A Project Report
On
“Study of assessment methods of working capital requirement”
For
“ank of !aharashtra”
y
"ai#ha$ % &agat
'nder the guidance of
!rs( So$ani
Su#mitted to
“'ni$ersity of pune”
)n partial fulfillment of the requirement for the award of the degree of master of
#usiness administration *!A+
,hrough
"ishwakarma institute of management
Pune- ./
1
0102',)"0 S'!!0R3
It gives me great pleasure to present this project report on working capital finance
at bank of Maharashtra, credit department, head office, Pune. The project was carried out
from 1
st
June !!" to #1
st
Jul$ !!".
The main objective of the project was to stud$ various t$pes of working capital
finance provided b$ banks. To know details the procedure of assessment of working
capital finance e%tended b$ banks.
&heels of business cannot move without mone$. 'vailabilit$ of mone$ is being
limited and wants being unlimited. (o procurement of fund is one of the important
functions in commercial ) non*commercial enterprises and utili+es it for ma%imi+ation
of business profits.
,usiness enterprises need funds to meet their different t$pes of re-uirements,
i. .ong*term re-uirement
ii. Medium*term re-uirement
iii. (hort*term re-uirement
&orking capital re-uirement is the short*term re-uirement. &orking capital is the
investment needed for carr$ing out da$*to*da$ operations of the business smoothl$. ,ank
is one of the important sources of working capital re-uirement. ,ank gives various
facilities to the borrowers.
In this project I have considered various banking facilities for the working capital
finance to the industries. It covers almost important aspect relating to assessment )
follow up of working capital finance. 'fter discussing the procedure followed b$ bank,
/or assessing working capital re-uirement case studies have been given with necessar$
data in the prescribed forms demonstrate the calculable done b$ bank to arrive at
ma%imum permissible bank finance. 'n inventor$ ) receivables constitute the major
portion of the total working capital re-uirement.
#
2ompany Profile
,he irth
0egistered on 11th (ept 12#3 with an authori+ed capital of 0s 1!.!! lakh and
commenced business on 4th /eb 12#1.
,he 2hildhood
5nown as a common man6s bank since inception, its initial help to small units has given
birth too man$ of toda$6s industrial houses. 'fter nationali+ation in 1212, the bank
e%panded rapidl$. It now has 12 branches 7as of #!th (eptember !!38 all over India.
The ,ank has the largest network of branches b$ an$ Public sector bank in the state of
Maharashtra.
,he Adult
The bank has fine tuned its services to cater to the needs of the common man and
incorporated the latest technolog$ in banking offering a variet$ of services.
Our Philosophy
o Technolog$ with personal touch.
Our 0m#lem
,he 4eepmal
o &ith its man$ lights rising to greater heights.
9
,he Pillar
o :ur institution* ($mboli+ing strength.
,he 5 !6s
($mbolising
• Mobilisation of Mone$
• Modernisation of Methods and
• Motivation of (taff.
Our Aims
The bank wishes to cater to all t$pes of needs of the entire famil$, in the whole countr$.
Its dream is ;:ne /amil$, :ne ,ank, Maharashtra ,ank;.
,he Autonomy
The ,ank attained autonomous status in 1224. It helps in giving more and more services
with simplified procedures without intervention of of its branches in rural areas.
3
Other Attri#utes
,ank is the convener of (tate level ,ankers committee
,ank has signed a Mo? with @AIM bank for co*financing of project e%ports
,ank offers Bepositor$ services and Bemat facilities in Mumbai.
,ank has captured 2".14> of its total business through computeri+ation.
1
O&02,)"0S
? To know the various t$pes of working capital finance provided b$ banks.
? To anal$+e in detail the procedure of assessment of working capital finance
e%tended b$ bank.
? To appl$ these procedure at a practical level with the help of case studies.
"
R0S0AR27 !0,7O4O8O93
This is anal$tical research area where we anal$ses information with cause and its
effects relationship. This anal$sis leads to the simple conclusions of whether to lend
mone$ to the institution for business.
'lso if the mone$ is lend then there is realit$ the norms are not alwa$s perfect and
hence it is essential to priorities stringent parameters and secondar$ parameters.
0esearch T$pe 'nal$tical
(ource of Bata Primar$ and (econdar$
(ample ?nit Industries appl$ing for loan
(ample Case studies
(ample Techni-ue 'llocation of Case
'nal$sis Tool used /inancial 'nal$sis
Primar$ BataD
? :bservation, Biscussion with the manager.
? The compan$ profile, annual reports have been obtained from ,:M.
(econdar$ BataD
(econdar$ data relating to the procedure of assessment of working capital finance, old
sanction proposals, 0,I guidelines etc. have been sourced from reference books.
4
)%,RO4'2,)O% ,O :OR
%9 2AP),A8
In accounting,E &orking capital is the difference between the inflow and outflow of
funds. In other words, it is the net cash inflow. It is defined as the e%cess of current assets
over current liabilities and provisions. In other words, it is net current assets or net
working capital.
' stud$ of working capital is of major importance to internal and e%ternal anal$sis
because of its close relationship with the da$*to*da$ operations of a business. &orking
Capital is the portion of the assets of a business which are used on or related to current
operations, and represented at an$ one time b$ the operating c$cle of such items as
against receivables, inventories of raw materials, stores, work in process and finished
goods, merchandise, notes or bill receivables and cash.
&orking capital comprises current assets which are distinct from other assets. In the first
instance, current assets consist of these assets which are of short duration.
&orking capital ma$ be regarded as the life blood of a business. Its effective provision
can do much to ensure the success of a business while its inefficient management can
lead not onl$ to loss of profits but also to the ultimate downfall of what otherwise might
be considered as a promising concern.
The funds re-uired and ac-uired b$ a business ma$ be invested to two t$pes of assetsD
1. /i%ed 'ssets.
2
. Current 'ssets
/i%ed assets are those which $ield the returns in the due course of time. The various
decisions like in which fi%ed assets funds should be invested and how much should be
invested in the fi%ed assets etc. are in the form of capital budgeting decisions. This can be
said to be fi%ed capital management.
:ther t$pes of assets are e-uall$ important i.e. Current 'ssets.
These t$pes of assets are re-uired to ensure smooth and fluent business operations and
can be said to be life blood of the business. There are two concepts of working capital —
can be financed from bank
borrowings. This method gives a minimum current ratio of 1D1. This method was
considered suitable onl$ for ver$ small borrowers where the re-uirement ! credit was less
than 0s 1! lacs
The borrower will contribute 3 > of the total current assets from long*term funds i.e.
owned funds and term borrowings. ' certain level of credit for purchases and other
current liabilities will be available to fund the building up of current assets and the bank
will provide the balance. Conse-uentl$, the current liabilities inclusive of bank borrowing
could not e%ceed "3 > of current assets. This method gives a current ratio of A(5 of core current assets, defined at the absolute
minimum level of raw material, processed stock, finished goods and stores, which are in
the pipeline. ' minimum level of the 3 > of the balance of the current assets should be
finance from the long term funds and term borrowings. This method covers straightness
the current ratio. The third is the ideal method. ,orrowers in the second stage are not
allowed to revert to the first stage. This method applies to all borrowers having credit
limit in e%cess of 0s.! lacs from the bank. Gowever this method was not accepted for
implementation.
In some cases, the net working capital was negative or 3 > of the working capital gap.
The new s$stems allowed this deficienc$ to be financed in addition to the permissible
bank finance b$ the bank. This kind of credit facilit$ is called working capital demand
loan, which was to be regulated over a period of time depending on the funds generating
capacit$ and abilit$ of the borrower.
The working capital demand loan is not allowed to be raised in the subse-uent $ear. /or
additional credit in subse-uent $ear, the borrowerLs long*term sources were re-uired to
provide 3 > of the additional working capital gap.
19
.( Style of credit<
The committee recommended the bifurcation of total credit limit into fi%ed and
fluctuating parts.
The fi%ed component is then treated as demand loan for the $ear representing minimum
level of borrowing, which the borrower e%pected to use through out the $ear.
The fluctuating component is taken care of b$ a demand cash credit. It could be partl$
used b$ wa$ of bills.
The new CC limit should be placed on a -uarterl$ budgeting reporting s$stem.
The interest rate on the loan components should be charged lower than the cash credit
amount. The 0,I has stipulated the interest differentiate at 1 >.
The cash credit limits sanctioned 7fluctuating8 are currentl$ !3 and the loan components
7fi%ed8 are 4! >.
C+ )%FOR!A,)O% S3S,0!<
The committee advocated for grater flow of information from borrower to the bank for
operational purpose and for the purpose of supervision and flow of up credit.
Information should be provided in the following formsD
13
I'AR,0R83 )%FOR!A,)O% S3S,0!< FOR!<
It should contain the production and sales estimates for the current and ne%t -uarter. also,
the current asset current liabilities estimates for the ne%t -uarter should be mentioned.
Iuarterly information system< Form ))<
It should contain the actual production and sales finger during the current $ear and the
latest completed $ear. 'lso, actual current asset and current liabilities for the latest
completed -uarter should be mention.
