finacial project

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Project Report "Banking System" in India

Introduction of Banking

Banking regulation Act, 1949, defines banking as accepting for the purpose of lending or investment,

of deposits of money from the public, repayable on demands or otherwise and with draw able on

demand by cheques, draft or order otherwise.

Functions of Commercial Banks :

1. To change cash for bank deposits and bank deposits for cash.

2. To transfer bank deposits between individuals and or companies.

3. To exchange deposits for bills of exchange, govt. bonds, the secured and unsecured promises of

trade and industrial units.

4. To underwrite capital issues. They are also allowed to invest 5% of their incremental deposit

liabilities in shares and debentures in the primary and secondary markets.

5. The lending or advancing of money either upon securities or without securities.

6. The borrowing, raising or taking of money.

7. The collecting and transmitting of money and securities.

8. The buying and selling of foreign exchange including foreign bank notes.

Banking scene in India

The banking sector in India is passing through a period of structural change under the combine

impact of financial sector reforms, internal competition, changes in regulations, new technology

global competitive pressure and fast evolving strategic objectives of banks and their existing and

potential competitors. Until the last decade, banks were regarded largely as institutions rather akin to

public utilities. The market for banking services were oligopolies and Centralized while the market

place was regulated and banks were expected to receive assured spreads over their cost of funds. This

phenomenon, which was caricatured as 3-6-3 banking in the united states, meaning that banks accepte

deposits at 3%, lent at 6%, and went home at 3 p.m. to play golf, was the result of the sheltered

markets and administrated prices for banking products. Existence of entry barriers for new banks

meant that competition was restricted to existing players, who often operated as a cartel, even in areas

where the freedom to price their products existed.

The market place began to change for banks in India as a result of reforms of the financial sectors

initiated in the current decade. On account of policy measures introduce to infuse greater competitive

vitality in the system, the banking has entered in to a competitive phase. Competition has emerged no

only from within the banking system but also from non-banking institutions. Lowering of entry

barriers, deregulation of interest rates and growing sophistication of customers have made banking fa

less oligopolistic today. Introduction of capital adequacy and other prudential norms, freedom granted


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to enter into new turfs and greater overlap of functions between banks and non-banks have forced

banks to get out of their cozy little world and think of the future of the banking.

Emerging Environment of Banking in India

Full convertibility of rupee leading to free mobility of capital, which will mean virtual collapse of the

national borders for trade and capital flows.

Greater coordination between monetary, fiscal and exchanged rate policies for achieving the goals offaster and sustainable economic growth, macro-economic stability and export promotion.

Close integration of various financial markets such as money market, capital market and forex market

Removal of lowering of existing barriers of competitiveness, which are present today in the form of

quantitative instructions on certain imports protective custom duties, reservation of certain utilities for

the public sector.

Growing privatization and commercialization infrastructure sector.

Today, Banks customers are better informed, more sophisticated and discerning. They also have

a wide choice to choose from various banks and non-bank intermediaries. Their expectations are

soaring. This is particularly true for banks corporate clientele but also applies to customers from

personal segment.

This is changing profile of customers call for a shift from product-based approach to customer

based approach. A bank aiming at maximizing customer value must, of necessity, plan for

customized products. A combination of marketing skills and state-of-the-art technology should enable

to bank in maximizing its profits through customer satisfaction.

In the next millennium banks will have to be more and more cautions about customer service,

profitability, increased productivity, to keep face with changing banking scenario. As banks in Indi

prepare themselves for the millenium these are the shifts in the paradigm they are likely to experience

The 21st century may see the dawn of DARWINIAN BANKING. Only the banks could fulfill the

demands of markets and changing items would survive and prosper.

A word about SBI card

SBI Segment : Small business credit card (SBI credit card)

Preamble :

Small business units, retail traders, artisans, village industries, small-scale industrial units and tiny

units, professionals and self employed persons etc., contribute significantly to the growth of our

economy.The entrepreneur himself manages many of the units. Very often, these entrepreneurs

complain of procedural delay in sanctions and renewal of limits. They also find it difficult to cope wit

the demands for audited balance sheet and other statements sought by the bank from time to time for

availing credit facilities. With a view to providing hassle free financial supports to the above categori

of entrepreneurs who have shown commitment to run the unit successfully and who are dealing with

the banks for last two years satisfactorily, new and friendly credit product namely small business cred


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card scheme is designed. Under the scheme, cumbersome procedural aspects relating to reviews and

renewals, submission of balance sheet, stock statements and other statements are done with credit

delivery made simple and easy.

Purpose :

To meet the credit requirements of small business units, industrial unit, retail trader, artisan, Small

Scale Industry (SSI) and tiny units.

Eligibility :

A. Customers of the following segments with a satisfactory track record for the last two years enjoyin

credit facilities.

Small industrial units (SSI and tiny units including artisans)

Small retail traders (Under SBF)

Professional and self employed persons

Small business enterprise

B. Units who do not enjoy credit limit with us/other banks at present with excellent performance and

credential may be considered.

Quantum of loan :

Loan up to Rs. 5 Lakh can be sanctioned to eligible persons.

Assessment :

The small business credit card limit can be fixed as follows :

For small business, retail trader etc. 20% of the annual turnover declared for tax purpose or last

twelve months turnover in the operative accounts, whichever is higher.

In respect of parties with good track record, where sales tax returns are not available, the credit limits

may be decided taking into consideration the actual turnover in the accounts during the last two years

For professionals and self employed persons, 50% of their gross annual income as per IT

return shall be considered as the limit for issuing the SBI credit card. For small scale industrial units, tiny sector units the assessment norms in vogue as per the

Nayak Committee recommendations would continue.

Validity :

Credit card limit will be valid for a period of three years, subject to satisfactory conduct of the

accounts.

Annual review will be done based on conduct/operations of the A/cs. A major portion of the

sales turnover should have been routed through the accounts as revealed by the credit

summations.


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Repayment :

The working capital advance may be continued subject to that review every year provided the

credit summations in the account is not less than 50% of the projected sales turnover. If the

credit summations is less than 50% of projected sales turnover. The outstanding as on the due

date of review should be made repayable in suitable monthly installments.

The term loan is repayable in suitable installments with in a maximum period of five years.

In case of composite loans, only the term loan is repayable in installments up to a maximumperiod of five years.

Interest rate :

As per extent instructions issued from time to time relating the market segment.

Refinance :

No refinance is to be claim from SIDBI

Security :

Primary : Hypothecation of the stock in trade receivables, machinery, office equipment.

Collateral :

Under SSI-No collateral security as per existing guidelines of RBI.

User SBF :

Up to Rs. 25000/- No collateral security. Over Rs. 25000/- charge over movable/immovable property or third party granted.

However, in case of the excellent track record, sanctioning authority may waive collateral requiremen

Margins :

Up to Rs. 25000/- - NIL

Rs. 25001/- to Rs. 5,00,000/- - 20%

Documentation :

Documents as per extant instructions.

Credit Card - A Convenient Banking Product :

The credit card is a hassle free convenient banking product aimed at simplifying the credit

delivery mechanism. Cumbersome procedural aspects relating to reviews and renewals, submission

stock statement, balance sheet and other statements are done away with. The credit limit will be

worked as detail above.


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Small business credit card

Card No.

Name

Account No.

Tel. No.

Limit Rs.

Date of issue

Valid upto

.. (Branch Code)

Signature of the Brach Manager Card holders Photograph with signature

The borrower would be issued a photo card indicating sanctioned limit and validity of the limit(sample card)

Insurance :

Fixed assets/stock pledged/hypothecated to the bank be fully insured at least to the extent of th

bank interests.

