I.

INTRODUCTION

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

i.

vii.

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

viii.

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

called current assets& current liabilities.

There are two components of working capital

GROSS ASSETS

WORKING

CAPITAL

=

TOTAL

CURRENT

NET WORKING CAPITAL CURRENT LIABILITIES OPERATING CYCLE :

=

CURRENT ASSETS –

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

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

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

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

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

Flash report

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

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

Credit analysis :

It involves investigation of the capacity of the

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

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The unit should be able to maintainadequate stock offinished goods for smooth sales operation. The analysis on these lines is important as the future is always uncertain and there will always be estimation errors. which depends on the nature of the activities of an enterprise & the duration of its operating cycle. the discount rate and the project life are to estimation errors. The method adopted under sensitivity analysis is to evaluate a project using a number of estimated cash flows to provide to the decision maker an insight into the variability of the outcomes. a part of working capital requirement should be financed for the long term & partly by determining MAXIMUM PERMISSABLE BANK Page 5 of 47 .Collateral (Security) Conditions (Economic. It provides information as to how sensitive the estimated project parameters. namely. Sensitivity analysis takes care of estimation errors by using a number of possible outcomes in evaluating a project. the expected cash flow. especially downside vulnerability) Sensitivity analysis :One measure which expresses risk in more precise terms is sensitivity analysis. After assessing the total requirement of working capital. Sensitivity analysis provides different cash flows estimates under three assumptions The worst (most pessimistic) The expected (the most likely) and The best (most optimistic) it is necessary to make a proper assessment of total requirement of the working capital. It has to be ensured that the unit will have regular supply of rawmaterial to facilitate uninterrupted production.

Page 6 of 47 . Navi Mumbai. 12/B. branches. The bank has branch officesacross the length and breadth of the country. Type of organization Type of industry Organizational set up : : : Nationalised Bank Banking Bank of Maharashtra is a nationalized bank with a standing of more than 7 years.2 COMPANY PROFILE: Name of the company : Location and address : BANK OF MAHARASHTRA Shop No. Sicily Marvel Apartment. 3.5. Koperkhairane. Regional offices.FINANCE 1. All the branches of the bank are under CORE BANKING SOLUTION (CBS). Sector No. In the state of maharashtraitself it has the largest network of branches.4. It has three tier organizational setup consisting of Central offices.

ONE FAMILY ONE BANK (CELEBRATING PLATINUM JUBILEE YEAR) Our Aims The bank wishes to cater to all types of needs of the entire family. customer centric bank serving diverse sections of the society. Maharashtra Bank". in the whole country. To adopt latest technology on a continuous basis. To be a vibrant. To enhance the shareholders‟ wealth through best practices and corporate governance. professional and involved workforce. One Bank. To build proactive. enhancing shareholders' and Page 7 of 47 . forward looking. Its dream is "One Family. techno-savvy. To innovate products and services to cater to diverse sections of society. Mission To ensure quick and efficient response to customer expectations.

LOGO The Deepmal : With its many lights rising to greater heights The 3 M's    Mobilisation of Money Modernisation of Methods and Motivation of Staff.employees' value while moving towards global presence. Page 8 of 47 .

Page 9 of 47 . one of the leading banks in India. small-scale industry and hi-tech agriculture. 2007. Bank of Maharashtra did reasonably well in quick period of time. multi city check facility. a tie-up with United Nations environment program (UNEP) for implementing solar home systems. It includes 22 specialized branches in the area of foreign exchange.. G. The Bank has 302 automated teller machines operating as of March 31. The bank was established with a goal to meet the banking needs of the common people. The deposits crossed 1crore mark within the year 1945. D. K. 1936 with a mere authorized capital of ` 10 lakhs and issued capital of ` 5 lakhs. Registered on September 16. has its headquarter located in Pune. Multiple delivery channels like internet banking. New Initiatives like the corporate agency tie up with United India Insurance Company for sale of general insurance products and with LIC of India for sale of life insurance products are available at all branches. The bank has fully-computerized branches. industrial finance. V. The bank has a tie-up with Franklin Templeton for distribution of mutual fund products. The bank also got listed on the Bombay Stock Exchange in 1958. crore.345 branches and 13 extension counters spread over 22 states and two union territories as on March 31. The bank has a branch network comprising 1. It has implemented core banking solution (CBS) in 66 branches which offer customer convenience products like any branch banking. . Kale and late Mr. The bank has joined national electronic funds transfer (NEFT) with 510 branches going live during the year and also launched an insta remit facility on its RTGS platform. 2007. The bank opened 29 new branches during the year. mobile banking and so on will be introduced in 2007-2008. 1935 by Prof. tie-ups with Hero Honda Motors and tractor and power tiller manufacturing companies for loans to farmers.etc. Sathe. The CBS network will be extended to 600 branches during the year 2007-2008.BRIEF PROFILE OF BANK OF MAHARASHTRA Bank of Maharashtra. Bank of Maharashtra started its operation on February 8.

