Working capital management on kotak mahindra group

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Working capital management on kotak mahindra group

  1. 1. SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF POST GRADUATE DEGREE IN INTERNATIONAL BUSINESS WORKING CAPITAL MANAGEMENT On Kotak Mahindra Group INDUSTRY GUIDE FACULTY GUIDE AMITY INTERNATIONAL BUSINESS SCHOOL, NOIDA AMITY UNIVERSITY – UTTAR PRADESH AMITY INTERNATIONAL BUSINESS SCHOOL 1
  2. 2. TABLE OF CONTENTS Chapter No. Subject Page No. Ch No.1 Executive Summary…………………. 6 Ch No.2 Research Methodology……………… 7 2.1 Primary Objective(s)…………. 2.2 Hypothesis…………………… 2.3 Research Design……………… 2.4 Sample Design……………….. 2.5 Scope of the Study……………. 2.6 Limitations……………………. Ch No.3 Critical Review of Literature……….. 9 Ch No.4 Company Profile ……………………. 18 Ch No.5 Industry Profile……………….. 21 Ch No.6 SWOT Analysis…………………. 45 Ch No.7 Data………………………………….. 46 7.1 Collection……………………… 7.2 Primary Data…………………… 7.3 Secondary Data….…………….. Ch No.8 Working Capital- Overall View……… 53 Ch No.9 Findings & Analysis…………………. 100 Ch No.10 Recommendations…………………… 112 Ch No.11 Bibliography…………………………. 114 Ch No.12 Annexure…………………………….. 115 12.1 Tables…………………………. 12.2 Graphs………………………… Ch No.13 Case Study...…..................................... 117 Ch No.14 Synopsis of the Project………………. 122 AMITY INTERNATIONAL BUSINESS SCHOOL 2
  3. 3. CH NO.1: EXECUTIVE SUMMARY The Indian Life Insurance Company has seen a remarkable shift since the time of establishment of the first company, Oriental Life Insurance Company in 1823. At the time of Independence and thereafter, there were more than 200 companies operating in India and not all of them on sound ethical principles. Many factors combined together to prompt the then Government to nationalize the life insurance industry in 1956 to form the Life Insurance Corporation of India. Insurance sector was once a monopoly, with LIC as the only company, a public sector enterprise. But nowadays the market opened up and there are many private players competing in the market. There are thirteen private life insurance companies who has entered the industry. The study in the first part gives detail information on the on-job training provided the competitive analysis of product of Kotak Mahindra Old Mutual Life Insurance Ltd. with ICICI Prudential Life Insurance. Also, analysis of financial statements. In the second part, is a project on “How does the Indian mutual fund industry compare vis - a - vis global standards and what should be our future expectations from it?” The paper begins by analyzing the current scenario in the industry characterized by problems with distribution, low investor awareness and concentration of corporate investors. In the next section, a comparison of the Mutual Fund Industry with global standards reveals that the industry still compares unfavorably with developed countries in terms of penetration, investor awareness and diversity of products and the extent of use of risk management techniques. Further comparison reveals that the attitude of regulator towards investor protection and the governance of mutual funds are at par with global standards. The paper then analysis the future expectations from the mutual fund industry in terms of increased investor awareness, product diversity and improvement in penetration and distribution. In the end I recommend certain steps that SEBI and AMCs should take in order to build investor confidence and trust. AMITY INTERNATIONAL BUSINESS SCHOOL 3
  4. 4. CH NO. 2: RESEARCH METHODOLOGY Primary Objective(s) The Basic objective of cash management is two fold: • To meet the cash disbursement needs (payment schedule); • To minimize funds committed to cash balances. These are conflicting and mutually contradictory and the task of cash management is to reconcile them. Hypothesis: 1. Customers have basis of preference in selection of the final Kotak Mahindra Old Mutual Life Insurance 2. The choice of the Kotak Mahindra Old Mutual Life Insurance might have an effect either of the personal preference or the country of origin 3. The final decision is based on prior experience Sample Size: The size of the sample was around 70 people considering the time constraint. Research Design: Data Collection: Data has been collected through both primary and secondary approach. Data Sources The research involved gathering Secondary data as well as Primary data. For the purpose two types of survey was conducted by me to collect the data - • Customer survey and • Consumer survey Primary Data Consumer survey was done to know their purchasing behaviour because they are the one who constitute the market and are the target of the business . In Insurance Industry untill and unless we have the knowledge of the consumer behaviour and factor which AMITY INTERNATIONAL BUSINESS SCHOOL 4
  5. 5. influence them to buy a paticular brand ,companies cannot focus upon the target market. Hence a consumer survey was done to know their wants, purchasing power, and buying habits in order to segment the market , and based on this consumer profile was identified. Secondary Data Secondary data regarding sales figures, promotional expenses and other related expenses was collected from the company’s own record to analyse the impact on sales due to the running schemes and make cost benefit analysis. Scope of the Study Both primary and Secondary data has been be used for the study. Primary data was collected through direct interaction with the company’s finance and accounts department. If needed schedule/questionnaires would be devised to get the information on all the relevant areas of the study such as receivable management, inventory management, management of cash etc. And I collected the data from the secondary sources comprising Annual Reports of the firm, other journals and peridocials. Apart from the conducting this research work on the basis of these informations, various techniques of financial management e.g., comparative statement, trend analysis and ratio analysis etc. were used in the present study. To present a broad view so far the purpose of the analysis and to make it easy to understand the problem/concept of a few graphs and tables shall also be presented. In each chapter, the analysis has been compared with actual management practices of the company under study. Limitation of the Study  The present study is limited to one Co., i.e. Kotak Mahindra Life Insurance Ltd., and covers a period from 2005 and 2006 due to limitation of time and accessibility to data base.  The authenticity of the suggestions and recommendations depend upon the rationality of the data provided to me.  Have to rely upon the data supplied.  Executives are not ready to part with the information beyond a limit. AMITY INTERNATIONAL BUSINESS SCHOOL 5
  6. 6. CH NO. 3: CRITICAL REVIEW OF LITERATURE WORKING CAPITAL - OVERALL VIEW Working Capital management is the management of assets that are current in nature. Current assets, by accounting definition are the assets normally converted in to cash in a period of one year. Hence working capital management can be considered as the management of cash, market securities receivable, inventories and current liabilities. In fact, the management of current assets is similar to that of fixed assets the sense that is both in cases the firm analyses their effect on its profitability and risk factors, hence they differ on three major aspects: 1. In managing fixed assets, time is an important factor discounting and compounding aspects of time play an important role in capital budgeting and a minor part in the management of current assets. 2. The large holdings of current assets, especially cash, may strengthen the firm’s liquidity position, but is bound to reduce profitability of the firm as ideal car yield nothing. 3. The level of fixed assets as well as current assets depends upon the expected sales, but it is only current assets that add fluctuation in the short run to a business. To understand working capital better we should have basic knowledge about the various aspects of working capital. To start with, there are two concepts of working capital:  Gross Working Capital  Net working Capital Gross Working Capital: Gross working capital, which is also simply known as working capital, refers to the firm’s investment in current assets: Another aspect of gross working capital points out the need of arranging funds to finance the current assets. The gross working capital concept focuses attention on two aspects of current assets management, firstly optimum investment in current assets and secondly in financing the current assets. These two aspects will help in remaining away from the two danger points of excessive or inadequate investment in current assets. Whenever a need of working capital funds arises due to increase in level of business activity or for any other reason the arrangement should be made quickly, and similarly if some surpluses are AMITY INTERNATIONAL BUSINESS SCHOOL 6
  7. 7. available, they should not be allowed to lie ideal but should be put to some effective use. Net Working Capital: The term net working capital refers to the difference between the current assets and current liabilities. Net working capital can be positive as well as negative. Positive working capital refers to the situation where current assets exceed current liabilities and negative working capital refers to the situation where current liabilities exceed current assets. The net working capital helps in comparing the liquidity of the same firm over time. For purposes of the working capital management, therefore Working Capital can be said to measure the liquidity of the firm. In other words, the goal of working capital management is to manage the current assets and liabilities in such a way that a acceptable level of net working capital is maintained. Importance of working capital management: Management of working capital is very much important for the success of the business. It has been emphasized that a business should maintain sound working capital position and also that there should not be an excessive level of investment in the working capital components. As pointed out by Ralph Kennedy and Stewart MC Muller, “the inadequacy or mis-management of working capital is one of a few leading causes of business failure. Current assets, in fact, account for a very large portion of the total investment of the firm. Table showing Current assets as percentage of Total assets Year Percentage 2004 31% 2005 26% 2006 35% AMITY INTERNATIONAL BUSINESS SCHOOL 7 0 5 10 15 20 25 30 35 40 2004 2005 2006
  8. 8. It can be visualized from the table that in the first year of our study i.e. 2004 it was 31% which was reduced to 26% in the next year and in 2006 it is 35% shows fluctuating trend. Determinants of Working Capital: There is no specific method to determine working capital requirement for a business. There are a number of factors affecting the working capital requirement. These factors have different importance in different businesses and at different times. So a thorough analysis of all these factors should be made before trying to estimate the amount of working capital needed. Some of the different factors are mentioned here below:- 1. Nature of business: Nature of business is an important factor in determining the working capital requirements. There are some businesses which require a very nominal amount to be invested in fixed assets but a large chunk of the total investment is in the form of working capital. There businesses, for example, are of the trading and financing type. There are businesses which require large investment in fixed assets and normal investment in the form of working capital. 2. Size of business: It is another important factor in determining the working capital requirements of a business. Size is usually measured in terms of scale of operating cycle. The amount of working capital needed is directly proportional to the scale of operating cycle i.e. the larger the scale of operating cycle the large will be the amount working capital and vice versa. 3. Business Fluctuations: Most business experience cyclical and seasonal fluctuations in demand for their goods and services. These fluctuations affect the business with respect to working capital because during the time of boom, due to an increase in business activity the amount of working capital requirement increases and the reverse is true in the case of recession. Financial arrangement for seasonal working capital requirements are to be made in advance. 4. Production Policy: As stated above, every business has to cope with different types of fluctuations. Hence it is but obvious that production policy has to be planned well in advance with respect to fluctuation. No two companies can have AMITY INTERNATIONAL BUSINESS SCHOOL 8
