I.

INTRODUCTION

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1.1 BACKGROUND OF STUDY

A manufacturing concern needs finance not only for acquisition of fixed assets but also for its day-to day operations. It has to obtain raw materials for processing, pay wage bills & other manufacturing expenses, store finished goods for marketing & grant credit to the customers. It may have to pass through the following stages to complete its operating cycleConversion of cash into raw materials raw material procured on credit, cash may have to be paid after a certain period. ii. iii. iv. v. vi. Conversion of raw materials into stock in process Conversion of stock in process into finished goods. Conversion of finished goods into receivables/debtors or cash. Conversion of receivables/debtors into cash A non-manufacturing trading concern may not require raw material for their processing, but it also needs finance for storing goods & providing credit to its customers.

i.

vii.

Similarly a concern engaged in providing services, it may not have to keep inventories but it may have to provide credit facility to its customers. Thus all enterprises engaged in manufacturing or trading or providing services require finance for their day-to-day operations, the amount required to finance day-to-day operation is called working capital

viii.

The assets & liabilities are created during the operating cycle are Page 2 of 47

called current assets& current liabilities.

There are two components of working capital

GROSS ASSETS

WORKING

CAPITAL

TOTAL

CURRENT

NET WORKING CAPITAL CURRENT LIABILITIES OPERATING CYCLE :

CURRENT ASSETS

When entrepreneurs for financing working capital requirements approach the banks, the bank has to examine the viability of the project before agreeing to provide working capital for it. Financial institutions & bank while providing term loan finance to unit for acquisition of fixed assets does a detailed viability study. They have to ensure that the project will generate sufficient return on the resources invested in it.

The viability of a project depends on Technical feasibility, Financial Page 3 of 47

feasibility, Flash report, Credit analysis, sensitivity analysis etc.

Technical feasibility : This aspect involves a detailed assessment of the goods and the services needed for the project land, building, raw material, transportation, technology etc. The important feature regarding technical feasibility relates to the type of technology to be used for the project. The project needs to be examined with particular reference to the following points regarding the technical feasibility. Land and Building Plant and Machinary Technical Competence Financial feasibility : The institution while advancing loan is quite

keen about the financial feasibility of the whole project. In finding out financial feasibility, the following facts should be taken into account: Cost of Project Means of Financing Cost of Production and Profitability Cash Flow Estimates Proforma Balance Sheets.

Flash report

: The banks prepares a flash report. The flash report is

to gauge whether it is feasible to provide the cash credit to the applicant. It determine the amount of money that the bank will earn by providing the cash credit

Credit analysis :

It involves investigation of the capacity of the

applicant to borrow and his willingness to repay the debt in time according to the agreement. To analyse the creditworthiness of the applicant there are five C s of credit. Character (Good Citizen) Capacity (Cash Flow) Capital (Wealth)

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Collateral (Security) Conditions (Economic, especially downside vulnerability)

Sensitivity analysis :One measure which expresses risk in more precise terms is sensitivity analysis. It provides information as to how sensitive the estimated project parameters, namely, the expected cash flow, the discount rate and the project life are to estimation errors. The analysis on these lines is important as the future is always uncertain and there will always be estimation errors. Sensitivity analysis takes care of estimation errors by using a number of possible outcomes in evaluating a project. The method adopted under sensitivity analysis is to evaluate a project using a number of estimated cash flows to provide to the decision maker an insight into the variability of the outcomes.

Sensitivity analysis provides different cash flows estimates under three assumptions The worst (most pessimistic) The expected (the most likely) and The best (most optimistic)

it is necessary to make a proper assessment of total requirement of the working capital, which depends on the nature of the activities of an enterprise & the duration of its operating cycle. It has to be ensured that the unit will have regular supply of rawmaterial to facilitate uninterrupted production. The unit should be able to maintainadequate stock offinished goods for smooth sales operation. After assessing the total requirement of working capital, a part of working capital requirement should be financed for the long term & partly by determining MAXIMUM PERMISSABLE BANK

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FINANCE

1.2 COMPANY PROFILE:

Name of the company : Location and address :

BANK OF MAHARASHTRA Shop No. 3,4,5, Sicily Marvel Apartment, Sector No. 12/B, Koperkhairane, Navi Mumbai.

Type of organization Type of industry Organizational set up

: : :

Nationalised Bank Banking

Bank of Maharashtra is a nationalized bank with a standing of more than 7 years. The bank has branch officesacross the length and breadth of the country. In the state of maharashtraitself it has the largest network of branches. All the branches of the bank are under CORE BANKING SOLUTION (CBS). branches, It has three tier

organizational setup consisting of Central offices.

Regional

offices,

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ONE FAMILY ONE BANK (CELEBRATING PLATINUM JUBILEE YEAR) Our Aims
The bank wishes to cater to all types of needs of the entire family, in the whole country. Its dream is "One Family, One Bank, Maharashtra Bank".

