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WORKING CAPITAL MANAGEMENT

REPORT ON SUMMER TRAINING AN OVERVIEW ON WORKING CAPITAL MANAGEMENT Submitted To Lovely Professional University In partial fulfillment of the Requirement for the award of Degree of BBA Submitted By:JAVAID AHMAD GANAIE BBA-MBA (Dual Int.) Roll No. RR1709A15 Reg. No. 3020070030 DEPARTMENT OF MANAGEMENT LOVELY PROFESSIONAL UNIVERSITY PHGWARA 2009

WORKING CAPITAL MANAGEMENT

DECLARATION I JAVAID AHMAD GANAIE, do hereby declare that the training report entitled An Overview on Working Capital Management submitted to LOVELY PROFESSINAL UNIVERSITY for the partial fulfillment of the requirement for the degree of BBA is one of my original work under the continuous guidance of LECT. GURPREET KAUR. I have not submitted this training report to any University for the award of any other degree.

JAVAID AHMAD GANAIE

WORKING CAPITAL MANAGEMENT

ACKNOWLEDGEMENT. Gratitude is not a thing of expression,; it is more, a matter of felling There is always a sense of gratitude which one expresses towards for their help and supervision in achieving the goals. It is my proud to privilege to have been inducted into JAMMU AND KASHMIR BANK LTD. at M.A Road Srinagar, a well known industry for the manufacturing of the spare parts. My words of thanks go to Mr.Altaf Ahmad, (Managing Director), for giving me the opportunity to do SUMMER TRAINING in his esteemed organization. I am also thank full to Mr. Sajid Ahmad, our training supervisors, and all the staff of Jammu & Kashmir Bank Limited, for their guidance, support, and co-operation extended to me. During the course of project. Special thanks to my guide who guided me to work honestly and gain knowledge in Summer Training. No words can express my feelings to my parents, friends whose cooperative attitude was the constant source of inspiration during the entire period of the project. I would like to thank to almighty GOD for his blessings showered on me during the completion of this project.

JAVAID AHMAD

WORKING CAPITAL MANAGEMENT

Contents 1. Execute Summary.6


2. Project & Objective...7 3. Profile of J&K Bank..8 4. Vision & Mission..9 5. History.10 6. Bank at Glance.13 7. Share Holding pattern..14 8. Unique Characteristics & Services.15 9. Products & Services15 10. Financial services & portfolio..18 11. Management.19 12. Awards & Accolades.20 13. Corporate Address21 14. Introduction.22 15. Working Capital Management.23 16. Need For WCM.24 17. Types of WCM.25

WORKING CAPITAL MANAGEMENT

18. Factors effecting WCM27 19. Operating & Cash Cycle..30 20. Reasons for Adequate WC..32 21. Management of WC34 22. Techniques for estimating WC requirement35 23. Approaches for determining the financial mix.38 24. Management of different components of WC39 25. Management of inventories.43 26. Management of Account Receivables47 27. Factors effecting the Receivables..50 28. Management of Account payables52 29. Overtrading & Undertrading.52

30. Undertrading.56
31. Sources of Working Capital..58 32. Regulation of Bank Finance..63 33. Small Scale Industries. 67 34. View of Managing Working Capital67 35. Observations Regarding WC..71 36. Key Working Capital Ratios..73 37. Performance Report75 38. Cash Credit Analysis & Computation In Jammu & Kashmir

Bank75
39. Assessment of WC80 40. Balance Sheet As on 31th March, 200982

41. Profit & Loss Account83 5

WORKING CAPITAL MANAGEMENT

42. WC Assessment in J&K Bank.84 43. Recommendations.87 44. Scanning of WC Financing in J&K bank..87 45. Estimation of WCM.89 46. Calculation of WC91 47. Know Ur customer guidelines Anti Money laundering Standards..93 49. RTGS in J&K bank105 50. NEFT105 52. News regarding J&K bank106 53. Bibliography.107

Executive summary Working capital management refers to the administration of all aspects of current assets, namely cash, marketable securities, debtors and stock (inventories) and current

WORKING CAPITAL MANAGEMENT

liabilities. The financial manager must determine levels and composition of current assets. He must see that right sources are tapped to finance current assets, and that current liabilities are paid in time. He must see that right sources are tapped to finance current assets, and that current liabilities are paid in time. There are many aspects of working capital management, which make it an important function of the financial manager:

Time: working capital management requires much of the financial managers time. Investment: working capital represents a large portion of the total investments in assets. Significance: working capital management has great significance for all firms but it is very critical for small firms. Growth: the need for working capital is directly related to the firms growth.

Investment in current assets represents a very significant portion of the total investment in assets. Working capital management is critical for all firms. A small firm may not have much investment in fixed assets, but it has to invest to in current assets. Small firms in India face a severe problem of collecting their debtors. Banks have their own policies to assess the working capital of the firm to finance them with the shortage. J&K Bank adopts certain method for financing their customers working capital requirements. There are certain recommendations from the committees for the banks to finance the working capital needs of their clients. It may, thus, be concluded that all precautions should be taken for the effective and efficient management of working capital. The finance manager should pay regular attention to the levels of current assets and the financing of current assets.

WORKING CAPITAL MANAGEMENT

PROJECT TITLE: Working capital management Project Objectives: To learn the effective management of working capital. To study how to keep the capital that is tied up in the working capital cycle at a minimum and maximizing profit. To study the different components of working capital and its impact on the performance of the firm. To study how J&K Bank finances working capital requirements of the firms.

Profile: Jammu & Kashmir Bank

WORKING CAPITAL MANAGEMENT

Birth Registered on 1st of October 1938 with an authorized capital of Rs 10.00 lakh and commenced business from 4th of July 1939. Childhood Registered on 1st of October 1938 with an authorized capital of Rs 10.00 lakh and commenced business from 4th of July 1939. After nationalization in 1969, the bank expanded rapidly. It now has more than 500 branches (as of 31st March 2009) all over India. The Bank has the largest network of branches by any Public sector bank in the state of Jammu & Kashmir. Adult The bank has fine tuned its services to cater to the needs of the common man and incorporated the latest technology in banking offering a variety of services. Banks Tagline Serving To Empower

WORKING CAPITAL MANAGEMENT

VISION To catalyze economic transformation and capitalize on growth.The bank aspires to make Jammu & Kashmir the most prosperous state in the country, by helping create a new financial architecture for the J&K economy, at the centre of which will be the J&K.

MISSION To provide the people of J&K international quality financial service and solutions and to be a super-specialist bank in the rest of the country.

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Company History: YEAR EVENTS1938 - The Jammu & Kashmir Bank Ltd was incorporated in 1938 to extend banking facilities in Jammu & Kashmir. - The bank was constituted as a government company under Companies Act 1956 and is functioning as bankers to the state government. 1993 - The Bank tied up with Reuter News Agency for instantaneous information about global foreign currency rates and fluctuations thereof. 1994 - The Bank tied up with Reuter News Agency for instantaneous information about global foreign currency rates and fluctuations thereof. 1995 - Banking Ombudsman Scheme was launched in June with a view to provide quick and inexpensive facility to resolve the grievances of banks' customers. - A loan delivery system was introduced in April to instil discipline in the utilization of bank credit especially by large borrowers. 1998 - Jammu and Kashmir Bank Ltd (J&K Bank) is coming out with a public issue of 1 85 00 000 equity shares of Rs.10 each for cash at a premium of Rs.28 per share aggregating Rs.70.30 crore. - A recovery drive was launched which included settlement of long outstanding loan accounts of chronic defaulters by outside court compromises. - Bank introduced a new term deposit scheme under the title "Jana Priya Jamma Yojna" carrying flexibility in the repayment schedule. - Housing Loan and Education Loan Schemes for general public have been introduced during the current financial year. 1999 - The bank entered into an agreement with IBA to connect its ATMs through a shared network. 2000 - Jammu and Kashmir Bank has tied up with Infosys Technologies to offer internet banking and for its e-commerce initiatives. - Jammu and Kashmir Bank is in talks with two foreign insurance companies for a joint venture for its insurance subsidiary to be floated by the year end. - Jammu and Kashmir Bank Ltd the Srinagar-based listed bank in the country tied up with Infosys Technologies Ltd. - Jammu and Kashmir Bank has tied up with American Express to launch a co-branded credit card. The J&K Bank American Express Credit card offers high value features including global validity balance transfer facility membership rewards and emergency cash.

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- The Bank will broaden its areas of diversification by getting into non-life insurance and depository business apart from life Insurance and asset management business following the recommendations of pricewaterhouse Coopers . 2001 - The Bank has launched J&K Bank - AMEX Co. Branded Credit Card pursuant to agreement entered with American Express Bank. - The Bank has tied up with the US-based insurance giant Metlife for the proposed foray in the insurance sector. 2002 -Jammu & Kashmir Bank Ltd has informed that following persons have ceased to be Directors of the Bank. Mr H S Anand and Mr M I Shahdad. Further the Company has informed that the following persons were appointed as Directors:Dr G Q Allaqaband and Mr D S Kandhari Further the following finance luminaries were reappointed as additional Directors of the Bank in the aforesaid Board Meeting.Dr A M Khusro Mr G P Gupta and Mr Vipin Malik. 2003 - Jammu and Kashmir Bank Ltd has informed the following change in the Board: 1) Mr G R Khan and Mr G M Dug have ceased to be directors of the bank at AGM held on June 02 2003.2) Mr Mohammad Yasin Mir and Mr B L Dogra have been appointed as directors on the Board at AGM held on June 02 2003.3) Dr A M Khusro Mr G P Gupta and Mr Vipin Malik have been appointed as Directors of bank on June 3 2003. -Jammu and Kashmir Bank has agreed to reduce the rate of interest rom 16 to 12% onvarious loans advanced to houseboat owners taxi and shikariwalas. -Dr Haseeb A Drabu consultant to the Economic Advisory Council of Prime Minister and presently the Economic Advisor to the government of J & K has been appointed as the Director of the Bank. -J & K Bank has informed that Mr D S Khandhari Director has ceased to be a directorto the bank on account of his resignation to the directorship. -Jammu and Kashmir Bank has strengthened its bonds with Infosys by successfully deploying Finacle Core Banking. -J & K bank has decided to launch Global Access Card ( an International Debit Card) in association with Master Card International. -Mr.J B Moria Mr J A Khan and Mr. A M Khusro were ceased to be the directors of the bank. -Mr Sudhakar Kaza General Manager National Clearing Centre RBI was appointed as the additional Director to the bank on the board. 2004 -J&K Bank slashes PLR to 11-pc -J&K Bank approves Rs 300-cr for Reliance Infocom -Jammu and Kashmir Bank ties up with ICICI Bank to share the ATM network -Jammu & Kashmir bank has received the Asian Banking Award 2004 in Manila for its customer convenience programme'. -J&K Bank signs MoU with Bajaj Tempo

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-Jammu & Kashmir Bank Ltd has informed that the following persons were appointed as Directors on the Board of the Bank at the Annual General Meeting of the Shareholders held on June 12 2004: 1. Dr Haseeb A Drabu 2. Mr Umar Khurshid Tramboo 3. Mr Munir-uddin Shawl -J & K Bank unveils international division in Srinagar -IDBI Bank ties up for Visa transactions with Jammu & Kashmir Bank to launch a platform for the state's merchant establishment. -JK Bank inks pact with Birla Power Solutions 2006 -Jammu & Kashmir Bank receives approval from RBI for increasing the FII's Holding. 2007 Jammu & Kashmir Bank Ltd has appointed Mr. M S Verma (Ex-Chairman State Bank of India) and Mr. G P Gupta (Ex-Chairman & Managing Director IDBI) as Directors of the Bank in the meeting of the Board of Directors held on June 09 2007. 2008 -Jammu & Kashmir Bank Ltd has appointed Mr. Ashok Kumar Mehta and Mr. Abdul Majid Mir Presidents as Executive Directors on the Board of Directors of the Bank w.e.f. May 01 2008 pursuant to the approval accorded by the Reserve Bank of India vide their letter dated April 30 2008. - Jammu & Kashmir Bank Ltd has informed that Mr. B L Dogra was reappointed as Director of the Bank at the 70th Annual General Meeting held on July 19 2008. Further the Bank has informed that Mr. M S Verma (Ex-Chairman State Bank of India) and Mr. G P Gupta (Ex-Chairman & Managing Director IDBI) were re-appointed as Directors of the Bank in the meeting of the Board of Directors held on July 19 2008.

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BANK AT A GLANCE Profile: Incorporated in 1938 as a limited liability company. Governed by companies Act and Banking regulation Act of India. Regulated by the Reserve bank of India and SEBI. Listed on National Stock Exchange (NSE) and Bombay Stock exchange (BSE). 53 per cent owned by the Govt. of J&K. Rated p1+ by standard and poor-CRISIL connecting highest degree of safety. Four decades of uninterrupted profitability and dividends.

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Share Holding pattern (as on 31-03-2009) S.NO 1 2 3 4 5 6 7 8 9 10 Particulars as on 31-03-2009 Govt .of Jammu & Kashmir Foreign institutional investors Resident individual Indian Mutual Funds Insurance companies Bodies corporate Non resident Indians Banks Transit / clearing members Trusts Percentage holding 53.17 27.79 14.32 1.71 1.27 1.26 0.40 0.03 0.03 0.02 of share

Unique Characteristics & Services 15

WORKING CAPITAL MANAGEMENT

J&K Bank carries out banking business of the Central Government Inspite of a government equity holding of 53 per cent, Jammu & Kashmir Bank J&K Bank is the one and only banker and lender of last resort to the Government Plan and non-plan funds, taxes and non-tax revenues are routed through the J&K J&K Bank claims the distinction of being the only private sector bank that has The services of J&K Bank are utilized for the purposes of disbursing the salaries J&K Bank collects taxes pertaining to Central Board of Direct Taxes, in Jammu &

(J&K Bank) is regarded as a private sector bank

of J&K

Bank

been designated as agent of RBI for banking

of Government officials

Kashmir Products & Services Support Services


Anywhere Banking Internet Banking SMS Banking ATM Services Debit Cards Credit Cards Merchant Acquiring

Depository Services

Demat Account Saving bank deposits Term deposits

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Current accounts Stock Broking Loan Products And Services Real Estate and Home Loans Education loans Automobile finance Consumer loans for various purposes, Consumption loans Personal loans to pensioners Mortgage loans for trade and service sectors Loans against mortgage of immovable property Specialized finance schemes and tax products and planning.

