Acknowledgement

No significant achievement can be a solo performance, especially when it comes to

preparing a project of this nature. My project bears the imprint of many people. I believe that if it
were not for the invaluable support, guidance, time, confidence and encouragement of these
people, this report would look much different than it does today.
I would like to extend my sincere thanks to all the staff of Bank of India, Fort branch for
facilitating and for providing with vital inputs and guidance through the duration of the project. I
would specially like to thank Mrs. Purvi Karshala (Credit Manager) and Mr. S. Ramani (DGM)
for their guidance and valuable inputs.
I would also like to thank Prof Khedkar , the Director of N. L. Dalmia Institute of
Management Studies and Research for continuously helping and motivating us to do well
throughout the course.

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 OBJECTIVE
The objective of this project is to study the procedure of Working Capital Assessment & its
credit Appraisal. This being the main objective of the project, it also includes many sub
objectives to reach the final objective. The major steps in completing the project report with full
understandings includes,
Study of Banking Structure in India
Study the history of Bank Of India and understanding the bank
Study the Working Capital in Detail
Study Various elements of Working Capital and its importance
Steps & Factors involved in Credit Appraisal for a Working Capital limit
Policies of Bank Of India for Appraising Credit for a Working Capital need
Understanding the above discussed points by taking Live Project and its Proposal
making.

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 INTRODUCTION OF BANKING SECTOR

OVERVIEW OF BANKING SECTOR:-

1. The existing banking structure in India, evolved over several decades, is elaborate And has
been serving the credit and banking services needs of the economy. There are multiple layers in
today's banking structure to cater to the specific and varied requirements Of different customers
and borrowers. The banking structure played a major role in the Mobilization of savings and
promoting economic development. In the post financial sector reforms (1991) phase, the
performance and strength of the banking structure improved perceptibly. Financial soundness of
the Indian commercial banking system compares favorably with most of the advanced and
emerging countries.

2. Since 1991, the size of the Indian economy in terms of GDP at market prices has Increased by
almost fifteen times, whereas the household financial savings have expanded By sixteen times
and the gross domestic savings by almost seventeen times during the same Period. The economic
structure diversified substantially and the economy has been opening up and getting increasingly
integrated with the global economy. As the real economy is, it is imperative that the banking
system is flexible and competitive to cope with multiple objectives and demands made on it by
various constituents of the economy. From the financial inclusion perspective too, there is a
pressing need to extend the reach of financial services to the excluded segments of the society.
Viewed from this perspective, today's banking structure in India has both the need and scope for
further growth in size and strength.

3. Many jurisdictions, world over have taken up the task of reviewing their banking systems with
a view to strengthen them based on the lessons from the global crisis. While the primary
motivation for the current exercise of reviewing the Indian banking structure is to cater to the
needs of a growing and globalizing economy as well as deepening financial Inclusion, it is
important to incorporate lessons from the global crisis, even when the Indian banking system has
remained largely unaffected by the global crisis. The Discussion Paper has therefore taken into
consideration the specific requirements of the Indian economy as well as the lessons learnt from
the global crisis particularly relating to banking structure while reviewing the Indian banking
structure.

4. The Discussion paper has identified certain building blocks for the revised banking Structure
with a view to addressing various issues such as enhancing competition, financing Higher
growth, providing specialized services and furthering financial inclusion. It also emphasizes the
need to address the concerns arising out of such changes with a view to managing the trade off
for ensuring financial stability. The issues considered are as under:

(i) Small banks vs. large banks: There is an ongoing debate on whether we need
small number of large banks or large number of small banks to promote financial inclusion.
Small local banks with geographical limitations play an important role in the supply of credit to
small enterprises and agriculture. While small banks have the potential for financial inclusion,

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performance of these banks in India (LABs and UCBs) has not been satisfactory. If small banks
are to be preferred, the issues relating to their size, numbers, capital requirements, exposure
norms, regulatory prescriptions and corporate governance need to be suitably addressed.

(ii) Universal Banking: With the failure of many investment banks during the crisis, the
universal banking model remains the dominant and preferred model in most of the post crisis
world. The structural reforms in Europe (Vickers and Liikanen) and US (Volcker) have
implications for the existing banking structures which need to be factored in any discussion on
banking structure in India. In India, the universal banking model is followed with banks
themselves as holding companies. However, under the universal banking model, the Financial
Holding Company (FHC) structure has distinct advantages and may be a preferred model.
Additionally, in a changing economic environment, there is a need for niche banking and
differentiated licensing could be a desirable step in this direction, particularly for infrastructure
financing, whole sale banking and retail banking. There is also a need to promote investment
banks/ investment banking activities.

(iii) Continuous authorisation: There is a case for reviewing the present stop and go or
block bank licensing policy which promotes rent seeking and considering continuous
authorization of new banks. Such entry would increase the level of competition, bring new ideas
and variety in the system. However, it is important that the entry norms should be stringent.
Authorities should seek to facilitate and encourage entry by only well-qualified entities in order
to improve the quality of the banking system and promote competition.

(iv) Conversion of UCBs into commercial banks: In the context of extending banking services,
there is a case for exploring the possibilities of converting some urban co-operative banks into
commercial banks/local area banks or small banks. These banks, freed from dual control and
with more avenues to raise capital, could extend banking services in the regions characterized by
poor banking outreach.

(v) Consolidation: The issue of consolidation in the banking sector has assumed significance,
considering the need for a few Indian banks to cater to global needs of the economy by becoming
global players. Consolidation in the banking sector may pave the way for stronger financial
institutions with the capacity to meet corporate and infrastructure funding needs. Taking into
account the pros and cons of consolidation, it has to be borne in mind that while consolidation of
commercial banks with established synergies and on the basis of voluntary initiatives is
welcome, it cannot be imposed on banks. Nevertheless, a measured approach is to be made both
on consolidation and global presence even if attaining global size is not imminent.

(vi) Presence of Foreign Banks in India: In view of the inherent potential for sustained growth
in the domestic economy and also growing integration into the global economy there needs to be
commensurate expansion in the presence of foreign banks in India. However, post crisis, the
support for domestic incorporation of foreign banks through the subsidiarisation route has
acquired importance. Comprehensive policy in this regard is being proposed.

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(vii) Indian banks presence overseas: Indian banks are allowed to expand overseas under a
policy framework of Reserve Bank of India and Government of India. Indian banks abroad are
facing challenges due to a highly competitive environment, enhanced regulation, more intensive
supervision and growing emphasis on ring fencing of operations in host jurisdictions in the wake
of the crisis. The way forward could be, apart from Representative Office and branch form of
presence overseas, local incorporation by large banks either individually or in joint venture mode
with other banks or with overseas banks. This will enable the large Indian banks to engage in a
much wider range of activities and have greater potential for growth. Eventually this may
facilitate banks increasing their global reach. Government Ownership: On the ownership issues,
proponents of private sector banks advocate that Government should reduce its ownership stake
in the public sector banks as private sector banks score over public sector banks in profitability
and efficiency. However, broadly over the years, the performance of public sector banks has
converged with that of new private sector banks and foreign banks. On one hand, the
predominance of government owned banks in India has contributed to financial stability, on the
other, meeting their growing capital needs casts a very heavy burden on the Government. What
is, therefore, needed is an optimal ownership mix to promote a balance between efficiency,
equity and financial stability. Going forward, there is a better pay-off in enabling PSBs to
improve their performance while promoting private sector banks. As regards the reduction in
fiscal burden on account of recapitalization of the Public Sector Banks (PSBs), it can be achieved
by considering issue of non-voting equity shares or differential voting equity shares. Government
could also consider diluting its stake below 51 per cent in conjunction with certain protective
rights to the Government by amending the statutes governing the PSBs. Another alternative
would be to move to a Financial Holding Company (FHC) structure.

