A Project Report

On
Study of assessment methods of working capital requirement
For
ank of !aharashtra
y
"ai#ha$ % &agat
'nder the guidance of
!rs( So$ani
Su#mitted to
'ni$ersity of pune
)n partial fulfillment of the requirement for the award of the degree of master of
#usiness administration *!A+
,hrough
"ishwakarma institute of management
Pune- ./
1
0102',)"0 S'!!0R3
It gives me great pleasure to present this project report on working capital finance
at bank of Maharashtra, credit department, head office, Pune. The project was carried out
from 1
st
June !!" to #1
st
Jul$ !!".
The main objective of the project was to stud$ various t$pes of working capital
finance provided b$ banks. To know details the procedure of assessment of working
capital finance e%tended b$ banks.
&heels of business cannot move without mone$. 'vailabilit$ of mone$ is being
limited and wants being unlimited. (o procurement of fund is one of the important
functions in commercial ) non*commercial enterprises and utili+es it for ma%imi+ation
of business profits.
,usiness enterprises need funds to meet their different t$pes of re-uirements,
i. .ong*term re-uirement
ii. Medium*term re-uirement
iii. (hort*term re-uirement
&orking capital re-uirement is the short*term re-uirement. &orking capital is the
investment needed for carr$ing out da$*to*da$ operations of the business smoothl$. ,ank
is one of the important sources of working capital re-uirement. ,ank gives various
facilities to the borrowers.

In this project I have considered various banking facilities for the working capital
finance to the industries. It covers almost important aspect relating to assessment )
follow up of working capital finance. 'fter discussing the procedure followed b$ bank,
/or assessing working capital re-uirement case studies have been given with necessar$
data in the prescribed forms demonstrate the calculable done b$ bank to arrive at
ma%imum permissible bank finance. 'n inventor$ ) receivables constitute the major
portion of the total working capital re-uirement.
#
2ompany Profile
,he irth
0egistered on 11th (ept 12#3 with an authori+ed capital of 0s 1!.!! lakh and
commenced business on 4th /eb 12#1.
,he 2hildhood
5nown as a common man6s bank since inception, its initial help to small units has given
birth too man$ of toda$6s industrial houses. 'fter nationali+ation in 1212, the bank
e%panded rapidl$. It now has 12 branches 7as of #!th (eptember !!38 all over India.
The ,ank has the largest network of branches b$ an$ Public sector bank in the state of
Maharashtra.
,he Adult
The bank has fine tuned its services to cater to the needs of the common man and
incorporated the latest technolog$ in banking offering a variet$ of services.
Our Philosophy
o Technolog$ with personal touch.
Our 0m#lem
,he 4eepmal
o &ith its man$ lights rising to greater heights.
9
,he Pillar
o :ur institution* ($mboli+ing strength.
,he 5 !6s
($mbolising
Mobilisation of Mone$
Modernisation of Methods and
Motivation of (taff.
Our Aims
The bank wishes to cater to all t$pes of needs of the entire famil$, in the whole countr$.
Its dream is ;:ne /amil$, :ne ,ank, Maharashtra ,ank;.
,he Autonomy
The ,ank attained autonomous status in 1224. It helps in giving more and more services
with simplified procedures without intervention of <overnment.
Our Social Aspect
The bank e%cels in (ocial ,anking, overlooking the profit aspect= it has a good share of
Priorit$ sector lending having 91> of its branches in rural areas.
3
Other Attri#utes
,ank is the convener of (tate level ,ankers committee
,ank has signed a Mo? with @AIM bank for co*financing of project e%ports
,ank offers Bepositor$ services and Bemat facilities in Mumbai.
,ank has captured 2".14> of its total business through computeri+ation.
1
O&02,)"0S
To know the various t$pes of working capital finance provided b$ banks.
To anal$+e in detail the procedure of assessment of working capital finance
e%tended b$ bank.
To appl$ these procedure at a practical level with the help of case studies.
"
R0S0AR27 !0,7O4O8O93
This is anal$tical research area where we anal$ses information with cause and its
effects relationship. This anal$sis leads to the simple conclusions of whether to lend
mone$ to the institution for business.
'lso if the mone$ is lend then there is realit$ the norms are not alwa$s perfect and
hence it is essential to priorities stringent parameters and secondar$ parameters.
0esearch T$pe 'nal$tical
(ource of Bata Primar$ and (econdar$
(ample ?nit Industries appl$ing for loan
(ample Case studies
(ample Techni-ue 'llocation of Case
'nal$sis Tool used /inancial 'nal$sis
Primar$ BataD
:bservation, Biscussion with the manager.
The compan$ profile, annual reports have been obtained from ,:M.
(econdar$ BataD
(econdar$ data relating to the procedure of assessment of working capital finance, old
sanction proposals, 0,I guidelines etc. have been sourced from reference books.
4
)%,RO4'2,)O% ,O :OR;)%9 2AP),A8
In accounting,E &orking capital is the difference between the inflow and outflow of
funds. In other words, it is the net cash inflow. It is defined as the e%cess of current assets
over current liabilities and provisions. In other words, it is net current assets or net
working capital.
' stud$ of working capital is of major importance to internal and e%ternal anal$sis
because of its close relationship with the da$*to*da$ operations of a business. &orking
Capital is the portion of the assets of a business which are used on or related to current
operations, and represented at an$ one time b$ the operating c$cle of such items as
against receivables, inventories of raw materials, stores, work in process and finished
goods, merchandise, notes or bill receivables and cash.

&orking capital comprises current assets which are distinct from other assets. In the first
instance, current assets consist of these assets which are of short duration.
&orking capital ma$ be regarded as the life blood of a business. Its effective provision
can do much to ensure the success of a business while its inefficient management can
lead not onl$ to loss of profits but also to the ultimate downfall of what otherwise might
be considered as a promising concern.
The funds re-uired and ac-uired b$ a business ma$ be invested to two t$pes of assetsD
1. /i%ed 'ssets.
2
. Current 'ssets
/i%ed assets are those which $ield the returns in the due course of time. The various
decisions like in which fi%ed assets funds should be invested and how much should be
invested in the fi%ed assets etc. are in the form of capital budgeting decisions. This can be
said to be fi%ed capital management.
:ther t$pes of assets are e-uall$ important i.e. Current 'ssets.
These t$pes of assets are re-uired to ensure smooth and fluent business operations and
can be said to be life blood of the business. There are two concepts of working capital
<ross and Fet. <ross working capital refers to gross current assets. Fet working capital
refers to the difference between current assets and current liabilities. The term current
assets refers to those assets held b$ the business which can be converted into cash within
a short period of time of sa$ one $ear, without reduction in value. The main t$pes of
current assets are stock, receivables and cash. The term current liabilities refer to those
liabilities, which are to be paid off during the course of business, within a short period of
time sa$ one $ear. The$ are e%pected to be paid out of current assets or earnings of the
business. The current liabilities mainl$ consist of sundr$ creditors, bill pa$able, bank
overdraft or cash credit, outstanding e%penses etc.
1!
NEED FOR :OR;)%9 CAPITAL
The need of gross working capital or current assets cannot be overemphasi+ed. The object
of an$ business is to earn profits. The main factor affecting the profits is the magnitude of
sales of the business. ,ut the sales cannot be converted into cash immediatel$. There is a
time lag between the sale of goods and reali+ation of cash. There is a need of working
capital in the form of current assets to fill up this time lag. Technicall$, this is called as
operating c$cle or working capital c$cle, which is the heart of need for working capital.
This working capital c$cle can be described in the following words.
If the compan$ has a certain amount of cash, it will be re-uired for purchasing the raw
material though some raw material ma$ be available on credit basis. Then the compan$
has to spend some amount for labour and factor$ overheads to convert the raw material in
work in progress, and ultimatel$ finished goods. These finished goods when sold on
credit basis get converted in the form of sundr$ debtors. (undr$ debtors are converted in
cash onl$ after the e%pir$ of credit period. Thus, there is a c$cle in which the originall$
available cash is converted in the form of cash again but onl$ after following the stages of
raw material, work in progress, finished goods and sundr$ debtors. Thus, there is a time
gap for the original cash to get converted in form of cash again. &orking Capital needs of
compan$ arise to cover the re-uirement of funds during this time gap, and the -uantum of
working capital needs varies as per the length of this time gap.
11
Thus, some amount of funds is blocked in raw materials, work in progress, finished
goods, sundr$ debtors and da$*to*da$ re-uirements. Gowever some part of these current
assets ma$ be financed b$ the current liabilities also. @.g. some raw material ma$ be
available on credit basis, all the e%penses need not be paid immediatel$, workers are also
to be paid periodicall$ etc. ,ut still the amounts re-uired to be invested in these current
assets is alwa$s higher than the funds available from current liabilities. This is precise
reason wh$ the needs for working capital arise. /rom the /inancial management point of
view, the nature of fi%ed assets and current assets differ from each other
1. The fi%ed assets are re-uired to be retained in the business over a period of time and
the$ $ield the returns over their life, whereas the current assets loose their identit$ over a
short period of time, sa$ one $ear.
. In the case of current assets, it is alwa$s necessar$ to strike a proper balance between
the li-uidit$ and profitabilit$ principles, which is not the case with fi%ed assets. @.g. If
the si+e of current assets is large, it is alwa$s beneficial from the li-uidit$ point of view
as it ensures smooth and fluent business operations. (ufficient raw material is alwa$s
available to cater to the production needs, sufficient finished goods are available to cater
to an$ kind of demand of customers, liberal credit period can be offered to the customers
to improve the sales and sufficient cash is available to pa$ off the creditors and so on.
Gowever, if the investment in current assets is more than what is ideall$ re-uired, it
affects the profitabilit$, as it ma$ not be able to $ield sufficient rate of return on
investment. :n the other hand, if the si+e of current assets is too small, it alwa$s involves
the risk of fre-uent stock out, inabilit$ of the compan$ to pa$ its dues in time etc. 's
1
such, the investment in current assets should be optimum. Gence, it is necessar$ to
manage the individual components of current assets in a proper wa$. Thus, working
capital management refers to proper administration of all aspects of current assets and
current liabilities. &orking Capital Management is concerned with the problems arising
out of the attempts to manage current assets, current liabilities and inter*relationship
between them. The intention is not to ma%imi+e the investment in working capital nor is
it to minimi+e the same. The intention is to have optimum investment in working capital.
In other words, it can be said that the aim of working capital management is to have
minimum investment in working capital without affecting the regular and smooth flow of
operations. The level of current assets to be maintained should be sufficient enough to
cover its current liabilities with a reasonable margin of safet$. Moreover, the various
sources available for financing working capital re-uirements should be properl$ managed
to ensure that the$ are obtained and utili+ed in the best possible manner.
1#
FA2,ORS AFF02,)%9 :OR;)%9 2AP),A8 !A%A90!0%,
The amount of working capital re-uired depends upon a number of factors which can be
stated as below
%ature of usiness<
(ome businesses are such, due to their ver$ nature, that their re-uirement of fi%ed capital
is more rather than working capital. These businesses sell services and not the
commodities and not the commodities and that too on cash basis. 's such, no funds are
blocked in piling inventories and also no funds are blocked in receivables. @.g. Public
utilit$ services like railwa$s, electricit$ boards, infrastructure oriented projects etc. Their
re-uirement of working capital is less. :n the other hand, there are some business like
trading activit$, where the re-uirement of fi%ed capital is less but more mone$ is blocked
in inventories and debtors. Their re-uirement of the working capital is more.
8ength of Production 2ycleD
In some business like machine tool industr$, the time gap between the ac-uisitions of
raw material till the end of final production of finished product itself is -uite high. 's
such more amounts ma$ be blocked either in raw materials, or work in progress or
finished goods or even in debtors. Faturall$, their needs of working capital are higher. :n
19
the other hand, if the production c$cle is shorter, the re-uirement of working capital is
also less.
