Beruflich Dokumente
Kultur Dokumente
XYZ
2/10/2013
JAMMU AND KASHMIR BANK
SUBMITTED BY : Mr.
CLASS :
ROLL NO :
AREA OF RESEARCH : FINANCE
SUBMITTED TO :
2
CERTIFICATE
TO WHOM IT MAY CONCERN
This is to certify that the Project Report titled “ASSESMENT OF WORKING
CAPITAL” for (JAMMU AND KASHMIR BANK LIMITED) is a bona fide work
carried out by Mr. pursuing MBA in ISLAMIC UNIVERSITY OF SCIENCE
AND TECHNOLOGY for fulfillment of Post Graduation Program in Business
Administration. His work and conduct has remained excellent. The student
has submitted the report on time.
H.O.D Guide
() (Mr. Aijaz-Ul-Haq Dawarki)
Place: Srinagar
Date:
ACKNOWLEDGEMENT
3
First of all I would like to express my gratitude to almighty God, who
bestowed his blessing on me and gave me courage and right type of
environment for completion of my project.
I am deeply indebted to my supervisor/project guide Mr. Aijaz-ul-Haq
Dawarki Associate Executive J&K Bank zonal office Kashmir (central)
having permitted me to carry out this project work. I wish to express my
deep sense of gratitude to him for his guidance and useful suggestions,
which helped me all the time in completing the project work in time.
I would like to thank Mr. Fayaz Ahmed Zargar (Assistant Vice President
Credit) for their great support, guidance, concern and particularly the
hospitability which I enjoyed very much during the whole time I have
been with the J&K Bank.
CONTENTS
4
TOPIC Page Number
DECLARATION
5
I Raja Saheem Hyder declare that I myself worked on the topic
ASSESMENT OF WORKING CAPITAL under J&K Bank zonal office
Kashmir (central).The data and the information is collected by myself
and no third party has helped me in doing so. I myself have conducted all
the surverys and research analysis.
Place: Srinagar
Date:
J&K Bank operates on the principle of 'socially empowering banking' and seeks to
deliver innovative financial solutions for household, small and medium enterprises.
The Bank , incorporated in 1938, and is listed on the NSE and the BSE. It has a track
record of uninterrupted profits and dividends for four decades. The J&K Bank is
rated P1+, indicating the highest degree of safety by Standard & Poor and CRISI
VISSION
MISSION
Our mission is two-fold: To provide the people of J&K international quality financial
service and solutions and to be a super-specialist bank in the rest of the country.
The two together will make us the most profitable Bank in the country.
HISTORY:
7
Traditional money lenders till 1920-30 performed entire banking in the state of
Jammu and Kashmir at exorbitant interest rates. At the same time some banks
functional but at a very limited scale, such as Punjab national bank, grind lays bank
and imperial bank of india.The role of these banks was reduced to the acceptance
of the deposits, as they could not grant loans and advances to the people of the
state owing to the statutory limitations. Under this scenario banks could not
ameliorate the financial and the social position of people of the state. To overcome
this critical situation then the maharaja of this state convinced an idea of setting up
of a state bank in the state. After prolonged exercises and deliberations of the
assignment for establishment of “Jammu and Kashmir Bank Ltd”was given to the
late sir Sorabji N Pochkkanwala, then managing director of the central bank of
India. Mr. S N Pochkkhanwala formulated a scheme on 24:09:1930,suggesting
establishment of a semi state bank with participation in capital by state and public
under the control of state government. Thus the bank was formally incorporated on
1st of October 1938 and commenced business from 4th July 1939 at its registered
office, residency road Srinagar Kashmir.
In its formative years, the bank had to encounter several serious problems,
particularly around the time of independence, when out of it total 10 branches, two
branches of Muzafarabad and mirpure fell to the other side of the line of control (
now Pakistan administrated Kashmir ) along with cash and other assets in
1947.However state government came to its rescue with the assistance Rs 6.00
lacks to meet the claim. The bank steadfastly overcome its difficulties and kept
growing. Following the extensions of central laws to the state of Jammu & Kashmir,
the bank was defined as a government company as per the provisions of the Indian
companies Act 1956. The bank had its first full time chairman in 1971, following the
social control measure in banks. The year in 1971 was the turning point for the
bank on conferment of scheduled bank status and witnessed remarkable progress
in all the vital fields of operations. Reserve Bank of India declared the bank as “A”
class bank in 1976. The forms of security either by way of primary security or
collateral security is given here under:-
1. Hypothecation:
Under hypothecation, the borrower is provided with working capital finance by the
bank against the security of movable property to the bank, generally inventories.
8
The borrower does not transfer the property to the bank, it remains in the
possession of the borrower, and however, the title of the property is transferred in
the name of bank or lending institutions. Thus hypothecation is a charge against
property for an amount of debt where neither ownership nor possession is passed
to the creditor. Banks generally grant under hypothecation only to first class
customers with highest integrity. Banks do not usually grant hypothecation facility
to new customers.
2. Pledge:
Under this agreement, the borrower is required to transfer the physical possession
of the property offered as security to bank to obtain credit. The bank has the right
of lien and can retain possession of the goods pledged unless payment of the
principle, interest and any other expenses is obtained from the borrower. In case of
default, the bank may either
a) Sue the borrower for the amount due or
b) Sue for the sale of goods pledged.
3. Mortgage:
Mortgage is the transfer of the legal or equitable interest in a specific immovable
property for security against the debt. In case of mortgage, the possession of the
property may remain with the borrower, however, the lender get the full legal title.
The transferor of interest (borrower) is called mortgagor, the transferee is called
the mortgagee and the instrument of the transfer is called the mortgage deed.
