Project Pramod
Transcript of Project Pramod
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1. INTRODUCTION:
Working capital may be regarded as the lifeblood of business. A study of
working capital is of major importance to internal and external analysis because of
its close relationship with the current day to day operation of a business. Working
capital is the leading cause of that position of the assets of a business which are used
in, or related to current operations, and represented at any one time by the operation
cycle of such items as against receivables, inventories of raw materials stress, work
in progress and finished goods, merchandise, notes or bills receivables and cash.
The assets of this type are relatively temporary in nature.
2. MEANING AND DEFINATIONS OF WORKINGCAPITAL
Ordinarily, the term Working Capital stands for that part of the capital,
which is required for the financing of working or current needs of the company.
Working capital is the lifetime of every concern. Whether it is manufacturing or
non-manufacturing one without adequate working capital, there can be no progress
in the industry. Inadequate working capital means shortage of raw materials, labour
etc., resulting in partial current assets less current liabilities has no economic
meaning in the sense of implying some type of normative behavior. According to
this line of reasoning. It is largely an accounting artifact. Working capital
management, then, is a misnomer. The working capital of the firm is not managed.
The term describes a category of management decisions affection specific types of
current assets and current liabilities. In turn, those decisions should be rooted in the
overall valuation of the firm.
Definitions:
1. According to Weston and Brigham, working Capital refers to a firms
investment in short term assets cash, short term securities, accounts
receivables and inventories.
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2. According to Hoagland, Working Capital is descriptive of that capital which
is not fixed. But the more common use of the working capital is to consider
it as the difference between the book value of the current assets and the
current liabilities:.
3. According to Bonneville, Any acquisition of funds which increase the
current assets increases working capital also, for they are on and the same.
3. CONCEPT OF WORKING CAPITAL
Working Capital is often classified as Gross working capital and Net working
capital. The former refers to the total of all Current assets and the later is the
difference between total current assets and total current liabilities. These are
acceptable terms. From the management point of view, Gross Working Capital
deals with the problems of managing individual current assets. i.e., the operation of
current assets which is constant in short run analysis and decision making. But
variable and managerial in long urn operation.
4. NEED FOR WORKING CAPITAL:
The need for working capital cannot be over emphasized. Every businessneeds some amount of Working Capital arises due to the time gap between
production and realization of cash from sales. There is an operating cycle involved
in the sales and realizations of each. The working Capital is need for the following
purposes: -
1. For the purchase of raw materials, components and spares.
2. To pay wages and salaries.3. To incur day to day expenses and overhead costs, such as fuel, power
and office expenses etc.
4. To meet the selling costs as packing, advertisement and distribution.
5. To provide credit facilities to customers.
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5. COMPOSITIION OF WORKING CAPITAL:
Working capital includes mainly current assets and current liabilities .
1. CURRENT ASSETS:a. Inventories : Raw Materials
Work in progressFinished goodsStores and SparesMiscellaneous Goods
b. Receivables : Trade debtorsLoans and AdvancesOther debtors balances
c. Marketable securities : Government SecuritiesSemi Government securitiesShares, debentures, etc.
d. Cash and Bank Balance : Cash in handCash at Bank
Cash in TransitII. CURRENT LIABILITIES:a. Sundry Creditors : Interest accused on loans
Advances received from customsShort-term loans from BanksTrade dues and other liabilitiesDeposits from public, etc.,
b. Current Provisions for : TaxationDividendsBonus
Contingencies
6. KINDS OF WORKING CAPITAL:
Working capital can be studied under two heads. (a) Permanent or Fixed
Working Capital, and (b) Variable working capital.
I. Permanent or Fixed Working Capital:This is the part of the Capital, which is permanently locked up in the
circulation and in keeping it moving. The permanent or fixed working capital can
again be sub-divided into (1) Regular Working Capital (2) Reserve working capital
or cushion working capital. Regular working is the minimum is the minimum
amount of liquid capital needed to keep up the circulation of the capital form cash to
inventories to receivables and back again to cash. Reserve margin or cushion
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working capital is the excess over the need for regular working capital that should
be provided for contingencies that arise at unstated periods,
II. VARIABLE WORKING CAPITAL.
The variable working capital changes capital changes with the volume of
business. It may be sub-divided into (I) Seasonal and (II) Special Working Capital.The capital required to meet the seasonal needs of industry is termed as seasonal
working capital is that part of the Variable working capital which is required for
financing special operations such as the inauguration of extensive marketing
campaigns, experiments with the methods of distribution, production etc.,
7. DETERMINANTS OF WORKING CAPITAL:
A company, as a general policy, wants to hold in balance as small a quantity
of working capital as possible so long as under solvency risks are not imposed on it.
This is a logical approach indication that working capital is a means to an end and
not an end itself. Qualitative amounts of working capital can hardly be used for
individual firms. As appraisal of these would provide guidance to management in
estimating prospective needs. A large number of factors influence the working
capital needs of the firms.
Working Capital is constantly affected by the crisscrossing economic
currents flowing about the business. The nature of firms activities, the economic
health of country, the availability of materials, the case or tightness of the money
market are all part of these shifting forces. It is difficult to rank them because the
influence of individual factors rises and declines over a period as the corporate
internal policies and the environment in which it operates change. However, thefollowing factors are pertinent for having an overall view of the forces affecting
capital needs.
FACTORS DETERMINING WORKING CAPITAL:
1. Nature and Size of Business
2. Manufacturing cycle
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3. Business Fluctuation
4. Production Policy
5. Firms credit policy
6. Availability of credit
7. Growth and expansion activities
8. Profit margin and profit appropriation
9. Price level changes
10. Operating of efficiency
11. Demand of creditors
12. Cash requirements
13. Time
14. Volume of sales
15. Terms of Purchases and sales
16. Inventory turnover
17. Inflation
18. Seasonal Fluctuations
19. Repayment ability
20. Activities of firm
III. SOURCES OF WORKING CAPITAL
For the convenience of study the sources of working capital may be classified
under the following two heads :
I. Sources of regular working capital:
1. Issues of shares
2. Issue of debentures
3. Retained profits
II. Sources of Variable or seasonal working capital:
1. Indigenous Bankers
2. Commercial banks
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3. Public Deposits
4. Ploughing back of Company profits
5. Other finance corporations.
I. OPERATING OR WORKING CAPITAL CYCLE:
The operating or working capital cycle is the length of time between
companies paying for materials entering into stock and receiving the inflow of cash
from sales. Operating cycle measures the time gap between investment of cash and
its realization out of sales revenue. The determinants of operating cycle is helpful
for control purposes with view to improving previous working capital ratios. This
analysis emphasiss the total time lag within the operating cycle by indicating the
relative significance of its constituent parts for reducing working capital tie-up by
action appropriate to each element. It provides a series of days equivalents which
can be used in budgeting or forecasting for translating sales and cost budgets into
budgets of working capital is mainly useful to ascertain the requirement of cash
working capital is mainly useful to ascertain the requirement of cash working capital
is mainly useful to ascertain the requirement of cash working capital to meet the
operating expense of a going concern. This concept is based on the continuity of the
flow of valued in a business operational those values usually flow in a going
concern center, mainly around the operational activities of a business in any period.
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OPERATING CYCLE :
Cash
Raw Materials
Work inProgress
Bills Receivablesor Debtors
Credit Sales
Finished Goods
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1. FINANCING CURRENT ASSETS:
The firm must find out the sources of funds to finance its current assets. It
can adopts different financing policies. Three types of financing are distinguished.
Long term financing, short term financing and spontaneous financing. The
important sources, retained earnings and debt from financial institutions. Short term
financing refers to those sources of short-term bank loans, commercial paper and
factoring receivables.
Spontaneous financing refers to the automatic sources of short-term funds.
The major sources of such financing are trade credit and outstanding expenses.
Spontaneous sources of finances are cost free. Therefore, a firm would like to
finance its current assets with spontaneous sources to the fullest extent. Thus, the
real choice of financing current assets is between short term and long-term sources.
