Summer Internship Project Working Capital Finance From Bank
Summer Internship Project Working Capital Finance From Bank
SEMESTER III
2020-2021
Submitted By:-
ROLL NO:-19100
BHIWANDI – 421302
2020-2021
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DECLARATION
hereby declare that I have completed the project on “Working Capital Finance
From Banks”
SIGNATURE
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CERTIFICATE
towards partial fulfilment for the Master of Management Studies is based on the
investigation carried out under our guidance. The project part therefore has not
Project Guide.
Director.
Mumbai.
Date:
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ACKNOWLEDGEMENT
To list who all have helped me is difficult because they are so numerous and
depth is so enormous.
I would like to acknowledge the following as being idealistic channel and fresh
I take this opportunity to thank that University of Mumbai for giving me chance
to this project.
I would like to thank my Director Mr. Arloph Johnvieira for providing the
I take this opportunity to thank our Coordinator Prof. Rahul Shah for her moral
I would also like to express my sincere gratitude towards my project guide Prof.
Rahul Shah whose guidance and care made the project successful.
I would like to thank my college library, for having provided various reference
Lastly, I would like to thank each and every person who directly or indirectly
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EXECUTIVE SUMMARY
finance at bank of Maharashtra, cre. the main objective of the project was to
being limited and wants being unlimited. so procurement of fund is one of the
I. long-term requirement
the investment needed for carrying out day-to-day operations of the business
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INDEX
SR. PAGE
NO. CONTENTS OF PROJECT NO.
Chp. 1 Introduction 7 - 10
objectives
scope of study
Chp.5 conclusion 33
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CHAPTER : 1
INTRODUCTION
Working capital financing is done by various modes such as trade credit, cash credit/bank
overdraft, working capital loan, purchase of bills/discount of bills, bank guarantee, letter of
The arrangement of working capital financing forms a major part of the day to day activities
of a finance manager. It is a very crucial activity and requires continuous attention because
working capital is the money which keeps the day to day business operations smooth.
Without appropriate and sufficient working capital financing, a firm may get into troubles.
Insufficient working capital may result in non-payment of certain dues on time. Inappropriate
mode of financing would result in loss of interest which directly hits the profits of the firm.
The term working capital is commonly used for the capital required for day-to-day
working in a business concern, such as for purchasing raw material, for meeting day-to-day
expenditure on salaries, wages, rents rates, advertising etc. Working capital refers to the
circulating capital required to meet the day to day operations of a business firm. Working
1. According to Weston & Brigham - “Working capital refers to a firm’s investment in short
The term “working capital” is often referred to “circulating capital” which is frequently used
to denote those assets which are changed with relative speed from one form to another i.e.,
starting from cash, changing to raw materials, converting into work-in-progress and finished
products, sale of finished products and ending with realization of cash from debtors. Working
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capital has been described as the “life blood of any business which is apt because it
Working capital can be utilized for operating costs that are involved in the everyday life of
business. Even very successful business owners may need working capital funds when the
Working capital is highly important in firms as it is used to generate further return for the
stakeholders. When working capital is managed improperly, allocating more than enough of
it will render management non-efficient & reduce the benefits of short term investments. On
the other hand, if working capital is too low, the company may miss a lot of profitable
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OBJECTIVES
by bank.
