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A Report

Study of Cash Management at State Bank of India

Submitted in the partial fulfillment of the course requirement for

Post Graduate Diploma in Management (AICTE)
Swadesh Behera
July 2010

Under the external guidance of Under the internal guidance of

Mr. A.Ramananda Dr. C.V.Divakar
Branch Manager Head of the Department
Kumaraswamy Layout Branch, Finance
Bangalore. Dayananda Sagar Business School.



I, Swadesh Behera, hereby declare that this

project entitled “STUDY OF CASH MANAGEMENT
AT STATE BANK OF INDIA”, has been prepared
by me under the valuable guidance and
supervision of Dr. C.V.Divakar, Faculty
Member, Dayananda Sagar Business School
(DSBS), Bangalore, in partial fulfillment of
the requirements for the award of the Post
Graduate Diploma in Management during the
academic year 2010.

I also declare that this project report has not

been submitted to any other university for
the award of any other degree, fellowship, or
any other similar title.


Dr. C.V.Divakar
Swadesh Behera
(Faculty Member)

Place: Bangalore


I would like to express my profound thanks to Dr.

C.V. Divakar, my teacher and guide, who has been
magnanimous in guiding, encouraging and supporting me
during this project and he guided me to choose this
immensely productive topic and it was because of his
confidence in me that I have been able to carry out such
a beautiful study report.

My sincere thanks go to Mr. A. Ramananda,
Branch Manager SBI Kumaraswamy Layout Branch,
Bangalore, for giving me an opportunity to do project
and for extending his valuable time and guidance and
patient support throughout my project.
I would also like to extend my sincere thanks to Miss.
Eairanti and Mr. Avash for helping me lot to know
about my subject.

I would also like to extend my gratitude to my

parents, friends for their consistent encouragement,
suggestions and moral support.


DSBS, Bangalore


This is to be certified that the project report
entitled “Study on CASH MANAGEMENT at
State Bank of India” is an authentic report of
the project work prepared by Mr. Swadesh
Behera under our guidance and supervision.

This is to state that the report is submitted in

partial fulfillment of the requirement for the
award of degree “POST GRADUATE DIPLOMA
IN MANAGEMENT (AICTE)” and has not been
submitted for the award of any other degree
or diploma from any other university.

Internal Guide
(Dr. C.V. Divakar) (Prof.
R.K. Vijayasarathy)



Cash is the important current asset for the operations of the business. Cash is the basic input
needed to keep the business running on a continuous basis; it is also the ultimate output expected
to be realized by selling the service or product manufactured by the firm. The firm should keep
sufficient cash, neither more nor less. Cash shortage will disrupt the firm’s manufacturing
operations while excessive cash will simply remain idle, without contributing anything towards
the firm’s profitability. Thus, a major function of the financial manager is to maintain a sound
cash position.

Cash is the money which a firm can disburse immediately without any restriction. The term cash
includes coins, currency and cheques held by the firm, and balances in its bank accounts.
Sometimes near-cash items, such as marketable securities or bank time’s deposits, are also
included in cash. The basic characteristic of near-cash assets is that they can readily be converted
into cash. Generally, when a firm has excess cash, it invests it in marketable securities. This kind
of investment contributes some profit to the firm.


Cash management is concerned with the managing of: (i) cash flows into and out of the firm,
(ii) cash flows within the firm, and (iii) cash balances held by the firm at a point of time by
financing deficit or investing surplus cash. Sales generate cash which has to be disbursed out.
The surplus cash has to be invested while deficit has to be borrowed. Cash management seeks to
accomplish this cycle at a minimum cost. At the same time, it also seeks to achieve liquidity and
control. Cash management assumes more importance than other current assets because cash is
the most significant and the least productive asset that a firm holds. It is significant because it is
used to pay the firm’s obligations. However, cash is unproductive. Unlike fixed assets or
inventories, it does not produce goods for sale. Therefore, the aim of cash management is to
maintain adequate control over cash position to keep the firm sufficiently liquid and to use
excess cash in some profitable way.

Cash management is also important because it is difficult to predict cash flows accurately,
particularly the inflows, and there is no perfect coincidence between the inflows and outflows of
cash. During some periods, cash outflows will exceed cash inflows, because payment of taxes,
dividends, or seasonal inventory builds up. At other times, cash inflow will be more than cash
payments because there may be large cash sales and debtors may be realized in large sums
promptly. Further, cash management is significant because cash constitutes the smallest portion
of the total current assets, yet management’s considerable time is devoted in managing it. In
recent past, a number of innovations have been done in cash management techniques. An
obvious aim of the firm these days is to manage its cash affairs in such a way as to keep cash
balance at a minimum level and to invest the surplus cash in profitable investment opportunities.

In order to resolve the uncertainty about cash flow prediction and lack of synchronization
between cash receipts and payments, the firm should develop appropriate strategies for cash
management. The firm should evolve strategies regarding the following four facets of cash

• Optimum Utilisation of Operating Cash
Implementation of a sound cash management programme is based on rapid generation,
efficient utilisation and effective conversation of its cash resources. Cash flow is a circle. The
quantum and speed of the flow can be regulated through prudent financial planning facilitating
the running of business with the minimum cash balance. This can be achieved by making a
proper analysis of operative cash flow cycle along with efficient management of working capital.

• Cash Forecasting
Cash forecasting is backbone of cash planning. It forewarns a business regarding
expected cash problems, which it may encounter, thus assisting it to regulate further cash flow
movements. Lack of cash planning results in spasmodic cash flows.

• Cash Management Techniques:

Every business is interested in accelerating its cash collections and decelerating cash
payments so as to exploit its scarce cash resources to the maximum. There are techniques in the
cash management which a business to achieve this objective.

• Liquidity Analysis:
The importance of liquidity in a business cannot be over emphasized. If one does the
autopsies of the businesses that failed, he would find that the major reason for the failure was
their unability to remain liquid. Liquidity has an intimate relationship with efficient utilisation of
cash. It helps in the attainment of optimum level of liquidity.

• Profitable Deployment of Surplus Funds

Due to non-synchronization of ash inflows and cash outflows the surplus cash may arise
at certain points of time. If this cash surplus is deployed judiciously cash management will itself
become a profit centre. However, much depends on the quantum of cash surplus and
acceptability of market for its short-term investments.

• Economical Borrowings
Another product of non-synchronisation of cash inflows and cash outflows is emergence
of deficits at various points of time. A business has to raise funds to the extent and for the period
of deficits. Raising of funds at minimum cost is one of the important facets of cash management.

The ideal cash management system will depend on the firm’s products, organization structure,
competition, culture and options available. The task is complex, and decisions taken can affect
important areas of the firm. For example, to improve collections if the credit period is reduced, it
may affect sales. However, in certain cases, even without fundamental changes, it is possible to

significantly reduce cost of cash management system by choosing a right bank and controlling
the collections properly.


The firm’s need to hold cash may be attributed to the following the motives:

• The transactions motive

• The precautionary motive

• The speculative motive

Transaction Motive
The transaction motive requires a firm to hold cash to conducts its business in the ordinary
course. The firm needs cash primarily to make payments for purchases, wages and salaries, other
operating expenses, taxes, dividends etc. The need to hold cash would not arise if there were
perfect synchronization between cash receipts and cash payments, i.e., enough cash is received
when the payment has to be made. But cash receipts and payments are not perfectly
synchronized. For those periods, when cash payments exceeds cash receipts, the firm should
maintain some cash balance to be able to make required payments. For transactions purpose, a
firm may invest its cash in marketable securities. Usually, the firm will purchase securities
whose maturity corresponds with some anticipated payments, such as dividends, or taxes in the
future. Notice that the transactions motive mainly refers to holding cash to meet anticipated
payments whose timing is not perfectly matched with cash receipts.

Precautionary Motive
The precautionary motive is the need to hold cash to meet contingencies in the future. It
provides a cushion or buffer to withstand some unexpected emergency. The precautionary
amount of cash depends upon the predictability of cash flows. If cash flow can be predicted with
accuracy, less cash will be maintained for an emergency. The amount of precautionary cash is
also influenced by the firm’s ability to borrow at short notice when the need arises. Stronger the
ability of the firm to borrow at short notice, less the need for precautionary balance. The
precautionary balance may be kept in cash and marketable securities. Marketable securities play

an important role here. The amount of cash set aside for precautionary reasons is not expected to
earn anything; therefore, the firm attempt to earn some profit on it. Such funds should be
invested in high-liquid and low-risk marketable securities. Precautionary balance should, thus,
held more in marketable securities and relatively less in cash.

