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OBJECTIVE OF THE PROJECT
As per mandatory requirement of Pune University, I have undertaken this project as a part fulfillment of Master of Business Administration curriculum within 2 months training at ‘VISHWAS CO-OPERATIVE BANK’. Each management student learns a lot during his 2 years of MBA programme, but the perfection in his learning can’t be even imagined until & unless there is a practical training. The (summer) project provides required practical training to student.
SELECTION OF THE TOPIC FOR STUDY
Topic selection is one of the most or one of the important aspects of out project. As it decides the course of action, to be followed. The topic selected should be such that it helps in understanding the Banking concepts clearly, as was given the topic by the company itself. The topic given by my project guide was “WORKING CAPITAL FINANCING BY BANK”. This covers all the things related to the Working Capital Finance provided by the banks. The topic was to collect the financial information from the bank so as to find out the working capital calculation process of the bank.
OBJECTIVE OF THE STUDY
While going through any advertisement for recruitment it is realized that any organization call for candidates with the main condition of work experience. It is clear-cut mentioned in such advertisement that preference would be given to candidates with experience. This point out that practical exposure is extremely important. So, right the University of Pune has taken right step by making it mandatory for the students to do the project work in an organization. This would help the student to get practical knowledge along with the theoretical knowledge. The objectives of the summer training are as follows: • To collect the financial information from the bank so as to find out the working capital calculation process of the bank. • To be able to apply the theoretical knowledge obtained at the institute in practical manner in the actual business environment. • To get the knowledge about organization problems, perceptions and challenges. • To interact with the managers of the company and gain knowledge through their real life experience.
The data collected for the project was in the form of written as well as verbal information 1) information regarding the Working Capital Financing by Bank.
Primary Data:The information about the bank is gathered from the discussion with the
employees/staff and from the web site of the bank. 2) Secondary Data:The secondary data collectedBalance as on the date of 31st march of the 3 year 2005-06, 06-07, 07-08. The profit & loss accounts for the year ending on The details about organizational structure The sources of secondary data wereThe financial statements i.e. balance sheets and profit & loss accounts were
Obtained from accounts department. Loan department supplied the loan procedures and details. The information regarding organization structure and services provided by the Bank was given Branch Manager.
SCOPE OF THE STUDY
The project relates to the financing of working capital by banks. An attempt has been made to analyze the procedures which the banks follow finance to industrial units to fulfill their working capital requirements, by utilizing the information provided by the loans section of the bank. The project extends to the study of the criteria on the basis of which banks provide finance, the methods of computation of the permissible bank finance. A major part of working capital loans is provided by the commercial banks. Industries depend upon the banks as a primary source of working capital finance. Over the past several years, banks have become the most reliable source of institutional credit. Banks provide short-term finance to industries in the form of working capital. Hence, working capital financing by banks is a subject worth studying.
LIMITATION OF THE STUDY
Generally banks do not allow the outsiders to have any study or research work in banks. Therefore, get the projects work in bank itself was very difficult. Due to confidentiality some important information, which are important for the project, could not be collected. Some of the information-lacked accuracy sues to which approximately values were used for the analysis. Hence, the results also reveal approximate values. The loan sanctioning procedure is chalked out by top management and as per the norms and rules issued by Reserve Bank of India. Therefore the project is not decision by itself but an aid to the management regarding the procedural aspect and loopholes of loan sanction. The project is based on theoretical guidelines and as per situations prevalent at the time of practical training. Hence, it may not apply to different situations. The time span for the project was very short which was of 9 weeks, which itself acts as a major constraint. Moreover, studying the guidelines and applied it practically within such short time span was a task of great pressure.
RATIONALE OF THE STUDY
The summer training at “Vishwas Co-operative Bank” was undertaken with a view to study certain fundamentals as well as commercial and operational aspects of the bank. While the usefulness of this summer training hardly needs to be emphasized, “Vishwas Co-operative Bank” also stands to benefit in many ways. Various data and operational work carried out by me can help “Vishwas co-operative Bank” in fulfilling their immediate informational and other needs, thus saving on valuable executive time and efforts. The basic job finance manager is to arrange for funds and apply them in the most effective manner. While deciding upon the sources of funds it is necessary to corporate finance is a bank loans.
The study has helps me;• • • To know the various procedural aspects of granting corporate loans. To know the various documents required for granting the corporate loans. Utility to bank.
The bank could understand;• • The various procedural changes need to make while granting the loans. The various steps needed to be taken to reduce NPAs.
PROFILE OF THE ORGANIZATION
2.1 Introduction to Bank
Vishwas Co-op Bank began in a small way, has now grown up to one of the leading and respectable banks not only in Nashik but also in Maharashtra. Area of Operation of the bank is Nashik, Thane, Dhule, Aurangabad, Jalgaon, Ahmad Nagar, Mumbai and Pune. At present the bank has five branches and Head Office. Looking at the performance and achievements of the Bank, RBI has granted the special permission to Vishwas Co-op Bank for opening a branch in Mumbai. Since the establishment, the bank is making a steady progress and continuously maintaining “A” audit classification. Vishwas Co-op Bank is the first bank to provide 16 hours Customer service i.e. Morning 8 A.M. to Mid night 11 O’clock. The Management Information System designed by bank has been made applicable to all the urban Co-op Banks in Maharashtra. The loan application forms designed by the bank are reckoned as a model loan application form and have been followed by many urban co-op banks in Maharashtra. On 6th February 2003, Vishwas Co-op Bank has been awarded the “Jagtik Marathi Chamber of Commerce and Industries” for its best performance in the co-operative banking sector at the national level, in the presence of Hon. Chief Minister of Maharashtra Shri. Sushilkumarji Shinde, Hon. Speaker of Loksabha Shri. Manohar Joshi, Hon. Governer of RBI Dr. Bimal Jalan and Executive Director of RBI Hon. Dr. Narendra Jadhav. Three of the six recommendations given by the Hon. Chairman of Vishwas Co-op Bank for smooth working of the Urban Co-op Banks are accepted by the honorable governor. The good work done by the bank is also appreciated by “Sahakar Bharati”, Mumbai by presenting an award of the “Best Bank” for the year 2000-2001. The financial position at the end of March 2006, is as follows: Total no of shareholders increased to 7335 from 7106 in 2005 with growth of 3.22%. The Share Capital increased to 361.60 Lacs from 353.83 Lacs with an increase of 7.77 Lacs. Reserves and other funds increased from 139.87 Lacs to 159.46 Lacs. Banks deposit growth is 4.45 % from 5608.73 Lacs to 5858.36 Lacs. Advances increased to 3664.33 Lacs from 10
3643.70 Lacs. The NPA %ge is 2.54 %. The bank has declared dividend to the shareholders and also recorded net profit of 42.05 Lacs from 20.40 Lacs with 21.65 Lacs of increase. The bank organises training camps and tours for the staff every year. The bank believes in spiritual training and encourages the staff for “Vipassana Courses” for which 12 days paid leave is sanctioned. The only bank in the district to have its own training centre named “Vishwas Dnyan Prabodhini and Research Institute, Nashik” with a capacity of around 100 members alongwith library with more than 3500 books related to banking, management and computer field.
