1

SUMMER INTERNSHIP PROJECT

A STUDY ON EVALUATION OF WORKING
CAPITAL IN CORPORATE FINANCE
AT J&K BANK LTD.

FOR THE PARTIAL FULFILLMENT OF THE REQUIREMENT

FOR THE AWARD OF
MASTER OF BUSINESS ADMINISTRATION

UNDER THE SUPERVISION OF: Mrs. Sana Beigh

SUBMITTED BY:

MIR MOHAMMAD ZULQARNAIN

MBA (2013-2015)

JAMIA HAMDARD, NEW DELHI

(WEBSITE: WWW.JAMIAHAMDARD.EDU)

CONTENTS
Certificatepage no
Acknowledgement 3
Declaration..............4
Certificate 5
Executive Summary6
Objective. 7
Research methodology8
CHAPTER-1

INTRODUCTION9-12
COMPANY PROFILE13-19
LITERATURE REVIEW20-21

CHAPTER-2

MEANING OF WORKING CAPITAL22-27

FACTORS DETERMINING WORKING CAPITAL REQUIREMENT 28-31

CHAPTER-3

WORKING CAPITAL FINANANCING BY BANK..32-39

CASE STUDY 40-46
SUMMARY47
CONCLUSION. 48
BIBLIOGRAPHY.49

ACKNOWLEDGEMENT

I express my deepest sense of gratitude to the God Almighty for the abundant blessing to do
study with great attitude. My summer training at J&k bank would not have been possible
without the guidance and care of certain people. Here I would like to acknowledge those
important people.
I am obliged and indebted to my faculty supervisor
Mrs. SANA Beigh
For his valuable suggesting and constructive criticism rendered at each stage of the summer
internship programme. Under his guidance I have been available to conduct the study and
complete it successfully. I express my thanks to

TARIQ KHAN (Associate executive, Zonal office Gurgaon)

&
RIYAZ AHMAD (Branch manager)
Okhla Ph-II
For giving me an opportunity to undergo the internship programme in the company.

I am deeply indebted for his able guidance. I am thankful to Mr. MUBASHIR who guided
me throughout the project. I would also like to thank other staff for their invaluable
contribution in making the whole experience what it has been. I acknowledge the immense
help rendered by family and friends without whom the effort would not have been possible.
Now I conclude the passage with sincere thanks to any and all, I may have forgotten to
mention.

Mir Mohammad Zulqarnain

DECLARATION

This is declare that the report entitled evaluating of working capital in corporate finance
has been made for the partial fulfilment of degree of Master of business Administration. It has
been done after second semester exam (Batch 2013-15) by me at J&K bank Okhla Ph.II
under the guidance of ISHFAQ RASHIDBALA (HOD Finance deptt. at J&K bank)
I confirm that this Report truly represents my work under taken as a part of Student
Internship Programme. This work is not a replication of work done previously by any other
person.

Name of the student:

Mir Mohammad Zulqarnain

CERTIFICATE

This is to certify that Project entitled evaluating of working capital in corporate

finance submitted by MIR MOHAMMAD ZULQARNAIN, is in partial
fulfilment of the requirement for the reward of master in business
administration
Certified further, that to the best of my knowledge the work presented in
the project has not been submitted to any other institution or any other
university for the award of Degree.

Signature:
Faculty supervisor:

EXECUTIVE SUMMARY
The major objective of this project is to make proper understanding of the working capital
management of any concern i.e. traders, manufacturers, and companies and the methods that
bank uses to finance this working capital.
Working capital is basically the funds that needed by any concern for day to day operations
that is badly needed for running of any business.
After apply long term sources fund by way of owners capital, reserve owner creates the
production capacity and after creating this capacity concern needs funds to operate within
shorter period. These funds can be finance by different banks and financial institution.
Working capital finance can be any form i.e. 1) cash credits
2) Overdrafts
3) Bills purchased/discounting
4) Pre-shipment and post- shipment credit
When its finance or loan by any bank. But in J&K Okhla Ph-II working capital is given in
form of cash credits to different retail traders.
Bank after taking securities, analysis of past, present and future expected level of sales and
production data of concern gives this working capital finance facility.
After giving this loan bank periodically analyse the stock statements of concern for making
amendments in next year or reduced the drawing power from its cash credit limit sanctioned
for working capital finance. Bank carefully checks the operations of this type of account as it
shows proper selling and purchasing are made by concern or not.

OBJECTIVE OF THE STUDY

1. To understand the knowledge acquired about working capital.

2. To understand how bank assess the requirement of working capital.

3. To understand the formalities and documentary support required by the bank for
assessing need of working capital finance proposed by client organisation.

4. To explore the working procedure about the requirement of working capital and its
various parameter for concerned client organisation.

Methodology
The study includes descriptive research and based on the
secondary data.

Sources of data
Entire information is collected through a secondary source i.e.
through a data, which have been gathered for some other
purposes. Some of the sources of secondary data are;

Books on working capital and handbook on banking information etc.

Information collected from various sites on internet.
Articles from Magazines like Business World, Financial Express etc.
Information collected from J&K Bank staff at lajpat nagar New Delhi.
Information collected from investerWords.com.

CHAPTER-1
INTRODUCTION
HISTORY OF INDIAN BANKING
A bank is a financial institution that provides banking and other financial services. By the
term bank is generally understood an institution that holds a Banking Licenses. Banking
licenses are granted by financial supervision authorities and provide rights to conduct the
most fundamental banking services such as accepting deposits and making loans. There are
also financial institutions that provide certain banking services without meeting the legal
definition of a bank, a so-called Non-bank. Banks are a subset of the financial services
industry.
The word bank is derived from the Italian banca, which is derived from German and means
bench. The terms bankrupt and "broke" are similarly derived from banca rotta, which refers
to an out of business bank, having its bench physically broken. Moneylenders in Northern
Italy originally did business in open areas, or big open rooms, with each lender working from
his own bench or table.
Typically, a bank generates profits from transaction fees on financial services or the interest
spread on resources it holds in trust for clients while paying them interest on the asset.
Development of banking industry in India followed below stated steps.
Banking in India has its origin as early 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 rates of interest.
Banking in India has an early origin where the indigenous bankers played a very
important role in lending money and financing foreign trade and commerce. During
the days of the East India Company, was the turn of the agency houses to carry on the
banking business. The General Bank of India was first Joint Stock Bank to be
established in the year 1786. The others which followed were the Bank Hindustan and
the Bengal Bank.

