SUBMITTED TO:
Ms.Anju
SUBMITTED BY:
Mehak Bashir
Roll No. 3011545
MBA Final Year
DECLARATION
MEHAK BASHIR hereby declare that, the project entitled WORKING CAPITAL
MANAGEMENT BY JAMMU AND KASHMIR BANK LTD assigned to me for the partial
fulfillment of MBA degree from Kurukshetra University, Kurukshetra. It is the original work
done by me and the information provided in the study is authentic to the best of my knowledge.
This study has not been submitted to any other institution or university for the award of any
other degree
MEHAK BASHIR
MBA -2ND YEAR
ROLL NO 3011545
ACKNOWLEDGEMENT:
The summer training at J&K Bank,headquater has given me an opportunity to gain great
practical exposure to the advance and loan section of the bank and it has indeed been a great
learning and enjoyable experience.
.
I would like to express my profound gratitude to my esteemed supervisors, MRS.NUZHAT
PARVEEN, (Executive, A&AP) for her precious assistance, guidance, encouragement and
untiring advice.
I sincerely thank our principal DR.SHIFALI and all the members of faculty for their generous
help in my project.
I feel grateful for my guide MS.ANJU,without whose help this project would not be possible.
I am also thankful to my parents for their continuous support and appreciation.
PREFACE
Theoretical knowledge without practical knowledge is of little value. Masters in Business
Administration is a unique course giving students an opportunity to combine practical
knowledge with the theory and provide an opportunity to learn about the complexities and
difficulties affecting any office routine. Current project is an assignment for completion of MBA
programme. I have carried out primary research on the working capital management in j&k
Bank.
The objective of industrial training in this course is to give a perspective about the organization
and functioning of all the areas of management, in an organisation. Towards the accomplishment
of this objective our training in a company for at least 1 month to get an extensive training in
various functional areas and to have a firsthand experience in modern office management.
We have a privilege to undergo my summer training in j&k Bank. We spent 2 months and got
extensive exposure of the working of Advance and recovery section of the Bank.
TABLE OF CONTENTS
CHAPTER 1 INTRODUCTION
INTROCUCTION TO INDUSTRY
INTRODUCTION TO COMPANY
INTRODUCTION TO TOPIC
CHAPTER 2
LITERATURE REVIEW
CHAPTER 3
RESEARCH METHODOLOGY
OBJECTIVES OF STUDY
LIMITATIONS OF STUDY
CHAPTER 4 DATA ANALYSIS AND INTERPRETATION
CHAPTER 5 FINDINGS
SUGGESSTIONS
CHAPTER 6 CONCLUSION
BIBLIOGRAPHY
Chapter 1
Introduction
INTRODUCTION TO INDUSTRY:
A bank is a financial institution that provides banking and other financial services to their
customers. A bank is generally understood as an institution which provides fundamental banking
services such as accepting deposits and providing loans. There are also nonbanking institutions
that provide certain banking services without meeting the legal definition of a bank. Banks are a
subset of the financial services industry.
A banking system also referred as a system provided by the bank which offers cash
management services for customers, reporting the transactions of their accounts and portfolios,
throughout the day. The banking system in India should not only be hassle free but it should be
able to meet the new challenges posed by the technology and any other external and internal
factors. For the past three decades, Indias banking system has several outstanding achievements
to its credit. The Banks are the main participants of the financial system in India. The Banking
sector offers several facilities and opportunities to their customers. All the banks safeguard the
money and valuables and provide loans, credit, and payment services, such as checking accounts,
money orders, and cashiers cheques. The banks also offer investment and insurance products.
As a variety of models for cooperation and integration among finance industries have emerged,
some of the traditional distinctions between banks, insurance companies, and securities firms
have diminished. In spite of these changes, banks continue to maintain and perform their primary
roleaccepting deposits and lending funds from these deposits.
80% of the banking segment in India was under governments ownership. On the suggestions of
Norseman Committee, the Banking Regulation Act was amended in 1993 and thus the gates for
the new private sector banks were opened.
The following are the major steps taken by the Government of India to Regulate Banking
institutions in the country:1949: Enactment of Banking Regulation Act.
1955: Nationalization of State Bank of India.
1959: Nationalization of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalization of 14 major Banks.
1971: Creation of credit guarantee corporation.
1975: Creation of regional rural banks.
1980: Nationalization of seven banks with deposits over 200 Crores. 23
NATIONALIZATION
By the 1960s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy. At the same time, it has emerged as a large employer, and a
debate has ensured about the possibility to nationalize the banking industry. Indira Gandhi, thethen Prime Minister of India expressed the intention of the Government of India (GOI) in the
annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank
Nationalization". The paper was received with positive enthusiasm. Thereafter, her move was
swift and sudden, and the GOI issued an ordinance and nationalized the 14 largest commercial
banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of
India, described the step as a Masterstroke of political sagacity" Within two weeks of the issue
of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of
Undertaking) Bill and it received the presidential approval on 9 August, 1969.
A second step of nationalization of 6 more commercial banks followed in 1980. The stated
reason for the nationalization was to give the government more control of credit delivery. With
the second step of nationalization, the GOI controlled around 91% of the banking business in
India. Later on, in the year 1993, the government merged New Bank of India with Punjab
National Bank. It was the only merger between nationalized banks and resulted in the reduction
of the number of nationalized banks from 20 to 19. After this, until the 1990s, the nationalized
banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.
The nationalized banks were credited by some; including Home minister P. Chidambaram, to
have helped the Indian economy withstand the global financial crisis of 2007-2009.
LIBERALIZATION
In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization,
licensing a small number of private banks. These came to be known as New Generation techsavvy banks, and included Global Trust Bank (the first of such new generation banks to be set
up), which later amalgamated with Oriental Bank of 24Commerce, Axis Bank(earlier as UTI
Bank), ICICI Bank and HDFC Bank. This move along with the rapid growth in the economy of
India revolutionized the banking sector in India which has seen rapid growth with strong
contribution from all the three sectors of banks, namely, government banks, private banks and
foreign banks. The next stage for the Indian banking has been setup 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 restrictions. 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 the
traditional banks. All this led to the retail boom in India. People not just demanded more from
their banks but also received more. Currently (2007), banking in India is generally 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. 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 but without any fixed exchange rate-and this has mostly
been true. With the growth in the Indian economy expected to be strong for quite some timeespecially in its services sector-the demand for banking services, especially retail banking,
mortgages and investment services are expected to be strong.
