Working Capital

Management: UNIT 15 CASE STUDIES

Issues and Practices

Objectives
After going through this Unit, you should be able to:
• know how the various components of working capital are managed by
the existing companies.
• get in touch with the nuances of Working Capital Management in terms
of policy and practice.
• understand how companies would be topping and mobilizing funds for
financing working capital.

Structure
15.1 Introduction
15.2 Cash Management in Paytm
15.3 Receivables Management – Case Study of TCS
15.4 Inventory Management – Case Study of Maruti Suzuki India Ltd.
15.5 Financing of Working Capital by Commercial Banks – Case Study of
SBI.

15.1 INTRODUCTION
Working Capital is a matter of great concern to any business. It is said to be
the lifeline of a business. The shorter the operating cycle of a unit, the more
significant it turns out to be. Usually, investment in Fixed Capital is a one-
time affair. Working capital is a continuous requirement which needs the
attention of the Management. It is for this reason, that working capital is also
called ‘circulating capital’. As the blood in the arteries and veins flows in the
body of an individual, working capital circulates in the firm in the same
manner. In the case of manufacturing activities like the production of Sugar,
Cement, Paints, etc., the quantum of working capital would be heavy and
significant. It is only in the case of service industries like Software
development that the working capital assumes low significance. Irrespective
of the size and proportion, working capital will have a paramount influence
on the profitability of the company. Therefore, ignoring the aspect of prudent
management of working capital would be very dangerous.

It would always be interesting to analyze how things are managed in the

actual field. Theoretically, one may propose many principles and stands, but
it is also important to verify to what extent those are appreciable and yield
results. With this intention, an attempt has been made in this unit to discuss
four live cases about all the important components of working capital. Care
has been taken to ensure that the company selected is significant from the
standpoint of the management of that component of working capital.

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Case Study on Paytm is expected to throw light on the modern state-of-the- Case Studies

art cash management practices and also highlight how the traditional
practices have been going into oblivion, yielding place to the newer ones. In
the present day context, swift practices through Payment Gateway, NEFT,
RTGS, etc., have become the order of the day. In a way, the transfer of funds
across places and accounts has turned out almost instantaneous. The
discussion in this case study would take the student closer to reality.
The case study about receivables management is done on TCS Ltd. TCS is
one of the companies having more receivables. The efficiency of
management of working capital thus depends on this component. As per the
Financial Statements of the company, the size of receivables is varying
between the lowest of Rs.24,000 crores to the highest of Rs. 29,000 crores.
Even a saving of 1 percent would add a significant amount to the profitability
of the company.
The other significant component of working capital is inventory. It is thought
that the Automobile giant M/s Maruti Suzuki would fit as the ad example.
Being a Japanese sponsored company, it could put in place state-of-the-art
Japanese inventory management techniques like JIT, Kaizen, etc., As one can
observe from the case study, the company has laid down its policies and
followed them scrupulously. It is the discipline of the Japanese companies
that takes them to the top.
On the whole, it is also considered appropriate to develop a case study on the
procedures followed by the Commercial Banks in financing working capital.
In this regard, the case study of SBI is thought the ‘best fit’. SBI, being the
biggest institution in the Indian banking industry is a model for other banks
in terms of its lending and other practices. By its sheer size also, it is in a
position to take risks and experiment with new and innovative methods. After
doing away with the implementation of Tandon Committee norms for
financing working capital, banks have a lot of freedom to design their
models. In that context, the SBI case offers interesting reading.

15.2 CASH MANAGEMENT IN PAYTM ORIGIN

AND GROWTH
Paytm is the brand name of the company, 97 Communications Ltd., a start-up
company founded by Mr. Vijay Shekhar Sharma in August 2010. Paytm is a
big success story as an e-commerce payment system. The company is located
in Noida Industrial Area, U.P. India. In addition to payment system services,
it is also extending cash management services through Paytm Mall, Paytm
Money, Gamepind, and Paytm Smart Retail. Initially, the Founder Mr. Vijay
Shekhar Sharma invested $2 Million in subscriptions from others. Started off
as a prepaid mobile and DTH recharge platform, now offers services that
cover digital wallets, data, and payments, online shopping, banking, postpaid
mobile, landline bill payments, etc. Further, extensions included the payment
of college/school fees, electricity bills, metro charges, water bills, and
ticketing for entertainment units like Movie Theatres, Amusement parks, etc.
It also entered into ticket bookings for railways, Airways, etc. Uber and
Indian Railways have added Paytm wallet as the payment option.
317
Working Capital Through these initiatives, the user-base runner of the company has grown
Management:
Issues and Practices substantially. Starting with a base of about 7 million users it has grown to
350 million. Similarly, the business turnover has jumped from just around
$100 million to about $600 million now. In terms of financial strength, its net
income itself is about $350 million. Given the value of about $20 billion.

Shareholding Pattern
Beginning with the small investment of $2 million by the promoter, Mr. V.S.
Sharma, many other venture capital firms, equity firms, and E-Commerce
giants have started evincing interest in the company. These included Sapphire
Ventures, Alibaba Group (through Ant Financial Services), Ratan Tata,
Softbank (a Start-up funding company) and Warren Buffett (through
Berkshire Hathaway).
In turn, Paytm also expanded its business through investments and
acquisitions of related businesses. In 2013, Paytm acquired Plustxt for $2
million, invested $5 million in an auto-rickshaw aggregator, called (Jugnoo),
invested in logistics Start-ups LogiNext and XpressBees in 2016, and
invested in a healthcare start-up called Q or QL, and continued this spree as
and when it found lucrative and necessary for business development.

