icici bank _working capital management_ amity
TRANSCRIPT
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ICICI BANK WORKING CAPITAL MANAGEMENT
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EXECUTIVE SUMMARY
With the economy surging, things are getting better in the Banking Industry. There are
plenty of changes occurs daily. According to Reserve bank of Indias banking review of
2004 2005 there was a notable pick up in demand from industry for investments and a
surge in exports. Evidently, the industrys focus now is on scaling up both domestically
and in markets abroad, widening the product and services port folio, and better using
technology to make banking more accessible and efficient. Most of researchers
conclusion is, Whether or not the sectors actually opens up in 2009, banks should use
that as an opportunity to get their growth strategies in place. Not Just through organic
growth, but growth through mergers and acquisition. What India need is not a large
number of small banks, but a small number of large banks.
As the RBIs deputy Governor, V.Leeladhar, said at Indian Banking Associations Jan
31 Seminar on Indian Banks and the Global change there is growing realization that
the ability to cope with possible downside risks would depend among others on the
soundness of the financial system and the strength of Individual participation.
India is still cagey about foreign investments in banks. Though a dramatic changes
sweeping through the industry for some years now in the rise of Indias Public sector
bank and private sector still it should fuel its grow to open up eyes towards open
market. In this scenario, While we look at the sensex breach the 10,000 level for
the first time it was yet another sign the India as a market for global liquidity had
arrived. When, We start co-relating the Gross Domestic product (GDP) growth of
emerging markets are supposed to reflect the health of the economy where India
emerges as a key player, India is arguably the best placed amongst the entire emerging
market lot.
Form the Investors point of view earning growth, price-earning multiplies and of course
the performance of the economy matters. In the second part, is a project on How does
the ICICI working capital management requirement fulfil? The paper begins by
analyzing the current scenario in the industry characterized by problems with
distribution, low investor awareness and concentration of corporate investors. In the
next section, a comparison of the Banking Industry with global standards reveals that
the industry still compares unfavourably with developed countries in terms of
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penetration, investor awareness and diversity of products and the extent of use of risk
management techniques. Further comparison reveals that the attitude of regulator
towards investor protection and the governance of banking industry are at par with
global standards. The paper then analysis the future expectations from the banking
industry in terms of increased investor awareness, product diversity and
improvement in penetration and distribution. Strategy adopted by ICICI bank for future
prospectus are Revisiting the old themes in a new year, Return of the static era,
Capital account convertibility and currency crisis, G-sec: Rates heading north, ICICI
Bank operates in a highly automated environment in terms of information technology
and communication systems. The entire bank's branches have connectivity which
enables the bank to offer speedy funds transfer facilities to its customers. Multi-branch
access is also provided to retail customers through the branch network and Automated
Teller Machines (ATMs).
Here the study is made of the financial analysis, the marketing management how
the marketing is done in order to achieve the organizational goals and objectives,
the study is done on the recruitment procedure followed by the bank and how they
maintain them. This report describes about the types of services provided by the
bank and their benefits on the part of the bank which type of additional benefitsthey provide to their costumers in order to maintain them and attract them to
invest more and more with the bank.
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CONTENT
ABSTRACT.....................................................................................................ii
SIGNATORY PAGE......................................................................................iii
TOPIC APPROVAL LETTER.......................................................................iv
ACKNOWLEDGMENT.................................................................................v
APPROVED THESIS SYNOPSIS...............................................................vii
INTRODUCTION .................................................................................................1
PROFILE..............................................................................................................25
LITERATURE REVIEW.....................................................................................41
RESEARCH METHODOLOGY.........................................................................57
FINDING AND ANALYSIS...............................................................................59
CONCLUSION....................................................................................................71
RECOMMENDATION.......................................................................................73
BIBLIOGRAPHY................................................................................................75
ANNEXURE QUESTIONNAIRE...................................................................76
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INTRODUCTION
HISTORY OF INDIAN BANKING
A bank is a financial institution that provides banking and other financial services. By
the term bank is generally understood an institution that holds a Banking Licenses.
Banking licenses are granted by financial supervision authorities and provide rights to
conduct the most fundamental banking services such as accepting deposits and making
loans. There are also financial institutions that provide certain banking services without
meeting the legal definition of a bank, a so-called Non-bank. Banks are a subset of the
financial services industry.
The word bankis derived from the Italian banca, which is derived from German and
means bench. The terms bankrupt and "broke" are similarly derived from banca rotta,
which refers to an out of business bank, having its bench physically broken.
Moneylenders in Northern Italy originally did business in open areas, or big open
rooms, with each lender working from his own bench or table.
Typically, a bank generates profits from transaction fees on financial services or the
interest spread on resources it holds in trust for clients while paying them interest on the
asset. Development of banking industry in India followed below stated steps.
Banking in India has its origin as early as the Vedic period. It is believed that
the transition from money lending to banking must have occurred even before
Manu, the great Hindu Jurist, who has devoted a section of his work to deposits
and advances and laid down rules relating to rates of interest.
Banking in India has an early origin where the indigenous bankers played a very
important role in lending money and financing foreign trade and commerce.
During the days of the East India Company, was the turn of the agency houses
to carry on the banking business. The General Bank of India was first Joint
Stock Bank to be established in the year 1786. The others which followed were
the Bank Hindustan and the Bengal Bank.
In the first half of the 19th century the East India Company established three
banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bankof Madras in 1843. These three banks also known as Presidency banks were
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amalgamated in 1920 and a new bank, the Imperial Bank of India was
established in 1921. With the passing of the State Bank of India Act in 1955 the
undertaking of the Imperial Bank of India was taken by the newly constituted
State Bank of India.
The Reserve Bank of India which is the Central Bank was created in 1935 by
passing Reserve Bank of India Act, 1934 which was followed up with the
Banking Regulations in 1949. These acts bestowed Reserve Bank of India (RBI)
with wide ranging powers for licensing, supervision and control of banks.
Considering the proliferation of weak banks, RBI compulsorily merged many of
them with stronger banks in 1969.
The three decades after nationalization saw a phenomenal expansion in the
geographical coverage and financial spread of the banking system in the
country. As certain rigidities and weaknesses were found to have developed in
the system, during the late eighties the Government of India felt that these had
to be addressed to enable the financial system to play its role in ushering in a
more efficient and competitive economy. Accordingly, a high-level committee
was set up on 14 August 1991 to examine all aspects relating to the structure,
organization, functions and procedures of the financial system. Based on the
recommendations of the Committee (Chairman: Shri M. Narasimham), a
comprehensive reform of the banking system was introduced in 1992-93. The
objective of the reform measures was to ensure that the balance sheets of banks
reflected their actual financial health. One of the important measures related to
income recognition, asset classification and provisioning by banks, on the basis
of objective criteria was laid down by the Reserve Bank.
The introduction of capital adequacy norms in line with international standards has
been another important measure of the reforms process.
1. Comprises balance of expired loans, compensation and other bonds such as National
Rural Development Bonds and Capital Investment Bonds. Annuity certificates are
excluded.
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2. These represent mainly non- negotiable non- interest bearing securities issued to
International Financial Institutions like International Monetary Fund, International
Bank for Reconstruction and Development and Asian Development Bank.
3. At book value.
4. Comprises accruals under Small Savings Scheme, Provident Funds, Special Deposits
of Non- Government
In the post-nationalization era, no new private sector banks were allowed to be
set up. However, in 1993, in recognition of the need to introduce greater
competition which could lead to higher productivity and efficiency of the
banking system, new private sector banks were allowed to be set up in the
Indian banking system. These new banks had to satisfy among others, the
following minimum requirements:
(i) It should be registered as a public limited company;
(ii) The minimum paid-up capital should be Rs 100 crore;
(iii) The shares should be listed on the stock exchange;
(iv) The headquarters of the bank should be preferably located in a centre
which does not have the headquarters of any other bank; and
(v) The bank will be subject to prudential norms in respect of banking
operations, accounting and other policies as laid down by the RBI. It
will have to achieve capital adequacy of eight per cent from the very
beginning.
A high level Committee, under the Chairmanship of Shri M.
