Sadhana Centre for Management and Leadership Development APEL 2011-12

Reading assignment

SUBMITTED BY Ms. JAS PREET KAUR 2010-C20 FINANCE

ABSTRACT

This is a comprehensive essay touching major aspect of finance ,a student needs to know and be familiar with . This essay is combined with theoretical knowledge which were imparted to us during our course and also practical knowledge and know how that we learned in our two months industry training. This essay comprises of three segments in the first financial services and markets which explains various markets ,instrument used in the markets and various financial services provided by institutions. The second segment comprises of various aspects related to the banking sector scenario of banking in india,various types of banks , norms and services the bank follows and provide. The third segment is about the importance of financial analysis in business and organizations, also there is financial analysis of TATA STEEL with respect to ratio analysis.

CONTENTS
1. INTRODUCTION4

2. MERCHANT BANKING5

3. COMMERCIAL BANKING.26

4. WORKING CAPITAL MANAGEMENT41

5. CORPORTE BANKING45

6. FINANCIAL ANALYSIS (TATA STEEL) 47

7. BAJAJ AUTO LTD.55

8. REFERENCES61

INT

TION:

Every country follows a system and works well wit in a set framework be it legal political or financial system. The world economic forum has identified strong financial system as its priority issue for rising against global financial crisis. Its very important for any country to have a sound buoyant and well regulated financial system for sustainability. A sound financial system helps in allocating capital in the most efficient manner from making funds available from where its surplus to where there is deficit. The flow of funds is from savers to borrowers at the least cost.
Savers (individuals)

Fl w of services Flow of funds

Borrowers (business
house, government)

This enables in coursing savings into investments thereby directing growth in the economy. In case of a faulty financial system there can have adverse effect on its monetary policy, its fiscal deficit ,public finance and thereby putting financial institutions at risk . Finan cial weakness in one country can also hamper other countries with which it has its trade linked, like we witnessed in the case of Americas financial crisis. The crisis was spilled across all nations which traded with America thereby causing global financial crisis. Hence wellness and soundness of a country is very imperative not only for the country itself but for its foreign allies as well. The financial system constitutes of
financial markets

financial instruments

financial institution
financial products and services

FINANCIAL MARKET :
Financial markets are the links between the lenders and borrowers. They act like intermediary between the two groups. So financial markets can be defined as transmission a mechanism between investors (or lenders) and the borrowers (or users) through which transfer of funds is facilitated 1 Financial markets consists of individual investors, financial intermed iaries and financial institutions . Functions of financial markets: 1. Financial markets enable and help price discovery, markets that are well organised due to continuous buyer seller interaction help in determining the value of financial assets.
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Indian financial market module 4 business finance notes.

2. Financial markets provide liquidity to financial assets. Investors can sell or transfer their financial assets through the facilities of financial markets. 3. Financial markets reduce the cost of transacting. Buyers and sellers do not need to advertise when the need to buy or sell assets, or locate customers .

TYPES OF MARKET

o ey

arket

Capital arket (Debt a d Equity market)

orex

arket

Comodity

arket

Deravative

arket

CLASSIFICATION OF FINANCIAL MARKETS:

Markets are classified in different ways , it can be classified on the basis of1. THE FINANCIAL CLAIM: Debt market and Equity market. Debt market promises fixed claims (for e.g. debentures, bonds etc. ) whereas equity markets provides residual claim in the form of dividend. 2. MATURITY OF THE CLAIM: market for short term claim is called the Money market whereas the market for long term claim ( over a period of 1 yr ) is called the Capital market. 3. SEASONING OF THE CLAIM: This is based upon whether the claim represents a new issue or and old issue in capital market. The new claim issues are called primary markets whereas old issues are called se ondary market. 4. TIMING OF DELIVERY: A cash or a spot market where the delivery occurs instantly whereas in a for ard or futures market the delivery occurs at a predetermined time in the future.

5. ORGANIZATIONAL STRUCTURE: An e change traded market is characterised by a centralised organisations with standard procedures whereas anover the counter market is a decentralised market with customised procedures.

MONEY MARKETS:
Money market is the market for short term lending and borrowings of credit instruments for a period of maturity less than one year . money markets help many business firms , governments and other units to meet their short term requirement. It enables availability of funds even for a period of one day up to a year. 1 day money market is called call money market (usually for the advantage of inter banks borrowings and lendings- MIBOR,MIBBR) 2-14 days money market are called notice money markets ,the money can be asked upon a notice otherwise its to be returned on the 14th day. 2-365 days all other instruments such as commercial papers, treasury bills ,certificate of deposits are available.

CAPITAL MARKETS:
Capital markets are the markets for long term lending and borrowings of funds. Capital markets include long term borrowings ( i.e. for 1 year and more) from banks and other financial institution, also raising capital by issuing various securities such as shares, debentures bonds etc. Hence capital for any business can be raised from equity (common shares, preference shares) markets or debt (debentures ,bonds etc) markets. The security issued in the securities market and are broadly divided into two groups the primary markets and the secondary markets . Primary markets deal with fresh issues of securities for e.g. issues of debentures from the company, issue of securities in the initial public offer (IPO)/ follow on public offer (FPO). The companies issues the securities. Whereas in the secondary markets the already issued securities are transferred and traded, for e.g. stock markets are secondary markets where existing securities are traded. Primary markets help in attaining long term funds for the companies by issuing fresh shares and debentures,in this process there are intermediaries that play a very importat role such as underwriters and merchant bankers ,they play a crucial role in issuing of securities in a IPO and FPO . The secondary market also known as the stock exchange market also plays a very crucial role in the circulation of long term funds and determining their holdings. Today these markets are well organised and enable transactions with fair and transparent practices. Stock brokers play a very important role in secondary markets and facilitate trading. While in the primary markets prices are decided by the management by compliance credit rating companies and by the regulators , securities exchange board of india (SEBI) ,in the secondary market the prices are determined merely on the basis of demand and supply. The Secondary market provides a continous platform for trading of existing securities. A company needs to be registered and be approved of with the stock exchange in order to trade its securities in the secondary market.
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ILLUSTRATIVE LEARNINGS: NIRMAL BANG SECURITIES PVT.LTD deals in financial services and provides stock broking facilities to its customers. It deals and trades in securities on their customers behalf for a minimal brokerage charges which varies from 2 to 5 paisa.

DERIVATIVES MARKETS:
Derivatives are financial instrument whose value are determined by the value of another underlying asset . in derivatives are traded in lots. Derivatives are instruments used to hedge risk but it has gained popularity for speculative purposes. There are two types of derivatives:
y y

FUTURES OPTIONS

FUTURES:
Forward and futures are contracts that specify the terms of purchase of underlying securities on future date. A future contract is a standardised contract,or an agreement between two parties to exchange the underlying assets ( in case of commodity future it is the commodity like oil,gold ets and for equity derivatives it s the shares and also nifty index ,it can also be forex futures.) at a predetermined future date for a price that is specified today. Futures unlike forwards are traded on the secondary markets. When the spot price which is the actual price in the future exceeds the contract price the buyres of the futres gain is SPOT PRICE CONTRACT PRICE When the contract price exceeds the spot price the future buyers loss is CONTRACT PRICE -- SPOT PRICE. There are two types of future - commodity future and financial future Commodity futures is a contract which takes up the underlying value of any commodity such as soya oilseeds, gold etc Financial future are contracts that take the underlying value of financial instruments such as EQUITY FUTURES, INTERST RATE FUTURES, FOREIGN EXCHANGE FUTURE AND STOCK INDEX FUTURE

OPTIONS: Options are contracts which give choices of Call and Put to the trader. BUY:
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When a trader buys a call for a particular script it means that that person is expecting the price of that script to go up. In order to attain this call ,the buyer has to pay a premium for it and when the prices of the script moves upward ,the premium also increases , this increase in the premium is the profit that the buyer makes. Similarly when the buyer is expecting the prices of the script to go down ,the buyer will buy a PUT. In order to buy this PUT ,the buyer has to pay a premium for it and the premium will increase when the price of the script moves down. This increase in premium is the profit for the buyer and if the prices go up then the premium decreases for the put option resulting in the loss to the buyer.

SELL:
when the trader sells a CALL ,it indicates that the trader expects the price to go down ,hence he sells at a higher premium and when the prices go down , the trader buys the call at lower premium.this difference in the premium is his profit booking. Similarly when the trader expects the prices to go up ,then the trader sells a PUT. The trader sells this PUT at higher premium and when the prices go up , the trader buys the sell at lower premium. This difference in the premium is his profit booking. When a trader sells the option ,the trader limits the profit and increases the limit for loss. And when the trader buys the option ,the trader limits the loss and increases the limit for profit

TERMINOLOGIES USED IN FUTURES/OPTIONS

y y y y y

Spot Price Expiry Date Margin: the amount required to place the order Lot Size Discount

y y y y y

Spot Price Expiry Date Premium Lot size Settlement : squaring off the position.

FOREIGN EXCHANGE MARKET: (FOREX MARKET)

This market is also called the currency markets,it s a medium of exchange of currency for international trade and international financial transaction,its simply understood as value of one currency in terms of another currency.its the largest and most liquid market in the world with a daily turnover of $4 billion trillion. ILLUSTRATIVE LEARNING:

During my internship. I learned that stock exchanges are allowed to trade only in 4 currencies they are y US Dollar y Great British pound y Euro y Japanese yen There are three currency exchange in india through which one can tradey MCX-SX y NSE y USE The currency come in lot sizes of 1000 , for Japanese yen it is 10000 yen as 100 yen =55 rupees. It was also noticed that many exporters invested in currency markets in order to hedge risk relating to the movement of rupees. It provides as an alternative investment for hedging risk and balancing out risk associated with equity markets. Dealing in these four currencies gives the advantage of 24/7 markets as all time zones are covered. In india the exchange rate is fixed by the Reserve Bank of India as the reference rate. The Reserve Bank of India compiles on a daily basis and publishes reference rates for Spot USD/INR and Spot EUR/INR. The rates are arrived at by averaging the mean of the bid / offer rates polled from a few select banks around 12 noon every week day (excluding Saturdays). The contributing banks are selected on the basis of their standing, market -share in the domestic foreign exchange market and representative character. The Reserve Bank periodically reviews the procedure for selecting the banks and the methodology of polling so as to ensure that the reference rate is a true reflection of the market activity.2 In flow of foreign exchange is in the form of y Exports y NRI- investments y Inward tourism y Foreign direct investment/ foreign institutional investors Out flow of foreign exchange is in the form of y Imports y Outward tourisim y Investments in foreign market

COMMODITY MARKETS
Commodity market comprises of exchange of commodities such as wheat,pulses, oil complex such as soya oil ,soyabeans and spices. Its determined that the demand for commodities

RBI We s e

markets will increase five times in the near future . investing in commodities diversifies ones portfolio. The major difference in financial assets and commodities is that commodities unlike stocks and bonds are physical assets that can be bought sold and used for something. Their real value can never be zero, they are not just a piece of paper. The prices of commodities can go down but can never be zero where as prices of stocks and bonds can go zero if the company goes bankrupt. There are a lot of benefits in trading in commodity markets as with the help of derivative instrument one can take advantage of this especially the farmers. They can sell their commodities at future date at a fixed price. There is no ral price as the prices have to be determined by the buyer and seller bilaterally. Derivative instruments in commodities: In commodity derivative market the underlying asset is the commodity. Forward and futures can be important in two asects such as in Price discovery Price risk management It helps the consumer in determining the projected price at which the commodity would be in the future date specially the farmers and exporters as he can quote a realistic price and secure his exports in the unpredictable and competitive world. Transactions are squared off before the expiry date of the contract and the contract is cash settled.

