Upload
surender-dhuran-prajapat
View
226
Download
0
Embed Size (px)
Citation preview
7/28/2019 vibha.doc
1/65
PROJECT REPORT
ON
WORKING CAPITAL MANAGEMENT
AT
PUNJAB NATIONAL BANK
SUBMITTED BY
VIBHA SINGAL
SESSION: 2009 - 2011
GURU JAMBESHWAR UNIVERSITY
(HISAR)
1
http://images.google.co.in/imgres?imgurl=http://www.topnews.in/files/PNB_1_0.jpg&imgrefurl=http://www.topnews.in/business-news/personal-finance%3Fpage%3D2&usg=__p6ylHnmV7uCsL9GaYw0a9D_5LQc=&h=350&w=366&sz=25&hl=en&start=16&um=1&tbnid=12PNJNMJT-qHpM:&tbnh=117&tbnw=122&prev=/images%3Fq%3Dpnb%26hl%3Den%26sa%3DN%26um%3D17/28/2019 vibha.doc
2/65
CERTIFICATE
This is to certify that project titled WORKING CAPITAL MANAGEMENT
at PNB is prepared by VIBHA SINGAL is being Submitted for the partial
fulfilment of the Masters degree in Business Administration Programme at
GURU JAMBESHWAR UNIVERSITY, HISAR. She has successfully
completed the project under my constant guidance and support.
Signature of the Project Guide
2
7/28/2019 vibha.doc
3/65
PREFACE
Summer training is a very important part of an MBA curriculum. It provides an
optimistic iconography for Future existence through which students are able to see the real
industrial environment which gives an opportunity to relate theory with practice.
I undertook two months training programme at Punjab National Bank (Hisar) and worked on
the project Working Capital Management at PNB . This report is the knowledge acquired
by me during this period of training.
3
7/28/2019 vibha.doc
4/65
ACKNOWLEDGEMENT
A Project usually falls short of its expectations unless guided by the right
person at the right time. This Project would not have completed
without the direct or indirect help and guidance of such luminaries in
Punjab National bank. They provided us with the necessary resources and
an environment conducive for healthy learning and training. They
provided us with the required amount of freedom to exercise our skill
under their able guidance.
At the outset, I would like to take this opportunity to gratefully
acknowledge the very kind and patient guidance and encouragement I
have received from our Project Guide Mr. Rajinder Kumar Kanaujia
(Manager PNB) throughout their critical evaluation and suggestion at
every stage of the Project, this report could never have reached its
present form.
I would like to extend my thanks to my GURU JAMBESHWAR
UNIVERSITYfor the facilities availed to me in terms of library work.
Last but not least I would like to thank all the respondents for giving their
precious time and relevant information and experience, I required,
without which the Project would have been incomplete.
4
7/28/2019 vibha.doc
5/65
CHAPTER 1
5
7/28/2019 vibha.doc
6/65
1.1 INTRODUCTION TO BANKING IN INDIA
The banking section will navigate through all the aspects of the Banking System in India. Itwill discuss upon the matters with the birth of the banking concept in the country to new
players adding their names in the industry in coming few years.
The banker of all banks, Reserve Bank of India (RBI), the Indian Banks Association (IBA)and top 20 banks like IDBI, HSBC, ICICI, ABN AMRO, etc. has been well defined underthree separate heads with one page dedicated to each bank.
However, in the introduction part of the entire banking cosmos, the past has been wellexplained under three different heads namely:
History of Banking in India
Nationalization of Banks in India
Scheduled Commercial Banks in India
The first deals with the history part since the dawn of banking system in India. Governmenttook major step in the 1969 to put the banking sector into systems and it nationalized 14
private banks in the mentioned year. This has been elaborated in Nationalization Banks inIndia. The last but not the least explains about the scheduled and unscheduled banks in India.Section 42 (6) (a) of RBI Act 1934 lays down the condition of scheduled commercial banks.The description along with a list of scheduled commercial banks are given on this page
1.1.1 HISTORY OF BANKING IN INDIA
6
7/28/2019 vibha.doc
7/65
Without a sound and effective banking system in India it cannot have a healthy economy. Thebanking system of India should not only be hassle free but it should be able to meet newchallenges posed by the technology and any other external and internal factors.
For the past three decades India's banking system has several outstanding achievements to itscredit. The most striking is its extensive reach. It is no longer confined to only metropolitansor cosmopolitans in India. In fact, Indian banking system has reached even to the remotecorners of the country. This is one of the main reasons of India's growth process.
The government's regular policy for Indian bank since 1969 has paid rich dividendsWith the nationalization of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank counters for getting a draftor for withdrawing his own money. Today, he has a choice. Gone are days when the mostefficient bank transferred money from one branch to other in two days. Now it is simple as
instant messaging or dials a pizza. Money has become the order of the day.
The first bank in India, though conservative, was established in 1786. From 1786 till today,the journey of Indian Banking System can be segregated into three distinct phases. They areas mentioned below:
Early phase from 1786 to 1969 of Indian Banks
Nationalization of Indian Banks and up to 1991 prior to Indian banking sector
Reforms. New phase of Indian Banking System with the advent of Indian Financial
& Banking Sector Reforms after 1991.
To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and PhaseIII.
Phase I
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan andBengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks.
These three banks were amalgamated in 1920 and Imperial Bank of India was establishedwhich started as private shareholders banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by Indians, PunjabNational Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913,Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bankof Mysore were set up. Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also experienced periodic failuresbetween 1913 and 1948. There were approximately 1100 banks, mostly small. To streamlinethe functioning and activities of commercial banks, the Government of India came up with
The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with
7
7/28/2019 vibha.doc
8/65
extensive powers for the supervision of banking in India as the Central Banking Authority.
During those days public has lesser confidence in the banks. As an aftermath depositmobilisation was slow. Abreast of it the savings bank facility provided by the Postaldepartment was comparatively safer. Moreover, funds were largely given to traders.
Phase II
Government took major steps in this Indian Banking Sector Reform after independence. In1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scaleespecially in rural and semi-urban areas. It formed State Bank of India to act as the principalagent of RBI and to handle banking transactions of the Union and State Governments all overthe country.
Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July,1969, major process of nationalization was carried out. It was the effort of the then Prime
Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country werenationalized.
Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 withseven more banks. This step brought 80% of the banking segment in India under Governmentownership.
The following are the steps taken by the Government of India to Regulate BankingInstitutions in the Country:
1949: Enactment of Banking Regulation Act.
1955: Nationalization of State Bank of India.
1959: Nationalization of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalization of 14 major banks.
1971: Creation of credit guarantee corporation.
1975: Creation of regional rural banks.
1980: Nationalization of seven banks with deposits over 200 crore.
After the nationalization of banks, the branches of the public sector bank India rose toapproximately 800% in deposits and advances took a huge jump by 11,000%.
Banking in the sunshine of Government ownership gave the public implicit faith andimmense confidence about the sustainability of these institutions.
Phase III
this phase has introduced many more products and facilities in the banking sector in itsreforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up
by his name which worked for the liberalisation of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being put to
give a satisfactory service to customers. Phone banking and net banking is introduced. Theentire system became more convenient and swift. Time is given more importance than
8
7/28/2019 vibha.doc
9/65
money.
The financial system of India has shown a great deal of resilience. It is sheltered from anycrisis triggered by any external macroeconomics shock as other East Asian Countriessuffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the
capital account is not yet fully convertible, and banks and their customers have limitedforeign exchange exposure.
1.1.2 SCHEDULED COMMERCIAL BANKS IN INDIA
9
7/28/2019 vibha.doc
10/65
The commercial banking structure in India consists of: Scheduled Commercial Banks in India
Unscheduled Banks in India
Scheduled Banks in India constitute those banks which have been included in the SecondSchedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks inthis schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.
As on 30th June, 1999, there were 300 scheduled banks in India having a total network of64,918 branches. The scheduled commercial banks in India comprise of State bank of Indiaand its associates (8), nationalized banks (19), foreign banks (45), private sector banks (32),co-operative banks and regional rural banks.
