HONDA CAR COMPANY

FOUNDER: SOICHIRO HONDA

DATE OF BIRTH: NOVEMBER 17, 1906

DATE OF DEATH: AUGUST 5, 1991

NATIONALITY: JAPANESE

PROFILE: SOICHIRO HONDA

DREAMER, WEAVER, AND A MAN WHO LOVED MACHINES

Soichiro Honda created a motor vehicle industry when it should have been impossible.
The time for that was the turn of the century, when Ford, Peugeot, and Daimler were
created. Shipbuilding magnate Henry J. Kaiser tried to break into the auto business in
1947, and lasted only a decade. The territory was taken, transportation was a mature
industry, and its giants wanted no new competitors. By mid-century, one man could no
longer create such a manufacturing empire.
Yet Honda did. It's easy to say that postwar Japan needed transportation, and Honda
seized the moment. Yet so did many others, and where are they today? Japan had its own
established giants, but Honda somehow made himself their equal.
This man, despite being a results-oriented pragmatist who suffered no fools gladly, was
driven at the core by a dream. He was born at the junction of old and new, as Japan swept
from agriculture to manufacturing. Strong contrasts filled his early life, as this
blacksmith's son gazed with wonder at the future's new machines--engines, pumps and
airplanes. Young Soichiro ran after the first car he saw, savoring its exotic breath. He
dreamed of transcending the dusty road with machines that moved, that multiplied human
abilities. And machinery made sense to him. Book-learning did not. He couldn't wait for
school diplomas to unlock his future--he plunged into practical work with cars and
engines.
Honda knew his own countrymen well enough to lead them, and he sought in others
talents he himself did not have. He was no isolated engineering nerd, dreaming in private.
Honda demanded practical results, and he found a way of working that brought those
results. He learned to regard failures as necessary steps toward understanding. He
instilled in others the drive to learn without fear of failure. Such was the road to success.
A motor vehicle empire is not created simply by acts of will or diligence. Honda
discovered, with his attempts to make piston rings in 1937, that the physical world
doesn't yield its secrets to effort alone. Its complexity requires study. Honda went back to
school to add the insights of metallurgy to guide his hundreds of experiments. Work and
study brought success, so that when he produced his first postwar motor-bicycles, he
knew the value of continuous reinvestment in technology.
It was not enough to have a good idea, a strong will and a willingness to put in the hours.
If you made a product no better and no worse than your competitor's, the customer had no
reason to prefer yours. But reinvestment in technology offered something different--a
way to grow ideas into useful new things that people would want. Japan's impressive
heavy industries had emerged during Honda's youth, but he knew it would take
something more to succeed in the turbulent 1950s.
Honda learned to reach goals by breaking with tradition and accepted views that stood
between himself and his goals. His novel way of seeing the world owed much to his
playful sense of humor. Learning early and through hard apprenticeship that
unconventional ideas could work, he applied this directness to everything in his life. He
showed famous disrespect for status, believing that work dignifies the workman, and that
therefore work clothes and cap were equally appropriate for financial meetings or shop
visits. He expected to be judged by his actions, not by the cut of his suit, and applied the
same standard to his associates. Knowing himself, he knew that people of any education
or background could have useful ideas.
Soichiro Honda's unconventional ways became the company's personality because he did
not pursue the socially correct compromise path of consensus decision-making. He was
everywhere in the flesh, checking the progress of R&D projects, visiting production
shops, helping workers assemble an engine, injecting his own views, asking questions.
Honda's way was to overturn the conventional to seek ideas so simple that traditional
thinkers had overlooked them. In Soichiro Honda's view, engineering was not just applied
science; it was imagination made real and useful. What do you need? We'll make it.
To make these things, Honda also changed marketing methods, and manufacturing. High
quality comes from a creative combination of design for use and design for
manufacturing, all aimed to hit a specific market need. A product that can be made in
easy steps can be made well, and a product that does its job reliably pleases its users.
The step-through Honda Cub(r) was the first international success for the Honda(r) Motor
Company, and it was a model for all the successes that were to follow. Recognize a need,
create a unique way to satisfy it, incorporate unusual performance, quality and reliability,
then build from an expanding reputation into yet other areas. This pattern defined the
Honda Way. A need was recognized, and after trial and error, the trouble-free, easy-to-
operate 50cc Cub was created.
Marketing targeted the general public with good, clean two-wheeled fun, and introduced
millions to motorcycling. When the market was saturated, Honda had the vision to see
that a similarly trouble-free kind of sports motorcycle could become equally popular,
building on the proven reputation of the Cub. As that success expanded into many
countries, Honda expanded its line, always offering customers a step up to more
sophisticated models. Soon thereafter came auto production, and the rest of the story is
familiar recent history.
The most difficult problems--those shunned by competitors--have been tackled by Honda
engineers who know this is the best way to be prepared for the future. From the
beginning, Honda sought the challenge of racing, and when his motorcycles won their
first Grand Prix road racing title in 1961, the new company's engineering power was
demonstrated to the world. Since then, racing has remained a valued element in Honda's
development process. From Honda's continuing research and development, a long
succession of technological triumphs has resulted--the low-emissions engines, variable
valve timing, the latest lean-burn combustion system and minimalist alloy chassis are
only a few. Because of work of this kind, Honda products are not commodities. They are
unique.
This success was no accident. Soichiro Honda invented himself by hard trial and error, to
succeed in difficult, fluid times. His company became an extension of himself, displaying
his qualities, employing his methods. Honda's unconventional personality was an
essential adaptation to an era of unpredictable, accelerating change, enabling the
company, like the man, to make room for itself among less agile giants, to take and hold
its place in history as a pioneer.

HIS BELIEFS
•"SOME DREAM TO ESCAPE REALITY,SOME TO CHANGE IT
FOREVER." --SOICHIRO HONDA
•"IF YOU HIRE ONLY THOSE PEOPLE YOU UNDERSTAND, THE
COMPANY WILL NEVER GET PEOPLE THAN YOU ARE. ALWAYS
REMEMBER THAT YOU OFTEN FIND OUTSTANDING PEOPLE
AMONG THOSE YOU DON'T PARTICULARLY LIKE."
--SOICHIRO HONDA
•SUCCESS IS 99% FAILURE. --SOICHIRO HONDA
•SUCCESS REPRESENTS 1%OF YOUR WORK WHICH RESULTS
FROM THE 99% THAT IS CALLED FAILURE. --SOICHIRO HONDA
•THE VALUE OF LIFE CAN BE MEASURED BY HOW MANY TIMES
YOU SOUL HAS BEEN DEEPLY STIRRED. --SOICHIRO HONDA
•YOU MUST GO AFTER THE OPPORTUNITIES THAT ARISE IN LIFE
THAT YOU ARE BEST EQUIPPED TO DO. --SOICHIRO HONDA
•SUCCESS CAN ONLY BE ACHIEVED THROUGH REPEATED
FAILURE AND INTROSPECTION. -- SOICHIRO HONDA
•REAL HAPPINESS LIES IN THE COMPLETION OF WORK USING
YOUR OWN BRAINS AND SKILLS. --SOICHIRO HONDA
•WHAT WE LEARN THROUGH FAILURE BECOMES A PRECIOUS
PART OF US, STRENGTHENING US IN EVERYTHING WE DO . SO
LET THE TOUGH THINGS MAKE YOU TOUGHER. --SOICHIRO
HONDA
•AFTER MATERIALS ARE CARRIED INTO THE FACTORY, NOTHING
BUT PRODUCTS SHOULD BE CARRIED OUT FROM IT. --SOICHIRO
HONDA
•YOU DO NOT HAVE TO BELIEVE IN MIRACLES TO BELIEVE IN
THE POWER OF DREAMS. --SOICHIRO HONDA

Table of Contents
1. Company Profile
(A) History
(B) Honda in India
(C) Honda Philosophy
(D) Ownership Pattern
(E) Manufacturing Capacity
(F) Sales and Distribution Network
(G) Product Range
(H) Sales Performance
(I) Environment and Safety
(J) Awards and Accolades

2. SWOT ANALYSIS

3.

