Work Flow Model

Flow chart for Deposits

Customer Inquiry

New

Existing

Officer/Manager explains rules of business/Bank requirements and compliance to KYC guidelines.

Reject

Request for fund transfer from SB A/c to Deposit A/c Acceptance by manager and authorize to open

Clerk opens the A/c /completes the formalities

Officer/Manager Verify/ Authorize

Passbook updating/ Issue of deposit receipt

21

Flow chart for Advances

Customer Inquiry

New

Existing

Compliance with KYC guidelines.

Acceptance

Manager/Branch in charge discussion a. Availability scheme resources b. Explain Bank requirements c. Accept application and details d. Process the application e. Sanction f. Pass on to the appropriate account Not viable

Reject

Clerk opens the account/ Documentation/ Disbursement

22

Future growth and Prospectus

The coming years are likely to be of strong but uneven global growth. As financial markets continue to normalize and households and firms reduce their indebt ness, growth is projected to gradually strengthen the emerging and developed economies. The IMF projected global growth at 4.5% for 2012. Emerging economies will continue to lead global growth. However, uncertainties in the form of higher oil and non-oil commodity prices and public debt pose risk to global growth. Indian economy is expected to continue its broad based growth momentum in FY12 backed by strong investment and consumption demand. Domestic demand will continue to hold the key to GDP growth. Inflation is under control after a long period. A strong saving and investment and consumption rates, favorable capital market conditions, capital flows and positive business outlook will also help the economy to maintain its growth momentum. Services sector will be a major contributor in the positive domestic outlook and banking sector will continue to be among the performing sectors in FY12. Efforts to bring in more inclusive growth and focus on the rural economy would propel the growth engine of the economy further.

23

McKinsey's 7s Framework
The McKinsey 7S framework is developed in the early 1980s by Tom Peters and Robert Waterman, two consultants working at the McKinsey & Company consulting firm, the basic premise of the model is that there are seven internal aspects of an organization that need to be aligned if it is to be successful. The 7S model can be used in a wide variety of situations where an alignment perspective is useful. The McKinsey 7S model involves seven interdependent factors which are categorized as either "hard" or "soft" elements: "Hard" elements are easier to define or identify and management can directly influence them: These are strategy statements; organization charts and reporting lines; and formal processes and IT systems. "Soft" elements, on the other hand, can be more difficult to describe, and are less tangible and more influenced by culture. However, these soft elements are as important as the hard elements if the organization is going to be successful.

24

Strategy: The key elements for the Bank's business strategy are;

To focus on quality growth opportunities by maintaining and enhancing the strengths in services

Use technology for competitive advantage and customer centric progressive bank

Branch expansion to provide services to a larger customer segment during 2010-11 210 branches were added. On January 2012, there were 3432 branches of the Bank.

To become one stop financial supermarket, the Bank has forayed into newer areas of banking products and services to meet the increasing needs of the customers.

Systems: The Bank has taken various proactive technology initiatives to maintain its competitive edge in Indian banking industry. Canara Bank has chosen Flex cube from Oracle Financial Services as the software application. Now all branches of Canara Bank are live on core banking application Flex cube. Flex cube is a universal banking solution for retail, corporate, internet and investment banking, from front to back office work. Flex cube also has the ability to support multi-bank, multi-currency, and multi-channel operations, using a widely recognized data model that will keep abreast of market dynamics. Canara Bank has a strong pan India presence with 2623 ATMs

25

Style: In Canara Bank, the decisions are taken by the top management concerning matters related to the organization. The decisions relating to department matters are taken by the departmental heads. The bank follows a participative leadership style which allows the ideas, suggestions etc. for the betterment of the bank. The team members are cooperative rather than being competitive. Staff: The departments in the Bank consist of Senior Manager/Manager, Officers, Clerks and sub-staff. The HR policies of the Bank have been reinvented and refocused time and again to suit to the changing banking scenario. HR interventions like SPANDAN for bringing attitudinal change among front line staff, PRATIBHA for grooming inhouse talents in varied specialized areas and executive grooming through reputed institutes and other significant HR tools like Quality Circles, Staff meetings and Brain Storming Sessions have been implemented for effective team building and fostering collective excellence. Specialized trainings to the Senior Management level/ Top level executives are conducted based on the requirement. Canara Bank has more than 45,800 employees and business per employee and profit per employee is Rs. 12.28 crores and Rs. 9.76 Lakhs respectively. Skills: Training policies and programs are suitably designed, modified and updated on a continuous basis to upgrade the knowledge levels and skills of its Executives, Officers, and Workmen on par with the best in the industry. While several new programs are introduced in tune with the corporate goals, the existing programs are made more interactive and learner friendly. Risk management and Basel II are the focus areas of their training programs.

26

Shared Values: Canara Bank was founded on these Principles, 1. To remove Superstition and ignorance. 2. To spread education among all to sub-serve the first principle. 3. To inculcate the habit of thrift and savings. 4. To transform the financial institution not only as the financial heart of the community but the social heart as well. 5. To assist the needy. 6. To work with sense of service and dedication. 7. To develop a concern for fellow human being and sensitivity to the surroundings with a view to make changes/remove hardships and sufferings. "A good bank is not only the financial heart of the community, but also one with an obligation of helping in every possible manner to improve the economic conditions of the common people" - A. Subba Rao Pai

27

SWOT Analysis
Strengths: 1. The Bank have well experienced, well trained, most dedicated and committed staff. There are sustained and focused efforts at every level, by each employee of the Bank, to continue to build up core deposits. 2. Strong rural presence. 3. It is well equipped to meet the challenges of 21 st century, in the areas of IT, Knowledge and competition. 4. It has launched Core Centralized banking solutions where all branches are connected live. 5. The Bank has specialized branches catering to the specific clientele segment. Weaknesses: 1. The Bank does not have many overseas branches. 2. As the employees are experienced the Bank has more number of aged workforces. Opportunities: 1. Controlling NPA through cash recovery. NPA was at 1.11% (Rs. 2347 crores) for the year ended 31st March, 2011. 2. To expand overseas business. 3. Upward revision in Deposit/interest rates attracts new customers/deposits. 4. Up gradation in technological products saves time and improves business. Threats: 1. The Bank face competition from other public sector bank, private sector banks, foreign banks and other financial institutions. 2. Changing economic policies of Government will have direct impact on interest rates. 3. Globalization has allowed other industries, such as IT industry, to attract talent human resource.