2.2 History of OrganizationWhenever one thinks about a bank, which is for the people, by the people, it is none other than Vishwas Co-op bank. In todays highly competitive and market driven economy, the common man's basic need is nothing but “Financial Need”. A Common man always finds it difficult to get loans of small amount. Taking into consideration, the problems faced by common man, Hon. Chairman Shri. Vishwas Thakur at the age of 27 alongwith his associate members founded the Vishwas Co-op Bank. The proposal for the formation of a bank was prepared under the guidelines of District Deputy Register Hon. Shri. Manohar Tribhuvan and Taluka Deputy Register Hon Shri Vijay Suryanwanshi. On 8th of October 1996, Co-operative department of Maharashtra State issued the necessary license. On 25th March 1997, Vishwas Co-op Bank came into existence. Vishwas Co-op Bank, which began in small humble way, has now grown up to one of the leading banks in Nashik and even in Maharashtra. Vishwas Co-op banks style of work is Dynamic. The approach of the bank in every aspect is very positive and innovative. Introduction and implementation of “Management Information System” and business development plan are the significant features of the bank, which has been appreciated by the Co-op department. Vishwas Co-op Bank has already started working on the interactive website where the customer can download Current, Savings and FD froms. He will also get the information on his account details through website. The customer will have only read only access. The staff will communicate each other through mail, which will make the communication more easier and faster. Vishwas Co-op Bank is also planning to go for Core Banking Solutions in near future, which will make Banking operations more customer friendly. Customer will avail the facility of anytime anywhere banking. The entire banking operation will become centralised. The Customer will withdraw as well as deposit the money from any branch. The staff will be in position to give better customer service due to this automation process.
2.3 Other Information Related to Organization Branches of Banks
Savarkar Nagar Branch Vishwas Vishwas Park, Savarkar Nagar, Gangapur Road, Nashik, Maharashtra,India. Pin Code:422013 TeleFax: 91-253-2305600/01 Ravivar karanja Branch 15, Ratna Manohar Sankul, Near Ahilyadevi Holkar Bridge, Ravivar Karanja, Nashik Maharashtra, India. Pin Code: 422001 TeleFax : 91-253-2305610 Nasik - Pune Road Branch Sayara Apartment, Ashok Chowk, Pakhal Road Corner, Nasik, Maharashtra, India. Pin Code: 422011. TeleFax: 91-253-2305614 HPT College Road Branch Plot No. 25, Swapna Vaibhav Colony, Canada Corner, College Road, Nasik, Maharashtra, India. PinCode : 422005. TeleFax: 91-253-2305613 Mumbai Naka Branch Vishwajyoti, Govind Nagar, Behind Hotel Prakash, Mumbai Naka, Nashik,Maharashtra, India. Pin Code: 422009. TeleFax: 91-253-2305612
Major Achievements of Banks
Reserve Bank of India granted permission to set up Vishwas Co-op Bank Ltd.’ in 199697. The bank’s operations began on March 25, 1997. Mr. Ratnakar Kulkarni, the then Commissioner and registrar of Co-operatives, Maharashtra and Marathi author Shivaji Sawant who wrote Mrutyunjay, inaugurated the branch located at Vishwavishwas Park, Savarkar Nagar, Gangapur road, Nasik 422013. Ravivar Karanja Branch opened on May 21, 2000. Mumbai Naka Branch was inaugurated on June 17, 2001. HPT College Road Branch was inaugurated on January 20, 2003. Nasik Poona Road Branch was inaugurated on July 20, 2003. The bank has the distinction of providing computer assisted banking services from the day one, in all five branches. The bank felicitates five veterans from various walks of life every year through Sanskriti Vaibhav, a leading cultural organisation in the city since 1999. Pune based Snake park’s director Neelamkumar Khaire, Criminal lawyer Ujjwal Nikam, Playwright Netaji Bhoir, Educationist Shamin Maulavi, Senior journalist Neelkanth Khadilkar, Social activist Vidya Phadake, Sports expert Ashok Dudhane and Industrialist B G Shirke have been felicitated with a momento and five thousand rupees each. Vishwas Co-op Bank Ltd. has bagged five prizes in the competition among cooperative banks in the state organised by The Vita Merchants Cooperative Bank, Vita, Sangali district and Yuvak Mudra. The staff members of the Vishwas Co-op Bank have bagged General Championship and prizes in various events in the cooperatives sports competition organised by Nasik district deputy registrar of co-operatives during January 26 – 28, 2001 in the city. The bank has been consistently awarded ‘A’ category in the statutory audit since its inception so far
Some Documents requirements for different account:For Savings Account: Documents required as under a) Two passport size photographs. 14
b) Address proof c) PAN Card photocopy d) Introducer's Signature For Current Account: Documents required as under a) Two passport size photographs. b) Proprietorship / Shop Act photocopy c) PAN Card photocopy d) Proprietorship stamp/Partnership stamps e) Introducer's signature
Fixed Deposit Schemes :
Period 15 to 180 days 181 Days to 1 Year 12 Months 1 Day to 24 Months 24 Months 1 Day to 60 Months 60 Months 1 Day onwards
Rate of Interest 7.25 % 10.00 % 10.00 % 8.00 % 7.25 %
Rate of Interest for Senior Citizens / Co-op Institutes 7.75 % 10.50 % 10.50 % 8.50 % 7.75 %
LakshaDhish Deposit Schemes: (To earn Rs. 1,00,000)
Deposit Rate Interest Rate Amount Invested
Deposit Rate for Senior Citizens, Co-op & Educational Institutes Interest Rate Amount Invested
1 Years 2 Years 3 Years 4 Years 5 Years
7.75 % 8.25 % 8.50 % 8.00 % 7.50 %
92610/- 8.25% 84930/- 8.75% 77700/- 9.00% 72840/- 8.50% 68970/- 8.00%
Recurring Deposit Schemes: (Amount earned after investing Rs 100 per month.)
