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ASUMMER TRAINING REPORTON

WORKING CAPITAL MANAGEMENTIN ICICI

SUBMITTED TO:

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR

THE AWARD THE DEGREE OF MASTER OF BUSINESS

ADMINISTRATION

(UTTRAKHAND TECHNICAL UNIVERSITY)

SUBMITTED TO : SUBMITTED BY

DR. VIVEKANAND SINGH MD. AMIR ALI(HOD-MBA -FINANCE) MBA ± III SEM.

(Batch 2009-2011)

NIMBUS ACADEMY OF MANAAGEMENT

DEHRADUN



ACKNOWLEDGEMENT

Preparing a project of this nature is an arduous task and I wasfortunate enough to get support from a large number of persons to

whom I shall always remain grateful.

I take this opportunity to thank all the respondents for giving their precious time and relevant information and experience, I requirewithout which this project would have been a different story.

In addition, I am thankful to DR. VIVEKANAND SINGH (Faculty ±

Finance) MBA Deptt. & all the faculty of the institute for their full-

hearted co-operation & guidance. This project study is the result of their right direction, motivation and support.

I would like to express my special gratitude to my Parents and myfriends, who are always a source of inspiration for me.

MD. AMIR ALIMBA ± III SEMNAM, DEHRADUN



DECLARATION

I HEREBY DECLARE THAT THIS PROJECT WORK ENTITLED

³WORKING CAPITAL MANAGEMENT IN ICICI´ IS MY WORK ,

CARRIED OUT UNDER THE GUIDANCE OF MY FACULTY GUIDE DR.

VIVEKANAND SINGH. THIS REPORT NEITHER FULL NOR IN PART HAS

EVER BEEN SUBMITTED FOR AWARD OF ANY OTHER DEGREE OF

EITHER THIS UNIVERSITY OR ANY OTHER UNIVERSITY.

MD. AMIR ALI

MBA ± III - SEM.



CERTIFICATE

I have the pleasure in certifying that Mr. MD. AMIR ALI is a bonafide student of

Master of Business Administration, IIIrd Sem. of Nimbus Academy of

Management , Dehradun.

He has completed his project entitled ³WORKING CAPITAL

MANAGEMENT IN ICICI´ under my guidance.

I certify that this is his original effort is has not been copied from any other source.

This project has also not been submitted in any university for the purpose of award

of any degree.

This project fulfills the requirement of the curriculum prescribed by Uttrakhand

Technical University, Dehradun, for the said course. I recommend this project

work for evaluation and consideration for the award of degree to the student.

Signature «««««««.. Name of Guide : Mr. Vivekanand Singh (Finance) Management Deptt.Date :««««««««..



PREFACE

As an integral part of the curriculum I, student of MBA , need to get exposed to

the Working Capital of Management to get a better understanding of Finance by way of undergoing practical training.

I consider myself fortunate enough that I had an opportunity to join ICICI Group,

Dehradun and undergo training at the same, for gaining substantial knowledge of

³Working Capital Management."

A progressive and forward-looking organization strives for the improvement of the

system and procedure so as to improve the organizational effectiveness. ICICI is one of

the pioneers in the Finance Sector in India.

Finance is the major asset of any organization. ICICI has large number of Finance

Sector and the management of such a vast number requires a proper mix of conceptual

skills to be effective and meet the organizational goal.

In the present report, an attempt has been made to study the ³WORKING

CAPITAL MANAGEMENT in ICICI."



CONTENTS

CHAPTER 1. Introduction

Company profile Objective & Rationale of the study An overview of performance appraisal

CHAPTER 2.

Literature Review Research Methodology

A)Research DesignB)Research ToolsC)Collection/Compilation of data

CHAPTER 3.

Data Analysis and Interpretations

CHAPTER 4.

Conclusion Limitations of the study Questionnaire Bibliography



EXECUTIVE SUMMARY

This project of ³Efficiency of Performance Appraisal of Employees´ aims at improvingthe efficiency of the organization .Today, with business environment changing at the blink of eye organizations need to achieve efficiency and effectiveness in order to stayahead. Competition in power back ± up industry is also getting hotter with moreunorganized players coming in. So the purpose of designing of the new training system isto make employees more competitive and dynamic in this throat competitive world.

The problem of this research was to design the training programme for ICICI BANK .,as before there was no structured design to train the different employees according totheir different needs and requirement .More specially ,the objective was to design amodel through which they can easily identify, the training needs, the best suited methodof training and the evaluation of the training.

After correlating the expectation with the existing system several lapses were found inthe present system .Some of those are:

y No Training policies

y Training needs are not identified through any formal process.

y Scope of Training is only limited to service Engineers.

y No feedback ,after completion of Training

y No Training Programme for executives and managers.

Finally recommendations were provided for developing the new system and a new modelis designed .The first recommendations includes proper training need analysis along with performance feed back and counseling. Another recommendations is to perform mid year performance reviews also apart from the annual reviews to facilitate problem solving before a situation worsens.



ICICI GROUP

In 1955, The Industrial Credit and Investment Corporation of India Limited (ICICI) incorporated

at the initiative of the World Bank, the Government of India and representatives of Indian

industry, with the objective of creating a development financial institution for providing

medium-term and long-term project financing to Indian businesses. Mr.A.Ramaswami Mudaliar

elected as the first Chairman of ICICI Limited.

ICICI emerges as the major source of foreign currency loans to Indian industry. Besides funding

from the World Bank and other multi-lateral agencies, ICICI was also among the first Indian

companies to raise funds from international markets

OVERVIEW OF ICICI BANK

ICICI Bank is India's second-largest bank with total assets of Rs. 3,849.70 billion (US$ 82

billion) at September 30, 2008 and profit after tax Rs. 17.42 billion for the half year ended

September 30, 2008. The Bank has a network of about 1,400 branches and 4,530 ATMs in India

and presence in 18 countries. ICICI Bank offers a wide range of banking products and financial

services to corporate and retail customers through a variety of delivery channels and through its

specialised subsidiaries and affiliates in the areas of investment banking, life and non-life

insurance, venture capital and asset management. The Bank currently has subsidiaries in the

United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong

Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in

United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our

UK subsidiary has established branches in Belgium and Germany.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock

Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New

York Stock Exchange (NYSE).



Effect of Financial Crisis

The major financial crisis of the 21st century involves esoteric instruments, unaware regulators,

and nervous investors.

Starting in the summer of 2007, the United States experienced a startling contraction in wealth,

triggered by the sub prime crisis, thereby leading to increase in risk spreads, and decrease in

credit market functioning. During boom years, mortgage brokers enticed by the lure of big

commissions, talked buyers with poor credit into accepting housing mortgages with little or no

down payment and without credit checks. Higher default levels, particularly among less credit-

worthy borrowers, magnified the impact of the crisis on the financial sector.

The same financial crisis, which started last summer, is back with a vengeance. Paul Krugman

describes the analogy between credit ± lending between market players and the financial

markets, and motor oil to car engines. The ability to raise cash on short notice, i.e. liquidity, is an

essential lubricant for the markets and for the economy as a whole.

The drying liquidity has closed shops of a large number of credit markets. Interest rates have

been rising across the world, even rates at which banks lend to each other. The freezing up of the

financial markets will ultimately lead to a severe reduction in the rate of lending, followed by

slowed and drastically reduced business investments, leading to a recession, possibly a nasty one.

A collapse of trust between market players has decreased the willingness of lending institutions

to risk money. The major reason behind this lack of trust being the bursting of the housing bubble, which caused a lot of AAA labeled investments to turn out to be junk.

The IMF has warned the global economy of a spiraled mortgage crisis, starting in the United

States, ultimately leading to the largest financial shock since the Great Depression.

Since 1864, American Banking has been split into commercial banks and investment banks. But

now that¶s changing. Some of the biggest names on Wall Street, Bear Stearns, Lehman Brothers,

and Merrill Lynch, have disappeared into thin air overnight. Goldman Sachs and Morgan Stanley

are the only two giants left. Nervous investors have been sending markets plunging down. Even

Morgan Stanley, one of the last two big independent investment banks on Wall Street, is

struggling to survive at the exchange, though it insists that the company is still in solid shape.

Markets all over the world are confronted by all-time low figures in the past couple of years or

more, including those of Britain, Germany, and Asia.



In India, IT companies, with nearly half of their revenues coming from banking and financial

service segments, are close monitors of the financial crisis across the world. The IT giants which

had Lehman Brothers and Merrill Lynch as their clients are TCS, Wipro, Satyam, and Infosys

Technologies. HCL escaped the loss to a great extent because neither Lehman Brothers nor ML

was its client.

The government has a reason to worry because the ongoing financial crisis may have an adverse

impact on the banks. Lehman Brothers and Merrill Lynch had invested a substantial amount in

the stocks of Indian Banks, which in turn had invested the money in derivatives, leading to the

exposure of even the derivates market to these investment bankers.

The real estate sector is also affected due to the same factor. Lehman Brothers¶ real estate partner

had given Rs. 7.40 crores to Unitech Ltd., for its mixed use development project in Santa Cruz.

Lehman had also signed a MoU with Peninsula Land Ltd, an Ashok Piramal real estate company,

to fund the latter¶s project amounting to Rs. 576 crores. DLF Assets, which holds an investment

worth $200 million, is another major real estate organization whose valuations are affected by

the Lehman Brothers dissolution.

Britain has also witnessed the so called ³bursting of the Brown bubble´, in the form of the

highest personal debt per capita in the G7 combined with an unsustainable rise in housing prices.

The longest period of expansion in the 21st century, which Britain claimed to be undergoing,

eventually revealed itself of being an illusion. The illusion of rising to prosperity has been

maintained by borrowing to spend, often in the form of equity withdrawal from increasing

expensive houses. The bubble ultimately burst, exposing Britain to the most serious financial

crisis since the 1920s. This brings a lot of misery for home owners who are set to see the cost of

mortgages soar following the deepening of the banking crisis and the Libor ± the rate at which

banks lend to each other.

The impact of the crisis is more vividly observable in the emerging markets which are suffering

from one of their biggest sell-offs.

³Everyone has exposure to everything«either directly or indirectly´, JP Morgan analyst, Brian

Johnson Economies with disproportionate offshore borrowings (like that of Australia) are

adversely affected by the western financial crunch. Globalization has ensured that none of the

economies of the world stay insulated from the present financial crisis in the developed

economies.



Analysis of the impact of the crisis on India can be on the basis of the following 3 criteria:

1. Availability of global liquidity

2. Demand for India investment and cost thereof

3. Decreased consumer demand affecting Indian exports

The main source of Indian prosperity was Foreign Direct Investment (FDI). American and

European companies were bringing in truck-loads of dollars and Euros to get a piece of the pie of

Indian prosperity. Less inflow of foreign investment will result in the dilution of the element of

GDP driven growth.

