A

PROJECT REPORT

ON

“TO STUDY WORKING CAPITAL FINANCING BY BANK ”

AT
“VISHVAS CO-OP BANK NASHIK
’

UNIVERSITY OF PUNE

IN THE PARTIAL FULFILLMENT OF THE REQUIREMENT OF

BACHLOR OF BUSINESS ADMINESTRATION

[BBA]

UNDER THE GUIDANCE OF

PROF .D.G. SHELKE

SUBMITTED BY
Awari Vaibhav Navnath

Through

Akole Taluka Education Society’s Agasti Art, Commerce, &

Dadasaheb Rupavate Science College, Akole. BATCH—2019-20

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 STUDENTS DECLARATION

Im Awari Vaibhav Navnath declare that the Project Report entitled TO

“TO STUDY WORKING CAPITAL FINANCING BY BANK ”
completed and submitted by me to UNIVERSITY OF PUNE, for the
partial fulfillment of T.Y.B.B.A under the guidance of Prof. D.G.Shelke
is my original work and the conclusions drawn there in are based on the
material collected myself.

The project work was undertaken as a part of the academic curriculum

according to university rules

Place: Akole Vaibhav Navnath

Awari

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 ACKNOWLEDGEMENT

At the first instance I offer my sincere thanks to the director Prof. D.G.
Shalke, who has introduce restructuring course and given me opportunity to bring out
this report.

I am Great full to our Prof. S.M.Tajane and thank him for valuable assistance
that he has given me without his co-operation. I would not have been able to complete
this project.

I am Indebted to the Sr. Manager: Mr. Prasad Patil and project guide Prof.
S.Tajane of “Vishwas co-op bank. Ltd.” under whom I Have collected my
Necessary data of my Project.

I wish to take this opportunity for expressing my grateful thanks to all those
who have been of valuable assistance to me in charring out research, as well as
writing this project for their kind co-operation and encouragement.

I once again thank them.

Place: AKOLE Awari Vaibhav

Navnath

Date:
TYBBA(FINANCE)

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 Chapter Particulars

Certificate from collage guide

Acknowledgement
Declaration

1.
Introduction
1.1 Selection of topic
1.2 Objective of study
1.3 Research Methodology
1.4 Scope of the study

2.
Profile of the Organization
2.1
Introduction to Organization
2.2 History of organization

3.
Analysis & Interpretation of Data
3.1 Introduction to Working Capital
3.2 Recommendation of various committee on working capital
finance
3.3 Calculation of working capital of bank

4. Conclusion of the study

5. Recommendations

6. Bibliography

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 CHAPTER -1

INTRODUCTION

1.1 BACKGROUND OF PROJECT TOPIC

Credit risk is defined as the potential that a bank borrower or counterparty will
fail to meet its obligations in accordance with agreed terms, or in other words it is
defined as the risk that a firm’s customer and the parties to which it has lent money
will fail to make promised payments is known as credit risk
The exposure to the credit risks large in case of financial institutions, such
commercial banks when firms borrow money they in turn expose lenders to credit
risk, the risk that the firm will default on its promised payments. As a consequence,
borrowing exposes the firm owners to the risk that firm will be unable to pay its debt
and thus be forced to bankruptcy.

IMPORTANCE OF THE PROJECT

The project helps in understanding the clear meaning of credit Risk Management In
Vishwas Co. Op. Bank. It explains about the credit risk scoring and Rating of the
Bank. And also Study of comparative study of Credit Policy with that of its
competitor helps in understanding the fair credit policy of the Bank and Credit
Recovery management of the Banks and also its key competitors.

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 1.2 OBJECTIVE OF THE STUDY

1. To Study the complete structure and history of Vishwas Co. Op. Bank.

2. To know the different methods available for credit Rating and understanding

the credit rating procedure used in Vishwas Co. Op. Bank.

3. To gain insights into the credit risk management activities of the Vishwas Co.

Op. Bank

4. To know the RBI Guidelines regarding credit rating and risk analysis.

5. Studying the credit policy adopted Comparative analyses of Public sector and

private sector.

1.3 RESEARCH METHODOLOGY

DATA COLLECTION METHOD

To fulfill the objectives of my study, I have taken both into considerations viz primary
& secondary data.

Primary data: Primary data has been collected through personal interview by
direct contact method. The method which was adopted to collect the information is
‘Personal Interview’ method.

Personal interview and discussion was made with manager and other
personnel in the organization for this purpose.

Secondary data: The data is collected from the Magazines, Annual reports,
Internet, Text books.

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The various sources that were used for the collection of secondary data are

o Internal files & materials

o Websites – Various sites like https://www.vishwasbank.com

1.4 SCOPE OF THE STUDY

The project relates to the financing of working capital by banks. An attempt has
been made to analyze the procedures which the banks follow finance to industrial
units to fulfill their working capital requirements, by utilizing the information
provided by the loans section of the bank.

The project extends to the study of the criteria on the basis of which banks
provide finance, the methods of computation of the permissible bank finance.

A major part of working capital loans is provided by the commercial banks.

Industries depend upon the banks as a primary source of working capital finance.

Over the past several years, banks have become the most reliable source of
institutional credit. Banks provide short-term finance to industries in the form of
working capital. Hence, working capital financing by banks is a subject worth studying.

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 CHAPTER- 2

PROFILE
OF THE
ORGANIZATION

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 2.1 Introduction to Bank

Vishwas Co-op Bank began in a small way, has now grown up to one of the
leading and respectable banks not only in Nashik but also in Maharashtra. Area of
Operation of the bank is Nashik, Thane, Dhule, Aurangabad, Jalgaon, Ahmad Nagar,
Mumbai and Pune. At present the bank has five branches and Head Office. Looking at
the performance and achievements of the Bank, RBI has granted the special
permission to Vishwas Co-op Bank for opening a branch in Mumbai.
Since the establishment, the bank is making a steady progress and continuously
maintaining “A” audit classification. Vishwas Co-op Bank is the first bank to provide
16 hours Customer service i.e. Morning 8 A.M. to Mid night 11 O’clock. The
Management Information System designed by bank has been made applicable to all
the urban Co-op Banks in Maharashtra. The loan application forms designed by the
bank are reckoned as a model loan application form and have been followed by many
urban co-op banks in Maharashtra. On 6th February 2003, Vishwas Co-op Bank has
been awarded the “Jagtik Marathi Chamber of Commerce and Industries” for its best
performance in the co-operative banking sector at the national level, in the presence of
Hon. Chief Minister of Maharashtra Shri. Sushilkumarji Shinde, Hon. Speaker of
Loksabha Shri. Manohar Joshi, Hon. Governer of RBI Dr. Bimal Jalan and Executive
Director of RBI Hon. Dr. Narendra Jadhav. Three of the six recommendations given
by the Hon. Chairman of Vishwas Co-op Bank for smooth working of the Urban Co-
op Banks are accepted by the honorable governor. The good work done by the bank is
also appreciated by “Sahakar Bharati”, Mumbai by presenting an award of the “Best
Bank” for the year