Bank may waive insurance of assets for equipment against the fire and other risk up to

Rs.25000/-

Cover under credit guarantee scheme :

All eligible loan accounts sanctioned for small scale industries (other than services) would

qualify for cover under CGTFSI scheme (presently the scheme has been introduce in five circles on

pilot basis viz. New Delhi, Chandigarh, Lucknow, Patna & Hydrabad).

Operation :

Small business credit card accounts should be maintained in a separate ledger.

Cheque book should be issued and marked as small business credit card account.

Pass book should be issued for mall business credit card holders.

Stock statement waived.

Submission of audited balance sheet waived.

Borrower would be issued a small business credit card with photograph thereon. Cost of

photograph to be borne by banks.

IRAC norms would be applicable.


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Brief opinion report should be recorded. Marked inquiries should be made and recorded in the

opinion report and singed by the field officer/cash officer or officers not below that rank.

Units within a radius of 5 kilometers may be covered intensively for the issue of credit card.

This condition may be waived for such of those units already in the book of the branch.

Inspections :

Half-yearly inspection/monitoring to ensure the end user funds.

Sanction :

Required loan may be sanctioned with in a week after receipt of detailed information.

Control return after sanction may be sent to next higher authority for approval .

Scoring Model :

Loan would be sanctioned up to Rs. 5,00,000/- based on the simplified scoring model as given

in annexure- II. Those who are scoring less than 60% would not qualify for the loan.

Rationale :

New schemes for hassle free credit facilities to small borrower.

Automatic Teller Machine (ATM)

An ATM (Automatic Teller Machine) card is useful to a card holder as it helps him to withdraw

cash from banks even when they are closed. This can be done by inserting the card in the ATM

installed at various banks locations.

State Bank Cash Plus CARD

Signature Panel.

Magnetic Stripe

Features of State Bank Cash Plus Card

State Bank Cash Plus Card having the 19 digit.

Name of the card holders mention there on it.

In case of State Bank Cash Plus Card, there is no expiry period but for the old card, the date

after which your card needs to be renewed is the last day of the month indicated on your card.

Signature panel on which you must sign as soon as youre your card. It identifies the card as

your State Bank Card Plus Card.

The magnetic stripe, which contains encoded information.

ATM card possess pincode which having the 4 digit.


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Use of State Bank Cash Plus Card

We uses our State Bank Cash Plus Card for cash withdrawal from ATMs.

We uses it for making the payments for purchase made at the merchant establishments.

Significance of the Study

This study entitled comparative study of various credit schemes of SBI V/s other banks will b

helpful for bankers to maintain customers service policy, for customers while deciding theirfinancing needs and also helpful for other researchers for further research in the future.

SBI card provides customers with an option, in addition to the existing banking credit facilities

available. With an SBI card customers can enjoy hassle-free credit facilities.

This study would help us to know about the problems that are faced by the consumers during

transactions. It would also reveal the problems that are being faced by the bank employees while

dealing with customers and would also highlight the future prospect of SBI card.

Review of Existing Literature :

It is very essential to know whether the study has already been conducted before. If so, how and to

what extent ? And because of this scholar has to go through all the existing literature related to the

study. SBI Card, very limited studies have been conducted on the subject. Due to the time restrictions

scholar could seek advice from only the limited literature, which is available with the bank.

As the concept is completely under the control of various banks and RBI. So the information is

directly taken from these sources.

Conceptualization

As the concept includes two terms i.e. cash credit or working capital loans and terms loans. Therefore

both the terms are taken into consideration in the proposed study. Due to the privatization of banking

sector many big private players entered in this sector giving a tough competition to the existing

players. So, to face this stiff competition all the public sector banks have to review their functioning.

These aspects will be given importance in this project report.

The concept of SBI card, question crops in mind what is a SBI card, What is its shape and size,

what is its function. A SBI card is nothing but a identity card containing card holders photographs

with signature, card no. Name, A/c No. limit, validity period, branch code with signature of BranchManager.

http://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/comparative-study-of-various-credit-

schemes-of-SBI-Vs-other-banks/introduction-of-banking-system-india-ch1.htm

Retail means sale of goods in small quantities, it is concerned with buying of goods in small quantitie

from the wholesaler and selling them in small quantities to the ultimate consumers as per their

requirements. The person engaged in this trade is called the retailer. He acts as a link between the
http://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/comparative-study-of-various-credit-schemes-of-SBI-Vs-other-banks/introduction-of-banking-system-india-ch1.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/comparative-study-of-various-credit-schemes-of-SBI-Vs-other-banks/introduction-of-banking-system-india-ch1.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/comparative-study-of-various-credit-schemes-of-SBI-Vs-other-banks/introduction-of-banking-system-india-ch1.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/comparative-study-of-various-credit-schemes-of-SBI-Vs-other-banks/introduction-of-banking-system-india-ch1.htm


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wholesaler and the customers. In retail trade goods are sold to the ultimate consumers for personal use

and for the use of the business in small quantities only. The retailer does not specialize in a particular

or a particular product. Rather he maintains a large variety of goods. Generally, sales are limited to a

and on a small scale.

MEANING OF BANKING

Banking has come to occupy a pivotal position in a nations economy. According to the modern

concept, banking is a business which not only deals with borrowings, lending and remittance of fundsbut also an important instrument for fostering economic growth.

The Banking Regulation Act 1949, defines the term banking as the accepting for the purpose

lending or investment of deposits of money from the public or otherwise and withdraw able by chequ

draft, order or otherwise. Thus, the essentials of banking are:

(1) There should be acceptance of deposited.

(2) Deposits should be from the public.

(3) Deposits should be repayable on demand or expiry of a term or after a specified periods.

(4) The purpose of deposits should be lending or investment.

Bank is an institution which deals in money and credit. It buys money from depositors and sell to th

borrowers. It is body of persons whether incorporated or not who carry on the business of banking.

bank may defined as a corporation or person which collects deposits from the public, repayable on

demand and which supplies and facilitates all kinds of exchanges.

RETAIL BANKING

Retail banking means mobilizing deposit form individuals and providing loan facilities to them

the form of home loans, auto loans, credit cards, etc, is becoming popular. This used to be considered

the banks as a tough proposition because of the volume of operations involved. But during the last cou

of years or so, banks seem to have realized that the only sustainable way to increase deposits is to loo

small and middle class consumer retail deposit and not the price sensitive corporate depositors. With

financial sector reforms gathering momentum, the banking system is facing increasing companies fro

non-banks and the capital market. More and more companies are tapping the capital market directly fo

finance. This is one of the main reasons for the banks to focus vigourously on the much ignored retail

deposits. Another reason is the current liquidity the margins are 1 to 2 percent above the prime rate; in

retail market they are 3to4 percent.

It is reported that Indian retail market has the potential to be second only to the USA. Nati

Readership Survey 5puts Indian households with monthly of over Rs. 5000 at 4.5 million. Accordin

the survey, the category of households with annual income of Rs. 2 lakhs and above is growing at the

of 30 per cent per annum. No winder, banks with vision and insight are trying to woo this market thro

a series of innovative additions to their products, services, technology and marketing methods. Fixed

unfixed Deposits, (cluster deposits which can be broken into smaller units to help meet deposi

overdraft without breaking up entirely), centralised database for any branch banking (whereby
http://www.pnbindia.com/BANK%20REGULATION%20ACT.pdfhttp://www.pnbindia.com/BANK%20REGULATION%20ACT.pdf


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customer can access his account in any of the branches irrespective of where the account is maintain

room services (whereby the customers are visited at their residences offices to enable them to open

accounts), automatic teller machines, tele banking network, extended banking time, courier pickup

cheques and documents, etc are some of the privileges extended to the customers by the banks in

eagerness to cultivate the retail market. In short, in the bold new world of retail banking the custom

crowned as king.

