WCM Kotak Mahindra

INTRODUCTION

WORKING CAPITAL:

Cash is the lifeline of a company. If this lifeline deteriorates, the company's ability to fund

operations, reinvest and meet capital requirements and payments also deteriorate.

Understanding a company's cash flow health is essential for making investment decisions. A

good way to judge a company's cash flow prospects is to look at its working capital

management (WCM).

Working capital of a company reveals more about the financial condition of a business than

almost any other calculation. It tells you what would be left if a company raised all of its short

term resources, and used them to pay off its short term liabilities. The more working capital,

the less financial strain a company experiences. Working capital also gives investors an idea of

the company's underlying operational efficiency. Money that is tied up in inventory or

money that customers still owe to the company can't be used to pay off any of its obligations.

So, if a company is not operating in the most efficient manner (slow collection) it will show up in

the working capital. This can be seen by comparing the working capital from one period of time

to another; slow collection may signal an underlying problem in the company's operations.

DEFINITION:

The definition of working capital is that it is the difference between an organization’s current

assets and its current liabilities. Of more importance is its function which is primarily to support

the day-to-day financial operations of an organization, including the purchase of stock, the

payment of salaries, wages and other business expenses, and the financing of credit sales. It’s a

measure of both a company's efficiency and its short-term financial health.

The better a company manages its working capital, the less the company needs to borrow. Even

companies with cash surpluses need to manage working capital to ensure that those surpluses

are invested in ways that will generate suitable returns for investors.

There are two concepts of working capital.

1

They are

→ Gross working capital and

→ Net working capital.

The term gross working capital, also referred to as working capital means the total current

asset. The term net working capital can be defined in two ways:

The most common definition of net working capital is the difference between the

current assets and the current liabilities.

The alternate definition of NWC is that portion of current assets which is financed with

long term funds. Since the current liabilities represent the sources of short term funds,

as long as current assets exceed current liabilities, the excess must be financed with long

term funds.

The net working capital, as a measure of liquidity is quite useful for internal control. The net

working capital helps in comparing the liquidity of the same firm over time.

Therefore:

Current Assets - Current Liabilities = Working Capital

A positive working capital means that the company is able to pay off its short-term liabilities. A

negative working capital means that a company currently is unable to meet its short-term

liabilities with its current assets (cash, accounts receivable, inventory).Management must

ensure that a business has sufficient working capital. Too little of the working capital will result

in cash flow problems highlighted by an organization exceeding its agreed overdraft limit, failing

to pay suppliers on time, and being unable to claim discounts for prompt payment. In the long

run, a business with insufficient working capital will be unable to meet its current obligations

and will be forced to cease trading even if it remains profitable on paper.

On the other hand, if an organization ties up too much of its resources in working capital it will

earn a lower than expected rate of return on capital employed. Again this is not a desirable

situation. As it is said that working capital is the difference between the current assets and the

current liabilities, the management of the company has to manage their current assets and

current liabilities.

2

NEED OF THE STUDY: Working capital management is one of the key areas of financial decision-making. It is

significant because, the management must see that an excessive investment in current assets

should protect the company from the problems of stock-out. Current assets will also determine

the liquidity position of the firm.

The goal of working capital management is to manage the firm current assets and current

liabilities in such a way that a satisfactory level of working capital is maintained. If the firm

cannot maintain a satisfactory level of working capital, it is likely to become insolvent and may

be even forced into bankruptcy.

SCOPE OF THE STUDY:A study of the Working capital involves an examination of long term as well as short term

sources that a company taps in order to meet its requirements of finance. Working Capital

scope is very wide concerning with the problems of managing current assets and current

liabilities because managing them is not an easy task. The scope of the study is confined to the

sources that Kotak Mahindra Group tapped over the years under study i.e. 2010-15.

3

OBJECTIVES OF THE STUDY:

To study the existing working capital management system of Kotak Mahindra Group.

(Formerly Kotak Mahindra bank Ltd.).

To find the liquidity position of the current assets and current liabilities of the company.

To examine feasibility of present system of managing working capital.

To understand how the company finances its working capital

To analyze the financial performance of the company with reference to working capital.

To give some suggestions to the management based on the information studied.

Investigate the relationship between corporate performance and WCM.

To investigate the impact of different factors affecting the working capital on net

liquidity balance and working capital requirement.

4

LIMITATIONS OF THE STUDY:

Due to the busy schedule of the executives in the company, all the required primary data could

not be collected, which might affect the results of the study

Recommendations of the study are only personal opinions. Hence the judgments may be biased

and could not be considered as ultimate and standard solutions

Short period of time is one of the limitations, due to which a detailed study could not be

conducted on the topic.

You can’t expand, can’t pay your staff, can’t pay yourself and can’t pay your suppliers.

So in a nutshell, no cash flow, or working capital, no viable business.

It leads to excessive debtors.

Firm fails to maintain the relationship with the banks due to non requirement of fun.

5

RESEARCH METHODOLOGY

The study of Working Capital management is based on primary as well as secondary data.

Data relating to. Has been collected through

PRIMARY DATA:

Data observed or collected directly from first-hand experience. It is original research data in its raw

form, without any analysis or processing

Detailed discussions with Vice-President.

Discussions with the Finance manager and other members of the Finance department.

SECONDARY DATA:

Secondary data is the data that have been already collected by and readily available from other sources.

Such data are cheaper and more quickly obtainable than the primary data.

Published annual reports of the company for the year 2008-12.

DATA ANALYSIS

The collected data has been processed using the tools of

Ratio analysis

Graphical analysis

Year-year analysis

These tools access in the interpretation and understanding of the Existing scenario of the

Capital Structure.

The primary data was gathered through personal interaction with the director of the

company.

The secondary data was collected from company’s annual reports from 2010-11 to 2014-

15, various books and Internet.

6

INDUSTRY PROFILE

History:

A bank is a financial institution that accepts deposits and channels those deposits into lending

activities. Banks primarily provide financial services to customers while enriching investors.

Government restrictions on financial activities by banks vary over time and location. Banks are

important players in financial markets and offer services such as investment funds and loans.

In some countries such as Germany, banks have historically owned major stakes in industrial

corporations while in other countries such as the United States banks are prohibited from

owning non-financial companies. In Japan, banks are usually the nexus of a cross-share holding

entity known as the keiretsu. In France, bancassurance is prevalent, as most banks offer

insurance services (and now real estate services) to their clients. The level of government

regulation of the banking industry varies widely, with countries such as Iceland, having

relatively light regulation of the banking sector, and countries such as China having a wide

variety of regulations but no systematic process that can be followed typical of a communist

system. The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena,

Italy, which has been operating continuously since 1472.

Origin of the word:

The name bank derives from the Italian word banco "desk/bench", used during the Renaissance

by Jewish Florentine bankers, who used to make their transactions above a desk covered by a

green tablecloth. However, there are traces of banking activity even in ancient times, which

indicates that the word 'bank' might not necessarily come from the word 'banco'.In fact, the

word traces its origins back to the Ancient Roman Empire, where moneylenders would set up

their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu,

from which the words banco and bank are derived. As a moneychanger, the merchant at the

bancu did not so much invest money as merely convert the foreign currency into the only legal

tender in Rome—that of the Imperial Mint. The earliest evidence of money-changing activity is

depicted on a silver drachm coin from ancient Hellenic colony Trapezus on the Black Sea,

modern Trabzon, c. 350–325 BC, presented in the British Museum in London.

7

The coin shows a banker's table (trapeza) laden with coins, a pun on the name of the city.In

fact, even today in Modern Greek the word Trapeza (Τράπεζα) means both a table and a bank.

Traditional banking activities:

Banks act as payment agents by conducting checking or current accounts for customers, paying

cheques drawn by customers on the bank, and collecting cheques deposited to customers'

current accounts. Banks also enable customer payments via other payment methods such as

telegraphic transfer, EFTPOS, and ATM.Banks borrow money by accepting funds deposited on

current accounts, by accepting term deposits, and by issuing debt securities such as banknotes

and bonds. Banks lend money by making advances to customers on current accounts, by

making installment loans, and by investing in marketable debt securities and other forms of

money lending.Banks provide almost all payment services, and a bank account is considered

indispensable by most businesses, individuals and governments. Non-banks that provide

payment services such as remittance companies are not normally considered an adequate

substitute for having a bank account.

Entry regulation:

Currently in most jurisdictions commercial banks are regulated by government entities and

require a special bank licence to operate.Usually the definition of the business of banking for

the purposes of regulation is extended to include acceptance of deposits, even if they are not

repayable to the customer's order—although money lending, by itself, is generally not included

in the definition.

Unlike most other regulated industries, the regulator is typically also a participant in the

market, i.e. a government-owned (central) bank. Central banks also typically have a monopoly

on the business of issuing banknotes. However, in some countries this is not the case. In the UK,

for example, the Financial Services Authority licences banks, and some commercial banks (such

as the Bank of Scotland) issue their own banknotes in addition to those issued by the Bank of

England, the UK government's central bank.

8

Definition:

The definition of a bank varies from country to country. Under English common law, a banker is

defined as a person who carries on the business of banking, which is specified as:

conducting current accounts for his customers

paying cheques drawn on him, and

Collecting cheques for his customers.