2.2 History of Organization-

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 Whenever one thinks about a bank, which is for the people, by the people, it is
none other than Vishwas Co-op bank. In todays highly competitive and market driven
economy, the common man's basic need is nothing but “Financial Need”. A Common
man always finds it difficult to get loans of small amount. Taking into consideration,
the problems faced by common man, Hon. Chairman Shri. Vishwas Thakur at the age
of 27 alongwith his associate members founded the Vishwas Co-op Bank. The
proposal for the formation of a bank was prepared under the guidelines of District
Deputy Register Hon. Shri. Manohar Tribhuvan and Taluka Deputy Register Hon Shri
Vijay Suryanwanshi.
On 8th of October 1996, Co-operative department of Maharashtra State issued
the necessary license. On 25th March 1997, Vishwas Co-op Bank came into
existence. Vishwas Co-op Bank, which began in small humble way, has now grown
up to one of the leading banks in Nashik and even in Maharashtra. Vishwas Co-op
banks style of work is Dynamic. The approach of the bank in every aspect is very
positive and innovative. Introduction and implementation of “Management
Information System” and business development plan are the significant features of the
bank, which has been appreciated by the Co-op department.
Vishwas Co-op Bank has already started working on the interactive website
where the customer can download Current, Savings and FD froms. He will also get
the information on his account details through website. The customer will have only
read only access. The staff will communicate each other through mail, which will
make the communication more easier and faster. Vishwas Co-op Bank is also
planning to go for Core Banking Solutions in near future, which will make Banking
operations more customer friendly. Customer will avail the facility of anytime
anywhere banking. The entire banking operation will become centralised. The
Customer will withdraw as well as deposit the money from any branch. The staff will
be in position to give better customer service due to this automation process.

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 BANKING INDUSTRY
OVERVIEW

INDUSTRY OVERVIEW

History:

Banking in India has its origin as carry as the Vedic period. It is believed that the
transition from money lending to banking must have occurred even before Manu, the
great Hindu jurist, who has devoted a section of his work to deposits and advances
and laid down rules relating to the interest. During the mogal period, the indigenous
bankers played a very important role in lending money and financing foreign trade
and commerce. During the days of East India Company, it was to turn of the agency
houses top carry on the banking business. The general bank of India was the first joint
stock

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bank to be established in the year 1786.The others which followed were the Bank of
Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued
till 1906, while the other two failed in the meantime. In the first half of the 19 th
Century the East India Company established three banks; The Bank of Bengal in
1809, The Bank of Bombay in 1840 and The Bank of Madras in 1843.These three
banks also known as presidency banks and were independent units and functioned
well. These three banks were amalgamated in 1920 and The Imperial Bank of India
was established on the 27th Jan 1921, with the passing of the SBI Act in 1955, the
undertaking of The Imperial Bank of India was taken over by the newly constituted
SBI. The Reserve Bank which is the Central Bank was created in 1935 by passing of
RBI Act 1934, in the wake of swadeshi movement, a number of banks with Indian
Management were established in the country namely Punjab National Bank Ltd, Bank
of India Ltd, Canara Bank Ltd, Indian Bank Ltd, The Bank of Baroda Ltd, The
Central Bank of India Ltd .On July 19th 1969, 14 Major Banks of the country were
nationalized and in 15th April 1980 six more commercial private sector banks were
also taken over by the government. The Indian Banking industry, which is governed
by the Banking Regulation Act of India 1949, can be broadly classified into two
major categories, non-scheduled banks and scheduled banks. Scheduled Banks
comprise commercial banks and the co-operative banks.

The first phase of financial reforms resulted in the nationalization of 14 major banks
in 1969 and resulted in a shift from class banking to mass banking. This in turn
resulted in the significant growth in the geographical coverage of banks. Every bank
had to earmark a min percentage of their loan portfolio to sectors identified as
“priority sectors” the manufacturing sector also grew during the 1970’s in protected
environments and the banking sector was a critical source. The next wave of reforms
saw the nationalization of 6 more commercial banks in 1980 since then the number of
scheduled commercial banks increased four- fold and the number of bank branches
increased to eight fold.

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After the second phase of financial sector reforms and liberalization of the sector in
the early nineties. The PSB’s found it extremely difficult to complete with the new
private sector banks and the foreign banks. The new private sector first made their
appearance after the guidelines permitting them were issued in January 1993.

The HDFC Bank was incorporated on August 1994 by the name of 'HDFC Bank
Limited', with its registered office in Mumbai, India. HDFC Bank commenced
operations as a Scheduled Commercial Bank in January 1995. The Housing
Development Finance Corporation (HDFC) was amongst the first to receive an 'in
principle' approval from the Reserve Bank of India (RBI) to set up a bank in the
private sector, as part of the RBI's liberalization of the Indian Banking Industry in
1994.

The Indian Banking System:

Banking in our country is already witnessing the sea changes as the banking sector
seeks new technology and its applications. The best port is that the benefits are
beginning to reach the masses. Earlier this domain was the preserve of very few
organizations. Foreign banks with heavy investments in technology started giving
some “Out of the world” customer services. But, such services were available only to
selected few- the very large account holders. Then came the liberalization and with it
a multitude of private banks, a large segment of the urban population now requires
minimal time and space for its banking needs.

Automated teller machines or popularly known as ATM are the three alphabets that
have changed the concept of banking like nothing before. Instead of tellers handling
your own

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cash, today there are efficient machines that don’t talk but just dispense cash. Under
the

Reserve Bank of India Act 1934, banks are classified as scheduled banks and non-
scheduled banks. The scheduled banks are those, which are entered in the Second
Schedule of RBI Act, 1934. Such banks are those, which have paid- up capital and
reserves of an aggregate value of not less then Rs.5 lacks and which satisfy RBI that
their affairs are carried out in the interest of their depositors. All commercial banks
Indian and Foreign, regional rural banks and state co-operative banks are Scheduled
banks. Non Scheduled banks are those, which have not been included in the Second
Schedule of the RBI Act, 1934.

The organized banking system in India can be broadly classified into three categories:
(i) Commercial Banks (ii) Regional Rural Banks and (iii) Co-operative banks. The
Reserve Bank of India is the supreme monetary and banking authority in the country
and has the responsibility to control the banking system in the country. It keeps the
reserves of all commercial banks and hence is known as the “Reserve Bank”.

Current scenario:-

Currently (2012), the overall banking in India is considered as fairly mature in terms
of supply, product range and reach - even though reach in rural India still remains a
challenge for the private sector and foreign banks. Even in terms of quality of assets
and
Capital adequacy, Indian banks are considered to have clean, strong and transparent
balance sheets - as compared to other banks in comparable economies in its region.
The Reserve Bank of India is an autonomous body, with minimal pressure from the
Government

With the growth in the Indian economy expected to be strong for quite some time
especially in its services sector, the demand for banking services especially retail

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banking, mortgages and investment services are expected to be strong. Mergers &
Acquisitions., takeovers, are much more in action in India.

One of the classical economic functions of the banking industry that has remained
virtually unchanged over the centuries is lending. On the one hand, competition has
had considerable adverse impact on the margins, which lenders have enjoyed, but on
the other hand technology has to some extent reduced the cost of delivery of various
products and services.

Bank is a financial institution that borrows money from the public and lends money to
the public for productive purposes. The Indian Banking Regulation Act of 1949
defines the term Banking Company as "Any company which transacts banking
business in India" and the term banking as "Accepting for the purpose of lending all
investment of deposits, of money from the public, repayable on demand or
otherwise and withdrawal by cheque, draft or otherwise".

Banks play important role in economic development of a country, like:

 Banks mobilise the small savings of the people and make them available for
productive purposes.

