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A Project Report on Working Capital Assessment

at Canara Bank, Circle Office, Bangalore

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Industry Profile

Introduction

Banking in India originated in the last decades of the 18th century. The first banks
were The General Bank of India, which started in 1786, and Bank of Hindustan,
which started in 1790; both are now defunct. The oldest bank in existence in India is
the State Bank of India, which originated in the Bank of Calcutta in June 1806, which
almost immediately became the Bank of Bengal. This was one of the three presidency
banks, the other two being the Bank of Bombay and the Bank of Madras, all three of
which were established under charters from the British East India Company. For
many years the Presidency banks acted as quasi-central banks, as did their successors.
The three banks merged in 1921 to form the Imperial Bank of India, which, upon
India's independence, became the State Bank of India in 1955.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The
Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in
Bombay in 1862; branches in Madras and Pondicherry, then a French colony,
followed. HSBC established itself in Bengal in 1869. Calcutta was the most active
trading port in India, mainly due to the trade of the British Empire, and so became a
banking center.

Around the turn of the 20th Century, the Indian economy was passing through a
relative period of stability. Around five decades had elapsed since the Indian Mutiny,
and the social, industrial and other infrastructure had improved. Indians had
established small banks, most of which served particular ethnic and religious
communities.

The period between 1906 and 1911, saw the establishment of banks inspired by the
Swadeshi movement. The Swadeshi movement inspired local businessmen and
political figures to found banks of and for the Indian community. A number of banks
established then have survived to the present such as Bank of India, Corporation
Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

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The fervor of Swadeshi movement lead to establishing of many private banks in
Dakshina Kannada and Udupi district which were unified earlier and known by the
name South Canara (South Kanara) district. Four nationalized banks started in this
district and also a leading private sector bank. Hence undivided Dakshina Kannada
district is known as "Cradle of Indian Banking".

The Government of India initiated measures to play an active role in the economic life
of the nation, and the Industrial Policy Resolution adopted by the government in 1948
envisaged a mixed economy. This resulted into greater involvement of the state in
different segments of the economy including banking and finance.

The major steps to regulate banking included:

 The Reserve Bank of India, India's central banking authority, was established in
April 1934, but was nationalized on January 1, 1949 under the terms of the
Reserve Bank of India (Transfer to Public Ownership) Act, 1948.
 In 1949, the Banking Regulation Act was enacted which empowered the Reserve
Bank of India (RBI) "to regulate, control, and inspect the banks in India."
 The Banking Regulation Act also provided that no new bank or branch of an
existing bank could be opened without a license from the RBI, and no two banks
could have common directors.

By the 1960s, the Indian banking industry had become an important tool to facilitate
the development of the Indian economy. At the same time, it had emerged as a large
employer, and a debate had ensued about the nationalization of the banking industry.
Indira Gandhi, then Prime Minister of India, expressed the intention of the
Government of India in the annual conference of the All India Congress Meeting in a
paper entitled "Stray thoughts on Bank Nationalization." The meeting received the
paper with enthusiasm. Thereafter, her move was swift and sudden. The Government
of India issued an ordinance and nationalized the 14 largest commercial banks with
effect from the midnight of July 19, 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The


stated reason for the nationalization was to give the government more control of credit

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delivery. With the second dose of nationalization, the Government of India controlled
around 91% of the banking business of India.

In the early 1990s, the then Narasimha Rao government embarked on a policy of
liberalization, licensing a small number of private banks. These came to be known as
New Generation tech-savvy banks, and included Global Trust Bank (the first of such
new generation banks to be set up), which later amalgamated with Oriental Bank of
Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This
move, along with the rapid growth in the economy of India, revitalized the banking
sector in India, which has seen rapid growth with strong contribution from all the
three sectors of banks, namely, government banks, private banks and foreign banks.

In the private banking sector of India, FDI is allowed up to a maximum limit of 74%
of the paid up capital of the Bank. On the other bank, FDI and Portfolio investment in
the public or nationalized banks in India all subject to a limit of 20% of totality. This
ceiling is also applicable to the investment in the SBI and its associates.

Currently, banking in India is generally fairly mature in terms of supply, product


range and reach-even though reach in rural India still remains a challenge for the
private sector and foreign banks. In terms of quality of assets and capital adequacy,
Indian banks are considered to have clean, strong and transparent balance sheets
relative to other banks in comparable economies in its region. The Reserve Bank of
India is an autonomous body, with minimal pressure from the government. The stated
policy of the Bank on the Indian Rupee is to manage volatility but without any fixed
exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-
especially in its services sector-the demand for banking services, especially retail
banking, mortgages and investment services are expected to be strong.

The Rs. 64 trillion (US$ 1.22 trillion) Indian banking industry has made exceptional
progress in last few years, even during the times when the rest of the world was
struggling with financial meltdown. Even today, financial institutions across the world
are facing the repercussions of the turmoil but the Indian ones are standing stiff under
the regulator's watchful eye and hence, have emerged stronger.

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Ratings agency Moody's believe that strong deposit base of Indian lenders and
Government's persistent support to public sector and private banks would act as
positive factors for the entire system amidst the negative global scenario.

The sector has undergone significant developments and investments in the recent past.
Some of them are discussed hereafter along with the key statistics and Government
initiatives pertaining to the same.

Key Statistics

 According to the Reserve Bank of India's Quarterly Statistics on Deposits and


Credit of Scheduled Commercial Banks', March 2011, Nationalized Banks, as a
group, accounted for 53.0 per cent of the aggregate deposits, while State Bank of
India (SBI) and its associates accounted for 21.6 per cent. The share of new private
sector banks, old private sector banks, foreign banks and regional rural banks in
aggregate deposits was 13.4 per cent, 4.6 per cent, 4.4 per cent and 3 per cent
respectively.
 With respect to gross bank credit also, nationalized banks hold the highest share of
52.8 per cent in the total bank credit, with SBI and its associates at 22.1 per cent and
New Private sector banks at 13.2 per cent. Foreign banks, Old private sector banks
and Regional Rural banks held relatively lower shares in the total bank credit with
4.9 per cent, 4.6 per cent and 2.4 per cent respectively. Another statement from RBI
has revealed that bank advances grew 17.08 per cent annually as on December 16,
2011 while bank deposits rose 18.03 per cent.
 RBI data shows that India raised US$ 1.6 billion through External Commercial
Borrowings (ECBs) in November 2011 for new projects. 78 companies raised US$
1.3 billion under automatic route and US$ 253 million was raised under the
approval route (it requires case-by-case approval by the regulator).
 India's foreign exchange reserves stood at US$ 297 billion as on Dec 30, 2011.
 In recent years, deposits under Non-Resident Indians (NRI) schemes have witnessed
an upsurge. There was an inflow Rs. 14,763 crores (US$ 2.83 billion) under NRI
deposits in 2010-11, which was 6.5 per cent higher from 2009-10. In 2011, the total
of NRI deposits was Rs. 2,30,812 crores (US$ 44.2 billion), compared to Rs.
2,27,078 crores (US$ 43.5 billion) in 2010.

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Recent Developments

 The US Export-Import Bank, with a commitment of US$ 7 billion, is on a way to


diversify its portfolio in India by financing projects in education, healthcare and
agriculture. After Mexico, India is the second biggest investment destination for the
bank as the entity anticipates the country to become the largest market in next 12-18
months.
 India Infrastructure Finance Company Ltd (IIFCL) and IDBI Bank have inked a
five-year memorandum of understanding (MoU) to launch Infrastructure Debt Fund
(IDF) schemes. The IDF, for which IDBI Bank and IIFCL would play strategic
investors, is expected to get launched by the end of February 2012.
 With 'green power' projects getting highly popular in India, especially in the states
of Gujarat and Rajasthan, banks are increasingly opening up to projects from non-
conventional (solar and wind) energy space. After receiving project proposals that
were meant for a particular industry/consumer or group of industries/consumers for
their own use, banks are now getting projects that entail commercial viability (25-
100 mega watts).

Recently, depreciation of partially convertible Indian Rupee against US Dollar has left
Indian importer high and dry, more particularly those who have not hedged their
dollar exposures. The unexpected depreciation of Rupee against US Dollar this year
by over 17 percent has caused a great concern for the Government, RBI and corporate
of India. On November 22, 2011 Indian Rupee has touched historic low of 52.73
before recovering little in next sessions.

Since late 2009, sovereign debt crisis brewed in Europe concerning some euro zone
states and the situation became tense in early 2010 with the downgrading of Greek
debt rating by global credit rating agencies to ‘Junk’ status with hints of default by the
Greek Government. The situation became further grave recently in October 2011 with
Greek coalition government headed by George Papandreou first announcing and then
ditching a plan for a referendum on a euro zone bailout package to limit the damage
from the currency bloc’s debt crisis with a deal in which the private sector was to
agree to voluntarily accept a nominal 50 percent cut in its bond investments to reduce
Greece’s debt burden by 100bn Euros, cutting its debts to 120 percent of GDP by

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2020, from 160 percent at present. Besides forcing the investing banks to accept a
haircut of 50 percent on Greek debt the deal, reached after prolonged hard-nosed
negotiations between investing bankers, head of states and the IMF, also proposes to
enlarge the European Financial Stability Facility (EFSF) war chest from €440bn to €1
trillion and requires European banks to find more capital against their losses on Greek
debt.

With cash in its treasury expected to last just over five weeks, Greece has been
plunged into a fresh bout of uncertainty with political differences in that country,
refusal of strong European countries to cough up more for the bailout, and G20
nations demanding more details of the rescue package declared on Oct 27, 2011
before they commit fresh cash to IMF, which could then lend to Europe’s bailout
facility.