➢ The main purpose of this project to access the financial viability of the loan proposal to
➢ This study would also involve working out and interpreting the financial ratios in case
• To study the various loan facilities provided by the bank such as Cash credit, packing
• To understand the loan appraisal process starting from receiving of the application till
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SCOPE OF STUDY
The management of working capital helps us to maintain the working capital at a satisfactory
level by managing the current assets and current liabilities. It also helps to maintain proper
balance between profitability, risk and liquidity of the business significantly. By managing
the working capital, current liabilities are paid in time. If the firm makes payment to it
creditors for raw material in time, it can have the availability of raw material regularly, which
doesn t cause any obstacles in production process. Adequate working capital increases paying
capacity of the business but the excess working capital causes more inventory, increases the
possibility of delay in realization of debts. On the other hand, absence of adequate working
capital leads to decrease in return on investment. The goodwill of the firm is also adversely
affected due to the inability to pay current liabilities in time. Hence, the management of
working capital helps to manage all the factors affecting the working capital in the most profitable
manner
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CHAPTER : 2
RESEARCH METHODOLOGY
1. Primary Data:-
The information collected in the primary data is based on questionnaire and survey method
2. Secondary Data:-
The secondary data as it has always been important for the completion of any report
provides a reliable, suitable, adequate and specific knowledge. The standard cost reports,
working sheets provide the knowledge and information regarding the relevant subjects.
The information collected in the secondary data is based on different sources like internet,
websites, books, magazines and journals etc. Secondary data’s has been obtained from
published reports like the annual reports of the company, balance sheets, and profit and loss
account, booklets, records such as files, reports maintained by the company. Mainly the
annual report consists of two parts; 1) Profit and Loss Account 2) Balance Sheet Profit and
loss account reveals the income and expenditure of the company. Balance Sheet reveals the
financial position of the organization. Those two statements are prepared by the highly
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CHAPTER:4
DATA COLLECTION
In accounting,” Working capital is the difference between the inflow and outflow of funds. In
other words, it is the net cash inflow. It is defined as the excess of current assets over current
liabilities and provisions. In other words, it is net current assets or net 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 operations of a business. Working Capital is the
portion of the assets of a business which are used on or related to current operations, and
represented at any one time by the operating cycle of such items as against receivables,
inventories of raw materials, stores, work in process and finished goods, merchandise, notes
or bill receivables and cash. Working capital comprises current assets which are distinct from
other assets. In the first instance, current assets consist of these assets which are of short
duration. Working capital may be regarded as the life blood of a business. Its effective
provision can do much to ensure the success of a business while its inefficient management
can lead not only to loss of profits but also to the ultimate downfall of what otherwise might
be considered as a promising concern. The funds required and acquired by a business may be
1. Fixed Assets.
2. Current Assets
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3. Fixed assets are those which yield the returns in the due course of time. The various
decisions like in which fixed assets funds should be invested and how much should be
These types of assets are required to ensure smooth and fluent business operations and
can be said to be life blood of the business. There are two concepts of working capital
Gross and Net. Gross working capital refers to gross current assets. Net working
capital refers to the difference between current assets and current liabilities. The term
current assets refers to those assets held by the business which can be converted into
cash within a short period of time of say one year, without reduction in value. The
main types of current assets are stock, receivables and cash. The term current
liabilities refer to those inabilities, which are to be paid off during the course of
business, within a short period of time say one year. They are expected to be paid out
of current assets or earnings of the business. The current liabilities mainly consist of
sundry creditors, bill payable, bank overdraft or cash credit, outstanding expenses etc.
1. The fixed assets are required to be retained in the business over a period of time
and they yield the returns over their life, whereas the current assets loose their identity
over a short period of time, say one year.
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NEED FOR 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. Thus,
some amount of funds is blocked in raw materials, work in progress, finished goods, sundry
debtors and day-to-day requirements. However some part of these current assets may be
financed by the current liabilities also. E.g. some raw material may be available on credit
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basis, all the expenses need not be paid immediately, workers are also to be paid periodically
etc. But still the amounts required to be invested in these current assets is always higher than
Financing of working
capital
working capital should be financed in such a manner that the enterprise may have its
➢ Shares: The most important source for the permanent or long-term Working Capital
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➢ Debentures: Another important source for raising the permanent Working Capital is
the issue of debentures, which means a debt where the debenture holder is considered
➢ Public Deposits (Fixed): These deposits are fixed in nature and are accepted by a
➢ Indigenous Bankers: Private money lenders used to be the only source of finance
prior to the establishment of commercial banks. They used to charge very high rates
of interest.
