A

PROJECT REPORT

ON

“TO STUDY WORKING CAPITAL FINANCING BY BANK ”

AT
“VISHVAS CO-OP BANK NASHIK
’

UNIVERSITY OF PUNE

IN THE PARTIAL FULFILLMENT OF THE REQUIREMENT OF

BACHLOR OF BUSINESS ADMINESTRATION

[BBA]

UNDER THE GUIDANCE OF

PROF .D.G. SHELKE

SUBMITTED BY
Awari Vaibhav Navnath

Through

Akole Taluka Education Society’s Agasti Art, Commerce, &

Dadasaheb Rupavate Science College, Akole. BATCH—2019-20

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 STUDENTS DECLARATION

Im Awari Vaibhav Navnath declare that the Project Report entitled TO

“TO STUDY WORKING CAPITAL FINANCING BY BANK ”
completed and submitted by me to UNIVERSITY OF PUNE, for the
partial fulfillment of T.Y.B.B.A under the guidance of Prof. D.G.Shelke
is my original work and the conclusions drawn there in are based on the
material collected myself.

The project work was undertaken as a part of the academic curriculum

according to university rules

Place: Akole Vaibhav Navnath

Awari

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 ACKNOWLEDGEMENT

At the first instance I offer my sincere thanks to the director Prof. D.G.
Shalke, who has introduce restructuring course and given me opportunity to bring out
this report.

I am Great full to our Prof. S.M.Tajane and thank him for valuable assistance
that he has given me without his co-operation. I would not have been able to complete
this project.

I am Indebted to the Sr. Manager: Mr. Prasad Patil and project guide Prof.
S.Tajane of “Vishwas co-op bank. Ltd.” under whom I Have collected my
Necessary data of my Project.

I wish to take this opportunity for expressing my grateful thanks to all those
who have been of valuable assistance to me in charring out research, as well as
writing this project for their kind co-operation and encouragement.

I once again thank them.

Place: AKOLE Awari Vaibhav

Navnath

Date:
TYBBA(FINANCE)

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 Chapter Particulars

Certificate from collage guide

Acknowledgement
Declaration

1.
Introduction
1.1 Selection of topic
1.2 Objective of study
1.3 Research Methodology
1.4 Scope of the study

2.
Profile of the Organization
2.1
Introduction to Organization
2.2 History of organization

3.
Analysis & Interpretation of Data
3.1 Introduction to Working Capital
3.2 Recommendation of various committee on working capital
finance
3.3 Calculation of working capital of bank

4. Conclusion of the study

5. Recommendations

6. Bibliography

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 CHAPTER -1

INTRODUCTION

1.1 SELECTION OF THE TOPIC FOR STUDY

Topic selection is one of the most or one of the important aspects of out project.
As it decides the course of action, to be followed. The topic selected should be such
that it helps in understanding the Banking concepts clearly, as was given the topic by
the company itself.

The topic given by my project guide was “WORKING CAPITAL

FINANCING BY BANK”. This covers all the things related to the Working Capital
Finance provided by the banks.

The topic was to collect the financial information from the bank so as to find out
the working capital calculation process of the bank.

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 1.2 OBJECTIVE OF THE STUDY

To collect the financial information from the bank so as to find out the
working capital calculation process of the bank.

1) To be able to apply the theoretical knowledge obtained at the institute in

practical manner in the actual business environment.

2) To get the knowledge about organization problems, perceptions and

challenges.

3) To interact with the managers of the company and gain knowledge through
their real life experience.

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 1.3 RESEARCH METHODOLOGY

The data collected for the project was in the form of written as well as verbal
information information regarding the Working Capital Financing by Bank.

1) Primary Data:-
The information about the bank is gathered from the discussion with the
employees/staff and from the web site of the bank.

2) Secondary Data:-
The secondary data collected-
Balance as on the date of 31st march of the 3 year 2014-15, 2015-16, 2016-17.
The profit & loss accounts for the year ending on
The details about organizational structure

The sources of secondary data were-

The financial statements i.e. balance sheets and profit & loss accounts were
Obtained from accounts department.
Loan department supplied the loan procedures and details.
The information regarding organization structure and services provided by the
Bank was given Branch Manager.

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 1.4 SCOPE OF THE STUDY

The project relates to the financing of working capital by banks. An attempt has
been made to analyze the procedures which the banks follow finance to industrial
units to fulfill their working capital requirements, by utilizing the information
provided by the loans section of the bank.

The project extends to the study of the criteria on the basis of which banks
provide finance, the methods of computation of the permissible bank finance.

A major part of working capital loans is provided by the commercial banks.

Industries depend upon the banks as a primary source of working capital finance.

Over the past several years, banks have become the most reliable source of
institutional credit. Banks provide short-term finance to industries in the form of
working capital. Hence, working capital financing by banks is a subject worth studying.

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 CHAPTER- 2

PROFILE
OF THE
ORGANIZATION

2.1 Introduction to Bank

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 Vishwas Co-op Bank began in a small way, has now grown up to one of the
leading and respectable banks not only in Nashik but also in Maharashtra. Area of
Operation of the bank is Nashik, Thane, Dhule, Aurangabad, Jalgaon, Ahmad Nagar,
Mumbai and Pune. At present the bank has five branches and Head Office. Looking at
the performance and achievements of the Bank, RBI has granted the special
permission to Vishwas Co-op Bank for opening a branch in Mumbai.
Since the establishment, the bank is making a steady progress and continuously
maintaining “A” audit classification. Vishwas Co-op Bank is the first bank to provide
16 hours Customer service i.e. Morning 8 A.M. to Mid night 11 O’clock. The
Management Information System designed by bank has been made applicable to all
the urban Co-op Banks in Maharashtra. The loan application forms designed by the
bank are reckoned as a model loan application form and have been followed by many
urban co-op banks in Maharashtra. On 6th February 2003, Vishwas Co-op Bank has
been awarded the “Jagtik Marathi Chamber of Commerce and Industries” for its best
performance in the co-operative banking sector at the national level, in the presence of
Hon. Chief Minister of Maharashtra Shri. Sushilkumarji Shinde, Hon. Speaker of
Loksabha Shri. Manohar Joshi, Hon. Governer of RBI Dr. Bimal Jalan and Executive
Director of RBI Hon. Dr. Narendra Jadhav. Three of the six recommendations given
by the Hon. Chairman of Vishwas Co-op Bank for smooth working of the Urban Co-
op Banks are accepted by the honorable governor. The good work done by the bank is
also appreciated by “Sahakar Bharati”, Mumbai by presenting an award of the “Best
Bank” for the year