Company Profile
History

HSCI was established in December 1995, with Honda Motor Co., (Japan) and Siel Ltd.
(India) as the key promoters. Honda’s models are strongly associated with advanced
design and technology, apart from its established qualities of durability, reliability and
fuel-efficiency.
Honda Siel Cars’ state-of-the-art manufacturing unit was set up in 1997 at Greater Noida,
U.P. and currently has a capacity of 50,000 cars annually. The company is planning to
raise its capacity to 100,000 cars per annum by the end of 2007.

HSCI has recently launched the all-new, third generation CR-V and new Accord in its
portfolio. The all-new Honda CR-V comes in 2 variants- 6 speed manual transmission
system and 5-speed automatic transmission system with Grade Logic Control for smooth
and effortless performance.

Honda’s most successful global model, the eighth generation Civic was launched in July
2006 and has already become segment leader within a short span of time. The Honda City
ZX, the largest selling sedan in India, is today recognized as one of the most successful
car brands in India. To ensure consumer’s safety, Honda has recently added new features
like Airbags and ABS in the VTEC version of the car.

In 2006, three of Honda’s four cars in the Indian market – City, Accord and CR-V, have
ranked first in the TNS Total Customers Satisfaction Award.

Corporate awards of HSCI in 2006 includes: ‘Indian Car of the Year’ (Honda Civic) by
automobile media, ‘Manufacturer of the Year’ by CNBC TV–18 Auto-car, ‘SUV of the
Year’ (Honda CR-V) by NDTV Profit Car India & Bike India, ‘SUV of the Year’ (Honda
CR-V) by Overdrive, ‘Best Driver’s Car’ award by CNBC TV-18 Auto-car Auto Awards,
‘Car of the Year’ (Honda Civic) by CNBC TV-18 Auto-car Auto Awards 2007, Jury
Award for Civic in BS Motoring Awards and ‘Car of the Year’ (Honda Civic) by NDTV
Profit Car India & Bike India Awards 2007, Viewers’ Choice’ award by NDTV, CNBC
and Aaj Tak, TNS Total Customer Satisfaction Study – 2006 (Accord, CR-V & City),
‘NDTV CNB-AAA PR & Communications Team of the Year’.
The company operates under the stringent standards of ISO 9001 for quality management
and ISO 14001 for environment management.

Honda in India

Honda Siel Cars India Ltd., (HSCI) was incorporated in December 1995 as a joint
venture between Honda Motor Co. Ltd., Japan and Siel Limited, a Siddharth Shriram
Group company, with a commitment to providing Honda’s latest passenger car models
and technologies, to the Indian customers.

The Honda City, its first offering introduced in 1997, revolutionized the Indian passenger
car market and has ever since been recognized as an engineering marvel in the Indian
automobile industry. The success of City as well as all its other models has led HSCI to
become the leading premium car manufacturer in India.

The total investment made by the company in India till date is Rs. 1620 crores. The
company has a capacity of manufacturing 100,000 cars.

Honda Philosophy
The Honda Philosophy expressed in this illustration shows the Company Principle,
Management Policies and the ‘Honda Way’ based upon the fundamental beliefs of
‘Respect for the Individual’ and ‘The Three Joys’

FUNDAMENTAL BELIEFS
Ownership Pattern

Honda Siel Cars India Ltd., (HSCI) was incorporated in December 1995 as a joint
venture between Honda Motor Co. Ltd., Japan and Siel Limited, a Siddharth Shriram
Group company. HSCI currently holds 99.9% ownership and rest 0.1% lies with
Siddharth Shriram Group company.

Manufacturing Capacity
HSCI’s state-of-the-art manufacturing unit was set up in 1997 at Greater Noida, U.P with
an investment of Rs. 450 crores. The green-field project is spread across 150 acres of
land. The initial installed capacity of the plant was 30,000 cars per annum, which was
thereafter increased to 50,000 cars on a two-shift basis. The capacity has further been
enhanced to 1, 00,000 units annually in February 2008. The capacity expansion was
necessitated by the excellent performance of all the Honda models, particularly the
growing demand for City ZX in India. Several modifications were done by the company
with the objective of offering higher quality products to its customers, faster and quicker.
The expansion process also included expansion of the covered area in the plant, from
1,07,000 sq.m. to 1,31,794 sq.m.
HSCI currently produces the Honda City ZX, Civic and Accord models in India and the
premium SUV, CR-V is sold as a fully imported unit from Japan. The company operates
under the stringent standards of ISO 9001 for quality management and ISO 14001 for
environment management.

Sales and Distribution Network

Honda Siel Cars India has a strong sales and distribution network spread across the
country. The network includes 80 facilities in 51 cities.

Having established itself as a leading brand in the metros, the company is now focusing
on increasing its presence in tier-II towns and cities and plans to increase its dealership
network to more than 100 by the end of 2008-09 fiscal year.

The company is targeting 100 dealer outlets across India by 2009, as per their expansion
strategy which is based on the '1 dealer per 1000 cars' formula.

Product Range
Honda Siel Cars’ product range in India includes the Honda City ZX in the mid-size segment,
Civic in the Lower D segment and Accord in the luxury segment and third generation all-new
CR-V (both 2.0L 2 WD and 2.4L 4WD) in the SUV segment. While the City ZX, Civic and
Accord are manufactured at the company’s plant, the CR-V is imported from Japan as a
Completely Built Unit.

1. HONDA CITY ZX
City ZX is today recognized as one of the most successful car brands in the country. Its
success is a replica of the success of its predecessor - the original Honda City, launched
way back in 1997. In fact, HSCI took a historic step in 2003, when it introduced the New-
City at a time when the original City was still performing brilliantly – and it was an
immediate success. The City ZX was launched two years later in 2005 as an enhanced
version of the New-City and is strongly associated with durability, reliability, quality and
fuel-efficiency.

The City ZX range includes 4 variants - EXi, GXi, CVT (Automatic Transmission) and
VTEC. While EXi, GXi and CVT variants come with the advanced combustion system of
the 1.5 litre Intelligent Dual & Sequential Ignition (i-DSI) engine, City VTEC embodies a
1.5 litre VTEC (Variable Valve Timing and Lift Electronic Control) engine. The VTEC
version was reintroduced in the new City inresponse to customer demand. The City
VTEC comes with sporty exteriors and plush interiors, catering to the premium segment
customers. On the outside, 14” alloy wheels adorn the car, front and rear fog lamps and
rear disc brake. The interiors are more lavish with leather steering, centre console and
beige and black upholstery.

The City is manufactured with 79% indigenization level and currently enjoys 25% market
share in its segment.
2. HONDA CIVIC

HSCI launched the 1.8S Civic in India in July 2006, which became a runaway success.
The company has also launched the 1.8v version of the CivicinJune2007.
The Civic is Honda’s largest selling model globally and is now sold in approximately
160 nations and regions worldwide. The Civic made its debut, with a two-door model
in July 1972, followed shortly by a three-door version. The series was a major hit,
especially among young people and for three consecutive years, from 1972 to 1974, the
Civic won the ‘Car of the Year Japan’ award. Civic’s development process contrasted
completely with Honda tradition. Rather than pursue development based primarily on
the vision of Company founder Soichiro Honda, the Civic’s development team
traveled to various world markets, gained local knowledge and experience first-hand,
and then set about creating a car that “is needed right now.”

Overseas production of Civic began in Indonesia in 1975, and Civic vehicles are now
made in 11 countries, including North America, Europe, Asia and South America. Total
cumulative production of Civic models at the end of calendar 2004 was approximately 16
million units—making it one of the most popular models in Honda history.