28

Financial Statements
P & L A/c for the year ended 31 March 2011 (Rs. In Crores) Sl. No. Particulars 1 Interest Earned (a)+(b)+(c)+(d) (a) Interest/discount on advances/bills (b) Income on Investments (c) Interest on balances with Reserve Bank of India & Other Inter-Bank Funds (d) Others Other Income Total Income (1+2) Interest Expended Operating Expenses (I)+(ii) (I) Employees Cost (ii) Other Operating Expenses 31.03.2011 23064.02 17051.85 5788.01 223.3 0.86 2703.03 25767.05 15240.74 4419.31 2954.84 1464.47 19660.05 6107 1081.11 0 5025.89 1000 4025.89 0 4025.89 31.03.2010 18751.96 13946.43 4577.99 210.42 17.12 2857.9 21609.86 13071.43 3477.62 2193.7 1283.92 16549.05 5060.81 1239.38 0 3821.43 800 3021.43 0 3021.43

2 3 4 5

Total Expenses ((4+5) excluding Provisions & 6 Contingencies) Operating Profit before Provisions and Contingencies 7 (3-6) 8 Provisions (Other than Tax) and Contingencies 9 Exceptional items Profit (+) / Loss (-) from Ordinary Activities before tax 10 (7-8-9) 11 Tax expense Net Profit (+) / Loss (-) from Ordinary Activities after 12 tax (10-11) 13 Extraordinary items (net of tax expense) 14 Net Profit (+) / Loss (-) for the period (12-13)

29

15 16 17

Paid up Equity Share Capital (Face Value of each shareRs.10/-) Reserves excluding Revaluation Reserves Analytical Ratios (i) Percentage of shares held by Government of India (ii) Capital Adequacy Ratio (iii) Earnings per Share (EPS) (Not Annualized) a) Basic and diluted EPS before Extraordinary items (net of tax expense) for the period, for the year to date and for the previous year b) Basic and diluted EPS after Extraordinary items for the period, for the year to date and for the previous year (iv) NPA Ratios (a) Amount of Gross Non Performing Assets (b) Amount of Net Non Performing Assets (c) Percentage of Gross Non Performing Assets (d) Percentage of Net Non Performing Assets (v) Return on Assets (Annualized) Public shareholding - Number of Shares - Percentage of shareholding Promoters and promoter group shareholding - Number of shares - Percentage of shares (as a % of the total shareholding of promoter and promoter group) - Percentage of shares (as a % of the total share capital of the Company)

443 17498.46 67.72% 15.38%

410 12129.1 73.17% 13.43%

97.83 97.83 3089.21 2347.33 1.45% 1.11% 1.42%

73.69 73.69 2590.31 1799.7 1.52% 1.06% 1.30%

18

19

143000000 110000000 32.28% 26.83% NIL 300000000 300000000 100.00% 67.72% 100.00% 73.17%

30

Balance Sheet as on 31.3.2011 (`Rs. in Crores) As on 31.03.2010 410 14261.8 234651 8440.56 6977.3 264741

As on 31.03.2011 Capital and liabilities Capital Reserves and surplus Deposits Borrowings Other liabilities and provisions Total Assets Cash & balances with reserve bank of India Balances with banks and money at call And short notice Investments Advances Fixed assets Other assets TOTAL 443 19596.82 293972.65 14261.65 7804.64 336078.76

22014.79 8693.32 83699.92 212467.17 2844.41 6359.15 336078.76

15719.5 3933.75 69677 169335 2859.37 3216.92 264741

31

Segment wise results

(Rs. In crores) 31.03.2011 31.03.2010 6249.48 6700.99 12220.51 0 596.07 25767.05 869.61 2207.25 2652.26 0 5729.12 377.88 6107 1081.11 1000 4025.89 5477.69 5646.6 10041.64 0 443.93 21609.86 1346.85 1664.16 1999.24 0 5010.25 50.56 5060.81 1239.38 800 3021.43

(a) 1 2 3 4 5 (b) 1 2 3 4

(c) (d) (e) (f) (g) (h) (i) 1 2 3 4 5 (j) 1 2 3 4 5 6

Business Segment Segment Revenue Treasury Operations Retail Banking Operations Wholesale Banking Operations Other Banking Operations Unallocated Total Segment Results Treasury Operations Retail Banking Operations Wholesale Banking Operations Other Banking Operations Total Unallocated Income/Expenses Operating Profit Provisions and Contingencies Income Tax Net Profit Other Information Segment Assets Treasury Operations Retail Banking Operations Wholesale Banking Operations Other Banking Operations Unallocated Assets Total Segment Liabilities Treasury Operations Retail Banking Operations Wholesale Banking Operations Other Banking Operations Unallocated Liabilities Capital and Reserves Total

108292.57 60302.3 160148.44 0 5237.09 333980.4 47011.06 124960.75 125895.27 0 18171.86 17941.46 333980.4

87199.12 51555.25 121344.65 0 2509.39 262608.41 39833.45 123063.48 76290.47 0 10881.9 12539.11 262608.41
32

Geographical Segment Domestic Operations Revenue Assets International Operations Revenue Assets Total Revenue Assets

(Rs. In Crores) 31.03.2011 31.03.2010 25448.69 318377.28 21299.71 252609.97

318.36 15603.12

310.15 9998.44

25767.05 333980.4

21609.86 262608.41

Key Financial Ratios

31st Mar 2010 5.65 8.1 6.12 9.81 7.52 2.45 2.8 1.5 1.3 26.76 9.83 7.35 305.83 73.69 (In %) 31st March 2011 5.37 8.13 5.8 9.73 7.72 2.76 3.12 1.52 1.42 28.26 12.28 9.76 405 97.83

Cost of Funds Yield on funds Cost of Deposits Yield on Advances Yield on Investments Spread as a % to AWF Net interest margin Operating Expenses to AWF Return on average assets Return on average net worth Business per employee (Rs. In crores) Profit per employee (Rs. In Lakhs) Book value (Rs.) EPS (Rs.) AWF: Average Working Funds

33

Learning Experience
The project work was carried out at Canara Bank gave me a lot of insight into the practical working of a Bank. I could understand the various functions of an organization like, Planning, Organizing, Directing, Controlling and Staffing. I learned the various methods used to assess the working capital of firms, companies etc. and the various forms of working capital extended to organizations. I understood various services provided by the Bank apart from the basic functions of accepting deposits and lending loans and learnt about the technology used in the Bank to provide quality, secure and faster services. I also learned the workflow for accepting deposits and providing loans and various strategies, policies and systems adopted by the Bank.

