KYC AML SHORT NOTES 4

KYC AML SHORT NOTES 4

49.  Banks/FIs should ensure that records pertaining to the identification of the customers and their address (e.g. copies of documents like passports, identity cards, driving licenses, PAN card, utility bills, etc.) obtained while opening the account and during the course of business relationship, are properly preserved for at least five years after the business relationship is ended as required under Rule 10 of the Rules ibid. The identification of records and transaction data should be made available to the competent authorities upon request.

50.  Banks/FIs may maintain records of the identity of their clients, and records in respect of transactions referred to in Rule 3 in hard or soft format.

51.  Combating Financing of Terrorism : The United Nations periodically circulates the following two lists of individuals and entities, suspected of having terrorist links, and as approved by its Security Council (UNSC).

(a)  The “Al-Qaida Sanctions List”, includes names of individuals and entities associated with the Al-Qaida.

(b)  The “1988 Sanctions List”, consisting of individuals (Section A of the consolidated list) and entities.

52.  The United Nations Security Council Resolutions (UNSCRs), received from Government of India, are circulated by the Reserve Bank to all banks and FIs. Banks/FIs are required to update the lists and take them into account for implementation of Section 51A of the Unlawful Activities (Prevention) (UAPA) Act, 1967, discussed below. Banks/FIs should ensure that they do not have any account in the name of individuals/entities appearing in the above lists. Details of accounts resembling any of the individuals/entities in the list should be reported to FIUIND.

53.  Freezing of Assets under Section 51A of Unlawful Activities (Prevention) Act, 1967 :

(a)  The Unlawful Activities (Prevention) Act, 1967 (UAPA) has been amended by the Unlawful Activities (Prevention) Amendment Act, 2008. Government has issued an Order dated August 27, 2009 (Annex II of this circular) detailing the procedure for implementation of Section 51A of the Unlawful Activities (Prevention) Act, 1967 for prevention of, and for coping with terrorist activities.

In terms of Section 51A, the Central Government is empowered to freeze, seize or attach funds and other financial assets or economic resources held by, on behalf of or at the direction of the individuals or entities listed in the Schedule to the Order, or any other person engaged in or suspected to be engaged in terrorism and prohibit any individual or entity from making any funds, financial assets or economic resources or related servicesavailable for the benefit of the individuals or entities listed in the Schedule to the Order or any other person engaged in or suspected to be engaged in terrorism.

57.  Jurisdictions that do not or insufficiently apply the FATF Recommendations:

(a)  Banks/FIs are required to take into account risks arising from the deficiencies in AML/CFT regime of the jurisdictions included in the FATF Statement. In addition to FATF Statements circulated by Reserve Bank of India from time to time, banks/FIs should also consider publicly available information for identifying countries, which do not or insufficiently apply the FATF Recommendations. It is clarified that banks/FIs should also give special attention to business relationships and transactions with persons (including legal persons and other financial institutions) from or in countries that do not or insufficiently apply the FATF Recommendations and jurisdictions included in FATF Statements. (b) Banks/FIs should examine the background and purpose of transactions with persons (including legal persons and other financial institutions) from jurisdictions included in FATF Statements and countries that do not or insufficiently apply the FATF Recommendations. Further, if the transactions have no apparent economic or visible lawful purpose, the background and purpose of such transactions should, as far as possible be examined, and written findings together with all documents should be retained and made available to Reserve Bank/other relevant authorities, on request.

58.  In terms of the Rule 3 of the PML (Maintenance of Records) Rules, 2005, banks/FIs are required to furnish information relating to cash transactions, cash transactions integrally connected to each other, and all transactions involving receipts by non-profit organisations (NPO means any entity or organisation that is registered as a trust or a society under the Societies Registration Act, 1860 or any similar State legislation or a company registered (erstwhile Section 25 of Companies Act, 1956 ) under Section 8 of the Companies Act, 2013), cash transactions ;where forged or counterfeit currency notes or bank notes have been used as genuine, cross border wire transfer, etc. to the Director, Financial Intelligence Unit-India (FIU-IND).

59.  FIU-IND has released a comprehensive reporting format guide to describe the specifications of prescribed reports to FIU-IND. FIU-IND has also developed a Report Generation Utility and Report Validation Utility to assist reporting entities in the preparation of prescribed reports. The Office Memorandum issued on Reporting Formats under Project FINnet dated 31st

March, 2011 by FIU containing all relevant details are available on FIU’s website. Banks/FIs should carefully go through all the reporting formats prescribed by FIU-IND.

60.  FIU-IND have placed on their website editable electronic utilities to file electronic Cash Transactions Report (CTR)/ Suspicious Transactions Report (STR) to enable banks/FIs which are yet to install/adopt suitable technological tools for extracting CTR/STR from their live transaction data base. It is, therefore, advised that in cases of those banks/FIs, where all the branches are not fully computerized, the Principal Officer of the bank/FI should cull out the transaction details from branches which are not yet computerized and suitably arrange to feed the data into an electronic file with the help of the editable electronic utilities of CTR/STR as have been made available by FIU-IND on their website http://fiuindia.gov.in.

In terms of Rule 8, while furnishing information to the Director, FIU-IND, delay of each day in not reporting a transaction or delay of each day in rectifying a misrepresented transaction beyond the time limit as specified in the Rule shall constitute a separate violation. Banks/FIs are advised to take note of the timeliness of the reporting requirements.

62.  Reports to be furnished to FIU-IND :

1)  Cash Transaction Report (CTR)

2)  Suspicious Transaction Reports (STR)

3)  Non-Profit Organisation

4)  Cross-border Wire Transfer

63.  The CTR for each month should be submitted to FIU-IND by 15th of the succeeding month. Cash transaction reporting by branches to their controlling offices should, therefore, invariably be submitted on monthly basis and banks/FIs should ensure to submit CTR for every month to FIU-IND within the prescribed time schedule.

64.  All cash transactions, where forged or counterfeit Indian currency notes have been used as genuine should be reported by the Principal Officer of the bank to FIU-IND in the specified format(Counterfeit Currency Report – CCR), by 15thday of the next month. These cash transactions should also include transactions where forgery of valuable security or documents has taken place and may be reported to FIU-IND in plain text form.

65.  While filing CTR, details of individual transactions below Rupees Fifty thousand need not be furnished. CTR should contain only the transactions carried out by the bank on behalf of their clients/customers excluding transactions between the internal accounts of the bank.

66.  A summary of cash transaction reports for the bank as a whole should be compiled by the Principal Officer of the bank every month in physical form as per the format specified. The summary should be signed by the Principal Officer and submitted to FIU-IND. In case of CTRs compiled centrally by banks for the branches having Core Banking Solution (CBS) at their central data centre, banks may generate centralised CTRs in respect of the branches under core banking solution at one point for onward transmission to FIU-IND, provided the CTR is to be generated in the format prescribed by FIU-IND.

