A REPORT

ON

ANALYSIS ABOUT CHANNEL

FINANCING OF ESCORTS AGRIMACHINERY

BY
ANURAG KALRA
ENROLLMENT NO. 11BSP0151

A REPORT
ON

ANALYSIS ABOUT CHANNEL

FINANCING OF ESCORTS AGRIMACHINERY
By
ANURAG KALRA
ENROLLMENT NO- 11BSP0151
ESCORTS LTD
A report submitted in partial fulfillment of
the requirements of PGPM Programme of
IBS Mumbai

SUBMITTED TO

FACULTY GUIDE

COMPANY GUIDE

Prof. SURESH SURALKAR

MR VIJAY NEHRA

Faculty member at

Team Manager

IBS- Mumbai

Finance

Escorts Ltd.

ACKNOWLEDGEMENT
I would like to gratefully acknowledge the contribution of all the people who took active part
and provided valuable support to me during the course of this project. To begin with, I would
like to offer my sincere thanks to Mr.Vijay Nehra, Team Manager-Finance , for giving me the
opportunity to do my summer training at Escorts Agri Machinery. Without his/her guidance,
support and valuable suggestions during the research, the project would not have been
accomplished.
My heartfelt gratitude also goes to the entire Finance team ( Mr. Taranjeet singh, Mr Ashok
Bhel , Mr Aurobindo Biswas,Head Commercial Finance , Ms Sunpreet Kaur) in Escorts Agri
Machinery Channel Finance Department ,for their co-operation and willingness to answer all
my queries, and provide valuable assistance.
I also sincerely thank Prof Suresh Suralkar, my faculty mentor at IBS, MUMBAI, who
provided valuable suggestions, shared his/her rich corporate experience, and helped me script
the exact requisites.
Last, but not least, I would like to thank all Dealers for sharing their experience and giving their
valuable time to me during the course of my project.

TABLE OF CONTENTS
Executive Summary
Chapter-1: Introduction1.1 Industry Overview
1.1.1

Indian Tractor Industry

1.2 Company Overview

1.2.1

Escorts Ltd.

1.2.2

Agri-Machinery Group

1.2.3

History of Agri-Machinery Group

1.2.4

Products of Escorts Agri-Macinery Group

1.2.5

Comparison of Escorts with the Major Tractor Manufactures

Chapter-2: Project Profile2.1 Objectives of the Study

2.2 Methodology
2.3 Channel Financing
2.3.1 Meaning
2.3.2 Benefits of channel financing

2.3.3 Process of channel financing

2.3.4 Scope of channel financing
2.3.5 Challenges for Channel financing
2..3.6 Channel finance role in financing
2.3.7 Channel finance of Escorts Agri-Machinery Group
Chapter-3: Observations and Analysis3.1 Analysis of various dealers

 Chapter-4: Findings
Chapter-5: Reccommendations

Annexure

EXECUTIV
E

EXECUTIVE SUMMARY
Escorts Ltd. is the holding company of the Escorts Group. Post restructuring Agri - machinery
or tractors have become the focus area of operations. Other business that is two- wheelers, IT,
Telecom, construction equipment, are controlled through subsidiaries and joint venture. Positive
off of its pistons business to a joint venture with a foreign collaborator, Escorts is focusing on its
core competence of tractors. Escorts have strong hands in house engineering skills, a wide
distribution/service network and brand franchise.
Channel Finance is an innovative option for extending working capital finance to dealers who
have business relationships with large companies. Channel Financing is the mechanism through
which a financial institution meets the various funds related requirements along the Supply
Chain at the suppliers end. This thereby helps the supplier in sustaining a seamless business
flow and avoiding Working Capital related difficulties. Channel Finance usually covers
discounting of Trade Bills drawn by a company and accepted by its dealers, distributors or
Channel Partners. It also provides overdraft facility to the dealers or distributors who have
business dealings with large Corporate.

INTRODUC
INTRODUC
TION
TION

1.1 INDUSTRY OVERVIEW

Indias agricultural sector is one of the most important component of the countrys economy,
although its share in the GDP has decreased substantially over the years. About 60 % of Indias
population is dependent on agriculture for its survival. Performance of the agricultural sector
continues to have a crucial impact on the price of essential goods and market demand for
various consumer products. Agricultural Equipment industry plays a major role in supporting
the performance of the agricultural sector in India. Farming activities are increasingly getting
mechanized, and the availability, quality and performance of agricultural equipments have an
increasing impact on improving the output and productivity of the agricultural sector.
Agriculture provides support for economic growth and social transformation of the country. As
one of the worlds largest agrarian economies, the agriculture sector (including allied activities)
in India accounted for 14.5 per cent of gross domestic product (GDP) at 2004-05 prices, in
2010-11 as compared to 14.7 per cent in 2009-10. In terms of composition, out of the total share
of 14.5 per cent that agriculture and allied sectors had in GDP in 2010-11, agriculture alone
accounted for 12.3 per cent. Timely and corrective measures taken by the government helped
boost agricultural production and growth in agriculture and allied sectors reached 7.0 per cent in
2010-11, the highest growth rate achieved during the last six years. In 2011-12, agriculture and
allied sectors are estimated to achieve a growth rate of 2.5 per cent.
As a proportion of the value added by agriculture to GDP, Gross Capital Formation (GCF) in
agriculture and allied sectors rose to 20.1 per cent in 2010-11 from 13.5 per cent in 2004-05 at
2004-05 prices which is a positive trend. The rates of growth and share of agriculture and allied
activities in the GDP of the country are given below:
FIGURES IN PERCENTAGE (%)
ITEM

2010-11

2011-12

Growth in GDP in agriculture & allied sectors

7.0

2.5

Share in GDP-agriculture and allied sectors

14.5

13.9

Agriculture

12.3

Forestry and logging

1.4

Fishing

0.7

Source: Central Statistical Organization (CSO) and Department Agriculture and Cooperation

