SIBM:Manipal

09.07.07

SME- ASSESSMENT OF WORKING CAPITAL

REQUIREMENTS

1. Simplified method in case of borrower seeking fund based

working capital limits of upto Rs.25 lakhs (raised from the
earlier limit of Rs.20 lakhs) adopting a holistic approach,
taking into account the borrower’s business potential,
business plans, past dealings, credit-worthiness, market
standing, collateral security available and ability to repay etc.
Wherever the activity of the borrower is such that
stocks/current assets are not available or creation of charge
on stocks/current assets is not possible the same need not be
insisted upon. The limits assessed through this simplified
method are to be secured by current assets primarily
wherever the credit facilities are extended for procuring /
against the current assets. The collateral security required to
be obtained from the borrowers assessed through the
simplified procedure is now relaxed to not less than 125%
of the value of the advance from the earlier requirement
of at least 150% of the value of the advance.

2. Liberalised Trade Finance Scheme to the small traders and

small businessman on the basis of total turnover declared in
the sales tax returns upto a limit of Rs.25 lakhs.

3. Turnover method in the case of borrower (non-SSI/SSSBE)

seeking fund based working capital credit limits upto Rs.2
crores and SSI & SSSBE borrowers upto Rs.5 crores. If the
borrower is eligible for higher credit limit as per EWCL
method, the same can be adopted instead of turnover method.

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4. Eligible working capital limit (EWCL) method in case of
non-SSI borrowers seeking working capital limits of above
Rs.2 crores from the banking system but upto and inclusive
of Rs.20 crores from the Bank. (For SSI/SSSBE borrowers
seeking fund based limits of over Rs.5 crores and upto and
inclusive of Rs.20 crores).

5. Cash budget or EWCL method for working capital needs of

borrowers seeking fund based limit of above Rs.20 crores.

6. Assessment of working capital on cash budget method for

seasonal and construction industry wherever adequate MIS
support is available with the borrower.

7. For assessment of working capital requirements of export

customers, any of the above methods, viz., projected turnover
method or EWCL method or cash budget method, whichever
is most suitable and appropriate to their business operations
may be adopted.

8. In the case of credit limits of above Rs.2.00 crore for IT &

software industry, cash budget method shall be adopted for
assessment (for details, please refer Circular No
218/98/BC/CR/64/CRPPD dtd.26.10.1998)

Basic financial parameters for Working Capital Assessment

The methodology for working capital assessment envisages
adoption of a BASKET OF BASIC FINANCIAL
PARAMETERS with broad bands to facilitate better risk
management and to imbibe requisite flexibility in credit
dispensation.

The following are the basic financial parameters to be

complied with in the case of all the borrowers irrespective of
the methods of assessment excepting where limits have been

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 assessed through simplified procedure for less than Rs.25
lakhs, Liberalised Trade Finance for less than Rs.25 lakhs
and in the case of rehabilitation of sick/weak units.

Financial Name of Prescribed Band

Parameters the Ratio
i. Current a. 1.10 to 1.33 under EWCL/Cash
Liquidity Ratio Budget Method
b. 1.25 to 1.33 under Projected
turnover Method for non
SSI/SSSBE borrowers
c. (i) Minimum of 1.25 under
Projected Turnover Method
for SSI and SSSBE borrowers
(ii) In case where the WC limits
are assessed on EWCL Method,
lower current ratio may be
accepted for SSI and SSSBE
units subject to a minimum of
1.05
ii Solvency Below 5:1
Indebtedne Ratio However, in exceptional cases, it may
ss (TOL:TN be allowed upto10:1 by the
W) sanctioning authority. This need not
be treated as a deviation for which
approval of the higher authorities is
required.
iii Security Security Minimum 1.25 for SSI and SSSBE
Coverage borrowers and 1.30 for non
Ratio SSI/SSSBE borrowers
iv Net profit The minimum requirement shall be
Profitabilit - positive that the business is making profit and
y not incurring losses for the past two
years. However exceptions may be
made by the Sanctioning Authority