KYC AML SHORT NOTES 3

KYC short Notes:

1.     The objective of KYC/AML/CFT guidelines is to prevent banks/FIs from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities.

2.     The PMLA came into effect from 1st July 2005. Necessary Notifications / Rules under the said Act were published in the Gazette of India on 1st July, 2005 by the Department of Revenue, Ministry of Finance, Government of India. The PMLA has been further amended vide notification dated March 6, 2009 and inter alia provides that violating the prohibitions on manipulative and deceptive devices, insider trading and substantial acquisition of securities or control as prescribed in Section 12 A read with Section 24 of the Securities and Exchange Board of India Act, 1992 (SEBI Act) will now be treated as a scheduled offence under schedule B of the PMLA.

3.     KYC procedures also enable banks/FIs to know/understand their customers and their financial dealings better and manage their risks prudently.

4.     For the purpose of KYC Norms, a ‘Customer’ is defined as a person who is engaged in a financial transaction or activity with a reporting entity and includes a person on whose behalf the person who is engaged in the transaction or activity, is acting.

5.     “Designated Director" means a person designated by the reporting entity (bank, financial institution, etc.) to ensure overall compliance with the obligations imposed under chapter IV of the PML Act.

SHORT NOTES 2 KYC AML

 SHORT NOTES  2 KYC AML

5. Terrorism Financing are 3 types



A.    State financing: Separate entities are created with organizational and financial support of the state

B.    Legimate modes : Donations by business,individuals and charity funds

C.    Private funding:by criminal activities by bank robberies, drug trafficking, kidnaps,exortion..



6. Money laundering can take several forms, although most methods can be categorized into one of a few types. These include "bank methods, smurfing [also known as structuring], currency exchanges, and double-invoicing".

 Structuring: Often known as smurfing, this is a method of placement whereby cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and to avoid anti-money laundering reporting requirements. A sub-component of this is to use smaller amounts of cash to purchase bearer instruments, such as money orders, and then ultimately deposit those, again in small amounts.

·         Bulk cash smuggling: This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement

·         Cash-intensive businesses: In this method, a business typically expected to receive a large proportion of its revenue as cash uses its accounts to deposit criminally derived cash. Such enterprises often operate openly and in doing so generate cash revenue from incidental legitimate business in addition to the illicit cash – in such cases the business will usually claim all cash received as legitimate earnings. Service businesses are best suited to this method, as such enterprises have little or no variable costs and/or a large ratio between revenue and variable costs, which makes it difficult to detect discrepancies between revenues and costs. Examples are parking structures, strip clubs, tanning salons, car washes, arcades, bars, restaurants, and casinos.

·         Trade-based laundering: This involves under- or over-valuing invoices to disguise the movement of money. For example, the art market has been accused of being an ideal vehicle for money laundering due to several unique aspects of art such as the subjective value of artworks as well as the secrecy of auction houses about the identity of the buyer and seller.

·         Shell companies and trusts: Trusts and shell companies disguise the true owners of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose their true owner. Sometimes referred to by the slang term rathole, though that term usually refers to a person acting as the fictitious owner rather than the business entity.

·         Round-tripping: Here, money is deposited in a controlled foreign corporation offshore, preferably in a tax haven where minimal records are kept, and then shipped back as a foreign direct investment, exempt from taxation. A variant on this is to transfer money to a law firm or similar organization as funds on account of fees, then to cancel the retainer and, when the money is remitted, represent the sums received from the lawyers as a legacy under a will or proceeds of litigation.

·         Bank capture: In this case, money launderers or criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny.

·         Casinos: In this method, an individual walks into a casino and buys chips with illicit cash. The individual will then play for a relatively short time. When the person cashes in the chips, they will expect to take payment in a check, or at least get a receipt so they can claim the proceeds as gambling winnings.

·         Other gambling: Money is spent on gambling, preferably on high odds games. One way to minimize risk with this method is to bet on every possible outcome of some event that has many possible outcomes, so no outcome(s) have short odds, and the bettor will lose only the vigorish and will have one or more winning bets that can be shown as the source of money. The losing bets will remain hidden.

·         Real estate: Someone purchases real estate with illegal proceeds and then sells the property. To outsiders, the proceeds from the sale look like legitimate income. Alternatively, the price of the property is manipulated: the seller agrees to a contract that underrepresents the value of the property, and receives criminal proceeds to make up the difference.

·         Black salaries: A company may have unregistered employees without written contracts and pay them cash salaries. Dirty money might be used to pay them.

·         Tax amnesties: For example, those that legalize unreported assets and cash in tax havens.

·         Life insurance business: Assignment of policies to unidentified third parties and for which no plausible reasons can be ascertained.

·         By using national banking services smurfing, Muiltiple tier of accounts,funnel accounts,Contra transactions,DD,cash depost and transfer fund connected accounts, front companies, legimate accounts, dormant accounts(Mostly used by terrorists) and wire transfer

·         Using remittance ,prepaid cards, money changers,credit and debit cards

By using The credit card industry includes: case study


 Credit card associations, such as American Express,MasterCard and Visa, which license member banks toissue bankcards, authorize merchants to accept thosecards, or bothIssuing banks, which solicit potential customers and issue the credit cards.Acquiring banks, which process transactions for merchants who accept credit cards.
 Third-party processors, which contract with issuing or acquiring banks to provide transaction processing andother credit card–related services for the banks.Credit card accounts are not likely to be used in the initialplacement stage of money laundering because the industrygenerally restricts cash payments. They are more likely to be usedin the layering or integration stages.
Example
Money launderer Josh prepays his credit card using illicit funds that he has already introduced into thebanking system, creating a credit balance on his account. Josh then requests a credit refund, whichenables him to further obscure the origin of the funds, which constitutes layering. Josh then uses the illicitmoney he placed in his bank account and the creditcard refund to pay for a new kitchen that he bought.Through these steps he has integrated his illicit fundsinto the financial system.

