A PROJECT REPORT ON FINANCING WORKING CAPITAL AT PNB

Submitted in partial fulfillment of the requirement for the

Award of Degree of Master of Business Administration
2014 – 2016

SUBMITTED BY SUBMITTED TO

AMIT MITTAL MONA KWATRA

30814803914 Faculty MAIT

MAHARAJA AGRASEN INSTITUTE OF TECHNOLOGY

(Affiliated to G.G.S.I.P. University)

Sector – 22, Rohini, Delhi -110086

An ISO 9001:2008 Certified Institute

AICTE NBA Accredited Institute
 STUDENT UNDERTAKING

This is to certify that I AMIT MITTAL had completed the Project titled “PROJECT
ON FINANCING WORKING CAPITAL AT PNB under the guidance of Ms. MONA
KWATRA in the partial fulfillment of the requirement for the award of degree
of MBA from Maharaja Agrasen Institute of Technology (Affiliated to G.G.S.I.P.
University), New Delhi. This is an original piece of work and I had neither copied
nor submitted it earlier elsewhere.

Student Name and Signature

Program

Date

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 Certificate from Guide

This is to certify that the project titled “A PROJECT ON FINANCING WORKING

CAPITAL AT PNB ” is an academic work done by “AMIT MITTAL” submitted in the
partial fulfillment of the requirement for the award of the Degree of MBA from
Maharaja Agrasen Institute of Technology (Affiliated to G.G.S.I.P. University), New
Delhi under my guidance and direction. To the best of my knowledge and belief
the data and information presented by him/her in the project has not been
submitted earlier.

Name and signature of Faculty Guide

Designation

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 ACKNOWLEDGEMENT

I would like to thank all those who helped me through the project of
familiarization I would like to express my sincere appreciation to my guide
MRS.MONA KWATRA for his enlightenment of my knowledge of feedback and the
Banking industry, valuable advice and kind support throughout the process of
dissertation completion

Most importantly, I would like to thank my parents and sister who were always
there to motivate me. I would like to thank all the focus group members for giving
their valuable time and thoughts to my project.

I would like to thank all the customers and employees of Banking for sharing their
valuable thoughts which helped me shape this project

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 TABLE OF CONTENTS

CHAPTER PAGE
CONTENTS
NUMBER NUMBER

1 EXECUTIVE SUMMARY 7

2 METHODOLOGY 9

3 COMPANY PROFILE 11

4 INTRODUCTION OF WORKING CAPITAL 17

5 WORKING CAPITAL FINANCE 24

6 LIMITATION OF INSUFFICIENT WORKING CAPITAL 30

7 METHODS OF ASSESSMENT OF WORKING CAPITAL 32

8 CASE STUDY 40

9 RECOMMENDATION AND CONCLUSION 50

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 BIBLOGRAPHY

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 CHAPTER 1

EXECUTIVE
SUMMARY

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EXECUTIVE SUMMARY

The objective of the project is to study and analyze the various aspects and
methods of financing working capital loan.

This study covers the process Punjab National Bank follows to assess the credit
worthiness of its clients and grant the finance for the working capital. I studied the
various types of facilities offered by the bank under Project Finance, including
both Fund based facilities like term loan and Cash credit and Non Fund based
facilities like Bank Guarantee and Letter of Credit and also the procedure followed
by the bank before granting the finance to its borrowers which includes the
calculation of the credit risk undertaken by the bank. Before granting finance, the
bank calculates the credit risk score of the client by using software called PNB
Trac, generated by feeding in both the quantitative and qualitative data of the
client, which is used by the bank to evaluate the credit risk of the bank and
accordingly charge the rate of interest to the clients.

After evaluating a number of facilities sanctioned by the bank, the study includes a
snapshot of such evaluation for both working capital & term loan appraisal.

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 CHAPTER 2

METHODOLOGY

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METHODOLOGY

The project makes use of ample amount of data to arrive at the conclusion. It does
so by paying equal attention to both quantitative as well as qualitative data. The
methodology that was adopted while appraisal of the project is described as below:

 Collection of data from borrowing party. (done by bank’s representative and

I gathered knowledge about the issues from the experience they gained from
their discussions with the promoters of the company)

 Verification of data and preparation of revised project report and projections

submitted by the company.

 Visit to factory site for physical verification of progress made by the

company.(performed by bank’s representative and I gathered first hand
information from him)

 Study of various bank circulars and govt. norms in order to arrive at figures
required for the borrower and facilities applied for.

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 CHAPTER 3

COMPANY PROFILE

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COMPANY PROFILE

Punjab National Bank (PNB) was registered on May 19, 1894 under the Indian
Companies Act with its office in Anarkali Bazaar, Lahore. With over 60 million
satisfied customers and more than 5670 offices including 6 overseas branches,
PNB has continued to retain its leadership position amongst the nationalized banks.
The bank has 6009 ATMs and around 169 lakh card holders.

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The bank enjoys strong fundamentals, large franchise value and good brand image.
Besides being ranked as one of India's top service brands, PNB has remained fully
committed to its guiding principles of sound and prudent banking. Apart from
offering banking products, the bank has also entered the credit card, debit card;
bullion business; life and non-life insurance; Gold coins & asset management
business, etc. PNB has earned many awards and accolades during the year in
appreciation of excellence in services, Corporate Social Responsibility (CSR)
practices, transparent governance structure, best use of technology and good
human resource management.

Since its humble beginning in 1895 with the distinction of being the first Swadeshi
Bank to have been started with Indian capital, PNB has achieved significant
growth in business which at the end of March 2012 amounted to Rs 6,73,363 crore.

PNB is ranked as the 2nd largest bank in the country after SBI in terms of branch
network, business and many other parameters. During the FY 2011-12, with
36.20% share of CASA to domestic deposits, the Bank achieved a net profit of Rs
4884 crores.

Bank has a strong capital base with capital adequacy ratio of 12.63% as on Mar’12
as per Basel II with Tier I and Tier II capital ratio at 9.28% and 3.35%
respectively. As on March’12, the Bank has the Gross and Net NPA ratio of 2.93%
and 1.52% respectively. During the FY 2011-12, its ratio of Priority Sector Credit
to Adjusted Net Bank Credit at 40.7% & Agriculture Credit to Adjusted Net Bank
Credit at 19.34% was also higher than the stipulated requirement of 40% & 18%
respectively. The Bank has also issued 40.8 lacs Kisan Credit Cards (KCC) till
March 31, 2012.

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The Bank has been able to maintain its stakeholders’ interest by posting a healthy
Net Interest Margin (NIM) of 3.84% in Mar’12 (3.96% Mar’11). The Earning per
Share improved to Rs 154.02 (Rs 140.60 Mar’11) while the Book value per share
improved to Rs 777.42 (Rs 632.48 Mar’11).