Speculative Motive
The speculative motive relates to the holding of cash for investing in profit-making
opportunities as and when they arise. The opportunity to make profit may arise when the security
prices change. The firm will hold cash, when it is expected that the interest rates will rise and
security prices will fall. Securities can be purchased when the interest rate is expected to fall; the
firm will benefit by the subsequent fall in interest rates and increase in security prices. The firm
may also speculate on materials’ prices. If it is expected that materials’ prices will fall, the firm
can postpone materials’ purchasing and make purchases in future when price actually falls. Some
firms may hold cash for speculative purposes. By and large, business firms do not engage in
speculations. Thus, the primary motives to hold cash and marketable securities are: the
transactions and the precautionary motives.

Cash flows are inseparable parts of the business operations of firms. A firm needs cash to invest
in inventory, receivable and fixed assets and to make payment for operating expenses in order to
maintain growth in sales and earnings. It is possible that firm may be taking adequate profits, but
may suffer from the shortage of cash as its growing needs may be consuming cash very fast. The
‘cash poor’ position of the firm can be corrected if its cash needs are planned in advance. At
times, a firm can have excess cash with it if its cash inflows exceed cash outflows. Such excess
cash may remain idle. Again, such excess cash flows can be anticipated and properly invested if
cash planning is resorted to. Cash planning is a technique to plan and control the use of cash. It
helps to anticipate the future cash flows and needs of the firm and reduces the possibility of idle
cash balances (which lowers firm’s profitability) and cash deficits (which can cause the firm’s

Cash planning protects the financial condition of the firm by developing a projected cash
statement from a forecast of expected cash inflows and outflows for a given period. The forecasts

may be based on the present operations or the anticipated future operations. Cash plans are very
crucial in developing the operating plans of the firm.

Cash planning can be done on daily, weekly or monthly basis. The period and frequency of cash
planning generally depends upon the size of the firm and philosophy of management. Large
firms prepare daily and weekly forecasts. Medium-size firms usually prepare weekly and
monthly forecasts. Small firms may not prepare formal cash forecasts because of the non-
availability of information and small-scale operations. But, if the small firm prepares cash
projections, it is done on monthly basis. As a firm grows and business operations become
complex, cash planning becomes inevitable for its continuing success.

Cash Forecasting and Budgeting

Cash budget is the most significant device to plan for and control cash receipts and payments. A
cash budget is a summary statement of the firm’s expected cash inflows and outflows over a
projected time period. It gives information on the timing and magnitude of expected cash flows
and cash balances over the projected period. This information helps the financial manager to
determine the future cash needs of the firm, plan for the financing of these needs and exercise
control over the cash and liquidity of the firm.

The time horizon of the cash budget may differ from firm to firm. A firm whose business is
affected by seasonal variations may prepare monthly cash budgets. Daily or weekly cash budgets
should be prepared for determining cash requirements if cash flows show extreme fluctuations.
Cash budgets for a longer intervals may be prepared if cash flows are relatively stable.

Cash forecasts are needed to prepare cash budgets. Cash forecasting may be done on short or
long-term basis. Generally, forecasts covering periods of one year or less are considered short-
term; those exceeding beyond one year are considered long term.

Short-term Cash Forecasts

It is comparatively easy to make short-term cash forecasts. The important functions of carefully
developed short-term cash forecasts are:

• To determine operating cash requirements

• To anticipate short-term financing

• To manage investment of surplus cash.

The short-term forecast helps in determining the cash requirements for a predetermined period to
run a business. If the cash requirements are not determined, it would not be possible for the
management to know-how much cash balance is to be kept in hand, to what extent bank
financing be depended upon and whether surplus funds would be available to invest in
marketable securities.

To know the operating cash requirements, cash flow projections have to be made by a firm. As
stated earlier, there is hardly a perfect matching between cash inflows and outflows. With the
short-term cash forecasts, however, the financial manager is enabled to adjust these differences
in favor of the firm.

It is well known that, for their temporary financing needs, most companies depend upon banks.
One of the significant roles of the short-term forecasts is to pinpoint when the money will be
needed and when it can be repaid. With such forecasts in hand, it will not be difficult for the
financial manager to negotiate short-term financing arrangements with banks. This in fact
convinces bankers about the ability of the management to run its business.

The third function of the short-term cash forecasts is to help in managing the investment of
surplus cash in marketable securities. Carefully and skillfully designed cash forecast helps a firm
to: (i) select securities with appropriate maturities and reasonable risk, (ii) avoid over and under-
investing and (iii) maximize profits by investing idle money.

Short-run cash forecasts serve many other purposes. For example, multi-divisional firms use
them as a tool to coordinate the flow of funds between their various divisions as well as to make
financing arrangements for these operations. These forecasts may also be useful in determining
the margins or minimum balances to be maintained with banks. Still other uses of these forecasts

• Planning reductions of short and long-term debt

• Scheduling payments in connection with capital expenditures programmes

• Planning forward purchases of inventories

• Checking accuracy of long-range cash forecasts

• Taking advantage of cash discounts offered by suppliers

• Guiding credit policies.

Short-term Forecasting Methods
Two most commonly used methods of short-term cash forecasting are:

• The receipt and disbursements method

• The adjusted net income method.

The receipts and disbursements method is generally employed to forecast for limited periods,
such as a week or a month. The adjusted net income method, on the other hand, is preferred for
longer durations ranging between few months to a year. Both methods have their pros and cons.
The cash flows can be compared with budgeted income and expenses items if the receipts and
disbursements approach is followed. On the other hand, the adjusted income approach is
appropriate in showing a company’s working capital and future financing needs.

Receipts and disbursements method: Cash flows in and out in most companies on a continuous
basis. The prime aim of receipts and disbursements forecasts is to summarize these flows during
a predetermined period. In case of those companies where each item of income and expense
involves flow of cash, this method is favoured to keep a close control over cash.

Three broad sources of cash inflows can be identified: (i) operating, (ii) non-operating, and
(iii) financial. Cash sales and collection from customers form the most important part of the
operating cash inflows. Developing a sales forecast is the first step in preparing cash forecast. All
precautions should be taken to forecast sales as accurately as possible. In case of cash sales, cash
is received at the time of sale. On the other hand, cash is realized after sometime if sale is on
credit. The time realizing cash on credit sales depends upon the firm’s credit policy reflected in
the average collection period.

It can easily be noted that cash receipts from sales will be affected by changes in sales volume
and the firm’s credit policy. To develop a realistic cash budget, these changes should be
accounted for. If the demand for the firm’s products slackens, sales will fall and the average
collection period is likely to be longer which increases the chances of bad debts. In preparing
cash budget, account should be taken of sales discounts, returns and allowances and bad debts as
they reduce the amount of cash collections from debtors.

Non-operating cash inflows include sale of old assets and dividend and interest income. The
magnitude of these items is generally small. When internally generated cash flows are not
sufficient, the firm resorts to external sources. Borrowings and issuance of securities are external
financial sources. These constitute financial cash inflows.

The next step in the preparation of a cash budget is the estimate of cash outflows. Cash outflows
include: (i) operating outflows: cash purchases, payment of payables, advances to suppliers,
wages and salaries and other operating expenses, (ii) capital expenditures, (iii) contractual
payments: repayment of loan and interest and tax payments; and (iv) discretionary payments:
ordinary and preference dividend. In case of credit purchases, a time lag will exist for cash
payments. This will depend on the credit terms offered by the suppliers.

It is relatively easy to predict the expenses of the firm over short run. Firms usually prepare
capital expenditure budgets; therefore, capital expenditures are predictable for the purposes of
cash budget. Similarly, payments of dividend do not fluctuate widely and are paid on specific
dates. Cash out flow can also occur when the firm repays its long-term debt. Such payments are
generally planned and, therefore, there is no difficulty in predicting them.

Once the forecasts for cash receipts and payments have been developed, they can be combined to
obtain the net cash inflow or outflow for each month. The net balance for each month would
indicate whether the firm has excess cash or deficit. The peak cash requirements would also be
indicated. If the firm has the policy of maintaining some minimum cash balance, arrangements
must be made to maintain this minimum balance in periods of deficit. The cash deficit can be
met by borrowings from banks. Alternatively, the firm can delay its capital expenditures or
payments to creditors or postpone payment of dividends.

One of the significant advantages of cash budget is to determine the net cash inflow or out flow
so that the firm is enabled to arrange finances. However, the firm’s decision for appropriate
sources of financing should depend upon factors such as cost and risk. Cash budget helps a firm
to manage its cash position. It also helps to utilize ideal funds in better ways. On the basis of
cash budget, the firm can decide to invest surplus cash in marketable securities and earn profits.

The virtues of the receipt and payment methods are:

• It gives a complete picture of all the items of expected cash flows.

• It is a sound tool of managing daily cash operations. This method, however, suffers from
the following limitations:

• Its reliability is reduced because of the uncertainty of cash forecasts. For example,
collections may be delayed, or unanticipated demands may cause large disbursements.

