Project Pramod

8/8/2019 Project Pramod

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1. INTRODUCTION:

Working capital may be regarded as the lifeblood of business. A study of

working capital is of major importance to internal and external analysis because of

its close relationship with the current day to day operation of a business. Working

capital is the leading cause of that position of the assets of a business which are used

in, or related to current operations, and represented at any one time by the operation

cycle of such items as against receivables, inventories of raw materials stress, work

in progress and finished goods, merchandise, notes or bills receivables and cash.

The assets of this type are relatively temporary in nature.

2. MEANING AND DEFINATIONS OF WORKINGCAPITAL

Ordinarily, the term Working Capital stands for that part of the capital,

which is required for the financing of working or current needs of the company.

Working capital is the lifetime of every concern. Whether it is manufacturing or

non-manufacturing one without adequate working capital, there can be no progress

in the industry. Inadequate working capital means shortage of raw materials, labour

etc., resulting in partial current assets less current liabilities has no economic

meaning in the sense of implying some type of normative behavior. According to

this line of reasoning. It is largely an accounting artifact. Working capital

management, then, is a misnomer. The working capital of the firm is not managed.

The term describes a category of management decisions affection specific types of

current assets and current liabilities. In turn, those decisions should be rooted in the

overall valuation of the firm.

Definitions:

1. According to Weston and Brigham, working Capital refers to a firms

investment in short term assets cash, short term securities, accounts

receivables and inventories.


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2. According to Hoagland, Working Capital is descriptive of that capital which

is not fixed. But the more common use of the working capital is to consider

it as the difference between the book value of the current assets and the

current liabilities:.

3. According to Bonneville, Any acquisition of funds which increase the

current assets increases working capital also, for they are on and the same.

3. CONCEPT OF WORKING CAPITAL

Working Capital is often classified as Gross working capital and Net working

capital. The former refers to the total of all Current assets and the later is the

difference between total current assets and total current liabilities. These are

acceptable terms. From the management point of view, Gross Working Capital

deals with the problems of managing individual current assets. i.e., the operation of

current assets which is constant in short run analysis and decision making. But

variable and managerial in long urn operation.

4. NEED FOR WORKING CAPITAL:

The need for working capital cannot be over emphasized. Every businessneeds some amount of Working Capital arises due to the time gap between

production and realization of cash from sales. There is an operating cycle involved

in the sales and realizations of each. The working Capital is need for the following

purposes: -

1. For the purchase of raw materials, components and spares.

2. To pay wages and salaries.3. To incur day to day expenses and overhead costs, such as fuel, power

and office expenses etc.

4. To meet the selling costs as packing, advertisement and distribution.

5. To provide credit facilities to customers.


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5. COMPOSITIION OF WORKING CAPITAL:

Working capital includes mainly current assets and current liabilities .

1. CURRENT ASSETS:a. Inventories : Raw Materials

Work in progressFinished goodsStores and SparesMiscellaneous Goods

b. Receivables : Trade debtorsLoans and AdvancesOther debtors balances

c. Marketable securities : Government SecuritiesSemi Government securitiesShares, debentures, etc.

d. Cash and Bank Balance : Cash in handCash at Bank

Cash in TransitII. CURRENT LIABILITIES:a. Sundry Creditors : Interest accused on loans

Advances received from customsShort-term loans from BanksTrade dues and other liabilitiesDeposits from public, etc.,

b. Current Provisions for : TaxationDividendsBonus

Contingencies

6. KINDS OF WORKING CAPITAL:

Working capital can be studied under two heads. (a) Permanent or Fixed

Working Capital, and (b) Variable working capital.

I. Permanent or Fixed Working Capital:This is the part of the Capital, which is permanently locked up in the

circulation and in keeping it moving. The permanent or fixed working capital can

again be sub-divided into (1) Regular Working Capital (2) Reserve working capital

or cushion working capital. Regular working is the minimum is the minimum

amount of liquid capital needed to keep up the circulation of the capital form cash to

inventories to receivables and back again to cash. Reserve margin or cushion


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working capital is the excess over the need for regular working capital that should

be provided for contingencies that arise at unstated periods,

II. VARIABLE WORKING CAPITAL.

The variable working capital changes capital changes with the volume of

business. It may be sub-divided into (I) Seasonal and (II) Special Working Capital.The capital required to meet the seasonal needs of industry is termed as seasonal

working capital is that part of the Variable working capital which is required for

financing special operations such as the inauguration of extensive marketing

campaigns, experiments with the methods of distribution, production etc.,

7. DETERMINANTS OF WORKING CAPITAL:

A company, as a general policy, wants to hold in balance as small a quantity

of working capital as possible so long as under solvency risks are not imposed on it.

This is a logical approach indication that working capital is a means to an end and

not an end itself. Qualitative amounts of working capital can hardly be used for

individual firms. As appraisal of these would provide guidance to management in

estimating prospective needs. A large number of factors influence the working

capital needs of the firms.

Working Capital is constantly affected by the crisscrossing economic

currents flowing about the business. The nature of firms activities, the economic

health of country, the availability of materials, the case or tightness of the money

market are all part of these shifting forces. It is difficult to rank them because the

influence of individual factors rises and declines over a period as the corporate

internal policies and the environment in which it operates change. However, thefollowing factors are pertinent for having an overall view of the forces affecting

capital needs.

FACTORS DETERMINING WORKING CAPITAL:

1. Nature and Size of Business

2. Manufacturing cycle


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3. Business Fluctuation

4. Production Policy

5. Firms credit policy

6. Availability of credit

7. Growth and expansion activities

8. Profit margin and profit appropriation

9. Price level changes

10. Operating of efficiency

11. Demand of creditors

12. Cash requirements

13. Time

14. Volume of sales

15. Terms of Purchases and sales

16. Inventory turnover

17. Inflation

18. Seasonal Fluctuations

19. Repayment ability

20. Activities of firm

III. SOURCES OF WORKING CAPITAL

For the convenience of study the sources of working capital may be classified

under the following two heads :

I. Sources of regular working capital:

1. Issues of shares

2. Issue of debentures

3. Retained profits

II. Sources of Variable or seasonal working capital:

1. Indigenous Bankers

2. Commercial banks


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3. Public Deposits

4. Ploughing back of Company profits

5. Other finance corporations.

I. OPERATING OR WORKING CAPITAL CYCLE:

The operating or working capital cycle is the length of time between

companies paying for materials entering into stock and receiving the inflow of cash

from sales. Operating cycle measures the time gap between investment of cash and

its realization out of sales revenue. The determinants of operating cycle is helpful

for control purposes with view to improving previous working capital ratios. This

analysis emphasiss the total time lag within the operating cycle by indicating the

relative significance of its constituent parts for reducing working capital tie-up by

action appropriate to each element. It provides a series of days equivalents which

can be used in budgeting or forecasting for translating sales and cost budgets into

budgets of working capital is mainly useful to ascertain the requirement of cash

working capital is mainly useful to ascertain the requirement of cash working capital

is mainly useful to ascertain the requirement of cash working capital to meet the

operating expense of a going concern. This concept is based on the continuity of the

flow of valued in a business operational those values usually flow in a going

concern center, mainly around the operational activities of a business in any period.


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OPERATING CYCLE :

Cash

Raw Materials

Work inProgress

Bills Receivablesor Debtors

Credit Sales

Finished Goods


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1. FINANCING CURRENT ASSETS:

The firm must find out the sources of funds to finance its current assets. It

can adopts different financing policies. Three types of financing are distinguished.

Long term financing, short term financing and spontaneous financing. The

important sources, retained earnings and debt from financial institutions. Short term

financing refers to those sources of short-term bank loans, commercial paper and

factoring receivables.

Spontaneous financing refers to the automatic sources of short-term funds.

The major sources of such financing are trade credit and outstanding expenses.

Spontaneous sources of finances are cost free. Therefore, a firm would like to

finance its current assets with spontaneous sources to the fullest extent. Thus, the

real choice of financing current assets is between short term and long-term sources.