Punjab National Bank continues to maintain its frontline position in the Indian
banking industry. In particular, the bank has retained its NUMBER ONE position
among the nationalized banks in terms of number of branches, Deposit, Advances,
total Business, Assets, Operating and Net profit in the year 2011-12.

The impressive operational and financial performance has been brought about by
Bank’s focus on customer based business with thrust on CASA deposits, Retail,
SME & Agri Advances and with more inclusive approach to banking; better asset
liability management; improved margin management, thrust on recovery and
increased efficiency in core operations of the Bank.

The performance highlights of the bank in terms of business and profit are shown
below:
Table 1: Performance highlights of the bank
Rs. In Crore

Parameters Mar’09 Mar’10 Mar’11 Mar’12 YOY

Growth %

Operating Profit 5690 7326 9056 10614 17.2

Net Profit 3091 3905 4433 4884 10.2

Deposit 209760 249330 312899 379588 21.3

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Advance 154703 186601 242107 293775 21.3

Total Business 364463 435931 555005 673363 21.3

Table 2: Advances (Sectoral)

Rs. In Crore

SI. Parameters FY Mar'11 Dec'11 FY Mar'12 % shareVariation

in over 11 to 12
Gr.Non food Amt. (%)
1 Global gross advances 243998 265884 297892 53894 22.1
2 Overseas advances 12904 19778 21755 8851 68.6
3 Domestic gross advances 231094 246106 276137 45043 19.5
3.a Food credit 4421 5424 5186 765 17.3
3.b Dom.Non food gross adv. 226673 240682 270951 100 44278 19.5
Of which
4 Aggriculture & allied 35462 38306 45917 16.9 10455 29.5
5 Industry 114072 118324 128162 47.2 14090 12.4
5.a MSME manufacturing 26848 29912 32391 11.9 5543 20.6
5.b Large Industry 87224 88412 97771 35.3 8547 9.8
6 Retail Loans 23621 26009 29196 10.8 5575 23.6
Of which
6.a Housing 11816 12373 13808 5.1 1991 16.9
6.b Car/Vechicle 1626 2178 2502 0.9 876 53.9
6.c Other retail loans 10179 11459 12887 4.7 2708 26.6
7 Commercial real estate 8955 10382 9661 3.6 706 7.9
Of which lease rental 3839 4936 5427 2 1588 41.4
8 Services & others 44563 47660 58437 21.5 13875 31.1

Recent Awards and Accolades:

 Conferred with the Best Bank Award 2011 amongst all the banks in India
by Business India
 Prestigious ‘Most Productive Public Sector Bank’ Award 2011, instituted
by Federation of Indian Chambers of Commerce and Industry (FICCI) and
Indian Banks’ Association (IBA).

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  Best Bank Award among Large Bank for “IT for internal effectiveness”
from IDRBT.
 MSME National Awards: One award for excellent performance in lending
under PMEGP scheme in North Zone and the other award at national level
for excellence in lending Interest Subsidy Eligibility Certificate (ISEC)
scheme of KVIC.
 Most Socially Responsible Bank Award 2011 by Business World &
Pricewaterhouse Coppers (PwC).
 India Pride Award in Corporate Social Responsibility (CSR) for the year
2011 by Dainik Bhaskar.
 Golden Peacock National Training Award 2011 by institute of Directors.
 SKOCH Financial Inclusion Award 2012 for its Jana Mitra Rickshaw
Scheme.
 Bank’s Overseas Branch, DIFC, Dubai has received ‘Business Super
Achiever Award’ under individual category from Asian Leadership Awards
in addition to the Asian most preferred branch (Banking & Finance) Award.
 ‘Technology Adoption’ Award in public sector bank category instituted by
Dun & Bradstreet and Polaris Software.
 Golden Peacock Award for HR Excellence instituted by Institute of
Directors.
 Global HR Excellence Award under the category “Organization with
Innovative HR Practices” instituted by ASIA PACIFIC HRM CONGRESS.

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 CHAPTER 4

INTRODUCTION
TO
WORKING CAPITAL

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Introduction to Working Capital

Working capital refers to that part of the firm’s capital which is required for
financing short- term or current assets such as cash, marketable securities, debtors
& inventories. Funds, thus, invested in current assts keep revolving fast and are
being constantly converted in to cash and this cash flows out again in exchange for
other current assets. Hence, it is also known as revolving or circulating capital or
short term capital.

Thus, Working capital for any unit means the total amount of circulating funds
required for meeting day to day requirements of the unit. For proper working a
manufacturing unit needs a specific level of current assets such as raw material,

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stock in process, finished goods, receivables and other current assets such as cash
in hand/ bank and advances etc. So the working capital means the funds invested in
current assets. This topic explains the concept of working capital cycle, gross
working capital, net working capital, factors affecting the requirements of working
capital and role of banker in assessment of right amount of working capital.

Figure 1: Working Capital

How can we distinguish it with the term loan?

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution
of financial assets over time, between the lender and the borrower.
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In a loan, the borrower initially receives or borrows an amount of money, called
the principal, from the lender, and is obligated to pay back or repay an equal
amount of money to the lender at a later time. Typically, the money is paid back in
regular installments, or partial repayments; in an annuity, each installment is the
same amount.

The loan is generally provided at a cost, referred to as interest on the debt, which
provides an incentive for the lender to engage in the loan. In a legal loan, each of
these obligations and restrictions is enforced by contract, which can also place the
borrower under additional restrictions known as loan covenants. Although this
article focuses on monetary loans, in practice any material object might be lent.

Acting as a provider of loans is one of the principal tasks for financial institutions.
For other institutions, issuing of debt contracts such as bonds is a typical source of
funding.

Working Capital Cycle:

The working capital cycle or operating cycle of a manufacturing unit means

the time taken for converting cash into cash via raw material, stock in
process, finished goods and receivables.

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 Figure 2: Working Capital Cycle

Payment

Cash Creditors

Supply
Collection

Raw
Debtors Material
s
Production
Sales

Finished Work in
Goods progress

Gross Working Capital and Net Working capital:

Working capital may also be explained as Gross working capital and Net
working capital.

Gross working capital means the total funds required for financing the total
current assets. Net Working capital means the difference of current assets and
liabilities.

Gross Working Capital = Current Assets

Net Working Capital = Current Assets − Current Liabilities

In other words, net working capital denotes the portion of gross working capital
contributed from long term sources. As per practice of Indian banks, net working

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capital should normally be 25% of total current assets which will give a current
ratio of 1.33 to the unit. When net working capital is negative, it implies that the
short term funds have been diverted / used for long term uses and the unit is facing
a liquidity crunch. Such situation may also arise due to losses. In such a situation,
the need of the hour is for raising long term sources.

