Overall AxisBank Operations and Assessment of Working Capital

KOMAL MAHESHWARI 14BSP2540 IBS, PUNE
1
A REPORT
ON
“Overall banking operations
And
Assessment of Working capital”
BY:
KOMAL MAHESHWARI
(14BSP2540)

2
A REPORT
ON
―Overall banking operations
And
Assessment of Working capital”
By
KOMAL MAHESHWARI
(14BSP2540)
Of
AXISBANK LTD.
A report submitted in partial fulfillment of the requirements of
PGPM Program of IBS PUNE
Distribution list:
Company guide: Faculty guide:
Mr. Pratik Pathak Prof. Vinod Lakhwani
(Operations Head)
Date of Submission: May 29, 2015

3
AUTHORISATION
This is to certify that this is a bona fide project report submitted in partial fulfilment of
the requirements of PGPM program of ICFAI Business School, Pune.
This report document titled ―Overall banking operations and Assessment of
Working capital‖ is a submission of work done by Komal Maheshwari.
This report has been formally submitted to Prof. Vinod Lakhwani,
IBS Ahmedabad.
And I have taken the special permission for to keep report copy with me, my faculty
guide and company guide.
This report has been verified and authenticated by:
KOMAL MAHESHWARI
IBS Pune

4
ACKNOWLEDGEMENTS
No task is a single man‘s effort. Any kind of job cannot be accomplished
without the assistance of others.
A precious debt of learning can be repaid only through gratitude.
First and foremost I wish to express my gratitude to the almighty God with
whose grace and blessings I have been able to complete this work.
Sincere thanks to Mr. Pratik Pathak (Operations Head, Axis Bank) and
Mr. Neerav Vyas (Credit Analyst, Axis Bank), for providing me an opportunity to
work at Axis Bank, Vadodara; an organization of great esteem, for 14 weeks as
an Intern.
I thank my mentor Prof. Vinod Lakhwani for his guidance and motivation;
whose support helped me a lot in successful completion of the project.
I am very thankful to Mr.Vikas Shah (Branch Head) for their keen interest,
inspiration, guidance, continuous encouragement, valuable suggestions and
constructive criticism throughout the period of my Internship. I also thank other
employees who made my stay at Axis Bank a fruitful one.

5
Last but not the least it would be unfair if I don‘t thank my parents and all my friends
for their active cooperation which was of great help during the course of my
Internship.
The time spent here provided me with lots of learning experiences which otherwise
would not have been possible. The internship provided me a great platform to put
theory into practice.
Regards,
KOMAL MAHESHWARI
14BSP2540
IBS Pune

6
CONTENTS
AUTHORISATION.....................................................................................................................................3
ACKNOWLEDGEMENTS...........................................................................................................................4
ABSTRACT................................................................................................................................................8
LIST OF ILLUSTRATION ............................................................................................................................9
INTRODUCTION.....................................................................................................................................10
Objective of the Study:- ....................................................................................................................10
Research Methodology:-...................................................................................................................11
Limitations of the study:-..................................................................................................................12
About Banking Industry: ...................................................................................................................13
Types of banking:..........................................................................................................................14
About Axis bank: ...............................................................................................................................16
Functions of Axis bank: .....................................................................................................................17
Axis bank’s organizational structure:................................................................................................17
Axis Bank’s product:-.........................................................................................................................18
How Axis borrow money?.................................................................................................................21
How Axis Bank generate Revenue? ..................................................................................................21
Lending Money to the public:-..........................................................................................................22
Delivery channel in Axis Bank: ......................................................................................................23
Lending Money to Corporate:- .........................................................................................................23
What Is Working Capital?..................................................................................................................25
Operating Cycle Method...............................................................................................................25
Why We Need Working capital?.......................................................................................................27
What is Working capital finance? .....................................................................................................28
Data Required for Assessment of working capital Requirement:- ...................................................31
RETAIL BANKING OPERATIONS IN AXIS BANK.......................................................................................32
Opening an account at Axis bank:.....................................................................................................32
Owner of Joint A/c: ...........................................................................................................................33
Saving Account..................................................................................................................................34
Current Account:...............................................................................................................................37

7
Various types of Account holder need documents and maintain rules relating to open Bank
Account Owner of personal A/c:.......................................................................................................40
Joint Stock Company:....................................................................................................................40
Public Limited company:...............................................................................................................41
Non-trading Organization: ............................................................................................................41
Closing of Bank Account:...............................................................................................................42
Steps of Cash Management at Branch Level: ...............................................................................43
ASSESSMENT OF WORKING CAPITAL FINANCE PROCESS .....................................................................47
Bank Credit as a Source of Meeting Working Capital Requirements: ..............................................48
Amount of Assistance: ..................................................................................................................48
Form of Assistance:...........................................................................................................................49
Assessment of Non-Fund Based Working Capital Facility:- ..........................................................49
Assessment of Fund Based Working Capital Facility:- ..................................................................58
Simplified Turnover Method (Nayak Committee) ........................................................................59
Chore Committee:- .......................................................................................................................62
PROCEDURE FOR WORKING CAPITAL FINANCE................................................................................63
CREDIT SANCTION PROCESS:- .......................................................................................................63
CREDIT MONITORING ARRANGEMENT.............................................................................................68
CREDIT RATING MODEL ................................................................................................................69
SECURITY...........................................................................................................................................71
Hypothecation: .............................................................................................................................71
Mortgage:......................................................................................................................................71
Pledge:...........................................................................................................................................72
Lien:...............................................................................................................................................72
BANKING ARRANGEMENTS...............................................................................................................73
CONSORTIUM BANKING ARRANGEMENT:....................................................................................73
MULTIPLE BANKING ARRANGEMENT:-.........................................................................................74
SYNDICATION:-..............................................................................................................................74
CONCLUSION.........................................................................................................................................75
BIBLIOGRAPHY ......................................................................................................................................76

8
ABSTRACT
Banks play a critical role in the economic development of an economy. They are
important not only for economic growth but also financial stability. In an economy
banks has three major roles to play i.e. first, they fulfill the financing needs of the
corporate sector. Second, they cater to the needs of the vast number of household
savers, providing assured returns on their surplus funds while maintaining liquidity
and safeguarding them from financial risks. Third, they act as a support for
development of financial markets and its participants.
The main objective of the project was to study various types of working capital
Finance provided by banks to know details and the procedure of assessment of
working capital finance extended by banks. And other objective is to know day to day
operations done by banks and their products.
This report is divided into two parts:-
1) Retail Banking
2) Assessment of working Capital
This project considered various banking facilities for the working capital finance to
the industries. It covers almost important aspect relating to assessment & follow up
of working capital finance. After discussing the procedure followed by bank, for
assessing working capital requirement case studies have been given with necessary
data in the prescribed forms demonstrate the calculable done by bank to arrive at
maximum permissible bank finance. An inventory & receivables constitute the major
portion of the total working capital requirement. And moreover this report shows the
entire flow of saving and current account till account open what types of formalities to
be done by bank and customers to open an account and this report also shows
different types of products.

