State Bank of Patiala Project Report

PART 1

BANKING

SCENARIO IN

INDIA

1

Banking Scenario in India

Banking in India originated in the first decade of 18th century. The first banks were The General

Bank of India, which started in 1786, and Bank of Hindustan, both of which are now defunct.

The oldest bank in existence in India is the State Bank of India, which originated in the "The

Bank of Bengal" in Calcutta in June 1806. This was one of the three presidency banks, the other

two being the Bank of Bombay and the Bank of Madras. The presidency banks were established

under charters from the British East India Company. They merged in 1925 to form the Imperial

Bank of India, which, upon India's independence, became the State Bank of India. For many

years the Presidency banks acted as quasi-central banks, as did their successors. The Reserve

Bank of India formally took on the responsibility of regulating the Indian banking sector from

1935. After India's independence in 1947, the Reserve Bank was nationalized and given broader

powers.

A couple of decades later, foreign banks such as Credit Lyonnais started their Calcutta

operations in the 1850s. At that point of time, Calcutta was the most active trading port, mainly

due to the trade of the British Empire, and due to which banking activity took roots there and

prospered.

EARLY HISTORY:

Banking in India originated in the last decades of the 18th century. The first banks were The

General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now

defunct. The oldest bank in existence in India is the State Bank of India, which originated in the

Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was

one of the three presidency banks, the other two being the Bank of Bombay and the Bank of

Madras, all three of which were established under charters from the British East India Company.

For many years the Presidency banks acted as quasi-central banks, as did their successors. The

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three banks merged in 1921 to form the Imperial Bank of India, which, upon India's

independence, became the State Bank of India.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a

consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and

still functioning today, is the oldest Joint Stock bank in India. It was not the first though. That

honor belongs to the Bank of Upper India, which was established in 1863, and which survived

until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance

Bank of Simla.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire

d’Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862.

Calcutta was the most active trading port in India, mainly due to the trade of the British Empire,

and so became a banking center.

Around the turn of the 20th Century, the Indian economy was passing through a relative period

of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial

and other infrastructure had improved. Indians had established small banks, most of which

served particular ethnic and religious communities.

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The Bank of Bengal, which later became the State Bank of India.

The presidency banks dominated banking in India but there were also some exchange banks and

a number of Indian Joint stock banks. All these banks operated in different segments of the

economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign

trade. Indian joint stock banks were generally under capitalized and lacked the experience and

maturity to compete with the presidency and exchange banks.

The period between 1906 and 1911, saw the establishment of banks inspired by

the Swadeshi movement. The Swadeshi movement inspired local businessmen and political

figures to found banks of and for the Indian community. A number of banks established then

have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of

Baroda, Canara Bank and Central Bank of India.

FROM WORLD WAR I TO INDEPENDENCE:

The period during the First World War (1914-1918) through the end of the Second World War

(1939-1945), and two years thereafter until the independence of India were challenging for

Indian banking. The years of the First World War were turbulent, and it took its toll with banks

simply collapsing despite the Indian economy gaining indirect boost due to war-related economic

activities.At least 94 banks in India failed between 1913 and 1918 as indicated in the following

4

Year Number of

Banks that

Failed

Authorized Capital

(Rs. Lacs)

Paid up Capital

(Rs lacs)

1913 12 274 35

1914 42 710 109

1915 11 56 05

1916 13 231 04

1917 09 76 25

1918 07 209 01

POST-INDEPENDENCE:

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,

paralyzing banking activities for months. India's independence marked the end of a regime of the

Laissez-faire for the Indian banking. The Government of India initiated measures to play an

active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the

government in 1948 envisaged a mixed economy. This resulted into greater involvement of the

state in different segments of the economy including banking and finance. The major steps to

regulate banking included:

In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it

became an institution owned by the Government of India.

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India

(RBI) "to regulate, control, and inspect the banks in India." However, despite these provisions,

control and regulations, banks in India except the State Bank of India, continued to be owned and

operated by private persons. This changed with the nationalization of major banks in India on

19th July, 1969.

NATIONALISATION:

By the 1960s, the Indian banking industry had become an important tool to facilitate the

development of the Indian economy. At the same time, it has emerged as a large employer, and a

debate has ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-

then Prime Minister of India expressed the intention of the GOI in the annual conference of the

All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The

paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and

the GOI issued an ordinance and nationalized the 14 largest commercial banks with effect from

the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the

step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the

Parliament passed the Banking Companies (Acquition and Transfer of Undertaking) Bill, and it

received the presidential approval on 9th August, 1969.

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A second dose of nationalization of 6 more commercial banks followed in 1980. The stated

reason for the nationalization was to give the government more control of credit delivery. With

the second dose of nationalization, the GOI controlled around 91% of the banking business of

India. Later on, in the year 1993, one of the nationalized banks, namely, New Bank of India was

merged with Punjab National Bank. It was the first and only merger of a Nationalized Bank into

a Nationalized Bank, resulting in the reducing the number of Nationalized Banks from 20 to

19.After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to the

average growth rate of the Indian economy.

LIBERALISATION:

In the early 1990s the then Narasimha Rao government embarked on a policy of liberalization

and gave licenses to a small number of private banks, which came to be known as New

Generation tech-savvy banks, which included banks such as Global Trust Bank (the first of such

new generation banks to be set up) which later amalgamated with Oriental Bank of Commerce,

UTI Bank (now re-named as Axis Bank), ICICI Bank and HDFC Bank. This move, along with

the rapid growth in the economy of India, kick started the banking sector in India, which has

seen rapid growth with strong contribution from all the three sectors of banks, namely,

government banks, private banks and foreign banks.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used

to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave

ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this

led to the retail boom in India. People not just demanded more from their banks but also received

more.

CURRENT SITUATION:

Currently banking in India is generally fairly mature in terms of supply, product range and reach-

even though reach in rural India still remains a challenge for the private sector and foreign banks.

In terms of quality of assets and capital adequacy, Indian banks are considered to have clean,

strong and transparent balance sheets relative to other banks in comparable economies in its

region. The Reserve Bank of India is an autonomous body, with minimal pressure from the

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government. The stated policy of the Bank on the Indian Rupee is to manage volatility but

without any fixed exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time especially in

its services sector-the demand for banking services, especially retail banking, mortgages and

investment services are expected to be strong. One may also expect M&as, takeovers, and asset

sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in

Kodak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been

allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005

that any stake exceeding 5% in the private sector banks would need to be vetted by them.

Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is

Government of India is holding a stake), 31 private banks (these do not have government stake;

they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a

combined network of over 53,000 branches and 49,000ATMs. According to a report by ICRA

Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the

banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively

More Introductions of Products and Facilities;

In 1991, under the chairmanship of M. Narasimha, a committee was set up by his name which

worked for the liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a

satisfactory service to customers. Phone banking and net banking is introduced. The entire

system became more convenient and swift. Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from any crisis

triggered by any external macroeconomics shock as other East Asian Countries suffered. This is

all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not

yet fully convertible, and banks and their customers have limited foreign exchange exposure.

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FUNCTIONS OF RESERVE BANK OF INDIA:

The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank to

the Reserve Bank of India. With this act Reserve Bank of India became the sole regulatory body

of the banking sector in India. It was entitled to perform the following functions.

Bank of Issue:

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank

notes of all denominations. The distribution of one rupee notes and coins and small coins all over

the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank

has a separate Issue Department which is entrusted with the issue of currency notes. The assets

and liabilities of the Issue Department are kept separate from those of the Banking Department.

Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold

coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40

crores in value. The remaining three-fifths of the assets might be held in rupee coins,

Government of India rupee securities, eligible bills of exchange and promissory notes payable in

India. Due to the exigencies of the Second World War and the post-war period, these provisions

were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold

and foreign exchange reserves of Ra. 200 cores, of which at least Rs. 115 cores should be in

gold. The system as it exists today is known as the minimum reserve system.