The Civic has an indigenization level of 72% and enjoys 45% market share in its
segment.
3. HONDA ACCORD

Accord comes with fresh new exterior styling, enhanced interiors and several new
value-added features. The Accord has a new-look; sporty rear with revamped LED Tail
lamps and rear bumper garnish that further enhances its stunning exterior styling.
Adding greater value to the 2.4 lt model, the new car now has premium wood & leather
steering wheel and turn indicators on side-view mirrors, features which were earlier
available only in the V6 model. For easy and convenient parking, the new Accord has
front and rear Parking Assistance Sensors, which warn the driver of obstacles in his
way while parking. The Accord V6 now has enhanced safety in the form of Vehicle
Stability Assist (VSA) technology and also new 10-spoke 16” alloy wheels.

Accord, which has been a popular premium sedan ever delight the customers with its
class-leading performance and luxury features such as leather upholstery, dual-zone
climate control and six-CD changer.

The Accord is manufactured with 34% indigenization level and currently enjoys 27%
market share in its segment.

4. HONDA CR-V
The 3rd generation CR-V was introduced in November 2006. The all-new, third
generation Honda CR-V offers its customers a distinctive combination of ‘the comfort of
a sedan with the thrills of a SUV’. The engine is a 2.4-liter DOHC i-VTEC, which
delivers a powerful torque of 162 ps @ 5,800 rpm. Real-time 4WD is a unique feature of
the car, which is the first in its class. The Real-time 4WD intelligently detects adverse
road conditions and switches to 4-wheel drive instantly. In normal conditions the all-new
CR-V operates in front wheel drive mode but in wet, muddy roads or off-road conditions,
it automatically switches to 4-wheel drive instantly. An enlarged clutch and stiffened
transmission parts help distribute 20% additional torque to the rear wheels which ensures
smooth drive in bad road conditions without compromising on safety or fuel
consumption. HSCI recently introduced the 2.0L 2WD (2-Wheel Drive) Honda CR-V,
which is more agile & has a sporty handling. The new lighter engine gives good fuel
efficiency, without compromising on performance.

The CR-V currently enjoys 37% market share in its segment.

Sales Performance

SALES (Including Excise Duty) (Rs Millions)

Particulars March 31,2008 March 31,2007
Car Sales :
A. City - Domestic - Nos 40,534 40,475
- % of total 65% 66%
- Amount 24,527 24,920
- Per Car('000) 605.10 615.70
B. Accord - Domestic - Nos 2,130 2,732
- % of total 3% 4%
- Amount 2,750 3,574
- Per Car('000) 1,291.18 1,308.20
C. Civic - Domestic - Nos 16,723 16,258
- % of total 27% 26%
- Amount 15,835 15,257
- Per Car('000) 946.92 938.44
D. CRV - Trading - Nos 3,426 1,873
- % of total 5% 3%
- Amount 5,225 2,571
- Per Car('000) 1,525.20 1,372.5
Total Domestic (A+B+C+D) - Nos 62,813 61,338
- Amount 48,338 46,322
E. Export (City 16; Accord 7 ) - Nos 23 34
- Amount 13 19
Grand Total (A+B+C+D+E) - Nos 62,836 61,372
- Amount 48,351 46,341
Spareparts Sales :
F. Spare Parts / Child Parts 310 1,477
G. SST / POP / Others 10 21
Total Sales (A+B+C+D+E+F+G) 48,671 47,839
ENVIRONMENT AND SAFETY

The Honda Group is globally recognized for its concern towards environment, safety and
conservation of the society in which it operates. HSCI follows the same in India for achieving
high standards in environmental safety in the various processes of car manufacturing.

The company operates under the stringent standards of ISO 9001 for quality management and
ISO 14001 for environment management.

Awards and Accolades

***YEAR 2008***

• Total Customer Satisfaction (Honda City and Honda CR-V) by TNS.

• ‘Best Executive Car’ (Honda Civic), CNBC Autocar Auto Awards.
• ‘Best Brand for eco friendliness’ (HSCI) by Auto India.
• ‘Best ad campaign of the year’ (HSCI’s 10th anniversary campaign) by
Overdrive.

***YEAR 2007***

• Manufacturer of the Year by CNBC TV–18 Autocar.

• ‘SUV of the Year’ (Honda CR-V) by NDTV Profit Car & Bike.
• ‘SUV of the Year’ (Honda CR-V) by Overdrive.
• ‘Best Driver’s Car’ award by CNBC TV-18 Autocar Auto Awards.
• ‘Car of the Year’ (Honda Civic) by CNBC TV-18 Autocar Auto Awards
2007.
• ‘Car of the Year’ (Honda Civic) by NDTV Profit Car & Bike Awards 2007.
• Viewers’ Choice’ award by NDTV, CNBC and Aaj Tak.
• TNS Total Customer Satisfaction Study – 2006 (Accord, CR-V & City).
• ‘NDTV CNB-AAA PR & Communications Team of the Year’.

***YEAR 2006***

• Best Indian Company (unlisted) by Business Standard Group.

• Manufacturer of the Year by NDTV Profit-Car India.
• Manufacturer of the Year by CNBC-TV 18 Autocar India.
• No 1 Mid Size Car (Honda City); No 1 Entry Luxury Car (Honda Accord)
and No 1 Premium SUV (Honda CR-V) by TNS.
• Best Mid-size Car in Initial Quality (Honda City) and Most Appealing Mid-
size car (Honda City) by JD Power.

***YEAR 2004***

• CNBC Autocar CAR of the year 2004 - Honda City.

• ICICI Overdrive SUV of the Year 2004 - Honda CR-V.
• ICICI Overdrive Car of the Year 2004 - Honda City.
• Business Standard Motoring Car of the Year 2004 - Honda City.
 HONDA MOTOR COMPANY SWOT ANALYSIS

Honda motor company is not just an average Japanese car manufacturer. Originally know for
motorcycles, Honda has managed to elude the dominate keiretsu system in Japan and become
one of the dominant automobile manufactures in the world

.
STRENGTHS

• Honda has a reputation for producing high quality products from cars to motorcycles to
lawn mowers.
• They are the largest manufacturer of motorcycles in the world.
• Honda has won many awards for initial quality and customer satisfaction.
• Their research has afforded them competitiveness in innovative products.
• They were a pioneer in engineering low emissions internal combustion and hybrid
technology.
• Honda is the only other manufacturer outside of Mitsubishi to branch out into many other
areas outside of automobiles, like motorcycles, scooters, power equipments (generators),
Asimo Robot.

WEAKNESSES

• Their prices are higher for non-luxury vehicles than comparable models by other
manufacturers.
• Their vehicles also have a reputation for being underpowered.
• Due to the latest technology being used in Honda products it is difficult to keep the prices
low.

OPPORTUNITIES

• To continue progressing low emission vehicles and alternative power sources.

 • Another area of opportunity would be developing nations like China and India. These are
large markets, and cheap dependable transportation would be a hot seller.

THREATS

• Too many competitors in automotive industry.

• Expanding market size of compact cars ( currently it is around 76% )
• Regaining the lead of low emissions is a risky proposition as other companies are coming
out with new and cost effective ideas of producing low emission vehicles.
• Increasing steel prices will make it difficult for the companies to continue the current
pricing strategy.

PROJECT TITLE: LOAN FINANCING FOR WORKING

CAPITAL

PROJECT OBJECTIVES

My primary objective is to get a first hand knowledge and a closer view of

the working capital under finance department.

1. To study how HSCI finances its working capital

requirements.