"Scheduled banks in India" means the State Bank of India constituted under the State Bank ofIndia Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India
(Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted undersection 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer ofUndertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the SecondSchedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank".
"Non-scheduled bank in India" means a banking company as defined in clause (c) of section5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".
The following are the Scheduled Banks in India (Public Sector): State Bank of India
State Bank of Bikaner and Jaipur
State Bank of Hyderabad
State Bank of Indore
State Bank of Mysore
State Bank of Saurashtra
State Bank of Travancore
Andhra Bank
Allahabad Bank
Bank of Baroda
Bank of India Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Overseas Bank
Indian Bank
Oriental Bank of Commerce
Punjab National Bank
Punjab and Sind Bank
Syndicate Bank
10
7/28/2019 vibha.doc
11/65
Union Bank of India
United Bank of India
UCO Bank
Vijaya Bank
The following are the Scheduled Banks in India (Private Sector):
ING Vysya Bank Ltd
Axis Bank Ltd
Indusind Bank Ltd
ICICI Bank Ltd
South Indian Bank
HDFC Bank Ltd
Centurion Bank Ltd
Bank of Punjab Ltd
IDBI Bank Ltd
The following are the Scheduled Foreign Banks in India:
American Express Bank Ltd.
ANZ Gridlays Bank Plc.
Bank of America NT & SA
Bank of Tokyo Ltd.
Banquc Nationale de Paris
Barclays Bank Plc
Citi Bank N.C.
Deutsche Bank A.G. Hongkong and Shanghai Banking Corporation
Standard Chartered Bank.
The Chase Manhattan Bank Ltd.
Dresdner Bank AG.
1.1.3 BANKING SERVICES IN INDIA
11
7/28/2019 vibha.doc
12/65
With years, banks are also adding services to their customers. The Indian banking industry ispassing through a phase of customers market. The customers have more choices in choosingtheir banks. A competition has been established within the banks operating in India.
With stiff competition and advancement of technology, the services provided by banks have
become more easy and convenient. The past days are witness to an hour wait beforewithdrawing cash from accounts or a cheque from north of the country being cleared in onemonth in the south.
This section of banking deals with the latest discovery in the banking instruments along withthe polished version of their old systems.
BANK ACCOUNT
The most common and first service of the banking sector. There are different types of bank
account in Indian banking sector. The bank accounts are as follows:
Bank Savings Account - Bank Savings Account can be opened for eligible person /
persons and certain organizations / agencies (as advised by Reserve Bank of India(RBI) from time to time)
Bank Current Account - Bank Current Account can be opened by individuals /
partnership firms / Private and Public Limited Companies / HUFs / SpecifiedAssociates / Societies / Trusts, etc.
Bank Term Deposits Account - Bank Term Deposits Account can be opened by
individuals / partnership firms / Private and Public Limited Companies / HUFs/Specified Associates / Societies / Trusts, etc.
Bank Account Online - With the advancement of technology, the major banks in the
public and private sector has faciliated their customer to open bank account online.Bank account online is registered through a PC with an internet connection. Theadvent of bank account online has saved both the cost of operation for banks as wellas the time taken in opening an account.
PLASTIC MONEY
Credit cards in India are gaining ground. A number of banks in India are encouraging peopleto use credit card. The concept of credit card was used in 1950 with the launch of chargecards in USA by Diners Club and American Express. Credit card however became more
popular with use of magnetic strip in 1970.
Credit card in India became popular with the introduction of foreign banks in the country.
Credit cards are financial instruments, which can be used more than once to borrow money orbuy products and services on credit. Basically banks, retail stores and other businesses issue
these.
12
7/28/2019 vibha.doc
13/65
LOANS
Banks in India with the way of development have become easy to apply in loan market. Thefollowing loans are given by almost all the banks in the country:
Personal Loan Car Loan or Auto Loan
Loan against Shares
Home Loan
Education Loan or Student Loan
In Personal Loan, one can get a sanctioned loan amount between Rs 25,000 to 10, 00,000depending upon the profile of person applying for the loan. SBI, ICICI, HDFC, HSBC aresome of the leading banks which deals in Personal Loan.
Almost all the banks have jumped into the market of car loan which is also sometimes termedas auto loan. It is one of the fast moving financial products of banks. Car loan / auto loan aresanctioned to the extent of 85% upon the ex-showroom price of the car with some simple
paper works and a small amount of processing fee.
Loan against shares is very easy to get because liquid guarantee is involved in it.
Home loan is the latest craze in the banking sector with the development of the infrastructure.Now people are moving to township outside the city. More number of townships is comingup to meet the demand of 'house for all'. The RBI has also liberalised the interest rates ofhome loan in order to match the repayment capability of even middle class people. Almost all
banks are dealing in home loan. Again SBI, ICICI, HDFC, HSBC are leading.
The educational loan, rather to be termed as student loan, is a good banking product for themass. Students with certain academic brilliance, studying at recognised colleges/universitiesin India and abroad are generally given education loan / student loan so as to meet theexpenses on tuition fee/ maintenance cost/books and other equipment.
MONEY TRANSFER
Beside lending and depositing money, banks also carry money from one corner of the globe
to another. This act of banks is known as transfer of money. This activity is termed asremittance business. Banks generally issue Demand Drafts, Banker's Cheques, Money Ordersor other such instruments for transferring the money. This is a type of Telegraphic Transfer orTele Cash Orders.
It has been only a couple of years that banks have jumped into the money transfer businessesin India. The international money transfer market grew 9.3% from 2003 to 2004 i.e. fromUS$213 bn. to US$233 bn. in 2004. Economists say that the market of money transfer willfurther grow at a cumulative 12.1% average growth rate through 2009.
13
7/28/2019 vibha.doc
14/65
1.2 FUTURE OF BANKING IN INDIA
A healthy banking system is essential for any economy striving to achieve good growth andyet remain stable in an increasingly global business environment. The Indian banking system
has witnessed a series of reforms in the past, like deregulation of interest rates, dilution ofgovernment stake in PSBs, and increased participation of private sector banks. It has also
14
7/28/2019 vibha.doc
15/65
undergone rapid changes, reflecting a number of underlying developments. This trend hascreated new competitive threats as well as new opportunities. This paper aims to foreseemajor future banking trends, based on these past and current movements in the market.
Given the competitive market, banking will (and to a great extent already has) become a
process of choice and convenience. The future of banking would be in terms of integration.This is already becoming a reality with new-age banks such as YES Bank, and others tooadopting a single-PIN. Geography will no longer be an inhibitor. Technology will prove to bethe differentiator in the short-term but the dynamic environment will soon lead to itssaturation and what will ultimately be the key to success will be a better relationshipmanagement.
1.2.1 OVERVIEW
If one were to say that the future of banking in India is bright, it would be a gross
understatement. With the growing competition and convergence of services, the customers(you and I) stand only to benefit more to say the least. At the same time, emergence of amultitude of complex financial instruments is foreseen in the near future (the trend is visiblein the current scenario too) which is bound to confuse the customer more than ever unless shespends hours (maybe days) to understand the same. Hence, I see a growing trend towards theimportance of relationship managers. The success (or failure) of any bank would depend notonly on tapping the untapped customer base (from other departments of the same bank,customers of related similar institutions or those of the competitors) but also on theeffectiveness in retaining the existing base.
India has witness to a sea change in the way banking is done in the past more than twodecades. Since 1991, the Reserve Bank of India (RBI) took steps to reform the Indian
banking system at a measured pace so that growth could be achieved without exposure to anymacro-environment and systemic risks. Some of these initiatives were deregulation of interestrates, dilution of the government stake in public sector banks (PSBs), guidelines being issuedfor risk management, asset classification, and provisioning. Technology has madetremendous impact in banking. Anywhere banking and Anytime banking have become areality. The financial sector now operates in a more competitive environment than before andintermediates relatively large volume of international financial flows. In the wake of greaterfinancial deregulation and global financial integration, the biggest challenge before theregulators is of avoiding instability in the financial system.