We will therefore, concentrate our attention on the short term Vs long term

financing.

Matching Approach:

A firm can adopt a financial plan, which involves the matching of the

expected life of the source of funds raised to finance assets. Thus, a ten-year loanmay be raised to finance a plan with and expected life of ten years. Stock to be sol

in thirty days may be financed with a thirty-day Bank Loan and so on. The

justification for exact matching is that, since the purpose of financing is to pay for

assets, the financing should be relinquished when the asset is expected to be

relinquished. Using long term financing of short term assets is expensive as the

funds will not be utilized for the full period. Similarly, financing long term assets

with short term financing will have to be made on a continuing basis. Thus, whenthe firm follows matching approach, long-term finance should be used to realized

that exact matching is not possible because of the uncertainty about the expected

lives to the assets .


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Conservative Approach:

A firm may adopt a conservative approach in financing its current and fixed

assets. The financing policy of the firm is said to be conservative when it depends

more on long term funds for its financing needs. Under conservative plan, the firm

finances its permanent assets and a part of temporary current assets with long term

financing. Thus in periods when the firm has no temporary current assets. It stores

liquidity by investing surplus funds into marketable securities. The conservative

plan relies heavily on long term financing and therefore it is less risky.

Aggressive Approach:

A firm may be aggressive in financing its assets. An aggressive policy is said

to be followed by the firm when it used more short term financing than warranted by

the matching plan. Under aggressive policy, the firm finances a part of its

permanent current assets with short term financing some extremely aggressive firms

may even finance a part of their fixed assets with short term financing. The

relatively more use of short term financing makes the firm more risky.

K. FINANCING WORKING CAPITAL:

A New Approach:

Attention may be drawn to hedging approach to finance current assets, i.e.,

each asset would be offset with a financing instrument of the same approximate

maturity with a hedging approach. Short term of seasonal variations in current

assets less trade creditors and provisions would be financed with short termdebt. On other hand, hard core or permanent components of current assets would

be financed with long term debt or equity.

The distinction between variable and permanent components of current assets

may be difficult to make in practice but it is neither illusory not unimportant. Short

term financing for long term needs is dangerous. A profitable firm may not

borrowed on a short term basis have become tied up in permanent assets.


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The hedging approach required the nature of the assets to be financed should

be matched by the majority of the source of funds. For the purpose of analysis, the

assets can be broadly classified into two classes.

1. Those which are required in a certain amount for a given level of

operation, and hence do not vary over time.

2. Those, which fluctuate over time.

Flexibility:

If the need for funds is seasonal or cyclical, the firm may not want to commit

itself to long term debt. If a firm expects its need for funds diminish in the near

future, or if it thinks there is a good chance that such a reduction will occur, it may

choose short term debt for the flexibility it provided a costs budget is used to

analyses the flexibility aspect o the maturity structure of debt.

Cost:

The cost aspect of the maturity decision involves the term structure of interest

rates, or the relationship between the maturity of debt and the interest rate on the

debt. If interest rates are lower on short term debt than long term debt,

management will like to utilize short term funds. On the other hand, if short

term money costs more than long term debt it is advisable to make use of long term

funds .

Risk:

Use of short term debt subjects a firm to more risk than dose long term

debt the risk effect occurs for two reasons. If a firm borrows on a long term basis its

interest cost will be relatively stable over time but if it borrows on a short term

basis its interest expenses will fluctuate widely often going quite high. If a firm

borrowers heavily on a short term basis, it may find itself unable to repay its debt


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or it may be in a shaky financial position that the lender will not extend the loan.

Thus a big uncertainty is created.

TANDON COMMITTEE RECOMMENDATIONS ON THE BANKS

AND WORKING CAPITAL:

The Reserve Bank of India set up a study group to firm guidelines for follow

up of Bank credit in July, 1974, under the chairmanship of Mr. P.L Tandon, the

chairmen of Punjab National Bank. The Study group submitted its report to the

Reserve Bank of India in August 1975. the recommendations of this committee

regarding the approach of the Banks towards the assessment of the working capital

requirements of industrial units are very significant in that these will engender

greater discipline in Bank Credit to Industry. The major recommendations are

stated below: -

a) Bank finance essentially for meeting working capital needs:

Bank credit is essentially intends to finance working capital requirements

only, other requirements, some sources would be found. Even for working capital

requirements, some portion of the contribution must come from sources other than

Bank finance.

b) Working capital gap:

The committee has popularized the concept of working capital gap,

representing the excess of current assets over current liabilities, other than bank

borrowings. According to the committee, the maximum permissible bank finance

should be 75% of the working capital gap, the balance of 25% to be provided by the

borrower from equity and long term borrowings.


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c) Norms:

The borrowings requirement of any industrial unit basically depends on the

length of the working capital cycle, from building inventories of raw materials to

getting the sale proceeds. If norms inventory and current assets are laid down for

different industries, the bank can easily work out the standard working capital

required by a unit and sanction the advance accordingly, the committee has

prescribed norms of inventory and receivable for 15 key industries. The industries

covered by the report are cotton and synthetic textiles, man made fibers, jute

textiles, rubber products, fertilizers, pharmaceuticals, dyes and dyestuffs, basic

industrial chemicals, eatables and hydrogenated oil, paper, cement, engineering

ancillaries and component supplies and engineering machinery manufactures. The

study group has not suggested any norms for the heavy engineering industry

because each unit in the industry has special characteristics.

III) Three different methods of working out working capital

requirements:

The committee has proposed three progressive alternatives by which the

banks may finance and working capital requirements of their industrial borrowers.

At the first stage the current assets may be worked out as per norms and the current

liabilities (expecting bank borrowings) may be deducted there form. This amount

would represent the working capital gap, 25% of which must be financed by the

borrowers out of long term funds. The maximum permissible bank borrowing

would therefore be only 75% of the working capital requirements calculated as per

the norms laid down regarding inventories and receivables.

In the second stage the borrower will have to provide a minimum of 25% of

total current assets out of long funds (as against his providing 25% of working

capital gap from long term funds in the first alternative).

In the third and the ideal method of calculating the borrowing units, the

committees makes a distinction between core current assets and other current assets.

The borrower should finance the entire core current assets plus a minimum of 25%


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of the other current assets. The group feels that the classifications of current assets

and current liabilities should be as per the accepted approach of the Banks. The

committee recommends that a borrower must gradually move from the first stage to

the third stage.

IV. Style of Credit:

The committee also recommends a change in what is calls the style of

credit i.e., the manner in which bank finance is extended to the borrower.

The total credit limit of a borrower should be bifurcated into two components:

the minimum, level of borrowings which the borrower expects to use

throughout the year (loan) and a demand cash credit which would take of hisfluctuating requirements. Both of these limits should be reviewed annually.

Its importance stems from tax reasons :

Investment in current assets represents a substantial portion of total

investment.

Investment in current assets and the level o f current liabilities have to be

geared quickly to changes in sales. To be sure, fixed asset investment and

long term financing are also responsive to variations in sales However, it

may be mentioned here that though this concept of working capital is

commonly used, it is an accounting concept with little economic meaning. It

makes little sense to say that a firm manages its net working capital. What a

firm really does is to take decisions with respect to various current assets and

current liabilities. This relationship is not as close and direct as it is in the

case of working capital components.

The importance of working capital management is reflected in the fact that

financial managers spend a great deal of time in managing current assets and

current liabilities. Arranging short term financing, negotiating favorable

credit terms, controlling the movement of cash, administering accounts


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receivable, and monitoring the investment in inventories consume a great

deal of time of financial managers.


