bank jk prjct

7/31/2019 Bank Jk Prjct

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ON

Session- 2012-13

In Partial Fulfillment of the Requirements for the award of

Degree of MBA (Master of Business Administration).

Submitted To Submitted By

J&K Bank (Zonal Office), Karamveer Singh

Jammu. Roll No.64/MBA/11


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TABLE OF CONTENTS

1. EXECUTIVE SUMMARY 08

2. METHODOLOGY 09

3. OBJECTIVES OF STUDY 10

4. HISTORY 11

5. COMPANY PROFILE 12

6. WORKING CAPITAL MANAGEMENT 28

7. RECEIVABLE MANAGEMENT 43

8. INVENTORY MANAGEMENT 55

9. CASH MANAGEMENT 62

10. WORKING CAPITAL FINANCE 74


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11. CONCLUSION AND SUGGESTIONS 78

12. BIBLIOGRAPHY 80

13. APPENDIX 81


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STUDENTS DECLARATION

This is to certify that I Karamveer Singh of MBA-III have done research on the

topic working capital and prepared the project report based on it. All the theory

contained in reports is form the list of books given in end in bibliography. I havenot copied from any report submitted earlier this or any other university. This is

purely original and authentic work.

MBA Semester -III

Karamveer Singh


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GUIDE CERTIFICATE

This is to certify that the project report entitled working capital submitted in

partial fulfillment of the requirement of degree of Masters of Business Administration

(MBA) from JAMMU UNIVERSITY ( KATHUA CAMPUS) JAMMU, is a bonafide

summer training project work carried out by Karamveer Singh under my direct

supervision and guidance and to the best of my knowledge and information. No part of

this work has been submitted for any other degree of any other University. The data

sources have been duly acknowledged.

Project Guide: Mrs. Jyosthana kumar

Signature:

Date:


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PREFACE

Without practical training, management education is meaningless so long with

the theory; practical training is provided to management students to expose them

to the actual working environment of any organization. Such training provides a

framework of knowledge relating to the concepts and practices of the assigned

topics in the organization. The summer training is an integral part of the course

curriculum of Master of Business Administration (MBA). In this, the student is inthe position to analyze the integral working of an organization with mature eyes

and understand the dynamics in a much better manner.

The most motivating aspect associated with pursuing a course in management or

business studies is the dynamism associated with it. Dynamism of adding a new

perspective to ones personality and vision by accumulating wider knowledge,

developing analytical skills not only by traditional ways of teaching and learning

but by observing things at work. The project is an opportunity to see the

application part of what we study or learn in classrooms. Management is that

function of an enterprise that concerns itself with the direction and control of the

various activities to attain business objectives. It is the science and art of

preparing, organizing and directing human efforts to control the force and utilize

the materials of nature for the benefits of men. In fact, the management thereby

provides the scientific technique to deal with the various problems in the areas of

management and the manager mixes some art to it and tries to shorten the gap

of ignorance. It provides a chain of solution to critical problems of manager.


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ACKNOWLEDGEMENT

I am a student of MBA 3rd

Semester want to acknowledge the fact that this

project could not be accomplished without support of everyone who has helped

me in completing the project.

I would like to start from scratch i.e. my heartiest thanks to my guide Mrs.Jyotsana Kumar who guided me throughout this project and who enlightened

my pathway towards the completion of this project and showed full interest at

each and every step of this project.

It gives me a great pleasure to acknowledge my deep & sincere

gratitude to zonal office J&K Bank Jammu for its inspiration & constant

encouragement .

I wholeheartedly extend my sense of gratitude towards all the

members of J&K Bank as their help during the course of my project work and

their valuable suggestions has helped me a lot in successfully accomplishing this

project.


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EXECUTIVE SUMMARY

As a partial fulfilment of the MBA course in which a training programme of two

months has been incorporated in the curriculum, during which a study is to be

done in an organization to extract the knowledge and skill from actual work

environment and a scope to observe the actual work place of an industry to gain

practical experience. During my summer training, I had a project at The Jammu

&Kashmir Bank Ltd on Working Capital managementand its assessment.

The most important part of the study includes case analysis of Working

Capital Assessment/Appraisal of a partnership firm o. (Name of the

fi rm has been changed) , M/S ABC FILLINGS the firm is engaged in filling fuel.


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RESEARCH METHODOLOGY

This is analytical research area where we analyses information with cause and its

effects relationship. This analysis leads to the simple conclusions of whether to

lend money to the institution for business. Also if the money is lend then there is reality the

norms are not always perfect and

hence it is essential to priorities stringent parameters and secondary parameters.

Research Type Analytical

Source of Data Primary and Secondary

Sample Unit Industries applying for loan

Sample Case studies

Sample Technique Allocation of Case

Analysis Tool used Financial Analysis

Primary Data:

Observation, Discussion with the manager.

The company profile, annual reports have been obtained from JK Bank.

Secondary Data:

Annual report of J&K bank for the year ended 31st March 2012

data relating to the procedure of assessment of working capital finance, old sanction

proposals, RBI guidelines etc. have been sourced from reference books.


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OBJECTIVES OF THE STUDY

To know the methods of assessment of working capital;

To know the documents required at the time of assessment of working

capital

To apply the methods at a practical level with the help of case study.


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HISTORY

Jammu and Kashmir (J&K) Bank, incorporated on October 1, 1938, was the first bank in the

country to emerge as a state-owned bank. On July 4, 1939 the bank commenced its business.

Later, in 1971 the bank received the status of a scheduled bank. The government of Jammu &Kashmir owns a 53% stake in the bank. The bank is listed on the National Stock Exchange

(NSE) and Bombay Stock Exchange (BSE)

Presently, the bank has a pan-India presence through its network of 556 branches, out of which344 branches are located in semi-urban and rural areas. It also includes extension counters and

service branches. The bank has a network 212 ATMs which is largest ATM network in J&K.

It is only bank in private sector that has been designated as agent of RBI for banking.

J&K Bank acts as a sole banker and lender to government of Jammu & Kashmir. It handles all

salaries of state government officials. The bank also carries out banking business of the centralgovernment.

Jammu & Kashmir Bank's Certificate of Deposit Programme has received 'P1+' rating from

Credit Rating Information Services of India (CRISIL), reflecting the highest degree of safety for

timely payment of principal and interest.

The bank also acts as a corporate agent of MetLife India Insurance Company. J&K Bank has

entered into an alliance with Bajaj Allianz to distribute the latter's non-life products. The bankhas entered into an arrangement with AMCs such as UTI, Kotak and Reliance Mutual Fund to

distribute their current schemes and NFOs (New fund offer).

Products and Services

Personal Banking- Under this, it offers various products and services such saving accounts,

loans, deposits, ATM facility, RTGS/NEFT facility, internet banking, demat services, etc.

NRI Banking- Besides various personal banking products, it also offers remittance services,

consultancy services to its NRI Clients.

Priority and SME- It also caters to the priority and SME segments and offers various kinds of

products to meet their various business requirements.

Future Strategy - Jammu & Kashmir Bank plans to develop new financial products for

agriculture, horticulture and artisan sector. It also plans to widen its product

portfolio.