RETAIL BANKING-A COOL OASIS

To bankers struggling through the shifting sands of corporate credit, retail banking looks like a cool o

Corporate Credit, retail banking looks like a cool oasis. Corporate customers rely less on commercia

banks every day as other fund raising avenues present themselves. As this disintermediation takes pla

and competition shrinks margins, retail banking has gained an irresistible allure for banks because of

apparently higher margins and potential fir growth.

With their large branch networks, banks have secured sizeable deposits-23 percent of GDP. On the as

side, however, retail advances account for a mere seven per cent of total lending. The penetration of

products like car loans or credit cards is very low. With very few focused multi-line banks, non banksoften significant players in retail lending, as HDFC is in house loans. Yet, many non-banks lack the

minimum size to make the necessary investments and address the challenges of retail banking.

A large number of banks and non-banks have launched or relaunched retail products and are attempti

grow their share of the personal financial services market. Even the term lending institutions have dec

that they need to go retail to raise funds. Many organization like ICICI are betting that a large part of

future growth will come from retail customers.

Retail banking is much more than as opportunity to addressing dwindling margins. It is an imperativ

preserve profits and market positions. Customers now have many more personal financial optio

growing credit culture, a willingness to switch between financial services providers, and a deman

lower interest rates. As they witness these trends, banks realize that they cannot remain passive. The

private sector banks are making inroads in the markets they serve, while competition from non-ban

growing. In respect, older institutions need to revamp their distribution capabilities, cust

management capabilities, operating culture, compensation system and operations processing.

WEB IMPACT ON BANKS RETAIL REVENUES:

For all those gurus whove been predicting that the net will end the business of said banks, here

shocker.

Even in the SILICON valley-driven USA, Internet is not expected to have a major impact in banks r

revenues.

The reason: the absence of a convenient alternative at present to using cash.
http://www.hdfcbank.com/http://www.icicibank.com/http://www.hdfcbank.com/http://www.icicibank.com/


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According to a report by moodys Investors service, at least in the intermediate term, the internet i

expected to impact large US banks core profitability or competitive position.

This is despite the despite business being the simple-most important profit source for most Amer

retail banks.

The core retail banking business of deposit taking will be sheltered form web-based competitors

margin shrinkage on this business.

Need for convenient access to physical locations coupled with the advantages of multiple del

channels like branch, ATM, telephone and computers, consumers need to leave money in transacti

accounts; customer inertia and the relatively limited cost savings available to consumers from

banking, are cited as the main factors supporting its view.

The moodys report, however, cautions that other consumer business such as residential mortgages,

loans and credit cards may be more vulnerable to web-based competitors.

However, most US banks have thin margins or low market shares in these businesses mitigating

impact, says the report made available to the Economic Times.

The rating agency is skeptical of banks ability to generate substantial incremental revenues from c

selling financial products to existing customers via the

Banks have to maintain a comprehensive and effective web based capability to maintain their compet

position, cautions moodys.

The need for customers to take frequent physical receipts, make convenient physical receipts, m

convenient physical delivery of cheques using ATMs, inhibition towards paying ATM charges for u

another banks ATM network by the consumer and time consuming, difficult and disruptive natu

switching accounts also contribute to the stickiness of retail deposits.

With low bank fees for individual transactions and relatively small bank deposits, the opportunity cos

in terms of interest income for customers is not material where the deposits are not large.

Banks offer convenience and choice and the web-based channels of banks have reported rapid grow

the number of customers by retaining current customers.

According to moodys a survey indicated that 35 per cent of Internet banking customer discon

because they dont find it convenient.

Customers prefer to use a variety of channels to conduct their banking which is why it remains to be

whether a business model based solely on internet banking will generate adequate returns and sustain

term competition against conventional banking systems.


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The advent of the internet could, however have a powerful effect on banks acquisition strategie

creating uncertainty about the value of purchasing large branch networks, the study says.

For some banks, however, the Internet could facilitate an increase in fee income by generating fees

Internet service arrangements like bill presentment and clearing.

However, if smart cards or stored value cards or other electronic cash substitute gain popul

alternatives could become more attractive to customers.

On the other hand, banks might be able to reduce costs of servicing the retail customers by moving t

over into a paperless environment.

Banks could introduce various incentives to the persuade customers to forego paper statements fo

basic savings account and credit card, says moodys.

THE RULES HAVE CHANGED

As the 1900s come to their close and we look eagerly towards the new millennium, a revolution thatchange the rules and every thing we have understood of the retail market, financial products and o

services. Economic boundaries are disappearing, and the global village is a reality where the r

customer will have a choice in a manner we may have never imagined.

Providers of retail products and services will battle for market and market share. It is battle that wi

fought at different levels and the real winner will be the customer, who will benefit from incre

competition through better products, distribution, technology, pricing, and post transaction service.

The quality and range of products will expand exponentially convenience of usage, customizatioindividual needs, and a host of other user-friendly add-ons will create a whole new frontie

applications. Companies will have to innovate and continuously upgrade their products. Anticipa

listening and responding to your customers needs, will be the buzz-words of this thrust.

Distribution will be the next key benchmark of success. The customer will demand (and therefor

provider will have to respond) for greater convenience of access to the product or service and all th

the best cost of delivery. Re-defined methods, the use of technology specifically the Internet

realigned strategies will drive this important criterion of success. Constraints of location, tim

accessibility etc will all be history. No matter how brilliant the product you have, your distribu

flexibility will be the customers selection parameter.

Again, quality of the product and responsive strategies for distribution will also have a link to p

Efficiencies on this front will be the next item on your report card. Through innovation in production

delivery and cost reduction strategies, the price to the customer will have to be at maximum benefit

intelligent customer will be ruthless with any price distortions, which as a consequence of inefficien

or market exploitation his cost benefit analysis will not allow for these variables.


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Would you prefer a product, which (hopefully) is never expected to need post sale service or one w

offers the best after sale service if required ? Clearly, the relationship with the customer starts with

transaction, does not and with it. Organisation we have to give equal importance to cost sale need

customers as the pitch made prior to the sale.

Technology will perhaps be the single largest driver of this detail thrust. The entire strategy will ev

around the absolute ability of the organisation to be at the cutting as edge of technology. We will ha

invest in technology far ahead of immediate needs and be able to anticipate the future direction at a we are perhaps not used to. Being able to keep abreast, but more importantly, being able to recogniz

immense potential that technology provides at all stages in the retail chain will be of param

importance. To leverage, exploit and link technology to your business will be the greatest challenge o

new millennium and I am convinced that the retail war will be won and lost on this one aspect, pu

because technology increasingly we influence on the entire chain in a retail business cycle.

Above all these, I would list attitude towards customer as the single point basis on determining the wi

of the race. Attitude to the customer will influence all the areas we have discussed and will en

excellence in each one of them. It is an intangible, it is not prescribed in a manual nor is it a quantifi

item in the balance sheet, but an organizations attitude to the customer will be the basis determina

success for any retail operation.

There are interesting and challenging times ahead the future promises a lot but will also m

extraordinary demands. The customer will be the most important aspect of your business and ultim

the winner of the retail war.

RISK INVOLVED IN RETAIL BUSINESS

There are of course, considerable risks in retail banking. They are :

(a) Databases on credit history are large.

(b) Collection mechanisms are poor.

(c) Investments in technology are large.

(d) Operating efficiency level needs to be very high.

(e) Unlike corporate banking, retail banking involves a large number of small accounts.