RBI latest interest rate changes


change date percentage
October 25 2011 8.500 %
September 16 2011 8.250 %
July 26 2011 8.000 %
June 16 2011 7.500 %
May 03 2011 7.250 %
March 17 2011 6.750 %
January 25 2011 6.500 %
November 02 2010 6.250 %
September 16 2010 6.000 %
July 27 2010 5.750 %

Graph Indian interest rate RBI - long-term graph

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Company Profile

Background and Inception

Canara Bank was founded by Shri Ammembal Subba Rao Pai, a great visionary and
philanthropist, in July 1906, at Mangalore, then a small port in Karnataka. The Bank
has gone through the various phases of its growth trajectory over hundred years of its
existence. This small seed blossomed into a limited company as 'Canara Bank Ltd.' in
1910 and became Canara Bank in 1969 after nationalization. Growth of Canara Bank
was phenomenal, especially after nationalization in the year 1969, attaining the status
of a national level player in terms of geographical reach and clientele segments.
Eighties was characterized by business diversification for the Bank. In June 2006, the
Bank completed a century of operation in the Indian banking industry. The eventful
journey of the Bank has been characterized by several memorable milestones. Today,
Canara Bank occupies a premier position in the comity of Indian banks. Canara Bank
has an unbroken record of profits since its inception.

Sound founding principles, enlightened leadership, unique work culture and


remarkable adaptability to changing banking environment have enabled Canara Bank
to be a frontline banking institution of global standards.

Canara is India’s fifth largest bank in terms of asset size; as on March 31, 2010, it had
an asset base of around Rs 2.6 trillion. The bank’s strong market position is
underpinned by its market share of over 4.8% in deposits and advances, and its
pan‐India branch network.

The new brand identity for Canara Bank is based on the idea of a bond and is a

representation of the close ties between the Bank and its many stakeholders – from

customers and employees to investors, institutions and society at large. With its rich

heritage of banking expertise, dedicated customer service and corporate social

responsibility, Canara Bank is a powerful enabler who helps its stakeholders to

achieve their goals. The two seamlessly connected links capture the essence of this

partnership.

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Significant Milestones

Year
1st July Canara Hindu Permanent Fund Ltd. formally registered with a capital of 2000
1906 shares of 50/- each, with 4 employees.
1910 Canara Hindu Permanent Fund renamed as Canara Bank Limited.
1969 14 major banks in the country, including Canara Bank, nationalized on July 19.
1976 1000th branch inaugurated.
Overseas branch at London inaugurated Cancard (the Bank’s credit card)
1983
launched.
1984 Merger with the Laksmi Commercial Bank Limited.
1985 Commissioning of Indo Hong Kong International Finance Limited.
1987 Canbank Mutual Fund & Canfin Homes launched.
1989 Can bank Venture Capital Fund started.
1989-90 Can bank Factors Limited, the factoring subsidiary launched.
Became the first Bank to articulate and adopt the directive principles of “Good
1992-93
Banking”.
Became the first Bank to be conferred with ISO 9002 certification for one of its
1995-96
branches in Bangalore.
Opened a 'Mahila Banking Branch', first of its kind at Bangalore, for catering
2001-02
exclusively to the financial requirements of women clientele.
2002-03 Maiden IPO of the Bank.
2003-04 Launched Internet Banking Services.
2004-05 100% Branch computerization.
Entered 100th Year in Banking Service. Launched Core Banking Solution in
2005-06 select branches. Number One Position in Aggregate Business among
Nationalized Banks.
Retained Number One Position in Aggregate Business among Nationalized
Banks. Signed MoUs for Commissioning Two JVs in Insurance and Asset
2006-07
Management with international majors’ viz., HSBC (Asia Pacific) Holding and
Robeco Groep N.V respectively.
Launching of New Brand Identity. Incorporation of Insurance and Asset
2007-08
Management JVs. Launching of 'Online Trading' portal. Launching of a ‘Call

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Centre’. Switchover to Basel II New Capital Adequacy Framework.
The Bank crossed the coveted 3 lakh crores in aggregate business. The Bank’s
2008-09
3rd foreign branch at Shanghai commissioned.
The Bank’s aggregate business crossed 4 lakh crores mark.
2009-10 Net profit of the Bank crossed 3000 crores. The Bank’s branch network
crossed the 3000 mark.
The Bank’s aggregate business crossed 5 lakh crores mark. Net profit of the
Bank crossed 4000 crores. 100% coverage under Core Banking Solution. The
Bank’s 4th foreign branch at Leicester and a Representative office at Sharjah,
2010-11
UAE, opened. The Bank raised 1993 crores under QIP. Govt. holding reduced
to 67.72% post QIP. As at December 2011, the total business of the Bank stood
at 534710 crores.

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Nature of the business carried

Canara bank, being a major public sector banks in India, is well known for its banking
operations. It provides various products and services to customers in the banking
industry. Other than banking operations it also provides Foreign Business, Asset
Management, Financial Services, Securities Market, Computer Services, Home
Loans, Corporate Cash Management Services, Factoring, Venture Capital Fund,
Mercantile Banking, and Insurance Banking to the various customers in India as well
as in abroad.

Vision and Mission

Vision

To emerge as a ‘Best Practices Bank’ by pursuing global benchmarks in profitability,


operational efficiency, asset quality, risk management and expanding the global reach.

Mission

To provide quality banking services with enhanced customer orientation, higher value
creation for stakeholders and to continue as a responsive corporate social citizen by
effectively blending commercial pursuits with social banking.

Quality Statement

“The branches will provide total banking services and continually review and improve
the processes for total customer satisfaction by quality management system
requirements as per ISO 9001:2000”

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Products and Services

I. Personal Banking

1. Savings & Deposits:

a. SB Gold Scheme ( Min. balance Rs. 50000)


b. Canara Bank Champ Scheme ( SB deposit for children)
c. Canara Saral Saving Scheme (An SB product designed for the
common man to provide a basic banking facility as part of the
financial inclusion objective of RBI)
d. Current Account
e. Canara premium current account
f. Fixed Deposit
g. Kamadhenu Deposit ( Re-investment Plan)
h. Canara tax saver scheme (A term deposit scheme under the Fixed
Deposit & Kamadhenu Deposit streams)
i. Recurring deposit
j. Special recurring deposit scheme
k. Ashraya Deposit Scheme (For Senior Citizens)
l. Canara Auto Renewal Deposit (Card)
m. Canara Super Savings Salary Account Scheme

2. Loan Products
a. Housing Loan
b. Canara Mobile (Vehicle)
c. Canara pension
d. Canara rent (To provide loans to owners of the property to meet
their business needs and / or genuine personal needs, against rents
receivable)
e. Canara Jeevan (Reverse Mortgage Loan (RML) scheme for senior
citizens)
f. Home improvement loan
g. Canara site loan
h. Teachers loan

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i. Canara Mortgage
j. Doctors choice
k. Canara cash (Shares)
l. Canara Budget (For employed/Business)
m. Swarna Loan (Gold Loan)
n. Canara guide (Loan scheme to finance individuals possessing a
valid certificate to practice as a Tax Return Preparer (TRP) as per
the scheme formulated by the Ministry of Finance, Government of
India for preparation of income tax returns)
o. Education Loan
3. Technology Products
a. Transactions Through the Bank ATMs And Other Bank ATMs
b. Purchase Of Goods And Services At POS Merchant Establishments
c. Mobile Top up
d. VISA Money transfer
e. E-Ticketing
4. Mutual Funds
5. Insurance Products
6. International services
7. Credit card services
8. Depository services
9. Ancillary services
a. Sale of Gold coins
b. Safe deposit locker
c. Safe custody services

II. Corporate Banking


1. Accounts & Deposits
2. Cash Management Services
3. Loans and Advances
4. Syndication Services
5. IPO Monitoring activity
6. Merchant banking Services
7. Canara E-Tax

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III. NRI Remittance Facility
1. Deposit Products
2. Loans & Advances
3. Remittance Facilities
4. Consultancy Services
IV. Internet Banking
V. Priority & SME Banking
1. Agriculture And Rural Credit Schemes
2. Education Loan And Other Priority Sector Loans
3. Government Sponsored Schemes
4. Lead Bank Activities
5. Lending to minority communities

Area of Operation

As a premier commercial bank in India, Canara Bank has a distinct track record in the
service of the nation for over 105 years. Today, Canara Bank has a strong pan India
presence with 3432 branches and 2623 ATMs, catering to all segments of an ever
growing clientele base of 4.04 crores. Across the borders, the Bank has 5 branches,
one each at London, Hong Kong, Shanghai, Leicester and Manama and a
Representative Office at Sharjah, UAE. Canara Bank is recognized as a leading
financial conglomerate in India, with as many as nine subsidiaries/sponsored
institutions/joint ventures in India and abroad.

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Ownership Pattern

Category No. of Shares % of shareholding


Government of India 300000000.00 67.72
Banks & Financial Institutions 45931757.00 10.37
Mutual Funds 4903743.00 1.11
Bodies Corporate 4101867.00 0.93
NRIs/OCBs 339316.00 0.08
Resident Individuals/HUF/Trust etc. 21603092.00 4.88
FII 66120225.00 14.93
Total 443000000.00 100.00

The data is category wise as on 31/03/2011. Nominal value of each share is Rs. 10.

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Competitors Information

Both Public sector and Private sector banks are competitors for the Bank. The local
financial organization and money lenders along with the multinational banks are also
giving strong competitions to the Bank. Following table shows the Deposits,
Investments and Advances of the 19 Public sector banks and SBI and its associates as
on 31st March, 2011.

(Rs. in crores)
S. No. BANKS Deposits Investments Advances
I NATIONALISED BANKS
1 Allahabad Bank 131,887 43,247 93,625
2 Andhra Bank 92,156 24,204 71,435
3 Bank of Baroda 305,439 74,018 228,676
4 Bank of India 298,886 85,872 213,096
5 Bank of Maharashtra 66,845 22,491 46,881
6 Canara Bank 293,973 83,700 212,467
7 Central Bank of India 179,356 54,504 129,725
8 Corporation Bank 116,747 43,453 86,850
9 Dena Bank 64,210 18,769 44,828
10 Indian Bank 105,804 34,784 75,250
11 Indian Overseas Bank 145,229 48,610 111,833
12 Oriental Bank of Commerce 139,054 42,075 95,908
13 Punjab & Sind Bank 59,723 18,644 42,638
14 Punjab National Bank 312,899 95,162 242,107
15 Syndicate Bank 135,596 35,068 106,782
16 UCO Bank 145,278 42,927 99,071
17 Union Bank of India 202,461 58,399 150,986
18 United Bank of India 77,845 26,259 53,502
19 Vijaya Bank 73,248 25,139 48,719
Total 2,946,636 877,326 2,154,380
II State Bank of India (SBI) 933,933 295,601 756,719
III ASSOCIATES OF SBI
1 State Bank of Bikaner & Jaipur 53,852 13,521 41,207
2 State Bank of Hyderabad 88,628 28,447 64,720
3 State Bank of Indore
4 State Bank of Mysore 43,225 12,927 34,030
5 State Bank of Patiala 68,066 17,275 51,433
6 State Bank of Travancore 58,158 17,927 46,044

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Infrastructure Facilities

The bank took several initiatives in the InfoTech front. The Bank covered all its
branches/Offices under Core Banking Solution (CBS). With 100% CBS, the Bank
now offers technology banking services, such as, Internet Banking, Funds transfer
through NEFT and RTGS, SMS alerts. The bank also offers online trading facility to
its clients through its subsidiary M/s Canara Bank Securities Ltd. The ATMs have
been enabled to offer value added services like Travel ticket booking, Mobile top up
and utility bill payments.