4. Banking Facilities:
Financing is the act of providing funds for business activities, making purchases or
investing. Financial institutions and banks are in the business of financing as they
provide capital to business, consumers and investors to help them achieve their
respective goals. There are two ways of providing funds i.e. financing to the
borrowers used by banks or financial institutions as given below.
A.Fundbased Financing:
9
The fund based financing provided by banks involve immediate outlay of funds,
which must be provided by before hands. This facility includes term loans facilities,
cash credit limit, overdraft etc.
1.Term loans:
A term loan is usually a single loan for a stated period of time or a series of loans on
specified dates. They are used for specific purposes such as acquiring machinery,
renovating a building, refinancing debt, entering into new business and so on and
so forth. Term loans are of maturity of 1 year and above and are repaid on an
amortized basis.
Term loans are mostly given to the borrowers who propose to set uo a unit ( project
) for example a manufacturing unit, or it may be to set up a power plant or
constructions of complexes, buildings, roads etc.
The maturity of term loans called tenor of the loan comprises of following
components:
a. Construction period:
Time taken for completion of construction activity by the unit holder.
B.Moratorium period:
Holiday period given to repay the term loan.
C.Repayment period:
Period in which the term loan is repaid.
2. Cash Credit:
Cash credit facility is the most popular method of bank finance to the borrowers
adopted by the lenders. Under cash credit facility, the borrower is allowed to
withdraw funds from the bank up to the sanctioned credit limit. He is not required to
10
borrow the entire credit sanctioned once, rather he can withdraw periodically to
the extent of his requirements and repay by depositing surplus funds in his cash
credit account.
3. Over draft:
Under the overdraft facility, the borrower is allowed to withdraw funds in excess of
balance in his current account up to a certain specified limit during a stipulated
period. Overdrawn amount is repaid on demand. Over draft generally continue for a
long period by annual renewals of the limits.
Letter of credit:
Suppliers particularly the foreign suppliers insist that the buyer should ensure that
his bank will make the payment if he fails to honor his obligations. This is ensured
through a letter of credit (L/C) arrangement. A bank opens a L/C in favour of a
customer to facilitate his purchase of goods. If the customer does not pay to the
supplier within the credit period, the bank makes the payment under the L/C
arrangement. Bank charges the customer for opening the L/C. Banks extends such
facility to financially sound customers.
Line Of Credit
The line of credit is the maximum amount that can be borrowed under the term of
loan. The loans are made for the period of one year or less; and they should be used
to finance the seasonal increase in inventory and accounts receivables. When the
inventory is sold, receivables are collected and the funds are used to reduce the
loan. The loans are usually payable on demand by the banks or within ninety days.
11
The Jammu and Kashmir Bank Limited
Type Private
Total assets 60,269.22 crore (US $10.97 billion) as on March 31, 2012
12
FINANCIALSTATEMENTS
Financial statement of a company consists of (a) a balance sheet disclosing the
financial position as at the end of the financial year, and (b) Profit & loss Account
(or an income and expenditure Account in the case of a company not carrying on
business for profit) disclosing the results of the operations of the results of the
operations of the company for the period covered by the financial year.
LEGAL REQUIREMENTS:
Accrual Basis & Double Entry System of Accounting [sec.209]
Sec.209 as amended by the Companies (Amendment) Act 1988 requires all the
companies to maintain the books of account on accrual basis and according to the
double entry system of accounting.
Profit & Loss Account to balance-sheet [Sec.216]
The profit & Loss Account must be annexed to the balance sheet.
Reports to be attached to Balance Sheet [Sec.216 & Sec.217]
The following two reports must be attached to the Balance sheet.
(a) Auditor’s Report u/s 216
(b) Director’s Report u/s 217.
13
Balance Sheet of Jammu and Kashmir Bank ------------------- in Rs. Cr. -------------------
Mar '12 Mar '11 Mar '10 Mar '09 Mar '08
Assets
Cash & Balances with RBI 2,783.65 2,974.96 2,744.73 2,302.95 3,219.97
Balance with Banks, Money at Call 1,670.21 573.85 1,869.51 2,971.81 1,217.27
Advances 33,077.42 26,193.64 23,057.23 20,930.41 18,882.61
Investments 21,624.32 19,695.77 13,956.25 10,736.33 8,757.66
Gross Block 855.52 788.10 561.35 517.90 471.32
Accumulated Depreciation 440.42 396.47 358.54 321.61 289.10
Net Block 415.10 391.63 202.81 196.29 182.22
Capital Work In Progress 5.18 2.13 1.32 3.13 9.79
Other Assets 693.34 676.17 714.95 552.34 486.47
Total Assets 60,269.22 50,508.15 42,546.80 37,693.26 32,755.99
14
15
Consolidated Balance Sheet of
------------------- in Rs. Cr. -------------------
Jammu and Kashmir Bank
Mar '12 Mar '11 Mar '10 Mar '09 Mar '08
12 mths 12 mths 12 mths 12 mths 12 mths
Capital and Liabilities:
Total Share Capital 48.49 48.49 48.49 48.49 48.49
Equity Share Capital 48.49 48.49 48.49 48.49 48.49
Share Application Money 0.00 0.00 0.00 0.00 28.10
Preference Share Capital 0.00 0.00 0.00 0.00 0.00
Init. Contribution Settler 0.00 0.00 0.00 0.00 0.00
Preference Share
0.00 0.00 0.00 0.00 0.00
Application Money
Employee Stock Opiton 0.00 0.00 0.00 0.00 0.00
Reserves 4,044.80 3,430.19 2,962.13 2,574.36 2,232.34
Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Net Worth 4,093.29 3,478.68 3,010.62 2,622.85 2,308.93
Deposits 53,341.76 44,675.94 37,231.89 32,999.10 28,593.26
Borrowings 1,240.96 1,104.65 1,100.21 996.63 751.79
Total Debt 54,582.72 45,780.59 38,332.10 33,995.73 29,345.05
Minority Interest 0.00 0.00 0.00 0.00 0.00
