record of implementation of financial

system reforms recommended by the CFS in 1991 and chart the

reforms necessary in the years ahead to make the banking system

stronger and better equipped to compete effectively in international

economic environment. The Committee has submitted its report to

the Government in April 1998. Some of the recommendations of the


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Committee, on prudential accounting norms, particularly in the areas

of Capital Adequacy Ratio, Classification of Government guaranteed

advances, provisioning requirements on standard advances and more

disclosures in the Balance Sheets of banks have been accepted and

implemented. The other recommendations are under consideration.

The banking industry in India is in a midst of transformation, thanks

to the economic liberalization of the country, which has changed

business environment in the country. During the pre-liberalization

period, the industry was merely focusing on deposit mobilization

and branch expansion. But with liberalization, it found many of its

advances under the non-performing assets (NPA) list. More

importantly, the sector has become very competitive with the entry

of many foreign and private sector banks. The face of banking is

changing rapidly. There is no doubt that banking sector reforms have

improved the profitability, productivity and efficiency of banks, but

in the days ahead banks will have to prepare themselves to face new

challenges.

WORKING CAPITAL - OVERALL VIEW

Working Capital management is the management of assets that are current in nature.

Current assets, by accounting definition are the assets normally converted in to cash in a

period of one year. Hence working capital management can be considered as the

management of cash, market securities receivable, inventories and current liabilities. In

fact, the management of current assets is similar to that of fixed assets the sense that is

both in cases the firm analyses their effect on its profitability and risk factors, hence

they differ on three major aspects:

1. In managing fixed assets, time is an important factor discounting and

compounding aspects of time play an important role in capital budgeting and a minor

part in the management of current assets.

2. The large holdings of current assets, especially cash, may strengthen the firms

liquidity position, but is bound to reduce profitability of the firm as ideal car yield

nothing.


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3. The level of fixed assets as well as current assets depends upon the expected

sales, but it is only current assets that add fluctuation in the short run to a business.

To understand working capital better we should have basic knowledge about the

various aspects of working capital. To start with, there are two concepts of working

capital:

Gross Working Capital

Net working Capital

Gross Working Capital: Gross working capital, which is also simply known as working

capital, refers to the firms investment in current assets: Another aspect of gross

working capital points out the need of arranging funds to finance the current assets. The

gross working capital concept focuses attention on two aspects of current assets

management, firstly optimum investment in current assets and secondly in financing the

current assets. These two aspects will help in remaining away from the two danger

points of excessive or inadequate investment in current assets. Whenever a need of

working capital funds arises due to increase in level of business activity or for any other

reason the arrangement should be made quickly, and similarly if some surpluses are

available, they should not be allowed to lie ideal but should be put to some effective

use.

Net Working Capital: The term net working capital refers to the difference between the

current assets and current liabilities. Net working capital can be positive as well as

negative. Positive working capital refers to the situation where current assets exceed

current liabilities and negative working capital refers to the situation where current

liabilities exceed current assets. The net working capital helps in comparing theliquidity of the same firm over time. For purposes of the working capital management,

therefore Working Capital can be said to measure the liquidity of the firm. In other

words, the goal of working capital management is to manage the current assets and

liabilities in such a way that a acceptable level of net working capital is maintained.

Importance of working capital management:

Management of working capital is very much important for the success of the business.

It has been emphasized that a business should maintain sound working capital position


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and also that there should not be an excessive level of investment in the working capital

components. As pointed out by Ralph Kennedy and Stewart MC Muller, the

inadequacy or mis-management of working capital is one of a few leading causes of

business failure.

Current assets, in fact, account for a very large portion of the total investment of the

firm.

Determinants of Working Capital:

There is no specific method to determine working capital requirement for a business.

There are a number of factors affecting the working capital requirement. These factors

have different importance in different businesses and at different times. So a thorough

analysis of all these factors should be made before trying to estimate the amount of

working capital needed. Some of the different factors are mentioned here below:-

1. Nature of business: Nature of business is an important factor in determining the

working capital requirements. There are some businesses which require a very

nominal amount to be invested in fixed assets but a large chunk of the total

investment is in the form of working capital. There businesses, for example, are

of the trading and financing type. There are businesses which require large

investment in fixed assets and normal investment in the form of working capital.

2. Size of business: It is another important factor in determining the working

capital requirements of a business. Size is usually measured in terms of scale of

operating cycle. The amount of working capital needed is directly proportional

to the scale of operating cycle i.e. the larger the scale of operating cycle the

large will be the amount working capital and vice versa.

3. Business Fluctuations: Most business experience cyclical and seasonal

fluctuations in demand for their goods and services. These fluctuations affect

the business with respect to working capital because during the time of boom,

due to an increase in business activity the amount of working capital

requirement increases and the reverse is true in the case of recession. Financial

arrangement for seasonal working capital requirements are to be made in

advance.


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4. Production Policy: As stated above, every business has to cope with different

types of fluctuations. Hence it is but obvious that production policy has to be

planned well in advance with respect to fluctuation. No two companies can have

similar production policy in all respects because it depends upon the

circumstances of an individual company.

5. Firms Credit Policy: The credit policy of a firm affects working capital by

influencing the level of book debts. The credit term is fairly constant in an

industry but individuals also have their role in framing their credit policy. A

liberal credit policy will lead to more amount being committed to working

capital requirements whereas a stern credit policy may decrease the amount of

working capital requirement appreciably but the repercussions of the two are not

simple. Hence a firm should always frame a rational credit policy based on the

credit worthiness of the customer.

6. Availability of Credit: The terms on which a company is able to avail credit

from its suppliers of goods and devices credit/also affects the working capital

requirement. If a company in a position to get credit on liberal terms and in a

short span of time then it will be in a position to work with less amount of

working capital. Hence the amount of working capital needed will depend upon

the terms a firm is granted credit by its creditors.

7. Growth and Expansion activities: The working capital needs of a firm increases

as it grows in term of sale or fixed assets. There is no precise way to determine

the relation between the amount of sales and working capital requirement but

one thing is sure that an increase in sales never precedes the increase in working

capital but it is always the other way round. So in case of growth or expansion

the aspect of working capital needs to be planned in advance.

8. Price Level Changes: Generally increase in price level makes the commodities

dearer. Hence with increase in price level the working capital requirements also

increases. The companies which are in a position to alter the price of these

commodities in accordance with the price level changes will face fewer

problems as compared to others. The changes in price level may not affect all

the firms in same way. The reactions of all firms with regards to price levelchanges will be different from one other.


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Every running business needs working capital. Even a business which is fully equipped

with all types of fixed assets required is bound to collapse without

(i) Adequate supply of raw materials for processing;

(ii) Cash to pay for wages, power and other costs;

(iii) Creating a stock of finished goods to feed the market demand regularly; and,

(iv) The ability to grant credit to its customers.

All these require working capital. Working capital is thus like the lifeblood of a

business. The business will not be able to carry on day-to-day activities without the

availability of adequate working capital.

Cash Creditors

Raw material

Work in

Working

Finished

Debtors

Working Capital

Cycle


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CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital

1. Gross Working Capital

2. Net Working Capital

Gross Working Capital

Gross Working Capital refers to the firms investment in current assets. Current assets

are the assets which can be converted into cash within an accounting year and include

cash, short-term securities, debtors, bills receivable and stock.