 Promotes the habit of savings among the people thereby offering attractive rates of
interests on their deposits.

 Provides safety and security to the surplus money of the depositors and as well
provides a convenient and economical method of payment.

 Banks provide convenient means of transfer of fund from one place to another.

 Helps the movement of capital from regions where it is not very useful to regions
where it can be more useful.

 Banks advances exposure in trade and commerce, industry and agriculture by

knowing their financial requirements and prospects.

 Bank acts as an intermediary between the depositors and the investors. Bank also
acts as mediator between exporter and importer who does foreign trades.

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Thus Indian banking has come from a long way from being a sleepy business
institution to a highly pro-active and dynamic entity. This transformation has been
largely brought about by the large dose of liberalization and economic reforms that
allowed banks to explore new business opportunities rather than generating revenues
from conventional streams (i.e. borrowing and lending). The banking in India is
highly fragmented with 30 banking units contributing to almost 50% of deposits and
60% of advances.

The Structure of Indian Banking:

The Indian banking industry has Reserve Bank of India as its Regulatory Authority.
This is a mix of the Public sector, Private sector, Co-operative banks and foreign
banks. The private sector banks are again split into old banks and new banks.

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 Reserve Bank of India
[Central Bank]

Scheduled Banks

Scheduled Commercial Scheduled Co-operative Banks

Banks

Public Sector
Banks Private Sector Foreign Regional
Banks Banks Rural Banks

Nationalized SBI & its Scheduled Urban Scheduled State

Banks Associates Co-Operative Co-Operative Banks
Banks

Old Private New Private

Sector Banks Sector Banks

Chart Showing Three Different Sectors of Banks

i) Public Sector Banks

ii) Private Sector Banks

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 Public Sector Banks

Nationalized Regional Rural

Banks Banks

Nationalized banks
This group consists of private sector banks that were nationalized. The Government of
India nationalized 14 private banks in 1969 and another 6 in the year 1980. In early
1993, there were 28 nationalized banks i.e., SBI and its 7 subsidiaries plus 20
nationalized banks. In 1993, the loss making new bank of India was merged with
profit making Punjab National Bank. Hence, now only 27 nationalized banks exist in
India.

Regional Rural banks

These were established by the RBI in the year 1975 of banking commission. It was
established to operate exclusively in rural areas to provide credit and other facilities to
small and marginal farmers, agricultural laborers, artisans and small entrepreneurs.

Private Sector Banks

Private Sector Banks

Old private new private

Sector Banks Sector Banks

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Old Private Sector Banks
This group consists of the banks that were establishes by the privy sectors, committee
organizations or by group of professionals for the cause of economic betterment in
their

operations. Initially, their operations were concentrated in a few regional areas.

However, their branches slowly spread throughout the nation as they grow.

New private Sector Banks

These banks were started as profit orient companies after the RBI opened the banking
sector to the private sector. These banks are mostly technology driven and better
managed than other banks.

Foreign banks
These are the banks that were registered outside India and had originated in a foreign
country. The major participants of the Indian financial system are the commercial
banks, the financial institutions (FIs), encompassing term-lending institutions,
investment

institutions, specialized financial institutions and the state-level development banks,

Non-Bank Financial Companies (NBFCs) and other market intermediaries such as the
stock brokers and money-lenders. The commercial banks and certain variants of
NBFCs are among the oldest of the market participants. The FIs, on the other hand,
are relatively new entities in the financial market place.

IMPORTANCE OF BANKING SECTOR IN A GROWING ECONOMY

In the recent times when the service industry is attaining greater importance compared
to manufacturing industry, banking has evolved as a prime sector providing financial
services to growing needs of the economy.

Banking industry has undergone a paradigm shift from providing ordinary banking
services in the past to providing such complicated and crucial services like, merchant
banking, housing finance, bill discounting etc. This sector has become more active

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with the entry of new players like private and foreign banks. It has also evolved as a
prime builder of the economy by understanding the needs of the same and
encouraging the

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development by way of giving loans, providing infrastructure facilities and financing
activities for the promotion of entrepreneurs and other business establishments.

For a fast developing economy like ours, presence of a sound financial system to
mobilize and allocate savings of the public towards productive activities is necessary.
Commercial banks play a crucial role in this regard.

The Banking sector in recent years has incorporated new products in their businesses,
which are helpful for growth. The banks have started to provide fee-based services
like, treasury operations, managing derivatives, options and futures, acting as bankers
to the industry during the public offering, providing consultancy services, acting as an
intermediary between two-business entities etc.At the same time, the banks are
reaching

Out to other end of customer requirements like, insurance premium payment, tax
payment etc. It has changed itself from transaction type of banking into relationship
banking, where you find friendly and quick service suited to your needs. This is
possible with understanding the customer needs their value to the bank, etc. This is
possible with the help of well organized staff, computer based network for speedy
transactions, products like credit card, debit card, health card, ATM etc. These are the
present trend of services. The customers at present ask for convenience of banking
transactions, like 24 hours banking, where they want to utilize the services whenever
there is a need. The relationship banking plays a major and important role in growth,
because the customers now have enough number of opportunities, and they choose
according to their satisfaction of responses and recognition they get. So the banks
have to play cautiously, else they may lose out the place in the market due to
competition, where slightest of opportunities are captured fast.

Another major role played by banks is in transnational business, transactions and

networking. Many leading Indian banks have spread out their network to other
countries, which help in currency transfer and earn exchange over it.

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These banks play a major role in commercial import and export business, between
parties of two countries. This foreign presence also helps in bringing in the
international standards of operations and ideas. The liberalization policy of 1991 has
allowed many foreign banks to enter the Indian market and establish their business.
This has helped large amount of foreign capital inflow & increase our Foreign
exchange reserve.

Another emerging change happening all over the banking industry is consolidation
through mergers and acquisitions. This helps the banks in strengthening their empire
and expanding their network of business in terms of volume and effectiveness.

EMERGING SCENARIO IN THE BANKING SECTOR

The Indian banking system has passed through three distinct phases from the time of
inception. The first was being the era of character banking, where you were
recognized as a credible depositor or borrower of the system. This era come to an end
in the sixties. The

Second phase was the social banking. Nowhere in the democratic developed world,
was banking or the service industry nationalized. But this was practiced in India.
Those were the days when bankers has no clue whatsoever as to how to determine the
scale of finance to industry. The third era of banking which is in existence today is
called the era of Prudential Banking. The main focus of this phase is on prudential
norms accepted internationally.

HDFC Group-
HDFC Bank with its six associate banks commands the largest banking resources in
India.

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

The stated reason for the nationalization was more control of credit delivery. After
this, until 1990s, the nationalized banks grew at a leisurely pace of around 4% also
called as the Hindu growth of the Indian economy. After the amalgamation of New
Bank of India with Punjab National Bank, currently there are 19 nationalized banks in
India.

Liberalization-

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

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

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

CURRENT SCENARIO-

Currently (2012), overall, banking in India is considered as fairly mature in terms of

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

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

In March 2012, the Reserve Bank of India allowed Warburg Pincus to increase its
stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an
investor has been allowed to hold more than 5% in a private sector bank since the RBI
announced norms in 2012 that any stake exceeding 5% in the private sector banks
would need to be vetted by them. Currently, India has 88 scheduled commercial banks
(SCBs) - 28 public sector banks (that is with the Government of India holding a
stake), 29 private banks (these do not have government stake; they may be publicly
listed and traded on stock exchanges) and 46 foreign banks. They have a combined
network of over 53,000 branches and 38,000 ATMs. According to a report by ICRA
Limited, a rating agency, the public sector banks hold over 75 percent of total assets
of the banking industry, with the private and foreign banks holding 18.2% and 6.5%
respectively.