Liquidity is a major driving force of the strong market performances we have seen in emerging

markets. Markets such as those of India are especially dependent on global liquidity and

international risk appetite. While interest rates in some countries are increasing, countries such as

Brazil are decreasing interest rates. In general, rising interest rates tend to have a negative impact

on global liquidity and subsequently equity prices as fund may move into bonds and other money

markets.

Indian companies which had access to foreign funds for financing their import and export will be

worst hit Foreign funds will be available at huge premiums and will be limited only to the blue-

chip companies, thus leading to:

1. Reduced capacity of expansion leading to supply ± side pressure

2. Increased interest rates to affect corporate profitability

3. Increased demand for domestic liquidity will put interest rates under pressure

Consumer demand will face a slow-down in developed economies leading to a reduced demand

for Indian goods and services, thus affecting Indian exports

1. Export oriented units will be worst hit, thus impacting employment

2. Widening of the trade gap due to reduced exports, leading to pressure on the rupee

exchange rate

Impact on Financial Markets:

1. Equity market will continue to remain in bearish mood



2. Demand for domestic liquidity will push interest rates high and as a result will lead to

rupee depreciation and depleted currency reserves

³Every happy family is alike, but every unhappy family is unhappy in their own way.´ ± Leo

Tolstoy. While each financial crisis is undoubtedly distinct, there are also striking similarities

between them in growth patterns, debt accumulation, and in current account deficits.

Impact on ICICI bank

The move by Lehman Brothers Holdings, the fourth-largest investment bank to file for

bankruptcy in the US, will impact the country¶s largest private bank ICICI Bank partly. The bank

will have to take a hit of $28 million on account of the additional provisioning that ICICI Bank¶s

UK subsidiary will have to make. During this quarter, ICICI Bank pared its credit default swap

(CDS) exposures to overseas corporate from $650 million to $80 million. Some of the larger

state-owned banks are also likely to take small hits because of mark-to-market provisioning on

their overseas investments. ICICI Bank will also have to make additional provisioning on its

investments in corporate bonds and on CDS exposures of Indian corporates. However, officials

in the Mumbai-based bank said that the provisioning requirement for these investments is not

substantial.

For the first quarter of FY09, ICICI Bank had reported a net profit of Rs 728 crore. ICICI Bank¶s

UK subsidiary had investments of euro 57 million (around $80 million) in senior bonds of

Lehman Brothers. It has already made a provision of close to $12 million against investment in

these bonds. Assuming a recovery of 50% of these investments, the additional provision required

would be about $28 million. The bank has already made a provision of $188 million in its

international books at the end of March 2007-08. According to a research report by broking

house Edelweiss, the UK subsidiary would have to book mark-to-market losses of $200 million.

The report said that the subsidiary had $600 million investments in mortgage-backed securities

and another $500 million investment in corporate bonds. However, bank officials said that it was

too early to comment on the mark-to-market on corporate bonds as things could change if the

Fed cuts rates. ICICI Bank and its subsidiaries had consolidated total assets of Rs 484,643 crore

as on June 30, while ICICI Bank UK had total assets of around $8.7 billion. At the end of the last



quarter, the bank had on its books CDS papers of overseas clients in the range of close to $650

million. Subsequently, the bank was able to pare this to $80 million. The bank also has close to

$1.5 billion of CDS of Indian papers. It is likely to take a small hit on these investments. Some of

the other Indian banks such as State Bank of India would also have to take a mark-to-market hit

on its investments. SBI officials said that it was too early to quantify the amount.

ICICI Bank Ltd., India's second- largest bank, reported $264 million of costs to write down the

value of overseas investments, the biggest loss disclosed by an Indian bank since the collapse of

the U.S. subprime-loan market.

The bank set aside $90 million through December and $70 million will be earmarked in fourth-

quarter earnings. The rest will be set off against the bank's net worth.

So far, 45 of the world's biggest banks and securities firms have written down or lost $181

billion related to investments tied to rising defaults on U.S. home loans or to people with poor

credit histories.

The company has the largest holdings of overseas investments among the nation's major banks

and has been expanding internationally to counter slowing demand for credit in India. The value

of the subprime-related investments in its $2 billion of overseas assets dropped because investors

are shunning all except the safest securities



CHAPTER 5-DATA ANALYSIS AND INTERPRETATION

FINANCIAL OF ICICI BANK

Performance Review ± Quarter ended September 30, 2008

Profit after tax of Rs. 1,014 crore; 39% increase over first quarter

42% year-on-year increase in core operating profit

12% year-on-year reduction in costs due to cost rationalization measures

Capital adequacy of 14.01%

CASA ratio increased to 30% from 25% a year ago

The Board of Directors of ICICI Bank Limited (NYSE: IBN) at its meeting held at Mumbai

today, approved the audited accounts of the Bank for the quarter ended September 30, 2008 (Q2-

2009).

Highlights

The profit after tax for Q2-2009 was Rs. 1,014 crore (US$ 216 million) compared to the

profit after tax of Rs. 1,003 crore (US$ 214 million) for the quarter ended September 30,

2007 (Q2-2008). The profit after tax for Q2-2009 represents an increase of 39% over the profit after tax of

Rs. 728 crore (US$ 155 million) in the quarter ended June 30, 2008 (Q1-2009).

Core operating profit (operating profit excluding treasury) increased 42% to Rs. 2,437

crore (US$ 519 million) for Q2-2009 from Rs. 1,712 crore (US$ 365 million) for Q2-

2008.

Net interest income increased 20% to Rs. 2,148 crore (US$ 457 million) for Q2-2009

from Rs. 1,786 crore (US$ 380 million) for Q2- 2008.

Fee income increased 26% to Rs. 1,876 crore (US$ 399 million) for Q2-2009 from Rs.

1,486 crore (US$ 316 million) for Q2-2008.

Operating expenses1 decreased 12% to Rs. 1,688 crore (US$ 359 million) for Q2-2009

from Rs. 1,926 crore (US$ 410 million) for Q2- 2008 due to the Bank¶s focus on

efficiency improvement and cost rationalization. The cost/average asset ratio for Q2-2009



was 1.7% compared to 2.1% for Q2-2008, and the cost/income ratio for Q2- 2009 was

42.5% compared to 50.5% for Q2-2008.

OPERATING REVIEW

Deposit growth

The Bank has adopted a conscious strategy of focusing on current and savings account deposits

and reducing its wholesale term deposit base. Current and savings account deposits increased

16% to Rs. 66,914 crore (US$ 14.2 billion) at September 30, 2008 from Rs. 57,827 crore (US$

12.3 billion) at September 30, 2007. Current and savings account (CASA) deposits constituted

30% of total deposits at September 30, 2008

compared to 25% at September 30, 2007. Total deposits declined marginally on a year-on-year

basis due to the reduction in term deposits pursuant to the strategy adopted by the Bank. The

Bank has significantly expanded its branch network to expand its reach and further enhance its

deposit franchise. At October 22, 2008, the Bank had 1,400 branches and 4,530 ATMs.

Credit growth

Consolidated advances of the Bank and its banking subsidiaries and ICICI Home Finance

Company increased 16% to Rs. 264,665 crore (US$ 56.4 billion) at September 30, 2008 from Rs.

227,583 crore (US$ 48.5 billion) at September 30, 2007.

International operations

ICICI Bank¶s international business continued to focus on:

Building a retail deposit base which gives the Bank access to low cost deposits on a

sustainable basis.

Being the preferred financier and adviser for overseas expansion of Indian corporate and

strengthening the global syndication network.

Being the preferred bank for non-resident Indians: The Bank¶s remittance volumes

increased by 38.2% in Q2-2009 to about Rs. 11,946 crore (US$ 2.5 billion) compared to

Q2-2008.



ICICI Bank Canada¶s profit after tax for the six months ended September 30, 2008 (H1-2009)

was CAD 22 million. ICICI Bank Canada¶s capital position continued to be strong with a capital

adequacy ratio of 15.4% at September 30, 2008. ICICI Bank Canada¶s deposit base increased by

over CAD 1.0 billion during the quarter to CAD 4.85 billion at September 30, 2008, of which

86% was term deposits.

ICICI Bank UK¶s profit before mark to market impact and provision on investments was US$ 43

million for H1-2009. After the required provisioning charge in respect of its investment portfolio

(including the mark-to-market impact of credit spread widening during the period), ICICI Bank

UK reported a net loss of US$ 35 million. ICICI Bank UK¶s capital position continued to be

strong with a capital adequacy ratio of 18.4% at September 30, 2008. ICICI Bank UK¶s deposit

base was US$ 4.9 billion at September 30, 2008, of which 39% was term deposits. At September

30, 2008, ICICI Bank UK had zero net non-performing assets.

The Bank and its subsidiaries have entirely exited their non-India linked credit derivatives

portfolio at no incremental loss over and above the provisions already held.

Capital adequacy

The Bank¶s capital adequacy at September 30, 2008 as per Reserve Bank of India¶s revised

guidelines on Basel II norms was 14.01% and Tier-1 capital adequacy was 11.03%, well above

RBI¶s requirement of total capital adequacy of 9.0% and Tier-1 capital adequacy of 6.0%.Table 4 (Rs in billion)

MAR 31, 2008 JUNE 30, 2008 SEP 30. 2008

TOTAL CAPITAL 13.97% 13.42% 14.01%

- TIER 1 11.76% 11.29% 11.03%

- TIER 2 2.20% 2.13% 2.98% *

* Pursuant to clarification received from RBI, Upper Tier II capital bonds of US$ 750 mn

issued in January 2007 are included in Tier-II capital.

Asset quality

At September 30, 2008, the Bank¶s net non-performing asset ratio was 1.8% on an

unconsolidated basis. The consolidated net NPA ratio of the Bank and its subsidiaries was 1.6%.

The specific provisions for nonperforming assets (excluding the impact of farm loan waiver)



were Rs. 868 crore (US$ 185 million) in Q2-2009 compared to Rs. 878 crore (US$ 187 million)

in Q1-2009.

Table 5 (Rs in billion)

SEP 30,2007 MAR 31, 2008 JUNE 30, 2008 SEP 30. 2008

GROSS NPAs 66.89 83.50 92.82 102.71

Less: cumulativew/offs and provision

36.53 47.86 51.80 59.72

NET NPAs 30.36 35.64 41.02 42.99

NET NPA ratio 1.41% 1.49% 1.74% 1.83%

Consolidated net NPA ratio of the Bank and its subsidiaries at 1.6%

Gross retail NPLs of Rs. 69.57 bn and net retail NPLs of Rs. 26.77 bn at September 30,

2008

Unsecured products constitute 57% of net retail NPLs

Performance highlights of insurance subsidiaries

ICICI Prudential Life Insurance Company (ICICI Life) increased its overall market share in

retail new business weighted received premiums from 12.7% in the year ended March 31, 2008

(FY2008) to 13.7% during April- August 2008. New business weighted received premium

increased by 22% in H1-2009 to Rs. 2,650 crore (US$ 564 million). While ICICI Life¶s results

reduced the consolidated profit after tax of ICICI Bank by Rs. 466 crore (US$ 99 million) in H1-

2009, ICICI Life¶s unaudited New Business Profit (NBP)2 in H1-2009 was Rs. 522 crore (US$

111 million). Assets held increased to Rs. 30,107 crore (US$ 6.4 billion) at September 30, 2008.