Period 1 Years 2 Years 3 Years 4 Years 5 Years
Depositor Senior Citizens, Co-op & Educational Institutes Interest Rate Amount earned Interest Rate Amount earned 10.00 % 1266/- 10.50 % 1270/10.00 % 2664/- 10.50 % 2679/8.00 % 4079/- 8.50 % 4109/8.00 % 5666/- 8.50% 5726/7.25 % 7240/- 7.75 % 7337/-
2.4 Organization Chart
Senior manager (Deposits)
Senior manager (Loans)
Senior manager (Miscellaneous)
ANALYSIS AND INTERPRETATION OF DATA
3.1 INTRODUCTION TO WORKING CAPITAL
The working capital management refers to management of the working capital, or to be more precise, the management of current assets .A firm working capital consists of its investment in current assets which include short term assets such as cash and bank balance, inventories, receivables (including debtors and bills),and marketable securities. Working capital management refers to the management of the level of all these individual currents assets. The need for working capital management arises from two considerations. First, existence of working capital is imperative in any firm. The fixed assets which usually require a large chunk of total funds, can be used at an optimum level only if supported by sufficient working capital, and second, the working capital involves investment of funds of the firm. If the working capital level is not properly maintained and managed, then it may result in unnecessary blocking of 18
scarce resources of the firm. The insufficient working capital, on the other hand, put different hindrances in smooth working of the firm. Therefore, the working capital management needs attention of all the financial managers. The working capital management includes the management of the level of individual currents assets as well as the management of total working capital. However, each individual current assets has unique characteristics which the financial manager must consider in deciding how much money should be invested in each of these current assets i.e., cash and bank balance, marketable securities, receivables and inventories has been taken up in subsequent chapters. However, the general principles of working capital management have been taken up in this chapter. Nature and Type of Working Capital: The term of working capital refers to current assets which may be defined as (i) those are convertible into cash or equivalents fixed assets as well as the current assets, both requires investment of funds. So, the management of working capital and of fixed assets, apparently seem to involve same types of considerations but it is not so. The management of working capital involves different concepts and methodology than the techniques used in fixed assets management. The reason for this difference is obvious. The very basis of fixed assets decision process and the working capital decision process are different. The fixed assets involve long period perspective and therefore, the concept of time value of money is applied in order to discount the future cash flows; whereas in working capital the time horizon is limited, in general to one year only and the time value of money concept is not considered. The fixed assets affect the long term profitability of the firm while the current assets affect the short liquidity position. i) Gross Working Capital : The gross working capital refers to the firm’s investment in all
the current assets taken together. The total of investments in all the individual current assets is the gross working capital. This concept implies the total of all current assets of a business firm. A current asset is that which can be converted into cash within an according year or an
operating cycle. The current assets include cash and bank balance, debtors, bills receivables, inventories, expenses prepaid and short-term investments. ii) Net Working Capital : This concept of working capital is the difference between current
assets and current liabilities. While current assets have been defined above, current liabilities can be explained as those liabilities which are expected to mature for payment within an accounting year and include creditors, bills payable, outstanding expenses, bank overdraft and short-term loans. The net working capital may either be positive or negative. If the total current assets are more than total current liabilities, then the difference is known as positive net working capital, otherwise the difference is known as negative net working capital. Both concepts of working capital (gross working capital & net working capital) have their own relevance and a financial manager should give due attention to both of these. The cash inflows and outflows for any firm are seldom synchronized and so, some working capital is necessary. The cash outflows occurring from the existence of current liabilities are more easily and correctly predictable but the cash flows from current assets are difficult to be accurately predicted. The more predictable, these cash flows are, the less the net working capital required by the firm. The firm with more and more uncertain cash inflows must maintain higher level of current assets adequate to cover the current liabilities. The working capital can also be divided into categories: i) fixed working capital and ii) fluctuating working capital. Every business requires some minimum amount of working capital inspite of the level of operations, throughout the year. This amount represents the fixed amount of working capital.
In many business firms, the levels of operations fluctuate from time to time depending upon the demand pattern. In case, the demand periods, the need for working capital also capital
also increases and during low demand periods, the for working capital also comes down. This aspect of working capital can be shown in a better way with the help of following diagram. The fixed amount of working capital also go on increasing as the time passed because of the growth of the firm. This can be shown in the following diagram. FACTORS DETERMINING WORKING CAPITAL REQUIREMENT: The working capital needs of a firm are determined and influenced by various factors. A wide variety of considerations may affect the quantum of working capital required and these considerations may vary from time to time. The working capital needed at one point of time may not be good enough for some other situation. The determination of working capital requirement is a continuous process and must be undertaken on a regular bas9s in the light of the changing situations. Following are some of the factors which are relevant in determining the working capital needs of the firm 1. Basis Nature of Business: In some business organizations, the sales are mostly on cash basis and the operating cycle is also very short. In these concerns, the working capital requirement is comparatively less. Mostly service giving companies come in this category. In such cases, the working capital requirement is more. 2. Production policy : Working capital requirements also fluctuate according to the production policy. Some products have a seasonal demand but in order to eliminate the fluctuations in working capital, the manufacturer plans the production in a steady flow throughout the year. This policy will even out the fluctuations in working capital. 3. Market conditions : Due to competition in the market, the demands for working capital fluctuate. In a competitive environment, a business firm has to give liberal credit to customers. Similarly, it will have to maintain a large inventory of finished goods to service the customers promptly. In this situation, larger amount of working capital will be required. On other hand, when a firm is in seller’s market, it can manage with a smaller amount of working capital because sales can be made on cash basis and there will be no need to maintain large inventory of finished goods because customers can be serviced with delay.
Seasonal fluctuations :
A firm which is producing products with seasonal demands,
requires more working capital during peak seasons while the demand for working capital will go down during slack seasons. 5. Growth and expension activities : The working capital needs of the firm increase as it grows in terms of sales or fixed assets. A growing firm may need to invest funds in fixed assets in order to sustain its growth production and sales. This will in turn increase investments in current assets which will result in increase in working capital needs. 6. Operating efficiency : The operating efficiency of the firm relates to the optimum utilization of resources at minimum cost. The firm will be effectively contributing to its working capital if it is efficient in controlling operating costs. The working capital is better utilized and cash cycle is reduced which capital needs. 7. Credit policy: The working capital requirements of a firm depend to a great extent on the
credit policy followed by a firm for its debtors. A liberal credit policy followed by a firm will result in huge funds blocked in debtors which will enhance the need for working capital. The situation will be further deteriorated if the collection procedure is also slack. If a liberal credit policy is followed without inquiring into the credit worthiness of customers there can be a problem of recovery in future which will further push up the working capital requirements. The need for working capital is also affected by the credit policy followed by the firm’s creditors. If the creditors are ready to supply materials and goods on liberal credit, working capital requirements are substantially reduced. On the other hand, if purchases are mainly for cash, working capital needs go up. While planning the working capital, due attention should be given towards the credit policies followed by the firm and its creditors. 8. Sales growth : As the sales grow, the working capital needs also go up. Actually it is very difficult to establish an exact proportion of increase in current assets, as a results of increase in sales. Advance planning of working capital becomes essential because current assets will have to be employed even before growth in sales takes place. Once sales start increasing, they must be sustained. For this a firm will have to expand its production facilities which will require more investments in fixed assets. This will in turn result in more requirements of current assets which will increase working capital needs.
9. Dividend policy : a company has to pay dividends in cash as per company act 1956. if a liberal policy is followed for payment of dividends, more working capital will be required. The needs for working capital will be substantially reduced if dividend policy is conservative.