Narasimham, was constituted by the Government of India in
December 1997 to review the record of implementation of financial
system reforms recommended by the CFS in 1991 and chart the
reforms necessary in the years ahead to make the banking system
stronger and better equipped to compete effectively in international
economic environment. The Committee has submitted its report to
the Government in April 1998. Some of the recommendations of the
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Committee, on prudential accounting norms, particularly in the areas
of Capital Adequacy Ratio, Classification of Government guaranteed
advances, provisioning requirements on standard advances and more
disclosures in the Balance Sheets of banks have been accepted and
implemented. The other recommendations are under consideration.
The banking industry in India is in a midst of transformation, thanks
to the economic liberalization of the country, which has changed
business environment in the country. During the pre-liberalization
period, the industry was merely focusing on deposit mobilization
and branch expansion. But with liberalization, it found many of its
advances under the non-performing assets (NPA) list. More
importantly, the sector has become very competitive with the entry
of many foreign and private sector banks. The face of banking is
changing rapidly. There is no doubt that banking sector reforms have
improved the profitability, productivity and efficiency of banks, but
in the days ahead banks will have to prepare themselves to face new
challenges.
WORKING CAPITAL - OVERALL VIEW
Working Capital management is the management of assets that are current in nature.
Current assets, by accounting definition are the assets normally converted in to cash in a
period of one year. Hence working capital management can be considered as the
management of cash, market securities receivable, inventories and current liabilities. In
fact, the management of current assets is similar to that of fixed assets the sense that is
both in cases the firm analyses their effect on its profitability and risk factors, hence
they differ on three major aspects:
1. In managing fixed assets, time is an important factor discounting and
compounding aspects of time play an important role in capital budgeting and a minor
part in the management of current assets.
2. The large holdings of current assets, especially cash, may strengthen the firms
liquidity position, but is bound to reduce profitability of the firm as ideal car yield
nothing.
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3. The level of fixed assets as well as current assets depends upon the expected
sales, but it is only current assets that add fluctuation in the short run to a business.
To understand working capital better we should have basic knowledge about the
various aspects of working capital. To start with, there are two concepts of working
capital:
Gross Working Capital
Net working Capital
Gross Working Capital: Gross working capital, which is also simply known as working
capital, refers to the firms investment in current assets: Another aspect of gross
working capital points out the need of arranging funds to finance the current assets. The
gross working capital concept focuses attention on two aspects of current assets
management, firstly optimum investment in current assets and secondly in financing the
current assets. These two aspects will help in remaining away from the two danger
points of excessive or inadequate investment in current assets. Whenever a need of
working capital funds arises due to increase in level of business activity or for any other
reason the arrangement should be made quickly, and similarly if some surpluses are
available, they should not be allowed to lie ideal but should be put to some effective
use.
Net Working Capital: The term net working capital refers to the difference between the
current assets and current liabilities. Net working capital can be positive as well as
negative. Positive working capital refers to the situation where current assets exceed
current liabilities and negative working capital refers to the situation where current
liabilities exceed current assets. The net working capital helps in comparing theliquidity of the same firm over time. For purposes of the working capital management,
therefore Working Capital can be said to measure the liquidity of the firm. In other
words, the goal of working capital management is to manage the current assets and
liabilities in such a way that a acceptable level of net working capital is maintained.
Importance of working capital management:
Management of working capital is very much important for the success of the business.
It has been emphasized that a business should maintain sound working capital position
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and also that there should not be an excessive level of investment in the working capital
components. As pointed out by Ralph Kennedy and Stewart MC Muller, the
inadequacy or mis-management of working capital is one of a few leading causes of
business failure.
Current assets, in fact, account for a very large portion of the total investment of the
firm.
Determinants of Working Capital:
There is no specific method to determine working capital requirement for a business.
There are a number of factors affecting the working capital requirement. These factors
have different importance in different businesses and at different times. So a thorough
analysis of all these factors should be made before trying to estimate the amount of
working capital needed. Some of the different factors are mentioned here below:-
1. Nature of business: Nature of business is an important factor in determining the
working capital requirements. There are some businesses which require a very
nominal amount to be invested in fixed assets but a large chunk of the total
investment is in the form of working capital. There businesses, for example, are
of the trading and financing type. There are businesses which require large
investment in fixed assets and normal investment in the form of working capital.
2. Size of business: It is another important factor in determining the working
capital requirements of a business. Size is usually measured in terms of scale of
operating cycle. The amount of working capital needed is directly proportional
to the scale of operating cycle i.e. the larger the scale of operating cycle the
large will be the amount working capital and vice versa.
3. Business Fluctuations: Most business experience cyclical and seasonal
fluctuations in demand for their goods and services. These fluctuations affect
the business with respect to working capital because during the time of boom,
due to an increase in business activity the amount of working capital
requirement increases and the reverse is true in the case of recession. Financial
arrangement for seasonal working capital requirements are to be made in
advance.
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4. Production Policy: As stated above, every business has to cope with different
types of fluctuations. Hence it is but obvious that production policy has to be
planned well in advance with respect to fluctuation. No two companies can have
similar production policy in all respects because it depends upon the
circumstances of an individual company.
5. Firms Credit Policy: The credit policy of a firm affects working capital by
influencing the level of book debts. The credit term is fairly constant in an
industry but individuals also have their role in framing their credit policy. A
liberal credit policy will lead to more amount being committed to working
capital requirements whereas a stern credit policy may decrease the amount of
working capital requirement appreciably but the repercussions of the two are not
simple. Hence a firm should always frame a rational credit policy based on the
credit worthiness of the customer.
6. Availability of Credit: The terms on which a company is able to avail credit
from its suppliers of goods and devices credit/also affects the working capital
requirement. If a company in a position to get credit on liberal terms and in a
short span of time then it will be in a position to work with less amount of
working capital. Hence the amount of working capital needed will depend upon
the terms a firm is granted credit by its creditors.
7. Growth and Expansion activities: The working capital needs of a firm increases
as it grows in term of sale or fixed assets. There is no precise way to determine
the relation between the amount of sales and working capital requirement but
one thing is sure that an increase in sales never precedes the increase in working
capital but it is always the other way round. So in case of growth or expansion
the aspect of working capital needs to be planned in advance.
8. Price Level Changes: Generally increase in price level makes the commodities
dearer. Hence with increase in price level the working capital requirements also
increases. The companies which are in a position to alter the price of these
commodities in accordance with the price level changes will face fewer
problems as compared to others. The changes in price level may not affect all
the firms in same way. The reactions of all firms with regards to price levelchanges will be different from one other.
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Every running business needs working capital. Even a business which is fully equipped
with all types of fixed assets required is bound to collapse without
(i) Adequate supply of raw materials for processing;
(ii) Cash to pay for wages, power and other costs;
(iii) Creating a stock of finished goods to feed the market demand regularly; and,
(iv) The ability to grant credit to its customers.
All these require working capital. Working capital is thus like the lifeblood of a
business. The business will not be able to carry on day-to-day activities without the
availability of adequate working capital.
Cash Creditors
Raw material
Work in
Working
Finished
Debtors
Working Capital
Cycle
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CONCEPTS OF WORKING CAPITAL
There are two concepts of working capital
1. Gross Working Capital
2. Net Working Capital
Gross Working Capital
Gross Working Capital refers to the firms investment in current assets. Current assets
are the assets which can be converted into cash within an accounting year and include
cash, short-term securities, debtors, bills receivable and stock.
Net Working Capital
Net Working Capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders which are expected to mature
for payment within an accounting year and include creditors, bills payable, andoutstanding expenses.
OPERATING AND CASH CONVERSION CYCLE
Operating cycle is the time duration in which a firm is able to convert its resources into
cash. The operating cycle of a manufacturing ICICI BANK. involves three phases:
Acquisition of resources such as raw material, labour, power and fuel etc.
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Manufacture of the product which includes conversion of raw material into
work-in-progress into finished goods.
Sale of the product either for cash or on credit. Credit sales create account
receivable for collection.
Calculation of Gross Operating Cycle
Gross Operating Cycle = Inventory conversion period (in days) + Debtors conversion
period (in days) Where,
Inventory conversion period = Raw material conversion period (RMCP) + Work-in-
progress conversion period (WIPCP) + Finished goods conversion period (FGCP).
Calculation of Net Operating Cycle (NOC) or Cash Conversion Cycle (CCC)
Net operating cycle = Gross operating cycle Creditors deferral period
NOC = GOC CDP
RECEIVABLE MANAGEMENT
A firm grants trade credit to protect its sales from the competitors and to attract the
potential customers to buy its products at favourable terms. Trade credit creates
accounts receivable or trade debtors that the firm is expected to collect in near future.