Objectives of Working Capital

The primary objective of working capital management is to ensure smooth
operating cycle of the business. Secondary objectives are to optimize the level of
working capital and minimize the cost of such funds.

The superior objective of financial management is wealth maximization and that

can be gained by profit maximization accompanied with sustainable growth and
development. For sustainable growth and development, the objectives of all the
stakeholders including customers, suppliers, employees, etc should be aligned to
the growth of the organization.

Smooth Working Capital Operating Cycle: This implies that the operating cycle
i.e. the cycle starting from acquisition of raw material to its conversion to cash
should be smooth. It is not easy; it is as good as circulating 5 balls with two hands
without dropping a single one. If following 6 points can be managed, this operating
cycle can be management well.

1. It means raw material should be present on requirement and it should not be a

cause to stoppages of production.

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2.All other requirements of production should be in place before time.
3. The finished goods should be sold as early as possible once they are produced
and inventoried.
4.The accounts receivable should be collected on time.
5.Accounts payable should be paid when due without any delay.
6. Cash should be available as and when required along with some cushion.

Lowest Working Capital: Working capital here refers to the current assets less
current liabilities (net working capital). It should be optimized because higher
working capital means higher interest cost and lower working capital means risk of
disturbance of operating cycle.

Minimize Rate of Interest or Cost of Capital: The cost of capital utilized on

working capital should be minimized so as to achieve higher profitability. If the
investment in working capital involves bank finance, interest rates should be
negotiated with bank. Cost can be minimized by utilizing long term funds but in a
proper mix. While deciding the mix of working capital, the fundamental principal
of financial management should be kept in mind that fixed assets and permanent
assets should be financed by long term sources of finance of approximately same
maturity and short term or temporary assets should be financed by short term
sources of finance.

Optimal Return on Current Asset Investment: The return on the investment

made in current assets should be more than the weighted average cost of capital so
as to ensure wealth maximization of the owners. In other words, the rate of return
earned due to investment in current assets should be more than the rate of interest
or cost of capital used for financing the current assets.

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 CHAPTER 5

WORKING CAPITAL
FINANCE

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Working Capital Finance

The term capital has several meaning in business and economic development
finance. In accounting and financial statement analysis, working capital is defined
as firm’s short term current assets and current liabilities. Net working capital
represents the excess of current assets over current liabilities and is an indicator of
firm’s ability to meet its short term financial obligation. From financing
perspective, working capital refers to the firm’s investment in two types of assets.
In one instance, working capital means a business’s investment in short-term assets
needed to operate over a normal business cycle. This meaning corresponds to the
required investment in cash, accounts receivable, inventory, and other items listed
as current assets on the firm’s balance sheet. In this context, working capital
financing concerns how a firm finances its current assets. A second broader
meaning of working capital is the company’s overall non fixed asset investments.
Businesses often need to finance activities that do not involve assets measured on
the balance sheet. For example, a firm may need funds to redesign its products or
formulate a new marketing strategy, activities that require funds to hire personnel
rather than acquiring accounting assets. When the returns for these “soft costs”
investments are not immediate but rather are reaped over time through increased
sales or profits, then the company needs to finance them. Thus, working capital
can represent a broader view of a firm’s capital needs that includes both current
assets and other non fixed asset investments related to its operations.

Forms of Working Capital Financing:

Working capital finance comes in many forms, each of which has a unique term
and offers different sets of advantages and disadvantages to the borrower. The five

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major forms of debts, which are used to finance working capital, are described
below:

 Line of credit
 Account receivable financing
 Factoring
 Inventory financing
 Term loan

The following table will give a fair idea about these five major forms of working
capital finance:

Table 3: Summary of working capital finance instruments

Finance instrument Description Key terms

Line of Credit Maximum loan limit Can be secured or unsecured.

established. Firms draw on Annual repayment.
loan as needed up to limit. Compensating balance may be
required.

Account Receivable (AR) Loan secured by accounts Loan amount based on

Loan receivable. percentage of accounts
receivable. Accounts
receivable assigned to lender
as sales occur. Loan balance
paid down with AR collection.
Factoring Sale of accounts receivable to Company paid based on
a third party collector average collection period less
(Factor). Factor bears a collection fee. Collection
collection risk. amount can be advanced with
an interest charge.

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 Inventory Financing Loan secured by inventory. Loan amount based on a
percentage of inventory value.
Lender receives security
interest in inventory and may
take physical control. Release
of inventory with loan
repayment.
Term Loan Medium-term loan. Principal Loan amount tied to collateral
repaid over several years value. Can be fully amortized
based on a fixed schedule. or a balloon loan. Typical
term is three to seven years.

Working Capital Finance is broadly categorized under two heads:

1) Fund Based. These are the facilities for which the bank provides funding

and assistance to actually purchase business assets or to meet business

expenses.
There are four types of fund based financing:
 Demand loan
 Term loan
 Cash-credit advance
 Overdraft
2) Non Fund Based. These are the facilities for which the bank can issue

letters of credit or can give a guarantee on behalf of the customer to the

suppliers, Government Departments for the procurement of goods and
services on credit.
Different ways of non fund based financing are:
 Letter of credit(LC)/Letter of guarantee
 Bank guarantee
 Performance guarantee
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  Finance guarantee
 Deferred payment guarantee

SECURITY REQUIRED IN BANK FINANCE:

Banks generally do not provide working capital finance without adequate security.
The nature and extent of security offered play an important role in influencing the
decision of the bank to advance working capital finance. The bank provides credit
on the basis of following modes of security:

Hypothecation – Under this mode of security, the banks provide working capital
finance to the borrower against the security of movable property, generally
inventories. It is a charge against property for the amount of debt where neither
ownership nor possession is passed to the creditor. In the case of default the bank
has the legal right to sell the property to realise the amount of debt.

Pledge – A pledge is bailment of goods as security for the repayment of a debt or

fulfillment of a promise. Under this mode, the possession of goods offered as
security passes into the hands of the bank. The bank can retain the possession of
goods pledged with it till the debt (principal amount) together with interest and
other expenses are repaid. . In case of non-payment of loan the bank may either;
Sue the borrower for the amount due; Sue for the sale of goods pledged; or after
giving due notice, sell the goods.
Lien – Lien means right of the lender to retain property belonging to the borrower
until he repays the debt. It can be of two types: (i) Particular lien and (ii) General
lien. Particular lien is a right to retain property until the claim associated with the

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property is fully paid. On the other hand, General lien is applicable till all dues of
the lender are paid. Banks usually enjoy general lien.