ILLUSTRATIVE LEARNINGS:
The commodities are transacted in many exchanges but following are few main exchanges that enhance risk free and hasel free buy and sell of commodities in the market.

MCX- MULTI COMMODITY EXCHANGE NCDEX---- NATIONAL COMMODITY AND DERIVATIVES EXCHANGE NSEL ---- NATIONAL SPOT EXCHANGE

The commodities market consist of the following products: Bullion: Gold and sillver Agriculture: cereals ,fibre, spices, pulses. plantation. sugar, oilseeds Metals: aluminium, copper zinc, iron, lead nickel Investment products: products like e-gold and e silver, gold guinea etc Energy : natural gas and thermal coal etc.

There are many more exchanges above mentioned being the most traded upon, MCX is the 6th largest commodity exchange. NSEL has launched E-GOLD /SILVER/COPPER/ZINC. Which enables investors to invest in products like E- GOLD /SILVER/COPPER/ZINC in one unit quantity also, with no other
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charges apart from the brokerage charges. Gold can be bought in the dematerialised form also. The brokerage charges are 5 paisa on 100 rupees. The gold is available at the international market prices and of 999 quality. It was also noticed that many farmers have their accounts with nirmal bang for commodity future/forward trading. Since they are the best to judge the seasonal trends and therefore this option is productive for them.

FINANCIAL INSTRUMENTS:
Raising funds through various financial instruments in various markets:

MONEY MARKET:
COMMERCIAL PAPERS MARKETS: In 1989 RBI allowed the issues of commercial Papers under the recommendations of the vaghul committee and since has become a popular debt instruments of the corporate world . Commercial paper is a debt instrument for short term borrowing that allows and enables corporate borrowers to broaden their prospect of short term borrowings and provides an additional financial instrument for investors with free negotiable interst rate. commercial paper are unsecure debt instrument in money market. It was meant to be used by borrowers with high credit rating from credit rating agencies such as crisil, care, etc. to borrow funds at rates which are lower than the prevailing bank rates. Commercial papers are unsecured promissory note provided to investors which is negotiable by endorsement and delivery. The discount varies with the credit rating of issuer company and demand and supply position in the money market. Negotiability of this instrument makes it an ideal instrument which most instruments are lacking. The emergence of commercial papers has added a new dimension to the money market. Corporate are allowed to issue commercial paper only if
y y y

The companies tangible net worth is not less than 4 crore as per the latest audited balance sheet. Company has been sanctioned working capital limit by banks or all india financial institutions The borrowal account of the company has been classified as a standard asset by the financing bank/institution.

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Individuals ,banking companies,other corporate bodies registered or incorporated in india , non-resident Indians and foreign institutional investors can invest in commercial papers, however amount invested in it should not be less than RS. 5 lakh and its multiple thereof. Advantages of commercial papers:
y y y y

High credit rating brings a company a lower cost of capital. Wide range of maturities provide more flexibility . it is issued between a maturity of minimum of 90 days and a maximum of 1 year. Commercial paper does not create any lien on assets of the company Tradeability of commercial papers provides investors with exit options.

Although there are various advantages both to issuer company and the bank there are a few limitations also in exercising commercial paper, it can bring down the banks credit limit.

CERTIFICATE OF DEPOSITS: Certificate of deposits was introduced by reserve bank of india (RBI) as a step towards regulations of interest rates on deposits. A certificate of deposits is a document title to time/term deposit and can be distinguished form the conventional time deposit in respect of its free negotiability and hence marketability. They are transferable from one party to another. Banks and financial institutions are the major issuers of certificate of deposits. The principal of investors in certificate of deposits are banks ,financial institutions,corporate and mutual funds.they can issue the certificate of deposits for a period of not less than 3 months and not more than 1 year. They are issued at a discount rate from the face value and the discount rate can be freely determined . Certificate of deposits are receipts of funds deposited in a bank at a fixed rate of interest for a fixed period of time. Certificate of deposits are popular form of short term investment for mutual funds and companies for the reasons
y y y

Certificates of deposits are generally risk free They offer a higher rate of interest than treasury bills or time deposits. They are transferable.

Certificates of deposits can be issued by scheduled commercial banks excluding regional rural banks (RRB) The denominations of certificate of deposits can be in multiples of 5 lakh subject to the minimum size of an issue to a single investor being Rs 25lakhs. The maturity period should not be less than 3 months and up to 1 year.
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Certificate of deposits are issued at a discount on face value.the issuing bank is free to determine the discount rates. The banks are required to maintain the usual SLR and CRR on the issue price of the certificate of deposits ,and cannot grant loans against certificate of deposits furthermore they cannot buy them back prematurely. The are freely transferable by endorsement and delivery but only after 45 days on the date of issues. The main motive behind certificate of deposits are control over cost of funds and assured availability of funds for specific period. From the investors point of view it s a better way of deploying their short term surplus funds,similarly certificate of deposits offer higher yields compared toconventional deposits and also secondary market provides it maximum liquidity. Today the markets of certificate of deposits have a good potential as financial institutions have collected huge funds for investments.

MONEY MARKET MUTUAL FUNDS: To encourage small investors to invest in money market ,a money market mutual fund was established to avail high market related yields. These mutual funds invests in instruments such as
y y y y

Call/notice money market Commercial bills Commercial paper Certificate of deposits

They are free to determine how much investment is to be made there is no limit set in it, but it needs to comply with the RBI guidelines. Money market mutual funds are considered to be the safest of the mutual funds.

REPOS AND REVERSE REPO: It stands for repurchase agreements thereby involving a simultaneous sale and repurchase.They are agreements between the seller and the buyer stating the sale and later repurchase of securities at a particular price and a date. For e.g. party A requires short term fund and party B wants to make a short term investments therefore party A sells security to party B at a certain price and simultaneously agrees to repurchase the same security at a specified time at a higher price. The difference in price is the interest cost for party A and is interest income for party B.

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A reverse repo is the opposite of a repo it means a initial purchase of an asset followed by its sale.

TREASURY BILLS : Treasury bills are the most important money market instruments ,they were introduced by the government of india in order to stabilise the money market. They have a tenor of 91 days and 364 days, these bills are sold on an auction basis weekly by the reserve bank of india in certain dominations. These treasury bills do not carry interst or coupon rates instead they are sold at discount and redeemed at par. They have become very popular due to their higher yield along with liquidity and safety. They can be transacted and have a very active secondary market. They also carry no credit or price risk. They were issued in order to reduce the net RBI credit to the government.

CAPITAL MARKETS:
Capital market is into three categories of Debt and equity and derivatives markets markets. Follo ing are instruments in both the markets. DEBT MARKETS: DEBENTURES: Debentures are instrument used by companies in order to raise long term loans from the public. It s the obligation of the company to pay its debenture holders on the date of maturity. The relationship of the the issuer company and the holder is of borrower and lender and on a stipulated date the principal and interest is to be paid to the holder. Debenture is a fixed income security and on liquidation or financial accounting the debentures holders are paid of the interest before preference shareholders. Debentures are certificates acknowledging indebtedness .

CONVERTIBLE DEBENTURES:

If an option is given to convert debentures into equity shares at the stated rate of exchange after a specified period, they are called convertible debentures. Convertible Debentures have

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become very popular in India. On conversion the holders cease to be lenders and become owners. SEBI is the regulatory authority for capital markets and as per their guidelines a company offering debt securities have to comply with the following guidelines
y y y y

Credit rating for the instrumentis compulsory and has to be disclosed in the offer document. For issue equal to or greater to an amount of 100 crore there should be minimum two credit ratings from two agencies Incase of maturity of more than 18 months the company has to appoint a debenture trustee and also create a debenture redemption reserve. The security that is the debenture must be created within six months from the date of issue.

The other instruments in the debt markets are

y y y

Convertible Bonds /non convertible Fixed deposits Zero coupon bonds/coupon bonds

EQUITY MARKETS:
These markets are also divided into primary and secondary markets and hence instruments issues in the PRIMARY MARKETS ARE:
y

Initial Public Offering [IPO] - An initial public offering is when an unlisted company makes either a fresh issue of securities of an offer for sale of its existing securities or both for the first time to the public. Further Issue - A follow on public offering is known as further issue. This is offered through an offer document when an already listed organization makes either a fresh issue of securities to the public or an offer for sale to the public. Rights Issue - Here, a listed organization proposes to issue fresh securities to its existing shareholders as on a record date. The rights are offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for organizations who would like to raise capital without diluting the stake of its existing shareholders. Preferential Issue/private placement issues - This is an issue of either shares or convertible securities by listed organizations to a select group of people under Section 81 of the Companies Act,1956. This issue is neither a Rights issue nor Public issue and is a faster way for any organization to raise capital.

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AMERICAN DEPOSITARY RECEIPTS

y y

y y

ADR s are instruments, in dollars, and issued by the US depository bank. A non US company that wants to list in the US (either on NYSE or NASDAQ) deposits it s shares with a bank and gets a receipt, which enables the company to issue American Depository Shares (ADS). These ADS serve as stock certificates and are interchangeably used with ADR s which represent ownership of shares deposited. There is no legal or technical difference between a GDR (GLOBAL DEPOSITARY RECEIPTS) and an ADR. ADR s are listed on NYSE or NASDAQ ( while GDR s are listed on European or Asian Exchanges) and offer access to the US institutional and retail investors while the GDR issues offer access to only US institutional market.