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PROFILE

Date of Establishment 01-10 1938

Revenue 832.728 ( USD in Millions )

Market Cap 44206.9076438 ( Rs. in Millions )

Corporate Address Corporate Head Quarters, Maulana Azad Road,Srinagar-190001, Jammu & Kashmir

www.jammuandkashmirbank.comManagement Details Chairperson - Mushtaq Ahmad

MD -

Directors - A K Mehta, Abdul Majid Bhat, Abdul MajidMir, AM Matto, Arnab Roy, B B Vyas, B L Dogra, G M

Dug, G P Gupta, Hari Narayan Iyer, Haseeb A Drabu, M I

Shahdad, M S Verma, Mushtaq Ahmad, Narendra Jadhav,

Nihal C Garware, Nisar Ali, Parvez Ahmad, R K Gupta,Sudhanshu Pandey, Vikrant Kuthiala

Business Operation BankPrivateBackground Jammu and Kashmir (J&K) Bank, incorporated on

October 1,1938, was the first bank in the country toemerge as a state-owned bank. On July 4, 1939 the bank

commenced its business.

Later, in 1971 the bank received the status of a scheduled

bank. The government of Jammu & Kashmir owns a 53%

stake in the bank. The bank is listed on the National StockExchange (NSE) and Bombay Stock Exchange (BSE).

Financials Total Income - Rs.5169.70 crore ( year ending Mar 2012)

Net Profit - Rs. 803 crore ( year ending Mar 2012)

Company Secretary Abdul Majid Bhat

Bankers

Auditors Gupta & Associates, Baweja & Koul, Gupta Sharma &Associates


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KEY PERSON

S.No Name Designation

1Mushtaq Ahmad Chairman

2Abdul Majid Bhat Company Secretary

3Hari Narayan Iyer Director

4M I Shahdad Director

5Vikrant Kuthiala Director

6Nisar Ali Director

7 AM Matto Director

8R K Gupta Director

9Nihal C Garware Director


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ORGANISATION STRUCTURE OF J&K BANK

ORGANIZATIONAL HIERARCHY :

Head Office

GM/DGP Zonal Office GM/DGM/AGM

Branches

STAFF HIERARCHY:

Chairman & Managing Director

Executive Director (ED)

General Manager (GM)

Deputy General Manager(DGM)

Assistant General Manager(AGM)

Chief Manager(CM)

Senior Manager

Manager

Assistant manager

Ward Staff

Subordinate staff


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DISTRBIUTION NETWORK:

J&K Bank corporate headquarter is in Maulana Azad Road, Srinagar 190001 (J&K).

The bank at present has an enviable network of over more than 611 branches

spread over various cities across India. All branches are linked on an online real-

time basis. The bank hold more than 9000 employees in the main headquarter of

Srinagar. This bank holds 11 zonal offices, 1 treasury office which is located at

Mumbai. Bank holds various D-MAT services that are known by name of J & K

Bank financial services.

During (the financial year 2011-12), 55 new branches were established, thereby

taking the number of branches to 603 as on 31st march 2012, spread over 20

states and 1 union territory. The area-wise breakup of the branch network

(excluding extension counters/mobile branches and service branches) is as under:

AREA BRANCHES

Metro 039

Urban 168

Semi-urban 123

Rural 273

TOTAL 603


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PROMOTERS:

Sr.No. Particulars Total shares % To Capital

1 Government of J&K 25775266 53.17

2 Indian Mutual funds 1158751 2.39

J Insurance companies 237473 0.49

4 Non resident Indians 357436 0.74

5 Foreign Inst. Investors 14135181 29.14

6 Bodies Corporate 1090373 2.30

7 Resident Individuals 3420272 11.30

8 Clearing members 13569 0.03

Total 46188321 100.00


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VISION OF THE BANK

The Bank's vision is To catalyze economic transformation and capitalize ongrowth.

The bank aspires to make Jammu and Kashmir the most prosperous state in the country, by

helping create a new financial architecture for the J&K economy, at the center of which will bethe J&K Bank. The Bank is committed to achieve healthy growth in profitability and

simultaneously to remain consistent with the Bank's risk appetite and at the same time ensuring

the highest levels of ethical standards, professional integrity and regulatory compliance.

MISSION OF THE BANK

The companys mission is two-fold: To provide the people of J&K international quality financial

service and solutions and to be a super-specialist bank in the rest of the country. The two

together will make it the most profitable bank in the country.

BUSINESS FOCUS

The J&K Banks mission is to be a World-class Indian Bank. The banks aim is to build soundcustomer franchises across distinct businesses so as to be the preferred provider of banking

services in the segments that the bank operates in and to achieve healthy growth in profitability,

consistent with the banks risk appetite. The bank is committed to maintain the highest level ofethical standards, professional integrity and regulatory compliance. J&K banks business

philosophy is based on four core values: OPERATIONAL EXCELLENCE, CUSTOMER

FOCUS, PRODUCT LEADERSHIP and PEOPLE.


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NEW BRAND IDENTITY

The new identity for The J&K Bankis a visual representation of the Banks philosophy and business

strategy. The three colored squares represent the regions of Jammu, Kashmir and Ladakh. The counter-

form created by the interaction is a falcon with outstretched wings- a symbol of power and

empowerment. The synergy between the three regions propels the Bank towards new horizons. Green

signifies growth and renewal, blue conveys stability and utility, and red represents energy and power. All

these attributes are integrated and assimilated in the white counter-form.

.


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FINANCIALS OF THE JAMMU AND KASHMIR Ltd.

Profit & Loss Account Amt in Rupees Crore

Particulars Year ending

March, 2012

Year ending

March, 2011

% Change

Interest Earned 4835.58 3713.13 30.23%

Interest Expended 2997.22 2169.47 38.15%

Net Interest Income 1838.36 1543.66 19.09%

Other Income 334.12 364.76 -8.40%

Operating Income 2172.48 1908.42 13.84%

Operating Expenses 802.15 758.93 5.69%

Operating Profit 1370.33 1149.49 19.21%

Provisions & Contingencies 169.23 215.10 -21.32%

PBT 1201.10 934.39 28.54%

Tax Provision 397.85 319.19 24.64%

Net Profit 803.25 615.20 30.57%

Share Capital 48.49 48.49 0.00%

EPS 165.69 165.69 30.57%

Net Interest Margins - - -

Net Interest Margins (Ann.) 3.58% 3.62% -


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Balance Sheet Amount in Rupees crore

Particulars As on March 31,

2012

As on March 31,

2011

% Change

Capital & Liabilities

Capital 48.49 48.49 0.00%

Reserve & Surplus 4044.69 3430.19 17.91%

Deposits 53346.90 44675.94 19.41%

Borrowings 1240.96 1104.65 12.34%

Other Liabilities &

Provisions

1588.18 1248.88 27.17%

Total 60269.22 50508.15 19.33%

Assets

Cash & Bank Balance 2783.65 2974.96 -6.43%

Balance with Bank and

Money at call & Short

Notice

1670.22 573.84 191.06%

Investments 21624.32 19695.77 9.79%Advances 33077.42 26193.64 26.28%

Fixed Assets 420.27 393.77 6.73%

Other Assets 693.34 676.17 2.54%

Total 60269.22 50508.15 19.33%


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COMPETITORS

Company Sales

(Rs.Million)