In most English common law jurisdictions there is a Bills of Exchange Act that codifies the law in

relation to negotiable instruments, including cheques, and this Act contains a statutory

definition of the term banker: banker includes a body of persons, whether incorporated or not,

who carry on the business of banking' (Section 2, Interpretation). Although this definition seems

circular, it is actually functional, because it ensures that the legal basis for bank transactions

such as cheques do not depend on how the bank is organized or regulated.

The business of banking is in many English common law countries not defined by statute but by

common law, the definition above. In other English common law jurisdictions there are

statutory definitions of the business of banking or banking business. When looking at these

definitions it is important to keep in minds that they are defining the business of banking for

the purposes of the legislation, and not necessarily in general. In particular, most of the

definitions are from legislation that has the purposes of entry regulating and supervising banks

rather than regulating the actual business of banking. However, in many cases the statutory

definition closely mirrors the common law one. Examples of statutory definitions:

"banking business" means the business of receiving money on current or deposit account,

paying and collecting cheques drawn by or paid in by customers, the making of advances to

customers, and includes such other business as the Authority may prescribe for the

purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation).

"banking business" means the business of either or both of the following:

1. Receiving from the general public money on current, deposit, savings or other similar

account repayable on demand or within less than [3 months] ... or with a period of call or

notice of less than that period;

2. paying or collecting cheques drawn by or paid in by customers.

9

Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct

debit and internet banking, the cheque has lost its primacy in most banking systems as a

payment instrument. This has led legal theorists to suggest that the cheque based definition

should be broadened to include financial institutions that conduct current accounts for

customers and enable customers to pay and be paid by third parties, even if they do not pay

and collect cheques.

Accounting for bank accounts:

Bank statements are accounting records produced by banks under the various accounting

standards of the world. Under GAAP and IFRS there are two kinds of accounts: debit and credit.

Credit accounts are Revenue, Equity and Liabilities. Debit Accounts are Assets and Expenses.

This means you credit a credit account to increase its balance, and you debit a debit account to

decrease its balance.

This also means you debit your savings account every time you deposit money into it (and the

account is normally in deficit), while you credit your credit card account every time you spend

money from it (and the account is normally in credit).

However, if you read your bank statement, it will say the opposite—that you credit your

account when you deposit money and you debit it when you withdraw funds. If you have cash

in your account, you have a positive (or credit) balance; if you are overdrawn, you have a

negative (or deficit) balance.

The reason for this is that the bank, and not you, has produced the bank statement. Your

savings might be your assets, but the bank's liability, so they are credit accounts (which should

have a positive balance). Conversely, your loans are your liabilities but the bank's assets, so they

are debit accounts (which should also have a positive balance).

Where bank transactions, balances, credits and debits are discussed below, they are done so

from the viewpoint of the account holder—which is traditionally what most people are used to

seeing.

10

Economic functions:

1. Issue of money, in the form of banknotes and current accounts subject to cheque or

payment at the customer's order. These claims on banks can act as money because they

are negotiable and/or repayable on demand, and hence valued at par. They are

effectively transferable by mere delivery, in the case of banknotes, or by drawing a

cheque that the payee may bank or cash.

2. Netting and settlement of payments – banks act as both collection and paying agents for

customers, participating in interbank clearing and settlement systems to collect,

present, be presented with, and pay payment instruments. This enables banks to

economies on reserves held for settlement of payments, since inward and outward

payments offset each other. It also enables the offsetting of payment flows between

geographical areas, reducing the cost of settlement between them.

3. Credit intermediation – banks borrow and lend back-to-back on their own account as

middle men.

4. Credit quality improvement – banks lend money to ordinary commercial and personal

borrowers (ordinary credit quality), but are high quality borrowers. The improvement

comes from diversification of the bank's assets and capital which provides a buffer to

absorb losses without defaulting on its obligations. However, banknotes and deposits

are generally unsecured; if the bank gets into difficulty and pledges assets as security, to

rise the funding it needs to continue to operate, this puts the note holders and

depositors in an economically subordinated position.

5. Maturity transformation – banks borrow more on demand debt and short term debt,

but provide more long term loans. In other words, they borrow short and lend long.

With a stronger credit quality than most other borrowers, banks can do this by

aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g.

withdrawals and redemptions of banknotes), maintaining reserves of cash, investing in

marketable securities that can be readily converted to cash if needed, and raising

replacement funding as needed from various sources (e.g. wholesale cash markets and

securities markets).

11

Law of banking:

Banking law is based on a contractual analysis of the relationship between the bank (defined

above) and the customer—defined as any entity for which the bank agrees to conduct an

account.

The law implies rights and obligations into this relationship as follows:

1. The bank account balance is the financial position between the bank and the customer:

when the account is in credit, the bank owes the balance to the customer; when the

account is overdrawn, the customer owes the balance to the bank.

2. The bank agrees to pay the customer's cheques up to the amount standing to the credit

of the customer's account, plus any agreed overdraft limit.

3. The bank may not pay from the customer's account without a mandate from the

customer, e.g. a cheque drawn by the customer.

4. The bank agrees to promptly collect the cheques deposited to the customer's account as

the customer's agent, and to credit the proceeds to the customer's account.

5. The bank has a right to combine the customer's accounts, since each account is just an

aspect of the same credit relationship.

6. The bank has a lien on cheques deposited to the customer's account, to the extent that

the customer is indebted to the bank.

7. The bank must not disclose details of transactions through the customer's account—

unless the customer consents, there is a public duty to disclose, the bank's interests

require it, or the law demands it.

8. The bank must not close a customer's account without reasonable notice, since cheques

are outstanding in the ordinary course of business for several days.

These implied contractual terms may be modified by express agreement between the customer

and the bank. The statutes and regulations in force within a particular jurisdiction may also

modify the above terms and/or create new rights, obligations or limitations relevant to the

bank-customer relationship.

12

The requirements for the issue of a bank license vary between jurisdictions but typically

include:

1. Minimum capital

2. Minimum capital ratio

3. 'Fit and Proper' requirements for the bank's controllers, owners, directors, and/or senior

officers

4. Approval of the bank's business plan as being sufficiently prudent and plausible.

Types of banks:

Banks' activities can be divided into retail banking, dealing directly with individuals and small

businesses; business banking, providing services to mid-market business; corporate banking,

directed at large business entities; private banking, providing wealth management services to

high net worth individuals and families; and investment banking, relating to activities on the

financial markets. Most banks are profit-making, private enterprises. However, some are owned

by government, or are non-profit organizations.

Central banks are normally government-owned and charged with quasi-regulatory

responsibilities, such as supervising commercial banks, or controlling the cash interest rate.

They generally provide liquidity to the banking system and act as the lender of last resort in

event of a crisis.

Types of retail banks:

Commercial bank: the term used for a normal bank to distinguish it from an investment

bank. After the Great Depression, the U.S. Congress required that banks only engage in

banking activities, whereas investment banks were limited to capital market activities.

Since the two no longer have to be under separate ownership, some use the term

"commercial bank" to refer to a bank or a division of a bank that mostly deals with

deposits and loans from corporations or large businesses.

Community Banks: locally operated financial institutions that empower employees to

make local decisions to serve their customers and the partners.

13

Community development banks: regulated banks that provide financial services and

credit to under-served markets or populations.

Postal savings banks: savings banks associated with national postal systems.

Private Banks: banks that manage the assets of high net worth individuals.

Offshore banks: banks located in jurisdictions with low taxation and regulation. Many

offshore banks are essentially private banks.

Savings bank: in Europe, savings banks take their roots in the 19th or sometimes even

18th century. Their original objective was to provide easily accessible savings products

to all strata of the population. In some countries, savings banks were created on public

initiative; in others, socially committed individuals created foundations to put in place

the necessary infrastructure. Nowadays, European savings banks have kept their focus

on retail banking: payments, savings products, credits and insurances for individuals or

small and medium-sized enterprises. Building societies and Landesbanks: institutions

that conduct retail banking.

Ethical banks: banks that prioritize the transparency of all operations and make only

what they consider to be socially-responsible investments.

Islamic banks: Banks that transact according to Islamic principles.

Types of investment banks:

Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for

their own accounts, make markets, and advise corporations on capital market activities

such as mergers and acquisitions.

Merchant banks were traditionally banks which engaged in trade finance. The modern

definition, however, refers to banks which provide capital to firms in the form of shares

rather than loans. Unlike venture capital firms, they tend not to invest in new

companies.

14

Both combined:

Universal banks, more commonly known as financial services companies, engage in

several of these activities. These big banks are very diversified groups that, among other

services, also distribute insurance— hence the term bancassurance, a portmanteau

word combining "banque or bank" and "assurance", signifying that both banking and

insurance are provided by the same corporate entity.

15

COMPANY PROFILE

Kotak Mahindra Bank Ltd

Kotak Mahindra Bank Ltd is a one stop shop for all banking needs. The bank offers

personal finance solutions of every kind from savings accounts to credit cards,

distribution of mutual funds to life insurance products. Kotak Mahindra Bank offers

transaction banking, operates lending verticals, manages IPOs and provides working

capital loans. Kotak has one of the largest and most respected Wealth Management

teams in India, providing the widest range of solutions to high net worth individuals,

entrepreneurs, business families and employed professionals.