1.2.2 RISK MANAGEMENT
The future of banking will undoubtedly rest on risk management dynamics. Only those banksthat have efficient risk management system will survive in the market in the long run. Theeffective management of credit risk is a critical component of comprehensive riskmanagement essential for long-term success of a banking institution.
Although capital serves the purpose of meeting unexpected losses, capital is not a substitutefor inadequate decontrol or risk management systems. Coming years will witness banksstriving to create sound internal control or risk management processes.
With the focus on regulation and risk management in the Basel II framework gainingprominence, the post-Basel II era will belong to the banks that manage their risks effectively.
15
7/28/2019 vibha.doc
16/65
The banks with proper risk management systems would not only gain competitive advantageby way of lower regulatory capital charge, but would also add value to the shareholders andother stakeholders by properly pricing their services, adequate provisioning and maintaining arobust financial structure.
The future belongs to bigger banks alone, as well as to those which have minimized theirrisks considerably.
CHAPTER 216
7/28/2019 vibha.doc
17/65
2.1INTRODUCTION
Punjab National Bank of India, the first Indian bank started only with Indian capital, was
nationalized in July 1969 and currently the bank has become a front-line banking institutionin India with 4525 Offices including 432 Extension Counters. The corporate office of the
17
7/28/2019 vibha.doc
18/65
bank is at New Delhi. Punjab National Bank of India has set up representative offices atAlmaty (Kazakhistan), Shanghai (China) and in London and a full fledged Branch in Kabul(Afghanistan).
Punjab National Bank with 4497 offices and the largest nationalized bank is serving its 3.5
crore customers with the following wide variety of banking services: Corporate banking
Personal banking
Industrial finance
Agricultural finance
Financing of trade
International banking
Punjab National Bank has been ranked 38th amongst top 500 companies by The EconomicTimes. PNB has earned 9th position among top 50 trusted brands in India.
Punjab National Bank India maintains relationship with more than 200 leading internationalbanks world wide. PNB India has Rupee Drawing Arrangements with 15 exchangecompanies in UAE and 1 in Singapore.
2.1.1 HISTORY OF THE BANK
Punjab National Bank (PNB) was registered on May 19, 1894 under the Indian CompaniesAct with its office in Anarkali Bazaar Lahore. The Bank is the second largest government-owned commercial bank in India with about 4,500 branches across 764 cities. It serves over37 million customers. The bank has been ranked 248th biggest bank in the world by BankersAlmanac, London. The bank's total assets for financial year 2007 were about US$60 billion.PNB has a banking subsidiary in the UK, as well as branches in Hong Kong and Kabul, andrepresentative offices in Almaty, Dubai, Oslo, and Shanghai. 1895: PNB commenced its operations in Lahore. PNB has the distinction of being the
first Indian bank to have been started solely with Indian capital that has survived to the
present. (The first entirely Indian bank, the Ouch Commercial Bank, was established in
1881 in Faizabad, but failed in 1958.) PNB's founders included several leaders of the
Swadeshi movement such as Dyal Singh Majithia and Lala HarKishen Lal,[1] Lala
Lalchand, Shri Kali Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi
Ram, and Lala Dholan Dass. Lala Lajpat Rai was actively associated with the
management of the Bank in its early years.
1904: PNB established branches in Karachi and Peshawar.
1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located in Delhi circle.
18
7/28/2019 vibha.doc
19/65
1947: Partition of India and Pakistan at Independence. PNB lost its premises in Lahore,
but continued to operate in Pakistan.
1951: PNB acquired the 39 branches of Bharat Bank (est. 1942); Bharat Bank became
Bharat Nidhi Ltd.
1961: PNB acquired Universal Bank of India. 1963: The Government of Burma nationalized PNB's branch in Rangoon (Yangon).
September 1965: After the Indo-Pak war the government of Pakistan seized all the offices
in Pakistan of Indian banks, including PNB's head office, which may have moved toKarachi. PNB also had one or more branches in East Pakistan (Bangladesh).
1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue.
1969: The Government of India (GOI) nationalized PNB and 13 other major commercial
banks, on July 19, 1969. 1976 or 1978: PNB opened a branch in London.
1986 The Reserve Bank of India required PNB to transfer its London branch to State
Bank of India after the branch was involved in a fraud scandal. 1986: PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue. The acquisition
added Hindustan's 142 branches to PNB's network. 1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980.
1998: PNB set up a representative office in Almaty, Kazakhstan.
2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala. Rao
Bahadur T.M. Appu Nedungadi, author of Kundalatha, one of the earliest novels inMalayalam, had established the bank in 1899. It was incorporated in 1913, and in 1965had acquired selected assets and deposits of the Coimbatore National Bank. At the time ofthe merger with PNB, Nedungadi Bank's shares had zero value, with the result that itsshareholders received no payment for their shares PNB also opened a representativeoffice in London.
2004: PNB established a branch in Kabul, Afghanistan.
PNB also opened a representative office in Shanghai.
PNB established an alliance with Everest Bank in Nepal that permits migrants to
transfer funds easily between India and Everest Bank's 12 branches in Nepal.
2005: PNB opened a representative office in Dubai.
2007: PNB established PNBIL - Punjab National Bank (International) - in the UK,
with two offices, one in London, and one in South Hall. Since then it has opened athird branch in Leicester, and is planning a fourth in Birmingham. Gatin Gupta
became Chairmen of Punjab National Bank.
2008: PNB opened a branch in Hong Kong.
2009: PNB opened a representative office in Oslo, Norway.
2.1.2 ACHIEVEMENTS
Punjab National Bank announced its Q1FY2010 results on 29 July 2009,
delivering 62% y-o-y growth in net profits to Rs832 crore (Rs512cr), substantially
ahead of expectations on account of large treasury gains, apart from healthyoperating performance.
19
7/28/2019 vibha.doc
20/65
While the banks deposit growth was reasonably robust at 4.4% sequentially and
26.5% y-o-y, unlike the peers its growth in advances also remained strong at 38%y-o-y.
In spite of being at the forefront of PLR cuts, the bank posted a healthy growth in
Net Interest Income (NII) of 29% y-o-y.
Other Income surged 113% y-o-y, driven by strong treasury gains of Rs355 crore
during the quarter in line with industry trends, even as Fee income was also robustat 45% y-o-y, on the back of strong balance sheet growth.
Operating expenses were higher than expected on account of Rs150 crore of
provisions for imminent wage hikes.
Gross and Net NPA ratios remained stable sequentially at 1.8% and 0.2%, with
the bank not adopting the guidelines of treating floating provisions as part of tier 2capital instead of adjusting against NPAs on express permission from the RBI.
2.2 VISION AND MISSION
Vision
20
7/28/2019 vibha.doc
21/65
To evolve and position the bank as a world class, progressive, cost effective and
customer friendly institution providing comprehensive financial and relatedservices.
Integrating frontiers of technology and serving various segments of society
especially weaker section.
Commited to excellence in serving the public and also excelling in corporate
values
Mission
To provide excellent professional services and improve its position as a leader in
financial and related services.
Build and maintain a team of motivated workforce with high work ethos.
Use latest technology aimed at customer satisfaction and act as an effectivecatalyst for socio economic development.
2.3 VALUES AND ETHICS
Bonding and Integrity
Ethical conduct Periodic disclosure
Confidentiality and fair dealing
Compliance with rules and regulations
2.4 PRODUCTS AND SERVICES
21
7/28/2019 vibha.doc
22/65
Savings Fund Account
1. Total Freedom Salary Account
2. PNB Prudent Sweep,
3. PNB Vidyarthi SF Account,
4. PNB Mitra SF
Account Current Account
1. PNB Vaibhav,
2. PNB Gaurav,
3. PNB Smart Roamer
Fixed Deposit Schemes
1. Spectrum Fixed Deposit Scheme,
2. Anupam Account,
3. Mahabachat Schemes,
4. Multi Benefit Deposit
Scheme Credit Schemes
1. Flexible Housing Loan,
2. Car Finance,
3. Personal Loan,
4. Credit Cards
Social Banking
1. Mahila Udyam Nidhi Scheme,
22
7/28/2019 vibha.doc
23/65
2. Krishi Card,
3. PNB Farmers Welfare Trust
Corporate Banking
1. Gold Card scheme for exporters,
2. EXIM finance
Business Sector
1. PNB Karigar credit card,
2. PNB Kushal Udhami,
3. PNB Pragati Udhami,
4. PNB Vikas Udhami
Apart from these, and the PNB also offers locker facilities, senior citizens schemes, PPFschemes and various E-services.
