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³CREDIT APPRAISAL ON WORKING CAPITAL´Ê

Submitted in partial fulfillment of the requirements for the award of

MBA

With specialization in

marketing

Submitted by

Mr. vijay kumar.m

Reg.No: MBA/08/68

Under the Guidance of

Mr. SohilNaragundkar

Indian Institute of Business Management


 
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Chapter 1 Rationale for the study 6-7

Chapter 2 Objective of the study 8-9

ºÊ Title of the Project
ºÊ Objective of the study
ºÊ Scope of the study

Chapter 3 Profile of the Company 10-21

Chapter 4 Theoretical Perceptive 22-27

Chapter 5 Research Methodology 28-29

ºÊ Research Design
ºÊ Data collection methods

Chapter 6 Data analysis and interpretations 30-59

Chapter 7 Findings 60-61

Chapter 8 Limitations 62-63

Chapter 9 Expected contribution from the study 64-65


 
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I the student studying in MBA sixth Tri-semester here by declare that the project work entitledʳa
study on retailers perception on Hyderabad industries limited´

Ê successfully completed and submitted by me. Under the guidance of

Mr.ShoilNaragundkar Prof, HET¶s INSTITUTE OF MANAGEMENT STUDIES. This is my
original work and has not been submitted earlier to any other Institution.

The report is for the fulfillment of the sixth-semester MBA. The

Matter in this report is based on the data collected by me at´ CREDIT APPRAISAL ON
WORKING CAPITAL

Êin RAICHUR.

ÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊ

ÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊʏ  Ê

ÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊ


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AKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my guide Ô
Ê
SohilNaragundkar

Ê for his exemplary guidance, monitoring and constant encouragement throughout the course of
this thesis. The blessing, help and guidance given by him time to time shall carry me a long
way in the journey of life on which I am about to embark.

I also take this opportunity to express a deep sense of gratitude to

Ê 
Ê Ê   Ê   Ê  
Ê
Ê  Ê 
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ÔÊ  Ê !Ê for his cordial support, valuable information and guidance, which
helped me in completing this task through various stages.

Lastly, I thank almighty, "#Ê $  %Ê  &Ê   & for their constant encouragement without
which this assignment would not be possible.


 
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³CREDIT APPRAISAL ON WORKING CAPITAL´

objectives of the project

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Ê Banking Regulation Act-1949
Ê Definition Of Co-Operative Bank
Ê alues Of Co- Operative Bank
Ê Principles Of Co-Operative Bank


 
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ºÊ Sharanegowda Bayyapur ( President)
ºÊ Ramesh vaidya ( Director)
ºÊ K. Sharanappa ( Director )
ºÊ Pampanagowda Badarli ( Director )
ºÊ S. B. Reddy ( Director )
ºÊ Halappa achar ( Director )
ºÊ Shyamrao Kulkarni ( Director )
ºÊ ishwanath patil ( Director )
ºÊ Rajshekhar Naik ( Director )
ºÊ Amregowda ( Director )
ºÊ M. enkagowda ( Director )
ºÊ Pratap Patil maski ( Director )
ºÊ R.TimmayyaShetti (Apex Bank rep.)
ºÊ B.H. Patil (Co-op societies joint
ºÊ registrar)
ºÊ Rajashri B. Agsar (Co-op Societies sub-Registrar)
ºÊ D.S. elu (NABARD Raichur, Spl.
Invity director )
ºÊ H.K. Chandrashekar (D.G.M. Apex Bank Bangalore,
Spl. Invity director)

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SERICES:

Loans Savings Other services

Ê Solar loan Ê Samruddhi deposit Ê Any branch
Ê Housing loan Scheme banking
Ê Furniture loan Ê Lakhpati RD a/c Ê Free demand drafts
Ê Gold loan Ê Kalpataru cash Ê SB a/c with
Ê Business loan certificate insurance cover of
Ê ehicle loan Ê Saving bank 1Lakh
Ê Machinery loan advantage a/c Ê 200 Insurance
Ê Car loan products


 
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Loans And Advances :

Raichur District Central Co-op Bank Ltd, Raichur providing following kinds of loans and
advances:

Ê Housing Loan : Bank lend hosing loan for construction of new house or repair of
existing one to its customers.
Interest Rate : 9.5%

Ê Furniture loan : Bank lend furniture loan to its customer for have furniture to their home.
Interest Rate : 12.5%

Ê Business Loan: Bank lend business loan for start new business, or develop existing one
to its customers.
Interest Rate : 12%

Ê ehicle Loan : Bank lend vehicle loan for purchase new vehicle to its customers.
Interest Rate :12.5%

Ê Machinery Loan : Bank lend machinery loan to its customers for have electrical
equipments , computers, laptop etc.
Interest Rate : 12.5%

Ê Car Loan : Bank lend car loan to its customers for have new car.
Interest Rate : 9.5%


 
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Savings:

Raichur District Central Co-op Bank Ltd, Raichur providing following savings schemes to
its customer:
Ê Samruddhi Deposit scheme : Its maturity period is one year .
Interest Rate : 8%

Ê Lakhpati RD account : customer have RD account facility they can deposit money up to
one lakh rupees.

