Acknowledgement

I am grateful to Prof.Alok Satsangi under whose enlightenment, the project Credit Monitoring & control in IDBI Bank was under taken. I also express my deepest gratitude towards Shri B R MAHI (DGM), IDBI BANK my corporate project guide for his effective guidance and inspiration. I want to thank all the staff of Large Corporate Group of IDBI BANK, New Delhi for their cooperation. Working with them was a pleasure and incredible experience. And finally, I thank my dear parents for their support and encouragement in all that I have achieved so far.

PREFACE As a part of PGDBM programme, a student has to pursue a project duly approved by the Director of the Institute. I had the privilege of undertaking project on CREDIT MONITORING & CONTROL. It aims in studying how banks minimize the credit risk that could arise from the borrowers or the entire portfolio. My project is divided into several aspects as details mentioned as under: First deals with the objectives and methodology of the study; Second deals with structure and function of IDBI; Third deals with procedure for sanctioning the Credit Facilities; Fourth deals with role of Credit Administration Department; Fifth deals with the suggestions, findings, limitations, conclusions.

Signature: Rohit Sethi

DECLARATION

I, the student of MBA & PGDBM from NSB School of Business hereby declare that the ProjectReport on credit monitoring and control in IDBI bank is original piece of work carried out under the guidance of Shri B R MAHI, Dy.General Manager (Credit Administration Department) Large Corporate Group, IDBI Bank, New Delhi.

Rohit Sethi.

Table of contents

1) IDBI Bank introduction 2). Objective and project methodology 3) Concept of working capital and term loans 4) Credit Administration Department

IDBI BANK INTRODUCTION

IDBI bank is in operation from last four decades first as a development financial institution and then as full service commercial bank. Various developments shown by the bank since its inception: On July 1, 1964 IDBI was established by an act of parliament, as a wholly owned subsidiary of Reserve Bank of India, which act as an efficient industrial structure in the country in tune with national requirement. In 1976, 100%ownership was transferred from RBI to government of India. In 1995, government of Indias stake had been reduced by domestic IPO to 72% and post capital restructuring to 58.1%. The current GOIs shareholding is about 53%. On October 1, 2004 IDBI converted into a banking company as Industrial development bank of India limited. It has also continued playing its role as DFI. On April 2, 2005 IDBI merged its hitherto banking subsidiary with itself. On October3, 2006 the United Western Bank Ltd. was merged with IDBI. In 2006, IDBI announced its foray into Life insurance business jointly with Western Bank and Fortis insurance international. A memorandum of understanding was signed by three partners on July 11, 2006 followed by Joint Venture Agreement on November 23, 2006. In 2006, IDBI GILTS ltd was incorporated as a wholly owned subsidiary of Bank to take primary dealership Business. IDBI is now a Universal Bank the merger was aimed at consolidating business across the value chain and the reaping the benefits of economies of scale, thus enable it to offer an array on customer friendly service to its existing prospective clients, both within the geographical boundaries of India. Headquartered in Mumbai, the commercial capital of country, IDBI today rides on the back of robust business strategy, a highly competent and dedicated work force and a state of art information technology platform which provide innovative banking services and customize financial solution to its clients across convenient delivery channels.

The bank currently boasts of a balance sheet and business size of Rs 2, 15,829crore and major shareholding around 53%. As of 31-3-2009, IDBIs delivery channel consists of 537 branches and 914 ATMs spread across 323 centers. The responsibility of day to day management of operation of a bank is vested with the chairman and managing director and two deputy managing director, who draw upon the support of and expertise of a cross disciplinary top management team. FUNCTIONS OF COMMERCIAL BANKS: The two essential functions of commercial bank are borrowing and lending of money. Banks borrow money by taking all kinds of deposits. Deposits may be received either on current Account where the banker incurs the obligation to repay the money on demand. Interest is not payable on current account deposits. In case of saving bank account, bank undertakes the obligation to repay them on demand. Interest is usually allowed on saving bank deposits although there usually restriction on the total amount that can be withdrawn. Besides these two main functions, a commercial bank also performs a variety of other functions i.e. the agency service and the general utility services. AGENCY SERVICES A commercial bank provides a range of investment services. Customer can arrange for dividends to be sent to their bank and paid directly to their bank accounts. Similarly bank will make applications on behalf of their customers for allotment arises from new capital issues, pay calls as they fall due and ultimately obtain share certificates. On certain agreed terms bank will allow their names to appear on approved prospectuses or other documents as the bankers for the issue of new capital; they will receive application and carry out other instruction.

GENERAL UTILITY SERVICES It include the issue of credit instruments like letter of credit, BG and travelers cheques, the acceptance of bills of exchange; the safe custody of valuables and documents; the transaction of foreign exchange business; acting as a referee as to the respectability and financial standing of customers; providing specialized advisory service to the customers; etc.

COMMERCIAL BANKS AND INDUSTRIAL FINANCE: Of the total loans and advance granted by the commercial bank, industry(large and medium) receives roughly 70%. Bank finance the long term and the short term requirements of companies. From the liquidity point of view short term finance is certainly desirable for a commercial bank. It is said that the loans granted by the banks on a short term basis are not short term in real sense they roll over a substantial portion of their short term credit. In the long term loans, the borrower gets the funds at a specified rate of interest for a specified period of time.

ACTIVITIES
IDBI Bank activities broadly may be divided into parts viz Banking and Retail Banking. Under Corporate Banking, fund based and non fund based credit facilities under various schemes like project loans, corporate loans, cash credit limit, working capital term loans, short term loan, packaging credit facilities bills discounting scheme, bills payments etc are being provided to Large, Medium, Infra Structure Projects and SME. IDBI is also providing finance to agriculture sector and other priority sectors under Govt. of India guidelines. Under Retail Banking, Preferred Banking where Exclusivity, Convenience and Privilege is a norm and its preferred program is designed to offer special services to a selected group of discerning and deserving individuals with special features to help save customer's time and efforts and tools to help customers build wealth through efficient deployment of assets. Preferred Banking promises to make the customer's banking experience a fulfilling one and another important service provided by IDBI is the NRI Banking Service. Further, IDBI offers. NRI Banking Products like Non Resident Rupee Checking Account, Non Resident Rupee Term Deposits and Foreign Currency Non Resident Deposit, it realizes that the customer's requirements are manifold. Hence, it provides seasoned banking professionalization to handle the customer's queries and offer value added services. The value-added services provide ranging from answers to online tax, foreign exchange related queries and needs with special emphasis on FEMA Guidelines issued by Reserve Bank of India from time to time.

SUBSIDIARIES

Revenue Break Down among Subsidiaries IDBI Capital Market Services Limited IDBI Capital Market Services Limited (IDBI Capital) offers Stock Broking, Distribution of Financial Products, Merchant Banking, Corporate Advisory Services, Debt arranging & underwriting, Portfolio Management of Pension Funds & Research services to institutional, corporate and retail clients. IDBI Capital is a major player in the Pension Fund Management with assets of over Rs. 8250Crores. The Equity broking segment has scaled up its operations enhancing turnover of cash segment by 40% over the previous year. IDBI Home Finance Limited IDBI Home finance Ltd. is a 100% subsidiary of IDBI Bank Ltd. The Company was incorporated on January 10, 2000 with the main object of carrying on the business of providing 10

long term finance to any person, company or corporation, society or association enabling such borrower to construct or purchase in India a house or flat for residential purposes. During the year, IDBI Home finances outstanding loan portfolio increased by Rs.563Crores from Rs.2147 Crores in FY year 2007to Rs.2710Crores in FY 2008, registering a growth of 26%. IDBI Intech Limited Intech provide IT related services in the area of Consultancy, System Integration, System implementation & support, Applications & Server hosting and other IT related managed services and specialized training to the IDBI staff & its Group companies and the other organizations, focusing mainly on the BFSI sector. IDBI Gilts Limited IDBI Gilts Ltd. was set up to undertake Primary Dealership [PD] Business. The company's business includes Bond trading, underwriting in auctions of primary issuance of Government dated securities and treasury bills. In addition, IDBI Gilts also plans to be a major player in the interest rate and credit derivative market.