Current

Price

Change

(%)

P/E

Ratio

Market

Cap.(Rs.Million)

52-Week

High/Lowo

HDFC Bank 199282.12 504.60 -0.66 22.96 1186127.26 558/400

ICICI Bank 335426.52 838.95 0.53 14.96 967159.72 1111/641

Axis Bank 219946.47 1023.70 -0.38 9.99 423812.94 1367/785

Kotak

Mahindra

Bank

43035.58 558.25 0.52 38.11 413537.65 603/411

Indusind

Bank

35893.57 310.10 -0.31 18.11 145325.56 352/222

Yes Bank 40417.47 338.10 0.03 12.25 119639.79 389/231

Centurion

Bk of Punj

12685.30 41.40 0.00 52.93 78932.68 43/41

Federal

Bank

40520.28 420.85 1.20 9.27 71985.34 480/322

ING Vysya

Bank

26940.64 339.45 -1.05 11.17 50982.98 379/275

J&K Bank 37131.32 911.90 -0.37 5.50 44206.91 957/645

Karur Vysya

Bank

22176.95 400.45 0.83 8.56 42952.90 479/322

Bank of Raj 13594.89 212.10 0.00 0.00 34222.35 214/207

South Indian

Bank

24460.17 23.70 6.28 6.70 26898.36 28/20


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EARNINGS UPDATEMARCH 31, 2012

The Board of Directors of The Jammu & Kashmir Bank Ltd. at their meeting held

on May 12, 2012 took on record the audited financial results for the full

year ended March 31, 2012.

Performance Highlights for the full year ended March 31, 2012:

Net Profit up 30.6 % at Rs 8032 million for the financial year ended Mar,

2012 as compared to Rs 6152 million earned during the financial year

ended Mar, 2011.

EPS for the year ended Mar, 2012 at Rs 165.69 up 30.6 % from Rs

126.90 earned during the previous financial year.

NIMs (Net Interest Margins) Ratio for the current financial year ended

Mar, 2012 at 3.58 % vis--vis 3.62 % for the previous financial year.

Post tax Return on Assets at 1.33 % for the FY ended Mar, 2012

compared to 1.22 % for the previous financial year.

Post Tax Return on Average Net-Worth for the FY ended Mar, 2012 at

21.22 % recording an improvement of 226 points from 18.96 % pertaining

to the previous financial year.


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Yield on Advances for the current FY improved to 11.45 % compared to

10.68 % for the FY ended Mar, 2011.

Cost of Deposits for the current FY stood at 5.92 % compared to 5.05 %

for the FY ended Mar, 2011.

Net profit per Employee improved to Rs 0.87 million for the financial year

ended Mar, 2012 from Rs 0.78 million pertaining to the year ended Mar,

2011.

Cost to Income Ratio at 36.92 % for the current fiscal which was at 39.77

% for the fiscal ended Mar, 2011.

Comfortable Capital Adequacy Ratio (Basel II) at 13.36 % as on Mar,

2012, well above RBI stipulated norm of 9 %.

Net Asset Value improved to Rs 844 as on Mar, 2012 compared to Rs

718 a year ago.


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WORKING

CAPITAL


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INTRODUCTION:

The term working capital is used in financial parlance to describe that capital

which is required by an enterprise to carry out its day to day operations. It mainly

consists of investments in raw material, work in progress, finished goods and

receivables. Banks provide the working capital finance in the form of cash credits,

overdraft, demand loans (for working capital purpose), bills purchased /

discounted limits and pre- shipment and post- shipment credits etc.

Working Capital is the life line of a business. Excess working capital results in non

productivity. The deficient working capital will cause liquidity problems and

affect the production .

Working capital management is concerned with the problems that arise in

attempting to manage the current assets, the current liabilities and the

interrelationship that exist between them.

CONCEPTS OF WORKING CAPITAL:

There are two concepts of working capital:

Gross working capital

Net working capital


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GROSS WORKING CAPITAL (GWC)

The term gross working capital, refer to the funds required for financing the

total current assets. In other words it means the funds invested by a

business concern in Current Assets.

For e.g.

Current Assets:

Stock in Hand 3.00 lacs

Cash and Bank Balance 2.50 lacs

Sundry debtors 1.80 lacs

Total C.A 7.30 lacs

Total funds required for financing = Gross Working Capital

= Total C.A. = 7.30 lacs

NET WORKING CAPITAL (NWC)

The term net working capital, refers to the difference between current assets and

current liabilities. NWC represents the long term funds invested in current assets

after meeting the investment in long term assets. It is also arrived at by working

out the difference between long term funds or liabilities and long term uses or

assets.


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Desirably, net working capital should be positive i.e. current assets should

exceed current liabilities or Current Ratio (current assets divided by current

liabilities) should be higher than 1:1. This would signify liquidity and availability of

adequate working funds. For a banker, it would connote a cushion of safety for

the funds lent.

For e.g.

Assuming the balance sheet of ABC ltd Company

Balance sheet at the year ending 31.3.2012(in lacs)

Liabilities Assets

Capital 6.00 Fixed assets 5.00

Unsecured loans 1.00 Securities 0.45

Current liabilities: Current assets:

--Sundry creditors 2.50 --Stock 3.00

--Bank overdraft 1.25 --Debtors 1.80

--Bills payable 2.00 --Cash/ bank 2.50

Total liabilities 12.75 Total assets 12.75


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Formula1: Net working capital= C.A- C.L

=7.30-5.75=1.55

OR

Formula 2: NWC=Long term sources Long term uses.

Where,

Long term sources= Capital + unsecured loans

=6.00+1.00 =7.00

Long term uses= Fixed assets+ securities

= 5.00+0.45=5.45

NWC=7.00-5.45=1.55

Though both the formula are applicable are calculating mostly applicable is NWC=

Long term sources- Long term uses. It is applicable to avoid complexity of

solution.

.


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THE OPERATING CYCLE AND WORKING CAPITAL NEEDS

Working capital cycle or the Operating cycle represents the time span within

which the cash utilized for procuring raw materials, payment of wages and

incurring overheads is reconverted into cash through sales realization.

Therefore the total time span within which the business activity rotates is called

an operating cycle or production cycle. In a trading concern, there is a series of

activities starting from procurement of goods (saleable goods) and ending with

the realization of sales revenue (at the time of sale itself in case of cash sales and

the time of debtors realizations in cash of credit sales).

In case of manufacturing concern, this series starts from procurement of raw

materials and ending with the sales realization of finished goods (after going

through the different stages of production). The time gap between the happening

of first event and happening of last event. This gap is called the operating cycle.

The operating cycle can be shown in the following figure:


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Raw

material

work inprogress

finishedgoods

billsreceivables

sundry

debtors


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QUANTUM OF WORKING CAPITAL:

The quantum of working capital requirements (gross working capital) depends on

nature of activities of an enterprise. The two main factors taken into

consideration are:

i. Level of activity or operation.

ii. Duration or length of the operating cycle.

