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FINANCING WORKING CAPITAL

AT PUNJAB NATIONAL BANK


SUBMITTED TO:
SUBMITTED BY:
INDUSTRY GUIDE:
MR. DEEPAK KUMAR, TRAINING
MANAGER, PUNJAB NATIONAL BANK

FACULTY GUIDE:
DR. ANSHUL VERMA, ASSOCIATE
PROFESSOR (FINANCE), BIMTECH

SAURABH KUMAR
ROLL NO. - 11DM181
PGDM- C
BATCH- 2011-13

SUMMER PROJECT CERTIFICATE

This is to certify that Mr. Saurabh Kumar has successfully completed the project on Financing
Working Capital at Punjab National Bank, Circle Office Patna as part of the requirement of
the fulfillment of course curriculum for the award of the Post Graduate Diploma in Management
(Finance) under my guidance. This is his original work to the best of my knowledge.

Date: June 25, 2012

Signature ________________

(Dr. Anshul Verma)


Associate Professor (Finance)
Birla Institute of Management Technology
BIMTECH SEAL

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(Greater Noida)

LETTER OF TRANSMITTAL

Birla Institute of Management Technology


Plot no. 5, Knowledge Park-II
Institutional Area
Greater Noida 201306
Uttar Pradesh, India
Date: June 24, 2012
Mr. Deepak Kumar
Training Manager
Zonal Training Centre
Circle Office
Patna

Dear Sir,
RE: Summer Internship Report 2012
Attached herewith is a copy of my summer-project report entitled Financing Working
Capital which I am submitting in order to mark the completion of my 8-week summer project
at your organization.
This report was prepared by me using the best of practices and summarizes the work performed
on the project and is being submitted in partial fulfillment of the requirements for award of Post
Graduate Diploma in Management.
I would like to mention that the overall experience with the organization was very good, which
helped me to know how is the work carried out in real practice. The eight weeks of practical
exposure which I got through your esteemed organization helped me to know the details about
the development of the corporate campaign in real practice which will be beneficial for me in
future and was very different from the theories which I have learnt up till now.
I feel honored that I got an opportunity to work with Punjab National Bank. Towards the end, I
would like to say that this was only possible because of the support of yours as well as the other
managers and healthy working environment.
I hope I did justice to the project and add some value to your organization.
Suggestions/comments are highly solicited.

Yours truly,
Saurabh Kumar
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ACKNOWLEDGEMENT
The satiation and euphoria that accompany the successful completion of the
project would be incomplete without the mention of the people who made it
possible.
The researcher takes this opportunit y to express his sincere gratitude to m y
industry guide Mr. Deepak Kumar (Training Manager, Punjab National Bank )
for their valuable guidance, support and encouraging words during the entire
project duration. The researcher would like to extend his gratitude towards Mr.
Reetesh Patel (Senior Manager, Punjab National Bank ) and Mr. Rajesh Kumar
(Chief Manager, Buddha colony branch) without whom the imagination of
completing this project was very difficult.

The researcher would like to express his profound sense of gratitude to Dr.
Anshul Verma, m y facult y guide, who has always given me motivat ional boost
to go and perform. The researcher would further like to thank him for his
persistence to listen to m y prob lems and to give apt solutions.

Saurabh Kumar

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New Delhi

TABLE OF CONTENTS
SERIAL
NUMBER

CONTENTS

PAGE
NUMBER

EXECUTIVE SUMMARY

METHODOLOGY

COMPANY PROFILE

INTRODUCTION OF WORKING CAPITAL

13

WORKING CAPITAL FINANCE

16

METHODS OF ASSESSMENT OF WORKING CAPITAL

20

CASE STUDY

24

RECOMMENDATION AND CONCLUSION

33

REFRENCES

34

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ANNEXTURES

35

ANNEXTURE A

35

ANNEXTURE B

48

ANNEXTURE C

49

ANNEXTURE D

51

LIST OF TABLES

SERIAL
NUMBER
1

CONTENTS
Performance highlights of the Bank

PAGE
NUMBER
11

Advances (Sectoral)

11

Summary of working capital finance instruments

17

LIST OF FIGURES

SERIAL
NUMBER
1
2

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CONTENTS
Working capital
Working capital cycle

PAGE
NUMBER
14
15

1. EXECUTIVE SUMMARY
The study gives an insight of summer internship undertaken in the circle office of Punjab
National Bank, Patna.
The objective of the project is to study and analyze the various aspects and methods of financing
working capital loan.
This study covers the process Punjab National Bank follows to assess the credit worthiness of its
clients and grant the finance for the working capital. I studied the various types of facilities
offered by the bank under Project Finance, including both Fund based facilities like term loan
and Cash credit and Non Fund based facilities like Bank Guarantee and Letter of Credit and also
the procedure followed by the bank before granting the finance to its borrowers which includes
the calculation of the credit risk undertaken by the bank. Before granting finance, the bank
calculates the credit risk score of the client by using software called PNB Trac, generated by
feeding in both the quantitative and qualitative data of the client, which is used by the bank to
evaluate the credit risk of the bank and accordingly charge the rate of interest to the clients.
After evaluating a number of facilities sanctioned by the bank, the study includes a snapshot of
such evaluation for both working capital & term loan appraisal.

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2. METHODOLOGY
The project makes use of ample amount of data to arrive at the conclusion. It does so by paying
equal attention to both quantitative as well as qualitative data. The methodology that was
adopted while appraisal of the project is described as below:

Collection of data from borrowing party. (done by banks representative and I gathered
knowledge about the issues from the experience they gained from their discussions with
the promoters of the company)

Verification of data and preparation of revised project report and projections submitted
by the company.

Visit to factory site for physical verification of progress made by the


company.(performed by banks representative and I gathered first hand information from
him)

Study of various bank circulars and govt. norms in order to arrive at figures required for
the borrower and facilities applied for.

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3. COMPANY PROFILE

Punjab National Bank (PNB) was registered on May 19, 1894 under the Indian Companies Act
with its office in Anarkali Bazaar, Lahore. With over 60 million satisfied customers and more
than 5670 offices including 6 overseas branches, PNB has continued to retain its leadership
position amongst the nationalized banks. The bank has 6009 ATMs and around 169 lakh card
holders.
The bank enjoys strong fundamentals, large franchise value and good brand image. Besides
being ranked as one of India's top service brands, PNB has remained fully committed to its
guiding principles of sound and prudent banking. Apart from offering banking products, the bank
has also entered the credit card, debit card; bullion business; life and non-life insurance; Gold
coins & asset management business, etc. PNB has earned many awards and accolades during the
year in appreciation of excellence in services, Corporate Social Responsibility (CSR) practices,
transparent governance structure, best use of technology and good human resource management.

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Since its humble beginning in 1895 with the distinction of being the first Swadeshi Bank to have
been started with Indian capital, PNB has achieved significant growth in business which at the
end of March 2012 amounted to Rs 6,73,363 crore.
PNB is ranked as the 2nd largest bank in the country after SBI in terms of branch network,
business and many other parameters. During the FY 2011-12, with 36.20% share of CASA to
domestic deposits, the Bank achieved a net profit of Rs 4884 crores.
Bank has a strong capital base with capital adequacy ratio of 12.63% as on Mar12 as per Basel
II with Tier I and Tier II capital ratio at 9.28% and 3.35% respectively. As on March12, the
Bank has the Gross and Net NPA ratio of 2.93% and 1.52% respectively. During the FY 201112, its ratio of Priority Sector Credit to Adjusted Net Bank Credit at 40.7% & Agriculture Credit
to Adjusted Net Bank Credit at 19.34% was also higher than the stipulated requirement of 40%
& 18% respectively. The Bank has also issued 40.8 lacs Kisan Credit Cards (KCC) till March 31,
2012.
The Bank has been able to maintain its stakeholders interest by posting a healthy Net Interest
Margin (NIM) of 3.84% in Mar12 (3.96% Mar11). The Earning per Share improved to Rs
154.02 (Rs 140.60 Mar11) while the Book value per share improved to Rs 777.42 (Rs 632.48
Mar11).
Punjab National Bank continues to maintain its frontline position in the Indian banking industry.
In particular, the bank has retained its NUMBER ONE position among the nationalized banks in
terms of number of branches, Deposit, Advances, total Business, Assets, Operating and Net
profit in the year 2011-12.
The impressive operational and financial performance has been brought about by Banks focus
on customer based business with thrust on CASA deposits, Retail, SME & Agri Advances and
with more inclusive approach to banking; better asset liability management; improved margin
management, thrust on recovery and increased efficiency in core operations of the Bank.
The performance highlights of the bank in terms of business and profit are shown below:

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Table 1: Performance highlights of the bank


Rs. In Crore

Parameters

Mar09

Mar10

Mar11

Mar12

YOY
Growth %

Operating Profit

5690

7326

9056

10614

17.2

Net Profit

3091

3905

4433

4884

10.2

Deposit

209760

249330

312899

379588

21.3

Advance

154703

186601

242107

293775

21.3

Total Business

364463

435931

555005

673363

21.3

Source: www.pnbindia.com/financials

Table 2: Advances (Sectoral)


Rs. In Crore
SI.

