Project Report on Working Capital Assessment (1)

7/28/2019 Project Report on Working Capital Assessment (1)

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Work Flow Model

Flow chart for Deposits


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Customer Inquiry

New

Officer/Manager explains

rules of business/Bank

requirements and

compliance to KYCguidelines.

Acceptance by manager

and authorize to open

Clerk opens the A/c

/completes the formalities

Officer/Manager

Verify/ Authorize

Existing

Reject

Request for fund transfer

from SB A/c to Deposit A/c

Passbook updating/

Issue of deposit receipt

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Flow chart for Advances

Customer Inquiry

New

Compliance with KYC

guidelines.

Manager/Branch in charge discussion

a. Availability scheme resources

b. Explain Bank requirements

c. Accept application and details

d. Process the application

e. Sanction

f. Pass on to the appropriate

account

Clerk opens the account/Documentation/ Disbursement

Not viable

Existing

Acceptance

Reject

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Future growth and Prospectus

The coming years are likely to be of strong but uneven global growth. As financial

markets continue to normalize and households and firms reduce their indebt ness,

growth is projected to gradually strengthen the emerging and developed economies. The

IMF projected global growth at 4.5% for 2012. Emerging economies will continue

to lead global growth. However, uncertainties in the form of higher oil and non-oil

commodity prices and public debt pose risk to global growth.

Indian economy is expected to continue its broad based growth momentum in FY12

backed by strong investment and consumption demand. Domestic demand will

continue to hold the key to GDP growth. Inflation is under control after a long period.

A strong saving and investment and consumption rates, favorable capital market

conditions, capital flows and positive business outlook will also help the economy to

maintain its growth momentum. Services sector will be a major contributor in the

positive domestic outlook and banking sector will continue to be among the

performing sectors in FY12. Efforts to bring in more inclusive growth and focus on

the rural economy would propel the growth engine of the economy further.

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McKinsey's 7s Framework

The McKinsey 7S framework is developed in the early 1980s by Tom Peters and

Robert Waterman, two consultants working at the McKinsey & Company consulting

firm, the basic premise of the model is that there are seven internal aspects of anorganization that need to be aligned if it is to be successful. The 7S model can be used in a

wide variety of situations where an alignment perspective is useful.

The McKinsey 7S model involves seven interdependent factors which are categorized as

either "hard" or "soft" elements:

"Hard" elements are easier to define or identify and management can directly

influence them: These are strategy statements; organization charts and reporting lines; and

formal processes and IT systems.

"Soft" elements, on the other hand, can be more difficult to describe, and are less

tangible and more influenced by culture. However, these soft elements are as

important as the hard elements if the organization is going to be successful.

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Strategy:

The key elements for the Bank's business strategy are;

To focus on quality growth opportunities by maintaining and enhancing the

strengths in services

Use technology for competitive advantage and customer centric progressive

bank

Branch expansion to provide services to a larger customer segment during

2010-11 210 branches were added. On January 2012, there were 3432 branches

of the Bank.

To become one stop financial supermarket, the Bank has forayed into newer

areas of banking products and services to meet the increasing needs of the

customers.

Systems:

The Bank has taken various proactive technology initiatives to maintain its

competitive edge in Indian banking industry. Canara Bank has chosen Flex cube from

Oracle Financial Services as the software application. Now all branches of Canara

Bank are live on core banking application Flex cube.

Flex cube is a universal banking solution for retail, corporate, internet and investment

banking, from front to back office work. Flex cube also has the ability to support

multi-bank, multi-currency, and multi-channel operations, using a widely recognized data

model that will keep abreast of market dynamics. Canara Bank has a strong pan India

presence with 2623 ATMs

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Style:

In Canara Bank, the decisions are taken by the top management concerning matters

related to the organization. The decisions relating to department matters are taken by the

departmental heads. The bank follows a participative leadership style which allows

the ideas, suggestions etc. for the betterment of the bank. The team members are

cooperative rather than being competitive.

Staff:

The departments in the Bank consist of Senior Manager/Manager, Officers, Clerks

and sub-staff. The HR policies of the Bank have been reinvented and refocused time

and again to suit to the changing banking scenario. HR interventions like SPANDAN

for bringing attitudinal change among front line staff, PRATIBHA for grooming in-

house talents in varied specialized areas and executive grooming through reputed

institutes and other significant HR tools like Quality Circles, Staff meetings and Brain

Storming Sessions have been implemented for effective team building and fostering

collective excellence. Specialized trainings to the Senior Management level/ Top level

executives are conducted based on the requirement. Canara Bank has more than

45,800 employees and business per employee and profit per employee is Rs. 12.28

crores and Rs. 9.76 Lakhs respectively.

Skills:

Training policies and programs are suitably designed, modified and updated on a

continuous basis to upgrade the knowledge levels and skills of its Executives,

Officers, and Workmen on par with the best in the industry. While several new

programs are introduced in tune with the corporate goals, the existing programs are

made more interactive and learner friendly. Risk management and Basel II are the

focus areas of their training programs.

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Shared Values:

Canara Bank was founded on these Principles,

1. To remove Superstition and ignorance.

2. To spread education among all to sub-serve the first principle.

3. To inculcate the habit of thrift and savings.

4. To transform the financial institution not only as the financial heart of the

community but the social heart as well.

5. To assist the needy.

6. To work with sense of service and dedication.

7. To develop a concern for fellow human being and sensitivity to the

surroundings with a view to make changes/remove hardships and sufferings.

"A good bank is not only the financial heart of the community, but also one with an

obligation of helping in every possible manner to improve the economic conditions of the

common people"

- A. Subba Rao Pai

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SWOT Analysis

Strengths:

1. The Bank have well experienced, well trained, most dedicated and committed

staff. There are sustained and focused efforts at every level, by each employee of

the Bank, to continue to build up core deposits.

2. Strong rural presence.

3. It is well equipped to meet the challenges of 21st century, in the areas of IT,

Knowledge and competition.

4. It has launched Core Centralized banking solutions where all branches are

connected live.

5. The Bank has specialized branches catering to the specific clientele segment.

Weaknesses:

1. The Bank does not have many overseas branches.

2. As the employees are experienced the Bank has more number of aged workforces.

Opportunities:

1. Controlling NPA through cash recovery. NPA was at 1.11% (Rs. 2347 crores) for

the year ended 31st

March, 2011.

2. To expand overseas business.

3. Upward revision in Deposit/interest rates attracts new customers/deposits.

4. Up gradation in technological products saves time and improves business.

Threats:

1. The Bank face competition from other public sector bank, private sector banks,

foreign banks and other financial institutions.

2. Changing economic policies of Government will have direct impact on interest

rates.

3. Globalization has allowed other industries, such as IT industry, to attract talent

human resource.

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Financial Statements

P & L A/c for the year ended 31 March 2011

(Rs. In Crores)

Sl.

