bank and corporate finance

Balance sheet Analysis for Working Capital facility (Year: 2013-‘14)

Chapter: 1 Introduction to

Bank & Corporate Finance

St. Kabir Institute of Professional Studies (SKIPS)


Definition of Bank:

A bank is a financial institution and a financial intermediary that accepts deposits and

channels those deposits into lending activities, either directly or through capital market. A

bank connects with capital deficits to customer with capital surpluses.

History of Banking in India:

Without a sound and effective banking system in India it cannot have a healthy

economy. The banking system of India should not only be hassle free but it should be able to

meet new challenges 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 its credit. The most striking is its extensive reach. It is no longer confined to

only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached

even to the remote corners 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 dividends

with 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 draft or for withdrawing his own money. Today, he has a choice. Gone are days when the

most efficient 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 are as 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, we divide scenario in Phase I, Phase II and Phase

III.

PHASE I

The General Bank of India was set up in the year 1786. Next were Bank of Hindustan

and Bengal 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

established which started as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab

National 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 Bank

of 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

failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To

streamline the 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 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was

vested with extensive powers for the supervision of banking in India as the Central Banking

Authority.

PHASE II

Government took major steps in this Indian Banking Sector Reform after

independence. In 1955, it nationalized Imperial Bank of India with extensive banking

facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of

India to act as the principal agent of RBI and to handle banking transactions of the Union and

State Governments all over the 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

City Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were

nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out in

1980 with seven more banks. This step brought 80% of the banking segment in India under

Government ownership.



The following are the steps taken by the Government of India to Regulate Banking

Institutions 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 crores.

Banking in the sunshine of Government ownership gave the public implicit faith and

immense confidence about the sustainability of these institutions.

PHASE III

This phase has introduced many more products and facilities in the banking sector in

its reforms measure. In 1991, under the chairmanship of M. Narasimham, a committee was

set up by his name which worked for the liberalization 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.

The entire system became more convenient and swift. Time is given more importance

than money.



The financial system of India has shown a great deal of resilience. It is sheltered from

any crisis triggered by any external macroeconomics shock as other East Asian Countries

suffered. 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 limited

foreign exchange exposure.

Types of Banks:

There are various types of banks which operate in our country to meet the financial

requirements of different categories of people engaged in agriculture, business, profession,

etc. On the basis of function, the banking institution in India may be divided into the

following types:


Types of Bank

Central Bank

Commercial Bank

Development Bank

Co-operative

Bank

Specialised Bank


Structure of Indian banking:

The structure of the banking industry its performance and efficiency which in turn

affects the bank’s ability to collect savings and channel them into productive investments.

The success of banking sector very much depends on the ownership of banks whether private

or public or mixed whether the industry is competitive or regulated in terms of interest rates,

spreads between landing and deposit rates, and whether service charges are competitively

determined or regulated by government or central bank. The Indian banking industry which is

governed by the banking regulation act of India, 1949 can be broadly classified into two

major categories – scheduled banks and non-scheduled banks.

Indian banking system comprises of both organized & unorganized banks.

Unorganized banking includes indigenous bankers & village money-landers. Organized

banking includes the following:

1. Reserve bank of India (Central bank)

2. Commercial banks

3. Development bank

4. Exim bank

5. Co-operative banks

6. Regional banks

7. National bank for agriculture & rural development (NABARD)

8. Land development banks



Structure of Indian banking


Reserve bank of India

Scheduled Banks Non-scheduled Banks

State Co-op. Banks

Commercial Banks

Central Co-op. Banks & Primary

credit societies

Commercial Banks

Indian Foreign

Public sector Banks

Private sector Banks

SBI & other subsidiaries

Other nationalized Banks

Regional rural Banks


Importance of Banks in Modern Economical Development of

India:

Banking System occupies an important place in a nation's economy. A Banking

institution is indispensable in a modern society. It plays a pivotal role in the economic

development of country and forms the core of the money market in an advanced country.

In India, though the money market is still characterized by the existence of both

organised and the unorganised segments, institutions in the organised money market have

grown significantly and are playing an increasingly important role. Among the organised

sector of money market, commercial banks and co - operative banks have been in existence

for the past several decades. These institutions are the sources of short-term credit to industry.

These institutions are the sources of short-term credit to industry, trade, commerce and

agriculture. Besides these institutions, a verity of Specialised financial institutions has been

set up in the country to cater to the specific needs of the industry, agriculture and foreign

trade.

In the field of Industrial finance, The Industrial Development Bank of India

(IDBI), set up in 1964, is the apex bank, which undertakes besides direct financing to big

industrial projects refinancing of term loans granted by other financial institution including

the commercial banks.

All the end Indian banking and financial system may be claimed to have the finest

set-up comparable to any advanced country.



1.1. Introduction to Corporate Finance :

Corporate finance is the study of a business's money-related decisions, which are

essentially all of a business's decisions. Despite its name, corporate finance applies to all

businesses, not just corporations. The primary goal of corporate finance is to figure out

how to maximize a company's value by making good decisions about investment,

financing and dividends. In other words, how should businesses allocate scarce resources

to minimize expenses and maximize revenues?

Every decision made in a business has financial implications, and any decision that

involves the use of money is a corporate financial decision. Defined broadly, everything that a

business does fits under the rubric of corporate finance. It is, in fact, unfortunate that we even

call the subject corporate finance; because it suggests too many observers a focus on how

large corporation make financial decisions and seems to exclude small and private businesses

from its purview. All businesses have to invest their resources wisely, find the right kind and

mix of financing to fund these investments, and return cash to the owners if there are not

enough good investments.

