A

PROJECT REPORT
ON
WORKING CAPITAL FINANCE
IN
HDFC BANK

SUBMITTED TO:

SAVITRIBAI PHULE PUNE UNIVERSITY

IN PARTIAL FULFILLMENT OF REQUIREMENT
FOR THE AWARD OF THE DEGREE OF
MASTERS OF BUSINESS ADMINISTRATION, (M.B.A)

SUBMITTED BY:
FAYZAN KHALIQ BHAT
UNDER THE GUIDANCE OF
PROF.
()

TRINITY INSTITUTE OF MANAGEMENT AND RESEARCH

KONDHWA-SASWAD ROAD, PUNE, 411060
BATCH: 2014-2016

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ACKNOWLEDGEMENT
It is not possible to prepare a project report without the
assistance & encouragement of other people. This one is
certainly no exception.
On the very outset of this report, I would like to extend my sincere &
heartfelt obligation towards all the personages who have helped me in
this endeavor. Without their active guidance, help, cooperation &
encouragement, I would not have made headway in the project.
I am ineffably indebted to PROF.

for conscientious guidance and

encouragement to accomplish this assignment.

I extend my gratitude to TRINITY INSTITUTE OF MANAGEMENT AND
RESEARCH for giving me this opportunity.
I also acknowledge with a deep sense of reverence, my gratitude
towards my parents and member of my family, who has always
supported me morally as well as economically.
At last but not least gratitude goes to all of my friends who directly or
indirectly helped me to complete this project report.
Any omission in this brief acknowledgement does not mean lack of
gratitude.

Thanking You
Fayzan Khaliq Bhat
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DECLARATION
I hereby declare that the project report entitled, "Working Capital Finance" at HDFC
Bank, submitted to the University of Pune, in partial fulfillment of the requirement for
the award of degree of Master of Business Administration (M.B.A) under the guidance
of PROF.
, of Finance subject of MBA at Trinity Institute Of
Management And Research , is my original work and the report submitted
is my own work and has not been submitted to any other Institute for the award of any
degree or diploma.
I shall be responsible for any unpleasant moment/situation.

Name: Fayzan Bhat

Place: Pune
Date:

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Signature:

INDEX
S.No.

CONTENTS

PAGE NO.

1.

Introduction &Executive Summary

5-14

2.

Company Profile

15-22

3.

Literature Review

23-25

4.

Research Methodology

26-29

5.

Data Analysis And Interpretation

30-56

6.

Findings

57-58

7.

Suggestions& Recommendations

59-60

9.

Conclusions

61-62

10.

Bibliography

63-64

11.

Annexure

65-70

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Executive Summary:
This project was carried out in one of the prominent and leading Banks in the state of Jammu and
Kashmir HDFC Bank. HDFC Bank Limited was incorporated in August 1994. It was promoted
by Housing Development Finance Corporation Limited (HDFC), India's largest housing finance
company. It was among the first companies to receive an 'in principle' approval from the Reserve
Bank of India (RBI) to set up a bank in the private sector. The Bank started operations as a
scheduled commercial bank in January 1995 under the RBI's liberalization policies. .
The main aim of the project was to trace out the working capital finance provided in the Kashmir
valley by HDFC bank to SME (Small Medium Enterprise). Working capital is the financing of
business that helps a company pay its trade creditors and cash flow it is the finance that
businesses need for their day-to-day trading operations. All businesses require working capital,
but sometimes they are unable to access the cash that they need because they have to wait for
large invoices to be paid sometimes for up to 90 days. Working capital is essential for the
company to meet its continuous operational needs. The availability of working capital influences
the company's ability to meet its trade and short-term debt obligations, as well as to remain
financially viable.
Businesses that are seasonal or cyclical often require more working capital to stay afloat during
the off season. Although the company may make more than enough to pay all its obligations
yearly, must ensure that they have enough working capital at any one time to meet their short
term obligations. Working capital is the amount of current assets minus the amount of current
liabilities as of specific date. These amounts are obtained from your company's balance sheet.
The formula for Working capital is:
Working capital = Current Assets Current Liabilities
Now in this project, we will discuss about various sources of working capital finance provided
by the HDFC bank in the J&K state. HDFC bank is one of the best banks in the world. HDFC
Bank has 2,776 branches and 10,490 ATMs across 1,399 cities in the country. In J&K state,
HDFC has 64 branches, and wide area of ATM networks. This covers almost 90 percent of state,
which makes HDFC one of the best banks of J&K.

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INTRODUCTION

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The working capital is the life-blood and nerve center of a business firm. The importance of
working capital in any industry needs no special emphasis. No business can run effectively
without a sufficient quantity of working capital. It is crucial to retain right level of working
capital. Working capital management is one of the most important functions of corporate
management. A business enterprise with ample working capital is always in a position to avail
advantages of any favorable opportunity either to buy raw materials or to implement a special
order or to wait for enhanced market status. Working capital can be utilized for the payment of
lease, employee's payroll, and pretty much any other operating costs that are involved in the
everyday life of business. Even very successful business owners may need working capital funds
when the unexpected circumstances arise. The overall success of the company depends upon its
working capital position. So, it should be handled properly because it shows the efficiency and
financial strength of company.
Working capital management is highly important in firms as it is used to generate further returns
for the stakeholders. When working capital is managed improperly, allocating more than enough
of it will render management non-efficient and reduce the benefits of short term investments. On
the other hand, if working capital is too low, the company may miss a lot of profitable
investment opportunities or suffer short term liquidity crisis, leading to degradation of company
credit, as it cannot respond effectively to temporary capital requirements. Efficient management
of working capital means management of various components of working capital in such a way
that an adequate amount of working capital is maintained for smooth running of a firm and for
fulfillment of objectives of liquidity and profitability. But, it is very difficult for the management
too to estimate working capital properly because, amount of working capital varies across firms
over the periods depending upon the nature of the business, nature of raw material used, process
technology used, nature of finished goods, degree of competition in the market, scale of
operation, credit policy etc. Therefore, a significant amount of fund is required to invest
permanently in the form of different current assets.
Working capital is a financial metric which represents operating liquidity available to a business,
organization or other entity, including governmental entity. Along with fixed assets such as plant
and equipment, working capital is considered a part of operating capital. Gross working capital
equals to current assets. Working capital is calculated as current assets minus current liabilities. If
current assets are less than current liabilities, an entity has a working capital deficiency, also
called a working capital deficit.

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Working capital is a common measure of a company's liquidity, efficiency, and overall health.
Because it includes cash, inventory, accounts receivable, accounts payable, the portion of debt
due within one year, and other short-term accounts, a company's working capital reflects the
results of a host of company activities, including inventory management, debt management,
revenue collection, and payments to suppliers.
Positive working capital generally indicates that a company is able to pay off its short-term
liabilities almost immediately. Negative working capital generally indicates a company is unable
to do so. This is why analysts are sensitive to decreases in working capital; they suggest a
company is becoming overleveraged, is struggling to maintain or grow sales, is paying bills too
quickly, or is collecting receivables too slowly. Increases in working capital, on the other hand,
suggest the opposite. There are several ways to evaluate a company's working capital further,
including calculating the inventory-turnover ratio, the receivables ratio, days payable, the current
ratio, and the quick ratio.
One of the most significant uses of working capital is inventory. The longer inventory sits on the
shelf or in the warehouse, the longer the company's working capital is tied up.
When not managed carefully, businesses can grow themselves out of cash by needing more
working capital to fulfill expansion plans than they can generate in their current state. This
usually occurs when a company has used cash to pay for everything, rather than seeking
financing that would smooth out the payments and make cash available for other uses. As a
result, working capital shortages cause many businesses to fail even though they may actually
turn a profit. The most efficient companies invest wisely to avoid these situations.
Analysts commonly point out that the level and timing of a company's cash flows are what really
determine whether a company is able to pay its liabilities when due. The working-capital formula
assumes that a company really would liquidate its current assets to pay current liabilities, which
is not always realistic considering some cash is always needed to meet payroll obligations and
maintain operations. Further, the working-capital formula assumes that accounts receivable are
readily available for collection, which may not be the case for many companies.
It is also important to understand that the timing of asset purchases, payment and collection
policies, the likelihood that a company will write off some past-due receivables and even capitalraising efforts can generate different working capital needs for similar companies. Equally
important is that working capital needs vary from industry to industry, especially considering
how different industries depend on expensive equipment, use different revenue accounting
methods, and approach other industry-specific matters. Finding ways to smooth out cash
payments in order to keep working capital stable is particularly difficult for manufacturers and
other companies that require a lot of up-front costs. For these reasons, comparison of working
capital is generally most meaningful among companies within the same industry, and the
definition of a "high" or "low" ratio should be made within this context.