ICICI Lombard General Insurance Company (ICICI General) increased its overall market share

from 11.9% in FY2008 to 12.5% during April-August 2008. ICICI General¶s premiumsincreased 12.2% on a year-on-year basis to Rs. 1,925 crore (US$ 410 million) in H1-2009.

Other subsidiaries (Rs in billion)

PROFIT AFTER TAX H-1 2008 H-1 2009

ICICI Securities Ltd. 0.37 0.24



ICICI Securities PD 0.99 0.21

ICICI Venture 0.27 1.39

ICICI AMC 0.53 0.44

ICICI Home Finance 0.29 0.39

SUMMARY PROFIT AND LOSS STATEMENT

Table 6 (Rs in crore)

SUMMARY BALANCE SHEET

Table 7 (Rs in crore)



Source: Company website

BALANCE SHEET FOR Q2 FY09

Assets



LIABILITIES





COMPARISON

Items 2003-

04

2004-05 2005-06 2006-07 2007-08 Group

Avg

All Banks'

Average

2007-08 2007-08

No. of offices 419 515 569 716 1268 359 795

No. of employees 13609 18029 25384 33321 40686 7232 11573

Business per employee (in Rs.lakh)

1010.00 880.00 905.00 1027.00 1008.00 717.52 634.09

Profit per employee (in Rs.lakh)

12.00 11.00 10.00 9.00 10.00 5.72 4.67

Capital and reserves & surplus 8360 12900 22556 24663 46820 3973 3994

Deposits 68109 99819 165083 230510 244431 29351 42026

Investments 43436 50487 71547 91258 111454 12096 14888Advances 62648 91405 146163 195866 225616 22539 31355

Interest income 9002 9410 14306 21996 30788 3093 3919

Other income 3065 3416 4181 6928 8811 733 751

Interest expended 7015 6571 9597 16358 23484 2108 2633

Operating expenses 2571 3299 5001 6691 8154 881 977

Cost of Funds (CoF) 3.59 3.02 4.01 5.34 6.40 6.13 5.81

Return on advances adjusted toCoF

6.94 5.75 4.58 4.08 4.33 4.87 4.11

Wages as % to total expenses 5.70 7.47 7.41 7.01 6.57 10.34 13.96

Return on Assets 1.31 1.48 1.30 1.09 1.12 1.15 1.16

CRAR 10.36 11.78 13.35 11.69 13.97 14.30 13.00

Net NPA ratio 2.21 1.65 0.72 1.02 1.55 1.09 1.00

COMPARISON AMONG VARIOUS BANKS ON VARIOUS

PARAMETERS



I analysed the above banks on various parameters to find out how they are placed in terms of

business growth, efficiency and the comfort they provide in terms of their current financial

standing and business exposures.

The growth-related variables indicate the last 5-year CAGR banks achieved in advances and

deposits. It also carries a ranking of these banks in terms of their latest CASA ratio. Axis Bank

emerges as an out-performer in this category.

On efficiency-related parameters, the cost/income ratio, quality of advances and the extent of

loan loss-loss provision coverage have been reviewed, and banks have been accordingly ranked.

PNB leads the pack with high scores in each variable.

In the next segment, certain comfort-related yardsticks have been compared. Capital-raising by

banks to bolster future growth, real estate exposure and overseas dependence for the business

have been compared. Although PNB did not raise any fresh capital and ranks last on that metric,

it ranks as the best bank with lower real estate and foreign exposure, which is critical during a

global economic slowdown. Also, we analysed banks that generate the maximum core interest

income as a proportion of total income. ICICI Bank and Axis Bank have greater proportions of

their income coming from 'other income' and these segments might have greater tendency to

show slower growth in the current scenario. A detailed analysis of the above parameters is

presented in the ensuing paragraphs.

Growth metric - Loan growth comparison

The chart below shows that the last 5 years loan growth achieved by India's major banks. HDFC

Bank showed consistent growth over the last 3 years (even though it shows a slight falling trend

in the 5-year chart). Axis Bank achieved a high compounded annual growth during this period,

followed by ICICI Bank.



Table 10

Loan growth CAGR (from FY04 to FY08)

AXIS

BANK

BOB BOI HDFC ICICI PNB SBI

59% 32% 25% 37% 38% 26% 27%

Growth metric - Deposit comparison

In terms of the deposit growth (CAGR) achieved by these banks during the last 5 years, Axis

Bank and ICICI Bank retain top two slots as seen in loan growth. ICICI Bank registered a

deposit growth of just 6% in FY08. This was in sharp contrast to the 40% growth the bank

achieved in the 4 years before FY08. PSU banks, on the other hand, grew at a much slower pace.

Table 11

Deposits growth CAGR (from FY04 to FY08)

AXIS BANK BOB BOI HDFC ICICI PNB SBI

43% 20% 20% 35% 38% 17% 14%

Source: Antique research Graph 7

Loan book analysis - Unsecured loans and NPAs

Unsecured loans primarily include personal loans and credit card exposures, priority sector

lending in rural areas, education loans, credits to SMEs (small and medium entrepreneurs) up to

Rs 5 lakh, etc. Exposure of Indian banks towards unsecured loans rose consistently over the

years. As shown in the chart below, HDFC Bank has the highest, with around 30% of its total

loans exposed to such loans.



Source: Company website Graph 8

Though there is no direct correlation between loan losses and unsecured loan exposure, in an

economic slowdown scenario, such exposure will carry a greater stress, and hence, a higher probability of default. Banks need to be extremely vigilant in terms of monitoring these loans

regularly, so that losses in the form of NPAs do not increase unreasonably and dent the quality of

the loan book.

However, a review of the gross NPA ratio, i.e., GNPA as a percentage of advances indicates that

HDFC Bank and other banks have ensured that the NPA increase is proportionate to that of the

loan growth. In fact, PSU banks have shown tremendous improvement in terms of loan quality,

as the GNPA ratio for these banks fell from average 8-9% levels to less than 3% levels in the last

5 years. Only ICICI Bank has shown deterioration of its loan quality as reflected in its increasing

GNPA ratio. The main reason for this increase is that the bank has substantial exposure to the

retail segment, including huge exposure to the real estate segment at almost 36% of total loans

that includes close to 30% exposure in the form of housing loans. The retail segment constitutes

close to 75% of ICICI Bank's NPAs.

Composition of loan book: Sept 30, 2008



Graph 9

Total loan book: Rs. 2,220 bn

Total retail loan book: Rs. 1,225 bn

Total retail disbursements (including ICICI Housing Finance Company): Rs. 170.00 bn in H1-

20091 Small ticket personal loans




Efficiency comparison - Cost / Income ratios of banks

In terms of control over costs, the below table explains cost/income ratios of these banks over the

last 5 years. At the end of FY08, all banks have a similar cost/income ratio averaging between

48- 50%. However, Bank of India has substantially lower cost-to-income ratio of 42%.


Source: Antique research




A not-so-encouraging sign in terms of NPA management of Indian banks is the fact that the loan

loss coverage ratio for banks as a group has reduced over the last 2 years. From 60% levels, the

coverage ratio has fallen to around 55%.


In terms of provision coverage for specific banks, Axis Bank has a low coverage ratio in the

private bank group at around 50%, and the SBI has a ratio of 42%, the lowest in PSU banks in

the comparison chart below.




Corporate Structure

at ICICI BANK

Board of Directors

Chairman & Managing Director (CMD)

Director Engineerin

And

Director Human

Resource

Director

Finance

Chief VigilanceOfficer

Executive Director Finance

CashManageme

ntBudgeting

Internal

Audit Taxation

Financialervice

CorporateB k

ProvidentFund Tru t

Taxation

Direct Taxes Indirect

Taxes



WOKRING CAPITAL MANAGEMENT- THE CONCEPT

Typically companies have 40 percent of their capital invested in workingcapital. But unlike their investment in fixed assets that are often subject to rigorousinvestment appraisal decisions the investment in working capital is a series of

apparently unconnected decisions in respect of sales, production, purchasing,inventories and cash. However, all these decisions may have a consequence on thelevel of investment in working capital and hence on the overall investment in thefirm. While individual managers should indeed make their own decisions, acomprehensive and co-ordinated policy is needed alongside appropriatemonitoring.

A study found that financial managers spent 32 percent of their time onmanaging working capital which, along with financial planning and budgeting (35

per cent), took up the greatest proportion of their time. In the light of this emphasisand the sharing of responsibility with the line managers it is surprising to find thatthe literature, although while comprehensive, is scattered in its source and lacksintegration into an overall framework.

Dividends andwithdrawals of profit

Shareholders andr riet r fund

Interest paymentsto loan stock-

Long term loans

Cash andmarketablesecurities

Fixed assets land

and building

Costs: MarketingProduction

Administration etc.

Materials and Purchases

Labour costs Creditors

Debtors Sales

Work in progress and

inventories



Working capital management is concerned with the problems that arise inattempting to manage the current assets, the current liabilities and theinterrelationships that exist between them. The term current assets refers to thoseassets which in the ordinary course of business can be or will be, turned into cash

within one year without undergoing a diminution in value and without disruptingthe operations of the firm. The major current assets are cash, marketable securities,accounts receivable and inventory. Current liabilities are those which are intendedat their inception to be paid in the ordinary course of business. Within a year, outof the current assets or earnings of the concern. The basic current liabilities areaccounts payable, bills payable, bank over draft, and outstanding expenses. Thegoal of working capital management is to manage the firm¶s current assets and

current liabilities in such a way that a satisfactory level of working capital ismaintained. This is so because if the firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent and may even be forced into

bankruptcy. The current assets should be large enough to cover its currentliabilities in order to ensure a reasonable margin of safety. Each of the currentassets must be managed efficiently in order to maintain the liquidity of the firm

while not keeping too high a level of any of them. Each of the short-term sourcesof financing must be continuously managed to ensure that they are obtained andused in the best possible way. The interaction between current assets and currentliabilities is, therefore, the main theme of the theory of working capitalmanagement.

Importance of Working Capital

The need for adequate investment in Working Capital can be understood from thefollowing points:-

1. Working capital is required to use fixed assets profitably. For example, amachine cannot be used productively without raw materials.

2. Funds are required for day-to-day operations and transactions. These are

provided by Cash and Cash Equivalents, forming part of Current Assets.3. Adequate Working Capital determines the short-term solvency of the

firm. Inadequate working capital means that the form will be unable tomeet its immediate payment commitments. This represents under ± capitalization.