➢ Trade credit: Trade credit refers to the credit extended by suppliers of goods in the
normal course of business. The credit worthiness of a firm and the confidence of its
➢ Installment credit: In this assets are purchased and possession of goods is taken
Generally, interest is charged on the unpaid price or it may be adjusted in the price.
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➢ Advances: Some business houses get advances from their customers and agents
against orders. Usually the manufacturing concerns having long production cycle
finance by discounting bills or invoices of its customers. Thus, a firm gets immediate
payment for sale made on credit. A factor is a financial institution which offers
services related to management and financing of debts arising out of credit sales.
supplying goods or services. However, firms having great demand for its products and
services, and those having good reputation in the market can demand deferred
incomes.
by firms to raise short-term funds. But only large companies enjoying high credit
rating and sound financial health can issue commercial paper to raise short-term
funds. The Reserve Bank of India has laid down a number of conditions to determine
eligibility of a company for the issue of commercial paper. Only a company which is
listed on the. Stock exchange has a net worth of at least Rs. 10 corers and a maximum
permissible bank inance of Rs. 25 crores can issue commercial paper not exceeding
30 per cent of its working capital limit. The maturity period of commercial paper
mostly ranges from 91 to 180 days. It is sold at a discount from its face value and
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Banking finance
Cash
Credit
Working
Capital Overdraft
Loan
Bank
Finance
Letter of
loans
Credit
Bills
Financing
• Cash Credit– Under this facility, the bank specifies a predetermined limit and the
borrower is allowed to withdraw funds from the bank up to that sanctioned credit limit
against a bond or other security. However, the borrower can not borrow the entire
sanctioned credit in lump sum; he can draw it periodically to the extent of his
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requirements. Similarly, repayment can be made whenever desired during the period.
excess of the actual credit balance in his current account up to a certain specified limit
during a stipulated period against a security. Within the stipulated limits any number
against the securities of life insurance policies, fixed deposits receipts, Government
securities, shares and debentures, etc. of the corporate sector. Interest is charged on
minimum(commitment) charges.
• Loans– Under this system, the total amount of borrowing is credited to the current
account of the borrower or released to him in cash. The borrower has to pay interest
on the total amount of loan, irrespective of how much he draws. Loans are payable
either on demand or in periodical instalments. They can also be renewed from time to
time. As a form of financing, loans imply a financial discipline on the part of the
borrowers.
• Bills Financing– This facility enables a borrower to obtain credit from a bank against
its bills. The bank purchases or discounts the bills of exchange and promissory notes
of the borrower and credits the amount in his account after deducting discount. Under
this facility, the amount provided is covered by cash credit and overdraft limit. Before
purchasing or discounting the bills, the bank satisfies itself about the creditworthiness
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• Letter of Credit– While the other forms of credit are direct forms of financing in
which the banks provide funds as well as bears the risk, letter of credit is an indirect
form of working capital financing in which banks assumes only the risk and the
supplier himself provide the funds. A letter of credit is the guarantee provided by the
buyer’s banker to the seller that in the case of default or failure of the buyer, the bank
shall make the payment to the seller. The bank opens letter of credit in favour of a
customer to facilitate his purchase of goods. This arrangement passes the risk of the
supplier to the bank. The customer pays bank charges for this facility to the bank.
such credit through a Working Capital Demand Loan (WCDL) account or a separate
minimum period of WCDL keeps on changing. WCDL is granted for a fixed term on
credit, the borrower has to pay a higher rate of interest more than the normal rate of
interest.
