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 1st June 2007 to 31st July 2007.

The main objective of the project was to study various types of working capital finance provided by banks. To know details the procedure of assessment of working capital finance extended by banks.

Wheels of business cannot move without money. Availability of money is being limited and wants being unlimited. So procurement of fund is one of the important functions in commercial & non-commercial enterprises and utilizes it for maximization of business profits.

Business enterprises need funds to meet their different types of requirements, i. ii. iii. Long-term requirement Medium-term requirement Short-term requirement Working capital requirement is the short-term requirement. Working capital is the investment needed for carrying out day-to-day operations of the business smoothly. Bank is one of the important sources of working capital requirement. Bank 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. After discussing the procedure followed by bank, For assessing working capital requirement case studies have been given with necessary data in the prescribed forms demonstrate the calculable done by bank to arrive at maximum permissible bank finance. An inventory & receivables constitute the major portion of the total working capital requirement.


Our Philosophy o Technology with personal touch. Our Emblem The Deepmal o With its many lights rising to greater heights. 4 . The Childhood Known as a common man's bank since inception.Company Profile The Birth Registered on 16th Sept 1935 with an authorized capital of Rs 10. the bank expanded rapidly. The Bank has the largest network of branches by any Public sector bank in the state of Maharashtra.00 lakh and commenced business on 8th Feb 1936. The Adult The bank has fine tuned its services to cater to the needs of the common man and incorporated the latest technology in banking offering a variety of services. It now has 1292 branches (as of 30th September 2005) all over India. its initial help to small units has given birth too many of today's industrial houses. After nationalization in 1969.

The Autonomy The Bank attained autonomous status in 1998. It helps in giving more and more services with simplified procedures without intervention of Government.The Pillar o Our institution. One Bank. it has a good share of Priority sector lending having 46% of its branches in rural areas. overlooking the profit aspect. Our Social Aspect The bank excels in Social Banking. The 3 M's Symbolising • • • Mobilisation of Money Modernisation of Methods and Motivation of Staff. Maharashtra Bank". in the whole country. 5 . Our Aims The bank wishes to cater to all types of needs of the entire family.Symbolizing strength. Its dream is "One Family.

6 .68% of its total business through computerization.Other Attributes Bank is the convener of State level Bankers committee Bank has signed a MoU with EXIM bank for co-financing of project exports Bank offers Depository services and Demat facilities in Mumbai. Bank has captured 97.

OBJECTIVES To know the various types of working capital finance provided by banks. 7 . To apply these procedure at a practical level with the help of case studies. To analyze in detail the procedure of assessment of working capital finance extended by bank.

Discussion with the manager. Research Type Source of Data Sample Unit Sample Sample Technique Analysis Tool used Analytical Primary and Secondary Industries applying for loan Case studies Allocation of Case Financial Analysis Primary Data: Observation. The company profile. RBI guidelines etc. annual reports have been obtained from BOM. 8 . old sanction proposals. This analysis leads to the simple conclusions of whether to lend money to the institution for business. Secondary Data: Secondary data relating to the procedure of assessment of working capital finance.RESEARCH METHODOLOGY This is analytical research area where we analyses information with cause and its effects relationship. have been sourced from reference books. Also if the money is lend then there is reality the norms are not always perfect and hence it is essential to priorities stringent parameters and secondary parameters.

it is net current assets or net working capital. it is the net cash inflow. 2. work in process and finished goods. A study of working capital is of major importance to internal and external analysis because of its close relationship with the day-to-day operations of a business.INTRODUCTION TO WORKING CAPITAL In accounting.” Working capital is the difference between the inflow and outflow of funds. It is defined as the excess of current assets over current liabilities and provisions. Working capital may be regarded as the life blood of a business. inventories of raw materials. In other words. and represented at any one time by the operating cycle of such items as against receivables. current assets consist of these assets which are of short duration. The funds required and acquired by a business may be invested to two types of assets: 1. stores. notes or bill receivables and cash. Fixed Assets. Current Assets 9 . merchandise. Working capital comprises current assets which are distinct from other assets. Its effective provision can do much to ensure the success of a business while its inefficient management can lead not only to loss of profits but also to the ultimate downfall of what otherwise might be considered as a promising concern. Working Capital is the portion of the assets of a business which are used on or related to current operations. In the first instance. In other words.