At present, banknotes in India are issued in the denomination of Rs.10, Rs.20, Rs.50, Rs.100,

Rs.500 and Rs.1000. These notes are called banknotes as they are issued by the Reserve Bank of

India (Reserve Bank). The printing of notes in the denominations of Re.1, Rs. 2 and Rs.5 has

been discontinued as these denominations have been coinised. However, such banknotes issued

earlier can still be found in circulation and these banknotes continue to be legal tender. Every

banknote issued by Reserve Bank of India (Rs.2, Rs.5, Rs.10, Rs.20, Rs.50, Rs.100, Rs.500 and

Rs.1000) shall be legal tender at any place in India in payment or on account for the amount

expressed therein, and shall be guaranteed by the Central Government, subject to provisions of

sub-section (2) Section 26 of RBI Act, 1934.

Currency Management;

8

The Reserve Bank derives its role in currency management from the Reserve Bank of India Act;

1934.The Reserve Bank manages currency in India. The Government, on the advice of the

Reserve Bank, decides on various denominations of banknotes to be issued. The Reserve Bank

also co-ordinates with the Government in the designing of banknotes, including the security

feature. The Reserve Bank estimates the quantity of banknotes that are likely to be needed

denomination-wise and accordingly, places indent with the various printing presses. Banknotes

received from banks and currency chests are examined and those fit for circulation are reissued

and the others (soiled and mutilated) are destroyed so as to maintain the quality of banknotes in

circulation. In terms of Section 25 of RBI Act, 1934 the design of banknotes is required to be

approved by the Central Government on the recommendations of the Central Board of the

Reserve Bank of India. The responsibility for coinage vests with the Government of India on the

basis of the Coinage Act, 1906 as amended from time to time. The Government of India also

attends to the designing and minting of coins in various denominations. The Reserve Bank

decides the volume and value of banknotes to be printed each year. The quantum of banknotes

that needs to be printed, broadly depends on the requirement for meeting the demand for

banknotes due to inflation, GDP growth, replacement of soiled banknotes and reserve stock

requirements

Banker to Government:

The second important function of the Reserve Bank of India is to act as Government banker,

agent and adviser. The Reserve Bank is agent of Central Government and of all State

Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the

obligation to transact Government business, via. To keep the cash balances as deposits free of

interest, to receive and to make payments on behalf of the Government and to carry out their

exchange remittances and other banking operations. The Reserve Bank of India helps the

Government - both the Union and the States to float new loans and to manage public debt. The

Bank makes ways and means advances to the Governments for 90 days. It makes loans and

advances to the States and local authorities. It acts as adviser to the Government on all monetary

and banking matter.

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Controller of Credit:

The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume

of credit created by banks in India. It can do so through changing the Bank rate or through open

market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India

can ask any particular bank or the whole banking system not to lend to particular groups or

persons on the basis of certain types of securities. Since 1956, selective controls of credit are

increasingly being used by the Reserve Bank.

The Reserve Bank of India is armed with many more powers to control the Indian money

market. Every bank has to get a license from the Reserve Bank of India to do banking business

within India, the license can be cancelled by the Reserve Bank of certain stipulated conditions

are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can

open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank

showing, in detail, its assets and liabilities. This power of the Bank to call for information is also

intended to give it effective Control of the credit system. The Reserve Bank has also the power to

inspect the accounts of any commercial bank.

As supreme banking authority in the country, the Reserve Bank of India, therefore, has the

following powers:

a) It holds the cash reserves of all the scheduled banks.

b) It controls the credit operations of banks through quantitative and qualitative control.

c) It controls the banking system through the system of licensing, inspection and calling for

information.

d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

Custodian of Foreign Reserves:

The Reserve Bank of India has the responsibility to maintain the official rate of exchange

According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at

fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed

was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d.

Though there were periods of extreme pressure in favor of or against the rupee. After India

10

became a member of the International Monetary Fund in 1946, the Reserve Bank has the

responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F.

Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the

custodian of India's reserve of international currencies. The vast sterling balances were acquired

and managed by the Bank. Further, the RBI has the responsibility of administering the exchange

controls of the country.

Supervisory functions:

In addition to its traditional central banking functions, the Reserve bank has certain non-

monetary functions of the nature of supervision of banks and promotion of sound banking in

India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI

wide powers of supervision and control over commercial and co-operative banks, relating to

licensing and establishments, branch expansion, liquidity of their assets, management and

methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorized to

carry out periodical inspections of the banks and to call for returns and necessary information

from them. The nationalization of 14 major Indian scheduled banks in July 1969 has imposed

new responsibilities on the RBI for directing the growth of banking and credit policies towards

more rapid development of the economy and realization of certain desired social objectives. The

supervisory functions of the RBI have helped a great deal in improving the standard of banking

in India to develop on sound lines and to improve the methods of their operation.

Classification of RBIs functions:

The monetary functions also known as the central banking functions of the RBI are related to

control and regulation of money and credit, i.e., issue of currency, control of bank credit, control

of foreign exchange operations, banker to the Government and to the money market. Monetary

functions of the RBI are significant as they control and regulate the volume of money and credit

in the country.

Equally important, however, are the non-monetary functions of the RBI in the context of India's

economic backwardness. The supervisory function of the RBI may be regarded as a non-

monetary function (though many consider this a monetary function). The promotion of sound

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banking in India is an important goal of the RBI, the RBI has been given wide and drastic

powers, under the Banking Regulation Act of 1949 - these powers relate to licensing of banks.

Banking Structure in India

12

Scheduled Commercial Banks:

13

Scheduled Commercial Banks are those included in the second schedule of the Reserve Bank of

India Act, 1934. In terms of ownership and function, commercials banks can be classified into

four categories;

1) Public sector Banks.

Public sector banks are those in which the government has the major holding. These can be

classified into two groups.

State Bank of India and its Associates.

The state bank of India was initially known as the Imperial Bank, which was formed in 1921 by

the amalgamation of three presidency banks—the bank of Bengal, the bank of Bombay and the

bank of Madras. The imperial bank acted as a bank to the government until the establishment of

RBI in 1935. The imperial bank was nationalized under the State Bank of India; Act 1955.this

marked the first phase of the nationalization of the banks. The main objective of the

nationalization was to extend banking facilities on a large scale particularly in the rural and semi-

urban areas. The state bank of India has the seven subsidiaries.

The state bank of Bikaner and Jaipur.

The state bank of Hyderabad.

The state bank of Indore.

The state bank of Mysore.

The state bank of Patiala.

The state bank of Saurashtra.

The state bank of Travancore.

2) Nationalized Bank

In 1969, fourteen big Indian joint stock banks in the private sector were nationalized. The

nationalization was effected by an ordinance which was later replaced by an act of Parliament,

known as Banking Companies (Acquisition and Transfer of Under takings) Act, 1970.the major

objective of the nationalization was to widen the branch net work of the banks particularly in the

rural and the semi urban areas which, in turn, would help in the greater mobilsation of savings

and flow of credit to neglected sectors such as, Agriculture and small scale industries. Public

14

sector banks have an edge over private sector banks in term of size, geographical reach and

access to low cost deposits. Huge Size enables them to cater to the large credit need of

corporates. The nationalized banks are a dominant segment in commercial Banking. Public

sector banks dominate with 75% of deposits and 71% of advances in the industry.

2) Private Sector Banks.

For over two decades, after nationalization of 14 large banks in 1969, no banks were allowed to

be set up in the private sector. The Narasimha Committee, in its first report, recommended the

freedom of entry into the financial system. The banks which have been set up in the 1990’s under

the guidelines of the Narasimha Committee are referred to as new private sector banks. New

private sector banks to with stand the competition from the public sector banks came up with

innovative products and superior services. They tapped new market such as retailing, capital

markets etc. They accessed low cost NRI funds and managed the associated Forex risk for them.