overlooking the profit aspect. Page 10 of 47 . Bank has captured 95. it has a good share of Priority sector lending having 46% of its branches in rural areas.25% of its total business through computerization.SOCIAL ASPECTS OF BANK OF MAHARASHTRA The bank excels in Social Banking. OTHER ATTRIBUTES Bank is the convener of State level Bankers committee Bank has signed a MOU with EXIM bank for co-financing of project exports Bank offers Depository services and Demat facilities in Mumbai.

SAVINGS DEPOSITS o o o o o o Mahabank – YuvaYojana MahabankLokBachatYojana Mahabank – SwasthyaYojana NRI Ordinary Account NRI External Account CURRENT DEPOSITS o Mahabank – Pearl & Sapphire TERM DEPOSITS o o o o o o o o o Mahabank – SulabhJamaYojana Monthly Interest Deposit Scheme Mahabank – SheetalJamaYojana Mahabank – Trust Deposit Scheme FCNR Account Cumulative Deposit Scheme (CDR) Quarterly Interest Deposit Scheme Mixie Deposit Scheme Mahasaraswati Scheme Page 11 of 47 .1.3 PRODUCTS & SERVICES Bank of Maharashtra offers a range of financial products and services to its customers. Following are the products and services of Bank of Maharashtra.

LOANS o o o o o o o o o o o o o o o o o Educational Loans Loans for Corporates Loans for Exporters Loans for Professionals Loans for Agriculturists Loans for Individuals Housing Finance Scheme Mahabank Platinum Housing Loans: Festive Offer MahabankAdhar Scheme Mahabank Gold Card Scheme for Exporters Mahabank Salary Gain Scheme Mahabank Vehicle Loan Scheme Mahabank Renewable Energy Equipments Mahabank Realty Finance Personal Loans Mahabank Solar Home Systems Mahabank Consumer Loan Scheme OTHER SERVICES o ATM Services o Demat Services o Bank assurance o Credit Card o Mahabill Pay o MahabankInsta Remit Scheme o NEFT FUTURE PLANS OF BANK OF MAHARASHTRA  To increase finance to Self Help Groups in rural areas. Page 12 of 47 .

83 crore during the financial year ended on March 31. PROFIT IN CRORES year 2012 profit in crores year 2011 0 100 200 300 400 500 Net worth of bank has also increased form 2709. comparing to a net profit of 330. 4 FINANCIAL PERFORMANCE Bank of Maharashtra registered a net profit of 430. 2012.24 crore in FY 201011 to 3775. Bank is planning setting up of overseas representative offices in New York . London. Singapore & Dubai. 1.  To substantially increase the Savings Bank Deposits.39 crore in 2010-11 by recording a growth of 30. NET WORTHIN CRORE year 2012 net worthin crore year 2011 0 1000 2000 3000 4000 Page 13 of 47 .40%.52 crore in FY 2011-12.

On the business front .03 Quick Ratio 21.28 Book Value 63. 2012 as compared to Rs. 133508 crore in MARCH 31. 114332 crore in MARCH 31.37 Operating Expense / Total Funds 2.52 Total Assets Turnover Ratios 0.77 Page 14 of 47 .75 Net Profit / Total Funds 0.52 Total Income / Capital Employed(%) 9.52 Earnings Per Share 6. total business of the bank registered a growth of 16.77% to Rs. TOTAL REVENUE IN CARORE year 2012 total revenue in carore year 2011 100000 110000 120000 130000 140000 SOME IMPORTANT FINANCIAL RATIOS FOR THE FY 2011-2012 PROFITABILITY RATIOS Return on Assets Excluding Revaluations 63.77 Return on Assets Including Revaluations 70.09 LEAVERAGE RATIOS Current Ratio 0.13 MANAGEMENT EFFICIENCY RATIOS Interest Income / Total Funds 9.

To analyse in detail the procedure of assessment of working capital finance extended by bank.5 OBJECTIVES OF STUDY   To know the process of working capital finance provided by banks.1. Page 15 of 47 .  To apply these procedure at a practical level with the help of case studies.

INTRODUCTION TOWORKING CAPITAL FINANCE Page 16 of 47 .II.

