WORKING CAPITAL FINANCING IN CENTRAL BANK OF INDIA

By SnehaAgarwal Guide Mr. V.K.Soni (Chief Manager) Project Work undertaken at:

Central Bank of India, Corporate Finance Branch, Parliament Street, New Delhi. Report submitted in partial fulfilment of the requirements For the award of Post-Graduate Diploma in Banking and Finance (2011-2013)

by National Institute of Bank Management,Pune

Acknowledgement
A work owes its success from the commencement to the completion. So let me express my gratitude to all those who helped me in various stages of this study. I would start by thanking Shri P.S. Srinivasan, Deputy General Manager of the branch for co-operating with me to complete my project without any hurdles. I cant refrain to accord my humble thanks to my Project Guide Shri V.K. Sonifor guiding me at all the stages with valuables inputs and for making the project study almost transparent without whom I would not have been able to complete my project. I also thank Shri Suresh Chandra, Head of the Forex Department, and Shri R.S. Raman, Assistant General Manager,for his unforgettable help and kind encouragement during my project at Central Bank of India. I would also like to thank and all the managers of Central Bank of India, Miss Karishma Jain, Mr.Tarun Gupta, Mr.Kuldeep Kashyap, Mr.Navneet Kumar, Miss Kavita Goyal for their invaluable assistance, support and guidance, without whom this project would not have been possible. I accord my deep sense of gratitude to the professors of our college for their direct and indirect help during the preparation of my project report. Words can never express satisfactorily in indebtedness but I dare to take this opportunity to declare my utmost sincere gratitude to my affectionate parents for their blessings and encouragement for the success There are many well Wishers,Friends and Central Bank Employees and Officers who directly and indirectly rendered with valuable help to complete this professional endeavour. I have deep sense of reverence for all of them. Lastly, I would like to thank NIBM and Prof. KalyanSwarup (dean of NIBM) who has given me such a wonderful opportunity.

With Regards, SnehaAgarwal

Table of Contents
Chapter No. i. ii. iii. iv. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Topic Acknowledgement Summer internship completion certificate Brief overview of the Bank Brief profile of Corporate Finance Branch Introduction Review of Literature Objective Methodology Analysis / Results Interpretations Conclusions &Recommendations Suggestions for the future research Executive Summary Appendices Page No. 2 3 5 9 11 52 53 54 55 68 69 70 71 72

BRIEF OVERVIEW OF THE BANK

Corporate vision
To emerge as a strong, vibrant and pro-active Bank/Financial Super Market and to positively contribute to the emerging needs of the economy through consistent harmonization of human, financial and technological resources and effective risk control systems.

Corporate Mission
To transform the customer banking experience into a fruitful and enjoyable one. To leverage technology for efficient and effective delivery of all banking services. To have bouquet of product and services tailor-made to meet customers aspirations. The pan-India spread of branches across all the state of the country will be utilized to further the socio economic objective of the Government of India with emphasis on Financial Inclusion. Established in 1911, Central Bank of India was the first Indian commercial bank which was wholly owned and managed by Indians. The establishment of the Bank was the ultimate realisation of the dream of Sir Sorabji Pochkhanawala, founder of the Bank. Sir Pherozesha Mehta was the first Chairman of a truly 'Swadeshi Bank'. In fact, such was the extent of pride felt by Sir Sorabji Pochkhanawala that he proclaimed Central Bank of India as the 'property of the nation and the country's asset'. He also added that 'Central Bank of India lives on people's faith and regards itself as the people's own bank'.

During the past 99 years of history the Bank has weathered many storms and faced many challenges. The Bank could successfully transform every threat into business opportunity and excelled over its peers in the Banking industry.

A number of innovative and unique banking activities have been launched by Central Bank of India and a brief mention of some of its pioneering services are as under:

1921 Introduction to the Home Savings Safe Deposit Schemeto build saving/thrift habits

in all sections of the society. 1924 An Exclusive Ladies Department to cater to the Bank's women clientele. 1926 Safe Deposit Locker facility and Rupee Travellers' Cheques. 1929 Setting up of the Executor and Trustee Department. 1932 Deposit Insurance Benefit Scheme. 1962 Recurring Deposit Scheme.

Subsequently, even after the nationalisation of the Bank in the year 1969, Central Bank continued to introduce a number of innovative banking services as under:

1976 The Merchant Banking Cell was established. 1980 Centralcard, the credit card of the Bank was introduced. 1986 'Platinum Jubilee Money Back Deposit Scheme' was launched. 1989 The housing subsidiary Cent Bank Home Finance Ltd. was started with its headquarters at Bhopal in Madhya Pradesh. 1994 Quick Cheque Collection Service (QCC) & Express Service was set up to enable speedy collection of outstation cheques.

Further in line with the guidelines from Reserve Bank of India as also the Government of India, Central Bank has been playing an increasingly active role in promoting the key thrust areas of agriculture, small scale industries as also medium and large industries. The Bank also introduced a number of Self Employment Schemes to promote employment among the educated youth.

Among the Public Sector Banks, Central Bank of India can be truly described as an All India Bank, due to distribution of its large network in 27 out of 29 States as also in 3 out of 7 Union Territories in India. Central Bank of India holds a very prominent place among the Public Sector Banks on account of its network of 3967 branches and 27 extension counters at various centres throughout the length and breadthof the country.

Customers' confidence in Central Bank of India's wide ranging services can very well be judged from the list of major corporate clients such as ICICI, IDBI, UTI, LIC, HDFC as also almost all major corporate houses in the country.

FINANCIAL HIGHLIGHTS
Business Growth (in crore)

Deposits Advances Total Business Investments CD Ratio

FY 2009 1,31,272 86,740 2,18,012 43,060 65.12%

FY 2010 1,62,107 1,07,118 2,69,225 50,562 65.01%

FY 2011 1,79,356 1,31,407 3,10,763 54,504 72.33%

FY 2012 1,96,173 1,50,725 3,46,898 59,577 76.83%

Profitability (in crore)

Gross Income Gross Expenses Operating Profit Net Profit NIM (%) Net Interest Income Non Interest Income

FY 2009 11,525 10,088 1437 571 1.97% 2228 1070

FY 2010 13,799 11,741 2058 1058 1.86% 2545 1735

FY 2011 16,486 13,895 2591 1252 3.31% 5326 1265

FY 2012 20,545 17,730 2815 533 2.78% 5169 1395

250,000

200,000

150,000 Deposits 100,000 Advances

50,000

0 FY 09 FY 10 FY 11 FY 12

NIM
3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% FY 09 FY 10 FY 11 FY 12 1.97% 1.86% NIM 3.31% 2.78%

BRIEF PROFILE OF CORPORATE FINANCE BRANCH, NEW DELHI

The Corporate Finance Branch is located in Parliament Street, New Delhi. It concentrates only on the corporate customers and holds their current and Time Deposit accounts only. There are no savings accounts with the branch. The branch handles credit proposals from corporates having credit needs of Rs. 75 croreand above. Some of its esteemed patrons are: 1. Surya Roshini Ltd. 2. Jubilant organosys. 3. Jubilant foodworks Ltd. 4. Bhushan Steel Ltd. 5. PunjLoyd Ltd. etc

Some of its financial highlights are as under. The 2012 figures are estimated .

Deposits as of March 2011

2049.29

2159

610.55

31.03.2010

31.03.2011

31.03.2012 Deposits (Rs. Crore)

Industry wise Exposure as of Sept. 2011

Sugar, 52.08 Real Cement, Estate, 195.82 152.38 Textile , 357.62 Pharma, 465.06 PSU, 994.04

Others, 1195.74

Power, 1244.84 Infrastructure, 1417.73 Steel, 912.44

Telecom, 507.04

NBFC, 3476.71

INTRODUCTION
Working capital is that portion of a firms capital which is employed in short termoperations. Current assets represent Gross Working Capital. The excess of current assets over current liabilities is Net Working Capital. Current assets consists of all stocksincluding finished goods, work in progress, raw material, cash, marketable securities,accounts receivables, inventories, short term investments, etc. These assets can beconverted into cash within an accounting year. Current liabilities represent the totalamount of short term debt which must be settled within one year. They representcreditors, bills payable, bank overdraft, outstanding expenses, short term loans, etc. The working capital is the finance required to meet the costs involved during theoperating cycle or business cycle. Operating cycle is the period involved from the timeraw materials are purchased to the time they are converted into finished goods and thesame are finally sold and realized. The need for current assets arises because of operating cycle. The operating cycle is a continuous process and therefore the need for current assets is felt constantly. Each and every current asset is nothing but blockage of funds. Therefore, these current assets need to be financed which is done through Working Capital Financing. There is always a minimum level of current assets or working capital which iscontinuously required by the firm to carry on its business operations. This minimum level of current assets is known as permanent or fixed working capital. It is permanent in the same way as the firms fixed assets are. This portion of working capital has to befinanced by permanent sources of funds such as; share capital, reserves, debentures andother forms of long term borrowings. The extra working capital needed to support thechanging production and sales is called fluctuating or variable or temporary workingcapital. This has to be financed on short term basis. The main sources for financing thisportion are trade credit, bank credit, factoring and commercial paper. It is in this context that bank financing assumes significance in the working capital financing of industrial concerns.

FACTORS AFFECTING WORKING CAPITAL MANAGEMENT:

The amount of working capital required depends upon a number of factors which can be stated as below:

Nature of Business:
Some businesses are such, due to their very nature, that their requirement of fixed capital is more rather than working capital. These businesses sell services and not the commodities and not the commodities and that too on cash basis. As such, no funds are blocked in piling inventories and also no funds are blocked in receivables. E.g. Public utility services like railways, electricity boards, infrastructure oriented projects etc. Their requirement of working capital is less. On the other hand, there are some business like trading activity, where the requirement of fixed capital is less but more money is blocked in inventories and debtors. Their requirement of the working capital is more.

Length of Production Cycle:

In some business like machine tool industry, the time gap between the acquisitions of raw material till the end of final production of finished product itself is quite high. As such more amounts may be blocked either in raw materials, or work in progress or finished goods or even in debtors. Naturally, their needs of working capital are higher. On the other hand, if the production cycle is shorter, the requirement of working capital is also less.15

Size and Growth of Business:

In very small companies the working capital requirements are quite high overheads, higher buying and selling costs etc. As such, the medium sized companies positively have an edge over the small companies. But if the business starts growing after a certain limit, the working capital requirements may be adversely affected by the increasing size.

