bimal project
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A PROJECT ON
A STUDY ON WORKING CAPITAL MANAGEMENT
An INTERNSHIP REPORT Submitted by
BIMALKANTA DAS
In partial fulfillment of the requirement of
For award of
Master of Business Administration
2010
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DECLARATION
I, BimalKanta Das a student of Centurion Institution OF Technology, Biju
Pattnaik University of technology, Rourkela bearing RollNo.0906307004, do hereby declare that this project report entitled
Working Capital Management at Axis Bank is the outcome of my own
work, and the same has not been copied or submitted to any other
University/Institute before.
I, also declare that the data provided in this report are true and fair tothe best of my knowledge and the interpretations are based on my own
understanding and judgment.
Date:
Place: Bhubaneswar BimalKanta Das
Roll No:0906307004,MBA
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ACKNOWLEDGEMENT
I wish to acknowledge my heartiest thanks to Mr. Arvind Khandelwal
my company guide of Axis Bank, and Mr.C.V.Kamesh, my Director ofC.I.T; without their sincere guidance and support this project would not
been a success, I acknowledge my gratitude to them.
Im very much thankful to Branch Head, for assigning me such a
beautiful project. I also acknowledge my thanks and gratitude to
Mr.Arvind Khandelwal for giving his valuable inputs and training
regarding the products & clearing the doubts aroused during the
periods of project preparation. I acknowledge my gratitude to all other
employees of Axis Bank for helping me during the project.
It gives immense pleasure to express my sincere gratitude to all the
people with whom I had the opportunity to work with and whose
valuable insights have helped me in furthering my knowledge and
understanding of the subject.
At last, Im also thankful to many people of the organization without
whose encouragement and support, the project would never have been
completed.
Date: BimalKanta Das
Place:Bhubaneswar MBA/0906307004
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CERTIFICATE
This is certify that I have guided Mr.BimalKanta Das 1st
year MBA
student of Centurion Institution of Technology,Jatni Bhubaneswarduring this course of Summer internship project titled Working Capital
Management successfully from 2nd
August 2010 to 17th
September
2010.
I found him sincere and hard working during the project work.
I wish a bright professional career.
Signature of guide
Official Seal
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TABLE OF CONTENTS
CHAPTER 1:
EXECUTIVE SUMMARY
INTRODUCTION
PURPOSE OF THE STUDY
OBJECTIVE OF THE STUDY
RESEARCH METHODOLOGY
LIMITATIONS OF THE STUDY
CHAPTER 2:
AXIS BANK
BACK GROUND
PROFILE
VISION, MISSION & OBJECTIVES
POLICIES & RULES OF AXIS BANK
AXIS BANK ACHIEVEMENTS AND AWARDS
PERFORMANCE OF AXIS BANK AT A GLANCE
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BOARD OF DIRECTORS
CHAPTER 3:
BANKING ANALYSIS
SWOT ANALYSIS
CHAPTER 4:
LITERATURE REVIEWWORKING CAPITAL MANAGEMENT
INVENTORY MANAGEMENT
CASH MANAGEMENT
RECEIVABLE MANAGEMENT
CHAPTER 5:
DATA ANALYSIS AND INTERPITATIONWORKING CAPITAL MANAGEMENT IN AXIS BANK
INVENTORY MANAGEMENT IN AXIS BANK
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CASH MANAGEMENT IN AXIS BANK
RECEIVABLE MANAGEMENT IN AXIS BANK
FINDINGS
SUMMARY AND SUGGESTIONS
CONCLUSION
BIBLOGRAPHY
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EXECUTIVE SUMMARY
I have been given an opportunity to do my summer training in a prestigious
and reputed organization i.e. Axis bank, Bhubaneswar. This has been a
strong player in the banking sector in our country, India. The tenure of my
summer training has been a continuous learning process that has enabled
me to understand the intricacies of the whole gamut of working capital
management in Axis bank.
The project title A Study on Working Capital Management in Axis Bank is a
comprehensive study and/or research carried out by me to the best of my
ability so as to have an insight to study not only the current asset andcurrent liabilities but also in maintaining a satisfactory level of working
capital.
Holding of current assets in substantial amount strengthens the liquidity
position & reduces the riskiness but only at the expense of profitability.
Therefore achieving risk-return trade off is significant in holding of current
assets. While cash outflows are predictable it runs contrary in case of cash
inflows. Sales program of any business concern does not bring back cashimmediately. There is a time lag that exists between sale of goods & sales
realization. The capital requirement during this time lag is maintained by
working capital in the form of current assets. The whole process of this
conversion is explained by the operating cycle concept.
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This study gives in detail the working capital management practices in Axis bank of each
current assets, namely inventory management, cash management, accounts receivable
management is studied permanent to Axis bank. Similarly management of accounts payable
is studied to understand the managing of current liabilities. A part from this concept of
operating cycle is studied.
The research methodology adopted for this study is mainly from secondary sources of data
which include annual reports of Axis bank, & website of the company. The use of primary
sources is limited to interviews with few of the employees in finance department.
The study of working capital management has shown that Axis bank has a strong working capital
position since its inception in 1994.
Thus the study shall certainly be of much importance for the company
to undertake rigorous correction measures so as to create brand
awareness, make it acceptable, followed by preference and
ultimately converting them to loyal customers.
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INTRODUCTION
CAPITAL
It is the difference between the total assets and total liabilities of the
enterprise.
For examples: If on a particular date the asset of the business amount
to Rs. 1,00,000 and liabilities to Rs. 30,000 then the capital on the date
would be Rs. 70,000. It is also known as net wroth.
Capital is essential for the setting up and smooth running of any business.
Investments made on fixed assets will yield excess cash inflows apart from the
payback amount and is spread over a longer period of time. Hence the cash inflows
(or) benefits associated are not immediate but are expected in the future. Cash
inflows & outflows occur on a continuous basis in case of current assets. Credit forms
an essential feature in the business (credit given to customers & credit from
suppliers). Since there is some time lag from the time of sales & sales realization
current assets & current liabilities, which together constitute the net working
capital, supports the business in its normal of operations. This calls for an efficient
management of working capital.
The policies, procedures and measures taken for managing of working capital
gain further importance in an organization like AXIS BANK where the working
capital requirements runs in crores of rupees. Any mismanagement on the part of
authority will not just cause loss but may even impair business operations. It is in
this context working capital has gained importance.
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The growth of any organization depends on overall performance of all the
departments. Any firms/banks/financial institution financial performance reflects
its strength, weaknesses, opportunities and threats of the organization with respect
to profits earned, investments, sales realization, turnover, turn on investment, net
worth of capital. Efficient management of financial resources and analysis of
financial results are prerequisite for success of an enterprise. In that working capital
management is one of the major area of financial management. Managing of working
capital implies managing of current assets of the company like cash, inventory,
accounts receivable, loans and advances and current liabilities like sundry creditors,
interest payment and provision.
PURPOSE OF THE STUDY
The main aim of any financial institution is to maximize the wealth of shareholders.
This can be achieved only by a steady flow of profits. Which in turn depend on
successful sales activity. To generate sales, investment of sufficient funds in current
assets is required. The need of current assets should be emphasized, as the sales
dont convert into cash immediately but involved a cycle of operations, namely
operating cycle.
Thus a detailed study regarding the working capital management in Axis
Company is to be done to consider the effectiveness of working capital management,
identify the shortcoming in management and to suggest for improvement in working
capital management.
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OBJECTIVES OF THE STUDY
y To study in general the working capital management procedure in Axis Bank, Bhubaneswar.
y To analyze and apply operating cycle concept of working capital in Axis Bank, Bhubaneswar.
y To know how the working capital is being financed.
y To know the various methods to be followed by Axis Bank for inventories and accounts
receivables.
y To give suggestions, if any, for better working capital management in Axis Bank.
RESEARCH METHODOLOGY
Research methodology used for study includes both primary& secondary sources of data. However
most of study is conducted based on secondary sources.
Secondary sources of data mainly include annual reports of Axis Bank Statement of changes in
working capital for the past 3 years is done using the data taken from these financial reports. Similarly
time series analysis of operating cycle and calculations of ratios is done. Apart from this, the website
of Axis Bank is referred to know the products, product facilities, network etc.
This research is focusing on working capital management and its effects on profitabilityfor a sample of Axis Bank. The main objectives are:
To establish a relationship between Working Capital Management and
Profitability over a period of 3 years for Axis Bank.