Parameters

1
Global gross advances
2
Overseas advances
3 Domestic gross advances
3.a
Food credit
3.b Dom.Non food gross adv.
Of which
4
Aggriculture & allied
5
Industry
5.a MSME manufacturing
5.b
Large Industry
6
Retail Loans
Of which
6.a
Housing
6.b
Car/Vechicle
6.c
Other retail loans
7 Commercial real estate
Of which lease rental
8
Services & others

FY Mar'11

Dec'11

FY Mar'12

243998
12904
231094
4421
226673

265884
19778
246106
5424
240682

297892
21755
276137
5186
270951

35462
114072
26848
87224
23621

38306
118324
29912
88412
26009

45917
128162
32391
97771
29196

16.9
47.2
11.9
35.3
10.8

10455
14090
5543
8547
5575

29.5
12.4
20.6
9.8
23.6

11816
1626
10179
8955
3839
44563

12373
2178
11459
10382
4936
47660

13808
2502
12887
9661
5427
58437

5.1
0.9
4.7
3.6
2
21.5

1991
876
2708
706
1588
13875

16.9
53.9
26.6
7.9
41.4
31.1

Source: www.pnbindia.com/financials

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% shareVariation
in
over 11 to 12
Gr.Non food
Amt.
(%)
53894
22.1
8851
68.6
45043
19.5
765
17.3
100
44278
19.5

Recent Awards and Accolades:

Conferred with the Best Bank Award 2011 amongst all the banks in India by Business
India
Prestigious Most Productive Public Sector Bank Award 2011, instituted by
Federation of Indian Chambers of Commerce and Industry (FICCI) and Indian Banks
Association (IBA).
Best Bank Award among Large Bank for IT for internal effectiveness from
IDRBT.
MSME National Awards: One award for excellent performance in lending under
PMEGP scheme in North Zone and the other award at national level for excellence in
lending Interest Subsidy Eligibility Certificate (ISEC) scheme of KVIC.
Most Socially Responsible Bank Award 2011 by Business World & Pricewaterhouse
Coppers (PwC).
India Pride Award in Corporate Social Responsibility (CSR) for the year 2011 by
Dainik Bhaskar.
Golden Peacock National Training Award 2011 by institute of Directors.
SKOCH Financial Inclusion Award 2012 for its Jana Mitra Rickshaw Scheme.
Banks Overseas Branch, DIFC, Dubai has received Business Super Achiever Award
under individual category from Asian Leadership Awards in addition to the Asian most
preferred branch (Banking & Finance) Award.
Technology Adoption Award in public sector bank category instituted by Dun &
Bradstreet and Polaris Software.
Golden Peacock Award for HR Excellence instituted by Institute of Directors.
Global HR Excellence Award under the category Organization with Innovative HR
Practices instituted by ASIA PACIFIC HRM CONGRESS.

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4. Introduction to Working Capital

Working capital refers to that part of the firms capital which is required for financing shortterm or current assets such as cash, marketable securities, debtors & inventories. Funds, thus,
invested in current assts keep revolving fast and are being constantly converted in to cash and
this cash flows out again in exchange for other current assets. Hence, it is also known as
revolving or circulating capital or short term capital.
Thus, Working capital for any unit means the total amount of circulating funds required for
meeting day to day requirements of the unit. For proper working a manufacturing unit needs a
specific level of current assets such as raw material, stock in process, finished goods, receivables
and other current assets such as cash in hand/ bank and advances etc. So the working capital
means the funds invested in current assets. This topic explains the concept of working capital
cycle, gross working capital, net working capital, factors affecting the requirements of working
capital and role of banker in assessment of right amount of working capital.

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Figure 1: Working Capital

How can we distinguish it with the term loan?


A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial
assets over time, between the lender and the borrower.
In a loan, the borrower initially receives or borrows an amount of money, called the principal,
from the lender, and is obligated to pay back or repay an equal amount of money to the lender at
a later time. Typically, the money is paid back in regular installments, or partial repayments; in
an annuity, each installment is the same amount.
The loan is generally provided at a cost, referred to as interest on the debt, which provides an
incentive for the lender to engage in the loan. In a legal loan, each of these obligations and
restrictions is enforced by contract, which can also place the borrower under additional
restrictions known as loan covenants. Although this article focuses on monetary loans, in
practice any material object might be lent.
Acting as a provider of loans is one of the principal tasks for financial institutions. For other
institutions, issuing of debt contracts such as bonds is a typical source of funding.

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Working Capital Cycle:


The working capital cycle or operating cycle of a manufacturing unit means the time
taken for converting cash into cash via raw material, stock in process, finished goods and
receivables.
Figure 2: Working Capital Cycle
Payment

Creditors

Cash
Collection

Debtors
Sales

Finished
Goods

Supply

Raw
Material
s
Production

Work in
progress

Gross Working Capital and Net Working capital:


Working capital may also be explained as Gross working capital and Net working capital.
Gross working capital means the total funds required for financing the total current assets. Net
Working capital means the difference of current assets and liabilities.
Gross Working Capital = Current Assets
Net Working Capital = Current Assets Current Liabilities
In other words, net working capital denotes the portion of gross working capital contributed from
long term sources. As per practice of Indian banks, net working capital should normally be 25%
of total current assets which will give a current ratio of 1.33 to the unit. When net working
capital is negative, it implies that the short term funds have been diverted / used for long term
uses and the unit is facing a liquidity crunch. Such situation may also arise due to losses. In such
a situation, the need of the hour is for raising long term sources.

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5. Working Capital Finance


The term capital has several meaning in business and economic development finance. In
accounting and financial statement analysis, working capital is defined as firms short term
current assets and current liabilities. Net working capital represents the excess of current assets
over current liabilities and is an indicator of firms ability to meet its short term financial
obligation. From financing perspective, working capital refers to the firms investment in two
types of assets. In one instance, working capital means a businesss investment in short-term
assets needed to operate over a normal business cycle. This meaning corresponds to the required
investment in cash, accounts receivable, inventory, and other items listed as current assets on the
firms balance sheet. In this context, working capital financing concerns how a firm finances its
current assets. A second broader meaning of working capital is the companys overall non fixed
asset investments. Businesses often need to finance activities that do not involve assets measured
on the balance sheet. For example, a firm may need funds to redesign its products or formulate a
new marketing strategy, activities that require funds to hire personnel rather than acquiring
accounting assets. When the returns for these soft costs investments are not immediate but
rather are reaped over time through increased sales or profits, then the company needs to finance
them. Thus, working capital can represent a broader view of a firms capital needs that includes
both current assets and other non fixed asset investments related to its operations.

Forms of Working Capital Financing:


Working capital finance comes in many forms, each of which has a unique term and offers
different sets of advantages and disadvantages to the borrower. The five major forms of debts,
which are used to finance working capital, are described below:

Line of credit
Account receivable financing
Factoring
Inventory financing
Term loan

The following table will give a fair idea about these five major forms of working capital
finance:

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Table 3: Summary of working capital finance instruments


Finance instrument
Line of Credit

Account
Loan

Receivable

Factoring

Inventory Financing

Term Loan

Description

Key terms

Maximum
loan
limit Can be secured or unsecured.
established. Firms draw on Annual
repayment.
loan as needed up to limit.
Compensating balance may be
required.
(AR) Loan secured by accounts Loan amount based on
receivable.
percentage
of
accounts
receivable.
Accounts
receivable assigned to lender
as sales occur. Loan balance
paid down with AR collection.
Sale of accounts receivable to Company paid based on
a third party collector average collection period less
(Factor).
Factor
bears a collection fee. Collection
collection risk.
amount can be advanced with
an interest charge.
Loan secured by inventory.

Loan amount based on a


percentage of inventory value.
Lender
receives
security
interest in inventory and may
take physical control. Release
of inventory with loan
repayment.
Medium-term loan. Principal Loan amount tied to collateral
repaid over several years value. Can be fully amortized
based on a fixed schedule.
or a balloon loan. Typical
term is three to seven years.

