37843451 raichur-district-center-co-operative-bank-ltd
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  • 2. DECLARATIONI JYOTI KAMAL student of B.B.A. III year in I.B.(P.G.) College, Panipat herebydeclare that the project report entitled “JOB SATISFACTION THE CENTRALCO-OPERATIVE BANK LTD (PANIPAT)” submitted for the degree of B.B.A. IIIyear is my original work and the project report has not formed the basis for the awardof any diploma, degree, associate ship, fellowship or similar other titles. It has notbeen submitted to any other university or institution for the award of any degree ordiploma. JYOTI KAMAL
  • 3. ACKNOWLEDGEMENTSurvey is an excellent tool for learning and exploration. No classroom routine cansubstitute which is possible while working in real situations. Application of theoreticalknowledge to practical situations is the bonanzas of this survey.Without a proper combination of inspection and perspiration, it‟s not easy to achieveanything. There is always a sense of gratitude, which we express to others for the helpand the needy services they render during the different phases of our lives. I too wouldlike to do it as I really wish to express my gratitude toward all those who have beenhelpful to me directly or indirectly during the development of this project.I would like to thank my professor MISS.NISHA GUPTA who was always there tohelp and guide me when I needed help. Her perceptive criticism kept me working tomake this project more full proof. I am thankful to her for his encouraging andvaluable support. Working under her was an extremely knowledgeable and enrichingexperience for me. I am very thankful to her for all the value addition andenhancement done to me.No words can adequately express my overriding debt of gratitude to my parents whosesupport helps me in all the way. Above all I shall thank my friends who constantlyencouraged and blessed me so as to enable me to do this work successfully. JYOTI KAMAL
  • 4. Table of contentExecutive summary Introduction Aims and objectives Part 1. An Overview of the Organization Banking Regulation Act- 1949 Definition of Co-operative Bank Values of Co- operative Bank Principles of Co-operative Bank Part 2. An Company Profile Introduction History of the organization. Special features Services Competitors Part 3 . Project overview Introduction Aims and objectives Methodology Analysis Finding conclusion Part 4. Methodology Bibliography
  • 5. EXECUTIVE SUMMARYThis project focuses on “Credit appraisal on working capital” In order to do the justiceto the topic, there is a brief introduction of credit appraisal this includes the differenttypes of credit sectors.Further, the concept of credit appraisal has been elaborated upon, which includesvarious factors for appraising credit to working capital .Primary aim of the project “ Credit appraisal on working capital” at the RaichurDistrict Central Co-op Bank Ltd, Raichur. Was to analyses existing practices of co-operative banks for credit appraisal on working capital.Basic objectives of the project 1) Study the credit appraisal in co- operative banks. 2) Study the credit appraisal on working capital. 3) Study the credit appraisal to different companies
  • 6. CHAPTER – I INTRODUCTION Job satisfaction describes how content an individual is with his or her job. It is arelatively recent term since in previous centuries the jobs available to a particular personwere often predetermined by the occupation of that person’s parent. There are a variety offactors that can influence a person’s level of job satisfaction. Some of these factors includethe level of pay and benefits, the perceived fairness o the promotion system within acompany, the quality of the working conditions, leadership and social relationships, the job
  • 7. itself (the variety of tasks involved, the interest and challenge the job generates, and theclarity of the job description/requirements). The happier people are within their job, the more satisfied they are said to be. Jobsatisfaction is not the same as motivation, although it is clearly linked. Job design aims toenhance job satisfaction and performance methods include job rotation, job enlargementand job enrichment. Other influences on satisfaction include the management style andculture, employee involvement, empowerment and autonomous workgroups. Jobsatisfaction is a very important attribute which is frequently measured by organizations. Themost common way of measurement is the use of rating scales where employees reporttheir reactions to their jobs. Questions relate to relate of pay, work responsibilities, varietyof tasks, promotional opportunities the work itself and co-workers. Some questioners askyes or no questions while others ask to rate satisfaction on 1 – 5 scale 9where 1 represents“not all satisfied” and 5 represents “extremely satisfied”).Definitions Job satisfaction has been defined as a pleasurable emotional state resulting fromthe appraisal of one’s job; an affective reaction to one’s job; and an attitude towards one’sjob. Weiss (2007) has argued that job satisfaction is an attitude but points out thatresearchers should clearly distinguish the objects of cognitive evaluation which are affect(emotion), beliefs and behaviors. This definition suggests that we from attitudes towardsour jobs by taking into account our feelings, our beliefs, and our behaviors.Affect Theory Edwin A. Lockes Range of Affect Theory (1976) is arguably the most famous jobsatisfaction model. The main premises of this theory is that satisfaction is determined by adiscrepancy between what one wants in a job and what one has in a job. Further, thetheory states that how much one values a given facet of work (e.e. the degree of autonomy
  • 8. in a position) moderates how satisfied/dissatisfied one becomes when expectations are/arenot met. When a person values a particular facet of a job, his satisfaction is more greatlyimpacted both positively (when expectations are met) and negatively (when expectationsare not met), compared to one who does not value that facet. To illustrate, if Employee Avalues autonomy in the workplace and Employee B is indifferent about autonomy, thenEmployee A would be more satisfied in a position that offers a high degree of autonomycompared to Employee B. this theory also states that too much of a particular facet willproduces stronger feelings of dissatisfaction the more a worker values that facet.Dispositional Theory Another well known job satisfaction theory is the Dispositional Theory. It is a verygeneral theory that suggests that people have innate dispositions that cause them to havetendencies toward a certain level of satisfaction, regardless of one’s job. This approachbecame a notable explanation of job satisfaction in light evidence that job satisfaction tendsto be stable over time and across careers and jobs. Research also indicates that identicaltwins have similar levels of job satisfaction. A significant model that narrowed the scope of the Dispositional Theory was the coreSelf-evaluations Model, proposed by Timorthy A. Judge in 1998. Judge argued that thereare four Core Self-evaluations that determine one’s disposition towards job satisfaction:self-esteem, general self-efficacy, locus of control, and neuroticism. This model states thathigher levels of self-esteem (the value one places on his self) and general self-efficacy (thebelief in one’s own competence) lead to higher work satisfaction. Having an internal locusof control (believing one has control over her/his own life, as opposed to outside forceshaving control) leads to higher job satisfaction. Finally, lower levels of neuroticism lead tohigher job satisfaction.Two – Factor Theory (Motivation – Hygiene Theory) Fredrick Herzberg’s Two factor theory (also known as Motivator Hygiene Theory)attempts to explain satisfaction and motivation in the workplace. This theory states thatsatisfaction and dissatisfaction are driven by different factors motivation and hygienefactors, respectively. Motivating factors are those aspects of the job that make people wanto perform, and provide people with satisfaction. These motivating factors are considered tobe intrinsic to the job, or the work carried out. Motivating factors include aspects of the
  • 9. working environment such as pay, company policies, supervisory practices, and otherworking conditions. While Herzberg’s model has stimulated much research, researchers have beenunable to reliably empirically prove the model, with Hackman & Oldham suggesting thatHerzberg’s original formulation of the model may have been a methodological artifact.Furthermore, the theory does not consider individual differences, conversely predicting allemployees will react in an identical manner to changes in motivating/hygiene factors.Finally, the model has been criticised in that it does not specify how motivating/hygienefactors are to be measured.
  • 10. Measuring Job Satisfaction There are many methods for measuring job satisfaction. By far, the most commonmethod for collecting data regarding job satisfacting is the Likert scale (named after RensisLikert). Other less common methods of for gauging job satisfaction include: Yes/Noquestions, True/False questions, point systems, checklist, forced choice answers. The Job Descriptive Index (JDI), created by smith, Kendall, & Hulin (1969), jobsatisfaction that has been widely used. It measures one’s satisfaction in five facets: pay,promotions and opportunities, coworkers, supervision, and the work itself. The scale issimple, participants answer either yes, no, or decide in response to whether givenstatements accurately describe one job. The Job in General Index is an overall measurement of job satisfaction. It was animprovement to the job Descriptive Index because the JDI focused too much on individualfacets and not enough on work satisfaction in general.1.1 Objective of the study The objective of the study is as follows  To assess the satisfaction level of employees in orient glass pvt ltd.  To identify the factors which influence the job satisfaction of employees.  To identify the factor which improves the satisfaction level of employees.  To know the employee satisfaction towards the facilities.  To offer valuable suggestions to improve the satisfaction level of employees.
  • 11. 1.2 Scope of the study This study emphasis in the following scope:  To identify the employees level of satisfaction upon that job.  This study is helpful to that organisation for conducting further research.  It is helpful to identify the employer’s level of satisfaction towards welfare measure.  This study is helpful to the organization for identifying the area of dissatisfaction of job of the employees.  This study helps to make a managerial decision to the company.1.3 Research Methodology Research methodology is the systematic way to solve the research problem. It givesan idea about various steps adopted by the researcher in a systematic manner with anobjective to determine various manners.1.3.1 Research Design A research design is considered as the framework or plan for a study that guides aswell as helps the data collection and analysis of data. The research design may beexploratory, descriptive and experimental for the present study. The descriptive researchdesign is adopted for this project.1.3.2 Research Approach The research worker contacted the respondents personally with well-preparedsequentially arranged questions. The questionnaire is prepared on the basis of objectivesof the study. Direct contract is used for survey, i.e., contacting employees directly in orderto collect data.1.3.4 Sample size The study sample constitutes 100 respondents constituting in the research area.