34

Statement of the problem

The sufficiency of working capital assists in raising credit standing of a business because of better terms on goods bought, lesser cost of manufacturing due to the acceptance of cash discounts, favorable rates of interest etc. Working capital needs of every organization varies depending upon various parameters. For assessing the working capital limits, the Banks should analyze the business operations in detail and credit worthiness of the organizations. Based on business operations, type of industry, creditworthiness and other parameters working capital needs are assessed. For all organizations a single method cannot be applied for assessing the limits. Different methods should be used based on suitability to the organization and acceptability by the Banks.

Objectives of the study

1. To understand the various methods used to assess the maximum working capital limits of different organizations. 2. To learn the different forms of working capital extended by the Banks. 3. To identify the different modes of security acceptable by the Banks for providing working capital finance. 4. To study the importance of adequate working capital. 5. Analysis of case studies pertaining to working capital financing. 6. To identify the different factors those affect the working capital requirement.

Scope of the study

The scope of the study was related to the various methods used by Canara bank. The procedures adopted by the Bank for sanctioning the working capital have been explained with the help of different case studies. The parameters to be analyzed for sanctioning or renewing the credit limit are explained.

35

Methodology
Research Design It is a descriptive study consisting of quantitative and qualitative factors. Descriptive research, also known as statistical research, describes data and characteristics about the population or phenomenon being studied. Descriptive research answers the questions who, what, where, when, why and how. Although the data description is factual, accurate and systematic, the research cannot describe what caused a situation. Nature of Data Primary and Secondary. Sources of Data collection Primary Data was collected by interviewing with the Bank employees. Secondary Data was personally collected from the Banks internal sources, official records, annual reports, the Banks website, data released by RBI in its website and management books.

Limitations of the Study

1. Though there was interaction with the Bank employees, more data was taken from secondary sources made available by the Bank. 2. The identity of the real borrower in the case study has been concealed as per the Banks requirement for maintaining the confidentiality. 3. The conclusion and interpretations drawn are based on few cases. Anyhow, different cases would have different situation. 4. Canara Bank has 34 circle offices but study was confined to only Bangalore rural Circle Office, covering 97 branches.

36

Analysis and Interpretation

Working capital It is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working 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 managing inventories, accounts receivable and payable, and cash. Operating cycle It is the average length of time between when a company purchases items for inventory and when it receives payment for sale of the items. A long operating cycle tends to harm profitability by increasing borrowing requirements and interest expense. The Operating Cycle determines the amount of working capital that a business requires to operate on a day-to-day basis. The shorter the Operating Cycle the lower the amount of working capital required for the business and the greater opportunity for investments in other value-adding activities. The following diagram shows the operating cycle.

37

Current Assets Current asset is represents the value of all assets that can reasonably be expected to be converted into cash within one year in the normal course of business. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses, and other liquid assets that can be converted readily to cash. Current Ratio Current ratio is liquidity ratio that measures a company's ability to pay short-term obligations. Also known as "liquidity ratio", "cash asset ratio" and "cash ratio". The Current Ratio formula is:

The ratio is mainly used to give an idea of the company's ability to pay back its shortterm liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations.

38

The benchmark current ratio for borrowers whose working capital limits are assessed under MPBF & Cash Budget system is 1.33. However in respect of those parties whose working capital limits ate assessed based on Turnover method is 1.25. If the current ratio is less than the bench mark of 1.33 (MPBF/Cash budget system) or 1.25 (Turnover Method) for the concerned financial year, but not less than 1, the limits may be permitted/renewed/enhanced by the respective sanctioning authority within the delegated powers. If the current ratio is less than 1 the sanctioning authority can permit only renewal of the existing limits, based on his/her delegated powers, subject to normal appraisal norms being followed. However in respect of accounts falling under the sanctioning powers of Executive Director/Chairman and Managing Director, the same can be permitted by the respective sanctioning authority.

39

The Bank considers the following factors for assessing the working capital
1. 2. 3. 4. General nature of the business carried. Size of the business. Production cycle of the organization and the industry. Changes in technology, as the advanced technology requires less amount of working capital. 5. Business cycle, cyclical fluctuations like boom and depression affects working capital needs. 6. 7. 8. Credit policy of the organization. Growth and expansion. Operating efficiency of the organization. Dividend policy of the organization.

9.

Adequacy of Working capital

The investment in current assets should be just adequate to the needs of the firm. Both excess working capital and inadequate working capital are dangerous to the firm. Problems of Excessive working capital 1. Low returns on investment as excess funds in current assets remains idle and earn nothing. 2. There is possibility of over capitalization. A firm having excess working capital may be tempted to invest heavily on fixed assets that may not be justified by its actual sales. This results in lower rate of return. 3. It results in unnecessary accumulation of inventories. Thus chances of inventory mishandling increases. 4. Excessive working capital makes management complacent. This may lead to management inefficiency. 5. It is an indication of defective working capital policy. It indicates firms inability to utilize the available resources productively.

40

Problems of inadequacy 1. A firm is not in a position to utilize the available production facilities effectively. 2. Inadequacy stagnate growth. It becomes difficult for the firm to undertake profitable project because of non-availability of working capital. 3. It also becomes difficult to implement operational plans of the firm. 4. Operational inefficiencies come up when it is difficult to meet even day to day commitments. 5. Fixed assets are not efficiently utilized because of lack of working capital; the firm's profitability may come down. 6. It makes the firm unable to enjoy attractive credit facilities from creditors and others. 7. In due course of time the firm may lose its reputation.

Importance of adequate working capital 1. It protects the solvency of the firm. Suppliers of goods, customers, creditors and others keep their faith in such a firm that is inn a position to meet its financial obligations promptly. 2. It enables the firm to get the benefits of cash discounts as a firm having sound working capital position can meet its financial obligations promptly. 3. It enables to extend better credit terms to the customers. 4. It helps in achieving stability of the firm. 5. It enables the firm to get easy loans and advances from banks and other financial institutions because of its good credit standard. 6. A firm having adequate working capital can execute rush orders as it can easily purchase additional raw materials and employ additional labor. 7. It provides capacity to hold up inventories. A firm with adequate working capital can wait for better market opportunities by holding up inventories till the prices increase favorably. But, has to sell its products as early as possible. 8. It improves general morale of the employees and creates goodwill for the firm.