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 voted by them.
J&K Bank functions as a universal bank in Jammu & Kashmir and as a specialized bank in the
rest of the country. It is also the only private sector bank designated as RBIs agent for banking
business, and carries out the banking business of the Central Government, besides collecting
central taxes for CBDT.
J&K Bank follows a two-legged business model whereby it seeks to increase lending in its home
state which results in higher margins despite modest volumes, and at the same time, seeks to
capture niche lending opportunities on a pan-India basis to build volumes and improve margins.
J&K Bank operates on the principle of 'socially empowering banking' and seeks to deliver
innovative financial solutions for household, small and medium enterprises.
The Bank, incorporated in 1938, and is listed on the NSE and the BSE. It has a track record of
uninterrupted profits and dividends for four decades. The J&K Bank is rated P1+, indicating the
highest degree of safety by Standard & Poor and CRISIL.
relations and recognizes exemplary communication capabilities at a global level. The awards
received include Rank 73 on the top hundred lists of annual reports from around the world,
Platinum Award in the Commercial Banks Up to $10 billion annual revenue from the Asia
Pacific Region and Silver Award for Most Creative Report across all sectors from the Asia
Pacific Region. Dr.Haseeb Drabu was chairman and chief executive of the bank for the period
2005 to 2010.
The bank continued to widen its activities and during the year 2012-13, 82 new business units
were added to widen the network to 685. Similarly, 105 new ATMs were added to take the total
ATM network to 613.
Continuing with its branch expansion plan the bank during the first half of the FY 2013-14
opened 65 new business units taking the total number of business units to 750 as on 30-09-2013.
BOARD OF DIRECTORS
MR.MUSHTAQ AHMAD.
HARI NARAYAN IYER.
M.I.SHAHDAD.
VIKRANT KUTHIALA
PROF. NISAR ALI.
M. MATTO.
RAKESH KUMAR GUPTA.
NIHAL GARWARE
M.A.Road
Srinagar 190001
Jammu & Kashmir
BRAND IDENTITY:
The new identity for J&k Bank is a visual representation of the Banks philosophy and business
strategy. The three colored squares represent the regions of Jammu, Kashmir and Ladakh. The
counter-form created by the interaction of the squares is a falcon with outstretched wings- a
symbol of power and empowerment. The synergy between the three regions propels the bank
towards new horizons. Green signifies growth and renewal, blue conveys stability and unity, and
red represents energy and power. All these attributes are integrated and assimilated in the white
counter-form.
PERFORMANCE OF BANK:
The Banks aggregate business crossed yet another Psychological mark and stood at
Rs.1,03,421.03 Crores at the end of the nancial year 2012-13, registering a growth of
19.67%.
The total deposits and advances of the bank during the year grew by 20.38% and 18.51%
respectively.
The investment portfolio of the bank registered a YOY growth of 19.04%.
Bank registered highest ever net profit of Rs.1055.10 crore,up by an impressive 31.35%.
Interest income of the bank recorded a growth of Rs.1301.22 crores .
CASA deposits of the bank at Rs.25191 crores constituted 39.32% of total deposits.
Net NPA stood at Rs.55.27 crores on march 2013,with net NPA ratio at 0.14% being one
of the lowest in the entire banking industry.
strategy. The Bank had planned to leap into a higher growth trajectory in FY 2010-11. However,
the not-so-conducive socio-economic conditions warranted a temporary deferment of the
ambitious growth plans and a shifting of focus to strengthen fundamentals to drive planned
growth.
SWOT ANALYSIS:
The term SWOT is the acronym made up of four words viz, Strengths, Weaknesses,
Opportunities and Threats. The first two variables are internal to an organization whereas the last
two are external. The value of SWOT analysis cannot be over emphasized. It is rightly said
winners recognize their limitations but focus on their strengths; losers recognize their strength
but focus on their limitation.
SWOT ANALYSIS
INTERNAL ENVIRONMENT
STRENGTH WEAKNESSES
INTERNAL FACTORS:
EXTERNAL ENVIRONMENT
THREAT
OPPORTUNITY
STRENGTH:
Strength is defined as something which is positive, good or such other characteristics that give to
the company an edge in the competitive market. The Bank has one unique source of strength
which if cultivated carefully, can be virtually impregnable its roots are in the state, and as such
it shares with the people of Jammu and Kashmir a kinship, and empathy for the cause of the
states progress, which no outside bank ever can. The J&K Bank also performs the leaders role
in the J&K. As a leader the Bank continued to discharge its Lead Bank responsibility in 8 out of
14 districts of J&K State satisfactorily.
WEAKNESS:
A weakness refers to something which one lacks. It is something which restricts us to move
forward. While doing my summer training in the J&K Bank I found the following weaknesses;
There is less competent staff at lower level.
Weak competitive capability because of lack of lesser advertisement budget.
Labor problems because of militancy in the state which results in strikes and tense
conditions.
The activities of Branch managers are not effectively monitored.
EXTERNAL FACTORS:
OPPORTUNITIES:
Opportunities are entirely external concerning the business environment. Opportunities do not
come very frequently and therefore, the management must exploit them to the maximum extent
without any delay. Each opportunity should be analyzed in terms of its profitability. The
opportunities analyzed by me for the J&K Bank are:
There is agriculture market which is still fully not trapped by the J&K Bank There are a
lot of schemes regarding agriculture such as post-harvest , preservation scheme and many
other schemes
The historical activities of the state such as carpet industry, dastakar finance, khatamband
schemes and many other activities of historical importance are not still fully covered by
J&K Bank.
THREATS:
With every opportunity, there also goes alongside certain threats which may adversely
affect the profitability and competitive capability of an enterprise. The threats analyzed are;
Competitors like HDFC Bank, Central Co-operative Bank, ICICI Bank etc. may enter in
the field to provide finance facility.