Ê Kalpataru cash certificate : A cash certificate which duration is five years.

Ê Savings bank advantage A/c : Customers have facility of have savings bank account with
Rs. 100.
Interest Rate : 5%


 
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CREDIT APPAISAL FOR WORKING CAPITAL

MEANING OF WORKING CAPITAL:

The term working capital refers to the current asset holding of an enterprise. This is
also sometimes called the Gross Working Capital. For a manufacturing enterprise, the
average levels of holding of raw material, goods in process, finished goods , receivables,
cash and other current assets together constitute a working capital . How does it differ
from the other forms of capital employed in a business ? Let us consider a example of
a house owner . The house owner purchases the house and furniture for the purpose of
having a comfortable life . However , merely owning a house and various pieces of
furniture is not a sufficient condition for running the daily chores of the household .

Fixed capital and working capital :

We may therefore broadly classify the funds employed in a business enterprise into two
components viz. fixed capital and working capital .

Fixed capital is invested in fixed assets which enable an enterprise manufacture goods for
sale and earning profit . on the other hand , working capital is employed in purchasing
those items , which are transformed into saleable goods by the production process .

Working capital refers to the merchandise itself . The difference between the fixed capital
and and working capital may be expressed in another manner . The assets representing
working capital rapidly convert from one form to another in a short period of time. Thus, cash
converts into raw material , raw material converts into goods in process and finally into finished
goods. The finished goods can be sold in market and in the process is converted back to cash
again.


 
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All these forms of current assets constitute working capitalÊ

Operating cycle concept of working capital:

The operating cycle concept of working capital envisages measurement of the average time
taken by an enterprise in manufacturing the goods and selling them for cash so that the funds can
be deployed for starting another batch of production . The system completes one cycle when
cash is realized out of the sale proceeds of finished goods from the receivable / debtors .

Working capital has different components , the most important being the raw material .
Manufacturing enterprises ensure that there always remain a minimum level of stock of raw
material , which takes care of any abrupt discontinuity in supply. The raw material is then
pressed into production . The processing time largely depends on the nature and specification
of the final product .

Again , because the process of delivery takes some time , the enterprise may have to ensure that
a minimum level of finished goods always remains available. This would take care of any
sudden influx of order that may have to be supplied immediately . Finally , though the products
have been delivered according to schedule , not all the supplies are paid for immediately . A
portion of sale proceeds may remain locked for sometime in the form of receivables. The
receivables holding period is the time allowed by manufacturer / supplier of the finished products
to its customers for making payments. The receivables are realized by the enterprise on expiry of
the credit period allowed by it .

Thus, every rupee invested in current assets at the beginning of the cycle comes back to the
promoter with the profit element added , after a lapse of a specific period of time . This length of
time is popularly known as the operating cycle or the working capital cycle. The cycle may be
diagrammatically represented in the following manner :


 
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Measuring operating cycle :

The operating capital concept raises a fundamental issue ± how to measure this time ? It is not
possible to physically track every element of raw material pressed into production , and observe
its movement across every stage of processing through the final production . When it comes out
in the shape of finished goods. The operating cycle is therefore measured in terms of days of
average inventory held for every major category of working capital component. The holding
ratios play a very important role at this stage. The holding periods of the individual WC
components are computed in the manner on analysis of financial statements. The aggregate of
all these holding periods represents the length of the operating cycle.

The following diagram makes the point clear :


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The working capital management policy of an enterprise is inextricably linked to its approach
towards current asset funding . From the point of view of currency, the assets of an enterprise
may be broadly divided into two categories i.e. current and non ± current assets . The capital
assets are funded by long term sources of finance , generally in a combination of long term loans
from banks / DFI s and a margin contributed by the promoters. On the other hand , current assets
may further be classified into two components ( I ) a core component and ( ii) a fluctuating
component.

A manufacturing enterprise has to maintain a minimum level of inventory at any point of time
in order to run the production at specified level . Fall of inventory below this level may trigger a
discontinuity in production and the required synchronization between the various stages of
production may get lost. We may call this minimum level of current assets as the permanent or
core current asset level.

The fluctuating current assets refer to the portion above this level that undergoes a change
continually on account of changes in demand , seasonality of product etc . during the various
period of the year.

