ON

Session- 2012-13
In Partial Fulfillment of the Requirements for
the award of Degree of MBA (Master of
Business Administration).

Submitted To
Submitted By

[1]

J&K Bank (Zonal Office),

Karamveer Singh
Jammu.

Roll

No.64/MBA/11
TABLE OF CONTENTS
S. No.

Title

Page no.

Executive Summary

Research Methodology

Objectives

History of J&K Bank

11

Profile

12

Key Persons

13

Organisation Structure

14

Distribution Network

15

Promoters

16

10

Vision of J&K Bank

17

11

Mission of J&K Bank

17

12

Business Focus of J&K Bank

17

13

New Brand identity

18

14

Financials

19

15

Competitors

21

16

Performance highlights of J&K Bank

22

17

Working Capital Overview

25

18

Operating Cycle

29

19

Quantum of working capital

31

20

Factors affecting the Working Capital Requirement

33

[2]

21

37

23

Assessment of Working capital

Committees behind the introduction of methods of
assessment
Methods of assessment of Working Capital

24

Case Study

62

25

Bibliography

73

22

41
45

STUDENTS DECLARATION

This is to certify that I Karamveer Singh of MBA-III have done research on the
topic working capital and prepared the project report based on it. All the theory
contained in reports is form the list of books given in end in bibliography. I have
not copied from any report submitted earlier this or any other university. This is
purely original and authentic work.

MBA Semester -III

Karamveer Singh

[3]

GUIDE CERTIFICATE
This is to certify that the project report entitled working capital submitted in
partial fulfillment of the requirement of degree of Masters of Business Administration
(MBA) from JAMMU UNIVERSITY ( KATHUA CAMPUS) JAMMU, is a bonafide
summer training project work carried out by Karamveer Singh

under my direct

supervision and guidance and to the best of my knowledge and information. No part of
this work has been submitted for any other degree of any other University. The data
sources have been duly acknowledged.

Project Guide: Mrs. Jyosthana kumar

Signature:
Date:

[4]

PREFACE
Without practical training, management education is meaningless
so long with the theory; practical training is provided to
management students to expose them to the actual working
environment of any organization. Such training provides a
framework of knowledge relating to the concepts and practices of
the assigned topics in the organization. The summer training is an
integral part of the course curriculum of Master of Business
Administration (MBA). In this, the student is in the position to
analyze the integral working of an organization with mature eyes
and understand the dynamics in a much better manner.
The most motivating aspect associated with pursuing a course in
management or business studies is the dynamism associated with
it. Dynamism of adding a new perspective to ones personality
and vision by accumulating wider knowledge, developing
analytical skills not only by traditional ways of teaching and
learning but by observing things at work. The project is an
opportunity to see the application part of what we study or learn
in classrooms. Management is that function of an enterprise that
concerns itself with the direction and control of the various
activities to attain business objectives. It is the science and art of
preparing, organizing and directing human efforts to control the
force and utilize the materials of nature for the benefits of men. In
fact, the management thereby provides the scientific technique to
deal with the various problems in the areas of management and
[5]

the manager mixes some art to it and tries to shorten the gap of
ignorance. It provides a chain of solution to critical problems of
manager.

ACKNOWLEDGEMENT
I am a student of MBA 3rd Semester want to acknowledge the
fact that this project could not be accomplished without support
of everyone who has helped me in completing the project.
I would like to start from scratch i.e. my heartiest thanks to my guide Mrs.
Jyotsana Kumar who guided me throughout this project and who enlightened
my pathway towards the completion of this project and showed full interest at
each and every step of this project.
It gives me a great pleasure to acknowledge my deep
& sincere gratitude to zonal office J&K Bank Jammu for its
inspiration & constant encouragement .

I whole heartedly extend my sense of gratitude

towards all the members of J&K Bank as their help during the
course of my project work and their valuable suggestions has
helped me a lot in successfully accomplishing this project.

[6]

EXECUTIVE SUMMARY

As a partial fulfilment of the MBA course in which a training

programme of two months has been incorporated in the
curriculum, during which a study is to be done in an organization
to extract the knowledge and skill from actual work environment
and a scope to observe the actual work place of an industry to
gain practical experience. During my summer training, I had a
project at The Jammu &Kashmir Bank Ltd on Working Capital
management and its assessment.

The most important part of the study includes case

analysis of Working Capital Assessment/Appraisal of a
partnership fi rm o. (Name of the fi rm has been changed),
M/S ABC FILLINGS the firm is engaged in filling fuel.

[7]

RESEARCH METHODOLOGY

This is analytical research area where we analyses information with cause and its
effects relationship. This analysis leads to the simple conclusions of whether to
lend money to the institution for business. Also if the money is lend then there is reality the
norms are not always perfect and
hence it is essential to priorities stringent parameters and secondary parameters.

Research Type

Analytical

Source of Data

Primary and Secondary

Sample Unit

Industries applying for loan

Sample

Case studies

Sample Technique

Allocation of Case

Analysis Tool used

Financial Analysis

Primary Data:
Observation, Discussion with the manager.
The company profile, annual reports have been obtained from JK Bank.
[8]

Secondary Data:
Annual report of J&K bank for the year ended 31st March 2012
data relating to the procedure of assessment of working capital finance, old sanction
proposals, RBI guidelines etc. have been sourced from reference books.

OBJECTIVES OF THE STUDY

To know the methods of assessment of working capital;

To know the documents required at the time of assessment

of working capital
To apply the methods at a practical level with the help of
case study.

[9]

[10]

HISTORY
Jammu and Kashmir (J&K) Bank, incorporated on October 1, 1938, was the first bank in the
country to emerge as a state-owned bank. On July 4, 1939 the bank commenced its business.
Later, in 1971 the bank received the status of a scheduled bank. The government of Jammu &
Kashmir owns a 53% stake in the bank. The bank is listed on the National Stock Exchange
(NSE) and Bombay Stock Exchange (BSE)
Presently, the bank has a pan-India presence through its network of 556 branches, out of which
344 branches are located in semi-urban and rural areas. It also includes extension counters and
service branches. The bank has a network 212 ATMs which is largest ATM network in J&K.
It is only bank in private sector that has been designated as agent of RBI for banking.
J&K Bank acts as a sole banker and lender to government of Jammu & Kashmir. It handles all
salaries of state government officials. The bank also carries out banking business of the central
government.
Jammu & Kashmir Bank's Certificate of Deposit Programme has received 'P1+' rating from
Credit Rating Information Services of India (CRISIL), reflecting the highest degree of safety for
timely payment of principal and interest.
The bank also acts as a corporate agent of MetLife India Insurance Company. J&K Bank has
entered into an alliance with Bajaj Allianz to distribute the latter's non-life products. The bank
has entered into an arrangement with AMCs such as UTI, Kotak and Reliance Mutual Fund to
distribute their current schemes and NFOs (New fund offer).
Products and Services
Personal Banking- Under this, it offers various products and services such saving accounts,
loans, deposits, ATM facility, RTGS/NEFT facility, internet banking, demat services, etc.
NRI Banking- Besides various personal banking products, it also offers remittance services,
consultancy services to its NRI Clients.
Priority and SME- It also caters to the priority and SME segments and offers various kinds of
products to meet their various business requirements.
[11]

Future Strategy - Jammu & Kashmir Bank plans to develop new financial products for
agriculture, horticulture and artisan sector. It also plans to widen its product
portfolio.

PROFILE
Date of Establishment
Revenue
Market Cap
Corporate Address

01-10 1938
832.728 ( USD in Millions )
44206.9076438 ( Rs. in Millions )
Corporate Head Quarters, Maulana Azad Road,Srinagar190001, Jammu & Kashmir
www.jammuandkashmirbank.com

Management Details
Chairperson - Mushtaq Ahmad
MD Directors - A K Mehta, Abdul Majid Bhat, Abdul Majid
Mir, AM Matto, Arnab Roy, B B Vyas, B L Dogra, G M
Dug, G P Gupta, Hari Narayan Iyer, Haseeb A Drabu, M I
Shahdad, M S Verma, Mushtaq Ahmad, Narendra Jadhav,
Nihal C Garware, Nisar Ali, Parvez Ahmad, R K Gupta,
Sudhanshu Pandey, Vikrant Kuthiala
Business Operation
Background

Bank Private
Jammu and Kashmir (J&K) Bank, incorporated on
October 1,1938, was the first bank in the country to
emerge as a state-owned bank. On July 4, 1939 the bank
commenced its business.
Later, in 1971 the bank received the status of a scheduled
bank. The government of Jammu & Kashmir owns a 53%
stake in the bank. The bank is listed on the National Stock
Exchange (NSE) and Bombay Stock Exchange (BSE).