The norms suggested by Tandon Study Group are being reviewed from time to time by the Committee of Direction constituted by the Reserve Bank to keep a constant view on working capital requirements. Inadequate levels of working capital may result in under-utilization of capacity and serious financial difficulties. The „study group to frame guidelines to follow-up of bank credit‟ (Tandon Study Group) appointed by Reserve Bank of India had suggested the norms for inventory and receivables regarding:Major industries on the basis of company finance studies made by Reserve Bank process periods in the different industries. discussions with the industry experts and feed-back received on the interim report. It keeps a watch on the various issues relating to working capital Page 17 of 47 . Similarly excessive levels may lead to unproductive use of credit and unnecessary interest Burdon on the unit. Proper assessment of working capital requirement may be done as under- If the bank credit is to be linked with production requirements. The committee has representatives from a few banks and it generally once in a quarter. It also consults the representative from industry and trade.2. Proper assessment of funds required for working capital is essential not only in the interest of the concerned unit but also in the national interest to use the scare credit according to production requirements.1 ASSESSMENT OF WORKING CAPITAL A unit needs working capital funds mainly to carry current assets required for its operations. it is necessary to assess the requirements on the basis of certain norms.

Banks may also consider suitable internal guidelines for accepting the projections made by the borrowers regarding sundry creditors as sundry creditors are taken as a source of financing current assets (inventories. it is necessary to project them correctly while calculating need of bank finance for working capital requirements. Banks make their own assessment of credit requirements of borrowers based on a total study of borrowers‟ business operations and they can also decide the levels of holding each item of inventory as also of receivables which in their view would represent a reasonable built up of current assets for being supported by banks‟ finance. receivables. Page 18 of 47 .). etc.requirements and gives various suggestions to suit the changing requirements of the industry and trade.

. e. CURRENT LIBILITES AMT CURRENT ASSETS AMT CREDITORS 200 RAW 380 Page 19 of 47 . i. The above minimum contribution of long-term funds is called minimum stipulated Net Working Capital (NWC) which comes from owned funds and term borrowings. It may be observed from the above that borrower‟s contribution from long term funds would be 25 per cent of the working capital gap under the first method of lending . the balance to come out of long-term funds.e. i.2.e. A certain level of credit for purchases and other current liabilities inclusiveof bankborrowings will not exceed 75 per cent of current assets.2COMPUTATION OF MAXIMUM PERMISSIBLE BANK FINANCE (MPBF): The Tandon Study group had suggested the following alternatives for working out the maximum permissible bank finance:- a. owned funds and long term borrowings. Borrower should provide for a minimum of 25 per cent of total current assets out of long-term funds. Above two method of lending may be illustrated by taking the following example of a borrower‟s financial position. projected as at the end of next year. i. owned funds and term borrowings b. Bank can work out the working capital gap. total current assets less current liabilities other than bank borrowings and finance a maximum of 75per cent of the gap.

CURRENT LIABILITIES (OTHER THAN BANK BORROWINGS) WORKING CAPITAL GAP 440 740 300 Page 20 of 47 .MATERIALS OTHER CURRENT LIBILITES BANK BORROWINGS INCLUDING BILLS DISCOUNTED WITH BANKERS RECEIVABLES INCLUDING BILLS DISCOUNTED WITH BANKERS OTHER CURRENT ASSETS 700 700 30 110 400 FINISHED GOODS 180 300 STOCK TRADES IN 40 FIRST METHOD TOTAL CURRENT ASSEST LESS:.

33:1. the borrower has to provide a minimum of 25 per cent of working capital gap from ling-term funds and it gives a minimum current ratio 1.17:1. the borrower has to provide a minimum of 25 per cent of total current assets from long-term funds and gives a minimum current ratio 1.25% OF ABOVE FROM LONG TERM SOURCES MBPF EXCESS BANK BORROWINGS CURRENT RATIO 110 330 70 1.17:1 SECOND METHOD TOTAL CURRENT ASSETS 25% OF ABOVE FROM LONG TERM SOURCES WORKING CAPITAL GAP LESS:.CURRENT LIABILITIES (OTHER THAN BANK BORROWINGS) MBPF EXCESS BANK BORROWINGS CURRENT RATIO 255 145 1. In the second method. Page 21 of 47 .33:1 740 185 555 300 of It may be observed from the above that in the first method.