Net Working Capital

Net Working Capital refers to the difference between current assets and current

liabilities. Current liabilities are those claims of outsiders which are expected to mature

for payment within an accounting year and include creditors, bills payable, andoutstanding expenses.

OPERATING AND CASH CONVERSION CYCLE

Operating cycle is the time duration in which a firm is able to convert its resources into

cash. The operating cycle of a manufacturing ICICI BANK. involves three phases:

Acquisition of resources such as raw material, labour, power and fuel etc.


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Manufacture of the product which includes conversion of raw material into

work-in-progress into finished goods.

Sale of the product either for cash or on credit. Credit sales create account

receivable for collection.

Calculation of Gross Operating Cycle

Gross Operating Cycle = Inventory conversion period (in days) + Debtors conversion

period (in days) Where,

Inventory conversion period = Raw material conversion period (RMCP) + Work-in-

progress conversion period (WIPCP) + Finished goods conversion period (FGCP).

Calculation of Net Operating Cycle (NOC) or Cash Conversion Cycle (CCC)

Net operating cycle = Gross operating cycle Creditors deferral period

NOC = GOC CDP

RECEIVABLE MANAGEMENT

A firm grants trade credit to protect its sales from the competitors and to attract the

potential customers to buy its products at favourable terms. Trade credit creates

accounts receivable or trade debtors that the firm is expected to collect in near future.

Credit Policy

The term credit policy is used to refer to the combination of three decision variables:

Credit standards are criteria to decide the types of customers to whom goods

could be sold on credit.

Credit terms specify duration of credit and terms of payment by customers.


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Collection efforts determine the actual collection period. The lower the

collection period the lower the investment in accounts receivable and vice versa.

Why do companies grant Credit?

Companies in practice feel the necessity of granting credit for several reasons:

Competition: Generally the higher the degree of competition, the more the

credit granted by a firm.

ICICI BANK. s bargaining power: If ICICI Bank. has a higher bargaining

power vis--vis its buyers, it may grant no or less credit. The ICICI BANK.

will have a strong bargaining power if it has a strong product, monopoly power,

brand image, large size or strong financial position.

Buyers requirements: In a number of business sectors buyers/dealers are not

able to operate without extended credit. This is particularly so in the case of

industrial products.

Buyers status: Large buyers demand easy credit terms because of bulk

purchases and higher bargaining power. Some companies follow a policy of not

giving much credit to small retailers since it is quite difficult to collect dues

from them.

Relationship with dealers: Companies sometimes extend credit to dealers to

build long-term relationships with them or to reward them for their loyalty.

Marketing tool: Credit is used as a marketing tool, particularly when a new

product is launched or when ICICI Bank. wants to push its weak product.

Industry practice: Small companies have been found guided by industry

practice or norm more than the large companies. Sometimes companies

continue giving credit because of past practice rather than industry practice.

Transit delays: This is a forced reason for extended credit in the case of a

number of companies in India. Most companies have evolved system to

minimize the impact of such delays. Some of them take the help of banks to

control cash flows in such situation.


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Credit-granting Decision

Once a firm has assessed the creditworthiness of a customer, is has to decide whether or

not credit should be granted. The firm should use the NPV rule to make the decision. If

the NPV is positive, credit should be granted. If the firm chooses not to grant any credit,

the firm avoids the possibility of any loss but loses the opportunity of increasing its

profitability. On the other hand, if grants credit, then it will benefit if the customer pays.

There is some probability that the customer will default, and then the firm may lose its

investment. The expected net payoff of the firm is the difference between the present

value of net benefit and present value of the expected loss.


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Factoring

Factoring is a popular mechanism of managing, financing and collecting receivables in

developed countries like USA and UK and now has extended to a number of othercountries in the recent past, including India.

Collection of receivables poses a problem, particularly for small-scale enterprises.

Banks have the policy of financing receivables. However, this support is available for a

limited period and the seller of goods and services has to bear the risk of default by

debtors.

Credit Granting

No

No pay-off

Grant

Payment Payment

PV of

Future Net

Cash Flow

Benefit Cost

PV of Lost

Investme

PV of

Net Payoff


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Factoring differs from a bank loan in three main ways.

First, the emphasis is on the value of the receivables, not the firms credit worthiness.

Secondly, factoring is not a loan it is the purchase of an asset i.e. the receivable.

Finally, a bank loan involves two parties whereas factoring involves three parties.

Factoring Services

While purchase of receivables is fundamental to the functioning of factoring, the factor

provides the following three basic services

Sales ledger administration and credit management.

Credit collection and protection against default and bad-debt losses.

Financial accommodation against the assigned book debts.

Costs and Benefits of Factoring

There are two types of costs involved:

The factoring commission or service fee

The interest on advance granted by the factor to the firm.

Factoring has the following benefits:

Factoring provides specialized service in credit management, and thus, helps the

firms management to concentrate on manufacturing and marketing.

Factoring helps the firm to save cost of credit administration due to the scale of

economies and specialization.

Ideally, factoring should benefit allclient, customers and factor. This may not happen

because of the lack of clarity as regards the roles of the client and the factor, inept

handling of credit and other functions by the client and the factor, overestimation of

benefits or underestimation of costs etc. the client should understand that the factor can

function efficiently with his full cooperation.
http://en.wikipedia.org/wiki/Bank_loanhttp://en.wikipedia.org/wiki/Receivableshttp://en.wikipedia.org/wiki/Credit_worthinesshttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Bank_loanhttp://en.wikipedia.org/wiki/Receivableshttp://en.wikipedia.org/wiki/Credit_worthinesshttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Asset


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WORKING CAPITAL FINANCE

Two most significant short-term sources of finance for working capital are:

Trade credit and,

Bank finance

Trade Credit

Trade credit refers to the credit that a customer gets from suppliers of goods in the

normal course of business. In practice, the buying firms do not have to pay cash

immediately for the purchases made. This deferral of payments is a short term financing

called trade credit. In India, it contributes to about one-third of the short-term financing.

Trade credit is mostly an informal arrangement, and is granted on an open account

basis. The buyer does not formally acknowledge it as a debt; he does not sign any legal

instrument. Open account trade credit appears as sundry creditors on the buyers

balance sheet.

Advantages of Trade Credit

Easy availability: Unlike other sources of finance, trade credit is relatively easy

to obtain. The easy availability is particularly important to small firms which

generally face difficulty in raising funds from the capital markets.

Flexibility: Trade credit grows with the growth in firms sales. The expansion

in the firms sales causes its purchases of goods and services to increase which

is automatically financed by trade credit.

Informality: Trade credit is an informal, spontaneous source of finance. It does

not require any negotiations and formal agreement.

Cost of Trade Credit

The supplier extending trade credit incurs costs in the form of the opportunity cost of

funds invested in accounts receivable and the cost of any cash discount taken by the

buyer. Most of the time he passes on all or part of these costs to the buyer implicitly in

the form of higher purchase price of goods and services supplied. The user of trade


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credit, therefore, should be aware of the costs of trade credit to make use of it

intelligently.

Accrued Expenses and Deferred Income

Accrued expenses represent a liability that a firm has to pay for the services which it

has already received. Thus they represent a spontaneous, interest-free sources of

financing. The most important component of accruals are wages and salaries, taxes and

interest.

Accrued wages and salaries represent obligations payable by the firm to its

employees. The firm incurs a liability the moment employees have rendered services.