We will therefore, concentrate our attention on the short term Vs long term
financing.
Matching Approach:
A firm can adopt a financial plan, which involves the matching of the
expected life of the source of funds raised to finance assets. Thus, a ten-year loanmay be raised to finance a plan with and expected life of ten years. Stock to be sol
in thirty days may be financed with a thirty-day Bank Loan and so on. The
justification for exact matching is that, since the purpose of financing is to pay for
assets, the financing should be relinquished when the asset is expected to be
relinquished. Using long term financing of short term assets is expensive as the
funds will not be utilized for the full period. Similarly, financing long term assets
with short term financing will have to be made on a continuing basis. Thus, whenthe firm follows matching approach, long-term finance should be used to realized
that exact matching is not possible because of the uncertainty about the expected
lives to the assets .
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Conservative Approach:
A firm may adopt a conservative approach in financing its current and fixed
assets. The financing policy of the firm is said to be conservative when it depends
more on long term funds for its financing needs. Under conservative plan, the firm
finances its permanent assets and a part of temporary current assets with long term
financing. Thus in periods when the firm has no temporary current assets. It stores
liquidity by investing surplus funds into marketable securities. The conservative
plan relies heavily on long term financing and therefore it is less risky.
Aggressive Approach:
A firm may be aggressive in financing its assets. An aggressive policy is said
to be followed by the firm when it used more short term financing than warranted by
the matching plan. Under aggressive policy, the firm finances a part of its
permanent current assets with short term financing some extremely aggressive firms
may even finance a part of their fixed assets with short term financing. The
relatively more use of short term financing makes the firm more risky.
K. FINANCING WORKING CAPITAL:
A New Approach:
Attention may be drawn to hedging approach to finance current assets, i.e.,
each asset would be offset with a financing instrument of the same approximate
maturity with a hedging approach. Short term of seasonal variations in current
assets less trade creditors and provisions would be financed with short termdebt. On other hand, hard core or permanent components of current assets would
be financed with long term debt or equity.
The distinction between variable and permanent components of current assets
may be difficult to make in practice but it is neither illusory not unimportant. Short
term financing for long term needs is dangerous. A profitable firm may not
borrowed on a short term basis have become tied up in permanent assets.
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The hedging approach required the nature of the assets to be financed should
be matched by the majority of the source of funds. For the purpose of analysis, the
assets can be broadly classified into two classes.
1. Those which are required in a certain amount for a given level of
operation, and hence do not vary over time.
2. Those, which fluctuate over time.
Flexibility:
If the need for funds is seasonal or cyclical, the firm may not want to commit
itself to long term debt. If a firm expects its need for funds diminish in the near
future, or if it thinks there is a good chance that such a reduction will occur, it may
choose short term debt for the flexibility it provided a costs budget is used to
analyses the flexibility aspect o the maturity structure of debt.
Cost:
The cost aspect of the maturity decision involves the term structure of interest
rates, or the relationship between the maturity of debt and the interest rate on the
debt. If interest rates are lower on short term debt than long term debt,
management will like to utilize short term funds. On the other hand, if short
term money costs more than long term debt it is advisable to make use of long term
funds .
Risk:
Use of short term debt subjects a firm to more risk than dose long term
debt the risk effect occurs for two reasons. If a firm borrows on a long term basis its
interest cost will be relatively stable over time but if it borrows on a short term
basis its interest expenses will fluctuate widely often going quite high. If a firm
borrowers heavily on a short term basis, it may find itself unable to repay its debt
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or it may be in a shaky financial position that the lender will not extend the loan.
Thus a big uncertainty is created.
TANDON COMMITTEE RECOMMENDATIONS ON THE BANKS
AND WORKING CAPITAL:
The Reserve Bank of India set up a study group to firm guidelines for follow
up of Bank credit in July, 1974, under the chairmanship of Mr. P.L Tandon, the
chairmen of Punjab National Bank. The Study group submitted its report to the
Reserve Bank of India in August 1975. the recommendations of this committee
regarding the approach of the Banks towards the assessment of the working capital
requirements of industrial units are very significant in that these will engender
greater discipline in Bank Credit to Industry. The major recommendations are
stated below: -
a) Bank finance essentially for meeting working capital needs:
Bank credit is essentially intends to finance working capital requirements
only, other requirements, some sources would be found. Even for working capital
requirements, some portion of the contribution must come from sources other than
Bank finance.
b) Working capital gap:
The committee has popularized the concept of working capital gap,
representing the excess of current assets over current liabilities, other than bank
borrowings. According to the committee, the maximum permissible bank finance
should be 75% of the working capital gap, the balance of 25% to be provided by the
borrower from equity and long term borrowings.
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c) Norms:
The borrowings requirement of any industrial unit basically depends on the
length of the working capital cycle, from building inventories of raw materials to
getting the sale proceeds. If norms inventory and current assets are laid down for
different industries, the bank can easily work out the standard working capital
required by a unit and sanction the advance accordingly, the committee has
prescribed norms of inventory and receivable for 15 key industries. The industries
covered by the report are cotton and synthetic textiles, man made fibers, jute
textiles, rubber products, fertilizers, pharmaceuticals, dyes and dyestuffs, basic
industrial chemicals, eatables and hydrogenated oil, paper, cement, engineering
ancillaries and component supplies and engineering machinery manufactures. The
study group has not suggested any norms for the heavy engineering industry
because each unit in the industry has special characteristics.
III) Three different methods of working out working capital
requirements:
The committee has proposed three progressive alternatives by which the
banks may finance and working capital requirements of their industrial borrowers.
At the first stage the current assets may be worked out as per norms and the current
liabilities (expecting bank borrowings) may be deducted there form. This amount
would represent the working capital gap, 25% of which must be financed by the
borrowers out of long term funds. The maximum permissible bank borrowing
would therefore be only 75% of the working capital requirements calculated as per
the norms laid down regarding inventories and receivables.
In the second stage the borrower will have to provide a minimum of 25% of
total current assets out of long funds (as against his providing 25% of working
capital gap from long term funds in the first alternative).
In the third and the ideal method of calculating the borrowing units, the
committees makes a distinction between core current assets and other current assets.
The borrower should finance the entire core current assets plus a minimum of 25%
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of the other current assets. The group feels that the classifications of current assets
and current liabilities should be as per the accepted approach of the Banks. The
committee recommends that a borrower must gradually move from the first stage to
the third stage.
IV. Style of Credit:
The committee also recommends a change in what is calls the style of
credit i.e., the manner in which bank finance is extended to the borrower.
The total credit limit of a borrower should be bifurcated into two components:
the minimum, level of borrowings which the borrower expects to use
throughout the year (loan) and a demand cash credit which would take of hisfluctuating requirements. Both of these limits should be reviewed annually.
Its importance stems from tax reasons :
Investment in current assets represents a substantial portion of total
investment.
Investment in current assets and the level o f current liabilities have to be
geared quickly to changes in sales. To be sure, fixed asset investment and
long term financing are also responsive to variations in sales However, it
may be mentioned here that though this concept of working capital is
commonly used, it is an accounting concept with little economic meaning. It
makes little sense to say that a firm manages its net working capital. What a
firm really does is to take decisions with respect to various current assets and
current liabilities. This relationship is not as close and direct as it is in the
case of working capital components.
The importance of working capital management is reflected in the fact that
financial managers spend a great deal of time in managing current assets and
current liabilities. Arranging short term financing, negotiating favorable
credit terms, controlling the movement of cash, administering accounts
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receivable, and monitoring the investment in inventories consume a great
deal of time of financial managers.
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Table 14.1 Constituents of Current Assets and Current
Liabilities
Part A : Current Assets
Inventories
Raw Materials and Components
Work in progress
Finished Goods
Others
Trade Debtors
Loans and Advances
Investments
Cash and Bank Balance
Part B : Current Liabilities
Sundry Creditors
Trade Advances
Borrowings
Commercial Banks
Others
Provisions
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This chapter, concerned with certain aspects and consideration relating to
overall working capital management, is divided into five sections:
Characteristics of Current Assets
Factors influencing working capital requirements
Working capital policy
Profit criterion for current assets
Operating cycle analysis
CHARACTERISTICS OF CURRENT ASSETS
In the management of working capital two characteristics of current assets
must be born in mind: (i) short life span, and (ii) swift transformation into other
asset forms.