Similarly. lending and borrowing of money.3 WORKING CAPITAL FINANCING BY BANKS A bank is a business organization which deals in money i. In determining working capital requirements of a firm. advancing loans. the bank may approve separate limits for „peak season‟ and „non-peak season‟. one of the most important functions of banks is to finance working capital requirement of firms. he can draw it periodically to the extent of his requirements. the borrower can not borrow the entire sanctioned credit in lump sum. repayment can be made whenever desired during the period. the bank takes into account its sales and production plans and desirable level of current assets. The amount approved by the bank for the firm‟s working capital requirement is called credit limit. These advances were usually given against the security of the current assets of the borrowing firm. Working capital advances forms major part of advance portfolio of banks. There is no commitment charge involved and interest is payable on the amount actually utilized by the borrower and not on the sanctioned limit. However. the bank credit is available in the following forms: CASH CREDIT– Under this facility. the bank specifies a predetermined limit and the borrower is allowed to withdraw funds from the bank up to that sanctioned credit limit against a bond or other security. Thus. In the case of firms with seasonal businesses. They perform all types of functions like accepting deposits. credit creation and agency functions. Besides these usual functions. it is maximum fund which a firm can obtain from the bank.e. Page 22 of 47 . Usually.2.

the bank satisfies itself about the creditworthiness of the drawer and genuineness of the bill. fixed deposits receipts. LETTER OF CREDIT– While the other forms of credit are direct forms of financing in which the banks provide funds as well as bears the risk. Overdraft facility is generally available against the securities of life insurance policies. the total amount of borrowing is credited to the current account of the borrower or released to him in cash. the amount provided is covered by cash credit and overdraft limit. LOANS – Under this system. of the corporate sector. letter of credit is an indirect form of working capital financing in which banks assumes Page 23 of 47 . As a form of financing. Within the stipulated limits any number of withdrawals is permitted by the bank. BILLS FINANCING– This facility enables a borrower to obtain credit from a bank against its bills.OVERDRAFT– Under this arrangement. irrespective of how much he draws. Interest is charged on the amount actually withdrawn by the borrower. loans imply a financial discipline on the part of the borrowers. The bank purchases or discounts the bills of exchange andpromissory notes ofthe borrower and credits the amount in his account after deducting discount. subject to some minimum(commitment) charges. shares and debentures. They can also be renewed from time to time. The borrower has to pay interest on the total amount of loan. Under this facility. Before purchasing or discounting the bills. the borrower is allowed to withdraw funds in excess of the actual credit balance in his current account up to a certain specified limit during a stipulated period against a security. Government securities. etc. Loans are payable either on demand or in periodical installments.

the bank shall make the payment to the seller.10 crore or above. Banks provide such credit through a Working Capital Demand Loan (WCDL) account or a separate „non–operable‟ cash credit account. On such additional credit. The customer pays bank charges for this facility to the bank. the borrower has to pay a higher rate of interest more than the normal rate of interest. This arrangement passes the risk of the supplier to the bank. The minimum period of WCDL keeps on changing. A letter of credit is the guarantee provided by the buyer‟s banker to the seller that in the case of default or failure of the buyer. This arrangement is presently applicable to borrowers having working capital requirement of Rs. The bank opens letter of credit in favour of acustomer to facilitate his purchase of goods. Page 24 of 47 . WCDL is granted for a fixed term onmaturity of which it has to be liquidated. renewed or rolled over.only the risk and the supplier himself provide the funds. WORKING CAPITAL LOAN– Sometimes a borrower may require additional credit in excess of sanctioned credit limit to meet unforeseen contingencies.

4 SECURITY REQUIRED IN BANK FINANCE Banks generally do not provide working capital finance without adequate security. LIEN – Lien means right of the lender to retain property belonging to the borrower until he repays the debt. It is a charge against property for the amount of debt where neither ownership nor possession is passed to the creditor. Page 25 of 47 .2. It can be of two types: (i) (ii) Particular lien and General lien. The bank provides credit on the basis of following modes of security: HYPOTHECATION – Under this mode of security. or After giving due notice. sell the goods. the possession of goods offered as security passes into the hands of the bank. In case of non-payment of loan the bank may either. Under this mode. Sue for the sale of goods pledged. Sue the borrower for the amount due. the banks provide working capital finance to the borrower against the security of movable property. The bank can retain the possession of goods pledged with it till the debt (principal amount) together with interest and other expenses are repaid. The nature and extent of security offered play an important role ininfluencing the decision of the bank to advance working capital finance. PLEDGE – A pledge is bailment of goods as security for the repayment of a debt or fulfillment of a promise. generally inventories. . In the case of default the bank has the legal right to sell the property to realise the amount of debt.

In case of mortgage. It is only security for payment. the latter person is said to have a charge on the property and all the provisions of simple mortgage will apply to such a charge. while the lender enjoys the full legal title. A charge may be created by the act of parties or by the operation of law. On the other hand.Particular lien is a right to retain property until the claim associated with the property is fully paid. CHARGE – Where immovable property of one person is made security for the payment of money to another and the transaction does not amount to mortgage. the possession of the property may remain with the borrower. MORTGAGE – Mortgage is the transfer of a legal or equitable interest in a specific immovable property for the payment of a debt. Mortgages are taken as an additional security for working capital credit by banks. Banks usually enjoy general lien. Page 26 of 47 . General lien is applicable till all dues of the lender are paid. The mortgage interest in the property is terminated as soon as the debt is paid.