9
LIST OF ILLUSTRATION
Figure 1 Banks....................................................................................................................................15
Figure 2 Functions of Axis Bank ......................................................................................................17
Figure 3 Organizational Structure....................................................................................................17
Figure 4 Products...............................................................................................................................18
Figure 5 Delivery Channel ................................................................................................................23
Figure 7 Types of A/C........................................................................................................................32
Figure 8 Saving a/c Process.............................................................................................................36
Figure 9 Need of Documents for current a/c..................................................................................37
Figure 10 Current a/c Process .........................................................................................................39
Figure 11 Assessment of WPF Process.........................................................................................47
Figure 12 Process for Issuing of Credit..................................................................................................54
Figure 13 PROCESS OF NEGOTIATION...................................................................................................55
Figure 14 PROCESS OF SETTELEMENT UNDER L/C................................................................................56
Figure 15 Pre Sanction Process.............................................................................................................64
Figure 16 Post Sanction Process ...........................................................................................................67
Table 1 Research Methodology .......................................................................................... 11
Table 2 Operating Cycle ..................................................................................................... 26
Table 3 Assessment of Limit of Letter of Guarantee............................................................ 50
Table 4 Assessment of Limit of LC...................................................................................... 58
Table 5 Example................................................................................................................. 61
Table 6 Example................................................................................................................. 61

10
INTRODUCTION
Objective of the Study:-
To know the various types of working capital finance provided by banks.
To analyse in detail the procedure of assessment of working capital finance
Extended by bank.
To apply these procedure at a practical level with the help of case studies.
To know overall operations of Axis bank.

11
Research Methodology:-
This is analytical research area where we analyses information with cause and its
effects relationship. This analysis leads to the simple conclusions of whether to lend
money to the institution for business.
Also if the money is lend then there is reality the norms are not always perfect and
hence it is essential to priorities stringent parameters and secondary parameters.
Research Type Analytical
Source of Data Primary and Secondary
Sample Unit Industries applying for loan
Sample Case studies
Sample Technique Allocation of Case
Analysis Tool used Financial Analysis
Table 1 Research Methodology
Primary Data:
Observation, Discussion with the manager.
The company profile, annual reports have been obtained from BOM.
Secondary Data:
Secondary data relating to the procedure of assessment of working capital
finance, old sanction proposals, RBI guidelines etc. have been sourced from
reference books.

12
Limitations of the study:-
The data availability is proprietary, not readily shared for dissemination and is
highly confidential.
Assumptions and projections are based on current market conditions and
have not taken into account the price volatility.
Financial statements of the proposed project are subject to risks and
uncertainties that could cause actual results to differ materially from those
mentioned in the report. The risks and uncertainties include, but are not
limited to, the following:
1) Changes in Indian laws
2) Changes in Indian in global economic conditions
3) Changes in government regulations
4) Introduction of new technologies
The staff although are very helpful but are not able to give much of their time
due to their own work constraints.
The study is being done keeping in mind the policies of the Head Office.
Due to the on-going process of globalization and increasing competition, no
single model or method will suffice over a long period of time and constant up
gradation will be required.

13
What is a Bank?
―A bank is a financial intermediary and MONEY creator that create money by lending
money to a borrower, thereby creating a corresponding deposit on the bank's
balance sheet. Lending activities can be performed directly by loaning or indirectly
through capital markets‖.
About Banking Industry:
The roots of the modern banking industry can be traced from the fourteenth century
in medieval Europe. Banking in India originated in the last decades of the 18th
century.
Banks act as payment agents by conducting checking or current accounts for
customers, paying cheques drawn by customers on the bank, and collecting
cheques deposited to customers' current accounts. Banks also enable customer
payments via other payment methods such as telegraphic transfer, EFT, POS, and
automated teller machine (ATM).
Banks play a critical role in the economic development of an economy. They are
important not only for economic growth but also financial stability. In an economy
banks has three major roles to play i.e. first, they fulfill the financing needs of the
corporate sector. Second, they cater to the needs of the vast number of household
savers, providing assured returns on their surplus funds while maintaining liquidity
and safeguarding them from financial risks. Third, they act as a support for
development of financial markets and its participants.
When we talk about banks, we are talking about several different types of financial
institutions, conducting different kinds of business. Some banks are very large and
carry out many different functions, others are more specialized. Some have
operated for hundreds of years and some have taken on new kinds of business
quite recently.

14
Types of banking:
1) Retail Banking
2) Commercial Banking
3) Investment Banking
 Retail banking:
Retail banks are the high street banks we are all familiar with. They take
deposits from individuals, provide saving facilities and pay interest on these
accounts. They also lend money to individuals, in the form of loans and
overdrafts, and charge interest on the money they lend. They provide a
range of other financial services.
Ex. Axis bank, HDFC bank etc.
 Commercial banking :
Commercial banks, or divisions of banks, provide banking services to
businesses, from small companies through to corporate banking directed at
large corporations. They help companies raise finance to expand their
businesses and to maintain their cash flow by lending them money. They
provide a wide range of other financial services.
Ex. Axis bank, SBI bank, HDFC bank etc.

15
 Investment banking:
Investment banks distribute and underwrite (guarantee the sale of) share
and bond issues; they trade securities on the financial markets and advise
corporations on capital market activities such as mergers and
acquisitions. Investment banks originally developed in the USA and these
banks have now taken over many roles that were previously carried out by
UK merchant banks.
Ex. Goldman Sachs, HSBC, Lazard etc.
There are many Retail banks in India like:
Figure 1 Banks

16
About Axis bank:
Axis Bank Limited (formerly UTI Bank) is the third largest private sector in India. It
offers financial services to customers segments covering large and Mid-Sized
corporates, MSME, Agriculture and Retail Businesses. Axis Bank has its
headquarters in Mumbai.
o In the year of 2014 Axis bank had revenue of US$5.3 billion, operating income
was US$1.5 billion, and Net Income was US$820 million. And Axis bank had
a network of 2402 branches and extension counters and 12922 ATMs. Axis
bank has the largest ATM network among private banks in India and it
operates an ATM at one of the world‘s highest sites at Thegu, Sikkim at a
height of 4023 meters (13,200 ft.) above sea level.
o The Bank has seven international offices with branches at Singapore, Hong
Kong, Dubai, Shanghai and Colombo and representative offices at Dubai and
Abu Dhabi, which focus on corporate lending, Trade finance.
As on 31 march 2014, Axis Bank had 37,901 Employees, out of which 7,117
employees were women. The bank incurred INR 26.7 billion on employee benefits
during the FY 2012-13. The average age of Axis Bank employees is 29 years.

17
Functions of Axis bank:
Figure 2 Functions of Axis Bank
Axis bank’s organizational structure:
Figure 3 Organizational Structure

18
Axis Bank’s product:-
Figure 4 Products
Credit card:
A credit card is a payment card issued to users as a system of a payment. It allows
the cardholder to pay for goods & services based on the holder‘s promise to pay for
them.
Credit card allows customers a continuing balance of debt.
Axis bank gives 50 days credit limit to the customers. If any circumstance he is able
to pay on time he will be charged 2.6% of amount.
There are mainly 5 types of cards.
1. The card for travel-fans
2. Power of signature
3. The card for entertainment-fans.
4. The customizable card for choosy-fans.
5. The card for self-employed.