Si=e and 9rowth of usiness<
In ver$ small companies the working capital re-uirements are -uite high overheads,
higher bu$ing and selling costs etc. 's such, the medium si+ed companies positivel$ have
an edge over the small companies. ,ut if the business starts growing after a certain limit,
the working capital re-uirements ma$ be adversel$ affected b$ the increasing si+e.
usiness I ,rade 2ycles<
If the compan$ is operating in the period of boom, the working capital re-uirements ma$
be more as the compan$ ma$ like to bu$ more raw material, ma$ increase the production
and sales to take the benefits of favourable markets, due to the increased sales, there ma$
be more and more amount of funds blocked in stock and debtors etc. (imilarl$, in case of
depression also, the working capital re-uirements ma$ be high as the sales in terms of
value and -uantit$ ma$ be reducing, there ma$ be unnecessar$ piling up of stocks
without getting sold, the receivables ma$ not be recovered in time etc.
,erms of Purchase and Sales<
(ometimes, due to competition or custom, it ma$ be necessar$ for the compan$ to e%tend
more and more credit to the customers, as a result of which more and more amounts is
locked up in debtors or bills receivables which increase working capital re-uirements. :n
13
the other hand, in case of purchases, if credit is offered b$ the suppliers of goods and
services, a part of working capital re-uirement ma$ be financed b$ them, but if it is
necessar$ to purchase these goods or services on cash basis, the working capital
re-uirement will be higher.
Profita#ility<
The profitabilit$ of the business ma$ var$ in each and ever$ individual case, which in its
turn ma$ depend upon numerous factors. ,ut high profitabilit$ will positivel$ reduce the
strain on working capital re-uirements of the compan$, because the profits to the e%tent
that the$ are earned in cash ma$ be used to meet the working capital re-uirements of the
compan$. Gowever, profitabilit$ has to be considered from one more angles so that it can
be considered as one of the wa$s in which strain on working capital re-uirements of the
compan$ ma$ be relieved. 'nd these angles areD
,a>ation Policy<
Gow much is re-uired to be paid b$ the compan$ towards its ta% liabilit$H
4i$idend Policy<
Gow much of the profits earned b$ the compan$ are distributed b$ wa$ of dividendH
0ffect of )nflation on :orking 2apital Requirement<
The phase of inflation can be identified with the situation of increasing price levels,
increasing demand and increasing suppl$. 's such, the working capital re-uirements
multipl$ during the phase of inflation due to increasing cost of production and increasing
11
level of sales turnover. Gowever, in order to control the increasing demand for working
capital during the period of inflation, the following measures ma$ be applied.
Possibilit$ of using cheaper substitute raw material, without affecting the -ualit$, should
be e%plored. /or this purpose, research activities ma$ be conducted. 'ttempts should be
made to reduce the production costs to ma%imum possible e%tent. /or this purpose, the
techni-ues like time and motion stud$, incentive schemes, cost reduction programmes
etc. ma$ be implemented. 'ttempts should be made to reduce the operating c$cle to the
ma%imum possible e%tent. 'iming at greater turnover at short intervals will go a long
wa$ to reduce the stress on working capital re-uirements. 'ttempts should be made to
reduce the locked up working capital in non*moving or obsolete inventories. ' clear*cut
polic$ should be formulated and followed for timel$ disposal of non* moving and
obsolete inventories. (imilarl$, efficient management information s$stem should be
developed to reflect the position of inventor$ from the various angles. 'ttempts should be
made to reduce the amount looked up in receivables. Iuicker reali+ation of debts will go
a long wa$ to reduce the stress on working capital re-uirements. 'ttempts should be
made to make the pa$ments of to creditors in time. This helps the business to build up
good reputation and increases its bargaining power with respect to period of credit of
credit for pa$ment and other conditions.
'ttempts should be made to match the projected cash inflows and projected cash
outflows. If the$ do not match, some of the pa$ments should be postponed or purchases
of certain avoidable items should be deferred. @stimation of &orking Capital
0e-uirementsD /irst of all estimates of all current assets should be made. These current
assets ma$ include stock, debtors. CashJ,ank balance prepaid e%penses etc.
1"
Bifference between the estimated current assets and current liabilities will represent the
working capital re-uirements. To this sometime a standard percentage ma$ be added to
take care of the contingencies. This techni-ue is known as Cash Cost techni-ue of
estimating of working capital re-uirements. There is another techni-ue available for
estimating working capital re-uirements also and that is in the form of ,alance (heet
Method. In this the forecast is made of various assets and liabilities, the difference
between assets and liabilities indicating either the surplus or deficienc$ of cash. There are
various methods available for financing the working capital re-uirementsD
Flied or Permanent or 2ore :orking 2apital<
This indicates the amount of minimum working capital, which is re-uired to be
maintained b$ ever$ business at an$ point of time, in order to carr$ on the business on
permanent and uninterrupted basis.
"aria#le or ,emporary :orking 2apital<
This indicates that amount of working capital re-uired b$ the business which is over and
above fi%ed or permanent or core working capital. This need of the working capital ma$
var$ depending upon the fluctuations in demand as a result of changes in production or
sales.
's far as financing of the fi%ed or permanent needs of working capital are concerned,
these needs should be met out of the long term sources of funds, :wn generation of
funds, out of the profits earned, shares or debentures.
14
's far as financing of the variable or temporar$ needs of working capital are concerned,
these needs can be met from the various sourcesD
1. ' part of these needs ma$ be financed b$ wa$ of the credits available from the
suppliers of material or services and of dela$ed pa$ment of e%penses.
. ' part of these needs ma$ be financed b$ wa$ of long term sources of funds in the
form of own generation of funds, out of profits earned shares, debentures and other long
term borrowings, public deposits etc.
#. ' part of these needs ma$ be financed b$ wa$ of long term sources of funds in the
form of own generation of funds, out of profits earned, shares, debentures and other long
term borrowing.
9. ' major portion of these working capital needs are financed b$ the ,anks. In financing
the working capital needs of the business, the credit obtained from ,anks pla$s a ver$
important role.
ank 2redit as a Source of !eeting :orking 2apital Requirements<
&hile bank credit is considered as a major source of meeting the working capital
re-uirement of the industr$, the banks have to consider the following factors before
meeting their re-uirements.
'K.&hat should be the amount of working capital assistanceH
,K.&hat should be the form in which working capital assistance ma$ be e%tendedH
12
CK.&hat should be the securit$ that should be obtained for e%tending the working capital
assistanceH
Amount of Assistance<
To obtain the bank credit for meeting the working capital re-uirements, the compan$ will
be re-uired to estimate the working capital re-uirements and will be re-uired to approach
the banks along with the necessar$ supporting data. :n the basis of the estimates
submitted b$ the compan$, the bank ma$ decide the amount of assistance which ma$ be
e%tended, after considering the margin re-uirements. This margin is to provide the
cushion against the reduction in the value of securit$. If the compan$ fails to fulfill its
obligations, the bank ma$ be re-uired to reali+e the securit$ for recovering the dues.
Margin mone$ is meant to take care of the possible reduction in the value of securit$. The
percentage of margin mone$ ma$ depend upon the credit standing of the compan$,
fluctuations in the price of securit$ or the directives of 0eserve ,ank of India from time
to time.
Form of Assistance<
'fter deciding the amount of overall assistance to be e%tended to the compan$, the bank
can disburse the amount in an$ of the following forms
Fon*/und ,ased .ending
!
/und ,ased .ending
%on-Fund ased 8ending
In case of Fon*/und ,ased .ending, the lending bank does not commit an$ ph$sical
outflow of funds. 's such, the funds position of the lending bank remains intact. The
Fon*/und ,ased .ending can be made b$ the banks in two forms*
a( ank 9uarantee<
(uppose Compan$ ' is the selling compan$ and Compan$ , is the purchasing compan$.
Compan$ ' does not know Compan$ , and as such is concerned whether Compan$ ,
will make the pa$ment or not. In such circumstances, B who is the ,ank of Compan$ ,,
opens the ,ank <uarantee in favour of Compan$ ' in which it undertakes to make the
pa$ment to Compan$ ' if Compan$ , fails to honour its commitment to make the
pa$ment in future. 's such, interests of Compan$ ' are protected as it is assured to get
the pa$ment, either from Compan$ , or from its ,ank B. 's such, ,ank <uarantee is the
mode which will be found t$picall$ in the sellerLs market. 's far as ,ank B is concerned,
while issuing the guarantee in favour of Compan$ ', it does not commit an$ outflow of
funds. 's such, it is a Fon*/und ,ased .ending for ,ank B. If on due date, ,ank B is
re-uired to make the pa$ment to Compan$ ' due to failure on account of Compan$ , to
make the pa$ment, this Fon*/und ,ased .ending becomes the /und ,ased .ending for
,ank B which can be recovered b$ ,ank B from Compan$ ,. /or issuing the ,ank
1
<uarantee, ,ank B charges the ,ank <uarantee Commission from Compan$ , which
gets decided on the basis of two factors*what is the amount of ,ank <uarantee and what
is the period of validit$ of ,ank <uarantee. In case of this conventional for of ,ank
<uarantee, both compan$ ' as well as Compan$ , get benefited as it is able to make the
credit purchases from Compan$ ' without knowing Compan$ '. 's such, ,ank
<uarantee transactions will be applicable in case of credit transactions.
In some cases, interests of purchasing compan$ are also to be protected. (uppose that
Compan$ ' which manufactures capital goods takes some advance from the purchasing
Compan$ ,. If Compan$ ' fails to fulfill its part of contract to suppl$ the capital goods
to Compan$ ,, their needs to be to be some protection available to Compan$ ,. In such
circumstances, ,ank C which is the banker of Compan$ ' opens a ,ank <uarantee in
/avour of Compan$ , in which it undertakes that if Compan$ ' fails to fulfill its part of
the contract, it will reimburse an$ losses incurred b$ Compan$ , due to this non
fulfillment of contractual obligations. (uch ,ank <uarantee is technicall$ referred to as
performance ,ank <uarantee and it ideall$ found in the bu$erLs market.
b. 8etter of 2redit<
The non*fund based lending in the form of letter of credit is ver$ regularl$ found in the
international trade. In case the e%porter and the importer are unknown to each other.
?nder these circumstances, e%porter is worried about getting the pa$ment from the
importer and importer is worried as to whether he will get the goods or not. In this case,
the importer applies to his bank in his countr$ to open a letter of credit in favour of the
e%porter whereb$ the importerLs bank undertakes to pa$ the e%porter or accept the bills or

drafts drawn b$ the e%porter on the e%porter fulfilling the terms and conditions specified
in the letter of credit.
Fund ased 8ending
In case of /und ,ased .ending, the lending bank commits the ph$sical outflow of funds.
's such, the funds position of the lending bank gets affected. The /und ,ased .ending
can be made b$ the banks in the following forms*
8oan< -
In this case, the entire amount of assistance is disbursed at one time onl$, either in cash or
b$ transfer to the compan$Ls account. It is a single advance. The loan ma$ be repaid in
instalments, the interests will be charged on outstanding balance.
:verdraftD - In this case, the compan$ is allowed to withdraw in e%cess of the balance
standing in its ,ank account. Gowever, a fi%ed limit is stipulated b$ the ,ank be$ond
which the compan$ will not be able to overdraw the account. .egall$, overdraft is a
demand assistance given b$ the bank i.e. bank can ask for the repa$ment at an$ point of
time. Gowever in practice, it is in the form of continuous t$pes of assistance due to
annual renewal of the limit. Interest is pa$able on the actual amount drawn and is
calculated on dail$ product basis.
2ash 2redit< -
#
In practice, the operations in cash credit facilit$ are similar to those of overdraft facilit$
e%cept the fact that the compan$ need not have a formal current account. Gere also a
fi%ed limit is stipulated be$ond which the compan$ is not able to withdraw the amount.
.egall$, cash credit is a demand facilit$, but in practice, it is on continuous basis. The
interests is pa$able on actual amount drawn and is calculated on dail$ product basis.
ills purchased or discounted< -
This form of assistance is comparativel$ of recent origin. This facilit$ enables the
compan$ to get the immediate pa$ment against the credit bills raised b$ the compan$.
The bank holds the bill as a securit$ till the pa$ment is made b$ the customer. The entire
amount of bill is not paid to the compan$. The Compan$ gets onl$ the present worth of
the amount of bill, the difference between the face value of the bill and the amount of
assistance being in the form of discount charges. :n maturit$, bank collects the full
amount of bill from the customer. &hile granting this facilit$ to the compan$, the bank
inevitabl$ satisfies itself about the credit worthiness of the customer. ' fi%ed limit is
stipulated in case of the compan$, be$ond which the bills are not purchased or discounted
b$ the bank.
