A Project Report on

“WORKING CAPITAL MANAGEMENT”

A case study of J&K Bank

IN THE FULLFILLMENT OF THE REQUIREMENT FOR THE AWARD OF

BACHELORS IN BUSINESS ADMINISTRATION

SUPERVISED BY:

Mr. Shahnawaz Taploo

Relationship Executive
J&K BANK B/U LAL BAZAR

GUIDED BY:

Mr. PEERZADA NAYEEM

Lecturer at Greenland Business School
SUBMITTED TO:
GREENLAND BUSINESS SCHOOL

SUBMITTED BY:
Mr. ZEESHAN YASIEN
Mr. TAWHEED BASHIR
BBA 4TH semester
Human Resource Development
Corporate Headquarters
Dalgate, Srinagar

This is to certify that Mr. Zeeshan Yasien, S/O Mohd

Yasien Sheikh, and Mr. Tawheed Bashir S/O Bashir
Ahmad Tantray of BBA 4th Semester, Greenland
Business School , have completed their project on the
topic “Working Capital Management – A case study
of J&K Bank” under the supervision of undersigned.

During their training they proved to be effective and

sincere students and I wish them all the best in their
future Endeavour.

Mr. Shahnawaz Taploo

Relationship Executive
J&K Bank
B/U:- Lal Bazar
 ACKNOWLEDGEMENT
All praise is due to Almighty Allah without whose grace we could
not accomplish this project work.

Our sincere gratitude to J&K Bank, an esteemed organization for

acknowledging us to complete the project work recognizing our
academic performance.

Our sincere thankfulness goes to Mr. Shahnawaz Taploo

Relationship Executive J&K Bank under whose knowledgeable
patronization we completed our project work.

Our sincere gratitude to the Greenland College of Education and

Department of Business, in particular, for providing guidance,
suggestions and better placement in the developed corporate
world.

Finally we thank our parents, and other family members who

always stood by our side and provided us moral and financial
support to take advantage of the golden opportunity in the present
competitive and advanced corporate world.
 TABLE OF CONTENTS

S.NO. TITLE PAGE NO.

1 INDUSTRY PROFILE 5-17
Historical phases of Banking in India
Banking sector reforms
Broad classification of Banks in India
Role & Functions of Banks
2 J&K BANK PROFILE 18-27
Bank Profile
J&K Bank SWOT analysis
Summary of Financials
Shareholding Pattern
3 WORKING CAPITAL 28-53
Meaning and concept
Classification of working capital
Methods of estimating working capital requirement
Working capital finance by commercial banks
Working capital analysis
4 WORKING CAPITAL MANAGEMENT 54-79
Sources, Inventory limits
Information required for assessment of working capital
Methods of assessment
5C Model of J&K Bank LTD
Ratio analysis
Steps in Working Capital assessment
5 CASE STUDIES 80-94
6 CONCLUSION 95
7 BIBLIOGRAPHY 96
 CHAPTER 1: INDUSTRY PROFILE
Bank is a financial institution and a financial intermediary that accepts deposits and
channels those deposits into lending activities, either directly by loaning or indirectly
through capital markets. A bank is the connection between customers that have capital
deficits and customers with capital surpluses.

Commercial role of banks:

The commercial role of banks is not limited to banking, and includes:

 issue of bank notes (promissory notes issued by a banker and payable to bearer
on demand)
 processing of payments by way of telegraphic transfer, EFTPOS, internet
banking or other means
 issuing bank drafts and bank cheques
 accepting money on term deposit
 lending money by way of overdraft, installment loan or otherwise
 providing documentary and standby letters of credit (trade finance), guarantees,
performance bonds, securities underwriting commitments and other forms of off-
balance sheet exposures
 safekeeping of documents and other items in safe deposit boxes

Economic functions of banks

The economic functions of banks include:

1. Issue of money, in the form of banknotes and current accounts subject to cheque
or payment at the customer's order. These claims on banks can act as money
because they are negotiable and/or repayable on demand, and hence valued at
par. They are effectively transferable by mere delivery, in the case of banknotes,
or by drawing a cheque that the payee may bank or cash.
2. Netting and settlement of payments – banks act as both collection and paying
agents for customers, participating in interbank clearing and settlement systems
to collect, present, be presented with, and pay payment instruments. This
enables banks to economize on reserves held for settlement of payments, since
inward and outward payments offset each other. It also enables the offsetting of
payment flows between geographical areas, reducing the cost of settlement
between them.
3. Credit Creation-The creation of credit or deposits is one of the most vital
operations of the commercial bank. Credit creation is the multiple expansions of
banks demand deposits. Banks advance a major portion of their deposits to the
borrowers and keep smaller parts of deposits to the customers on demand. As
the customers of the banks have full confidence that the amount (deposit) lying in
the banks is quite safe and can be withdrawn on demand. The banks utilize this
trust of their clients and expand loans by much more time than the amount of
demand deposits possessed by them. This tendency on the part of the
commercial banks to expand their demand deposits as a multiple of their excess
cash reserve is called creation of credit.
4. Credit intermediation – Banks borrow from one individual or institution and lend
back to other individuals and institutions there by act as credit Intermediary
(middle men).
5. Credit quality improvement – banks lend money to ordinary commercial and
personal borrowers (ordinary credit quality), but are high quality borrowers. The
improvement comes from diversification of the bank's assets and capital which
provides a buffer to absorb losses without defaulting on its obligations. However,
banknotes and deposits are generally unsecured; if the bank gets into difficulty
and pledges assets as security, to rise the funding it needs to continue to
operate, this puts the note holders and depositors in an economically
subordinated position
6. Promoting capital formation- A developing economy needs a high rate of capital
formation to accelerate the economic development, but the rate of capital
formation depends upon the rate of saving. Unfortunately, in underdeveloped
countries, saving is very low. But banks encourage savings in the
underdeveloped countries by providing very attractive services. Banks also
mobilize the idle capital of the country and make it available for productive
purposes.
7. Maturity transformation – banks borrow more on demand debt and short term
debt, but provide more long term loans. In other words, they borrow short and
lend long. With a stronger credit quality than most other borrowers, banks can do
this by aggregating issues (e.g. accepting deposits and issuing banknotes) and
redemptions (e.g. withdrawals and redemptions of banknotes), maintaining
reserves of cash, investing in marketable securities that can be readily converted
to cash if needed, and raising replacement funding as needed from various
sources (e.g. wholesale cash markets and securities markets).
HISTORICAL PHASES OF BANKING IN INDIA

There are three different phases of banking in India

1) Pre-Nationalization Era.
2) Nationalization Era.
3) Post Liberalization Era.

1. Pre-Nationalization Era

During the early part of the 19th century, volume of foreign trade was relatively small.
Later as the trade expanded, the need for banks of the European type was felt and the
government of the East India Company took interest in having its own bank.

The government of Bengal took the initiative and the first and the first presidency bank,
the Bank of Calcutta (Bank of Bengal) was established in 1800, in 1840, the Bank of
Bombay and in 1843, the Bank of Madras was also set up.

These three banks were also known as “Presidency Bank”. The

presidency bans had their branches in important trading centres but mostly lacked in
uniformity in their operational policies. In 1899, the Government proposed to
amalgamate these three banks in to one so that it could also function as a central bank,
but the presidency Banks did not favour the idea. However, the conditions prevailing
during world war period (1914-1918) emphasized need for a unified banking institution,
as a result of which the Imperial Bank was set up in 1921.

The RBI (Reserve Bank of India) was established in 1935 as the central
bank of the country. In 1949, the Banking Regulation act passed and the RBI was
nationalised and acquired extensive regulatory powers over the commercial banks.

2. Nationalization stages

After independence in 1951, the All India Rural Credit Survey committee under Shri A.
D. Gorwala as chairman recommended amalgamation of the Imperial Bank of India and
ten others banks into a newly established bank called the State Bank of India (SBI). The
government of India accepted the recommendations of the committee.

The main objective of establishing SBI by nationalizing the Imperial Bank

of India was “to extend banking facilities on a large scale more particularly in the rural
and semi-urban areas and to diverse other public purposes.

,
 On 19th July 1969, then the Prime Minister, Mrs. Indira Gandhi announced
the nationalization of 14 major scheduled Commercial Banks each having deposits
worth Rs. 50 crore and above. This was a turning point in the history of commercial
banking in India. Later the Government Nationalized six more commercial private sector
banks, with deposit liability of not less than Rs. 200 crores on 15th April 1980.

Consequences of Nationalization

 The quality of credit assets fell because of liberal credit extension policy.
 Political interference has been as additional malady.
 Poor appraisal involved during the loan Disbursement conducted for credit
disbursals.
 The credit facilities extended to the priority sector at concessional rates.
 The high level of low yielding SLR investments adversely affected the
profitability of the banks.
 The rapid branch expansion has been the squeeze on the profitability of
banks emanating primarily due to the increase in the fixed costs.
 There was downward trend in the quality of services and efficiency of the
banks.

3. Post-Liberalization Era--- Thrust on Quality and Profitability

By the beginning of 1990, the social banking goals set for the banking industry made
most of the public sector resulted in the presumption that there was no need to look
at the fundamental financial strength of this bank. Consequently they remained
undercapitalized. Revamping this structure of the banking industry was of extreme
importance, as the health of the financial sector in particular and the economy as a
whole would be reflected by its performance.

The root causes for the lacklustre performance of banks, formed the
elements of the banking sector reforms. Some of the factors that led to the dismissal
performance of banks were.

 Regulated interest rate structure.

 Lack of focus on profitability.
 Lack of transparency in the bank’s balance sheet.
 Lack of competition.
 Excessive regulation on organization structure and managerial resource.
 Excessive support from government.
 Against this background, the financial sector reforms were initiated to bring about
a paradigm shift in the banking industry, by addressing the factors for its
dismissal performance. In this context, the recommendations made by a high
level committee on financial sector, chaired by M. Narasimham, laid the
foundation for the banking sector reforms. These reforms tried to enhance the
viability and efficiency of the banking sector. The Narasimham committee
suggested that there should be functional autonomy, flexibility in operations,
dilution of banking strangulations, reduction in reserve requirements and
adequate financial infrastructure in terms of supervision, audit and technology.

Recent Changes in Banking Sector:

Five associates and the Bharatiya Mahila Bank became part of the State Bank of
India (SBI) , catapulting the country’s largest lender to among the top 50 banks in the
world.

State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank
of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT),
besides Bharatiya Mahila Bank (BMB), merged with SBI.

With this six-way mega merger, SBI has again displayed its ability to change and
evolve in order to continue as the country champion among banks in India and to create
enduring value. The combined entity will enhance the productivity, mitigate geographical
risks, increase operational efficiency and drive synergies across multiple dimensions
while ensuring increased levels of customer delight

BANKING SECTOR REFORMS

The banking sector reforms in the 1990s in India were based on the report of the
committee headed by Mr M. Narasimham in 1991. Major recommendations of the
committee were given in 1991, known as The Narasimham Committee I
recommendations.
In April 1998, the Committee in its second report on banking sector reforms, also
known as Narasimham Committee II, made a series of sweeping recommendations.
The report covers an entire gamut of issues ranging from bank mergers and the
creation of globalized banks to bank closures, recasting bank boards and revamping
banking legislations
The Narasimham Committee I
The Major Recommendations of this committee as under:
 There should be no bar to new banks being set up in the private sector, provided
they have the start up capital and other requirements prescribed by the Reserve
Bank of India.
 The government should indicate that there would be no further nationalization of
banks and there should not be difference in treatment between public sector
banks and private sector banks.
 The banking system should evolve towards a broad pattern consisting of three or
four large banks, including the State Bank of India which could become
international in character; eight to ten national banks with a network of branches
throughout the country engaged in universal banking; local banks whose
operations would be generally confined to a specified region and lastly, rural
banks to cater to rural areas.
 There should be an assets reconstruction fund (ARF) which could take over from
the banks and financial institutions a portion of their bad and doubtful debts at a
discount, the level of discount being determined by independent auditors on the
basis of clearly defined guidelines. The ARF, according to the committee, should
be provided with special powers for recovery, somewhat broader than those
contained in Sections 29-32 of the State Financial Corporation Act, 1951. The
capital of the ARF should be subscribed to by the public sector banks and the
financial institutions.
 The banks and the financial institutions should be authorized to recover bad
debts through the special tribunals and based on the valuation given in respect of
each asset by a panel of at least two independent auditors.
 The public sector banks with profitable operations should be allowed to tap the
capital market for enhancement of their share capital. Subscribers to such issues
could be mutual funds, profitable public sector undertakings (PSUs) and the
employees of the institutions besides the general public.
 Branch licensing should be abolished and the option of opening branches or
closing of branches other than rural branches should be left to the commercial
judgment of the individual banks. Further, the internal organization of banks is
best left to the judgment of the management of the individual banks.
 There should be phased reduction of the CRR and the SLR.
 Banks should adhere to prescribed capital adequacy ratio
(CAR) and should attain a CAR of 8 per cent by 1998.
 A board for financial supervision should be set up to oversee the operations of
the banks.
 Banks should conform to prudential income recognition norms of provisioning
against bad and doubtful debts and ensure transparency in maintaining balance
sheets.
 There should be speedy computerisation of the banking industry.
 According to the committee, foreign banks should be subjected to the same
requirements as are applicable to Indian banks and allowing the foreign banks to open
branches or subsidiaries. Joint ventures between foreign banks and Indian banks
should also be permitted particularly in regard to merchant banking, investment
banking, leasing and other newer forms of financial services. Priority sector lending by
banks should be reduced from 40 per cent to 10 per cent of their total credit.
The committee recommended phasing out concessional interest rates. The
committee was of the view that the present structure of administered interest rates was
highly complex and rigid and proposed that interest rates be further deregulated so as
to reflect emerging market conditions. Premature moves to market-determined interest
rates could, as experience abroad has shown, pose the danger of excessive bank
lending at highly nominal rates to borrowers of dubious credit worthiness, the committee
observed.
Most of the recommendations of the committee have since been implemented.
Meanwhile, keeping in view the changing global scenario after the setting up of the
1.1670 and the need for more efficient, competitive and broad-based banking sector,
the government has set up another committee, once again headed by Mr Narasimhan.