19
Accounts:
A bank account is a financial amount between a bank customer and a financial
institution. Account can be deposit a/c or credit a/c or other type of a/c offered by
financial institutes. The financial transaction which have occurred within a given
period of time on a bank account are reported to the customer on a bank statement
and the balance of the account at any point in time is the financial position of the
customer with the institution.
A fund that a customer has entrusted to a bank and from which the customer can
make withdrawals. Bank account may have a positive or credit balance where the
bank owes money to the customer or a negative or debit balance where the
customer owes the bank money.
Types of account:
1. Saving account
2. Current account
3. Salary account
Corporate banking:
Corporate banking is the area of finance dealing with the sources of funding and the
capital structure of corporation and actions that managers take to increase the value
of the firm. The primary goal of corporate banking is to provide funding to companies
o they can maximize the profit.
While providing finance to companies they check all the history and their forecasting.
Companies present net profit Government policies. These things done with the help
of the CRISIL rating. CRISIL suggests maximum permissible bank finance (MPBF)
according to that rating and with the help of MPBF bank gives finance to banks.

20
Insurance:
Insurance is the equitable transfer of the risk of a loss from one entity to another in
exchange for payment. It is a form of risk management primarily used to hedge
against the risk of a contingent uncertain loss. In the Axis bank Max life insurance is
a company selling the insurance the insured or policy holder is the person or entity
buying the insurance policy.
The amount of money to be charged a certain amount of insurance Isa called as a
policy.
Ex. Max life insurance is selling one policy its name is ―monthly guaranteed income‖
in which customer is required to pay yearly 50,000/- for 12 years and he/she will get
monthly income guaranteed income from 13 years onwards of 6000/- per month and
at the end of 18 years he will get double of premium.
The age of person should be under 58.
Mortgage loan:
Mortgage loan is used by purchasers of real property to raise money to buy the
property to be existing property owners to raise funds for any purpose. If the
customer is not able to repay the loan then bank can sell his/her property.

21
How Axis borrow money?
Banks borrow money by accepting funds deposited on current accounts, by
accepting term deposits, and by issuing debt securities such as banknotes and
bonds. Banks lend money by making advances to customers on current accounts, by
making installment loans, and by investing in marketable debt securities and other
forms of money lending.
How Axis Bank generate Revenue?
A bank can generate revenue in a variety of different ways including interest,
transaction fees and financial advice. The main method is via charging interest on
the capital it lends out to customers. The bank profits from the differential between
the level of interest it pays for deposits and other sources of funds, and the level of
interest it charges in its lending activities. Profitability from lending activities has been
cyclical and dependent on the needs and strengths of loan customers and the stage
of the economic cycle. Fees and financial advice constitute a more stable revenue
stream and banks have therefore placed more emphasis on these revenue lines to
smooth their financial performance. Banks have expanded the use of risk-based
pricing from business lending to consumer lending, which means charging higher
interest rates to those customers that are considered to be a higher credit risk and
thus increased chance of default on loans. This helps to offset the losses from bad
loans, lowers the price of loans to those who have better credit histories, and offers
credit products to high risk customers who would otherwise be denied credit.

22
Lending Money to the public:-
Lending money is one of the two major activities of any Bank. Banks accept
deposit from public for safe-keeping and pay interest to them. They then lend
this Money to earn interest on this money. In a way, the Banks act as
intermediaries between the people who have the money to lend and those who
have the need for money to carry out business transactions. The difference
between the rate at which the interest is paid on deposits and is charged on
loans, is called the "spread".
Banks lend money in various forms and they lend for practically every activity.
Loans are given against or in exchange of the ownership (physical or
constructive) of various types of tangible items. Some of the securities against
which the Banks lend are:-
1) Commodities
2) Debts
3) Financial Instruments
4) Real Estate
5) Automobiles
6) Consumer durable goods
7) Documents of title

23
Delivery channel in Axis Bank:
Figure 5 Delivery Channel
Lending Money to Corporate:-
The Bank provides holistic funding solution to the supply chain of corporates.
Products under this segment cater to the funding needs of supply chain members
and increase operational efficiency of the entire chain. The service delivery is
through a technology platform designed to increase transactional convenience for
the corporate.
The following models of channel Finance are designed to cater to the supply chain‘s
Finance needs:
Dealer Financing: This product is designed to provide Finance facility to the
dealers or distributors of a particular corporate exclusively for their purchases
made from that Corporate. The facility gives an easy access to finance the
dealers or distributors and helps a Corporate in strengthening its distribution
network.

24
Factoring of Receivables: Factoring facility involves the purchase of
accounts receivable in a trade transaction. The seller gets instantaneous
liquidity and the buyer gets credit at an affordable cost. This form of credit
helps the corporate in boosting its sales and managing the receivables
efficiently.
Vendor Finance: The product is designed to provide Finance to vendors of a
particular Corporate against supplies made to the corporate. It aids the cash
flow of a vendor and helps to improve the overall supply chain's performance
and reliability. Corporates can use this facility to develop a strong and reliable
vendor base.
Rent Receivable Financing: These products are designed for companies
involved in renting out goods like computer hardware, furniture, construction
equipment etc. to other companies. The loans are advanced against future
rent receivables.

25
What Is Working Capital?
Working capital is defined as the total amount of funds required for day to day
operation of a unit. It can also be referred as the current asset holding of an
enterprise. It is often classified as gross working capital (GWC) and net working
capital (NWC). Working capital finance is utilized for operating purposes, resulting in
creation of current assets (such as inventories and receivables). This is in contrast to
term loans which are utilized for establishing or expanding a manufacturing unit by
the acquisition of fixed assets.
Gross Working Capital refers to the fund required for financing total current assets
of a business unit. Net working capital no other hand is the difference between
current assets and current liabilities (including bank borrowings) that is nothing but
the surplus of long term sources over long term uses as such it is known as the liquid
surplus available in a unit that can be either positive or negative. A positive NWC is
always desirable because of the fact that it provides not only margin for the working
capital requirement but also improves ability of the borrower to meet its short term
liabilities.
Operating Cycle Method
Every business unit has an operating cycle which indicates that a unit procures ‗raw
material‘ from its funds, convert into ‗stock in process‘ which again is converted into
‗finished goods‘ which can be sold for cash and thus transformed into ‗fund‘.
Alternatively it can be sold on credit and on realization thereof gets converted into
fund.
Thus every rupee invested in current assets at the beginning of the cycle comes
back to the promoter with the profit element added, after the lapse of a specific
period of time. This length of time is known as operating cycle or working capital
cycle.