Third Party Services


Mutual Funds Insurance Services - Life & Non Life Remittance Services

Cash Management Services


Real Time Gross Settlement (RTGS) National Electronic Fund Transfer (NEFT)

Infrastructure: Global Standards

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The fastest growing bank with 550 branches across the country 98% of the business is computerized Anywhere Banking, Tele-Banking and SWIFT facilities available Internet Banking, SMS and Mobile Banking provided ATMs connected globally to all MasterCard networked ATMs Mobile ATM Service available first of its kind in Northern India J&K Bank Global Access Debit Cards: Cirrus and Maestro enabled Own credit card Live on RTGS System of RBI

Financial Services portfolio: One stop for all financial needs - Insurance joint venture with MetLife international Life insurance products of MetLife (India) Pvt. Limited Non-life insurance products of Bajaj Allianz General Insurance Co. Limited Offering UTI and Kotak Mutual Funds

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Providing Depository Services Offering Stock Broking services

- Collection agent for utility services provided by State and Private sector New Business Initiatives: Shaping ourselves to serve better. To meet the growing needs of the economy, in tune with the banking innovative financial products. Monetizing the Banks branch network. Third party products distribution. Investment Banking. Offshore Banking. competitive

MANAGEMENT Corporate Headquarter: The Corporate Headquarter of the Bank is located at Srinagar and is headed by Chairman and Chief Executive officer (CEO), who is appointed by the J&K Government for a period of 3 to 5 years. Generally, the Chairman is selected among reputed Economists, Bankers or/and the Administrators of the State. The Chairman is guided by the Board of Directors of the Bank. Board of Directors: Currently there are 8 members on the Board of Directors of the Bank, excluding Chief Executive Officer. The Board sits more than a dozen times in a year to review the business 19

WORKING CAPITAL MANAGEMENT

activities of the Bank. It also plans and regulates the future activities of the Bank through policy decisions and administrative guidelines. All the important decisions of the Bank have to be endorsed by the Board of Directors before their implementation. NAME OF THE BOARD OF DIRECTORS: 1.Haseeb A Drabu 2. M S Verma 3. G P Gupta 4. B B Vyas,IAS 5. Ashok Kumar Mehta 6. Abdul Majid Mir 7. B L Dogra Corporate Management: The Management of the Bank consists of the following three categories: Senior Management Middle Management Junior Management. Chairman & CEO Director Director Director Executive Director Executive Director Director

At the top of management, there is Chairman and Chief Executive Officer, who is followed by two Executive Directors and five Presidents. The Presidents are followed by 20 Vice Presidents, who in turn are followed by the Senior Executive Managers. The Senior Executive Managers are assisted by the Executive Managers. In the Middle Management, there are Senior Executives and Executives and in the Junior Management there are Associate Executives. AWARDS AND ACCOLADES

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In recognition of its excellent customer service, fair business practices, overall operational efficiency, overall performance, etc the bank has been felicitated by the following awards during the last few years: Asian Banking Awards 2004 No. 1 Bank in India _ ET _ CMIE Survey 98-99 The Best Bank - Rediff.com & PWC Survey Indias Fastest Growing Bank Business Standard Excellence Award Institute of Economic Studies Ranked as No. 1 on Safety Parameters Business Standard Survey Ranked as No. 2 on Profitability front _ Business Standard Survey Jamnalal Bajaj Uchit Vyavahar Puraskar 2002 Council for Fair Business Practices dated 26th March 2003. Best Private Sector Bank Award- Financial Express, Presented by Dr. Bimal Jalan, Governor, Reserve Bank of India on 4th April 2003. Best Universal Bank Award - Financial Express, Presented by Dr. Bimal Jalan, Governor, Reserve Bank of India on 4th April 2003 Ranked 87th among Indias Top 500 Companies by worlds renowned rating agency DUN & BRADSTREET Asian Banking Award 2004 for the Customer Convenience programme.

CORPORATE ADDRESS The Jammu and Kashmir Bank Limited Profile:Founded. . 1938 Headquarters Srinagar, India

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Number of locations> 577 branches/offices Atm = 300 Area served . Mostly J & K Industry Financial, Commercial banks Revenue Employees Website Phone:............................................. 20,595,000,000 (2007) 7267 http://www.jkbank.net (+91-0194) -2481930-2481935

INTRODUCTION Financial Management is that managerial activity which is concerned with the planning and controlling of the firms financial resources. Financial management focuses on finance manager performing various tasks as Budgeting, Financial Forecasting, Cash Management, Credit Administration, Investment Analysis, Funds Management, etc. which help in the process of decision making.

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The management of fixed and current assets, however, differs in three important ways: Firstly, in managing fixed assets, time is very important; consequently discounting and compounding aspects of time element play an important role in capital budgeting and a minor one in the management of current assets. Secondly, the large holdings of current assets, especially cash, strengthen firms liquidity position but it also reduces its overall profitability. Thirdly, the level of fixed as well as current assets depends upon the expected sales, but it is only the current assets, which can be adjusted with sales fluctuation in the short run. Here, we will be focusing mainly on management of current assets and current liabilities. Management of current assets needs to seek an answer to the following question: 1. Why should you invest in current assets? 2. How much should be invested in each type of current assets? 3. What should be the proportion of short term and long-term funds to finance 4. What sources of funds should be used to finance current assets? the current assets?

WORKING CAPITAL MANAGEMENT Working Capital Management is the process of planning and controlling the level and mix of current assets of the firm as well as financing these assets. Specifically, Working Capital Management requires financial managers to decide what quantities of cash, other liquid assets, accounts receivables and inventories the firm will hold at any point of time.

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Working capital is the capital you require for the working i.e. functioning of your business in the short run. CONCEPT OF WORKING CAPITAL There are two concepts of working capital: (1)Gross Working Capital (2)Net Working Capital 1.Gross working capital It refers to the firms investment in the current assets and includes cash, short term securities, debtors, bills receivables and inventories. It is necessary to concentrate on the fact that the investment in the current assets should be neither excessive nor inadequate. WC requirement of a firm keeps changing with the change in the business activity and hence the firm must be in a position to strike a balance between them. The financial manager should know where to source the funds from, in case the need arise and where to invest in case of excess funds.

2.Net working capital It refers to the difference between the current assets and the current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year and include creditors, bills payable, bank overdraft and outstanding expenses. When current assets exceed current liabilities it is called Positive WC and when current liabilities exceed current assets it is called Negative WC. 24

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The Net WC being the difference between the current assets and current liabilities is a qualitative concept. It indicates: The liquidity position of the firm Suggests the extent to which the WC needs may be financed by permanent sources of funds It is a normal practice to maintain a current ratio of 2:1. Also, the quality of current assets is to be considered while determining the current ratio. On the other hand a weak liquidity position poses a threat to the solvency of the company and implies that it is unsafe and unsound. The Net WC concept also covers the question of judicious mix of long term and short-term funds for financing the current assets.

NEED FOR WORKING CAPITAL The basic objective of financial management is to maximize shareholders wealth. This is possible only when the company earns sufficient profit. The amount of such profit largely depends upon the magnitude of sales. However, sales do not convert into cash instantaneously. There is always time gap between the sale of goods and receipt of cash.

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Working capital is required for this period in order to sustain the sales activity. TYPES OF WORKING CAPITAL Working Capital can be divided into two categories on the basis of time: 1. Permanent working capital 2. Temporary or Variable working capital 1. PERMANENT WORKING CAPITAL:This refers to that minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities. It represents the current assets required on a continuing basis over the entire year. Tandon committee has referred to this type of working capital as core current assets.

The following are the characteristics of this type of working capital:1. Amount of permanent working capital remains in the business in one form or another. This is particularly important from the point of view of financing. The suppliers of such working capital should not expect its return during the lifetime of the firm. 2. It also grows with the size of the business. Permanent working capital is permanently needed for the business and therefore it should be financed out of long-term funds. This is the reason why the current ratio has to be substantially more than 1. 26

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2.TEMPORARY OR VARIABLE WORKING CAPITAL:The amount of such working capital keeps on fluctuating from time to time on the basis of business activities. In other words, it represents additional current assets required at different times during the operating year.

Temporary

Amount of working Capital (Rs.) Time

permanent

Temporary

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Amount of working Capital (Rs.)

permanent

Time

FACTORS INFLUENCING THE WORKING CAPITAL

REQUIREMENT

All firms do not have the same WC needs .The following are the factors that affect the WC needs: 1. Nature and size of business: The WC requirement of a firm is closely related to the nature of the business. We can say that trading and financial firms have very less investment in fixed assets but require a large sum of money to be invested in WC. On the other hand Retail stores, for example, have to carry large stock of variety of goods little investment in the fixed assets. Also a firm with a large scale of operations will obviously require more WC than the smaller firm. The following table shows the relative proportion of investment in current assets and fixed assets for certain industries:

Current assets (%) 10-20 20-30 30-40 40-50 50-60 60-70

Fixed assets (%) 80-90 70-80 60-70 50-60 40-30 30-40

Industries Hotel and restaurants Electricity generation and Distribution Aluminum, Shipping Iron and Steel, basic industrial chemical Tea plantation Cotton textiles and Sugar 28

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70-80 80-90

20-30 10-20

Edible oils, Tobacco Trading, Construction

2. Manufacturing cycle: It starts with the purchase and use of raw materials and completes with the production of finished goods. Longer the manufacturing cycle larger will be the WC requirement; this is seen mostly in the industrial products. 3. Business fluctuation: When there is an upward swing in the economy, sales will increase also the firms investment in inventories and book debts will also increase, thus it will increase the WC requirement of the firm and vice-versa. 4. Production policy: To maintain an efficient level of production the firms may resort to normal production even during the slack season. This will lead to excess production and hence the funds will be blocked in form of inventories for a long time, hence provisions should be made accordingly. Since the cost and risk of maintaining a constant production is high during the slack season some firms may resort to producing various products to solve their capital problems. If they do not, then they require high WC. 5. Firms Credit Policy: If the firm has a liberal credit policy its funds will remain blocked for a long time in form of debtors and vice-versa. Normally industrial goods manufacturing will have a liberal credit policy, whereas dealers of consumer goods will a tight credit policy. 6. Availability of Credit: If the firm gets credit on liberal terms it will require less WC since it can always pay its creditors later and vice-versa. 7. Growth and Expansion Activities: It is difficult precisely to determine the relationship between volume of sales and need for WC. The need for WC does not follow the growth but precedes it. Hence, if the firm is planning to increase its business activities, it needs to plan its WC requirements during the growth period. 8. Conditions of Supply of Raw Material: If the supply of RM is scarce the firm may need to stock it in advance and hence need more WC and vice-versa.

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9. Profit Margin and Profit Appropriation: A high net profit margin contributes towards the WC pool. Also, tax liability is unavoidable and hence provision for its payment must be made in the WC plan, otherwise it may impose a strain on the WC. Also if the firms policy is to retain the profits it will increase their WC, and if they decide to pay their dividends it will weaken their WC position, as the cash will flow out. However this can be avoided by declaring bonus shares out of past profits. This will help the firm to maintain a good image and also not part with the money immediately, thus not affecting the WC position. Depreciation policy of the firm, through its effect on tax liability and retained earning, has an influence on the WC. The firm may charge a high rate of depreciation, which will reduce the tax payable and also retain more cash, as the cash does not flow out. If the dividend policy is linked with net profits, the firm can pay fewer dividends by providing more depreciation. Thus depreciation is an indirect way of retaining profits and preserving the firms WC position.

OPERATING CYCLE AND CASH CYCLE All business firms aim at maximizing the wealth of the shareholder for which they need to earn sufficient return on their operations. To earn sufficient profits they need to do

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enough sales, which further necessitates investment in current assets like raw materiel etc. There is always an operating cycle involved in the conversion of sales into cash. The duration of time required to complete the following sequences of events in case of a manufacturing firm is called the operating cycle:1. Conversion of cash into raw material 2. Conversion of raw material into WIP 3. Conversion of WIP into FG 4. Conversion of FG into debtors and bills receivable through sales 5. Conversion of debtors and bills receivable into cash Each component of working capital namely inventory, receivables and payables has two dimensions time and money. When it comes to managing working capital - Time Is Money. Therefore, if cash is tight, consider other ways of financing capital investment loans, equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are cash outflows remove liquidity from the business.

If YOU Collect receivables (debtors) faster

Then ...... You release cash from the cycle

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Collect receivables (debtors) slower Get better credit from suppliers

Your receivables soak up cash You increase your cash resources

Shift inventory (stocks) faster Move inventory (stocks) slower

You free up cash You consume more cash

Accounts Receivable

Cash

Finished goods

Raw materials

WIP

OPERATING CYCLE

Operating

Cycle

Of

Non

Manufacturing

Firms

Operating

Cycle

Of

Service And Financial Firms

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DEBTORS

CASH CASH STOCK OF FINISHED GOODS DEBTORS

Operating cycle of non-manufacturing firm like the wholesaler and retail includes conversion of cash into stock of finished goods, stock of finished goods into debtors and debtors into cash. Also the operating cycle of financial and service firms involves conversion of cash into debtors and debtors into cash. Thus we can say that the time that elapses between the purchase of raw material and collection of cash for sales is called operating cycle whereas time length between the payment for raw material purchases and the collection of cash for sales is referred to as cash cycle. The operating cycle is the sum of the inventory period and the accounts receivables period, whereas the cash cycle is equal to the operating cycle less the accounts payable period.