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 wherever the borrower suffers
temporary setback leading to loss in
any one year. This need not be treated
as a deviation for which approval of
the higher authorities is required.
For new units/venture, item Nos. (i), (ii), (iii) and (iv) may be
on the basis of projected figures
Overall compliance to basic financial parameters
i) While it may be ideal to look for sound financial
parameters say, current ratio at 1.33, low TOL/
TNW ratio, strong security position etc. in practice
it may not always be possible to get borrowers all of
whose financial parameters strong. In view of this,
one of the parameters may be relaxed by the
sanctioning authority, if other financial parameters
have stronger values within the prescribed bands.
In other words, all the basic financial parameters
accepted for sanctioning the credit facilities should
collectively satisfy proper risk management
standards.
ii) However, in case of existing borrowers, whose
dealings are satisfactory and limits are fully secured
by way of mortgage of fixed
assets/deposits/KVP/NSC/surrender value of Life
Insurance Policies, sanctioning authorities may
renew the limits even if more than one of the basic
parameters are not complied with and in case any
enhancement is involved clearance from the next
higher authority shall be obtained.
iii) The deviations in other cases may be permitted by the
next Higher Authority, if required on merits of each

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 case and having due regard to the business
expediency.
iv) In the case of ED/CMD/MC sanctions, the respective
sanctioning authorities may permit deviations.

I. Turnover Method:
The Working Capital requirements of the borrowers, both in the
SSI as well as Non-SSI Sector, shall be assessed under Turnover
Method (except in the cases where the simplified procedure as
above is adopted) as follows:
(a)Projected Annual Gross Sales (Turnover)
________
(b) Working Capital Finance requirement at 25% of (a)
________
(c) Minimum Margin to be brought in by the borrower at 5%
for SSI & 6.25% for non SSI of (a)
or actual NWC, whichever is higher
________
(d) Working Capital Finance Permissible (b - c)
________

Note: While assessing future projections branch shall analyse

consistency of trends, its volatility and past performance both
financial and physical. While consistency in trends is a positive
picture, if a high degree of volatility beyond 10% to 20% tolerance
observed between projections made by the borrower/ accepted by
the bank and his actual performance, greater care and caution shall
be exercised while accepting projected turnover while
review/renewal.
SSI as well as Non-SSI borrowers requesting for higher Working
Capital Limits than permissible under Turnover Method may be

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assessed under EWCL Method also and may be sanctioned limits
as eligible under EWCL method.

II. Eligibile Working Capital Limit (EWCL) Method:

The EWCL Method shall be applied in the case of borrowers
seeking fund-based Working Capital limits of Rs. 2 Crores and
above (Non SSI) and Rs. 5 Crores and above (SSI) from the
Banking System but upto and inclusive of Rs. 20.00 Crores
from the Banking System and the assessment shall be carried out
as under:
Projections for the ensuing year
I. Total Current Assets
_______________
II. Current Liabilities other than Bank borrowings
_______________
III. Working Capital Gap (I-II)
_______________
IV. Bench-Mark Net-Working Capital (NWC) at 25%
of (I) or projected NWC, whichever is higher
_______________
V. Eligible Working Capital Limit (III-IV)
_______________
(a) Basis for Assessment:

The requirement of working capital finance is assessed on the basis

of projections of need based current assets for the ensuing year for
a reasonable business plan.
The extent of bank finance which can be sanctioned, will depend
on several factors as discussed below:

i) Estimation of Production/Sales:

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This should be examined against the borrower's production
capacity, past actuals and market trends.

ii) Level of Current Assets:

The need based level of current assets required to be maintained
for achieving the estimated level of production/sales include raw
materials, semi-finished and finished goods, consumable stores &
spares, receivables, advances to suppliers, etc. The levels of
current assets of each item of inventory as also receivables should
be decided keeping in view the past actuals maintained by the
borrower, overall levels of inventory and receivables and other
relevant factors affecting the production/sales of the unit.

iii) Current Liabilities:

Part of the current assets is financed by current liabilities other
than bank borrowings such as creditors for purchases, advances
from customers, accrued expenses, etc. The current liabilities also
should be projected based on the past trends and prevailing market
conditions.

iv) Working Capital Gap:

The difference between current assets and current liabilities (other
than bank borrowings) is termed as working capital gap which has
to be financed by banks/promoters.

III. Cash Budget Method

The working capital requirements of the borrowers seeking fund-
based limits of above Rs. 20.00 crores shall be assessed either
under CASH BUDGET Method or the EWCL Method discussed
earlier, as may be decided by the Bank. The corporate borrowers
whose management of finance is cash budget driven and the
existing clients of the bank who have a consistency good track

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record of fulfilling the specified norms/covenants – financial &
performance related – can opt for the assessment under Cash
Budget Method.
***