• It fails to highlight the significant movements in the working capital items.

Adjusted net income method: This method of cash forecasting involves the tracing of working
capital flows. It is sometimes called the sources and uses approach. Two objectives of the
adjusted net income approach are: (i) to project the company’s need for cash at a future date and
(ii) to show whether the company can generate the required funds internally, and if not, how
much will have to be borrowed or raised in the capital market.

As regards the form and content of the adjusted net income forecast, it resembles the cash flow
statement discussed previously. It is, in fact a projected cash flow statement based on proforma
financial statements. It generally has three sections: sources of cash, uses of cash and the
adjusted cash balance. This procedure helps in adjusting estimated earnings on an accrual basis
to a cash basis. It also helps in anticipating the working capital movements.

In preparing the adjusted net income forecasts items such as net income, depreciation, taxes,
dividends etc., can easily be determined from the company’s annual operating budget. Normally,
difficulty is faced in estimating working capital changes; especially the estimates of accounts
receivable (debtors) and inventory pose problem because they are influenced by factors such as
fluctuations in raw material costs, changing demand for the company’s products and possible
delays in collections. Any error in predicting these items can make the reliability of forecast

One popularly used method of projecting working capital is to use ratios relating accounts
receivable and inventory to sales. For example, if the past experience tells that accounts
receivable of a company range between 32 percent to 36 percent of sales, an average rate of 34
percent can be used. The difference between the projected figure and that on the books will
indicate the expected increase or decrease in cash attributable to receivable.

The benefits of the adjusted net income method are:

• It highlights the movements in the working capital items, and thus helps to keep a control
on s firm’s working capital.

• It helps in anticipating a firm’s financial requirements.

The major limitation of this method is:

• It fails to trace cash flows, and therefore, its utility in controlling daily cash operations is

Long-term Cash Forecasting
Long-term cash forecasts are prepared to give an idea of the company’s financial requirements in
the distant future. They are not as detailed as the short-term forecasts are. Once a company has
developed long-term cash forecast, it can be used to evaluate the impact of, say, new product
developments or plant acquisitions on the firm’s financial condition three, five, or more years in
the future. The major uses of the long-term cash forecasts are:

• It indicates as company’s future financial needs, especially for its working capital

• It helps to evaluate proposed capital projects. It pinpoints the cash required to finance
these projects as well as the cash to be generated by the company to support them.

• It helps to improve corporate planning. Long-term cash forecasts compel each division to
plan for future and to formulate projects carefully.

Long-term cash forecasts may be made for two, three or five years. As with the short-term
forecasts, company’s practices may differ on the duration of long-term forecasts to suit their
particular needs.

The short-term forecasting methods, i.e., the receipts and disbursements method and the adjusted
net income method, can also be used in long-term cash forecasting. Long-term cash forecasting
reflects the impact of growth, expansion or acquisitions; it also indicates financing problems
arising from these developments.

Cash Collection Instruments in India

The main instruments of collection used in India are: (i) cheques, (ii) drafts, (iii) documentary
bills, (iv) trade bills, and (v) letter of credit.

Features of instruments of collection in India

Instrument Pros Cons
1. Cheques • No charge • Can bounce

• Payable through clearing • Collection times can be long
• Can be discounted after receipts • Collection charge
• Low discounting charge
2. Drafts • Payable in local clearing • Cost of collection
• Chances of bouncing are less • Buyers account debited on day
3. Documentary bills • Low discounting charge • Not payable through clearing
• Theoretically, goods are not • High collection cost
released till payments are made • Long delays
or the bill is accepted
4. Trade bills • No charge except stamp duty • Procedure is relatively
• Can be discounted cumbersome
• Discipline of payment on due • Buyers are reluctant to accept
date the due date discipline
5. Letters of credit • Good credit control as goods are • Opening charges
released on payment or • Transit period interest
acceptance of bill • Negotiation charges
• Seller forced to meet delivery • Need bank lines to open LC
schedule because of expiry date. • Stamp duty on usance bills

Determining the Optimum Cash Balance

One of the primary responsibilities of the financial manager is to maintain a sound liquidity
position of the firm so that the dues are settled in time. The firm needs cash to purchase raw
materials and pay wages and other expenses as well as for paying dividend, interest and taxes.
The test of liquidity is the availability of cash to meet the firm’s obligations when they become

A firm maintains the operating cash balance for transaction purposes. It may also carry
additional cash as a buffer or safety stock. The amount of cash balance will depend on the risk-
return trade-off. If the firm maintains small cash balance, its liquidity position weakens, but its
profitability improves as the released funds can be invested in profitable opportunities
(marketable securities). When the firm needs cash, it can sell its marketable securities (or
borrow). On the other hand, if the firm keeps high balance, it will have a strong liquidity position
but its profitability will be low. The potential profit foregone on holding large cash balance is an
opportunity cost to the firm. The firm should maintain- just enough, neither too much nor too
little- cash balance. How to determine optimum cash balance if cash flows are predictable and if
they are not predictable?

Optimum Cash Balance under Certainty:
Baumol’s Model
The Baumol model of cash management provides a formal approach for determining a firm’s
optimum cash balance under certainty. It considers cash management similar to an inventory
management problem. As such, the firm attempts to minimize the sum of the cost of holding cash
(inventory of cash) and the cost of converting marketable securities to cash.

The Baumol’s model makes the following assumptions:

• The firm is able to forecast its cash needs with certainty.

• The firm’s cash payments occur uniformly over a period of time.

• The opportunity cost of holding cash is known and it does not change over time.

• The firm will incur the same transaction cost whenever it converts securities to cash.

Let us assume that the firm sells securities and starts with a cash balance of C rupees. As the firm
spends cash, its cash balance decreases steadily and reaches to zero. The firm replenishes its cash
balance to C rupees by selling marketable securities. This pattern continues over time. Since the
cash balance decreases steadily, the average cash balance will be: C/2

Baumol’s model for cash balance

Cash balance

C/2 Average


0 T1 T2 T3

The firm incurs a holding cost for keeping the cash balance. It is an opportunity cost; that is, the
return foregone on the marketable securities. If the opportunity cost is k, then the firm’s holding
cost for maintaining an average cash balance is as follows:

Holding cost = k(C/2) (1)

The firm incurs a transaction cost whenever it converts its marketable securities to cash. Total
number of transactions during the year will be total funds requirement, T, divided by the cash
balance, C, i.e. T/C. The per transaction cost is assumed to be constant. If per transaction cost is
c, then the total transaction cost will be:

Transaction cost = c(T/C) (2)

The total annual cost of the demand for cash will be:

Total cost = k(C/2) + c(T/C) (3)

What is the optimum level of cash balance, C*? We know that the holding cost increases as the
demand for cash, C, increases. However, the transaction cost reduces because with increasing C
the number of transactions will decline. Thus, there is a trade-off between the holding cost and
the transaction cost.


Total cost

Holding cost

Transaction cost

Cash balance


Cost trade-off: Baumol’s model

The optimum cash balance, C*, is obtained when the total cost is minimum. The formula for the
optimum cash balance is as follows:

C* = 2cT/k (4)

where, C* is the optimum cash balance, c is the cost per transaction, T is the total cash needed
during the year and k is the opportunity cost of holding cash balance. The optimum cash balance
will increase with increase in the per transaction cost and total funds required and decrease with
the opportunity cost.

Optimum Cash Balance under Uncertainty:
The Miller-Orr Model
The limitation of the Baumol model is that it does not allow the cash flows to fluctuate. Firms in
practice do not use their cash balance uniformly nor are they able to predict daily cash inflows
and outflows. The Miller-Orr (MO) model overcomes this shortcoming and allows for daily
cash flow variation. It assumes that net cash flows are normally distributed with a zero value of
mean and standard deviation. The MO model provides for two control limits—the upper control
limit and the lower control limit as well as a return point. If the firm’s cash flows fluctuate
randomly and hit the upper limit, then it buys sufficient marketable securities to come back to a
normal level of cash balance (the return point). Similarly, when the firm’s cash flows wander and
hit the lower limit, it sells sufficient marketable securities to bring the cash balance back to the
normal level (the return point).

Cash balance

Upper limit

Purchase of securities

Return point

Sale of securities

Lower point


Miller- Orr model

The firm sets the lower control limit as per its requirement of maintaining minimum cash
balance. At what distance the upper control limit will be set? The difference between the upper
limit and the lower limit depends on the following factors:

• The transaction cost (c)

• The interest rate, (i)

• The standard deviation of net cash flows.