  9. 9. similar production policy in all respects because it depends upon the circumstances of an individual company. 5. Firm’s Credit Policy: The credit policy of a firm affects working capital by influencing the level of book debts. The credit term is fairly constant in an industry but individuals also have their role in framing their credit policy. A liberal credit policy will lead to more amount being committed to working capital requirements whereas a stern credit policy may decrease the amount of working capital requirement appreciably but the repercussions of the two are not simple. Hence a firm should always frame a rational credit policy based on the credit worthiness of the customer. 6. Availability of Credit: The terms on which a company is able to avail credit from its suppliers of goods and devices credit/also affects the working capital requirement. If a company in a position to get credit on liberal terms and in a short span of time then it will be in a position to work with less amount of working capital. Hence the amount of working capital needed will depend upon the terms a firm is granted credit by its creditors. 7. Growth and Expansion activities: The working capital needs of a firm increases as it grows in term of sale or fixed assets. There is no precise way to determine the relation between the amount of sales and working capital requirement but one thing is sure that an increase in sales never precedes the increase in working capital but it is always the other way round. So in case of growth or expansion the aspect of working capital needs to be planned in advance. 8. Price Level Changes: Generally increase in price level makes the commodities dearer. Hence with increase in price level the working capital requirements also increases. The companies which are in a position to alter the price of these commodities in accordance with the price level changes will face fewer problems as compared to others. The changes in price level may not affect all the firms in same way. The reactions of all firms with regards to price level changes will be different from one other. AMITY INTERNATIONAL BUSINESS SCHOOL 9
  10. 10. CIRCULATION SYSTEM OF WORKING CAPITAL In the beginning the funds are obtained by issuing shares, often supplemented by long term borrowings. Much of these collected funds are used in purchasing fixed assets and remaining funds are used for day to day operation as pay for raw material, wages overhead expenses. After this finished goods are ready for sale and by selling the finished goods either account receivable are created and cash is received. In this process profit is earned. This account of profit is used for paying taxes, dividend and the balance is ploughed in the business. Working capital is considered to efficiently circulate when it turns over quickly. As circulation increases, the investment in current assets will decrease. Current assets turnover ratio speaks about the efficiency of Kotak Mahindra in the utilisation of current assets. Fast turnover current assets results in a better rate on investment. Table showing Current Assets Turnover Ratio Year Ratio (in times) 2004 1.78 2005 2.98 2006 1.98 Average: 2.24 AMITY INTERNATIONAL BUSINESS SCHOOL 100 0.5 1 1.5 2 2.5 3 2004 2005 2006
  11. 11. The ratio average is 2.24 times in the study period of 3 years. In 2005 current assets turnover ratio is highest one i.e. 2.98 during the 3 year study. Reasons being during this year company has achieved sales growth 44.36% over the previous year and additional activity needs more funds. KOTAK MAHINDRA LIFE INSURANCE LTD. Ratios useful to analyze working capital management (A) Efficiency Ratios 2004 2005 2006 Ideal Ratio 1. Working Capital Turnover (times) 4.84 10.23 5.71 - 2. Current Assets Turnover (times) 1.78 2.98 1.97 - 3. Inventory turnover (times) 9.49 9.20 7.88 - (B) Liquidity Ratio 1. Current Ratio 2.12 1.80 2.41 2.0 2.AcidTestRatio 1.15 0.98 1.03 1.0 3. Cash Ratio 0.57 0.08 0.05 0.5 AMITY INTERNATIONAL BUSINESS SCHOOL 11
  12. 12. Interpretation (Ratio Analysis)  The utilization rate of net working capital as depicted by working capital turnover ratio is fluctuating during the period. It shows that working capital has not been effectively used over the period of years except in the year 2005.  As shown by current assets turnover ratio, the utilisation of current assets in terms of sales has shown a decreasing trend which shows that current assets has been effectively used to achieve sales.  Again if we look at the efficiency with which individual elements of working capital have been utilized, the picture of inventory turnover is not very bright.  Receivables turnover also shows a declining trend. Generally such a situation does not suit the company.  As we look at the extent of liquidity of working capital, we notice that the ratio shows an increasing trend. This indicates improvement on the liquidity front.  If we analyze the structural health of working capital, the proportion of current assets to total assets has been appropriate during this period. Such a higher proportion of current asset in the assets portfolio of Kotak Mahindra Life Insurance Ltd. is quite acceptable. AMITY INTERNATIONAL BUSINESS SCHOOL 12 (C) Structural Health of Working Capital Ratio/Year 2004 2005 2006 1. CA 0.31 0.26 0.35 2. CL 0.15 0.14 0.14 3. Cash to CA 0.27 .04 0.02 4. Receivables to CA 0.27 0.50 0.40 5. Loans and Advances to CA 0.15 0.19 0.15 6. Inventory to CA 0.42 0.38 0.50 7. RM to Inventory 0.44 0.46 0.30 8. Stock spares to inventory 0.12 0.14 0.11 9. WIP to inventory 0.06 0.08 0.03 10. Finished Goods to Inventory 0.38 0.32 0.56
  13. 13. Our analysis above indicates the areas of concern to management in making best possible use of resources. Decreasing efficiency in the use of current assets hints of the possibility of problems in working capital management. On further analysis, inventory constitutes a major proportion of total current assets. Among its various components, raw materials, stocks, spared and finished goods in particular need further analysis as here stand out to the problem areas. Cash Flow Statement (2005-06) Sources Amount A ( in Lacs) Application Amount B (in Lacs) Proceeds from borrowings 162.37 Loss from operation 185.27 Sale of assets 27.34 Change in cash 5.01 Total 190.28 190.28 Summary of Cash Flow Analysis a) Cash from operation to total cash available = 185.31/190.28 = 97.38% b) Cash from long term sources to total cash available = 162.37/190.28 = 85.33% c) Proceeds from sale of non-current assets to total cash = 17 14/19028 = 0.90% Schedule of Changes in Working Capital Particulars Amount (in lacs) Changes in Working Capital Dec’2005 Dec’2006 Increase (Debit) Decrease (Credit) Current Assets Inventories 93.87 146.36 52.48 - Sundry Debtors 123.22 114.71 - 8.51 AMITY INTERNATIONAL BUSINESS SCHOOL 13
  14. 14. Cash and Bank balances 10.64 5.63 - 5.01 Other current assets 20.14 247.87 21.66 288.36 1.52 - Current Liabilities 137.02 116.07 20.95 - Working capital (CA-CL) 110.85 172.29 Increase in Working Capital 61.44 - 61.44 172.29 172.29 74.96 74.96 Fund Flow Statement (2005-06) Sources Amount A (in lacs) Application Amount B (in Lacs) Increase in loan 162.37 Increase in working capital 61.44 Sale of asset 22.94 Loss from operation 123.87 Total 185.31 185.31 Summary of Fund Flow Analysis 1. Increase in net working capital — 61.44 2. Funds from operations to finance permanent address (123.87) 3. Ratio of fund flow from operations to total funds in the business (-) 123.87/85.31 = (66.85) Interpretation (Fund Flow Statement) 1. Networking capital has been increased over the years, which has increased liquidity AMITY INTERNATIONAL BUSINESS SCHOOL 14
  15. 15. 2. Company should take corrective actions to covert loss from operation to funds from operation. AMITY INTERNATIONAL BUSINESS SCHOOL 15
  16. 16. CH NO. 4: COMPANY PROFILE CREATING BANKING HISTORY Established in 1985, The Kotak Mahindra group has long been one of India's most reputed financial organizations. In February 2006, Kotak Mahindra Finance Ltd, the group's flagship company was given the license to carry on banking business by the Reserve Bank of India (RBI). This approval creates banking history since Kotak Mahindra Finance Ltd. is the first company in India to convert to a bank. The Complete Bank At Kotak Mahindra Bank, we address the entire spectrum of financial needs for individuals and corporates. We have the products, the experience, the infrastructure and most importantly the commitment to deliver pragmatic, end-to-end solutions that really work. * A license authorizing the bank to carry on banking business has been obtained from the Reserve Bank of India in terms of Section 22 if the Banking Regulation Act, 1949. It must be distinctly understood, however, that in issuing the license, the Reserve Bank of India does not undertake any responsibility for the financial soundness of the bank or the correctness of any of the statements made or opinion expressed in this connection. The Kotak Mahindra Group Kotak Mahindra is one of India's leading financial conglomerates, offering complete financial solutions that encompass every sphere of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the financial needs of individuals and corporates. The group has a net worth of over Rs. 3,200 crore, employs around 10,800 people in its various businesses and has a distribution network of branches, franchisees, representative offices and satellite offices across 300 cities and towns in India and offices in New York, London, Dubai, Mauritius and Singapore. The Group services around 2.6 million customer accounts. AMITY INTERNATIONAL BUSINESS SCHOOL 16
  17. 17. Our Story The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance Limited. This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak & Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, and that's when the company changed its name to Kotak Mahindra Finance Limited. Since then it's been a steady and confident journey to growth and success. 1986 Kotak Mahindra Finance Limited starts the activity of Bill Discounting 1987 Kotak Mahindra Finance Limited enters the Lease and Hire Purchase market 1990 The Auto Finance division is started 1991 The Investment Banking Division is started. Takes over FICOM, one of India's largest financial retail marketing networks 1992 Enters the Funds Syndication sector 1995 Brokerage and Distribution businesses incorporated into a separate company - Kotak Securities. Investment Banking division incorporated into a separate company - Kotak Mahindra Capital Company 1996 The Auto Finance Business is hived off into a separate company - Kotak Mahindra Prime Limited (formerly known as Kotak Mahindra Primus Limited). Kotak Mahindra takes a significant stake in Ford Credit Kotak Mahindra Limited, for financing Ford vehicles. The launch of Matrix Information Services Limited marks the Group's entry into information distribution. 1998 Enters the mutual fund market with the launch of Kotak Mahindra Asset Management Company. 2000 Kotak Mahindra ties up with Old Mutual plc. for the Life Insurance business. Kotak Securities launches its on-line broking site (now www.kotaksecurities.com). Commencement of private equity activity through setting up of Kotak Mahindra Venture Capital Fund. 2004 Matrix sold to Friday Corporation Launches Insurance Services. 2006 Kotak Mahindra Finance Ltd. converts to a commercial bank - the first Indian company to do so. AMITY INTERNATIONAL BUSINESS SCHOOL 17