The activities involved in managing cash flows in business environment.

a) Need of Corporate Finance:

Finance is the life blood of business. It is required by all types of companies. It is required for

starting a company. It is required for running a company. It is required for the survival,

stability and growth of a company. It is required for expansion and diversification of a

business. Finance is also required for closing down the company. So, a company cannot


http://kalyan-city.blogspot.com/2011/03/what-is-business-meaning-definitions.html


survive without finance. It requires promotional finance to start the company. It requires

long-term finance to purchase fixed assets. It requires development finance for growth,

expansion and diversification of business.

b) Importance of Corporate Finance:

I. Research and Development: Corporate Finance is needed for Research and

Development. Today, a company cannot survive without continuous research and

development. The company has to go on making changes in its old products. It must also

invent new products. If not, it will be getting automatically thrown out of the market.


1 Research and Development

2 Motivating Employees

3 Promoting a Company

4 Smooth Conduct of Business

5 Expansion and Diversification

6 Meeting Contingencies

7 Government Agencies

8 Dividend and Interest

9 Replacement of Assets


II. Motivating Employees: Manager and employees must be continuously motivated

to improve their performance. They must be given financial incentives, such as bonus, higher

salaries, etc. They must also be given non-financial incentives such as transport facilities,

canteen facilities (eatery), etc. All this requires finance.

III. Promoting a Company: Finance is needed for promoting (starting) a company. It

is needed for preparing Project Report, Memorandum of Association, Articles of Association,

Prospectus, etc. It is needed for purchasing Land and Buildings, Plant and Machinery and

other fixed assets. It is needed to purchase raw materials. It is also needed to pay wages,

salaries and other expenses. In short, we cannot start a company without finance.

IV. Smooth Conduct of Business: Finance is needed for conducting the business

smoothly. It is needed as working capital. It is needed for paying day-to-day expenses. It is

needed for advertising, sales promotion, distribution, etc. A company cannot run smoothly

without finance.

V. Expansion and Diversification: Expansion means to increase the size of the

company. Diversification means to produce and sell new products. Modern machines and

modern techniques are needed for expansion and diversification. Finance is needed for

purchasing modern machines and modem technology. So, finance becomes mandatory for

expansion and diversification of a company.



VI. Meeting Contingencies: The Company has to meet many contingencies. For e.g.

sudden fall in sales, loss due to natural calamity, loss due to court case, loss due to strikes,

etc. The company needs finance to meet these contingencies.

VII. Government Agencies: There are many government agencies such as Income Tax

authorities, Sales Tax authorities, Registrar of Companies, Excise authorities, etc. The

company has to pay taxes and duties to these agencies. Finance is needed for paying these

taxes and duties.

VIII. Dividend and Interest: The Company has to pay dividends to the shareholders. It

has to pay interest to the debenture holders, banks, etc. It also has to repay the loans. Finance

is needed to pay dividends and interest.

IX. Replacement of Assets: Plant and Machinery are the main assets of the company.

They are used for producing goods and services. However, after some years, these assets

become old and outdated. They have to be replaced by new assets. Finance is needed for

replacement of old assets. That is, finance is needed to buy new assets.

1.2. Definition of Corporate Finance:



The financial activities related to running a corporation. A division or department

that oversees the financial activities of a company. Corporate finance is primarily concerned

with maximizing shareholder value through long-term and short-term financial planning and

the implementation of various strategies. Everything from capital investment decisions to

investment banking falls under the domain of corporate finance.

1.3. Objective of the study:

The IDBI has been playing a significant role in the promotion of Industrial. Its assistance has

been channelled through its scheme for the refinance of Industrial loans, and to a limited

extent, through the bills rediscounting scheme.

Objective:

i. Financial analysis of the company based on the Profit and loss Account & Balance

sheet on the basis of key factors such as Liquidity, Solvency, Growth, Activity Analysis and

Profitability of companies.

ii. To assess the working capital limit sanctioned / to be sanctioned to the company.

1.4. Scope of the study:

To Study the Balance sheet of Companies who has applied for either Working Capital

Term Loan or Term Loan and understanding.

Key factors for loan sanction.



There are few key factors to analyse the Profit and Loss Account & Balance Sheet of

Companies.

a) Liquidity

b) Solvency

c) Profitability

d) Growth

Liquidity:

The degree to which as asset or security can be bought or sold in the market affecting

the asset’s price. Liquidity is characterized by a high level of trading activity. Liquidity

Analysis includes Current Ratio. Current Ratio indicates Current Assets over Current

Liabilities. Normally, the current ratio should be minimum 1.33.

Solvency:

Solvency in Corporate Finance is the degree to which the current assets of entity

exceed the current liability of the entity. Solvency can be described as the ability of

corporation to meet its long term fixed expenses and to accomplish long term expansion and

growth. The solvency ratio measures the size of the company’s after-tax income, excluding

Non - cash depreciation expenses, as compared to the firm’s total debt obligation. It provides

a measurement of how likely a company will be to continue meeting its debt obligations.

Profitability:

The state or condition of yielding a financial profit or gain. It is often measured by

viability so measuring current and past profitability projecting future profitability is very



important. Profitability is the % of Net Profit or Profit after Tax to Net Sales. Income is

money generated from the activities of the business. Expenses are the cost of resources used

up or consumed by the activities of the business. This is essentially a listing of income and

expenses during a period of time (usually a year) for the entire business.

The Purpose of Financial Statement:

The Purpose of Financial Statement is to communicate. Financial statement indicates

state of the business. Financial Statement helps in measuring the Profitability of the company.

Purpose of Financial Statement is different from all Stake holders’ side. Financial Statements

provide useful information to a wide range of users:

Managers require Financial Statements to manage the affairs of the company by assessing its

financial performance and position and taking important business decisions.

Shareholders use Financial Statements to assess the risk and return of their investment in the

company and take investment decisions based on their analysis.

Prospective Investors need Financial Statements to assess the viability of investing in a

company. Investors may predict future dividends based on the profits disclosed in the

Financial Statements. Furthermore, risks associated with the investment may be gauged from

the Financial Statements. For instance, fluctuating profits indicate higher risk. Therefore,

Financial Statements provide a basis for the investment decisions of potential investors.