The above Pie Chart explains that the share of Agriculture and Allied sectors in India has
reduced significantly from 14.7% in 2009-10 to 13.9% in 2011-12(as estimated). This means
that the focus of India has shifted from Agriculture to Manufacturing and Service sectors but
still major revenue is generated from Agriculture Sector only.
1.1.1INDIAN TRACTOR INDUSTRY
Higher productivity and greater output are the two major contributions in farm mechanization.
Tractors are an integral part of farm mechanization and play a crucial role in increasing
agricultural productivity. Tractor is a highly versatile piece of machinery used in agriculture
both for land reclamation and for carrying out various crop cultivation activities. It is also
employed for carrying out various operations connected with raising the crops by attaching

suitable implements, to provide the necessary energy for performing various crop production
operations involved in the production of agricultural crops. Tractors are capital intensive, labour
displaying used as a mode of transport, in electricity generation, in construction industry and for
haulage operation. It has become an inevitable part of farm structure. The application of tractor
for agricultural activities which swept India during the past few years has helped the farmers to
improve.
Tractor industry is an important part as agriculture sector is one of the main contributors to
Indias GDP. Earlier, they were imported to India and later on were indigenously manufactured
with the help of foreign collaborations.The tractor industry in India has made a significant
progress in terms of production and capacity as well as indigenisation of technology.
Tractor market in India is about Rs 6000 crore. On an average around 400000 tractors are
produced and their sale is 260000.Uttar Pradesh is the largest tractor market in our country. One
out of every four tractor is being purchased here. One third of worlds Tractor production is in
India. The Total Turn Over is 10000 crore and the Total investment is 8000 crore. With
Employment of 28000 people directly and 150000 people indirectly the Tractor population is
3000000 compared to 900000 in China.

The Indian tractor industry has experienced strong volume growth during FY10- FY12 (for 9
months) due to favourable cyclical and structural demand drivers. While tractor volumes
remained robust throughout FY12 despite macro-economic headwinds, the domestic tractor
market has shown some signs of weakness over the last couple of months.
FY08

VOLUMES
FY09
FY10

Domestic +
346,508
345,827
Export
Source: CMIE Database; ICRA Estimates

441,174

FY11

FY12e

545,128

605,092

Growth momentum in tractor market continues:

After a period of downturn during FY08 and FY09, the up-cycle in the tractor market has
extended over the last three years (FY10-9mFY12). Some of the cyclical factors that have
contributed to healthy demand side economics are good south-west monsoons supporting farm
output, strong rural liquidity sustained by higher minimum support price (MSP) for crops and
double digit food inflation, besides adequate credit availability driven by NBFCs and private
banks. Structural drivers like scarcity of farm labour in light of alternate employment
opportunities, steady replacement demand and growing non-agricultural use of tractors have
also supported tractor volumes.

Exports contribute about approximately 11% to the total tractor sales of India. Volumes saw a
decline in FY09-FY10 on account of global economic recession but a recovery was seen in
FY11 and the growth momentum continued to be healthy in FY12. While Nepal, Bangladesh,
Sri Lanka and the United States remain major export destinations, the expanding footprint of
Indian tractor manufacturers in African and new South-East Asian markets is expected to drive

export growth further. Export to neighbouring countries such as Thailand, Malaysia and
Indonesia is supported by the Asian Free Trade Agreement. Further, export volumes are
expected to benefit from the introduction of higher HP tractors by Indian manufacturers. TAFE,
M&M, and John Deere are the major tractor exporters from India.

The
Indian
tractor
industry has 13 main national participants and some regional players as well. The market share
is, however, concentrated amongst the top-five manufacturers which account for over 90% of
the total sales volumes. With relaxation of the Foreign Direct Investment in agriculture to boost
productivity, large international participants such as AGCO Corporation, CNH Global and John
Deere entered the Indian Tractor market few years ago. Most of these international
manufacturers have continued to maintain their presence in India either through their whollyowned subsidiaries, joint ventures or through technical collaborations. As there as relatively low
entry barriers in the tractor industry in terms of technology, costs involved in branding,
distribution network and spare parts availability act as barriers.
The tractor industry has witnessed consolidation in 2005 and 2007 with merger of
manufacturers such as Eicher Tractors with TAFE and Punjab Tractors with M&M,
respectively.
1.2 COMPANY OVERVIEW
1.2.1 ESCORTS LIMITED
The Escorts Group is among the India's leading engineering conglomerates which operate
in the high growth sectors of agri-machinery, construction & material handling
equipment, railway equipment and auto components. Having pioneered farm mechanization
in the country, Escorts has played a pivotal role in the agricultural growth of India for more than
five decades.Being one of the leading tractor manufacturers of the country, it offers a
comprehensive range of tractors, more than 45 variants starting from 25 to 80 HP. Escort,
Farmtrac and Powertrac are the most widely accepted and preferred tractor brands.

It has been a leading material handling and construction equipment manufacturer for a diverse
range of equipments like cranes, loaders, vibratory rollers and forklifts. Today, Escorts is the
world's largest Pick 'n' Carry Hydraulic Mobile Crane manufacturer. Escorts has been a major
player in the railway equipment business in India.Their product offering includes brakes,
couplers, shock absorbers, rail fastening systems, composite brake blocks and vulcanized rubber
parts. In the Auto components segment, Escorts is a leading manufacturer of auto suspension
products including shock absorbers and telescopic front forks.
Throughout the evolution of Escorts, It has been a harbinger of new technology and a prime
mover on the industrial front by introducing wide range of new products and technologies that
helped to take the country forward for its betterment.