For more information, please visit the Kotak Mahindra Bank website

www.kotak.com/bank/personal-banking/

Kotak Mahindra Old Mutual Life Insurance Ltd

Kotak Mahindra Old Mutual Life Insurance Ltd is a 74:26 joint venture between Kotak

Mahindra Bank Ltd., its affiliates and Old Mutual plc. A Company that combines its

international strengths and local advantages to offer its customers a wide range of

innovative life insurance products, helping them take important financial decisions at

every stage in life and stay financially independent. The company covers over 3 million

lives and is one of the fastest growing insurance companies in India.

www.kotaklifeinsurance.com

16

Kotak Securities Ltd

Kotak Securities is one of the largest broking houses in India with a wide geographical

reach. Kotak Securities operations include stock broking and distribution of various

financial products including private and secondary placement of debt, equity and

mutual funds.

Kotak Securities operate in five main areas of business:

o Stock Broking (retail and institutional).

o Depository Services.

o Portfolio Management Services.

o Distribution of Mutual Funds.

o Distribution of Kotak Mahindra Old Mutual Life Insurance Ltd products.

Kotak Mahindra Capital Company (KMCC)

Kotak Investment Banking (KMCC) is a full-service investment bank in India offering a

wide suite of capital market and advisory solutions to leading domestic and

multinational corporations, banks, financial institutions and government companies.

Our services encompass Equity & Debt Capital Markets, M&A Advisory, Private Equity

Advisory, Restructuring and Recapitalization services, Structured Finance services and

Infrastructure Advisory & Fund Mobilization.

Kotak Mahindra Prime Ltd (KMPL)

Kotak Mahindra Prime Ltd is among India's largest dedicated passenger vehicle finance

companies. KMPL offers loans for the entire range of passenger cars, multi-utility

vehicles and pre-owned cars. Also on offer are inventory funding and infrastructure

funding to car dealers with strategic arrangements via various car manufacturers in

India as their preferred financier.

For more information, please visit the KMPL website http://carloan.kotak.com

17

Kotak International Business

Kotak International Business specialises in providing a range of services to overseas

customers seeking to invest in India. For institutions and high net worth individuals

outside India, Kotak International Business offers asset management through a range of

offshore funds with specific advisory and discretionary investment management

services.

For more information, please visit the Kotak Mahindra International Business website

www.investindia.kotak.com

Kotak Mahindra Asset Management Company Ltd (KMAMC)

Kotak Mahindra Asset Management Company offers a complete bouquet of asset

management products and services that are designed to suit the diverse risk return

profiles of each and every type of investor. KMAMC and Kotak Mahindra Bank are the

sponsors of Kotak Mahindra Pension Fund Ltd, which has been appointed as one of six

fund managers to manage pension funds under the New Pension Scheme (NPS).

Kotak Private Equity Group (KPEG)

Kotak Private Equity Group helps nurture emerging businesses and mid-size enterprises

to evolve into tomorrow's industry leaders. With a proven track record of helping build

companies, KPEG also offers expertise with a combination of equity capital, strategic

support and value added services. What differentiates KPEG is not merely funding

companies, but also having a close involvement in their growth as board members,

advisors, strategists and fund-raisers.

For more information, please visit the KPEG website www.privateequityfund.kotak.com

18

Kotak Realty Fund

Kotak Realty Fund deals with equity investments covering sectors such as hotels, IT

parks, residential townships, shopping centers, industrial real estate, health care, retail,

education and property management. The investment focus here is on development

projects and enterprise level investments, both in real estate intensive businesses.

Since the inception of the erstwhile Kotak Mahindra Finance Limited in 1985, it has been a

steady and confident journey leading to growth and success. The milestones of the group

growth story are listed below year wise.

VISION

To be the most trusted Global Indian Financial Services brand and the most preferred financial

services employer with focus on creating value.

OUR STORY

Since the inception of the erstwhile Kotak Mahindra Finance Limited in 1985, it has been a

steady and confident journey leading to growth and success. The milestones of the group growth

story are listed below year wise.

OUR BUSINESSES

Kotak Mahindra is one of India's leading banking and financial services group, offering a wide

range of financial services that encompass every sphere of life.

Kotak Mahindra Old Mutual Life Insurance Ltd Kotak Securities Ltd Kotak Mahindra Capital Company (KMCC) Kotak Mahindra Prime Ltd (KMPL) Kotak International Business Kotak Mahindra Asset Management Company Ltd (KMAMC) Kotak Private Equity Group (KPEG) Kotak Realty Fund

19

Milestones

2015 Uday Kotak - 'Transformational Business Leader Award' at the AIMA Managing India Awards 2014. Uday Kotak - 'Entrepreneur of the Decade' by Bombay Management Association (BMA).2014 . Ranked among top 5 Best Ranked Companies for Corporate Governance Practices in

IR Global Ranking

2013 Best Managed Board by Aon Hewitt-Mint Study 2012. Best Bank Award in New Private Sector Bank category by Financial Express.

2012 . Uday Kotak, Executive Vice Chairman & Managing Director, Kotak Mahindra Bank

was presented with the Financial Leadership Award at NDTV Profit Biz Excellence Award.

2011 .Kotak Mahindra Bank and Cisco won the Asian Banker Award for the Best Contact

Center Deployment

201

0

.Ahmedabad Derivatives and Commodities Exchange, a Kotak anchored enterprise,

became operational as a national commodity exchange.

2009 Kotak Mahindra Bank Ltd. opened a representative office in Dubai

Entered Ahmedabad Commodity Exchange as anchor investor.

2008 Launched a Pension Fund under the New Pension System.

200

6

Bought the 25% stake held by Goldman Sachs in Kotak Mahindra Capital

Company and Kotak Securities.

200

5

Kotak Group realigned joint venture in Ford Credit; their stake in Kotak Mahindra

Prime was bought out (formerly known as Kotak Mahindra Primus Ltd) and Kotak

group’s stake in Ford credit Kotak Mahindra was sold.

20

Launched a real estate fund.

200

4 Launched India Growth Fund, a private equity fund.

200

3

Kotak Mahindra Finance Ltd. converted into a commercial bank - the first Indian

company to do so.

2001 Matrix sold to Friday Corporation.

Launched Insurance Services.

Kotak Securities Ltd. was incorporated

2000 Kotak Mahindra tied up with Old Mutual plc. for the Life Insurance business.

Kotak Securities launched its on-line broking site.

Commencement of private equity activity through setting up of Kotak Mahindra

Venture Capital Fund.

199

8

Entered the mutual fund market with the launch of Kotak Mahindra Asset

Management Company.

199

6

The Auto Finance Business is hived off into a separate company - Kotak

Mahindra Prime Limited (formerly known as Kotak Mahindra Primus Limited).

Kotak Mahindra takes a significant stake in Ford Credit Kotak

Mahindra Limited, for financing Ford vehicles. The launch of Matrix Information

Services Limited marks the Group's entry into information distribution.

199

5

Brokerage and Distribution businesses incorporated into a separate company -

Securities. Investment banking division incorporated into a separate company -

Kotak Mahindra Capital Company

21

199

2 Entered the Funds Syndication sector

199

1

The Investment Banking Division was started. Took over FICOM, one of India's

largest financial retail marketing networks

1990 The Auto Finance division was started

1987 Kotak Mahindra Finance Ltd entered the Lease and Hire Purchase market

1986 Kotak Mahindra Finance Ltd started the activity of Bill Discounting

AwardsRecent achievements

At Kotak Mahindra Group we take a client-centric view and constantly innovate to provide you

with the best of services and infrastructure. We have regularly received accolades that stand

testimony to our success in this endeavour. Some of our recent achievements are:

Banking

ICAI Award

Excellence in Financial Reporting under Category 1 - Banking Sector for the year ending

31st March, 2014.

Asiamoney

Best Local Cash Management Bank 2014.

IDG India

Kotak won the CIO 100 'The Agile 100' award 2013.

22

IDRBT

Banking Technology Excellence Awards Best Bank Award in IT Framework and

Governance Among Other Banks' – 2009.

Banking Technology Award for IT Governance and Value Delivery, 2008.

IR Global Rankings

Best Corporate Governance Practices - Ranked among the top 5 companies in Asia

Pacific, 2009.

FinanceAsia

Best Private Bank in India, for Wealth Management business, 2009.

Kotak Royal Signature Credit Card

Was chosen "Product of the Year" in a survey conducted by Nielsen in 2009.

IBA Banking Technology Awards

Best Customer Relationship Achievement - Winner 2008 & 2009.

Best overall winner, 2007.

Best IT Team of the Year, 4 years in a row from 2006 to 2009.

Best IT Security Policies & Practices, 2007.

Euromoney

Best Private Banking Services (overall), 2009.

Emerson Uptime Champion Awards

Technology Senate Emerson Uptime Championship Award in the BFSI category, 2008.

Miscellaneous

Best Local Trade Bank in India

The UK based Trade & Forfaiting Review awarded Kotak Mahindra Bank Ltd. the Bronze

Award in the category of Best Local Trade Bank in India at the TFR Awards 2011.