  18. 18. 2004 Launches India Growth Fund, a private equity fund. 2005 Kotak Group realigns joint venture in Ford Credit; Buys Kotak Mahindra Prime (formerly known as Kotak Mahindra Primus Limited) and sells Ford credit Kotak Mahindra. Launches a real estate fund 2006 Bought the 25% stake held by Goldman Sachs in Kotak Mahindra Capital Company and Kotak Securities AMITY INTERNATIONAL BUSINESS SCHOOL 18
  19. 19. CH NO. 5: INDUSTRY PROFILE Our Corporate Identity Kotak Mahindra Bank At Kotak Mahindra Bank, we address the entire spectrum of financial needs for individuals and corporates. We have the products, the experience, the infrastructure and most importantly the commitment to deliver pragmatic, end-to-end solutions that really work. Kotak Mahindra Old Mutual Life Insurance Ltd. Kotak Mahindra Old Mutual Life Insurance is a 76:24 joint venture between Kotak Mahindra Bank Ltd. and Old Mutual plc. Kotak Mahindra Old Mutual Life Insurance is one of the fastest growing insurance companies in India and has shown remarkable growth since its inception in 2004. Old Mutual, a company with 160 years experience in life insurance, is an international financial services group listed on the London Stock Exchange and included in the FTSE 100 list of companies, with assets under management worth $ 400 Billion as on 30th June, 2006. For customers, this joint venture translates into a company that combines international expertise with the understanding of the local market. Every child is different. Each has their own set of dreams and aspirations. As a parent you would like to provide your child with all the building blocks that could develop his or her potential to the fullest. This could mean extra coaching or tuition for talented children, special training or equipment for natural athletes or professional training for born singers. AMITY INTERNATIONAL BUSINESS SCHOOL 19
  20. 20.  HEADSTART CHILD PLANS A specially tailored, cost-effective plan, aims to give your children the financial means to pursue his or her dreams and live them. The Headstart Advantage: • Choice of 2 plan variants o Future Protect o Assure Wealth • Maximizes wealth while providing protection • Joint life option • Save for 2 children with one plan • Additional bonus units • Flexible Withdrawal Life is unpredictable, but the earlier you start planning for your future, the more likely are you and your family to reap the rewards.  SUKHI JEEVAN It is a long-term savings and protection plan that keeps pace with your changing needs at every step of life - be it saving for your kids’ future, or your retirement. This plan helps you prepare for important milestones in your life. And, most importantly, it ensures your family is secure when life dishes up harsh misfortunes. Benefits • Fulfill your children’s dreams or plan your retirement • Small savings to meet your varying needs • Regular bonuses • Easy application: o Simple documentation o No medical tests* o Hassle–free sign-up • Premium payment options: yearly, half-yearly or monthly (through ECS only) AMITY INTERNATIONAL BUSINESS SCHOOL 20
  21. 21.  KOTAK PRIVILEGED ASSURANCE PLAN “In this policy, the investment risk in the investment portfolio is borne by the policyholder.” Kotak Privileged Assurance Plan is exclusively crafted to ensure that while your money is protected, it multiplies. Concocting the best mix of steady and stable growth with dynamic and flexible management of your funds, the plan strives to give you that extra bit of return, protection and flexibility, in a single plan made specially for discerning customers like you. The plan offers you access to two# funds to provide you avenue for growth while offering you Capital Guarantee. Please note that in this policy, the investment risk in the investment portfolio is to be borne by the policyholder. However, Kotak Life Insurance offers you a capital guarantee on this plan to safeguard against the downside risk of falling markets. "Why should you invest in the Kotak Privileged Assurance Plan?" This plan is ideal if you want • Low cost structure on an investment plus insurance package • A short investment horizon • Flexibility of investment amounts • Protection of your hard earned money • Aggressive growth with calculated risks • Smart protection for your family  KOTAK TERM PLAN Kotak Term Plan is a pure risk product that aims to cover your life at a nominal cost. You may want to take this plan to cover your outstanding debts like a mortgage, a home loan etc. Since this is a pure risk cover product, there is no maturity benefits payable on survival. This is a non-participating plan. "Who can avail of this plan?" • HOW OLD DO YOU HAVE TO BE TO AVAIL OF THIS PLAN? Minimum age - 18 years Maximum age - 60 years • FOR WHAT TERM CAN I AVAIL OF THIS PLAN? 10 - 30 years for regular premium 5 - 30 years for single premium AMITY INTERNATIONAL BUSINESS SCHOOL 21
  22. 22. • WHAT IS THE MINIMUM PREMIUM THAT I NEED TO PAY AND AT WHAT INTERVALS CAN I PAY THEM? Quarterly Rs.540 Half Yearly Rs.1055 Annually Rs.2000 Single Premium Rs.10000 • WHAT IS THE MAXIMUM AGE THAT THE PLAN CAN COVER YOU TILL? 70 years "What are the advantages of this plan?" 1. It is a low-cost insurance plan. 2 You can choose between a regular premium payment option or a single premium payment option. 3 In case you opt for the regular premium payment option, you may pay your premiums either annually, or in half yearly or quarterly installments. 4 Your Kotak Term Plan can be converted into any other plan offered by Kotak Life Insurance (except for another Term plan) provided there are at least 5 years before cover ceases*. 5 In case you forget to pay your premium by the due date, you are entitled to a grace period of 30 days from the date of unpaid premiums. 6 In case of a financial emergency, you have the option to surrender the policy provided you have taken the single premium payment option*. "What value-adds can you opt for?" You may avail of the following non-participating value-adds for a nominal premium at the time of taking your policy, subject to aggregate premium on all value-adds (except Critical Illness Benefit) not exceeding 30% of the basic Kotak Term Plan premium.  Accidental Death Benefit: This benefit provides an additional amount (over and above the basic sum assured) to the beneficiary in the event of the accidental death of the life insured. The maximum cover available under this rider is equal to the basic sum assured (subject to a maximum of Rs.10 lakhs). AMITY INTERNATIONAL BUSINESS SCHOOL 22
  23. 23.  Permanent Disability Benefit: This benefit can be added to your basic life insurance policy to provide financial support in case of disability due to an accident. The amount payable under this benefit would be paid out as an annuity. The maximum permanent disability benefit that you can avail of is equal to the basic sum assured (subject to a maximum of Rs.10 lakhs).  Critical Illness Benefit: This benefit can be added to your basic life insurance policy to provide financial support in the event of a medical emergency. On the first occurrence of critical illness during the term of the policy, you would receive a portion of the sum assured to reduce your financial burden in this emergency. "What do you receive on maturity of the policy?" Since this is a pure risk cover plan, there are no maturity benefits. "What happens in the event of death of the life insured?" In the event of death during the term of the policy, the beneficiary would receive the sum assured. "Are there any Tax Benefits?" Section 80C, 10(10D) of Income Tax Act would apply. Premiums paid for Critical Illness Benefit qualify for benefits under Section 80D. These benefits are as per the currently prevailing tax regulations and you are advised to consult your tax advisor for details. "How does this plan work?" To explain, how his plan works…. Mr. Sanjay Gupta, a 30-year-old male, decides to buy the Kotak Term Plan for a sum assured of Rs.10, 00,000 for a 10 year term. The annual premium that Mr.Gupta pays is Rs.3, 747 annually. In the event of his unfortunate death during the next ten years, his family would receive Rs.10, 00,000. In the illustration, some benefits are guaranteed and some are variable. Guaranteed Returns are marked "guaranteed" in the illustration. Variable returns are shown at two different rates of assumed future returns. These assumed rates of return are not guaranteed and they are not the upper or lower limits of what you might get back .The actual return may be different depending on a number of factors including future investment performance. AMITY INTERNATIONAL BUSINESS SCHOOL 23
  24. 24. "What do you do next?" To find out more about this plan, you can call us at any Kotak Life Insurance Branch Offices or send us an e-mail at lifeexpert@kotak.com. "Exclusions" In case the life insured commits suicide within 1 (one) year of the plan, no benefits outlined in the plan would be payable. Exclusions for Accidental Death Benefit, Permanent Disability Benefit & Critical Illness Benefit: he Accidental Death Benefit, Permanent Disability Benefit & Critical Illness Benefit would not be paid out in the following circumstances: a) Self inflicted injuries, suicide, insanity, immorality, committing any breach of law or being under the influence of drugs, liquor etc. b) When the life insured is engaged in aviation or aeronautics other than as a passenger on a licensed commercial aircraft operating on a scheduled route. c) Due to injuries from war (whether war is declared or not), invasion, hunting, other dangerous hobbies or activities, or having been on duty in military, para-military, security or police organization. Additional Exclusions for Critical Illness: a) Unreasonable failure to seek or follow medical advice. b) Any pre-existing medical conditions not disclosed at inception. c) Infection with Human Immunodeficiency Virus (HIV) or conditions due to acquired Immune Deficiency Syndrome (AIDS). In addition, no benefit would be paid in respect of the exclusions specific to each critical illness. "Prohibition of Rebates" Section 41 of the Insurance Act, 1938 states: - (1) No person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to take out or renew or continue an insurance in respect of any kind of risk relating to lives or property in India, any rebate of the whole or part of the commission payable or any rebate of the premium AMITY INTERNATIONAL BUSINESS SCHOOL 24
  25. 25. shown on the policy, nor shall any person taking out or renewing or continuing a policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectuses or tables of the insurer. (2) Any person making default in complying with the provision of this section shall be punishable with fine, which may extend to five hundred rupees. The product leaflet gives only the salient features of the plan. The policy document is the conclusive document, and provides in detail all the conditions relating to the Kotak Term Plan.  KOTAK PREFFERED TERM PLAN The Kotak Preferred Term Plan is designed to provide you with reduced premium rates for a sum assured of Rs.10 lakhs and above. "Who is eligible for Kotak Preferred Term Plan?" 1) Males over the age of 18 years, who do not use tobacco in any form. 2) Females over the age of 18 years. "What are the advantages of this plan?" • It is a low-cost insurance plan. • You can choose between a regular premium payment option or a single premium payment option. In case you opt for the regular premium payment option, you may pay your premiums either annually, or in half yearly or quarterly installments. • Your Kotak Term Plan can be converted into any other plan offered by Kotak Life Insurance (except for another Term plan) provided there are at least 5 years before cover ceases*. • In case you forget to pay your premium by the due date, you are entitled to a grace period of 30 days from the date of unpaid premiums. • In case of a financial emergency, you have the option to surrender the policy provided you have taken the single premium payment option*. "What value-adds can you opt for?" You may avail of the following non-participating value-adds for a nominal premium at the time of taking your policy, subject to aggregate premium on all value-adds (except Critical Illness Benefit) not exceeding 30% of the basic Kotak Term Plan premium. AMITY INTERNATIONAL BUSINESS SCHOOL 25