The major
revenue for
Escorts
(around
74%)
comes from
its Agri Machinery Division. There are other companies as well which contribute to the overall
revenue share like Construction equipment accounts for 17%, Railway equipment 6% and Auto
components around 3% approximately.
1.2.2 AGRI MACHINERY GROUP
1.2.3 HISTORY OF ESCORTS AGRI MACHINERY
In 1948, Escorts group launched Escorts Agricultural Machines Limited. Later on in 1958, it
started importing MF tractor from Yugoslavia for marketing in India. Then in 1960, A
manufacturing plant was set up at Faridabad by the name of Escorts Agri Machinery Group.
In 1965, the company acquired Industrial licence to manufacture URSUS/ ESCORT tractors. In
1969 a separate company, Escorts Tractors Ltd., was established with equity participation of
Ford Motor Co., Basildon, UK for the manufacture of Ford agricultural tractors in India. Later
on Escorts signed a contract with Ford Motor Company to manufacture Ford 3000 model
tractors and established a Escorts Institute of Farm Mechanisation (EIFM) in Bangalore.Then in
1977, Begining of Escorts Scientific Research Centre at Faridabad by developing its own
Engines for E-27 and E-37.

In 1979, the sales turnover crossed the Rs. 50 crore mark which was highly applaudable.In
1983, Established state-of-the-art R&D centre to spearhead newer breakthroughs in Farm
Mechanisation and to maintain industry leadership. Later in 1988, Escorts annualised turnover
crossed above Rs.100 crores.
In 1996, a Disengagement of Joint venture with New Holland took place and the Farmtrac
Tractor series were launched. In the same year, Escorts Tractors Ltd. formally merged with its
parent company, Escorts Ltd.
In 1997, A Joint Venture with an Italian company CARRARO was finalised to establish a
company in India for manufacturing and marketing of transmission and axles. A Memorandum
of understanding for Joint Venture with a Polish Company POL-MOT was signed for assembly,
manufacturing and marketing of Farm Machinery.
In 1999, Escorts launched Powertrac series of tractors.Since inception, Escorts Group has
manufactured over 1 million tractors. Escorts Agri Machinery Group has three recognized and
well-accepted tractor brands, which are on distinct and separate technology platforms.
Today, Escort Agri Machinery Group has a nationwide network with over 600 dealers, 100 parts
stockists and 30 area offices. Their national share stands at 20%. The company has developed its
own in-house state-of-the-art technology R&D facility. The main focus of the R&D facility is to
develop new and better products that can offer improved performance with lower fuel
consumption and least maintenance and parts requirements.
1.2.4 COMPANY MISSION AND VISION
Escorts Endeavours to transform lives in rural and urban India by leading the revolution in
agricultural mechanization, modernization of automotive and railway technology, as well as
transformation of Indian construction industry.
The Strategic Values define how the company will achieve its envisioned future. These values
must be embedded into their manner of thinking and ways of work.

Customer Centricity
Acute sensitivity to the needs and experiences of the customer shall guide all that we do.

Excellence
We will strive to achieve and surpass world class standards in all that we do.

Innovation
We will use the power of technology and imagination to deliver solutions to the customer
needs.

Agility
We will operate in our markets with the ability to change direction and position with
nimbleness and speed.

Escorts Limited pioneered farm mechanization in India with foray in tractor manufacturing in
1960. Escorts Limited manufactures wide range of tractors (from 27-75 HP). Its brands
Farmtrac, Powertrac and Escort are well recognized and widely accepted in the Indian market as
well as overseas. The major importers of Escorts tractors are North America, Africa and Europe.
Besides tractors, the Agri Machinery division also manufactures implements, trailers and
lubricants.It commands an overall market share of 13% (approx) of the total domestic tractor
industry.

The total revenue of the Agri Machinery Division has increased over the past few years and it
has been ranging between 20000 to 35000 Million Rs (approximately). The growth rate
however, increased initially at a steady rate, then declined during the year 2010-11 but has been
stable for the last two financial years.
1.2.5

PRODUCTS OF ESCORTS AGRI MACHINERY

TRACTORS

Farmtrac:
Farmtrac brand are the most powerful premium range of tractors that give maximum
productivity to the farmers. These are agricultural tractors with power 60 to 110 HP.They
are embedded with cutting edge technology combined with the quality of components used
in various elements, their reliability results from using solutions of companies like Carraro
and Perkins. These tractors were designed for farms and companies with wide variety of
needs. Outstanding comfort in the cabin resulting from good ventilation, available space
provide proper working conditions.
There are various Farmtrac models as well like FT 670 2 WD, FT 670 4 WD, FT 685 DT ,
FT 690 DT etc.

Powertrac:
Powertrac tractors are built in India by the Escorts Group (Escorts Agri) for sale in India.
They are considered the economy-models, and is one of most popular brands built by
Escorts Agri Machinery division.

Escort:
Escort brand of tractors are symbolic of reliability and trust and enjoy the confidence of the
farming community for the last 40 years. It comes under the economy range and the tractor
has 2 cylinders with 27 - 35 Hp.

New inverter tractor:

Escorts limited became the pioneer in Indian Tractor Industry by launching India's first-ever
Inverter Tractor. This technology offers the farmers an integrated multi-purpose vehicle that
can be used as a tractor for Agri-operations and with the help of an in-built battery system, it
can generate electricity which is help the farmers in lighting up their homes.This tractor
launch reaffirms Escorts commitment towards enhanced value proposition to its
customers.Inverter Tractor comes in popular Escorts variants including FT 45, PT 439 & PT
434 and is currently available across the states of Madhya Pradesh, Uttar Pradesh, Haryana,
Rajasthan, Maharashtra, Bihar, & West Bengal etc.