LACP Vision Awards 2010 for Annual Report 2010-11

Platinum Award - Best among Banking Category, APAC.

Gold Award - Most Creative Report, APAC.

23

Ranked No. 21 among Top 50 Reports, APAC.

Ranked No. 87 among the World's Top 100 Annual Reports.

Businessworld

'Most Valuable CEO' overall, 2010 awarded to Mr. Uday Kotak, Executive Vice Chairman

& Managing Director.

CNBCTV 18

'Best Performing CFO in the Banking/Financial Services sector by CNBCTV 18 CFO

Awards 2010 awarded to Mr. Jaimin Bhatt.

GIREM

GIREM awarded Kotak Realty Funds Group, the "Investor of the Year" Award for 2009.

IBA Banking Technology Awards

Best Use of Business Intelligence - up, 2008.

Best Enterprise Risk Management - Runner up, 2008.

The Great Places to Work Institute, India

Best Workplaces in India, 2008.

Hewitt

10th Best Employer in India, 2007, 2008 & 2009.

Financial Insights Innovation Award

Best Innovation in Enterprise Security Management in the Asia Pacific Region, 2009.

Frost & Sullivan

Best Passenger Vehicle Finance Company in India, 2006.

CNBC TV 18

Indian Business Leader of the Year, 2008 awarded to Uday Kotak, Executive Vice

Chairman & Managing Director.

Banking information

The Bank publishes the standalone and consolidated results on a quarterly basis. The

standalone results is subjected to "Limited Review" by the auditors of the Bank. The same are

also reviewed by the Audit Committee before submission to the Board. Along with the quarterly

24

results, an earnings update is also prepared and posted on the website of the Bank. Every

quarter, the Executive Vice-Chairman and Managing Director and the Executive Director(s)

participate on a call with the analysts / shareholders, the transcripts of which are posted on the

website of the Bank. The Bank also has dedicated personnel to respond to queries from

investors.

Financial Calendar: For each calendar quarter, the financial results are reviewed and taken

on record by the Board during the last week of the month subsequent to the quarter ending.

The audited annual accounts as at 31st March are approved by the Board, after a review

thereof by the Audit Committee. The Annual General Meeting to consider such annual accounts

is held in the second quarter of the financial year.

Stock Exchanges on which listed:

Trading of shares to be in compulsorily dematerialized form: The equity shares of

the Bank have been activated for dematerialization with the National Securities Depository

Limited and with the Central Depository Services (India) Limited vide ISIN INE237A01028.

Share Transfer System: Applications for transfers, transmission and transposition are

received by the Bank at its Registered Office or at the office(s) of its Registrars & Share Transfer

Agents. As the shares of the Bank are in dematerialized form, the transfers are duly processed

by NSDL/CDSL in electronic form through the respective depository participants. Shares which

are in physical form are processed by the Registrars & Share Transfer Agents, Karvy

Computershare Private Limited, on a regular basis and the certificates dispatched directly to the

investors.

Investor Helpdesk: Share transfers, dividend payments and all other investor related

activities are attended to and processed at the office of our Registrars & Share Transfer Agents.

For lodgment of Transfer Deeds and any other documents or for any grievances/complaints,

kindly contact Karvy Computershare Private Limited, contact details of which are provided

elsewhere in the Report.

25

For the convenience of the investors, transfers and complaints from the investors are accepted

at the Registered Office between 9:30 a.m. to 5:30 p.m. from Monday to Friday except on bank

holidays.

Corporate ResponsibilityCommunity investment and development

Kotak Mahindra views Corporate Social Responsibility as an investment in society and in its own

future. Kotak uses the power of its human and financial capital to help in transforming

communities into vibrant, desirable places for people to live. The group leverages its core

competencies in three areas:

SustainabilityAn integral part of all Kotak Mahindra Group activities is to be consistently responsible

to shareholders, clients, employees, society and the environment.

Economic DevelopmentBy helping people achieve their financial goals, Kotak strengthens the fabric of

communities and helps them overcome unemployment and poverty to help them shape

their future.

Doing My BitA growing number of employees are committed to civic leadership and responsibility

with the support and encouragement of the Kotak Group. A number of employees have

been involved in strengthening communities through voluntary work, payroll giving and

management inputs.

For any CSR related queries, please contact:

Group CSR

Kotak Mahindra Bank Ltd

26

Tel. Board +91 22 6720 6720

Email: [email protected]

Senior ManagementMr. Uday S. Kotak

Executive Vice Chairman and Managing Director

Mr. Uday Kotak, is the Executive Vice-Chairman and Managing Director of the Bank, and its

principal founder and promoter. Mr. Kotak is an alumnus of Jamnalal Bajaj Institute of

Management Studies.

In 1985, when he was still in his early twenties, Mr Kotak thought of setting up a bank when

private Indian banks were not even seen in the game. First Kotak Capital Management Finance

Ltd (which later became Kotak Mahindra Finance Ltd), and then with Kotak Mahindra Finance

Ltd, Kotak became the first non-banking finance company in India's corporate history to be

converted into a bank. Over the years, Kotak Mahindra Group grew into several areas like stock

broking and investment banking to car finance, life insurance and mutual funds.

Among the many awards to Mr Kotak's credit are the CNBC TV18 Innovator of the Year Award

in 2006 and the Ernst & Young Entrepreneur of the Year Award in 2003.

He was featured as one of the Global Leaders for Tomorrow at the World Economic Forum's

annual meet at Davos in 1996. He was also featured among the Top Financial Leaders for the

21st Century by Euromoney magazine. He was named as CNBC TV18 India Business Leader of

the Year 2008 and as the most valued CEO by businessworld in 2010.

Mr. C Jayaram

Joint Managing Director

Mr. C. Jayaram, is a Joint Managing Director of the Bank and is currently in charge of the Wealth

Management Business of the Kotak Group. An alumnus of IIM Kolkata, he has been with the

Kotak Group since 1990 and member of the Kotak board in October 1999. He also oversees the

international subsidiaries and the alternate asset management business of the group. He is the

Director of the Financial Planning Standards Board, India. He has varied experience of over 25

27

years in many areas of finance and business, has built numerous businesses for the Group and

was CEO of Kotak Securities Ltd. An avid player and follower of tennis, he also has a keen

interest in psephology.

Mr. Dipak Gupta

Joint Managing Director

An electronics engineer and an alumnus of IIM Ahmedabad, Mr. Gupta has been with the Kotak

Group since 1992 and joined the board in October 1999.

He heads commercial banking, retail asset businesses and looks after group HR function. Early

on, he headed the finance function and was instrumental in the joint venture between Kotak

Mahindra and Ford Credit International.

He was the first CEO of the resulting entity, Kotak Mahindra Primus Ltd.

Sr.No Name & Address of Stock Exchange Market Scrip Code

1

The Bombay Stock Exchange Limited

Phiroze Jeejeebhoy Towers

Dalal Street, Fort,

Mumbai 400 023

500247

2

National Stock Exchange of India Limited

Exchange Plaza, 5th Floor,

Bandra-Kurla Complex,

Bandra, Mumbai 400 051

KOTAKBANK

3 Luxembourg Stock Exchange BP 165, L-2011 Luxembourg

28

REVIEW OF LITERATURE

WORKING CAPITAL MANAGEMENTManagement of working capital plays a very important role in the financial management of a

company because maintaining a balance of income to debt can be difficult and owners must be

diligent to assure that it is kept. Sometimes it takes a little assistance to maintain levels of

fluidity or make major purchases.

If working capital dips too low, a business risks running out of cash. Even very profitable

businesses can run into trouble if they lose the ability to meet their short-term obligations.

Working capital financing can be used as a fast cash option to cushion the periods when the

flow is not ideal or readily available. Even when owners are meticulous in managing working

capital, finding the right levels to remain comfortable and competitive can be difficult.

The Importance of Good Working Capital Management

Working capital constitutes part of the Company’s investment in a department. Associated with

this is an opportunity cost to the company. (Money invested in one area may "cost"

opportunities for investment in other areas.) If a department is operating with more working

capital than is necessary, this over-investment represents an unnecessary cost to the Company

From a department's point of view, excess working capital means operating inefficiencies. In

addition, unnecessary working capital increases the amount of the capital charge which

departments are required to meet

OBJECTIVES OF MANAGING WORKING CAPITAL

Describe the risk-return trade-off involved in managing a firm's working capital.

Explain the determinants of net working capital.

Calculate the effective cost of short-term credit.

29

List and describe the basic sources of short-term credit.

Describe the special problems encountered by multinational firms in managing working

capital.

Working capital management takes place on two levels:

Ratio analysis can be used to monitor overall trends in working capital and to identify

areas requiring closer management

The individual components of working capital can be effectively managed by using

various techniques and strategies

When considering these techniques and strategies, departments need to recognize that each

department has a unique mix of working capital components. The emphasis that needs to be

placed on each component varies according to department.

Furthermore, working capital management is not an end in itself. It is an integral part of the

department's overall management. The needs of efficient working capital management must be

considered in relation to other aspects of the department's financial and non-financial

performance.

Working Capital Ratio=Current Assets /Current Liabilities:

The working capital ratio (or current ratio) attempts to measure the level of liquidity, that is, the

level of safety provided by the excess of current assets over current liabilities.