To find out the effects of different components of working capital management on
profitability
To establish a relationship between the two objectives of liquidity and profitability
of the Axis Bank.
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To find out the relationship between profitability and size of the Axis Bank.
To find out the relationship between debt used by the Axis Bank and itsProfitability
To draw conclusion about relationship of working capital management andProfitability of the Axis Bank.
LIMITATIONS OF THE STUDY
Although every effort has been made to study the Working Capital Management in detail,
in an organization of Axis Bank size, it is not possible to make an exhaustive study in a limited
duration of 2 months.
It is not possible to include data of 2009-10, as the audited financial report has not come yet
(at the time of preparation of this report). However data of 2009-10 is included partially from
the un audited financial reports of Axis Bank.
Apart from the above constraint, one serious limitation of the study is, that it is not possible
to reveal some of the financial data owing to the policies and procedures laid down by Axis
Bank. However the available data is analyzed with great effort to get an insight into Working
Capital Management in Axis bank.
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AXIS BANK
Company Profile:
About Us
Axis Bank was the first of the new private banks to have begun operations
in 1994, after the Government of India allowed new private banks to be
established. The Bank was promoted jointly by the Administrator of the
specified undertaking of the Unit Trust of India (UTI - I), Life Insurance
Corporation of India (LIC) and General Insurance Corporation of India (GIC)
and other four PSU insurance companies, i.e. National Insurance Company
Ltd., The New India Assurance Company Ltd., The Oriental Insurance
Company Ltd. and United India Insurance Company Ltd.
The Bank today is capitalized to the extent of Rs. 407.44 crores with the
public holding (other than promoters and GDRs) at 54.51%.
The Bank's Registered Office is at Ahmedabad and its Central Office is
located at Mumbai. The Bank has a very wide network of more than 1042
branches (including 56 Service Branches/CPCs as on 30th June 2010). The
Bank has a network of over 4474 ATMs (as on 30th June 2010) providing 24
hrs a day banking convenience to its customers. This is one of the largest
ATM networks in the country.
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The Bank has strengths in both retail and corporate banking and is
committed to adopting the best industry practices internationally in order to
achieve excellence.
Promoters
Axis Bank Ltd. has been promoted by the largest and the best Financial
Institution of the country, UTI. The Bank was set up with a capital of Rs.
115 crore, with UTI contributing Rs. 100 crore, LIC - Rs. 7.5 crore and GICand its four subsidiaries contributing Rs. 1.5 crore each.
SUUTI - Shareholding 23.86%
Erstwhile Unit Trust of India was set up as a body corporate under the UTI
Act, 1963, with a view to encourage savings and investment. In December
2002, the UTI Act, 1963 was repealed with the passage of Unit Trust of
India (Transfer of Undertaking and Repeal) Act, 2002 by the Parliament,
paving the way for the bifurcation of UTI into 2 entities, UTI-I and UTI-II
with effect from 1st February 2003. In accordance with the Act, the
Undertaking specified as UTI I has been transferred and vested in the
Administrator of the Specified Undertaking of the Unit Trust of India
(SUUTI), who manages assured return schemes along with 6.75% US-64Bonds, 6.60% ARS Bonds with a Unit Capital of over Rs. 14167.59 crores.
The Government of India has appointed Shri K. N. Prithviraj as the
Administrator of the Specified undertaking of UTI, to look after and
administer the schemes under UTI - I, where Government has continuing
obligations and commitments to the investors, which it will uphold.
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Board of Directors
The members of the Board are :
Dr. Adarsh Kishore Chairman
Smt. Shikha Sharma Managing Director & CEO
Shri M. M. Agrawal Deputy Managing Director
Shri J.R. Varma Director
Dr. R.H. Patil Director
Smt. Rama Bijapurkar Director
Shri R.B.L. Vaish Director
Shri M.V. Subbiah Director
Shri K. N. Prithviraj Director
Shri V. R. Kaundinya Director
Shri S. B. Mathur Director
Shri M. S. Sundara Rajan Director
Shri S. K. Roongta Director
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Values Vision 2015 and Core
VISION 2015:
To be the preferred financial solutions provider excelling in
customer delivery through insight, empowered employees and
smart use of technology.
Core Values
Customer Centricity
The customer is the center of our universe and our aim is to find
a solution to all his financial needs.
Ethics
Our inner voice as important as the bottom line. We want to winalways, but not at the cost of conscience.
Transparency
Every initiative taken, information shared product lunched has
reflected our true image.
Teamwork
None of us can do alone what all of us can do together.
Teamwork has always been the key to our success.
Ownership
At Axis Bank every employees is responsible for nurturing the
business and enhancing shareholders value.
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Shareholding Pattern
on 30/06/2010
Sr.No.
Name of the Shareholders No. of SharesHeld
% StaketoTotal
A. Promoter Shareholding
1. Administrator of the Specified Undertaking of theUnit Trust of India - (SUUTI)
97,224,373 23.86
2. Life Insurance Corporation of India 39,262,917 9.64
3. General Insurance Corporation of India 7,862,331 1.93
4. The New India Assurance Company Limited 4,252,455 1.04
5. National Insurance Company Limited 2,398,740 0.59
6. United India Insurance Company Limited 1,197,979 0.29
7. The Oriental Insurance Company Limited 1,532,462 0.38
Total Promoter Shareholding - A 153,731,257 37.73
B. Non-Promoter Indian Shareholding
8. Indian Financial Institutions (IFIs) 6,594,121 1.62
9. Mutual Funds 19,845,473 4.87
10. Others (Individuals/CorporateBodies/HUF/Trusts/Banks)
47,404,011 11.63
Total Non-Promoter Indian Shareholding - B 73,843,605 18.12
C. Foreign Shareholding
11. FDI Route - GDRs Issue (2005, 2007 & 2009) 31,616,542 7.76
12. Foreign Financial Institutions (FIIs) 147,767,331 36.27
13. NRIs/OCBs/FBD/FB-DR/Foreign Bank/ForeignNationals
483,740 0.12
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Total Non-Promoter Foreign Shareholding - C 179,867,613 44.15
Total A + B + C 407,442,475 100.00
PROFILE
Axis Bank is one of the fastest growing bank in the country and has anextremely
competitiveandprofitable banking franchiseevidenced by : Comprehensive
portfolio of banking services including Corporation Credit, RetailBanking,
Business Banking, Capital Market, Treasury and InternationalBanking.
RETAILBANKING
The Bank aims to increase its market-share in India's expanding financialservices industry through continued emphasis on building a strong retailfranchise. The Bank remains committed to developing long-term strongrelationships with its customers and ensuring that they have access tohigh-quality service as well as the full suite of financial solutions to help
achieve their financial objectives. Growth strategies have focused onbuilding profitable relationships across various customer segments. Inorder to achieve the objective of becoming more customer-centric, ratherthan product-centric, the Bank has restructured Retail Banking into twogroups namely Mass and Mass Affluent, and Affluent segments. The Massand Mass Affluent Segment owns, as the name indicates, mass-marketcustomers, while the Affluent Segment owns clientele defined as affluent,comprising customers in the wealth and private banking space.
During the year, the Bank has succeeded in continuing the momentum ofgrowth in retail liabilities with a special focus on the quality of acquisition.
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The Bank is the fourth largest debit card issuer in the industry st with abase of 147 lac debit cards issued till 31 March 2010. With 14 variantsdesigned for different customer segments, thedebit card base has grown23% year-on-year.
The Bank was also the first to launch a Platinum Chip Debit Cardin the country, which is presently offered exclusively to the PriorityBanking customer segment. In the prepaid cards market, theBank has attained a leadership position offering a bouquet ofproducts suited to a variety of needs: Rewards Cards - fordisbursement of incentives and commissions, Payroll Cards - forlow-value salary payments, Gift Cards - a substitute for cash, giftvouchers and physical gifts, Meal Cards
- for disbursement of meal allowances, Annuity Cards -for annuitypayments to customers of LIC of India and Remittance Cards- for st disbursement of inward remittances. As on 31 March
2010, the Bank had issued more than 2 million pre-paid cards.