Mission
To ensure quick and efficient response to customer expectations.

To innovate products and services to cater to diverse sections of society.

To adopt latest technology on a continuous basis.

To build proactive, professional and involved workforce. To enhance the shareholders wealth through best practices and corporate governance.

To be a vibrant, forward looking, techno-savvy, customer centric bank serving diverse sections of the society, enhancing shareholders' and Page 7 of 47

employees' value while moving towards global presence.

LOGO

The Deepmal : With its many lights rising to greater heights

The 3 M's

Mobilisation of Money Modernisation of Methods and Motivation of Staff.

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BRIEF PROFILE OF BANK OF MAHARASHTRA

Bank of Maharashtra, one of the leading banks in India, has its headquarter located in Pune. Registered on September 16, 1935 by Prof. V. G. Kale and late Mr. D. K. Sathe, Bank of Maharashtra started its operation on February 8, 1936 with a mere authorized capital of ` 10 lakhs and issued capital of ` 5 lakhs. The bank was established with a goal to meet the banking needs of the common people. Bank of Maharashtra did reasonably well in quick period of time. The deposits crossed 1crore mark within the year 1945. The bank also got listed on the Bombay Stock Exchange in 1958. crore. The bank has a branch network comprising 1,345 branches and 13 extension counters spread over 22 states and two union territories as on March 31, 2007. It includes 22 specialized branches in the area of foreign exchange, industrial finance, small-scale industry and hi-tech agriculture. The Bank has 302 automated teller machines operating as of March 31, 2007. The bank opened 29 new branches during the year. The bank has fully-computerized branches. It has implemented core banking solution (CBS) in 66 branches which offer customer convenience products like any branch banking, multi city check facility, ..etc. The CBS network will be extended to 600 branches during the year 2007-2008. Multiple delivery channels like internet banking, mobile banking and so on will be introduced in 2007-2008. The bank has joined national electronic funds transfer (NEFT) with 510 branches going live during the year and also launched an insta remit facility on its RTGS platform. New Initiatives like the corporate agency tie up with United India Insurance Company for sale of general insurance products and with LIC of India for sale of life insurance products are available at all branches. The bank has a tie-up with Franklin Templeton for distribution of mutual fund products; tie-ups with Hero Honda Motors and tractor and power tiller manufacturing companies for loans to farmers; a tie-up with United Nations environment program (UNEP) for implementing solar home systems.

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SOCIAL ASPECTS OF BANK OF MAHARASHTRA

The bank excels in Social Banking, overlooking the profit aspect; it has a good share of Priority sector lending having 46% of its branches in rural areas.

OTHER ATTRIBUTES

Bank is

the

convener

of State

level

Bankers

committee

Bank has signed a MOU with EXIM bank for co-financing of project exports Bank offers Depository services and Demat facilities in Mumbai. Bank has captured 95.25% of its total business through computerization.

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1.3 PRODUCTS & SERVICES

Bank of Maharashtra offers a range of financial products and services to its customers. Following are the products and services of Bank of Maharashtra. SAVINGS DEPOSITS
o o o o o o

Mahabank YuvaYojana MahabankLokBachatYojana Mahabank SwasthyaYojana NRI Ordinary Account NRI External Account

CURRENT DEPOSITS
o

Mahabank Pearl & Sapphire

TERM DEPOSITS
o o o o o o o o o

Mahabank SulabhJamaYojana Monthly Interest Deposit Scheme Mahabank SheetalJamaYojana Mahabank Trust Deposit Scheme FCNR Account Cumulative Deposit Scheme (CDR) Quarterly Interest Deposit Scheme Mixie Deposit Scheme Mahasaraswati Scheme

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LOANS o o o o o o o o o o o o o o o o o Educational Loans Loans for Corporates Loans for Exporters Loans for Professionals Loans for Agriculturists Loans for Individuals Housing Finance Scheme Mahabank Platinum Housing Loans: Festive Offer MahabankAdhar Scheme Mahabank Gold Card Scheme for Exporters Mahabank Salary Gain Scheme Mahabank Vehicle Loan Scheme Mahabank Renewable Energy Equipments Mahabank Realty Finance Personal Loans Mahabank Solar Home Systems Mahabank Consumer Loan Scheme OTHER SERVICES o ATM Services o Demat Services o Bank assurance o Credit Card o Mahabill Pay o MahabankInsta Remit Scheme o NEFT

FUTURE PLANS OF BANK OF MAHARASHTRA

To increase finance to Self Help Groups in rural areas. Page 12 of 47

To substantially increase the Savings Bank Deposits. Bank is planning setting up of overseas representative offices in New York , London, Singapore & Dubai.