Current assets have a short life span. Cash balances may be held idle for a
week or two, accounts receivable may have a life span of 30 to 60 days, and
inventories may be held for 30 days to 100 days. The life span of current assetsdepends upon the time required in the activities of procurement, production, sales,
and collection and degree of synchronization among them.
Each current asset is swiftly transformed into other current asset forms: cash
is used for acquiring raw materials are transformed into finished goods (this
transformation may involve several stages of work in progress); finished goods,
generally sold on credit, are converted into receivable (book debt); and finally
accounts receivable on realization, generate cash. Figure 14.1 shown the cycle of
transformation.
The short life span of working capital components and their swift
transformation from one form into another form has certain implications.
Decisions relating to working capital management are repetitive and frequent.
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The difference between profit and present value is insignificant.
The close interaction among working capital components implies that
efficient management of one component cannot be undertaken without
simultaneous consideration of other components. For example, if the firm
has a large accumulation of finished goods inventory it may have to provide
more liberal credit terms or show laxity in credit collection. Another
example: if the firm has a crunch it may have to offer generous discounts.
Finished Goods
Wages, Salaries,Factory Overheads
Cash Suppliers
Raw Materials
Work in Progress
AccountsReceivable
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Factors influencing working capital requirements
The working capital needs of firm are influenced by numerous factors the
important once are as follows:
Nature of business
Seasonality of operations
Production policy
Market conditions
Conditions of supply
Nature of Business
The working capital requirement of firm is closely related to the nature of its
business. A service firm, like an electricity undertaking or a transport corporation,
which has a short operation cycle and which sells predominantly on cash basis, has a
modest working capital requirement. On the other hand, a manufacturing concern
like a machine tolls unit, which has a long operating cycle and which sells largely
on credit, has a very substantial working capital requirement. Table 14.2 shows the
relative proportions of investment in current assets and fixed assets for certainindustries.
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Table 14.2 Proportions of Current Assets and Fixed AssetsCurrent Assets
%
10-20
20-30
30-40
40-50
50-60
60-70
70-80
80-90
Fixed Assets
%
80-90
70-80
60-70
50-60
40-50
30-40
20-30
10-20
Industries
Hotels and Restaurants
Electricity Generation and Distribution
Aluminium, Shipping
Iron and Steel, Basic Industrial Chemicals
Tea Plantation
Cotton Textiles, Sugar
Edible Oils, Tobacco
Trading, Construction
Seasonality of Operations
Firms which have marked seasonality in their operations usually have highly
fluctuating working capital requirements. To illustrate, consider a firm
manufacturing ceiling fans. The sale of ceiling fans reaches a peak during the
summer months and drops sharply during the winter period. The working capital
need of such a firm is likely to increase considerably in summer months and
decrease significantly during the winter period. The working capital need of such a
firm is likely to increase considerably in summer months and decrease significantly
during the winter period. On the other hand, a firm manufacturing a product like
lamp, which have fairly even sales round the year, tends to have stable working
capital needs .
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Production policy
A firm marked by pronounced seasonal fluctuation in its sales may pursue a
production policy, which may reduce the sharp variations in working capital
requirements. For example, a manufacturing of ceiling fans may maintain a steady
production throughout the year than intensify the production activity during the peak
business season. Such a production policy may dampen the fluctuations in working
capital requirements.
Market Conditions
The degree of competition prevailing in the market place has an important
bearing on working capital needs. When competition is keen ,a larger inventory of
finished goods is required to promptly sever customers who may not be inclined to
wait because other manufacturers are deadly to meet their needs. Further, generous
credit terms may have to be offered to attract customers in a highly competitive
market. Thus working capital needs tend to be high because to great investment in
finished goods inventory and accounts receivable.
If the market is strong and competition weak, a firm can mange with smaller inventory of finished goods because customers can be served and avoid lock-up of
funds in accounts receivable --- it can even ask for advance payment, partial or total.
Conditions of Supply
The inventory of raw materials, spares, and stores depends on the conditions
of supply. If the supply is prompt and adequate, the firm can manage with small
inventory. However, if the supply is unpredictable and scant then the firm, to ensure
continuity of production, would have to acquire stocks as and when they available
and carry larger inventory on an average. A similar policy may have to be followed
when the raw material is available only seasonally and production operations are
carried out round the year.
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WORKING CAPITAL POLICY
Two important issue in formulating the working capital policy are:
1. What should be the ratio of current assets to sales?
2. What should be the ratio of short term financing to long term
financing?
Current Assets in Relation to Sales
If the firm can forecast accurately its level and pattern to sales, inventory
procurement time, inventory usage rates, level an pattern of production, production
cycle time, split between cash sales and credit sales, collection period, and other
factors which impinge on working capital components, the investment in current
assets can be defined uniquely. When uncertainty characterized the above factors,
as it usually does, the investment in current assets cannot be specified uniquely. In
face of uncertainty, the outlay on current assets would consist of a base component
meant to meet normal requirements and a safety component meant to cope with
usual demands and requirements. The safety component depends on how
conservative or aggressive is the current asset policy of the firm. If the firm pursuesa very conservative current asset policy it would carry a high level of current assets
in relation to sales.
CurrentAssets Conservative
Moderate
Aggressive
Sales
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Fig. 14.2 Various Current Asset Policies
(This happens because the safety component is substantial) if the firm adopts
a moderate current assets policy. It would carry a moderate level of current assets in
relation to sales. Finally, if the firm follows a highly aggressive current asset policyit would carry a low level of current assets in relation to sales. The relationship
between current assets and sales under these different current assets policies is
shown in Fig 14.2
What are the likely consequences of conservative and aggressive current
asset policies? A conservative current asset policy trends to reduce risk. The
surplus current assets under this policy enable the firm to cope rather early with
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variations in sales, production plans, and procurement time. Further the higher
liquidity associated with this policy diminishes the changed of technical insolvency.
The reduction of risk, however, is also accompanied by lower expected profitability.
An aggressive current asset policy seeking to minimize the investment in
current assets exposed the firm to greater risk. The firm may be unable to cope with
unanticipated changes in the market place and operating conditions. Further the
risk.
Table 14.3 Effects of Conservative and Aggressive Current Asset PoliciesConservative policy Aggressive PolicySales 10,00,000 10,00,000EBIT 2,00,000 2,00,000Current Asses 6,00,000 4,00,000Fixed Assets 5,00,000 5,00,000Total Assets 11,00,000 9,00,000Profitability 18.2% 22.2%
Of technical insolvency becomes greater. The compensating for higher risk,
of course, is higher expected profitability because of the lower investment in current
assets associated with it.
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Ratio of Short term Financing to Long term Financing
Current assets of a firm are supported by spontaneous current liabilities
(Trade creditors and provision) short term bank financing, and long term
sources of fiannce (debentures and equity, in the main). Assuming that the level of
spontaneous current liabilities is determined by extraneous factors (trade proactive,
income-tax payment schedule etc.,) the relevant question in current assets financing
is: what should be the relative proportions of short term bank financing, on the one
hand, and long term sources of finance on the other? The two broad policy
alternatives, in this respect are:
(1) a conservative current asset financing policy, and (ii) an aggressive current asset
financing policy.
An aggressive current asset financing policy, relaying more on short term
bank financing tends to have the opposite effects. It exposes the firm to a higher
degree of risk, but reduces the average cost of financing.
