Introduction to Working Capital

in a perfect world, there would be no necessity for current assets andliabilities because there would be
no uncertainty, no transaction costs,information search costs, or production and technology constraints.
The unitcost of production would not vary with the quantity produced. Borrowing andlending rates shall
be same. Capital, labour, and product market shall beperfectly competitive and would reflect all
available information, thus in suchan environment, there would be no advantage for investing in short
termassets.However the world we live is not perfect. It is characterized byconsiderable amount of
uncertainty regarding the demand, Market price,quality and availability of own products and those of
suppliers. There aretransaction costs for purchasing or selling goods or securities. Information iscostly to
obtain and is not equally distributed. There are spreads between theborrowings and lending rates for
investments and financings of equal risks.Similarly each organization is faced with its own limits on the
productioncapacity and technologies it can employ there are fixed as well as variablecosts associated
with production goods. In other words, the markets in whichreal firm operated are not perfectly
competitive.These real world circumstance introduce problem`s which require thenecessity of
maintaining working capital. For example, an organization may befaced with an uncertainty regarding
availability of sufficient quantity of crucialimputes in future at reasonable price. This may necessitate the
holding of inventory, current assets. Similarly an organization may be faced with anuncertainty
regarding the level of its future cash flows and insufficient amountof cash may incur substantial costs.
This may necessitate the holding of reserveof short term marketable securities, again a short term
capital assets. Incorporate financial management, the term working capital management
(net)represents the excess of current assets over current liabilities.

An Overview of the Indian Banking Sector

Banking sector is a ladder to other sectors for their improvement andtheir growth. Thus a strong bank
sector is required for the economic growth of a country. After the reforms in 1991, banks are growing by
leap and bounds.Commercial banks have a comparative advantage as providers of capitalbecause of
their special knowledge of customers and ability to closely monitoruses of funds on an ongoing
basis.The major participants of the Indian financial system are the commercialbanks, the Financial
Institutions (FIs), encompassing Term-Lending Institutions,Investment Institutions, Specialized Financial
Institutions and the State-LevelDevelopment Bank, Non-Bank Financial Companies (NBFCs) and other
marketintermediaries such as the stock brokers and money-lenders. The commercialbanks and certain
variants of NBFCs are among the oldest of the marketparticipants. The Financial Institutions, on the
other hand, are relatively newentities in the financial market place.

Historical Perspective

A STUDY ON WORKING CAPITAL MANAGENT IN SBI

DSBS/PGDM/AICTE/ A STUDY ON WORKING CAPITAL MANAGEMENT IN SBI Page 12

powers for supervision & control of banks. The Act also vested licensingpowers & the authority to
conduct inspections in RBI.In 1955, RBI acquired control of the

Imperial Bank of India

, which wasrenamed as State Bank of India. In 1959, SBI took over control of eight privatebanks floated
in the erstwhile princely states, making them as its 100%subsidiaries.RBI was empowered in 1960, to
force compulsory merger of weak bankswith the strong ones. The total number of banks was thus
reduced from 566 in1951 to 85 in 1969. In July 1969, government nationalized 14 banks havingdeposits
of Rs. 50 crores & above.In 1980, government acquired 6 more banks with deposits of more than Rs.200
crores. Nationalization of banks was to make them pay the role of catalyticagents for economic growth.
The Narsimham Committee report suggestedwide ranging reforms for banking sector in 1992 to
introduce internationallyaccepted banking practices.The amendment of Banking Regulation Act in 1993

saw the entry of newprivate sector banks. Banking segment in India functions under the umbrella of
Reserve Bank of India the regulatory, central bank. This segment broadlyconsists of:
1. Commercial Banks2.
Co-operative Banks
Commercial Banks
The commercial banking structure in India consists of:
Scheduled Commercial Banks
Unscheduled Banks
Scheduled Commercial Banks constitute those banks which have beenincluded in the second Scheduled
of Reserve Bank of India (RBI) Act, 1934. RBIin turn includes only those banks in this schedule which
satisfy the criteria laiddown vide section 42 (60) of the Act. Some co-operative banks are
scheduledcommercial banks albeit not all co-operative banks are. Being a part of thesecond schedule
confers some benefits to the bank in terms of access toaccommodation by RBI during the time of
liquidity constraints. At the sametime, however, this status also subjects the bank to certain conditions
andobligation towards the reserve regulations of RBI. This sub sector can broadlybe classified into:
Public sector
Private sector
Foreign banks

Public sector banks have either the Government of India or Reserve Bankof India as the majority
shareholder. This segment comprises of:
State Bank of India (SBI) and its subsidiaries;
Other nationalized banks
WORKING CAPITAL
In simple words working capital is the excess of current Assets overcurrent Liabilities. Working capital
has ordinarily been defined as the excess of current assets over current liabilities. Working capital is
heart of the business If it is weak business cannot proper and survives. It is therefore said the fate of
large scale investment in fixed assets is often determined by a relatively smallamount of current assets.
As the working capital is important to lifeline of company. If this lifeline deteriorates so that the
company ability to fundoperation, re-invest do meet capital requirements and payment.Understanding
company`s cash flow health is essential to making investmentdecision. A good way to judge a company`s
cash flow prospects is to look at itsworking capital management. The company must have adequate
workingcapital as much as needed by the company. It should neither be excessive ornor inadequate.
Excessive working capital cuisses for idle funds lying with thefirm without earning any profit, where as
inadequate working capital showsthe company doesnt have sufficient funds for financing its daily needs
workingcapital management involves study of the relationship between firm`s currentassets and current
liabilities. The goal of working capital management is toensure that a short term debt and upcoming
operational expenses. The bettera company managers its working capital, the less the company needs
toborrow. Even companies with cash surpluses need to manage working capitalto ensure those
surpluses are invested in ways that will generate suitablereturns for investors.

Banking Basics
Banking Regulation Act of India, 1949 defines Banking as

accepting, forthe purpose of lending or lending of investment of deposits of money from thepublic,
repayable on demand or otherwise and withdraw able by cheque, draft,order or otherwise.

Most of the activities a Bank performs are derived from the abovedefinition; In addition, Banks are
allowed to perform certain activities whichare ancillary to this business of accepting deposits and
lending. A bank

srelationship with the public, therefore, revolves around accepting deposits andlending money. Another
activity which is assuming increasing importance istransfer of money
both domestic and foreign
from one place to another.This activity generally known as
remittance business
in banking parlance. Theso called FOREX (foreign exchange) business is largely a part of
remittancealbeit it involves buying and selling of foreign currencies

The primary objective of working capital management is to ensurethat sufficient cash is available to
Meet day to day cash flow needs.
Pay wages and salaries when they fall due.
Pay creditors to ensure continued supplies of goods and services.
Pay government taxation and provider of capital-dividends and
Ensure the long term survival of the business entity