:orking 2apital ,erm 8oans< -
To meet the working capital needs of the compan$, banks ma$ grant the working capital
term loans for a period of # to " $ears, pa$able in $earl$ or half $earl$ installments.
Packing 2redit< -
9
This t$pe of assistance ma$ be considered b$ the bank to take care of specific needs of
the compan$ when it receives some e%port order. Packing credit is a facilit$ given b$ the
bank to enable the compan$ to bu$ the goods to be e%ported. If the compan$ holds a
confirmed e%port order placed b$ the overseas bu$er or a letter of credit in its favour, it
can approach the bank for packing credit facilit$.
Operating cycle<
The time between purchase of inventor$ items 7raw material or merchandise8 and
their conversion into cash is known as operating c$cle or working capital c$cle. The
longer the period of conversion the longer will be the period of operating c$cle. '
standard operating c$cle ma$ be for an$ time period but does not generall$ e%ceed a
financial $ear. :bviousl$, the shorter the operating c$cle larger will be the turnover of the
fund invested for various purposes. The channels of investment are called current assets.
3
OP0RA,)%9 23280
1
Cash
0eceipt from
debtors
Creation of
receivables
7Bebtors8
(ales of
/inished
<oods
Creation of
'Jc pa$able
7Creditors8
Purchase of
raw material,
components
&arehousing
of /inished
<oods
Manufacturing
operationD wages )
salaries, fuel,
power, etc
:ffice, selling,
distribution and
other e%penses
Pa$ments to
creditors
:OR;)%9 2AP),A8 F)%A%20
' manufacturing concern needs finance not onl$ for ac-uisition of fi%ed assets but
also for its da$*to*da$ operations. It has to obtain raw materials for processing, pa$ wage
bills ) other manufacturing e%penses, store finished goods for marketing ) grant credit
to the customers. It ma$ have to pass through the following stages to complete its
operating c$cle*
i. Conversion of cash into raw materials M raw material procured on credit, cash
ma$ have to be paid after a certain period.
ii. Conversion of raw materials into stock in process.
iii. Conversion of stock in process into finished goods.
iv. Conversion of finished goods into receivablesJdebtors or cash.
v. Conversion of receivablesJdebtors into cash.
' non*manufacturing trading concern ma$ not re-uire raw material for their
processing, but it also needs finance for storing goods ) providing credit to its customers.
(imilarl$ a concern engaged in providing services, it ma$ not have to keep inventories
but it ma$ have to provide credit facilit$ to its customers. Thus all enterprises engaged in
manufacturing or trading or providing services re-uire finance for their da$*to*da$
operations, the amount re-uired to finance da$*to*da$ operation is called working capital
) the assets ) liabilities are created during the operating c$cle are called current assets )
current liabilities. The total of all the current assets is called gross working capital ) the
e%cess of current assets over current liabilities is called net working capital.
"
&hen entrepreneurs for financing working capital re-uirements approach the
banks, the bank has to e%amine the viabilit$ of the project before agreeing to provide
working capital for it. /inancial institutions ) bank while providing term loan finance to
unit for ac-uisition of fi%ed assets does a detailed viabilit$ stud$. The$ have to ensure
that the project will generate sufficient return on the resources invested in it. The viabilit$
of a project depends on technical feasibilit$, marketabilit$ of the products, at a profitable
price, availabilit$ of financial resources in time ) proper management of the unit. In brief
the project should satisf$ the tests of technical, commercial, financial ) managerial
feasibilit$.
Proper co*ordination amongst banks ) financial institution is necessar$ to judge
the viabilit$ of a project ) to provide working capital at appropriate time without an$
dela$. If a unit approaches banks onl$ for working capital re-uirement ) no viabilit$
stud$ has been done earlier which is done at the time of providing term loans, a detailed
viabilit$ stud$ is necessar$ before agreeing to provide working capital finance.
In the view of scarcit$ of bank credit, its increasing demand from various sectors
of econom$ ) its importance in the development of econom$, bank should provide
working capital finance according to production re-uirements. Therefore it is necessar$
to make a proper assessment of total re-uirement of the working capital, which depends
on the nature of the activities of an enterprise ) the duration of its operating c$cle. It has
to be ensured that the unit will have regular suppl$ of raw material to facilitate
uninterrupted production. The unit should be able to maintain ade-uate stock of finished
goods for smooth sales operation. The re-uirement of trade credit, facilities to be given
b$ the unit to its customers should also be assessed on the basis of practice prevailing in
4
the particular industr$Jtrade which assessing above re-uirements, it should also be
ensured that carr$ing cost of inventories ) duration of credit to customers are minimi+ed.
'fter assessing the total re-uirement of working capital, a part of working capital
re-uirement should be financed for the long term ) partl$ b$ determining ma%imum
permissible bank finance.
2
ASS0SS!0%, OF :OR;)%9 2AP),A8
' unit needs working capital funds mainl$ to carr$ current assets re-uired for its
operations. Proper assessment of funds re-uired for working capital is essential not onl$
in the interest of the concerned unit but also in the national interest to use the scare credit
according to production re-uirements. Inade-uate levels of working capital ma$ result in
under*utili+ation of capacit$ and serious financial difficulties. (imilarl$ e%cessive levels
ma$ lead to unproductive use of credit and unnecessar$ interest ,urdon on the unit.
Proper assessment of working capital re-uirement ma$ be done as under*
)( %orms for in$entory and recei$a#les<
If the bank credit is to be linked with production re-uirements, it is necessar$ to assess
the re-uirements on the basis of certain norms. The Nstud$ group to frame guidelines to
follow*up of bank creditL 7Tandon (tud$ <roup8 appointed b$ 0eserve ,ank of India
had suggested the norms for inventor$ and receivables regarding 1D major industries on
the basis of compan$ finance studies made b$ 0eserve ,ank process periods in the
different industries, discussions with the industr$ e%perts and feed*back received on the
interim report. The norms suggested b$ Tandon (tud$ <roup are being reviewed from
time to time b$ the Committee of Birection constituted b$ the 0eserve ,ank to keep a
constant view on working capital re-uirements. The committee has representatives
from a few banks and it generall$ once in a -uarter. It also consults the representatives
from industr$ and trade. It keeps a watch on the various issues relating to working
#!
capital re-uirements and gives various suggestions to suit the changing re-uirements of
the industr$ and trade.
,anks make their own assessment of credit re-uirements of borrowers based on a total
stud$ of borrowersL business operations and the$ can also decide the levels of holding
each item of inventor$ as also of receivables which in their view would represent a
reasonable built up of current assets for being supported b$ banksL finance. ,anks ma$
also consider suitable internal guidelines for accepting the projections made b$ the
borrowers regarding sundr$ creditors as sundr$ creditors are taken as a source of
financing current assets 7inventories, receivables, etc.8, it is necessar$ to project them
correctl$ while calculating need of bank finance for working capital re-uirements.
))( 2omputation of !a>imum Permissi#le ank Finance *!PF+<
The Tandon (tud$ group had suggested the following alternatives for working out the
ma%imum permissible bank financeD*
a. ,ank can work out the working capital gap. i. e. total current assets less current
liabilities other than bank borrowings and finance a ma%imum of "3 per cent of
the gap= the balance to come out of long*term funds, i.e. owned funds and term
borrowings
b. ,orrower should provide for a minimum of 3 per cent of total current assets
out of long*term funds, i.e. owned funds and long term borrowings. ' certain
level of credit for purchases and other current liabilities inclusive of bank
borrowings will not e%ceed "3 per cent of current assets.
#1
It ma$ be observed from the above that borrowerLs contribution from long term
funds would be 3 per cent of the working capital gap under the first method of lending
and 3 per cent of total current assets under the second method of lending. The above
minimum contribution of long*term funds is called minimum stipulated Fet &orking
Capital 7F&C8 which comes from owned funds and term borrowings.
'bove two method of lending ma$ be illustrated b$ taking the following e%ample of
a borrowerLs financial position, projected as at the end of ne%t $ear.

2urrent 8ia#ilities Amt 2urrent Assets Amt
Creditors for purchase !! 0aw materials #4!
:ther current liabilities 1!! (tock in process 9!
#!! /inished goods 14!
,ank borrowing, including bills
discounted with bankers
9!! 0eceivables, including bills
discounted with bankers
11!
:ther current assets #!
"!! "9!
/irst method (econd method
Total current assets "9! total current assets "9!
.essD current liabilities 3> of above from long term
:ther than bank borrowings #!! sources
143
#
&orking capital gap 99! 333
3> of above from long term lessD current liabilities
(ources 11! :ther than bank borrowings #!!
Ma%imum permissible bank ##! Ma%imum permissible bank 33
/inance finance
@%cess ,ank borrowings "! @%cess ,ank borrowings 193
Current ratio 1.1"D1 Current ratio 1.##D1
It ma$ be observed from the above that in the first method, the borrower has to
provide a minimum of 3 per cent of working capital gap from ling*term funds and it
gives a minimum current ratio 1.1"D1. In the second method, the borrower has to provide
a minimum of 3 per cent of total current assets from long*term funds and gives a
minimum current ratio of 1.##D1.
&hile estimating the total re-uirement of long*term funds for new projects,
financial institutionsJbanks should calculate for working capital on the basis of norms
prescribed for inventor$ and receivables and b$ appl$ing the second method of lending.
' project ma$ suffer from shortage of working capital funds if sufficient margin for
working capital is not provided as per the second method of lending while funding new
projects. Proper co*ordination between banks ) financial institutions is necessar$ to
ensure availabilit$ of sufficient working capital finance to meet the production
re-uirement.
)))( 2lassification of current assets ? 2urrent lia#ilities<
In order to calculate net working capital ) ma%imum permissible bank finance, it is
necessar$ to have proper classification of various items of current assets ) current
##
liabilities. 'll illustrative lists of current assets ) current liabilities for the purpose of
assessment of working capital are furnished below=
2urrent assets< -
a. Cash and bank balances
b. Investments
c. 0eceivables arising out of sales other than deferred receivables 7including bills
purchased ) discounted b$ bankers8
d. Installments b$ deferred receivables due within one $ear
e. 0aw materials ) components used in the process of manufactured including
those in transit
f. (tock in process including semi finished goods
g. /inished goods including goods in transit
h. :ther consumable spares
i. 'dvance pa$ment for ta%
j. Prepaid e%penses
k. 'dvances for purchases of raw materials, components ) consumable stores
l. Pa$ment to be received from contracted sale of fi%ed assets during the ne%t 1
months
2urrent 8ia#ilities<
a. (hort*term borrowings 7including bills purchased ) discounted8 from
,anks and ii. :thers
#9
b. ?nsecured loans
c. Public deposits maturing within one $ear
d. (undr$ creditors 7trade8 for raw material ) consumer stores ) spares
e. Interest ) other charges accrued but no due for pa$ments
f. 'dvancesJprogress pa$ments from customers
g. Beposits from dealers selling agents, etc.
h. (tatutor$ liabilities
Provident fund dues
Provision for ta%ation
(ales*ta%, e%cise, etc.
:bligation towards workers considered as statutor$
i. Miscellaneous current liabilities
Bividends
.iabilities for e%penses
<ratuit$ pa$able within one $ear
'n$ other pa$ments due within one $ear
%otes on classification of 2urrent Assets ? 2urrent 8ia#ilities<
1. Investment in shares, debenture, etc. and advances to other firmsJcompanies, not
connected with the business of the borrowing firm, should be e%cluded from
#3
current assets. (imilarl$ investment made in units of ?nit Trust of India ) other
mutual funds ) in associate companiesJsubsidiaries, as well as investment made
andJor loans e%tended as inter*corporate deposits should not be included in the
build*up of current assets while assessing ma%imum permissible bank finance.
. The borrowers are not e%pected to make the re-uired contribution of 3 per cent
from long*term sources in respect of e%port receivables. Therefore, e%port
receivables ma$ be included in the total current assets for arriving at the
ma%imum permissible bank finance but the minimum stipulated net working
capital ma$ be reckoned after e%cluding the -uantum of e%port receivables from
the total current assets.
#. NBead inventor$L i.e. slow moving or obsolete items should not be classified as
current assets.