Working Capital Finance is broadly categorized under two heads:


1) Fund Based. These are the facilities for which the bank provides funding and assistance
to actually purchase business assets or to meet business expenses.
There are four types of fund based financing:
Demand loan
Term loan
Cash-credit advance
Overdraft

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2) Non Fund Based. These are the facilities for which the bank can issue letters of credit or
can give a guarantee on behalf of the customer to the suppliers, Government Departments
for the procurement of goods and services on credit.
Different ways of non fund based financing are:
Letter of credit(LC)/Letter of guarantee
Bank guarantee
Performance guarantee
Finance guarantee
Deferred payment guarantee

SECURITY REQUIRED IN BANK FINANCE:


Banks generally do not provide working capital finance without adequate security. The nature
and extent of security offered play an important role in influencing the decision of the bank to
advance working capital finance. The bank provides credit on the basis of following modes of
security:
Hypothecation Under this mode of security, the banks provide working capital finance to the
borrower against the security of movable property, generally inventories. It is a charge against
property for the amount of debt where neither ownership nor possession is passed to the creditor.
In the case of default the bank has the legal right to sell the property to realise the amount of
debt.
Pledge A pledge is bailment of goods as security for the repayment of a debt or fulfillment of a
promise. Under this mode, the possession of goods offered as security passes into the hands of
the bank. The bank can retain the possession of goods pledged with it till the debt (principal
amount) together with interest and other expenses are repaid. . In case of non-payment of loan
the bank may either; Sue the borrower for the amount due; Sue for the sale of goods pledged; or
after giving due notice, sell the goods.
Lien Lien means right of the lender to retain property belonging to the borrower until he
repays the debt. It can be of two types: (i) Particular lien and (ii) General lien. Particular lien is a
right to retain property until the claim associated with the property is fully paid. On the other
hand, General lien is applicable till all dues of the lender are paid. Banks usually enjoy general
lien.
Mortgage Mortgage is the transfer of a legal or equitable interest in a specific immovable
property for the payment of a debt. In case of mortgage, the possession of the property may
remain with the borrower, while the lender enjoys the full legal title. The mortgage interest in the
property is terminated as soon as the debt is paid. Mortgages are taken as an additional security
for working capital credit by banks.
Charge Where immovable property of one person is made security for the payment of money
to another and the transaction does not amount to mortgage, the latter person is said to have a
charge on the property and all the provisions of simple mortgage will apply to such a charge. A
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charge may be created by the act of parties or by the operation of law. It is only security for
payment.
Role of Banker:
The unit should have sufficient amount of working capital. A portion of it is to be financed from
long term sources called the liquid surplus or net working capital (NWC). The remaining is
normally financed by the bank in the form of working capital limits. Excess maintenance of
working capital may result in idle resources and high interest cost whereas less amount of
working capital may mean disruption in the working. So both the situations are to be avoided.
That is why the technique of calculation of right amount of working capital assumes
significance. For financing of working capital, a banker should be able to calculate right amount
of working capital needed by the unit being financed. It shall mean right amount of financing
which will result in higher profitability for the unit and safety of funds of the bank.

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6. Methods of Assessment of Working Capital

1) NAYAK COMMITTEE/TURNOVER METHOD


2) TRADITIONAL METHOD/ TONDON II METHOD
3) CASH BUDGETING METHOD

1) TURNOVER METHOD: It provide 5 crore to SME and 2 crore for general advances, while
financing we should assess that the operating cycle of the firm /company is approximately 8
month.
As per Nayak method or turnover method PBF as assessed under:
1.
2.
3.
4.
5.

Accepted Projected sales


Required W.C.(25% of A)
Stipulated Margin(5% 0f A)
Actual NWC(C.A-C.L)
Permissible bank fianc
[(B-C) or (B-D) whichever is less]

2) TRADITIONAL METHOD/TONDON II METHOD: It is applicable where NAYAK


COMMITTEE/TURNOVER METHOD is not applicable. This method talks about MPBF. This
is also known as Financing Working Capital Gap. In this method WC assessed as under.
A. Chargeable C.A
B. Other C.A
C. Total Charge C.A
D. Other C.L
E. W.C Gap(C-D)
F. NWC Required (25% of C)
G. Projected NWC/ Actual NWC (C.A- C.L)
H. PBF = [(F-E) OR (F-G)], whichever is maximum.
3) CASH BUDGETING METHOD: It is mainly used for service sector companies Like
BPO, KPO, Software companies etc. And it eliminates traditional requirement of Stock and
Debtors for assessment.
Bank Finance in the form of Working Capital = Cash Inflow Cash Outflow

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Steps involved in arriving at the level of Working Capital Requirement:

Based on the level of activity decided and the unit cost and sales price projections, the
banks calculate at the annual sales and cost of production.
The quantum of current assets (CA) in the form of Raw Materials, Work-in-progress,
Finished goods and Receivables is estimated as a multiple of the average daily turnover.
The multiple for each of the current assets is determined generally based on the industry
norms.
The current liabilities (CL) in the form of credit availed by the business from its creditors
or on its manufacturing expenses are deducted from the current assets (CA) to arrive at
the Working Capital Requirement (WCR).

Standard Formulae for determination of Working Capital:


The issue of computation of working capital requirement has aroused considerable debate
and attention in this country over the past few decades. A directed credit approach was
adopted by the Reserve Bank of ensuring the flow of credit to the priority sectors for
fulfillment of the growth objectives laid down by the planners. Consequently, the
quantum of bank credit required for achieving the requisite growth in Industry was to be
assessed. Various committees such as the Tandon Committee and the Chore Committee
were constituted and studied the problem at length.
Norms were fixed regarding the quantum of various current assets for different industries
(as multiples of the average daily output) and the Maximum Permissible Bank Financing
(MPBF) was capped at a certain percentage of the working capital requirement thus
arrived at.
Working Capital assessment on the formula prescribed by the Tandon Committee:
Working Capital Requirement (WCR) = [Current assets i.e. CA (as per industry norms)
Current Liabilities i.e. CL]
Permissible Bank Financing [PBF} = WCR Promoters Margin Money i.e. PMM (to be
brought in by the promoter)
As per Formula 1: PMM = 25% of [CA CL] and thereby PBF = 75% of [CA CL]
As per Formula 2: PMM = 25% of CA and thereby PBF = 75% [CA] CL
As is apparent Formula 2 requires a higher level of PMM as compared to Formula 1. Formula 2
is generally adopted in case of bank financing. In cases of sick units where the promoter is
unable to bring in PMM to the extent required under Formula 2, the difference in PMM between
Formulae 1 and 2 may be provided as a Working Capital Term Loan repayable in installments
over a period of time.

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Working Capital and Small Scale Industries:


Small scale industries have a distinct set of characteristics such as low bargaining power leading
to problems of receivables and lower credit on purchases, poor financial strength, high level of
variability due to dependence on local factors, etc. Consequently, it has been rightly argued that
the industry norms on different current assets cannot be adopted.
The PR Nayak Committee that was appointed to devise norms for assessing the working capital
requirement of small-scale industries arrived at simplified norm pegging the Working Capital
bank financing at 20% of the projected annual turnover. However, in case of units which are
non-capital intensive such as hotels, etc. banks often assess requirements both on the Nayak
Committee norms as well as the working cycle norms and take the lower of the two figures.
Eligibility and Norms for bank financing of SSIs as per Nayak Committee:
a. Applicability:

In case of SSIs, with working capital requirement of less than Rs.5


In case of other industries, with working capital requirement of less than Rs. 1 crore

crores

b. Quantum of Working Capital bank financing:


20% of the projected annual turnover
c. Subject to a Promoter bringing in a margin of:
5% of the projected annual turnover (i.e. 20% of the total fund requirement that has been
estimated at 25% of the projected annual turnover)
The formula driven computation of working capital requirement have been subjected to much
debate over the past few decades. The advantage of such computation has been that it removes
discretion from the officials of banks (which are largely from the Public Sector). The uniformity
thus reduces the scope for accusation of bias.
However, the strongest argument against the MPBF based lending has been that it does not take
into account the variations arising out of location, relative bargaining of the enterprise and other
reasons, which could vary its need for working capital. Even though the banker could understand
the problem, it was not possible to act on it due to the norms. Further, the One Size fits all
theory ensured that banks never needed to develop credit appraisal skills and lent to all and
sundry based on their seeming adherence to norms on paper.
The method has also been criticized as being more appropriate for the era where credit was
rationed out. Banks today are capable of undertaking better assessment of the requirements and
welcome the idea of offering higher limits (larger exposures) to established clients if required in
order to retain their business in the face of competition from other banks.
In 1997, the RBI permitted banks to evolve their own norms for assessment of the Working
Capital requirements of their clients.

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Cash flow based computation of Working Capital:


Cash flow is the most realistic means of assessing the operations of an enterprise. Drawing up
cash flow statements (monthly or quarterly) for the past few years clearly indicate the seasonal
and secular trend in utilization of working capital. The projections drawn up by the entrepreneur
may then be jointly discussed with the banker as modified in light of the past performance and
the bankers opinions. The peak cash deficit is ascertained from the cash budgets. The
promoters share (margin money) for such requirement maybe mutually arrived at by the banker
and the borrower with the balance requirement forming the Bank financed part of Working
Capital.
Cash flow based computation of working capital requirement has been recommended by the RBI
for assessment of working capital requirement permitting the banks to evolve their own norms
for such assessment. The reason for this has been that Cash flow factors in the past trends, takes
into account the company specific factors and is based on mutual discussion between the banker
and the borrower thereby increasing its acceptability. Also, large companies have adopted cash
budgeting systems for managing their cash flows and hence such a system does not impose
additional requirements on the corporate.
Cash flow system is extremely relevant in case of the seasonal industries to assess the peak credit
requirement and in case of large companies (working capital requirements above Rs. 10 crores).
However the reluctance to provide the cash budgets thereby revealing additional information to
the banks, has led to even larger companies shying away from Cash Budget method of assessing
Working Capital. Consequently Cash Budget method is currently prevalent mainly in case of
seasonal industries, construction sector as well as other entities whose operations are linked to
projects.
Bank financing based on cash budgets works well and is a good step form for the system:
A big failure in the working capital system hitherto followed by our banks has been that the
Drawing Power (within the PBF limit) is based on post facto stock statements and these are reset
typically on a monthly basis. This means:

The borrowing unit is putting its money upfront and the Drawing Power is a form of
reimbursement.
Responsiveness to sudden surges in demand/ seasonality/ other short term boom
conditions is non-existent, putting a burden on the company to finance this at exorbitant
rates from private financiers.
Finally, a growing company will always be playing catch-up and its Permissible Bank
Financing will be lagging its cash requirements by at least one year.