The Bank also issues travel currency cards - foreign currencydenominated prepaid cards, positioned as a convenient
alternative to travellers' cheques.25
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It is issued in nine currencies. The Bank has also issued more than550,000 credit cards since its launch in 2006 and today offers an entirerange of retail and commercial cards. Since its launch of the innovativeSecured Credit Card, the Bank has become a market leader in the
product with a card base of 102,000, helping the Bank grow its credit cardportfolio in difficult market conditions. During the year, the Bank alsolaunched the Signature Credit Card that offers benefits like priority pass,concierge facilities, complimentary travel insurance and premium brandofferings. A slew of measures have been taken to improve portfolio qualityand these include greater focus on higher income customer segments,portfolio rationalisation, tighter credit monitoring and a robust collectioninfrastructure. The Bank launched its merchant-acquiring business inDecember 2003, and in over six years, has emerged as one of the largestacquirers in the country with an installed base of ~1.60 lac point-of-sale
terminals. The Bank also focuses on distribution of third party products,with a special thrust on mutual funds and Bancassurance. While the
general insurance industry continued to be affected by de-tariffingin certain insurance products, the distribution of these productsgenerated a premium of over Rs. 130 crores in the financial yearregistering a growth of 28%, with an emphasis on need-basedproduct offerings across the Bank's branches. Similarly, the Bankhas been engaged in a successful referral partnership for the
distribution of life insurance products, with a collection of ~ Rs.390 crores of annual premium in 2009-10. The Bank is a leadingdistributor of mutual funds in the country, adding 90,000 newcustomers in 2009-10. During the year, the Bank set a milestonewith a collection of Rs. 714 crores in the NFO of Axis Equitylaunched by the Axis Mutual Fund. Of the 92,000 applications
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collected in the NFO of Axis Equity, 77% was from retail investors investingless than Rs. 50,000 each, which reflects the Bank's ability togenerate interest among small retail investors in investment opportunities.The Bank offers Demat services from more than 750 branches across thecountry and presently has more than 2 lac accounts. Axis Bankoffers 'Online Trading Services' in alliance with Geojit BNP Paribas,facilitating seamless stock-trading through electronic linkages oftrading, bank and demat accounts with high-security online features. Duringthe year, ~ 47,000 customers have subscribed to the Bank'sonline trading account, the total traded volume in which was more than Rs.8,000 crores.
Axis Bank Wealth, launched in 2008-09, is a comprehensive valueproposition aimed at taking care of the financial needs of clients,
which include their investment and business needs, besides normalbanking facilities. The Bank is able to provide expertise to assistcustomers to protect and grow their wealth from a long-term perspective.Presently, the proposition is being offered at select centresacross India and the total assets under management of over 1,800 clientsof Axis Bank Wealth are over Rs. 2,200 crores. In September 2009, AxisBank launched the private banking business in the domestic market,christened 'Prive' to cater to highlyaffluent individuals and families offeringthem unique investment opportunities. Axis Bank Prive offerssophisticated investment and advisory services to clients who entrust theBank with Assets under Management (AUM) of more than Rs. 5 crores. Ithas been rolled out across six cities in India in 2009-10 and follows a team-based approach for managing client relationships.
CORPORATE BANKINGThe Bank's Corporate Banking franchise aims to provide a wide array ofproducts across several customer segments, including credit,
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trade finance, structured finance and syndication services for debt andequity. Since each corporate engagement also offers opportunities on theretail side of the business, products anchored in the Retail SBUs also forma part of the corporate marketing effort.New customer acquisition and relationship-deepening constitute the two-pronged strategy for growth. In order to leverage growthopportunities offered by India's infrastructure sector, a separateinfrastructure business group has been established within thecorporate banking group.
As per Planning Commission estimates, infrastructure spending in Indiawhich was at a level of 5% of the GDP in 2006-07 rose to 5.75%th in 2007-08 and the target level for the 11 Five Year Plan (2007-12) is toachieve infrastructure investment of 9.00% of GDP. The dampening of
equity markets following the global financial crisis acted as decelerators formobilizing resources for the infrastructure sectors in FY 2009. Howevercapital flows to the sector have steadily improved thereafter. The economicdownturn has reaffirmed the need for higher infrastructure spending forsustained growth of the economy and the quantum of spending ofapproximately the USD 500 billion envisaged during the 11 Five Year Planis expected to double to USD 1 trillion in the next five year plan (2012-17).The Bank has continued to retain its leadership position in the infrastructuredebt market and syndicated an aggregate amount of Rs. 27,000 crores by
way of Rupee and Foreign currency loans during 2009-10. EuromoneyProject Finance (Deals of the Year 2009) has conferred several awards inthe area of infrastructure financing to the Bank. These include categoriessuch as 'Road Deal of the Year', 'Indian Rail Deal of the Year' and 'IndianPPP Deal of the Year'.
CORPORATE CREDITDuring the year, corporate credit, including lending to large and mid-corporates and to infrastructure, grew to Rs. 52,503.53 crores,
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increasing by Rs. 11,292.63 crores, or 27.40% over last year. Thisincludes the lending out of the Bank's overseas branches at Rs. 12,285.40crores (equivalent to USD 2.74 billion). The Bank's approach to credit in thelarge corporate and infrastructure segments is sectoral, allowing for anefficacious mining of opportunities in each sector as well as improvedevaluation of sector-specific risks. The credit policy of the Bank has put inplace a matrix of industry exposure limits with a view to de-risking of theportfolio through diversification. In keeping with this strategy, the highestexposure to any sector was 17.50% of the Bank's total lending (10.65%previous year). The practice of internal and external rating continues to beundertaken on an ongoing basis. The entire corporate credit portfolio isinternally rated with 74.42% of the ratings accorded being A and above.74.13% of the portfolio has been externally rated till the end of the year.The mid-corporate group is an important business segment of the Bank,
with a credit book of Rs. 11,466.55 crores on 31 March 2010, increasing byRs. 2,485.87 crores, or 27.68% over last year. This includes advances atoverseas branches of Rs. 931.11 crores (equivalent to USD 207 million),comprising mainly credit extended to Indian corporates. The mid-corporatesegment has maintained its asset-quality and controlled delinquenciesthrough constant and close monitoring. Besides widening the customerbase of the mid-corporate segment and adopting a careful assessment ofacceptable risk-return tradeoffs, the focus of the segment has been todeepen existing client relationships by actively cross-selling a wide range ofproducts and services, based on detailed client-wise account plans,thereby increasing the Bank's share in the aggregate business level ofthe customer.
TREASURYThe Bank has an integrated Treasury, covering both domestic and globalmarkets, which manages the Bank's funds across geographies.During the year, the Bank posted a vigorous growth in both customer-based and proprietary Treasury business.
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In foreign exchange business, the Bank has increased its presence in theinter-bank markets and despite the competitive environment, grew thecustomer forex (merchant) business during 2009-10 by 36% year-on-year.The Bank offers products in the bullion business and in the CurrencyFutures segment (it became a member on the NSE and the MCX in theCurrency Futures segment). The Bank has played a key role in thesovereign debt markets during the year and booked trading gains from thegovernment securities portfolio of Rs. 302.63 crores against Rs. 217.35crores last year. During the year, the Bank became a member of the NSEon the Interest Rate Futures segment and used the Interest Rate Swapmarket for proprietary trading as well as for hedging its balance sheet risks.The Bank enlarged its business with financial institutions during the yearraising foreign currency resources to support customer trade businessacross the borders and increasing trade finance activity. The Bank also
participated actively in risk-participation business overseas with severalreputed international banks. The Bank has a stringent process of setting upinterbank exposure limits and a strong monitoring process to react quicklyto changing markets and economic conditions.
Debt Capital Market and Equity Trading
The Bank continued to maintain its leadership position in the domestic debt
market and has syndicated an aggregate amount of aroundRs. 69,077 crores through the private placement of bonds and debentures.Prime database has ranked the Bank as the number 1 arranger for privateplacement of bonds and debentures till December 2009. Bloomberg hasalso ranked the Bank as number 1 in India st Domestic Bond League Tablefor the calendar year 2009 and for the quarter ended 31 March 2010. AsiaMoney has rated the Bank as the Best Domestic Debt House in India forthe year 2009.
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The Bank maintains an investment of proprietary trading portfolio in
corporate bonds and equities. As on 31 March 2010, the Bank's investment
in corporate bonds, equities and others was Rs. 21,778.94 crores against
Rs. 18,607.48 crores last year.