Policy Holders Funds 0.00 0.00 0.00 0.00 0.00
Group Share in Joint
0.00 0.00 0.00 0.00 0.00
Venture
Other Liabilities &
1,587.77 1,248.88 1,199.06 1,069.68 1,102.02
Provisions
Total Liabilities 60,263.78 50,508.15 42,541.78 37,688.26 32,756.00
Mar '12 Mar '11 Mar '10 Mar '09 Mar '08
12 mths 12 mths 12 mths 12 mths 12 mths
Assets
Cash & Balances with RBI 2,783.65 2,974.96 2,744.73 2,302.95 3,219.97
Balance with Banks, Money
1,670.22 573.85 1,869.51 2,971.81 1,217.27
at Call
16
Advances 33,077.42 26,193.64 23,057.23 20,930.41 18,882.61
Investments 21,619.32 19,695.77 13,951.25 10,731.33 8,757.66
Gross Block 855.52 788.10 561.35 517.90 471.32
Accumulated Depreciation 440.42 396.47 358.54 321.61 289.10
Net Block 415.10 391.63 202.81 196.29 182.22
Capital Work In Progress 5.18 2.13 1.32 3.13 9.79
Other Assets 669.22 654.91 704.03 542.64 480.03
Minority Interest 0.00 0.00 0.00 0.00 0.00
Group Share in Joint
0.00 0.00 0.00 0.00 0.00
Venture
Total Assets 60,240.11 50,486.89 42,530.88 37,678.56 32,749.55
17
RATIO ANALYSIS
Ratio Analysis is a very important tool of financial analysis. It is the process of
establishing the significant relationship between the items of financial statements
to provide meaningful understanding of the performance and financial position of a
firm. Ratios are classified as under
(1) Liquidity Ratios
(2) Activity Ratios
(3) Leverage Ratios
(4) Profitability Ratios
Financial ratio analysis is a useful tool for users of financial statement. It has
following advantages:
Advantages
Limitations
Despite usefulness, financial ratio analysis has some disadvantages. Some key
demerits of financial ratio analysis are:
1. Different companies operate in different industries each having different
environmental conditions such as regulation, market structure, etc. Such factors
are so significant that a comparison of two companies from different industries
might be misleading.
2. Financial accounting information is affected by estimates and assumptions.
Accounting standards allow different accounting policies, which impairs
comparability and hence ratio analysis is less useful in such situations.
3. Ratio analysis explains relationships between past information while users are
more concerned about current and future information.
18
Bench mark of key financial ratios in J&K bank:
Financial ratios are the only tools and not an end in credit appraisal process. They
are maens to an end and the only pass guiding signals. Analysis of a combination of
critical financial ratios can help in proper decision making. They are also practical
constraints in evolving industry wise benchmarks for key financial indicators.
Some important ratios are used during analysis of the financial statement by the
banks to ascertain the credit worthiness of the borrowers are described as under:
LIQUIDITY RATIOS:
These ratios are also called as working capital ratios or short term solvency ratio.
As enterprise must have an adequate working capital to run its day to day
operations. The important liquidity ratios are:
Quick ratio:
This ratio is also called as acid test ratio or liquidity ratio. This ratio is ascertained
by comparing the liquidity assets (i.e. assets which are immediately convertible into
cash without much loss) to CL. It is calculated as under.
Leverage Ratio:
A firm should have both strong short term as well as long term financial positions.
To judge the long term financial position of the firm, financial leverage ratios are
calculated
Following ratios are commonly used to analyze leverage.
It is relaxed upon 3:1 in case of SME and large industries sector up to 4:1 in case
infrastructure projects.
TOL/TNW:
This is also called gearing ratio. This ratio indicates leverage to the owned funds of
the firm. Higher gearing ratio indicates that the firm is more leveraged to the
external sources of funds and in turn will expose it to high debt cost.
20
Interest Coverage Ratio:
It is used to test the firm’s debt servicing capacity. A high interest coverage ratio
means that the firm can easily meet its interest if earnings before interest and taxes
suffer considerable decline. It is calculated as
Profitability Ratios:
Profitability is the indication of the efficiency with which the operations of the
business are carried on. Bankers, financial institutions and other creditors look at
profitability ratios as an indicator whether or not the sustainability more than it
pays interest for the use of borrowed funds and whether the ultimate repayment of
their debt appears reasonably certain. Owners are interested to know the
profitability as it indicates the return, which they can get on their investment. The
following are the profitability ratios:
21
Gross profit ratio:
Gross profit margin reflects the efficiency with which the management produces
each unit of product. It shows the percentage of the gross profit to sales.It is
calculated as under:
More the gross profit margin more is the efficient production & better is the
operating performance.
Net profit margin shows the percentage of net profit to sales. The ratio reflects the
efficiency of manufacturing, administration, and selling the products.
22
Earning per share Ratio:
In order avoid the confusion on account of the varied meaning of the term capital
employed, the overall profitability can also be judged by calculating earnings per
share with the help of the following formula:
Accounting personnel, who need to know whether the organization will be able
to cover payroll and other immediate expenses
Potential lenders or creditors, who want a clear picture of a company's ability to
repay
Potential investors, who need to judge whether the company is financially sound
Potential employees or contractors, who need to know whether the company will
be able to afford compensation
Definition of Fund
Fund means working capital. If current assets of company is more than current
liability of business, it is called working capital and working capital’s other name is
Fund.