Banks generally do not provide working capital finance without adequate security. The nature
and extent of security offered play an important role in influencing the decision of the bank to
advance working capital finance. The bank provides credit on the basis of following modes of
security:
• Hypothecation– Under this mode of security, the banks provide working capital
ownership nor possession is passed to the creditor. In the case of default the bank has
the legal right to sell the property to realise the amount of debt.
fulfilment of a promise. Under this mode, the possession of goods offered as security
passes into the hands of the bank. The bank can retain the possession of goods
pledged with it till the debt (principal amount) together with interest and other
expenses are repaid. . In case of non-payment of loan the bank may either; Sue the
borrower for the amount due; Sue for the sale of goods pledged; or After giving due
• Lien– Lien means right of the lender to retain property belonging to the borrower
until he repays the debt. It can be of two types: (i) Particular lien and (ii) General lien.
Particular lien is a right to retain property until the claim associated with the property
is fully paid. On the other hand, General lien is applicable till all dues of the lender
immovable property for the payment of a debt. In case of mortgage, the possession of
the property may remain with the borrower, while the lender enjoys the full legal title.
The mortgage interest in the property is terminated as soon as the debt is paid.
Mortgages are taken as an additional security for working capital credit by banks.
• Charge- Where immovable property of one person is made security for the payment
of money to another and the transaction does not amount to mortgage, the latter
person is said to have a charge on the property and all the provisions of simple
mortgage will apply to such a charge. A charge may be created by the act of parties
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Regulation of Bank Finance
Concerned about such a distortion in credit allocation, the Reserve Bank of India (RBI) has
been trying, particularly from the mid 1960s onwards, to bring a measure of discipline among
industrial borrowers and to redirect credit to the priority sectors of the economy. From time to
time, the RBI issues guidelines and directives relating to matters like the norms for inventory
and receivables, the maximum permissible bank finance, the form of assistance, the
information and reporting system, and the credit monitoring mechanism. The important
guidelines and directives have stemmed from the recommendations of various committees
such as the Dahiya Committee, the Tandon Committee, the Chore Committee, and the Mara
the Committee. However, in recent years, in the wake of financial liberalization, the RBI has
given freedom to the boards of individual banks in all matters relating to working capital
financing. From the mid-eighties onwards, special committees were set up by the RBI to
prescribe norms for several other industries and revise norms for some industries covered by
inventory and receivable norms have been debated and criticized mostly. The committee
pointed out that the borrower should be allowed to hold only a reasonable level of current
assets, particularly inventory and receivables only the normal inventory, based on the
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production plan, lead time of supplies, economic ordering levels and reasonable factor of
safety, should be financed by the banker. Receivables which are in tune with the practices of
the borrower’s firm /industry should be financed. Lending Norms The recommendation of the
Tandon Committee regarding the “Lending norms” has far - reaching implications. The
lending norms have been suggested in view of the realization that the banker’s role as a
lender in only to supplement the borrower’s resources and not to meet his entire working
capitals needs. In the context of this approach, the committee has suggested three alternative
methods for working out the maximum permissible level of bank borrowings. Each
successive method reduces the involvement of short-term bank credit to finance the current
assets. Maximum Permissible Bank Finance: The Tandon Committee had suggested three
❖ First Method: According to this method, the borrower will have to contribute a
minimum of 25% of the working capital gap from long-term funds, i.e., owned funds
and term borrowings. This will give a current ratio of 1:17:1.The term working capital
gap refers to the total of current assets less current liabilities other than bank
borrowings.
❖ Second Method: Under this method the borrower has to provide the minimum of
25% of the total current assets that will give a current ratio of 1.33:1.
❖ Third Method : In this method, the borrower’s contribution from long term funds
will be to the extent of the entire core current assets and a minimum of 25% of the
The term core current assets refers to the absolute minimum level of investment in all current
assets which is required at all times to carry out minimum level of business activities.
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ASSESSMENT OF WORKING CAPITAL
A unit needs working capital funds mainly to carry current assets required for its operations.