Financial Institutions (e.g. banks) use Financial Statements to decide whether to grant a

loan or credit to a business. Financial institutions assess the financial health of a business to



determine the probability of a bad loan. Any decision to lend must be supported by a

sufficient asset base and liquidity.

Suppliers need Financial Statements to assess the credit worthiness of a business and

ascertain whether to supply goods on credit. Suppliers need to know if they will be repaid.

Terms of credit are set according to the assessment of their customers' financial health.

Customers use Financial Statements to assess whether a supplier has the resources to ensure

the steady supply of goods in the future. This is especially vital where a customer is

dependent on a supplier for a specialized component.

Employees use Financial Statements for assessing the company's profitability and its

consequence on their future remuneration and job security.

Competitors compare their performance with rival companies to learn and develop strategies

to improve their competitiveness.

General Public may be interested in the effects of a company on the economy, environment

and the local community.

Governments require Financial Statements to determine the correctness of tax declared in

the tax returns. Government also keeps track of economic progress through analysis of

Financial Statements of businesses from different sectors of the economy.



What is Balance sheet?

Balance Sheet is the snap shot of financial strength of any company at any point of time. It

gives the details of the assets and the liabilities of the company. Understanding balance sheet

is very important because it gives an idea of the financial strength of the company at any

given point of time.

A financial statement that summarizes a company's assets, liabilities and shareholders'

equity at a specific point in time.

Role of Financial Statement in Decision making:

The finance department of a company generates a variety of financial information that is

helpful in decision making, including: Profit and Loss accounts providing details of whether

the business is making efficient use of financial resources. It is useful to establish the

performance as well as the future potential of the entity.

Balance Sheet information providing details of a business asset and liabilities, as well

as the liquidity of the business.

Sales and purchases information setting out particular types of trading and accounts

with particular customers and suppliers.

Information about the purchase of assets and liabilities.

Information about the wages paid out by a business.

Information about costs.



By providing a steady and up-to-date flow of information, a business is able to make

appropriate decisions about:

How to increase sales

How to reduce costs

How to raise profitability

When to purchase new assets

The best sources of finance, and duration, etc.



Chapter: 2 Overview of

IDBI



2.1. Business Profile:

i. Company:

IDBI Bank Ltd. is a Bank with its operations driven by a cutting edge core Banking

IT platform. The Bank offers personalized banking and financial solutions to its clients in the

retail and corporate banking arena through its large network of Branches and ATMs, spread

across length and breadth of India. We have also set up an overseas branch at Dubai and have

plans to open representative offices in various other parts of the Globe, for encashing

emerging global opportunities. Our experience of financial markets will help us to effectively

cope with challenges and capitalize on the emerging opportunities by participating effectively

in our country’s growth process.

As on March 31, 2012, the Bank had a network of 973 Branches and 1542 ATMs.

The Bank's total business, during FY 2011-12, reached Rs. 3,91,651 Crore, Balance sheet

reached Rs. 2,90,837 Crores while it earned a net profit of Rs. 2032 Crore (up by 23.15%)s.

Our vision for the Bank is “TO BE THE MOST PREFERRED AND TRUSTED BANK

ENHANCING VALUE FOR ALL STAKEHOLDERS”.

Mission:

Delighting customers with our excellent service and comprehensive suite of best-in-

class financial solutions.

Touching more people's lives with our expanding retail footprint while maintaining

our excellence on corporate and infrastructure financing.

Continuing to act in an ethical, transparent and responsible manner, becoming the role

model for corporate governance.



Deploying world class technology, systems and processes to improve business

efficiency and exceed customer’s expectations.

Encouraging a positive, dynamic and performance-driven work culture to nurture

employees grow them and build a passionate and committed work force.

Expanding our global presence.

Relentlessly striving to become a greener bank.

ii. Customer:

The main customers of the bank are the depositors and the borrowers. The depositors

and the borrowers may be an individual or a company. Apart from borrowing and depositing,

the customers (the borrower and the depositor) may also avail services from treasury and

trade finance departments. These services may also be availed by the individual or a company

who are not the clients of the bank. The clients of the bank may also avail services like CMS

(Cash Management Service) from the bank. Other than the borrowers and the depositors there

also exists a group of customers who buy insurance, mutual funds, etc.

iii. Competitors:

The Competitors for Bank is Both Public sector & Private sector banks.

Public Sector banks such as Bank of Baroda, Canara Bank, Union Bank of India, Bank of

India, State Bank of India, Punjab National Bank, Andhra bank & Allahabad bank.

Private Sector banks such as HDFC Bank, ICICI Bank, Axis Bank, Federal bank.



2.2. Designation Structure:

2.3. Product/Services:


CMD

DMD

ED

CGM

DGM/AGM/RM

DGM/AGM/RM

ED

CGM

DGM/AGM/RM

DGM/AGM/RM

ED

CGM

DGM/AGM/RM

DGM/AGM/RM

ED

CGM

DGM/AGM/RM

DGM/AGM/RM

Products

Fund based

assitance

Non- Fund based

assistance

Cash Manage

ment service

TreasuryTrade

finance


1. Fund based assistance:

a. Term Loan:

Term loans can be sanctioned for project loan (green field or brown field) or non-

project loan. Project loans are sanctioned for setting up a new unit or for expansion of

existing units whereas Term Loans (Non-project) are extended for the purpose of acquisition

of fixed assets. Viz., Building, Plant and Machinery etc.