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A company can be endowed with assets and profitability but short of liquidity if its assets cannot
readily be converted into cash. Positive working capital is required to ensure that a firm is able to
continue its operations and that it has sufficient funds to satisfy both maturing short-term debt
and upcoming operational expenses. The management of working capital involves managing
inventories, accounts receivable and payable, and cash.
The basic calculation of the working capital is done on the basis of the gross current assets of the
firm.
Current assets and current liabilities include three accounts which are of special importance.
These accounts represent the areas of the business where managers have the most direct impact:
Accounts receivable (current asset)
Inventory (current assets), and
Accounts payable (current liability)
The current portion of debt (payable within 12 months) is critical, because it represents a shortterm claim to current assets and is often secured by long term assets. Common types of shortterm debt are bank loans and lines of credit.
An increase in net working capital indicates that the business has either increased current assets
(that it has increased its receivables, or other current assets) or has decreased current liabilities
for example has paid off some short-term creditors, or a combination of both..
If a company's current assets do not exceed its current liabilities, then it may run into trouble
paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining
working capital ratio over a longer time period could also be a red flag that warrants further
analysis. For example, it could be that the company's sales volumes are decreasing and, as a
result, its accounts receivables number continues to get smaller and smaller. Working capital also
gives investors an idea of the company's underlying operational efficiency. Money that is tied up
in inventory or money that customers still owe to the company cannot be used to pay off any of
the company's obligations. So, if a company is not operating in the most efficient manner, it will
show up as an increase in the working capital. This can be seen by comparing the working
capital from one period to another; slow collection may signal an underlying problem in the
company's operations.

Working Capital finance: Working capital finance is defined as the capital of a business that
is used in its day-to-day trading operations, calculated as the current assets minus the current
liabilities. For many companies, this is wholly comprised of trade debtors (that is, bills
outstanding) and trade creditors (bills the company in question has yet to pay).
Various sources of working Capital finance provided by HDFC Bank:
The HDFC bank has two categories in which they provide working capital finance .They are:

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1. The firm or business having turnover less than or equal to Rs 5crores.

2. The firm or business having turnover greater than Rs 5crores.

Following types of working capital finance are provided under category 1:

A} Value draw: Providing financial assistance to first-time borrowers/ existing borrowers an
efficient working capital solution from the Emerging Enterprises Group, the Value draw over
draft facility

Credit facility up to Rs 25 Lacs/Take-Over of existing facilities at attractive interest rates.

Wide range of collateral options
Residential/Commercial/Industrial Property/Shares
Stock/Book-Debts/Gold
Dedicated Relationship Management
Pre-Qualified Business Credit Cards to meet your business expenses

Documents required for availing this facility:

CA Certified/Audited Financial statements

Previous Six month bank statements
Term loan re-payment track record if any
Collateral Documents
Any other documents as per banks discretion based on individual case merit.

B}Elitedraw: Providing working capital solutions which assist you in taking your business to
scale new heights

Credit facility starting from Rs 25 lacs/Take-Over of existing facilities at attractive

interest rates.
Wide range of collateral options
Residential/Commercial/Industrial Property
Stock/Book-Debts
Dedicated Relationship Management
Pre-Qualified "Business Credit Cards" to meet your business expense

Documents required for availing this facility:

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Financial statements
Previous Six month bank statements
Term loan re-payment track record if any
Collateral Documents
Any other documents as per banks discretion based on individual case merit.

Following types of working capital finance/facility are provided under category 2:

Cash credit/ Overdraft:
HDFC Bank offers Cash Credit / Overdraft facilities to various segments of customers for their
working capital requirements. This is a fund based facility to help fund business inventory (raw
materials and finished goods) and receivables (debtors).

Letter of Credit
HDFC offer import financing through Letters of Credit, which are well accepted globally and
supported by a strong trade finance set up. They are direct members of SWIFT and have
correspondent banking arrangements with more than 450 banks worldwide. They also structure
complex Letters of Credit.

Bank Guarantee
Bank Guarantees are necessary for certain business obligations. At HDFC Bank, we issue Bank
Guarantees on your behalf under any business contract. HDFC have dedicated Trade Finance
desks spread throughout the country providing the customers with the best services that add
value to their business.

Short Term Finance

HDFC helps the customer, structure low cost credit programs and cash flow financing to meet
their specific short term cash requirements. Loans are structured to enhance customers
profitability by scheduling repayments to match their cash flow available to repay their debts.

Packing Credit
Packing Credit is offered to exporters to help them finance the purchase and import of raw
materials, and the processing and packing of the goods meant for export.

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Post Shipment Limits

Post Shipment Credit is offered to exporters to help them finance export sales receivables, after
the date of shipment of goods till the date of realization of export proceeds.
HDFC offers various services:
Negotiations/ payments/ acceptance of export documents under Letters of Credit.
Purchase/ discount of export documents under Confirmed Orders/Export Contracts, etc.
Advances against export bills sent on a collection basis.
Advances against exports sent on a consignment basis.
Advances against undrawn balance on exports.
Advances against approved deemed exports.

Documents required for availing these facilities:

Completed Application Form along with Annexure (Duly filled, signed by customer)
Last 2 years audited financial statements along with auditor and director's report. (Latest
provisional results signed by the Directors / partners / proprietor For previous
financial year if audited statements are not available (till 7 months of year ending))
and financial projections for the total tenure of term loan, including Calculation of
DSCR (if any).
Last 2 years ITR and Sales (VAT) Tax Return of latest completed FY*
Copy of the sanction letter of the existing bank (or Bank Statement Reflecting The Limit
or CA Certificate confirming the existing borrowings)
Bank statement of all bank accounts for last 6 months and any past repayment track
records (loan statements) of the establishment & its promoters
For Ltd / Pvt Ltd co Shareholding pattern & MOA / AOA. For Partnership firm Partnership Deed
External Rating (CRISIL, ICRA, CARE etc.)
Copy of complete property documents of all properties to be mortgaged
Copy of telephone bills/ electricity bills (latest) to be available for address
confirmation (for Merchant cases - non HDFC Bank customers only)
Certificate under Shop and Establishment Act or Govt. Registration Document (for
Merchant cases - non HDFC Bank customers only)

All Documents should be self-attested by Applicant / borrower.

In this project we will also make assessment of working capital. The HDFC bank Srinagar
provided me with financial statements of certain business which have requested for working

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capital finance .I have analyzed those financials and I had made my recommendations according
to their financial statements.

WORKING CAPITAL MANAGEMENT:

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 qualitative concept gives an idea regarding source of financing capital. According to
qualitative concept the amount of working capital refers to excess of current assets over current
liabilities. L.J. Guthmann defined working capital as the portion of a firms current assets
which are financed from longterm funds.
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
Structure of Working Capital:
The different elements or components of current assets and current liabilities constitute the
structure of working capital which can be illustrated in the shape of a chart as follows:
Structure of Current Assets and Current Liabilities:
Current Liabilities
Bank Overdraft
Creditors

Outstanding Expenses
Bills Payable
Short-term Loans
Proposed Dividends
Provision for Taxation, etc.