·         A money launderer could put ill-gotten funds in accounts at banksoffshore and then access these funds using credit and debitcards associated with the offshore account. Alternatively, he couldsmuggle the cash out of one country into an offshore jurisdictionwith lax regulatory oversight, place the cash in offshore banks and— again — access the illicit funds using credit or debit cards.In a 2002 Report called “Extent of Money Laundering throughCredit Cards Is Unknown,” the U.S. Government AccountabilityOffice, the Congressional watchdog of the United States, offered hypothetical money laundering scenarios using credit cards. One
example was: “[Money launderers establish a legitimate businessin the U.S. as a ‘front’ for their illicit activity. They establish a bank account with a U.S.-based bank and obtain credit cards and ATM cards under the name of the ‘front business.’ Funds from theirillicit activities are deposited into the bank account in the United States. While in another country, where their U.S.-based bank hasaffiliates, they make withdrawals from their U.S. bank account,
using credit cards and ATM cards. Money is deposited by one of their cohorts in the U.S. and is transferred to pay off the credit cardloan or even prepay the credit card. The bank’s online services make it possible to transfer funds between checking and creditcard accounts.”



6.ML Global measures can be achieved by



A.    Engagement of international organizations

B.    UNO initiatives like Vienna convention in 1988, Political declaration in 1998  , The Palermo convention in 2003

C.    International monetary fund

D.    Financial intelligence units (In india 15th nov 2004 , Director EIU economic intelligence council, Headed by finance Minister)

E.    Egmont group of FIUs..1995 (151  FIUs)

CASE STUDY KYC AML

Online or Internet Banking ( Special Case study how Money laundering 3 steps Happens):: Very important

Placement — Launderers want to get their proceeds into legitimate repositories such as banks, securities or real estate, with as little trace of the source and beneficial ownership as possible. Often, cyberspace banks do not accept conventional deposits. However,cyberbanks could be organized to take custodial-like forms — holding, reconciling and transferring rights to assets held in different forms around the world. Money launderers can create their own systems shadowing traditional commercial banks in order to acceptdeposits, perhaps as warehouses for cash or otherbulk commodities. Thus, cyberspace banks have thepotential to offer highly secure, uncommonly private“placement” vehicles for money launderersLayering — Electronic mail messages, aided by encryption and cyberspace banking transfers, enablelaunderers to transfer assets around the world manytimes a day.

 Integration — Once layered, cyberspace bankingtechnologies may facilitate integration in two ways.If cyberbanking permits person-to-person cash-like transfers, with no actual cash involvement, existing currency reporting regulations do not apply. Using“super smart-card” technologies, money can be movedaround the world through ATM transactions. These smart cards permit easy retrieval of the “account”balance by the use of an ATM card

Short Notes on Anti Money Laundering

Short Notes on Anti Money Laundering

1. The conversion or transfer of property, the concealment or disguising of the nature of the proceeds, the acquisition, possession or use of property, knowing that these are derived from criminal activity and participate or assist the movement of funds to make the proceeds appear legitimate is money laundering.

Money obtained from certain crimes, such as extortion, insider trading, drug trafficking, and illegal gambling is "dirty" and needs to be "cleaned" to appear to have been derived from legal activities, so that banks and other financial institutions will deal with it without suspicion. Money can be laundered by many methods which vary in complexity and sophistication.

Money laundering involves three steps: The first involves introducing cash into the financial system by some means ("placement"); the second involves carrying out complex financial transactions to camouflage the illegal source of the cash ("layering"); and finally, acquiring wealth generated from the transactions of the illicit funds ("integration"). Some of these steps may be omitted, depending upon the circumstances. For example, non-cash proceeds that are already in the financial system would not need to be placed.

According to the United States Treasury Department:

Money laundering is the process of making illegally-gained proceeds (i.e., "dirty money") appear legal (i.e., "clean"). Typically, it involves three steps: placement, layering, and integration. First, the illegitimate funds are furtively introduced into the legitimate financial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it is integrated into the financial system through additional transactions until the "dirty money" appears "clean".

2.Money laundering involves taking criminal proceeds and disguising their illegal source in anticipation of ultimately using the criminal proceeds to perform legal and illegal activities.

Simply put, money laundering is the process of making dirty money look clean.

3. Money laundering methods

Money laundering:

The money laundering cycle can be broken down into three distinct stages; however, it is important to remember that money laundering is a single process. The stages of money laundering include the:

Placement Stage

Layering Stage

Integration Stage

The Placement Stage
The placement stage represents the initial entry of the "dirty" cash or proceeds of crime into the financial system. Generally, this stage serves two purposes: (a) it relieves the criminal of holding and guarding large amounts of bulky of cash; and (b) it places the money into the legitimate financial system. It is during the placement stage that money launderers are the most vulnerable to being caught. This is due to the fact that placing large amounts of money (cash) into the legitimate financial system may raise suspicions of officials.

The placement of the proceeds of crime can be done in a number of ways. For example, cash could be packed into a suitcase and smuggled to a country, or the launderer could use smurfs to defeat reporting threshold laws and avoid suspicion. Some other common methods include:

Loan Repayment

Repayment of loans or credit cards with illegal proceeds Gambling

Purchase of gambling chips or placing bets on sporting events

Currency Smuggling

The physical movement of illegal currency or monetary instruments over the border

Currency Exchanges

Purchasing foreign money with illegal funds through foreign currency exchanges

Blending Funds

AML KYC PREFACE

AML KYC:

This policy and procedure document is a comprehensive source of reference for all the

concerned and relevant activities of the Bank towards Know Your Customer (KYC), Anti

Money Laundering (AML) and Combating the Financing of Terrorism (CFT) compliance. The

policies and procedures developed are designed to ensure that the Bank is committed to the

prevention of the use of its facilities for laundering the proceeds of crime and financing

terrorist activities. It consists of the following sections:

− Risk based acceptance model to facilitate the classification of current and

existing customers on the basis of money laundering and terrorist financing

risk;

− Account opening procedures including customer classification, verification of

customer information using documentary and non-documentary methods and

escalation processes;

− Policy for customer information updates based on the risk level of the

individual or entity;

− Internal controls to measure the risk levels of products, services and

customers accepted and to measure the effectiveness of current policies and

procedures;

− Policies and procedures for the monitoring and reporting of transactions;

− Policies and procedures for customer record maintenance, retention and their

sharing with government agencies; and

− Recommendation for a training programme for Bank officials geared towards

customer identification and acceptance, customer risk ranking and detection

of money laundering instances.

1.1 Statement of commitment

The goals and objectives of this KYC, AML & CFT programme are to (1) deter

individuals and entities from using the Bank to launder the proceeds of illegal activities;

(2) enable member branches of the Bank to comply with their obligations under the

Prevention of Money Laundering Act, Unlawful Activities Prevention Act (ULPA) and

regulations from Reserve Bank of India (RBI) and National Bank for Agriculture and

Rural Development (NABARD), regulatory bodies for the banks; (3) manage and

mitigate money laundering and terrorist financing related risks; (4) allow banks to cooperate

with regulatory bodies and government agencies in detecting and deterring

money laundering and terrorist financing; and (5) provide employees with guidance for

actions to be taken to comply with the Bank’s obligations under the law and the Bank’s

policies.