The Bank provides term loan assistance in both rupee and foreign currencies for

Greenfield projects as also for expansion, diversification and modernization. Interest rate on

rupee term loan is fixed or floating based on BBR plus a fixed spread, as per creditworthiness

of borrower, rating, risk perception, tenure of loan and other relevant factors. Interest Rate on

Foreign Currency Loan is normally floating rate based on LIBOR plus a fixed spread

according to creditworthiness of borrower, rating, risk perception, tenure of loan and other

relevant factors.

b. Short Term Loans:

Short Term Loans (STL) is sanctioned to existing clients with investment grade

rating, having good track record of relationships. STL is generally granted for meeting short-

term cash flow mismatches or as bridge finance against financial closure, the take out is

envisaged from the RTL, to be sanctioned, at times, by the Bank.

c. Working Capital (Cash credit):



IDBI Bank provides Working Capital facility to the industry to finance day-to-day

requirement. The working capital funds are generally required for purchase of raw materials,

stores, fuel, for payment of labour, power charges, for storing finished goods till they are sold

Out & for financing the sales by way of sundry debtors / receivables. Cash Credit facility is

granted to the customers to bridge working capital gap. Cash Credit (CC) is granted against

hypothecation of stock such as raw materials, work-in-process, finished goods and stock-in-

trade, including stores and spares. CC is granted by way of a running account, drawings to be

regulated within the drawing limit permissible which is arrived at on the basis of composition

of current assets and current liability based on the declaration in the stock statement in the

prescribed format submitted by the borrower.

d. Packing credit to exporter:

The scheme is intended to make short-term working capital finance available to

exporters at internationally comparable interest rates.

Types of Export Credit:

(1) Pre-shipment Export Credit/ Packing Credit (RPC/PCFC),

(2) Post-shipment Export Credit – both in Foreign Currency (FCY) and Rupees.

Pre-shipment / Packing Credit also known as 'Packing credit' is a loan/ advance granted to an

exporter for financing the purchase, processing, manufacturing or packing of goods prior to

shipment. Packing credit can also be extended as working capital assistance to meet expenses



such as wages, utility payments, travel expenses etc; to companies engaged in export or

services. Packing credit is sanctioned / granted on the basis of letter of credit or a confirmed

and irrevocable order for the export of goods / services from India or any other evidence of

an order for export from India.

'Post-shipment Credit' means any loan or advance granted or any other credit provided by a

bank to an exporter of goods / services from India from the date of extending credit after

shipment of goods / rendering of services to the date of realisation of export proceeds as per

the period of realization prescribed by Reserve Bank of India (RBI) and includes any loan or

advance granted to an exporter, in consideration of, or on the security of any duty drawback

allowed by the Government from time to time. As per extant guidelines of RBI, the period

prescribed for realisation of export proceeds is 12 months from the date of shipment.

e. Buyout of Receivables:

Receivable Buyout with recourse aims to provide working capital finance by

converting domestic receivables into cash, thus, helping companies to tide over constraints of

cash flow and working capital. Under the scheme, Bank only providing advances to suppliers

(with large pool of receivables) against domestic trade receivable (age of receivables should

not exceed 90 days) and other services such as debt collection and administration of sales

ledger etc. shall be taken by the company.

Supplier/Borrower shall draw bills of exchange/invoice for goods supplied and the

purchaser shall accept the same. After acceptance of bills of exchange/invoice, Bank shall

advance discounted value of the receivable for the tenor of the receivable. If purchaser fails to



pay the due amount on due dates, the supplier shall make payment. Borrower/Supplier

Company shall submit list of receivables confirming that the documentary proof are with the

company. An agreement would be entered into with supplier for assignment of the debts

before providing advance. Supplier/Borrower should also enter into agency agreement for

collection of debts with the Bank.

f. Supple chain finance:

With a view to provide finance to dealers towards the invoices raised by corporate

on dealers, Bank has devised a product for Channel Finance to the dealers of corporate for

inventory funding facility for Authorised Dealers (ADs) of well established corporate. The

amount of Line of Credit (LOC) for the corporate is generally fixed with reference to annual

turnover of the corporate. Sub limits to dealers is allocated as recommended by the corporate

and would be linked to turnover of dealers with the corporate.

g. Cash dispenser supplier:

In order to finance ATMs/CDs installed and maintained by vendors under

transaction cost model with minimum 1000 ATMs/CDs, a suitable product for financing to

ATM/CD Vendors has been devised for installation and managed services for ATMs/Cash

Dispensers where Bank provide finance to the successful bidders/vendors of public sector

Banks who would install and maintain the ATMs/Cash Dispensers (Brown Label ATMs)

under the transaction cost model.



h. Bill Discounting and Invoice Discounting:

IDBI Bank Fund Based assistance offers both Purchase and Sale Bill Discounting

and also Invoice Discounting for OEM /vendors to large Corporate.

Under this type of lending, Bank takes the bill drawn by borrower on his

(borrower's) customer and pays him immediately deducting some amount as

discount/commission. The Bank then presents the Bill to the borrower's customer on the due

date of the Bill and collects the total amount. If the bill is delayed, the borrower or his

customer pays the Bank a pre-determined interest depending upon the terms of transaction.

Bills are classified into four categories as LCBD (Bill Discounting backed with LC), CBD

(Clean Bill Discounting), DBD (Drawee bill discounting) and IBD (Invoice bills

discounting).

Bill Finance constitutes a vital part of the working capital finance and is a

major Trade Finance activity.

Bill Discounting Features

IDBI Bank offers discounting of bills up to original tenor of 180 days.

Bill discounting facility offered as Sale bill discounting or Drawee bill discounting.

Bills under LCs issued by domestic banks/branches (LCBD) under simplified

procedure.

Invoice Discounting Features:

Especially useful for OEM / vendors to large corporate.

No bill of exchange / No acceptance.

As an overdraft facility or bill discounting facility.

FIFO method for interest calculation

Capability to handle large number of invoices through special software.