1. 4 FINANCIAL PERFORMANCE
Bank of Maharashtra registered a net profit of 430.83 crore during the financial year ended on March 31, 2012, comparing to a net profit of 330.39 crore in 2010-11 by recording a growth of 30.40%.

PROFIT IN CRORES

year 2012 profit in crores year 2011 0 100 200 300 400 500

Net worth of bank has also increased form 2709.24 crore in FY 201011 to 3775.52 crore in FY 2011-12.

NET WORTHIN CRORE

year 2012 net worthin crore year 2011

1000

2000

3000

4000

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On the business front , total business of the bank registered a growth of 16.77% to Rs. 133508 crore in MARCH 31, 2012 as compared to Rs. 114332 crore in MARCH 31.

TOTAL REVENUE IN CARORE

year 2012 total revenue in carore year 2011 100000 110000 120000 130000 140000

SOME IMPORTANT FINANCIAL RATIOS FOR THE FY 2011-2012 PROFITABILITY RATIOS

Return on Assets Excluding Revaluations 63.77 Return on Assets Including Revaluations 70.13

MANAGEMENT EFFICIENCY RATIOS

Interest Income / Total Funds 9.37 Operating Expense / Total Funds 2.75 Net Profit / Total Funds 0.52 Total Income / Capital Employed(%) 9.52 Total Assets Turnover Ratios 0.09

LEAVERAGE RATIOS
Current Ratio 0.03 Quick Ratio 21.52

Earnings Per Share 6.28 Book Value 63.77 Page 14 of 47

1.5 OBJECTIVES OF STUDY

To know the process of working capital finance provided by banks. To analyse in detail the procedure of assessment of working capital finance extended by bank. To apply these procedure at a practical level with the help of case studies.

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II. INTRODUCTION TOWORKING CAPITAL FINANCE

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2.1 ASSESSMENT OF WORKING CAPITAL

A unit needs working capital funds mainly to carry current assets required for its operations. Proper assessment of funds required for working capital is essential not only in the interest of the concerned unit but also in the national interest to use the scare credit according to production requirements. Inadequate levels of working capital may result in under-utilization of capacity and serious financial difficulties. Similarly excessive levels may lead to unproductive use of credit and unnecessary interest Burdon on the unit.

Proper assessment of working capital requirement may be done as under-

If the bank credit is to be linked with production requirements, it is necessary to assess the requirements on the basis of certain norms. The study group to frame guidelines to follow-up of bank credit (Tandon Study Group) appointed by Reserve Bank of India had suggested the norms for inventory and receivables regarding:Major industries on the basis of company finance studies made by Reserve Bank process periods in the different industries, discussions with the industry experts and feed-back received on the interim report. The norms suggested by Tandon Study Group are being reviewed from time to time by the Committee of Direction constituted by the Reserve Bank to keep a constant view on working capital requirements. The committee has representatives from a few banks and it generally once in a quarter. It also consults the representative from industry and trade. It keeps a watch on the various issues relating to working capital Page 17 of 47

requirements and gives various suggestions to suit the changing requirements of the industry and trade.

Banks make their own assessment of credit requirements of borrowers based on a total study of borrowers business operations and they can also decide the levels of holding each item of inventory as also of receivables which in their view would represent a reasonable built up of current assets for being supported by banks finance. Banks may also consider suitable internal guidelines for accepting the projections made by the borrowers regarding sundry creditors as sundry creditors are taken as a source of financing current assets (inventories, receivables, etc.), it is necessary to project them correctly while calculating need of bank finance for working capital requirements.

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2.2COMPUTATION OF MAXIMUM PERMISSIBLE BANK FINANCE (MPBF):

The Tandon Study group had suggested the following alternatives for working out the maximum permissible bank finance:-

a. Bank can work out the working capital gap. i. e. total current assets less current liabilities other than bank borrowings and finance a maximum of 75per cent of the gap; the balance to come out of long-term funds, i.e. owned funds and term borrowings

b. . Borrower should provide for a minimum of 25 per cent of total current assets out of long-term funds, i.e. owned funds and long term borrowings. A certain level of credit for purchases and other current liabilities inclusiveof bankborrowings will not exceed 75 per cent of current assets. It may be observed from the above that borrowers contribution from long term funds would be 25 per cent of the working capital gap under the first method of lending . The above minimum contribution of long-term funds is called minimum stipulated Net Working Capital (NWC) which comes from owned funds and term borrowings.