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OBJECTIVE AND PROJECT METHODOLOGY

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OBJECTIVE AND PROJECT METHODOLOGY The main objective of this report is to understand the post sanction monitoring of credit in case of credit monitoring and control. The project methodology start with understanding concept related to working capital followed by financing of working capital which include study of different component of working capital, procedure of sanctioning the loan, detailed appraisal, post sanction monitoring of credit. 1. Data Base: The study is mostly confined to secondary data which is collected from stock statement and QIS published by company. Additional information has been collected from staff members of the credit Administration department. 2. Scope and period of Study: The study has been conducted from information gathered for 2 financial year (2007-08, 2008-09). 3. Techniques and Tool used: The analysis is mainly based on tools like financial ratios, percentage etc.

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Business Segments Wholesale Banking Services (58% income, 61% profits) provided Rs. 4652 Crores as Net Interest Income and Rs. 423Crores as the Net Profit in the year of 2008. The Wholesale bank provides services such as working capital finance, trade services, transactional services, cash management, etc to large, mid & small sized corporate and Agri-based businesses. It has been actively participating in structuring and financing of infrastructure projects in the areas of power, telecom, roads, airports, seaports, railways and logistics as well as Special Economic Zones. IDBI is a member of the Core Committee of the Government set up for finalization of the Ultra Mega Power Projects. Further, it is also an active member of the InterInstitutional Group for power sector. Retail Banking Services (27% income, 31% profits) Retail Banking provided Rs. 2166 Crores as Net Interest Income and Rs. 187 Crores as the Net Profit in the year of 2008. The objective of the Retail Bank is to provide its target market customers. a full range of financial products and banking services, giving the customer a onestop window for all his/her banking requirements.

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In Retail Finance, IDBI offers. an array of innovative Retail Asset products, both Secured (Housing Loan, Mortgage Loan, Loan against Securities) and Unsecured (Personal Loans, Educational Loans and Overdraft to Merchant Establishments). During the year, Bank increased its bouquet of retail products by launching Loan against Rent Receivables, Loan against Commercial Property, Reverse Mortgage Loan, Holiday Travel Loan and Loan to the Staff of IDBI-Assisted Units Treasury(15% income, 6% profits Wholesale Banking provided Rs. 1283 Crores as Net Interest Income and Rs. 44.8 Crores----in FY-2008-as the Net Profit in the year of 2008. In Corporate Finance, IDBI offers a wide array of corporate banking products under various business segments such as Deposits, Cash Management Services, Central and State Government agency business (both direct and indirect taxes), Trade Finance and Treasury Products. Within Treasury, the bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities, and Equities. COMPETITORS: IDBI is the tenth largest development bank in the world. The company faces competition from both national banks and regional banks in the country. State Bank of India : State Bank of India, a public sector bank, is the largest bank in India. Besides personal and corporate banking, SBI is also involved in NRI (Non Resident Indian) services through its network in India and overseas. As of May 2008, the bank had 21 subsidiaries and 10,186 branches. The Bank has posted a Net Profit of Rs. 6729Crores for 2007-08 as compared to Rs4541Crores in 2006-07, registering a growth of 48.18%. Punjab National Bank : Punjab National Bank with 4497 offices is the largest nationalized bank currently serving 3.5 Crores customers. Punjab National Bank has been ranked 38th amongst top 500 companies by The Economic Times. PNB has earned 9th position among top 50 trusted brands in India. The bank posted a gross profit of Rs. 4006 Crores for 2007-08 as compared to Rs. 3231 Crores in 2006-07, registering a growth of 24.6%.

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Bank of India: Bank of India, established on 7 September 1906 is a bank with headquarter in Mumbai. Government-owned since nationalization in 1969, is one of India's leading banks with about 2,884 branches including 27 branches outside India. The bank posted a gross profit of Rs.3701 Crores for 2007-08 as compared to Rs. 2394 Crores in 2006-07, registering a growth of 54.59%. HDFC Bank : The Housing Development Finance Corporation (HDFC) Bank Limited the second largest private sector bank in India by net profit generated revenues of over Rs. 5228 Crores in 2007. Headquartered in Mumbai the bank is one of the first private banks to be set up in India. With a network reach of 1412 branches spread over 528 cities across India and having over 2890 ATMs across these cities, the bank is the largest private sector bank in terms of branch network in India leaving behind ICICI bank. Financial Comparison of the competitors: Financial Metrics FY2008 (Rs in Crores) Name IDBI SBI PNB Market Capitalization Net Profit Total Earnings Earnings per share 4,341.35 73909.58 14358.9 729.46 6729.12 2048.76 2009.4 9772.1 58348.7 16262.58 14472.15 10.06 106.56 64.98 38.26

Bank of India 13344.7 Market Share:

Indian Banking Sector is a fragmented market with 27 PSU banks, 25 private banks, 30 foreign banks and a host of cooperative and regional rural banks. IDBI bank has a market share of 1.6%. SBI, being the largest bank in India has a market share of 22.7%. The top 8 banks account for

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barely 54 per cent of the market share with several smaller players occupying the remaining 44

per cent.

Procedure for sanctioning of the loan: IDBI provide the financial assistance to corporate for setting up new business, existing corporate for expansion, modernization, diversification, integration etc and credit facilities to meet working capital of its clients. A. Appraisals for Financial Assistance: 1. Detailed Appraisal In respect of an applicant approaching the bank for the first time for financial assistance, credit report from bankers on the promoter, Applicant Company and group companies if any to be obtained to assess creditworthiness of the borrower. 17

The various risks relating to the project (sponsor risk, participant risk, operating risk, engineering risk, supply risk, market risk etc.) needs to examined. Appraisal of a project would need to be comprehensive, involving detailed scrutiny of its management aspects, technical feasibility, commercial viability and financial appraisal. 2. APPRAISAL OF MANAGEMENT ASPECTS The background, creditworthiness and track record of the promoter companies and their past dealings with institution/banks would need to be scrutinized carefully. Resourceful and capable promoters could make a success of marginal projects also while promoters' deficiencies could affect implementation of otherwise intrinsically good projects. Assessment of Management/Promoters capabilities, thus, assumes critical significance in appraisal. The status of accounts maintained by the applicant company with its bankers and reports on associate/group concerns of the borrowers to be obtained from its bankers before taking any credit decisions. 3.APPRAISAL OF FINANCIAL VIABILITY Financial appraisal would involve verifying reasonableness of estimates of different elements of project cost and projected working to ascertain whether the critical ratios based thereon are in line with stipulated benchmarks. In particular, a rigorous assessment of financial ratios depends to a critical extent on reasonableness and viability of assumptions. In this context it would be desirable to keep in view consumption norms of raw materials, utilizes and other factors seen to be critical for realization of projections and a part of due diligence attempt a comparison with domestic and global standards in this regard. Critical Appraisal ratios to be focused on are: DSCR(Debt service coverage ratio): It could be desirable to have a DSCR of 1.5:1 over the repayment period of the project not exceeding 10 years. Breakeven point and Cash Break even point: In general, these ratios should be in line with the respective industry and the lower these ratios are the better. IRR: While, conventionally, an IRR of 15% has been considered the minimum required. Further, the rate of 15% may not be sustainable in the context of today's low interest rate regime and, as a matter of fact, it would be desirable to take a project as viable with a certain margin over the cost of capital.