The level of activity refers to the level of production or sales. An increased sales

turnover would normally require increased working capital for its achievement.

For instance, if a unit producing 1000 units per month desires to produce 1200

units in the coming months, then it requires more working funds to attain the

increased production target. On the other hand, if for the same production level

of 1000 units per month, the raw material availability changes from 10 days to 15

days, then more raw material is to be stored which means requirement of

additional working funds. Similar situation might arise in respect of work in

process, finished goods and receivables.

For estimation of gross working capital requirement we must also know the level

of operating expenses required for attaining projected level of sales. For e.g. if the

sales forecast of a unit for a next year are Rs 8 lacs, its operating expenses are Rs

6 lacs, and the estimated length of its operating cycle is 4 months(120 days).What

shall be total working capital requirement to achieve the sales target? Since each

rupee of working capital employed during the year will be turned over 3 times

(360 day120 days) the total working capital required by the unit on an average


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will be Rs 2 lacs (Rs6lacs3). Any reduction in the length of operating cycle will

improve the working capital turnover ratio. Thus if the same unit is able to reduce

the length of operating cycle from 120 days to say 90 days, its working capital

turnover will improve from 3 times to 4 times per year(36090). Accordingly the

gross working capital requirement will be Rs 1.50 lacs (Rs6 lacs4) instead of Rs 2

lacs. This means better utilization of resources of resources on account of better

management of one or more phases of operating cycle.

VIABILITY OF THE PROJECT:

A detailed study is usually done by financial institution and banks while providing

term loan finance to a unit for acquisition of fixed assets, so as to ensure that the

project will generate sufficient returns on the resources invested in it. The

viability of a project depends on technical feasibility, marketability of the products

at a profitable price, availability of financial resources in the time and proper

management of the unit. In brief, a project should satisfy the tests of technical,

commercial, financial and managerial feasibilities. A detailed viability study is

necessary before agreeing to provide working capital finance.

The past and future viability can be ascertained by examining the financial

statements for the past 2-3 years as well as the estimated / projected statement

for the current and next year. It is implicit that the concern will have to submit an

acceptable business plan or forecast in the form of estimated/ projected financial

statements to the bank.


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FACTORS DETERMINING WORKING CAPITAL REQUIREMENT:

The working capital needs of a firm are determined and influenced by various

factors. A wide variety of consideration may affect the quantum of working

capital required and these considerations may vary from time to time. The

working capital needed at one point of time may not be good enough for some

other situation. The determination of working capital requirement is a continuous

process and must be undertaken on a regular basis in the changing situations.

Following are some of the factors which are relevant in determining the working

capital needs of the firm:

1. 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 that too on cash basis. As

such, no founds are blocked in piling inventories and also no funds are blocked in

receivables. E.g. Public utility services like railways, infrastructure oriented project

etc. there requirement of working capital is less. On the other hand, there are

some businesses like trading activities, where requirement of fixed capital is less

but more money is blocked in inventories and debtors.

2. Length of production cycle: In some business like machine tools industry,

the time gap between the acquisition of raw material till the end of final

production of finished products itself is quite high. As such, amount may be

blocked either in raw material or in work in progress, finished goods, or even in

debtors. Naturally there need of working capital is high.

3. Size and growth of business: In very small company the working capital

requirement is quit high due to high overhead, higher buying and selling cost etc.

as such medium size business positively has edge over the small companies. But if

the business start growing after certain limit, the working capital requirements

may adversely affect by the increasing size.


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13) Level of taxes: The first appropriation out of profits is payment or provision

for tax. The amount of taxes to be paid is determined by the prevailing tax

regulations. Tax liability is, in a sense, short-term liability payable in cash. An

adequate provision for tax payment is, therefore, an important aspect of working

capital planning. If tax liability increases, it leads to an increase in the requirement

of working capital and vice versa.

14) Dividend policy: Another appropriation of profits which has a bearing on

working capital is dividend payment. The payment of dividend consumes cash

resources and, thereby, affects the working capital to that extent. If any firm does

not pay dividend but retains the profits, working capital increases. In planning

working capital requirements, therefore, a basic question to be decided is

whether profits will be retained or paid out to shareholders.

15) Depreciation policy: Depreciation policy also exerts an influence on the

quantum of working capital. Depreciation charges do not involve any cash

outflows. The effect of depreciation policy on working capital is indirect.

16) Price level changes: Changes in the price level also affect the requirements of

working capital. Rising prices necessitate the use of more funds for maintaining an

existing level of activity. For the same level of current assets, higher cash layouts

are required. The effect of rising prices is that a higher amount of working capital

is required. In the case of companies which can raise their prices proportionately,

there is no serious problem regarding working capital.

To conclude, the level of working capital is determined by a wide variety of

factors which are partly internal to the firm and partly external (environmental)

to it. Efficient working capital management requires efficient planning and a

constant review of the needs of an appropriate working capita strategy.


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ASSESSMENT OF WORKING CAPITAL (WITH SPECIAL REFERENCE WITH

J&K BANK):

The assessment of correct amount of working capital is extremely important for

any financing institution. Any overestimation of the requirement resulting in

blockage of scare funds in idle assets is both, a drain on profitability as also a

reflection on performance of the management of the financing institution. At the

same time any paucity of funds due to an underestimation may cripple the unit

and deprive it of many profitable opportunities. Scarcity of funds will also

adversely affect the liquidity of the unit and in turn its reputation, due to itsinability to meet its commitments in time.

Operating with thin working capital is like walking on a tight rope and any

unforeseen blockage of funds may instantaneously imperil the very existence of

the unit. It is, therefore, of prime importance that the assessment of working

capital is judiciously and meticulously done.

The exercise becomes all the more important for bankers because a major portion

of their working funds is tied in financing of working capital needs of their

constituents. Proper and prudent calculation of working capital needs of the

prospective borrowers contribution of his adequate share in the shape of margin.

The exercise of assessing working capital requirement centres aroundascertaining the operating cycle of the unit and then converting this period into

monetary values based on the cost of components involved.


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WHY ASSESSMENT OF WORKING CAPITAL IS DONE ??? When any business entity

starts business be it a manufacturer / trader / service provider micro / small /

medium or large enterprise it deals in manufactured or traded goods or

provides services. Every business transaction passes through a Working Capital

Cycle from initial cash - to credit purchase of goods to manufacture process

to credit sales to customer realization of book debts payment to creditors

and again in cash for smooth functioning of every business, it need Working

Capital Funds in the form of Cash Credit.

for buying Raw Materials & Finished Goods, Purchase of Services

Packing Material & Stores and Consumables, Spare Parts

Payment to Labor, Wages & Salaries to Staff meeting business expenses

like Power & Electricity, Rent, Rates, Taxes

Administrative, Selling & Marketing Overheads

Payment of Corporate and Individual Income Taxes

Cash Credit is granted by banks for above needs keeping a certain percentage of

the current assets value as margin money. The CC facility is generally granted for

one year and it is subjected to review at the expiry of one year. At the time of first

time sanction of Cash Credit or Renewal of Cash Credit borrower is required to

give to the bank a CC Proposal along with CMA Data, through which bank assesses

the working Capital Gap of the borrower that can be funded by the bank.


