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SVKMs Narsee Monjee Institute of Management Studies

Mukesh Patel School of Technology Management and


Engineering
INTERIM REPORT ON
Assessment of Working Capital Management
By
HIMANSHU CHAURASIA
Roll Number: M-066
Number:71209120007
Faculty Mentor
Mrs. Malti Hoskte
Industry Mentor
Mr. Piyush Bardhan

Introduction:
Bank of India was founded on 7th September, 1906 by a group of eminent
businessmen from Mumbai. The Bank was under private ownership and control till July
1969 when it was nationalized along with 13 other banks.
Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50
employees, the Bank has made a rapid growth over the years and blossomed into a
mighty institution with a strong national presence and sizable international operations.
In business volume, the Bank occupies a premier position among the nationalized
banks.
The Bank has 4963 branches in India spread over all states/ union territories including
specialized branches. These branches are controlled through 54 Zonal Offices. There
are 60 branches/ offices and 5 Subsidiaries and 1 joint venture abroad.

Work Profile of Credit Department of Bank of India:


Lending money is one of the main functions of a commercial bank. In the lending
process, selection of borrower is the most crucial and vital job for a banker. The credit
department collects and files every available bit of information concerning people or
firms that borrow money. This material consists of financial reports, press clippings,
personal interviews, and statements of condition and, in fact, every item that has even
a remote bearing upon the standing of borrowers.
It requires technical training of a high order properly to classify and analyze this data.
Before a customer enjoys credit facilities it is important that the applicant should
qualify for five Cs. The five Cs are: Character Intention to pay back the loan, Capacity
Borrowers competence in terms of utilizing the fund profitably and generate income,
Capital Financial strength to cover the risk, Conditions -General business condition
between two parties, Collateral Implies additional securities.
In addition, objectives of the credit department are managing credit exposure of the
bank, maintaining credit risk, compliance of Central Bank Ltd, recovering or collecting
dues of retail loans or advances. If all this information is satisfactory, the capital factor
is studied in the borrower's financial statement of condition, which balance sheet

should be taken off at regular intervals. It must show a sufficiently "liquid" position to
satisfy the banker that his loan can and will be repaid when due. To show this, there
must be an ample margin of quick assets (those readily convertible into cash) over
current liabilities to enable the borrower, despite any natural shrinkage of values in
liquidation, readily to meet his obligations..

Project Description:
Working capital management involves the relationship between a firms short-term
assets and its short-term liabilities. The goal of working capital management is to ensure
that a firm is able to continue its operation and that it has sufficient ability to satisfy
both maturing short-term debt and upcoming operational expenses. The management of
working capital involves managing inventories, accounts receivable and payable, and
cash.
The Working Capital comprises of Amount for raw material of various kind;
Amount of stock in progress;
Amount for all finish goods in store and in transit;
Amount for receivables or sundry debtors;
Other routine expenses;
Means to finance the Working Capital is:
1.
2.
3.

Credit available on purchase;


Short term borrowing;
Surplus of long term funds over the long term uses(Net working capital)

Factors which determines working capital:


1.
2.
3.
4.
5.

Policies for production.


Manufacturing process.
Credit policy of the unit.
Pace of turnover.
Seasonability.

Any enterprise whether industrial, trading or other acquires two types of assets to run its
business as has already been emphasised time and again. It requires fixed assets which
are necessary for carrying on the production/business such as land and buildings, plant
and machinery, furniture and fixtures etc. For a going concern these assets are of
permanent nature and are not to be sold. The other types of assets required for day to day
working of a unit are known as current assets which are floating in nature and keep
changing during the course of business. It is these 'current assets' which are generally
referred to as 'working capital'. We are by now already aware of the short-term nature of
these assets which are classified as current assets. It may be noted here that there may not
be any fixed ratio between the fixed assets and floating assets for different projects as
their requirement would differ depending upon the nature of project. Big industrial
projects may require substantial investment in fixed assets and also large investment for
working capital. The trading units may not require heavy investment in fixed assets while
they may be carrying huge stocks in trade. The service units may hardly require any
working capital and all investment may be blocked in creation of fixed assets.