26
In order to keep the operating cycle going on, certain level of current assets are
always required, the total of which gives the amount of total working capital required.
Thus total working capital can be obtained by assessing the level of various
components of current assets.
The operating cycle is therefore measured in terms of days of average inventory held
for every major category of working capital components.
Stages Time Value
I Raw Material Holding Period Value of RM
consumed during
the period
II Stock in Process Time taken in
converting RM into
FG
RM +
Manufacturing
expenses during the
period (cost of
production)
III Finished Goods Holding period of
FG before being
sold
RM + mfg. exp. +
adm. Overheads for
the period (cost of
sales)
IV Receivables Credit allowed to
buyer
RM + mfg. exp .+
adm. Exp. + profit
for the period
(Sales)
Table 2 Operating Cycle

27
Why We Need Working capital?
The need of gross working capital or current assets cannot be overemphasized. The
object of any business is to earn profits. The main factor affecting the profits is the
magnitude of sales of the business. But the sales cannot be converted into cash
immediately. There is a time lag between the sale of goods and realization of cash.
There is a need of working capital in the form of current assets to fill up this time lag.
Technically, this is called as operating cycle or working capital cycle, which is the
heart of need for working capital. This working capital cycle can be described in the
following words. If the company has a certain amount of cash, it will be required for
purchasing the raw material though some raw material may be available on credit
basis. Then the company has to spend some amount for labour and factory
overheads to convert the raw material in work in progress, and ultimately finished
goods. These finished goods when sold on credit basis get converted in the form of
sundry debtors. Sundry debtors are converted in cash only after the expiry of credit
period. Thus, there is a cycle in which the originally available cash is converted in the
form of cash again but only after following the stages of raw material, work in
progress, finished goods and sundry debtors. Thus, there is a time gap for the
original cash to get converted in form of cash again. Working Capital needs of
company arise to cover the requirement of funds during this time gap, and the
quantum of working capital needs varies as per the length of this time gap.

28
What is Working capital finance?
A manufacturing concern needs finance not only for acquisition of fixed assets but
also for its day-to-day operations. It has to obtain raw materials for processing, pay
wage bills & other manufacturing expenses, store finished goods for marketing &
grant credit to the customers. It may have to pass through the following stages to
complete its operating cycle.
Conversion of cash into raw materials – raw material procured on credit, cash may
have to be paid after a certain period.
1. Conversion of raw materials into stock in process.
2. Conversion of stock in process into finished goods.
3. Conversion of finished goods into receivables/debtors or cash.
4. Conversion of receivables/debtors into cash.
A non-manufacturing trading concern may not require raw material for their
processing, but it also needs finance for storing goods & providing credit to its
customers.
Similarly a concern engaged in providing services, it may not have to keep
inventories but it may have to provide credit facility to its customers. Thus all
enterprises engaged in manufacturing or trading or providing services require
finance for their day-to-day operations, the amount required to finance day-to-day
operation is called working capital & the assets & liabilities are created during the
operating cycle are called current assets & current liabilities. The total of all the
current assets is called gross working capital & the excess of current assets over
current liabilities is called net working capital.

29
When entrepreneurs for financing working capital requirements approach the banks,
the bank has to examine the viability of the project before agreeing to provide
working capital for it. Financial institutions & bank while providing term loan finance
to unit for acquisition of fixed assets does a detailed viability study. They have to
ensure that the project will generate sufficient return on the resources invested in it.
The viability of a project depends on technical feasibility, marketability of the
products, at a profitable price, availability of financial resources in time & proper
management of the unit. In brief the project should satisfy the tests of technical,
commercial, financial & managerial feasibility.
Proper co-ordination amongst banks & financial institution is necessary to judge the
viability of a project & to provide working capital at appropriate time without any
delay. If a unit approaches banks only for working capital requirement & no viability
study has been done earlier which is done at the time of providing term loans, a
detailed viability study is necessary before agreeing to provide working capital
finance.
In the view of scarcity of bank credit, its increasing demand from various sectors of
economy & its importance in the development of economy, bank should provide
working capital finance according to production requirements. Therefore it is
necessary to make a proper assessment of total requirement of the working capital,
which depends on the nature of the activities of an enterprise & the duration of its
operating cycle. It has to be ensured that the unit will have regular supply of raw
material to facilitate uninterrupted production. The unit should be able to maintain
adequate stock of finished goods for smooth sales operation. The requirement of
trade credit, facilities to be given by the unit to its customers should also be
assessed on the basis of practice prevailing in the particular industry/trade which
assessing above requirements, it should also be ensured that carrying cost of
inventories & duration of credit to customers are minimized.

30
After assessing the total requirement of working capital, a part of working capital
requirement should be financed for the long term & partly by determining maximum
permissible bank finance.

31
Data Required for Assessment of working capital Requirement:-
For assessing the working capital needs of an organization, bank follows CMA
(Credit Monitoring Arrangement). It is required by banks and other financial
institutions, to introspect or study the minutes of balance sheet and other financial
statements of a body corporate for financing their projects. In other words it is the
detailed explanation of the balance sheet and other financial ratios of the firm or any
other corporate.
The CMA includes analysis of following six documents:
i) Existing and proposed banking arrangements
ii) Operating statement
iii) Analysis of Balance Sheet
iv) Build-up of current assets and current liabilities
v) Calculation of MPBF (Maximum Permissible Bank Finance)
vi) Fund Flow Statement

32
RETAIL BANKING OPERATIONS IN AXIS BANK
Opening an account at Axis bank:
The depositors served as the basic source of deposit that leads to form the funds to
lend loans to others. A transaction with a depositor is launched with the opening of
account in the bank. I was informed that various types of Bank Accounts are opened
in the bank, that is to say,
Figure 6 Types of A/C
I have learned till now two accounts Currents and saving till the opening of that
account. Entire process of both is below. First we will understand process of saving
account.

33
Owner of Joint A/c:
When two or more persons open an account jointly, it is called a joint A/c and
such account holders are termed as joint A/c holder. While maintaining, the following
rules and regulations are followed:
The joint account holders or any one of them authorized to operate the A/c
may open either a joint account.
The joint account holders are equally liable for repayment of debt taken from
the bank.
If after the death of an owner, if at least two of them are alive, then the money
is withdrawn from the A/c through cheque and new A/c is opened for the alive
persons and the money is deposited to the A/c.
According to the rules of our country is case of joint A/c by husband and wife,
the husband is considered as the owner of that A/c.
 Usually the client is required to deposit at least 10,000/- in saving and
10,000/- in Current Account.
 The Banker therefore provides the customer with a pay in slip book, a
chequebook and a passbook.

34
Saving Account:
As the name indicates this account is meant for saving purpose, any
individual either single or joint can open a saving account.
In the accounts one has to maintain minimum balance as low as 10,000/-. In
saving a/c number of financial transaction are restricted.
Interest rates are higher when compared to current account. Any cash
transaction of 10 lakh and above in a year will be informed to the IT
department.
In case if you do many transactions and issuing of cheques in saving account
banks have all the rights to question you on income and reason for
transaction.
Axis Bank pays interest quarterly at the rate of 4% p.a. on daily balance basis
in your Savings Account.
While account opening process within 10 days customer will get chequebook,
passbook and debit card to their residence. With the help of chequebook
he/she can withdraw money whenever he/she wants
Passbook gives you your all transactions that you have done.
If customer exceed limit of transaction means if he does transaction more
than 5 then he/she will be charged for 230/- .