SECONDARY MARKETS:
COMMON STOCK/SHARES: These are securities or shares of the companies ownership that are traded in the secondary market on the stock exchanges in our country such as BSE and NSE after it has been issued by the companies in the primary market as IPO s and FPO s. An investor avails the ownership right of that company and as return on investment gets dividend from the company in case of profit and incase of loss it has to bear the loss. PREFERENCE STOCKS/SHARE These show hybrid qualities of debentures and common stock, these stocks have a fixed rate of dividend but do not have the ownership rights. Dividends are paid only in case of profits and on liquidation these shareholders are given preference in repayment over the common shareholders. MUTUAL FUNDS SCHEMES: This is a pool of investment with various schemes, if an individual finds it difficult to invest in the equity markets then through mutual funds one can invest indirectly into the equity markets and capital markets. A fund manager carefully prepares a scheme in which he determines a rate on the investing by projecting the investment into various sectors etc. An individual in this form can diversify the risk from one sector or markets.

EXCHANGES: ILLUSTRATIVE LEARNINGS

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Exchanges are institutions, organisations or any association which are established for the buying and selling of securities ,commodities and foreign currency. They form as financial intermediaries which help the investors and lenders to make bilateral trade between them. Exchanges form the part of secondary capital market as they list securities that are sold by the primary buyers and not by the issuing companies and then they are bought and sold in the secondary investors or traders. Stock exchange also facilitates buying of IPO of issuing company. Every exchange has to be registered and recognised under the ruling authority of that market like the stock exchange has to be registered under the securities contract regulation act (SCRA). Exchanges are different for every market, at NIRMAL BANG SECURITIES I came across exchanges in these markets:
y y y

STOCK MARKETS COMMODITIES MARKET AND FOREX MARKETS

STOCK EXCHANGES: Stock markets are the most common markets people are aware of, on a survey we conducted at NIRMAL BANG SECURITIES, very few people who were aware of financial markets knew only about stock markets and no other markets. There are around 25 stock exchanges that are aothorised by SEBI, the regulators of capital markets. Most of them are regional stock exchanges such as Calcutta stock exchange, Bangalore stock exchange, Pune stock exchange etc. The most common stock exchange with global presence are BOMBAY STOCK EXCHANGE and NATIONAL STOCK EXCGANGE. If a certain company is listed on these stock exchange its said that these companies are publically listed. There is a certain criteria for the companies to be listed in these stock exchanges and if they fulfil these these criteria they enlarge their markets as investors throughout the world can invest. It also gives them a higher credibility or goodwill creating more avenues. A company that is not listed on stock exchanges can trade in OTC (over the counter) these are usually small companies but it can be said that they are riskier as they were not qualified enough to be traded on the stock exchange. BOMBAY STOCK EXCHANGE(BSE) This is the oldest stock exchange in asia and india with permanent validity under the SCRA. The barometer of the capital markets is SENSEX. This stands for BSE sensitivity index it comprises of BSE listed top 30 companies which are traded the most and in volumes or one can say there are certain parameters due to which some companies come into the sensex such as history,track record, market capitisations etc.
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When one talks about stock markets,one is generally referring to the sensex going up and down. This sensex has a certain value which indicate the wellness or lullness in the capital markets . Ho is sense calculated is a frequently asked question but easy to understand- let understand.----Sensex is calculated on the free float market capitalisation weightage of 30 prominent, most traded, and sond companies. Market capitalisation of a company is calculated by multiplying the price of the stock by the number of shares issued by the company, further we require the free floating shares which simply means the number of shares that are floating in the market for trading. A company issues shares but some of these shares are held by the govt, promoters, or anybody who has a motive to control the company. The company has to give a detailed list to BSE of such issues and from the actual issues minus the locked issues the free flaot shares a removed. Hence we get FREE FLOAT MARKET CAPITALISATION, this is calculated for all the 30 companies and added and is related to the base year which is 1978-79 and the index value is 100 LIST OF COMPANIES ON SENSEX (as on 4/7/2011)
Company
Bajaj Auto Bharti Airtel BHEL Cipla DLF HDFC HDFC Bank Hero Honda Hindalco Inds Hindustan Unilever ICICI Bank Infosys ITC Jaiprakash Asso Jindal Steel L&T Mahindra & Mahindra Maruti Suzuki NTPC ONGC Reliance Comm Reliance Infra RIL SBI Sterlite Inds Tata Motors Tata Power Tata Steel TCS Wipro

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BSE Mid-Cap and BSE Small-Cap Inde

y y y

Base year of these indices would be 2002-2003

Base index value would be 1000 for each of these indices BasedConstructed on 80%-15%-5% method whereby top 750 companies by average market capitalization and liquidity are categorized under large, mid and small cap segment respectively from the list of eligible universe of BSE. BSE Mid-Cap tracks the performance of scrips between 80 & 95% of 750 companies and BSE Small-Cap index tracks the performance of remaining 5% scrips (95-100%

NATIONAL STOCK EXCHANGE (NSE): National stock exchange was established by a group of financial institutions. The index of NSE is called NIFTY. This index is a 50 prominent listed companies. Nifty has index sector wise such as BANK NIFTY, NIFTY PSU BANK, NIFTY FMCG, NIFTY PHARMA ETC. COMMODITIES EXCHANGE: These exchanges are under the authority of forward market commission. The various exchanges on national level are
y y y y y

Multi commodity exchange (MCX) National commodity and derivative exchange limited (NCDEX) National multi commodity exchange limited (NMCE) Indian commodity exchange limited (ICE) Ace derivatives and commodity exchange limited (ADCE)

WORLD EXCHANGES :
y y y y y y y y
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USA - DOW JONES, NASDAQ, NYSE JAPPAN---- NIKKEI CHINA--- HANG SENG SINGAPORE -- STRAITS TIMES KOREA --- KOSPI GERMANY DAX FRANCE CAC UK FTSE
 
.c c s e

www.bse

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NON BANKING FINANCIAL CORPORATION AND SERVICES:

Non-banking financial companies (NBFCs) are fast emerging as an important segment of Indian financial system. It is an heterogeneous group of institutions (other than commercial and co-operative banks) performing financial intermediation in a variety of ways, like accepting deposits, making loans and advances, leasing, hire purchase, etc. They raise funds from the public, directly or indirectly, and lend them to ultimate spenders. They advance loans to the various wholesale and retail traders, small-scale industries and self-employed persons. Thus, they have broadened and diversified the range of products and services offered by a financial sector. Gradually, they are being recognised as complementary to the banking sector due to their customer-oriented services; simplified procedures; attractive rates of return on deposits; flexibility and timeliness in meeting the credit needs of specified sectors; etc The NBFCs accepting public deposits should comply with the Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998, as issued by the bank. Some of the important regulations relating to acceptance of deposits by the NBFCs are:y y y y y y y

They are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand. They cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. They cannot offer gifts/incentives or any other additional benefit to the depositors. They should have minimum investment grade credit rating. Their deposits are not insured. The repayment of deposits by NBFCs is not guaranteed by RBI.

The types of NBFCs registered ith the RBI are:  

Equipment leasing company:- is any financial institution whose principal business is that of leasing equipments or financing of such an activity. Hire-purchase company:- is any financial intermediary whose principal business relates to hire purchase transactions or financing of such transactions. Loan company:- means any financial institution whose principal business is that of providing finance, whether by making loans or advances or otherwise for any activity other than its own (excluding any equipment leasing or hire-purchase finance activity). Investment company:- is any financial intermediary whose principal business is that of buying and selling of securities.

No , these NBFCs have been reclassified into three categories:y y

Asset Finance Company (AFC) Investment Company (IC) and

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Loan Company (LC). Under this classification, 'AFC' is defined as a financial institution whose principal business is that of financing the physical assets which support various productive/economic activities in the country.4

HIRE PURCHASE:
Hire purchase is a kind of instalment credit under which the hire purchaser, called the hirer,agrees to take delivery of the goods on hire and pays a specific amount for it at a interval. The rental amount includes the principal as well as the interest with an option to purchase the particular item of asset after the payment of all the rentals. Hire purchase is different from credit sales or instalments sale. The basic distinction between the two is in the credit or instalment sale, the ownership of property passes to the purchaser immediately on sale or on payment of the initial instalment, where as in hire purchase the seller retains the ownership till the hirer pays the last instalment. Only after the last instalments can the hirer exercise the option of purchasing the property against the payment of an agreed residual value. Only the hirer has the option of purchasing and not with the seller. Usually in practice the finance company purchases the property from the equipment supplier and lets it on hire to the hirer, the hirer is asked to make a down payment and the balance cn be repaid in maximum 60 days. a flat rate of interest is taken into consideration for interest calculations During the period of the contract the hirer can choose or opt for the early repayment and purchase the assets. The hirer, exercising this optio is required to pay the remaining amount of the instalments with some deductions in the interest. The SALES TAX aspect is considered in the hire purchase transactions . the tax on the sale of purchase of goods includes the tax on the delivery of goods on hire purchase . The accounting aspect is on the basis of the cash purchase of the asset is taken and hire purchase instalments are recorded as liabilities. The depriciationis charged on the cash purchase price of the asset In the beginning the instalments are recorded as receivables as a current assets by the purchaser or the finance company and the unearned income of the instalments are termed under current liability as unmatured finance charges . At the end of the accounting period the finance company or the purchaser recognises the part of the unmatured income as the current income of the period. At the end of the accounting period the hire purchase less the

Bus ess.gov.in gove nment of India s official website.



21

instalments is shown as receivables (stock on hire) and the finance income component of these instalments is shown as a current liabilities.

LEASING:
Leasing is a contractual agreement where the lessor of the equipment transfers the right to use the equipment to the lessee for an agreed period of time in return of rentals. At the end the period the assets is returned to the lessor , unless there is a provision of ownership . BENEFITS OF LEASING
y y y y

Flexibility 100% financing Utilisation ouser orientedf own funds in other important activity Tax benefits

TYPES OF LEASINGOF LEASE AGREEMENTS Lease agreements are basically of two types. They are y Financial lease and y Operating lease. The other variations in lease agreements are y (c) Sale and lease back y (d) Leveraged leasing and y (e) Direct leasing.