Business Trade Cycles:

If the company is operating in the period of boom, the working capital requirements may be more as the company may like to buy more raw material, may increase the production and sales to take the benefits of favorable markets, due to the increased sales, there may be more and more amount of funds blocked in stock and debtors etc. Similarly, in case of depression also, the working capital requirements may be high as the sales in terms of value and quantity may be reducing, there may be unnecessary piling up of stocks without getting sold, the receivables may not be recovered in time etc.

Terms of Purchase and Sales:

Sometimes, due to competition or custom, it may be necessary for the company to extend more and more credit to the customers, as a result of which more and more amounts is locked up in debtors or bills receivables which increase working capital requirements. On the other hand, in case of purchases, if credit is offered by the suppliers of goods and services, a part of working capital requirement may be financed by them, but if it is necessary to purchase these goods or services on cash basis, the working capital requirement will be higher.16

Profitability:
The profitability of the business may vary in each and every individual case, which in its turn may depend upon numerous factors. But high profitability will positively reduce the strain on working capital requirements of the company, because the profits to the extent that they are earned in cash may be used to meet the working capital requirements of the company. However, profitability has to be considered from one more angles so that it can be considered as one of the ways in which strain on working capital requirements of the company may be relieved. And these angles are :
Taxation Policy: How much is required to be paid by the company towards its tax liability? Dividend Policy: How much of the profits earned by the company are distributed by way of dividend? Effect of Inflation on Working Capital Requirement:

The phase of inflation can be identified with the situation of increasing price levels, increasing demand and increasing supply. As such, the working capital requirements multiply during the phase of inflation due to increasing cost of production and increasing level of sales turnover. However, in order to control the increasing demand for working capital during the period of inflation, the following measures may be applied. Possibility of using cheaper substitute raw material, without affecting the quality, should be explored. For this purpose, research activities may be conducted. Attempts should be made to reduce the production costs to maximum possible extent. For this purpose, the techniques like time and motion study, incentive schemes, cost reduction programmes etc. may be implemented. Attempts should be made to reduce the operating cycle to the maximum possible extent. Aiming at greater turnover at short intervals will go a long way to reduce the stress on working capital requirements. Attempts should be made to reduce the locked up working capital in non-moving or obsolete inventories. A clear-cut policy should be formulated and followed for timely disposal of non- moving and obsolete inventories. Similarly, efficient management information system should be developed to reflect the position of inventory from the various angles. Attempts should be made to reduce the amount looked up in receivables. Quicker realization of debts will go a long way to reduce the stress on working capital requirements. Attempts should be made to make the payments of to creditors in time. This helps the business to build up good reputation and increases its bargaining power with respect to period of credit of credit for payment and other conditions. Attempts should be made to match the projected cash inflows and projected cash outflows. If they do not match, some of the payments should be postponed or purchases of certain avoidable items should be deferred. Estimation of Working Capital Requirements: First of all estimates of all current assets should be made. These current assets may include stock, debtors. Cash/Bank balance prepaid expenses etc. Difference between the estimated current assets and current liabilities will represent the working capital requirements. To this sometime a standard percentage may be added to take care of the contingencies. This technique is known as Cash Cost technique of estimating of working capital requirements . There is another technique available for estimating working capital requirements also and that is in the form of Balance Sheet Method. In this the forecast is made of various assets and liabilities, the difference between assets and liabilities indicating either the surplus or deficiency of cash. There are various methods available for financing the working capital requirements:

Scope of Working Capital Management:

The need of gross working capital or current assets cannot be overemphasized. The object of any business is to earn profits. The main factor affecting the profits is the magnitude of sales of the business. But the sales cannot be converted into cash immediately. There is a time lag between the sale of goods and realization of cash. There is a need of working capital in the form of current assets to fill up this time lag. Technically, this is called as operating cycle or working capital cycle, which is the heart of need for working capital.

This working capital cycle can be described in the following words.

If the company has a certain amount of cash, it will be required for purchasing the raw material though some raw material may be available on credit basis. Then the company has to spend some amount for labour and factory overheads to convert the raw material in work in progress, and ultimately finished goods. These finished goods when sold on credit basis get converted in the form of sundry debtors. Sundry debtors are converted in cash only after the expiry of credit period. Thus, there is a cycle in which the originally available cash is converted in the form of cash again but only after following the stages of raw material, work in progress, finished goods and sundry debtors. Thus, there is a time gap for the original cash to get converted in form of cash again. Working Capital needs of company arise to cover the requirement of funds during this time gap, and the quantum of working capital needs varies as per the length of this time gap.Thus, some amount of funds is blocked in raw materials, work in progress, finished goods, sundry debtors and day-to-day requirements. However some part of these current assets may be financed by the current liabilities also. E.g. some raw material may be available on credit basis, all the expenses need not be paid immediately, workers are also to be paid periodically etc. But still the amounts required to be invested in these current assets is always higher than the funds available from current liabilities. This isprecise reason why the needs for working capital arise. From the Financial management point of view, the nature of fixed assets and current assets differ from each other. 1. The fixed assets are required to be retained in the business over a period of time and they yield the returns over their life, whereas the current assets loose their identity over a short period of time, say one year.

2. In the case of current assets, it is always necessary to strike a proper balance between the liquidity and profitability principles, which is not the case with fixed assets. E.g. If the size of current assets is large, it is always beneficial from the liquidity point of view as it ensures smooth and fluent business operations. Sufficient raw material is always available to cater to the production needs, sufficient finished goods are available to cater to any kind of demand of customers, liberal credit period can be offered to the customers to improve the sales and sufficient cash is available to pay off the creditors and so on. However, if the investment in current assets is more than what is ideally required, it affects the profitability, as it may not be able to yield sufficient rate of return on investment. On the other hand, if the size of current assets is too small, it always involves the risk of frequent stock out, inability of the company to pay its dues in time etc. As such, the investment in current assets should be optimum. Hence, it is necessary to manage the individual components of current assets in a proper way. Thus, working capital management refers to proper administration of all aspects of current assets and current liabilities. Working Capital Management is concerned with the problems arising out of the attempts to manage current assets, current liabilities and inter-relationship between them. The intention is not to maximize the investment in working capital nor is it to minimize the same. The intention is to have optimum investment in working capital. In other words, it can be said that the aim of working capital management is to have minimum investment in working capital without affecting the regular and smooth flow of operations. The level of current assets to be maintained should be sufficient enough to cover its current liabilitieswith a reasonable margin of safety. Moreover, the various sources available for financing working capital requirements should be properly managed to ensure that they are obtained and utilized in the best possible manner. Working capital cycle vary from industry to industry depending upon its nature of business

The working capital cycle is illustrated as follows:

Cash/Sundry Creditors

Sundry Debtors RawMaterials/Stores&Spares

Sales Stock-in-Proces

Finished Goods

Fig. Operating Cycle

ThetotalworkingcapitalrequirementsforIndustrialUnitswilldependuponthe ofassetsandtheoperationofthecycle.

holdingperiod

Thus,thestockingofrawmaterialsmaybe

equivalenttooneorthreemonthsrawmaterialsconsumptionformostindustries,butsaynilforasugar mill. Asregardstheoperatingcycle,thedurationofeachstageofprocesscycleisfirstdecided uponhaving regardtothefunctionitissupposedtoperform. Theconversionofrawmaterialsintofinishedgoods depends upon the technical requirements and manufacturing facilities available. Similarly,theturnover offinishedproducts and theirtransformationintobookdebts,billsor cash could berelatedto factorslikedeliveryschedule,business customs and competition. Thus,theworking capital cycleofamanufacturing activitystartswiththe acquisitionofrawmaterials and endswith realization of cash for finished goods. Thecycleislonginsomecasesandshortinothers,dependinguponthenatureofbusiness. Cycleisfastinconsumergoodsindustriesandslowincapitalgoodsindustries. perishablessuchasfoodarticles,beverages,fruits,fish,eggs,etc. distilling,timber,steel,etc. Cycleisshortincaseof Cycleislonginthecaseoftobacco,

Seasonalindustrieslikemanufacturersofumbrella,woolenfabrics,fans,

refrigerators,etc., require higher stocks in somemonths and bareminimum in remainingmonths. Duringthecycle,fundsareblockedinvariousstagesofcurrentassets,viz.,cashitself, inventory(consistingofrawmaterials,stockinprocess,finishedgoods)andreceivables. Theserequire finance. Financeinvolvescosts. Quickerthecyclemoreistheturnovernormallyandlongerthecycle, the less is the turnover. Stagnation in anyareaeffects turnover and profitability. Effects ofshort supply: Itshallbringcrunchintheworkingoftheunitandtherebyfailuretoutilizethe capacitieswhichresultinshortfallinproduction,shortfallinsales,businessfailure,under materials, machineryandmanagement,frustrationoftheobjectiveofenterprise, created utilizationofmen, inabilitytoaccept

attractiveopportunities etc. Effects ofexcess supply Buildsuphugeinventory,bookdebts,whichisnotrequiredfortheirnormal operations.Complacencyanddeterioratingmanagementefficiency,extravagance,unhealthy unwarranted expansion, Liberal Dividend Policy,Diversion of funds, etc. speculation

Thelevel of investment in an operatingcycle depends upon changes in: Terms ofproduction and sales otherfactors remainingconstant Thepriceof raw materials Lead time forproducing raw materials Thepattern ofmanufacturingexpenses Theprocess time Policyof extending credit (both on purchaseas wellas sales) etc.