In view of the increased attacks of phishing and pharming the Bank has put in place
24X7 centralized monitoring system of anti phishing and anti malware. To make the
Internet Banking facility more secure a slew of measures like implementation of OTP
(One Time Password) module, two live validation of account number for
NEFT/RTGS transaction through Net Banking and mutual authentication of Internet
Server customer PC (CAN Secure) were introduced. With increased confidence, the
number of customers enrolled for internet banking has moved up to 3.86 Lakhs
(March, 2011).

The Bank upgraded its Data Centre infrastructure to comply with ISO 27001
standards and did the upward migration of database to Oracle 11G version. The bank
has a well designed and secured corporate network covering all the branches and
offices.

A customer terminal has also been provided in the branches for easy and ready
reference to own accounts of customers. The Bank has also implemented Electronic
Data Interchange Module for payment of customs duty and fulfilling the related
formalities in electronic mode.

To connect with the youth of the country and obtain first hank unrestricted feedback,
the bank has a presence at Twitter (http://twitter.com/canarabanktweet).

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Know Your Customer (KYC)

The Bank took several measures for the effective implementation of KYC and Anti
Money Laundering (AML) guidelines and for ensuring KYC compliance by all
branches.

To ensure better compliance of guidelines on KYC/AML following steps have been


initiated.

1. All Zonal/ Circles have nominated an Executive as Nodal Compliance Officer for
monitoring and ensuring compliance of guidelines on KYC/AML/Combating of
Financial of Terrorism (CFT).

2. Branches were advised to strictly adhere to the guidelines on KYC/AML/CFT to


prevent abuse of banking system by money launderers using money mules.

3. NREGA (National Rural Employment Guarantee Act) job card/Aadhar document


has to be accepted as identification document for opening of accounts. Accounts
opened with these documents will have restrictions applicable to 'small accounts'.

4. Printing and dispatch of Thanks giving letters to new account holders and
introducers are done centrally at Zonal/Circles Offices.

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Awards & Achievements

Received during 2011-12

 Canara Bank was awarded coveted Skoch award for financial inclusion on
5.01.2012 at New Delhi. The award was handed over by Dr. C. Rangarajan,
Chairman Prime Ministers’ Economic Advisory Council to Smt. Archana
Bhargava, Executive Director, Canara Bank in a glittering function held at New
Delhi. The other dignitaries present on the occasion were Dr. D. Damodaran
Former Chairman SEBI, Dr. Govinda Rao, and Mr. Yogesh Aggarwal, Chairman
PFRDA. A certificate of merit was handed over to S. S. Bhat, General Manager
Financial Inclusion Wing for Canara Banks role in providing Access to Banking
and Financial Services. Citation reads as "Canara Bank has a hand in every arena
when it comes to promoting financial inclusion through skilling and self
employment. During last one year it has shown significant improvement in its
financial inclusion efforts.
 The Bank was conferred with National Award - 2011 for excellence in the field of
Khadi and Village Industries - Best Bank, South Zone for PMEGP (Prime
Ministers Employment Generation Program).
 Corporate Social Responsibility Award-2011.

Received during 2010-11 Awards/Accolades

 Canara Utsav & SLBC Kerala-Declaration of total banking coverage


 The Bank has been conferred with the Second Best Bank Award under National
Awards for Excellence in lending to Micro Enterprises for the year 2009-10, by
the Ministry of MSME and Outstanding Performer at National level for
implementation of Interest Subsidy Eligibility Scheme (ISEC) of KVIC in the
country for 2009-10.
 The Bank was conferred 4 awards by the Public Relations Council of India
(PRCI), in the following categories
 Silver Award for Corporate Film ( TV Commercial ) – English
 Bronze Award for House Journal/Magazine – Languages
 Bronze Award for Table Calendar
 Bronze Award for Corporate Advertisement – Single - English

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Specific achievements pertaining to recovery wing are as follows:

1. Cash recovery of rs.750 crores achieved during June 2011 quarter which is all
time high for any particular quarter.
2. On line auction of secured assets introduced and implemented under sarfaesi.

Achievement of inspection wing:

Total Number of Branches / Units risk rated: 3378


Number of LOW Risk branches: 2009
% of LOW Risk branches: 59.47 %
Number of HIGH Risk branches: 1
Audit / Inspection conducted as per the audit plan and there is no backlog.
The concurrent audit of 494 branches covers 79 % of advances and 53 % of
deposits of the Bank.

Priority Sector Performance

Highlights of Priority Sector Performance in last 3 years.

 Bank has achieved hat-trick by crossing all mandated and Internal


Targets in Priority Credit.
 Bank has doubled the growth under Agriculture in 2009-10 compared
to 2008-09.
 The Agriculture disbursement in FY 07-08 was Rs.11443 crores while
in it in FY 10-11 Rs. 22374Crores, which is almost doubled in a period
of 3 years.
 Education loan stood at Rs.3503 crores, compared to O/s level of
Rs.1737 crores for Mar 08 more than doubled in 3 years.
 Weaker Sections, SC/ST and Minority advances also more than
doubled in 3 years.

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Work Flow Model

Flow chart for Deposits

Customer Inquiry

New Existing

Officer/Manager explains
rules of business/Bank
requirements and Reject
compliance to KYC
guidelines.
Request for fund transfer
from SB A/c to Deposit A/c

Acceptance by manager
and authorize to open

Clerk opens the A/c


/completes the formalities

Officer/ Manager Passbook updating/


Verify/ Authorize Issue of deposit receipt

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Flow chart for Advances

Customer Inquiry

New Existing

Compliance with KYC Acceptance


guidelines.

Manager/Branch in charge discussion

a. Availability scheme resources

b. Explain Bank requirements

c. Accept application and details


Not viable
Reject
d. Process the application

e. Sanction

f. Pass on to the appropriate


account

Clerk opens the account/


Documentation/ Disbursement

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Future growth and Prospectus

The coming years are likely to be of strong but uneven global growth. As financial
markets continue to normalize and households and firms reduce their indebt ness,
growth is projected to gradually strengthen the emerging and developed economies.
The IMF projected global growth at 4.5% for 2012. Emerging economies will
continue to lead global growth. However, uncertainties in the form of higher oil and
non-oil commodity prices and public debt pose risk to global growth.

Indian economy is expected to continue its broad based growth momentum in FY12
backed by strong investment and consumption demand. Domestic demand will
continue to hold the key to GDP growth. Inflation is under control after a long period.
A strong saving and investment and consumption rates, favorable capital market
conditions, capital flows and positive business outlook will also help the economy to
maintain its growth momentum. Services sector will be a major contributor in the
positive domestic outlook and banking sector will continue to be among the
performing sectors in FY12. Efforts to bring in more inclusive growth and focus on
the rural economy would propel the growth engine of the economy further.

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McKinsey's 7s Framework

The McKinsey 7S framework is developed in the early 1980s by Tom Peters and
Robert Waterman, two consultants working at the McKinsey & Company consulting
firm, the basic premise of the model is that there are seven internal aspects of an
organization that need to be aligned if it is to be successful. The 7S model can be used
in a wide variety of situations where an alignment perspective is useful.

The McKinsey 7S model involves seven interdependent factors which are categorized
as either "hard" or "soft" elements:

"Hard" elements are easier to define or identify and management can directly
influence them: These are strategy statements; organization charts and reporting lines;
and formal processes and IT systems.

"Soft" elements, on the other hand, can be more difficult to describe, and are less
tangible and more influenced by culture. However, these soft elements are as
important as the hard elements if the organization is going to be successful.

24
Strategy:

The key elements for the Bank's business strategy are;

 To focus on quality growth opportunities by maintaining and enhancing the


strengths in services
 Use technology for competitive advantage and customer centric progressive
bank
 Branch expansion to provide services to a larger customer segment during
2010-11 210 branches were added. On January 2012, there were 3432 branches
of the Bank.
 To become one stop financial supermarket, the Bank has forayed into newer
areas of banking products and services to meet the increasing needs of the
customers.

Systems:

The Bank has taken various proactive technology initiatives to maintain its
competitive edge in Indian banking industry. Canara Bank has chosen Flex cube from
Oracle Financial Services as the software application. Now all branches of Canara
Bank are live on core banking application Flex cube.

Flex cube is a universal banking solution for retail, corporate, internet and investment
banking, from front to back office work. Flex cube also has the ability to support
multi-bank, multi-currency, and multi-channel operations, using a widely recognized
data model that will keep abreast of market dynamics. Canara Bank has a strong pan
India presence with 2623 ATMs

25
Style:

In Canara Bank, the decisions are taken by the top management concerning matters
related to the organization. The decisions relating to department matters are taken by
the departmental heads. The bank follows a participative leadership style which
allows the ideas, suggestions etc. for the betterment of the bank. The team members
are cooperative rather than being competitive.

Staff:

The departments in the Bank consist of Senior Manager/Manager, Officers, Clerks


and sub-staff. The HR policies of the Bank have been reinvented and refocused time
and again to suit to the changing banking scenario. HR interventions like SPANDAN
for bringing attitudinal change among front line staff, PRATIBHA for grooming in-
house talents in varied specialized areas and executive grooming through reputed
institutes and other significant HR tools like Quality Circles, Staff meetings and Brain
Storming Sessions have been implemented for effective team building and fostering
collective excellence. Specialized trainings to the Senior Management level/ Top level
executives are conducted based on the requirement. Canara Bank has more than
45,800 employees and business per employee and profit per employee is Rs. 12.28
crores and Rs. 9.76 Lakhs respectively.