Above two method of lending may be illustrated by taking the following example of a borrowers financial position, projected as at the end of next year. CURRENT LIBILITES AMT CURRENT ASSETS AMT

CREDITORS

200

RAW

380

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MATERIALS OTHER CURRENT LIBILITES BANK BORROWINGS INCLUDING BILLS DISCOUNTED WITH BANKERS RECEIVABLES INCLUDING BILLS DISCOUNTED WITH BANKERS OTHER CURRENT ASSETS 700 700 30 110 400 FINISHED GOODS 180 300 STOCK TRADES IN 40

FIRST METHOD TOTAL CURRENT ASSEST LESS:- CURRENT LIABILITIES (OTHER THAN BANK BORROWINGS) WORKING CAPITAL GAP 440 740 300

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25% OF ABOVE FROM LONG TERM SOURCES MBPF EXCESS BANK BORROWINGS CURRENT RATIO

110 330 70 1.17:1

SECOND METHOD TOTAL CURRENT ASSETS 25% OF ABOVE FROM LONG TERM SOURCES WORKING CAPITAL GAP LESS:- CURRENT LIABILITIES (OTHER THAN BANK BORROWINGS) MBPF EXCESS BANK BORROWINGS CURRENT RATIO 255 145 1.33:1 740 185 555 300

of It may be observed from the above that in the first method, the borrower has to provide a minimum of 25 per cent of working capital gap from ling-term funds and it gives a minimum current ratio 1.17:1. In the second method, the borrower has to provide a minimum of 25 per cent of total current assets from long-term funds and gives a minimum current ratio 1.33:1.

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2.3 WORKING CAPITAL FINANCING BY BANKS

A bank is a business organization which deals in money i.e. lending and borrowing of money. They perform all types of functions like accepting deposits, advancing loans, credit creation and agency functions. Besides these usual functions, one of the most important functions of banks is to finance working capital requirement of firms. Working capital advances forms major part of advance portfolio of banks. In determining working capital requirements of a firm, the bank takes into account its sales and production plans and desirable level of current assets. The amount approved by the bank for the firms working capital requirement is called credit limit. Thus, it is maximum fund which a firm can obtain from the bank. In the case of firms with seasonal businesses, the bank may approve separate limits for peak season and non-peak season. These advances were usually given against the security of the current assets of the borrowing firm.

Usually, the bank credit is available in the following forms:

CASH CREDIT Under this facility, the bank specifies a predetermined limit and the borrower is allowed to withdraw funds from the bank up to that sanctioned credit limit against a bond or other security. However, the borrower can not borrow the entire sanctioned credit in lump sum; he can draw it periodically to the extent of his requirements. Similarly, repayment can be made whenever desired during the period. There is no commitment charge involved and interest is payable on the amount actually utilized by the borrower and not on the sanctioned limit.

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OVERDRAFT Under this arrangement, the borrower is allowed to withdraw funds in excess of the actual credit balance in his current account up to a certain specified limit during a stipulated period against a security. Within the stipulated limits any number of withdrawals is permitted by the bank. Overdraft facility is generally available against the securities of life insurance policies, fixed deposits receipts, Government securities, shares and debentures, etc. of the corporate sector. Interest is charged on the amount actually withdrawn by the borrower, subject to some minimum(commitment) charges. LOANS Under this system, the total amount of borrowing is credited to the current account of the borrower or released to him in cash. The borrower has to pay interest on the total amount of loan, irrespective of how much he draws. Loans are payable either on demand or in periodical installments. They can also be renewed from time to time. As a form of financing, loans imply a financial discipline on the part of the borrowers.

BILLS FINANCING This facility enables a borrower to obtain credit from a bank against its bills. The bank purchases or discounts the bills of exchange andpromissory notes ofthe borrower and credits the amount in his account after deducting discount. Under this facility, the amount provided is covered by cash credit and overdraft limit. Before purchasing or discounting the bills, the bank satisfies itself about the creditworthiness of the drawer and genuineness of the bill.

LETTER OF CREDIT While the other forms of credit are direct forms of financing in which the banks provide funds as well as bears the risk, letter of credit is an indirect form of working capital financing in which banks assumes Page 23 of 47

only the risk and the supplier himself provide the funds. A letter of credit is the guarantee provided by the buyers banker to the seller that in the case of default or failure of the buyer, the bank shall make the payment to the seller. The bank opens letter of credit in favour of acustomer to facilitate his purchase of goods. This arrangement passes the risk of the supplier to the bank. The customer pays bank charges for this facility to the bank.

WORKING CAPITAL LOAN Sometimes a borrower may require additional credit in excess of sanctioned credit limit to meet unforeseen contingencies. Banks provide such credit through a Working Capital Demand Loan (WCDL) account or a separate nonoperable cash credit account. This arrangement is presently applicable to borrowers having working capital requirement of Rs.10 crore or above. The minimum period of WCDL keeps on changing. WCDL is granted for a fixed term onmaturity of which it has to be liquidated, renewed or rolled over. On such additional credit, the borrower has to pay a higher rate of interest more than the normal rate of interest.