Deposit Insurance and resolution: The crisis has brought into sharp focus the need for effective
deposit insurance and resolution regimes to deal with the failing/failed banks with least cost. In
India, failures of commercial banks have been rare, and the beneficiaries of the deposit insurance
system have mainly been the urban co-operative banks. The FSB key attributes could be the
guiding principles for setting up a resolution framework in India. The existence of an effective
resolution regime is essential for any type of banking structure India may pursue.

It is recognised that a dynamic and externally competitive real economy can be served better by a
responsive banking system. While there can be no ideal one-size fits all' banking structure as
such, it is recognised that a banking system should not only be able to meet the needs of the
economy, but also be resilient enough to withstand shocks and promote financial stability. The
envisaged policy will have to be in the backdrop of a strong regulatory and supervisory regime
with increased intensity of supervision for the systemically important banks. The reoriented
banking system with a continuum of banks may also help to improve the efficiency of the
monetary policy transmission mechanism.

The Indian Banking system has the Reserve Bank of India (RBI) as the apex body for all matters
relating to the banking system.

Page | 5
Business model
A bank can generate revenue in a variety of different ways including interest, transaction fees
and financial advice. The main method is via charging interest on the capital it lends out to
customers of The bank profits from the difference between the level of interest it pays for
deposits and other sources of funds, and the level of interest it charges in its lending activities.
This difference is referred to as the spread between the cost of funds and the loan interest rate.
Historically, profitability from lending activities has been cyclical and dependent on the needs
and strengths of loan customers and the stage of the Economic cycle. Fees and financial advice
constitute a more stable revenue stream and banks have therefore placed more emphasis on these
revenue lines to smooth their financial performance.

First, this includes the Gram-Leach-Bliley Act, which allows banks again to merge with
investment and insurance houses. Merging banking, investment, and insurance functions
allows traditional banks to respond to increasing consumer demands for "one-stop shopping"
by enabling cross-selling of products (which, the banks hope, will also increase profitability).
Second, they have expanded the use of risk-based financing from business lending to
consumer lending, which means charging higher interest rates to those customers that are
considered to be a higher credit risk and thus increased chance of default on loans. This helps
to offset the losses from bad loans, lowers the price of loans to those who have better credit
histories, and offers credit products to high risk customers who would otherwise be denied
credit.
Third, they have sought to increase the methods of payment processing available to the
general public and business clients. These products include debit cards, prepaid cards, smart
cards, and credit cards. They make it easier for consumers to conveniently make transactions
and smooth consumption over time (in some countries with underdeveloped financial
systems, it is still common to deal strictly in cash, including carrying suitcases filled with
cash to purchase a home).
However, with convenience of easy credit, there is also increased risk that consumers will
mismanage their financial resources and accumulate excessive debt. Banks make money
from card products through interest charges and fees charged to cardholders,
and transaction fees to retailers who accept the bank's credit and/or debit cards for
payments.
This helps in making profit and facilitates economic development as a whole.

Page | 6
Products
Retail banking

Savings account
Money market account
Certificate of deposit(CD)
Individual retirement account (IRA)
Credit card
Personal Loans
Debit Cards
Insurance
Business banking

Business loan
Capital raising (Equity / Debt / Hybrids)
Mezzanine finance
Project finance
Revolving credit
Risk management (FX, interest rates, commodities, derivatives)
Term loan
Cash Management Services (Lock box, Remote Deposit Capture, Merchant Processing)
credit services

Page | 7
Classification of Banks :

1. Non-Schedule Banks
These are banks, which are not included in the second schedule of the Banking Regulations Act,
1965. It means they do not satisfy the conditions laid down by that schedule. They are further
classified as back:
Central co-operative banks and primary credit societies
Commercial Banks

2. Schedule Banks
Must have paid-up capital and reserve of mot less than Rs.50,00,000 . The must satisfy the RBI
than its affairs are motconducted in a manner detrimental to the interests of itsdepositors. These
are further classified as follow:
State co-operative Banks
Commercial Banks

Banks are further sub-divided as:-

Indian Banks:-These banks are companies registered in India under companies act, 1956,
their place of origin is in India. These are further classified into
.
State Bank of India and its Subsidiaries:-This group comprises of the State Bank of India
(SBI) and its seven subsidiaries viz., State Bank of Patiala, State Bank of Hyderabad, State
Bank of Travancore, State Bank of Bikaner & Jaipur State Bank of Indore.
Other Nationalized Banks:-This group consists of private sector bank that were national.
The Government of India Nationalized 14 private banks in 1969and another 6 in the year
1980.
Regional Rural Banks:-The RBI established these in the year 1975 of Banking
Commission. It was established to operate exclusively in rural areas to provide credit and
other facilities to small and marginal farmers and small entrepreneurs.
Old private Sector Banks:-This group consists of Banks that were established by the privy
states, community organization or by a group of professionals for the cause of economic
betterment in their area of operations. Initially their branches slowly spread throughout the
national as they grew.
New Private Sector Banks:-These banks were started as profit oriented companies after the
RBI opened the banking sector to the private sector, these banks are monthly technology
driven and betterment in their branches slowly spread throughout the nation as they grew.

Page | 8
Page | 9
 Company overview

Bank of India was founded on 7th September, 1906 by a group of eminent businessmen
from Mumbai. The Bank was under private ownership and control till July 1969 when it was
nationalised along with 13 other banks .

Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50 employees,
the Bank has made a rapid growth over the years and blossomed into a mighty institution with a
strong national presence and sizable international operations. In business volume, the Bank
occupies a premier position among the nationalised banks .

The Bank has 4293 branches in India spread over all states/ union territories including
specialized branches. These branches are controlled through 50 Zonal Offices. There are 29
branches/ offices (including five representative offices) and 3 Subsidaries and 1 joint venture
abroad.

The Bank came out with its maiden public issue in 1997 and follow on Qualified Institutions
Placement in February 2008. . Total number of shareholders as on 30/09/2009 is 2,15,790.

While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront of
introducing various innovative services and systems. Business has been conducted with the
successful blend of traditional values and ethics and the most modern infrastructure. The Bank
has been the first among the nationalised banks to establish a fully computerised branch and
ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a
Founder Member of SWIFT in India. It pioneered the introduction of the Health Code System in
1982, for evaluating/ rating its credit portfolio.