  26. 26.  Accidental Death Benefit: This benefit provides an additional amount (over and above the basic sum assured) to the beneficiary in the event of the accidental death of the life insured. The maximum cover available under this rider is equal to the basic sum assured (subject to a maximum of Rs.10 lakhs).  Permanent Disability Benefit: This benefit can be added to your basic life insurance policy to provide financial support in case of disability due to an accident. The amount payable under this benefit would be paid out as an annuity. The maximum permanent disability benefit that you can avail of is equal to the basic sum assured (subject to a maximum of Rs.10 lakhs). Permanent disability is defined as permanent and immediate inability to work or permanent loss of use of two limbs or total and permanent loss of sight.  Critical Illness Benefit: This benefit can be added to your basic life insurance policy to provide financial support in the event of a medical emergency. On the first occurrence of critical illness during the term of the policy, you would receive a portion of the sum assured to reduce your financial burden in this emergency. "What do you receive on maturity of the policy?" Since this is a pure risk cover plan, there are no maturity benefits. "What happens in the event of death of the life insured?" In the event of death during the term of the policy, the beneficiary would receive the sum assured. "Are there any Tax Benefits?" Section 80C, 10(10D) of Income Tax Act would apply. Premiums paid for Critical Illness Benefit qualify for benefits under Section 80D. These benefits are as per the currently prevailing tax regulations and you are advised to consult your tax advisor for details. * Please consult your tax advisor for details "How does this plan work?" Mr.Rajiv Sharma, 30 years old, is eligible for the Kotak Preferred Term Plan. He decides to take up this policy for a sum assured of Rs.10, 00,000 for a term of 10 years. AMITY INTERNATIONAL BUSINESS SCHOOL 26
  27. 27. His annual premium would be Rs.2, 645. In case of Mr. Sharma’s unfortunate death during the next ten years, his family would receive Rs.10, 00,000. In the illustration, some benefits are guaranteed and some are variable. Guaranteed Returns are marked "guaranteed" in the illustration. Variable returns are shown at two different rates of assumed future returns. These assumed rates of return are not guaranteed and they are not the upper or lower limits of what you might get back .The actual return may be different depending on a number of factors including future investment performance. "What do you do next?" To find out more about this plan, you can call us at any Kotak Life Insurance Branch Offices or send us an e-mail at lifeexpert@kotak.com. "Exclusions" In case the life insured commits suicide within 1 (one) year of the plan, no benefits outlined in the plan would be payable. Exclusions for Accidental Death Benefit, Permanent Disability Benefit & Critical Illness Benefit: The Accidental Death Benefit, Permanent Disability Benefit & Critical Illness Benefit would not be paid out in the following circumstances: a) Self inflicted injuries, suicide, insanity, immortality, committing any breach of law or being under the influence of drugs, liquor etc. b) When the life insured is engaged in aviation or aeronautics other than as a passenger on a licensed commercial aircraft operating on a scheduled route. c) Due to injuries from war (whether war is declared or not), invasion, hunting, other dangerous hobbies or activities, or having been on duty in military, para-military, security or police organization. Additional Exclusions for Critical Illness: a) Unreasonable failure to seek or follow medical advice. b) Any pre-existing medical conditions not disclosed at inception. c) Infection with Human Immunodeficiency Virus (HIV) or conditions due to acquired Immune Deficiency Syndrome (AIDS). In addition, no benefit would be paid in respect of the exclusions specific to each critical illness. AMITY INTERNATIONAL BUSINESS SCHOOL 27
  28. 28. "Prohibition of Rebates" Section 41 of the Insurance Act, 1938 states: - (1) No person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to take out or renew or continue an insurance in respect of any kind of risk relating to lives or property in India, any rebate of the whole or part of the commission payable or any rebate of the premium shown on the policy, nor shall any person taking out or renewing or continuing a policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectuses or tables of the insurer. (2) Any person making default in complying with the provision of this section shall be punishable with fine, which may extend to five hundred rupees. How to live for today and plan for an independent tomorrow.  KOTAK MONEY BACK PLAN The Kotak Money Back Plan not only covers your life, it also assures you a certain percent of the sum assured as cash payment at regular intervals of every 5 years. It is a savings plan with the added advantage of life cover and regular cash inflow. This plan is ideal for planning special moments like a wedding, your child's education or purchase of an asset etc. This is a participating plan (with profits). "Who can avail of this Plan?" • HOW OLD DO YOU HAVE TO BE TO AVAIL OF THIS PLAN? Minimum age- 18 years Maximum age- 60 years • FOR WHAT TERM CAN I AVAIL OF THIS PLAN? 15, 20 & 25 years • WHAT IS THE MAXIMUM AGE THAT THE PLAN CAN COVER YOU TILL? 75 years AMITY INTERNATIONAL BUSINESS SCHOOL 28
  29. 29. "What are the advantages of this plan?" 1. The plan not only covers your life but also provides you with a survival benefit payout every 5 years. 2. In the unfortunate event of death of life insured, the beneficiary would receive the death benefit. The death benefit keeps increases by 7% of the sum assured every year. 3. On maturity, you would receive the sum of the Survival Benefit, Bonus addition* and Guaranteed addition**. *Bonus addition is the amount in the Accumulation Account, in excess of the sum assured. Accumulation Account is your personal account in which the premiums that you pay are deposited, the return declared every year is added and the survival benefit payouts, risk and expense charges are deducted. Guaranteed addition is the guaranteed amount payable on maturity, over and above the Survival Benefit. 4. The amount available in the Accumulation Account is invested in various financial instruments (as per IRDA regulations) so your money works hard for you. 5. The Automatic Cover Maintenance facility ensures the policy remains in force even if you miss premium payments. This facility is available after the first three years of the term. 6. You have the benefit of a 15-day free look period. 7. You have the option of paying premiums quarterly, half yearly or yearly. "What value-adds can you opt for?" You may avail of the following value-adds for a nominal premium at the time of taking the plan, subject to the aggregate premium on all value-adds not exceeding 30% of the basic Kotak Money Back Plan premium. AMITY INTERNATIONAL BUSINESS SCHOOL 29
  30. 30.  Term Benefit/ Preferred Term Benefit: In the event of death during the term of this benefit, the beneficiary would receive an additional death benefit amount, which is over and above the sum assured. The maximum Term Benefit you can avail of is equal to the basic sum assured. Where the term benefit cover applied for is more than Rs 10 lakhs, better rates may apply, subject to meeting eligibility requirements.  Accidental Death Benefit: This benefit provides an additional amount (over and above the sum assured) to the beneficiary in the event accidental death of the life insured. The maximum cover available under this benefit is equal to the basic sum assured (subject to a maximum of Rs.10 lakhs).  Permanent Disability Benefit: This benefit can be added to the basic life insurance plan to provide financial support in case of permanent disability due to an accident. The amount payable under this benefit would be paid out as an annuity. The maximum permanent disability benefit that you can avail of is equal to the basic sum assured (subject to a maximum of Rs.10 lakhs). Permanent disability is defined as permanent and immediate inability to work or permanent loss of use of two limbs or total and permanent loss of sight.  Critical Illness Benefit: This benefit can be added to the basic life insurance plan to provide financial support in the event of medical emergencies. On the first occurrence of critical illness during the term of the policy, you would receive a portion of the sum assured to reduce your financial burden in this emergency. *Please contact our Life Advisor for the list of critical illnesses  Life Guardian Benefit: This benefit can be availed of, only in case where the life insured and the proposer are two different individuals. In case of the unfortunate death of the proposer, this benefit keeps the policy alive by waiving all future premiums on the policy.  Accidental Disability Guardian Benefit: In case the proposer is permanently disabled as a result of an accident, this benefit keeps the policy alive by waiving all future premiums on the policy. "What do you receive on maturity of this plan?" AMITY INTERNATIONAL BUSINESS SCHOOL 30
  31. 31. On maturity, you would receive the sum of the Survival benefit, Guaranteed addition and Bonus addition. The table below illustrates the survival benefit pay out for every Rs.1000 of sum assured. Survival Benefit Payout for every Rs. 1000 Sum Assured Payouts (in Rs.) 5th year 10th year 15th year 20th year 25th year 15-YEAR PLAN Survival Benefit 250 250 500 Guaranteed Addition - - 200* 20-YEAR PLAN Survival Benefit 200 200 200 400 Guaranteed Addition - - - 300* 25-YEAR PLAN Survival benefit 150 150 150 150 400 Guaranteed Addition - - - - 400* *The Bonus Addition, if any, is payable over and above these benefits. "What happens in the event of death of the life insured?" In the unfortunate event of the death during the term of the plan, the beneficiary would receive the death benefit. The death benefit increases by 7% of the sum assured each year. This increasing amount has been designed keeping in mind the rising inflation. Death Benefit payout for every Rs. 1000 Sum Assured Payouts (in Rs.) Term 1st year 2nd year 3rd year 5th year 7th year 10th year 15th year 20th year 25th year 15 YEARS 1000 1070 1140 1280 1420 1630 1980 20 YEARS 1000 1070 1140 1280 1420 1630 1980 2330 25 1000 1070 1140 AMITY INTERNATIONAL BUSINESS SCHOOL 31
  32. 32. YEARS 1280 1420 1630 1980 2330 2380 "Are there any Tax Benefits?" Section 80C, 10(10D) of Income Tax Act would apply. Premiums paid for Critical Illness Benefit qualify for benefits under Section 80D. These benefits are as per the currently prevailing tax regulations and you are advised to consult your tax advisor for details. * Please consult your tax advisor for details. "How does this plan work?" Mr. Sanjay Gupta, 30 years old, decides to buy a Kotak Money Back Plan for a sum assured of Rs.5,00,000 and for a term of 20 years. His annual premium and the payouts are outlined below. Annual Premium Rs.34,124 Survival Benefit: After 5 years Rs.100,000 After 10 years Rs.100,000 After 15 years Rs.100,000 At the end of the 20 years Balance sum assured Rs.200,000 Guaranteed addition Rs.150,000 Bonus addition Variable AMITY INTERNATIONAL BUSINESS SCHOOL 32