Flow of fund means movement of fund. I take the example of air; we can feel its
movement or flow of air. Same thing is happen with fund, due to the activity of
business fund is transfer from one asset to another assets. If fixed assets are
converted into current asset or fixed liability is converted into current liabilities,
these are the flow of fund. But if current assets are changed with current assets or
current assets are changed into current liabilities, then, there is no flow of fund
because there is no change working capital. Suppose, we get the money from
debtor, this is not flow of fund because, working capital is not changed. Both items
of current assets and when current assets change into current assets, there will
not be change in working capital.
Flow of Fund = Fixed asset changes into current asset or current asset changes
into fixed assets
24
Or
Fixed liability changes into current liability or current liability changes into fixed
liability.
Fund flow statement is a statement which shows the inflow and out flow of funds
between two dates of balance sheet. So, it is known as the statement of changes in
financial position. We all know that balance sheet shows our financial position and
inflow and outflow of fund affects it. So, in company level business, it is very
necessary to prepare fund flow statement to know what the sources are and what
are applications of fund between two dates of balance sheet. Generally, it is
prepare after getting two year balance sheet.
According to Prof. Anthony, “The funds flow statement describes the sources from
which additional funds were derived and the use of which these funds were put.”
Or
Or
25
Main differences between Cash flow and Fund flow statement is given below:
1. Fund flow statement reflects the change in the working capital of a company
while cash flow statement shows the change in the cash position of the company
between two balance sheet dates.
2. Funds flow statement deals with all the components of working capital while cash
flow statement deals with cash and cash equivalents.
4. As cash flow statement is easily understood by any person but funds flow
statement is little bit complex.
There are two concepts of working capital viz. quantitative and qualitative. Some
people also define the two concepts as gross concept and net concept. According
to quantitative concept, the amount of working capital refers to ‘total of current
assets’. Current assets are considered to be gross working capital in this concept.
The excess of current assets over current liabilities is termed as ‘Net working
capital’. In this concept “Net working capital” represents the amount of current
assets which would remain if all current liabilities were paid. Both the concepts of
working capital have their own points of importance. “If the objectives is to
measure the size and extent to which current assets are being used, ‘Gross
concept’ is useful; whereas in evaluating the liquidity position of an undertaking
‘Net concept’ becomes pertinent and preferable.
It is necessary to understand the meaning of current assets and current liabilities
for learning the meaning of working capital, which is explained below.
Current assets – It is rightly observed that “Current assets have a short life span.
These type of assets are engaged in current operation of a business and normally
used for short– term operations of the firm during an accounting period i.e. within
twelve months. The two important characteristics of such assets are, (i) short life
span, and (ii) swift transformation into other form of assets. Cash balance may be
held idle for a week or two, account receivable may have a life span of 30 to 60
days, and inventories may be held for 30 to 100 days.”
Fitzgerald defined current assets as, “cash and other assets which are expected to
be converted in to cash in the ordinary course of business within one year or within
such longer period as constitutes the normal operating cycle of a business.”
Current liabilities – The firm creates a Current Liability towards creditors (sellers)
from whom it has purchased raw materials on credit. This liability is also known as
27
accounts payable and shown in the balance sheet till the payment has been made
to the creditors.
The claims or obligations which are normally expected to mature for payment
within an accounting cycle are known as current liabilities. These can be defined as
“those liabilities where liquidation is reasonably expected to require the use of
existing resources properly classifiable as current assets, or the creation of other
current assets, or the creation of other current liabilities.”
28
Structure of Current Assets and Current Liabilities
At one given time both the current assets and current liabilities exist in the
business. The current assets and current liabilities are flowing round in a business
like an electric current. However, “The working capital plays the same role in the
business as the role of heart in human body. Working capital funds are generated
and these funds are circulated in the business. As and when this circulation stops,
29
the business becomes lifeless. It is because of this reason that the working capital
is known as the circulating capital as it circulates in the business just like blood in
the human body.”
Figure No.1 depicting ‘Working Capital Cycle’ makes it clear that the amount of
cash is obtained mainly from issue of shares, borrowing and operations. Cash
funds are used to purchase fixed assets, raw materials and used to pay to
creditors. The raw materials are processed; wages and overhead expenses are
paid which in result produce finished goods for sale.
The sale of goods may be for cash or credit. In the former case, cash is directly
received while in later case cash is collected from debtors. Funds are also
30
generated from operation and sale of fixed assets. A portion of profit is used for
payment of interest, tax and dividends while remaining is retained in the business.
This cycle continues throughout the life of the business firm.
Conceptual classification
There are two concept of working capital viz., quantitative and qualitative. The
quantitative concept takes into account as the current assets while the qualitative
concept takes into account the excess of current assets over current liabilities.
Deficit of working capital exists where the amount of current liabilities exceeds the
amount of current assets. The above can be summarized as follows:
(i) Gross Working Capital = Total Current Assets
(ii) Net Working Capital = Excess of Current Assets over Current Liabilities
(iii) Working Capital Deficit = Excess of Current Liabilities over Current Assets.
The information of working capital can be collected from Balance Sheet or Profit
and Loss Account; as such the working capital may be classified as follows:
31
i. Cash Working Capital – This is calculated from the information contained in
profit and loss account. This concept of working capital has assumed a great
significance in recent years as it shows the adequacy of cash flow in business.
It is based on ‘Operating Cycle Concept’s which is explained later. Balance
Sheet Working Capital – The data for Balance Sheet Working Capital is
collected from the balance sheet. On this basis the Working Capital can also
be divided in three more types, viz., gross Working Capital, net Working
Capital and Working Capital deficit.
ii. Permanent Working Capital – It is a part of total current assets which is not
changed due to variation in sales. There is always a minimum level of cash,
inventories, and accounts receivables which is always maintained in the
business even if sales are reduced to a minimum. Amount of such investment
32
is called as permanent working capital. “Permanent Working Capital is the
amount of working capital that persists over time regardless of fluctuations in
sales.” This is also called as regular working capital.