23 | P a g e

7. CASE STUDY
FORM- I

UB STAINLESS LIMITED (Formerly WEST COAST SAW PIPES LIMITED)

Facilities requested

Rs. In Lacs

A. Term Loan
B.

Working Capital Facilities

1.

Fund Based Limits

80.00

- Cash Credit

500.00

- Packing Credit

(150.00)

- Bill Discounting

(300.00)

Fund Based Limits (Not to exceed)


2.

500.00

Non Fund Based Limits


Bank Guarantee

100.00

Letter of Credit (Inland / Foreign)

300.00

Total Non Fund Based Limits (Not to exceed)

300.00

Interchangeability between fund based and non fund based limits, with total limits not to
exceed Rs. 800.00 lacs.

C.

Total Limits (A + B)

24 | P a g e

880.00

Assessment of Working Capital Requirement

ASSESSMENT OF WORKING CAPITAL REQUIREMENT


FORM II : OPERATING STATEMENT
AMOUNT IN Rs: Lacs
NAME OF THE UNIT

Estimates for the year ending 31st March

UB STAINLESS LTD.

ACTUAL

ACTUAL

Audited

Audited

EST.
Current
Yr

31-3-09

31-3-10

31-3-11

12

12

12

GROSS SALES

II

III

i.

Domestic sales

630.65

2554.27

4000

5000

5500

6050

6655

7320.5

ii.

Export sales

126.56

5.15

Formerly WEST COAST SAW PIPES LTD.

No. of months
1

Other operating/rvenue income

PRO.

PRO.

Next Yr.

PRO.

Next Yr.

31-3-12

PRO.
Next
Yr.

Next Yr.

PRO.
Next Yr.

31-3-13

31-3-14

31-3-15

31-3-16

12

12

12

12

12

IV

VI

VII

VIII

Total

757.21

2559.42

4005

5000

5500

6050

6655

7320.5

Less excise duty

65.44

198.32

412

515

566.5

623.15

685.47

754.01

Net sales ( item 1 - item 2 )

691.77

2361.1

3593

4485

4933.5

5426.85

5969.53

6566.49

% age rise (+) or fall (-) in net sales

N/A

241.31%

52.17%

24.83%

10.00%

10.00%

10.00%

10.00%

compared to previous year (annualised)


5

Cost of Sales
i.)

Raw materials (including stores and other

516.95

2046.72

3000

3750

4125

4537.5

4991.25

5490.38

items used in the process of manuf.)


(a) imported

400

500

550

605

665.5

732.05

516.95

2046.72

2600

3250

3575

3932.5

4325.75

4758.33

Other Spares

27.84

51.08

70

87.5

96.25

105.88

116.46

128.11

(a) imported

(b) Indigenous
ii)

(b) Indigenous

27.84

51.08

70

87.5

96.25

105.88

116.46

128.11

iii)

Power and Fuel

20.6

30.64

40

50

55

60.5

66.55

73.21

iv)

Direct labour

16.22

44.31

70

87.5

96.25

105.88

116.46

128.11

(Factory wages & salary)


v)

Other mfg. Expenses

vi)

Depreciation

vii)

SUB TOTAL (I TO VI)

viii)

ADD: Opening stocks-in-process

ix)

Deduct : Closing stocks-in- process

x)

Cost of Production

xi)

Add : Opening stock of finished goods

xii)

Deduct closing stock of finished goods

xiii)

SUB-TOTAL (Total cost of sales)

Sub-total

SUB-TOTAL

25 | P a g e

4.78

3.13

10

26.92

54.11

60

65

70

80

90

100

613.31

2229.99

3245

4046

4449.5

4897.76

5389.72

5929.81

2.3

76.43

286.06

352

400

442

484

532

615.61

2306.42

3531.06

4398

4849.5

5339.76

5873.72

6461.81

76.43

286.06

352

400

442

484

532

586

539.18

2020.36

3179.06

3998

4407.5

4855.76

5341.72

5875.81

539.18

2020.36

3179.06

3998

4407.5

4855.76

5341.72

5875.81

539.18

2020.36

3179.06

3998

4407.5

4855.76

5341.72

5875.81

Selling, general & administration exp.

Sub total (5+6)

8
9
10
11

(i)

71.65

178.06

185

194

204

214

225

236

610.83

2198.42

3364.06

4192

4611.5

5069.76

5566.72

6111.81

Operating profit before interest (3-6)

80.94

162.68

228.94

293

322

357.09

402.81

454.68

Interest

11.51

10.24

35

76

77

74

71

69

Operating profit after interest (8-9)

69.43

152.44

193.94

217

245

283.09

331.81

385.68

7.69

18.89

10

10

11.2

12

( c) Balances written back

0.22

8.97

(d) Others

0.43

6.69

8.34

34.55

10

10

11.2

12

58.52

54.4

0.83

59.35

54.4

Add other non-operating income


(a) Interest received
(b) Commission

Sub-total ( income )
(ii)

Deduct other non-operating expenses


(a) Preliminary Expenses
(b) Deffered Tax Provision
( c) Fringe benefit tax
(d) Exchange fluctuations
Sub-total ( expenses )

(iii)

Net of other non-operating income/exp

12

Profit before tax/loss[10+11(iii)]

13

Provision for taxes

14

Net profit/loss ( 12-13 )

15

(a) Equity dividend paid (paid+BS Prov)

-51.01

-19.85

10

10

11.2

12

18.42

132.59

201.94

225

255

293.09

343.01

397.68

78.8

90.56

105.99

122.88

18.42

132.59

201.94

225

176.2

202.53

237.02

274.8

(b) Dividend Rate


c) Transfer to General Reserve
d) Deffered Tax Liability
16

Retained profit ( 14-15 )

17

Retained profit/Net profit (% age)

26 | P a g e

18.42

132.59

201.94

225

176.2

202.53

237.02

274.8

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

FORM III - ANALYSIS OF BALANCE SHEET


LIABILITIES
Name: UB STAINLESS LIMITED (Formerly WEST COAST SAW PIPES LIMITED)

Amounts in Rs. Lacs

ACTUAL

ACTUAL

PRO.

PRO.

PRO.

PRO.

PRO.

Audited

EST.
Current
Yr

CURRENT LIABILITIES

Audited

Next Yr.

Next Yr.

Next Yr.

Next Yr.

Next Yr.

Year

31-3-09

31-3-10

31-3-11

31-3-12

31-3-13

31-3-14

31-3-15

31-3-16

No. of months

12

12

12

12

12

12

12

12

Short-term borrowings from banks


(including bills purchased, discounted
& excess borrowing on repayment basis
(I)

From applicant banks

500

500

550

550

550

550

(ii)

From other banks

(iii)

Of which BP & BD

SUB TOTAL

500

500

550

550

550

550

Short term borrowings from others

Sundry Creditors (Trade)

413.02

955.1

380

479

521

573

630

693

Advance payments from customers


/deposits from dealers

76.31

22.06

20

30

30

30

30

30

Provision for taxes

28.5

59.1

60

60

60

60

60

60

Dividend payable

Other statutory liabilities

30.4

30.1

31.5

20.52

16.16

178.69

172.22

173.42

173.42

183.42

183.42

183.42

80

696.52

1208.48

663.82

772.52

825.92

866.94

919.58

863

696.52

1208.48

1163.82

1272.52

1375.92

1416.94

1469.58

1413

(due within one year)


8

Deposits/instalments of term loans/


DPGs/Debentures(over-due within 1 year)

Other current liabilities & provisions


(due within 1 Yr) Specify major items

SUB-TOTAL (B)
10

TOTAL CURRENT LIABILITIES (1to9)


TERM

LIABILITIES

11

Debentures (not maturing within 1 year)

12

Preference shares

(redeemable after one year)


13

Term loans

8.75

44.7

98.28

68.18

36.68

16.16

14

Deferred Payment Credits

15

Unsecured Loan

27 | P a g e

16

Other term liabilities

70

70

70

70

70

70

17

TOTAL TERM LIABILITIES (11 to 16)

8.75

44.7

168.28

138.18

106.68

86.16

70

70

18

TOTAL OUTSIDE LIABILITIES (10+17)

705.27

1253.18

1332.1

1410.7

1482.6

1503.1

1539.58

1483

365

365

365

365

365

365

365

365

NET WORTH
19

Equity share capital

20

Prefrence share capital

21

Share premium

170

170

170

170

170

170

170

170

22

Other reserve (excluding provisions)

83.41

83.41

83.41

83.41

83.41

83.41

83.41

83.41

23

Surplus (+) or deficit (-) in


-122.36

10.23

212.17

437.17

613.37

815.9

1052.92

1327.72

Deferred Tax Liability

-0.78

53.62

53.62

53.62

53.62

53.62

53.62

53.62

24

NET WORTH

495.27

682.26

884.2

1109.2

1285.4

1487.93

1724.95

1999.75

25

TOTAL LIABILITIES (18+24)

1200.54

1935.44

2216.3

2519.9

2768

2991.03

3264.53

3482.75

Profit & Loss Account


23a

Others (specify)

ANALYSIS OF BALANCESHEET
Name: UB STAINLESS LIMITED
Formerly WEST COAST SAW PIPES LTD.