Forms of Bank Finance
BANK CREDIT Bank credit is the primary institutional source of working capital finance in India. In fact, it represents the most important source for financing of current assets. FORMS OF CREDIT 1. OVERDRAFT
Under cash credit/overdraft form/ arrangement of bank finance, the bank specifies a predetermined borrowing/credit limit. The borrower can draw/ borrow up to the stipulated credit/overdraft limit. Within the specified limit, any numbers of drawls /drawings are possible to the extent of his requirement periodically. Similarly, repayment can be made whenever desired during the period. The interest is determined on the basis of the running balance/amount actually utilized by the borrower and not on the sanctioned limit. However, a minimum(commitment) chare may be payable on the unutilized balance irrespective of the level of borrowing for availing of the facility. This form of bank financing of working capital is highly attractive to the borrowers because, firstly, it is flexible in that although borrowed funds are repayable on demand, banks usually do not recall cash advances/roll them over and, secondly, the borrower has the freedom to draw the amount in advance as and when required while the interest liability is only on the amount actually outstanding. However, cash credit/overdraft is inconvenient to the hampers credit planning. It was the most popular method of bank financing of working capital in India till the early nineties. With the emergence of new banking since the midnineties, cash credit cannot at present exceed 20% of the maximum permissible bank finance (MPBF) / credit limit to any borrower.
2. LOANS Under this arrangement, the entire amount of borrowing is credited to the current account of the borrower or released in cash. The borrower has to pay interest on the total amount. The loans are payable on demand or in periodic 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. Form a modest beginning in the early nineties, at least 80% of MPBF/CREDIT limit must now be in the form of loans in India. 3. BILLS PURCHASED/DISCOUNTED
This arrangement is of relatively recent origin in India. With the introduction of the new bill market scheme in 1970 by the reserve bank of India(RBI), bank credit is being made available through discounting of usance bills by banks. The RBI envisaged the progressive use of bills as an instrument of credit as against the prevailing practice of using the widely-prevalent cash credit arrangement for financing working capital. The cash credit arrangement gave rise to unhealthy practices. As the availability of bank credit was unrelated to production needs, borrowers enjoyed facilities in excess their legitimate needs. Moreover, it led to double financing. This was possible because credit was done, for example, by buying goods on credit from suppliers and raising cash credit by hypothecating the same goods. The bill financing is intended to link credit with the sale and purchase of goods and, thus, eliminate the scope for misuse or diversion of credit to other purposes. 4. TERM LOANS FOR WORKING CAPITAL: Under this arrangement, banks advance loans for 3-7 years repayable in yearly or half-yearly installments. 5. LETTER OF CREDIT: While the other forms of bank credit are direct forms of financing in which banks provide funds as well as bear risk, letter of credit is an indirect form of working capital financing an banks assume only the risk, the credit being provided by the supplier himself. The purchaser of goods on credit obtains a letter of credit from a bank. The bank undertakes the responsibility to make payment to the supplier in case the buyer fails to meet his obligations. Thus, the modus operandi of letter of credit is that the supplier sells goods on credit/ extends credit (finance) to the purchaser, the bank gives a guarantee and bears risk only in case of default by the purchaser. SECURITIES REQUIRED IN BANK FINANCE :
Banks do not provide working capital finance without obtaining adequate security. The following securities are the most important modes of security required by bank1. HYPOTHECATION: Under this mode of security, the banks provide credit to borrowers against the security of movable property, usually inventory of goods. The goods hypothecated, however, continue to be in the possession of the owner of these goods (i.e., the borrower). The rights of the lending bank (hypothecate) depend upon the terms of the contract between the borrower and lender. Although the bank does not have physical possession of the goods, it has the legal right to sell the goods to realize the outstanding loan. Hypothecation facility is normally not available to new borrower. 2. PLEDGE: Pledge, as a mode of security, is different from hypothecation in that in the former, unlike in the goods which are offered as security are transferred to the physical possession of the lender. An essential prerequisite of pledge therefore is that the goods are in the custody of the bank. The borrower, who offers the security, is called a ‘pawnor’ (pledgor), while the bank is called ‘pawnee’ (pledgee). The lodging of the goods by the pledgor to the pledge is a kind of bailment. Therefore, pledge creates some liabilities for the bank. It must take reasonable care of goods pledged with it. The term ‘reasonable care’ means car, which a prudent person would take to protect his property. He would be responsible for any loss or damage if he uses the pledged goods for his own purposes. In case of non-payment of the loans, the bank enjoys the right to sell the goods. 3. LEIN: The term lien refers to the right of a party to retain goods belonging to another party until a debt due to him is paid. Lien can be of two types - I) particular lien , & II) general lien. Particular lien is right to retain goods until a claim pertaining to these goods is fully paid. On the other hand, general lien can be applied till all dues of the claimant are paid. Banks usually enjoy general lien.
MORTAGE: It is the transfer of a legal/ equitable interest in specific immovable property for securing the payment of debt. The person who parts with the interest in the property is called ‘mortgagor’ and the bank in whose favour the transfer takes place is the ‘mortgagee’. The instrument of transfer is called the ‘mortgage deed’. Mortgage is, thus, conveyance of interest in the mortgaged property. 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.
ASSESSMENT OF WORKING CAPITAL
A) SIMPLIFIED TURNOVER METHOD • Under this method for working capital purposes for borrowers requiring fundbased limits upto Rs.5 crore SSI borrowers and Rs.2 crore in case of other borrowers, may be assessed at minimum of 25% of the projected annual turnover of which 115th should be provided by the borrower (i.e. minimum margin of 5% of the annual turnover to be provided by the borrower) and the
balance 4/5th (i.e. 20% of the annual turnover) can be extended by way working capital finance. • The projected turnover/output may be interpreted as projected “gross sales “which will include excise duty also. • Since the bank finance is only intended to support need-based requirement of a borrower, if the available NWC (net long term surplus funds) is more than 5% of the turnover the former should be reckoned for assessing the extent of bank finance. B) MAXIMUM PERMISSIBLE BANK FINANCE SYSTEM (MPBF) • Assessment of working capital limits in respect of borrowers not eligible to provided fund based working capital limits under ‘simplified turnover method’ is to be done as per MPBF system ‘second method of lending’, except in case of tea and sugar industry where credit requirement is assessed as per cash budget system. • Under this method, for assessment of borrowers WC needs, the projections submitted by the borrower in the various forms mentioned that the following year is relevant. The first step in assessing the quantum of WC finance is to find out whether the projections given by the borrower are reasonable. Any optimism or pessimism in accepting projections is neither desirable for the bank nor for the borrower as it may lead to over-financing or under-financing. • To assess the reasonableness of borrower’s projections, the following factors should be kept in view; a) The branches can use with advantage the past data given by the borrower as well as the
data available with it. The comparison has to be made between the past performance and the
future projections. If the future projections are markedly different form the past trend in relation to projected rate of growth, the reasons for the same have to be ascertained before accepting the various projections. b) The projections given by the borrower are normally based on certain assumptions such
as market demand, cost of raw materials, price, availability of inputs and other environmental factor. The bank has to assess how far these assumptions are realistic and materialize. c) How limits already sanctioned by the bank have been utilized by the borrower in the
past? Has the conduct of the account been as per terms of sanction or these have been frequently violated. d) Critical analysis of sales projections – the most important area to be looked into is sales.