HDFC Bank had the lowest cost of deposits in 2003-04. Given the greater efficiency of private

sector banks, public sector banks started loosing market share and have been doing soat about

1% per annum.

3) Foreign Banks.

Foreign banks have been operating in India since decades. A few foreign banks have been

operating in India for over a century. ANZ Grind lays has been in India for more than hundred

years, while Standard Chartered Bank ha been around since 1858. The presence of foreign banks

in India has benefitted the financial system by enhancing competition, transfer of technology and

specialized skills in higher efficiency and greater customer satisfaction. They have also enabled

large Indian companies to access foreign currency resources from their overseas branches. They

are active players in the money market and foreign exchange market which has contributed to

enhancing the liquidity and deepening of these markets in terms of both volumes and products.

New foreign banks are allowed to conduct business in India after taking into consideration the

financial soundness of the bank, international and home country ranking, rating, international

presence and economic and political relations between the countries.

4) Regional Rural Banks.

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A new category of scheduled banks came into existence in 1975 when six regional rural banks

(RRB’s) came into existence under the regional rural banks ordinance, 1975. This ordinance was

promulgated by the government of India on 26 September 1975. This ordinance was

subsequently replaced by Regional Rural Banks Act, 1976. Although cooperative and

commercial banks achieved a high reach and disbursement of credit, there existed a vast gap in

the area of rural credit. In order to fill up this gap, a new set up of banks, namely, RRB’s was

established. Each RRB is sponsored by a public sector bank. The authorized capital of each RRB

is Rs one core and the issued capital is Rs 25 lakh. Out of this issued capital, 50% is authorized

by the government of India, 15% by concerned state government and the rest 35% by the sponsor

bank.

Cooperative Banking;

Cooperative Banks came into existence with the enactment of the cooperative credit society’s act

of 1904 which provided for the formation of cooperative credit societies. Subsequently, in 1912,

a new act was passed which provided for the formation of cooperative central banks.

Cooperative credit institutions play a pivotal role in the financial system of the economy in terms

oh their reach, volume of operations and the purpose they serve. Cooperative banks fill in the

gaps of banking needs of small and medium income groups not adequately met through by the

public and private sector banks. The cooperative banking system supplements the efforts of the

commercial banks in mobilizing savings and meeting the credit needs of the local population.

The cooperative credit sector in India comprises rural cooperative institutions and urban

cooperative banks. The rural cooperative credit institutions comprise of institutions such as state

cooperative banks, district central cooperative banks and primary agriculture credit societies,

which specialize in short term credit and institutions such as state cooperative agriculture & rural

development banks and primary cooperative agriculture & rural development banks, which

specialize in long term credit.

Urban cooperative banks (UCB’s) are mostly engaged in retail banking. They are not permitted

to deal in foreign exchange directly because of the high risk involved in the Fore business. Urban

cooperative banks mobilize saving from middle and low income urban groups and purvey the

credit to the weaker sections.

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PART2

Company profile

17

State bank of India

The evolution of State Bank of India can be traced back to the first decade of the 19th century. It began

with the establishment of the Bank of Calcutta in Calcutta, on 2 June 1806. The bank was redesigned as

the Bank of Bengal, three years later, on 2 January 1809. It was the first ever joint-stock bank of the

British India, established under the sponsorship of the Government of Bengal. Subsequently, the Bank of

Bombay (established on 15 April 1840) and the Bank of Madras (established on 1 July 1843) followed the

Bank of Bengal. These three banks dominated the modern banking scenario in India, until when they were

amalgamated to form the Imperial Bank of India, on 27 January 1921. 

An important turning point in the history of State Bank of India is the launch of the first Five Year Plan of

independent India, in 1951. The Plan aimed at serving the Indian economy in general and the rural sector

of the country, in particular. Until the Plan, the commercial banks of the country, including the Imperial

Bank of India, confined their services to the urban sector. Moreover, they were not equipped to respond to

the growing needs of the economic revival taking shape in the rural areas of the country. Therefore, in

order to serve the economy as a whole and rural sector in particular, the All India Rural Credit Survey

Committee recommended the formation of a state-partnered and state-sponsored bank. 

The All India Rural Credit Survey Committee proposed the takeover of the Imperial Bank of India, and

integrating with it, the former state-owned or state-associate banks. Subsequently, an Act was passed in

the Parliament of India in May 1955. As a result, the State Bank of India (SBI) was established on 1 July

1955. This resulted in making the State Bank of India more powerful, because as much as a quarter of the

resources of the Indian banking system were controlled directly by the State. Later on, the State Bank of

India (Subsidiary Banks) Act was passed in 1959. The Act enabled the State Bank of India to make the

eight former State-associated banks. As its subsidiaries.

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The State Bank of India emerged as a pacesetter, with its operations carried out by the 480 offices

comprising branches, sub offices and three Local Head Offices, inherited from the Imperial Bank. Instead

of serving as mere repositories of the community's savings and lending to creditworthy parties, the State

Bank of India catered to the needs of the customers, by banking purposefully. The bank served the

heterogeneous financial needs of the planned economic development. 

Branches

the corporate center of SBI is located in Mumbai. In order to cater to different functions, there are several

other establishments in and outside Mumbai, apart from the corporate center. The bank boasts of having

as many as 14 local head offices and 57 Zonal Offices, located at major cities throughout India. It is

recorded that SBI has about 10000 branches, well networked to cater to its customers throughout India. 

ATM

SBI provides easy access to money to its customers through more than 8500 ATMs in India. The Bank

also facilitates the free transaction of money at the ATMs of State Bank Group, which includes the ATMs

of State Bank of India as well as the Associate Banks – State Bank of Bikaner & Jaipur, State Bank of

Hyderabad, State Bank of Indore, etc. You may also transact money through SBI Commercial and

International Bank Ltd by using the State Bank ATM-cum-Debit (Cash Plus) card. Subsidiaries.

The State Bank Group includes a network of eight banking subsidiaries and several non-banking

subsidiaries. Through the establishments, it offers various services including merchant banking services,

fund management, factoring services, primary dealership in government securities, credit cards and

insurance. 

The eight banking subsidiaries are:

State Bank of Bikaner and Jaipur (SBBJ)

State Bank of Hyderabad (SBH)

State Bank of India (SBI)

State Bank of Indore (SBIR)

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State Bank of Mysore (SBM)

State Bank of Patiala (SBP)

State Bank of Saurashtra (SBS)

State Bank of Travancore (SBT)

STATE BANK OF PATIALA

State Bank of Patiala is an associate bank of State Bank of India. State Bank of Patiala (SBP),

originally named Patiala State Bank, and currently an associate bank of the State Bank of India,

was founded on 17 November 1917. SBP was founded by Maharaja Bhupinder Singh, Maharaja

of the princely state of Patiala of Undivided India, and the functions of the Bank included the

normal functions of commercial banks, as also some functions similar to functions of a central

bank for the princely state of Patiala.

After India’s independence, the Bank was made a wholly owned subsidiary of the Government

of Punjab. On 1 April 1960, SBP was accorded the status of an Associate bank of the State Bank

Group. Presently, the State Bank of Patiala has a network of 1035 service outlets, including 1010

branches, in all major cities of India, but most of the branches are located in the Indian states of

Punjab, Haryana, Himachal Pradesh, Rajasthan, Madhya Pradesh, Jammu &

Kashmir, Delhi and Gujarat.

Distribution network

The business of State Bank of Patiala has grown manifold since its establishment. Recent records

say that State Bank of Patiala is networked by its 830 service outlets. There are more than 1000

branches of SBP, spread across the major cities of India, out of which, the majority of branches

are located in its home State, Haryana, Himachal Pradesh, Rajasthan, Jammu & Kashmir, Delhi

and Chandigarh. The Bank provides easy access to money to its customers through its ATMs

spread over 16 states of India. It was the first bank in India to go on CORE 100%., the Bank has

grown to a network of 1060 branches and 25 Extension Counters spread over 20 States and 1

UT, and total business of more than Rs. 1,45,000 corers as on 30TH JUNE 2012.