Credit Policy
The term credit policy is used to refer to the combination of three decision variables:
Credit standards are criteria to decide the types of customers to whom goods
could be sold on credit.
Credit terms specify duration of credit and terms of payment by customers.
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Collection efforts determine the actual collection period. The lower the
collection period the lower the investment in accounts receivable and vice versa.
Why do companies grant Credit?
Companies in practice feel the necessity of granting credit for several reasons:
Competition: Generally the higher the degree of competition, the more the
credit granted by a firm.
ICICI BANK. s bargaining power: If ICICI Bank. has a higher bargaining
power vis--vis its buyers, it may grant no or less credit. The ICICI BANK.
will have a strong bargaining power if it has a strong product, monopoly power,
brand image, large size or strong financial position.
Buyers requirements: In a number of business sectors buyers/dealers are not
able to operate without extended credit. This is particularly so in the case of
industrial products.
Buyers status: Large buyers demand easy credit terms because of bulk
purchases and higher bargaining power. Some companies follow a policy of not
giving much credit to small retailers since it is quite difficult to collect dues
from them.
Relationship with dealers: Companies sometimes extend credit to dealers to
build long-term relationships with them or to reward them for their loyalty.
Marketing tool: Credit is used as a marketing tool, particularly when a new
product is launched or when ICICI Bank. wants to push its weak product.
Industry practice: Small companies have been found guided by industry
practice or norm more than the large companies. Sometimes companies
continue giving credit because of past practice rather than industry practice.
Transit delays: This is a forced reason for extended credit in the case of a
number of companies in India. Most companies have evolved system to
minimize the impact of such delays. Some of them take the help of banks to
control cash flows in such situation.
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Credit-granting Decision
Once a firm has assessed the creditworthiness of a customer, is has to decide whether or
not credit should be granted. The firm should use the NPV rule to make the decision. If
the NPV is positive, credit should be granted. If the firm chooses not to grant any credit,
the firm avoids the possibility of any loss but loses the opportunity of increasing its
profitability. On the other hand, if grants credit, then it will benefit if the customer pays.
There is some probability that the customer will default, and then the firm may lose its
investment. The expected net payoff of the firm is the difference between the present
value of net benefit and present value of the expected loss.
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Factoring
Factoring is a popular mechanism of managing, financing and collecting receivables in
developed countries like USA and UK and now has extended to a number of othercountries in the recent past, including India.
Collection of receivables poses a problem, particularly for small-scale enterprises.
Banks have the policy of financing receivables. However, this support is available for a
limited period and the seller of goods and services has to bear the risk of default by
debtors.
Credit Granting
No
No pay-off
Grant
Payment Payment
PV of
Future Net
Cash Flow
Benefit Cost
PV of Lost
Investme
PV of
Net Payoff
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Factoring differs from a bank loan in three main ways.
First, the emphasis is on the value of the receivables, not the firms credit worthiness.
Secondly, factoring is not a loan it is the purchase of an asset i.e. the receivable.
Finally, a bank loan involves two parties whereas factoring involves three parties.
Factoring Services
While purchase of receivables is fundamental to the functioning of factoring, the factor
provides the following three basic services
Sales ledger administration and credit management.
Credit collection and protection against default and bad-debt losses.
Financial accommodation against the assigned book debts.
Costs and Benefits of Factoring
There are two types of costs involved:
The factoring commission or service fee
The interest on advance granted by the factor to the firm.
Factoring has the following benefits:
Factoring provides specialized service in credit management, and thus, helps the
firms management to concentrate on manufacturing and marketing.
Factoring helps the firm to save cost of credit administration due to the scale of
economies and specialization.
Ideally, factoring should benefit allclient, customers and factor. This may not happen
because of the lack of clarity as regards the roles of the client and the factor, inept
handling of credit and other functions by the client and the factor, overestimation of
benefits or underestimation of costs etc. the client should understand that the factor can
function efficiently with his full cooperation.
http://en.wikipedia.org/wiki/Bank_loanhttp://en.wikipedia.org/wiki/Receivableshttp://en.wikipedia.org/wiki/Credit_worthinesshttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Bank_loanhttp://en.wikipedia.org/wiki/Receivableshttp://en.wikipedia.org/wiki/Credit_worthinesshttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Asset -
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WORKING CAPITAL FINANCE
Two most significant short-term sources of finance for working capital are:
Trade credit and,
Bank finance
Trade Credit
Trade credit refers to the credit that a customer gets from suppliers of goods in the
normal course of business. In practice, the buying firms do not have to pay cash
immediately for the purchases made. This deferral of payments is a short term financing
called trade credit. In India, it contributes to about one-third of the short-term financing.
Trade credit is mostly an informal arrangement, and is granted on an open account
basis. The buyer does not formally acknowledge it as a debt; he does not sign any legal
instrument. Open account trade credit appears as sundry creditors on the buyers
balance sheet.
Advantages of Trade Credit
Easy availability: Unlike other sources of finance, trade credit is relatively easy
to obtain. The easy availability is particularly important to small firms which
generally face difficulty in raising funds from the capital markets.
Flexibility: Trade credit grows with the growth in firms sales. The expansion
in the firms sales causes its purchases of goods and services to increase which
is automatically financed by trade credit.
Informality: Trade credit is an informal, spontaneous source of finance. It does
not require any negotiations and formal agreement.
Cost of Trade Credit
The supplier extending trade credit incurs costs in the form of the opportunity cost of
funds invested in accounts receivable and the cost of any cash discount taken by the
buyer. Most of the time he passes on all or part of these costs to the buyer implicitly in
the form of higher purchase price of goods and services supplied. The user of trade
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credit, therefore, should be aware of the costs of trade credit to make use of it
intelligently.
Accrued Expenses and Deferred Income
Accrued expenses represent a liability that a firm has to pay for the services which it
has already received. Thus they represent a spontaneous, interest-free sources of
financing. The most important component of accruals are wages and salaries, taxes and
interest.
Accrued wages and salaries represent obligations payable by the firm to its
employees. The firm incurs a liability the moment employees have rendered services.
They are, however, paid afterwards, usually at some fixed interval like one month.
Accrued taxes and interest constitute another source of financing. Corporate taxes are
paid after the firm has earned profits. These taxes are paid quarterly during the year in
which profits are earned. This is a deferred payment of the firms obligation and thus, is
a source of finance.
Deferred income represents funds received by the firm for goods and services which it
has agreed to supply in future. These receipts increase the firms liquidity in the form ofcash; therefore, they constitute an important source of financing.
Bank finance for working capital
Banks are the main institutional source of working capital finance in India. After trade
credit, bank credit is the most important source of financing working capital
requirements.
Forms of bank finance
A firm can draw funds from its bank within the maximum credit limit sanctioned. It can
draw funds in the following forms:
Overdraft:
Under the overdraft facility, the borrower is allowed to withdraw funds in excess of the
balance in his current account up to a certain specified limit during a stipulated period.
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It is a very flexible arrangement from the borrowers point of view since he can
withdraw and repay funds whenever he desires within the overall stipulations.
Cash credit:
The cash credit facility is similar to the overdraft arrangement. It is the most popular
method of bank finance for working capital in India. Under the cash credit facility, a
borrower is allowed to withdraw funds from the bank upto the sanctioned credit limit.
He is not required to borrow the entire sanctioned credit once, rather, he can draw
periodically to the extent of his requirements and repay by depositing surplus funds in
his cash credit account. Cash credit limits are sanctioned against the security of current
assets. Cash credit is a most flexible arrangement from the borrowers point of view.
Purchasing or discounting of bills:
Under the purchase or discounting of bills, a borrower can obtain credit from a bank
against its bills. The bank purchases or discounts the borrowers bills. Before
purchasing or discounting the bills, the bank satisfies itself as to the creditworthiness of
the drawer. When a bill is discounted, the borrower is paid the discounted amount of the
bill. The bank collects the full amount on maturity.
Letter of credit:
Suppliers, particularly the foreign suppliers, insist that the buyer should ensure that his
bank will make the payment if he fails to honour its obligation. This is ensured through
a letter of credit(L/C) arrangement. A bank opens an L/C in favour of a customer to
facilitate his purchase of goods. If the customer does not pay to the supplier within the
credit period, the bank makes the payment under the L/C arrangement. This
arrangement passes the risk of the supplier to the bank. Bank charges the customer for
opening the L/C.