In the first half of the 19th 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 were amalgamated in 1920
and a new bank, the Imperial Bank of India was established in 1921. With the passing
of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India
was taken by the newly constituted State Bank of India.
The Reserve Bank of India which is the Central Bank was created in 1935 by passing
Reserve Bank of India Act, 1934 which was followed up with the Banking
Regulations in 1949. These acts bestowed Reserve Bank of India (RBI) with wide
ranging powers for licensing, supervision and control of banks. Considering the
proliferation of weak banks, RBI compulsorily merged many of them with stronger
banks in 1969.
The three decades after nationalization saw a phenomenal expansion in the
geographical coverage and financial spread of the banking system in the country. As
certain rigidities and weaknesses were found to have developed in the system, during
the late eighties the Government of India felt that these had to be addressed to enable
the financial system to play its role in ushering in a more efficient and competitive
economy. Accordingly, a high-level committee was set up on 14 August 1991 to
examine all aspects relating to the structure, organization, functions and procedures of
the financial system. Based on the recommendations of the Committee (Chairman:
Shri M. Narasimham), a comprehensive reform of the banking system was introduced
in 1992-93. The objective of the reform measures was to ensure that the balance
sheets of banks reflected their actual financial health. One of the important measures
related to income recognition, asset classification and provisioning by banks, on the
basis of objective criteria was laid down by the Reserve Bank.
The introduction of capital adequacy norms in line with international standards has been
another important measure of the reforms process.
1. Comprises balance of expired loans, compensation and other bonds such as National Rural
Development Bonds and Capital Investment Bonds. Annuity certificates are excluded.

2. These represent mainly non- negotiable non- interest bearing securities issued to
International Financial Institutions like International Monetary Fund, International Bank for
Reconstruction and Development and Asian Development Bank.
3. Comprises accruals under Small Savings Scheme, Provident Funds, Special Deposits of
Non- Government
In the post-nationalization era, no new private sector banks were allowed to be set
up. However, in 1993, in recognition of the need to introduce greater competition
which could lead to higher productivity and efficiency of the banking system, new
private sector banks were allowed to be set up in the Indian banking system. These
new banks had to satisfy among others, the following minimum requirements:
(i)

It should be registered as a public limited company;

(ii)

The minimum paid-up capital should be Rs 100 crore;

(iii)

The shares should be listed on the stock exchange;

(iv)

The headquarters of the bank should be preferably located in a centre which

does not have the headquarters of any other bank; and

(v)

The bank will be subject to prudential norms in respect of banking operations,

accounting and other policies as laid down by the RBI. It will have to achieve
capital adequacy of eight per cent from the very beginning.
A high level Committee, under the Chairmanship of Shri M. Narasimham,
was constituted by the Government of India in December 1997 to review
the record of implementation of financial system reforms recommended by
the CFS in 1991 and chart the reforms necessary in the years ahead to
make the banking system stronger and better equipped to compete
effectively in international economic environment. The Committee has
submitted its report to the Government in April 1998. Some of the
recommendations of the Committee, on prudential accounting norms,
particularly in the areas of Capital Adequacy Ratio, Classification of
Government guaranteed advances, provisioning requirements on standard
advances and more disclosures in the Balance Sheets of banks have been

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accepted and implemented. The other recommendations are under

consideration.
The banking industry in India is in a midst of transformation, thanks to the
economic liberalization of the country, which has changed business
environment in the country. During the pre-liberalization period, the
industry was merely focusing on deposit mobilization and branch
expansion. But with liberalization, it found many of its advances under the
non-performing assets (NPA) list. More importantly, the sector has become
very competitive with the entry of many foreign and private sector banks.
The face of banking is changing rapidly. There is no doubt that banking
sector reforms have improved the profitability, productivity and efficiency
of banks, but in the days ahead banks will have to prepare themselves to
face new challenges.

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Company profile
Jammu and Kashmir bank limited was incorporated on 1st October 1938 and commenced its
business from 4th July 1939 at Kashmir (India).

It is a private bank in which 53% owned by Jammu and Kashmir government.

Regulated by the RBI and SEBI.

Listed in NSE and BSE.

Rated p1+ by STANDARD and POORCRISIL connoting highest degree of safety. .

Headquarter of J&K bank is in SRINAGAR.

J&K has 600 branches operating in India

Various product of J&K bank

Loan products
1) Home loan
2) Education loan
3) Automobile finance
4) Consumer loan
5) Personal loan to pensioners
6) Mortgage loan for trade and service sector
7) Loan against mortgage of immovable property
8) Loans and advances against insurance /FDs

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9) Other loans

Deposits products
1) Termed bank deposit
2) Saving bank deposits
3) Recurring deposits
4) Current accounts
5) Locker facility

Non-resident banking
1) NRI saving account
2) NRI fixed deposits

Mutual funds and insurance

J&K bank has entered into tie up with reputed assets management companies for distribution
of mutual funds and insurance products.
UTI, KOTAK AND RELIANCE FOR MUTUAL FUNDS
METLIFE FOR LIFE INSURANCE
BAJAJ ALIANZ FOR NON LIFE INSURANCE

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CUSTOMER SERVICES
ANY WHERE BANKING
Power to access to your account across our branch network
This include cash deposit/ withdrawal of outstation cheque

INTERNET BANKING
SMS BANKING:
Be in touch with J&K on the move
a) Balance enquiry
b) Transaction enquiry
c) Cheque status enquiry
CREDIT CARDS:
1) 20 TO 30 days credit free period
2) Cash withdrawal facility up to 20% of total credit limit

DEBIT CARDS
1) PIN BASED-MAESTRO/CIRRUS DEBIT CARDS
2) Provide online access to saving or current account
3) No transaction fees at J&K banks ATM
4) Accepted at all domestic and international

MERCHANT ACQURING:
1) Features- all types
2) of visa and master card accepted
3) Quick merchant payment
4) Merchant help desk and online support
5) No hidden charges

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DEPOSITARY SERVICES
1) A Depositary is like a bank where securities are held in electronic or dematerialized form
.In our country NATIONAL SECURITIES DEPOSITARIES LIMITED(NSDL) and
CENTRAL SECURITIES DEPOSITORIES LIMITED( CSDL) these are two depositories.