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Table 14.1 Constituents of Current Assets and Current

Liabilities

Part A : Current Assets

Inventories

Raw Materials and Components

Work in progress

Finished Goods

Others

Trade Debtors

Loans and Advances

Investments

Cash and Bank Balance

Part B : Current Liabilities

Sundry Creditors

Trade Advances

Borrowings

Commercial Banks

Others

Provisions


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This chapter, concerned with certain aspects and consideration relating to

overall working capital management, is divided into five sections:

Characteristics of Current Assets

Factors influencing working capital requirements

Working capital policy

Profit criterion for current assets

Operating cycle analysis

CHARACTERISTICS OF CURRENT ASSETS

In the management of working capital two characteristics of current assets

must be born in mind: (i) short life span, and (ii) swift transformation into other

asset forms.

Current assets have a short life span. Cash balances may be held idle for a

week or two, accounts receivable may have a life span of 30 to 60 days, and

inventories may be held for 30 days to 100 days. The life span of current assetsdepends upon the time required in the activities of procurement, production, sales,

and collection and degree of synchronization among them.

Each current asset is swiftly transformed into other current asset forms: cash

is used for acquiring raw materials are transformed into finished goods (this

transformation may involve several stages of work in progress); finished goods,

generally sold on credit, are converted into receivable (book debt); and finally

accounts receivable on realization, generate cash. Figure 14.1 shown the cycle of

transformation.

The short life span of working capital components and their swift

transformation from one form into another form has certain implications.

Decisions relating to working capital management are repetitive and frequent.


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The difference between profit and present value is insignificant.

The close interaction among working capital components implies that

efficient management of one component cannot be undertaken without

simultaneous consideration of other components. For example, if the firm

has a large accumulation of finished goods inventory it may have to provide

more liberal credit terms or show laxity in credit collection. Another

example: if the firm has a crunch it may have to offer generous discounts.

Finished Goods

Wages, Salaries,Factory Overheads

Cash Suppliers

Raw Materials

Work in Progress

AccountsReceivable


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Factors influencing working capital requirements

The working capital needs of firm are influenced by numerous factors the

important once are as follows:

Nature of business

Seasonality of operations

Production policy

Market conditions

Conditions of supply

Nature of Business

The working capital requirement of firm is closely related to the nature of its

business. A service firm, like an electricity undertaking or a transport corporation,

which has a short operation cycle and which sells predominantly on cash basis, has a

modest working capital requirement. On the other hand, a manufacturing concern

like a machine tolls unit, which has a long operating cycle and which sells largely

on credit, has a very substantial working capital requirement. Table 14.2 shows the

relative proportions of investment in current assets and fixed assets for certainindustries.


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Table 14.2 Proportions of Current Assets and Fixed AssetsCurrent Assets

%

10-20

20-30

30-40

40-50

50-60

60-70

70-80

80-90

Fixed Assets

%

80-90

70-80

60-70

50-60

40-50

30-40

20-30

10-20

Industries

Hotels and Restaurants

Electricity Generation and Distribution

Aluminium, Shipping

Iron and Steel, Basic Industrial Chemicals

Tea Plantation

Cotton Textiles, Sugar

Edible Oils, Tobacco

Trading, Construction

Seasonality of Operations

Firms which have marked seasonality in their operations usually have highly

fluctuating working capital requirements. To illustrate, consider a firm

manufacturing ceiling fans. The sale of ceiling fans reaches a peak during the

summer months and drops sharply during the winter period. The working capital

need of such a firm is likely to increase considerably in summer months and

decrease significantly during the winter period. The working capital need of such a

firm is likely to increase considerably in summer months and decrease significantly

during the winter period. On the other hand, a firm manufacturing a product like

lamp, which have fairly even sales round the year, tends to have stable working

capital needs .


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Production policy

A firm marked by pronounced seasonal fluctuation in its sales may pursue a

production policy, which may reduce the sharp variations in working capital

requirements. For example, a manufacturing of ceiling fans may maintain a steady

production throughout the year than intensify the production activity during the peak

business season. Such a production policy may dampen the fluctuations in working

capital requirements.

Market Conditions

The degree of competition prevailing in the market place has an important

bearing on working capital needs. When competition is keen ,a larger inventory of

finished goods is required to promptly sever customers who may not be inclined to

wait because other manufacturers are deadly to meet their needs. Further, generous

credit terms may have to be offered to attract customers in a highly competitive

market. Thus working capital needs tend to be high because to great investment in

finished goods inventory and accounts receivable.

If the market is strong and competition weak, a firm can mange with smaller inventory of finished goods because customers can be served and avoid lock-up of

funds in accounts receivable --- it can even ask for advance payment, partial or total.

Conditions of Supply

The inventory of raw materials, spares, and stores depends on the conditions

of supply. If the supply is prompt and adequate, the firm can manage with small

inventory. However, if the supply is unpredictable and scant then the firm, to ensure

continuity of production, would have to acquire stocks as and when they available

and carry larger inventory on an average. A similar policy may have to be followed

when the raw material is available only seasonally and production operations are

carried out round the year.


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WORKING CAPITAL POLICY

Two important issue in formulating the working capital policy are:

1. What should be the ratio of current assets to sales?

2. What should be the ratio of short term financing to long term

financing?

Current Assets in Relation to Sales

If the firm can forecast accurately its level and pattern to sales, inventory

procurement time, inventory usage rates, level an pattern of production, production

cycle time, split between cash sales and credit sales, collection period, and other

factors which impinge on working capital components, the investment in current

assets can be defined uniquely. When uncertainty characterized the above factors,

as it usually does, the investment in current assets cannot be specified uniquely. In

face of uncertainty, the outlay on current assets would consist of a base component

meant to meet normal requirements and a safety component meant to cope with

usual demands and requirements. The safety component depends on how

conservative or aggressive is the current asset policy of the firm. If the firm pursuesa very conservative current asset policy it would carry a high level of current assets

in relation to sales.

CurrentAssets Conservative

Moderate

Aggressive

Sales


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Fig. 14.2 Various Current Asset Policies

(This happens because the safety component is substantial) if the firm adopts

a moderate current assets policy. It would carry a moderate level of current assets in

relation to sales. Finally, if the firm follows a highly aggressive current asset policyit would carry a low level of current assets in relation to sales. The relationship

between current assets and sales under these different current assets policies is

shown in Fig 14.2

What are the likely consequences of conservative and aggressive current

asset policies? A conservative current asset policy trends to reduce risk. The

surplus current assets under this policy enable the firm to cope rather early with


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variations in sales, production plans, and procurement time. Further the higher

liquidity associated with this policy diminishes the changed of technical insolvency.

The reduction of risk, however, is also accompanied by lower expected profitability.

An aggressive current asset policy seeking to minimize the investment in

current assets exposed the firm to greater risk. The firm may be unable to cope with

unanticipated changes in the market place and operating conditions. Further the

risk.

Table 14.3 Effects of Conservative and Aggressive Current Asset PoliciesConservative policy Aggressive PolicySales 10,00,000 10,00,000EBIT 2,00,000 2,00,000Current Asses 6,00,000 4,00,000Fixed Assets 5,00,000 5,00,000Total Assets 11,00,000 9,00,000Profitability 18.2% 22.2%

Of technical insolvency becomes greater. The compensating for higher risk,

of course, is higher expected profitability because of the lower investment in current

assets associated with it.


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Ratio of Short term Financing to Long term Financing

Current assets of a firm are supported by spontaneous current liabilities

(Trade creditors and provision) short term bank financing, and long term

sources of fiannce (debentures and equity, in the main). Assuming that the level of

spontaneous current liabilities is determined by extraneous factors (trade proactive,

income-tax payment schedule etc.,) the relevant question in current assets financing

is: what should be the relative proportions of short term bank financing, on the one

hand, and long term sources of finance on the other? The two broad policy

alternatives, in this respect are:

(1) a conservative current asset financing policy, and (ii) an aggressive current asset

financing policy.

An aggressive current asset financing policy, relaying more on short term

bank financing tends to have the opposite effects. It exposes the firm to a higher

degree of risk, but reduces the average cost of financing.

