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TITLE OF THE STUDY: Working Capital Financing by a Bank: City Bank Ltd.
SUBMITTED TO
M. Shahjahan Mina (Professor) Department of Finance University of Dhaka
SUBMITTED BY
Section A BBA 16th Batch Department of Finance University of Dhaka
ABOUT US
Sl No. 01 02
Id 16-013 16-141
Executive Summary
Working capital is just like a heart of a firm and if it is weak; the business cannot prosper and survive, although there is a large body (investment) of fixed assets. This genre of capital determines the funds available with a company for day to day operations. So working capital decisions constitute a major share of a firms management concern. Determination of source of finance of that capital captivates a bulk share of that concern. This study attempts to view City Bank Limited as a source of working capital financing. Throughout the study it is attempted to analyze the prime aspects of CBLs working capital financing facilities in a qualitative approach. The study is formally initiated with a brief yet comprehensive understanding of some major issues regarding working capital and the importance of suck kind of financing in a business arena. In the next step of the study the bank is formally introduced as a second generation bank that is also a financier of working capital for business firm. In the very next stance the working capital financing guidelines are introduced. The guidelines appeared to de well responsive to the present context. The study then puts focus on the financing tools the firm adopts to provide fund for working capital purposes. It was understood that the accommodated working capital through cash credit, overdraft, letter of credit , revolving credit, loan against trust receipt and factoring. Then it was understood that the firm manage the loanable fund from deposit and arrangement from other bank. The bank prefers manufacturing concerns for loan advancing. In the next move it was discussed that the bank employs separate approach for assessing loan application for existing and new clients. It was also discussed that the loan amount to be advanced to a certain client depends on the borrowers need, the amount sought, borrowers integrity and risk factor. The bank employs modern credit risk management policy and Bangladesh Banks credit manual to monitor loaned funds. The next move of the st udy involves the point that the bank allows land, building, inventory hypothecation, lien, third part guarantee as collateral. Then the interest aspect of the financing was discussed which reveals that interest rate varies depending on the customers integ rity and the overall risk factor and the availability of fund too. It was then discovered in the study that banks existing clients get some additional advantage over the new applicants which includes interest rate concessions. The study then revels that the bank has an excellent recover rate of over 97%. The study formally ends with the indication of repayment schedule from where it was found out that loans are recovered generally through equal installments with adjustments for unpaid fraction in the last month.
need to finance these purchase, production, sales, and collection costs prior to receiving payment from customers. Figure 5.1 illustrates this short-term cash flow and financing cycle. Another way to view this function of working capital is providing liquidity. Adequate and appropriate working capital financing ensures that a firm has sufficient cash flow to pay its bills as it awaits the full collection of revenue.
A profitable firm with competitive goods or services can still be forced into bankruptcy if it has not adequately financed its working capital needs and runs out of cash. Working capital is also needed to sustain a firms growth. As a business grows, it needs larger investments in inventory, accounts receivable, personnel, and other items to realize increased sales. New facilities and equipment are not the only assets required for growth; firms also must finance the working capital needed to support sales growth. A final use of working capital is to undertake activities to improve business operations and remain competitive, such as product development, ongoing product and process improvements, and cultivating new markets. With firms facing heightened competition, these improvements often need to be integrated into operations on a continuous basis. Consequently, they are more likely to be incurred as small repeated costs than as large infrequent investments. This is especially true for small firms that cannot afford the cost and risks of large fixed investments in research and development projects.In
today's competitive financial environment, effective cash management has become a critical success factor. This is the right time to have integrated cash management solution.
Under a real-time online banking platform, these 5 distinct Units are supported at the back by a robust service delivery or operations setup and also a smart IT Backbone. Such centralized business segment based business & operating model ensure specialized treatment and services to the bank's different customer segments. The bank currently has 90 online branches and 1 SME service centers and 11 SME/Agri branch spread across the length & breadth of the country that include a full fledged Islami Banking branch. Besides these traditional delivery points, the bank is also very active in the alternative delivery area. It currently has 163 ATMs of its own; and ATM sharing arrangement with a partner bank that has more than 550 ATMs in place; SMS Banking; Interest Banking and so on. It already started its Customer Call Center operation. The bank has a plan to end the current year with 200 own ATMs. The Financial Supermarket with a Winning Culture Offering Enjoyable Experiences Mission: Offer wide array of products and services that differentiate and excite all customer segments Be the Employer of choice by offering an environment where people excel and leaders are created Continuously challenge processes and platforms to enhance effectiveness and efficiency Promote innovation and automation with a view to guaranteeing and enhancing excellence in service Ensure respect for community, good governance and compliance in everything we do
Vision: Result Driven Accountable & Transparent Courageous & Respectful Engaged & Inspired Focused on Customer Delight
City Banks Cash Management: Their cash management services include local and cross border payments, collections, information management, account services, liquidity management and investment services for both corporate and institutional clients. Payment Services They can help you save time and money by reducing processing costs while providing a value-added service to your suppliers. City Banks payment solutions can help to reduce your overall processing costs for domestic and global payments saving you time and money while providing a value-added service to your suppliers. Our comprehensive payment services will be tailored to enhance your accounts payable process. This will eliminate many manual tasks involved in making payments, allowing you and your staff to spend more time focusing on your core business needs. We understand that most of your effort in the payment cycle is directed towards initiation; difficulties in the subsequent reconciliation process can jeopardize the whole process. With City Bank Channels you can now track the exact status of each payment through timely reports that can be uploaded seamlessly into your companys system.