Financials

Total Income - Rs.5169.70 crore ( year ending Mar 2012)

Net Profit - Rs. 803 crore ( year ending Mar 2012)

Company Secretary
Bankers
Auditors

Abdul Majid Bhat

Gupta & Associates, Baweja & Koul, Gupta Sharma &
[12]

Associates

KEY PERSON

S.No
1

Name

Designation

Mushtaq Ahmad

Chairman

Abdul Majid Bhat

Company Secretary

Hari Narayan Iyer

Director

M I Shahdad

Director

Vikrant Kuthiala

Director

Nisar Ali

Director

[13]

AM Matto

Director

R K Gupta

Director

Nihal C Garware

Director

ORGANISATION STRUCTURE OF J&K BANK

ORGANIZATIONAL HIERARCHY :
Head Office

GM/DGP Zonal Office

GM/DGM/AGM

Branches
STAFF HIERARCHY:
Chairman & Managing Director
Executive Director (ED)
[14]

President
Vice-President
Assistant Vice-President
Executive Manager
Senior Executive
Executive
Assistant Executive
Banking Associate
Banking Attendant

DISTRBIUTION NETWORK:
J&K Bank corporate headquarter is in Maulana Azad Road,
Srinagar 190001 (J&K). The bank at present has an enviable
network of over more than 611 branches spread over various
cities across India. All branches are linked on an online real-time
basis. The bank hold more than 9000 employees in the main
headquarter of

Srinagar. This bank holds 11 zonal offices, 1

treasury office which is located at Mumbai. Bank holds various DMAT services that are known by name of J & K Bank financial
services.
During (the financial year 2011-12),

55 new

branches were

established, thereby taking the number of branches to 603 as on

31st march 2012, spread over 20 states and 1 union territory. The
[15]

area-wise breakup of the branch network (excluding extension

counters/mobile branches and service branches) is as under:
AREA

BRANCHES

Metro

039

Urban

168

Semi-urban

123

Rural

273

TOTAL

603

PROMOTERS:
Sr.No.

Particulars

Total shares % To Capital

Government of J&K 25775266

53.17

Indian Mutual funds 1158751

2.39

Insurance companies

237473

0.49

Non resident Indians

357436

0.74

Foreign Inst. Investors

14135181

29.14

[16]

Bodies Corporate

1090373

2.30

Resident Individuals 3420272

Clearing members

13569

0.03

Total

46188321

100.00

11.30

VISION OF THE BANK

The Bank's vision is To catalyze economic transformation and capitalize on

growth.
The bank aspires to make Jammu and Kashmir the most prosperous state in the country, by
helping create a new financial architecture for the J&K economy, at the center of which will be
the J&K Bank. The Bank is committed to achieve healthy growth in profitability and
simultaneously to remain consistent with the Bank's risk appetite and at the same time ensuring
the highest levels of ethical standards, professional integrity and regulatory compliance.

[17]

MISSION OF THE BANK

The companys 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 it the most profitable bank in the country.

BUSINESS FOCUS
The J&K Banks mission is to be a World-class Indian Bank. The banks aim is to build sound
customer franchises across distinct businesses so as to be the preferred provider of banking
services in the segments that the bank operates in and to achieve healthy growth in profitability,
consistent with the banks risk appetite. The bank is committed to maintain the highest level of
ethical standards, professional integrity and regulatory compliance. J&K banks business
philosophy is based on four core values: OPERATIONAL EXCELLENCE, CUSTOMER
FOCUS, PRODUCT LEADERSHIP and PEOPLE.

NEW BRAND IDENTITY

[18]

The new identity for The J&K Bank is a visual representation of the Banks
philosophy and business strategy. The three colored squares represent the regions
of Jammu, Kashmir and Ladakh. The counter-form created by the interaction is a
falcon with outstretched wings- a symbol of power and empowerment. The synergy
between the three regions propels the Bank towards new horizons. Green signifies
growth and renewal, blue conveys stability and utility, and red represents energy
and power. All these attributes are integrated and assimilated in the white counterform.

[19]

FINANCIALS OF THE JAMMU AND KASHMIR Ltd.

Profit & Loss Account

Amt in

Rupees Crore
Particulars

Interest Earned

4835.58

Year ending
March,
2011
3713.13

Interest Expended

2997.22

2169.47

38.15%

Net Interest Income

1838.36

1543.66

19.09%

334.12

364.76

-8.40%

Operating Income

2172.48

1908.42

13.84%

Operating Expenses

802.15

758.93

5.69%

1370.33

1149.49

19.21%

169.23

215.10

-21.32%

1201.10

934.39

28.54%

Tax Provision

397.85

319.19

24.64%

Net Profit

803.25

615.20

30.57%

48.49

48.49

0.00%

165.69

165.69

30.57%

Net Interest Margins

Net Interest Margins

(Ann.)

3.58%

3.62%

Other Income

Operating Profit
Provisions &
Contingencies
PBT

Share Capital
EPS

Year ending
March, 2012

[20]

% Change

30.23%

Balance Sheet

Amount in

Rupees crore
Particulars

As on March
31, 2012

As on
March 31,
2011

% Change

48.49

48.49

0.00%

4044.69

3430.19

17.91%

53346.90

44675.94

19.41%

Borrowings

1240.96

1104.65

12.34%

Other Liabilities &

Provisions

1588.18

1248.88

27.17%

60269.22

50508.15

19.33%

Cash & Bank Balance

2783.65

2974.96

-6.43%

Balance with Bank

and Money at call &
Short Notice
Investments

1670.22

573.84

191.06%

21624.32

19695.77

9.79%

Advances

33077.42

26193.64

26.28%

Fixed Assets

420.27

393.77

6.73%

Other Assets

693.34

676.17

2.54%

60269.22

50508.15

19.33%

Capital &
Liabilities
Capital
Reserve & Surplus
Deposits

Total
Assets

Total

[21]

COMPETITORS

Company

Sales
(Rs.Million
)

Current
Price

Change
(%)

P/E
Market
Ratio Cap.
(Rs.Million)

52-Week
High/Lowo

HDFC Bank

199282.12

504.60

-0.66

22.9
6

1186127.26

558/400

ICICI Bank

335426.52

838.95

0.53

14.9
6

967159.72

1111/641

Axis Bank

219946.47

1023.7
0

-0.38

9.99

423812.94

1367/785

Kotak

43035.58

558.25

0.52

38.11 413537.65

603/411

35893.57

310.10

-0.31

18.11 145325.56

352/222

Yes Bank

40417.47

338.10

0.03

12.2
5

119639.79

389/231

Centurion

12685.30

41.40

0.00

52.9
3

78932.68

43/41

40520.28

420.85

1.20

9.27

71985.34

480/322

26940.64

339.45

-1.05

11.17 50982.98

379/275

Mahindra
Bank
Indusind
Bank

Bk of Punj
Federal
Bank
ING Vysya

[22]

Bank
J&K Bank

37131.32

911.90

-0.37

5.50

44206.91

957/645

Karur Vysya

22176.95

400.45

0.83

8.56

42952.90

479/322

Bank of Raj

13594.89

212.10

0.00

0.00

34222.35

214/207

South Indian

24460.17

23.70

6.28

6.70

26898.36

28/20

Bank

Bank

EARNINGS UPDATE MARCH 31, 2012

The Board of Directors of The Jammu & Kashmir Bank Ltd. at their meeting held
on May 12, 2012 took on record the audited financial results for the full
year ended March 31, 2012.
Performance Highlights for the full year ended March 31, 2012:

Net Profit up 30.6 % at Rs 8032 million for the financial year ended Mar,
2012 as compared to Rs 6152 million earned during the financial year
ended Mar, 2011.

EPS for the year ended Mar, 2012 at Rs 165.69 up 30.6 % from Rs
126.90 earned during the previous financial year.