2) J&K BANK is participant of both NSDL and CSDL.

3) You can open a depository participant (DP) ACCOUNT, either through J&K BANK
branches.

4)There is no fees for opening a DP A/C however a nominal fees will be levied toward
services as per bank tariff.

5) Depository network of J&K are available in DELHI, SRINAGAR, and JAMMU.

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Mushtaq Ahmad(Chairman & CEO)

Chairmans statement:The world is slowly emerging from the headwinds of the global
financial crisis of 2007-09, the worst ever since the Great
Depression of 1929-33. Set against the back drop of a jittery
global economy, India stood tall countering unpredictable
challenges, although the impact was conspicuous on some critical
economic indicators.
I am delighted to declare that J&K Bank has not only successfully
countered the vortex of adverse socio-economic conditions, but
also propelled itself into a growth trajectory, catalysing pervasive
socio-economic development in Jammu and Kashmir.
Acknowledging the critical role banks can play in the socioeconomic development of the people, the J&K Bank will drive
vertical and horizontal expansions in 2013-14. The Banks branch
network will cross the 600 mark by March2014, nearing statewide omnipresence.
Esteemed shareholder, we are looking forward to your
enthusiastic support for achieving the growth trajectory from

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where achievement of ` 100,000 Crores business volume and net

profit of ` 1000 Crores by March 2015will be a reality rather than
an uphill task.

PERFORMANCE AT A GLANCE
The e Banks aggregate business crossed yet another psychological mark
and stood at ` 70,869.57 Crores at the end of the financial year 2013-14.
The Banks total Business increased by ` 10,575.18 Crores from the
previous years figure of ` 60,294.39 Crores, registering a growth of
17.54%.
The e total deposits of the Bank grew by 7,438.77Crores from ` 37,237.16
Crores as on 31st March,2013 to ` 44,675.93 Crores as on 31st March,
2014, registering
19.98% growth. CASA deposits of the Bank at ` 18,084.82 Crores
constituted 40.48% of total deposits.
The e Bank continued its prudent approach in expanding quality credit
assets in line
with its policy on Credit Risk Management. Its net advances increased by `
3,136.41 Crores from ` 23,057.23 Crores as on31st March, 2013 to `
26,193.64Crores as on 31st March, 2014,growing by 13.60%. Th e growth
was recorded even after
Repayment of ` 2,300 Crores by the State Govt. of J&K as an arrangement
with RBI/J&K Bank.
Priority sector advances increased from ` 8,632.29 Crores to ` 10,274.46
Crores during the year.
The Banks performance in the recovery of NPAs during the year continued
to be good. During the year, the Bank effected a cumulative cash
recovery, up-gradation of NPAs and technical write-off of ` 232.63 Crores
compared to 285.74 Crores in the previous year.

NET PROFIT AND DIVIDEND

The Bank registered highest ever Net Profit of ` 615.20Crores for the
financial year 2013-14 compared to` 512.38 Crores for the financial year
2012-13,registering 20.07% surge.

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The Board of Directors has recommended record dividend of 260 per cent
for the financial year 2013-14.
In terms of extant guidelines, the Bank will pay the dividend distribution
tax for the financial year 2013-14.Accordingly the total outflow on account
of dividend for the year 2013-14 will be ` 146.98 Crores including the
dividend distribution tax.

INCOME ANALYSIS
The Banks interest income grew by ` 656.25 Crores from ` 3,056.88
Crores in the year 2012-13 to` 3,713.13 Crores in 2013-14. Interest
expenses marginally increased from ` 1,937.54 crores to` 2,169.47 Crores
during the year. The Net Interest Income increased from ` 1,119.33 Crores
to` 1,543.66 Crores.

The Net Income from operations [Interest Spread plus Non-interest

Income] increased to ` 1,908.42 Crores in the financial year 2013-14 from
` 1,535.57 Crores in the financial year 2012-13, growing by 24.28%.
The Operating Expenses witnessed an increase of` 181.57 Crores during
the financial year 2013-14 and stood at ` 758.93 Crores, compared to `
577.37 Crores in 2012-13.

The Cost to Income ratio (Operating Expenses to Net Operating Income)

marginally increased from37.60% in the financial year 2009-10 to 39.77%
in the
financial year 2013-14 even after substantial increase in operating
expenses.

The Banks Net Worth increased to ` 3,478.68Crores on

31stMarch, 2014.The Return on Average Net Worth, for the
financial year2013-14 stood at18.96%

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LITERATURE REVIEW
Working Capital Management is the process of planning and controlling the level and mix
of current assets of the firm as well as financing these assets. Specifically, Working Capital
Management requires financial managers to decide what quantities of cash, other liquid
assets, accounts receivables and inventories the firm will hold at any point of time.
Working capital is the capital you require for the working i.e. functioning of your business in
the short run.
Gross working capital refers to the firms investment in the current assets and includes cash,
short term securities, debtors, bills receivables and inventories.
It is necessary to concentrate on the fact that the investment in the current assets should be
neither excessive nor inadequate.
WC requirement of a firm keeps changing with the change in the business activity and hence
the firm must be in a position to strike a balance between them. The financial manager should
know where to source the funds from, in case the need arise and where to invest in case of
excess funds.
The dangers of excessive working capital are as follows:
1. It results in unnecessary accumulation of inventories. Thus the chances of inventory
mishandling, waste, theft and losses increase
2. It is an indication of defective credit policy and slack collection period.
Consequently higher incidences of bad debts occur which adversely affects the
profits.

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3. It makes the management complacent which degenerates into managerial

inefficiency
4. Tendencies of accumulating inventories to make speculative profits grow. This may
tend to make the dividend policy liberal and difficult to copes with in future when
the firm is unable to make speculative profits.

The dangers of inadequate working capital are as follows:

1. It stagnates growth .It becomes difficult for the firms to undertake profitable
projects for non-availability of the WC funds.
2. It becomes difficult to implement operating plans and achieve the firms profit
targets
3. Operating inefficiencies creep in when it becomes difficult even to meet day-today commitments.
4. Fixed assets are not efficiently utilized. Thus the rate of return on investment
slumps.
5. It renders the firm unable to avail attractive credit opportunities etc.
6. The firm loses its reputation when it is not in position to honor its short-term
obligations. As a result the firm faces a tight credit terms.