35
In case of salary account if salary does not credit for consecutive three
months then the account is considered as saving account and minimum
balance maintenance is required.

36
Figure 7 Saving a/c Process

37
Current Account:
Figure 8 Need of Documents for current a/c
-LLP agreement and
Certificate of
incorporation & PAN
card

38
Current account mainly for persons, firms, organization etc. this is useful
when a person does a number of business transactions on daily basis
While there is no interest paid on amount held in the account. There is no limit
on number of transactions. In the accounts one has to maintain minimum
balance as low as 10,000/-.
While account opening process within 10 days customer will get chequebook,
passbook and debit card to their residence. With the help of chequebook
he/she can withdraw money whenever he/she wants
Passbook gives you your all transactions that you have done.
If customer exceed limit of transaction means if he does transaction more
than 5 then he will be charged for 750/- .
The procedure relating to C. D. account is summarized below.
 Person intending to open a Bank Account shall apply in a prescribed
form, duly filled in.
 He will put at least three specimen signatures in the signature card
supplied by the bank and given two passport size photograph.
 Application form shall be dully verified by a competent officer.
 Bank officer shall carefully check specimen signature of the client and
verify the genuine of the introducer.
 After these formalities Officer proceed for next step that steps are
below:

39
Figure 9 Current a/c Process

40
Various types of Account holder need documents and maintain rules relating
to open Bank Account Owner of personal A/c:
If any person opens account in his own name and maintain it, he will be termed
as the owner of personal A/c. He has to maintain the bank A/c. Nobody for him can
maintain the A/c. The necessary documents require opening personal A/c, which is
discussed above.
Joint Stock Company:
While opening an account in the name of a company, the Banker must satisfy
himself about the following:
The name of the company, the shareholders name and addresses.
Whether the company is registered or not.
If there is any change among the shareholders, it must be informed to the
bank.
All the shareholders are equally liable for the repayment debt taken from the
bank.

41
Public Limited company:
While opening an account in the name of public limited company the Banker should
take the following particulars:
The application for opening an account
Naming the person who is authorized by the managing director or managing
committee to operate the bank A/c.
Specimen signature of the customer.
Certified copy of constitution and memorandum of the company
List of directors and their signature certified by chairman
Scrutiny the financial condition, nature of business of the company
The company is liable for the repayment of debt taken from the bank.
Non-trading Organization:
Clubs, societies, charitable and religious institutions not engaged in trading
activities can open their accounts in the bank. According to the constitution of
this institution one or more employee authorized to operate the bank A/c can
operate the A/c. If the institutions are not registered, Bank Account cannot be
opened.

42
Closing of Bank Account:
The relationship between a Banker and his customer is a contractual one
and may be terminated by either of them by giving notice of his intention to the other
person. The rights and obligation of a Banker in this regard is as follows:
If a customer directs the Banker to close his account.
On receipt of the notice of the death of a customer.
If a Banker receives a notice regarding the insanity of his customer.
On receipt of a Garnishee order from the court.
Fixed account is closed automatically after the specified date.

43
Steps of Cash Management at Branch Level:
The cash receipts procedure, as I found, is summarized below:
Cash Receipt:
Pay-in-slip or credit voucher are given to the cash counter for depositing cash.
Cash deposit section checks the title if account, its number, amount in words
and figures in the pay-in-slip or credit voucher.
Cash receiving officer after receiving the cash giving records/denomination of
the currency on the back of the voucher shall enter the particulars of the
voucher in the cash receiving book under progressive serial number & puts
his signature putting the date stamp both on counter foil & pay-in-slip voucher.
Then he will pass it on to the officer- in-charge of cash section for his
signature along with the register
The officer will then detach pay-in-slip from the counter foil and return it to the
receiving officer along with the register.
The officer sends the pay-in-slip/ credit voucher to the deposit section in case
of pay-in-slips and credit vouchers to the respective section to which it relates.
Cahier and cash-in-charge puts signature on the book at time of closing cash.

44
Cash Payment:
Generally cheques, D.D, pay order and cash deposit voucher etc. are
received from customer and institutions.
The formalities are given below:
The instrument is checked for any discrepancy, posting and cancellation
Specimen signature of cancellation officer should be available
Cash is counted and the denomination of notes are written on the reverse of
the instrument
Cash is paid to the bearer of the instrument
Particulars of the instruments are entered in paying cash book
Paid instruments are kept with the paying officer
Cancellation Of cheque:
The cancellation officer shall keep the specimen signature card under his
personal custody.
All specimen signature cards will be kept in serial order.
In case of difference of signature, cheques shall not be passed.
Officer shall not pass any cheque unless it is posted against the account and
initialled by the ledger keeper.
The cancellation shall be made waving a red line across the signature of the
drawers of the cheque.
The cancellation shall sign in full using red ink the drawer‘s signature.

45
Cash Balancing:
The entire cash related employees ensure the balancing of cash on daily
basis:
All cash register written in words and signed
Checking agreed with each other
Preparing cash position memo
Writing cash Balance book
Checking all registers and signing
Ensuring that Balance is correct.
Preparing cash cum daybook.
Checking cash in hand:
Cash should be checked as per cash balance which is showing in system.
Counting the loose cash entirely also coin
Petty cash
Prize bond stick
Late paid cash/Scrutiny instrument
Surplus cash if any pass voucher

46
Cash safe keeping:
All the custodians of cash must ensure overnight safe keeping of cash at
branch level. Counted cash to keep under following precaution:
Iron safe condition
Strong room as per specification
Lodgement of keys
Maintain safe limit
Excess over limit disposal

47
ASSESSMENT OF WORKING CAPITAL FINANCE
PROCESS
Figure 10 Assessment of WPF Process

48
Bank Credit as a Source of Meeting Working Capital Requirements:
While bank credit is considered as a major source of meeting the working capital
requirement of the industry, the banks have to consider the following factors before
meeting their requirements.
A. What should be the amount of working capital assistance?
B. What should be the form in which working capital assistance may be
extended?
C. What should be the security that should be obtained for extending the working
capital assistance?
Amount of Assistance:
To obtain the bank credit for meeting the working capital requirements, the company
will be required to estimate the working capital requirements and will be required to
approach the banks along with the necessary supporting data. On the basis of the
estimates submitted by the company, the bank may decide the amount of assistance
which may be extended, after considering the margin requirements. This margin is to
provide the cushion against the reduction in the value of security. If the company
fails to fulfil its obligations, the bank may be required to realize the security for
recovering the dues.
Margin money is meant to take care of the possible reduction in the value of security.
The percentage of margin money may depend upon the credit standing of the
company, fluctuations in the price of security or the directives of Reserve Bank of
India from time to time.