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Debt Equity Ratio and Current Ratio would need to be in line with stipulations of the Project Finance Scheme and are, at present, expected to be not more than 1.5:1 (not more than 3:1 for infrastructure projects) and not less than 1.33: 1 respectively. Fixed Asset Coverage Ratio is expected to be at least 2:1 The process of appraisal would require scrutiny and discussion on all major aspects of management, technical, market and profitability as given in the company's application for assistance. It is desirable that the final set of projections and assumptions thereof are also made available to the promoter and his commitment obtained thereto. This would ensure that in course of monitoring of the project, the promoter is also aware of the benchmarks against which the performance of the company/project is to be assessed. After finalization of the appraisal report by the project evaluation team, the proposal submit to the appropriate authority for sanction. Recommendation for sanction based on a holistic viability assessment, comprising all aspects of the project like managerial competence, market prospects, financial soundness and economic justification. 4 APPRAISAL OF TECHNICAL ASPECTS Technical aspects need to be examined in detail to ensure that the project for which assistance is sought is a technically feasible proposition. In case of large projects or in case of industries where institutions have not had much exposure like films industry, it would be desirable to have a Committee of experts to get their views. 5 APPRAISALS OF MARKET ASPECTS This would require a careful assessment of the existing and potential market i.e. demand and supply, both domestic and international, for the product as also their cost structure. Services of MRD should be utilized in this regard to the extent necessary. 6 TERMS OF SANCTION The terms on which assistance is sanctioned are generally standardized although suitably structured terms of sanction depending upon the specific circumstances of the proposal may be necessary. The conditions might be classified as "Pre-commitment". 7 DISBURSEMENTS: Disbursement of sanctioned assistance is being made after the execution of Documents. The format prescribed for disbursement of direct finance assistance broadly indicates the necessary 19

requirements to be completed by the Borrower at the time of seeking disbursement and serves as an indicative checklist. The Borrower makes an application for disbursement of the loan in the specified format with all the necessary details. The Bank ensures the compliances of the terms of sanction accepted by the borrower, properly executed all the requisite documents and make disbursement through its account maintained with IDBI.

Procedure of sanction of working capital

For any business there are two types of capital requirement: Fixed capital and Working Capital. The role of fixed capital is to acquire fixed assets like land, building, plant and machinery etc. Fixed assets give return over a long period of time. In the initial stage of setting up of a company, the expenses related to fixed capital is large. Working capital are the funds deployed for managing regular day to day business operations like purchase of raw material, payment of wages , salaries etc. There is difference between current asset and fixed asset in terms of liquidity .To recover the initial investment in fixed assets firm require several years while in case of current assets like inventories and debtors (account receivable) investment can be recovered in less than a year. WORKING CAPITAL: it refers to that part of firms capital, which is required for financing short term assets such as cash, debtors, marketable securities and inventories. Working capital is among the most important things that contribute to the success of a business. A business may cease to function properly without it. Lack of working capital may leave a company with too little cash to pay its short term obligations. A company with a very low amount of working capital may be at a risk of running out of money. A company with less working capital can face financial difficulties and may be even forced towards bankruptcy. Due to this it may have to borrow money in attempt to remain afloat. In some type of businesses, it isnt as much of a problem to have lower amount of working capital Companies that are operated on a cash basis have fast inventory turnover, and can generate cash quickly do not necessarily need more working capital. CURRENT ASSETS Also known as liquid assets are the resource that are currently in possession of the holder and could be converted into cash within a short period. These cash equivalents would possess an 20

ability to get converted into cash within one calendar year. It also indicates short term deployment of funds and form gross working capital. Companies need current asset to fund their day to day operation.

TYPES OF CURRENT ASSETS: 1) Cash and equivalents 2) Prepaid expenses 3) Account receivable 4) Inventories 5) Short term investment Cash and equivalents: these assets are literally money in the bank : cold, hard cash or something equivalent, like bearer bonds and money market funds. Prepaid expenses: the company has already paid these expenses to its suppliers. It can be lump sum paid to an advertising agency. Although these expenditures are not technically liquid, since the company doesnt actually have the money in question in the bank, having bills already paid is a definite plus the quantum and period , for which specific component of current asset is held, should be reasonable and related to requirement. Account receivable: also known as debtors, these are the funds that the companys customers currently owe to the company. The company has sold the products but is yet to receive the payments which appear as debtors in its books. Normally account receivable is almost turned into cash within a short amount of time, some of the debtors may take more time to liquidate. In rare cases company have to write off bad account receivable if they have shipped or provided services to the customer unable to pay. Inventories: the stocks which are held by the company consist of raw material, work in progress, finished goods and other consumables. The company stocks raw material to meet its regular requirement in line with its availability, lead time and seasonality. The stock of raw material that have been processed but not yet converted into finished goods is called work in progress. Stock of work in progress and finished good depend on type of product and product cycle.

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Short term investment: It normally come to play when a company has so much cash in hand that it can afford to tie some of its cash in bonds lasting less than one year. It cannot be liquefied easily without some effort, but earns a higher return.

CURRENT LIABILITIES: These are what a company currently owes to its suppliers and creditors. These are short term debts. Current liabilities are the main source of finance for working capital and are normally identified with operating cycle of business. Five main categories of operating cycle: 1) Account payable 2) Accrued expense 3) Income tax 4) Short term notes payable Account payable: this is the money that company currently owes to its suppliers, partners, and employees the basic cost of its regular business operation that the company hasnt yet paid, for whatever reason. One company account payable is another companys account receivable. A company has the power to push back the due dates on some of its account payable. Accrued expenses: the company has incurred certain expenses, but not yet paid them. These are normally marketing and distribution expense that are billed on a set scheduled and have not yet come due. Income tax payable: this is a specific type of accrued expense- the income tax the company has to accrue over the year, but does not have to pay yet, according to various federal, state, and local tax schedules. Short term notes payable: the company has drawn off this amount from its line of credit (cash credit or overdraft facilities) from a bank or other financial institution. It needs to be repaid within next 12months. VARIOUS FACTORS DETERMINING WORKING CAPITAL: Total costs incurred on materials, wages and overheads 22

The length of production cycle i.e. the time taken for conversion of raw materials into finished goods. The length of time for which raw materials remain in store before they are issued to production. The length of sales cycle during which finished goods are to kept waiting for sale. The average period of credit allowed to customers. The amount of cash required to day to day expenses of business. The amount of cash required for advance payments. The average period of credit to be allowed by suppliers. Time lag in payment of wages and other overheads. CONCEPTS OF WORKING CAPITAL AND TERM LOANS: There are two concepts of working capital: 1) Gross working capital 2) Net working capital Gross working capital: it consists of firm investment in current assets like cash, short term securities, debtors, bill receivable and inventory. Net working capital: it refers to the difference between current assets and current liabilities. It can be positive or negative. A positive net working capital occurs when current asset exceed current liabilities. Working capital cycle: The main aim of firm is to maximize the shareholders wealth. Firm always try to earn sufficient return from its operation. To earn profit, sufficient sales activity is required. The firm has to invest relevant funds in current assets for generating sales. Current asset is required because sales do not converted into cash instantaneously. There is always an operating cycle involved in conversion of sales into cash. Working capital cycle of a manufacturing activity starts with acquisition of raw material and ends with the realization of cash for finished goods. It is also called as cash to cash cycle. The size of operating cycle depends on nature of business. Acquisition of resources: such as raw material, labor, spares, fuel etc. Manufacture of product: conversion of raw material into finished goods. Sales of the product: it is done either for cash or on credit. 23

