Financial Management

Project
on
Working Capital
Management
of
INDUSIND BANK

OVERVIEW
Capital required for a business can be classified under two main categories:
Fixed capital
Working capital

Fixed capital: funds are required to every business for two purposes for its establishment
and carry on its day to day operation. At time of long term funds are required to create
production facilities through purchase of fixed assets such as plant and machinery, land,
building, furniture, etc., funds invested are for permanent or fixed basis which are called
Fixed capital.
Working capital: To carry out daily operation short term funds are required to take care
purchase of raw materials, payment of wages, transportation expenses, etc, these funds
are known as Working capital.

INTRODUCTION OF WORKING CAPITAL:

Working capital may also be regarded as lifeblood of business. In other words, working capital is
the amount of funds necessary to cover the cost of operating the enterprise. Working capital
represents both current assets and liabilities. It is known as Circulating capital. The term
circulate indicates the change or flow of current assets and liabilities, which are fluctuating, not
constant.

NEED OF WORKING CAPITAL:

A study of working capital is of major importance to internal and external analysis because of its
close relationship with the day- to- day operation of business. It has to obtain raw material, pay
wages, transportation expenses, warehousing expensing, grant credits to its customers. The sale
of goods will not immediately be converted into cash. It may have to pass through various stage
to complete its operating cycles:
In case of manufacturing firm:
Conversion of cash into raw material
Conversion of raw material into working progress
Conversion of work in progress into finished goods

Conversion of finished goods into debtors and bills receivable through sales
Conversion of debtors and bills receivable into cash

In case of trading firms:

Conversion of cash into inventories
Conversion of inventories into account receivable
Conversion of account receivable into cash

TYPES OF WORKING CAPITAL:

1. PERMANENT WORKING CAPITAL: It means the minimum amount of investment

in all current assets which is regarded at all time to carry on minimum level of business
activities. The magnitude of current assets increases and decreases over a period of time
due to increase in the level of activity. There is always a minimum level of current assets
required at all time by the firm to carry on its business operation. Tandon committee
named it as Core current assets. It has the following features:

It classified on the basis of time factors

It constantly changes from one assets to another
Its size increase with the growth of business operation
It changes from firm to firm

2. TEMPORARY WORKING CAPITAL:

It is also known as fluctuating or variable working capital. Here the working capital
keeps on changing depending upon the changes in production and sales. The extra
working capital required to support the changes in production and sales is known as
temporary working capital.
3. GROSS WORKING CAPITAL: It is also known as guess working capital; the
amount of funds invested in the various components of current assets.

4. NET WORKING CAPITAL: The amount difference between current assets and current
liabilities is called net working capital. The concept of net working capital enables a firm
to determine the exact amount available for operational requirements.
5. NEGATIVE WORKING CAPITAL: When current liabilities exceeds current assets,
negative working capital emerges. This happens when a firm is nearing crisis which
might arise due to inefficiency of operative force.
6. CASH WORKING CAPITAL: It is one, which is calculated from the item appearing in
the profit & loss a/c. it shows the real flow of money or value at a particular time is
considered to the most reliable approach in working capital. The cash working capital
indicates the adequacy of cash flow, which is an essential pre-requisite of business.

OBJECTIVES OF WORKING CAPITAL:

The basic objective of working capital management is to manage the firms current assets
and liabilities in such a way that the satisfactory level of working capital of business is
maintained.

DETERMINANTS OF WORKING CAPITAL:

A large number of factors influence working capital needs of a firm.
1. Nature of industry
2. Size of Business.
3. Manufacture cycle
4. Production policy
5. Volume of sales
6. Term of purchase & sales
7. Business Cycle
8. Rate of Stock Turnover
9. Seasonal Variation

10. Earning capacity & dividend policy

11. Price level changes
12. Operating efficiency
13. Taxes

DANGERS OF INADEQUATE WORKING CAPITAL:

It stagnates growth. It becomes difficult for the firm to undertaking profitable projects due to
non-availability of the working capital funds.
It becomes difficult to implement operating plans and achieve the firms profit target.
Operating inefficiencies creep in when it becomes difficult even to meet day to day
commitments funds, thus the rate of return on investment slumps.
Paucity of working capital funds renders the firm unable to avail of attractive credit
opportunities etc.
The firm losses its reputation when it is not in position to honour its short term obligations. As
a result, the firm face tight credit terms.
Because of inadequacy of working capital, the firm might lose its orders and ultimately leads to
insolvency.