Working capital loan:
A borrower may sometimes require ad hoc or temporary accommodation in excess of
sanctioned credit limit to meet unforeseen contingencies. Banks provide such
accommodation through a demand loan account or a separate non-operable cash credit
account. The borrower is required to pay a higher rate of interest above the normal rate
of interest on such additional credit.
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Commercial Paper
Commercial paper is an important money market instrument in advanced countries like
USA to raise short-term funds. In India, the Reserve Bank of India (RBI) introduced the
commercial paper scheme in the Indian money market in 1989. Commercial paper is a
form of unsecured promissory note issued by firms to raise short-term funds. The
commercial paper market in the USA is a blue-chip market where financially sound and
highest rated companies are able to issue commercial papers. The buyers of commercial
papers include banks, insurance companies, unit trusts and firms with surplus funds to
invest for a short period with minimum of risk. Given this investment objective of the
investors in the commercial paper market, there would exist demand for commercial
papers of highly creditworthy companies.
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COMPANY PROFILE
ICICI Bank is Indias second-largest bank. It has a network of about 614 branches and
extension counters and over 2,200 ATMs. ICICI Bank offers a wide range of banking
products and financial services to corporate and retail customers through a variety of
delivery channels and through its specialized subsidiaries and affiliates in the areas of
investment banking, life and non-life insurance, venture capital and asset management.
ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross
border needs of clients and leverage on its domestic banking strengths to offer products
internationally.
ICICI Bank currently has subsidiaries in the United Kingdom, Russia and Canada,branches in Singapore, Bahrain, Hong Kong, Sri Lanka and Dubai International
Finance Centre and representative offices in the United States, United Arab Emirates,
China, South Africa and Bangladesh. Our UK Subsidiary has established a branch in
Belgium. ICICI Bank is the most valuable bank in India in terms of market
capitalization. ICICI Banks equity shares are listed in India on the Bombay stock
Exchange and the National Stock Exchange of India Limited and its American
Depositary Receipts ((ADRs) are listed on the New York Stock Exchange (NYSE).
ICICI Bank has formulated a Code of Business Conduct and Ethics for its directors and
employees. At June 5, ICICI Bank, with free float market capitalization* of about Rs.
480.00 billion ranked third amongst all the companies listed on the Indian Stock
exchanges. ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian
financial institution, and was its wholly-owned subsidiary. ICICIs shareholding in
ICICI Bank was reduced to 46% through a public offering of shares in Indian fiscal
1998, an equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI
Banks acquisition of Bank of Madura Limited in all-stock, amalgamation in fiscal
2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and
fiscal 2002.
ICICI was formed in 1955 at the initiative of the World Bank, the Government of India
and representatives of Indian industry. The principal objective was to create a
development financial institution for providing medium-term and long-term project
financing to Indian businesses. In the 1990s, ICICI transformed its business from adevelopment financial institution offering only project finance to a diversified financial
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services group offering a wide variety of products and services, both directly and
through a number of subsidiaries an affiliates like ICICI Bank. In 1999, ICICI become
the first Indian company and the first bank or financial institution, from non-Japan Asia
to be listed on the NYSE.
After consideration of various corporate structuring alternatives in the context of the
emerging competitive scenario in the Indian banking industry, and the move towards
universal banking, the managements of ICII and ICICI Bank formed the view that the
merger of ICICI with ICICI Bank would be the optimal strategic alternative for both
entities, and would create the optimal legal structure for the ICICI groups universal
banking strategy.
The merger would enhance value for ICICI shareholders through the merged entittys
access to low-cost deposits, greater opportunities for earning fee-based income and the
ability to participate in the payments system and provide transaction-banking services.
The merger would enhance value for ICICI Bank shareholders through a large capital
base and scale of operations, seamless access to ICICIs strong corporate relationships
built up over five decades, entry into new business segments, hither market share in
various business segments, particularly fee-based services, and access to the vast talent
pool of ICICI hand its subsidiaries. In October 2001, the Boards of Directors of ICICI
and ICICI Bank approved the merger of ICICI Personal Financial Services Limited and
ICICI Capital Services Limited, with ICICI Bank
The merger was approved by shareholders of ICICI and ICICI Bank in January 2002,
and by the High Court of Judicature at Mumbai and the Reserve Bank of India in April
2002. Consequent to the merger, the ICICI groups financing and banking operations,
both wholesale and retail, have been integrated in a single entity.
*Free float holding excludes all promoter holdings, strategic investments and cross
holdings among public sector entities. ICICI Bank disseminates information on its
operation and initiatives on a regular basis. The ICICI Bank website serves as a key
investor awareness facility, a lowing stake holders to access information on ICICI
Bank at their convenience. ICICI Banks dedicated investor relations personal play a
proactive role in disseminating information to both analysts and investors and respond
to specific queries.
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LITRATUR REVIEW
Working Capital Management is the process ofplanning and controlling the level and
mix of current assets of the firm as well as financing these assets. Specifically, Working
Capital Management requires financial managers to decide what quantities of cash,
other liquid assets, accounts receivables and inventories the firm will hold at any point
of time.
Working capital is the capital you require for the working i.e. functioning of your
business in the short run.
Gross working capital refers to the firms investment in the current assets and includes
cash, short term securities, debtors, bills receivables and inventories.
It is necessary to concentrate on the fact that the investment in the current assets should
be neither excessive nor inadequate.
WC requirement of a firm keeps changing with the change in the business activity and
hence the firm must be in a position to strike a balance between them. The financial
manager should know where to source the funds from, in case the need arise and where
to invest in case of excess funds.
The dangers of excessive working capital are as follows:
1. It results in unnecessary accumulation of inventories. Thus the chances of
inventory mishandling, waste, theft and losses increase
2. It is an indication of defective credit policy and slack collection period.
Consequently higher incidences of bad debts occur which adversely affects
the profits.
3. It makes the management complacent which degenerates into managerial
inefficiency
4. Tendencies of accumulating inventories to make speculative profits grow.
This may tend to make the dividend policy liberal and difficult to copes with
in future when the firm is unable to make speculative profits.
The dangers of inadequate working capital are as follows:
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1. It stagnates growth .It becomes difficult for the firms to undertake
profitable projects for non-availability of the WC funds.
2. It becomes difficult to implement operating plans and achieve the firms
profit targets
3. Operating inefficiencies creep in when it becomes difficult even to meet
day-to-day commitments.
4. Fixed assets are not efficiently utilized. Thus the rate of return on
investment slumps.
5. It renders the firm unable to avail attractive credit opportunities etc.
6. The firm loses its reputation when it is not in position to honor its short-
term obligations. As a result the firm faces a tight credit terms.
Net working capital refers to the difference between the current assets and the current
liabilities. Current liabilities are those claims of outsiders, which are expected to mature
for payment within an accounting year and include creditors, bills payable, bank
overdraft and outstanding expenses.
When current assets exceed current liabilities it is called Positive WC and when current
liabilities exceed current assets it is called Negative WC.
The Net WC being the difference between the current assets and current liabilities is a
qualitative concept. It indicates:
The liquidity position of the firm
Suggests the extent to which the WC needs may be financed by permanent
sources of funds
It is a normal practice to maintain a current ratio of 2:1. Also, the quality of current
assets is to be considered while determining the current ratio. On the other hand a weak
liquidity position poses a threat to the solvency of the ICICI BANK. and implies that it
is unsafe and unsound. The Net WC concept also covers the question of judicious mix
of long term and short-term funds for financing the current assets.
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Permanent and variable working capital:
The minimum level of current assets required is referred to as permanent working
capital and the extra working capital needed to adapt to changing production and sales
activity is called temporary working capital.
NEED AND IMPORTANCE OF WORKING CAPITAL MANAGEMENT
The importance of working capital management stems from the following reasons:
1. Investment in current assets represents a substantial portion of the total
investment.
2. Investments in current asset and the level of current liabilities have to be gearedquickly to change in sales, which helps to expand volume of business.
3. Gives ICICI Bank. the ability to meet its current liabilities
4. Take advantage of financial opportunities as they arise.
A firm needs WC because the production, sales and cash flows are not instantaneous.