ASSETS

Year
26
27
(I)
(ii)
28

(I)

(ii)
29

No. of months
Cash and bank balances
Investment (other than long term Investmt
Government & other Trustee securities
Fixed Deposits with Banks
Receivables other than deferred &
exports (include bills purchased and
Discounted by banks
Export receivables(include bills
purchased & discounted by banks
Installments of deferred
Receivables (overdue within one yr.)

28 | P a g e

ACTUAL

ACTUAL

Audited

Audited

Amount in
Rs. Lacs
EST.
PRO.
Current
Yr
Next Yr.

Next Yr.

Next Yr.

Next Yr.

Next Yr.

31-3-09
12
60.01

31-3-10
12
17.65

31-3-11
12
5.79

31-3-12
12
14.73

31-3-13
12
20.74

31-3-14
12
23.23

31-3-15
12
52.33

31-3-16
12
79.32

0
30.66

0
1.9

0
100

0
100

0
125

0
125

0
140

0
150

143.05

521.06

666.67

833.33

916.67

1008.33

1109.17

1220.08

PRO.

PRO.

PRO.

PRO.

30
(I)

(ii)
(iii)
(iv)

31
32
33

34

35
36
37
38
(I)
(ii)
(iii)
(iv)
39
40
41
42

43
44

45
46
47
48

Inventory:
Raw materials(including stores & other
items used in the process of
manufacturing
(a) Imported
(b) Indigenous
Stock-In-Process
Finished goods
Other Consumable Spares
(a) Imported
(b) Indigenous)
Advance Recoverable in cash or in kind
Advance payment of taxes
Other Current assets Specify major items
(a.) Advance recoverable
(b.) Deposits
(c.)
(d.)

193.13

582.08

690

823

906.75

995.63

1094.19

1204.51

112.37
0
112.37
76.43
0
4.33
0
4.33
0
74.25
225.19
221.44
3.75
0
0

290.62
0
290.62
286.06
0
5.4
0
5.4
0
107.89
159.45
155.7
3.75
0
0

328
50
278
352
0
10
0
10
0
80
73.75
70
3.75
0
0

410.5
62.5
348
400
0
12.5
0
12.5
60
60
63.75
60
3.75
0
0

450.75
68.75
382
442
0
14
0
14
60
60
63.75
60
3.75
0
0

496.63
75.63
421
484
0
15
0
15
60
60
103.75
60
3.75
40
0

546.19
83.19
463
532
0
16
0
16
60
60
63.75
60
3.75
0
0

600.51
91.51
509
586
0
18
0
18
60
60
63.75
60
3.75
0
0

TOTAL CURRENT ASSETS (26 to 33)

726.29

1390.03

1616.21

1954.81

2152.91

2375.94

2579.44

2837.66

717.57
245.8
471.77

823.82
299.91
523.91

940
359.91
580.09

975
424.91
550.09

1095
494.91
600.09

1175
574.91
600.09

1335
664.91
670.09

1395
764.91
630.09

2.48
0
0

21.5
0
0

20
0
0

15
0
0

15
0
0

15
0
0

15
0
0

15
0
0

2.48

21.5

20

15

15

15

15

15

2.48

21.5

20

15

15

15

15

15

0
1200.54
495.27

0
1935.44
682.26

0
2216.3
884.2

0
2519.9
1109.2

0
2768
1285.4

0
2991.03
1487.93

0
3264.53
1724.95

0
3482.75
1999.75

29.77
1.04
1.42

181.55
1.15
1.84

452.39
1.39
1.51

682.29
1.54
1.27

776.99
1.56
1.15

959
1.68
1.01

1109.86
1.76
0.89

1424.66
2.01
0.74

0.02

0.07

0.19

0.12

0.08

0.06

0.04

0.04

FIXED ASSETS
Gross Block (Land & Building
machinery, work-in-process)
Depreciation to date
NET BLOCK
OTHER NON-CURRENT ASSETS
Investment/book debts/advances/
deposits which are not current assets
a) Investment in subsidiary Co/ Asso.
b) Others
Advances to supplier of capital goods/cont.
Deferred receivables (maturity> 1 year
Others (Receivables over six months)
Non-consumables stores & spares
Other non-current assets including dues
from Directors
TOTAL OTHER NON-CURR. ASSETS
Intangible assets (patents, goodwill, prelim
expenses, bad/ doubtful exp not provided
etc
TOTAL ASSETS(34+37+41+42)
TNW (24-42)
NET WORKING CAPITAL
(17+24)-(37+41+42) tally with 34-10
CURRENT RATIO (34/10)
TOL/TNW (18/44)
Total term liabilities/tangible net
worth(17/44)

29 | P a g e

FORM
IV
COMPARATIVE STATEMENT OF CURRENTS ASSETS AND CURRENT LIABILITIES
Name:

UB STAINLESS LIMITED ( formerly WEST COAST SAW PIPES LIMITED)

Amounts in Rs. Lacs


ACTUAL

PRO.

PRO.

PRO.

PRO.

PRO.

Audited

EST.
Current
Yr

Next Yr.

Next Yr.

Next Yr.

Next Yr.

Next Yr.

Year

31-3-10

31-3-11

31-3-12

31-3-13

31-3-14

31-3-15

31-3-16

No. of months

12

12

12

12

12

12

12

A. CURRENT ASSETS

17.65

5.79

14.73

20.74

23.23

52.33

79.32

Cash and bank balances


Investment (other than long term Investmt

Government & other Trustee securities

1.9

100

100

125

125

140

150

521.06

666.67

833.33

916.67

1008.33

1109.17

1220.08

582.08

690

823

906.75

995.63

1094.19

1204.51

Fixed Deposits with Banks


Receivables other than deferred &
exports (include bills purchased and
Discounted by banks
Export receivables(include bills
purchased & discounted by banks
Installments of deferred
receivables (overdue within one yr.)
Inventory:
290.62

328

410.5

450.75

496.63

546.19

600.51

items used in the process of manufacturing

Raw materials(including stores & other

50

62.5

68.75

75.63

83.19

91.51

(a) Imported

290.62

278

348

382

421

463

509

(b) Indigenous

286.06

352

400

442

484

532

586

Stock-In-Process

Finished goods

5.4

10

12.5

14

15

16

18

Other Consumable Spares

5.4

10

12.5

14

15

16

18

(a) Imported

60

60

60

60

60

Advance Recoverable in cash or in kind

(b) Indigenous)

107.89

80

60

60

60

60

60

Advance payment of taxes

159.45

73.75

63.75

63.75

103.75

63.75

63.75

Other Current assets Specify major items

155.7

70

60

60

60

60

60

(a.) Advance recoverable

3.75

3.75

3.75

3.75

3.75

3.75

3.75

(b.) Deposits

40

(c.)

30 | P a g e

(d.)
TOTAL CURRENT ASSETS

1390.03

1616.21

1954.81

2152.91

2375.94

2579.44

2837.66

Amount in Rs. Lacs


ACTUAL

PRO.

PRO.

PRO.

PRO.

PRO.

Audited

EST.
Current
Yr

Next Yr.

Next Yr.

Next Yr.

Next Yr.

Next Yr.

Year

31-3-10

31-3-11

31-3-12

31-3-13

31-3-14

31-3-15

31-3-16

No. of months

12

12

12

12

12

12

12

From applicant banks

500

500

550

550

550

550

From other banks

Of which BP & BD

SUB TOTAL

500

500

550

550

550

550

Short term borrowings from others

Sundry Creditors (Trade)

955.1

380

479

521

573

630

693

/deposits from dealers

22.06

20

30

30

30

30

30

Provision for taxes

59.1

60

60

60

60

60

60

Dividend payable

Other statutory liabilities

30.4

30.1

31.5

20.52

16.16

172.22

173.42

173.42

183.42

183.42

183.42

80

1208.48

663.82

772.52

825.92

866.94

919.58

863

B.

CURRENT LIABILITIES

Short-term borrowings from banks


(including bills purchased, discounted
& excess borrowing on repayment basis

Advance payments from customers

(due within one year)


Deposits/instalments of term loans/
DPGs/Debentures(over-due within 1 year)
Other current liabilities & provisions
(due within 1 Yr) Specify major items

TOTAL CURRENT LIABILITIES

31 | P a g e

FORM V
COMPUTATION OF MAXIMUM PERMISSIBLE BANK FINANCE FOR WORKING CAPITAL

Name:

UB STAINLESS LIMITED (formerly WEST COAST SAW PIPES LIMITED)

FIRST METHOD OF LENDING

ACTUAL

ACTUAL

EST.