NATURE OF FACILITIESAND FIXINGOF CREDIT LIMITS: Afterdeciding theamountofoverallassistancewhichisbeing assessed bycalculating minimum permissiblebank finance(MPBF)to be extended to the company, the bankcan disbursetheamountin anyof the followingforms:

Nature of Facilities
And FixingofCreditLimit

NonFundBased Lending

FundBasedLending

BankGuarantee

Letter of Credit

Loan

Over Draft

CashCredit

BillPurchased or Discounted

WorkingCapital TermLoan

Packing Credit

Fig.NATURE OFFACILITIESANDFIXINGOFCREDITLIMITS

Non-FundBasedLending Fund BasedLending

1. Non-FundBased Lending : Incaseof Non-FundBasedLending,the lendingbank does not commit

anyphysicaloutflowoffunds.Assuch,thefundspositionofthelendingbankremainsintact.TheNonFundBasedLending can bemadebythe banks in two forms.

a.BankGuarantee: Suppose Company A is the selling company and Company B is the purchasing

company.CompanyAdoesnotknowCompanyBandassuchisconcernedwhetherCompanyBwill makethepaymentornot.Insuchcircumstances,DwhoistheBankofCompanyB,openstheBank GuaranteeinfavourofCompanyA in whichitundertakestomakethepaymenttoCompanyAif the paymentinfuture.Assuch,interestsof

CompanyBfailstohonouritscommitmenttomake

CompanyAareprotectedasitisassuredtogetthepayment,eitherfromCompanyBorfromitsBank D.Assuch,BankGuaranteeisthemodewhichwillbefoundtypicallyinthesellersmarket.Asfaras BankDisconcerned,whileissuingtheguaranteeinfavourofCompanyA,itdoesnotcommitany outflowof

funds.Assuch,itisaNon-FundBasedLendingforBankD.Ifonduedate,BankDis required to makethe payment toCompanyA dueto failureon account ofCompanyBtomakethepayment,thisNon-

FundBasedLendingbecomestheFundBasedLendingforBankDwhich canberecoveredbyBankDfromCompanyB.ForissuingtheBankGuarantee,BankDchargesthe BankGuaranteeCommissionfromCompanyBwhichgetsdecidedonthebasisoftwofactors-whatis theamountofBankGuaranteeandwhatistheperiod ofvalidityofBankGuarantee.Incaseofthis conventional for ofBankGuarantee,both companyAaswellas CompanyB getbenefited asitis able to

makethecreditpurchasesfromCompanyAwithoutknowingCompanyA.Assuch,BankGuarantee transactions will be applicable in caseofcredittransactions.

In some cases, interests of purchasing company are also to be protected. Suppose that CompanyAwhichmanufacturescapitalgoodstakessomeadvancefromthepurchasingCompanyB.If CompanyAfailstofulfillitspartofcontracttosupplythecapitalgoodstoCompanyB,theirneedsto betobesomeprotectionavailabletoCompany B.Insuchcircumstances,BankCwhichisthebankerof

CompanyAopensaBank Guaranteein FavourofCompanyB in whichitundertakesthat if CompanyA failstofulfillitspartofthecontract,itwillreimburseanylossesincurredbyCompany fulfillmentofcontractualobligations.SuchBank B duetothisnon Bank

Guaranteeistechnicallyreferredtoasperformance

Guarantee and itideallyfoundin thebuyers market.

Itisgenerallyobservedthatguaranteesaremainlyrequiredbytheconstructioncompaniesforthpurpose

ofEMD,

Bid Bond, APG, Machinery Advance etc. An indicativeway of assessing theguaranteelimits maybeassumed as under:

Sr. No. A B

Particulars Value of contracts expected to be bid EMDGuarantee (generally 3% to 5% of A), Here we will assume5%

Amount 1000.00 50.00

Expectedvalueofthenewcontract(25%ofA),Itmayvary from companyto company

250.00

D E

PerformanceGuarantee(Normally10%of C) AdvancePayment/SecurityDepositGuarantee(5%ofC),This mayvaryfrom project toproject.

25.00 12.50

F G H I J

Fresh Guarantees required (B+C+D+E) Existingbankguarantees(Assumption) Guarantees expiringduringtheyear Guarantees requirement (F+G-I) Total guarantees limits required

337.50 100.00 25.00 412.50 412.50

Inothercaseswhereguaranteesaretobeissuedfortheprocurementofrawmaterials,theassessment willbe casespecific andno formal wayof assessment can beapplied.

b. LetterofCredit: Thenon-fundbasedlendingintheformofletterofcreditisveryregularlyfoundinthe international trade. In case the exporter and the importer are unknown to each other.Underthese

circumstances,exporterisworriedaboutgettingthepaymentfromtheimporterandimporterisworried astowhetherhewillgetthegoodsornot.Inthiscase,theimporterappliestohisbankinhiscountryto openaletterofcreditinfavouroftheexporterwherebytheimportersbankundertakestopaythe exporteroracceptthebillsordraftsdrawnbytheexporterontheexporterfulfillingthe specifiedin theletterofcredit. termsand conditions

followingmajorfactorsshould betaken into account in anyquantitative method of assessment: A B C D Annual consumption of thematerial beingpurchased Lead time from opening of creditto shipments Transitperiod forgoods till it arrives at the factory Credit Period available 120(Rs lacs) (months) (months) 3(months)

ThesumofB,CandDcanbecalledaspurchasecycle.Intheabovecasepurchasecyclewouldbe4

months.

Wedenote thepurchasecyclebyP(months). Thecyclecommences at thepointof placement of order whereas the final payment is made at the end of thecycle.

ThequantumofLClimitmaynowbeworkedoutusingtheexpression(PXA/12),whichwouldwork out to Rs40 lacs. This represents the cost of the material that willbe consumed in oneworkingcycle.

2. FundBased Lending :

IncaseofFundBasedLending,thelendingbankcommitsthephysicaloutflowoffunds.Assuch,the fundspositionofthelendingbankgetsaffected.TheFundBasedLendingcanbemadebythebanksin followingformsthe

Loan: Inthiscase,theentireamountofassistanceisdisbursedatonetimeonly,eitherincashorby transfertothe

companysaccount.Itisasingleadvance.Theloanmayberepaidininstilments,the interestswillbe chargedon outstandingbalance.

Overdraft: Inthiscase,thecompanyisallowedtowithdrawinexcessofthebalancestandinginitsBank account.However,afixedlimitisstipulatedby theBankbeyondwhichthecompanywillnotbeableto

overdrawtheaccount.Legally,overdraftisademandassistancegivenbythebanki.e.bankcanaskfor therepaymentatanypointoftime. Howeverinpractice,itisintheformofcontinuoustypesof

assistanceduetoannualrenewalofthelimit.Interestis payableontheactualamountdrawnandis calculated on dailyproduct basis.

CashCredit: Inpractice,theoperationsincashcreditfacilityaresimilartothoseofoverdraftfacilityexceptthefact thatthecompanyneednothaveaformalcurrentaccount.Herealsoafixedlimitisstipulatedbeyond whichthecompanyisnotabletowithdrawtheamount.Legally,cashcreditisademandfacility,butin practice,itisoncontinuousbasis.Theinterestsispayableonactualamountdrawnandiscalculatedon dailyproduct basis.

Bills purchased ordiscounted:Thisformofassistanceiscomparativelyofrecentorigin.Thisfacilityenablesthecompanyto gettheimmediatepaymentagainstthecreditbillsraisedbythecompany.Thebankholdsthebillasa securitytillthepaymentismadebythecustomer.Theentireamountofbillisnotpaidtothecompany. TheCompany getsonlythepresentworthoftheamountofbill,thedifferencebetweenthefacevalueof

thebillandtheamountofassistancebeingintheformofdiscountcharges.Onmaturity,bankcollects amount of bill from thecustomer.Whilegrantingthis facilityto the company,

thefull the bank ofthe

inevitablysatisfiesitselfaboutthecreditworthinessofthecustomer.Afixedlimitisstipulatedincase company, beyondwhich the bills arenot purchased or discounted bythe bank.

Working Capital TermLoans:Tomeettheworkingcapitalneedsofthecompany,banksmaygranttheworkingcapitalterm loans foraperiod of3 to7years, payable inyearlyorhalfyearlyinstallments.

Packing Credit: Thistypeofassistancemaybeconsideredbythebanktotakecareofspecificneedsofthe whenitreceivessomeexportorder.Packingcreditisafacilitygivenby company thebanktoenablethe

companytobuythegoodstobeexported.Ifthecompanyholdsaconfirmedexportorderplacedbythe overseas buyer oraletterof creditin its favour,itcan approach the bank for packingcreditfacility.

Methods ofAssessment ofWorking Capital Management: AssessmentoftheWorkingCapitalrequirementofaborrowershallgenerallybemadeunder anyoneof the followingthreemethods:

Turnover method

Methods of Assessmentof Working Capital Maximum Permissible BankFinance (MPBF)System CashBudget System

Fig.Methods of Assessment of WorkingCapitalManagement:

TurnoverMethod: Underthismethodworkingcapitallimitshallbecomputedat20%oftheprojectedgross salesturnoveracceptedbythebank.Thissystemisnormallyapplicabletotraders,merchants,exporters whoarenothavingapredeterminedmanufacturing/tradingcycle.Undertheturnovermethodbank ensurethat maintenanceof minimummargin on theprojectedannual sales turnover. should

Normally25%oftheestimatedgrosssalesturnovervalueshallbecomputedasworking requirements,ofwhich20%shallbeprovidedbythebankandthebalance5%bywayof promotercontributiontowardsmarginmoney.Howeveriftheavailablenetworkingcapital(NWC)is

capital

more,thesameshallbereckonedfor assessingtheextentofbankfinanceandlowerlimit/scanbe considered.

Theturnover method

maybeapplied forsanction

of fundbased

working

capital

to the SSIunits.In

borrowersrequiringworking caseofatraders,whilebank

capitalfacilityuptoRs500lakhsfromthebanking

systemfor

financecouldbeassessedat20%oftheprojectedturnover,theactual

drawalsshouldbeallowedonthebasisof drawing powerdeterminedafterdeductingunpaidstocks. Under this method currentratio would be1.25.

Example Projected acceptedannual Gross Sales Turnover 25%ofthe above Minimum margin to beprovided bythe borrower Rs.10.00 lacs Rs. 2.50 lacs Rs. 0.50 lacs (orNWC, whichever is higher) Bank finance Rs. 2.00 lacs (orlesser, in caseNWC is higher)

Astheworkingcapitalrequirementarelinkedtoprojectedturnover,reasonablenessoftheprojected annualturnoveroftheapplicantcompanyshouldbeanalyzed bykeepinginviewofpastperformance

oftheunit,theordersonhand,installedcapacityoftheunits,power,availabilityofrawmaterialsand otherinfrastructuralfacilities.Inrespectofanew unitprojectedturnovershouldbeanalysedwith

regard to installed capacity, marketability of the products, performance of the similar unit in the industry, backgroundof thepromoters etc.