Mortgage – Mortgage is the transfer of a legal or equitable interest in a specific

immovable property for the payment of a debt. In case of mortgage, the possession
of the property may remain with the borrower, while the lender enjoys the full
legal title. The mortgage interest in the property is terminated as soon as the debt is
paid. Mortgages are taken as an additional security for working capital credit by
banks.
Charge – Where immovable property of one person is made security for the
payment of money to another and the transaction does not amount to mortgage, the
latter person is said to have a charge on the property and all the provisions of
simple mortgage will apply to such a charge. A charge may be created by the act of
parties or by the operation of law. It is only security for payment.

Role of Banker:
The unit should have sufficient amount of working capital. A portion of it is to be
financed from long term sources called the liquid surplus or net working capital
(NWC). The remaining is normally financed by the bank in the form of working
capital limits. Excess maintenance of working capital may result in idle resources
and high interest cost whereas less amount of working capital may mean disruption
in the working. So both the situations are to be avoided. That is why the technique
of calculation of right amount of working capital assumes significance. For
financing of working capital, a banker should be able to calculate right amount of
working capital needed by the unit being financed. It shall mean right amount of
financing which will result in higher profitability for the unit and safety of funds of
the bank.
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 CHAPTER 6

LIMITATION OF
INSUFFICIENT
WORKING CAPITAL

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 LIMITATION OF INSUFFICIENT WORKING CAPITAL
The amount of working capital should be sufficient. Inadequate amount of working
capital may create a lot of financial problems in business. Sometimes,
inadequate working capital may be the major causes for closing down the business
organization. Due to shortage of working capital, raw materials cannot be
purchased on time and payment of labor and other expenses cannot be made on
time. The disadvantages suffered by a firm with insufficient working capital are as
follows:

1. The firm is unable to take advantages of new opportunities or adapt to change.

2. Trade discounts are lost. A firm with sufficient working capital is able to finance
larger stocks and can therefore place large orders.
3. Cash discounts are lost. Some firms will try to persuade their debtors to pay
early by offering cash discounts.
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4. The advantages of being able to offer a credit line to customers are forgone.

5. Financial reputation is lost due to non-payment of trade creditors on time.

6. Creditors may apply to the court for winding up if the firm fails to pay their
obligations on time.

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 CHAPTER 7

METHODS OF
ASSESSMENT OF
WORKING CAPITAL

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Methods of Assessment of Working Capital

1) NAYAK COMMITTEE/TURNOVER METHOD

2) TRADITIONAL METHOD/ TONDON II METHOD

3) CASH BUDGETING METHOD

1) TURNOVER METHOD: It provide 5 crore to SME and 2 crore for general

advances, while financing we should assess that the operating cycle of the firm
/company is approximately 8 month.

As per Nayak method or turnover method PBF as assessed under:

1. Accepted Projected sales

2. Required W.C.(25% of A)
3. Stipulated Margin(5% 0f A)
4. Actual NWC(C.A-C.L)
5. Permissible bank fiancé
[(B-C) or (B-D) whichever is less]

2) TRADITIONAL METHOD/TONDON II METHOD: It is applicable where

NAYAK COMMITTEE/TURNOVER METHOD is not applicable. This method
talks about MPBF. This is also known as Financing Working Capital Gap. In this
method WC assessed as under.

A. Chargeable C.A
B. Other C.A
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C. Total Charge C.A
D. Other C.L
E. W.C Gap(C-D)
F. NWC Required (25% of C)
G. Projected NWC/ Actual NWC (C.A- C.L)
H. PBF = [(F-E) OR (F-G)], whichever is maximum.

3) CASH BUDGETING METHOD: It is mainly used for service sector

companies Like BPO, KPO, Software companies etc. And it eliminates traditional
requirement of Stock and Debtors for assessment.

Bank Finance in the form of Working Capital = Cash Inflow –Cash

Outflow

Steps involved in arriving at the level of Working Capital Requirement:

 Based on the level of activity decided and the unit cost and sales price
projections, the banks calculate at the annual sales and cost of production.
 The quantum of current assets (CA) in the form of Raw Materials, Work-in-
progress, Finished goods and Receivables is estimated as a multiple of the
average daily turnover. The multiple for each of the current assets is
determined generally based on the industry norms.
 The current liabilities (CL) in the form of credit availed by the business from
its creditors or on its manufacturing expenses are deducted from the current
assets (CA) to arrive at the Working Capital Requirement (WCR).

Standard Formulae for determination of Working Capital:

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The issue of computation of working capital requirement has aroused considerable
debate and attention in this country over the past few decades. A directed credit
approach was adopted by the Reserve Bank of ensuring the flow of credit to the
priority sectors for fulfillment of the growth objectives laid down by the planners.
Consequently, the quantum of bank credit required for achieving the requisite
growth in Industry was to be assessed. Various committees such as the Tandon
Committee and the Chore Committee were constituted and studied the problem at
length.

Norms were fixed regarding the quantum of various current assets for different
industries (as multiples of the average daily output) and the Maximum Permissible
Bank Financing (MPBF) was capped at a certain percentage of the working capital
requirement thus arrived at.

Working Capital assessment on the formula prescribed by the Tandon

Committee:

Working Capital Requirement (WCR) = [Current assets i.e. CA (as per industry
norms) – Current Liabilities i.e. CL]
Permissible Bank Financing [PBF} = WCR – Promoter’s Margin Money i.e. PMM
(to be brought in by the promoter)

As per Formula 1: PMM = 25% of [CA – CL] and thereby PBF = 75% of [CA –
CL]
As per Formula 2: PMM = 25% of CA and thereby PBF = 75% [CA] – CL

As is apparent Formula 2 requires a higher level of PMM as compared to Formula

1. Formula 2 is generally adopted in case of bank financing. In cases of sick units

35 | P a g e
where the promoter is unable to bring in PMM to the extent required under
Formula 2, the difference in PMM between Formulae 1 and 2 may be provided as a
Working Capital Term Loan repayable in installments over a period of time.

Working Capital and Small Scale Industries:

Small scale industries have a distinct set of characteristics such as low bargaining
power leading to problems of receivables and lower credit on purchases, poor
financial strength, high level of variability due to dependence on local factors, etc.
Consequently, it has been rightly argued that the industry norms on different
current assets cannot be adopted.

The PR Nayak Committee that was appointed to devise norms for assessing the
working capital requirement of small-scale industries arrived at simplified norm
pegging the Working Capital bank financing at 20% of the projected annual
turnover. However, in case of units which are non-capital intensive such as hotels,
etc. banks often assess requirements both on the Nayak Committee norms as well
as the working cycle norms and take the lower of the two figures.