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2.4 SECURITY REQUIRED IN BANK FINANCE

Banks generally do not provide working capital finance without adequate security. The nature and extent of security offered play an important role ininfluencing the decision of the bank to advance working capital finance. The bank provides credit on the basis of following modes of security: HYPOTHECATION Under this mode of security, the banks provide working capital finance to the borrower against the security of movable property, generally inventories. It is a charge against property for the amount of debt where neither ownership nor possession is passed to the creditor. In the case of default the bank has the legal right to sell the property to realise the amount of debt. PLEDGE A pledge is bailment of goods as security for the repayment of a debt or fulfillment of a promise. Under this mode, the possession of goods offered as security passes into the hands of the bank. The bank can retain the possession of goods pledged with it till the debt (principal amount) together with interest and other expenses are repaid. . In case of non-payment of loan the bank may either; Sue the borrower for the amount due. Sue for the sale of goods pledged; or After giving due notice, sell the goods. LIEN Lien means right of the lender to retain property belonging to the borrower until he repays the debt. It can be of two types: (i) (ii) Particular lien and General lien. Page 25 of 47

Particular lien is a right to retain property until the claim associated with the property is fully paid. On the other hand, General lien is applicable till all dues of the lender are paid. Banks usually enjoy general lien. MORTGAGE Mortgage is the transfer of a legal or equitable interest in a specific immovable property for the payment of a debt. In case of mortgage, the possession of the property may remain with the borrower, while the lender enjoys the full legal title. The mortgage interest in the property is terminated as soon as the debt is paid. Mortgages are taken as an additional security for working capital credit by banks. CHARGE Where immovable property of one person is made security for the payment of money to another and the transaction does not amount to mortgage, the latter person is said to have a charge on the property and all the provisions of simple mortgage will apply to such a charge. A charge may be created by the act of parties or by the operation of law. It is only security for payment.

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2.5 RECENT RBI GUIDELINES WORKING CAPITAL FINANCE:

REGARDING

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

1. The notion of Maximum Permissible Bank Finance (MPBF) has been abolished byRBI and a new system was proposed by the INDIAN BANKINGASSOCIATION (IBA).This has given banks greater freedom and responsibility for assessing credit needs andcredit worthiness. The salient features of new system are: For borrowers with requirements of uptoRs. 25 lakhs, credit limits will be computed after detailed discussions with borrower, without going into detailedevaluation. For borrowers with requirements above Rs. 25 lakhs, but uptoRs. 5 crore, creditlimit can be offered upto 20% of the projected gross sales of the borrower. For large borrowers not selling in the above categories, the cash budget systemmay be used to identify the working capital needs.

However, RBI permits banks to follow Tandon/Chore Committee guidelines and retain MPBF concept with necessary modifications.

2. Earlier RBI had prescribed consortium arrangements for financing working capital beyond Rs. 50 crore. Now it is not essential to have consortium arrangements. However, banks may themselves decide to form consortium so that the risks are spread. The disintegration of consortium system, the entry of term lending institutions into working capital finance and the emergence of money market borrowing options gives the best possible deal. Page 27 of 47

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

4. RBI had also issued lending norms for working capital, under which the banks would decide the levels of holding of inventory and receivables, which should be supported by bank finance, after taking into account the operating cycle of an industry as well as other relevant factors. Other aspects of lending discipline, viz maintenance of minimum current ratio, submission and use of data furnished under quarterly information system etc. would continue through with certain modifications, which would make it easier for smaller borrowers to comply with these guidelines.

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2.6 WORKING CAPITAL FINANCING AT BANK OF MAHARASHTRA

Bank provides working capital finance to their customers through funded facilities like CASH CRDIT (Running account facility) Against the collateral security.

WHAT IS CASH CREDIT A/C

Cash credit is an arrangement under which a customer of a bank or financial institution is allowed an advance up to certain limit against credit granted by bank. That means a loan may be granted say for Rs. 1 Lakh however the customer/borrower of the loan may take the amount of loan to the extent required by him but not exceeding the limit of Rs. 1 Lakh In Cash Credit facility an amount of loan is given to the borrower/businessman for his working capital needs. The entire amount of working capital required is not funded by the bank, some small amount will have to be funded by the businessman and the balance amount will be funded by a bank as a loan The amount so worked out is given as loan and is called as "limit" this is because under this kind of loan the borrower may not take up the entire amount of loan as working capital requirement every day is not the same, i.e. on one day the amount of working capital required may for eg. may be Rs. 96,000 and on a another day it may be Rs. 92,000 as some debtor might have paid up some amount. Hence the businessman will require Rs.96,000 on one day and he will require Rs. 92,000 on the other day only. He on a particular day may require Rs. 1,07,300 but the loan amount that he can get is any amount which is not more than the "limit" of the loan given. If in the above eg. Limit is say Rs. 1 lakh then when he requires Rs. 1.07300 he will get loan upto Rs. 1 lakh only