  • 12. 1.3.5 Sampling Area The study is conducted in employees of Orient Glass Pvt Ltd.1.3.6 Sampling Design The researcher has used probability sampling in which stratified random sampling is used.1.3.7 Collection of Data Most of the data collected by the researcher is primary data through personal interview, where the researcher and the respondent operateface – to – face.1.3.8 Research Instrument The researcher has used a structured questionnaire as a research instrument tool which consists of open ended questions, multiple choiceand dichotomous questions in order to get data. Thus, Questionnaire is the data collection instrument used in the study. All the questions in thequestionnaire are organized in such a way that elicit all the relevant information that is needed for the study1.3.9 Statistical Tools The statistical tools used for analyzing the data collected are percentage method,chi square, bar diagrams and pie diagrams.
  • 13. 1.3.10 Analysis of Data The data are collected through survey and books, reports, newspapers and internet etc., thesurvey conducted among the employees of Orient Glass Pvt Ltd. The data collected by theresearcher are tabulated and analyzed in such a way to make interpretations. Various steps, which are required to fulfill the purpose, i.e., editing, coding, and tabulating.Editing refers to separate, correct and modify the collected data. Coding refers to assigningnumber or other symbols to each answer for placing them in categories to prepare data fortabulation refers to bring together the similar data in rows and columns and totaling them in anaccurate and meaningful manner The collected data are analyzed and interrupted using statistical tools and techniques.1.4 Research period The research period of the study has from 1st February to May 1st 2008 having 18 weeks of duration.1.5 Limitations of the study  The survey is subjected to the bias and prejudices of the respondents. Hence 100% accuracy can’t be assured.  The researcher was carried out in a short span of time, where in the researcher could not widen the study.  The study could not be generalized due to the fact that researcher adapted personal interview method.
  • 14. 1.6 Chapter scheme This project is summarized into five different chapters.Chapter-1 Consists of an Introduction, statement of the problem, objectives of the study,Rrsearch methodology and limitations of the studyChapter-2 Contains Industry Profile, which contains of world scenario, national scenario, andstate scenario.Chapter -3 Consists of company profile, which states about the promoter of the company and abrief history about the company.Chapter-4 Consists of analysis and interpretation of the collected data.Chapter-5 Consists of findings of the study.Chapter-6 It includes suggestion and recommendations. A copy of questionnaire is included as appendix at the end of this report.
  • 15. MethodologyAs my project work is based on credit appraisal in the Raichur District Central Co-opBank Ltd, Raichur. I had put my self very much into the job to reach the depth ofcredit appraisal in different sectors. I involved myself directly interacting with variousexecutives of loans and investment department.The findings of the project included following steps: I. Collection of data:- I. Primary Data: The data collected through face to face interaction with Managers and Executives. II. Secondary Data: The data collected through magazines, internet.II. Analysis of data:- I. Pie charts, II. Annual reports of bank.
  • 16. PART-1An Industry Profile Banking Regulation Act-1949 Definition Of Co-Operative Bank Values Of Co- Operative Bank Principles Of Co-Operative Bank
  • 17. Banking Regulation Act, 1949(As applicable to co-operative societies)The Banking Regulation Act,1949(as applicable to co-operative societies) which hadcome into force from 1st March 1966, has vested the Reserve Bank with variousstatutory powers of control and supervision over the Co-operative Banks. The powersin regard to incorporation, management etc. of these banks, continue to vest in theRegistrars of Co- operatives societies of the States concerned. Further the provisionsof the B.R. Act 1949 shall be in addition to, and not, save as expressly provided in theAct, in derogation of any other law for the time being in force. This means that theCo-operative Banks are required not only to comply with the provision of the B.R.Act, but also other laws applicable to them. In respect of matters specifically providedfor in the B.R. Act the provisions of the said Act will prevail over the provisions ofthe Co-operative societies Acts. According to this Act, a “Primary Co-operative Bank” means a Co-operativeSociety other than a Primary Agriculture Credit Society:1) The primary object or principal business of which is the transaction of bankingbusiness2) The paid- up share capital and reserves of which are not less than one lakh ofrupees.
  • 18. 3) The bye- laws of which gives only permit as a share holder or a member varies co-op institutions which are working in Raichur district. Like Primary Agriculture Co-opsocieties which are back bone of DCC Bank, Taluka Agricultural produces marketingco-op societies, Urban Co-op Banks & co-op societies.Definition of Co- operative Banks A co-operative is an autonomous association of smaller co-op institutions or personsunited voluntarily to meet their common economic, social and cultural needs andaspirations through a jointly owned and democratically controlled enterprise.Values of Co- operative Banks:1) Self – responsibility2) Democracy3) SolidityIn tradition of their founders, co-operative members believe in the ethical values ofhonesty, openness, social responsibility and caring for others.Principles of Co- operative Banks:
  • 19. 1) Voluntary and open membership only for co-op societies which are working inRaichur district only.2) Democratic member control.3) Member Economic Participation.4) Autonomy and independence.5) Education, Training, and Information.6) Cooperation among Cooperatives.7) Concern for Community. PART- 2 An Bank Profile Introduction Special Features Services Competitors
  • 20. Bank Profile: RAICHUR DISTRICT CENTER CO- OPERATIVE BANK LTD.Head Office: Rajendra Gunj Circle, Raichur-584102.Established: 1919First President: Late A. B. Patil (1960-67) (After State re-organisation1959)Present President: Sharane Gowda BayyapurThe Raichur District central Co-op Bank Ltd, Raichur is a district level rural creditbank established in 1919 for the sake of people to help agricultures. Up toIndependence in 1947, bank was worked under Hyderabad Nizam Sarkar Govt.After Independence up to state re-organization bank were worked in 11 talukasnamely Raichur, Manvi, Deodurga, Lingasugur , Sindhanur, Koppala Kushtigi,yalburga, Gangavati, Alampur & Gadval under the Hyderabad state. In 1959 RaichurDistrict separated from Hyderabad State included in Karnataka State than called
  • 21. Mysore state. Gadval & Alampur talukas separated from RDCC Bank, because thesetwo talukas included in newly formed Andhra Pradesh.In 1959 than Deputy Commissioner of Raichur took over the charge as the Presidentof RDCC Bank.In 1960 A. B. Patil became the first president of RDCC Bank.In the year 2001 Raichur district divided in to two district namely Raichur district &Koppal district. Koppal district includes Gangavati, yalburga, kushtagi, but RDCCBank were not divided. So present it has operations in two district.Fund collection is necessity of bank but this bank‟s prime goal is protection ofcollected fund and useful investment. With the suitable directions given by Board ofDirectors and with efficient management, the bank is moving forward with success.Today it contains nineteen branches. Out of its nineteen branches today four branchesare having their own building. Other building are well planned and furnished.All of its nineteen branches well equipped computerized facilities are available.This bank not only gives importance to co-operative sector but also gives importanceto education, health and social programs and also encourages them. Without anydiscrimination it helps people according to their qualification. It helps the patientssuffering from kidney problem, heart problem, cancer and other diseases. It is due tothis bank that high- educational system and eye- specialist centre are established inRaichur town.
  • 22. Board of DirectorsThe present members in board of directors of Raichur DistrictCenter Co-Operative Bank Ltd, Raichur.