NIMs (Net Interest Margins) Ratio for the current financial year ended
[23]

Mar, 2012 at 3.58 % vis--vis 3.62 % for the previous financial year.

Post

tax Return on Assets at 1.33 % for the FY ended

Mar, 2012

compared to 1.22 % for the previous financial year.

Post Tax Return on Average Net-Worth for the FY ended Mar, 2012 at
21.22 % recording an improvement of 226 points from 18.96 % pertaining
to the previous financial year.

Yield on Advances for the current FY improved to 11.45 % compared to

10.68 % for the FY ended Mar, 2011.

Cost of Deposits for the current FY stood at 5.92 % compared to 5.05 %

for the FY ended Mar, 2011.

Net profit per Employee improved to Rs 0.87 million for the financial year
ended Mar, 2012 from Rs 0.78 million pertaining to the year ended Mar,
2011.

Cost to Income Ratio at 36.92 % for the current fiscal which was at 39.77
% for the fiscal ended Mar, 2011.

[24]

 Comfortable Capital Adequacy Ratio (Basel II) at 13.36 % as on Mar,

2012, well above RBI stipulated norm of 9 %.

Net Asset Value improved to Rs 844 as on Mar, 2012 compared to Rs

718 a year ago.

WORKING
CAPITAL
[25]

INTRODUCTION:
The term working capital is used in financial parlance to describe
that capital which is required by an enterprise to carry out its day
to day operations. It mainly consists of investments in raw
material, work in progress, finished goods and receivables. Banks
provide the working capital finance in the form of cash credits,
overdraft, demand loans (for working capital purpose), bills
purchased / discounted limits and pre- shipment and postshipment credits etc.
Working Capital is the life line of a business. Excess working
capital results in non productivity. The deficient working capital
will cause liquidity problems and affect the production .
Working capital management is concerned with the problems that
arise in attempting to manage the current assets, the current
liabilities and the interrelationship that exist between them.
[26]

CONCEPTS OF WORKING CAPITAL:

There are two concepts of working capital:
Gross working capital
Net working capital

GROSS WORKING CAPITAL (GWC)

The term gross working capital, refer to the funds required for
financing the total current assets. In other words it means the
funds invested by a business concern in Current Assets.
For e.g.
Current Assets:
Stock in Hand

3.00 lacs

Cash and Bank Balance

2.50 lacs

Sundry debtors

1.80 lacs

Total C.A

7.30 lacs

Total funds required for financing = Gross Working Capital

[27]

= Total C.A. = 7.30 lacs

NET WORKING CAPITAL (NWC)

The term net working capital, refers to the difference between
current assets and current liabilities. NWC represents the long
term

funds

invested

in

current

assets

after

meeting

the

investment in long term assets. It is also arrived at by working out

the difference between long term funds or liabilities and long term
uses or assets.

Desirably, net working capital should be positive i.e. current

assets should exceed current liabilities or Current Ratio (current
assets divided by current liabilities) should be higher than 1:1.
This would signify liquidity and availability of adequate working
funds. For a banker, it would connote a cushion of safety for the
funds lent.

For e.g.
Assuming the balance sheet of ABC ltd Company
Balance sheet at the year ending 31.3.2012(in lacs)
Liabilities
Capital

Assets
6.00

Fixed assets
[28]

5.00

Unsecured loans

1.00

Securities

Current liabilities:

0.45

Current assets:

--Sundry creditors

2.50

--Stock

3.00

--Bank overdraft

1.25

--Debtors

1.80

--Bills payable

2.00

--Cash/ bank

2.50

Total liabilities

12.75

Total assets

12.75

Formula1: Net working capital= C.A- C.L

=7.30-5.75=1.55
OR
Formula 2: NWC=Long term sources Long term uses.
Where,
Long term sources= Capital + unsecured loans
=6.00+1.00 =7.00

Long term uses= Fixed assets+ securities

= 5.00+0.45=5.45
NWC=7.00-5.45=1.55

Though both the formula are applicable are calculating mostly

applicable is NWC= Long term sources- Long term uses. It is
applicable to avoid complexity of solution.
[29]

THE OPERATING CYCLE AND WORKING CAPITAL

NEEDS

Working capital cycle or the Operating cycle represents the time

span within which the cash utilized for procuring raw materials,
payment of wages and incurring overheads is reconverted into
cash through sales realization.
Therefore the total time span within which the business activity
rotates is called an operating cycle or production cycle. In a
trading concern, there is a series of activities starting from
procurement of goods (saleable goods) and ending with the
realization of sales revenue (at the time of sale itself in case of
cash sales and the time of debtors realizations in cash of credit
sales).
In case of manufacturing concern, this series starts from
procurement of raw materials and ending with the sales
realization of finished goods (after going through the different
[30]

stages of production). The time gap between the happening of

first event and happening of last event. This gap is called the
operating cycle. The operating cycle can be shown in the
following figure:

Raw
m ateri
al

sundry
debtors

w ork in
progress
bills
receivabl
es
finishe
d
goods
[31]

QUANTUM OF WORKING CAPITAL:

The quantum of working capital requirements (gross working
capital) depends on nature of activities of an enterprise. The two
main factors taken into consideration are:
i.

Level of activity or operation.

ii.

Duration or length of the operating cycle.

The level of activity refers to the level of production or sales. An

increased

sales turnover would normally require increased

working capital for its achievement. For instance, if a unit

producing 1000 units per month desires to produce 1200 units in
the coming months, then it requires more working funds to attain
the increased production target. On the other hand, if

for the

same production level of 1000 units per month, the raw material
availability changes from 10 days to 15 days, then more raw
material is to be stored which means requirement of additional
working funds. Similar situation might arise in respect of work in
process, finished goods and receivables.
[32]

For estimation of gross working capital requirement we must also

know the level of operating expenses required for attaining
projected level of sales. For e.g. if the sales forecast of a unit for a
next year are Rs 8 lacs, its operating expenses are Rs 6 lacs, and
the estimated length of its operating cycle is 4 months(120
days).What shall be total working capital requirement to achieve
the sales target? Since each rupee of working capital employed
during the year will be turned over 3 times (360 day120 days)
the total working capital required by the unit on an average will
be Rs 2 lacs (Rs6lacs3). Any reduction in the length of operating
cycle will improve the working capital turnover ratio. Thus if the
same unit is able to reduce the length of operating cycle from 120
days to say 90 days, its working capital turnover will improve from
3 times to 4 times per year(36090). Accordingly the gross
working capital requirement will be Rs 1.50 lacs (Rs6 lacs4)
instead of Rs 2 lacs. This means better utilization of resources of
resources on account of better management of one or more
phases of operating cycle.

VIABILITY OF THE PROJECT:

A detailed study is usually done by financial institution and banks
while providing term loan finance to a unit for acquisition of fixed
assets, so as to ensure that the project will generate sufficient
returns on the resources invested in it. The viability of a project
depends on technical feasibility, marketability of the products at a
profitable price, availability of financial resources in the time and
[33]

proper management of the unit. In brief, a project should satisfy

the tests of technical, commercial, financial and managerial
feasibilities. A detailed viability study is necessary before
agreeing to provide working capital finance.
The past and future viability can be ascertained by examining the
financial statements for the past 2-3 years as well as the
estimated / projected statement for the current and next year. It is
implicit that the concern will have to submit an acceptable
business plan or forecast in the form of estimated/ projected
financial statements to the bank.