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CHAPTER-2
Objective: 1

to understand the knowledge acquired by working capital

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Meaning of Working Capital

Capital required for a business can be classified under two main categories via,
1) Fixed Capital
2) Working Capital
Every business needs funds for two purposes for its establishment and to carry out its day- today operations. Long terms funds are required to create production facilities through purchase
of fixed assets such as land, building, furniture, etc. Investments in these assets represent that
part of firms capital which is blocked on permanent or fixed basis and is called fixed capital.
Funds are also needed for short-term purposes for the purchase of raw material, payment of
wages and other day to- day expenses etc.
These funds are known as working capital. In simple words, working capital refers to
that part of the firms capital which is required for financing short- term or current assets such
as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assts
keep revolving fast and are being constantly converted in to cash and this cash flows out
again in exchange for other current assets. Hence, it is also known as revolving or circulating
capital or short term capital.
CONCEPT OF WORKING CAPITAL
There are two concepts of working capital:
1. Gross working capital
2. Net working capital

GROSS WORKING CAPITAL

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The gross working capital is the invested in the total current assets of the enterprises. Current
assets are those assets which can be converted into cash within a short period normally one
accounting year. The total of investments in all the individual current assets is the gross
working capital. For example, if a firm has a cash balance of Rs. 50,000, debtors of Rs.
70,000, and inventory of raw material and finished goods has been assessed at Rs. 1,00,000,
then the gross working capital of the firm is Rs. 2,20,000 .(50,000+70,000+1,00,000)
CONSTITUENTS OF CURRENT ASSETS
1) Cash in hand and cash at bank
2) Bills receivables
3) Sundry debtors
4) Short term loans and advances.
5) Inventories of stock as:
a. Raw material
b. Work in process
c. Stores and spares
d. Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities.

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CONSTITUENTS OF CURRENT LIABILITIES

1. Accrued or outstanding expenses.
2. Short term loans, advances and deposits.
3. Dividends payable.
4. Bank overdraft.
5. Provision for taxation
6. Bills payable.
7. Sundry creditors.

NET WORKING CAPITAL

In a narrow sense, the term working capital refers to the net working. Net working capital is
the excess of current assets over current liability, or, say:
NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.
The current liabilities refer to those liabilities which are payable within a period of one year.
Net working capital can be positive or negative. If the total current assets are more than the
total current liabilities, then the difference is known as positive net working capital, otherwise
the difference is known as negative working capital. The greater the margin by which the
firms current assets cover its current liabilities, the better it will be.
The distinction between gross working capital and net working capital does not in
any way undermine the relevance of the concepts of either gross or net working capital. The
gross working capital denotes total working capital or the total investment in current assets. A
firm should maintain an optimum level of gross working capital. The gross working capital
also gives an idea of total funds required for maintaining current assets.

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On the other hand, net working capital refers to the amount of funds that must be
invested by the firm, more or less, regularly in current assets and the remaining portion of
current assets being financed by current liabilities. The net working capital also denotes the
net liquidity being maintained by the firm. This also gives an idea of buffer available to
current liabilities.

The gross working capital concept is financial or going concern concept whereas net working
capital is an accounting concept of working capital. Both the concepts have their own merits.
The gross concept is sometimes preferred to the concept of working capital for the following
reasons:
1. It enables the enterprise to provide correct amount of working capital at correct
time.
2. Every management is more interested in total current assets with which it has to
operate then the source from where it is made available.
3. It take into consideration of the fact every increase in the funds of the enterprise
would increase its working capital.
4. This concept is also useful in determining the rate of return on investments in
working capital.
The net working capital concept, however, is also important for following reasons:
1. It is qualitative concept, which indicates the firms ability to meet to its operating
expenses and short-term liabilities.
2. It indicates the margin of protection available to the short term creditors.
3. It is an indicator of the financial soundness of enterprises.
4. It suggests the need of financing a part of working capital requirement out of the
permanent sources of funds.

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Both concept of working capital i.e. the gross working capital and the net working capital
have their own relevance and financial manager should give due attention to both these. The
cash inflows and outflows for any firm are seldom synchronized and so, some working
capital is necessary. The cash outflows occurring from the existence of current liabilities are
more easily and correctly predictable but the cash flows from the current assets are difficult to
be accurately predicted. The firm more and more uncertain cash inflows must maintain higher
and higher level of current assets adequate to cover the current liabilities.

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CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified into two ways:
On the basis of concept.
On the basis of time.
On the basis of concept working capital can be classified as gross working capital and net
working capital. On the basis of time, working capital may be classified as:
Permanent or fixed working capital.
Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure effective
utilization of fixed facilities and for maintaining the circulation of current assets. Every firm
has to maintain a minimum level of raw material, work- in-process, finished goods and cash
balance. This minimum level of current assets is called permanent or fixed working capital as
this part of working is permanently blocked in current assets. As the business grow the
requirements of working capital also increases due to increase in current assets.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is required to
meet the seasonal demands and some special exigencies. Variable working capital can further
be classified as seasonal working capital and special working capital. The capital required to
meet the seasonal need of the enterprise is called seasonal working capital. Special working
capital is that part of working capital which is required to meet special exigencies such as
launching of extensive marketing for conducting research, etc.
Temporary working capital differs from permanent working capital in the sense that is
required for short periods and cannot be permanently employed gainfully in the business.

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FACTORS DETERMINIG WORKING CAPITAL REQUIREMENT

The working capital needs of a firm are determined and influenced by various factors. A wide
variety of considerations may affect the quantum of working capital required and these
considerations may vary from time to time. The working capital needed at one point of time
may not be good enough for some other situation. The determination of working capital
requirement is a continuous process and must be undertaken on regular basis in the light of
changing situations. Following are some of the factors which are relevant in determining the
working capital needs of the firm.
1. Nature of business: Nature of business is an important factor in determining the
working capital requirements. There are some businesses which require a very
nominal amount to be invested in fixed assets but a large chunk of the total investment
is in the form of working capital. There businesses, for example, are of the trading and
financing type. There are businesses which require large investment in fixed assets
and normal investment in the form of working capital.
2. Size of business: It is another important factor in determining the working capital
requirements of a business. Size is usually measured in terms of scale of operating
cycle. The amount of working capital needed is directly proportional to the scale of
operating cycle i.e. the larger the scale of operating cycle the large will be the amount
working capital and vice versa.
3.