DANGERS OF EXCESS WORKING CAPITAL:

It result in unnecessary accumulation of inventories. Thus, the chances of inventory
mishandling, waste, and theft and losses increases.
It is an indication of defective credit policy and slack collection period. Consequently, higher
incident of bad debts adversely affects profits.
Excessive working capital makes the management complacent, which degenerates into,
managerial inefficiency.
Tendencies of accumulating inventory to make speculative profit grow. This may tend to make
dividend policy liberal and difficult to cope with the future when the firm is unable to make
speculative profits.

 This leads to deceptive values of real assets of the company.

ABOUT

IndusInd Bank Limited is a Mumbai based Indian new generation bank, established in 1994.
The bank offers commercial, transactional and electronic banking products and services.
IndusInd Bank was inaugurated in April 1994 by then Union Finance Minister Manmohan
Singh. Indusind Bank is the first among the new-generation private banks in India.
IndusInd Bank Limited is an India-based bank that offers various banking and para banking
services, including accepting of deposits, such as savings accounts, currents accounts and fixed
deposits. The Bank is also engaged in granting of loans to various segments, including
industries/business and retail loans to individuals, among others. Its segments include Treasury,
which includes various investment portfolios, profit/loss on sale of investments, profit/loss on
foreign exchange transactions equities, income from derivatives and money market operations;
Corporate/Wholesale Banking, which includes lending to and deposits from corporate customers
and identified earnings; Retail Banking, which includes lending to and deposits from retail
customers and identified earnings, and Other Banking Operations, which includes all other
operations not covered under Treasury Corporate/Wholesale Banking and Retail Banking. The
Bank has over 800 branches in India

The bank started its operations with a capital amount of Rs. 1 billion among which Rs.
600 million was donated by the Indian Residents and Rs. 400 million was raised by the NonResident Indians. The bank has specialized in retail banking services and continuously upgrades
its support systems by introducing newer technologies. It is also working on expanding its
network of branches all across the country along with meeting the global benchmark. According
to the bank, its name is derived from the rich and vivid Indus Valley Civilisation.
IndusInd Bank has 745 branches, and 1635 ATMs spread across 392 geographic locations of the
country as of May 2015. It also has a representative office in London and another in Dubai.
Mumbai has the maximum number of bank branches followed by New Delhi and Chennai. The
bank has also proposed to double the branches count to 1200 by March 2017.

How bank help in working capital management

Working capital management is a managerial accounting strategy focusing on maintaining efficient levels
of both components of working capital, current assets and current liabilities, in respect to each other.
Working capital management ensures a company has sufficient cash flow in order to meet its short-term
debt obligations and operating expenses.
Working capital is the financing in a small business that helps a company pay its trade creditors and cash
flow it is the finance that businesses need for their day-to-day trading operations.
Role of indusind bank in financing working capital
Following are the services been provided by the bank for financing the working capital of small- scale
enterprises:-

1. Loans (secured i.e. against property, against vehicle, gold loan)

2. Deposits
3. Trade credit
4. Bank overdraft and cash credit
5. Cards services provided like debit , credit , commercial etc.

Working capital funding

It is purely a secured loan through collateral security or guaranter. Sometimes it may be
unsecured but only for corporate loan.
It is more given due to few of the reasons:
1. It is the most popular loan now a days
2. It does not involves risk factor means it is risk free
3. It has high interest charge
4. Its demand is increasing on fast pace
Working capital limit funding is based on business cycle (operating cycle) & minimum of 3 years
of experience is required before giving loan.

Benefits of working capital funding

Running account facility for a Short term period, on renewable basis.

1. Financing the inventory & receivable of the business.
2. Flexible account operations operate the account as and when required.
3. Reduced interest payment

Working capital funding mainly includes:

1. Cash credit limit (CC)
2. Bank overdraft limit (Bank O/D)

PRODUCT BASKET OF INDUSIND BANK

RETAIL LOANS

Loan against Property(LAP)

Housing Loan

Personal Loans

Gold loans

Loans can also be classified on the basis of: Secured

Home loans

Vehicle loans

Project financing

Loans to SME

Unsecured

Personal loan

C.C and O.D facility

PRODUCT BASKET OF INDUSIND BANK FOR WORKING CAPITAL FINACING

PURPOSES:-

1. Working Capital Finance

Running account facility for a Short term period, on renewable basis.