STOCK ARRIVES ORDER PLACED

CASH RECD. A/CS REC. PERIOD 33

INV. PERIOD

WORKING CAPITAL MANAGEMENT

A/CS Pay. Period

FIRM REC. INVOICE

CASH Pd. FOR MATERIALS

OPERATING CYCLE

CASH CYCLE Cash cycle

REASONS FOR ADEQUATE WORKING CAPITAL A firm must have adequate working capital, i.e., as much as needed by the firm. It should neither have excessive nor inadequate. Both situations are dangerous. Excessive working capital means the firm has idle funds, which earn no profit for the firm. Inadequate working capital means the firm does not have sufficient funds for running its operations, which ultimately results in production interruptions, and lowering down the profitability.

It will be interesting to understand the relation between working capital, risk and return. In a manufacturing concern, it is generally accepted that higher levels of working capital decrease the risk and decrease the profitability too.

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While lower levels of working capital increase the risk but have the potentiality of increasing the profitability also. This principle is based on the following assumptions: (i) There is direct relationship between risk and profitability --- higher is the risk, higher is the profitability, while lower is the risk, lower is the profitability. (ii) Current assets are less profitable than fixed assets. (iii) Short-term funds are less expensive than long-term funds.

MANAGEMENT OF WORKING CAPITAL Working capital Management refers to all aspects of the administration of both current assets and current liabilities. In other words, working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationships that exist between them. Moreover, different components of working capital are to be properly balanced in such a way that during one complete production or trade cycle the cash should be available for purchase of fresh material and for running the business including operating expenses, after realization of sale proceeds of earlier cycle without any hurdles. In the absence of such situation, the financial position in respect of the firms liquidity may not be satisfactory in spite of satisfactory liquidity ratio. Working capital management policy have a great effect on firms profitability, liquidity and its structural health. A finance manager should therefore, chalk out appropriate working capital management policies in respect of each of the components of working capital so as to ensure higher profitability, proper liquidity and sound structural health of the organization. 35

WORKING CAPITAL MANAGEMENT

In order to achieve this objective the finance manager has to perform basically following two functions: 1) Estimating the amount of working capital. 2) Sources from which these funds have to be raised. ESTIMATING WORKING CAPITAL REQUIREMENTS In order to determine the amount of working capital needed by a firm, a number of factors viz. production policies, nature of business, length of manufacturing process, rapidity of turnover, seasonal fluctuations, etc. are to be considered by the finance manager.

TECHNIQUES FOR ASSESSMENT OF WORKING CAPITAL REQUIREMENTS

1.

ESTIMATION OF COMPONENTS OF WORKING CAPITAL METHOD: Since working capital is the excess of current assets over current liabilities, an assessment of the working capital requirements can be made by estimating the amounts of different constituents of working capital e.g., inventories, accounts receivable, cash, accounts payable, etc.

2. PERCENT OF SALES APPROACH:This is a traditional and simple method of estimating working capital requirements. According to this method, on the basis of past experience between sales and working capital requirements, a ratio can be determined for estimating the working capital requirements in future.

3. OPERATING CYCLE APPROACH: -

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According to this approach, the requirements of working capital depend upon the operating cycle of the business. The operating cycle begins with the acquisition of raw materials and ends with the collection of receivables It may be broadly classified into the following four stages viz. 1. Raw materials and stores storage stage. 2. Work-in-progress stage. 3. Finished goods inventory stage. 4. Receivables collection stage. The duration of the operating cycle for the purpose of estimating working capital requirements is equivalent to the sum of the durations of each of these stages less the credit period allowed by the suppliers of the firm. Symbolically the duration of the working capital cycle can be put as follows: O=R+W+F+D-C Where, O=Duration of operating cycle; R=Raw materials and stores storage period; W=Work-in-progress period; F=Finished stock storage period; D=Debtors collection period; C=Creditors payment period. Each of the components of the operating cycle can be calculated as follows:-

R=

Average stock of raw materials and stores Average raw materials and stores consumptions per day

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W=

Average work-in-progress inventory Average cost of production per day

D=

Average book debts Average credit sales per day

C=

Average trade creditors Average credit purchases per day

After computing the period of one operating cycle, the total number of operating cycles that can be computed during a year can be computed by dividing 365 days with number of operating days in a cycle. The total expenditure in the year when year when divided by the number of operating cycles in a year will give the average amount of the working capital requirement.

APPROACHES FOR DETERMINING THE FINANCING MIX There are three basic approaches for determining the working capital financing mix.

(i) THE HEDGING APPRAOCH:38

WORKING CAPITAL MANAGEMENT

According to this approach, the maturity of source of funds should match the nature of assets to be financed. The approach is, therefore, termed as Matching approach. It divides requirements of total working capital funds into two categories. a) Permanent working capital, i.e., funds required for purchase of core current assets. Such funds do not vary over time. b) Temporary or seasonal working capital, i.e., funds which fluctuate over time.

The permanent working capital requirements should be financed by long-term funds while the seasonal working capital requirements should be financed out of short-term funds.

(ii) THE CONSERVATIVE APPROACH: According to this approach all requirements of funds should be met from long-term sources. The short-term sources should be used only for emergency requirements. The conservative approach is less risky, but more costly as compared to the hedging approach. In other words conservative approach is low profit-low risk (or high cost, high net working capital) while hedging approach results in high profit-high risk (or low cost, low net working capital).

(iii) TRADE-OFF BETWEEN HEDGING AND CONSERVATIVE APPROACH: -

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The hedging and conservative approaches are both on two extremes. Neither of them can therefore help in efficient working capital management. A trade-off between these two can give satisfactory results. The level of such trade-off will differ from case to case depending upon perception of the risk by the persons involved in financial decision-making. However, one way of determining the level of trade-off is by finding the average of the minimum and the maximum requirements of working capital during a period. The average working capital so obtained may be financed by long-term funds and the balance by short-term funds.

MANAGEMENT OF DIFFERENT COMPONENTS OF WORKING CAPITAL Working capital management involves management of different components of working capital such as cash, inventories, accounts receivable, creditors, etc

MANAGEMENT OF CASH It is the duty of the finance manager to provide adequate cash to all segments of the organization. He also has to ensure that no funds are blocked in idle cash since this will involve cost in terms of interest to the business. A sound cash management scheme, therefore, maintains the balance between the twin objectives of liquidity and cost.

Meaning of cash The term cash with reference to cash management is used in two senses. In a narrower sense it includes coins, currency notes, cheques, bank drafts held by a firm with it and the demand deposits held by it in banks. In a broader sense it also includes near-cash assets such as, marketable securities and time deposits with banks. Such securities or deposits can immediately be sold or converted 40

WORKING CAPITAL MANAGEMENT

into cash if the circumstances require. The term cash management is generally used for management of both cash and near-cash assets.

Motives for holding cash A distinguishing feature of cash as an asset, irrespective of the firm in which it is held, is that it does not earn any substantial return for the business. In spite of this fact cash is held by the firm with following motives.

1. Transaction motive A firm enters into a variety of business transactions resulting in both inflows and outflows. In order to meet the business obligation in such a situation, it is necessary to maintain adequate cash balance. Thus, cash balance is kept by the firms with the motive of meeting routine business payments.

2.Precautionary motive A firm keeps cash balance to meet unexpected cash needs arising out of unexpected contingencies such as floods, strikes, presentment of bills for payment earlier than the expected date, unexpected slowing down of collection of accounts receivable, sharp increase in prices of raw materials, etc. The more is the possibility of such contingencies more is the cash kept by the firm for meeting them. 3.Speculative motive A firm also keeps cash balance to take advantage of unexpected opportunities, typically outside the normal course of the business. Such motive is, therefore, of purely a speculative nature.

4.Compensation motive

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Banks provide certain services to their clients free of charge. They, therefore, usually require clients to keep a minimum cash balance with them, which help them to earn interest and thus compensate them for the free services so provided. Business firms normally do not enter into speculative activities and, therefore, out of the four motives of holding cash balances, the two most important motives are the compensation motive.

Objectives of cash management There are two basic objectives of cash management: 1. To meet the cash disbursement needs as per the payment schedule; 2. To minimize the amount locked up as cash balances.

1.Meeting cash disbursements The first basic objective of cash management is to meet the payments Schedule. In other words, the firm should have sufficient cash to meet the various requirements of the firm at different periods of times. The business has to make payment for purchase of raw materials, wages, taxes, purchases of plant, etc. The business activity may come to a grinding halt if the payment schedule is not maintained. Cash has, therefore, been aptly described as the oil to lubricate the ever-turning wheels of the business, without it the process grinds to a stop.

2.minimizing funds locked up as cash balances The second basic objective of cash management is to minimize the amount locked up as cash balances. In the process of minimizing the cash balances, the finance manager is

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confronted with two conflicting aspects. A higher cash balance ensures proper payment with all its advantages. But this will result in a large balance of cash remaining idle. Low level of cash balance may result in failure of the firm to meet the payment schedule. The finance manager should, therefore, try to have an optimum amount of cash balance keeping the above facts in view.

MANAGEMENT OF INVENTORIES Inventories are good held for eventual sale by a firm. Inventories are thus one of the major elements, which help the firm in obtaining the desired level of sales.

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Kinds of inventories Inventories can be classified into three categories. (i) Raw materials: These are goods, which have not yet been committed to production in a manufacturing firm. They may consist of basic raw materials or finished components. (ii) Work-in-progress: This includes those materials, which have been committed to production process but have not yet been completed. (iii) Finished goods: These are completed products awaiting sale. They are the final output of the production process in a manufacturing firm. In case of wholesalers and retailers, they are generally referred to as merchandise inventory.

The levels of the above three kinds of inventories differ depending upon the nature of the business.

Benefits of holding inventories Holding of inventories helps a firm in separating the process of purchasing, producing and selling. In case a firm does not hold sufficient stock of raw materials, finished goods, etc., the purchasing would take place only when the firm receives the order from a customer. It may result in delay in executing the order because of difficulties in obtaining/ procuring raw materials, finished goods, etc. thus inventories provide cushion so that the purchasing, production and sales functions can proceed at optimum speed.

The specific benefits of holding inventories can be put as follows: 44

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(i) Avoiding losses of sales If a firm maintains adequate inventories it can avoid losses on account of losing the customers for non-supply of goods in time. (ii) Reducing ordering cost The variable cost associated with individual orders, e.g., typing, checking, approving and mailing the order, etc., can be reduced if a firm places a few large orders than numerous small orders. (iii) Achieving efficient production runs Maintenance of large inventories helps a firm in reducing the set-up cost associated with each production run.

Risks and costs associated with inventories Holding of inventories exposes the firm to a number of risks and costs. Risk of holding inventories can be put as follows: (i) Price decline This may be due to increase in the market supply of the product, introduction of a new competitive product, price cutting by the competitors, etc. (ii) Product deterioration This may due to holding a product for too long a period or improper storage conditions. (iii) Obsolescence This may be due to change in customers taste, new production technique, improvements in the product design, specifications, etc.

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The costs of holding inventories are as follows: (i) Materials cost This includes the cost of purchasing the goods, transportation and handling charges less any discount allowed by the supplier of the goods. (ii) Ordering cost This includes the variable cost associated with placing an order for the goods. The fewer the orders, the lower will be the ordering costs for the firm.

(iii) Carrying cost This includes the expenses for storing the goods. It comprises storage costs, insurance costs, spoilage costs, cost of funds tied up in inventories, etc. Management of inventory Inventories often constitute a major element of the total working capital and hence it has been correctly observed, good inventory management is good financial management. Inventory management covers a large number of issues including fixation of minimum and maximum levels; determining the size of the inventory to be carried ; deciding about the issue price policy; setting up receipt and inspection procedure; determining the economic order quantity; providing proper storage facilities, keeping check on obsolescence and setting up effective information system with regard to the inventories. However, management inventories involves two basic problems: (i) (ii) Maintaining a sufficiently large size of inventory for efficient and smooth production and sales operations; Maintaining a minimum investment in inventories to minimize the direct-indirect costs associated with holding inventories to maximize

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the profitability. Inventories should neither be excessive nor inadequate. If inventories are kept at a high level, higher interest and storage costs would be incurred. On the other hand, a low level of inventories may result in frequent interruption in the production schedule resulting in underutilization of capacity and lower sales. The objective of inventory management is, therefore, to determine and maintain the optimum level of investment in inventories, which help in achieving the following objectives: (i) (ii) (iii) (iv) (v) Ensuring a continuous supply of materials to production department facilitating uninterrupted production. Maintaining sufficient stock of raw material in periods of short supply. Maintaining sufficient stock of finished goods for smooth sales operations. Minimizing the carrying costs. Keeping investment in inventories at the optimum level.

MANAGEMENT OF ACCOUNTS RECEIVABLES Accounts receivables (also properly termed as receivables) constitute a significant portion of the total currents assets of the business next after inventories. They are a direct consequences of trade credit which has become an essential marketing tool in modern business.

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When a firm sells goods for cash, payments are received immediately and, therefore, no receivables are credited. However, when a firm sells goods or services on credit, the payments are postponed to future dates and receivables are created. Usually, the credit sales are made on open account, which means that, no, formal acknowledgements of debt obligations are taken from the buyers. The only documents evidencing the same are a purchase order, shipping invoice or even a billing statement. The policy of open account sales facilities business transactions and reduces to a great extent the paper work required in connection with credit sales. Meaning of receivables Receivables are assets accounts representing amounts owed to the firm as a result of sale of goods / services in the ordinary course of business. They, therefore, represent the claims of a firm against its customers and are carried to the assets side of the balance sheet under titles such as accounts receivables, customer receivables or book debts. They are, as stated earlier, the result of extension of credit facility to then customers a reasonable period of time in which they can pay for the goods purchased by them.

Purpose of receivables Accounts receivables are created because of credited sales. Hence the purpose of receivables is directly connected with the objectives of making credited sales. The objectives of credited sales are as follows: (i) Achieving growth in sales: If a firm sells goods on credit, it will generally be in a position to sell more goods than if it insisted on immediate cash payments. This is because many customers are either not prepared or not in a position to pay cash when they purchase the goods. The firm can sell goods to such customers, in case it resorts to credit sales.

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(ii) Increasing profits: Increase in sales results in higher profits for the firm not only because of increase in the volume of sales but also because of the firm charging a higher margin of profit on credit sales as compared to cash sales.