Mission

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To retain the banks position as the premier Indian financial services. It’s also aims to be a group

with world class standard and significant global business commitment to quality in customer,

shareholder and employee satisfaction.

Vision

It aims to maximize its shareholder value through high sustained earning per share.

Competitors and other player in the field:

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Related product and services:

Bank offers fruitful product like Insurance, mutual fund investment, general insurance & credit cards

under tie up arrangement various companies as under:

Sr.no. Tie-up company Type of product

1 SBI life insurance co.ltd. All type of life insurance product

2 SBI mutual fund UTI MF,frankin

templetion MF

Mutual fund

3 United India insurance co.ltd. Non-life insurance product

4 SBI cards & payment services ltd. credit card product

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SBI Life Insurance Products: - SBI Life Insurance products are of two types:-

1. Group Products

a) Group Swadhan Insurance: - This is a simple insurance product available for all account

holders of our bank in the age group of 18 to 50 years at a very affordable premium. Under the

scheme Sum Assured for ` 50,000, ` 1 lac, `3 lac & ` 5 lac is available.

b) Rinnraksha Scheme: - This scheme covers the House, Vehicle, Education & Personal Loan

borrowers of the bank. In unfortunate event of death the loan outstanding amount (according to

EMI Schedule) is adjusted with the claim received from SBI Life Insurance Co.

2. Individual Products: - These products can be sold by the Certified Insurance Felicitators

(CIF, a staff member specifically trained, as per IRDA norms, for sale of individual insurance

products).At present the main products for sale are:-

Saral Shied: - It is an individual without profit pure term insurance plan. Minimum age:

18 years Max Entry age: 60 years Maturity/vesting age: 65 years Min. term 5 years,

Minimum Sum Assured Rs.7.50 Lacs/Maximum Rs. 24.00 Lacs, Riders: Preferred

Term/Accidental Death Benefit/Accidental Total Permanent Disability is also available.

Smart Shield: - It is an individual without profit pure term insurance plan. Minimum

age: 18 years Max Entry age: 65 years Maturity/vesting age: 70 years Min. term 5 years,

Minimum Sum Assured-Rs.25.00Lacs/Maximum-no limit, Riders: Preferred

Term/Accidental Death Benefit/Accidental Total Permanent Disability is also available.

Smart Money Back: - It is an individual endowment assurance product with money

back plan where in case policyholder is alive at specific durations (end of policy

years).During the policy term, a fixed % of the basic sum assured is paid to him as

survival benefit in fixed number of installments. Minimum Age: 14 years Max Entry Age:

58 years Maturity/vesting age: 70 years, Term 12/15/20/25 years.

23

Subh Nivesh: - It is an individual participating traditional savings cum whole life

endowment plan primarily designed as savings vehicle with protection along with income

generation and wealth transformation. It is a regular premium plan for a term varies from

5 to 30 years with a minimum annual premium payment of Rs. 6000.00 per annum and

minimum/maximum entry age is 18/60 years.

Smart Wealth: - It is an individual Unit Link single premium insurance product. This

product provides the policyholders two types of investment return, namely Guaranteed

Return and Market Linked Return. Minimum Term 10 years, Minimum Premium Amount

Rs.50000

Flexi Smart Insurance: - It is an individual, non-linked traditional life insurance cum

saving plan with guaranteed interest rate of 2.50%p.a. for the entire policy term. This

product provides the flexibilities to policy holders to choose option of premium holiday

during the policy term, increase or decrease the Sum Assured (SA), SA multiplier factor

(SAMF),boost investment through Top-ups. Minimum Age: 8 years Max. Entry age: 60

Years, Maturity/Vesting Age: 70 Years, Premium term: 10 to 20 years, Premium Mode:

Regular Premium.

Hospital Cash: - It is an Individual/Non- unit–linked/Health Plan which provides daily

cash benefit to cover hospitalization expenses due to sickness/accident. In the product 3

types of benefit is available: -

(a)Daily Hospital Cash Benefit (DHCB) – this benefit is payable in the event of hospitalization

(other than ICU) of the Life Assured for a continuous period of more than 24 hours of

hospitalization

(b)Intensive Care Unit Benefit (ICU) – This benefit is payable in the event of hospitalization in

an ICU of the Life Assured for a continuous period of more than 24 hours of hospitalization.

(c) Family Care Benefit – if in case, members covered under the same policy are hospitalized

simultaneously due to same ailment or due to same event of accident for at least 5consecutive

days, then an additional lump sum equivalent to Rs.10000

24

Minimum age: 1 years Max Entry age: 65 years Maturity/vesting age: 75 years Min. term 3 years

(Fixed) Max Term 3 years (Fixed) Premium Mode: Regular Premium

Smart Horizon: - It is a unit-linked product with an option of both active fund

management and/or passive fund management with the feature of Automatic Asset

Allocation. The customer can also choose a mix between Passive & Active fund

management. Minimum and maximum annual premium under yearly premium mode of

Rs. 24,000/- & Rs 74,000/- respectively. The policy term is of 10 years and any term

between 15 years and 30 years.

Smart Pension: - It is a ULIP pension product with minimum single premium mode of

Rs. 50,000/-and no maximum limit of premium. It has 4 fixed policy terms: 10/15/20/25

years. The minimum & maximum entry age is 30 years and 65 years respectively

Minimum Term 10 years, Maturity Benefit: 1/3rd of commutable, 2/3rd Annuity

(compulsory), Death Benefit, Fund Value.

Smart Scholar: - It is a unit-linked non-participating product for securing the future

needs of the child. The risk cover is on the life of the proposer who is the life assured.

The nominee at the point of sale must be a child whose interest the policyholder wants to

protect. Entry Age for child- 0 to17 years, for parents 18 to 57 years. Maturity/Vesting

Age 65 years, Minimum Term 8 years, Maximum Term 25 years, Guaranteed Addition

available from 8th Policy year 1% x (Average fund value over the 1st day of the last 24

policy months).

Smart Elite: - It is an individual unit-linked product designed mainly for preferred

(HNI) customer. It offers Limited Premium paying Term and Single Premium payment

option. Minimum Entry 18 years, Max Entry age: 60 years, Maturity/Vesting Age 65

years, Minimum Term 5 years, Maximum Term 20 years.

B. Mutual Fund Investments: - The main products are as under:-

1. SBI Gold Fund

25

2. SBI Magnum Tax Gain

3. SBI Magnum Emerging Business

4. Magnum FMCG

5. Magnum Global

6. Franklin India Blue Chip

7. Franklin India Tax Shield

8. Franklin India Prima Plus

9. UTI Opportunities

10. UTI Dividend Yield

C. General Insurance Business: -

1. Insurance Cover of buildings, Machinery, Goods, and Vehicles etc. can be got from our

branches through United India Insurance Co. Ltd.

2. Our account holders can have accidental insurance cover of ` 2.5 lacs at annual premium of `

50 only and cover of ` 5 lacs (with PAN Card) at ` 98 only.

D. SBI Credit Cards:-

1. Our bank is only sourcing the applications for SBI Credit Cards. The credit decision regarding

the approval or otherwise of the applications sourced would vest with SBICPSL.

2. This product is available at selected centre’s approved SBI Credit Cards.

RELATED PRODUCTS

26

• SBI Mutual Fund

• SBI Life Insurance

• SBI Card

RELATED FORMS

• SBI Credit Card

• United India Insurance Co. Ltd.

• UTI Mutual Fund

PART 3

27

RESEARCH

METHODOLOGY

Research methodology

PROJECT TITLE-

A study of finance “MARKET FESIBILITY OF CASH CREDIT IN STATE BANK OF PATIALA, JAIPUR.

DURATION OF PROJECT- 45 DAYS

OBJECTIVE OF THE PROJECT-

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To ascertain the awareness of the cash credit as a product/ offering of SBP Bank.