FACTORS

DETERMINING

WORKING

CAPITAL

REQUIREMENT:
The working capital needs of a firm are determined and
influenced by various factors. A wide variety of consideration may
affect the quantum of working capital required and these
considerations may vary from time to time. The working capital
needed at one point of time may not be good enough for some
other situation. The determination of working capital requirement
is a continuous process and must be undertaken on a regular
basis in the changing situations. Following are some of the factors
which are relevant in determining the working capital needs of the
firm:

[34]

1. Nature of business: Some businesses are such, due to their

very nature, that their requirement of fixed capital is more rather
than working capital. These businesses sell services and not the
commodities and that too on cash basis. As such, no founds are
blocked in piling inventories and also no funds are blocked in
receivables. E.g. Public utility services like railways, infrastructure
oriented project etc. there requirement of working capital is less.
On the other hand, there are some businesses like trading
activities, where requirement of fixed capital is less but more
money is blocked in inventories and debtors.
2. Length of production cycle:
In some business like machine tools industry,
the time gap between the acquisition of raw material till the end
of final production of finished products itself is quite high. As such,
amount may be blocked either in raw material or in work in
progress, finished goods, or even in debtors. Naturally there need
of working capital is high.
3. Size and growth of business: In very small company the
working capital requirement is quit high due to high overhead,
higher buying and selling cost etc. as such medium size business
positively has edge over the small companies. But if the business
start growing after certain limit, the working capital requirements
may adversely affect by the increasing size.
4. Business/ Trade cycle: If the company is the operating in the
time of boom, the working capital requirement may be more as
the company may like to buy more raw material, may increase
the production and sales to take the benefit of favorable market,
due to increase in the sales, there may more and more amount of
funds blocked in stock and debtors etc. similarly in the case of
depressions also, working capital may be high as the sales terms
of value and quantity may be reducing, there may be
unnecessary piling up of stack without getting sold, the receivable
may not be recovered in time etc.
[35]

5. Terms of purchase and sales: Some time due to competition

or custom, it may be necessary for the company to extend more
and more credit to customers, as result which more and more
amount is locked up in debtors or bills receivables which increase
the working capital requirement. On the other hand, in the case of
purchase, if the credit is offered by suppliers of goods and
services, a part of working capital requirement may be financed
by them, but it is necessary to purchase on cash basis, the
working capital requirement will be higher.
6. Profitability: The profitability of the business may be vary in
each and every individual case, which is in turn its depend on
numerous factors, but high profitability will positively reduce the
strain on working capital requirement of the company, because
the profits to the extent that they earned in cash may be used to
meet the working capital requirement of the company.
7) Operating efficiency: If the business is carried on more
efficiently, it can operate in profits which may reduce the strain
on working capital; it may ensure proper utilization of existing
resources by eliminating the waste and improved coordination
etc.
8)Production policy: The quantum of working capital is also
determined by production policy. In the case of certain lines of
business, the demand for products is seasonal, that is, they
are purchased during the certain months of the year.
9) Credit policy: The credit policy relating to sales and
purchases also affects the working capital. The credit policy
influences the requirement of working capital in two ways:
Through credit terms granted by the firm to its customers/
buyers of goods Credit terms available to the firm from its
creditors.
The credit terms granted to customers have a bearing on the
magnitude of working capital by determining the level of book
[36]

debts. The credit sales result in higher book debts (receivables).

Higher book debts mean more working capital. On the other hand,
if liberal credit terms are available from the suppliers of goods
(trade creditors); the need for working capital is less
10) Growth and Expansion: As a company grows, it is logical to
expect that a larger amount of working capital is required. It is, of
course, difficult to determine precisely the relationship between
the growth in the volume of business of a company and the
increase in its working capital. But it is true that growth industries
require more working capital than those that are static.
11) Vagaries in the availability of Raw Material: The
availability of certain raw materials on a continuous basis without
interruption would sometimes affect the requirement of working
capital. There may be some materials which cannot be procured
easily either because of their sources are few or they are irregular.
To sustain smooth production, therefore, the firm might be
compelled to purchase and stock them far in excess of genuine
production needs. This will result in an excessive inventory of
such materials. This will lead to a relatively high level of working
capital.
12) Profit level: The level of profits earned differ from enterprise
to enterprise. In general, the nature of the product, hold on the
market, quality of management and monopoly power would
determine the profit earned by a firm. Higher profit margin would
improve the prospects of generating more internal funds thereby
contributing to the working capital pool. The net profit is a source
of working capital to the extent that it has been earned in cash.
The cash profit can be found by adjusting non-cash items such as
depreciation, outstanding expenses and losses written off, in the
net profit. But in practice, cash is used for augmenting stock,
book debts, and fixed assets. The availability of internal funds for
working capital requirements is determined not merely by the
profit margin but also by the manner of appropriating profits.
[37]

13) Level of taxes: The first appropriation out of profits is

payment or provision for tax. The amount of taxes to be paid is
determined by the prevailing tax regulations. Tax liability is, in a
sense, short-term liability payable in cash. An adequate provision
for tax payment is, therefore, an important aspect of working
capital planning. If tax liability increases, it leads to an increase in
the requirement of working capital and vice versa.
14) Dividend policy: Another appropriation of profits which has
a bearing on working capital is dividend payment. The payment of
dividend consumes cash resources and, thereby, affects the
working capital to that extent. If any firm does not pay dividend
but retains the profits, working capital increases. In planning
working capital requirements, therefore, a basic question to be
decided is whether profits will be retained or paid out to
shareholders.
15) Depreciation policy: Depreciation policy also exerts an
influence on the quantum of working capital. Depreciation
charges do not involve any cash outflows. The effect of
depreciation policy on working capital is indirect.
16) Price level changes: Changes in the price level also affect
the requirements of working capital. Rising prices necessitate the
use of more funds for maintaining an existing level of activity. For
the same level of current assets, higher cash layouts are required.
The effect of rising prices is that a higher amount of working
capital is required. In the case of companies which can raise their
prices proportionately, there is no serious problem regarding
working capital.
To conclude, the level of working capital is determined by
a wide variety of factors which are partly internal to the
firm and partly external (environmental) to it. Efficient
working capital management requires efficient planning
and a constant review of the needs of an appropriate
working capita strategy.
[38]

[39]

ASSESSMENT

OF

WORKING

CAPITAL

(WITH

SPECIAL

REFERENCE WITH J&K BANK):

The assessment of correct amount of working capital is extremely
important for any financing institution. Any overestimation of the
requirement resulting in blockage of scare funds in idle assets is
both, a drain on profitability as also a reflection on performance of
the management of the financing institution. At the same time
any paucity of funds due to an underestimation may cripple the
unit and deprive it of many profitable opportunities. Scarcity of
funds will also adversely affect the liquidity of the unit and in turn
its reputation, due to its inability to meet its commitments in
time.
Operating with thin working capital is like walking on a tight rope
and any unforeseen blockage of funds may instantaneously
imperil the very existence of the unit. It is, therefore, of prime
importance that the assessment of working capital is judiciously
and meticulously done.

The exercise becomes all the more important for bankers because
a major portion of their working funds is tied in financing of
working capital needs of their constituents. Proper and prudent
[40]

calculation of working capital needs of the prospective borrowers

contribution of his adequate share in the shape of margin.
The exercise of assessing working capital requirement centres
around ascertaining the operating cycle of the unit and then
converting this period into monetary values based on the cost of
components involved.

WHY ASSESSMENT OF WORKING CAPITAL IS DONE ???

When any business entity starts business be it a manufacturer /
trader / service provider micro / small / medium or large
enterprise it deals in manufactured or traded goods or provides
services. Every business transaction passes through a Working
Capital Cycle from initial cash - to credit purchase of goods to
manufacture process to credit sales to customer realization of
book debts payment to creditors and again in cash for smooth
functioning of every business, it need Working Capital Funds in
the form of Cash Credit.
for buying Raw Materials & Finished Goods, Purchase of
Services
Packing Material & Stores and Consumables, Spare Parts
Payment to Labour, Wages & Salaries to Staff meeting
business expenses like Power & Electricity, Rent, Rates,
Taxes
Administrative, Selling & Marketing Overheads
Payment of Corporate and Individual Income Taxes
Cash Credit is granted by banks for above needs keeping a
certain percentage of the current assets value as margin money.
The CC facility is generally granted for one year and it is
[41]

subjected to review at the expiry of one year. At the time of first

time sanction of Cash Credit or Renewal of Cash Credit borrower is
required to give to the bank a CC Proposal along with CMA Data,
through which bank assesses the working Capital Gap of the
borrower that can be funded by the bank.