7alf year operating statement form )))A<
'ctual operating performance for the half $ear ended against the estimate should be
mentioned.
7alf year fund flow statement< Form )))<
It should contain the estimate as well as the actual sources and use of fund for the half
$ear ended.
,orrowers with a credit limit of more than1 crore are re-uired to suppl$ the -uarterl$
information.
The bank to follow up and supervise the use of credit should properl$ use the information
supplied b$ the borrower.
11
The bank must ensure that the bank credit was used for the purposes for which it is
granted, keeping in view the borrowers operation and environment.
The bank should confirm whether the actual result is in conformit$ with the e%pected
results. 'SJ* 1!> variation is considered normal.
The banker should be treated as a partner in the business with whom information should
be shared freel$ and frankl$.
The recommendations of the Tandon committee have been widel$ debated and critici+ed.
The bankers have found a difficult to implement the committeeLs recommendations.
Gowever, the Tandon committee has brought about a perceptible change in the outlook
and attitude of both the banker and their customers. The$ have become -uite aware in the
matter of making the best use of a scare resource like bank credit. The committee has
help in bringing the financial discipline through a balanced and integrated scheme of
bank lending. Most of banks in India, even toda$ continue to look at the needs of the
corporate in the light of recommendation of the Tandon committee
1"
27OR0 2O!!),,00
)%,RO4'2,)O%
In 'pril 12"2, the 0,I constituted a working group to review the s$stem of cash credit
under the chairmanship of Mr. 5. ,. Chore, Chief :fficer, B,C:B, 0,I. The main terms
of reference for the group were to review the cash credit discipline and relate credit limit
to production.
R02O!!0%4A,)O% OF 27OR0 2O!!),,00< -
ank credit< -
,orrower should contribute more funds to finance their working capital re-uirement and
reduce their dependence on bank credit. The committee suggested placing the second
method of lending as e%plain in the Tandon committee report.
In case the borrower is unable to compl$ with this re-uirement immediatel$, he would be
granted e%cess borrowing in the form of working capital loan 7&CT.8.
The &CT. should be paid in seam$ annual installments for a period not e%ceeding 3
$ears and a higher rate of interest than under the cash credit s$stem would be charged.
This procedure should appl$ to those borrowers, having working capital re-uirements of
more than 0s 1! lacs.
14
80"08 OF 2R04), 8)!),
,ank should appraise and fi% separate limits for the Tpeak levelE and normal Tnon pick
levelE credit re-uirements for all borrowers in e%cess of 0s. 1! lacs indicating the
relevant periods.
&ith the sanctioned limits for these two periods, the borrower should indicate in advance
his need for funds during the -uarter. 'n$ deviation in utili+ation of funds ,e$ond 1!>
should be considered irregular and is subject to penalt$ fi% b$ the 0,I 7> p.a. over the
normal rate8
,ank should discourage ad hoc or temporar$ credit limits. If sanction under e%ceptional
circumstances the same should be given in the form of a separate demand loan and
additional interest of at least 1> should charged.
8ending system<
The s$stem of three t$pes of lending should continue i.e. cash credit loan and bills
wherever possible= the bank should replace cash credit s$stem b$ loan and bills.
,ank should scrutini+e the cash credit accounts of large borrowers oneLs a $ear.
,ifurcation of cash credit account into demand loan fluctuating cash credit component, as
recommended b$ the Tandon committee should discontinue.
12
'dvances against books debts should be converted to bills wherever possible and at least
3!> of cash credit limit utili+e for financing purchases of raw material inventor$ should
also be charged to the bill s$stem.
)nformation System
The discipline relating to the submission of Iuarterly Statements to be obtained from
the borrower should be strictl$ adhered to in respects of all borrowers having working
capital limits of more than 0s.3! lacs.
If the borrower does not submit report within the prescribed time, he should be penali+ed
b$ charging a penal rate of interest, which is > p. a. more than the contracted rate.
,anks should insists the public sector undertakings and large borrower to maintained
control accounts in their books to give precise data regarding their dues to the small units
and furnish such data in their -uarterl$ reports.
Other recommendations<
0e-uest for rela%ation of inventor$ norms and for ad hoc increases in limits should be
subjected b$ banks to close scrutin$ and agreed onl$ in e%ceptional circumstances.
Bela$s on the part of the banks in sanctioning credit limits should be reduced in cases
where the borrowers cooperate in giving the necessar$ information about their past
performance and future projection in time.
"!
'utonomous institutions on the lines of the discount houses in ?.5 ma$ be set up to
encourage the bill s$stem of financing and to facilitate all mone$ operations.
There should be a TcellE attached to the chairmenLs office at the central office of each
bank to attend to matters like immediate communication of credit control measures at the
operational level.
The central offices of bank should take a second look at the credit budget as soon as
changes in the credit polic$ are announced b$ the 0,I and the$ should revised their plan
of action in the right of new polic$ and communicate the corrective measures at the
operational levels at the earliest.
,ank should give particular attention to monitor the ke$ branches and critical accounts.
The communication channels and s$stem and procedures with in the banking s$stem
should be toned up so as to ensure that minimum time is taken for collection of
instruments.
"1
F)%A%2)A8 RA,)OS
2'RR0%, RA,)OF2'RR0%, ASS0,@ 2'RR0%, 8)A),)0S
Gelp to measure li-uidit$ and financial strength, indication of availabilit$ of current
assets to pa$ current liabilities. The higher the ratio betters the li-uidit$ position.
to Fet (ales
!.3"
1.!1>
!.42
!.2#>
4.1
9."2>
Cash 'ccruals 1.9 ".4 #!.!9
TF& e%cl 0evaluation 0eserve 1".3# 14.91 49.49
T:. J TF& 0atio 1.## 1.4 1.14
F&C 19.91 14.9" 9!.#3
Current 0atio .3" .9! #.12
A( Sales< 's partners have been engaged in marketing the new technolog$ to various
users for the initial J# $ears vigorousl$ and their efforts are started $ielding results.
Buring the $ear !!3 the firm has obtained approval from ,G@., FTPC, and G'. for
use of its products M B(C ) @(C. 'greement with FTPC through ,G@. 7Garidwar8 is
e%clusive suppl$ 7not to an$ other companies8 for annual turnover of 0s. 3!.!! .acs.
The orders are of repetitive nature. ,esides ,G@. 7G$d8 have also started placing sample
orders. The firm has also been able to secure orders from G'. 75oraptut8 for B(C )
@(C.
Buring the $ear up to FovL!3 the firm has alread$ done sale of 0s. 1!!.!! lacs besides
the job work. :rders worth 0s. 13!.!! lacs from ,G@. 7Garidwar8 are on hand
scheduled to be completed before MarchL!1. Completion of this of these orders will
enable the firm to achieve a sale of 0s. 3!.!! lacs b$ this $ear end. This is acceptable.
B( Profit< Githerto the net profit in terms of sales has been about 1.!!>. 'gainst this
backdrop the estimated profitabilit$ of 9."2> in the current appears unreasonable. Buring
discussion it is clarified that as the firm has shifted its focus from mare job work to direct
"3
selling the margin will be high. In fact it has set up its own machining plant and has
secured approval from ,G@. for the Iualit$ of its own materials.
It used to pa$ for job works to other companiesJfirms for the machining purpose. This
pa$ment was to the tune of 3> 7app%8 of the job work revenue. /or the $ear !!3 as the
job work is being done in*house the e%penses are estimated to be hardl$ 3>. ,esides,
margin of direct selling of its materials is better. Moreover with increased sales the
marginal revenue would be proportionatel$ high adding to the increased $ield. In view of
the above factors we ma$ accept the profitabilit$ estimates made b$ the firm. In the
coming " $ears the firm has estimated profitabilit$ ranging from 4.3> to 1.3>. This
appears to be on the higher side. 's the sales are estimated to stabili+e at 0s. #1.!! lacs
we ma$ accept the profitabilit$ of 9."2> as acceptable for the $ear !!3. 'ccordingl$ the
net profit for the
nd
$ear would be 0s. 1#."! lacs and then 0s. 19.23 lacs p. a.
5( 2ash Accrual< &ith addition to fi%ed assets the depreciation shall be high. Thus with
accepted profitabilit$ the accrual would be 0s. #!.!! lacs for the $ear !!3 followed b$
0s. #.!# lacs, 0s. #!.1 lacs respectivel$. The position is acceptable.
.( ,%:< ?p to !!9*!3 the TF& has been increasing with retention of profits. In the
$ear !!3 for the e%pansion plan the partner have agreed in bring in additional capital of
0s. 91.!! lacs, 0emaining 0s !.!! lacs from internal accrual. &e have discussed the
issue of infusion of capital b$ partners. It is informed that depending upon the advice of
their auditors the$ would be either increasing the amount of individual capital andJor
brings in unsecured loans from friendsJrelatives to be converted to capital over a period
of time. (ince the e%isting work is being carried out from their own sources the branch is
advised to obtain a C'Ls certificate certif$ing the amount investing that will be
"1
considered as their contribution. (ince the cash accrual for the $ear !!3 is accepted at
0s. #!.!! lacs the remaining contribution of 0s. !.!! lacs from partners appears
reasonable.