Skills:

Training policies and programs are suitably designed, modified and updated on a
continuous basis to upgrade the knowledge levels and skills of its Executives,
Officers, and Workmen on par with the best in the industry. While several new
programs are introduced in tune with the corporate goals, the existing programs are
made more interactive and learner friendly. Risk management and Basel II are the
focus areas of their training programs.

26
Shared Values:

Canara Bank was founded on these Principles,

1. To remove Superstition and ignorance.


2. To spread education among all to sub-serve the first principle.
3. To inculcate the habit of thrift and savings.
4. To transform the financial institution not only as the financial heart of the
community but the social heart as well.
5. To assist the needy.
6. To work with sense of service and dedication.
7. To develop a concern for fellow human being and sensitivity to the
surroundings with a view to make changes/remove hardships and sufferings.

"A good bank is not only the financial heart of the community, but also one with an
obligation of helping in every possible manner to improve the economic conditions of
the common people"

- A. Subba Rao Pai

27
SWOT Analysis

Strengths:

1. The Bank have well experienced, well trained, most dedicated and committed
staff. There are sustained and focused efforts at every level, by each employee of
the Bank, to continue to build up core deposits.
2. Strong rural presence.
3. It is well equipped to meet the challenges of 21 st century, in the areas of IT,
Knowledge and competition.
4. It has launched Core Centralized banking solutions where all branches are
connected live.
5. The Bank has specialized branches catering to the specific clientele segment.

Weaknesses:

1. The Bank does not have many overseas branches.


2. As the employees are experienced the Bank has more number of aged workforces.

Opportunities:

1. Controlling NPA through cash recovery. NPA was at 1.11% (Rs. 2347 crores) for
the year ended 31st March, 2011.
2. To expand overseas business.
3. Upward revision in Deposit/interest rates attracts new customers/deposits.
4. Up gradation in technological products saves time and improves business.

Threats:

1. The Bank face competition from other public sector bank, private sector banks,
foreign banks and other financial institutions.
2. Changing economic policies of Government will have direct impact on interest
rates.
3. Globalization has allowed other industries, such as IT industry, to attract talent
human resource.

28
Financial Statements

P & L A/c for the year ended 31 March 2011

(Rs. In Crores)
Sl.
No. Particulars 31.03.2011 31.03.2010
1 Interest Earned (a)+(b)+(c)+(d) 23064.02 18751.96
(a) Interest/discount on advances/bills 17051.85 13946.43
(b) Income on Investments 5788.01 4577.99
(c) Interest on balances with Reserve Bank of India &
Other Inter-Bank Funds 223.3 210.42
(d) Others 0.86 17.12
2 Other Income 2703.03 2857.9
3 Total Income (1+2) 25767.05 21609.86
4 Interest Expended 15240.74 13071.43
5 Operating Expenses (I)+(ii) 4419.31 3477.62
(I) Employees Cost 2954.84 2193.7
(ii) Other Operating Expenses 1464.47 1283.92
Total Expenses ((4+5) excluding Provisions &
6 Contingencies) 19660.05 16549.05
Operating Profit before Provisions and Contingencies
7 (3-6) 6107 5060.81
8 Provisions (Other than Tax) and Contingencies 1081.11 1239.38
9 Exceptional items 0 0
Profit (+) / Loss (-) from Ordinary Activities before tax
10 (7-8-9) 5025.89 3821.43
11 Tax expense 1000 800
Net Profit (+) / Loss (-) from Ordinary Activities after
12 tax (10-11) 4025.89 3021.43
13 Extraordinary items (net of tax expense) 0 0
14 Net Profit (+) / Loss (-) for the period (12-13) 4025.89 3021.43

29
Paid up Equity Share Capital (Face Value of each share-
15 Rs.10/-) 443 410
16 Reserves excluding Revaluation Reserves 17498.46 12129.1
17 Analytical Ratios
(i) Percentage of shares held by Government of India 67.72% 73.17%
(ii) Capital Adequacy Ratio 15.38% 13.43%
(iii) Earnings per Share (EPS) (Not Annualized)
a) Basic and diluted EPS before Extraordinary items (net
of tax expense) for the period, for the year to date and for the
previous year 97.83 73.69
b) Basic and diluted EPS after Extraordinary items for
the period, for the year to date and for the previous year 97.83 73.69
(iv) NPA Ratios
(a) Amount of Gross Non Performing Assets 3089.21 2590.31
(b) Amount of Net Non Performing Assets 2347.33 1799.7
(c) Percentage of Gross Non Performing Assets 1.45% 1.52%
(d) Percentage of Net Non Performing Assets 1.11% 1.06%
(v) Return on Assets (Annualized) 1.42% 1.30%
18 Public shareholding
- Number of Shares 143000000 110000000
- Percentage of shareholding 32.28% 26.83%
19 Promoters and promoter group shareholding NIL
- Number of shares 300000000 300000000
- Percentage of shares (as a % of the total shareholding of
promoter and promoter group) 100.00% 100.00%
- Percentage of shares (as a % of the total share capital of the
Company) 67.72% 73.17%

30
Balance Sheet as on 31.3.2011

(`Rs. in Crores)
As on As on
31.03.2011 31.03.2010
Capital and liabilities
Capital 443 410
Reserves and surplus 19596.82 14261.8
Deposits 293972.65 234651
Borrowings 14261.65 8440.56
Other liabilities and provisions 7804.64 6977.3
Total 336078.76 264741
Assets
Cash & balances with reserve bank of
India 22014.79 15719.5
Balances with banks and money at call
And short notice 8693.32 3933.75
Investments 83699.92 69677
Advances 212467.17 169335
Fixed assets 2844.41 2859.37
Other assets 6359.15 3216.92
TOTAL 336078.76 264741

31
Segment wise results

(Rs. In crores)
Business Segment 31.03.2011 31.03.2010
(a) Segment Revenue
1 Treasury Operations 6249.48 5477.69
2 Retail Banking Operations 6700.99 5646.6
Wholesale Banking
3 Operations 12220.51 10041.64
4 Other Banking Operations 0 0
5 Unallocated 596.07 443.93
Total 25767.05 21609.86
(b) Segment Results
1 Treasury Operations 869.61 1346.85
2 Retail Banking Operations 2207.25 1664.16
Wholesale Banking
3 Operations 2652.26 1999.24
4 Other Banking Operations 0 0
Total 5729.12 5010.25
Unallocated
(c) Income/Expenses 377.88 50.56
(d) Operating Profit 6107 5060.81
Provisions and
(e) Contingencies 1081.11 1239.38
(f) Income Tax 1000 800
(g) Net Profit 4025.89 3021.43
(h) Other Information
(i) Segment Assets
1 Treasury Operations 108292.57 87199.12
2 Retail Banking Operations 60302.3 51555.25
Wholesale Banking
3 Operations 160148.44 121344.65
4 Other Banking Operations 0 0
5 Unallocated Assets 5237.09 2509.39
Total 333980.4 262608.41
(j) Segment Liabilities
1 Treasury Operations 47011.06 39833.45
2 Retail Banking Operations 124960.75 123063.48
Wholesale Banking
3 Operations 125895.27 76290.47
4 Other Banking Operations 0 0
5 Unallocated Liabilities 18171.86 10881.9
6 Capital and Reserves 17941.46 12539.11
Total 333980.4 262608.41

32
(Rs. In Crores)
Geographical Segment 31.03.2011 31.03.2010
a Domestic Operations
Revenue 25448.69 21299.71
Assets 318377.28 252609.97

b International Operations
Revenue 318.36 310.15
Assets 15603.12 9998.44

c Total
Revenue 25767.05 21609.86
Assets 333980.4 262608.41

Key Financial Ratios


(In %)
31st Mar 31st March
2010 2011
Cost of Funds 5.65 5.37
Yield on funds 8.1 8.13
Cost of Deposits 6.12 5.8
Yield on Advances 9.81 9.73
Yield on Investments 7.52 7.72
Spread as a % to AWF 2.45 2.76
Net interest margin 2.8 3.12
Operating Expenses to AWF 1.5 1.52
Return on average assets 1.3 1.42
Return on average net worth 26.76 28.26
Business per employee (Rs. In crores) 9.83 12.28
Profit per employee (Rs. In Lakhs) 7.35 9.76
Book value (Rs.) 305.83 405
EPS (Rs.) 73.69 97.83
AWF: Average Working Funds

33
Learning Experience

The project work was carried out at Canara Bank gave me a lot of insight into the
practical working of a Bank. I could understand the various functions of an
organization like, Planning, Organizing, Directing, Controlling and Staffing. I learned
the various methods used to assess the working capital of firms, companies etc. and
the various forms of working capital extended to organizations.

I understood various services provided by the Bank apart from the basic functions of
accepting deposits and lending loans and learnt about the technology used in the Bank
to provide quality, secure and faster services. I also learned the workflow for
accepting deposits and providing loans and various strategies, policies and systems
adopted by the Bank.

34
Statement of the problem

The sufficiency of working capital assists in raising credit standing of a business


because of better terms on goods bought, lesser cost of manufacturing due to the
acceptance of cash discounts, favorable rates of interest etc. Working capital needs of
every organization varies depending upon various parameters. For assessing the
working capital limits, the Banks should analyze the business operations in detail and
credit worthiness of the organizations. Based on business operations, type of industry,
creditworthiness and other parameters working capital needs are assessed. For all
organizations a single method cannot be applied for assessing the limits. Different
methods should be used based on suitability to the organization and acceptability by
the Banks.

Objectives of the study

1. To understand the various methods used to assess the maximum working


capital limits of different organizations.
2. To learn the different forms of working capital extended by the Banks.
3. To identify the different modes of security acceptable by the Banks for
providing working capital finance.
4. To study the importance of adequate working capital.
5. Analysis of case studies pertaining to working capital financing.
6. To identify the different factors those affect the working capital requirement.