No. Particulars 31.03.2011 31.03.2010

1 Interest Earned (a)+(b)+(c)+(d) 23064.02 18751.96

(a) Interest/discount on advances/bills 17051.85 13946.43

(b) Income on Investments 5788.01 4577.99

(c) Interest on balances with Reserve Bank of India &

Other Inter-Bank Funds 223.3 210.42

(d) Others 0.86 17.12

2 Other Income 2703.03 2857.9

3 Total Income (1+2) 25767.05 21609.86

4 Interest Expended 15240.74 13071.43

5 Operating Expenses (I)+(ii) 4419.31 3477.62

(I) Employees Cost 2954.84 2193.7

(ii) Other Operating Expenses 1464.47 1283.92

Total Expenses ((4+5) excluding Provisions &

6 Contingencies) 19660.05 16549.05

Operating Profit before Provisions and Contingencies

7 (3-6) 6107 5060.81

8 Provisions (Other than Tax) and Contingencies 1081.11 1239.38

9 Exceptional items 0 0

Profit (+) / Loss (-) from Ordinary Activities before tax

10 (7-8-9) 5025.89 3821.4311 Tax expense 1000 800

Net Profit (+) / Loss (-) from Ordinary Activities after

12 tax (10-11) 4025.89 3021.43

13 Extraordinary items (net of tax expense) 0 0

14 Net Profit (+) / Loss (-) for the period (12-13) 4025.89 3021.43

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Paid up Equity Share Capital (Face Value of each share-

15 Rs.10/-) 443 410

16 Reserves excluding Revaluation Reserves 17498.46 12129.1

17 Analytical Ratios

(i) Percentage of shares held by Government of India 67.72% 73.17%

(ii) Capital Adequacy Ratio 15.38% 13.43%(iii) Earnings per Share (EPS) (Not Annualized)

a) Basic and diluted EPS before Extraordinary items (net

of tax expense) for the period, for the year to date and for the

previous year 97.83 73.69

b) Basic and diluted EPS after Extraordinary items for

the period, for the year to date and for the previous year 97.83 73.69

(iv) NPA Ratios

(a) Amount of Gross Non Performing Assets 3089.21 2590.31

(b) Amount of Net Non Performing Assets 2347.33 1799.7

(c) Percentage of Gross Non Performing Assets 1.45% 1.52%

(d) Percentage of Net Non Performing Assets 1.11% 1.06%

(v) Return on Assets (Annualized) 1.42% 1.30%

18 Public shareholding

- Number of Shares 143000000 110000000

- Percentage of shareholding 32.28% 26.83%

19 Promoters and promoter group shareholding NIL

- Number of shares 300000000 300000000

- Percentage of shares (as a % of the total shareholding of

promoter and promoter group) 100.00% 100.00%

- Percentage of shares (as a % of the total share capital of theCompany) 67.72% 73.17%

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Balance Sheet as on 31.3.2011

(`Rs. in Crores)

As on As on

31.03.2011 31.03.2010

Capital and liabilitiesCapital 443 410

Reserves and surplus 19596.82 14261.8

Deposits 293972.65 234651

Borrowings 14261.65 8440.56

Other liabilities and provisions 7804.64 6977.3

Total 336078.76 264741

Assets

Cash & balances with reserve bank of

India 22014.79 15719.5

Balances with banks and money at call

And short notice 8693.32 3933.75

Investments 83699.92 69677

Advances 212467.17 169335

Fixed assets 2844.41 2859.37

Other assets 6359.15 3216.92

TOTAL 336078.76 264741

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Segment wise results

(Rs. In crores)

Business Segment 31.03.2011 31.03.2010

(a) Segment Revenue

1 Treasury Operations 6249.48 5477.69

2 Retail Banking Operations 6700.99 5646.6

Wholesale Banking

3 Operations 12220.51 10041.64

4 Other Banking Operations 0 0

5 Unallocated 596.07 443.93

Total 25767.05 21609.86

(b) Segment Results



Wholesale Banking3 Operations 2652.26 1999.24


Total 5729.12 5010.25

Unallocated

(c) Income/Expenses 377.88 50.56

(d) Operating Profit 6107 5060.81

Provisions and

(e) Contingencies 1081.11 1239.38

(f) Income Tax 1000 800

(g) Net Profit 4025.89 3021.43

(h) Other Information

(i) Segment Assets



Wholesale Banking

3 Operations 160148.44 121344.65


5 Unallocated Assets 5237.09 2509.39

Total 333980.4 262608.41

(j) Segment Liabilities

1 Treasury Operations 47011.06 39833.452 Retail Banking Operations 124960.75 123063.48

Wholesale Banking

3 Operations 125895.27 76290.47


5 Unallocated Liabilities 18171.86 10881.9

6 Capital and Reserves 17941.46 12539.11

Total 333980.4 262608.41

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(Rs. In Crores)

Geographical Segment 31.03.2011 31.03.2010

a Domestic Operations

Revenue 25448.69 21299.71

Assets 318377.28 252609.97

b International Operations

Revenue 318.36 310.15

Assets 15603.12 9998.44

c Total

Revenue 25767.05 21609.86

Assets 333980.4 262608.41

Key Financial Ratios

(In %)

31st Mar 31st March

2010 2011

Cost of Funds 5.65 5.37

Yield on funds 8.1 8.13

Cost of Deposits 6.12 5.8

Yield on Advances 9.81 9.73

Yield on Investments 7.52 7.72

Spread as a % to AWF 2.45 2.76

Net interest margin 2.8 3.12

Operating Expenses to AWF 1.5 1.52

Return on average assets 1.3 1.42

Return on average net worth 26.76 28.26

Business per employee (Rs. In crores) 9.83 12.28

Profit per employee (Rs. In Lakhs) 7.35 9.76

Book value (Rs.) 305.83 405

EPS (Rs.) 73.69 97.83

AWF: Average Working Funds

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Learning Experience

The project work was carried out at Canara Bank gave me a lot of insight into the

practical working of a Bank. I could understand the various functions of an

organization like, Planning, Organizing, Directing, Controlling and Staffing. I learned thevarious methods used to assess the working capital of firms, companies etc. and the

various forms of working capital extended to organizations.

I understood various services provided by the Bank apart from the basic functions of

accepting deposits and lending loans and learnt about the technology used in the Bank

to provide quality, secure and faster services. I also learned the workflow for

accepting deposits and providing loans and various strategies, policies and systems

adopted by the Bank.

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Statement of the problem

The sufficiency of working capital assists in raising credit standing of a business

because of better terms on goods bought, lesser cost of manufacturing due to the

acceptance of cash discounts, favorable rates of interest etc. Working capital needs of

every organization varies depending upon various parameters. For assessing the

working capital limits, the Banks should analyze the business operations in detail and

credit worthiness of the organizations. Based on business operations, type of industry,

creditworthiness and other parameters working capital needs are assessed. For all

organizations a single method cannot be applied for assessing the limits. Different

methods should be used based on suitability to the organization and acceptability by

the Banks.

