A REPORT ON

TREASURY MANAGEMENT & BANKING FUNCTION AT NHPC

This project report is submitted in partial fulfillment of the requirements of the PGDM (Finance) program of

Jaipuria Institute of Management, Noida

Under supervision of Dr. Pratibha Wasan

Submitted By: Davesh Kadian PGFA1113

JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA

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TABLE OF CONTENTS

1) Introduction
1.1 An overview 1.2 Objective, Limitation of study 1.3 Methodology 6 7 .. 8

2.)

About Company
2.1 NHPC- overview . 9

3.) Treasury Management 3.1 Introduction 3.2 DPE guidelines for investing surplus cash 3.3 Investment of surplus cash 3.4 Eligible Instruments where NHPC can invest 3.5 Procedure for investment .10 .10 12 ....13 14 ....16 ..17 ..................18 ....20 .24

3.6 Comparison of NHPCs Investment pattern with other companies 3.6.1 NTPC 3.6.2 TATA POWER 3.6.3 RELIANCE POWER 3.7 Analysis of result 3.8 Recommendations

4.)

Is Investing in T.Ds a sound decision?

4.1 Methodology 4.3 Why UTI LIQUID SCHEMES? ..25 ..26 ..28 ....29

4.4 Opportunity cost of not investing in that schemes ...27 4.5 Interpretation of result

4.6 Comparison of Effective ROI on FDs &UTI MF Return

4.7 Interest that could have been earned ...33 JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA Page 2

4.8 Conclusion

...35

5.) Banking Section

5.1 Function of Banking section 5.1.1 Payment function 5.1.2 Collection from beneficiaries 5.1.3 Equity from GOI 5.1.4 Cash Credit and Loans 5.2 Recommendation .....37 .37 .41 ....41 ..42 43

6.) References

...44

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Declaration
I hereby declare that this project report entitled Treasury Management & Banking Functions at NHPC has been prepared by me with the help of industrial mentor and is an original work submitted to Jaipuria Institute of Management, Noida towards fulfillment of the requirement for the award of Post Graduate Diploma in Management (2011-13). I also hereby declare that this project report has not been submitted at any time to any other university or institute for the award of any Degree of Diploma.

Davesh Kadian PGFA1113 Jaipuria Institute of Management Noida

JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA

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Acknowledgement
I owe a debt of gratitude to many people who helped me in this project report. They shared their experience, insights, research and writings and were so helpful and gracious to me during the preparation of this project report.

I am thankful to Mr. Ashish Saigal, Sr. Manager Finance for giving me opportunity to work and get valuable learnings regarding professional and corporate world from this prestigious organization. I also express my gratitude and thanks to Mr. Anil Gaba my company guides for their invaluable guidance and inspiring suggestion. They provided me an insight for the project and helped me to merge my theoretical concepts with their practical application.

I pay my sincere thanks to Dr. Pratibha Wasan Faculty JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA for her invaluable suggestions in completing the project. I would like to thank her for her constant attention and for motivating me during the preparation of the project.

I also thank my colleagues and friends who helped me in this project by providing their valuable suggestion and help.

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INTRODUCTION
This project is divided into 2 parts. 1 TREASURY MANAGEMENT: One of the most important functions of Finance manager is optimum utilization of ideal funds so as to get good returns for his company. My project includes Finding out How much ideal fund is available in NHPC and for how many days. Finding out various investment options available to NHPC. Comparison of NHPCS investment pattern with other PSU and Private Sector Power companies. Determining whether NHPCs current investment pattern is good?

Banking Function: The most important aspect of treasury department is its Banking function. Banking is always an important part of treasury department in big organisations. This section is responsible for making Payments to various suppliers, employees, various projects of NHPC. This project involves finding out How Banking department works? What are its functions and its importance in Cash Management?

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Objective of the Project:

The objective of the project is to determine How NHPC invests its surplus cash and comparing NHPCS investment pattern with other power sector companies so as to provide a clear picture whether NHPCS investment portfolio needs amendment or not. It will help the company to assess its present policy regarding investment and provide a base to change its policy if there will be a need to do so.

After that Determining whether investing in FDs is sound option or not by comparing it with different schemes of UTI Liquid fund. This project helps the company in knowing whether its cash management is efficient or not? It will help the company in making its investment decision by providing important data about various mutual fund schemes their performance in past.

Limitations of the Study:

Since this project involves getting knowledge about all the aspects of treasury management in just 8 weeks so it is not possible to get knowledge about each and every aspect in detail. Therefore TIME LIMIT is a limitation of my study.

As I have to compare NHPCs investment pattern with other power sector companies and determining whether NHPCs decision of investing in FDs is good or not and for that getting complete data for such a study is not easy which again is a limitation of my study. Past data is collected for comparing FD return and MF returns which is a limitation of my study because for making investment decision past data is not considered as reliable source.