BASIC NATURE OF BUSINESS: The working capital requirement is closely

related to the nature of the business of the firm. In case of a retail shop or a trading
firm, the amount of working capital required is small enough. Most of the transactions
are undertaken in cash and length of operating cycle is generally small.
In case of manufacturing concerns, different types of production processes are
performed. One unit of raw material introduced in the production schedule may take
long period before it is available as finished goods for sale. Funds are blocked not
only in raw materials but also in labour expenses and overhead at every stage of
production. The operating cycle is usually a longer one and sales are made generally
on credit terms. So in case of manufacturing concerns, there is requirement of
substantial working capital.

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4. BUSINESS CYCLE FLUCTUATIONS: Different phases of business cycle i.e.,

boom, recession, recovery etc. also affect the working capital requirement. In case
boom conditions, inflationary pressure appears and business activities expand. As a
result the overall need for cash, inventories etc, increases resulting in more and more
funds blocked in these current assets. In case of recession period however, there is
usually a dullness in business activities and there will be and opposite effect on the
level of working capital requirement. There will be a fall in inventories and cash
requirement etc.
5. SEASONAL OPERATIONS: If a firm is operating in goods and services having
seasonal fluctuations in demand, then the working capital requirement will also
fluctuate with every change. In a cold drink factory the demand will certainly be
higher in summer season and therefore more capital is required to maintain higher
production, in the form of larger inventories and bigger receivables. On the other
hand, if the operations are smooth and even throughout the year then the working
capital requirement will be constant and will not be affected by the seasonal factors.
6. Market Competitiveness: The market competiveness has an important bearing on
the working capital needs of a firm. In view of the competitive conditions prevailing
in the market, the firm may have to offer liberal credit terms to the customer resulting
in higher debtors. Even larger inventories may be maintained to serve an order as and
when received; otherwise the customer may go to some other supplier. Thus the
working capital tends to be high as a result of greater investment in inventories and
receivable. On the other hand, a monopolistic firm may not require larger working
capital. It may ask the customers to pay in advance or to wait for some time after
placing the order.
7. Credit policy: The credit policy means the totality of terms and conditions on which
goods are sold and purchased. A firm has to interact with two types of credit policies
at a time. One, the credit policy of the supplier of raw materials, goods etc., and two,
the credit policy relating to credit which it extends to its customers. In both the cases,
however the firm while deciding its credit policy has to take care of the credit policy
of the market. For example, a firm might be purchasing goods and services on credit
terms but selling goods only for cash. The working capital requirement of this firm

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9

will be the lower than that of a firm which is purchasing cash but has to sell on credit
basis.
8. Supply conditions: The time taken by a supplier of raw materials, goods etc. after
placing an order, also determines the working capital requirement. If goods are
received as soon as or in a short period after placing an order, then the purchaser will
not like to maintain a high level of inventory of that good. Otherwise, larger
inventories should be kept e.g. in case of imported goods. It is often seen that the
shopkeeper may not be keeping stock of all items, but whenever there demand, they
procure from the wholesaler/producer and supply it to their customers.
9. Growth and Expansion activities: The working capital needs of a firm increases as it
grows in term of sale or fixed assets. There is no precise way to determine the relation
between the amount of sales and working capital requirement but one thing is sure
that an increase in sales never precedes the increase in working capital but it is always
the other way round. So in case of growth or expansion the aspect of working capital
needs to be planned in advance.
10. Price Level Changes: Generally increase in price level makes the commodities
dearer. Hence with increase in price level the working capital requirements also
increases. The companies which are in a position to alter the price of these
commodities in accordance with the price level changes will face fewer problems as
compared to others. The changes in price level may not affect all the firms in same
way. The reactions of all firms with regards to price level changes will be different
from one other.
Every running business needs working capital. Even a business which is fully equipped with
all types of fixed assets required is bound to collapse without
(i)

Adequate supply of raw materials for processing;

(ii)

Cash to pay for wages, power and other costs;

(iii)

Creating a stock of finished goods to feed the market demand regularly; and,

(iv)

The ability to grant credit to its customers.

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0

Thus, the working capital requirement of a firm is determined by a host of factors. Every
consideration is to be weighted relatively to determine the working capital requirement.
Further, the determination of working capital requirement is not once a while exercise, rather
a continuous review must be made in order to assess the working capital requirement in the
changing situation. There are various reasons which may require the review of the working
capital e.g., change in credit policy, change in sales volume etc.

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1

CHAPTER-3
Objective: 2

to understand how bank assess the requirement of working capital.

WORKING CAPITAL FINANCING BY BANK

A commercial bank is a business organization which deals in money i.e. lending and
borrowing of money. They perform all kind of functions like accepting deposits and
advancing loans, credit creation and agency function.

One of the most important functions of banks is to finance the working capital requirement
of firm .In determining the working requirement of firm the bank takes into accounts its sales,
production plans and desirable level of current assets. The amount approved by the bank for
the firms working capital requirement is called the maximum permissible credit limit. Thus it
is maximum fund which a firm can obtain from the bank.

Bank provides the working capital finance in the following forms:

1)
2)
3)
4)
5)
6)

Overdraft
Cash credit
Letter of credit
Working capital Loan
Purchasing & Discounting of bill
Commercial Paper

Overdraft: Under the overdraft facility, the borrower is allowed to withdraw

funds in excess of the balance in his current account up to a certain specified limit during a
stipulated period. It is a very flexible arrangement from the borrowers point of view since he
can withdraw and repay funds whenever he desires within the overall stipulations.

Cash Credit: The cash credit facility is similar to the overdraft arrangement. It is
the most popular method of bank finance for working capital in India. Under the cash credit
facility, a borrower is allowed to withdraw funds from the bank up to the sanctioned credit
limit. He is not required to borrow the entire sanctioned credit once, rather, he can draw
periodically to the extent of his requirements and repay by depositing surplus funds in his

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2

cash credit account. Cash credit limits are sanctioned against the security of current assets.
Cash credit is a most flexible arrangement from the borrowers point of view.