INTRODUCTION TO TOPIC:
WHAT IS WORKING CAPITAL:
Working capital (abbreviated WC) is a financial metric which represents
operating
capital is required to ensure that a firm is able to continue its operations and that it has sufficient
funds to satisfy both maturing short-term debt and upcoming operational expenses The
management of working capital involves:
1.Conversion of raw material into stocks- in- process.
2.Conversion of stocks in process into finished goods.
3.Conversion of finished into receivables/debtors or cash.
4.Conversion of receivables/debtors into cash.
A non-manufacturing trading concern may not require funds for purchase of raw materials and
their processing, but it also needs finance for sorting goods and providing credit to its customers.
Similarly a concern engaged providing services may not have to keep inventories, but it may
have to provide credit facility to its customers .Thus all enterprises engaged in manufacturing or
trading or providing service require finance for their day to day operations. The amount required
to finance day to day operations is called working capital and the assets and liabilities created
during the OPERATING CYCLE are called current assets and current liabilities. The total of all
current assets is called GROSS WORKING CAPITAL and excess of current assets over current
liabilities is called NET WORKING CAPITAL.
While the study of gross working capital indicates the nature and extent of working capital
requirement, the analysis of net working capital indicates liquidity position on an enterprise.
It may be observed from the above that working capital management is essential to carry on day
to day operations and to maintain the operating cycle of an enterprise. Fixed assets cannot
generate income unless they are used with the help of working capital. Therefore working capital
is considered as a life blood on an enterprise. As per the study on Finances of Public Limited
Companies conducted by reserve bank of India, current assets constitute more than 50% of total
assets of the companies covered by the study. It indicates that current assets occupy an important
place in total assets of an enterprise and their proper management is essential for the success of
the enterprise and safety of the funds provided by the financial banks.
When banks are approached by entrepreneurs for financing working capital requirements, the
banks have to examine the viability of the project before agreeing to provide working capital to
it. A detailed viability study is done by financial institutions and banks while providing term loan
finance to a unit for execution of fixed assets. They have to ensure that the project will generate
sufficient return on the resources invested in it. The viability of a project depends on technical
resources and ends with realization of cash from the sale of finished goods.it involves purchase
of raw material and stores ,its conversation into stock of finished goods through work in
progress with progressive increasement of labor and services costs, conversion of finished stock
into sales, debtors and receivables and ultimately realization of cash and this cycle continues
again from cash to purchase of raw material and so on. The speed/ time duration required to
complete one cycle determines the requirement of working capital longer the period of cycle,
larger is the requirement of working capital.
FIG: 1
The gross operating cycle of the firm is equal to the length of the receivables and inventories
conversion periods, Thus,
Gross Operating Cycle = RMCP +WIPCP +FGCP+RCP
RMCP= Raw material conversion period
WIPCP =Work in process conversion period
FGCP=Finished goods conversion period
RCP=Receivable conversion period
However, a firm may acquire some resources on credit and thus defer payments for certain
period .in that case, net operating cycle period can be calculated as
Net Operating Cycle Period = Gross Operating Cycle Period-Payable Deferral Period
Raw material conversion period =
average payables
Net credit purchases per day
for working capital. Proper management of working capital will generate cash and will help
improve profits and reduce risk.
Working Capital can be divided into two categories on the basis of time: 1. Permanent working capital
2. Temporary or Variable working capital
1. PERMANENT WORKING CAPITAL:This refers to that minimum amount of investment in all current assets which is required
at all times to carry out minimum level of business activities. It represents the current assets
required on a continuing basis over the entire year.
Tandon committee has referred to this type of working capital as core current assets
The following are the characteristics of this type of working capital:1. Amount of permanent working capital remains in the business in one form or another.
This is particularly important from the point of view of financing. The suppliers of such
working capital should not expect its return during the lifetime of the firm.
2. It also grows with the size of the business.
Permanent working capital is permanently needed for the business and therefore it should be
financed out of long-term funds.
This is the reason why the current ratio has to be substantially more than 1
2. TEMPORARY OR VARIABLE WORKING CAPITAL:The amount of such working capital keeps on fluctuating from time to time on the basis
of business activities.
In other words, it represents additional current assets required at different times during the
operating year.
1.Nature and size of business: The WC requirement of a firm is closely related to the
nature of the business. We can say that trading and financial firms have very less investment in
fixed assets but require a large sum of money to be invested in WC. On the other hand Retail
stores, for example, have to carry large stock of variety of goods little investment in the fixed
assets.
Also a firm with a large scale of operations will obviously require more working capital than
smaller firms.
2.Manufacturing cycle: It starts with the purchase and use of raw materials and completes
with the production of finished goods. Longer the manufacturing cycle larger will be the WC
requirement; this is seen mostly in the industrial products.
3.Business fluctuation: When there is an upward swing in the economy, sales will increase also
the firms investment in inventories and book debts will also increase, thus it will increase the
WC requirement of the firm and vice-versa.
4.Production policy:To maintain an efficient level of production the firms may resort to
normal production even during the slack season. This will lead to excess production and hence
the funds will be blocked in form of inventories for a long time, hence provisions should be
made accordingly. Since the cost and risk of maintaining a constant production is high during the
slack season some firms may resort to producing various products to solve their capital
problems. If they do not, then they require high WC.
5.Firms Credit Policy:If the firm has a liberal credit policy its funds will remain blocked
for a long time in form of debtors and vice-versa. Normally industrial goods manufacturing will
have a liberal credit policy, whereas dealers of consumer goods will a tight credit policy.
6.Availability of Credit: If the firm gets credit on liberal terms it will require less WC since
it can always pay its creditors later and vice-versa.
7.Growth and Expansion Activities: It is difficult precisely to determine the relationship
between volume of sales and need for WC. The need for WC does not follow the growth but
precedes it. Hence, if the firm is planning to increase its business activities, it needs to plan its
WC requirements during the growth period.
8.Conditions of Supply of Raw Material: If the supply of RM is scarce the firm may
need to stock it in advance and hence need more WC and vice-versa.