2 Definitions

2.1 Customer

RBI defines a customer1 as any one of the following:

− A person or entity that maintains an account and/or has a business

relationship with the Bank.

− One on whose behalf the account is maintained (i.e., the beneficial owner) or

beneficiary of transactions conducted by professional intermediaries, such as

stock brokers, chartered accountants, solicitors, etc. as permitted under the

law.

− Any person or entity connected with a financial transaction or any other

product offered by the Bank including walk-in customers.

Today Certified credit professionals Recollected

LC EOQ,
MSMED,
PSL Classification,
Ratio(Inventory Turnover,
ICR,
DER
Leverage Ratio etc.)
Break Even Point,
TREDS,
CERSAI,
Credit Monitoring,
Capital Budgeting Methods Cases (IRR,ARR,NPV)Minor
,IBC.
Working Capital Assessment
Factoring-Forfaiting .

Today Digital banking recollected super questions

Previous years Digital banking recollected

Aeps
Nach
Upi
Virtual keyboard to safegaurd against keylogger
4 questions on process of chargeback
Nfc technology and RFID
Approx 8-10 question on security of POS terminals
2 que on MDR
What is cash withdrawal through pos called

CCP export credit and RBI priority Guidelines

Export Finance
Export Finance : Funds advanced by a lending institution (such as an exportimport
bank or trade development bank) against confirmed orders from qualified foreign
buyers to enable the exporter to make and supply ordered goods. Usually, the exporter
arranges a commitment from the buyer to make the payment directly to the lender.
Upon receipt of payment the lender deducts the loan amount plus interest and other
charges and forwards the balance to the exporter.


RBI and DGFT::
RBI controls Foreign Exchange and DGFT (Directorate General of Foreign
Trade) controls Foreign Trade. Exim Policy as framed in accordance with
FEMA is implemented by DGFT. DGFT functions under direct control of
Ministry of Commerce and Industry. It regulates Imports and Exports
through EXIM Policy.
On the other hand, RBI keeps Forex Reserves, Finances Export trade and
Regulates exchange control. Receipts and Payments of Forex are also
handled by RBI.
IEC - Importer Exporter Code::
One has to apply for IEC to become eligible for Imports and Exports. DGFT
allots IEC to Exporters and Importers in accordance with RBI guidelines
and FEMA regulations. EXIM Policy is also considered before allotting IEC.
Export
Declaration
Form
All exports (physically or otherwise) shall be declared in the following Form.
1. GR form--- meant for exports made otherwise than by post.
2. PP Form---meant for exports by post parcel.
3. Softex form---meant for export of software.
4. SDF (Statutory Declaration Form)----replaced GR form in order to
submit declaration electronically.
SDF is submitted in duplicate with Custom Commissioned who puts its
stamp and hands over the same to exporter marked “Exchange Control
Copy” for submission thereof to AD.
Exemptions
• Up to USD 25000 (value) – Goods or services as declared by the
exporter.
• Trade Samples, Personal effects and Central Govt. goods.
• Gift items having value up to Rs. 5.00 lac.
• Goods with value not exceeding USD 1000 value to Myanmar.
• Goods imported free of cost for re-export.
• Goods sent for testing.
ADs may consider waiver for export of goods free of cost for export
promotion up to 2% of average annual exports of previous 3 years subject
to ceiling of Rs. 5.00 lac. The limit is Rs. 10.00 lac for Status Holder
Exporters.
Prescribed Time limits::
The time norms for export trade are as under:
• Submission of documents with “Exchange Control Copy” to AD
within 21 days from date of shipment.
• Time period for realization of Export proceeds is has been reduced
to 9M for all types of exports including exports to SEZ (Special
economic zones), SHE(Status Holder Exporters) and 100%EOUs.
Previously, the time period was 12Months for SEZs and SHEs.
• For, Exports to Warehouse established outside India, as soon as it
is realized and in any case within fifteen months from the date of
shipment of goods
• After expiry of time limit, extension is sought by Exporter on ETX
Form. The AD can extend the period by 6M.
However, reporting will be made to RBI on XOS Form on half yearly basis
in respect of all overdue bills which remained outstanding for more than
prescribed period or the bills which are overdue
Direct Dispatch
of Shipping
Documents::
AD banks may handle direct dispatch of shipping documents provided
export proceeds are up to USD 1 Million and the exporter is regular
customer of at least 6 months.
Advance Payments::
Exporters may receive advance payments from their overseas importers
provided:
• Shipment is made within 1 year from receipt of advance.
• Rate of interest payable should not exceed LIBOR+100 bps.
• Documents are routed through AD from which advance was routed.
Prescribed
Method of
payment and
Reduction in
export proceeds
Exporter will receive payment though any of the following mode:
• Bank Drafts, TC, Currency, FCNR/NRE deposits, International
Credit Card. But the proceeds can be in Indian Rupees from Nepal
and Bhutan.
• Export proceeds from ACU countries can be settled in ACU/EURO
or ACU/Dollar. A separate Dollar/Euro account is maintained which
is denominated as ACU Dollar or ACU EURO.
ACU – Asian Clearing Union was formed in Tehran, Iran in 1974 and it
comprises of following 9 countries as members.
India, Bangladesh, Bhutan, Myanmar, Iran, Pak, Srilanka, Nepal and
Maldives.
Exporters may be allowed to reduce the export proceeds with the following:
• Reduction in Invoice value on account of discount for pre-payment
of Usance bills (maximum 25%)
• Agency commission on exports.
• Claims against exports.
• Write off the unrecoverable export dues up to maximum limit of 10%
of export value.
The proceeds of exports can be got deposited by exporter in any of the
following account:
1. Overseas Foreign Currency account.
2. Diamond Dollar account.
3. EEFC (Exchange Earners Foreign Currency account)
DDA _ diamond Dollar accounts
Diamond Dollar account can be opened by traders dealing in Rough and
Polished diamond or Diamond studded Jewellary with the following
conditions:
1. With track record of 2 years.
2. Average Export turnover of 3 crores or above during preceding 3
licensing years.
DDA account can be opened by the exporter for transacting business in
Foreign Exchange. An exporter can have maximum 5 Diamond Dollar
accounts.
EEFC Exchange Earners Foreign Currency accounts can be opened by exporters.
100% export proceeds can be credited in the account which does not earn
interest but this amount is repatriable outside India for imports (Current
Account transactions).
Pre-shipment
Finance or
Packing Credit::
Packing credit has the following features:
1. Calculation of FOB value of order/LC amount or Domestic cost of
production (whichever is lower).
2. IEC allotted by DGFT.
3. Exporter should not be on the “Caution List” of RBI.
4. He should not be under “Specific Approval list” of ECGC.
5. There must be valid Export order or LC.
6. Account should be KYC compliant.
Liquidation of Pre-shipment credit
• Out of proceeds of the bill.
• Out of negotiation of export documents.
• Out of balances held in EEFC account
• Out of proceeds of Post Shipment credit.
Concessional rate of interest is allowed on Packing Credit up to 270
days. Previously, the period was 180 days. Running facility can also be
allowed to good customers.