The firm needs cash to purchase raw materials and pay expenses, as there may not be
perfect matching between cash inflows and outflows. Cash may also be held up to meet
future exigencies. The stocks of raw materials are kept in order to ensure smooth
production and to protect against the risk of non-availability of raw materials. Also
stock of finished goods has to be maintained to meet the demand of customers on
continuous basis and sudden demand of some customers. Businessmen today try to
keep minimum possible stock as it leads to blockage of capital. Goods are sold on credit
for competitive reasons. Thus, an adequate amount of funds has to be invested in
current assets for a smooth and uninterrupted production and sales process. Because of
the circulating nature of current assets it is sometimes called circulating capital.
All firms do not have the same WC needs .The following are the factors that affect the
WC needs:
1. Nature and size of business: The WC requirement of a firm is closely
related to the nature of the business. We can say that trading and financial
firms have very less investment in fixed assets but require a large sum ofmoney to be invested in WC. On the other hand Retail stores, for example,
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have to carry large stock of variety of goods little investment in the fixed
assets.
Also a firm with a large scale of operations will obviously require more WC than the
smaller firm. The following table shows the relative proportion of investment in current
assets and fixed assets for certain industries:
Each component of working capital namely inventory, receivables and payables has
two dimensions time and money. When it comes to managing working capital - Time Is
Money. Therefore, if cash is tight, consider other ways of financing capital investment -
loans, equity, leasing etc. Similarly, if you pay dividends or increase drawings, these
are cash outflows remove liquidity from the business.
If you ....... Then ......
Collect receivables (debtors) faster You release cash from the cycle
Collect receivables (debtors) slower Your receivables soak up cash
Get better credit from suppliers You increase your cash resources
Shift inventory (stocks) faster You free up cash
Move inventory (stocks) slower You consume more cash
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Operating Cycle Of Non Manufacturing Firms / Operating Cycle Of Service And
Financial Firms
Operating cycle of non-manufacturing firm like the wholesaler and retail includes
conversion of cash into stock of finished goods, stock of finished goods into debtors
and debtors into cash. Also the operating cycle of financial and service firms involves
conversion of cash into debtors and debtors into cash.
Thus we can say that the time that elapses between the purchase of raw material
and collection of cash for sales is called operating cycle whereas time length
between the payment for raw material purchases and the collection of cash for
sales is referred to as cash cycle. The operating cycle is the sum of the inventory
period and the accounts receivables period, whereas the cash cycle is equal to the
operating cycle less the accounts payable period.
DEBTORS
CASH
STOCK OF
FINISHED
GOODS
DEBTORSCASH
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ORDER PLACED
STOCK ARRIVES
INV. PERIOD
CASH Pd. FOR MATERIALS
OPERATING CYCLE
FIRM REC. INVOICE
A/CS Pay.Period
CASH RECD.
A/CS REC. PERIOD
CASH CYCLE
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RESEARCH METHODOLOGY
The objective of working capital management is to maintain the optimum balance of
each of the working capital components. This includes making sure that funds are held
as cash in bank deposits for as long as and in the largest amounts possible, thereby
maximizing the interest earned. However, such cash may more appropriately be
invested in other assets or in reducing other liabilities. My objectives of analyzing
working capital management in ICICI BANK are as follows:
To study the method which ICICI BANK is using to ascertain its working
capital requirement?
To learn about the sources from which ICICI BANK is procuring funds to fulfill
its working capital requirements.
To study where the procured funds have been used by ICICI BANK.
To study whether the company is running effectively with as little money tied
up in current accounts as possible.
To analyze whether the method being used for ascertainment of working capital
requirement is efficient or not.
To have an appreciation of the financial environment within which business
operates.
f. Methodology
METHODOLOGY
The study is based on personal decision, interview schedules, documentary observation;
the data has been collected from the executives of the organization and through the
published sources.
RESEARCH
The research work is restricted only to the ICICI BANK SYSTEM. The study is based
on the outcomes of personal interviews and documentary observation. But the extreme
care has been taken to involve the constructive suggestion from the executives. The
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success of research basically depends upon the method, which is adopted to solve the
research problem i.e.
a) To collect desired information and data in a systematic manner.
b) Appropriate selection of method is necessary.
The first & foremost step in any research procedure is:-
STEP 1: Problem Formulation
It is a very important step which has to be understood properly and clearly on which the
study is based because it tells the scope of the study and it should not go beyond it nor
should execute some irrelevant aspect. In this case the study is based on how ICICIBANK manages its Working capital requirements.
STEP 2: Objectives of the Study
After the problem formulation the objectives should be clear through which specific
type of information can be collected. The objective of this is to study about the
management of Working Capital for day to day business transactions.
STEP3: Determine source data
The third step includes the collection of data, which is from the source i.e. primary
secondary data. After the collection of data, it should be organized and analyzed to
check whether the objectives are fulfilled or not.
After analyzing the data investigation of research had worked out with the help of
following steps:
Research design
Tools & techniques
RESEARCH DESIGN:
A research is an arrangement of conditions for the collection & analysis of data in a
manner that aims the research purpose and achievements of goal with economy in
procedure depending on research problem. The study of Working Capital is generallybased on documentary evidences.
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TOOLS AND TECHNIQUES:
In order to conduct the study the following methods were adopted.
1. Personal Discussion: There is certain information related to the subject which isknown to employees of the office so through connecting with the employees
and executives the information is gathered. Like, about the company profile, its
inception, growth etc.
2. Direct Personal Interviews: The investigator personally approaches the
concerned people and asks them to furnish information, which is of material
input for the enquiry. Therefore these ideas, suggestions views are collected on
the topic through interview.
3. Documentary observation: The investigator consults the secondary sources like
journals, annual reports, magazines, books, unpublished material from library,
internet and the area office.
COLLECTION OF DATA
Primary data: are those that are collected for the first time by the investigator and the
primary data used ad collected for this study are:-
Direct Personal Interview with my project guide at ICICI BANK
Indirect Oral Investigation auditors and other concerned employees at ICICI
BANK
Information through e-mail about the components of operating cycle from the
ICICI BANK At Delhi.
Secondary data: are not collected but obtained from the published and unpublished
sources and the secondary data collected for this study are:-
Published data about ICICI BANK , through newspapers, magazines, research
institutes, journals and books.
Unpublished data through scholars, libraries, area office in ICICI BANK .
Company information from their ICICI BANK S official website
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DATA ANALYSIS AND FINDING
CIRCULATION SYSTEM OF WORKING CAPITAL
In the beginning the funds are obtained by issuing shares, often supplemented by long
term borrowings. Much of these collected funds are used in purchasing fixed assets and
remaining funds are used for day to day operation as pay for raw material, wages
overhead expenses. After this finished goods are ready for sale and by selling the
finished goods either account receivable are created and cash is received. In this process
profit is earned. This account of profit is used for paying taxes, dividend and the
balance is ploughed in the business.
Working capital is considered to efficiently circulate when it turns over quickly. As
circulation increases, the investment in current assets will decrease. Current assets
turnover ratio speaks about the efficiency of ICICI bank in the utilisation of current
assets. Fast turnover current assets results in a better rate on investment.
Table showing Current Assets Turnover Ratio
Year Ratio (in times)
207 1.78
2008 2.98
2009 1.98
Average: 2.24
The ratio average is 2.24 times in the study period of 3 years. In 2008 current assets
turnover ratio is highest one i.e. 2.98 during the 3 year study. Reasons being during this
0
0.5
1
1.5
2
2.5
3
2007 2008 2009
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year company has achieved sales growth 44.36% over the previous year and additional
activity needs more funds.
ICICI BANK LTD.
Ratios useful to analyze working capital management
(A) Efficiency Ratios 2007 2008 2009 Ideal Ratio
1. Working Capital Turnover (times) 4.84 10.23 5.71 -
2. Current Assets Turnover (times) 1.78 2.98 1.97 -
3. Inventory turnover (times) 9.49 9.20 7.88 -
(B) Liquidity Ratio
1. Current Ratio 2.12 1.80 2.41 2.0
2.AcidTestRatio 1.15 0.98 1.03 1.0
3. Cash Ratio 0.57 0.08 0.05 0.5
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Interpretation (Ratio Analysis)
The utilization rate of net working capital as depicted by working capitalturnover ratio is fluctuating during the period. It shows that working capital has
not been effectively used over the period of years except in the year 2008.