(f) Demands on processing capabilities are higher.

(g) Retail segment is not something you can get into overnight.

(h) The right systems and the right architecture needs to be put in place first.

PRODUCT RANGE OF RETAIL BANKING

New Private sector banks have great resource mobilizing and asset expansion capabilities which

cannot be undermined by the fact these banks volume. Which have taken decades of option for the ol

private sector bank to build. These bank are dominating the market with new product, service3 and


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ideas. Information technology has enabled many private banks are emerging strong in banking and

financial services with the marketing of new product and service based on technological capabilities.

In the present scenario HDFC bank Ltd. is a fast emerging bank. It has 227branches throug

the India in Rewari city HDFC has one branch also and one ATMs.

Apart from the HDFC bank, the other bank like PNB, SBI which is included in study. These

are the public sector bank. SBI is the one bank in India. These two are also providing the retail ban

service.

Now the emergence of the retail concept of the banking customers are expecting more and b

services. To day customer prefer private banks because they can have personal relationship with the

personnel, with lesser hierachy and It is possible for these banks to forget closer ties with customers a

HDFC Bank provide the following service :-

1. Current A/C 2. Loan

3. Corporate Salary A/C 4. Online A/C

5. Debit Card 6. Phone Banking

7. Intercity/ Inter Branch Banking 8. Net Banking

9. Bill Pay

SBI & PNB Provides following services :-

Deposit

-Demand Deposit

Current Deposit

Saving Deposit

-Time Deposit

Fixed Deposit

Akshaya Deposit

Cumulative Deposit


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Pragati Deposit

Loan :-

Housing finance for individuals Car finance

Finance for consumer disables

Finance for Scooter/Motorcycles

Finance against future lease Rentols

Personal loan to pensioness

Personal loan to serving Army officers, Govt. & other Employees

Education loan scheme

Advance against life policy

Advance against bank deposits

- ATMs


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HDFCS RANGE OF PRODUCT

Current A/C:-

Under this account a person can deposit and with draw money as many times in a day a

wants . The regulars an average quarterly balance of the Rs. 10000 only .Besides the free ATM card

easy accessibility. Your first 50 cheque leave are o

Offered free. This can be as:-

Premium current account From any branch

HDFC bank Trade - Small business

HDFC bank plus.

Loans :- To Suits every need.

A loan is a specified amount sanctioned for a period of times. Loans are granted generally

against the security of assets or on the personal security of the borrower. The

borrowers may with draw the amount of the loan in lamp sum in instalment. Similarly it may be repay

in lump sum or in instalment.

HDFC bank provides following loan under the retail banking segment :-

Car Loan (For new and used cars).

Personal loan.

Loans against securities and two wheelers .

Consumer loan.

Car Loan :- Varity of finance schemes


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New Car loan :-

Loan amount : upto 90% Of car value

Tenure : 12 to 48 month


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Personal Loan :- For anything you have in mind

Holiday abroad

Wedding in the family

Higher education

No security or granter required

Loan amount: Rs. 25000 to Rs 10 lack

Tenure :12 to 48 months.

Eligibility : Salaried, individuals, self-employed doctors and CAS, CS, Engineers M.B.A.S

Two wheelers and Consumer loan :-

Whatever your dream, HDFC have a scheme

Two wheelers

Personal computer and AC

Durable like TV, Washing Machine, Refrigerator etc.

For HDFC bank A/C holders only.

Loan amount : Rs. 7000 to 1 lakh (Max 85% of product value)

Tenure : 6 to 36 months

Eligibility : Salaried and self employed individuals

Loan against securities - An overdraft facility

Loan amount Rs. 50000 to Rs. 20 lakh (upto 60%of market value of demand share)

Mutual Fund Rs. 50000 to Rs. 10 lakh


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LIC policy Rs.100000 onwards.

Corporate salary A/c:-

With HDFC banks corporate salary A/C, employees receive an array of rewards with

monthly pay cheque. All at no extra coast to organisation. E-age banking service from any where, at

time:-

Phone banking

Inter branch banking

Net banking

Bill payable

Free phone banking

Free mobile banking

Free demand draft

Free International debit card

Direct salary credit

Overdraft facility

Demote A/C

Joint A/C facility

Free Demand Draft

PHONE BANKING: HDFC bank provides phonebanking facility to its customers. With the help of

service customers can get their account detail, ask for a cheque book or a statement, open a fixed dep

transfer money within their own accounts, order a demand drafts, stop cheque payment etc. all by pho

INTERCITY/ INTERBRANCH BANKING: At HDFC you can access your account from any of

131 branches in 26 cities. So you can withdraw cash form another branch, through a self-cheque. You

deposit a local cheque in one branch and get it credited to your account in another city.

NETBANKING : Internet banking is just like normal banking, with a one big exception that you dhave to go to the bank for transactions. Instead you can access your account any time form any part o

world, and do so when you have the time ,and not when the bank is open. Through the net banking

can transfer funds within the same bank, open a fixed deposit, get a demand draft, make a TDS enq

request a stop payment of on a cheque, request for a new cheque book or even cheque your acc

balance.

BILLPAY : HDFC bank provides its customers to pay their mobile bills in some selected cities ove

phone as well as through their ATMs. In Mumbai you can pay BPL Mobile bills, in Delhi you can

Airtel bills and in Chennai you can pay RPG and Sky cell cellular bills through this facility. You can


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pay MTNL bills in Mumbai and Delhi and MSEB bills in Pune and Mumbai. It saves a lot of time , w

you spend in long queues or writing cheques.

Debit Cards

HDFC Banks International debit card provide seamless freedom and fiscal manageme

spending, both locally and globally.

The Debit and ATM Card, when issued as visa compliant cards, will give you the freedom to access

your savings or current at merchant location and ATMs.

Whenever you make payments, the amount will be instantly debited from your account.

present ATM cards allow you to access your account 24 hours a day, all through the year.

How does it work?

All you need to do is present your card to the merchant who will swipe it through the electr

terminal and enter the amount of your purchase. You only need to sign the transaction slip.

Your account will be automatically debited for the amount of your purchase. Your debit card

be used at any merchant location displaying the visa electronic logo or at any ATM displaying the c

logo of course, you can always use it any HDFC Bank ATM as a normal ATM card.

What if your Debit Card is lost or stolen?

If your card is lost or stolen, you are protected from fraudulent charges from the moment

report the loss to the bank.

Any transaction limit for the Debit Card?

For the safety of the card holders, the bank have a daily limit of Rs. 15000 at ATM, (at merc

location there is no transaction limit,) and this is subject to the available balance in your account.

SBI & PNB PRODUCT RANGE

Deposit


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Deposits accepted by bank may be categorised as demand deposit and time deposit.

Demand Deposit

Demand deposits are those deposits that can be withdrawn without notice. Bank undertake to r

such deposits as demand. The following types of deposit accounts are classified under Demand Depo

(a) Current Account

(b) Saving Account

Current Account :

Under this accounts, a person can deposit and with draw money as many times in a day as he

wants. Money can be withdrawn by issuing cheques. Current acount are remunerative type of deposit

accounts as no interest its payable on the credit balances outstanding in these accounts.

Saving Accounts :

This account is opened for the purpose of savings. Any purpose of savings. Any person includ

a minor can open this account by depositing a small sum of money. Saving Bank Account is subject t

restriction as to the number of withdrawal as also the amount of withdraw as also the amount of

withdrawal permitted by banks during any specified period. However there is no restriction on the num

and amount of deposits that can be made on any day. Balances in the Saving Bank Account cans inter

at rates as determined by RBI from time to time.