FACTORING
It has been introduced in India during 1991 on the Report of Kalyanasundrama Committee Factoring is a financial service that provides services to small scale firms. Who sell on credit basis, collection of receivable poses a problem.In that case factoring organizations play an important role in collection of debtors. To the seller or the client all the sales become cash basis as factors provide them with cash. The client who is the creditor becomes hassel free from the bad debts and time to recover their money . all the inconvenience of collection the receivables ,paper accounting are erased as factors take charge of these activities. The clients working capital management becomes more efficient as the client has liquidity to perform the core activity of the business. This service is of great help for international trade ,where the traders that is the buyer and seller are located in different parts of the world, factoring institution are of graet help in providing assistance in the collection of receivables, maintaining of sales ledger, helping in credit protection there by providing complete trade solutions.
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Leading banks like HSBC ,State bank of india and canara bank. In other words, factoring is an arrangement under which a financial institution (called factor) undertakes the task of collecting the book debts of its client in return for a service charge in the form of discount or rebate. The factoring institution eliminates the client s risk of bad debts by taking over the responsibility of book debts due to the client. The factoring institution advances a proportion of the value of book debts of the client immediately and the balance on maturity of book debts.

The agreement between the supplier and the factor specifies the factoring procedure. Usually the firm sends the customer s order to the factor for evaluating the customer s creditworthiness and approval. Once the factor is satisfied about the customer s credit worthiness and agrees to buy receivables, the firm dispatches goods to the customer. The customer will be informed that his account has been sold to the factor, and he is instructed to make payment directly to the factor. To perform his functions of credit evaluation and collection for a large number of clients, a factor may maintain a credit department with specialized staff. Once the factor has purchased a firm s receivables and if he agrees to own them, he will have to provide protection against any bad-debt losses to the firm.

SECURITISATION:
Securitisation refers to a process of converting liquid assets to liguid assets by converting longer duration cash flows into shorter ones. It denotes the process of selling of assets by the person holding it into marketable securities to an intermediary. A typical securitisation transaction consists of the following steps: y creation of a special purpose vehicle to hold the financial assets underlying the securities; y sale of the financial assets by the originator or holder of the assets to the special purpose vehicle, which will hold the assets and realize the assets; y issuance of securities by the SPV, to investors, against the financial assets held by it. Securitisation is done in order to relieve the holder of the assests from the balance sheet therby relieving capital adequacy and provides liquidity and greater avenue of investments.

THE PROCEDURES: Transfer of assets by the originator to a person ,company or trust specially formed for this purpose which is called a special purpose vehicle ( SPV) ,which is entirely a different entity. The assets transferred should be homogenous in nature regarding the risk in them or the maturity of these assets should be same as this makes it easir for them to be pooled in together
23

SPV divides them into markeatable securities called the pay through certificates and pass through certificates. The issue of securities are managed by merchant bankers who underwrite the issue like in any other issue. The originator continues to administer the lpan portfolio for some fee and then passes of the collection (for eg. The interst received by the customers will be to the originator bank only.if that security is securitised then the interest goes to the SPV ) to the trust. FINANCIAL ASSETS WHICH CAN BE SOLD As per the Sale Guidelines, the following classes of assets can be sold by banks/FIs to Securitisation (or Reconstruction) Companies: y An NPA; y A standard asset (i.e., an asset that is not an NPA) where: a. the asset is under consortium /multiple banking arrangements, b. at least 75% by value of the asset is classified as NPAin the books of other bank/FIs, and c. at lease 75% by value of the banks/FIs who are under the consortium/multiple banking arrangement agree to the sale of the asset to the Securitisation (or Reconstruction) Company.

PASS THROUGH CERTIFICATES. Pass Through Certificates is instruments which signifies the transfer of interest in the receible in favour of the holder. Investor gets a proportionate interest in pool of receivable . Collections are also divided proportionately monthly. No reinvestment of cash collected by the SPV. PAY THROUGH CERTIFICATES. Pay through certificates are similar instrument but here the SPV instead of transferring undivided interst on the receivables issues debt securities such as bonds repayable on fixed dates but these are in turn would be backed by the mortgaged transferred by the originator to the SPV. SPV make temporary reinvestment of cash flow to the extent required for making up to the difference of the dates of payments on the mortgages along with the income out of reinvestment to retire bonds. Such bonds are called Mortgaged back bonds.

ILLUSTRATIVE LEARNINGS
Securitisation is new in india but it has been there in the developed country, one can say this was one of the reasons why America faced a financial crisis, firstly they provided loan to the NINJAS (no income no jobs and assets) group which were very likely to default and then the financial institutions securitised such loans, there by creating a chain of default investments.

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LOAN SYNDICATION:
Loan syndication refers to the services rendered by the merchant bankers in arranging and procuring credit from financial institutions (FIs), banks, other lending and investment organizations for financing the client s project costs or meeting working capital requirements. Thus, it can be said loan syndication is a project finance service. Merchant Banker s do loan syndication to meet their customer s large scale fund requirements. Syndication of loan is a mode of risk sharing and credit participation by a group of lending bankers. This isa preferred mode of credit delivery,especially when the amount of credit is large and long term in natur. Loan syndication is both in domestic and international operations. The borrower gives a mandate to the bank to arrange the credit. This bank is called the lead manager, who prepares a memorandum. The lead banks then ask for the collaboration from other banks and asks for their participation in this loan. The leading manager,bank sets a proposal in front of all the participants, for each bank to evaluate. There is a syndicated meeting held and the proposal is finalised as required by every bank. Issues of coordinatinf communicating within the syndication is laid upon. And the deal is sighned and the loan is disbursed to the borrower. Advantages of loan syndication are that huge funds are facilitated. Other participating banks can lend with very low operating cost and most importantly the risk is shared proportionately and no bank has to solely take the bear the burden of the loan. Where as the readiness of every bank and documentation with every bank can be inconvenient , full of hassle and time consuming SOURCES OF FUND FOR LOAN SYNDICATION
y y y y

All India Financial Institutions like Industrial Finance Corporation of India(IFCI) and Industrial Bank of India(IBI) State Financial Institutions like State Financial Corporation (SFC), and State Industrial Development Corporations (SIDC). All India level investment institutions like Life Insurance Corporation of India(LIC) and Unit Trust of India(UTI) Commercial Banks.

ILLUSTRATIVE LEARNINGS:
In 2008 State bank of india was the top gainer in earning fees from loan syndication.

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COMMERCIAL BANKING:

INTRODUCTION: BANKS AND ECONOMIC DEVELOPMENT Banks play a very important role in the economic development of any country. They control a large portion of the money in circulation in the economy. They mobilize the savings of the economy leading to capital formation and assist business and industrial units in need of capital for setting up and running their businesses. Economic development is a dynamic and continuous process. Banks are the mainstay of the economic progress of a country, because they act as intermediaries between the savers and users of resources and provide the lifeline to all the productive sectors of the economy. Every country has a central bank that governs financial regulations and policies, in the United States we have the Federal bank likewise in india we have the RESERVE BANK OF INDIA (RBI). The RBI has powers vested in them under the The Reserve Bank Of India Act, 1935, and the Banking Regulation Act, 1949. The banking system can be traced back to the rule of east india company with English agency houses set up for banking purposes which eventually failed but The birth of modern banking in India can be traced to the establishment of the following three presidency banks
o Bank Of Bengal in 1809, o Bank Of Bombay in 1840 and o Bank Of Madras in 1843.

Then in the rage of swadeshi movement , businessmen and industrialist established joint stock banks with the Indian management .The following banks were established
y y y y y y y

The Allahabad Bank (1865 ), The Punjab National Bank (1895 ), The Bank Of India ( 1906), The Canara Bank ( 1906 ), The Indian Bank ( 1907), The Bank Of Baroda (1908),, The Central Bank Of India ( 1911 ) and many others.

The Imperial Bank Of India Act was passed in 1920 for amalgamating the three presidency banks. The Imperial Bank Of India was established in 1921.It was given powers to hold the government funds and to manage the public debt. The branches of the bank were also functioning as clearing houses . However it was not authorized to issue currency.

26

In view of a continuous need felt for a central bank of our own, The Reserve Bank Of India Act was passed in 1934 and RBI was established in 1935 to

y y y

Regulate the issue of currency, Securing the monetary stability, and Operate the currency and credit system of the country to foster economic development of the country.

ESTABLISHMENT OF STATE BANK OF INDIA

In 1955, the Imperial Bank Of India was nationalized and State Bank Of India came into existence with the objective of extending banking facilities on a large scale, especially in rural and semi urban areas. In 1959, The State Bank Of India ( Associate Banks ) Act was passed through which public sector banking was further extended. The following banks were made asociate banks of SBI.
y y y y y y y y

State Bank Of Bikaner , State Bank Of Jaipur State Bank Of Indore, State Bank Of Mysore, State Bank Of Patiala, State Bank Of Saurashtra, State Bank Of Hyderabad and State Bank Of Travancore.

NATIONALISATION OF BANKS
14 major commercial banks were nationalized on 19th July, 1969. These private run banks were taken over by the government of india. These were-

1. Allahabad Bank, 2. Bank Of Maharashtra, 3. Indian Bank, 4. Punjab National Bank, 5. Union Bank Of India, 6. United Commercial Bank 7. Central Bank Of India

8. Bank of India, 9. Bank Of Baroda, 10. Indian Overseas Bank, 11. Syndicate Bank, 12. United Bank Of India, 13. Canara Bank 14. Dena Bank,

27

In 1980, another six banks were nationalized to further extend the public sector banking. These were y Andhra Bank, y Corporation Bank, y Oriental Bank Of Commerce, y New Bank Of India, y Punjab & Sind Bank and y Vijaya Bank.