9. (ecurit$ depositsJtender deposits given b$ borrower should be classified as non*
current assets irrespective of whether the$ mature within the normal operating
c$cle of one $ear or not.
3. 'dvancesJprogress pa$ments from customer should be classified as current
liabilities. Gowever, where a part of advances received is re-uired b$ government
regulations to be invested in certain approved securities, the benefit of netting
ma$ be allowed to the e%tent of such investment and the balance ma$ be classified
as current liabilit$.
1. Beposits from dealers, selling agents, etc. received b$ the borrower ma$ treated as
term liabilities irrespective of their tenure if such deposits are accepted to be
#1
repa$able onl$ when the dealershipJagenc$ is terminated. The deposits, which do
not fulfill the above condition, should be classified as current liabilities.
". Bisputed liabilities in respect of income ta%, e%cise, custom dut$ and electricit$
charges need not be treated as current liabilities e%cept to the e%tent of provided
for in the books of the borrower. &here such disputed liabilities are treated as
contingent liabilities for period be$ond one $ear, the borrower should be advised
to make ade-uate provision so that he ma$ be in a position to meet the liabilities
as ) when the$ accrue.
4. If disputed e%cise liabilit$ has been shown as contingent liabilit$ or b$ wa$ of
notes to the balance sheet, it need not be treated as current liabilit$ for calculating
the permissible bank finance unless it has been collected or provided for in the
accounts of borrowers. ' certificate from the (tatutor$ 'uditors of the borrowers
ma$ be obtained regarding the amount collected from the customers in respect of
disputed e%cise liabilit$ or provision made in the borrowersL accounts. The
amount of e%cise dut$ pa$able should be treated as current liabilit$ for the
purpose of working out the permissible limit of the bank finance strictl$ on the
basis of the certificate from the borrowersL (tatutor$ 'uditors. The same principle
ma$ also be applied for disputed sales ta% dues.
2. In case of other statutor$ dues, dividends, etc., estimated amount pa$able within
one $ear should be shown as current liabilities even if specific provisions have not
been made for their pa$ment.
1!. 's per the instructions issued b$ the 0eserve ,ank in :ctober, 122#, the entire
term loan investment falling due for pa$ment in the ne%t twelve months need not
#"
be treated as an item of current liabilities for the purpose of arriving at MP,/.
Gowever all overdue term loan should be treated as current liabilities unless the
loan has been rescheduled b$ the financial institutionsJbanks. It ma$ be added that
the entire amount of term loan installments pa$able within the ne%t twelve months
which is kept outside the current liabilities while calculating MP,/. Feed not be
taken into account while computing net working capital 7F&C8. Gowever the
entire amount of term loan installments due within the ne%t twelve months should
continue to be treated as current liabilit$ for the purpose of calculating the current
ratio.
)"( )nformation@4ata required for assessment of working capital<
In order to assess the re-uirements of working capital on the basis of production needs,
it is necessar$ to get the data from the borrowers regarding their pastJprojected
production, sales, cost of production, cost of sales, operating profit, etc. in order to
ascertain the financial position of the borrowers ) the amount of working capital needs
to be financed b$ banks, it is necessar$ to call for the data from the borrowers regarding
their net worth, long term liabilities, current liabilities, fi%ed assets, current assets, etc.
the 0eserve ,ank prescribed the forms in 12"3 to submit the necessar$ details
regarding the assessment of working capital under its credit authori+ation scheme. The
scheme of credit authori+ation was changed into credit monitoring arrangement in
1244. The forms used under the credit authori+ation scheme for submitting necessar$
information have also been simplified in 1221 for reporting the credit sanctioned b$
#4
banks above the cut*off point to reserve bank under its scheme of credit monitoring
arrangement.
's the traders and merchant e%porters who do not have manufacturing activities
are not re-uired to submit the data regarding raw materials, consumable stores, goods*
in*process, power and fuel, etc., a separate set of forms has been designed for traders
and merchant e%porters. In view of the peculiar nature of leasing and the hire purchase
concerns, a separate set of forms has also designed for them.
In addition to the informationJdata in the prescribed forms, bank ma$ also call for
additional information re-uired b$ them depending on the nature of the borrowersL
activities ) their financial position. The data is collected from the borrowers in the
following si% formsD *
A( Particulars of the e>isting@proposed limits from the #anking system *form )+
Particulars of the e%isting credit from the entire banking s$stem as also the term
loan facilities availed of from the term lending institutionsJbanks are furnished in this
form. Ma%imum ) minimum utili+ation of the limits during the last 1 months
outstanding balances as on a recent date are also given so that a comparison can be
made with the limits now re-uested ) the limits actuall$ utili+ed during the last 1
months.
B( Operating Statement *Form ))+
#2
The data relating to last sales, net sales, cost of raw material, power ) fuel, direct
labour, depreciation, selling, general e%penses, interest, etc. are furnished in this form.
It also covers information on operating profit ) net profit after deducting total
e%penditure from total sale proceeds.
5( Analysis of alance Sheet *Form )))+
' complete anal$sis various items of last $earLs balance sheet, current $earLs
estimate ) following $earLs projections is given, in this form. The details of current
liabilities, term liabilities, net worth, current assets, other non*current assets, etc. are
given in this form as per the classification accepted b$ banks.
.( 2omparati$e statement of current assets ? current lia#ilities *Form )"+
This form gives the details of various items of current assets and current liabilities
as per classification accepted b$ banks. The figures given in this form should tall$
with the figures given in the form III where details of all the liabilities ) assets are
given. In case of inventor$, receivables and sundr$ creditors= the holdingJlevels are
given not onl$ in absolute amount but also in terms of number of month so that a
comparative stud$ ma$ be done with prescribed normsJpast trends. The$ are indicated
in terms of numbers of months in bracket below their amounts.
C( 2omputation of !a>imum Permissi#le ank Finance *Form "+
9!
:n the basis of details of current assets ) liabilities given in form IO, Ma%imum
Permissible ,ank /inance is calculated in this form to find out credit limits to be
allowed to the borrowers.
D( Fund Flow Statement *Form ")+
In this form, fund flow of long term sources ) uses is given to indicate whether
long term funds are sufficient for meeting the long term re-uirements. In addition to
long term sources and uses, increaseJdecrease in current assets is also indicated in this
form.
"( 2heck list for $erification of the information@data<
,ank should verif$ not onl$ the arithmetical accurac$ of the data furnished b$ the
borrowers but also the logic behind various assumptions based on which the projections
have been made. /or this purpose, bank officials should hold discussions with the
borrowers on projected sales, level of operations, level of inventor$, receivables, etc. if
necessar$, a visit to the factor$ ma$ also be made to have a clear idea of products and
processes.
ASS0SS0!0%, OF O,70R 8)!),S
91
80,,0R OF 2R04),
The banker e%amines the proposal of the letter of credit from two anglesD
o The cases where letter of credit is re-uired once onl$
o The cases where letter of credit is re-uired once regularl$.
In the second categor$ it is convenient for the banker to fi% the separate limit of the letter
of credit.
ASS0SS0!0%, OF ,70 8)!),S '%40R 80,,0R OF 2R04),-:),7 80A4
,)!0
9
The bu$er does not receive the goods immediatel$ on the placement of the order on the
seller. There is alwa$s long time log between the order placement and the receipt of the
material. This period is also referred to as the lead*time.
0>ample< -
If it is assumed that the total raw material re-uirement is 0s.9!lacs per annum and the
normal lead time is months, the bu$er will be re-uired to place order so that he has at
least months stock *ignoring safel$ level8. Thus, the total number of order placed would
be 1 per $ear and the value of per order would be 0s.9! .acs. This is shown below
Assessment of the limits under 82- with lead-time
'nnual re-uirement of raw material 9! .acs
Formal lead time months
Oalue per order 7'8 9!J1P0s.9! .acs
Margin for customer Q!>7,8 0s 4 .acs
.imits under letter of credit 7'*,8 Rs # .acs
Assessment of the limits under letter of credit-without lead-time
9#
'nnual re-uirement of raw material 9! lacs
Monthl$ re-uirement of raw material 9!J1 months P! lacs
Formal inventor$ level 71 month8 0s ! lacs
Oalue per order 7'8 0s ! lacs
Margin for customer Q !> 7,8 0s 9 lacs
.imits under letter of credit 7'*,8 0s 11 lacs
A%; 9'ARA%,00S
There is no standard formula for assessment of bank guarantee limit. The details
pertaining to nature of guarantees, particulars of the contract, period for which the
guarantee is sought and the amount of guarantee to be obtained, this information along
with the view on the creditworthiness of the borrower and relationship with the bank
comprise the major input towards deciding the sanction of limits re-uired b$ borrower.
'ppropriate conditions regarding cash margin and securities have to be laid down to
protect the interest of the bank..
99
PRO204'R0 FOR :OR;)%9 2AP),A8 F)%A%20
2R04), SA%2,)O% PRO20SS
The revised credit process is introduced with a view of reducing the time lag in the
sanction of credit besides clearl$ delineating the areas of responsibilities of various
functionaries. 's per this the revised process is divide into two components that is Pre
sanctioning and Post sanctioning
In the pre sanctioning it is the onl$ time that the bank can take due assessment and
precautions to make sure that the investments are done for the benefit of the bank. The
post sanctioning is the follow of the pa$ment. Incase the pa$ment defaults then the
account will go into FP' in stages and the bank is then said to scrutini+e the said
account.
PR0 SA%2,)O% PRO20SS< -
O#tain loan application
&hen a customer re-uired loan he is re-uired to complete application form and submit
the same to the bank also the borrower has to be submit the re-uired information along
with the application form.
93
The information, which is generall$ re-uired to be submitted b$ the borrower along with
the loan application, is underD *
'udited balance sheets and profit and loss accounts for the previous three $ear7in
case borrower alread$ in the business8
@stimated balance sheet for current $ear.
Projected balance sheet for ne%t $ear.
91
PR0 SA%2,)O%
PRO20SS
'PP0'I('. )
0@C:MM'FB'TI:F
'((@((M@F
T
('FCTI:FIF<
Profile for promotersJdirectors, senior management personnel of the compan$.
In case the amount of loan re-uired b$ borrower is 3! lacs and above he should be
submit the 2!A Report
@%amine for preliminar$ appraisal
0,I guidelines. Policies
Prudential e%posure norms and bank lending polic$
Industr$ e%posure restriction and related risk factors.
Compliance regarding transfer of borrowers accounts from one bank to
another bank
<overnment regulation J legislation impact on the industr$
'cceptabilit$ of the promoter and applicant status with regards to other
unit to industries.
'rrive at the preliminar$ decision.
@%amineJanal$sis Jassessment
/inancial statement 7in the prescribed forms8 refers figure &C c$cle ) ,(
assessment thumb rules.
9"
/inancial ratio ) Bividend polic$.
Bepreciation method
0evaluation of fi%ed assets.
0ecords of defaults 7Ta%, dues etc.8
Pending suits having financial implication 7Customs, e%cise etc.8
Iualifications to balance sheet auditors remarks etc.
Trend in sales and profitabilit$ and estimates Jprojection of sales.
Production capacities and utili+ationD past ) projected production
efficienc$ and cost.
@stimated working capital gap &.0.T acceptable buildup of
inventor$JreceivablesJother current assets and bank borrowing patterns.
'ssess MP,/ Mdetermine facilities re-uired
'ssess re-uirement of off balance sheet facilities vi+..Jcs,,Jgs etc.
Management -ualit$, competence, track records
Compan$Ls structure and s$stem
Market shares of the units under comparison.
94
?ni-ue feature
Profitabilit$ factors
Inventor$J0eceivable level
Capacit$ utili+ation
Capital market perception.
POS, SA%2,)O% PRO20SS
Super$ision and follow up< -
(anction credit limit of working capital re-uirement after proper assessment of proposal
is alone not sufficient. Close supervision and follow up are e-uall$ essential for safet$ of
bank credit and to ensure utili+ation of fund lend. ' timel$ action is possible onl$ close
supervision and followed up b$ using following techni-ues.
o Monthl$ stock statement
o Inspection of stock
o (crutin$ of operation in the account
o Iuarterl$Jhalf -uarterl$ statements.
o ?nder information s$stem
o 'nnual audited report
92
2R04), !O%),OR)%9 ARRA%90!0%,
Conse-uent upon the withdrawal of re-uirement of prior authori+ation under the
erstwhile credit authori+ation scheme 7C'(8 and introduction of a s$stem of post
3!