The Narasimham Committee II

The major recommendations of this committee were as follows:
 Concept of 'narrow banking' should be tried out to rehabilitate weak banks. If this
was not successful, the issue of closure should be examined. Narrow banking,
according to the committee, implies that weak banks should not be permitted to
invest their funds anywhere except in government securities as these were
absolutely sale and risk-free.
 Two or three large Indian banks should be given an international character.
 Small local banks should he confined to states or a cluster of districts in order
to serve local trade, small industry and agriculture.
 The committee has also commented on the government's role in public sector
banks by observing that government ownership has become an instrument of
management. Such micromanagement of banks is not conducive to the
enhancement of autonomy and flexibility.
 Functions of boards and management need to be reviewed so that the boards
remain responsible for enhancing shareholder value through formulation of
corporate strategy.
 There is a need to review minimum prescriptions for capital adequacy In this
regard. The committee recommended that minimum CAR be raised to 10
 percent by 2002. Most of the banks have a CAR of 11 per cent or higher.
 The committee also felt a need to lay down prudential and disclosure norms
and sound procedures for the purpose of supervision and regulation.
 There should be an integration of NBFC's lending activities into the financial
system.
 There is a need for public sector banks to speed up computerization and focus
on relationship banking.
 A review of recruitment procedures, training and remuneration policies in public
sector banks should be carried out.
 Threat of action by vigilance and other investigative authorities, even in the
case of commercial decisions creates low morale. The committee
recommended that this issue be addressed in right earnest.
 Need for professionalizing and depoliticizing of bank boards.
 The Banking Service Recruitment Boards should be abolished.

Broad classification of Banks in India

In India banks are classified in various categories using different criteria. Following is
one of most used classification of Indian Banking Industry.
1) The Reserve Bank of India (RBI)

At the Apex level of Indian banking Industry is the Reserve Bank of India
(RBI). Reserve Bank of India is India's central banking institution, which
controls the monetary policy of the country. It was established on 1 April 1935
during the British Raj in accordance with the provisions of the Reserve Bank
of India Act, 1934. It was inaugurated with share capital of Rs. 5 Crores
divided into shares of Rs. 100 each fully paid up.
The RBI plays an important part in the Economic development strategy of
the Government of India. It is a member bank of the Asian Clearing Union.
The general superintendence and direction of the RBI is entrusted with the
21-member-strong Central Board of Directors—the Governor (currently Urjit
Patel), four Deputy Governors, two Finance Ministry representative, ten
government-nominated directors to represent important elements from India's
economy, and four directors to represent local boards headquartered at
Mumbai, Kolkata, Chennai and New Delhi.

Role and Functions of RBI

 Under Section 22 of the Reserve Bank of India Act, the Bank has the
sole right to issue bank notes of all denominations. The distribution of
one rupee notes and coins and small coins all over the country is
undertaken by the Reserve Bank as agent of the Government.
 The second important function of the Reserve Bank of India is to act as
Government banker, agent and adviser.
 The Reserve Bank of India acts as the bankers’ bank. The scheduled
banks can borrow from the Reserve Bank of India on the basis of
eligible securities or get financial accommodation in times of need or
stringency by re discounting bills of exchange. In this capacity, Bank is
also known as lender of last Resort.
 Controller of Credit- As the central bank of the country, the Reserve
Bank undertakes the responsibility of controlling credit in order to
ensure internal price stability and promote economic growth. Through
this function, the Reserve Bank attempts to achieve price stability in
the country and avoids inflationary and deflationary tendencies in the
country.
 The Reserve Bank of India has the responsibility to maintain the official
rate of exchange.
 The RBI plays an important part in the economic development strategy
of the Government of India. It is a member bank of the Asian Clearing
Union.
 Custodian of Exchange Reserves- The Reserve Bank is the custodian
of India's foreign exchange reserves. It maintains and stabilises the
 external value of the rupee, administers exchange controls and other
restrictions imposed by the government, and manages the foreign
exchange reserves. Money supply

 Promotional and Developmental Functions- Besides the traditional

central banking functions, the Reserve Bank also performs a variety of
promotional and developmental functions:

o By encouraging the commercial banks to expand their branches

in the semi-urban and rural areas, the Reserve Bank helps to
reduce the dependence of the people in these areas on the
defective unorganised sector of indigenous bankers and money
lenders, and to develop the banking habits of the people.
o By establishing the Deposit Insurance Corporation, the Reserve
Bank helps to develop the banking system of the country,
enhances confidence of the depositors and avoids bank failures.
o Through the institutions like Unit Trust of India, the (Reserve
Bank helps to mobilise savings in the country.
o Since its inception, the Reserve Bank has been making efforts
to promote institutional agricultural credit by developing
cooperative credit institutions.
o The Reserve Bank also helps to promote the process of
industrialisation in the country by setting up specialised
institutions for industrial finance.
o It also undertakes measures for developing bill market in the
country.

2) COMMERCIAL BANKS

These banks function to help the public, entrepreneurs and businesses. They
give financial services to these businessmen like debit cards, banks accounts,
short term deposits, etc. with the money people deposit in such banks. They
also lend money to businessmen in the form of overdrafts, credit cards,
secured loans, unsecured loans and mortgage loans to businessmen. The
commercial banks in the country were nationalized in 1969. So the various
policies regarding the loans, rates of interest and loans etc are controlled by
the Reserve Bank.

The commercial banks can be further classifies as public sector bank,

private sector banks, foreign banks and regional banks.
 1. PUBLIC SECTOR BANKS
These are owned and operated by the government, who has a major share in
them. The major focus of these banks is to serve the people rather earn
profits. Some examples of these banks include State Bank of India, Punjab
National Bank, Bank of Maharashtra, etc.
 State Bank of India
 Nationalized Banks (19)
 Regional Rural Banks sponsored by Public Sector Banks (196)

2. PRIVATE SECTOR BANKS

These are owned and operated by private institutes. They are free to operate
and are controlled by market forces. A greater share is held by private players
and not the government. For example, Axis Bank, Kotak Mahindra Bank etc.
 Old generation Private Banks (22)
 Foreign New Generation Private Banks (8)
 Banks in India (40)

3. FOREIGN BANKS
These are those banks that are based in a foreign country but have several
branches in India. Some examples of these banks include; HSBC, Standard
Chartered Bank etc.

4. REGIONAL RURAL BANKS

These were brought into operation with the objective of providing credit to
the rural and agricultural regions and were brought into effect in 1975 by
RRB Act. These banks are restricted to operate only in the areas specified
by government of India. These banks are owned by State Government
and a sponsor bank. This sponsorship was to be done by a nationalized
bank and a State Cooperative bank.

3) DEVELOPMENT BANKS
Development banks are specialized financial institutions. They provide
medium and long-term finance to the industrial and agricultural sector. They
provide finance to both private and public sector. Development banks are
multipurpose financial institutions. They do term lending, investment in
securities and other activities. They even promote saving and investment
habit in the public.
 Industrial Finance Corporation of India (IFCI) is the first development bank
in India. It started in 1948 to provide finance to medium and large-scale
industries in India.
Development banks in India are classified into following four groups:

a) Industrial Development Banks: It includes, for example, Industrial

Finance Corporation of India (IFCI), Industrial Development Bank of India
(IDBI), and Small Industries Development Bank of India (SIDBI).
b) Agricultural Development Banks: It includes, for example, National
Bank for Agriculture & Rural Development (NABARD).
c) Export-Import Development Banks: It includes, for example, Export-
Import Bank of India (EXIM Bank).
d) Housing Development Banks: It includes, for example, National Housing
Bank (NHB).

4) Co-operative Sector Banks

These banks are controlled, owned, managed and operated by cooperative
societies and came into existence under the Cooperative Societies Act in
1912. These banks are located in the urban as well in the rural areas.
Although these banks have the same functions as the commercial banks,
they provide finance to farmers, salaried people, small scale industries, etc.
and their rates of interest of interest are lower as compared to other banks.

There are three types of cooperative banks in India, namely:

1. Primary credit societies

These are formed in small locality like a small town or a village. The
members using this bank usually know each other and the chances of
committing fraud are minimal.

2. Central cooperative banks

These banks have their members who belong to the same district. They
function as other commercial banks and provide loans to their members. They
act as a link between the state cooperative banks and the primary credit
societies.

3. State cooperative banks

These banks have a presence in all the states of the country and have their
presence throughout the state.
5) SPECIALIZED BANKS
These provide unique services to their customers. Some such banks include
foreign exchange banks, development banks, industrial banks, export import
banks etc. These banks also provide huge financial support to businesses
and various kinds projects and traders who have to import or export their
goods or services. These include banks like EXIM bank, NABARD, SIDBI,
etc
 Chapter 2: The Jammu & Kashmir Bank Limited
Profile
Jammu And Kashmir Bank Limited (J & K) was incorporated in 1st October of the year
1938 by the ruler of Jammu & Kashmir Maharaja Hari Singh. It commenced its
business from 4th July of the year 1939 at in Kashmir (India). The Bank was the first in
the country as a state owned bank. Jammu and Kashmir Bank had to face serious
problems in 1947 i.e. at the time of independence. With the partition of Pakistan, two
out of the total ten branches of the bank, namely the ones in Muzaffarabad and Mirpur,
fell to the other side of the line of control (now Pak Occupied Kashmir), along with cash
and other assets. At that point of time, in keeping with the extended Central laws of the
state, J&K Bank was categorized as a Government Company, as per the provisions of
Indian Companies Act 1956. It was in the year 1971 that Jammu and Kashmir Bank
was granted the status of a 'Scheduled Bank'. Five years later, it was declared as "A"
Class Bank, by the Reserve Bank of India (RBI). As the years passed on, the bank
started achieving more and more success. During the year 1993, the Bank made tie
up with Reuter News Agency for instantaneous information about global foreign
currency rates and fluctuations. In the year of 1995, Banking Ombudsman Scheme
was launched in June and a loan delivery system was introduced in April, which was
used for large borrowers. During the year of 1998, J & K had introduced a new term
deposit scheme under the title of Jana Priya Jamma Yojna carrying flexibility in the
repayment schedule and in the same year the bank introduced Housing Loan and
Education Loan Schemes. The Bank had entered into an agreement with IBA to
connect its ATMs through a shared network in the year 1999. To offer Internet Banking
and for its e-commerce initiatives, the bank made tie up with Infosys Technologies and
also in the same year J&K Bank had entered into agreement with American Express to
launch a co-branded credit card. J&K Bank had diversified into non-life insurance and
depository business, apart from life Insurance and asset management business in the
year of 2000. The Bank had launched Global Access Card (An International Debit
Card) in association with Master Card International during the year of 2003. During the
year 2004, J&K Bank agreed with ICICI Bank to share the ATM network. In the same
year the bank had received the Asian Banking Award 2004 in Manila for its customer
convenience programme. Signed MoU with Bajaj Tempo in the year of 2004. During
the year 2005-06, J&K opened its branches in Chennai, Kanpur, Agra and Kolkata.
Also in the same year introduced new product and services for rural finance. During the
period of 2006-2007, the bank introduced various hi-tech and customer friendly
products. The Bank and TATA Consultancy Services (TCS), Asia's largest IT company
signed a Memorandum of Understanding (MoU) to signal their intent to work together
to create an IT blue-print for the bank. Going forward with its renewed business
strategy, J & K Bank had opened its 564th branch at Lassipora, Pulwama Srinagar in
July of the year 2008. The Jammu & Kashmir Bank is a financial institution which
provides employment to thousands of people throughout the country. It has given the
tremendous purchasing power in the hands of public by providing the loans on easy &
even negligible interests. The greatest achievement of the bank during the course of
last year has been to become a financially strong bank. An important aspect of the
Bank has been its ownership. J&K Bank by collaborating with Maestro has given its
customers an opportunity to perform the transactions anywhere in the world & even the
customers are free to carry huge amounts of cash along with them with the help of
maestro cards provided by the bank. Customers can purchase by using this card and
the amount gets automatically deducted from their accounts. The J&K Bank has
proved to be very much profitable to its shareholders. There is an increase in the
profits year by year. The Bank has helped the Government of Jammu & Kashmir by
providing financial assistance and prospective opportunities to the youth by providing
both loans for education as well as employment.
The J&K Bank has proved to be very much profitable to its shareholders. There
is an increase in the profits year by year. The Bank has helped the Government of
Jammu & Kashmir by providing financial assistance and prospective opportunities to the
youth by providing both loans for education as well as employment. The Bank is one of
the fastest growing banks in the country and has over 680 branches and over 550 plus
ATMs established across the country. More than 98 per cent business of the Bank is
computerized.