Banking in India

1 Central Bank Reserve Bank of India

State Bank of India, Allahabad Bank, Andhra
Bank, Bank of Baroda, Bank of India, Bank of
Maharastra,Canara Bank, Central Bank of India,
Corporation Bank, Dena Bank, Indian Bank, Indian
2 Nationalised Banks
overseas Bank,Oriental Bank of Commerce, Punjab
and Sind Bank, Punjab National Bank, Syndicate
Bank, Union Bank of India, United Bank of India,
UCO Bank,and Vijaya Bank.
Bank of Rajastan, Bharath overseas Bank, Catholic
Syrian Bank, Centurion Bank of Punjab, City Union
Bank, Development Credit Bank, Dhanalaxmi

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 Bank, Federal Bank, Ganesh Bank of Kurundwad,
HDFC Bank, ICICI Bank, IDBI, IndusInd Bank,
ING Vysya Bank, Jammu and Kashmir Bank,
3 Private Banks
Karnataka Bank Limited, Karur Vysya Bank, Kotek
Mahindra Bank, Lakshmivilas Bank, Lord Krishna
Bank, Nainitak Bank, Ratnakar Bank,Sangli Bank,
SBI Commercial and International Bank, South
Indian Bank, Tamil Nadu Merchantile Bank Ltd.,
United Western Bank, UTI Bank, YES Bank.

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 Forms of Bank Finance

BANK CREDIT

Bank credit is the primary institutional source of working capital finance in India.
In fact, it represents the most important source for financing of current assets.

FORMS OF CREDIT

1. OVERDRAFT
Under cash credit/overdraft form/ arrangement of bank finance, the bank
specifies a predetermined borrowing/credit limit. The borrower can draw/ borrow
up to the stipulated credit/overdraft limit. Within the specified limit, any numbers
of drawls /drawings are possible to the extent of his requirement periodically.
Similarly, repayment can be made whenever desired during the period. The
interest is determined on the basis of the running balance/amount actually utilized
by the borrower and not on the sanctioned limit. However, a
minimum(commitment) chare may be payable on the unutilized balance
irrespective of the level of borrowing for availing of the facility. This form of
bank financing of working capital is highly attractive to the borrowers because,
firstly, it is flexible in that although borrowed funds are repayable on demand,
banks usually do not recall cash advances/roll them over and, secondly, the
borrower has the freedom to draw the amount in advance as and when required
while the interest liability is only on the amount actually outstanding. However,
cash credit/overdraft is inconvenient to the hampers credit planning. It was the
most popular method of bank financing of working capital in India till the early
nineties. With the emergence of new banking since the mid-nineties, cash credit
cannot at present exceed 20% of the maximum permissible bank finance (MPBF) /
credit limit to any borrower.

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2. LOANS
Under this arrangement, the entire amount of borrowing is credited to the
current account of the borrower or released in cash. The borrower has to pay
interest on the total amount. The loans are payable on demand or in periodic
installments. They can also be renewed from time to time. As a form of financing,
loans imply a financial discipline on the part of the borrowers. Form a modest
beginning in the early nineties, at least 80% of MPBF/CREDIT limit must now be
in the form of loans in India.

3. BILLS PURCHASED/DISCOUNTED
This arrangement is of relatively recent origin in India. With the
introduction of the new bill market scheme in 1970 by the reserve bank of
India(RBI), bank credit is being made available through discounting of usance
bills by banks. The RBI envisaged the progressive use of bills as an instrument of
credit as against the prevailing practice of using the widely-prevalent cash credit
arrangement for financing working capital. The cash credit arrangement gave rise
to unhealthy practices. As the availability of bank credit was unrelated to
production needs, borrowers enjoyed facilities in excess their legitimate needs.
Moreover, it led to double financing. This was possible because credit was done,
for example, by buying goods on credit from suppliers and raising cash credit by
hypothecating the same goods. The bill financing is intended to link credit with
the sale and purchase of goods and, thus, eliminate the scope for misuse or
diversion of credit to other purposes.

4. TERM LOANS FOR WORKING CAPITAL:

Under this arrangement, banks advance loans for 3-7 years repayable in
yearly or half-yearly installments.

5. LETTER OF CREDIT:
While the other forms of bank credit are direct forms of financing in
which banks provide funds as well as bear risk, letter of credit is an indirect form

28 | P a g e
 of working capital financing an banks assume only the risk, the credit being
provided by the supplier himself.
The purchaser of goods on credit obtains a letter of credit from a bank.
The bank undertakes the responsibility to make payment to the supplier in case the
buyer fails to meet his obligations. Thus, the modus operandi of letter of credit is
that the supplier sells goods on credit/ extends credit (finance) to the purchaser,
the bank gives a guarantee and bears risk only in case of default by the purchaser.

 SECURITIES REQUIRED IN BANK FINANCE :

Banks do not provide working capital finance without obtaining adequate

security. The following securities are the most important modes of security
required by bank-

1. HYPOTHECATION:
Under this mode of security, the banks provide credit to borrowers against
the security of movable property, usually inventory of goods. The goods
hypothecated, however, continue to be in the possession of the owner of these
goods (i.e., the borrower). The rights of the lending bank (hypothecate) depend
upon the terms of the contract between the borrower and lender. Although the
bank does not have physical possession of the goods, it has the legal right to sell
the goods to realize the outstanding loan. Hypothecation facility is normally not
available to new borrower.

2. PLEDGE:
Pledge, as a mode of security, is different from hypothecation in that in
the former, unlike in the goods which are offered as security are transferred to the
physical possession of the lender. An essential prerequisite of pledge therefore is
that the goods are in the custody of the bank. The borrower, who offers the
security, is called a ‘pawnor’ (pledgor), while the bank is called ‘pawnee’
(pledgee). The lodging of the goods by the pledgor to the pledge is a kind of
bailment. Therefore, pledge creates some liabilities for the bank. It must take
reasonable care of goods pledged with it. The term ‘reasonable care’ means car,

29 | P a g e
 which a prudent person would take to protect his property. He would be
responsible for any loss or damage if he uses the pledged goods for his own
purposes. In case of non-payment of the loans, the bank enjoys the right to sell the
goods.

3. LEIN:
The term lien refers to the right of a party to retain goods belonging to
another party until a debt due to him is paid. Lien can be of two types - I)
particular lien , & II) general lien. Particular lien is right to retain goods
until a claim pertaining to these goods is fully paid. On the other hand, general
lien can be applied till all dues of the claimant are paid. Banks usually enjoy
general lien.

4. MORTAGE:
It is the transfer of a legal/ equitable interest in specific immovable
property for securing the payment of debt. The person who parts with the interest
in the property is called ‘mortgagor’ and the bank in whose favour the transfer
takes place is the ‘mortgagee’. The instrument of transfer is called the ‘mortgage
deed’. Mortgage is, thus, conveyance of interest in the mortgaged property. The
mortgage interest in the property is terminated as soon as the debt is paid.
Mortgages are taken as an additional security for working capital credit by banks.