A set financing pattern is evolved to meet the requirement of a unit for acquisition of
fixed assets and current assets. Fixed assets are to be financed by owned funds and
long-term liabilities raised by a unit while current assets are partly financed by long-term
liabilities and partly by current liabilities and other short-term loans arranged by the unit
from the bank. The balance sheet of a unit under such dispensation may be represented as
in next page.
The total current assets with the firm may be taken as gross working capital whereas the
net working capital with the unit may be calculated as under:
Net Working Capital
(NWC)

= Current Assets
(GWC)

Current Liabilities
(including bank borrowings)

This net working capital is also sometimes referred to as 'liquid surplus' with the firm and
has been margin available for working capital requirements of the unit. Financing of
working capital has been the exclusive domain of commercial banks while they also grant
term loans for creation of fixed assets either on their own or in consortium with State
level/All India financial institutions. The financial institutions are also now considering
sanction of working capital loans.
The current assets in the example given in the earlier paragraph are financed asunder:
Current Assets =
Current liabilities + Working capital limits from banks + Margin
from long-term liabilities

CASH

Debtors

Overheads

Inventory

Sales

Working Capital Management in Banks


After company proposes to the bank for finance through working capital, the bank asks
for its financial statement i.e. Balance sheet and Profit and Loss A/C for analysis.
Financial analysis is helpful in assessing corporate excellence, judging credit
worthiness, forecasting bond ratings, predicating bankruptcy and assessing market risk.
It comprises of ratio analysis. Financial Ratio Analysis is study of ratio between various
items in financial statement.
Numbers of ratios are there but following ratios are to be studied in working capital
finance:
I. Capitalization Ratio/Leverage Ratio:
1.

Debt-Equity Ratio: Debt/Equity

The main purpose of this ratio is to ascertain the relative stakes of the creditors i.e. the
owners of an enterprise.
Favorable Ratio for
Term liabilities to net Worth=2:1
Total Liability to Net Worth=3:1

For the sake of taxation laws, it is cheaper to raise money by way of loans etc., instead
of raising money by way of equity.
2.
Interest Coverage Ratio: EBIT/Interest
This ratio is widely used by lenders to assess a firms debt capacity. It is a major
determinant of bond rating. A high Interest Coverage ratio means that the firm can
easily meet its interest burden even if earnings before interest and taxes suffer a
considerable decline.
II. Liquidity Ratio:
Its objective is to find out whether the company will have sufficient cash and other
resources to meet the liabilities as and when they arise.
The two ratios generally computed. They are;
1)

Current Ratio: Current Assets /Current Liabilities

This is an important liquidity ratio. It expresses the relationship between Current assets
and Current Liabilities. If the ratio is 1 or more than 1, it would mean that value of
current assets exceeds the Current Liabilities.

The acceptable minimum Current Ratio Under India Conditions=1.33;


If Current Ratio <1.33 then companys liquidity is in danger;
If current Ratio <1 then company would be on the verge of sickness.

III. Profitability ratio:


1)

Net Profit Margin: Net Profit/Sales

It show the earnings left to the shareholders as a % of Net sales. It measures the overall
efficiency of the firm.
IV. Inventory + Receivable/Sales

It expresses the relationship of inventory + Receivables to sales.