Conversion of raw material into finished goods depends upon technical requirement and manufacturing facilities available. Similarly turnover of finished goods and their transformation into book debts, bills or cash could be related to factors like delivery schedule, business custom and competition. Working capital cycle is fast in consumer goods industry and slow in capital goods industry. Cycle is short in case of perishable goods such as food articles, beverages, fish, fruits etc. Factors determining the requirement of working capital:
1) Nature of business: working capital requirement of a firm are basically influenced by

nature of business. For example trading and financial firm require small investment in fixed asset and large investment in working capital. While public utilities need small investment in working capital and more investment in fixed asset.
2) Credit policy: the credit terms to be granted depends upon the norms of industry to

which the firm belongs. A high collection period means tie up of large funds in debtors.
3) Market and demand condition: most of the forms experience seasonal fluctuation in

demand for their product and their services. These business variation effect the working capital requirement in case of boom in the market sales will increase and incase of recession, firms investment in inventories and debtors will also decrease.
4) Technology and manufacturing policy: a technology should be chosen which provide

shortest operating cycle within a specified time period. Longer the working capital cycle, larger will be the working capital requirement.
5) Price level changes: firm will require a higher amount of working capital if there is an

increase in price level. Those companies which immediately revise their product prices with rising price level will not face a severe working capital problem.

Management of working capital: the goal of working capital is to ensure that a firm is able to continue its operation and that it has sufficient ability to satisfy both maturing short term debt and upcoming operational expenses. The managing of working capital involves managing inventories, account receivable and payable cash. Working capital management approach: 24

Ratio analysis: there are different ratios such as working capital ratio, inventory turnover ratio, and receivable collection ratio help in analysis of problem area of management. Current ratio: it is used to measure the financial stability of companies. It indicates whether the companies have enough resource to meet the financial obligation over next 12 months. Current ratio= current asset /current liabilities It is generally accepted that customer should meet the 25%requirement of its working capital from long term sources. Thus normally the current ratio should be minimum 1.33. Inventory turnover ratio: it is one of the accounting liquidity ratio or a financial ratio. This ratio measures that number of times, on average the inventory is sold during the period. Inventory turnover =sales /inventory If inventory turnover ratio is low then it indicates that management team doesnt do its job properly in managing activities. Receivable collection ratio: a collection ratio has to do with the outstanding account receivable of a given company. This ratio is an average of amount of time that is usually required for payment on the invoices issued foe a given calendar period to be paid in full by the customers. Receivable collection ratio: Accounts receivable/ (revenue/365) Financing and monitoring of working capital: There are two major source of financing working capital are Trade credit and Bank borrowings. Use of trade credit has shown a significant increase over the years. Trade credit as the ratio of current assets is about 40% and the next major source is bank borrowing. After trade credit banks are the second most important source of working capital finance in India. A bank considers a firm sale and production plan and the desirable level of current assets in determining its working capital requirement. A working capital finance provided by the banks to trade and industry was regulated by the reserve bank of India through a series of guidelines and instruction issued. Several indirect measures to regulate bank credit such as exposure norms for lending to individual or group borrowers, prudential norms for income recognition asset classification and provision for advance and capital adequacy ratios were introduced by RBI and greater operation freedom has been provided to bank for dispensation of credit.

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CREDIT ADMINISTRATION

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Before proceed further to discuss the role of credit administration, it would be better to understand what is credit and syndication of credit: CREDIT: is borrowed money that borrower or company use to acquire assets to set up a industrial unit. Common types of credit include mortgages or home loans as well as lines of credit. Credit is the provision of resources (such as granting a loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. It is any form of deferred payment. The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower. Repayment is an important part of the credit process. A good credit history means honoring credit repayment agreements. If not, companys credit rating may be damaged and it may not be able to get credit again when there is a need.

Syndication of Credit:
A syndicated Credit is an agreement between two or more lending institutions to provide a borrower a Credit facility using common Loan documentation. A prospective borrower intending to raise resources through this method awards a mandate to a Bank as "Lead Manager" to arrange Credit and the prerogatives of the mandated Bank in resolving contentious issues in the course of the transaction. The mandated Bank prepares an Information Memorandum about the borrower in consultation with the latter and distributes the same amongst the prospective lenders soliciting their participation in the Credit to be extended to the borrower. The Information Memorandum 27

provides the basis for each lending Bank making its own independent economic and financial evaluation of the borrower, if necessary, by seeking additional supporting information from other sources as well. Thereafter, the mandated Bank convenes a meeting to discuss the syndication strategy relating to coordination process and finalizes deal timing, charges towards management expenses and cost of Credit, share of each participating Bank in the Credit etc. The Loan agreement is signed by all the participating Banks. The borrower is required to give prior notice to Lead Manager or his agent for drawing the Loan amount to enable the latter to tie up disbursements with the other lending Banks. Syndication is thus very similar to the system of consortium lending in terms of dispersal of risk and is a convenient mode of raising long term funds by borrowers.

CREDIT ADMINISTRATION The key element toward insuring proper credit discipline in bank is the development of a strong centralized credit administration department.. Structure: Each corporate banking have been allocated an independent resource to handle this function as a risk representative. The number of officials at the branch varies depending on the size of credit portfolio. Function: 1) End use monitoring 2) Identification of early warning signals at incipient stage. 3) Meticulous compliance of terms and conditions of sanction While the primary responsibility of monitoring the health of the account lies with the relation ship manager (RM) , credit administration function aids in the Endeavour of achieving the corporate objective of loss minimization and profit maximization . Role and responsibilities: The credit administration deptt is dealing with all the post sanction functions: i.e. Security creation, Disbursal of loans/release of credit facilities Credit monitoring Collating the data required for filing statutory returns. Monitors at the branches centrally through various system generated reports and the made report submitted by the branch on a regular basis.

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This document seeks to define the role and responsibilities of the branch functionaries and also the function of the credmin at the corporate level. The activities to be taken at the branch and corporate office are listed below: The role credmin commences with the sanction of the credit facilities to the client. The role of branches in maintaining efficient credmin is broadly laid down under following heads:

Rate of interest: Banks are permitted to determine their lending rates taking into account their cost of funds, transaction costs etc. with the approval of the board. Banks are also required to publish the minimum and maximum interest rates charged on advances and display the information in every branch. An appropriate ceiling may be fixed on the interest, including processing and other charges that could be levied on such loans, which may be suitably publicized. No objection certificate: bank should not finance a borrower already availing credit facility from another bank without obtaining a No objection certificate from existing financial bank. Opening of current account: the importance of credit discipline should be kept in view for reduction in NPA levels at the time of opening of current accounts bank should: Insist on declaration from account holder to the effect that he is not enjoying any credit facility with any other commercial bank. Bank should ascertain whether he/she is a member of any other co-operative society /bank. It so then full details such as name of bank , number of shares held, details of credit facilities such as nature, outstanding, due date etc. should be obtained. If he/she is already enjoying any credit facility from any other commercial bank, bank opening a current account should duly inform the concerned lending bank and insist on obtaining a no objection certificate. If a prospective customer is a corporate borrower enjoying credit facilities from more than one bank, the bank may inform consortium leader. Bank may open a current account of prospective customer in case no response is received from existing bankers after a minimum waiting period of fortnight. Certification of account of non corporate borrowers by chartered accountants: 29

As per the income tax act,1961, filling of audited balance sheet and profit and loss account is mandatory for certain types of non corporate entities. Therefore bank must insist on audited financial statement from the borrowers enjoying large limits; since such borrowers would be submitting the audit certificate to the income tax authorities, based on audit of their books of account by a chartered accountant.