CONCEPT OF MARGIN
Margin in relation to working capital has two concepts which need
to be clearly understood. The one concept of providing margin by
way of liquid surplus i.e. from long-term liabilities has already
been explained. It must be clear by now that current assets shall
partly be financed by capital & long-term liabilities for any going
concern. This gains importance while fixing overall limits of
working capital by the bank.
The other concept of margin as applicable to working capital
limits is related to the value of security charged to the bank as
cover for these limits. Financial accommodation up to 100% of the
value of goods would not be granted by the banks and they would
fix a certain margin on the value of security which must be
provided by the borrower and the balance amount will be
financed by the bank. The percentage of margin fixed on any
security is dependent on its nature.
CONCEPT OF WORKING CAPITAL GAP (WCG)
[42]

Working Capital Gap represents the difference between the total

current assets (TCA) and current liabilities excluding bank
borrowing i.e. other current liabilities (OCL).
After assessing the projected level of current assets and current
liabilities, the WCG will be calculated as under:
Projected Current assets

Less: Projected Current Liabilities (other

than
bank borrowings)

Working Capital Gap (A - B)

Working Capital Gap (WCG) so arrived should be partly financed

from Net Working Capital (NWC) and partly from bank finance.

COMMITTEES BEHIND THE INTRODUCTION OF METHODS OF

ASSESSMENT
TANDON COMMITTEE
A study group headed by Shri Prakash Tandon, the then Chairman
of Punjab National Bank, was constituted by the RBI in July 1974
with the purpose of framing guidelines for commercial banks for
follow-up & supervision of bank credit for ensuring proper end-use
of funds and to suggest ways for optimum utilization of Bank
credit. This was the first elaborate attempt by the central bank to
organize the Bank credit.
Most banks in India even today continue to look at the needs of
the corporate in the light of methodology recommended by the
Group. The report of this group is widely known as Tandon
Committee report. The weaknesses in the Cash Credit system
have persisted with the non-implementation of one of the crucial
recommendations of the Committee. In the background of credit
[43]

expansion seen in 1977-79 and its ill effects on the economy, RBI
appointed a working group to study and suggest
i) Modifications in the Cash Credit system to make it amenable to
better management of funds by the Bankers and
ii) Alternate type of credit facilities to ensure better credit
discipline and co relation between credit and production.
The Group was headed by Shri. K.B. Chore of RBI and was named
Chore Committee. Another group headed by Shri. P.R. Nayak
(Nayak Committee) was entrusted the job of looking into the
difficulties faced by Small Scale Industries due to the
sophisticated nature of Tandon & Chore Committee
recommendations The recommendations made by Tandon
Committee and reinforced by Chore Committee were
implemented in all Banks and Bank Credit became much more
organized. However, the recommendations were perceived as too
strict by the industry and there has been a continuous clam our
from the Industry for movement from mandatory control to a
voluntary market related restraint. With recent liberalization of
economy andre forms in the financial sector, RBI has given the
freedom to the Banks to work out their own norms for inventory
and the earlier norms are now to be taken as guidelines and not a
mandate. In fact, beginning with the slack season credit policy of
1997-98, RBI has also given full freedom to all the Banks to devise
their own method of assessing the short term credit requirements
of their clients and grant lines of credit accordingly. Most banks,
however, continue to be guided by the principles enunciated in
Tandon Committee report.
Major recommendations of the committee were as follows:
1. Assessment of need based credit of the borrower on a rational
basis on the basis of their business plans.

[44]

2. Bank credit would only be supplementary to the borrowers

resources and not replace them, i.e. banks would not finance one
hundred percent of borrowers working capital requirement.

3. Bank should ensure proper end use of bank credit by keeping a

closer watch on the borrowers business, and impose financial
discipline on them.

4. Working capital finance would be available to the borrowers on

the basis of industry wise norms (prescribe first by the Tandon
Committee and then by Reserve Bank of India) for holding
different current assets, viz.
Raw materials including stores and others items used in
manufacturing process
Stock in Process
Finished goods
Accounts receivables

5. Credit would be made available to the borrowers in different

components like cash credit; bills purchased and discounted
working capital, term loan, etc., depending upon nature of holding
of various current assets.

6. In order to facilitate a close watch under operation of

borrowers, bank would require them to submit at regular
intervals, data regarding their business and financial operations,
for both the past and the future periods.
NAYAK COMMITTEE
The Committee was constituted by Reserve Bank of India in
December 1991under the Chairmanship of Shri P. R. Nayak, the
[45]

then Deputy Governor to examine the issues confronting SSIs in

the matter of obtaining finance. It had recommended a simplified
procedure for sanction of Working Capital to the manufacturing
units. It had recommended assessment of WC at 25% of the
turnover of which 5% may be contributed by the promoters and
the balance 20% may be provided by the banks.
This Group is of the view that in order to simplify and expedite
sanction of working capital limits and also to ensure that the
micro and small enterprises are not forced to take help of
professionals for obtaining working capital limits, it is necessary
that no CMA data or any future projections except sales are
obtained for assessing WC limits under Nayak Committee. The
limits should be assessed at 20% of the projected sales. As
regards projected sales, the borrower has to justify and convince
the bankers.
There is a need to impress upon banks that the Nayak Committee
norms should be implemented without exception. Banks should
issue clear cut guidelines to their branches that CMA data or
Operating Statement, Balance Sheet, Cash Flows etc are not
necessary for working capital limits upto Rs.5 crores in the SME
sector. The need for strict implementation of Nayak Committee
Norms for assessment of WC requirement and permissible bank
finance cannot be overemphasized, especially in light of the views
of the various stakeholders regarding delayed financing and
inadequacy of limits as one of the major reasons for poor growth
of SME sector and a contributor to sickness in the sector.
The Committee submitted its report in 1992. All the major
recommendations of the Committee have been accepted and the
banks have been inter-alia advised to:
i) Give preference to village industries, tiny industries and other
small scale units in that order, while meeting the credit
requirements of the small scale sector;
[46]

ii) Grant working capital credit limits to SSI units computed on the
basis of minimum 20% of their estimated annual turnover whose
credit limit in individual cases is up to Rs.2 crores [ since raised to
Rs.5 crores ];
iii) Prepare annual credit budget on the `bottom-up basis to
ensure that the legitimate requirements of SSI sector are met in
full;
iv) Extend Single Window Scheme of SIDBI to all districts to meet
the financial requirements (both working capital and term loan) of
SSIs;
v) Ensure that there should not be any delay in sanctioning and
disbursal of credit. In case of rejection/curtailment of credit limit
of the loan proposal, are ference to higher authorities should be
made;
vi) Not to insist on compulsory deposit as a `quid pro-quo for
sanctioning the credit;
vii) Open specialized SSI bank branches or convert those
branches which have a fairly large number of SSI borrower
accounts, into specialized SSI branches;
viii) Identify sick SSI units and take urgent action to put them on
nursing programmes;
ix) Standardize loan application forms for SSI borrowers; and
x) Impart training to staff working at specialized branches to bring
about attitudinal change in them.

[47]

METHODS OF ASSESSMENT OF WORKING CAPITAL

With freedom given to the banks in evolving their own method of
lending, generally the banks evolved their lending policy
accordingly to which borrowers with working capital limits upto.
There are 3 methods for assessing the working capital. They are:
1. Turnover Method
2. Cash Budget Method
3. Tandon Committee Methods

[48]

A. TURNOVER METHOD
In this method:
Turnover

Working Capital Requirement = 25% of

Promoter Contribution (Margin) = 5% of Turnover

Bank Finance = 20% of Turnover
Applicability: Applicable to borrowers who are engaged in
manufacturing,
services and trading activities
with fund based working capital
requirements
up to and Inclusive of Rs.2 crore (Rs.5 crore for
SSI) as per bank norms.