They are, however, paid afterwards, usually at some fixed interval like one month.

Accrued taxes and interest constitute another source of financing. Corporate taxes are

paid after the firm has earned profits. These taxes are paid quarterly during the year in

which profits are earned. This is a deferred payment of the firms obligation and thus, is

a source of finance.

Deferred income represents funds received by the firm for goods and services which it

has agreed to supply in future. These receipts increase the firms liquidity in the form ofcash; therefore, they constitute an important source of financing.

Bank finance for working capital

Banks are the main institutional source of working capital finance in India. After trade

credit, bank credit is the most important source of financing working capital

requirements.

Forms of bank finance

A firm can draw funds from its bank within the maximum credit limit sanctioned. It can

draw funds in the following forms:

Overdraft:

Under the overdraft facility, the borrower is allowed to withdraw funds in excess of the

balance in his current account up to a certain specified limit during a stipulated period.


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It is a very flexible arrangement from the borrowers point of view since he can

withdraw and repay funds whenever he desires within the overall stipulations.

Cash credit:

The cash credit facility is similar to the overdraft arrangement. It is the most popular

method of bank finance for working capital in India. Under the cash credit facility, a

borrower is allowed to withdraw funds from the bank upto the sanctioned credit limit.

He is not required to borrow the entire sanctioned credit once, rather, he can draw

periodically to the extent of his requirements and repay by depositing surplus funds in

his cash credit account. Cash credit limits are sanctioned against the security of current

assets. Cash credit is a most flexible arrangement from the borrowers point of view.

Purchasing or discounting of bills:

Under the purchase or discounting of bills, a borrower can obtain credit from a bank

against its bills. The bank purchases or discounts the borrowers bills. Before

purchasing or discounting the bills, the bank satisfies itself as to the creditworthiness of

the drawer. When a bill is discounted, the borrower is paid the discounted amount of the

bill. The bank collects the full amount on maturity.

Letter of credit:

Suppliers, particularly the foreign suppliers, insist that the buyer should ensure that his

bank will make the payment if he fails to honour its obligation. This is ensured through

a letter of credit(L/C) arrangement. A bank opens an L/C in favour of a customer to

facilitate his purchase of goods. If the customer does not pay to the supplier within the

credit period, the bank makes the payment under the L/C arrangement. This

arrangement passes the risk of the supplier to the bank. Bank charges the customer for

opening the L/C.

Working capital loan:

A borrower may sometimes require ad hoc or temporary accommodation in excess of

sanctioned credit limit to meet unforeseen contingencies. Banks provide such

accommodation through a demand loan account or a separate non-operable cash credit

account. The borrower is required to pay a higher rate of interest above the normal rate

of interest on such additional credit.


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Commercial Paper

Commercial paper is an important money market instrument in advanced countries like

USA to raise short-term funds. In India, the Reserve Bank of India (RBI) introduced the

commercial paper scheme in the Indian money market in 1989. Commercial paper is a

form of unsecured promissory note issued by firms to raise short-term funds. The

commercial paper market in the USA is a blue-chip market where financially sound and

highest rated companies are able to issue commercial papers. The buyers of commercial

papers include banks, insurance companies, unit trusts and firms with surplus funds to

invest for a short period with minimum of risk. Given this investment objective of the

investors in the commercial paper market, there would exist demand for commercial

papers of highly creditworthy companies.


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COMPANY PROFILE

ICICI Bank is Indias second-largest bank. It has a network of about 614 branches and

extension counters and over 2,200 ATMs. ICICI Bank offers a wide range of banking

products and financial services to corporate and retail customers through a variety of

delivery channels and through its specialized subsidiaries and affiliates in the areas of

investment banking, life and non-life insurance, venture capital and asset management.

ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross

border needs of clients and leverage on its domestic banking strengths to offer products

internationally.

ICICI Bank currently has subsidiaries in the United Kingdom, Russia and Canada,branches in Singapore, Bahrain, Hong Kong, Sri Lanka and Dubai International

Finance Centre and representative offices in the United States, United Arab Emirates,

China, South Africa and Bangladesh. Our UK Subsidiary has established a branch in

Belgium. ICICI Bank is the most valuable bank in India in terms of market

capitalization. ICICI Banks equity shares are listed in India on the Bombay stock

Exchange and the National Stock Exchange of India Limited and its American

Depositary Receipts ((ADRs) are listed on the New York Stock Exchange (NYSE).

ICICI Bank has formulated a Code of Business Conduct and Ethics for its directors and

employees. At June 5, ICICI Bank, with free float market capitalization* of about Rs.

480.00 billion ranked third amongst all the companies listed on the Indian Stock

exchanges. ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian

financial institution, and was its wholly-owned subsidiary. ICICIs shareholding in

ICICI Bank was reduced to 46% through a public offering of shares in Indian fiscal

1998, an equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI

Banks acquisition of Bank of Madura Limited in all-stock, amalgamation in fiscal

2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and

fiscal 2002.

ICICI was formed in 1955 at the initiative of the World Bank, the Government of India

and representatives of Indian industry. The principal objective was to create a

development financial institution for providing medium-term and long-term project

financing to Indian businesses. In the 1990s, ICICI transformed its business from adevelopment financial institution offering only project finance to a diversified financial


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services group offering a wide variety of products and services, both directly and

through a number of subsidiaries an affiliates like ICICI Bank. In 1999, ICICI become

the first Indian company and the first bank or financial institution, from non-Japan Asia

to be listed on the NYSE.

After consideration of various corporate structuring alternatives in the context of the

emerging competitive scenario in the Indian banking industry, and the move towards

universal banking, the managements of ICII and ICICI Bank formed the view that the

merger of ICICI with ICICI Bank would be the optimal strategic alternative for both

entities, and would create the optimal legal structure for the ICICI groups universal

banking strategy.

The merger would enhance value for ICICI shareholders through the merged entittys

access to low-cost deposits, greater opportunities for earning fee-based income and the

ability to participate in the payments system and provide transaction-banking services.

The merger would enhance value for ICICI Bank shareholders through a large capital

base and scale of operations, seamless access to ICICIs strong corporate relationships

built up over five decades, entry into new business segments, hither market share in

various business segments, particularly fee-based services, and access to the vast talent

pool of ICICI hand its subsidiaries. In October 2001, the Boards of Directors of ICICI

and ICICI Bank approved the merger of ICICI Personal Financial Services Limited and

ICICI Capital Services Limited, with ICICI Bank

The merger was approved by shareholders of ICICI and ICICI Bank in January 2002,

and by the High Court of Judicature at Mumbai and the Reserve Bank of India in April

2002. Consequent to the merger, the ICICI groups financing and banking operations,

both wholesale and retail, have been integrated in a single entity.

*Free float holding excludes all promoter holdings, strategic investments and cross

holdings among public sector entities. ICICI Bank disseminates information on its

operation and initiatives on a regular basis. The ICICI Bank website serves as a key

investor awareness facility, a lowing stake holders to access information on ICICI

Bank at their convenience. ICICI Banks dedicated investor relations personal play a

proactive role in disseminating information to both analysts and investors and respond

to specific queries.


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LITRATUR REVIEW

Working Capital Management is the process ofplanning and controlling the level and

mix of current assets of the firm as well as financing these assets. Specifically, Working

Capital Management requires financial managers to decide what quantities of cash,

other liquid assets, accounts receivables and inventories the firm will hold at any point

of time.