Default in payment of statutory dues by borrowers: Bank should safe guard their interest vis--vis statutory dues like provident fund, employee state insurance. Thus it would be desirable for the bank to ensure that these dues are paid by the borrowers promptly. Bank should incorporate an appropriate declaration in their application forms for enhancement of credit facilities. SANCTION OF ADVANCES: Irregularities in credit sanction: bank should certain precaution to avoid irregular practice such sanctioning of advances beyond discretionary powers and without proper credit appraisal in order to minimize chances of fraud. Delegation of powers: The board of directors should delegate specific powers to branch manager and other functionaries at the head office as also to the chairmen of sanction in matter of sanction of advance and expenditure. The internal inspector should examine during the course of inspection of branches whether powers have been exercised properly and any unauthorized exercise of powers should immediately be brought to the notice of head office. Oral sanction: the higher authorities at various levels should desist from the unhealthy practice of conveying sanction of advance orally or on telephone PROPER RECORD OF DEVIATION: Only in exigencies, sanctions beyond discretionary powers have to be resorted to, the following steps: Record of such sanction should be maintained by the sanctioning authorities explaining the circumstances under which sanction were made. Written confirmation of competent sanctioning 30

authority should obtained by the disbursing authority within a week. Sanction with discretionary power should also be reported to the head office within a stipulated time and head office should meticulously follow up receipt of such returns. Head office should diligently scrutinize the statement and should take stringent action against erring functionary.

SECURITY REQUIRED IN BANK FINANCE: Bank generally does not provide working capital finance without adequate security. Following are the modes of security which a bank may acquire: HYPOTHECATION: during this process borrower is provided with working capital finance by the bank against the security of movable property generally inventories. The borrower does not transfer property to the bank its possession is remained with the borrower. Banks generally grant credit hypothecation to first class customers with highest integrity. It is generally not granted to new borrowers. PLEDGE: in this process borrower is required to transfer the physical possession of property offered as a security to the bank to obtain credit. The bank has the right to retain possession of goods pledged unless payment of principle, Interest and other expense is made. In case of default bank may either sue the borrower for the amount due or can sue for sales of goods pledged and can even sale the good after giving due notice. MORTGAGE: Mortgage is the legal transfer of immovable property of payment of a debt. In case of mortgage the possession of the property may retain with the borrower, with the lender getting the full legal title. The transfer of interest is called mortgager and the transferee (bank) is called mortgagee and the instrument of transfer is called mortgage deed. In case of working capital finance, mode of security is either hypothecation or pledge. the main reason behind it is that credit granted against immovable property has some difficulties. They are not self liquidating. Also there are difficulties in ascertaining the title and assessing the value of property.

31

INSURANCE OF THE ASSET It is essential that adequate insurance cover is available for the prime security as well as collateral security offered, for an advance prior to granting the advance or at the time of disbursement of the amount of advance. Goods or property pledged, hypothecated or mortgaged to the Bank either as a prime or collateral security must be fully covered by appropriate theft, fire, strike and riot insurance. Renewal of Policies It should be ensured that insurance policies held in all advance accounts are renewed in time. Borrower should be advised to arrange to renew the policy well in time before the expiry date. In case the borrower fails to renew the insurance cover in good time before the expiry of the policy, it is advisable to pay the premium direct to the insurance company with intimation to the borrower in writing and debit the account of the borrower before the date of expiry of the existing insurance policy. Where necessary, an undertaking should be obtained from the borrower authorizing the Bank to arrange renewal of insurance cover and to debit the premium amount to their account.

32

CREDIT MONITORING AND CONTROL

33

MONITORING OPERATION: Monitoring of working capital is another important aspect of working capital financing which bank should take into account. It is of high importance to check the proper utilization of funds so as to prevent its misuse by the borrowers. DIVERSION OF FUNDS: Sometimes credit facilities extended by the bank have been utilized for the purposes other than those for which they were sanctioned and payments have been made from borrowal accounts to parties unconnected with the business of borrower. Such diversion of funds also results in depletion of working capital leading to account turning into NPA. So it is necessary to ensure that loan facilities are utilized by borrowers for the purpose which such facilities are sanctioned. Whenever and wherever diversion is observed bank should take appropriate action against the borrower concerned and the steps needed to protect the banks interest. In case a borrower is found to have diverted finance for the purposes, other than those for which it was granted, banks must recall the amounts so diverted. In addition, banks may charge penal interest on the amount diverted. Some of the bank clients are known to be making sage cash withdrawals. It is quite possible that such cash withdrawals may be used by the account holders for undesirable or illegal activities. While cash withdrawals cannot be refused, banks should keep a proper vigil over request of their clients for cash withdrawals from their accounts for large amounts. POST SANCTION MONITORING: It is the primary responsibility of banks to be vigilant and ensure proper end use of bank funds/monitor the funds flow. It is therefore, necessary for banks to evolve such arrangements as may be considered necessary to ensure that drawals from cash credit /overdraft accounts are 34

strictly for the purpose for which the credit limits are sanctioned by them. There should be no diversion of working capital finance for acquisition of fixed assets, investments in associate companies, and acquisition of shares, debentures and other investment in capital market. Post sanction follow up of loans and advances should be effective so as to ensure that the security obtained from borrowers by way of hypothecation, pledge etc. are not tempered with in any manner and are adequate. Account showing sign of turning into NPAs: banks may put in place more stringent safeguards, especially where accounts shows sign of turning into NPAs. In such cases banks may Strengthen their monitoring system by resorting to more frequent inspections of borrowers godowns, ensuring that sale proceeds are routed through the borrowers accounts maintained with the bank and insisting on pledge of stock in place hypothecation. MONITORING METHODS: Drawals against clearing cheques should be sanctioned only to first class customers and in such cases the extent of need and limits should also be subjected to thorough scrutiny and periodic review. Bank should issue bankers cheques/pay orders/demand drafts against instruments presented for clearing, unless the proceeds thereof are collected and credited to the account of the party. Bankers cheque /pay orders/demand drafts, need not to be issued by debit to cash credit/over draft accounts which are already overdrawn or likely to be withdrawn with the issue of such instruments. Drawals against clearing instruments should be normally confined to bank drafts and government cheques and only to a limited extent against third party cheques. Cheques should represent genuine trade transactions and strict vigilance should be observed against assisting kite flying operation. Drawals against cheques of allied concerns should not be permitted and the facility of drawal against clearing cheques should be of temporary nature and need not to be allowed on regular basis without popper scrutiny and appraisal Bills of accommodation nature should never be purchased and the officials responsible for purchase of bills should be punished suitably. For an effective monitoring of advances, it is necessary for the banks to undertake an exercise for review of the advances on a regular basis. The review should specifically attempt to make an assessment of the working capital requirements of the borrower based on the latest data 35

available, whether limits continue to be within the need-based requirement and according to banks prescribed lending norms.

END USE OF FUNDS: In case of project financing, bank should seek to ensure end use of funds obtaining certificate from the chartered accountant for the purpose. In case of short term loan corporate /clean loans, such an approach should be implemented by due diligence on the part of lender themselves, and to the extent possible, such loans should be limited to only those borrowers whose integrity and reliability were above board. Bank therefore should not depend entirely on the certificates issued by the chartered accountant but strengthen their internal controls and the credit risk management to enhance the quality of their loan portfolio. Following are the illustrative measures that could be taken by the lenders for monitoring and ensuring end use of funds. Meaningful scrutiny of quarterly progress report/balance sheet of the borrowers. Regular inspection the borrowers assets charged to lenders as security. Periodic scrutiny of borrowers book of accounts and the no lien account maintained with other banks. Periodical comprehensive management audit of the Credit function of the lenders so as to identify the systemic weakness in credit administration. A sound monitoring system serves as a back-up mechanism for testing various assumptions made at the time of assessment of credit needs of the borrowers. It also enables the Bank to evaluate the performance of the assisted unit and its financial health, to anticipate and foresee problems and prospects and to identify danger signals with a view to initiate timely and appropriate corrective measures.