SERVICES
It offers the latest and technological service offerings to its customers including:

 Anywhere, tele-banking and SWIFT

 Internet, SMS and Mobile Banking
 Globally connected ATM network
 Mobile ATM Service
 Global Access Debit & Credit Cards
 Live RTGS System of RBI
Besides the Bank also offers services like:
 Distributor of:
 Life Insurance products of MetLife
 Bajaj Allianz General Insurance
  Mutual funds
 Providing Depository Services
 Offering Stock Broking Services
 Collection Agent for utility services
 Credit cards

The Bank is governed by the Companies Act and Banking Regulation Act and is
regulated by the Reserve Bank of India and Securities & Exchange Board of India
(SEBI). It is a listed company and its equity is listed on the National Stock Exchange
(NSE) and Bombay Stock Exchange (BSE). The Bank is categorized as a Private sector
Bank despite the fact that Government of J&K continues to hold 53% of the equity of the
Bank. JKB is the sole banker and lender of last resort to the Government of J & K.
The Bank has four decades of uninterrupted profitability and dividends and has obtained
a rating of "P1+", for its short term borrowing program and “FAA+” for its long term
borrowing program, by Standard and Poor- CRISIL connoting highest degree of safety.

PRODUCTS OFFERED BY J&K BANK

The Bank offers a range of banking products and services in Personal Banking,
Corporate Banking and Internet Banking. It offers various kinds of conventional asset
and liability products for its customers. The products include:
Liability side products
 Savings Bank account
 Current accounts
 Term deposits of various maturities
 Certificates of Deposit program
Asset side products
Besides corporate loans (cash credit, term loans and bills), the Bank offers a large
number of conventional loan products like:
 Auto loans
 Housing loans
 Educational loans
 Other Finance Schemes:
 Consumer loans
 Consumption loans
 Personal loans to pensioners
 Mortgage loans for Trade and Service sectors
  Loan against mortgage of immovable property
 Fair price shop scheme

SCHEMES
Keeping in mind the social sector initiatives of the Bank, it is also offering large number
of specialized schemes including:
 Help Tourism
 All purpose agri term loan
 Fruit advance scheme (apple)
 Zafran Scheme
 Roshni Financing scheme
 Craft development finance
 Dastkar finance
 Giri finance scheme
 Khatamband finance scheme
 Commercial premises finance
 Laptop/PC Finance
The Bank offers non fund based facilities like Guarantees, Letters of Credit, etc. to its
customers.

FUTURE TRENDS:

J&K Bank has traversed a long way from the day one with the solitary aim of ‘social
benefit’ and substantial progress has already been made towards this end.

Computerization and up gradation of technologies, rationalization of area wise branch

structure, staffing, development of human resources and strengthening of corporate
management studies are issues which Bank will address and implement in the coming
years. At the same time the emphasis will shift to greater self-regulation through
adherence to prudential norms, corporate governance and strengthening of internal
supervision and audit system as per guidelines of RBI. Further shift will be on re-
orientation and retraining of staff in tune with the changes in the operating environment;
the need to widen the scope and range of products and services and above all an
improvement in the delivery system and customer service levels. However, it will remain
Bank’s endeavour to reduce the non-performing loans both in percentage as well as in
absolute terms.

Jammu & Kashmir Bank Limited SWOT Analysis

SWOT – Strengths
-high growth rate
-experienced business units
-reduced labor costs
-high profitability and revenue
-existing distribution and sales networks
-domestic market

SWOT – Weaknesses
-High Stressed Assets

SWOT – Opportunities
-growing economy
-new markets
-venture capital
-income level is at a constant increase
-growing demand

SWOT – Threats
-external business risks
-technological problems
SUMMARY OF FINANCIALS (2015-2017)

In recognition of its strong fundamentals and dynamic growth model, J&k Bank recently
won the prestigious FE India’s best bank award. The bank has been ranked No.1 in best
old private sector bank category in the survey conducted across the banking industry. In
terms of profitability the Bank stands 3 rd in overall industry. The Bank has a history of
being profit making and making uninterrupted dividend payments for the last over forty
years. The Profit & Loss accounts of the Bank for the years FY2015 to FY 2017 are given
below:

Particulars Year ended Mar Year ended Mar 2016 ( Year ended Mar 2017 (in
2015 (in Rs.Crore) Rs.Crore) Rs.Crore)

Income

Interest Earned 7,061.13 6,843.57 6,685.80

Other Income 593.97 504.03 492.86

Total Income 7,655.1 7,347.6 7,178.66

Expenditure

Interest expended 4,410.22 4,133.48 4,173.86

Employee Cost 894.03 1,019.59 1,122.54

Selling and Admin Expenses 1,747.75 1,714.51 3,429.47

Depreciation 94.50 63.99 85.08

Operating Expenses 1,409.05 1,546.21 1,710.47

Provisions & Contingencies 1,327.23 1,251.88 2,926.62

Total Expenses 7,146.50 6,931.57 8,810.95

Net Profit for the Year 508.60 416.03 -1,632.29

Profit brought forward
- - -

Total 508.60 416.03 -1,632.29

Equity Dividend 101.80 84.84 0.00

Corporate Dividend Tax 20.35 17.27 0.00

Per share data

Earning Per Share(Rs.)
10.49 8.58 -31.31
Equity Dividend (%)
210.00 175.00 0.00

Book Value(Rs.) 126.04 132.51 108.88

Appropriations
Transfer to Statutory Reserve
386.44 313.92 1,632.29

Transfer to Other Reserves 0.01 0.00 0.00

Proposed Dividend/Transfer 122.15 102.11 0.00

Govt.
Balance c/f to Balance Sheet
- - -

Total 508.60 416.03 -1632.29

The Balance sheet of the Bank as on March 31, 2015, March 31, 2016 and March 31,
2017, are given below as:

Particulars As on Mar. 31, 2015 As on Mar. 31,2016 As on Mar 31,2017

Rs.Crore) Rs. Crore) Rs. Crore)

Capital & Liabilities

Total Share Capital 48.49 48.49 52.15

Reserves 6,061.56 6,375.48 5,624.35

Total Shareholders Fund 6110.05 6423.98 5676.49

Deposits 65,756.19 69,390.25 72,463.09

Borrowings 2,240.00
2,339.67 1,276.05
Other Liabilities & Provisions
1,879.54 2,213.84 2,603.04

Total Capital & Liabilities 76085.45 80268.07 82018.67

Assets
Cash & Balances with RBI
2,373.06 3,126.74 3,590.97

Balance with Banks, Money 1,360.71 76.27 1,794.96

Call

Advances 50,193.29
44,585.82 49,816.11

Investments 25,124.30 20,353.62 21,290.89

Fixed Assets 688.91 763.72 1,543.31

Other Assets 1,952.66

5,754.44 3,982.42

Total Assets 76085.45 80268.07 82018.67

Shareholding Pattern of J&K Bank as on 31-06-2017

CATEGORY OF SHAREHOLDER Percentage ShareHolding (%)

Promoter

Indian Promoter 56.45

Foreign Promoter 0.00

Total Promoter 56.45

Non Promoter

Institutions

Mutual Funds / UTI 5.22

FI/Bank/Insurance 3.01

Govt 0.00

FII 0.00

Other 18.01

Total Institutions 26.24

Non-Institution

Bodies Corporate 3.63

Individuals (upto Rs. 1 lakh) 12.25

Individuals (in excess of Rs. 1 lakh) 0.29

NRIs/OCBs 0.75

Others 12.93

Total Non-Institution 17.31

Total Non Promoter 43.55

CATEGORY OF SHAREHOLDER Percentage ShareHolding (%)

Depository Receipts 0.00

Total 100.00
 Chapter no 3: Working Capital
MEANING OF WORKING CAPITAL:
Capital required for a business can be classified under two main categories viz,

(1) Fixed capital and (2) Working capital

Every business needs funds for two purposes-for its establishment and to carry out
its day-to-day operations. Long term funds are required to create production facilities
through purchases of fixed assets such as plant and machinery, land, building, furniture,
etc. Investments in these assets represent that part of firm’s capital which is blocked on
a permanent or fixed basis and is called fixed capital. Funds are also needed for short
term purpose for the purchase of raw materials, payment of wages and the other day-to-
day expenses, etc. These funds are known as working capital. In simple words, 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, debtor and inventories. Funds, thus,
invested in current assets keep revolving fast and are being constantly converted into
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.

In the words of Shubin, "working capital is the amount of funds necessary to cover
the cost of operating the enterprise"

According to Genestenberg," circulating capital means current assets of a

company that are changed in the ordinary course of business from one form to another,
as for example, from cash to inventories, inventories to receivables, receivable into
cash. "

Concepts of working capital

There are two concepts of working capital:

(a) Balance sheet concept

(b) Operating cycle or circular flow concept

(A) Balance sheet concept

There are two interpretation of working capital under the balance sheet concept:
(i) Gross working capital
(ii) Net working capital
In the broad sense, the term working capital refers to the gross working capital and
represents the amount of funds invested in current assets. Thus, the gross working
capital is the capital invested in total current assets of the enterprise. Current assets
are those assets which in the ordinary course of business can be converted into cash
within a short period of normally one account year. Examples of current assets are:

CONSTITUENTS OF CURRENT ASSETS

1. Cash in hand and bank balances.

2. Bills Receivables.
3. Sundary debtors (less provisions for bad debts).
4. Short-term loans and advances.
5. Inventories of stocks, as :
(a) Raw materials,
(b) Work-in-process,
(c) Stores and Spares,
(d) Finished goods.
6. Temporary Investments of surplus funds.
7. Prepaid Expenses.
8. Accrued Incomes.

In a narrow sense, the term working capital refers to the net working capital. Net
working capital is the excess of current assets over current liabilities, or say:

Net working capital = current assets - current liabilities

Net working capital may be positive or negative. When the current assets exceed the
current liabilities the working capital is positive and negative working capital results
when the current liabilities are more than the current assets. Currently liabilities are
those liabilities which are intended to be paid in the ordinary course of business within a
short period of normally one account year out of the current assets or the income of the
business. Examples of current liabilities are:

CONSTITUENTS OF CURRENT LIABILITIES

1. Bills payable.
2. Sundry creditors or accounts payable.
3. Accrued or outstanding expenses.
4. Short-term loans, advances and deposits.
5. Dividends payable.
6. Bank overdraft.
7. Provision for taxation, if it does not amount to appropriation of profits.
The gross capital concept is financial or going concern concept where as net working
capital is an accounting concept of working capital. These two concepts of working
capital are not exclusive, rather both have their own merits

B. Operating cycle or circular flow concept:

As discussed earlier, working capital refers to that part of firms capital which is
required for financing short term or current assets such as cash marketable securities
debtors and inventories. Funds, thus, invested again in exchange for current assets.
hence, it's also known as revolving or circulating capital. The circular flow concept of
working capital is based upon this operating or working capital cycle of a firm. The cycle
starts with the purchase of raw material and other resources and ends with the
realization of cash from the sale of finished goods. It involves purchase of raw material
and stores, its conversion into stock of finished goods through work in progress with the
progressive increment of labour and service costs, conversion of finished stock into
sales, debtors and receivables and ultimately realisation of cash and this cycle
continues again from cash to purchase of raw material and so on. The speed or time
duration required to complete one cycle determines the requirement of working capital
longer period of cycle, larger is the requirement of working capital.

The gross operating cycle of a firm is equal to the length of the inventories and
receivables conversion periods.