Conservative Aggressive
ModerateOverall
Working
Capital policy
AggressiveOverall
Working
Capital policyConservative
Overall
Working
Capital policy
Moderate
Overall
Working
Capital policy
Choosing the Working Capital Policy:
The overall working capital policy adopted by the firm may broadly be
conservative, moderate, or aggressive. A conservative overall working capital
means that the firm chooses a conservative current asset policy along with a
conservative current asset financing policy. A moderate overall working capital
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policy reflects a combination of conservative current asset policy and and aggressive
current asset financing policy or a combination of an aggressive current asset policy
and a conservative current asset financing policy. An aggressive overall working
capital policy consist of an aggressive current asset policy and an aggressive current
asset financing policy. Figure 14.3 shows visually the various way of combining
individual policies, with respect to current assets and current assets financing, into
an overall working capital policy.
An overall conservative working policy reduces risk and offers low return.
An overall moderate working capital policy offers moderate return accompanied
with moderate risk. An overall aggressive working capital policy provide a package
of high risk and high return. The choice of an overall working capital policy would
depend on the risk disposition of management.
PROFIT CRITERIAN FOR WORKING CAPITAL
Current assets can be easily liquidated and the value realized on liquidation
would be more or less equal to the amount invested initially. Put differently,
investment in current assets is reversible. For reversible investments the criterion of
not profit per period (the period may be defined as one year) is equivalent to the
criterion of et portent value. The point is explained below.
Let P be the initial investment in current asset, r the rate of return earned on it
and K the cost of capital.
The profit per year will be:
Pr Pk
Where Pr = return for the year (14.1)
Pk = cost of funds for the year
The net present value, assuming that the investment in the current asset continues
for n years, will be:
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3. Finished goods inventory stage
4. Debtors collection stage
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Duration of the Operating Cycle
The duration of the operating cycle is equal to the sum of the durations of
each of these stages less the credit period allowed by the suppliers of the firm. In
symbols:
O = R+W+F+D-C
Where O Duration of operating cycle
R = raw material and stores storage period
W = work in process period
F = finished goods period
D = debtors collection period
C = creditors payment period
The components of the operating cycle may be calculated as follows:
Average stock of raw materials and stores
R =
Average raw materials and stores consumption per day
Average work in process inventory
W =
Average cost of production per day
Average finished goods inventoryF =
Average cost of goods sold per day
Average book debts
D =
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Average credit sales per day
Average trade creditors
C =
Average credit purchases per day
On simplification this expression reduces to:
(1+k) n - 1
[P r P k ]
K (1+k) n
Comparing Eqs. (14.1) and (14.6) we find that the criterion of profit per
period embodied in Eq. (14.1) is equivalent to the criterion of net present value,
reflected in Eq. (14.6) because Eq. (14.6) is simply a multiple of Eq. (14.1). given
this equivalence, the criterion of net profit per period may be substituted of the
criterion of net present value in analyzing working capital decisions.
OPERATING CYCLE ANALYSIS
The operating cycle of a firm begins with the acquisition of raw materials and
ends with the collection of receivables. It may be devided into four stages:
1. Raw materials and stores storage stage
2. Work in process stage
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Working Capital Control
From the preceding discussion it is clear that working capital requirement
depends on the level of operations and the length of operating cycle. Monitoring the
duration of the operating cycle is an important ingredient of working capital control.
In this context, the following points should be borne in mind:
1. The duration at the raw material stage depends on the regularity of
supply, transportation time, degree of permissibility, price fluctuations,
and economies of bulk purchases. It varies from a few days, for highly
perishable or readily available raw materials, to six months or even
longer, for imported materials.
2. The duration at the work in process stage depends on the length of
manufacturing cycle, consistency in capacities at different stages, and
efficient co-ordination of various inputs.
3. The duration at the finished goods stage depends on the pattern of
production and seas. If production is fairly uniform throughout the year
but sales are highly seasonal or vice versa, the duration at the finished
goods stage tends to be long.
4. The duration at the debtors stage depends on the credit period granted,
discounts offered for prompt payment, and efficiency and rigors of
collection efforts.
It is helpful to monitor the behavior of overall operating cycle and its
individual component. For this purpose time series analysis and cross section
analysis may be donein time series analysis the duration of the operating cycle andits individual components is compared over a period of time for the same firm. In
cross section analysis the duration of the operating cycle and its individual
components is compared with that of other firms of a comparable nature.
In order to understand the length of time for which resources are committed
to various components of working capital operating cycle analysis may be done. An
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extension of this analysis, may be done to the reflect the magnitudes of resource
commitments. This section discusses these two kinds of analysis with illustrations.
OPERATING CYCLE ANALYSIS
The operating cycle of a firm begins with the acquisition of raw materials and
ends with the collection of receivables. There are four aspects of the operating cycle
which involve commitment of resources; raw material stage: work in process stage:
finished goods stage; and accounts receivable stage. There is one aspect of the
operating cycle which proved resources; account payable stage (this is the period for
which credit is provided by the suppliers of raw materials).
The duration of the operating cycle may be defined as:
Where D = duration of the operation cycle
Dm = duration of the raw material stage
Dwip = duration of the work in process stage
D fg = duration of the finished goods stage
Daf = duration of the accounts receivable stage
D sp = duration of the accounts payable stage
A word about the components of the operating cycle is in order.
Duration of Raw Material and Stores Stage: this represents the number of
days for which raw materials and stores remain in inventory before they are issued
for production. It may be calculated as:
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Average stock of raw materials and stores
D rm =
Average raw materials and stores consumed per day
Duration of the working process stage this represents the number of days
required in the work-in-process stage. It may be measured as:
Average work-in-process inventory
DWIP =
Average work-in-process value of raw materials committed per
day
Duration of the Finished Goods Stage: This reflects the number of days for
which finished goods remain in inventory before they are sold. It may be calculated
as:
Average finished goods inventory
D fg =
Average cost of goods sold per day
Duration of the Accounts Receivable Stage: This denotes the number of days
required to collect the accounts receivable. It may be measured as:
Average accounts receivable
D ar =
Average Sales per day
Duration of the Accounts Payable Stage: This represents the number of days
for which the suppliers of raw materials offer credit. It may be calculated as
Average accounts payable
D ap =
Average credit purchases per day
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WEIGHTED OPERATING CYCLE ANALYSIS
The operating cycle analysis focused only on the time dimension of
investment. It shows the durations of various components of the operating cycle.
This analysis can be extended to take into account differential magnitudes of
investment at different stages of the operating cycle. Such extended analysis leads
to the calculation of what may be referred to as the weighted operating cycle which
is more useful in working capital analysis.
The procedure for calculating the weighted operating cycle consists of the
following steps:
STEP 1 Calculate for durations of various steps of the operating cycle the duration
of various stages namely,
D rm = ( duration of the raw materials and sores stage)
Dwip = (duration of the work-in process stage)
D fg = (duration of the finished goods stage)
D ar = (duration of the accounts receivable stage)
D ap = (duration of the accounts payable stage)
May be calculated using the formulae described in the previous section.
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STEP 2 : Determine the weights for various stages of the operating cycle.
The weights applicable to various stages of the operating cycle reflect the
proportions of the cost incurred up to that stage in relation to the selling price of the
product. Hence, the weights are:
Stage Weight
Raw materials and stores stage W rm =
Raw materials and stores cost per unit
Sales price per unit
Work in process stage W wip =
Raw materials and stores cost per unit
+0.5 processing cost per unit
Sales price per unit
Finished goods stage W fg =
Cost of goods sold per unit
Sales price per unit
Sales price per unit
Accounts receivable W ar =
Sales price per unit
Raw materials and stored cost per unit
Accounts payable stage W ap =
Sales price per unit
Pictorially the durations and weights corresponding to different stages are shown in
Figure 14 B.1
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STEP 3 Calculate the weighted operating cycle
The duration of the weighted operation cycle is equal to:
Wwip
D rm Dwip D fg D ar
Fig 14.B.1 Pictorial Representation of Durations and Weights Corresponding to
Different Stages of the operating cycle
Dw = W rm D rm + W wip Dwip + W fg D fg + W ar D ar + W ap D ap
Cash, the most liquid asset, so of vital importance to the daily operations of
business firms. While the proportion of corporate assets held in the form of cash is
very small, often between 1 per cent and 3 percent, its efficient management incrucial to the solvency of the business because in a very important sense cash is the
focal point of fund flows in a business. In view of its importance, it is generally
referred to as the life blood of a business enterprise
Why does a firm need cash? There are two primary reasons for a firm to hold
cash:
1. To meet the needs of day-to-day transactions: and2. To protect the firm against uncertainties charactering its cash flows.