33
WORKING CAPITAL FINANCE
OBJECTIVES:
SCOPE
The management of working capital helps us to maintain the working capital at a
satisfactory level by managing the current assets and current liabilities. It also
helps to maintain proper balance between profitability, risk and liquidity of the
business significantly. By managing the working capital, current liabilities are paid
in time. If the firm makes payment to it creditors for raw material in time, it can have
the availability of raw material regularly, which doesn’t t cause any obstacles in
production process. Adequate working capital increases paying capacity of the
business but the excess working capital causes more inventory, increases the
possibility of delay in realization of debts. On the other hand, absence of adequate
working capital leads to decrease in return on investment. The goodwill of the firm
is also adversely affected due to the inability to pay current liabilities in time.
Hence, the management of working capital helps to manage all the factors affecting
the working capital in the most profitable manner.
34
What is Working Capital?
For any activity whether trading or industrial, two types of assets are required-
Fixed assets and current assets.
Fixed assets i.e. land, building, plant and machinery etc. constitute the
infrastructure for industrial activity. These assets remain more or less permanently
in the business and are not meant for sale. Hence, the funds utilized for acquiring
these assets remain permanently locked up and are known as Fixed ( or sunk )
capital. These long term funds come from the owner’s contributions/banks
/directors /relatives and friends / general public.
Current assets i.e. stock in trade, receivables, debtors etc,are the means of
production activity. They go through the production cycle and
are meant for eventual sale. ‘Production cycle’ refers to the
period in which raw materials are processed into finished goods.
Funds required for financing the production cycle and other
current assets are called ‘working capital’. Its main sources are
bank borrowing and sundry creditors.
Workig capital cycle represents the time span within which, the
cash utilized or procuring raw materials, payment of wages and
incurring overheads is reconverted into cash through sales
realization. A schematic diagram of the ‘working capital cycle’ is
given below:
35
Cash
Sales Stock-in-progress
Finished Goods
Long
term Long term Lia.
&Net Funds Worth
NWC (NWC / Margin)
C.L
Bank
Inthe diagram
borrowings
Other current
B.B liabilities
O.C.L
it may be seen that working capital required for financing current assets is
generated from three sources, namely bank borrowings long term funds and other
current liabilities. The net working capital is positive and signifies margin
contribution of long term funds to finance current assets. It may also be possible for
a unit to work with negative working capital, where short-term liabilities including
bank borrowings are used to finance part of long term assets. This may signify
diversion of bank funds for other unapproved uses. It may also not be in the interest
of a unit to have very large NWC or liquid surplus which may indicate a position of
idle funds or lower turnover in working capital. The assessment of working capital
will, therefore, involve the following two aspects.
(a) The level of current assets required to be held by any unit including the
composition of current assets for efficient functioning.
37
(b)The mode of financing these assets.
The Reserve Bank prescribed the forms in 1975 to submit the necessary details
regarding the assessment of working capital under its credit authorization scheme.
The scheme of credit authorization was changed into credit monitoring
arrangement in 1988. The forms used under the credit authorization scheme for
submitting necessary information have also been simplified in 1991 for reporting
the credit sanctioned by banks above the cut-off point to reserve bank under its
scheme of credit monitoring arrangement.
As the traders and merchant exporters who do not have manufacturing activities
are not required to submit the data regarding raw materials, consumable stores,
goods in- process, power and fuel, etc., a separate set of forms has been designed
for traders and merchant exporters.
38
In view of the peculiar nature of leasing and the hire purchase concerns, a separate
set of forms has also designed for them.
In addition to the information/data in the prescribed forms, bank may also call for
additional information required by them depending on the nature of the borrowers’
activities & their financial position. The data is collected from the borrowers in the
following six forms:
Particulars of the existing credit from the entire banking system as also the term
loan facilities availed of from the term lending institutions/banks are furnished in
this form. Maximum & minimum utilization of the limits during the last 12 months
outstanding balances as on a recent date are also given so that a comparison can
be made with the limits now requested & the limits actually utilized during the last
12 months.
estimate & following year’s projections is given, in this form. The details of
current liabilities, term liabilities, net worth, current assets, other non-current
assets, etc. are given in this form as per the classification accepted by banks
39
3. Comparative statement of current assets & current liabilities (Form IV)
This form gives the details of various items of current assets and current
liabilities as per classification accepted by banks. The figures given in this form
should tally with the figures given in the form III where details of all the liabilities
& assets are given. In case of inventory, receivables and sundry creditors; the
holding/levels are given not only in absolute amount but also in terms of number
of month so that a comparative study may be done with prescribed norms/past
trends. They are indicated in terms of numbers of months in bracket below their
amounts.
long term funds are sufficient for meeting the long term requirements. In addition
to long term sources and uses, increase/decrease in current assets is also
indicated in this form.
Bank should verify not only the arithmetical accuracy of the data furnished by the
borrowers but also the logic behind various assumptions based on which the
projections have been made. For this purpose, bank officials should hold
discussions with the borrowers on projected sales, level of operations, level of
40
inventory, receivables, etc. if necessary, a visit to the factory may also be made to
have a clear idea of products and processes.
The calculation of working capital requirement during the entire project was done
as per the following three methods:
o Operating Cycle Method
o Net Working Capital Method
o On the basis of Sales.
OPERATING CYCLE METHOD:
As per the Operating cycle method the working capital requirement is calculated as
under:
Debtor days XX
Inventory days XX
XXX
Less creditors days XX
Operating days XX
O/cycle XX
41
NET WORKING CAPITAL METHOD:
As per the Net Working Capital method the working capital requirement is
calculated as under:
Permissible amount is 3 times the net working capital as per above formula.