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2.7 PROCEEDURE OF WORKING CAPITAL FINANCING AT BANK OF MAHARASHTRA PRE SECTION PROCESS
Obtain loan application: Customer who wants to avail the cash credit facility should submit complete application form along with requited information. The information generally required to be submitted by the customer along with the application form are: Audited balance sheet and profit and loss account for previous three years along with income tax or sales tax returns. Estimated balance sheet for the current year. Projected balance sheet for the next year. CMA report Industry exposure restriction and related risk factors Government regulation and its impact on the industry. Memorandum and articles of association of the company/ partnership deed of partnership firm. Assets and Liabilities of the guarantors along with latest income tax returns file. In case of takeover of advances, section letters of facilities being availed fromexisting bankers. Project report containing details of all the assets, name of suppliers, capacity of utilization, production , sales , projected profit and loss and balance sheet for next 7 to 8 years till the loan is paid. Photocopies of lease deed/ title deeds of all the properties being offered as primary and collateral security. Position of accounts from the existing bankers and confirmation about the assets being standard with them. (in case of takeover)

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POST SECTION PROCESS:

Section credit of credit limit of working capital requirement after proper assessment is not alone sufficient, close supervision and follow up is required to ensure the safety and proper utilization of fund lend.A timely action is possible only close supervision and followed up by using following techniques. o Monthly stock statement o Inspection of stock o Scrutiny of operation of account o Quarterly/ half quarterly statement o Under information system o Annual audited report

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2.8 CREDIT RATING

CREDIT RATING MODEL The various risk faced by any company may be broadly classified as follows: INDUSTRY RISK: It covers the industry characteristic, compensation, financial data etc. COMPANY/ BUSINESS RISK: It considers the market position, operating efficiency of the company etc. PROJECT RISK: It includes the project cost, project implementation risk, post project implementation etc. MANAGEMENT RISK: It covers the track record of the company, their attitude towards risk, propensity for group transaction, corporate governance etc. FINANCIAL RISK: Financial risk includes the quality of financial statements, ability of the company to raise capital, cash flow adequacy etc.

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2.9 CREDIT RATING AT BANK OF MAHARASHTRA

The banks evaluate the borrower depending on the risk involved in the financing to them. Therefore, each borrower is graded or credit rating is assigned to them and interest is charged on the principle of Lower the risk, lower the interest, Higher the risk, higher the rate of interest

CREDIT RISK RATING

AAA+ AAA AA A B C D PRIME EXCELLENCE GOOD SATISFACTORY RISK PRONE HIGH RISK HIGHEST RISK

DRAWING POWER OF BORROWER

Suppose a borrower has a Rs. 100 lakh as working capital limit sectioned to him by a bank. Security provided by borrower is hypothecation of inventory Borrower needs to hold inventory of 130 lakh Actual level of inventory with borrower is 100 lakh Margin prescribed by bank is 25% Therefore with this level of inventory, the borrower enjoys only 82.5 lac of his working capital limit of 100 lakh

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2.10 DOCUMENTATION MAHARASHTRA

RF 45 -

AT

BANK

OF

Request letter for making CASH CREDIT facility available

F 260 F273

Receipt for amount of loan Loans/advances/facilities granted/ to be granted to (Right of set-off) (Required for guarantor as well as borrower)

RF 46/47

Demand promissory note (Required for all types of loan)

F 154 (A) RF 66(J)

Guarantee bond (franking of Rs. 100 required) Composite deed of hypothecation for all facilities (0.2% of the amount)

MORTAGAGE Format A Memorandum declaration (Rs.100 franking is required) and notary also Format B Memorandum of record of equitable mortgage (Franking of 0.2% of total amount of loan) Format C Mortgage of letter of conformation It consist of Form I : (Creation and modification) includes: Title deed Third party mortgage

Form I

Satisfaction of any existing

security interest

Form III :

Particulars of securitization or construction of fixed asset

Form IV :

particulars of satisfaction of securitization & reconstruction of transaction.

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2.11 IMPROTANT FINANCIAL RATIOS FOR ASSESSMENT OF WORKING CAPITAL FINANCE

CURRENT RATIO=CURRENT ASSET/ CURRENT LIABITIES

Help to measure liquidity and financial strength, indication of availability of current assets to pay current liabilities. The higher the ratio betters the liquidity position. Generally it should be at least 1.33.

TOL/TNW=TOL/TANGIABLE NET WORTH

Indicate size of stakes, stability and degree of solvency. Indicates how high the stake of the creditors is. Indicate what proportion of the company finance is represented by the tangible net worth. The lower the ratio, greater the solvency. Anything over 5 should be viewed with concern.

OPERATING PROFIT RATIO=OPERATING PROFIT/NET SALES100

This ratio indicates operating efficiency. Indication of net margin of profit available on Rs. 100 sales. Trend for company over a period should be encouraging.