Eligibility and Norms for bank financing of SSIs as per Nayak Committee:

a. Applicability:
In case of SSIs, with working capital requirement of less than Rs.5 crores
In case of other industries, with working capital requirement of less than Rs. 1
crore

b. Quantum of Working Capital bank financing:

20% of the projected annual turnover

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c. Subject to a Promoter bringing in a margin of:
5% of the projected annual turnover (i.e. 20% of the total fund requirement that has
been estimated at 25% of the projected annual turnover)

The formula driven computation of working capital requirement have been

subjected to much debate over the past few decades. The advantage of such
computation has been that it removes discretion from the officials of banks (which
are largely from the Public Sector). The uniformity thus reduces the scope for
accusation of bias.

However, the strongest argument against the MPBF based lending has been that it
does not take into account the variations arising out of location, relative bargaining
of the enterprise and other reasons, which could vary its need for working capital.
Even though the banker could understand the problem, it was not possible to act on
it due to the norms. Further, the “One Size fits all” theory ensured that banks never
needed to develop credit appraisal skills and lent to all and sundry based on their
seeming adherence to norms on paper.

The method has also been criticized as being more appropriate for the era where
credit was rationed out. Banks today are capable of undertaking better assessment
of the requirements and welcome the idea of offering higher limits (larger
exposures) to established clients if required in order to retain their business in the
face of competition from other banks.

In 1997, the RBI permitted banks to evolve their own norms for assessment of the
Working Capital requirements of their clients.

Cash flow based computation of Working Capital:

37 | P a g e
Cash flow is the most realistic means of assessing the operations of an enterprise.
Drawing up cash flow statements (monthly or quarterly) for the past few years
clearly indicate the seasonal and secular trend in utilization of working capital. The
projections drawn up by the entrepreneur may then be jointly discussed with the
banker as modified in light of the past performance and the banker’s opinions. The
peak cash deficit is ascertained from the cash budgets. The promoter’s share
(margin money) for such requirement maybe mutually arrived at by the banker and
the borrower with the balance requirement forming the Bank financed part of
Working Capital.

Cash flow based computation of working capital requirement has been

recommended by the RBI for assessment of working capital requirement
permitting the banks to evolve their own norms for such assessment. The reason
for this has been that Cash flow factors in the past trends, takes into account the
company specific factors and is based on mutual discussion between the banker
and the borrower thereby increasing its acceptability. Also, large companies have
adopted cash budgeting systems for managing their cash flows and hence such a
system does not impose additional requirements on the corporate.

Cash flow system is extremely relevant in case of the seasonal industries to assess
the peak credit requirement and in case of large companies (working capital
requirements above Rs. 10 crores). However the reluctance to provide the cash
budgets thereby revealing additional information to the banks, has led to even
larger companies shying away from Cash Budget method of assessing Working
Capital. Consequently Cash Budget method is currently prevalent mainly in case of
seasonal industries, construction sector as well as other entities whose operations
are linked to projects.

38 | P a g e
Bank financing based on cash budgets works well and is a good step form for
the system:

A big failure in the working capital system hitherto followed by our banks has
been that the Drawing Power (within the PBF limit) is based on post facto stock
statements and these are reset typically on a monthly basis. This means:

 The borrowing unit is putting its money upfront and the Drawing Power is a
form of reimbursement.
 Responsiveness to sudden surges in demand/ seasonality/ other short term
boom conditions is non-existent, putting a burden on the company to finance
this at exorbitant rates from private financiers.
 Finally, a growing company will always be playing “catch-up” and its
Permissible Bank Financing will be lagging its cash requirements by at least
one year.

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 CHAPTER 8

CASE STUDY

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CASE STUDY

FORM- I UB STAINLESS LIMITED (Formerly WEST COAST SAW PIPES LIMITED)

Facilities requested Rs. In Lacs

A. Term Loan 80.00

B. Working Capital Facilities
1. Fund Based Limits

- Cash Credit 500.00

- Packing Credit (150.00)
- Bill Discounting (300.00)

Fund Based Limits (Not to exceed) 500.00

2. Non Fund Based Limits
Bank Guarantee 100.00
Letter of Credit (Inland / Foreign) 300.00

Total Non Fund Based Limits (Not to exceed) 300.00

Interchangeability between fund based and non fund based limits, with total limits not to
exceed Rs. 800.00 lacs.

C. Total Limits (A + B) 880.00

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 Assessment of Working Capital Requirement

ASSESSMENT OF WORKING CAPITAL REQUIREMENT

FORM II : OPERATING STATEMENT

AMOUNT IN Rs: Lacs
NAME OF THE UNIT Estimates for the year ending 31st March
UB STAINLESS LTD. ACTUAL ACTUAL EST. PRO. PRO. PRO. PRO.
Current Next
Formerly WEST COAST SAW PIPES LTD. Audited Audited Yr Next Yr. Next Yr. Next Yr. Yr.

31-3-09 31-3-10 31-3-11 31-3-12 31-3-13 31-3-14 31-3-15

No. of months 12 12 12 12 12 12 12

1 GROSS SALES I II III IV V VI VII

i. Domestic sales 630.65 2554.27 4000 5000 5500 6050 6655
ii. Export sales 0 0 0 0 0 0 0
Other operating/rvenue income 126.56 5.15 5 0 0 0 0
Total 757.21 2559.42 4005 5000 5500 6050 6655
2 Less excise duty 65.44 198.32 412 515 566.5 623.15 685.47
3 Net sales ( item 1 - item 2 ) 691.77 2361.1 3593 4485 4933.5 5426.85 5969.53
4 % age rise (+) or fall (-) in net sales N/A 241.31% 52.17% 24.83% 10.00% 10.00% 10.00%
compared to previous year (annualised)
5 Cost of Sales
i.) Raw materials (including stores and other 516.95 2046.72 3000 3750 4125 4537.5 4991.25
items used in the process of manuf.)
(a) imported 0 0 400 500 550 605 665.5
(b) Indigenous 516.95 2046.72 2600 3250 3575 3932.5 4325.75
ii) Other Spares 27.84 51.08 70 87.5 96.25 105.88 116.46
(a) imported 0 0 0 0 0 0 0
(b) Indigenous 27.84 51.08 70 87.5 96.25 105.88 116.46
iii) Power and Fuel 20.6 30.64 40 50 55 60.5 66.55
iv) Direct labour 16.22 44.31 70 87.5 96.25 105.88 116.46
(Factory wages & salary)
v) Other mfg. Expenses 4.78 3.13 5 6 7 8 9
vi) Depreciation 26.92 54.11 60 65 70 80 90
vii) SUB TOTAL (I TO VI) 613.31 2229.99 3245 4046 4449.5 4897.76 5389.72
viii) ADD: Opening stocks-in-process 2.3 76.43 286.06 352 400 442 484
Sub-total 615.61 2306.42 3531.06 4398 4849.5 5339.76 5873.72
ix) Deduct : Closing stocks-in- process 76.43 286.06 352 400 442 484 532
x) Cost of Production 539.18 2020.36 3179.06 3998 4407.5 4855.76 5341.72
xi) Add : Opening stock of finished goods 0 0 0 0 0 0 0
SUB-TOTAL 539.18 2020.36 3179.06 3998 4407.5 4855.76 5341.72