Objectives of the study

1. To understand the various methods used to assess the maximum working

capital limits of different organizations.

2. To learn the different forms of working capital extended by the Banks.

3. To identify the different modes of security acceptable by the Banks for

providing working capital finance.

4. To study the importance of adequate working capital.

5. Analysis of case studies pertaining to working capital financing.

6. To identify the different factors those affect the working capital requirement.

Scope of the study

The scope of the study was related to the various methods used by Canara bank. The

procedures adopted by the Bank for sanctioning the working capital have been

explained with the help of different case studies. The parameters to be analyzed for

sanctioning or renewing the credit limit are explained.

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Methodology

Research Design

It is a descriptive study consisting of quantitative and qualitative factors. Descriptive

research, also known as statistical research, describes data and characteristics about

the population or phenomenon being studied. Descriptive research answers the

questions who, what, where, when, why and how. Although the data description is

factual, accurate and systematic, the research cannot describe what caused a situation.

Nature of Data

Primary and Secondary.

Sources of Data collection

Primary Data was collected by interviewing with the Bank employees.

Secondary Data was personally collected from the Banks internal sources, official

records, annual reports, the Banks website, data released by RBI in its website and

management books.

Limitations of the Study

1. Though there was interaction with the Bank employees, more data was taken

from secondary sources made available by the Bank.

2. The identity of the real borrower in the case study has been concealed as per

the Banks requirement for maintaining the confidentiality.

3. The conclusion and interpretations drawn are based on few cases. Anyhow,

different cases would have different situation.

4. Canara Bank has 34 circle offices but study was confined to only Bangalore

rural Circle Office, covering 97 branches.

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Analysis and Interpretation

Working capital

It is a financial metric which represents operating liquidity available to a business,

organization or other entity, including governmental entity. Along with fixed assets such

as plant and equipment, working capital is considered a part of operating capital. Net

working capital is calculated as current assets minus current liabilities. If current assets

are less than current liabilities, an entity has a working capital deficiency, also called a

working capital deficit.

A company can be endowed with assets and profitability but short of liquidity if its

assets cannot readily be converted into cash. Positive working capital is required to

ensure that a firm is able to continue its operations and that it has sufficient funds to

satisfy both maturing short-term debt and upcoming operational expenses. The

management of working capital involves managing inventories, accounts receivable

and payable, and cash.

Operating cycle

It is the average length of time between when a company purchases items for

inventory and when it receives payment for sale of the items. A long operating cycle

tends to harm profitability by increasing borrowing requirements and interest expense.

The Operating Cycle determines the amount of working capital that a business

requires to operate on a day-to-day basis. The shorter the Operating Cycle the lower

the amount of working capital required for the business and the greater opportunity

for investments in other value-adding activities. The following diagram shows the

operating cycle.

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Current Assets

Current asset is represents the value of all assets that can reasonably be expected to be

converted into cash within one year in the normal course of business. Current assets

include cash, accounts receivable, inventory, marketable securities, prepaid expenses, and

other liquid assets that can be converted readily to cash.

Current Ratio

Current ratio is liquidity ratio that measures a company's ability to pay short-term

obligations. Also known as "liquidity ratio", "cash asset ratio" and "cash ratio". The

Current Ratio formula is:

The ratio is mainly used to give an idea of the company's ability to pay back its short-

term liabilities (debt and payables) with its short-term assets (cash, inventory,

receivables). The higher the current ratio, the more capable the company is of paying its

obligations.

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The benchmark current ratio for borrowers whose working capital limits are assessed

under MPBF & Cash Budget system is 1.33. However in respect of those parties

whose working capital limits ate assessed based on Turnover method is 1.25.

If the current ratio is less than the bench mark of 1.33 (MPBF/Cash budget system) or

1.25 (Turnover Method) for the concerned financial year, but not less than 1, the

limits may be permitted/renewed/enhanced by the respective sanctioning authority

within the delegated powers.

If the current ratio is less than 1 the sanctioning authority can permit only renewal of the

existing limits, based on his/her delegated powers, subject to normal appraisal norms

being followed. However in respect of accounts falling under the sanctioningpowers of

Executive Director/Chairman and Managing Director, the same can be permitted by

the respective sanctioning authority.

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The Bank considers the following factors for assessing the working

capital

1. General nature of the business carried.

2. Size of the business.

3. Production cycle of the organization and the industry.

4. Changes in technology, as the advanced technology requires less amount of

working capital.

5. Business cycle, cyclical fluctuations like boom and depression affects working

capital needs.

6. Credit policy of the organization.

7. Growth and expansion.

8. Operating efficiency of the organization.

9. Dividend policy of the organization.

Adequacy of Working capital

The investment in current assets should be just adequate to the needs of the firm. Both

excess working capital and inadequate working capital are dangerous to the firm.

Problems of Excessive working capital

1. Low returns on investment as excess funds in current assets remains idle and

earn nothing.

2. There is possibility of over capitalization. A firm having excess working

capital may be tempted to invest heavily on fixed assets that may not be

justified by its actual sales. This results in lower rate of return.

3. It results in unnecessary accumulation of inventories. Thus chances of

inventory mishandling increases.

4. Excessive working capital makes management complacent. This may lead to

management inefficiency.

5. It is an indication of defective working capital policy. It indicates firms

inability to utilize the available resources productively.

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Problems of inadequacy

1. A firm is not in a position to utilize the available production facilities

effectively.

2. Inadequacy stagnate growth. It becomes difficult for the firm to undertake

profitable project because of non-availability of working capital.

3. It also becomes difficult to implement operational plans of the firm.

4. Operational inefficiencies come up when it is difficult to meet even day to day

commitments.

5. Fixed assets are not efficiently utilized because of lack of working capital; the

firm's profitability may come down.

6. It makes the firm unable to enjoy attractive credit facilities from creditors and

others.

7. In due course of time the firm may lose its reputation.

Importance of adequate working capital

1. It protects the solvency of the firm. Suppliers of goods, customers, creditors

and others keep their faith in such a firm that is inn a position to meet its

financial obligations promptly.2. It enables the firm to get the benefits of cash discounts as a firm having sound

working capital position can meet its financial obligations promptly.

3. It enables to extend better credit terms to the customers.

4. It helps in achieving stability of the firm.

5. It enables the firm to get easy loans and advances from banks and other

financial institutions because of its good credit standard.

6. A firm having adequate working capital can execute rush orders as it can

easily purchase additional raw materials and employ additional labor.

7. It provides capacity to hold up inventories. A firm with adequate working

capital can wait for better market opportunities by holding up inventories till

the prices increase favorably. But, has to sell its products as early as possible.

8. It improves general morale of the employees and creates goodwill for the firm.

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Mode of Security

Banks provide credit on the basis of the following modes of security.