Loans and advances CCP exam

Loans and Advances::(Useful for Certified credit officers( professionals) , Caiib also)) very important for bankers



1. ˜Credit Rating Agencies in India are regulated by: RBI

2. ˜CRISIL stands for: Credit Rating Information Services of India Ltd.

3. ˜Deferred Payment Guarantee is : Guarantee issued

when payment by applicant of guarantee is to be made in installments over a period of time.

4. ˜If Break Even Point is high, it can be construed that the margin of safety is ____: Low.

5. ˜Long Term uses – 12; total Assets – 30; Long Term source 16; What is net working capital : 4

6. ˜On which one of the following assets, depreciation is applied on Straight line method: Computers.

7. ˜Projected Turnover is Rs.400 lacs, margin by promoter is Rs. 20 lacs. What is maximum bank

finance as per Annual Projected Turnover method: 80 lakhs.

8. ˜Rohit was a loanee of the branch and news has come that he has expired. On enquiry, it was

observed that he left some assets. Upto what extent the legal heirs are liable to the Bank? Legal heirs are

liable for the liabilities upto the assets inherited by them.

9. ˜The appraisal of Deferred Payment Guarantee is same as that of a) Demand Loan b) OD c) Term

Loan d) CC : Term Loan.

10. A cash credit account will be treated as NPA if the CC limit is not renewed within ___days from the

due date of renewal: 180 days.

11. A director of a bank wants to raise loan of Rs 10 lakh from his bank against Life Insurance Policy with

surrender value of more than Rs 15 lakh. What will be done?: Bank can sanction.

12. A firm is allowed a limit of Rs.1.40 lac at 30% margin. It wants to avail the limit fully. How much will

be the value of security : Rs.2 lac

13. A guarantee issued for a series of transactions is called: Continuing guarantee

14. A lady who has taken a demand loan against FD come to the branch and wants to add name of her

minor son, as joint a/c holder. What you will do?: Name can be added only after adjustment of the loan.

15. A letter of credit which is issued on request of the beneficiary in favour of his supplier: Back to Back

LC

16. A loan is given by the bank on hypothecation of stock to Mr. A. Bank receives seizure order from

State Govt. What should bank do?: Bank will first adjust its dues and surplus if any wilt be shared with

the Govt.

17. A loan was sanctioned against a vacant land. Subsequently a house was constructed at the site.

What security is available now to the bank? : Both

18. A minor was given loan. On attaining majority he acknowledges having taken loan and promises to

pay. Whether the loan can be recovered? : He can not ratify the contract. Hence recovery not possible.

19. A negotiating bank and issuing bank are allowed days each for scrutiny of documents drawn

under Letter of credit to ensure that documents are as per LC: 5 banking days each.

20. Age limit staff housing loan: 70 years;

21. An L/C is expiring on 10.05.2008. A commotion takes place in the area and bank could not open.

Under these circumstances can the LC be negotiated?: The L/C can not be negotiated because expiry date

of LC can not be extended if banks are closed for reasons beyond their control.

22. As per internal policy of certain banks, the net worth of a firm does not include: a. Paid up capital b.

Free Reserve c. Share Premium d. Equity received from Foreign Investor : Revaluation Reserves

23. Authorised capital is Rs.10 lac. Paid up capital Rs.6 lac. The loss of previous year is Rs.1 lac. Loss in

current year is Rs3 _ lac. The tangible net worth is : Rs.2 lac

24. Authorised capital= 10 lac, paid-up capital = 60%, loss during current year = 50000, loss last year =

2 lacs, what is the tangible net worth of the company? : 3.5 lac

25. Bailment of goods by a person to another person, to secure a loan is called : Pledge

26. Balance outstanding in a CC limit is Rs.9 lakh. Value of stock is Rs.5 lakhs. It is in doubtfUl for more

than two years as on 31 March 2012. What is the amount of provision to be made on 31-03-2013?: Rs.9

lakhs (100% of liability as account is doubtful for more than 3 years)

27. Balance Sheet of a firm indicates which of the following – Balance Sheet indicates what a firm

owes and what a firm owns as on a particular date.

28. Bank limit for working capital based on turn over method: 20% of the projected sales turnover

accepted by Banks

29. Banks are required to declare their financial results quarterly as per provisions of : SEBI

30. Banks are required to maintain -a margin of ___ for issuing Guarantee favouring stock exchange on

behalf of share Brokers.

31. Banks are required to obtain audited financial papers from non corporate borrowers for granting

working capital limit of: Rs.25 lakh &above

32. Banks provide term loans and deferred payment guarantee to finance capital assets like plant and

machinery. What is the difference between these two: Outlay of funds.

33. Benchmark Current Ratio under turn over method is: 1.25

34. Break Even Point: No profit no loss. ( TR-TC=Zero)

35. Calculate Debt Equity ratio – Debenture – Rs 200, capital 50; reserves – 80; P& L account credit

balance – Rs 20: 4: 3 ( 200 divided by 150).

36. Calculate Net working capital– Total assets 1000; Long Term liabilities 400; Fixed assets, Intangible

assets and Non current assets (i.e. long term uses) Rs 350; What is net working capital : 400- 350= Rs

50

37. Calculate Tangible Net Worth: Land and building: 200 Lacs; Capital:80000 intangible asset:15000:

65,000

38. CALCULATION OF INTEREST IN LOAN ACCOUNT: MONTHLY

39. CARE stands for : Credit Analysis & Research Ltd

40. Cash Budget method is used for sanctioning working capital limits to : Seasonal Industries

41. CC limit Rs 4 lacs. Stock 6 lacs. Margin 25% . What is drawing power? : NOTIONAL - 4.5 lacs, BUT

ACTUAL Rs. 4 LAC.

42. Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI) is a

government company licensed under Section 25 of the Companies Act, has been incorporated to operate

and maintain the Central Registry under the provisions of _____: SARFAESI Act 2002.

43. CIBIL is the agency that provides information to the member banks on (i) Credit Rating (ii)

Information on credit History: Information on Credit History of borrowers

44. Contribution means : profit + fixed cost

45. Current Assets 600, Long Term sources - 600, Total Assests1000, what is NWC and Current Ratio: CR

1.5 : 1; NWC = 200 .