2.2 History of Organization-

Whenever one thinks about a bank, which is for the people, by the people, it is

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none other than Vishwas Co-op bank. In todays highly competitive and market driven
economy, the common man's basic need is nothing but “Financial Need”. A Common
man always finds it difficult to get loans of small amount. Taking into consideration,
the problems faced by common man, Hon. Chairman Shri. Vishwas Thakur at the age
of 27 alongwith his associate members founded the Vishwas Co-op Bank. The
proposal for the formation of a bank was prepared under the guidelines of District
Deputy Register Hon. Shri. Manohar Tribhuvan and Taluka Deputy Register Hon Shri
Vijay Suryanwanshi.
On 8th of October 1996, Co-operative department of Maharashtra State issued
the necessary license. On 25th March 1997, Vishwas Co-op Bank came into
existence. Vishwas Co-op Bank, which began in small humble way, has now grown
up to one of the leading banks in Nashik and even in Maharashtra. Vishwas Co-op
banks style of work is Dynamic. The approach of the bank in every aspect is very
positive and innovative. Introduction and implementation of “Management
Information System” and business development plan are the significant features of the
bank, which has been appreciated by the Co-op department.
Vishwas Co-op Bank has already started working on the interactive website
where the customer can download Current, Savings and FD froms. He will also get
the information on his account details through website. The customer will have only
read only access. The staff will communicate each other through mail, which will
make the communication more easier and faster. Vishwas Co-op Bank is also
planning to go for Core Banking Solutions in near future, which will make Banking
operations more customer friendly. Customer will avail the facility of anytime
anywhere banking. The entire banking operation will become centralised. The
Customer will withdraw as well as deposit the money from any branch. The staff will
be in position to give better customer service due to this automation process.

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 CHAPTER 3

ANALYSIS
AND
INTERPRETATIO
N OF DATA

3.1 INTRODUCTION TO WORKING CAPITAL

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 The working capital management refers to management of the working capital,
or to be more precise, the management of current assets .A firm working capital
consists of its investment in current assets which include short term assets such as cash
and bank balance, inventories, receivables (including debtors and bills),and marketable
securities. Working capital management refers to the management of the level of all
these individual currents assets. The need for working capital management arises from
two considerations. First, existence of working capital is imperative in any firm. The
fixed assets which usually require a large chunk of total funds, can be used at an
optimum level only if supported by sufficient working capital, and second, the working
capital involves investment of funds of the firm. If the working capital level is not
properly maintained and managed, then it may result in unnecessary blocking of scarce
resources of the firm. The insufficient working capital, on the other hand, put different
hindrances in smooth working of the firm. Therefore, the working capital management
needs attention of all the financial managers.

The working capital management includes the management of the level of

individual currents assets as well as the management of total working capital. However,
each individual current assets has unique characteristics which the financial manager
must consider in deciding how much money should be invested in each of these current
assets i.e., cash and bank balance, marketable securities, receivables and inventories has
been taken up in subsequent chapters. However, the general principles of working
capital management have been taken up in this chapter.

Nature and Type of Working Capital:

The term of working capital refers to current assets which may be defined as (i)
those are convertible into cash or equivalents fixed assets as well as the current assets,
both requires investment of funds. So, the management of working capital and of fixed

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assets, apparently seem to involve same types of considerations but it is not so. The
management of working capital involves different concepts and methodology than the
techniques used in fixed assets management. The reason for this difference is obvious.
The very basis of fixed assets decision process and the working capital decision process
are different. The fixed assets involve long period perspective and therefore, the concept
of time value of money is applied in order to discount the future cash flows; whereas in
working capital the time horizon is limited, in general to one year only and the time
value of money concept is not considered. The fixed assets affect the long term
profitability of the firm while the current assets affect the short liquidity position.

i) Gross Working Capital : The gross working capital refers to the firm’s
investment in all the current assets taken together. The total of investments in all the
individual current assets is the gross working capital. This concept implies the total of
all current assets of a business firm. A current asset is that which can be converted into
cash within an according year or an operating cycle. The current assets include cash and
bank balance, debtors, bills receivables, inventories, expenses prepaid and short-term
investments.

ii) Net Working Capital : This concept of working capital is the difference between
current assets and current liabilities. While current assets have been defined above,
current liabilities can be explained as those liabilities which are expected to mature for
payment within an accounting year and include creditors, bills payable, outstanding
expenses, bank overdraft and short-term loans.

The net working capital may either be positive or negative. If the total current
assets are more than total current liabilities, then the difference is known as positive net
working capital, otherwise the difference is known as negative net working capital.

Both concepts of working capital (gross working capital & net working capital)
have their own relevance and a financial manager should give due attention to both of
these. The cash inflows and outflows for any firm are seldom synchronized and so,
some working capital is necessary. The cash outflows occurring from the existence of
current liabilities are more easily and correctly predictable but the cash flows from

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current assets are difficult to be accurately predicted. The more predictable, these cash
flows are, the less the net working capital required by the firm. The firm with more and
more uncertain cash inflows must maintain higher level of current assets adequate to
cover the current liabilities.

The working capital can also be divided into categories: i) fixed working capital
and ii) fluctuating working capital.

Every business requires some minimum amount of working capital inspite of the
level of operations, throughout the year. This amount represents the fixed amount of
working capital.

In many business firms, the levels of operations fluctuate from time to time
depending upon the demand pattern. In case, the demand periods, the need for working
capital also capital also increases and during low demand periods, the for working
capital also comes down. This aspect of working capital can be shown in a better way
with the help of following diagram.

The fixed amount of working capital also go on increasing as the time passed
because of the growth of the firm. This can be shown in the following diagram.