9.Profit Margin and Profit Appropriation: A high net profit margin contributes towards
the WC pool. Also, tax liability is unavoidable and hence provision for its payment must be
made in the WC plan, otherwise it may impose a strain on the WC.
Also if the firms policy is to retain the profits it will increase their WC, and if they decide to
pay their dividends it will weaken their WC position, as the cash will flow out. However this can
be avoided by declaring bonus shares out of past profits. This will help the firm to maintain a
good image and also not part with the money immediately, thus not affecting the WC position.
10.Depreciation policy of the firm, through its effect on tax liability and retained earning,
has an influence on the WC. The firm may charge a high rate of depreciation, which will reduce
the tax payable and also retain more cash, as the cash does not flow out. If the dividend policy is
linked with net profits, the firm can pay fewer dividends by providing more depreciation. Thus
depreciation is an indirect way of retaining profits and preserving the firms WC position.
Create a framework to ensure smooth and timely flow of credit to the banks customers,
ensure prudent credit growth both quantitative and qualitative and to augment interest
and non interest income within the statutory framework prescribed by the reserve bank of
India.
Adhere to the lending norms prescribed by the bank, RBI and the government from time
to time
Ensure consistency in standardization of credit practices.
Ensure balanced sectoral and diversified growth of credit so as to have proper risk
spectrum, with no credit concentration and within the prudential exposure norms.
Evolve a well defined system to identify measure, monitor and control various risks
METHODOLOGY OF LENDING:
For the assessment of working capital requirements of borrowers, following methods will be
followed:
1.TURN OVER METHOD: Assessment of working capital(fund based) finance based on
projected turnover/sales of the unit will be applicable in case of following categories of
borrowers, subject to fulfillment of conditions described herein:
Category of borrower
Conditions to be fulfilled
crore
sector
providing or rendering
services.
CHAIRMAN
2.President(Risk)
BENCHMARK RATIOS:
The following are the key ratios:
Key ratio
minimu
In case of MSE
Remarks /deviations.
Current
m
1.33:1
borrowers
1.25:1 for limits up to
ratio
5.00 crores
1.33:1 for limits above
Debt
equity ratio
2:1
5.00 crores
3:1 for loans above 2.00
My be relaxed up to:
lacs.
1.30
activities
However the levels can be relaxed up to
t service
minimu
1.3 average
coverage
m and
ratio)
1.50
average
the bank.
under
base case
Interest
scenario
1.25:1
1.25:1
coverage
ratio
MINIMUM MARGIN
ADVANCE
Cash credit/SOD against
primary security of
hypothecation of stocks
and book debts
MSE borrowers
against own
term
deposits
advance
15% on loans against term deposits having residual
maturity of more than five years as on the date of
Loans
advance.
10% for advances against term deposits having
advance
15% for advances against term deposits having
residual maturity of more than 4 years but ot more
than 6 years as on the date of advance
20% for advances against term deposits having
residual majority of more than 6 years as on the date
Loans and
of advance
10% for advances against term deposits having
advances to
entities
advance
15% for advance against term deposits having residual
other than
individuals
25%
permitted shares
Loans under special
basis.
As prescribed under the scheme
schemes
Bank guarantees and
LCs
time
Connotations
Highest degree of safety with lowest
AA
credit risk
High degree of safety with low credit
3
4
risk
Same as above
Adequate degree of safety with low
A and BBB+
BBB
5
6
credit risk
Same as above
Moderate degree of safety with
BBBBB+, BB ,BBB
C & Below
7
8
9
10
AAA+ and A
RENEWAL OF ACCOUNTS:
1. Renewal of all borrower accounts will be completed at least on yearly basis in the prescribed
manner. In case of accounts where at the time of renewal has been observed ,the bank shall
renew the accounts for a shorter period as deemed fit and ensure regular follow up for
rectification of the weaknesses.
2. Where complete review is not possible for want of CMA data, the review may be undertaken
on the basis of latest working results and conduct of account. Audited financial statement must
be insisted for, in all borrower accounts in case of fresh renewal of accounts having credit limits
of Rs.60.00 lacs and above.
3. The jobs relating to the renewal of the credit facilities shall be closely monitored by credit
departments of concerned cluster offices, zonal offices & A&AP,CHQ, as the case may be.
renewal of the working capital limits shall be ensured within the due dates and not later than 3
months after due date in the accounts where it not possible due to specific reasons.
Chapter 2
Review
of
Literature
The purpose of this chapter is to present a review of literature relating to the working capital
management. Although working capital is an important ingredient in the smooth working of
business entities, it has not attracted much attention of scholars. Whatever studies have
conducted, those have exercised profound influence on the understanding of working capital
management good number of these studies which pioneered work in this area have been
conducted abroad, following which, Indian scholars have also conducted research studies
exploring various aspects of working capital. Special studies have been undertaken, mostly
economists, to study the dynamics of inventory investment which often represented largest
component of total working capital.
Studies adopting a new approach towards working capital management are reviewed here.
Sagan in his paper (1955), perhaps the first theoretical paper on the theory of working
capital management, emphasized the need for management of working capital accounts
and warned that it could vitally affect the health of the company. He realized the need to
build up a theory of working capital management. He discussed mainly the role and
functions of money manager inefficient working capital management. Sagan pointed out
the money managers operations were primarily in the area of cash flows generated in the
course of business transactions. However, money manager must be familiar with what is
being done with the control of inventories, receivables and payables because all these
accounts affect cash position. Thus, Sagan concentrated mainly on cash component of
working capital. Sagan indicated that the task of money manager was to provide funds as
and when needed and to invest temporarily surplus funds as profitably as possible in view
of his particular requirements of safety and liquidity of funds by examining the risk and
return of various investment opportunities.
Walker in his study (1964) made a pioneering effort to develop a theory of working
capital management by empirically testing, though partially, three propositions based on
risk-return trade-off of working capital management. Walker studied the effect of the
change in the level of working capital on the rate of return in nine industries for the year
1961 and found the relationship between the level of working capital and the rate of
return to be negative.