As shown by current assets turnover ratio, the utilisation of current assets in
terms of sales has shown a decreasing trend which shows that current assets has
been effectively used to achieve sales.
Again if we look at the efficiency with which individual elements of workingcapital have been utilized, the picture of inventory turnover is not very bright.
Receivables turnover also shows a declining trend. Generally such a situation
does not suit the company.
As we look at the extent of liquidity of working capital, we notice that the ratio
shows an increasing trend. This indicates improvement on the liquidity front.
(C) Structural Health of Working Capital
Ratio/Year 2004 2005 2006
1. CA 0.31 0.26 0.35
2. CL 0.15 0.14 0.14
3. Cash to CA 0.27 .04 0.02
4. Receivables to CA 0.27 0.50 0.40
5. Loans and Advances to CA 0.15 0.19 0.15
6. Inventory to CA 0.42 0.38 0.50
7. RM to Inventory 0.44 0.46 0.30
8. Stock spares to inventory 0.12 0.14 0.11
9. WIP to inventory 0.06 0.08 0.03
10. Finished Goods to Inventory 0.38 0.32 0.56
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If we analyze the structural health of working capital, the proportion of current
assets to total assets has been appropriate during this period.
Such a higher proportion of current asset in the assets portfolio of ICICI Bank. is quite
acceptable.
Our analysis above indicates the areas of concern to management in making best
possible use of resources. Decreasing efficiency in the use of current assets hints of the
possibility of problems in working capital management. On further analysis, inventory
constitutes a major proportion of total current assets. Among its various components,
raw materials, stocks, spared and finished goods in particular need further analysis as
here stand out to the problem areas.
Cash Flow Statement (200 8-09)
Sources Amount A
( in Lacs)
Application Amount B
(in Lacs)
Proceeds from
borrowings
162.37 Loss from operation 185.27
Sale of assets 27.34 Change in cash 5.01
Total 190.28 190.28
Summary of Cash Flow Analysis
a) Cash from operation to total cash available
= 185.31/190.28 = 97.38%
b) Cash from long term sources to total cash available
= 162.37/190.28 = 85.33%
c) Proceeds from sale of non-current assets to total cash
= 17 14/19028 = 0.90%
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Schedule of Changes in Working Capital
Particulars Amount
(in lacs)
Changes in Working
Capital
Dec2008 Dec2009 Increase
(Debit)
Decrease
(Credit)
Current Assets
Inventories 93.87 146.36 52.48 -
Sundry Debtors 123.22 114.71 - 8.51
Cash and Bank
balances
10.64 5.63 - 5.01
Other current assets 20.14
247.87
21.66
288.36
1.52 -
Current Liabilities 137.02 116.07 20.95 -
Working capital (CA-CL) 110.85 172.29
Increase in Working Capital 61.44 - 61.44
172.29 172.29
74.96 74.96
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Fund Flow Statement (200 8-09)
Sources Amount A
(in lacs)
Application Amount B
(in Lacs)
Increase in loan 162.37 Increase in working capital 61.44
Sale of asset 22.94 Loss from operation 123.87
Total 185.31 185.31
Summary of Fund Flow Analysis
1. Increase in net working capital 61.44
2. Funds from operations to finance permanent address (123.87)
3. Ratio of fund flow from operations to total funds in the business (-)
123.87/85.31 = (66.85)
Interpretation (Fund Flow Statement)
1. Networking capital has been increased over the years, which has increased
liquidity
2. Company should take corrective actions to covert loss from operation to funds
from operation.
3.1 CURRENT RATIO:
This is the most widely used ratio. It is the ratio of current assets and current liabilities.
It shows a firms ability to cover its current liabilities with its current assets. Generally
2:1 is considered ideal for a concern i.e., current assets should be twice of the currentliabilities. If the current assets are two times of the current liabilities, there will be no
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adverse effect on business operations when the payment of current liabilities is made.
If the ratio is less than 2, difficulty may be experienced in the payment of current
liabilities and day to day operation of the business may suffer. If the ratio is higher
than 2, it is comfortable for the creditor but, for the business concern, it is indicator of
idle funds and a lack of enthusiasm for work. It is calculated as follows:
CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES
For the calculation this ratio
Current assets include inventories, sundry debtors, cash and bank
balances and loans & advances
Current liabilities include Current liabilities and provisions.
3.2. QUICK RATIO (OR) ACID TEST RATIO:
This is the ratio of liquid assets to current liabilities. Is shows a firms ability to
meet current liabilities with its most liquid or quick assets. The standard ratio 1:1 is
considered ideal ratio for a concern. Liquid assets are those, which can be easily
converted in to cash within a short period of time without loss of value. This ratio can
be calculated by using the formula:
LIQUID RATIO = LIQUID ASSETS / CURRENT LIABILITIES
For the calculation of this ratio
A liquid asset of quick asset includes Sundry Debtors, Cash and Bank balance
and Loan & Advances.
Current liabilities include Current Liabilities and Provisions.
3.3. CASH RATIO:-
Generally receivables are more liquid the inventories, but there may be dough regarding
their reliability in time. Hence only absolute liquid assets such as Cash in hand, Cash at
bank, Marketable Securities are ideal taken into consideration 1:2 is considered as ideal
ratio. This ratio also called absolute Liquid Ratio.
This ratio is shown as :-
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CASH RATIO = ABSOLUTE LIQUID ASSETS / CURRENT LIABITIES
3.4. INTERNAL MEASURE:-
Yet another ratio, which assets a firms ability to meet its regular cash expenses, the
internal measure relates liquid assets to average daily operating cash out flows. The
daily operating expenses will be equal to cost of goods sold plus selling administrative
and general expenses less depreciation divided by number of days in the year.
INTERNAL MEASURE = CURRENT ASSETS INVENTORY / AVERAGE
DAILY OPERATING EXPENCES.
3.5. NET WORKING CAPITAL RATIO:-
The difference between current assets and current liabilities including short term bank
borrowing is called Net Working Capital or Net Current Assets. Net Working Capital in
sometimes used as a measure of a firms liquidity. It is considered that, between two
firms, the one having the larger Net Working Capital has the greater the ability to meet
its current obligation. This is not necessarily so the measure of liquidity is a
relationship, rather than the difference between Current Assets and Current Liabilities.
Net Working Capital how ever, measure the firms potential reservoir of funds. It can
be related to net assets.
NET WORKING CAPITAL = NET WORKING CAPITAL / NET ASSETS.
3.6. INTEREST COVERAGE RATIO:-
This ratio indicates whether the earnings of a firm are sufficient to pay interest charges
periodically or not. In other words, it is calculated to know whether the creditors are
secured or unsecured, in respect of their periodical interest income it is also called as
Debt Secure Ratio or fixed charges cover.
INTEREST COVERAGE RATIO = NET PROFIT BEFORE INCOME TAX /INTEREST CHARGES.
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3.7. INVENTORY TURNOVER RATIO:
This ratio, also known as Stock Turnover Ratio, establishes relationship
between cost of goods sold during a given period and the average amount of inventory
held during that period. This ratio reveals the number of items finished stock is turned
over during a given accounting period. Higher the ratio the better it is because it shows
that finished stock rapidly turned over. On the other hand, a low stock turnover ratio is
not desirable because it reveals the accumulation of obsolete stock, or the carrying of
too much stock. This ratio is calculated as follows:
INVENTORY TURNOVER= COST OF GOODS SOLD / AVERAGE STOCK
For the calculation of this ratio
COST OF GOODS COLD = OPENING STOCK + PURCHASES +
MANUFACTURING EXPENSES - CLOSING STOCK
AVERAGE STOCK = OPENING STOCK + CLOSING STOCK /2
SIGNIFICANCE
If this ratio is high, it indicates the efficient of management in converting stock into
cash quickly, sound liquidity position and liquidity of goods maintained
3.8. DEBTORS TURNOVER RATIO:
When a firm sells goods on credit, book debts are created. Debtors are
expected to be converted into cash over a short period. To a great extent, the amount
and quality of debtors determine the liquidity position of the firm. Debtors Turnover
Receivables Turnover is calculated by dividing credit sales by average debtors. This
ratio indicates the number of times, on an average the debtors or receivables turnover
each year. Generally, the higher the value of debtors turnover, the more efficiency is
the management of assets. Sometimes, data relating to credit sales, opening balance
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and closing balance of debtors may not be available. Then the debtors turnover can be
calculated by dividing total sales by closing balance of debtors.