Gross Operating Cycle = RMCP +WIPCP + FGCP + RCP

Where, RMCP = Raw Material Conversion Period

WIPCP= Work-in-Progress Conversion Period
FGCP = Finished Goods Conversion Period
RCP= Receivables Conversion Period
Classification of Working Capital:
Working capital may be classified in two ways:

(a) On the basis of concept.

(b) On the basis of time.

On the basis of concept, working capital is classified as gross working capital and net
working capital. This classification is important from the point of view of the financial
manager.

On the basis of time, working capital may be classified as:

1. Permanent or fixed working capital.

2. Temporary or variable working capital.

1. Permanent or Fixed Working Capital:

Permanent or fixed working capital is the minimum amount which is required to ensure
effective utilization of fixed facilities and for maintaining the circulation of current assets.
There is always a minimum level of current assets which is continuously required by the
enterprise to carry out its normal business operations. For example, every firm has to
maintain a minimum level of raw materials, work-in-process, finished goods and cash
balance.

This minimum level of current assets is called permanent or fixed working capital as this
part of capital is permanently blocked in current assets. As the business grows, the
requirements of permanent working capital also increase due to the increase in current
assets.
The permanent working capital can further be classified as regular working capital and
reserve working capital required to ensure circulation of current assets from cash to
inventories, from inventories to receivables and from receivables to cash and so on.
Reserve working capital is the excess amount over the requirement for regular working
capital which may be provided for contingencies that may arise at unstated periods such
as strikes, rise in prices, depression, etc.

2. Temporary or Variable Working Capital:

Temporary or variable working capital is the amount of working capital which is required
to meet the seasonal demands and some special exigencies. Variable working capital
can be further classified as seasonal working capital and special working capital. Most
of the enterprises have to provide additional working capital to meet the seasonal and
special needs.

The capital required to meet the seasonal needs of the enterprise is called seasonal
working capital Special working capital is that part of working capital which is required to
meet special exigencies such as launching of extensive marketing campaigns for
conducting research, etc.

Temporary working capital differs from permanent working capital in the sense that it is
required for short periods and cannot be permanently employed gainfully in the
business.
Importance or advantages of adequate working capital

Working capital is the life blood and nerve centre of the business. Just a circulation of
blood is essential in the human body for maintaining life, working capital is very
essential to maintain the smooth running of a business. No business can run
successfully without an adequate amount of working capital. The main advantage of
maintaining adequate amount of working capital are as follows:

1. Solvency of the business. Adequate working capital helps in maintaining solvency of

the business by providing an uninterrupted flow of production.

2. Goodwill. A sufficient working capital enables a business concern to make prompt

payments and hence helps in creating and maintaining goodwill.

3. Easy loans. A concern having adequate working capital, high solvency and good
credit standing can arrange loans from banks and other on easy and favorable terms.

4. Cash discounts. Working capital also enables a concern to avail cash discounts on
the purchases and hence it reduces costs.

5. Regular supply of raw materials sufficient working capital ensures regular supply of
raw materials and continuous production.

6. Regular payment of salaries wages and other day-to-day commitments. A company

which has ample working capital can make regular payment of the salaries, wages and
other day-to-day commitments which raises the morale of its employees, increase their
efficiency, reduces wastages and costs and enhances production and profits.

7. Exploitation of favorable market conditions. Only concerns with adequate working

capital can exploit favorable market conditions such as purchasing its requirements in
bulk when the prices are lower and by holding its inventories for higher prices.

8. Ability to face crisis. Adequate working capital enables a concern to face business
crisis in emergencies such as depression because during such, generally, there is much
pressure of working capital.

9. Quick and regular return on investments. Every investor wants a quick and regular
return on his Investments. Sufficiency of working capital enables a concern to pay
quicker and regular dividends of its investors as there may not be much pressure to
plough back profits this gains the confidence of its investors and creates a favorable
market to raise additional funds in the future.

10. High morale. Adequacy of working capital creates an environment of security

confidence, high morale and creates overall efficiency in a business.

Excess or inadequate working capital:

Every business concern should have adequate working capital to run its business
operations. It should have neither redundant or excess working capital nor inadequate
or shortage of working capital. Both excess as well as short working capital are bad for
any business. However, out of the two, it's the inadequacy of working capital which is
more dangerous from the point of view of the firm.

Disadvantages of redundant or excessive working capital:

1. Excessive working capital means idle funds which earn no profit for the business and
hence the business cannot earn a proper rate of return on its investments

2. When there is redundant working capital, it may lead to unnecessary purchasing and
accumulation of inventories causing more chances of theft, waste and losses

3. Excessive working capital implies excessive debtors and defective credit policy which
may cause higher incidence of bad debts.

4. It may result into overall inefficiency in the organisation

5. When there is excessive working capital, relations with banks and other Financial
Institutions may not be maintained

6. Due to low rate of return on Investments, the value of shares may also fall

7. The redundant working capital who is rise to speculative transactions.

Disadvantages or dangers of inadequate working capital:

1. A concern which has inadequate working capital cannot pay its short term liabilities in
time. Thus, it will lose its reputation I shall not be able to get good credit facilities

2. It cannot buy its requirement in bulk and cannot Avail of discounts, etc.

3. It become difficult for the firm to exploit favorable market conditions and undertake
profitable projects due to lack of working capital

4. The firm cannot pay day to day expenses of its operations and it creates
inefficiencies, increases costs and reduces the profit of the business

5. It becomes impossible to utilize efficiently the fixed assets due to non availability of
liquid funds.

6. The rate of return on Investments also fall with the shortage of working capital

The need or objects of working capital:

The need for working capital cannot be over emphasized. Every business needs
some amount of working capital. The need for working capital arises due to the time gap
between production and realisation of cash from sales. There is an Operating cycle
involved in the sales and realisation of cash. There are time gaps in purchase of raw
materials and production; production and sales; and sales and realisation of cash. Thus,
working capital is needed for the following purposes:

1. For the purchase of raw materials, components and spares

2. To pay wages and salaries

3. To incur day to day expenses and overheads cost such as fuel, power and office
expenses etc

4. To meet the selling costs as packing, advertising etc

5. To provide credit facilities to the customers

6. To maintain the inventories of raw material, work in progress, stores and spares and
finished stock.

For studying the need of working capital in a business, one has to study the
business under varying circumstances such as new concern, as a growing concern and
as one which has attained maturity. A new concern requires a lot of liquid funds tu meet
initial expenses like promotion, formation etc. These expenses are called preliminary
expenses and are capitalised. The amount needed as working capital in a new concern
depends primarily upon its size and the ambitions of its promoters. Greater the size of
the business unit, generally larger will be the requirement of working capital. The
amount of working capital needed goes on increasing with the growth and expansion of
business till it attains maturity. At maturity the amount of working capital needed is
called normal working capital. There are many other factors which influence the need of
working capital in a business.

Factors determining the working capital requirements:

Factors determining the working capital requirements

 Nature or Character of Business
 Size of Business/Scale of Operations
 Production Policy
 Manufacturing Process/Length of Production Cycle
 Seasonal Variations
 Working Capital Cycle
 Rate of Stock Turnover
 Credit Policy
 Business Cycle
 Rate of Growth of Business
 Earning Capacity and Dividend Policy
 Price Level Changes
 Other Factors
 The working capital requirements of a concern depend upon a large number of
factors such as nature size of business, the character of their operations, the length of
production cycles, the rate of stock turnover and the state of economic situation. It's not
possible to rank them because all such factors are of different importance and the
influence of individual factors changes for a firm over time. However, the following are
important factors generally influencing the working capital requirement.

1. Nature or character of business. The working capital requirements of a firm

basically depend upon the nature of its business. Public utility undertakings like
electricity, water Supply and railways need very limited working capital because they
offer cash sales only supply services, not products, and as such no funds are tied up in
inventories and receivables. On the other hand trading and financial firms require less
investment in fixed assets but have to invest large amount in current assets like
inventories, receivables and cash ; as such they need large amount of working capital.
The manufacturing undertakings also require sizeable working capital along with fixed
Investments. Generally Speaking it may be said that public utility undertakings require
small amount of working capital, trading and financial require relatively very large
amount, where as manufacturing undertakings require sizable working capital between
these two extremes.

2. Size of business or scale of operations. The working capital requirements of a

concern are directly influenced by the size of its business which may be measured in
terms of scale of operation. Greater the size of a business unit, generally larger will be
the requirements of working capital. However, in some cases even smaller concern may
need more working capital due to high overheads charges, inefficient use of available
resources and other economic disadvantage of small size.

3. Production policy. In certain industries the demand is subject to wide fluctuations

due to seasonal variations. The requirements of working capital, in such cases, depend
upon the production policy. The production could be kept either study by accumulating
inventories during slack periods with a view to meet high demand during the peak
season or the production could be curtailed during the slack season and increased
during the peak season. If the policy is to keep production steady by accumulating
inventories it will require higher working capital.
4. Manufacturing process or length of production cycle. In manufacturing business,
the requirements of working capital increase in direct proportion to length of
manufacturing process. Longer the process period of manufacture, larger is the amount
of working capital required. The longer the manufacturing time, the raw material and
other supplies have to be carried for a longer period in the process with progressive
increment of labour and service cost is before the finished product is finally obtained.
Therefore, if there are alternative processes of production, the process with the shortest
production period should be chosen.

5. Seasonal variations. In certain industries raw material is not available throughout

the year. They have to buy raw material in bulk during the season to ensure an
uninterrupted flow and process them during the entire year. A Huge amount is, thus,
blocked in the form of material inventories during such season, which gives rise to more
working capital requirements. Generally, during the busy season, a firm requires larger
working capital then in the slack season.

6. Working capital cycle. In a manufacturing concern, the working capital cycle starts
with the purchase of raw material and ends with the realisation of cash from the sale of
finished products. This cycle involves purchase of raw materials and stores, its
conversion into stock of finished goods through work in progress with progressive
increment of labour and service costs, conversion of finishing stock into sales

7. Rate of stock turnover. This is a huge degree of inverse co-relationship between

the quantum of working capital and the velocity or speed with which the sales are
affected. A firm having high rate of stock turnover will need lower amount of working
capital as compared to a firm having a low rate of turnover. Example, in case of
previous stone dealer, the turnover is very slow. They have to maintain a large number
of stocks and the moment of stock will is very low. Thus, the working capital
requirements of such a dealer shall be higher than date of Provision Store.

8. Credit Policy. The credit policy of a concern and it's dealing with debtors and
creditors influence considerably the requirements of working capital. A concern that
purchases its requirements on credit and sells its products or services on cash requires
lesser amount of working capital. On the other hand a concern buying its requirements
for cash and allowing credit to its customers, shall need larger amount of working capital
as very huge amount of funds are bound to be tied up in debtors or bills receivable.

9. Business cycles. Business cycle refers to alternate expansion contraction in general

business activity. In a period of boom i.e., when the business is prosperous, there is
need for larger amount of working capital due to increase in sales, rise in prices,
optimistic expansion of business, etc. On the contrary in the time of depression i.e.,
where is down swing of cycle, the business contracts, sales decline, difficulties are
faced in collection of from debtors and forms may have large working capital lying idle.

10. Rate of growth of business. The working capital requirements of a concern

increase with the growth and expansion of its business activities. Although, it is difficult
to determine the relationship between the growth in the volume of business and the
growth in the working capital of a business, yet it may be concluded that for a normal
rate of expansion in the volume of business, we may have retained profits to provide for
more working capital but in fast growing concerns, we shall require larger amount of
working capital.

11. Earning capacity and dividend policy. some firms have more earning capacity
then others due to quality of their products, monopoly conditions, etc. Such firms with
high earning capacity may generate cash profits from operations and contribute to their
working capital. The dividend policy of a concern also influences the requirements of its
working capital. A firm that maintains a steady high rate of cash dividend irrespective of
it's generation of profits need more working capital then the firm that retains larger part
of its profits and does not pay so high rate of cash dividend.

12. Price level changes. Changes in the price level also affect the working capital
requirements. Generally, the rising price will require the firm to maintain larger amount
working capital as more funds will be required to maintain the same current assets. The
effect of rising prices may be difficult 4 different firms. Some firms may be affected
much while some other may not be affected at all by the rise in prices.
13. Other factors. Certain other factors such as operating efficiency, management
ability, irregularities of supply, import policy, asset structure, importance of labour,
banking facilities, etc., also influence the requirement of working capital.

Estimate of working capital requirements:

Working capital is the lifeblood and controlling nerve centre of a business. No
business can be successfully run without an adequate amount of working capital. To
avoid the shortage of working capital at once, an estimate of working capital
requirements should be made in advance so that arrangements can be made to procure
adequate working capital.