The analysis of balance sheet and Profit and Loss A/C is done before actually going in
to the study i.e. The Balance Sheet and Profit And Loss A/C is studied to have a rough
idea about the companys position regarding whether it is making profit or not, whether
the debt-Equity Ratio, Current ratio, Profitability Ratio are favorable or not. If all this
assessment leads to positive way then only bank will proceed further and can go for
deep analysis for lending. Otherwise it will reject the proposal at primary stage only.
Example:

COMMENTS IN BRIEF ON FINANCIAL POSITION


Company has submitted CMA data based on audited balance sheet as on 31.03.15
And Estimate & projection as at 31.03.16 and 31.03.17.Our comments are based on the
same.
PAID UP CAPITAL/TNW: The company is having paid up capital of Rs 23.16 lac
since 31.03.14 which is maintains and projected at same level. The company has
posted TNW of Rs 72.97lacs as on 31.03.14 and increased to Rs.93.14 lacs as on
31.03.15. TNW has estimated at Rs 154.10 lac and projected at 239.16lacs for the year
2015-16 and 2016-17 respectively .The trend of increasing TNW is due to retention of
profit and surplus.
NET SALES: The company has posted sales of Rs 897.57 lacs during Financial year
2013-14 which increased to Rs1022.50 lacs during FY 2014-15.( increase of 13.9%of
the previous financial year.) During the year 2015-16 the company has estimated sales
of Rs.1217.41 lacs.i.e19.06% increase .Keeping in the view of the estimated sales of
Rs1377.69 lacs projected sales of Rs.1598.12 lacs (considering 13.13% growth) as at
31.03.17 appears to be reasonable % achievable.
OTHER INCOME: Other income due to interest received on tax refund and other
interest received on VAR refund around Rs.0.17lac as FY 2014-15 and as per
provisional it is at Rs1.18lac.Other income remain stagnant during estimate and
projected CMA of the firm.
PROFITS/PROFITABILITY: Profitability of the firm of Rs.0.24lac at FY2013-14
and increased to Rs.1.70lacs at FY2014-15.As per provisional figure the profitability
also increased to Rs.5.01lacs during FY2015-16.The same trend of increasing follow in
the estimate and projection year of the firm is Rs6.12 lac and Rs.6.22lac during the
FY2016-17 and FY2017-18 respectively.
CURRENT RATIO: Current ratio is posted at 1.11 as on 31.03.14 & 1.17 as on
31.03.15 and slightly increased to 1.37 as on 31.03.16.Considering finance given to
SME unit, CR at current level may be acceptable.CR is estimated at 1.54 as on FY
2016-17 and projected at 1.78 as on FY 2017-18.Hence acceptable .
DEBT EQUITY RATIO: DER is 6.38 as at 31.03.14 and decreased to 4.83 as at
31.03.15 .As per provisional the ratio also declined to 3.19 as at 31.03.16.The same
trend of decline is follow during the estimated FY 2016-17 is 2.01 and Projection
FY2017-18 is 1.39.

Outcome from the Project


In financial account in,a balance sheet or statement of financial position is a summary of
the financial balance of an individual or organization, whether its a sole proprietorship
business partnership ,a corporation, Private limited company or other organization such
Government or not for profit entity .Assets ,liabilities and ownership equity are listed as
specific date, such as the end of its financial year.
A balance sheet is often described as a "snapshot of a company's financial
condition".[1] Of the four basic financial statement, the balance sheet is the only
statement which applies to a single point in time of a business' calendar year.

Completed Tasks:
25th April to 30nd May -2016-Introduction of Banking
2nd May to 7th May 2016-Gained Basic Knowledge about banking sector
9th May to 14th May 2016-Analysis of Balance Sheet
15th May to 21th May 2016- Analysis of Balance Sheet
23rd May to 28th May 2016-Reviewing Working Capital Limit
30th May to 4th June 2016- Reviewing Working Capital Limit
6th June to 13th June 2016-Reviewing working Capital Limit
Remaining Task
13th June to 20th June 2016-Making Proposal
20th June to 24th June 2016-Making Proposal

Refrence:

http://www.academia.edu/9871184/3.3_Functions_of_the_Credit_Department_of_Commercial_
Bank
http://www.bankofindia.co.in/english/history3.aspx
http://www.rushabhinfosoft.com/webpages/BHTML/CH-15.HTM
https://en.wikipedia.org/wiki/Balance_sheet
Guidance from the Book of Working Capital Management of the Bank.

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