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DEBTORS TURNOVER RATIO = CREDIT SALES / AVERAGE DEBTORS
(OR)
AVERAGE TRADE DEBTORS = TOTAL SALES / CLOSING DEBTORS
(OR)
AVERAGE TRADE DEBTORS = (OPENING TRADE DEBTORS + BILLS
PAYABLE) + (CLOSING TRADE DEBTORS + BILLS RECIEVABLES) / 2
SIGNIFICANCE:-
Higher D.T.O Ratio indicators more efficient collection of debtors and signifies the
more liquidity of debts and lower D.T.O Ratio, indicates more inefficient collection of
debts and signifies less liquidity of debts.
3.9. COLLECTION PERIOD:-
The average number of days for which Debtors remain outstanding is called the average
collection period and can be computed as follows.
AVERAGE COLLECTION PERIOD = DEBTORS / SALES * 360
3.10. FIXED ASSETS TURNOVER RATIO:-
Fixed Assets turn over ratio is calculated to measure the adequacy or otherwise of
shown as Investment in Fixed Assets.
This ratio is shown as.
FIXED ASSETS TURN OVER RATIO = COST OF GOODS SOLD (OR)
SALES / NET FIXED ASSETS.
SIGNIFICANCE:-
This ratio is very significant for the manufacturing concerns. High ratio indicates
efficiency in work performance where as low ratio means inadequate investment in
fixed assets.
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3.11. NET ASSETS TURN OVER RATIO:-
The firm can compute net assets turnover simply by dividing sales by net assets
NET ASSETS TURNOVER = SALES / NET ASSETS
It may be recalled that net assets (or) net fixed assets and net current i.e. current assets
equal capital liabilities. Since net assets equal to net capital employed, net assets
turnover may also be called capital employed turnover.
3.12. RETURN ON EQUITY:-
This ratio is also known as Net Worth ratio or Return on Share Holders
Funds. ROE established relationship between Net Profit after Tax and Share HoldersFunds. It is expressed as
ROE = NET PROFIT (after tax) / SHAREHOLDERS FUND * 100
SHAREHILDERS: - EQUITY SHARE CAPITAL + PREFERANCE SHARE
CAPITAL + ACCUMULATED.PROFITS ACCUMULATED LOSES
SIGNIFICANCE:-
R.O.E is very significant in measuring the overall profitability or operational efficiency
of ICICI Bank. . It enables the management to know whether the basic objective of the
business maximization of profits is achieved or not and the shareholders to decide
whether their investment is safe and remunerative of ICICI Bank. can also be
measured by means of a trend ratios calculated for several number of years.
CURRENT ASSETS TURNOVER RATIO:
This ratio measures the contribution of current assets to sales generation. If we
get higher ratio, it indicates that there is more contribution of Current Assets in
generating sales. On the other hand, if we get lower ratio, it indicates that there is not
much contribution of Current Assets in generating of sales. It is calculated by dividing
the Net Sales value by the Current Assets Value.
CURRENT ASSETS TURNOVER RATIO = NET SALES / CURRENT ASSETS
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For the calculation of this ratio
Net Sales included all Sales during the particular year.
Current Assets included inventories, Sundry Debtors, Cash & Bank Balance andLoans & Advances.
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CURRENT RATIO:
Current ratio is the relation ship between current assets and current liabilities. It is
expressed as
Current ratio = {current assets / current liabilities}
YearCurrent assets
(Rs)
Current
liabilities(Rs)Ratio
2004-2005 408,239,314 15,72,02,165 2.60
2005-2006 23,27,51,034 6,12,73,808 3.81
2006-2007 22,118,248 5,45,10,612 4.06
2007-2008 22,080,768 6,00,75,063 3.67
2008-2009 256,866,676 7,24,93,761 3.54
INTERPRETATION:-
During 2004-2009, the current ratio of the ICICI BANK. was 2.60, 3.81 4.06 3.67 and
3.54. This indicates that for every rupees of Current Liability,ICICI BANK. has more
that 2 rupees to pay for it for all years of study the current ratio is more than the
standard ratio of 2:1
3.1.2. QUICK RATIO:
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Quick ratio is the relationship between quick assets and current assets and current assets
means current assets-stock-prepaid expenses. Quick ratio is also means Liquid ratio or
Acid test ratio. This ratio may be expressed as follows.
Quick ratio = Quick assets
Current liabilities
Year Quick assets(RS) Current
liabilities(RS)
Ratio
2004-2005 29,12,88,906 15,72,02,105 1.85
2005-2006 14,06,44,910 6,12,73,808 2.29
2006-2007 15,24,45,596 5,45,10,612 2.83
2007-2008 16,76,74,581 6,00,75,063 2.79
2008-2009 19,43,93,190 7,24,93,761 2.68
1.85
2.29
2.83 2.792.68
0
0.5
1
1.5
2
2.5
3
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
RATIO
YEARS
QUICK RATIO
RATIO
INTERPRETATION:- standard ratio is 1:1
During 2004-2009 , the quick ratio of the ICICI BANK. was 1.85, 2.29, 2.83, 2.79,
2.68 times. It was more than the standard ratio of 1:1
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3.1.3. CASH RATIO:-
Cash ratio = Absolute Liquid Ratio / Current Ratio
Year Absolute Liquid
Assets
Current
liabilities(RS)
Ratio
2004-2005 3,39,69,015 15,72,02,165 0.22
2005-2006 2,47,36,325 6,12,73,808 0.40
2006-2007 2,16,26,781 5,45,10,612 0.39
2007-2008 4,17,12,910 6,00,75,063 0.69
2008-2009 4,28,47,929 7,24,93,761 0.59
0.22
0.4 0.39
0.69
0.59
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
RATIO
YEARS
CASH RATIO
RATIO
INTERPRETATION:-
During 2004-2009 , the Cash Ratio of the ICICI BANK. was 0.22, 0.44, 0.39, 0.69, and
0.59. times. During 2008-2009 on an average ICICI BANK. has 0.45 times of current
liabilities.
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3.1.4. INTERNAL MEASURE:-
Internal measure = {Current Assets Inventory / Average Daily Operating
Expenses}.
YearCurrent assets
Inventory
Average Daily
Operating
Expenses
Ratio
2004-2005 29,12,88,906 15,05,888 193.43
2005-2006 14,06,44,910 9,12,301 154.16
2006-2007 15,42,45,396 6,58,809 234.13
2007-2008 16,76,74,581 7,87,168 213.01
2008-2009 19,43,93,190 11,89,431 165.95
0
50
100
150
200
250
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
193.43
154.16
234.13
213.01
165.95
RATIO
YEARS
INTERNAL MEASURE
RATIO
INTERPRETATION:-
During 2005-2006 Internal Measure was 193.43 days. This indicates that ICICI BANK.
will be able to run the business without cash for about 193.43 days. During 2006-2007
the measure was 154.16, 234.13, 213.01, 165.95, days. During the period of study
2008-2009 ratio has reduced i.e. 193.43 days to 56 days.
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3.1.5. NET WORKING CAPITAL RATIO:-
Net working capital = Net Working capital / Net Assets.
YearNet Working
CapitalNet Assets Ratio
2004-2005 25,53,14,751 28,75,84,831 0.89
2005-2006 18,00,92,070 21,79,29,890 0.83
2006-2007 1,78,73,80,54 21,51,16,997 0.83
2007-2008 17,02,24,200 20,68,27,087 0.82
2008-2009 1,93,67,86,78 23,04,00,145 0.84
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
0.89
0.83 0.83 0.820.84
RATIO
YEARS
NET WORKING CAPITAL
INTERPRETATION:-
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During 2004-2009 , The Net Working Capital Ratio of the ICICI BANK. was 0.89,
0.83, 0.83, 0.823 and 0.84 times. For all the years of Analysis, for one rupee of Net
assets with the ICICI BANK. , it has less than one rupee of Net Working Capital.
3.1.6. INTEREST COVERAGE RATIO:-
Interest coverage ratio = Earning Before Income Tax / Interest charges.