2.5 AWARDS AND DISTINCTIONS
Ranked among top 50 companies by the leading financial daily, Economic Times.
Ranked as 323rd biggest bank in the world by Bankers Almanac (January 2006),
London. Earned 9th place among India's Most Trusted top 50 service brands in Economic
Times- A.C Nielson Survey. Included in the top 1000 banks in the world according to The Banker, London.
Golden Peacock Award for Excellence in Corporate Governance - 2005 by Institute of
Directors. FICCI's Rural Development Award for Excellence in Rural Development 2005
23
7/28/2019 vibha.doc
24/65
2.6 ORGANIZATIONAL STRUCTURE
24
7/28/2019 vibha.doc
25/65
SWO T ANALYSIS
25
7/28/2019 vibha.doc
26/65
Strength
Weakness
Opportunities
Threats
Lets analyze SWOT in order to know as to where the company stands
2.7 SWOT ANALYSIS
STRENGTH
26
7/28/2019 vibha.doc
27/65
Wide network
Large number of customers
Fast adaptability to technology
Brand image
WEAKNESS
27
7/28/2019 vibha.doc
28/65
Casual behaviour
Corruption and red tapism
Slow decision making due to large hierarchy
High gross NPA
28
7/28/2019 vibha.doc
29/65
OPPORTUNITIES
Home to home banking services
Diversification towards other fields
Globalization
29
7/28/2019 vibha.doc
30/65
THREATS
Stiff competition from SBI and other private players.
30
7/28/2019 vibha.doc
31/65
CHAPTER 3
31
7/28/2019 vibha.doc
32/65
WORKING CAPITAL MANAGEMENT
INTRODUCTION OF WORKING CAPITAL
The net working capital of business is its current assets less its current liabilities.
Current Assets include:
Stock of Raw Material
Work in Progress
Finished Goods Trade Debtors
Prepayments
Cash Balances
Current Liabilities include:
Trade Creditors
Accruals
Taxation Payable
Dividends Payable Short term Loans
Every business needs adequate liquid resources in order to maintain day to day cash flows.It needs enough cash to by wages and salaries as they fall due and to pay creditors if it is tokeep its workforce and ensure its supplies. Maintaining adequate working capital; is not justimportant in the short term.
Sufficient liquidity must be maintained in order to ensure the survival of business inthe long term as well. Even a profitable business may fail if it does not have adequate cashflows to meet its liabilities as tyhey fall a due. Therefore when business make investmentdecisions they must not only consider the financial outlay involved with acquiring the newmachine or the new building etc, but must also take account of the additional current assetsthat are usually involved with any expansion of activity .
Increase production tends to engender a need to hold additional stocks of raw material &work in progress.
Increased sales usually mean that the level of debtor will increase. A general increase in thefirms scales of operation tends to imply a need for greater level of cash.
32
7/28/2019 vibha.doc
33/65
THEORY OF WORKING CAPITAL
MEANING OF WORKING CAPITAL:
Capital required for a business can be classifies under two main categories:
Fixed Capital
Working Capital
Every business needs funds for two purposes for its establishments and to carry out day today operations. Long term funds are required to create production facilities through purchaseof fixed assets such as plant and machinery, land and building, furniture etc. Investments inthese assets are representing that part of firms capital which is blocked on a permanent orfixed basis and is called fixed capital. Funds are also needed for short term purposes for the
purchasing of raw materials, payments of wages and other day to day expenses etc. Thesefunds are known as working capital. In simple words, Working capital refers to that part ofthe firms capital which is required for financing short term or current assets such as cash,marketable securities, debtors and inventories.
CONCEPTS OF WORKING CAPITAL:
There are two concepts of working capital:
Balance Sheet concepts
Operating Cycle or circular flow concept
BALANCE SHEET CONCEPT:
There are two interpretation of working capital under the balance sheet concept:
Gross Working Capital
Net Working Capital
The term working capital refers to the Gross working capital and represents the amount offunds invested in current assets . Thus, the gross working capital is the capital invested intotal current assets of the enterprises. Current assets are those assets which are converted intocash within short periods of normally one accounting year. Example of current assets is:
Constituents of Current Assets:
Cash in hand and Bank balance
Bills Receivable
Sundry Debtors
Short term Loans and Advances
Inventories of Stock as:
Raw Materials
33
7/28/2019 vibha.doc
34/65
Work in Process
Stores and Spaces
Finished Goods
Temporary Investments of Surplus Funds
Prepaid Expenses
Accrued Incomes
The term working capital refers to the net working capital. Net working capital is the excessof current assets over current liabilities or say:
Net Working Capital = Current Assets Current Liabilities.
NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE:
When the current assets exceed the current liabilities, the working capital is positive and the
negative working capital results when the current liabilities are more than the current assets.Current liabilities are those liabilities which are intended to be paid in the ordinary course of
business within a short period of normally one accounting year of the current assets or theincome of the business. Examples of current liabilities are:
CONSTITUENTS OF CURRENT LIBILITIES:
Bills Payable
Sundry Creditors or Account Payable
Accrued or Outstanding Expenses
Short term Loans, Advances and Deposits Dividends Payable
Bank Overdraft
Provision for Taxation, If does not amount to appropriation of profits
The gross working capital concept is financial or going concern concept whereas net workingcapital is an accounting concept of working capital.
34
7/28/2019 vibha.doc
35/65
OPERATING CYCLE OR CIRCULATING CASH FORMAT:
Working Capital refers to that part of firms capital which is required for financing short termor current assets such as cash, marketable securities, debtors and inventories. Funds thusinvested in current assets keep revolving fast and being constantly converted into cash andthese cash flows out again in exchange for other current assets. Hence it is also known asrevolving or circulating capital. The circular flow concept of working capital is based uponthis operating or working capital cycle of a firm. The cycle starts with the purchase of rawmaterial and other resourcesAnd ends with the realization of cash from the sales of finished goods. It involves purchase ofraw material and stores, its conversion into stocks of finished goods through work in progresswith progressive increment of labor and service cost, conversion of finished stocks into sales,debtors and receivables and ultimately realization of cash and this cycle continuous again
from cash to purchase of raw materials and so on. The speed/ time of duration required tocomplete one cycle determines the requirements of working capital longer the period ofcycle, larger is the requirement of working capital.Receivable conversion periodRaw material storage
(RCP) conversion period (RMSCP)
Cash received formDebtors and paid to suppliers
Of raw materials
Sales of finished Raw materialsGoods introduced into process
Finished Goods
Produced
Finished goods conversion Work in processPeriod (FGCP) Conversion period
(WIPCP)
35
7/28/2019 vibha.doc
36/65
The gross operating cycle of a firm is equal to the length of the inventories and receivablesconversion periods. Thus,
Where,RMCP = Raw Material Conversion PeriodWIPCP = Work in- Process Conversion PeriodFGCP = Finished Goods Conversion PeriodRCP = Receivables Conversion PeriodHowever, a firm may acquire some resources on credit and thus defer payments for certain
period. In that case, net operating cycle period can be calculated as below:
Further, following formula can be used to determine the conversion periods.
Raw Material Conversion Period = Average Stock of Raw Material.Raw Material Consumption per day
Work in process Conversion Period = Average Stock of Work-in-ProgressTotal Cost of Production per day
Finished Goods Conversion Period = Average Stock of Finished Goods Total Cost of Goods sold per day
Receivables Conversion Period = Average Accounts Receivables Net Credit Sales per day
Payable Deferral Period = Average PayableNet Credit Purchase per day
36
Gross Operating Cycle = RMCP + WIPCP + FGCP + RCP
Net Operating Cycle Period = Gross Operating Cycle Period Payable Deferral period
7/28/2019 vibha.doc
37/65
CLASSIFICATION OR KIND OF WORKING CAPITAL:
Working capital may be classified in two ways:
On the basis of concept On the basis of time
On the basis of concept, working capital is classified as gross working capital and net workingcapital. The classification is important from the point of view of the financial manager.