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 xii) Deduct closing stock of finished goods 0 0 0 0 0 0 0
xiii) SUB-TOTAL (Total cost of sales) 539.18 2020.36 3179.06 3998 4407.5 4855.76 5341.72
6 Selling, general & administration exp. 71.65 178.06 185 194 204 214 225
7 Sub total (5+6) 610.83 2198.42 3364.06 4192 4611.5 5069.76 5566.72
8 Operating profit before interest (3-6) 80.94 162.68 228.94 293 322 357.09 402.81
9 Interest 11.51 10.24 35 76 77 74 71
10 Operating profit after interest (8-9) 69.43 152.44 193.94 217 245 283.09 331.81
11 (i) Add other non-operating income
(a) Interest received 7.69 18.89 8 8 10 10 11.2
(b) Commission 0 0 0 0 0 0 0
( c) Balances written back 0.22 8.97 0 0 0 0 0
(d) Others 0.43 6.69 0 0 0 0 0
Sub-total ( income ) 8.34 34.55 8 8 10 10 11.2
(ii) Deduct other non-operating expenses
(a) Preliminary Expenses 0 0 0 0 0 0 0
(b) Deffered Tax Provision 58.52 54.4 0 0 0 0 0
( c) Fringe benefit tax 0.83 0 0 0 0 0 0
(d) Exchange fluctuations 0 0 0 0 0 0 0
Sub-total ( expenses ) 59.35 54.4 0 0 0 0 0
(iii) Net of other non-operating income/exp -51.01 -19.85 8 8 10 10 11.2
12 Profit before tax/loss[10+11(iii)] 18.42 132.59 201.94 225 255 293.09 343.01
13 Provision for taxes 0 0 0 0 78.8 90.56 105.99
14 Net profit/loss ( 12-13 ) 18.42 132.59 201.94 225 176.2 202.53 237.02
15 (a) Equity dividend paid (paid+BS Prov)
(b) Dividend Rate
c) Transfer to General Reserve
d) Deffered Tax Liability
16 Retained profit ( 14-15 ) 18.42 132.59 201.94 225 176.2 202.53 237.02
17 Retained profit/Net profit (% age) 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

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 FORM III - ANALYSIS OF BALANCE SHEET
LIABILITIES
Name: UB STAINLESS LIMITED (Formerly WEST COAST SAW PIPES LIMITED)

Amounts in Rs. Lacs

ACTUAL ACTUAL EST. PRO. PRO. PRO. PRO. PRO.

Current
CURRENT LIABILITIES Audited Audited Yr Next Yr. Next Yr. Next Yr. Next Yr. Next Yr.

Year 31-3-09 31-3-10 31-3-11 31-3-12 31-3-13 31-3-14 31-3-15 31-3-16

No. of months 12 12 12 12 12 12 12 12
1 Short-term borrowings from banks
(including bills purchased, discounted
& excess borrowing on repayment basis
(I) From applicant banks 0 0 500 500 550 550 550 550
(ii) From other banks 0 0 0 0 0 0 0 0
(iii) Of which BP & BD 0 0 0 0 0 0 0 0
SUB TOTAL 0 0 500 500 550 550 550 550
2 Short term borrowings from others 0 0 0 0 0 0 0 0
3 Sundry Creditors (Trade) 413.02 955.1 380 479 521 573 630 693
4 Advance payments from customers
/deposits from dealers 76.31 22.06 20 30 30 30 30 30
5 Provision for taxes 28.5 59.1 60 60 60 60 60 60
6 Dividend payable 0 0 0 0 0 0 0 0
7 Other statutory liabilities 0 0 0 0 0 0 0 0
(due within one year)
8 Deposits/instalments of term loans/
DPGs/Debentures(over-due within 1 year) 0 0 30.4 30.1 31.5 20.52 16.16 0
9 Other current liabilities & provisions
(due within 1 Yr) Specify major items 178.69 172.22 173.42 173.42 183.42 183.42 183.42 80

SUB-TOTAL (B) 696.52 1208.48 663.82 772.52 825.92 866.94 919.58 863
10 TOTAL CURRENT LIABILITIES (1to9) 696.52 1208.48 1163.82 1272.52 1375.92 1416.94 1469.58 1413

TERM LIABILITIES

11 Debentures (not maturing within 1 year) 0 0 0 0 0 0 0 0

12 Preference shares 0 0 0 0 0 0 0 0
(redeemable after one year)
13 Term loans 8.75 44.7 98.28 68.18 36.68 16.16 0 0

14 Deferred Payment Credits 0 0 0 0 0 0 0 0

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 15 Unsecured Loan 0 0 0 0 0 0 0 0
16 Other term liabilities 0 0 70 70 70 70 70 70
17 TOTAL TERM LIABILITIES (11 to 16) 8.75 44.7 168.28 138.18 106.68 86.16 70 70
18 TOTAL OUTSIDE LIABILITIES (10+17) 705.27 1253.18 1332.1 1410.7 1482.6 1503.1 1539.58 1483

NET WORTH
19 Equity share capital 365 365 365 365 365 365 365 365
20 Prefrence share capital 0 0 0 0 0 0 0 0
21 Share premium 170 170 170 170 170 170 170 170
22 Other reserve (excluding provisions) 83.41 83.41 83.41 83.41 83.41 83.41 83.41 83.41
23 Surplus (+) or deficit (-) in
Profit & Loss Account -122.36 10.23 212.17 437.17 613.37 815.9 1052.92 1327.72
23a Others (specify)
Deferred Tax Liability -0.78 53.62 53.62 53.62 53.62 53.62 53.62 53.62

24 NET WORTH 495.27 682.26 884.2 1109.2 1285.4 1487.93 1724.95 1999.75
25 TOTAL LIABILITIES (18+24) 1200.54 1935.44 2216.3 2519.9 2768 2991.03 3264.53 3482.75