(iii) Meeting competition: A firm may have to resort to granting of credit facilities to its customers because of similar facilities being granted by the competing firms to avoid the loss of sales from customers who would buy elsewhere if they did not receive the expected output. The overall objective of committing funds to accounts receivables is to generate a large flow of operating revenue and hence profit than what would be achieved in the absence of no such commitment. Costs of maintaining receivables The costs with respect to maintenance of receivables can be identified as follows: 1. Capital costs: Maintenance of accounts receivables results in blocking of the firms financial resources in them. This is because there is a time lag between the sale of goods to customers and the payments by them. The firm has, therefore, to arrange for additional funds top meet its own obligations, such as payment to employees, suppliers of raw materials, etc., while awaiting for payments from its customers. Additional funds may either be raised from outside or out of profits retained in the business. In both the cases, the firm incurs a cost. In the former case, the firm has to pay interest to the outsider while in the latter case, there is an opportunity cost to the firm, i.e., the money which the firm could have earned otherwise by investing the funds elsewhere. 2. Administrative costs: The firm has to incur additional administrative costs for maintaining accounts receivable in the form of salaries to the staff kept for maintaining accounting records

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relating to customers, cost of conducting investigation regarding potential credit customers to determine their creditworthiness, etc.

3. Collection costs: The firm has to incur costs for collecting the payments from its credit customers. Sometimes, additional steps may have to be taken to recover money from defaulting customers. 4. Defaulting costs: Sometimes after making all serious efforts to collect money from defaulting customers, the firm may not be able to recover the over dues because of the of the inability of the customers. Such debts are treated as bad debts and have to be written off since they cannot be realized.

Factors affecting the size of receivables The size of the receivable is determined by a number of factors. Some of the important factors are as follows: (1) Level of sales: This is the most important factor in determining the size of accounts receivable. Generally in the same industry, a firm having a large volume of sales will be having a larger level of receivables as compared to a firm with a small volume of sales. Sales level can also be used for forecasting change in accounts receivable. (2) Credited policies: The term credit policy refers to those decision variables that influence the amount of trade credit, i.e., the investment in receivables. These variables include the quantity of trade accounts to be accepted, the length of the credit period to be extended, the cash discount to be given and any special terms to be offered depending upon particular

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circumstances of the firm and the customer. A firms credit policy, as a matter of fact, determines the amount of risk the firm is willing to undertake in its sales activities. If a firm has a lenient or a relatively liberal credit policy, it will experience a higher level of receivables as compared to a firm with a more rigid or stringent credit policy. This is because of two reasons: (i) A lenient credit policy encourages even the financially strong customers to make delays in payments resulting in increasing the size of the accounts receivables; (ii) Lenient credit policy will result in greater defaults in payments by financially weak customers thus resulting in increasing the size of receivables.

(3) Terms of trade: The size of the receivables is also affected by terms of trade (or credit terms) offered by the firm. The two important components of the credit terms are: (i) (ii) Credit period; Cash discount.

(i) Credit period: The term credit period refers to the time duration for which credit is extended to the customers. It is generally expressed in terms of net days. For example, If a firms credit terms are net 15, it means the customers are expected to pay within 15 days from the date of credit sale.

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(ii) Cash discount: Most firms offer cash discount to their customers for encouraging them to pay their dues before the expiry of the credit period. The terms of the cash discounts indicate the rate of discount as well as the period for which the discount has been offered.

MANAGEMENT OF ACCOUNTS PAYABLE Management of accounts payable is as much important as management of accounts receivable. There is a basic difference between the approach to be adopted by the finance manager in the two cases. Whereas the underlying objective in case of accounts receivable is to maximize the acceleration of the collection process, the objective in case of accounts payable is to slow down the payments process as much as possible. But it should be noted 52

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that the delay in payment of accounts payable may result in saving of some interest costs but it can prove very costly to the firm in the form of loss credit in the market. The finance manager has, therefore, to ensure that the payments after obtaining the best credit terms possible.

OVERTRADING AND UNDERTRADING The concepts of overtrading and undertrading are intimately connected with the net working capable position of the business. To be more precise they are connected with the cash position of the business.

OVERTRADING: Overtrading means an attempt to maintain or expand scale of operations of the business with insufficient cash resources. Normally, concerns having overtrading have a high turnover ratio and a low current ratio. In a situation like this, the company is not in a position to maintain proper stocks of materials, finished goods, etc., and has to depend on the mercy of the suppliers to supply them goods at the right time. It may also not be able to extend credit to its customers, besides making delay in payment to the creditors. Overtrading has been amply described as overblowing the balloon. This may, therefore, prove to be dangerous to the business since disproportionate increase in the operations of the business without adequate resources may bring its sudden collapse.

CAUSES OF OVERTRADING The following may be the causes of over-trading: (i) Depletion of working capital: Depletion of working capital ultimately results in depletion of cash resources. Cash resources of the company may get depleted by premature repayment of long-term loans,

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excessive drawings, dividend payments, purchase of fixed assets and excessive net trading losses, etc. (ii) Faulty financial policy: Faulty financial policy can result in shortage of cash and overtrading in several ways: (a) Using working capital for purchase of fixed assets. (b) Attempting to expand the volume of the business without raising the necessary resources, etc.

(iii) Over-expansion: In national emergencies like war, natural calamities, etc., a firm may be required to produce goods on a larger scale. Government may pressurize the manufacturers to increase the volume of production without providing for adequate finances. Such pressure results in over-expansion of the business ignoring the elementary rules of sound finance. (iv) Inflation and rising prices: Inflation and rising prices make renewals and replacements of assets costlier. The wages and material costs also rise. The manufacturer, therefore, needs more money even to maintain the existing level of activity. (v) Excessive taxation: Heavy taxes result in depletion of cash resources at a scale higher than what is justified. The cash position is further strained on account of efforts of the company to maintain reasonable dividend rates for their shareholders. CONSEQUENCES OF OVERTRADING

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The consequences of over-trading can be summarized as follows: (i) Difficulty in paying wages and taxes: This is one of the most dangerous consequences of overtrading. Non-payments of wages in time create a feeling of uncertainty, insecurity and dissatisfaction in all ranks of the labour. Non-payments of taxes in time may result in bringing down the reputation of the company considerably in the business and government circles. (ii) Costly purchases: The company has to pay more for its purchases on account of its inability to have proper bargaining, bulk buying and selecting proper source of supplying quality materials. (iii) Reduction in sales: The company may have to suffer in terms of sales because the pressure for cash requirements may force it to offer liberal cash discounts to debtors for prompt payments, as well as selling goods at throwaway prices. (iv) Difficulties in making payments: The shortage of cash will force the company to persuade its creditors to extend credit facilities to it. Worry, anxiety and fear will be the managements constant companions. (v) Obsolete plant and machinery: Shortage of cash will force the company to delay even the necessary repairs and renewals. Inefficient working, unavoidable breakdowns will have an adverse effect both on volume of production and rate of profit.

Symptoms and remedies for overtrading The situation of overtrading should be remedied at the earliest possible opportunity, i.e., as soon as its first symptoms are visible.

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The symptoms can be put as follows: (a) A higher increase in the amount of creditors as compared to debtors. This is because of firms inability to pay its creditors in time and exercising of undue pressure on debtors for payments; (b) Increased bank borrowing with corresponding increase in inventories; (c) Purchase of fixed assets out of short-term funds; (d) A fall in the working capital turnover (working capital/sales) ratio. (e) A low current ratio and high turnover ratio.

The cure for overtrading is easier to prescribe but difficult to follow. The cure is simplereduce the business or increase finance. Both are difficult. However, arrangement of more finance is better. If this is not possible, the only advisable course left will be to sell the business as a going concern.

UNDERTRADING: It is the reverse of overtrading. It means improper and underutilization of funds lying at the disposal of the undertaking. In such a situation the level of trading is low as compared to the capital employed in the business. It results in increase in the size of inventories, book debts and cash balances. Undertrading is a matter of fact an aspect of overcapitalization. The basic cause of undertrading is, therefore, underutilization of the firms resources. Such underutilization may be due any one or more of the following causes:

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Conservative policies followed by the management; Non-availability or shortage of basic facilities necessary for production such as, raw materials, power, labour, etc; General depression in the market resulting in fall in the demand of companys products;

The symptoms of undertrading are the following: (i) (ii) (iii) A very high current ratio; Low turnover ratios; An increase in working capital turnover (working capital/ sales) ratio.

Consequences of undertrading The following are the consequences of undertrading: (i) The profits of the firm show a declining trend resulting in a lower return on capital employed (ROI) in the business. (ii) The value of the shares of the company on the stock exchange starts falling on account of lower profitability; (iii) There is loss to the reputation of the firm on account of lower profitability and creation of impression in the minds of investors that the management is inefficient.

Remedies for undertrading The condition of undertrading is set in because of underutilization of the firms resources. The situation can, therefore, be remedied by the management by adopting a more dynamic and result-oriented approach. The firm may go for diversification and

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undertaking new profitable jobs, projects, etc., resulting in a better and efficient utilization of the firms resources.

SOURCES OF WORKING CAPITAL The working capital requirements should be met both from short-term as well long-term sources of funds. Sources of long term financing are shares, debentures, preference share, retained earnings and debt from financial institution, sources of short term finance include bank loans, commercial papers and factoring receivables Its will be appropriate to meet at least 2/3rd (if not the whole) of the permanent working capital requirements from long-term sources and only for the period needed.

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The financing of working capital through short-term sources of funds has the benefits of lower cost and establishing close relationship with the banks. Financing of working capital from long-term resources provides the following benefits: (i) (ii) It reduces risk, since the need to repay loans at frequent intervals is eliminated. It increases liquidity since the firm has not to worry about the payment of these funds in the near future.

SHORT TERM SOURCES OF FINANCE Two most important sources of working capital finance are trade credit and bank credit. Over the period of years the amount of trade credit has gone up significantly, at the same time obtaining the trade credit from banks for large-scale industries has become increasingly difficult. A combination of short and long term finances is used to finance to working capital requirements. Current assets are normally financed by the short-term sources, which include the following: Accruals: This includes what the firm owes to the employees. Its main

components are wages and taxes. Since they are payable at a future date, they have been accrued but not shown as paid in the balance sheet. Till that time they serve as source of finance. They are a source of spontaneous financing. Since the firm pays no interest, they are regarded as a free source of finance.

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Trade Credit: It is a spontaneous source of financing, which constitutes 25 to 50

% of short term financing. Obtaining trade credit depends on: Earnings record over a period of time Liquidity position of a firm over a period of time Record of payment.

Cost of Trade Credit: If the supplier offers discount for prompt payment, there is a cost associated with trade credit availed beyond the discount period. If the terms of payment are say 2/10, net 30, then the cost of credit during the discount period is nil, whereas the cost during non-discount period is:

Discount % *

360 Credit Period - Discount Period

1 Discount %

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In our case it would be:

0.02*360 (1-0.02) (30 10)

= 36.7 %

Cost of trade credit for various credit terms is shown here

CREDIT

COST

OF

TRADE

TERMS 1/10,net 20 1) Unless the firm is hard 2/10,net 45 3/10,net 60 pressed financially it should 2/15,net 45 not forgo the discount for prompt payment 2) up till the last date, to save on the interest part.

CREDIT 36.4 % 21.0% 22.3% 24.5%

If the firm is unable to avail the discount, it should try to postpone the payment

Forms Of Bank Finance: The banks give working capital advances in the following ways: Cash Credits / Overdrafts: Under this arrangement the borrower can borrow upto a fixed limit and repay it as and when he desires. Interest is charged only on the running balance and not on the sanctioned amount. A minimal chare is payable for availing this facility. Loans: They are either credited to the current account of the borrower or given to him in cash. A fixed rate of interest is charged and the loan amount is repayable on demand or in periodical installments. Purchase/Discount of Bills: A bill may be discounted with the bank and when it matures on a future date the bank collects the amount from the party who had accepted the bill. When a bank is short of funds it can sell or rediscount the bill on the other hand the bank with surplus funds would invest in bills. However, with discount rates at 13-14 per cent for 90-day paper, bill discounting is an expensive source of short-term funds.

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Letter Of Credit: When an L/C is opened by the bank in favour of the customer it takes the responsibility of honoring the obligation in case the customer fails to do so. In this case though the customer provides the credit the risk is borne by the bank. Hence we can say that it is an indirect form of financing.