Conservative Aggressive

ModerateOverall

Working

Capital policy

AggressiveOverall

Working

Capital policyConservative

Overall

Working

Capital policy

Moderate

Overall

Working

Capital policy

Choosing the Working Capital Policy:

The overall working capital policy adopted by the firm may broadly be

conservative, moderate, or aggressive. A conservative overall working capital

means that the firm chooses a conservative current asset policy along with a

conservative current asset financing policy. A moderate overall working capital


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policy reflects a combination of conservative current asset policy and and aggressive

current asset financing policy or a combination of an aggressive current asset policy

and a conservative current asset financing policy. An aggressive overall working

capital policy consist of an aggressive current asset policy and an aggressive current

asset financing policy. Figure 14.3 shows visually the various way of combining

individual policies, with respect to current assets and current assets financing, into

an overall working capital policy.

An overall conservative working policy reduces risk and offers low return.

An overall moderate working capital policy offers moderate return accompanied

with moderate risk. An overall aggressive working capital policy provide a package

of high risk and high return. The choice of an overall working capital policy would

depend on the risk disposition of management.

PROFIT CRITERIAN FOR WORKING CAPITAL

Current assets can be easily liquidated and the value realized on liquidation

would be more or less equal to the amount invested initially. Put differently,

investment in current assets is reversible. For reversible investments the criterion of

not profit per period (the period may be defined as one year) is equivalent to the

criterion of et portent value. The point is explained below.

Let P be the initial investment in current asset, r the rate of return earned on it

and K the cost of capital.

The profit per year will be:

Pr Pk

Where Pr = return for the year (14.1)

Pk = cost of funds for the year

The net present value, assuming that the investment in the current asset continues

for n years, will be:


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3. Finished goods inventory stage

4. Debtors collection stage


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Duration of the Operating Cycle

The duration of the operating cycle is equal to the sum of the durations of

each of these stages less the credit period allowed by the suppliers of the firm. In

symbols:

O = R+W+F+D-C

Where O Duration of operating cycle

R = raw material and stores storage period

W = work in process period

F = finished goods period

D = debtors collection period

C = creditors payment period

The components of the operating cycle may be calculated as follows:

Average stock of raw materials and stores

R =

Average raw materials and stores consumption per day

Average work in process inventory

W =

Average cost of production per day

Average finished goods inventoryF =

Average cost of goods sold per day

Average book debts

D =


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Average credit sales per day

Average trade creditors

C =

Average credit purchases per day

On simplification this expression reduces to:

(1+k) n - 1

[P r P k ]

K (1+k) n

Comparing Eqs. (14.1) and (14.6) we find that the criterion of profit per

period embodied in Eq. (14.1) is equivalent to the criterion of net present value,

reflected in Eq. (14.6) because Eq. (14.6) is simply a multiple of Eq. (14.1). given

this equivalence, the criterion of net profit per period may be substituted of the

criterion of net present value in analyzing working capital decisions.

OPERATING CYCLE ANALYSIS

The operating cycle of a firm begins with the acquisition of raw materials and

ends with the collection of receivables. It may be devided into four stages:

1. Raw materials and stores storage stage

2. Work in process stage


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Working Capital Control

From the preceding discussion it is clear that working capital requirement

depends on the level of operations and the length of operating cycle. Monitoring the

duration of the operating cycle is an important ingredient of working capital control.

In this context, the following points should be borne in mind:

1. The duration at the raw material stage depends on the regularity of

supply, transportation time, degree of permissibility, price fluctuations,

and economies of bulk purchases. It varies from a few days, for highly

perishable or readily available raw materials, to six months or even

longer, for imported materials.

2. The duration at the work in process stage depends on the length of

manufacturing cycle, consistency in capacities at different stages, and

efficient co-ordination of various inputs.

3. The duration at the finished goods stage depends on the pattern of

production and seas. If production is fairly uniform throughout the year

but sales are highly seasonal or vice versa, the duration at the finished

goods stage tends to be long.

4. The duration at the debtors stage depends on the credit period granted,

discounts offered for prompt payment, and efficiency and rigors of

collection efforts.

It is helpful to monitor the behavior of overall operating cycle and its

individual component. For this purpose time series analysis and cross section

analysis may be donein time series analysis the duration of the operating cycle andits individual components is compared over a period of time for the same firm. In

cross section analysis the duration of the operating cycle and its individual

components is compared with that of other firms of a comparable nature.

In order to understand the length of time for which resources are committed

to various components of working capital operating cycle analysis may be done. An


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extension of this analysis, may be done to the reflect the magnitudes of resource

commitments. This section discusses these two kinds of analysis with illustrations.

OPERATING CYCLE ANALYSIS

The operating cycle of a firm begins with the acquisition of raw materials and

ends with the collection of receivables. There are four aspects of the operating cycle

which involve commitment of resources; raw material stage: work in process stage:

finished goods stage; and accounts receivable stage. There is one aspect of the

operating cycle which proved resources; account payable stage (this is the period for

which credit is provided by the suppliers of raw materials).

The duration of the operating cycle may be defined as:

Where D = duration of the operation cycle

Dm = duration of the raw material stage

Dwip = duration of the work in process stage

D fg = duration of the finished goods stage

Daf = duration of the accounts receivable stage

D sp = duration of the accounts payable stage

A word about the components of the operating cycle is in order.

Duration of Raw Material and Stores Stage: this represents the number of

days for which raw materials and stores remain in inventory before they are issued

for production. It may be calculated as:


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Average stock of raw materials and stores

D rm =

Average raw materials and stores consumed per day

Duration of the working process stage this represents the number of days

required in the work-in-process stage. It may be measured as:

Average work-in-process inventory

DWIP =

Average work-in-process value of raw materials committed per

day

Duration of the Finished Goods Stage: This reflects the number of days for

which finished goods remain in inventory before they are sold. It may be calculated

as:

Average finished goods inventory

D fg =

Average cost of goods sold per day

Duration of the Accounts Receivable Stage: This denotes the number of days

required to collect the accounts receivable. It may be measured as:

Average accounts receivable

D ar =

Average Sales per day

Duration of the Accounts Payable Stage: This represents the number of days

for which the suppliers of raw materials offer credit. It may be calculated as

Average accounts payable

D ap =

Average credit purchases per day


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WEIGHTED OPERATING CYCLE ANALYSIS

The operating cycle analysis focused only on the time dimension of

investment. It shows the durations of various components of the operating cycle.

This analysis can be extended to take into account differential magnitudes of

investment at different stages of the operating cycle. Such extended analysis leads

to the calculation of what may be referred to as the weighted operating cycle which

is more useful in working capital analysis.

The procedure for calculating the weighted operating cycle consists of the

following steps:

STEP 1 Calculate for durations of various steps of the operating cycle the duration

of various stages namely,

D rm = ( duration of the raw materials and sores stage)

Dwip = (duration of the work-in process stage)

D fg = (duration of the finished goods stage)

D ar = (duration of the accounts receivable stage)

D ap = (duration of the accounts payable stage)

May be calculated using the formulae described in the previous section.


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STEP 2 : Determine the weights for various stages of the operating cycle.

The weights applicable to various stages of the operating cycle reflect the

proportions of the cost incurred up to that stage in relation to the selling price of the

product. Hence, the weights are:

Stage Weight

Raw materials and stores stage W rm =

Raw materials and stores cost per unit

Sales price per unit

Work in process stage W wip =

Raw materials and stores cost per unit

+0.5 processing cost per unit


Finished goods stage W fg =

Cost of goods sold per unit



Accounts receivable W ar =


Raw materials and stored cost per unit

Accounts payable stage W ap =


Pictorially the durations and weights corresponding to different stages are shown in

Figure 14 B.1


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STEP 3 Calculate the weighted operating cycle

The duration of the weighted operation cycle is equal to:

Wwip

D rm Dwip D fg D ar

Fig 14.B.1 Pictorial Representation of Durations and Weights Corresponding to

Different Stages of the operating cycle

Dw = W rm D rm + W wip Dwip + W fg D fg + W ar D ar + W ap D ap

Cash, the most liquid asset, so of vital importance to the daily operations of

business firms. While the proportion of corporate assets held in the form of cash is

very small, often between 1 per cent and 3 percent, its efficient management incrucial to the solvency of the business because in a very important sense cash is the

focal point of fund flows in a business. In view of its importance, it is generally

referred to as the life blood of a business enterprise

Why does a firm need cash? There are two primary reasons for a firm to hold

cash:

1. To meet the needs of day-to-day transactions: and2. To protect the firm against uncertainties charactering its cash flows.