Theprojected turnover / output value is the gross sales which include excise duty. The assessmentof workingcapitalcreditlimitsshouldbedonebothasperprojectedturnoverbasisand traditionalmethodsbasedonproduction/processingcycle(MPBF).Ifthecreditrequirementbasedon MPBFmethodishigherthantheoneassessedonprojectedturnoverbasis,thesamemay Ontheotherhand,iftheassessedcreditrequirementislower besanctioned.

thantheoneassessedonprojected

turnoverbasis,whilethecreditlimitcanbesanctionedat20%oftheprojectedturnover,drawals maybe allowed basingon actual drawingpower afterexcludingunpaid stocks.

Inadditiontotheabove,anyothershortterm/adhocWorkingCapitalfacilitiestomeetthe emergentneedsoftheborrowersandotherseasonal imperfectionscanbeconsidered by thesanctioning

authority,subjecttotheborrowersubmittingtherequireddetailsinsupportoftheneed/justificationand thesanctioningauthorityisconvinced/satisfied withtheborrowerrequirements.Suchshortterm finance/

adhocfacilities shallbepermitted forshort term, sayupto 3-4 months.

MPBFSystem: BeforetheMPBFMethodisexplained,itisnecessarytounderstandtheerstwhileSecondMethodof LendingunderTandonCommitteeRecommendations. minimummarginof25%ofall balancei.e75%befinanced bytheBank. UnderMethodII,theborrowershouldbringina

currentassetsfromownedfundsandlongtermliabilities,andthe

Theexamplegiven below will illustrate this:CurrentLiabilities Creditforpurchase Other current liabilities 100 50 150 Bank borrowings including bill 200 Current Assets Raw materials Stock-in-process Finishedgoods 200 20 90

Receivables including bill 50 discounted

Discounted

350 MethodII a. Current Assets Less: b.CurrentLiabilitiesother Borrowings c. WorkingCapital Gap d.Minimumstipulatednet capital i.e25%of Current Assets e.Actual/projectednetworkingcapital (totalcurrentassets370minustotal current liabilities 350 incl. Bank Borrowings 200) f.Item c minus d g.Itemcminus e h. Max. Permissible Bank (Item f orgwhichever is lower) i. Excess borrowings 72 128 200 Finance 128 20 220 working 92 thanBank 150 370

Other current assets

10 370

(representing shortfall in net working capital item d minus e)

Asperpastpractice,currentassetsandcurrentliabilitiesforthenextyeararereckonedinaccordance with theusuallyacceptedapproach of bank.

Theborrowerisrequiredtobring25%ofcurrentassets.

AgainsttheMPBFofRs.128lakhsthe

actualborrowingisRs.200lakhsresultinginexcessborrowingofRs.72lakhs. Thisexcessborrowing is required to be brought from the long term sources i.e. Equity, unsecuredloans or long term borrowings.Inabsenceof anysupportfrom theborrower, thedeficitin longterm sources maybetreated

asworkingcapitalTermLoanrepayablebytheborrowerbyinstallmentstobefixedwhilesanctioning the nextyear's limits.

Theassessmentofcreditrequirementoftheborrowershallbemadebasedonthetotalstudyof theborrower'sbusinessoperationsvis--vistheproduction/processingcycleoftheindustry,whichshall represent a reasonable build up of current assets for beingsupported bybank finance.

BasedonKannanCommitteerecommendations,RBIhasallowedfreedomtothebankstodecide theholdinglevels functioningof theunit. ofvariouscomponentsofcurrentassetsforfinancialsupporttoensureefficient

Cash Budget System In the case of borrowers enjoying /requiring credit facilities of over Rs. 25 cr., the same can be assessed on the basis of Cash Budget system or MPBF system, at the option of the borrowers. However conservative approach has to be followed. However, in the case of specific industries / seasonal activities such as software export, construction activity, tea and sugar, normally, the system of assessment based on the cash budget may be adopted. Further, in the case of specific industries like tea, wherever for specific reasons, the borrower opts to avail the Working Capital facility under MPBF system, the same may be permitted by the respective sanctioning authority after necessary evaluation and justification. Structure of Cash Flow Statement The cash flow statement shows the movement of cash and bank balances during a certain period, the reasons for increase (+) or decrease (-) in the bank borrowings, the level of cash holding between 2 intervals of time. The cash flow statement is a historical statement that depicts the flow of cash in the system. A cash budget statement depicts the projected movement of cash and bank balances at a future period. It shows the expected inflow and outflow of cash and deficit and surplus in generation of cash.The statement covers most of the details needed for assessment of the financial needs of the borrower.The statement of cash flow is made more meaningful and useful for assessment of working capital by grouping the cash flows under three heads viz., Operating, Investing and Financing.

The principal cash flows arising out of the above three main groups are described below: i) Operating Activities These activities involve producing and delivering goods and providing services. Cash inflows from operating activities include receipts from customers for sale of goods and services, including receipts from collection of debtors. Cash outflows from operating activities include payments to employees for services, payment to suppliers of goods, payments to Governments for taxes and duties and services etc. ii) Investing Activities These activities involve extending and recovering loans and acquiring and disposing of debt and equity instruments and fixed assets. Cash inflow from investing activities include

receipts from loan collections, receipts from sales of debt and equity instruments of other enterprises and receipts from sale of fixed assets. Cash outflows from investing activities include disbursements of loans, payments to acquire debt and equity instruments of other enterprises and payments (including advances or down payments) to acquire fixed assets. iii) Financing Activities These activities involve obtaining resources from owners and providing them with a return on and return of their investment, borrowing and repaying amounts borrowed, and obtaining and paying for other resources obtained from creditors on long term credit. Cash inflows from financing activities include proceeds from issuing equity instruments, debentures, mortgages, bills and from other long and short term borrowings. Cash outflows from financing activities are payments of dividends, repayments of amounts borrowed and principal payments to creditors who have extended long term credit.

Assessment of the limit under the cash budget system is done by arriving at the deficit between cash inflow and cash outflow during a period of time. The various segments of cash budget are as under:

1.

Cash inflow (a) (b) (c) (d) (e) Realisation from debtors Cash Sales Receipt by way of trade advances Miscellaneous receipts Long term sources in the form of TL, equity induction TOTAL CASH INFLOW

2.

Cash Outflow (a) (b) (c) (d) (e) (f) (g) Payment to Sundry Creditors (Trade Creditors) Payment of Sundry Creditors (expenses) Cash expenses Cash purchases Deposits and Investments Advances to suppliers Other outflows like repayment of TL, Debentures, ICDs, CPs and other obligations.

TOTAL CASH OUTFLOW 3. 4. 5. Deficit (-) Surplus (+) (1 -2) Add Opening Balance (Deficit/Surplus) Amount of Deficit to be Financed (NET OF 3 + 4 or 3-4) (3) (4) (5)

In the case of borrowers whose credit limits are to be assessed on the basis of cash budget system, the bank shall obtain the following data from the borrower along with applications. (a) (b) (c) Cash Flow Statement Projected Balance Sheet and Profitability Statement Credit Monitoring Arrangement (CMA) data

In addition to the cash budget statement, the bank shall obtain following additional information to scrutinise the cash budget statement. (a) (b) (c) (d) (e) (f) (g) (h) Credit sales during the quarter Credit purchase during the quarter Opening Stock of the finished goods Closing Stock of the finished goods Receivables outstanding at the beginning Receivables outstanding at the end Creditors outstanding at the beginning Creditors outstanding at the end.

In the case of seasonal industries / industries having peak/non peak level operations, cash budget indicating the peak level/non peak level cash flows shall be obtained separately. Based on such peak level/non peak level cash deficit, peak level limits shall be arrived at. The quantum of bank finance for working capital to the borrower shall be the peak level of the annual cash deficit projected as per the projected cash flow statement. However, the working capital limits shall be in tune with the quarterly cash deficit of the borrower as revealed in the quarterly cash budget. To ensure sufficient liquidity, the projected balance sheet should reveal the minimum current ratio acceptable to the bank. The bank shall obtain the quarterly cash flow projections one month in advance before the commencement of the quarter for stipulating the operative limit.

While fixing the limits based on the cash budget, the following points shall be borne in mind: (a) (b) The cash budget is realistic and based on the operations in the business / similar business The cash budget statement tallies with the underlying financial statements viz., projected balance sheet and profit and loss account. (c) Outstanding bank borrowings figured in the projected balance sheet tally with the deficit as shown in the cash budget statement. (d) The closing balance of the debtors is correctly arrived at by summing up, opening balance of debtors + credit sales minus (-) realization of debtors. (e) The expenses as indicated in the cash budget tallies with the expenses as reflected in the project profit and loss account.

In the case of existing borrowers, the branches shall be in a position to scrutinize the projected cash flow statement with the actuals for the previous period and if necessary, obtain other explanation from the borrowers for variations. In the case of new clients, the projected cash flow statement shall be analysed based on the operating cycle / activities of the borrower / other similar borrowers. The bank shall obtain on a quarterly basis, the actuals of cash flow within a fortnight of the completion of the quarter and scrutinise the variations with reference to the projected cash flow obtained earlier, in the same format. During the review of the cash flow statement, if there are major variations between the projected and actuals, the same may be analysed. The reasons therefore should also be indicated and evaluated critically. Apart from the above, the bank should also obtain half yearly balance sheet and funds flow statement.

ComputationofDrawing Power

Thedrawing

power

thataborrowerenjoysatanyonepointdependsoneachcomponentsofworkingcapital.Thebankforeachcom ponent,whichtheborrowermustholdashiscontributiontofinance workingcapital,prescribesmargins.Thedrawingpoweroftheborrowercanbebest followingillustration explainedwiththe

1.

Inventories Total inventory (excluding non usable non moving, slow moving stocks)(period to be specified) LESS;Unpaidstocks(onaccountofsundrycreditorsforpurchases, DALC,advancepaymentguarantees/supplierscreditetc.)andstock hypothecated to anyother facilities Value ofpaid stock(A B) LESS: Stipulated marginon stocks as per sanction DP/DLon stocks (C-D) C D E B A

ASSESSEMENT OF OTHER LIMITS

LETTER OF CREDIT
The banker examines the proposal of the letter of credit from two angles: o The cases where letter of credit is required once only o The cases where letter of credit is required once regularly. In the second category it is convenient for the banker to fix the separate limit of the letterof credit.