Current Assets
Cash and Bank Balance
Inventories: Raw-Materials
Work-in-progress
Finished Goods
Spare Parts
Accounts Receivables
Bills Receivables
Accrued Income
Prepaid Expenses
Short-term Investments

The management of current assets, current liabilities and inter-relationship between them is
termed as working capital management. Working capital management is concerned with
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problems that arise in attempting to manage the current assets, the current liabilities and the
inter-relationship that exist between them. In practice, There is usually a distinction made
between the investment decisions concerning current assets and the financing of working
capital.
From the above, the following two aspects of working capital management emerge:
1. To determine the magnitude of current assets or level of working capital and
2. To determine the mode of financing or hedging decisions.
WORKING CAPITAL FINANCE:
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 owners
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.
Working 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.
Working Capital Facilities:
Working Capital Facilities also called Cash Credits is a type of facility that is used for
withdrawing amount from business account even though the account does not have enough credit
balance. Here, the amount limit which can be withdrawn is sanctioned by bank based on business
cycle of client as well as working capital gap and drawing power of clients. Here, the drawing
power is determined upon understanding the stock as well as book debts statements that are
submitted by borrowers at monthly intervals against security through hypothecation of :

Stock of commodities
Book debts

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Here, the excess cash withdrawal facility is made on demand from customer where they have to
pay interest on excess amount withdrawn. Further, the Cash Credit facility is also useful for those
businesses where cash payment like wages, transportation need to be made and receivables are
not realized in time.

COMPANY
PROFILE
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HISTORY OF ORGANISATION:
HDFC Bank Limited is an Indian banking and financial services company based in
Mumbai, Maharashtra. It was incorporated in 1994. HDFC Bank is the fifth largest bank
in India by assets. It is the largest bank in India by market capitalization as of 24
February 2014. As on Jan 2 2014, the market cap value of HDFC was around USD
26.88B, as compared to Credit Suisse Group with USD 47.63B. The bank was promoted
by the Housing Development Finance Corporation, a premier housing finance company
(set up in 1977) of India.
As of 31 March 2014, the bank had assets of INR 4.08 trillion. For the fiscal year 201213, the bank has reported net profit of INR 69 billion, up 31% from the previous fiscal
year. Its customer base stood at 28.7 million customers on 31 March 2014.
The Housing Development Finance Corporation Limited (HDFC) was amongst the first
to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a
bank in the private sector, as part of the RBI's liberalization of the Indian Banking
Industry in 1994. HDFC Bank commenced operations as a Scheduled Commercial Bank
in January 1995.
HDFC Bank comprises of a dynamic and enthusiastic team determined to accomplish the
vision of becoming a World-class Indian bank. HDFC banks business philosophy is
based on our four core values - Customer Focus, Operational Excellence, Product
Leadership and People. They believe that the ultimate identity and success of their bank
will reside in the exceptional quality of people and their extraordinary efforts. They are
committed to hiring, developing, motivating and retaining the best people in the industry.

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BOARD OF DIRECTORS:
NAME
C .M. Vasudev

DESIGNATION
Chairman

AdityaPuri

Managing Director

PareshSukthankar

Deputy Managing Director

KiazadBarucha

Executive Director

A.N. Roy

Director

KekiMistry

Director

ParthoDatta

Director

Bobby Parikh

Director

Vijay Merchant

Director

PanditPalande

Director

RenuKarnad

Director

ADDRESS:
HDFC Bank,
1st floor C.S.No.6/242
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SenapatiBapatMarg,
Lower Parel,
Mumbai 400 013

VISION AND MISSION STATEMENT:

VISION:
To be customer driven best managed enterprise that enjoys market leadership in providing
housing related finance.
MISSION:
To provide package of attractive financial services for housing purpose through a competent and
motivate team of employees using the state of the art and technology to maintain the financial
stability and growth of the organization whilst contributing to the national goal of providing
decent housing to all.

AWARDS & ACHIVEMENTS :

Awards and recognitions 2014:

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Outlook Money
award 2014
IBA Innovation
Awards
Dun & Bradstreet
Polaris Financial
Technology Banking
Award 2014

Institutional Investor

Forbes Asia
Sunday Standard
Best Banker Awards

Asia Money 2014

MACCIA Awards
2014
UTI Mutual Fund
CNBC TV 18
Financial Advisory
Awards 2012
Dun & Bradstreet
Corporate Awards
2012
NDTV Profit Business
Leadership Awards
2012
NASSCOM CNBC
TV18 IT Innovation
Award
The National Quality
Excellence Awards
FE Best Bank
Awards
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Skoch Financial

Best Bank in Large

Banks Category
Most Innovative Use of
Technology
Best Private Sector
Bank Technology
Adoption
Best Private Sector
Bank Retail
Overall Best Private
Sector Bank
Best Bank in Asia
Mr. AdityaPuri - Best
CEO
Fab 50 Companies List
for the 7th year
Best Private Sector
Bank: Large
Safest Bank: Large
Mr. AdityaPuri: Top
Achiever
Best Domestic Bank in
India
Mr. AdityaPuri: Best
Executive in India
Best in Financial
Services: Bank
Category
Best Performing Bank
Private

Best in Banking sector

Winner in the banking

category
Best IT Driven
Innovation in Banking
(COMMERCIAL)
Best Customer Service
Result
Best Bank: New Private
sector
Best in Strength &
Soundness
Mr. AdityaPuri: Best
Banker
Organization of the

Products and Services:

HDFC Bank offers the following four core products:
Personal banking:
Under Personal Banking, HDFC offers:

Accounts & Deposits

Loans

Cards

Demat

Investments

Insurance

Forex

Premium Banking

Private Banking

NRI banking :
Under NRI Banking, HDFC offers
Accounts & Deposits
Money Transfer
Investments & Insurance
Research Reports
Payment Services
SME banking:
Under SME Banking, HDFC offers:
Accounts & Deposits

Business Financing

Trade Services

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Payments & Collections

Cards

Wholesale banking:
HDFC offers Wholesale Banking for Corporates and Financial Institutions & Trusts. The Bank
also provides services such as Investment Banking and other services in the Government sector.

Services provided by HDFC Bank:

Wholesale banking services:
HDFC Bank provides a range of commercial and transactional banking services, including
working capital finance, trade services, transactional services, cash management, etc. to large,
small and mid-sized corporates and agriculture-based businesses in India. The bank is also a
leading provider of these services to its corporate customers, mutual funds, stock exchange
members and banks.
Retail banking services:
HDFC Bank was the first bank in India to launch an International Debit Card in association with
VISA (Visa Electron). The bank also issues the MasterCard Maestro debit card. The Bank
launched its credit card business in late 2001. By the end of June 2015, it had a credit card base
of 9.94 million. By March 2012, the bank had a total card base (debit and credit cards) of over
19.7 million. The Bank is also one of the leading players in the "merchant acquiring" business
with over 240,000 point-of-sale (POS) terminals for debit / credit cards acceptance at merchant
establishments. The Bank is positioned in various net based B2C opportunities including a wide
range of Internet banking services for Fixed Deposits, Loans, Bill Payments, etc.
Treasury:
The bank has three main product areas - Foreign Exchange and Derivatives, Local Currency
Money Market & Debt Securities, and Equities. These services are provided through the bank's
Treasury team. To comply with statutory reserve requirements, the bank is required to hold 25%
of its deposits in government securities. The Treasury business is responsible for managing the
returns and market risk on this investment portfolio.
Operations:
As of 30 September 2014, HDFC Bank has 3,251 branches and 11,177 ATMs, in 2,022 cities in
India, and all branches of the bank are linked on an online real-time basis. The Bank has overseas
branch operations in Bahrain , Hong Kong and Dubai.
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HDFC Bank has two subsidiaries:

HDB Financial Services Limited (HDBFS):
HDBFS is engaged in retail asset financing. It is a non-deposit taking non-bank finance
company (NBFC). Apart from lending to individuals, the company grants loans to micro,
small and medium business enterprises. It also runs call centers for collection services to
the HDFC Banks retail loan products. HDFC Bank holds 97.4% shares in HDBFS. As of
March 31, 2014, HDBFS has 230 branches in 184 cities. During the FY 2012-13, HDBFS
had turnover of INR 9.6 billion and profit after tax of INR 1 billion. It has 6,404
employees as of 31 March 2014.
HDFC Securities Limited (HSL):
HSL is engaged in stock broking. As of March 31, 2014, HDBFS has 194 branches across
150 cities. HDFC Bank has 62.1% shareholding in HSL. During the FY 2012-13, HSL
had turnover of INR 2.3 billion and profit after tax of INR 668 million. During the year,
the Company received the Best e-Brokerage Award - 2012 in the Outlook Money
Awards in the runner up category.
Listings and Shareholding :
The equity shares of HDFC Bank are listed on the Bombay Stock Exchange, where it is a
constituent of the BSE SENSEX index, and the National Stock Exchange of India where it is
a constituent of the CNX Nifty. Its American Depositary Shares are listed on the NYSE. Its
Global Depository Receipts (GDRs) are listed on the Luxembourg Stock Exchange where 2
GDRs represent one underlying equity share of HDFC Bank.