Methods of estimating working capital requirements:

The following methods are usually followed in forecasting working capital

requirements of a firm:

1. Percentage of sales method.

2. Regression analysis method. (average relationship between sales and working

capital)

3. Cash forecasting method.

4. Operating cycle method.

5. Projected balance sheet method.

1. Percentage of sales method:

This method of estimating working capital requirements is based on the
assumptions that the level of working capital for any firm is directly related to its sales
value. If past experience indicates a stable relationship between the amount of sales
and working capital, then this basis may be used to determine the requirement of
working capital for future. Thus, if the sales the year 2007 amounted to ₹ 30 lakh and
working capital was ₹ 6 lakh; the requirement of working capital for the year 2008 on an
estimated sales of ₹ 40 lakh shall be ₹ 8 lakh; i.e., 20% of ₹ 40 lakh. The individual
items of current assets and current liabilities can also be estimated on the basis of the
past experience as a percentage of sales. This method is simple to understand and
easy to operate but it cannot be applied in all cases because the direct relationship
between sales and working capital may not be established.

2. Regression analysis method (average relationship between

sales and working capital) :
This method of forecasting working capital requirement is based upon the
statistical technique of estimating or predicting the unknown value of a dependent
variable from the known value of an independent variable. It is the measure of the
average relationship between two or more variables, i.e., sales and working capital, in
terms of the original unit of the data.

The relationship between sales and working capital is represented by the

equation:

y = a + bx

Where, y = Working Capital (dependent variable)

a = Intercept of the least square
b = Slope of the regression line
x = Sales (independent
variable)

3. Cash forecasting method:

This method of estimating working capital requirements involves forecasting of
cash receipts and disbursement during a future period of time. Cash forecast will
include all possible sources from which cash will be received and the channels in which
payments are to be made so that a consolidated cash position is determined. This
method is similar to the preparation of a cash budget. The excess of receipts over
payments represent surplus of cash and the excess of payments over receipts causes
deficit of cash or the amount of working capital required.

4. Operating cycle method:

 This method of estimating working capital requirements is based upon the
operating cycle concept of working capital we know the concept and determination of
duration of operating cycle. The cycle starts with the purchase of raw material and other
resources and ends with the realisation of cash from the sale of finished goods. It
involves purchase of raw material and stores, its conversion into stock of finished goods
through work in progress with progressive increment of labour and service costs,
conversion of fixed stock into sales, debtors and receivables, realisation of cash and
this cycle continues again from cash to purchase of raw material and so on. The speed
or time duration required to complete one cycle determines the requirement of working
capital - longer the period of cycle, larger is the requirement of working capital and vice
versa. The requirements of working capital be estimated as:

Working Capital = {Estimated Cost of Goods Sold * (Operating Cycle/ 365)} +Desired

Cash and Bank Balance

5. Projected balance sheet method:

Under this method, projected balance sheet for future that is prepared by
forecasting of assets and liabilities. The excess of estimated total current assets over
estimated current liabilities is computed to indicate the estimated amount of working
capital required
Financing of Long-Term Working Capital

Shares: Issue of shares is the most important source for raising the permanent or
long-term capital. A company can issue various types of shares as equity shares,
preference shares and deferred shares. According to the Companies Act, 1956,
however, a public company cannot issue deferred shares. Preference shares carry
preferential rights in respect of dividend at a fixed rate and in regard to the repayment of
capital at the time of winding up the company. Equity shares do not have any fixed
commitment charge and the dividend on these shares is to be paid subject to the
availability of sufficient profits. As far as possible, a company should raise the maximum
amount of permanent capital by the issue of shares.

Debentures: A debenture is an instrument issued by the company acknowledging its

debt to its holder. It is also an important method of raising long-term or permanent
working capital. The debenture-holders are the creditors of the company. A fixed rate of
interest is paid on debentures. The interest on debentures is a charge against profit and
loss account. The debentures are generally given floating charge on the assets of the
company. When the debentures are secured they are paid on priority to other creditors.
The debentures may be of various kinds such as simple, naked or unsecured
debentures, secured or mortgaged debentures, redeemable debentures, irredeemable
debentures, convertible debentures and non-convertible debentures. The debentures as
a source of finance have a number of advantages both to the investors and the
company. Since interest on debentures have to be paid on certain predetermined
intervals at a fixed rate and also debentures get priority on repayment at the time of
liquidation, they are very well suited to cautious investors. The firm issuing debentures
also enjoys a number of benefits such as trading on equity, retention of control, tax
benefits, etc.

Public Deposits: Public deposits are the fixed deposits accepted by a business
enterprise directly from the public. This source of raising short term and medium-term
finance was very popular in the absence of banking facilities. In the past, Bombay for
periods of 6 months to 1 year. But now-a-days even long-term deposits for 5 to 7 years
are accepted by the business houses. Public deposits as a source of finance have a
large number of advantages such as very simple and convenient source of finance,
taxation benefits, trading on equity, no need of securities and an inexpensive source of
finance. But it is not free from certain dangers such as it is uncertain, unreliable,
unsound and inelastic source of finance. The Reserve Bank of India has also laid down
certain limits on public deposits. Non-banking concerns cannot borrow by way of public
deposits more than 25% of its paid-up capital and free reserves.

Ploughing Back of Profits: Ploughing back of profits means the reinvestments by

concern of its surplus earnings in its business. It is an internal source of finance and is
most suitable for an established firm for its expansion, modernization and replacement
etc. This method of finance has a number of advantages as it is the cheapest rather
cost-free source of finance; there is no need to keep securities; there is no dilution of
control; it ensures stable dividend policy and gains confidence of the public. But
excessive resort to ploughing back of profits may lead to monopolies, misuse of funds,
over capitalization and speculation, etc.

Loans from Financial Institutions: Financial institutions such as Commercial

Banks, Life Insurance Corporation, Industrial Finance Corporation of India, State
Financial Corporations, State Industrial Development Corporations, Industrial
Development Bank of India, etc. also provide short-term, medium-term and long-term
loans. This source of finance is more suitable to meet the medium-term demands of
working capital. Interest is charged on such loans at a fixed rate and the amount of the
loan is to be repaid by way of installments in a number of years.

Financing of Short-Term Working Capital

Indigenous Bankers:
Private money-lenders and other country bankers used to be the only source of finance
prior to the establishment of commercial banks. They used to charge very high rates of
interest and exploited the customers to the largest extent possible. Now-a-days with the
development of commercial banks they have lost their monopoly.

But even today some business houses have to depend upon indigenous bankers for
obtaining loans to meet their working capital requirements.

Trade Credit:
Trade credit refers to the credit extended by the suppliers of goods in the normal course
of business. As present day commerce is built upon credit, the trade credit arrangement
of a firm with its suppliers is an important source of short-term finance. The credit-
worthiness of a firm and the confidence of its suppliers are the main basis of securing
trade credit. It is mostly granted on an open account basis whereby supplier sends
goods to the buyer for the payment to be received in future as per terms of the sales
invoice. It may also take the form of bills payable whereby the buyer signs a bill of
exchange payable on a specified future date.

When a firm delays the payment beyond the due date as per the terms of sales invoice,
it is called stretching accounts payable. A firm may generate additional short-term
finances by stretching accounts payable, but it may have to pay penal interest charges
as well as to forgo cash discount. If a firm delays the payment frequently, it adversely
affects the credit worthiness of the firm and it may not be allowed such credit facilities in
future.

The main advantages of trade credit as a source of short-term finance include:

(i) It is an easy and convenient method of finance.

(ii) It is flexible as the credit increases with the growth of the firm.

(iii) It is informal and spontaneous source of finance.

However, the biggest disadvantage of this method of finance is charging of higher

prices by the suppliers and loss of cash discount.

Installment Credit:
This is another method by which the assets are purchased and the possession of goods
is taken immediately but the payment is made in installments over a pre-determined
period of time. Generally, interest is charged on the unpaid price or it may be adjusted
in the price. But, in any case, it provides funds for some time and is used as a source of
short-term working capital by many business houses which have difficult fund position.

Advances:
Some business houses get advances from their customers and agents against orders
and this source is a short-term source of finance for them. It is a cheap source of
finance and in order to minimize their investment in working capital, some firms having
long production cycle, specially the firms manufacturing industrial products prefer to
take advances from their customers.
Factoring or Accounts Receivable Credit:
Another method of raising short-term finance is through accounts receivable credit
offered by commercial banks and factors. A commercial bank may provide finance by
discounting the bills or invoices of its customers.

Thus, a firm gets immediate payment for sales made on credit. A factor is a financial
institution which offers services relating to management and financing of debts arising
out of credit sales. Factoring is becoming popular all over the world on account of
various services offered by the institutions engaged in it.

Factors render services varying from bill discounting facilities offered by commercial
banks to a total takeover of administration of credit sales including maintenance of sales
ledger, collection of accounts receivables, credit control and protection from bad debts,
provision of finance and rendering of advisory services to their clients. Factoring may be
on a recourse basis, where the risk of bad debts is borne by the client, or on a non-
recourse basis, where the risk of credit is borne by the factor.

At present, factoring in India is rendered by only a few financial institutions on a

recourse basis. However, the Report of the Working Group on Money Market (Vaghul
Committee) constituted by the Reserve Bank of India has recommended that banks
should be encouraged to set up factoring divisions to provide speedy finance to the
corporate entities.

In-spite of many services offered by factoring, it suffers from certain limitations. The
most critical fall outs of factoring include;

(i) The high cost of factoring as compared to other sources of short-term finance,

(ii) The perception of financial weakness about the firm availing factoring services, and

(iii) Adverse impact of tough stance taken by factor, against a defaulting buyer, upon the
borrower resulting into reduced future sales.

Accrued Expenses:
Accrued expenses are the expenses which have been incurred but not yet due and
hence not yet paid also. These simply represent a liability that a firm has to pay for the
services already received by it. The most important items of accruals are wages and
salaries, interest, and taxes.

Wages and salaries are usually paid on monthly, fortnightly or weekly basis for the
services already rendered by employees. The longer the payment-period, the greater is
the amount of liability towards employees or the funds provided by them. In the same
manner, accrued interest and taxes also constitute a short-term source of finance.

Taxes are paid after collection and in the intervening period serve as a good source of
finance. Even income-tax is paid periodically much after the profits have been earned.
Like taxes, interest is also paid periodically while the funds are used continuously by a
firm. Thus, all accrued expenses can be used as a source of finance.

The amount of accruals varies with the change in the level of activity of a firm. When the
activity level expands, accruals also increase and hence they provide a spontaneous
source of finance. Further, as no interest is payable on accrued expenses, they
represent a free source of financing.

However, it must be noted that it may not be desirable or even possible to postpone
these expenses for a long period. The payment period of wages and salaries is
determined by provisions of law and practice in industry.

Similarly, the payment dates of taxes are governed by law and delays may attract
penalties. Thus, we may conclude that frequency and magnitude of accruals is beyond
the control of managements. Even then, they serve as a spontaneous, interest free,
limited source of short-term financing.

Deferred Incomes:
Deferred incomes are incomes received in advance before supplying goods or services.
They represent funds received by a firm for which it has to supply goods or services in
future. These funds increase the liquidity of a firm and constitute an important source of
short-term finance. However, firms having great demand for its products and services,
and those having good reputation in the market can demand deferred incomes.

Commercial Paper:
Commercial paper represents unsecured promissory notes issued by firms to raise
short-term funds. It is an important money market instrument in advanced countries like
U.S.A. In India, the Reserve Bank of India introduced commercial paper in the Indian
money market on the recommendations of the Working Group on Money Market
(Vaghul Committee).

But only large companies enjoying high credit rating and sound financial health can
issue commercial paper to raise short-term funds. The Reserve Bank of India has laid
down a number of conditions to determine eligibility of a company for the issue of
commercial paper. Only a company which is listed on the stock exchange, has a net
worth of at least Rs 10 crores and a maximum permissible bank finance of Rs 25 crores
can issue commercial paper not exceeding 30 per cent of its working capital limit.

The maturity period of commercial paper, in India, mostly ranges from 91 to 180 days. It
is sold at a discount from its face value and redeemed at face value on its maturity.
Hence, the cost of raising funds, through this source, is a function of the amount of
discount and the period of maturity and no interest rate is provided by the Reserve Bank
of India for this purpose.

Commercial paper is usually bought by investors including banks, insurance companies,

unit trusts and firms to invest surplus funds for a short-period. A credit rating agency,
called CRISIL, has been set up in India by ICICI and UTI to rate commercial papers.

Commercial paper is a cheaper source of raising short-term finance as compared to the

bank credit and proves to be effective even during period of tight bank credit. However,
it can be used as a source of finance only by large companies enjoying high credit
rating and sound financial health. Another disadvantage of commercial paper is that it
cannot be redeemed before the maturity date even if the issuing firm has surplus funds
to pay back.