10 . There are two concepts of working capital — Gross and Net. Other types of assets are equally important i. Gross working capital refers to gross current assets. The term current liabilities refer to those liabilities. receivables and cash. Net working capital refers to the difference between current assets and current liabilities.e. The various decisions like in which fixed assets funds should be invested and how much should be invested in the fixed assets etc. They are expected to be paid out of current assets or earnings of the business. Current Assets. which are to be paid off during the course of business. The current liabilities mainly consist of sundry creditors.Fixed assets are those which yield the returns in the due course of time. These types of assets are required to ensure smooth and fluent business operations and can be said to be life blood of the business. without reduction in value. bank overdraft or cash credit. The main types of current assets are stock. This can be said to be fixed capital management. outstanding expenses etc. The term current assets refers to those assets held by the business which can be converted into cash within a short period of time of say one year. within a short period of time say one year. are in the form of capital budgeting decisions. bill payable.

If the company has a certain amount of cash.NEED FOR WORKING CAPITAL The need of gross working capital or current assets cannot be overemphasized. and ultimately finished goods. E. This working capital cycle can be described in the following words. some amount of funds is blocked in raw materials. Technically. The object of any business is to earn profits. However some part of these current assets may be financed by the current liabilities also. finished goods.g. some raw material may be 11 . These finished goods when sold on credit basis get converted in the form of sundry debtors. finished goods and sundry debtors. The main factor affecting the profits is the magnitude of sales of the business. there is a cycle in which the originally available cash is converted in the form of cash again but only after following the stages of raw material. Thus. Thus. Thus. this is called as operating cycle or working capital cycle. it will be required for purchasing the raw material though some raw material may be available on credit basis. and the quantum of working capital needs varies as per the length of this time gap. There is a time lag between the sale of goods and realization of cash. Working Capital needs of company arise to cover the requirement of funds during this time gap. work in progress. sundry debtors and day-to-day requirements. But the sales cannot be converted into cash immediately. work in progress. There is a need of working capital in the form of current assets to fill up this time lag. which is the heart of need for working capital. Sundry debtors are converted in cash only after the expiry of credit period. there is a time gap for the original cash to get converted in form of cash again. Then the company has to spend some amount for labour and factory overheads to convert the raw material in work in progress.

all the expenses need not be paid immediately. As such.available on credit basis. However. The fixed assets are required to be retained in the business over a period of time and they yield the returns over their life. if the investment in current assets is more than what is ideally required. On the other hand. it is always beneficial from the liquidity point of view as it ensures smooth and fluent business operations. say one year. Sufficient raw material is always available to cater to the production needs. liberal credit period can be offered to the customers to improve the sales and sufficient cash is available to pay off the creditors and so on. which is not the case with fixed assets. it affects the profitability. This is precise reason why the needs for working capital arise. as it may not be able to yield sufficient rate of return on investment. it is always necessary to strike a proper balance between the liquidity and profitability principles. working capital management refers to proper administration of all aspects of current assets and 12 . E. But still the amounts required to be invested in these current assets is always higher than the funds available from current liabilities. whereas the current assets loose their identity over a short period of time. Thus. If the size of current assets is large. inability of the company to pay its dues in time etc. it is necessary to manage the individual components of current assets in a proper way. if the size of current assets is too small. In the case of current assets.g. sufficient finished goods are available to cater to any kind of demand of customers. it always involves the risk of frequent stock out. the nature of fixed assets and current assets differ from each other 1. workers are also to be paid periodically etc. 2. Hence. From the Financial management point of view. the investment in current assets should be optimum.