C( ,O8@,%:< The ratio has been below .!! up to #1.!#.!3 and with proposed capital
infusion the same is estimated to be about 1.14 which is acceptable being well within
benchmark level.
D( %:2 ? 2( R(< ,oth the parameters have been well above their respective benchmark
levels and are estimated to improve further over the e%isting levels. It ma$ be mentioned
that even though the firm is increasing its production capacit$ and conse-uentl$ sales it
has not re-uested an$ additional working capital. Buring discussion it is gathered that
with direct selling the pa$ment term would be 2! > against suppl$ of materials which
would improve its cash flow and hence there will not be additional re-uirement of
working capital. Gowever the partners have informed that after the e%pansion is
completed in March !1 the$ ma$ approach us for additional working if re-uired at that
point of time.
Thus the overall financial position of the firm is satisfactor$.
Assessment of present proposal< -
A(
rking capital assessment<
A( 2omments on< -
i. (ales projectionsD 'lread$ discussed.
ii. Inventor$ ) receivablesD @%cept the receivables the firm has estimated other current
asset as per past trend and hence acceptable. The holding level of receivables has
been 1.3 month to 1."3 months sales. /or the current $ear it has estimated the same to
""
be .## months. It is clarified that as the firm would be e%ecuting 0s 13!.!! lacs
worth of orders from ,G@. in ne%t 9 months 7 't least 0s 4!.!! lacs as accepted b$
us8 there will be concentration of debtors at the $ear end. Gence the estimates appear
reasonable. Creditors have been nil and are estimated to be nil too.
'gainst this background P,/ is calculated as under.
(
rking of !PF< -
&:05IF< :/ M'AIM?M P@0MI((I,.@ ,'F5 /IF'FC@D 70s in lacs8.
Particulars #1.!#.!9
'udited
#1.!#.!3
'udited
#1.!#.!1
Projected
a. Total current assets #.11 #1."! 33.#3
b. :C. @%cl. short term ,, !.!2 !.13 *
c. &orking Capital of TC'8
3.2! ".2# 1#.49
e. 'ctualJProjected F&C 19.91 14.9" 9!.#3
f. Item c*d 1".1 #.1 91.31
g. Item c*e 2.11 1#.!4 13.!!
h. MP,/ 2.11 1#.!4 13.!!
i. e%cess borrowings if an$ * * *
2ase Study B<
Comparative ,alance (heet and Performance J /inancial IndicatorsD
,ridged ,alance (heetD
70s in lacs8
.iabilities #1.!#.!9 #1.!#.!3 #1.!#.!1 'ssets #1.!#.!9 #1.!#.!3 #1.!#.!1
7'udit8 7'udit8 7@stm8 7'udit8 7'udit8 7@stm8
"4
Capital "."" #1.#! 91.9 Fet ,lock #.1! .93 1."1
?nsec .n 1.!! 1.!! 3.!! 'dvanceJBeposits
7FC'8
!.#9 !.#9 1.!2
Term
.oan
1.14 !.14 * (undr$ Bebtors 9.1" 4.32 34.12
(undr$
Creditors
1.13 1#.4" 11."1 (tock #9.3 32.2 "!.#1
,ank
,orrowing
2."3 93.4! 1!!.!! 0ecurring Bep !."3 1.3# 1.1!
Chits 1.! * * Cash ."9 .#! #.1
:ther
liabilities
1.1# 9.9 #.41 :C' #.!1 9.19 3.##
Chits * .1 *
Total 14.14 1!1.42 111.22 Total 14.14 1!1.42 111.22
#1.!#.!!9 #1.!#.!3 #1.!#.!1 #1.!#.!"
Fet &orth "."" #1.#! 91.9 94.!9
.essD 0evaluation 0eserves * * * *
.essD Intangible 'ssets * * * *
Tangible Fet &orth "."" #1.#! 91.9 94.!9
P@0/:0M'FC@ J 5@V /IF'FCI'. IFBIC'T:0(D 70s in .acs8
Particulars #1.!#.!9
7audited8
#1.!#.!3
7audited8
#1.!#.!1
7estimated8
#1.!#.!"
7projected8
Fet (ales
> Increase J Becrease
"!.1 111.11
31>
1"92.19
33>
1411.!4
1.1#>
Fet Profit 'fter Ta% !.91 !.3 !.# !.#
Cash 'ccruals #.4" #.31 9.41 9."9
TF& e%cl 0evaluation 0eserve "."" #1.#! 91.9 94.!9
T:. J TF& 0atio 1.9" 1.41 .21 .92
F&C 1.31 #3.12 9#.1 3!."2
Current 0atio 1.14 1.33 1.#4 1.99
%et Sales< The firm deals in the products of Gindustan .ever .td and ,harti Tele .td
7'irtel8. The estimated sale for !!9*!3, as per last review, was 0s. 19!3 lacs, with a
growth of 23> over previous $ear. Gowever the actual sales were 0s. 111 lacs, with a
"2
growth of 31>. 'chievement is 4!>. In this connection, the firm has informed that the
estimated growth of !> in Gindustan .ever products could not be achieved and hence
the variation. This is due to polic$ changes contemplated b$ G.. to reduce the no. of
dealers as well as product consolidation.
/or the $ear !1.!9.!3 to #1.!1.!1, the firm has estimated a sale of 0s. 1"92.19 lacs and
for the ne%t $ear, projected a sale of 0s. 1411.!4 lacs. Till (eptember !3, the firm was
dealing in detergents, .akme products of Gindustan .td and the products of 'irtel. /rom
:ctober !3, the firm added the business of personal of Gindustan .ever .td. The
performance of the firm during the $ear !1.!9.!3 to #1.!1.!1 is as underD
Betergent of Gindustan .ever .td D 0s. 3#1 lacs
.akme of Gindustan .ever .td D 0s. 1#3 lacs
Personal products of G.. D 0s. 11 lacs 7:ct !3 to Jan !18
'irtel D 0s. 19 lacs
Total D 0s. 19#9 lacs
Considering the actual sale of 0s. 19#9 lacs in the first ten months the estimated sales of
0s. 1"3!.!! lacs during the current $ear appears reasonable. 's per the estimate, the
growth in sales during the $ear !3*!1 is 33> compared to !9*!3. in this connection, the
firm has informed that the$ were allotted more areasJjurisdiction b$ Gindustan .ever .td.
/or the ne%t $ear, the firm has projected a sale of 0s. 1411 lacs, with the break up of sales
as underD
4!
Betergent of Gindustan .ever .td D 0s. 1! lacs 71.#> growth8
.akme of Gindustan .ever .td D 0s. 114 lacs 79>8
Personal products of G.. D 0s. #44 lacs 7"> annuali+ed8
'irtel D 0s. "!4 lacs 71!.4>8
Total D 0s. 1411 lacs
The growth of the sale projected for the ne%t $ear is around ">. The estimatedJprojected
sales, appears achievable in view of the performance of the firm in the past and during
the $ear till Jan !1.
%et Profit< The firm has been earning profits consistentl$, but the margin is ver$ thin.
Buring !!9*!3 the profitabilit$ further dropped as compared to its previous $ear mainl$
due to competitive pricing in the consumeJpersonal goods segments offered b$ various
companies. The profitabilit$ has been between !.3> in !!9*!3 and is estimated to be
!.#> in the $ear !!3*!1 followed b$ similar trend in the ne%t $ear. The trend is
estimatedJprojected to continue. Gence it is acceptable.
,angi#le %et
rth< The firm has been maintaining the TF& at a satisfactor$ level.
Major portion of the profits are retained in the business. Buring the $ear !!3*!1 the firm
has proposed to infuse additional capital of 0s. .!! lacs followed b$ 0s. 9.!! lacs in the
ne%t $ear. The position is acceptable.
,O8@,%:< The ratio has been consistentl$ below the bench mark level. Gowever
compared to the previous $ears, the present level estimatedJprojected is higher in view of
view of the additional borrowings for the increased turnover. Gowever the same is still
below the bench mark.
41
%et
rking 2apital< The firm has been maintaining F&C at more than 3> of TC'
level which is above the stipulated bench mark and is estimated to well within the bench
mark too. The firm has proposed infusion of addition unsecured loan of 0s. 9.!! lacs to
improve the F&C position. ' suitable certificate from the C' is to be obtained to this
effect. 'n undertaking is to be obtained not to repa$ this unsecured loan during current of
our credit facilities.
2urrent Ratio< The firm has been maintaining current ratio at a satisfactor$ level.
Through the estimated level for the $ear !!3*!1, is slightl$ lower compared to $ear
!!9*!3 M it is still above the bench mark level.
Thus overall financial position is satisfactor$.