Working capital is the capital you require for the working i.e. functioning of your

business in the short run.

Gross working capital refers to the firms investment in the current assets and includes

cash, short term securities, debtors, bills receivables and inventories.

It is necessary to concentrate on the fact that the investment in the current assets should

be neither excessive nor inadequate.

WC requirement of a firm keeps changing with the change in the business activity and

hence the firm must be in a position to strike a balance between them. The financial

manager should know where to source the funds from, in case the need arise and where

to invest in case of excess funds.

The dangers of excessive working capital are as follows:

1. It results in unnecessary accumulation of inventories. Thus the chances of

inventory mishandling, waste, theft and losses increase

2. It is an indication of defective credit policy and slack collection period.

Consequently higher incidences of bad debts occur which adversely affects

the profits.

3. It makes the management complacent which degenerates into managerial

inefficiency

4. Tendencies of accumulating inventories to make speculative profits grow.

This may tend to make the dividend policy liberal and difficult to copes with

in future when the firm is unable to make speculative profits.

The dangers of inadequate working capital are as follows:


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1. It stagnates growth .It becomes difficult for the firms to undertake

profitable projects for non-availability of the WC funds.

2. It becomes difficult to implement operating plans and achieve the firms

profit targets

3. Operating inefficiencies creep in when it becomes difficult even to meet

day-to-day commitments.

4. Fixed assets are not efficiently utilized. Thus the rate of return on

investment slumps.

5. It renders the firm unable to avail attractive credit opportunities etc.

6. The firm loses its reputation when it is not in position to honor its short-

term obligations. As a result the firm faces a tight credit terms.

Net working capital refers to the difference between the current assets and the current

liabilities. Current liabilities are those claims of outsiders, which are expected to mature

for payment within an accounting year and include creditors, bills payable, bank

overdraft and outstanding expenses.

When current assets exceed current liabilities it is called Positive WC and when current

liabilities exceed current assets it is called Negative WC.

The Net WC being the difference between the current assets and current liabilities is a

qualitative concept. It indicates:

The liquidity position of the firm

Suggests the extent to which the WC needs may be financed by permanent

sources of funds

It is a normal practice to maintain a current ratio of 2:1. Also, the quality of current

assets is to be considered while determining the current ratio. On the other hand a weak

liquidity position poses a threat to the solvency of the ICICI BANK. and implies that it

is unsafe and unsound. The Net WC concept also covers the question of judicious mix

of long term and short-term funds for financing the current assets.


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Permanent and variable working capital:

The minimum level of current assets required is referred to as permanent working

capital and the extra working capital needed to adapt to changing production and sales

activity is called temporary working capital.

NEED AND IMPORTANCE OF WORKING CAPITAL MANAGEMENT

The importance of working capital management stems from the following reasons:

1. Investment in current assets represents a substantial portion of the total

investment.

2. Investments in current asset and the level of current liabilities have to be gearedquickly to change in sales, which helps to expand volume of business.

3. Gives ICICI Bank. the ability to meet its current liabilities

4. Take advantage of financial opportunities as they arise.

A firm needs WC because the production, sales and cash flows are not instantaneous.

The firm needs cash to purchase raw materials and pay expenses, as there may not be

perfect matching between cash inflows and outflows. Cash may also be held up to meet

future exigencies. The stocks of raw materials are kept in order to ensure smooth

production and to protect against the risk of non-availability of raw materials. Also

stock of finished goods has to be maintained to meet the demand of customers on

continuous basis and sudden demand of some customers. Businessmen today try to

keep minimum possible stock as it leads to blockage of capital. Goods are sold on credit

for competitive reasons. Thus, an adequate amount of funds has to be invested in

current assets for a smooth and uninterrupted production and sales process. Because of

the circulating nature of current assets it is sometimes called circulating capital.

All firms do not have the same WC needs .The following are the factors that affect the

WC needs:

1. Nature and size of business: The WC requirement of a firm is closely

related to the nature of the business. We can say that trading and financial

firms have very less investment in fixed assets but require a large sum ofmoney to be invested in WC. On the other hand Retail stores, for example,


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have to carry large stock of variety of goods little investment in the fixed

assets.

Also a firm with a large scale of operations will obviously require more WC than the

smaller firm. The following table shows the relative proportion of investment in current

assets and fixed assets for certain industries:

Each component of working capital namely inventory, receivables and payables has

two dimensions time and money. When it comes to managing working capital - Time Is

Money. Therefore, if cash is tight, consider other ways of financing capital investment -

loans, equity, leasing etc. Similarly, if you pay dividends or increase drawings, these

are cash outflows remove liquidity from the business.

If you ....... Then ......

Collect receivables (debtors) faster You release cash from the cycle

Collect receivables (debtors) slower Your receivables soak up cash

Get better credit from suppliers You increase your cash resources

Shift inventory (stocks) faster You free up cash

Move inventory (stocks) slower You consume more cash


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Operating Cycle Of Non Manufacturing Firms / Operating Cycle Of Service And

Financial Firms

Operating cycle of non-manufacturing firm like the wholesaler and retail includes

conversion of cash into stock of finished goods, stock of finished goods into debtors

and debtors into cash. Also the operating cycle of financial and service firms involves

conversion of cash into debtors and debtors into cash.

Thus we can say that the time that elapses between the purchase of raw material

and collection of cash for sales is called operating cycle whereas time length

between the payment for raw material purchases and the collection of cash for

sales is referred to as cash cycle. The operating cycle is the sum of the inventory

period and the accounts receivables period, whereas the cash cycle is equal to the

operating cycle less the accounts payable period.

DEBTORS

CASH

STOCK OF

FINISHED

GOODS

DEBTORSCASH


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ORDER PLACED

STOCK ARRIVES

INV. PERIOD

CASH Pd. FOR MATERIALS

OPERATING CYCLE

FIRM REC. INVOICE

A/CS Pay.Period

CASH RECD.

A/CS REC. PERIOD

CASH CYCLE


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RESEARCH METHODOLOGY

The objective of working capital management is to maintain the optimum balance of

each of the working capital components. This includes making sure that funds are held

as cash in bank deposits for as long as and in the largest amounts possible, thereby

maximizing the interest earned. However, such cash may more appropriately be

invested in other assets or in reducing other liabilities. My objectives of analyzing

working capital management in ICICI BANK are as follows:

To study the method which ICICI BANK is using to ascertain its working

capital requirement?

To learn about the sources from which ICICI BANK is procuring funds to fulfill

its working capital requirements.

To study where the procured funds have been used by ICICI BANK.

To study whether the company is running effectively with as little money tied

up in current accounts as possible.

To analyze whether the method being used for ascertainment of working capital

requirement is efficient or not.

To have an appreciation of the financial environment within which business

operates.

f. Methodology

METHODOLOGY

The study is based on personal decision, interview schedules, documentary observation;

the data has been collected from the executives of the organization and through the

published sources.

RESEARCH

The research work is restricted only to the ICICI BANK SYSTEM. The study is based

on the outcomes of personal interviews and documentary observation. But the extreme

care has been taken to involve the constructive suggestion from the executives. The


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success of research basically depends upon the method, which is adopted to solve the

research problem i.e.

a) To collect desired information and data in a systematic manner.

b) Appropriate selection of method is necessary.