While cash serves the functions, it is an idle resourced which has an
opportunity cost. The liquidity provided by cash holding is at the expense of profits
sacrificed by fore going alternative investment opportunities. Hence, the financial
W rmW fg W sf
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manager should carefully plan and control cash. This chapter is divided into five
section. Focuses on the following aspects of cash planning and control:
Cash budgeting
Loan-term cash forecasting
Reports for control
Monitoring collections and disbursements
Forms of liquidity.
MONITORING COLLECTIONS AND DISUREMENTS
To enhance the efficiency of cash management, collections and
disbursements must be properly monitored. In this respect, the following are
helpful.
Prompt Billing
Often there is a time lag between the dispatch of goods or provision of
service and the sending of bills. By preparing and sending the bills promptly a firm
can ensure earlier remittance. It should be realized that it is in the area of billing
that the companys control is high and there is a sizeable opportunity to free up
cash. To tap this opportunity the treasurer should work with the controller and
others in (i) accelerating invoice data, (ii) mailing bills promptly and (iii) identifying
payment location.
Expeditious Collection of Cheques
An important aspect of efficient dash management is to process the cheques
received very promptly. Yet many firms deposit cheques received wit some delay.
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In addition to quick handling of cheques, firm-receiving remittances by
cheques from different parts of the country might decentralize its collections and cut
down the delay in the conversion of cheques into cash. Instead of asking its
customers to remit their cheques to head office, it may ask them to send their
remittances to a regional/local office of the company, which is advised to deposit
the remittances in the regional/local office of its bank. The regional/local office of
the bank may be instructed to remit the collections (beyond a certain maximum
balance) to the head office account by telegraphic transfer or telex transfer. With
the vast network of branches set up by the major banks, regional/local collection
centers can be easily established. To ensure that the system of collection works
according to the plan, it is helpful to periodically audit the actual transfers by the
collecting banks and see whether they are in conformity with the instructions given
to them.
Control of Payables
By a proper control of payables, a firm can conserve its cahs resources.
This involves several things:
1. Payments should be made only as and when they fall due.
2. Payables and their disbursement may be centralized. This helps in
consolidating funds at the head office, scheduling payments more
effectively, reducting unproductive bank balances at the regional/ local
offices, and investing surplus finds more effectively.
3. arrangements may be made with suppliers to set due dates of their bills to
match with the companys period of peak receipts. Synchronization of
cash outflows and inflows help a company to get greater mileage from its
cash resources.
Playing the Float:
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When a firm issues a cheques it reduces the balance in its book. The balance
in the banks books, however, is not reduced till the payment is made by the bank.
The amount of cheques issued by the firm but not paid for by the bank is referred to
as the payment float now considers what happens when a firm receives a cheque
and deposits it with its bank. When the cheque is cleared. The amount of cheque
deposited by the form in the bank but not cleared is referred to as the collection
float. The difference between the payment fund and collection float is negative the
balance in the books of the bank is less than the balance in the books of the firm.
As long as the books of the bank show a positive balance, a negative cash
balance in the books o the firm may not be viewed with alarm. So if a firm enjoys a
positive net float it may issue cheques even if it means having an overdrawn bank
account in its books. Such an action is referred to as playing the float. It is
considered risky. However within limits a firm can play this game reasonably and
get a higher mileage form its cash resources.
To illustrate the game of playing the float let us consider an example ABC
Company issues cheques of Rs.20,000 daily these cheques to view cleared. ABC
receives cheques of Rs.20,000 daily and thanks to its expeditions collection; it takes
4 days for these cheques to be realized. Assuming that there is zero balance to begin
with the balance in the books of the firm and the books of the bank will be as shown
in Table from thereon the closing balance in the firms books would be zero and the
closing balance in the banks books would be Rs.40,000. a part of this may be used.
Table 15.9 Balance in the Books of the Firm and the Books of the BanksDay Books of the Firm Books of the Bank 1. Balance decreased by
Rs.20,000(cheques issued and increased
by Rs.20,000 (cheques deposited). The
net effect is nil so the closing balance is
zero.
Balance of the firm is neither increased
nor decreased. Hence the closing
balance is zero.
2. - - do - - - - do - -3. - - do - - - - do - -4. - - do - - - - do - -
5. - - do - - Balance of the firm is increased by
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Rs.20,000 (cheques deposited on the first
day are reedited). The closing balance is
Rs.20,000.6. - - do - - Balance of the firm is increased by
Rs.20,000 (cheques deposited on the
second day are credited). The closing balance is Rs.40,000.
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7. - - do - - Balance of the firm is increased by
Rs.20,000 (cheques issued on the first
day are credited) and decreased by
Rs.20,000. (cheques issued on the first
day are paid). The closing balance isRs.40,000. form this day onward each
day Rs.20,000 is debited to tae firms
account and the closing balance remains
at Rs.40,00.
FORMS OF LIQUIDITY
The liquid resources of a firm may be kept in various form; cash balance in
current account, reserve drawing power under a cash credit or over draft
arrangement. Ordinary units of the Unit Trust of India, and short term deposits with
other companies (called inter-corporate deposits). Let us look at the pros and cons
of these forms of maintaining liquidity.
Cash balance in current account provides the highest degree of liquidity.However, the interest earned on current account balance is not. Hence it is costly to
keep cash balance in current account at no firm can conceivably do without some
balance in current accounts.
Reserve drawing power under a cash credit or overdraft arrangements may
appear to be an economical way of maintaining liquidity. The firm is not required
to pay any interest on the unutilized portions of the cash credit or overdraft limits
yet it has a ready access to the un drawn amounts. There is however, a catch here.
If a part of the cash credit or overdraft limit kept in to reserve to meet contingencies,
remains unutilized over a prolonged period of time, the bankers may reduce the cash
credit or overdraft limit. This seems to be the reasons why some firms draw fully on
these limits, for some period of time at least, even if it means keeping the funds
virtually idle in the current accounts.
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The ordinary units of the Unit Trust of India (UTI) offer a reasonably
convenient and attractive avenue for investing for the following reasons: (i) the
dividend on these units is substantially tax-exempt. (ii) These units appreciate in a
fairly predictable fashion (iii) there is a very active secondary market for these units.
Depositing money with other companies on a short term basis is fairly
attractive I terms of rate of return. Presently inter-corporate deposits 15 to 21
percent rate of interest typically deposits are made for period of 2 to 6 months.
Often with a right to recall at a months notice. While very attractive form the point
of view of written inter-corporate deposits suffer from two disadvantages. (i) a
minimum of 1 months time may be required to convert them into cash and (ii) the
degree of risk associated with them is higher compared to other forms of
maintaining short term liquidity which virtually risk-free.
DESIGN OF THE STUDY
TITLE OF THE PROJECT:The project report A Study of Working Capital Management of
ANANTHAPUR DISTRICT CO-OPERATIVE CENTRAL BANK contains a
comprehensive treatment of the topic working capital management with a view that
the reader understand this financial decisions thoroughly well and is able to evaluate
its implication for shareholders and the company. From the beginning this project
report has been stressing on the analytical approach and the concepts are made clear
in a simple language. The project contains a real life financial ANANTHAPUR
DISTRICT CO-OPERATIVE CENTRAL BANK.
The special features of this report can be as follows : -
1. Comprehensive coverage of the topic working capital management.
2. Decisional focus and analytical approach.
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3. Procedural orientation and full of financial tables, charts and diagrams to
support the project study.
Finally, the project report is primarily targeted and aimed to help the reader
to develop a skill to understand, analyze, and interpret financial problems and data
to make good financial decisions.