  • 23. Sharanegowda Bayyapur ( President) Ramesh vaidya ( Director) K. Sharanappa ( Director ) Pampanagowda Badarli ( Director ) S. B. Reddy ( Director ) Halappa achar ( Director ) Shyamrao Kulkarni ( Director ) Vishwanath patil ( Director ) Rajshekhar Naik ( Director ) Amregowda ( Director ) M. Venkagowda ( Director ) Pratap Patil maski ( Director ) R.TimmayyaShetti (Apex Bank rep.) B.H. Patil (Co-op societies joint registrar) Rajashri B. Agsar (Co-op Societies sub-Registrar) D.S. Velu (NABARD Raichur, Spl. Invity director ) H.K. Chandrashekar (D.G.M. Apex Bank Bangalore, Spl. Invity director)VISION AND MISSION
  • 24. Protection of collected fund. Useful investment of fun Better customer service. Building transparency in all dealings. SPECIAL FEATURES: Fully computerized for efficient services. Secured deposits and high returns. “ EASY HOME LOANS” and many other attractive loan schemes.BRANCHES:Sl.no Branches1 Head Office Raichur2 Gunj Branch Raichur3 City Talties Road Raichur4 Gajgarpet Raichur5 Nijalingappa Raichur Colony6 Station Area Raichur7 I.D.S.M.T. Layout Raichur8 Manvi9 Sindhanur10 Gangavati11 Koppala
  • 25. 12 Yalburga13 Kuknur14 Kushtagi15 Hanumasagar16 Lingasugur17 Devadurga18 Kavital19 Koppala Station AreaPROGRESS AT A GLANCE Rupees in LakhsS. Details 2006-07 2007-08 2008-09 2009-10N (UnAdited)
  • 26. 1 Membership a) Govt. 1 1 1 1 b) Co-op Societies 782 787 791 792 Total 783 788 792 7922 Branches 16 16 18 183 Share Capital a) Govt. 381.87 381.87 381.87 381.87 b) Co-op Societies 630.13 648.85 795.72 908.03 Total 1012.00 1030.72 1277.59 1289.904 Reserve & other funds a) Reserve fun 22.04 23.87 51.08 101.55 b) Other fund 669.61 670.76 757.40 813.23 Total 691.65 694.63 808.48 914.785 Deposits a) Individual Deposits 44223.17 5477.13 6794.58 9068.49 b) Institutions Deposits 1829.30 1817.63 1945.82 2212.48 c) Societies Deposits 4171.05 5200.55 6627.61 7806.16 Total 10423.52 12495.31 15368.01 19087.136 Loan Borrowed a) Short term loan 5887.47 7409.00 9670.49 9091.87 b) Mid term loan (non form) 196.60 143.05 104.05 81.81 c) Mid term loan 412.95 303.23 195.99 140.75 d) Computer loan 0.82 0.77 0.77 0.76 total 6497.84 7856.05 9971.79 9315.19
  • 27. 7 Loans & Advances a) Short term loan 67.10 60.04 59.88 65.17 b) Oil seed loan 35.58 35.23 35.23 35.32 c) KCC loan 9341.38 8625.24 11670.22 13718.48 d) Midterm agriculture loan 233.98 296.28 380.33 513.57 e) Renewed midterm loan 29.14 28.33 24.62 23.54 f) Security loan 893.77 981.18 1157.75 1248.71 g) Mortgage loan 754.21 268.02 1230.99 2133.90 h) Long term loan 259.93 411.93 564.01 782.44 i) Short term (non-agri) 594.09 555.53 759.08 1317.72 j) Mid & long term loan 471.99 530.19 867.13 767.98 (non-agri) k) Housing loan 81.09 90.22 187.03 280.93 l) Vehicle loan 54.05 54.01 79.90 99.86 m) Liquidated societies loan 9.37 38.14 32.83 28.31 arrears Total 12825.68 11974.34 17045.00 21015.338 Investments 4802.95 8211.59 8709.28 7949.879 Own fund 1703.65 1725.35 1986.07 2204.6810 Working Capital 18625.01 23028.25 27325.87 32340.5711 Profit & loss -158.5 335.58 336.98 -332.66
  • 28. PROPORTION OF PROFIT & LOSS Rupees in Lakhs YEAR Profit 2006-07 -158.5 2007-08 335.58 2008-09 336.98 2009-10 -332.66 400 300 200 100 0 year 2006-07 2007-08 2008-09 2009-10 -100 -200 -300 -400
  • 29. FINANCIAL PERFORMANCEThe Financial performance of RDCC Bank Ltd, Raichur for the year 2008-2009 &forecast for the year 2009-10, under the various parameters are as discussed herebelow: Rupees inLakhs:Sl.no Income & Expenditure 2007-08 2008-09 Forecast For the year 2009-101 Interest income 1699.67 1783.22 2545.162 Non interest income 52.26 52.35 104.843 Interest expenses 752.67 1043.97 15984 Net interest income (1+2-3) 999.26 791.16 10525 Staff expenses & others 669.09 454.63 7006 Provisions & Contingencies ---- ---- ----7 Profit 330.17 336.97 352.00Bank under profit of Rs. 336.97 Lakhs for the year 2008-09 against to 2007-08 littlehigh. In 2007-08 bank was under profit of Rs. 330.17 Lakhs due to payment of exceedin payment of interest by the bank. In the same time in the year 2007-08 salaryexpenses was Rs.669.09 Lakhs, where as the salary expenses was decreased to Rs.454.63Lakhs in the year 2008-09 . Non interest by the banking operating income, bank earned Rs. 52.26 Lakhs &52.35 Lakhs for the year 2007-08 & 2008-09 accordingly.
  • 30. Bank audit for the year 2009-10 is going on. Bank‟s forecasted profit for theyear 2009-10 is Rs. 352 Lakhs. Bank expected interest income for the said year Rs.2545.16 Lakhs and from other non-interest income by Rs. 105.84 lakhs whereas,expected expenditure of interest Rs. 1598 Lakhs, Salary and other expenses is Rs. 700Lakhs.RECOVERY PERFORMANCES The bank has recovered a loan amount of Rs. 8180.25 Lakhs as on 31.03.2009.Details are as shown below:Agriculture LoanSl. Details Demand Recovery Balance %No.1. Short Term Loan 60.12 0.16 59.962. Short Term Oil Seed Loan 36.38 -- 36.383. KCC Loan 8551.31 7208.44 1342.874. Mid Term Loan 117.35 81.62 35.735. Mid Term Converted 18.04 3.71 14.33 Loan6. Long Term Loan 32.75 30.31 2.44 Total 8815.95 7324.24 1491.71 83.08
  • 31. Non-Agriculture LoanSl. Details Demand Recovery Balance %No.1. Short Term Loan 459.53 439.90 19.632. Mid Term Loan 493.88 416.11 77.77 Total 953.41 856.01 97.403. Non-Renewal CC & 18.75 -- 18.75 OD Loan4. Credits of Societies 32.83 -- 32.83 under Liquidation Total (1+2+3+4) 9820.94 8180.25 1640.69 83.29INVESTMENTSAs on 31-3-2009 bank invested Rs.8709.28 Lakhs in various organizations.Rs. 301.57 Lakhs invested in state & Central Government bonds, Rs. 354.40 Lakhs inNABARD, Rs. 4723.23 Lakhs in Karnataka Co-op Apex Bank ltd, Bangalore. Rs.3328.88 Lakhs in local commercial bank for daily transaction. And also bankpurchased shares from IIFCO for the worth of Rs. 1Lakhs.WORKING CAPITAL:Bank Working Capital was Rs. 22090.86 Lakhs as on ending 31-3-2008, it isincreased in the year 2008-09 to Rs. 27325.87 Lakhs as on year ending 31-3-2009.In the year 2008-09 bank sanction the loan Rs. 11057.48 lakhs for short termagricultural loan, Rs. 175.25 Lakhs as mid term loan, Rs. 432.42 lakhs long term loan& for non- agricultural sector Rs. 7147.47 lakhs. Bank advanced in agricultural sectorlike Horticulture, irrigation, Agri land development, tanks formation dairydevelopment & rural key loan etc.
  • 32. Bank formed 3200 self service wings in Raichur & Koppala districts out of these SSG1965 groups were sanctioned loan upto 31-3-2009. As per the direction of centralGovt, State Govt . & NABARD. Bank given the priority for SSG. Bank given moreattention to upliftment of Rural, BPL, women SSG.NPA:In the year 2001 NPA were 11.42%, but in decreased by 2008-09 to 3.09%. where asRBI & NABARD fixed NPA to max 5%.BORROWINGS:NABARD bank is main borrower of the bank. bank borrowed the Rs. 9670.49 lakhs inthe year 2008-09. And payable to NABARD bank for the year 2007-08 was Rs.7856.05 Lakhs. Bank refunded the total loan to NABARD through Apex bank whichto be paid as on 31-3-2009 there is no out standing loan payable to NABARD.AUDIT AND CONTROLS:The audit and inspection serves the objective of ensuring safe and sound practices andpolicies. The concurrent audit of the bank which covers all the 19 branches hasenabled early identification of defects/ deficiencies for initiating necessary actions forrectification and setting right the deficiencies. In the area of house keeping the bankcontinues to do well with the balancing of books and inter bank/ branch accounts beendrawn up to March 31, 2009. Now as per the NABARD direction bank is under goingthe audit through the Charted Accountant those who are appointed by NABARD.Previously the was done by Karnataka Govt. co-op audit department.HUMAN RESOURCES:Total staff strength of the bank as at the end of March 2009 stood at132.The collective efforts of management and the employees enabled the bank to showprogressive growth during the year and the relationship continued to be harmonious.With a thrust to strengthen and improve competency, bank has been imparting trainingto the staff discharging their duties at various levels to enable them to perform theirduties and responsibilities more effectively in a highly competitive customer driven
  • 33. environment. Bank has also been encouraging its employees to take up variousexaminations conducted by Indian Institute of Banking and Finance.The bank is also encouraging its staff to enroll them for various specialized coursesmore particularly on Anti Money Laundering and Know Your Customer (AML &KYC), Trade Finance, Risk Management etc. BOARD OF DIRECTORS:The Board of Directors at the end of March 2009 comprised of 15 & 2 members arespecial invites. 17 members of the Board of Directors were held during the year. Theboard has constituted various sub committees, which met regularly and transactedvarious business entrusted to them. All the members on board contributedTheir knowledge, expertise and experience in their respective fields towards all rounddevelopment of the bank.As per the directions of NABARD bank, DCC bank must have the Professionalknowledge 3 directors from the field of Charted Accountant, Business developer &Professional development those who are highly skilled. Bank is going to co-opt 3directors from the same field in forth coming year.ACHIEVEMENTS AND AWARDS: Won “ Best Co- operative Bank “ Award in 2005- 2006. By Apex Bank.