'ssessment of ProposalD
A(
rking capital assessment
Comments onD
i. Inventor$D
's per past trend, the level of stocks held b$ the firm is between 14 da$s
to ! da$s during last tow $ears and the same is estimated to be 13 da$s in this
$ear !!3*!1. This being an improvement over the past $ears is acceptable.
ii. 0eceivablesD
's per past trend, the level of credit allowed b$ the firm is between !.#! to
!.9! monthLs sales. Gowever the firm estimatedJprojected a higher level of
!.39 monthLs sale this level appears on the higher side and therefore bank
recast the figures of receivables with a !.9! monthLs sales. 'ccordingl$ the
acceptable level of debtors would be 0s. 34.3! lacs.
4
iii. :ther Current 'ssetsD
The current assets include cash and bank deposits 70B8. The
estimatedJprojected level of these assets is in conformit$ with the earlier
levels.
:ther than the above, the firm has another current asset in the form of
NClaims 0eceivableL. These are amount receivables from MJs Gindustan .ever
.td for an$ breakage in stock supplied. Till $ear !!9*!3 the level was -uite
on lower side oaround 0s. # to 9 lacs. Gowever during the $ear !!3*!1 and
!!1*!", the firm has estimatedJprojected a higher level of 0s. 3 lacs and 0s.
#! lacs respectivel$. In this connection the firm has informed that present
outstanding claims receivable from Gindustan .ever .td is around 3 lacs and
the level is likel$ to continue. The branch is to obtain a C'Ls certificate in this
regard.
iv. (undr$ CreditorsD
The firm is reportedl$ not getting an$ credit from either Gindustan .ever
.td of 'irtel. Gowever the firm has estimatedJprojected a level of 0s. 11 lacs
for miscellaneous credits. The level is in conformit$ with the past trend.
v. :ther Current .iabilit$D
The other current liabilities include provisions for e%penses and ta%ation.
The estimatedJprojected level is in conformit$ with the past trend.
vi. Method .endingD
The method of lending is based on build up of current assets and
liabilities, with second method of lending.
4#
vii. Comments on F&CD
The estimatedJprojected F&C is ade-uate to meet the margin re-uirement
of working capital.
,. &orking of MP,/D
Particulars #1.!#.!9
7audited8
#1.!#.!3
7audited8
#1.!#.!1
7@stimated8
#1.!#.!"
7Projected8
' Total Current 'ssets 13.9 22.1! 132.12 113.1!
, TC. 7e%cept bank borrowings8 4.24 14.11 13.3" 19.41
C &orking Capital Increase J Becrease
"3.#3
12.#1>
11.1
*ve
!9.!!
Fet Profit 'fter Ta%
> to Fet (ales
#.13
9.14>
.!!
#.4>
1!.2
3.!9>
Cash 'ccruals 1.!# ".1# 12.2
TF& e%cl 0evaluation 0eserve 1.!" 9.!2 #9.#
43
T:. J TF& 0atio 1.#" 1.21 .3"
F&C 1#.14 1#.14 13."1
Current 0atio .! 1."# 1.1
CommentsD
A( Sales< (ales mean service chargesJ consultanc$ fees received for the FBT inspection
and course fees received for its various training programs on FBT. 's mentioned earlier
the compan$ is mainl$ doing FBT inspection of oil refineries of 0eliance Industries,
:F whereas
consultanc$ fees have declined b$ 13> 7app%8. In the $ear !!3*!1 the compan$ has
received contracts worth 0s 4".!! lacs from 0I. for its Jamnagar Plant. The compan$ has
estimated a sale of 0s !9.!! lacs comprising consultanc$ fee ) component sale of 0s
14!.!! lacs and training fees of 0s 9.!! lacs. The training fee is slightl$ less than the
last $earLs fees. 's on #!.11.!3 the compan$ has alread$ booked a sale of 0s12.!!lacs.
,esides it has orders from small ) medium companies. 's such we are of the view that
the compan$ would be in a position to achieve a sale of 0s13!.!!lacs. &e ma$ accept the
said level.
B( %et Profit< Profit margins in consultanc$ works are comparativel$ more. Therefore
with decline in consultanc$ fees the profitabilit$ has declined during !!9*!3. Buring
!!3*!1 the compan$ has estimated a net profit of 0s 1!.2 lacs with profitabilit$ of
3.!9>. The compan$ officials have clarified that with increased sales and without an$
41
additional cost the marginal revenue will be more. Moreover net profit as of #!.11.!3 as
declared b$ the compan$ has been 0s. 1!.1! lacs. 'ccordingl$ the estimates appear
reasonable.
5( ,%:< &ith 1!!> retention of net profit the TF& acceptable as on #1.!#.!1 would be
0s. #9.9! lacs.
.( ,O8@,%:< The ratio for the last three $ears has been below the bench mark and is
e%pected to be so in the current $ear too.
C( %:2 ? 2(R< Buring !!*!# sundr$ creditorLs mode of financing was resorted to b$
the compan$ for its working funds and partl$ for its fi%ed assets resulting in C.0. below
1.!!. This imbalance is rectified in !!#*!9 b$ raising capital and infusing unsecured
loans from directors and others. The position as at #1.!#.!3 is also above the respective
bench mark. Gowever during the current $ear the compan$ proposes to add fi%ed assets
from its internal accruals and partl$ out of its e%isting built up of F&C resulting in
reduction in F&C level to !> of the TC'. Conse-uentl$ current ratio is estimated at
1.1. In fact as the minimum acceptable F&C is !> and current ratio is 1.3 the
proposed estimates can be acceptable as the purpose of utili+ation of F&C is for
ac-uiring fi%ed assets re-uired for business purposes onl$.
Thus overall financial position is satisfactor$.
'ssessment of Present ProposalD
4"
A(
rking 2apital Assessment<
'. Comments onD
i. (ales ProjectionsD 'lread$ dealt with elsewhere in the note.
ii. Comments on F&CD 'lread$ discussed.
Assessment<
The compan$ had re-uested for project specific working capital 7CC8 facilit$ of 0s 3.!!
lacs for its contract worth 0s 4".!! lacs from 0I. which will be completed within 9
months. This job is completed. ,ut the compan$ is able to obtain similar contracts from
others like .)T, (outh Central railwa$s etc in ensuing months for which it re-uires the
working capital. In fact for the ne%t $ear it has estimated a sale of more than 0s. !!.!!
lacs.
's at #!.11.!3 the TC' level is 0s. 1.3" lacs which is 92> of total sales as on that date.
/or the current $ear it has estimated a TC' level of 0s. "1."1 lacs which works out to
31> of accepted sales level. (ince the estimated level is more or less e-uivalent to the
actual level as on #!.11.!3 we ma$ accept the same. The compan$ has estimated an :C.
level of 0s. #1.!! lacs which as per the actual level prevailing as on #!.11.!3. This is
acceptable too. 'ccordingl$ P,/ is arrived as under.
i. TC' level accepted 0s"1."1lacs
ii. :C. 0s#1.!!lacs
iii. &C< 0s9!."1lacs
iv. 0e-uired F&C 7!>8 0s13.#9lacs
44
v. @stimated level 0s13."1lacs
vi. MP,/ 0s3.!!lacs.
2onclusions
? The re-uirement of working capital finance is ever increasing.
? .oans and advances formed a major portion of the current assets of the firm
because of which the working capital gap is large.
42
? The bank prefers to use the second method of lending working capital under the
MP,/ rather than evolving their own method.
? In most of the cases, h$pothecation andJor mortgage are used to create securities
for the banks.
? ,ank has their own internal credit rating procedure to rate the clients 7,orrowers8.
? 'fter doing the assessment of the financial indicators it is up to the judgment of
the top management of the bank to sanction such loan. The ver$ decision could be
against the assessment result.
? If the compan$ is with bank from inception stage then the$ are given preference,
as credible and lo$al part$ over their financial indicators.
? There is a stiff competition to the nationali+ed banks from the foreign investors as
their lending rates are much lower than nationali+ed banks.
? Toda$ the foreign investors are ver$ big threat to business and its e%istence.
? ,ank of Maharashtra has kept a conservative look to banking.
2!
Suggestions
? Closel$ monitoring and inspecting the activities and stocks of the borrowers from
time to time can avoid the misuse of working capital
? &hile working out the working capital limits, banks must e%clude the loans and
advances from the current assets. The assessment should be done mainl$ stock
and the inventor$ level of borrower.
? ,ank must e%tend working capital finance through non*fund based facilities.
? 'nother ideal method would be to use .C as the primar$ source of e%tending,
working capital clubbed with bill discounting. This would ensure that the credit is
put to the right use b$ the borrower and repa$ment is guaranteed to the bank.
? The bank must further secure themselves b$ holding a second charge on all the
fi%ed assets of the borrower.
? The time period taken b$ the banks to sanction the limits should be significantl$
reduced to allow the borrowers to make use of the credit when the need is most
felt.