POS, SA%2,)O%
PRO20SS
/:..:& ?P
(?P@0OI(I:
F
M:FIT:0IF<
) C:FT0:.
sanction scrutin$ under credit monitoring arrangement 7CM'8 the database forms have
been recogni+ed as CM' database. The revised forms for CM' database as drawn up b$
the sub*committee of committee of directions have come into use from 1
st
'pril 1221.
The e%isting forms prescribed for specified industries continue to remain in force. &ith a
view to imparting uniformit$ to the appraisal s$stem, database from all borrowers
including ((I units enjo$ing working capital limits of 0s. 3! lacs and more from the
banking s$stem should be obtained.
The revised sets of forms have been separatel$ prescribed for industrial borrowers and
tradersJmerchant e%porters. The details of forms are as underD *
/orm 1D * particulars of the e>isting@proposed limit from the #anking system(
/orm D *Operating statement(
It contains data relating to gross sales, net sales, cost of raw material, power and fuel, etc.
It gives the operating profit and the net profit figures.
/orm # D * Analysis of #alance sheet(
It is complete anal$sis of various items of last $ears balance sheet= current $ears estimate
and following $ears projection are given in this form.
/orm 9 D * 2omparati$e statement of current asset and lia#ilities(
31
Betails of various items of current asset and current liabilities are given.
The figures in this form must tall$ with those in form III.
/orm 3D * 2omputation of ma>imum permissi#le #ank finance for working capital(
The calculation of MP,/ is done in this form to obtain the fund based credit limits to be
granted to the borrower.
/orm 1D * Fund flow statement
It provides the details of fund flow from long term sources and uses to indicate weather
the$ are sufficient to meet the borrowers long term re-uirements.
2R04), RA,)%9 !O408
The various risk faced b$ an$ compan$ ma$ be broadl$ classified as followsD
)ndustry Risk< It covers the industr$ characteristic, compensation, financial data etc.
2ompany@ #usiness risk< It considers the market position, operating efficienc$ of the
compan$ etc.
Project risk< It includes the project cost, project implementation risk, post project
implementation etc.
!anagement risk< It covers the track record of the compan$, their attitude towards risk,
propensit$ for group transaction, corporate governance etc.
3
Financial risk< financial risk includes the -ualit$ of financial statements, abilit$ of the
compan$ to raise capital, cash flow ade-uac$ etc.
4RA:)%9 PO:0R OF ,70 ORRO:0R
The drawing power that a borrower enjo$s at an$ one point depends on each components
of working capital. The bank for each component, which the borrower must hold as his
contribution to finance working capital, prescribes margins. The drawing power of the
borrower can be best e%plained with the following illustration
)llustration<
(uppose a borrower has 0s 1!!.!! lacs as working capital limit sanctioned to him b$ a
bank.
The securit$ provided b$ the borrower to the bank is the h$pothecation of inventor$.
(uppose, the borrower needs to hold an inventor$ level of sa$ 1#! lacs in order to enjo$
0s 1!! lacs as his working capital limit.
The actual level of inventor$ with the borrower at a point is sa$ 11! lacs.
The inventor$ margin prescribed b$ the bank is sa$ 3 >
Therefore with this inventor$ level, the borrower enjo$s onl$ 0s 4.3 lacs as his working
capital limit as against 0s 1!! lacs.
Inventor$ level 70e-uired8 0s 1#! lacs
3#
4rawing power of #orrower Rs AEE lacs
Inventor$ level 7'ctual8 0s 11! lacs
Margin prescribed b$ bank 3 >
4rawing power of #orrower AAE-*E(BCR AAE+ F Rs /B(C lacs
(uppose, the borrower holds 0s 13! lacs of inventor$,
Inventor$ level 7re-uired8 0s 13! lacs
4rawing power of #orrower Rs AEE lacs
Inventor$ level 7actual8 0s 13! lacs
Margin prescribed b$ bank 3 >
4rawing power of #orrower ACE G *E(BC H ACE+ F Rs( AAB(B lacs
Therefore, in this case the borrower would still enjo$ 0s 1!! lacs as his working capital
limits as against 0s 11.3 lacs.
Therefore, the lower of the two is alwa$s considered as the working capital limit or the
drawing power of the borrower sanctioned b$ the bank.
S02'R),3
39
,anks need some securit$ from the borrowers against the credit facilities e%tended to
them to avoid an$ kind of losses. securities can be created in various wa$s. ,anks
provide credit on the basis of the following modes of securit$ from the borrowers.
7ypothecation< under this mode of securit$, the banks provide credit to borrowers
against the securit$ of movable propert$, usuall$ inventor$ of goods. The goods
h$pothecated, however, continue to be in possession of the owner of the goods i.e. the
borrower. The rights of the banks depend upon the terms of the contract between
borrowers and the lender. 'lthough the bank does not have the ph$sical possession of the
goods, it has the legal right to sell the goods to reali+e the outstanding loans.
G$pothecation facilit$ is normall$ not available to new borrowers.
!ortgage< It is the transfer f a legal J e-uitable interest in specific immovable propert$
for securing the pa$ment of debt. It is the conve$ance of interest in the mortgaged
propert$. This interest terminated as soon as the debt is paid. Mortgages are taken as an
additional securit$ for working capital credit b$ banks.
Pledge< The goods which are offered as securit$, are transferred to the ph$sical
possession of the lender. 'n essential prere-uisite of pledge is that the goods are in the
custod$ of the bank. Pledge creates some kind of liabilit$ for the bank in the sense that
33
N0easonable careL means care, which a prudent person would take to protect his propert$.
In case of non*pa$ment b$ the borrower, the bank has the right to sell the goods.
8ien< The term lien refers to the right of a part$ to retained goods belonging to other
part$ until a debt due to him is paid. .ien can be of two t$pes vi+. Particular lien i.e. '
right to retain goods until a claim pertaining to these goods are full$ paid, and 9eneral
lien, &hich is applied till all dues of the claimant are paid. ,anks usuall$ enjo$ed general
lien.
A%;)%9 ARRA%90!0%,S
&orking capital is made available to the borrower under the following arrangements=
31
2O%SOR,)'! A%;)%9 ARRA%90!0%,<
0,I till 122" made it obligator$ for availing working capital facilities be$ond a limit 70s
3!! million in 122"8, through the consortium arrangement. The objective of the
arrangement was to jointl$ meet the financial re-uirement of big projects b$ banks and
also share the risks involved in it.
&hile it consortium arrangement is no longer obligator$, some borrowers continue to
avail working capital finance under this arrangement. The main features of this
arrangement are as follows=
,ank with ma%imum share of the working capital limits usuall$ takes the role of Nlead
bankL.
.ead bank, independentl$ or in consultation with other banks, appraise the working
capital re-uirements of the compan$.
,anks at the consortium meeting agree on the ratio of sharing the assessed limits.
.ead bank undertakes the joint documentation on behalf of all member banks.
.ead bank organi+es collection and dissemination of information regarding conduct of
account b$ borrower.
!'8,)P80 A%;)%9 ARRA%90!0%,
3"
Multiple banking is an open arrangement in which no banks will take the lead role.
Most borrowers are shifting their banking arrangement to multiple banking arrangements.
The major features are M
,orrower needs to approach multiple banks to tie up entire re-uirement of working
capital.
,anks independentl$ assessed the working capital re-uirements of the borrower.
,anks, independent of each other, do documentation, monitoring and conduct of the
account
,orrowers deals with all financing banks individuall$.
S3%4)2A,)O%
' s$ndicated credit is an agreement between two or more lenders to provide a borrower
credit facilit$ using common loan agreement. It is internationall$ practiced model for
financing credit re-uirements, wherein banks are free to s$ndicate the credit limit
irrespective of -uantum involved. It is similar to a consortium arrangement in terms of
dispersal of risk but consist of a fi%ed repa$ment period.
R09'8A,)O% OF A%; F)%A%20
34
)%,RO4'2,)O%
,ank follows certain norms in granting working capital finance to companies.
These norms have been greatl$ influenced b$ the reconditions of various committees
appointed b$ the 0,I from time to time. The norms of working capital finance followed
b$ banks are mainl$ based on the recommendation of ,andon committee and chore
committee(
These committees were appointed on the presumption that the e%isting s$stem of bank
lending of number of weakness industries in India have grown rapidl$ in the last three
decades as result of which, the industrial s$stem has become var$ comple%. The banks
role has shifted from trade financing to industrial financing during this period.
Gowever, the banks lending practices and st$les have remained the same. Industries
toda$ fail to use bank finance efficientl$. Their techni-ues of managing funds are
unscientific and non*professional. The industries toda$ lack in reducing costs, optimi+ing
the use of inputs, conserving resources etc.
The weakness of the e%isting s$stem highlighted b$ the Behejia committee in 1214 and
identified b$ the tondon committee in 12"9, are as followsD
It is the borrower who decides how much he would borrow =the bankers does not decide
how much he would lend and is, therefore, not in a position to do credit planning. The
bank credit is treated as the first sources of finance and not as supplementar$ to other
sources of finance.
32
The amount of credit is e%tended is based on the amount of securit$ available and not on
the level of operations of the borrower.
(ecurit$ does not b$ itself ensure safet$ of bank. /unds since all bad stick$ advances are
secure advances. (afet$ essentiall$ lies in the efficient follow up of the industrial
operations of the borrower.
&e discuss the following committeeLs important finding and recommendations for bank
financeD *
,A%4O% 2O!!),,00
27OR0 2O!!),,00(
,A%4O% 2O!!),,00
1!
)%,RO4'2,)O%<
The Tandon committee was appointed b$ the 0,I in Jul$ 12"9 and headed b$ (hri.
Prakash .. Tandon, the chairman of the Punjab national bank, to suggest guidelines for
rational allocation and optimum use of bank credit taking into consideration the weakness
of the leading s$stem. ,ank credit, which had become a scare commodit$, strictl$
rationed to meet the credit re-uirement of all the sectors. The larger sector of the industr$
needed strict rationing becomes
It was over rel$ing on bank finance and pre empted most of it while the other sectors
were not getting even their due share. Therefore, the method and criterion adopted for
fi%ing credit ration needed to be standardi+ed so that there is minimum scope for miss*use
or part of the credit uses. The Tandon committee was concern e%actl$ with this problem.
Its report laid down as to how the credit ratio of individual borrowers could be fi%ed at
imposed certain obligation on them for the efficient use of the credit made available.
The recommendation of the ,andon committee based on the following notionsD
The borrower should indicate the demand for credit for which he should draw operating
plans for the ensuring $ear and suppl$ them to the banker. This would facilitate credit
planning at the banks level and help the banker in evaluating the borrowerLs credit needs
in a more realistic manner.
The banker should finance onl$ the genuine production needs of the borrower. The
borrower maintained reasonable levels inventories and receivables. @fficient management
11
of resources should therefore be ensured to eliminate slow moving and flabb$
inventories.
The working capital needs of borrower cannot entirel$ finance b$ the banker. The banker
will finance onl$ a reasonable part of it for the remaining= the borrower should depend on
his own fund. 0ecommendation of Tandon committee accordingl$, the Tandon committee
put forth in the following recommendations
)n$entory and recei$a#les norms
The borrower is allowed to hold onl$ a reasonable level of current asset, particularl$
inventor$ and receivable. The committee suggested the ma%imum level of raw material,
stock in process, finished goods, which corporate in an industr$ should be to hold.
:nl$ the normal inventor$ based on a production plan, lead*time of supplies, economic
ordering levels and reasonable factor safet$ should be financed b$ the banker.

8ending norms<
1
The banker should finance onl$ a part of the working capital gap= the other part should be
financed b$ the borrower form long*term sources.
The current asset will be taken on the estimate values or values as per the Tandon
committee norms, whichever is lower.
The current will consist of inventor$ and receivables, referred as chargeable current
assets 7CC'8, and other current assets 7:C'8.