All other aspects are directly related to the projected level of sales. Therefore, determining the projected level of sales is the first step in assessing the working capital needs of a borrower. Once the level of sales has been determined in relation to sales. The projected level of sales depends upon: • What is the installed and licensed capacity? Does it have any idle capacity, which can now be utilized? • • Are essential inputs available to take care of projected production figures? What are the present market conditions and terms of sales? What plans are there to boost sales? • • • What is the position of order book/orders in hand? From what sources increase in NWC will be met? Is the unit proposing to tap the export potentials/ markets? What are the prospects for exports? 29
How the increase in production is going to affect the quality and cost of production? Is the unit undertaking any expansion, modernization or diversification programme? A higher than normal sales estimate for the following year can be accepted only after the
bank is satisfied on the basis of the above scrutiny that the projected level of sales can be achieved and the available past data and future plans give positive indications in this regards. The bank has also to ensure that borrower is whiling to create the necessary support to achieve the sales target. 1. The branches, having satisfied itself as to the projected level of sales, can determine the other data in relation to sales. The following steps can be taken for finalizing other data: • The relationship between different items constituting cost of production can be studies in relation to sales and cost of sales. It is to be ensured that the projected increase in respect of any items is not out of proportion to the past relationship. Valuation of various items should be based on current cost. • After finalizing the above-mentioned projections, the holding period of current assets is to be determined. The holding period of chargeable current assets can be determined based on the rule that the projected holding should be preferably lower of norms or past practice. • The levels of other current assets can also be estimated on the basis the borrower’s past practice. • The projected level of NWC should at least be 25% of total current assets under second method of lending.
The bank is to bridge the gap between current assets and current liabilities after ensuring the borrower’s contribution. Therefore, the quantum of bank finance is very much dependent upon availability of short-term credit from other sources i.e. other current liabilities is projected properly.
CASH BUDGET SYSTEM In case of tea and sugar industries of finance may be at the peak during certain months
while the sale proceeds may be realized throughout the year to repay the outstanding in the account. Therefore, credit limits are fixed on the basis of projected monthly cash budgets to be received before beginning of the season. Branches should follow the procedure/guidelines issued form time to time through various circulars for financing tea and sugar industries.
FIXATION OF FUND-BASED AND NON- FUND BASED LIMITS • After arriving at the MPBF on the basis of inventory and receivable norms and appropriate method of lending, the various fund based & non-fund based limits and sublimits have to be decided. The fund based limits should not exceed the MPBF. • The bulk of the inventory limits are set up generally in the shape of cash credit, the receivable limits may be either by way of C/C against hook debts or by way of bills limit. Within the sanctioned limit, drawing power may be allowed on the basis of monthly stock statements, depending upon the regularity and reliability and to ensure there is no double financing.
In addition to the fund-based limits, non-fund based limits like inland &foreign L/C, guarantees and acceptances are given keeping in view the needs as well as the capacity of the borrower.
Loan system for delivery of bank credit
In order to bring out an element of discipline in the utilization of bank credit and gain better control over flow, a “loan system for delivery of bank credit” was introduced by RBI. The said system has been extended in phased manner to cover larger number of borrowers. • • Loan component and cash credit component. Under this system, after the assessment of MPBF of a borrower, working capital requirements are bifurcated into ‘loan component’, termed as Working Capital Demand Loan (WCDL) and ‘cash credit (cc) component’. Normally, borrowers are expected to avail the ‘loan component’ only after having fully availed/utilized the prescribed percentage of CC component of MPBF. However, if a borrower desires to draw the ‘loan component’ first, the same can be agreed to. • The extant guidelines for annual review of working capital limits are invariably to be strictly observed even under the system of loan delivery. As regards the guidelines relating to the cut off point of the working capital limits above which loan delivery system is applicable, the percentages of limits to be allowed as WCDL and CC component, the repayment of WCDL, the procedure for renewal/rollover of WCDL, incumbents should follow the instructions advised through HO circulars form time to time. • • The loan system would be applicable to borrower accounts classified as ‘standard’ or ‘substandard’ Adhoc credit limit for meeting temporary requirements should be sanctioned only after the borrower has fully utilized the “cash credit component” and the ‘loan component’ of the MPBF. In the case of consortium, member banks are normally expected to share the “cash credit component” • and the “loan component” on a pro rata basis of their individual shares of MPBF. The bifurcation of the credit limit into ‘loan’ and ‘cash credit’ should be effected after excluding export credit limits (pre-shipment and post-shipment).
Bills limit for inland sales is to be fully carved out of the loan component. Bills limit also includes limit for purchase of third party ( outstation) cheques , banks drafts.
Suitable clauses are to be incorporated in the loan document to provide for a right to recall working capital credit facility including the loan component. Exemption – at present sugar, tea fertilizer and information technology & software industries are exempted form the purview of loan system for delivery of bank credit.
PROCEDURE FOR OBTAINING WORKING CAPITAL FINANCE
Regarding loan proposal We refer to the captioned loan proposal recommended by you for sanctioning/renewing advance facility the loan requested by the applicant. We are pleased to inform you that, the board of directors in the meeting held on ________________. Have considered the proposal for sanction / renewal and the detailed of same as under:-
Mr. / Mrs.----------Limit requestedType Limit sanctioned / renewed Margin Margin Repayment holiday Repayment in monthly installment Rate of interest with monthly rests+ penal interest @ % to be charged on the overdue amount on monthly basis. Installment Rs-------per month 1st installment due Security:-
Prime: --------------------------------Collateral: -----------------------------Valuation amount Rs.------------------
JUSTIFICATION FOR WORKING CAPITAL LIMIT
A) I) Actual sales for the year ended 31st mar. xxxxx xxxxx xxxxx Rs. Rs. xxxxx
II) Projected sales for the year ended 31st mar. III) Accepted projected sales for 31st mar. 20% of I or II B) Own funds I) Capital + reserve (net worth)
II) Unsecured loan from family members
Three times to total Own funds:C) 1) Current Assets: i)cash/bank balance ii)Stock iii)Book Debts iv)Advance paid to supplier’s v)Other current assets Total 2) Current Liability: i)Creditors ii)Advance received form customer iii) Other current liability Total Working Capital Gap:- Current assets - current liability (1 - 2) Maximum Permissible Bank Finance -Least of A, B & C
-------------xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx
xxxxx xxxxx xxxxx xxxxx
3.2 Recommendation’s of various committees on working capital finance
Tandon Committee Recommendations on working capital finance from the bank:A study group, popularly known as tandon committee, was appointed by Reserve Bank Of India in July 1974, under the chairmanship of shri. P.L.Tandon,to suggest
guidelines for national allocation and optimum use of bank credit. Tandon committee also highlighted the weaknesses in the existing system of working capital finance, as pointed out by the committee. The Tondon Committee suggested that the borrower should be allowed to hold reasonable level of current assets. Particularly in the case of inventories, the Tondon committee suggested that the level of inventory should be as per the requirement only and in any case excessive investments in the inventories should be avoided. The banker should finance only those receivables which are in tune with the practices of the borrower’s company and industry. In order to avoid excessive investments in inventories, there is a need for having some uniform norms. The Tondon Committee in its final report has suggested norms for 15 industries. Industries like heavy engineering and sugar were omitted. The recommendations of the Tandon Committee are based on the following notions 1. Operating plan: The borrower should indicate the likely demand for credit. For this purpose, he should draw operating plans for the ensuing year and supply them to the banker. This procedure will facilitate credit planning at the bnks level. It will also help the bankers in evaluating the borrower’s credit needs in a realistic manner and in the periodic follow-up during the ensuing year. 2. Production-based financing: The banker should finance only the genuine production needs of the borrower. The borrower should maintain reasonable levels of inventory and receivable; he should hold just enough to carry on his target production. Efficient management of resources should therefore, be ensured to eliminate slow moving and flabby inventories. 3. Partial bank financing: The working capital needs of the borrower cannot be entirely financed by the banker. The banker will finance only a reasonable part of it; for the remaining the borrower should depend upon his own funds, generated internally and externally.