The formula for determining the distance between upper and lower control limits (called Z) is as

(Upper Limit—Lower Limit) = (3/4 * transaction cost * cash flow variation/ interest per day)⅓ (5)

We can notice from equation (5) that the upper and lower limit will be far off from each other
(i.e. Z will be larger) if transaction cost is higher or cash flows show greater fluctuations. The
limits will come closer as the interest increases. Z is inversely related to the interest rate. It is
noticeable that the upper limit is three times above the lower control limit and the return point
lies between the upper and the lower limit. Thus,

Upper Limit = Lower Limit + 3Z (6)

Return point = Lower Limit + Z (7)

The net effect is that the firms hold the average cash balance equal to:

Average Cash Balance = Lower Limit +4/3 Z

The MO model is more realistic since it allows variation in cash balance within lower and upper
limits. The financial manager can set the lower limit according to the firm’s liquidity
requirement. The past data of the cash flow behavior can be used to determine the standard
deviation of net cash flows. Once the upper and lower limits are set, managerial attention is
needed only if the cash balance deviates from the limits. The action under these situations are
anticipated and planned in the beginning.


There is a close relationship between cash and money market securities or other short-term
investment alternatives. Investment in these alternatives should be properly managed. Excess
cash should normally be invested in those alternatives that can be conveniently and promptly
converted into cash. Cash in excess of the requirement of operating cash balance may be held for
two reasons. First, the working capital requirements of the firm fluctuate because of the elements
of seasonality and business cycles. The excess cash may build up during slack seasons but it
would be needed when the demand picks up. Thus, excess cash during slack season is idle
temporarily, but has a predictable requirement later on. Second, excess cash may be held as a
buffer to meet unpredictable financial needs. A firm holds extra cash because cash flows cannot
be predicted with certainty. Cash balance held to cover the future exigencies is called the
precautionary balance and is usually invested in the short-term money market investments until

Instead of holding excess cash for the above-mentioned purpose, the firm may meet its
precautionary requirements as and when they arise by making short-term borrowings. The choice
between the short-term borrowings and liquid assets holding will depend upon the firm’s policy
regarding the mix of short-term financing.

The excess amount of cash held by the firm to meet its variable cash requirements and future
contingencies should be temporarily invested in marketable securities, which can be regarded
as near moneys. A number of marketable securities may be available in the market. The financial
manager must decide about the portfolio of marketable securities in which the firm’s surplus
cash should be invested.

Types of Short-term Investment Opportunities
The following short-term investment opportunities are available to companies in India to invest
their temporary cash surplus:

• Treasury bills -- Treasury bills (TBs) are short-term government securities. The usual
practice in India is to sell treasury bills at a discount and redeem them at par on maturity.
The difference between the issue price and the redemption price, adjusted for the time
value of money, is return on treasury bills. They can be bought and sold any time; thus,
they have liquidity. Also, they do not have the default risk.

• Commercial papers – Commercial papers (CPs) are short-term, unsecured securities

issued by highly credit worthy large companies. They are issued with a maturity of three
months to one year. CPs are marketable securities, and therefore, liquidity is not a

• Certificates of deposits – Certificates of deposits (CDs) are papers issued by banks

acknowledging fixed deposits for a specified period of time. CDs are negotiable
instruments that make them marketable securities.

• Bank deposits – A firm can deposit its temporary cash in a bank for a fixed period of
time. The interest rate depends on the maturity period. For example, the current interest
rate for a 30 to 45 days deposit is about 3 percent and for 180 days to one year is about 6-
7 percent. The default risk of the bank deposits is quite low since the government owns
most banks in India.

• Inter-corporate deposits – Inter-corporate lending borrowing or deposits (ICDs) is a

popular short-term investment alternative for companies in India. Generally a cash
surplus company will deposit (lend) its funds in a sister or associate companies or with
outside companies with high credit standing. In practice, companies can negotiate inter-
corporate borrowing or lending for very short periods. The risk of default is high, but
returns are quite attractive.

• Money market mutual funds – Money market mutual funds (MMMFs) focus on short-
term marketable securities such as TBs, CPs, CDs, or call money. They have a minimum
lock-in period of 30 days, and after this period, an investor can withdraw his or her
money any time at a short notice or even across the counter in some cases. They offer
attractive yields; yields are usually 2 percent above than on bank deposits of same
maturity. MMMFs are of recent origin in India, and they have become quite popular with
institutional investors and some companies.

Cash Management Services generally offered

The following is a list of services generally offered by banks and utilised by larger businesses
and corporations:

• Account Reconcilement Services: Balancing a checkbook can be a difficult process for

a very large business, since it issues so many checks it can take a lot of human
monitoring to understand which checks have not cleared and therefore what the
company's true balance is. To address this, banks have developed a system which allows
companies to upload a list of all the checks that they issue on a daily basis, so that at the
end of the month the bank statement will show not only which checks have cleared, but
also which have not. More recently, banks have used this system to prevent checks from
being fraudulently cashed if they are not on the list, a process known as positive pay.

• Advanced Web Services: Most banks have an Internet-based system which is more
advanced than the one available to consumers. This enables managers to create and
authorize special internal logon credentials, allowing employees to send wires and access
other cash management features normally not found on the consumer web site.

• Armored Car Services: Large retailers who collect a great deal of cash may have the
bank pick this cash up via an armored car company, instead of asking its employees to
deposit the cash.

• Automated Clearing House: services are usually offered by the cash management
division of a bank. The Automated Clearing House is an electronic system used to
transfer funds between banks. Companies use this to pay others, especially employees
(this is how direct deposit works). Certain companies also use it to collect funds from
customers (this is generally how automatic payment plans work). This system is
criticized by some consumer advocacy groups, because under this system banks assume
that the company initiating the debit is correct until proven otherwise.

• Balance Reporting Services: Corporate clients who actively manage their cash balances
usually subscribe to secure web-based reporting of their account and transaction
information at their lead bank. These sophisticated compilations of banking activity may

include balances in foreign currencies, as well as those at other banks. They include
information on cash positions as well as 'float' (e.g., checks in the process of collection).
Finally, they offer transaction-specific details on all forms of payment activity, including
deposits, checks, wire transfers in and out, ACH (automated clearinghouse debits and
credits), investments, etc.

• Cash Concentration Services: Large or national chain retailers often are in areas where
their primary bank does not have branches. Therefore, they open bank accounts at various
local banks in the area. To prevent funds in these accounts from being idle and not
earning sufficient interest, many of these companies have an agreement set with their
primary bank, whereby their primary bank uses the Automated Clearing House to
electronically "pull" the money from these banks into a single interest-bearing bank

• Lockbox services: Often companies (such as utilities) which receive a large number of
payments via checks in the mail have the bank set up a post office box for them, open
their mail, and deposit any checks found. This is referred to as a "lockbox" service.

• Positive Pay: Positive pay is a service whereby the company electronically shares its
check register of all written checks with the bank. The bank therefore will only pay
checks listed in that register, with exactly the same specifications as listed in the register
(amount, payee, serial number, etc.). This system dramatically reduces check fraud.

• Sweep Accounts: are typically offered by the cash management division of a bank.
Under this system, excess funds from a company's bank accounts are automatically
moved into a money market mutual fund overnight, and then moved back the next
morning. This allows them to earn interest overnight. This is the primary use of money
market mutual funds.

• Zero Balance Accounting: can be thought of as somewhat of a hack. Companies with

large numbers of stores or locations can very often be confused if all those stores are
depositing into a single bank account. Traditionally, it would be impossible to know
which deposits were from which stores without seeking to view images of those deposits.
To help correct this problem, banks developed a system where each store is given their
own bank account, but all the money deposited into the individual store accounts are
automatically moved or swept into the company's main bank account. This allows the
company to look at individual statements for each store. U.S. banks are almost all
converting their systems so that companies can tell which store made a particular deposit,

even if these deposits are all deposited into a single account. Therefore, zero balance
accounting is being used less frequently.

• Wire Transfer: A wire transfer is an electronic transfer of funds. Wire transfers can be
done by a simple bank account transfer, or by a transfer of cash at a cash office. Bank
wire transfers are often the most expedient method for transferring funds between bank
accounts. A bank wire transfer is a message to the receiving bank requesting them to
effect payment in accordance with the instructions given. The message also includes
settlement instructions. The actual wire transfer itself is virtually instantaneous, requiring
no longer for transmission than a telephone call.

• Controlled Disbursement: This is another product offered by banks under Cash

Management Services. The bank provides a daily report, typically early in the day, that
provides the amount of disbursements that will be charged to the customer's account.
This early knowledge of daily funds requirement allows the customer to invest any
surplus in intraday investment opportunities, typically money market investments. This is
different from delayed disbursements, where payments are issued through a remote
branch of a bank and customer is able to delay the payment due to increased float time.

In the past, other services have been offered the usefulness of which has diminished with the rise
of the Internet. For example, companies could have daily faxes of their most recent transactions
or be sent CD-ROMs of images of their cashed checks.