Collection Services: We have a comprehensive branch network and the local knowledge to help you with lower costs and greater efficiency. The City Bank Collections Solution leverages the Bank's extensive regional knowledge and widespread branch network across our key markets to specially tailor solutions for your regional and local collection needs. This Collections Solution, delivered through a standardized international platform, has the flexibility to cater to your local needs, thus enabling you to meet your objectives of reducing costs and increasing efficiency and profitability through better receivables and risk management. The key components of our solution include the following:
Liquidity Management
Let us help you to get the most out of your companys cash resources with physical sweeping, notional pooling, interest reallocation and investment.
Loan to hand loom industry, candle 19.00 manufacturer, cane goods manufacturer, embroidery block printing etc. Small Industry II Loan to packaging, printing-press, adhesive 19.00 products manufacturer, nail wire industry, lathe machine etc. includes EMI based ppg WORKING CAPITAL FINANCING Interest Rate Working Capital I Loan to Large Industry Working Capital II Loan to SME Loans in the form of CC(Hypo), CC (Pledge), 16.00 LTR, LIM against inventory of raw, wip and finished goods both Mfg and NON-MFG Working capital loans to enterprises engaged 17.50 in manufacturing and non-manufacturing.
Collateral
CBLs credit department puts formidable efforts in determining the worthiness of potential collateral. Types of assets kept as mortgage: The bank opts for particular assets for individual sector. Manufacturing sector: Land, building andmachinery. In the case of short term working capital of a manufacturing firm the bank also goes for inventory. In this caseinventories stuck and lead time play a considerable time in determining loan amount. Service sector: Project land building Trading Business: Warehouse
Valuation of Collateral
Valuation of land and building pledged as collateral is not performed based on borrowers provided price information. Here the bank rather takes help from an individual surveyor and generally advanced 50% or lower of the market value of the asset as loan.
Other aspects of interest rate Interest on various lending categories will depend on the level of risk and type of security offered. Interest may be reviewed at least once in 6 month and more often when appropriate fixed interest rate should be discouraged. All rates should vary with cost of funds fluctuation based on a spread of profit. Effective yield can be enhanced to the extent the borrowers are required to maintain deposits to support borrowing activities. Yield should be further improved by commitment fee and Service charges where possible. All pricing of loans should however have relevance with the market condition and be approved by the Executive committee / Managing Director from time to time. Where repayment and interest servicing performance of a credit deteriorates it shall be identified at an early state and closely monitored in order to avoid loan losses.
Recovery rate:
CBL has a superior working capital loan recovery rate which they believe is above industry average. The bank enjoys a recovery rate of around97% of the loan it advances.
Repayment schedule
CBL employs a loan recovery procedure which is intended to accommodate both the client and the bank itself. Generally these amounts are round figure and during the determination of the installment amount bank consider thepayment ability of the client. The entire loan amount shall be paid into equalmonthly installment throughout the loan period. Any excess or shortage hasadjusted with last installment. Dues shall be recoverable in the following manners: In equal monthly installments. The monthly installment shall be payable by the first week of every month, but the first installment shall be payable on the corresponding day of the subsequent monthof disbursement. If the customer fails to repay three monthly installments, bank reserves the rightto cancel or call back the entire outstanding loan liability of the concerned accountirrespective of the validity of the account and bank can also take initiative for ArthaRinAdalotAin Act-2003.
Calculation:
The effective interest rate is calculated as if compounded annually. The effective rate is calculated in the following way, where r is the effective annual rate, i the nominal rate, and n the number of compounding periods per year (for example, 12 for monthly compounding): For example, a nominal interest rate of 6% compounded monthly is equivalent to an effective interest rate of 6.17%. 6% compounded monthly is credited as 6%/12 = 0.005 every month. After one year, the initial capital is increased by the factor (1 + 0.005)12 1.0617. The yield depends on the frequency of compounding: Given a collection of pairs (time, cash flow) involved in a project, the internal rate of return follows from the net present value as a function of the rate of return. A rate of return for which this function is zero is an internal rate of return.
Effective Interest Rate (EIR) is a special kind of Internal Interest Rate (IIR):
Given the (period, cash flow) pairs (n,Cn ) where n is a positive integer, the total number of periods N, and the net present valueNPV , the internal rate of return is given by r in: NPV
For Example: City Banks Initial Expense/investment and Cash FlowsYear (n) 2009 2010 2011 2012 Cash flow (Cn) -123400 36200 54800 48100
NPV = 0 = - Initial Investment + => 0 = - 123400 + By manual Input: r = 5% ; the NPV= $2,331.99
r = 7%; the NPV = ($2,439.85)
+ +
Bibliography
www.CBLbanglabank.com www.en.wikipidia.com Financial management, I M Pandey (ninth Edition) www.researchexamples.com/finance/working-capital-management