While cash serves the functions, it is an idle resourced which has an

opportunity cost. The liquidity provided by cash holding is at the expense of profits

sacrificed by fore going alternative investment opportunities. Hence, the financial

W rmW fg W sf


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manager should carefully plan and control cash. This chapter is divided into five

section. Focuses on the following aspects of cash planning and control:

Cash budgeting

Loan-term cash forecasting

Reports for control

Monitoring collections and disbursements

Forms of liquidity.

MONITORING COLLECTIONS AND DISUREMENTS

To enhance the efficiency of cash management, collections and

disbursements must be properly monitored. In this respect, the following are

helpful.

Prompt Billing

Often there is a time lag between the dispatch of goods or provision of

service and the sending of bills. By preparing and sending the bills promptly a firm

can ensure earlier remittance. It should be realized that it is in the area of billing

that the companys control is high and there is a sizeable opportunity to free up

cash. To tap this opportunity the treasurer should work with the controller and

others in (i) accelerating invoice data, (ii) mailing bills promptly and (iii) identifying

payment location.

Expeditious Collection of Cheques

An important aspect of efficient dash management is to process the cheques

received very promptly. Yet many firms deposit cheques received wit some delay.


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In addition to quick handling of cheques, firm-receiving remittances by

cheques from different parts of the country might decentralize its collections and cut

down the delay in the conversion of cheques into cash. Instead of asking its

customers to remit their cheques to head office, it may ask them to send their

remittances to a regional/local office of the company, which is advised to deposit

the remittances in the regional/local office of its bank. The regional/local office of

the bank may be instructed to remit the collections (beyond a certain maximum

balance) to the head office account by telegraphic transfer or telex transfer. With

the vast network of branches set up by the major banks, regional/local collection

centers can be easily established. To ensure that the system of collection works

according to the plan, it is helpful to periodically audit the actual transfers by the

collecting banks and see whether they are in conformity with the instructions given

to them.

Control of Payables

By a proper control of payables, a firm can conserve its cahs resources.

This involves several things:

1. Payments should be made only as and when they fall due.

2. Payables and their disbursement may be centralized. This helps in

consolidating funds at the head office, scheduling payments more

effectively, reducting unproductive bank balances at the regional/ local

offices, and investing surplus finds more effectively.

3. arrangements may be made with suppliers to set due dates of their bills to

match with the companys period of peak receipts. Synchronization of

cash outflows and inflows help a company to get greater mileage from its

cash resources.

Playing the Float:


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When a firm issues a cheques it reduces the balance in its book. The balance

in the banks books, however, is not reduced till the payment is made by the bank.

The amount of cheques issued by the firm but not paid for by the bank is referred to

as the payment float now considers what happens when a firm receives a cheque

and deposits it with its bank. When the cheque is cleared. The amount of cheque

deposited by the form in the bank but not cleared is referred to as the collection

float. The difference between the payment fund and collection float is negative the

balance in the books of the bank is less than the balance in the books of the firm.

As long as the books of the bank show a positive balance, a negative cash

balance in the books o the firm may not be viewed with alarm. So if a firm enjoys a

positive net float it may issue cheques even if it means having an overdrawn bank

account in its books. Such an action is referred to as playing the float. It is

considered risky. However within limits a firm can play this game reasonably and

get a higher mileage form its cash resources.

To illustrate the game of playing the float let us consider an example ABC

Company issues cheques of Rs.20,000 daily these cheques to view cleared. ABC

receives cheques of Rs.20,000 daily and thanks to its expeditions collection; it takes

4 days for these cheques to be realized. Assuming that there is zero balance to begin

with the balance in the books of the firm and the books of the bank will be as shown

in Table from thereon the closing balance in the firms books would be zero and the

closing balance in the banks books would be Rs.40,000. a part of this may be used.

Table 15.9 Balance in the Books of the Firm and the Books of the BanksDay Books of the Firm Books of the Bank 1. Balance decreased by

Rs.20,000(cheques issued and increased

by Rs.20,000 (cheques deposited). The

net effect is nil so the closing balance is

zero.

Balance of the firm is neither increased

nor decreased. Hence the closing

balance is zero.

2. - - do - - - - do - -3. - - do - - - - do - -4. - - do - - - - do - -

5. - - do - - Balance of the firm is increased by


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Rs.20,000 (cheques deposited on the first

day are reedited). The closing balance is

Rs.20,000.6. - - do - - Balance of the firm is increased by

Rs.20,000 (cheques deposited on the

second day are credited). The closing balance is Rs.40,000.


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7. - - do - - Balance of the firm is increased by

Rs.20,000 (cheques issued on the first

day are credited) and decreased by

Rs.20,000. (cheques issued on the first

day are paid). The closing balance isRs.40,000. form this day onward each

day Rs.20,000 is debited to tae firms

account and the closing balance remains

at Rs.40,00.

FORMS OF LIQUIDITY

The liquid resources of a firm may be kept in various form; cash balance in

current account, reserve drawing power under a cash credit or over draft

arrangement. Ordinary units of the Unit Trust of India, and short term deposits with

other companies (called inter-corporate deposits). Let us look at the pros and cons

of these forms of maintaining liquidity.

Cash balance in current account provides the highest degree of liquidity.However, the interest earned on current account balance is not. Hence it is costly to

keep cash balance in current account at no firm can conceivably do without some

balance in current accounts.

Reserve drawing power under a cash credit or overdraft arrangements may

appear to be an economical way of maintaining liquidity. The firm is not required

to pay any interest on the unutilized portions of the cash credit or overdraft limits

yet it has a ready access to the un drawn amounts. There is however, a catch here.

If a part of the cash credit or overdraft limit kept in to reserve to meet contingencies,

remains unutilized over a prolonged period of time, the bankers may reduce the cash

credit or overdraft limit. This seems to be the reasons why some firms draw fully on

these limits, for some period of time at least, even if it means keeping the funds

virtually idle in the current accounts.


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The ordinary units of the Unit Trust of India (UTI) offer a reasonably

convenient and attractive avenue for investing for the following reasons: (i) the

dividend on these units is substantially tax-exempt. (ii) These units appreciate in a

fairly predictable fashion (iii) there is a very active secondary market for these units.

Depositing money with other companies on a short term basis is fairly

attractive I terms of rate of return. Presently inter-corporate deposits 15 to 21

percent rate of interest typically deposits are made for period of 2 to 6 months.

Often with a right to recall at a months notice. While very attractive form the point

of view of written inter-corporate deposits suffer from two disadvantages. (i) a

minimum of 1 months time may be required to convert them into cash and (ii) the

degree of risk associated with them is higher compared to other forms of

maintaining short term liquidity which virtually risk-free.

DESIGN OF THE STUDY

TITLE OF THE PROJECT:The project report A Study of Working Capital Management of

ANANTHAPUR DISTRICT CO-OPERATIVE CENTRAL BANK contains a

comprehensive treatment of the topic working capital management with a view that

the reader understand this financial decisions thoroughly well and is able to evaluate

its implication for shareholders and the company. From the beginning this project

report has been stressing on the analytical approach and the concepts are made clear

in a simple language. The project contains a real life financial ANANTHAPUR

DISTRICT CO-OPERATIVE CENTRAL BANK.

The special features of this report can be as follows : -

1. Comprehensive coverage of the topic working capital management.

2. Decisional focus and analytical approach.


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3. Procedural orientation and full of financial tables, charts and diagrams to

support the project study.

Finally, the project report is primarily targeted and aimed to help the reader

to develop a skill to understand, analyze, and interpret financial problems and data

to make good financial decisions.