4. Increase in activity levels and sales should be backed up by suitableinvestment in working capital.



5. The aspects of liquidity and profitability should be suitably analyzed bythe Finance Manager. Too much emphasis on profitability may effectliquidity.

In today¶s cutthroat competition working capital has gained much more importancethan was ever accorded to it. Working capital management has become an activityvital to the success of the any company, more so for the following reasons:

1. The tough money conditions prevailing during the last few years hasmade it comparatively difficult to raise additional finance banks andfinancial institutions on a short-term basis. Apart from this, the cost of such financed has gone up considerably in recent times the bank interestfor short-term borrowing has been as high as 11% per annum.

2. The amounts invested in some current assets do not earn any return. For example, if a business keeps cash balance to enable it to pay the various

expenses and when they arise, this cash is idle and does not earn interest.Similarly, amount invested in inventory does not earn any return. On theother hand, the inventory is exposed to the risk of loss due todeterioration in the quality, pilferage, handling loss, etc.

3. Till 1972 the interest rate on long-term funds was higher than the intereston the short-term borrowings. Therefore, it was advantageous to provide

only the minimum required amount to finance working capital out of long term sources so that as and when needed the extra funds could bemet out of short term sources on which the interest was less. But now adays interest rate on short term finance is higher, therefore many

businesses have to finance a comparatively higher portion of workingcapital requirement with costlier short term borrowings, or raisingadditional funds on long term basis. This has necessarily caused greater attention to be focused on minimizing working capital needed.

Therefore, it is necessary to minimize the amount that it is tied up in current assetsin order to minimize the interest cost of working capital. At the same time, areasonable level of cash should be maintained in order to ensure that all paymentobligations are met as and when they arise, and inventory should be such that the

production operations are carried on smoothly without being adversely affected byshortage of any item. In the short-term, given a certain price and cost of productionfor its products, the profitability of a business can be effectively improved upon byefficient use of available working capital. Working capital goes through a sequenceof changes; the faster these changes take place, the better it is for the business as awhole, because the same amount of working capital can service a higher level of sales.



Components of Working Capital:The various items comprising working capital are collectively called current assets,the typical items of current assets are:-

1. Cash2. Temporary Investments3. Inventory of:

i) Raw material, stores, supplies and spares

ii) Work in progress, andiii) Finished goods

4. Advance payment towards expenses on purchases and other short-termadvances, which are recoverable.

5. Sundry trade debtors.

Part of the amount required to finance the current assets would be available from

suppliers of goods, and other parties to whom payments are due for expenses.These items are collectively called current liabilities. Items of current liabilitiesare:

1. Creditors for good purchased.2. Creditors for other expenses.3. Temporary on short-term borrowings from banks, financial insinuations

or other parties.4. Advances received from other parties against goods to be sold, or as

short-term deposits.5. Other current liabilities such as tax payable, and dividend payable.

WORKING CAPITAL = Current assets, loans and advances- Current liabilitiesand provision- interest accrued and due

Working capital can be examined under two heads:

Internal financing- deals with determining the size of working capital needs in particular business situations and seeking to achieve certain long run operatinggoals.External Financing- deals with how much working capital is required in specific

situations and how to acquire them.Working capital is classified into two categories:Gross Capital- refers to total of all the current assets.Net working capital- it is the difference between total current assets and totalcurrent liabilities.

Working capital management is important from two reasons:

Investment in current assets represents a substantial portion of total investment.



Investment in current assets and the level of current liabilities have to be greetedquickly to changes in sales.

Important aspects of working capital management:

1. Estimating the various requirements of the business and providing for them.

2. Assessing or evaluating the efficiency of working capital use.

3. Making important decisions in specific instances such as:i) Inventory levelsii) Purchasing Policyiii) Credit sales policyiv) Sources of short-term borrowings, etc.

Constituents of Working Capital:

1. Raw materials2. Working in progress3. Finished goods4. Debtors

5. Creditors

Measuring Working Capital:

Working capital balances are measured from the financial data of corporate balance sheet. Changes in balances can be measured in rupee amounts and also in% by comparing current assets, current liabilities and working over a given period.

y Radio Analysis- It can be used by management as a means of checkingupon the efficiency with which working capital is being used in theenterprise. The most important rations are:-

1. Turn over radio (net sales divided by average net working capital)

2. Current ratio (current assets divided by current liabilities)3. Current debt to tangible net worth (current liabilities divided by tangible net

worth)

y Funds from analysis- it is an effective management tool to study howfunds have been procured for the business and how they have beenemployed. The technique helps to analyzes changes in working capitalcomponents between two dates.

y Working capital budget- it involves careful measurement of future

requirements and the formulation of plans for meeting them. Theworking capital budget is an important phase of an overall financial



budgeting. It measures permanent and variable working capitalrequirements and assures that they are duly provided for. Theobjective is to secure an effective utilization of the investment.

Types of Working Capital:

Working capital can be studied under two heads:-

1. Fixed or permanent working capital: To carry on business a certain

minimum level of working capital is necessary on a continuous and uninterrupted basis. For all practical purposes this requirement has to be met permanently as withother assets. This requirement is referred to as permanent or fixed working capital.Every industry has to maintain a minimum stock of raw materials, working in

progress, finished products, loose tools and spare parts. It covers the irreducibleamount necessary for maintaining the circulation of the current assets. Fixedworking capital is financed by issue of shares, issue of debentures and also by

investing capital and/or revenue reserves in the concern.2. Variable or temporary working capital- The additional working capitalmay also be required on account of certain abnormal conditions like changes in

production and sales as a result of seasonable changes. Additional doses of working capital may be administrated to face cut throat competition or other contingencies like strikes and lockouts. Such additional cost incurred is known as

variable working capital. Variable working capital is financed from permanentsources such as retained earnings or the sale of shares or long- term debt and alsofrom bank loan taken against hypothecation or pledge of inventory or mortgage of fixed assets.



FACTORS DETERMINING WORKING CAPITAL REQUIREMENT IN

BUSINESS:-

The nature of the business/ industry Seasonality The Credit policy announced every year by RBI Competitiveness Availability or otherwise of raw materials. The source of Raw material and the lead time required Financial policies The location of operations Distribution/ marketing arrangements

Working capital margin



WORKING CAPITAL FINANCING IN ICICI BANK

Introduction:

After determining the level of working capital, a firm has to decided how it is to befinanced. The need for financing arises mainly because the investment of workingcapital/ current assets, that is, raw material, work/stock in process, finished goods

and receivables typically fluctuates during the year.The Sources of Working Capital financing are: Trade Credit Bank Credit RBI framework/ regulation of bank credit/ finance/advances. Factoring

Commercial Papers

The Main sources of Working Capital Financing in ICICI BANK:

Bank Credit RBI framework/ regulation of bank credit/ finance/advances. Commercial Papers

BANK CREDIT:

Bank credit is the Primary Source of working capital in ICICI BANK. In fact, itrepresents the most important sources for financing of current assets.Working Capital Finance is provided by banks in 2 ways.

Fund ±Based

Cash Credit/ Overdrafts Loans

Purchase/ Discount Bills Working Capital Term Loans.

Non-Fund Based:

Letter of Credit

Bank Guarantee



CASH MANAGEMENT ± THE CONCEPT

Cash management is one of the key areas of working capital management. Apartfrom the fact that is the most liquid current assets, cash is the commondenominator to which all current assets can be reduced because the other major liquid assets, i.e. receivables and inventory get eventually converted into cash. This

underlines the significance of cash management.

Motives for Holding Cash:

The term cash with reference to cash management is used in two senses. In anarrow sense it is used broadly to cover currency and generally acceptedequivocalness of cash such as cheques, drafts and demand deposits in banks. The

broader view of cash also includes near cash assets, such as marketable securitiesand time deposits in banks. Irrespective of the form in which it is held, a

distinguishing feature of cash, as an asset, is that it has no earning power. There arefour primary motives for maintaining cash balance.

1. transaction motive2. precautionary motive3. speculative motive4. compensating motive

Transaction Motive:

A firm enters into a variety of business transactions resulting in both inflows andoutflows of cash. Cash balance is kept by the firm with the motive of meetingroutine business payments.

Precautionary motive:

A firm keeps cash balance to meet unexpected cash needs arising out of unexpected contingencies such as floods, strikes, presentment of bills for paymentearlier than the expected date, unexpected slowing down of collection of accountsreceivables, sharp increase in prices of raw materials, etc.

Speculative motive:

A firm also keeps cash balance to take advantage of unexpected opportunities,typically outside the normal course of the business. Such motive is, therefore, of

purely a speculative nature.Compensation Motive:

Banks provide certain services to their clients free of charge. They therefore,usually require clients to keep minimum cash balance with them, which helps themto earn interest and thus compensate them for the free services so provided.

OBJECTIVES OF CASH MANAGEMENT:

1. To meet the cash disbursement need as per the payment schedule.



2. To minimize the amount locked up as cash balances.

1. Meeting Cash disbursement:

The first basic objective of cash management is to meet the paymentschedule. In other words, the firm should have sufficient cash to meet the variousrequirements of the firm at different period of times.

2. Minimizing funds locked up as cash balances:

The second basic objective of cash management is to minimize the amountlocked up as cash balances. In the process of minimizing the cash balances, theFinance Manger is confronted with two conflicting aspects. A higher cash balanceensures proper payment with all its advantages. But this will result in a large

balance of cash remaining idle. A low level of cash balance may result in failure of the firm to meet the payment schedule. The finance manager should, therefore, try

to have an optimum amount of cash balance keeping the above facts in view.



CENTRALIZED CASH MANAGEMENT SYSTEM AT ICICI BANK

ICICI BANK has adopted a centralized cash control system for controlling thefunds of entire company from the corporate office at Delhi. This is an intentionalstrategy followed by the company to have complete control over the lifeblood of any company, its cash.

Having a profitable company and running it sufficiently in terms of growth is onething and having a comfortable cash position for the organization is quite another.A profitable company may not necessarily have the misconception of carrying theabove nation and then.Therefore to be completely in control of their cash position, ICICI BANK hasopted for the centralized cash management system. The system has been refinedover the period of time that it has been in place. The system has been refined over

the period of time that has been in place. It is difficult to think to any other systemof cash management, which would have suited the company more, given its natureof business and type of structure. The need of such a system for such a largeorganization like ICICI BANK can hardly be overemphzed.



INVESTMENT OF SURPLUS FUNDS IN ICICI BANK

Investment of short-term surplus funds is made under certain guidelines for publicsector enterprise, which are known as DPE Guidelines (Department of public

enterprises) issued by Ministry of Company affairs by Government of India. ICICIBANK often has surplus funds for short period of time, before they are required for capital expenditures, loan repayment, or some other purpose. These funds may bedeployed in a variety of ways. At one end of the spectrum is the term deposit in a

bank, virtually a risk-free investment, which offers an interest rate of about 10% atthe other end of the spectrum is the investment is equity shares which can producehighly volatile returns. In between lie several avenues like units, public sector

bonds ready forwards, badla financing, inter-corporate deposits.The employed avenue for investing surplus funds in the short run in ICICI BANK in inter-corporate deposits.