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METHODOLOGY
TREASURY MANAGEMENT
To know how to prepare daily rolling cash flow How to calculate minimum cash balance To know for how many days surplus cash is available to the company To know what are the various sources where surplus cash can be invested. Comparison of NHPCs investment pattern with other companies.

Is Investing in FD a sound Decision?

Selecting various liquid schemes of UTI. NAV for year 2009-10 and 2010-11 is taken to calculate the return generated by a particular scheme in a particular period. Average rate of interest is taken for FDs for a particular time period. Comparison of return from different schemes of UTI with return from FDs.

BANKING:
To know what are the functions of banking section. To know how Banking section helps in efficient utilization of funds?

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NHPC AN OVERVIEW
In India, electricity is produced in various sector hydro, tidal, winds, geothermal &gas potential. NHPC is the power organization in the field of hydro sector. It was established in 7th November 1975.NHPC is a schedule an enterprise of the government of India. With an authorized share capital of Rs. 15,000 crore and an investment base of about Rs. 25,000 crore. NHPC is ranked as a premier organization in the country for development ofhydropower. NHPC is among the TOP TEN companies in the country in terms of investment. A credited with ISO-9001:2000 &ISO-14001:2004 certificates for its quality system & environment concerns. NHPC Corporate office is in FARIDABAD. The saga of NHPC is replete with many challenges. To begin with NHPC took over three most difficult & almost abandoned projects in geologically weak Himalayan Ranges from the erstwhile central hydroelectric projects Control Board. These projects were the 180MW Baira Siul in Himachal Pradesh, 105 MW Loktak in Manipur & the 345 MW Salal Stage-1 in J&K. The initial mandate given to the corporation to complete these three projects were fulfilled with the commissioning of Baira Siul in 1981, Loktak in 1983 & Salal Stage-1 in1987.The successful completion of these projects in most difficult areas & their operation is a testimony to NHPCs success. So far, NHPC has completed 12 projects with a total installed capacity of 5175 MW which includes 1000MW.Indira Sager project &520 MW Omkareshwar 2 Project through Narmada Hydroelectric Development Corporation Ltd. (NHDC)-a joint Venture of NHPC with government of Madhya Pradesh. Besides this; NHPC has commissioned the 14.1 MW Devi hat JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA Page 9

projects in Nepal, 60MW Kurichu project in Bhutan, 5.25 MW Kalpong project in Andaman & Nicobar Islands &4MW Sippi projects in Arunachal Pradesh as deposit work. At present 12 projects with a total installed capacity of 5132MW are under execution.

TREASURY MANAGEMENT
Treasury management (or treasury operations) includes management of an enterprise' holdings in and trading in government and corporate bonds, currencies, financial futures, options and derivatives, payment systems and the associated financial risk management. It involves optimum utilization of surplus cash available in a company for a particular time period. Today in every big organization Treasury Department is responsible for this function. At NHPC there is also Treasury Department which does this function very efficiently. Being a PSU it has to follow certain guidelines issued by DEPARTMENT FOR PUBLIC ENTERPRISES for investing its surplus cash in various sources. The guidelines are:

D.P.E GUIDELINES FOR INVESTMENT OF SHORT TERM CASH SURPLUS

1) The surplus availability should be worked out for a maximum period of one year at any point of time. 2) In the present scenario as applicable to NHPC the surplus arising are only cash surplus and not fund surplus, i.e. to say that the corporation is resorting to short term borrowings and any short term cash surplus does not offset such short term borrowings, thus in actuality NHPC holds surplus cash and not surplus funds. However in order to gainfully utilize such excesses rather than to keep the funds idle there is a need to formulate the system for utilizing such cash surplus to the benefit of the Corporation.

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3) NHPC can invite bids for deposit of surplus cash from only those banks with which it has commercial interest. 4) The exposure limit for individual banks for NHPC is as follows:

Sl. Net worth No. 1. Between Rs. 500 Crs. and Rs. 5000 Crs. 2. Above Rs. 5000 Crs a) Private Bank

Maximum amount of Investment with one single Bank/Financial Institution at a time

10% of Net Worth Rs. 500 Crs. Without any limit

a) Nationalised Bank 5) While allocating investment to the banks within the prescribed exposure limit it shall be necessarily ensured that the 60:40 ratio amongst public sector banks and private sector banks as stipulated in recent DPE Guidelines is strictly adhered to. 6) NHPC can invest in Mutual Funds floated by Public Units.

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INVESTMENT OF SURPLUS CASH

When the company anticipates the condition of surplus cash, the treasury management of the company looks for the avenue available for the investment of this cash in such a way that the return can be maximized and the investment can be converted into cash as and when required without any loss of time. Investing surplus cash involves two basic problems: 1. DETERMINATION OF SURPLUS CASH The determination of amount of surplus cash can be done only after calculating the minimum cash level that is required by the company termed as safety level of cash. The safety level of cash is determined by the finance department separately for normal and peak period. In both the cases, the two basic factors are to be decided which are, first the desired days of cash the minimum number of days for which cash balance should be sufficient to cover payments, second is average daily cash outflow

Safety level of cash during periods = Desired days of cash * Average daily cash outflows

Safety level of cash during peak periods = Desired days of cash at the business period * Average of highest daily cash outflows.