Financing the inventory & receivable of the business.

Flexible account operations operate the account as and when required.

Reduced interest payment

2. Term Loan

Long term finance for business expansion

Offered in INR and foreign currency.(FCTL)

Collateral based facility

Takeover of existing loan at competitive rates

3. Trade

Grow your business with our trade offerings

Letter of credit for import of goods and domestic purchase

Bank Guarantees both financial and performance

4. Unsecured Business Loans

Grow your business with our trade offerings

Based on business financials : No Collaterals taken

Fast processing of loan

Repayment on the basis of equated monthly instalment(EMI)

 Loan Against Property(LAP)

Before providing the loan, the banks look for the following points to be satisfied:

Knowing your customer(KYC)

Capability to repay the loan amount

Intention to repay the loan (seen from history or any political background, if any)

For providing loans against mortgage, Bank considers the following: Evaluate the property of customer to whom loan is to be extended, by the valuation
officer of its circle rate. And, also find out as to whether the property is constructed or
rented, is industrial/commercial or personal, is approved by Development Authority and
the type of property to be mortgaged.

Know Your Customer(KYC)

KYC is used by bank to appraise customers on the basis of their records/ documents
namely:In case of individuals: Photo ID
DOB Proof
PAN
Sign Proof
Address Proof
Relationship proof (Blood relation, etc)

In case of Proprietorship business:

PAN

Address Proof(Utility bill)

Registration proof (TIN No., etc.)

In case of Partnership:

Separate PAN

Utility bill

Registration

In case of Private limited:

PAN

MOA

Shareholding pattern

Utility Bill

List of directors

Repayment capacity
Various elements are considered to evaluate the repayment capacity of the borrower as
follows:In case of individuals:

Salary(monthly) of the borrower

Bonus and other average incentives earned by the applicant

House on rent, if any as shown in I.T return

In case of business:

Turnover- Balance sheet and P & L A/C of company

Cross verification from VAT

Service Tax( if belongs to service industry)

Intention to repay
For evaluating the intention to repay mainly Data of borrowers credit track- from CIBIL or such
other Credit Rating Agency and the Credit Score is checked for the purpose of granting the loan.

Various other risk or credit scoring parameters for rating/scoring of borrowers of the bank are: Age, Domicile, and Profile
Track record with our own bank or other banks/financial instituitions
Applicants business experience and the experience of the co-borrower and/or the
Guarantor
Product for which the loan is sought- from type and nature of application;
locality; operational area perspective
Product and operational viability
Fleet strength( as maybe applicable for each type of loan product)
Other income and financials; other assets owned
Strength of banking transactions
Work orders on hand
Market reputation
Loan to value norms and loan period sought
Feedback from field investigation check

Processing of applying for loan:It takes 5-6 days for providing loan from the date of application of loan by the applicant after
performing all necessary procedures such as House verification, Business verification, Document
verification and Property from registrar office.

 Vehicle loan
Loan for vehicle is unsecured loan because value is getting depreciated and it is movable
property.
Loan is provided for:

Commercial Vehicle

Construction Equipment

Personal vehicle

Farm equipment(and/or tractors)

For the purpose of commercial vehicle:

KYC

Financed trucks track record from CIBIL Report

FTU( First Time User) have no back up with CIBIL; so they are reviewed for having
vehicle or not having vehicle.

For the purpose of personal vehicle:

F.I- Field Investigation is important

For the purpose of construction equipment:

Government purchase order

For the purpose of farm equipment (or tractor):

Field investigation of Khasra(quality of land) and Khatauni(area of land)

 Gold Loan

It is a secured loan as the value of gold appreciates.

For the purpose of providing loan gold against which loan is provided is valued at
lower of the real value and the market value, and thereafter, bank funds 80% of the
lower value arrived.