New jai kissan series:

As the advent of newer applications of tractors across the country, it has become the need of
the hour for tractors to be more 'Customized' & 'Specialized' to maximize productivity and
efficiency.The product line was launched in the states of Punjab, Haryana, Rajasthan and
western UP. The Jai Kissan Series consist of the following range of tractors:-

Valuemaxx:
The most popular is the VALUEMAXX tractors which has been designed to cater to all the
basic farm applications of their customers and it has a powerful and economical engine.
Along with the above features, it also possess Single Clutch, Easy Steer, Diesel Power and
dual PTO facility as well. This type of tractor is best suited to be used as a Cultivator, Seed
drill, M B Plough, Harrow and Disc Plough.

Agmaxx:

Under the Jai Kissan series , the second most popular tractor range is the AGMAXX tractors
which are manufactured to cater to the emerging agriculture and PTO operated applications.
This range of Tractors has dual clutch and adjustable front axle, that increase productivity
and saves customers time and money. Such kind of tractor can be used as Rotavator, Straw
Reaper, Potato Digger, Thresher, bailer, Harvester and Potato Planter.

Loadmaxx:
Under the Jai Kissan series ,another tractor range is the LOADMAXX tractors which are
well equipped to cater to the heavy haulage applications and are built with Oil immersed
brakes and cerametallic clutch., extra Torque Machine , 3rd Hydraulic Lever with Coupler.
It is best suited for Single Axle Trolley, Double Axle Trolley, and Tipping Trolley.

Supermaxx:
Under the Jai Kissan series ,another tractor range is the SUPERMAXX tractors which caters
to both, emerging Agri and Heavy Haulage requirement of their customers. It is best suited
for Rotavator, Laser Leveller, Reaper, Loaded trolley, and Tipping trolley.It also has extra
features like Oil Immersed Brakes, Power Steering, extra Torque Machine, Heavy Hydraulic
Lift , Multi Speed Reverse PTO, Flexi Axle, Bigger Tyre and Dual PTO.

Inframaxx:
Under the Jai Kissan series, another tractor range is the INFRAMAXX tractors which has
been built to cater to the increasing use of tractor in commercial and construction
applications. It is best suited for Loader, Dozer, Backhoe Loader, grader, etc. It also has
extra features like Epicyclic Reduction, 24 Speed Synchromesh, Synchro Shuttle.

1.2.6

COMPARISION OF
MANUFACTURERS

ESCORTS

WITH

OTHER

MAJOR

TRACTOR

Escorts sales are less in the 21-30HP Tractors Category when compared to other manufacturers
like Mahindra & Mahindra which has the highest sales in this category.

Escorts sales are very less in the 31-40HP Tractors Category and Mahindra & Mahindra has the
highest sales of 99062 Tractors in this category. Even the sales of TAFE and Sonalika were
more than Escorts.

Escorts is a major seller of 41-50HP Tractors and contributes to a total market share of 37153
tractor sales which is slightly less than sales of Mahindra & Mahindra Ltd.

Mahindra & mahindra is the major player in the indian tractor industry and has sold 37882
tractors in the Above 51Hp tractor category in 2010-11 financial year. Escorts although being a
major contributor to the overall tractor industry doesnt have any sales in this category in 201011 financial year.

PROJECT
PROFILE

2.1 OBJECTIVES OF THE STUDY:

To analyze the process of meeting the short term credit requirement of the company and the
dealers
To understand the he financing terms with the banks and the financial institutions of the
company and the dealers.
To analyze the retail and channel financing system of Escorts Argi-Machinery Group.
To analyze the short-term financial position (i.e. liquidity and profitability position) of
dealers.
To understand the basis on which the channel finance is made available to the dealer.
To evaluate the impact of channel financing on the company.
2.2 METHODOLOGY:
Research Type: The research design is Descriptive as well as Exploratory in nature.
Population and Sample Size: The total number of dealers the company deals with is 160(i.e.
population size). We have taken a sample of 5 dealers, located in different areas. The sample has
been taken on random basis.
Type of Data: Secondary data is used for analysis. The financial statements already prepared by
the dealers have been used.
Sources of Data: The financial reports of the dealers are used as a source of data. The C.A.
Certified provisional financial statements(i.e. income statement and balance sheet) have been
analyzed and evaluated. The financial reports of the dealers have been taken from the company,
which have been provided by the dealers.
Methods and Techniques: As under:

Various liquidity, activity and profitability ratios have been used for analyzing the shortterm financial position of the dealers.

The Calculation norms as per the Tandon and Nayak Committee have been used for
calculation of Maximum Bank Permissible Finance Limit.

2.3 CHANNEL FINANCING:

2.3.1 MEANING:
Channel Financing is an innovative option for extending working capital finance to dealers who
have business relationships with large companies. Dealers are now able to leverage their
relationship with reputed companies in sourcing low cost funds with support from their
counterparts.
Channel Financing is the mechanism through which a Bank / Financial Institution meets the
various funds related requirements along the Supply Chain at the suppliers end. Therefore it
helps the supplier in sustaining a seamless business flow and avoiding Working Capital related
difficulties. Channel financing relates to ensuring that integrated financial and commercial
solution is available to the entire chain of supply and distribution, that could ensure the health of
the firm, financed by the bank.
Forward and backward linkages in a business organization play a significant role in the success
or failure of the business entity. For example a manufacturing or trading firm, while the
suppliers of raw material are important as they provide input for production, equally important
is the role of its distributors which sell products manufactured by the firm through retailers to
the ultimate consumer. Channel financing relates to ensuring that integrated financial and
commercial solution is available to the entire chain of supply and distribution that could ensure
the good health of the firm, financed by the bank.
Through channel financing, the business firms can out-source a major part of their working
capital needs thereby reducing their dependence on bank finance. For instance, it need not avail
of credit from its bank to pay off the supplier if the supplier gets the finance in his own name
from the bank for the raw materials supplied on credit in the form of say, drawee bills financing.
The bank can also allow loan to the dealer for the credit term that has been fixed between the
firm and the dealer in the form of receivable finance or finance against book debts or factoring
of the receivables. This enables the manufacturing firm to get cash immediately for the finished
goods supplied. This firm functions as the principal customer which suggests the names of its
suppliers and dealers to the bank. Thereafter, the bank makes a due diligence assessment of the
suppliers/dealers standing and credit worthiness and decides to provide finance on merit.
The pre and post sale working capital requirement of the manufacturing concern would be
scaled down. Such firms can concentrate more on their core competence area of production and
marketing their products besides saving time and costs involved in arranging creditors and