Scope of the study

The scope of the study was related to the various methods used by Canara bank. The
procedures adopted by the Bank for sanctioning the working capital have been
explained with the help of different case studies. The parameters to be analyzed for
sanctioning or renewing the credit limit are explained.

35
Methodology

Research Design

It is a descriptive study consisting of quantitative and qualitative factors. Descriptive


research, also known as statistical research, describes data and characteristics about
the population or phenomenon being studied. Descriptive research answers the
questions who, what, where, when, why and how. Although the data description is
factual, accurate and systematic, the research cannot describe what caused a situation.

Nature of Data

Primary and Secondary.

Sources of Data collection

Primary Data was collected by interviewing with the Bank employees.

Secondary Data was personally collected from the Bank’s internal sources, official
records, annual reports, the Bank’s website, data released by RBI in its website and
management books.

Limitations of the Study

1. Though there was interaction with the Bank employees, more data was taken
from secondary sources made available by the Bank.
2. The identity of the real borrower in the case study has been concealed as per
the Banks requirement for maintaining the confidentiality.
3. The conclusion and interpretations drawn are based on few cases. Anyhow,
different cases would have different situation.
4. Canara Bank has 34 circle offices but study was confined to only Bangalore
rural Circle Office, covering 97 branches.

36
Analysis and Interpretation

Working capital

It 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.
Net 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.

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.

Operating cycle

It is the average length of time between when a company purchases items for
inventory and when it receives payment for sale of the items. A long operating cycle
tends to harm profitability by increasing borrowing requirements and interest expense.
The Operating Cycle determines the amount of working capital that a business
requires to operate on a day-to-day basis. The shorter the Operating Cycle the lower
the amount of working capital required for the business and the greater opportunity
for investments in other value-adding activities. The following diagram shows the
operating cycle.

37
Current Assets

Current asset is represents the value of all assets that can reasonably be expected to be
converted into cash within one year in the normal course of business. Current assets
include cash, accounts receivable, inventory, marketable securities, prepaid expenses,
and other liquid assets that can be converted readily to cash.

Current Ratio

Current ratio is liquidity ratio that measures a company's ability to pay short-term
obligations. Also known as "liquidity ratio", "cash asset ratio" and "cash ratio". The
Current Ratio formula is:

The ratio is mainly used to give an idea of the company's ability to pay back its short-
term liabilities (debt and payables) with its short-term assets (cash, inventory,
receivables). The higher the current ratio, the more capable the company is of paying
its obligations.

38
The benchmark current ratio for borrowers whose working capital limits are assessed
under MPBF & Cash Budget system is 1.33. However in respect of those parties
whose working capital limits ate assessed based on Turnover method is 1.25.

If the current ratio is less than the bench mark of 1.33 (MPBF/Cash budget system) or
1.25 (Turnover Method) for the concerned financial year, but not less than 1, the
limits may be permitted/renewed/enhanced by the respective sanctioning authority
within the delegated powers.

If the current ratio is less than 1 the sanctioning authority can permit only renewal of
the existing limits, based on his/her delegated powers, subject to normal appraisal
norms being followed. However in respect of accounts falling under the sanctioning
powers of Executive Director/Chairman and Managing Director, the same can be
permitted by the respective sanctioning authority.

39
The Bank considers the following factors for assessing the working
capital

1. General nature of the business carried.


2. Size of the business.
3. Production cycle of the organization and the industry.
4. Changes in technology, as the advanced technology requires less amount of
working capital.
5. Business cycle, cyclical fluctuations like boom and depression affects working
capital needs.
6. Credit policy of the organization.
7. Growth and expansion.
8. Operating efficiency of the organization.
9. Dividend policy of the organization.

Adequacy of Working capital

The investment in current assets should be just adequate to the needs of the firm. Both
excess working capital and inadequate working capital are dangerous to the firm.

Problems of Excessive working capital

1. Low returns on investment as excess funds in current assets remains idle and
earn nothing.
2. There is possibility of over capitalization. A firm having excess working
capital may be tempted to invest heavily on fixed assets that may not be
justified by its actual sales. This results in lower rate of return.
3. It results in unnecessary accumulation of inventories. Thus chances of
inventory mishandling increases.
4. Excessive working capital makes management complacent. This may lead to
management inefficiency.
5. It is an indication of defective working capital policy. It indicates firm’s
inability to utilize the available resources productively.

40
Problems of inadequacy

1. A firm is not in a position to utilize the available production facilities


effectively.
2. Inadequacy stagnate growth. It becomes difficult for the firm to undertake
profitable project because of non-availability of working capital.
3. It also becomes difficult to implement operational plans of the firm.
4. Operational inefficiencies come up when it is difficult to meet even day to day
commitments.
5. Fixed assets are not efficiently utilized because of lack of working capital; the
firm's profitability may come down.
6. It makes the firm unable to enjoy attractive credit facilities from creditors and
others.
7. In due course of time the firm may lose its reputation.

Importance of adequate working capital

1. It protects the solvency of the firm. Suppliers of goods, customers, creditors


and others keep their faith in such a firm that is inn a position to meet its
financial obligations promptly.
2. It enables the firm to get the benefits of cash discounts as a firm having sound
working capital position can meet its financial obligations promptly.
3. It enables to extend better credit terms to the customers.
4. It helps in achieving stability of the firm.
5. It enables the firm to get easy loans and advances from banks and other
financial institutions because of its good credit standard.
6. A firm having adequate working capital can execute rush orders as it can
easily purchase additional raw materials and employ additional labor.
7. It provides capacity to hold up inventories. A firm with adequate working
capital can wait for better market opportunities by holding up inventories till
the prices increase favorably. But, has to sell its products as early as possible.
8. It improves general morale of the employees and creates goodwill for the firm.

41
Mode of Security

Banks provide credit on the basis of the following modes of security.

1. Hypothecation

Under this, bank provides credit against the security of movable property, usually
the inventory of goods. The hypothecated goods continue to be in the possession
of the borrower, but the Bank has legal right to realize the outstanding notes.

2. Pledge

Goods offered are transferred to the physical position of the lender. The goods
will be in the custody of the lender. However, the Bank has to take reasonable
care of thee goods. In case of the nonpayment by the borrower, the Bank has the
right to sell the goods.

3. Mortgage

Under this, security offered is immovable property. It involves transfer of legal


interest in the immovable property by an instrument called Mortgage Deed. The
Mortgage Deed terminates as soon as the debt is repaid. Mortgage is taken as
additional security for working capital credit.

4. Charge

Whenever proposals from a corporate entity are received, the financing bank
before sanctioning any credit facility is expected to inspect the Register of
Charges to find out whether the proposed properties/assets to be charged to the
Bank are unencumbered or not. Register for applications pending registration
should also be looked into.

5. Margin money

Banks do not provide 100% finance. They insist that customers should bring a
portion of required finance from other sources. This amount is called as
Margin Money.

42
Forms of Bank Finance

I. Inventory Limits (Pre sales)

1. Open Cash Credit (OCC)


2. Simplified OCC for Traders and SSI
3. OCC-Cum loan scheme for traders
4. Key shut cash credit
5. Produce loan
6. Packing credit and clean packing credit
7. Overdraft

II. Finance against receivables (Post sales)

1. Book debts
2. Bills discounting

III. Non Fund based limits

1. Letter of credit
2. Bank guarantees
3. Advance payment guarantees
4. Co-acceptance

43
I. Inventory Limits

1. Open Cash Credit

Open Cash Credit scheme (OCC) is a running credit facility to Micro, Small &
Medium Sector entrepreneurs against stocks and receivables. Assessment limit
depends on the working capital requirement of the unit assessed as per turnover
method/MPBF System/Cash Budget System. OCC is granted against the
hypothecation of Raw materials, WIP, Finished Goods and Receivables.

Drawings from the account is against Drawing limit arrived based on stocks such
as raw materials, work-in-process, finished goods and receivables. Whenever
required, Overdraft against Book debts is also permitted against book debt of
specific age arising out of genuine trade transactions with Government/Public
Sector Undertakings/Joint Stock Companies/firms of repute.

Prime security are Stocks, Receivables and Collateral securities are Land and
building, plant and machinery plus personal guarantee is obtained whenever
applicable.

2. Simplified OCC

Simplified OCC is a liberalized credit facility to Small Entrepreneurs who are not
in a position to maintain detailed stock books. Purpose is to provide working
capital needs of Small Enterprises units. This Facility is available as Running
Limit. Maximum limit available is Rs. 5 Lakhs only.

Prime securities are assets created out of the credit facility and no collateral
security for loans up to Rs.5 Lakhs.

3. OCC cum loan scheme for small traders

This scheme is meant for tiny retail traders and small business enterprises like
petty shop keepers who are not able to comply with the requirements laid down
even under the SOCC scheme such as maintenance of stock books, submission

44
statements etc. The maximum amount of credit facility is Rs. 25,000 per borrower.
Stock statements should be submitted once in a year as at 31st March, every year.

4. Produce loan

It is an advance against pledge of stock, separate loan account is maintained for


advance granted each time.

5. Key Shut Cash Credit

This is an advance by way of running account advance is granted as and when


goods are pledged. Whenever party wants to relates the goods he has to credit the
required amount to Key Shut Cash Credit account.

6. Packing Credit

Packing Credit is any loan or advance granted or any other credit provided by the
Bank to an exporter for financing the purchase, processing, manufacturing or
packing of goods prior to shipment, on the basis of letter of credit opened in his
favor or in favor of some other person, by an overseas buyer or a confirmed and
irrevocable order for the export of goods from the producing country or any other
evidence of an order for export from that country having been placed on the
exporter or some other person, unless lodgment of export orders or letter of credit
with the bank has been waived.

7. Overdraft

Overdraft is an extension of credit from the Bank when an account reaches zero.
An overdraft allows the customers to continue withdrawing money even if the
account has no funds in it. Basically the bank allows people to borrow a set
amount of money.

45
II. Finance against receivables

1. Book debts

A book debt is a sum of money due to a business in the ordinary course of its
business. It has been described as a debt that would normally be entered in the
books of the business regardless of whether or not it is in fact entered. Book debts
include sums owed to a business for goods or services supplied or work carried
out.