Over the years, there had been a significant change in the shareholding
pattern of the company, and the founder, who had about 51% at the
incorporation got shrunk to about 15.73%. There was major shuffling in the
holdings by other firms too. At the end of 2020, the following is found to be a
shareholding pattern of Paytm (i.e., One97 Communications Ltd.):

Sl. No. Name of the Holder % of Holding

1. Alibaba 38.19

2. SoftBank 19.69

3. SAIF Partners 19.93

4. Berkshire Hathaway 2.96

5. Media Tek Inc. 0.76

6. One97 Employee Welfare Trust 0.48

7. Mr. V.S. Sharma (Promoter) 15.73

8. Mark Schwartz 0.15

9. Others 2.11

Total 100.00

No. of Shares (Approx) 57,389,217

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 Case Studies
The Controversies
The runaway success of the firm is not without controversies. There was an
allegation (2018) that the firm had shared the personal details of its users with
the Indian Government, violating the ‘privacy policy. There is also an
apprehension that the promoter and his relatives had nexus with the ruling
party (BJP) and thus involved in politicking through their services. In recent
times, controversy (September 2020) pertains to the violation of Google’s
Play Store Gambling Policy, leading to the removal of its ‘Paytm’ app from
the ‘Google Play Store’. There is also an apprehension that the Chinese E-
Commerce major (Alibaba) is using Paytm as the tool to get personal data of
Indians and thus increased its shareholding to a substantial level of about
40%. Nevertheless, Paytm is not on the list of 118 Apps banned by the
Central Government, on the finding that ‘One97 Communications Ltd.’ is
still an Indian Company.

The Operation of Paytm Services

Paytm is operating a payment Gateway that accepts payments from any
funding source. Besides, payment Gateway, as payment links with diverse
business entities, which include educational institutions, all kinds of business
establishments, professionals, distributors, consultants, etc. It has developed a
portal called ‘Paytm icol collect in acts as a window for receiving payments.
It is also involved in all types of QR codes and monitors and processes
payments of all kinds. Not only on the receipts side, but has I butt also
offered payout services which include Employ Benefits, Enterprise Bill
Payments, and different kinds of EMIs.

It has also developed exclusive cloud services and put in place different kinds
of Apps for dealing with its customers. Business Khata is the exclusive
service extended to its customers. Financial services delivered include
Current Accounts, Salary accounts for Employees, and Credit Card Services.
The Business Model of Paytm includes the appointment of Paytm Service
Agents (PSAs) who wish to work with Paytm as the Service Partner to sell
Paytm Products. Those that intend to tie up with Paytm for its service have to
submit required documents like company proof, Business proof, PAN Card,
Bank Account details, GST details, KYC of the Authorised signatory, and
photos/videos of the place of Business.

Financials of Paytm (One97 Communications Ltd.)

The following are the details ending March 31, 2019:

Consolidated Standalone
(INR in Crore) (INR in Crore)
2018-19 2017-18 2018-19 2017-18
Revenue from Operations 3,232.01 3,052.90 3,049.87 2,982.22
Other Income 347.66 256.71 341.74 247.16
TOTAL REVENUE 3,579.67 3,309.61 3,391.61 3,229.38
Less: Expenses
Employee Benefit Expense 856.22 613.98 627.78 528.66 319
Working Capital
Management:
Finance Cost 16.87 18.88 16.50 18.39
Issues and Practices Depreciation and Amortization 99.51 78.88 75.81 68.92
Expense
Other Expenses 6,757.54 4,152.79 6,534.71 4,082.11
TOTAL EXPENSES 7,730.14 4,864.53 7,254.80 4,698.08
Profit/Loss before sharing (4,150.47) (1,554.92)(3,863.19) (1,468.70)
of the result of
associates and taxation from
continuing operations
Share of result of associates / 14.61 (30.81) - -
joint venture entities
Profit/Loss before exceptional (4,135.86) (1,585.73)(3,863.19) (1,468.70)
items and tax from continuing
operations
Exceptional items (82.52) 3.40 (91.02) (2.30)
Profit/Loss before Tax from (4,218.38) (1,582.33)(3,954.21) (1,471.00)
Continuing Operations
Tax Expense (6.49) 1.53 0.12 (1.01)
Profit/Loss from Continuing (4,211.89) (1,583.86)(3,954.33) (1,469.99)
Operations
Profit/Loss for the (5.31) (20.48) (5.31) (20.48)
period from
discontinued operations
Profit/Loss for the year (4,217.20) (1,604.34)(3,959.64) (1,490.47)
Total Comprehensive (4,221.81) (1,606.05)(3,959.78) (1,491.23)
Income/Loss
Loss attributable to equity (4,167.98) (1,589.46) - -
holders of the parent
Loss attributable to non- (49.22) (14.88) - -
controlling interests
Total Comprehensive (4,172.93) (1,591.17) - -
Income/Loss attributable to
equity holders of the parent
Total Comprehensive (48.88) (14.88) - -
Income/Loss attributable to non-
controlling interests
Basic & Diluted EPS for (742.17) (311.42) (705.02) (291.77)
continuing operations
Basic & Diluted EPS for (0.95) (4.06) (0.95) (4.06)
discontinued
operations
Basic & Diluted EPS for (743.12) (315.48) (705.97) (295.83)
continuing and discontinued
operations

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Consolidated Balance Sheet of One 97 Communications Limited as of Case Studies
March 31, 2019
(Amount in INR Crore)
Notes As of As of
March 31, March 31,
2019 2018
ASSETS
Non-current assets
Property plant and equipment 1 284.28 161.13
Capital work-in-progress 51.31 18.54
Goodwill 4 293.02 312.21
Other intangible assets 4 73.45 99.02
Intangible assets under development 4.29 1.63
Investment in Joint Venture 5(a) 46.05
Investment in associates 5(b) 200.20 175.57
Financial Assets
Investments 6(b) 105.08 211.59
Loans 6(c) 107.40 32.48
Other Financial Assets 6(d) 137.07 243.64
Current tax assets 464.76 281.26
Deferred tax assets 28 3.04 0.80
Other non-current assets 8 141.04 53.68
Total Non-current Assets 1,910.99 1,591.55