30 | P a g e
 ASSESSMENT OF WORKING CAPITAL

A) SIMPLIFIED TURNOVER METHOD

 Under this method for working capital purposes for borrowers

requiring fund-based limits upto Rs.5 crore SSI borrowers and Rs.2
crore in case of other borrowers, may be assessed at minimum of 25%
of the projected annual turnover of which 115th should be provided by
the borrower (i.e. minimum margin of 5% of the annual turnover to be
provided by the borrower) and the balance 4/5 th (i.e. 20% of the annual
turnover) can be extended by way working capital finance.

 The projected turnover/output may be interpreted as projected “gross

sales “which will include excise duty also.

 Since the bank finance is only intended to support need-based

requirement of a borrower, if the available NWC (net long term surplus
funds) is more than 5% of the turnover the former should be reckoned
for assessing the extent of bank finance.

B) MAXIMUM PERMISSIBLE BANK FINANCE SYSTEM (MPBF)

 Assessment of working capital limits in respect of borrowers not

eligible to provided fund based working capital limits under
‘simplified turnover method’ is to be done as per MPBF system
‘second method of lending’, except in case of tea and sugar industry
where credit requirement is assessed as per cash budget system.

 Under this method, for assessment of borrowers WC needs, the

projections submitted by the borrower in the various forms mentioned
that the following year is relevant. The first step in assessing the
quantum of WC finance is to find out whether the projections given by

31 | P a g e
 the borrower are reasonable. Any optimism or pessimism in accepting
projections is neither desirable for the bank nor for the borrower as it
may lead to over-financing or under-financing.

 To assess the reasonableness of borrower’s projections, the following

factors should be kept in view;

a) The branches can use with advantage the past data given by the borrower as well
as the data available with it. The comparison has to be made between the past
performance and the future projections. If the future projections are markedly
different form the past trend in relation to projected rate of growth, the reasons for the
same have to be ascertained before accepting the various projections.

b) The projections given by the borrower are normally based on certain

assumptions such as market demand, cost of raw materials, price, availability of
inputs and other environmental factor. The bank has to assess how far these
assumptions are realistic and materialize.

c) How limits already sanctioned by the bank have been utilized by the borrower in
the past? Has the conduct of the account been as per terms of sanction or these have
been frequently violated.

d) Critical analysis of sales projections – the most important area to be looked into
is sales. All other aspects are directly related to the projected level of sales. Therefore,
determining the projected level of sales is the first step in assessing the working
capital needs of a borrower. Once the level of sales has been determined in relation to
sales. The projected level of sales depends upon:

 What is the installed and licensed capacity? Does it have any idle capacity,
which can now be utilized?

 Are essential inputs available to take care of projected production figures?

32 | P a g e
  What are the present market conditions and terms of sales? What plans are there
to boost sales?

 What is the position of order book/orders in hand?

 From what sources increase in NWC will be met?

 Is the unit proposing to tap the export potentials/ markets? What are the
prospects for exports?

 How the increase in production is going to affect the quality and cost of
production?

 Is the unit undertaking any expansion, modernization or diversification

programme?

A higher than normal sales estimate for the following year can be accepted only
after the bank is satisfied on the basis of the above scrutiny that the projected level of
sales can be achieved and the available past data and future plans give positive
indications in this regards. The bank has also to ensure that borrower is whiling to
create the necessary support to achieve the sales target.

1. The branches, having satisfied itself as to the projected level of sales, can
determine
the other data in relation to sales. The following steps can be taken for finalizing
other data:

 The relationship between different items constituting cost of production can be

studies in relation to sales and cost of sales. It is to be ensured that the projected
increase in respect of any items is not out of proportion to the past relationship.
Valuation of various items should be based on current cost.

33 | P a g e
  After finalizing the above-mentioned projections, the holding period of current
assets is to be determined. The holding period of chargeable current assets can
be determined based on the rule that the projected holding should be preferably
lower of norms or past practice.

 The levels of other current assets can also be estimated on the basis the
borrower’s past practice.

 The projected level of NWC should at least be 25% of total current assets under
second method of lending.

 The bank is to bridge the gap between current assets and current liabilities after
ensuring the borrower’s contribution. Therefore, the quantum of bank finance is
very much dependent upon availability of short-term credit from other sources
i.e. other current liabilities is projected properly.

C) CASH BUDGET SYSTEM

In case of tea and sugar industries of finance may be at the peak during certain
months while the sale proceeds may be realized throughout the year to repay the
outstanding in the account. Therefore, credit limits are fixed on the basis of projected
monthly cash budgets to be received before beginning of the season. Branches should
follow the procedure/guidelines issued form time to time through various circulars for
financing tea and sugar industries.

FIXATION OF FUND-BASED AND NON- FUND BASED LIMITS

 After arriving at the MPBF on the basis of inventory and receivable norms and
appropriate method of lending, the various fund based & non-fund based limits
and sub-limits have to be decided. The fund based limits should not exceed the
MPBF.

34 | P a g e
  The bulk of the inventory limits are set up generally in the shape of cash credit,
the receivable limits may be either by way of C/C against hook debts or by way
of bills limit. Within the sanctioned limit, drawing power may be allowed on the
basis of monthly stock statements, depending upon the regularity and reliability
and to ensure there is no double financing.

 In addition to the fund-based limits, non-fund based limits like inland &foreign
L/C, guarantees and acceptances are given keeping in view the needs as well as
the capacity of the borrower.

Loan system for delivery of bank credit

In order to bring out an element of discipline in the utilization of bank credit and
gain better control over flow, a “loan system for delivery of bank credit” was
introduced by RBI. The said system has been extended in phased manner to cover
larger number of borrowers.

 Loan component and cash credit component.

 Under this system, after the assessment of MPBF of a borrower,
working capital requirements are bifurcated into ‘loan component’,
termed as Working Capital Demand Loan (WCDL) and ‘cash credit
(cc) component’. Normally, borrowers are expected to avail the ‘loan
component’ only after having fully availed/utilized the prescribed
percentage of CC component of MPBF. However, if a borrower desires
to draw the ‘loan component’ first, the same can be agreed to.
 The extant guidelines for annual review of working capital limits are
invariably to be strictly observed even under the system of loan
delivery. As regards the guidelines relating to the cut off point of the
working capital limits above which loan delivery system is applicable,
the percentages of limits to be allowed as WCDL and CC component,
the repayment of WCDL, the procedure for renewal/rollover of

35 | P a g e
 WCDL, incumbents should follow the instructions advised through HO
circulars form time to time.
 The loan system would be applicable to borrower accounts classified
as ‘standard’ or ‘substandard’
 Adhoc credit limit for meeting temporary requirements should be
sanctioned only after the borrower has fully utilized the “cash credit
component” and the ‘loan component’ of the MPBF. In the case of
consortium, member banks are normally expected to share the “cash
credit component” and the “loan component” on a pro rata basis of
their individual shares of MPBF.
 The bifurcation of the credit limit into ‘loan’ and ‘cash credit’ should
be effected after excluding export credit limits (pre-shipment and post-
shipment).
 Bills limit for inland sales is to be fully carved out of the loan
component. Bills limit also includes limit for purchase of third party
( outstation) cheques , banks drafts.
 Suitable clauses are to be incorporated in the loan document to provide
for a right to recall working capital credit facility including the loan
component.
 Exemption – at present sugar, tea fertilizer and information technology
& software industries are exempted form the purview of loan system
for delivery of bank credit.