!A1)!'! P0R!)SS)80 A%; F)%A%20<
The Tandon committee suggested the following three methods of determining the
permissible level of bank borrowings*
The borrower will contribute 3 > of the working capital gap from long term fund i.e
owned fund and term borrowings= the remaining "3 > can be financed from bank
borrowings. This method gives a minimum current ratio of 1D1. This method was
considered suitable onl$ for ver$ small borrowers where the re-uirement ! credit was less
than 0s 1! lacs
The borrower will contribute 3 > of the total current assets from long*term funds i.e.
owned funds and term borrowings. ' certain level of credit for purchases and other
current liabilities will be available to fund the building up of current assets and the bank
will provide the balance. Conse-uentl$, the current liabilities inclusive of bank borrowing
could not e%ceed "3 > of current assets. This method gives a current ratio of A(5<A. This
1#
method was considered for all borrowers whose credit re-uirements were more than 0s
1! lacs.
The borrower will contribute 1!! > of core current assets, defined at the absolute
minimum level of raw material, processed stock, finished goods and stores, which are in
the pipeline. ' minimum level of the 3 > of the balance of the current assets should be
finance from the long term funds and term borrowings. This method covers straightness
the current ratio. The third is the ideal method. ,orrowers in the second stage are not
allowed to revert to the first stage. This method applies to all borrowers having credit
limit in e%cess of 0s.! lacs from the bank. Gowever this method was not accepted for
implementation.
In some cases, the net working capital was negative or 3 > of the working capital gap.
The new s$stems allowed this deficienc$ to be financed in addition to the permissible
bank finance b$ the bank. This kind of credit facilit$ is called working capital demand
loan, which was to be regulated over a period of time depending on the funds generating
capacit$ and abilit$ of the borrower.
The working capital demand loan is not allowed to be raised in the subse-uent $ear. /or
additional credit in subse-uent $ear, the borrowerLs long*term sources were re-uired to
provide 3 > of the additional working capital gap.
19
.( Style of credit<
The committee recommended the bifurcation of total credit limit into fi%ed and
fluctuating parts.
The fi%ed component is then treated as demand loan for the $ear representing minimum
level of borrowing, which the borrower e%pected to use through out the $ear.
The fluctuating component is taken care of b$ a demand cash credit. It could be partl$
used b$ wa$ of bills.
The new CC limit should be placed on a -uarterl$ budgeting reporting s$stem.
The interest rate on the loan components should be charged lower than the cash credit
amount. The 0,I has stipulated the interest differentiate at 1 >.
The cash credit limits sanctioned 7fluctuating8 are currentl$ !3 and the loan components
7fi%ed8 are 4! >.
C+ )%FOR!A,)O% S3S,0!<
The committee advocated for grater flow of information from borrower to the bank for
operational purpose and for the purpose of supervision and flow of up credit.
Information should be provided in the following formsD
13
I'AR,0R83 )%FOR!A,)O% S3S,0!< FOR!<
It should contain the production and sales estimates for the current and ne%t -uarter. also,
the current asset current liabilities estimates for the ne%t -uarter should be mentioned.
Iuarterly information system< Form ))<
It should contain the actual production and sales finger during the current $ear and the
latest completed $ear. 'lso, actual current asset and current liabilities for the latest
completed -uarter should be mention.
7alf year operating statement form )))A<
'ctual operating performance for the half $ear ended against the estimate should be
mentioned.
7alf year fund flow statement< Form )))<
It should contain the estimate as well as the actual sources and use of fund for the half
$ear ended.
,orrowers with a credit limit of more than1 crore are re-uired to suppl$ the -uarterl$
information.
The bank to follow up and supervise the use of credit should properl$ use the information
supplied b$ the borrower.
11
The bank must ensure that the bank credit was used for the purposes for which it is
granted, keeping in view the borrowers operation and environment.
The bank should confirm whether the actual result is in conformit$ with the e%pected
results. 'SJ* 1!> variation is considered normal.
The banker should be treated as a partner in the business with whom information should
be shared freel$ and frankl$.
The recommendations of the Tandon committee have been widel$ debated and critici+ed.
The bankers have found a difficult to implement the committeeLs recommendations.
Gowever, the Tandon committee has brought about a perceptible change in the outlook
and attitude of both the banker and their customers. The$ have become -uite aware in the
matter of making the best use of a scare resource like bank credit. The committee has
help in bringing the financial discipline through a balanced and integrated scheme of
bank lending. Most of banks in India, even toda$ continue to look at the needs of the
corporate in the light of recommendation of the Tandon committee
1"
27OR0 2O!!),,00
)%,RO4'2,)O%
In 'pril 12"2, the 0,I constituted a working group to review the s$stem of cash credit
under the chairmanship of Mr. 5. ,. Chore, Chief :fficer, B,C:B, 0,I. The main terms
of reference for the group were to review the cash credit discipline and relate credit limit
to production.
R02O!!0%4A,)O% OF 27OR0 2O!!),,00< -
ank credit< -
,orrower should contribute more funds to finance their working capital re-uirement and
reduce their dependence on bank credit. The committee suggested placing the second
method of lending as e%plain in the Tandon committee report.
In case the borrower is unable to compl$ with this re-uirement immediatel$, he would be
granted e%cess borrowing in the form of working capital loan 7&CT.8.
The &CT. should be paid in seam$ annual installments for a period not e%ceeding 3
$ears and a higher rate of interest than under the cash credit s$stem would be charged.
This procedure should appl$ to those borrowers, having working capital re-uirements of
more than 0s 1! lacs.
14
80"08 OF 2R04), 8)!),
,ank should appraise and fi% separate limits for the Tpeak levelE and normal Tnon pick
levelE credit re-uirements for all borrowers in e%cess of 0s. 1! lacs indicating the
relevant periods.
&ith the sanctioned limits for these two periods, the borrower should indicate in advance
his need for funds during the -uarter. 'n$ deviation in utili+ation of funds ,e$ond 1!>
should be considered irregular and is subject to penalt$ fi% b$ the 0,I 7> p.a. over the
normal rate8
,ank should discourage ad hoc or temporar$ credit limits. If sanction under e%ceptional
circumstances the same should be given in the form of a separate demand loan and
additional interest of at least 1> should charged.
8ending system<
The s$stem of three t$pes of lending should continue i.e. cash credit loan and bills
wherever possible= the bank should replace cash credit s$stem b$ loan and bills.
,ank should scrutini+e the cash credit accounts of large borrowers oneLs a $ear.
,ifurcation of cash credit account into demand loan fluctuating cash credit component, as
recommended b$ the Tandon committee should discontinue.
12
'dvances against books debts should be converted to bills wherever possible and at least
3!> of cash credit limit utili+e for financing purchases of raw material inventor$ should
also be charged to the bill s$stem.
)nformation System
The discipline relating to the submission of Iuarterly Statements to be obtained from
the borrower should be strictl$ adhered to in respects of all borrowers having working
capital limits of more than 0s.3! lacs.
If the borrower does not submit report within the prescribed time, he should be penali+ed
b$ charging a penal rate of interest, which is > p. a. more than the contracted rate.
,anks should insists the public sector undertakings and large borrower to maintained
control accounts in their books to give precise data regarding their dues to the small units
and furnish such data in their -uarterl$ reports.
Other recommendations<
0e-uest for rela%ation of inventor$ norms and for ad hoc increases in limits should be
subjected b$ banks to close scrutin$ and agreed onl$ in e%ceptional circumstances.
Bela$s on the part of the banks in sanctioning credit limits should be reduced in cases
where the borrowers cooperate in giving the necessar$ information about their past
performance and future projection in time.
"!
'utonomous institutions on the lines of the discount houses in ?.5 ma$ be set up to
encourage the bill s$stem of financing and to facilitate all mone$ operations.
There should be a TcellE attached to the chairmenLs office at the central office of each
bank to attend to matters like immediate communication of credit control measures at the
operational level.
The central offices of bank should take a second look at the credit budget as soon as
changes in the credit polic$ are announced b$ the 0,I and the$ should revised their plan
of action in the right of new polic$ and communicate the corrective measures at the
operational levels at the earliest.
,ank should give particular attention to monitor the ke$ branches and critical accounts.
The communication channels and s$stem and procedures with in the banking s$stem
should be toned up so as to ensure that minimum time is taken for collection of
instruments.
"1
F)%A%2)A8 RA,)OS
2'RR0%, RA,)OF2'RR0%, ASS0,@ 2'RR0%, 8)A),)0S
Gelp to measure li-uidit$ and financial strength, indication of availabilit$ of current
assets to pa$ current liabilities. The higher the ratio betters the li-uidit$ position.
<enerall$ it should be at least 1.##.
,O8@,%:F,O8@,A%9)A80 %0, :OR,7
Indicate si+e of stakes, stabilit$ and degree of solvenc$. Indicates how high the stake of
the creditors is. Indicate what proportion of the compan$ finance is represented b$ the
tangible net worth. The lower the ratio, greater the solvenc$. 'n$thing over 3 should be
viewed with concern.
The ratio should be studied at the peak level of operations.
OP0RA,)%9 PROF), RA,)OFOP0RA,)%9 PROF),@%0, SA80SHAEE
This ratio indicates operating efficienc$. Indication of net margin of profit available on
0s. 1!! sales. Trend for compan$ over a period should be encouraging.
"
4S2R*40, S0R")20 2O"0RA90 RA,)O+F40PR)2)A,)O%J)%,R0S, O%
,0R! 8OA%@ )%,R0S, O% ,0R! 8OA%J)%S,A88!0%, OF ,0R! 8OA%
It indicates the number of times total debt service obligation consisting of interest and
repa$ment of the principal in installment is covered b$ the total fund available after ta%es.
&ith the help of this ratio 7popularl$ known as B(C08, we can find out whether the loan
taken for ac-uisition of fi%ed assets can be rapid convenientl$.
This ratio of 1.3 to considered ade-uate.
&e have alread$ touched upon depreciation as non cash e%penditure and since the funds
are available with the enterprise to that e%tent. It is in order to ask for this sum in
reduction of loan.
)%,0R0S, 2O"0RA90 RA,)OF0AR%)%9S 0FOR0 ,0R! 8OA% A%4
,A1A,)O% @ )%,0R0S, O% ,0R! 8OA%
The ratio indicates ade-uac$ of profit to cover interest. Gigher the ratio more is the
securit$ to the lender.
"#
Analysis ? )nterpretation of the data
2ase studies
2ase study A<
Comparative ,alance (heet and Performance J /inancial IndicatorsD
'bridged ,alance sheet
70s in lacs8
.iabilities #1.!#.!9 #1.!#.!3 #1.!#.!1 'ssets #1.!#.!9 #1.!#.!3 #1.!#.!1
'udited 'udited Prov. 'udited 'udited Prov.
Capital 1".3# 14.91 49.49 /' #.13 1.19 13!."#
0eserves Bepr. 3.43 1.#4 1.9
F& AK(C5 A/(.A /.(/. Fet ,lock AK(5E BE(BD ABL(5A
T. 1.9# 13.24 .24 Cash )
,ank
1.9" !.49 .31
?nsec .n 0M
T. from
,:M
.91 41.91 &IP
T.7car8 A(KD A(// E(5/ /< 1."" 11.3# 13.!!
(cred 0ec* Bom 4.14 1.!1 #3.1#
,k ,orr 2.11 1#.!4 13.!! @%port
:C. !.!2 !.13 :C' 1.12 .# ."1
TC. L(BE A5(B5 AC(EE TC' B5(DA 5A(KE CC(5C
Inv
Tot FC'
'cc .oss
Tot.Intang
'ss.
Tot .iab 9!.21 31.21 149.11 Tot 'ss 9!.21 31.21 149.11
#1.!#.!!9 #1.!#.!3 #1.!#.!1
U Fet &orth AK(C5 A/(.A /.(/.
.essD 0evaluation 0eserves * * *
.essD Intangible 'ssets * * *
Tangible Fet &orth 1".3# 14.91 49.49
"9
P@0/:0M'FC@ J 5@V /IF'FCI'. IFBIC'T:0(D 70s in .acs8
Particulars #1.!#.!9 #1.!#.!3 #1.!#.!1
Fet (ales
> Increase J Becrease
31.11
"1.1>
23."!
"!.33>
14!.!!