The first & foremost step in any research procedure is:-

STEP 1: Problem Formulation

It is a very important step which has to be understood properly and clearly on which the

study is based because it tells the scope of the study and it should not go beyond it nor

should execute some irrelevant aspect. In this case the study is based on how ICICIBANK manages its Working capital requirements.

STEP 2: Objectives of the Study

After the problem formulation the objectives should be clear through which specific

type of information can be collected. The objective of this is to study about the

management of Working Capital for day to day business transactions.

STEP3: Determine source data

The third step includes the collection of data, which is from the source i.e. primary

secondary data. After the collection of data, it should be organized and analyzed to

check whether the objectives are fulfilled or not.

After analyzing the data investigation of research had worked out with the help of

following steps:

Research design

Tools & techniques

RESEARCH DESIGN:

A research is an arrangement of conditions for the collection & analysis of data in a

manner that aims the research purpose and achievements of goal with economy in

procedure depending on research problem. The study of Working Capital is generallybased on documentary evidences.


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TOOLS AND TECHNIQUES:

In order to conduct the study the following methods were adopted.

1. Personal Discussion: There is certain information related to the subject which isknown to employees of the office so through connecting with the employees

and executives the information is gathered. Like, about the company profile, its

inception, growth etc.

2. Direct Personal Interviews: The investigator personally approaches the

concerned people and asks them to furnish information, which is of material

input for the enquiry. Therefore these ideas, suggestions views are collected on

the topic through interview.

3. Documentary observation: The investigator consults the secondary sources like

journals, annual reports, magazines, books, unpublished material from library,

internet and the area office.

COLLECTION OF DATA

Primary data: are those that are collected for the first time by the investigator and the

primary data used ad collected for this study are:-

Direct Personal Interview with my project guide at ICICI BANK

Indirect Oral Investigation auditors and other concerned employees at ICICI

BANK

Information through e-mail about the components of operating cycle from the

ICICI BANK At Delhi.

Secondary data: are not collected but obtained from the published and unpublished

sources and the secondary data collected for this study are:-

Published data about ICICI BANK , through newspapers, magazines, research

institutes, journals and books.

Unpublished data through scholars, libraries, area office in ICICI BANK .

Company information from their ICICI BANK S official website


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DATA ANALYSIS AND FINDING

CIRCULATION SYSTEM OF WORKING CAPITAL

In the beginning the funds are obtained by issuing shares, often supplemented by long

term borrowings. Much of these collected funds are used in purchasing fixed assets and

remaining funds are used for day to day operation as pay for raw material, wages

overhead expenses. After this finished goods are ready for sale and by selling the

finished goods either account receivable are created and cash is received. In this process

profit is earned. This account of profit is used for paying taxes, dividend and the

balance is ploughed in the business.

Working capital is considered to efficiently circulate when it turns over quickly. As

circulation increases, the investment in current assets will decrease. Current assets

turnover ratio speaks about the efficiency of ICICI bank in the utilisation of current

assets. Fast turnover current assets results in a better rate on investment.

Table showing Current Assets Turnover Ratio

Year Ratio (in times)

207 1.78

2008 2.98

2009 1.98

Average: 2.24

The ratio average is 2.24 times in the study period of 3 years. In 2008 current assets

turnover ratio is highest one i.e. 2.98 during the 3 year study. Reasons being during this

0

0.5

1

1.5

2

2.5

3

2007 2008 2009


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year company has achieved sales growth 44.36% over the previous year and additional

activity needs more funds.

ICICI BANK LTD.

Ratios useful to analyze working capital management

(A) Efficiency Ratios 2007 2008 2009 Ideal Ratio

1. Working Capital Turnover (times) 4.84 10.23 5.71 -

2. Current Assets Turnover (times) 1.78 2.98 1.97 -

3. Inventory turnover (times) 9.49 9.20 7.88 -

(B) Liquidity Ratio

1. Current Ratio 2.12 1.80 2.41 2.0

2.AcidTestRatio 1.15 0.98 1.03 1.0

3. Cash Ratio 0.57 0.08 0.05 0.5


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Interpretation (Ratio Analysis)

The utilization rate of net working capital as depicted by working capitalturnover ratio is fluctuating during the period. It shows that working capital has

not been effectively used over the period of years except in the year 2008.

As shown by current assets turnover ratio, the utilisation of current assets in

terms of sales has shown a decreasing trend which shows that current assets has

been effectively used to achieve sales.

Again if we look at the efficiency with which individual elements of workingcapital have been utilized, the picture of inventory turnover is not very bright.

Receivables turnover also shows a declining trend. Generally such a situation

does not suit the company.

As we look at the extent of liquidity of working capital, we notice that the ratio

shows an increasing trend. This indicates improvement on the liquidity front.

(C) Structural Health of Working Capital

Ratio/Year 2004 2005 2006

1. CA 0.31 0.26 0.35

2. CL 0.15 0.14 0.14

3. Cash to CA 0.27 .04 0.02

4. Receivables to CA 0.27 0.50 0.40

5. Loans and Advances to CA 0.15 0.19 0.15

6. Inventory to CA 0.42 0.38 0.50

7. RM to Inventory 0.44 0.46 0.30

8. Stock spares to inventory 0.12 0.14 0.11

9. WIP to inventory 0.06 0.08 0.03

10. Finished Goods to Inventory 0.38 0.32 0.56


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If we analyze the structural health of working capital, the proportion of current

assets to total assets has been appropriate during this period.

Such a higher proportion of current asset in the assets portfolio of ICICI Bank. is quite

acceptable.

Our analysis above indicates the areas of concern to management in making best

possible use of resources. Decreasing efficiency in the use of current assets hints of the

possibility of problems in working capital management. On further analysis, inventory

constitutes a major proportion of total current assets. Among its various components,

raw materials, stocks, spared and finished goods in particular need further analysis as

here stand out to the problem areas.

Cash Flow Statement (200 8-09)

Sources Amount A

( in Lacs)

Application Amount B

(in Lacs)

Proceeds from

borrowings

162.37 Loss from operation 185.27

Sale of assets 27.34 Change in cash 5.01

Total 190.28 190.28

Summary of Cash Flow Analysis

a) Cash from operation to total cash available

= 185.31/190.28 = 97.38%

b) Cash from long term sources to total cash available

= 162.37/190.28 = 85.33%

c) Proceeds from sale of non-current assets to total cash

= 17 14/19028 = 0.90%


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Schedule of Changes in Working Capital

Particulars Amount

(in lacs)

Changes in Working

Capital

Dec2008 Dec2009 Increase

(Debit)

Decrease

(Credit)

Current Assets

Inventories 93.87 146.36 52.48 -

Sundry Debtors 123.22 114.71 - 8.51

Cash and Bank

balances

10.64 5.63 - 5.01

Other current assets 20.14

247.87

21.66

288.36

1.52 -

Current Liabilities 137.02 116.07 20.95 -

Working capital (CA-CL) 110.85 172.29

Increase in Working Capital 61.44 - 61.44

172.29 172.29

74.96 74.96


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Fund Flow Statement (200 8-09)

Sources Amount A

(in lacs)

Application Amount B

(in Lacs)

Increase in loan 162.37 Increase in working capital 61.44

Sale of asset 22.94 Loss from operation 123.87

Total 185.31 185.31

Summary of Fund Flow Analysis

1. Increase in net working capital 61.44

2. Funds from operations to finance permanent address (123.87)

3. Ratio of fund flow from operations to total funds in the business (-)

123.87/85.31 = (66.85)

Interpretation (Fund Flow Statement)

1. Networking capital has been increased over the years, which has increased

liquidity

2. Company should take corrective actions to covert loss from operation to funds

from operation.