FIRST METHOD OF LENDING

Audited

Audited

Current Yr

PRO.

PRO.

Next Yr. Next Yr.

PRO.

PRO.

Next Yr. Next Yr.

PRO.
Next Yr.

Year 31-Mar-09 31-Mar-10 31-Mar-11 31-Mar-12 31-Mar-13 31-Mar-14 31-Mar-15 31-Mar-16


1.Total current assets

726.29

1390.03

1616.21

2.Other current liabilities


3.Working capital gap(1-2)

696.52

1208.48

663.82

772.52

825.92

866.94

919.58

863.00

29.77

181.55

952.39

1182.29

1326.99

1509.00

1659.86

1974.66

7.44

45.39

238.10

295.57

331.75

377.25

414.97

493.67

5.Actual/projected NWC

29.77

181.55

452.39

682.29

776.99

959.00

1109.86

1424.66

6.Item-3 minus Item-4


7.Item- 3 minus Item-5

22.33

136.16

714.29

886.72

995.24

1131.75

1244.89

1480.99

0.00

0.00

500.00

500.00

550.00

550.00

550.00

550.00

0.00

0.00

500.00

500.00

550.00

550.00

550.00

550.00

1.Total Current Assets


2.OCL(other than bank borrowing)
3.Working Capital Gap(1-2

726.29

1390.03

1616.21

1954.81

2152.91

2375.94

2579.44

2837.66

696.52

1208.48

663.82

772.52

825.92

866.94

919.58

863.00

29.77

181.55

952.39

1182.29

1326.99

1509.00

1659.86

1974.66

4.Min. stipulated net working capital

181.57

347.51

404.05

488.70

538.23

593.99

644.86

709.42

4.Min. stipulated net working capital

1954.81

2152.91

2375.94

2579.44

2837.66

(25% of WCG excluding export rec.)

8.MPBF

(item 10 or 11 whichever is lower)

9.Excess borrowing repres


enting shortfall of NWC(4-5)

SECOND METHOD OF LENDING

(25% of TCA excluding export rec.)

5.Actual/projected NWC

29.77

181.55

452.39

682.29

776.99

959.00

1109.86

1424.66

6.Item-3 minus Item-4


7.Item- 3 minus Item-5

-151.80

-165.96

548.34

693.59

788.76

915.01

1015.00

1265.24

0.00

0.00

500.00

500.00

550.00

550.00

550.00

550.00

8.MPBF

(item 10 or 11 whichever is lower)

-151.80

-165.96

500.00

500.00

550.00

550.00

550.00

550.00

9.Excess borrowing repres

-151.80

-165.96

enting shortfall of NWC(4-5)

Thus the Maximum Permissible Bank Finance (MPBF) for the year 2010-11 and 2011-12 is
Rs. 500 Lacs.

32 | P a g e

8. CONCLUSIONS & RECOMMENDATIONS


After studying and evaluating the various aspects of the credit decisions taken up by Punjab
National Bank through the interviews with manager and the banks circulars, it is clear that the
bank is following a sound process.
1. The study presents an example of a project related to manufacturing industry. It was found that
the bank relies mainly on its internal credit rating, DSCR & Debt equity ratio to appraise the
project financially. But most of the banks have started checking the Internal Rate of Return of
the project before doing its pricing. So, to be in accordance with the banking industry PNB
should also modify its appraisal process to include the same.

2. After analyzing the process, I have realized that most of the delay in the process is due to the
delay in collection of documents from the customer end. Therefore initially at the point of
contact with the customers, there should be a checklist form provided to the customers for the
various loans that the customers have applied for. And the customer should be aware of all the
papers that would be required for the project appraisal.
For example : If any SME organization is applying for the Working Capital enhancement or
renewal or for the term loan, then the financial of the company i.e. Audited CMA data for the
last 3 years, Provisional documents upto the last quarter, Projected data should be submitted.
If the company is applying for the loan over the Collateral Security then some documents like
Copy of the Title deed, NEC ( Non-Encumbrance Certificate), Certified copy of the TITLE
DEED, Valuation report should be submitted by the customers issued by Bank approved Valuer
or Advocate.

33 | P a g e

REFRENCES

PNB Intranet Portal


PNB Circular
PNB website: www.pnbindia.in
Pnbindia.com/financial
Working Capital Finance Chapter 5 by Seidman
Working Capital Finance by Banks and its Regulations by Reema Srivastava
www.tutor2u.net/working capital

34 | P a g e

ANNEXTURES
ANNEXTURE A:

M/S DURGA MAA PROPOSAL


BOARD NOTE
Date of proposal

14.09.2011

Whether fresh/renewal/ enhancement/


In-principle

Enhancement

Asset Classification as on ..

Standard

Credit Risk Rating based on ABS 31.03.2011. Score :71


(Previous and current with scores and reasons RATING:
for degradation, if any)
AALast PMS Score, if applicable

NIL

Customer ID No.

GAA000172

Activity Code

NA

Whether sensitive sector Real estate/Capital No


market along with applicable risk weight
Date of last sanction & Sanctioning Authority

03.07.2010

Enhancement of existing Cash Credit(Hyp)


Limit to Rs 150.00 lacs from the existing Rs
44.00 lacs

1.a)

b)

Name of the Borrower and


Constitution
Address of Regd. Office

35 | P a g e

M/S DURGA MAA

Gandhi maidan,Patna
c)

Works/Factory

d)

Date of incorporation/
establishment

2006

e)

Dealing with PNB since

12.09.2006

f)

Business
Activity
Installed Capacity

2.

DO

(Product)/ Distributor of CEMENT

Branch Office/CO

3.a)

NIL
Directors/Partners/Proprietors
Proprietor; SAMIR KUMAR
(Name, Address, Mobile No., e- 9334254775.9931692445
mail
ID of main Directors/Key persons)

b)

Whether any of them, in RBIs NO


Caution advices/ECGC Caution
list/Willful defaulters' list. If yes,
the reasons for considering the
proposal.

c)

If any of them, related


Directors/ Sr. Officers of PNB

d)

Management Change since last NIL


sanction, if any

e)

Whether Memorandum of
Association permits the Activity &
Powers for borrowings

NA

f)

Shareholding Pattern

Proprietary Concern

g)

Whether the profile of the


borrower, its
Director/Partners/Promoters and
its Group Cos./Associate Firms
has been verified through CIBIL
database/other credit information
bureaus
If No please give reasons.

36 | P a g e

to NO

YES

If Yes please give details.

4. Facilities Recommended:
Nature

(Rs.in lacs)
Proposed

Existing

Fund Based
CC(H)/CC (Book Debt)
Inland Bills limit
FOBP/FOUBP/FABC
Others
Fund Based Ceiling
Non Fund Based
ILC/FLC
ILG/ FLG
Non Fund Based Ceiling
Term Loan
Limit of credit exposure on account of all
derivative products
TOTAL COMMITMENT

44.00

150..00

44.00

150.00

Details of limits from other Banks/FIs/Consortium/Multiple Banking as on: NIL


(Rs. In lacs)
Name of the Bank

6. A
NIL

Existing
FB
NFB

Share %
FB
NFB

Proposed
FB
NFB

Share %
FB
NFB

Details of Group Companies/Allied/Associate firms and the facilities sanctioned to them:

Name of the Company

FB

NFB

Name of Dealing Bank Classification


Account

6. B Comments on conduct of these accounts with our bank/other banks: N/A

37 | P a g e

of

6. C Key Financial Figures (Audited) of Group/Allied/Associate concerns (for the last 3


years).
(Rs. in lacs)
31.03.2009
31.03.2010
31.03.2011
Paid Up Capital
10.18
20.00
73.55
Reserves & Surplus
0
0
0
10.18
20.00
73.55
Tangible Net worth
Block Assets
1.00
0.88
17.32
Secured/Unsecured Loans
6.04
9.80
0
Sales
103.12
277.65
652.35
Profit before Tax
2.42
4.14
6.55
Profit After Tax
2.42
4.13
6.21

Comments on Financial Indicators


7. A (i) Financial Position of the borrower (All amounts in Rs Lacs)
)
31.3.2009 31.3.2010 31.3.2011 Latest data up to
the last quarter
of
current
financial
year(31.03.2012)

Gross Sales
Other Income
Operating
Profit/Loss
Profit before
tax
Profit after tax
Cash profit/
(Loss)
Block Assets
Depreciation
Net Assets
Secured Loan
Unsecured
Loan
Paid up capital
Reserves and
Surplus
excluding
38 | P a g e