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THE BANKING SYSTEM

TYPES OF BANKS

CENTRAL ANK

COMMERCIAL ANK

DEVELOPMENTAL ANKS

SPECIALISED ANKS

CO-OPERATIVE ANKS

INTERNATIONAL ANKS

CENTRAL BANK: A bank which guides and regulates the banking system . its called the bankers bank as it plays a important role in guiding and controlling the functions of other banks. The central bank is entrusted with the power to produce currency for the government. The central bank is the banker for the government as well. Central bank,RBI also monitors the function of all the oter banks in the country. It moniters the base points ,fixes the interest rate according to the countries situation. It also establishes exchange control norms. One of the most important function of RBI is monetary management- regulations about the money supply In the country and the credit availability in the country.these monetary management is of two types that is general monetary monetary and selective credut controls. In carrying out the general monetary management, RBI has two tools ,direct and indirect. The direct tools of monetary management are reserve requirement of banks (commercial) such as CRR and SLR, administered interest rates and credit controls. Whereas the indirect tool of control is open market instruments such as bonds and debentures which RBI resorts in times of inflation which helps in reducing the money supply. In order to increase the money supply in the country the RBI lends money to the banks against the security of debentures and bonds, this process is called repo transaction . hence through the transaction of Repo and reverse repo the RBI can control the money supply in the economy.
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Also by regulating the bank rate that is the rate at which the central bank lends fund to banks against approved securities ,purchase , and eligible bills of exchange . The effect of change in the bank rate is to make an impact on the cost of acquiring funds from the central bank. The RBI also maintains the foreign exchange reserve and overseas fluctuation in the exchange rates unlike countries like USA .

ILLUSTRATIVE LEARNINGS AND KNOWLEDGE: As a measure to reduce the money supply I the economy in the prevailing times of inflation RBI has increased their interest rates While the short-term lending (repo) rate has been raised to 7.5 per cent, the borrowing rate has been hiked to 6.5 per cent on 16th june 2011. This has been the 10th interest rate hike since march 2010. This move will put preasure on loans by aking them costlier . 5 It (RBI's move) will put pressure on short-term deposit rates and subsequently on the lending rates. But rate hike by banks would not be immediate. Inflation stands at around 9 per cent in, much above the central bank's comfort level of 5-6 per cent. The measures to control money supply , the RBI said, would also help in mitigating the impact of "potentially adverse global developments."

COMMERCIAL BANKS :
Commercial banks are the banks to the general public for their day to day banking.it performs all the functions of accepting deposits to providing loans and advances for short medium and long term basis. Commercial banks are in
y

Public sector

NATIONALISED BANKS: These were banks which were operating in the private sector but were taken over by the government ,list of these banks have been mentioned above. STATE BANKS : These were banks that were formed after the RBI took stakes in the imperial bank of india. Then its associates were formed according to the kings province .The associate banks of SBI are
y
5

State Bank of Bikaner & Jaipur

," Indian Overseas Bank CMD M Narendra told PTI.

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y y y y

State Bank of Hyderabad State Bank of Mysore State Bank of Patiala State Bank of Travancore

State bank of saurashtra and indore have been merged with SBI REGIONAL RURAL BANKS: These banks operate within a small region and are sponsored by the central government 50%,the national bank 35% and state banks 15%
y

Private sector: These are bank which are owned in private ownership . The old private banks are karnataka bank. Jammu and kashmir bank, ING Vyasa and the new private banks are ICICI bank Yes bank Axis bank etc. GTB was the first private bank. Foreign banks: These are banks which have their operations globally such as HSBC, Barclays, Citibank etc.

DEVELOPMENT BANKS:
Several financial institutions likeDevelopment Finance Institutions (DFIs) were established to provide funds to the large medium and small industry in India. The DFIs provide finance for the establishment of new industrial projects as well as for expansion, diversification, and modernization of existing industrial enterprises. Industrial finance are provided by such banks, the largest development banks is Industrial development bank of india (IDBI). Development bank, are designed to provide medium- and long-term capital for productive investment, often accompanied by technical assistance, in developing countries 6

SPECIALISED BANKS.
There are some banks, which cater to the requirements and provide overall support for setting up business in specific areas of activity.some examples of specialised banks are E port Import Bank of India (EXIM Bank) : This bank was formulated with an objective to provide economic assistance to the importers and exporters of india. This bank is fully owned by the government of india. It also functions as the apex financial institution in providing services such as
y y
6

export credit, overseas investment,

Britannica.com-encyclopedia

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y y

agri and SME finance, and finance for units that are export oriented

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI): This bank was established under an act of Indian parliament as the principal financial institution for y Promoting y Financing y Development of industry in the micro,small.medium enterprise (MSME) sector. y Coordinationg the functions of other institution engaged in similar activities SIDBI has been assisting the entire spectrum of MSME sector, including the tiny ,village and cottage industries through suitable schemes tailored to meet the requirement of setting up of new projects,expansion,diversification,and rehabilitation of existing units

NATIONAL BANK FOR AGRICULTURAL AND RURAL DEVELOPMENT (NABARD): NABARD was set by the government of india as the development bank with a agenda of facilitating credit flow for the promotion and development of agriculture ,small-scale industries,cottage industries ,village and handicraft industries and other industries towards rural development. NABARD is a n apex institution in handling matters regarding policy,planning,control and operations in the field of credit for agriculture as also for other economic and development activities in rural areas . It initiates matters towards institution building to improve the credit delivery system,including monitoring and formulation of various schemes. It coordinates rural financing activities of all the institutions engaged in such development,it prepares rural credit plans.it plays a important role in supervising and imparting specific training that is required. CO-OPERATIVE BANK People who come together to jointly serve their common interest often form a co-operative society under the Co-operative Societies Act. When a co-operative society engages itself in banking business it is called a Co-operative Bank. The society has to obtain a licence from the Reserve Bank of India before starting banking business. Any co-operative bank as a society is to function under the overall supervision of t he Registrar, Co-operative Societies of the State. As regards banking business, the society must follow the guidelines set and issued by the Reserve bank of india.

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CAPITAL ADEQUACY NORMS

Any drawback in the banking system of an economy whether developed or developing . hence in order to improve the strength of financial system, the need of a prudential banking monitor is required, and therefore BASEL COMMITTEE on Banking supervision and monitoring was formed. One of the important parameters to assess the financial strength of any business is it s Capital or Net Worth. Banking business is no exception to this rule. The issue of what should be the minimum capital requirement of a banking company had been engaging the attention of regulators in many countries . Till late1970s, there were no set or standard guidelines in this regard. The Governors of the central banks of G-10 countries constituted a Committee of Banking Supervisory Authorities in 1975. This Committee usually meets at the Bank for International Settlements at Basel in Switzerland and hence has come to be known over the years as the Basel Committee on Banking Supervision. The Basel Committee provided for the first time a framework for capital adequacy in 1988 which is known as Basel I Accord The Basel I norms for risk weights were more of a rudimentary nature. For example,
y y y

All exposures to sovereigns were assigned a risk weight of zero. All bank exposures were assigned a risk weight of 20%, and All corporate exposure were assigned a risk weight of 100%, etc .

Such a rigid approach without any consideration for the strengths or weaknesses of individual entities was the main shortcoming of the Basel I Accord.The fact that an excellent corporate could have a lesser risk weight than even a weak bank was not recognized under Basel I. The report of the Committee is titled as INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT AND CAPITAL STANDARDS A REVISED FRAMEWORK. Which was the BASEL 11 accord The fundamental objective of Basel II accord was
y y y y

to revise the Basel I accord in order to strengthen the soundness and stability of the system The intention of Basel II is to promote sound risk management practices by Banks. It demands allocation of capital for Operational Risk for the first time. The Basel II accord is expected to establish a minimum level of capital for internationally active banks. National regulators are free to set higher standards for minimum capital if they so desire.
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In India, the CRAR requirement is set at 10% for internationally active banks and 9% for other banks, of which Tier I Capital should be at least 6% and balance can be Tier II Capital.

THE FRAMEWORK : The Basel II Accord aligns regulatory capital with the risk profile of a bank. It rests on 3 Pillars, as under
y First PillarMINIMUM CAPITAL REQUIREMENT. y Second Pillar- SUPERVISORY REVIEW PROCESS. y Third PillarMARKET DISCIPLINE.

Pillar 1 stipulates the minimum capital requirement and different approaches to calculate charge with respect to credit, market and operational risk. Minimum capital for Credit Risk
y

Standardized Approach: this approach is based on risk weights stipulated as per the ratings given by the rating agencies such as CRISIL,ICRA,CARE and FITCH India. Internal Rating Based Approach (IRB): this is based upon the internal credit tating of the bank in assessing risk by parameters such as i) ii) iii) Probability of default Loss given default Exposure of default

Minimum capital for Market risk As a part of operations bank have to hold the following assets
y Debt securities y Equity y Forex y Commodities y Derivatives etc. The value of the above assets fluctuate due to due to volatility in the market and the banks are exposed to risk for the mark to market period of holding them. Hence by standard and internal models approach market risk is measured.

Minimum capital for operational risk: Here the basic indiacator approach is calculated as a percentage of average total grossincome of the bank for the last three years . Operational risk varies with the volume and nature of
34

business. It may be measured as a proportion of gross income, which is a direct measure of operational volumes. Operational risk is defined as a risk of loss resulting from inadequate or failed internal processes, people, systems or from external processes / events. This definition includes legal risk, but excludes strategic and reputational risk. Basel II accord provides three methods for calculating capital charge for operational risks
y The Basic Indicator Approach (BIA), y The Standardized Approach (SA), and y The Advanced Management Approach (AMA). The banks are expected to move from the Basic Indicator Approach to Advanced Management Approach over a period of time. A bank will not normally be allowed to revert to a simpler approach once it is approved for more advanced approach.

Pillar 2 Pillar 2 provides for a supervisory reviw of the banks capital adequacy and internal risk management. The national supervisory for india is RBI which is made responsible for evaluating and ensuring that banks have a sound internal processes that take care of all the potential risk. RBI has to ensure that the stipulated capital requirement is maintained as per pillar 1, Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require the banks to hold capital in excess of the minimum needed. Supervisors should require banks to operate with a buffer over and above the Pillar I standard. Buffer is meant to cover uncertainties related to the system. Similarly, bank specific uncertainties are addressed by bank specific buffer prescriptions. Supervisors should seek to intervene at an early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of a particular bank and should require rapid remedial action if capital is not maintained or restored. If bank is not meeting the requirements in the above four principles, the supervisor should consider a range of options. These may include extensive monitoring, restricting dividend pay outs, requiring the bank to raise additional capital etc.

Pillar 3 The purpose of Pillar 3 Market Discipline is to complement the minimum capital requirements ( Pillar 1) and Supervisory Review Process (Pillar 2).

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Pillar 3 provides disclosure requirements for banks using Basel II framework. These disclosures will allow market participants to assess key information and thereby make informed decisions about a bank. Basel Committee has made considerable efforts to see that Pillar 3 disclosures framework does not conflict with the requirements under the accounting standards. Accounting and other mandatory disclosures are generally audited. Additional disclosures provided under Pillar 3 framework must be consistent with the audited statements. Banks are encouraged to provide all the information at one place.