2. DETERMINATION OF CHANNELS OF INVESTMENT The finance manager can determine the amount of surplus cash by comparing the actual amount of cash available with the highest safety level of cash. Such surplus cash may be of two type temporary or permanent surplus. Temporary cash surplus consist of funds which are available for investment on a short term basis maximum for a period of six months, since they are required to meet regular obligations like taxes, dividends etc. permanent cash surplus consists of funds which are kept by the firm to use in some unknown or unforeseen profitable opportunity of expansion or acquisition of some assets. Such funds are available for investment for a period ranging from six months to a year.

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ELIGIBLE INSTRUMENTS Investments may be made in one or more of the following instruments: Public Deposit Account of Govt. of India. Term Deposits with any Scheduled Commercial Bank (i.e. banks incorporated in India) and with a NET WORTH (Paid up Capital plus Free Reserves) of atleast Rs. 500 Crores, fulfilling the Capital Adequacy norms as prescribed by the RBI from time to time. Instruments which have been rated by an established Credit Rating Agency and have been accorded the highest investment grade credit rating signifying highest safety e.g. certificates of Deposit, deposit Schemes or similar instruments issued by scheduled commercial Private Sector banks/term lending institutions including their subsidiaries as well as commercial paper of corporate and eligible schemes of UTI. Investment of funds in Fixed/Term deposits of Public Sector Banks may be made without credit rating for them.

Any other Debt Instrument which has obtained highest credit rating from one of the established Credit Rating agencies. Treasury Bills and Government of India securities. Though DPE guidelines permit investment upto 3 years in this instrument but investment shall not be made for a period exceeding one year.

AMOUNT & AUTHORITY COMPETENT TO INVEST

APPROVING AUTHORITY 1. For amount upto Rs.1000 crores 2. For amount above Rs. 1000 cr.upto Rs.2000 crores Director (Finance) Chairman & Managing Director Board of Directors

3. Beyond Rs. 2000 Crore without any limit

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PROCEDURE ADOPTED FOR INVESTING SURPLUS CASH AT NHPC

First of all investment committee is formed which take decisions regarding Where the investment is to be done among available options, DPE guidelines are being met. Treasury Department from the monthly budget prepares a Daily rolling cash flow. Whenever a case of cash surplus arises it will firstly be used to offset the debit balances appearing in the Cash Credit accounts maintained with different Banks as well as offset of WCDL account/MIBOR linked loans etc. at the earliest available opportunity. Finding the minimum cash balance that is required to be maintained during normal working hours. The next step is to work out the expected number of days for which the excess cash will remain available. The investment of the same will depend upon the number of days for which such amount would be available. After this NHPC invites bids from various banks with which it is has commercial interest. Quotations from various banks along with the amount and the number of days the cash is available is sent to the investment committee for their approval. After getting the approval from the committee surplus cash is invested in that bank which offers the highest rate of interest.

MINIMUM CASH BALANCE REQUIRED = 10 Crores

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COMPARISION OF NHPCS INVESTMENT PATTERN WITH OTHER POWER COMPANIES

INVESTMENT PATTERN OF NHPC

All the investments of NHPC during the period were in only one kind out of the various options provided, namely term deposits with scheduled banks. It can be said that the investment policy being followed is- to avoid any kind of hassles or tricky situation and place the surplus funds in the safest possible option without paying much heed to the maximization of returns by meticulously choosing from the available avenues.

TOTAL INVESTMENT: 4230 CRORE

Among the investments made in financial year 2009-10 the following points were noticed:More than 80% of the investments made by NHPC exceeded an amount of RS 85 CRORE The range of investments varied from a minimum of Rs.4 cr to a staggering maximum of Rs 300 cr. Average investment through the year being a remarkable Rs. 50 Cr per investment.

Among the investment made in the current financial year 2010-11 the following points were noticed.

TOTAL INVESTMENT: 5212.9 CRORE

Among the investments made in financial year 2010-11 the following points were noticed:More than 70% of the investments made by NHPC exceeded an amount of RS 100 CRORE JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA Page 15

The range of investments varied from a minimum of Rs.1 cr to a staggering maximum of Rs 216 cr. Average investment through the year being a remarkable Rs. 75 Cr per investment.

NTPCS INVESTMENT PATTERN IN YEAR 2009 & 2010

TOTAL INVESTMENT IN 2009-10 = 2701.13 CRORES
FIGURES IN CR.

NTPC 2009
0 59.2 244.6 BONDS 909.2 1488.13 Invstmnt in JV INVST IN SUBSIDIRES SURPLUS CASH IN VARIOUS INST ON BEHALF OF CUSTOMERS

TOTAL INVESTMENT IN 2010-11 = 3352.98 CRORES

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NTPC 2010

19.3 850.8 BONDS 30.4 681.8 1770.68 Invstmnt in JV INVST IN SUBSIDIRES SURPLUS CASH IN VARIOUS INST ON BEHALF OF CUSTOMERS

TATA POWERS INVESTMENT PATTERN IN YEAR 2009 & 2010

FIGURES IN CR.