Audited
103.12
0.17
4.48

Audited
277.65
0.14
11.67

Audited
663.35
0.38
18.55

Projected
993.82
0.5
38.14

2.42

4.14

6.55

5.85

2.42
2.57

4.13
4.14

6.21
6.77

5.44
5.7

1.15
0.15
1.00
6.04
0.00

1.00
0.12
0.88
9.80
0.00

1.73
0.56
1.17
38.03
0.00

1.11
0.27
0.84
160
0

10.18
0.00

20.00
0.00

73.55
0.00

87
0

revaluation
reserves
Misc.
expenditure
not written off
Accumulated
losses
Deferred Tax
Liability/Asset
Tangible Net
Worth
Net Working
Capital
Current Ratio
Debt Equity
Ratio
Operating
Profit/Sales

7.A(ii)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

10.18

20.00

73.55

87

9.18

15.47

56.24

69.93

2.39
NA

1.75
NA

3.21
NA

1.43
NA

4.34

4.20

2.80

3.84

Comments on Financial Indicators

CAPITAL:
31.03.09 31.03.10 31.03.11 31.03.12
The capital of
Audited Audited Audited Projection
the company
Capital
10.18
20.00
73.55
87.00
has
increased to Rs 73.55 lacs (2011) from 10.18 lacs in 2009.Retention of Profits and fresh
additions of capital has ensured that the capital has improved. It is projected to further
improve to Rs 87.00 lack as on close of F.Y 2012.
SALES

31.03.09 31.03.10 31.03.11 31.03.12


Audited Audited Audited Projection
Sales 103.12
277.65
663.35
993.82

The Sales Revenue of the


company has increased to
Rs 663.35 (2011)lack from
Rs103.12 lack in 2009.It is
further projected to touch Rs 993.82 lack in 2012.The increase has been on
account of the fact that the firm has been able to add on to the Distribution of
Other companies. Influx of additional Working capital has enabled the firm to
39 | P a g e

Improve stock position and consolidate its position in the market.


31.03.09 31.03.10 31.03.11 31.03.12
PROFIT
Audited Audited Audited Projection
The operating profit of the
Profit 4.48
11.67
18.55
38.14
firm has increased to
Rs 18.55 lacs in 2011 from
Rs 4.48 lacs in 2009.It is
projected to increase to Rs 38.14 lacs in 2012 .The margins of the firm has
Increased along with the increase in sales.

CURRENT RATIO
31.03.09 31.03.10 31.03.11 31.03.12
The Current account of the
Audited Audited Audited Projection
Firm has fluctuated on
C.R 2.39
1.75
3.21
1.43
account of the increases in
Current Liability .However it
Has always remained much above the accepted level.

7. B

Details of investment in Shares, Debentures, Units or diversion of funds outside


the business etc.
NIL

7.C

Details of Liabilities not accounted for/Contingent liabilities

NIL
7. D
7. E

Status/details of adverse comments by Auditors of the borrowing unit


NIL
Position of assessment of income tax/sales tax/wealth tax of the borrowing
concern/ partners/proprietor
Up to 31.03.2011

7. F
unit

Overall likely impact of (7.B to 7.E) on the financial position of the borrowing

NIL
8. A

Primary Security.

40 | P a g e

i)

Working capital facility::Hypothecation of Stock in trade

ii)

Term Loan facility

8. B

Guarantee/Guarantors

Name of Guarantor
Neelam Kumari

NMs
Previous
34.08

Jyoti Devi

18.15

17.50

12.00

12.00

Ram Naresh Sharma

17.50

12.70

7.50

7.50

Present
117.70

IPs
Previous
34.50

Present
61.00

CR Date
Previous
Present
12.11.2009
20.09.2011
12.11.2009
20.09.2011
12.11.2009
20.09.2011

Comments on changes, if any.


Neelam Kumaris net means has increased on account of additions in I.P
8. C

Total Commitments by Guarantor(s): Rs 150.00.00 Lacs

8. D Collateral Security (Including details of changes in IPs as security from last


sanction, if any)
Security
Area in Owners Value
Basis
Date
Description
Sq M or hip
Last
Prese Realizab for
Sq Ft
sancti
nt
le value valuati
on
on
book
value

41 | P a g e

Whet
her
existi
ng/
fresh

Vacant plot
Khata 17,Plot
386Tauji No:
302,Mauja
Kamarji.Patna
Khata
No:658,Plot
1690,Tauji
360,Mauja
Manpur
Bairia,Gopalpur
,Patna
Khata
No:658,Plot
1668,1690,Taji
360,MAuja
Manpur
Bairia,Patna
Khata No3,Plt
No: 672,Tauji
5753,Thana
93,Mauja
Chilbili,P.S.Beu
r,Patna
As per Sale
Deed 13017,Dtd
13.12.2009,Paha
ripar,Patna
As per Sale
Deed No:
15222,dtd
26.12.2006,Than
a 33,Tauji
5071,Beur,
Ward No: 55,PS
Mal
Salami,Patna

9.

1878.
18

2722

1769.
30

2722

1327

Neelam
Kumari
w/o
Sameer
Kumar
Neelam
Kumari
w/o
Sameer
Kumar

NA

16.18

15.00

Value
s
Report

27.06.201
1

Fres
h

NA

51.33

46.00

Value
s
Report

27.06.201
1

Fres
h

Sameer
Kumar
s/o
Ramad
har
Sngh
Sameer
Kumar
s/o
Ramad
har
Sngh
Ram
Naresh
Sharma

NA

40.97

37.00

Value
s
Report

27.06.201
1

Fres
h

NA

24.00

21.5

Value
s
Report

27.06.201
1

Fres
h

7.50

7.50

7.50

Value
s
Report

Exist
ing

Neelam
Kumari
w/o
Sameer
Kumar

34.50

34.50

34.50

Value
s
Report

Exist
ing

Jyoti
Devi

12.00

12.00

12.00

Value
s
Report

Exist
ing

Balance

(Rs. In lacs)
Irregularity
along
with

Position of Account as on

Nature
42 | P a g e

Limit

VS

DP

Cash Credit

44.00

99.42

69.59

50.26

reasons
NIL*

*Drawing above the sanctioned limit of Rs 44.00 permitted by the Chief Manager Incumbent)
within his vested powers.
10. a

Conduct of the Account

Availment of limit, overdrawing


The conduct of the account has been satisfactory .There has been limited overdrawing, to
meet out the emergency situations. The same has been sanctioned by the Incumbent
within his vested powers.
Routing of proportionate business in consortium, routing of sale proceeds, honoring of
commitment in non fund based facilities(details of LC/LG devolved/invoked with
amount),
The firm has routed 100% of the sale proceeds through the Cash Credit account during
the Financial year 2010-2011
Regularity in submission of financial statement/QMS/Stock Statement.
The firm has been regular in submitting the Financial Data/statements.
The information regarding no. of cheques returned with amount involved due to financial
reasons during the review period should be mentioned.
There has been no returning.
The amount/frequency of irregularity in the account during the review period should be
mentioned.
The account has been never irregular.
10. B Review of the Account (Appendix C to be enclosed)
10. C Value of the Account
Period
20102011

Nature of Limit
Cash Credit

Amount
44.00 Lac

Interest/Commission Earned
365438

(Rs. In lacs)
Yield (%)
8.29%

Comments, if any
10.D

Summary of irregularities pointed out by Banks Inspectors, Concurrent Auditors, Credit


Audit & Review Division (CA&RD), RBI Inspectors, Statutory Auditors, observations of
Stock Audit Report, Comment on Preventive Monitoring Score Trends, (and status of
rectification of these irregularities)
NIL

43 | P a g e

11.

Brief History (Should also include comments on industry scenario and industry outlook,
management, production and marketing, borrowers' diversification, expansion,
modernization programme, risk perception including environmental and social risk along
with proposed mitigations)
The applicant firm is a Proprietary concern of Shri Sameer Kumar Singh s/o Ramadhar
singh.The Firm has been dealing with PNB since its inception in 2006.Previously the
firm had its credit limits with PNBTransport Nagar Patna. Over a period of time the firm
was able to increase its sales and as a result of the same the need for higher Working
Capital forced them to Shift to the Current Branch wherein the Higher Authority was
vested with more. Powers .The Working Capital Limit has increased to R 44 lacs from Rs
8.00 lacs during the period. The firm is a Whole sale Distributor of Various big time
Cement Companies. To meet the future growth potential they have applied for revision of
limits to Rs 150.00 lacs

12.