2. To study the various aspects of loan financing.

3. To explain the credit arrangement through banks.

4. To analyze the financing of the working capital through

banks.
WORKING CAPITAL - OVERALL VIEW

Working Capital management is the management of assets that are current in nature.
Current assets, by accounting definition are the assets normally converted in to cash in a
period of one year. Hence working capital management can be considered as the
management of cash, market securities receivable, inventories and current liabilities. In
fact, the management of current assets is similar to that of fixed assets the sense that is
both in cases the firm analyses their effect on its profitability and risk factors, hence they
differ on three major aspects:
1. In managing fixed assets, time is an important factor discounting and
compounding aspects of time play an important role in capital budgeting and a
minor part in the management of current assets.
2. The large holdings of current assets, especially cash, may strengthen the firm’s
liquidity position, but is bound to reduce profitability of the firm as ideal car yield
nothing.
3. The level of fixed assets as well as current assets depends upon the expected
sales, but it is only current assets that add fluctuation in the short run to a
business.

The amount of working capital considered adequate may vary from one company to
another depending on the type of business, composition of current assets, inventory
turnover rate and credit terms.

Advantages

• Gives a company the ability to meet its current liabilities.

• Expand its volume of business.
• Take advantage of financial opportunities as they arise.

Disadvantages

• Lack of sufficient working capital and inability to liquidate current assets are
frequent causes of business failure.

To understand working capital better we should have basic knowledge about the various
aspects of working capital. To start with, there are two concepts of working capital:
 Gross Working Capital
  Net working Capital

Gross Working Capital: Gross working capital, which is also simply known as working
capital, refers to the firm’s investment in current assets: Another aspect of gross working
capital points out the need of arranging funds to finance the current assets. The gross
working capital concept focuses attention on two aspects of current assets management,
firstly optimum investment in current assets and secondly in financing the current assets.
These two aspects will help in remaining away from the two danger points of excessive
or inadequate investment in current assets. Whenever a need of working capital funds
arises due to increase in level of business activity or for any other reason the arrangement
should be made quickly, and similarly if some surpluses are available, they should not be
allowed to lie ideal but should be put to some effective use.
Net Working Capital: The term net working capital refers to the difference between the
current assets and current liabilities. Net working capital can be positive as well as
negative. Positive working capital refers to the situation where current assets exceed
current liabilities and negative working capital refers to the situation where current
liabilities exceed current assets. The net working capital helps in comparing the liquidity
of the same firm over time. For purposes of the working capital management, therefore
Working Capital can be said to measure the liquidity of the firm. In other words, the goal
of working capital management is to manage the current assets and liabilities in such a
way that a acceptable level of net working capital is maintained.

Importance of working capital management:

Management of working capital is very much important for the success of the business. It
has been emphasized that a business should maintain sound working capital position and
also that there should not be an excessive level of investment in the working capital
components. As pointed out by Ralph Kennedy and Stewart MC Muller, “the inadequacy
or mis-management of working capital is one of a few leading causes of business failure.

Determinants of Working Capital:

There is no specific method to determine working capital requirement for a business.
There are a number of factors affecting the working capital requirement. These factors
have different importance in different businesses and at different times. So a thorough
analysis of all these factors should be made before trying to estimate the amount of
working capital needed. Some of the different factors are mentioned here below:-

1. Nature of business: Nature of business is an important factor in determining the

working capital requirements. There are some businesses which require a very
nominal amount to be invested in fixed assets but a large chunk of the total
investment is in the form of working capital. There businesses, for example, are of
the trading and financing type. There are businesses which require large
investment in fixed assets and normal investment in the form of working capital.

2. Size of business: It is another important factor in determining the working capital

requirements of a business. Size is usually measured in terms of scale of operating
cycle. The amount of working capital needed is directly proportional to the scale
of operating cycle i.e. the larger the scale of operating cycle the large will be the
amount working capital and vice versa.

3. Business Fluctuations: Most business experience cyclical and seasonal

fluctuations in demand for their goods and services. These fluctuations affect the
business with respect to working capital because during the time of boom, due to
an increase in business activity the amount of working capital requirement
increases and the reverse is true in the case of recession. Financial arrangement
for seasonal working capital requirements are to be made in advance.

4. Production Policy: As stated above, every business has to cope with different
types of fluctuations. Hence it is but obvious that production policy has to be
planned well in advance with respect to fluctuation. No two companies can have
similar production policy in all respects because it depends upon the
circumstances of an individual company.

5. Firm’s Credit Policy: The credit policy of a firm affects working capital by
 influencing the level of book debts. The credit term is fairly constant in an
industry but individuals also have their role in framing their credit policy. A
liberal credit policy will lead to more amount being committed to working capital
requirements whereas a stern credit policy may decrease the amount of working
capital requirement appreciably but the repercussions of the two are not simple.
Hence a firm should always frame a rational credit policy based on the credit
worthiness of the customer.

6. Availability of Credit: The terms on which a company is able to avail credit from
its suppliers of goods and devices credit/also affects the working capital
requirement. If a company in a position to get credit on liberal terms and in a
short span of time then it will be in a position to work with less amount of
working capital. Hence the amount of working capital needed will depend upon
the terms a firm is granted credit by its creditors.

7. Growth and Expansion activities: The working capital needs of a firm increases
as it grows in term of sale or fixed assets. There is no precise way to determine
the relation between the amount of sales and working capital requirement but one
thing is sure that an increase in sales never precedes the increase in working
capital but it is always the other way round. So in case of growth or expansion the
aspect of working capital needs to be planned in advance.

8. Price Level Changes: Generally increase in price level makes the commodities
dearer. Hence with increase in price level the working capital requirements also
increases. The companies which are in a position to alter the price of these
commodities in accordance with the price level changes will face fewer problems
as compared to others. The changes in price level may not affect all the firms in
same way. The reactions of all firms with regards to price level changes will be
different from one other.
Ratios useful to analyze working capital management

(A) Efficiency Ratios 2007 2008 Ideal Ratio

1. Working Capital Turnover (times) 7.37 17.28 -
2. Current Assets Turnover (times) 4.47 5.04 -
3. Inventory turnover (times) 16.89 7.69 -

(B) Liquidity Ratio

1. Current Ratio 2.54 1.41 2.0
2.AcidTestRatio 0.87 0.48 1.0
3. Cash Ratio 0.08 0.05 0.5

(C) Structural Health of Working Capital

Ratio/Year 2007 2008
1.CA 69.89 46.88
2. Cash to CA 59.9 5.77
3. Loans and Advances to CA 12.67 26.38
4. Inventory to CA 26.48 65.51
5. RM to Inventory 85.49 40.16
6. Stock spares to inventory 0.34 0.06
7. WIP to inventory 2.55 1.33
8. Finished Goods to Inventory 10.87 58.09
Interpretation (Ratio Analysis)

• The utilization rate of net working capital as depicted by working capital turnover
ratio has increased from last year. It shows that company is generating a lot of
sales compared to the money it uses to fund the sales.
• The lower the investment in current assets and the higher current assets turnover
ratio, the more efficient the organization.
• The picture of inventory turnover is not very bright because low turnover implies
poor sales and therefore, excess inventory.
• As we look at the extent of liquidity of working capital, we notice that the ratio
shows a declining trend. Generally such a situation does not suit the company.
• If we analyze the structural health of working capital, the proportion of current
assets to total assets has been appropriate during the period.
• Such a higher proportion of current assets in the assets portfolio of HSCIL is quite
acceptable.
• Inventory constitutes a major proportion of total current assets. Among its various
components, raw materials, stocks, spare parts and finished goods stand out to be
the problem areas.

MANAGEMENT OF WORKING CAPITAL IN

HSCI

The need for working capital in HSCI can be calculated with the help of operating cycle.

The operating cycle can be defined as the time duration starting from procurement of

goods or raw-materials and ending with sales realization. In HSCIL, raw material is

purchased with cash, then raw material is converted into work in progress, which in turn
gets converted into finished goods; lastly cash is received from dealers. The length or

time duration of the operating cycle of any firm can be defined as the sum of its inventory

conversion period and the receivable conversion period.