ASSESSEMENT OF THE LIMITS UNDER LETTER OF CREDIT-WITH LEADTIME

The buyer does not receive the goods immediately on the placement of the order on theseller. There is always long time log between the order placement and the receipt of thematerial. This period is also referred to as the lead-time.

Example: If it is assumed that the total raw material requirement is Rs.240lacs per annum and thenormal lead time is 2 months, the buyer will be required to place order so that he has atleast 2 months stock (ignoring safely level). Thus, the total number of order placed wouldbe 6 per year and the value of per order would be Rs.40 Lacs. This is shown below

Assessment of the limits under LC- with lead-time:

Annual requirement of raw material 240 Lacs Normal lead time 2 months Value per order (A) 240/6=Rs.40 Lacs Margin for customer @20%(B) Rs 8 Lacs Limits under letter of credit (A-B) Rs32 Lacs

Assessment of the limits under letter of credit-without lead-time

Annual requirement of raw material 240 lacs Monthly requirement of raw material 240/12 months =20 lacs Normal inventory level (1 month) Rs 20 lacs Value per order (A) Rs 20 lacs Margin for customer @ 20% (B) Rs 4 lacs Limits under letter of credit (A-B) Rs 16 lacs

BANK GUARANTEES

There is no standard formula for assessment of bank guarantee limit. The detailspertaining to nature of guarantees, particulars of the contract, period for which theguarantee is sought and the amount of guarantee to be obtained, this information alongwith the view on the creditworthiness of the borrower and relationship with the bankcomprise the major input towards deciding the sanction of limits required by borrower.Appropriate conditions regarding cash margin and securities have to be laid down toprotect the interest of the bank..

PROCEDURE FORWORKINGCAPITALFINANCE

CREDIT SANCTION PROCESS Therevisedcreditprocessisintroducedwithaviewofreducingthetimelaginthesanctionofcreditbesidesclea rlydelineatingtheareasof responsibilitiesofvarious

functionaries.AsperthistherevisedprocessisdivideintotwocomponentsthatisPresanctioningandPost sanctioning

Inthepresanctioningitistheonlytimethatthebankcantakedueassessmentandprecautionstomakesurethatt heinvestmentsaredoneforthebenefitofthebank.Thepostsanctioningisthefollow ofthepayment.Incasethepaymentdefaultsthenthe bankisthensaidtoscrutinizethesaidaccount. accountwillgointoNPAinstagesandthe

PRE SANCTIONPROCESS: -

Obtain loan application Whenacustomerrequiredloanheisrequiredtocompleteapplicationformandsubmitthesametothebankalso theborrowerhastobesubmittherequiredinformationalongwiththeapplicationform.

PRE SANCTION PROCESS

APPRAISAL&REC OMMANDATION

SANCTIONING

ASSESSMENT

Theinformation,whichisgenerallyrequiredtobesubmittedbytheborroweralongwiththeloan application,isunder:1. Auditedbalancesheetsandprofitandlossaccountsforthepreviousthreeyear(incaseborrower alreadyinthebusiness) 2. Estimatedbalancesheet for currentyear. 3. Projectedbalancesheetfornextyear. 4. Profileforpromoters/directors,seniormanagementpersonnelofthecompany. 5. /Incasetheamountofloanrequiredbyborroweris50lacsandaboveheshouldbesubmittheCM A Report

POST SANCTION PROCESS

Supervisionandfollowup:-

Sanctioncreditlimitofworkingcapitalrequirementafterproperassessmentofproposal isalonenotsufficient.Closesupervisionandfollowupareequally essentialforsafetyofbankcreditandtoensureutilizationoffundlend.Atimelyactionispossibleonlyclo sesupervisionandfollowedupbyusingfollowingtechniques.

o Monthlystockstatement o Inspectionofstock o Scrutinyofoperationintheaccount o Quarterly/halfquarterlystatements. o Underinformationsystem o Annualauditedreport

POST SANCTION PROCESS

FOLLOWUP

MONITORING &CONTROL

SUPERVISION

FINANCIAL RATIOS:
Ratio Analysis is an important step in the assessment of working capital. Analysis of financial statements is done by arriving at certain ratios like : Capital + Reserves (other than intangible reserves & revalidation reserves) - accumulated losses. Long Term Debt / Equity (Tangible Net worth) Current Assets / Current liabilities

1.

Tangible Net worth

2. 3.

Debt Equity Ratio Current Ratio

4.

Fixed Assets Coverage Net Fixed Assets (i.e, after providing for Depn) / Long term debt Ratio Profitability Ratios : Gross Profit Ratio Net profit Ratio Sales - Cost of goods sold / Sales Net profit after tax / Sales Net Profit after Tax + Depreciation + secured by fixed assets

5.

6.

Debt Service Coverage Ratio

Interest on Term loan / Interest on Term loan + Principal repayment instalment Total Liability (Long tem + short term / Tangible Net worth

7. 8.

TOL : TNW Holding Levels : - For Raw Materials -For Stock-in-process - For finished goods - For Sundry Debtors -For Sundry Creditors

Actual holdins x 365 / Raw mateials consumed (RM) Actual holdings X 365 / Cost of Production (SIP) Actual holdings X 365 / Cost of sales (FG) Actual sundry debtors X 365 / Gross Sales Actual sundry creditors X 365 / Total purchases.

FINANCIAL RATIOS INTERPRETATION:

CURRENT RATIO=CURRENT ASSET/ CURRENT LIABITIES:

Helptomeasureliquidityandfinancialstrength,indicationofavailabilityofcurrentassetsto paycurrentliabilities. Thehigher theratio bettersthe liquidityposition. Generallyitshould be at least

TOL/TNW=TOL/TANGIABLE NETWORTH:

Indicatesizeofstakes,stabilityanddegreeofsolvency.Indicateshowhighthestakeofthe

creditorsis.

Indicatewhatproportionofthecompanyfinanceisrepresentedbythetangiblenet worth. The lowerthe ratio, greater the solvency. Anything over5 should be viewed with concern.Theratio should bestudied at thepeak level of operations.

OPERATING PROFITRATIO=OPERATING PROFIT/NET SALES100:

Thisratio indicates operating efficiency.Trend forcompanyoveraperiod should be encouraging.

Review of limits:

Duration of working Capital limits The duration of credit limits to be fixed shall be upto a maximum period of one year from the date of sanction, except in the case of employees of the Bank and certain eligible borrowal accounts of exporters and in respect of loans to traders and business enterprises subject to certain guidelines set out (where it shall be for two years / three years). In respect of established exporters (other than Gold card holders ) having satisfactory track record with a branch for atleast 3 years and who are categorized under ASCC S1 or S2 ( or standard asset where the account is not subjected to ASCC norms) the working capital limits may be sanctioned for a period of 2 years with inbuilt flexibility to step up / step down the quantum of limits within the overall outer limits assessed at the end of first year.

The period referred to above shall pertain only to sanctioning of running / operative limits. In the case of OD against our own term deposits, the tenability can be fixed upto the date of maturity of the term deposit. However, the branch shall make yearly review of such limits so as to keep the accounts in order. In respect of loans / Advances to traders and Business Enterprises, the tenability of secured OD limit uptoRs. 10 lacs may be fixed upto a maximum of 2 years provided the same are collaterally secured fully by valuable securities like NSC, KVP, IVP term deposits of our Bank. If the limits upto Rs.10 lacs are collaterally secured fully /tly by EMT of Land & Building the tenability of the limits upto Rs.10 would be one year only. The tenability of the OD facilities sanctioned to the ex-employee of our Bank, against the approved securities viz LIP, NSCs, KVPs and shares and debentures be permitted for a period of 2 years. It is to be noted that the overdraft facility is for the purpose of personal requirements and not for business purposes. In respect of Gold Card Scheme to exporters, taking into account the track record and also the anticipated export turnover, branches / offices may sanction working capital limits (in principle limit ) for a period of 3 years subject to fulfillment of stipulated terms and conditions. In respect of accounts under sanctioning powers of HO with credit risk rating of LR1 and LR2 for the last 2 years, limit may be sanctioned for a period of 2 years with inbuilt flexibility to step up / step down the quantum of limits at the end of 1st year within the overall outer limit. In respect of consortium accounts wherever we are members, we may fall in line with the leader. Renewal Branches shall take up renewal process with the borrowers sufficiently ahead of the date of expiry of limits. Circles and ROs shall closely follow-up with branches with regard to renewal of limits in time, based on PRR 8 (i.e., Half Yearly statement on credit review & programming).

Extension of Expired limit: Due dates of the margins are to be diarised. If due to unavoidable and genuine reasons the limit are not renewed within the due date then, extension of the tenability of the limits may be permitted a review is made by the authority permitting such extension.