Following are the major recommendations: 1. • Inventory and receivable norms The borrower should be allowed to hold only a reasonable level of current assets, particularly inventory and receivables; • The banker should finance only those receivables which are in tune with the practices of the borrower’s firm and industry; • The committee suggested norms for 15 industries excluding heavy engineering and highly seasonal industries, like sugar. The norms were applied to all industrial borrowers, including small-scale industries, with aggregate limits from the banking system in excess of Rs.10 lakhs; • Norms are prescribed separately for 49 different industries. The norms appropriate to each unit should be applied. 2. Lending norms It recommended that the banker be required to finance only a part of the working capital gap; the other part was to be financed by the borrower from the longterm sources. Working capital gap is defined as current assets minus current liabilities other than the bank borrowing. Current assets will be taken at estimated value, or as per the tendon committee norms, whichever is lower. Current assets will consist of inventory and receivables, referred as chargeable current assets and other current assets. 3. Maximum Permissible Bank Finance (MPBF): Committee suggested the following three methods of determining the permissible level of bank borrowings:
In the first method of lending, the borrower will contribute
25% of the working capital gap; the remaining 75% can be financed from bank borrowings. This can be represented as --- MPBF = 75% of W.C.G. W.C.G. = C.A- C.L. • Second method: The borrower will contribute 25% of the total current assets. The remaining of the working capital gap can be bridged from the bank borrowings. This can be represented as ---- MPBF = 75% of current assets. • Third method: The borrower will contribute 100% of core assets and 25% of the balance of the working current assets. The remaining of the working capital gap can be met from the bank borrowing. This can be represented as ---- 75% (current assets- core current assets) - current liabilities. The Reserve Bank of India has implemented only the first two methods. The recommendations apply to all borrowers having limits in excess of Rs.20 lakhs from the banking system. At the time when this system of lending was introduced, in some cases the net working capital was negative while in others it was equal it was equal to 25% of working capital gap. The committee allowed this deficiency to be financed, in addition to the permissible bank finance by banks. It was however, to be regularized over a period of time depending upon the funds generating capacity and ability of the borrower. This kind of credit facility was called working capital term loan.
Methods of determining MPBF as under the Three Methods of Lending. Particulars Core Assets Other Current Assets Method I 20 80 Method II 20 80 Method III 20 80
Total Current Assets Less. Current liabilities Working Capital Gap Less: Borrower’s Contribution MPBF
100 20 80 20 60
100 20 80 25 55
100 20 80 40 40
Calculation of borrower’s Contribution 1st method: 25% of working capital gap 80*25% = 20 2nd method: 25% of total current assets 100*25% = 25 3rd method: 100% of core current assets 20+ (80*25%) = 20+20 =40
4. Style of Credit: In view of the deficiencies of the cash credit system of lending, the committee recommended the bifurcation of total credit limit into fixed and fluctuating parts. The fixed component was to be treated as a demand loan for the year representing the minimum level of borrowings, which the borrower expected to use throughout the year. The fluctuating component was to be taken care of by a demand cash credit, which could be partly used by way of bills.
The committee also suggested the interest differentials. As an incentive to switch over to the new style of credit, it recommended that interest rate on the loan component be charged lower than the cash credit account. The RBI stipulated the differential at 1%. 5. Information system: The committee advocated for the greater flow of information both for operational purposes and for the purpose of supervision and follow-up. Borrowers with credit limits of more than Rs.1 crore were required to supply the quarterly information. From the periodical data supplied, the bank should ascertain whether the actual result was in conformity with the expected result of there was a variance calling for remedial action. A “+ or -10%” variance was considered normal. The variance beyond this limit needed to be investigated. The main thrust of the Tondon committee was that the banker should be treated as a partner in the business with whom information was to be shared freely and frankly. Deviations from norms: Deviations are allowed for agreed short periods in certain cases such as failure of machinery, power cuts, strikes, transport delays, bottlenecks, non-availability of shipping space etc. Slip back: A unit whose current ratio is better than the minimum required, should not be allowed not be to slip back of worsen it. Slip back is allowed provided that borrower’s contribution does not go below a minimum of 25%. The Tondon committee has also suggested norms for determining borrowing limits. As per the norms, the banker is required to finance only a part of working capital gap and the remaining amount should be financed through long-term sources. The following three methods are suggested by the committee: The committee recommended that the first method should be used mainly as stop gap and the borrower’s ultimately should move to the third method. The borrowers who are
already in the second stage should not be allowed to enter into first stage. They should be encouraged to enter into the third stage. The committee has also suggested a change in the style of bank lending. The total credit limit should be divided into fixed part and fluctuating part. The fixed part will be taken care of by demand cash credit. The interest rate on the loan component should be lower than credit system.
Chore Committee Recommendations:
A working group under the chairmanship of Mr. K.B. Chore was formed in April 1979 by the Reserve Bank of India. The main terms of reference for this group wee to review the cash-credit system and suggest modifications and if required, suggest alternate credit system. The important recommendations made by this committee are as follows;
i) Reduced dependence on bank credit As far as possible, the borrower should try to reduce the dependence on bank credit. Therefore, the second method suggested by Tondon committee is recommended. If necessasary, the borrower should be granted a working capital term loan which should be repaid in semi-annual installments of 5 years with a higher rate of interest than the cash credit. ii) Credit limit to be separated For every borrower, limits should be fixed according to ‘peak level’ and normal non-peak level. This limit is to be fixed for all the borrowers borrowing in excess of Rs.10 lakhs and will be according to peak and non-peak periods. It will be the duty of the borrower to indicate his needs well in advance. If actual borrowing exceeds this limit by more than 10% appropriate action will be taken against the borrower. Ad-hocs or temporary credit limits should be discouraged by the banks. iii) Existing lending system to continue The banks should continue the existing system of three types of lending viz. cash credit, loans and bills. However, loans and bills should gradually replace cash credit system. The division of cash credit account into fixed and fluctuating components as per suggestions of Tondon committee should be discounted. Advances against book-debts should be converted to bills wherever possible and at least 50% of the cash credit limit utilized for financing of raw material inventory should be changed to bills system.
iv)Information system The discipline relating to the submission of quarterly statements to be obtained from the borrowers under the existing system should be strictly adhered to in respect of all borrowers having capital limits of Rs.50 lakhs and over from the banking system.