TYPES OF DEPOSITS
A bank accepts deposits , this is one of the ways through which a bank collects capital and this they further provide it in the form of loans and advances to borrowers and earn interest which is their real income. Although deposits are banks liabilities for which they have to pay their customers interest , which is lower than the interest they get from the borrowers and this becomes their income. Hence a bank should have an adequate ratio of deposits. In india SBI have the largest deposit base. A bank accepts deposits in the following types:

Current Accounts : current accounts are for day to day financial transaction,most of the
countries do not pay an interest in such deposits as the depositer is entitled to withdraw complete amount at their disposal keeping minimum balance amount that is required by the bank. The no of withdrawals are not restricted in such deposits. Business, institutions, corporate usually have current accounts.

SAVINGS ACCOUNT : this type of account is usually opened by individuals for the
purpose of saving the surplus amount. Around 3.5% interest is paid by the banks to the customers/depositors but its subject to change from time to time and bank to bank due to highly competitive industry. Interst is paid only on the balance amount that is remaining in the account at the end of the financial year. The number of withdarals are restricted in these types of deposits and thus it is not suitable for business transactions. In this a minimum balance is asked to be maintained. Only in saving bangs salary account a minimum balance is not really required to be maintained.

TERM DEPOSIT/FIXED DEPOSIT: This is the type of deposit are not repayable
on demand such as current and savings accounts. These accounts deposits money for a period or term and is payable only on the expiry of the term,hence they have a maturity date. The bank legally cannot call upon and pay a depositor before the maturity date,but if the depositor wishes to encash its fixed deposit the n its allowed but at a lower interest rate. These are a lucrative options for a individual who has surplus ,wishes to get better returns than the savings accounts as it pays at higher rate of interest but does not have a big risk taking capacity. The interest can be paid monthly quarterly ,half yearly and yearly .

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Fixed /term deposits are very popular in india,as it s the safest mode of getting interest .

RECURRING DEPOSITS : These are forms of term deposits where in the depositord
deposit money every month for a set period of time and on the interest is calculated monthly thus on maturity the customer gets the aggregate amoun. This is popular amongst the small ans lower middle class.

ILLUSTRATIVE LEARNINGS: At Nirmal bang securities,we students did a survey

know about the investment pattern of individuals and acceptance of alternative investments. From the outcome of this survey it was noticed that our entire sample invested and preferred fixed deposit and were very apprehensive about other financial investments.

CALL DEPOSITS : These are deposits which are accepted from another bank and
financial institution. Deposits can be recalled by the lending bank or repaid by the borrowing bank at any point of time. The rate on such deposits depend upon the liquidity in the money market.

CERTIFICATE OF DEPOSITS: Certificate of deposits was introduced by reserve

bank of india (RBI) as a step towards regulations of interest rates on deposits. A certificate of deposits is a document title to time/term deposit and can be distinguished form the conventional time deposit in respect of its free negotiability and hence marketability. They are transferable from one party to another. Banks and financial institutions are the major issuers of certificate of deposits. The principal of investors in certificate of deposits are banks ,financial institutions,corporate and mutual funds.they can issue the certificate of deposits for a period of not less than 3 months and not more than 1 year. They are issued at a discount rate from the face value and the discount rate can be freely determined . Certificate of deposits are receipts of funds deposited in a bank at a fixed rate of interest for a fixed period of time.

FINANCIAL INSTRUMENTS

BILLS OF EXCHANGE:
A bill of exchange is a instrument in writing containing an unconditional order sighned by the maker, directing a certain person to pay a certain sum of moneyonly to or to the bearer.
y y

The maker of the bil is called a drawer. The person who is directed to pay is called drawee.
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The person who receives the money is called the payee

PROMISSORY NOTE:
A promissory note is an instrument in writing,containing an unconditional undertaking sighned by the maker to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument. The person who makes the promise to pay is called the maker. He is the debtor and therefore must sign the instrument. The person who is to receive the payment is called a payee There are only two parties involved whereas in bills of exchange there are three parties involved.

CHEQUE:
A cheque is a bill of exchange drawn upon a specified banker and payable on demand . a cheque may be payable to the bearer or to order but in either case it has to be payable on demand. The banker named must pay when the cheque is presented for payment. The cheque is valid if the drawer has sufficient funds in his/her accound or has opted for an overdraft facilities. A post dated cheque is valid only for 6 months. An open cheque canbe presented for over the counter payment,but not a crossed cheque.

LETTER OF CREDIT
Letter of credit is a letter issued by the bankat the demand of the customerfavouring the supplier of goods, where by the the issuing banks undertakes to make the payment on submission of certain documents as specified. Banks only deal in the documentation but not the underlying goods. The banks bridge the gap of trust between the two parties involved in the trade and enhances trade.

BANK GUARANTEE
Guarantees are generally issued by banks in order to enable their customers in participating in tenders and auctions. ,where a banks customer is required to submit a bank guarantee for a minimum stipulated amount in lieu of security/deposits. When the customer obtains payment, the floater of the tender who gave the advance asks for the bank guarantee covering the amount of the advance. There are three parties involved
y y

The applicant who is the customer The beneficiary in whose favour the guarantee is issued
38

And the bank

CHEQUES AND CLEARING HOUSES:

Clearing house is a place where the representatives of every bank meet and exchange their cheques. The clearing is a process of arranging the clearance of cheques drawn on each other. The bank that manages the clearing house functions is called the settlement bank. Every bank that is participating in the clearing process must maintain current accounts with the settlement banks,in order to enhance the the exchange. When the cheques and instruments are received in the accounts of the cutomers of the bank and is presented to the other banks for clearance its called as out ard clearing. Similarly cheques and instruments drawn on itself and received from other banks through the clearing house are called in ard clearing. The huge volumes of cheques and instrument deposited by the customers in different branches has made clearing of cheques a difficult task. Thus cheques presented in banks from different banks are sorted with high speed machines with the help of the MICR number on the cheque .once the cheue is recognised they are give to the respective representative of the bank who takes the cheques to the bank and post the relevant transaction in appropriate accounts. The settlement of funds in clearing occurs at several levels. The value of all the cheques presented by a bank on other banks represents the claim by that bank on other banks. Same claims are made by all the banks on every other bank in the clearing. Debit or credit position of the bank is determined after the nets settlement at clearing house. This process is known as interbank settlement. The payment process is completed only when the drawer s account is debited and payee account is credited. This occurs after all the erroneous checks are returned which can be due to lack of sufficient funds.

THE SYSTEMS USED FOR SPEED CLEARING:

y y y y y

Real time gross settlement (RTGS) Electronic clearing services (ECS) National electronic fund transfer (NEFT) National electronic clearing services (NECS) Centralised fund management services (CFMS)

SERVICE CHARGE ON CLEARING CHEQUES

i) Local Cheques The service / processing / maintenance charges levied from other member banks by the bank managing a Clearing House are as follows
39

(a) MICR Cheque Processing Centres (MICR CPCs) : MICR Cheque Processing Centres levy cheque processing charges from member banks at the rate advised by the Reserve Bank of India from time to time. Currently the CPCs (including the five CPCs managed by RBI) charge @ Rs. 2/- per cheque (Re .1/- from the presenting bank and Re.1/- from the drawee bank). (b) Other Clearing Houses : Clearing Houses other than MICR CPCs collect maintenance charges from the member banks towards various expenses incurred for operating the clearing house. The maintenance charges are calculated based on the actual expenditure incurred by the bank managing the clearing house for clearing operations and the same is equally shared by all the member banks on a no-profit basis.7

THE KYC NORMS:

The KYC Guidelines are issued under Sec 35(A) of the Banking Regulation Act,1949 and contravention of the same will attract penalties. The objectives of KYC framework is two fold 1) To ensure satisfactory customer identification, and 2) To monitor transactions of suspicious nature. Banks have to obtain all necessary information to establish the identity / legal existence of every new customer which must be verified where felt necessary. All transactions, especially large ones, in a new account must be closely monitored for at least 6 months and any suspicious transactions must be reported to FSSB

ILLUSTRATIVE LEARNINGS: The KYC norms for an individual account

holder at nirmal bang are-Identity and Residence proof of all applicants Copy of Valid Passport / Voter's ID / Valid Driving licence / Ration Card (For Ration card without photo, a separate bank signature verification is essential) / Employer's issued Photo ID + Letter Or Documents 4 and 5 Age proof of all applicants - Copy of Valid Passport / Valid Driving licence / PAN Card / Birth certificate / School leaving certificate / Voters ID Card Residence proof of all applicants Copy of Latest Telephone bill / Latest Electicity bill / Valid Registered Rental
7

RESERVE BANK OF INDIA official website on paper clearing system

40

Agreement / Pan Intimation Letter / Medical Insurance Policy / Latest bankstatements received by customer by post ( Not of co-operative bank and approved by L&C) / Voter's ID / Driving License / Ration Card- same condition as Identity proof / Valid Passport / Credit card statements / RV report / Employer's issued Photo ID + Letter Signature Verification proof of applicant Copy of Valid Passport, Valid Driving Licence, Copy of Pan Card Or cancelled cheque

VIEW POINT: LEARNINGS:

The future of Indian banking industry lies in financial inclusion which needs to be looked into by the industry as a business opportunity in the bottom of the pyramid R . M .MALA As said above the future can be bright only with financial inclusions in the country, the banks have yet to tap the masses of our country. As we all know that only around 28-35% of our population have active bank accounts and that the volumes have not been tapped yet. There are very few branches of banks that reach the corners of our country the mass population have no access to the banks and its facility. The masses of the country should be encouraged in saving as this will not only improve their quality of life but will also help in improving the condition of the economy. Under the FINANCIAL INCLUSION programme of RBI. Plans are made to make banking facilities accessible via mobile banking to all villages.this the have projected to accomplish by 2015, although this is a gigantic task but its one step to attack poverty of our country. This is possible with the help of technology,consolidation good corporate governance and removal of unnecessary charges by the banks.