Time Deposit

Any deposit, which is repayable after a period of notice rather than repayable after a fixed da

period, is a time deposit or popularly called as term deposits. The following type of account in both b

are classified under Retail Time Deposits.

Fixed Deposit

Apshaya Deposit

Cumulative Deposit

Pragati Deposit

Fixed Deposit :-


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Fixed Deposit where the depositor makes a lumpsum deposit where the depositors mak

lumpsum deposit at one time for a fixed period and receive payment there of on Maturity with interes

Apshaya Deposit :-

Apshaya Deposit is a reinvestment deposit Scheme where the depositors makes a lump

deposit at one time for a fixed period and receive payment there of on Maturity with interes

WORKING CAPITAL - Meaning of Working Capital

Capital required for a business can be classified under two main categories via,

1) Fixed Capital

2) Working Capital

Every business needs funds for two purposes for its establishment and to carry out its day- to-da

operations. Long terms funds are required to create production facilities through purchase of fixe

assets such as p&m, land, building, furniture, etc. Investments in these assets represent that part

firms capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are als

needed for short-term purposes for the purchase of raw material, payment of wages and other day to

day expenses etc.

These funds are known as working capital. In simple words, working capital refers to that pa

of the firms capital which is required for financing short- term or current assets such as casmarketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolving fa

and are being constantly converted in to cash and this cash flows out again in exchange for oth

current assets. Hence, it is also known as revolving or circulating capital or short term capital.

CONCEPT OF WORKING CAPITAL

There are two concepts of working capital:

1. Gross working capital

2. Net working capital

The gross working capital is the capital invested in the total current assets of the enterprises curren

assets are those

Assets which can convert in to cash within a short period normally one accounting year.

CONSTITUENTS OF CURRENT ASSETS


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1) Cash in hand and cash at bank

2) Bills receivables

3) Sundry debtors

4) Short term loans and advances.

5) Inventories of stock as:

a. Raw material

b. Work in process

c. Stores and spares

d. Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses

8. Accrued incomes.

9. Marketable securities.

In a narrow sense, the term working capital refers to the net working. Net working capital

the excess of current assets over current liability, or, say:

NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.

Net working capital can be positive or negative. When the current assets exceeds the curre

liabilities are more than the current assets. Current liabilities are those liabilities, which ar

intended to be paid in the ordinary course of business within a short period of normally on

accounting year out of the current assts or the income business.

CONSTITUENTS OF CURRENT LIABILITIES

1. Accrued or outstanding expenses.

2. Short term loans, advances and deposits.

3. Dividends payable.


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4. Bank overdraft.

5. Provision for taxation , if it does not amt. to app. Of profit.

6. Bills payable.

7. Sundry creditors.

The gross working capital concept is financial or going concern concept whereas net working capital

an accounting concept of working capital. Both the concepts have their own merits.

The gross concept is sometimes preferred to the concept of working capital for the following reasons:

1. It enables the enterprise to provide correct amount of working capital at correct time.

2. Every management is more interested in total current assets with which it has to operat

then the source from where it is made available.

3. It take into consideration of the fact every increase in the funds of the enterprise woul

increase its working capital.

4. This concept is also useful in determining the rate of return on investments in workin

capital. The net working capital concept, however, is also important for following reasons:

It is qualitative concept, which indicates the firms ability to meet to its operatin

expenses and short-term liabilities.

IT indicates the margin of protection available to the short term creditors.

It is an indicator of the financial soundness of enterprises.

It suggests the need of financing a part of working capital requirement out of th

permanent sources of funds.


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CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in to ways:

o On the basis of concept.

o On the basis of time.

On the basis of concept working capital can be classified as gross working capital and ne

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

Permanent or fixed working capital.

Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure effectiv

utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has t

maintain a minimum level of raw material, workin-process, finished goods and cash balance. Th

minimum level of current assts is called permanent or fixed working capital as this part of working

permanently blocked in current assets. As the business grow the requirements of working capital als

increases due to increase in current assets.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is required to meet th

seasonal demands and some special exigencies. Variable working capital can further be classified a

seasonal working capital and special working capital. The capital required to meet the seasonal need o

the enterprise is called seasonal working capital. Special working capital is that part of working capit

which is required to meet special exigencies such as launching of extensive marketing for conductin

research, etc.

Temporary working capital differs from permanent working capital in the sense that is required fo

short periods and cannot be permanently employed gainfully in the business.

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL

SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining th

solvency of the business by providing uninterrupted of production.


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Goodwill: Sufficient amount of working capital enables a firm to make prompt paymen

and makes and maintain the goodwill.

Easy loans: Adequate working capital leads to high solvency and credit standing ca

arrange loans from banks and other on easy and favorable terms.

Cash Discounts: Adequate working capital also enables a concern to avail cash discoun

on the purchases and hence reduces cost.

Regular Supply of Raw Material: Sufficient working capital ensures regular supp

of raw material and continuous production.

Regular Payment Of Salaries, Wages And Other Day TO Da

Commitments: It leads to the satisfaction of the employees and raises the morale of i

employees, increases their efficiency, reduces wastage and costs and enhances production an

profits.

Exploitation Of Favorable Market Conditions: If a firm is having adequa

working capital then it can exploit the favorable market conditions such as purchasing i

requirements in bulk when the prices are lower and holdings its inventories for higher prices.

Ability To Face Crises: A concern can face the situation during the depression.

Quick And Regular Return On Investments: Sufficient working capital enabl

a concern to pay quick and regular of dividends to its investors and gains confidence of th

investors and can raise more funds in future.

High Morale: Adequate working capital brings an environment of securities, confidenc

high morale which results in overall efficiency in a business.

EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate amount of working capital to run its busine

operations. It should have neither redundant or excess working capital nor inadequate nor shortage

of working capital. Both excess as well as short working capital positions are bad for any businesHowever, it is the inadequate working capital which is more dangerous from the point of view o

the firm.

DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL

1. Excessive working capital means ideal funds which earn no profit for the firm an

business cannot earn the required rate of return on its investments.


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2. Redundant working capital leads to unnecessary purchasing and accumulation

inventories.

3. Excessive working capital implies excessive debtors and defective credit policy whic

causes higher incidence of bad debts.

4. It may reduce the overall efficiency of the business.

5. If a firm is having excessive working capital then the relations with banks and oth

financial institution may not be maintained.

6. Due to lower rate of return n investments, the values of shares may also fall.

7. The redundant working capital gives rise to speculative transactions

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working capital arises due to thtime gap between production and realization of cash from sales. There is an operating cycle involve

in sales and realization of cash. There are time gaps in purchase of raw material and production

production and sales; and realization of cash.

Thus working capital is needed for the following purposes:

For the purpose of raw material, components and spares.

To pay wages and salaries

To incur day-to-day expenses and overload costs such as office expenses.

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

To provide credit facilities to the customer.

To maintain the inventories of the raw material, work-in-progress, stores and spares an

finished stock.

For studying the need of working capital in a business, one has to study the business under varyin

circumstances such as a new concern requires a lot of funds to meet its initial requirements such a

promotion and formation etc. These expenses are called preliminary expenses and are capitalize

The amount needed for working capital depends upon the size of the company and ambitions of i

promoters. Greater the size of the business unit, generally larger will be the requirements of th

working capital.


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The requirement of the working capital goes on increasing with the growth and expensing of th

business till it gains maturity. At maturity the amount of working capital required is called norm

working capital.

There are others factors also influence the need of working capital in a business.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS

1. NATURE OF BUSINESS: The requirements of working is very limited

public utility undertakings such as electricity, water supply and railways because they off

cash sale only and supply services not products, and no funds are tied up in inventories an

receivables. On the other hand the trading and financial firms requires less investment

fixed assets but have to invest large amt. of working capital along with fixed investments.