monitoring recovery. As regards the suppliers and dealers, the major benefit is that they get
payments promptly, which improve their liquidity position and cost. This also helps them as
well as the bank to cut level of counter party risks.
The banks also gain substantially from the process of channel financing which include increased
customer base, effective due diligence and smoothness of lending activity and loan origination
process. Besides, the banks will be able to ensure better credit discipline. Since the risk is
diversified through finance to supplier, manufacturer and the dealers, the credit exposure norms
are better observed. Hence channel financing is a very convenient tool in managing their assets
portfolio.
Channel financing, due to its distinct advantages to the business firms as well as banks, has been
suggested for implementation in various forms, by various committees in India such as
receivable financing by Tandon Committee, drawee bills financing by Chore Committee and
through factoring by Kalyansundram Committee. Channel financing opens up manifold
opportunities due to which the banks can make conscious efforts at popularizing this credit
delivery mechanism.
Channel Financing has two aspects:

Discounting of Trade Bills: It includes discounting of trade bills drawn by a company

and accepted by its Dealers / Distributors / Channel Partners.

 Providing Overdraft facility: It includes providing overdraft facility to the dealers /

distributors who have business dealings with large Corporate.
Through channel financing, the business firms can out-source a major part of their working
capital needs thereby reducing their dependence on bank finance. Channel financing opens up
manifold opportunities due to which the banks can make conscious efforts at popularizing this
credit delivery mechanism.
2.3.2 BENEFITS OF CHANNEL FINANCING:
To the Corporate:
Working Capital Finance can be made available by the corporate to their channel partners at
cost lower than current cost of credit.
Release of funds from the balance sheet results in better and improvement in financial ratios.
Channel Finance can be used by corporate as a marketing tool and strengthening their
relationship and loyalty towards their channel partners.
It increases the efficiency of the receivable management and cash management process of
the corporate.
It helps in increasing sales through higher purchasing power for channel partners and ability
to introduce payment discipline with their channel partners.
Results in improved profitability.
To the Dealers/ Distributors (i.e. Channel Partners):
Channel finance is a steady and cheaper source of Working Capital financing for Channel
Partners.
Upto certain limits it is a clean facility of financing.
Channel partners can increase their sales through higher purchasing power.
Simplicity of documentation and approval procedures.
By availing cash discounts from corporate channel partners can increase their profitability.
To the Banks:
Through channel financing process can increase their customer base

 It ensures smoothness of lending activity, loan originations process of banks as well as

ensures better credit discipline.
As the risk can be diversified through finance to supplier, manufacturer and the dealers, the
exposure norms can be better observed.
It is a very convenient tool for banks in managing their asset portfolio.
2.3.3

PROCESS OF CHANNEL FINANCING:

Channel
Partner

Corporate

Bank
3

Step1: Supply of goods from Corporate to Channel Partner.

Step2: Advise to Bank to make payment for the purchase.
Step3: Payment by Bank for goods purchased by Channel Partner.
Step4: Repayment by Channel Partner to Bank as per facility term.
2.3.4

SCOPE OF CHANNEL FINANCING:

Often companies with high levels of technical expertise are unable to realize the full potential of
their capabilities due to lack of proper working capital. Smart financing can help them to grab
new opportunities and manage the huge business growth happening today. Several channel
partners sacrifice business opportunities due to working capital constraints. Channel financing
can helps tackle this loss of opportunities. Finance options allow more transactions within a
single credit cycle, helping the company grow faster.
Channel Finance has helped many companies to get aggressive in taking bigger credit
exposures. It has also enhanced their ability to service more deals. Distributors too are aware of
the need for channel financing and have introduced various programs to enable their key
partners with tools to avail more financing options. At present banks prefer larger companies
with proper balance sheets for bill discounting. Smaller companies are usually not given priority
and have to pay higher interest rates.

Vendors too are doing their bit to help channels manage their internal finances better as well as
empower them with customer financing schemes.

2.3.5 CHALLENGES FOR CHANNEL FINANCE:

The following are the major challenges that these products face in India:
1. While there are more options for corporates to raise finances than ever before, only a small
segment of the companies is presently availing channel financing options. To be eligible for
this facility, borrowers need to have strong financials and transparent reporting which is
currently lacking among a large number of companies.
2. Lack of financial planning is another issue compounded by the lack of qualified and
experienced personnel to manage the finances.
3. There is also a misconception that availing loans will create an interest burden on the
already dipping bottom-line. Contrary to this notion, availing finance will allow a company
to carry out more transactions within a single credit cycle, thus reducing the total effective
operating expense incurred per credit cycle.
4. Availment of financing necessitates strong fiscal discipline. Once financing options are
availed one has to get smart with the overall finance management. Forecasting of the
working capital needs becomes paramount and clients have to ensure that bankers are paid
on time lest credibility is lost and the ability to raise future finances is affected. Smart
financing enables companies to improve their capabilities to benefit from new opportunities
and speed up growth.
5. Even after RBI has given approval for products like channel finance, factoring etc there is a
lot of non-cooperation from the banks regarding issuance of letter of disclaimer and Opinion
reports. Further, banks offer multiple products as against limited facilities of financing
offered by most of the NBFCs which acts as a hurdle for the corporate to switch to NBFCs
for their financing requirement.
6. The corporates dont prefer channel financing as NBFCs have a higher rate of interest than
the banks due to their higher cost of funds. Other working capital products like overdraft
facility, cash credit account, letter of credit etc. carry lower rate of interest.
7. Also one of the major challenges which corporate face is non-cooperation from there debtors
and creditors.