TOTAL INVESTMENT IN 2009-10 = 2313.39 CRORES

TATA POWER (2009-2010)
41.72 203.57 397.43 defferd taxatn liability fund invstmnt 1367.35 Mutual funds other securities contigency reserve investments

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TOTAL INVESTMENT IN 2010-11 = 2010.07 CRORES

TATA POWER (2010-2011)

215.39

203.57 397.43 contigency reserve investments defferd taxatn liability fund invstmnt Mutual funds

1497 other securities

RELIANCE ENERGY LTDS INVESTMENT PATTERN IN YEAR 2009 & 2010

TOTAL INVESTMENT IN 2009-10 = 485.06 CRORES

Reliance Energy Ltd. 2009

75.46 150

0 goi- bonds covrtble pref shares unquoted equity shares

45.05

214.55

redeemable preferance shares mutual funds

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TOTAL INVESTMENT IN 2010-11 = 1042.67 CRORES Reliance Energy Ltd. 2010

206 417.67 88.64 goi- bonds covrtble pref shares unquoted equity shares redeemable preferance shares 285.33 mutual funds

45.05

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Analysis and Investment Pattern

For the purpose of comparison of investment practices data of last two years of each company is taken into account. As it is already discussed for the purpose of investment four things are considered mainly which are security, liquidity, maturity and yield.

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NHPCS INVESTMENT PATTERN:

The investment pattern followed at NHPC is very simple. More than 50% of surplus cash is available for period 46 to 180 days. As shown in the graph all the surplus cash is invested in Term Deposits which shows that it is very much concerned about SECURITY. The reason why NHPC goes for this pattern is: The guidelines issued by DPE for investing surplus cash. It does not want to take risk. It is very easy and most secured way of investing surplus cash. This investment pattern is giving NHPC good return i.e. in 2009-10 8.5% and in 20010-11 (8.6%)

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NTPCS INVESTMENT PATTERN:

It can be noticed clearly that NTPC is very high on security point as it has its 92% of investment in the Government bonds; also the reason behind its major investment in government bonds is that it has to abide by the rules and regulation set by DPE which gives most preference to the safety. So the investment of NTPC being a PSU is mainly into Government Bonds. The Average return for NTPC in 2009-10 is 8.45%. In 2010-11 8.8%.

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TATA POWERS INVESTMENT PATTERN:

If the investment pattern of Tata power is considered it had its 65% of investment in the Mutual Funds in 2009-10., the investment in other securities is decreased by Tata Power in year 2008. It has most aggressive practice of investment as its major part of investment is MFs schemes which include Debt and some part of it in Gold ETFs.

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RELIANCES INVESTMENT PATTERN:

The investment pattern of Reliance Energy is completely different from NHPC, NTPC and Tata power. Its major investments are in mutual funds. In the year 2010, it has maximum investments in Shares Mutual funds and Government Bonds but it has changed its strategy in the year 2011 by increasing its investment in mutual funds up to 87% and decreasing its investment in government bonds and shares. This move of reliance energy indicates that safety and yield are on the top priority for the company as by increasing its investment in mutual funds they have diversified their investments thereby decreasing their risk on the other hand they reduce the %age of investment in the shares and debentures which shows they have maintained balance between security and yield. Another reason for investing in mutual funds may be saving tax. Avg. Return in 2009-10 is 9.45% Avg. Return in 2010-11 is 10.2%

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RECOMMENDATIONS: Policies adopted by NHPC for the investment purpose are quite stringent, if compared with that of the policies adopted by Tata Power and Reliance Energy. NHPC doesnt have liberty to invest in many instruments which can yield much better returns. They have investment mainly in Government security which are better option from security point of view but yield is relatively low, here it can be recommended that surplus money can be invested in the mutual funds which will diversify risk as well as it will increase return ratio. The reason for investing in FDs is because of Tax Advantage that NHPC enjoy being a Power sector company but this advantage remains only for 2 years from now which will reduce the effective rate of interest from FDs. So in that situation investing in mutual funds will also be a good option because dividend received from MF is exempted from tax. It can also look for other investment options like CP, T-Bills etc. Investment in bonds can also be considered as good investment option keeping in mind the present scenario where the interest rates on Deposits are decreasing and chances are that it will decrease further.

IS INVESTING IN T.Ds A SOUND DECISION?

Various liquid schemes of UTI are selected because the guideline issued by DPE has to be followed.

NAV for year 2009-10 and 2010-11 taken to calculate the return generated by a particular scheme in a particular period.

Return from MF = NAV on last day + Dividend (for that period if any) NAV on 1st day / NAV on 1st day JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA Page 25

Average rate of interest is taken for FDs for a particular time period.

Comparison of return from different schemes of UTI with return from FDs.