Presently Bank has overseas presence in 20 foreign countries spread over 5 continents with 53
offices including 4 Subsidiaries, 4 Representative Offices and 1 Joint Venture, at key banking
and financial centres viz., Tokyo, Singapore, Hong Kong, London, Jersey, Paris and New York.
Contribution of foreign branches in the global business of the Bank as at 31.03.2013 is as under

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BANK OF INDIAS SERVICES:

BOIs service offerings include:

LOAN SERVICES:
1) Personal loan
2) Agriculture & priority sector
3) SME
4) Commercial loans
5) Trade finance
6) NRI loans
ONLINE SERVICES:
1) Mobile banking
2) Internet
3) Pay bills
4) Book ticket
5) Tax payments
6) Star e-remit
ANCILLARY SERVICES:
1) Remittance
2) Star cash management services
3) Safe deposit vault
4) Safe custody services
5) Depository services
6) Gold
7) Insurance
8) Mutual fund

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 HIGLIGHTS FOR THE YEAR ENDED 2013

Performance as on 31.03.2014 (Rs. In Crores, Except %)

Deposits 476974 Operating Profit 8423

Growth 24.91% Net Profit 2729

Advances 376228 Gross NPA Ratio 3.15%

Growth 28.42% Net NPA Ratio 2.00%

Business Mix 853202 Provision Coverage 58.68%

Growth 26.44% Earnings Per Share (Rs.) 44.74

Growth Return on Equity 11.73% Book value per Share (Rs) 387.53

Capital Adequacy Ratio Capital Adequacy Ratio

(Basel-II) 10.76% (Basel-III) 9.97%

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Financing by Banks
A new business typically needs funds for capital or fixed assets (usually one-time, larger
purchases like equipment or a building) and working capital (to cover operating costs such as
rent, wages and supplies).
bank will offer a range of solutions to address a range of financing needs. Use this brief
description of the more popular types of financing to better understand each option.
Term Loans - Large amounts of well-placed capital can make a big difference to your ability to
stay competitive. If you are planning to purchase fixed assets (like a new kitchen for your
restaurant, or new computers for your design firm) then consider a term loan.
Bridge Loans - This type of financing provides your business with a bridge to get over short-
term financing gaps while you arrange a more permanent solution.
Operating Line of Credit - These are usually a good, flexible option for businesses seeking
short-term funding while they collect accounts receivable or move inventory. A line of credit
acts as a cushion to help you manage shortfalls or seize opportunities.
Business Credit Card - A credit card provides a form of short-term financing because you can
charge business expenses to the card and pay later. Many cards can be used without incurring
interest charges as long as you pay your balance in full within a stated period of time. Business
credit cards also help you to separate your work and personal expenses to make year-end
accounting easier. Many cards give you the ability to earn points or offer cash back with every
purchase you make.
Lease Financing - Instead of buying office equipment, technology or manufacturing equipment,
leasing is often preferable. Similar to a car lease, your business agrees to pay a specific monthly
amount for the use of an asset.
Factoring - Large customer orders can squeeze cash flow as the owner tries to juggle the cost of
fulfilling the order and collecting payment. To turn those accounts receivable into cash, you can
sell them at a discount to outside lenders.
business will likely need to borrow money at some stage of its development. The more advance
planning you do, the better your chances of getting the financing you need at the best rate
possible.

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Working Capital Assessment
What is Working Capital?
Working capital for any manufacturing unit means the total amount of circulating funds required
for the continuous operations of the unit on a going basis.
The working capital comprises of: -
1. Amount for raw material of various kinds.
2. Amount for stock in process.
3. Amount for all finished goods in stores and in transit.
4. Amount for receivables or sundry debtors.
5. Other routine expenses.

Factors which determine the working capital:-

1. Policies for production
2. Manufacturing process
3. Credit policy of the unit
4. Pace of turnover
5. Seasonality

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Introduction To Working Capital Assessment
Every business needs adequate liquid resources in order to maintain day to day cash flows. It
needs enough cash to by wages and salaries as they fall due and to pay creditors if it is to keep its
workforce and ensure its supplies. Maintaining adequate working capital; is not just important in
the short term. Sufficient liquidity must be maintained in order to ensure the survival of business
in the long term as well. Even a profitable business may fail if it does not have adequate cash
flows to meet its liabilities as they fall a due. Therefore when business make investment
decisions they must not only consider the financial outlay involved with acquiring the new
machine or the new building etc, but must also take account of the additional current assets that
are usually involved with any expansion of activity. Working Capital Management (WCM) is the
management of short term financing requirements of a firm. This includes maintaining optimum
balance of working capital components receivables, inventory and payables and using the cash
efficiently for day-to-day operations. Optimization of working capital balance means minimizing
the working capital requirements and realizing maximum possible revenues. Efficient WCM
increases firms free cash flow, which in turn increases the firms growth opportunities and
return to shareholders. Even though firms traditionally are focused on long term capital
budgeting and capital structure, the recent trend is that many companies across different
industries focus on WCM efficiency.

The management of current assets on the basis of the following points:

1. Current assets are for short period while fixed assets are for more than one year
2. The large holding of current assets ,especially cash, strengthens liquidity position but also
reduce overall profitability ,and to maintain an optimal level of liquidity and profitability , risk
return trade off is involved holding current assets
3. Only current assets can be adjusted with sales fluctuating in the short run. Thus the firm has
greater degree of flexibility in managing current assets. The management of current assets help
affirm in building a good market reputation regarding its business and economic conditions.

Page | 15
NEED OF THE STUDY
During the post liberalization are the worlds assail as economic indias scenario has shown a
great progress and is growing with increased phase this has necessitated the complex and
efficient ways of management .thinking practically the main concern is of the influence of
external environment on business providing a modern dimension to business to management
.they find solution for many problems in the aspect of financial analysis .financial establishes
inter relationship that exists among. The different items appeared in the financial statements,
which are effectively helpful to describe the company should monitor key indication of
operating performance and where possible must compare, itself with the competitors in the
industry.
A systematic financial analysis of accounting figure helps to analysis the probable caused
relationship among different items after analyzing scrutinizing the past result which helps the
management to prepare budgets ,to formulate company policy and to prepare future plan of
action. It focuses on companys relative performance in sales growth margins and assets
management .It is a simple tool where by a company can make its internal audit to evaluate
internal strengths and weakness of the part of the strategic planning.
Components for Working Capital Management-
Inventory Management -Inventory management is described as the planning, coordinating and
controlling activities related to the flow of inventory through and out of an organization,
Inventory may be classified as Supplies, Raw materials, Work in progress and finished goods.
These classes of inventory are essential part of virtually all business operations, as with the case
of account receivables, inventory levels depends heavily on sales, whereas receivables build up
after sales have been made, inventory must be acquired ahead of sales. The necessity of
forecasting sales before establishing target inventory levels makes inventory management a
difficult task. Also, since error in the establishment of inventory levels quickly leads to low sales
or excessive carrying cost, inventory management is as important as it is difficult. Proper
inventory management requires close coordination among the sales, purchasing, production and
the finance departments .
Account receivables-Account receivables makes up a very large portion of the firms assets;
they actually composed of 25.97 percent in their levels will affect profitability. An increase in
account receivables that is additional extension of trade credits- not only result in higher sales ,
also requires additional financing to support the increased investment in account receivables .
The cost of credit investigation and collection efforts and the chances of bad debts are increased.
Whenever a credit sale is made, it increases the firms account receivables, therefore the credit
account receivable management depends upon the degree to which the firm sells on credits. Cash
flow from sales cannot be invested until the account is collected, control of account receivables
takes on additional importance and efficient collection determines both profitability and liquidity
of the firm. With respect to the size of investment in account receivables, the financial manager
does not play any role but other factors that come to determine it level. Firstly, the percentage of
credit sales to total sales affects the level of account receivables held and in essence the nature of
the business tends to determine the blend between credit sales and cash sales. The level of sales
also determines the size of investment in account receivables that is, the more sales, the greater
the account receivables. As the firm experience seasonal and permanent growth in sales, the level