Format for calculation of Turnover method:

S.N
o.
1

Particulars

Amount

Projected Sales Turnover as on current year

XXXX
XXXX

25% of the projected turnover as on current

year
5% of the projected turnover as on current
year
Available Net working capital in the past
financial year
(2 - 3)

(2 - 4)

XXXX

Maximum Permissible Bank Finance (5 or 6

whichever is lower)

XXXX

2
3
4

XXXX
XXXX
XXXX

Specifications about Turnover Method:

Proposed by the Nayak Committee
Applicable for limits upto 6 crores
Used for assessment of working capital needs of small scale
units
[49]

 Not appropriate for manufacturing and big trading

companies

[50]

B. Cash Budget System

In this method credit appraisal is entirely done by total inflows
and outflows of the firm/company during peak season and slack
season throughout the year. This method is applicable for:
Seasonal industries (sugar/ rice/ mills/ textiles/ tea/ tobacco/
fertilizers)
Contractors
Real Estate Developers
Software Exporters

Applicability: Applicable to borrowers who are enjoying

working capital limits of Rs 10 crores and above option have been
given to the borrower to be assessed as per the Cash Budget
Method. For industries like the mentioned above where in the
pattern of financing the peak cash deficit(s) is followed all along,
the existing system of assessment under the Cash Budget
Method is followed.
Cash Inflows Cash Outflows = Bank Finance in the form
of Working capital

[51]

Cash Inflows
(Operating as well
as Capital inflows
marked for
business uses)
Cash Outflows
(Business
Expenditure)

Bank Finance in
the form of
Working Capital
Limitations:
Will not reflect changes in various current assets and
current liabilities.
It does not give any clue whether a company is earning profit
or not.
Funds flow statement is required to detect any diversion of
funds. But this method does not include Funds flow
statement
Eliminates traditional requirement of Stock and Debtors for
assessment
[52]

3. Tandon Committee Method

Tandon Committee has recommendation the following methods:
Method I
Borrowers is required to contribute a minimum of 25% of the
Working Capital Gap from long term sources (i.e. owned
funds + term borrowings) and the balance 75% of the
working capital gap will be
financed by the bank.
This approach was considered suitable only for very small
borrowers
i.e. where the requirements of credit were
less than Rs.10 lacs.
Method II
Borrower is required to contribute a minimum of 25% of the
Total Current Assets from long term sources (i.e. owned
funds + term borrowings) and the balance 75% of the
working capital gap will be financed by the bank.
RBI stipulated that the working capital needs of all borrowers
enjoying fund based credit facilities of more than Rs.10 lacs
should be appraised (calculated) under this method.
Method III
The borrowers should bring 100% of hard core assets + 25%
of other current assets.
The hardcore current assets i.e. the current assets which
are permanently required by the unit for its
functioning must be exclusively financed by the borrower.
(This method was not accepted for implementation and
hence is of only academic interest)
Specifications about Tandon Methods:
[53]

 Under Method I the promoter has to bring minimum margin

whereas the margin to be brought in under Method III is
maximum
Chore Committee has discarded Method III and
recommendation Method II
Banks mainly uses this method for assessment of working
capital requirement

Matrix based on Working Capital Lending Methods

Segment
Small Scale
Industries

Limits
Upto 5 crore

Method
Turnover Method

Upto 5 crore

Tandon Methods

Trade And Services

Upto 2 crore
Above 2 crore
Above 10 crore

Turnover Method
Tandon Methods
Cash Budget method

Industrial Units

Upto 2 crore
Above 2 crore
Above 10 crore

Turnover Method
Tandon Methods
Cash Budget Method

[54]

Maximum Permissible Bank Finance (MPBF)

Maximum Permissible Bank Finance (MPBF) guidelines were
suggested in Tandon Committee that was being followed by Indian
Banks with lot of stringency.
Format for calculation of Maximum Permissible Bank
Finance
S.
No.
1

Particulars

Amount

Total Current Assets

XXXX

Current Liabilities (other than bank

borrowings)
Working Capital Gap (1 - 2)

XXXX

XXXX

Minimum stipulated Net Working Capital (25%

of TCA or WCG other than export receivables)
Actual/Projected Net Working Capital

Item (3 - 4)

XXXX

Item (3 - 5)

XXXX

2
3
4

XXXX

XXXX

Maximum Permissible Bank Finance (Item

XXXX
6 or 7 whichever is lower)
9
Excess Borrowings, if any representing short
XXXX
fall in NWC (4 - 5)
Excess borrowing (shortfall in NWC) shall be ensured by additional
funds to be brought in by the applicant or by additional bank
finance over MPBF. Under this method, it was thought that the
borrower should provide for a minimum of 25% of total current
assets out of long-term funds i.e., owned funds plus term
borrowings. A certain level of credit for purchases and other
current liabilities will be available to fund the buildup of current
assets and the bank will provide the balance (MPBF).
Consequently, total current liabilities inclusive of bank borrowings
could not exceed 75% of current assets specially inventory.
Generally, bankers are stipulating 50% margin on book debts
[55]

and in case of valued debtors, they are lowering the margin to the
tune of 40% to 30% on case-to-case basis.

[56]

Illustration For Calculation Of Maximum Permissible Bank

Finance (MPBF):
The projected level of current assets and current liabilities other
than bank borrowings as indicated by the borrowers financial
position for the next year is as under:Current Liabilities
(excluding Bank
Borrowing)
Creditors for purchase
Other current liabilities

Amoun
t
100
40

Current Assets

Raw material
Stock in-process
Finished Goods
Receivables
Other Current Assets

Amou
nt
200
20
80
50
10

140
140
The total current assets are as per the norms/past trend and in
relation to the projected sales/production for the next year.
Creditors and other current liabilities also conform to the past
trend.
1st Method
nd
Method
ensures
higher 360
(A)
Total2Current
Assets
(B)
Less: Current
contribution
of borrower by140
Liabilities
thanCapital
way of Netother
Working
bank
borrowing
(NWC).

2nd Method
(A) Total Current Assets
(B)Less: Current
Liabilities other than bank
borrowing

(C) Working Capital

220 (C) Working Capital Gap
(A-B)
Gap(A-B)
Credit Monitoring
(D) Minimum Stipulated
55 (D) Minimum Stipulated
NWC (25% of TCA)
Arrangement
NWC
(25% of WCG)(CMA)

360
140

220
90

With the improvement in the

130
(E) MPBF (C-D)
165 (E) MPBF (CD)
financial discipline followed
by banks, the system of prior authorization by Reserve Bank
under the Credit Authorization Scheme (CAS) for sanction of
Working Capital limits above the respective cut-off points was
[57]

withdrawn and in its place a scheme of Credit Monitoring

Arrangement was introduced on 10th October, 1988.
Under CMA all proposals involving sanction / renewal of credit
limits beyond the cut-off point are to be reported to the Reserve
Bank for post sanction scrutiny to ensure that the basic disciplines
are being observed. The cut-off point for reporting to the Reserve
Bank under CMA was fixed initially at Rs.5.00 crores for working
capital facilities (funded) and at Rs.2.00 crores for term loans on
10th October, 1988 when this scheme was introduced in place of
Credit Authorization Scheme. The cut-off point for reporting to the
Reserve Bank has been increased in Dec. 1992 to Rs.5.00 crores
for term loans. All proposals involving working capital / renewal of
credit limits to borrowers enjoying working capital facilities
(funded based) of Rs.10 crores and above and sanction of
additional limits to the existing borrowers which would take their
total limits from the banking system to Rs.10 crores and above are
to be reported to the RBI for post sanction scrutiny. Similarly, all
sanction of term loans (including deferred payment guarantees) in
which the share of banking system is Rs.5.00 crore and above are
to be reported to the RBI for post sanction scrutiny. It may be
clarified that term loans from banking system as a whole
(excluding those from term lending institutions) should be taken
into account in this regard. Further, the cut-off point of Rs.5.00
crores in respect of term loans for reporting purposes is applicable
irrespective of the amount of the working capital facilities
available to a party from the banking system exceed Rs.5 crores,
it is to be reported to the RBI even if the working capital limits to
the concerned party are less than Rs.10.00 crores i.e. the cut-off
point meant for reporting working capital limits.
As the role of the Reserve Bank has been changed from prior
authorization to post-sanction scrutiny, the scheme has been
named as Credit Monitoring Arrangement (CMA).