Shareholding: On 30 September 2014, the promoter group Housing Development

Finance Corporation held 22.72% of its equity shares. 33.61% of the shares were owned
by the Foreign Institutional Investors (FII). Around 428,000 individual public
shareholders own approx. 8.43% of its shares. The remaining 35.24% shares are owned
by others.

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LITERATURE
REVIEW

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LITERATURE REVIEW:
ABSTRACT:
Working capital is the lifeblood and nerve center of any business. No business can run
successfully without adequate working capital. Hence, working capital management is very
important of corporate finance because it directly affects the liquidity and profitability of the
firm. An efficient working capital management (WCM) has a significant effect towards the
creation of firms value.
The present paper gives various review of Literature on working capital management (conceptual
and research). The main objective of this paper is to provide the wide variety of reviews on
working capital management in different industries and fields to identify the research gap for
further studies.
The study has been identified that research studies of general nature relating to working capital
management are limited. Further, research studies touching upon finance are of Automotive
Battery industry are also very limited, while working capital management in Automotive Battery
Industry is hither to a much neglected area.

Raheman & Nasr (2007) studied the effect of different variables of working capital management
including the average collection period, inventory turnover in days, average payment period,
cash conversion cycle and current ratio on the net operating profitability of Pakistani firms. The
results show that there was a significant negative relationship between variables of the working
capital management and profitability of the firm, meaning that as the cash conversion cycle
increases it will lead to decreasing profitability of the firm. Thus managers can create a positive
value for the shareholders by reducing the cash conversion cycle to a possible minimum level.

Teruel & Solano (2007) studied the effects of working capital management on the profitability of
a sample of SME firms in Spain. The results demonstrate that managers can create value by
24 | P a g e

reducing their firms number of days accounts receivable and inventories. Similarly, shortening
the cash conversion cycle also improves the firms profitability. Hence, there was a significant
negative relationship between variables of working capital management and profitability of the
firm.

Deloof (2003) on the other hand studied the large Belgian non-financial firms for the 1992
1996 periods to investigate the relation between working capital management
and corporate
profitability. Trade credit policy, inventory policy and cash conversion cycle is used as a
comprehensive measure of working capital management. The result suggests that managers can
increase corporate profitability by reducing the number of days accounts receivable and
inventories since there is a negative relationship between working capital management and
corporate profitability.

Uyar (2009) studied the relationship of cash conversion cycle with firm profitability in Turkey.
The result indicated that there is a significant negative correlation between the CCC and ROA.
The firms with shorter CCC are more likely to be more profitable than the firms with longer
CCC.

Sen&Oruc (2009) also studied the relationship between working capital management and firm
profitability in Istanbul Stock Exchange. According to the results, there is a significant negative
relationship between working capital management variables, measured by cash conversion cycle,
and the firms profitability.

Based on the above previous research, the author developed a hypothesis that there is a
relationship between efficiency of working capital management variables and firms profitability
in the sample of non-financial companies listed in Kompas 100
index at Indonesia Stock
Exchange.

25 | P a g e

RESEARCH
METHODOLOGY

26 | P a g e

Methodology:
The objectives of the present study were accomplished by conducting systematic market research
.Market research is the systematic design, analysis, and reporting of data and findings that are
relevant to different marketing situations facing the company. The marketing research process
adopted in the present study consists the following stages:
Defining the problem and the research objective: The research objective states what
information is needed to solve the problem.
Developing the research plan: Once the problem is identified, the next step is to prepare a
plan for getting the information needed for the research. The present study adopted the
explanatory approach wherein there was a need to gather large amount of information
before making conclusions.
Collection and source of data: Market research requires two kinds of data i.e., primary
data and secondary data .The questionnaires contained both open-ended and close-ended
questions. Here open-ended questions were not useful as it was an explanatory research
that was conducted wherein main objective was to get an insight into how people think
rather than measuring how many people think in a particular way .Secondary data was
collected from various journals, books.
Analyze the collected information: This involved converting raw data into useful
information .It involved tabulation of data and using statistical measures.
Report research findings: This phase marked the culmination of the marketing research

effort. The report with the research findings are a formal written documented .the
research findings and personal experience were used to propose the recommendation to
develop the product. Articles of the interest to the readers and advertisers as suggested by
them were incorporated in the dummy.

RESEARCH DESIGN:
Research design is an arrangement of condition for collection and analysis of data in a manner
that aims to combine relevance to research purpose with an economy in procedure.

27 | P a g e

Research design is needed because it facilitates the smooth ailing of the various research
operations.
Research is the detailed blue print used to guide a research study towards its objectives .It helps
to collect, measure and analysis of data.
Research design specifies the methods and procedures for conducting a particular study. In my
project company wanted to conduct a deep study to find the needs of the working capital in small
and large size firms.
In order to learn and observe the practical applicability and feasibility of various theories and
concepts, the following sources are being used:

OBJECTIVES OF THE STUDY:

To understand the basic meaning of working capital finance and working capital
management.
To understand the credit appraisal system for working capital financing.
To understand the structure of Working Capital.
To understand how to make a final recommendation to sanction or reject the loan
proposal.

SCOPE OF THE STUDY:

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 doesnt 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.
Limitation of the study:

The study was limited for only 3 years because the data shared by the bank was valid for
three years only.
Summer internship program was only for 8 weeks, so it was not possible to make full
study on the topic.

28 | P a g e

Bank doesnt provide full information about customers as that could violate Data
Protection Act.
It was not possible to visit every branch of HDFC to collect information due to climatic
and political situation in the Kashmir Valley.

SOURCE OF DATA:
Primary source of Information
Discussions with the project guide and staff members.
Discussions with various other departmental head.
Secondary Sources of Information

RBI guidelines regulating the activities of the banks.

Banks credit policy and related circulars and guidelines issued by the bank.
Study of proposals and manuals.
Website of HDFC bank and other related sources.

29 | P a g e

DATA ANALYSIS AND

INTERPRETATION

30 | P a g e

Credit appraisal system of HDFC Bank for working capital

financing:
HDFC Bank follows a three step process for credit appraisal of applicant. These are:
1.
2.
3.
A.

Assessment of operating cycle of applicant

Assessment of financial statements of applicant
Assessment of financial statements using the technique of Ratio Analysis
OPERATING CYCLE ASSESMENT:Working Capital is defined as the total
amount of funds required for day to day operations of a business unit. It is often classified
as gross working capital and net working capital. Gross working capital refers to the fund
required for financing total current assets whereas net working capital refers to the
difference between total current assets and current liabilities and this difference can be
positive and negative.

Net working capital = Currents assets Current Liabilities.