Page | 16
of account receivables will naturally increase. The final one is the credit and collection policies,
more specifically; it is the terms of sales, the quality of customers and collection efforts. The
terms of sales specifies the time period during which the customer must pay for the sale and the
terms; that is, the discount for paying early, and if so, how much?. The type of customer and
credit policy also affects the level of investment in account receivables. For receivables,
managing our decision is not to minimize loses, but to maximize profits.
Cash- Cash management is described as minimizing the firms risk of insolvency. Cash can
make production halt should payment for raw materials purchased be continually late or omitted
entirely resulting to low production leading to low profit margin. Sound working capital is
designed to minimize the time between cash expenditure on material and collection of cash sales.
There are various ways of managing cash are as follows: Cash Convention Cycle Model being
focusing on the length of time between where the company makes payment and when it receives
cash inflows, it also equals the length of time between the firms actual cash expenditure and its
own cash receipts, Receivables Collection Period is the average length of time required to
convert the firms credit sales per day and Payable Deferral Period is also the average length of
time between the purchase of material and labour and the payment for cash for them.
Account payables -Firms generally make purchases from other firms on credits, recording the
debts as account payables. It is the largest single category of short term debt because small firms
do not qualify from financing from other sources , they rely heavily especially on trade credits as
a result firms that do sell on credit have a credit policy that includes terms of credits. Account
payables can further be looked into as trade account payables and other accounts payables. Trade
accounts payables are short term obligations to suppliers for purchases of merchandise and other
accounts payable includes liabilities for any goods and services other than merchandise.

Page | 17
CONCEPT OF WORKING CAPITAL:
The concept of working capital includes current assets and current liabilities both. The various
concepts of working capital are as follows.
1. Gross working capital: Gross working capital refers to the firms investment in current assets
current assets are the assets, which can be converted into cash within an accounting year or
operating cycle. It includes cash, short term securities, debtors bills receivables and stock.
Gross working capital focuses on :-
a. Optimization of investment in current assets.
b. Financing of current assets.

2. Net working capital: Net working capital refers to the difference between current assets and
liabilities are those claims of outsiders, which are expected to mature for payment within an
accounting year. It includes creditors or accounts payables bills payable and outstanding
expenses. Net working copulate can be positive or negative. A positive working capital will arise
when current assets exceed current liabilities and vice versa.

Positive NWC = CA > CL

Negative NWC = CA < CL
Net working capital focuses on :-
a. Liquidity position of the firm.
b. Judicious mix of short-term and long-term financing.

3.Permananet Working Capital: Permanent working capital is the minimum amount of current
assets which is needed to conduct a business even during the dullest season of the year. The
amount varies from year to year depending up on the growth of the company and stage of
business cycle in which it operates. It is the amount of funds required to produce goods and
services which are necessary to satisfy demand at a particular point.

4.Temporary Working Capital: It is represents the additional assets which are required at
different times during the operating year additional inventory, extra cash etc., seasonal working
capital is the additional amount of current assets particularly cash, receivables and inventory
which is required during the more active business seasons of the year.

5.Balance Sheet Working Capital: The balance sheet working capital is one which calculated
from the items appearing in the balance sheet. Gross working capital which is represented by the
excess of current assets, and net working capital which is represented by the excess of current
assets over current liabilities are examples of balance sheet working capital.

6. Cash Working Capital: Cash working capital is one which is calculated from the appearing
in the profit and loss account. It shows the real flow of money or value at a particular time and is
considered to be the most realistic approach in working capital management. It is the basis of the

Page | 18
operating cycle concept which has assumed a great importance in financial management in
recent years. The reason is the working capital indicates the adequacy of the cash flow. Which is
an essential pre-requisite of a business.

7.Negative Working Capital: Numbers working capital emerges when current liabilities exceed
current assets. Such a situation is not absolutely theoretical, and occurs when a firm is nearing a
crisis of some magnitude.

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Operating Cycle
Operating cycle is the time duration required to convert sales after the conversion of resources
into inventories, into cash. The operating cycle of a manufacturing company involves three
phases:

1. Acquisition of resources
2. Manufacture of the product
3. Sale of the product

These phases of operating cycle create cash flows among which cash inflows are mostly
uncertain whereas cash outflows are relatively certain. The firm needs to hold cash to purchase
the raw materials, pay for labor, as these payments involve day-to-day transactions,
manufacturing firm needs to maintain liquidity.

Operating cycle of a manufacturing firm

Length of operating Cycle

A. Procurement of Raw Material 30 days
B. Conversion / Process time 15 days
C. Average time of holding of FG 15 days
D. Average Collection Period 30 days
E. Operating Cycle (a+b+c+d) 90 days
F. Operating Cycle in a year (365days/e) 4 cycle

1. Total Operating Expenses per Rs 60.00cr

Annum

2. Total Turnover per Annum Rs 70.00cr

3. Working Capital Requirement Rs 15cr

= Total Operating Expenses (1)/ No. of
operating Cycle (f as said earlier)

Page | 20
Types of Working Capital Needs

Another important aspect of working capital management is to analyze the total working capital
needs of the firm in order to find out the permanent and temporary working capital. Working
capital is required because of existence of operating cycle. The lengthier the operating cycle,
greater would be the need for working capital. The operating cycle is a continuous process and
therefore, the working capital is needed constantly and regularly. However, the magnitude and
quantum of working capital required will not be same all the times, rather it will fluctuate.
The need for current assets tends to shift over time. Some of these changes reflect permanent
changes in the firm as is the case when the inventory and receivables increases as the firm
grows and the sales become higher and higher. Other changes are seasonal, as is the case with
increased inventory required for a particular festival season. Still others are random reflecting
the uncertainty associated with growth in sales due to firm's specific or general economic
factors.

The working capital needs can be bifurcated as:

Permanent working capital
Temporary working capital
Permanent working capital:
There is always a minimum level of working capital, which is continuously required by a firm
in order to maintain its activities. Every firm must have a minimum of cash, stock and other
current assets, this minimum level of current assets, which must be maintained by any firm all
the times, is known as permanent working capital for that firm. This amount of working capital
is constantly and regularly required in the same way as fixed assets are required. So, it may also
be called fixed working capital.

Temporary working capital:

Any amount over and above the permanent level of working capital is temporary, fluctuating or
variable working capital. The position of the required working capital is needed to meet
fluctuations in demand consequent upon changes in production and sales as a result of seasonal
changes.

Page | 21
The permanent level is constant while the temporary working capital is fluctuating increasing
and decreasing in accordance with seasonal demands as shown in the figure. In the case of an
expanding firm, the permanent working capital line may not be horizontal. This is because the
demand for permanent current assets might be increasing (or decreasing) to support a rising
level of activity. In that case line would be rising.

Page | 22
INVENTORY MANAGEMENT

Inventories
Inventories constitute the most important part of the current assets of large majority of
companies. On an average the inventories are approximately 60% of the current assets in public
limited companies in India. Because of the large size of inventories maintained by the firms, a
considerable amount of funds is committed to them. It is therefore, imperative to manage the
inventories efficiently and effectively in order to avoid unnecessary investment.

Nature of Inventories
Inventories are stock of the product of the company is manufacturing for sale and components
make up of the product. The various forms of the inventories in the manufacturing companies
are:
Raw Material: It is the basic input that is converted into the finished product through the
manufacturing process. Raw materials are those units which have been purchased and stored for
future production.
Work-in-progress: Inventories are semi-manufactured products. They represent product that
need more work they become finished products for sale.
Finished Goods: Inventories are those completely manufactured products which are ready for
sale. Stocks of raw materials and work-in-progress facilitate production, while stock of finished
goods is required for smooth marketing operations. Thus, inventories serve as a link between the
production and consumption of goods.