[58]

CMA
data iscapital.
a tool used
by the bankers
to assess
the requirement
of working
It is divided
into six parts
as follows:
Form I
Particulars of Existing & Proposed Limits
Form II

Operating Statement

Form III

Analysis of Balance Sheet

Form IV Comparative Statement of Current Assets & Current

Liabilities
Form V
(MPBF)

Computation of Maximum Permissible Bank Finance

Form VI

Funds Flow Statement

The prescribe CMA forms are detailed below:

1. Particulars of the existing/ proposed limits from the

banking system (Form - 1):
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 and
minimum utilization of the limits during the last 12 months and
outstanding balances as on a recent date are also give so that a
comparison can be made with the limits now requested and limits
actually utilized during the last 12 months.
2. Operating Statement (Form - 2):
The data relating to gross sales, net sales, cost of
raw materials, power and fuel, direct labor, depreciation, selling,
general and administration expenses, interest, etc. are furnished
in the form. It also covers information on operating profit and net
profit after deducting total expenditure from total sale proceeds.
3. Analysis of Balance Sheet (Form - 3)
A complete analysis of various items of last years
balance sheet, current years estimates and following years
projections is given in the form. The details of current liabilities,
[59]

term liabilities, net worth, current assets, fixed assets, other non
current assets, etc., are given in the form as per the classification
accepted by the banks.
4. Comparative Statement of Current Assets and Current
Liabilities(Form -4) This form gives the details of various items
of current assets and current liabilities as per the classification
accepted by the banks. The figures given in the form should tally
with the figures given in the Form -3 where details of all the
liabilities and assets are given. This form is used to indicate all the
current assets and current liabilities at one place. In case of
inventory (raw materials, consumable spares, stock-in-process
and finished goods), receivables and sundry creditors; the
holding/levels are given not only in absolute amounts but also in
terms of number of months so that a comparative study may be
done with the prescribed norms/past trends. They are indicated in
terms of number of months in brackets below their amounts.
5. Computation of Maximum Permissible bank Finance
(Form - 5) On the basis of the details of the current assets and
current liabilities given in Form 4, maximum permissible bank
finance is calculated in the form to find out the credit limits to be
allowed to the borrowers.
6. Funds Flow Statement (Form 6
In the form, funds flow of long term sources and uses is given to
indicate whether 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.

[60]

INFORMATION / DATA REQUIRED FOR ASSESSMENT OF

WORKING CAPITAL
In order to assess the requirements of working capital on the
basis of production needs, it is necessary to get the data from the
borrowers regarding their past / projected production, sales, cost
of production, cost of sales, operating profits, etc. In order to
ascertain the financial position of the borrowers and the amount
of working capital needs to be financed by banks, it is necessary
to call for the data from the borrowers regarding their net worth,
long term liabilities, current liabilities, fixed assets, current assets,
etc. The RBI has prescribed the forms in 1975 to submit the
necessary details regarding the assessment of the working capital
requirements under its Credit Authorization Scheme (CAS) was
changed into Credit Monitoring Arrangement (CMA) in 1988.
In order to assess the working capital requirement of Rs.100.00
lacs and above, branches should obtain the basic information
from the borrowers in the above-mentioned forms prescribed by
RBI for reporting under its scheme of CMA (Since dispensed with
CAS). In addition to the information / data in the prescribed forms,
branches may also call for additional information required by
them depending on the nature of the borrowers activities and
their financial position.
The data or information needed for working capital assessment
for new units and old units are as given below.
For New Units
Bankers judgment and calculation will be based on the
projections and estimates submitted to the bank by the parties. To
check the hypothesis and assumptions inter firm comparisons
involved in similar kind of activity can be done. The projections in
case of new companies should have following information:
A. Projected Balance sheets (estimated/projected/audited)
[61]

B. Projected Profit and loss account (estimated/projected/audited)

C. Raw material quantity and value required to affect the sales
D. Basis for projecting manufacturing and administrative
expenses
E. Period involved in various stages of operating cycle
F. Proportion of Cash and Credit Sales
G. Liquid surplus presently available
H. Closing stock of raw materials, work in progress and finished
goods and receivable estimates
I. Manufacturing process details
J. Detailed note on demand and supply and marketing
arrangements.
K. Competition analysis
Existing Units
For existing units judgment will be more accurate as the
projections can be compared with past performance and
estimates can be cross checked to data of past financial
statements. The following information of the last year, current
year and next year shall be required in order to judge accuracy of
the need of the borrower:
A. Balance sheet (estimated/projected/audited)
B. Profit and Loss account (estimated/projected/audited)
C. Cash and Credit Sales
D. Cash and Credit purchases of raw materials
E. Basis for manufacturing costs and factory overheads
F. Basis for administrative expenses
[62]

G. Liquid surplus presently available

H. Opening and Closing stock of raw materials ,work in progress
and finished goods and receivables
I. Manufacturing process details
J. Detailed note on demand and supply and marketing
arrangements.
K. Competition analysis
STEPS INVOLVED IN FINANCIAL ANALYSIS OF LENDING
Step1: Companys financial statement for at least 3 to 5 years is
acquired. The financial statement must include the following:

Balance sheets
Income statements
Shareholders equity statement
Cash flow statements

Step 2: A quick scanning of all the statements is done to look for

large movements in specific terms from one year to the next. If
there is something suspicious, relevant research about the
company is done from the information available to find out the
reason. Notes accompanying the financial statement are also
reviewed for additional information that may be significant to
analysis.
Step 3: This stage calls for an exhaustive scrutiny of the balance
sheet. While examining, the advances manager looks for the large
changes in overall components of companys assets and liabilities
of equity. For example, have fixed assets grown rapidly in one or
two years, due to acquisitions or new facilities? Has the portion of
debt grown rapidly, to reflect a new financial strategy?
Step 4: This level relates to an assessment of the
income statement as furnished by the client. The advances
manager looks for the trends overtime. Graphs and growth of the
following entries over the past several years are calculated.
[63]

 Revenue (sales)
Net income (profit, earnings)
For each key expense components on the income statement,
percentage of sales of each year is calculated. For example,
percentage of cost of goods sold over sales, general and
administrative expenses over sales and development over sales
are computed. Favorable and unfavorable trends are highlighted.
Manager determines whether the spending trends support the
companys strategies.
Step 5: The very phase pertains to an evaluation of the cash flow
statement. It gives information about the cash inflows and
outflows from operations, financing and investing. While the
income statement provides information about both cash and noncash items, the cash flow statement attempts to reconstruct that
information to make it clear how cash is obtained and used by
the business, since that is what investors really care about.
Step 6: Calculation of financial ratios:
KEY RATIO LEVELS
Particulars

Low Risk

Medium Risk

High Risk

Current Ratio
TOL/TNW

>1.40
<2.00

1.20 1.40
2.00 3.50

<1.20
<3.50

Interest
Coverage
PAT/Sales %

>3.50

2.00 3.50

<2.00

>10.00

4.00 10.00

<4.00

Inventory (No.
of days)
Debtors (No. of
days)
Debt Equity
Ratio
DSCR (For TL)

<60

60 90

>90.00

<45

45 90

>90.00

<1.25

1.25 1.75

>1.75

>2.00

1.25 2.00

<1.25

[64]

PROCEDURE OF GRANTING CASH CREDIT

We have studied in this lesson that banks provide financial
assistance to its customers in the form of loans, advances, cash
credit, overdraft and through the discounting of bills. The
procedure of applying for and sanction of loans and advances
differs from bank to bank. However, the steps which are generally
to be taken in all cases are as follows:
(I) Filling up of loan application form
Each bank has separate loan application forms for different
categories of borrowers. When you want to borrow money from a
bank, you will have to fill up a loan application form available with
the bank free of cost. The loan application form contains different
columns to be filled in by the applicant. It includes all information
required about the borrower, purpose of loan, nature of facility
(cash-credit) required, period of repayment, nature of security
offered, and the financial status of the borrower.
A running business limit may be required to furnish additional
information in respect of Assets and liabilities, Profit and loss for
the last 2 to 3 years, the names and addresses of three persons
(which may include borrowers, suppliers, customers and bankers)
for reference purposes.
(ii) Submission of form along with relevant documents
[65]

The loan application form duly filled in should be submitted to the

bank along with the relevant documents.
(iii) Sanctioning of loan
The bank scrutinizes the documents submitted and determines th
e credit worthiness of theapplicant. If it is found to be feasible, the
loan is sanctioned. If the loan is for Rs.5000 or less, normally the
Branch Manager himself can take the decision and sanction the
loan. In case the amount of loan is more than Rs.5000, the
application is considered at regional, zonal or head office level,
depending on the amount of loan.
(iv) Executing the Agreement
When the loan is sanctioned by the bank and the borrower is
informed about it, he will have to execute an agreement with the
bank regarding terms and condition for the amount of loan raised.
(v) Arrangement of Security for Loan
The borrower will now arrange for security against the loan. These
securities may be immovable properties, shares, debentures,
fixed deposit receipts, and other documents, like, Kisan Vikas
Patra, National Saving Certificate, as per agreement. When the
borrower completes all the formalities, he is allowed to get the
amount of loan as sanctioned by the bank.