To identify the major market players of this offering and their respective share.

To assess the importance of the loyalty of the customers vis-à-vis financers.

To identify the share/ segment (whether it exists or not) for the said offering of the SBP

Bank

RESEARCH-

Research Methodology is a way to systematically solve the research problem. It may be

understood as a science of studying how research is done scientifically. When we talk of research

methodology we not only talk of research methods but also consider the logic behind the

methods we use in the context of the research study and why we are not using other methods so

that research results are capable of being evaluated either by the researcher himself or by others.

Research Area:

Research area of my study is Hyundai motors India ltd. More specifically my research area is to do

financial analysis of this company. It includes sales, production, cost, profit, liquidity and solvency

analysis of this company. To study its Corporate Social Responsibility and its concern towards

environment and safety also formed a part of my research area.

Research Design: Data Collection and Sampling:

Sources of Data Collection:-Basically there are two types of data i.e. secondary and primary:

Primary Data Collection:-

Primary data collection contains the following four types of methods: -

1) Observation Method

2 ) Experimental Method.

3) Panel Method.

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S e c o n d a r y   D a t a   C o l l e c t i o n

1) Internal Source:

Various internal sources like employee, books, sales activity, stock availability, product cost, etc.

2) External Sources:

Libraries, trade publications, literatures, etc. are some important sources of external data. In this

our survey team has used primary data for the core purpose of the project and this primary data

has been gathered by survey method. We have also used secondary data to know the background of the

company.

TOOLS AND TECHNIQUES

The following tools and techniques were implemented and put to use in order to analyze ably.

Statistical Tools:

Pie charts

Technological Tools:

Ms- Excel

Ms-Word

Working Capital finance

Working capital, also known as "WC", is a financial metric which represents operating liquidity

available to a business. Along with fixed assets such as plant and equipment, working capital is

considered a part of operating capital. It is calculated as current assets minus current liabilities. If

current assets are less than current liabilities, an entity has a working capital deficiency, also

called a working capital deficit. Net working capital is working capital minus cash (which is a

current asset). It is a derivation of working capital, which is commonly used in valuation

techniques such as DCFs (Discounted cash flows).

30

Working Capital = Current Assets − Current Liabilities

A company can be endowed with assets and profitability but short of liquidity if its assets cannot

readily be converted into cash. Positive working capital is required to ensure that a firm is able to

continue its operations and that it has sufficient funds to satisfy both maturing short-term debt

and upcoming operational expenses. The management of working capital involves managing

inventories, accounts receivable and payable and cash.

Working capital management

Working capital management Decisions relating to working capital and short term financing are

referred to as working capital management. These involve managing the relationship between a

firm's short term assets and its short term liabilities. The goal of working capital management is

to ensure that the firm is able to continue its operations and that it has sufficient cash flow to

satisfy both maturing short-term debt and upcoming operational expenses.

The term working capital has several meanings in business and economic development finance.

In accounting and financial statement analysis, working capital is defined as the firm’s short-

term or current assets and current liabilities. Net working capital represents the excess of current

assets over current liabilities and is an indicator of the firm’s ability to meet its short-term

financial obligations. From a financing perspective, working capital refers to the firm’s

investment in two types of assets. In one instance, working capital means a business’s investment

in short-term assets needed to operate over a normal business cycle. This meaning corresponds to

the required investment in cash, accounts receivable, inventory, and other items listed as current

assets on the firm’s balance sheet. In this context, working capital financing concerns how a firm

finances its current assets. A second broader meaning of working capital is the company’s

overall no fixed asset investments. Businesses often need to finance activities that do not involve

assets measured on the balance sheet. For example, a firm may need funds to redesign its

products or formulate a new marketing strategy, activities that require funds to hire personnel

rather than acquiring accounting assets. When the returns for these “soft costs” investments are

not immediate but rather are reaped over time through increased sales or profits, then the

company needs to finance them. Thus, working capital can represent a broader view of a firm’s

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capital needs that includes both current assets and other no fixed asset investments related to its

operations. We use this last meaning of working capital and focus on the tools and issues

involved in financing these business investments.

Business Uses of Working Capital

Just as working capital has several meanings, firms use it in many ways. Most fundamentally,

working capital investment is the lifeblood of a company. Without it, a firm cannot stay in

business. Thus, the first, and most critical, use of working capital is providing the ongoing

investment in short-term assets that a company needs to operate. A business requires a minimum

cash balance to meet basic day-to-day expenses and to provide a reserve for unexpected costs. It

also needs working capital for prepaid business costs, such as licenses, insurance policies, or

security deposits. Furthermore, all businesses invest in some amount of inventory, from a law

firm’s stock of office supplies to the large inventories needed by retail and Wholesale

enterprises. Without some amount of working capital finance, businesses could not open and

operate. A second purpose of working capital is addressing seasonal or cyclical financing needs.

Here, working capital finance supports the buildup of short-term assets needed to generate

revenue, but which come before the receipt of cash. For example, a toy manufacturer must

produce and ship its products for the holiday shopping season several months before it receives

cash payment from stores. Since most businesses do not receive prepayment for goods and

services, they need to finance these purchase, production, sales, and collection costs prior to

Receiving payment from customers.

Capital Financing.

There is always a minimum level of current assets or working capital which is continuously

required by the firm to carry on its business operations. This minimum level of current assets is

known as permanent or fixed working capital. It is permanent in the same way as the firm’s fixed

assets are. This portion of working capital has to be financed by permanent sources of funds such

as; share capital, reserves, debentures and other forms of long term borrowings. The extra

working capital needed to support the changing production and sales is called fluctuating or

variable or temporary working capital. This has to be financed on short term basis. The main

32

sources for financing this portion are trade credit, bank credit, factoring and commercial paper

that bank financing assumes significance in the working capital financing of industrial concerns.

WORKING CAPITAL FINANCING BY BANKS

A commercial bank is a business organization which deals in money i.e. lending and borrowing

of money. They perform all types of functions like accepting deposits, advancing loans, credit

creation and agency functions. Besides these usual functions, one of the most important

functions of banks is to finance working capital requirement of firms. Working capital advances

forms major part of advance portfolio of banks. In determining working capital requirements of a

firm, the bank takes into account its sales and production plans and desirable level of current

assets. The amount approved by the bank for the firm’s working capital requirement is called

credit limit. Thus, it is maximum fund which a firm can obtain from the bank. In the case of

firms with seasonal businesses, the bank may approve separate limits for ‘peak season’ and ‘non-

peak season’. These advances were usually given against the security of the current assets of

the borrowing firm. Usually, the bank credit is available in the following forms:

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 cannot borrow the entire sanctioned credit in lump sum;

he can draw it periodically to the extent of his requirements. Similarly, repayment can be made

whenever desired during the period. There is no commitment charge involved and interest is

payable on the amount actually utilized by the borrower and not on the sanctioned limit.

Overdraft – Under this arrangement, the borrower is allowed to withdraw funds in 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 of withdrawals is permitted by

the bank. Overdraft facility is generally available against the securities of life insurance policies,

fixed deposits receipts, Government securities, shares and debentures, etc. of the corporate

sector. Interest is charged on the amount actually withdrawn by the borrower, subject to some

minimum (commitment) charges.

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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

installments. 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 promissionary 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 of the drawer and genuineness of the bill.

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 3 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 favor 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.

Working Capital Loan – Sometimes a borrower may require additional credit in excess of

sanctioned credit limit to meet unforeseen contingencies. Banks provide such credit through a

Working Capital Demand Loan (WCDL) account or a separate non–operable’ cash credit

account. This arrangement is presently applicable to borrowers having working capital

requirement of Rs.10 crores or above. The minimum period of WCDL keeps on changing.

WCDL is granted for a fixed term on maturity of which it has to be liquidated, renewed or rolled

over. On such additional credit, the borrower has to pay a higher rate of interest more than the

normal rate of interest.