(I) Inventory Conversion Period: It is the time required to for the conversion of

raw materials into finished goods sales. In a manufacturing firm, the ICP is

consisting of Raw Material Conversion Period(RCP), Work-in-Progress

Conversion Period(WPCP), and the Finished Goods Conversion

Period(FGCP). In HSCIL, the inventory conversion period is 60 days.

(II) Receivables Conversion Period: It is the time required to convert the credit

sales into cash realization. In HSCIL, the receivables conversion period is

zero as cars are given to dealers before taking the payments from them.

The total of inventory conversion period and receivables conversion period gives us the

total opearting cycle period. The net operating cycle of the firm is arrived by deducting

the deferral period from the total operating cycle period. The deferral period is the time

given by the creditors to make teh payments. In HSCIL, the deferral period is 45 days.

So, the net operating cycle period comes out to be 15 days.

On the basis of operating cycle and according to the estimates, daily and as well as

monthly cash flows are maintained. The company has to decide about the funds
arrangement through various banks like how much they have to keep in each of the bank

account to meet the funds requirements.

* Projected sales figures are given by the marketing department and accordingly the

company has to decide about the funds to keep in each bank account to make the

payments. Expected collection is calculated as average selling price multiplied by

expected number of cars to be sold. Average selling price is calculated as number of cars

multiplied by average price.

* Higher Value Cheques and Fixed Depository Receipts are also taken in receipts.

* The payments side include custom duty, excise duty, salary, import payments,

misc.payment, cheques in pipeline etc.

*While maintaining the cash flows, payment dates have to be kept in mind because on the

payment dates, more funds are needed to be kept in the bank account. The date for

original equipment payments is 20th of every month, import payment is 2nd last working

day, salary date is 5th. So on these dates more funds are needed.

* The transfer of funds also takes place from one bank to another. The company likes to

make the payments through the banks whose interest rates are low, thereby lowering the

interest payments.

*Interest rates charged by different banks doing business with HSCIL are as follows:

BANKS RATE OF INTEREST

ICICI 14.45%

KOTAK 11.75%

BOTM 8.25-9.95%
 CITIBANK 7.23-9.67%

MIZUHO 9.2-9.65%

SOURCES OF FINANCING

(WHERE TO LOOK FOR MONEY)

In the present days there exists several sources of finance. Keeping in view the type of

requirement the finance sources are chosen. Following are the various types of finance

source:

1. Long term sources of finance

Long term sources of finance are those that are needed over a longer period of time -
generally over a year. The reasons for needing long term finance are generally different to
those relating to short term finance.

Long term finance may be needed to fund expansion projects - maybe a firm is
considering setting up new offices, may be they want to buy new premises, may be they
have a new product that they want to develop and maybe they want to buy another
company. The methods of financing these types of projects will generally be quite
complex and can involve large sums of money.

The long-term sources of finances can be raised from the following sources:
(I) Share Capital

The most important source of long-term finance for a limited company is usually that
raised from shareholders, the owners of the business. Share Capital is raised through the
sale of shares to individuals or institutions, who in return for their investment receive
interest in the form of a dividend, which constitutes a share of the profits made by the
business. In addition the shareholder may be able to make a Capital Gain on their
investment by selling their share holding at a latter date. Dependent on the type of Share,
the shareholder will also have certain voting rights. There are two main types of Share,
the Ordinary Share and the Preference Share and these are each considered below:

*Ordinary Shares: The majority of Share Capital will be raised through the issue of
Ordinary Shares. Ordinary Shareholders, are the legal owners of the business, and are
entitled to full shareholder voting rights at meetings - the Annual General Meeting
(A.G.M.), or at Extra-Ordinary General Meetings (E.G.M.s). They are entitled to receive
returns out of the companies profit, in the form of Dividends. Unfortunately dividends are
not guaranteed on ordinary shares, and are dependent on the performance. Thus if the
business has had a particularly poor year, the Directors of the company may decide that a
dividend is not paid to the ordinary shareholder. There is considerable risk involved in
being an Ordinary Shareholder / Owner of a business, particularly if the business is
declared insolvent, however in good years the dividend, and potential Capital Gain may
be high enough to justify this risk.

* Preference Shares: Are designed for investors who do not wish to take the degree of
risk associated with being an ordinary shareholder. They offer a guaranteed dividend,
although this fixed level of return can potentially be less than that received by an
Ordinary Shareholder. Preference Shareholders are not strictly owners of the business and
therefore have limited voting rights, in comparison to the Ordinary Shareholder.

(II) Retained Profit

A major source of long-term finance for a business is retained income, profit, which is
not distributed to the shareholders in the form dividends at year end, but instead retained
within the business. The amount of profit retained by the business over the years can be
seen in the Profit & Loss Reserve on the companies Balance Sheet. One of the
advantages of this form of internal finance is that it costs far less when compared to
external sources of finance which will normally require additional interest. Further, the
business is not answerable to any additional external financial institution for the use to
which they put such funds.
(III) Loan Capital

Finance which is generated through external borrowing over the long-term is often
referred to as Loan Capital. This can take many forms which include:

(a) Debentures: Debentures are normally associated with limited companies. A business
will offer potential investors the opportunity to invest in the company through the
purchase of debentures which are divided into units, similar in principle to shares. The
investors, called debenture holders, are deemed as creditors to the business and not
owners, and will receive interest payments from the company until, at an agreed date, the
loan is redeemed, paid back in full. Most debentures are Secured, in that the holder of the
debenture will have claim over either specified assets of the business should the business
default on interest payments, or claim over general assets of the business up to the value
of the debenture loan.

(b) Mortgages: A Business may take out mortgages to purchase assets such as land and
buildings. The land and buildings concerned are the security for the loan, should the
business default on repayments, fail to back repayments. If the value of the land /
buildings concerned increases during the period of the mortgage, or the mortgage
incorporates a period of fixed interest - and interest rates rise, this reduces the real cost of
borrowing for the business.

(c) Venture Capital: Venture Capitalists offer capital to business ventures which other
financial institutions / investors might consider too risky. Usually the Venture Capital
firm will require shares in the business and influence in the running of the company at a
strategic level, to protect their investments, normally in the form of a non-executive
position on the board. Their aim is to see the value of their shares in the business grow, so
that at some latter date they may sell their interests in the business at a profit. Often this
may involve the business being floated on the stock-exchange.

(d)Business Angels: Business Angels' are private investors, who invest directly in private
companies in return for an equity stake and perhaps a seat on the company's board. The
main motivation for the Business Angel is the potential capital gain from their
investment. However many Business Angels also invest to help businesses they believe
in, and play a part in the entrepreneurial process. It is often the case that the Business
Angel is, or was, involved in running their own business venture, and the company can
gain from their experience.
2. SHORT TERM SOURCES OF FINANCE

Various short term sources of finance include:

(I) Bank Credit

Credit facility extended by commercial banks to meet the working capital requirement
has been an important source of short term funds to business firms. In India, bank credit
has been the main institutional source of short term financing requirement. The bank
credit, in general, is a short term financing say for a year or so. This short term financing
to business firm is regarded as self-liquidating in the sense that the uses to which the
borrowing firm is expected to put the funds are ordinarily expected to generate cash flows
adequate to repay the loan within a year. Further, these loans are called self-liquidating
because the bank’s motive to provide finance is to meet the seasonal demand e.g., to
cover the seasonal increase in inventories or receivables. In principle, the bank credit is
intended to carry the firm through seasonal peaks in financing need. The amount of credit
extended by a bank may be referred to as a credit limit which denotes the maximum limit
of loan which the firm can avail from the bank. Sometimes, the bank may approve
different limits fro peak season and for non-peak season.