36

Disbursement: Disbursement of any advance (credit facility) should be effected only after: Sanction of facility by the appropriate authority. Proper execution of security documents by borrower / guarantor and their checking and verification. Compliance of all terms of sanction including creation and registration of charge over securities, where applicable. Completion of account opening formalities, where applicable. Stock Statements Statements of stocks hypothecated to the Bank should be obtained in the prescribed form at stipulated intervals as per the terms of sanction. The stock statements are, sometimes, given by the borrowers on their letter heads. In such cases, they must declare in the statement that the goods are their property or they have such interest in them as entitles them to hypothecate the goods to the Bank and that the goods are not subject to any lien, claim or charge of any sort. Periodical stock statements, when received, must be scrutinized to ensure, in particular, that: i. ii. iii. iv. v. vi. vii. viii. They are signed by the person/s authorised to operate on the account. The composition and age of the hypothecated stocks are satisfactory. Pledged goods, if any, are not included in the statement of stocks hypothecated. The valuation of stocks conforms to the market price or cost price, whichever is lower. The stocks paid for is arrived at by deducting the Sundry/Trade Creditors. For goods and stocks earmarked for Letter of Credits etc. The balance in the account as on the date of statement is within the drawing limit. Description of goods given in the stock statement, their value and the location of godown where these are stored are as indicated in the insurance policy. On receipt of the stock statement, if it is found that outstanding in the account is more than the available drawing limit, penal rate should be charged on excess drawings as per 37

the guidelines in this regard. The borrower should be advised suitably with regard to the composition of current assets.

STATEMENT OF BOOK DEBTS: Statements of book debts should be obtained at regular intervals as per the periodicity (monthly or quarterly) mentioned in the relative Credit Proposal and stipulated in the terms of sanction. In addition to the periodical statements of book debts, half-yearly statements of book debts should be obtained as on 30th September and 31st March along with declaration The statements of book debts submitted by the borrower should be scrutinized thoroughly. Particular attention should be given to the following aspects: a) The composition and age of book debts should be in accordance with the terms of sanction. b) The amount of advance or deposits received from the debtors. or commission, discount or credit balances due to the debtors should be deducted from the figures of debts shown in the statement. In other words, the advance should be considered only against net realizable value of the eligible book debts declared in the statement. c) Statement of book debts should be certified by the Chartered Accountant periodically, wherever, stipulated in the terms of sanction. Compliance of Terms and Conditions and EOD/Covenants: Branch has to ensure that all the sanction terms and conditions stipulated by the Sanctioning Authority is complied with. Special care should be taken to check the breach of EOD (Event of default) and other covenants. If the branch finds any deviation, matter should be brought to the notice of the Sanctioning Authority along with necessary account strategy and directions should be obtained. Monitoring Operations in the Account: The accounts of the borrower with the Bank should be monitored closely to ensure that: The account is operated within the limit. The account is used for genuine transactions for which the limits are granted and that there is no diversion of funds or any other undesirable features. Particular care should be taken in case of cash credit / overdrafts accounts to ensure that the 38

drawings are strictly used for the purpose for which the credit facilities are sanctioned and no diversion of funds for investment in associate concern or acquisition of fixed assets/ acquisition of shares / debentures is allowed. Turnover in the account is commensurate with the projected sales and operative / financial statements are submitted by the borrower in time. Appropriate interest (including penal interest, where applicable) and other charges are debited to the accounts promptly. The borrower has paid the interest amount and installments due, wherever applicable. Periodic Inspections: It should be ensured by way of periodic inspection that the securities charged to the Bank continue to be adequate, marketable and realizable. Apart from physical verification of the assets, as per the guidelines given in this regard, the inspection should also cover other equally important aspects like: Inspection of factory premises, production process, etc. Inspection of books of accounts, accounting procedures and system of financial planning and control. Discussions with the owners./key officials on issues like overall performance, problems and prospects of the unit, market trends, competition, quality and manufacturing process etc.

Stock Inspection:
In all accounts where advances have been granted for trading purposes or for working capital, inspection of stock should be carried out quarterly or more frequently where necessary. As far as possible, inspection ought to be a surprise and should not be known in advance or anticipated by the borrower. The Branch Head should personally devise a system to ensure regular receipt of stock statements and inspection of stocks as per the terms of sanction. Date of receipt of stock statements and related details should be entered into the account records. Similarly, the date on which inspection was carried out and by whom should also be noted on records. Stock statements together with the Stock Inspection Reports of the inspecting official should be maintained in account-wise files. Inspection of Book Debts Inspection for advances against book debts should be carried out periodically as stipulated in the terms of sanction. The Agreement of Hypothecation of Book Debts to be obtained from the 39

borrowers contains a clause that gives the Bank power of inspection of record of accounts of the borrowers. The purpose of inspection of book debts is to verify the items declared in statements of book debts submitted by the borrower to the Bank with the relative entries made in the records such as Debtors. Record and Cash Book maintained by borrower. Inspecting official, apart from following the general guidelines given in respect of inspection of stocks, should examine the book debts to ascertain: 1) If all debts are genuine - verify at random from invoices. 2) Age of book debts - verify at random from invoices. 3) There is no increase in overdue book debts. 4) The main parties on whom book debts are usually raised are of adequate worth. 5) High value transactions to be verified for genuineness.

Early Warning Signals Risk Minimization Exercise It is to be noted that monitoring is essence in working capital financing. It helps in promptly identifying the signs of weakness developing in the account and initiate timely corrective action. Following are the indicative list of warning signals in the accounts: 1) Failure to get the financial statements on time 2) Slow down in collection of receivables 3) Deterioration / imbalance in cash position 4) Increase in amount / percentage of accounts receivable. 5) Slowdown in inventory turnover 6) Deterioration in the Working Capital position 7) Marked change in the mix of trading assets 8) Concentration on non-current assets / intangible assets 9) Increase in the long term debt. 10) Under-utilization of capacity

40

RENEWAL OF CREDIT FACILITIES All credit facilities, other than ad-hoc guarantees / letters of credit, are required to be renewed annually. The Annual Renewal exercise gives the Bank an opportunity mainly to assess: i. ii. iii. iv. v. vi. vii. The performance of the borrowers business activity. How well and effectively the borrowed funds were utilised. The position of the Banks security. The borrowers position with regard to plough back of profits. Whether the limits are appropriate. Whether the operations of the borrower reveal any signs of incipient sickness and if so, what corrective steps can be taken. To validate the assumption under sanction. It may thus be observed that timely annual renewal is an important step in the follow-up, supervision and administration of credit.