  • 34. Part 3. Project overviewIntroductionAims and objectivesMethodologyAnalysisFindingsConclusion
  • 35. INTRODUCTION:Why Bank Credit?Credit provided by banks is an important driver of National economy. In the oldendays, when banking had not taken the present shape, individuals or familiestraditionally doing the banking business provided credit to the user. However, thepresent day economy is vastly different from the old economy.The modern economy is driven by technology, and the most important variable of theeconomy are the consumption demands of the vast population as well as the supplymachineries to meet the demand. The sources of supply no longer confine to the areawhere the demand exists. With the improvement in transport and communicationsystem, the demands can be easily met by supplies made from sources located in far-flung areas .Today, the total output of by our industrial and non- industrial sectors is very large,the finance requirements of which cannot possibly be met by traditional financiersalone. The role of modern co- operative banks as providers of credit to the economybegins at this point.Sectors in which banks provide credit:During the post- independence period, a phenomenal growth in bank credit has beenlargely responsible behind the growth of industry in our country.Most of the credit was directly provided to the production sector that fuelled thegrowth of manufacturing industries in India. However, even during the post-independence period, banks were owned / controlled by large business houses. Thisresulted in credit flowing to selected enterprises mainly belonging to these businesshouses. Consequently, the credit portfolio of many banks acutely suffered from highconcentration risks, as the beneficiaries of credit were a select few and, also becausecredit was utilized in only a small number of activities pursued by these business
  • 36. houses. Many banks became unviable in the process. Besides, this approach of lendingwas not in tune with the prime objective of independent India i.e. welfare of societyat large.Priority Sector:The nationalization of banks in 1969 and 1980 made an attempt to shift the focus ofbank lending to a large extent.RBI propagated the concept of priority sector and laid down guidelines that everybank would have to deliver credit to certain important sectors of the Indian economy.In order to ensure that these guidelines are met, RBI also stipulated a minimum levelof credit the banks have to commit to these sub- sectors, are the following ,:  Agriculture  Small scale industries. Indirect financing to the SSI sector include financing industrial estates, khadi and village industries etc  Small road and water transport operators, retail trade, small business, and professional and self- employed persons, State sponsored organization for Scheduled Caste and Tribes etc  Education , Housing, pure consumption loans , loans to self- help groups.  Food and agro- based industry  Software sector and Venture capital  others According to RBI directives, the scheduled banks are required to ensured that priority sector advances constitute 40% of net bank credit and that a substantial portion is directed to the weaker sections. Within the overall main lending target of 40% of net bank credit to the priority sector, 10% of net bank credit should be delivered to the weaker sections and 1% of previous year‟s total advances is given under the Differential Rate of Interest ( DRI) schemes.
  • 37. Other Sector:As we have already discussed, banks have traditionally been providing credit to theindustrial and manufacturing sector. During the past two decades, services sector hasemerged as a significant contributor to the gross domestic product of he nation.Services sector is therefore an area of tremendous opportunity for banks in India, sofar as lending is concerned.Thanks to the economic liberalization and growing consumerism in the country,almost all banks ( including foreign banks) in India have identified personal businesssegment as the thrust area for providing credit. Dedicated branches are being openedfor financing consumer durables as well as for consumption by banks.Retail finance has been identified as the area in which maximum target for creditdeployment is being set by a majority of banks. The core business in the personalbusiness segment is dominated by housing loans and education loans in which there iskeen competition for grabbing higher market share amongst banks.LOAN POLICY AND EXPOSURE NORMS : Banks accept deposit from the general public. The funds mobilized are invested bythe banks in various types of securities, investments, and loans.The deposits are repaid out of the proceeds of loan, advances and investments madeby them. While dispensing credit, banks have to thoroughly examine the inherent riskelement in a credit proposal. In order to contain the risk to a manageable level, and also to ensure that the lendingbank does not fall into an asset liability. Mismatch position, RBI has laid downelaborate guidelines on the maximum ceiling of the loan that can be given to providedto certain section of borrowers.RBI has also prescribed that all banks should have an in house loan policy document (which should be based on the broad guidelines given by RBI).
  • 38. Such loan policy document would contain the ceiling level, the standards of appraisal,decision making powers at different levels of hierarchy, the documentation standardsand the premise on which lending decision should be taken by credit officers. The exposure norms prescribed by RBI are given below in brief. An important pointto be noted by the credit officers in this context is that the exposure norms relate to theexposure at the whole bank level.Within the overall exposure limit, the individual lending banks may decide on thelimit up to which credit officers can provide credit facilities at the ground / operatinglevel:  The exposure ceiling is linked to the capital funds of the lending bank. Capital funds is the sum total of Tier 1 and Tier 2 capital recognized for the purpose of computation of capital adequacy.  With effect from April 1, 2002, the exposure ceiling is 15% of capital funds in case of single borrower and 40% in the case of a borrower group.  Exposure to borrowers belonging to a group may exceed the exposure norm of 40% of the bank‟s capital funds by an additional 10% (i.e. up to 50%) , provided the additional exposure is on account of extension of credit to all infrastructure projects.Lending rates :Lending in India was in the nature of directed lending till about a decade ago. So werethe lending rates , and banks were expected to offer interest rates for deposits andcharge lending rates against credit in terms of RBI prescription most of the time.Through out the 1990s , the lending norms were gradually relaxed as a result of thesteps initiated towards financial sector reforms.
  • 39. This also resulted in gradual deregulation of interest rates by RBI . Today, almostthe entire interest scenario is deregulated except loans up to Rs. 2.00 Lakh in prioritysector ( where interest rates are prescribed by RBI)And in the DIR ( differentialinterest rates) lendings.As things stand now , the most important elements of lending rates and the directivesissued by RBI in this direction are given below: PLR ( Prime Lending Rates) : PLRs are benchmark rates set by the policy framers of the bank. During the second half of the 1990s, banks were allowed to set different PLRs for the purpose of pricing loans of various maturities. Banks in India are now generally pricing their loan products on the basis of individual benchmarks fixed by them w. e. f. the financial year 2004 – 2005. Individual banks fix their PLRs after taking into account their actual cost of funds , operating expenses and a minimum margin to cover regulatory requirement of provisioning / capital charge besides factoring their profit margin. Commercial banks apply interest to the loan accounts on a monthly basis. This is also a recent development and has been effective from April 2002. This is popularly known as application of interest on diminishing balance method. RBI has now given the freedom to banks to offer all categories of loans on fixed or floating rates. The floating rate credit products are usually priced using their PLRs or other market benchmarks. Now banks are offering loans at sub – PLR rates to their creditworthy borrowers. This has been permitted in view of the prevailing international practice , integration of the domestic credit dispensation with international platforms and also to provide operational flexibility to banks in deciding their lending rates.
  • 40. CREDIT APPAISAL:In the credit appraisal process, the decision maker makes an attempt to find answer totwo questions. First, whet her the entrepreneur requires fund, and also what are hiscredentials. If the answer to the first question is positive, the second question is allabout the extent of his requirement and the ways and means to fund the requirement.Assessment of credit requirement for enterprises working at a small scale is oftendifficult because of lack of data relating to operations of the unit. Often, the promotersare skilled personnel or artisans without having any knowledge of financialmanagement or accountancy. Besides, the low level of operations may not allow thepromoter to employ a regular accountant.A credit appraising officer may not find any profit and loss account or balance sheetof the borrowing enterprise, on the basis of which he may work out the level of creditrequired. In many situations, a credit analyst may have to counsel the borrower , andeven work out the likely profit/ loss and balance sheet on the basis of availableinformation.It is therefore necessary that a credit analyst has a good knowledge of accountancy.RBI has therefore suggested that lending banks may not insist on submission ofaudited financial statements up to credit requirements of Rs. 25 lakh fromprospective borrowers.Beyond this level, lending bankers usually compute the credit requirements afterundertaking a structured analysis of the financial statements of the borrowingenterprises. The financial management textbooks as well as the internal guidelines ofindividual banks prescribe the various methods of undertaking these exercises. Theproblem in credit assessment and dispensation , however, lies elsewhere.The financial statements are mostly prepared from the tax management angle. Thesestatements may not necessarily be built on the prudential principles of financialmanagement. Credit analysts therefore face a daunting task of uncovering the mask ofwindow dressing from the financial statements and undertake the analysis only on theresultant figures that represent the situation in reality. Thus, besides being a goodaccountant, a credit analyst must possess a basic undertaking of the principles offinancial management as well as taxation matters to understand the nuances offinancial engineering.
  • 41. METHODS OF CREDIT APPRAISAL:Till about, 1990 , bank credit was considered a scarce commodity and therefore therewas a strong focus on the need to optimally use this resource towards creation ofprimary assets. In banking parlance , these assets were known as a primary security,as a primary charge is created in favour of the lending bank on the assets created outof bank finance. With the gradual liberalization of the Indian economy , co- operativebanks began providing credit to other sectors and also for activities that do not fallstrictly under the manufacturing sector.As a result, the consumption sector got a big boost and personal banking segmentemerged as a lucrative business proposition for credit delivery. In its turn, a creditprovided to the personal segment also meant a thrust to the industries manufacturingconsumer goods. On the other hand, general services and software sector emerged asanother area to which the label of industrial production may not strictly fit. Theimportance of this sector in the Indian economy as a whole has only been increasingwhich the co-operative banks cannot afford to ignore.These developments in the last decade gradually brought in a revolution in themethods of financing so far followed by co- operative banking. In the monetary policyof 1997 – 98 , RBI declared the MPBF method as optional and suggested that co-operative banks may evolve their own rational methods for financing various types ofactivities . RBI also suggested cash budget method as a viable option. In fact , cashbudget method of financing has already gained recognition as a suitable method offinancing activities. Where no tangible security can be created or changed in favourof the bank.Cash flow based assessment is emerging as the most important method of appraisalof bank finance, where the lending banks finance a portion of the cash gap or deficitoccurring at any point of time , the remaining portion being met by the promoters astheir margin.