49
Form of Assistance:
After deciding the amount of overall assistance to be extended to the company, the
bank can disburse the amount in any of the following forms
1) Non-Fund Based Lending
2) Fund Based Lending
Non-Fund Based Lending:-
In case of Non-Fund Based Lending, the lending bank does not commit any physical
outflow of funds. As such, the funds position of the lending bank remains intact. The
Non-Fund Based Lending can be made by the banks in two forms:-
1) Bank Guarantee
2) Letter of Credit
Assessment of Non-Fund Based Working Capital Facility:-
Bank Guarantee:-
A contract of guarantee can be defined as a contract to perform the promise, or
discharge the liability of a third person in case of his default. The contract of
guarantee has three principal parties as under:
Principal debtor: The person who has to perform or discharge the liability and for
whose default the guarantee is given.

50
Principal creditor: The person to whom the guarantee for due fulfilment of
contract by principal debtor. Principal creditor is also sometimes referred to
as beneficiary.
Guarantor or Surety: The person who gives the guarantee.
Bank provides guarantee facilities to its customers who may require these facilities
for various purposes. The guarantees may broadly be divided in two categories as
under:
Financial guarantees: Guarantees to discharge financial obligations to the
customers.
Performance guarantees: Guarantees for due performance of a contract by
customers.
Assessment of Limit of Letter of Guarantee
Outstanding Bank Guarantee as per
audited balance sheet
A
Add bank guarantee required during the
period
B
Less estimated maturity or cancellation of
bank guarantee during the period
C
Requirement of bank guarantee D = A + B - C
Table 3 Assessment of Limit of Letter of Guarantee

51
Bills Co-Acceptance:
It is same as letter of credit. The difference is that the letter of credit is
accepted by buyer as well by co-accepting bank.
Deferred Payment Guarantee (DPG):
A deferred payment guarantee is a contract under which a bank promises to
pay the supplier the price of machinery supplied by him on deferred terms, in
agreed instalments with stipulated interest in the respective due dates, in case
of default in payment thereof by the buyer. As far as the buyer of the plant and
machinery is concerned, it serves the same purpose as term loan. The
advantage to the buyer is that he is benefited to the extent of savings in
interest charges accruing on account of opting equipment financing under
instalment payment system less the guarantee.

52
Letter of Credit:
Letter of credit (LC) is a method of settlement of payment of a trade transaction and
is widely used to finance purchase of raw material, machinery etc. It contains a
written undertaking by the bank on behalf of the purchaser to the seller to make
payment of a stated amount on presentation of stipulated documents and fulfilment
of all the terms and conditions incorporated therein. Letters of credit thus offers both
parties to a trade transaction a degree of security. The seller can look forward to the
issuing bank for payment instead of relying on the ability and willingness of the buyer
to pay.
Parties to a Letter of Credit
1. Applicant/Opener: It is generally the buyer of the goods who gets the letter of
credit issued by his banker in favor of the seller. The person on whose behalf
and under whose instructions the letter of credit is issued is known as
applicant/ opener of the credit.
2. Opening bank/issuing bank: The bank issuing the letter of credit.
3. Beneficiary: The seller of goods in whose favour the letter of credit is issued.
4. Advising Bank: Notification regarding issuing of letter of credit may be directly
sent to the beneficiary by the opening bank. It is, however, customary to
advise the letter of credit through sane other bank operating at the
place/country of seller. The bank which advises the letter of credit to the
beneficiary is known as advising bank.

53
5. Confirming Bank: A letter of credit substitutes the credit worthiness of the
buyer with that of the issuing bank. It may sometimes happen especially in
import trade that the issuing bank itself is not widely known in the exporter's
country and exporter is not prepared to rely on the L/C opened by that bank.
In such cases the opening bank may request other bank usually in the country
of exporter to add its confirmation which amounts to an additional undertaking
being given by that bank to the beneficiary. The bank adding its confirmation
is known as confirming bank. The confirming bank has the same liabilities
towards the beneficiary as that of opening bank.
6. Negotiating Bank: The bank that negotiates the documents drawn under letter
of credit and makes payment to beneficiary.
The function of advising bank, confirming bank and negotiating bank may be
undertaken by a single bank only.
Letter of Credit Mechanism:-
Any business/industrial venture will involve purchase transactions relating to
machine/other capital goods and raw material etc., and also sale transactions
relating to its products. The customer may be an applicant for a letter of credit for his
purchases while be the beneficiary under other letter of credit for his sale
transaction.

54
The complete mechanism of a letter of credit may be divided in three parts as under:
1) Issuing of Credit: Letter of credit is always issued by the buyer's bank
(issuing bank) at the request and on behalf and in accordance with the
instructions of the applicant. The letter of credit may either be advised directly
or through some other bank. The advising bank is responsible for
transmission of credit and verifying the authenticity of signature of issuing
bank and is under no commitment to pay the seller. The advising bank may
also be required to add confirmation and in that case will assume all the
liabilities of issuing bank in relation to the beneficiary as stated already. Refer
to diagram given below for complete process of issuance of credit.
Figure 11 Process for Issuing of Credit

55
2) Negotiation of Documents by beneficiary:- On receipt of letter of credit, the
beneficiary shall arrange to supply the goods as per the terms of L/C and
draw necessary documents as required under L/C. The documents will then
be presented to the negotiating bank for payment/acceptance as the case
may be. The negotiating bank will make the payment to the beneficiary and
obtain reimbursement from the opening bank in terms of credit. The entire
process of negotiation is diagrammatically represented as under:
Figure 12 PROCESS OF NEGOTIATION

56
3) Settlement of Bills Drawn under Letter of Credit by the opener: The last
step involved in letter of credit mechanism is retirement of documents
received under L/C by the opener. On receipt of documents drawn under L/C,
the opening bank is required to closely examine the documents to ensure
compliance of the terms and conditions of credit and present the same to the
opener for his scrutiny. The opener should then make payment to the opening
bank and take delivery of documents so that delivery of goods can be
obtained by him. This aspect of L/C transaction is represented as under:
Figure 13 PROCESS OF SETTELEMENT UNDER L/C

57
Types of Letter of Credit:
Letter of credit may be divided in two broad categories as under:
A. Revocable letter of credit. This may be amended or cancelled without
prior warning or notification to the beneficiary. Such letter of credit will
not offer any protection and should not be accepted as beneficiary of
credit.
B. Irrevocable letter of credit. This cannot be amended or cancelled
without the agreement of all parties thereto. This type of letter of credit
is mainly in use and offers complete protection to the seller against
subsequent development against his interest.
Letter of credit may provide drawing of documents on following two bases:
A. Delivery against payment (DP): In this case documents are
delivered against payment. The beneficiary is paid as soon as the
paying bank or borrower‗s bank has determined that all necessary
documents are in order.
B. Delivery against acceptance (DA): In this case documents are
delivered against acceptance. The borrower pays after certain due
date of payment specified.