Current Assets
Financial Assets
Investments 6(a) 2,897.88 4,455.09
Trade Receivables 7 258.45 504.78
Cash and Cash Equivalents 9(a) 325.47 331.84
Bank balances other than cash 9(b) 37.26 38.21
and cash equivalents
Loans 6(c) 308.83 12.86
Other Financial Assets 6(d) 1,829.29 1,106.55
Other Current Assets 8 1,413.82 635.77
Total Current Assets 6,671.00 7,085.10

TOTAL ASSETS 8,581.99 8,676.65

EQUITY AND LIABILITIES

EQUITY
Share Capital 10(a) 57.53 55.32
Instruments entirely equity in nature 10(a) --- 173.63
Other Equity 10(b) 5,681.15 7,254.90 321
Working Capital
Management:
Equity attributable to the owner of 5,738.68 7,483.35
Issues and Practices the parent
Non-controlling interests 86.17 135.47
Total Equity 5,824.85 7,619.32

LIABILITIES
Non-current Liabilities
Financial Liabilities
Borrowings 12(a) 26.96 --
Deferred Tax Liability 28 18.47 22.67
Provisions 11 11.55 9.89
Total Non-current Liabilities 56.98 32.56

Current Liabilities
Financial Liabilities
Borrowings 12(a) 695.60 242.12
Trade Payables
(a) Total Outstanding dues of 12(b) 11.26 0.88
micro and small enterprises
(b) Total Outstanding dues other 12(b) 725.39 461.80
than (a) above
Other financial liabilities 12(c) 715.41 235.80
Contract Liabilities 352.87 ---
Other Current Liabilities 13 159.17 53.60
Provisions 11 40.46 30.67

Total Current Liabilities 2,700.16 1024.77

Total Liabilities 2,757.14 1,057.33

TOTAL EQUITY AND 8,581.99 8,676.65

LIABILITIES

Questions for Discussion:

1) How do you analyze the Business Model of Paytm? Do you have any
suggestions?
2) In the light of the stiff competition among the multiple players of
payment Gateways, what kind of Cash Management strategies you can
think of for Paytm.
3) How do you look at the Ratio between Current Assets and Non-Current
Assets of the company?
4) Keeping in view the given Financials, what kind of working capital
policies do you imagine for the company?
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 Case Studies
15.3 RECEIVABLES MANAGEMENT IN TATA
CONSULTANCY SERVICES LIMITED
Introduction
The Bombay Stock Exchange (BSE) has compiled data on the Top 100
companies listed with it, based on the figures available from their latest
Balance Sheets (see Annexure-I). As per the data compiled, the Tata
Consultancy Services Limited (TCSL) has the highest Sundry Debtors
(Receivables) at Rs.28,660 crore, which is about 86% of the total Current
Assets of the company. Close to it L & T has about Rs.27,913 crore (80.6
percent) in the second place. True, that there are a few companies that had the
highest percentage of receivables such as PTC India (97.01%), NHPC
(88.27%), ITI (86.84%), Sterling & Wilson (88.16%), and McNally Bharat
Engineering (98.37%). But the size of their receivables in absolute terms is
much lower. In this regard, the Economic Times (a Financial Daily of India)
commented that the Indian MSMEs, especially Startups are choked by the
large dues to be received from the large companies, to whom they are
supplying the goods and services.

Case of TCS
Against this background, it is felt that TCS offers itself as a good case study,
in the sphere of ‘Receivables Management. TCS is a big name in the IT
Sector of India. It is the second-largest Indian company in terms of market
capitalization. In 2018, TCS was ranked eleventh on the Fortune India 500
list.

Going into the past, TCS was founded in 1968 by Tata Sons Ltd., the parent
company. Tata Sons owns about 72% of the shareholding in TCS. The
company has 67 subsidiaries and offers a wide range of IT Services to its
customers which include application software development, business process
outsourcing, capital planning, software consultancy, and also educational
services linked to IT. The company website says that ‘TCS is an IT Services,
Consulting and Business Solutions Organisation that has been partnering
with many of the world’s large businesses in their transformation Journeys
for over years. The network of TCS includes over 4.43 lakh trained
consultants in over 46 countries. The revenues of the company stood at US
$22 billion by the end of March 31, 2020. TCS is a company carrying on
excellent work to influence climate change across the world; as evidenced by
a learning place on the ‘Sustainability Indices’ by the Dow Jones, MSCI, and
FTSE.

The Receivables Story

As indicated earlier, trade receivables are occupying a significant place in the
company’s Current Assets. As per the Balance Sheet information (given as
Annexure-II), trade receivables stood at Rs.28,660 crore, in 2019-20
compared to Rs.24,029 crore in 2018-19. In terms of percentages, receivables
formed 36.2 percent of Current Assets in 2019-20, higher by 5.8 percent
compared to the previous year (i.e 3 percent). This amply shows the
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Working Capital significance of handling receivables effectively. The Accounting Policies
Management:
Issues and Practices concerning countries are stated as follows by the Company:

• Contract assets are classified as unbilled receivables (the other only act
of invoicing is pending); when there is an unconditional right to receive
cash.

• The company provides for the expected credit loss in the collection of
receivables. This is done by taking into account the tagging of
receivables.

• Revenue recognition is done only when the collectability of receivables

is reasonably assured.

• Allowance for delinquent receivables is treated as the operating expense.

• The company recognizes lifetime expected losses for all trade

receivables that do not constitute a financing transaction.

• When the company leases any asset as a lessor, the lease rents are treated
as receivables and the rate of return is computed on the net investment
made in that asset.