Page 27 of 47 . Earlier RBI had prescribed consortium arrangements for financing working capital beyond Rs. 2. The recent changes made by RBI in the guidelines for bank credit for working capital finance are discussed below: 1. However. banks may themselves decide to form consortium so that the risks are spread.5 RECENT RBI GUIDELINES WORKING CAPITAL FINANCE: REGARDING In the past. but uptoRs. However. working capital financing was constrained with detailed regulations on how much credit the banks could give to their customers. RBI permits banks to follow Tandon/Chore Committee guidelines and retain MPBF concept with necessary modifications. 25 lakhs. For borrowers with requirements above Rs. credit limits will be computed after detailed discussions with borrower.  For large borrowers not selling in the above categories. 25 lakhs.This has given banks greater freedom and responsibility for assessing credit needs andcredit worthiness. The notion of Maximum Permissible Bank Finance (MPBF) has been abolished byRBI and a new system was proposed by the INDIAN BANKINGASSOCIATION (IBA). 50 crore. the entry of term lending institutions into working capital finance and the emergence of money market borrowing options gives the best possible deal. The disintegration of consortium system. creditlimit can be offered upto 20% of the projected gross sales of the borrower. The salient features of new system are:    For borrowers with requirements of uptoRs. 5 crore. Now it is not essential to have consortium arrangements. the cash budget systemmay be used to identify the working capital needs.2. without going into detailedevaluation.

provided that their fund based working capital needs from the banking system were less than Rs. 1 crore. RBI has also suggested that the units engaged in export activities need not bring in any contribution from their long term sources for financing that portion of current assets as is represented by export receivables. which would make it easier for smaller borrowers to comply with these guidelines. viz maintenance of minimum current ratio. Banks were advised not to apply the second method of lending for assessment of MPBF to those exporter borrowers. would continue through with certain modifications.3. after taking into account the operating cycle of an industry as well as other relevant factors. submission and use of data furnished under quarterly information system etc. which should be supported by bank finance. Other aspects of lending discipline. who had credit export of not less than 25% of there total turnover during the previous accounting year. 4. under which the banks would decide the levels of holding of inventory and receivables. RBI had also issued lending norms for working capital. Page 28 of 47 .

2. Limit is say Rs. i. 1 Lakh In Cash Credit facility an amount of loan is given to the borrower/businessman for his working capital needs.96. some small amount will have to be funded by the businessman and the balance amount will be funded by a bank as a loan The amount so worked out is given as loan and is called as "limit" this is because under this kind of loan the borrower may not take up the entire amount of loan as working capital requirement every day is not the same. That means a loan may be granted say for Rs. 1 lakh then when he requires Rs.6 WORKING CAPITAL FINANCING AT BANK OF MAHARASHTRA Bank provides working capital finance to their customers through funded facilities like CASH CRDIT (Running account facility) Against the collateral security.07.300 but the loan amount that he can get is any amount which is not more than the "limit" of the loan given. Hence the businessman will require Rs. on one day the amount of working capital required may for eg. 96.000 on one day and he will require Rs.000 as some debtor might have paid up some amount. 1.07300 he will get loan upto Rs. 92. The entire amount of working capital required is not funded by the bank.000 and on a another day it may be Rs. 92.000 on the other day only. 1 lakh only Page 29 of 47 . may be Rs.e. He on a particular day may require Rs. 1 Lakh however the customer/borrower of the loan may take the amount of loan to the extent required by him but not exceeding the limit of Rs. If in the above eg. WHAT IS CASH CREDIT A/C Cash credit is an arrangement under which a customer of a bank or financial institution is allowed an advance up to certain limit against credit granted by bank. 1.

projected profit and loss and balance sheet for next 7 to 8 years till the loan is paid. Assets and Liabilities of the guarantors along with latest income tax returns file. Position of accounts from the existing bankers and confirmation about the assets being standard with them. capacity of utilization. section letters of facilities being availed fromexisting bankers. Project report containing details of all the assets. Projected balance sheet for the next year. CMA report Industry exposure restriction and related risk factors Government regulation and its impact on the industry. name of suppliers.2. production . (in case of takeover) Page 30 of 47 . Estimated balance sheet for the current year. In case of takeover of advances. Memorandum and articles of association of the company/ partnership deed of partnership firm.7 PROCEEDURE OF WORKING CAPITAL FINANCING AT BANK OF MAHARASHTRA PRE SECTION PROCESS  Obtain loan application: Customer who wants to avail the cash credit facility should submit complete application form along with requited information.   Photocopies of lease deed/ title deeds of all the properties being offered as primary and collateral security. sales . The information generally required to be submitted by the customer along with the application form are:           Audited balance sheet and profit and loss account for previous three years along with income tax or sales tax returns.