FACTORS DETERMINING WORKING CAPITAL REQUIREMENT:

The working capital needs of a firm are determined and influenced by various
factors. A wide variety of considerations may affect the quantum of working capital
required and these considerations may vary from time to time. The working capital
needed at one point of time may not be good enough for some other situation. The

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 determination of working capital requirement is a continuous process and must be
undertaken on a regular bas9s in the light of the changing situations. Following are
some of the factors which are relevant in determining the working capital needs of the
firm
1. Basis Nature of Business: In some business organizations, the sales are mostly on
cash basis and the operating cycle is also very short. In these concerns, the working
capital requirement is comparatively less. Mostly service giving companies come in
this category. In such cases, the working capital requirement is more.
2. Production policy : Working capital requirements also fluctuate according to the
production policy. Some products have a seasonal demand but in order to eliminate
the fluctuations in working capital, the manufacturer plans the production in a steady
flow throughout the year. This policy will even out the fluctuations in working capital.
3. Market conditions : Due to competition in the market, the demands for working
capital fluctuate. In a competitive environment, a business firm has to give liberal
credit to customers. Similarly, it will have to maintain a large inventory of finished
goods to service the customers promptly. In this situation, larger amount of working
capital will be required.
On other hand, when a firm is in seller’s market, it can manage with a smaller
amount of working capital because sales can be made on cash basis and there will be
no need to maintain large inventory of finished goods because customers can be
serviced with delay.
4. Seasonal fluctuations : A firm which is producing products with seasonal demands,
requires more working capital during peak seasons while the demand for working
capital will go down during slack seasons.
5. Growth and expension activities : The working capital needs of the firm increase as
it grows in terms of sales or fixed assets. A growing firm may need to invest funds
in fixed assets in order to sustain its growth production and sales. This will in turn
increase investments in current assets which will result in increase in working capital
needs.
6. Operating efficiency : The operating efficiency of the firm relates to the optimum
utilization of resources at minimum cost. The firm will be effectively contributing to
its working capital if it is efficient in controlling operating costs. The working capital
is better utilized and cash cycle is reduced which capital needs.

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7. Credit policy: The working capital requirements of a firm depend to a great extent
on the credit policy followed by a firm for its debtors. A liberal credit policy followed
by a firm will result in huge funds blocked in debtors which will enhance the need for
working capital. The situation will be further deteriorated if the collection procedure
is also slack. If a liberal credit policy is followed without inquiring into the credit
worthiness of customers there can be a problem of recovery in future which will
further push up the working capital requirements.
The need for working capital is also affected by the credit policy followed by
the firm’s creditors. If the creditors are ready to supply materials and goods on liberal
credit, working capital requirements are substantially reduced. On the other hand, if
purchases are mainly for cash, working capital needs go up. While planning the
working capital, due attention should be given towards the credit policies followed by
the firm and its creditors.

8. Sales growth : As the sales grow, the working capital needs also go up. Actually it is
very difficult to establish an exact proportion of increase in current assets, as a results
of increase in sales. Advance planning of working capital becomes essential because
current assets will have to be employed even before growth in sales takes place. Once
sales start increasing, they must be sustained. For this a firm will have to expand its
production facilities which will require more investments in fixed assets. This will in
turn result in more requirements of current assets which will increase working capital
needs.

9. Dividend policy : a company has to pay dividends in cash as per company act 1956.
if a liberal policy is followed for payment of dividends, more working capital will be
required. The needs for working capital will be substantially reduced if dividend
policy is conservative.

Forms of Bank Finance

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BANK CREDIT

Bank credit is the primary institutional source of working capital finance in India.
In fact, it represents the most important source for financing of current assets.

FORMS OF CREDIT

1. OVERDRAFT
Under cash credit/overdraft form/ arrangement of bank finance, the bank
specifies a predetermined borrowing/credit limit. The borrower can draw/ borrow
up to the stipulated credit/overdraft limit. Within the specified limit, any numbers
of drawls /drawings are possible to the extent of his requirement periodically.
Similarly, repayment can be made whenever desired during the period. The
interest is determined on the basis of the running balance/amount actually utilized
by the borrower and not on the sanctioned limit. However, a
minimum(commitment) chare may be payable on the unutilized balance
irrespective of the level of borrowing for availing of the facility. This form of
bank financing of working capital is highly attractive to the borrowers because,
firstly, it is flexible in that although borrowed funds are repayable on demand,
banks usually do not recall cash advances/roll them over and, secondly, the
borrower has the freedom to draw the amount in advance as and when required
while the interest liability is only on the amount actually outstanding. However,
cash credit/overdraft is inconvenient to the hampers credit planning. It was the
most popular method of bank financing of working capital in India till the early
nineties. With the emergence of new banking since the mid-nineties, cash credit
cannot at present exceed 20% of the maximum permissible bank finance (MPBF) /
credit limit to any borrower.

2. LOANS
Under this arrangement, the entire amount of borrowing is credited to the
current account of the borrower or released in cash. The borrower has to pay

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 interest on the total amount. The loans are payable on demand or in periodic
installments. They can also be renewed from time to time. As a form of financing,
loans imply a financial discipline on the part of the borrowers. Form a modest
beginning in the early nineties, at least 80% of MPBF/CREDIT limit must now be
in the form of loans in India.

3. BILLS PURCHASED/DISCOUNTED
This arrangement is of relatively recent origin in India. With the
introduction of the new bill market scheme in 1970 by the reserve bank of
India(RBI), bank credit is being made available through discounting of usance
bills by banks. The RBI envisaged the progressive use of bills as an instrument of
credit as against the prevailing practice of using the widely-prevalent cash credit
arrangement for financing working capital. The cash credit arrangement gave rise
to unhealthy practices. As the availability of bank credit was unrelated to
production needs, borrowers enjoyed facilities in excess their legitimate needs.
Moreover, it led to double financing. This was possible because credit was done,
for example, by buying goods on credit from suppliers and raising cash credit by
hypothecating the same goods. The bill financing is intended to link credit with
the sale and purchase of goods and, thus, eliminate the scope for misuse or
diversion of credit to other purposes.

4. TERM LOANS FOR WORKING CAPITAL:

Under this arrangement, banks advance loans for 3-7 years repayable in
yearly or half-yearly installments.

5. LETTER OF CREDIT:
While the other forms of bank credit are direct forms of financing in
which banks provide funds as well as bear risk, letter of credit is an indirect form
of working capital financing an banks assume only the risk, the credit being
provided by the supplier himself.
The purchaser of goods on credit obtains a letter of credit from a bank.
The bank undertakes the responsibility to make payment to the supplier in case the
buyer fails to meet his obligations. Thus, the modus operandi of letter of credit is

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 that the supplier sells goods on credit/ extends credit (finance) to the purchaser,
the bank gives a guarantee and bears risk only in case of default by the purchaser.