3.1 CURRENT RATIO:

This is the most widely used ratio. It is the ratio of current assets and current liabilities.

It shows a firms ability to cover its current liabilities with its current assets. Generally

2:1 is considered ideal for a concern i.e., current assets should be twice of the currentliabilities. If the current assets are two times of the current liabilities, there will be no


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adverse effect on business operations when the payment of current liabilities is made.

If the ratio is less than 2, difficulty may be experienced in the payment of current

liabilities and day to day operation of the business may suffer. If the ratio is higher

than 2, it is comfortable for the creditor but, for the business concern, it is indicator of

idle funds and a lack of enthusiasm for work. It is calculated as follows:

CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES

For the calculation this ratio

Current assets include inventories, sundry debtors, cash and bank

balances and loans & advances

Current liabilities include Current liabilities and provisions.

3.2. QUICK RATIO (OR) ACID TEST RATIO:

This is the ratio of liquid assets to current liabilities. Is shows a firms ability to

meet current liabilities with its most liquid or quick assets. The standard ratio 1:1 is

considered ideal ratio for a concern. Liquid assets are those, which can be easily

converted in to cash within a short period of time without loss of value. This ratio can

be calculated by using the formula:

LIQUID RATIO = LIQUID ASSETS / CURRENT LIABILITIES

For the calculation of this ratio

A liquid asset of quick asset includes Sundry Debtors, Cash and Bank balance

and Loan & Advances.

Current liabilities include Current Liabilities and Provisions.

3.3. CASH RATIO:-

Generally receivables are more liquid the inventories, but there may be dough regarding

their reliability in time. Hence only absolute liquid assets such as Cash in hand, Cash at

bank, Marketable Securities are ideal taken into consideration 1:2 is considered as ideal

ratio. This ratio also called absolute Liquid Ratio.

This ratio is shown as :-


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CASH RATIO = ABSOLUTE LIQUID ASSETS / CURRENT LIABITIES

3.4. INTERNAL MEASURE:-

Yet another ratio, which assets a firms ability to meet its regular cash expenses, the

internal measure relates liquid assets to average daily operating cash out flows. The

daily operating expenses will be equal to cost of goods sold plus selling administrative

and general expenses less depreciation divided by number of days in the year.

INTERNAL MEASURE = CURRENT ASSETS INVENTORY / AVERAGE

DAILY OPERATING EXPENCES.

3.5. NET WORKING CAPITAL RATIO:-

The difference between current assets and current liabilities including short term bank

borrowing is called Net Working Capital or Net Current Assets. Net Working Capital in

sometimes used as a measure of a firms liquidity. It is considered that, between two

firms, the one having the larger Net Working Capital has the greater the ability to meet

its current obligation. This is not necessarily so the measure of liquidity is a

relationship, rather than the difference between Current Assets and Current Liabilities.

Net Working Capital how ever, measure the firms potential reservoir of funds. It can

be related to net assets.

NET WORKING CAPITAL = NET WORKING CAPITAL / NET ASSETS.

3.6. INTEREST COVERAGE RATIO:-

This ratio indicates whether the earnings of a firm are sufficient to pay interest charges

periodically or not. In other words, it is calculated to know whether the creditors are

secured or unsecured, in respect of their periodical interest income it is also called as

Debt Secure Ratio or fixed charges cover.

INTEREST COVERAGE RATIO = NET PROFIT BEFORE INCOME TAX /INTEREST CHARGES.


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3.7. INVENTORY TURNOVER RATIO:

This ratio, also known as Stock Turnover Ratio, establishes relationship

between cost of goods sold during a given period and the average amount of inventory

held during that period. This ratio reveals the number of items finished stock is turned

over during a given accounting period. Higher the ratio the better it is because it shows

that finished stock rapidly turned over. On the other hand, a low stock turnover ratio is

not desirable because it reveals the accumulation of obsolete stock, or the carrying of

too much stock. This ratio is calculated as follows:

INVENTORY TURNOVER= COST OF GOODS SOLD / AVERAGE STOCK


COST OF GOODS COLD = OPENING STOCK + PURCHASES +

MANUFACTURING EXPENSES - CLOSING STOCK

AVERAGE STOCK = OPENING STOCK + CLOSING STOCK /2

SIGNIFICANCE

If this ratio is high, it indicates the efficient of management in converting stock into

cash quickly, sound liquidity position and liquidity of goods maintained

3.8. DEBTORS TURNOVER RATIO:

When a firm sells goods on credit, book debts are created. Debtors are

expected to be converted into cash over a short period. To a great extent, the amount

and quality of debtors determine the liquidity position of the firm. Debtors Turnover

Receivables Turnover is calculated by dividing credit sales by average debtors. This

ratio indicates the number of times, on an average the debtors or receivables turnover

each year. Generally, the higher the value of debtors turnover, the more efficiency is

the management of assets. Sometimes, data relating to credit sales, opening balance


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and closing balance of debtors may not be available. Then the debtors turnover can be

calculated by dividing total sales by closing balance of debtors.


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DEBTORS TURNOVER RATIO = CREDIT SALES / AVERAGE DEBTORS

(OR)

AVERAGE TRADE DEBTORS = TOTAL SALES / CLOSING DEBTORS

(OR)

AVERAGE TRADE DEBTORS = (OPENING TRADE DEBTORS + BILLS

PAYABLE) + (CLOSING TRADE DEBTORS + BILLS RECIEVABLES) / 2

SIGNIFICANCE:-

Higher D.T.O Ratio indicators more efficient collection of debtors and signifies the

more liquidity of debts and lower D.T.O Ratio, indicates more inefficient collection of

debts and signifies less liquidity of debts.

3.9. COLLECTION PERIOD:-

The average number of days for which Debtors remain outstanding is called the average

collection period and can be computed as follows.

AVERAGE COLLECTION PERIOD = DEBTORS / SALES * 360

3.10. FIXED ASSETS TURNOVER RATIO:-

Fixed Assets turn over ratio is calculated to measure the adequacy or otherwise of

shown as Investment in Fixed Assets.

This ratio is shown as.

FIXED ASSETS TURN OVER RATIO = COST OF GOODS SOLD (OR)

SALES / NET FIXED ASSETS.

SIGNIFICANCE:-

This ratio is very significant for the manufacturing concerns. High ratio indicates

efficiency in work performance where as low ratio means inadequate investment in

fixed assets.


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3.11. NET ASSETS TURN OVER RATIO:-

The firm can compute net assets turnover simply by dividing sales by net assets

NET ASSETS TURNOVER = SALES / NET ASSETS

It may be recalled that net assets (or) net fixed assets and net current i.e. current assets

equal capital liabilities. Since net assets equal to net capital employed, net assets

turnover may also be called capital employed turnover.