BUSINESS BANKINGBusiness Banking initiatives have consistently focused on procuring low-cost funds by offering a range of current account products andcash management solutions across all business segments coveringcorporates, institutions, central and state government ministries andundertakings, as well as small and retail business customers. The cross-selling of transactional banking products have also succeeded in
enlarging the customer base and growing current account balances. Thus,sourcing of current accounts is one of the key enablers for thest growth of the balance sheet. As on 31 March 2010, current accountbalances for the Bank stood at Rs. 32,167.74 crores, againstst Rs. 24,821.61 crores on 31 March 2009, rising 29.60% over the year. Ona daily average basis, current account balances grew fromst st Rs. 14,658.35 crores on 31 March 2009 to Rs. 18,321.75 crores on 31
March 2010, thus increasing 24.99% over the year.
With the intent of providing business clients greater flexibility in meetingtheir transactional banking requirements, the Bank has made significantimprovements in its alternate banking channel using mobile and internetbanking. Cash Management Services (CMS) also leveraged the networkand reach to provide a wide range of customized collection and paymentssolutions. Strong correspondent bank alliances similarly offer corporateclients a very wide geographical coverage.
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The network and technologybased solutions have helped the Bank handlebulk-payment mandates for dividends, interest payments, redemptions andrefunds. The Bank has designed several facilities for its corporate clienteleusing its technology platform. One such facility is the Power Accesssolution which provides seamless integration between Bank's core bankingsystem, the payment modules and the corporate client's ERP Systems. TheBank has established a strong presence with companies raising equityfunds, by offering its services as bankers to the Issue.
The Bank acts as an agency bank for government business offering
banking services to various Central Government ministries /departments
and other State Governments/Union Territories. Currently, the Bank
accepts income/other direct taxes through214 authorised branches at 137
locations and central excise and service taxes though 56 authorised
branches at 13 locations. The Bankalso handles disbursement of civil
pension through 218 authorised branches and defence pension through
151 authorised branches.
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Additionally, the Bank provides collection and payment services to fourCentral Government ministries/departments and eight StateGovernments/Union Territories. During the year, the Bank receivedapproval from the Government of Sikkim for handling collection ofsales tax in the state.The Bank also strengthened its association with the e-Governance initiatives of various state governments in India aimed atproviding better delivery of citizen/ business services. During the year, theBank received approvals from governments of Chhattisgarh and Orissatowards appointment as the nodal bank for their 'e-Procurement Projects'.The Bank is associated with Government of Andhra Pradesh forimplementing Electronic Benefit Transfer (EBT) Projects, a new line ofbusiness for handling disbursements relating to various Govt. BenefitSchemes through Smart Cards under an IT Enabled FinancialInclusion Model in four districts. During the year, the Bank extended its
association to three more state governments for implementing similar EBTProjects in various districts (two in Chhattisgarh and one each in Haryanaand Karnataka). As a result of these business initiatives, the totalgovernment business throughput during the year was Rs. 71,039 croresagainst Rs. 60,869 crores in the previous year
CAPITAL MARKETS
During the year, the Capital Markets SBU was restructured with the debtcapital market business (hitherto a part of the capital markets)carved into a separate vertical. As a result, the Bank's Capital Markets SBUcomprises equity capital markets (ECM) business, mergers andacquisitions and private equity syndication. There is thus a separate andclear focus on the equity capital markets involving the various facets of itsbusinesses.
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The turmoil in the global financial markets in the early part of the yearadversely affected deal flow as equity investors stayed away from themarkets and companies put expansion plans on hold. With improvement inthe global capital markets, there was an improvement in the ECM activity inthe second half of the financial year. The Bank is a SEBI-registeredCategory I Merchant Banker and has been fairly active in advising Indiancompanies to raise equity through IPOs, FPOs, QIPs and Rights issues.The Bank has built strong relationships with Indian companies, becomingan effective bridge between such corporates and domestic andinternational institutional investors. During 2009-10, the Bank advised over10 companies in raising Rs. 5,288 crores from international and domesticequity investors. The M&A advisory focuses on domestic and cross-borderbuy, and sell mandates for Indian clients. The Private Equity businessworks with the Bank's mid-cap and SME clients and advises them in raising
capital from private equity investors. The improved economic situation hashad a beneficial effect on the financial markets. The Capital Markets SBUhas taken various initiatives to improve origination efforts by partneringclosely with the Bank's relationship teams to mine existing corporaterelationships.INTERNATIONAL BANKINGThe International Banking strategy of the Bank revolves around leveragingits relations with corporates in India while providingbanking solutions at overseas centres. The product offerings at overseascentres cover a wide spectrum of businesses involving retailbanking, wealth management, corporate banking and treasury solutions.The Bank's international presence spans the major financial hubs in Asiawith branches at Singapore, Hong Kong and DIFC, Dubai, andrepresentative offices at Shanghai and Dubai, besides strategic allianceswith banks and exchange houses in the Gulf Co-operation Council (GCC)countries. While branches at Singapore, Hong Kong and DIFC-Dubaienable the Bank to partner with Indian corporate doing business globally,
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the Dubai Representative Office and the arrangement with GCC basedbanks and exchange houses provide access to the NRI population. TheShanghai Representative Office apart from providing presence in the keymarket of China fulfills the regulatory requirement of establishing a branchin course of time to enhance the ability of the Bank to tap businessopportunities emanating from that region.29The Bank consciously focused on consolidation of its overseas balancesheet with optimum use of resources at the cost of growth. As ofst 31 March 2010, the total asset size at the three foreign branches wasUSD 3.10 billion.
RISK MANAGEMENTBanking is the business of managing risks and the role of risk managementis to balance the trade-off between risk and return. It entailsthe identification, measurement and management of risks across thevarious businesses and effective utilization of capital. Risk ismanaged through a framework of policies and principles approved by theBoard of Directors and supported by an independent riskfunction that ensures the Bank operates within its risk appetite. The riskmanagement function attempts to anticipate vulnerabilities atthe transaction level or at the portfolio level, as appropriate, throughquantitative or qualitative examination of the embedded risks.The Bank continues to focus on refining and improving its riskmeasurement systems.The main risks faced by the Bank are credit risk, market risk, operationalrisk and liquidity risk. The Bank's risk management processesare guided by well-defined policies appropriate for the various riskcategories, independent risk oversight and periodical monitoringthrough the sub-committees of the Board.
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Credit exposures may arise from direct lending, off-balance sheet productssuch as bank guarantees, letters of credits and derivative transactions inthe trading book, and from the holdings of debt securities in the trading orbanking book. Both credit and market risk expertise are combined tomanage risk arising out of traded credit products such as bonds,credit derivatives and market related off-balance sheet transactions.The Bank continuously monitors portfolio concentrations by borrower,groups, industry and geography, where applicable. Portfolio leveldelinquency matrices are tracked at frequent intervals. The rating-wiseportfolio distribution gives an indication of portfolio quality as well as thepossible impact under stress conditions. The Risk Management Committeeof the Board periodically reviews the impact of the stress scenariosresulting in rating downgrades, or drop in asset values in case of securedexposures on the portfolio. The portfolio level risk analytics provide insight
into the capital allocation required to absorb unexpected losses at a definedconfidence level.
A graphical representation highlighting the distribution of risk acrossvarious rating grades for large corporate, mid corporate, st infrastructurebusiness as on 31 March 2010 is given below:
Rating Distribution for Large Corporate / Infrastructure Business /MidCorporate Exposure as on 31 March 2010
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Market Risk
Market risk is the risk to the Bank's earnings and capital due to changes inthe market level of interest rates, prices of securities, foreign
exchange and equities, as well as the volatilities of those changes. TheBank is exposed to market risk through its trading activities,which are carried out both for customers and on a proprietary basis. TheBank adopts a comprehensive approach to market riskmanagement for its trading, investment and asset/liability portfolios. Formarket risk management, the Bank uses both non-statisticalmeasures like position, gaps and sensitivities (duration, PVBP, optionGreeks) and statistical measures like Value at Risk (VaR), supplementedby Stress Tests and Scenario Analysis.
The Bank uses Historical Simulation and its variants for computing VaR forits trading portfolio. VaR is calculated at a 99% confidencelevel for a one-day holding period. The VaR models for different portfoliosare back-tested at regular intervals and the results are used to maintainand improve the efficacy of the model. The VaR measure is supplementedby a series of stress tests and sensitivity analysis that estimates the likelybehavior of a portfolio under extreme but plausible conditions and itsimpact on earnings and capital.