The "quick ratio" a derivative, excludes inventories from the current assets, considering only

those assets most swiftly realizable. There are also other possible refinements.

There is no particular benchmark value or range that can be recommended as suitable for all

government departments. However, if a department tracks its own working capital ratio over a

period of time, the trends-the way in which the liquidity is changing-will become apparent.

Current assets:

The term current assets refer to those assets which in the ordinary course of business can be,

or will be, converted into cash within one year without under going any diminution in the value

and without disrupting the operations of the firm. The major current assets are cash, cash

30

equivalent, marketable securities, accounts receivable, inventory, prepaid expenses and other

short term investments.

Debtors

Debtors are people or other firms who owe money to the firm. This will usually happen where

the firm has sold goods with a period of credit. The firm sells the good or service but allows the

purchaser a period of credit to pay - usually a month. During this month the purchaser owes the

firm the money and is therefore a debtor.

If the firm has debts these are considered an asset, because when the debtors pay the firm will

have converted the debt into cash in the bank. Because most debts are relatively short-term

they are considered current assets the amount of debtors a firm has depends on the line of

business they are in.

CASH

In a business the term cash may have a broader meaning. Cash is an asset to the business and is

usually considered to be one of the current assets. Under the heading cash on the balance

sheet may be included a number of items of varying liquidity. A small amount may actually be

cash (or readies) held in tills or as petty cash, but the majority is likely to be held in various bank

accounts. However, since money in current accounts rarely earns interest, if a business has a

surplus of cash it may invest it in various ways. Some will have to be in very liquid accounts so

that if necessary they can get at it very quickly, but some may be tied up for longer periods of

time.

Inventory

Inventory is also a current asset which can be either raw materials, finished items available for

sale, or goods in the process of being manufactured. Inventory is recorded as an asset on a

company's balance sheet.

31

Raw material

An item used to produce something else is called a "raw material." Some raw materials are easy

to spot, but many require detective work.

Raw material of a company may be imported or indigenous. Raw material should be managed

in such a way that flow of production is not interrupted. Reordering quantity and time should

be estimated in a proper manner.

Work in process

An operation is composed of processes designed to add value by transforming inputs into useful

outputs. Inputs may be materials, labor, energy, and capital equipment. Outputs may be a

physical product (possibly used as an input to another process) or a service. Processes can have

a significant impact on the performance of a business, and process improvement can improve a

firm's competitiveness.

Finished Goods

Definition: Commodities that will not undergo further processing and are ready for sale to the

final demand user, either an individual consumer or business firm. This includes unprocessed

foods such as eggs and fresh vegetables, as well as processed foods such as bakery products

and meats.

This also includes durable goods such as automobiles, household furniture and appliances, and

Nondurable goods such as apparel and home heating oil.

Prepaid Expenses

In the course of every day operations, businesses will have to pay for goods or services before

they actually receive the product sometimes companies decide to prepay taxes, salaries, utility

bills, rent, or the interest on their debt. These would all be pooled together and put on the

balance sheet under the heading prepaid expenses. By their very nature, Prepaid Expenses are

a small part of the balance sheet.

32

Current liabilities

The term current liabilities are those liabilities which are intended at the time of their inception,

to be paid in the ordinary course of business, within a year, out of the current assets or

earnings of the concern. The basic current liabilities are accounts payable, bills payable, bank

overdraft and outstanding expenses and other short term debts.

Creditors

Creditors (Accounts Payable) are suppliers whose invoices for goods or services have been

processed but who have not yet been paid.

In other words, creditors are people to whom the company owes the money.

The term creditor is frequently used in the financial world, especially in reference to short term

loans, long term bonds, and mortgages.

The term creditor derives from the notion of credit. In modern America, credit refers to a rating

which indicates the ability of a borrower and likelihood to pay back his or her loan. In earlier

times, credit also referred to reputation or trustworthiness.

Classification of Current Assets and Current Liabilities

The current classification applies to those assets that will be realized in cash, sold, or consumed

within one year (or operating cycle, if longer), and those liabilities that will be discharged by use

of current assets or the creation of additional current liabilities within one year (or operating

cycle, if longer). The current liability section of a balance sheet is also intended to include

obligations that are due on demand or will be due on demand within one year from the balance

sheet date, even though liquidation may not be expected within that period. Short-term

obligations shall be excluded from current liabilities only if the enterprise intends to refinance

33

the obligation on a long-term basis and has the demonstrated ability to consummate the

financing.

The ordinary operations of a business involve a circulation of capital within the current asset

group. Cash is expended for materials, labor, operating expenses, and other services, and such

cash expenditures are included in the inventory value. Upon sale of the products or

performance of services, the accumulated expenditures are converted into receivables and

ultimately into cash again. The average period of time intervening between the cash-to-cash

conversion is the operating cycle of the business. When the business has no clear operating

cycle, or when the operating cycle is shorter than 12 months, a 12-month period should be

used to segregate current assets.

This concept of the nature of current assets would exclude from that classification such

resources as 1) cash and claims to cash that are restricted as to withdrawal or other use for

current operations; 2) investments in securities (whether marketable or not) or advances that

have been made for the purpose of control, affiliation, or other business advantage; 3) cash

surrender value of life insurance; 4) depreciable assets; 5) long-term receivables; and 6) land.

For analytical purposes, specific recommendations of the FFSC are:

1. Principal debt due within 12 months, even on notes with monthly payments, should be

included as a current liability.

2. Capital leases should be accounted for on the balance sheet, with the current portion of

the principal due and the accrued interest shown as a current liability.

3. Cash value of life insurance should be a non-current asset.

4. Loans to family members should be treated based on the characteristics of the notes.

(The amount of these loans should be separately disclosed, if material.)

5. PIK certificates should be treated as current assets.

6. Retirement accounts should be shown as non-current assets.

The current portion of both deferred tax assets and deferred tax liabilities are to be recorded as

current assets or current liabilities.

34

CASH MANAGEMENT

Good cash management can have a major impact on overall working capital management.

The key elements of cash management are:

Cash forecasting;

Balance management;

Administration;

Internal control.

Cash Forecasting:

Good cash management requires regular forecasts. In order for these to be materially accurate,

they must be based on information provided by those managers responsible for the amounts

and timing of expenditure. Capital expenditure and operating expenditure must be taken into

account. It is also necessary to collect information about impending cash transactions from

other financial systems, such as creditors and payroll.

Balance Management: Those responsible for balance management must make decisions

about how much cash should at any time be on call in the Departmental Bank Account and how

much should be on term deposit at the various terms available.

There are various types of mathematical model that can be used. One type is analogous to the

ERQ inventory model. Linear programming models have been developed for cash management,

subject to certain constraints. There are also more sophisticated techniques.

Administration: Cash receipts should be processed and banked as quickly as possible

because:

35

They cannot earn interest or reduce overdraft until they are banked;

Information about the existence and amounts of cash receipts is usually not available

until they are processed.

Where possible, cash floats (mainly petty cash and advances) should be avoided. If, on review,

the only reason that can be put forward for their existence is that "we've always had them",

they should be discontinued. There may be situations where they are useful, however. For

example, it may be desirable for peripheral parts of departments to meet urgent local needs

from cash floats rather than local bank accounts.

Internal Control:

Cash and cash management is part of a department's overall internal control system. The main

internal cash control is invariably the bank reconciliation. This provides assurance that the cash

balances recorded in the accounting systems are consistent with the actual bank balances. It

requires regular clearing of reconciling items.

The key to successful cash management is milestones:

o Capital is provided to execute a business plan

o Cash use must track growth in enterprise value

o Enterprise value is measured by milestones, not the fiscal calendar

Cash management is not cost control

o Cost control is a reactive measure using crude tools e.g. % cuts

o Cost control often depletes value (e.g. by using people as accounting chips)

CREDITORS MANAGEMENT:

Creditors are the businesses or people who provide goods and services in credit terms. That is,

they allow us time to pay rather than paying in cash.

There are good reasons why we allow people to pay on credit even though literally it doesn't

make sense! If we allow people time to pay their bills, they are more likely to buy from your

business than from another business that doesn't give credit. The length of credit period

36

allowed is also a factor that can help a potential customer deciding whether to buy from a

company or not: the longer the better.

Creditors will need to optimize their credit control policies in exactly the same way as the

debtors' turnover ratio.

CREDITORS TURNOVER RATIO:

As with the stock turnover ratio, creditor values relate to the costs of raw materials, goods and

services.

DEBTORS MANAGEMENT

The objective of debtor management is to minimize the time-lapse between completion of

sales and receipt of payment. The costs of having debtors are:

Opportunity costs (cash is not available for other purposes);

Bad debts.

Debtor management includes both pre-sale and debt collection strategies.

Pre-sale strategies include:

Offering cash discounts for early payment and/or imposing penalties for late payment;

Agreeing payment terms in advance;

Requiring cash before delivery;

Setting credit limits;

Setting criteria for obtaining credit;

Billing as early as possible;

Requiring deposits and/or progress payments.