3.12. RETURN ON EQUITY:-

This ratio is also known as Net Worth ratio or Return on Share Holders

Funds. ROE established relationship between Net Profit after Tax and Share HoldersFunds. It is expressed as

ROE = NET PROFIT (after tax) / SHAREHOLDERS FUND * 100

SHAREHILDERS: - EQUITY SHARE CAPITAL + PREFERANCE SHARE

CAPITAL + ACCUMULATED.PROFITS ACCUMULATED LOSES

SIGNIFICANCE:-

R.O.E is very significant in measuring the overall profitability or operational efficiency

of ICICI Bank. . It enables the management to know whether the basic objective of the

business maximization of profits is achieved or not and the shareholders to decide

whether their investment is safe and remunerative of ICICI Bank. can also be

measured by means of a trend ratios calculated for several number of years.

CURRENT ASSETS TURNOVER RATIO:

This ratio measures the contribution of current assets to sales generation. If we

get higher ratio, it indicates that there is more contribution of Current Assets in

generating sales. On the other hand, if we get lower ratio, it indicates that there is not

much contribution of Current Assets in generating of sales. It is calculated by dividing

the Net Sales value by the Current Assets Value.

CURRENT ASSETS TURNOVER RATIO = NET SALES / CURRENT ASSETS


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Net Sales included all Sales during the particular year.

Current Assets included inventories, Sundry Debtors, Cash & Bank Balance andLoans & Advances.


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CURRENT RATIO:

Current ratio is the relation ship between current assets and current liabilities. It is

expressed as

Current ratio = {current assets / current liabilities}

YearCurrent assets

(Rs)

Current

liabilities(Rs)Ratio

2004-2005 408,239,314 15,72,02,165 2.60

2005-2006 23,27,51,034 6,12,73,808 3.81

2006-2007 22,118,248 5,45,10,612 4.06

2007-2008 22,080,768 6,00,75,063 3.67

2008-2009 256,866,676 7,24,93,761 3.54

INTERPRETATION:-

During 2004-2009, the current ratio of the ICICI BANK. was 2.60, 3.81 4.06 3.67 and

3.54. This indicates that for every rupees of Current Liability,ICICI BANK. has more

that 2 rupees to pay for it for all years of study the current ratio is more than the

standard ratio of 2:1

3.1.2. QUICK RATIO:


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Quick ratio is the relationship between quick assets and current assets and current assets

means current assets-stock-prepaid expenses. Quick ratio is also means Liquid ratio or

Acid test ratio. This ratio may be expressed as follows.

Quick ratio = Quick assets

Current liabilities

Year Quick assets(RS) Current

liabilities(RS)

Ratio

2004-2005 29,12,88,906 15,72,02,105 1.85

2005-2006 14,06,44,910 6,12,73,808 2.29

2006-2007 15,24,45,596 5,45,10,612 2.83

2007-2008 16,76,74,581 6,00,75,063 2.79

2008-2009 19,43,93,190 7,24,93,761 2.68

1.85

2.29

2.83 2.792.68

0

0.5

1

1.5

2

2.5

3

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

RATIO

YEARS

QUICK RATIO

RATIO

INTERPRETATION:- standard ratio is 1:1

During 2004-2009 , the quick ratio of the ICICI BANK. was 1.85, 2.29, 2.83, 2.79,

2.68 times. It was more than the standard ratio of 1:1


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3.1.3. CASH RATIO:-

Cash ratio = Absolute Liquid Ratio / Current Ratio

Year Absolute Liquid

Assets

Current

liabilities(RS)

Ratio

2004-2005 3,39,69,015 15,72,02,165 0.22

2005-2006 2,47,36,325 6,12,73,808 0.40

2006-2007 2,16,26,781 5,45,10,612 0.39

2007-2008 4,17,12,910 6,00,75,063 0.69

2008-2009 4,28,47,929 7,24,93,761 0.59

0.22

0.4 0.39

0.69

0.59

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

RATIO

YEARS

CASH RATIO

RATIO

INTERPRETATION:-

During 2004-2009 , the Cash Ratio of the ICICI BANK. was 0.22, 0.44, 0.39, 0.69, and

0.59. times. During 2008-2009 on an average ICICI BANK. has 0.45 times of current

liabilities.


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3.1.4. INTERNAL MEASURE:-

Internal measure = {Current Assets Inventory / Average Daily Operating

Expenses}.

YearCurrent assets

Inventory

Average Daily

Operating

Expenses

Ratio

2004-2005 29,12,88,906 15,05,888 193.43

2005-2006 14,06,44,910 9,12,301 154.16

2006-2007 15,42,45,396 6,58,809 234.13

2007-2008 16,76,74,581 7,87,168 213.01

2008-2009 19,43,93,190 11,89,431 165.95

0

50

100

150

200

250

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

193.43

154.16

234.13

213.01

165.95

RATIO

YEARS

INTERNAL MEASURE

RATIO

INTERPRETATION:-

During 2005-2006 Internal Measure was 193.43 days. This indicates that ICICI BANK.

will be able to run the business without cash for about 193.43 days. During 2006-2007

the measure was 154.16, 234.13, 213.01, 165.95, days. During the period of study

2008-2009 ratio has reduced i.e. 193.43 days to 56 days.


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3.1.5. NET WORKING CAPITAL RATIO:-

Net working capital = Net Working capital / Net Assets.

YearNet Working

CapitalNet Assets Ratio

2004-2005 25,53,14,751 28,75,84,831 0.89

2005-2006 18,00,92,070 21,79,29,890 0.83

2006-2007 1,78,73,80,54 21,51,16,997 0.83

2007-2008 17,02,24,200 20,68,27,087 0.82

2008-2009 1,93,67,86,78 23,04,00,145 0.84

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

0.89

0.83 0.83 0.820.84

RATIO

YEARS

NET WORKING CAPITAL

INTERPRETATION:-


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During 2004-2009 , The Net Working Capital Ratio of the ICICI BANK. was 0.89,

0.83, 0.83, 0.823 and 0.84 times. For all the years of Analysis, for one rupee of Net

assets with the ICICI BANK. , it has less than one rupee of Net Working Capital.

3.1.6. INTEREST COVERAGE RATIO:-

Interest coverage ratio = Earning Before Income Tax / Interest charges.

YearEarning Before

Income TaxNet Assets Ratio

2004-2005 5,70,88,927 2,11,55,402 2.69

2005-2006 3,72,61,281 1,84,06,065 2.02

2006-2007 1,94,17,633 91,56,027 -2.12

2007-2008 3,15,09,427 85,41,299 3.68

2008-2009 7,28,92,192 83,80,203 8.69

-4

-2

0

2

4

6

8

10

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

2.69 2.02

-2.12

6.68

8.69

RATIO

YEARS

INTEREST COVERAGE RATIO

RATIO


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INTERPRETATION:-

During 2004-2009 , the interest coverage ratio of the ICICI BANK. was 2.69, 2.02,

-2.12, 3.68, 8.69 times. During 2002-2004 and 2005-2007, it has a satisfactory interest

coverage ratio. Bit During 2004-2005, it showed a negative rate; indicate the inefficient

operation of the ICICI BANK. .

3.1.7. INVENTORY TURNOVER RATIO:-

Inventory Turnover Ratio = Cost Of Goods Sold / Average Inventory.