2. SIZE OF THE BUSINESS: Greater the size of the business, greater is th

requirement of working capital.

3. PRODUCTION POLICY: If the policy is to keep production steady b

accumulating inventories it will require higher working capital.

4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time th

raw material and other supplies have to be carried for a longer in the process wi

progressive increment of labor and service costs before the final product is obtained. S

working capital is directly proportional to the length of the manufacturing process.

5. SEASONALS VARIATIONS: Generally, during the busy season, a fir

requires larger working capital than in slack season.

6. WORKING CAPITAL CYCLE: The speed with which the working cyc

completes one cycle determines the requirements of working capital. Longer the cycle larg

is the requirement of working capital.

DEBTORS

CASH FINISHED GOODS

RAW MATERIAL WORK IN PROGRESS


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7. RATE OF STOCK TURNOVER: There is an inverse co-relationship between th

question of working capital and the velocity or speed with which the sales are affected.

firm having a high rate of stock turnover wuill needs lower amt. of working capital a

compared to a firm having a low rate of turnover.

8. CREDIT POLICY: A concern that purchases its requirements on credit and sales i

product / services on cash requires lesser amt. of working capital and vice-versa.

9. BUSINESS CYCLE: In period of boom, when the business is prosperous, there is nee

for larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion o

business, etc. On the contrary in time of depression, the business contracts, sales declin

difficulties are faced in collection from debtor and the firm may have a large amt. of workin

capital.

10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall requi

large amt. of working capital.

11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earnin

capacity than other due to quality of their products, monopoly conditions, etc. Such firm

may generate cash profits from operations and contribute to their working capital. Th

dividend policy also affects the requirement of working capital. A firm maintaining a stead

high rate of cash dividend irrespective of its profits needs working capital than the firm th

retains larger part of its profits and does not pay so high rate of cash dividend.

12. PRICE LEVEL CHANGES: Changes in the price level also affect the working capit

requirements. Generally rise in prices leads to increase in working capital.

Others FACTORS: These are:

Operating efficiency.

Management ability.

Irregularities of supply.

Import policy.

Asset structure.

Importance of labor.

Banking facilities, etc.


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MANAGEMENT OF WORKING CAPITAL

Management of working capital is concerned with the problem that arises in attempting t

manage the current assets, current liabilities. The basic goal of working capital management

to manage the current assets and current liabilities of a firm in such a way that a satisfactor

level of working capital is maintained, i.e. it is neither adequate nor excessive as both th

situations are bad for any firm. There should be no shortage of funds and also no workin

capital should be ideal. WORKING CAPITAL MANAGEMENT POLICES of a firm hasgreat on its probability, liquidity and structural health of the organization. So working capit

management is three dimensional in nature as

1. It concerned with the formulation of policies with regard to profitability, liquidity an

risk.

2. It is concerned with the decision about the composition and level of current assets.

3. It is concerned with the decision about the composition and level of current liabilities.

WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre of a business. Adequate amount o

working capital is very much essential for the smooth running of the business. And the mo

important part is the efficient management of working capital in right time. The liquidit

position of the firm is totally effected by the management of working capital. So, a study changes in the uses and sources of working capital is necessary to evaluate the efficiency wit

which the working capital is employed in a business. This involves the need of working capit

analysis.

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

1. Ratio analysis.

2. Fund flow analysis.

3. Budgeting.

1. RATIO ANALYSIS


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A ratio is a simple arithmetical expression one number to another. The technique of rat

analysis can be employed for measuring short-term liquidity or working capital position of

firm. The following ratios can be calculated for these purposes:

1. Current ratio.

2. Quick ratio

3. Absolute liquid ratio

4. Inventory turnover.

5. Receivables turnover.

6. Payable turnover ratio.

7. Working capital turnover ratio.

8. Working capital leverage

9. Ratio of current liabilities to tangible net worth.

2. FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study the source from whicadditional funds were derived and the use to which these sources were put. The fund flo

analysis consists of:

a. Preparing schedule of changes of working capital

b. Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position (working capita

business enterprise between beginning and ending of the financial dates.

3. WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of business plans and polices to b

pursued in the future period time. Working capital budget as a part of the total budge tin


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process of a business is prepared estimating future long term and short term working capit

needs and sources to finance them, and then comparing the budgeted figures with actu

performance for calculating the variances, if any, so that corrective actions may be taken

future. He objective working capital budget is to ensure availability of funds as and needed, an

to ensure effective utilization of these resources. The successful implementation of workin

capital budget involves the preparing of separate budget for each element of working capita

such as, cash, inventories and receivables etc.

ANALYSIS OF SHORT TERM FINANCIAL POSITION OR TEST O

LIQUIDITY

The short term creditors of a company such as suppliers of goods of credit and commerci

banks short-term loans are primarily interested to know the ability of a firm to meet i

obligations in time. The short term obligations of a firm can be met in time only when it

having sufficient liquid assets. So to with the confidence of investors, creditors, the smootfunctioning of the firm and the efficient use of fixed assets the liquid position of the firm mu

be strong. But a very high degree of liquidity of the firm being tied up in current asset

Therefore, it is important proper balance in regard to the liquidity of the firm. Two types o

ratios can be calculated for measuring short-term financial position or short-term solvenc

position of the firm.

1. Liquidity ratios.

2. Current assets movements ratios.

A) LIQUIDITY RATIOS

Liquidity refers to the ability of a firm to meet its current obligations as and when thes

become due. The short-term obligations are met by realizing amounts from current, floating

circulating assts. The current assets should either be liquid or near about liquidity. The

should be convertible in cash for paying obligations of short-term nature. The sufficiency oinsufficiency of current assets should be assessed by comparing them with short-ter

liabilities. If current assets can pay off the current liabilities then the liquidity position

satisfactory. On the other hand, if the current liabilities cannot be met out of the current asse

then the liquidity position is bad. To measure the liquidity of a firm, the following ratios ca

be calculated:

1. CURRENT RATIO

2. QUICK RATIO


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3. ABSOLUTE LIQUID RATIO

1. CURRENT RATIO

Current Ratio, also known as working capital ratio is a measure of general liquidity and i

most widely used to make the analysis of short-term financial position or liquidity of a firm.

is defined as the relation between current assets and current liabilities. Thus,

CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITES

The two components of this ratio are:

1) CURRENT ASSETS

2) CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables, sundry debtors, inventori

and work-in-progresses. Current liabilities include outstanding expenses, bill payabl

dividend payable etc.

A relatively high current ratio is an indication that the firm is liquid and has the ability to pa

its current obligations in time. On the hand a low current ratio represents that the liquidit

position of the firm is not good and the firm shall not be able to pay its current liabilities time. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the curren

liabilities is considered to be satisfactory.

CALCULATION OF CURRENT RATIO

(Rupees in crore)

e.g.

Year 2006 2007 2008

Current Assets 81.29 83.12 13,6.57

Current Liabilities 27.42 20.58 33.48

Current Ratio 2.96:1 4.03:1 4.08:1

Interpretation:-


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As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of th

company for last three years it has increased from 2006 to 2008. The current ratio of compan

is more than the ideal ratio. This depicts that companys liquidity position is sound. Its curre

assets are more than its current liabilities.

2. QUICK RATIO

Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be defineas the relationship between quick/liquid assets and current or liquid liabilities. An asset is sai

to be liquid if it can be converted into cash with a short period without loss of value.

measures the firms capacity to pay off current obligations immediately.