Quarterly information system: QIS: credmin should follow up for timely submission of QIS in the prescribed format, which is later analyzed to track the movement in current assets, current liabilities. Credmin should on the following QIS1: Projection of the quarter vis-a vis annual projections QIS2: Actual vis-a-vis projection. 1) Compare the QIS figures with the stock statement and seek clarification for variances if any. 2) Comments on the stock debtors. and creditors lock up 3) Movement in net working capital. 4) Over funding if any 5) EOD triggered if any. 41

QIS3: Whether the cash generation is in line with projections. 1 Whether the cash is better or worse than previous half year. within the accepted levels- i.e. adequately backed by in flow 2) Whether the deployment for long term uses fixed assets , investments is

CASE STUDY

42

RICO AUTO INDUSTRY INTRODUCTION: Rico auto industries limited, belonging to Rico group and promoted by Shri.Arvind Kapur was incorporated in march 1983 for manufacture of auto components. The company is engaged in the manufacture of auto components vis two wheeler rear and front wheel hubs, clutches , brake systems , engine housings , gears and oil pumps for maruti and gear shift drums for two wheelers and installed pressure die casting machines to manufacture diesel generating sets , engine frames and housing etc the company also provide business process management services . The present global financial crises has impacted the Indian auto component industry also .During the last quarter the industry had negative growth of 0.4% partly due to a dip of over 12% in India s export . in domestic market , the liquidity has slowed down the vehicle demand ,specially commercial vehicle . FINANCIAL ANALYSIS: Net sales: Net sales in 2008 have decreased to 708.71cr from 770.41cr in 2007. This decrease in sales is due to impact of global financial crises. Another reason behind decrease in sales is lower revenue from hero Honda motors due to change in customer preference spoke wheel bikes to alloy wheel bikes. Net profit after tax: there is a fall in net profit due to decrease in net sales and also due to increase in raw material prices. Net working capital: net working capital has increased to a great extent in 2008 as compare to previous year. As net working capital has increased but working capital cycle did not operate properly. This is due to increase in raw material prices. Current ratio: it is equal to current assets divided by current liabilities. Current ratio of 2008 is .88 which is much below than normal ratio. This decline in current ratio is due to increase in

43

capital expenditure of Rs. 80.04cr out of which an expenditure of Rs. 54cr were funded by short term debt raised by the company. Gearing: the gearing has increased in the financial year 2008 in comparison to 2007. This is due to increase in short term debt

Observation / comments: The net profit of the company has declined on account of increased in interest cost. This is due to raise of short term loan by the company. Net sales has declined because of financial crises and also due to due to decrease in demand. Current ratio shows a sharp decline. This is due to increase in current liabilities and decrease in current assets. Thus company needs to improve its current ratio either by increase in current assets or by decrease in current liabilities in the form of short term debt.

SUNBEAM AUTO LTD:

Introduction of company: Sunbeam auto limited was incorporated on 2nd may, 1996 as sunbeam casting ltd. The unit was transferred to sunbeam auto limited in a going concern basis. The range of product manufactured by the company include: crank case, crank case cover, cylinder heads and cover, piston etc. The company also has an alloy making section where they can make all type of aluminum alloy. Financial analysis: Net Sales: net sales of financial year 2008 has declined to 780.97cr as compare to FY07 840.43cr. This decrease in sales is due to decrease in domestic sales. Profitability: Net profit of FY08 has declined to 9.28cr as compare to FY07 17.67cr. This decline in profitability is due to increase in net sales and increase in cost of input and wages. Gearing: the gearing of the company has improved in the FY 08 as the liabilities have declined from 60.45cr in FY 07 to Rs. 37.76cr in FY 08. 44

Current ratio: current ratio of FY08 has improved to 1.32 as compare to FY07 current ratio i.e.1.23 this is due to decrease in current liabilities and increase in current assets.

ANALYSIS OF FINANCIAL FOLLOW UP REPORT OF RICO AUTO INDUSTRIES LIMITED: RESULTS OF QUARTER ENDING:
400 350 300 250 crores 200 150 100 50 0 2008 current assets aurrent liabilities actual actual estimate

Sources of funds: Bank borrowing: Sundry creditors: Level of inventory: Inventory :

actual 31march 78.08% 24.24%

Actual 30june 86.62% 20.84%

Estimate 30 June 54.49% 27.24%

36.87

28.77

28.72 45

Receivables: Sundry creditors :

60.73 57.09

48.10 39.36

60.24 51.32

Observation and comments: Current assets of quarter ending June increases as compare to quarter ending March. Similarly currents liabilities also increase but more as compare to current assets. Due to this current ratio of quarter ending June has decrease further to .85. Normal current ratio is greater than 1, thus company should try to improve its current ratio either by reducing its current liabilities or by increasing its current assets. Bank borrowing of quarter ending June has increased to a great extent than estimated this can be the major factor behind decrease in current ratio below 1. Thus company should try to reduce its short term borrowing, so that its liabilities will get reduce. Inventory level of quarter ending June has decrease from previous quarter this is because company has taken fewer raw materials from creditors. as a result creditors. Also decreases. Sales of product which also reduces because of the global financial crises or recession. Thus debtors. or receivables also get reduces During this period, to survive in the market company need to make improvement in technology or efficiency so that cost of production gets decreases. Bank borrowing in quarter ending June has increased to a great extent thus company should try to reduce its interest cost to improve its current ratio by reducing the bank borrowing.

46

QUARTERLY INFORMATION SYSTEM OF SUNBEAM AUTO ltd: Observation and comments: 1) QIS -1 Statement for the quarter ending 30th September, 2008 of SUNBEAM AUTO ltd: Estimate of the quarter ending sept08 i.e. estimate of the quarter production , gross sales , net sales is in line with annual production , gross sales , net sales . Current ratio of quarter ending sep08 is = 1.25 . Minimum requirement of maintaining the ratio is 1.33:1. Company need to maintain its liquidity ratio by reducing its current liability in the form of sundry creditors and short term borrowing. 2) QIS1 Statement for the quarter ending December, 08 of sunbeam auto limited Annual production, gross sales, net sales is in line with quarter production, gross sales , net sales . Current assets and current liabilities of that quarter has also been maintained but Still there is need to improve the current ratio by maintaining the liquidity position of the company either by reducing the current liabilities or by increasing the current assets. 3) QIS-2 of quarter ending march 09 shows the current ratio of 1.25 that shows stability with the previous quarters. but still it need some improvement to maintained this ratio with expected or standard ratio.

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Data related to quarter end June 08 Production (tons) Gross sales(lacs) Net sales (lacs)

Estimate as given in QIS -1 at the beginning of the quarter 8343.770 22292.21 18423.32

Actual results

8569.373 24994.76 21014.94

Data related to quarter end. Production Gross sales Net sales

Variation -225.60 -2702.55 2591.62

Variation as a percentage of age to estimates -2.70 -12.12 -14.07

Variation in between production and net sales is much more thus company need to maintain balance between production and sales otherwise it might face problem related to demand. Less production and more sales means more demand in the market as compare to supply thus company might increase its production to make a balance between demand and supply Comparison of Current assets and current liabilities of estimate and actual quarter and reasons behind changes is mention below:

48

1) Stock in progress of actual is less as compare to estimate which is good for company point of view because less money is trap in work in progress so company will be able to invest it in other forms to get more return . 2) Actual stock of finished good is less as compare to estimate. Thus company needs to increase its finished goods by improvement in technology to increase its sales and earn more profit. 3) Actual receivables are more than estimated. Company need to reduce its debtors. Because liquidity will be available and company will be able to invest other ways or to meet the opportunity cost. 4) in case of current liabilities , actual creditors for purchase of raw materials , stores are more than estimated thus should need to reduce its creditors to maintained its current ratio. 5) Current ratio of quarter end June 08 is less than estimated. Thus company need to increase or maintain its liquidity ratio. 6) Less current ratio than estimated means that current liabilities are more than estimated. 7) Estimated current ratio was 1.13 and actual is 1.11 which is less than estimated QIS II statement for the quarter ending 30th September,08 related to the performance of the company . In this we also compare QIS-II statement of June ended 08. Data related to the quarter ending sept 08 Production (in tons) Gross sales(in lacs) Net sales(in lacs) Quarter ending 19190.96 production 22603.16 Gross sales -3412.21 As A percentage of value annual June September 8569.373 8741.971 24994.76 26943.96 plan/ production 24.65 25.15 -17.78 As percentage of annual plan / sales 26.02 28.05 49 7822.284 23221.06 8741.971 26943.96 -919.69 -3722.91 Estimated data Actual data variation Variation as a percentage to estimates -11.76 -16.03