  33. 33. i) What would Mr.Gupta receive on maturity of the plans? Mr.Gupta would get cash flows in year 5, 10 and 15 as mentioned above. Assuming that the Accumulation Account grows at a rate of 6%, the payout on maturity would be Rs.510,900. At a growth rate of 10%, the maturity amount payable would be Rs.872,600. The table below shows the details of the payout. @6% @10% BALANCE SUM ASSURED Rs.200,000 Rs.200,000 GUARANTEED ADDITION Rs.150,000 Rs.150,000 BONUS ADDITION Rs.160,900 Rs.522,000 Final payout at the end of 20 years Rs.510,900 Rs.872,600 ii) What would Mr.Gupta receive on death of Mr.Gupta at the end of 11 th year? On Mr.Gupta’s death, his family would receive a sum of Rs.850,000 In the past, Mr.Gupta has already received 2 installments of Rs.100,000 each as survival benefit payouts in the 5th and 10 year. In the illustration, some benefits are guaranteed and some are variable. Guaranteed Returns are marked "guaranteed" in the illustration. Variable returns are shown at two different rates of assumed future returns. These assumed rates of return are not guaranteed and they are not the upper or lower limits of what you might get back .The AMITY INTERNATIONAL BUSINESS SCHOOL 33
  34. 34. actual return may be different depending on a number of factors including future investment performance. "What do you do next?" To find out more about our plans, you can call us at any of our branch offices or e-mail us at lifeexpert@kotak.com. "General exclusion" In case the life insured commits suicide within 1 (one) year of the plan, no benefits outlined in the plan would be payable. Exclusions for Accidental Death Benefit, Permanent Disability Benefit & Critical Illness Benefit: The Accidental Death Benefit, Permanent Disability Benefit & Critical illness Benefit would not be paid out in the following circumstances: a. Self inflicted injuries, suicide, insanity, immorality, committing any breach of law or being under the influence of drugs, liquor etc. b. When the life insured is engaged in aviation or aeronautics other than as a passenger on a licensed commercial aircraft operating on a scheduled route. c. Due to injuries from war (whether war is declared or not), invasion, hunting, other dangerous hobbies or activities, or having been on duty in military, para- military, security or police organization. Additional Exclusions for Critical Illness: a. Unreasonable failure to seek or follow medical advice. b. Any pre-existing medical conditions not disclosed at inception. c. Infection with Human Immunodeficiency Virus (HIV) or conditions due to acquired Immune Deficiency Syndrome (AIDS). In addition, no benefit would be paid in respect of the exclusions specific to each critical illness. No claim under the Kotak Life Guardian Benefit would be admitted if, within one year of the date of issue of this policy, the premium payer commits suicide, whether being sane or insane at the time of committing suicide. AMITY INTERNATIONAL BUSINESS SCHOOL 34
  35. 35. No claim under the Kotak Accidental Disability Guardian Benefit would be admissible in the following circumstances: a. The premium payer suffers from self-inflicted injuries, suicide, insanity, immorality, committing any breach of law or being under the influence of drugs, liquor etc. b. Where the premium payer is engaged in aviation or aeronautics other than as a passenger on a licensed commercial aircraft operating on a scheduled route. c. The premium payer suffers injuries from war (whether war is declared or not), invasion, hunting, mountaineering, motor racing of any kind, other dangerous hobbies or activities, or having been on duty in military, para-military, security or police organization. "Prohibition of Rebates" Section 41 of the Insurance Act, 1938 states: - (1) No person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to take out or renew or continue an insurance in respect of any kind of risk relating to lives or property in India, any rebate of the whole or part of the commission payable or any rebate of the premium shown on the policy, nor shall any person taking out or renewing or continuing a policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectuses or tables of the insurer. (2) Any person making default in complying with the provision of this section shall be punishable with fine, which may extend to five hundred rupees.  KOTAK CHILD ADVNTAGE PLAN The Kotak Child Advantage Plan is an investment plan designed to meet your child's future financial needs. It's a plan that gives your child the "azaadi" to realize his dreams. The plan is a participating plan with a 15-day free look period. "Who can avail of this plan?" • HOW OLD DOES THE CHILD HAVE TO BE TO AVAIL OF THIS PLAN? AMITY INTERNATIONAL BUSINESS SCHOOL 35
  36. 36. Minimum age - 0 years Maximum age -17 years • FOR WHAT TERM CAN I AVAIL OF THIS PLAN? 10 - 30 years • WHAT IS THE MAXIMUM SUM ASSURED ALLOWED UNDER THIS PLAN? Rs.25,00,000 "What are the advantages of this plan?" 1. On Maturity, you would receive the sum assured plus the bonus addition. Bonus addition is the amount in the Accumulation Account*, in excess of the sum assured. 2. The balance available in the Accumulation Account is invested in various financial instruments (as per IRDA regulations) so your money works hard to earn more for your child. 3. The Automatic Cover Maintenance facility ensures the policy remains in force even if you miss premium payments. This facility is available after the first three years of the Term. 4. You can take a loan against this plan, after the policy has been in force for at least three years. 5. You have the option of paying premiums quarterly, half yearly or yearly. *Accumulation Account is your personal account in which the premiums that you pay are deposited, the return declared every year is added and risk and expense charges are deducted. 6. You have the benefit of a 15 day free look period. "What value-adds can you opt for?" You may avail of these value adds for a nominal premium at the time of taking the plan. The aggregate premium of the value-adds should not exceed 30% of the basic policy premium.  Life Guardian Benefit: In case of the unfortunate death of the premium payer, AMITY INTERNATIONAL BUSINESS SCHOOL 36
  37. 37. this benefit keeps the policy alive by waiving all future premiums on the policy.  Accidental Disability Guardian Benefit: In case the premium payer is permanently disabled as a result of accident, this benefit keeps the policy alive by waiving all future premiums on the policy. "Are there any Tax Benefits?" Section 80C, 10(10D) of Income Tax Act, 1961 would apply. You are advised to consult your tax advisor for details. Please consult your tax advisor for details "How does this plan work?" Mr.Sanjay Gupta is a 30-year-old professional and has a 6-year-old son. To secure his child's future, Mr.Gupta decides to buy the Kotak Child Advantage Plan. He wants to buy a plan with a sum assured of 5 lakh, term of 15 years, so that when the child is 21 years old, he has at least Rs.5 lakh to invest in his education/ career etc. Mr. Gupta buys the Kotak Child Advantage Plan along with both the value-adds offered with the basic plan. Description Premium Kotak child advantage plan premium Rs.31,857/- Life guardian benefit premium Rs.1,225/- Accidental disability guardian benefit premium Rs.155/- Total Annual Premium Paid Rs.33,237/- i) What would be the payout on maturity of the plan? Assuming that the Accumulation Account grows at 6%p.a., the maturity amount would be Rs.6, 34,800/- at the end of 15 years. At a growth rate of 10%, the maturity amount payable would be Rs. 8, 82,100/-. ii) In the unfortunate event of the death/ disability of the parent (premium payer), what would the beneficiary receive? AMITY INTERNATIONAL BUSINESS SCHOOL 37
  38. 38. Mr.Gupta has taken the benefit of waiver of premium by paying a minimal additional amount of Rs.1, 380/- per year. In the event of Mr.Gupta’s death or accidental disability, future premiums payable on his son’s policy will be waived and the policy will continue to be in force. On maturity the beneficiary would get the sum assured of Rs.5,00,000 along with bonuses accrued during the term of the policy (as discussed in (i) above). In the illustration, some benefits are guaranteed and some are variable. Guaranteed Returns are marked "guaranteed" in the illustration. Variable returns are shown at two different rates of assumed future returns. These assumed rates of return are not guaranteed and they are not the upper or lower limits of what you might get back .The actual return may be different depending on a number of factors including future investment performance. "What happens in the event of death of the life insured?" In the event of the unfortunate death of the insured during the term of the plan, the following would become payable: • If the policy has been in force for five years or if the life insured is at least 18 years old, the beneficiary will receive either the Sum Assured or Accumulation Account whichever is higher, as on the date of death. • If the death occurs within five years from commencement of policy and if the insured is less than 18 years old, the death benefit would be either the total of all premiums paid so far or the surrender value at that time, whichever is higher. • "What do you do next?" To find out more about this plan, you can call us at any Kotak Life Insurance Branch Offices or send us an e-mail at lifeexpert@kotak.com "General exclusion" In case the life insured commits suicide within 1 (one) year of the plan, no benefits outlined in the plan would be payable. No claim under the Kotak Life Guardian Benefit would be admitted if, within one year of the date of issue of this policy, the premium payer commits suicide, whether being sane or insane at the time of committing suicide. No claim under the Kotak Accidental Disability Guardian Benefit would be admissible in the following circumstances: (1) The premium payer suffers from self-inflicted injuries, attempt to suicide, insanity, AMITY INTERNATIONAL BUSINESS SCHOOL 38
  39. 39. immorality, committing any breach of law or being under the influence of drugs, liquor etc. (2) Where the premium payer is engaged in aviation or aeronautics other than as a passenger on a licensed commercial aircraft operating on a scheduled route. (3) The premium payer suffers injuries from war (whether war is declared or not), invasion, hunting, mountaineering, motor racing of any kind, other dangerous hobbies or activities, or having been on duty in military, para-military, security or police organization. "Prohibition of Rebates" Section 41 of the Insurance Act, 1938 states: - (1) No person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to take out or renew or continue an insurance in respect of any kind of risk relating to lives or property in India, any rebate of the whole or part of the commission payable or any rebate of the premium shown on the policy, nor shall any person taking out or renewing or continuing a policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectuses or tables of the insurer. (2) Any person making default in complying with the provision of this section shall be punishable with fine, which may extend to five hundred rupees.  KOTAK ENDOWMENT PLAN Kotak Endowment Plan is a protection plan that covers your life and at the same time ensures that your money does not lie idle. It invests a portion of your premium in financial instruments and ensures a considerable growth in savings. This is a participating plan (with profits). "Who can avail of this plan?" How old do you have to be to avail of this plan? Minimum age - 18 years Maximum age - 65 years For what term can i avail of this plan? 10-30 years What is the maximum age that the plan can cover you till? 75 years "What are the advantages of this plan?" AMITY INTERNATIONAL BUSINESS SCHOOL 39