Some other sources of finance are explained below: (1)Short-Term Loans from Financial Institutions: The LIC, GIC and UTI provide short-term loans to manufacturing companies that have a good track record. The following are the eligibility conditions if obtaining the loans: Declared an annual dividend of 6 % for the past 5 years, in some cases it The debt equity ratio should not exceed 2:1 The current ratio should be at least 1:1 at least 2:1. (2)Public Deposits: Unsecured deposits are taken from the public to finance the working capital requirements. They are an important source of short and medium term finances. A Co. can accept public deposits subject to the stipulations of RBI from time to time maximum up to 35% of its paid up capital and reserves, from the public and shareholders. These deposits may be accepted for a period of 6 months to 3 years. Advantages formality. Cheaper method of raising short term finance. Method of financing is simple and easy as it does not require much The average of the interest cover ratios for the past three years should be

is 10 % over last 3 years

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Does not require any security. Disadvantages Only for Co.s enjoying good reputation in the market. The public depositors may put pressure on the Co. to refund the deposits if there is a rumour that Co. is not doing well. Right Debentures for working capital: In order to get long term resources for working capital, the public limited companies can issue rights debentures to their shareholders. The key guidelines to be followed include: The amount of debenture issue should not exceed 20 % of the gross current assets, loans and advances minus the long term loans presently available for financing working capital OR 20 % of paid up share capital, including preference capital and free reserves, whichever is the lower of the two exceed 1:1 They shall be first offered to Indian resident shareholders of the company on a pro rata basis. The debt equity ratio including the proposed dividend issue should not

REGULATION OF BANK FINANCE The RBI issues guidelines to the banks in this respect. Recommendations of the Tondon Committee and the Chore Committee have been incorporated in the guidelines. 63

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Tondon committee was appointed by the RBI in 1974 to suggest guidelines for the rational allocation and the optimum use of the bank credit. The major weaknesses in the working capital finance as pointed out by the Dehejia committee and again identified by the Tondon committee are: Borrower decides how much to borrow, hence the banker is in no position Bank credit is treated as the first source of finance and not the Credit given is based on security available and not on the basis of Security given alone is not enough; safety lies in the efficient follow up of to do any credit planning supplementary source operations of the borrower the industrial operations of the borrower. Recommendations of the Tondon Committee: They are based on the following notions: The borrower should indicate the likely demand for credit The banker should finance only the genuine production needs The banker will finance only the reasonable part of it; the borrower himself will bring in the remaining part. Inventory And Receivables Norms: Only the normal inventory, based on a production plan, lead time of supplies, economic order levels and reasonable factor of safety, should be financed by the banker. Flabby, profit making or excessive inventory should not be permitted under any circumstances. Norms should be laid down to bring uniformity in banks approach in assessing the working capital requirement. The committee has suggested norms for fifteen industries. The norms were applicable to all borrowing industries, including the small-scale industries, with aggregate limits from the banking system in excess of Rs. 10 lacs. The norms laid down the

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maximum limit upto which credit could be granted. The central committee of direction, constituted by the RBI has been empowered to make the on-going review of the bank. Lending Norms: Most firms face problems of inadequate working capital due to credit indiscipline (diversion of working capital to meet long term requirements or to acquire other assets).The banker is required to finance only a part of the working capital gap. The working capital gap is defined as current assets current liabilities excluding bank borrowings. The committee had suggested the following three methods for determining the maximum permissible bank finance (MPBF): In the first method the borrower will contribute 25 % of the working capital gap; the remaining 75 % can be financed from bank borrowings. This method will give a minimum current ratio of 1:1. In the second method the borrower will constitute 75 % of the total current assets. The remaining will be financed by the bank. MPBF = 0.75(CA) CL = this method will give a current ratio of 1.3:1. In this case current liability including MPBF will be 30+45 =75.Therefore the current ratio will be 100/75 = 1.33 In the third method the borrower will finance 100 percent of core assets (permanent component of the working capital), as defined and 25 % of the balance of the current assets. The remaining can be met from the bank borrowing 0.75 (CA CCA) CL = 0.75(100-20) 30 = 30 (assuming that CCA is 20). CA = current assets CL = non bank current liabilities CCA = core current assets.

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WORKING CAPITAL MANAGEMENT


(a) Current assets (b)Current liabilities, excluding bank borrowings. (c) Working capital gap (a-b) (d) Borrowers contribution (e) Permissible bank finance First method Rs. 100 30 70 17.5 (25 % of c) 52.5 Second method Rs. 100 30 70 25 (25 % of a) 45

Style Of Credit: The committee has suggested a bifurcation of the total credit limit into fixed and fluctuating parts. The fixed part will be treated as a demand loan for the representing the minimum level of borrowing. The fluctuating part will be taken care of by the demand cash credit. The cash credit part may be partly be used as bills. The committee also suggested that interest rate on the loan component be charged lower than that on cash credit. The RBI has stipulated the differential at 1 %. Information System: Information is to be provided in three forms operating statement, quarterly budget and funds flow statement. Borrowers with credit limit of more than Rs 1 crore are required to submit quarterly information. This information should be used to see if the desired results have been achieved. A variance of about 10 % is considered to be normal. This report has helped in bringing a financial discipline through a balanced and integrated scheme for bank lending. Also the key components of the Chore Committee recommendations, which highly influence the existing reporting system, are as follows: Quarterly information system-form 1: It gives estimation of production and sales for the current year and the ensuing quarter, and the estimates of current assets and liabilities for the ensuing year. Quarterly information system-form 2: This gives the actual production and sales in the current year and for the latest completed year and the actual current assets and liabilities for the latest completed year.

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WORKING CAPITAL MANAGEMENT

Half yearly operating statements- form 3: It gives the actual operating Half yearly funds flow statement-form 3b: It gives the sources and uses of

performance for the half year ended. funds for the half year ended. Credit monitoring: Based on the recommendations of the Marathe Committee, the RBI replaced its Credit Authorization Scheme by its Credit Monitoring Arrangement in 1988. The issues examined are: Whether the minimum current ratio is 1.33? Whether the sales, production, etc estimates match with the actual? If not, Are the information system requirements complied with? Are the renewals of the limits in time? Is the bank following the norms for inventory and receivables prescribed by the RBI standing committee, if they are different, are they justified? Financial information, specific industry analysis and financial models are used to determine the credit worthiness of the borrower. what are the reasons for deviations?

SMALL SCALE INDUSTRIES VIEW OF MANAGING WORKING CAPITAL As we all know that working capital management is more important to small firms as compared to large firms because they may have little investment in fixed assts but high investment in current assets. Here we will look at working capital management in the small scale-manufacturing units and how it affects them.

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WORKING CAPITAL MANAGEMENT

The small-scale sector has emerged as a dynamic and vibrant sector of the Indian economy. The sector accounts for 40% of the industrial production, 35% of the total exports. There are about 30 lacs Small Scale Industries in the country and about 90% of employment in the country is in this sector. We will now look at the management of working capital in SSIs. For the purpose of this project the details about various SSIs are given below: GIRNAR PACKAGING [Vapi (Gujarat)] The main unit under the name of Girnar Packaging is situated at Vapi (Gujarat) approximately 150Kms from Mumbai. It was started in 1980. Sources of finance The long-term finance, if required, is raised from commercial banks. The banks provide loans to them to an extent of four times the money contributed by the partners. The short-term finance is raised by hundis. The company makes purchases of raw materials with a credit period of 30 days. Similarly, they sell the goods also at 30 days credit period. The amount to be paid to the suppliers is normally paid after the credit period of 30 days. Hence they efficiently manage their funds and reduce their WC requirements. As soon as the goods are sold, they draw a bill on the customer and then discount the bill with the bank for funds. Also, the customer and the company share the interest charged equally. Thus this provides a good source of short-term finance. Inventory, Receivables Formerly, they used to keep inventory of four weeks. But now they are practicing JIT. They now maintain a stock for only 3 days. The value of the 3-day inventory is around Rs 20 lakhs. They have realized the importance of funds and hence are trying to avoid blocking of too much money in the inventory and hence are resorting to modern inventory management practices.

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WORKING CAPITAL MANAGEMENT

Capacity utilization The entire plant capacity is utilized, as Girnar gets enough orders. In fact, they receive and accept 20 % more orders than their actual capacity. They do so to earn more profits and because they expect a few cancellations or postponement of some orders that they receive. If they cannot complete the orders, they give out the job to other small firms and then they send it to their customers. ON-LINE PACKAGING LIMITED (GOA) On Line Packaging Ltd, situated in Goa, was established in the year 1998. Sources of Finance The owners meet the companys Short term and Long-term finance needs. The company does not have to depend on Banks or any other financial institutions. Working capital of the plant is 30 lacs, which is contributed by the partners. Inventory The planning and production of the packaging material is done as per the clients policy of Just In Time (JIT). The company usually gets four weeks for planning and production. The finished products are kept ready one week prior to the actual delivery date. They simply keep the inventory to minimum and procure it as and when necessary. JANAK ENTERPRISES (DAHANU) Janak Enterprises is an ancillary unit situated at Dahanu. The company was established in 1973 and used to produce hinges since the year of commencement. Later on, in 1977, they started manufacturing 2-wheeler parts for Kinetic Engineering Limited. But since 1979 till date, they are producing Scooter horns for Bajaj Auto Limited. Long term and short term requirements of Janak Enterprises are covered by Co -

operative Banks like Saraswati & Kapol Co - operative Bank and Nationalised Banks like

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WORKING CAPITAL MANAGEMENT

State Bank of India and Bank of Baroda. Nationalized banks also give loans for R & D projects. They pay a comparatively high rate of bank interest. Loans are given on the basis of past performance of the unit. But according to

them, bank financing depends to a considerable extent on Bank - Agent relationships and facts of a proposal. Working Capital is given on basis of production, sales price, material cost,

content of raw material, salary structure, wage bills and wage structure and other expenditures. Their cash is mainly stuck in debts and inventory.

SHIVAM PACKAGING (KHOPOLI): Shivam packaging commenced production from February 1999. Sources of Finance Long Term Finance: Shivam Packaging Industries Pvt. Ltd. has taken a term loan of Rs. 36,00,000 from the Union Bank of India. They had to give 200% collateral for getting this loan. The plant and machinery, land and building are also pledged with the Union Bank of India. The tenure of this loan is 5 years at the rate of 16.5%.

Short Term Finance: The working capital (the Stock and Debtors) loan limit provided by the Union Bank of India to Shivam Packaging Ltd. is Rs. 25,00,000. This is also known as the Cash Credit account.

Working Capital:

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Inventory Sundry Debtors Cash & Bank Balances Less: Liabilities Working Capital

Rs. 15,00,000 Rs. 20,00,000 Rs. 20,000 Rs. 15,00,000 Rs. 20,20,000

They maintain a raw material inventory of about 45-50 tons, which is Rs. 14-15 The Economic Ordering Quantity for him is 10 tons of Paper, which is 1

Lakhs in money value. truckload. The minimum time taken for the raw material to reach the factory is one week, since all his suppliers are located at Vapi. They maintain a maximum of 10-day inventory of finished goods, depending on the consignment, or if the delivery is deferred.

OBSERVATIONS REGARDING WORKING CAPITAL MANAGEMENT IN SMALL SCALE INDUSTRIES Since it was a matter relating to finance, not everybody revealed all the aspects of working capital management. However an effort was put in to get the maximum out of them .The following conclusion can be made on the basis of information gathered: Most of them are not very professionally managed and hence they are really not aware of their working capital policy as to whether it is aggressive or conservative. Basically they are not very conscious about it. However now they have started realizing the importance of cost of money and have started planning their cash. Cash management:

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WORKING CAPITAL MANAGEMENT

They are facing problems managing their cash as their cash is mainly stuck in debts and inventory, to overcome this they try and discount the bill with the bank as soon as possible, deal only on cash basis and keep the credit period to the minimum. Receivables management: They try to match the credit they get with the credit period they give, for efficient Debtors take unusually long time to repay and hence most of their funds are management, as is in the case of Girnar packaging. (Matching approach) blocked in there. They need efficient receivable management system. Since they are SSIs it is practically difficult for them to have contract for payment period over which they can charge interest, also there is more personal relation with their customers and they normally wouldnt take immediate action if the payment is not made on time. Inventory management: Though most of them are not very professionally managed, some of them are now

practicing JIT and are aware of the EOQ concept. They have realized the need to reduce blockage of funds in inventory and are working towards it. Trying to reduce the lead time and servicing the orders as fast as possible is the only way out for them. Financing for WC: Their main source of their cash has been bank loans. Many of them have taken

bank loans at very high interest rates. At times they give 200% collateral as is in the case of Shivam packaging. Thus they are paying a high cost of cash and hence need better cash management. Many of them take cash credit to finance their fluctuating WC needs Cash credit limit is fixed on the basis of sundry debtors and stock hypothecated. Hence collateral is very important for obtaining bank loans.

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WORKING CAPITAL MANAGEMENT

Obtaining bank finance is not only about past performance and future projections

but also about developing trust-based relationship with the bankers. This makes obtaining loans easier.

KEY WORKING CAPITAL RATIOS Below are those ratios which are important measures of working capital utilization. They are explained with its formulae and its interpretation:-

Ratios

Formulae

Result

Interpretation

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WORKING CAPITAL MANAGEMENT

On average, you turn over the value of your entire stock every x days. You may need to Stock Turnover (in days) Average Stock * Sold 365/ Cost of Goods = X days break this down into product groups for effective stock management. Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days.

It takes you on average x days to collect money due to you. If your official credit Receivables Ratio (in days) Debtors * 365/ Credit Sales terms are 45 day and it takes you 65 days, = X days its a problem One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days. On average, you pay your suppliers every x days. If you negotiate better credit terms this Payables Ratio (in days) Creditors 365/ Credit Purchases * = X days will increase. If you pay earlier, say, to get a discount this will decline. If you simply defer paying your suppliers (without agreement) this will also increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer.

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WORKING CAPITAL MANAGEMENT

For example, 1.5 times means that you Total Current Current Ratio Assets/ Total Current Liabilities = X times should be able to lay your hands on Rs 1.50 for every Rs 1.00 you owe. Less than 1 times e.g. 0.75 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands.

(Total Current Assets Quick Ratio Inventory)/ Total Current Liabilities = X times Similar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash.

Working Capital turnover

Net Working Capital

Sales/ As % Sales

A high percentage means that working capital needs are high relative to your sales.

Other working capital measures include the following:


Bad debts expressed as a percentage of sales. Cost of bank loans, lines of credit, invoice discounting etc. 75

WORKING CAPITAL MANAGEMENT

Debtor concentration - degree of dependency on a limited

number of customers. Once ratios have been established for your business, it is important to track them over time and to compare them with ratios for other comparable businesses or industry sectors.

Performance report Jammu and Kashmir Bank Ltd. Reports Earnings Results for the Full Year Ended March 2009 CAPITAL & RESERVES The banks net worth as at 31st march 2009 was Rs.4959.88 crores comprising of paid up capital of Rs.48.49 crores,share warrants of Rs. 28.10 crores and reserves of Rs.2574.36 crores . An amount of Rs.272.09 crores was transferred to reserves from the profits earned during FY 09. PROFIT The bank posted a net profit of Rs.410 crores for the year ,which is 13.88% higher than Rs.360 crores in the previous year .The operating profits were up by over 18.34% at Rs.771.45 crores at the end of march 2009 as compared to previous year. INCOME The Bank continued to register an impressive year-on-year improvement in earnings. During the year,the total income has increased by 20.67% to Rs.3233.17 crores from Rs2679.24. crores in the previous year NET INTEREST INCOME During the year ,the Banks net interest income increased to Rs 1000 crores registering a growth of 23.54% CAPITAL ADEQUACY RATIO

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WORKING CAPITAL MANAGEMENT

The Banks Capital Adequacy Ratio (CAR) is at a comfort level of 13.46% as on 31st march 2009. DIVIDEND The policy of rewarding the shareholders with high dividends continued this year as well.In view of appreciable performance of the bank ,the Directors are pleased to recommend a dividend of 155% for the year ended March 31,2009. BUSINESS PERFORMANCE The Bank continues to register an impressive year-on-year improvement in financial performance.The Bank achieved a business turnover of Rs.47475.87 crores for the year 2008-09 as against Rs. 42274.24 crores in the previous year,registering a growth of 12.30%.The operational efficiency of the Bank improved during the year to 38.24% from 40.13% of the previous year.