STATEMENT OF THE PROBLEM

Working Capital Management is crucial for either a manufacturing company

or services company. Therefore the study of this project is limited to a period of

five years (2000 to 2005). The study analyzes sources, investment constituents of

working capital, growth of Net working Capital. It has also tries to test whether too

much of long term sources (more than 25%) are diverted into working capital, and

the Maximum Permissible Bank Finance (MPBF) of the company. All these were

done with the help of analysis of the published financial statements of the company.

1. 1.Preparation of summery of financial statements and important schedule

over the period.2. 2.Conduction an analysis and detection of major/broad sources of working

capital to the company, i.e., long term and short term sources.

3. 3.Classification of the company into moderate, aggressive and conservative

based on certain assumption.

4. 4.Analysis of net working capital as a percentage of total sales over the study

period and thus projects for the future.

5. 5.Analysis of net working capital in terms of rupee over the study period andthus project and future.

Decomposition of Gross Working Capital into its constituents and find out

the percentage of investments into each constituents of working capital and their

average growth.

Study effects of debtors and inventories on working capital of the company.


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Put up a hypotheses and test whether more than 25% of long term sources re

diverted into working capital area (tendon Committee Norm,-II).

Both the researcher and the company agreed the above research design and

this is an house research work and involved extensive analysis of the company

statements and did not involve questionnaires.

DATA NEED AND COLLECTION:

This study makes extensive use of Secondary data collected in the forms if

Annual Reports and Companys working Capital Manual. The nature of secondary

data collected was bothqualitative and quantities in nature. Considering the above

plan, research plan for this study is essentially a combination of qualitative and

quantitative aspects.

The secondary sources of data can be divided into mainly two parts:

Internal:

Accounting Section

Finance Section

HRD Department

Miscellaneous Records

External:

Information from published materials like,Annual Report of the company

Working Capital Manuals

Magazines

There was also use primary data in the case of financing working capital

trough pen and paper work and discussion held with the concerned company


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officials from various departments. The primary data was obtained through survey

method i.e., personnel interview method.

SAMPLING PLAN:

Methodology non-probability convenience sampling methods. This means a

continuous block of six years is taken into consideration of five years of operations,

which means sampling proportion, are approximately 84% Further emphasis is

given only to assessment of working capital and ratios connected with it in finance

department. The sampling helps the researcher to concentrate relatively small

number of people and hence it may lead to effectiveness. The basis for selection of

the units is based on convenience.

EXPECTED CONTRIBUTION FROM THE PROJECT:

A study of this nature may not give any specific monetary contributions to

the company but it is likely to highlight:

Costs of constituents of working capital Overall costs of present working capital

Reduction of costs of present working capital

Reduction of cost of present working capital and hence its impact on

the profitability.

Objective of the report:

1. To analyze the components of working capital in the ADCC Bank during

the period 2000 2001 to 2002 2005.

2. To present the different ways of assessment of working requiremtn and

directive of the RBI from time to time.


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3. To study the present system of credit Appraisal for financing of working

capital requirement of the bank requirement in case study based on the

following.

4. To analyze the Balance sheets and P&L Accounts of ADCC Bank

Financial appraisal of bank using selective ratio

5. To identify liquidity position and patentability position of ADCC Bank

Assessment of working capital involving computing of maximum

permissible of credit limits.

6. To find the collection time for loans and advances and turnover in terms

of working capital.

7. Also to study the methods of financing working capital

ANANTHAPUR DISTRICT CO-OPERATIVE CENTRAL

BANK

SCOPE OF THE PROJECT

The scope of this study is limited to working capital management practices of

one single company namely ADCC Bank.

RESEARCH DESIGN

An Exploratory research design is used for the above mentioned objectives.

This type of research design is identified as applicable for this study, while keeping

in mind:

Title of the project study

The statement of problem

Objective of the study


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This particular study is a combination of both quantitative and qualitative

aspects. The research design for this study includes the following:

Identification of the study period i.e. a periods between 2001 to 2005 i.e., 5

years.

LMITATIONS:

The limitations in this study report are:

Only short term aspects will be looked into.

The study is limited to ANATHAPUR DISTRIC CO-OPERATIVE

CENTRAL BANK.The study period is limited for five years (2001-2005) only

The study is extensively based on the annual reports and some projections

provided by the company.

Certain informations are confidential in nature and not easily accessible in

the company.

Suggestions and conclusions are limited to working capital area only.

METHODOLOGICAL ASSUMTIONS:

No serious assumptions so far were made as to limit the usefulness of the

study as made at any stage. However the following assumptions were made-

A study period of five years (2001-2005).

Objectives of the study and the research design as agreed upon by the

company and the researcher are sufficient, accurate and correct portray true state of

affairs of working capital management of the company.


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Published information from the company is accurate and true.

Percentage of Gross

Working Capital satisfied by current liabilities

Up to 25% - Conservative W/C approach

26% - 50% - Moderate W/C approach

Above 50% - Aggressive W/C approach


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INDUSTRY

PROFILE


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Industry Profile

Banking Sector

The Reserve Bank of the (RBI), as the central bank of the country, closely

monitors Developments in the whole financial sector.

The banking sector is dominated by scheduled Commercial Banks (Scabs).

As at Ends-March 2002, there were 396 commercial bank operating in India.

This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196

Regional Banks. Also, there were 67 scheduled co-operative banks

consisting of 51 scheduled urban co-operative banks and 26 scheduled state

co-operative banks.

Types of Banks NoPublic Sector 27Private 31Foreign 42Regional Rural 196

Scheduled Commercial Banks in India

31

27

42

196

Public Sector

Private

Foreign

Regional Rural


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Scheduled Co-Operative Banks in India

16

51

Urban Co-Operative Banks State Co-Operative Banks


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Scheduled commercial banks touched, on the deposit front, a growth of 14%

as against 18% registered in the previous year. And on advances, the growth

was 14.5% against 17.3% of the earlier year.

State Bank of India is still the largest bank in India with ICICI Bank, leading

of 20%. ICICI and its two subsidiaries merged with ICICI Banks, leading

creating the second largest bank in India with a balance sheet size of

Rs.1040bn.

Higher provisioning norms, tighter asset classification norms, dispensing

with the concept of past due for recognition of NPAs, lowering of ceiling

on exposure to a single borrower and group exposure etc., are among the

important measures in order to improve the banking Sector.

A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to

strengthen the ability of banks to absorb loses and the ratio has subsequently

been raised from 8% to 9%. It is proposed to hike the CAR to 12% by 2004

based on the Basle on the Committee recommendations.

Retail Banking is the new mantra in the banking sector. The home loans

alone account for nearly two-third of the total retail portfolio of the banks.

According to one estimate, the retail segment is expected to grow at 30%-

40% in the coming years.

Net banking, phone banking, mobile banking, ATMs and bill payments are

the new buzz words that banks are using to lure customers.

With a view to provide an institutional mechanism for sharing of information

on borrowers by banks and Financial Institutional, the Credit Information

Bureau (India) Ltd. (CIBIL) was set up in August 2000. The Bureau

provides a framework for collecting, processing and sharing credit


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information on Borrowers of credit institutions, SBI and HDFC are the

promoters of the CIBIL

The RBI is now planning to transfer of its stakes in the SBI, NHB and

National Bank for Agricultural and Rural Development to the private players.

Also, the Government has sought to lower its holding in PSBs to a minimum

of 33 percent of total capital by allowing them to raise capital from the

market.

Banks are free to acquire shares, convertible debentures of corporates and

units of equity- oriented mutual funds, subject to a ceiling of 5% of the total

outstanding advances (including Commercial Paper) as on March 31 of the

previous year.

INDIAN BANKING SYSTEM

Introduction

Banking during the Vedic period largely meant money lending, and the

complicated mechanism of modern banking was not known to them

This is true not only in the case of India, but also of other countries.

Although the business of banking is as old as authentic history, banking institutions

have developed from a few simple operations involving the satisfaction of the whole

community by securing speedy application of capital, slowly seeking employment

and thus providing the vary life blood of commerce.