 SECURITIES REQUIRED IN BANK FINANCE :

Banks do not provide working capital finance without obtaining adequate

security. The following securities are the most important modes of security
required by bank-

1. HYPOTHECATION:
Under this mode of security, the banks provide credit to borrowers against
the security of movable property, usually inventory of goods. The goods
hypothecated, however, continue to be in the possession of the owner of these
goods (i.e., the borrower). The rights of the lending bank (hypothecate) depend
upon the terms of the contract between the borrower and lender. Although the
bank does not have physical possession of the goods, it has the legal right to sell
the goods to realize the outstanding loan. Hypothecation facility is normally not
available to new borrower.

2. PLEDGE:
Pledge, as a mode of security, is different from hypothecation in that in
the former, unlike in the goods which are offered as security are transferred to the
physical possession of the lender. An essential prerequisite of pledge therefore is
that the goods are in the custody of the bank. The borrower, who offers the
security, is called a ‘pawnor’ (pledgor), while the bank is called ‘pawnee’
(pledgee). The lodging of the goods by the pledgor to the pledge is a kind of
bailment. Therefore, pledge creates some liabilities for the bank. It must take
reasonable care of goods pledged with it. The term ‘reasonable care’ means car,
which a prudent person would take to protect his property. He would be
responsible for any loss or damage if he uses the pledged goods for his own
purposes. In case of non-payment of the loans, the bank enjoys the right to sell the
goods.

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3. LEIN:
The term lien refers to the right of a party to retain goods belonging to
another party until a debt due to him is paid. Lien can be of two types - I)
particular lien , & II) general lien. Particular lien is right to retain goods
until a claim pertaining to these goods is fully paid. On the other hand, general
lien can be applied till all dues of the claimant are paid. Banks usually enjoy
general lien.

4. MORTAGE:
It is the transfer of a legal/ equitable interest in specific immovable
property for securing the payment of debt. The person who parts with the interest
in the property is called ‘mortgagor’ and the bank in whose favour the transfer
takes place is the ‘mortgagee’. The instrument of transfer is called the ‘mortgage
deed’. Mortgage is, thus, conveyance of interest in the mortgaged property. The
mortgage interest in the property is terminated as soon as the debt is paid.
Mortgages are taken as an additional security for working capital credit by banks.

ASSESSMENT OF WORKING CAPITAL

A) SIMPLIFIED TURNOVER METHOD

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  Under this method for working capital purposes for borrowers
requiring fund-based limits upto Rs.5 crore SSI borrowers and Rs.2
crore in case of other borrowers, may be assessed at minimum of 25%
of the projected annual turnover of which 115th should be provided by
the borrower (i.e. minimum margin of 5% of the annual turnover to be
provided by the borrower) and the balance 4/5 th (i.e. 20% of the annual
turnover) can be extended by way working capital finance.

 The projected turnover/output may be interpreted as projected “gross

sales “which will include excise duty also.

 Since the bank finance is only intended to support need-based

requirement of a borrower, if the available NWC (net long term surplus
funds) is more than 5% of the turnover the former should be reckoned
for assessing the extent of bank finance.

B) MAXIMUM PERMISSIBLE BANK FINANCE SYSTEM (MPBF)

 Assessment of working capital limits in respect of borrowers not

eligible to provided fund based working capital limits under
‘simplified turnover method’ is to be done as per MPBF system
‘second method of lending’, except in case of tea and sugar industry
where credit requirement is assessed as per cash budget system.

 Under this method, for assessment of borrowers WC needs, the

projections submitted by the borrower in the various forms mentioned
that the following year is relevant. The first step in assessing the
quantum of WC finance is to find out whether the projections given by
the borrower are reasonable. Any optimism or pessimism in accepting
projections is neither desirable for the bank nor for the borrower as it
may lead to over-financing or under-financing.

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  To assess the reasonableness of borrower’s projections, the following
factors should be kept in view;

a) The branches can use with advantage the past data given by the borrower as well
as the data available with it. The comparison has to be made between the past
performance and the future projections. If the future projections are markedly
different form the past trend in relation to projected rate of growth, the reasons for the
same have to be ascertained before accepting the various projections.

b) The projections given by the borrower are normally based on certain

assumptions such as market demand, cost of raw materials, price, availability of
inputs and other environmental factor. The bank has to assess how far these
assumptions are realistic and materialize.

c) How limits already sanctioned by the bank have been utilized by the borrower in
the past? Has the conduct of the account been as per terms of sanction or these have
been frequently violated.

d) Critical analysis of sales projections – the most important area to be looked into
is sales. All other aspects are directly related to the projected level of sales. Therefore,
determining the projected level of sales is the first step in assessing the working
capital needs of a borrower. Once the level of sales has been determined in relation to
sales. The projected level of sales depends upon:

 What is the installed and licensed capacity? Does it have any idle capacity,
which can now be utilized?

 Are essential inputs available to take care of projected production figures?

 What are the present market conditions and terms of sales? What plans are there
to boost sales?

 What is the position of order book/orders in hand?

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  From what sources increase in NWC will be met?

 Is the unit proposing to tap the export potentials/ markets? What are the
prospects for exports?

 How the increase in production is going to affect the quality and cost of
production?

 Is the unit undertaking any expansion, modernization or diversification

programme?

A higher than normal sales estimate for the following year can be accepted only
after the bank is satisfied on the basis of the above scrutiny that the projected level of
sales can be achieved and the available past data and future plans give positive
indications in this regards. The bank has also to ensure that borrower is whiling to
create the necessary support to achieve the sales target.

1. The branches, having satisfied itself as to the projected level of sales, can
determine
the other data in relation to sales. The following steps can be taken for finalizing
other data:

 The relationship between different items constituting cost of production can be

studies in relation to sales and cost of sales. It is to be ensured that the projected
increase in respect of any items is not out of proportion to the past relationship.
Valuation of various items should be based on current cost.

 After finalizing the above-mentioned projections, the holding period of current

assets is to be determined. The holding period of chargeable current assets can
be determined based on the rule that the projected holding should be preferably
lower of norms or past practice.

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  The levels of other current assets can also be estimated on the basis the
borrower’s past practice.

 The projected level of NWC should at least be 25% of total current assets under
second method of lending.

 The bank is to bridge the gap between current assets and current liabilities after
ensuring the borrower’s contribution. Therefore, the quantum of bank finance is
very much dependent upon availability of short-term credit from other sources
i.e. other current liabilities is projected properly.