41

Mode of Security
Banks provide credit on the basis of the following modes of security. 1. Hypothecation Under this, bank provides credit against the security of movable property, usually the inventory of goods. The hypothecated goods continue to be in the possession of the borrower, but the Bank has legal right to realize the outstanding notes. 2. Pledge Goods offered are transferred to the physical position of the lender. The goods will be in the custody of the lender. However, the Bank has to take reasonable care of thee goods. In case of the nonpayment by the borrower, the Bank has the right to sell the goods. 3. Mortgage Under this, security offered is immovable property. It involves transfer of legal interest in the immovable property by an instrument called Mortgage Deed. The Mortgage Deed terminates as soon as the debt is repaid. Mortgage is taken as additional security for working capital credit. 4. Charge Whenever proposals from a corporate entity are received, the financing bank before sanctioning any credit facility is expected to inspect the Register of Charges to find out whether the proposed properties/assets to be charged to the Bank are unencumbered or not. Register for applications pending registration should also be looked into. 5. Margin money Banks do not provide 100% finance. They insist that customers should bring a portion of required finance from other sources. This amount is called as Margin Money.
42

Forms of Bank Finance

I.
Inventory Limits (Pre sales) 1. Open Cash Credit (OCC) 2. Simplified OCC for Traders and SSI 3. OCC-Cum loan scheme for traders 4. Key shut cash credit 5. Produce loan 6. Packing credit and clean packing credit 7. Overdraft

II.

Finance against receivables (Post sales) 1. Book debts 2. Bills discounting

III.

Non Fund based limits

1. Letter of credit 2. Bank guarantees 3. Advance payment guarantees 4. Co-acceptance

43

I. Inventory Limits
1. Open Cash Credit Open Cash Credit scheme (OCC) is a running credit facility to Micro, Small & Medium Sector entrepreneurs against stocks and receivables. Assessment limit depends on the working capital requirement of the unit assessed as per turnover method/MPBF System/Cash Budget System. OCC is granted against the hypothecation of Raw materials, WIP, Finished Goods and Receivables. Drawings from the account is against Drawing limit arrived based on stocks such as raw materials, work-in-process, finished goods and receivables. Whenever required, Overdraft against Book debts is also permitted against book debt of specific age arising out of genuine trade transactions with Government/Public Sector Undertakings/Joint Stock Companies/firms of repute. Prime security are Stocks, Receivables and Collateral securities are Land and building, plant and machinery plus personal guarantee is obtained whenever applicable. 2. Simplified OCC Simplified OCC is a liberalized credit facility to Small Entrepreneurs who are not in a position to maintain detailed stock books. Purpose is to provide working capital needs of Small Enterprises units. This Facility is available as Running Limit. Maximum limit available is Rs. 5 Lakhs only. Prime securities are assets created out of the credit facility and no collateral security for loans up to Rs.5 Lakhs. 3. OCC cum loan scheme for small traders This scheme is meant for tiny retail traders and small business enterprises like petty shop keepers who are not able to comply with the requirements laid down even under the SOCC scheme such as maintenance of stock books, submission

44

statements etc. The maximum amount of credit facility is Rs. 25,000 per borrower. Stock statements should be submitted once in a year as at 31st March, every year. 4. Produce loan It is an advance against pledge of stock, separate loan account is maintained for advance granted each time. 5. Key Shut Cash Credit This is an advance by way of running account advance is granted as and when goods are pledged. Whenever party wants to relates the goods he has to credit the required amount to Key Shut Cash Credit account. 6. Packing Credit Packing Credit is any loan or advance granted or any other credit provided by the Bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favor or in favor of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from the producing country or any other evidence of an order for export from that country having been placed on the exporter or some other person, unless lodgment of export orders or letter of credit with the bank has been waived. 7. Overdraft Overdraft is an extension of credit from the Bank when an account reaches zero. An overdraft allows the customers to continue withdrawing money even if the account has no funds in it. Basically the bank allows people to borrow a set amount of money.

45

II. Finance against receivables

1. Book debts A book debt is a sum of money due to a business in the ordinary course of its business. It has been described as a debt that would normally be entered in the books of the business regardless of whether or not it is in fact entered. Book debts include sums owed to a business for goods or services supplied or work carried out. 2. Bills discounting While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or

Promissory Note) before it is due and credits the value of the bill after a discount charge to the customer's account. The transaction is practically an advance against the security of the bill and the discount represents the interest on the advance from the date of purchase of the bill until it is due for payment

III. Non fund based limits

1. Letter of Credit A Letter of Credit (LC) is a written instrument issued by a Banker (Opening Bank), at the request of a buyer (Applicant) in favor of a seller (Beneficiary), undertaking to honor drafts drawn by the seller in accordance with the terms and conditions specified in the letter of credit. An inland letter is one in which is opened by a Bank at the request of its customer (Buyer) in favor of the seller in the same country. 2. Bank guarantee It is a guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it.

46

3. Advance payment guarantee Advance payment guarantees are forms of protection making it possible for buyers to recover an advance payment extended to sellers. If a seller fails to pay according the terms and conditions laid down for governing the purchases of goods/services, then this guarantee comes into play. 4. Co-acceptance The banks constituent strikes deal with his seller to sell goods on credit by drawing usance bill of exchange. The seller draws the bills, they are accepted by the buyer and then co accepted by the buyers banker. The supplier gets the proceeds immediately by discounting the co accepted bills with his banker. Any borrower irrespective of the size of the credit limits can seek this facility. It is not necessary that the borrower should enjoy cash credit facilities with the bank. However, if the borrower does not have any credit facilities, the branch should at, the time of recommending this facility, ensure that proper arrangements are made for retiring the bills. Adequate balance should be available in the current account for retiring the bills.

IV.Short term lending products

Following are the short term facilities that are permitted, selectively, to top rated borrowers, PSU, MNCs etc as per the guidelines evolved by the bank from time to time. 1. Corporate loan scheme. 2. MIBOR Linked product: Mumbai Inter-bank offered rate (MIBOR) is fluctuating in nature and indicates prevailing rates in money market. 3. Short term lending rate. 4. Bills under letter of credit.

47

Credit limits could be made available in any of the following methods as required:
1. Sole banking Under this, the entire requirements of the borrower are met by one bank only. 2. Multiple banking arrangements Borrowers can avail any credit facilities from any banks without a formal consortium arrangement. So long as the total credit limits enjoyed by a borrower from the bank is within the permissible resources of a single bank, or within the prudential exposure norms, such facilities can be extended by individual banks without a formal consortium under the Multiple Banking Arrangement. 3. Consortium Arrangement When the amount involved is very large and beyond the permissible resources of a single bank or beyond what a single bank would like to risk under ordinary circumstances on a single borrower beyond the prudential exposure norms. 4. Syndication A syndicated credit is an agreement between two or more lending institutions to provide the borrower credit facility using common loan documentation.