1. Hypothecation

Under this, bank provides credit against the security of movable property, usually

the inventory of goods. The hypothecated goods continue to be in the possession

of the borrower, but the Bank has legal right to realize the outstanding notes.

2. Pledge

Goods offered are transferred to the physical position of the lender. The goods will

be in the custody of the lender. However, the Bank has to take reasonable care of

thee goods. In case of the nonpayment by the borrower, the Bank has the right to sell

the goods.

3. Mortgage

Under this, security offered is immovable property. It involves transfer of legal

interest in the immovable property by an instrument called Mortgage Deed. The

Mortgage Deed terminates as soon as the debt is repaid. Mortgage is taken as

additional security for working capital credit.

4. Charge

Whenever proposals from a corporate entity are received, the financing bank

before sanctioning any credit facility is expected to inspect the Register of

Charges to find out whether the proposed properties/assets to be charged to the Bank

are unencumbered or not. Register for applications pending registration should also

be looked into.

5. Margin money

Banks do not provide 100% finance. They insist that customers should bring a

portion of required finance from other sources. This amount is called as

Margin Money.

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Forms of Bank Finance

I. Inventory Limits (Pre sales)

1. Open Cash Credit (OCC)

2. Simplified OCC for Traders and SSI

3. OCC-Cum loan scheme for traders

4. Key shut cash credit

5. Produce loan

6. Packing credit and clean packing credit

7. Overdraft

II. Finance against receivables (Post sales)

1. Book debts

2. Bills discounting

III. Non Fund based limits

1. Letter of credit

2. Bank guarantees

3. Advance payment guarantees

4. Co-acceptance

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I. Inventory Limits

1. Open Cash Credit

Open Cash Credit scheme (OCC) is a running credit facility to Micro, Small &

Medium Sector entrepreneurs against stocks and receivables. Assessment limit

depends on the working capital requirement of the unit assessed as per turnover

method/MPBF System/Cash Budget System. OCC is granted against the

hypothecation of Raw materials, WIP, Finished Goods and Receivables.

Drawings from the account is against Drawing limit arrived based on stocks such as

raw materials, work-in-process, finished goods and receivables. Whenever

required, Overdraft against Book debts is also permitted against book debt of

specific age arising out of genuine trade transactions with Government/Public

Sector Undertakings/Joint Stock Companies/firms of repute.

Prime security are Stocks, Receivables and Collateral securities are Land and

building, plant and machinery plus personal guarantee is obtained whenever

applicable.

2. Simplified OCC

Simplified OCC is a liberalized credit facility to Small Entrepreneurs who are not in a

position to maintain detailed stock books. Purpose is to provide working capital

needs of Small Enterprises units. This Facility is available as Running Limit.

Maximum limit available is Rs. 5 Lakhs only.

Prime securities are assets created out of the credit facility and no collateral

security for loans up to Rs.5 Lakhs.

3. OCC cum loan scheme for small traders

This scheme is meant for tiny retail traders and small business enterprises like

petty shop keepers who are not able to comply with the requirements laid down

even under the SOCC scheme such as maintenance of stock books, submission

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statements etc. The maximum amount of credit facility is Rs. 25,000 per borrower.

Stock statements should be submitted once in a year as at 31 st March, every year.

4. Produce loan

It is an advance against pledge of stock, separate loan account is maintained for

advance granted each time.

5. Key Shut Cash Credit

This is an advance by way of running account advance is granted as and when

goods are pledged. Whenever party wants to relates the goods he has to credit the

required amount to Key Shut Cash Credit account.

6. Packing Credit

Packing Credit is any loan or advance granted or any other credit provided by the

Bank to an exporter for financing the purchase, processing, manufacturing or

packing of goods prior to shipment, on the basis of letter of credit opened in his

favor or in favor of some other person, by an overseas buyer or a confirmed and

irrevocable order for the export of goods from the producing country or any other

evidence of an order for export from that country having been placed on the

exporter or some other person, unless lodgment of export orders or letter of credit

with the bank has been waived.

7. Overdraft

Overdraft is an extension of credit from the Bank when an account reaches zero. An

overdraft allows the customers to continue withdrawing money even if the account

has no funds in it. Basically the bank allows people to borrow a set amount of

money.

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II. Finance against receivables

1. Book debts

A book debt is a sum of money due to a business in the ordinary course of its

business. It has been described as a debt that would normally be entered in the

books of the business regardless of whether or not it is in fact entered. Book debts

include sums owed to a business for goods or services supplied or work carried

out.

2. Bills discounting

While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or

Promissory Note) before it is due and credits the value of the bill after a discount

charge to the customer's account. The transaction is practically an advance against the

security of the bill and the discount represents the interest on the advance from the date

of purchase of the bill until it is due for payment

III. Non fund based limits

1. Letter of Credit

A Letter of Credit (LC) is a written instrument issued by a Banker (Opening

Bank), at the request of a buyer (Applicant) in favor of a seller (Beneficiary),

undertaking to honor drafts drawn by the seller in accordance with the terms and

conditions specified in the letter of credit.

An inland letter is one in which is opened by a Bank at the request of its customer

(Buyer) in favor of the seller in the same country.

2. Bank guarantee

It is a guarantee from a lending institution ensuring that the liabilities of a debtor

will be met. In other words, if the debtor fails to settle a debt, the bank will cover

it.

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3. Advance payment guarantee

Advance payment guarantees are forms of protection making it possible for

buyers to recover an advance payment extended to sellers. If a seller fails to pay

according the terms and conditions laid down for governing the purchases of

goods/services, then this guarantee comes into play.

4. Co-acceptance

The banks constituent strikes deal with his seller to sell goods on credit by

drawing usance bill of exchange. The seller draws the bills, they are accepted by

the buyer and then co accepted by the buyers banker. The supplier gets the

proceeds immediately by discounting the co accepted bills with his banker.

Any borrower irrespective of the size of the credit limits can seek this facility. It is

not necessary that the borrower should enjoy cash credit facilities with the bank.

However, if the borrower does not have any credit facilities, the branch should at,

the time of recommending this facility, ensure that proper arrangements are made

for retiring the bills. Adequate balance should be available in the current account

for retiring the bills.

IV.Short term lending products

Following are the short term facilities that are permitted, selectively, to top rated

borrowers, PSU, MNCs etc as per the guidelines evolved by the bank from time to

time.

1. Corporate loan scheme.

2. MIBOR Linked product: Mumbai Inter-bank offered rate (MIBOR) is fluctuating

in nature and indicates prevailing rates in money market.

3. Short term lending rate.

4. Bills under letter of credit.

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Credit limits could be made available in any of the following methods as required:

1. Sole banking

Under this, the entire requirements of the borrower are met by one bank only.

2. Multiple banking arrangements

Borrowers can avail any credit facilities from any banks without a formal

consortium arrangement. So long as the total credit limits enjoyed by a borrower

from the bank is within the permissible resources of a single bank, or within the

prudential exposure norms, such facilities can be extended by individual banks

without a formal consortium under the Multiple Banking Arrangement.