  40. 40. 1. On maturity, you would receive the sum assured plus the bonus addition. Bonus addition is the amount in the Accumulation Account*, in excess of the sum assured. Accumulation Account is your personal account, in which the premiums that you pay are deposited, the return declared every year is added and risk and expense charges are deducted. 2. The amount available in the Accumulation Account is invested in various financial instruments (as per IRDA regulations) so your money works harder for you. 3. The Automatic Cover Maintenance facility ensures the policy remains in force even if you miss premium payments. This facility is available after the first three years of the term. 4. You can take a loan against your policy, after the policy has been in force for at least three years. 5. You have the option of paying premiums quarterly, half yearly or yearly. You also have the flexibility to pay premiums through the full term of the policy or pay it for a fixed term of 3, 5, 7, 10 or 15 years. 6. You have the benefit of a 15-day free look period. "What value-adds can you opt for?" You may avail of the following value-adDs for a nominal premium at the time of taking the plan, subject to the aggregate premium on all value-adds not exceeding 30% of the basic plan premium.  Term Benefit / Preferred Term Benefit: In the event of death during the term of this benefit, the beneficiary would receive an additional death benefit amount, which is over and above the sum assured. The maximum term benefit you can avail of is equal to the basic sum assured. Where the Term Benefit cover applied for is more than Rs.10 lakhs, better rates may apply, subject to meeting eligibility requirements.  Accidental Death Benefit: This benefit provides an additional amount (over and above the basic sum assured) to the beneficiary in the event of the accidental death of the life insured. The maximum cover available under this benefit is equal to the basic sum assured (subject to a maximum of Rs.10 lakhs).  Permanent Disability Benefit: This benefit provides financial support in case of your permanent disability due to an accident. The amount payable is over and above the basic sum assured and would be paid out as an annuity. The maximum AMITY INTERNATIONAL BUSINESS SCHOOL 40
  41. 41. Permanent Disability Benefit that you can avail of is equal to the basic sum assured (subject to a maximum of Rs.10 lakhs). Permanent disability is defined as a permanent and immediate inability to work, the permanent loss of use of two limbs or a total and permanent loss of sight.  Critical Illness Benefit: This benefit can be taken with the basic life insurance policy to provide financial support in the event of medical emergencies. On the first occurrence of critical illness during the term of the policy, you would receive a portion of the sum assured to reduce your financial burden in this emergency. The maximum Critical Illness Benefit that you can avail of is equal to half the basic sum assured subject to maximum of Rs. 20 lakhs.  Life Guardian Benefit: This benefit can be availed of, only in a case where the life insured and the proposer are two different individuals. In case of the unfortunate death of the proposer, this benefit keeps the policy alive by waiving all future premiums on the policy.  Accidental Disability Guardian Benefit: In case the proposer is permanently disabled as a result of an accident, this benefit keeps the policy alive by waiving all future premiums on the policy. This benefit is available also where the life insured is the proposer. "What happens in the event of death of the life insured?" In the event of death of the life insured during the term of the plan, the beneficiary would receive the sum assured or the amount in the Accumulation Account, whichever is higher. "Are there any Tax Benefits?" Section 80C, 10(10D) of Income Tax Act would apply. Premiums paid for Critical Illness Benefit qualify for benefits under Section 80D. These benefits are as per the currently prevailing tax regulations and you are advised to consult your tax advisor for details. "How does this plan work?" Mr. Sanjay Gupta, who is 30 years old, decides to buy a Kotak Endowment Plan for a sum assured of Rs. 5,00,000 for a 20-year term for his wife, who is aged 28. Mr. Gupta AMITY INTERNATIONAL BUSINESS SCHOOL 41
  42. 42. decides to take the Life Guardian Benefit as a rider to the plan. He does this to provide enhanced security and protection to his wife. The annual premiums paid by Mr. Gupta are as follows Amount (Rs.) KOTAK ENDOWMENT PLAN PREMIUM 22,552 LIFE GUARDIAN BENEFIT PREMIUM 1,106 TOTAL ANNUAL PREMIUM PAID 23,658 i) What would be the payout maturity? On maturity Sanjay Gupta would receive the sum assured or Accumulation Account, whichever is higher. Assuming that the Accumulation Account grows at a rate of 6%, the payout on maturity would be Rs. 6,93,800. At a growth rate of 10%, the maturity amount payable would be Rs. 10,97,700. ii) What would happen in the event of Mr.Gupta’s unfortunate death at the end of 10th year? Since Mr. Gupta is the proposer on Mrs. Gupta’s policy and has availed of the Life Guardian Benefit, all future premiums on Mrs. Gupta’s policy would be waived. Thereafter the policy will continue as if the premiums are being paid regularly. On maturity of her policy Mrs. Gupta would receive amounts as discussed above.* * Assuming that the Accumulation Account grows at 6% and 10% respectively p.a. In the illustration, some benefits are guaranteed and some are variable. Guaranteed Returns are marked "guaranteed" in the illustration. Variable returns are shown at two different rates of assumed future returns. These assumed rates of return are not AMITY INTERNATIONAL BUSINESS SCHOOL 42
  43. 43. guaranteed and they are not the upper or lower limits of what you might get back .The actual return may be different depending on a number of factors including future investment performance. CH NO. 6: SWOT ANALYSIS STRENGTHS • Market position is strong • Aggressive foreign bank • Shareholders return has grown more than 7 times • Maintains a position as a leading Asian Cash Management provider • Brand – Kotak Bank modern and dynamic look appeals to the growing middle income earners • Improved product proposition • Better geographic balances WEAKNESS • HDFC, IDBI, ABN-AMBRO, Citibank and ICICI Bank are dominant players • Has disadvantage due to last entry • Fewer locations as compared to other MNC banks • Service delivery perception is weak OPPORTUNITIES • Branch expansion for rapid growth • Increase focus on value creation in whole banking • Improve shareholders return • Build market share in consumer banking as consumer banking continues to offer highest potential for growth • Broadening of the demographic base • Tie ups with master card networks • Integrated sales and service approach • Can offer a complete corporate package under proposed corporate relationship • AMITY INTERNATIONAL BUSINESS SCHOOL 43
  44. 44. THREATS • ICICI is pitching in quite aggressively • Citibank is expanding in new markets • Competitive products and offers from IDBI and HDFC • Proposed networking of all branches in next 6 months AMITY INTERNATIONAL BUSINESS SCHOOL 44
  45. 45. CH NO. 7: DATA COLLECTIONDATA COLLECTION A semi-structured kind of questionnaire was designed which contain both open- ended and multiple choice questions. The questionnaire designed was to provide dual information sharing type, it is seriously undertaken that anyone who in undergoing the process, should find his interest or else he might show disinterest towards the programme. Actually, I have been dressing my project as the awareness programme. This awareness programme provided all those filling up of the questionnaire with enough information about the services of the Kotak Mahindra Old Mutual Life Insurance. Thus the questionnaire was equally important both ways to the customers as well as to the bank to draw out its prospects. The questionnaire designed to know the potential of the customer and help as a successful programme visiting the offices and small business enterprises without pre- appointment also provided me with information about that they demand from a new bank where they would prefer to open an account. For those already holding a relationship with the Kotak Mahindra Old Mutual Life Insurance, shared with me their opinion about the back and its services as well as suggestions were also obtained from them of how to attract more potentiality for the bank. SAMPLING PLANSAMPLING PLAN I have been assigned to visit the offices and small business firms in Delhi. I was free to choose my area. Hence I choose areas near the Bank or places where I could feel greater prospects, such a places where small shopping malls or new business firms have come out and over the industrial belts where several offices could be found out. The sample areas I choose was the following: • Noida • Punjabi Bagh • Lawrence Road • Gurgaon I was advised not to visit the bigger companies because they were not our target customers. AMITY INTERNATIONAL BUSINESS SCHOOL 45
  46. 46. FIELD WORK PLANFIELD WORK PLAN The field work was carried according the sampling plan formed. I visited the offices and small business enterprises /firms under my own limitations and time constraint at the following places. (a) Noida (b) Punjabi Bagh (c) Lawrence Road (d) Gurgaon At some of the offices appointment were already made while at many places I visited, without pre-appointments. The main motive for these visits was to identify the potential customers or the potential market. A two-way discussion was done through which the customers were made aware of the services of Kotak Mahindra. The questionnaires are either directly filled up or indirectly filled up by the people through this as well as the prospect of the areas as such were these campaigns were put up. AMITY INTERNATIONAL BUSINESS SCHOOL 46
  47. 47. FINANCIAL STATEMENTS Kotak Mahindra Life Insurance Ltd... Profit & Loss Account for the year ended 31St Dec, 2005 Current Year 31st Dec. 05 (in lakhs) Previous Year 31st Dec 04 (in lakhs) Income Sales 1,134.22 785.65 Other Income 25.32 21.33 1159.54 806.98 Expenditure Materials consumed 738.73 526.15 Personnel Expenses 87.3 70.36 Depreciation 30.01 29.93 Financial Charges 26.72 55.68 Excise duty 130.87 101.14 Misc. Expenditure 18.33 19.87 1198.26 953.49 Loss for the year before extra ordinary items and prior period adjustments (38.72) (146.51) Extra-ordinary items - Expenses on abandoned projects - (2.15) Assets woff (6.64) Pension liability (5.14) - Prior period adjustments (0.30) (1.50) Expenses of extraordinary items 44.16 156.80 Loss bought forward from previous years (324.23) (167.43) Balance carried to the B/S (368.39) (324.23) AMITY INTERNATIONAL BUSINESS SCHOOL 47
  48. 48. Balance Sheet as at 31 Dec 2005 As on 31st Dec 05 (In Lacs) As on 31st Dec 04 (In Lacs) Source of Funds Shareholders funds Share capital 734.20 834.20 Reserve and surplus 21.00 755.20 855.20 Loan Funds Secured loans 198.09 217.96 Unsecured loans 0.04 2.95 198.13 220.91 953.33 976.11 Application of funds Fixed Asset Gross block 520.94 493.93 Less: Depreciation 125.09 95.21 395.85 398.72 Capital W.I.P. 1.58 2.69 Net book value 397.43 401.41 Investments 0.10 - Current Assets, Loans and Advances Inventories 93.87 129.57 Sundry Debtors 123.22 82.75 Cash& Bank Balances 10.64 82.20 Other current Assets 20.14 11.42 Loans and advances 47.06 45.68 294.93 351.62 AMITY INTERNATIONAL BUSINESS SCHOOL 48
  49. 49. Profit & Loss Account for the year ended 31st Dec, 2006 Current Year 31 Dec 06 (In Lacs) Previous Year 31 Dec 05 (In Lacs) Income Sales 903.92 1134.22 Other Income 34.09 25.32 987.04 1159.54 Expenditure Materials Consumed 621.23 738.73 Personnel Expenses 104.58 87.33 Mfg Other expenses 172.48 166.27 Dep / Amortisation 34.38 30.01 Financial Charges 30.57 26.72 Excise duty 120.04 130.87 Mis Expenditure W/off 20.28 18.33 1224.32 1198.26 Loss for the year before extra ordinary items and prior period adjustments (116.88) (38.72) Extra ordinary items: Expenses on abandoned project W/off -- -- Assets W/off -- -- AMITY INTERNATIONAL BUSINESS SCHOOL 49 As at Dec 31 2005 As at Dec 31.2004 Less: Current Liabilities Provisions Current Liabilities 137.02 143.68 Provisions 15.73 8.56 152.75 152.24 Net current assets 142.18 199.38 Miscellaneous Expenditure (Total extent not written off adjusted) 45.23 51.09 Profit and loss 368.39 324.23 953.33 1076.11