STATEMENT OF THE PROBLEM
Working Capital Management is crucial for either a manufacturing company
or services company. Therefore the study of this project is limited to a period of
five years (2000 to 2005). The study analyzes sources, investment constituents of
working capital, growth of Net working Capital. It has also tries to test whether too
much of long term sources (more than 25%) are diverted into working capital, and
the Maximum Permissible Bank Finance (MPBF) of the company. All these were
done with the help of analysis of the published financial statements of the company.
1. 1.Preparation of summery of financial statements and important schedule
over the period.2. 2.Conduction an analysis and detection of major/broad sources of working
capital to the company, i.e., long term and short term sources.
3. 3.Classification of the company into moderate, aggressive and conservative
based on certain assumption.
4. 4.Analysis of net working capital as a percentage of total sales over the study
period and thus projects for the future.
5. 5.Analysis of net working capital in terms of rupee over the study period andthus project and future.
Decomposition of Gross Working Capital into its constituents and find out
the percentage of investments into each constituents of working capital and their
average growth.
Study effects of debtors and inventories on working capital of the company.
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Put up a hypotheses and test whether more than 25% of long term sources re
diverted into working capital area (tendon Committee Norm,-II).
Both the researcher and the company agreed the above research design and
this is an house research work and involved extensive analysis of the company
statements and did not involve questionnaires.
DATA NEED AND COLLECTION:
This study makes extensive use of Secondary data collected in the forms if
Annual Reports and Companys working Capital Manual. The nature of secondary
data collected was bothqualitative and quantities in nature. Considering the above
plan, research plan for this study is essentially a combination of qualitative and
quantitative aspects.
The secondary sources of data can be divided into mainly two parts:
Internal:
Accounting Section
Finance Section
HRD Department
Miscellaneous Records
External:
Information from published materials like,Annual Report of the company
Working Capital Manuals
Magazines
There was also use primary data in the case of financing working capital
trough pen and paper work and discussion held with the concerned company
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officials from various departments. The primary data was obtained through survey
method i.e., personnel interview method.
SAMPLING PLAN:
Methodology non-probability convenience sampling methods. This means a
continuous block of six years is taken into consideration of five years of operations,
which means sampling proportion, are approximately 84% Further emphasis is
given only to assessment of working capital and ratios connected with it in finance
department. The sampling helps the researcher to concentrate relatively small
number of people and hence it may lead to effectiveness. The basis for selection of
the units is based on convenience.
EXPECTED CONTRIBUTION FROM THE PROJECT:
A study of this nature may not give any specific monetary contributions to
the company but it is likely to highlight:
Costs of constituents of working capital Overall costs of present working capital
Reduction of costs of present working capital
Reduction of cost of present working capital and hence its impact on
the profitability.
Objective of the report:
1. To analyze the components of working capital in the ADCC Bank during
the period 2000 2001 to 2002 2005.
2. To present the different ways of assessment of working requiremtn and
directive of the RBI from time to time.
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3. To study the present system of credit Appraisal for financing of working
capital requirement of the bank requirement in case study based on the
following.
4. To analyze the Balance sheets and P&L Accounts of ADCC Bank
Financial appraisal of bank using selective ratio
5. To identify liquidity position and patentability position of ADCC Bank
Assessment of working capital involving computing of maximum
permissible of credit limits.
6. To find the collection time for loans and advances and turnover in terms
of working capital.
7. Also to study the methods of financing working capital
ANANTHAPUR DISTRICT CO-OPERATIVE CENTRAL
BANK
SCOPE OF THE PROJECT
The scope of this study is limited to working capital management practices of
one single company namely ADCC Bank.
RESEARCH DESIGN
An Exploratory research design is used for the above mentioned objectives.
This type of research design is identified as applicable for this study, while keeping
in mind:
Title of the project study
The statement of problem
Objective of the study
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This particular study is a combination of both quantitative and qualitative
aspects. The research design for this study includes the following:
Identification of the study period i.e. a periods between 2001 to 2005 i.e., 5
years.
LMITATIONS:
The limitations in this study report are:
Only short term aspects will be looked into.
The study is limited to ANATHAPUR DISTRIC CO-OPERATIVE
CENTRAL BANK.The study period is limited for five years (2001-2005) only
The study is extensively based on the annual reports and some projections
provided by the company.
Certain informations are confidential in nature and not easily accessible in
the company.
Suggestions and conclusions are limited to working capital area only.
METHODOLOGICAL ASSUMTIONS:
No serious assumptions so far were made as to limit the usefulness of the
study as made at any stage. However the following assumptions were made-
A study period of five years (2001-2005).
Objectives of the study and the research design as agreed upon by the
company and the researcher are sufficient, accurate and correct portray true state of
affairs of working capital management of the company.
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Published information from the company is accurate and true.
Percentage of Gross
Working Capital satisfied by current liabilities
Up to 25% - Conservative W/C approach
26% - 50% - Moderate W/C approach
Above 50% - Aggressive W/C approach
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INDUSTRY
PROFILE
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Industry Profile
Banking Sector
The Reserve Bank of the (RBI), as the central bank of the country, closely
monitors Developments in the whole financial sector.
The banking sector is dominated by scheduled Commercial Banks (Scabs).
As at Ends-March 2002, there were 396 commercial bank operating in India.
This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196
Regional Banks. Also, there were 67 scheduled co-operative banks
consisting of 51 scheduled urban co-operative banks and 26 scheduled state
co-operative banks.
Types of Banks NoPublic Sector 27Private 31Foreign 42Regional Rural 196
Scheduled Commercial Banks in India
31
27
42
196
Public Sector
Private
Foreign
Regional Rural
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Scheduled Co-Operative Banks in India
16
51
Urban Co-Operative Banks State Co-Operative Banks
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Scheduled commercial banks touched, on the deposit front, a growth of 14%
as against 18% registered in the previous year. And on advances, the growth
was 14.5% against 17.3% of the earlier year.
State Bank of India is still the largest bank in India with ICICI Bank, leading
of 20%. ICICI and its two subsidiaries merged with ICICI Banks, leading
creating the second largest bank in India with a balance sheet size of
Rs.1040bn.
Higher provisioning norms, tighter asset classification norms, dispensing
with the concept of past due for recognition of NPAs, lowering of ceiling
on exposure to a single borrower and group exposure etc., are among the
important measures in order to improve the banking Sector.
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to
strengthen the ability of banks to absorb loses and the ratio has subsequently
been raised from 8% to 9%. It is proposed to hike the CAR to 12% by 2004
based on the Basle on the Committee recommendations.
Retail Banking is the new mantra in the banking sector. The home loans
alone account for nearly two-third of the total retail portfolio of the banks.
According to one estimate, the retail segment is expected to grow at 30%-
40% in the coming years.
Net banking, phone banking, mobile banking, ATMs and bill payments are
the new buzz words that banks are using to lure customers.
With a view to provide an institutional mechanism for sharing of information
on borrowers by banks and Financial Institutional, the Credit Information
Bureau (India) Ltd. (CIBIL) was set up in August 2000. The Bureau
provides a framework for collecting, processing and sharing credit
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information on Borrowers of credit institutions, SBI and HDFC are the
promoters of the CIBIL
The RBI is now planning to transfer of its stakes in the SBI, NHB and
National Bank for Agricultural and Rural Development to the private players.
Also, the Government has sought to lower its holding in PSBs to a minimum
of 33 percent of total capital by allowing them to raise capital from the
market.
Banks are free to acquire shares, convertible debentures of corporates and
units of equity- oriented mutual funds, subject to a ceiling of 5% of the total
outstanding advances (including Commercial Paper) as on March 31 of the
previous year.
INDIAN BANKING SYSTEM
Introduction
Banking during the Vedic period largely meant money lending, and the
complicated mechanism of modern banking was not known to them
This is true not only in the case of India, but also of other countries.
Although the business of banking is as old as authentic history, banking institutions
have developed from a few simple operations involving the satisfaction of the whole
community by securing speedy application of capital, slowly seeking employment
and thus providing the vary life blood of commerce.