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.current liabilities. The intention is to have optimum investment in working capital. the various sources available for financing working capital requirements should be properly managed to ensure that they are obtained and utilized in the best possible manner. 13 . The intention is not to maximize the investment in working capital nor is it to minimize the same. In other words. current liabilities and inter-relationship between them. Moreover. The level of current assets to be maintained should be sufficient enough to cover its current liabilities with a reasonable margin of safety. Working Capital Management is concerned with the problems arising out of the attempts to manage current assets.

or work in progress or finished goods or even in debtors. On the other hand. their needs of working capital are higher. 14 . due to their very nature. if the production cycle is shorter. electricity boards. Their requirement of working capital is less. Naturally.FACTORS AFFECTING WORKING CAPITAL MANAGEMENT The amount of working capital required depends upon a number of factors which can be stated as below Nature of Business: Some businesses are such. that their requirement of fixed capital is more rather than working capital. the time gap between the acquisitions of raw material till the end of final production of finished product itself is quite high. On the other hand. Their requirement of the working capital is more. infrastructure oriented projects etc. As such more amounts may be blocked either in raw materials. These businesses sell services and not the commodities and not the commodities and that too on cash basis. Public utility services like railways. there are some business like trading activity. Length of Production Cycle: In some business like machine tool industry. E.g. no funds are blocked in piling inventories and also no funds are blocked in receivables. As such. the requirement of working capital is also less. where the requirement of fixed capital is less but more money is blocked in inventories and debtors.

the medium sized companies positively have an edge over the small companies. Business I Trade Cycles: If the company is operating in the period of boom. the working capital requirement will be higher.Size and Growth of Business: In very small companies the working capital requirements are quite high overheads. the working capital requirements may be high as the sales in terms of value and quantity may be reducing. the working capital requirements may be adversely affected by the increasing size. 15 . in case of depression also. Similarly. the working capital requirements may be more as the company may like to buy more raw material. there may be more and more amount of funds blocked in stock and debtors etc. the receivables may not be recovered in time etc. as a result of which more and more amounts is locked up in debtors or bills receivables which increase working capital requirements. due to the increased sales. But if the business starts growing after a certain limit. higher buying and selling costs etc. there may be unnecessary piling up of stocks without getting sold. Terms of Purchase and Sales: Sometimes. a part of working capital requirement may be financed by them. As such. On the other hand. if credit is offered by the suppliers of goods and services. may increase the production and sales to take the benefits of favourable markets. but if it is necessary to purchase these goods or services on cash basis. in case of purchases. due to competition or custom. it may be necessary for the company to extend more and more credit to the customers.

But high profitability will positively reduce the strain on working capital requirements of the company. research activities may be conducted. Attempts should be 16 . the following measures may be applied. However. For this purpose. because the profits to the extent that they are earned in cash may be used to meet the working capital requirements of the company. And these angles are: Taxation Policy: How much is required to be paid by the company towards its tax liability? Dividend Policy: How much of the profits earned by the company are distributed by way of dividend? Effect of Inflation on Working Capital Requirement: The phase of inflation can be identified with the situation of increasing price levels.Profitability: The profitability of the business may vary in each and every individual case. Possibility of using cheaper substitute raw material. As such. which in its turn may depend upon numerous factors. profitability has to be considered from one more angles so that it can be considered as one of the ways in which strain on working capital requirements of the company may be relieved. should be explored. However. without affecting the quality. in order to control the increasing demand for working capital during the period of inflation. the working capital requirements multiply during the phase of inflation due to increasing cost of production and increasing level of sales turnover. increasing demand and increasing supply.

Attempts should be made to make the payments of to creditors in time. Cash/Bank balance prepaid expenses etc. may be implemented. Quicker realization of debts will go a long way to reduce the stress on working capital requirements. Estimation of Working Capital Requirements: First of all estimates of all current assets should be made. This technique is known as Cash Cost technique of 17 . incentive schemes. the techniques like time and motion study. Attempts should be made to reduce the amount looked up in receivables. Attempts should be made to reduce the locked up working capital in non-moving or obsolete inventories. These current assets may include stock. Difference between the estimated current assets and current liabilities will represent the working capital requirements. For this purpose.moving and obsolete inventories. Aiming at greater turnover at short intervals will go a long way to reduce the stress on working capital requirements. cost reduction programmes etc.made to reduce the production costs to maximum possible extent. Similarly. If they do not match. A clear-cut policy should be formulated and followed for timely disposal of non. To this sometime a standard percentage may be added to take care of the contingencies. This helps the business to build up good reputation and increases its bargaining power with respect to period of credit of credit for payment and other conditions. Attempts should be made to reduce the operating cycle to the maximum possible extent. Attempts should be made to match the projected cash inflows and projected cash outflows. efficient management information system should be developed to reflect the position of inventory from the various angles. some of the payments should be postponed or purchases of certain avoidable items should be deferred. debtors.