Finding correlation of various UTI schemes and FDs rates.

Those schemes whose correlation is +ve and S.D is low is selected for analysis

WHY UTI LIQUID FUND SCHEMES?

The reason why I have selected liquid schemes of UTI is that: They conform to the guidelines issued by DPE. LIQUID schemes are considered as one of the safest mutual fund schemes. The portfolio of UTI schemes has positive relationship with FD rates. No entry load and exit load on many of the schemes.

UTI LIQUID FUND CASH PLAN- GROWTH

MEAN S.D CORRELATION SHARP RATIO .15 .02 .04 2.20

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UTI LIQUID FUND CASH PLAN- MONTHLY DIVIDEND

MEAN S.D CORRELATION SHARP RATIO .11 .12 -.39 .03

UTI LIQUID FUND CASH PLAN- WEEKLY DIVIDEND

MEAN S.D CORRELATION SHARP RATIO .14 .14 -.06 .09

The correlation is between T.Ds and MF return where as Sharp ratio is calculated for determining how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset. The result above shows that out of the available 3 schemes only UTI LIQUID FUND CASH PLAN- GROWTH is selected because it has least risk associated with it and also the SHARPE RATIO is high for this fund which again is good from risk point of view.

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OPPORTUNITY COST OF NOT INVESTING IN LIQUID FUND CASH PLAN GROWTH

FOR YEAR 2009-10
Fig in lakhs

NO OF DAYS 1 TO 7 8 TO 14 15 TO 30 31 TO 45 46 TO 60 61 to 90 91 TO 135 136 to 180 180 TO MORE

Return from F.D in lakh 0 647.2219 1506.091 2501.301 8637.458 4549.256 2419.614 3362.591 2184.595

Return from M.F in lakhs 0 710.95 1380.73 2150.675 6466.91 4664.46 2425.302 3342.201 2003.3 TOTAL

NET PROFIT/LOSS

-63.7281 125.361 350.6264 2170.548 -115.204 -5.68775 20.38971 181.295 2663.6

FOR YEAR 2010-11

Fig in lakhs

PERIOD IN DAYS 1 TO 7 8 TO 14 15 TO 21 22 TO 30 31 TO 45 46 TO 90 91 TO 180 180 TO MORE

Return from F.D in lakh 57.031 612.418 1210.843 1877.123 1256.188 3317.016 3826.944 6735.592

Return from M.F in lakhs 62.632 683.520 1381.950 1903.865 1221.760 3003.654 3578.784 6534.180 TOTAL

NET PROFIT/LOSS -5.601 -71.102 -171.107 -26.742 34.428 313.362 248.160 201.412 522.809

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INTERPRETATION
The total profit that NHPC had generated by not investing in UTI Liquid Growth Plan scheme FOR FY 2009-10 is 2663.6 Crores FOR FY 2010-11 is 522.809 Crores Therefore it can be said that NHPCs decision of investing in Term Deposits was right. But here one point needs to be mentioned i.e. NHPC enjoys TDS exemption on its interest income on Term Deposits and because of that so far it is able to fetch good return in comparison to UTI Liquid plan. But this Tax exemption will remain valid for the next two years and after that the effective Rate of Return will decrease and it might make investing in Term Deposit less attractive.

The next part of my report will focus on IF NHPC did not enjoy this tax advantage then could it be able to earn better return than UTI Liquid plan.

COMPARISON OF EFFECTIVE ROI ON TDs AND UTI LIQUID FUND CASH PLAN GROWTH RETURN
Being a Power Sector Public Unit NHPC enjoys advantage of not paying any TDS on interest income earned on its Term Deposits which makes its decision of investing in Deposits a right one. But NHPC can enjoy this advantage for the next two years only after that it has to pay TDS on its TERM DEPOSITS with any bank i.e. @ of 22.6% which will reduce the effective rate of return on FDs. Therefore an attempt is made to find out if NHPC does not enjoy this tax advantage then would it be able to earn more return than those offered by UTI Liquid Growth Plan scheme.

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FOR F.Y. 2009-10

GRAPH SHOWING T.D ANNUAL RATE AND UTI LIQUID SCHEME ANNUAL RETUNS

GRAPH SHOWING EFFECTIVE T.D RATE AND UTI LIQUID SCHEME RETUNS

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FOR F.Y. 2010-11

GRAPH SHOWING T.D ANNUAL RATE AND UTI LIQUID SCHEME ANNUAL RETUNS

GRAPH SHOWING EFFECTIVE T.D RATE AND UTI LIQUID SCHEME RETUNS JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA Page 31

FOR F.Y. 2009-10

PERIOD IN DAYS 1 TO 7 8 TO 14 15 TO 21 22 TO 30 31 TO 45 46 TO 90 91 TO 180 180 TO MORE Return from F.D in lakh 44.142 474.011 937.192 1452.893 972.289 2567.370 2962.055 5236.119 TOTAL Return from M.F in lakhs 62.632 683.52 1381.95 1903.865 1221.76 3003.654 3578.784 6534.18 NET PROFIT/LOSS -18.490 -209.509 -444.758 -450.972 -249.471 -436.284 -616.729 -1298.061 -3724.273