46. Current Liabilities are those liabilities which are to be paid: within one Year

47. Current Ratio = 2:1, Net working Capital=60000, What is the Current Liability of the firm? : 60000

48. Current ratio indicates: Liquidity of the firm (ability of a firm to pay current liabilities in time)

49. Current Ratio is 1.33:1, Current Assets is 100, what will be the amount of Current Liability: 75 lakhs



50. Debt Equity Ratio indicates: Long term solvency or capital structure of the firm.

51. Debt Securitization refers to: Conversion of receivables into debt instruments.

52. Debt Service coverage ratio is used for: Sanction of Term Loans

53. Deferred Payment guarantee is: Financial Guarantee

54. Deferred payment guarantee issued by a bank is a : Contingent Liability.

55. Difference between Long Term Source and Long Term Use is called: Net Working capital.

56. DSCR indicates: Ability of firm to repay term loan instalments

57. DSCR is for evaluating: Term Loan repayment-surplus generating capacity.

58. Duty of confirming bank: Only to verify the genuineness of L/C.

59. Equitable Mortgage is created by deposit of title deeds with bank at – (a) any where in India; (b)

state capital; (c) only at Mumbai, Chennai or Kolkatta; (d) Any place notified by state government for this

purpose: Correct answer is (d).

60. Excess of current liability over current assets means the firm may face difficulties in meeting its

financial obligations in short term.

61. Expand CRILC: Central Repository of Information on large credits.

62. Expand IRR : Internal Rate of Return

63. Finance for construction of road and port is classified as: Infrastructure Finance.

64. For ascertaining that a firm will be able to generate sufficient profit to repay instalments of term

loan, which ratio is computed?: Debt Service Coverage Ratio

65. For assessing Fund Based Working Capital limit for MSME upto _______Turnover method is followed

under Nayak committee: Rs.5 crore.

66. For classification of assets in consortium accounts, which of the following is to be considered?: In

consortium accounts, each bank will classify the account as per its record of recovery.

67. For Takeover of accounts from other Banks, the account copies of all the borrower accounts with the

present bankers / financial institution shall be obtained at least for the last ______: 12 months.

68. Formation of consortium, when essential : When bank touches its exposure ceiling

69. Full form of DSCR: Debt Service coverage ratio;

70. Gold is pledged with bank as security for a Bank Guarantee by a borrower. Bank Guarantee stands

expired. Whether a temporary overdraft availed by the borrower which is overdue can be got adjusted by

selling the Gold held as security for issue of guarantee: Yes, because Bankers lien is a general lien and is

an implied pledge. Further, the Gold was deposited in the ordinary course of business.

71. Green field project is related to : setting up new projects

72. Guarantee issued by a bank in favour of Custom department that party will fulfill export obligation for

availing exemption from custom duty regarding tax. Such guarantee is called: Financial Guarantee

73. Guarantee issued by a bank which is still outstanding is shown in the Balance Sheet as: Contingent

Liability.

74. Guarantors Liability: Recall the a/c and cause demand against the borrower and guarantor. Balance

in guarantor's SB a/c cannot be appropriated directly.

75. Holiday period given for repayment of installements in a loan is termed as: Moratorium period

76. How DSCR is calculated?: (Profitafter tax + Depreciation + Interest on Term Loan) divided by (Annual

instalment of term loan+ interest on term loan)

77. How much additional risk weight has been provided on restructured loans?: 25%

78. Hypothecation can be converted to pledge by: taking possession with the consent of the borrower.

79. Hypothecation described under SARFEASI Act.

80. If a businessman start a business with a Capital investment of Rs.3,00,000/- and withdraw

Rs.25,000/- later. If Net Profit is Rs.1,20,000/- and income tax paid thereon is Rs.30,000/-, what is the

position of capital account (net worth) at the end of the year – 395000; 365000; 360000; nil:

Rs.3,65,000/-

81. If a LC contains a clause "about" regarding the amount and quantity of goods, how much tolerance is

permitted?: 10%

82. If current ratio is 2:1, net working capital is Rs 20,000, current asset will be: Rs 40,000

83. If debtors are Rs 4 lac, annual sale is 60 lac, what is the Debt collection period: 0.8 months

84. If Debtors velocity ratio increases, it means debt collection period has increased or sales have

decreased.

85. If documents are to be presented in about July month: these can be presented within 5 days before

or 5 days after.

86. If in a Guarantee issued is silent, what will be the limitation period: 3 yrs and in case of Govt

guarantee it is 30 years.

87. If in a LC words around is written with date then variation of is allowed in the period: +/- 5 calendar

days

88. If limit is 3 lacs, margin is 25% what should be stock to avail full limit?: Rs4 lac

89. If on a letter of credit it is not mentioned whether it is revocable or irrevocable, then as UCPDC 600, it

will be treated as : Irrevocable LC

90. If on a Letter of Credit, date is mentioned as "end of the month", then as per UCPDC 600, it will

mean: 21st to last day of the month.

91. If stock statement is not submitted for 3 months from its due date and DP is allowed on the basis of



old stock report, then the account will be considered NPA after:90 days

92. If the projected sale of a-small (manufacturing) enterprise is Rs 80 lakh, margin available with the

borrower is Rs 4 lakh, then as per turnover method, working capital limit will be: Rs 16 lakh.

93. If working capital limit to a borrower is Rs 10 crore and above, then as per RBI guidelines, the loan

component should be at least: as per bank's discretion.(earlier it used to be 80%).

94. In a company, the registration of charges is required for: a)loan against FD b)lien on Govt Securities

c) assignment of Book Debts d) lien on Shares : Book Debts

95. In A current account OD of Rs. 12000 is made. The FDR has become due later on if the right of

appropriation can be used. The borrower has objected that he never requested for overdraft, hence

payment can not be appropriated. The customer is right.

96. In a letter of credit, it is written that documents can be negotiated about 30th June. In this case, the

documents can be negotiated: Before or after 5 clays of 30th June.

97. In case of a loan under consortium, each bank can have Maximum working capital limit of Rs-No

rule in this regard. Rules of consortium to be framed by members of consortium.

98. In case of loan given by more than one bank under a consortium, how the asset classification is done

by various banks?: Each bank will classify the account based on its record of recovery.