WORKING CAPITAL MANAGEMENT:

The funds required to carry out day to day operations is known as the Working Capital.The amount of working capital needed depends upon the length of the operating cycle as well as the projected level of sales. Fixed assets are mainly financed by Term lending Institutions, working capital is mainly provided by commercial banks.Short Term Financial Management or Working Capital Management deals with discussion relating to Current Assets and Current Liabilities. There are two major concepts of Working Capital Net Working Capital and Gross Working Capital. Gross Working Capital is total current assets while Net Working Capital is current assets minus current liabilities.
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When accountants use the term Working Capital, they are generally referring to Net Working capital which is the excess of current assets over current liabilities.This indicates the extent to which current assets are financed by long term sources or the extent to which the firm is protected from liquidity problems. But managing the current assets and liabilities is a difficult task as the difference is huge and constantly changes according to the business. Working Capital Management is a significant facet of the overall Financial Management owing to the following two reasons
o Investment in current assets represents a substantial portion of the total investment, and o Investment in current assets and the level of current liabilities have to be geared quickly to changes in Sales.

No doubt the fixed asset investment and the long term financing are also responsive to variation in sales. But, this relationship is not as close and direct as it is in the case of working capital components Importance The importance of working capital management is reflected in the fact that finance managers spend a great deal of their time in managing the current assets and current liabilities. Arranging short term financing , negotiating favorable credit terms, controlling the movement of cash, administering the account receivables and monitoring the investment in inventories consumes a great deal of time of the finance managers
y y

Sound Working Capital Management rests on two fundamental decision issues for the firm. They are The optimum level of investment in current assets, and The appropriate mix of short term and long term financing used to support this investment in current assets.

These decisions are , in turn, influenced by the tradeoff that must be made between Profitability and Risk. Lowering the level of investment in current assets, while still being able to support sales, would lead to an increase in in the firm s return on total assets. To the extent that the explicit costs of short term financing are lower than those of medium and long term financing, the greater the proportion of short term debt in total debt, the higher will be the profitability of the firm. Thus, profitability considerations suggest maintaining a low level of current assets and a high level of current liabilities to total liabilities. This will imply a low or conceivably negative level of Net Working Capital.Offsetting the increased profitability of this strategy, is the increased Liquidity Risk faced by the firm. Hence , it is critical to maintain the right tradeoff between current assets and current liabilities to manage the Risk Return dilemma.

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The above discussion of Working Capital Management brings out two basic principles of finance
o Profitability varies inversely with liquidity, o Profitability moves together with Risk or there is a tradeoff between Risk and Return.

Net working capital is a qualitative aspect,where we expect the current assets to be in access of current liability but what we do not see is the quality of these assets. hence this quality of assets should be taken into account for calculating current assets.

CASH MANAGEMENT:
Cash, being the most liquid asset, is vitally important to the daily operations of a firm. Efficient cash management is crucial for the solvency of a business.The amount of cash held by a firm is usually small 1% to 1.5% of the total assets of the firm. There are three common motives for holding cash
o Transaction Motive- this motive is for making cash available for normal day to day business practices that requires instant cash payments such as wages salaries, taxes, operating expenses,etc. o Precautionary Motive- this motive is to meet any emergencies or contingencies in the future. It provides safety and security for the future emergencies. On short notice the company will not be able to borrow huge funds and hence cash should me kept.

o Speculative Motive. this motive is for any future opportunity which will entitle the company for profit.

Idle cash has an opportunity cost attached to it. The liquidity provided by cash holding is at the expense of profits sacrificed by foregoing alternate investment opportunities. Hence, it is one of the important functions of a finance manager to ensure optimal conservation and utilization of cash. CASH MANAGEMENT CONSISTS OF THE FOLLOWING SEVEN IMPORTANT ASPECTS
o o o o o

Cash budgeting, Long term Cash Forecasting, Reports for control, Monitoring collections and receivables, Optimal Cash Balance,
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o Options for investing surplus funds, and o Strategies for investing surplus funds.

Cash budgeting or short term cash forecasting is the principal tool for cash management. Cash budgets, routinely drawn up by business firms, which are helpful in Estimating cash requirements, Planning short term financing, Scheduling payments for capital expenditure, Planning purchase of materials, Developing credit policies, and Checking the accuracy of long term cash forecasts.

The principal method of short term cash forecasting is the Receipts and Payments Method. Sometimes, the adjusted net income method is used though the method is used mainly for long term cash forecasting

INVENTORY MANAGEMENT:
Inventories are the crucial part of current assets, keeping inventories means locking up companies fundsby storage and maintenance cost: there are three motives for any company to hold inventories Transactional motive- this motive is holding inventories inorder to continue smooth production and operations.

Precautional motive- this motive for holding inventories is inorder to safeguard for future unpredictable changes in demand.

Speculative motive- this motive is to take decision on increasing or decreasing inventory levels in order to attain profit of price fluctuation.

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CORPORATE FINANCE
Every decision that is taken in an organization has its implications on finance. Decisions are taken have a cost attached to it and therefore they affect the financials of the business. When we talk about business and business activities it s all related to financial actively. Hence business decision must be taken wisely for acquiring resources,investments, expansions ,finding the right mix to fund these investments,cost of every business activity is to be ascertained and the true valuation of the company should be done. All these come under the umbrella of business or corporate finance. Concept of financial and operating leverage:

OPERATING LEVERAGE:
Its defined as the firms ability to use the fixed operating cost to magnify the effects of changes in sales on its earning before interest and taxes. In other words with fixed cost the percentage change in profits along with a change in volume is greater than the percentage change in volue. Degree of operating leverage (DOL) = CONTRIBUTION EBIT (Earning before interest and ta ) WHERE CONTRIBUTION IS = SALES VARIABLE COST

OR DOL =

% CHANGE IN EBIT % CHANGE IN SALES

When proportionate change in EBIT due to a given change in sales is more than the proportionate change in sales, there is a element of operating leverage. Greater the degree of leverage, higher is the operating leverage. For eg. Sales (-) Variable cost Contribution (-) fixed cost EBIT CASE 1 100000 50000 50000 50000 0 BASE 200000 100000 100000 50000 50000 CASE 2 300000 150000 150000 50000 100000

A 50% increase in sales results in 100% increase in EBIT and vice-versa

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Financial leverage:
Its defined as the ability of the firm to use fixed financial charges such as interest and preference dividend rate to magnify the effects of changes in EBIT or the earning per share. In other words financial leverage results from the preserve of fixed income stream. These fixed charges do not vary with the EBIT or the operating profits the companies making. They have to be paid regardless of the amount of profit or EBIT available to pay them. This concept is also known as capital gearing and trading on equity.

Degree of financial leverage (DOFL)

EBIT EBT

Or DOFL =

% CHANGE IN EPS % CHANGES IN EBIT

For eg. EBIT (-) INTEREST EBT (-) TAXES EAT NO. OF SHARES EPS

CASE 1 30000 10000 20000 7000 13000 5000 2.6

BASE 500 00 10000 40000 14000 26000 5000 5.2

CASE 2 70000 10000 60000 21000 39000 5000 7.8

This means with a 40% increase in EBIT levels, there is a 50% increase in earnings after tax (EAT) which is the profit available to shareholders
The higher levels of risks are attached to the higher degree of financial leverage. High fixed financial cost increases the financial risk therby increasing financial risk. Financial risk is the risk of financial fixed cost , with increase in fixed financial charges the company also needs to increase the EBIT importantly so as to meet the payment of interest and not be in loss.

46

COMBINED LEVERAGE:
The operating leverage has its implications on the operating risk and is measure in percentage changes in EBIT due to percentage changes in sales. The financial leverage has its own implication on financial risk and is measured by percentage change in EPS due to percentage changes in EBIT. Since both these leverages are closely related to ascertaining the ability to cope with fixed charges and if they are combined the have to deal with risk that is called the TOTAL RISK. DEGREE OF COMBINED LEVERAGE (DOCL) == CONTRIBUTION * EBIT EBIT EBT

CONTRIBUTION EBT

ANALYSIS OF FINANCIAL RATIOS OF TATA STEEL FOR THE YEAR 2010-2011

THE ANNUAL REPORT HAS ALSO BEEN ATTACHED. CONSOLIDATED BALANCE SHEET AND PROFIT AND LOSS ACCOUNT ON PAGE NO 188 AND 189

TATA STEEL: RATIOS

47

LIQUIDITY RATIO:
It measures the ability of the firm to meet its current obligation and reflect upon the solvency of a firm for short term funds. The failure of a country to meet its obligations,due to lack of sufficient funds, this will result in poor credit worthiness,loss of creditors. On the other hand a very high liquidity is also not very good for a firm , it shows that the the firms assets are remaining idle and the liquidity is tied unnecessarily. The liquidity ratios are CURRENT RATIOS AND QUICK RATIOS

CUREENT RATIO

= =

current assets current liabilities 59,768.64 33,760.98

1.770346714

Quic ratio


Liquid Assets- inventories Current Liabilities 59768.64 -(1841.58 + 22213.66 ) 33,760.98 35,713.40 33,760.98

= =

1.057830667

The current ratio measures a firm solvency, and the availability of current assets in respect for every one rupee of current liability. The logic that has to be followed that even if current assets get reduced to half the current liabilities have to be met and that s why a conventional ratio of 2:1 is ideal. If the current ratio is higher that means there is larger amount of rupees available for every rupee for liability.

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At TATA STEEL its observed that the have a current ratio of 1.77 , which is a close to a ratio of 2:1. Tata steel as 1.77 rupee for every 1 rupee liability. The quick ratio measures the firms liquidity by converting the firms current assets into cash to meet the current liabilities. Quick ratio talks about current assets that convert into cash without diminishing of the assts value. It includes cash, marketable securities , debtors and receivables but it excludes inventories which diminish in value and is hard to encash. TATA STEEL has a quick ratio of 1.05 ,they have 1.05 rupees for every rupee of liability.