POST SECTION PROCESS: Section credit of credit limit of working capital requirement after proper assessment is not alone sufficient.A timely action is possible only close supervision and followed up by using following techniques. close supervision and follow up is required to ensure the safety and proper utilization of fund lend. o Monthly stock statement o Inspection of stock o Scrutiny of operation of account o Quarterly/ half quarterly statement o Under information system o Annual audited report Page 31 of 47 .

financial data etc. compensation. Page 32 of 47 . post project implementation etc. operating efficiency of the company etc. MANAGEMENT RISK: It covers the track record of the company. their attitude towards risk. corporate governance etc. ability of the company to raise capital.8 CREDIT RATING CREDIT RATING MODEL The various risk faced by any company may be broadly classified as follows: INDUSTRY RISK: It covers the industry characteristic. COMPANY/ BUSINESS RISK: It considers the market position. FINANCIAL RISK: Financial risk includes the quality of financial statements.2. cash flow adequacy etc. PROJECT RISK: It includes the project cost. propensity for group transaction. project implementation risk.

2. Therefore. lower the interest”. 100 lakh as working capital limit sectioned to him by a bank. “Higher the risk.5 lac of his working capital limit of 100 lakh Page 33 of 47 . higher the rate of interest” CREDIT RISK RATING AAA+ AAA AA A B C D PRIME EXCELLENCE GOOD SATISFACTORY RISK PRONE HIGH RISK HIGHEST RISK DRAWING POWER OF BORROWER Suppose a borrower has a Rs. each borrower is graded or credit rating is assigned to them and interest is charged on the principle of “Lower the risk. Security provided by borrower is hypothecation of inventory Borrower needs to hold inventory of 130 lakh Actual level of inventory with borrower is 100 lakh Margin prescribed by bank is 25% Therefore with this level of inventory.9 CREDIT RATING AT BANK OF MAHARASHTRA The banks evaluate the borrower depending on the risk involved in the financing to them. the borrower enjoys only 82.

2.2% of the amount) MORTAGAGE Format A Memorandum declaration (Rs. 100 required) Composite deed of hypothecation for all facilities (0.2% of total amount of loan) Format C Mortgage of letter of conformation It consist of Form I : (Creation and modification) includes: Title deed Third party mortgage Form I : Satisfaction of any existing security interest Form III : Particulars of securitization or construction of fixed asset Form IV : particulars of satisfaction of securitization & reconstruction of transaction.10 DOCUMENTATION MAHARASHTRA RF 45 - AT BANK OF Request letter for making CASH CREDIT facility available F 260 F273 Receipt for amount of loan Loans/advances/facilities granted/ to be granted to (Right of set-off) (Required for guarantor as well as borrower) RF 46/47 Demand promissory note (Required for all types of loan) F 154 (A) RF 66(J) Guarantee bond (franking of Rs.100 franking is required) and notary also Format B Memorandum of record of equitable mortgage (Franking of 0. Page 34 of 47 .

DSCR (DEBTSERVICECOVERAGE RATIO)= DEPRICIATION+INTREST ON TERM LOAN/ INTREST ON TERM LOAN+INSTALLMENT OF TERM LOAN It indicates the number of times total debt service obligation consisting of interest and repayment of the principal in installment is covered by the total fund available after Page 35 of 47 . Indicate what proportion of the company finance is represented by the tangible net worth. Anything over 5 should be viewed with concern. Indication of net margin of profit available on Rs.2.33. stability and degree of solvency. indication of availability of current assets to pay current liabilities. TOL/TNW=TOL/TANGIABLE NET WORTH Indicate size of stakes. Indicates how high the stake of the creditors is. greater the solvency.11 IMPROTANT FINANCIAL RATIOS FOR ASSESSMENT OF WORKING CAPITAL FINANCE CURRENT RATIO=CURRENT ASSET/ CURRENT LIABITIES Help to measure liquidity and financial strength. 100 sales. OPERATING PROFIT RATIO=OPERATING PROFIT/NET SALES×100 This ratio indicates operating efficiency. Trend for company over a period should be encouraging. The higher the ratio betters the liquidity position. The lower the ratio. Generally it should be at least 1.

INTEREST COVERAGE RATIO=EARNINGS BEFORE TERM LOAN AND TAXATION / INTEREST ON TERM LOAN The ratio indicates adequacy of profit to cover interest. We have already touched upon depreciation as non-cash expenditure and since the funds are available with the enterprise to that extent. Page 36 of 47 .5 to 2 considered adequate. we can find out whether the loan taken for acquisition of fixed assets can be rapid conveniently. With the help of this ratio (popularly known as DSCR). Higher the ratio more is the security to the lender. It is in order to ask for this sum in reduction of loan.taxes. This ratio of 1.