Working Capital Finance by Commercial Banks:

Commercial banks are the most important source of short-term capital. The major
portion of working capital loans are provided by commercial banks. They provide a wide
variety of loans tailored to meet the specific requirements of a concern.

The different forms in which the banks normally provide loans and advances are
as follows:
(a) Loans

(b) Cash Credits

(c) Overdrafts

(d) Purchasing and discounting of bills.

(a) Loans:
When a bank makes an advance in lump-sum against some security it is called a loan.
In case of a loan, a specified amount is sanctioned by the bank to the customer. The
entire loan amount is paid to the borrower either in cash or by credit to his account. The
borrower is required to pay interest on the entire amount of the loan from the date of the
sanction.
A loan may be repayable in lump sum or installments. Interest on loans is calculated at
quarterly rests and where repayments are stipulated in installments, the interest is
calculated at quarterly rests on the reduced balances. Commercial banks generally
provide short-term loans up to one year for meeting working capital requirements. But
now-a-days term loans exceeding one year are also provided by banks. The term loans
may be either medium-term or long- term loans.

(b) Cash Credits:

A cash credit is an arrangement by which a bank allows his customer to borrow money
up to a certain limit against some tangible securities or guarantees. The customer can
withdraw from his cash credit limit according to his needs and he can also deposit any
surplus amount with him.

The interest in case of cash credit is charged on the daily balance and not on the entire
amount of the account. For these reasons, it is the most favourite mode of borrowing by
industrial and commercial concerns. The Reserve Bank of India issued a directive to all
scheduled commercial banks on 28th March 1970, prescribing a commitment charge
which banks should levy on the unutilized portion of the credit limits.

(c) Overdrafts:
Overdraft means an agreement with a bank by which a current account-holder is
allowed to withdraw more than the balance to his credit up to a certain limit. There are
no restrictions for operation of overdraft limits. The interest is charged on daily
overdrawn balances. The main difference between cash credit and overdraft is that
overdraft is allowed for a short period and is a temporary accommodation whereas the
cash credit is allowed for a longer period. Overdraft accounts can either be clean
overdrafts, partly secured or fully secured.

(d) Purchasing and Discounting of Bills:

Purchasing and discounting of bills is the most important form in which a bank lends
without any collateral security. Present day commerce is built upon credit. The seller
draws a bill of exchange on the buyer of goods on credit. Such a bill may be either a
clean bill or a documentary bill which is accompanied by documents of title to goods
such as a railway receipt.

The bank purchases the bills payable on demand and credits the customer’s account
with the amount of bill less discount. At the maturity of the bills, bank presents the bill to
its acceptor for payment. In case the bill discounted is dishonoured by non-payment, the
bank recovers the full amount of the bill from the customer along with expenses in that
connection. In addition to the above mentioned forms of direct finance, commercial
banks help their customers in obtaining credit from their suppliers through the letter of
credit arrangement.

Letter of Credit: A letter of credit popularly known as L/c is an undertaking by a bank to

honour the obligations of its customer up to a specified amount, should the customer fail
to do so. It helps its customers to obtain credit from suppliers because it ensures that
there is no risk of non-payment. L/c is simply a guarantee by the bank to the suppliers
that their bills up to a specified amount would be honoured. In case the customer fails to
pay the amount, on the due date, to its suppliers, the bank assumes the liability of its
customer for the purchases made under the letter of credit arrangement.
A letter of credit may be of many types, such as:

(i) Clean Letter of Credit:

It is a guarantee for the acceptance and payment of bills without any conditions.

(ii) Documentary Letter of Credit:

It requires that the exporter’s bill of exchange be accompanied by certain documents
evidencing title to the goods.

(iii) Revocable Letter of Credit:

It is one which can be withdrawn by the issuing bank without the prior consent of the
exporter.

(iv) Irrevocable Letter of Credit:

It cannot be withdrawn without the consent of the beneficiary.

(v) Revolving Letter of Credit:

In such type of letter of credit the amount of credit it automatically reversed to the
original amount after such an amount has once been paid as per defined conditions of
the business transaction. There is no need for further application for another letter of
credit to be issued provided the conditions specified in the first credit are fulfilled.

(vi) Fixed Letter of Credit:

It fixes the amount of financial obligation of the issuing bank either in one bill or in
several bills put together.

Security Required in Bank Finance:

Banks usually do not provide working capital finance without obtaining adequate
security.
The following are the most important modes of security required by a bank:
1. Hypothecation:
Under this arrangement, bank provides working capital finance against the security of
movable property, usually inventories. The borrower does not give possession of the
property to the bank. It remains with the borrower and hypothecation is merely a charge
against property for the amount of debt. If the borrower fails to pay his dues to the bank,
the banker may file a case to realize his dues by sale of the goods/property
hypothecated.

2. Pledge:
Under this arrangement, the borrower is required to transfer the physical possession of
the property or goods to the bank as security. The bank will have the right of lien and
can retain the possession of goods unless the claim of the bank is met. In case of
default, the bank can even sell the goods after giving due notice.

3. Mortgage:
In addition to the hypothecation or pledge, banks usually ask for mortgages as collateral
or additional security. Mortgage is the transfer of a legal or equitable interest in a
specific immovable property for the payment of a debt. Although, the possession of the
property remains with the borrower, the full legal title is transferred to the lender. In case
of default, the bank can obtain decree from the court to sell the immovable property
mortgaged so as to realize its dues.

Working capital analysis or measuring the working capital.

Working capital is the life blood and nerve centre of a business. Just as circulation of
blood is essential in the human body for maintaining life working capital is very essential
to maintain the smooth running of a business. No business can run successfully without
an adequate amount of working capital. However, it must also be noted that working
capital is a means to run the business smoothly and profitably, and not an end. Thus,
concept of working capital has its own importance in an going concern. A going
concern, usually, has a positive balance of working capital, i.e, the excess of current
assets over current liabilities, but sometimes the uses of working capital maybe more
then the sources resulting into a negative value of working capital. This negative
balance is generally offset soon by gains in the following periods. A study of change in
the uses and sources of working capital is necessary to evaluate the efficiency with
which the working capital is employed in a business. This involves t the need of working
capital analysis.

The analysis of working capital can be conducted through a number of devices, such
as:

1. Ratio analysis

2. Funds flow analysis

3. Budgeting

1. Ratio analysis. A ratio is a simple arithmetical expression of the relationship of

one number two another. The technique of ratio analysis can be employed for
measuring short term liquidity or working capital position of a firm. The following ratios
may be calculated for this purpose:

(a) Current ratio.

(b) Acid test ratio.

(c) Absolute liquid ratio or cash position ratio.

(d) Inventory turnover ratio.

(e) Receivable turnover ratio.

(f) Payables turnover ratio.

(g) Working capital turnover ratio.

(h) Working capital leverage.

(i) Ratio of current liabilities to tangible net worth.

2. Funds flow analysis. Funds flow analysis is technical device designated to

study the sources from which additional funds were derived and the use to which these
sources were put. It is an effective management tool to study change in the financial
position (working capital) of a business enterprise between beginning and ending
financial statements dates. The funds flow analysis consists of: (i) Preparing schedule of
changes in working capital, and (ii) Statement of sources and application of funds.

3. Working capital budget. A budget is financial and/or quantitative expression of

business plans and policies to be pursued in the future period of time. Working capital
budget, as a part of total budgeting process of a business, is prepared estimating future
long term and short term working capital needs and the sources to finance them, and
then comparing the budgeted figures with all the actual performance for calculating
variances, if any, so that corrective actions may be taken in the future. The objectives of
a working capital budget are to ensure availability of funds as and when needed, and to
ensure effective utilization of these resources. The successful implementation of
working capital budget involves the preparing of separate budgets for various elements
of working capital, such as, cash, inventories and receivables etc.
 Chapter 4: Working Capital Management

Sources of Financing Working Capital

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. Produce loan

5. Packing credit and clean packing credit

6. 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
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 of 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. Packing Credit/Export Finance: 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 and for making arrangements to sell the
same. That is this loan is available both prior to shipment and post 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/state 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.

6. 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. This mode of working capital financing by J&k bank can be of

A. Clean overdraft: It involves financing by checking the soundness and clarity of

current account.

B. Secured overdraft: It involves overdraft against fixed deposit of burrower. The

amount of overdraft is repaid from the fixed deposit of burrower.

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. The J&K Bank under bill
financing purchases cheques, hundis, drafts from burrowers usually these include
government securities
III. Non Fund based limits: Non fund based financing are essentially in nature
of promises made by banks in favors of a third party to provide monetary compensation
on behalf of their clients if certain situations emerge. These non-fund based facilities
maybe in nature of banks guarantee or letter of credit.

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. Suppliers particularly the foreign
suppliers insist that the buyer should ensure that his bank will make the payment if he
fails to honor his obligations. This is ensured through a letter of credit (L/C)
arrangement. A bank opens a L/C in favor of a customer to facilitate his purchase of
goods. If the customer does not pay to the supplier within the credit period, the bank
makes the payment under the L/C arrangement. Bank charges the customer for
opening the L/C. Banks extends such facility to financially sound customers

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.

The Jammu & Kashmir bank accepts guarantee under two heads

1). Performance bank guarantee. which is extended on the guarantee of known

customers to burrowers and this type of guarantee is linked to the performance of
burrowing unit.

2). Financial bank guarantee. under this mainly the government departments are
allowed working capital. Cash securities are taken as earnest money.

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.

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

Information/Data required for assessment of working

capital
In order to assess the requirements of working capital on the basis of production needs,
it is necessary to get the data from the borrowers regarding their past/projected
production, sales, cost of production, cost of sales, operating profit, etc. in order to
ascertain the financial position of the borrowers & the amount of working capital needs
to be financed by banks, it is necessary to call for the data from the borrowers regarding
their net worth, long term liabilities, current liabilities, fixed assets, current assets, etc.
The Reserve Bank prescribed the forms in 1975 to submit the necessary details
regarding the assessment of working capital under its credit authorization scheme. The
scheme of credit authorization was changed into credit monitoring arrangement in
information have also been simplified in 1991 for reporting the credit sanctioned by
banks above the cut-off point to reserve bank under its scheme of credit monitoring
arrangement. As the traders and merchant exporters who do not have manufacturing
activities are not required to submit the data regarding raw materials, consumable
stores, goods in- process, power and fuel, etc., a separate set of forms has been
designed for traders and merchant exporters. In view of the peculiar nature of leasing
and the hire purchase concerns, a separate set of forms has also designed for them. In
addition to the information/data in the prescribed forms, bank may also call for additional
information required by them depending on the nature of the borrowers’ activities & their
financial position. The data is collected from the borrowers in the following six forms:

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

(Form I) Particulars of the existing credit from the entire banking system as also the
term Loan facilities availed of from the term lending institutions/banks are furnished in
this form. Maximum & minimum utilization of the limits during the last 12 months
outstanding balances as on a recent date are also given so that a comparison can be
made with the limits now requested & the limits actually utilized during the last 12
months.

2. Operating Statement (Form II) The data relating to last sales, net sales, cost
of raw material, power & fuel, direct labor, depreciation, selling, general expenses,
interest, etc. are furnished in this form. It also covers information on operating profit &
net profit after deducting total expenditure from total sale proceeds.

3. Analysis of Balance Sheet (Form III) A complete analysis various items of

last year’s balance sheet, current year’s estimate & following year’s projections is given,
in this form. The details of current liabilities, term liabilities, net worth, current assets,
other non-current assets, etc. are given in this form as per the classification accepted by
banks.

4. Comparative statement of current assets & current liabilities (Form

IV) This form gives the details of various items of current assets and current liabilities
as per classification accepted by banks. The figures given in this form should tally with
the figures given in the form III where details of all the liabilities & assets are given. In
case of inventory, receivables and sundry creditors; the holding/levels are given not only
in absolute amount but also in terms of number of month so that a comparative study
may
be done with prescribed norms/past trends. They are indicated in terms of numbers of
months in bracket below their amounts.

5. Computation of Maximum Permissible Bank Finance (Form V)

On the basis of details of current assets & liabilities given in form IV, Maximum
Permissible Bank Finance is calculated in this form to find out credit limits to be allowed
to the borrowers.

6. Fund Flow Statement (Form VI) In this form, fund flow of long term sources &
uses is given to indicate whether long term funds are sufficient for meeting the long term
requirements. In addition to long term sources and uses, increase/decrease in current
assets is also indicated in this form.

The financial year of a company is the period for which Profit & Loss Account of a
company is prepared. Such financial year may be more or less than a calendar year but
it shall not exceed 15 months unless the Registrar grants a special permission in which
case it may extend up to 18 months.
 Methods of Assessments
Assessment of working capital 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, and prevailing mandatory instructions by RBI
and trade and industry practice.

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

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 are 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 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 are 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 buildup 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.