Page | 23
Inventory Management Techniques
In managing inventories, the firms objective should be to be in consonance with the shareholder
wealth maximization principle. To achieve this, the firm should determine the optimum level of
inventory. Efficiently controlled inventories make the firm flexible. Inefficient inventory control
results in unbalanced inventory and inflexibility-the firm may sometimes run out of stock and
sometimes pile up unnecessary stocks.
Economic Order Quantity (EOQ): The major problem to be resolved is how much the
inventory should be added when inventory is replenished. If the firm is buying raw materials, it
has to decide lots in which it has to purchase on replenishment. If the firm is planning a
production run, the issue is how much production to schedule. These problems are called order
quantity problems, and the task of the firm is to determine the optimum or economic lot size.
Determine an optimum level involves two types of costs:-
Ordering Costs: This term is used in case of raw material and includes all the cost of acquiring
raw material. They include the costs incurred in the following activities:
Requisition
Purchase Ordering
Transporting
Receiving
Inspecting
Storing
Ordering cost increase with the number of orders placed; thus the more frequently inventory is
acquired, the higher the firms ordering costs. On the other hand, if the firm maintains large
inventorys level, there will be few orders placed and ordering costs will be relatively small.
Thus, ordering costs decrease with the increasing size of inventory.
Carrying Costs: Costs are incurred for maintaining a given level of inventory are called
carrying costs. These include the following activities:
Warehousing Cost
Handling
Administrative cost
Insurance
Deterioration and obsolescence
Carrying costs are varying with inventory size. This behavior is contrary to that of ordering costs
which decline with increase in inventory size. The economic size of inventory would thus
depend on trade-off between carrying costs and ordering cost.

Page | 24
ABC System:
ABC system of inventory keeping is followed in the factories. Various items are categorized into
three different levels in the order of their importance. For e.g. items such as memory, high
capacity processors and royalty are placed in the A category. Large number of firms has to
maintain several types of inventories. It is not desirable the same degree of control all the items.
The firm should pay maximum attention to those items whose value is highest. The firm should
therefore, classify inventories to identify which items should receive the most effort in
controlling. The firm should be selective in approach to control investment in various types of
inventories. This analytical approach is called ABC Analysis. The high-value items are
classified as A items and would be under tightest control. C items represent relatively least
value and would require simple control. B items fall in between the two categories and require
reasonable attention of management.

Page | 25
RECEIVABLES MANAGEMENT
Cash flow can be significantly enhanced if the amounts owing to a business are collected faster.
Every business needs to know.... who owes them money.... how much is owed.... how long it is
owing.... for what it is owed.

Late payments erode profits and can lead to bad debts.

Slow payment has a crippling effect on business; in particular on small businesses whom can
least afford it. If you don't manage debtors, they will begin to manage your business as you
will gradually lose control due to reduced cash flow and, of course, you could experience an
increased incidence of bad debt.

The following measures will help manage debtors

1. Have the right mental attitude to the control of credit and make sure that it gets the priority
it deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly understood by staff, suppliers and customers.
4. Be professional when accepting new accounts, and especially largerones.
5. Check out each customer thoroughly before you offer credit. Use credit agencies, bank
references, industry sources etc.
6. Establish credit limits for each customer and stick to them.
7. Continuously review these limits when you suspect tough times are coming or if operating
in a volatile sector.
8. Keep very close to your larger customers.
9. Invoice promptly and clearly.
10.Consider charging penalties on overdue accounts.
11.Consider accepting credit /debit cards as a payment option.
12.Monitor your debtor balances and aging schedules, and don't let any debts get too old.
Debtors due over 90 days (unless within agreed credit terms) should generally demand
immediate attention. Look for the warning signs of a future bad debt. For example..
1. Longer credit terms taken with approval, particularly for smaller orders.
2. Use of post-dated checks by debtors who normally settle within agreed terms.
3. Evidence of customers switching to additional suppliers for the same goods.
4. New customers who are reluctant to give credit references.
5. Receiving part payments from debtors.

Here are few ways in collecting money from debtors: -

Develop appropriate procedures for handling late payments.
Track and pursue late payers
Get external help if you own efforts fail.
Dont feel guilty asking for money .. its yours and you are entitled to it.
Make that call now. And keep asking until you get some satisfaction.

Page | 26
 In difficult circumstances, take what you can now and agree terms for the remainder, it
lessens the problem.
When asking for your money, be hard on the issue but soft on the person. Dont give the
debtor any excuses for not paying.
Make that your objective is to get the money, not to score points or get even.

Page | 27
MANAGING PAYABLES (Creditors)
Creditors are a vital part of effective cash management and should be managed carefully to
enhance the cash position
Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity
problems.

Consider the following: -

Who authorizes purchasing in your company - is it tightly managed or spread among a

number of (junior) people?
Are purchase quantities geared to demand forecasts?
Do you use order quantities, which take account of stock holding and purchasing costs?
Do you know the cost to the company of carrying stock?
How many of your suppliers have a return policy?
Are you in a position to pass on cost increases quickly through price increases to your
customers?
If a supplier of goods or services lets you down can you charge back the cost of the delay?

There is an old adage in business that "if you can buy well then you can sell well".
Management of your creditors and suppliers is just as important as the management of your
debtors. It is important to look after your creditors- slow payment by you may create ill feeling
and can signal that your company is inefficient (or in trouble!).
Remember that a good supplier is someone who will work with you to enhance the future
viability and profitability of your company.

Page | 28
Methods of arriving at the Working Capital

Turn over Method MPBF Method Cash Budgeting

(Nayak Committee)- (Tandon Committee)- B Method- C
A
Working Capital up to Applicable in case of w/c Applicable in case of w/c
Rs 5 crores required above Rs 5 required above Rs 5
Crores Crores
Basis Projected Annual Inventory and Peak level cash deficit
Turnover Assuming Receivable holding
Production/ Business levels
cycle of 3 months
To whom Fund based &NFB Borrowers having W.C Borrowers having W.C
applicable W.C Credit limits limits (fund based and limits (fund based and
upto non fund based) above Rs non fund based) above
and inclusive of Rs 5 5 crores from the Rs 5 crores from the
crores from the banking system banking system
banking system
Note: Borrowers given Note: Borrowers given
option to choose between option to choose between
B& C but the decision to B& C but the decision to
allow the switch over by allow the switch over by
borrower to Cash Budget borrower to Cash Budget
System would be purely System would be purely
at Banks discretion. at Banks discretion.
Further , borrowers opting Further , borrowers
for cash budgeting opting for cash budgeting
method should satisfy the method should satisfy the
bank about their having bank about their having
the necessary the necessary
infrastructure in place to infrastructure in place to
submit the submit the
required information required information
periodically in time periodically in time
Computation of 20% of Projected Tandons II Method of Peak level cash
Limit Annual Lending ( Levels to be in deficit will be the
Turnover conformity with past or level of total W.C.
industry as may be finance
advised from time to
time by RBI and also
borrowers level of
activity)
Margin/ 5% of Projected 25% of Current Assets Debt: Equity Ratio of
Borrowers Annual 3 : 1 and Current
contribution Turnover Ratio of Minimum
1 : 33 : 1

Page | 29
Working Capital Finance
A) Fund Based
- Inventory finance and
- Bill Finance ( Post Sales Finance).
B) Non Fund Based
- Letter of Credit (LC)
- Bank Guarantee.