  • 42. INCOME RECOGNITION NORMS:There has been a sea change in the manner in which Indian co- operative banking hasbeen dispensing credit during the last decade.A credit portfolio is recognized as a non- performing asset in books of the bank if theborrower has not serviced the interest or repayment obligation.This is regardless of whether the borrowing enterprise is a profit making entity.Credit appraisal methods are therefore increasingly focusing on the assessment of therepayment capacity of the borrower , which in turn depends on his cash generatingability.Mere assessment of accounting profit is no more the most important criteria of creditassessment. Today, credit appraisal has emerged as an area which require adequatedomain knowledge on the part of the appraising officer, with a mix of experienceand the ability to see through the maze of financial statements .
  • 43. Fair practices code for lenders:There have been far reaching changes in the arena of banker - borrower relationshipduring the year 2002 and 2003.The changes relate to both the recovery aspects of the credit provided by the lendingbankers as well as the responsibility of the lending bankers in this regard .Thus, while the lending banks have been provided with a very strong recoverweapon by means of SARFAESI Act during the year 2002, RBI has also advised the lending bankers to adoptthe prescribed guidelines regarding Fair Practices code. The importantguidelines prescribed by RBI in this regard have been listed in Annexure no. 2.
  • 44. CREDIT APPAISAL FOR WORKING CAPITALMEANING OF WORKING CAPITAL: The term working capital refers to the current asset holding of an enterprise.This is also sometimes called the Gross Working Capital. For a manufacturingenterprise, the average levels of holding of raw material, goods in process,finished goods , receivables, cash and other current assets together constitute aworking capital . How does it differ from the other forms of capital employedin a business ? Let us consider a example of a house owner . The house ownerpurchases the house and furniture for the purpose of having a comfortable life .However , merely owning a house and various pieces of furniture is not asufficient condition for running the daily chores of the household .Fixed capital and working capital :We may therefore broadly classify the funds employed in a business enterpriseinto two components viz. fixed capital and working capital .Fixed capital is invested in fixed assets which enable an enterprise manufacturegoods for sale and earning profit . on the other hand , working capital isemployed in purchasing those items , which are transformed into saleable goodsby the production process .Working capital refers to the merchandise itself . The difference between thefixed capital and and working capital may be expressed in another manner .The assets representing working capital rapidly convert from one form to another ina short period of time. Thus, cash converts into raw material , raw material convertsinto goods in process and finally into finished goods. The finished goods can be soldin market and in the process is converted back to cash again.All these forms of current assets constitute working capital . The cash conversiontime in respect of fixed assets may be very high , usually years .
  • 45. T.G. Rose has used the phrase circulating capital to express working capitalmovement in his book titled The Internal Finance Of Industrial Undertakings. Thedynamics of circulating capital vis- a- vis infusion of funds , withdrawal of funds andrelatively stationary character of fixed capital is summed up in the diagram below :First circle is circulating capitalMiddle circle is fixed capitalThe above diagram captures the movement as well as the magnitude of both thecategories of capital . The fixed capital forms the core of the total funds invested inbusiness. The circulating capital continuously moves around the nucleus , i.e. corecapital. The diagram indicates that there is a continuous churning of the circulatingcapital . If the profit earned and other funds infused in the business are retained andfurther ploughed back , the circle dimension grow over a period of time. Thedimensions of the nucleus and the outer circle may also undergo changes , if the firmacquires new fixed assets or dispose the old ones.
  • 46. Operating cycle concept of working capital:The operating cycle concept of working capital envisages measurement of theaverage time taken by an enterprise in manufacturing the goods and selling them forcash so that the funds can be deployed for starting another batch of production . Thesystem completes one cycle when cash is realized out of the sale proceeds of finishedgoods from the receivable / debtors .Working capital has different components , the most important being the raw material. Manufacturing enterprises ensure that there always remain a minimum level of stockof raw material , which takes care of any abrupt discontinuity in supply. The rawmaterial is then pressed into production . The processing time largely depends on thenature and specification of the final product . Again , because the process of delivery takes some time , the enterprise may have toensure that a minimum level of finished goods always remains available. This wouldtake care of any sudden influx of order that may have to be supplied immediately .Finally , though the products have been delivered according to schedule , not all thesupplies are paid for immediately . A portion of sale proceeds may remain locked forsometime in the form of receivables. The receivables holding period is the timeallowed by manufacturer / supplier of the finished products to its customers formaking payments. The receivables are realized by the enterprise on expiry of thecredit period allowed by it .Thus, every rupee invested in current assets at the beginning of the cycle comes backto the promoter with the profit element added , after a lapse of a specific period oftime . This length of time is popularly known as the operating cycle or the workingcapital cycle. The cycle may be diagrammatically represented in the followingmanner :
  • 47. Cash RawReceivables material Finished Goods in goods process
  • 48. Measuring operating cycle :The operating capital concept raises a fundamental issue – how to measure this time ?It is not possible to physically track every element of raw material pressed intoproduction , and observe its movement across every stage of processing through thefinal production . When it comes out in the shape of finished goods. The operatingcycle is therefore measured in terms of days of average inventory held for every majorcategory of working capital component. The holding ratios play a very important roleat this stage. The holding periods of the individual WC components are computed inthe manner on analysis of financial statements. The aggregate of all these holdingperiods represents the length of the operating cycle.The following diagram makes the point clear : processing starts rec realised RM processing purchaed end FG sold
  • 49. Working capital policy :The working capital management policy of an enterprise is inextricably linked to itsapproach towards current asset funding . From the point of view of currency, theassets of an enterprise may be broadly divided into two categories i.e. current and non– current assets . The capital assets are funded by long term sources of finance ,generally in a combination of long term loans from banks / DFI s and a margincontributed by the promoters. On the other hand , current assets may further beclassified into two components ( I ) a core component and ( ii) a fluctuatingcomponent.A manufacturing enterprise has to maintain a minimum level of inventory at anypoint of time in order to run the production at specified level . Fall of inventory belowthis level may trigger a discontinuity in production and the required synchronizationbetween the various stages of production may get lost. We may call this minimumlevel of current assets as the permanent or core current asset level.The fluctuating current assets refer to the portion above this level that undergoes achange continually on account of changes in demand , seasonality of product etc .during the various period of the year.
  • 50. LENDING AGAINST WORKING CAPITALREQUIREMENT (PRE- NATIONALISATIONSCENARIO) :During the pre- nationalization period, lending operation of co- operative banks inIndia was largely confined to funding credit requirement of individual companiesengaged mainly in agro – based industries / activities such as jute , sugar , textile etc.The lending covenants were almost always governed by the security provided by theborrowers , both primary and collateral. Besides, as the industrial activity of thecountry was largely agro based, large swings in the operations on account of seasonalfluctuations in a business year were common occurrences. This led to large seasonalvariations in the demand for bank credit as well.In fact, availability of bank credit was not necessarily a function of the level ofproduction or operation , as it is today . The lending bankers followed a security –centric approach in credit dispensation.The establishment of new industries and introduction of new technologies in the post-independence period brought about a change in the outlook of commercial lending bybanks in India . The working capital requirement of many new generation industrieswere uniform throughout the year , the demand for credit was at a higher level andagricultural inputs were not necessarily required for many products .Co-operative banks adopted an operating cycle approach towards working capitalrelated lending operations , where the requirement was determined in terms ofholding periods of individual current asset components . for example , raw materialholding would be in terms of „X „ months of consumption and so on . The sum totalof the current assets would then be netted against other sources of funding such astrade credit received etc.The balance amount represented the working capital requirement against which bankcredit was provided. The lending banker would then determine the extent to which theabove gap should be funded after considering the margin available against individualcomponents. The borrowing company would have to fund the residual amount, byinfusing fresh capital or by mobilizing funds from other sources .Co- operative banks in India were thus already in search of a logical and rationalsystem of lending for working capital purposes during the initial years of the postindependence period . In the late sixties , Dehejia Committee made an observationthat the ratio of bank credit to inventory had grown rather disproportionately . Also,
  • 51. the growth in the quantum of bank credit extended far exceeds the value of theoutput of industrial production . These two observations indicated that bank creditwas perhaps not being used for the purpose of production alone .Indications were quite strong that the increased bank credit was used for hoardingessential commodities for the purpose of making undue profits. In order to rectifythe situation , Dehejia Committee made a few strong recommendations . one of therecommendations was to use funds flow analysis for ascertaining the sources andend use of funds . In order to contain the rapid and disproportionate growth of credit ,RBI took certain stringent measures in 1973 which resulted in Credit Squeeze in thelending scenario of India .Finally, RBI appointed a committee in 1974 under the chairmanship of Shri P.L.Tondon , the then chairman and managing director of Punjab National Bank . Themain agenda before the committee was to examine the various patterns andmethods of financing working capital requirement adopted by banks in India andto suggest necessary changes in these methods , which would ensure judiciousallocation of bank credit . Bank credit was scarce and RBI wanted to ensure thatthere should at least be a need based distribution of credit amongst theborrowing community or a credit rationing system , if possible .