Liquidity Risk
Liquidity Risk is defined as the current and prospective risk to earnings orcapital arising from a bank's inability to meet its current or future obligationson the due date. The Bank's ALM policy defines the gap limits for itsstructural liquidity position. The liquidity profile of the Bank is analyzed on astatic basis by tracking all cash inflows and outflows in the maturity ladderbased on the expected occurrence of cash flows.
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The liquidity profile of the Bank is also estimated on a dynamic basis byconsidering the growth in deposits and loans, investment obligations, etc.for a short-term period of three months.The Bank's ability to meet its obligations and fund itself in a crisis scenariois critical and accordingly, liquidity stress tests are conductedunder different scenarios at periodical intervals to assess the impact onliquidity to withstand stressed conditions. The liquidity positionsof overseas branches are managed in line with the Bank's internal policiesand host country regulations. Such positions are also reviewed centrally bythe Bank's ALCO along with domestic positions.
Operational RiskTo manage the operational risk in an effective, efficient and proactivemanner, the Bank has an Operational Risk Management (ORM)Policy, which is reviewed annually by the Risk Management Committee ofthe Board (RMC). In addition to the ORM policy, operational riskmanagement framework, loss data collection methodology, risk and controlself-assessment framework, key risk indicators framework and roles andresponsibilities of operational risk management function are approved bythe RMC. The Bank has an Operational Risk Management Committee
(ORMC), which oversees the implementation of the aforesaidframework/policies. In terms of the ORM policy/framework, the RiskDepartment identifies, assesses, monitors and mitigates/controls the risk toan acceptable level.
New products, processes and services introduced by the Bank are subjectto rigorous risk review and sign-off process by the Product ManagementCommittee where all relevant risk are identified and assessed by thedepartments, independent of the risk-taking unit (product/process/serviceowner).
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Similarly, changes proposed in the existing product/processes/services arealso subject to review by the Change Management Committee.Outsourcing arrangements are examined and approved by the OutsourcingCommittee. The IT Security Committee of the Bank provides directions formitigating the operational risk in information systems. As per the directionsof the ORMC, a sub-committee (Sub-ORMC) has been constituted whereinthe operational risk issues are discussed in detail. The Bank has put inplace a Business Continuity Plan (BCP) for all the critical applications.
POLICIES AND RULES OF AXIS BANK
Axis bank have a lot of policies are made for his customers. There aresome few policies are explained below:
Privacy policy
Your privacy is important to Axis Bank. This is why, as a member of Axis
Bank, we are committed to the Axis Bank Privacy Promise for Consumers,
which is as follows:
Axis Bank Privacy Promise for Consumers
While information is the cornerstone of our ability to provide superior
service, our most important asset is our customers' trust. Keeping customer
information secure, and using it only as our customers would want us to, is
a top priority for all of us at Axis Bank. Here then, is our promise to our
individual customers:
We will safeguard, according to strict standards of security and
confidentiality, any information our customers share with us.
We will limit the collection and use of customer information to the minimum
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we require to deliver superior service to our customers, which includes
advising our customers about our products, services and other
opportunities, and to administer our business.
We will permit only authorized employees, who are trained in the proper
handling of customer information, to have access to that information.Employees who violate our Privacy Promise will be subject to our normaldisciplinary process.
We will not reveal customer information to any external organization unless
we have previously informed the customer in disclosures or agreements,
have been authorized by the customer, or are required by law.
We will always maintain control over the confidentiality of our customerinformation. We may, however, facilitate relevant offers from reputable
companies. These companies are not permitted to retain any customer
information unless the customer has specifically expressed interest in their
products or services.
We will tell customers in plain language initially, and at least once annually,
how they may remove their names from marketing lists. At any time,
customers can contact us to remove their names from such lists.Whenever we hire other organizations to provide support services, we willrequire them to conform to our privacy standards and to allow us to auditthem for compliance.
For purposes of credit reporting, verification and risk management, we willexchange information about our customers with reputable reference sourcesand clearinghouse services.
We will not use or share - internally or externally - personally identifiable
medical information for any purpose other than the underwriting or
administration of a customer's policy, claim or account, or as disclosed tothe customer when the information is collected, or to which the customer
consents.
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Every officer shall undertake and perform his duties in such capacity
and at such places as he may be directed by the Bank.
Every officer shall maintain good conduct, discipline, punctuality and
show courtesy and attention to all persons in their transactions or
dealings with the Bank.
Every officer shall discharge his duties with utmost integrity, honesty,
devotion and diligence and do nothing which is unbecoming of him or
which is likely to tarnish the image of the Bank. Cases of fraud and
dishonesty will attract penalty of dismissal.
An officer shall maintain secrecy about the affairs of the Bank and its
customers and will sign a declaration of fidelity and secrecy in the
prescribed form.
No officer shall engage in any trade or business or accept employment
or fee for any work done by him outside the Bank.
No officer shall take an active part in politics and stand for election
anywhere outside the Bank.
We will attempt to keep customer files complete, up-to-date, and accurate.
We will tell our customers how and where to conveniently access theiraccount information (except when we're prohibited by law) and how to
notify us about errors which we will promptly correct.
We will continuously assess ourselves to ensure that customer privacy isrespected. We will conduct our business in a manner that fulfills our Promise
in the many nations in which we do business.
RULES OF AXIS BANK
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No officer shall indulge in gambling or speculative activities in any
shares, stocks, securities, commodities or valuables. He can, however,
make bonafide investment of his own funds in such securities as he
may wish to buy.
As Per SEBI (Investment Advice by Intermediaries) (Amendment)
Regulations, 2001, it will be necessary that whenever any of our
employees in the course of providing investment advices, speaks
about any type of security (be it the Bank's shares or any other shares
or debentures) to any analyst / media or in a public forum or writes in
any newspaper or other publications, he will have to make a
declaration about his own interest including long and short position in
the said security. Further, it will also be incumbent upon him to
disclose the interest of his dependent family members and of the
employer (Bank) including their long and short positions in the said
security. Similarly, should an employee recommend a scrip for
investment where the Bank has an investment, the person rendering
such advice will have to disclose his own interests, his dependents'
interest as also the Bank's interest.
An officer shall not enter into any personal dealings with customers or
service providers (including contractors, consultants and vendors) ofthe Bank which may result in undue pecuniary advantages to the
officer.
No officer shall guarantee in his private capacity the pecuniary
obligations of another person or agree to indemnify in such capacity
another person from loss except with the prior approval of the Bank
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An officer shall so manage his private affairs as to avoid insolvency or
habitual or excessive indebtedness. Issue of cheques by officers on
their personal accounts without keeping sufficient balance therein is an
act of serious misconduct and will attract stringent disciplinary action.
No officer shall indulge in sexual harassment which includes such
unwelcome sexually determined behaviour (whether directly or by
implication) as :
y physical contact and advances;
y a demand or request for sexual favours;
y sexually coloured remarks;y showing pornography, and
y any other unwelcome physical, verbal or non-verbal conduct of sexual
nature.
Whether or not such conduct constitutes an offense of sexual harassment
will be determined by a Complaints Committee formed for this purpose, who
would receive and deal with the complaints lodged by the aggrieved staff.
Any violation of the code of conduct would constitute an act of misconduct
for which disciplinary action may be taken by the Bank and would be
punishable under the provisions for penalties.
Every officer on first appointment and as on 31st March each year
(beginning with 31st March, 2003), shall submit a return of assets and
liabilities giving full details of:
y the immovable property owned or acquired or held by the officer in his/hername or in the name of any member of his / her family* or in the name of
any other person;
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y all financial securities and bank deposits including cash balances owned or
acquired or held by the officer;y debts and other liabilities incurred by the officer directly or indirectly,
including loans from the Bank.
For the purpose of this Rule "Family" mean Spouse, whether residing with
the officer or not, but does not include a legally separated spouse
y Children or step children or adopted children of the officer whether residing
with the officer or not and dependent wholly on such officer but does notinclude children or step children of whose custody the officer has been
deprived of by or under any law; andy Any other person related to, by blood or marriage to the officer or to the
officer's spouse and wholly dependent upon such officer.