  50. 50. Pension liability -- 5.14 Prior period adjustments -- 0.30 Loss after prior pd. Exp. & extra-ord. Items. (116.88) (44.16) Loss b/f from early years (368.39) (324.23) Less: Amt. Adjusted against Cap. Reduction300 (68.39) --- Loss: c/f to B/S (185.27) (368.39) Balance Sheet as at 31 Dec 2006 Sources Of Funds 31 Dec 06 (Lacs) 31 Dec 05 (Lacs) Shareholders Fund Capital 434.20 734.20 Reserves & Surplus 21.00 21.00 455.20 755.20 Loan Funds Secured loans 360.46 198.09 Unsecured loans -- 0.04 Application of Funds Fixed Assets Gross Block 530.59 520.94 Less: Dep. 153.55 125.09 Net Block 377.04 395.85 Capital work in progress inc. capital advances. 3.25 1.58 380.29 397.43 Investments 0.10 0.10 Current assets, Loans & Advances Inventories 146.36 93.87 Sundry Debtors 114.71 123.22 Cash & Bank Balances 5.63 10.64 Other current Assets. 21.66 20.14 AMITY INTERNATIONAL BUSINESS SCHOOL 50
  51. 51. Loans & Advances 44.39 47.06 Less: Current liabilities & Provisions Liabilities 116.07 137.02 Provisions 14.11 15.73 Net Current Assets 130.18 152.75 Misc. Expenditure (To the extent not w/off) 47.43 45.23 Profit & Loss A/c 185.27 368.39 Total: 815.66 953.33 AMITY INTERNATIONAL BUSINESS SCHOOL 51
  52. 52. CH NO. 8: WORKING CAPITAL- OVERALL VIEW CASH MANAGEMENT Cash is the important current asset for the operations of the business. Cash is the basic input needed to keep the business running on a continuous basis It is also the ultimate output expected to be realised by selling the service or product manufactured by the firm. The firm should keep sufficient cash, neither more nor less. Cash shortage will disrupt the firm’s operations while excessive cash will simply remain idle, without contributing anything towards the firm’s profitability. Thus a major function of the Financial Manager is to maintain a sound cash position. Cash is the money which a firm can disburse immediately without any restriction The term cash includes currency and cheques held by the firm and balances in its bank accounts. Sometimes near cash items, such as marketable securities or bank time deposits are also included in cash. The basic characteristics of near cash assets are that they can readily be converted into cash. Cash management is concerned with managing of: i) Cash flows in and out of the firm ii) Cash flows within the firm iii) Cash balances held by the firm at a point of time by financing deficit or inverting surplus cash. Sales generate cash which has to be disbursed out. The surplus cash has to be invested while deficit cash has to be borrowed. Cash management seeks to accomplish this cycle at a minimum cost. At the same time it also seeks to achieve liquidity and control. Therefore the aim of Cash Management is to maintain adequate control over cash position to keep firm sufficiently liquid and to use excess cash in some profitable way. The Cash Management is also important because it is difficult to predict cash flows accurately. Particularly the inflows and that there is no perfect coincidence between the inflows and outflows of the cash. During some periods cash outflows will exceed cash inflows because payment for taxes, dividends or seasonal inventory build up etc. On the other hand cash inflows will be more than cash payment because there may be large cash sales and more debtors’ realization at any point of time. Cash Management is also important because cash constitutes the smallest portion of the current assets, yet AMITY INTERNATIONAL BUSINESS SCHOOL 52
  53. 53. management’s considerable time is devoted in managing it. An obvious aim of the firm now-a-days is to manage its cash affairs in such a way as to keep cash balance at a minimum level and to invest the surplus cash funds in profitable opportunities. In order to resolve the uncertainty about cash flow prediction and lack of synchronization between cash receipts and payments, the firm should develop appropriate strategies regarding the following four facets of cash management. 1. Cash Planning: - Cash inflows and cash outflows should be planned to project cash surplus or deficit for each period of the planning period. Cash budget should prepared for this purpose. 2. Managing the cash flows: - The flow of cash should be properly managed. The cash inflows should be accelerated while, as far as possible decelerating the cash outflows. 3. Optimum cash level: - The firm should decide about the appropriate level of cash balances. The cost of excess cash and danger of cash deficiency should be matched to determine the optimum level of cash balances. 4. Investing surplus cash: - The surplus cash balance should be properly invested to earn profits. The firm should decide about the division of such cash balance between bank deposits, marketable securities and inter corporate lending. The ideal Cash Management system will depend on the firm’s products, organisation structure, competition, culture and options available. The task is complex and decision taken can effect important areas of the firm. Functions of Cash Management: Cash Management functions are intimately, interrelated and intertwined Linkage among different Cash Management functions have led to the adoption of the following methods for efficient Cash Management:  Use of techniques of cash mobilization to reduce operating requirement of cash  Major efforts to increase the precision and reliability of cash forecasting.  Maximum effort to define and quantify the liquidity reserve needs of the firm.  Development of explicit alternative sources of liquidity  Aggressive search for relatively more productive uses for surplus money assets. AMITY INTERNATIONAL BUSINESS SCHOOL 53
  54. 54. The above approaches involve the following actions which a finance manager has to perform. 1. To forecast cash inflows and outflows 2. To plan cash requirements 3. To determine the safety level for cash. 4. To monitor safety level for cash 5. To locate the needed funds 6. To regulate cash inflows 7. To regulate cash outflows 8. To determine criteria for investment of excess cash 9. To avail banking facilities and maintain good relations with bankers Motives for holding cash: There are four primary motives for maintaining cash balances: 1. Transaction motive 2 .Precautionary motive 3. Speculative motive 4. Compensating motive 1. Transaction motive: - The transaction motive refers to the holding of cash to meet anticipated obligations whose timing is not perfectly synchronised with cash receipts. If the receipts of cash and its disbursements could exactly coincide in the normal course of operations, a firm would not need cash for transaction purposes. Although a major part of transaction balances are held in cash, a part may also be in such marketable securities whose maturity conforms to the timing of the anticipated payments. 2. Precautionary motive: - Precautionary motive of holding cash implies the need to hold cash to meet unpredictable obligations and the cash balance held in reserve for such random and unforeseen fluctuations in cash flows are called as precautionary balances. Thus, precautionary cash balance serves to provide a cushion to meet unexpected contingencies. The unexpected cash needs at short AMITY INTERNATIONAL BUSINESS SCHOOL 54
  55. 55. notice may be the result of various reasons as : unexpected slowdown in collection of accounts receivable, cancellations of some purchase orders, sharp increase in cost of raw materials etc. The more unpredictable the cash flows, the larger the need for such balances. Another factor which has a bearing on the level of precautionary balances is the availability of short term credit. Precautionary cash balances are usually held in the form of marketable securities so that they earn a return. 3. Speculative motive: - It refers to the desire of a firm to take advantage of opportunities which present themselves at unexpected movements and which are typically outside the normal course of business. The speculative motive represents a positive and aggressive approach. Firms aim to exploit profitable opportunities and keep cash in reserve to do so. The speculative motive helps to take advantage of :In opportunity to purchase raw materials at a reduced price on payment of immediate cash; A chance to speculate on interest rate movements by buying securities when interest rates are expected to decline; delay purchases of raw materials on the anticipation of decline in prices; etc. 4. Compensation motive: - Yet another motive to hold cash balances is to compensate banks for providing certain services and loans. Banks provide a variety of services to business firms , such as clearances of cheques, supply of credit information, transfer of funds, etc. While for some of the services banks charge a commission of fee for others they seek indirect compensation. Usually clients are required to maintain a minimum balance of cash at the bank. Since this balance can not be utilised by the firms for transaction purposes, the bank themselves can use the amount for services rendered. To be compensated for their services indirectly in this form, they require the clients to always keep a bank balance sufficient to earn a return equal to the cost of services. Such balances are compensating balances. Compensating balances are also required by some loan agreements between a bank and its customer. AMITY INTERNATIONAL BUSINESS SCHOOL 55
  56. 56. CASH MANAGEMENT: OBJECTIVES The Basic objective of cash management is two fold: (a) To meet the cash disbursement needs (payment schedule); (b) To minimize funds committed to cash balances. These are conflicting and mutually contradictory and the task of cash management is to reconcile them. Meeting the payments schedule: - A basic objective of the cash management is to meet the payment schedule, i.e. to have sufficient cash to meet the cash disbursement needs of the firm. The importance of sufficient cash to meet the payment schedule can hardly be over emphasized. The advantages of adequate cash are : (i) it prevents insolvency or bankruptcy arising out of the inability of the firm to meet its obligations; (ii) the relationship with the bank is not strained; (iii) it helps in fostering good relations with trade creditors and suppliers of raw materials, as prompt payment may also help their cash management; (v) it leads to a strong credit rating which enables the firm to purchase goods on favorable terms and to maintain its line of credit with banks and other sources of credit; (vi) to take advantage of favorable business opportunities that may be available periodically; and (vi) finally the firm can meet unanticipated cash expenditure with a minimum of strain during emergencies, such as strikes , fires or a new marketing campaign by competitors. Minimizing funds committed to cash balances: - The second objective of cash management is to minimize cash balances. In minimizing cash balances two conflicting aspects have to be reconciled. A high level of cash balance will, ensure prompt payment together with all the advantages, but it also implies that large funds will remain idle ultimately results less to the expected. A low level of cash balances, on the other hand, may mean failure to meet the payment schedule that aim of cash management should be to have an optimal amount of cash balances AMITY INTERNATIONAL BUSINESS SCHOOL 56