ACTIVITY RATIO:

INVENTORY TURNOVER RATIO

Cost of goods sold Average inventory

1,09,942.36 19592.595 5.611424112

days of inventory holding

365 inventory turnover ratio 365 5.61142

DEBTORS TURNOVER RATIO

Net Credit Sales Average Debtors (debtors of previous yr +debtore of this yr) 2

Average Debtors

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65.04587654 = (66) d ys

Average Stoc =


= =

Opening Stoc + Closing Stoc /2 (16971.53+22213.66)/2 =

19,592.60

= =

(11512.44 + 14816.28)/2 13164.36

1,21,345.75 13,164.36 9.217747767

Average collection period

12 months or 365 days Debtors Turnover Ratio

365 9.2174

39.59901925

LEVERAGE RATIOS
DEBT RATIO = Total debt Total capital employed 60,684.34 1,01,722.16 0.596569518

DEBT EQUITY RATIO

Total debt NET WORTH 60,684.34 50

37,970.27 = 1.598206702

interest coverage ratio =

EBIT interest charges

= EBIT =

1,19,734.10 - 1,07,172.32 12,561.78 2,770.04

INTEREST AS FINANCE CHARGE =

interest coverage ratio =

12,561.78 2,770.04 4.534873143

PROFITABLE RATIOS
RETURN ON CAPITAL EMPLOYED = EBIT(1-T) Capital employed

= = =

12561.78 101722.16 0.123491086 * 100 12.34910859%

RETURN ON EQUITY

PAT NET WORTH

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EBIT

TOTAL INCOME

TOTAL EX ENSES BEFORE INTERST CHARGE ADDED

= = =

8,982.69 37970.27 0.236571665 * 100 23.65716651

IF AVERAGE NET WOTH IS TAKEN OF LAST YEAR AND THIS YEAR = 23715.42 2 = THEN ROE = = = 30842.845 8,982.69 30842.845

37970.27

0.291240643 * 100 29.12406427

ACTIVITY RATIO :
This ratio measures the firms ability to utilise its assets. Theses ratios are called turnover ratio because it indicates the speed at which assets are converted into sales or cash. Inventory turnover ratio is a measure of the firms efficiency in procuring storing and converting the product and selling. This ratio is determined in no. of days of holding inventories before the sales. It shows in how many days the inventory is converted into sales and brings sales and liquidity. At TATA STEEL the inventory turnover ratio is approx 5.6 which indicates that any inventor is kept for 65 to 66 days before it gets converted into sales. For a heavy steel producing company is fairly a good ratio. Similarly the debtors turnover ratio indicates the ratio of debtors or receivables are collected back. This ratio is also in no of days which is the AVERAGE COLLECTION PERIOD. Its good to have a shorter collection period as it provides better liquidity, but its also good to maintain good relations with the customer without letting the business get effected. TATA STEEL has a debtors turnover ratio of approx 9.2 and average collection period of approx 40 days. This is a good number as the any industry would not delay this after 45 days or maximum till 60 days. But at TATA STEEL the debts are recovered in approx 40d days.

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With creditors turnover ratio its similar as this ratio indicates the ratio and the number of days in which payments are made.

LEVERAGE RATIO
These are known as capital structure ratios. These ratios throw light upon the long term solvency of the firm as reflected its ability to assure the long term lenders with their periodic paments , along with repayment of principal on maturity. DEBT EQUITY RATIO: this ratio measure the relative proportion of proportion of debt and equity in managing the assts of a firm. A high ratio indicates high financing from the creditors whereas the owners funds are less where as a low ratio would indicate a low financing from the creditors and more of owners funds . Both high and low ratios have their own implications which depend upon the industry types. At TATA STEEL its seen that the debt equity ratio is 1.59 which is indicates that the debt raised is more than the shareholders funds and reserve and surplus. Why is the owners funds relatively less than the debtors is a point to look upon. Does this structure work for TATA STEEL. DEBT RATIO: this ratio indicates the measure of debt in the total fund employed by the company. This reflects upon the financial risk of the company. At TATA STEEL the debt ratio is approx 0.59 which indicates that the company has more than half its capital raised through debt. The company needs to generate sufficient amount of revenue in order to pay back the interest charged by these debt securities or loans . INTEREST COVERAGE RATIO: This ratio measures the debt servicing capacity of a firm for the fixed interest on long term loan . AT TATA STEEL this ratio is very important as 0.59 slightly more than half is raised by debt. The lenders need to know the firms ability to pay back its lenders interst. At TATA STEEL the interst coverage ratio is approx 4.5 , which indicates that there is 4.5 times a rupee for every rupee of the lenders. The interest can be covered 4.5 times. The company is using the debt and has the ability to pay back its lenders.

PROFITABILITY RATIO.
Profitability ratio can measure the profitability of the firm, the returns it provides on the basis of sales and investments. On investment the profitability can be measured by the calculating the return on capital employed and return on equity and return on assets.
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RETURN ON CAPITAL EMPLOYED: Return on capital employed indicates and measures the return that is received on the total capital employed. Hence its calculated on earnings before the interest and taxes as we require income from which interest can be paid to the lenders and taxes cannot be avoided . At TATA STEEL the return on total capital employed is approx 12.3%, if the average of capital employed is taken of this as well as the previous year then the the return would be 13.6%. but in the current year the company has got 12.3% additional to the capital they have employed. RETURN ON EQUITY: This ratio measures and indicates the return the shareholders have got after the residual income is removed. Hence return on equity is calculated on the basis of profit after taxes,this is for the shareholders although the company can choose to retain the earnings for the companies funds or can be distributed but the return can be calculated. At TATA STEEL the rrturn on equity is of 23.6% for the current year and 29.1% if average net woth is taken. This implies owners who have invested in the company have availed a profitable return of 23.6%.

54

FINANCIAL RATIO ANALYSIS OF BAJAJ AUTO LTD FOR THE YEAR 2010-2011 (Balance sheet and profit and loss account on page 91 and 92) LIQUIDITY RATIO:
It measures the ability of the firm to meet its current obligation and reflect upon the solvency of a firm for short term funds.

CURRENT RATIO:
CURRENT RATIO = current assests current liabilities 2,905.40 3,966.91 0.732408852

The current ratio of Bajaj auto ltd is below 1 ,it also clearly indicates that the liabilities of the company are more than the current assets. The company will only be able to pay 0.73 rupees for liability of 1 rupee. QUICK RATIO:
QUIICK RATIO = Liquid Assets- inventories Current Liabilities

2905.4 -576.25 3,966.91 2,329.15 3,966.91

0.587144654

This is even further lower than the current ratio, if assets are to be encashed then the company has only 0.58 rupee for every 1 rupee liability
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ACTIVITY RATIO
INVENTORY TURNOVER RATIO = Cost of goods sold Average inventory

576.25 + 458.39 2 517.32

13,410.56 517.32 25.92314235

days of inventory holding = =

365/inventory turnover ratio 365 25.92314

14.08008443

DEBTORS TURNOVER RATIO

Net Credit Sales Average Debtors + Average B/R Debtors of the previous year + debtors of this year 2 341.61 + 238.52 2 290.065 16,962.11 290.065

= =

56

Average Stoc

Opening Stoc + Closing Stoc /2

58.47692759

Average collection period

= =

12 months or 365 days / Debtors Turnover Ratio 365 58.4769

6.241780943

CREDITORS TURNOVER RATIO

Net credit Purchases Average Creditors BY SCHEDULE (9) 1952.79 + 1576.33 2 1764.56

Average creditors schedule 9

11,804.46 1764.56 6.689747019

average payment period

12 months or 365 days / s Turnover Ratio 365 6.68974

54.56116381

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LEVERAGE RATIOS
DEBT RATIO = Total debt Total capital employed 347.45 5184.67 0.067014873

DEBT EQUITY RATIO

Total debt Share equity 347.45 4,807.22 0.0722767

COVERAGE RATIO
interest coverage ratio = EBIT interest charges

EBIT

(TOTAL EXPENSES

INT. CHARGE)

GROSS INCOME

= = INTEREST CHARGES = 3,738.04 123.89

( 13393.9 -

123.89) -

17,008.05

3,738.04 123.89 30.17224958

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PROFITABILITY RATIO
RETURN ON ASSETS = PAT/EBIT(1-T) ToTal ASSETS TOTAL +CURRENT LIABILITIES 5184.67 + 3966.91 9151.58 3,454.79 9151.58 0.377507491 37.75074905 * 100 * 100

TOTAL ASSETS = = PAT =

= =

RETURN ON CAPITAL EMPLOYED

EBIT(1-T) Capital employed

*100

3,454.79 5184.67 0.666347135 66.63471349 *100

= =

RETURN ON EQUITY

PAT NET WORTH

*100

3,454.79 4,807.22 0.718666922 71.86669218 59 *100

= =

ACTIVITY RATIO: Inventory turnover ratio:

Inventory turnover ratio is a measure of the firms efficiency in procuring storing and converting the product and selling. This ratio is determined in no. of days of holding inventories before the sales. It shows in how many days the inventory is converted into sales and brings sales and liquidity.

BAJAJ AUTOs is approx 14 to 15 days , they make orders according to the projected
demands . this ratio is comparatively a good ratio. One can say the vehicles are made once the order has been made. Debtors turnover ratio: Again their average collection period is only 6 days, that means most of their payments are made within a week. As we know in this segment the consumer pays cash or takes a loan where the bank pays instantly and hence the payment chain is fast. Where as they take around 55 days or a month to pay their suppliers which is according to the industry norms

LEVERAGE RATIO
Inventory turnover ratio is a measure of the firms efficiency in procuring storing and converting the product and selling. This ratio is determined in no. of days of holding inventories before the sales. It shows in how many days the inventory is converted into sales and brings sales and liquidity.

Debt ratio:
This indicates the total capital raised by the company to the total fund employed in that year, surprisingly BAJAJ AUTO has raised a small ratio of capital in the form of debt. The debt is 0.06% of the total funds.

DEBT EQITY RATIO:

This indictes the capital raised in a company to the net worth that is equity and reserves. At BAJAJ AUTO the debt is to less as compare to the equity funds. It also indicates that the company has a huge pool of reserves thereby indicating the dividened policy of the company and the owners capital volume.

INTERST COVERAGE RATIO

This ratio talks about the ability of the firm to pay interst. BAJAJ AUTO has 30 rupees for every 1 rupee of interest they have to pay. This is because of the fact that the company in the first place has borrowed very less debt.

PROFITABILITY RATIO:
This indicates the return in % form. Thers is around 37% return on the value of assets in the current year which is a very good return. And around 66% retuen on total fund employed and 70% return on equities. This shows the company is prospering and growing in real value

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REFERENCE
WEBSITES:
y y y y

www.rbi.org.in www.sebi.gov.in www.bseindia.com www.business.gov.in

BOOKS: Financial management by I M PANDEY FINANCIAL SERVICES markets and regulations by ANIL AGASHE Fundamentals of modern banking by N C MAJUMDAR

Research papers: Indias financial system by Franklin Allen (Finance Department -The Wharton School ) Rajesh
Chakrabarti (Finance Area - Indian School of Business) and Shankar D(Centre for Analytical Finance Indian School of Business )

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