Cash credit limit (c.c limit):

This Loan given to meet working capital requirements of the company on the basis on
company turnover, company financials, value of stock having by company. This loan
given against collateral security ie: Residence, Industrial or Commercial Property.
A limit is given in current account where the client can withdraw amount upto the limit
sanctioned.
Key Features of Cash Credit Limit :The loans are generally approved within 15 working days of
submission of complete documentation.
The interest charged only on the utilized amount. It will charged
basics on the end of the day (closing) balance.
No minimum Monthly repayment required
This loan can be used business purpose only.
Documents

Photograph of main applicants

ID proof : Pan card/ Passport/c Driving License

Signature Proof : Pan card/ Passport/Driving License

Age Proof : Pan card/ Passport/Driving License/DOB Certificate

Residence Proof : Passport/ Voter Card/Driving License/Ration

Card/ Telephone Bill/ Electricity Bill.

Office Proof : Telephone Bill/ Sales Tax registration certificate/

Electricity Bill

Ownership Proof : Electricity Bill/house tax/property papers

Income Proof : last 3 years audited financial along with audit report
with all schedules.

Bank statement : main account last 6 month.

Sanction letter of existing Cash credit or overdraft limit availed by the
company.

Collateral Security : Property papers which are offered.

Constitution proof : MOA/ partnership deed

Others : any Govt. registration like service tax, sales Tax, excise,

Loan Proof : Repayment Schedule of all running loans

Balance sheet : Previous yr, Current yr & projected years

Bank overdraft limit:

The word overdraft means the act of overdrawing from a Bank account. In other words,
the account holder withdraws more money from a Bank Account than has been deposited
in it. OD or Overdraft Limit is the excess withdrawal over the Current Account Amount.
Every Current A/C Holder enjoys this facility, wherin they can borrow in excess of their
funds in the account this limit is enhanced or reduced based on the Customer's Credit
worthiness
Limits
Loan/Overdraft against Property is a flexible product offering that allows you a
combination of a Term Loan and Overdraft facility against residential or commercial
property. It also allows you to fulfill your short term and long term business
requirements, be it working capital requirement or business expansion by unlocking the
potential of your property. This product is useful for professionals, Sole Proprietors,
Proprietorship Firms, Partnership Firms or a Private Limited Company with an annual
turnover in the range of INR 90 lakh to INR 45 crore.
Documentations.

Application form

Passport copy / PAN Card / Ration card

Office address proof

Passport sized photographs of all applicants / co-applicants

Certified copies of MOA / AOA /Partnership deed

Repayment track record

3 years audited financials

3 years ITR of directors/partners

6 months bank statement of main operating account

Professional qualification certificate in case of Doctors / CA / Lawyers /

Architects

Five Cs for the purpose of working capital assistance

Banks use rigorous policies and analyses when determining if and how much money to lend to
clients. The methods used by banks are often summarized by categorizing lending analysis as
the five Cs of credit. The five Cs of credit are character, capital, capacity, conditions and
collateral. Banks use the five Cs for specific reasons respective to each category, but all are
utilized to understand the risk of default on a loan.

Character
It is important to a bank to have significant comfort with the character of its prospective
borrowers. Indicators such as credit rating and borrowing history coupled with more qualitative
factors such as honesty and integrity all support a case for a borrower's willingness and ability to
repay a loan.
Capital
A bank needs to understand the capital position of the prospective borrower's business or
personal wealth. More capital represents the borrower's ability to withstand volatility. It also
demonstrates the commitment an owner of a borrowing entity maintains. A strong capital
position reassures a lender of repayment capacity in a borrower.
Capacity
Understanding capacity to repay a loan is critical for a bank during the underwriting process.
Capacity is determined by the borrower's ability to generate cash flow to service the interest and
principal on the loan. Strong cash flow from borrowers' normal business activities demonstrates
capacity to repay debt and mitigates the probability of default.
Conditions
A bank must also understand the broader market conditions affecting the industry, segment,
market and overall economy in which its borrowers engage in commerce. Strong industry growth
or economic conditions support a business' ability to generate cash and repay debt.

Collateral
Lenders often take a lien on borrower collateral. In the event a borrower is not able to repay debt
with its cash flow, a lender must rely on the quality and saleability of borrower collateral to repay
the loan. A robust analysis of the collateral supporting a loan is an important step in granting a
loan.