Other Issues
• TCS being in the leadership position is facing several challenges from its
Indian competitors like Infosys, HCL, and Wipro.
• The acquisition strategies of the company are needed to be sharpened.
There is an apprehension in the market that its surplus is being
distributed to the shareholders to satisfy them, rather than using them for
acquisition and expansion.

• In the face of future technology changes, how well the company

responds to imbibe and nurture such tech changes is also going to leave a
tremendous impact on its business.

• The other issue is Customer Relationship Management (CRM). It is that

Tata Group Companies are in ideal CRM. This needs to be continued for
better hold in the market.

Questions for Discussion

1) How do you view the significance of Receivables to any company, in
particular to TCS?
2) Do you propose any changes in the Accounting Policies of the company
for better management of Receivables? You can draw a comparison
between the Indian GAAP and IFRS.

3) What ratios do you compute to discern the effectiveness of receivables

management by TCS?

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 Case Studies
Annexure – I: Sundry Debtors of Top 100 Companies

Sundry % of Current
S. No. Company
Debtors Assets
1 TCS 28,660.00 85.58
2 Larsen 27,912.96 80.62
3 NTPC 15,668.11 54.77
4 Infosys 15,459.00 53.27
5 IOC 12,844.09 16.66
6 Hindustan Aeron 11,583.39 36.97
7 Wipro 9,257.00 46.58
8 SAIL 8,812.39 26.77
9 NFL 7,735.33 85.62
10 HCL Tech 7,504.00 85.19
11 Reliance 7,483.00 13.67
12 BHEL 7,107.62 31.69
13 PTC India 6,787.85 97.01
14 Bharat Elec 6,732.91 55.18
15 NLC India 6,691.83 79.76
16 Tech Mahindra 6,212.00 76.98
17 Sun Pharma 6,168.13 65.23
18 Pharma 5,789.57 56.86
19 Chambal Fert 5,563.11 81.22
20 KEC Intl 5,223.41 88.28
21 BPCL 5,164.34 20.09
22 Power Grid Corp 4,867.90 41.74
23 ONGC 4,777.39 33.38
24 Dr. Reddys Labs 4,638.70 67.54
25 Rashtriya Chem 4,551.23 82.68
26 GAIL 4,546.84 54.71
27 Reliance Infra 4,106.24 94.14
28 Coromandel Int 4,040.57 59.48
29 HPCL 3,922.72 16.93
30 Enterprises 3,846.48 62.47
31 NHPC 3,818.34 88.27
32 Bharti Airtel 3,810.00 52.84
33 Lupin 3,616.33 48.82
34 Cipla 3,560.27 50.11
35 Kalpataru Power 3,517.39 76.57
36 JSW Steel 3,166.00 13.09
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Working Capital
Management:
37 UP 3,161.00 68.13
Issues and Practices 38 Siemens 3,123.90 31.94
39 M&M 2,998.98 28.20
40 Vodafone Idea 2,919.10 53.53
41 Grasim 2,905.32 51.78
42 Redington 2,805.58 61.78
43 Rajesh Exports 2,790.24 19.17
44 ITI 2,761.14 86.84
45 GSFC 2,722.76 67.89
46 Cadila Health 2,456.70 57.99
47 NCC 2,408.26 74.33
48 United Spirits 2,283.50 54.97
49 MRF 2,257.03 36.31
50 JISL 2,232.57 70.33
51 Jain Irrigation 2,232.57 70.33
52 NMDC 2,223.71 41.65
53 BGR Energy 2,220.57 84.57
54 L&T Infotech 2,176.70 85.42
55 Adani Ports 2,132.67 32.00
56 Maruti Suzuki 2,127.00 39.66
57 Jyoti Structure 2,105.54 96.93
58 Hindalco 2,093.00 12.61
59 ITC 2,092.00 12.33
60 Zee Entertain 2,052.00 29.55
61 Bajaj Electric 2,048.99 72.03
62 Cox & Kings 2,031.32 73.74
63 ISGEC Heavy Eng 1,990.44 75.48
64 TML-D 1,978.06 21.17
65 Tata Motors 1,978.06 21.17
66 ABB India 1,947.54 44.19
67 MMTC Ltd 1,925.36 85.07
68 GE T&D India 1,898.82 72.81
69 UltraTechCement 1,848.28 30.84
70 Glenmark 1,835.24 66.47
71 Hind Constr 1,821.97 83.48
72 Apar Ind 1,803.58 55.91
73 ABB Power Produ 1,792.85 72.47
74 PC Jeweller 1,780.55 24.50
75 Sadbhav Engg 1,743.41 86.57
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 Case Studies
76 Bajaj Auto 1,725.10 55.70
77 Bharat Forge 1,654.91 57.93
78 Hero Motocorp 1,603.14 54.58
79 Petronet LNG 1,602.57 24.60
80 Alkem Lab 1,555.07 45.56
81 SpiceJet 1,545.82 87.65
82 HFCL 1,545.71 77.34
83 Sterling & Wils 1,539.76 88.16
84 Rattan Power 1,535.22 66.94
85 Divis Labs 1,533.21 45.30
86 Jindal Saw 1,532.57 38.47
87 FEL 1,520.10 55.36
88 Future Ent 1,520.10 55.36
89 BEML 1,510.37 42.65
90 Torrent Pharma 1,508.94 44.28
91 Mangalore Chem 1,446.31 75.21
92 Polycab 1,439.40 39.73
93 Mindtree 1,438.90 71.08
94 JK Tyre & Ind 1,436.03 55.71
95 Voltas 1,429.25 47.66
96 GNFC 1,413.42 55.76
97 Sterlite Techno 1,413.16 75.61
98 Bosch 1,413.00 29.53
99 Mcnally Bh Engg 1,385.32 98.37
100 Simplex Infra 1,382.73 70.02