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.

Calculation of working capital requirement under method 1

On average basis After application of broad
indicators
Raw materials

Stores

Stocks – in - Progress

Finished goods

Bills receivables/ debtors

Total

Liabilities Amount | Assts 1 2

Creditors for purchase | Inventries

Other current liabilities | Other current

assets
Total current liabilities |
other than bank
borrowings
Total | Total
S.No Particulars 1 2

1 Total current assets

2 Total current liabilities excluding bank borrowings

3 Working capital gap

4 Min. requirement margin being 25% of working

capital

5 Actual/projected net working capital

6 3–4

7 3-5

8 MPBF Min of 6 or 7

9 Excess bank borrowing

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 build-up 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. However, such margin held for deferred
payment guarantees should be considered as noncurrent assets. 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.

Calculation of Working capital requirement under method 2

S.No Particulars 1 2

1 Total current assets

2 Total current liabilities excluding bank borrowings

3 Working capital gap

4 Min. requirement margin being 25% of working

capital

5 Actual/projected net working capital

6 3–4

7 3-5

8 MPBF Min of 6 or 7

9 Excess bank borrowing

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. Buy back of equity shares.
 5C MODEL OF J&K BANK LTD
The J&K bank uses 5C MODEL to find the credit worthiness of burrowers

Capacity:

This dimension measures the ability of the firms or the individual burrowers to repay the
working capital loans. The burrowers’ clientele, past history of business transactions,
opportunities and threats of the business, the capacity of the repayment and the
permissible limit to which business can be provided loans. are all analyzed for the
advancement of any finance.

Co-lateral:

Collateral is a burrower’s pledge of specific property to a lender, to secure repayment of

a loan. The collateral serves as protection for a lender against burrower’s default- that
is, any borrower failing to pay the principal and interest under the terms of a loan
obligation. If the borrower does default on a loan (due to insolvency or other event) he
forfeits the property pledged as collateral. The J&K bank ltd assesses whether the
borrowers has enough property under the different schemes for different loans to pledge
as collateral.

Capital:

It refers to the minimum amount of capital investment of the borrowers own funds in the
project. It is called as margin money and is varies according to scheme under which
borrower has applied for working capital fund.

Conditions:

The J&K bank puts conditions on the borrower, to obtain funds from the bank, in the
form of checking the economic feasibility of the project and the end use of funds.
Character:

The character of the borrower is checked in terms of borrower’s trustworthiness, his

image in market, the kind of relationship he shares with creditors as well as debtors,
education and experience are all checked.

RATIO ANALYSIS

Ratio Analysis is a very important tool of financial analysis. It is the process of

establishing the significant relationship between the items of financial statements to
provide meaningful understanding of the performance and financial position of a firm.
Ratios are classified as under

Liquidity Ratios
Activity Ratios
Leverage Ratios
Profitability Ratios

Financial ratio analysis is a useful tool for users of financial statement. It has
following advantages:

Advantages
It simplifies the financial statements.
It helps in comparing companies of different size with each other.
It helps in trend analysis which involves comparing a single company over
a period.
It highlights important information in simple form quickly. A user can judge a
company by just looking at few numbers instead of reading the whole financial
statements.
Limitations

Despite usefulness, financial ratio analysis has some disadvantages. Some key
demerits of financial ratio analysis are:

1. Different companies operate in different industries each having different

environmental conditions such as regulation, market structure, etc. Such factors are so
significant that a comparison of two companies from different industries might be
misleading.

2. Financial accounting information is affected by estimates and assumptions.

Accounting standards allow different accounting policies, which impairs comparability
and hence ratio analysis is less useful in such situations.

3. Ratio analysis explains relationships between past information while users are more
concerned about current and future information.

Bench mark of key financial ratios in J&K bank:

Financial ratios are the only tools and not an end in credit appraisal process. They are
means to an end and the only pass guiding signals. Analysis of a combination of critical
financial ratios can help in proper decision making. They are also practical constraints in
evolving industry wise benchmarks for key financial indicators.
Some important ratios are used during analysis of the financial statement by the banks
to ascertain the credit worthiness of the borrowers is described as under:

LIQUIDITY RATIOS: These ratios are also called as working capital ratios or short
term solvency ratio. As enterprise must have an adequate working capital to run its day
to day operations. The important liquidity ratios are:

CURRENT RATIOS: It is defined as a relationship between current assets and

current liabilities. This ratio is a measure of general liquidity and is most widely used to
make the analysis of short-term financial position or liquidity of a firm. It is calculated as
under.

Current Assets
Current Ratio = -----------------------
Current liabilities
QUICK RATIO: This ratio is also called as acid test ratio or liquidity ratio. This ratio is
ascertained by comparing the liquidity assets (i.e. assets which are immediately
convertible into cash without much loss) to CL. It is calculated as under.

Quick Assets
Quick Ratio= --------------------
Current liabilities

Net working capital (NWC): The NWC is the measure of owner’s stake or long
term liquid funds in the firm. It has a close relationship with current ratio. When current
ratio equals to 1 NWC is zero. When current ratio is more than 1 NWC is positive and
vice versa. Negative NWC implies that lending bank is running a more than normal
financial risk in respect of borrowers. It is calculated as under.
NWC= current assets – current liabilities

Net working capital is sometimes used as a measure of firm’s liquidity. It is considered

that between two firms, the one having a larger NWC has the greater ability to meet its
current obligations.

LEVERAGE RATIO: A firm should have both strong short term as well as long term
financial positions. To judge the long term financial position of the firm, financial
leverage ratios are calculated. Following ratios are commonly used to analyze leverage.

DEBT EQUITY RATIO: Debt Equity ratio is calculated to measure the relative
claims of outsiders and the owners (i.e. shareholders) against the firm’s assets. This
ratio indicates the relationship between the external equities or the outsider’s funds and
the internal equities or the shareholders’ funds. It is calculated as

Long term Debts

Debt Equity ratio= --------------------------
Shareholders’ Funds

It is relaxed upon 3:1 in case of SME and large industries sector up to 4:1 in case
infrastructure projects.
TOL/TNW: This is also called gearing ratio. This ratio indicates leverage to the owned
funds of the firm. Higher gearing ratio indicates that the firm is more leveraged to the
external sources of funds and in turn will expose it to high debt cost.

INTEREST COVERAGE RATIO: It is used to test the firm’s debt servicing

capacity. A high interest coverage ratio means that the firm can easily meet its interest if
earnings before interest and taxes suffer considerable decline. It is calculated as

EBIT
Interest coverage ratio= ---------
Interest

DEBT SERVICE COVERAGE RATIO (DSCR): DSCR is the ratio of cash

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

EBIT+ principal repayment on existing & proposed loans

DSCR= --------------------------------------------------------------------------------
Principal repayment+ Interest payments

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

PROFITABILITY RATIOS: Profitability is the indication of the efficiency with which

the operations of the business are carried on. Bankers, financial institutions and other
creditors look at profitability ratios as an indicator whether or not the sustainability more
than it pays interest for the use of borrowed funds and whether the ultimate repayment
of their debt appears reasonably certain. Owners are interested to know the profitability
as it indicates the return, which they can get on their investment. The following are the
profitability ratios:
GROSS PROFIT RATIO: Profit margin reflects the efficiency with which the
management produces each unit of product. It shows the percentage of the gross profit
to sales. It is calculated as under:

Gross profit
Gross Profit ratio =-----------------* 100
Net sales

More the gross profit margin more is the efficient production & better is the operating
performance.

NET PROFIT RATIO: Net profit is obtained when operating expenses, interest and
taxes are subtracted from gross profit. It is calculated as under.

Net profit
Net profit Ratio=--------------* 100
Net sales

Net profit margin shows the percentage of net profit to sales. The ratio reflects the
efficiency of manufacturing, administration, and selling the products.

OVERALL PROFITABILITY RATIOS: It is also called “return on investment” or

return on capital employed. It indicates the percentages of the total capital employed in
the business. It is calculated as

Net profit before Interest and tax

ROI=-----------------------------------------------* 100
Capital employed

The ROI invested is a concept that measure the profit, which a firm earns or investing a
unit of capital. The return on capital employ also shows whether the company’s
borrowing policy was economically and whether the capital had been employed
fruitfully.
EARNINGS PER SHARE RATIO: In order avoid the confusion on account of the
varied meaning of the term capital employed, the overall profitability can also be judged
by calculating earnings per share with the help of the following formula:

PAT & preferences dividend

EPS = ------------------------------------------
No. of equity shares

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

PRICE EARNINGS RATIO: This ratio indicated the number of times the earnings
per share is covered by its market price. This is calculated according to the following
formula:
Market price per equity share
PER = -------------------------------------------
Earnings per share

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

Check list for verification of the information/data:

Bank should verify not only the arithmetical accuracy of the data furnished by the
borrowers but also the logic behind various assumptions based on which the projections
have been made. For this purpose, bank officials should hold discussions with the
borrowers on projected sales, level of operations, level of inventory, receivables, etc. if
necessary, a visit to the factory may also be made to have a clear idea of products and
processes.
STEPS IN WORKING CAPITAL ASSESSMENT.
STEPS IN WORKING CAPITAL ASSESSMENT

The working capital finance by banks is meant to assist the borrower in meeting a
portion of requirement of funds needed for day to day operations. Hence, it is obvious
that working capital finance should be made only after ascertaining the genuine needs
of the borrower. The following considerations may be kept in this regard.

1. Financial Statements (Balance Sheet & profit & loss A/c Should be obtained for the
last 3 years as well as estimates for current year and projections for next year.

2. The sales figure is the focal point for consideration since the requirement of working
capital will depend on the level of sales the borrower expects to achieve, in the next
year. To make a realistic assessment of sales projected for the next year; the trend in
sales during previous years, the potential for growth, the production capacity, demand
for product, expertise of entrepreneur in locating markets, export potential, type of
product, quality of product etc. will have to be taken into account. But, ultimately it is the
judgment of the credit appraiser which is vital for making a reasonable estimate of
sales.

3. Once the projected figure is assessed, the next step is to find out the requirement of
W.C. that is to ascertain as to what should be the optimum level of holding current
assets so that the projected sales are achieved. The levels of holding of inventory (Raw
material, semi-Finished Goods and Finished Foods) and receivables will depend on the
period of holding inventory and receivables. Hence thorough appraisal will have to be
made to find out as to what should be the reasonable period of holding of inventory and
receivables.

Once the period of holdings is scientifically ascertained, the investment in CA. (i.e. W.C)
can be calculated on the basis of the following:

a) R.M holding –calculated on the basis of so many months of R.M consumed.

b) SFG holding –calculated on the basis of so many months of cost of sales,

c) F.G holding –calculated on the basis of so many months of cost of sales,

 d) Receivables holding- calculated on the basis of so many months of sales.

4. Once the total requirement of C.A. is assessed, the next step is to explore the
alternate sources available, other than bank finance; in fact, the sources of financing
C.A. are three:

Sources like sundry creditors, advance payments from customers etc.

Bank finance, and
NWC, which is the contribution from long term sources.

In principle bank finance can be calculated as follows.

Total Current Assets Rs.

Less sources like S.cr

and advance payment Rs.

Difference (Working capital gap) Rs. Of the gap, Bank Finance will be 75% to 80%
depending upon margin requirements which will have to come from long term sources
(in the form of NWC).

POINTS TO NOTE:

1. Sales and period of holding of inventory and receivables are the areas where slight
misjudgment will result in unrealistic assessment. Hence, these two are the most
important areas requiring closer analysis and scrutiny.

2. The MPBF reflects the maximum limit up to which the bank can finance but is not an
entitlement to borrow. If the NWC available is more than the stipulated margin, the limit
of bank finance will be corresponding reduced.

List of recommendations of various Committees on Working Capital:

TENDON COMMITTEE:

1) These recommendations are applicable to all industrial units having working capital
limits of Rs.10 lacs and above from the banking system.
2) Term Loans for acquisition of capital assets, B/Gs’ etc. are not included while
computing cut off point at Rs 10 lacs.

3) Inventory and receivable norms (I/R norms) are prescribed for 15 specified industries.
For others, banks have to be guided by the own judgment and the past trends.

4) These inventory/receivables norms represent maximum holding, not entitlements and

are not interchangeable.

5) Deviations in these I/R norms are allowed under exceptional situations.

6) Three methods of lending are prescribed to calculate Maximum Permissibl

First method envisages borrower’s margin contribution to the extent or minimum 25% of
working capital gap and second method enhances his contribution to the extent of
minimum 25% of total current assets.

7) Borrowers should gradually be brought from first method of lending to second

method of lending.

8) Annual review or all such accounts should be conducted.

9) Bill culture should be encouraged and receivables should increasingly be financed by

way of bills rather than by cash credits against book debts.