these needs should be met out of the long term sources of funds. Variable or Temporary Working Capital: This indicates that amount of working capital required by the business which is over and above fixed or permanent or core working capital. which is required to be maintained by every business at any point of time. There are various methods available for financing the working capital requirements: Flied or Permanent or Core Working Capital: This indicates the amount of minimum working capital. out of the profits earned. in order to carry on the business on permanent and uninterrupted basis. There is another technique available for estimating working capital requirements also and that is in the form of Balance Sheet Method. these needs can be met from the various sources: 1.estimating of working capital requirements. As far as financing of the fixed or permanent needs of working capital are concerned. Own generation of funds. the difference between assets and liabilities indicating either the surplus or deficiency of cash. shares or debentures. This need of the working capital may vary depending upon the fluctuations in demand as a result of changes in production or sales. As far as financing of the variable or temporary needs of working capital are concerned. In this the forecast is made of various assets and liabilities. 18 . A part of these needs may be financed by way of the credits available from the suppliers of material or services and of delayed payment of expenses.

A part of these needs may be financed by way of long term sources of funds in the form of own generation of funds. Bank Credit as a Source of Meeting Working Capital Requirements: While bank credit is considered as a major source of meeting the working capital requirement of the industry.What should be the form in which working capital assistance may be extended? C]. 3. public deposits etc. shares. A major portion of these working capital needs are financed by the Banks. A part of these needs may be financed by way of long term sources of funds in the form of own generation of funds.2.What should be the security that should be obtained for extending the working capital assistance? 19 . out of profits earned. out of profits earned shares. A]. 4. debentures and other long term borrowings. the banks have to consider the following factors before meeting their requirements. debentures and other long term borrowing.What should be the amount of working capital assistance? B]. In financing the working capital needs of the business. the credit obtained from Banks plays a very important role.

after considering the margin requirements.Amount of Assistance: To obtain the bank credit for meeting the working capital requirements. On the basis of the estimates submitted by the company. The percentage of margin money may depend upon the credit standing of the company. Form of Assistance: After deciding the amount of overall assistance to be extended to the company. This margin is to provide the cushion against the reduction in the value of security. the company will be required to estimate the working capital requirements and will be required to approach the banks along with the necessary supporting data. Margin money is meant to take care of the possible reduction in the value of security. If the company fails to fulfill its obligations. fluctuations in the price of security or the directives of Reserve Bank of India from time to time. the bank may be required to realize the security for recovering the dues. the bank may decide the amount of assistance which may be extended. the bank can disburse the amount in any of the following forms Non-Fund Based Lending Fund Based Lending 20 .

while issuing the guarantee in favour of Company A. As such. As such. it is a Non-Fund Based Lending for Bank D. the funds position of the lending bank remains intact. Bank Guarantee is the mode which will be found typically in the seller’s market. D who is the Bank of Company B. this Non-Fund Based Lending becomes the Fund Based Lending for Bank D which can be recovered by Bank D from Company B. Bank D is required to make the payment to Company A due to failure on account of Company B to make the payment. For issuing the Bank Guarantee. As such. the lending bank does not commit any physical outflow of funds.Non-Fund Based Lending In case of Non-Fund Based Lending. it does not commit any outflow of funds. Company A does not know Company B and as such is concerned whether Company B will make the payment or not. Bank Guarantee: Suppose Company A is the selling company and Company B is the purchasing company. In such circumstances. either from Company B or from its Bank D. The Non-Fund Based Lending can be made by the banks in two forms- a. Bank D charges the Bank Guarantee Commission from Company B which gets decided on the basis of two factors-what is the amount of Bank Guarantee and what is the period of validity of Bank Guarantee. In case of this conventional for of Bank Guarantee. As such. As far as Bank D is concerned. opens the Bank Guarantee in favour of Company A in which it undertakes to make the payment to Company A if Company B fails to honour its commitment to make the payment in future. If on due date. interests of Company A are protected as it is assured to get the payment. both company A as well as Company B get benefited as it is able to make the 21 .