Inter-Corporate Deposits:

A deposit made by one company with another, normally for a period up to six

months is referred to as and inter-corporate deposits;As inter-corporate deposits represent unsecured borrowing the lending companymust satisfy itself about the credit-worthiness of the borrowing firm. In addition, itmust make sure that it adheres to the following requirements, as stipulated bySection 370 of the Company¶s act;

a) A company cannot lend more than 10 percent of its net worth (equity plusfree reserves) to any single company.

b) The total lending of a company cannot exceed 30 percent of its net worthwithout the prior approval of the central government and a special resolution

permitting such excess lending.



INVESTMENT PROCESS OF ICICI BANK

In ICICI BANK all the investments has been done under DEP guidelines issued by

Government of India. Board of directors has further put certain restrictions oninvestments. Before investing in any bank or financial institutions or non-bankingfinancial institutions ICICI BANK sees that whether the investment is secure or not and investment is made on Highest Grade Rating. ICICI BANK invests in termdeposits with banks and inter-corporate deposits with Central PSUs. ICICI BANK sees that the banks or financial institutions in which they are investing shold behighly liquid, secure, maximizing their return, best rate are provided by them and

the position of the bank is sound. All the Banks quote their rates, and amongstthem the highest quote is selected. If two or more banks quote the same rate thanthe amount to the invested is split. ICICI BANK has set maximum limit on their investment with all the banks up to which exposure will be made with banks.



INVENTORY MANAGEMENT- THE CONCEPT

Inventories consisting of raw material, work-in-process, and finished goods,represent a significant proportion of total assets- generally varying between 15

percent and 45 percent with an average around 30 percent.

What Is Effective Inventory Management?

³Effective inventory management allows a distributor to meet or exceed his (or her) customers expectations of production availability with the amount of eachitem that will maximize the distributor¶s net profits.Inventory is usually a distributor¶s largest asset. Effective Inventory Managementis dedicated to helping distributors provide outstanding customer service whilemaximizing the return on their inventory investment.

Objectives:

The objective of inventory management consists of two counterbalancing parts:1. To minimize investments in inventory;2. To meet a demand for the product by efficiently organizing the

production and sales process.

Need For Inventories:

What purpose is served by inventories? Before we answer this question, a

distinction may be drawn between process or movement inventories andorganization inventories. Process or movement inventories are required because ittakes time to complete a process/ operation and to move product from on stage toanother. The average quantity of such inventories would be equal to:Since you don¶t know when each of them will be required, how can you determinehow many of each one to stock?Part of developing your MRO stock list was defining where each spare parts isused in your operations. Now we must determine the critical nature of each one of these items. We¶ve found it helpful to assign each of these items into one of threecategories;

Very Critical Parts

Lack of this part will cause a major, expensive problem for your company. For example, one of our customers is a food processor with one large (actually room-

size) mixer. It this machine breaks down, all productions stops. Therefore, any partthat is necessary for this machine¶s operations is very critical.

Somewhat Critical Parts;

The loss of the machine or operation these parts support will shut down animportant machine or operation. The same company has 14 wrapping machines. If one of these machines breaks down, it may delay the completion of a productionrun, but it would not completely shut down operations.



Non-Critical Parts:

The loss of the machine or operations these parts support will have no or littleeffect on overall production. There are available workarounds that can be utilizedfor an extended period of time.The target stock level of a repair part is determined by a combination of its ³criticalnature´ and lead-time. In the following matrix, we define the number of normal-use quantities that should be maintained in stock for each repair part;

Lead Time? ? 1 Day ? 7 Days ? 30 Days ? 60 Days

Very critical 1 2 3 3

Somewhat Critical 0 1 1 1-2

Non - Critical 0 0 0-1 1

For very critical parts that can completely shut down operations, we will keep one normal-usequantity of each item in inventory even though we can get a replacement part In less than aday. And if the lead-time of a very critical part is greater than a week, we will probably wantto keep three normal - use quantities on the shelf in our parts room. The cost of this"Insurance" is the annual cost of carrying inventory (normally 20% to 25% of the inventoryvalue of the target stock level). You must weigh this expense against the cost of shuttingdown operations. Notice that we are not even considering maintaining an inventory of a non-critical part unless it has an extended lead-time.The average-use quantity suggestions in this table are not "cast in stone" and should headjusted for your organization's specific needs. However, if you must reduce the value of your spare-parts inventory. We strongly suggest you discontinue or reduce your stock of non-critical and somewhat critical parts before reducing the target stock level of any of thevery critical items. After all, these products support the lifeblood of Your vital operations. With proper management of MRO inventory, an organization can

maintain an outstanding level of productivity at the lowest possible overall cost. But like anyother process, it cannot be accomplished without a logical, methodical action plan.

INVENTORY LevelsThe inventory levels at the close of the last three years ending March 31 are as follows:

(Rs. In Crores)

2002-2003 2003-2004 2004-2005 2005-2006

a) Raw Materials 660.35 655.60 719.66 853.06 b) Store, Spares and Loose Tools 98.83 90.26 80.86 87.25c) Work - in - Progress and Semi -Finished goods

1081.44 1074.13 938.43 943 96

d) Finished goods 208.98 185.62 274.81 235.82e) Scrap 12.07 12.11 13.30 13.60

TOTAL 2061.67 2017.72 2027.06 2133.69

The stock of finished goods represented 0.39,0.31,0.44 and 0.33 month's sales in 2002-03,

2003-04, 2004-05, and 2005-06 respectively.



RECEIVABLES MANAGEMENT

THE CONCEPT

The term receivables is defined as debt owned to the firm by customers arisingfrom sales of goods or services in the ordinary course of business. The receivablesrepresents an important component of the current assets. When a firm makes an

ordinary sales of goods or services and does not receive payment, the firm grantstrade credit and creates accounts receivables, which could be collected in thefuture. Receivables management is also called trade credit management.Thus, accounts receivable represent an extension of credit to customers, allowingthem a reasonable period of time in which to pay for the goods received. It enablesthe firm to manage its receivables well. Maintain tight control over your accountsrecoverable with capabilities that help you track invoices, process receipts and

analyze customer activity, so you can manage sales made on account moreeffectively and yet maintain lower overhead cost.

Objectives of Receivables Management:

Improve Customer Satisfaction:Enhance customer service and increase customer retention with customized

information, history, and notes that are easily accessible when working with thosecustomers.

Take Control of Your Sales:

Manage your sales process more effectively by measuring trends and analyzing performance with comprehensive customer tracking combined with sales tracking by person or territory.

Enhance Your Productivity:

Reduce administrative costs and enhance office productivity with automatedreceipt processing and posting, easy-to-manage exception handling, and

personalized statement cycles that fit your customers and business.

Streamline Revenue Allocation:

Simplify the ungainly task of deferring revenues over multiple periods withautomatically managed calculations and journals entries customized to fit your

business needs.Increase Access to Vital Information:

Find the information you need to make more effective business decisions withcomprehensive reporting capabilities and stratigforward customer account andsales performance tracking.



Costs:

The major categories of costs associated with the extension of credit and accountsreceivable are:

1. Collection Costs: Collection costs are administrative cost incurred incollecting the receivables from the customers to whom credit saleshave been made.

2. Capital Costs: There is a time lag between the sale of goods to, and

payment by, the customers. The firm should arrange for additional capitalto meet its own obligations while waiting from payments from itscustomers.

3. Delinquency Cost: This cost arises out of the customers to meet their obligations when payments on credit sales become due after the expiry of the credit period.

4. Default Cost: The firm may not be to recover the over dues because of

the inability of the customers. Such costs are known as default costsassociated with credit sales and accounts receivables.

FEATURES OF RECEIVABLES MANAGEMENT:

View un-posted, posted and historical transactions, plus complete

customer, period sales, yearly sales, payment history and receivablessummary information.

Utilize user-defined fields to track the customer information you needto improve sales and customer service, including, ship to, bill to andstatement to addresses; and credit limit, payment terms and accounthistory.

Automate your customer installment payment by creating schedules,calculating interest, amortizing amounts, and forecasting the impact of variable interest rates, payment amounts, and installment changes.

Maintain full control over the receivables process with automatedlockbox processing, customer billing defaults, NSF tracking, multicurrency support, and the ability to fully define customer statementcycles.

Analyze your sales performance with receivables tracking for eachsalesperson or sales territory, including commissions, commissionedsales, non-commissioned sales, and cost of sales for the year-to-date.



PROCESS OF RECEVIABLE MANAGEMENT IN ICICI BANK:

The process of receivables management in ICICI BANK consists of the followingimportant steps:

Order Booking Billing

Payment terms Collection effort & Monitoring

Order Booking:

Order Booking is done by the business sector of ICICI BANK. After the order is

booked the main consideration is on how the order will be executed, i.e. which unitwill-supply what. ICICI BANK being a major power manufacture the major customer relate to government or government department. But during last fiveyears ICICI BANK is also taking order from private parties as well as in theInternational Management.Billing:

Billing is done by the ICICI BANK as per terms of contract to the customer, themajor component of net Billing is given below;

Basic Price:Add: Excise Duty= Gross BillingLess AdvanceLess: 10% or 5% amount= NET BILLING

Payment Terms:

Against Material Milestone based

Mode of Payment:

Cheques Drafts Adjustments (Bartered Trade) Bank Transfers LC Payments



Collection Efforts and Monitoring:

Effect of the Collection effort will decline the bad debt expenses and will reducethe average Collection Period.

Collection Efforts:

Regular interaction with customers. Meeting at higher levels in case of disputes.

If dispute is not solved matter is referred to the concern ministry. Legal action Commercial Settlements.

Monitoring:

Monitoring is done on monthly basis by ICICI BANK in the following sequencesof levels:

Unit level Business sector level Corporate level



MANAGEMENT CURRENT LIABILITIES

Current liabilities constitute debts that are payable in cash within the short-term period of a year or less.Until this liability falls due for payment, it serves as a short-term source of financing to support the working capital needs. While the promptness in

discharging the short term debts on due dates determines the solvency andcreditworthiness of the company. It is also essential that credit opportunities areavailed to the best extent possible in terms of amount and duration. If creditfacilities are not asked for an obtained, it will amount to wastage of availableresources. Thus, the question is one of deciding as to how much or what level of current liabilities is to be sustained by the company.

One approach is to relate current liabilities to current assets. An intention to keepthe ratio of 2;1 would mean that the current liabilities are not to exceed 50 percentof the value of current assets. When the current liabilities get related to the liquidassets it is known as µQuick Ratio¶. The position is regarded as sound if the currentliabilities are equal to or less than liquid assets. If the current assets tend to exceedthe company¶s self-set norms of current ratio and/or quick ratio, it would amount

to over-stretching this bandy source of finance. Another approach to planning andcontrol of current liabilities involves measuring net current ratio against cashearnings.