The Bank may also, at any time, by general or special order, require an
officer to furnish within a period to be specified in the order, a statement of
moveable or immoveable property owned, held or acquired by the officer or
on the officer's behalf or by any member of the officer's family as may be
specified in the order. Such a statement shall, if so required by the Bank
include the details of the means by which or the sources from which such
property was acquired.
The above statement of Asset and Liabilities should be furnished in the
enclosed format on or before 30th June every year.
Non-submission of the above annual statements by officers would constitute
an act of misconduct under the Bank's Staff Rules for which disciplinary
action may be taken by the Bank.
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Officers posted in branches and zonal offices should submit the form to their
respective Zonal Heads. Zonal Heads and officers in Central Office should
submit their forms to the Senior Vice President, HR Department at Central
Office.
An officer, as a general rule, shall not accept gifts or other benefits
other than of nominal value from any individual or concern having
official dealings with the Bank or from any officer junior to him/her so
as to avoid any possibility of such gifts or benefits even appearing to
compromise business or official relationships. Officers must use their
discretion in being satisfied that the gifts are indeed of nominal value.
No officer shall take or give or attempt to take or give any undue
assistance or use or attempt to use any unfair methods or means in
respect of any examination or test conducted or held by the Bank or
any other authority or institution.
An officer shall comply with all the terms and conditions in respect of
any loan, advance or other facility granted by the Bank.
No officer shall use his position or influence directly or indirectly, to
secure employment for his son, daughter or any other member of his
family in any private undertaking having official dealings with the
Bank (this will include the Bank's borrowers, contractors, consultants
and vendors).
No officer shall grant on behalf of the Bank any loan or advance to
himself or his spouse, a Joint Hindu Family of which he or his spouse
is a member or a partnership with which he or his spouse is connected
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in any manner or a trust in which he or his spouse is a trustee, or a private
or public limited company, in which he or his spouse hold substantial
interest. ("Substantial interest" as defined in clause (ne) of Section 5 of the
Banking Regulation Act 1949).
No officer shall grant on behalf of the Bank any loan or advance to (a)
a family member; (b) an individual who is the guarantor of a family
member or an individual who is a partner in business of a family
member; (c) a Joint Hindu Family in which a family member is a
member; (d) a firm in which a family member is a partner, manager
or guarantor; and (e) a company in which a family member holds
substantial interest or is interested as director manager or guarantor,
without prior permission of the Bank.
Officers may not contribute the Bank's funds or assets to any political
candidate, party, charity, or similar organization, unless such
contribution is expressly permitted by law/ regulation / directive and
has been preapproved by the appropriate authorized representative of
the Bank.
An officer shall comply with all lawful and reasonable directions which
may from time to time be given to him by an officer under whose
control he may be placed.
Officers who suspect violations of the letter or spirit of the Bank's laid
down systems, procedures or staff rules have an obligation to report
their concerns to the Bank's designated Vigilance Officer.
ACHIEVEMENTS & AWARDS OF AXIS BANK
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FINANCIAL PERFORMANCE OF AXIS BANK AT A
GLANCE
Results at a Glance
Net Profit rose to Rs. 562.04 crores during Q1FY10 from Rs. 330.14
crores in Q1FY09, registeringa growth of 70.24% yoy.
Balance Sheet Size increased 24.18% yoy from Rs. 1,13,660
crores at the end of Q1FY09 to Rs.1,41,142 crores at the end of
Q1FY10.
Demand Deposits rose 24.62% yoy from Rs. 35,449 crores at the
end of Q1FY09 to Rs. 44,176crores at the end of Q1FY10. On a
daily average basis, demand deposits grew by 24.75% toRs
39,739 crores in Q1 FY10 from Rs 31,854 crores in Q1 FY09.
The Bank is well capitalised with a Capital Adequacy Ratio of
15.28% at the end of Q1 FY10compared to 13.25% at the end
of Q1FY09 and 13.69% at the end of FY2009. The Tier - Icapital
was 9.39% at the end of the quarter against 9.93% at the end ofJune 2008 and 9.26%at the end of FY2009.
Table-1 Rs in crores
Financial Performance Q1FY10 Q1FY09 % Growth
Net Profit 562.04 330.14
EPS Diluted (Rs.) 15.50 9.03 72%
Net Interest Income 1,045.63 810.46
Other Income 958.57 624.80 53%
- Fee Income 626.63 537.27 17%
- Trading Income 326.07 57.31 469%
- Miscellaneous Income 5.87 30.22 (81%
Operating Revenue 2,004.20 1,435.26 40%
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Core Operating Revenue* 1,678.13 1,377.95 22%
Operating Expenses (incl.depreciation)
827.84 632.94 31%
Operating Profit 1,176.36 802.32 47%
Core Operating Profit** 850.29 745.01 14%
* Core Operating Revenue = Operating Revenue Trading Income** Core Operating Profit = Operating Profit Trading Income
Axis Bank has announced its unaudited results for the first quarter of FY
2009-10, following the approval of its Board of Directors in a meetingheld in Mumbai on 13
th
July 2009. The Net Profit of the Bank for the
first quarter was Rs. 562.04 crores, growing by 70.24% over the Net
Profit of Rs. 330.14 crores during the first quarter of the previous year.
The Banks balance sheet has grown by 24.18% yoy to Rs. 1,41,142
crores as at the end of June 2009 from Rs. 1,13,660 crores as at end June
2008. Demand deposits have grown 24.62% yoy and constituted 40% of
the total deposits, with Savings Bank deposits growing 32% yoy andCurrent Account deposits growing 16% yoy. On a daily average basis,
demand deposits grew by 24.75% yoy and constituted 37% of the total
deposits during Q1 FY10, as against 35% in Q4 FY09 and38% in Q1
FY09.
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Trading Profits
The Bank generated Rs. 326.07 crores of Trading Profits in Q1FY10, as compared to
Rs. 57.31 crores in Q1FY09, a growth of 468.96% yoy. The share of Trading Profits
to the Operating Revenue increased from 3.99% in Q1FY09 to 16.27% in Q1FY10.
NPAs and restructured loans
Net NPAs, as a proportion of Net Customer Assets, increased to 0.41% as at the end
of June 2009 compared to 0.35% as at end March 2009 and was below the level of
0.47% as at end June 2008. Gross NPAs as a proportion of Gross Customer Assets
were at 1.01% at end June 2009, compared to 0.96% as at end March 2009 and 0.92%
as at end June 2008. The Bank had a provision coverage of 85.88% at the end of June2009 (as a proportion of Gross NPAs together with accumulated write-offs). If the
accumulated write-offs are excluded, provisions held as a proportion of Gross NPAs
would constitute 59.89% as at end June 2009.
The Bank has restructured loans aggregating Rs. 995.95 crores during the quarter, of
which Rs. 182.86 crores were restructured under the CDR mechanism. Of the total
loans restructured during the quarter, loans aggregating Rs. 101.71 crores were
restructured for a second time in terms of the Reserve Bank of India dispensation. The
cumulative value of assets restructured upto 30
th
June 2009 was Rs. 2,520.10 crores,constituting 2.77% of gross customer assets. The diminution in fair value against the
restructured loans during the quarter was Rs. 34 crores and has been provided for.
The segment-wise break-up of the restructured loans for loans restructured in the
quarter is as follows:
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Table-2
The sector-wise breakup of loans restructured during the quarter is as
follows:
Table-3
The sector-wise breakup of loansrestructured
during the quarteris as follows: Oil& Gas
48%
Textiles 17%
Real Estate 6%
Steel 5%
Others 24%
Investment Portfolio
Large/Mid-
Corporate71%
SME 19%
Capital Market 4%
Agriculture 6%
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The combination of a stable and sound financial system, effectiveregulatory oversight and a prompt and appropriate policy stimulus responsehelped the economy withstand much of the adverse effects of the globalslowdown. Secondly, strong demand for consumer goods, both durablesand non-durables, has been a reason for the growth remaining relativelyrobust. The strong domestic demand is now also increasingly beingaugmented by improving external trade. The recovery could have beeneven swifter and broader had agricultural output not been adverselyaffected by deficit rainfall. The growth of the manufacturing sector morethan doubled, from 3.2% in 2008-09 to 8.9% in 2009-10. There has alsobeen a recovery in the growth of gross fixed capital formation, which hadsignificantly declined in 2008-09. However, inflationary conditions in 2009-10, especially in the second half of the year, with double-digit food inflationremain an area of concern. The overall GDP growth for 2009-10 is
estimated at 7.2%.