C) CASH BUDGET SYSTEM

In case of tea and sugar industries of finance may be at the peak during certain
months while the sale proceeds may be realized throughout the year to repay the
outstanding in the account. Therefore, credit limits are fixed on the basis of projected
monthly cash budgets to be received before beginning of the season. Branches should
follow the procedure/guidelines issued form time to time through various circulars for
financing tea and sugar industries.

FIXATION OF FUND-BASED AND NON- FUND BASED LIMITS

 After arriving at the MPBF on the basis of inventory and receivable norms and
appropriate method of lending, the various fund based & non-fund based limits
and sub-limits have to be decided. The fund based limits should not exceed the
MPBF.

 The bulk of the inventory limits are set up generally in the shape of cash credit,
the receivable limits may be either by way of C/C against hook debts or by way
of bills limit. Within the sanctioned limit, drawing power may be allowed on the
basis of monthly stock statements, depending upon the regularity and reliability
and to ensure there is no double financing.

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  In addition to the fund-based limits, non-fund based limits like inland &foreign
L/C, guarantees and acceptances are given keeping in view the needs as well as
the capacity of the borrower.

Loan system for delivery of bank credit

In order to bring out an element of discipline in the utilization of bank credit and
gain better control over flow, a “loan system for delivery of bank credit” was
introduced by RBI. The said system has been extended in phased manner to cover
larger number of borrowers.

 Loan component and cash credit component.

 Under this system, after the assessment of MPBF of a borrower,
working capital requirements are bifurcated into ‘loan component’,
termed as Working Capital Demand Loan (WCDL) and ‘cash credit
(cc) component’. Normally, borrowers are expected to avail the ‘loan
component’ only after having fully availed/utilized the prescribed
percentage of CC component of MPBF. However, if a borrower desires
to draw the ‘loan component’ first, the same can be agreed to.
 The extant guidelines for annual review of working capital limits are
invariably to be strictly observed even under the system of loan
delivery. As regards the guidelines relating to the cut off point of the
working capital limits above which loan delivery system is applicable,
the percentages of limits to be allowed as WCDL and CC component,
the repayment of WCDL, the procedure for renewal/rollover of
WCDL, incumbents should follow the instructions advised through HO
circulars form time to time.
 The loan system would be applicable to borrower accounts classified
as ‘standard’ or ‘substandard’
 Adhoc credit limit for meeting temporary requirements should be
sanctioned only after the borrower has fully utilized the “cash credit

26 | P a g e
 component” and the ‘loan component’ of the MPBF. In the case of
consortium, member banks are normally expected to share the “cash
credit component” and the “loan component” on a pro rata basis of
their individual shares of MPBF.
 The bifurcation of the credit limit into ‘loan’ and ‘cash credit’ should
be effected after excluding export credit limits (pre-shipment and post-
shipment).
 Bills limit for inland sales is to be fully carved out of the loan
component. Bills limit also includes limit for purchase of third party
( outstation) cheques , banks drafts.
 Suitable clauses are to be incorporated in the loan document to provide
for a right to recall working capital credit facility including the loan
component.
 Exemption – at present sugar, tea fertilizer and information technology
& software industries are exempted form the purview of loan system
for delivery of bank credit.

PROCEDURE FOR OBTAINING WORKING CAPITAL

FINANCE

27 | P a g e
Regarding loan proposal

We refer to the captioned loan proposal recommended by you for

sanctioning/renewing advance facility the loan requested by the applicant. We are
pleased to inform you that, the board of directors in the meeting held on
________________. Have considered the proposal for sanction / renewal and the
detailed of same as under:-

Mr. / Mrs.-----------

Limit requested-
Type
Limit sanctioned / renewed
Margin
Margin
Repayment holiday
Repayment in monthly installment
Rate of interest with monthly rests+ penal interest @ % to be charged on the
overdue amount on monthly basis.
Installment Rs-------per month
1st installment due
Security:-

Prime: ---------------------------------

Collateral: ------------------------------

Valuation amount Rs.------------------

28 | P a g e
3.2 Recommendation’s of various committees on working
capital finance

Tandon Committee Recommendations on working capital finance

from the bank:-
A study group, popularly known as tandon committee, was appointed by
Reserve Bank Of India in July 1974, under the chairmanship of shri.
P.L.Tandon,to suggest guidelines for national allocation and optimum use of bank
credit. Tandon committee also highlighted the weaknesses in the existing system of
working capital finance, as pointed out by the committee. The Tondon Committee
suggested that the borrower should be allowed to hold reasonable level of current
assets. Particularly in the case of inventories, the Tondon committee suggested that
the level of inventory should be as per the requirement only and in any case
excessive investments in the inventories should be avoided. The banker should
finance only those receivables which are in tune with the practices of the borrower’s
company and industry. In order to avoid excessive investments in inventories, there
is a need for having some uniform norms. The Tondon Committee in its final report
has suggested norms for 15 industries. Industries like heavy engineering and sugar
were omitted.
The recommendations of the Tandon Committee are based on the following
notions

1. Operating plan:
The borrower should indicate the likely demand for credit. For this
purpose, he should draw operating plans for the ensuing year and supply them to the
banker. This procedure will facilitate credit planning at the bnks level. It will also
help the bankers in evaluating the borrower’s credit needs in a realistic manner and
in the periodic follow-up during the ensuing year.

2. Production-based financing:
The banker should finance only the genuine production needs of the
borrower. The borrower should maintain reasonable levels of inventory and

29 | P a g e
 receivable; he should hold just enough to carry on his target production. Efficient
management of resources should therefore, be ensured to eliminate slow moving
and flabby inventories.

3. Partial bank financing:

The working capital needs of the borrower cannot be entirely financed by
the banker. The banker will finance only a reasonable part of it; for the remaining
the borrower should depend upon his own funds, generated internally and
externally.

Following are the major recommendations:

1. Inventory and receivable norms

 The borrower should be allowed to hold only a reasonable level of
current assets, particularly inventory and receivables;

 The banker should finance only those receivables which are in tune
with the practices of the borrower’s firm and industry;

 The committee suggested norms for 15 industries excluding heavy

engineering and highly seasonal industries, like sugar. The norms
were applied to all industrial borrowers, including small-scale
industries, with aggregate limits from the banking system in excess of
Rs.10 lakhs;

 Norms are prescribed separately for 49 different industries. The norms

appropriate to each unit should be applied.