Which implies?
Bank can allow a max CC limit of 25% of sales to a manufacturing unit and 15% of
sales to a trading unit.
42
So, 20% of sales = 20/100 * Sales
= XXX
43
STEPS IN WORKING CAPITAL
ASSESSMENT
The working capital finance by banks is meant to assist the borrower in meeting a
portion of requirement of funds needed for day to day operations. Hence, it is
obvious that working capital finance should be made only after ascertaining the
genuine needs of the borrower. The following considerations may be kept in this
regard.
Financial Statements (Balance Sheet & profit & loss A/c Should be obtained for the
last 3 years as well as estimates for current year and projections for next year.
2. The sales figure is the focal point for consideration since the requirement of
working capital will depend on the level of sales the borrower expects to achieve, in
the next year.
To make a realistic assessment of sales projected for the next year; the trend in
sales during previous years, the potential for growth, the production capacity,
demand for product, expertise of entrepreneur in locating markets, export
potential, type of product, quality of product etc. Will have to be taken into account.
But, ultimately it is the judgment of the credit appraiser which is vital for making a
reasonable estimate of sales.
3. Once the projected figure is assessed, the next step is to find out the
requirement of W.C., that is to ascertain as to what should be the optimum level of
holding current assets so that the projected sales are achieved.
The levels of holding of inventory (Raw material, semi Finished Goods and Finished
Foods) and receivables will depend on the period of holding inventory and
receivables. Hence thorough appraisal will have to be made to find out as to what
should be the reasonable period of holding of inventory and receivables.
Once the period of holdings is scientifically ascertained, the investment in CA. (i.e
W.C) can be calculated on the basis of the following:
a) R.M holding –calculated on the basis of so many months of R.M consumed.
b) SFG holding –calculated on the basis of so many months of cost of sales,
c) F.G holding –calculated on the basis of so many months of cost of sales,
d) Receivables holding- calculated on the basis of so many months of sales.
44
4. Once the total requirement of C.A. is assessed, the next step is to explore the
alternate sources available, other than bank finance,
In fact, the sources of financing C.A. are three:
Of the gap, Bank Finance will be 75% to 80% depending upon margin requirements
which will have to come from long term sources (in the form of NWC).
POINTS TO NOTE:
1. Sales and period of holding of inventory and receivables are the areas where
slight misjudgment will result in unrealistic assessment. Hence, these two are
the most important areas requiring closer analysis and scrutiny.
2. The MPBF reflects the maximum limit up to which the bank can finance but is
not an entitlement to borrow. If the NWC available is more than the stipulated
margin, the limit of bank finance will be corresponding reduced.
45
List of recommendations of various Committees on Working Capital:
Tendon Committee:
1) These recommendations are applicable to all industrial units having working
capital limits of Rs.10 lakhs and above from the banking system.
2) Term Loans for acquisition of capital assets, B/Gs, etc. are not included while
computing cut off point at Rs 10 lakhs.
3) Inventory and receivable norms (I/R norms) are prescribed for 15 specified
industries. For others, banks have to be guided by the own judgment and the
past trends.
4) These inventory/receivables norms represent maximum holding, not
entitlements and are not interchangeable.
5) Deviations in these I/R norms are allowed under exceptional situations.
6) Three methods of lending are prescribed to calculate Maximum permissible
Bank Finance (MPBF). But, RBI had not accepted the third method or lending.
7) First method envisages borrower’s margin contribution to the extent or
minimum 25% of working capital gap and second method enhances his
contribution to the extent of minimum 25% of total current assets.
8) Borrowers should gradually be brought from first method of lending to second
method of lending.
9) Annual review or all such accounts should be conducted.
10) Bill culture should be encouraged and receivables should increasingly be
financed by way of bills rather than by cash credits against book debts.
11) Cash credit should be bifurcated into demand loan for
core-portion and fluctuating cash credit component
with interest differentiation.
46
CHORE COMMITTEE RECOMMENDATIONS:
1) The borrowers enjoying working capital limits of over Rs.50 lakhs should be
placed directly under second method of lending.
2) Bifurcation of cash credit should not be done but instead peak level and non-
peak level limits should be introduced.
3) Compulsory periodical review of cash credit accounts should be done and
quarterly information system should be introduced to monitor quarterly
performance.
4) Bill finance should be greatly encouraged and system of drawee bill scheme
should be made a compulsory segment of cash credit limits.
NAYAK COMMITTEE RECOMMENDATIONS:
1) Working capital finance to SSI units and more particularly to smaller SSIs are
on a very limited scale and should be encouraged.
2) SSI units falling under first method of lending should be financed for working
capital on the basis of annual projected sales turnover and should not be
subjected to assessment under first method at lending.
3) Gross working capital requirement of such SSI units should be arrived at on
the basis of minimum 25% of their projected sales turnover. Minimum 20%
should be financed by bank & minimum 5% may be taken as margin.
4) In highly exceptional situations bank finance of less than 20% of annual
projected sales turnover may be given provided it is justified and genuine
requirements of the borrower are fully met. This may however not be made as
rule.
The aforesaid recommendations are amended from time to time. The latest
guidelines of RBI of India on working capital advances are given separately.
47
Different methods of working capital assessment:
1) Simple method: It may be followed in small cases (viz.limit upto Rs.25,000/-)
Items HOLDING
Period
Working
Capital
Margin
(%)and (MPBF)
(Months/days) Required value
(1) (2) (3) (4) (5)
c) Finished Goods
| ∏
Total Current assets – current
Total Current assets – Current
liabilities ( other than Bank
Liabilities ( Other than Bank
Borrowings)
borrowings)
MPBF MPBF
CURRENT RATIO= 1.17:1 CURRENT RATIO= 1.33:1
49
NOTES:
1) In the first method, margin is in terms of working capital gap whereas margin
is calculated on total current assets in the case of second method.