Post-sale strategies include:

37

Creditors' Turnover = Average Creditors

(Cost of Sales/365)

Placing the responsibility for collecting the debt upon the center that made the sale;

Identifying long overdue balances and doubtful debts by regular analytical reviews;

Having an established procedure for late collections, such as

- a reminder;

- a letter;

- cancellation of further credit;

- telephone calls;

- use of a collection agency;

- legal action.

Objectives of Receivables management:

To maintain an optimum level of investment in receivables.

To maintain optimum volume of sales.

To control the cost of credit allowed & to keep it at the minimum possible level.

To keep down the average collection period.

To obtain benefit from the investment in debtors at optimum level.

Debt Control and Debt Collection Period

Debt control is an important part of business activity because although a debt is an asset, it is

not as liquid an asset as cash in the bank. Firms have to ensure they collect their debts as

efficiently as possible within the terms they have set for the debt.

The only way we can consider how efficient the firm's debt control has been is to use a ratio.

This ratio is known as the debt collection period.

DEBT COLLECTION PERIOD (in days)

365_____________

debt turnover ratio

The figure measures (in number of days) how long on average it has taken the firm to collect its

debts. The higher the figure the longer it has taken. However, the normal period for collecting

debts will differ between industries. For example, a figure of 10 days may sound very

impressive, but if this was the figure for a chain of supermarkets it would be high. Therefore no

38

debt is incurred and retail firms will tend to have very few debtors and a low debt collection

period. Firms who do a lot of business on credit though will have much higher debt collection

periods.

Debtors' Turnover:

Debtors control is a vital aspect of working capital management. Many businesses need to sell

their goods on credit, otherwise they might find it difficult to survive if their competitors

provide such credit facilities; this could mean losing customers to the opposition.

The formula for debtors' turnover is:

Working Capital Cycle:

The way working capital moves around the business is modeled by the working capital cycle.

This shows the cash coming into the business, what happens to it while the business has it and

then where it goes.

The working capital cycle shows the movement of cash into and out of the business. The

components of working capital cycle are the debtors, creditors, raw materials and cash.

The cycle starts with buying of raw materials on credit from the suppliers. These suppliers

become the creditors of the company. The raw materials undergo through different value

addition stages and are converted into finished goods. The finished goods are sold to the

customers on credit who become the debtors of the company. At the end of the credit period

the company gets the cash from the debtors whom they pay to the creditors and the cycle goes

on.

It is must for any company to have an ideal working capital cycle. It should neither be too long

nor too short. If the cycle is too long the funds get stuck up with the debtors and prompt

payment to the creditors cannot be made.

A simple working capital cycle may look something like:

39

Debtors' Turnover =Net credit sales

Average debtors

CASH CREDITORS

RAW MATERIALS

W.I.PFINISHED GOODS

DEBTORS

Supply

Production

Value added conversion

Sales

Collection

40

Payment

WORKING CAPITAL FINANCING:

Banks are the main institutional sources of working capital finance in India. After trade credit

bank credit is the most important source of working capital requirement of firms in India. A

bank considers a firm’s sales and production plans and the desirable levels of current assets in

determining its working capital requirements. The amount approved by the bank for the firm’s

working capital is called credit limit.

FORMS OF BANK FINANCE:

A firm can draw funds from its banks within the maximum credit limit sanctioned. It can draw

funds in the following forms.

→ Overdrafts

→ Cash credit

→ Bills purchasing or discounting

→ Working capital loan

→ Letter of credit

TANDON COMMITTEE:

Like many other activities of the banks, method and quantum of short-term

finance that can be granted to a corporate was mandated by the Reserve Bank of

India till 1994. This control was exercised on the lines suggested by the

recommendations of a study group headed by Shri Prakash Tandon.

The study group headed by Shri Prakash Tandon, the then Chairman of Punjab

National Bank, was constituted by the RBI in July 1974 with eminent personalities

drawn from leading banks, financial institutions and a wide cross-section of the

Industry with a view to study the entire gamut of Bank's finance for working

capital and suggest ways for optimum utilization of Bank credit. This was the first

elaborate attempt by the central bank to organize the Bank credit. The report of

this group is widely known as Tandon Committee report.

41

Most banks in India even today continue to look at the needs of the corporate in

the light of methodology recommended by the Group.

As per the recommendations of Tandon Committee, the corporate should be

discouraged from accumulating too much of stocks of current assets and should

move towards very lean inventories and receivable levels.

First Method of Lending:

Banks can work out the working capital gap, i.e. total current assets less current liabilities

other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and

finance a maximum of 75 per cent of the gap; the balance to come out of long-term

funds, i.e., owned funds and term borrowings. This approach was considered suitable

only for very small borrowers i.e. where the requirements of credit were less than Rs.10

lacs. This method will give a minimum current ratio of 1:1

Second Method of Lending: Under this method, it was thought that the borrower should provide for a

minimum of 25% of total current assets out of long-term funds i.e., owned funds plus

term borrowings. A certain level of credit for purchases and other current liabilities will

be available to fund the buildup of current assets and the bank will provide the balance

(MPBF). Consequently, total current liabilities inclusive of bank borrowings could not

exceed 75% of current assets. RBI stipulated that the working capital needs of all

borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be

appraised (calculated) under this method this method will give a current ratio of 1.3:1.

42

Working Capital assessment on the formula prescribed by the Tandon

Committee. Working Capital Requirement (WCR) = [Current assets i.e. CA (as per industry norms) – Current

Liabilities i.e. CL]

Permissible Bank Financing [PBF} = WCR – Promoter’s Margin Money i.e. PMM (to be brought in

by the promoter)

As per Formula 1: PMM = 25% of [CA – CL] and thereby PBF = 75% of [CA – CL]

As per Formula 2: PMM = 25% of CA and thereby PBF = 75%[CA] – CL

As is apparent Formula 2 requires a higher level of PMM as compared to Formula 1. Formula 2

is generally adopted in case of bank financing. In cases of sick units where the promoter is

unable to bring in PMM to the extent required under Formula 2, the difference in PMM

between Formulae 1 and 2 may be provided as a Working Capital Term Loan repayable in

installments over a period of time.

METHODS FOR DETERMINING PERMISSIBLE BANK BORROWINGS

1st method 2nd method

(a) Current

assets(CA)

100 100

(b) Current

liabilities(CL)

20 20

(c) Working capital

gap (CA-CL)(a-b)

80 80

(d) Borrower’s

contribution

20(25% of c) 25(25% 0f a)

(e) Permissible bank

finance,(c-d)

60 55

43

The main factors used in the estimation of working capital requirement:

The nature of business and sector-wise norms

Factors such as seasonality of raw materials or of demand may require a high level of

inventory being maintained by the company. Similarly, industry norms of credit allowed

to buyers determine the level of debtors of the company in the normal course of

business.

The level of activity of the business Inventories and receivables are normally expressed

as a multiple of a day’s production or sale. Hence, higher the level of activity, higher the

quantum of inventory, receivables and thereby working capital requirement of the

business. So in order to arrive at the working capital requirement of the business for the

year, it is essential to determine the level of production that the business would

achieve. In case of well-established businesses, the previous year’s actual and the

management projections for the year provide good indicators. The problems arise

mainly in the case of determining the limit for the first time or in the initial few years of

the business. Banks often adopt industry standard norms for capacity utilization in the

initial years.

Steps involved in arriving at the level of working capital requirement:

Based on the level of activity decided and the unit cost and sales price projections, the

banks calculate at the annual sales and cost of production.

The quantum of current assets (CA) in the form of Raw Materials, Work-in-progress,

Finished goods and Receivables is estimated as a multiple of the average daily turnover.

The multiple for each of the current assets is determined generally based on the

industry norms.

The current liabilities (CL) in the form of credit availed by the business from its creditors

or on its manufacturing expenses are deducted from the current assets (CA) to arrive at

the Working Capital Requirement (WCR).

The issue of computation of working capital requirement has aroused considerable

debate and attention in this country over the past few decades. A directed credit

44

approach was adopted by the Reserve Bank of ensuring the flow of credit to the priority

sectors for fulfillment of the growth objectives laid down by the planners. Consequently,

the quantum of bank credit required for achieving the requisite growth in Industry was

to be assessed. Various committees such as the Tandon Committee and the Chore

Committee were constituted and studied the problem at length.

Norms were fixed regarding the quantum of various current assets for different

industries (as multiples of the average daily output) and the Maximum Permissible Bank

Financing (MPBF) was capped at a certain percentage of the working capital

requirement thus arrived at.

Negative Working Capital:

Some companies can generate cash so quickly they actually have a negative working capital.

This is generally true of companies in the restaurant business (McDonalds had a negative

working capital of $698.5 million between 1999 and 2000). Amazon.com is another example.

This happens because customers pay upfront and so rapidly, the business has no problems

raising cash. In these companies, products are delivered and sold to the customer before the

company ever pays for them.

A negative working capital is a sign of managerial efficiency in a business with low inventory and

accounts receivable (which means they operate on an almost strictly cash basis). In any other

situation, it is a sign a company may be facing bankruptcy or serious financial trouble

Ratio Analysis:

The ratio analysis is one of the most powerful tools of financial analysis. it is the process of

establishing and interpreting various ratios (Quantities relationship between figures and groups

of figures).it is with the help of ratios that the financial statements can be analysis more clearly

and decision are made from such analyses.