48

Assessment of working capital

Assessment is based on: 1. Total study of the business operations. 2. Production and processing cycle of the industry. 3. Financial and managerial capability of the borrower and the various parameters relating the unit and the industry. Norms for Working capital assessment are made depending upon the quantum of finance required, segment of the borrower, prevailing mandatory instructions by RBI and trade and industry practice prevailing.

Methods of assessment
Working capital requirements of a unit would be assessed by adopting various methods like Turnover Method, Maximum Permissible Bank Finance (MPBF) System, and Cash Budget System, depending on the type of activity.
1. 2. 3.

Turnover Method Maximum Permissible Bank Finance Cash Budget system

49

1. Turnover Method
Origin of this method is traced to the P R Nayak Committee recommendations which were reviewed by the Vaz Committee. The working capital limit is computed at 20% of the projected gross sales accepted by the bank. The Projected sales is computed based on the sales for the previous periods and demands for the products. For SSI borrowers, fund based working capital facilities are assessed up to Rs. 5 crores under Turnover Method or MPBF system at the option of the borrower. For non SSI borrowers, fund based working capital limit up to Rs. 2 crores can be assessed under this method. This system is made applicable to traders, merchants and exporters who are not having a pre determined manufacturing/trading cycle. However, even such borrowers can opt for MPBF system, if the same is more suitable for assessing the working capital needs and is advantageous to them. Under this method branches/offices shall ensure maintenance of a minimum margin on the projected annual sales turnover i.e. 25% of the estimated gross sales turnover value is provided as working capital requirement, of which 20% is provided by the bank and the balance 5% is by way of promoters contribution towards margin money. However, if the available Net Working Capital is more, the same is reckoned for assessing the extent of bank finance and lower limits can be considered. As the working capital requirements are linked to projected sales turnover, branches should satisfy themselves about the reasonableness of the projected annual turnover of the applicant. This should be done with reference to the past performance of the units, as reflected in the audited financial statements, the orders on hand, installed capacity of the units, power, availability of raw material and other inputs and infrastructural facilities. In case of new units the branches should ensure that the projections made are realistic by analyzing the installed capacity, availability of infrastructural facilities, marketability of the product and performance of similar units in the industry, background of the promoters and
50

such other factors relevant to a particular unit. In case where the actual performance of the unit exceeds the projected level accepted by the bank and the assessed working capital is found to be inadequate, the branches should reassess the working capital needs of the units and additional limits should be permitted in tune with the actual requirements of the unit.

2. Maximum Permissible Bank Finance

Assessment of working capital limits over Rs. 2 crores for Non SSI borrowers and over Rs.5 crores for SSI borrowers, but up to Rs. 25 crores is assessed based on MPBF system. For limits of over Rs. 25 crores, credit facilities may be assessed on the basis of MPBF or Cash Budget System, at the option of the borrower. The assessment of credit requirement of the party is based on the total study of the borrowers business operations via-a-via the production/processing cycle of the industry which shall represent a reasonable build up of current assets for being supported by bank finance. Based on Kannan Committee recommendations RBI has allowed freedom to the banks to decide holding levels of various components of current assets for financial support to ensure efficient functioning of the unit. 10% of tolerance level is allowed on the assessed MPBF. Classification of Current Assets and Current Liabilities: A few important classifications are given below; a. All short term/temporary investment in money market instruments like commercial papers, certificate of deposits can be considered as current assets. However, other investments like Inter Corporate Deposits (ICD), instruments in listed shares and debentures including investments in subsidiaries and associations are to be considered as noncurrent assets. b. Cash margin for non fund based limits (like Letter of Credit, Guarantees) may be treated as part of current assets for the purpose of MPBF and current ratio. However, such margin held for deferred payment guarantees should be considered as noncurrent assets.

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c. All term loan installments (FDs, Debenture, etc.) repayable within next 12 months should be considered as current liability for computation of current ratio and MPBF. d. Inter Corporate Deposits are to be treated as current liability. Tandon Committee has recommended 3 methods to arrive at the MPBF. As per the recommendations of Tandon Committee, the corporate should be discouraged from accumulating too much of stocks of current assets and should move towards very lean inventories and receivable levels. The committee even suggested the maximum levels of Raw Material, Stock-in-process and Finished Goods which a corporate operating in an industry should be allowed to accumulate. These levels were termed as inventory and receivable norms. Depending on the size of credit required, the funding of these current assets (working capital needs) of the corporate could be met by one of the following methods: First Method of Lending Banks can work out the working capital gap, i.e. total current assets less current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned funds and term borrowings. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lakhs. Second Method of Lending Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit for purchases and other current liabilities will be available to fund the buildup of current assets and the bank will provide the balance (MPBF). Consequently, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the working capital needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 Lakhs should be appraised (calculated) under this method.
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Third Method of Lending Under this method, the borrower's contribution from long term funds will be to the extent of the entire Core Current Assets, which has been defined by the Study Group as representing the absolute minimum level of raw materials, process stock, finished goods and stores which are in the pipeline to ensure continuity of production and a minimum of 25% of the balance current assets should be financed out of the long term funds plus term borrowings. (This method was not accepted for implementation and hence is of only academic interest).

3. Cash Budget System

Cash budget is an estimation of the cash inflows and outflows for a business or individual for a specific period of time. Cash budget is a detailed plan showing how cash resources will be acquired and used over some specific time period. Cash budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations and/or whether too much cash is being left in unproductive capacities. A cash budget is extremely important as it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems. This method is applied where borrowers require credit facilities of over Rs. 25 crores. MPBF system can also be applied for assessing the requirement of over Rs. 25 crores at the option of the borrowers. However, in case of specific industries/seasonal activities such as construction activity, tea and sugar, the system of assessment based on cash budget is adopted.