Source: www.moneycontrol.com

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Working Capital Annexure-II: Key Items of Working Capital of TCS
Management:
Issues and Practices
(Rs. in Crore)

Sl. Item 2019- 2018- 2017- 2016- 2015-

No. 20 19 18 17 16
1. Current Liabilities
A. Short Term Nil Nil 181 200 113
Borrowings
B. Trade Payables 6784 7632 4775 4198 5376
C. Other Current 15057 11030 8931 6245 5711
Liabilities
D. Short Term Provisions 235 174 171 66 115
Total Current 24026 18896 14058 10701 11309
Liabilities
2. Current Assets
A. Current Investments 25686 28280 35073 40729 21930
B. Inventories 5 10 25 21 9
C. Trade Receivables 28660 24029 18882 16582 19058
D. Cash & Cash 4824 8900 3487 1316 4806
Equivalents
E. Short Term Loans & 7270 7018 2793 2704 2523
Advances
F. Other Current Assets 12749 10795 7962 7090 5051
Total Current Assets 79194 79032 68222 68442 53377
3. Fixed Assets 16903 10495 10678 10708 10720
4. Total Assets 104975 99500 91056 89758 77417
5. Total Income 156949 146463 123104 117966 108646
6. Profit After Tax 32340 31472 25826 26289 24270
Note: Compiled from the Annual Reports of the TCS Ltd., as available from the website.

15.4 INVENTORY MANAGEMENT IN MARUTI

SUZUKI INDIA LIMITED
About the Company
Maruti Suzuki India Limited (MSIL) is a subsidiary of Suzuki Motor
Corporation (SMC) of Japan. Going into history, the Government of India
established an automobile company on 24-02-1981 in the name of Maruti
Udyog Limited (MUL). The MUL was merged with SMC in October 1982.
The first car plant was set up at Gurugram in 1982. The company came to
prominence within a short period because of its very popular brands like
Maruti-800, Alto, Wagon R, Swift, Ertiga, Baleno, Ciaz, Celerio, and many
other models. In 2015, the company launched a new dealership network in
the name of ‘NEXA’ for selling premium cars. It also has entered the pre-
owned car market with its brand name ‘True Value’. MSIL has been the
single largest car manufacturer in India with about 47.4 percent of the market
share by November 2020. The Net Sales Turnover of the company stood at
328 Rs.75,610 crore at the end of Financial Year 2019-20. You can take a glance
at the Chief Financials of the Company in annexure-I (appended to this case Case Studies

study).

Value System and Policies

The core values of the company are stated as follows:
• Customer Obsession
• Openness and Learning
• Networking and Partnership
• Fast, Flexible First Mover
• Innovation and Creativity

In addition, it has put in place a ‘Code of Business Conduct and Ethics’ to be

compiled by every Senior Manager to ensure ethical business operations. It
includes compliance with the laws of the land, honesty, and integrity in
business dealings. This document is circulated among the Directors,
Managers, and all the Senior Personnel and is to be acknowledged properly.

Inventory Management
Being a car manufacturer, materials occupy a significant part of the cost of
production. To affect, effects and gain a competitive advantage among the
players in the market, materials/inventory management assumes paramount
importance. Going by the financials of the company, the cost of raw materials
consumed formed part of 50 percent of the total expenses of the company
during 2019-20. Inventories formed part of 38.1 percent of the total current
assets at Rs.8,427 crore in the same year (see annexure-II). The CIF value of
raw materials imported by the company stood at Rs.2,488 crore during 2019-
20; which is about 77.4 percent of the inventory and 7.2 percent of the
material cost. These figures indicate the critical value of inventories to any
automobile company like the MSIL.

Management Practices of the Company

Japanese companies are known for unique Management Practices from the
beginning like lifetime employment and consensual decision-making. Strong
company philosophy, distinct corporate culture; all put together as Theory-Z
(as theorized by Dr. William Ouchi). These practices were regarded as new to
the Western Management Style and thus gained wide currency and popularity
during the 1980s and since then.

In respect of Inventory Management, Japanese companies are known for

introducing new and innovative techniques like the Just-in-Time (JIT)
inventory system, Kaizen (KAI=Change; ZEN=Good or Better), and Kanban
(Billboard or Taskboard). Besides these, they are also said to be good with
the conventional inventory management practices like FIFO, LIFO, ABC
Analysis, EOQ, etc.

To go into the specifics, MSIL has introduced the following inventory

systems for effective management of its inventories:

329
Working Capital • Bar Codes to reduce processing times, increase the accuracy of data, and
Management:
Issues and Practices speed up the operation.
• Delivery instruction system to reduce lead time and reduce the
requirement for buffer stocks.
• Just-in-Time to align raw material orders issued to suppliers with
production schedules. It is quite surprising to note that it leaves just four
hours for the supply of local items and six days for imported items. The
inventory to sales ratios is also kept low every time.
• Kanban system is put in place to control the supply chains and realize
cost savings. This is a technique designed to reduce idle time in the
production process. The main idea under this model is to deliver the
material item when the process needs it exactly at that time.
• Kaizen is the inventory management practice that the company uses for
continuous and incremental improvement in the system.
• Vendor Management is the most efficient in MSIL. This has a focus on
the suppliers. In respect of Maruti, it is found that about 70% of the
suppliers are within 100 kms radius. Components are supplied directly to
the Assembly Line; thereby reducing the packaging costs. The company
also practices the system of engaging full component suppliers, instead
of individual parts; thus, reducing the ordering costs.
• As indicated earlier, MSIL is a strong believer in localization. Its policy
is to source the maximum components of materials, almost up to 90%
from local sources. It is working relentlessly to substitute local
components in place of imported ones.
Questions for Discussion
1) Taking the MSIL as an example, give your ideas for better inventory
management.
2) Like the Japanese Inventory Management Systems, can you identify
anything of Indian origin?
3) Analyse the Financial Statements of MSIL given in the annexures to note
down Inventory Policies and Practices of MSIL.
4) Can you compare Western and Japanese Management Practices for the
betterment of the performance of a company? Where do Indian
companies stand.