  • 52. Working capital requirement up to Rs.1 crore:Following are the requirement for working capital up to Rs. 1 crore.  The assessment of working capital requirement of borrowers , other than SSI units , requiring fund based working capital limits up to Rs.1 crore and SSI units requiring fund based working capital limits up to Rs 5.oo crore from the banking system may be made on basis of their projected annual.  In accordance with these guidelines , working capital requirement is to be assessed at 25% of the projected turnover to be shared between the borrower and the bank viz. borrower contributing 5% of the turnover as net working capital and bank providing finance at a minimum of 20 % of the turn over .  The banks may carry out the assessment based on projected turnover basis or the traditional method. If the requirement based on traditional production / processing cycle is higher than the one assessed on projected turn over basis , the same may be sanctioned , as borrower must be financed up to the extent of minimum 20 percent of their projected annual turnover .  The bank may satisfy themselves about the reasonableness of the projected annual turnover of the applicants , both for new as well as existing units, on the basis of annual statements of account or any other documents such as return filed with sales- tax / revenue authorities and also ensure that the estimated growth during the year is realistic.  The borrowers would be required to bring in 5 % of their annual turnover as margin money. In cases, where out put exceeds the projections or where the initial assessment of working capital is found inadequate , suitable enhancement in the working capital limits should be considered by the competent authority as and when deemed necessary.  Drawals against the limits should be allowed against the usual safeguards so as to ensure that the same are used for the purpose intended. Banks will have to
  • 53. ensure regular and timely submission of monthly statements of stocks ,receivables , etc. by the borrowers and also periodical verification of suchstatements by their officials.
  • 54. Working capital requirements above Rs. 1 Crore:Method of Assessment :  The revised guidelines in respect of borrowers of other than SSI units , requiring working capital limits above Rs. 1 crore and for SSI units requiring fund based working capital limits above Rs. 5 crore from the banking system bestow greater level of flexibility to the primary Co- operative banks in their day to- day operations without diluting the prudential norms for lending as prescribed by RBI.  The earlier prescription regarding Maximum Permissible Bank Finance ( MPBF ) , based on a minimum current ratio of 1.33 :1, recommended by Tondon Working Group has been withdrawn. Banks are now free to decide on the minimum current ratio and determine the working capital requirement according to their perception of the borrowers and their credit needs.  Banks may evolve an appropriate system for assessing the capital credit needs of borrowers whose requirement are above Rs. 1 crore . Banks may adopt any of the under noted methods for arriving at the working capital requirement of such borrower . a) The turnover method , as prevalent for small borrowers may be used as a tool of assessment for this segment as well , b) Since major corporates have adopted cash budgeting as a tool of funds management , banks may follow cash budget system for assessing working capital finance in respect of large borrowers. c) The banks may even retain the concept of the MPBF with necessary modification.
  • 55. Tondon committee on Financing Working Capitalrequirements :The Tondon Committee examined the different aspects of prevalent bank lendingpractices during the period and suggested implementation of some far reaching stepsthat would streamline and rationalize the process of credit dispensation process bythe banks in India.The important suggestions are given below :  Assessment of the credit requirements of the borrowers should be directly related to the level of operations and activity of the borrowing enterprise . This envisaged distinct shift from the security- centric approach of lending to a production- oriented approach of lending in future.  The promoters must bring in a minimum amount of margin out of total working capital requirement of the unit . Banks should finance only the residual portion of working capital requirement as bank credit should be viewed only as a supplementary source of finance .  The committee prescribed standard norms for holding raw material , stock in process , finished goods , consumables and receivables etc . for different industries. This would ensure a level of homogeneity is assessment of working capital requirements of similar industries . The holding levels of individual component of working capital therefore could no longer be fixed arbitrarily. This measure would effectively reduce the scope for arbitrarily setting the level of bank credit for working capital purposes without having any linkage with the level of production of the borrowing enterprise.  The committee also felt that it was necessary to standardize the different methods practiced by bank for computing the levels of bank credit for working capital requirements . The committee prescribed 3 methods for computation of MPBF in this regard.
  • 56.  Depending on holding level of the individual component of working capital, the total amount of bank credit computed in accordance with the MPBF prescription would be bifurcated into different components of credit. Delivery of different components of credit would also confirm to specific prescription pertaining to that working capital component, if anualy. The committee also suggested methods to follow up the bank credit after delivery to verify whether actual levels of production and utilization of bank credit were closed to the initially projected levels on the basis of which assessments were done . We elaborate further the specific suggestion made by the committee in context of financing of working capital requirement made by The Committee.
  • 57. Inventories and Norms:While prescribing holding norms for the different components of working capital,the Committee classified the inventory in to the following categories:Normal inventory :Normal inventory is the level of inventory carried by an enterprise required tomaintain a normal production schedules. A normal level of inventory sustains theproduction as initially planned . It also includes the cushion level or safety level ofinventory designed to take care of contingent situations .Flabby inventory :Inventory in excess of the normal level resulting on account of poor workingcapital management or inefficient distribution was identified as flabby inventoryby the committee.Profit making inventory :Inventory held by a unit for a realization of stock profit is a profit makinginventory . Hording of essential commodities was a common phenomenon duringthe relevant period , which is a example of profit making inventory .Safety inventory :A safety inventory level is built up to meet unexpected short fall in supply of basicmaterial or to take care of a sudden spurt of demand .The committee treated build – up of safety inventory as a mode of insurance cover.Excessive inventory :The committee also recognized that some time an enterprise may have to build aninventory level much in excess of normal level . excessive inventory may built ifthe enterprise imports and stocks a large quantity of material require for
  • 58. production . Excessive inventory built up may also occur as a result of governmental control on sale of a commodity. Sugar is an example were the sale of which is subject to government control. Build up of excessive inventory is common occurrence in sugar manufacturing unit which may not necessarily be on account of inefficient working capital management policy followed by the enterprise. The committee made the recommendations in very clear terms . It suggested that flabby and profit making inventories should not be financed by banks . Further , borrowing enterprise have to make a constant and endeavours to bring down the flabby or otherwise excessive inventory to the normal inventory level by employing prudent inventory management techniques. The committee summed up its recommendations in respect of financing inventory by banks in following words “ carrying inventory in excess of normal inventory which includes reasonable factor of safety , is but an avoidable luxury, which the banker should not encourage “ The committee also felt that a level of receivables which is not in tune with the past trend of the enterprise and also with the general industry practices, should not be financed by a banker.Inventory norms :The committee identified the following as the main component of working capital ofa manufacturing enterprise :  Raw material including stores and other items used in the manufacturing process  Stock in process  Finished goods  Receivables and  SparesHolding periods in respect of different components of working capital are expressedin months . Where as raw material holding period is expressed in terms of months ofconsumption. Holding period of stocks in process is expressed in terms of months ofcost of production . for example, if cost of production per annum is Rs.120 lakh andstocks in process holding is worth Rs. 5 lakh, the holding period of SIP is one half of
  • 59. a month . On the other hand , the holding period of finished goods is expressed interms of months of cost of sale ( i.e. cost of production + change in stock of finishedgoods ) . Finally, holding period of receivables is expressed in terms of months ofsales. Receivable arising out of export sales or deferred payments sale etc. were notincluded while working out the holding level for receivables . No specific norms wereprescribed by the committee for holding period of spares . This is in view of the factthat the value of spares is generally in significant compare to that of other componentof inventory. However , the value of spare is not expected to exceed 5% of the totalinventory . The committee is expected that lending banks should enquire into thereasons if the holding level of spares exceeds this level or is inconsistent with the pasttrend of the enterprise in this regard .The Tondon committee had initially prescribed holding norms for fifteen industrygroup. It was also prescribed that these norms should be reviewed on a periodicalbasis and modified , if necessary . As, suggested , such reviews were undertakenseveral times subsequently and norms revised in respect of a no. of industry groups.Besides, norms for new industry group were also prescribed from time to time .Compliance with these norms by the lending banks was mandatory. In its Monetaryand Credit Policy of 1997- 98 , RBI declared these compliance norms optional .Banks were now free to set their own bench marks on holding norms on the basis oftheir own data base or industry wise databases accepted and recognized by them . Nevertheless , the holding norms prescribed by the Tondon Committee are stillrecognized as important sources both for the purpose of reference and assessment bythe banks engaged in lending against working capital requirements. A list of theholding norms of the various industry groups is annexed . Salient features of theholding norm prescriptions of Tondon Committee are summarized below :  Holding norms prescribed by committee were not static in nature. The norms were subjected to review periodically.  Separate holding norms were prescribed for same product for different geographical locations whenever warranted .