36 | P a g e
PROCEDURE FOR OBTAINING WORKING CAPITAL
FINANCE

Regarding loan proposal

We refer to the captioned loan proposal recommended by you for

sanctioning/renewing advance facility the loan requested by the applicant. We are
pleased to inform you that, the board of directors in the meeting held on
________________. Have considered the proposal for sanction / renewal and the
detailed of same as under:-

Mr. / Mrs.-----------

Limit requested-
Type
Limit sanctioned / renewed
Margin
Margin
Repayment holiday
Repayment in monthly installment
Rate of interest with monthly rests+ penal interest @ % to be charged on the
overdue amount on monthly basis.
Installment Rs-------per month
1st installment due
Security:-

Prime: ---------------------------------

Collateral: ------------------------------

37 | P a g e
 Valuation amount Rs.------------------

3.2 Recommendation’s of various committees on working

capital finance

Tandon Committee Recommendations on working capital finance

from the bank:-
A study group, popularly known as tandon committee, was appointed by
Reserve Bank Of India in July 1974, under the chairmanship of shri.
P.L.Tandon,to suggest guidelines for national allocation and optimum use of bank
credit. Tandon committee also highlighted the weaknesses in the existing system of
working capital finance, as pointed out by the committee. The Tondon Committee
suggested that the borrower should be allowed to hold reasonable level of current
assets. Particularly in the case of inventories, the Tondon committee suggested that
the level of inventory should be as per the requirement only and in any case
excessive investments in the inventories should be avoided. The banker should
finance only those receivables which are in tune with the practices of the borrower’s
company and industry. In order to avoid excessive investments in inventories, there
is a need for having some uniform norms. The Tondon Committee in its final report
has suggested norms for 15 industries. Industries like heavy engineering and sugar
were omitted.
The recommendations of the Tandon Committee are based on the following
notions

1. Operating plan:
The borrower should indicate the likely demand for credit. For this
purpose, he should draw operating plans for the ensuing year and supply them to the
banker. This procedure will facilitate credit planning at the bnks level. It will also

38 | P a g e
 help the bankers in evaluating the borrower’s credit needs in a realistic manner and
in the periodic follow-up during the ensuing year.

2. Production-based financing:
The banker should finance only the genuine production needs of the
borrower. The borrower should maintain reasonable levels of inventory and
receivable; he should hold just enough to carry on his target production. Efficient
management of resources should therefore, be ensured to eliminate slow moving
and flabby inventories.

3. Partial bank financing:

The working capital needs of the borrower cannot be entirely financed by
the banker. The banker will finance only a reasonable part of it; for the remaining
the borrower should depend upon his own funds, generated internally and
externally.

Following are the major recommendations:

1. Inventory and receivable norms

 The borrower should be allowed to hold only a reasonable level of
current assets, particularly inventory and receivables;

 The banker should finance only those receivables which are in tune
with the practices of the borrower’s firm and industry;

 The committee suggested norms for 15 industries excluding heavy

engineering and highly seasonal industries, like sugar. The norms
were applied to all industrial borrowers, including small-scale
industries, with aggregate limits from the banking system in excess of
Rs.10 lakhs;

 Norms are prescribed separately for 49 different industries. The norms

appropriate to each unit should be applied.

39 | P a g e
 2. Lending norms
It recommended that the banker be required to finance only a part of the
working capital gap; the other part was to be financed by the borrower from
the long-term sources. Working capital gap is defined as current assets minus
current liabilities other than the bank borrowing.
Current assets will be taken at estimated value, or as per the tendon
committee norms, whichever is lower. Current assets will consist of inventory
and receivables, referred as chargeable current assets and other current assets.

3. Maximum Permissible Bank Finance (MPBF):

Committee suggested the following three methods of
determining the permissible level of bank borrowings:

 First method: In the first method of lending, the borrower will

contribute 25% of the working capital gap; the remaining 75% can be
financed from bank borrowings. This can be represented as --- MPBF
= 75% of W.C.G.
W.C.G. = C.A- C.L.

 Second method: The borrower will contribute 25% of the total current
assets. The remaining of the working capital gap can be bridged from
the bank borrowings. This can be represented as ---- MPBF = 75% of
current assets.

 Third method: The borrower will contribute 100% of core assets and
25% of the balance of the working current assets. The remaining of the
working capital gap can be met from the bank borrowing. This can be
represented as ---- 75% (current assets- core current assets) - current
liabilities.
The Reserve Bank of India has implemented only the first two methods. The
recommendations apply to all borrowers having limits in excess of Rs.20 lakhs
from the banking system. At the time when this system of lending was introduced,

40 | P a g e
 in some cases the net working capital was negative while in others it was equal it
was equal to 25% of working capital gap. The committee allowed this deficiency
to be financed, in addition to the permissible bank finance by banks. It was
however, to be regularized over a period of time depending upon the funds
generating capacity and ability of the borrower. This kind of credit facility was
called working capital term loan.

Methods of determining MPBF as under the Three Methods of Lending.

Particulars Method I Method II

Method III

Core Assets 20 20
20

Other Current Assets 80 80

80

Total Current Assets 100 100

100

Less. Current liabilities 20 20

20

Working Capital Gap 80 80

80

Less: Borrower’s Contribution 20 25

40
MPBF 60 55
40

41 | P a g e
 Calculation of borrower’s Contribution

1st method: 25% of working capital gap

80*25% = 20

2nd method: 25% of total current assets

100*25% = 25
3rd method: 100% of core current assets
20+ (80*25%) = 20+20 =40

4. Style of Credit:
In view of the deficiencies of the cash credit system of lending, the
committee recommended the bifurcation of total credit limit into fixed and
fluctuating parts.
The fixed component was to be treated as a demand loan for the year
representing the minimum level of borrowings, which the borrower expected to use
throughout the year. The fluctuating component was to be taken care of by a
demand cash credit, which could be partly used by way of bills.
The committee also suggested the interest differentials. As an incentive to
switch over to the new style of credit, it recommended that interest rate on the loan
component be charged lower than the cash credit account. The RBI stipulated the
differential at 1%.

5. Information system:
The committee advocated for the greater flow of information both for
operational purposes and for the purpose of supervision and follow-up.
Borrowers with credit limits of more than Rs.1 crore were required to
supply the quarterly information. From the periodical data supplied, the bank should
ascertain whether the actual result was in conformity with the expected result of

42 | P a g e
 there was a variance calling for remedial action. A “+ or -10%” variance was
considered normal. The variance beyond this limit needed to be investigated.
The main thrust of the Tondon committee was that the banker should be
treated as a partner in the business with whom information was to be shared freely
and frankly.

NPA treatment for WCF

Definition of NPA

An asset, including a leased asset, becomes non-performing when it ceases to

generate income for the bank. A ‘non performing asset’ (NPA) was defined as a credit
facility in respect of which the interest and/ or installment of principal has remained
‘past due’ for a specified period of time. The specified period was reduced in phased
manner as under

Year ending march 31 Specified period

1993 Four quarters

1994 Three quarters

1995 onwards Two quarters

NPA borrower wise of facility –wise

The criteria for classifying an account into performing and non-performing

assets are based on the record of the recovery of interest/installment and conduct of

43 | P a g e
the running account. Further, all the facilities granted to a borrower will have to be
treated as NPA and not particular facility or part there of which has become NPA.