44>
Fet Profit 'fter Ta%
> to Fet (ales
!.3"
1.!1>
!.42
!.2#>
4.1
9."2>
Cash 'ccruals 1.9 ".4 #!.!9
TF& e%cl 0evaluation 0eserve 1".3# 14.91 49.49
T:. J TF& 0atio 1.## 1.4 1.14
F&C 19.91 14.9" 9!.#3
Current 0atio .3" .9! #.12
A( Sales< 's partners have been engaged in marketing the new technolog$ to various
users for the initial J# $ears vigorousl$ and their efforts are started $ielding results.
Buring the $ear !!3 the firm has obtained approval from ,G@., FTPC, and G'. for
use of its products M B(C ) @(C. 'greement with FTPC through ,G@. 7Garidwar8 is
e%clusive suppl$ 7not to an$ other companies8 for annual turnover of 0s. 3!.!! .acs.
The orders are of repetitive nature. ,esides ,G@. 7G$d8 have also started placing sample
orders. The firm has also been able to secure orders from G'. 75oraptut8 for B(C )
@(C.
Buring the $ear up to FovL!3 the firm has alread$ done sale of 0s. 1!!.!! lacs besides
the job work. :rders worth 0s. 13!.!! lacs from ,G@. 7Garidwar8 are on hand
scheduled to be completed before MarchL!1. Completion of this of these orders will
enable the firm to achieve a sale of 0s. 3!.!! lacs b$ this $ear end. This is acceptable.
B( Profit< Githerto the net profit in terms of sales has been about 1.!!>. 'gainst this
backdrop the estimated profitabilit$ of 9."2> in the current appears unreasonable. Buring
discussion it is clarified that as the firm has shifted its focus from mare job work to direct
"3
selling the margin will be high. In fact it has set up its own machining plant and has
secured approval from ,G@. for the Iualit$ of its own materials.
It used to pa$ for job works to other companiesJfirms for the machining purpose. This
pa$ment was to the tune of 3> 7app%8 of the job work revenue. /or the $ear !!3 as the
job work is being done in*house the e%penses are estimated to be hardl$ 3>. ,esides,
margin of direct selling of its materials is better. Moreover with increased sales the
marginal revenue would be proportionatel$ high adding to the increased $ield. In view of
the above factors we ma$ accept the profitabilit$ estimates made b$ the firm. In the
coming " $ears the firm has estimated profitabilit$ ranging from 4.3> to 1.3>. This
appears to be on the higher side. 's the sales are estimated to stabili+e at 0s. #1.!! lacs
we ma$ accept the profitabilit$ of 9."2> as acceptable for the $ear !!3. 'ccordingl$ the
net profit for the
nd
$ear would be 0s. 1#."! lacs and then 0s. 19.23 lacs p. a.
5( 2ash Accrual< &ith addition to fi%ed assets the depreciation shall be high. Thus with
accepted profitabilit$ the accrual would be 0s. #!.!! lacs for the $ear !!3 followed b$
0s. #.!# lacs, 0s. #!.1 lacs respectivel$. The position is acceptable.
.( ,%:< ?p to !!9*!3 the TF& has been increasing with retention of profits. In the
$ear !!3 for the e%pansion plan the partner have agreed in bring in additional capital of
0s. 91.!! lacs, 0emaining 0s !.!! lacs from internal accrual. &e have discussed the
issue of infusion of capital b$ partners. It is informed that depending upon the advice of
their auditors the$ would be either increasing the amount of individual capital andJor
brings in unsecured loans from friendsJrelatives to be converted to capital over a period
of time. (ince the e%isting work is being carried out from their own sources the branch is
advised to obtain a C'Ls certificate certif$ing the amount investing that will be
"1
considered as their contribution. (ince the cash accrual for the $ear !!3 is accepted at
0s. #!.!! lacs the remaining contribution of 0s. !.!! lacs from partners appears
reasonable.
C( ,O8@,%:< The ratio has been below .!! up to #1.!#.!3 and with proposed capital
infusion the same is estimated to be about 1.14 which is acceptable being well within
benchmark level.
D( %:2 ? 2( R(< ,oth the parameters have been well above their respective benchmark
levels and are estimated to improve further over the e%isting levels. It ma$ be mentioned
that even though the firm is increasing its production capacit$ and conse-uentl$ sales it
has not re-uested an$ additional working capital. Buring discussion it is gathered that
with direct selling the pa$ment term would be 2! > against suppl$ of materials which
would improve its cash flow and hence there will not be additional re-uirement of
working capital. Gowever the partners have informed that after the e%pansion is
completed in March !1 the$ ma$ approach us for additional working if re-uired at that
point of time.
Thus the overall financial position of the firm is satisfactor$.
Assessment of present proposal< -
A( :orking capital assessment<
A( 2omments on< -
i. (ales projectionsD 'lread$ discussed.
ii. Inventor$ ) receivablesD @%cept the receivables the firm has estimated other current
asset as per past trend and hence acceptable. The holding level of receivables has
been 1.3 month to 1."3 months sales. /or the current $ear it has estimated the same to
""
be .## months. It is clarified that as the firm would be e%ecuting 0s 13!.!! lacs
worth of orders from ,G@. in ne%t 9 months 7 't least 0s 4!.!! lacs as accepted b$
us8 there will be concentration of debtors at the $ear end. Gence the estimates appear
reasonable. Creditors have been nil and are estimated to be nil too.
'gainst this background P,/ is calculated as under.
( :orking of !PF< -
&:05IF< :/ M'AIM?M P@0MI((I,.@ ,'F5 /IF'FC@D 70s in lacs8.
Particulars #1.!#.!9
'udited
#1.!#.!3
'udited
#1.!#.!1
Projected
a. Total current assets #.11 #1."! 33.#3
b. :C. @%cl. short term ,, !.!2 !.13 *
c. &orking Capital <ap7a*b8 #.3 #1.33 33.#3
d. Min. (tipulated F&C
73> of TC'8
3.2! ".2# 1#.49
e. 'ctualJProjected F&C 19.91 14.9" 9!.#3
f. Item c*d 1".1 #.1 91.31
g. Item c*e 2.11 1#.!4 13.!!
h. MP,/ 2.11 1#.!4 13.!!
i. e%cess borrowings if an$ * * *
2ase Study B<
Comparative ,alance (heet and Performance J /inancial IndicatorsD
,ridged ,alance (heetD
70s in lacs8
.iabilities #1.!#.!9 #1.!#.!3 #1.!#.!1 'ssets #1.!#.!9 #1.!#.!3 #1.!#.!1
7'udit8 7'udit8 7@stm8 7'udit8 7'udit8 7@stm8
"4
Capital "."" #1.#! 91.9 Fet ,lock #.1! .93 1."1
?nsec .n 1.!! 1.!! 3.!! 'dvanceJBeposits
7FC'8
!.#9 !.#9 1.!2
Term
.oan
1.14 !.14 * (undr$ Bebtors 9.1" 4.32 34.12
(undr$
Creditors
1.13 1#.4" 11."1 (tock #9.3 32.2 "!.#1
,ank
,orrowing
2."3 93.4! 1!!.!! 0ecurring Bep !."3 1.3# 1.1!
Chits 1.! * * Cash ."9 .#! #.1
:ther
liabilities
1.1# 9.9 #.41 :C' #.!1 9.19 3.##
Chits * .1 *
Total 14.14 1!1.42 111.22 Total 14.14 1!1.42 111.22
#1.!#.!!9 #1.!#.!3 #1.!#.!1 #1.!#.!"
Fet &orth "."" #1.#! 91.9 94.!9
.essD 0evaluation 0eserves * * * *
.essD Intangible 'ssets * * * *
Tangible Fet &orth "."" #1.#! 91.9 94.!9
P@0/:0M'FC@ J 5@V /IF'FCI'. IFBIC'T:0(D 70s in .acs8
Particulars #1.!#.!9
7audited8
#1.!#.!3
7audited8
#1.!#.!1
7estimated8
#1.!#.!"
7projected8
Fet (ales
> Increase J Becrease
"!.1 111.11
31>
1"92.19
33>
1411.!4
1.1#>
Fet Profit 'fter Ta% !.91 !.3 !.# !.#
Cash 'ccruals #.4" #.31 9.41 9."9
TF& e%cl 0evaluation 0eserve "."" #1.#! 91.9 94.!9
T:. J TF& 0atio 1.9" 1.41 .21 .92
F&C 1.31 #3.12 9#.1 3!."2
Current 0atio 1.14 1.33 1.#4 1.99
%et Sales< The firm deals in the products of Gindustan .ever .td and ,harti Tele .td
7'irtel8. The estimated sale for !!9*!3, as per last review, was 0s. 19!3 lacs, with a
growth of 23> over previous $ear. Gowever the actual sales were 0s. 111 lacs, with a
"2
growth of 31>. 'chievement is 4!>. In this connection, the firm has informed that the
estimated growth of !> in Gindustan .ever products could not be achieved and hence
the variation. This is due to polic$ changes contemplated b$ G.. to reduce the no. of
dealers as well as product consolidation.
/or the $ear !1.!9.!3 to #1.!1.!1, the firm has estimated a sale of 0s. 1"92.19 lacs and
for the ne%t $ear, projected a sale of 0s. 1411.!4 lacs. Till (eptember !3, the firm was
dealing in detergents, .akme products of Gindustan .td and the products of 'irtel. /rom
:ctober !3, the firm added the business of personal of Gindustan .ever .td. The
performance of the firm during the $ear !1.!9.!3 to #1.!1.!1 is as underD
Betergent of Gindustan .ever .td D 0s. 3#1 lacs
.akme of Gindustan .ever .td D 0s. 1#3 lacs
Personal products of G.. D 0s. 11 lacs 7:ct !3 to Jan !18
'irtel D 0s. 19 lacs
Total D 0s. 19#9 lacs
Considering the actual sale of 0s. 19#9 lacs in the first ten months the estimated sales of
0s. 1"3!.!! lacs during the current $ear appears reasonable. 's per the estimate, the
growth in sales during the $ear !3*!1 is 33> compared to !9*!3. in this connection, the
firm has informed that the$ were allotted more areasJjurisdiction b$ Gindustan .ever .td.
/or the ne%t $ear, the firm has projected a sale of 0s. 1411 lacs, with the break up of sales
as underD
4!
Betergent of Gindustan .ever .td D 0s. 1! lacs 71.#> growth8
.akme of Gindustan .ever .td D 0s. 114 lacs 79>8
Personal products of G.. D 0s. #44 lacs 7"> annuali+ed8
'irtel D 0s. "!4 lacs 71!.4>8
Total D 0s. 1411 lacs
The growth of the sale projected for the ne%t $ear is around ">. The estimatedJprojected
sales, appears achievable in view of the performance of the firm in the past and during
the $ear till Jan !1.
%et Profit< The firm has been earning profits consistentl$, but the margin is ver$ thin.
Buring !!9*!3 the profitabilit$ further dropped as compared to its previous $ear mainl$
due to competitive pricing in the consumeJpersonal goods segments offered b$ various
companies. The profitabilit$ has been between !.3> in !!9*!3 and is estimated to be
!.#> in the $ear !!3*!1 followed b$ similar trend in the ne%t $ear. The trend is
estimatedJprojected to continue. Gence it is acceptable.
,angi#le %et :orth< The firm has been maintaining the TF& at a satisfactor$ level.
Major portion of the profits are retained in the business. Buring the $ear !!3*!1 the firm
has proposed to infuse additional capital of 0s. .!! lacs followed b$ 0s. 9.!! lacs in the
ne%t $ear. The position is acceptable.
,O8@,%:< The ratio has been consistentl$ below the bench mark level. Gowever
compared to the previous $ears, the present level estimatedJprojected is higher in view of
view of the additional borrowings for the increased turnover. Gowever the same is still
below the bench mark.
41
%et :orking 2apital< The firm has been maintaining F&C at more than 3> of TC'
level which is above the stipulated bench mark and is estimated to well within the bench
mark too. The firm has proposed infusion of addition unsecured loan of 0s. 9.!! lacs to
improve the F&C position. ' suitable certificate from the C' is to be obtained to this
effect. 'n undertaking is to be obtained not to repa$ this unsecured loan during current of
our credit facilities.
2urrent Ratio< The firm has been maintaining current ratio at a satisfactor$ level.
Through the estimated level for the $ear !!3*!1, is slightl$ lower compared to $ear
!!9*!3 M it is still above the bench mark level.