Present Proposal
Enhancement of C/C (hypo) to Rs 150.00 lacs from existing Rs 44.00 lacs
Brief of the proposal

a)
b)

Justification for working capital sanction as per simplified method or traditional method
of lending, as the case may be

i)

Assessment of Fund Based Limits as per second method of lending


Item
Chargeable current assets
Other current assets
Total current assets
Other current liabilities
Working capital gap
Net Working Capital at 25% of Total
Current Assets less Export Receivables
Projected net working capital
Permissible bank finance

ii)

Current Years Estimates Accepted for the


year
232.00
2.05
234.05
4.12
229.93
58.50
69.93
160.00

Assessment of Fund Based Limits as per simplified turnover method

PBF will be computed at 25% of estimated turnover accepted for PBF net of margin
The margin will be computed higher of 5% of estimated turnover or projected
NWC.
Since the bank finance is only intended to support need based requirement of
a borrower if the available N WC (net long term surplus funds) is more than 5

44 | P a g e

per cent of the turnover the former should be reckoned for assessing the extent
of bank finan ce
Since the applicant is within the stipulated credit limit the MPBF as per Nayak
Committee is as follows.
Projected Sales for t he period 2011-2012
WCG @ 25% of sales
Margin @ 5 % of Sales
NWC
MPBF

967.00 lacs
241.75 lacs
48.35.lacs
69.93 lacs
171.82 lacs

The actual working capital gap of Rs 229.93 will be met by bor rowing from
Bank (RS 150.00 lacs ) and existing NWC (RS 69.93 lacs)
Additional
funding of Rs 10.00 lac s will be brought in over the couple of months.
c) Justification of non-fund based facilities

(A)

Assessment of Non Fund Based Limits

LETTER OF CREDIT: NIL


Particulars
1.
2.
3.
4.
5.
6.
7.
8.

ILC (Indigenous)

Total purchases during the year


Purchases proposed against LC
(FOB/CIF Value)
RM requirement against LC per month
Usance Period in months
Lead Period in month
Total period in months
LC requirement (3 X 6)
LC recommended

BANK GUARANTEE: NIL


Nature & amount of limit sanctioned
Outstanding as on
Name of the beneficiary / ies in whose favour guarantees to be
issued
Nature of the guarantee limit required i.e. performance/
45 | P a g e

(Rs in Crore)
FLC
(Imported)

financial/ Bid Bond etc.


Margin proposed
Security
Justification for the proposed limit
d)

13.

Justification for term loan/DPG: NIL

Purpose

Summary of cost of project and means of finance

Summary of profitability, Break-Even, DSCR and IRR, with comments thereon:

Status of various statutory approvals and clearances

Implementation schedule/Draw down schedule

Proposed repayment schedule

Present status of project (physical as well as financial)

a) Comments on Credit Risk Rating Report (Reasons for down gradation be mentioned)
Credit Risk Rating of the Firm has improved from BB to AA.The improvement has
been on account of higher TNW (on account of fresh infusion of capital), Higher
Profitability and higher NWC.

b) Rate of Interest applicable as well as proposed


TR.O.I
will be BR+4.50 % as applicable to Trading account Above Rs 50.00 lacs
with AA- Credit Risk Rating.
c) Risk perception, if any
The Revenue earning will be effected if Construction activities slow down. If the
Cement
Prices get regulated by the Govt then took the Earnings will be adversely effected.
14.
Other Issues
15.

Summary of merits/justifications for considering the proposal.


The borrowing firm is an established Distributor of Cement in the city with long time
experience in
the trade. The Construction activity both in the private sector (Building of Multistoried
Apartments) and in the Public Sector (Construction of Roads and Bridges) will ensure a
continuous high growth chart for the firm
16.

Recommendations:
Recommended for Sanction of Cash Credit (Hypothecation) limit of Rs 150.00 lacs by
Enhancement from Rs 44.00 lacs with terms and conditions as per annexure.

46 | P a g e

SIGNATURE OF APPRAISING AUTHORITY

ORDERS OF THE SANCTIONING AUTHORITY


Sanctioned Cash Credit (Hypothecation) limit of Rs 1, 50, 00,000.00 (Rupees One
Crore Fifty Lac only) by enhancement from Rs 44.00 lacs as per recommendation
and as per Terms and conditions annexed.
CHIEF MANAGER
Date:

General Instructions

If account is eligible for stock audit, the observations of stock audit reports along with
comments are furnished.

Under risk perception comments about generation of employment, social development


aspects, backward area development incentives, social disorder/ unrest, availability of
pollution control certificate, changes in regulatory policies of Local/State/Central Govt. etc.
Activity is Prohibitive or not, location of unit in Restrictive Area (i.e. near to Residential,
Historic Monuments, etc.) be given.

The following Annexure be enclosed with the proposal:


Profit & Loss Account and Balance Sheet/Fund Flow Statement for last three years. Key
financial figures i.e. paid up capital, sales, and net profit: Latest Data for the current
financial year.
Credit Risk Rating Report.
Key financial indicators for associate/ group/allied/subsidiary companies should include
Gross Sales, PBT and TNW.
Terms & conditions proposed.

47 | P a g e

ANNEXTURE B:

CALCULATING MBPF THROUGH NAYAK COMMITTEE/TURNOVER METHOD

BIHAR PRECISION FORGINES

SALES
PURCHASE
GROSS POFIT
NET PROFIT
C.A
C.L.
C.R
NWC
TNW
DER

31st
March

31st
March

2012

2013

105
68.5
11.95
2.06
59.28
44.6
1.32
14.68
18.65
1.53

155.1
98.5
23.45
10.68
67.11
45.34
1.48
21.77
28.13

A.PROJECTED
SALE
B. ACCEPTED
SALE
C. 25% OF ACCEPTED
SALE
(W/C requirement)
D. Less : 5%of Accepted sale

5.25

7.25

14.45

21.77

2012

2013

105

155.1

105

145

26.25

36.25

14.45

21.77

11.8

14.48

OR
E. NWC whichever is higher
MPBF

(C E)
48 | P a g e

Recommendation:
As when we go through the case we got to know that in 2013 his sales certainly go up and it let
to increase the NP.
And in this case the company asks for cash credit of Rs.12 .00 lacs but the bank provided these
organization Rs.10 lacs cash credit.
So according to me its a profitable approach to the bank that they provide cash credit to BIHAR
PRECISION FORGIEN and they have charges the rate of interest by rating method.
Rating can be done by analyzing Balance sheet and trading, P/L a/c in the software of the banks,
where they find the rate of interest to be charged.
They have taken a Land on Mortgage for this Cash Credit.
The basic rate of charging is 10.25 % + the rating.

ANNEXTURE C:

CALCULATING MBPF THROUGH TONDON II COMMITTEE/TRADITIONAL


METHOD

SHEETAL GARMENTS

SHEETALS GARMENTS
ACTUAL
2011
105.32

ESTIMATE
2012

1)

TOTAL C.A

2)

OTHER LIABILITIES
(EXCEPT BORROWING)

(.16+.15)
0.21

(.90+2.49+.06)
3.45

3)

WORKING CAPITAL GAP

105.11

288.3

4)

MINI STIPULATED NWC


(25% OF C.A)

26.28

72.07

49 | P a g e

5)

NWC (ACTUAL/PROJECTED)

6)

ITEMS 3 MINUS
ITEM 4

105.11
(105.32.21)

108.3
(291.75183.45)

78.83

216.22

7)

ITEM 3 MINUS
ITEM 5

180

8)

PBF
(LOWER 0F 6 AND ITEM 7)

180

9)

NWC TO TCA %

99.8

37.12

10)

BANK FINANCE TO TCA %

74.85

74.11

11)

SUNDRY CREDITOR TO TCA

12)

OTHER C.L TO TCA%

0.2

1.18

13)

INVESTMENT TO
NET SALES PER DAY

NA

NA

14)

RECEIVABLE TO GROSS SALES


(DAY)

15)

SUNDRY CREDITOR TO PURCHASE


(DAYS)

Thus Maximum Permissible Bank Finance for Sheetal Garments is Rs.180 Lacs.

50 | P a g e

Annexure D:
ONLINE CREDIT RISK RATING SYSTEM/PNB TRACThis a system developed by PNB for categorizing the risking BOND in the loan ACCOUNT
there are various tool for rating the account in this pnb track system, which is as under procedure
1. Small loan: For a loan above 2 lacs to 20 lacs
2. Small Loan II : This is for a limit greater than 20 lacs TO 50 lacs
3. Mid corporate loans: For 50 lacs to 5 crores.
4. Large corporate: 5 crore and above
5. New Entrepreneur:
6. NBFC
Risk rating is done through our model for categorizing the risk to linking with price (rate of
interest).

RATING SCALE
SCORE OBTAINED

RATING

DESCRIPTION
MINIMUM RISK

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ABOVE 80

PNB
AAA

ABOVE 77.5 UPTO 80

PNB
AA+

ABOVE 72.50 UPTO 77.50

PNB AA

ABOVE 70.00 UPTO 72.50

PNB AA-

ABOVE 67.50 UPTO 70.00

PNB A+

ABOVE 62.50 UPTO 67.50

PNB A

ABOVE 60.00 UPTO 62.50

PNB A-

MARGINAL RISK

MODEST RISK

ABOVE 57.50 UPTO 60.00

PNBBB+

ABOVE 52.50 UPTO 57.50

PNB BB

ABOVE 50.00 UPTO 52.50

PNB BB-

ABOVE 47.50 UPTO 50.00

PNB B+

ABOVE 42.50 UPTO 47.50

PNB B

ABOVE 40.00 UPTO 42.50

PNB B-

ABOVE 30.00 UPTO 40.00

PNB C

HIGH RISK

30.00 AND BELOW

PNB D

CAUTION

AVERAGE RISK

52 | P a g e

MARGINALLY ACCEPTABLE RISK