8. Lack of awareness about the product.

2.3.6 CHANNEL FINANCE ROLE IN FINANCING:
Channel finance is the major source for financing working capital requirements of a company.
Capital required for any business can be classified under two main categories via,
Fixed Capital
Working Capital
Every business needs funds for two purposes for its establishment and to carry out its day- today operations. Long terms funds are required to create production facilities through purchase of
fixed assets such as plant & machinery, land, building, furniture, etc. Investments in these assets
represent that part of firms capital which is blocked on permanent or fixed basis and is called
fixed capital. Funds are also needed for short-term purposes for the purchase of raw material,
payment of wages and other day to- day expenses etc.
These funds are known as working capital. In simple words, working capital refers to that part
of the firms capital which is required for financing short- term or current assets such as cash,
marketable securities, debtors & inventories. Funds, thus, invested in current assets keep
revolving fast and are being constantly converted in to cash and this cash flows out again in
exchange for other current assets. Hence, it is also known as revolving or circulating capital or
short term capital.
Thus,
It is the minimum amount of resources that a company requires, thus it helps to
effectively cover the usual costs and expenses necessary to operate the business.
It facilitates smooth functioning of the business.
It ensures a sound liquidity position of the business.
Determining Working Capital Requirement:
The basic formula includes two factors:
Current Assets: Current assets are known as short term assets and include cash in hand
and cash at bank, bills receivables, sundry debtors, short term loans and advances,
inventories of stock, prepaid expenses, accrued incomes and marketable securities.
Current Liabilities: Current liabilities are known as short term obligations of a business
and include bank overdraft, outstanding expenses, short term loans, advances and
deposits, sundry creditors, bills payable and dividends payable.

Working Capital = Current Assets Current Liabilities

Positive working capital means that the company is able to pay off its short-term liabilities
whereas, negative working capital means that a company currently is unable to meet its shortterm liabilities with its current assets (cash, accounts receivable and inventory). An increase in
working capital indicates that the business has either increased current assets (that is has
increased its receivables, or other current assets) or has decreased current liabilities, for
example has paid off some short-term creditors. It is also known as Net working Capital.
Channel Finance and Working Capital :Channel financing is a major source of working capital
finance and provides a unique solution for financing the working capital requirements of the
corporate as well as of the channel partners (i.e. dealers/ distributors). Channel financing is
adopted to improve the working capital of the company by avoiding inventory pile up and
earning speedy collections.
2.3.7 CHANNEL FINANCING OF ESCORTS AGRI-MACHINERY GROUP:
Efforts by Escorts Limited:
Escorts Limited facilitated dealer finance tie-ups with banks and financial institutions by
leveraging the strengths of its relationships with banks. A dedicated team is appointed to visit
dealers in India at regular intervals to conduct this initiative. In the year 2010-11, company has
formalized arrangements with two of the major Public Sector Bank(s) who had agreed to extend
the drawee bill discounting facility to accredit dealers of Escorts limited with a total programme
size of Rs. 250 crores (State Bank of Patiala Rs. 50 crore and Punjab National Bank Rs. 200
crores). In a span of 5-6 months, the dealer portfolio under channel finance was able to touch
193 dealers.
Process of providing Channel Finance adopted by the Escorts Agri-Machinery Group:
On the basis of financial soundness and credit worthiness of the dealers the company ensures the
channel finance facility to the dealers. It includes following:
Selling Process:

Escorts AgriMachinery
Group

Distributors

Dealer
s

The basic process of selling by escorts was selling to the distributors and than to the dealers.
Whereas, now the company focuses on eliminating the distributors (i.e. middle men) and selling
directly to the dealers.
New selling process:

Escorts AgriMachinery
Group

Dealer
s

Under this selling process the company and the dealer come in direct contact with each other
and direct selling is involved, where dealers can directly purchase from the company. There is a
limit of finance provided to each dealer and here is the main role of channel financing. In which
the Banks provides finance to the dealer against the bill of exchange drawn by the company
against the dealer on the invoice amount. The company has appointed area officers at each area,
who are in direct contact and interact with the dealers.
Steps involved in Channel Financing:
The area officer draws the bill of exchange in the name of the company against the dealer
for the units of tractor purchased by the dealer
The dealer accepts the bill of exchange (hundi) and sends it back to the company along with
the post dated cheque.
The required or maximum trade of cycle can be 60 days.
After the bill of exchange is received by the company, it analyses the financial statements of
the dealer and sends the analyzed report along with the bill of exchange for discounting.
The bank on the basis of companys analyzed report, its terms and conditions and after
analyzing the dealers financial statements, discounts the bill of exchange and grants loan to
the dealer.
During the peak season (i.e. February or June and July) the banks and company increase the
limit of channel finance provided by them.
Financial Statements required:
The dealer need to provide the company with various financial data, that company can analyse
and on the basis of dealers financial soundness (i.e. strong liquidity and profitability position),
grants finance to the dealer from the bank. Following statements of the dealer are required:
Current quarter balance sheet (i.e. of 3 months)
C.A. certified documents
Last 2 years audited balance sheets
Provisional balance sheet

Analysis of dealers Financial Statements:

The analysis is done basically to analyze the short term financial position of the dealer. The
liquidity and profitability position of the channel partner is analyzed. Following calculations and
analyses is carried on by the company:
Calculation of Ratios:
Ratios are used to compare risk and return of different firms in order to help equity investors
and creditors make intelligent investment and credit decisions. Short-term bank and trade
creditors are primarily interested in the immediate liquidity of the firm. Ratios provide a profile
of a firm, its economic characteristics and competitive strategies, and its unique operating,
financial, and investment characteristics. Activity, liquidity and profitability analysis is done of
dealers firm to provide it with finance facility.