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CONCEPT OF MARGIN

Margin in relation to working capital has two concepts which need to be clearly

understood. The one concept of providing margin by way of liquid surplus i.e.

from long-term liabilities has already been explained. It must be clear by now that

current assets shall partly be financed by capital & long-term liabilities for any

going concern. This gains importance while fixing overall limits of working capital

by the bank.

The other concept of margin as applicable to working capital limits is related to

the value of security charged to the bank as cover for these limits. Financial

accommodation up to 100% of the value of goods would not be granted by the

banks and they would fix a certain margin on the value of security which must be

provided by the borrower and the balance amount will be financed by the bank.The percentage of margin fixed on any security is dependent on its nature.

CONCEPT OF WORKING CAPITAL GAP (WCG)

Working Capital Gap represents the difference between the total current assets

(TCA) and current liabilities excluding bank borrowing i.e. other current liabilities

(OCL).

After assessing the projected level of current assets and current liabilities, the

WCG will be calculated as under:

Projected Current assets A

Less: Projected Current Liabilities (other than

bank borrowings)

B

Working Capital Gap (A - B) C

Working Capital Gap (WCG) so arrived should be partly financed from Net

Working Capital (NWC) and partly from bank finance.


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COMMITTEES BEHIND THE INTRODUCTION OF METHODS OF ASSESSMENT

TANDON COMMITTEE A study

group headed by Shri Prakash Tandon, the then Chairman of Punjab National

Bank, was constituted by the RBI in July 1974 with the purpose of framing

guidelines for commercial banks for follow-up & supervision of bank credit for

ensuring proper end-use of funds and to suggest ways for optimum utilization of

Bank credit. This was the first elaborate attempt by the central bank to organize

the Bank credit.

Most banks in India even today continue to look at the needs of the corporate in

the light of methodology recommended by the Group. The report of this group is

widely known as Tandon Committee report. The weaknesses in the Cash Creditsystem have persisted with the non-implementation of one of the crucial

recommendations of the Committee. In the background of credit expansion seen

in 1977-79 and its ill effects on the economy, RBI appointed a working group to

study and suggest

i) Modifications in the Cash Credit system to make it amenable to better

management of funds by the Bankers and

ii) Alternate type of credit facilities to ensure better credit discipline and co

relation between credit and production.

The Group was headed by Shri. K.B. Chore of RBI and was named Chore

Committee. Another group headed by Shri. P.R. Nayak (Nayak Committee) was

entrusted the job of looking into the difficulties faced by Small Scale Industries

due to the sophisticated nature of Tandon & Chore Committee recommendations

The recommendations made by Tandon Committee and reinforced by Chore

Committee were implemented in all Banks and Bank Credit became much more

organized. However, the recommendations were perceived as too strict by the

industry and there has been a continuous clam our from the Industry for

movement from mandatory control to a voluntary market related restraint. With

recent liberalization of economy andre forms in the financial sector, RBI has given

the freedom to the Banks to work out their own norms for inventory and the

earlier norms are now to be taken as guidelines and not a mandate. In fact,


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beginning with the slack season credit policy of 1997-98, RBI has also given full

freedom to all the Banks to devise their own method of assessing the short term

credit requirements of their clients and grant lines of credit accordingly. Most

banks, however, continue to be guided by the principles enunciated in Tandon

Committee report.

Major recommendations of the committee were as follows:

1. Assessment of need based credit of the borrower on a rational basis on the

basis of their business plans.

2. Bank credit would only be supplementary to the borrowers resources and not

replace them, i.e. banks would not finance one hundred percent of borrowersworking capital requirement.

3. Bank should ensure proper end use of bank credit by keeping a closer watch on

the borrowers business, and impose financial discipline on them.

4. Working capital finance would be available to the borrowers on the basis of

industry wise norms (prescribe first by the Tandon Committee and then by

Reserve Bank of India) for holding different current assets, viz.

Raw materials including stores and others items used in manufacturing

process

Stock in Process

Finished goods

Accounts receivables

5. Credit would be made available to the borrowers in different components like

cash credit; bills purchased and discounted working capital, term loan, etc.,

depending upon nature of holding of various current assets.


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6. In order to facilitate a close watch under operation of borrowers, bank would

require them to submit at regular intervals, data regarding their business and

financial operations, for both the past and the future periods.

NAYAK COMMITTEE

The Committee was constituted by Reserve Bank of India in December 1991under

the Chairmanship of Shri P. R. Nayak, the then Deputy Governor to examine the

issues confronting SSIs in the matter of obtaining finance. It had recommended a

simplified procedure for sanction of Working Capital to the manufacturing units. It

had recommended assessment of WC at 25% of the turnover of which 5% may be

contributed by the promoters and the balance 20% may be provided by the

banks.

This Group is of the view that in order to simplify and expedite sanction of

working capital limits and also to ensure that the micro and small enterprises are

not forced to take help of professionals for obtaining working capital limits, it is

necessary that no CMA data or any future projections except sales are obtained

for assessing WC limits under Nayak Committee. The limits should be assessed at

20% of the projected sales. As regards projected sales, the borrower has to justify

and convince the bankers.

There is a need to impress upon banks that the Nayak Committee norms should

be implemented without exception. Banks should issue clear cut guidelines to

their branches that CMA data or Operating Statement, Balance Sheet, Cash Flows

etc are not necessary for working capital limits upto Rs.5 crores in the SME

sector. The need for strict implementation of Nayak Committee Norms for

assessment of WC requirement and permissible bank finance cannot be

overemphasized, especially in light of the views of the various stakeholders

regarding delayed financing and inadequacy of limits as one of the major reasonsfor poor growth of SME sector and a contributor to sickness in the sector.

The Committee submitted its report in 1992. All the major recommendations of

the Committee have been accepted and the banks have been inter-alia advised

to:


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i) Give preference to village industries, tiny industries and other small scale units

in that order, while meeting the credit requirements of the small scale sector;

ii) Grant working capital credit limits to SSI units computed on the basis

of minimum 20% of their estimated annual turnover whose credit limit inindividual cases is up to Rs.2 crores [ since raised to Rs.5 crores ];

iii) Prepare annual credit budget on the `bottom-up basis to ensure that the

legitimate requirements of SSI sector are met in full;

iv) Extend Single Window Scheme of SIDBI to all districts to meet the financial

requirements (both working capital and term loan) of SSIs;

v) Ensure that there should not be any delay in sanctioning and disbursal of credit.

In case of rejection/curtailment of credit limit of the loan proposal, are ference to

higher authorities should be made;

vi) Not to insist on compulsory deposit as a `quid pro-quo for sanctioning the

credit;

vii) Open specialized SSI bank branches or convert those branches which have a

fairly large number of SSI borrower accounts, into specialized SSI branches;

viii) Identify sick SSI units and take urgent action to put them on nursing

programmes;

ix) Standardize loan application forms for SSI borrowers; and

x) Impart training to staff working at specialized branches to bring about

attitudinal change in them.