[66]

WORKING CAPITAL ASSESSMENT

1) CASE STUDY

NAME OF THE APPLICANT BORROWER: M/S ABC FILLINGS, Shivaji

Chowk , Jammu
GENERAL INFORMATION ON THE PROPOSAL:
Name of the Branch
Shivaji Chowk, Jammu
Date of Receipt of Proposal
22-04-2012
Nature of Proposal
Renewal cum enhancement proposal
Existing Banking Arrangement
[67]

Sole
Proposed Banking Arrangement
-doActivity
Petrol Pump
Sector
Priority
Particulars of the existing facilities enjoyed by the Applicant
Type

Limit

of

BOS

Margin

Securi

as on

ties

facility
Cash

60.0 8,90,1

Credi 0
70
Recommen Type of
t
lacs
dation of
facility
Branch

25%

Hypothecat

on
ion
of
Limit stocks
Margin &Interest Securiti
stock
/Commi
es
s
& Book
50%

Debts,

on

Party

3rd ssion
on NFB

Guarantee, facilitie
s
debts Mortgage
book

Enhancem
ent in C/C
limit from
Rs. 60 lacs
to Rs.95
lacs

C/C

60.00

Limit

lacs

ofStocks:
Property
to - 25%

95.00
lacs

NA

1. Hypot
hecati
on of

Book

stock

Debts: -

[68]

&

50%

Book
Debts
2. 3rd
Part
y
Guar
ante
e of
two
pers
ons
3. Mortg
age
of
Prope
rty
valuin
g
Rs.91.
30
lacs

DETAILS OF PARTNERS:
[69]

Name

Address

ENW as on

Share in the
firm

Mrs. XYZ

Trikuta

nagar, Rs.

8.25

95%

8.50

4%

Subhash nagar, Rs. 5.00 lacs

1%

Jammu

crores
approx.

. PQR

Nanak

nagar, Rs.

Jammu

crores
approx.

Mrs. DEF

Jammu

approx.

SECURITIES EXISTING/ PROPOSED FOR THE FACILITY:

PRIMARY
Type of security

Ownership,
location

Value of security
and

address
Hypoth. of stocks Near

kithchen Stocks

& book

gallery

lacs.

Debts

jammu

Book

Rs.

Debts

30.64

Rs.

70.71 lacs

COLLATERAL (MORTGAGE AND OTHER TANGIBLE SECURITY)

[70]

Type of security

Ownership,

Value of security

location and
address
Mortgage of House
built

in

Gandhi

nagar, 91.30 lacs

plot jammu

measuring 45x 65

COLLATERAL SECURITY (GUARANTEE)

Name

Address

Relationshi Age

Net Worth

p
Mr. FGH

Mr. LMN

Channi

Son in Law 43 yrs

Rs.1.35

Himmat,

cores

Jammu

approx.

Gandhi

Friend

60 yrs.

Rs. 100.00

nagar,

lacs

Jammu

approx.

[71]

BACKGROUND
M/S ABC FILLINGS is a partnership concern of three partners
namely i) Mrs. XYZ ii) Mr. PQR iii) Mrs. DEF carrying on.a petrol
pump at l, Shivaji Chowk Jammu. Share holding pattern of the
partners is as underXYZ

95%

PQR

4%

DEF

1%

Presently the firm is enjoying a cash credit limit of Rs. 60.00 lacs
from us. The firm, in order to expand its business further, has
requested for an enhancement in existing limit from Rs. 60.00
lacs to Rs.95.00 lacs

ASSESSMENT OF WORKING CAPITAL FUND BASED: The assessment has been made on the projected figures for the
FY 201-12 and same parameters have been accepted in
computation of MPBF

[72]

MPBF METHOD
Particulars

Holding Period

Amount in lacs of

(in days/weeks/

Rs.

months)
A Current Assets
Stocks
S. Debtors/

34.52

20

98.63

Receivables
Others (specify)
Total (A)

133.15

B Current Liabilities
S. Creditors

9.00

Others if any
Total (B)

9.00

C Working Capital Gap

124.15

(A-B)
[73]

D Stipulated NWC @25%

33.29

of A
E Projected NWC

34.17

F MPBF(C-DorE)

89.98 Say Rs 90.00

whichever is less

lacs only

Limit recommended for sanction Rs. 90.00 lacs

RECOMMENDATION:
Keeping in view the above facts it is recommended that existing
c/c limit of M/S ABC FILLINGS may be enhanced from Rs 60.00
lacs to Rs. 90.00 lacs (Rupees ninety lacs only) for one year
subject to its renewal after review against the following securities,
terms and conditions:-

SECURITIES:
Primary

Hypothecation of all types of stocks and

assignment book debts.

Collateral

Extension of charge on property already

mortgage by way of equitable mortgage
against existing C/C limit comprising
house built in
[74]

Gandhi nagar, Jammu

measuring 45x 65 owned by Mr.LMN,

one of HM guarantor valued Rs 91.00
lacs only by
Third party guarantee of two
persons namely

i. Mr.FGH

R/O Gandhi Nagar,

Jammu
ii. Mr. LMN S/O R/O Gandhi NagarJammu

TERMS AND CONDITIONS:

Period

One

year

subject

to

renewal

after

review.
The renewal proposal to be submitted
not later than 9 months from the date of
sanction.
Interest

11.75% p.a with monthly rests or other

such
rate of interest as may be prescribed by
the Bank from time to time
Margin

25% on stocks & book-debts.

Drawing power

The drawings in the account to be

strictly
regulated

as

per

Drawing

power

available. For this purpose branch shall

obtain stocks statement, Debtors and
Creditor
[75]

list

on

monthly

basis

and

compute the drawing power accordingly.

Stocks

older

than

90

days

to

be

excluded for the purpose of calculating

Drawing power.
Disbursement

The facility to be released for purchase

of
fresh stocks only. The drawings in the cash credit limit shall
be allowed strictly against the drawing security documents
as per Manual of Loan documents issued by Law
Department, Corporate Headquarters, Srinagar.
To get the title verification report and related loan
documents vetted from Law Department Zonal Office,
Jammu
To obtain original Title deeds in respect of properly
mortgaged to be kept on record.
To obtain non encumbrance cum title verification certificate
from the counsel on the approved panel of the bank.
A copy of fresh Jamabandhi certificate to be obtained if
already not obtained.
To create banks charge over the mortgaged properly in
revenue record and acknowledgement of the same be
obtained and place with the documents.
The party to undertake not to create any subsequent charge
on primary as well as collateral security during the currency
of loan.

[76]

 The party to execute an irrevocable power of attorney

authorizing the bank to sell the primary as well as collateral
security in
power available on the paid up stocks
and receivables from time to time.
Insurance

The stocks as well as mortgaged

property

to

be

got comprehensively

insured with some reputed insurance

company against all risks with usual
Bank Clause at party's cost.

OTHER TERMS AND CONDITIONS:

Before release of credit facility Branch head to ensure:
To obtain all legal/security documents as per Manual of Loan
documents

issued

by

Law

Department,

Corporate

Headquarters, Srinagar.
To

get

the

title

verification

report

and

related

documents vetted from Law Deptt. Zonal Office, Jammu.

[77]

loan

 To obtain original Title Deeds in respect of property

mortgaged to be kept on record.
To obtain Non encumbrance cum title verification certificate
from the counsel on the approved panel of the Bank.
A copy of fresh Jamabandhi certificate to be obtained if
already not obtained.
To create bank's charge over the mortgaged property in
revenue record and acknowledgement of the same be
obtained and placed with the documents.
The party to undertake not to create any subsequent charge
on primary as well as collateral security during the currency
of loan.
The party to execute an irrevocable power of attorney
authorizing the Bank to sell the primary as well as collateral
security in case of its failure to adjust the account on
demand.

[78]

 www.google.com
www.jkbank.net
J&K Bank circulars
Management Accounting by Shashi. K. Gupta
http://wiki.answecom/Q/How_would_you_assess_the_workin
g_capital_requirements_of_a_seasonal_industry
http://www.rushabhinfosoft.com/webpages/BHTML/CH15.HTM

http://www.jkbank.net/pdfs/invest/2012/JKBank-Earnings
%20Update-Mar-2012-Crore.pdf
[79]