Letter of credit: Suppliers, particularly the foreign suppliers, insist that the buyer
should ensure that his bank will make the payment if he fails to honour its obligation. This is
ensured through a letter of credit (L/C) arrangement. A bank opens an L/C in favour of a
customer to facilitate his purchase of goods. If the customer does not pay to the supplier
within the credit period, the bank makes the payment under the L/C arrangement. This
arrangement passes the risk of the supplier to the bank. Bank charges the customer for
opening the letter of credit.

Working capital loan: A borrower may sometimes require ad hoc or temporary

accommodation in excess of sanctioned credit limit to meet unforeseen contingencies. Banks
provide such accommodation through a demand loan account or a separate non-operable cash
credit account. The borrower is required to pay a higher rate of interest above the normal rate
of interest on such additional credit.

Purchasing and Discounting of bill: Under the purchase or discounting of

bills, a borrower can obtain credit from a bank against its bills. The bank purchases or
discounts the borrowers bills. Before purchasing or discounting the bills, the bank satisfies
itself as to the creditworthiness of the drawer. When a bill is discounted, the borrower is paid
the discounted amount of the bill. The bank collects the full amount on maturity.

Commercial Paper: Commercial paper is an important money market instrument

in advanced countries like USA to raise short-term funds. In India, the Reserve Bank of India
(RBI) introduced the commercial paper scheme in the Indian money market in 1989.
Commercial paper is a form of unsecured promissory note issued by firms to raise short-term
funds. The commercial paper market in the USA is a blue-chip market where financially
sound and highest rated companies are able to issue commercial papers. The buyers of
commercial papers include banks, insurance companies, unit trusts and firms with surplus
funds to invest for a short period with minimum of risk. Given this investment objective of

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3

the investors in the commercial paper market, there would exist demand for commercial
papers of highly creditworthy companies.
In J&K bank Okhla Ph.II, Delhi working capital is financed in form of overdraft and
cash credit only.

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4

Assessment of working capital requirement of firm/borrower by bank

(J&K)
1. Bank must emphasized that assessment of working capital requirement of a concern
must be proceeded by a detail appraisal of the past and future financial viability of
borrower. In J&K bank three years balance sheet are taken up for working capital of
financing for any borrower. These balance sheets comprise of one balance sheet for
current year, one balance sheet for previous year, and one for next year.
It is implicit that concern will have to submit an acceptable business plan or forecasts in the
form of estimated/projected financial statements of the bank.
2. Quantum of working capital requirement:- concern will request that it will in need
of such amount as working capital finance after giving securities, working result of
firm of borrower and balance sheet. But it does not make any sense that bank will
accept it or not.
Bank will consider on two bases: Level of activity
Duration or length of operating cycle
Level of activity: - shows the level of production or sales. Whether firm want to increase the
production. For e.g., any firm produces 1000 units but now want to produce 1500 units in
next year it means the firm will want more working capital.
Length of operating cycle:- Bank also consider the operating cycle .It has to be ensured that
unit will have regular supply of raw material to facilitate the production .the unit should also
be able to have adequate stock of finished goods for smooth sales of operation. Bank always
want shorten life cycle as much as operating cycle will small. It will show the sales are
coming rapidly and concerns position is good enough for this financing.

3. Current assets build up: - The projected level of current asset will determine the
gross working capital requirement it include
a) Raw materials and consumable
b) Stock in process
c) Finished goods

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5

d) Receivables
e) Other current assets (like: cash, investment, advances to suppliers of raw
materials/stores and other advances etc.)
Bank after getting information about current asset build up take margin of total current
asset as per prescribe by R.B.I

Calculation of period of holding: Period of holding of current assets are calculated as underA) raw materials and consumable: it is calculated in terms of annual consumption
cost of raw materials and stores it depends upon
a) average consumption of raw materials
b) fluctuation in the raw materials availability
c) storage facility available
B) stock in process: the funds blocked up in stock in process depends on the
following factors;
a) time required for conversion of raw materials to finished goods;
b) number of products handled at the time in the process;
c) average quantities of each product processed at each time (batch quantity);
d) the process- i.e. the manner in which raw materials are added in the process
C) finished goods: it depend upon
a) delays due to inspection finished goods delays
b) delays in preparation and dispatch of documents
c) delays in shipment
D) Receivables: in case of credit sales receivable(debtors) are created it depend upon
period of credit given and efficiency of management in debt collection it is
computed in relation to gross sales.

Stock holding period:

Formulae,
AVERAGE STOCK/(PURCHASE OF CURRENT YEAR)*360 = STOCK HOLDING
PERIOD
AVERAGE STOCK = (OPENING STOCK+CLOSING STOCK)/2
E,g. if stock holding period is calculated as 63days and purchase of that period is 80 lacs. It
means after 23 day amount realised from purchases that belongs to stock is
(PURCHASES*23)/360 =14 lacs

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6

Debtors holding period :

Formulae,
(Debtors/sales of that period)*360 = debtor holding period
E.g. If debtor holding period is computed as 110 days and sales for that period is 100 lacs it
means amount realised from debtor is (SALES*DEBTOR HOLDING PERIOD)/360
(100*110)/360= 30 LACS

CREDITOR HOLDING PERIOD

Formulae
(CREDITOR/PURCHASES OF THAT PERIOD)*360= CREDITOR HOLDING PERIOD
E.g.: if creditor holding period calculated from above formula is 60 days and purchases of
current year is 80 lacs then amount paid to creditor after 60 days is computed with this
formula---(PURCHASES*CREDITOR HOLDING PERIOD)/360
(80*60)/360=13 lacs that amount is given to creditors after 60 days.

Objective: 3
to understand the formalities and documentary support required by the
bank for assessing need of working capital finance proposed by client organisation.