Banking:
Banking means the accepting for the purpose of lending or investing, of
deposit of money from the public, repayable on demand or otherwise and withdraw
able by cheque, draft, order or other ways. Bank means any company which
transacts the business of banking in India.
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Business of Banking:
Besides the important functions mentioned in the above definition, Banks
also engage in one or more of the following forms of the business, namely,
collection of Cheque and bills, remittance of funds, foreign exchange, under taking
the administration of estates as executors and trustees, acting as agents, accepting
articles for sage custody, letting of safe deposit lockers etc These and many other
functions are set out in detail in section 6 of the baking regulation act 1949. a
banking company is not permitted to engage in any form of business other than
these referred to in the act.
Types of Banks
Commercial Banks
Besides specialized financial institutions like cooperatives for agriculture and
industrial banks there are commercial banks, largely of general purpose in nature.
They collect funds from people and distribute them among borrowers drawn from
almost all the sectors of the economy. As such they posses a great potential for
good, if managed competently, as also for bad, if worked improperly.
Indigenous Banks:
In existence for centuries, some trace their presence to the Vedic times of
2000 to 1400 B.C. Indigenous banking in India is a system which admirablyfulfilled the needs in growth of modern commercial banks, indigenous banks
continue to hold on even in present times.
As indigenous banker is any individual or private firm receiving deposits and
dealing in Hindis or lending money. Although deposit side is emphasized, these
banks do not necessarily depend upon this source entirely, like modern commercial
banks. Very many among them also used founds of their own.
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Money Lenders
Money lenders are those whose primary business is money lending: such
essential functions as receiving of deposits or/and dealing in hundis are outside their
operations.
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Indian Banking System
Reserve Bank of India
(Central Bank and Monetary Authority)
The modern sector comprises (i) The Reserve Bank of India (2) The state
Bank of India and its seven subsidiaries (3) The foreign Exchange Banks and (4)
The twenty nationalized commercial banks and several private sector commercial
banks.
The indigenous sector comprises (i) the Indigenous Banker and (2) The
money lenders.
State Bank of India
Commercial Banks Regional Rural Banks Co-Operative Banks
Public Sector Banks Private Sector
Indian Foreign
State Co-Operative Banks
Central Co-Operative Banks
State Bank Group Other Nationalized BanksPrimary Credit Societies
Associate Banks
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Challenges before the Indian Banking Industry
Competition and Consolidation
The deregulation in interest rates, grant of functional to banks in the area of
credit, Entry of foreign banks and emergence of new private banks has made the
banking environgment more competitive. While the total share in bank credit
continues to be dominated by public sector banks, the share of foreign banks is
showing an increasing trend. As announced in the Union Budget for 2002-2003, it
has been decided to give an option to foreign banks to either operate as branches of
their parent banks or to set up subsidiaries. As per the recent RBI guidelines, the
overall ceiling for foreign direct investment n private sector banks has also been
enhanced. In the changed scenario, it has now become extremely important for
Indian banks remain competitive for surviving. Universally there is a move towards
consolidation and convergence. It has been our contention that the Government and
supervisory authorities should only provide a conductive environment for
consolidation and convergence through appropriate fiscal and monetary policies
supported by a sound regulatory and supervisory framework. Hence, bank
consolidation/ merger process should be primarily market driven and such proposals
should come voluntarily from the banks themselves depending on the organizational
synergy and the market share.
Management of NPA
Management of NPAs continues to be the foremost challenge of the Indian
banking system. In the recent past there has a conscious and persistent effort
through the prescription of strict objective norms for the identification andclassification of NPAs. This was also supplemented by the sustained efforts both by
the RBI for setting up the Requisite infrastructure as also systems/ procedures for
effecting recoveries/ reduction of NPAs. The result has been encouraging.
However, realizing the legal system, Govt. of India/RBI has taken several special
steps to ensure that legal inadequacies do not thwart the resolve to reduce the NPAs
of banks.
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In addition, banks have been advised to strengthen their administration
machinery and put in place effective risk management system to reduce the fresh
incidence of NPAs.
Tightening of Prudential Standards
The prudential standards need to be enhanced to fall in the line with the
international best practices. In the direction, Reserve Bank of Indian has introduced
the 90 days delinquency norm for identification of NPAs with effect from the year
ending March 2004 and reduced the timeframe for classification of a sub-standard
asset as a doubtful asset from 18 months to 12 months with effect from the year
ending March 2005. in some countries, doubtful assets, irrespective of their status
i.e. secured or unsecured, are required to be classified as loss assets and fully
provided for. However, in Indian, doubtful assets balances, by collateral, are
provided for only upto 50% of the outstanding balances, irrespective of the number
of years in which the accounts remain in this category. Given the delay in recovery
of dues through the legal process, the current provisioning norms followed in India
do not entirely cover the latest losses inherent in such advances. The existing
provisioning requirements would have to be enhanced in line with the international
best practices.
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The Proposed Based Capital Accord
The Based Committee recognizes that the New Accord is more extensive and
complex thatn the 1988 Acord. The new Accord is more risk sensitive and it
contains a range of new option for measuring both credit and operational risks.
The New Accord is likely to be finalized next year and would be
implemented in member jurisdictions in 2006.
The adoption of the New Based Capital Adequacy Framework, relating to
assigning capital on a consolidated basis, use of external credit assessment as a
means for assigning preferential risk weights, sophisticated techniques for
estimating economies capital, etc., may need suitable modifications to adequately
reflect the institutional realities and macro-economic factors specific to emerging
market economies including India. Recognizing these implications, RBI has been
impressing on the Basel Committee the some of these proposals may require
ossification/flexibility to fully reflect the concerns of the emerging market
economics. Not withstanding the above, it is imperative that the banks in India
study the proposed Capital adequacy framework identify their transition path and
initiate steps to be fully prepared for adoption of the new standards when
introduced.
Risk Management Systems
In view of the diverse financial and on financial risk confronted by banks in
the wake of the financial sector deregulation, the risks management practices of
banks have to be upgraded by adopting sophisticated techniques like VAR, Duration
and Simulation and adopting internal model-based approaches as also credit risk
modeling techniques, at least by top banks. Banks need to evolve an integrated risk
management system depending on their size, complexity and the risk appetite. As a
step towards enhancing and fine tuning the existing risk management practices in
banks RBI has recently issued the draft guidance notes on credit and market risks.
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Risk Based Supervision
Financial sector supervision is expected to become increasingly risk oriented
and concerned more with validation of system. Bank managements will have to
develop internal capital assessment processes in accordance with their risk profile
and control environment. These internal processes would then be subject to review
and supervisory management and the adequacy of risk containment. The transaction
based internal/external audit would have to give way to risk based audit system.
As banks are computerizing more areas of their opertions, they would be
required to introduce information system audit also.
Technology Issues
The delivery of products and services need extensive use of information
technology necessitating high magnitude of investment. However, with a view to
enhance the quality of customer service as also to enhance the quality of control,
one of the prime thrust areas for the future would be completion of branch
computerization and networking of banks. This would also necessitate putting in
place of appropriate legal and security systems.
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COMPANY
PROFILEAND
PRODUCT
PROFILE
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COMPANY PROFILE: -
Profile of ANATHAPUR DISTRICT OF OPERATIVE CENTRAL
BANK
Ananthapur District Co-Operative central Bank was established on 22 nd April
1919 under Indian government Co-Operative societies Act 1904 with its head
office at Ananthapur.
The bank is established with the objectives of developing banking habits in
the people living in the remote villages and to provide them credit facilities with a
view to strengthen the rural economy by developing the economic condition of
agricultures laborers rural artisans and small and marginal farmers. The bank isdedicated to continue development of the area and to provide improved banking
facilities to meet the area and to provide improved banking facilities to meet the
ever increasing credits needs of the people.
Branch Network: -
The Bank is operating with total number of branches 18 and 212 prmaryagricultural co-operative societies and 563 other tie-up Agricultural co-operative
societies.