Types of Bank Credit

In India, banks may give financial assistance in different shapes and forms. The usual
forms of bank credit are as follows:

(a) Overdraft: it is the simplest of different forms of bank credit. In this case, the
borrowing firm which already has a current account with the bank is allowed to
withdraw more (up to a specified limit) over and above the balance in the current
account. The amount so overdrawn may be repaid by depositing back in the
current account as and when the firm wants. The firm is not required to seek
approval of the bank authority every time it is overdrawing, but a one time
approval may work for a particular period, say a year. The bank, however, can
review and modify the overdraft limit at any time. The firm has to pay interest at a
specify rate only for the period during which the amount was overdrawn. The
bank may also charge a minimum amount per period for maintaining the draft
limit even if no amount has been over drawn.

(b) Cash Credit: the credit facility under the cash credit is similar to the overdraft.
Under the cash credit, a loan limit is sanctioned by the bank and the borrower can
withdraw any amount at ant time, within that limit. The interest is charged on the
daily balance and not on the entire amount of the account. The bank may or may
not charge any minimum commitment fee. The amount withdrawn can be repaid
 by depositing in the bank amount. Hence it is the most favorite mode of
borrowing by industrial concerns.

*The financing is called cash credit if it is given against the hypothecation of goods
or security of the book debts. The term overdraft may be used when the loan is
given against the security of assets other than inventories and book debts.

(c) Bills Discounting and Bills Purchased: commercial banks also provide short
term credit by discounting the bills of exchange emerging out of commercial
transactions of sale and purchase. In the normal course of credit sales, the seller of
the goods may draw a bill on the buyer of goods who accepts the bill and thereby
promises to pay the bill as per terms and conditions mentioned in the bill.
However, if the seller wants the money before the maturity date of the bill, he can
get the bill discounted by a bank which will pay the amount of the bill to the seller
after charging some discount. The discount depends upon the amount of the bill,
the maturity period and the prime lending rate prevailing at that time. The bank
resents the bill to the buyer on the due date and gets the payments. The difference
the amount so received and the amount paid by the bank in respect of the bill is
the income of the bank.

The bill may be payable on demand or on maturity. When the bill payable on
demand is discounted, it is called bills purchased; and when the bill payable at maturity is
discounted by a bank, it is called bills discounting. One of the short coming of the bill
discounting system is that the bank, which discounts the bill, must establish and verify
the creditworthiness of the buyer, which at times, may be difficult, complicated and time
consuming process.

(d) Letter of Credit: A letter of credit is a guarantee provided by buyer’s banker to

the seller that in case of default or failure of the buyer, the bank shall make the
payment to the seller. The responsibility of the buyer is assumed by the bank in
case the latter fails to honor his obligations. The letter of credit issued by the bank
may be given by the buyer to the seller along with the bill of exchange. So, the
letter of credit becomes a security of the bill and any bank (or the bank of the
seller) will have no problem in discounting the bill.

The letter of credit provides a non-fund based financing as the funds are not
involved in the issue of the letter of credit. It is a contingent liability of the bank and shall
arise only if the buyer fails to pay. However, whenever a letter of credit is issued, the
amount is adjusted against the fund based cash credit limit of the buyer. It may be noted
that in case of letter of credit, the bank provides only a security and undertakes the risk
for the bill period, but the financing is in fact, made by the seller. So, it is an indirect form
of financing as against the overdraft, cash credit and bill discounting where the bank
provides a direct financing.
 (e)Working Capital loan: This refers to the working capital limit of a borrower
extended to him in the form of a loan. The loan component covers the permanent part of
the working capital need while cash credit component caters to the fluctuating part of the
limit. The interest is charged on the loan component irrespective of utilization when such
a term loan is availed. Since SMEs do not generally possess expertise in managing loan
funds in case of low utilization of limits and also have lower control on their working
capital management, carving out a loan component is not mandatory in their case.

(f) Bank Guarantee: A letter of guarantee is issued by a banker to a third party

indicating that the bank would meet the financial consequences (to a specified amount) in
the event of failure of its client in adhering to the terms of the contract with the third
party.

(g) Export Packing Credit:

Industry used term - EPC RATES

This is a fluctuating rates linked with LIBOR (London Inter Bank offered Rates) .Since in
international trading both the parties are not aware of each other hence
they take renowned bank (globally) to trust each other & deal through them.

Packing credit is any loan or advance granted or any other credit provided by a bank to an
exporter for financing the purchase, processing, manufacturing or packing of goods prior
to shipment, on the basis of letter of credit opened in his favor or in favor of some other
person, by an overseas buyer or a confirmed and irrevocable order for the export of goods
from the producing country or any other evidence of an order for export from that
country having been placed on the exporter or some other person, unless lodgment of
export orders or letter of credit with the bank has been waived.

(II). Commercial Papers: These are short term unsecured promissory notes issued by
firms with a high credit rating at a discount to the face value. The maturity varies from 15
days to a year.

(III)Trade Credit: This is a period of time given to a business to pay for goods that
they have received. It is often 28 days but some businesses might not pay for 6 months
and on some occasions even a year after they have received goods.
HOW HSCI FINANCES ITS WORKING CAPITAL
REQUIREMENTS

HSCI finances its working capital requirements by taking cash credit and buyer’s credit.

HSCI

TRADE CREDITS-
CASH CREDIT- WCDL
BUYERS CREDIT

Trade Credits- Buyer’s Credit

Trade credit is a loan availed of by an importer from overseas bank or financial institution
against a specific import. Buyer’s credit refers to a foreign currency loan availed by an
Indian importer. A buyer credit is based on a separate loan agreement between the
exporter’s bank and the buyer (or buyer’s bank).

Authorized Dealers may approve proposals received in form ECB(External Commercial

Borrowing) for short term credit fro financing fro imports of goods India as per below
details under Automatic route:

Non Capital Trade credit: Up to one year from the date of shipment for amount not
exceeding USD 20 mm per import transaction.

Capital Goods Trade credit: more than one year and less than three year for amount not
exceeding USD 20 mm per import transaction.

Any deviation from above would require RBI approval.

How does it work?

* The exporter contracts with the international buyer (HSCIL) to supply goods.

* HSCI requests its Bank (Citibank) for loan financing.

* Buyer’s bank (Citibank) immediately pays the principal amount to the lender’s bank or
exporter’s bank.

* Lender’s bank informs the exporter that payment has been received from the importer’s
bank.

* Finally, HSCIL pays the principal and the interest amount to its bank (Citibank).

A Buyer’s Credit is summarized in the diagram below:

Delivery of goods and

services under supply
Foreign contract HSCIL
Exporter (BUYER)

Requests
Disburse for loan
ment financing

Bank
Loan agreement
Borrower’s
Bank
Lender Loan payment (Citibank)
HONDA Siel CARS INDIA LTD. (HSCI) is importing various items from the following
countries:-
♦ JAPAN.
♦ THAILAND.
♦ PHILIPPINES.
♦ INDONESIA.
♦ USA.

The following items from the above countries are being imported under the following

heads:-

♦ Kits – A complete set of components.

♦ Consumables.
♦ Spare parts (Now Transferred to HMI).
♦ Capital.
♦ Others.

Process For Booking The Loan

Once the approval from AD and the documents covering import have been received, the
importer must submit a complete set of application documents to the bank requesting the
bank to send instructions to the overseas lender to book the loan. It should contain:

1. Request letter to send instructions to the bank.

2. Provide the bank with precise payment instructions.

 3. Provide the facility letter agreement and Board resolution.

4. Give an undertaking to the bank for submission of exchange control copy of bill
of entry within 3 months of the date of entry.

5. Give an undertaking to provide us NOC from IT/Withholding tax prior to making

the repayment (for interest).

6. Copies of relevant shipping documents.

For availing this credit, all documents should be submitted to at least 2 clear working
days.