2. Non - fund based assistance:

a. Bank Guarantee / Performance Guarantee:

Bank Guarantee is an instrument issued by the Bank in which the Bank agrees to

stand guarantee against the non-performance of some action/performance of a party. The

quantum of guarantee is called the 'guarantee amount'. The guarantee is issued upon receipt

of a request from 'applicant' for some purpose/transaction in favour of a 'Beneficiary'. The

'issuing bank' will pay the guarantee amount to the 'beneficiary' of the guarantee upon receipt

of the 'claim' from the beneficiary. This results in 'invocation' of the Guarantee. IDBI Bank

issues the entire range of Bank Guarantees, namely,

Bid Bond Guarantee

Advance payment Guarantee

Guaranty for warranty obligation

Payment Guarantee/Loan Guarantee

Performance Guarantee

Deferred payment Guarantee

Shipping Guarantee

Trade Credit Guarantee

Standby LC

Bank issues Guarantee favouring beneficiaries abroad either directly or through our

correspondent banks across the continents. Similarly, IDBI Bank also issues guarantees

favoring resident beneficiaries on behalf of our overseas branches / correspondents.



b. Letters of Credit:

Documentary Credits, more commonly known as letters of credit are a widely used

method to effect payments in domestic and international trade. A written undertaking is

issued by a bank (usually referred to as the issuing bank) on the instructions of the buyer of

goods to the seller. The use of documentary credits provides enough safeguards for the

parties involved. The seller is ensured payment, provided he complies with terms he agreed to

while the buyer can include all terms and conditions within the documentary credits that

satisfy him on the quality and quantity of the goods without having to sight / inspect the

goods themselves. Since banks act as trustworthy third parties/ intermediaries, the issues

relating to trust between the buyer and the seller are taken care of.

Documentary Credits can be either sight or usance depending on whether credit

period is extended to the buyer by the seller.

c. Buyer’s Credit:

Buyer's Credit availed by the importers should be need based and tenure of the

Buyers’ Credit should be within their normal operating cycle. Rollovers of the Buyer's Credit

should be permitted only after seeking justification from the borrower or independently

assessing the requirement for the same. The transaction should be for imports into India.

Short Term Trade Credit is not permitted (a) for any Merchanting trade /Intermediary trade

transactions, (b) for financing advance payment for imports and (c) financing purchase by

entities in Domestic Tariff Area (DTA) from units in Special Economic Zone (SEZ)/ 100%

Export Oriented Units (EOU). Import should be permissible under the current Foreign Trade

Policy.



2.5. SWOT Analysis:

a) Strengths of IDBI Bank:

The banks major strength is it involves latest cutting edge technologies to support its

core banking operations.

The bank has network of 943 branches and 1529 ATMs.

The total turnover of the bank is 3,37,584 crores in the last FY 2010-11, and earned a

net profit of Rs.1650 cr.

The bank has grown at a rate of 60% compared to previous year.

IDBI has the first mover advantage in opening ‘G-sec portal’. This is a platform for

the retail investors to invest in government securities.

IDBI is one of the largest commercial banks in India which focuses on industrial

infrastructure and development.

IDBI’s product portfolio includes 14 broad classifications, and there are some sub

categories in each. The bank has customized solution faculties for its industrial clients.

The location of its head quarters in Mumbai fosters the growth of the bank.

IDBI’s subsidiaries are into capital market services, IT services, asset management

and life insurance.

b). Weaknesses of IDBI bank:

IDBI has less penetration into the rural market.

IDBI has very less number of branches and ATM network compared to other major

players.

The bank lacks in promotional activities.



It concentrates mainly on commercial banking services whereas the individual

banking services is where the main revenue lies.

c). Opportunities for IDBI bank:

Scope for bagging government schemes is high as IDBI belongs to public sector.

Global opportunities for IDBI are the rise as the management is keenly focusing on

global expansion in next few years.

They have a good number of financial expertises to face the emerging industrial and

economic growth in India.

It is the only bank in public sector which has enabled social media plug-in in its

website. This has increased the brand awareness and better reach to its customers.

The bank has good opportunities in semi-urban and Tire II cities areas as the

industrial growth is taking very rapidly.

d). Threats for IDBI Bank:

IDBI faces tough competition in terms of new market development due to competition

from both government and private banks.

FDI in Indian banking has been opened up to 74% by the RBI.

In private banking HDFC, ICICI, Axis bank and in public sector SBI, Punjab National

Bank, Andhra bank and Allahabad bank are the major competitors.

The bank has to focus on improving the customer satisfaction in order to sustain the

loyal customers.

Recent scams and fraudulent activities of bank have gained mistrust from its

customers and investors.



2.6. Business Strategy:

Bank’s strategy during the year under review focused on aggressive growth in Retail

lending and repositioning of delivery channels to realize higher CASA deposits. At the same

time, Bank sought to maintain its leadership position in the corporate banking and investment

banking space, so as to meet the requirements of the corporate sector. Specific focus was laid

on cross selling of Bank’s entire product and service offerings across the entire range of

customers, so as to build sustainable and stable relationships. Bank’s strategy during the year

resulted in improvement in various profitability parameters and consolidated its business

position across various benchmarks, so as to bring them more in line with the prevailing

industry standards.



Chapter: 3 Literature

review

[Source: By Aurora’s Technological Research Institute (ATRI)

of Jawaharlal Nehru Technology University]



Broadly speaking there are three steps involved in the analysis of financial

statements. These are:

I. Selection

II. Classification

III. Interpretation

The first step involves selection of information relevant to the purpose of

analysis of financial statements. The second step involved methodical classification of data

and the third step includes drawing of interpretations and conclusion.

Methods of device:

The analysis and interpretation is used to determine the financial position and

results of operations as well. A number of method or devices are used to study relationship

between different statements. An effort is made to use those devices which clearly analyze

the position of the enterprise.

The followings are the methodologies used:

Ratio Analysis

Comparative Statements

Leverages



1) Ratio Analysis:

Introduction:

The ratio analysis is one of the most powerful tools of financial analysis. It is the process of

establishing and interpreting various ratios. It is with the help of ratios that the financial

statements can be analyzed more clearly and decisions made from such analysis.

A ratio is simple arithmetical expression of the relationship of one number to another. It may

be defined as the indicated quotient of two mathematical expressions.