QUICK RATIO = QUICK ASSETS

CURRENT LIABILITES

Where Quick Assets are:

1) Marketable Securities

2) Cash in hand and Cash at bank.

3) Debtors.

A high ratio is an indication that the firm is liquid and has the ability to meet its curren

liabilities in time and on the other hand a low quick ratio represents that the firms liquidit

position is not good.

As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quic

assets are equal to the current liabilities then the concern may be able to meet its short-term

obligations. However, a firm having high quick ratio may not have a satisfactory liquidit

position if it has slow paying debtors. On the other hand, a firm having a low liquidity positio

if it has fast moving inventories.

CALCULATION OF QUICK RATIO

e.g. (Rupees in Crore)

Year 2006 2007 2008

Quick Assets 44.14 47.43 61.55


Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1

Interpretation :


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A quick ratio is an indication that the firm is liquid and has the ability to meet its curre

liabilities in time. The ideal quick ratio is 1:1. Companys quick ratio is more than ideal rati

This shows company has no liquidity problem.

3. ABSOLUTE LIQUID RATIO

Although receivables, debtors and bills receivable are generally more liquid than inventorie

yet there may be doubts regarding their realization into cash immediately or in time. Sabsolute liquid ratio should be calculated together with current ratio and acid test ratio so as t

exclude even receivables from the current assets and find out the absolute liquid asset

Absolute Liquid Assets includes :

ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS

CURRENT LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

e.g. (Rupees in Crore)

Year 2006 2007 2008

Absolute Liquid Assets 4.69 1.79 5.06


Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1

Interpretation :

These ratio shows that company carries a small amount of cash. But there is nothing to b

worried about the lack of cash because company has reserve, borrowing power & long term

investment. In India, firms have credit limits sanctioned from banks and can easily draw cash

B) CURRENT ASSETS MOVEMENT RATIOS

Funds are invested in various assets in business to make sales and earn profits. Th

efficiency with which assets are managed directly affects the volume of sales. The better thmanagement of assets, large is the amount of sales and profits. Current assets movement ratio

measure the efficiency with which a firm manages its resources. These ratios are calle

turnover ratios because they indicate the speed with which assets are converted or turned ov

into sales. Depending upon the purpose, a number of turnover ratios can be calculated. Thes

are :

1. Inventory Turnover Ratio

2. Debtors Turnover Ratio


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3. Creditors Turnover Ratio

4. Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if current assets include high amount o

debtors due to slow credit collections and moreover if the assets include high amount of slo

moving inventories. As both the ratios ignore the movement of current assets, it is important t

calculate the turnover ratio.

1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO :

Every firm has to maintain a certain amount of inventory of finished goods so as to me

the requirements of the business. But the level of inventory should neither be too high n

too low. Because it is harmful to hold more inventory as some amount of capital

blocked in it and some cost is involved in it. It will therefore be advisable to dispose th

inventory as soon as possible.

INVENTORY TURNOVER RATIO = COST OF GOOD SOLD

AVERAGE INVENTORY

Inventory turnover ratio measures the speed with which the stock is converted into sale

Usually a high inventory ratio indicates an efficient management of inventory becaus

more frequently the stocks are sold ; the lesser amount of money is required to financ

the inventory. Where as low inventory turnover ratio indicates the inefficie

management of inventory. A low inventory turnover implies over investment

inventories, dull business, poor quality of goods, stock accumulations and slow movin

goods and low profits as compared to total investment.

AVERAGE STOCK = OPENING STOCK + CLOSING STOCK

2

(Rupees in Crore)

Year 2006 2007 2008

Cost of Goods sold 110.6 103.2 96.8

Average Stock 73.59 36.42 55.35

Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times

Interpretation :

These ratio shows how rapidly the inventory is turning into receivable through sales. I

2007 the company has high inventory turnover ratio but in 2008 it has reduced to 1.75 time


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This shows that the companys inventory management technique is less efficient as compar

to last year.

2. INVENTORY CONVERSION PERIOD:

INVENTORY CONVERSION PERIOD = 365 (net working days)

INVENTORY TURNOVER RATIO

e.g.

Year 2006 2007 2008

Days 365 365 365

Inventory Turnover Ratio 1.5 2.8 1.8

Inventory Conversion Period 243 days 130 days 202 days

Interpretation :

Inventory conversion period shows that how many days inventories takes to convert fro

raw material to finished goods. In the company inventory conversion period is decreasin

This shows the efficiency of management to convert the inventory into cash.

3. DEBTORS TURNOVER RATIO :

A concern may sell its goods on cash as well as on credit to increase its sales and a liber

credit policy may result in tying up substantial funds of a firm in the form of trade debtor

Trade debtors are expected to be converted into cash within a short period and are included i

current assets. So liquidity position of a concern also depends upon the quality of trad

debtors. Two types of ratio can be calculated to evaluate the quality of debtors.

a) Debtors Turnover Ratio

b) Average Collection Period

DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)

AVERAGE DEBTORS

Debtors velocity indicates the number of times the debtors are turned over during a yea

Generally higher the value of debtors turnover ratio the more efficient is the management o

debtors/sales or more liquid are the debtors. Whereas a low debtors turnover ratio indicate

poor management of debtors/sales and less liquid debtors. This ratio should be compared wi

ratios of other firms doing the same business and a trend may be found to make a bett

interpretation of the ratio.


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AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR

2

e.g.

Year 2006 2007 2008

Sales 166.0 151.5 169.5

Average Debtors 17.33 18.19 22.50

Debtor Turnover Ratio 9.6 times 8.3 times 7.5 times

Interpretation :

This ratio indicates the speed with which debtors are being converted or turnover in

sales. The higher the values or turnover into sales. The higher the values of debtors turnove

the more efficient is the management of credit. But in the company the debtor turnover ratio

decreasing year to year. This shows that company is not utilizing its debtors efficiency. No

their credit policy become liberal as compare to previous year.

4. AVERAGE COLLECTION PERIOD :

Average Collection Period = No. of Working Days

Debtors Turnover Ratio

The average collection period ratio represents the average number of days for which

firm has to wait before its receivables are converted into cash. It measures the quality o

debtors. Generally, shorter the average collection period the better is the quality of debtors as

short collection period implies quick payment by debtors and vice-versa.

Average Collection Period = 365 (Net Working Days)

Debtors Turnover Ratio

Year 2006 2007 2008

Days 365 365 365

Debtor Turnover Ratio 9.6 8.3 7.5

Average Collection Period 38 days 44 days 49 days

Interpretation :


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The average collection period measures the quality of debtors and it helps

analyzing the efficiency of collection efforts. It also helps to analysis the credit policy adopte

by company. In the firm average collection period increasing year to year. It shows that th

firm has Liberal Credit policy. These changes in policy are due to competitors credit policy.

5. WORKING CAPITAL TURNOVER RATIO :

Working capital turnover ratio indicates the velocity of utilization of net workincapital. This ratio indicates the number of times the working capital is turned over in th

course of the year. This ratio measures the efficiency with which the working capital

used by the firm. A higher ratio indicates efficient utilization of working capital and

low ratio indicates otherwise. But a very high working capital turnover is not a goo

situation for any firm.

Working Capital Turnover Ratio = Cost of Sales

Net Working Capital

Working Capital Turnover = Sales

Networking Capital

e.g.

Year 2006 2007 2008

Sales 166.0 151.5 169.5

Networking Capital 53.87 62.52 103.09

Working Capital Turnover 3.08 2.4 1.64

Interpretation :

This ratio indicates low much net working capital requires for sales. In 2008, th

reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the company requires 6

paisa as working capital. Thus this ratio is helpful to forecast the working capital requireme

on the basis of sale.