Purpose of Cash Management

Cash management is the stewardship or proper use of an entity’s cash resources. It serves as the
means to keep an organization functioning by making the best use of cash or liquid resources of
the organization.

The function of cash management at the U.S. Treasury is threefold:

1. To eliminate idle cash balances. Every dollar held as cash rather than used to augment
revenues or decrease expenditures represents a lost opportunity. Funds that are not needed to
cover expected transactions can be used to buy back outstanding debt (and cease a flow of funds
out of the Treasury for interest payments) or can be invested to generate a flow of funds into the

Treasury’s account. Minimizing idle cash balances requires accurate information about expected
receipts and likely disbursements.

2. To deposit collections timely. Having funds in-hand is better than having accounts receivable.
The cash is easier to convert immediately into value or goods. A receivable, an item to be
converted in the future, often is subject to a transaction delay or a depreciation of value. Once
funds are due to the Government, they should be converted to cash-in-hand immediately and
deposited in the Treasury's account as soon as possible.

3. To properly time disbursements. Some payments must be made on a specified or legal date,
such as Social Security payments. For such payments, there is no cash management decision. For
other payments, such as vendor payments, discretion in timing is possible. Government vendors
face the same cash management needs as the Government. They want to accelerate collections.
One way vendors can do this is to offer discount terms for timely payment for goods sold.


Research Design


Research is a systematic process of collecting and analyzing information (data) in order to

increase our understanding of the phenomenon about which we are concerned or interested. A
Research Design is the framework or plan for a study which is used as a guide in collecting and
analyzing the data collected. It is the blue print that is followed in completing the study. The
basic objective of research cannot be attained without a proper research design. It specifies the
methods and procedures for acquiring the information needed to conduct the research effectively.
It is the overall operational pattern of the project that stipulates what information needs to be
collected, from which sources and by what methods.


Study of CASH MANAGEMENT at the State Bank of India


Objectives of a project tell us why project has been taken under study. It helps us to know more
about the topic that is being undertaken and helps us to explore future prospects of that
organisation. Basically it tells what all have been studied while making the project.

1. To understand how cash is being managed by SBI (K.S.layout, Bangalore)

2. To gain knowledge about the system prevailing in Banks.

3. To suggest methods for improving cash management in Banks.



There are two types of data used. They are primary and secondary data. Primary data is defined
as data that is collected from original sources for a specific purpose. Secondary data is data
collected from indirect sources.


These include the survey or questionnaire method, as well as the personal interview methods of
data collection.


These include books, the internet, company brochures, the company website, competitor’s
websites etc, newspaper articles etc.


Sampling refers to the method of selecting a sample from a given universe with a view to draw
conclusions about that universe. A sample is a representative of the universe selected for study.

The sample size is 20


Following are the limitations faced by me during this project:

 The allotted time period of 8 weeks for the study was relatively insufficient, keeping in
mind the long duration it can take at times, to close a particular corporate deal.

 The study might not produce absolutely accurate results as it was based on a sample
taken from the population.

 It was difficult getting time and access to senior level Finance/HR managers (who had to
be talked to, to get required information) due to their busy schedules and prior

 A few of the managers refrained from giving the required information as he considered
me to be from their confidential domains.


Company Profile


Without a sound and effective banking system in India it cannot have a healthy economy.
The banking system of India should not only be hassle free but it should be able to meet new
challenges posed by the technology and any other external and internal factors.

For the past three decades India’s banking system has several outstanding achievements to its
credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or
cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of
the country. This is one of the main reasons for India’s growth. The government’s regular policy
for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private
banks of India.

The first bank in India, though conservative, was established in 1786. From 1786 till today, the
journey of Indian Banking System can be segregated into three distinct phases. They are as
mentioned below:

• Early phase from 1786 to 1969 of Indian Banks.

• Nationalization of Indian Banks and up to 1991 prior to Indian.
• Banking sector Reforms.
• New phase of Indian Banking System with the advent of Indian.
• Financial & Banking Sector Reforms after 1991.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and
Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These
three banks were amalgamated in 1920 and Imperial Bank of India was established which started
as private shareholders banks, mostly European shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National
Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of
India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore
were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic failures
between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the
functioning and activities of banks, mostly small. To streamline the functioning and activities of
commercial banks, the Government of India came up with The Banking Companies Act, 1949
which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No.
23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of
banking in India as the Central Banking System.

During those day’s public has lesser confidence in the banks. As an aftermath deposit
mobilization was slow. Abreast of it the savings bank facility provided by the Postal department
was comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In 1955,
it nationalized Imperial Bank of India with extensive banking facilities on a large scale specially
in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI
and to handle banking transactions of the Union and state government all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July
1969, major process of nationalization was carried out. It was the effort of the then Prime
Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were
nationalized. Second phase of nationalization Indian Banking Sector Reform was carried out in
1980 with seven more banks. This step brought 80% of the banking segment in India under
Government ownership.

The following are the steps taken by the Government of India to Regulate Banking
Institutions in the Country:

1. 1949: Enactment of Banking Regulation Act.

2. 1955: Nationalization of State Bank of India.
3. 1959: Nationalization of SBI subsidiaries.
4. 1961: Insurance cover extended to deposits.
5. 1969: Nationalization of 14 major banks.
6. 1971: Creation of credit guarantee corporation.
7. 1975: Creation of regional rural banks.
8. 1980: Nationalization of seven banks with deposits over 200 crores.

After the nationalization of banks, the branches of the public sector bank India rose to
approximately 800% in deposits and advances took a huge jump by 11000%. Banking in the
sunshine of Government ownership gave the public implicit faith and immense confidence about
the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in its reforms
measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his
name, which worked for the Liberalization of Banking Practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to give
a satisfactory service to customers. Phone banking and net banking is introduced. The entire
system became more convenient and swift. Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from any crisis
triggered by any external macroeconomics shock as other East Asian Countries suffered. This is
all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not
yet fully convertible, and banks and their customers have limited foreign exchange exposure.

Banking in India originated in the first decade of 18th century with The General Bank of India
coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are
now defunct. The oldest bank in existence in India is the State Bank of India being established as
“The Bank of Calcutta” in Calcutta in June 1806. Couple of Decades later, foreign Banks like
HSBC and Credit Lyonnais Started their Calcutta operations in 1850s. At that point of time,
Calcutta was the most active trading port, mainly due to the trade of British Empire and due to
which banking actively took roots there and prospered. The first fully Indian owned bank was the
Allahabad Bank set up in 1865.

By 1900, the market expanded with the establishment of banks like Punjab National Bank in
1895 in Lahore; Bank of India in 1906 in Mumbai-both of which were founded under private

ownership. Indian Banking Sector was formally regulated by Reserve Bank of India from 1935.
After India’s independence in 1947, the Reserve Bank was nationalized and given broader

SBI Group

The Bank of Bengal, which later became the State Bank of India. State Bank of India with its
seven associate banks commands the largest banking resources in India.


The next significant milestone in Indian Banking happened in late 1960s when the then Indira
Gandhi government nationalized on 19th July 1949, 14 major commercial Indian banks followed
by nationalization of 6 more commercial Indian banks in 1980.

The stated reason for the nationalization was more control of credit delivery. After this, until
1990s, the nationalized banks grew at a leisurely pace of around 4% also called as the Hindu
growth of the Indian economy.

After the amalgamation of New Bank of India with Punjab National Bank, currently there are 19
nationalized banks in India.


In the early 1990’s the then Narasimha Rao government embarked a policy of liberalization and
gave licenses to a small number of private banks, which came to be known as New generation
tech-savvy banks, which included banks like ICICI and HDFC. This move along with the rapid
growth of the economy of India, kick started the banking sector in India, which has seen rapid
growth with strong contribution from all the sectors of banks, namely Government banks, Private
Banks and Foreign banks. However there had been a few hiccups for these new banks with many

either being taken over like Global Trust Bank while others like Centurion Bank have found the
going tough.

The next stage for the Indian Banking has been set up with the proposed relaxation in the
norms for Foreign Direct Investment, where all Foreign Investors in Banks may be given voting
rights which could exceed the present cap of 10%, at present it has gone up to 49% with some

The new policy shook the Banking sector in India completely. Bankers, till this time, were
used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new
wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All
this led to the retail boom in India. People not just demanded more from their banks but also
received more.


Currently (2010), overall, banking in India is considered as fairly mature in terms of

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

With the growth in the Indian economy expected to be strong for quite some time-especially
in its services sector, the demand for banking services-especially retail banking, mortgages and
investment services are expected to be strong. M&As, takeovers, asset sales and much more
action (as it is unraveling in China) will happen on this front in India.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak
Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed
to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any
stake exceeding 5% in the private sector banks would need to be vetted by them.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that
is with the Government of India holding a stake), 29 private banks (these do not have
government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign
banks. They have a combined network of over 53,000 branches and 21,000 ATMs. According to
a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total
assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5%
respectively.SBI is the only bank consisting 26% participation in public sector banks and 39%
participation in commercial banks in India.