330
 annexure – I: Income Statement of Maruti Suzuki India Case Studies
(Rs. in Crore)
Mar’20 Mar’19 Mar’18 Mar’17 Mar’16
INCOME
Net Sales Turnover 75610.60 86020.30 79762.70 68034.80 57538.10
Other Income 3420.80 2561.00 2045.50 2279.80 1461.00
Total Income 79031.40 88581.30 81808.20 70314.60 58999.10
EXPENSES
Stock Adjustments -238.10 210.80 40.70 -380.10 6.90
Raw Material Consumed 34636.60 45023.90 44941.30 42629.60 35483.90
Power and Fuel .00 .00 .00 .00 .00
Employee Expenses 3383.90 3254.90 2833.80 2331.00 1978.80
Administration and Selling
.00 .00 .00 .00 .00
Expenses
Research and
.00 .00 .00 .00 .00
Development Expenses
Expenses Capitalized .00 .00 .00 .00 .00
Other Expenses 30525.60 26531.40 19885.40 13101.30 11184.10
Provisions Made .00 .00 .00 .00 .00
TOTAL EXPENSES 68308.00 75021.00 67701.20 57681.80 48653.70
Operating Profit 7302.60 10999.30 12061.50 10353.00 8884.40
EBITDA 10723.40 13560.30 14107.00 12632.80 10345.40
Depreciation 3525.70 3018.90 2757.90 2602.10 2820.20
EBIT 7197.70 10541.40 11349.10 10030.70 7525.20
Interest 132.90 75.80 345.70 89.40 81.50
EBT 7064.80 10465.60 11003.40 9941.30 7443.70
Taxes 1414.20 2965.00 3281.60 2603.60 2079.40
Profit and Loss for the
5650.60 7500.60 7721.80 7337.70 5364.30
Year
Extraordinary Items .00 .00 .00 .00 .00
Prior Year Adjustment .00 .00 .00 .00 .00
Other Adjustment .00 .00 .00 .00 .00
Reported PAT 5650.60 7500.60 7721.80 7337.70 5364.30
KEY ITEMS
Reserves Written Back .00 .00 .00 .00 .00
Equity Capital 151.00 151.00 151.00 151.00 151.00
Reserves and Surplus 48286.00 45990.50 41606.30 36280.10 29733.20
Equity Dividend Rate 1200.00 1600.00 1600.00 1500.00 700.00
Agg. Non-Promoter
.00 .00 .00 .00 .00
Share(Lakhs)
Agg. Non-Promoter
.00 .00 .00 .00 .00
Holding(%)
Government Share .00 .00 .00 .00 .00
Capital Adequacy Ratio .00 .00 .00 .00 .00
EPS(Rs.) NaN NaN NaN NaN NaN
Source: https://economictimes.indiatimes.com
331
Working Capital annexure – II: Balance Sheet of Maruti Suzuki India
Management:
Issues and Practices
(Rs. in Crore)