Welter, in his study (1970), stated that working capital originated because of the global
delay between the moment expenditure for purchase of raw material was made and the
moment when payment were received for the sale of finished product. Delay centres are
located throughout the production and marketing functions. The study requires specifying
the delay centres and working capital tied up in each delay centre with the help of
information regarding average delay and added value.
Lambrix and Singhvi (1979) adopting the working capital cycle approach to the
working capital management, also suggested that investment in working capital could be
optimized and cash flows could be improved by reducing the time frame of the physical
flow from receipt of raw material to shipment of finished goods, i.e. inventory
management, and by improving the terms on which firm sells goods as well as receipt of
cash.
Warren and Shelton (1971) applied financial simulation to simulate future financial
statements of a firm, based on a set of simultaneous equations. Financial simulation
approach makes it possible to incorporate both the uncertainty of the future and the many
interrelationships between current assets, current liabilities and other balance sheet
accounts. The strength of simulation as a tool of analysis is that it permits the financial
manager to incorporate in his planning both the most likely value of an activity and the
margin of error associated with this estimate. Warren and Shelton presented a model in
which twenty simultaneous equations were used to forecast future balance sheet of the
firm including forecasted current assets and forecasted current liabilities.
Cohn and Pringle in their study (1973) illustrated the extension of Capital Asset
Pricing Model (CAPM)1 for working capital management decisions. They tried to
interrelate long-term investment and financing decisions and working capital
management decisions through CAPM. They emphasized that an active working capital
management policy based on CAPM could be employed to keep the firms shares in a
given risk class. By risk, he meant unsystematic risk, the only risk deemed relevant by
CAPM. Owing to the lumpy nature for long-term financial decisions, the firm is
continually subject to shifts in the risk of its equity. The fluid nature of working capital,
capital. The study further revealed the overstocking of inventory in regard to its each
component, very low receivables turnover and more cash than warranted by operational
requirements and thus total mismanagement of working capital in public sector
undertakings.
Chapter 3
Research
Methodology
TITLE OF STUDY:
A study on working capital management of Jammu and Kashmir bank
STATEMENT OF PROBLEM:
Working capital risk refers to the possibility of a negative impact on the financial situation of
enterprises and financial results due to lack of working capital and other reasons, resulting in
economic losses. It is one of the major financial risks facing enterprises. Management of
working capital is important as it directly affects the functioning of the business any disturbance
here will not only affect the operations and profits but also it affects the reputation of the
business.
RESEARCH DESIGN
The Research Design undertaken for the study is Descriptive one. A study, which wants to
portray the characteristics of a group or individuals or situation, is known as Descriptive study. It
is mostly qualitative in nature. The main objective of Descriptive Study is to acquire knowledge.
Researcher has followed CASE STUDY method to understand the procedure followed by J&K
Bank in sanctioning the Overdraft facility. And also the financial data of the selected cases has
been analyzed.
SOURCE OF DATA:
Data are the raw materials in which marketing research works. The task of data collection begins
after research problem has been identified and research design is chalked out. Data collected are
classified into primary and secondary data.
Secondary data
Since the project was based on case studies so only secondary data was collected. Secondary
data was collected various reports, annual reports, documents charts, management information
systems, etc in J&K BANK, And also collected various magazines, books, newspapers etc.
OBJECTIVES OF STUDY
The study was conducted keeping in mind the following objectives:
To study the different components of working capital and its impact on the
LIMITATIONS OF STUDY
The study was conducted with the following limitations :
1. The data used in this study is mostly based on secondary data.
2. This study is conducted within a short period. During the limited period the study may not be
detailed, full-fledged and utilized in all aspects.
3. The study is limited to J & K Bank, and its strategies for funding working Capital needs.
4. The study is done only on the customers of J & K Bank.
5. Only the printed data about the company are available and not the backend details.
Chapter 4
Data Analysis
And
Interpretation
CASE STUDY 1:
M/S. XYZ ELECTRONICS
Name of the branch
b/u abc
Nature of proposal
Renewal of existing:
1.cash credit facility of rs.220.00 lacs
2.ILC/FLC limit of Rs.50.00 lacs with usance period of 120 days with the interchangeability of
ILC/FLC limit to all the three group concerns totaling to Rs.70.00 lacs i.e. 50 lacs +1o lacs ( abc)
+10 lacs(def)
3.interest rate in line with the interest rate of BR + 3% as applicable on the other sister concerns
Existing banking arrangement
Sole
Proposed banking arrangement
Sole
Type of facility
C/C
limit
Margin
Rate of interest
220.00
25% of stocks
BR + 450 bps
present effective
activity
14.75% p.a.
FLC
50.00
20%
Total
270.00
Manufacturing/assembling of LCD/color television sets
Priority classification
Priority sector
Particulars of existing facilities sanctioned by the bank
SECURITIES:
1.hypothecation of all kinds of stock lying anywhere in the name of the firm,book debts and
immovable assts of the firm.
Collaterals:
1.house property valuing Rs216.56 lacs.
2.Factory and building valued at Rs.223.48 lacs.
3.Extension of charge on property already mortgaged ,valued at Rs.48.10 lacs.
4.extension of charge on commercial property valued at Rs.42.00 lacs.
Total value of tangible security is 530.14 lacs.
Guarantee:
Third party guarantee of two persons
Requested credit facilities
Renewal of existing cash credit facility at Rs.220.00 lacs .ILC/FLC limit of Rs.50.00 lacs with
usance period of 120 days with the interchangeability of ILC/FLC limit to all the three group
concerns totaling to Rs.70.00 lacs i.e. 50 lacs +1o lacs ( abc)+10 lacs(def)
interest rate in line with the interest rate of BR + 3% as applicable on the other sister concerns
Internal rating:
Original rating
Interest rate
Current rating
JKB-SME-2
Proposed interest rate
BR+3.50%
BR+3.50%
Effective-14% p.a
Effective-13.75% p.a
Value
4.11
1.50
2.00
1.00
2.64
1.00
2.64
3.43
JKB-SME-2(3.45)
2.13%
PRICING OF ACCOUNT
The risk grade of SME-2 as per the latest circular of interest rates qualifies for an interest rate of
BR-3.50% i.e. 13.75% at present.