FOR F.Y. 2010-11

NO OF DAYS 1 TO 7 8 TO 14 15 TO 30 31 TO 45 46 TO 60 61 to 90 91 TO 135 136 to 180 180 TO MORE

Effective TD ROI

UTI LIQUID PLAN RET. 0

NET LOSS/PROFIT

500.9497644 1090.409854 1810.942192 6253.519453 3293.661265 1751.800715 2434.515656 1581.647127 Total

710.95 1380.73 2150.675 6466.91 4664.46 2425.302 3342.20098 2003.300445

-210.0002356 -290.3201458 -339.7328082 -213.3905468 -1370.798735 -673.5012855 -907.6853241 -421.6533179 -4427.082399

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INTERPRETATION
It is clear from the above table and graph that if NHPC didnt have the Tax advantage then NHPCs decision of investing in FDs was proved wrong because the data above shows that the opportunity cost of not investing in UTI Liquid plan Growth In F.Y 09-10 would be ---- 373 crores. In F.Y.10-11 would be ---- 443 Crores. Therefore it can be said that NHPC has to look for other investment option other than T.D because after 2 years when it doesnt have Tax advantage the result could be same as it has come now. So here it can be suggested that investing in this scheme can be a good option and while looking for other investment options in future this scheme can be a good option. Though decision regarding future investment cannot be taken solely on the basis of this data because of different market and economic condition at that time but this data can be very helpful for the management while taking investment decision in future.

INTEREST THAT COULD HAVE BEEN EARNED IF SURPLUS CASH INVESTED IN UTI LIQUID FUND SCHEME
NHPC at present doesnt invest its surplus cash for less than 7 days because no bank accepts deposit for less than 7 days. Therefore a lot of surplus cash remain idle. The table below shows amount of surplus cash available to NHPC which remain idle and generating no returns. This table is not exhaustive and contains surplus cash not for the complete year. It is just to show if the amount could have been invested in UTI LIQUID PLAN GROWTH then NHPC would be able to earn handsome amount of return on it.

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FOR F.Y 2009-10

INVESTMENT DATE 27-03-09 17-04-09 17-04-09 14-05-09 05--06-2009 03--12-2009 17-12-09 14-01-10 14-01-10

MATURITY DATE 31-03-09 22-04-09 20-04-09 19-05-09 09--06-2009 07--12-2009 22-12-09 19-01-10 20-01-10

NO OF DAYS 4 5 3 5 4 4 5 5 6

AMOUNT 250,000,000.00 320,000,000.00 90,000,000.00 100,000,000.00 50,000,000.00 150,000,000.00 800,000,000.00 200,000,000.00 150,000,000.00

MF RATE (p.a) 8.98 8.16 8.11 8.48 8.23 8.21 8.48 7.67 7.65 TOTAL

INTEREST COULD HAVE EARNED

24,603,288.65 35,789,187.73 6,000,516.98 11,616,944.90 4,507,463.95 13,500,203.56 92,966,184.31 21,014,907.04 18,870,263.86 228,868,960.98

For F.Y 2010-11

INTEREST COULD HAVE EARNED 118,417,441.32 22,368,242.33 17,436,569.62 30,968,605.78 28,527,973.56 1,366,151.20 6,846,713.65 13,796,533.66 3,451,645.93 9,349,549.12

INVEST. DATE

MATURITY DATE

DAYS

AMOUNT

MF Rate (p.a) 9.00 8.16 8.49 8.31 8.33 8.31 8.33 8.39 8.40 8.53

27-Mar-10 17-Apr-10 14-May-10 11-Jun-10 11-Jun-10 11-Jun-10 11-Jun-10 12-Jun-10 17-Jun-10 12-Aug-10

2-Apr-10 22-Apr-10 17-May-10 15-Jun-10 16-Jun-10 14-Jun-10 16-Jun-10 18-Jun-10 20-Jun-10 16-Aug-10

6 5 3 4 5 3 5 6 3 4

800,000,000.00 200,000,000.00 250,000,000.00 340,000,000.00 250,000,000.00 20,000,000.00 60,000,000.00 100,000,000.00 50,000,000.00 100,000,000.00

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9-Jan-11 9-Jan-11 14-Jan-11 14-Jan-11

14-Jan-11 15-Jan-11 18-Jan-11 17-Jan-11

5 6 4 3

90,000,000.00 210,000,000.00 50,000,000.00 150,000,000.00

7.95 7.92 7.71 7.71 TOTAL

9,804,598.52 27,333,687.41 4,222,978.90 9,501,965.65 303,392,656.66

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Conclusion
After considering all the points above it can be said that investment decision making process at NHPC is very simple and here Security is given priority over yield. That is the reason why NHPC invest only in Term Deposits with banks. Though investment in mutual fund can be a good option from return point of view but it involves more risk as compared to investing in FDs and it also needs a good forecasting skills and constant watch over economic condition because MFs are subject to market fluctuation.