34

SECURITY REQUIRED IN BANK FINANCE

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 finance to the

borrower against the security of movable property, generally inventories. It is a charge against

property for the amount of debt where neither ownership nor possession is passed to the creditor.

In the case of default the bank has the legal right to sell the property to realize the amount of

debt.

Pledge – A pledge is bailment of goods as security for the repayment of a debt or fulfillment 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 notice, sell the goods.

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 are paid. Banks usually enjoy general

lien.

Mortgage – Mortgage is the transfer of a legal or equitable interest in a specific 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.

35

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 or by the operation of law. It is only security for

payment.

REGULATION OF BANK CREDIT

Till the sixties, bank credit for working capital was available easily and in convenient form to

industrial borrowers. Further, the cash credit arrangement, the principal device through which

such finance has been provided, is quite advantageous from the point of view of borrowers.

Banks have not been concerning themselves about the soundness of the borrower or about the

actual end use of the loan. Bank financing was mainly security oriented. This security oriented

system tended to favor borrowers with strong financial resources irrespective of their economic

function. This resulted in the concentration of economic power. Another problem was that the

increase in the bank credit was not commensurate with the expansion in the level of inventory

and production. This resulted in a number of distortions in financing of working capital by

banks.

Major Banks was nationalized in 1969 and with that, approach to lending also changed.

Consequently, bank credit has been subjected to various rules, regulations and controls. The

basic objective of regulation and control of bank credit is to ensure its equitable distribution to

various sectors of the Indian economy. The RBI has been trying, particularly from the mid-

sixties onwards, to bring a measure of discipline among industrial borrowers and to redirect

credit to priority sectors of the economy. The RBI has been issuing guidelines and directives to

the banking sectors towards this end. Important guidelines and directives have derived from the

recommendations of certain specially constituted groups assigned with the task of examining

various aspects of bank finance to industry.

RECENT RBI GUIDELINES REGARDING WORKING CAPITAL FINANCE

36

In the past, working capital financing was constrained with detailed regulations on how much

credit the banks could give to their customers. The recent changes made by RBI in the guidelines

for bank credit for working capital finance are discussed below:

1. The notion of Maximum Permissible Bank Finance (MPBF) has been abolished by RBI and a

new system was proposed by the Indian Banking Association (IBA). This has given banks

greater freedom and responsibility for assessing credit needs and credit worthiness. The salient

features of new system are:

- For borrowers with requirements of upto Rs. 25 lakhs, credit limits will be computed after

detailed discussions with borrower, without going into detailed evaluation.

- For borrowers with requirements above Rs. 25 lakhs, but upto Rs. 5 crores, credit limit can be

offered upto 20% of the projected gross sales of the borrower.

- For large borrowers not selling in the above categories, the cash budget system may be used to

identify the working capital needs.

However, RBI permits banks to follow Tandon/Chore Committee guidelines and retain MPBF

concept with necessary modifications.

2. Earlier RBI had prescribed consortium arrangements for financing working capital beyond Rs.

50 crores. Now it is not essential to have consortium arrangements. However, banks may

themselves decide to form consortium so that the risks are spread. The disintegration of

consortium system, the entry of term lending institutions into working capital finance and the

emergence of money market borrowing options gives the best possible deal.

3. Banks were advised not to apply the second method of lending for assessment of MPBF to

those exporter borrowers, who had credit export of not less than 25% of their total turnover

during the previous accounting year, provided that their fund based working capital needs from

the banking system were less than Rs. 1 crore. RBI has also suggested that the units engaged in

export activities need not bring in any contribution from their long term sources for financing

that portion of current assets as is represented by export receivables.

4. RBI had also issued lending norms for working capital, under which the banks would decide

the levels of holding of inventory and receivables, which should be supported by bank finance,

37

after taking into account the operating cycle of an industry as well as other relevant factors.

Other aspects of lending discipline, via; maintenance of minimum current ratio, submission and

use of data furnished under quarterly information system etc. would continue though with certain

modifications, which would make it easier for smaller borrowers to comply with these

guidelines.

ASSETS LIABILITIES

Net working capital requires long term financing

Forms of Working Capital Financing

Working capital financing comes in many forms, each of which has unique terms and offers

certain advantages and disadvantages to the borrower. This section introduces the five major

forms of debt used to finance working capital and discusses the relative advantages of each one.

The purpose of this information is to provide insight into the different ways in which debt can be

structured and prepare practitioners to choose and structure a debt tool best suited to a firm’s

financial situation and needs. The major features of the five working debt tools described below.

38

Current assets

(CA)

Long-term assets

Current liabilities

(CL)

Long-term liabilities & owners equity

Share of current assets financed with long term capital

Line of Credit

A line of credit is an open-ended loan with a borrowing limit that the business can draw against

or repay at any time during the loan period. This arrangement allows a company flexibility to

borrow funds when the need arises for the exact amount required. Interest is paid only on the

amount borrowed, typically on a monthly basis. A line of credit can be either Current Assets

(CA) Long-term Assets. Specific assets such as accounts receivable or inventory. The standard

term for a line of credit is 1 year with renewal subject to the lender’s annual review and

approval. Since a line of credit is designed to address cyclical working capital needs and not to

finance long-term assets, lenders usually require full repayment of the line of credit during the

annual loan period and prior to its renewal. This repayment is sometimes referred to as the

annual cleanup. Two other costs, beyond interest payments, are associated with borrowing

through a line of credit. Lenders require a fee for providing the line of credit, based on the line’s

credit limit, which is paid whether or not the firm uses the line. This fee, usually in the range of

25 to 100 basis points, covers the bank’s costs for underwriting and setting up the loan account in

the event that a firm does not use the line and the bank earns no interest income. A second cost is

the requirement for a borrower to maintain a compensating balance account with the bank. Under

this arrangement, a borrower must have a deposit account with a minimum balance equal to a

percentage of the line of credit, perhaps 10% to 20%. If a firm normally maintains this balance in

its cash accounts, then no additional costs are imposed by this requirement. However, when a

firm must increase its bank deposits to meet the compensating balance requirement, then it is

incurring an additional cost. In effect, the compensating balance reduces the business’s net loan

proceeds and increases its effective interest rate. Consider a line of credit for $1 million at a 10%

interest rate with a 20% compensating balance requirement. When the company fully draws on

the line of credit, it will have borrowed $1 million but must leave $200,000 on deposit with the

lender, resulting in net loan proceeds of $800,000. However, it pays interest on the full $1

million drawn. Thus, the effective annual interest rate is 12.5% rather than 10% (one year’s

interest is $100,000 or 12.5% of the $800,000 in net proceeds). Like most loans, the lending

terms for a line of credit include financial covenants or minimal financial standards that the

borrower must meet. Typical financial covenants include a minimum current ratio, a minimum

net worth, and a maximum debt-to-equity ratio. The advantages of a line of credit are twofold.

First, it allows a company to minimize the principal borrowed and the resulting interest

39

payments. Second, it is simpler to establish and entails fewer transaction and legal costs,

particularly when it is unsecured. The disadvantages of a line of credit include the potential for

higher borrowing costs when a large compensating balance is required and its limitation to

financing cyclical working capital needs. With full repayment required each year and annual

extensions subject to lender approval, a line of credit cannot finance medium-term or long-term

Working capital investments.

Accounts Receivable Financing

Some businesses lack the credit quality to borrow on an unsecured basis and must instead pledge

collateral to obtain a loan. Loans secured by accounts receivable are a common form of debt

used to finance working capital. Under accounts receivable debt, the maximum loan amount is

tied to a percentage of the borrower’s accounts receivable. When accounts receivable increase,

the allowable loan principal also rises. However, the firm must use customer payments on these

receivables to reduce the loan balance. The borrowing ratio depends on the credit quality of the

firm’s customers and the age of the accounts receivable. A firm with financially strong

customers should be able to obtain a loan equal to 80% of its accounts receivable. With weaker

credit customers, the loan may be limited to 50% to 60% of accounts receivable. Additionally, a

lender may exclude receivables beyond a certain age (e.g., 60 or 90 days) in the base used to

calculate the loan limit. Older receivables are considered indicative of a customer with financial

problems and less likely to pay.3 Since accounts receivable are pledged as collateral, when a

firm does not repay the loan, the lender will collect the receivables directly from the customer

and apply it to loan payments. The bank receives a copy of all invoices along with an assignment

that gives it the legal right to collect payment and apply it to the loan. In some accounts

receivable loans, customers make payments directly to a bank-controlled account (a lock box).