DEPOSITS Total deposits have increased by 15.42% from Rs. 28593.26 crores on 31st March 2008 to Rs.33004 crores on 31st March 2009,within which CASA deposits have increased by 20.04% to Rs.11197.50 crores on 31st March 2009,from Rs.9328.01 crores last year. ADVANCES During the year,the total advancesof the bank increased by 10.84% to Rs.20930.41 crores from Rs.18882.61 crores in the previous year.The yield on advances has increased by 102 basic points to 10.50% from 9.48% in the previous year. FOREIGN EXCHANGE The contribution from foreign exchange business to the Banks gross income has been to the tune of Rs.36.65 crores The forex Dealing room at treasury operations recorded a

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WORKING CAPITAL MANAGEMENT

turnover of Rs.50991.03 crores generating a net earning of Rs. 12.03 crores against Rs.8.84 crores of the previous year,thus registering a growth of 36.09%. INVESTMENTS The Banks total investments increased by 22.60% from Rs. 8757.66 with the regulatory requirement. crores to Rs.10736.33 crores .The increase in investments has mainly been in SLR securities in tune

CASH CREDIT ANALYSIS AND COMPUTATION IN JAMMU KASHMIR BANK LTD. BALANCE SHEET ANALYSIS. Sales % Of increase Purchase Gross Profit Net Profit % N.P. to Sales Balance Sheet Liabilities 31/03/2008 25.80 23.97 2.60 1.20 4.65 31/03/2009 33.65 30.43 25.81 3.27 1.43 4.25 31/03/2010 48.00 42.64 42.24 5.21 2.25 4.69

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WORKING CAPITAL MANAGEMENT

Capital Net worth Current Liabilities Bank loan Sundry Creditors Expenses payable Unpresented cheques Total Current Liabilities Total liabilities Assets Fixed assets Current Assets Sundry debtors Closing Stock Cash in hand Total current assets Total assets Financial indicators Net worth Current assets Current liabilities N.W.C Current Ratio Closing Stock Opening Stock Avg.stocking Holding periods (Days) Debtors Stocking period Creditors Avg.stocking peroid

4.00 4.00 1.20 0.00 0.93 0.00 2.13 6.13 0.18 1.90 3.87 0.18 5.95 6.13 4.00 5.95 2.13 3.82 2.79 3.87 5.64 4.76 27 58 14 71

5.43 5.43 1.26 0.00 0.19 3.80 5.25 10.68 0.16 3.52 6.80 0.20 10.52 10.68 5.43 10.52 5.25 5.27 2.00 6.80 3.87 5.34 38 95 3 74

5.43 5.43 10.00 0.00 0.00 0.00 10.00 15.43 0.15 5.53 9.75 0.00 15.43 15.43 5.43 15.28 10.00 5.28 1.53 9.75 6.80 8.28 41 83 0 71

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WORKING CAPITAL MANAGEMENT

Assessment of working Capital:-as followed in JK bank (Sales) at maximum 25% increase on achieved is accepted Anticipated Sales for year 48.00 2010 Anticipated purchases for 42.24 year 2010 Current Assets Days Stocking period stocks 83 Debtors period 41 Advance Total Current Assets Less sundry creditors Net working Capital Less 25% margin Or N.W.C M.P.B.F Say rupees 10.60 80

Amount in lacs 11.06 4.81 15.87 0.00 15.87 3.96 5.28 10.59

WORKING CAPITAL MANAGEMENT

Hence we can say that the maximum permissible finance which the bank can lend is Rs 10.60 lacs, which although can vary depending upon the final decision of the sanctioning authority. Rate of interest:- PLR+0.50% ( the PLR is subject to change from time to time) DOCUMENTATION:To safeguard the interest of the bank, all legal and security documents shall be executed in consultation with the concerned legal department. Security on stocks40% and 25% on book debts Security Primary: Hypothecation of stocks Collateral: Mortgage of house property under description, along with land measuring, under Khasra no., Khata no., Khewat no., and place or location and value of land. Third party guarantee of two persons:COMMENTS Business Observation:Party should route sales through the account which should constitutes a percentage of above 60% of the sales achieved. Sales:-The study of financial statement reveals that the firm has achieved sales figure of 25.80 lacs and 33.65 lacs during the financial year 2008 and2009 showing increase in the sales. The party has envisaged the sales of Rs 48.00 lacs thereby projected an increase in their sales over the previous year sales. The bank should accept a certain percentage for the computation of working capital requirement of the party. Capital:-The capital base of the firm is increasing in 2008 to 2009 by 4.00 to 5.43 respectively, due to retention of major portion of profit in business. The net worth of the firm is 4.00 lacs, 5.43 lacs, and 5.43 lacs in 2008, 2009 and projected for 2010, is same as of 2009, which is satisfactory. Net Profits:- the net profit of the firm is 1.20 lacs, and 1.43 lacs and 2.25 lacs in 2008, 2009 and projected 2010 which is increasing and is a good sign. Working Cycle:-The bank should accept the working cycle at 41 days days debtors, 83 days stocks and 0 days of creditors for computation of MBFP. Current Ratio:-The current ratio of the firm shows slight functioning trend, but is in satisfactory level. Other terms and conditions 1:-To allow the funds as per drawing power. 2:-The hypothecated stocks is got insured with usual with usual bank clause at partys cost. 3:-To ensure the end use of funds. 4:-TO ensure the turnover of accounts. 5:-To ensure the burrower/mortgagor/guarantor have not defaulted to any bank/financial institution before release of the fresh facility.

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BALANCE SHEET AS AT 31 MARCH,2009 As at As at 31.03.2009 31.03.2008 (Rs.000 omitted) (Rs.000 omitted) CAPITAL & LIABILITIES Capital Equity Share Warrants Reserves & Surplus Deposits Borrowings Other Liabilities & Provisions 484,992 25,743,684 330,041,036 9,966,265 10,696,711 484,992 280,950 22,323,351 285,932,630 7,517,861 11,020,157 327,559,871 32,199,667 12,172,743 87,576,631 82

TOTAL 376,932,618 ASSETS Cash & Balance with RBI 23,029,505 Balance with Banks & Money at Call & Short 29,718,115 Notice Investments 107,363,347

WORKING CAPITAL MANAGEMENT

Advances Fixed Assets Other Assets TOTAL Contingent Liabilities Bills for Collection

209,304,113 1,994,143 5,523,395 376,932,618 91,409,177 9,490,429

188,826,118 1,920,015 4,864,697 327,559,871 112,644,286 6,285,380

PROFIT & LOSS ACCOUNT FOR THE YEAR

ENDED 31ST MARCH 2009 Year Ended 31.03.2009 (Rs.000 Omitted) Year Ended 31.03.2008 (Rs.000 Omitted) 24,342,304 2,450,133 26,792,437

INCOME Interest Earned Other Income TOTAL 29,881,197 2,450,539 32,331,736

II

EXPENDITURE Interest Expended Operating Expenses 19,878,612 4,708,607 16,237,917 4,036,141 83

WORKING CAPITAL MANAGEMENT

Provisions & Contingencies TOTAL III NET PROFIT TOTAL IV i) ii) iii) iv) v) APPROPRIATIONS TRANSFERRED TO Statutory Reserve Capital Reserve Revenue & Other Reserve Proposed Dividend Tax On Dividend TOTAL Earnings Per Share

3,646,162 28,233,381 4,098,335 32,331,736

2,918,337 23,192,395 3,600,042 26,792,437

1,023,389 2,115,992 819,671 139,303 4,098,335 84.54

900.010 1,820,924 751,406 127,702 3,600,042 74.26

WORKING CAPITAL ASSESSMENT IN J&K BANK PURI COMMITTEE RECOMMENDATIONS. FORMULA RECOMMENDED FOR ASSESSMENT OF WORKING CAPITAL REQUIREMENTS OF SSI. I) ADVANCED UPTO RS.25000 (OPERATING CYCLE * MONTHLY EXPENDITURE)/30 II) ADVANCES ABOVE RS.25000 AND UPTO RS.2 LAKHS WORKING CAPITAL REQUIREMENTS SR.NO STOCKING PERIOD 1 IMPORTED RAW MATERIAL ________ DAYS MARGIN %AGE VALUE PBF

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WORKING CAPITAL MANAGEMENT

INDIGENOUS RAW MATERIALS ______ DAYS STOCK IN PROGRESS _________ DAYS FINISHED GOODS _______ DAYS SUNDRY DEBTORS ______ DAYS MONTHLY EXPENSES FOR ONE MONTH TOTAL (A)

LESS: - LIQUID SURPLUS IN BALANCESHEET AS ON: -________: RS. _______ AND CREDIT ON PURCHASES _____ DAYS RS. ______ RS. ______ LIMIT RECOMMENDED / SANCTIONED (A -B) RS. _______

(B)

(C)

Method #1 for assessment of working capital Working capital assessment Sr.no Particulars Mar07 Mar08 (Rs. In lakhs) Provisional mar'09 Projected mar'-

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WORKING CAPITAL MANAGEMENT

2010 A Total current assets (Excluding fixed deposits Money margin) Other current liabilities Excluding short-term bank bal.) Working capital GAP (a-b) Minimum stipulated Net working capital (25% of total current assets Excluding expected receivables.) Actual /projected net w.cap Item (c-d) Item (c-e) MPBF (lower of ( f or g)) 57.03 69.65 56.6 62.5

33.84

33.21

23

25

C D

23.19

36.44

33.6

37.5

11.41

13.93

11.32

12.5

E F G H I

6.84 11.78 16.35 11.78

14.67 22.51 21.77 21.77

15.6 22.28 18 18

12.5 25 25 25

Excess borrows if any

Method #2 (sales approach) for assessment of working capital Working capital assessment Sr.no A Particulars Projected sales for the year 2004-05 25% of sales Less:- 5% of gross sales margin (Rs.in lakhs) 115.09 28.77 5.75

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WORKING CAPITAL MANAGEMENT

Permissible bank finance B 25% of sales Less: - projected net working capital Bank finance Bank borrowings shown in the projections Of the company F Limit applied for Limit recommended for sanction E or F whichever is lower

23.02 28.77 15.21 15.21

15.00 10.00 10.00

RECOMMENDATIONS BY TANDON COMMITTEE The report submitted by the Tandon committee is a landmark in the history of financing of working capital by commercial banks in India. The report was submitted on 9th August 1975. The report included recommendations covering all aspects of lending. The recommendations were essentially based on three principles: (i) A proper financial discipline has to be observed by the borrower. He should supply to the banker information regarding his operational plans well in advance. (ii) The main function of the banker as a lender is to supplement the borrowers resources to carry an acceptable level of current assets. (iii) The bank should know the end-use of bank credit so that it is used only for the purposes for which it is made available.

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SCANNING OF WORKING CAPITAL FINANCING IN J&K BANK

Working capital financing in Jammu & Kashmir Bank is done as per the recommendations proposed by different competent authorities, such as Tandon committee report, Chore committee report. There is still scope for more efficient working capital financing in the bank. Recommendations after Scanning of working capital financing J&K Bank: (i) While assessing the project, the profit element should be considered with the risk element collectively. (ii) Financing of working capital should be avoided to a long loss making firm, even though regular customer.

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WORKING CAPITAL MANAGEMENT

(iii) Some times the clients business looks promising and real to his words then certain relaxation should be provided as far as policies are considered. (iv) Sectoral analysis should be considered before providing the working capital finance to any firm, trends should be considered. (v) Statement of financial transactions should be review at regular interval to minimize losses due to irregular payments and defaulters.

ESTIMATION OF WORKING CAPITAL REQUIREMENT (AN EXAMPLE) AVERAGE PERIOD OF ESTIMATE CREDIT 6 weeks 1.5 weeks COMING YEAR 2,60,000 1,95,000 48,000 36,000 45,500 60,000 14,000 6,50,000 89 FOR

ELEMENTS

Purchase of materials Wages Admin.o/h Rent 2 months Salaries 1 month Office expense 2 weeks Factory o/h (Includes 2 months depreciation 20%) Sales Cash Credit 7 weeks

WORKING CAPITAL MANAGEMENT

Raw materials are in stock for 4 weeks FG are in stock for 1 month Process time 15 days Factory overheads and wages accrue evenly FG are valued at cost of production Minimum cash balance required is 40,000

Assumptions: 1) Production and sales are evenly distributed throughout the year 2) Raw materials are issued to production right in the beginning, whereas wages and overheads are incurred evenly. 3) 15 days is taken as 2 weeks 1) 1year = 52 weeks

SOLUTION:Budgeted P/L

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WORKING CAPITAL MANAGEMENT

ELEMENT Raw Material Wages Prime Cost Overheads Cost Of Goods Sold

YEARLY 2,60,000 1,95,000 4,55,000 60,000 5,15,000

WEEKLY 5,000 3,750 8,750 1,154 9,904

Calculation of Working Capital Requirement CURRENT ASSETS (A) Stock Raw Material 20,000 (2,60,000/52 *4) Finished Goods 39,616 59,616 (515,000/52*4) (B) WIP Raw Material 10,000 (2,60,000/52*2) Wages 3,750 (1,95,000/52*2*0.5) Overheads 1,154 14904 RS. RS.