  • 60.  For the purpose of prescribing holding norms , finished goods and receivables were taken together , and a composite holding norm suggested .  Holding norms prescribed for a particular industry is the ceiling level and these should not be treated as rights or entitlements .  The norms indicate the average level of the inventory holding for a class of current assets , and not necessarily for any sub – components of such current assets.  The committee recognized the need to allow deviations from the prescribed norms in certain deserving situations.Tandon Committee prescription for assessment forassessment of working capital credit requirement :Tandon Committee made an observation that a banker‟s role as a working capitallender should be to supplement the resources already available to the borrower incarrying a reasonable level of current asset in relation to his production requirements .Such resources may in the form of promoters‟ margin or other liabilities e.g. tradecredit made available by suppliers of materials etc . The Committee recognized that the other current liabilities are very importantsources for funding the on going working capital requirements and these should beused diligently before availing bank credit as a source of last resort which should betaped only after all the internal and external sources of funding working capitalrequirements at the disposal of the enterprise were exhausted .The role of NWC as the promoters‟ margin towards working capital requirementswas firmly established in the process . In view of the above observations , thecommittee prescribed three alternative methods of computation of MPBF. All thethree methods recognized that the banks would lend only a portion of the WCG ,which is the value of the acceptable level of current assets after netting of f the othersources of funding WC requirements.The other sources of funding were represented by all the current liabilities except bankborrowing for working capital .In other words, current assets would be funded first by
  • 61. raising the other current liabilities . The residual portion of current asset in workingcapital gap which would be part financed by the lending banks.  First Method :In the first method of computation of MPBF , the margin contribution of theborrowing enterprise would be at a minimum level of 25% of the WCG . Suchmargin is contributed by the NWC of the enterprise . In the first method ofcomputation , the NWC of the enterprise would be at a minimum level of 25 % ofWCG . A bank may lend a maximum amount of 75 % of the WCG.  Second Method :The second method provides a more stringent prescription , where the enterprise hasto meet a minimum margin requirement of 25% of the current assets ( as against 25%of WCG stipulated in the first method ) .WCG is always lower than the level of current assets , and therefore , the marginrequirement in the second method is always higher than that stipulated in the firstmethod . The MPBF is worked out by subtracting the stipulated amount of marginfrom the WCG. Third Method :As discussed earlier , the committee recognized that there always exists a core elementin the working capital requirement of an enterprise . This core element is thepermanent level of current assets maintained by an enterprise so long it remains agoing concern . This level of asset was termed as the core current asset ( CCA) by thecommittee . This is an idea very close to concept of minimum level of inventorymaintained by enterprise to ensure uninterrupted production . The third method oflending prescribes that the borrowing enterprise should have the financial strength tofund the entire core current assets on its own ( or from long term surplus ). In addition , the promoters have to bring in a minimum margin to the extent of 25%to the remaining portion of the current assets . In this method , therefore , MPBF is theresidual portion of WCG after subtracting the CCA and margin component ,calculated in the above method .
  • 62. The third method is the most stringent of the all three methods prescribed by thecommittee . Though recognition of core current asset was a very bold and realisticstep and the prescribed method of financing working capital requirement was perhapsan answer to address the problem of allocation of scarce bank funds during therelevant period , the third method was not accepted by RBI for the purpose ofimplementation . RBI accepted the lending prescription as per the first and secondmethods for implementation of lending banks . to start with , it was suggested thebank credit for working capital requirements would be computed using first methodfor limits of Rs. 10 lakh and above up to Rs.50 lakh . The method of computationwould then be replaced by second method during the subsequent year .The three methods of computing MPBF are summarized in the table below :First method MPBF = ( CA – OCL ) – 25% of ( CA- OCL)Second method MPBF = ( CA- OCL ) – 25% of CAThird method MPBF = ( CA- OCL ) – CCA - 25 % of ( CA- OCL)Comments and Observation : 1. The enterprise has made short term borrowing fro the banking system in excess of MPBF , though the amount of excess borrowing varies with the method of computation of MPBF. The excess borrowing is at the highest level when the third method is employed for computing MPBF. 2. The impact of selecting a particular method of computation of MPBF on the Current Ratio is discernible . In the first method , the extent of margin that the enterprise has to mobilize from its long term surplus depends on its ability to tap the other short term sources of finance . 3. On the other hand , the second method envisages a minimum current ratio of 1.33 . A transition from the first method to the second method therefore always puts pressure on the enterprise to bring in more margin from long term surplus / other long term sources .
  • 63. 4. Theoretically, the minimum current ratio in respect of the 3rd method also stands at 1.33 . However , a business enterprise has always maintain a certain level of core current asset .A lending bank may continue to follow these methods or evolve other methods forworking capital lending. The alternative methods suggested by RBI included cashbudget method, which has been discussed in detail .Holding period method of assessment of working capital :Banks have traditionally been assessing working capital credit requirements on thebasis of holding period of the components of chargeable current assets i.e. rawmaterial , stocks in process, finished goods etc. The holding period method ofassessment follows the operating cycle concept of working capital.The working capital requirement and compute the permissible level of bank credit ofan enterprise by this method in the following manner :  To start with , the assessing officer firms up the projection for sales, the important cost element related to production and weighs such projections against benchmark set by lending bank, if any. For existing units, validation of projected figures may be done by undertaking a trend analysis of sales, the various expenses and holding and other ratios over a period of time . For new enterprises , validation of the projections may be done on the basis of his own experience and the industry average figures for such activity .  The holding period method of assessment of working capital requirements generally adopts a simplified approach towards recognition of the various elements of cost. In this method, the assessing officer usually adds all the expenses with the cost of raw materials and consumables .  The amount of working capital required for holding the different components of current assets are then worked out on the basis of the prospective holding periods as projected and validated above.  In addition , some lending bankers prefer to include the amount of expenses for reasonable period in the amount of working capital required. This is generally
  • 64. applied in case of small units in order to provide an extra cushion while computing the working capital requirement .  The individual margin requirement against working capital requirement against working capital requirements for holding various component of current asset are computed using the specified rates .  The amount mobilized from the other sources of financing current assets are now subtracted from the aggregate of the individual current asset holdings. The other sources of financing current assets are :  Actual NWC available in the business .  Amount of trade credit allowed by the suppliers  Advance payment received from customers against future supplies to be made by the enterprise .The permissible amount of bank finance is lower of the following :  Total of the net working capital credits limits calculated as per step four and  The aggregate of the working capital limit as reduced by the other available sources of finance , as worked out .Working capital assessment for small loans :Small business, retailer , village and tiny industries in the SSI sector form animportant business segment for co-operative banks . Thus, providing timelyassistance to these small entrepreneurs is also equally important for lending banks. Atimely and adequate level of bank credit helps generate employment in this sector . Besides , co-operative banks in India are given specific targets for lending to thissegment of priority sector by the Government and RBI. This is a weak and vulnerablesector where the units may become non-performing even if there are temporarymismatches in their cash flows. In t view of this , it is important that assessment anddelivery of working capital credit facilities for such units are done on realisticparameters and also that the monitoring of credit facilities are done on a regular basis.
  • 65. This is possible if the characteristic feature of the small enterprise are understoodproperly. The most important features of such units are the following :  They usually do not maintain proper books of account.  A full scale application of holding norms for the purpose of assessing working capital credit limits in these situations may not be necessary in practice.  Monitoring the withdrawal of funds and the position of outstanding balance in these small loan accounts against a permitted level of drawing power may not always be a practicable proposition in respect of small loan.  Small entrepreneurs tend to divert the amount of credit provided for business needs towards consumption needs at the slightest provocation.A simple method of SSI of their WC credit needs :  Work out an estimate of sales and the corresponding production related item - wise expenses per month.  The average holding period of important items viz . raw material , semi finished goods, may be assessed by credit officer on the basis of his experience in dealing with similar kind of activity.  If the operating cycle is estimated in months , the product of the OC and the total expenses per month may be considered as the gross working capital .
  • 66. Financing working capital requirements of Trading Enterprises :Trading enterprises include wholesale dealers and retail outlets of consumer goods tatrequire a substantial amount of working capital . During the pre- liberalization years,lending for working capital to traders did not rank high in the priority list ofcommercial banks . The scenario is changing fast. Not only the sector has attracted ahigher level of bank lending during the recent year, co-operative banks are alsocompeting with each other to have a higher market share in bank credit in this sectorof economy .Characteristic feature of Trading Enterprise :  Trading is a traditional business activity , usually carried on by a family.  In India, trading activity is carried on mostly by HUF‟s , partnerships, and proprietorship concerns.  In case of established trading units , a major portion of the working capital requirement is usually met by trade credit made available by supplier , are very common .  Trading units generally have low NWC and profit figures both in absolute and percentage terms .  Usually , trading enterprise offer significant amount of collateral securities , often in the form of immovable properties.  The asset side of the balance sheet of trading enterprise characteristically merchandise , receivables, and current assets as the as the main items.  On the liability side of the balance sheet , trading units usually carry a small amount of capital. This is sometime associated with high level of trade credit s and unsecured loans, the latter often made available by friends and relatives of promoter (s).