Each business unit has an operating cycle which can be illustrated below:

Cash

Raw Material

Receivables

Goods in
Process

Finished Goods

Operating Cycle

31 | P a g e

This Cycle continues and in order to keep the operating cycle going on, certain levels of current
assets are required, the total of which gives the amount of working capital required. Thus total
working capital can be obtained by assessing the various current assets in terms of time and
value.
Current assets: Are those assets for the companies that are reasonably expected to be converted
into cash within a one year during the normal course of business. Current assets include cash,
accounts receivable, inventories, short term investments, prepaid expenses etc. These assets are
used for the main activity of the business and must be kept at certain reasonable level for
efficient working of business.
Current Liabilities: are the concerns debts or obligations that are due within a one year. They
appear on the balance sheet and include many items such as short term, sundry creditors etc.
These liabilities are the obligations that must be fulfilled within a one year and form an important
part of working capital since these are the short term source of the funds.
B. ASSESSMENT OF FINANCIAL STATEMENTS:
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. Though, there is no standard form prescribed for the preparation of profit and loss Account
under the companies Act, yet Section 211 of the company Act states, that both the statements i.e.
income statement and balance sheet should present true and fair view of the internal working
process of the business .
MEANING OF FINANCIAL YEAR:
The financial year of a company is the period for which Profit & Loss Account of a company is
prepared. Such financial year may be more or less than a calendar year but it shall not exceed 15
months unless the Registrar grants a special permission in which case it may extend up to 18
months.
Contents of Balance Sheet:The balance sheet is the significant financial statement of a firm. In
fact, it is called fundamental accounting report. Other terms to describe this financial statement
are statement of financial positions or position statement. As the name suggests the balance sheet
provides information about the financial standing/position of a firm at a particular point of time.
Part 1 of Schedule VI gives the prescribed form for the preparation of balance sheet

32 | P a g e

.Accordingly; Balance sheet of company can be prepared in either of the two forms as follows
(A) Horizontal Form (B) Vertical form

PART -1. SCHEDULE VI

A) HORIZONTAL FORM OF BALANCE SHEET
Balance sheet as at March 31

Liabilities
Share Capital

Amoun Assets
t

Amount

Fixed Assets

Equity
Preference

Land building
and plant

Reserves and Surplus

Less: depreciation

SECURED FUNDS

Investment

UNSECURED FUNDS

Current assets :

CURRENT LIABILTY
AND PROVISION

Total

33 | P a g e

Total

Inventory
Debtors
Cash at bank
Advance
deposits, etc.

Balance Sheet report form:

Balance sheet as at March 31;
Particulars
Source of funds:
Shareholders funds
Capital
Reserve and surplus
Loan funds
Secured
Unsecured
Total
Application of funds
Fixed assets
Gross block
Less depreciation
Investments
Current assets, loans and advances
Inventories
Sundry debtors
Cash and bank balance
Other current assets
Loan and advances
Less :
Current liabilities and provisions
Liabilities
Provisions
Net current assets
Miscellaneous expenditure
Profit and Loss account
Total

34 | P a g e

Amount

Profit and Loss account for the year ending 31 March

Particulars
To cost of goods sold
To gross profit

Amount

Particulars
By net sales

Total
General and
Administrative
Expenses
Selling expenses
Interest
Depreciation
Provision for tax
Net profit
Total

Amount

Total
By gross profit b/d
Other incomes

Total

C. ASSESSMENT OF FINANCIAL STATEMENTS USING THE

TECHNIQUE OF RATIO ANALYSIS:
35 | P a g e

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. For the purpose of credit
appraisal of the applicant, HDFC Bank uses following ratios:
(1)
Liquidity Ratios
(2)
Activity Ratios
(3)
Leverage Ratios
(4)
Profitability Ratios
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:
Current Ratio:
It is defined as a relationship between current assets and current liabilities. This ratio is a
measure of general liquidity and is most widely used to make the analysis of short-term
financial position or liquidity of a firm. It is calculated as under.
Current Ratio=

Current Assets
Current liabilities

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.
Quick Ratio= Quick Assets
Current liabilities
Net working capital (NWC):
The NWC is the measure of owners stake or long term liquid funds in the firm. It has a close
relationship with current ratio. When current ratio equals to 1 NWC is zero. When current ratio is
more than 1 NWC is positive and vice versa. Negative NWC implies that lending bank is
running a more than normal financial risk in respect of borrowers. It is calculated as under.
NWC= current assets current liabilities
Net working capital is sometimes used as a measure of firms liquidity. It is considered that
between two firms, the one having a larger NWC has the greater ability to meet its current
obligations.

36 | P a g e

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.
Debt Equity Ratio:Debt Equity ratio is calculated to measure the relative claims of outsiders
and the owners (i.e. shareholders) against the firms assets. This ratio indicates the relationship
between the external equities or the outsiders funds and the internal equities or the shareholders
funds. It is calculated as:
Debt Equity ratio=

Long term Debts

Shareholders Funds

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.
Interest Coverage Ratio:It is used to test the firms 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
Interest coverage ratio=

EBIT
Interest

Debt Service Coverage Ratio (DSCR):

DSCR is the ratio of cash available for debt servicing to interest, principle loan payment. It is a
popular benchmark used in the measurement of equitys ability to produce enough cash to cover
its debt payments. The higher the ratio, the easier is to repay the loan.
DSCR=

EBIT+PrincipalRepayment on existing & proposed loans

Principal repayment+ Interest payments

Typically most commercial banks require the ratio of 1.15-1.35 times (net operating
income/annual debt service) to ensure cash flows insufficient to cover loan payments on an
outgoing basis. In HDFC bank the acceptable levels in base case scenario are prescribed as
1.30:1 (minimum) and 1.60:1 (average). However under the scenarios of decrease in sales price
by 5% increase in critical inputs by 5%, increase in project cost by 5% and decrease in
operational expenditure by 5% DSCR at minimum of 1.15:1 and average of 1.40:1 is prescribed
to be accepted.

37 | P a g e

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:
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:
Gross Profit ratio=
Gross profit * 100
Net sales
More the gross profit margin more is the efficient production & better is the operating
performance.
Net profit ratio: Net profit is obtained when operating expenses, interest and taxes are
subtracted from gross profit. It is calculated as under.
Net profit Ratio=

Net profit * 100

Net sales

Net profit margin shows the percentage of net profit to sales. The ratio reflects the efficiency of
manufacturing, administration, and selling the products.
Turnover Ratios:Turnover ratios can also be also termed as Efficiency Ratios or Performance
Ratios or Activity Ratios. Turnover Ratios highlight the different aspect of financial statement to
satisfy the requirements of different parties interested in the business. It also indicates the
effectiveness with which different assets are vitalized in a business. Turnover means the number
of times assets are converted or turned over into sales. The activity ratios indicate the rate at
which different assets are turned over.

Stock Turnover Ratio:This ratio is also called as Inventory Ratio or Stock Velocity Ratio.
Inventory means stock of raw materials, working in progress and finished goods. This ratio is
used to measure whether the investment in stock in trade is effectively utilized or not. It reveals
the relationship between sales and cost of goods sold or average inventory at cost price or
average inventory at selling price. Stock Turnover Ratio indicates the number of times the stock
has been turned over in business during a particular period. While using this ratio, care must be
taken regarding season and condition. Price trend supply condition etc. In order to compute this
ratio, the following formula is used:
38 | P a g e

Stock Turnover Ratio (STR) = Cost of goods sold

Average Inventory
Days of inventory holding (DIH) =

365 OR 360
STR

Debtors Turnover Ratio:Debtor's Turnover Ratio is also termed as Receivable Turnover Ratio
or Debtor's Velocity. Receivables and Debtors represent the uncollected portion of credit sales.
Debtor's Velocity indicates the number of times the receivables are turned over in business
during a particular period. In other words, it represents how quickly the debtors are converted
into cash. It is used to measure the liquidity position of a concern. This ratio establishes the
relationship between receivables and sales. Two kinds of ratios can be used to judge a firm's
liquidity position on the basis of efficiency of credit collection and credit policy.
Debtors turnover Ratio (DTR) = Net Credit Sales
Average Debtors
Average collection period = 365 or 360
DTR
Creditors Turnover Ratio:
Creditors turnover ratio is also termed as Payable Turnover Ratio or Creditor's Velocity. The
credit purchases are recorded in the accounts of the buying companies as Creditors to Accounts
Payable. The Term Accounts Payable or Trade Creditors include sundry creditors and bills
payable. This ratio establishes the relationship between the net credit purchases and the average
trade creditors. Creditor's velocity ratio indicates the number of times with which the payment is
made to the supplier in respect of credit purchases. Two kinds of ratios can be used for
measuring the efficiency of payable of a business concern relating to credit purchases.