NPA treatment for WCF
Definition of NPA
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A ‘non performing asset’ (NPA) was defined as a credit facility in
respect of which the interest and/ or installment of principal has remained ‘past due’ for a specified period of time. The specified period was reduced in phased manner as under
Year ending march 31
1993 1994 1995 onwards NPA borrower wise of facility –wise
Four quarters Three quarters Two quarters
The criteria for classifying an account into performing and non-performing assets are based on the record of the recovery of interest/installment and conduct of the running account. Further, all the facilities granted to a borrower will have to be treated as NPA and not particular facility or part there of which has become NPA. Net worth of borrower/guarantor/value of security Availability of security of net worth borrower/guarantor should not be taken into account for the purpose the treating an advance as NPA or otherwise, as income recognition is based on record of K. FORMAT OF CALCULATING OF N.P.A.
PARTICULAR Gross advances Gross N.P.A. Gross N.P.A. as percentage of net advances Deductions Balance in interest suspense A/C DCGC/ECGS claims received & held pending adjustment Partly payment received & kept in suspense A/C Net Advances ( 1 - 4) Net N.P.A. Net N.P.A. as percentage of net advances
AMT 0000 0000 0000 0000 0000 0000 0000 0000 0000 0000
3.3 Calculation of working capital of Vishwas co-operative bank
(Last 3 years)
particular Total of balance-sheet Cash & stamp Bank balance Investment Loans & Advances Overdue & Bills for collection Assets Other assets Branch adjustment Total Deductions Contra entries Loan recovery scheme Bills for collection Total Working capital of bank 31/03/2006 16810225 8719250 247783942 366432918 3726073 17225363 10590622 20457 671308850 31/03/2007 15908066 18879432 230412045 399710086 5206515 19230482 11088624 700435250 31/03/2008 19191286 28464250 272457047 486720941 8188089 24852845 16655193 105337 856634988
2311126 1414947 3726073 667582777
4638237 568278 5206515 695228735
7067042 1121047 8188089 848446899
Year 2005 2006 2007 2008
N.P.A. 2.86 2.54 2.40 1.51
From this analysis, we can see that Working Capital of bank is increasing year by year. This is good for bank because the more the working capital the more will be the investment by the bank and the more is the opportunity to make profits. .
N.P.A. of last few years
By Trend Analysis Moving Average Method
06 07 08
2.86 + 2.54 2 2.54 + 2.40 2 2.40 + 1.51 2
= = =
2.70 2.47 1.96
3 2.5 2 1.5 1 0.5 0 2006 2007 2008 NPA Avg. Npa
The above analysis shows that NPA is decreasing in year by year. This is very good feature for bank because bank can have more faith in its customers and also depend on the current scrutiny procedure.
Vishwas Co.op Bank ltd. Nashik
Balance Sheet As on 31/03/08 LIABILITIES
Share Capital Share Capital Reserve & Other Funds Bad & Doubtful Debts Res. Std. Assets Reserve
Cash In Hand Cash In Hand Stamp In Hand Franking Stamp In Hand Stamp On Hand
Building Fund Reserve Funds Tent. Bad & doubtful Res. Charity Fund Dividend Equi. Fund General Fund Inv.Dep. Res. Total Res. & Other Funds Deposits Current Account Saving Account Reccuring Account Fix Account Re-investment Account Locker Security Deposit Matured Dep. Not paid Overdraft Ag. Fdr Cash Credit (stock-hyp) Total Deposits Loan recovery Scheme Loan recovery Scheme
Outward Bills For Collection (contra)
58,59,155 88,76,812 26,94,848 3,000 21,000 2,06,000 15,089
Total Stamp In Hand Bank Balance MSC.Bank Nsk.A/c S.B.I. MSC Bank Mumbai Ndcc Bank Model Col.Br. HDFC Bank Pune A/C Central Bank Of India HDFC Bank SGL A/C NDCC Bank Agra Rd. Br. HDFC Bank Nashik A/C I.D.B.I. Bank Punjab National Bank A/C Total Bank Balances Investment Non SLR Inv. NMC 7.5% Bonds Reserve Fund Inv. MSC Bank Reserve Fund Inv. Co-op Bank shares Building Fund Inv. MSC Bank Inv. 11,21,047 70,67,042 NDCC Bank Inv. S.B.I. Inv. MSFC 10.25% Bond Inv. Govt. Securities IDBI Bank Inv. Sarswat Bank Inv. Shamrao Vitthal Bank Inv. ICICI Preduntial Bonds IOB Bonds Inv. 6.75% APSFC Bonds Thane Janata Bank For Inv. Cosmos Bank For Inv. Yes Bank Inv. ICICI Fix Maturity Plan Total Inv. Loans & Advances Gala/Shade Purchase Staff Loan (Term Loan) O/D Ag.FDR Vehical Hypothication
4,81,95,061 13,95,02,581 1,14,83,392 24,72,67,019 22,70,49,993 29,10,000 3,48,74,789 21,933 6,938
6,889 88,25,816 8,52,459 3,16,918 2,48,850 5,148 6,27,234 9,27,234 87,06,522 79,37,243 10,000 2,84,64,250
62,47,500 3,40,000 5,00,000 75,00,000 13,62,050 5,00,000
O.B.C. Overdue Int. Reserve NPA Int. Reserve Interest Payable Interest Payable Int. In Cash For Quarterly FD Total Int. Payable Other Payable & Provisions Audit Fee Payable T.D.S. Payable Pay order Provisions for Expenses Sundry Crs. Bonus Payable Div. Payable Div. Payable 2005/06 Div. 2006-07 Staff Welfare Fund Education Fund Payable Bank Guarantee A.E.O.