Bifurcation of Fund Based Limits

1-Inventory
Inventory: CC/PC/COD/SOD
Bills : CBP/DBP/SBP/FBP/ CUBD/DUBD/FUBD
Inventory Limit
A. Total Inventory
B. Creditors
C. Margin
D. Paid Inventory (A-B)
E. Inventory Limit ( D-C)

2-Bill Finance -Post Sales Finance

DBPs : Bills of Exchange accompanied with
I) Invoice and
ii) Documents of title of the Goods - LRS/RR
DUBD : Invoice /LRS / RRS Maximum Tenor 180 days
CUBD : Bill of Exchange / Promissory Notes.
- Eligibility Carved out of MPBF
Export Bills : FBP/FUBD
- Security Export Documents drawn against confirmed orders /

Page | 30
Bifurcation of Non Fund Based Limits
1-Letter of credit
- Inland/Foreign
-Usance/Sight

2-Bank Guarantee
- Performance.
- Financial Bid Bonds/Security Deposits/ Mobilization advance/retention money.

Page | 31
Factors for Working Capital Finance
1 BUSINESS CYCLE FLUCTUATIONS:
Different phases of business cycle i.e. boom, recession, recovery etc, also effect working capital
requirement. In case of born conditions inflationary pressure appears and business activities
expand. As a result the overall need for cash, inventories etc., increase resulting more and more
funds blocked in these current assets. In case of recession period. However, there is usually
dullness in business activities and there will be opposite effect on the level of working capital.

2 CREDIT POLICY:
The credit policy means the totality of terms and conditions on which goods are sold and
purchased. At firm has interact with 2 types of credit policies at a time one, the credit policy of
the supplier of raw material, goods etc, and two the credit policy relating to credit which it
contends to its customer. In both the cases, however, the firm while deciding its credit policy has
to take care of credit policy of the market for example affirm might be purchasing goods and
services on credit but selling foods only for cash the working capital requirement of this firm will
be lower than that of a firm which is purchasing cash, but has to sell on credit basis.
3 CONDITIONS OF SUPPLY: If the supply is prompt and adequate the firm can manage with
small inventory, if the supply is unpredicted and service then the firm has to ensure continuity of
production.

Page | 32
WORKING CAPITAL POLICY
Two important issues in formulation the working capital policy are:
1. What should be the ratio of current assets to sales.
2. What should be the ratio of short term financing to long-term financing.
CURRENT ASSETS IN RELATION TO SALES: It usually does the investment in current
assets cannot be specified unequally. In sales of uncertainty the outlook on current assets would
consist of base component meant to meet normal requirement and safety component mean to
copy with unusual demands and requirements. The safety assets policy of the firm .
1. If the firm pursues a very conservation current assets policy is should carry a high level of
current assets in relation to sales.
2. If the adopts a moderate current assets policy it would carry a moderate level of current
assets in relation to assets.
3. If the term follows highly aggressive current assets policy. It would carry a low level of
current assets in relation of sales.
RATIO OF SHORT TERM FINANCING TO LONG TERM FINANCING:- What would
be the relative proportions of short-term bank financing on one hand and long-term sources of
finance and the other hand. The board policy alternatives in the respect are:
1. A conservative current assets financing policy.
2. An aggressive current assets financing policy. Conservative current assets financing
policy refills less on short-term bank financing and more long on term sources like
debentures. An aggressive current financing policy relies heavily on short-term bank
finance and seeks to reduce dependants on long term financing.

CHOOSING THE WORKING CAPITAL POLICY:-

The overall working capital policy adopted by the firm may broadly:-
1. Conservative
2. Moderate
3. Aggressive
CONSERVATIVE: A conservative overall working capital policy means that the firm chooses
conservative current assets policy along with conservative current assets financing policy.
MODERATE: A moderate overall working capital policy reflects a combination of a
conservative current assets policy and aggressive current assets financing policy or a
combination of an aggressive current assets policy and conservative current assets financing
policy.
AGGRESSIVE: An aggressive overall working capital consists of an aggressive current assets
policy and aggressive current assets financing policy.

Page | 33
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL
Solvency of Business: Adequate working capital helps in maintaining the solvency of the
business by providing uninterrupted of production.
Goodwill: Sufficient amount of working capital enables a firm to make prompt payments and
makes and maintain the goodwill.
Easy loans: Adequate working capital leads to high solvency and credit standing can arrange
loans from banks and other on easy and favorable terms.
Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the
purchases and hence reduces cost.
Regular Supply of Raw Material: Sufficient working capital ensures regular supply of raw
material and continuous production.
Regular Payment Of Salaries, Wages And Other Day TO Day Commitments: It leads to the
satisfaction of the employees and raises the morale of its employees, increases their efficiency,
reduces wastage and costs and enhances production and profits.
Exploitation Of Favorable Market Conditions: If a firm is having adequate working capital
then it can exploit the favorable market conditions such as purchasing its requirements in bulk
when the prices are lower and holdings its inventories for higher prices.
Ability To Face Crises: A concern can face the situation during the depression.
Quick And Regular Return On Investments: Sufficient working capital enables a concern to
pay quick and regular of dividends to its investors and gains confidence of the investors and can
raise more funds in future.
High Morale: Adequate working capital brings an environment of securities, confidence, high
morale which results in overall efficiency in a business.

Page | 34
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL
- Excessive working capital means ideal funds which earn no profit for the firm and business
cannot earn the required rate of return on its investments.
- Redundant working capital leads to unnecessary purchasing and accumulation of inventories.
- Excessive working capital implies excessive debtors and defective credit policy which causes
higher incidence of bad debts.
- It may reduce the overall efficiency of the business.
- If a firm is having excessive working capital then the relations with banks and other financial
institution may not be maintained.
- Due to lower rate of return n investments, the values of shares may also fall.
- The redundant working capital gives rise to speculative transactions

Page | 35
 Clarifications in regard to Assessment of Working Capital Limits by RBI
Issues raised by banks
1 Whether banks should sanction
working capital limits computed on
the basis of a minimum of 20 percent of
the projected annual turnover/output
value or whether it is intended that
banks should also arrive at the
requirement based on the traditional
approach of production/processing cycle
and thereafter decide the quantum of
need-based finance. If the traditional
approach is followed the working
capital finance arrived at could be either
more than or less than 20 percent. In
case it is less than 20 percent, whether
banks should still give 20 percent ?
2 Whether projected turn over/output
value basis 'gross sales'
3 Whether the 5 percent promoter's
stake (Net Working Capital) should
be reckoned with reference to the
projected turnover or with reference
to the working capital arrived at
based on production/ processing
cycle
Page | 36
Clarifications
The assessment of working capital credit
limits should
be done both as per projected turnover basis
and traditional method. If the credit
requirement based on production/ processing
cycle is higher than the one assessed on
projected turnover basis, the same may be
sanctioned as RBI guidelines stipulate bank
finance at minimum of 20 percent of the
projected turnover. On the
other hand if the assessed credit requirement
is lower than the one assessed on projected
turnover basis, while the credit limit can be
sanctioned at 20 percent of the projected
turnover, actual drawls may be allowed
on the basis of drawing power to be
determined by banks after excluding unpaid
stocks. In the case of Selective Credit Control
commodities the drawing power should be
determined as indicated in the RBI directive.
The projected turnover/output value may be
interpreted as projected 'Gross Sales' which
will include excise duty also.
In terms of extant guidelines the working
capital requirement is to be assessed at 25
percent of the projected turnover to be shared
between the borrower
and bank viz. borrower contributing 5% of the
turnover as NWC and bank providing finance
at a minimum of 20
percent of the turnover. The above guidelines
were framed assuming an average
production/processing cycle of 3 months (i.e.
working capital would be turned over four
times in a year). It is possible that certain
industries may have a production cycle
shorter/longer 3 months. While in the case of
a shorter cycle, the same principle could be
applied as it is the intention to make available
at least 20 percent of turnover by way of bank
finance. In case the cycle is longer, it is
expected that the borrower should bring in
proportionately higher stake in relation to his
requirement of bank finance. Going by the