Net current debt is the difference between current liabilities and liquid assets,where liquid assets are cash, near cash and accounts receivables.

Current liquidity = Net Current Debt * 365Earning before tax

If the current ratio exceeds 2, 1, that gives the impression of satisfactory liquidity position. If the quick ratio is below 1:1 say, then the position of the companycannot regarded as sound and then there is a need to examine whether the companycan generate adequate earnings to take care of the shortfall and enable settlementof all debts.

Managing Trade Creditors:

As a part of current liabilities, the planning and control approaches have relevanceto the management of µTrade Creditors also. The aim should he to ensure that theaverage age of outstanding trade credit is neither excessive nor too low.



Any tendency to exact considerably extended credit terms is to be curved. It may be easy to obtain protracted periods of credit from some suppliers who are makingfresh entry into the market, but such suppliers would introduce in the price anelement of interest for the extended credit allowed. It might thus, prove to be anexpensive resources. A measure of the average age of trade creditors can be had bythe following formula:

Average trade creditors = Number of days purchases outstanding

Average purchases per day in trade creditorsIf the normal terms of credit indicate an average of two months, credit against

purchase and if the computation based on above formula shows out standings tocreditors well exceeding 60 days, there is need for prompt action to bring thesituation under control by:

a) Prompt arrangement to settle overdue bills and b) Being cautious in the matter of further credit purchases.

A company in the process of rapid expansion of activity may be tempted to bargainwith the suppliers and avail enhanced credit period for purchases. The funds thusgenerated may mostly be used in acquisition of fixed assets for expansion and theconsequence would be an acute shortage of liquid funds within the short period,when the due dates for settlement of trade creditors arrive.

One dictum can be: do not be in a hurry to make the payment until the agreed duedate. At the same time, avoid being named a late payer, and ensure settlements ondue dates.

Bills Payable, Bank Overdraft & Cash Credit:

Other forms of common Current Liabilities are Bills Payable, Bank Overdraft, andCash Credit whose management have already been talked about in WorkingCapital Financing in Working Capital Management.



EXPECTED PERFORMANCE OF ICICI BANK 2006-07

A Memorandum of Understanding (MOU) for the year 2005-06

was signed between CMD, ICICI BANK and the Secretary(Heavy Industries & Public Enterprises),

In addition, a number of dynamic and sector specific criteriacovering areas such as achievement of TQM score, humanresource development, engineering and research &development including technology development projects,project implementation (modernization/expansion), capitalexpenditure for schemes, globalization through enhanced

overseas marketing efforts, supply completion for major projectsand corporate governance have been identified with specifictarget for each of them to be achieved during the year.



OBJECTIVES OF THE STUDY

To study and analyses working capital management of ICICI.

For this purpose:

o Study Treasury management

o Study Inventory management

o Study Receivable management

o Study Current liabilities management



RESEARCH

METHODOLOGY



RESEARCH METHODOLOGY

Nature of design: Study is exploratory in nature.

Scope: This is the project on working capital. This report tries to study andanalyses working capital of ICICI . For this purpose, the various part of workingcapital has been explained which are, Inventory management, Treasurymanagement, Receivable management, and Current liabilities management.

Information Requirement: Information Require during the study were:

Employees view regarding working capital management. Sources of finance Investment process

Financial overview

Sampling Design:

Type of sampling- Probability sampling (Simple random) Sample size- 25% employees of finance department. Sample unit- Employees of ICICI.

Sources of data collection:

Primary source:That is through the discussion with the various officers working in various sectionsof finance department.

Secondary source:Booklets, company profile, cost audit report and the annual report.The basic sources of information are as follows:-

1. The information regarding the profile of organization has been collected

from the annual report and the interview of the concerned officer of thecountry

2. The data are secondary in nature and are collected from the publishedinformation of the finance department of ICICI.

3. Some information has been collected through formal as well as informaldiscussions with various department heads.

4. Some information has been collected from ICICI websites.



Limitations of the study:

There are certain problems and issues encountered in such analysis which are:-

1. Price level changes are not taken in to account to modify the balance figure.2. In this study the less emphasis is given on cash management as the relevant

information regarding. It has not been obtained because ICICI is under corporate finance.

3. It is assumed that the company has not changed in accounting policies.4. It has cover the period from 2001-06 as the information and data regarding

the year 1997-98 has not been obtained.

Besides these limitations, the environment factors such as social, economical and political etc. under which the organization operates have their impact on thefinancial operation of the firm.



Employees

80%

19%

0.50% 0.50%0%

20%

40%

60%

80%

100%

H average low very low

Employees

ANALYSIS & INTERPRETATION

Study shows that working capital management play great role in the success of the company. All area under working capital namely-Treasury Management,Inventory Management, Receivable Management and Current LiabilitiesManagement are equally stressed by employees. No company can stand withoutworking capital management. It provides positive reinforcement for goalachievement.

Information attain by study can be interpret through graphs.

1.

Importance given to working capital management

Graph shows that most of the employees gives high importance toworking capital management.



Emp

oees

10 ¡

60¡

20¢ 00 ¡

10¢ 00 ¡

0 ¡

20 ¡

40 ¡

60 ¡

80 ¡

0£ 25¡ 25£ 50 ¡ 50£ 75 ¡ 75£ 100¡

Emp

oees

Emp

o¤

ees

80¡

20¡

0 ¢ 00¡ 0 ¢ 00 ¡

0 ¡

20¡

40¡

60¡

80¡

100¡

¥ ¦ gh a§

e ̈ age

o© §

e ̈

¤

o©

Emp

o¤

ees

2.

Time Spend

It shows that most of the employees spend their 25-50% of time on

working capital, which shows the importance of working capitalmanagement.

3.

Helpful in future goal settlement

It shows that working capital management play great role in identifying& setting future goals.



Emp o

ees

85

10 4 00 1 00

0

20

40

60

80

100

gh a

e age o

e

o

Emp o

ees

4.

Motivate to improve performance

It shows that working capital management motivate most of employees toimprove their performance.



FINDINGS

ICICI BANK is today, a multi-product company offering over 180 highly

sophisticated engineering products under one umbrella. While the core competenceof ICICI BANK is in the power sector, it has progressively established thetechnological infrastructure to cater to core sectors like industry, transportation,transmission, oil& gas, renewable energy etc. Its diverse manufacturing facilitiesgive it a competitive edge. ICICI BANK is one of the most successful public sector enterprises consistently making profits since 1971-72 and paying dividends since1976-77.Following are the findings of the study:-

The turnover for the year 2005-06 has touched a new high for the year insuccession, thereby reaching the figure of Rs.145255 million against Rs.103364

million in 2004-05, an increase of 40.53% increase in activity levels and salesshould be backed by suitable investment working capital.

The primary source of financing working capital requirements in ICICIBANK is surplus funds. The other sources adopted earlier include bank financing(both fund based and non-fund based), commercial papers (rarely issued), foreigncurrency loans, etc. Sources of finance exported by FSD of ICICI BANK arecommercial papers, rupee borrowings in unrated category short-term foreigncurrency loans, USD/Re-negotiation, AC Loco quarterly Lease rentals and forwardcover circulars.

In 2005-06, sundry debtors have increased by 21%. The increase is mainlyattributable to pre-dominance of sale of long cycle time power projects, change in

payment terms by state utilities leading to a higher percentage of deferred payment,delay in payments by government departments and long process of verification of documents in case of exports.

ICICI BANK has opted for the centralized cash management system to becompletely in control of their position. The company deals with a consortium of 14Indian banks to take care of its vastly spread operation. The unique practices of cash management at ICICI BANK include maintaining zero balance account,following practice of validation, cash management product; use of cash pooling &

web based cheque collection system.Investment of short term surplus funds is made under certain guidelines for

public sector enterprises, which are known as DPE Guidelines (Department of Public Enterprises) issued by ministry of company affairs by government of India.It is mainly employed in inter corporate deposits. ICICI BANK¶s credit policy

seeks to maximize sales growth consistent with an acceptable risk. ICICI BANK being a major power manufacturer, mainly the customers related to government or



government departments. But during the last five years ICICI BANK is also takingorders from the private parties as well as in the international management. Billingis done as per the terms of contract to a particular customer. Payment collection isdone using various modes. Monitoring is done on monthly basis by ICICI BANK at unit, business sector and corporate level.

OTHERS:-

1. Financial Operations: - Networking capital (other than cash & bank balances) increased by Rs.1576 million during 2005-06 over the previousyear. The factors contributing to the increase are: -a) Increase in sundry debtors by 11960 million.

b) Increase in inventory by Rs. 8283 million.c) Increase in other current assets and loan and advances by Rs.74 million.

2. Power Sector: - Power sector booked orders worth Rs.108620 millionfor the supply and installation of 3354.2 Mw of power generating equipmentas well as services and supply of spares.

3. Industry Sector: - Orders amounting Rs.47280 million have been received by the industry sector in 2005-06 as against Rs.41170 million in the previousyear.

4. International Business: - During the year ICICI BANK secured several prestigious orders, each one of which signifies a major step forward towards

consolidation in international business.5. Capital Investment: - Continued efforts towards modernization of the

manufacturing technology and augmentation of manufacturing capacity, in

our manufacturing units and at sites resulted in capital investment of Rs.2730 million during the year 2005-06

6. Human Resource: - The Industrial Relations at various units and servicedivisions of the company remained harmonious and cordial during the year under report. The thrust on participative culture continued during the year.

7. ICICI BANK maintained its share of 65% in the country¶s total installed power generating capacity and this has significantly contributed to 73% of the power generated in the country during the year.



CONCLUSION & RECOMMENDATION

The study shows that typically ICICI BANK has 40% of their capital invested inWorking Capital. It gives more stress to Working Capital Management. ICICIBANK is no exception to the rule and has a skilled work force especially devotedto the task of Working Capital Management. A Study found that financial manager spend 32% of their time of Managing Working Capital. Findings shows that ICICIBANK have balance working capital but it has not satisfactory current ration.After study some recommendation are given below:1. ICICI BANK should maintain their Working Capital in balance form so thatsolvency remain continuous.

2. It showed take care of their current liabilities so that satisfactory liquidityratio can be attain.3. It showed work in favour of their employees and should encourage to do

better work for Working Capital Management.4. Skilled workforce should maintain, those who have full knowledge about

Working Capital.5. New technique should develop which prove helpful in Working Capital

Management



BIBLIOGRAPHY

Fundamentals of financial management ± Prassanna Chandra

Working capital management ± V.E.Ramamoorthy Problem of working capital ± R.K.Mishra Financial management ± Khan & Jain Financial management ± I.M.Pandey Financial management ± P.V.Kulkarni Corporate cash management ± Alfred L.Hunt

Annual report 2005-06 Ten year Digest of financial report ICICI BANK. Manual published by ICICI BANK. Web sites : -

www.myfinancials.com www.ICICI BANK.com



QUESTIONNAIRE

Name:

Job Title:

Age:

Sex:Qualification:

Note: Please tick (3) mark concerned options.