YearEarning Before
Income TaxNet Assets Ratio
2004-2005 5,70,88,927 2,11,55,402 2.69
2005-2006 3,72,61,281 1,84,06,065 2.02
2006-2007 1,94,17,633 91,56,027 -2.12
2007-2008 3,15,09,427 85,41,299 3.68
2008-2009 7,28,92,192 83,80,203 8.69
-4
-2
0
2
4
6
8
10
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
2.69 2.02
-2.12
6.68
8.69
RATIO
YEARS
INTEREST COVERAGE RATIO
RATIO
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INTERPRETATION:-
During 2004-2009 , the interest coverage ratio of the ICICI BANK. was 2.69, 2.02,
-2.12, 3.68, 8.69 times. During 2002-2004 and 2005-2007, it has a satisfactory interest
coverage ratio. Bit During 2004-2005, it showed a negative rate; indicate the inefficient
operation of the ICICI BANK. .
3.1.7. INVENTORY TURNOVER RATIO:-
Inventory Turnover Ratio = Cost Of Goods Sold / Average Inventory.
YearCost Of Goods
Sold
Average
Inventory
Ratio Reciprocal
Days
2004-2005 38,36,34,765 10,15,48,932 3.78 95.23
2005-2006 21,50,49,422 10,50,28,266 2.05 175.06
2006-2007 18,01,30,846 7,99,89,388 2.25 160
2007-2008 21,09,96,524 6,00,02,919 3.52 102.2
2008-2009 28,27,08,034 11,55,73,673 2.45 146.93
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0
0.5
1
1.5
2
2.5
3
3.5
4
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
3.78
2.05 2.25
3.52
2.45RATIO
YEARS
INVENTORY TURNOVER RATIO
ratio
INTERPRETATION:-
During 2008-2009 the ICICI BANK. was turning its inventory of finished goods into
sales 7.5 times, 3.09, 2.45, 1.456, and 1.154, times in a year. It has shown a decreasing
trend during the period of study. The reciprocal of inventory turnover which gives the
average inventory holdings in a year shows that ICICI BANK. was holding inventory
for 48, 115, 147, 247, and 312 days in a year. From past two years it was very high,
indicating the poor management of sales affairs.
3.1.8 DEBTORS TURNOVER RATIO:-
Debtors Turnover Ratio = Credit Sales / Average Trade Debtors.
Year Credit SalesAverage Trade
DebtorsRatio
2004-2005 56,08,70,712 19,54,05,750 2.87
2005-2006 33,36,01,680 18,66,14,238, 1.78
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2006-2007 23,80,00,904 24,85,27,400 0.96
2007-2008 32,37,69,616 25,85,80,486 1.25
2008-2009 47,84,22,373 27,75,06,937 1.72
2.87
1.78
0.96
1.25
1.72
0
0.5
1
1.5
2
2.5
3
3.5
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
TIMES
YEARS
DEBTORS TURNOVER RATIO
Ratio
INTERPRETATION:-
During 2007-2008 the Debtors Turnover Ratio was around 2.87 times. This indicates
that the collection of debt is good in this year also indicates that debtors that debtors are
being connected into cash 2times in a year. During 2006-2007, 2008-2009, 2006-2007
the ratio was 1.78, 0.96, 1.25 1.72 times
3.1.9. Debtors Collection Period:
Collection Period = Debtors / Sales * 100.
Year
Debtors
Credit Sales Ratio
Days
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2004-2005 2,57,319,891 56,08,70,712 2.18 165.16
2005-2006 1,15,908,585 33,36,01,680 2.88 125.08
2006-2007 1,32,618,815 23,80,00,904 1.79 200.59
2007-2008 1,12,961,761 32,37,69,616 2.57 140.06
2008-2009 15,15,45,260 47,84,22,373 3.16 114.03
0
0.5
1
1.5
2
2.5
3
3.5
2004-20052005-20062006-20072007-20082008-2009
2.18
2.88
1.79
2.57
3.16
RATIO
YEARS
COLLECTION PERIOD
Ratio
INTERPRETATION:-
During 2004-2009 the ICICI BANK. was turning its debtors 165, 125, 200, 140, and
114 times in a year. During 2005-2006, it was high indicating the poor quality of
debtors. But during 2006-2007, it has shown declining trend indicating the
improvement of quality of debtors.
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3.1.10. FIXED ASSETS TURNOVER RATIO:-
Fixed Assets Turnover Ratio = Sales / Net Fixed Assets.
Year SalesNet Fixed
Assets
Ratio Reciprocal
Days
2004-2005 15,13,53,218 3,22,70,080 17.38 0.06
2005-2006 10,27,63,700 3,78,37,820 8.82 0.11
2006-2007 6,83,83,700 3,63,78,943 6.54 0.15
2007-2008 12,47,43,127 3,66,02,887 8.85 0.112
2008-2009 17,69,69,283 3,67,21,467 13.02 0.08
0
2
4
6
8
10
12
14
16
18
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
17.38
8.82
6.54
8.85
13.02
RATIOINTIMES
YEARS
FIXED ASSETS TURNOVER RATIO
Ratio
INTERPRETATION:-
During 2004-2009 , the FAT Ratio was 17.38, 8.82, 6.54, 8.85, and 13.02 times. The
reciprocal of this ratio was 0.06, 0.11, 0.15, 0.112, and 0.08. The Current Assets
Turnover Ratio was 2.19, 1.83, 1.33, 1.90, and 2.47, times. The reciprocal of this ratio
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was 0.46, 0.54, 0.75, 0.58, and 0.40 times. This indicates that for every one rupee of
sales ICICI BANK. needs respective 0.06 invested in FAs and 0.46 invested in CAs.
3.1.11. NET ASSETS TURNOVER RATIO:-
Net Assets Turnover Ratio = Sales / Net Assets.
Year Sales Net Assets Ratio
2004-2005 56,08,70,712 28,75,84,831 1.95
2005-2006 33,36,01,680 21,79,29,890 1.53
2006-2007 23,80,00,904 21,51,16,997 1.11
2007-2008 32,37,69,616 20,68,27,087 1.56
2008-2009 47,84,22,373 23,04,00,145 2.08
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0
0.5
1
1.5
2
2.5
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
1.95
1.53
1.11
1.56
2.08
RATIO(%)
YEARS
NET ASSETS TURNOVER RATIO
Ratio
INTERPRETATION:-
During 2004-2005 the Net Assets Turnover Ratio of the ICICI BANK. was 1.95 times
it implies the ICICI BANK. is producing Rs 1.95 of sales for 1 rupee of capital
employed in Net Assets. During 2008-2009 the Net Assets Turnover Ratio of the ICICIBANK. was 1.53, 1.11, 1.56, 2.08 times.
3.1.12. RETURN ON EQUITY:-
Return on Equity = Net Profit / Share Holders Funds * 100.
Year Net ProfitShare Holders
FundsRatio
2004-2005 2,21,25,320 9,10,04,379 24.31
2005-2006 1,22,92,460 10,10,11,016 12.17
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2006-2007 -95,21,547 9,03,83,661 -10.53
2007-2008 1,78,70,361 10,63,40,760 16.80
2008-2009 42,56,84,613 14,49,09,975 29.37
-15
-10
-5
0
5
10
15
20
25
30
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
24.31
12.17
-10.53
16.8
29.37
R.O.E(%)
YEARS
RETURN ON EQUITY
Ratio
INTERPRETATION:-
During 2004-2009 the return on equity of the ICICI BANK. was 24031, 12.17, -10.53,
16.80, and 29.37 %. It was very low during 2004-2005, where as 2007-2008 showed an
improvement by 29.37 %.
3.1.13 CURRENT ASSETS TURN OVER RATIO:
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Current Assets Turnover Ratio = {Sales / Net Current Assets}
Year Sales Net current Assets Ratio
Reciprocal
Ratio(Times)
2004-2005 56,08,70,712 25,53,14,751 2.19
0.46
2005-2006 33,36,01,680 18,00,92,070 1.85 0.54
2006-2007 23,80,00,904 17,87,38,054 1.33 0.75
2007-2008 32,37,69,616 17,02,24,200 1.90 0.53
2008-2009 47,84,22,373 19,36,78,678 2.47 0.40
0
0.5
1
1.5
2
2.5
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
2.19
1.85
1.33
1.9
2.47
Ratio(times)
years
Current Assets Turnover Ratio
ratio
Interpretation:
The Current Assets Turnover ratio was 2.19, 1.85, 1.33, 1.90, and 2.47 times. The
reciprocal of this ratio was 0.46, 0.54, 0.75,