4 Whether 5 percent NWC should be
reckoned with reference to turnover
or with reference to available long
term sources; in other words is the
prescribed NWC the minimum
amount?
5 Whether drawing power should
continue to be regulated through
stocks and whether unpaid stocks
deducted for arriving at drawing
power ?
6 Since the present instructions cover
traders as well, and most trade is
done at market credit, whether the
credit limits should be assessed as
20 percent of the turnover per se
and actual drawing regulated through
stocks ?
Page | 37
above principle, at least 1/5th of working
capital requirement should be brought in by
way of NWC.
Whether 5 percent NWC should be reckoned
with reference to turnover or with reference to
available long term sources; in other words is
the prescribed NWC the minimum amount?
It is left to the discretion of banks. However,
in arriving at drawing power, unpaid stocks
are not financed as it would result in double
financing. The drawing power should
conform to Reserve Bank of India directives
in the case of Selective Credit Control
commodities
In the case of traders, while bank finance
could be assessed at 20 percent of the
projected turnover, the actual drawls should
be allowed on the basis of drawing powers to
be determined by bank after ensuring that
unpaid stocks are excluded. In the case of
SCC commodities the RBI directive should be
scrupulously followed.
 Documents for Working Capital Financing
Pre-sanction documents

Filled-in application form

Last 3 years' IT returns
Last 3 years' audited balance sheet
Last 12 months' bank statements for all operative accounts
Proof for signature verification - passport / driving licence / PAN card / Bank's verification
Identity proof
Address proof
Constitutional documents
Business licenses etc

Pre-disbursement documents

Duly executed loan documents

Property documents as applicable
Title deeds (sale deed, lease deed, share certificates, etc) and prior title deeds
Land revenue records
Property tax receipts
Approved construction/building plan
NOC from development authorities for lease properties

Page | 38
 Procedure of Credit Finance at BOI

COMPANY

BANK

DUE DELIGENCE

ADMINISTRATIVE CLEARANCE

CHECKLIST SHARED BY COMPANY

PROPOSAL PREPARATION

PROPOSAL SEND TO HO FOR APPROVAL

CREC COMITEE ASK FOR QUERIES IF ANY

SANCTIONING AUTHORITIES GOTHROUGH

PROPOSAL

SANCTION OF PROPOSAL

SANCTION LETTER TO COMPANY

Page | 39
Project Financing Methodology Carried Out by Banks
1- Company approaches the bank with a financing proposal according to their needs and
requirements.
2- on receiving the proposal the banks undertakes the entire background check over the company
involving a due-diligence.
Due-diligence - It is the process of evaluating a prospective business decision by getting
information about the financial, legal, and other material (important) state of the other party.
The due-diligence carried out by the bank is done for both the New Business Group(NBG) and
the Proposal

A. To be done for NBG

Remarks

a. Banks/RBI/ ECGC defaulters list

b. CIBIL Reports

c. Statement of Accounts from present

bankers

d. ROC Search

B. To be done for Proposal

Remarks

a. Status Reports from present bankers

b. D & B reports

c. Plant Inspection/Office visit

Page | 40
Banks appoint external consultants who carries out the due diligence in the following format
which involves the following informations regarding the company and its members-

Bio Data of Promoters/ Directors

Bio Data of Key Managerial Personnel

Board of Directors and Management ofthe Company

Changes in Board of Directors in last three years

Key Management Personnel

Changes in Key Employee positions in last three years.

Shareholding Pattern (Top Ten Shareholders)

Shareholding of the Promoter Group

Lock in if any for promoters contribution

Capital Build-upa

Company and Group Company/Concern Information

No litigations certificate from all group companies including borrower company,

subsidiaries and all ventures and businesses of the promoters and corporate promoters

Litigations against Company

Litigations against Directors

Certificate from Company on no Revaluation of Assets

Certificate for compensation to the Directors

Certificate on 370 (1B) Companies, Group Companies, ventures of the promoter

Certificate for Group Companies

Undertaking Regarding Past Dues

Certificate Regarding Interest of Directors/Managing Director in Borrower Company

Declaration by the Directors Regarding Other Directorships

Declaration by the Individual Promoters for Other Interests

Page | 41
3-Administrative Clearance After a satisfactory due diligence of the company the bank
undertakes the activity of administrative clearances which is cleared by the Head Office. The
Administrative Clearance or In Principle Approval comprises of the following details prepared
by the Head Office of the bank.

Brief Financials
Due-Diligence
Company Background
Business Activity
Place of Business of Company
Principal Person
Security Provided by Company
Check RBI Defaulter List, if any Directors name comes on it
In case of term loan, information such as cost of project, means of finance by company,
DSCR, and repayment period is gathered
Present Loan Request
Quarterly/Half Yearly unaudited sales, EBIDTA and NP to be given for current year
SWOT Analysis
Concessions if any recommended in terms of-
ROI, BG/LC, Processing/TEVS fees,
Recommendation by Head Office in brief on the following-
Synopsis about the company, Present Management and their achievements, Existing Banking
arrangement, External Credit Rating, Commission, Interest

If the Administrative Clearance is accepted by HO then it is conveyed to branch, and if it is

declined then same is conveyed to the company. In case company can make some changes in the
proposal and again ask HO for administrative clearance. As the proposal is accepted, the
checklist is shared by the branch to the company, and the information asked in checklist is to be
provided by the company to bank on receiving all the information by the bank, bank starts
preparing proposal as per the standard guidelines of BOI.
4-Checklist - On acceptance of the administrative Clearances the bank prepares the check list
wherein they request the company to provide them with all the financial datas in depth to help
them understand the justification or the funds required and the current balance sheet standings of
the company after which the banks starts preparing the proposal for the loan requirement of the
company.
5 Preparation of the Proposal The immense competition amongst Banks/Financial Institutions
to grab quality credit portfolio has resulted in Borrowers seeking speedier decisions on credit
requests. Many a times sanctioning authorities are not in a position to take quicker decisions as the
credit proposals are either incomplete or lack vital details or are not prepared with adequate care and
preciseness. This results in raising of queries or decisions being held up for want of more information
which result in avoidable delays.
The following checklists, Dos & Donts help overcome the above situation