Banking in India

1 Central Bank Reserve Bank of India

State Bank of India, Allahabad Bank, Andhra Bank,
Bank of Baroda, Bank of India, Bank of Maharashtra,
Canara Bank, Central Bank of India, Corporation Bank,
Dena Bank, Indian Bank, Indian overseas Bank, Oriental
2 Nationalized
Bank of Commerce, Punjab and Sind Bank, Punjab
National Bank, Syndicate Bank, Union Bank of India,
United Bank of India, UCO Bank, and Vijaya Bank.

Bank of Rajasthan, Bharat overseas Bank, Catholic

Syrian Bank, Centurion Bank of Punjab, City Union
Bank, Development Credit Bank, Dhanalaxmi Bank,
Federal Bank, Ganesh Bank of Kurundwad, HDFC Bank,
3 Private Banks
ICICI Bank, IDBI, IndusInd Bank, ING Vysya Bank,
Jammu and Kashmir Bank, Karnataka Bank Limited,
Karur Vysya Bank, Kotak Mahindra Bank, Lakshmivilas
Bank, Lord Krishna Bank, Niantic Bank, Ratnakar Bank,
Sangli Bank, SBI Commercial and International Bank,
South Indian Bank, Tamil Nadu Mercantile Bank Ltd.,
United Western Bank, UTI Bank, YES Bank.

Structure of Indian Banking

Reserve Bank of India is the regulating body for the Indian Banking Industry. It is a mixture of
Public sector, Private sector, Co-operative banks and foreign banks. The private sector banks are
further spilt into old banks and new banks.

Reserve Bank of India

Scheduled Banks

Scheduled Scheduled Co-operative

Commercial Banks Banks

Public Sector Banks Private Sector Banks Foreign Banks Regional Rural Banks

Scheduled Urban cooperative Bank

Scheduled State co-operative Banks

Nationalized Banks

SBI & its Associates

Old Private Sector Banks New Private Sector

Bank Overview


Not only many financial institution in the world today can claim the antiquity and majesty of the
State Bank Of India founded nearly two centuries ago with primarily intent of imparting stability
to the money market, the bank from its inception mobilized funds for supporting both the public
credit of the companies governments in the three presidencies of British India and the private
credit of the European and India merchants from about 1860s when the Indian economy book a
significant leap forward under the impulse of quickened world communications and ingenious
method of industrial and agricultural production the Bank became intimately in valued in the
financing of practically and mining activity of the Sub- Continent Although large European and
Indian merchants and manufacturers were undoubtedly thee principal beneficiaries, the small
man never ignored loans as low as Rs.100 were disbursed in agricultural districts against glad
ornaments. Added to these the bank till the creation of the Reserve Bank in 1935 carried out
numerous Central – Banking functions.

Adaptation world and the needs of the hour has been one of the strengths of the Bank, In the
post depression exe. For instance – when business opportunities become extremely restricted,
rules laid down in the book of instructions were relined to ensure that good business did not go
post. Yet seldom did the bank contravene its value as depart from sound banking principles to

retain as expand its business. An innovative array of office, unknown to the world then, was
devised in the form of branches, sub branches, treasury pay office, pay office, sub pay office and
out students to exploit the opportunities of an expanding economy. New business strategy was
also evaded way back in 1937 to render the best banking service through prompt and courteous
attention to customers.

A highly efficient and experienced management functioning in a well defined organizational

structure did not take long to place the bank an executed pedestal in the areas of business,
profitability, internal discipline and above all credibility A impeccable financial status consistent
maintenance of the lofty traditions if banking an observation of a high standard of integrity in its
operations helped the bank gain a pre- eminent status. No wonders the administration for the
bank was universal as key functionaries of India successive finance minister of independent
India Resource Bank of governors and representatives of chamber of commercial showered
economics on it.

Modern day management techniques were also very much evident in the good old day’s years
before corporate governance had become a puzzled the banks bound functioned with a high
degree of responsibility and concerns for the shareholders. An unbroken record of profits and a
fairly high rate of profit and fairly high rate of dividend all through ensured satisfaction,
prudential management and asset liability management not only protected the interests of the
Bank but also ensured that the obligations to customers were not met.

The traditions of the past continued to be upheld even to this day as the State Bank years itself to
meet the emerging challenges of the millennium.




Togetherness is the theme of this corporate loge of SBI where the world of banking services
meet the ever changing customers needs and establishes a link that is like a circle, it indicates
complete services towards customers. The logo also denotes a bank that it has prepared to do
anything to go to any lengths, for customers.

The blue pointer represent the philosophy of the bank that is always looking for the growth and
newer, more challenging, more promising direction. The key hole indicates safety and security.


To retain the Bank’s position as premiere Indian Financial Service Group, with world class
standards and significant global committed to excellence in customer, shareholder and employee
satisfaction and to play a leading role in expanding and diversifying financial service sectors
while containing emphasis on its development banking rule.


 Premier Indian Financial Service Group with prospective world-class Standards of

efficiency and professionalism and institutional values
 Retain its position in the country as pioneers in Development banking.
 Maximize the shareholders value through high-sustained earnings per Share.
 An institution with cultural mutual care and commitment, satisfying and

 Good work environment and continues learning opportunities.


 Excellence in customer service

 Profit orientation
 Belonging commitment to Bank
 Fairness in all dealings and relations
 Risk taking and innovative
 Team playing
 Learning and renewal
 Integrity
 Transparency and Discipline in policies and systems.

Organization Structure



G. M G.M G. M G.M G. M

(Operations) (C&B) (F&S) (I) & CVO (P&D)

Zonal officers

Functional Heads

Regional officers


Competitors and other players in the field:-

Top Performing Public Sector Banks

Andhra Bank

Allahabad Bank

Punjab National Bank

Dena Bank

Vijaya Bank

Top Performing Private Sector Banks




Kotak Mahindra Bank

Centurion Bank of Punjab

Top Performing Foreign Banks

Standard Chartered
American Express


Cash Management As part of State Bank's global transaction solutions to Corporates and
Institutions, we provide Cash Management, Securities Services and Trade Services through our
strong market networks in Asia. We are committed to providing you with

o Integrated, superior cross-border and local services

o Efficient transaction processing

o Reliable financial information

o Innovative products

o World-class clearing services thus ensuring a full suite of transactional products for your

For Corporates

State Bank is highly recognized as a leading cash management supplier across the emerging
markets. Our Cash Management Services cover local and cross border Payments, Collections,
Information Management, Account Services and Liquidity Management for both corporate and
institutional customers. With State Bank's Cash Management services, you'll always know your
exact financial position. You have the flexibility to manage your company's complete financial
position directly from your computer workstation. You will also be able to take advantage of our
outstanding range of Payments, Collections, Liquidity and Investment Services and receive
comprehensive reports detailing your transactions. With State Bank, you have everything it takes
to manage your cash flow more accurately.

o Payments Services

o Collection Services

o Liquidity Management

For Financial Institutions

Standard Chartered is highly recognized as a leading cash management supplier across the
emerging markets. Our Cash Management Services cover local and cross border Payments,
Collections, Information Management, Account Services and Liquidity Management for both
corporate and institutional customers. If you are looking for a correspondent banking partner you
can trust, Standard Chartered can help you. We have more than 500 offices located in 50
countries throughout the world and, with 150 years of on-the-ground experience, we can help our
bank clients with all their cash management needs.

o Clearing Services

o Asian Gateway

Payment Services Global payments solution for efficient transaction processing Looking to
outsource your payments to enable:

o Efficient processing of all your payables in the most cost effective way

o Straight through processing both at your end as well as your bank's back-end

o Efficient payables reconciliation with minimal effort and delay

o Quick approval of payments from any location

o Minimum hindrance to automation due to local language difficulties

o Centralized management of payables across departments, subsidiaries and countries

Our Solution State Bank's Straight Through Services (STS) Payments Solution can be tailored
to the different payment needs of companies, whatever industry, size or country you may be in.
With a comprehensive End-to-end Payment Processing Cycle, STS allows companies to process
a variety of payment types, whether they be domestic or international, local or central in different
countries, all in a single system file. To realise the benefits of STS, please contact your local
Relationship Manager or Cash Management representative. Our Coverage We are the foreign
bank having the largest geographical representation in the country. We are the only bank which
provides draft status to you on the website.