Bank Guarantee transactions will be applicable in case of credit transactions. In such circumstances. it will reimburse any losses incurred by Company B due to this non fulfillment of contractual obligations. the importer applies to his bank in his country to open a letter of credit in favour of the exporter whereby the importer’s bank undertakes to pay the exporter or accept the bills or drafts drawn by the exporter on the exporter fulfilling the terms and conditions specified in the letter of credit. Such Bank Guarantee is technically referred to as performance Bank Guarantee and it ideally found in the buyer’s market.credit purchases from Company A without knowing Company A. In this case. In some cases. Suppose that Company A which manufactures capital goods takes some advance from the purchasing Company B. interests of purchasing company are also to be protected. Bank C which is the banker of Company A opens a Bank Guarantee in Favour of Company B in which it undertakes that if Company A fails to fulfill its part of the contract. their needs to be to be some protection available to Company B. b. As such. Letter of Credit: The non-fund based lending in the form of letter of credit is very regularly found in the international trade. exporter is worried about getting the payment from the importer and importer is worried as to whether he will get the goods or not. 22 . In case the exporter and the importer are unknown to each other. Under these circumstances. If Company A fails to fulfill its part of contract to supply the capital goods to Company B.

the entire amount of assistance is disbursed at one time only. a fixed limit is stipulated by the Bank beyond which the company will not be able to overdraw the account. either in cash or by transfer to the company’s account. The Fund Based Lending can be made by the banks in the following forms- Loan: - In this case. the operations in cash credit facility are similar to those of overdraft facility except the fact that the company need not have a formal current account. As such. the lending bank commits the physical outflow of funds. Legally. it is on continuous basis. bank can ask for the repayment at any point of time.In this case. Cash Credit: - In practice. The loan may be repaid in instalments. but in practice. 23 . the company is allowed to withdraw in excess of the balance standing in its Bank account. overdraft is a demand assistance given by the bank i. Interest is payable on the actual amount drawn and is calculated on daily product basis. However. Here also a fixed limit is stipulated beyond which the company is not able to withdraw the amount. cash credit is a demand facility. It is a single advance. it is in the form of continuous types of assistance due to annual renewal of the limit. the interests will be charged on outstanding balance. Legally. the funds position of the lending bank gets affected. The interests is payable on actual amount drawn and is calculated on daily product basis.e. Overdraft: . However in practice.Fund Based Lending In case of Fund Based Lending.

Packing Credit: - This type of assistance may be considered by the bank to take care of specific needs of the company when it receives some export order. The Company gets only the present worth of the amount of bill. payable in yearly or half yearly installments. Packing credit is a facility given by the bank to enable the company to buy the goods to be exported. 24 . banks may grant the working capital term loans for a period of 3 to 7 years. The bank holds the bill as a security till the payment is made by the customer. While granting this facility to the company. On maturity. A fixed limit is stipulated in case of the company. beyond which the bills are not purchased or discounted by the bank. the difference between the face value of the bill and the amount of assistance being in the form of discount charges. If the company holds a confirmed export order placed by the overseas buyer or a letter of credit in its favour. the bank inevitably satisfies itself about the credit worthiness of the customer. it can approach the bank for packing credit facility.Bills purchased or discounted: - This form of assistance is comparatively of recent origin. bank collects the full amount of bill from the customer. This facility enables the company to get the immediate payment against the credit bills raised by the company. Working Capital Term Loans: - To meet the working capital needs of the company. The entire amount of bill is not paid to the company.