Firms gain several benefits with accounts receivable financing. With the loan limit tied to total

accounts receivable, borrowing capacity grows automatically as sales grow. This automatic

matching of credit increases to sales growth provides a ready means to finance expanded sales,

which is especially valuable to fast-growing firms. It also provides a good borrowing alternative

for businesses without the financial strength to obtain an unsecured line of credit. Accounts

receivable financing allows small businesses with creditworthy customers to use the stronger

credit of their customers to help borrow funds. One disadvantage of accounts receivable

40

financing is the higher costs associated with managing the collateral, for which lenders may

charge a higher interest rate or fees. Since accounts receivable financing requires pledging

collateral, it limits a firm’s ability to use this collateral for any other borrowing. This may be a

concern if accounts receivable are the firm’s primary asset.

Factoring

Factoring entails the sale of accounts receivable to another firm, called the factor, who then

collects payment from the customer. Through factoring, a business can shift the costs of

collection and the risk of nonpayment to a third party. In a factoring arrangement, a company and

the factor work out a credit limit and average collection period for each customer. As the

company makes new sales to a customer, it provides an invoice to the factor. The customer pays

the factor directly, and the factor then pays the company based on the agreed upon average

collection period, less a slight discount that covers the factor’s collection costs and credit risk. In

addition to absorbing collection risk, a factor may advance payment for a large share of the

invoice, typically 70% to 80%, providing the company with immediate cash flow from sales. In

this case, the factor charges an interest rate on this advance and then deducts the advance amount

from its final payment to the firm when an invoice is collect. Factoring has several advantages

for a firm over straight accounts receivable financing. First, it saves the cost of establishing and

administering its own collection system. Second, a factor can often collect accounts receivable

at a lower cost than a small business, due to economies of scale, and transfer some of these

savings to the company. Third, factoring is a form of collection insurance that provides an

enterprise with more predictable cash flow from sales. On the other hand, factoring costs may be

higher than a direct loan, especially when the firm’s customers have poor credit that lead the

factor to charge a high fee. Furthermore, once the collection function shifts to a third party, the

business loses control over this part of the customer relationship, which may affect overall

customer relations, especially when the factor’s collection practices differ from those of the

company

Inventory Financing

As with accounts receivable loans, inventory financing is a secured loan, in this case with

inventory as collateral. However, inventory financing is more difficult to secure since inventory

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is riskier collateral than accounts receivable. Some inventory becomes obsolete and loses value

quickly, and other types of inventory, like partially manufactured goods, have little or no resale

value. Firms with an inventory of standardized goods with predictable prices, such as

automobiles or appliances, will be more successful at securing inventory financing than

businesses with a large amount of work in process or highly seasonal or perishable goods. Loan

amounts also vary with the quality of the inventory pledged as collateral, usually ranging from

50% to 80%. For most businesses, inventory loans yield loan proceeds at a lower share of

pledged assets than accounts receivable financing. When inventory is a large share of a firm’s

current assets, however, inventory financing is a critical option to finance working capital.

Lenders need to control the inventory pledged as collateral to ensure that it is not sold before

their loan is repaid. Two primary methods are used to obtain this control: (1) warehouse storage;

and (2) direct assignment byproduct serial or identification numbers.4 under one warehouse

arrangement, pledged inventory is stored in a public warehouse and controlled by an independent

party (the warehouse operator). A warehouse receipt is issued when the inventory is stored, and

the goods are released only upon the instructions of the receipt-holder. When the inventory is

pledged, the lender has control of the receipt and can prevent release of the goods until the loan

is repaid. Since public warehouse storage is inconvenient for firms that need on-site access to

their inventory, an alternative arrangement, known as a field warehouse, can be established.

Here, an independent public warehouse company assumes control over the pledged inventory at

the firm’s site. In effect, the firm leases space to the warehouse operator rather than transferring

goods to an off-site location. As with a public warehouse, the lender controls the warehouse

receipt and will not release the inventory until the loan is repaid. Direct assignment by serial

number is a simpler method to control inventory used for manufactured goods that are tagged

with a unique serial number. The lender receives an assignment or trust receipt for the pledged

inventory that lists all serial numbers for the collateral. The company houses and controls its

inventory and can arrange for product sales. However, a release of the assignment or return of

the trust receipt is required before the collateral is delivered and ownership transferred to the

buyer. This release occurs with partial or full loan repayment. While inventory financing

involves higher transaction and administrative costs than other loan instruments, it is an

important financing tool for companies with large inventory assets. When a company has limited

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accounts receivable and lacks the financial position to obtain a line of credit, inventory financing

may be the only available type of working capital debt

Term Loan

While the four prior debt instruments address cyclical working capital needs, term loans can

finance medium-term noncyclical working capital. A term loan is a form of medium-term debt in

which principal is repaid over several years, typically in 3 to 7 years. Since lenders prefer not to

bear interest rate risk, term loans usually have a floating interest rate set between the prime rate

and prime plus 300 basis points, depending on the borrower’s credit risk. Sometimes, a bank will

agree to an interest rate cap or fixed rate loan, but it usually charges a fee or higher interest rate

for these features. Term loans have a fixed repayment schedule that can take several forms.

Level principal payments over the loan term are most common. In this case, the company pays

the same principal amount each month plus interest on the outstanding loan balance. A second

option is a level loan payment in which the total payment amount is the same every month but

the share allocated to interest and principle varies with each payment. Finally, some term loans

are partially amortizing and have a balloon payment at maturity. Term loans can be either

unsecured or secured; a business with a strong balance sheet and a good profit and cash flow

history might obtain an unsecured term loan, but many small firms will be required to pledge

assets. Moreover, since loan repayment extends over several years, lenders include financial

covenants in their loan agreements to guard against deterioration in the firm’s financial position

over the loan term. Typical financial covenants include minimum net worth, minimum net

working capital (or current ratio), and maximum debt-to-equity ratios. Finally, lenders often

require the borrower to maintain a compensating balance account equal to 10% to 20% of

the loan amount.

The major advantage of term loans is their ability to fund long-term working capital needs.

benefit from having a comfortable positive net working capital margin, which lowers the

pressure to meet all short-term obligations and reduces bankruptcy risk. Term loans provide the

medium-term financing to invest in the cash, accounts receivable, and inventory balances needed

to create excess working capital. They also are well suited to finance the expanded working

capital needed for sales growth. Furthermore, a term loan is repaid over several years, which

reduces the cash flow needed to service the debt. However, the benefits of longer term financing

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do not come without costs, most notably higher interest rates and less financial flexibility. Since

a longer repayment period poses more risk to lenders, term loans carry a higher interest rate than

short-term loans. When provided with a floating interest rate, term loans expose firms to greater

interest rate risk since the chances of a spike in interest rates increase for a longer repayment

period. Due to restrictive covenants and collateral requirements, a term loan imposes

considerable financial constraints on a business. Moreover, these financial constraints are in

place for several years and cannot be quickly reversed, as with a 1-year line of credit. Despite

these costs, term loans can be of great value to small firms, providing a way to supplement their

limited supply of equity and long-term debt with medium-term capital.

PART 5

FINDINGS

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Working capital management entails short term decisions - generally, relating to the next one

year periods - which are "reversible". These decisions are therefore not taken on the same basis

as Capital Investment Decisions (NPV or related) rather they will be based on cash flows and / or

profitability.