99. In case of revaluation of fixed assets, what percentage of revaluation reserve will be added to Tier

II capital of the bank?: 45%

100. In Letter Of Credit jmporter is called: Opener of Letter of Credit

101. In project finance, Debt Equity Ratio requirement for other than Infrastructure finance is: 2:1

102. In respect of a project report, the feasibility which is given least importance by the preparers of the

report, but very important for a banker is : a) Commercial b) Technical c) economic d) financial Ans: C

103. In the Balance Sheet of a bank, Contingent Liabilities are shown as: footnote to the Balance Sheet.

104. In the case of advance to a limited company for purchase of vehicle, the charge is registered with

Regional Transport Authority in addition to registration of charge with. Registrar of Companies. Why this is

done?:So that borrower can not sell the vehicle without intimation to the bank

105. Interest rate on advances is related to – Bank rate; Base Rate; PLR: MCLR Rate

106. Limit sanctioned Rs 5 lac; Stock Rs 6 lac; Margin 25%; What will be Drawing power: Rs 4.5 lac

107. Loan Delivery System is not applicable to: a) Loan to Soft ware industry b) export credit: export

credit

108. Loan Delivery System suggested by Rashid Mani Committee is applicable on borrowers with working

capital limits of: Rs 10 crore and above

109. Loan is in the name of A&B. Both have signed documents. A signs the Balance Confirmation but B

does not. In this case limitation will extend against: both

110. Lorry Receipts issued by Transport Operators approved by IBA are preferred. The reason is the

Transport Operators will take care of: Carriers Risk.

111. Stand by LC is just like : Financial guarantee (A guarantee of payment issued by a bank on behalf of a

client that is used as "payment of last resort" should the client fail to fulfill a contractual commitment with

a third party. Standby letters of credit are created as a sign of good faith in business transactions, and are

proof of a buyer's credit quality and repayment abilities)

112. Standard Score under CIBIL: 300 to 900

113. Stock Audit is required in respect of loans of : Rs.1.00 crore & above

114. Subordinate Debt is shown as part of in the Balance Sheet of a bank: Other Liabilities and

Provisions

115. Tangible Net Worth (TNW) is calculated as: Total paid up capital + Reserves – Intangible Assets.

116. The appraisal of deferred payment guarantee is similar to term loan: The difference is outlay of funds.

117. THE APPRAISAL OF DEFERRED PAYMENT GUARANTEE IS SIMILAR TO: TERM LOAN

118. The Audited Balance sheet for the latest financial year is to be obtained within ______ to finalise

credit rating and re-fix interest accordingly: 6 months.

119. The Bank did not disclose all material facts regarding loan to the guarantor while obtaining

guarantee. Can guarantor escape liability?: Guarantor cannot escape from his liability as it is not

necessary to disclose all the materials facts with regards to the loan.

120. The Borrower has to bring funds as his contribution for loan from: Long term Sources

121. The charge on stocks is created by: Hypothecation ( also by pledge or lien)

122. The concept of Base Rate is not applicable in the case of: Loan against Bank’s own deposit

123. The limitations of financial statements are : only quantitative not qualitative.

124. The long term liability to tangible net worth ratio implies : Long term solvency of the firm .

125. The main distinction between Hypothecation and Pledge is on accountof : Possession

126. The Meaning of Debtor Velocity Ratio is: Cycle of Debt Collection Period

127. The procedure used for ascertaining Customers Credit worth is called: Credit Rating

128. Time Limit for registration of equitable mortgage with CERSAI: 30 days from date of deposit of

title deeds. (Normally 30days and then delay can be condoned up to 30days on payment of penalty).

129. To improve Current Ratio of 2:1, what has to be done? a) Recover cash from Receivables b) Cash

sales c) Decrease the Bills payables.

130. Total Indebtedness Ratio is represented by: Total outside liabilities divided by Tangible Net Worth

131. What is "pari passu" means: Sharing in the ratio of outstanding.

132. What is a Break even point-The level of sales at which a firm does not earn any profit and does not

incur any loss.

133. What is cash loss : net loss before depreciation (Net loss minus depreciation)

134. What is Deffered Payment Guarantee?: Guarantee issued when payment by applicant of

guarantee is to be made in instalments over a period of time.

135. What is Mortgage? Transfer of interest in specific immovable property to secure an existing

or future debt.

136. What is nature of Banker's Lien?: It is implied pledge because Banker can dispose-off the goods after

giving notice to the borrower.

137. What is Pari Passu charge?: In case of consortium advance sale proceeds of security will be

shared among banks in proportion to their outstanding.

138. What is Real Rate of Interest?: Prevailing interest rate minus inflation rate

139. What is the meaning of Group in Exposure Norms: Commonality of management & Effective Control

140. What is the relationship between bank and customers in case of overdraft?: Creditor and Debtor

141. What is the risk weight for Personal Loans? 125%

142. What is the risk weight for Unrated companies?: 100%

143. What is the type of liability for the bank on account of issue of Bank Guarantee?: Contingent Liability

144. What type of bank gaurentee bank gives when a customer purchases a machine on instalment basis?:

Deferred Payment guarantee.

145. What type of Guarantee is Deffered Payment Guarantee: Financial Guarantee

146. What type of liability is represented by Bank Guarantee?: Contingent Liability and shown as a

footnote in the Balance Sheet.

147. What will be the tangible net worth if total assets are Rs 35 crore; total outside liability Rs 30 crore;

intangible assets Rs 3 crore: Rs 2 crore

148. What will happen in case of negative working capital limit: Current Liabilities are more than

Current Assets

149. Which is not a Credit Rating Agency – CRISIL, CARE, SMERA, ICRA, CIBIL: CIBIL

150. Which is not found in operating expenses statement of P&L statement - Salaries, Rent, Power: Power

151. Which is not included in Contingent liability – Bank Guarantee; Letter of Credit; Forward Contract;

Bills Payable: Bills payable

152. Which of the following is a contingent liability – deposits, borrowings, capital, guarantee: Bank

Guarantee

153. Which of the following is a Credit Information company – CIBIL, FIMDA, AMFI, CRISIL: CRISIL

154. Which of the following is part of the Solvency Ratios: debt equity ratio.

155. Which of the following represent Debt Service Coverage Ratio: (Net Profit after tax + Depreciation

+ Interest on Term loan) divided by (Annual instalment of term loan + interest on term loan)

156. Which of the items will not be an asset in banks bal sheet: Advances/Fixed Asset / Deposits :

Deposits

157. Which one of following is credit information company?: Equifax

158. Which system replaced Benchmark Prime Lending rate in banks: Base Rate

159. While arriving Drawing Power for financing against book debts, only Book Debts _____and below are

to be taken in to consideration. (other than MSME advances): 90 days

160. While doing Project Appraisal, sensitivity analysis is useful for: Viability and sustainability of project.

161. While financing for TL, Bank should look for the ability of the firm to generate the income to service

the debt

162. While granting loans to a partnership, banks generally insist that the firm should be registered

whereas registration of a partnership firm is optional. What is the reason for the same?: An

unregistered firm can not sue its debtors for recovery of its dues whereas other can sue the

firm for recovery of their dues

163. While undertaking technical appraisal, the following is not considered: cost of production and sales (it

is used for economic viability).