LENDINGARRANGEMENT FOR WORKINGCAPITALFACILITIES:

Lending Arrangement For Working Capital Facility

Lending Outside Regular Arrangement

Sole Banking Arrangement

Multiple Banking Arrangement

Consortium Banking Arrangement

Fig.LENDINGARRANGEMENTFORWORKINGCAPITALFACILITIES:

Lending OutsideRegularArrangement Borrowerdoes not indiscriminatelyraisecreditfrom thebankingsector oravailof double financingor divertfunds,RBIhasdirectedthatbanks,whichareoutsidetheregularworkingcapital ofaborrower,should theborrower. Sole Banking Arrangement UnderSoleBanking,theentirecreditrequirementsoftheborroweraremetbyoneBankonly, Concernedfunctionarieswill,onreceiptoftheborrower'srequestfor/onmarketingacreditline, advise the sole banker of the Bank's intention to extend a credit line. functionarieswillrequestthesolebankertoconveyitsNOCwithinaperiodof30daysfromthedateof receiptoftherequest. Intheeventthatnoresponseisreceivedfromthesolebankerbythe30thday,it willbe assumed that thesole banker does not have anyobjection to the extension of the creditfacility. Multiple Banking Arrangement Borrowerscanavailanycreditfacilities(bothFB&NFB)fromanynumberofbanks withouta formal consortium arrangement Inthecaseofamultiplebankingarrangement,asthearrangementprovidesforflexibleentry andexitofbankstolendtotheborrower,theBankmaynotberequiredtoobtaintheNOCfromthe otherlendingbanks. However,bank mayadvisethemultiplebankersabouttheextensionofcredit immediately Concerned seektheNOCoftheworkingcapitalbanksbeforeextending bankingarrangement anycredit facilities to

facilityandseekNOCcumlettercedingpari-passuchargeforsharingthesecuritywhereverwarranted. Advisingextensionofcreditfacilitiestoothermultiplebankerswouldalsoobviatetheriskofdouble financing. ConsortiumBanking Arrangement: Thenecessityofconsortium/participatingleadingariseswhentheamountinvolvedisverylargeand permissibleresourcesofasinglebankorbeyondwhatabankwouldliketoriskunder ordinarycircumstances on asingle borrower. Inrespectofaconsortiumbankingarrangement,concernedfunctionarieswilladvisethelead bankofthe consortiumoftheproposedextensionofcreditfacility. Itwillrequesttheleadbankto conveyitsNOConbehalfoftheconsortium within30daysof receiptoftherequest.Aprotectiveclause totheeffectthatifnoresponseisreceivedfromtheleadbankerbythe30thday,itwillbeassumedthat the lead banker does nothave anyobjection to the extension of the creditfacility. In the event that the leadbankerhasanobjectiontotheextensionofcreditfacility,theBankmayseekthe borrower's intervention in thematter. beyondthe

SECURITY REQUIRED IN BANK FINANCE

Banks generally do not provide working capital finance without adequatesecurity. The nature and extent of security offered play an important role in influencingthe decision of the bank to advance working capital finance. The bank provides credit onthe basis of following modes of security:

Hypothecation Under this mode of security, the banks provide working capitalfinance to the
borrower against the security of movable property, generallyinventories. It is a charge against property for the amount of debt where neitherownership nor possession is passed to the creditor. In the case of default the bank hasthe legal right to sell the property to realise the amount of debt.

Pledge A pledge is bailment of goods as security for the repayment of a debt orfulfillment of a promise.
Under this mode, the possession of goods offered as securitypasses into the hands of the bank. The bank can retain the possession of goodspledged with it till the debt (principal amount) together with interest and otherexpenses are repaid. . In case of non-payment of loan the bank may either; Sue theborrower for the amount due;Sue for the sale of goods pledged; or After giving duenotice, sell the goods.

Lien Lien means right of the lender to retain property belonging to the borroweruntil he repays the debt.
It can be of two types: (i) Particular lien and (ii) General lien.Particular lien is a right to retain property until the claim associated with the propertyis fully paid. On the other hand, General lien is applicable till all dues of the lenderare paid. Banks usually enjoy general lien.

Mortgage Mortgage is the transfer of a legal or equitable interest in a specificimmovable property for
the payment of a debt. In case of mortgage, the possession ofthe property may remain with the borrower, while the lender enjoys the full legal title. The mortgage interest in the property is terminated as soon as the debt is paid.Mortgages are taken as an additional security for working capital credit by banks.

ChargeWhere immovable property of one person is made security for the paymentof money to another
and the transaction does not amount to mortgage, the latterperson is said to have a charge on the property and all the provisions of simplemortgage will apply to such a charge. A charge may be created by the act of parties orby the operation of law. It is only security for payment regulation of bank credit.

Till the sixties, bank credit for working capital was available easily and inconvenient form to industrial borrowers. Further, the cash credit arrangement, theprincipal device through which such finance has been provided, is quite advantageousfrom the point of view of borrowers. Banks have not been concerning themselves aboutthe soundness of the borrower or about the actual end use of the loan. Bank financing was mainly security oriented. This security oriented system tended to favour borrowers with strong financial resources irrespective of their economic function. This resulted in the concentration of economic power. Another problem was that the increase in the bank credit was not commensurate with the expansion in the level of inventory and production.This resulted in a number of distortions in financing of working capital by banks.

Major Banks was nationalized in 1969 and with that, approach to lending alsochanged. Consequently, bank credit has been subjected to various rules, regulations andcontrols. The basic objective of regulation and control of bank credit is to ensure itsequitable distribution to various sectors of the Indian economy. The RBI has been trying, particularly from the mid-sixties onwards, to bring a measure of discipline among industrial borrowers and to redirect credit to priority sectors of the economy. The RBI has been issuing guidelines and directives to the banking sectors towards this end. Important guidelines and directives have derived from the recommendations of certain specially constituted groups assigned with the task of examining various aspects of bank finance to industry.

RECENT RBI GUIDELINES REGARDING WORKING CAPITAL FINANCE

In the past, working capital financing was constrained with detailed regulations onhow much credit the banks could give to their customers. The recent changes made byRBI in the guidelines for bank credit for working capital finance are discussed below:

1. The notion of Maximum Permissible Bank Finance (MPBF) has been abolished byRBI and a new system was proposed by the Indian Banking Association (IBA). Thishas given banks greater freedom and responsibility for assessing credit needs andcredit worthiness. The salient features of new system are: - For borrowers with requirements of uptoRs. 25 lakhs, credit limits will becomputed after detailed discussions with borrower, without going into detailedevaluation. - For borrowers with requirements above Rs. 25 lakhs, but uptoRs. 5 crores, creditlimit can be offered upto 20% of the projected gross sales of the borrower.

For large borrowers not selling in the above categories, the cash budget systemmay be used to identify the working capital needs. However, RBI permits banks to follow Tandon/Chore Committee guidelines andretain MPBF concept with necessary modifications.

2. Earlier RBI had prescribed consortium arrangements for financing working capitalbeyond Rs. 50 crores. Now it is not essential to have consortium arrangements. However, banks may themselves decide to form consortium so that the risks arespread. The disintegration of consortium system, the entry of term lending institutionsinto working capital finance and the emergence of money market borrowing optionsgives the best possible deal.

3. Banks were advised not to apply the second method of lending for assessment ofMPBF to those exporter borrowers, who had credit export of not less than 25% of their total turnover during the previous accounting year, provided that their fundbased working capital needs from the banking system were less than Rs. 1 crore. RBIhas also suggested that the units engaged in export activities need not bring in any contribution from their long term sources for financing that portion of current assetsas is represented by export receivables.

4. RBI had also issued lending norms for working capital, under which the banks woulddecide the levels of holding of inventory and receivables, which should be supportedby bank finance, after taking into account the operating cycle of an industry as well asother relevant factors. Other aspects of lending discipline, viz; maintenance ofminimum current ratio, submission and use of data furnished under quarterlyinformation system etc. would continue though with certain modifications, whichwould make it easier for smaller borrowers to comply with these guidelines. From the above discussion we can say that bank credit occupies an important place in financing working capital requirements of industries. Working capital financing is a specialized line of business and largely dominated by commercial banks. Generally, the bank finance for meeting working capital needs is easily available to firms. But it has been always difficult to determine the norms for an adequate quantum of bank credit required by an industry for working capital purpose. Various committees have been set up for examining the working capital financing by banks and to recommend norms for and to regulate bank credit. Besides this from time to time, Reserve Bank of India has been issuing guidelines and directives to the banks to strengthen the procedures and norms for working capital financing.

CREDIT MONITORINGARRANGEMENT(CMA): Consequentuponthewithdrawalofrequirementofpriorauthorizationundertheerstwhilecredit authorization

scheme (CAS) and introduction of a system of post sanction scrutiny under credit monitoring arrangement (CMA) the database forms have been recognized as CMA database. The sub-committeeofcommitteeofdirectionshave remain in

revisedformsforCMAdatabaseasdrawnupbythe

comeintousefrom1stApril1991.Theexistingformsprescribedforspecifiedindustriescontinueto force. With a view to imparting uniformity

to the appraisal system, database from all borrowers

includingSSIunits enjoying workingcapital limits of Rs. 50 lacs andmore from thebankingsystemshould beobtained.Therevisedsetsofformshavebeenseparatelyprescribed borrowersandtraders/merchant exporters. Thedetails of forms areas under:for industrial

Form 1:-particulars ofthe existing/proposed limit fromthe banking system.

Form 2:-Operating statement. Itcontainsdatarelatingtogrosssales,netsales,costofrawmaterial,powerandfuel,etc.Itgivesthe operatingprofitand the net profitfigures.

Form 3 :-Analysisofbalancesheet. Itiscompleteanalysisofvariousitemsoflastyearsbalancesheet;currentyearsestimateandfollowing years projection aregiven in this form.

Form 4 :-Comparativestatement ofcurrent asset andliabilities. Details of various itemsof current asset andcurrent liabilities aregiven.

Form 5:-Computationofmaximumpermissible bankfinanceforworking capital. ThecalculationofMPBFisdoneinthisformtoobtainthefundbasedcreditlimitstobegrantedtothe borrower. Form 6:-Fund flowstatement Itprovidesthedetailsoffundflowfromlongtermsourcesandusestoindicateweathertheyare sufficient to meet theborrowers longtermrequirements.

CREDIT RATINGMODEL:

Thevarious risk faced byanycompanymaybebroadlyclassified as follows: Industry Risk:It coversthe industrycharacteristic, compensation, financial data etc. Company/ business risk:It considers themarket position, operatingefficiencyofthecompanyetc. Project risk:It includesthe project cost, project implementation risk, post project implementation etc. Managementrisk:Itcoversthetrackrecordofthecompany,theirattitudetowardsrisk,propensityforgrouptrans action, corporategovernanceetc. Financialrisk:financialriskincludesthequality offinancialstatements,abilityofthecompanytoraise capital, cashflow adequacyetc.

Review of Literature
Since my project is related to the assessment of working capital, so it was necessary to have a clear understanding about the process and guidelines related to it. So, I studied the credit appraisal format and lending policy of Central Bank of India. In credit appraisal format I went through the format of term loan, working capital (both fund based and non fund based). After going through the guidelines my concepts became clear that what data is required for appraisal of proposal. Then I went through loan proposals through which I came to know that how all relevant information are presented in a report. Then I went through some of the appraisal report appraised by the credit wing of the bank. This gave me the clear idea that what are the areas that has to be kept in mind during the appraisal process. As a part of my project, I have reviewed various project reports, loan applications/ proposals, Executive briefs, Letters of communication by Branch Authorities to Various authorities. I have gone through the Project Report/ Loan Applications from the borrowers. I have tried to appraise projects on my own too so that I understand the appraisal part not only theoretically but also practically. Not only appraising, I worked on the operational aspect as well like writing LC, entering data in the CBS of the bank, preparing acceptances received from the clients.