2) MPBF is the maximum bank finance and not an entitlement.
3) Current Assets/ Current liabilities are to be classified as per RBI guidelines.
4) All borrowers with fund based working capital from banking system of Rs.2
crore and above will be subjected to ∏ method of lending with a few
exceptions where the first method will apply. Those below Rs.2 crore will be
subjected to Nayak Committee recommendations.
Notes:
1) Less than 20% may be given by bank provided justified and genuine
requirements are met.
2) Margin of 5% will be maintained proportionate to the total working
requirements and will increase or decrease depending on the quantum of
working capital. Exception may be allowed only in cases where lesser margin
is stipulated under specific schemes.
3) Sundry Creditors, advance from customers etc.will not be treated as margin
4) The recommendations hold valid in case of all borrowers where fund based
working capital limits are less than Rs.2 crore.
Business Results
Liabilities
Term Liabilities
Term Loan 0.00 0.00 3.25 2.38
Current Liabilities
51
Working Capital from J&K Bank 43.70 68.33 300.00 300.00
Assets
Current assets
Cash & Bank Balance 14.16 6.60 7.29 23.52
ONCA
Security deposits 0.59 2.10 60.00 66.90
COMPUTATION OF MPBF:
Debtor period 84
Creditor period 83
53
Build up of current assets/ current liabilities
OCA 38
54
ILLUSRATION NO 2
Liabilities
Term liabilities
Unsecured Loans 0.00 0.00 0.00
Current Liabilities
Working Capital from J&K bank 15.63 10.86 19.00
55
Sundry Creditors 4.22 6.60 7.60
Assets
Gross block 0.20 0.17 0.14
Current Assets
Cash and bank balance 0.35 0.09 0.42
Financial Indicators
COMPUTATION OF MPBF:
Stocking Period 89
Debtors Period 17
Creditors Period 19
57
Build up of Current assets / Current liabilities
WCG 36.29
MPBF ( 1 ) 24.60
MPBF ( 2 ) 20.00
58
ANALYSIS OF BALANCE SHEET
A balance sheet is a financial statement showing what a business organization
owns and what it owes as on given date. In simple words we can say that Balance
sheet is a statement of Assets and liabilities showing the financial position of an
organization.
All things, which business organizations owns are called assets and the various
amounts of money it owes to the other are called liabilities.
The items of liabilities on the left hand side of the balance sheet shows the various
sources of money available to the company. On the right hand side the item of
assets represent how this money has been employed or used.
Besides borrowings from banks and other sources, a business organization obtains
some money from the owners of the organization and the money so provided to the
organization by its owners is called capital. While maintaining accounts a business
organization and its owners are treated as two different entities. The capital of an
organization represents the amount owned by it to the owners. Capital is,
therefore, part of the organization’s liabilities. Under the head “share capital” on
the liabilities side in this balance sheet of a Limited Liability Company the
information regarding ‘Authorized Capital’ Issued Capital, Subscribed Capital and
paid up capital is given.
Authorized Capital is the maximum capital the company is legally authorized to
issue. The portion out of authorized capital offered to public for subscription/apply
is known as Issued Capital. Out of Issued Capital, the portion for which people
apply is known as Subscribed Capital. Out of the Subscribed Capital, the amount
actually received by the company is known as “Paid-up Capital”.
59
Different items of Balance Sheet
Liabilities Assets
Receivables/Bookdebt/Sundry
Redeemable Preference share Debtors
Inventories
60
Bank Overdraft a) Raw Material
61
SOME IMPORTANT TERMS:
Net owned Fund:-
Owned fund (Paid up capital, free reserve, Balance in share premium account and
capital reserve representing surplus arising out of sale process of assets) minus
accumulated losses and book value of intangible assets.
Net Worth :- (Owner’s Equity)
Sum of share capital, reserve and surplus. The net worth of the bank increased by
Rs.237 crores to Rs.937 crores from Rs.700 crores of previous years thereby
registering an impressive growth of 34% which is as under:-
Capital Reserve:-
Reserves that are not available for distribution among share holders e,g valuation
reserve, Depreciation reserve, Share premium reserve and capital subsidy
reserve.
Revenue Reserve:-
Reserves which are created out of profit and are available for distribution among
share holders.
Free Reserve:-
These are surplus and part of revenue reserve.
CRR: - (SEC.42 (.) RBI Act 1934)
62
Every banking company is required to maintain an average daily balance equal to at
least 3% of its DTL (Demand and time liabilities )n with RBI. Presently J&K bank is
maintaining CRR of 4.75%.
Bank Rate:-
Rate for any loans/Advances against specified securities provided to schedule
commercial Banks by rediscounting or purchase of eligible bills.
OR
Rate prescribed by RBI at which reserve bank of India accommodates
banks/Financial institutions to meet statutory/ short-term obligations.
Prime lending rate:-
Rate at which banks lend to their most valued (Prime) customers. The PLR of J& K
bank is presently is 11.50%
SLR (SEC.24 BR ACT) (Statutory Liquidity Ratio):-
Every banking company has to maintain in India, at the close of business on any day
in cash, Gold or unencumbered approved securities, an amount being not less than
25% of its total DTL.
CAR (Capital Adequacy Ratio):-
Ration of capital to risk weighted assets. Capital adequacy ratio of J&K bank
being15.46%ason31.03.11
63
Total income & expenses of the bank were to the tune of Rs.161086.33 & 114962.14
lacs for the year 2012 as compared to previous year of Rs.115727.80 & 8848.29
respectively, Whereas the net profit increased by a record 55% at Rs.260 crores as
on 31.03.2012 against Rs.168 crores as on 31.03.2012 & the total income recorded
a phenomenal growth of 39%.