Collection Services

Comprehensive receivables management solution State Bank understands that operating and
sustaining a profitable business these days is extremely tough. In an environment of constant
changes and uncertainties, most businesses face challenges of costs and efficiency. Key concerns

o Receivables Management - ensuring receivables are collected in an efficient and timely

manner to optimise utilisation of funds.

o Risk Management - ensuring effective management of debtors to eliminate risk of returns

and losses caused by defaulters and delayed payments

o Inventory Management - ensuring efficient and quick turnaround of inventory to

maximise returns.

o Cost Management - reducing interest costs through optimal utilisation of funds.

Our Solution The State Bank Collections Solution leverages the Bank's extensive regional
knowledge and widespread branch network across our key markets to specially tailor solutions
for your regional and local collection needs. This Collections Solution, delivered through a
standardised international platform, has the flexibility to cater to your local needs, thus enabling
you to meet your objectives of reducing costs and increasing efficiency and profitability through
better receivables and risk management. The key components of our solution include the

o Extensive Clearing Network

o Guaranteed Credit

o Comprehensive MIS

o System Integration

o Outsourcing of Collection

Liquidity Management

Solutions for efficient management of your funds A corporate treasurer's main challenge often
revolves around ensuring that the company's cash resources are utilised to their maximum
advantage. You need a partner bank that can help you:

o Maximise interest income on surplus balances; minimise interest expense on deficit

balances for domestic, regional and global accounts

o Minimise FX conversion for cross-currency cash concentration

o Customise liquidity management solutions for different entities in different countries

o Centralise information management of consolidated account balances

Our Solution With our global experience and on-the-ground market knowledge, State Bank will
help you define an overall cash management strategy which incorporates a liquidity management
solution that best meets your needs.

Key Features Based on your needs and the regulatory environment that you are in, you can
choose any of the following features:

o Physical Sweeping

o Notional Pooling

Liquidity Management in SBI

Measuring and managing the liquidity needs are vital for effective operation of commercial
banks. By assuring a bank's ability to meet its liabilities as they become due, liquidity
management can reduce the probability of an adverse situation developing. The importance of
liquidity transcends individual institutions, as liquidity shortfall in one institution can have
repercussions on the entire system. Bank managements should measure, not only the liquidity
positions of banks on an ongoing basis, but also examine how liquidity requirements are likely to
evolve under different conditions.

Banks are in the business of maturity transformation. They lend for longer time periods, as
borrowers normally prefer a longer time frame. But their liabilities are typically short term in
nature, as lenders normally prefer a shorter time frame (liquidity preference). This results in
long-term interest rates typically exceeding short-term rates. Hence, the incentive for banks for
performing the function of financial intermediation is the difference between interest receipt and
interest cost which is called the interest spread. It is implicit, therefore, that banks will have a
mismatched balance sheet, with liabilities greater than assets in short term, and with assets
greater than liabilities in the medium and long term. These mismatches, which represent liquidity
risk, are with respect to various time horizons. Hence, the overwhelming concern of a bank is to
maintain adequate liquidity.

Liquidity has been defined as the ability of an institution to replace liability run off and fund
asset growth promptly and at a reasonable price. Maintenance of superfluous liquidity will,
however, impact profitability adversely. It can also be defined as the comprehensive ability of a
bank to meet liabilities exactly when they fall due or when depositors want their money back.
This is a heart of the banking operations and distinguishes a bank from other entities.

Cash Reserve Ratio

A scheduled bank is under the obligation to keep a cash reserve called the Statutory Cash
Reserve, with the Reserve Bank of India (RBI) under Section 42 of the Reserve Bank of India
Act, 1934. Every scheduled bank is required to maintain with the Reserve Bank an average daily
balance equal to least 3% of its net demand and time liabilities. Average daily balances mean the
average of balances held at the close of business on each day of the fortnight. The Reserve Bank
is empowered to increase the rate of Statutory Cash Reserve from 3% to 20% of the Net Demand
and Time Liabilities (NDTL).

Statutory Liquidity Ratio

Section 24(2A) of Banking Regulation Act, 1949, requires every banking company to maintain
in India in Cash, Gold or Unencumbered Approved Securities or in the form of net balance in
current accounts maintained in India by the bank with a nationalized bank, equivalent to an
amount which shall not at the close of the business on any day be less than 25% or such other
percentage not exceeding 40% as the RBI may from time to time, by notification in the Gazette
of India, specify, of the total of its demand and time liabilities in India as on the last Friday of the
second preceding fortnight, which is known as SLR. At present, all Scheduled Commercial
Banks are required to maintain a uniform SLR of 25% of the total of their demand and time
liabilities in India as on the last Friday of the second preceding fortnight which is stipulated
under Section 24 of the RBI Act, 1949.

RBI can enhance the stipulation of SLR (not exceeding 40%) and advise the banks to keep a
large portion of the funds mobilized by them in liquid assets, particularly government and other
approved securities. As a result, funds available for credit would get reduced.
All banks have to maintain a certain portion of their deposits as SLR and have to invest that
amount in these Government securities.

Government securities are sovereign securities. These are issued by the RBI on behalf of the
Government of India, in lieu of the Central Government's market borrowing program.
The term government securities include:

Government Dated Securities, i.e., Central Government Securities

State Government Securities
Treasury Bills.

The Central Government borrows funds to finance its fiscal deficit. The market borrowing of the
Central Government is raised through the issue of dated securities and 364 days Treasury Bills,
either by auction or by floatation of fixed coupon loans.

In addition to the above, Treasury Bills of 91 days are issued for managing the temporary cash
mismatches of the government. These do not form part of the borrowing program of the Central

Based on the required CRR and SLR per day, the treasury department of the bank ensures that
sufficient balance is maintained in the Reserve Bank (at its different branches). The fund
manager calculates on a daily basis the RBI balances based on opening RBI balances and taking
into account various inflows and outflows during the day. The fund manager takes the summary
of inflows and outflows and the net effect is added to/subtracted from the opening RBI balances.
By this method, an RBI balance of all the 14 days is arrived at. For instance, on the opening day
of the fortnight, if there is an anticipated surplus, banks can generally lend it at an average,
subject to subsequent inflows/outflows. Conversely, for a shortfall, the bank may borrow the
required amount in call/repo/Collateralized Borrowings and Lending Obligations (CBLO)
markets on a daily basis.

Successful functioning of the funds department depends mostly on the prompt collection of
information from branches/other departments regarding the inflow and outflow of funds. The
information should also be collected accurately and collated properly/correctly. Improper
maintenance of liquidity and CRR position by the fund manager may lead to either a default or
an excess which does not earn any interest for the bank.

A Framework for Measuring and Managing Liquidity

Measuring and managing liquidity needs are vital for effective operation of commercial banks.
By assuring a bank's ability to meet its liabilities as they become due, liquidity management can
reduce the probability of an adverse situation developing. The importance of liquidity transcends
individual institutions, as liquidity shortfall in one institution can have repercussions on the
entire system. Bank managements should measure not only the liquidity positions of banks on an
ongoing basis, but also examine how liquidity requirements are likely to evolve under different
assumptions. Experience shows that assets like government securities and other money market

instruments, which are generally treated as liquid could also become illiquid when the market
and players are unidirectional. Therefore, liquidity has to be tracked through maturity or cash
flow mismatches.

The framework for assessing and managing bank liquidity has three dimensions:
o Measuring and managing net funding requirements
o Managing market access and
o Contingency planning.


Analysis and

Q1. On which bank you depend for your regular transaction?

() No. of people

SBI 60 % (60)

ICICI 33 % (33)
HDFC 5% (5)
OTHER 2% (2)

Analysis of the above diagram

It has been observed that approximately 60% correspondents are using the service of SBI for
their daily transaction, around 33% of people are using ICICI Bank for their transaction and only
5% & 2% of people are using HDFC & other Bank service respectively in Kumaraswamy
Layout. It also shows that SBI have the highest market position in Kumaraswamy Layout as per
my sample.

Q2. Are you aware of products & services provided by SBI?

YES 85% (85)

NO 15% (15)
Total No. of People 100

Analysis of the above diagram

From the above data it is clear that most of the customers (around 85%) of K.S.layout have the
idea about the product & services of SBI, the rest 15% have the idea about the product they are

Q3. Are you aware of SBI’s straight to bank services?

(a)YES 60% (60)

(b) NO 40% (40)
Total Number of People 100

Analysis of the above diagram

It’s very good for SBI as most of the companies are aware of the cash management services

provided by the bank. The bank can look into companies as to propose its services to the

concerned company personals.

Q4. Are you satisfied with your company services?

(a) YES 70% (70)

(b) NO 30%(30)
Total Number of People 100

Analysis of the above diagram

From the above analysis it can be interpreted that most of the companies were satisfied by their

CMS provider but still they found few areas of improvement, SBI can give solutions for those


Q5. What are your main modes of premium collection?