Banking:

Banking means the accepting for the purpose of lending or investing, of

deposit of money from the public, repayable on demand or otherwise and withdraw

able by cheque, draft, order or other ways. Bank means any company which

transacts the business of banking in India.


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Business of Banking:

Besides the important functions mentioned in the above definition, Banks

also engage in one or more of the following forms of the business, namely,

collection of Cheque and bills, remittance of funds, foreign exchange, under taking

the administration of estates as executors and trustees, acting as agents, accepting

articles for sage custody, letting of safe deposit lockers etc These and many other

functions are set out in detail in section 6 of the baking regulation act 1949. a

banking company is not permitted to engage in any form of business other than

these referred to in the act.

Types of Banks

Commercial Banks

Besides specialized financial institutions like cooperatives for agriculture and

industrial banks there are commercial banks, largely of general purpose in nature.

They collect funds from people and distribute them among borrowers drawn from

almost all the sectors of the economy. As such they posses a great potential for

good, if managed competently, as also for bad, if worked improperly.

Indigenous Banks:

In existence for centuries, some trace their presence to the Vedic times of

2000 to 1400 B.C. Indigenous banking in India is a system which admirablyfulfilled the needs in growth of modern commercial banks, indigenous banks

continue to hold on even in present times.

As indigenous banker is any individual or private firm receiving deposits and

dealing in Hindis or lending money. Although deposit side is emphasized, these

banks do not necessarily depend upon this source entirely, like modern commercial

banks. Very many among them also used founds of their own.


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Money Lenders

Money lenders are those whose primary business is money lending: such

essential functions as receiving of deposits or/and dealing in hundis are outside their

operations.


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Indian Banking System

Reserve Bank of India

(Central Bank and Monetary Authority)

The modern sector comprises (i) The Reserve Bank of India (2) The state

Bank of India and its seven subsidiaries (3) The foreign Exchange Banks and (4)

The twenty nationalized commercial banks and several private sector commercial

banks.

The indigenous sector comprises (i) the Indigenous Banker and (2) The

money lenders.

State Bank of India

Commercial Banks Regional Rural Banks Co-Operative Banks

Public Sector Banks Private Sector

Indian Foreign

State Co-Operative Banks

Central Co-Operative Banks

State Bank Group Other Nationalized BanksPrimary Credit Societies

Associate Banks


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Challenges before the Indian Banking Industry

Competition and Consolidation

The deregulation in interest rates, grant of functional to banks in the area of

credit, Entry of foreign banks and emergence of new private banks has made the

banking environgment more competitive. While the total share in bank credit

continues to be dominated by public sector banks, the share of foreign banks is

showing an increasing trend. As announced in the Union Budget for 2002-2003, it

has been decided to give an option to foreign banks to either operate as branches of

their parent banks or to set up subsidiaries. As per the recent RBI guidelines, the

overall ceiling for foreign direct investment n private sector banks has also been

enhanced. In the changed scenario, it has now become extremely important for

Indian banks remain competitive for surviving. Universally there is a move towards

consolidation and convergence. It has been our contention that the Government and

supervisory authorities should only provide a conductive environment for

consolidation and convergence through appropriate fiscal and monetary policies

supported by a sound regulatory and supervisory framework. Hence, bank

consolidation/ merger process should be primarily market driven and such proposals

should come voluntarily from the banks themselves depending on the organizational

synergy and the market share.

Management of NPA

Management of NPAs continues to be the foremost challenge of the Indian

banking system. In the recent past there has a conscious and persistent effort

through the prescription of strict objective norms for the identification andclassification of NPAs. This was also supplemented by the sustained efforts both by

the RBI for setting up the Requisite infrastructure as also systems/ procedures for

effecting recoveries/ reduction of NPAs. The result has been encouraging.

However, realizing the legal system, Govt. of India/RBI has taken several special

steps to ensure that legal inadequacies do not thwart the resolve to reduce the NPAs

of banks.


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In addition, banks have been advised to strengthen their administration

machinery and put in place effective risk management system to reduce the fresh

incidence of NPAs.

Tightening of Prudential Standards

The prudential standards need to be enhanced to fall in the line with the

international best practices. In the direction, Reserve Bank of Indian has introduced

the 90 days delinquency norm for identification of NPAs with effect from the year

ending March 2004 and reduced the timeframe for classification of a sub-standard

asset as a doubtful asset from 18 months to 12 months with effect from the year

ending March 2005. in some countries, doubtful assets, irrespective of their status

i.e. secured or unsecured, are required to be classified as loss assets and fully

provided for. However, in Indian, doubtful assets balances, by collateral, are

provided for only upto 50% of the outstanding balances, irrespective of the number

of years in which the accounts remain in this category. Given the delay in recovery

of dues through the legal process, the current provisioning norms followed in India

do not entirely cover the latest losses inherent in such advances. The existing

provisioning requirements would have to be enhanced in line with the international

best practices.


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The Proposed Based Capital Accord

The Based Committee recognizes that the New Accord is more extensive and

complex thatn the 1988 Acord. The new Accord is more risk sensitive and it

contains a range of new option for measuring both credit and operational risks.

The New Accord is likely to be finalized next year and would be

implemented in member jurisdictions in 2006.

The adoption of the New Based Capital Adequacy Framework, relating to

assigning capital on a consolidated basis, use of external credit assessment as a

means for assigning preferential risk weights, sophisticated techniques for

estimating economies capital, etc., may need suitable modifications to adequately

reflect the institutional realities and macro-economic factors specific to emerging

market economies including India. Recognizing these implications, RBI has been

impressing on the Basel Committee the some of these proposals may require

ossification/flexibility to fully reflect the concerns of the emerging market

economics. Not withstanding the above, it is imperative that the banks in India

study the proposed Capital adequacy framework identify their transition path and

initiate steps to be fully prepared for adoption of the new standards when

introduced.

Risk Management Systems

In view of the diverse financial and on financial risk confronted by banks in

the wake of the financial sector deregulation, the risks management practices of

banks have to be upgraded by adopting sophisticated techniques like VAR, Duration

and Simulation and adopting internal model-based approaches as also credit risk

modeling techniques, at least by top banks. Banks need to evolve an integrated risk

management system depending on their size, complexity and the risk appetite. As a

step towards enhancing and fine tuning the existing risk management practices in

banks RBI has recently issued the draft guidance notes on credit and market risks.


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Risk Based Supervision

Financial sector supervision is expected to become increasingly risk oriented

and concerned more with validation of system. Bank managements will have to

develop internal capital assessment processes in accordance with their risk profile

and control environment. These internal processes would then be subject to review

and supervisory management and the adequacy of risk containment. The transaction

based internal/external audit would have to give way to risk based audit system.

As banks are computerizing more areas of their opertions, they would be

required to introduce information system audit also.

Technology Issues

The delivery of products and services need extensive use of information

technology necessitating high magnitude of investment. However, with a view to

enhance the quality of customer service as also to enhance the quality of control,

one of the prime thrust areas for the future would be completion of branch

computerization and networking of banks. This would also necessitate putting in

place of appropriate legal and security systems.


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COMPANY

PROFILEAND

PRODUCT

PROFILE


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COMPANY PROFILE: -

Profile of ANATHAPUR DISTRICT OF OPERATIVE CENTRAL

BANK

Ananthapur District Co-Operative central Bank was established on 22 nd April

1919 under Indian government Co-Operative societies Act 1904 with its head

office at Ananthapur.

The bank is established with the objectives of developing banking habits in

the people living in the remote villages and to provide them credit facilities with a

view to strengthen the rural economy by developing the economic condition of

agricultures laborers rural artisans and small and marginal farmers. The bank isdedicated to continue development of the area and to provide improved banking

facilities to meet the area and to provide improved banking facilities to meet the

ever increasing credits needs of the people.

Branch Network: -

The Bank is operating with total number of branches 18 and 212 prmaryagricultural co-operative societies and 563 other tie-up Agricultural co-operative

societies.