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METHODS OF ASSESSMENT OF WORKING CAPITAL

With freedom given to the banks in evolving their own method of lending,

generally the banks evolved their lending policy accordingly to which borrowers

with working capital limits upto.

There are 3 methods for assessing the working capital. They are:

1. Turnover Method

2. Cash Budget Method

3. Tandon Committee Methods


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A. TURNOVER METHOD

In this method: Working Capital Requirement = 25% of Turnover

Promoter Contribution (Margin) = 5% of Turnover

Bank Finance = 20% of Turnover

Applicability: Applicable to borrowers who are engaged in manufacturing,

services and trading activities with fund based working capital

requirements up to and Inclusive ofRs.2 crore (Rs.5 crore for

SSI) as per bank norms.

Format for calculation of Turnover method:

S.No. Particulars Amount

1 Projected Sales Turnover as on current year XXXX

2 25% of the projected turnover as on current year XXXX

3 5% of the projected turnover as on current year XXXX

4 Available Net working capital in the past financial year XXXX

5 (2 - 3) XXXX

6 (2 - 4) XXXX

7 Maximum Permissible Bank Finance (5 or 6 whichever is

lower)

XXXX

Specifications about Turnover Method:

Proposed by the Nayak Committee

Applicable for limits upto 6 crores

Used for assessment of working capital needs of small scale units

Not appropriate for manufacturing and big trading companies


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B. Cash Budget System

In this method credit appraisal is entirely done by total inflows and outflows of

the firm/company during peak season and slack season throughout the year. This

method is applicable for:

Seasonal industries (sugar/ rice/ mills/ textiles/ tea/ tobacco/ fertilizers)

Contractors

Real Estate Developers

Software Exporters

Applicability: Applicable to borrowers who are enjoying working capital limits of

Rs 10 crores and above option have been given to the borrower to be assessed as

per the Cash Budget Method. For industries like the mentioned above where in

the pattern of financing the peak cash deficit(s) is followed all along, the existing

system of assessment under the Cash Budget Method is followed.

Cash Inflows Cash Outflows = Bank Finance in the form of Working capital


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Limitations:

Will not reflect changes in various current assets and current liabilities.

It does not give any clue whether a company is earning profit or not.

Funds flow statement is required to detect any diversion of funds. But this

method does not include Funds flow statement

Eliminates traditional requirement of Stock and Debtors for assessment

Cash Inflows

(Operating as well as

Capital inflows marked

for business uses)

Cash Outflows

(Business Expenditure)

Bank Finance in the

form of Working

Capital


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3. Tandon Committee Method

Tandon Committee has recommendation the following methods:

Method I

Borrowers is required to contribute a minimum of 25% of the WorkingCapital Gap from long term sources (i.e. owned funds + term borrowings)

and the balance 75% of the working capital gap will be financed by the

bank.

This approach was considered suitable only for very small borrowers i.e.

where the requirements of credit were less than Rs.10 lacs.

Method II

Borrower is required to contribute a minimum of 25% of the Total CurrentAssets from long term sources (i.e. owned funds + term borrowings) and

the balance 75% of the working capital gap will be financed by the bank.

RBI stipulated that the working capital needs of all borrowers enjoying fund

based credit facilities of more than Rs.10 lacs should be appraised

(calculated) under this method.

Method III

The borrowers should bring 100% of hard core assets + 25% of other

current assets.

The hardcore current assets i.e. the current assets which are

permanently required by the unit for its functioning must be

exclusively financed by the borrower.

(This method was not accepted for implementation and hence is of only

academic interest)

Specifications about Tandon Methods:

Under Method I the promoter has to bring minimum margin whereas the

margin to be brought in under Method III is maximum

Chore Committee has discarded Method III and recommendation Method II

Banks mainly uses this method for assessment of working capital

requirement


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Matrix based on Working Capital Lending Methods

Segment Limits Method

Small Scale Industries Upto 5 crore Turnover Method

Upto 5 crore Tandon Methods

Trade And Services Upto 2 crore Turnover Method

Above 2 crore Tandon Methods

Above 10 crore Cash Budget method

Industrial Units Upto 2 crore Turnover Method

Above 2 crore Tandon Methods

Above 10 crore Cash Budget Method


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Maximum Permissible Bank Finance (MPBF)

Maximum Permissible Bank Finance (MPBF) guidelines were suggested in Tandon

Committee that was being followed by Indian Banks with lot of stringency.

Format for calculation of Maximum Permissible Bank Finance

S. No. Particulars Amount

1 Total Current Assets XXXX

2 Current Liabilities (other than bank borrowings) XXXX

3 Working Capital Gap (1 - 2) XXXX

4 Minimum stipulated Net Working Capital (25% of TCA or

WCG other than export receivables)

XXXX

5 Actual/Projected Net Working Capital XXXX

6 Item (3 - 4) XXXX

7 Item (3 - 5) XXXX

8 Maximum Permissible Bank Finance (Item 6 or 7

whichever is lower)

XXXX

9 Excess Borrowings, if any representing short fall in NWC

(4 - 5)

XXXX

Excess borrowing (shortfall in NWC) shall be ensured by additional funds to be

brought in by the applicant or by additional bank finance over MPBF. Under this

method, it was thought that the borrower should provide for a minimum of 25%

of total current assets out of long-term funds i.e., owned funds plus term

borrowings. A certain level of credit for purchases and other current liabilities will

be available to fund the buildup of current assets and the bank will provide the

balance (MPBF). Consequently, total current liabilities inclusive of bank

borrowings could not exceed 75% of current assets specially inventory. Generally,

bankers are stipulating 50% margin on book debts and in case of valued debtors,

they are lowering the margin to the tune of 40% to 30% on case-to-case basis.


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Illustration For Calculation Of Maximum Permissible Bank Finance (MPBF):

The projected level of current assets and current liabilities other than bank

borrowings as indicated by the borrowers financial position for the next year is as

under:-

Current Liabilities (excluding

Bank Borrowing)

Amount Current Assets Amount

Creditors for purchase 100 Raw material 200

Other current liabilities 40 Stockin-process 20

Finished Goods 80

Receivables 50

Other Current Assets 10

140 140

The total current assets are as per the norms/past trend and in relation to the

projected sales/production for the next year. Creditors and other current

liabilities also conform to the past trend.

Method 2nd

ensures higher contribution of borrower by way of Net Working

Capital (NWC).

1st

Method

(A) Total Current Assets 360

(B) Less: Current Liabilitiesother than bank borrowing

140

(C) Working Capital Gap(A-B) 220

(D) Minimum Stipulated NWC

(25% of WCG)

55

(E) MPBF (C-D) 165

2nd

Method

(A) Total Current Assets 360

(B)Less: Current Liabilities otherthan bank borrowing

140

(C) Working Capital Gap (A-B) 220

(D) Minimum Stipulated NWC

(25% of TCA)

90

(E) MPBF (CD) 130


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Credit Monitoring Arrangement (CMA)

With the improvement in the financial discipline followed by banks, the system of

prior authorization by Reserve Bank under the Credit Authorization Scheme (CAS)

for sanction of Working Capital limits above the respective cut-off points waswithdrawn and in its place a scheme of Credit Monitoring Arrangement was

introduced on 10th

October, 1988.