N.P.A (NON Performing Assets)
The net NPA of the bank reduced to (Rs.120.49 cores) 1.88% from Rs.116.88 corers
(2.45% of the previous year. Gross NPA of the bank being 3.92% (252.19 cores) for
the quarters ended sept. & Dec 02, net not available as the provisioning is done on
yearly basis.
Other Highlights of J&K bank
A listed company with 53% equity of J&K state.
Bankers to the Govt. of J&K state.
Four decades of un-interrupted profitability & Dividends. Dividends 50% fir the year
2012 as compared to 40% of previous year.
Business as on march 2012 crossed Rs.1935 cores registering an increase of 21%
Credit take off recorded a remarkable growth of 35% as against national growth of
12.8%
Fastest growing bank in India with a network of 451 branches spread across the
country.
ATM facility available at 217 branches as on 05.02.2012.
Telebanking facility available at 40 branches (Kashmir (17), Jammu ( 10 ) & outside
(13).
Swift facility available at almost all the forex branches.
Co-branded J&K bank Amex credit cards available.
Providing depository services accredit with ISO 9002 certification & a depository
participant of NSDL.
64
Entered into alliance with Bajaj Allianz to distribute their non life insurance
products on terms & conditions of 17.5% (15% commission & 2.5% service charges
)
Launched MetLife insurance operations in joint venture with MetLife international
(USA) in the country in respect of %age as under:-
MetLife Int’l Inc.Holding 26%
Jammu & Kashmir Bank Ltd. 25%
M.Pallonji & co 31%
Other small investors 18%
CRISIL:-
One of the leading credit rating agency re-affirmed “P1+” rating to the bank’s
certificate of Deposit program indicating the highest degree of safety for timely
payment of principle & Interest.
Launching JK Bank Global Access Debit Card shortly, which shall be cirrus &
Maestro enabled. Agreement signed with MasterCard International.
65
__________IRAC & Provisioning_________
66
***In future the prudential norms to declare an A/C NPA are only 90 days w.e.f.
2004. To this norm provisioning @ 3% yearly is being provided from the last one
year by J&K bank thereby leaving a shortfall of 4% only.\
Classification (Sectorial)
***RBI Norms
** 40% of total lending in priority sector, out of which (18% in agriculture in which
maximum 4.5% as indirect & remaining 13.5% as direct.)
*** 10% weaker sections, 1% DRI of last year net banking credit & remaining 11% in
others. In case of shortfall amount to be invested with NABARD at a very low rate of
intt.
Eligibility for qualifying in priority sector.
*** Agriculture (Direct) Short term loan, crop loan, fruit advanced, land
development, plantation/Horticulture, Goober gas plant, NRY, PMYR, SJSRY, Etc.
Indirect:- Argo services,fertilizers,SC/Strops & others.
Transport :-With fleet Upto10 vehicles (Trucks,Buses,Taki etc.
Small Business (up to limit of Rs.20.00lacs)
Retail trade (Limit Up to 10.00 lacs)
Professional and self Employed Persons
Medical practioners/Doctors up to 15.00 lac & others ( Engineers, Lawyers,
architects etc ) up to 10.00 lacs
67
Small scale industry (up to rs 1.00 crore in plant & machinery )
NON PRIORITY
Trade (Retail/Whole sale Rs.10.00 lacs 7above)
Transport (with fleet of above 10 vehicles)
Medium and large scale industries ( with initial investment in plant & machinery
above Rs.3.00 crores if sanctioned before 29.12.99 & above Rs.1.00 crore if
sanctioned after 29.12.99 ( in private and public sector )
Small Business with credit limit above Rs.20.00 lacs (Tourism, Hotel Travel agency)
Professional & self employed ( Medical fractioned above 15.00 lacs & others (
Engineers, Lawyers, Arcetects etc above 10.00 lacs )
Durable Consumer goods loans, personnel loans, Bills purchased & discounted &
loans to staff for purchase of shares.
68
69
J&K Bank functions as a universal bank in Jammu & Kashmir and as a specialised
bank in the rest of the country. It is also the only private sector bank designated as
RBI’s agent for banking business, and carries out the banking business of the
Central Government, besides collecting central taxes for CBDT.
J&K Bank operates on the principle of 'socially empowering banking' and seeks to
deliver innovative financial solutions for household, small and medium enterprises.
The Bank , incorporated in 1938, and is listed on the NSE and the BSE. It has a track
record of uninterrupted profits and dividends for four decades. The J&K Bank is
rated P1+, indicating the highest degree of safety by Standard & Poor and CRISIL.
Conclusions
o If the company is with bank from inception stage then they are given
preference, as credible and loyal party over their financial indicators.
o There is a stiff competition to the nationalized banks from the foreign
investors as their lending rates are much lower than nationalized banks.
70
o Today the foreign investors are very big threat to business and its existence.
Suggestions
o Closely monitoring and inspecting the activities and stocks of the borrowers
from time to time can avoid the misuse of working capital
o While working out the working capital limits, banks must exclude the loans
and advances from the current assets. The assessment should be done mainly
stock and the inventory level of borrower.
o Bank must extend working capital finance through non-fund based facilities.
o Another ideal method would be to use LC as the primary source of extending,
working capital clubbed with bill discounting. This would ensure that the
credit is put to the right use by the borrower and repayment is guaranteed to
the bank.
o The bank must further secure themselves by holding a second charge on all
the fixed assets of the borrower.
The time period taken by the banks to sanction the limits should be significantly
reduced to allow the borrowers to make use of the credit when the need is most
felt.
71
BIBLIOGRAPHY
1) www.jkbank.net
2) www.jkbank.net/history.php
72