Ratio analysis is a technique of analysis and interpretation of financial statements for helping

in making certain decisions. It is a better understanding of financial strengths and weakness

of a firm. There are number of ratios which can be calculated from the information gives in

the financial statements. But the analysis has to select the appropriate data and calculated a

few appropriate ratios from the keeping in mind the objective of analysis.

The following are the four steps involving in the ratio analysis.

a) Selection of relevant data from the financial statements depending upon

the objective of the analysis.

b) Calculate of appropriate ratios from the above data.

c) Comparison of the calculated ratios with the ratio developed from projected

financial statements or the ratio of some other firms or the comparison with ratio of the

industry to which the firm belongs.

d) In te rpre ta t ion of the ra t ios .

The observation of the ratio is an important factor. Observation needs skills, intelligence, and

fore sightedness the inherent limitations of ratio analysis should be kept in mind while

interpreting them. A single ratio in itself does not convey much of the sense. To make ratio a

useful, they have to be further interpreted.



Guidelines for use of ratios:

The calculation of ratios may not be difficult task but their use in not easy. Following are the

guidelines or factors may be kept in mind, while interpreting various ratios.

I. Accuracy of f inancia l s tatements:

The ratios are calculated from the data available in financial statements. The reliability of

ratios is linked to the accuracy of information in these statements.

II. P u r p o s e o f a n a l y s i s :

The type of ratios to calculate will depend upon the purpose for which these are required. The

purpose of user is also important for the analysis of ratios.

III. S e l e c t i o n o f r a t i o s :

Another precaution in this analysis is the proper selection of appropriate ratios. The ratio

should match the purpose for which those are required.

Use & Significance of Ratios:

The ratio analysis is one of the most powerful tools of financial health of enterprise. The use

of ratios is not confined to financial managers, as discussed earlier, these are different parties’

interest in the ratio analysis for knowing the financial position of a firm for different

purposes. The supplier of goods on credit, banks, financial institutions, investors, Share

holders and management all make use of ratio analysis as tools in evaluating the financial

position and performance of a firm for getting credit, providing loans or making investments

in the firm.



Limitations of ratio analysis:

I. Limited use of s ing le rat io:

A single ratio usually does not convey much of a sense, to make better interpretation a

number of ratios have to calculate. This is likely to confuse the analyst than help him in

making any meaningful conclusion.

II. Lack of adequate s tandards:

There are no well accepted standards or rules of thumb for all ratios which can be accepted as

norms. It renders interpretation of the ratios difficult.

III. Inherent limitations of accounting:

Like financial statements, ratios also suffer from the inherent weakness of accounting records

such as their historical nature; ratios are the part is not necessarily true indicators of future.

2). Comparative Statement:

Comparative analysis:

In comparative analysis financial statements are those statements which have been designed

in a way so as to provide time perspective to the consideration of various elements of

financial position embodied in such elements. In these statements figures for two or more

periods are placed side by side to facilitate comparison. Both the Income statement and

balance sheet can be prepared in the form of comparative financial statements.



Comparative Income Statement:

The income statement discloses net profit or net loss on account of operations. A comparative

income statement will show the absolute figures for two (or) more periods, the absolute from

one period to another period and it desired the change in terms of percentages.

Since the figures for two or more periods are shown side by side the reader can quickly as

certain whether sales have increased or decreased whether cost of sales has increased or

decreased etc. Thus only a reading of data included in comparative statement will be helpful

in deriving meaningful of conclusions.

Comparative Balance Sheet:

It is one two or more different data can be used for companies assets and liabilities and

finding out any increase or decrease in those items. Thus while in a single balance sheet the

emphases is on present in the comparative balance sheet. Such a balance sheet is very useful

in studying the trends in an enterprise.

3). Leverage:

The term leverage refers to relationship between two variables i.e. interrelated variables. The

variable could be sales, cost, revenues and operating profits etc…

Three different leverages: -

1 . O p e r a t i n g l e v e r a g e

2 . F i n a n c i a l L e v e r a g e

3 . C o m b i n e L e v e r a g e



Chapter: 4 Analysis of

Financial Statement

(Balance sheet Analysis of ABC Ltd. & XYZ Ltd.)



Financial Statement Analysis of ABC Ltd.

(Rupees in lakh)

Statement of

Financial

Analysis

2012 2013 2014 2015

A. PROFILE ANALYSIS

Total Assets

(Tangible)16,960 18,646 19,443 22,438

Total Outside

Liability (TOL)13,215 14,292 14,141 15,453

Total Networth

(TNW)3,745 4,354 5,302 6,985

Net Sales 19,556 24,399 29,670 36,435

PBDIT 2,433 2,661 3,571 4,913

Operating Profits

(OPBT)850 990 2,016 2,748

Net Profit 885 1,004 1,447 1,776

Gross Cash

Accruals1,274 1,679 2,550 3,222

Term Liabilities to

Gross Cash

Accruals

2.56 2.30 1.32 0.99

Net Working 1,200 2,423 2,642 3,201



Capital

% of NWC to

Current Assets10.76% 18.85% 19.71% 20.71

Current Assets to

Net Sales57.01% 52.68% 45.18% 42.42%

1. Profile Analysis:

i. At the end of the year 2013 total tangible assets are increased by 9.94% for the

reason that

Total Tangible Assets were increased because the old machinery was not

capable to fulfil the current demand hence management decided to increased production

capacity & they bought new machinery for accomplish the demand & they gave funds to

other companies so their Loans & Advances has increased.

ii. Total Outside Liability has increased for the reason that

ABC Ltd. received more orders from their customers so Import has increased

as there was increase in demand hence company has to import more raw materials to cater the

demand & Company has taken Term Loan so Total Outside Liability has increased.

iii. They get more order from their customers so Domestic sales & Export

receivables have increased.

iv. PBDIT, Operating Profit & Net Profit were increased because Demand has

increased in 2013 so as per Demand ABC Ltd. received more orders from their customers.



v. Net Working capital has increased because to increase production company

bought new plant & machinery and also increased advances which was results in increasing

current Asset & other side to fulfil the working capital needs company has to borrow funds

from formal sector.