Under CMA all proposals involving sanction / renewal of credit limits beyond the

cut-off point are to be reported to the Reserve Bank for post sanction scrutiny to

ensure that the basic disciplines are being observed. The cut-off point for

reporting to the Reserve Bank under CMA was fixed initially at Rs.5.00 crores for

working capital facilities (funded) and at Rs.2.00 crores for term loans on 10

th

October, 1988 when this scheme was introduced in place of Credit Authorization

Scheme. The cut-off point for reporting to the Reserve Bank has been increased in

Dec. 1992 to Rs.5.00 crores for term loans. All proposals involving working capital

/ renewal of credit limits to borrowers enjoying working capital facilities (funded

based) ofRs.10 crores and above and sanction of additional limits to the existing

borrowers which would take their total limits from the banking system to Rs.10

crores and above are to be reported to the RBI for post sanction scrutiny.

Similarly, all sanction of term loans (including deferred payment guarantees) inwhich the share of banking system is Rs.5.00 crore and above are to be reported

to the RBI for post sanction scrutiny. It may be clarified that term loans from

banking system as a whole (excluding those from term lending institutions) should

be taken into account in this regard. Further, the cut-off point ofRs.5.00 crores in

respect of term loans for reporting purposes is applicable irrespective of the

amount of the working capital facilities available to a party from the banking

system exceed Rs.5 crores, it is to be reported to the RBI even if the working

capital limits to the concerned party are less than Rs.10.00 crores i.e. the cut-off

point meant for reporting working capital limits.

As the role of the Reserve Bank has been changed from prior authorization to

post-sanction scrutiny, the scheme has been named as Credit Monitoring

Arrangement (CMA).


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CMA data is a tool used by the bankers to assess the requirement of workingcapital. It is divided into six parts as follows:

Form I Particulars of Existing & Proposed Limits

Form II Operating Statement

Form III Analysis of Balance Sheet

Form IV Comparative Statement of Current Assets & Current Liabilities

Form V Computation of Maximum Permissible Bank Finance (MPBF)

Form VI Funds Flow Statement

The prescribe CMA forms are detailed below:

1. Particulars of the existing/ proposed limits from the banking system (Form -

1):

Particulars of the existing credit from the entire banking system as also the term

loan facilities availed of from the term lending institutions/banks are furnished in

this form. Maximum and minimum utilization of the limits during the last 12

months and outstanding balances as on a recent date are also give so that a

comparison can be made with the limits now requested and limits actually utilized

during the last 12 months.

2. Operating Statement (Form - 2):

The data relating to gross sales, net sales, cost of raw materials, power and fuel,

direct labor, depreciation, selling, general and administration expenses, interest,

etc. are furnished in the form. It also covers information on operating profit and

net profit after deducting total expenditure from total sale proceeds.

3. Analysis of Balance Sheet (Form - 3) A

complete analysis of various items of last years balance sheet, current years

estimates and following years projections is given in the form. The details of

current liabilities, term liabilities, net worth, current assets, fixed assets, other

non current assets, etc., are given in the form as per the classification accepted by

the banks.


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4. Comparative Statement of Current Assets and Current Liabilities(Form -4) This

form gives the details of various items of current assets and current liabilities as

per the classification accepted by the banks. The figures given in the form should

tally with the figures given in the Form -3 where details of all the liabilities and

assets are given. This form is used to indicate all the current assets and current

liabilities at one place. In case of inventory (raw materials, consumable spares,

stock-in-process and finished goods), receivables and sundry creditors; the

holding/levels are given not only in absolute amounts but also in terms of number

of months so that a comparative study may be done with the prescribed

norms/past trends. They are indicated in terms of number of months in brackets

below their amounts.

5. Computation of Maximum Permissible bank Finance (Form - 5) On the basis ofthe details of the current assets and current liabilities given in Form4,

maximum permissible bank finance is calculated in the form to find out the credit

limits to be allowed to the borrowers.

6. Funds Flow Statement (Form 6

In the form, funds flow of long term sources and uses is given to indicate whether

long term funds are sufficient for meeting the long term requirements. In addition

to long term sources and uses, increase/decrease in current assets is also

indicated in this form.


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E. Period involved in various stages of operating cycle

F. Proportion of Cash and Credit Sales

G. Liquid surplus presently available

H. Closing stock of raw materials, work in progress and finished goods and

receivable estimates

I. Manufacturing process details

J. Detailed note on demand and supply and marketing arrangements.

K. Competition analysis

Existing Units For

existing units judgment will be more accurate as the projections can be compared

with past performance and estimates can be cross checked to data of past

financial statements. The following information of the last year, current year and

next year shall be required in order to judge accuracy of the need of the

borrower:

A. Balance sheet (estimated/projected/audited)

B. Profit and Loss account (estimated/projected/audited)

C. Cash and Credit Sales

D. Cash and Credit purchases of raw materials

E. Basis for manufacturing costs and factory overheads

F. Basis for administrative expenses

G. Liquid surplus presently available

H. Opening and Closing stock of raw materials ,work in progress and finished

goods and receivables

I. Manufacturing process details


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J. Detailed note on demand and supply and marketing arrangements.

K. Competition analysis

STEPS INVOLVED IN FINANCIAL ANALYSIS OF LENDING

Step1: Companys financial statement for at least 3 to 5 years is acquired. The

financial statement must include the following:

Balance sheets

Income statements

Shareholders equity statement

Cash flow statements

Step 2: A quick scanning of all the statements is done to look for large movements

in specific terms from one year to the next. If there is something suspicious,

relevant research about the company is done from the information available

to find out the reason. Notes accompanying the financial statement are also

reviewed for additional information that may be significant to analysis.

Step 3: This stage calls for an exhaustive scrutiny of the balance sheet. While

examining, the advances manager looks for the large changes in overall

components of companys assets and liabilities of equity. For example, have fixed

assets grown rapidly in one or two years, due to acquisitions or new facilities? Hasthe portion of debt grown rapidly, to reflect a new financial strategy?

Step 4: This level relates to an assessment of the income statement as furnished

by the client. The advances manager looks for the trends overtime. Graphs and

growth of the following entries over the past several years are calculated.

Revenue (sales)

Net income (profit, earnings)

For each key expense components on the income statement, percentage of salesof each year is calculated. For example, percentage of cost of goods sold over

sales, general and administrative expenses over sales and development over sales

are computed. Favorable and unfavorable trends are highlighted. Manager

determines whether the spending trends support the companys strategies.


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Step 5: The very phase pertains to an evaluation of the cash flow statement. It

gives information about the cash inflows and outflows from operations, financing

and investing. While the income statement provides information about both cash

and non-cash items, the cash flow statement attempts to reconstruct that

information to make it clear how cash is obtained and used by the business, since

that is what investors really care about.