3. Consortium Arrangement

When the amount involved is very large and beyond the permissible resources of a

single bank or beyond what a single bank would like to risk under ordinary

circumstances on a single borrower beyond the prudential exposure norms.

4. Syndication

A syndicated credit is an agreement between two or more lending institutions toprovide the borrower credit facility using common loan documentation.

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Assessment of working capital

Assessment is based on:

1. Total study of the business operations.

2. Production and processing cycle of the industry.

3. Financial and managerial capability of the borrower and the various parameters

relating the unit and the industry.

Norms for Working capital assessment are made depending upon the quantum of

finance required, segment of the borrower, prevailing mandatory instructions by RBI and

trade and industry practice prevailing.

Methods of assessment

Working capital requirements of a unit would be assessed by adopting various

methods like Turnover Method, Maximum Permissible Bank Finance (MPBF)

System, and Cash Budget System, depending on the type of activity.

1. Turnover Method

2. Maximum Permissible Bank Finance

3. Cash Budget system

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1. Turnover Method

Origin of this method is traced to the P R Nayak Committee recommendations

which were reviewed by the Vaz Committee. The working capital limit is

computed at 20% of the projected gross sales accepted by the bank. The Projectedsales is computed based on the sales for the previous periods and demands for the

products.

For SSI borrowers, fund based working capital facilities are assessed up to Rs. 5

crores under Turnover Method or MPBF system at the option of the borrower. Fornon

SSI borrowers, fund based working capital limit up to Rs. 2 crores can be assessed

under this method.

This system is made applicable to traders, merchants and exporters who are not

having a pre determined manufacturing/trading cycle. However, even such

borrowers can opt for MPBF system, if the same is more suitable for assessing the

working capital needs and is advantageous to them.

Under this method branches/offices shall ensure maintenance of a minimum

margin on the projected annual sales turnover i.e. 25% of the estimated gross sales

turnover value is provided as working capital requirement, of which 20% is

provided by the bank and the balance 5% is by way ofpromoters contribution

towards margin money. However, if the available Net Working Capital is more,

the same is reckoned for assessing the extent of bank finance and lower limits can

be considered.

As the working capital requirements are linked to projected sales turnover,

branches should satisfy themselves about the reasonableness of the projected

annual turnover of the applicant. This should be done with reference to the past

performance of the units, as reflected in the audited financial statements, theorders on hand, installed capacity of the units, power, availability of raw material

and other inputs and infrastructural facilities. In case of new units the branches

should ensure that the projections made are realistic by analyzing the installed

capacity, availability of infrastructural facilities, marketability of the product and

performance of similar units in the industry, background of the promoters and

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such other factors relevant to a particular unit. In case where the actual

performance of the unit exceeds the projected level accepted by the bank and the

assessed working capital is found to be inadequate, the branches should reassess the

working capital needs of the units and additional limits should be permitted in tune

with the actual requirements of the unit.

2. Maximum Permissible Bank Finance

Assessment of working capital limits over Rs. 2 crores for Non SSI borrowers and

over Rs.5 crores for SSI borrowers, but up to Rs. 25 crores is assessed based on

MPBF system. For limits of over Rs. 25 crores, credit facilities may be assessed

on the basis of MPBF or Cash Budget System, at the option of the borrower. The

assessment of credit requirement of the party is based on the total study of the

borrowers business operations via-a-via the production/processing cycle of the

industry which shall represent a reasonable build up of current assets for being

supported by bank finance. Based on Kannan Committee recommendations RBI

has allowed freedom to the banks to decide holding levels of various components

of current assets for financial support to ensure efficient functioning of the unit.

10% of tolerance level is allowed on the assessed MPBF.

Classification of Current Assets and Current Liabilities: A

few important classifications are given below;

a. All short term/temporary investment in money market instruments like

commercial papers, certificate of deposits can be considered as current assets.

However, other investments like Inter Corporate Deposits (ICD), instruments in listed

shares and debentures including investments in subsidiaries and associations are to be

considered as noncurrent assets.

b. Cash margin for non fund based limits (like Letter of Credit, Guarantees) may betreated as part of current assets for the purpose of MPBF and current ratio.

However, such margin held for deferred payment guarantees should be considered as

noncurrent assets.

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c. All term loan installments (FDs, Debenture, etc.) repayable within next 12 months

should be considered as current liability for computation of current ratio and

MPBF.

d. Inter Corporate Deposits are to be treated as current liability.

Tandon Committee has recommended 3 methods to arrive at the MPBF. As per the

recommendations of Tandon Committee, the corporate should be discouraged from

accumulating too much of stocks of current assets and should move towards very

lean inventories and receivable levels. The committee even suggested the maximum

levels of Raw Material, Stock-in-process and Finished Goods which a corporate

operating in an industry should be allowed to accumulate. These levels were termed

as inventory and receivable norms. Depending on the size of credit required, the

funding of these current assets (working capital needs) of the corporate could be met

by one of the following methods:

First Method of Lending

Banks can work out the working capital gap, i.e. total current assets less

current liabilities other than bank borrowings (called Maximum Permissible

Bank Finance 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. This approach was considered suitable only for very small

borrowers i.e. where the requirements of credit were less than Rs.10 lakhs.

Second Method of Lending

Under this method, it was thought that the borrower should provide for a

minimum of 25% of total current assets out of long-term funds i.e., owned

funds plus term borrowings. A certain level of credit for purchases and

other current liabilities will be available to fund the buildup of current

assets and the bank will provide the balance (MPBF). Consequently, total

current liabilities inclusive of bank borrowings could not exceed 75% of

current assets. RBI stipulated that the working capital needs of all

borrowers enjoying fund based credit facilities of more than Rs. 10 Lakhs

should be appraised (calculated) under this method.

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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

by the Study Group as representing the absolute minimum level of raw

materials, process stock, finished goods and stores which are in the pipeline

to ensure continuity of production and a minimum of 25% of the balance

current assets should 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).

3. Cash Budget System

Cash budget is an estimation of the cash inflows and outflows for a business or

individual for a specific period of time. Cash budget is a detailed plan showing how cash

resources will be acquired and used over some specific time period.

Cash budgets are often used to assess whether the entity has sufficient cash to fulfill

regular operations and/or whether too much cash is being left in unproductive

capacities. A cash budget is extremely important as it allows a company to determine

how much credit it can extend to customers before it begins to have liquidity

problems.

This method is applied where borrowers require credit facilities of over Rs. 25 crores.

MPBF system can also be applied for assessing the requirement of over Rs. 25 crores at

the option of the borrowers. However, in case of specific industries/seasonal

activities such as construction activity, tea and sugar, the system of assessment based on

cash budget is adopted.