One measure of cash flow is provided by the cash conversion cycle - the net number of

days from the outlay of cash for raw material to receiving payment from the customer. As

a management tool, this metric makes explicit the inter-relatedness of decisions relating

to inventories, accounts receivable and payable, and cash. Because this number

effectively corresponds to the time that the firm's cash is tied up in operations and

unavailable for other activities, management generally aims at a low net count.

In this context, the most useful measure of profitability is Return on capital (ROC). The

result is shown as a percentage, determined by dividing relevant income for the 12

months by capital employed; Return on equity (ROE) shows this result for the firm's

shareholders. Firm value is enhanced when, and if, the return on capital, which results

from working capital management, exceeds the cost of capital, which results from capital

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investment decisions as above. ROC measures are therefore useful as a management tool,

in that they link short-term policy with long-term decision making Management of

working capital

Guided by the above criteria, management uses a combination of policies and techniques for the

management of working capital. These policies aim at managing the current assets (generally

cash and cash equivalents, inventories and debtors) and the short term financing, such that cash

flows and returns are acceptable.

Cash management. Identify the cash balance which allows for the business to meet day to

day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows for uninterrupted

production but reduces the investment in raw materials - and minimizes reordering costs -

and hence increases cash flow;

Debtor’s management. Identify the appropriate credit policy, i.e. credit terms which will

attract customers, such that any impact on cash flows and the cash conversion cycle will

be offset by increased revenue and hence Return on Capital (or vice versa).

Short term financing. Identify the appropriate source of financing, given the cash

conversion cycle: the inventory is ideally financed by credit granted by the supplier;

however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors

to cash" through "factoring.

SBP bank has substantial appetite for recognized credits. The bank has a team of customer-

driven relationship managers with wide industry experience in various segments. Bank offers

working capital finance by way of cash credit or loans suitably structured to the needs and risk

profile of the customer.

Loan amounts from Rs 5 Lac onwards

Easy Documentation

Fast Processing

At par cheque facility

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Internet Banking & Phone Banking Facilities

Multi-Location Banking

Documentation

The Bank has well established systems and procedures for documentation in respect of all credit

facilities. These have been laid down keeping in view the ultimate objective of documentation

which is to serve as primary evidence in any dispute between the Bank and the borrower and for

enforcing the bank’s right to recover the loan amount together with interest thereon (through

court of law as a final resort), in the event of all other recourses proving to be of no benefit. In

order that this objective is achieved, the documentation process attempts to ensure that :-

- The owing of the debt to the Bank by the borrower is clearly established by the documents.

- The charge created on the borrower’s assets as security for the debt is maintained and

enforceable and

- The Bank’s right to enforce the recovery of the debt through court of law is not allowed

become time barred under the Law of Limitation.

Documentation is not confined to mere obtention of security documents at the outset. It is a

continuous and ongoing process covering the entire duration of an advance comprising the

following steps:-

.i)Pre-execution formalities : These cover mainly searches at the Office of Registrar of

Companies and search of the Register of Charges (applicable to corporate borrowers), also

capacity of borrowers to borrow and the formalities to be completed by the borrowers, searches

at the office of the sub-Registrar of Assurances or Land Registry to check the existence or

otherwise of prior charge over the immovable property offered as security, besides taking other

precautions before creating equitable/registered mortgage. Including obtention of lawyer’s

opinion as to clear, absolute and marketable title to the property based upon the genuineness,

completeness and adequacy of the title deeds provided.

ii) Execution of Documents: This covers obtention of proper documents, appropriate stamping

and correct execution thereof as per terms of the sanction of the advance and the internal

directives of a corporate borrower such as Memorandum and Articles of Association, relevant

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resolution of Board etc. A copy of the loan agreement along with its enclosures will be delivered

to the borrower at the time of sanction/disbursal of loans and acknowledgement of receipt thereof

will be obtained.

iii) Post-execution formalities : This phase covers the completion of formalities in respect of

mortgages, if any, registration with the Registrar of Assurances, wherever applicable, and the

registration of charges with the Registrar of Companies within the stipulated period etc.

iv) Protection from Limitation/Safeguarding Securities: These measures aim at preventing the

documents from getting time-barred by limitation and protecting the securities charged to the

Bank from being diluted by any subsequent charge that might be created by the borrower to

secure his other debts, if any. These objectives are sought to be achieved by:

a) Obtention of revival letter within the stipulated period.

b) Obtention of Balance Confirmation from the borrower at least at annual intervals.

c) Making periodical searches at the Office of Registrar of Companies/Registrar of Assurances.

d) Insurance of assets charged – (unless specifically waived) to insure the Bank against the risk

of fire, other hazards etc.

e) Periodical valuation of securities charged to the Bank.

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PART 6

PROJECT

ANALYSIS

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PROJECT ANALYSIS

State bank of Patiala provide various type of loan. These are personal loan, home loan,

educational loan, car loan and others. These shows in pie chart that how much people prefer what

loan.

To repair/renovate/extend/alter an existing house. To purchase ready built flat/house/apartment

from cooperative Group housing societies/State Govt. Housing Board/other Govt. agencies/

private builders of repute. Term Loans are sanctioned for Purchase of new Passenger cars/ jeeps

multi utility vehicles (MUVs and SUVs). The interest rate is fixed over the term of the loan

ensuring your repayments will not increase if official interest rates increase. Choose from a loan

term ranging from 3 to 7 years. Flexible repayment options – make repayments monthly or

fortnightly. Easy repayment methods – pay, direct debit, cash, cheque, or visit an RAC Member

Service Centre.

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How many people are aware of the SBP Banks loan facility?

 Awareness regarding the SBP Banks loan facility seems better as 60% of the respondents were aware of this very facility of the bank, 30% were not knowing &10% were aware about

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PART 7

SWOT ANALYSIS

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Strength/ Opportunities:

The growth for SBP in the coming years is likely to be fueled by the following factors:

Continued effort to increase low cost deposit would ensure improvement in NIMs and

hence earnings.

Growing retail & SMEs thrust would lead to higher business growth.

Strong economic growth would generate higher demand for funds pursuant to

higher corporate demand for credit on account of capacity expansion.

Weakness/ Threats:

The risks that could ensue to SBP in time to come are as under:

SBP is currently operating at a lowest CAR. Insufficient capital may restrict the growth

prospects of the bank going forward.

Stiff competition, especially in the retail segment, could impact retail growth of SBI and

hence slowdown in earnings growth.

Contribution of retail credit to total bank credit stood at 26%. Significant thrust on

growing retail book poses higher credit risk to the bank.

Delay in technology up gradation could result in loss of market shares.

Management indicated a likely pension shortfall on account of AS-15 to be close

toRs50bn.

Slow down in domestic economy would pose a concern over credit off-take thereby

impacting earnings growth.

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PART 8

CONCLUSION

AND

SUGGESTION

Conclusion

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SBP Bank is the number one private, scheduled commercial banks in India, as found by many

well reputed research organizations, nonetheless has a long way to go to establish a strong

presence in this part. This is expressly reflected in the report under submission. The reasons put

forward by the respondents largely boil down to the conservative lending procedures, that the

bank takes pride in, particularly for the fact that the bank could successfully tide over the

recession-smitten times that shook the banking industry across the world.

The fact could also be attributed to the long presence of competitors. However what was

reassuring that the bank has certainly bright prospects to make good strides as the private sector

in the valley assumes prominence.

SUGGESTION

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Establishing new branches across valley at locations having trade / business importance could

remarkably translate in great business prospects by providing services to the latent/ potential

customer base.

The issues of loyalty of customers towards their obtaining banker(s) suggests that appropriate

offerings at suitable rates should be thought about to give them (potential customers) reason to

think about the bank’s offerings.

BIBLIOGRAPHY

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www.sbi.com

www. sbp.com

Internal circular of SBP Bank

The economics Times

The times of India

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