Mar 20 Mar 19 Mar 18 Mar 17 Mar 16

12 mths 12 mths 12 mths 12 mths 12 mths
EQUITIES AND LIABILITIES
SHAREHOLDER'S FUNDS
Equity Share Capital 151.00 151.00 151.00 151.00 151.00
Total Share Capital 151.00 151.00 151.00 151.00 151.00
Reserves and Surplus 48,286.00 45,990.50 41,606.30 36,280.10 29,733.20
Total Reserves and 48,286.00 45,990.50 41,606.30 36,280.10 29,733.20
Surplus
Total Shareholders’ 48,437.00 46,141.50 41,757.30 36,431.10 29,884.20
Funds
NON-CURRENT LIABILITIES
Long Term 0.00 0.00 0.00 0.00 0.00
Borrowings
Deferred Tax 598.40 564.00 558.90 466.20 194.30
Liabilities [Net]
Other Long Term 2,170.30 2,036.50 1,585.30 1,105.00 807.50
Liabilities
Long Term Provisions 51.60 39.50 26.50 21.90 14.80
Total Non-Current 2,820.30 2,640.00 2,170.70 1,593.10 1,016.60
Liabilities
CURRENT LIABILITIES
Short Term 106.30 149.60 110.80 483.60 77.40
Borrowings
Trade Payables 7,494.10 9,633.00 10,497.00 8,367.30 7,407.30
Other Current 3,014.80 3,743.30 4,274.30 3,926.50 3,155.60
Liabilities
Short Term Provisions 679.60 624.40 560.00 449.00 398.90
Total Current 11,294.80 14,150.30 15,442.10 13,226.40 11,039.20
Liabilities
Total Capital And 62,552.10 62,931.80 59,370.10 51,250.60 41,940.00
Liabilities
ASSETS
NON-CURRENT ASSETS
Tangible Assets 15,374.50 14,956.70 13,047.30 12,919.70 12,163.10
Intangible Assets 406.70 451.10 311.70 373.00 346.90
Capital Work-In- 1,337.40 1,600.10 2,125.90 1,252.30 1,006.90
Progress
Other Assets 0.00 0.00 0.00 0.00 0.00
Fixed Assets 17,118.60 17,007.90 15,484.90 14,545.00 13,516.90
Non-Current 35,248.80 31,469.50 34,072.90 26,302.20 18,875.40
Investments
Deferred Tax Assets 0.00 0.00 0.00 0.00 0.00
[Net]
332
 Case Studies
Long Term Loans 0.20 0.20 0.20 0.30 0.40
And Advances
Other Non-Current 1,757.10 2,092.60 1,890.70 1,626.90 1,701.30
Assets
Total Non-Current 54,124.70 50,570.20 51,448.70 42,474.40 34,094.00
Assets
CURRENT ASSETS
Current Investments 1,218.80 5,045.50 1,217.30 2,178.80 1,056.80
Inventories 3,214.90 3,325.70 3,160.80 3,262.20 3,132.10
Trade Receivables 2,127.00 2,310.40 1,461.80 1,199.20 1,322.20
Cash And Cash 21.10 178.90 71.10 13.80 42.20
Equivalents
Short Term Loans 16.90 16.00 3.00 2.50 147.80
And Advances
Other Current Assets 1,828.70 1,485.10 2,007.40 2,119.70 2,144.90
Total Current Assets 8,427.40 12,361.60 7,921.40 8,776.20 7,846.00
Total Assets 62,552.10 62,931.80 59,370.10 51,250.60 41,940.00
OTHER ADDITIONAL INFORMATION
CONTINGENT LIABILITIES, COMMITMENTS
Contingent Liabilities 12,955.50 12,090.30 10,181.20 9,642.10 9,368.70
CIF VALUE OF IMPORTS
Raw Materials 2,487.60 4,396.90 3,887.90 3,725.40 3,363.20
Stores, Spares, And 64.00 58.50 66.10 20.10 62.90
Loose Tools
Trade/Other Goods 64.00 58.50 66.10 20.10 62.90
Capital Goods 917.30 1,331.20 648.30 1,481.80 738.30
EXPENDITURE IN FOREIGN EXCHANGE
Expenditure In 9,099.00 12,802.70 3,872.50 0.00 3,792.60
Foreign Currency
REMITTANCES IN FOREIGN CURRENCIES FOR DIVIDENDS
Dividend Remittance -- -- -- -- 424.50
In Foreign Currency
EARNINGS IN FOREIGN EXCHANGE
FOB Value Of Goods -- -- -- -- 4,735.30
Other Earnings 5,424.60 5,218.60 5,455.90 -- 57.00
BONUS DETAILS
Bonus Equity Share -- -- -- -- --
Capital
NON-CURRENT INVESTMENTS
Non-Current 84.30 1,077.30 337.60 329.00 583.90
Investments Quoted
Market Value
Non-Current 34,775.70 30,609.10 33,041.90 25,606.20 18,404.60
Investments Unquoted
Book Value
CURRENT INVESTMENTS
333
Working Capital Current Investments -- -- -- -- --
Management:
Issues and Practices Quoted Market Value
Current Investments 1,218.80 5,045.50 1,217.30 2,178.80 1,056.80
Unquoted Book Value

Source: https://economictimes.indiatimes.com

15.5 FINANCING OF WORKING CAPITAL BY

COMMERCIAL BANKS: SBI
Introduction
Working Capital requirements of the companies are usually met by the
commercial banks in the form of cash, overdraft, and short-term Loans. There
is a particular method of financing industry by Banks. Way back in the
Nineteen Seventies and Eighties Tandon Committee (1974) and Chore
Committee (1979) and a few other Committees constituted by the RBI have
worked out methodologies in this regard. The same are being followed by the
Banks since then with little modifications. In effect, the extent and procedure
in respect of Financing of Working Capital are conditioned by the Guidelines
issued by the RBI from time to time. Since SBI is the biggest institution in
our banking industry, the case study is considered worth studying.

SBI Policies for Working Capital Finance

State Bank of India provides Working Capital Finance in various forms such
as Cash Credit, Demand Loan, Bill Financing, and Non-funded facilities. The
Bank staff assesses the working capital requirements of the industrial unit,
using all their knowledge, based on the risk profile, and working capital
cycle. Usually, working capital loans are sanctioned for less than a year. Yet
times, ad-hoc or temporary requirements of the borrowers are also taken into
account. Normally working capital loans given by SBI carry a floating rate of
interest linked to Situation, Background, Assessment, and Recommendation
(SBAR). The interest charged is based on the SBI Prime Lending Rate for
working capital finance. Short-term Loans sanctioned by the Bank are linked
to Short-Term Advance Rates (STAR). In addition, SBI also provides
financial assistance towards Bills Discounting, Export Credit, etc. It also
extends non-fund-based facilities such as Letters of Credit (LCs), Guarantees,
and Loans Syndication.

Asset-Based Loan (ABL) is a new facility offered to MSME firms that are
covered under MSMED Act, 2006. The ABLs are provided to all kinds of
Manufacturing and Service Units, covering wholesale, retail, trade
professionals and self-employed. Usually, the period of repayment will be 96
months. There is also a facility called Drop line OD, which can be sanctioned
for periods ranging from 12 months to 18 months – with either equated
reduction in limit or customized reduction in limit. Keeping in view the given
trends in the business and industry, SBI is providing varied types of loans,
which included working capital. A few of them spread to purposes like
Export Packing Credit, Cotton Ginning Plus, Fleet Finance, E-dealer Finance
Scheme, E-Vendor Finance Scheme, PM Mudra Yojana, Lease Rental
334
Discounting, SME E-Biz Loan, Simplified Small Business Loan, Stand-up Case Studies

India, SME Smart Score, SME Credit Card, Warehouse Receipt Finance,
Finance to Food Processing Industry, Loans to Business Correspondents, SBI
Exporters’ Gold Card Scheme, etc. SBI’s Portfolio of working capital loans
is so diverse and innovative, reflecting the pooled experience of a large
reservoir of professionals.
The swift actions of the SBI received wide acclaim during Covid-19 times,
for taking measures to process and disburse working capital loans within 5
days. The finance minister has stated, in this regard, that about 45 lakh
industrial units had got benefitted from this measure. SBI has directed the
Branch Managers to release funds in time by taking into account the difficult
times.