DSCR (DEBTSERVICECOVERAGE RATIO)=

DEPRICIATION+INTREST ON TERM LOAN/ INTREST ON TERM LOAN+INSTALLMENT OF TERM LOAN

It indicates the number of times total debt service obligation consisting of interest and repayment of the principal in installment is covered by the total fund available after

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taxes. With the help of this ratio (popularly known as DSCR), we can find out whether the loan taken for acquisition of fixed assets can be rapid conveniently.

This ratio of 1.5 to 2 considered adequate.

We have already touched upon depreciation as non-cash expenditure and since the funds are available with the enterprise to that extent. It is in order to ask for this sum in reduction of loan.

INTEREST COVERAGE RATIO=EARNINGS BEFORE TERM LOAN AND TAXATION / INTEREST ON TERM LOAN

The ratio indicates adequacy of profit to cover interest. Higher the ratio more is the security to the lender.

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III. RESEARCH METHODOLOGY

This is an analytical research area where we analyse information with cause and its effects relationship. This analysis leads to the simple conclusion of weather to lend to the institutions for their working capital needs. Research Type Source Of Data Sample Sample Technique Analysis Tool Used Analytical Primary And Secondary Case Study Allocation of cases Financial analysis

Primary Data

Observation, Discussion with branch manager

Secondary Data :

Old section proposals RBI guidelines Reference books

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IV. DATA PROCESSING AND ANALYSIS

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4.1 CASE STUDIES

COMPARATIVE BALANCE SHEET AND PERFORMANCE / FINANCIAL INDICATORS: ABRIDGED BALANCE SHEET

Liabilities 31.03.04 31.03.05 31.03.06 Assets 31.03.04 Audited Audited Prov. Audited Capital 17.53 18.41 84.84 FA 23.15 Reserves Depr. 5.85 Net NW 17.53 18.41 84.84 17.3 Block Cash & TL 12.43 15.98 2.98 1.47 Bank Unsec Ln TL from BOM TL(car) 1.76 Scred Bk Borr 9.11 OCL 0.09 TCL 9.2 13.08 0.15 13.23 15 15 2.46 1.88 81.46 0.38 RM WIP FG RecDom Export OCA TCA Inv Tot NCA Acc Loss Tot.Intan g Ass. Tot Ass 40.91 12.77 8.18 1.19 23.61

31.03.05 Audited 26.64 6.38 20.26 0.84

31.03.06 Prov. 150.73 21.42 129.31 2.51

16.53 12.01 2.32 31.7

15 35.13 2.71 55.35

Tot Liab 40.91

51.96

184.66

51.96

184.66

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31.0 3.20 11 * NET WORTH LESS: REVALU ATION RESER VES LESS: INTANG IBLE ASSETS TANGIB LE NET WORTH 17.5 3 -

31. 03. 12 18. 41 -

31. 03. 13 84. 84 -

17.5 3

18. 41

84. 84

PERFORMANCE / KEY FINANCIAL INDICATORS: (Rs in Lacs)

PARTIC ULARS NET SALES % INCREA SE / DECREA SE NET PROFIT AFTER TAX % TO NET SALES CASH ACCRUA LS 6.4 2 7.2 8 30. 04 31. 03. 11 56. 11 71. 1% 31. 03. 12 95. 70 70. 55 % 31. 03. 13 180 .00 88 %

0.5 7 1.0 1%

0.8 9 0.9 3%

8.6 2 4.7 9%

TNW EXCL REVALU ATION RESERV E TOL / TNW RATIO

17. 53

18. 41

84. 84

1.3 3

1.8 2

1.1 8

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NWC

14. 41 2.5 7

18. 47 2.4 0

40. 35 .69

CURREN T RATIO

SALES: As partners have been engaged in marketing the new technology to various users for the initial 2/3 years vigorously and their efforts are started yielding results. During the year 2012 the firm has obtained approval from BHEL, NTPC, and HAL for use of its products DSC & ESC. Agreement with NTPC through BHEL (Hardwar) is exclusive supply (not to any other companies) for annual turnover of Rs. 250.00 Lac. The orders are of repetitive nature. Besides BHEL (Hid) have also started placing sample orders. The firm has also been able to secure orders from HAL (Koraptut) for DSC & ESC. During the year up to Nov11 the firm has already done sale of Rs. 100.00 lac besides the job work. Orders worth Rs. 150.00 lac from BHEL (Hardwar) are on hand scheduled to be completed before March13. Completion of this of these orders will enable the firm to achieve a sale of Rs. 250.00 lac by this year end. This is acceptable.