2. Bills discounting

While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or
Promissory Note) before it is due and credits the value of the bill after a discount
charge to the customer's account. The transaction is practically an advance against
the security of the bill and the discount represents the interest on the advance from
the date of purchase of the bill until it is due for payment

III. Non fund based limits

1. Letter of Credit

A Letter of Credit (LC) is a written instrument issued by a Banker (Opening


Bank), at the request of a buyer (Applicant) in favor of a seller (Beneficiary),
undertaking to honor drafts drawn by the seller in accordance with the terms and
conditions specified in the letter of credit.

An inland letter is one in which is opened by a Bank at the request of its customer
(Buyer) in favor of the seller in the same country.

2. Bank guarantee

It is a guarantee from a lending institution ensuring that the liabilities of a debtor


will be met. In other words, if the debtor fails to settle a debt, the bank will cover
it.

46
3. Advance payment guarantee

Advance payment guarantees are forms of protection making it possible for


buyers to recover an advance payment extended to sellers. If a seller fails to pay
according the terms and conditions laid down for governing the purchases of
goods/services, then this guarantee comes into play.

4. Co-acceptance

The banks constituent strikes deal with his seller to sell goods on credit by
drawing usance bill of exchange. The seller draws the bills, they are accepted by
the buyer and then co accepted by the buyer’s banker. The supplier gets the
proceeds immediately by discounting the co accepted bills with his banker.

Any borrower irrespective of the size of the credit limits can seek this facility. It is
not necessary that the borrower should enjoy cash credit facilities with the bank.
However, if the borrower does not have any credit facilities, the branch should at,
the time of recommending this facility, ensure that proper arrangements are made
for retiring the bills. Adequate balance should be available in the current account
for retiring the bills.

IV.Short term lending products

Following are the short term facilities that are permitted, selectively, to top rated
borrowers, PSU, MNCs etc as per the guidelines evolved by the bank from time to
time.

1. Corporate loan scheme.


2. MIBOR Linked product: Mumbai Inter-bank offered rate (MIBOR) is fluctuating
in nature and indicates prevailing rates in money market.
3. Short term lending rate.
4. Bills under letter of credit.

47
Credit limits could be made available in any of the following methods as required:

1. Sole banking

Under this, the entire requirements of the borrower are met by one bank only.

2. Multiple banking arrangements

Borrowers can avail any credit facilities from any banks without a formal
consortium arrangement. So long as the total credit limits enjoyed by a borrower
from the bank is within the permissible resources of a single bank, or within the
prudential exposure norms, such facilities can be extended by individual banks
without a formal consortium under the Multiple Banking Arrangement.

3. Consortium Arrangement

When the amount involved is very large and beyond the permissible resources of a
single bank or beyond what a single bank would like to risk under ordinary
circumstances on a single borrower beyond the prudential exposure norms.

4. Syndication

A syndicated credit is an agreement between two or more lending institutions to


provide the borrower credit facility using common loan documentation.

48
Assessment of working capital

Assessment is based on:

1. Total study of the business operations.


2. Production and processing cycle of the industry.
3. Financial and managerial capability of the borrower and the various parameters
relating the unit and the industry.

Norms for Working capital assessment are made depending upon the quantum of
finance required, segment of the borrower, prevailing mandatory instructions by RBI
and trade and industry practice prevailing.

Methods of assessment

Working capital requirements of a unit would be assessed by adopting various


methods like Turnover Method, Maximum Permissible Bank Finance (MPBF)
System, and Cash Budget System, depending on the type of activity.

1. Turnover Method
2. Maximum Permissible Bank Finance
3. Cash Budget system

49
1. Turnover Method

Origin of this method is traced to the P R Nayak Committee recommendations


which were reviewed by the Vaz Committee. The working capital limit is
computed at 20% of the projected gross sales accepted by the bank. The Projected
sales is computed based on the sales for the previous periods and demands for the
products.

For SSI borrowers, fund based working capital facilities are assessed up to Rs. 5
crores under Turnover Method or MPBF system at the option of the borrower. For
non SSI borrowers, fund based working capital limit up to Rs. 2 crores can be
assessed under this method.

This system is made applicable to traders, merchants and exporters who are not
having a pre determined manufacturing/trading cycle. However, even such
borrowers can opt for MPBF system, if the same is more suitable for assessing the
working capital needs and is advantageous to them.

Under this method branches/offices shall ensure maintenance of a minimum


margin on the projected annual sales turnover i.e. 25% of the estimated gross sales
turnover value is provided as working capital requirement, of which 20% is
provided by the bank and the balance 5% is by way of promoters’ contribution
towards margin money. However, if the available Net Working Capital is more,
the same is reckoned for assessing the extent of bank finance and lower limits can
be considered.

As the working capital requirements are linked to projected sales turnover,


branches should satisfy themselves about the reasonableness of the projected
annual turnover of the applicant. This should be done with reference to the past
performance of the units, as reflected in the audited financial statements, the
orders on hand, installed capacity of the units, power, availability of raw material
and other inputs and infrastructural facilities. In case of new units the branches
should ensure that the projections made are realistic by analyzing the installed
capacity, availability of infrastructural facilities, marketability of the product and
performance of similar units in the industry, background of the promoters and

50
such other factors relevant to a particular unit. In case where the actual
performance of the unit exceeds the projected level accepted by the bank and the
assessed working capital is found to be inadequate, the branches should reassess
the working capital needs of the units and additional limits should be permitted in
tune with the actual requirements of the unit.

2. Maximum Permissible Bank Finance

Assessment of working capital limits over Rs. 2 crores for Non SSI borrowers and
over Rs.5 crores for SSI borrowers, but up to Rs. 25 crores is assessed based on
MPBF system. For limits of over Rs. 25 crores, credit facilities may be assessed
on the basis of MPBF or Cash Budget System, at the option of the borrower. The
assessment of credit requirement of the party is based on the total study of the
borrower’s business operations via-a-via the production/processing cycle of the
industry which shall represent a reasonable build up of current assets for being
supported by bank finance. Based on Kannan Committee recommendations RBI
has allowed freedom to the banks to decide holding levels of various components
of current assets for financial support to ensure efficient functioning of the unit.
10% of tolerance level is allowed on the assessed MPBF.

Classification of Current Assets and Current Liabilities:

A few important classifications are given below;

a. All short term/temporary investment in money market instruments like


commercial papers, certificate of deposits can be considered as current assets.
However, other investments like Inter Corporate Deposits (ICD), instruments in
listed shares and debentures including investments in subsidiaries and associations
are to be considered as noncurrent assets.
b. Cash margin for non fund based limits (like Letter of Credit, Guarantees) may be
treated as part of current assets for the purpose of MPBF and current ratio.
However, such margin held for deferred payment guarantees should be considered
as noncurrent assets.

51
c. All term loan installments (FDs, Debenture, etc.) repayable within next 12 months
should be considered as current liability for computation of current ratio and
MPBF.
d. Inter Corporate Deposits are to be treated as current liability.

Tandon Committee has recommended 3 methods to arrive at the MPBF. As per the
recommendations of Tandon Committee, the corporate should be discouraged from
accumulating too much of stocks of current assets and should move towards very
lean inventories and receivable levels. The committee even suggested the maximum
levels of Raw Material, Stock-in-process and Finished Goods which a corporate
operating in an industry should be allowed to accumulate. These levels were termed
as inventory and receivable norms. Depending on the size of credit required, the
funding of these current assets (working capital needs) of the corporate could be met
by one of the following methods:

First Method of Lending

Banks can work out the working capital gap, i.e. total current assets less
current liabilities other than bank borrowings (called Maximum Permissible
Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap;
the balance to come out of long-term funds, i.e., owned funds and term
borrowings. This approach was considered suitable only for very small
borrowers i.e. where the requirements of credit were less than Rs.10 lakhs.

Second Method of Lending

Under this method, it was thought that the borrower should provide for a
minimum of 25% of total current assets out of long-term funds i.e., owned
funds plus term borrowings. A certain level of credit for purchases and
other current liabilities will be available to fund the buildup of current
assets and the bank will provide the balance (MPBF). Consequently, total
current liabilities inclusive of bank borrowings could not exceed 75% of
current assets. RBI stipulated that the working capital needs of all
borrowers enjoying fund based credit facilities of more than Rs. 10 Lakhs
should be appraised (calculated) under this method.

52
Third Method of Lending

Under this method, the borrower's contribution from long term funds will
be to the extent of the entire Core Current Assets, which has been defined
by the Study Group as representing the absolute minimum level of raw
materials, process stock, finished goods and stores which are in the pipeline
to ensure continuity of production and a minimum of 25% of the balance
current assets should be financed out of the long term funds plus term
borrowings. (This method was not accepted for implementation and hence
is of only academic interest).

3. Cash Budget System

Cash budget is an estimation of the cash inflows and outflows for a business or
individual for a specific period of time. Cash budget is a detailed plan showing how
cash resources will be acquired and used over some specific time period.

Cash budgets are often used to assess whether the entity has sufficient cash to fulfill
regular operations and/or whether too much cash is being left in unproductive
capacities. A cash budget is extremely important as it allows a company to determine
how much credit it can extend to customers before it begins to have liquidity
problems.

This method is applied where borrowers require credit facilities of over Rs. 25 crores.
MPBF system can also be applied for assessing the requirement of over Rs. 25 crores
at the option of the borrowers. However, in case of specific industries/seasonal
activities such as construction activity, tea and sugar, the system of assessment based
on cash budget is adopted.

53
Cash Flow Statement

It is a summary of receipts and disbursements of cash for a particular period of time.


It also explains reasons for the changes in cash position of the firm. Cash flows are
cash inflows and outflows. Transactions which increase the cash position of the entity
are called as inflows of cash and those which decrease the cash position as outflows
of cash. Cash flow Statement traces the various sources which bring in cash such as
cash from operating activities, sale of current and fixed assets, issue of share capital
and debentures etc. and applications which cause outflow of cash such as loss from
operations, purchase of current and fixed assets, redemption of debentures, preference
shares and other long-term debt for cash. In short, a cash flow statement shows the
cash receipts and disbursements during a certain period. The statement of cash flow
serves a number of objectives which are as follows:

 Cash flow statement aims at highlighting the cash generated from operating
activities.
 Cash flow statement helps in planning the repayment of loan schedule and
replacement of fixed assets, etc.
 Cash is the centre of all financial decisions. It is used as the basis for the
projection of future investing and financing plans of the enterprise.
 Cash flow statement helps to ascertain the liquid position of the firm in a
better manner.
 Banks and financial institutions mostly prefer cash flow statement to analyze
liquidity of the borrowing firm.
 Cash flow Statement helps in efficient and effective management of cash.
 The management generally looks into cash flow statements to understand the
internally generated cash which is best utilized for payment of dividends.