21
i#liography
ooks<
A( 7A%4 OO; O%:OR
%9 2AP),A8 F)%A%20
B. P. ('0B', P?,.I(G@B ,V (.J.B. IMP@A, M?M,'I, /:?0TG @BITI:F
B( F)%A%2)A8 !A%A90!0%,
0. P. 0?(T'
On
“Study of assessment methods of working capital requirement”
For
“ank of !aharashtra”
y
"ai#ha$ % &agat
'nder the guidance of
!rs( So$ani
Su#mitted to
“'ni$ersity of pune”
)n partial fulfillment of the requirement for the award of the degree of master of
#usiness administration *!A+
,hrough
"ishwakarma institute of management
Pune- ./
1
0102',)"0 S'!!0R3
It gives me great pleasure to present this project report on working capital finance
at bank of Maharashtra, credit department, head office, Pune. The project was carried out
from 1
st
June !!" to #1
st
Jul$ !!".
The main objective of the project was to stud$ various t$pes of working capital
finance provided b$ banks. To know details the procedure of assessment of working
capital finance e%tended b$ banks.
&heels of business cannot move without mone$. 'vailabilit$ of mone$ is being
limited and wants being unlimited. (o procurement of fund is one of the important
functions in commercial ) non*commercial enterprises and utili+es it for ma%imi+ation
of business profits.
,usiness enterprises need funds to meet their different t$pes of re-uirements,
i. .ong*term re-uirement
ii. Medium*term re-uirement
iii. (hort*term re-uirement
&orking capital re-uirement is the short*term re-uirement. &orking capital is the
investment needed for carr$ing out da$*to*da$ operations of the business smoothl$. ,ank
is one of the important sources of working capital re-uirement. ,ank gives various
facilities to the borrowers.
In this project I have considered various banking facilities for the working capital
finance to the industries. It covers almost important aspect relating to assessment )
follow up of working capital finance. 'fter discussing the procedure followed b$ bank,
/or assessing working capital re-uirement case studies have been given with necessar$
data in the prescribed forms demonstrate the calculable done b$ bank to arrive at
ma%imum permissible bank finance. 'n inventor$ ) receivables constitute the major
portion of the total working capital re-uirement.
#
2ompany Profile
,he irth
0egistered on 11th (ept 12#3 with an authori+ed capital of 0s 1!.!! lakh and
commenced business on 4th /eb 12#1.
,he 2hildhood
5nown as a common man6s bank since inception, its initial help to small units has given
birth too man$ of toda$6s industrial houses. 'fter nationali+ation in 1212, the bank
e%panded rapidl$. It now has 12 branches 7as of #!th (eptember !!38 all over India.
The ,ank has the largest network of branches b$ an$ Public sector bank in the state of
Maharashtra.
,he Adult
The bank has fine tuned its services to cater to the needs of the common man and
incorporated the latest technolog$ in banking offering a variet$ of services.
Our Philosophy
o Technolog$ with personal touch.
Our 0m#lem
,he 4eepmal
o &ith its man$ lights rising to greater heights.
9
,he Pillar
o :ur institution* ($mboli+ing strength.
,he 5 !6s
($mbolising
• Mobilisation of Mone$
• Modernisation of Methods and
• Motivation of (taff.
Our Aims
The bank wishes to cater to all t$pes of needs of the entire famil$, in the whole countr$.
Its dream is ;:ne /amil$, :ne ,ank, Maharashtra ,ank;.
,he Autonomy
The ,ank attained autonomous status in 1224. It helps in giving more and more services
with simplified procedures without intervention of of its branches in rural areas.
3
Other Attri#utes
,ank is the convener of (tate level ,ankers committee
,ank has signed a Mo? with @AIM bank for co*financing of project e%ports
,ank offers Bepositor$ services and Bemat facilities in Mumbai.
,ank has captured 2".14> of its total business through computeri+ation.
1
O&02,)"0S
? To know the various t$pes of working capital finance provided b$ banks.
? To anal$+e in detail the procedure of assessment of working capital finance
e%tended b$ bank.
? To appl$ these procedure at a practical level with the help of case studies.
"
R0S0AR27 !0,7O4O8O93
This is anal$tical research area where we anal$ses information with cause and its
effects relationship. This anal$sis leads to the simple conclusions of whether to lend
mone$ to the institution for business.
'lso if the mone$ is lend then there is realit$ the norms are not alwa$s perfect and
hence it is essential to priorities stringent parameters and secondar$ parameters.
0esearch T$pe 'nal$tical
(ource of Bata Primar$ and (econdar$
(ample ?nit Industries appl$ing for loan
(ample Case studies
(ample Techni-ue 'llocation of Case
'nal$sis Tool used /inancial 'nal$sis
Primar$ BataD
? :bservation, Biscussion with the manager.
? The compan$ profile, annual reports have been obtained from ,:M.
(econdar$ BataD
(econdar$ data relating to the procedure of assessment of working capital finance, old
sanction proposals, 0,I guidelines etc. have been sourced from reference books.
4
)%,RO4'2,)O% ,O :OR

In accounting,E &orking capital is the difference between the inflow and outflow of
funds. In other words, it is the net cash inflow. It is defined as the e%cess of current assets
over current liabilities and provisions. In other words, it is net current assets or net
working capital.
' stud$ of working capital is of major importance to internal and e%ternal anal$sis
because of its close relationship with the da$*to*da$ operations of a business. &orking
Capital is the portion of the assets of a business which are used on or related to current
operations, and represented at an$ one time b$ the operating c$cle of such items as
against receivables, inventories of raw materials, stores, work in process and finished
goods, merchandise, notes or bill receivables and cash.
&orking capital comprises current assets which are distinct from other assets. In the first
instance, current assets consist of these assets which are of short duration.
&orking capital ma$ be regarded as the life blood of a business. Its effective provision
can do much to ensure the success of a business while its inefficient management can
lead not onl$ to loss of profits but also to the ultimate downfall of what otherwise might
be considered as a promising concern.
The funds re-uired and ac-uired b$ a business ma$ be invested to two t$pes of assetsD
1. /i%ed 'ssets.
2
. Current 'ssets
/i%ed assets are those which $ield the returns in the due course of time. The various
decisions like in which fi%ed assets funds should be invested and how much should be
invested in the fi%ed assets etc. are in the form of capital budgeting decisions. This can be
said to be fi%ed capital management.
:ther t$pes of assets are e-uall$ important i.e. Current 'ssets.
These t$pes of assets are re-uired to ensure smooth and fluent business operations and
can be said to be life blood of the business. There are two concepts of working capital —
can be financed from bank
borrowings. This method gives a minimum current ratio of 1D1. This method was
considered suitable onl$ for ver$ small borrowers where the re-uirement ! credit was less
than 0s 1! lacs
The borrower will contribute 3 > of the total current assets from long*term funds i.e.
owned funds and term borrowings. ' certain level of credit for purchases and other
current liabilities will be available to fund the building up of current assets and the bank
will provide the balance. Conse-uentl$, the current liabilities inclusive of bank borrowing
could not e%ceed "3 > of current assets. This method gives a current ratio of A(5 of core current assets, defined at the absolute
minimum level of raw material, processed stock, finished goods and stores, which are in
the pipeline. ' minimum level of the 3 > of the balance of the current assets should be
finance from the long term funds and term borrowings. This method covers straightness
the current ratio. The third is the ideal method. ,orrowers in the second stage are not
allowed to revert to the first stage. This method applies to all borrowers having credit
limit in e%cess of 0s.! lacs from the bank. Gowever this method was not accepted for
implementation.
In some cases, the net working capital was negative or 3 > of the working capital gap.
The new s$stems allowed this deficienc$ to be financed in addition to the permissible
bank finance b$ the bank. This kind of credit facilit$ is called working capital demand
loan, which was to be regulated over a period of time depending on the funds generating
capacit$ and abilit$ of the borrower.
The working capital demand loan is not allowed to be raised in the subse-uent $ear. /or
additional credit in subse-uent $ear, the borrowerLs long*term sources were re-uired to
provide 3 > of the additional working capital gap.
19
.( Style of credit<
The committee recommended the bifurcation of total credit limit into fi%ed and
fluctuating parts.
The fi%ed component is then treated as demand loan for the $ear representing minimum
level of borrowing, which the borrower e%pected to use through out the $ear.
The fluctuating component is taken care of b$ a demand cash credit. It could be partl$
used b$ wa$ of bills.
The new CC limit should be placed on a -uarterl$ budgeting reporting s$stem.
The interest rate on the loan components should be charged lower than the cash credit
amount. The 0,I has stipulated the interest differentiate at 1 >.
The cash credit limits sanctioned 7fluctuating8 are currentl$ !3 and the loan components
7fi%ed8 are 4! >.
C+ )%FOR!A,)O% S3S,0!<
The committee advocated for grater flow of information from borrower to the bank for
operational purpose and for the purpose of supervision and flow of up credit.
Information should be provided in the following formsD
13
I'AR,0R83 )%FOR!A,)O% S3S,0!< FOR!<
It should contain the production and sales estimates for the current and ne%t -uarter. also,
the current asset current liabilities estimates for the ne%t -uarter should be mentioned.