NHPC can invest in Liquid Schemes of UTI but so far it has restricted itself from doing that because till now it has generated good returns from FDs and the main advantage that NHPC enjoys is that it doesnt have to pay any TDS on interest income because being a POWER sector PSU it is exempted. But NHPC can enjoy this exemption for the next 2 years and after that returns from FDs will not be as good as compared to now therefore keeping this thing in mind NHPC has to look for other investment options so as to earn better returns. UTI LIQUID PLAN GROWTH can be considered as an investment option because the return from this fund has outperformed the returns that NHPC had generated if TDS has been deducted from it.

The best option that is available to NHPC for investing its surplus cash for period ranging less than 7 days is MFs or C.P because at present NHPC doesnt invest its money for less than 7 days because no bank pays interest on deposits for less than 7 days which means that the money lies ideal and it is not earning any income But if NHPC invest that money in Liquid schemes of UTI than it can earn a reasonable amount of money which so far it is not earning.

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Banking Function at NHPC

Cash and banking section is another important department of TD which is responsible for making payments to suppliers and projects. As the name suggest this department involves all aspects of Funds Utilization. The following are the functions of this department:

PAYMENT FUNCTION
Making timely payment to various suppliers and employees is the main function of Banking section of NHPC. NHPC has adopted E-payment system for achieving this. Various modes of E-payment adopted by NHPC are: Real Time Gross Settlement (RTGS) National Electronic Fund Transfer (NEFT) Electronic Clearing System (ECS) Direct Payment (DP) Internet Banking (IB) Inland letter of credit

For making payment through RTGS and NEFT IFSC is required. Indian Financial System Code (IFSC) is an alpha numeric code designed to uniquely identify the bank-branches in India. This is 11 digit code with first 4 characters representing the banks code, the next character reserved as control character (Presently 0 appears in the fifth position) and remaining 6 characters to identify the branch. The MICR code has 9 digits to identify the bank-branch.

RTGS: RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a 'real time' and on 'gross' basis. This is the fastest possible money transfer system through the banking channel. The minimum amount that NHPC can send through RTGS is Rs. 1 lakh. The party receives the payment within 2hr of making the payment. All payments through RTGS is done through their SBI CAG account and Axis bank account.

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NEFT: It is a nationwide funds transfer system to facilitate transfer of funds from any bank branch to any other bank branch. The maximum amount that can be sent through NEFT is Rs. 2 lakhs. The party gets the credit on the same Day or the next Day depending on the time of settlement. All the NEFT is done through their SBI CAG account. ECS: It is a mode of electronic funds transfer from one bank account to another bank account using the services of a Clearing House. This is normally for bulk transfers from one account to many accounts or vice-versa. NHPC can send only 1 file of ECS in a day. The party gets credit after 4 days of sending the ECS file to the bank. The file is sent to RBI for processing and from there the amount is credited to partys account. NHPC has tie up AXIS BANK for sending its ECS file. Max amount that can be send through ECS in a single file is Rs 5 lakhs. DP: When payment is done within the same bank but in a different account then Direct payment is used. NHPC used this mode of payment for making payments like Salary, Convenience allowances, Lease Payment etc . IB: This mode of payment is used by NHPC when sending the amount to its projects. NHPC has used this facility with the help of SBI and make all their payments to their projects with the help of Internet Banking. Letter of credit: A Letter of credit is a document issued by bank, guaranteeing that a buyers payment to a seller will be received on time and for the correct amount on presentation of certain set of documents within a given time frame. A Letter of credit is basically a document issued by a bank guaranteeing a client's ability to pay for goods or services. A bank or finance company issues a Letter of credit on behalf of an importer or buyer, authorizing the exporter or seller to obtain payment within a specified timeframe once the terms and conditions outlined in the Letter of credit are met. The Letter of credit acts like an insurance contract for both the buyer and seller and practically eliminates the credit risk for both parties, while at the same time reducing payment delays. A Letter of credit provides the exporter or seller with the greatest degree of safety when extending credit. It is JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA Page 38

useful when the importer or buyer is not well known and when exchange restrictions exist or are possible. Beneficiaries are required to open LC in favour of NHPC with the beneficiaries bank. The dates on which LC becomes operational are predecided and mentioned in the LC. CO has bank accounts with the bank branch in which the LC is opened by the beneficiary and the funds credited on operating the LC are immediately transferred to the bank account in CO. In normal course, collection from beneficiaries is received through cheque/ DD. In case the payment is not made by the beneficiary on due date, NHPC can operate the LC and collect payment directly from the bank

Types of Letter Of Credit

Banks may issue several types of letters of credit. It is best for importers and exporters to meet with their banking officer to determine which type of credit best suits their needs. The most common type of letters of credit are described follows:

Revocable: A revocable letter of credit allows for amendments, modifications and cancellation of the terms outlined in the letter of credit at any time and without the consent of the exporter or beneficiary. Because this places the exporter at risk, revocable letters of credit are not generally accepted and are regarded as worthless.