Activity Analysis: Following ratios are calculated:

o Inventory Turnover Ratio
o Inventory Conversion Period
o Debtors Turnover Period
o Debtors Collection Period
o Creditors Turnover Period
o Creditors Payable Period

Liquidity Analysis: Following ratios are calculated:

o Current Ratio
o Quick Ratio
o Working Capital Ratio

Profitability Analysis: Following ratios are calculated

o Net Profit Margin

Further following analysis is done

Operating Cycle
Cost of Goods Sold Ratio

 Interest Coverage Ratio

Consortium Value
Maximum Bank Permissible Finance Limit (MBPF): As per following:
o Tandon Committee
o Nayak Committee

OBSERVATI
ONS AND

3.1 ANALYSIS OF VARIOUS DEALERS:

Activity, liquidity and profitability analysis is done of dealers firm to provide it with finance
facility.
1. Activity analysis: It evaluates revenue and output generated by firms assets. Activity ratios
describe the relationship between the firms level of operations (usually defined as sales)
and the assets needed to sustain operating activities. The higher the ratio, the more efficient
the firms operations. Under it following analysis is done:

Inventory turnover ratio: It measures the efficiency of the firms inventory management.
Inventory Turnover Ratio= Cost of Goods Sold / Average Inventory

JATTI
MODERN
TRACTORS TRACTORS

M/S SAI
TRACTORS

8.661

6.183

6.811

M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION

4.482

13.57

A higher ratio indicates that inventory does not remain in warehouses or on the shelves but
rather turns over rapidly from the time of acquisition to sale.
It is further used for calculating:
Inventory conversion period: it is defined as average number of days the inventory is in stock. It
measures average time period taken to convert the raw material to sales.
Inventory Conversion Period = 360 / Inventory Turnover Ratio

JATTI
MODERN
TRACTORS TRACTORS

M/S SAI
TRACTORS

M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION

41.57

52.854

58.223

80.31

26.524

Channel Finance is provided to those dealers of the company whose inventory conversion
period is upto 60 days. All the above dealers are meeting the required criteria except M/S Shiv
Motors which is having an ICP of 80 days.

Debtors turnover / Receivables Turnover ratio: It measures the effectiveness of the firms
credit policies and indicates the level of investment in receivables needed to maintain the
firms sales level. It is used to evaluate the firms operating performance.
Debtors Turnover Ratio = Sales / Average Debtors (Trade
Receivables)

JATTI
MODERN
TRACTORS TRACTORS

M/S SAI
TRACTORS

18.74

26.829

15.064

M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION

27.188

6.061

It is further used for calculating:

Debtors Collection Period: It is defined as an average number of days the receivables are
outstanding.
Debtors Collection Period = 360 / Debtors Turnover Ratio

JATTI
MODERN
TRACTORS TRACTORS

M/S SAI
TRACTORS

M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION

19.21

23.897

13.418

13.24

59.394

Channel Finance is provided to those dealers of the company whose Debtor Collection Period is
upto 60 days. All the above dealers are meeting the required criteria and M/S Shiv Motors has a
lowest DCP of 13 days which means that the debtors are collected quickly.

Creditors turnover / Payables turnover Ratio: A short-term liquidity measure used to

quantify the rate at which a company pays off its suppliers. It shows how a firm manages
paying its own bills.

It is further used for calculating:

JATTI
MODERN
TRACTORS TRACTORS

M/S SAI
TRACTORS

8.454

34.67

17.693

M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION

5.834

5.336

Creditors Payable Period: It is defined as an average number of days the payables are
outstanding. Defined as:
Creditors Payable Period = 360 / Creditors Turnover Ratio

JATTI
MODERN
TRACTORS TRACTORS

M/S SAI
TRACTORS

42.58

10.38

20.34

M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION

61.704

67.459

Channel Finance is provided to those dealers of the company whose Creditors Payable Period is
upto 60 days. The above dealers are meeting the required criteria except M/S Shiv Motors and
M/S Bhargava Trading Corp. which are exceeding the required limit.
2. Liquidity analysis: It measures the adequacy of a firms cash resources to meet its nearterm cash obligations. The short-term lenders assess the ability of a firm to meet its current
obligations. That ability depends on the cash resources available as of the balance sheet date
and the cash to be generated through the operating cycle of the firm. Generally, the higher
the value of the ratio, the larger the margin of safety that the company possesses to cover
short-term debts. Under it following analysis is done:

Current Ratio: It defines cash resources as all current assets. It measures the firms ability to
meet its current obligations. The current ratio can give a sense of the efficiency of a
company's operating cycle or its ability to turn its product into cash. The higher the current
ratio, the more capable the company is of paying its obligations.
Current Ratio = Current Assets / Current Liabilities

JATTI
MODERN
TRACTORS TRACTORS

M/S SAI
TRACTORS

1.654

7.35

1.312

M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION

1.21

1.295

Quick Ratio = (Cash+Marketable Securities+Accounts Receivables) / Current

Liabilities

The ideal current ratio is 1.5:1. The higher the current ratio, the better will be the liquidity
position of the company. M/s Sai Tractors has a current ratio of 7.35 which is the highest. A
very high ratio is also not appropriate because the funds of the company are lying idle as cash.
The current ratio of Jatti Tractors is apt.