The loan portfolios of SBI for MSME include the following:

• Loans under PMMY (MUDRA) and Stand-up India
• Asset-Backed Loan (ABL)
• ABL for Commercial Real Estate
• SBI Open Term Loan
• SME Collateral Free Loan under CGTMSE
• SME Asset – GST Receivables
• Standby Line of Credit
• Simplified Cash Credit

SBI also has the distinction of being the only Bank, having established a
special delivery mechanism for sanction and disbursement of working capital
loans. These included the establishment of a Centralized Processing Cell for a
quick assessment, sanction, and disbursal and appointment of Relationship
Managers for different categories of MSMEs to provide customized products
and services.

Working Capital Finance is a requirement of every business unit, including

large firms. But the manner of providing working capital finance to large
firms would be something different. Generally, these requirements are met by
a consortium of Banks or through Social Banking. Under this process,
usually, there will be a ‘Lead Bank’ and other banks join as associates.
During the Covid-19 times, it is observed that even large companies
approached Banks for meeting their current liabilities like paying for material
purchases, payment of wages, meeting energy requirements, etc. Thus,
working capital finance is the ‘life blood’ for running the wheels of business
and industry.

RBI Guidelines for Working Capital Finance

Regarding the provision of finance by commercial banks for working capital
requirements, RBI has been issuing Advisories to Commercial Banks from
time to time. These are the nature guidelines to be followed by the banks for
ensuring sound banking practices. A major Advisory was issued in 2005 and
got it revised in July 2009. As per these guidelines, banks are required to
335
Working Capital follow the procedure mentioned below:
Management:
Issues and Practices  The assessment of working capital requirements is to be made based on
projected annual turnover in the case of Working Capital Limits (WCL)
up to Rs.1.00 crore and up to Rs.5.00 crore for SSI units.
 Based on the above assessment, 20% of the projected turnover is
financed by Banks, and 5% is contributed by the borrower.
 Drawls against the Working Capital Limits (WCL) should be need-based
and properly checked by the Bank.
 Maximum Permissible Bank Finance (MPBF) rules based on the
recommendations of the Tandon Committee were completely withdrawn.
Now Banks are free to follow their procedures in assessing the actual
working capital needs of the firms and accordingly fix Working Capital
Limits.
 Freedom is given to Banks to fix norms for individual Current Assets
holdings and accordingly decide Working Capital Limits.
 Banks may also consider sanctioning Ad-hoc credit limits, if satisfied,
and if the borrower has exhausted the original limits.
 In December 2018, RBI has issued separate guidelines to banks in case
of corporates having Working Capital Limits above Rs.150 crore. These
rules are intended to enhance credit discipline among large borrowers.
 As per the above, these large borrowers have to avail of 40% of their
Working Capital Limits as a Working Capital Demand Loan (WCDL).
The remaining 60% may be in other forms like cash credit, OD, etc. This
demand loan will be for a specified period varying from 7 days to 1 year.

The magnitude of Working Capital Financing

To know the extent of working capital funding extended by the SBI, the latest
balance figures are verified. As per the same by March 31, 2020, the total
capital, and liabilities of SBI stood at Rs.39,51,394 crore. The advances of
the bank stood at Rs.23,25,290 crore. Of these Advances, Cash Credits,
Overdrafts, and Loans repayable on demand accounted for about 30.48
percent at Rs.7,08,726 crore. Similarly, the bills purchased accounted for
about 3.61 percent. Similarly secured loans against inventory, book debts,
etc. also constituted a significant portion at 71.99 percent at Rs.16,73,925
crore. Of course, a majority of them may be against fixed assets which may
include land, buildings, machinery, etc. Nevertheless, the loan portfolio of the
Bank clearly shows the significance of the working Capital Finance Extended
to Trade and Industry (see Annexure-1).

Questions
1) Looking into the Case Study of SBI, what kind of Working Capital
Finance policies and practices do you suggest to other Banks?

2) Should the RBI have any control over Commercial Banks in the matter
of Financing Working Capital?

3) Keeping in view the significance of working capital to industry and the

336 Loan Portfolio of Banks, what financing strategies do you recommend?
 Case Studies
Annexure-1
Advances are given by SBI during Financial Year 2019-20
(000s omitted)
As at As at
31.03.2020 31.03.2019
(Current (Previous
Year)Rs. Year)Rs
A. I. Bills purchased and discounted 84017,46,96 80278,87,21
II. Cash credits, overdrafts, and 708726,92,91 776633,45,81
loans repayable on demand
III. Term loans 1532545,16,20 1328964,58,75
TOTAL 2325289,56,07 2185876,91,77
B. I. Secured by tangible assets 1673925,40,51 1582764,41,50
(includes advances against Book Debts)
II. Covered by Bank/ Government 92117,72,36 80173,16,17
Guarantees
III. Unsecured 559246,43,20 522939,34,10
TOTAL 2325289,56,07 2185876,91,77
C. (I) Advances in India
(i) Priority Sector 526675,87,35 520729,77,60
(ii) Public Sector 287504,28,69 240295,89,39
(iii) Banks 812,52,23 9174,06,50
(iv) Others 1154187,79,39 1114 679,73 ,28
TOTAL 1969180,47,66 1884879,46,77
(II) Advances Outside India
(i) Due from Banks 80372,75,07 69975,74,47
(ii) Due to Others
(a) Bills purchased and discounted 31091,11,08 26740,94,1
(b) Syndicated Loans 172482,45,21 138191,25,40
(c) Others 7 216 2 ,7 7, 0 5 66089,51,02
Total 356109,08,41 300997,45,00
Grand Total [C (I) and C (II)] 2325289,56,07 2185876,91,77

Source: www.sbi.co.in

Annual Report of 2019-20 of SBI

337