164. Who is bound to file particulars of charge with the Registrar of Companies under MCA 21, when a

company creates charge of somebody on its movable or immovable property except by way of

pledge?: officials of the company.

165. Why banks do not grant loan to a minor?: A minor is not competent to contract Therefore, Ioan given

to a minor can not be recovered.

166. Why banks ensure that charge created on any asset of the company should be registered with ROC

within stipulated period?: If charge is not registered, bank will become unsecured creditor.

167. Why banks prefer financing of bills?: because the advance is self liquidating

168. Why fund flow statement is taken from the borrower?: To know sources from where funds have been

raised and how funds have been utilized and to know changes in net working capital position.

169. Why loan against Partly Paid Shares are not preferred by banks?: Because partly paid shares

represent contingent liability. In case company makes demand and the borrower does not pay the

amount then the bank will have to pay the amount otherwise share may be forfeited. Moreover it is

prohibited by RBI

170. Working capital requirement of a firm is required to be met through : Short term sources and surplus

Letter of credit problems steps

Letter of credit problems steps





For Assessing LC Limit we have to take care of following thing .

1.what will be annual purchases.
2.Wht is EOQ-economic order quantity which is calculated by source of supply,means of transport and any discount.
3.Lead time- the time taken in recving the goods after LC opened
4.Transit time if any
5.Usance time- the time to make the payment at any future date accepted by buyer.
Nw he we calculate we hv to convert annual purchases in to months
Then decide whether LC is DA or DP
Da Lc- the LC for which payment is made by the buyer at any future date after its acceptance by him .this is also called usance LC
dP Lc- LC for which the payment is made on production of documents no further time is given.this is also called sight Lc
So It's clear if we talk about dP Lc- we don't count usance time while calcuting total time/LC cycle so it will be Lead time+transit time
If talk Da Lc- it will be Lead time+transit time +usance time
Hw LC limit is calculated on that basis
Monthly purchases*total timing
Total timing will depend on what LC is opened whether do or da
We assume that
-annual consumption of material to b purchased under LC .........C RS.
-Lead time ...L(months)
-transit time...T(months)
-usance period....U(minths/)

Purchase cycle=L+t+u ie.P(months)
LC limit=P*C/12
Why C/12 bcz C is annual purchasing we hv to convert it in months basis while calculating LC limit

Quasi credit (Non Fund based):

Quasi credit (Non Fund based):

Quasi Credit signifies financing for trade, and it concerns both domestic and

international trade transactions. A trade transaction requires a seller of goods and

services as well as a buyer. Various intermediaries such as banks and financial

institutions can facilitate these transactions by financing the trade

Non Fund Business

Bank Guarantee: As a part of Banking Business, Bank Guarantee (BG) Limits are

sanctioned and guarantees are issued on behalf of our customers for various

purposes. Broadly, the BGs are classified into two categories:

i) Financial Guarantees are direct credit substitutes wherein a bank irrevocably

undertakes to guarantee the payment of a contractual financial obligation. These

guarantees essentially carry the same credit risk as a direct extension of credit i.e.

the risk of loss is directly linked to the creditworthiness of the counter-party against

whom a potential claim is acquired. Example – Guarantees in lieu of repayment of

financial securities/margin requirements of exchanges, Mobilization advance,

Guarantees towards revenue dues, taxes, duties in favour of tax/customs/port/excise

authorities, liquidity facilities for securitization transactions and deferred payment

guarantees.

working capital

WORKING CAPITAL

Working capital, also known as net working capital, is the difference between a company’s current assets, like cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods, and current liabilities, like accounts payable.
Working Capital = Current Assets - Current Liabilities

The objective of running any industry is earning profits. An industry will require funds to
acquire “fixed assets” like land, building, plant, machinery, equipments, vehicles, tools etc.,
and also to run the business i.e. its day to day operations.
Funds required for day to-day working will be to finance production and sales. For
production, funds are needed for purchase of raw materials/stores/fuel, for employment of
labour, for power charges etc., for storing finished goods till they are sold out and for
financing the sales by way of sundry debtors/ receivables.
Capital or funds required for an industry can therefore be bifurcated as fixed capital and
working capital. Working capital in this context is the excess of current assets over current
liabilities. Current assets are those assets that in the ordinary course of business will be
converted into cash within a brief period (during the operating cycle of the industry and
normally not exceeding one year) without undergoing diminution in value and without
disrupting the operation. Current liabilities are those liabilities intended at their inception, to
be paid in the ordinary course of business within a reasonably short time (normally within a
year) out of the current assets or the income of the business. The above definition of
working capital, however, takes into account only the funds available to the industry from
long term sources like capital and long term borrowings, after meeting the expenses
towards fixed and other non-current assets. It does not represent the total funds required
by the industry for working capital to sustain its level of operations.
The excess of current assets over current liabilities is treated as net working capital or
liquid surplus and represents that portion of the working capital which has been provided
from the long term source. This can be explained by the following diagram.



Working Capital Assessment :
Concept of Working Capital: Working capital denotes the amount of funds needed for
meeting day-to-day operations of a concern.
This is related to short-term assets and short-term sources of financing. Hence it deals
with both, assets and liabilities
There are two concepts or senses used for working capital.
1. Gross Working Capital: The concept of gross working capital refers to the total
value of current assets. In other words, gross working capital is the total amount
available for financing of current assets. However, it does not reveal the true financial
position of an enterprise. How? A borrowing will increase current assets and, thus, will
increase gross working capital but, at the same time, it will increase current liabilities
also.
As a result, the net working capital will remain the same. This concept is usually
supported by the business community as it raises their assets (current) and is in their
advantage to borrow the funds from external sources such as banks and the financial
institutions.
In this sense, the working capital is a financial concept. As per this concept:
Gross Working Capital = Total Current Assets
2. Net working Capital: The net working capital is an accounting concept which
represents the excess of current assets over current liabilities. Current assets consist of
items such as cash, bank balance, stock, debtors, bills receivables, etc. and current
liabilities include items such as bills payables, creditors, etc. Excess of current assets
over current liabilities, thus, indicates the liquid position of an enterprise.
The ratio of 2:1 between current assets and current liabilities is considered as optimum
or sound. What this ratio implies is that the firm/ enterprise have sufficient liquidity to
meet operating expenses and current liabilities. It is important to mention that net
working capital will not increase with every increase in gross working capital.
Importantly, net working capital will increase only when there is increase in current
assets without corresponding increase in current liabilities.