31.03.11
31.03.12
31.01.13
31.03.13
31.03.14
Gross sales
Less excise duty
Net sales
% growth in sales
Cost of production
Raw material
248.47
21.37
227.10
0.00
585.78
46.32
539.47
136
548.26
55.15
493.11
-6
655.00
51.78
603.22
12
690.00
54.55
635.45
5
179.92
354.40
446.31
493.92
510.31
consumed
Freight and carriage
power
wages
Other manufacturing
20.64
0.59
7.70
10.36
33.31
0.56
17.84
13.55
9.93
0.00
14.29
0.04
0.11
0.69
21.55
2.09
0.11
0.71
22.27
2.16
expenses
depreciation
Sub total
Add:opening stock in
0.64
219.85
0.00
1.20
420.86
28.40
2.53
473.10
18.51
2.53
520.89
0.00
4.50
540.06
0.00
progress.
Less: closing stock in
28.40
18.51
71.93
0.00
0.00
progress.
Cost of production
Add: opening stock of
191.45
0.00
430.75
17.95
419.68
31.52
520.89
31.52
540.06
38.11
191.45
17.95
448.70
31.52
451.20
31.37
552.41
38.11
578.17
39.51
finished goods
Total cost of sales
Administrative and
173.50
14.86
417.18
38.20
419.83
21.04
514.30
29.00
538.66
32.00
188.36
38.74
3.70
35.04
0.05
35.09
0.00
455.38
84.09
7.21
76.88
0.05
76.93
0.00
440.87
52.24
11.62
40.62
0.12
40.74
0.00
543.30
59.92
14.00
45.92
0.05
45.97
42.00
570.66
64.79
15.00
49.79
0.05
49.84
10.00
finished goods
selling expenses
OPBIT
Less: financial charges
Add : other income
Net profit
drawings
Retained profit
NP to sales ratio(in %)
35.09
14.12
76.93
13.13
40.74
7.43
3.97
7.02
39.84
7.22
31.03.11
31.03.12
31.03.13
31.03.13
31.03.14
86.99
86.99
350.00
350.00
349.63
349.63
353.96
353.96
393.80
393.80
0.00
0.00
86.99
0.00
0.00
350.00
22.50
22.50
372.13
0.00
0.00
353.96
0.00
0.00
393.80
54.17
0.37
46.63
220.00
220.00
4.09
0.16
0.00
58.42
145.41
20.52
2.21
0.00
23.10
373.10
0.00
1.85
2.72
51.20
423.33
21.47
2.50
2.75
246.72
600.68
26.04
2.55
0.00
248.59
642.39
5.62
0.64
4.98
4.98
7.86
1.20
6.66
6.66
17.78
2.53
15.25
15.25
19.75
4.37
15.38
15.38
30.75
8.87
21.88
21.88
28.41
17.95
79.86
0.26
0.00
1.46
127.94
12.49
1.00
0.00
11.44
o.o5
145.41
18.51
31.52
129.96
0.02
0.00
2.43
182.44
184.00
6.05
169.60
8.30
0.05
373.10
71.93
31.37
71.80
3.73
7.94
11.00
197.77
210.31
3.30
206.96
0.00
0.05
423.33
74.95
38.11
254.28
1.95
0.00
9.00
378.29
207.01
0.00
206.96
0.00
0.05
600.68
77.44
39.51
267.87
3.64
0.00
12.00
400.46
220.05
0.00
220.00
0.00
0.05
642.39
31.03.12
31.03.13
31.03.13
31.03.11
31.03.14
86.99
0.67
127.94
58.42
69.52
2.19
116
350.00
0.07
182.44
23.10
159.34
7.90
80
349.63
0.21
197.77
51.20
146.47
3.86
47
353.96
0.70
378.29
246.72
131.57
1.53
140
393.80
0.63
400.46
248.59
151.87
1.61
140
days)
Inventory period-RM
Inventory period-FG
Creditors period
53
37
8
15
27
21
62
47
0
52
41
16
52
40
8
HOLDING PERIOD(DAYS)
a) Stocks: the stock holding period of the concern has been fluctuating from 80 days to 42
days during the FY 2011-12.the same is estimated to be at 93 days for FY 2012-13 and is
projected to be at 92 days for FY 2013-14.business unit in keeping view of that the
demand for the product will increase has accepted the projected holding level.
b) Debtors: the debtors mainly constitutes the sister concern of the captioned borrower.
Further to capitalize on the market the borrower has projected the higher level of debtors.
keeping in view the strengths of the group the same is accepted for the computation of
MPBF.
c) Creditors: the creditors level has been in line with the past trends and same has been
accepted as projected.
Holding period
Amount
Stock-RM
Stock-FG
Debtors
Cash in hand
OCA
Total A
B) Current liabilities
S.Creditors
Other liabilities
Total B
C) Working capital gap(A-B)
D) 25% margin of current assets
E) NWC projected
F) MPBF(C-D) OR (C-E) whichever is
52
40
140
77.44
39.51
267.87
3.64
12.00
400.46
18
26.04
2.55
28.59
371.87
100.12
151.87
220.00
less
Business unit has recommended renewal of existing cash credit facility of Rs.220.00 lacs and
same is recommended for approval.
DEBTORS PERIOD:
Particulars
Debtors period(in
days)
31.03.11
116
31.03.12
80
31.03.13
47
31.03.13
140
31.03.14
140
GRAPH:
11
140
14
120
132
100
80
13
60
40
12
20
0
11
No.of days
INTERPRETATION:
12
13
132
14
The debtors mainly constitutes the sister concern of the captioned borrower. Further to capitalize
on the market the borrower has projected the higher level of debtors. keeping in view the
strengths of the group the same is accepted for the computation of MPBF.
CREDITORS PERIOD:
Particulars
Creditors period
31.03.11
8
31.03.12
21
31.03.13
0
31.03.13
16
31.03.14
8
GRAPH
11
25
14
20
132
15
13
10
12
5
0
11
NO.OF DAYS
12
13
132
14
INTERPRETATION:
The creditors level has been in line with the past trends and same has been accepted as projected.