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(60,000/52 *2*0.5) (C) Debtors 87,500 (6,50,000/52*7) (D) Cash TOTAL C.A. (-)CURRENT LIABILITIES (A) Creditors Raw materials 30,000 (2,60,000/52*6) (B)Wages 5,625 (1,95,000/52*1.5) (C) Administration overheads Rent (48,000/52*8) Salary (36,000/52*4) Office expense (45,500/52*2) (D) Factory overheads 9,235 60,00/52*8) TOTAL C.L. WC reqd.(CA-CL) 56,570 1,45,260 7,385 2,769 1,780 11,904 40,000 2,02,020

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WORKING CAPITAL MANAGEMENT

Know Your Customer Guidelines Anti Money Laundering Standards 1. Know Your Customer Standards a) The objective of the KYC guidelines is to prevent banks from being used, intentionally or Unintentionally, by criminal elements for money laundering activities. KYC procedures enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently. The revised KYC policy of the bank incorporates the following four elements: i. Customer Acceptance Policy (CAP) ii. Customer Identification Procedures (CIP) iii. Monitoring of Transactions; and iv. Risk Management b) A customer for the purpose of KYC Policy is defined as: . A person or entity that maintains an account and/or has a business relationship with the bank . One on whose behalf the account is maintained (i.e., the beneficial owner) . Beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors, etc as permitted under the law . Any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of high value demand draft as a single transaction. 2. Customer Acceptance Policy (CAP) a) The following Customer Acceptance Policy indicating the criteria for acceptance of customers shall be followed in the bank. The branches shall accept customer strictly in accordance with the said policy: i. No account shall be opened in anonymous or fictitious/benami name(s)

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ii. Parameters of risk perception shall be clearly defined in terms of the nature of business activity, location of customer and his clients, mode of payments, volume of turnover, social and financial status etc., to enable categorization of customers into low, medium and high risk called Level I, Level II and Level III respectively; Customers requiring very high level of monitoring e.g., Politically Exposed Persons (PEPs) may be categorized as Level IV. iii. The branches shall collect documents and other information from the customer depending on perceived risk and keeping in mind the requirements of AML Act, 2002 and guidelines issued by RBI from time to time. iv. The branches shall close an existing account or shall not open a new account where it is unable to apply appropriate customer due diligence measures i.e., branch is unable to Verify the identity and/or obtain documents required as per the risk categorization due to non cooperation of the customer or non reliability of data/information furnished to the branch. The branches shall, however, ensure that these measures do not lead to the harassment of the customer. However, in case the account is required to be closed on this ground, the branches shall do so only after permission of J/DGM (I&V) of their concerned Zonal Offices is obtained. Further, the customer should be given a prior notice of at least 20 days wherein reasons for closure of his account should also be mentioned. V. The Updated Manual of Instructions (Chapter 2 Volume I) provides detailed guidelines as to the mode of operations of different types of accounts and the circumstances in which a customer is permitted to act on behalf of another person/entity. The branches are advised to strictly follow these instructions. vi. The branches shall make necessary checks before opening a new account so as to ensure that the identity of the customer does not match with any person with known criminal background or with banned entities such as individual terrorists or terrorist organizations, etc. RBI has been circulating lists of terrorist entities notified by the Government of India so that banks exercise caution against any transaction detected with such entities. The branches shall invariably consult such lists to ensure that prospective person/s or organizations desirous to establish relationship with the bank are not in any way involved in any unlawful activity and that they do not appear in such lists. c) The branches shall prepare a profile for each new customer based on risk categorization. The bank has devised a revised Composite Account Opening Form for recording and maintaining the profile of each new customer. Revised form is separate for Individuals, Partnership Firms, and Joint Customers, Corporates and other legal entities or special accounts e.g., account in the name of brand names, domain names, etc. The nature and extent of due diligence shall depend on the risk perceived by the branch. The branches should continue to follow strictly the instructions issued by the bank regarding secrecy of customer information. The branches should bear in mind that the adoption of customer acceptance policy and its implementation does not become too restrictive and should not result in denial of banking services to general public, especially to those, who are financially or socially disadvantaged,. c) The risk to the customer shall be assigned on the following basis:

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i. Low Risk (Level I): Individuals (other than High Net Worth) and entities whose identities and sources of wealth can be easily identified and transactions in whose accounts by and large conform to the known profile may be categorized as low risk. The illustrative examples of low risk customers could be salaried employees whose salary structures are well defined, people belonging to lower economic strata of the society whose accounts show small balances and low turnover, Government Departments and Government owned companies, regulators and statutory bodies etc. In such cases, only the basic requirements of verifying the identity and location of the customer shall be met. ii. Medium Risk (Level II): Customers that are likely to pose a higher than average risk to the bank may be categorized as medium or high risk depending on customers background, nature and location of activity, country of origin, sources of funds and his client profile etc; such as: a) Persons in business/industry or trading activity where the area of his residence or place of business has a scope or history of unlawful trading/business activity. b) Where the client profile of the person/s opening the account, according to the perception of the branch is uncertain and/or doubtful/dubious. iii. High Risk (Level III): The branches may apply enhanced due diligence measures based on the risk assessment, thereby requiring intensive due diligence for higher risk customers, especially those for whom the sources of funds are not clear. The examples of customers requiring higher due diligence may include a) Non Resident Customers, b) High Net worth individuals c) Trusts, charities, NGOs and organizations receiving donations, d) Companies having close family shareholding or beneficial ownership e) Firms with sleeping partners f) Politically Exposed Persons (PEPs) of foreign origin g) Non-face to face customers, and h) Those with dubious reputation as per public information available, etc. The persons requiring very high level of monitoring may be categorized as Level IV. 3. Customer Identification Procedure (CIP)

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a) Customer identification means identifying the person and verifying his/her identity

by using reliable, independent source documents, data or information. The branches need to obtain sufficient information necessary to establish, to their satisfaction, the identity of each new customer, whether regular or occasional, and the purpose of the intended nature of banking relationship. Being satisfied means that the branch is able to satisfy the competent authorities that due diligence was observed based on the risk profile of the customer in compliance of the extant guidelines in place. Besides risk perception, the nature of information/documents required would also depend on the type of customer (individual, corporate, etc). For customers that are b) Natural persons, the branches shall obtain sufficient identification data to verify the identity of the customer, his address/location, and also his recent photograph. For customers that are legal persons or entities, the branches shall (i) Verify the legal status of the legal person/entity through proper and relevant documents (ii) Verify that any person purporting to act on behalf of the legal person/entity is so authorized and identify and verify the identity of that person (iii) Understand the ownership and control structure of the customer and determine who are the natural persons who ultimately control the legal person. Customer Identification requirements in respect of a few typical cases, especially, legal persons requiring an extra element of caution are given in Annexure I for the guidance of branches.

c) If the branch decides to accept such accounts in terms of the Customer Acceptance Policy, the branch shall take reasonable measures to identify the beneficial owner(s) and verify his/her/their identity in a manner so that it is satisfied that it knows who the beneficial owner(s) is/are. An indicative list of the nature and type of documents/information that may be relied upon for customer identification is given in Annexure II. 3. Monitoring of Transactions a) Continuous monitoring is an essential ingredient of effective KYC procedures and the extent of monitoring should be according to the risk sensitivity of the account. Branches shall pay special attention to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose. Transactions that involve large amount of cash inconsistent with the size of the balance maintained may indicate that the funds are being washed through the account. High risk accounts shall be subjected to intensive monitoring.

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b) The branches shall continue to follow strictly the instructions regarding cash transactions issued vide our Circular No.326 reference No. BDS&P/MRC/2003-1980 dated 05.03.2003, wherein a threshold limit of Rs.5 lakh for cash transactions and Rs.10 lakh for fund transfer transactions was set for reporting details thereof. However, as per revised KYC policies and procedures, the branches are now required to maintain proper record of all cash transactions (both deposits and withdrawals) of Rs.10 lakh and above only. The details of cash transactions involving deposits and withdrawals of Rs.10 lakh and above are to be furnished to the concerned Joint General Manager/Deputy General Manager (I&V), Zonal Offices on fortnightly basis viz., as on every 15th and last working day of the month containing full particulars such as name of the account holder, account number, date of opening of account and other details as mentioned in Circular No.74/95 reference No. BDS&P/878/95/460 dated 25.08.1995 and reiterated vide Circular No.168 reference No. PDA/CPPD-01/02-18 dated 27.09.2002 and Circular No.326 reference No.BDS&P/MRC/2003- 1980 dated 05.03.2003. These statements have to reach the concerned JGM/DGM (I&V), Zonal Office within seven days from the stipulated date of the fortnightly statement. c) The I&V Department, Corporate Headquarters shall ensure adherence to the KYC policies and procedures. Concurrent/Internal Auditors shall specifically check and verify the application of KYC procedures at the branches and comment on the lapses if any observed in this regard. The compliance in this regard shall be put up before the Audit Committee of the Board on quarterly intervals. All staff members shall be provided training on Anti Money Laundering as conveyed vide Circular No.326 reference No. BDS&P/MRC/2003-1980 dated 05.03.2003. The focus of training shall be different for frontline staff, compliance staff and staff dealing with new customers. 5. Risk Management a) The banks KYC policies and procedures cover management oversight, systems and controls, segregation of duties, training and other related matters. For ensuring effective implementation of the banks KYC policies and procedures, the Branch Managers shall explicitly allocate responsibilities within the branch. The Branch Manager shall authorize the opening of all new accounts. However, in case of branches with business of Rs.50 crore or above, where there is usually another senior Officer next below the Branch Manager heading the Accounts Department may authorize the opening of new accounts. The branches shall prepare risk profiles of all their existing and new customers and apply Anti Money Laundering measures keeping in view the risks involved in a transaction, account or banking/business relationship.

b) Training encompassing applicable money laundering laws and recent trends in money laundering activity as well as the banks policies and procedures to combat money laundering shall be provided to all the staff members of the bank periodically in phases. The HRD Department, Corporate Headquarters shall determine the frequency of training and identify personnel to be trained at each branch.

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c) The General Manager, Planning & Accounts Department shall be empowered to prescribe threshold limits for a particular group of accounts and the branches shall pay particular attention to the transactions which exceed these limits. The threshold limits shall be reviewed annually and changes, if any, conveyed to branches for monitoring. d) The banks internal audit and compliance functions have an important role in evaluating and ensuring adherence to the KYC policies and procedures. The compliance function shall provide an independent evaluation of the banks own policies and procedures, including legal and regulatory requirements. The bank shall ensure that the audit machinery of the bank is staffed adequately with individuals who are well versed in such policies and procedures. Concurrent/Internal Auditors shall specifically check and verify the application of KYC procedures at the branches and comment on the lapses observed in this regard. The compliance in this regard shall be put up before the Audit Committee of the Board on quarterly intervals. 6. Customer Education Implementation of KYC procedures requires branches to demand certain information from the customers that may be of personal in nature or which have hitherto never been called for. This can sometimes lead to a lot of questioning by the customer as to the motive and purpose of collecting such information. Therefore, the front desk staff needs to handle such situations tactfully while dealing with customers and educate the customer of the objectives of the KYC programme. The branches shall also be provided specific literature/pamphlets to educate customers in this regard. 7. New Technologies The KYC procedures shall invariably be applied to new technologies including JK Bank Global Access Debit Card products and/or JK Bank Credit Card products, including Internet banking/Mobile banking facility or such other product which may be introduced by the bank in future that might favour anonymity, and take measures, if needed to prevent their use in money laundering schemes. Branches should ensure that appropriate KYC procedures are duly applied before issuing the cards to the customers. It is also desirable that if at any point of time bank appoints/engages agents for marketing of these cards / products are also subjected to KYC measures. 8. KYC for the Existing Accounts As per extant RBI guidelines, the branches were required to obtain Composite Account Opening Form from all the existing customers as per the following schedule: Date for S.No./Category Nature of customer accounts Completion of the

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Process 1. All types of customer accounts including borrowal accounts of the companies, firms, trusts, institutions etc.March 31, 2004 2. All customer accounts including borrowal accounts, other than those included in category 1 above, opened during the period from January1, 1998 till date June 30, 2004 3. All customer accounts including borrowal accounts, other than those included in category 1 above, opened between January 1, 1993 and December 31, 1997 September 30, 2004 4. All customer accounts including borrowal accounts, other than those included in category 1 above, opened before January 1, 1993.December 31,2004 While, the revised guidelines shall apply to all new customers/accounts, branches shall apply these to the existing customers on the basis of materiality and risk. However, transactions in existing accounts shall be continuously monitored and any unusual pattern in the operation of the account should trigger a review of the Customer Due Diligence (CDD) measures. It has however to be ensured that all the existing accounts of companies, firm, trusts, charitable, religious organizations and other institutions are subjected to minimum KYC standards which would establish the identity of the natural/legal person and those of the beneficial owners. The term/recurring deposit accounts or accounts of similar nature shall be treated as new accounts at the time of renewal and shall be subjected to revised KYC procedures. 9. Appointment of Principal Officer To ensure compliance, monitoring and report compliance of Anti Money Laundering policy of the bank, Senior Executive heading the I&V Department of the bank at Corporate Headquarters shall act as Principal Officer. He shall be responsible to monitor and report transactions and share information on Anti Money Laundering as required under the law. The Principal Officer shall maintain close liaison with enforcement agencies, banks and any other institutions that are involved in the fight against money laundering and combating financing of terrorism. The Principal Officer shall furnish a compliance certificate to the Board on quarterly basis certifying that Revised Anti Money laundering Policy is being strictly followed by all the branches of the bank. Annex- I Customer Identification Requirements Indicative Guidelines Trust/Nominee or Fiduciary Accounts. There exists the possibility that trust/nominee or fiduciary accounts can be used to circumvent the customer identification procedures. The branches should determine whether the customer is acting on behalf of another person as trustee/nominee or any other intermediary. If so, branches shall insist on receipt of satisfactory evidence of the identity of the intermediaries and of the persons on whose behalf they are acting, as also obtain