Step 6: Calculation of financial ratios:

KEY RATIO LEVELS

Particulars Low Risk Medium Risk High Risk

Current Ratio >1.40 1.20 1.40


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PROCEDURE OF GRANTING CASH CREDIT

We have studied in this lesson that banks provide financial assistance to its

customers in the form of loans, advances, cash credit, overdraft and through the

discounting of bills. The procedure of applying for and sanction of loans andadvances differs from bank to bank. However, the steps which are generally to be

taken in all cases are as follows:

(I) Filling up of loan application form

Each bank has separate loan application forms for different categories of

borrowers. When you want to borrow money from a bank, you will have to fill up

a loan application form available with the bank free of cost. The loan application

form contains different columns to be filled in by the applicant. It includes all

information required about the borrower, purpose of loan, nature of facility

(cash-credit) required, period of repayment, nature of security offered, and the

financial status of the borrower.

A running business limit may be required to furnish additional information in

respect of Assets and liabilities, Profit and loss for the last 2 to 3 years, the names

and addresses of three persons (which may include borrowers, suppliers,

customers and bankers) for reference purposes.

(ii) Submission of form along with relevant documents

The loan application form duly filled in should be submitted to the bank along

with the relevant documents.

(iii) Sanctioning of loan

The bank scrutinizes the documents submitted and determines the credit worthin

ess of theapplicant. If it is found to be feasible, the loan is sanctioned. If the loan

is for Rs.5000 or less, normally the Branch Manager himself can take the decision

and sanction the loan. In case the amount of loan is more thanRs.5000, the

application is considered at regional, zonal or head office level, depending on the

amount of loan.


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WORKING CAPITAL

1) CASE STUDY

NAME OF THE APPLICANT BORROWER: M/S ABC FILLINGS, Shivaji Chowk , Jammu

GENERAL INFORMATION ON THE PROPOSAL:

Name of the Branch Shivaji Chowk, Jammu

Date of Receipt of

Proposal

22-04-2012

Nature of Proposal Renewal cum enhancement proposal

Existing Banking

Arrangement

Sole

Proposed Banking

Arrangement

-do-

Activity Petrol Pump

Sector Priority


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Particulars of the

existing facilities

enjoyed by the

Applicant

Type

of

facility

Limit BOS as

on

Margin Securities

Cash

Credit

60.00

lacs

8,90,170 25%

on

stocks

& 50%

on

book

debts

Hypothecation

of stocks &

Book Debts,

3rd

Party

Guarantee,

Mortgage of

Property

Recommenda

tion of

Branch

Enhancement

in C/C limit

from Rs. 60

Type of

facility

Limit Margin Interest

/Commi

ssion on

NFB

facilities

Securities


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[65]

lacs to Rs.95

lacs

C/C

Limit

60.00

lacs to

95.00

lacs

Stocks: -

25%

Book

Debts: -

50%

NA 1. Hypoth

ecation of

stocks &

Book Debts

2.3rd Party

Guarantee

of two

persons

3.Mortgage

of Property

valuing

Rs.91.30

lacs

DETAILS OF PARTNERS:

Name Address ENW as on Share in the

firm

Mrs. XYZ Trikuta nagar,

Jammu

Rs. 8.25 crores

approx.

95%


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. PQR Nanak nagar,

Jammu

Rs. 8.50 crores

approx.

4%

Mrs. DEF Subhash nagar,

Jammu

Rs. 5.00 lacs

approx.

1%

SECURITIES EXISTING/ PROPOSED FOR THE FACILITY:

PRIMARY

Type of security Ownership, location

and address

Value of security

Hypoth. of stocks &

book

Near kithchen gallery Stocks Rs. 30.64 lacs.

Debts jammu Book Debts Rs. 70.71

lacs

COLLATERAL (MORTGAGE AND OTHER TANGIBLE SECURITY)

Type of security Ownership, location

and address

Value of security

Mortgage of House

built in plot measuring

Gandhi nagar, jammu 91.30 lacs


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45x 65

COLLATERAL SECURITY (GUARANTEE)

Name Address Relationship Age Net Worth

Mr. FGH Channi

Himmat,

Jammu

Son in Law 43 yrs Rs.1.35 cores

approx.

Mr. LMN Gandhi

nagar,

Jammu

Friend 60 yrs. Rs. 100.00

lacs approx.

BACKGROUND

M/S ABC FILLINGS is a partnership concern of three partners namely i) Mrs. XYZ ii)

Mr. PQR iii) Mrs. DEF carrying on.a petrol pump at l, Shivaji Chowk Jammu. Share

holding pattern of the partners is as under-


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XYZ 95%

PQR 4%

DEF 1%

Presently the firm is enjoying a cash credit limit of Rs. 60.00 lacs from us. The

firm, in order to expand its business further, has requested for an enhancement in

existing limit from Rs. 60.00 lacs to Rs.95.00 lacs

ASSESSMENT OF WORKING CAPITAL FUND BASED: -

The assessment has been made on the projected figures for the FY 201-12 and

same parameters have been accepted in computation of MPBF


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MPBF METHOD

Particulars Holding Period

(in days/weeks/

months)

Amount in lacs of Rs.

A Current Assets

Stocks 7 34.52

S. Debtors/ Receivables 20 98.63

Others (specify)

Total (A) 133.15

B Current Liabilities

S. Creditors 4 9.00

Others if any

Total (B) 9.00

C Working Capital Gap (A-B) 124.15

D Stipulated NWC @25% of A 33.29

E Projected NWC 34.17


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persons namely : i. Mr.FGH R/O Gandhi Nagar, Jammu

ii. Mr. LMN S/O R/O Gandhi NagarJammu

TERMS AND CONDITIONS:

Period : One year subject to renewal after review.

The renewal proposal to be submitted not later

than 9 months from the date of sanction.

Interest : 11.75% p.a with monthly rests or other such

rate of interest as may be prescribed by the Bankfrom time to time

Margin : 25% on stocks & book-debts.

Drawing power : The drawings in the account to be strictly

regulated as per Drawing power available. For this

purpose branch shall obtain stocks statement,

Debtors and Creditor list on monthly basis and

compute the drawing power accordingly. Stocks

older than 90 days to be excluded for the purpose

of calculating Drawing power.

Disbursement : The facility to be released for purchase of

fresh stocks only. The drawings in the cash credit limit shall be allowedstrictly against the drawing security documents as per Manual of Loan

documents issued by Law Department, Corporate Headquarters, Srinagar.

To get the title verification report and related loan documents vetted from

Law Department Zonal Office, Jammu


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To obtain original Title deeds in respect of properly mortgaged to be kept

on record.

To obtain non encumbrance cum title verification certificate from the

counsel on the approved panel of the bank.

A copy of fresh Jamabandhi certificate to be obtained if already not

obtained.

To create banks charge over the mortgaged properly in revenue record

and acknowledgement of the same be obtained and place with the

documents.

The party to undertake not to create any subsequent charge on primary as

well as collateral security during the currency of loan.

The party to execute an irrevocable power of attorney authorizing the bank

to sell the primary as well as collateral security in

power available on the paid up stocks and

receivables from time to time.

Insurance : The stocks as well as mortgaged

property to be got comprehensively insured

with some reputed insurance company against all

risks with usual Bank Clause at party's cost.


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BIBILOGRAPHY

www.google.com


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bank jk prjct

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