25,51,929 5,32,592 30,84,521
4,44,084 21,736 6,11,89,746 1,20,710 22,80,966 9,32,352 8,32,866 9,69,144 2,88,038 1,41,244 30,000 2,90,000
75,00,000 50,00,000 30,44,100 30,16,500 45,97,500 70,00,000 50,00,000 70,00,000 10,00,000
Obligations Closing Allowance Payable 6 Total Other Payable & Prov. Profit Profit & Loss Balance Of Profit Total Profit
Housing Loan (New) Housing Loan (old) Personal Loan Swapnapurti Loan Cash Credit (Stock-Hyp) Term Loan Self Help Group Vishwadeep Yojana Stock Hypo (Term Loan) Cash Credit B/R Total Loans And Advances Overdue(NPA) Int. Receivable (Contra) NPA Int. Receivable Outward Bills Receivable O.B.R. Fixed Assets Vehicle Account Fur. Fixture & Dead Stock Library L&B Total Fixed Assets Other Assets Sundry Drs. Outward Clearing Tangible Assets Prepaid Exp. Stock Of P&S Int. Receivable On Inv. Tds Receivable Int. Recei On Govt. Securi. Staff Advance Premium On Inv. A.E.O. Obligations Bank Guarantee Gold/ Silver Ornaments Total Other assets Branch Adjustment
3,32,04,714 3,79,76,569 1,43,50,294 12,24,403 2,41,82,577
35,62,273 3,733 35,66,006
3,39,328 38,68,750 17,22,694
18,87,093 11,99,450 1,15,721 3,61,773 4,62,616 44,01,595 2,88,904 18,45,137 24,600 57,54,648 2,90,000 23,653 1,66,55,193
Head Office ITZ Cash Cards ITZ Cash Cards
TOTAL OF LIABILITIES
TOTAL OF ASSETS
For understanding the procedure of lending working capital of the bank let us assume the following cases. CASE 1 Balance sheet of ABC Ltd Liabilities Equity Capital Rs. Assets 100000 Goodwill(At cost) Rs. 500000
6% Pref. Capital General Reserve Profit & Loss A/C Provision for Taxation Bills payable Bank overdraft Creditors 12% Debentures
0 500000 Plant & Machinery 100000 Land & Building 400000 Furniture 176000 124000 20000 80000 Inventories Bills Receivable Debtors Bank Investments(Short500000 term) 290000 0 Working Capital Gap
600000 700000 100000 600000 30000 150000 200000 20000 2900000
Particular Current Assets Inventories B/R Drs. Bank Inv. (Short Term) Total Current Assets Current Liabilities B/P Bank Overdraft Crs. Provision for Taxation Total of Current Liabilities W/C Gap (A - B ) C
Rs 6,00,000 30,000 1,50,000 2,00,000 20,000 10,00,000 1,24,000 20,000 80,000 1,76000 4,00,000 6,00,000
Particular W/C Gap Less Borrower Contribution
Method 1 6,00,000
Method 2 6,00,000
1,50,000 (25% of W/C Gap )
2,50,000 (25% of Current Assets) 3,50,000
So, From the MPBF method we can say that Bank will go with 2 nd method because in this case borrowers contribution is more and chances of bank getting into loss if considered about the NPA in effect.
CASE-2 Balance sheet of XYZ Ltd. Liabilities Share Capital(Rs.10 each) Profit & Loss A/C Creditors Bills Payable Rs. 100000 0 200000 250000 150000 Assets Land & Building Plant & Machinery Stock Debtors Bills Receivable Cash & Bank Furniture Rs. 500000 300000 150000 150000 125000 175000 200000 1600000
Working Capital Gap
Method 1 W/C Gap Less Particular Borrower Contribution Current Assets Stock B/R Drs. Cash Current Liabilities B/P Crs. Total of Current Liabilities B 50,000 (25% of W/C Gap ) 1,50,000 2,00,000
Method 2 2,00,000
15,0000 (25% of Current Assets) 12,5000 50,000 15,0000 17,5000 A 6,00,000 15,0000 25,0000 4,00,000
Total Current Assets
So, From the MPBF method we can say that Bank will go with 2 nd method because in this case borrowers contribution is more and chances of bank getting into loss if considered about the NPA in effect.
The study revealed the increased importance of the Banking sector for industry & trade and its contribution in the smooth operation of industries and its hand in the industrial growth as banks provide the much needed large amounts of working capital to industries. Following important conclusions were drawn from the study:Banks are supposed to gather certain preliminary information from the parties but it is not necessary that the information given is correct in all respects and if loan is sanctioned to such borrowers it proves to be a bad asset for the bank. In some cases, even if the information is correct and bank has sanctioned loan to a sound party may not be in a position to repay the loans. And yet another case can be of a deliberate fraud committed by a party.
Even after so much of analyses and care taken for providing or lending fund banks have to face large number of frauds. Large value frauds take place in banks, specially in credit accounts. The reasons for the frauds are the following:• • • Sometimes there is lack of pre-sanction survey including improper identification of borrowers. Even in certain cases, physical verification of collateral security offered was not done. Appraisal is not done properly and there undue dependence on borrower’s financial statements including projected sales turnover, which are at times manipulated by some hired professionals. • • Disbursements are sometimes made, even before completion of all terms & conditions of the sanction. Undue haste is shown in case takeover of borrowal accounts from other banks.
Banks as well as the customers face problem in initial stage of scrutiny as the customer is not aware of the information he has to submit and even the bankers demand information in pieces. This cause inconvenience to both and the time in the sanction of the loan also elongates. Another problem that is faced in the working capital loans is regarding interest rate payment. The interest rate is fixed on the basis of PLR’s STPLR’s which keep fluctuating because of the changes in the RBI’s credit policies. If the interest rates increase at a certain point of time, customers are relevant to pay interest at the higher rates. This generates the risk of non-payment by customers.
According to me, following steps need to be taken to overcome the problems that the bank is faced with:1. As soon as customer approaches the bank for working capital finance, the officers in the loans section need to explain to the customer all especially terms related to the guarantee & guarantor, securities & the interest rates. This would help in avoiding the misunderstanding later on. 2. It was also noted that all the required information was not asked for at all same time. Rather it was demanded in pieces. This created a bad image of the bank in the eyes of the customer and also looses interest in providing the authentic information. Therefore, it is suggested that all the information be collected at once only. 60
3. All the information is scrutinized in one setting because otherwise the banker would loose the links & will have to review all the information all over again, every time to recall the earlier analysis, which would waste a lot of time. 4. It shoud be made clear to the borrower that PLR’s are subject to change and as PLR’s change the rate of interest to be charged may increase or decrease and he will have to pay interest accordingly. 5. Bank should not make the disbursements until and unless the borrower has fully completed all the formalities and all terms & conditions are complied with. 6. There were cases where the borrower had diverted finance, granted for working capital purposes, for other activities or had made investments in associate companies or subsidiaries. Some borrowers also went to the extent of transferring the amount of packing credit account & cash credit account in to their saving accounts to earn interests. Therefore, it is recommended that the bank should sanction the loan only after fully satisfying itself that the purpose for which the loan is sanctioned is a genuine one. It should also testify the credit worthiness of party from the market. The penalty should be increased and such an act should also be liable for other punishments. 7. Bank should also provide same kind of reward on the best performing loan accounts such as rebate on interest on time, submission of statements in time etc. 8. It should be checked that the quarterly statements reveal the true position of the parties dealings because there were cases when the parties had played mischief with figures to window dress their position so that the bank does not take any measures against them for being able to achieve the projected levels.
9. Training needs to be imparted to personal handling credit management and they also need to be trained in customer management.
Books referred. 1) Financial management: I.M.Pandey. 2) Financial management: K.P. Rustogi. Websites referred. 1) www.vishwasbank.com
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