Securities required in working capital finance

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7

Bank generally does not provide working capital finance without adequate security. The
nature and extent of security offered play an important role in influencing the decision of
bank to advance the working capital finance.
HypothecationUnder this mode of security, the banks provide working capital finance to the
Borrower against the security of movable property, generally inventories. It is a charge
against property for the amount of debt where neither ownership nor possession is passed to
the creditor. In the case of default the bank has the legal right to sell the property to realize
the amount of debt.
PledgeA pledge is bailment of goods as security for the repayment of a debt or
fulfilment of a promise. Under this mode, the possession of goods offered as security passes
into the hands of the bank. The bank can retain the possession of goods pledged with it till the
debt (principal amount) together with interest and other expenses are repaid. . In case of nonpayment of loan the bank may either; Sue the barrower for the amount due; or Sue for the
sale of goods pledged; or after giving due notice, sell the goods.
Lien
Lien means right of the lender to retain property belonging to the barrower
until he repays the debt. It can be of two types: (i) Particular lien and (ii) General lien.
Particular lien is a right to retain property until the claim associated with the property is fully
paid. On the other hand, General lien is applicable till all dues of the lender are paid. Banks
usually enjoy general lien.
Mortgage
Mortgage is the transfer of a legal or equitable interest in a specific immovable
property for the payment of a debt. In case of mortgage, the possession of the property may
remain with the borrower, while the lender enjoys the full legal title. 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.
Charge
Where immovable property of one person is made security for the payment
of money to another and the transaction does not amount to mortgage, the latter person is said
to have a charge on the property and all the provisions of simple mortgage will apply to such
a charge. A charge may be created by the act of parties or by the operation of law. It is only
security for payment.
N.B- In many cases that I dealt with in J&K Bank hypothecation of stocks/debts are taken as
primary security and as collateral securities mortgage are taken and sometimes 3 rd party
guarantee has also been taken from requested party

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8

Margin taken by bank: The question of margin arises for several reasons it is just kept by bank to avoid future
contingencies.
In many cases where price fluctuations are high markets becomes risky that time bank
avoids giving loan to institution.

By keeping some margin on current assets (large borrowers), and some margin on
working capital gap bank can give finance for working capital at any time now a days.
RULE FOR MARGIN:

Working capital gap which the borrower has already in hand before financing which is
current assets less current liabilities in the previous year of financing
OR
25% of Net working capital (NWC) in the year in which financing is giving.,
(whichever is higher)

Objective: 4
to explore the working procedure about the requirement of working
capital and its various parameter for concerned client organisation.

PROCEDURE OF APPRAISAL OF WORKING CAPITAL

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9

Study of
borrower

Quantum of advanced
requested for

Securities (primary and

collateral)

Analysis of various financial

statements of borrower

Assessment of working capital

requirement
(maximum permissible
finance)

Sanctioning of finance

(NOTE FOR SUBMISSION TO BRANCH HEAD)

Subject: -

Fresh Cash Credit facility in favour of M/s EXIM CRAFT

Name of applicant Brower: -

M/S EXIM CRAFT.

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0

(Prop. Mr.Romesh Lal Khajuria)

01. General information of the proposal:
Date of receipt of proposal

15.12.2013

Existing Banking arrangements

sole banking

Proposed banking arrangement

sole banking

Sanction comes under power of

Branch head

Activity

Trading &Export of all kinds of

Textiles& Handicrafts

Sector

Trade

Priority Classification

Priority

Particulars of existing facilities enjoyed

By the applicant borrower at the branch

NIL

Facilities requested by the Party/firm/Co.

Facility
C/C

02.

Amount
Rs.12.00 lacs

Borrower Information:

Address:

Delhi

Constitution

Sole Proprietorship

Date of establishment

1992

Period of dealing with branch

since 1995

03. Particulars of proprietor:

04.

Securities offered for the proposed facility:

Primary security:
Collateral security:

Hypothecation of all kinds of stocks and Book debts.

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1

Equitable Mortgage of Residential house property .valued at Rs.22.05 lacs (Rs.18.74 lacs
as forced value) by M/s Vikas dubey.dated on 12.12.2013.
05. Brief about the applicant:
Mr.Romesh Lal k is the sole proprietor of M/s Exim Craft, with office atLajpat
nagar, delhi.The borrower is dealing with the export and wholesale of all kinds of textiles and
handicrafts.Mr.Romesh is maintaining current a/c with this branch under refrence no. xxxx
since 1995 and has an experience of about19 years in this line activity, having earned a good
market reputation. The conduct of the account is satisfactory.
06. Present facilities:
The party is not availing any credit facility from this Branch
07. Present request:
The party has requested for a fresh cash credit facility of Rs.12 lacs from the Branch.
08. Period:

One year

09. Rate of interest: BR+5.00 %( Presently 15.50%)

10. Purpose of borrowing:
The party has to expand his existing business.
11. Inspection of the unit:
The inspection of the unit has been conducted by shakeel ahmad and Javed iqbal,two officers
of the branch on 21.12.2013.the inspection of the property to be mortgaged has been
conducted by Mr. Babu ram on 24.12.2013.

Client organisation analysis:

BALANCESHEET ANALYSIS:

Year

31.03.201
1

(Rs.
in
lakh)
31.03
31.03.
31.03.20
.2012
2013
14

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2

Achi
eved
38.25
45.06

Purchases
Sales
%growth of sales
Net profit
Liabilities
Capital
Secured loan
Unsecured loan
Total term liabilities
Current liabilities
Working capital
Sundry creditors
Expenses Payable
Advance from customer
Other current liabilities
Total Current liabilities

Achieve

Project

3.2

d
26.25
38.62
-14.29
3.19

Projected
47.58
55
42.41
4.4

ed
54.93
70
27.27
6.51

10.79
3.69
1.8
16.28

10.77
4.47
2.19
17.43

11
3.5

15
2.5

14.5

17.5

6.46
4.41
0.31
0.2
0.71
12.09

6.18
3.97
0.35
0.19
1.06
11.75

12
5

12
4

17

16

28.37

29.18

31.5

33.5

13.55
13.55

16.14
16.14

6.75
6.75

5.74
5.74

8.2
5.47
1.05
0.1
14.82
28.37

6.56
4.13
2.25
0.1
13.04
29.18

14
10
0.75
24.75
31.5

17
10
0.66
0.1
27.76
33.5

2.73
1.23
77
42
44

1.29
1.11
90
54
38

7.75
1.46
106
38
65

11.76
1.74
111
26
51

Total
liabilities
Assets
Fixed assets
Total
Current assets
Stock
Sundry debtors
Cash & bank balances
Fixed deposits
Total Current Assets
Total assets