31.03.11
37
31.03.12
27
31.03.13
47
31.03.13
41
31.03.14
40
GRAPH
50
45
40
11
35
12
30
13
25
132
20
14
15
15
10
5
0
NO.OF DAYS
INTERPRETATION
The stock holding period of the concern has been fluctuating from 80 days to 42 days during the
FY 2011-12.the same is estimated to be at 93 days for FY 2012-13 and is projected to be at 92
days for FY 2013-14.business unit in keeping view of that the demand for the product will
increase has accepted the projected holding level.
CASE STUDY 2:
ABC TRADERS
Nature of the proposal
Proposed banking
arrangement
Activity
Sector
Priority classification
Particulars of the
existing facilities
Facility
CC
Limit
BOS
300.00 296.69
ROI
MARGIN
BR+3.5%(14%) 25% on stocks and
Recommendation of the BU has recommended for renewal cum enhancement of the existing
bank
cash limit from 300.00 lacs to 475.00 lacs at the interest rate of BR +
3%(13.5%) against existing securities.
BACKGROUND OF APPLICANT
The concern is a partnership concern engaged in manufacturing of alloy steel flats, bars, rounds
and hexagons. the concerns parent group has satisfactorily dealings with the bank.
The unit has a maximum capacity of 722 MT/ annum as per DIC ASSESSMENT .the unit was
established in December 2009 and was sanctioned credit facilities byway of term loan of rs.
50.00 lac s and cash credit limit of rs.300.00 lacs . however the term loan was not availed by the
firm and cash credit facility was availed after revalidation in 2010. In the view of the variation in
the sales achieved vis a vis projection envisaged earlier the cash credit limit was renewed upto
September 2011, with the condition that the part shall get the additional land measuring 3 kanals
transferred in their favor from SICOP and mortgage the same with the bank.
REQUEST OF PARTY
The party has requested for enhancement of existing cash credit limit from existing 300.00 lacs
to 500.00 lacs to meet its working capital requirement which has increased due to the rise in he
prices of raw materials and increase in sales against existing securities, terms and conditions of
interest rate of BR +3.0%(13.5%).
RECOMMENDATION OF BU:
The BU has recommended for the renewal cum enhancement of the cash credit limit from
existing 300.00 lacs to475 lacs at the interest rate of BR +3.0% in favor of the party for a period
of one year subject to renewal after review against existing securities, terms and conditions.
Particulars
LONG TERM SOURCES
Capital
Unsecured loan
Term loan
Total long term sources
SHORT TERM SOURCES
Bank borrowings
Sundry creditors
Other current liabilities
Total current liabilities
TOTAL LIABILITIES
LONG TERM USES
Gross block
Depreciation
Net block
SHORT TERM USES
Raw materials
Semi finished goods
Finished goods
Consumables
Sundry debtors
Cash in hand
TOTAL CURRENT ASSETS
NON-CURRENT ASSETS
Security deposits
TOTAL NON-CURRENT
ASSETS
TOTAL ASSETS
Audited
31.03.2010
Audited
31.03.2011
Provisional
31.03.2012
Projected
31.03.2013
229.31
0.00
0.00
229.31
342.49
0.00
0.00
342.49
709.85
0.00
0.00
709.85
1005.57
0.00
0.00
1005.7
91.76
56.31
0.00
148.07
377.38
246.16
181.34
0.00
427.50
769.99
289.73
200.82
0.00
490.55
1200.40
500.00
64.33
0.00
564.33
1569.90
267.50
0.00
267.50
276.50
70.20
206.30
246.26
38.07
208.19
208.18
20.68
187.50
10.53
21.05
28.43
0.98
36.99
4.92
102.90
20.79
177.38
67.43
27.12
249.33
14.08
556.13
5.22
230.41
281.20
50.85
384.24
31.99
983.91
60.00
210.00
400.00
10.00
680.00
22.40
1382.40
6.98
6.98
7.56
7.56
8.30
8.30
0.00
0.00
377.38
767.99
1200.40
1569.90
BUSINESS RESULTS
Sales realization
Less excise duty
Add central excise duty refund
NET SALES
COST OF PRODUCTION
16.44
1.53
0.00
14.91
899.33
83.98
0.00
815.35
1485.19
139.73
0.00
1345.46
1800.00
0
0.00
1800.00
44.97
6.49
14.11
0.00
65.57
0.00
21.05
644.86
28.66
152.43
70.20
896.15
21.05
177.38
870.67
37.11
266.41
38.06
1212.25
177.38
230.41
1304.39
38.30
79.7
20.68
1443.07
230.41
210.00
COST OF PRODUCTION
Add opening stock of finished goods
SUB TOTAL
Less closing stock of finished goods
TOTAL COST OF SALES
GROSS PROFIT
Administrative and selling expenses
SUB TOTAL
OPERATING PROFIT BEFORE
44.52
0.00
44.52
28.43
16.09
-1.18
2.18
18.27
-3.36
739.82
28.43
768.25
67.43
700.82
114.53
20.20
721.02
94.33
1159.22
67.43
1226.65
281.2
645.45
400.01
36.39
981.84
363.62
1463.48
281.2
1744.68
400.00
1344.68
455.32
39.6
1384.28
415.72
INTEREST
Less interest charged
OPERATING PROFIT AFTER
0.95
-4.31
21.30
73.03
40.09
323.53
70
345.72
INTEREST
Preliminary expenses written off
Fringe benefit tax
PAT
Add non-operating income
PROFIT BEFORE TAX
Provision for tax
NET PROFIT/LOSS
RETAINED PROFITS/LOSS
CASH ACCRUALS
0.00
0.00
-4.31
0.44
-3.87
0.00
-3.87
-3.87
-3.87
0.00
0.00
73.03
17.65
90.68
0.00
90.68
90.68
160.88
0.00
0.00
323.53
32.54
356.07
0.00
356.07
356.07
394.13
0.00
0.00
345.72
0.00
345.72
0.00
345.72
345.72
366.40
16.44
102.90
148.07
84
170
636
810
451
1250
-45.17
229.31
899.33
556.13
427.50
12
86
35
100
101
131
128.63
342.49
1485.19
983.91
490.55
2
72
107
93
83
191
493.36
709.85
1800.00
1382.40
564.33
17
52
107
136
18
294
818.07
1005.57
FINANCIAL INDICATORS
Income
Current assets
Current liabilities
Stock period /raw material days
Stock period/stock in progress
Stock period/finished goods
Debtors period
Creditors period
Cash conversion cycle
NWC
Tangible net worth
TOL/TNW
DER
CURRENT RATIO
PROFIT MARGIN(%)
0.65
0.40
0.69
-23.54
1.25
0.72
1.30
10.08
0.69
0.41
2.01
23.97
0.56
0.50
2.45
19.21
HOLDING LEVELS:
A) The inventory holding level in respect of raw materials, semi finished goods and finished
goods show smooth trend. The inventory holding of the firm was at 133 days in the year 20102011 and 181 days in the year 2011-12. The inventory holding level has increased owing to the
increase of 65% in sales over the last year. The inventory holding has been projected at reduced
level of 176 days for fy 2013which is accepted for assessing working capital requirement of the
firm.
