THE CASH BUDGET METHOD As already noted, the Reserve Bank of India has permitted the banks to choose

CashBudget Method, as one of the alternatives to MPBF method, in case of largeborrowers. This method endeavors to assess the credit requirements of a borroweron the basis of his projected cash inflows and outflows during a specific period of time.One of the important drawbacks of MPBF method is that the working capital limit islimited to the accepted level of current assets, and not much significance is attachedto the cash flows of the borrowers. Sometimes the receivables remain unrealizedfor longer period of time or inventories are accumulated for a longer period due topeculiar nature of demand. Thus the borrowers face the liquidity problem which isturn affects their production as need-based working capital limits taking into accounttheir cash flows, are not made available to them.Under the Cash Budget Method, the entire funds requirements of a borrower aretaken into account. Payments which are not inevitable and which may be incurredupon the availability of funds are not included. For example, payment of dividends,unrelated investments, diversion for creation of fixed assets for forward/backwardintegration are excluded from the total outflows. The Cash budget method thus helpsin arriving at need-based working capital limits. Thus this method avoidsaccumulation of larger current assets than actual requirements, diversion of fundsbecause of availability of surplus funds and also prevents sickness of the businessunits due to inadequate working capital funds. As the current assets are taken asprime security for working capital limits, banks can restrict their exposure to theextent of availability of the security.

The calculation of eligible bank finance under Cash Budget System is shown in thechart below:On the basis of the Cash Projections, quarterly Working Capital limits may be fixed.For monitoring of the utilisation of credit limits, the bank may call for data periodicallyi.e monthly, quarterly or half yearly, in addition to the balance sheet. If in a quarterexcess finance has been availed of, explanation may be called from the borrowerand a penal interest may be charged on the excess amount for the entire previousquarter to enforce financial discipline.