10) Cash credit should be bifurcated into demand loan for core-portion and fluctuating
cash credit component with interest differentiation.
CHORE COMMITTEE RECOMMENDATIONS:

1) The borrowers enjoying working capital limits of over Rs.50 lacs should be placed
directly under second method of lending.

2) Bifurcation of cash credit should not be done but instead peak level and non-peak
level limits should be introduced.

3) Compulsory periodical review of cash credit accounts should be done and quarterly
information system should be introduced to monitor quarterly performance.

4) Bill finance should be greatly encouraged and system of drawer bill scheme should
be made a compulsory segment of cash credit limits.

NAYAK COMMITTEE RECOMMENDATIONS:

1) Working capital finance to SSI units and more particularly to smaller SSIs are on a
very limited scale and should be encouraged.

2) SSI units falling under first method of lending should be financed for working capital
on the basis of annual projected sales turnover and should not be subjected to
assessment under first method at lending.

3) Gross working capital requirement of such SSI units should be arrived at on the basis
of minimum 25% of their projected sales turnover. Minimum 20% should be financed by
bank & minimum 5% may be taken as margin.

4) In highly exceptional situations bank finance of less than 20% of annual projected
sales turnover may be given provided it is justified and genuine requirements of the
borrower are fully met. This may however not be made as rule.The aforesaid
recommendations are amended from time to time. The latest guidelines of RBI of India
on working capital advances are given separately.
 CASE STUDIES
ASSESEMENT OF WORKING CAPITAL CASH CREDIT

M/S Mandial Furniture House

M/S Mandial Furniture House proprietor Mr. Zahoor Ahmad Mandal, Usmania Masjid
Bota Kadal Lal Bazar, is engaged in retail business of furniture items The party has
been in connection with and dealing with J&K Bank Lal Bazar branch since year 2003
with satisfactory dealings and good conduct. The turnover of the account is
encouraging. The party has established good trade connections. No negative
complaints have been registered or found against the party ever since the opening of
the account with the bank branch. The amount is frequently routed through the account
and the performance of account is good

Borrower’s information

Name of the applicant Mr. Zahoor Ahmad Mandal

borrower

Address of head/Regd. office Usmania Masjid Bota Kadal Lal

Bazar
Constitution Sole proprietor

Firm Pan No. BVOPM5391Q

Net worth as on
 General information of the proposal

Date of receipt of the proposal 20/08/2017

Date of submission of the 31/08/2017

proposal
Nature of proposal Fresh Cash Credit limit

Existing Banking Arrangement Sole

Proposed Banking Sole

Arrangement
Sanction comes under the Branch Head
power of
Activity Furniture Dealer

Sector Trade

Priority classification Priority sector

Purpose of borrowing For expansion of business

Amount requested 5.00 Lacs

Securities proposed for the facility

Primary security

A. Hypothecation of Stocks, Book Debts & all other Current/Fixed assets of the firm

B. Collateral Security

Third party guarantee

1. Mr. Muhammad Mushtaq Bhat S/O: Mr. Ali Muhammad Bhat R/O:Masjid
Mohammadia , Alamdar Colony B, Lal Bazar,Sgr

2. Mr. Hilal Ahmad Najar S/o: Mr. Ghulam Rasool Najar R/O:, New Colony, Lal
Bazar,Sgr

Both the guarantors are dealing with J&K bank branches. As reported both are availing
cash credit facility with their respective branches and with satisfactory performance.

Financials of the Firm (amount in Rs. Lacs)

Particulars 31.03.2017 31.03.2018

Sales 42.16 65.00

Purchases 44.50 61.42

% of sales growth 54.17

Gross Profit 2.18 5.32

Net profit 1.36 2.50

Liabilities

Share capital 4.08 4.08

Total term Liabilities 4.08 5.08

Current Liabilities

C/C – JKB 0.00 6.00

Temp Borrowing 0.00 0.00

Un Presented Chq 0.00 0.00

Expenses Payable 0.16 0.22

Sundry Creditors 2.21 3.00

Total current Liabilities 2.37 9.22

Total Liabilities 6.45 14.30

Assets

Fixed Assets 0.23 0.20

Total Fixed Assets 0.23 0.20

Current Assets

Cash in hand /Bank Balance 0.21 0.30

Stocks 4.50 6.25

Sundry Debtors 1.51 7.55

Advances to Suppliers 0.00 0.00

Total Current Assets 6.22 14.10

Total Assets 6.45 14.30

Financial Indicators

NWC 3.85 4.88

Current Ratio 2.62 1.53

Stocking Velocity (Days) 36 37

Debtors Velocity (Days) 8 42

Creditors Velocity (Days) 18 18

Comments and observations

Financial indicators have been calculated as follows

a) Net Working Capital: Total Current Assets Less Total Current Liabilities

b) Current Ratio: Total Current Assets divide by Total Current Liabilities

c) Stock Velocity: Stock for the year divided by Cost of the Goods Sold or credit
purchases during year multiplied by 360

d) Debtors Velocity: Average Receivables or debtors for the year divided by credit
sales during the year multiplied by 360

e) Creditors Velocity: Average payables or creditors for the year divided by credit
purchases during the year multiplied by 360

Other Comments and Observations

SALES:
In the FY 2016-17 party has routed sales of Rs.42.16 lacs and has projected sales
turnover of Rs.65.00 Lacs for the FY2018 which given the previous year’s sales
turnover seems to be high and hence shall be accepted.

GROSS PROFIT & NET PROFIT :

Both gross & net profit are showing increasing trend

STOCK HOLDING LEVEL:

There has been a stock holding level of 36 days during FY 2017and has projected 37
days for the year 2018 but only 35 days of stock holding has been accepted keeping
in view the nature of activity .

DEBTOR VELOCITY LEVEL:

There has been a debtor velocity level of 8 days during FY 2017 and has projected
debtor velocity level of 42 days but only 35 days only during FY 2018 has been
acceptable.

CREDITOR VELOCITY LEVEL:

There has been a creditor velocity of 18 days during the FY 2017. However, the party
has proposed creditor level of 18 days which is acceptable.
 Assessment of MPBF (Amount in Lacs)

Particulars Amount

Accepted Sales 65.00

Accepted Purchases 61.42

Current Assets

Stock 35 6.00

Debtors 35 6.30

Cash in hand 0.30

Total Current Assets (a) 12.60

Current Liabilities

Creditors 18 3.22

Total current liabilities (b) 3.22

Working Capital Gap (a-b) 9.38

Margin 40% of WCG or NWC 4.88

whichever is higher)

MPBF 4.50
 Recommendations of the Bank Branch
In view of the foregoing discussion a Cash Credit Facility of Rs.4.50 Lacs (Rupees Four
Lac Fifty Thousand only) is recommend for sanction in favour of Mr. Zahoor Ahmad
Mandal S/o: Mr. Ghulam Rasool Mandal R/O: New Colony, Lal Bazar,Sgr-190023 for a
period of one year subject to renewal after review against securities as discussed.
 ASSESEMENT OF WORKING CAPITAL CASH CREDIT

M/S Dress Well

M/S Dress Well proprietor Mr. Ahmad Syeed Beigh, Bota Kadal Lal Bazar, is engaged
in business of garment items

Borrower’s information

Name of the applicant Mr. Ahmad Syeed Beigh

borrower
Address of head/Regd. office Bota Kadal Lal Bazar

Constitution Sole proprietor

Net worth as on

General information of the proposal

Date of receipt of the proposal 24/06/2017

Date of submission of the 17/07/2017

proposal
Nature of proposal Fresh Cash Credit limit

Existing Banking Arrangement Sole Arra

nge
Proposed Banking ment
 Sole
Sanction comes under the Branch Head
power of
Activity Garment Items

Sector Trade

Priority classification Priority sector

Purpose of borrowing To meet the WC

Amount requested 15.00 lacs

Securities proposed for the facility

Primary security

A. Hypothecation of Stocks, Book Debts & all other Current/Fixed assets of the
firm

B. Collateral Security

Third party guarantee

 1. Mr. Nazir Ahmad Khan S/O: Mr. Mohammad Amin Khan R/O: Botashah Mohalla,
Lal Bazar,Sgr

2. Mrs. Asiya Manzoor W/o: Mr. Tarique Ahmad Khan R/O:, Malla Pora, Raina
Wari,Sgr

Both the guarantors are dealing with J&K bank branches. As reported both are availing
cash credit facility with their respective branches and with satisfactory performance.

Financials of the Firm (amount in Rs. Lacs)

Particulars 31.03.2017 31.03.2018

Sales 3696823.00 6000000.00

Purchases 3343565.00 6094000.00

% of sales growth 0.00 62.30

Gross Profit 485652.00 895000.00

Net profit 295746.00 480000.00

Liabilities

Share capital 996455.00 1356000.00

Total term Liabilities 996455.00 1356000.00

Current Liabilities

C/C – JKB 0.00 1500000.00

Temp Borrowing 0.00 0.00

Un Presented Chq 0.00 0.00

Expenses Payable 26178.00 40000.00

Sundry Creditors 85148.00 225000.00

Total current Liabilities 111326.00 1765000.00

Total Liabilities 1107781.00 3121000.00

Assets

Fixed Assets 69036.00 62000.00

Total Fixed Assets 69036.00 62000.00

Current Assets

Cash in hand /Bank Balance 15961.00 18000.00

Stocks 457812.00 1447000.00

Sundry Debtors 564972.00 1594000.00

Advances to Suppliers 0.00 0.00

Total Current Assets 1038745.00 3059000.00

Total Assets 1107781.00 3121000.00

Financial Indicators

NWC 927419.00 1294000.00

Current Ratio 9.33 1.73

Stocking Velocity (Days) 49 85

Debtors Velocity (Days) 34 96

Creditors Velocity (Days) 9 13

Comments and observations

Financial indicators have been calculated as follows

a) Net Working Capital: Total Current Assets Less Total Current Liabilities

b) Current Ratio: Total Current Assets divide by Total Current Liabilities

c) Stock Velocity: Stock for the year divided by Cost of the Goods Sold or credit
purchases during year multiplied by 360

d) Debtors Velocity: Average Receivables or debtors for the year divided by credit
sales during the year multiplied by 360

e) Creditors Velocity: Average payables or creditors for the year divided by credit
purchases during the year multiplied by 360

Other Comments and Observations

SALES:
In the FY 2016-17 party has routed sales of Rs. 3696823.00 and has projected sales
turnover of Rs. 6000000.00 for the FY2018 which given the previous year’s sales
turnover seems to be high and hence shall be accepted.

GROSS PROFIT & NET PROFIT :

Both gross & net profit are showing increasing trend

STOCK HOLDING LEVEL:

There has been a stock holding level of 49 days during FY 2017and has projected 85
days for the year 2018 but only 35 days of stock holding has been accepted keeping
in view the nature of activity .

DEBTOR VELOCITY LEVEL:

There has been a debtor velocity level of 34 days during FY 2017 and has projected
debtor velocity level of 96 days but only 35 days only during FY 2018 has been
acceptable.

CREDITOR VELOCITY LEVEL:

There has been a creditor velocity of 9 days during the FY 2017. However, the party
has proposed creditor level of 13 days which is acceptable.

Assessment of MPBF (Amount in Lacs)

Particulars Amount

Accepted Sales 6000000.00

Accepted Purchases 6094000.00

Current Assets

Stock 1447000.00

Debtors 1094000.00

Cash in hand 18000.00

Total Current Assets (a) 2559000.00

Current Liabilities

Creditors 265000.00

Total current liabilities (b) 265000.00

Working Capital Gap (a-b) 2294000.00

Margin 40% of WCG or NWC 1294000.00

whichever is higher)

MPBF 1000000.00

Recommendations of the Bank Branch

In view of the foregoing discussion a Cash Credit Facility of Rs.1000000.00 (Rupees ten
Lac only) is recommend for sanction in favour of Mr. Ahmad Syeed Beigh S/o: Mr.
Assadullah Beigh R/O: Bota Kadal, Lal Bazar,Sgr-190023 for a period of one year
subject to renewal after review against securities as discussed.
 Conclusion
The bank sanctions working capital on the basis of following points:-

 Determination of current asset and current liabilities.

 Calculation of various ratios.
 Transaction of the firm with the bank.
 Feedback and references by various parties.

The Current Assets and Current Liabilities are estimated using various techniques of
financial management. Once the necessary requirements are fulfilled and relevant
information is extracted by the bank, the bank required quantum of working capital is
sanctioned in favour of the firm on prevailing interest rates.
BIBLIOGRAPHY
www.jkbank.net

Official records of the J&k bank

www.rbi.org.in/

www.moneycontrol.com/

www.google.com

https://en.wikipedia.org/wiki/

Shashi K. GUPTA, R.K SHARMA. Management Accounting

Principles and Practice