BANK PROCEDURE
1. Receiving applications
2. Brief assessment of requirement as per application.
3. Processing of application — which involve:
(a) Assessment of financial parameters
(b)Assessment of need (on the basis of site visit)
(c) Assessment of creditworthiness of party
(d)Assessment of economic viability
(e) Assessment of technical feasibility
(f) Assessment on managerial competency.
4. Security — which involves
(a) Scrutiny of securities
(b) Valuation of stocks and securities
(c) Obtaining legal opinion
(d) Assessment of personal guarantors.
5. Forming opinion about the proposal
6. Sanction of credit
7. Documentation — which involves inspecting and acquiescing all legal document.
8. Release of credit
9. Follow up

CITIBANK arranges overseas trade financing for Honda Siel Cars India on the
following terms and conditions:

Borrower: Honda Siel Cars India

Facility: Import financing under the Buyer’s Credit(Trade Credits) scheme of the
Reserve Bank of India.

Lender of the facility: Citibank, Bahrain

Arranger of the facility: Citibank, New Delhi

Total Facility Amount: Not exceeding an aggregate principal amount of $10,000,000.

Purpose: For payment of the import of goods that are not under the negative list, as per
extant EXIM Policy of India and for which Letter of Credit has been opened by Citibank,
New Delhi.

Facility Tenor: Drawdown in tranches of minimum USD 100,000 or equivalent in any

other non-INR currency , as mutually agreed with Citibank, Bahrain. The Facility would
be availed fro a period of 3 months from the date of this offer.

Repayment Period: Each drawdown shall require at least 3 business days prior written
notice and the period of repayment of each such drawdown shall be as mutually agreed,
but, in no event, exceeding one year from the date of shipment.

Interest: The borrower shall pay interest at the rate of LIBOR plus 50 bpps p.a. for the
tenor of the repayment period, in the currency of drawdown and 175 bpps p.a. as
arrangement fees. Interest will be calculated on the basis of actual number of days
elapsed in a year of 365 days. Without prejudice to Citibank, Bahrain’s rights of recovery
and damages, the Borrower shall be liable to pay interest at the rate of 200 bppa over the
applicable LIBOR from the due date of repayment to the actual date of receipt of
payment by Citibank, Bahrain.

Repayments: All principal and interest amounts due under the Facility shall be paid
through an account held by the Borrower with Citibank, New Delhi.

Prepayments: No prepayments are allowed except with the prior consent of Citibank,
Bahrain and such consent may be conditional.

Taxes and other deductions: The repayment of principal and interest and any other
charges, shall be made without any set-off, counter-claim, taxes, duties, levies or
condition of any kind and, should the Borrower be compelled by law to make such
withholding, the sum payable by the Borrower shall be increased so that the amount
actually received by Citibank, Bahrain is the amount that Citibank, Bahrain would have
received if there has been no such withholding. Withholding tax on interest is payable,
and the same would be to account of the Borrower.
Governing Law/Jurisdiction: The facility will be governed by the laws of India and
competent courts of India shall have exclusive jurisdiction.

Documentation: (a) Acceptance of this offer letter.

(b) Facility Agreement between Citibank, Bahrain and the Borrower.
(c) Demand Promissory Note in favour of Citibank, Bahrain.
(d) Borrowing Resolutions with specimen signature of authorized
representatives.
(e) Such other documents that may required by Citibank N.A. In
addition, documents such as Form A1(for import payment), Form
A2 (for the remittance of interest), Trade Credit Form, Accepted
Import Contract Copy, Commercial Invoice, Bill of Entry etc. but
Limited to the above as required by Citibank New Delhi through
which the import documents shall be routed under this facility.
(f) TDS Certificate (to be submitted by the end of the month in which
the tax has been deposited).

CASH CREDIT

The company is taking cash credit of 500 million from ICICI Bank which includes
working capital demand loan, export packing credit and foreign bills purchased,
and letters of credit of 5 million which includes bank guarantee.

Facility Overall Limits

Fund Based 500.0
Cash Credit (500.0)
WCDL (20.0)
EPC (20.0)
FBP/FBD (20.0)
Non-Fund Based
Letters of Credit 5.0
Bank Guarantee (5.0)
Total 505.0

There are certain operational terms and conditions of bank, some are as follows:

*Period of Sanction: The working capital facilities are payable on demand/ on the
specified dates. However the facilities are available for a period of 12 months subject to
review at periodical intervals wherein the facilities may be continued / cancelled /
reduced depending upon the conduct and utilization of the facilities.

*Processing Fee: Nil

*Insurance: The Company has to ensure comprehensive insurance cover against all risks
on the stocks.

*Inspection: The unit will be inspected at annual intervals by the Bank’s functionaries.
The expenditure in connection with the inspection will be borne by the company.
Inspections, if required will also be conducted by the Bank’s concurrent auditors or
statutory auditors or officials of RBI or any other re-financing agency.

TERMS AND CONDITIONS RELATED TO FACILITY

Facility: Cash Credit (Hypothecation)

Proposed Limit: Rs. 500 million
Security: Unsecured
Interchangeability: Nil
Validity of Facility: 12 months
Interest: The interest rate stipulated by ICICI shall be 1.80% per annum below the sum
of I-BAR and the cash credit risk prevailing on each day, plus applicable interest rate or
other statutory levy, if any, on the principal amount of the loan remains outstanding each
day.

I-BAR as on date is 15.75% p.a., Cash Credit Premia is 0.5 p.a. and the applicable
interest rate as on date is 14.45% p.a. Rate of Interest is subject to revision from time to
time.

Facility: Working Capital Demand Loan (WCDL)

Proposed Limit: Rs.500 million (as a sub-limit of cash credit)
Security: Unsecured
Interchangeability: Nil
Validity period: 12 months
Draw down: Minimum of Rs. 10.0 million per draw down / tranche; draw down under
the facility will be subject to a written request/ notice of 2 business days in advance.
Tenor/Repayment schedule: Maximum tenor of each trannche: 180 days (or) upto
validity period of facility, whichever is earlier
Minimum tenor of each tranche: 30 days.
Principal amount of each tranche is to be repaid as bullet payment on the maturity date or
in installments as agreed upon, but within the validity period of the facility.
Interest: The rate of interest for each drawal within the Facility will be stipulated by
ICICI Bank at the time of disbursement of each drawal, which shall be 2.49 per annum
below the sum of IBAR and the Term Premium prevailing on that date plus applicable
interest tax or other statutory levy, if any.
Interest Payable Frequency: Interest would be payable monthly, on the last date of
each month.
Interest calculation: Interest will be calculated on 365 day basis in respect of rupee
loans.
Commitment fee: Nil
Prepayment: The Company may pay any of the outstanding tranches, subject to payment
of applicable prepayment premium as stipulated by ICICI Bank.

Facility: Export Packing Credit

Proposed Limit: Rs.20 million (as a sub-limit of Cash Credit)
Security: Unsecured
Interchangeability: Nil
Validity of Facility: 12 months
Repayment terms: (i) EPC loans will be allowed up to 180 days or expiry of contracts /
Export LCs
or expiry of process cycle whichever is earlier.
(ii) The EPC shall be liquidated out of proceeds of export bill
discounting /
purchase.
Interest: The rate of interest for each drawal within the facility will be stipulated by
ICICI Bank at the time of disbursement of each drawal, which shall be 1.74% per annum
below the sum of IBAR and the Term Premium prevailing on that date, plus applicable
interest tax or other statutory levy, if any.

Such rate of interest stipulated by ICICI Bank at the time of disbursement shall be capped
at 2.50% per annum below IBAR in respect of pre-shipment credit up to 180 days.
The IBAR as on date is 15.75% p.a. , the Term Premia is –ve 0.2% p.a. and the applicable
rate as on date is 13.81%p.a.

ECGC Cover: Drawings under the EPC shall be covered under ECGC’s Individual
Packing Credit Guarantee taken by ICICI Bank, premium in respect of which shall be
borne by ICICI Bank.
Documents against which EPC to be given: Based on confirmed export orders /
irrevocable LCs only.