Page | 42
Checklists

Take the previous sanctioned proposal and go through the same fully
Ensure all terms are complied with
Go through the Memos prepared since the last sanction in the account for any over
limit/ad hoc etc. granted
Study CMA data/Financial Statements thoroughly- Read the Auditors Report and Notes
on Balance Sheet carefully
Verify the sales trend in the past and confirm that the projections are done accordingly
and if not what the borrowers are to say and whether the reasons are cogent and
acceptable
Study the holding levels of inventory past trend, actual, industry norms provided by
RBI etc.
Check turnover in the account Ensure that the party has no banking relationship with
other Banks of which we are not aware/authorized by us /consortium
Check on cheques returned for financial reasons Both issued by the Company/Lodged
by it. Check devolvement of L/Cs, Invocation of Guarantees, Return of Bills Purchased in
the account,. Also check whether all commitments are met on due dates
Check whether pro-rata business is routed through us in case of consortium accounts.
Check for consortium meetings held and minutes of meetings held are kept on record
Check latest position of accounts Reasons for overdue, if any;
Whether inspections are done as per stipulations and whether the findings are satisfactory
Verify Internal Audit Report/Concurrent Audit Report etc. for comments on this account
Look critically at profit/profitability
In accounts having term loan component whether DSCR is calculated properly and the
same is acceptable to us
Collect data on Banks exposure to the company/firm by way of credit facilities, as
investment in NCDs, Equity Shares, Underwriting obligations etc. Take a declaration to
that effect from the Borrower
Collect data on Group Exposure along the same lines;
Verify credit rating sheet and confirm that the marks are awarded properly and the
pricing has been appropriately derived at
While taking exposure, check for industry exposure and NPA levels in your Branch/Area;
Confirm that dues to the financial institutions /banks are repaid in time and accounts are
in order
Confirm that the statement of basis of worth (CBD-23,IT/WT returns) is obtained
recently/updated
Confirm that status reports on drawees etc. are updated
Delegation Verify as to which is the authority for the proposed sanction;
Check/Confirm that Technical Appraisal if needed is carried out. Study the report fully
and carefully. In case of doubts/clarifications feel free to contact the technical cell for
more details
Confirm that the proponents/company/group does not come in any defaulters list
Check as to when security charged to the bank was verified last

Page | 43
 Ensure security documents are in order. Confirm that renewal documents are obtained
recently
Ensure Insurance Policy is obtained and coverage is adequate
In case of Export Accounts, ECGC coverage is taken and proper reporting to ECGC in
their prescribed format has been done within the stipulated time frame;
In case of Corporate Borrower take search with ROC to ensure that all our charges are
properly registered with due priority
In case of borrowers where stock audit has been done, whether
irregularities/discrepancies observed by stock auditors have been properly taken care of
by the company and the bank;
In case of borrowers where Management Audit has taken place, whether the observations
have been appropriately dealt with.

DOs
Use prescribed formats for proposals and for reporting Ad hoc , Over limit etc
If you have given Ad hoc/Over limit on the basis of proposal due for review, get the review
done before the deadline for ad hoc expires
For any reference (Review/Over limit/Ad hoc), please furnish:-
o Present position of accounts in the format prescribed;
o Position on compliance, if any pending;
o If any promises were made either by Customer/Branch during previous sanction and
position on those promises;
o Sales/purchase figures/performance up-to-date;
o Last inspection date & adverse findings, if any
Verify defaulters list of RBI, ECGC, FERA, COFFEPOSA, Bank's defaulters, list of
undesirable accounts etc. before considering credit proposals. Look out for name of the
company, its associates, directors, promoters and all persons associated with it in these lists
In case of term loan, present status of the project should be given
Find out whether any of our subsidiaries or our investment department has taken any
exposure on the borrower
Please check (if possible personally) marketability, condition etc. of collateral security.

DONTs
Do not take over Substandard/Doubtful/Loss accounts and accounts which are in
negative/non-priority areas;
Do not allow customers to bring Status Reports from the Bank
Do not structure the limits to fit any specific designated authority as per delegation. Always
make a realistic assessment first and then decide the authority
Do not propose a security unless you verify its ownership and the possibility of creating our
charge on the security and the customers willingness to offer the same
Do not exceed your delegated authority. In case the business requirements justify exceeding
the delegated authority the same should be immediately reported to the appropriate authority
with reasons/justification in writing and seek confirmation. Also follow the prescribed
procedure

Page | 44
 Do not allow ad hoc/over limits on a regular basis. Ensure regularization before expiry
dates. Do not allow ad hoc/over limits if the account is overdue for review
Do not allow ad hoc/ over limit or any credit facility without any written
application/request. The repayment of the adhoc/over limit should never be linked to the
sanction of additional/regular limits
Do not ask information/details/queries in piece-meal basis. Have a check list ready at the
time of first discussion itself to give the customer

Once all the above mentioned procedures are followed the proposal is sent to the Head Office for
its approval. Wherein they assess the proposal and all the elements involved in the proposal
which is then forwarded to the CREC Committee which questions the managers and the team
involved in the making of the proposal on various queries based on the proposal which on
satisfaction forward it to the sanctioning authorities (CMD/ED/GM) who on complete
satisfaction on every norms of the proposal sanctions the same and send its back to the branch
where the proposal initially originated for sanctioning. Once the sanctioned proposal is received
by the branch they prepare the sanction letter for the company and forwards the information
regarding the same to the concerned company on the approval of the proposal.

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 CREDIT DELIVERY
Steps involved in Credit Delivery
Documentation.
Security Creation.
PDC Compliance.
Monitoring Before Releasing Of Limits.
A/C Opening of the Company.
Disclosure.

Once the approved proposal is received it is followed by Credit Appraisal which involves the
following Important steps.

The First step in Credit Appraisal is of documentation wherein the company furnishes all
the important and necessary documents required for the bank in the documentation
process.
Documentation is followed by the process of Securities Creation wherein all securities
and related documents are processed by the bank after a thorough inspection of the same.
The various payment charges are charged to the company account such as Processing
Fees.
The next step in Credit Appraisal is the PDC Compliance.
This is followed by the most important step of monitoring all the terms and conditions
before releasing the limits. The monitoring team monitors the following before the
release of the limits.
Overdue Position.
Security Validation & In Force.
Review.
Insurance Policy.
Meetings Are Placed or Not.
ROC Search (Security).
External Rating Of The Company
Internal Rating Of The Company.
Stock Audit.
Sub-Stock Statement.
COD, CDR.
Financial Of The Company.
Once the monitoring is completed the companies Account is opened with the Bank in
case of new Account or the Limits are transferred into the account in case of an existing
Account.
On completion of all the process involved in the credit appraisals the final is step is the
disclosures and disbursement of the Credit.

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Industries Requiring Working Capital Finance
1 Automobile Assembler
2 Automobile Parts and Accessories
3 Cable and Electric Goods
4 Cement
5 Chemical
6 Engineering
7 Fertilizer
8 Food and Personal care Product
9 Glass and Ceramics
10 Jute
11 Leather and Tanneries
12 Oil and Gas Exploration &Refinery
13 Oil and Gas Marketing
14 Paper and Board
15 Pharmaceutical
16 Synthetic and Rayon
17 Textile Composite
18 Textile Spinning
19 Textile Weaving
20 Tobacco
21 Vanaspati and Allied
22 Power Generation & Distribution
23 Sugar and Allied

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Bibliography
The content of the project report have been extracted from google.com, Bank Of India as well as
other reference material available on various sites and the following the links.
http://www.rushabhinfosoft.com/webpages/BHTML/CH-15.HTM
http://www.bms.co.in/techniques-for-assessment-of-working-capital-requirements/
http://ajjuhanji.weebly.com/uploads/5/4/9/0/5490518/project_report_on_working_capital_assess
ment.pdf

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