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Cash Flow Statement It is a summary of receipts and disbursements of cash for a particular period of time. It also explains reasons for the changes in cash position of the firm. Cash flows are cash inflows and outflows. Transactions which increase the cash position of the entity are called as inflows of cash and those which decrease the cash position as outflows of cash. Cash flow Statement traces the various sources which bring in cash such as cash from operating activities, sale of current and fixed assets, issue of share capital and debentures etc. and applications which cause outflow of cash such as loss from operations, purchase of current and fixed assets, redemption of debentures, preference shares and other long-term debt for cash. In short, a cash flow statement shows the cash receipts and disbursements during a certain period. The statement of cash flow serves a number of objectives which are as follows: Cash flow statement aims at highlighting the cash generated from operating activities. Cash flow statement helps in planning the repayment of loan schedule and replacement of fixed assets, etc. Cash is the centre of all financial decisions. It is used as the basis for the projection of future investing and financing plans of the enterprise. Cash flow statement helps to ascertain the liquid position of the firm in a better manner. Banks and financial institutions mostly prefer cash flow statement to analyze liquidity of the borrowing firm. Cash flow Statement helps in efficient and effective management of cash. The management generally looks into cash flow statements to understand the internally generated cash which is best utilized for payment of dividends. Cash Flows are inflows and outflows of cash and cash equivalents. The statement of cash flow shows three main categories of cash inflows and cash outflows, namely; operating, investing and financing activities.

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1. Operating activities are the principal revenue generating activities of the enterprise. Cash flow from operating activities is primarily derived from the principal revenue generating activities of the enterprise. A few items of cash flows from operating activities are; Cash receipt from the sale of goods and rendering services. Cash receipts from royalties, fee, Commissions and other revenue. Cash payments to suppliers for goods and services. Cash payment to employees. Cash payment or refund of Income Tax. 2. Investing activities include the acquisition and disposal of long term assets and other investments not included in cash equivalents. Investing Activities refer to transactions that affect the purchase and sale of fixed or long term assets and investments. Examples of cash flow arising from investing activities are; Cash payments to acquire fixed Assets. Cash receipts from disposal of fixed assets. Cash payments to acquire shares, or debenture investment. Cash receipts from the repayment of advances and loans made to third parties. Thus, Cash inflows from investing activities are, Cash sale of plant and machinery, land and Building, furniture, goodwill etc. Cash sale of investments made in the shares and debentures of other companies. Cash receipts from collecting the Principal amount of loans made to third parties. Cash outflow from investing activities are; Purchase of fixed assets i.e. land, Building, furniture, machinery etc. Purchase of Intangible assets i.e. goodwill, trade mark etc. Purchase of shares and debentures. Purchase of Government Bonds.
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3. Financing activities are activities that result in change in the size and composition of the owners capital (including Preference share capital in the case of a company) and borrowings of the enterprise. The third section of the cash flow statement reports the cash paid and received from activities with non-current or long term liabilities and shareholders Capital. Examples of cash flow arising from financing activities are; Cash proceeds from issue of shares or other similar instruments. Cash proceeds from issue of debentures, loans, notes, bonds, and other shortterm borrowings. Cash repayment of amount borrowed. Cash Inflows from financing activities are; Issue of Equity and preference share capital for cash only. Issue of Debentures, Bonds and long-term note for cash only Cash outflows from financing activities are; Payment of dividends to shareholders. Redemption or repayment of loans i.e. debentures and bonds. Redemption of preference share capital. Buy back of equity shares.

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Format for Cash flow Statement for the year ended ................ (i) Cash flow from operating activities A. Operating cash receipts B. Less: Operating cash payment C. Cash generated from operation (A - B) D. Less: Income tax paid (Net of tax refund received) E. Cash flow before extraordinary items F. Adjusted extraordinary items (+/-)/Receipt/payment G. Net cash flow from (or used in) operating activities (ii) Cash flow from investing activities (iii) Cash flow from financing activities (iv) Net increase/decrease in cash and cash equivalents (i + ii + iii) (v) Add: cash and cash equivalent in the beginning of the year (vi) Less: cash under cash equivalent in the end of the year xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx XXX

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The following are to be clarified while fixing the limits based on the cash budget. 1. The cash budget is realistic and based on the operations in the business/similar business. 2. The cash budget statement tallies with the underlying financial statements viz. Balance Sheet and Profit and Loss A/c. 3. Outstanding bank borrowing figured in the projected Balance Sheet tallies with the deficit as shown in the cash budget statement. 4. The closing balance of debtors is correctly arrived at summing up balance of debtors + Credit sales-Realization of Debtors). 5. The expenses as indicated in the cash budget tallies with the expenses as reflected in the projected Profit and Loss A/c. The assessment of working capital limits is done based on the projected cash flow statement, profitability statement and projected Balance Sheet. Wherever there is no deficit in operating cycle and net deficit is only due to investing/financing cycles, such deficit is not financed. Branches should obtain the required details at least one month before the commencement of the year for which the assessment is to be made. (Opening

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Case Study I
Application for sanction of working capital limit: Rs. 15 Lakhs (Renewal). Nature of limit: OCC. Margin: 40% on consumables & 40% on debtors. Security: Plant and Machinery, and Hypothecation of Stocks & Receivables. The unit is engaged in anodizing aluminium panel. It gets orders on contract basis. The company gets orders from different customers and do the anodizing process and deliver it to the party. Anodizing is a process of coating on aluminium panels. Working capital requirement of the unit is mainly to meet their expenses for consumables and against amount locked up as debtors. Findings while the Unit visit: Operating cycle in relation to unit, The trade activity starts from picking material on behalf of customers, anodizing (executing work order) and delivering it to the customers. Consumables are held for 3 months. The unit allows 45 days to 60 days credit to the customers. The duration of the operating cycle differs from one order to another; normally it takes 4 days to 5 days. The Unit use some of the materials like Sulphuric acid and Nitric acid which has to be purchased 2-3 days before order execution. The unit avails 90 days credit from creditors. Working capital limit is assessed on Turnover Method. The Unit has opted for it as it befits them. The Units main activity is anodizing. The holding level of inventory is less. The unit is satisfied with the Banks finance.