1. Do you have full knowledge of your present job?

A) High B) Average C) Low D) Very Low

2. How do you find the working environment in organization?

A) Satisfactory B) Unsatisfactory C) Average

3. Do you have any idea related to working capital?

A) Yes B) No

4. Is Finance deptt. gives more stress to working capital?

A) Yes B) No

5. How much importance to working capital & Cash Management is given by

you?


6. Under working capital management, which working area is more preferable?

A) Treasury Management B) Inventory Management

C) Receivable Management D) Current Liabilities

7. How much time you spend on working capital & Cash management?

A) 0-25% B) 25-50% C) 50-75%

D) 75-100%

8. Company can stand without working capital management?

A) Yes B) No

9. Does working capital management provide reinforcement for goal

achievement?



A) Yes B) No

10. Does it help you in identifying & setting future goals.


11. How much improvement you got in working capital.

A) outstanding B) satisfactory C) Unsatisfactory

12. How much you feels motivated for further improving your performance?




RISK ASSOCIATED WITH INVESTMENTS

Risk in holding securities is generally associated with the possibility that

realized returns will be less than the returns that were expected.

Forces that contribute to variation in return- price or dividend constitute

elements of risk.

Forces that are uncontrollable , external and broad in their effect are

called sources of systematic risk while forces that are controllable and

internal factors that are peculiar to industries/firms are called sources of

unsystematic risk.

SYSTEMATIC RISK

Systematic risk refers to that portion of total variability in return caused

by factors affecting the prices of all securities. Economic ,political and

sociological changes are sources of systematic risk.

UNSYSTEMATIC RISK

Unsystematic risk is that portion of total risk that is unique to a firm or

industry.Factors such as management capability, consumer preferences

and labor strikes cause systematic variability of returns in a firm.

TYPES OF SYSTEMATIC RISK

MARKET RISK: Variability in return on most of common stock due to

changing investor¶s expectation is known as Market Risk. This is due to

tangible events like lower corporate profits and intangible events .

Intangible events are related to market psychology. The initial decline in

the market can cause the fear of loss to grip investor`s , and a kind of



herd instinct builds as all investor make for the exit. These reactions to

reactions frequently culminate excessive selling which lowers down the

prices and index fall.

INTEREST RISK:- Interest risk refers to the uncertainty of future

market values and of the size of future income, caused by fluctuations in

interest rates.

As rate of interest on government securities rise or fall, the rate of return

demanded on alternative investments also rise and fall.

PURCHASING POWER RISK:-Purchasing power risk is the

uncertainty of the purchasing power of the amounts to be received. Both

inflation and deflation are covered in the all-encompassing term in

purchasing power risk.

UNSYSTEMATIC RISK

BUSINESS RISK:- Business risk is a function of the operating

conditions faced by a firm and variability these conditions inject into

operating income and expected dividends.

FINANCIAL RISK:- It is due to the presence of borrowed funds or debt

in the capital structure which creates fixed payments in the form of

interest that must be sustained by the form. As debt financing increases,

the variability of there return effect their expectation concerning their

return and therefore increases the risk of being ruined.



The total risk of an investment consist of two components:-

1) DIVERSIFIABLE OR UNSYSTEMATIC RISK :- It represent the

portion of an investment¶s risk that can be eliminated by holding

enough stock.

2) NON DIVERSIFIABLE RISK:- This is external to an industry an is

attributed to forces such as war, inflation etc.

TOTAL RISK= DIVERSIFIABLE RISK + NON DIVERSIFIABLE

RISK

Beta measures non diversifiable risk. Beta shows how the price of a

security responds to market forces.

The more responsive the price of a security to changes in the market, the

higher will be its beta.

Beta is calculated by relating the return on a security with a

return of market.

BETA= n7xy ± (7x) (7y)

n7x2 ± (7x)2

ALPHA=DY - FDX



Risk is an inherent aspect of every form of investment. For mutual fund

investments, risks would include variability, or period-by-period

fluctuations in total return. The value of the scheme's investments may be

affected by factors affecting capital markets such as price and volume

volatility in the stock markets, interest rates, currency exchange rates,

foreign investment, changes in government policy, political, economic or

other developments.

RISK FREE RATE is the return on a security that is free from default risk

and uncorrelated with return in the economy.eg Treasury Bills ± 364 days

Government Bonds with maturity period of 15 ± 20 yrs.

DEFAULT RISK refers to the risk accruing from the fact that the borrower may not

pay interest / principle on time. This is also known as credit risk . In short, how stable is

the company or entity to which you lend your money when you invest? How certain are

you that it will be able to pay the interest you are promised, or repay your principal

when the investment matures?

MARKET RISK: At times the prices or yields of all the securities in a particular market

rise or fall due to broad outside influences. When this happens, the stock prices of both

an outstanding, highly profitable company and a fledgling corporation may be affected.

This change in price is due to "market risk".

INFLATION RISK: Sometimes referred to as "loss of purchasing power." Whenever the

rate of inflation exceeds the earnings on your investment, you run the risk that you'll

actually be able to buy less, not more .



In short, how stable is the company or entity to which you lend your money when you

invest? How certain are you that it will be able to pay the interest you are promised, or

repay your principal when the investment matures?

INTEREST RATE RISK: Changing interest rates affect both equities and bonds in many

ways. Bond prices are influenced by movements in the interest rates in the financial

system. Generally, when interest rates rise, prices of the securities fall and when

interest rates drop, the prices increase. Interest rate movements in the Indian debt

markets can be volatile leading to the possibility of large price movements up or down

in debt and money market securities and thereby to possibly large movements in the

NAV.

INVESTMENT RISKS: In the sectoral fund schemes, investments will be

predominantly in equities of select companies in the particular sectors. Accordingly, the

NAV of the schemes are linked to the equity performance of such companies and may

be more volatile than a more diversified portfolio of equities.

LIQUIDITY RISK : Thinly traded securities carry the danger of not being easily saleable

at or near their real values. The fund manager may therefore be unable to quickly sell an

illiquid bond and this might affect the price of the fund unfavorably. Liquidity risk ischaracteristic of the Indian fixed income market.

CHANGES IN THE GOVERNMENT POLICY: Changes in Government

policy especially in regard to the tax benefits may impact the business

prospects of the companies leading to an impact on the investments made by

the fund.



MEASURING AND EVALUATING MUTUAL FUND

PERFORMANCE

Different performance measures :

Change in NAV =NAV at the end of the period ± NAV at the beginning of the

period.

It is very simple method.

However does not give the correct picture, in case the fund has distributed

dividend.

Total Return = Dividend distributions + change in NAV * 100 .

Corrects the shortcoming of the first method by taking into account the

dividend distributed.

Suitable for all types of funds. Performance must be interpreted in the light

of market conditions and investment objective.

However, it ignores the fact that distributed dividend also get reinvested.

ROI = { Units held+ / End NAV } - begin NAV.

Ex-div NAV 100

Beginning NAV

It is most suitable method which overcomes the limitation of second method

by considering the reinvestment of dividend.

EXPENSE RATIO

Total expense/average net assets of the fund is an indicator of the funds

efficiency and cost effectiveness.

Income Ratio.

Net Investment Income

y Net Assets.

Portfolio Turnover Ratio:It measures the amount of buying and selling done by a

fund. It gives an idea of how fast the fund manager is churning his portfolio.

High turnover ratio also indicates high transaction costs .



Transaction Costs include all expenses related to trading such as brokerage

commission paid, stamp duty on transfer registrar fees and custodians fees. It

has significant bearing an fund performance.

EVALUATING FUND PERFORMANCE

Basis of choosing an Appropriate Performance Benchmark:

The asset class if invests in,

An equity fund should be judged against another equity fund & equity

benchmark (Indices).

The funds stated objective.

Equity Funds.

Index Fund ± An Index fund invests in the stock comprising of the index

in the same ratio.

For example,

Market Index Fund - BSE Sensex

Nifty Index Fund - NIFTY

y This is a passive management style.

The difference between the return of this fund, and its index benchmark can be

explained by ³TRACKING ERROR ́ .

Active Equity Funds : The fund manager actively manages this fund. To

evaluate performance in such case we have to select an appropriate benchmark.

Large diversified equity fund - BSE 100

Sector fund - Sectoral Indices

Debt Funds :

y Debt fund can also be judged against a debt market index e.g. I-BEX

y Close ended debt funds can be measured against bank fixed deposits of

comparable maturity.



Money Market :

Money market have portfolio of short term instruments. The general practice is

to benchmark it against short term bank deposits.

Criteria for peer group comparisons to be considered

y The investment objectives and risk profiles

y Expense ratio

Even when two funds with similar characteristics are otherwise comparable, their

returns must be calculated on a comparable basis. Hence,

1. Compare returns of two funds over the same periods only;

2. Similarly, only average annualized compound returns are comparable

3. Only after-tax returns of two different schemes should be compared.

RISK & FINANCIAL PLANNING

Investment plans can be prepared for an investor only by

assessing his needs and risk profile.

Based upon the risk levels of the various kinds of funds,

Jacob¶s recommended following broad portfolio sub-allocation.

y Low risk (50 % G-see + MMUTUAL FUND)

y Moderate risk (40% Growth & Income + 30% G-sec) + 20%

Growth + 10% Index funds).

y High Risk/Aggressive (25% Growth funds + 25% International

funds + 25% Sector funds + 15% High yield bond funds + 10%

Gold Funds)

³Risk hence represents the volatility of earnings.´

Riskiness of equity fund depends upon the kind of stocks in the portfolio, the

diversification and the ability of the fund manager to time the market.

Equity price risks are

y Company specific

y Sector specific and



y Market specific.

The µStandard deviation´ (SD) measures the fluctuation of a funds returns around a

mean level, which can be a benchmark of another fund. This is the best measure of

total risk .

Beta is a measure of systematic risk (market risk). A b is more than 1 indicates that

the fund could fluctuate more in the same direction as the markets while b is less

than 1 denoted that the fund would fluctuate lesser than the market in the same

direction as the market.

Bogle¶s Ex marks or µR-squared¶ measures how much of a funds fluctuations is

attributable to the movement in the overall markets, from 0 ± 100%. Index

1funds have Ex-mark of nearly 100%.

Risk adjusted performance is measured by Sharpe & Treynor ratios. Sharpe ratio

divides the risk premium by the funds standard deviation, while the Treynor¶s

divided it by beta.

A funds risk level is also measured by its P/E multiple



All the above measure other than Beta or P/E ratio help measure the debt

portfolio as well. Debt portfolios are also exposed to default risk and the

interest rate risks.

The average maturity or duration of a portfolio should be considered while

evaluating the riskiness of debt portfolios.