Facility: Foreign Usance Bills Discounted / Foreign Bills Purchased

Proposed Limit: Rs.20 million (as a sub-limit of Cash Credit)
Tenor/ Usance: In case of DA bills, usance not exceeding 180 days.
Specific Security: Against documents of title of goods viz., Bill of lading / AWBs, Bills
of Exchange, invoices, packing lists, certificates of origin.
Interest: The rate of interest for each drawal within the Facility will be stipulated by
ICICI Bank at the time of disbursement of each drawal, which shall be 3.36% per annum
below the sum of IBAR and the Term Premium prevailing on that date, plus applicable
interest tax or other statutory levy, if any. Such rate of interest stipulated by ICICI Bank
at the time of disbursement shall be capped at 2.505 per annum below IBAR in respect of
post shipment credit on sight bills and usance bills up to 90 days.
The IBAR as on date is 15.75% per annum, the Term Premia is –ve 0.2% per annum and
the applicable rate as on date is 12.19% p.a.

Facility: Letters of Credit (LC)

Type: Both Inland and Foreign LC, Usance or Sight
Proposed Limit: Rs. 5.0 million
Sub limit: Bank guarantees : Rs.5.0 million
The aggregate outstanding of all the sub-limits as proposed above, shall not exceed the
overall limit for the facility.
Interchangeability: Full interchangeability between Inland LCs and foreign LCs.
Purpose: Procurement of raw materials, consumable stores, spares and tools and capital
goods for normal expenditure.
Validity: 12 months
Security: Unsecured
Cash Margin: Nil
Usance: A maximum of 180 days for FLCs and 90 days for ILCs (from the date of
shipment/dispatch)
Commission: 0.10% per annum
• SWIFT/Communication charges-Rs.1500 per LC
• Amendment charges-Rs.1500 per amendment.
• Correspondent bank charges, if any, shall be charged on actuals.
Minimum commission: Rs. 1500 per LC

Commission Collection Frequency: Payable upfront at the time of opening of the LC.
General: * Foreign letters of credit will be opened as per the provisions of exchange
control and import trade regulations.
* Import LCs will be opened against valid import licenses, wherever applicable.
* In respect of usance LCs, the goods received under unpaid LCs will be excluded from
the value of stocks for arriving at drawing power.
* In respect of high value/machinery LCs, the company may be required to furnish
projected cash flow statements, if the bank so desires.
* In case of high value LCs, the bank reserves the right to call for opinion reports from
reputed information exchange bureaus like Dun and Bradstreet or from banks in India or
overseas at the expense of the company.
*LCs for import of capital goods shall be restricted for purposes of bnormal capital
expenditure only.
Others: The last date of negotiation of any LC under the facility shall not exceed the
validity period of the facility.

Facility: Bank Guarantee

Type: Both financial and performance guarantees
Proposed Limit: Rs.5 million (as a sub-limit of LC)
Interchangeability: Full interchangeability between BG and Letters of credit.
Purpose: Financial and performance guarantees.
Towards bid bond, security deposit, earnest money deposit, contract
performance/
performance guarantees, advance payment and retention money purposes;
Customs,
central excise, sales tax, electricity, insurance purposes.
Validity: 12 months
Security: Unsecured
Cash margin: Guarantees covering disputed liabilities- 100%.
Financial guarantees- Nil
Performance Guarantees- Nil
BG Tenor: Maximum period of BG to be restricted to 3 years.
Commission: 0.05% per annum
Minimum commission: Rs.1000 per guarantee
Commission Collection Frequency: Upfront.
General: * The bank guarantees to be issued shall be as per the format acceptable to the
Bank.
* In case of bid bond / EMD/ advance payment / retention money guarantees
stipulated
under project exports, Bank will obtain counter guarantees from ECGC at the
expense of the company.
* If the guarantees to be issued come under EPCG scheme, bank will obtain
counter
guarantee of ECGC at the expense of the company.

The company has also taken a working capital demand loan of Rs.50 crores from
Kotak Mahindra Bank for a period of 1 year. The operational terms and conditions
and other terms and conditions of Kotak Mahindra Bank are almost the same.

LIST OF DOCUMENTS TO BE FILED WITH THE BANK

Following documents need to be filed with the Bank before taking loan:

1. Duly accepted sanction letter signed by authorized signatory of the borrower.

2. Board resolution of the borrower to avail the facility.
3. Shareholders’ resolution u/s 293(1)(d) and certificate from the Company Secretary
stating that the borrowing is within limits prescribed under sec. 293(1)(d).
4. Signature verification of authorized signatories.
5. Request letter fro the facility.
6. Demand Promissory Note for WCDL 50 CR.
7. Letter of Continuing Security for WCDL 50 CR.
8. Certified copy of Memorandum and Articles of Association.
9. Master facility Agreement along relevant schedules.
10. General Counter Guarantee cum Indemnity.
11. Letter of Appropriation and Setoff.
12. Certified true copy of Board Resolution of the purchaser(Borrower’s customer)
authorizing the signatory to sign the Bill of Exchange.
13. Supplementary Agreement.
14. Risk Disclosure Statement.
15. Forwards Contract Declaration.
16. Deed of Hypothecation - 1st pari passu charge on the present and future current
assets of the Borrower along with registration of charge with RoC (FORM 8).
17. Deed of Hypothecation - 2nd pari passu charge on the present and future moveable
fixed assets of the Borrower along with registration of charge with RoC (FORM 8).
18. Equitable mortgage 2nd pari passu charge on the immoveable fixed assets of the
borrower situated at Plot No A-1 Sector 40/41, Surajpur-Kasna Road, Greater Noida,
along with registration of charge with RoC (FORM 8).
19. NOC/Pari Passu letters from other institutions.
20. Any Other documents as prescribed by the Bank.

The company further has to declare that the credit facilities to be extended to the
company shall be used only for working capital purposes and how much credit
company is availing from other banks also.

RESEARCH AND FINDINGS

1. Short term funds have not been used during the year to finance long term
investments.
 2. The cash credit facilities from banks are secured by way of pari passu charges
created/ to be created on immovable assets,raw materials, semi-finished and
finished goods, spares, plant and machinery and other movable assets of the
company, both present and future.

3. The company is not dealing in shares, securities and other investments.

4. The working of HSCI with various banks it deals with is very smooth.

5. Honda is using its retained earning for the distribution of bonus and for the crisis
situations and uses the external sources of funds in the form of loans from various
banks in the working capital mainly for the purpose of payments to its vendors
and suppliers.

6. The analysis of financial data reveals that company has very sound position
regarding liquidity and solvency as shown by the current and quick ratios.

7. Current assets comprise a significant portion of total investment in assets of the

company
.
8. Purchase policy regarding raw material, consumables, and tools and packing
materials etc. should be introduced which ultimately helps in planning of
inventory, availment of maximum trade cash discount and availment of maximum
credit period from suppliers.
SUGGESTIONS

1. Company should make a policy in respect of investment of excess cash.

2. Overall cash policy should be introduced.

3. Proper cash flow forecasting should be done as it is essential to successful

working capital management.

4. Company must implement contingency plans that takes a holistic view of

the organization in the context of a variety of of different contingency
situations. This will help minimize the adverse effects of unforeseen
events and provide financial flexibility in uncertain times by having
working capital as a ready source of cash.

LIMITATIONS OF THE STUDY

1. The authenticity of the suggestions depends upon the rationality of the data
supplied to me.
2. Have to rely upon the data supplied.
3. Executives are not ready to part with the information beyond a limit.
4. Time constraint to have a indepth knowledge of the process.
 Working Capital Financing is crucial for business growth. Working capital financing
covers company’s needs in working capital and takes into account its operating cycles.
Therefore it is a very flexible kind of financing.