Statement of

Financial

Analysis

2012 2013 2014 2015

B. LIQUIDITY ANALYSIS

Current Ratio 1.12 1.23 1.25 1.26

2. Liquidity Analysis:

i. Current ratio has increased in 2013 which indicate that Company is able to

convert bank borrowings into current assets i.e. stocks or receivables.

Statement of 2012 2013 2014 2015



Financial

Analysis

C. PROFITABILITY ANALYSIS

PBDIT/Net Sales

(%)12.44% 10.91% 12.04% 13.48%

OPBT/Net Sales

(%)4.35% 4.06% 6.79% 7.54%

Net Profit/Net Sales

(%)4.53% 4.11% 4.88% 4.87%

Return on Assets

(%)5.22% 5.38% 7.44% 7.92%

Return Profit/ Net

Profits (%)94.46% 95.12% 84.80% 83.50%

Return on Net

Worth (%)16.68% 16.10% 19.41% 18.82%

3. Profitability Analysis:



Profitability analysis based on the operating profit / net profit as a percentage of Net Sales.

i. % of PBDIT to Net Sales, % of OPBT to Net Sales & % of Net Profit to Net

Sales were decreased in 2013 for the reason that

The main reason behind reduction in profitability is as under:

Shortage in power supply at company’s Dehradun Plant.

Continued infringement of Dynapar AQ, which affected profitability.

Increase in Sales of the products which are having lower profit margins. This

has increased sales of the company, however reduced profit margin of the company.

Higher interest cost.

Statement of 2012 2013 2014 2015



Financial

Analysis

D. ACTIVITY ANALYSIS (IN DAYS)

Receivable

Turnover –

Domestic

48 51 38 38

Receivable

Turnover – Export9 8 53 61

Inventory Turnover 126 116 98 89

Accounts Payables

Turnover131 104 95 84

4. Activity Analysis (in Days):

i. Receivables Turnover - Domestic & Export receivable holding was slightly

increased in 2013. Receivables Turnover – Domestic & Export receivable holding was 59

days which means after maximum 59 days ABC Ltd. get money from their debtors through

Domestic Sales & Export Receivables. Receivables holding was increased because

In 2013 ABC Ltd. received more orders from their customers so to fulfil their

demand they produced more & hence sales were increased.



Customers were not paid at a time of trade so there was a Delay in collection

of money & which results in working cycle became delayed so Receivables holding was

increased.

ii. Accounts payables Turnover was 104 days in 2013 which shows that after

every 104 days ABC Ltd. paid to their creditors. It was decreased by 27 days because

As a result of getting more orders, Sales was increased so they receive more

funds from their debtors.

Receivable turnover holding was less than Account payables Turnover holding

which shows that Company received money speedy as compare to previous year so Company

paid money speedy to their creditors so Account Payable Turnover holding was decreased.



Statement of

Financial

Analysis

2012 2013 2014 2015

E. GROWTH RATIOS

Net Sales Growth

(%)13.65% 24.76% 21.60% 22.80%

Net Profit Growth

(%)37.64% 13.45% 44.12% 22.74%

Net Worth Growth

(%)4.32% 16.26% 21.77% 31.74%

5. Growth Ratio:

i. Net Sales Growth has progressively increased in 2013 for the reason that

Demand has steadily increased in 2013.

ii. Net Profit Growth increased in 2013 but not more than previous years’ growth

because

Sale of the company has increased.



Financial Statement Analysis of XYZ Ltd.

(Rupees in lakh)

Statement of

Financial

Analysis

2012 2013 2014 2015 2016 2017 2018 2019

A. PROFILE ANALYSIS

Total Assets

(Tangible)39,603 43,127 43,210 44,006 42,890 42,413 42,601 42,130

Total Outside

Liability (TOL)28,157 32,347 33,026 34,897 33,504 31,818 30,202 27,381

Total Networth

(TNW)11,510 10,780 10,184 9,109 9,386 10,595 12,399 14,749

Net Sales 21,443 18,408 14,184 17,370 21,660 25,689 27,951 28,618

PBDIT 4,180 5,014 4,468 4,941 6,594 6,784 7,484 9,413

Operating Profits

(OPBT)1,763 518 182 936 1,844 2,185 3,045 5,208

Net Profit 1,151 -1,673 182 936 1,775 1,883 2,594 4,620

Gross Cash

Accruals2,530 2,787 2,124 2,900 3,761 3,891 4,625 6,673

Term Liabilities to

Gross Cash

Accruals

5.52 8.43 11.81 8.39 5.8 5.01 3.58 2.08

Net Working

Capital2,321 9,612 4,888 5,243 6,199 9,795 10,867 14,841



% of NWC to

Current Assets15.05% 55.27% 41.57%

35.62

%36.91% 46.57% 46.34% 54.48%

Current Assets to

Net Sales71.91% 94.48% 82.90%

84.73

%77.53% 81.88% 83.90% 95.18%


i. Total tangible assets has greatly increased in 2012 for the reason that

XYZ Ltd. received more sales order from their Customers so accomplish that

order they bought Plant and machinery so there was a slightly increased in Gross fixed assets

such as Land, Building, & furniture and fixture & other fixed assets.

XYZ Ltd. gave funds to other companies so there were a healthy increased in

Loans & advances.

ii. Total Outside Liability has increased in 2012 for the reason that

To fulfil the demand, they have imported more Raw materials so their creditors

have very much increased.

XYZ Ltd. needed more funds for short term so there was extremely increased in

Short term borrowings from other banks.