58
Assessment of Limit of Letter of Credit
Annual Raw Material
Consumption
A
Annual Raw Material
Procurement through ILC/
FLC
B
Monthly Consumption C
Usance D
Lead Time E
Total Time F = D + E
LC Time Required G = F * C
Table 4 Assessment of Limit of LC
Assessment of Fund Based Working Capital Facility:-
While public sector banks in India are nominally independent entities they are
subject to intense regulation by the Reserve Bank of India (RBI). This includes rules
about how much the bank should lend to individual borrowers—the so-called
―maximum permissible bank finance‖. There are multiple methods as suggested by
different committees from time to time. We have discussed following
recommendations by three committees:

59
Simplified Turnover Method (Nayak Committee)
This method of assessing working capital requirement of a firm is given by “Nayak
Committee”. The committee headed by Mr. P.R. Nayak examined the adequacy of
institutional credit to SSI sector and gave its recommendations which are as under:
Under this method, bank credit for working capital purposes for borrowers
requiring fund based limits up to Rs. 5 crore for SSI borrowers and Rs. 2 crore
in case of other borrowers, may be assessed at minimum of 25% of the
projected annual turnover of which should be provided by the borrower (i.e.
minimum margin of 5% of the annual turnover to be provided by the borrower)
and balance 4/5th (i.e. 20% of the annual turnover) can be extended by way of
working capital finance.
The projected turnover or output value may be interpreted as projected gross
sales which will include excise duty also.
Since the bank finance is only intended to support the need based
requirement of a borrower, if the available NWC (net long term surplus funds)
is more than 5%of the turnover the former should be reckoned for assessing
the extent of bank finance.

60
Maximum Permissible Banking Finance Method (Tandon Committee )
A committee headed by Mr. P.L. Tandon, ex-chairman of PNB, was constituted
with view to suggest improvement in the existing ash credit system. It submitted
its report on guidelines for follow up of credit in August 1974, suggesting three
methods of lending. These are as follows:
1st Method of Lending: 75% of the working capital gap (WCG = Total
current assets – Total current liabilities other than bank borrowings) is
financed by the bank and the balance 25% of the WCG considered as margin
is to come out of long term source i.e. owned funds and term borrowings. This
will give rise to a minimum current ratio of 1.17:1. The difference of 0.17 (=
1.17 – 1) represents the borrower‗s margin which is known as Net Working
Capital (NWC).
2nd Method of Lending: Bank will finance maximum up to 75% of total
current assets (TCA) and borrower has to provide a minimum of 25% of total
current assets as the margin out of long term sources. This will give a
minimum current ratio of 1.33:1.
a) 3rd Method of Lending: This is same as 2nd method of lending, but
excluding core current assets from total assets and the core current assets
are financed out of long term funds of the company. The term ―core current
assets‖ refers to the absolute minimum level of investment in current assets,
which is required at all times to carry out minimum level of business activity.
The current ratio is further improved to 1.79:1.

61
EXAMPLE:
Current Liabilities Current Assets
Creditors for
purchase
100 Raw material 200
Other current
liability
50 Stock in process 20
Bank
Borrowings
200 Finished Goods 90
Receivables 50
Other current assets 10
350 370
Table 5
1st Method 2nd Method 3rd Method
Total CA 370 Total CA 370 Total CA 370
Less Total
CL - Bank
Borrowing
150 Less 25% of
CA
92 Less Core CA
from long term
sources
95
WCG 220 278 275
25% of
WCG from
long term
sources
55 Less Total CL -
Bank
Borrowings
150 Less 25% from
long term
sources
Total CL - Bank
Borrowings
69
150
MPBF 165 MPBF 128 MPBF 56
Current
Ratio
1.17:1 Current Ratio 1.33:
1
Current Ratio 1.79:1
Table 6

62
Chore Committee:-
The R.B.I constituted, in April 1979, a working group under the chairmanship
of Sri K.B Chore, to review the system of cash credit with the particular
reference to the gap between sanctioned limit and the extent of their
utilization. It was also asked to suggest alternative type of credit facilities
which would ensure greater credit discipline and enable the banks to relate
the credit limits to increase in output or other productive activities.
The committee recommended assessment of working capital requirements
have to be mandatorily assessed based on 2nd method of lending suggested
by Tandon Committee except for sick/Units under rehabilitation.
As such, the banks are presently assessing need based WC financing under 2nd
Method of lending.
b) Cash Budget System
In case of tea, sugar, construction companies, film industries and service sector
requirement of finance may be at the peak during certain months while the sale
proceeds may be realised throughout the year to repay the outstanding in the
account. Therefore, credit limits are fixed on the basis of projected monthly cash
budgets to be received before beginning of the season.
Branches should follow the procedure/guidelines issued from time to time through
various Circulars for financing tea, sugar, construction companies, film industries
and service sector.

63
PROCEDURE FOR WORKING CAPITAL FINANCE
CREDIT SANCTION PROCESS:-
The revised credit process is introduced with a view of reducing the time lag in
the sanction of credit besides clearly delineating the areas of responsibilities of
various functionaries. As per this the revised process is divide into two
components that is Pre sanctioning and Post sanctioning.
In the pre sanctioning it is the only time that the bank can take due assessment
and precautions to make sure that the investments are done for the benefit of the
bank. The post sanctioning is the follow of the payment. In case the payment
defaults then the account will go into NPA in stages and the bank is then said to
scrutinize the said account.
PRE SANCTION PROCESS:-
Obtain loan application
When a customer required loan he is required to complete application form and
submit the same to the bank also the borrower has to be submit the required
information along with the application form.

64
Figure 14 Pre Sanction Process
The information, which is generally required to be submitted by the borrower
along with the loan application, is under: -
 Audited balance sheets and profit and loss accounts for the previous three
year(in case borrower already in the business)
 Estimated balance sheet for current year.
 Projected balance sheet for next year.
 Profile for promoters/directors, senior management personnel of the
company.
 In case the amount of loan required by borrower is 50 lacs and above he
should be submit the CMA Report

65
Examine for preliminary appraisal
RBI guidelines. Policies
Prudential exposure norms and bank lending policy
Industry exposure restriction and related risk factors.
Compliance regarding transfer of borrowers accounts from one bank to
another bank
Government regulation / legislation impact on the industry
Acceptability of the promoter and applicant status with regards to other unit to
industries.
Arrive at the preliminary decision.
Examine/analysis /assessment
Financial statement (in the prescribed forms) refers figure WC cycle & BS
assessment thumb rules.
Financial ratio & Dividend policy.
Depreciation method
Revaluation of fixed assets.
Records of defaults (Tax, dues etc.)
Pending suits having financial implication (Customs, excise etc.)
Qualifications to balance sheet auditors remarks etc.
Trend in sales and profitability and estimates /projection of sales.

66
Production capacities and utilization: past & projected production efficiency
and cost.
Estimated working capital gap W.R.T acceptable build-up of
inventory/receivables/other current assets and bank borrowing patterns.
Assess MPBF –determine facilities required
Assess requirement of off balance sheet facilities viz.L/cs,B/gs etc.
Management quality, competence, track records
Company‘s structure and system
Market shares of the units under comparison.
Unique feature
Profitability factors
Inventory/Receivable level
Capacity utilization
Capital market perception.