On the basis of time, working capital may be classified as:
Permanent or Fixed working capital
Temporary or Variable working capital.
37
7/28/2019 vibha.doc
38/65
t
38
On the basis of concept On the basis of time
Net WorkingCapital
Permanent or
Fixed WorkingCapital
Gross Working
Capital
Temporary or
Variable Working
Capital
Kinds of Working Capital
Reserve Working
Capital
Regular
Working Capital
Special Working
Capital
7/28/2019 vibha.doc
39/65
1. PERMANENT OR FIXED WORKING CAPITAL:
Permanent or fixed working capital is the minimum amount which is required to ensureeffective utilization of fixed facilities and for maintaining the circulation of current assets.
There is always a minimum level of current assets which is continuously required by theenterprises to carry out its normal business operations.
2. TEMPRORAY OR VARIABLE WORKING CAPITAL:
Temporary or variable working capital is the amount of working capital which is required tomeet the seasonal demands and some special exigencies.Varibles working capital can befurther classified as second working capital and special working capital. The capital requiredto meet the seasonal needs of the enterprises is called the seasonal working capital.
Temporary working capital differs from permanent working capital in the sense that is
required for short periods and cannot be permanently employed gainfully in the business
IMPORATNCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL:
Working capital is the life blood and nerve centre of a business . just a circulation of a bloodis essential in the human body for maintaining life, working capital is very essential tomaintain the smooth running of a business. No business can run successfully without anadequate amount of working capital. The main advantages of maintaining adequate amountof working capital are as follows:
Solvency of the Business
Goodwill
Easy Loans
Cash discounts
Regular supply of Raw Materials
Regular payments of salaries, wages & other day to day commitments.
Exploitation of favorable market conditions
Ability of crisis
Quick and regular return on investments
High morals
39
7/28/2019 vibha.doc
40/65
THE NEED OR OBJECTS OF WORKING CAPITAL:
The need for working capital cannot be emphasized. Every business needs some amount ofworking capital. The need of working capital arises due to the time gap between production
and realization of cash from sales. There is an operating cycle involved in the sales andrealization of cash. There are time gaps in purchase of raw materials and production,
production and sales,And sales, and realization of cash, thus , working capital is needed for the following
purposes:
For the purchase of raw materials , components and spaces
To pay wages and salaries
To incur day to day expenses and overhead costs such as fuel, power and officeexpenses etc.
To meet the selling costs as packing, advertising etc. To provide credit facilities to the customers.
To maintain the inventories of raw materials, work in- progress, stores and sparesand finished stock.
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL
Solvency Of The Business: Adequate working capital helps in maintaining the
solvency of the business by providing uninterrupted of production.
Goodwill: Sufficient amount of working capital enables a firm to make prompt
payments and makes and maintain the goodwill.
Easy loans: Adequate working capital leads to high solvency and credit standing
can arrange loans from banks and other on easy and favorable terms.
Cash Discounts: Adequate working capital also enables a concern to avail cash
discounts on the purchases and hence reduces cost.
Regular Supply of Raw Material: Sufficient working capital ensures regular supply
of raw material and continuous production.
40
7/28/2019 vibha.doc
41/65
Regular Payment Of Salaries, Wages And Other Day TO Day Commitments: It
leads to the satisfaction of the employees and raises the morale of its employees,increases their efficiency, reduces wastage and costs and enhances production and
profits.
Exploitation Of Favorable Market Conditions: If a firm is having adequate
working capital then it can exploit the favorable market conditions such as purchasingits requirements in bulk when the prices are lower and holdings its inventories forhigher prices.
Ability To Face Crises: A concern can face the situation during the depression.
Quick And Regular Return On Investments: Sufficient working capital enables a
concern to pay quick and regular of dividends to its investors and gains confidence ofthe investors and can raise more funds in future.
High Morale: Adequate working capital brings an environment of securities,
confidence, high morale which results in overall efficiency in a business.
EXCESS OR INADEQUATE WORKING CAPITAL
Every business concern should have adequate amount of working capital to run itsbusiness operations. It should have neither redundant or excess working capital norinadequate nor shortages of working capital. Both excess as well as short workingcapital positions are bad for any business. However, it is the inadequate workingcapital which is more dangerous from the point of view of the firm.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL
1. Excessive working capital means ideal funds which earn no profit for the firmand business cannot earn the required rate of return on its investments.
41
7/28/2019 vibha.doc
42/65
2. Redundant working capital leads to unnecessary purchasing and accumulation ofinventories.
3. Excessive working capital implies excessive debtors and defective credit policywhich causes higher incidence of bad debts.
4. It may reduce the overall efficiency of the business.
5. If a firm is having excessive working capital then the relations with banks andother financial institution may not be maintained.
6. Due to lower rate of return n investments, the values of shares may also fall.
7. The redundant working capital gives rise to speculative transactions
DISADVANTAGES OF INADEQUATE WORKING CAPITAL
Every business needs some amounts of working capital. The need for working capital arisesdue to the time gap between production and realization of cash from sales. There is anoperating cycle involved in sales and realization of cash. There are time gaps in purchase ofraw material and production; production and sales; and realization of cash.
Thus working capital is needed for the following purposes:
For the purpose of raw material, components and spares.
To pay wages and salaries
To incur day-to-day expenses and overload costs such as office expenses.
To meet the selling costs as packing, advertising, etc.
To provide credit facilities to the customer.
To maintain the inventories of the raw material, work-in-progress, stores and sparesand finished stock.
42
7/28/2019 vibha.doc
43/65
For studying the need of working capital in a business, one has to study the businessunder varying circumstances such as a new concern requires a lot of funds to meet itsinitial requirements such as promotion and formation etc. These expenses are called
preliminary expenses and are capitalized. The amount needed for working capital dependsupon the size of the company and ambitions of its promoters. Greater the size of the
business unit, generally larger will be the requirements of the working capital.
The requirement of the working capital goes on increasing with the growth and expensingof the business till it gains maturity. At maturity the amount of working capital required iscalled normal working capital.
There are others factors also influence the need of working capital in a business.
FACTORS DETERMING THE WORKING CAPITAL REQUIRMENT:
The working capital requirements of a concern depend upon a large number of factors such asnature and size of the business, the characteristics of their operations, the length of productioncycle , the rate of stock turnover and the state of economic situation. However the followingare the important factors generally influencing the working capital requirements.
NATURE OR CHARACTERSTICS OF A BUSINESS : The nature and theworking capital requirement of enterprises are interlinked. While a manufacturing
industry has a long cycle of operation of the working capital, the same would be shortin an enterprises involve in providing services. The amount required also varies as perthe nature, an enterprises involved in production would required more working capitalthen a service sector enterprise.
MANAFACTURE PRODUCTION POLICY: Each enterprises in themanufacturing sector has its own production policy, some follow the policy ofuniform production even if the demand varies from time to time and other may followthe principles of demand based production in which production is based on thedemand during the particular phase of time. Accordingly the working capitalrequirements vary for both of them.
43
7/28/2019 vibha.doc
44/65
OPERATIONS: The requirement of working capital fluctuates for seasonal business.The working capital needs of such business may increase considerably during the
busy season and decrease during the
MARKET CONDITION: If there is a high competition in the chosen project
category then one shall need to offer sops like credit, immediate delivery of goods etcfor which the working capital requirement will be high. Otherwise if there is nocompetition or less competition in the market then the working capital requirementswill be low.
AVABILITY OF RAW MATERIAL: If raw material is readily available then oneneed not maintain a large stock of the same thereby reducing the working capitalinvestment in the raw material stock . On other hand if raw material is not readilyavailable then a large inventory stocks need to be maintained, there by calling forsubstantial investment in the same.
GROWTH AND EXAPNSION: Growth and Expansions in the volume of businessresult in enhancement of the working capital requirements. As business growth andexpands it needs a larger amount of the working capital. Normally the needs forincreased working capital funds processed growth in business activities.