The rebound notwithstanding, the slowdown in economic activity resulted ina lower growth of corporate capital expenditure and demand for bankcredit, which fell from over 26 percent in early August 2008 to a low ofunder 10 percent in November 2009. Another impact of the slowdown wasa deterioration in the quality of credit and the banking sector witnessedrising levels of delinquencies and restructured assets. There was thus agreater degree of prudence and caution in lending to sectors that appearedrelatively vulnerable.
On the other hand, slower demand for credit and the consequent ampleliquidity led to the deployment of funds for short durations in non-bankinginvestment opportunities such as mutual funds and commercial paper.Despite these and other challenges, Indian banks have been able tomaintain their profitability and given the adequate levels of capitalization ofa majority of the banks and comprehensive regulatory oversight, the risk ofa banking sector led volatility and instability appears remote.
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expansion and other long-term
funding requirements against
the security of immovable
residential or commercial
property.y Axis gives different EMI base
term loan to the different
enterprise.
LITERTATURE REVIEW
WORKING CAPITAL MANAGEMENT
Working capital is the firms holdings of current assets such as cash, receivables,
inventory & marketable securities. Every firm requires working capital for its day to day
transactions such as purchasing raw material, for meeting salaries, wages, rents, rates,
advertising etc.
Significance of working capital:
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The world in which real firms function is not perfect. It is characterized by the firms
considerable uncertainty regarding the demand, market price, quality & availability of its own
products and those suppliers. While the firm has many strategies available to address these
circumstances, strategies that utilize investment or financing with working capital accounts
often offer a substantial advantage over the other techniques. The importance of working
capital management is reflected in the fact that financial managers spend a great deal of time
in managing current assets and current liabilities like-
y Arranging short term financing.
y Negotiating favorable credit terms.
y Controlling the movement of cash.
y Administering accounts receivables.
y Monitoring investment in receivables.
Decision concerning the above areas play a vital role in maximizing the overall value of the
firm. Once decisions concerning these areas are reached, the level of working capital is also
determined in active decision sense, but falls out as residual from the decision just made.
The management of working capital plays an important role in maintaining the
financial health during the normal course of business. This critical role can be enunciated by
examining the flow of resources through the firm. By far the major flow is the working capital
cycle.
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This is the loop (previous page) which starts at the cash and the marketable securities
account, goes through the current account as direct labour and materials which are
purchased and use to produce inventory, which in turn is sold and generates accounts
receivables, which are finally collected to replenish cash. The major point to notice about this
cycle is that the turnover or velocity of resources through this is very high related to the other
inflows and outflows of the cash account.
There are two concepts of working capital namely; Gross working capital and Net
working capital.
Gross working capital, simply called as working capital refers to the firms investment
in current assets. Current assets are the assets, which in ordinary course of business can be
converted into cash within an accounting year. Current assets include cash and bank
balances, short term loans and advances bills receivables, sundry debtors, inventory, prepaid
expenses, accured incomes, money receivable (within 12 months).
The gross working capital focuses attention of two aspects of current assets
management.
a) Optimum investment in current assets and
b) Financing of current assets.
The consideration of the level of investment in current assets should avoid two danger
points-excessive and inadequate investment in current arranging funds to finance current
assets. Whenever a need for working capital funds arises due to the increasing level of
business activity or for any other reason arrangement should be made quickly.
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Net working capital :
Net working capital refers to the difference between the current assets and current liabilities.
Current liabilities are those claims of outsiders, which are accepted, to measure for payment
with an accounting year and include creditors, bills payable and outstanding expenses.
Net Working Capital = Current Assets Current Liabilities
Net working capital can be positive or negative. A positive net working capital will arise when
current assets exceeds current liabilities. It is a quantitative concept, which indicates the
liquidity position of the firm and suggests the extent to which working capital needs may be
financed by permanent sources of funds.
Working capital can be classified into two categories i.e,
1. Permanent working capital.
2. Temporary or variable working capital.
Permanent working capital:
It is the minimum amount of investment in all current assets which is required at alltimes to carry out minimum level of business activities. Tandon committee has reserved to
this type of working capital as Core Current Assets.
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Amount of permanent working capital remains in the business in one form or
another. It also grows with the size of the business. It is permanently needed for the business,
and therefore be financed out of long-term funds.
Variable working capital :
The amount of working capital over permanent working capital is known as variable
working capital. The amount of such working capital keeps on fluctuating from time on the
business activities. It may further be divided into seasonal working capital and special
working capital. Seasonal working capital is required to meet the seasonal demands of busy
periods occurring at stated intervals. On the other hand, special working capital is required to
meet extraordinary needs for contingencies. Events like strikes, fire, unexpected competition,
rising price tendencies or initiating a big advertisement campaign require such capital.
Approaches for financing working capital :
There are three approaches to financing the working capital :
1. Hedging approach2. Conservation approach
3. aggressive approach
Hedging approach :
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A firm is said to be following Hedging approach if it matches the maturity of the debt
with the maturity of assets. For the firm following hedging approach, long term financing will
be used to finance fixed assets and permanent current assets and short term financing for
temporary or variable current assets. As the level of these assets increases, the long financing
level also increases.
However, it should be realized that exact matching is not possible because of the uncertainty
about the expected lives of assets.
Conservative approach:
A firm in practice may adopt a conservative approach in financing its current and fixed
assets. The financing policy of the firm is said to be conservative when it depends more on
long term funds for financing needs. Under a conservative plan, the firm finances its
permanent assets and also a part of temporary current assets, the idle long-term funds can be
invested in the tradable securities to conserve liquidity. The conservative plan relies heavily
on long term financing.
Aggressive approach :
A firm may be aggressive in financing its assets. A firm follows aggressive policy when
it uses more short-term financing than warranted by the matching plan. Under an aggressive
policy, the firm financing a part of its permanent current assets with short term financing.
Some extremely aggressive firms may even finance a part of their fixed assets with short-
term financing.
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Importance of working capital :
A business firm must maintain an adequate level of working capital in order to run its
business smoothly. It is worthy to note that both excessive and inadequate working capital
positions are harmful. Out of two, inadequacy of working capital is more dangerous for a
firm.
Excessive working capital results in idle funds on which no profits are earned. Similarly
insufficiency of working capital results in interruption of production. This will lead to
inefficiencies, increase in costs and reduction in profits. Working capital is like the lifeblood of
business. If it becomes weak, the business can hardly prosper and survive. No business can
run successfully with out and adequate amount of working capital.
The following are the few advantages of adequate working capital in the business :
y Cash Discount : Adequate working capital enables a firm to avail cash discount
facilitates offered to it by the suppliers. The amount of cash discount reduces
the cost of purchase.
y Goodwill : Adequate working capital enables a firm to make prompt payment.
Making prompt payment is a base to create and maintain goodwill.
y Ability to face crisis : The provision of adequate working capital facilities to
meet situations of crisis and emergencies. It enables a business to with stand
periods of depression smoothly.
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y Credit-worthiness : It enables a firm to operate its business more efficiently
because there is not delay in getting loans from banks and others on easy and
favorable terms.
y
Regular supply of raw materials : It permits the carrying of inventories at a
level that would enable a business to serve satisfactory the needs of its
customers. That is it ensures regular supply of raw materials and continuous
production.
y Expansion of markets : A firm which has adequate working capital, can create
favorable market condition i.e, purchasing its requirements in bulk when prices
are lower and holding its inventories for higher. Thus profits are increased.
y Increased productivity.
y Research programs.
y High Morale.
Problems of inadequate working capital :
y Firm may not be able to take advantage of profitable business opportunities.
y Production facilities cannot be utilized fully.
y Short-term liabilities cannot be paid because of non-availability of funds.
y Its low liquidity may lead to low profitability. In the same way, low profitability results
in low liquidity.
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y It may not be able to take advantages of cash discounts.
y Credit worthiness of the firm may be damaged because of lack of liquidity. Thus it
may be lose its reputation; thereafter a firm may not be able get credit facilities.
Danger of excessive working capital :
y A firm may be tempted to over trade and lose heavily.
y Unable to extract benefits of customers credit.
y The situation may lead to unnecessary purchases and accumulation of inventories.
This cause more chances of theft, waste, losses etc.
y There arise an imbalance between liquidity and profitability.
y Excessive working capital means funds are idle.
y The situation leads to greater production, which may not be having matching demand.
y The excess of working capital leads to carelessness about cost of production.