Share Capital: -

The share capital of the Bank is 70 lakhs which is issued and fully subscribed

by Individuals B class 2 lacks and societies and other central banks A class 68lakhs respectively.


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Deposits: -

The aggregate deposits at the close of financial year (2003) stood as

Rs.164.61 crores registering growth of 12.38% over the level of previous year. The

break up of deposits for the conservative 63 years are given in the following table.

Positions As On (Amt in Tousands)

Particulars 31-03-2003 31-03-2004 31-03-2005A/c Amt A/c Amt A/c Amt

CD Deposit

Saving Deposit

Time Deposit

3456

24569

425943

202442

331353

10456

4542

27493

486949

290926

636259

537520

4976

29981

495634

392987

808062

445068Total Deposit 453995 544251 518984 1464705 530591 1646117

Central Bank of India, zonal office under above circular has informed that

from 31-03-05 the interest rate structure of domestic team deposit would be:

Maturity Period Existing Interest rate

w.e.f 31-03-05

Revised Interest rate

w.e.f 31-03-0546days-90days

91days-179days180days-1year

1year-3years

over 3 years

4.50

5.505.75

6

6.25

6.50

5

66.25

6.50

7

7.50


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DEPOSITS

Keeping in mind our divers clients and their varied needs, we have devised

flexible deposit schemes. The deposit schemes correspond to the clients time frame

requirements of cash, convenience and life style.

1. Current Account

2. Savings Scheme

3. Savings Bank Account

4. Term Deposits

Fixed Deposit Scheme: -

With a minimum deposit amount of Rs.250/- money can be deposited for any

period ranging from 15 days to 10 years.

Recurring Deposit Scheme: -

You can choose any deposit period ranging from 10 to 120 months, incompleted 3 months under variable monthly installments you have the option to

choose a core monthly installment and remit any amount subject to this minimum

with a maximum 10 times of the core monthly installment.

Capital Gains Account Scheme: -

Under this scheme an income tax assessor can avail of the benefit of exemption from capital gains if the amount of capital gains or the net consideration

is deposited in any branch on or before the due dates of their filling return of

income.


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LOANS & ANDVANCES

Over the years, as part of our quest in partnering the individuals progress, we

have introduced many schemes that cater the people of all ages right from student

loans, and loans for retired persons among other.

ADCC BANK HOME LOAN: -

Individuals can avail of housing loans for the construction of hous as well as

for repair of the existing house.

EDUCATIONAL LOAN: -

A student of Indian Nationality is eligible to apply for the loan provided

he/she has secured admission to the institutions.

JEWEL LOAN: -

Individuals of all income groups are given loans depending upon the value of the gold as assessed periodically. Loans are for a period of 1 year.

ADCC BANK RENT SCHEME: -

Owners of the property wo have let out the same to reputed companies,

commercial/industrial, software, Banks, reputed institutions, etc. this loan is

available to the owners of the property only.


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1. ADCC LOAN PRODUCT OF CULTIVATION OF

GRAPE SEEDLESS PER ACRE: -

Purpose of loan is

1. Cultivation of Grape Seedless.

Eligibility of borrowers

Those peoples who are having their own lands and surety of 2 or 3 persons

who are also having some property of their own.

Interest Rate: -

1. Amount of Loan upto 20,000 - 13.0%

2. Amount of Loan above 20,000/ to 50,000 14.5%

3. Amount of Loan above 50,000 to 1,00,000 15.5%

4. Amount of Loan above 1,00,000 to 2,00,000 16.0%

5. Amount of Loan above 2,00,000 17.5%

Appraisal Fee: -

5% of loan sanctioned at the time of 1 st disbursement of the loan.

Security: -

1. Equitable mort age of the plots building of that purchased out of the

bank loan.

2. Two guarantors having substantial worth

3. Authority from the employer of the employee to deduct the loan

installment from the monthly salary and to remit the same direction to

the branch towards loan A/c of the borrower.

Repayment Period: -


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Six years inclusive of two years grace.

Cost of Cultivation of Grape Seedless per Acre: -

Sl.No Particulars 1 year 2 year Total

A MATERIAL1. Planning material including

10% casualty replacement in

second year

3632 360 3985

2. Manure and fertilizer 16500 13700 302003. Irrigation 1800 1800 36004. Plant Protection 15000 1500 300005. Drip 0 0 06. Pandal 47500 - 47500

7. Growth Regulators 2500 - 25008. Bore well Pump set 0 0 09. Fencning 500 - 500

Sub Total A 87425 30860 118285B LABOUR

1. Land Prearation 1000 - 1000Digging pits, filling and

planting @ Rs.12/plant

8700 870 9570

Plant protection 800 800 1600Inter culture 400 400 800Manuring 400 400 800Harvesting - 800 800Pruning 1000 1000 2000Thinning 1000 1000 2000Watch and ward 1000 1000 2000Sub Total B 14300 6270 20570

C Contigency @ 5% 5086 1857 6943Grand Total 106811 38987 145800Say 106800 39000 145800

Total Unit Cost(Capitalised upto 2 years)

Maintenance Cost: -

From third year onwards 37,700


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2. ADCC LOAN PRODUCTS FOR SERICULTURE

Purpose of Loan: -

Establishment of one acre mulberry plantation.

Repayment Period: -

Seven years inclusive of one year grace.

A Cost of Establishment of one acre mulberry plantationSl.No Particulars Amount

1.2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

Land preparationPlanting materials

Cost of planting

Manures

Fertilizers

Intercultural operations

Irrigation

Labour cost for silk worm rearing

Shed maintenance

Chemicals

Cost of DFL 250@ Rs.350 per 100DBI

1000500

400

1500

2000

1000

500

2800

500

500

750Total 11450

Total (rounded off) 11500


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B Cost of rearing sed (pucca)

Plinth area of shed (Sq Ft) 30x15M

Cost of contruction/sf t

450

120Total 540

C Cost of rearing equipment

Sl.No Particulars Quantity Cost Total Cost1.

2.

3.

Reanng Trays

Feeding Stands

Chopping Knives

a. Small

b. Medium

c. Big

MatsChandrikas on hire basis

Protection net

100

4

1

1

1

60

1

30

300

50

200

500

8

400

3000

1200

0

50

200

500

200480

400Total Cost 6030

Total Unit Cost 71500D Recurring cost of mulberry cultivation for second and

subsequent years

9500`

E Recurring cost for rearing of cocoons for second and

subsequent years

9700

F Repayment Period

Seven years inclusive of one year grace


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3. ADCC LOAN PRODUCTS FOR DAIRY

Purpose of Loan: -

1. For cross bred cows

2. Graded Murrah Buffalos

3. Female Cross bred Calf rearing

4. GMB Calf rearing

Repayment Period: -

For cross bred cows and Graded Murrah Buffalos it is six years

For female cross bred calf rearing it is three years with two years grace.

For GMB calf rearing it is four years with three years grace.

Sl.No Item of Expenditure Cost in Rs.A Cross bred Cows1. Two CBCs yielding 6 litres milk per daya.

b.

c.

Cost of two CBCs

Insurance premium for first normal

Transport of animals

18000

450

400Total cost 18900

d. Repayment Period Six YrsCost of 90 Kg conc feed Rs.450/- could also be financed

2. Two CBCs yielding 8 litres milk per daya. Cost of two CBCs 24000

b. Insurance premium for first animal 600c. Transport of animals 400

Total cost 25000d. Repayment period Six years

Cost of 110 Kg conc feed Rs.550/- could also be financed

B. GRADED MURRAH BUFFALLOES (GMBs)1. Two GMBs yielding 6 litres milk per daya. Cost of two GMBs 24000

b. Insurance premium for first animal 600c. Transport of animals 400

Total Cost 25000d. Repaying Period Six years

Cost of 120 KG conc Feed Rs.600/- could also be financed


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2. Two GMBs yielding 8 litres milk per daya. Cost of two GMBs 32000

b.

Documents

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