INVENTORIES

(Rs. in Crore


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Year 2005-2006 2006-2007 2007-2008

Inventories 37.15 35.69 75.01

Interpretation :

Inventories is a major part of current assets. If any company wants to manage its workin

capital efficiency, it has to manage its inventories efficiently. The graph shows that inventor

in 2005-2006 is 45%, in 2006-2007 is 43% and in 2007-2008 is 54% of their current assetThe company should try to reduce the inventory upto 10% or 20% of current assets.

CASH BNAK BALANCE :

(Rs. in Crore

Year 2005-2006 2006-2007 2007-2008

Cash Bank Balance 4.69 1.79 5.05

Interpretation :

Cash is basic input or component of working capital. Cash is needed to keep the busines

running on a continuous basis. So the organization should have sufficient cash to meet variou

requirements. The above graph is indicate that in 2006 the cash is 4.69 crores but in 2007

has decrease to 1.79. The result of that it disturb the firms manufacturing operations. In 200

it is increased upto approx. 5.1% cash balance. So in 2008, the company has no problem fo

meeting its requirement as compare to 2007.

DEBTORS :

(Rs. in Crore

Year 2005-2006 2006-2007 2007-2008

Debtors 17.33 19.05 25.94

Interpretation :

Debtors constitute a substantial portion of total current assets. In India it constitute on

third of current assets. The above graph is depict that there is increase in debtors. It represen

an extension of credit to customers. The reason for increasing credit is competition an

company liberal credit policy.

CURRENT ASSETS :


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(Rs. in Crore

Year 2005-2006 2006-2007 2007-2008

Current Assets 81.29 83.15 136.57

Interpretation :

This graph shows that there is 64% increase in current assets in 2008. This increase arise because there is approx. 50% increase in inventories. Increase in current assets shows th

liquidity soundness of company.

CURRENT LIABILITY :

(Rs. in Crore

Year 2005-2006 2006-2007 2007-2008

Current Liability 27.42 20.58 33.48

Interpretation :

Current liabilities shows company short term debts pay to outsiders. In 2008 the curre

liabilities of the company increased. But still increase in current assets are more than i

current liabilities.

NET WOKRING CAPITAL :

(Rs. in Crore

Year 2005-2006 2006-2007 2007-2008

Net Working Capital 53.87 62.53 103.09

Interpretation :

Working capital is required to finance day to day operations of a firm. There should be a

optimum level of working capital. It should not be too less or not too excess. In the compan

there is increase in working capital. The increase in working capital arises because th

company has expanded its business.

RESEARCH METHODOLOGY


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The methodology, I have adopted for my study is the various tools, which basically analyze criticall

financial position of to the organization:

I. COMMON-SIZE P/L A/CII. COMMON-SIZE BALANCE SHEET

III. COMPARTIVE P/L A/C

IV. COMPARTIVE BALANCE SHEET

V. TREND ANALYSIS

VI. RATIO ANALYSIS

The above parameters are used for critical analysis of financial position. With the evaluation of eachcomponent, the financial position from different angles is tried to be presented in well and systematic

manner. By critical analysis with the help of different tools, it becomes clear how the financial

manager handles the finance matters in profitable manner in the critical challenging atmosphere, the

recommendation are made which would suggest the organization in formulation of a healthy and

strong position financially with proper management system.

I sincerely hope, through the evaluation of various percentage, ratios and comparative analysis,

the organization would be able to conquer its in efficiencies and makes the desired changes.

ANALYSIS OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:

Financial statement is a collection of data organized according to logical and consistent accounting

procedure to convey an under-standing of some financial aspects of a business firm. It may show

position at a moment in time, as in the case of balance sheet or may reveal a series of activities over a

given period of time, as in the case of an income statement. Thus, the term financial statements

generally refers to the two statements

(1) The position statement or Balance sheet.

(2) The income statement or the profit and loss Account.

OBJECTIVES OF FINANCIAL STATEMENTS:

According to accounting Principal Board of America (APB) states


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The following objectives of financial statements: -

1. To provide reliable financial information about economic resources and obligation of a business

firm.

2. To provide other needed information about charges in such economic resources and obligation.

3. To provide reliable information about change in net resources (recourses less obligations) missing

out of business activities.

4. To provide financial information that assets in estimating the learning potential of the business.

LIMITATIONS OF FINANCIAL STATEMENTS:

Though financial statements are relevant and useful for a concern, still they do not present a final

picture a final picture of a concern. The utility of these statements is dependent upon a number of

factors. The analysis and interpretation of these statements must be done carefully otherwise

misleading conclusion may be drawn.

Financial statements suffer from the following limitations: -

1. Financial statements do not given a final picture of the concern. The data given in these statements

is only approximate. The actual value can only be determined when the business is sold or liquidated.

2. Financial statements have been prepared for different accounting periods, generally one year, durin

the life of a concern. The costs and incomes are apportioned to different periods with a view to

determine profits etc. The allocation of expenses and income depends upon the personal judgment of

the accountant. The existence of contingent assets and liabilities also make the statements imprecise.

So financial statement are at the most interim reports rather than the final picture of the firm.

3. The financial statements are expressed in monetary value, so they appear to give final and accurate

position. The value of fixed assets in the balance sheet neither represent the value for which fixed

assets can be sold nor the amount which will be required to replace these assets. The balance sheet is

prepared on the presumption of a going concern. The concern is expected to continue in future. So

fixed assets are shown at cost less accumulated deprecation. Moreover, there are certain assets in the

balance sheet which will realize nothing at the time of liquidation but they are shown in the balance

sheets.

4. The financial statements are prepared on the basis of historical costs Or original costs. The value of

assets decreases with the passage of time current price changes are not taken into account. Thestatement are not prepared with the keeping in view the economic conditions. the balance sheet loses

the significance of being an index of current economics realities. Similarly, the profitability shown by

the income statements may be represent the earning capacity of the concern.

5. There are certain factors which have a bearing on the financial position and operating result of the

business but they do not become a part of these statements because they cannot be measured in

monetary terms. The basic limitation of the traditional financial statements comprising the balance

sheet, profit & loss A/c is that they do not give all the information regarding the financial operation o

the firm. Nevertheless, they provide some extremely useful information to the extent the balance shee


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mirrors the financial position on a particular data in lines of the structure of assets, liabilities etc. and

the profit & loss A/c shows the result of operation during a certain period in terms revenue obtained

and cost incurred during the year. Thus, the financial position and operation of the firm.

FINANCIAL STATEMENT ANALYSIS

It is the process of identifying the financial strength and weakness of a firm from the available accounting data andfinancial statements. The analysis is done

CALCULATIONS OF RATIOS

Ratios are relationship expressed in mathematical terms between figures, which are connected with

each other in some manner.

CLASSIFICATION OF RATIOS

Ratios can be classified in to different categories depending upon the basis of classification

The traditional classification has been on the basis of the financial statement to which th

determination of ratios belongs.

These are:-

Profit & Loss account ratios

Balance Sheet ratios

Composite ratios

Project Description :

Title : Project Report on Working Capital Management

Pages : 73

Description : Project Report on Working Capital Management, Working capital analysis, Working

Capital Management - Meaning & Concept, working capital Classification, Importance, Advantages

and Disadvantages of Working Capital, Factors determining the working capital requirements & Ratio

Analysis

Category : Project Report for MBA


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We made this project of various companies like Reliance Industries, Grasim Industries, Dabur India

Ltd. etc., its cost is Rs. 2499/- only without Synopsis and Rs. 2999/- only with synopsis. If you need

this project, mail us at this id : [email protected] or phone/sms at +91-9813045915

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