Net worth of borrower/guarantor/value of security

Availability of security of net worth borrower/guarantor should not be
taken into account for the purpose the treating an advance as NPA or otherwise, as
income recognition is based on record of K.

FORMAT OF CALCULATING OF N.P.A.

PARTICULAR AMT

0000

Gross advances 0000

Gross N.P.A. 0000

Gross N.P.A. as percentage of net advances 0000

Deductions

Balance in interest suspense A/C 0000

DCGC/ECGS claims received & held pending adjustment 0000

Partly payment received & kept in suspense A/C 0000

Net Advances ( 1 - 4) 0000

44 | P a g e
 Net N.P.A. 0000

Net N.P.A. as percentage of net advances 0000

3.3 Calculation of working capital of Vishwas co-operative

bank
(Last 3 years)

particular 31/03/2015 31/03/2016 31/03/2017

Total of balance-sheet
Cash & stamp 1681022 1590806 1919128
5 6 6
Bank balance 871925 1887943 2846425
0 2 0
Investment 24778394 23041204 27245704
2 5 7
Loans & Advances 36643291 39971008 48672094
8 6 1
Overdue & Bills for 372607 520651 818808
collection 3 5 9
Assets 1722536 1923048 2485284
3 2 5
Other assets 1059062 1108862 1665519
2 4 3
Branch adjustment 2045 - 10533
7 7
67130885 70043525 85663498
Total 0 0 8
Deductions

Contra entries
Loan recovery scheme 231112 463823 706704
6 7 2
Bills for collection 141494 56827 112104
7 8 7
Total 372607 520651 818808
3 5 9

Working capital of bank 66758277 69522873 84844689

45 | P a g e
 7 5 9

Year N.P.A.
2014 2.86
2015 2.54
2016 2.40
2017 1.51

From this analysis, we can see that Working Capital of bank is increasing year by
year. This is good for bank because the more the working capital the more will be the
investment by the bank and the more is the opportunity to make profits.
.

N.P.A. of last few years

By Trend Analysis
Moving Average Method

06 2.86 + 2.54 = 2.70

2

07 2.54 + 2.40 = 2.47

2

46 | P a g e
 08 2.40 + 1.51 = 1.96
2

2.5

1.5 NPA
Avg. Npa
1

0.5

0
2015 2016 2017

The above analysis shows that NPA is decreasing in year by year. This is very good
feature for bank because bank can have more faith in its customers and also depend
on the current scrutiny procedure.

Vishwas Co.op Bank ltd. Nashik

Balance Sheet As on 31/03/2017

LIABILITIES RS. RS. ASSETS RS. RS.

Share Capital Cash In Hand

Share Capital Cash In Hand 1,67,71,586
Reserve & Other Funds Stamp In Hand
Bad & Doubtful Debts Res. 16,64,036 Franking Stamp In Hand 24,17,080
Std. Assets Reserve 16,51,010 Stamp On Hand 2,620
Building Fund 58,59,155 Total Stamp In Hand 24,19,700
Reserve Funds 88,76,812
Tent. Bad & doubtful Res. 26,94,848 Bank Balance
Charity Fund 3,000 MSC.Bank Nsk.A/c 6,889
Dividend Equi. Fund 21,000 S.B.I. 88,25,816
General Fund 2,06,000 MSC Bank Mumbai 8,52,459
Inv.Dep. Res. 15,089 Ndcc Bank Model Col.Br. 3,16,918
Total Res. & Other Funds 2,09,90,950 HDFC Bank Pune A/C 2,48,850
Central Bank Of India 5,148
Deposits HDFC Bank SGL A/C 6,27,234
Current Account 4,81,95,061 NDCC Bank Agra Rd. Br. 9,27,234

47 | P a g e
Saving Account 13,95,02,581 HDFC Bank Nashik A/C 87,06,522
Reccuring Account 1,14,83,392 I.D.B.I. Bank 79,37,243
Fix Account 24,72,67,019 Punjab National Bank A/C 10,000
Re-investment Account 22,70,49,993 Total Bank Balances 2,84,64,250
Locker Security Deposit 29,10,000
Matured Dep. Not paid 3,48,74,789 Investment
Overdraft Ag. Fdr 21,933 Non SLR Inv. 62,47,500
Cash Credit (stock-hyp) 6,938 NMC 7.5% Bonds 3,40,000
Total Deposits 71,13,11,707 Reserve Fund Inv. 5,00,000
MSC Bank Reserve Fund Inv. 75,00,000
Loan recovery Scheme Co-op Bank shares 13,62,050
Loan recovery Scheme 3 Building Fund Inv. 5,00,000
Outward Bills For Collection MSC Bank Inv. 52,50,000
(contra)
O.B.C. 11,21,047 NDCC Bank Inv. 1,40,00,000
Overdue Int. Reserve S.B.I. Inv. 50,00,000
NPA Int. Reserve 70,67,042 MSFC 10.25% Bond Inv. 10,00,000
Interest Payable Govt. Securities 12,25,99,392

Interest Payable 25,51,929 IDBI Bank Inv. 6,50,00,005

Int. In Cash For Quarterly FD 5,32,592 Sarswat Bank Inv. 75,00,000
Total Int. Payable 30,84,521 Shamrao Vitthal Bank Inv. 50,00,000
ICICI Preduntial Bonds 30,44,100
Other Payable & Provisions IOB Bonds Inv. 30,16,500
Audit Fee Payable 4,44,084 6.75% APSFC Bonds 45,97,500
T.D.S. Payable 21,736 Thane Janata Bank For Inv. 70,00,000
Pay order 6,11,89,746 Cosmos Bank For Inv. 50,00,000
Provisions for Expenses 1,20,710 Yes Bank Inv. 70,00,000
Sundry Crs. 22,80,966 ICICI Fix Maturity Plan 10,00,000
Bonus Payable 9,32,352 Total Inv. 27,24,57,047
Div. Payable 8,32,866
Div. Payable 2005/06 9,69,144 Loans & Advances
Div. 2006-07 2,88,038 Gala/Shade Purchase
Staff Welfare Fund 1,41,244 Staff Loan (Term Loan) 90,00,561
Education Fund Payable 30,000 O/D Ag.FDR 9,69,55,272
Bank Guarantee A.E.O. 2,90,000 Vehical Hypothication 1,43,01,768
Obligations
Closing Allowance Payable 3,21,27 Housing Loan (New) 3,32,04,714
6
Total Other Payable & Prov. 6,78,62,163 Housing Loan (old) 3,79,76,569
Personal Loan 1,43,50,294
Profit Swapnapurti Loan 12,24,403
Profit & Loss 35,62,273 Cash Credit (Stock-Hyp) 2,41,82,577
Balance Of Profit 3,733 Term Loan 21,69,77,295

Total Profit 35,66,006 Self Help Group 3,39,328

Vishwadeep Yojana 38,68,750
Stock Hypo (Term Loan) 17,22,694
Cash Credit 1,53,65,750
B/R 14,60,230
Total Loans And Advances 48,67,20,941

48 | P a g e
 Overdue(NPA) Int. Receivable
(Contra)
NPA Int. Receivable 70,67,042

Outward Bills Receivable

O.B.R. 11,21,047

Fixed Assets
Vehicle Account 12,67,226
Fur. Fixture & Dead Stock 1,24,05,182
Library 86,402
L&B 1,10,94,034
Total Fixed Assets 2,48,52,845

Other Assets
Sundry Drs. 18,87,093
Outward Clearing 11,99,450
Tangible Assets 1,15,721
Prepaid Exp. 3,61,773
Stock Of P&S 4,62,616
Int. Receivable On Inv. 44,01,595
Tds Receivable 2,88,904
Int. Recei On Govt. Securi. 18,45,137
Staff Advance 24,600
Premium On Inv. 57,54,648
A.E.O. Obligations Bank 2,90,000
Guarantee
Gold/ Silver Ornaments 23,653
Total Other assets 1,66,55,193

Branch Adjustment
Head Office 71,165

ITZ Cash Cards

ITZ Cash Cards 34,172

TOTAL OF LIABILITIES 85,66,34,990 TOTAL OF ASSETS 85,66,34,990

49 | P a g e
 For understanding the procedure of lending working capital of the bank let us
assume the following cases.