Creditors turnover ratio (CTR) = Net credit purchases

Average Creditors
Average Collection period = 365 or 360
CTR

Working Capital Turnover Ratio:

This ratio highlights the effective utilization of working capital with regard to sales. This ratio
represents the firm's liquidity position. It establishes relationship between cost of sales and
networking capital. This ratio is calculated as follows:
39 | P a g e

Working Capital Turnover Ratio =

Sales
Net Working Capital

Net Sales = Gross Sales - Sales Return

Work Capital = Current Assets - Current Liabilities
Overall profitability ratios:
It is also called return on investment or return on capital employed. It indicates the percentages
of the total capital employed in the business. It is calculated as
ROI=

Net profit before Interest and tax * 100

Capital employed

The ROI invested is a concept that measure the profit, which a firm earns or investing a unit of
capital. The return on capital employ also shows whether the companys borrowing policy was
economically and whether the capital had been employed fruitfully.
Earnings 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:
EPS=

PAT & preferences dividend

No. of equity shares

EPS helps in determining the market price of the equity shares of the company. It also helps in
estimating the companys capacity to its equity shareholders.

Price earnings ratio:

This ratio indicated the number of times the earnings per share is covered by its market price.
This is calculated according to the following formula:
PER = Market price per equity share
Earnings per share
40 | P a g e

It helps the investor in deciding whether to buy or not shares of company at a particular market
price.

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 profit, etc. in order to ascertain the financial position of the
borrowers & 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 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.
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:

1) Particulars of the existing/proposed limits from the banking system

(Form I):
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
41 | P a g e

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.
2). Operating Statement (Form II)
The data relating to last sales, net sales, cost of raw material, power & fuel, direct labor,
depreciation, selling, general expenses, interest, etc. are furnished in this form. It also covers
information on operating profit & net profit after deducting total expenditure from total sale
proceeds.
3). Analysis of Balance Sheet (Form III)
A complete analysis various items of last years balance sheet, current years estimate &
following years 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.
4).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.
5). Computation of Maximum Permissible Bank Finance (Form V)
On the basis of details of current assets & liabilities given in form IV, Maximum Permissible
Bank Finance is calculated in this form to find out credit limits to be allowed to the borrowers.
Check list for verification of the information/data:
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 inventory, receivables, etc. if necessary, a visit to the factory may also be
made to have a clear idea of products and processes.

Process of how to make a final recommendation to sanction or reject the loan

proposal:
Calculation of Working Capital

42 | P a g e

The calculation of working capital requirement is done by HDFC Bank 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:

1. Debtor days = Debtors *365

Sales
2. Stock Days = Inventories *365
Total expenses
Total expenses = Sales PBDIT
3. Creditor Days =

Creditors * 365
Total Expenses

Operating Cycle = Debtor Day + Stock Days Creditor Days

No. of times operating cycles repeats in a year =

365
Operating Cycle
Limit available on the basis of operating cycle method = Sales Turnover
No. of times operating cycles repeats in a year

NET WORKING CAPITAL METHOD:

As per the Net Working Capital method the working capital requirement is calculated as under:
Net Working Capital = [Capital + Unsecured Loan + Term Loans
F/Assets Investments Loans & Advances]

Permissible amount is 3 times the net working capital as per above formula.

Which implies?
43 | P a g e

Working capital Requirement = [Capital + Unsecured Loan + Term Loans

F/Assets Investments Loans & Advances] x 3

ON THE BASIS OF SALES:

Bank can allow a max CC limit of 25% of sales to a manufacturing unit and 15% of sales to a
trading unit.

HDFC Bank mostly allows 20% of sales as CC limit to manufacturing units and 15% of sales to
non-manufacturer units.

So, 20% of sales = 20/100 * Sales

= XXX

So the as per bank policy allowable amount as CC is XXX.

ASSESSMENT OF WORKING CAPITAL:

Case No.1. Manufacturer

44 | P a g e

P&L SHEET
Total income
PBDIT
Interest
Depreciation
PBT
Tax
PAT
Cash Profits
Liabilities
Tangible Net worth
Short Term Debt
Long term Debt
Unsecured loans from promoters
Total Debt
Current liabilities & Provisions
Total liabilities
Assets
Net Fixed Assets
Investments
Loans & Advances
Sundry Debtors
Inventories
Other Current Assets
Total Current Assets
Total Assets

Mar 31, 14 (in Lacs)

475.3
7.6
1.8
0.1
5.7
0.1
5.6
5.7
44.1
11.8
0.0
0.0
11.8
7.9
63.8
0.4
0.0
0.0
18.6
40.8
3.9
63.4
63.8

Solution: - Above is the balance sheet and profit and loss account of manufacturing business
(cable manufacturer). The customer has requested for Working capital facility so that it can carry
its operations smoothly. It has requested for Rs 1 crore as a Working capital facility. Before
giving any Working capital facility we have to analyze its financials, we have to check its model
of business, method of business, how much is time taken by debtors, how much time business
take to pay off its creditors.

The following information is extracted from the given balance sheet and profit and loss account:

Total income of the business

: 475.3

Profit before Dep. Interest and tax

: 7.6

45 | P a g e

Interest paid

: 1.8

Depreciation

: 0.1

Income tax paid

: 0.1

Profit after dep, interest and tax

: 5.6

Tangible net worth (Capital)

: 44

Current liabilities and provision

: 7.9

Fixed Assets

: 0.4

Total Current Assets

: 63.4

To provide the working capital facility, we will apply the two methods:
1. Sales turnover method.
2. Operation cycle Method.
1. Sales turnover Method:
In this method we will calculate 15% of sales turnover for trader and service concern & 20% of
sales turnover for manufacturing concern. This method is also applicable when sales turnover of
the firm is below 5crore. In given case, it is a manufacturing concern and its turnover is also
below 5crore, so working capital facility will be calculated on 20% of sales turnover.
Working capital requirement is 20% of sales turnover
i.e., 20 % x 475.3
= 95lacs
As per this method, bank can finance a maximum amount of 95lacs in this case.

2. Operating Cycle Method:

Under this method, the time required for realization of cash is calculated i.e., the time period in
which the investor collects back the invested amount in the form of sales. The following
procedure is adopted:
a. Debtor days = Debtors x 365
Sales
18.6/ 475.3 x 365
= 14 days
46 | P a g e

b. Stock Days = Inventories x 365

Total Expenses
Total Expenses = Sales PBDIT
Total Expenses = 475.3- 7.6
Total Expenses = 467.7
Stock days = 40.8/ 467.7 X 365
= 31 Days
c. Creditors Days = Creditors x 365
Total Expenses
= 7.9/ 467.7 x 365
= 6 Days
Operating Cycle = Debtors Days + Stock Days Creditors days
= 14 + 31 6
= 39 Days
No. of times Operating Cycle repeats in a year = 365/ 39 = 9
Limits available on the basis of turnover = 475.3/9 = 52 lac
Thus, the maximum permissible limit is 52 lacs.
Net working capital [NWC] = Capital + Unsecured loans + term loan fixed assets
Investments loans and advances.
NWC = 44.1+ 0.0 + 0.0 0.4-0.0-0.0
NWC = 43.7 lac

Net tangible worth = Tangible worth + unsecured loans

Net Tangible Worth = 36.5 + 0.0
Net Tangible Worth=36.5
Above we have calculated the methods to provide the working capital facility to the customer.
Sales turnover Method: 95 lac

47 | P a g e

Operating cycle Method: 52 lac

Now we will provide the customer with working capital facility, which is among higher the two.
i.e. 95lacs.
Model of business: Manufacturer
Net tangible net worth: 36.5
NWC

: 47.3lacs

Working capital requirement: 1core

Methods Applicable: 1 Sales Turnover Method 2: Operating cycle Method
Working capital facility given: 95lacs

Case No.2 Traders

P& L Sheet (All figures in Rs. Lacs)
48 | P a g e

Mar 31,14

Total income
PBDIT
Interest
Depreciation
PBT
Tax
PAT
Cash Profits
Liabilities
Tangible Net worth
Short Term Debt
Long term Debt
Unsecured loans from promoters
Total debt
Current liabilities and provision
Total liabilities
Assets
Net fixed Assets
Investment
Loans & advances
Sundry Debtors
Inventories
Other Current Assets
Total Current Assets
Total Assets

1354.7
18.5
12.2
0.5
5.8
0.1
5.7
6.2
222.7
85.9
0.00
0.00
85.9
20.0
328.6
4.3
0.0
0.0
163.5
156.9
4.0
324.4
328.6

Solution: Above is balance sheet and Profit & loss a/c of a trader. He requires working capital to
run its daily operation smoothly. So he has asked for working capital facility up to 5crore. Before
giving any facility we have to analyze its financials, we have to check its model of business,
method of business, how much is time taken by debtors, how much time business take to pay off
its creditors. It will play an important role in deciding its working capital facility. .After checking
all the details, we have extracted the following information:

Total income of the business

: 1354.7

Profit before Dep. Interest and tax

: 18.5

Interest paid

: 12.2

Depreciation

: 0.5

49 | P a g e

Income tax paid

: 0.1

Profit after dep, interest and tax

: 5.7

Tangible net worth (Capital)

:222.7

Current liabilities and provision

: 20.0

Fixed Assets

: 4.3

Total Current Assets

: 324.4

In this case the turnover is above 5crore, so the following two methods will be applicable:

1) Operating cycle Method.