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Cash Flow Statement

It is a summary of receipts and disbursements of cash for a particular period of time. It

also explains reasons for the changes in cash position of the firm. Cash flows are cash

inflows and outflows. Transactions which increase the cash position of the entity are called

as inflows of cash and those which decrease the cash position as outflows of cash. Cash

flow Statement traces the various sources which bring in cash such as cash from

operating activities, sale of current and fixed assets, issue of share capital and debentures

etc. and applications which cause outflow of cash such as loss from operations, purchase

of current and fixed assets, redemption of debentures, preference shares and other

long-term debt for cash. In short, a cash flow statement shows the cash receipts and

disbursements during a certain period. The statement of cash flow serves a number of

objectives which are as follows:

Cash flow statement aims at highlighting the cash generated from operating

activities.

Cash flow statement helps in planning the repayment of loan schedule and

replacement of fixed assets, etc.

Cash is the centre of all financial decisions. It is used as the basis for the

projection of future investing and financing plans of the enterprise.

Cash flow statement helps to ascertain the liquid position of the firm in a

better manner.

Banks and financial institutions mostly prefer cash flow statement to analyze

liquidity of the borrowing firm.

Cash flow Statement helps in efficient and effective management of cash.

The management generally looks into cash flow statements to understand the

internally generated cash which is best utilized for payment of dividends.

Cash Flows are inflows and outflows of cash and cash equivalents. The statement ofcash

flow shows three main categories of cash inflows and cash outflows, namely;

operating, investing and financing activities.

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1. Operating activities are the principal revenue generating activities of the

enterprise. Cash flow from operating activities is primarily derived from the

principal revenue generating activities of the enterprise. A few items of cash flows from

operating activities are;

Cash receipt from the sale of goods and rendering services.

Cash receipts from royalties, fee, Commissions and other revenue.

Cash payments to suppliers for goods and services.

Cash payment to employees.

Cash payment or refund of Income Tax.

2. Investing activities include the acquisition and disposal of long term assets and

other investments not included in cash equivalents. Investing Activities refer to

transactions that affect the purchase and sale of fixed or long term assets and

investments. Examples of cash flow arising from investing activities are;

Cash payments to acquire fixed Assets.

Cash receipts from disposal of fixed assets.

Cash payments to acquire shares, or debenture investment.

Cash receipts from the repayment of advances and loans made to third parties.

Thus, Cash inflows from investing activities are,

Cash sale of plant and machinery, land and Building, furniture, goodwill etc.

Cash sale of investments made in the shares and debentures of other

companies.

Cash receipts from collecting the Principal amount of loans made to third

parties.

Cash outflow from investing activities are;

Purchase of fixed assets i.e. land, Building, furniture, machinery etc.

Purchase of Intangible assets i.e. goodwill, trade mark etc.

Purchase of shares and debentures.

Purchase of Government Bonds.

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3. Financing activities are activities that result in change in the size and

composition of the owners capital (including Preference share capital in the case

of a company) and borrowings of the enterprise. The third section of the cash flow

statement reports the cash paid and received from activities with non-current or

long term liabilities and shareholders Capital. Examples of cash flow arising fromfinancing activities are;

Cash proceeds from issue of shares or other similar instruments.

Cash proceeds from issue of debentures, loans, notes, bonds, and other short-

term borrowings.

Cash repayment of amount borrowed.

Cash Inflows from financing activities are;

Issue of Equity and preference share capital for cash only.

Issue of Debentures, Bonds and long-term note for cash only

Cash outflows from financing activities are;

Payment of dividends to shareholders.

Redemption or repayment of loans i.e. debentures and bonds.

Redemption of preference share capital.

Buy back of equity shares.

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Format for Cash flow Statement for the year ended ................

(i) Cash flow from operating activities

A. Operating cash receipts xxx

B. Less: Operating cash payment xxx

C. Cash generated from operation (A - B) xxx

D. Less: Income tax paid (Net of tax refund received) xxx

E. Cash flow before extraordinary items xxx

F. Adjusted extraordinary items (+/-)/Receipt/payment xxx

G. Net cash flow from (or used in) operating activities xxx

(ii) Cash flow from investing activities xxx

(iii) Cash flow from financing activities xxx

(iv) Net increase/decrease in cash and cash equivalents (i + ii + iii) xxx

(v) Add: cash and cash equivalent in the beginning of the year xxx

(vi) Less: cash under cash equivalent in the end of the year xxx

XXX

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The following are to be clarified while fixing the limits based on the cash budget.

1. The cash budget is realistic and based on the operations in the business/similar

business.

2. The cash budget statement tallies with the underlying financial statements viz.

Balance Sheet and Profit and Loss A/c.

3. Outstanding bank borrowing figured in the projected Balance Sheet tallies with the

deficit as shown in the cash budget statement.

4. The closing balance of debtors is correctly arrived at summing up (Opening

balance of debtors + Credit sales-Realization of Debtors).

5. The expenses as indicated in the cash budget tallies with the expenses as reflected

in the projected Profit and Loss A/c.

The assessment of working capital limits is done based on the projected cash flow

statement, profitability statement and projected Balance Sheet. Wherever there is no

deficit in operating cycle and net deficit is only due to investing/financing cycles,

such deficit is not financed. Branches should obtain the required details at least one

month before the commencement of the year for which the assessment is to be made.

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Case Study I

Application for sanction of working capital limit: Rs. 15 Lakhs (Renewal).

Nature of limit: OCC.

Margin: 40% on consumables & 40% on debtors.

Security: Plant and Machinery, and Hypothecation of Stocks & Receivables.

The unit is engaged in anodizing aluminium panel. It gets orders on contract basis. The

company gets orders from different customers and do the anodizing process and deliver

it to the party. Anodizing is a process of coating on aluminium panels. Working

capital requirement of the unit is mainly to meet their expenses for consumables

and against amount locked up as debtors.

Findings while the Unit visit:

Operating cycle in relation to unit,

The trade activity starts from picking material on behalf of customers,

anodizing (executing work order) and delivering it to the customers.

Consumables are held for 3 months.

The unit allows 45 days to 60 days credit to the customers.

The duration of the operating cycle differs from one order to another; normally

it takes 4 days to 5 days.

The Unit use some of the materials like Sulphuric acid and Nitric acid which

has to be purchased 2-3 days before order execution.

The unit avails 90 days credit from creditors.

Working capital limit is assessed on Turnover Method. The Unit has opted for it as it befitsthem. The Units main activity is anodizing. The holding level of inventory is less. The unit

is satisfied with the Banks finance.