B) Debtors level stood at 100 days for the fy 2010-11 and at 93 days for the year 2011-12.the
debtors level has been projected at 136 days for the year 2012-13 which is on the higher side
keeping in view the past trend. Keeping in view the sales projected for the fy2013 the debtors
level is accepted at 11 days for calculation of MPBF.
C) the creditors level was at 101 days for fy2011 and 83 days for fy2012.the creditors level has
been projected at18 days for fy 2013. The matter was taken up with the party who has informed
that it intends to make cash purchases at preferred rates and as such the level has been projected
18 days. As such the creditors level of 18 days has been accepted for calculation of MPBF.
7) the cash and the bank balance of the firm was at rs.14.08 lacs and rs.31.99 lacs as on
31.03.2011 and 31.03.2012 respectively. The cash and the bank balance have been projected at
rs.22.40 lacs as on 31.03.2013. however, cash and bank balance has been considered at 100%
margin for assessing MPBF.
1800.00
No. of days
17
52
107
111
18
61.60
211.39
399.67
555.00
22.40
10.00
1260.06
65.22
0.00
Margin
15.40
52.85
99.92
138.75
22.40
2.50
331.81
1194.84
331.81
818.07
818.07
376.77
863.02
(NWC)
MIN OF I & II
Limit recommended by BU
Limit recommended by (A&AP) CHQ
376.77
475.00
375.00
DEBTORS PERIOD
Particulars
Debtors period
Audited
31.03.2010
810
Audited
31.03.2011
100
Provisional
31.03.2012
93
Projected
31.03.2013
136
GRAPH:
10
1000
13
800
12
600
11
12
13
400
11
200
0
10
NO.OF DAYS
INTERPRETATION
Debtors level stood at 100 days for the fy 2010-11 and at 93 days for the year 2011-12.the
debtors level has been projected at 136 days for the year 2012-13 which is on the higher side
keeping in view the past trend. Keeping in view the sales projected for the fy2013 the debtors
level is accepted at 11 days for calculation of MPBF.
CREDITORS PERIOD
Particulars
Creditors period
Audited
31.03.2010
451
Audited
31.03.2011
101
Provisional
31.03.2012
83
Projected
31.03.2013
18
GRAPH
500
450
400
350
10
300
11
250
12
13
200
150
100
50
0
NO OF DAYS
INTERPRETATION
The creditors level was at 101 days for fy2011 and 83 days for fy2012.the creditors level has
been projected at18 days for fy 2013. The matter was taken up with the party who has informed
that it intends to make cash purchases at preferred rates and as such the level has been projected
18 days. As such the creditors level of 18 days has been accepted for calculation of MPBF.
Audited
31.03.2010
636
Audited
31.03.2011
35
Provisional
31.03.2012
107
Projected
31.03.2013
107
GRAPH
10
700
13
600
500
12
400
11
12
13
300
11
200
100
0
10
NO OF DAYS
INTERPRETATION:
The inventory holding level in respect of raw materials, semi finished goods and finished goods
show smooth trend. The inventory holding of the firm was at 133 days in the year 2010-2011 and
181 days in the year 2011-12. The inventory holding level has increased owing to the increase of
65% in sales over the last year. The inventory holding has been projected at reduced level of 176
days for fy 2013which is accepted for assessing working capital requirement of the firm.
Chapter 5
Findings
And
Suggestions
FINDINGS
The bank uses its own software to compute working capital needs of the assessee
The bank has an internal rating system applicable to all borrowers in addition to rating
of various agencies
Working capital needs are financed only for a short duration of time ,that is one
operating cycle
Past performance and business results are must for calculating present needs.
Mainly three ratios inventory turnover ratio, debtors turnover ratio and creditors
turnover ratio are used to assess working capital needs.
SUGGESSTIONS
J&K Bank is following a good procedure in granting cash credit facility. The procedure is as per
RBI Guidelines.
The time taken by bank in granting the facility is more, it can speed up the time taken for
sanctioning.
Bank can concentrate on small borrowers, as there are many small traders in this region.
Bank can also extend other facilities of short term financing like factoring.
Bank can give loans at concessional rate for farmers to meet their working capital
need.
Chapter 6
Conclusion
And
Bibliography
CONCLUSION
Over the years, it has been noticed that the cash Credit facility was formulated with the
best intentions, as it provides borrower the advantage that he may operate the account
within the stipulated limit as and when required. It is the source of advance where the
borrower can save interest by reducing the debit balance whenever he is in position to do
so. It runs like a current account except that the Money can be withdrawn from this
account it is not restricted to the amount deposited in the account. Cash credit facility
helps the party to improve their business which in turn helps economy to grow.
BIBLIOGRAPHY
BOOKS
JOURNALS
Annual reports of J&K Bank.
WEB
www.netbank.org
www.rushabhinfosoft.com
www.advancedbusinesscapital.com
en.wikipedia.org
www.JKbank.net