2. Lending norms
It recommended that the banker be required to finance only a part of the
working capital gap; the other part was to be financed by the borrower from
the long-term sources. Working capital gap is defined as current assets minus
current liabilities other than the bank borrowing.

30 | P a g e
 Current assets will be taken at estimated value, or as per the tendon
committee norms, whichever is lower. Current assets will consist of inventory
and receivables, referred as chargeable current assets and other current assets.

3. Maximum Permissible Bank Finance (MPBF):

Committee suggested the following three methods of
determining the permissible level of bank borrowings:

 First method: In the first method of lending, the borrower will

contribute 25% of the working capital gap; the remaining 75% can be
financed from bank borrowings. This can be represented as --- MPBF
= 75% of W.C.G.
W.C.G. = C.A- C.L.

 Second method: The borrower will contribute 25% of the total current
assets. The remaining of the working capital gap can be bridged from
the bank borrowings. This can be represented as ---- MPBF = 75% of
current assets.

 Third method: The borrower will contribute 100% of core assets and
25% of the balance of the working current assets. The remaining of the
working capital gap can be met from the bank borrowing. This can be
represented as ---- 75% (current assets- core current assets) - current
liabilities.
The Reserve Bank of India has implemented only the first two methods. The
recommendations apply to all borrowers having limits in excess of Rs.20 lakhs
from the banking system. At the time when this system of lending was introduced,
in some cases the net working capital was negative while in others it was equal it
was equal to 25% of working capital gap. The committee allowed this deficiency
to be financed, in addition to the permissible bank finance by banks. It was
however, to be regularized over a period of time depending upon the funds
generating capacity and ability of the borrower. This kind of credit facility was
called working capital term loan.

31 | P a g e
 Methods of determining MPBF as under the Three Methods of Lending.

Particulars Method I Method II

Method III

Core Assets 20 20
20

Other Current Assets 80 80

80

Total Current Assets 100 100

100

Less. Current liabilities 20 20

20

Working Capital Gap 80 80

80

Less: Borrower’s Contribution 20 25

40
MPBF 60 55
40

Calculation of borrower’s Contribution

1st method: 25% of working capital gap

80*25% = 20

32 | P a g e
 2nd method: 25% of total current assets
100*25% = 25
3rd method: 100% of core current assets
20+ (80*25%) = 20+20 =40

4. Style of Credit:
In view of the deficiencies of the cash credit system of lending, the
committee recommended the bifurcation of total credit limit into fixed and
fluctuating parts.
The fixed component was to be treated as a demand loan for the year
representing the minimum level of borrowings, which the borrower expected to use
throughout the year. The fluctuating component was to be taken care of by a
demand cash credit, which could be partly used by way of bills.
The committee also suggested the interest differentials. As an incentive to
switch over to the new style of credit, it recommended that interest rate on the loan
component be charged lower than the cash credit account. The RBI stipulated the
differential at 1%.

5. Information system:
The committee advocated for the greater flow of information both for
operational purposes and for the purpose of supervision and follow-up.
Borrowers with credit limits of more than Rs.1 crore were required to
supply the quarterly information. From the periodical data supplied, the bank should
ascertain whether the actual result was in conformity with the expected result of
there was a variance calling for remedial action. A “+ or -10%” variance was
considered normal. The variance beyond this limit needed to be investigated.
The main thrust of the Tondon committee was that the banker should be
treated as a partner in the business with whom information was to be shared freely
and frankly.

33 | P a g e
 NPA treatment for WCF

Definition of NPA

An asset, including a leased asset, becomes non-performing when it ceases to

generate income for the bank. A ‘non performing asset’ (NPA) was defined as a credit
facility in respect of which the interest and/ or installment of principal has remained
‘past due’ for a specified period of time. The specified period was reduced in phased
manner as under

Year ending march 31 Specified period

1993 Four quarters

1994 Three quarters

1995 onwards Two quarters

NPA borrower wise of facility –wise

The criteria for classifying an account into performing and non-performing

assets are based on the record of the recovery of interest/installment and conduct of
the running account. Further, all the facilities granted to a borrower will have to be
treated as NPA and not particular facility or part there of which has become NPA.

Net worth of borrower/guarantor/value of security

Availability of security of net worth borrower/guarantor should not be
taken into account for the purpose the treating an advance as NPA or otherwise, as
income recognition is based on record of K.

34 | P a g e
 FORMAT OF CALCULATING OF N.P.A.

PARTICULAR AMT

0000

Gross advances 0000

Gross N.P.A. 0000

Gross N.P.A. as percentage of net advances 0000

Deductions

Balance in interest suspense A/C 0000

DCGC/ECGS claims received & held pending adjustment 0000

Partly payment received & kept in suspense A/C 0000

Net Advances ( 1 - 4) 0000

Net N.P.A. 0000

Net N.P.A. as percentage of net advances 0000

35 | P a g e
 3.3 Calculation of working capital of Vishwas co-operative
bank
(Last 3 years)

particular 31/03/2015 31/03/2016 31/03/2017

Total of balance-sheet
Cash & stamp 1681022 1590806 1919128
5 6 6
Bank balance 871925 1887943 2846425
0 2 0
Investment 24778394 23041204 27245704
2 5 7
Loans & Advances 36643291 39971008 48672094
8 6 1
Overdue & Bills for 372607 5206515 818808
collection 3 9
Assets 1722536 19230482 2485284
3 5
Other assets 10590622 11088624 1665519
3
Branch adjustment 20457 - 10533
7
67130885 70043525 85663498
Total 0 0 8
Deductions

Contra entries
Loan recovery scheme 231112 463823 706704
6 7 2
Bills for collection 141494 56827 112104
7 8 7
Total 372607 520651 818808
3 5 9

Working capital of bank 66758277 69522873 84844689

7 5 9

36 | P a g e
 Year N.P.A.
2014 2.86
2015 2.54
2016 2.40
2017 1.51

From this analysis, we can see that Working Capital of bank is increasing year by
year. This is good for bank because the more the working capital the more will be the
investment by the bank and the more is the opportunity to make profits.
.

N.P.A. of last few years

By Trend Analysis
Moving Average Method

06 2.86 + 2.54 = 2.70

37 | P a g e
 2

07 2.54 + 2.40 = 2.47

2

08 2.40 + 1.51 = 1.96

2

2.5

1.5 NPA
Avg. Npa
1

0.5

0
2015 2016 2017

The above analysis shows that NPA is decreasing in year by year. This is very good
feature for bank because bank can have more faith in its customers and also depend
on the current scrutiny procedure.