FUND IN ACCORDANCE OF THEIR RISK LEVEL.

Money Market Mutual Fund

Govt bond fund

Index funds

. Income funds

Balanced funds

Growth & Income funds

International funds

Precious metal funds

Growth funds



Aggressive funds.



ACCOUNTING, VALUATION & TAXATION

Accounting

1.The balance sheet of a mutual fund is different from the balance sheet of a bank or

a company. All of the fund¶s assets belong to the investors and are held in fiduciary

capacity by the trustees.

2.Mutual funds in India are required to follow the accounting policies laid down in

SEBI (Mutual Fund) Regulations, 1996 and the amendments in 1998.

3.The fund does not account for investor¶s subscriptions as liabilities or deposits but

as Unit Capital. On the other hand, the investments made on behalf of the investors

are reflected on the assets side and are the main constituent of the balance sheet.

4.It is common practice for mutual funds to compute the share of each investor on

the basis of the value of Net Assets Per Share/Unit, commonly known as the Net

Asset Value (NAV)

NAV = Net Assets of the scheme / Number of Units Outstanding, i.e. Market

value of investments + Receivables + Other Accrued Income +Other Assets =

Accrued Expenses ± Other Payable ± Other Liabilities.

y No. of Units Outstanding as at the NAV date.

5.NAV of all schemes must be calculated and published at least weekly for closed-

end schemes and daily for open-end schemes.

6.A fund¶s NAV is affected by four sets of factors:

purchase and sale of investment securities

valuation of all investment securities held

other assets and liabilities, and

units sold or redeemed



7.According to SEBI,it is required that the fund must ensure that repurchase price is

not lower than 93% of NAV (95% in the case of a closed-fund). On the other side, a

fund may sell new units at a price that is different from the NAV, but the sale price

cannot be higher than 107 % of NAV. Also the difference between the repurchase

price and the sale price of the unit is not permitted to exceed 7% of the sale price.

8.The AMC may charge the scheme with investment management and advisory fees

subject to the following limits:

@ 1.25% of the first Rs. 100 crores of weekly average net assts

outstanding in the accounting year, and @ 1% of weekly average net

assets in excess of Rs. 100 crores.

For no load schemes, the AMC may charge an additional management fee upto 1 %

of weekly average net assets outstanding in the accounting year.

In addition to fees mentioned above, the AMC may charge the scheme with the

following expenses:

Initial expenses of launching schemes (not exceed 6% of initial resources

raised under the scheme): and

Recurring expenses including:

marketing and selling expenses agents¶ commission

brokerage and transaction costs

registrar services for transfer of units sold or redeemed

fees and expenses of trustees

audit fees

The total expenses charged by the AMC to a scheme, excluding issue or redemption

expenses but including investment management and advisory fees, are subject to the

following limits:

y on the first Rs. 100 crores of average weekly net assets- 2.5%.

y on the next Rs. 300 crores of average weekly net assets- 2.25%.

y on the next Rs. 300 crores of average weekly net assets- 2.0%.

y on the balance of average weekly net assets- 1.75%.



y For bond funds, the above percentages are required to be lower by 0.25%.

VALUATION

Mutual Funds value their investments on a ³mark to market´ basis; on the date of

valuation; eg ± if it¶s a daily NAV, the portfolio is valued daily.

Valuation of Traded Securities.

Where a security is traded on Stock Exchange (SE): valued at the last quoted closing

price where it is ³principally traded´.

If the security is not traded on the valuation day, take the value at which it was

traded on other SE on the earliest previous day, but not more than 30 days prior to

valuation.

Value of traded securities = Market price of traded securities x It¶s no. of

shares or bonds.

TAXATION

Most countries do not impose any tax on this entity ± the trust ± because the

income it earns is meant for the investors. The trust is considered to be only a

pass-through entity. After the 1999/2000 Budget the investors are totally exempt

from paying any tax on the d ividend income they receive from the mutual funds,

while certain types of schemes pay some taxes. Income distributed to unit

holders by a closed-end or debt fund is liable to a dividend distribution tax

of 10% plus a surcharge of 2% i.e. a tax of 10.2%.

In India

y Generally, income earned by any MUTUAL FUND is exempt from

tax.



y Income distributed to unit holders by a closed end or a debt fund is

liable to a dividend distribution tax of 10% plus a surcharge of

12% i.e. is a tax of 10.2%.

Wealth Tax: Ownership of units is not considered as µwealth¶ under the

Wealth Tax Act, and is therefore not chargeable to wealth tax.

Special Provisions for Offshore Fund Investors, NRIs, OCBs and

FIIs:

Under Section 195 of the Act the Mutual Fund is required to deduct tax at source at

the rate of 20% on any long-term capital gains if the payee Unitholder is a non

resident. In respect to short term capital gains t ax is required to be deducted at

source at the rate of 30% if the payee Unitholder is a non-resident non-corporate and

at the rate of 48% if the payee Unitholder is a foreign company.

Capital Gains on Sale of Units

However, if the investor sells his units and earns ³Capital Gains´, the investor is

subject to the Capital Gains Tax as under:

If units are held for not more than 12 months, they will be treated as short term

capital asset, otherwise as long term capital asset. (This period is 36 months for

assets other than shares and listed securities).



CHAPTER NO 9

ROLE OF SECURITIES EXCHANGE BOARD OF INDIA

(SEBI)

GoI and SEBI both are concerned with the protection of investor interests. SEBI

has incorporated the rules of good conduct in MF regulations . It has also issued

guidelines to AMFI and mutual funds to develop codes o f conduct for fund distributors,

fund managers and all employees and associates of AMC and Trustee Company.

The following areas are monitored by SEBI

i. Fund structure: In India, trustees have fiduciary responsibility towards investors in

mutual funds. Mutual funds are a trust and the trustees hold investors money in trust.

The money continues to belong to the investors and fund managers only manage

it.Indian mutual funds structure is made on the principal of Independence in the legal

structure. This independence is

achieved in the following three ways:

a. Separation of functions: The ownership, management and custody of the assets of

mutual funds lie with different entities. No one constituent has total control of the

assets of the mutual funds.

b. Independence of organizations: Mutual funds are trusts, which are, manage by

³board of trustees´ and AMC is a company, which is run by its ³board of directors´.

Trustees are given the overall role of independent supervision of all AMC personal

including the directors.

c. Independence of personal: Both the trusts and AMC should have a prescribed level

of independent personnel. Two-third of the board of trustees has to be independent and

505 of the board of directors of AMC have to be independent. Further, a trustee cannot

serve as a Director on the AMC he supervises or even any other AMC.



ii. Fund governance: The mutual fund structure has been designed to protect the

investor through a system of checks and balances on the observation of ethical

standards.

iii. Exercise of voting rights by funds: Mutual funds hold shares in various companiesas a part of their investment portfolio. The shares are in the name of trustees, who also

receive the right to vote as investors. Ethical norms require that the trustees exercise

these rights in the interest of fund investors. There is no law that places a specific

responsibility on trustees to vote in a particular way; however, SEBI is empowered to

investigate any case in this regard.

iv. Fund operations: Even at operating level, SEBI expects that AMC¶s observe ethical

norms in day-to-day exercise of their functions. Some of the practices, which SEBI

considers unethical, are:

a. Insider trading: Fund managers should not collude with insiders of various

companies and use information for their own benefit.

b. Preferential treatment to selected investors: Mutual funds being vehicles of

collective investment, all investors should be treated equally. The regulators keep check

to see that no discrimination is in favor of any investor.

c. Personal trading by fund managers and employees: The objective is the fund

managers and other fun employees do not use any no public information for personal

gains. SEBI has taken a view that not all fund employees at all levels should be barred

from personal trading, however they should disclose their holdings and transactions

made during a given period.

MAIN REGULATIONS /GUIDELINES

i. Guidelines for good conduct of AMC and Trustee company- personal trading: SEBI

has indicated some minimum requirements that have to be followed by employees of

AMC and Trustees. AMC¶s and TC¶s can set rules that are more stringent in this regard.

The responsibility to ensure ethical compliance by AMC¶s is set on trustees.



ii. Regulations of personal trading:

a. AMC is required to file a quarterly statement of dealings in securities by key

personal of AMC.

b. The trustees are also required to file details of security transactions where they

exceed Rs.1 lakh.

c. The regulations require that trustees certify that the AMC employees do not

indulge in front running or self-dealing.

iii. Regulations on insider trading: SEBI has instructed that SEBI (insidertrading)

(Amendment) regulations 2002 shall be followed by AMC, TC, their directors and

employees.

iv. Regulations on fund advertisement: SEBI has issued detailed guidelines that

mutual funds have to follow while advertising their products.

v. Compliance officer: SEBI has made it mandatory for every AMC to have a

compliance officer who would be responsible for implementation of all laws, guidelines

and voluntary codes of conduct. Compliance officer not only reviews but can also give

approval to personal trading and investment transactions.

vi. Code of conduct for distributors: All the d istributors and agents have to follow thecode of conduct laid down in the fifth schedule of the SEBI MF Regulations (1996) as

well as AGNI. Mutual funds have to monitor and report any violation of these

guidelines to SEBI and AMFI.



SUGGESTIONS

Out of sample of 8 open ended funds of equity diversified scheme selected

from four different sectors that is from technology ,banking, pharma and

infrastructure ,these following funds are suggested for the purpose of

investment.

On the basis of risk return analysis, it is to be suggested that Sundaram

BNP Paribas of Infrastructure sector , DSP Merill Lynch of technology

sector , HDFC fund of banking sector are best mutual funds for the

purpose of investment .

.



CONCLUSION

On the basis of risk and return analysis,

Sundaram BNP Paribas is the best fund in infrastructure sector

As its Sharpe`s index is 181.304, which reflects the excess return

earned on a portfolio per unit of its total risk.

Treynor index is 5.6734 which reflects excess return on a portfolio per

unit of its systematic risk. Jensen measure is 0.83764 which reflects the difference between the

returns actually earned on a portfolio and returns the portfolio was

supposed to earn.

DSP Merill Lynch-Technology is best mutual fund in technology sector.

As its Sharpe`s Index is133.482, which reflects the excess return

earned on a portfolio per unit of its total risk

Treynor Index is 0.6203 which reflects excess return on a portfolio per

unit of its systematic risk.

Jensen measure is 0.30655 which reflects the absolute performance on

a risk adjusted basis.

HDFC is best mutual fund in banking sector

As its Sharpe`s Index is 109.1346, which reflects the excess return

earned on a portfolio per unit of its total risk



Treynor Index is 12.505 which reflects excess return on a portfolio per

unit of its systematic risk.

Jensen measure is 1.1378 which reflects the absolute performance on a

risk adjusted basis.

According to ET Quarterly Mutual fund tracker , DSP Merill Lynch is the

topper in June 08 with three platinum and three gold ratings in equity

diversified scheme .

nam icic bank

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