Proper assessment of funds required for working capital is essential not only in the interest of
the concerned unit but also in the national interest to use the scare credit according to
of capacity and serious financial difficulties. Similarly excessive levels may lead to
unproductive use of credit and unnecessary interest Burdon on the unit. Proper assessment of
I. Norms for inventory and receivables: If the bank credit is to be linked with production
requirements, it is necessary to assess the requirements on the basis of certain norms. The
‘study group to frame guidelines to follow-up of bank credit’ (Tandon Study Group)
appointed by Reserve Bank of India had suggested the norms for inventory and receivables
regarding major industries on the basis of company finance studies made by Reserve Bank
process periods in the different industries, discussions with the industry experts and feed-
back received on the interim report. The norms suggested by Tandon Study Group are being
reviewed from time to time by the Committee of Direction constituted by the Reserve Bank
to keep a constant view on working capital requirements. The committee has representatives
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from a few banks and it generally once in a quarter. It also consults the representatives from
industry and trade. It keeps a watch on the various issues relating to working
II. Computation of Maximum Permissible Bank Finance (MPBF): The Tandon Study
group had suggested the following alternatives for working out the maximum permissible
bank finance:- a. Bank can work out the working capital gap. i. e. total current assets less
current liabilities other than bank borrowings and finance a maximum of 75 per cent of the
gap; the balance to come out of long-term funds, i.e. owned funds and term borrowings b.
Borrower should provide for a minimum of 25 per cent of total current assets out of long-
term funds, i.e. owned funds and long term borrowings. A certain level of credit for
purchases and other current liabilities inclusive of bank borrowings will not exceed 75 per
III. Classification of current assets & Current liabilities: In order to calculate net working
capital & maximum permissible bank finance, it is necessary to have proper classification of
various items of current assets & current liabilities. All illustrative lists of current assets &
current liabilities for the purpose of assessment of working capital are furnished below;
Current assets: -
b. Investments
c. Receivables arising out of sales other than deferred receivables (including bills purchased
e. Raw materials & components used in the process of manufactured including those in
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f. Finished goods including goods in transit
i. Prepaid expenses
Current Liabilities:
a. Short-term borrowings (including bills purchased & discounted) from Banks and
d. Sundry creditors (trade) for raw material & consumer stores & spares
h. Statutory liabilities
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• Obligation towards workers considered as statutory
• Dividends
Based on the attitude of the finance manager towards risk, profitability and liquidity, the
1. RESTRICTED POLICY
In restricted policy, the estimation of current assets for achieving targeted revenue is
done very aggressively without considering for any contingencies and provisions for
any unforeseen event. After deciding, these policies are forcefully implemented in the
organization without tolerating any deviations. In the diagram, point R represents the
restricted policy which attains the same level of revenues with lowest current
assets.Adopting this policy would result in an advantage of the lower working capital
requirement due to the lower level of current assets. This saves the interest cost to the
company and which in turn produces higher profitability i.e. higher return (ROI). On
the other hand, there is the disadvantage i the form of high risk due to very aggressive
2. RELAXED POLICY
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Relaxed policy is just the opposite of restricted policy. In this policy, the estimation of
current assets for achieving the targeted revenue is prepared after careful
the level of activities or sales etc. After the reasonable estimates also, a cushion to
avoid any unforeseen circumstances is left to avoid the maximum possible risk. In the
diagram, it represents the point Rx which uses the highest level of current assets for
almost no risk or low risk. This policy guarantees the entrepreneur of the smooth
functioning of the operating cycle. We know that earnings are more important than
investment because higher investment in the current assets attracts higher interest cost
which in turn reduces profitability. Because of its conservative nature, this policy is
3. MODERATE POLICY
Moderate policy is a balance between the two policies i.e. restricted and relaxed. It
assumes characteristics of the both the policies. To strike a balance, moderate policy
assumes risk which is lower than restricted and higher than conservative. In
The biggest benefit of this policy is that it has reasonable assurance of smooth
capital policies can be further framed for each component of networking capital. cash,
accounts receivable, inventory and accounts payable. Cash policies can be to maintain
an appropriate level of cash. When the level is high, it should be invested in liquid
investments for short term and vice versa. Accounts receivable policy may state about
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payment terms, credit period, credit limit, etc. Inventory policy may speak of
minimizing the levels of inventory till the point it poses any risk to the satisfaction of
Working capital is one of the most difficult financial concepts for the small-business owner to
understand. In fact, the term means a lot of different things to a lot of different people. By
definition, working capital is the amount by which current assets exceed current liabilities.