PRICE LEVEL CHANGES : Generally raising price level require a higherinvestment in the working capital. With increasing prices, the same levels of currentassets needs enhanced investments.
MANUFACTURING CYCLE: The manufacturing cycle starts with the purchase ofraw material and is completed with the production of finished goods. If themanufacturing cycle involves a longer period the need for working capital would bemore. At time business needs to estimate the requirement of working capital inadvance for proper control and management. The factors discussed above influencethe quantum of working capital in the business. The assessment of the working capitalrequirement is made keeping this factor in view. Each constituents of the workingcapital retains it form for a certain period and that holding period is determined by thefactors discussed above. So for correct assessment of the working capital requirement
the duration at various stages of the working capital cycle is estimated. Thereafterproper value is assigned to the respective current assets, depending on its level ofcompletion. The basis for assigning value to each component is given below:
44
7/28/2019 vibha.doc
45/65
Each constituent of the working capital is valued on the basis of valuationEnumerated above for the holding period estimated. The total of all such valuation becomesthe total estimated working capital requirement.The assessment of the working capital should be accurate even in the case
of small and micro enterprises where business operation is not very large. We know thatworking capital has a very close relationship with day-to-day operations of a business.
Negligence in proper assessment of the working capital, therefore, can affect the day-to-dayoperations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurateassessment of the working capital may cause either under-assessment or over-assessment ofthe working capital and both of them are dangerous.
PRINCIPLES OF WORKING CAPITAL MANAGEMENT POLICY:
The following are the general principles of a sound working capital management policy:
45
COMPONENTS OF WORKING
CAPITAL BASIS OF VALUATION
Stock of Raw Material Purchase of Raw Material
Stock of Work -in- Process At cost of Market value which is lower Stock of finished Goods Cost of Production
Debtors Cost of Sales or Sales Value
Cah Working Expenses
PRINCIPLES OF WORKING CAPITAL MANAGEMNT POLICY
PRINCIPLES OF
RISKVARIATIONS
PRINCIPLES OF
COST OFCAPITAL
PRINCIPLES
OF EQUITYPRINCIPLES
PRINCIPLES OF
MATURITY OFPAYMENTS
7/28/2019 vibha.doc
46/65
1. PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS POLICY):
Risk here refers to the inability of a firm to meet its obligations as and when they become duefor payment. Larger investment in current Assets with less dependence on short term
borrowings, increase liquidity, reduces risk and thereby decreases the opportunity for gain orloss.On the other hand less investments in current assets with greater dependence on short term
borrowings, reduces liquidity and increase profitability. In other words there is a definiteinverse relationship between the degree of risk and profitability. In other words, there is adefinite inverse relationship between the risk and profitability. A conservative management
prefers to minimize risk by maintaining a higher level of current assets or working capitalwhile a liberal management assumes greater risk by reducing working capital. However, thegoal of management should be to establish a suitable trade off between profitability and risk.
2. PRINCIPLES OF COST OF CAPITAL:
The various source of raising working capital finance have different cost of capital and thedegree of risk involved. Generally, higher and risk however the risk lower is the cost andlower the risk higher is the cost. A sound working capital management should always try toachieve a proper balance between these two.
3.PRINCIPLE OF EQUITY POSITION:
The principle is concerned with planning the total investments in current assets. According tothis principle, the amount of working capital invested in each component should beadequately justified by a firms equity position. Every rupee invested in current assets shouldcontribute to the net worth of the firm. The level of current assets may be measured with thehelp of two ratios:
1. Current assets as a percentage of total assets and2. Current assets as a percentage of total sales
While deciding about the composition of current assets, the financial manager may considerthe relevant industrial averages.
4. PRINCIPLES OF MATURITY OF PAYMENT:
The principle is concerned with planning the source of finance for working capital.According to the principles, a firm should make every effort to relate maturities of paymentto its flow of internally generated funds. Maturity pattern of various current obligations is animportant factor in risk assumptions and risk assessments. Generally shorter the maturityschedule of current liabilities in relation to expected cash inflows, the greater the inability tomeet its obligations in time.
46
7/28/2019 vibha.doc
47/65
MANAGEMENT OF WORKING CAPITAL
Management of working capital is concerned with the problem that arises in attempting tomanage the current assets, current liabilities. The basic goal of working capital managementis to manage the current assets and current liabilities of a firm in such a way that a
satisfactory level of working capital is maintained, i.e. it is neither adequate nor excessive asboth the situations are bad for any firm. There should be no shortage of funds and also noworking capital should be ideal. WORKING CAPITAL MANAGEMENT POLICES of afirm has a great on its probability, liquidity and structural health of the organization. Soworking capital management is three dimensional in nature as
1. It concerned with the formulation of policies with regard to profitability, liquidity andrisk.
2. It is concerned with the decision about the composition and level of current assets.
3. It is concerned with the decision about the composition and level of current liabilities.
WORKING CAPITAL ANALYSIS
As we know working capital is the life blood and the centre of a business. Adequate amount
of working capital is very much essential for the smooth running of the business. And themost important part is the efficient management of working capital in right time. Theliquidity position of the firm is totally effected by the management of working capital. So, astudy of changes in the uses and sources of working capital is necessary to evaluate theefficiency with which the working capital is employed in a business. This involves the needof working capital analysis.
The analysis of working capital can be conducted through a number of devices, such as:
47
7/28/2019 vibha.doc
48/65
Ratio analysis.
Fund flow analysis.
Budgeting.
1. RATIO ANALYSIS
A ratio is a simple arithmetical expression one number to another. The technique of ratioanalysis can be employed for measuring short-term liquidity or working capital position of afirm. The following ratios can be calculated for these purposes:
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio
4. Inventory turnover.
5. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio of current liabilities to tangible net worth.
2. FUND FLOW ANALYSIS
Fund flow analysis is a technical device designated to the study the source from which
additional funds were derived and the use to which these sources were put. The fund flowanalysis consists of:
a. Preparing schedule of changes of working capital
b. Statement of sources and application of funds.
It is an effective management tool to study the changes in financial position (working capital)
business enterprise between beginning and ending of the financial dates.
48
7/28/2019 vibha.doc
49/65
3. WORKING CAPITAL BUDGET
A budget is a financial and / or quantitative expression of business plans and polices to be
pursued in the future period time. Working capital budget as a part of the total budge tingprocess of a business is prepared estimating future long term and short term working capitalneeds and sources to finance them, and then comparing the budgeted figures with actual
performance for calculating the variances, if any, so that corrective actions may be taken infuture. He objective working capital budget is to ensure availability of funds as and needed,and to ensure effective utilization of these resources. The successful implementation ofworking capital budget involves the preparing of separate budget for each element of workingcapital, such as, cash, inventories and receivables etc.
ANALYSIS OF SHORT TERM FINANCIAL POSITION OR TEST OF LIQUIDITY
The short term creditors of a company such as suppliers of goods of credit and commercialbanks short-term loans are primarily interested to know the ability of a firm to meet itsobligations in time. The short term obligations of a firm can be met in time only when it ishaving sufficient liquid assets. So to with the confidence of investors, creditors, the smoothfunctioning of the firm and the efficient use of fixed assets the liquid position of the firmmust be strong. But a very high degree of liquidity of the firm being tied up in currentassets. Therefore, it is important proper balance in regard to the liquidity of the firm. Twotypes of ratios can be calculated for measuring short-term financial position or short-termsolvency position of the firm.
1. Liquidity ratios.
2. Current assets movements ratios.
A) LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its current obligations as and when thesebecome due. The short-term obligations are met by realizing amounts from current, floatingor circulating assts. The current assets should either be liquid or near about liquidity. Theseshould be convertible in cash for paying obligations of short-term nature. The sufficiency orinsufficiency of current assets should be assessed by comparing them with short-termliabilities. If current assets can pay off the current liabilities then the liquidity position issatisfactory. On the other hand, if the current liabilities cannot be met out of the current assetsthen the liquidity position is bad. To measure the liquidity of a firm, the following ratios can
be calculated:
1. CURRENT RATIO
49
7/28/2019 vibha.doc
50/65
2. QUICK RATIO
3. ABSOLUTE LIQUID RATIO
CALCULATION OF CURRENT RATIO
CURRENT RATIO
20%
37%
43% FY 2005-2006
FY 2006-2007
FY2007-2008
1. CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure of general liquidity and itsmost widely used to make the analysis of short-term financial position or liquidity of a firm.