Iuarterly information system< Form ))<
It should contain the actual production and sales finger during the current $ear and the
latest completed $ear. 'lso, actual current asset and current liabilities for the latest
completed -uarter should be mention.
7alf year operating statement form )))A<
'ctual operating performance for the half $ear ended against the estimate should be
mentioned.
7alf year fund flow statement< Form )))<
It should contain the estimate as well as the actual sources and use of fund for the half
$ear ended.
,orrowers with a credit limit of more than1 crore are re-uired to suppl$ the -uarterl$
information.
The bank to follow up and supervise the use of credit should properl$ use the information
supplied b$ the borrower.
11
The bank must ensure that the bank credit was used for the purposes for which it is
granted, keeping in view the borrowers operation and environment.
The bank should confirm whether the actual result is in conformit$ with the e%pected
results. 'SJ* 1!> variation is considered normal.
The banker should be treated as a partner in the business with whom information should
be shared freel$ and frankl$.
The recommendations of the Tandon committee have been widel$ debated and critici+ed.
The bankers have found a difficult to implement the committeeLs recommendations.
Gowever, the Tandon committee has brought about a perceptible change in the outlook
and attitude of both the banker and their customers. The$ have become -uite aware in the
matter of making the best use of a scare resource like bank credit. The committee has
help in bringing the financial discipline through a balanced and integrated scheme of
bank lending. Most of banks in India, even toda$ continue to look at the needs of the
corporate in the light of recommendation of the Tandon committee
1"
27OR0 2O!!),,00
)%,RO4'2,)O%
In 'pril 12"2, the 0,I constituted a working group to review the s$stem of cash credit
under the chairmanship of Mr. 5. ,. Chore, Chief :fficer, B,C:B, 0,I. The main terms
of reference for the group were to review the cash credit discipline and relate credit limit
to production.
R02O!!0%4A,)O% OF 27OR0 2O!!),,00< -
ank credit< -
,orrower should contribute more funds to finance their working capital re-uirement and
reduce their dependence on bank credit. The committee suggested placing the second
method of lending as e%plain in the Tandon committee report.
In case the borrower is unable to compl$ with this re-uirement immediatel$, he would be
granted e%cess borrowing in the form of working capital loan 7&CT.8.
The &CT. should be paid in seam$ annual installments for a period not e%ceeding 3
$ears and a higher rate of interest than under the cash credit s$stem would be charged.
This procedure should appl$ to those borrowers, having working capital re-uirements of
more than 0s 1! lacs.
14
80"08 OF 2R04), 8)!),
,ank should appraise and fi% separate limits for the Tpeak levelE and normal Tnon pick
levelE credit re-uirements for all borrowers in e%cess of 0s. 1! lacs indicating the
relevant periods.
&ith the sanctioned limits for these two periods, the borrower should indicate in advance
his need for funds during the -uarter. 'n$ deviation in utili+ation of funds ,e$ond 1!>
should be considered irregular and is subject to penalt$ fi% b$ the 0,I 7> p.a. over the
normal rate8
,ank should discourage ad hoc or temporar$ credit limits. If sanction under e%ceptional
circumstances the same should be given in the form of a separate demand loan and
additional interest of at least 1> should charged.
8ending system<
The s$stem of three t$pes of lending should continue i.e. cash credit loan and bills
wherever possible= the bank should replace cash credit s$stem b$ loan and bills.
,ank should scrutini+e the cash credit accounts of large borrowers oneLs a $ear.
,ifurcation of cash credit account into demand loan fluctuating cash credit component, as
recommended b$ the Tandon committee should discontinue.
12
'dvances against books debts should be converted to bills wherever possible and at least
3!> of cash credit limit utili+e for financing purchases of raw material inventor$ should
also be charged to the bill s$stem.
)nformation System
The discipline relating to the submission of Iuarterly Statements to be obtained from
the borrower should be strictl$ adhered to in respects of all borrowers having working
capital limits of more than 0s.3! lacs.
If the borrower does not submit report within the prescribed time, he should be penali+ed
b$ charging a penal rate of interest, which is > p. a. more than the contracted rate.
,anks should insists the public sector undertakings and large borrower to maintained
control accounts in their books to give precise data regarding their dues to the small units
and furnish such data in their -uarterl$ reports.
Other recommendations<
0e-uest for rela%ation of inventor$ norms and for ad hoc increases in limits should be
subjected b$ banks to close scrutin$ and agreed onl$ in e%ceptional circumstances.
Bela$s on the part of the banks in sanctioning credit limits should be reduced in cases
where the borrowers cooperate in giving the necessar$ information about their past
performance and future projection in time.
"!
'utonomous institutions on the lines of the discount houses in ?.5 ma$ be set up to
encourage the bill s$stem of financing and to facilitate all mone$ operations.
There should be a TcellE attached to the chairmenLs office at the central office of each
bank to attend to matters like immediate communication of credit control measures at the
operational level.
The central offices of bank should take a second look at the credit budget as soon as
changes in the credit polic$ are announced b$ the 0,I and the$ should revised their plan
of action in the right of new polic$ and communicate the corrective measures at the
operational levels at the earliest.
,ank should give particular attention to monitor the ke$ branches and critical accounts.
The communication channels and s$stem and procedures with in the banking s$stem
should be toned up so as to ensure that minimum time is taken for collection of
instruments.
"1
F)%A%2)A8 RA,)OS
2'RR0%, RA,)OF2'RR0%, ASS0,@ 2'RR0%, 8)A),)0S
Gelp to measure li-uidit$ and financial strength, indication of availabilit$ of current
assets to pa$ current liabilities. The higher the ratio betters the li-uidit$ position.
to Fet (ales
!.3"
1.!1>
!.42
!.2#>
4.1
9."2>
Cash 'ccruals 1.9 ".4 #!.!9
TF& e%cl 0evaluation 0eserve 1".3# 14.91 49.49
T:. J TF& 0atio 1.## 1.4 1.14
F&C 19.91 14.9" 9!.#3
Current 0atio .3" .9! #.12
A( Sales< 's partners have been engaged in marketing the new technolog$ to various
users for the initial J# $ears vigorousl$ and their efforts are started $ielding results.
Buring the $ear !!3 the firm has obtained approval from ,G@., FTPC, and G'. for
use of its products M B(C ) @(C. 'greement with FTPC through ,G@. 7Garidwar8 is
e%clusive suppl$ 7not to an$ other companies8 for annual turnover of 0s. 3!.!! .acs.
The orders are of repetitive nature. ,esides ,G@. 7G$d8 have also started placing sample
orders. The firm has also been able to secure orders from G'. 75oraptut8 for B(C )
@(C.
Buring the $ear up to FovL!3 the firm has alread$ done sale of 0s. 1!!.!! lacs besides
the job work. :rders worth 0s. 13!.!! lacs from ,G@. 7Garidwar8 are on hand
scheduled to be completed before MarchL!1. Completion of this of these orders will
enable the firm to achieve a sale of 0s. 3!.!! lacs b$ this $ear end. This is acceptable.
B( Profit< Githerto the net profit in terms of sales has been about 1.!!>. 'gainst this
backdrop the estimated profitabilit$ of 9."2> in the current appears unreasonable. Buring
discussion it is clarified that as the firm has shifted its focus from mare job work to direct
"3
selling the margin will be high. In fact it has set up its own machining plant and has
secured approval from ,G@. for the Iualit$ of its own materials.
It used to pa$ for job works to other companiesJfirms for the machining purpose. This
pa$ment was to the tune of 3> 7app%8 of the job work revenue. /or the $ear !!3 as the
job work is being done in*house the e%penses are estimated to be hardl$ 3>. ,esides,
margin of direct selling of its materials is better. Moreover with increased sales the
marginal revenue would be proportionatel$ high adding to the increased $ield. In view of
the above factors we ma$ accept the profitabilit$ estimates made b$ the firm. In the
coming " $ears the firm has estimated profitabilit$ ranging from 4.3> to 1.3>. This
appears to be on the higher side. 's the sales are estimated to stabili+e at 0s. #1.!! lacs
we ma$ accept the profitabilit$ of 9."2> as acceptable for the $ear !!3. 'ccordingl$ the
net profit for the
nd
$ear would be 0s. 1#."! lacs and then 0s. 19.23 lacs p. a.
5( 2ash Accrual< &ith addition to fi%ed assets the depreciation shall be high. Thus with
accepted profitabilit$ the accrual would be 0s. #!.!! lacs for the $ear !!3 followed b$
0s. #.!# lacs, 0s. #!.1 lacs respectivel$. The position is acceptable.
.( ,%:< ?p to !!9*!3 the TF& has been increasing with retention of profits. In the
$ear !!3 for the e%pansion plan the partner have agreed in bring in additional capital of
0s. 91.!! lacs, 0emaining 0s !.!! lacs from internal accrual. &e have discussed the
issue of infusion of capital b$ partners. It is informed that depending upon the advice of
their auditors the$ would be either increasing the amount of individual capital andJor
brings in unsecured loans from friendsJrelatives to be converted to capital over a period
of time. (ince the e%isting work is being carried out from their own sources the branch is
advised to obtain a C'Ls certificate certif$ing the amount investing that will be
"1
considered as their contribution. (ince the cash accrual for the $ear !!3 is accepted at
0s. #!.!! lacs the remaining contribution of 0s. !.!! lacs from partners appears
reasonable.