Share Capital: -
The share capital of the Bank is 70 lakhs which is issued and fully subscribed
by Individuals B class 2 lacks and societies and other central banks A class 68lakhs respectively.
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Deposits: -
The aggregate deposits at the close of financial year (2003) stood as
Rs.164.61 crores registering growth of 12.38% over the level of previous year. The
break up of deposits for the conservative 63 years are given in the following table.
Positions As On (Amt in Tousands)
Particulars 31-03-2003 31-03-2004 31-03-2005A/c Amt A/c Amt A/c Amt
CD Deposit
Saving Deposit
Time Deposit
3456
24569
425943
202442
331353
10456
4542
27493
486949
290926
636259
537520
4976
29981
495634
392987
808062
445068Total Deposit 453995 544251 518984 1464705 530591 1646117
Central Bank of India, zonal office under above circular has informed that
from 31-03-05 the interest rate structure of domestic team deposit would be:
Maturity Period Existing Interest rate
w.e.f 31-03-05
Revised Interest rate
w.e.f 31-03-0546days-90days
91days-179days180days-1year
1year-3years
over 3 years
4.50
5.505.75
6
6.25
6.50
5
66.25
6.50
7
7.50
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DEPOSITS
Keeping in mind our divers clients and their varied needs, we have devised
flexible deposit schemes. The deposit schemes correspond to the clients time frame
requirements of cash, convenience and life style.
1. Current Account
2. Savings Scheme
3. Savings Bank Account
4. Term Deposits
Fixed Deposit Scheme: -
With a minimum deposit amount of Rs.250/- money can be deposited for any
period ranging from 15 days to 10 years.
Recurring Deposit Scheme: -
You can choose any deposit period ranging from 10 to 120 months, incompleted 3 months under variable monthly installments you have the option to
choose a core monthly installment and remit any amount subject to this minimum
with a maximum 10 times of the core monthly installment.
Capital Gains Account Scheme: -
Under this scheme an income tax assessor can avail of the benefit of exemption from capital gains if the amount of capital gains or the net consideration
is deposited in any branch on or before the due dates of their filling return of
income.
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LOANS & ANDVANCES
Over the years, as part of our quest in partnering the individuals progress, we
have introduced many schemes that cater the people of all ages right from student
loans, and loans for retired persons among other.
ADCC BANK HOME LOAN: -
Individuals can avail of housing loans for the construction of hous as well as
for repair of the existing house.
EDUCATIONAL LOAN: -
A student of Indian Nationality is eligible to apply for the loan provided
he/she has secured admission to the institutions.
JEWEL LOAN: -
Individuals of all income groups are given loans depending upon the value of the gold as assessed periodically. Loans are for a period of 1 year.
ADCC BANK RENT SCHEME: -
Owners of the property wo have let out the same to reputed companies,
commercial/industrial, software, Banks, reputed institutions, etc. this loan is
available to the owners of the property only.
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1. ADCC LOAN PRODUCT OF CULTIVATION OF
GRAPE SEEDLESS PER ACRE: -
Purpose of loan is
1. Cultivation of Grape Seedless.
Eligibility of borrowers
Those peoples who are having their own lands and surety of 2 or 3 persons
who are also having some property of their own.
Interest Rate: -
1. Amount of Loan upto 20,000 - 13.0%
2. Amount of Loan above 20,000/ to 50,000 14.5%
3. Amount of Loan above 50,000 to 1,00,000 15.5%
4. Amount of Loan above 1,00,000 to 2,00,000 16.0%
5. Amount of Loan above 2,00,000 17.5%
Appraisal Fee: -
5% of loan sanctioned at the time of 1 st disbursement of the loan.
Security: -
1. Equitable mort age of the plots building of that purchased out of the
bank loan.
2. Two guarantors having substantial worth
3. Authority from the employer of the employee to deduct the loan
installment from the monthly salary and to remit the same direction to
the branch towards loan A/c of the borrower.
Repayment Period: -
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Six years inclusive of two years grace.
Cost of Cultivation of Grape Seedless per Acre: -
Sl.No Particulars 1 year 2 year Total
A MATERIAL1. Planning material including
10% casualty replacement in
second year
3632 360 3985
2. Manure and fertilizer 16500 13700 302003. Irrigation 1800 1800 36004. Plant Protection 15000 1500 300005. Drip 0 0 06. Pandal 47500 - 47500
7. Growth Regulators 2500 - 25008. Bore well Pump set 0 0 09. Fencning 500 - 500
Sub Total A 87425 30860 118285B LABOUR
1. Land Prearation 1000 - 1000Digging pits, filling and
planting @ Rs.12/plant
8700 870 9570
Plant protection 800 800 1600Inter culture 400 400 800Manuring 400 400 800Harvesting - 800 800Pruning 1000 1000 2000Thinning 1000 1000 2000Watch and ward 1000 1000 2000Sub Total B 14300 6270 20570
C Contigency @ 5% 5086 1857 6943Grand Total 106811 38987 145800Say 106800 39000 145800
Total Unit Cost(Capitalised upto 2 years)
Maintenance Cost: -
From third year onwards 37,700
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2. ADCC LOAN PRODUCTS FOR SERICULTURE
Purpose of Loan: -
Establishment of one acre mulberry plantation.
Repayment Period: -
Seven years inclusive of one year grace.
A Cost of Establishment of one acre mulberry plantationSl.No Particulars Amount
1.2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Land preparationPlanting materials
Cost of planting
Manures
Fertilizers
Intercultural operations
Irrigation
Labour cost for silk worm rearing
Shed maintenance
Chemicals
Cost of DFL 250@ Rs.350 per 100DBI
1000500
400
1500
2000
1000
500
2800
500
500
750Total 11450
Total (rounded off) 11500
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B Cost of rearing sed (pucca)
Plinth area of shed (Sq Ft) 30x15M
Cost of contruction/sf t
450
120Total 540
C Cost of rearing equipment
Sl.No Particulars Quantity Cost Total Cost1.
2.
3.
Reanng Trays
Feeding Stands
Chopping Knives
a. Small
b. Medium
c. Big
MatsChandrikas on hire basis
Protection net
100
4
1
1
1
60
1
30
300
50
200
500
8
400
3000
1200
0
50
200
500
200480
400Total Cost 6030
Total Unit Cost 71500D Recurring cost of mulberry cultivation for second and
subsequent years
9500`
E Recurring cost for rearing of cocoons for second and
subsequent years
9700
F Repayment Period
Seven years inclusive of one year grace
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3. ADCC LOAN PRODUCTS FOR DAIRY
Purpose of Loan: -
1. For cross bred cows
2. Graded Murrah Buffalos
3. Female Cross bred Calf rearing
4. GMB Calf rearing
Repayment Period: -
For cross bred cows and Graded Murrah Buffalos it is six years
For female cross bred calf rearing it is three years with two years grace.
For GMB calf rearing it is four years with three years grace.
Sl.No Item of Expenditure Cost in Rs.A Cross bred Cows1. Two CBCs yielding 6 litres milk per daya.
b.
c.
Cost of two CBCs
Insurance premium for first normal
Transport of animals
18000
450
400Total cost 18900
d. Repayment Period Six YrsCost of 90 Kg conc feed Rs.450/- could also be financed
2. Two CBCs yielding 8 litres milk per daya. Cost of two CBCs 24000
b. Insurance premium for first animal 600c. Transport of animals 400
Total cost 25000d. Repayment period Six years
Cost of 110 Kg conc feed Rs.550/- could also be financed
B. GRADED MURRAH BUFFALLOES (GMBs)1. Two GMBs yielding 6 litres milk per daya. Cost of two GMBs 24000
b. Insurance premium for first animal 600c. Transport of animals 400
Total Cost 25000d. Repaying Period Six years
Cost of 120 KG conc Feed Rs.600/- could also be financed
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2. Two GMBs yielding 8 litres milk per daya. Cost of two GMBs 32000
b.