50
FIANANCIAL
YEAR
CURRENT
ASSETS
CURRENT
LAIBILITIES CURRENT RATIO
FY 2005-2006 29843.52 7611.44 3.92
FY 2006-2007 47163.72 6597.95 7.14
FY2007-2008 61410.49 7459.4 8.23
7/28/2019 vibha.doc
51/65
It is defined as the relation between current assets and current liabilities. Thus,
CURRENT RATIO = CURRENT ASSETSCURRENT LIABILITES
The two components of this ratio are:
1) CURRENT ASSETS
2) CURRENT LIABILITES
Current assets include cash, marketable securities, bill receivables, sundry debtors,inventories and work-in-progresses. Current liabilities include outstanding expenses, bill
payable, dividend payable etc.
A relatively high current ratio is an indication that the firm is liquid and has the ability to pay
its current obligations in time. On the hand a low current ratio represents that the liquidityposition of the firm is not good and the firm shall not be able to pay its current liabilities intime. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the currentliabilities is considered to be satisfactory.
CALCULATION OF QUICK RATIO
51
7/28/2019 vibha.doc
52/65
Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be definedas the relationship between quick/liquid assets and current or liquid liabilities. An asset issaid to be liquid if it can be converted into cash with a short period without loss of value. It
measures the firms capacity to pay off current obligations immediately.
QUICK RATIO = QUICK ASSETS
CURRENT LIABILITEIS
QUICK RATIO
25%
33%
42% FY 2005-2006
FY 2006-2007
FY2007-2008
Where Quick Assets are:
1) Marketable Securities
2) Cash in hand and Cash at bank.
3) Debtors.
A high ratio is an indication that the firm is liquid and has the ability to meet its currentliabilities in time and on the other hand a low quick ratio represents that the firms liquidity
position is not good.
52
FIANANCIAL YEAR
QUICK ASSETS
QUICK
LIABILITITES CURRENT LAIBILITIES QUICK RATIO
FY 2005-2006 12759.32 7611.44 1.67
FY 2006-2007 14530.46 6597.95 2.2
FY2007-2008 20880.64 7459.4 2.78
7/28/2019 vibha.doc
53/65
As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quickassets are equal to the current liabilities then the concern may be able to meet its short-termobligations. However, a firm having high quick ratio may not have a satisfactory liquidity
position if it has slow paying debtors. On the other hand, a firm having a low liquidityposition if it has fast moving inventories.
3. ABSOLUTE LIQUID RATIO
Although receivables, debtors and bills receivable are generally more liquid than inventories,yet there may be doubts regarding their realization into cash immediately or in time. Soabsolute liquid ratio should be calculated together with current ratio and acid test ratio so asto exclude even receivables from the current assets and find out the absolute liquid assets.
Absolute Liquid Assets includes :
ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETSCURRENT LIABILITES
ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.
B) CURRENT ASSETS MOVEMENT RATIOS
Funds are invested in various assets in business to make sales and earn profits. The efficiencywith which assets are managed directly affects the volume of sales. The better themanagement of assets, large is the amount of sales and profits. Current assets movementratios measure the efficiency with which a firm manages its resources. These ratios are calledturnover ratios because they indicate the speed with which assets are converted or turned overinto sales. Depending upon the purpose, a number of turnover ratios can be calculated. Theseare :
1. Inventory Turnover Ratio
2. Debtors Turnover Ratio
3. Creditors Turnover Ratio
4. Working Capital Turnover Ratio
The current ratio and quick ratio give misleading results if current assets include high amountof debtors due to slow credit collections and moreover if the assets include high amount ofslow moving inventories. As both the ratios ignore the movement of current assets, it is
important to calculate the turnover ratio.
53
7/28/2019 vibha.doc
54/65
1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO :
Every firm has to maintain a certain amount of inventory of finished goods so as to meet therequirements of the business. But the level of inventory should neither be too high nor toolow. Because it is harmful to hold more inventory as some amount of capital is blocked in it
and some cost is involved in it. It will therefore be advisable to dispose the inventory as soonas possible.
INVENTORY TURNOVER RATIO = COST OF GOOD SOLDAVERAGE INVENTORY
Inventory turnover ratio measures the speed with which the stock is converted into sales.Usually a high inventory ratio indicates an efficient management of inventory because morefrequently the stocks are sold ; the lesser amount of money is required to finance theinventory. Where as low inventory turnover ratio indicates the inefficient management ofinventory. A low inventory turnover implies over investment in inventories, dull business,
poor quality of goods, stock accumulations and slow moving goods and low profits ascompared to total investment.
AVERAGE STOCK = OPENING STOCK + CLOSING STOCK2
Financial Year FY 05-06 FY 06-07 FY07-08
inventory turnover ratio/ stockvelocity
4.351329
3.2479138 2.9936
INVENTORY TURNOVER RATIO
0 1 2 3 4 5
FY 05-06
FY 06-07
FY07-08
inventory turnover ratio/
stock velocity
2. INVENTORY CONVERSION PERIOD:
54
7/28/2019 vibha.doc
55/65
INVENTORY CONVERSION PERIOD = 365 (net working days)INVENTORY TURNOVER RATIO
3. DEBTORS TURNOVER RATIO :
A concern may sell its goods on cash as well as on credit to increase its sales and a liberalcredit policy may result in tying up substantial funds of a firm in the form of trade debtors.Trade debtors are expected to be converted into cash within a short period and are included incurrent assets. So liquidity position of a concern also depends upon the quality of tradedebtors. Two types of ratio can be calculated to evaluate the quality of debtors.
a) Debtors Turnover Ratio
b) Average Collection Period
DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)AVERAGE DEBTORS
Debtors velocity indicates the number of times the debtors are turned over during a year.Generally higher the value of debtors turnover ratio the more efficient is the management ofdebtors/sales or more liquid are the debtors. Whereas a low debtors turnover ratio indicates
poor management of debtors/sales and less liquid debtors. This ratio should be compared withratios of other firms doing the same business and a trend may be found to make a betterinterpretation of the ratio.
AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR2
4. AVERAGE COLLECTION PERIOD :
Average Collection Period = No. of Working DaysDebtors Turnover Ratio
55
7/28/2019 vibha.doc
56/65
The average collection period ratio represents the average number of days for which a firmhas to wait before its receivables are converted into cash. It measures the quality of debtors.Generally, shorter the average collection period the better is the quality of debtors as a short
collection period implies quick payment by debtors and vice-versa.
Average Collection Period = 365 (Net Working Days)Debtor turnover ratio
5. WORKING CAPITAL TURNOVER RATIO :
Working capital turnover ratio indicates the velocity of utilization of net working capital.This ratio indicates the number of times the working capital is turned over in the course of theyear. This ratio measures the efficiency with which the working capital is used by the firm. Ahigher ratio indicates efficient utilization of working capital and a low ratio indicatesotherwise. But a very high working capital turnover is not a good situation for any firm.
Working Capital Turnover Ratio = Cost of SalesNet Working Capital
Working Capital Turnover = Sales
Net working Capital
ANALYSIS OF FINANCIAL STATEMENTS
56
7/28/2019 vibha.doc
57/65
FINANCIAL STATEMENTS:
Financial statement is a collection of data organized according to logical and consistent
accounting procedure to convey an under-standing of some financial aspects of a businessfirm. It may show position at a moment in time, as in the case of balance sheet or may reveala series of activities over a given period of time, as in the case of an income statement. Thus,the term financial statements generally refers to the two statements
(1) The position statement or Balance sheet.
(2) The income statement or the profit and loss Account.