C( ,O8@,%:< The ratio has been below .!! up to #1.!#.!3 and with proposed capital
infusion the same is estimated to be about 1.14 which is acceptable being well within
benchmark level.
D( %:2 ? 2( R(< ,oth the parameters have been well above their respective benchmark
levels and are estimated to improve further over the e%isting levels. It ma$ be mentioned
that even though the firm is increasing its production capacit$ and conse-uentl$ sales it
has not re-uested an$ additional working capital. Buring discussion it is gathered that
with direct selling the pa$ment term would be 2! > against suppl$ of materials which
would improve its cash flow and hence there will not be additional re-uirement of
working capital. Gowever the partners have informed that after the e%pansion is
completed in March !1 the$ ma$ approach us for additional working if re-uired at that
point of time.
Thus the overall financial position of the firm is satisfactor$.
Assessment of present proposal< -
A(

A( 2omments on< -
i. (ales projectionsD 'lread$ discussed.
ii. Inventor$ ) receivablesD @%cept the receivables the firm has estimated other current
asset as per past trend and hence acceptable. The holding level of receivables has
been 1.3 month to 1."3 months sales. /or the current $ear it has estimated the same to
""
be .## months. It is clarified that as the firm would be e%ecuting 0s 13!.!! lacs
worth of orders from ,G@. in ne%t 9 months 7 't least 0s 4!.!! lacs as accepted b$
us8 there will be concentration of debtors at the $ear end. Gence the estimates appear
reasonable. Creditors have been nil and are estimated to be nil too.
'gainst this background P,/ is calculated as under.
(

&:05IF< :/ M'AIM?M P@0MI((I,.@ ,'F5 /IF'FC@D 70s in lacs8.
Particulars #1.!#.!9
'udited
#1.!#.!3
'udited
#1.!#.!1
Projected
a. Total current assets #.11 #1."! 33.#3
b. :C. @%cl. short term ,, !.!2 !.13 *
c. &orking Capital of TC'8
3.2! ".2# 1#.49
e. 'ctualJProjected F&C 19.91 14.9" 9!.#3
f. Item c*d 1".1 #.1 91.31
g. Item c*e 2.11 1#.!4 13.!!
h. MP,/ 2.11 1#.!4 13.!!
i. e%cess borrowings if an$ * * *
2ase Study B<
Comparative ,alance (heet and Performance J /inancial IndicatorsD
,ridged ,alance (heetD
70s in lacs8
.iabilities #1.!#.!9 #1.!#.!3 #1.!#.!1 'ssets #1.!#.!9 #1.!#.!3 #1.!#.!1
7'udit8 7'udit8 7@stm8 7'udit8 7'udit8 7@stm8
"4
Capital "."" #1.#! 91.9 Fet ,lock #.1! .93 1."1
?nsec .n 1.!! 1.!! 3.!! 'dvanceJBeposits
7FC'8
!.#9 !.#9 1.!2
Term
.oan
1.14 !.14 * (undr$ Bebtors 9.1" 4.32 34.12
(undr$
Creditors
1.13 1#.4" 11."1 (tock #9.3 32.2 "!.#1
,ank
,orrowing
2."3 93.4! 1!!.!! 0ecurring Bep !."3 1.3# 1.1!
Chits 1.! * * Cash ."9 .#! #.1
:ther
liabilities
1.1# 9.9 #.41 :C' #.!1 9.19 3.##
Chits * .1 *
Total 14.14 1!1.42 111.22 Total 14.14 1!1.42 111.22
#1.!#.!!9 #1.!#.!3 #1.!#.!1 #1.!#.!"
Fet &orth "."" #1.#! 91.9 94.!9
.essD 0evaluation 0eserves * * * *
.essD Intangible 'ssets * * * *
Tangible Fet &orth "."" #1.#! 91.9 94.!9
P@0/:0M'FC@ J 5@V /IF'FCI'. IFBIC'T:0(D 70s in .acs8
Particulars #1.!#.!9
7audited8
#1.!#.!3
7audited8
#1.!#.!1
7estimated8
#1.!#.!"
7projected8
Fet (ales
> Increase J Becrease
"!.1 111.11
31>
1"92.19
33>
1411.!4
1.1#>
Fet Profit 'fter Ta% !.91 !.3 !.# !.#
Cash 'ccruals #.4" #.31 9.41 9."9
TF& e%cl 0evaluation 0eserve "."" #1.#! 91.9 94.!9
T:. J TF& 0atio 1.9" 1.41 .21 .92
F&C 1.31 #3.12 9#.1 3!."2
Current 0atio 1.14 1.33 1.#4 1.99
%et Sales< The firm deals in the products of Gindustan .ever .td and ,harti Tele .td
7'irtel8. The estimated sale for !!9*!3, as per last review, was 0s. 19!3 lacs, with a
growth of 23> over previous $ear. Gowever the actual sales were 0s. 111 lacs, with a
"2
growth of 31>. 'chievement is 4!>. In this connection, the firm has informed that the
estimated growth of !> in Gindustan .ever products could not be achieved and hence
the variation. This is due to polic$ changes contemplated b$ G.. to reduce the no. of
dealers as well as product consolidation.
/or the $ear !1.!9.!3 to #1.!1.!1, the firm has estimated a sale of 0s. 1"92.19 lacs and
for the ne%t $ear, projected a sale of 0s. 1411.!4 lacs. Till (eptember !3, the firm was
dealing in detergents, .akme products of Gindustan .td and the products of 'irtel. /rom
:ctober !3, the firm added the business of personal of Gindustan .ever .td. The
performance of the firm during the $ear !1.!9.!3 to #1.!1.!1 is as underD
Betergent of Gindustan .ever .td D 0s. 3#1 lacs
.akme of Gindustan .ever .td D 0s. 1#3 lacs
Personal products of G.. D 0s. 11 lacs 7:ct !3 to Jan !18
'irtel D 0s. 19 lacs
Total D 0s. 19#9 lacs
Considering the actual sale of 0s. 19#9 lacs in the first ten months the estimated sales of
0s. 1"3!.!! lacs during the current $ear appears reasonable. 's per the estimate, the
growth in sales during the $ear !3*!1 is 33> compared to !9*!3. in this connection, the
firm has informed that the$ were allotted more areasJjurisdiction b$ Gindustan .ever .td.
/or the ne%t $ear, the firm has projected a sale of 0s. 1411 lacs, with the break up of sales
as underD
4!
Betergent of Gindustan .ever .td D 0s. 1! lacs 71.#> growth8
.akme of Gindustan .ever .td D 0s. 114 lacs 79>8
Personal products of G.. D 0s. #44 lacs 7"> annuali+ed8
'irtel D 0s. "!4 lacs 71!.4>8
Total D 0s. 1411 lacs
The growth of the sale projected for the ne%t $ear is around ">. The estimatedJprojected
sales, appears achievable in view of the performance of the firm in the past and during
the $ear till Jan !1.
%et Profit< The firm has been earning profits consistentl$, but the margin is ver$ thin.
Buring !!9*!3 the profitabilit$ further dropped as compared to its previous $ear mainl$
due to competitive pricing in the consumeJpersonal goods segments offered b$ various
companies. The profitabilit$ has been between !.3> in !!9*!3 and is estimated to be
!.#> in the $ear !!3*!1 followed b$ similar trend in the ne%t $ear. The trend is
estimatedJprojected to continue. Gence it is acceptable.
,angi#le %et

Major portion of the profits are retained in the business. Buring the $ear !!3*!1 the firm
has proposed to infuse additional capital of 0s. .!! lacs followed b$ 0s. 9.!! lacs in the
ne%t $ear. The position is acceptable.
,O8@,%:< The ratio has been consistentl$ below the bench mark level. Gowever
compared to the previous $ears, the present level estimatedJprojected is higher in view of
view of the additional borrowings for the increased turnover. Gowever the same is still
below the bench mark.
41
%et

level which is above the stipulated bench mark and is estimated to well within the bench
mark too. The firm has proposed infusion of addition unsecured loan of 0s. 9.!! lacs to
improve the F&C position. ' suitable certificate from the C' is to be obtained to this
effect. 'n undertaking is to be obtained not to repa$ this unsecured loan during current of
our credit facilities.
2urrent Ratio< The firm has been maintaining current ratio at a satisfactor$ level.
Through the estimated level for the $ear !!3*!1, is slightl$ lower compared to $ear
!!9*!3 M it is still above the bench mark level.
Thus overall financial position is satisfactor$.