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Balance Sheet of AB Coaters (P) Ltd. As on 31/3/2011 Particulars Sources of funds Shareholders fund Share capital Share application money Reserves and surplus Loan Fund Secured loan Unsecured loan 31/3/2010 Previous 31/3/2011 Current 31/3/2012 Projected

2000000.00 1000000.00 8822615.95 2745154.70 Total 14567770.65

2000000.00 1000000.00 1650507.34 7074990.55 2670154.70 14395652.59

2000000.00 1000000.00 3600000.00 5200000.00 2670000.00 14470000.00 9900000.00 3000.00

Application of funds Fixed assets Investments Current assets, loans and advances Cash in hand Cash at bank Deposit Loans and Advances Sundry debtors Closing stock Total (A)

11787742.41 10367101.64 3000.00 3000.00

91468.00 442139.00 324948.00 1885443.09 410636.00 3154634.09

86744.50 319557.22 1645207.05 631560.00 2555900.08 535319.55 5774288.40

50000.50 200000.00 1935000.00 600000.00 2847000.00 600000.00 6232000.00

Sundry creditors, Current liabilities & Provisions Sundry creditors 171475.80 Current liabilities & Provisions 722962.79 Total (B) 894438.59 Net Current Assets (A-B) 2260195.50 Deferred tax asset 62323.00 miscellaneous expenditure 454509.74 Total 14567770.65

419428.20 1425994.25 1845422.45 3928865.95 71497.00 25188.00 14395652.59

300000.00 1500000.00 1800000.00 4432000.00 95000.00 40000.00 14470000.00

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P & L A/c for the year ended 31/3/2011 Particulars 31/3/2010 Previous 31/3/2011 Current 16634391.12 170695.05 16805086.17 3148534.92 2693671.50 3171393.00 3279837.10 12293436.50 4511649.64 971063.00 1707122.77 12594.00 1820869.88 346741.00 9174.00 47903.00 1435399.88 -416727.74 1018672.14 31/3/2012 Projected 20000000.00 200000.00 20200000.00 4000000.00 3200000.00 3800000.00 3934000.00 14934000.00 5266000.00 900000.00 1468000.00 50000.00 2848000.00 800000.00 2000.00 50000.00 2000000.00 2000000.00

Income 1. Anodizing & Other charges 10015421.32 2. Other income 160777.30 Total (A) 10176198.62 Expenditure 3. Consumables utilized 2008789.94 4. Processing costs 2283319.02 5. Employee costs 2046327.00 6. Operation & Other expenses 2244786.20 Total (B) 8583222.16 PBIDT (A-B) 1592976.46 7. Interest & Finance charges 978751.95 8. Depreciation 1137985.85 9. Preliminary expenses written off 12594.00 PBT -536355.32 10. Provision for Taxes Current tax Differed tax Asset 223573.00 Fringe benefits Tax 37923.99 11. Net Profit/(Loss) -350706.31 12. Balance b/f -66021.43 13. Balance carried to Balance Sheet -416727.74

Key Information Particulars Current ratio Gross profit: Sales Net profit: Sales Net sales (Rs. In Lakhs) PBDIT (Rs. In Lakhs) PBT (Rs. In Lakhs) PAT (Rs. In Lakhs) NWC (Rs. In Lakhs) Net worth (Rs. In Lakhs) 2011 1.21 0.27 0.08 165.59 45.11 18.2 14.35 8.98 36.26 2010 0.61 0.16 100.15 15.93 -5.36 -3.51 -14.22 15.45

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Interpretations: There is an increase in the current ratio from .61 in 2010 to 1.21 in 2011. Though the ratio is below the benchmark of 1.25, it is satisfactory. Net worth of the company has increased by Rs. 20.18 Lakhs for the year ended 2011 due to the retention of earnings in the system. Net working capital increased from Rs. -14.22 Lakhs to Rs. 8.96 Lakhs for the year 2011. Electricity and staff salary are the main expenses of the Unit.

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Assessment of working capital Based on Turnover Method (Rs. In Lakhs) Amount 200.00 50.00

Particulars Accepted projected annual gross sales 25% of the above Less: Minimum margin by the party 5% of projected sales or NWC of previous year (Whichever is higher) Bank finance

Amount

10.00 8.98

10.00 40.00

Calculation of NWC Calculation of NWC Particulars Current assets Debtors(less than 6 months) Closing stock Cash and Bank Deposit Advances Deferred Tax Total (A) Current liabilities Sundry creditors current liabilities & Provisions Canara Bank OD Loan installment in 12 months Total (B) NWC (Rs. In Lakhs) 2010 2011 14.72 4.10 0.91 1.00 1.49 0.62 22.84 1.71 7.23 14.30 13.83 37.07 23.47 5.35 4.06 13.05 5.27 0.71 51.91 4.19 14.26 10.67 13.83 42.95 8.96

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Based on MPBF (Rs. In Lakhs) Current Assets Debtors Closing stock Cash Bank Deposits Total (A) Current liabilities Sundry creditors Current liabilities & Provisions Total (B) WC Gap (A-B) Less: 25% of Current assets MPBF 28.47 6 0.5 2 15.95 52.92 3 15 18 34.92 13.23 21.69

Conclusion: Under Turnover method as well as MPBF method the customer is eligible for higher working capital limits. However, the party has asked only for the renewal but not for enhancement. The Bank has financed Rs. 15 Lakhs. When compared both the methods, limit under Turnover method is more.

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Case Study II
Name: ABC Fuels Application for sanction of working capital limit: Rs. 35 Lakhs (Renewal) Nature of limit: OCC Margin: 35% on Stocks and Debtors Security: Hypothecation of Stocks & Receivables Final accounts of ABC Fuels are given below.

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Trading and P & L A/c for the year ended 31/3/2011 Particulars 1 Opening Stock 2 Purchases 12.5% VAT purchases Exempted purchases 3 Sales 12.5% VAT sales Exempted sales 4 Closing stock 5 Gross profit (3+4)-(1+2) 6 Rental income from HPCL 7 Total (5+6) 8 Operating expenses Accounting charges Audit fees Staff uniform & Welfare Books & periodicals Electricity charges General expenses Profession Tax Salaries Postages Telephone charges Bank interest & charges Insurance Rent paid to site owner 9 Net Profit (7-8) 10 Total (8+9) 2010 2011 2012 Previous Current Projected 395859.00 1916597.51 321797.00 20016102.00 263443.00 20114685.00 395859.00 436088.00 180000.00 616088.00 6000.00 10000.00 3600.00 1210.00 4960.00 3162.00 2500.00 60000.00 368.00 4610.00 125396.00 17682.00 180000.00 196600.00 616088.00 362745.00 34387149.00 374002.00 33582922.00 1916597.51 727768.51 180000.00 907768.51 12000.00 10000.00 5420.00 1560.00 8190.00 7120.00 2500.00 72000.00 410.00 6630.00 305856.51 17682.00 180000.00 278400.00 907768.51 400000.00 35000000.00 400000.00 36910574.51 849205.00 843482.00 180000.00 1023482.00 12000.00 10000.00 60000.00 1800.00 9000.00 8000.00 2500.00 90000.00 500.00 7000.00 325000.00 17682.00 180000.00 300000.00 1023482.00