Quick Ratio: It measures a firm's ability to meet its short-term obligations with its most
liquid assets. The quick ratio is more conservative than the current ratio because it excludes
inventory and other current assets (i.e. prepaid expenses), which are more difficult to turn
into cash. Also known as acid test ratio. Defined as:

JATTI
MODERN
TRACTORS TRACTORS

M/S SAI
TRACTORS

0.546

2.766

0.503

M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION

0.185

0.983

A higher ratio means a more liquid current position and better position of the company. The
ideal quick ratio is 0.33:1. M/s Sai Tractors has a current ratio of 2.766 which is the highest.
Avery high ratio is also not appropriate because the funds of the company are lying idle as cash

Working Capital Ratio: Working Capital is calculated by subtracting current liabilities from
current assets.
Working Capital = Current Assets Current Liabilities

JATTI
MODERN
TRACTORS TRACTORS

M/S SAI
TRACTORS

1724121

20317000

15182932

M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION

4357799

2825406

Working Capital Ratio is defined as:

Working Capital Ratio = Working Capital / Current Liabilities

JATTI
MODERN
TRACTORS TRACTORS

M/S SAI
TRACTORS

M/S
M/S BHARGAVA
SHIV
TRADING
MOTORS CORPORATION

0.654

0.3122

6.349

0.21

0.2959

Higher the ratio, better it is for the company as it shows stronger liquidity position. M/S Sai
Tractors has the highest Working Capital Ratio of 6.349.
3. Profitability analysis: Profitability ratios show firms overall efficiency and performance. It
is used to assess a business's ability to generate earnings as compared to its expenses and
other relevant costs incurred during a specific period of time. The objective of this analysis
is to detect consistency in the earnings of the firm. Under this following analysis is done:

Net Profit Margin: It is an indication of how effective a firm is at cost control. It measures
the overall profit margin net of all expenses.
Net Profit Margin = (Net Profit / Sales) * 100

JATTI
MODERN
TRACTORS TRACTORS

1%

0.2%

M/S SAI
TRACTORS

0.9%

M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION

0.69%

0.13%

A higher profit margin indicates a more profitable company that has better control over its costs
compared to its competitors. Jatti Tractors has the highest Profit margin.
4. Operating Cycle: The average length of time between when a firm purchases items for
inventory and when it receives payment for sale of the items. A long operating cycle tends to
harm profitability by increasing borrowing requirements and interest expense.
Net Operating Cycle = Inventory Conversion Period + Receivables Conversion
Period Payables Deferral Period
JATTI
MODERN
TRACTORS TRACTORS

M/S SAI
TRACTORS

M/S
SHIV

M/S BHARGAVA
TRADING

MOTORS

18.195

56.406

61.257

31.846

CORPORATION

18.46

As per the company norms, the operating cycle of dealers firm should be maximum of 60 days.
All the above dealers comply with the requirements except M/S Sai Tractors which has a
slightly higher Net Operating Cycle.
5. Cost of Goods Sold Ratio: It measures cost as a percentage of sales. Cost of goods sold
refers to the inventory costs of those goods a business has sold during a particular period. It
includes the cost of the materials used in creating the good along with the direct labor costs used
to produce the good.
Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses Closing
Stock
Cost of Goods Sold Ratio = (Cost of Goods Sold / Sales) *

JATTI
MODERN
TRACTORS TRACTORS

90.88%

98.1%

M/S SAI
TRACTORS

93.7%

M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION

91.1%

97.6%

The ratio is expressed in terms of percentage. As per company norms the COGS of the dealers
firm should not be less than 90-91 percentage of sales value.
6. Interest Coverage Ratio / Times interest earned:
JATTI
MODERN
TRACTORS TRACTORS

M/S SAI
TRACTORS

M/S
M/S BHARGAVA
SHIV
TRADING
MOTORS CORPORATION

1.671

1.167

1.538

1.742

40.524

Apart from calculation of ratios, following are considered:

Consortium Value: It involves the value of all the short term borrowings from banks by the
dealer. It is the combined value of all the short term finances obtained by the dealer from
various banks. It is the sum total of channel finance, cash credit and overdraft facility to the
dealer from various banks.
Maximum Permissible Bank Finance Limit (MBPF): The MBPF can be calculated on the
basis of two formulas.
1. As per Tondon Committee
2. As per Nayak Committee
Tandon Committee:
This is an attempt by the central bank to organise the Bank credit. The report of this group is
widely known as Tandon Committee report.RBI appointed a working group to study and
suggest

Modifications in the Cash Credit system to make it amenable to better management of funds
by the Bankers

Alternate type of credit facilities to ensure better credit discipline and co relation between
credit and production.

According to Tondon Committee, Escorts Agri Machinery group follows the following norms.
The Maximum permissible banking finance limit for dealers is MIN(x,y) where
X= Working Capital of the dealer, i.e Current Asset Current liabilities
Y= 25 % of the Total Current Assets
Nayak Committee:
The Nayak Committee report is applicable to units with credit requirements of less than Rs.50
lacs.
According to Nayak Committee, Escorts Agri Machinery group follows the following norms.

According to RBI, The Working Capital of the dealers should be as follows:Working Capital = 20% of [Projected Turnover of Dealer Consortium Value(short term
borrowings)]
RBI has also given full freedom to all the Banks to devise their own method of assessing the
short term credit requirements of their clients and grant lines of credit accordingly. Most banks,
however, continue to be guided by the principles enunciated in Tandon Committee report.

FINDINGS

Taking in view the industry analysis it has been observed that Mahindra and Mahindra has the
largest share in the Indian tractor industry. Though Escorts is not far behind having a major
share. The main procedure by escorts is channel finance in which there is no direct dealing with
customers rather it is with distributors and dealers. The balance sheet of dealers are analyzed
and based on various calculated ratios maximum permissible credit limit is decided for the
dealers. The company has been able to increase its revenue by approx 90 crores by providing
channel finance facility. It helps in increasing the cash flow due to the timely payment by the
dealers thus meeting the short term requirements and improving the liquidity position of escorts
ltd.

The strategies followed by Escorts should be more aggressive in order to

compete with its competitors like Mahindra and Mahindra, TAFE and Sonalika
ltd.

The company should hold regular meetings with its dealers and improving their
relationships.

Stress more on channel financing to improve sales and revenues.

It should tie-up with more banks and financial institutions to facilitate the channel
financing process.