ANALYSIS OF BALANCESHEET

Name: UB STAINLESS LIMITED

Formerly WEST COAST SAW PIPES LTD.
Amount in
Rs. Lacs
ASSETS ACTUAL ACTUAL EST. PRO. PRO. PRO. PRO. PRO.
Current
Audited Audited Yr Next Yr. Next Yr. Next Yr. Next Yr. Next Yr.
Year 31-3-09 31-3-10 31-3-11 31-3-12 31-3-13 31-3-14 31-3-15 31-3-16
No. of months 12 12 12 12 12 12 12 12
26 Cash and bank balances 60.01 17.65 5.79 14.73 20.74 23.23 52.33 79.32
27 Investment (other than long term Investmt
(I) Government & other Trustee securities 0 0 0 0 0 0 0 0
(ii) Fixed Deposits with Banks 30.66 1.9 100 100 125 125 140 150

28 (I) Receivables other than deferred &

exports (include bills purchased and
Discounted by banks 143.05 521.06 666.67 833.33 916.67 1008.33 1109.17 1220.08
(ii) Export receivables(include bills
purchased & discounted by banks 0 0 0 0 0 0 0 0

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29 Installments of deferred
Receivables (overdue within one yr.)
30 Inventory: 193.13 582.08 690 823 906.75 995.63 1094.19 1204.51
(I) Raw materials(including stores & other
items used in the process of
manufacturing 112.37 290.62 328 410.5 450.75 496.63 546.19 600.51
(a) Imported 0 0 50 62.5 68.75 75.63 83.19 91.51
(b) Indigenous 112.37 290.62 278 348 382 421 463 509
(ii) Stock-In-Process 76.43 286.06 352 400 442 484 532 586
(iii) Finished goods 0 0 0 0 0 0 0 0
(iv) Other Consumable Spares 4.33 5.4 10 12.5 14 15 16 18
(a) Imported 0 0 0 0 0 0 0 0
(b) Indigenous) 4.33 5.4 10 12.5 14 15 16 18
31 Advance Recoverable in cash or in kind 0 0 0 60 60 60 60 60
32 Advance payment of taxes 74.25 107.89 80 60 60 60 60 60
33 Other Current assets Specify major items 225.19 159.45 73.75 63.75 63.75 103.75 63.75 63.75
(a.) Advance recoverable 221.44 155.7 70 60 60 60 60 60
(b.) Deposits 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75
(c.) 0 0 0 0 0 40 0 0
(d.) 0 0 0 0 0 0 0 0

34 TOTAL CURRENT ASSETS (26 to 33) 726.29 1390.03 1616.21 1954.81 2152.91 2375.94 2579.44 2837.66

FIXED ASSETS
35 Gross Block (Land & Building
machinery, work-in-process) 717.57 823.82 940 975 1095 1175 1335 1395
36 Depreciation to date 245.8 299.91 359.91 424.91 494.91 574.91 664.91 764.91
37 NET BLOCK 471.77 523.91 580.09 550.09 600.09 600.09 670.09 630.09
OTHER NON-CURRENT ASSETS
38 Investment/book debts/advances/
deposits which are not current assets 2.48 21.5 20 15 15 15 15 15
(I) a) Investment in subsidiary Co/ Asso. 0 0 0 0 0 0 0 0
b) Others 0 0 0 0 0 0 0 0
(ii) Advances to supplier of capital goods/cont.
(iii) Deferred receivables (maturity> 1 year
(iv) Others (Receivables over six months) 2.48 21.5 20 15 15 15 15 15

39 Non-consumables stores & spares

40 Other non-current assets including dues
from Directors
41 TOTAL OTHER NON-CURR. ASSETS 2.48 21.5 20 15 15 15 15 15
42 Intangible assets (patents, goodwill, prelim
expenses, bad/ doubtful exp not provided
etc 0 0 0 0 0 0 0 0
43 TOTAL ASSETS(34+37+41+42) 1200.54 1935.44 2216.3 2519.9 2768 2991.03 3264.53 3482.75
44 TNW (24-42) 495.27 682.26 884.2 1109.2 1285.4 1487.93 1724.95 1999.75

NET WORKING CAPITAL

45 (17+24)-(37+41+42) tally with 34-10 29.77 181.55 452.39 682.29 776.99 959 1109.86 1424.66
46 CURRENT RATIO (34/10) 1.04 1.15 1.39 1.54 1.56 1.68 1.76 2.01
47 TOL/TNW (18/44) 1.42 1.84 1.51 1.27 1.15 1.01 0.89 0.74
Total term liabilities/tangible net
48 worth(17/44) 0.02 0.07 0.19 0.12 0.08 0.06 0.04 0.04

46 | P a g e
 FORM
IV

COMPARATIVE STATEMENT OF CURRENTS ASSETS AND CURRENT LIABILITIES

Name: UB STAINLESS LIMITED ( formerly WEST COAST SAW PIPES LIMITED)

Amounts in Rs. Lacs

ACTUAL EST. PRO. PRO. PRO. PRO. PRO.
Current
Audited Yr Next Yr. Next Yr. Next Yr. Next Yr. Next Yr.
Year 31-3-10 31-3-11 31-3-12 31-3-13 31-3-14 31-3-15 31-3-16
No. of months 12 12 12 12 12 12 12
A. CURRENT ASSETS 17.65 5.79 14.73 20.74 23.23 52.33 79.32
Cash and bank b alances
Investment (other than long term Investmt 0 0 0 0 0 0 0
Government & other Trustee securities 1.9 100 100 125 125 140 150
Fixed Deposits with Banks

Receivables other than deferred &

exports (include bills purchased and 521.06 666.67 833.33 916.67 1008.33 1109.17 1220.08
Discounted by banks
Export receivables(include bills 0 0 0 0 0 0 0
purchased & discounted by banks
Installments of deferred
receivables (overdue within one yr.) 582.08 690 823 906.75 995.63 1094.19 1204.51
Inventory:
Raw materials(including stores & other 290.62 328 410.5 450.75 496.63 546.19 600.51
items used in the process of manufacturing 0 50 62.5 68.75 75.63 83.19 91.51
(a) Imported 290.62 278 348 382 421 463 509
(b) Indigenous 286.06 352 400 442 484 532 586
Stock-In-Process 0 0 0 0 0 0 0
Finished goods 5.4 10 12.5 14 15 16 18
Other Consumable Spares 0 0 0 0 0 0 0
(a) Imported 5.4 10 12.5 14 15 16 18
(b) Indigenous) 0 0 60 60 60 60 60
Advance Recoverable in cash or in kind 107.89 80 60 60 60 60 60
Advance payment of taxes 159.45 73.75 63.75 63.75 103.75 63.75 63.75
Other Current assets Specify major items 155.7 70 60 60 60 60 60
(a.) Advance recoverable 3.75 3.75 3.75 3.75 3.75 3.75 3.75
(b.) Deposits 0 0 0 0 40 0 0
(c.) 0 0 0 0 0 0 0