Vishwas Co.op Bank ltd. Nashik

Balance Sheet As on 31/03/2017

LIABILITIES RS. RS. ASSETS RS. RS.

Share Capital Cash In Hand

Share Capital Cash In Hand 1,67,71,586
Reserve & Other Funds Stamp In Hand
Bad & Doubtful Debts Res. 16,64,036 Franking Stamp In Hand 24,17,080
Std. Assets Reserve 16,51,010 Stamp On Hand 2,620
Building Fund 58,59,155 Total Stamp In Hand 24,19,700
Reserve Funds 88,76,812
Tent. Bad & doubtful Res. 26,94,848 Bank Balance
Charity Fund 3,000 MSC.Bank Nsk.A/c 6,889
Dividend Equi. Fund 21,000 S.B.I. 88,25,816
General Fund 2,06,000 MSC Bank Mumbai 8,52,459

38 | P a g e
Inv.Dep. Res. 15,089 Ndcc Bank Model Col.Br. 3,16,918
Total Res. & Other Funds 2,09,90,950 HDFC Bank Pune A/C 2,48,850
Central Bank Of India 5,148
Deposits HDFC Bank SGL A/C 6,27,234
Current Account 4,81,95,061 NDCC Bank Agra Rd. Br. 9,27,234
Saving Account 13,95,02,581 HDFC Bank Nashik A/C 87,06,522
Reccuring Account 1,14,83,392 I.D.B.I. Bank 79,37,243
Fix Account 24,72,67,019 Punjab National Bank A/C 10,000
Re-investment Account 22,70,49,993 Total Bank Balances 2,84,64,250
Locker Security Deposit 29,10,000
Matured Dep. Not paid 3,48,74,789 Investment
Overdraft Ag. Fdr 21,933 Non SLR Inv. 62,47,500
Cash Credit (stock-hyp) 6,938 NMC 7.5% Bonds 3,40,000
Total Deposits 71,13,11,707 Reserve Fund Inv. 5,00,000
MSC Bank Reserve Fund Inv. 75,00,000
Loan recovery Scheme Co-op Bank shares 13,62,050
Loan recovery Scheme 3 Building Fund Inv. 5,00,000
Outward Bills For Collection MSC Bank Inv. 52,50,000
(contra)
O.B.C. 11,21,047 NDCC Bank Inv. 1,40,00,000
Overdue Int. Reserve S.B.I. Inv. 50,00,000
NPA Int. Reserve 70,67,042 MSFC 10.25% Bond Inv. 10,00,000
Interest Payable Govt. Securities 12,25,99,392

Interest Payable 25,51,929 IDBI Bank Inv. 6,50,00,005

Int. In Cash For Quarterly FD 5,32,592 Sarswat Bank Inv. 75,00,000
Total Int. Payable 30,84,521 Shamrao Vitthal Bank Inv. 50,00,000
ICICI Preduntial Bonds 30,44,100
Other Payable & Provisions IOB Bonds Inv. 30,16,500
Audit Fee Payable 4,44,084 6.75% APSFC Bonds 45,97,500
T.D.S. Payable 21,736 Thane Janata Bank For Inv. 70,00,000
Pay order 6,11,89,746 Cosmos Bank For Inv. 50,00,000
Provisions for Expenses 1,20,710 Yes Bank Inv. 70,00,000
Sundry Crs. 22,80,966 ICICI Fix Maturity Plan 10,00,000
Bonus Payable 9,32,352 Total Inv. 27,24,57,047
Div. Payable 8,32,866
Div. Payable 2005/06 9,69,144 Loans & Advances
Div. 2006-07 2,88,038 Gala/Shade Purchase
Staff Welfare Fund 1,41,244 Staff Loan (Term Loan) 90,00,561
Education Fund Payable 30,000 O/D Ag.FDR 9,69,55,272
Bank Guarantee A.E.O. 2,90,000 Vehical Hypothication 1,43,01,768
Obligations
Closing Allowance Payable 3,21,27 Housing Loan (New) 3,32,04,714
6
Total Other Payable & Prov. 6,78,62,163 Housing Loan (old) 3,79,76,569
Personal Loan 1,43,50,294
Profit Swapnapurti Loan 12,24,403
Profit & Loss 35,62,273 Cash Credit (Stock-Hyp) 2,41,82,577
Balance Of Profit 3,733 Term Loan 21,69,77,295

Total Profit 35,66,006 Self Help Group 3,39,328

Vishwadeep Yojana 38,68,750

39 | P a g e
 Stock Hypo (Term Loan) 17,22,694
Cash Credit 1,53,65,750
B/R 14,60,230
Total Loans And Advances 48,67,20,941

Overdue(NPA) Int. Receivable

(Contra)
NPA Int. Receivable 70,67,042

Outward Bills Receivable

O.B.R. 11,21,047

Fixed Assets
Vehicle Account 12,67,226
Fur. Fixture & Dead Stock 1,24,05,182
Library 86,402
L&B 1,10,94,034
Total Fixed Assets 2,48,52,845

Other Assets
Sundry Drs. 18,87,093
Outward Clearing 11,99,450
Tangible Assets 1,15,721
Prepaid Exp. 3,61,773
Stock Of P&S 4,62,616
Int. Receivable On Inv. 44,01,595
Tds Receivable 2,88,904
Int. Recei On Govt. Securi. 18,45,137
Staff Advance 24,600
Premium On Inv. 57,54,648
A.E.O. Obligations Bank 2,90,000
Guarantee
Gold/ Silver Ornaments 23,653
Total Other assets 1,66,55,193

Branch Adjustment
Head Office 71,165

ITZ Cash Cards

ITZ Cash Cards 34,172

TOTAL OF LIABILITIES 85,66,34,990 TOTAL OF ASSETS 85,66,34,990

40 | P a g e
 For understanding the procedure of lending working capital of the bank let us
assume the following cases.

CASE 1

Balance sheet of ABC Ltd

Liabilities Rs. Assets Rs.