Cash Flows are inflows and outflows of cash and cash equivalents. The statement of
cash flow shows three main categories of cash inflows and cash outflows, namely;
operating, investing and financing activities.

54
1. Operating activities are the principal revenue generating activities of the
enterprise. Cash flow from operating activities is primarily derived from the
principal revenue generating activities of the enterprise. A few items of cash flows
from operating activities are;

 Cash receipt from the sale of goods and rendering services.


 Cash receipts from royalties, fee, Commissions and other revenue.
 Cash payments to suppliers for goods and services.
 Cash payment to employees.
 Cash payment or refund of Income Tax.

2. Investing activities include the acquisition and disposal of long term assets and
other investments not included in cash equivalents. Investing Activities refer to
transactions that affect the purchase and sale of fixed or long term assets and
investments. Examples of cash flow arising from investing activities are;

 Cash payments to acquire fixed Assets.


 Cash receipts from disposal of fixed assets.
 Cash payments to acquire shares, or debenture investment.
 Cash receipts from the repayment of advances and loans made to third parties.

Thus, Cash inflows from investing activities are,

 Cash sale of plant and machinery, land and Building, furniture, goodwill etc.
 Cash sale of investments made in the shares and debentures of other
companies.
 Cash receipts from collecting the Principal amount of loans made to third
parties.

Cash outflow from investing activities are;

 Purchase of fixed assets i.e. land, Building, furniture, machinery etc.


 Purchase of Intangible assets i.e. goodwill, trade mark etc.
 Purchase of shares and debentures.
 Purchase of Government Bonds.

55
3. Financing activities are activities that result in change in the size and
composition of the owner’s capital (including Preference share capital in the case
of a company) and borrowings of the enterprise. The third section of the cash flow
statement reports the cash paid and received from activities with non-current or
long term liabilities and shareholders’ Capital. Examples of cash flow arising from
financing activities are;

 Cash proceeds from issue of shares or other similar instruments.


 Cash proceeds from issue of debentures, loans, notes, bonds, and other short-
term borrowings.
 Cash repayment of amount borrowed.

Cash Inflows from financing activities are;

 Issue of Equity and preference share capital for cash only.


 Issue of Debentures, Bonds and long-term note for cash only

Cash outflows from financing activities are;

 Payment of dividends to shareholders.


 Redemption or repayment of loans i.e. debentures and bonds.
 Redemption of preference share capital.
 Buy back of equity shares.

56
Format for Cash flow Statement for the year ended..............

(i) Cash flow from operating activities

A. Operating cash receipts xxx

B. Less: Operating cash payment xxx

C. Cash generated from operation (A – B) xxx

D. Less: Income tax paid (Net of tax refund received) xxx

E. Cash flow before extraordinary items xxx

F. Adjusted extraordinary items (+/–)/Receipt/payment xxx

G. Net cash flow from (or used in) operating activities xxx

(ii) Cash flow from investing activities xxx

(iii) Cash flow from financing activities xxx

(iv) Net increase/decrease in cash and cash equivalents (i + ii + iii) xxx

(v) Add: cash and cash equivalent in the beginning of the year xxx

(vi) Less: cash under cash equivalent in the end of the year xxx

XXX

57
The following are to be clarified while fixing the limits based on the cash budget.

1. The cash budget is realistic and based on the operations in the business/similar
business.
2. The cash budget statement tallies with the underlying financial statements viz.
Balance Sheet and Profit and Loss A/c.
3. Outstanding bank borrowing figured in the projected Balance Sheet tallies with the
deficit as shown in the cash budget statement.
4. The closing balance of debtors is correctly arrived at summing up (Opening
balance of debtors + Credit sales-Realization of Debtors).
5. The expenses as indicated in the cash budget tallies with the expenses as reflected
in the projected Profit and Loss A/c.

The assessment of working capital limits is done based on the projected cash flow
statement, profitability statement and projected Balance Sheet. Wherever there is no
deficit in operating cycle and net deficit is only due to investing/financing cycles,
such deficit is not financed. Branches should obtain the required details at least one
month before the commencement of the year for which the assessment is to be made.

58
Case Study I

Application for sanction of working capital limit: Rs. 15 Lakhs (Renewal).

Nature of limit: OCC.

Margin: 40% on consumables & 40% on debtors.

Security: Plant and Machinery, and Hypothecation of Stocks & Receivables.

The unit is engaged in anodizing aluminium panel. It gets orders on contract basis.
The company gets orders from different customers and do the anodizing process and
deliver it to the party. Anodizing is a process of coating on aluminium panels.
Working capital requirement of the unit is mainly to meet their expenses for
consumables and against amount locked up as debtors.

Findings while the Unit visit:

Operating cycle in relation to unit,

 The trade activity starts from picking material on behalf of customers,


anodizing (executing work order) and delivering it to the customers.
 Consumables are held for 3 months.
 The unit allows 45 days to 60 days credit to the customers.
 The duration of the operating cycle differs from one order to another; normally
it takes 4 days to 5 days.
 The Unit use some of the materials like Sulphuric acid and Nitric acid which
has to be purchased 2-3 days before order execution.
 The unit avails 90 days credit from creditors.

Working capital limit is assessed on Turnover Method. The Unit has opted for it as it
befits them. The Unit’s main activity is anodizing. The holding level of inventory is
less. The unit is satisfied with the Bank’s finance.

59
Balance Sheet of AB Coaters (P) Ltd. As on 31/3/2011

Particulars 31/3/2010 31/3/2011 31/3/2012


Previous Current Projected
Sources of funds
Shareholders fund
Share capital 2000000.00 2000000.00 2000000.00
Share application money 1000000.00 1000000.00 1000000.00
Reserves and surplus - 1650507.34 3600000.00
Loan Fund
Secured loan 8822615.95 7074990.55 5200000.00
Unsecured loan 2745154.70 2670154.70 2670000.00
Total 14567770.65 14395652.59 14470000.00
Application of funds
Fixed assets 11787742.41 10367101.64 9900000.00
Investments 3000.00 3000.00 3000.00
Current assets, loans and
advances
Cash in hand 91468.00 86744.50 50000.50
Cash at bank - 319557.22 200000.00
Deposit 442139.00 1645207.05 1935000.00
Loans and Advances 324948.00 631560.00 600000.00
Sundry debtors 1885443.09 2555900.08 2847000.00
Closing stock 410636.00 535319.55 600000.00
Total (A) 3154634.09 5774288.40 6232000.00
Sundry creditors, Current
liabilities & Provisions
Sundry creditors 171475.80 419428.20 300000.00
Current liabilities & Provisions 722962.79 1425994.25 1500000.00
Total (B) 894438.59 1845422.45 1800000.00
Net Current Assets (A-B) 2260195.50 3928865.95 4432000.00
Deferred tax asset 62323.00 71497.00 95000.00
miscellaneous expenditure 454509.74 25188.00 40000.00
Total 14567770.65 14395652.59 14470000.00

60
P & L A/c for the year ended 31/3/2011

Particulars 31/3/2010 31/3/2011 31/3/2012


Previous Current Projected
Income
1. Anodizing & Other charges 10015421.32 16634391.12 20000000.00
2. Other income 160777.30 170695.05 200000.00
Total (A) 10176198.62 16805086.17 20200000.00
Expenditure
3. Consumables utilized 2008789.94 3148534.92 4000000.00
4. Processing costs 2283319.02 2693671.50 3200000.00
5. Employee costs 2046327.00 3171393.00 3800000.00
6. Operation & Other expenses 2244786.20 3279837.10 3934000.00
Total (B) 8583222.16 12293436.50 14934000.00
PBIDT (A-B) 1592976.46 4511649.64 5266000.00
7. Interest & Finance charges 978751.95 971063.00 900000.00
8. Depreciation 1137985.85 1707122.77 1468000.00
9. Preliminary expenses written off 12594.00 12594.00 50000.00
PBT -536355.32 1820869.88 2848000.00
10. Provision for Taxes
Current tax - 346741.00 800000.00
Differed tax Asset 223573.00 9174.00 2000.00
Fringe benefits Tax 37923.99 47903.00 50000.00
11. Net Profit/(Loss) -350706.31 1435399.88 2000000.00
12. Balance b/f -66021.43 -416727.74 -
13. Balance carried to Balance Sheet -416727.74 1018672.14 2000000.00

Key Information

Particulars 2011 2010


Current ratio 1.21 0.61
Gross profit: Sales 0.27 0.16
Net profit: Sales 0.08 -
Net sales (Rs. In Lakhs) 165.59 100.15
PBDIT (Rs. In Lakhs) 45.11 15.93
PBT (Rs. In Lakhs) 18.2 -5.36
PAT (Rs. In Lakhs) 14.35 -3.51
NWC (Rs. In Lakhs) 8.98 -14.22
Net worth (Rs. In Lakhs) 36.26 15.45

61
Interpretations:

 There is an increase in the current ratio from .61 in 2010 to 1.21 in 2011.
Though the ratio is below the benchmark of 1.25, it is satisfactory.
 Net worth of the company has increased by Rs. 20.18 Lakhs for the year ended
2011 due to the retention of earnings in the system.
 Net working capital increased from Rs. -14.22 Lakhs to Rs. 8.96 Lakhs for the
year 2011.
 Electricity and staff salary are the main expenses of the Unit.