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 (d.)
TOTAL CURRENT ASSETS 1390.03 1616.21 1954.81 2152.91 2375.94 2579.44 2837.66

Amount in Rs. Lacs

ACTUAL EST. PRO. PRO. PRO. PRO. PRO.
Current
B. CURRENT LIABILITIES Audited Yr Next Yr. Next Yr. Next Yr. Next Yr. Next Yr.
Year 31-3-10 31-3-11 31-3-12 31-3-13 31-3-14 31-3-15 31-3-16
No. of months 12 12 12 12 12 12 12
Short-term borrowings from banks
(including bills purchased, discounted
& excess borrowing on repayment basis
From applicant banks 0 500 500 550 550 550 550
From other banks 0 0 0 0 0 0 0
Of which BP & BD 0 0 0 0 0 0 0
SUB TOTAL 0 500 500 550 550 550 550
Short term borrowings from others 0 0 0 0 0 0 0
Sundry Creditors (Trade) 955.1 380 479 521 573 630 693
Advance payments from customers
/deposits from dealers 22.06 20 30 30 30 30 30
Provision for taxes 59.1 60 60 60 60 60 60
Dividend payable 0 0 0 0 0 0 0
Other statutory liabilities 0 0 0 0 0 0 0
(due within one year)
Deposits/instalments of term loans/
DPGs/Debentures(over-due within 1 year) 0 30.4 30.1 31.5 20.52 16.16 0
Other current liabilities & provisions
(due within 1 Yr) Specify major items 172.22 173.42 173.42 183.42 183.42 183.42 80

TOTAL CURRENT LIABILITIES 1208.48 663.82 772.52 825.92 866.94 919.58 863

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 FORM V

COMPUTATION OF MAXIMUM PERMISSIBLE BANK FINANCE FOR WORKING CAPITAL

Name: UB STAINLESS LIMITED (formerly WEST COAST SAW PIPES LIMITED)

FIRST METHOD OF LENDING ACTUAL ACTUAL EST. PRO. PRO. PRO. PRO. PRO.
FIRST METHOD OF LENDING Audited Audited Current Yr Next Yr. Next Yr. Next Yr. Next Yr. Next Yr.
Year 31-Mar-09 31-Mar-10 31-Mar-11 31-Mar-12 31-Mar-13 31-Mar-14 31-Mar-15 31-Mar-16
1.Total current assets 726.29 1390.03 1616.21 1954.81 2152.91 2375.94 2579.44 2837.66
2.Other current liabilities 696.52 1208.48 663.82 772.52 825.92 866.94 919.58 863.00
3.Working capital gap(1-2) 29.77 181.55 952.39 1182.29 1326.99 1509.00 1659.86 1974.66
4.Min. stipulated net working capital 7.44 45.39 238.10 295.57 331.75 377.25 414.97 493.67
(25% of WCG excluding export rec.)
5.Actual/projected NWC 29.77 181.55 452.39 682.29 776.99 959.00 1109.86 1424.66
6.Item-3 minus Item-4 22.33 136.16 714.29 886.72 995.24 1131.75 1244.89 1480.99
7.Item- 3 minus Item-5 0.00 0.00 500.00 500.00 550.00 550.00 550.00 550.00
8.MPBF (item 10 or 11 whichever is lower) 0.00 0.00 500.00 500.00 550.00 550.00 550.00 550.00
9.Excess borrowing repres
enting shortfall of NWC(4-5)

SECOND METHOD OF LENDING

1.Total Current Assets 726.29 1390.03 1616.21 1954.81 2152.91 2375.94 2579.44 2837.66
2.OCL(other than bank borrowing) 696.52 1208.48 663.82 772.52 825.92 866.94 919.58 863.00
3.Working Capital Gap(1-2 29.77 181.55 952.39 1182.29 1326.99 1509.00 1659.86 1974.66
4.Min. stipulated net working capital 181.57 347.51 404.05 488.70 538.23 593.99 644.86 709.42
(25% of TCA excluding export rec.)
5.Actual/projected NWC 29.77 181.55 452.39 682.29 776.99 959.00 1109.86 1424.66
6.Item-3 minus Item-4 -151.80 -165.96 548.34 693.59 788.76 915.01 1015.00 1265.24
7.Item- 3 minus Item-5 0.00 0.00 500.00 500.00 550.00 550.00 550.00 550.00
8.MPBF (item 10 or 11 whichever is lower) -151.80 -165.96 500.00 500.00 550.00 550.00 550.00 550.00
9.Excess borrowing repres -151.80 -165.96
enting shortfall of NWC(4-5)

Thus the Maximum Permissible Bank Finance (MPBF) for the year 2010-11 and 2011-12 is
Rs. 500 Lacs.

49 | P a g e
 CHAPTER 9
CONCLUSIONS
&
RECOMMENDATIONS

50 | P a g e
CONCLUSIONS & RECOMMENDATIONS

After studying and evaluating the various aspects of the credit decisions taken up
by Punjab National Bank through the interviews with manager and the bank’s
circulars, it is clear that the bank is following a sound process.

The study presents an example of a project related to manufacturing industry. It

was found that the bank relies mainly on its internal credit rating, DSCR & Debt –
equity ratio to appraise the project financially. But most of the banks have started
checking the Internal Rate of Return of the project before doing its pricing. So, to
be in accordance with the banking industry PNB should also modify its appraisal
process to include the same.

After analyzing the process, I have realized that most of the delay in the process is
due to the delay in collection of documents from the customer end. Therefore
initially at the point of contact with the customers, there should be a checklist form
provided to the customers for the various loans that the customers have applied for.
And the customer should be aware of all the papers that would be required for the
project appraisal.

For example : If any SME organization is applying for the Working Capital
enhancement or renewal or for the term loan, then the financial of the company i.e.
Audited CMA data for the last 3 years, Provisional documents upto the last quarter,
Projected data should be submitted.
If the company is applying for the loan over the Collateral Security then some
documents like Copy of the Title deed, NEC ( Non-Encumbrance Certificate),
Certified copy of the TITLE DEED, Valuation report should be submitted by the
customers issued by Bank approved Valuer or Advocate.

51 | P a g e
BIBLIOGRAPHY

Books Referred:

 Accountancy. R.K. Mittal,A.K.Jain.

 Working Capital Finance Chapter – 5 by Seidman

 Working Capital Finance by Banks and its Regulations by Reema Srivastava

Internet websites:

 Www.PNB.Com

 Www.Moneycontrol.Com

 Www.Wikipedia.Org

 Www.Google.Com

 Www.Scribd.Com

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