Irrevocable: An irrevocable letter of credit requires the consent of the issuing bank, the beneficiary and applicant before any amendment, modification or cancellation to the original terms can be made. This type of letter of credit is commonly used and preferred by the exporter or beneficiary because payment is always assured, provided the documents submitted comply with the terms of the letter of credit. Irrevocable letters of credit can be both confirmed and unconfirmed. Such creditors cannot be withdrawn by the issuing banker without the consent of the beneficiary even if his customer i.e. buyer requires to do so.

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Expenditures and collections at the accounting unit

TD has a Drawing limit system which is an arrangement with State Bank of India under which the funds are deposited by TD on 1st and 15th of every month (and on any day on need basis) for enabling SBI to issue instructions to all its specified branches at projects to make payment, up to specified limit, on behalf of SBI. The project is simultaneously informed about the limit / revised limit up to which the cheques can be issued and funds can be drawn by authorized signatory on monthly basis. The unutilized limit as per bank statement at month end is not carried over to next month and is transferred to separate a collection account.

Important Factors to be taken into consideration

It is imperative that drawing limit is to be judiciously identified as it involves blocking of the costly funds. Remittance to collection account during the course of month does not earn any interest to the Corporation unless the money is actually drawn and deployed elsewhere. Accordingly, any major remittance into collection account is to be specifically brought to the notice of the Corporate Office for effective deployment. Drawing limit is fixed/ revised after a careful review of the anticipated cash flow estimate based on budget provisions, site requirements, progress of work, manpower deployment, un-encashed cheques of the earlier period etc. Any increase in this limit is authorized on the requirement of unit and recommendation of concerned Director. Monthly permanent drawing limit is authorised by Cash and bank section with the approval of Director (Fin) on the basis of requirement from the units/ projects.

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Collections from Beneficiaries

The payment for sale of energy is received at any of the following units: Corporate Office Liaison office ED office Project Regional office As per the existing system the receipts against sale of energy are being received from beneficiary states through the following modes: Through Cash Management Product service Through cheques Through Letter of Credit Through collection account from project

Operation of collection account

The collection account is an arrangement with SBI for centralized receipts. All the projects and units are required to remit the cheque/draft into respective collections account. Receipts on account of sale of energy from SEBs are preferably received through `Cash Management Product` Services. It is the duty of the Head of Finance of the unit to verify weekly that the branch has complied with this arrangement and not allowed the credit balance to accumulate.

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EQUITY FROM GOI

An annual plan is prepared by the planning section and sent to Ministry of Power, GoI for approval, which provides project wise detail of funds required during the year. These funds can be utilized only for the purpose for which they are being approved/ sanctioned for by the GoI. Revision for the annual requirement for current year is done by the end of October by way of an application along with the fresh requirement with project wise break up and reasons for the same The equity is drawn on quarterly basis from Ministry of Power against the sanctioned annual plan. Cash and bank section writes the request letter to Ministry of Power on quarterly basis in format prescribed by the Ministry along with necessary enclosures which generally contains following details: Project-wise details of amount/budgetary support sanctioned, expenditure incurred in the previous quarter, expected requirement of fund and net requirement for the current quarter in the prescribed format Cash flow statement Milestones achieved and proposed Activity wise financial requirement Status of Government approval/PIB clearance of the projects etc

Cash credit and short terms loans

An arrangement for cash credit facility by way of sanction of cash credit limits is entered into with the banks. The cash credit facility entitles the company to utilize funds to the extent of the limits sanctioned by the banks for financing the working capital requirement of the company. Cash credit account is operated like a normal bank account. In NHPC efforts are made to minimize the interest cost on these cash credit limits and short term loans. In lieu of this NHPC has negotiated with the banks to provide the interest rate on these short term deposits and cash credit limits linked with Mumbai Interbank Overnight Average (MIBOR). JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA Page 42

NHPC has Rs.5000cr Cash Credit limit with SBI. NHPC has Rs.1000cr Cash Credit limit with IOB Faridabad. NHPC has taken loan worth 9000 Crores from different banks and financial institutions. NHPC has raised Rs. 600 Crores from Bonds issue.

Recommendations

All the payments should be done on the next day for the smooth functioning of department. It will help in making timely payment of customers and employees because certain modes of payment like RTGS has to be done before a particular time so to avoid any misplacing of VOUCHERS it is essential that all payments has to be made on the next day. The cash section should avoid dealing with customers while making payments. So there has to be a fix time for customers queries i.e. 2pm to 3pm. It will help not only the organisation but also customers for better redressal of their complaints. Reconciliation of accounts has to be done weekly.

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References
www.rbi.org.in www.nhpc.nic.in www.investopedia.com www.businessworld.in www.amfiindia.com www.moneycontrol.com www.nseindia.com Internal reports of NHPC like various Manuals on every department

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