(a) CASH 25% (25)

(b) CHEQUE 65% (65)
(c) DEMAND DRAFT 10% (10)
Total Number of People 100

Analysis of the above diagram

Most of the companies accept premium in the form of cheque as it’s a safer instrument than

cash and is easily handled as compared to demand draft SBI can provide various cheque

collections options to the companies.

Q6. What are your main modes making payments?

(a) CHEQUE 70% (70)

(b) CASH 20% (20)
(c) DEMAND DRAFT 10% (10)
Total Number of People 100

Analysis of the above diagram

Like premium most of the companies distribute their payments through cheques only DD and

cash are made out under special circumstances.

Q7. Does the financial crisis in US affecting your functioning here in INDIA?

(a) YES 75% (75)

(b) NO 25% (25)


Analysis of the above diagram

From the pie chart its quite evident that the financial crisis in US are affecting people globally

and even insurance companies are gravely affected by the crisis



The ABC Ltd. is a FMCG Company. The company has presence in more than 15 cities
and has its head quarter in Mumbai. The company has Depots at these cities. And each depot has
some turnover every month, the name of Cities, the monthly turnover of the each depots and
number of retailers in each cities are as follows:

Sr. No. Cities Monthly Turnover No. of Retailers
(Rs. In Crores)

1 Mumbai 1.5 200

2 Delhi 1.25 180

3 Calcutta 1.00 175

4 Madras 0.75 180

5 Ahmadabad 0.75 150

6 Bangalore 0.70 160

7 Hyderabad 1.00 155

8 Pune 0.50 140

9 Jaipur 0.60 150

10 Indore 0.75 120

11 Cochin 0.50 130

12 Agra 0.50 120

13 Jalandhar 0.40 110

14 Jammu 0.10 115

15 Nagpur 0.10 135

16 Lucknow 0.10 140

The requirements of the ABC Ltd. are as follows:

1. All money should be ABC Ltd. a/c at Delhi.

2. All money should on the next day basis.
3. Details of cheques deposited at different location on daily basis:

• Location

• No. of cheques deposited

• Cheque number

• Cheque amount

• Date of deposit

• Clearing date

• Retailer name/code

• Returned cheques
 Date
 Reason
 Location
 Amount
1. Courier pick-up service at each location.
2. Monthly reports of each location about sales, collection, expenditures etc.
3. Other MIS reports


These are the conditions and facts of the organisation. Now, what the bank will do? I have taken
the case of STATE BANK OF INDIA CMS. This is regarding how the bank makes deal with
the company.

The STATE BANK OF INDIA will analysis the location of the company. The ABC Ltd.
has sixteen locations in the country. This is not always possible to have the branches at each
location of the client for the banks. In this case, we are taking the assumptions as follows:

• In 10 locations of the company, the bank has its own presence.

• In 2 locations of the company, the bank has tie-up with correspondent bank
• And in remaining 4 locations, the bank has no presence as well as no tie-up with any other

How the bank makes allocation of the different instruments?

The bank broadly categorized the instruments into two types:

I. Local Cheque Collections (LCC)

LCC are the cheques, which are drawn and deposited at the same location. Eg. A Cheque
drawn at Jaipur must be deposited at Jaipur only.

The LCC is again categorized into two types:

A local Cheque which is drawn and deposited at the same location where the bank has its
own presence.

A local Cheque which is drawn and deposited at the same location where the bank doesn’t
have its own presence but has tie up with correspondent Bank.

II. Upcountry Cheque Collections (UCC)

The UCC are the cheques, which are drawn and deposited at different locations. Eg. A
Cheque drawn at Jaipur is deposited at Delhi.

The UCC is again categorized into two types:


An upcountry Cheque which is drawn at one location and deposited at another location where
the bank has its own presence.

An upcountry Cheque which is drawn at one location and deposited at another location where
the bank has tie-up with correspondent Bank.

An upcountry Cheque which is drawn at one location and deposited at another location where
the banks neither have its own presence nor have tie-up with correspondent bank.


Pricing is competitive; varies from centre to center. It also varies from instruments to

Special pricing can be worked out taking into account the volume of funds & the centres.
The pricing part of the CMS is very complex. Normally, the STATE BANK of INDIA takes into
account the following factors while going for pricing:

1) Bank In Funds/ Out of Funds & Correspondent Bank Charges:

When Cheque is deposited in the bank it passes through the clearing house. In India, clearing
is done through RBI, SBI and PSU banks. The RBI has presence in 15 cities in India while
SBI has 938 locations in India including its associates. Other cities where clearing house is
not there, the clearing is done through Correspondent Bank, mostly these are PSU Banks or
Co-operative Banks.

Suppose I deposit the Cheque on day 0, then the time taken by the clearing houses to debit
the bank account would be different. The SBI has to debit its customer’s account on the next
day basis irrespective of days to clear.

Day when the Clearing Bank Days for which Bank In Fund/Out of
Cheque will be bank is out Fund
credited fund

Day1 RBI 0 Not out of funds

Day2 SBI 1 1 Day out of funds

Day3 Correspondent Bank 1 1 Day out of funds

In this case, the bank charges interest on the money which it gives in form of “Credit
against Uncleared Cheque”, to the company. When it comes to the Correspondent bank, the bank
has to pay extra charges to these banks.

2) Overheads:
The bank takes into account the overheads charges, which it occurs in the process. The o/hs
charges include salary, administration charges, maintenance etc.

3) Margin:
After including the transaction and other overheads charges, the bank gets the cost of
transaction. On this the bank adds its margin for being in the business.

In pricing, other elements like courier charges return cheques etc. also considered. Pricing in

CMS in generally negotiable between the company and the Bank.


• Exclusive CMP desks with infrastructure
• Debit Transfers
• Courier pick-up at branches
• No collection a/cs needed at branches
• Customized Reports
• Transmission of data through Internal LAN system
• Direct credit to accounts

Benefits to Customers:

• Centralized Control of cash

• Cost reduction
• Enhanced Liquidity
• Interchange of Information between treasury & operating units
• Reduced excess cash balance
• Cash forecasting & scheduling
• Effective control over disbursements
• Timely & effective investments




The study allowed us get answers regarding the service awareness among people and the
problems it faces. The key findings and analysis of the survey showed the following

• A large number of clients and customers call the branch frequently to handle banking
issues , this shows the keenness of the customers to call the branch for almost every small
issue. The service Straight2bank does provide an answer to the problem of the customers.
The service provided by staright2bank does offer the main requirements of the customers
for which they visit or call the branch

• All the respondents wanted to carry out the banking needs at their convenience. This
means the service caters the banking needs that customers generally require and its main
benefit of banking while sitting at office is desired by one and all, thereby proving that
the service does have the potential usage.

• Few of the respondents were aware about the service which was desired by 100%
respondents clearly showing that there has been a falter in its promotion and awareness

• Customers were not aware that the service was a free one, this is clear that almost all the
attributes of the services are favorable to the customers still customers are not using the
service and are not even aware of it.

• Almost all customers once educated about the service readily enrolled for it whereas a
mere portion did not trust the bank and thought that the bank would have some hidden
charges that they are not putting forward

Many clients who enrolled for the staright2bank service would have problems using it as
the drop boxes are not strategically placed many areas do not even have drop box facility;
State Bank must look into the policies of installing the drop box. They should assign it to
the regional office or allow branches to put up boxes where the branch thinks it would be
optimally utilized no matter which area of the city as of now that branches are allowed to
put up drop boxes in a radius which falls in close by areas to the branch. A customer who
lives close by to the branch would not use this service whereas customers who are far of
require the service, however the branch cannot provide them with the facility as they
cannot install the boxes in that area and it is the duty of the local branch of that area to
put up boxes which is not happening they hardly know where customers of the other
branch are located


We suggest following measures, which State Bank could take so as to take on heavy competition
from HSBC Bank and ABN AMRO Bank:

• Try to reduce cost, so that benefits can be passed on to customers. Senior managers at
SBI keep on telling that it is difficult to reduce cost, because of services we provide.
But the fact is, India being a price sensitive market; people at times go for monetary
benefits rather than for long-term non- monetary benefits. If charges can’t be reduced
because of costs involved, make the services customized, so that services are
provided to only those customers who are willing to pay the price for services they
are getting and let the other customers enjoy costs benefits without getting services.

• SBI should provide competitive prices as nowadays a lot business is being acquired
by AXIS bank and HSBC bank and SBI is facing a lot competition from these banks

• SBI should contact with their clients regularly for knowing the problems faced by
them. This will help SBI in providing best services to customers. This will result in
additional customer base by getting further references from satisfied clients.

• SBI should focus on getting the business other business clients other than its existing
customers as it would help them to increase their business opportunities.