This analysis leads to the simple conclusion of weather to lend to the institutions for their working capital needs. Discussion with branch manager Secondary Data : Old section proposals RBI guidelines Reference books Page 37 of 47 . Research Type Source Of Data Sample Sample Technique Analysis Tool Used Analytical Primary And Secondary Case Study Allocation of cases Financial analysis Primary Data : Observation. RESEARCH METHODOLOGY This is an analytical research area where we analyse information with cause and its effects relationship.III.

IV. DATA PROCESSING AND ANALYSIS Page 38 of 47 .

06 Prov.15 Reserves Depr.03.26 0.03.7 15 35.11 OCL 0.76 Scred Bk Borr 9.51 16.42 129.41 84.03.53 18.66 Page 39 of 47 . Audited Capital 17.1 CASE STUDIES COMPARATIVE BALANCE SHEET AND PERFORMANCE / FINANCIAL INDICATORS: ABRIDGED BALANCE SHEET Liabilities 31.2 13.64 6.66 51.01 2.84 31.03.77 8.41 84.08 0.31 2.96 184.61 31.84 FA 23.46 1.85 Net NW 17.15 13.38 20.06 Assets 31.4.09 TCL 9. Tot Ass 40. 150.19 23.05 31.53 18. 5.Intan g Ass.03.88 81.71 55.53 12.98 1.98 2.91 51.47 Bank Unsec Ln TL from BOM TL(car) 1.13 2.03.84 17.43 15.04 Audited Audited Prov.38 RM WIP FG RecDom Export OCA TCA Inv Tot NCA Acc Loss Tot.91 12.23 15 15 2.35 Tot Liab 40.04 31.73 21.32 31.46 0.18 1.05 Audited 26.96 184.3 Block Cash & TL 12.

53 18.31. 13 180 . 03.1 8 Page 40 of 47 . 84 PERFORMANCE / KEY FINANCIAL INDICATORS: (Rs in Lacs) PARTIC ULARS NET SALES % INCREA SE / DECREA SE NET PROFIT AFTER TAX % TO NET SALES CASH ACCRUA LS 6. 03.5 3 - 31.0 3. 84 - - - - 17. 03. 11 71. 41 84.6 2 4. 11 56. 12 18.3 3 1. 03.9 3% 8.7 9% TNW EXCL REVALU ATION RESERV E TOL / TNW RATIO 17. 41 - 31. 70 70. 55 % 31. 04 31.0 1% 0.00 88 % 0. 03.4 2 7. 41 84. 13 84.5 3 18. 1% 31.5 7 1.8 2 1.20 11 * NET WORTH LESS: REVALU ATION RESER VES LESS: INTANG IBLE ASSETS TANGIB LE NET WORTH 17. 84 1.8 9 0.2 8 30. 12 95.

00%. 100.00 lac from BHEL (Hardwar) are on hand scheduled to be completed before March‟13. 250. This payment was to the tune of 25% (apt) of the Page 41 of 47 . PROFIT: Hitherto the net profit in terms of sales has been about 1.00 lac besides the job work. It used to pay for job works to other companies/firms for the machining purpose. 150.4 0 40. In fact it has set up its own machining plant and has secured approval from BHEL for the Quality of its own materials. The firm has also been able to secure orders from HAL (Koraptut) for DSC & ESC. NTPC. Completion of this of these orders will enable the firm to achieve a sale of Rs. 250. 47 2. This is acceptable.5 7 18. During discussion it is clarified that as the firm has shifted its focus from mare job work to direct selling the margin will be high.NWC 14. 41 2.69 CURREN T RATIO SALES: As partners have been engaged in marketing the new technology to various users for the initial 2/3 years vigorously and their efforts are started yielding results.79% in the current appears unreasonable.00 Lac. During the year 2012 the firm has obtained approval from BHEL. 35 . and HAL for use of its products – DSC & ESC. Against this backdrop the estimated profitability of 4.00 lac by this year end. The orders are of repetitive nature. Besides BHEL (Hid) have also started placing sample orders. Agreement with NTPC through BHEL (Hardwar) is exclusive supply (not to any other companies) for annual turnover of Rs. Orders worth Rs. During the year up to Nov‟11 the firm has already done sale of Rs.