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Balance Sheet of AB Coaters (P) Ltd. As on 31/3/2011

Particulars 31/3/2010 31/3/2011 31/3/2012

Previous Current Projected

Sources of funds

Shareholders fundShare capital 2000000.00 2000000.00 2000000.00

Share application money 1000000.00 1000000.00 1000000.00

Reserves and surplus - 1650507.34 3600000.00

Loan Fund

Secured loan 8822615.95 7074990.55 5200000.00

Unsecured loan 2745154.70 2670154.70 2670000.00

Total 14567770.65 14395652.59 14470000.00

Application of funds

Fixed assets 11787742.41 10367101.64 9900000.00

Investments 3000.00 3000.00 3000.00Current assets, loans and

advances

Cash in hand 91468.00 86744.50 50000.50

Cash at bank - 319557.22 200000.00

Deposit 442139.00 1645207.05 1935000.00

Loans and Advances 324948.00 631560.00 600000.00

Sundry debtors 1885443.09 2555900.08 2847000.00

Closing stock 410636.00 535319.55 600000.00

Total (A) 3154634.09 5774288.40 6232000.00

Sundry creditors, Currentliabilities & Provisions

Sundry creditors 171475.80 419428.20 300000.00

Current liabilities & Provisions 722962.79 1425994.25 1500000.00

Total (B) 894438.59 1845422.45 1800000.00

Net Current Assets (A-B) 2260195.50 3928865.95 4432000.00

Deferred tax asset 62323.00 71497.00 95000.00

miscellaneous expenditure 454509.74 25188.00 40000.00

Total 14567770.65 14395652.59 14470000.00

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P & L A/c for the year ended 31/3/2011

Particulars 31/3/2010 31/3/2011 31/3/2012


Income

1. Anodizing & Other charges 10015421.32 16634391.12 20000000.002. Other income 160777.30 170695.05 200000.00

Total (A) 10176198.62 16805086.17 20200000.00

Expenditure

3. Consumables utilized 2008789.94 3148534.92 4000000.00

4. Processing costs 2283319.02 2693671.50 3200000.00

5. Employee costs 2046327.00 3171393.00 3800000.00

6. Operation & Other expenses 2244786.20 3279837.10 3934000.00

Total (B) 8583222.16 12293436.50 14934000.00

PBIDT (A-B) 1592976.46 4511649.64 5266000.00

7. Interest & Finance charges 978751.95 971063.00 900000.008. Depreciation 1137985.85 1707122.77 1468000.00

9. Preliminary expenses written off 12594.00 12594.00 50000.00

PBT -536355.32 1820869.88 2848000.00

10. Provision for Taxes

Current tax - 346741.00 800000.00

Differed tax Asset 223573.00 9174.00 2000.00

Fringe benefits Tax 37923.99 47903.00 50000.00

11. Net Profit/(Loss) -350706.31 1435399.88 2000000.00

12. Balance b/f -66021.43 -416727.74 -

13. Balance carried to Balance Sheet -416727.74 1018672.14 2000000.00

Key Information

Particulars 2011 2010

Current ratio 1.21 0.61

Gross profit: Sales 0.27 0.16

Net profit: Sales 0.08 -

Net sales (Rs. In Lakhs) 165.59 100.15PBDIT (Rs. In Lakhs) 45.11 15.93

PBT (Rs. In Lakhs) 18.2 -5.36

PAT (Rs. In Lakhs) 14.35 -3.51

NWC (Rs. In Lakhs) 8.98 -14.22

Net worth (Rs. In Lakhs) 36.26 15.45

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Interpretations:

There is an increase in the current ratio from .61 in 2010 to 1.21 in 2011.

Though the ratio is below the benchmark of 1.25, it is satisfactory.

Net worth of the company has increased by Rs. 20.18 Lakhs for the year ended

2011 due to the retention of earnings in the system.

Net working capital increased from Rs. -14.22 Lakhs to Rs. 8.96 Lakhs for the

year 2011.

Electricity and staff salary are the main expenses of the Unit.

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Assessment of working capital

Based on Turnover Method

(Rs. In Lakhs)

Particulars Amount Amount

Accepted projected annual gross sales 200.00

25% of the above 50.00

Less: Minimum margin by the party

5% of projected sales 10.00

or NWC of previous year 8.98 10.00

(Whichever is higher)

Bank finance 40.00

Calculation of NWC

Calculation of NWC

(Rs. In Lakhs)


Current assets

Debtors(less than 6 months) 14.72 23.47

Closing stock 4.10 5.35

Cash and Bank 0.91 4.06

Deposit 1.00 13.05

Advances 1.49 5.27

Deferred Tax 0.62 0.71

Total (A) 22.84 51.91

Current liabilities

Sundry creditors 1.71 4.19

current liabilities & Provisions 7.23 14.26

Canara Bank OD 14.30 10.67

Loan installment in 12 months 13.83 13.83

Total (B) 37.07 42.95

NWC 8.96

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Based on MPBF

(Rs. In Lakhs)

Current Assets

Debtors 28.47

Closing stock 6Cash 0.5

Bank 2

Deposits 15.95

Total (A) 52.92

Current liabilities

Sundry creditors 3

Current liabilities & Provisions 15

Total (B) 18

WC Gap (A-B) 34.92Less: 25% of Current assets 13.23

MPBF 21.69

Conclusion:

Under Turnover method as well as MPBF method the customer is eligible for higher

working capital limits. However, the party has asked only for the renewal but not for

enhancement. The Bank has financed Rs. 15 Lakhs. When compared both the

methods, limit under Turnover method is more.

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Case Study II

Name: ABC Fuels

Application for sanction of working capital limit: Rs. 35 Lakhs (Renewal)

Nature of limit: OCC

Margin: 35% on Stocks and Debtors

Security: Hypothecation of Stocks & Receivables

Final accounts of ABC Fuels are given below.

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Trading and P & L A/c for the year ended 31/3/2011

Particulars 2010 2011 2012


1 Opening Stock - 395859.00 1916597.51

2 Purchases12.5% VAT purchases 321797.00 362745.00 400000.00

Exempted purchases 20016102.00 34387149.00 35000000.00

3 Sales

12.5% VAT sales 263443.00 374002.00 400000.00

Exempted sales 20114685.00 33582922.00 36910574.51

4 Closing stock 395859.00 1916597.51 849205.00

5 Gross profit (3+4)-(1+2) 436088.00 727768.51 843482.00

6 Rental income from HPCL 180000.00 180000.00 180000.00

7 Total (5+6) 616088.00 907768.51 1023482.00

8 Operating expensesAccounting charges 6000.00 12000.00 12000.00

Audit fees 10000.00 10000.00 10000.00

Staff uniform & Welfare 3600.00 5420.00 60000.00

Books & periodicals 1210.00 1560.00 1800.00

Electricity charges 4960.00 8190.00 9000.00

General expenses 3162.00 7120.00 8000.00

Profession Tax 2500.00 2500.00 2500.00

Salaries 60000.00 72000.00 90000.00

Postages 368.00 410.00 500.00

Telephone charges 4610.00 6630.00 7000.00Bank interest & charges 125396.00 305856.51 325000.00