Capital A/c as on 31/3/2011 Particulars Balance b/d Add: Net profit share of profit Less: Drawings TDS Bank OD interest Balance c/d 2010 1021193 196600 7200 60000 30540 150000 984453 2011 984453 278400 7400 72000 30588 300000 867665 2012 867665 300000 7500 80000 31000 350000 714165
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Balance Sheet as on 31/3/2011 Particulars Liabilities Capital A/c Secured Loan Canara Bank OD Current Liabilities Audit fees payable Total Assets Fixed assets Gold Jewellery Deposit Security deposit in HPCL Telephone deposit Current assets Stock in trade VAT refundable Moidu Tiles & Brick Ind Bharath Hardware KGF Moidu Jowar Cash & Bank Balance Total 2010 2011 2012 Previous Current Projected 984453 4200692 10000 5195145 867665 4798359 10000 5676024 714165 3500000 10000 4224165

46000 200000 2000

46000 200000 2000

46000 200000 2000 849205 6000 300000 580000 2119230 121730 4224165

395859 1916597.51 7292 5212 300000 300000 580000 580000 2119230 2119230 1544764 506984.49 5195145 5676024

Key Information Particulars Current ratio Gross profit: Sales Net profit: Sales Net sales (Rs. In Lakhs) NWC (Rs. In Lakhs) Net worth (Rs. In Lakhs) Gross profit Closing stock 2011 0.51 2.14 2.78 339.57 -23.79 8.68 7.27 19.16 2010 0.45 2.14 1.97 203.78 -22.62 9.84 4.36 3.96

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Interpretation: There is reduction in Net Worth from the year 2010 to 2011 as there is increase in drawings. Sales have increased over the previous year (66.64%). Net profit has increased. The % of net profit to gross sales has been reduced marginally due to increase in the operating expenses. One of the important aspects that should be noticed is that Bank OD interest is charged in Capital A/c instead of P & L A/c. If the Bank OD is charged in P&L A/c, it will bring down the profit. Investments in subsidies are shown under current assets, which are treated as non-current assets. Assessment of Working Capital Under Turnover Method Particulars Accepted projected annual gross sales 25% of the above Less: Minimum margin by the party 5% of projected sales or NWC of previous year (Whichever is higher) Bank finance Under MPBF (Rs. In Lakhs) Current Assets Stocks VAT refund Cash Total (A) Current Liabilities Audit fees Total (B) WC Gap (A-B) Less: 25% of CA MPBF 8.49 0.06 1.22 9.77 0.1 0.1 9.67 2.4425 7.2275 Amount (Rs. In Lakhs) Amount 373.11 93.28

18.65 23.79

23.79 69.49

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Case Study III

Name: B Poultry Farm (P) Ltd. Limit: Rs.106.06 Lakhs Nature of limit: OCC Margin: 35% Purpose: To meet the working capital requirement for purchase of feed, medicine etc.

Observations during the unit visit: Raw material required for 2 months were stored. All the sales made by the unit were cash sales and thus they did not have any debtors. Interest rate is 12.5% which is paid once in 6 months. Operating cycle in relation to the Unit Trade activity starts from procuring day to day old chicks for the purpose of producing and selling eggs. Day old chicks are fed. Birds start hatching eggs after 25th week and the life span of a bird ranges between 68 to 75 weeks. Stock of feed are purchased for cash and are held for 2 months. The birds start laying eggs from the 25th week, once then unit will be receiving the sale proceeds. The operating cycle ends when birds lose their fertility, after which they are sold.

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Balance Sheet as on 31/3/2011 Particulars Sources of fund Share holders fund a. share capital b. Advance towards share capital Loan Fund a. Secured loan Total Funds Application on funds Fixed assets Gross Block Less: Depreciation Net block Current assets & Loans & Advances Less: Current liabilities & Provisions Net Current Assets P&L A/c Dr. balance Add: Profit/Loss P&L A/c Dr. balance Total Assets 31/3/2011 31/3/2010

500000 7085000 31259488 38844488

500000 7085000 28836338 36421338

16864014 1916459 14947555 24067111 761463 23305648 2455693 1864407.81 591285.19 38844488

18721566 1857552 16864014 17636104 534473 17101631 1045184 -1410509 2455693 36421338

P&L A/c for the year ended 31/3/2011 Particulars Income Culling of birds Sale of eggs Other income Total Expenditure Cost of birds, feed Personnel Administration expenses Maintenance expenses Depreciation Total Net Profit/Loss 31/3/2011 2985235.00 50607529.00 2353789.00 55946553.00 41202874.00 3594427.00 5324030.00 2044355.00 1916459.19 54082145.19 1864407.81 31/3/2010 5398795.00 9470035.00 1903457.00 16772287.00 10396275.00 2222371.00 2458573.00 1248025.00 1857552.00 18182796.00 -1410509.00

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As poultry business comes under agriculture sector, the assessment is based on total cost of the chick and expenditure. (Rs. In Lakhs) Amount 88.32 67.13 6.74 0.98 163.17 57.1095 106.0605

Particulars Chick cost (69000 chicks @128) Stock of feed ingredients Finished feed stock Stock of medicines Total Current Assets Less: Margin 35% Working capital limit 65%

Sanctioned amount is Rs. 106.0605 Lakhs.

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Findings
1. Growth of the organization may not be projected accurately. In one of the cases analysed, the Bank had under assessed the projected sales. The sales grew at 66%. 2. Some of the parties inflate Balance Sheet to show the favourable ratios. Hence, the quality of the components of ratios is given more importance. 3. In one of the cases, bank OD interest was debited to Capital A/c to inflate the net profit which indicates that the funds have been diverted for some other purposes. 4. Working capital needs are assessed according to the industry standards. For poultry, assessment was made based on costs and other expenses.

Suggestions
1. Bank has to educate its customers especially large borrowers regarding the various products and services of the Bank. 2. Though RBI guidelines and Right to Information details are available on the Banks website, all customers will not be interested to go through them. A better means of communication to its customers is required.

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Conclusion

Canara Bank was established in 1906. Since then it has been successfully carrying out its activities. The company is known for its systematic of the business. All the departments in the organization are well equipped with the modern technology and controlled by competent persons. Most of the clerical work is done by using computers that saves time and energy. The Bank has created friendly atmosphere for the employees and gives them freedom to work freely. The Bank also gives many benefits from its various schemes and keeps the employees happy. It believes that happy work force is the foundation of a prosperous company. The Bank follows various methods for assessing the working capital needs of the companies depending on the industry standards. Analysis of financial statements is considered very important for the projections and accuracy is based on the level of understanding and interpretation of the statements. The Bank is providing working capital to all sectors of Indian Economy.

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