Thus overall financial position is satisfactor$.
'ssessment of ProposalD
A( :orking capital assessment
Comments onD
i. Inventor$D
's per past trend, the level of stocks held b$ the firm is between 14 da$s
to ! da$s during last tow $ears and the same is estimated to be 13 da$s in this
$ear !!3*!1. This being an improvement over the past $ears is acceptable.
ii. 0eceivablesD
's per past trend, the level of credit allowed b$ the firm is between !.#! to
!.9! monthLs sales. Gowever the firm estimatedJprojected a higher level of
!.39 monthLs sale this level appears on the higher side and therefore bank
recast the figures of receivables with a !.9! monthLs sales. 'ccordingl$ the
acceptable level of debtors would be 0s. 34.3! lacs.
4
iii. :ther Current 'ssetsD
The current assets include cash and bank deposits 70B8. The
estimatedJprojected level of these assets is in conformit$ with the earlier
levels.
:ther than the above, the firm has another current asset in the form of
NClaims 0eceivableL. These are amount receivables from MJs Gindustan .ever
.td for an$ breakage in stock supplied. Till $ear !!9*!3 the level was -uite
on lower side oaround 0s. # to 9 lacs. Gowever during the $ear !!3*!1 and
!!1*!", the firm has estimatedJprojected a higher level of 0s. 3 lacs and 0s.
#! lacs respectivel$. In this connection the firm has informed that present
outstanding claims receivable from Gindustan .ever .td is around 3 lacs and
the level is likel$ to continue. The branch is to obtain a C'Ls certificate in this
regard.
iv. (undr$ CreditorsD
The firm is reportedl$ not getting an$ credit from either Gindustan .ever
.td of 'irtel. Gowever the firm has estimatedJprojected a level of 0s. 11 lacs
for miscellaneous credits. The level is in conformit$ with the past trend.
v. :ther Current .iabilit$D
The other current liabilities include provisions for e%penses and ta%ation.
The estimatedJprojected level is in conformit$ with the past trend.
vi. Method .endingD
The method of lending is based on build up of current assets and
liabilities, with second method of lending.
4#
vii. Comments on F&CD
The estimatedJprojected F&C is ade-uate to meet the margin re-uirement
of working capital.
,. &orking of MP,/D
Particulars #1.!#.!9
7audited8
#1.!#.!3
7audited8
#1.!#.!1
7@stimated8
#1.!#.!"
7Projected8
' Total Current 'ssets 13.9 22.1! 132.12 113.1!
, TC. 7e%cept bank borrowings8 4.24 14.11 13.3" 19.41
C &orking Capital <ap 31.1 4!.22 19#.1 13!."2
B Minimum stipulated margin 73>
of TC'8
11.#1 9."4 #2.4! 91.9!
@ 'ctualJ estimated F&C 1.31 #3.12 9#.1 3!."2
/ Item 7c*d8 #2.23 31.1 1!#.4 1!2.#2
< Item 7c*e8 2."3 93.4! 1!!.!! 1!!.!!
G MP,/ 7lower of above two8 2."3 93.4! 1!!.!! 1!!.!!
I @%cess borrowings, if an$ * * * *
2ase Study 5<
Comparative ,alance (heet and Performance J /inancial IndicatorsD
70s in lacs8
.iabilities #1.!#.!9 #1.!#.!3 #1.!#.!1 'ssets #1.!#.!9 #1.!#.!3 #1.!#.!1
'udited 'ud @stm 'udited 'ud @stm
Capital 11.! 1".! 1".! /' #!.32 91.2" 19.#"
0eserves 9."! 9.4 13.1! Bepr. 1.1# 1.1 1.3
49
Bef ta% !." .13 .1!
F& BA(AK B.(AK 5.(.E Fet
,lock
B5(LK 5.(KA .5(AB
T. 1.2 4.22 1!.11 Cash
)
,ank
3.#9 1.! 1.""
?nsec .n 19.11 14.1" 11."1 0M
:T. &IP
TT. AD(E/ BK(AD BK(5K /< 1!.19 11.## 9.3!
(cred #.92 1.!1 0ec*
Bom
".# 1."! 9!.4!
,k ,orr 3.!! @%port
:C. 2.#1 1.4! #1.!! :C' .4 .92 9.19
TC. AB(/C A/(/D DA(EE TC' BD(E5 5B(C. KD(KA
Inv
:th
FC'
* .41 .41
Tot
FC'
'cc
.oss
:th
Intang
'ss.
!.1! !.!4 !.!4
Tot .iab 3!.1! "!.12 1."" Tot
'ss
3!.1! "!.12 1.""
#1.!#.!!9 #1.!#.!3 #1.!#.!1
U Fet &orth BA(AK B.(AK 5.(.E
.essD 0evaluation 0eserves
.essD Intangible 'ssets !.1! !.!4 !.!4
Tangible Fet &orth 1.!" 9.!2 #9.#
P@0/:0M'FC@ J 5@V /IF'FCI'. IFBIC'T:0(D 70s in .acs8
Particulars #1.!#.!9 #1.!#.!3 #1.!#.!1
Fet (ales
> Increase J Becrease
"3.#3
12.#1>
11.1
*ve
!9.!!
Fet Profit 'fter Ta%
> to Fet (ales
#.13
9.14>
.!!
#.4>
1!.2
3.!9>
Cash 'ccruals 1.!# ".1# 12.2
TF& e%cl 0evaluation 0eserve 1.!" 9.!2 #9.#
T:. J TF& 0atio 1.#" 1.21 .3"
F&C 1#.14 1#.14 13."1
43
Current 0atio .! 1."# 1.1
CommentsD
A( Sales< (ales mean service chargesJ consultanc$ fees received for the FBT inspection
and course fees received for its various training programs on FBT. 's mentioned earlier
the compan$ is mainl$ doing FBT inspection of oil refineries of 0eliance Industries,
:F<C, and FTPC. The consultanc$ fees depend upon the volume of machineries put
under FBT inspection. Buring !!9*!3 the sales have declined due to this factor onl$. It
ma$ be mentioned here that during the $ear the course fees have grown b$ !!> whereas
consultanc$ fees have declined b$ 13> 7app%8. In the $ear !!3*!1 the compan$ has
received contracts worth 0s 4".!! lacs from 0I. for its Jamnagar Plant. The compan$ has
estimated a sale of 0s !9.!! lacs comprising consultanc$ fee ) component sale of 0s
14!.!! lacs and training fees of 0s 9.!! lacs. The training fee is slightl$ less than the
last $earLs fees. 's on #!.11.!3 the compan$ has alread$ booked a sale of 0s12.!!lacs.
,esides it has orders from small ) medium companies. 's such we are of the view that
the compan$ would be in a position to achieve a sale of 0s13!.!!lacs. &e ma$ accept the
said level.
B( %et Profit< Profit margins in consultanc$ works are comparativel$ more. Therefore
with decline in consultanc$ fees the profitabilit$ has declined during !!9*!3. Buring
!!3*!1 the compan$ has estimated a net profit of 0s 1!.2 lacs with profitabilit$ of
3.!9>. The compan$ officials have clarified that with increased sales and without an$
additional cost the marginal revenue will be more. Moreover net profit as of #!.11.!3 as
41
declared b$ the compan$ has been 0s. 1!.1! lacs. 'ccordingl$ the estimates appear
reasonable.
5( ,%:< &ith 1!!> retention of net profit the TF& acceptable as on #1.!#.!1 would be
0s. #9.9! lacs.
.( ,O8@,%:< The ratio for the last three $ears has been below the bench mark and is
e%pected to be so in the current $ear too.
C( %:2 ? 2(R< Buring !!*!# sundr$ creditorLs mode of financing was resorted to b$
the compan$ for its working funds and partl$ for its fi%ed assets resulting in C.0. below
1.!!. This imbalance is rectified in !!#*!9 b$ raising capital and infusing unsecured
loans from directors and others. The position as at #1.!#.!3 is also above the respective
bench mark. Gowever during the current $ear the compan$ proposes to add fi%ed assets
from its internal accruals and partl$ out of its e%isting built up of F&C resulting in
reduction in F&C level to !> of the TC'. Conse-uentl$ current ratio is estimated at
1.1. In fact as the minimum acceptable F&C is !> and current ratio is 1.3 the
proposed estimates can be acceptable as the purpose of utili+ation of F&C is for
ac-uiring fi%ed assets re-uired for business purposes onl$.
Thus overall financial position is satisfactor$.
'ssessment of Present ProposalD
A( :orking 2apital Assessment<
4"
'. Comments onD
i. (ales ProjectionsD 'lread$ dealt with elsewhere in the note.
ii. Comments on F&CD 'lread$ discussed.
Assessment<
The compan$ had re-uested for project specific working capital 7CC8 facilit$ of 0s 3.!!
lacs for its contract worth 0s 4".!! lacs from 0I. which will be completed within 9
months. This job is completed. ,ut the compan$ is able to obtain similar contracts from
others like .)T, (outh Central railwa$s etc in ensuing months for which it re-uires the
working capital. In fact for the ne%t $ear it has estimated a sale of more than 0s. !!.!!
lacs.
's at #!.11.!3 the TC' level is 0s. 1.3" lacs which is 92> of total sales as on that date.
/or the current $ear it has estimated a TC' level of 0s. "1."1 lacs which works out to
31> of accepted sales level. (ince the estimated level is more or less e-uivalent to the
actual level as on #!.11.!3 we ma$ accept the same. The compan$ has estimated an :C.
level of 0s. #1.!! lacs which as per the actual level prevailing as on #!.11.!3. This is
acceptable too. 'ccordingl$ P,/ is arrived as under.
i. TC' level accepted 0s"1."1lacs
ii. :C. 0s#1.!!lacs
iii. &C< 0s9!."1lacs
iv. 0e-uired F&C 7!>8 0s13.#9lacs
v. @stimated level 0s13."1lacs
44
vi. MP,/ 0s3.!!lacs.
2onclusions
The re-uirement of working capital finance is ever increasing.
.oans and advances formed a major portion of the current assets of the firm
because of which the working capital gap is large.
42
The bank prefers to use the second method of lending working capital under the
MP,/ rather than evolving their own method.
In most of the cases, h$pothecation andJor mortgage are used to create securities
for the banks.
,ank has their own internal credit rating procedure to rate the clients 7,orrowers8.
'fter doing the assessment of the financial indicators it is up to the judgment of
the top management of the bank to sanction such loan. The ver$ decision could be
against the assessment result.
If the compan$ is with bank from inception stage then the$ are given preference,
as credible and lo$al part$ over their financial indicators.
There is a stiff competition to the nationali+ed banks from the foreign investors as
their lending rates are much lower than nationali+ed banks.
Toda$ the foreign investors are ver$ big threat to business and its e%istence.
,ank of Maharashtra has kept a conservative look to banking.
2!
Suggestions
Closel$ monitoring and inspecting the activities and stocks of the borrowers from
time to time can avoid the misuse of working capital
&hile working out the working capital limits, banks must e%clude the loans and
advances from the current assets. The assessment should be done mainl$ stock
and the inventor$ level of borrower.
,ank must e%tend working capital finance through non*fund based facilities.
'nother ideal method would be to use .C as the primar$ source of e%tending,
working capital clubbed with bill discounting. This would ensure that the credit is
put to the right use b$ the borrower and repa$ment is guaranteed to the bank.
The bank must further secure themselves b$ holding a second charge on all the
fi%ed assets of the borrower.
The time period taken b$ the banks to sanction the limits should be significantl$
reduced to allow the borrowers to make use of the credit when the need is most
felt.
21
i#liography
ooks<
A( 7A%4 OO; O%:OR;)%9 2AP),A8 F)%A%20
B. P. ('0B', P?,.I(G@B ,V (.J.B. IMP@A, M?M,'I, /:?0TG @BITI:F
B( F)%A%2)A8 !A%A90!0%,
0. P. 0?(T'<I, <'.<:TI' P?,.IC'TI:F, F@& B@.GI, (@C:FB
@BITI:F, !!!.
)%,0R%0, S),0S<
http<@@www(#anknetindia(com
http<@@www(#ankofmaharashtra(in
http<@@www(indiamarkets(com
http<@@www(#usinessfinance(com
2