Insurance 17682.00 17682.00 17682.00

Rent paid to site owner 180000.00 180000.00 180000.00

9 Net Profit (7-8) 196600.00 278400.00 300000.00

10 Total (8+9) 616088.00 907768.51 1023482.00

Capital A/c as on 31/3/2011


Balance b/d 1021193 984453 867665

Add: Net profit 196600 278400 300000

share of profit 7200 7400 7500

Less: Drawings 60000 72000 80000

TDS 30540 30588 31000

Bank OD interest 150000 300000 350000

Balance c/d 984453 867665 714165

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Balance Sheet as on 31/3/2011



Liabilities

Capital A/c 984453 867665 714165Secured Loan

Canara Bank OD 4200692 4798359 3500000

Current Liabilities

Audit fees payable 10000 10000 10000

Total 5195145 5676024 4224165

Assets

Fixed assets

Gold Jewellery 46000 46000 46000

Deposit

Security deposit in HPCL 200000 200000 200000Telephone deposit 2000 2000 2000

Current assets

Stock in trade 395859 1916597.51 849205

VAT refundable 7292 5212 6000

Moidu Tiles & Brick Ind 300000 300000 300000

Bharath Hardware KGF 580000 580000 580000

Moidu Jowar 2119230 2119230 2119230

Cash & Bank Balance 1544764 506984.49 121730

Total 5195145 5676024 4224165

Key Information


Current ratio 0.51 0.45

Gross profit: Sales 2.14 2.14

Net profit: Sales 2.78 1.97

Net sales (Rs. In Lakhs) 339.57 203.78

NWC (Rs. In Lakhs) -23.79 -22.62Net worth (Rs. In Lakhs) 8.68 9.84

Gross profit 7.27 4.36

Closing stock 19.16 3.96

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Interpretation:

There is reduction in Net Worth from the year 2010 to 2011 as there is

increase in drawings.

Sales have increased over the previous year (66.64%).

Net profit has increased. The % of net profit to gross sales has been reduced

marginally due to increase in the operating expenses.

One of the important aspects that should be noticed is that Bank OD interest is

charged in Capital A/c instead of P & L A/c.

If the Bank OD is charged in P&L A/c, it will bring down the profit.

Investments in subsidies are shown under current assets, which are treated as

non-current assets.

Assessment of Working Capital

Under Turnover Method

(Rs. In Lakhs)

Particulars Amount Amount

Accepted projected annual gross sales 373.11

25% of the above 93.28

Less: Minimum margin by the party

5% of projected sales 18.65

or NWC of previous year 23.79 23.79

(Whichever is higher)

Bank finance 69.49

Under MPBF

(Rs. In Lakhs)

Current Assets

Stocks 8.49

VAT refund 0.06

Cash 1.22

Total (A) 9.77

Current LiabilitiesAudit fees 0.1

Total (B) 0.1

WC Gap (A-B) 9.67

Less: 25% of CA 2.4425

MPBF 7.2275

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Case Study III

Name: B Poultry Farm (P) Ltd.

Limit: Rs.106.06 Lakhs

Nature of limit: OCC

Margin: 35%

Purpose: To meet the working capital requirement for purchase of feed, medicine etc.

Observations during the unit visit:

Raw material required for 2 months were stored.

All the sales made by the unit were cash sales and thus they did not have any

debtors.

Interest rate is 12.5% which is paid once in 6 months.

Operating cycle in relation to the Unit

Trade activity starts from procuring day to day old chicks for the purpose of

producing and selling eggs.

Day old chicks are fed.

Birds start hatching eggs after 25th week and the life span of a bird ranges

between 68 to 75 weeks.

Stock of feed are purchased for cash and are held for 2 months.

The birds start laying eggs from the 25th week, once then unit will be receiving

the sale proceeds.

The operating cycle ends when birds lose their fertility, after which they are

sold.

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Balance Sheet as on 31/3/2011

Particulars 31/3/2011 31/3/2010

Sources of fund

Share holders fund

a. share capital 500000 500000b. Advance towards share capital 7085000 7085000

Loan Fund

a. Secured loan 31259488 28836338

Total Funds 38844488 36421338

Application on funds

Fixed assets

Gross Block 16864014 18721566

Less: Depreciation 1916459 1857552

Net block 14947555 16864014

Current assets & Loans & Advances 24067111 17636104Less: Current liabilities & Provisions 761463 534473

Net Current Assets 23305648 17101631

P&L A/c Dr. balance 2455693 1045184

Add: Profit/Loss 1864407.81 -1410509

P&L A/c Dr. balance 591285.19 2455693

Total Assets 38844488 36421338

P&L A/c for the year ended 31/3/2011

Particulars 31/3/2011 31/3/2010

Income

Culling of birds 2985235.00 5398795.00

Sale of eggs 50607529.00 9470035.00

Other income 2353789.00 1903457.00

Total 55946553.00 16772287.00

Expenditure

Cost of birds, feed 41202874.00 10396275.00

Personnel 3594427.00 2222371.00Administration expenses 5324030.00 2458573.00

Maintenance expenses 2044355.00 1248025.00

Depreciation 1916459.19 1857552.00

Total 54082145.19 18182796.00

Net Profit/Loss 1864407.81 -1410509.00

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As poultry business comes under agriculture sector, the assessment is based on total cost

of the chick and expenditure.

(Rs. In Lakhs)

Particulars Amount

Chick cost (69000 chicks @128) 88.32

Stock of feed ingredients 67.13

Finished feed stock 6.74

Stock of medicines 0.98

Total Current Assets 163.17

Less: Margin 35% 57.1095

Working capital limit 65% 106.0605

Sanctioned amount is Rs. 106.0605 Lakhs.

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Findings

1. Growth of the organization may not be projected accurately. In one of the

cases analysed, the Bank had under assessed the projected sales. The sales

grew at 66%.2. Some of the parties inflate Balance Sheet to show the favourable ratios.

Hence, the quality of the components of ratios is given more importance.

3. In one of the cases, bank OD interest was debited to Capital A/c to inflate the

net profit which indicates that the funds have been diverted for some other

purposes.

4. Working capital needs are assessed according to the industry standards. For

poultry, assessment was made based on costs and other expenses.

Suggestions

1. Bank has to educate its customers especially large borrowers regarding the

various products and services of the Bank.

2. Though RBI guidelines and Right to Information details are available on the

Banks website, all customers will not be interested to go through them. A

better means of communication to its customers is required.

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Conclusion

Canara Bank was established in 1906. Since then it has been successfully carrying out its

activities. The company is known for its systematic of the business. All the

departments in the organization are well equipped with the modern technology and

controlled by competent persons. Most of the clerical work is done by using

computers that saves time and energy. The Bank has created friendly atmosphere forthe

employees and gives them freedom to work freely. The Bank also gives many benefits

from its various schemes and keeps the employees happy. It believes that happy work

force is the foundation of a prosperous company.

The Bank follows various methods for assessing the working capital needs of the

companies depending on the industry standards. Analysis of financial statements is

considered very important for the projections and accuracy is based on the level of

understanding and interpretation of the statements. The Bank is providing working

capital to all sectors of Indian Economy.

Documents

Project Report on Working Capital Assessment (1)