OBJECTIVES OF FINANCIAL STATEMENTS:
According to accounting Principal Board of America (APB) states
The following objectives of financial statements: -
1. To provide reliable financial information about economic resources and obligation of abusiness firm.
2. To provide other needed information about charges in such economic resources andobligation.
3. To provide reliable information about change in net resources (recourses less obligations)missing out of business activities.
4. To provide financial information that assets in estimating the learning potential of thebusiness.
LIMITATIONS OF FINANCIAL STATEMENTS:
Though financial statements are relevant and useful for a concern, still they do not present afinal picture a final picture of a concern. The utility of these statements is dependent upon a
57
7/28/2019 vibha.doc
58/65
number of factors. The analysis and interpretation of these statements must be done carefullyotherwise misleading conclusion may be drawn.
Financial statements suffer from the following limitations: -
1. Financial statements do not given a final picture of the concern. The data given in thesestatements is only approximate. The actual value can only be determined when the business issold or liquidated.
2. Financial statements have been prepared for different accounting periods, generally oneyear, during the life of a concern. The costs and incomes are apportioned to different periodswith a view to determine profits etc. The allocation of expenses and income depends upon the
personal judgment of the accountant. The existence of contingent assets and liabilities alsomake the statements imprecise. So financial statement are at the most interim reports ratherthan the final picture of the firm.
3. The financial statements are expressed in monetary value, so they appear to give final andaccurate position. The value of fixed assets in the balance sheet neither represent the value forwhich fixed assets can be sold nor the amount which will be required to replace these assets.The balance sheet is prepared on the presumption of a going concern. The concern isexpected to continue in future. So fixed assets are shown at cost less accumulateddeprecation. Moreover, there are certain assets in the balance sheet which will realize nothingat the time of liquidation but they are shown in the balance sheets.
4. The financial statements are prepared on the basis of historical costs Or original costs. Thevalue of assets decreases with the passage of time current price changes are not taken intoaccount. The statement are not prepared with the keeping in view the economic conditions.the balance sheet loses the significance of being an index of current economics realities.Similarly, the profitability shown by the income statements may be represent the earningcapacity of the concern.
5. There are certain factors which have a bearing on the financial position and operatingresult of the business but they do not become a part of these statements because they cannot
be measured in monetary terms. The basic limitation of the traditional financial statementscomprising the balance sheet, profit & loss A/c is that they do not give all the informationregarding the financial operation of the firm. Nevertheless, they provide some extremelyuseful information to the extent the balance sheet mirrors the financial position on a particular
data in lines of the structure of assets, liabilities etc. and the profit & loss A/c shows the resultof operation during a certain period in terms revenue obtained and cost incurred during theyear. Thus, the financial position and operation of the firm.
CONSEQUENCES OF UNDER ASSESMENT OF WORKING CAPITAL:
Growth may be stunted. It may become difficult for the enterprises to undertakeprofitable projects due to non availability of working capital.
58
7/28/2019 vibha.doc
59/65
Implementations of operating plans may brome difficult and consequently the profitgoals may not be achieved.
Cash crisis may emerge due to paucity of working funds.
Optimum capacity utilization of fixed assets may not be achieved due to nonavailability of the working capital.
The business may fail to honour its commitment in time thereby adversely affecting itscreditability. This situation may lead to business closure.The business may be compelled to by raw materials on credit and sell finished goods on cash.In the process it may end up with increasing cost of purchase and reducing selling price byoffering discounts . both the situation would affect profitable adversely.
Now avaibility of stocks due to non availability of funds may result in production stoppage.While underassessment of working capital has disastrous implications on businessoverassesments of working capital also has its own dangerous.
CONSEQUENCES OF OVER ASSESMNET OF WORKING CAPITAL:
Excess of working capital may result in un necessary accumulation of inventories.
It may lead to offer too liberal credit terms to buyers and very poor recovery system &cash management.
It may make management complacent leading to its inefficiency.
Over investment in working capital makes capital less productive and may reducereturn on investment.
Working Capital is very essential for success of business & therefore needs efficientmanagement and control. Each of the components of working capital needs propermanagement to optimize profit.
INVENTORY MANAGEMNT:
59
7/28/2019 vibha.doc
60/65
Inventory includes all type of stocks. For effective working capital management, inventoryneeds to be managed effectively. The level of inventory should be such that the total cost ofordering and holding inventory is the least. Simultaneously stock out costs should beminimized. Business therefore should fix the minimum safety stock level reorder level ofordering quantity so that the inventory costs is reduced and outs management become
efficient.
RECEIVABLE MANAGEMENT:
60
7/28/2019 vibha.doc
61/65
Given a choice, every business would prefer selling its produce on cash basis. However, dueto factors like trade policies , prevailing market conditions etc. Business are compelled tosells their goods on credit. In certain circumstances a business may deliberately extend creditas a strategy of increasing sales. Extending credit means creating current assets in the form ofdebtors or account receivables. Investment in the type of current assets needs proper and
effective management as, it gives rise to costs such as :
Cost of carrying receivables
Cost of bad debts losses
Thus the objective of any management policy pertaining to accounts receivables would beto ensure the benefits arising due to the receivables are more then the costs incurred forthe receivables and the gap between benefit and costs increased resulting in increase
profits. An effective control of receivablesHelp a great deal in properly managing it. Each business should therefore try to find outcoverage credit extends to its clients using the below given formula:
Average Credit = Total amount of receivable
(Extend in days) Average credit sale per day
Each business should project expected sales and expected investments in receivable basedon various factor, which influence the working capital requirement. From this it would be
possible to find out the average credit days using the above given formula. A businessshould continuously try to monitor the credit days and see that the average. Credit offer toclients is not crossing the budgeted period otherwise the requirement of investment in theworking capital would increase and as a result, activities may get squeezed. This may lead
to cash crisis.
61
7/28/2019 vibha.doc
62/65
CASH BUDGET:
Cash budget basically incorporates estimates of future inflow and outflows of cash covera projected short period of time which may usually be a year, a half or a quarter year .effective cash management is facilated if the cash budget is further broken down into
months, weeks or even a daily basis.
There are two components of cash budget are:
1. Cash inflows2. Cash outflows
The main source for thses flows are given here under:
1. Cash Sales2. Cash received from debtors
3. Cash received from Loans, deposits etc.4. Cash receipts other revenue income5. Cash received from sale of investment or assets.
CASH OUTFLOWS:
1. Cash Purchase2. Cash payments to Creditors3. Cash payment for other revenue expenditure4. Cash payment for assets creation5. Cash payments for withdrawals, taxes.6. Repayments of Loan etc.
62
7/28/2019 vibha.doc
63/65
A suggestive for, at for cash budget is given below:
CONCLUSION
63
MONT
HS
PARTICULARS JANUARY FERBUARYMARC
H
Estimated cash inflows
. I. Total cash inflows Estimated cash outflows .. .. II. Total cash outflows III. Opening cash balances
IV. Add/deduct surplus/deflictduring the
month ( I-II) V. Closing cash balances (III -IV) VI. Minimum level of cash balance VII. Estimated excess or short fall of cash
(V-VI)
7/28/2019 vibha.doc
64/65
Working capital management is an important aspect of any business. Every business concernshould have adequate working capital to run its business operation. Every concern shouldhave neither redundant of excess working capital nor inadequate or shortage of workingcapital. Both excess as well as short working capital positions are bad for any business.The three elements of working capital management are cash management receivable
management and inventory management. If a finance manager maintains these threeelements of working capital management properly means the concern will get dramaticimprovement in their sales volume and also in business. Working capital policies of a firmhave a great effect on its profitability, liquidity and structured health of the organization.Every concern should adopt some new tread management strategies that will help in greater
productivity, inventory optimization and also better working capital management. So, it isnoted that working capital is a means to run business smoothly and profitability. Thus, theconcept of working capital has its own important in a going concern.
Good management of working capital is part of good finance management effective use of
working capital will contribute to the operational efficiency of a department; optimum usewill help to generate maximum return.
64
7/28/2019 vibha.doc
65/65
BIBLOGRAPHY
Financial Management theory and practice by Prassanna Chandra
Www. Google.com,
www. Wikepidia.com
www. Pnbindia.com