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ANALYSIS OF OPENING WORKING CAPITAL :

When a business enterprise approaches a bank for providing certain credit facilities , a enterprise
is required to submit the important financial statements and any further information relating to its
activity, as required by lending bank. The lender undertakes an analysis of above statements
before he takes a decision on the credit proposal.

Analysis of profit and loss and balance sheet :

The following methods are applied for analysis of the statement :

For analysis of profit and loss statement

Ê Percent of sales method
Ê Incremental sales method
Ê Time series analysis

For analysis of balance sheet

Ê Percentage balance sheet method
Ê Trend percentage
Ê Ratio analysis
Ê Fund flow analysis
Ê Cash flow analysis

Analysis of operating ( profit & loss) statement by percent of sales method :

In this method the individual cost component are expressed as percentage of net sales
during the year.


 
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Analysis of operating statement by incremental sales method :

The management of the enterprise has made endeavors to neutralize the impact of increasing
cost of consumption of raw material by ensuring that other inputs and factor of production are
made cost effective in best possible manner.

Analysis of balance sheet by ratios:

The balance sheet ratios are :
Liquidity ratio :
It used in considering in working capital.

Current ratio :
This is done by comparing the short term assets of enterprise with its short term liabilities .
urrent ratio = current assets

urrent liabilities

Quick ratio :
It measure degree of liquidity of an enterprise may be gauged by weighing the liquid component
of current asset and CL.

Quick ratio = urrent assets ² Inventory

urrent liability


 
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Holding ratios :
Bankers attach a great degree of importance of these ratios .

a)Ê Raw material holding = stock of raw material x 365

Annual consumption of raw material

b)Ê tock in process stock in process level x 365

ost of production

c)Ê Finished goods holding = finished goods level x 365

ost of sales

d)Ê Receivable holding level = BR level x 365

e)Ê trade creditors level = trade credit level x 365

annul purchase

f) advances paid to suppliers = advances to future supplies x 365

annual purchase

g) advances received against future sale = advance received againstle

s x 365/ annual gross sale


 
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Important holding ratios are :

Particular 2007 2008

Stock 1.27 1.5
Receivable 1.57 1.35
Advances to suppliers 0.63 0.86
Trade credit 1.44 1

Calculation of ratios :

a)Ê Stock in process holding = stock in process level * 365

Cost of production

b)Ê Receivable holding level = Bills receivable level * 365

Annual purchase
c)Ê Advances to suppler = Advances paid against * 365
future supplies
______________________________
Annual purchase
d)Ê Trade creditors holding = trade creditos level * 365

Level Annual purchase

The working capital of the KIRAN TRADER¶s is calculated in the following manner after taking
into account account the related components of current assets and liabilities :
in Rs. ooo¶s


 
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Projected level of stock 1.5 of consumption 2634

Projected level of 1.35 of sales 2516
receivables
Projected level of advance 0.86 of purchases 1590
payment made to suppliers
Less: trade credit available 1.55 of purchases 2860
Working capital required 3880

Working capital required = 2634+ 2516+ 1590 ± 2860 = 3880 ( 38,80,000)

Bank has to demand a 30 % margin against paid up stock and a 40% margin against receivables /
trade debtors . The individual credit limits may therefore be worked out as under :

WC Credit limit against paid ± up stock = ( 4224000 ± 2860000) x 70%

= 955000.= 950000

WC Credit limit against receivables = 2516000 x 60% = 1509000

= 1000000

Here bank decide to put to put a ceiling of Rs. 10,00,000 . on credit limit against receivables.

Margin requirement is 38,80,000 ± 1950000 = 19,30,000.


 
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I find the following points:

1)Ê Banks apply holding method to lend money for Kiran Traders.

2)Ê Bank apply 1.3 current ratio for lend credit money which is above Rs 1 crore .

3)Ê Bank apply Tandon Committee suggestion for lending money with some alteration.

4) Bank¶s lending rates are very competitive in nature

5)Bank lend only 20% of working capital requirement .

6)Trader ready to contribute 5% for working capital.


 
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By doing project in Raichur District Center Co-op Bank Ltd, Raichur. I come to the
conclusion that

1)Ê Bank achieving very good financial performance

2)Ê Bank¶s lending rates are very competitive in nature.

3)Ê Banks growth rate is very high as compare to other co-operative banks.

4)Ê Banks administration is very good .

5)Ê It is playing a vital role in the rural credit in Raichur

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Ê D.D. Mukherjee ± Credit appraisal and analysis

Ê I.M.Pandey - Financial Management

Ê Rdcc Bank Annul Reports

3- Ê

www.rbi.org.in


 
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