00 lac we may accept the profitability of 4. TNW: Up to 2011-12 the TNW has been increasing with retention of profits.03 lac. It is informed that depending upon the advice of their auditors they would be either increasing the amount of individual capital and/or brings in unsecured loans from friends/relatives to be converted to capital over a period of time. This appears to be on the higher side. 32. 312. Remaining Rs 20. 14. In view ofthe above factors we may accept the profitability estimates made by the firm.00 lac from internal accrual. Rs. Page 42 of 47 . Besides. Since the cash accrual for the year 2012 is accepted at Rs. 46.62 lac respectively.00 lac. In the coming 7 years the firm has estimated profitability ranging from 8. Moreover with increased sales the marginal revenue would be proportionately high adding to the increased yield. Accordingly the net profit for the 2nd year would be Rs.00 lac for the year 2012 followed by Rs. 30. CASH ACCRUAL: With addition to fixed assets the depreciation shall be high. 13.95 lac p. a.5%.5% to 12. As the sales are estimated to stabilize at Rs.job work revenue. 20.00 lacs the remaining contribution of Rs.00 lac from partners appears reasonable. We have discussed the issue of infusion of capital by partners. 30. Since the existing work is being carried out from their own sources the branch is advised to obtain a CA‟s certificate certifying the amount investing that will beconsidered as their contribution. Thus with accepted profitability the accrual would be Rs. The position is acceptable.79% as acceptable for the year 2005. margin of direct selling of its materials is better. In the year 2012 for the expansion plan the partner have agreed in bring in additional capital of Rs. 30.70 lac and then Rs. For the year 2011 as the job work is being done inhouse the expenses are estimated to be hardly 5%.

12 and with proposed capital infusion the same is estimated to be about 1.TOL/TNW: The ratio has been below 2. However the partners have informed that after the expansion is completed in March 13 they may approach us for additional working if required at that point of time. Page 43 of 47 .03. It may be mentioned that even though the firm is increasing its production capacity and consequently sales it has not requested any additional working capital.18 which is acceptable being well within benchmark level. NWC & CURRENT RATIO: Both the parameters have been well above their respective benchmark levels and are estimated to improve further over the existing levels. During discussion it is gathered that with direct selling the payment term would be 90 % against supply of materials which would improve its cash flow and hence there will not be additional requirement of working capital.00 up to 31. Thus the overall financial position of the firm is satisfactory.

Creditors estimated to be nil too.00 lac worth of orders from BHEL in next 4 months ( At least Rs 80. The holding level of receivables has been year it has estimated the 1. have been nil and are Page 44 of 47 .5 month to 1. INVENTORY & RECEIVABLES: Except the receivables the firm has estimated other current asset as per past trend and hence acceptable. For the current same to be 2. of debtors at the year end.33 months. WORKING CAPITAL ASSESSMENT: SALES PROJECTIONS: Already discussed.00 lac as accepted by us) there will be concentration Hence the estimates appear reasonable.ASSESSMENT OF PRESENT PROPOSAL: A. It is clarified that as the firm would be executing Rs150.75 months sales. Against this background MPBF is calculated as under.

13 ESTM.15 31.08 13. MBPF i.09 55.35 41.00 7. PARTICULARS 31.03.51 15.93 18.41 17.70 0.08 Page 45 of 47 .35 13. OTHER CURRENT LIBILITIES OTHER THAN BANK BORROWINGS c.11 AUDITED a.12 AUDITED 31. ACTUAL/PROJECTED NWC f. TOTAL CURRENT ASSEST b. STIPULATED NWC e.00 15. WORKING CAPITAL GAP d.55 31. EXCESS BORROWINGS IF ANY 23. ITEM c-d g.35 - 23.47 23.62 9.03.84 40.90 14.11 31.11 9.61 0.52 5. 55.WORKING OF MPBF: -WORKING OF MAXIMUM PERMISSIBLE BANK FINANCE: (Rs in lacs). ITEM c-e h.62 13. MIN.03.

 The documentation part used by Bank of Maharashtra is very prompt and is as per the guidelines of RBI.IV. CONCLUSIONS   The need for working capital is ever increasing.   Bank has their own credit rating procedure . If the applicants have banking with bank since inception stage then they are given preference as creditable and loyal party over their financial indication. Page 46 of 47 .  Hypothecation and mortgage are generally used to create securities for the bank. Bank of Maharashtra follows Tondon Commiittee guidelines for lending money.

RECOMMENDATIONS  Closely monitoring and inspecting the activities and stock of the borrowers from time to time can avoid the misuse of working capital.  Statement of financial transactions should be review at regular interval to minimize losses due to irregular payments and defaulters.V.  The bank must further secure themselves by holding a second charge on the fixed assets of the borrower so as to ensure the safety. Page 47 of 47 .  Sensitivity analysis should be done before sectioning cash credit facility to get the insight into the variability of the outcomes.

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