CASE 1

Balance sheet of ABC Ltd

Liabilities Rs. Assets Rs.

Equity Capital 1000000 Goodwill(At cost) 500000
6% Pref. Capital 500000 Plant & Machinery 600000
General Reserve 100000 Land & Building 700000
Profit & Loss A/C 400000 Furniture 100000
Provision for
Taxation 176000 Inventories 600000
Bills payable 124000 Bills Receivable 30000
Bank overdraft 20000 Debtors 150000
Creditors 80000 Bank 200000
Investments(Short-
12% Debentures 500000 term) 20000
2900000 2900000

Working Capital Gap

Particular Rs
Current Assets
Inventories 6,00,000
B/R 30,000
Drs. 1,50,000

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 Bank 2,00,000
Inv. (Short Term) 20,000
Total Current Assets A 10,00,000
Current Liabilities
B/P 1,24,000
Bank Overdraft 20,000
Crs. 80,000
Provision for Taxation 1,76000
Total of Current Liabilities B 4,00,000

W/C Gap (A - B ) C 6,00,000

Particular Method 1 Method 2

W/C Gap 6,00,000 6,00,000

Less - -
Borrower Contribution 1,50,000 2,50,000
(25% of W/C Gap ) (25% of Current Assets)
MPBF 4,50,000 3,50,000

So, From the MPBF method we can say that Bank will go with 2 nd method
because in this case borrowers contribution is more and chances of bank getting into
loss if considered about the NPA in effect.

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 CASE-2

Balance sheet of XYZ Ltd.

Liabilities Rs. Assets Rs.

Share Capital(Rs.10
each) 1000000 Land & Building 500000
Profit & Loss A/C 200000 Plant & Machinery 300000
Creditors 250000 Stock 150000
Bills Payable 150000 Debtors 150000
Bills Receivable 125000
Cash & Bank 175000
Furniture 200000
1600000 1600000

Working Capital Gap

Particular Rs
Current Assets
Stock 15,0000
B/R 12,5000
Drs. 15,0000
Cash 17,5000

Total Current Assets A 6,00,000

Current Liabilities
B/P 15,0000
Crs. 25,0000

Total of Current Liabilities B 4,00,000

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 Method 1 Method 2

W/C Gap 2,00,000 2,00,000

Less - -

Borrower Contribution 50,000 1,50,000

(25% of W/C Gap ) (25% of Current Assets)

1,50,000 50,000

So, From the MPBF method we can say that Bank will go with 2 nd method
because in this case borrowers contribution is more and chances of bank getting into
loss if considered about the NPA in effect.

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 CHAPTER-4

CONCLUSIONS

Conclusions:

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 The study revealed the increased importance of the Banking sector for
industry & trade and its contribution in the smooth operation of industries and its hand
in the industrial growth as banks provide the much needed large amounts of working
capital to industries.

Following important conclusions were drawn from the study:-

 Banks are supposed to gather certain preliminary information from the parties
but it is not necessary that the information given is correct in all respects and if
loan is sanctioned to such borrowers it proves to be a bad asset for the bank. In
some cases, even if the information is correct and bank has sanctioned loan to
a sound party may not be in a position to repay the loans. And yet another case
can be of a deliberate fraud committed by a party.
Even after so much of analyses and care taken for providing or lending fund banks
have to face large number of frauds. Large value frauds take place in banks, specially
in credit accounts.
The reasons for the frauds are the following:-

 Sometimes there is lack of pre-sanction survey including improper

identification of borrowers.
 Even in certain cases, physical verification of collateral security
offered was not done.
 Appraisal is not done properly and there undue dependence on
borrower’s financial statements including projected sales turnover,
which are at times manipulated by some hired professionals.
 Disbursements are sometimes made, even before completion of all
terms & conditions of the sanction.
 Undue haste is shown in case takeover of borrowal accounts from
other banks.

 Banks as well as the customers face problem in initial stage of scrutiny as the
customer is not aware of the information he has to submit and even the

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 bankers demand information in pieces. This cause inconvenience to both and
the time in the sanction of the loan also elongates.
 Another problem that is faced in the working capital loans is regarding interest
rate payment. The interest rate is fixed on the basis of PLR’s STPLR’s which
keep fluctuating because of the changes in the RBI’s credit policies. If the
interest rates increase at a certain point of time, customers are relevant to pay
interest at the higher rates. This generates the risk of non-payment by
customers.

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 CHAPTER-5

RECOMMENDATIO
NS

Recommendations:

According to me, following steps need to be taken to overcome the problems

that the bank is faced with:-

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 1. As soon as customer approaches the bank for working capital finance, the
officers in the loans section need to explain to the customer all especially
terms related to the guarantee & guarantor, securities & the interest rates. This
would help in avoiding the misunderstanding later on.

2. It was also noted that all the required information was not asked for at all same
time. Rather it was demanded in pieces. This created a bad image of the bank
in the eyes of the customer and also looses interest in providing the authentic
information. Therefore, it is suggested that all the information be collected at
once only.

3. All the information is scrutinized in one setting because otherwise the banker
would loose the links & will have to review all the information all over again,
every time to recall the earlier analysis, which would waste a lot of time.

4. It shoud be made clear to the borrower that PLR’s are subject to change and as
PLR’s change the rate of interest to be charged may increase or decrease and
he will have to pay interest accordingly.

5. Bank should not make the disbursements until and unless the borrower has
fully completed all the formalities and all terms & conditions are complied
with.

6. There were cases where the borrower had diverted finance, granted for
working capital purposes, for other activities or had made investments in
associate companies or subsidiaries. Some borrowers also went to the extent of
transferring the amount of packing credit account & cash credit account in to
their saving accounts to earn interests. Therefore, it is recommended that the
bank should sanction the loan only after fully satisfying itself that the purpose
for which the loan is sanctioned is a genuine one. It should also testify the
credit worthiness of party from the market. The penalty should be increased
and such an act should also be liable for other punishments.

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 7. Bank should also provide same kind of reward on the best performing loan
accounts such as rebate on interest on time, submission of statements in time
etc.

8. It should be checked that the quarterly statements reveal the true position of
the parties dealings because there were cases when the parties had played
mischief with figures to window dress their position so that the bank does not
take any measures against them for being able to achieve the projected levels.

9. Training needs to be imparted to personal handling credit management and

they also need to be trained in customer management.

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 CHAPTER -6

Bibliography

Bibliography

Books referred.

1) Financial management: I.M. Pande.

2) Financial management: K.P. Rustogi.

Websites referred.

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 1) www.vishwasbank.com

2) Google

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