Objective
To study the methodology and various parameters taken into consideration for Bank Credit sanctioning and Credit Disbursement for the purpose of working capital requirement of various Projects and analyse creditworthiness of the borrower by Central Bank of India. To gain practical knowledge of Working capital Financing and analyze various parameters taken into consideration for financing a project.

Understand the correct selection of project, thus reducing credit risk.

To get hands on experience of the operational part after granting of credit to the clients of the bank.

Methodology
Data Collection: Obtaining data of the loans already sanctioned for various projects, and for the projects for which the proposal is under appraisal. Sources of Data: Credit policy of the bank Already appraised projects New projects on hand Website of bank: www.centralbankofindia.co.in Website of RBI : www.rbi.org.in

Data is also collected through: Mentor and employee discussion

Selection: Selecting some of the borrowers and projects to analyse their proposals.
Data Analysis: The study will include study of the loan application of the applicant by the bank, followed by the banks method of credit appraisal. It will also include study of Banks Credit Rating Model. Data Validation: To analyse the documents received by the bank, manuals for advances, and circulars and sent from Zonal Office and to study the documents for proper selection of project in order to reduce credit risk. Conclusion: Arriving at conclusions & Recommendations (if any) and submission of Final Project Report.

Analysis/ results
The procedure followed to assess working capital in the bank is: 1. Receipt of request from the company. 2. Documents like MOA, Audited balance sheet, note on companys background, details of banking arrangement etc .are required to be submitted. 3. NBG (New Business Group) is sent to the Head office for approval. 4. Once the NBG gets approved, a detailed study of the company, its financials, the industry in which it deals etc is done. 5. Final proposal is prepared and sent to the head office for approval. 6. After approval, the company is intimated about the sanction of working capital loan. 7. Post Sanction analysis is done by examining the requirements of working capital of the firm.

I have tried to illustrate the analysis of working capital financing followed by the banks in the form of case studies mentioned below.

CASE STUDY 1:
(Rs. In Crore)

Existing/Proposed Limits
Facility Limits Exist Prop. 200.00 Interest / Comm Exist Prop. 0.20%*p.a. plus service tax Discounted Cash NA margin in the form of FDRs, maturity value being equal to LC liability on due date. Margin

O/s as on

Non Fund Based

TOTAL NFB LIMITS TOTAL LIMITS

200.00

200.00

LC/LG Limit Usance : : Rs. 200.00Crore 12 Months with fixed maturity. The exact date of maturity will be communicated by the company at the time of shipment. Import LC issuance & retirement charges (all inclusive) 0.20% p.a. plus service tax (Our LC Commission will not be less than that of SBI.)

Commission :

Facility Arrangement

Multiple Banking

Collateral Security:

Cash Margin, which will be in form of Fixed Deposit placed with Bank. The maturity value of the FD will be equal to the maturity value of the LC/LOU in Indian Rupees. Company will be booking Foreign Exchange forward contract content for LC/LOU liability with our bank, for the same maturity as that of LC/LOU. Company will sign set-off agreement with bank to set off its import obligations as per the format enclosed confirming that CIPL will have no further payment obligations under the import leg.

Brief History of the account:

The company was setup in 1987. It is a private company with a strong presence in agriculture processing, merchandising, industrial production, financial services, refining of edible vegetable oils. It is engaged in handling, shipping and processing of various products including refined oils; grain and oilseeds; sugar; cotton and animal feed. In India, the companys business is structured as three broad business unitsRefined Oil division, Grains & Oilseeds and Trade & Structured Finance; and a few small business units like Sugar, Cotton, Animal nutrition engaged in trading of these commodities.

Financial Indicators FY 2010 Audited 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Paid-Up Capital Reserves & Surplus Intangible Assets Tangible Net Worth Adjusted TNW Long termLiabilities Capital Employed(4)+(6) Net Block Investments Non-CurrentAssets Current Assets 1838.26 Current Liabilities NWC Net Sales 4959.22 Domestic 1404.03 Export 0.00 % growth 126.44 15 16 17 18 19 20 21 Long Term sources 188.67 Long Term uses 1838.26 Short Term sources 1776.04 Short Term uses Surplus/Deficit Return on Equity % 1.28% Return on Assets % -62.22 20.16% -62.22 6354.60 39.79 85.39 0.00 125.19 125.19 1.25 126.44 166.92 0.00 21.74 1776.04 FY 2011 Audited

(Rs. In Crore) FY 2012 Estim. 46.53 151.19 0.00 197.72 197.72 1.25 198.97 250.54 0.00 56.27 2366.23 2474.08 -107.84 6624.12 5330.03 1307.30 4.24 198.97 306.82 2474.08 2366.23 -107.84 33.27% 2.46% 39.79 230.60 0.00 270.39 270.39 1.25 271.64 243.00 0.00 46.00 2436.00 2453.35 -17.35 6910.00 5540.00 1385.00 4.32 271.64 289.00 2453.35 2436.00 -17.35 36.26% 3.60% FY 2013 Projection 39.79 353.31 0.00 393.11 393.11 1.25 394.36 253.00 0.00 46.00 2471.00 2375.63 95.36 7319.00 58.43 1496.00 5.92 394.36 299.00 2375.63 2471.00 95.36 38.54% 5.47%

RATIOS: FY 2010 Audited 0.97 1 2 3 4 Current Ratio 0.01 Debt/Equity Ratio 14.69 TOL/TNW Ratio TOL/TNW Ratio with unsecured loan as quasi capital & included in Net Worth 553.80 5 6 7 8 Gross Profit 103.22 EBIDTA 86.19 Net Profit Before Tax 25.23 Net Profit After Tax % of growth 17.02 9 10 11 12 13 Depreciation 42.26 Cash Accruals 0.09 Gross Profit margin % 0.00 Net Profit margin % 0.01 Debt/EBIDTA % 0.01 0.01 0.01 0.01 0.01 0.02 0.11 0.11 0.11 89.44 122.03 176.50 23.64 24.00 25.00 65.79 98.03 151.50 148.80 167.03 222.50 172.45 191.03 247.50 705.22 746.03 822.50 12.52 9.08 6.05 0.01 0.00 0.00 FY 2011 Audited 0.96 FY 2012 Estim. 0.99 FY 2013 Projection 1.04

Paid up capital Paid up capital has increased from Rs. 39.79 Cr in FY 2010 to Rs. 46.53 Cr in FY 2011 due to share application money of Rs.6.74 Cr in 2011.
Net Working capital In line with the companys global treasury policy, it does not fund its long term assets via long term debt. Long term debt is taken by the organization selectively, i.e., in the parent country, USA. Also, Long term funding is costlier than short term funding. Hence, for some period company may get into a situation where they have to fund fixed assets locally through the short term fund. Long term liability

The only term liability of the company is Rs.1.25 Cr in the form of preference shares (redeemable after 1year but within 12 years). Current liabilities Besides borrowings from Associate companies, Creditors and advance payments from customer contribute majorly to current liability. Current Assets Finished goods form major part of current assets of the company. Current Ratio As the company is in practice of funding its long term assets by short term debts, the current ratio of the company is low. However the company is continuously looking at reviewing and improving their funding methodology. The ratio seems to improve a little in projections. Debt to Equity Ratio The company has limited long term debts due to its policy of funding long term assets through short term debts. The Net worth of the company is good. This causes a low D:E Ratio.

Assessment of Letter of Credit: Particulars FLC(Imported) Million USD 1 Total purchases during the year Purchases proposed against LC (FOB/CIF Value) RM requirement against LC per month Usance period in months Lead period in months Total period in months LC requirement (3x6) LC recommended 600 3000 FLC (Imported) in RsCrore**

520

2600

43.33

216.65

4 5 6 7 8

12 0.65 * 12 520 40 2600 200

*Lead period is the time gap between date of the bill of lading and date of opening the LC.

As per the LC assessment given above, the total LC requirement of the company is Rs. 2600.00 Cr (Assuming 1USD = 50Rs), however the company is already enjoying the LC limits of Rs.3350.00 Cr. The justification by the company on the same is as under:

The present LC limits exceeding the proposed requirement will always be the case as due to envisaged or unforeseen changes in fructification of certain commercial contracts, there always needs to be flexibility required with respect to having more than 4 banks( Axis,IDBI,SBI and SBT) as far as set up limits are concerned. Typically if requirement will be 1 x , the set up limits will be to the tune of 1.33 x in our business.

Recommendations:

Being a subsidiary, it has a strong business profile through extensive global sourcing, logistics network and vast experience in trading in various commodities. Growth prospects for the company are considered good in view of the vast potential for development, with India being one of the most critical growth markets for the company. The company has strong operational guidance and financial support from parent company. Facility is based on the terms under which company is required to maintain cash margin in the form of fixed deposits whose maturity value equals 100% of liability under LC facility. The company is in a growth phase. Establishing credit relationship with company will provide good opportunities for our Bank. The facility is secured by Cash Margin (100% on due date) therefore, we have stipulated LC Commission of 0.20%. We have verified the sanction letters of SBI and confirm that SBI is also charging LC Commission of 0.20%.

In view of the aforesaid, we recommend the LC/LOU for Buyers Credit facility of Rs. 200.00 Crore shall be admitted for the detail appraisal on terms & conditions given in enclosed term sheet.

CASE STUDY 2:
Account with Constitution Market Perception Business / Line of activity Branch: CFB, Delhi Private Limited Company Not a listed company Trading of coal Zone: Delhi

(Rs. In Crore) Facility Limits Exist Fund Based CC cum OD 10.00 10.00 Base Rate+3.25% 25% Prop. Interest / Commission Margin Exist. Prop.

TOTAL FB Non Fund Based ILC/FLC/BG/ LOU/ Buyers Credit Sub Limit Stand By LC

90.00

1% p.a. (All inclusive) plus service tax. 10% Payable upfront.

TOTAL NFB LIMITS TOTAL LIMITS -

(90.00) 90.00 100.00

Detailsof Working Capital limits from the Consortium

Name of the Bank/FIs

Proposed share* FB NFB 90.00 140.00 92.00 92.00 23.00 435.00 FB

Share% NFB 25.64 25.64 20.51 20.51 7.70 39.00 20.68 32.18 21.15 21.15 4.84 100.00

Central Bank of India Axis Bank SBOP IDBI Others Total

10.00 10.00 8.00 8.00 3.00 39.00

* Final Allocation will be done after full tie-up. Company has informed us that they have also approached Dena Bank and SBI for tie up of limits.