2) Maximum permissible Bank finance
1) Operating Cycle Method:
Under this method, the time required for realization of cash is calculated i.e., the time period in
which the investor collects back the invested amount in the form of sales. The following
procedure is adopted:

a. Debtor days = Debtors x 365

Sales
163.5/1354.7 x 365
= 44 days

b. Stock Days = Inventories x 365

Total Expenses
Total Expenses = Sales PBDIT
Total Expenses =1354.7 - 18.5
Total Expenses = 1336.2

Stock days

= 156.9/ 1336.2X 365

= 42 Days

50 | P a g e

c. Creditors Days =

Creditors x 365
Total Expenses
= 20.0/1336.2 x 365
= 5 Days

Operating Cycle = Debtors Days + Stock Days Creditors days

= 44 + 42 5
= 81 Days
No. of times Operating Cycle repeats in a year = 365/ 81 = 4
Limits available on the basis of turnover = 1354.3/4 = 338.6 lac
Thus, the maximum permissible limit is 338.6 lacs
2. MAXIMUM PERMISSIBLE BANK FINANCE (MPBF):
This method is applicable when the sales turnover of the firm is above 5crore. In this method
expected turnover plays an important role in deciding the working capital facility of the firm.
MPBF:
The projected sales for the next year are taken as 20% incremental
A) Sales turnover in previous year

1354.7

B) Expected sales turnover

1625.64

C) Working Capital Eligibility

406.41

(25% of expected sales)

D) Minimum margin from promoter

101.60

E) Maximum Working capital eligibly

406.41

F) Credit availed from other banks

00.0

MPBF=which is higher among (d-e)

406.41

Net Working capital= capital + unsecured loans + term loan Fixed Assets loan and advances
= 222.7 + 0.00
NWC

+ 0.00

- 4.3

- 0.00

= 218.4 lac

Net Tangible Worth = Tangible net worth + unsecured loans

Net Tangible Worth
51 | P a g e

= 222.7

- 00.0

Net Tangible Worth

= 222.7

Above we have calculated the methods by which working capital facility can be provided to the
business.
Operating Cycle Method: 338.6 lac
MPBF

: 406.41 lac

As above mentioned, the customer has requested for working capital facility up to 5 crore. The
facility will be provided which higher among the two methods i.e. 406.41 lacs by MPBF

Model of business: Trader

Net tangible net worth

: 222.7lacs

NWC

: 218.4lacs

Working capital requirement

: 5crore

Methods Applicable

: 1 operating cycle Method 2: MPBF

Working capital facility given

: 406.41

Case No.3 Trader

P& L Sheet (All figures in Rs. Lacs)
Total income
PBDIT
Interest
Depreciation
52 | P a g e

Mar 31,14
1838.3
11.9
0.1
0.2

PBT
Tax
PAT
Cash Profits
Liabilities
Tangible Net worth
Short Term Debt
Long term Debt
Unsecured loans from promoters
Total debt
Current liabilities and provision
Total liabilities
Assets
Net fixed Assets
Investment
Loans & advances
Sundry Debtors
Inventories
Other Current Assets
Total Current Assets
Total Assets

11.6
0.1
11.5
11.7
36.5
0.00
0.00
0.00
0.00
158.6
195.1
8.6
0.0
0.0
82.4
84.6
19.6
186.6
195.1

Solution:
Given is the balance sheet and profit and loss a/c of a business entity which deals with trading
sector. The customer has requested for working capital facility of 6crore to continue their
business without any obstacles .Before providing any working capital facility .We have to
analyze its financials, its debtors and creditors. Its model of business. The customer has provided
the following information:

Total income of the business

: 1838.3

Profit before Dep. Interest and tax

: 11.9

Interest paid

: 0.1

Depreciation

: 0.2

Income tax paid

: 0.1

Profit after dep, interest and tax

: 11.5

Tangible net worth (Capital)

: 36.5

53 | P a g e

Current liabilities and provision

: 158.6

Fixed Assets

: 8.6

Total Current Assets

: 186.6

In this case the turnover is above 5crore so the following two methods will be applicable:
1) Operating Cycle Method
2) Maximum Permissible Bank Finance

1. Operating Cycle Method:

Under this method, the time required for realization of cash is calculated i.e , the time period in
which the investor collects back the invested amount in the form of sales. The following
procedure is adopted:

Debtor days = Debtors x 365

Sales
=82.4/1838.3 x 365
= 16 days
Stock Days = Inventories x 365
Total Expenses
Total Expenses = Sales PBDIT
Total Expenses =1838.3 11.9
Total Expenses = 1826.4
Stock days

= 84.6/ 1826.4 x 365

= 16 Days

Creditors Days = Creditors x 365

Total Expenses
= 158.6/1826.4x 365
= 31 Days
Operating Cycle = Debtors Days + Stock Days Creditors days
54 | P a g e

= 16 + 16 31
= 1 Days
No. of times Operating Cycle repeats in a year = 365/ 1 = 365
Limits available on the basis of turnover = 1838.3/365 = 5.03 lac

Thus, the maximum permissible limit is 5.03 lacs

2. MAXIMUM PERMISSIBLE BANK FINANCE (MPBF):
This Method is applicable when turnover of the firm is over 5crore.
MPBF:
The projected sales for the next year are taken as 20% incremental
A) Sales turnover in previous year

1838.3

B) Expected sales turnover

2205.96

C) Working Capital Eligibility

551.49

(25% of expected sales)

D) Minimum margin from promoter

137.87

E) Maximum Working capital eligibly

551.49

F) Credit availed from other banks

00.0

MPBF=which is higher among (d-e)

551.49

Net Working capital = capital + unsecured loans + term loan Fixed Assets loan and
advances
= 36.5

+ 0.00

NWC

+ 0.00

- 8.6

- 0.00

= 27.9 lac

Net Tangible worth = Tangible worth + unsecured loans

Net Tangible Worth =36.5+ 00.0
Net Tangible Worth = 36.5

55 | P a g e

Above we have calculated the methods by which working capital facility can be provided to the
business.
Operating cycle method: 5.03
MPBF

: 551.49

As above mentioned, the customer has requested for working capital facility upto 5crore. The
facility will be provided which higher among the two methods i.e. 551.49 lacs by MPBF
Model of business: Trader
Net tangible net worth: 36.5lacs
NWC

: 27.9lacs

Working capital requirement: 6crore

Methods Applicable: 1 operating cycle Method 2: MPBF
Working capital facility given: 551.49lacs

56 | P a g e

FINDINGS

Findings:
It was found that Rate of interest of HDFC bank is comparatively low as compared
to the other banks in the valley.
Researcher found that HDFC bank is not flexible in case of documents.
The researcher found that the overall reviews given by Business which uses
working capital facilities from HDFC were quite good.

57 | P a g e

58 | P a g e

SUGGESTIONS

Suggestions:
Closely monitoring and inspecting the activities and stocks of the borrowers
from time to time can avoid the misuse of working capital
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.
Bank must extend working capital finance through non-fund based facilities.
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.
The bank must further secure themselves by holding a second charge on all the
fixed assets of the borrower.

59 | P a g e

 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.

60 | P a g e

CONCLUSIONS

Conclusion:

The requirement of working capital finance is ever increasing.