  • 67. Assessment of working capital requirement of trading units :The trading enterprise s have a higher asset turn over ratio compared to that in respectof enterprises in the manufacturing segment. A low level of bank credit provided forworking capital purposes to a trading unit may therefore support a comparatively highturn over of sales. It is not unusual for an inland trading unit to register an annual sale turnover in therange of Rs. 2 crore – Rs. 10 crore or perhaps even beyond , on the strength of aworking capital credit limit of 50 lakh provided by banks .The level of the turn over depends to a large extent of the commodity traded in .Banks usually employ the traditional holding method for assessing working capitalcredit requirement of trading enterprises . However, many banks , follow the methodprescribed by Tandon committee , especially when credit limits are high , say Rs. 25lakh and above .Margin requirements :The skill of credit analyst does not lie in working capital out the permissible amountof finance against an acceptable level of holding of current assets . This is a simplearithmetical process, and very often the projection are made very close to thepermissible level of bank finance .The real test of a quantitative appraisal of bank credit lies in validating the thepropriety of the margin requirement and whether the available sources of finance andalso the financial statements indicate that the amount of margin required can actuallymobilized .The assumption in funding the margin required in respect of trading units may oftengo wrong . Most commonly, the margin – deficit situations are explained by makingstatements that the margin requirement would be funded by way of the existingNWC in the business , plough back of profit / cash accrual etc. If there still sources is commonly proposed .Quite often , the projected financialstatement do not corroborate these proposition . As a result , assessment of workingcapital requirement largely reduces to a theoretical exercise.
  • 68. System of credit delivery by Banks :The banks lend the credit in following ways :  Cash credit system .  Working capital Demand loan ( WCDL ) system  Consortium system of credit delivery  Multiple Banking system  Syndication of credit  Commercial paper
  • 69.  Cash credit system :Bank in India have traditionally been using the cash credit system for delivery of bankcredit for working capital purposes . The system is quite popular and several reasonsare attributed to its popularity.The cash credit system of credit delivery dominates the scenario of credit dispensationby banks . A recent survey has shown that despite the various modes of bankcredit introduced by banks in India , the amount of credit delivered by way of cashcredit is reigning at level of 46 %.Cash credit system of credit delivery poses some real operational problem for thelending banks at the apex management level as well.  Working capital Demand Loan system :RBI had introduced the Loan system of delivery of bank credit in April 1995. Theloan system is commonly known as the WCDL system of lending. It was implementedin phases proportion of borrowing accounts in the Indian banking system . Presently ,the WCDL system is applicable to borrowers enjoying working capital credit limits ofRs. 10 crore and above from the banking system . The loan system envisages that alarger portion of WC credit provided by the banks should be in the form of a loanrepayable over a period of time. The remaining portion can be provided by way ofcash credit .
  • 70. Consortium system of credit delivery :In the pre nationalization period , the Indian banks practiced a crude form of multiplebanking relating to credit delivery . The system was not bound by any laid down codeof conduct or regulation . The nature and amount of security offered was veryimportant factor in the decision making process of banks . the beneficiaries of bankcredit were generally a big industrial and business houses. It was felt that this systemof indisciplined lending was likely to adversely affect the health of the lending banks.It was therefore necessary to regulate this system of lending prevalent in the Indianbanking system and also to frame and implement a proper system of risk sharingamongst banks. Multiple Banking System : In the monetary policy, of 1997- 98 , the RBI declared that borrowing enterprise might also use multiple banking routes for availing working capital credit requirement . However , no concrete set of guidelines regarding the use of this new platform for delivery of credit has yet been issued by RBI or any other regulatory authority. This has resulted in a certain degree of heterogeneity and indiscipline in credit delivery by lending banks through the multiple banking channel . companies with slack financial principles and governance may exploit the situation in a manner that may be determined to the interest of lending banks . Syndication of creditSyndication of credit is another mode of risk sharing and credit participation by agroup of lending bankers . This is a preferred mode of credit delivery especially whenthe amount of credit is large in nature. In the monetary policy of 1997 – 98 , RBI hadindicated that bank might opt for syndication mode of lending in lieu of theconsortium route . Syndication of credit for providing working capital creditrequirement has not yet gained ground in India.
  • 71. Commercial paper Commercial paper has emerged as popular instrument for financing working capital requirement of corporate borrowers of banks . Commercial Paper is an unsecured money market instrument issued in the form of a promissory note .This instrument was introduced in India in 1990 so as to enable the highly rated corporate borrowers of banks to diversify their sources of borrowing.ANALYSIS OF OPENING WORKING CAPITAL : When a business enterprise approaches a bank for providing certain credit facilities ,a enterprise is required to submit the important financial statements and any furtherinformation relating to its activity, as required by lending bank. The lender undertakesan analysis of above statements before he takes a decision on the credit proposal.Analysis of profit and loss and balance sheet :The following methods are applied for analysis of the statement :For analysis of profit and loss statement  Percent of sales method  Incremental sales method  Time series analysisFor analysis of balance sheet  Percentage balance sheet method  Trend percentage  Ratio analysis  Fund flow analysis  Cash flow analysis Analysis of operating ( profit & loss) statement by percent of sales method : In this method the individual cost component are expressed as percentage of net sales during the year.Analysis of operating statement by incremental sales method : The management of the enterprise has made endeavors to neutralize the impact ofincreasing cost of consumption of raw material by ensuring that other inputs andfactor of production are made cost effective in best possible manner.
  • 72. Analysis of balance sheet by ratios: The balance sheet ratios are :Liquidity ratio :It used in considering in working capital.Current ratio :This is done by comparing the short term assets of enterprise with its short termliabilities .Current ratio = current assets Current liabilitiesQuick ratio :It measure degree of liquidity of an enterprise may be gauged by weighing the liquidcomponent of current asset and CL.Quick ratio = Current assets – Inventory Current liabilityHolding ratios :Bankers attach a great degree of importance of these ratios .a) Raw material holding = stock of raw material x 365 Annual consumption of raw materialb) Stock in process stock in process level x 365 Cost of productionc) Finished goods holding = finished goods level x 365 Cost of salesd) Receivable holding level = BR level x 365e) trade creditors level = trade credit level x 365 annul purchasef) advances paid to suppliers = advances to future supplies x 365 annual purchaseg) advances received against future sale = advance received againstle s x 365/ annual gross sale
  • 73. To know credit appraisal to working capital. I take the one trading company and try to know how bank lend the credit to that trading company. Its name is KIRAN TRADERS. And its balance sheet as follows: Profit and loss account for marh 31 - 2008Sale 22360Purchase cost of material sold 21070Other expenses ( including interest ) 1065Depreciation 18Profit before Tax 207Tax 51Drawing 48Retained profit 108Balance sheet particularsparticulars 2007 2008 particulars 2007 2008Capital 104 212 Fixed 91 85 assets(net)Unsecured 996 1176 Stock 1535 2634loan (quasi (merchandised)equity)Unsecured 816 874 Advance to 787 1590loan ( CL) suppliersBank 1257 1950 Receivables 2045 2516borrowingTrade 1809 2860 Advance tax 28 51creditStatutory 44 Other current 254 63liability assetsOther 26 10 Cash/ bank 312 143currentliabilitiesTotal 5052 7082 Total 5052 7082The enterprise has purchased fixed assets worth Rs. 12000 during 2008.
  • 74. Important holding ratios are :Particular 2007 2008Stock 1.27 1.5Receivable 1.57 1.35Advances to suppliers 0.63 0.86Trade credit 1.44 1Calculation of ratios : a) Stock in process holding = stock in process level * 365 Cost of production b) Receivable holding level = Bills receivable level * 365 Annual purchase c) Advances to suppler = Advances paid against * 365 future supplies ______________________________ Annual purchase d) Trade creditors holding = trade creditos level * 365 Level Annual purchase
  • 75. The working capital of the KIRAN TRADER‟s is calculated in the following mannerafter taking into account account the related components of current assets andliabilities : in Rs. ooo‟sProjected level of stock 1.5 of consumption 2634Projected level of 1.35 of sales 2516receivablesProjected level of 0.86 of purchases 1590advance payment madeto suppliersLess: trade credit 1.55 of purchases 2860availableWorking capital 3880requiredWorking capital required = 2634+ 2516+ 1590 – 2860 = 3880 ( 38,80,000)Bank has to demand a 30 % margin against paid up stock and a 40% margin againstreceivables / trade debtors . The individual credit limits may therefore be worked outas under :WC Credit limit against paid – up stock = ( 4224000 – 2860000) x 70% = 955000.= 950000WC Credit limit against receivables = 2516000 x 60% = 1509000 = 1000000Here bank decide to put to put a ceiling of Rs. 10,00,000 . on credit limit againstreceivables.Margin requirement is 38,80,000 – 1950000 = 19,30,000.
  • 77. Findings :I find the following points: 1) Banks apply holding method to lend money for Kiran Traders. 2) Bank apply 1.3 current ratio for lend credit money which is above Rs 1 crore . 3) Bank apply Tandon Committee suggestion for lending money with some alteration. 4) Bank lend only 20% of working capital requirement . 5) Trader ready to contribute 5% for working capital.
  • 78. Conclusion :By doing project in Raichur District Center Co-op Bank Ltd, Raichur. I come to theconclusion that 1) Bank achieving very good financial performance 2) Bank‟s lending rates are very competitive in nature. 3) Banks growth rate is very high as compare to other co-operative banks. 4) Banks administration is very good . 5) It is playing a vital role in the rural credit in Raichur 6)
  • 79. BIBLIOGRAPHY:  D.D. Mukherjee – Credit appraisal and analysis  I.M.Pandey - Financial Management  John D‟silva - Co- operative Banking Website: www.rbi.org.in www.indyainfoline.in