67
POST SANCTION PROCESS:-
Supervision and follow up: -
Sanction credit limit of working capital requirement after proper assessment of
proposal is alone not sufficient. Close supervision and follow up are equally essential
for safety of bank credit and to ensure utilization of fund lend. A timely action is
possible only close supervision and followed up by using following techniques.
Monthly stock statement
Inspection of stock
Scrutiny of operation in the account
Quarterly/half quarterly statements.
Under information system
Annual audited report
Figure 15 Post Sanction Process

68
CREDIT MONITORING ARRANGEMENT
Consequent upon the withdrawal of requirement of prior authorization under the
erstwhile credit authorization scheme (CAS) and introduction of a system of post
sanction scrutiny under credit monitoring arrangement (CMA) the database forms
have been recognized as CMA database. The revised forms for CMA database
as drawn up by the sub-committee of committee of directions have come into use
from 1st April 1991.
The existing forms prescribed for specified industries continue to remain in force.
With a view to imparting uniformity to the appraisal system, database from all
borrowers including SSI units enjoying working capital limits of Rs. 50 lacs and
more from the banking system should be obtained.
The revised sets of forms have been separately prescribed for industrial
borrowers and traders/merchant exporters. The details of forms are as under: -
Form 1: - particulars of the existing/proposed limit from the banking system.
Form 2: -Operating statement.
It contains data relating to gross sales, net sales, cost of raw material, power and
fuel, etc.
It gives the operating profit and the net profit figures.
Form 3: - Analysis of balance sheet.
It is complete analysis of various items of last year‘s balance sheet; current years
estimate and following year‘s projection are given in this form.

69
Form 4: - Comparative statement of current asset and liabilities.
Details of various items of current asset and current liabilities are given.
The figures in this form must tally with those in form III.
Form 5: - Computation of maximum permissible bank finance for working capital.
The calculation of MPBF is done in this form to obtain the fund based credit limits
to be granted to the borrower.
Form 6: - Fund flow statement
It provides the details of fund flow from long term sources and uses to indicate
whether they are sufficient to meet the borrower‘s long term requirements.
CREDIT RATING MODEL
The various risk faced by any company may be broadly classified as follows:
Industry Risk:
It covers the industry characteristic, compensation, financial data etc.
Company/ business risk:
It considers the market position, operating efficiency of the company etc.
Project risk:
It includes the project cost, project implementation risk, post project
implementation etc.

70
Management risk:
It covers the track record of the company, their attitude towards risk, propensity
for group transaction, corporate governance etc.
Financial risk:
Financial risk includes the quality of financial statements, ability of the company
to raise capital, cash flow adequacy etc.

71
SECURITY
Banks need some security from the borrowers against the credit facilities
extended to them to avoid any kind of losses. Securities can be created in
various ways. Banks provide credit on the basis of the following modes of
security from the borrowers.
Hypothecation:
Under this mode of security, the banks provide credit to borrowers against the
security of movable property, usually inventory of goods. The goods
hypothecated, however, continue to be in possession of the owner of the goods
i.e. the borrower. The rights of the banks depend upon the terms of the contract
between borrowers and the lender. Although the bank does not have the physical
possession of the goods, it has the legal right to sell the goods to realize the
outstanding loans.
Hypothecation facility is normally not available to new borrowers.
Mortgage:
It is the transfer of a legal / equitable interest in specific immovable property for
securing the payment of debt. It is the conveyance of interest in the mortgaged
property. This interest terminated as soon as the debt is paid. Mortgages are
taken as an additional security for working capital credit by banks.

72
Pledge:
The goods which are offered as security are transferred to the physical
possession of the lender. An essential prerequisite of pledge is that the goods are
in the custody of the bank. Pledge creates some kind of liability for the bank in
the sense that ‗Reasonable care‘ means care, which a prudent person would take
to protect his property. In case of non-payment by the borrower, the bank has the
right to sell the goods.
Lien:
The term lien refers to the right of a party to retained goods belonging to other
party until a debt due to him is paid. Lien can be of two types viz. Particular lien
i.e. A right to retain goods until a claim pertaining to these goods are fully paid,
and General lien, Which is applied till all dues of the claimant are paid. Banks
usually enjoyed general lien.

73
BANKING ARRANGEMENTS
Working capital is made available to the borrower under the following
arrangements;
Consortium Banking Arrangement:
 RBI till 1997 made it obligatory for availing working capital facilities beyond a
limit (Rs 500 million in 1997), through the consortium arrangement. The
objective of the arrangement was to jointly meet the financial requirement of
big projects by banks and also share the risks involved in it.
 While it consortium arrangement is no longer obligatory, some borrowers
continue to avail working capital finance under this arrangement. The main
features of this arrangement are as follows;
 Bank with maximum share of the working capital limits usually takes the role
of ‗lead bank‘.
 Lead bank, independently or in consultation with other banks, appraise the
working capital requirements of the company.
 Banks at the consortium meeting agree on the ratio of sharing the assessed
limits.
 Lead bank undertakes the joint documentation on behalf of all member banks.
 Lead bank organizes collection and dissemination of information regarding
conduct of account by borrower.

74
Multiple Banking Arrangement:-
 Multiple banking is an open arrangement in which no banks will take the
lead role.
 Most borrowers are shifting their banking arrangement to multiple banking
arrangements. The major features are:-
 Borrower needs to approach multiple banks to tie up entire requirement of
working capital.
 Banks independently assessed the working capital requirements of the
borrower.
 Banks, independent of each other, do documentation, monitoring and
conduct of the account
 Borrowers deals with all financing banks individually.
Syndication:-
A syndicated credit is an agreement between two or more lenders to provide a
borrower credit facility using common loan agreement. It is internationally
practiced model for financing credit requirements, wherein banks are free to
syndicate the credit limit irrespective of quantum involved. It is similar to a
consortium arrangement in terms of dispersal of risk but consist of a fixed
repayment period.

75
CONCLUSION
The requirement of working capital finance is ever increasing.
Loans and advances formed a major portion of the current assets of the firm
because of which the working capital gap is large.
The bank prefers to use the second method of lending working capital under
the MPBF rather than evolving their own method.
In most of the cases, hypothecation and/or mortgage are used to create
securities for the banks.
Bank has their own internal credit rating procedure to rate the clients
(Borrowers).
After doing the assessment of the financial indicators it is up to the judgment
of the top management of the bank to sanction such loan. The very decision
could be against the assessment result.
If the company is with bank from inception stage then they are given
preference, as credible and loyal party over their financial indicators.
There is a stiff competition to the nationalized banks from the foreign
investors as their lending rates are much lower than nationalized banks.
Today the foreign investors are very big threat to business and its existence.
Bank of Maharashtra has kept a conservative look to banking.

76
BIBLIOGRAPHY
INTERNET SITES:
http://www.banknetindia.com
http://www.AxisBank.com
http://www.indiamarkets.com
http://www.businessfinance.com

Overall AxisBank Operations and Assessment of Working Capital

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (20)

Similar to Overall AxisBank Operations and Assessment of Working Capital

Similar to Overall AxisBank Operations and Assessment of Working Capital (20)

More from Axis Bank

More from Axis Bank (10)

Recently uploaded

Recently uploaded (20)

Overall AxisBank Operations and Assessment of Working Capital