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details of the nature of the trust or other arrangements in place. While opening an account for a trust, branches should take reasonable precautions to verify the identity of the trustees and the settlors of trust (including any person settling assets into the trust), grantors, protectors, beneficiaries and signatories. Beneficiaries should be identified when they are defined. In the case of a 'foundation', steps should be taken to verify the founder managers/ directors and the beneficiaries, if defined. Accounts of companies and firms Branches need to be vigilant against business entities being used by individuals as a front for maintaining accounts with banks. Branches should examine the control structure of the entity, determine the source of funds and identify the natural persons who have a controlling interest and who comprise the management. These requirements may be moderated according to the risk perception e.g. in the case of a public company it will not be necessary to identify all the shareholders. But at least promoters, directors and its executives need to be identified adequately. Client accounts opened by professional intermediaries, When the branch has knowledge or reason to believe that the client account opened by a professional intermediary is on behalf of a single client, that client must be identified.Branches may hold 'pooled' accounts managed by professional intermediaries on behalf of entities like mutual funds, pension funds or other types of funds. Branches should also maintain 'pooled' accounts managed by lawyers/chartered accountants or stockbrokers for funds held 'on deposit' or 'in escrow' for a range of clients. Where funds held by the intermediaries are not co-mingled at the branch and there are 'sub-accounts', each of them attributable to a beneficial owner, all the beneficial owners must be identified. Where such accounts are co-mingled at the branch; the branch should still look through to the beneficial owners. Where the bank rely on the 'customer due diligence' (CDD) done by an intermediary, it shall satisfy itself that the intermediary is regulated and supervised and has adequate systems in place to comply with the KYC requirements. Accounts of Politically Exposed Persons (PEPs) resident outside India Politically exposed persons are individuals who are or have been entrusted with prominent public functions in a foreign country, e.g., Heads of States or of Governments, senior politicians, senior government/judicial/military officers, senior executives of state-owned corporations, important political party officials, etc. Branches should gather sufficient information on any person/customer of this category intending to establish a relationship and check all the information available on the person in the public domain. Branches should verify the identity of the person and seek information about the sources of funds before accepting the PEP as a customer. The branches should seek prior approval of their concerned Zonal Heads for opening an account in the name of PEP. Accounts of non-face-to-face customers With the introduction of telephone and electronic banking, increasingly accounts are being opened by banks for customers without the need for the customer to visit the bank branch. In the case of non-face-to-face customers, apart from applying the usual customer identification procedures, there must be specific and adequate procedures to mitigate the higher risk involved. Certification of all the documents presented shall be insisted upon and, if necessary, additional documents may be called for. In such cases, branches may also require the first payment to be effected through the customer's account if any with another bank which, in turn, adheres to similar KYC standards. In the case of cross-border customers, there is the additional difficulty of matching the customer with the documentation and the branches might have to rely on third party certification/introduction. In such cases, it must be ensured that the third party is a

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regulated and supervised entity and has adequate KYC systems in place. Correspondent Banking a) Correspondent banking is the provision of banking services by one bank (the correspondent bank') to another bank (the 'respondent bank'). These services may include cash/funds management, international wire transfers, drawing arrangements for demand drafts and mail transfers, payable-through-accounts, cheques clearing, etc. The bank while entering into any kind of correspondent banking arrangement shall gather sufficient information to understand fully the nature of the business of the correspondent/respondent bank. Information on the other banks management, major business activities, level of AML/CFT compliance, purpose of opening the account, identity of any third party entities that will use the correspondent banking services, and regulatory/supervisory framework in the correspondent's/respondents country shall be of special relevance. Similarly, the bank shall also ascertain from publicly available information whether the other bank has been subject to any money laundering or terrorist financing investigation or regulatory action. Such relationships shall be established only with the prior approval of the Board. The Board may in the alternative delegate powers in this regard to a committee headed by the Chairman/CEO of the bank and lay down clear parameters for approving such relationships. Proposals approved by the Committee should invariably be put up to the Board at its next meeting for post facto approval. The responsibilities of each bank with whom correspondent banking relationship is established should be clearly documented. In the case of payable-through- accounts, the correspondent bank should be satisfied that the respondent bank has verified the identity of the customers having direct access to the accounts and is undertaking ongoing 'due diligence' on them. The bank shall also ensure that the respondent bank is able to provide the relevant customer identification data immediately on request. b) Bank shall not enter into a correspondent relationship with a 'shell bank'. A Shell bank is a bank which is incorporated in a country where it has no physical presence and is unaffiliated to any regulated financial group. Shell banks are not permitted to operate in India. Bank shall also guard against establishing relationships with respondent foreign financial institutions that permit their accounts to be used by shell banks. The Bank shall move cautiously while continuing relationships with respondent banks located in countries with poor KYC standards and countries identified as 'non-cooperative' in the fight against money laundering policies and procedures in place and apply enhanced 'due diligence' procedures for transactions carried out through the correspondent accounts Annex-II Customer Identification Procedure Features to be verified and documents that may be obtained from customers Features Documents Accounts of individuals Legal name and any other names Used Correct permanent address

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(i) Passport (ii) PAN card (iii) Voters Identity Card (iv) Driving license (v) Identity card (subject to the satisfaction of the branch) (vi) Letter from a recognized public authority or public servant verifying the identity and residence of the customer to the satisfaction of branch (vii) Telephone bill (viii) Bank account statement (ix) Letter from any recognized public authority (x) Telephone bill (xi) Bank account statement (xii) Letter from any recognized public authority xiii) Electricity Bill xiv) Ration Card xv) Letter from the employer, (subject to the satisfaction of the branch) xvi) Any other document which provides customer information to the satisfaction of the bank will suffice. Accounts of companies Name of the company Principal place of business Mailing address of the company Telephone/Fax Number (i) Certificate of incorporation and Memorandum & Articles of Association (ii) Resolution of the Board of Directors to open an account and identification of those who have authority to operate the account (iii) Power of Attorney granted to its managers, officers or employees to transact business on its behalf (iv) Copy of PAN allotment letter (v) Copy of the telephone bill Accounts of partnership firms Legal name Address Names of all partners and their addresses Telephone numbers of the firm and partners (i) Registration certificate, if registered (ii) Partnership deed (iii) Power of Attorney granted to a partner or an employee of the firm to transact business on its behalf (iv) Any officially valid document identifying the partners and the persons holding the Power of Attorney and their addresses (v) Telephone bill in the name of firm/partners Accounts of trusts & foundations Names of trustees, settlers, beneficiaries and signatories Names and addresses of the founder, the managers/directors and the beneficiaries Telephone/fax numbers (i) Certificate of registration, if registered (ii) Power of Attorney granted to transact business on its behalf

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(iii) Any officially valid document to identify the trustees, settlors, beneficiaries and those holding Power of Attorney, founders/managers/ directors and their addresses (iv) Resolution of the managing body of the foundation/association (v) Telephone bill

Real Time Gross Settlement J&K bank offers Real Time Gross Settlement (RTGS) payments and collections as a speedy, convenient, cost-efficient and secure method to move large value funds across the country. This offering is based on Reserve Bank of India's (RBI) RTGS payment system. Product Features RTGS is applicable for payouts in excess of INR100, 000 Smooth, safe and fastest mode of transferring money across the banks in India RBI's RTGS guidelines require the beneficiary bank to credit the beneficiary's account or return the funds, within a maximum time of 2 hours RTGS is an effective collections mechanism as funds from across the country can be collected & credited to your account on the same day An efficient mechanism for outstation payments and collections. Payments can be made to or received from across the country on a same-day basis Over 34,000+ bank branches participate in RTGS (as at October 07) Efficient working capital management by enabling negotiation of better terms with suppliers & by facilitating speedy collection of funds Simplifies account reconciliation due to predictability of funds flow Savings of time and cost involved in physical dispatch of cheques to beneficiaries, deposits of cheques by beneficiaries with their banks & clearing of these cheques Reduced chances of frauds typically associated with paper-based payments

National Electronic Fund Transfer (NEFT) J&K Bank offers National Electronic Fund Transfer (NEFT) payments as a speedy, convenient, cost-efficient and secure mechanism to move funds across the country. This offering is based on RBIs NEFT system. Product Features RBIs NEFT guidelines mandate the beneficiary bank to credit the beneficiarys account or return the funds, within the same day for transactions processed before a stipulated cut-off time Smooth, safe and fastest mode of transferring money across the banks in India 103

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There is no floor or cap on the amount of transfer in NEFT, means you can transfer from an amount as small as one rupee to any amount NEFT is an effective collections mechanism as funds from across the country can be collected & credited to your account on the same day Efficient mechanism for outstation payments and collections. Payments can be made to or received from across the country on a same-day basis Over 31,000+ bank branches participate in NEFT (as at October 07) Efficient working capital management by enabling negotiation of better terms with suppliers and by facilitating speedy collection of funds Simplifies account reconciliation due to predictability of fund flow Savings of time and cost involved in physical dispatch of cheques to beneficiaries, deposits of cheques by beneficiaries with their banks & clearing of these cheques Reduces chances of frauds typically associated with paper-based payments News Regarding Jammu And Kashmir Bank Srinagar, Jul 30: J&K bank has once again displayed its commitment to uplift the backbone sectors of states economy by over achieving its target of extending credit to the priority sector, thereby outperforming all other banks operating in the state. This was clearly reflected by the credit disbursement figures for the financial year 2008-09 released at the 76th meeting of State Level Bankers Committee (SLBC) held here at SKICC today. While Dr Haseeb Drabu, Chairman, J&K Bank and convener SLBC presided over the meeting, Mr SS Kapoor, Chief Secretary, government of Jammu and Kashmir was the Chief Guest on the occasion. As against the total Annual Credit Plan (ACP) outlay of Rs.1911.41 Crore to the priority sector in the J&K State for the financial year 2008-09, various banks operating in the State have recorded total credit disbursement of Rs.1938.37 Crore for the financial year ended 31st March 2009, thereby reflecting overall achievement of 101%. The J&K Bank alone has disbursed credit of Rs.1198.18 Crore to priority sector thereby far surpassing the allocated annual aggregate target of Rs.836.13 Crore for the bank thereby recording an achievement of 143%. This was disclosed by Dr Drabu while addressing the committee members. The Chairman in his welcome address and presentation commented that the performance of banks in the State in supporting and financing the priority sector has be slightly down as compared to the corresponding period of the previous year attributed partly to the disturbances derailing the economic activities in the State and partly to the impact of economic slowdown. He impressed upon the banks to improve their performance and involvement so that the flow of credit is enhanced and the trend is maintained as intended. Expressing concern over the poor credit dispensation in key sectors of the two major divisions of the state, Drabu said, Poor lending in Agriculture sector in Kashmir division and less exploitation of micro-fiance potential in Jammu region is really something we should address.

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Complimenting J&K Bank for over achieving the plan targets, Chief Secretary S S Kapoor stressed on the need to work for promoting RSETIs model in the J&K State to ensure building and enhancing entrepreneur skills. The Chief Secretary expressed his displeasure over the thin participation from the Government side. These are matters that pertain to government and absence of government officials in the meeting reflects lack of commitment on their part in discharging their duties towards socio-economic development of the state, Mr Kapoor emphasized. Responding to Chief Secretarys call for establishing Rural Self Employment Training Institutes (RSETIs), Dr Drabu announced setting up of six RSETIs across the state during the current financial year. SBI officials also announced their decision to set up two RSETIs in the state. Earlier Dr Drabu welcomed Mr Arnab Roy, regional Director, RBI and Mr Sukhdeve, CGM, NABARD for their maiden presence in the J&K SLBC meet. Among others present on the occasion included Principal Secretary Industries and Commerce, Mr. Anil Goswami, Commissioner/ Secretary Finance, Mr. Sudhanshu Pandy, Executive Directors of J&K Bank, heads of various government departments/ development agencies and senior functionaries of major banks/ financial institutions operating in the State.

J&K Bank to act as nodal agency for credit to artisans Srinagar, July 3: After being designated as the Regional Coordinator Bank for implementation of the Credit Guarantee Fund scheme, States premier financial institution J&K Bank has been asked to act as a nodal agency to facilitate the increased flow of credit to the maximum number of artisans associated with the handicrafts industry.In order to ensure that the credit facility is extended to the artisans in handicrafts sector without any hassles, it is desired that J&K Bank may act as a Nodal Agency to facilitate the increased flow of credit to the maximum number of artisans in J&K state, reads the communiqu addressed to the Chairman of the J&K Bank from Director, Government of India, Ministry of Textiles.Precisely, the scheme is in place to alleviate the problem of collateral security and impediment to flow of credit to small and tiny industries sector, including artisans associated with the handicrafts sector. Credit Guarantee Fund Scheme (CGFS) is to cover credit facilities extended to small-scale industries, handicrafts included, by the banks. The guarantee cover under the CGFS is available, in respect of a single eligible borrower, not exceeding Rs 50 lakh by way of term loan and/or working capital facilities on or after entering into an agreement with the Trust, to the small scale industrial units including information technology and software industries, without any collateral security and/or third party guarantees.

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Bank pays highest dividend to State Friday, 09 July, 2004, 17:43 Jammu and Kashmir Bank has paid the highest ever dividend of Rs 25.77 crore to the state government for 2003-04. Bank Chairman Mohammad Yusuf Khan presented the Rs 25.77 cheque to the state Chief Minister Mufti Mohammad Sayeed. The dividend cheques included 50 per cent interim dividend and final dividend of an equal amount. This is the highest ever dividend paid by the Bank to the State government. The Bank paid 100 per cent dividend to its shareholders for the year 2003-04, after registering a hefty profit of Rs 406.33 crore. The Bank has paid Rs 91.11 crore to the state government in the shape of dividend till date, against total investment of Rs 53.12 crore. The state government is holding 2, 57, 75,266 shares, constituting 53 per cent of total subscribed capital of the bank. As on date the market capitalisation of the said holding is Rs 716.55 crore, an appreciation of Rs 663.34 crores, even in depressed market conditions.

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BIBLIOGRAPHY 1. Author: Dr. S N Maheshwari Name of the book: Financial Management Edition 2009 Publisher name: SULTAN CHAND &SONS Pages no.: D.290 onwards 2. Author: I .M. Pandey Name of the book: Financial Management 8th Edition 2009 Publisher name: VIKAS PUBLISHING HOUSE PVT. LTD Page no.: 820 3.Author:Prasana Chandra Name of the book: Financial Management Edition 2009 Publisher name :LOTUS PUBLISHING HOUSE PVT. LTD Page no.539 3.Jammu & Kashmir Bank journals

4. Bank Watch, Sajad Bazaz

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