Security Primary Security 1stPariPassu charge on current assets of the company

Collateral Security: Land Property bearing khasra no 1552, 1061, 1558 and 1575 situated in Loni Ghaziabad, admeasuring 1.45 acres in the name of Vedansh Real Estate Private Limited.

Brief History of the account:

The company is a part of World Window Group (WWG) which, through its flagship company World Window Impex India Pvt Limited and its subsidiaries, is currently involved in the business of, trading of ferrous & non ferrous metal & metal scrap, Inland Container Depot (ICD) operations, road transportation, freight forwarding, manufacturing and coal mining. As extension to its existing line of business, the group plans to venture into coal trading though its newly formed company.

The company is a private limited company, incorporated on December 16, 2011 with the main object to carry on trade in India, or elsewhere, the trading business of Coal, Coke, fly ash, iron ore etc and to act as sole selling agents, commission agents, distributors, wholesalers and retailers.
Select Financial Indicators of Worlds Window Impex India Pvt Ltd (Rs. In Crore) FY-08 Tangible Net Worth Long termLiabilities Current Ratio Debt/Equity Ratio TOL/TNW Ratio Net Sales Net Profit AfterTax Depreciation Cash Accruals 77.45 22.39 1.17 0.29 2.93 462.07 6.21 4.83 11.03 FY-09 134.66 11.06 1.48 0.08 1.49 622.55 1.38 4.91 6.29 FY-10 139.60 15.62 1.60 0.11 1.44 804.00 5.84 4.54 10.38 FY-11 149.76 23.18 1.55 0.15 1.77 928.12 10.97 3.95 14.92

Projected Financial Indicators (Rs. In Crore) FY-2013 Projection Paid-Up Capital Reserves & Surplus Intangible Assets Tangible Net Worth Adjusted TNW Long termLiabilities Capital Employed 120.00 23.96 0.00 143.96 143.96 0.00 143.96 FY-2014 Projection 140.00 57.39 0.00 197.39 197.39 0.00 197.39 FY-2015 Projection 140.00 97.51 0.00 237.51 237.51 0.00 237.51 FY-2016 Projection 140.00 145.61 0.00 285.61 285.61 0.00 285.61 FY-2017 Projection 140.00 204.69 0.00 344.69 344.69 0.00 344.69

Net Block Investments Non-CurrentAssets Current Assets

0.42 0.00 0.00 524.10 380.56

0.43 0.00 0.00 592.89 395.95 196.94 2026.80 2026.80 0.00 20.00

0.43 0.00 0.00 711.81 474.77 237.04 2432.16 2432.16 0.00 20.00 237.51 0.43 474.77 711.81 237.08 16.88% 5.63%

0.41 0.00 0.00 854.86 569.70 285.16 2918.59 2918.59 0.00 20.00 285.61 0.41 569.70 854.86 285.20 16.85% 5.63%

0.37 0.00 0.00 996.35 652.07 344.28 3356.38 3356.38 0.00 15.00 344.69 0.37 652.07 996.35 344.32 17.14% 5.93%

Current Liabilities 143.54 NWC 1689.00 Net Sales 1689.00 Domestic 0.00 Export % growth 143.96 Long Term sources 0.42 Long Term uses 380.56 Short Term sources 524.10 Short Term uses 143.54 Surplus/Deficit 16.64% Return on Equity % 4.57% Return on Assets % 5.63% 16.94% 196.96 592.89 395.95 0.43 197.39

RATIOS: FY-2013 Projection 1.38 Current Ratio 0.00 Debt/Equity Ratio 2.64 TOL/TNW Ratio 84.37 Gross Profit 76.00 EBIDTA 35.47 Net Profit Before Tax 23.96 Net Profit After Tax 39.52% % of growth 0.08 Depreciation 24.04 Cash Accruals 5.00% Gross Profit margin % 1.42% Net Profit margin % 0.00 Debt/EBIDTA % 0.00 0.00 0.00 0.00 1.65% 1.65% 1.65% 1.76% 5.00% 5.00% 5.00% 5.00% 33.52 40.21 48.25 59.21 0.09 0.11 0.12 0.14 19.95% 20.02% 22.73% 33.43 40.10 48.13 59.07 49.48 59.37 71.23 87.44 91.21 109.44 131.36 156.06 101.25 121.49 145.83 167.67 2.01 2.00 1.99 1.89 0.00 0.00 0.00 0.00 FY-2014 Projection 1.50 FY-2015 Projection 1.50 FY-2016 Projection 1.50 FY-2017 Projection 1.53

Assessment of Working Capital Limits: (Rs. In Crore) Calculation of MPBF on sales estimates of Rs.1689 Crore for the year ending 31.03.2013 Prov. for the year ended Year Ending 1 Net Sales 2 Total Current Assets 2013 1689.00 524.10 Following Years estimates 2014 2026.80 592.89

3 Total Current Liabilities (Other than Bank borrowings) 4 Working Capital Gap Min. required margin (25% of CA excluding export 5 receivables) 6 Actual/Projected NWC 7 Maximum permissible bank finance 8 Total working capital/borrowing limits

341.56 182.54

355.93 236.96

131.03

148.22

143.54 39.00 39.00

196.96 40.00 40.00

Compliance under Inventory and Receivables Levels:

(Justification in brief should be given when deviations are recommended) Inventory Estimates Following year 2013 Months Finished Goods Receivables Sundry Creditors domestic 2.43 0.49 2.08 Value in Crore 324.50 69.41 329.25 Months 2.43 0.49 2.08 Value in Crore 389.40 83.29 339.00 Projections 2014

Justification for proposed Working capital limits.

The company is newly incorporated company. It has not started its business. The company has approached various banks to meet its working capital requirement for FY 2012-13. Total limits were assessed at Rs. 478 Crore (FB Rs. 39 Crore and NFB Rs. 439 Crore) by Axis Bank. Proposed limits will be utilized for procurement of coal for further sale in domestic market. Looking to the group and its activities, projected sales of Rs. 1689 Crore seems reasonable. Company will hold stock of coal equal to 2.43 months consumption, which is reasonable as coal will be imported from overseas markets against letter of credit having usance period of 120 days.

Approx. 3.042, times LC will revolve. Moreover, company has various Inland Container Depot (ICD), which can be utilized to keep the coal in stock. Therefore, holding level of inventory is at comfortable level. Company has informed that imported Coal will be sold in domestic market immediately on receipt. Company has estimated that it will realize proceeds in 15-20 days. Therefore, debtor collection period is estimated at very low level.

Assessment and Justification for Non fund based limits. Particulars 1 2 3 4 5 6 7 8 Total purchases during the year Purchases proposed against LC (FOB/CIF Value) 70% RM requirement against LC per day (2 / 365) Usance period in days Lead period in days Total period in days LC requirement (3x6) LC recommended ILC/FLC 1903.71 1332.60 3.651 90 30 120 438.12 439.00

In view of the foregoing we recommend for Cash Credit cum OD facility of Rs. 10 Crore NFB limit in form of ILC/FLC/BG/LOU/SBLC of RS. 90 Crore may be sanctioned on terms and conditions annexed.

Interpretation
From both these projects, I observed: The requirement of working capital finance is ever increasing. Loans and advances formed a major portion of the current assets of the firm because of which the working capital gap is large. In most of the cases, hypothecation and/or mortgage are used to create securities for the banks. Bank has their own internal credit rating procedure to rate the clients (Borrowers). After doing the assessment of the financial indicators it is up to the judgment of the top management of the bank to sanction such loan. The very decision could be against the assessment result. If the company is with bank from inception stage then they are given preference, as credible and loyal party over their financial indicators. There is a stiff competition to the nationalized banks from the foreign investors as their lending rates are much lower than nationalized banks. A little deviations in Current Ratio and TOL/TNW or any other ratio is acceptable if the same is backed by appropriate liquid ( cash or cash equivalent) assests.

Conclusions & Recommendations

Closely monitoring and inspecting the activities and stocks of the borrowers from time to time can avoid the misuse of working capital

While working out the working capital limits, banks must exclude the loans and advances from the current assets. The assessment should be done mainly stock and the inventory level of borrower.

Bank must extend working capital finance through non-fund based facilities. Another ideal method would be to use LC as the primary source of extending, working capital clubbed with bill discounting. This would ensure that the credit is put to the right use by the borrower and repayment is guaranteed to the bank.

The bank must further secure themselves by holding a second charge on all the fixed assets of the borrower.

The time period taken by the banks to sanction the limits should be significantly reduced to allow the borrowers to make use of the credit when the need is most felt.

SUGGESTIONS FOR FUTURE RESEARCH

Since my tenure during the internship was equally divided between the exchange of information reports and the credit appraisals, I was able to do only appraisals of two companies. In the appraisals part I was able to do the financial and commercial feasibility of the company in addition to managerial feasibility. In future I would also like to do the technical feasibility and study of stock audits and inspection reports of the company as this would also provide me with the clear idea about the company's functioning. Apart from this, I would also be interested in knowing more about the functioning of foreign exchange department in addition to the credit department.

Executive summary
Working capital is the fund invested in current assets and is needed for meetingday to day expenses. It occupies an important place in a firms Balance Sheet. Working capital financing is a specialized area and is designed to meet the working capital requirements of a business. The main sources of working capital financing are trade credit, bank credit, factoring and commercial paper. Out of all these, this project is related only to bank credit which represents the mostimportant source for financing of current assets. The firms generally enjoy easy access to the bank finance for meeting their working capital needs.But from time to time, Reserve Bank of India has been issuing guidelines and directives to the banks to strengthen the procedures and norms for working capital financing. This project attempts to analyse the role of bank credit in financing working capital needs of firms. It also tries to give a birds eye view about the guidelines issued by RBI to banks in relation to working capital financing. It contains a few proposals in the form of case studies which I had tried to analyse during my internship.

Appendices
Books:

1) Loan Policy Book of Central bank of India.

Web Sites:

http://www.centralbankofindia.co.in http://www.indiamarkets.com http://www.businessfinance.com (http://www.businessfinance.com/working-capital.htm)