  57. 57. CASH MANAGEMENT TECHNIQUES & PROCESSES The following are the basic cash management techniques and process which are helpful in better cash management: Speedy cash collection: In managing cash efficiently the cash in flow process can be accelerated through systematic planning and refined techniques. These are two broad approaches to do this which are narrated as under: Prompt payment by customer: One way to ensure prompt payment by customer is prompt billing with clearly defined credit policy. Another and more important technique to encourage prompt payment the by customer is the practice of offering trade discount/cash discount. Early conversion of payment into cash: Once the customer has makes the payment by writing its cheques in favor of the firm, the collection can be expedited by prompt encashment of the cheque. It will be recalled that there is a lack between the time and cheque is prepared and mailed by the customer and the time funds are included in the cash reservoir of the firm. Concentration Banking: In this system of decentralised collection of accounts receivable, large firms which have a large no. of branches at different places, select some of these which are strategically located as collection centers for receiving payment for customers. Instead of all the payments being collected at the head office of the firm, the cheques for a certain geographical areas are collected at a specified local collection centers. Under this arrangement the customers are required to send their payments at local collection center covering the area in which they live and these are deposited in the local account of concerned collection, after meeting local expenses, if any. Funds beyond a predetermined minimum are transferred daily to a central or disbursing or concentration bank or account. A concentration banking is one with which the firm has a major account usually a disbursement account. Hence this arrangement is referred to as concentration banking. Lock-Box System: The concentration banking arrangement is instrumental in reducing the time involve in mailing and collection. But with this system of collection of accounts receivable, processing for purposes of internal accounting is involved i.e. sometime in elapses before a cheque is deposited by the local collection center in its account. The AMITY INTERNATIONAL BUSINESS SCHOOL 57
  58. 58. lock-box system takes care of these kind of problem, apart from effecting economy in mailing and clearance times. Under this arrangement, firms hire a post office box at important collection centers. The customers are required to remit payments to lock-box. The local banks of the firm, at respective places, are authorized to open the box and pick up the remittance received from the customers. Usually the authorised bank picks up the cheques several times a day and deposits them in the firm’s account. After crediting the account of the firm the banks send a deposit 4epo slip along with the list of payments and other enclosures, if any, to the firm by way of proof and record of the collection. Slowing disbursements: A basic strategy of cash management is to delay payments as long as possible without impairing the credit rating/standing of the firm. In fact, slow disbursement represents a source of funds requiring no interest payments. There are several techniques to delay payment of accounts payable namely (1) avoidance of early payments; (2) centralized disbursements; (3) floats; (4) accruals. Avoidance of early payments: One way to delay payments is to avoid early payments. According to the terms of credit, a firm is required to make a payment within a stipulated period. It entitles a firm to cash discounts. If however payments are delayed beyond the due date, the credit standing may be adversely affected so that the firms would find it difficult to secure trade credit later. But if the firm pays its accounts payable before the due date it has no special advantage. Thus a firm would be well advised not to make payments early i.e. before the due date. Centralized disbursements: Another method to slow down disbursements is to have centralized disbursements. All the payments should be made by the head office from a centralized disbursement account. Such an arrangement would enable a firm to delay payments and conserve cash for several reasons. Firstly it involves increase in the transit time. The remittances from the head office to the customers in distant places would involve more mailing time than a decentralized payment by a local branch. The second reason for reduction in operating cash requirement is that since the firm has a centralized bank account, a relatively smaller total cash balance will be needed. In the case of a decentralized arrangement, a minimum cash balance will have to be maintained at each branch which will add to a large operating cash balance. Finally, schedules can be tightly controlled and disbursements made exactly on the right day. Float: A very important technique of slow disbursements is float. The term float refers to amount of money tied up in the cheque that have been written, but have yet to be collected and encashed. Alternatively, float represents the difference between the bank balance and book balance of cash of a firm. The difference between the balance as AMITY INTERNATIONAL BUSINESS SCHOOL 58
  59. 59. shown in the firm’s record and the actual bank balance is due to transit and processing delays. There is time lag between the issue of a cheque by the firm and its presentation to its bank by the customer’s bank for payment. The implication is that although a cheque has been issued cash would be required later when the cheque resented for encashment. Therefore, a firm can send remittance although it does not have cash in its bank at the time of issuance of cheque. Meanwhile, funds can be arranged to make payments when the cheque is presented for collection after a few days. Float used in this sense is called cheque kitting. Accruals: Finally, a potential tool for stretching accounts payable is accruals which are defined as current liabilities that represent a service or goods received by a firm but not yet paid for. For instance, payroll, i.e. remuneration to employees, who render services in advance and receive payment later. In a way they extend credit to the firm for a period at the end of which they are paid, say, a week or month. The longer the period after which payment is made, the greater the amount of free financing and the smaller the amount of cash balances required. Thus, less frequent payrolls, i.e. monthly as compared to weekly, are important sources of accruals. They can be manipulated to slow down disbursements. DETERMINING THEOPTIMAL LEVEL OF CASH BALANCE: Cash balance is maintained for the transaction purposes and additional amount may be maintained as a buffer or safety stock. The Finance manager should determine the appropriate amount of cash balance. Such a decision is influenced by trade-off between risk and return. If the firm maintains a small cash balance , its liquidity position becomes week and suffers from a paucity of cash to make payments. But a higher profitability can be attained by investing released funds in some profitable opportunities. When the firm runs out of cash it may have to sell its marketable securities, if available, or borrow. This involves transaction cost. On the other hand if the firm maintains a higher level of cash balance, it will have a sound liquidity position but forego the opportunities to earn interests. The potential interest lost on holding large cash balance involves opportunities cost to the firm. Thus the firm should maintain an optimum cash balance, neither a large nor a small cash balance. To find out the optimum cash balance the transaction cost and risk of too small balance should be matched with opportunity costs of too large a balance should be matched with opportunity cost of too large a balance. Figure shows this trade-off graphically. If the AMITY INTERNATIONAL BUSINESS SCHOOL 59
  60. 60. firm maintains larger cash balances its transaction cost would decline, but the opportunity cost would increase. At point X the sum of two costs is minimum. This is the point of optimum cash balance. Receipts and disbursement of cash are hardly in perfect synchronization. Despite the absence of synchronization it is not difficult to determine the optimum level of cash balance. If cash flows are predictable it is simply a problem of minimizing the total costs - the transaction cost and the opportunity cost. The determination of optimum working cash balance under certainty can thus be viewed as an inventory problem in which we balance the cost of too little cash ( transaction cost) against the cost of too much cash( opportunity cash) Cash flows, in practice, are not completely predictable. At times they may be completely random. Under such a situation, a different model based on the technique of control theory is needed to solve the problem of appropriate level of working cash balance. With unpredictable variability of cash flows, we need information on transaction costs, opportunity costs and degree of variability of net cash flows to determine the appropriate cash balance. Given such data the minimum and maximum of cash balances should be set. Greater the degree of variability, higher the minimum cash balance. Whenever the cash balance reaches a maximum level, the differences between maximum and minimum levels should be invested in marketable securities. When balance is falls to zero, marketable securities should be sold and proceed should be transferred to the working cash balances. EVALUATION OF CASH MANAGEMENT PERFORMANCES To assess the cash management performance this phase is divided as follows: a) Size of Cash b) Liquidity and Adequacy of cash c) Control of cash A) Size of cash: The quantum of cash held by KOTAK MAHINDRA during the study period is presented in the table. The trend percentage also calculated and shown in the table: AMITY INTERNATIONAL BUSINESS SCHOOL 60
  61. 61. Size of cash balance (Rs. in Crores) Year Cash (In Lacs) Trend 2004 82.20 100 2005 10.64 -87.83 2006 5.63 -93.15 Source : Annual report AMITY INTERNATIONAL BUSINESS SCHOOL 61 -150 -100 -50 0 50 100 150 200 2004 2005 2006 Trend Cash
  62. 62. Size of sales (Rs. in Lacs) Year Sales Trend 2004 785.65 100 2005 1134.23 44.36 2006 903.92 15.05 Source Annual Reports AMITY INTERNATIONAL BUSINESS SCHOOL 62 0 200 400 600 800 1000 1200 1400 2004 2005 2006 Trend Sales
  63. 63. (B) Liquidity and Adequacy of Cash: One of the most important jobs of the Finance Manager is to maintain sufficient liquidity to enable the firm to pay off its obligations when they fall due. To test a firm’s liquidity and solvency we commonly use current and quick ratios. Traditionally 2:1 current ratio and 1:1 quick ratio are taken as satisfactory standards for the purpose. The former indicates the extent of the soundness of the current financial position of a firm and the degree of safety provided to the creditors, the later signifies the ability of a firm to settle all its current obligations on a particular date. Current ratio and quick ratio Year Current ratio Quick ratio 2004 2.12 1.51 2005 1.80 0.97 2006 2.41 1.03 Source: Annual Reports AMITY INTERNATIONAL BUSINESS SCHOOL 63 0 0.5 1 1.5 2 2.5 3 3.5 4 2004 2005 2006 Quick Ratio Current Ratio
  64. 64. Our analysis clearly shows that the company has very sound position regarding liquidity and solvency. Further, all the ratios fluctuate throughout the period. (C) Control of Cash: One of the major objectives of cash management from the stand point of increasing return on investment is to economize on the cash holding without impairing the overall liquidity requirements of the firms. This is possible by effecting tighter controls over cash flows. The following ratio has been applied to assess the efficiency of cash control:  Cash to Current Assets ratio  Cash turnover ratio  Cash to current liabilities ratio Cash to Current assets ratio Year Cash to CA Ratio 2004 26.89 2005 4.29 2006 1.95 Average : 9.43 Source : Annual Reports AMITY INTERNATIONAL BUSINESS SCHOOL 64 0 5 10 15 20 25 30 2004 2005 2006
  65. 65. Conclusion: It can be inferred from the above table that cash to current assets ratio is decreasing which shows dark position of liquidity, which ultimately affect the operational efficiency of the firm. Cash to Current Liability Ratio (%) Year Cash to CL ratio 2004 57.21 2005 7.76 2006 4.85 Average: 23.27 Source: Annual Reports Conclusion: Cash to current liability ratio shows the cash balance maintained by company at a certain point of time for meeting its current liabilities. The lesser the ratio, proves the efficiency of the company for maintaining liquidity at a minimum level of cash balance. It is reducing during the study period and is at the minimum level of 4.85% in the year 2006. Overall Conclusion: The analysis of financial data reveals that the company has very sound position regarding liquidity and solvency as shown by the current and quick ratios. The cash to current liabilities ratio is nearly on decreasing trend shows the efficiency of operations. AMITY INTERNATIONAL BUSINESS SCHOOL 65

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