Equity Capital 1000000 Goodwill(At cost) 500000
6% Pref. Capital 500000 Plant & Machinery 600000
General Reserve 100000 Land & Building 700000
Profit & Loss A/C 400000 Furniture 100000
Provision for
Taxation 176000 Inventories 600000
Bills payable 124000 Bills Receivable 30000
Bank overdraft 20000 Debtors 150000
Creditors 80000 Bank 200000
Investments(Short-
12% Debentures 500000 term) 20000
2900000 2900000

Working Capital Gap

Particular Rs

41 | P a g e
 Current Assets
Inventories 6,00,000
B/R 30,000
Drs. 1,50,000
Bank 2,00,000
Inv. (Short Term) 20,000
Total Current Assets A 10,00,000
Current Liabilities
B/P 1,24,000
Bank Overdraft 20,000
Crs. 80,000
Provision for Taxation 1,76000
Total of Current Liabilities B 4,00,000

W/C Gap (A - B ) C 6,00,000

Particular Method 1 Method 2

W/C Gap 6,00,000 6,00,000

Less - -
Borrower Contribution 1,50,000 2,50,000
(25% of W/C Gap ) (25% of Current Assets)
MPBF 4,50,000 3,50,000

So, From the MPBF method we can say that Bank will go with 2 nd method
because in this case borrowers contribution is more and chances of bank getting into
loss if considered about the NPA in effect.

42 | P a g e
 CASE-2

Balance sheet of XYZ Ltd.

Liabilities Rs. Assets Rs.

Share Capital(Rs.10
each) 1000000 Land & Building 500000
Profit & Loss A/C 200000 Plant & Machinery 300000
Creditors 250000 Stock 150000
Bills Payable 150000 Debtors 150000
Bills Receivable 125000
Cash & Bank 175000
Furniture 200000
1600000 1600000

Working Capital Gap

Particular Rs
Current Assets
Stock 15,0000
B/R 12,5000
Drs. 15,0000
Cash 17,5000

Total Current Assets A 6,00,000

Current Liabilities
B/P 15,0000
Crs. 25,0000

Total of Current Liabilities B 4,00,000

43 | P a g e
 Method 1 Method 2

W/C Gap 2,00,000 2,00,000

Less - -

Borrower Contribution 50,000 1,50,000

(25% of W/C Gap ) (25% of Current Assets)

1,50,000 50,000

So, From the MPBF method we can say that Bank will go with 2 nd method
because in this case borrowers contribution is more and chances of bank getting into
loss if considered about the NPA in effect.

44 | P a g e
 CHAPTER-4

CONCLUSIONS

45 | P a g e
 Conclusions:

The study revealed the increased importance of the Banking sector for
industry & trade and its contribution in the smooth operation of industries and its hand
in the industrial growth as banks provide the much needed large amounts of working
capital to industries.

Following important conclusions were drawn from the study:-

 Banks are supposed to gather certain preliminary information from the parties
but it is not necessary that the information given is correct in all respects and if
loan is sanctioned to such borrowers it proves to be a bad asset for the bank. In
some cases, even if the information is correct and bank has sanctioned loan to
a sound party may not be in a position to repay the loans. And yet another case
can be of a deliberate fraud committed by a party.
Even after so much of analyses and care taken for providing or lending fund banks
have to face large number of frauds. Large value frauds take place in banks, specially
in credit accounts.
The reasons for the frauds are the following:-

 Sometimes there is lack of pre-sanction survey including improper

identification of borrowers.
 Even in certain cases, physical verification of collateral security
offered was not done.
 Appraisal is not done properly and there undue dependence on
borrower’s financial statements including projected sales turnover,
which are at times manipulated by some hired professionals.
 Disbursements are sometimes made, even before completion of all
terms & conditions of the sanction.
 Undue haste is shown in case takeover of borrowal accounts from
other banks.

46 | P a g e
 Banks as well as the customers face problem in initial stage of scrutiny as the
customer is not aware of the information he has to submit and even the
bankers demand information in pieces. This cause inconvenience to both and
the time in the sanction of the loan also elongates.
 Another problem that is faced in the working capital loans is regarding interest
rate payment. The interest rate is fixed on the basis of PLR’s STPLR’s which
keep fluctuating because of the changes in the RBI’s credit policies. If the
interest rates increase at a certain point of time, customers are relevant to pay
interest at the higher rates. This generates the risk of non-payment by
customers.

47 | P a g e
 CHAPTER-5

RECOMMENDATIO
NS

Recommendations:

According to me, following steps need to be taken to overcome the problems

that the bank is faced with:-

48 | P a g e
 1. As soon as customer approaches the bank for working capital finance, the
officers in the loans section need to explain to the customer all especially
terms related to the guarantee & guarantor, securities & the interest rates. This
would help in avoiding the misunderstanding later on.

2. It was also noted that all the required information was not asked for at all same
time. Rather it was demanded in pieces. This created a bad image of the bank
in the eyes of the customer and also looses interest in providing the authentic
information. Therefore, it is suggested that all the information be collected at
once only.

3. All the information is scrutinized in one setting because otherwise the banker
would loose the links & will have to review all the information all over again,
every time to recall the earlier analysis, which would waste a lot of time.

4. It shoud be made clear to the borrower that PLR’s are subject to change and as
PLR’s change the rate of interest to be charged may increase or decrease and
he will have to pay interest accordingly.

5. Bank should not make the disbursements until and unless the borrower has
fully completed all the formalities and all terms & conditions are complied
with.

6. There were cases where the borrower had diverted finance, granted for
working capital purposes, for other activities or had made investments in
associate companies or subsidiaries. Some borrowers also went to the extent of
transferring the amount of packing credit account & cash credit account in to
their saving accounts to earn interests. Therefore, it is recommended that the
bank should sanction the loan only after fully satisfying itself that the purpose
for which the loan is sanctioned is a genuine one. It should also testify the
credit worthiness of party from the market. The penalty should be increased
and such an act should also be liable for other punishments.

49 | P a g e
 7. Bank should also provide same kind of reward on the best performing loan
accounts such as rebate on interest on time, submission of statements in time
etc.

8. It should be checked that the quarterly statements reveal the true position of
the parties dealings because there were cases when the parties had played
mischief with figures to window dress their position so that the bank does not
take any measures against them for being able to achieve the projected levels.

9. Training needs to be imparted to personal handling credit management and

they also need to be trained in customer management.

50 | P a g e
 CHAPTER -6

Bibliography

Bibliography

Books referred.

1) Financial management: I.M. Pande.

2) Financial management: K.P. Rustogi.

51 | P a g e
 Websites referred.

1) www.vishwasbank.com

2) Google

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