Total

17311.344

51938.72

49.79

54.06

Actual production, gross sales and net sales is more than estimated figures. This shows a good sign for the company. But when we see about variation, there is more difference in variation in production and net sales which I think company need to consider. Because less production and more sales lead to more demand which is not meet by the company? So company either increase production or decrease sales to maintain the balance between production and net sales. Because more production leads to more sales and more sales leads to more profit and also increase in liquidity. This retained earning is either used to pay all the liabilities or to invest in business for future growth. Despite of all these things company also need to maintained its cost of production for more profit. Actual sales in this quarter are more than that of previous quarter which is satisfactory for the company point of view and also from creditors point of view. The main point of concern is needed to reduce a variation in production and net sales for profit maximization and also revenue maximization. ANALYSIS OF CURRENT ASSETS AND CURRENT LIABILITIES OF QUARTER ENDING SEP, 08 Total actual current assets are more than that of estimated current assets. This is because of following reasons: 1) Indigenous consumption of stocks has increased. 2) Stock in progress has decreased which is good from company point of view. 3) Receivables including bills discounted with bankers has increased in huge amount . it means more money is trapped in the form debtors which should be reduced . 4) Other current assets have also increased. Total actual current liabilities has also increased than estimated which is an area of concern for company .the reasons behind that are following: 1) Creditors for purchase of raw materials & store have increased in huge amount but still the production level is not up to the mark. Thus company needs to use effective and efficient technology to reduce the creditors. And decrease the cost of production. 50

Economies of scale can be achieved only by reducing the cost of production and also by efficient and effective technology. 2) Other current liabilities has also increased Overall net working capital has increased which is good for company point of view but it still need improvement. Comparative analysis of stock statement of companies: Stock statement of RICO AUTO INDUSTRIES LIMITED: Raw material in the month of March has increased from 47.3762crore in Feb to 47.9861crore. Work in progress increased to a great extent than raw material. When work in progress will not increase, it means that raw material has been taken from creditors. get stuck or trap in the store . The carrying cost and other cost of operating will also get increase . Thus company need to make a balance in between raw material, work in progress and finished good. If there is a balance in all the stocks then cost of production will also not increase. Total stock of RICO auto industries has increased in the month of march from 78.8227cr to 80.66cr As stocks of the company has raised which indicates creditors. Should also be raised. Because company purchase raw material from creditors. to form finished goods through working capital cycle . Smaller will the working capital cycle, more efficient will be for the company. As more raw materials get converted into finished good. If demand the product increases, company will be able to maximize the profit or sales revenue. Net stock or charge stock for the month of march is 1989lac. it means bank should finance or give funds to the company only on chargeable stock i.e. on 9.89cr . This latter amount comes after deducting creditors from the total stocks. As per the norms of the bank, after deducting the margin of 25% from chargeable stock i.e. 4.97cr from 19.87cr, it will become the 14.9145cr. This will become the drawing power for the company.

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Stock statement of sunbeam auto limited: Comparative analysis of stock statement of months of march and April: In stock statement of march, Raw material : Work in progress: Finished goods Stores Creditors : : : 15.4898cr 26.1375cr 2.110cr 11.7256cr 66.1523crs

In stock statement of April , 08: Raw material : 27.5791crs 22.1697crs 2.0883crs 13.9185crs 78.8726lcrs

Work in progress : Finished goods Stores Creditors : : :

Observation and comments:

52

 As raw material in April has increased, work in progress need to be increased. But work in progress has decreased in March. Decrease in work in progress means that raw material is not properly utilized. Stock in stores has increased subsequently which increase the other cost like carrying cost , pilferage , deterioration cost etc This increase in costs will have direct impact on cost of production, thus cost of production will get increases. As raw material has increased, similarly creditors also increased to a great extent in the month of April because creditors provide raw material for the production of finished goods. Working capital cycle involves conversion of raw material in to wok in progress then to finished goods .These finished goods are get converted into sales in the form of debtors. . When cash received from the debtors. it is then paid to the creditors. . Smaller the working capital cycle, better will be for the company, liquidity is also maintained. Thus company need to make a balance between raw material, finished goods, so that raw material get easily converted into finished goods and it will be available to the debtors for sale . This will reduce the cost of production and maximize the sales revenue and profit . Drawing power can be determine only after deducting the sundry creditors from the total stocks. After deducting the creditors, chargeable stock is obtained .from chargeable stock a margin of 25% is deducted from the chargeable stock then drawing power is obtained. Similarly drawing power from book debts can be obtained. Total drawing power shows that how much a company can collect fund from the banks, depends on share of the banks Comparative analysis of sunbeam and Rico auto industries: OBSERVATION/COMMENTS: Net sales: net sales of sunbeam are more as compare to Rico auto ltd. This is due to more short term debt taken by RICO, which has increased the current liabilities. As a result interest cost increases. Net profit: net profit of both Rico and Sunbeam are almost similar. 53

Current ratio: current ratio of sunbeam auto industries is 1.32 and of Rico auto ltd is 0.88. There is a huge difference in the current ratio of both industries. Therefore Rico auto industries need to improve its current ratio either by decreasing its current liabilities or by increasing its current assets.

FINDINGS AND OUTCOME

54

Following are the outcomes of study:

What is working capital and importance of working capital management?
Understanding the importance was one of the important learning from the report. Working is the money which any business requires to do its day to day operations. Working capital management comprises of three parts management of inventory, receivables and finished goods.

What is credit monitoring and control?

An understanding of sound monitoring system serves as a back-up mechanism for testing various assumptions made at the time of assessment of credit needs of the borrowers. It also enables the Bank to evaluate the performance of the assisted unit and its financial health, to anticipate and foresee problems and prospects and to identify danger signals with a view to initiate timely and appropriate corrective measures. Monitoring of funds are with respect to proper end use of funds and there should be no diversion of funds

Credit monitoring in SUNBEAM and RICO auto industries: Monitoring in relation to various aspects:
a. In financial statements 1) Failure to get the financial statements on time 2) Slow down in collection of receivables 1. Deterioration / imbalance in cash position 2. Increase in amount / percentage of accounts receivables 3. Slowdown in inventory turnover 4. Decline in current assets as percentage of total assets 5. Deterioration in the Working Capital position 6. Increase in the long term debt 55

7. Under-utilization of capacity

b.

In Income Statement 1. Declining sales / sharp increase in sales 2. Major gap between gross/net sales, rising cost and narrowing margins, rising sales and falling profits 3. Rising level of bad debts, disproportionate increase in overheads operating losses.

c.

In Receivables 1. changes in credit portfolio, extended terms 2. Concentration of sales 3. Compromise of accounts receivables 4. Receivables from affiliated companies / subsidiaries.

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BIBLIOGRAPHY: A handbook on financial management by: I M PANDEY. A hand book on financial management: TATA MCGRAW HILL. Hand book on Financial decision making : JOHN J HAMPTON Hand book on corporate finance by S.C.KUCHHAL. Hand book on financial management by RAVI.M.KISHORE BOOK on financial management by PRASANNA CHANDRA Financial management by S.N MAHESHWARI

Website: www.google.com www.idbibank.com www.idbi.com www.hindubusinessline.com www.wikipedia.com www.rbi.gov.co.in

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