In most of the cases, hypothecation and/or mortgage are used to create
securities for the banks.
Bank has their own internal credit rating procedure to rate the clients
(Borrowers).
After doing the assessment of the financial indicators it is up to the judgment
of the top management of the bank to sanction such loan. The very decision
could be against the assessment result.
If the company is with bank from inception stage then they are given
preference, as credible and loyal party over their financial indicators.
There is a stiff competition to the nationalized banks from the foreign
investors as their lending rates are much lower than nationalized banks.
61 | P a g e

BIBLOGRAPHY
62 | P a g e

www.hdfc.com
www.hdfcbank.com
I M Pandey, Financial Management, VIKASPUBLISHING HOUSE PVT. LTD, 2010,
10TH edition
Banks previous record of customers who were availing working capital facility
Data from different branches about the customers ,who had requested for working capital

facility
Audited balance sheet and profit and loss account of various customers.

63 | P a g e

ANNEXURE
64 | P a g e

Financial statements:
1
P&L SHEET
Total income
PBDIT
Interest
Depreciation
PBT
Tax
PAT
Cash Profits
Liabilities
Tangible Net worth
Short Term Debt
Long term Debt
Unsecured loans from promoters
Total Debt
Current liabilities & Provisions
Total liabilities
Assets
Net Fixed Assets
Investments
Loans & Advances
Sundry Debtors
Inventories
Other Current Assets
Total Current Assets
Total Assets

65 | P a g e

Mar 31, 14
475.3
7.6
1.8
0.1
5.7
0.1
5.6
5.7
44.1
11.8
0.0
0.0
11.8
7.9
63.8
0.4
0.0
0.0
18.6
40.8
3.9
63.4
63.8

P& L Sheet (All figures in Rs. Lacs)

Total income
PBDIT
Interest
Depreciation
PBT
Tax
PAT
Cash Profits
Liabilities
Tangible Net worth
Short Term Debt
Long term Debt
Unsecured loans from promoters
Total debt
Current liabilities and provision
Total liabilities
Assets
Net fixed Assets
Investment
Loans & advances
Sundry Debtors
Inventories
Other Current Assets
Total Current Assets
Total Assets

66 | P a g e

Mar 31,13
1354.7
18.5
12.2
0.5
5.8
0.1
5.7
6.2
222.7
85.9
0.00
0.00
85.9
20.0
328.6
4.3
0.0
0.0
163.5
156.9
4.0
324.4
328.6

3
P& L Sheet (All figures in Rs. Lacs)
Total income
PBDIT
Interest
Depreciation
PBT
Tax
PAT
Cash Profits
Liabilities
Tangible Net worth
Short Term Debt
Long term Debt
Unsecured loans from promoters
Total debt
Current liabilities and provision
Total liabilities
Assets
Net fixed Assets
Investment
Loans & advances
Sundry Debtors
Inventories
Other Current Assets
Total Current Assets
Total Assets

67 | P a g e

Mar 31,13
1838.3
11.9
0.1
0.2
11.6
0.1
11.5
11.7
36.5
0.00
0.00
0.00
0.00
158.6
195.1
8.6
0.0
0.0
82.4
84.6
19.6
186.6
195.1

Balance Sheet of HDFC Bank

Capital and Liabilities:
Total Share Capital
Equity Share Capital
Share Application Money
Preference Share Capital
Init. Contribution Settler
Preference Share Application Money
Employee Stock Option
Reserves
Revaluation Reserves
Net Worth
Deposits
Borrowings
Total Debt
Minority Interest
Policy Holders Funds
Group Share in Joint Venture
Other Liabilities & Provisions
Total Liabilities
Assets
Cash & Balances with RBI
Balance with Banks, Money at Call
Advances
Investments
Gross Block
Accumulated Depreciation
Net Block
Capital Work In Progress
Other Assets
Minority Interest
Group Share in Joint Venture
Total Assets
Contingent Liabilities
Bills for collection
Book Value (Rs)

68 | P a g e

Mar '14
12 months

Mar '13
12 months

Mar '12
12 months

Mar '11
12 months

479.81
479.81
0.00
0.00
0.00
0.00
0.00
43,686.82
0.00
44,166.63
367,080.33
49,596.72
416,677.05
151.74
0.00
0.00
42,624.55
503,619.97
Mar '14
12 months

475.88
475.88
0.00
0.00
0.00
0.00
0.00
36,166.84
0.00
36,642.72
296,091.77
39,496.61
335,588.38
221.34
0.00
0.00
35,270.54
407,722.98
Mar '13
12 months

469.34
469.34
0.00
0.00
0.00
0.00
0.30
29,741.11
0.00
30,210.75
246,539.58
26,334.15
272,873.73
183.66
0.00
0.00
37,786.88
341,055.02
Mar '12
12 months

465.23
465.23
0.00
0.00
0.00
0.00
2.91
25,117.91
0.00
25,586.05
208,287.21
14,650.44
222,937.65
121.66
0.00
0.00
29,317.57
277,962.93
Mar '11
12 months

25,357.22
14,556.21
315,418.86
119,571.06
3,026.28
0.00
3,026.28
0.00
25,690.33
0.00
0.00
503,619.96
744,115.98
0.00
184.10

14,630.88
12,900.28
247,245.12
110,960.41
2,773.32
0.00
2,773.32
0.00
19,212.98
0.00
0.00
407,722.99
746,227.84
0.00
154.00

14,991.63
6,183.53
198,837.53
96,795.11
2,377.91
0.00
2,377.91
0.00
21,869.30
0.00
0.00
341,055.01
884,004.64
0.00
128.74

25,100.89
4,737.39
160,831.42
70,276.67
2,200.94
0.00
2,200.94
0.00
14,815.63
0.00
0.00
277,962.94
588,587.96
0.00
549.91

Profit &Loss Account of HDFC Bank

Income
Interest Earned
Other Income
Total Income
Expenditure
Interest expended
Employee Cost
Selling and Admin Expenses
Depreciation
Miscellaneous Expenses
Preoperative Exp Capitalized
Operating Expenses
Provisions & Contingencies
Total Expenses
Net Profit for the Year
Minority Interest
Share Of P/L Of Associates
Net P/L After Minority Interest & Share Of Associates
Extraordinary Items
Profit brought forward
Total
Preference Dividend
Equity Dividend
Corporate Dividend Tax
Per share data (annualized)
Earnings Per Share (Rs)
Equity Dividend (%)
Book Value (Rs)
Appropriations
Transfer to Statutory Reserves
Transfer to Other Reserves
Proposed Dividend/Transfer to Govt.
Balance c/f to Balance Sheet
Total

69 | P a g e

Mar '14
12 months

Mar '13
12 months

Mar '12
12 months

Mar '11
12 months

42,555.02
8,297.50
50,852.52

35,861.02
7,132.96
42,993.98

28,193.40
5,992.32
34,185.72

20,043.33
4,585.05
24,628.38

23,445.45
4,494.47
0.00
688.68
13,459.41
0.00
12,469.65
6,172.91
42,088.01
Mar '14
12 months
8,764.51
24.65
-3.63
8,743.49
0.00
11,475.94
20,240.45
0.00
1,643.35
284.97

19,695.45
4,201.79
0.00
663.26
11,533.21
0.00
11,551.90
4,846.36
36,093.71
Mar '13
12 months
6,900.28
33.52
-2.88
6,869.64
0.00
8,621.39
15,521.67
0.00
1,309.66
222.74

15,106.12
3,573.09
0.00
554.16
9,678.95
0.00
9,494.70
4,311.50
28,912.32
Mar '12
12 months
5,273.40
30.02
-3.64
5,247.02
0.00
6,326.95
11,600.35
0.00
1,009.52
163.89

9,425.15
2,977.14
0.00
509.11
7,699.28
0.00
7,317.94
3,867.59
20,610.68
Mar '11
12 months
4,017.69
32.24
-7.04
3,992.49
0.00
4,625.23
8,642.92
0.00
768.00
124.68

36.53
0.00
184.10

29.00
0.00
154.00

22.47
0.00
128.74

86.36
0.00
549.91

2,227.79
855.84
1,928.32
15,207.47
20,219.42

1,810.06
672.63
1,532.40
11,475.94
15,491.03

1,262.45
516.72
1,173.41
8,621.39
11,573.97

1,005.46
392.64
892.68
6,326.95
8,617.73