YearCost Of Goods

Sold

Average

Inventory

Ratio Reciprocal

Days

2004-2005 38,36,34,765 10,15,48,932 3.78 95.23

2005-2006 21,50,49,422 10,50,28,266 2.05 175.06

2006-2007 18,01,30,846 7,99,89,388 2.25 160

2007-2008 21,09,96,524 6,00,02,919 3.52 102.2

2008-2009 28,27,08,034 11,55,73,673 2.45 146.93


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0

0.5

1

1.5

2

2.5

3

3.5

4

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

3.78

2.05 2.25

3.52

2.45RATIO

YEARS

INVENTORY TURNOVER RATIO

ratio

INTERPRETATION:-

During 2008-2009 the ICICI BANK. was turning its inventory of finished goods into

sales 7.5 times, 3.09, 2.45, 1.456, and 1.154, times in a year. It has shown a decreasing

trend during the period of study. The reciprocal of inventory turnover which gives the

average inventory holdings in a year shows that ICICI BANK. was holding inventory

for 48, 115, 147, 247, and 312 days in a year. From past two years it was very high,

indicating the poor management of sales affairs.

3.1.8 DEBTORS TURNOVER RATIO:-

Debtors Turnover Ratio = Credit Sales / Average Trade Debtors.

Year Credit SalesAverage Trade

DebtorsRatio

2004-2005 56,08,70,712 19,54,05,750 2.87

2005-2006 33,36,01,680 18,66,14,238, 1.78


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2006-2007 23,80,00,904 24,85,27,400 0.96

2007-2008 32,37,69,616 25,85,80,486 1.25

2008-2009 47,84,22,373 27,75,06,937 1.72

2.87

1.78

0.96

1.25

1.72

0

0.5

1

1.5

2

2.5

3

3.5

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

TIMES

YEARS

DEBTORS TURNOVER RATIO

Ratio

INTERPRETATION:-

During 2007-2008 the Debtors Turnover Ratio was around 2.87 times. This indicates

that the collection of debt is good in this year also indicates that debtors that debtors are

being connected into cash 2times in a year. During 2006-2007, 2008-2009, 2006-2007

the ratio was 1.78, 0.96, 1.25 1.72 times

3.1.9. Debtors Collection Period:

Collection Period = Debtors / Sales * 100.

Year

Debtors

Credit Sales Ratio

Days


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2004-2005 2,57,319,891 56,08,70,712 2.18 165.16

2005-2006 1,15,908,585 33,36,01,680 2.88 125.08

2006-2007 1,32,618,815 23,80,00,904 1.79 200.59

2007-2008 1,12,961,761 32,37,69,616 2.57 140.06

2008-2009 15,15,45,260 47,84,22,373 3.16 114.03

0

0.5

1

1.5

2

2.5

3

3.5

2004-20052005-20062006-20072007-20082008-2009

2.18

2.88

1.79

2.57

3.16

RATIO

YEARS

COLLECTION PERIOD

Ratio

INTERPRETATION:-

During 2004-2009 the ICICI BANK. was turning its debtors 165, 125, 200, 140, and

114 times in a year. During 2005-2006, it was high indicating the poor quality of

debtors. But during 2006-2007, it has shown declining trend indicating the

improvement of quality of debtors.


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3.1.10. FIXED ASSETS TURNOVER RATIO:-

Fixed Assets Turnover Ratio = Sales / Net Fixed Assets.

Year SalesNet Fixed

Assets

Ratio Reciprocal

Days

2004-2005 15,13,53,218 3,22,70,080 17.38 0.06

2005-2006 10,27,63,700 3,78,37,820 8.82 0.11

2006-2007 6,83,83,700 3,63,78,943 6.54 0.15

2007-2008 12,47,43,127 3,66,02,887 8.85 0.112

2008-2009 17,69,69,283 3,67,21,467 13.02 0.08

0

2

4

6

8

10

12

14

16

18

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

17.38

8.82

6.54

8.85

13.02

RATIOINTIMES

YEARS

FIXED ASSETS TURNOVER RATIO

Ratio

INTERPRETATION:-

During 2004-2009 , the FAT Ratio was 17.38, 8.82, 6.54, 8.85, and 13.02 times. The

reciprocal of this ratio was 0.06, 0.11, 0.15, 0.112, and 0.08. The Current Assets

Turnover Ratio was 2.19, 1.83, 1.33, 1.90, and 2.47, times. The reciprocal of this ratio


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was 0.46, 0.54, 0.75, 0.58, and 0.40 times. This indicates that for every one rupee of

sales ICICI BANK. needs respective 0.06 invested in FAs and 0.46 invested in CAs.

3.1.11. NET ASSETS TURNOVER RATIO:-

Net Assets Turnover Ratio = Sales / Net Assets.

Year Sales Net Assets Ratio

2004-2005 56,08,70,712 28,75,84,831 1.95

2005-2006 33,36,01,680 21,79,29,890 1.53

2006-2007 23,80,00,904 21,51,16,997 1.11

2007-2008 32,37,69,616 20,68,27,087 1.56

2008-2009 47,84,22,373 23,04,00,145 2.08


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0

0.5

1

1.5

2

2.5

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

1.95

1.53

1.11

1.56

2.08

RATIO(%)

YEARS

NET ASSETS TURNOVER RATIO

Ratio

INTERPRETATION:-

During 2004-2005 the Net Assets Turnover Ratio of the ICICI BANK. was 1.95 times

it implies the ICICI BANK. is producing Rs 1.95 of sales for 1 rupee of capital

employed in Net Assets. During 2008-2009 the Net Assets Turnover Ratio of the ICICIBANK. was 1.53, 1.11, 1.56, 2.08 times.

3.1.12. RETURN ON EQUITY:-

Return on Equity = Net Profit / Share Holders Funds * 100.

Year Net ProfitShare Holders

FundsRatio

2004-2005 2,21,25,320 9,10,04,379 24.31

2005-2006 1,22,92,460 10,10,11,016 12.17


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2006-2007 -95,21,547 9,03,83,661 -10.53

2007-2008 1,78,70,361 10,63,40,760 16.80

2008-2009 42,56,84,613 14,49,09,975 29.37

-15

-10

-5

0

5

10

15

20

25

30

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

24.31

12.17

-10.53

16.8

29.37

R.O.E(%)

YEARS

RETURN ON EQUITY

Ratio

INTERPRETATION:-

During 2004-2009 the return on equity of the ICICI BANK. was 24031, 12.17, -10.53,

16.80, and 29.37 %. It was very low during 2004-2005, where as 2007-2008 showed an

improvement by 29.37 %.

3.1.13 CURRENT ASSETS TURN OVER RATIO:


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Current Assets Turnover Ratio = {Sales / Net Current Assets}

Year Sales Net current Assets Ratio

Reciprocal

Ratio(Times)

2004-2005 56,08,70,712 25,53,14,751 2.19

0.46

2005-2006 33,36,01,680 18,00,92,070 1.85 0.54

2006-2007 23,80,00,904 17,87,38,054 1.33 0.75

2007-2008 32,37,69,616 17,02,24,200 1.90 0.53

2008-2009 47,84,22,373 19,36,78,678 2.47 0.40

0

0.5

1

1.5

2

2.5

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

2.19

1.85

1.33

1.9

2.47

Ratio(times)

years

Current Assets Turnover Ratio

ratio

Interpretation:

The Current Assets Turnover ratio was 2.19, 1.85, 1.33, 1.90, and 2.47 times. The

reciprocal of this ratio was 0.46, 0.54, 0.75,

Documents

ICICI Bank _Working Capital Management_ Amity