Determinants of Working Capital :
The need of working capital is not always the same it varies from year to year or even
month-to-month depending upon a number of factors. There is no set of rules or formulate to
determine the working capital needs of the firm. Each factor has its own importance and itsimportance of the factors changes for a firms over time.
In order to determine the proper amount of working capital of concern, the following
factors should be considered.
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y Nature of business.
y Size of the business unit.
y Seasonal variation.
y Time consumed in manufacturing.
y Turnover of circulating capital.
y Need to stockpile raw material and finished goods.
y Growth and expansion.
y Business cycle fluctuations.
y Terms of purchase and sale.
y Pricing level changes.
y Inventory turnover.
y Dividend policy.
Ratio to measure the efficiency of working capital :
y Current Ratio : Current assets/Current liabilities
y Quick Ratio : (current assets Inventories) /Current liabilities
y Sales to cash : Sales during a period / Averge cash balance.
y Average collection period : Debtors dividend by annual credit sales and the
resulting figure multiplied by 365. This retio indicates how many days of credit
is being obtained from the suppliers.
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y Average payment Period : Creditors divided by annual credit purchase and the
resultant figure is multiplied by 365. This retio indicates how many days of
credit are being obtained from the suppliers.
y
Inventory turnover ratio : Sales /Average inventory.
Working capital policy :
Working capital management policies have a great effect on firm`s profitability, liquidity and
its structural health. A finance manager should therefore, chalk out appropriate working
capital policies in respect of each competent of working capital so as to ensure high
profitability, proper liquidity and sound structural health of the organization.
In order to achieve this objective the financial manager has to perform basically following
two function.
1.Estimating the amount of working capital .
2.Sources from which these funds have to be raised.
Objectives of Working Capital Management :
The objectives of working capital management are two fold :
1. Maintenance of working capital and
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2. Ability of ample funds at the time of need.
The basic goal of working capital management is to manage each of the funds current assets
and current liabilities in such a way that an acceptable level of net working capital is always
maintained in the business.
Operating Cycle :
Working capital is required because of the time gap between the sales and their
actual realization in cash. This time gap is technically terms as operating cycle of the business.
In case manufacturing company, the operating cycle of time necessary to complete
the following cycle of event.
y Conversion of cash into raw materials.
y Conversion of raw materials into work in progress.
y Conversion of work in progress into finished goods.
y Conversion of finished goods into accounts receivables.
y Conversion of accounts receivable into cash.
This cycle is continuous phenomena. In case of Trading Firm the operating cycle will include
the length of time required to :
a) Cash into inventories.
b) Inventories into accounts receivables.
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c) Accounts receivables into cash.
In case of Financing Firm the operating cycle includes the length of time taken for 1 year.
a) Conversion of cash debtors, and
b) Conversion of debtors into cash.
Working capital turnover ratio :
It measures the efficiency of the employment of working capital. Generally higher the
turnover, greater is the efficiency and larger the sale of profits. Working capital turnover ratio
can be calculating with help of the following formula.
Working capital turnover ratio = sales .
Net working capital
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INVENTORY MANAGEMENT
Inventories constitute the most significant part of current assets for a majority ofcompanies in India. The term inventory refers to the stockpile of the product.
Inventories can be classified as three categories :
1. Raw material : Inputs that are converted into finished products through
manufacturing process.
2. Work in progress : semi finished products that require further work to be done before
they are ready for sale.
3. Finished goods : Goods which are completely manufactured products and/or ready for
sale.
Need to hold Inventories :
There are three general motives for holding inventories.
1. The Transaction Motive : Which emphasis the need to maintain inventories to
facilitate smooth production and sales operation.
2. The Precaution Motive : Which necessitates holding of inventories to guard against
the risk of unpredictable changes in demand and supply forces and other factors.
3. The Speculative Motive : Which influences the decision to increase or reduce
inventory level to take advantage of price fluctuation.
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OBJECTIVES :
The objective of inventory management is to determine and maintain the optimum level
of inventory management as both excessive and inadequate inventories are not desirable.
The optimum level inventory lies between the two danger points, excessive and inadequate
inventories. The optimum level of inventory should be determined on the basis of trade off
between costs and benefits associated with the levels of inventory.
TECHNIQUES :
Attention is given to the basic concepts relevant to the management and control of
inventory. The aspects include-
y Determination of the type of control required.
y The basic economic order quantity.
y The re-order point.
y Safety stock.
As a matter of fact the inventory management techniques are a part of production
management. However a familiarity with them is essential for a financial manager in planning
and budgeting inventory.
DETERMINATION OF THE TYPE OF THE CONTROL REQUIRED:
ABC System :
The ABC system is a widely used classification technique to identify various items of
inventory for purposes of inventory control.
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This technique is based on the assumption that a firm should not exercise the same degree of
control on all items of inventory. It should rather keep a more rigorous control on items that
are (1) most costly, and/or (2) slowest turning while items that are less expensive should be
given less control effort.
On the basis of cost involved the various inventory items according to the system are
categorized into three classes.
A = Largest inventory leading to most sophisticated inventory control techniques.
B = Midway and deserving less attention than A but more than C leading to
employing less sophisticated techniques.
C = Small investment with fairly large number deserving minimum attention.
Order Quantity Problem :
Economic Order Quantity (EOQ) model :
After various items are classified on the basis of the ABC analysis, the management
becomes aware of the type of control that would be appropriate for each of the three
categories of the inventory items. The group A items warrants the maximum attention and
the most rigorous control. A key inventory problem particularly in respect of the group A
items relates to the determination of the size or quantity of inventory.
Buying in large quantities implies a high inventory level, which will assure
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(i) Smooth production /sale operation and
(ii) Lower ordering or set-up costs. However it increases the ordering costs and
likelihood of interruption in the operation due to stock outs.
Thus a trade-off between benefits derived from the availability of inventory and the cost of
carrying that level of inventory has to be derived by placing an optimum level of inventory
order that minimizes the cost associated with inventory order that minimizes the costassociated with inventory management.
The optimum level thus derived is known as Economic Order Quantity. EOQ equates
the cost of ordering with the cost of storage of raw materials.
Ordering cost :
It is difficult to quantify this cost, as there are many factors involved. It include cost of
stationary, salaries of those engaged in preparing the purchase orders etc.
Cost of storage (or) cost of carrying inventory :
This includes the cost of store keeping, interest on capital locked up in stores, the incidence of
insurance cost, evaporation etc.
For effective material control and to avoid overstocking and under stocking of raw materials,
an important requirement is to decide upon various levels of materials.
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These levels are maximum level, minimum level and re-order level. By taking action on the
basis of these levels, each item of material will automatically be held within appropriate
limits of control.
These level are not permanent, but need revision according to the changes in the factors,
which determine these levels.
Factors include :
y Rate of consumption of materials.
y Lead time i.e, time lag.
y Storage capacity.
y Availability of funds for investment in inventories.
y Cost of storage.
y Risks of loss due to deterioration, theft, fine etc.
y Seasonal factors certain materials are cheaply available during certain seasons.
y Fluctuation in market prices.
y Insurance costs.
CASH MANAGEMENT
Cash is the most important factor in financial management. It is also the most important
current asset for the operation of the business. Every activity in an enterprise revolves round
the cash. Cash is limited in every enterprise and it cannot be raised as and when required
which calls for an efficient management of funds available.
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Cash is the most liquid asset and is of vital importance to the daily operations of the business.
While the proportion of corporate assets held in the form of cash is very small (often in
between 1% to 3%) its efficient management is crucial to the business because cash is the
focal point in business.
Meaning of cash :
The term cash is used in two senses. In a narrower sense it includes currency notes, cheques,
bank drafts held by a firm with it and the demand deposits held by it in banks. In a broader
sense it also includes near cash assets such as marketable securities and time deposits with
bank.
The main reason for a firm to hold cash is to meet the needs of day-to-day transactions and
to protect the firm against uncertainties characterizing its cash flows.
While cash serves these functions, it is an idle resource which has an opportunity cost. The
liquidity provided by cash holding is at the expense of profits sacrificed foregoing alternative
opportunities. Hence, the finance manager should carefully plan and control cash.
OBJECTIVES OF CASH MANAGEMENT :
y To meet the cash disbursement need as per the payment schedule.
y To minimize the amount locked up as cash balances.
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