Total Accounts Payable Turnover holding was less then Receivable Turnover

holding so they take funds from other banks.

iii. There was a very much increased in Net sales for the reason that



They get more sales order from their customers.

iv. Operating Profit & Net Profit goes down in 2012 as

To fulfil the demand they bought new plant & machinery so expenses such as

Power and fuel, depreciation of that machinery, maintenance & to work on that new

machinery more labour are required so labour costs goes up.

v. There was a huge increased in Net Working capital for the reason that

They get more orders from so to increase the production capacity they import

more so they paid more advance money to their creditors.

Statement of 2012 2013 2014 2015 2016 2017 2018 2019



Financial

Analysis

B. LIQUIDITY ANALYSIS

Current Ratio 1.18 2.24 1.71 1.55 1.59 1.87 1.86 2.20

2. Liquidity Analysis

i. Current ratio has increased in 2012. As the Current ratio is more, Company is good

in generating revenue from its borrowings. In 2010 & 2011 Current ratio was same & Current

ratio has increased in 2011 which shows conversion of banks funds into current assets.

Statement of

Financial

2012 2013 2014 2015 2016 2017 2018 2019



Analysis

C. PROFITABILITY ANALYSIS

PBDIT/ Net Sales

(%)19.49% 27.24% 31.50% 28.45% 30.44% 26.41% 26.78% 32.89%

OPBT/ Net Sales

(%)8.22% 2.81% 1.28% 5.39% 8.51% 8.51% 10.89% 18.20%

Net Profit/ Net Sales

(%)5.37% -9.09% 1.28% 5.39% 8.19% 7.33% 9.28% 16.14%

Return on Assets

(%)2.91% -3.88% 0.42% 2.13% 4.14% 4.44% 6.09% 10.97%

Return Profit/ Net

Profits (%)100% 100% 100% 100% 100% 100% 100% 100%

Return on Net Worth

(%)9.96% -15.45% 1.78% 10.22% 18.82% 17.7% 20.84% 31.23%

3. Profitability Analysis:

i. % of PBDIT to Net Sales, % of OPBT to Net Sales & % of Net Profit to

Net Sales were decreased in 2012 for the reason that

To fulfil the demand XYZ Ltd. decided to purchase new Plant & machinery,

Land, Building, furniture & fixtures so there are so many expenses that are related to this

fixed assets were increased such as Depreciation, Repairs & maintenance, Power & fuel.



ii. Return Profit/ Net Profit based on the Retained Profit as a percentage of Net Profit.

XYZ Ltd. retained all part of profit for future motive. Dividends were not given by them in

2012.

Statement of

Financial

Analysis

2012 2013 2014 2015 2016 2017 2018 2019

D. ACTIVITY ANALYSIS (IN DAYS)

Receivable Turnover

– Domestic152 286 173 173 144 129 129 130

Receivable Turnover

– Export0 0 0 0 0 0 0 0

Inventory Turnover 51 76 74 71 66 63 62 60

Accounts Payables

Turnover117 139 45 45 45 45 45 45

4. Activity Analysis:

i. Receivables Turnover - Domestic & Export receivable holding was 152 days in

2012 which means after maximum 152 days they get money from their debtors &



Receivables Turnover - Domestic & Export receivable holding was greatly increased for the

reason that

Domestic Sale was increased which increased debtors and simultaneously

increase in debtors holding level.

ii. Inventory Turnover was 51 days which shows after every 51 days Inventory has

been sold. Inventory Turnover holding has increased in 2012 for the reason that

Processing time for new products for which capex was incurred increased which

increased inventory holding level.

iii. Accounts Payable Turnover holding was 117 days in 2012 which means after

every 117 days XYZ Ltd. paid money to their creditors. Accounts Payable Turnover was

increased for the reason that

They import more Raw-material to accomplish the demand as compare to

previous year so that they arrive at the sales order.

Receivables Turnover has increased which ultimately resulted into higher

creditor holding level.

Statement of

Financial

2012 2013 2014 2015 2016 2017 2018 2019



Analysis

E. GROWTH RATIOS

Net Sales Growth

(%)68% -14.15% -22.95% 22.46% 24.7% 18.6% 8.81% 2.39%

Net Profit Growth

(%)-18.77% -245.35% -110.88% 414.29% 89.64% 6.08% 37.76% 78.1%

Net Worth Growth

(%)96.23% -6.3% -5.5% -10.51% 3.03% 12.82% 16.95% 18.88%

5. Growth Ratios:

i. Net Sales Growth indicate that % increase in Net Sales as compare to Previous year

& Net Sales Growth is negative due to recessionary trend prevailing in the industry in which

the company operates i.e Automobile industry.

ii. Net Profit Growth shows that % increase in Net Profit as compare to preceding

year. Net Profit Growth is negative

Though the company has incurred capex in anticipation of good orders, due to

recessionary trend in the industry, the company could not get anticipated orders that affected

profitability of the company and the company made losses in FY2013.



Chapter: 5 Findings &

Recommendations

Findings :




More the Net Working Capital the company can infuse, less the bank borrowing

required.

2. Liquidity Analysis:

If the company’s stock is not moving/ idle inventory, the current ratio would be

higher nut that does not mean that company’s liquidity position is better.

3. Activity Analysis:

Activity Analysis includes how many days Money has been received from their

debtors, Inventory has been sold & money paid to their creditors.

Receivables Turnover - Domestic & Export receivable holding time period is

less than Accounts Payable Turnover then there is no need to borrow money from other

banks.

As the Inventory Turnover holding is less it shows Net Sales Growth is

excellent.

Recommendations:

Holding period for receiving money should less than holding period of payment

to creditors so that Net Operating Cycle should complete easily.

Bibliography St. Kabir Institute of Professional Studies (SKIPS)


www.idbi.com

CMA – Credit Monitoring Arrangement


bank and corporate finance

Documents

bengal bank

bank of bengal

central bank of india

imperial bank of india

reserve bank of india

bank of baroda

canara bank

bank of madras