'ssessment of ProposalD
A(

Comments onD
i. Inventor$D
's per past trend, the level of stocks held b$ the firm is between 14 da$s
to ! da$s during last tow $ears and the same is estimated to be 13 da$s in this
$ear !!3*!1. This being an improvement over the past $ears is acceptable.
ii. 0eceivablesD
's per past trend, the level of credit allowed b$ the firm is between !.#! to
!.9! monthLs sales. Gowever the firm estimatedJprojected a higher level of
!.39 monthLs sale this level appears on the higher side and therefore bank
recast the figures of receivables with a !.9! monthLs sales. 'ccordingl$ the
acceptable level of debtors would be 0s. 34.3! lacs.
4
iii. :ther Current 'ssetsD
The current assets include cash and bank deposits 70B8. The
estimatedJprojected level of these assets is in conformit$ with the earlier
levels.
:ther than the above, the firm has another current asset in the form of
NClaims 0eceivableL. These are amount receivables from MJs Gindustan .ever
.td for an$ breakage in stock supplied. Till $ear !!9*!3 the level was -uite
on lower side oaround 0s. # to 9 lacs. Gowever during the $ear !!3*!1 and
!!1*!", the firm has estimatedJprojected a higher level of 0s. 3 lacs and 0s.
#! lacs respectivel$. In this connection the firm has informed that present
outstanding claims receivable from Gindustan .ever .td is around 3 lacs and
the level is likel$ to continue. The branch is to obtain a C'Ls certificate in this
regard.
iv. (undr$ CreditorsD
The firm is reportedl$ not getting an$ credit from either Gindustan .ever
.td of 'irtel. Gowever the firm has estimatedJprojected a level of 0s. 11 lacs
for miscellaneous credits. The level is in conformit$ with the past trend.
v. :ther Current .iabilit$D
The other current liabilities include provisions for e%penses and ta%ation.
The estimatedJprojected level is in conformit$ with the past trend.
vi. Method .endingD
The method of lending is based on build up of current assets and
liabilities, with second method of lending.
4#
vii. Comments on F&CD
The estimatedJprojected F&C is ade-uate to meet the margin re-uirement
of working capital.
,. &orking of MP,/D
Particulars #1.!#.!9
7audited8
#1.!#.!3
7audited8
#1.!#.!1
7@stimated8
#1.!#.!"
7Projected8
' Total Current 'ssets 13.9 22.1! 132.12 113.1!
, TC. 7e%cept bank borrowings8 4.24 14.11 13.3" 19.41
C &orking Capital Increase J Becrease
"3.#3
12.#1>
11.1
*ve
!9.!!
Fet Profit 'fter Ta%
> to Fet (ales
#.13
9.14>
.!!
#.4>
1!.2
3.!9>
Cash 'ccruals 1.!# ".1# 12.2
TF& e%cl 0evaluation 0eserve 1.!" 9.!2 #9.#
43
T:. J TF& 0atio 1.#" 1.21 .3"
F&C 1#.14 1#.14 13."1
Current 0atio .! 1."# 1.1
CommentsD
A( Sales< (ales mean service chargesJ consultanc$ fees received for the FBT inspection
and course fees received for its various training programs on FBT. 's mentioned earlier
the compan$ is mainl$ doing FBT inspection of oil refineries of 0eliance Industries,
:F whereas
consultanc$ fees have declined b$ 13> 7app%8. In the $ear !!3*!1 the compan$ has
received contracts worth 0s 4".!! lacs from 0I. for its Jamnagar Plant. The compan$ has
estimated a sale of 0s !9.!! lacs comprising consultanc$ fee ) component sale of 0s
14!.!! lacs and training fees of 0s 9.!! lacs. The training fee is slightl$ less than the
last $earLs fees. 's on #!.11.!3 the compan$ has alread$ booked a sale of 0s12.!!lacs.
,esides it has orders from small ) medium companies. 's such we are of the view that
the compan$ would be in a position to achieve a sale of 0s13!.!!lacs. &e ma$ accept the
said level.
B( %et Profit< Profit margins in consultanc$ works are comparativel$ more. Therefore
with decline in consultanc$ fees the profitabilit$ has declined during !!9*!3. Buring
!!3*!1 the compan$ has estimated a net profit of 0s 1!.2 lacs with profitabilit$ of
3.!9>. The compan$ officials have clarified that with increased sales and without an$
41
additional cost the marginal revenue will be more. Moreover net profit as of #!.11.!3 as
declared b$ the compan$ has been 0s. 1!.1! lacs. 'ccordingl$ the estimates appear
reasonable.
5( ,%:< &ith 1!!> retention of net profit the TF& acceptable as on #1.!#.!1 would be
0s. #9.9! lacs.
.( ,O8@,%:< The ratio for the last three $ears has been below the bench mark and is
e%pected to be so in the current $ear too.
C( %:2 ? 2(R< Buring !!*!# sundr$ creditorLs mode of financing was resorted to b$
the compan$ for its working funds and partl$ for its fi%ed assets resulting in C.0. below
1.!!. This imbalance is rectified in !!#*!9 b$ raising capital and infusing unsecured
loans from directors and others. The position as at #1.!#.!3 is also above the respective
bench mark. Gowever during the current $ear the compan$ proposes to add fi%ed assets
from its internal accruals and partl$ out of its e%isting built up of F&C resulting in
reduction in F&C level to !> of the TC'. Conse-uentl$ current ratio is estimated at
1.1. In fact as the minimum acceptable F&C is !> and current ratio is 1.3 the
proposed estimates can be acceptable as the purpose of utili+ation of F&C is for
ac-uiring fi%ed assets re-uired for business purposes onl$.
Thus overall financial position is satisfactor$.
'ssessment of Present ProposalD
4"
A(

'. Comments onD
i. (ales ProjectionsD 'lread$ dealt with elsewhere in the note.
ii. Comments on F&CD 'lread$ discussed.
Assessment<
The compan$ had re-uested for project specific working capital 7CC8 facilit$ of 0s 3.!!
lacs for its contract worth 0s 4".!! lacs from 0I. which will be completed within 9
months. This job is completed. ,ut the compan$ is able to obtain similar contracts from
others like .)T, (outh Central railwa$s etc in ensuing months for which it re-uires the
working capital. In fact for the ne%t $ear it has estimated a sale of more than 0s. !!.!!
lacs.
's at #!.11.!3 the TC' level is 0s. 1.3" lacs which is 92> of total sales as on that date.
/or the current $ear it has estimated a TC' level of 0s. "1."1 lacs which works out to
31> of accepted sales level. (ince the estimated level is more or less e-uivalent to the
actual level as on #!.11.!3 we ma$ accept the same. The compan$ has estimated an :C.
level of 0s. #1.!! lacs which as per the actual level prevailing as on #!.11.!3. This is
acceptable too. 'ccordingl$ P,/ is arrived as under.
i. TC' level accepted 0s"1."1lacs
ii. :C. 0s#1.!!lacs
iii. &C< 0s9!."1lacs
iv. 0e-uired F&C 7!>8 0s13.#9lacs
44
v. @stimated level 0s13."1lacs
vi. MP,/ 0s3.!!lacs.
2onclusions
? The re-uirement of working capital finance is ever increasing.
? .oans and advances formed a major portion of the current assets of the firm
because of which the working capital gap is large.
42
? The bank prefers to use the second method of lending working capital under the
MP,/ rather than evolving their own method.
? In most of the cases, h$pothecation andJor mortgage are used to create securities
for the banks.
? ,ank has their own internal credit rating procedure to rate the clients 7,orrowers8.
? 'fter doing the assessment of the financial indicators it is up to the judgment of
the top management of the bank to sanction such loan. The ver$ decision could be
against the assessment result.
? If the compan$ is with bank from inception stage then the$ are given preference,
as credible and lo$al part$ over their financial indicators.
? There is a stiff competition to the nationali+ed banks from the foreign investors as
their lending rates are much lower than nationali+ed banks.
? Toda$ the foreign investors are ver$ big threat to business and its e%istence.
? ,ank of Maharashtra has kept a conservative look to banking.
2!
Suggestions
? Closel$ monitoring and inspecting the activities and stocks of the borrowers from
time to time can avoid the misuse of working capital
? &hile working out the working capital limits, banks must e%clude the loans and
advances from the current assets. The assessment should be done mainl$ stock
and the inventor$ level of borrower.
? ,ank must e%tend working capital finance through non*fund based facilities.
? 'nother ideal method would be to use .C as the primar$ source of e%tending,
working capital clubbed with bill discounting. This would ensure that the credit is
put to the right use b$ the borrower and repa$ment is guaranteed to the bank.
? The bank must further secure themselves b$ holding a second charge on all the
fi%ed assets of the borrower.
? The time period taken b$ the banks to sanction the limits should be significantl$
reduced to allow the borrowers to make use of the credit when the need is most
felt.
21
i#liography
ooks<
A( 7A%4 OO; O%:OR

B. P. ('0B', P?,.I(G@B ,V (.J.B. IMP@A, M?M,'I, /:?0TG @BITI:F
B( F)%A%2)A8 !A%A90!0%,
0. P. 0?(T'