A ratio is simple arithmetic expression of the relationship of one to another. According to

accountants Handbooks by Ixen and Bedford a ratio is an expression of the quantities

relationship between two numbers.

45

Types of Ratios:

i. Liquidity Ratios

ii. Leverage Ratios

iii. Profitability Ratios

iv. Activity Ratios

i. Liquidity Ratio

Current ratio= current assets/current liabilities

Quick ratio= quick assets/current liabilities

Measures firms ability to meet its obligation; leverage ratios show the proportions of

the debt equity in financing the firm’s assets; activity ratios reflect the firm efficiency in

utilizing its assets, and profitability ratios measure overall performance and

effectiveness of the firm.

ii. Leverage Ratio

Leverage ratio= debt/equity ratio

The short-term creditors, like bankers and suppliers of raw materials, are more

concerned with the forms current debt paying ability. On the other hand, long term

creditors like debenture holder’s financial institution etc. are more concerned with the

firm’s long term financial strength. A firm should have strong short as well as long-term

financial position.

iii. Profitability Ratio

46

Profitability refers to net result of business operation two types of ratios are used to

measure profitability. These are profit margin ratios rate of return ratios.While profit

margin ratios shows the relationship between profit and investment.

The important profit margin ratios are:

Gross profit Ratio= gross profit/sales*100

Operating profit ratio=operating expenses/net sales*100

Net profit Ratio=PAT/netsales*100

The important rate of return ratios are:

Return on assets Return of capital employed,

Return on shareholders’ equity,

Return on equity share capital.

iv. Activity Ratio

Fixed assets turnover ratio=net sales/fixed assets

Current assets turnover ratio= net sales/current assets

Debtors turnover ratio=net credit sales/ average debtors

These ratios are also referred to activity ratios asset management ratios. They measure

how efficiency a firm employs the assets. They are based on the relationship between

level of activity and levels of various assets. The important turnover ratios are inventory

turnover ratio, debtors’ turnover ratio, creditors’ turnover ratio, fixed turnover ratio,

total assets turnover ratio.

Comparative balance sheet:

47

The comparative balance sheet analysis is the study of the trend of the same items, group of

items and computed items in two or more balance sheets of the same enterprise on different

dates. The changes in periodic observed by comparison of the balance sheet at the end of a

period and these changes can help in informing an opinion about the progress of and

enterprise.

While interpreting comparative balance sheet the interpreter is expected to study the following

aspects;-

1. Current interpreting comparative and liquidity position

2. Long term financial position

3. Profitability of the concern

48

DATA ANALYSIS AND INTERPRETATION

Size and growth of current assets and liabilities and Net working capital of Kotak Mahindra

during the period 2010-11 to 2014-15.

CURRENT ASSETS AND LIABILITIES (All amounts are in Cr)

Year Current

Assets

Growth

Rate (%)

Current

Liabilities

Growth Rate (%) Net W.C

2010-11 17701.69 100 12844.57 100 4857.12

2011-12 17766.01 100.3634 15064.09 117.2798 2701.92

2012-13 23075.31 129.8846 24270.24 161.1132 -1194.93

2013-14 31800.29 137.8109 23803.06 98.07509 7997.23

2014-15 41713.78 131.1742 29197.75 122.6639 12516.03

CURRENT A

SSETS

GROWTH RATE

CURRENT L

IABILITRIES

GROWTH RATE

NET W.C-5000

05000

1000015000200002500030000350004000045000

2010-112011-122012-132013-142014-15

Interpretation:

The Current assets and the current liabilities of Kotak Mahindra are in the increasing stage but

at the financial year 2014-2015 it is in the decreasing stage because of increasing in the current

liabilities and the growth rate is 131.17. The net working capital is also in the increasing stage.

49

WORKING CAPITAL TURNOVER RATIO:

(All amounts are in Cr)

YearSales(Income) Networking Capital Ratio

2010-11 2845.84 4857.12 0.585911

2011-12 3222.70 2701.92 1.192744

2012-13 3676.54 -1194.93 -3.07678

2013-14 4811.12 7997.23 0.601598

2014-15 7028.66 12516.03 0.561573

SALES (Income) NET W.C RATIO-2000

0

2000

4000

6000

8000

10000

12000

14000

2010-112011-122012-132013-142014-15

Interpretation:

The Net working capital of Kotak Mahindra are In the increasing stage but at the financial year

2014-2015 it is in the decreasing stage because of increasing in the sales and the growth rate is

131.17. The net working capital is also in the increasing stage.

50

TURNOVER RATIO:

Debtors Turnover Ratio expresses the relationship between debtors and sales. A high Debtors

Turnover Ratio or low Debt collection period is indicative of sound credit management policy.

Table shows Debtors Turnover Ratio of Kotak Mahindra. During 2010-11 to

2014-15.(All amounts are in Cr)

Year Net Credit Sales(Income) Avg. Debt Ratio

2010-11 2845.84 21542.90 0.132101

2011-12 3222.70 21549.00 0.149552

2012-13 3676.54 30026.98 0.122441

2013-14 4811.12 40984.92 0.117388

2014-15 7028.66 55132.04 0.127488

NET CREDIT SALE (Income) AVERAGE DEBT. RATIO0

10000

20000

30000

40000

50000

60000

2010-112011-122012-132013-142014-15

51

INERPRETATION:

From the above table, it is observed that the Kotak Mahindra debtor’s turnover ratio shows a

good sigh. The company noted a maximum ratio of 14.95 in the year 2011-12 and the maximum

ratio in the year of 2014-15 is 12.74.

If we observed the above table the ratio is increasing the year 2010--11 is 13.21 to 14.95 in the

year 2011-12 in the year but it is decreased to 12.74 in the year 2014-15. It shows a good sign

for the company.

Current Ratio:

52

It is the ratio of the current assets current liabilities this ratio is used to know the company’s

ability to meet its current obligations. The standard norm for the current ratio is 2:1

Current ratio = current Assets / Current liabilities.

Table showing current ratio of Kotak Mahindra Ltd during the period 2010-11 to 2014-15

(All amounts are in Cr)

Year Current Assets Current Liabilities Ratio

2010-11 17701.69 12844.57 1.378146

2011-12 17766.01 15064.09 1.179362

2012-13 23075.31 24270.24 0.950766

2013-14 31800.29 23803.06 1.335975

2014-15 41713.78 29197.75 1.428664

CURRENT ASSETS CURRENT LIABILITRIES RATIO0

5000

10000

15000

20000

25000

30000

35000

40000

45000

2010-112011-122012-132013-142014-15

INTERPRETATION:

53

It is observed that the Kotak Mahindra current rationing a increasing trend; the company’s

liquidity position is satisfactory. The current ratio increased slightly up to 2011-12 is 1.33. But in

2012-13 it declined because of increase in current liabilities, and then it started to decreased

further in 2012-13 as 0.95.If the company maintains to increase the ratio it can meet

obligations.

Quick Ratio:

54

Quick ratio is relation between quick assets and current liabilities. The term quick assets, which

can be converted into cash with a short notice. This category also includes cash bank balances

short – term investments and receivables.

Quick ratio = Quick Assets / current liabilities

Table showing quick ratio of Kotak Mahindra during the period 2010-11 to 2014-15.

(All amounts are in Cr)

Year Quick Assets Current Liabilities Ratio

2010-11 17701.69 12844.57 1.378146

2011-12 17766.01 15064.09 1.179362

2012-13 23075.31 24270.24 0.950766

2013-14 31800.29 23803.06 1.335975

2014-15 41713.78 29197.75 1.428664

QUICK ASSETS CURRENT LIABILITRIES RATIO0

5000

10000

15000

20000

25000

30000

35000

40000

45000

2010-112011-122012-132013-142014-15

INTERPRETATION:

55

It is observed that the Kotak Mahindra current rationing a increasing trend; the company’s

liquidity position is satisfactory.

The current ratio increased slightly up to 2011-12 is 1.33. But in 2012-13 it declined because of

increase in current liabilities, and then it started to decrease further in 2012-13 as 0.95. If the

company maintains to increase the ratio it can meet obligations.

Composition of current Assets:

56

(All the amounts are in Cr)

Particulars 2010-11 2011-12 2012-13 2013-14 2014-15 Avg.

Sundry Debtors 21542.90 21549.00 30026.98 40984.92 55132.04 338.47

Cash and Balance

with RBI

1710.29 995.35 2085.67 2107.72 2016.49 178.39

Advances 15552.22 16625.34 20775.05 29329.31 39079.23 242.72

Balance with bank 439.18 145.32 214.59 363.26 618.06 35.60

Total 39244.6 39315 53102.3 72785.2 96845.8

SUNDRY DEBTORS CASH AND BALANCE WITH

RBI

ADVANCES BALANCE WITH BANK

0

10000

20000

30000

40000

50000

60000

2010-112011-122012-132013-142014-15

INTERPRETATION:

57

The income statement is also called as income statement, it is considered to be the most useful

of all financial statements. It prepared by a business concern in order to know the profit earned

and loss sustained during a specified period. It explains what has happened to a business as a

result of operations between two balance sheet dates. For this purpose it matches the

revenues and cost incurred in the process of earning revenues and shows the net profit earned

or loss suffered during a particular period.