However, if you simply run this calculation each period to try to analyze working capital, you
won't accomplish much in figuring out what your working capital needs are and how to meet
them.
A more useful tool for determining your working capital needs is the operating cycle. The
operating cycle analyses the accounts receivable, inventory and accounts payable cycles in
terms of days. In other words, accounts receivable are analyzed by the average number of
days it takes to collect an account. Inventory is analyzed by the average number of days it
takes to turn over the sale of a product (from the point it comes in your door to the point it is
converted to cash or an account receivable). Accounts payable are analyzed by the average
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Most businesses cannot finance the operating cycle (accounts receivable days + inventory
days) with accounts payable financing alone. Consequently, working capital financing is
needed. This shortfall is typically covered by the net profits generated internally or by
Most businesses need short-term working capital at some point in their operations. For
instance, retailers must find working capital to fund seasonal inventory build-up between
September and November for Christmas sales. But even a business that is not seasonal
occasionally experiences peak months when orders are unusually high. This creates a need
for working capital to fund the resulting inventory and accounts receivable build-up.
Some small businesses have enough cash reserves to fund seasonal working capital needs.
However, this is very rare for a new business. If your new venture experiences a need for
short-term working capital during its first few years of operation, you will have several
potential sources of funding. The important thing is to plan ahead. If you get caught off
guard, you might miss out on the one big order that could put your business over the hump.
Here are the five most common sources of short-term working capital financing:
1. Equity. If your business is in its first year of operation and has not yet become
profitable, then you might have to rely on equity funds for short-term working capital
needs. These funds might be injected from your own personal resources or from a
2. Trade creditors. If you have a particularly good relationship established with your
trade creditors, you might be able to solicit their help in providing short-term working
capital. If you have paid on time in the past, a trade creditor may be willing to extend
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terms to enable you to meet a big order. For instance, if you receive a big order that
you can fulfill, ship out and collect in 60 days, you could obtain 60-day terms from
your supplier if 30-day terms are normally given. The trade creditor will want proof
of the order and may want to file a lien on it as security, but if it enables you to
Once you have filled an order, a factoring company buys your account receivable and
then handles the collection. This type of financing is more expensive than
4. Line of credit. Lines of credit are not often given by banks to new businesses.
However, if your new business is well-capitalized by equity and you have good
collateral, your business might qualify for one. A line of credit allows you to borrow
funds for short-term needs when they arise. The funds are repaid once you collect the
accounts receivable that resulted from the short-term sales peak. Lines of credit
typically are made for one year at a time and are expected to be paid off for 30 to 60
consecutive days sometime during the year to ensure that the funds are used for short-
5. Short-term loan. While your new business may not qualify for a line of credit from a
bank, you might have success in obtaining a one-time short-term loan (less than a
year) to finance your temporary working capital needs. If you have established a good
note for one order or for a seasonal inventory and/or accounts receivable build-up.
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In addition to analysing the average number of days it takes to make a product (inventory
days) and collect on an account (accounts receivable days) vs. the number of days financed
by accounts payable, the operating cycle analysis provides one other important analysis.
You can see that working capital has a direct impact on cash flow in a business. Since cash
flow is the name of the game for all business owners, a good understanding of working
➢ The company should administrate their credit on the basis of certain well recognized
➢ The company should maintain an optimum level of cash in the business in order to
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CHAPTER 5:- CONCLUSION
advanced formed a major portion of the current assets of the firm because of
which the working capital gap is larges. From the above discussion we can say
requirements of industries.
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