Financial indicators
Net working capital
Current Ratio
Stock velocity
Creditors velocity
Debtors velocity

Computation of MPBF

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3

Accepted purchased
Accepted sales
Current Assets
Stocks
96
Debtors
50
Other
Total current
Assets
Current liabilities
Creditors
26
Expense payable
Other

54.93
70

Total current liabilities

working Capital Gap
Margin (25% of CA's or NWC,whichever
is higher)
M
PBF

3.97
20.40
11.76

14.65
9.72
24.37
3.97

8.64

CA
6.09

NWC
11.76

(Say Rs. 9.00 lacs)

RECOMMENDATION AND COMMENTS:

Sales
The firm is running on profitable lines. The sales of the concern have declined by 14.29%
when compared to the sales turnover of the preceding year but have been projected to
increase by 42% in this year. All the sales have not been routed through the account. The
party has informed that 30% of sales are dealt in cash as also cash sales in various exhibitions
that the party has attended, are not reflected in the account.
The party has projected the sales turnover of Rs. 55.00 lacs for the current financial year,
which seems on higher side. The matter with regard to achievement of projected sales was

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discussed with the party who informed that he is to attend some foreign and domestic
exhibitions, some payment are due for realization and has some order to be executed for
achievement of projection. The party has expressed the hope of achieving the projected sales
and has assured to route all the sales through the account.
Current Ratio
The current ratio of the firm stands at 1.23as on 31.03.2012, 1.11 as on 31.03.2013,&1.46
projected for the financial year 2013-2014. It is accepted.

Holding period
Stocking period:The stock holding period during the last two year is at 77 & 90 days
respectively. The stock velocity has been projected at 106 days &111days for the current FY
2012-13 &2013-14, which seems to be on higher side.
The bank accepted stock velocity at 96 days.

Debtors period
The debtors period of the firm stands at 38 days as on 31.03 2013. The projections stand at
65 days for the financial year 2013-14which is on the higher side.

Creditors period
The creditors velocity of the firm stood at 42 &54 for the last two years. The projection
stand at 38 days for the for the current financial year 2013-14 which seems reasonable, hence
accepted.

Recommendations:
In view of the deliberations made in the forgoing paras, it is proposed that a fresh Cash Credit
facility of rs. 9.00 lakh (Rupees nine lakh only)may be sanctioned in favour of M/S Exim
Craft Prop.Mr. Romesh lal khajuria for a period of one year subject to renewal after review,
against the below mentioned securities, terms and conditions.
Nature of facility:

Cash credit

Amount of limit:

Rs. 9.00 lakh

Securities:

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5

Primary:

Hypothecation of all kinds of stocks in trade and book debts.

Collateral:
Equitable mortgage of freehold residential House and land situated at Jammu standing in the
name of Mr. Romesh lal khajuria S/O-Mr. Dharam chand.It is valued at 22.05 lacs(Rs.18.74
lakh forced value)by Vikas dubey vide valuation dated 12.12.2013.

Rate of interest:

Margin:

BR+5.00 %( Presently 15.50%)

25% against stock

25% against book debts.

Insurance:

All type of stocks & mortgage property to be got

Comprehensively insured with usual bank clause.

SUMMARY
Cash flows in a cycle into, around and out of a business. It is the business's life blood and
every manager's primary task is to help keep it flowing and to use the cash flow to generate
profits. If a business is operating profitably, then it should, in theory, generate cash surpluses.
If it doesn't generate surpluses, the business will eventually run out of cash and expire. The
faster a business expands, the more cash it will need for working capital and investment. The
cheapest and best sources of cash exist as working capital right within business. Good
management of working capital will generate cash will help improve profits and reduce risks.

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6

Bear in mind that the cost of providing credit to customers and holding stocks can represent a
substantial proportion of a firm's total profits.
There are two elements in the business cycle that absorb cash - Inventory (stocks and workin-progress) and Receivables (debtors owing you money). The main sources of cash are
Payables (your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and payables) has two
dimensions ........TIME ......... and MONEY. When it comes to managing working capital TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies
due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory
levels relative to sales), the business will generate more cash or it will need to borrow less
money to fund working capital. As a consequence, you could reduce the cost of bank interest
or you'll have additional free money available to support additional sales growth or
investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer
credit or an increased credit limit; you effectively create free finance to help fund future sales.

CONCLUSION
1. J&K bank is a growing bank which has strong hold in some states especially in
Jammu and Kashmir. It is the main lender of money there and it has come up with
some unique products to meet the needs of its clients there.
2. J&K bank is growing its existence in India. Since it is in the process of growing and
expanding it is giving working capital financing facility at lesser interest rates than
other big players may charge.

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3. J&K bank has made the process of getting working capital financing faster than the
other banks to face the competition.
4. J&K bank has also been successful in attracting new customers looking for working
capital financing. Banks fast response, good customer service and reasonable interest
rates are responsible for it.
CLIENT ORGANISATION
5. Working capital of the company M/S EXIM CRAFT is increasing and showing
positive working capital per year. It shows good liquidity position.
6. Positive working capital indicates that the company has the ability of payments of
short term liabilities.
7. The study of receivable management of the company shows that they do not have
credit policy and hence have a high average collection period.
8. The current ratio of the firm stands at 1.23as on 31.03.2010, 1.11 as on 31.03.2011,
&1.46 projected for the financial year 2011-2012. It is accepted. It means that the firm
has more current assets to pay its current liabilities.
9. Working capital finance facility is given only for one year after one year bank review
or renewed the facility after the proper assessment of borrower account conduct,
stocks statement of borrower fund.

REFERENCES AND BIBLIOGRAPHY

During the completion of this project work I have taken references from various sources
which include:

Annual report of The Jammu and Kashmir Bank ltd.

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8

Magazines such as Business Economics, Bank Dairy, Bank Catalogue, Bank

magazine etc.
Yearly journals of the Jammu and Kashmir Bank Ltd.
Book principles of financial management- BY: R. P. RUSTAGI
Website of the bank;
www.jkbank.net
www.jkbank.com
www.rbi.org.in