PROFIT: Hitherto the net profit in terms of sales has been about 1.00%. Against this backdrop the estimated profitability of 4.79% in the current appears unreasonable. During discussion it is clarified that as the firm has shifted its focus from mare job work to direct selling the margin will be high. In fact it has set up its own machining plant and has secured approval from BHEL for the Quality of its own materials. It used to pay for job works to other companies/firms for the machining purpose. This payment was to the tune of 25% (apt) of the Page 41 of 47

job work revenue. For the year 2011 as the job work is being done inhouse the expenses are estimated to be hardly 5%. Besides, margin of direct selling of its materials is better. Moreover with increased sales the marginal revenue would be proportionately high adding to the increased yield. In view ofthe above factors we may accept the profitability estimates made by the firm. In the coming 7 years the firm has estimated profitability ranging from 8.5% to 12.5%. This appears to be on the higher side. As the sales are estimated to stabilize at Rs. 312.00 lac we may accept the profitability of 4.79% as acceptable for the year 2005. Accordingly the net profit for the 2nd year would be Rs. 13.70 lac and then Rs. 14.95 lac p. a.

CASH ACCRUAL: With addition to fixed assets the depreciation shall be high. Thus with accepted profitability the accrual would be Rs. 30.00 lac for the year 2012 followed by Rs. 32.03 lac, Rs. 30.62 lac respectively. The position is acceptable.

TNW: Up to 2011-12 the TNW has been increasing with retention of profits. In the year 2012 for the expansion plan the partner have agreed in bring in additional capital of Rs. 46.00 lac, Remaining Rs 20.00 lac from internal accrual. We have discussed the issue of infusion of capital by partners. It is informed that depending upon the advice of their auditors they would be either increasing the amount of individual capital and/or brings in unsecured loans from friends/relatives to be converted to capital over a period of time. Since the existing work is being carried out from their own sources the branch is advised to obtain a CAs certificate certifying the amount investing that will beconsidered as their contribution. Since the cash accrual for the year 2012
is accepted at Rs. 30.00 lacs the remaining contribution of Rs. 20.00 lac from partners appears reasonable.

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TOL/TNW: The ratio has been below 2.00 up to 31.03.12 and with proposed capital infusion the same is estimated to be about 1.18 which is acceptable being well within benchmark level.

NWC & CURRENT RATIO: Both the parameters have been well above their respective benchmark levels and are estimated to improve further over the existing levels. It may be mentioned that even though the firm is increasing its production capacity and consequently sales it has not requested any additional working capital. During discussion it is gathered that with direct selling the payment term would be 90 % against supply of materials which would improve its cash flow and hence there will not be additional requirement of working capital. However the partners have informed that after the expansion is completed in March 13 they may approach us for additional working if required at that point of time. Thus the overall financial position of the firm is satisfactory.

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ASSESSMENT OF PRESENT PROPOSAL: A. WORKING CAPITAL ASSESSMENT:

SALES PROJECTIONS: Already discussed. INVENTORY & RECEIVABLES: Except the receivables the firm has estimated other current asset as per past trend and hence acceptable. The holding level of receivables has been year it has estimated the

1.5 month to 1.75 months sales. For the current

same to be 2.33 months. It is clarified that as the firm would be executing Rs150.00 lac worth of orders from BHEL in next 4 months ( At least Rs 80.00 lac as accepted by us) there will be concentration Hence the estimates appear reasonable. Creditors estimated to be nil too. Against this background MPBF is calculated as under. of debtors at the year end. have been nil and are

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WORKING OF MPBF: -WORKING OF MAXIMUM PERMISSIBLE

BANK FINANCE: (Rs in lacs). PARTICULARS 31.03.11 AUDITED a. TOTAL CURRENT ASSEST b. OTHER CURRENT LIBILITIES OTHER THAN BANK BORROWINGS c. WORKING CAPITAL GAP d. MIN. STIPULATED NWC e. ACTUAL/PROJECTED NWC f. ITEM c-d g. ITEM c-e h. MBPF i. EXCESS BORROWINGS IF ANY 23.52 5.90 14.41 17.62 9.11 9.11
31.55

31.03.12 AUDITED 31.70 0.15

31.03.13 ESTM. 55.35 -

23.61 0.09

55.35 13.84 40.35 41.51 15.00 15.00

7.93 18.47 23.62 13.08 13.08

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IV. CONCLUSIONS

The need for working capital is ever increasing.

Bank of Maharashtra follows Tondon Commiittee guidelines for lending money.

Hypothecation and mortgage are generally used to create securities for the bank.

Bank has their own credit rating procedure .

If the applicants have banking with bank since inception stage then they are given preference as creditable and loyal party over their financial indication.

The documentation part used by Bank of Maharashtra is very prompt and is as per the guidelines of RBI.

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V. RECOMMENDATIONS
Closely monitoring and inspecting the activities and stock of the borrowers from time to time can avoid the misuse of working capital.

The bank must further secure themselves by holding a second charge on the fixed assets of the borrower so as to ensure the safety.

Statement of financial transactions should be review at regular interval to minimize losses due to irregular payments and defaulters.

Sensitivity analysis should be done before sectioning cash credit facility to get the insight into the variability of the outcomes.

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