62
Assessment of working capital

Based on Turnover Method

(Rs. In Lakhs)
Particulars Amount Amount
Accepted projected annual gross sales 200.00
25% of the above 50.00
Less: Minimum margin by the party
5% of projected sales 10.00
or NWC of previous year 8.98 10.00
(Whichever is higher)
Bank finance 40.00

Calculation of NWC

Calculation of NWC
(Rs. In Lakhs)
Particulars 2010 2011
Current assets
Debtors(less than 6 months) 14.72 23.47
Closing stock 4.10 5.35
Cash and Bank 0.91 4.06
Deposit 1.00 13.05
Advances 1.49 5.27
Deferred Tax 0.62 0.71
Total (A) 22.84 51.91
Current liabilities
Sundry creditors 1.71 4.19
current liabilities & Provisions 7.23 14.26
Canara Bank OD 14.30 10.67
Loan installment in 12 months 13.83 13.83
Total (B) 37.07 42.95
NWC 8.96

63
Based on MPBF

(Rs. In Lakhs)
Current Assets
Debtors 28.47
Closing stock 6
Cash 0.5
Bank 2
Deposits 15.95
Total (A) 52.92
Current liabilities
Sundry creditors 3
Current liabilities & Provisions 15
Total (B) 18

WC Gap (A-B) 34.92


Less: 25% of Current assets 13.23
MPBF 21.69

Conclusion:

Under Turnover method as well as MPBF method the customer is eligible for higher
working capital limits. However, the party has asked only for the renewal but not for
enhancement. The Bank has financed Rs. 15 Lakhs. When compared both the
methods, limit under Turnover method is more.

64
Case Study II

Name: ABC Fuels

Application for sanction of working capital limit: Rs. 35 Lakhs (Renewal)

Nature of limit: OCC

Margin: 35% on Stocks and Debtors

Security: Hypothecation of Stocks & Receivables

Final accounts of ABC Fuels are given below.

65
Trading and P & L A/c for the year ended 31/3/2011

Particulars 2010 2011 2012


Previous Current Projected
1 Opening Stock - 395859.00 1916597.51
2 Purchases
12.5% VAT purchases 321797.00 362745.00 400000.00
Exempted purchases 20016102.00 34387149.00 35000000.00
3 Sales
12.5% VAT sales 263443.00 374002.00 400000.00
Exempted sales 20114685.00 33582922.00 36910574.51
4 Closing stock 395859.00 1916597.51 849205.00
5 Gross profit (3+4)-(1+2) 436088.00 727768.51 843482.00
6 Rental income from HPCL 180000.00 180000.00 180000.00
7 Total (5+6) 616088.00 907768.51 1023482.00
8 Operating expenses
Accounting charges 6000.00 12000.00 12000.00
Audit fees 10000.00 10000.00 10000.00
Staff uniform & Welfare 3600.00 5420.00 60000.00
Books & periodicals 1210.00 1560.00 1800.00
Electricity charges 4960.00 8190.00 9000.00
General expenses 3162.00 7120.00 8000.00
Profession Tax 2500.00 2500.00 2500.00
Salaries 60000.00 72000.00 90000.00
Postages 368.00 410.00 500.00
Telephone charges 4610.00 6630.00 7000.00
Bank interest & charges 125396.00 305856.51 325000.00
Insurance 17682.00 17682.00 17682.00
Rent paid to site owner 180000.00 180000.00 180000.00
9 Net Profit (7-8) 196600.00 278400.00 300000.00
10 Total (8+9) 616088.00 907768.51 1023482.00

Capital A/c as on 31/3/2011

Particulars 2010 2011 2012


Balance b/d 1021193 984453 867665
Add: Net profit 196600 278400 300000
share of profit 7200 7400 7500
Less: Drawings 60000 72000 80000
TDS 30540 30588 31000
Bank OD interest 150000 300000 350000
Balance c/d 984453 867665 714165

66
Balance Sheet as on 31/3/2011

Particulars 2010 2011 2012


Previous Current Projected
Liabilities
Capital A/c 984453 867665 714165
Secured Loan
Canara Bank OD 4200692 4798359 3500000
Current Liabilities
Audit fees payable 10000 10000 10000
Total 5195145 5676024 4224165
Assets
Fixed assets
Gold Jewellery 46000 46000 46000
Deposit
Security deposit in HPCL 200000 200000 200000
Telephone deposit 2000 2000 2000
Current assets
Stock in trade 395859 1916597.51 849205
VAT refundable 7292 5212 6000
Moidu Tiles & Brick Ind 300000 300000 300000
Bharath Hardware KGF 580000 580000 580000
Moidu Jowar 2119230 2119230 2119230
Cash & Bank Balance 1544764 506984.49 121730
Total 5195145 5676024 4224165

Key Information

Particulars 2011 2010


Current ratio 0.51 0.45
Gross profit: Sales 2.14 2.14
Net profit: Sales 2.78 1.97
Net sales (Rs. In Lakhs) 339.57 203.78
NWC (Rs. In Lakhs) -23.79 -22.62
Net worth (Rs. In Lakhs) 8.68 9.84
Gross profit 7.27 4.36
Closing stock 19.16 3.96

67
Interpretation:

 There is reduction in Net Worth from the year 2010 to 2011 as there is
increase in drawings.
 Sales have increased over the previous year (66.64%).
 Net profit has increased. The % of net profit to gross sales has been reduced
marginally due to increase in the operating expenses.
 One of the important aspects that should be noticed is that Bank OD interest is
charged in Capital A/c instead of P & L A/c.
 If the Bank OD is charged in P&L A/c, it will bring down the profit.
 Investments in subsidies are shown under current assets, which are treated as
non-current assets.

Assessment of Working Capital


Under Turnover Method
(Rs. In Lakhs)
Particulars Amount Amount
Accepted projected annual gross sales 373.11
25% of the above 93.28
Less: Minimum margin by the party
5% of projected sales 18.65
or NWC of previous year 23.79 23.79
(Whichever is higher)
Bank finance 69.49

Under MPBF
(Rs. In Lakhs)
Current Assets
Stocks 8.49
VAT refund 0.06
Cash 1.22
Total (A) 9.77
Current Liabilities
Audit fees 0.1
Total (B) 0.1
WC Gap (A-B) 9.67
Less: 25% of CA 2.4425
MPBF 7.2275

68
Case Study III

Name: B Poultry Farm (P) Ltd.

Limit: Rs.106.06 Lakhs

Nature of limit: OCC

Margin: 35%

Purpose: To meet the working capital requirement for purchase of feed, medicine etc.

Observations during the unit visit:

 Raw material required for 2 months were stored.


 All the sales made by the unit were cash sales and thus they did not have any
debtors.
 Interest rate is 12.5% which is paid once in 6 months.

Operating cycle in relation to the Unit

 Trade activity starts from procuring day to day old chicks for the purpose of
producing and selling eggs.
 Day old chicks are fed.
 Birds start hatching eggs after 25th week and the life span of a bird ranges
between 68 to 75 weeks.
 Stock of feed are purchased for cash and are held for 2 months.
 The birds start laying eggs from the 25th week, once then unit will be receiving
the sale proceeds.
 The operating cycle ends when birds lose their fertility, after which they are
sold.

69
Balance Sheet as on 31/3/2011

Particulars 31/3/2011 31/3/2010


Sources of fund
Share holders fund
a. share capital 500000 500000
b. Advance towards share capital 7085000 7085000
Loan Fund
a. Secured loan 31259488 28836338
Total Funds 38844488 36421338
Application on funds
Fixed assets
Gross Block 16864014 18721566
Less: Depreciation 1916459 1857552
Net block 14947555 16864014
Current assets & Loans & Advances 24067111 17636104
Less: Current liabilities & Provisions 761463 534473
Net Current Assets 23305648 17101631
P&L A/c Dr. balance 2455693 1045184
Add: Profit/Loss 1864407.81 -1410509
P&L A/c Dr. balance 591285.19 2455693
Total Assets 38844488 36421338

P&L A/c for the year ended 31/3/2011

Particulars 31/3/2011 31/3/2010


Income
Culling of birds 2985235.00 5398795.00
Sale of eggs 50607529.00 9470035.00
Other income 2353789.00 1903457.00
Total 55946553.00 16772287.00
Expenditure
Cost of birds, feed 41202874.00 10396275.00
Personnel 3594427.00 2222371.00
Administration expenses 5324030.00 2458573.00
Maintenance expenses 2044355.00 1248025.00
Depreciation 1916459.19 1857552.00
Total 54082145.19 18182796.00
Net Profit/Loss 1864407.81 -1410509.00

70
As poultry business comes under agriculture sector, the assessment is based on total
cost of the chick and expenditure.

(Rs. In Lakhs)
Particulars Amount
Chick cost (69000 chicks @128) 88.32
Stock of feed ingredients 67.13
Finished feed stock 6.74
Stock of medicines 0.98
Total Current Assets 163.17
Less: Margin 35% 57.1095
Working capital limit 65% 106.0605

Sanctioned amount is Rs. 106.0605 Lakhs.

71
Findings

1. Growth of the organization may not be projected accurately. In one of the


cases analysed, the Bank had under assessed the projected sales. The sales
grew at 66%.
2. Some of the parties inflate Balance Sheet to show the favourable ratios.
Hence, the quality of the components of ratios is given more importance.
3. In one of the cases, bank OD interest was debited to Capital A/c to inflate the
net profit which indicates that the funds have been diverted for some other
purposes.
4. Working capital needs are assessed according to the industry standards. For
poultry, assessment was made based on costs and other expenses.

Suggestions

1. Bank has to educate its customers especially large borrowers regarding the
various products and services of the Bank.
2. Though RBI guidelines and Right to Information details are available on the
Bank’s website, all customers will not be interested to go through them. A
better means of communication to its customers is required.

72
Conclusion

Canara Bank was established in 1906. Since then it has been successfully carrying out

its activities. The company is known for its systematic of the business. All the

departments in the organization are well equipped with the modern technology and

controlled by competent persons. Most of the clerical work is done by using

computers that saves time and energy. The Bank has created friendly atmosphere for

the employees and gives them freedom to work freely. The Bank also gives many

benefits from its various schemes and keeps the employees happy. It believes that

happy work force is the foundation of a prosperous company.

The Bank follows various methods for assessing the working capital needs of the

companies depending on the industry standards. Analysis of financial statements is

considered very important for the projections and accuracy is based on the level of

understanding and interpretation of the statements. The Bank is providing working

capital to all sectors of Indian Economy.

73