The nature of Income which is a focus of the income statement can be well understood if

business is taken as an organization that uses “Input” to produce “Output”. The output of the

goods and services that the business provides to its customers. The values of these outputs are

the goods and services that the business provides to its customers. The values of these outputs

art the amounts paid by the customers for them. These amounts are called “revenues” in the

accounting. The inputs are the economic resources used by the business in providing these

goods and services. These are termed “expenses” in accounting.

The comparative balance sheet analysis is the study of the same items, group of items and

computed items in two or more balance sheets of the same enterprise on different dates. The

changes in periodic balance sheet items reflect the conduct of a business. The changes can be

observed by comparison of the balance sheet at the beginning and at the end of a period and

these changes can help in informing an opinion about the progress of and enterprise.

.

Working capital turnover ratio Of Kotak Mahindra limited:

58

Implementing an effective working capital management system is an excellent way for many

companies to improve their earnings. The two main aspects of working capital management are

ratio analysis and management of individual components of working capital.

Working capital turnover ratio 2015

Working capital turnover ratio 2014 2015

Total current Assets

Sundry Debtors 40984.92 55132.04

Cash and Balances with RBI 2107.72 2016.49

Balance with Bank 363.26 618.06

Advances 29329.31 39079.23

Total 72785.21 96845.82

Total Current Liabilities

Borrowings 11723.95 16595.52

Other Liabilities 3032.36 2553.67

Contingent Liabilities 12291.30 17319.52

Total 27047.61 36468.71

Net working capital 45737.6 60377.11

Increase\decrease in net working capital 14639.51

59

Working c

apita

l turnove

r rati

o 2012

Working c

apita

l turnove

r rati

o

Total

curre

nt Asse

ts

Sundry

Debtors

Cash an

d Balances

with

RBI

Balance

with Ban

k

Advances To

tal

Total

Current L

iabiliti

es

Borrowings

Other Lia

bilities

Contingent Li

abiliti

esTo

tal

Net worki

ng cap

ital

Increase

\decreas

e in net

working c

apita

l0

20000

40000

60000

80000

100000

120000

Interpretation:

The networking capital of Kotak Mahindra has been increased to 60377.11 Cr the financial

position i.e. the performance of Kotak Mahindra has increased and the current assets defects

its current liability.

60

Working capital turnover ratio 2014

Working capital turnover ratio 2014

Working capital turnover ratio 2013 2014

Total current Assets

Sundry Debtors 30026.98 40984.92

Cash and Balances with RBI 2085.67 2107.72

Balance with Bank 214.59 363.26

Advances 20775.05 29329.31

Total 53102.29 72785.21

Total Current Liabilities

Borrowings 6140.51 11723.95

Other Liabilities 2869.42 3032.36

Contingent Liabilities 4156.15 12291.30

Total 13166.08 27047.61

Net working capital 39936.21 45737.6

Increase\decrease in net working capital 5801.39

61

Working c

apita

l turnove

r rati

o 2011

Working c

apita

l turnove

r rati

o

Total

curre

nt Asse

ts

Sundry

Debtors

Cash an

d Balances

with

RBI

Balance

with Ban

k

Advances To

tal

Total

Current L

iabiliti

es

Borrowings

Other Lia

bilities

Contingent Li

abiliti

esTo

tal

Net worki

ng cap

ital

Increase

\decrea

se in net

working c

apita

l0

10000

20000

30000

40000

50000

60000

70000

80000

INTERPRETATION:

The networking capital of Kotak Mahindra has been increased to 45737.60 Cr the financial

position i.e. the performance of Kotak Mahindra has increased and the current assets defects

its current liability.

62

Working capital turnover ratio 2013

Working capital turnover ratio 2013

Working capital turnover ratio 2012 2013

Total current Assets

Sundry Debtors 21549.00 30026.98

Cash and Balances with RBI 995.35 2085.67

Balance with Bank 145.32 214.59

Advances 16625.34 20775.05

Total 39315.01 53102.29

Total Current Liabilities

Borrowings 5904.07 6140.51

Other Liabilities 3257.34 2869.42

Contingent Liabilities 4486.28 4156.15

Total 13647.69 13166.08

Net working capital 25667.32 39936.21

Increase\decrease in net working capital 14268.89

63

Working c

apita

l turnove

r rati

o 2010

Working c

apita

l turnove

r rati

o

Total

curre

nt Asse

ts

Sundry

Debtors

Cash an

d Balances

with

RBI

Balance

with Ban

k

Advances To

tal

Total

Current L

iabiliti

es

Borrowings

Other Lia

bilities

Contingent Li

abiliti

esTo

tal

Net worki

ng cap

ital

Increase

\decrea

se in net

working c

apita

l0

10000

20000

30000

40000

50000

60000

INTERPRETATION:

The networking capital of Kotak Mahindra has been increased to 39936.21Cr the financial

position i.e. the performance of Kotak Mahindra has increased and the current assets defects

its current liability.

64

Working capital turnover ratio 2012

Working capital turnover ratio 2012

Working capital turnover ratio 2011 2012

Total current Assets

Sundry Debtors 21542.90 21549.00

Cash and Balances with RBI 1710.29 995.35

Balance with Bank 439.18 145.32

Advances 15552.22 16625.34

Total 39244.59 39315.01

Total Current Liabilities

Borrowings 5119.25 5904.07

Other Liabilities 3175.75 3257.34

Contingent Liabilities 7172.79 4486.28

Total 15467.79 13647.69

Net working capital 23776.80 25667.32

Increase\decrease in net working capital 1890.52

65

Working c

apita

l turnove

r rati

o 2009

Working c

apita

l turnove

r rati

o

Total

curre

nt Asse

ts

Sundry

Debtors

Cash an

d Balances

with

RBI

Balance

with Ban

k

Advances To

tal

Total

Current L

iabiliti

es

Borrowings

Other Lia

bilities

Contingent Li

abiliti

esTo

tal

Net worki

ng cap

ital

Increase

\decreas

e in net

working c

apita

l0

5000

10000

15000

20000

25000

30000

35000

40000

45000

INTERPRETATION:

The networking capital of Kotak Mahindra has been increased to 25667.32 Cr the financial

position i.e. the performance of Kotak Mahindra has increased and the current assets defects

its current liability.

66

FINDINGS

1. The Kotak Mahindra net working capital is satisfactory between the years 2012-13, since

it shows decreasing trend but after that it is in declining position.

2. The current ratio of Kotak Mahindra is satisfactory during the period of study 2010-11 to

2014-15. It is increased but after that it is declining.

3. The average quick ratio of Kotak Mahindra is not good though the quick ratio is showing

maximum value of 1.24 in the year 2010-11 and then it is declining.

4. Fixed assets turnover ratio of Kotak Mahindra has been increased. And the company has

to maintain this.

5. Inventory turnover ratio of Kotak Mahindra is also increased gradually, without any fit

falls up to 2010-11. In the year 2010-11 it is inclined, and again it has increased in the

year 2014-15. Good inventory management is good sign for efficient management.

6. Total Assets turnover ratio of Kotak Mahindra is not satisfactory because it is always

below one, except in the year 2014-15 having a value of 2.14.

7. Return on investment is not satisfactory. This indicates that the company’s funds are not

being utilized in a better way.

67

SUGGESTIONS

1. position of funds should be utilized properly.

2. Better Awareness to increase the sales is suggested.

3. Cost cut down mechanics can be employed.

4. Better production technique can be employed.

5. The investment on raw material should be made as per the requirement. Unnecessary

investment may block up the funds.

6. Neither too high nor too low inventory turnover ratios may reduce profit and liquidity

position of the industry. So, proper balance should be made to increase profits and to

ensure liquidity.

7. The raw material should be acquired from the right source at right quality and at right

cost.

8. The process that was being used by Kotak Mahindra Group with the purchasing

department should undergo changes; so that, it enhances the delivery of a product

without compromising its quality by improving the utilization of materials, labor and

equipment.

68

CONCLUSIONS

1. The Kotak Mahindra Net Profit Ratio is showing negative profit in the year 2010--11.

These event is an expected one because since from the previous two years it is showing

the decline stage in Net Profit Ratio.

2. Profit Margin of Kotak Mahindra is decreasing and showing negative profit because

there is increase in the price of copper.

3. The Kotak Mahindra Net Working Capital Ratio is satisfactory.

4. The Kotak Mahindra return on Total Assets ratio shows a negative sign in the year 2010-

11.

5. The Operating Ratio of Kotak Mahindra increased in the year 2010-11.

6. The Operating Ratio of Kotak Mahindra satisfactory. Due to increase in cost of

production, this ratio is decreasing. So the has to reduce its office administration

expenses.

69

BIBLIOGRAPHY

BOOKS REFFERED:

Financial Management Written By M.Y. Khan & P.K. Jain

Financial Management Written By Prasanna Chandra

Financial Management Written By I. M. Pandey

Financial Management Written By S. N. Maheswari

Websites:

www.kotak.com

www.bankingindia.com

www.evanimics.com

www.damodaram.com

www.investopedia.com

www.valuebasedmanagement.net

70