Obviously. The channels of investment are called current assets. the shorter the operating cycle larger will be the turnover of the fund invested for various purposes. The longer the period of conversion the longer will be the period of operating cycle. 25 . A standard operating cycle may be for any time period but does not generally exceed a financial year.Operating cycle: The time between purchase of inventory items (raw material or merchandise) and their conversion into cash is known as operating cycle or working capital cycle.

distribution and other expenses 26 . components Creation of receivables (Debtors) Creation of A/c payable (Creditors) Sales of Finished Goods Payments to creditors Warehousing of Finished Goods Manufacturing operation: wages & salaries. fuel. etc Office. selling.OPERATING CYCLE Cash Receipt from debtors Purchase of raw material. power.

pay wage bills & other manufacturing expenses. Conversion of receivables/debtors into cash. cash may have to be paid after a certain period. Conversion of stock in process into finished goods. iii.WORKING CAPITAL FINANCE A manufacturing concern needs finance not only for acquisition of fixed assets but also for its day-to-day operations. v. It may have to pass through the following stages to complete its operating cycle- i. Thus all enterprises engaged in manufacturing or trading or providing services require finance for their day-to-day operations. Conversion of finished goods into receivables/debtors or cash. ii. The total of all the current assets is called gross working capital & the excess of current assets over current liabilities is called net working capital. the amount required to finance day-to-day operation is called working capital & the assets & liabilities are created during the operating cycle are called current assets & current liabilities. store finished goods for marketing & grant credit to the customers. it may not have to keep inventories but it may have to provide credit facility to its customers. Similarly a concern engaged in providing services. A non-manufacturing trading concern may not require raw material for their processing. but it also needs finance for storing goods & providing credit to its customers. Conversion of cash into raw materials – raw material procured on credit. It has to obtain raw materials for processing. Conversion of raw materials into stock in process. iv. 27 .

The viability of a project depends on technical feasibility. bank should provide working capital finance according to production requirements. its increasing demand from various sectors of economy & its importance in the development of economy. commercial. marketability of the products. the bank has to examine the viability of the project before agreeing to provide working capital for it. financial & managerial feasibility. Financial institutions & bank while providing term loan finance to unit for acquisition of fixed assets does a detailed viability study. facilities to be given by the unit to its customers should also be assessed on the basis of practice prevailing in 28 . In the view of scarcity of bank credit. at a profitable price. In brief the project should satisfy the tests of technical. which depends on the nature of the activities of an enterprise & the duration of its operating cycle. availability of financial resources in time & proper management of the unit. The requirement of trade credit. a detailed viability study is necessary before agreeing to provide working capital finance. If a unit approaches banks only for working capital requirement & no viability study has been done earlier which is done at the time of providing term loans.When entrepreneurs for financing working capital requirements approach the banks. It has to be ensured that the unit will have regular supply of raw material to facilitate uninterrupted production. Therefore it is necessary to make a proper assessment of total requirement of the working capital. They have to ensure that the project will generate sufficient return on the resources invested in it. The unit should be able to maintain adequate stock of finished goods for smooth sales operation. Proper co-ordination amongst banks & financial institution is necessary to judge the viability of a project & to provide working capital at appropriate time without any delay.

a part of working capital requirement should be financed for the long term & partly by determining maximum permissible bank finance. After assessing the total requirement of working capital. it should also be ensured that carrying cost of inventories & duration of credit to customers are minimized.the particular industry/trade which assessing above requirements. 29 .

Inadequate levels of working capital may result in under-utilization of capacity and serious financial difficulties. Proper assessment of working capital requirement may be done as under- I. The ‘study group to frame guidelines to follow-up of bank credit’ (Tandon Study Group) appointed by Reserve Bank of India had suggested the norms for inventory and receivables regarding 1: major industries on the basis of company finance studies made by Reserve Bank process periods in the different industries. It also consults the representatives from industry and trade. It keeps a watch on the various issues relating to working 30 . Similarly excessive levels may lead to unproductive use of credit and unnecessary interest Burdon on the unit. Proper assessment of funds required for working capital is essential not only in the interest of the concerned unit but also in the national interest to use the scare credit according to production requirements. The norms suggested by Tandon Study Group are being reviewed from time to time by the Committee of Direction constituted by the Reserve Bank to keep a constant view on working capital requirements. discussions with the industry experts and feed-back received on the interim report. The committee has representatives from a few banks and it generally once in a quarter. Norms for inventory and receivables: If the bank credit is to be linked with production requirements.ASSESSMENT OF WORKING CAPITAL A unit needs working capital funds mainly to carry current assets required for its operations. it is necessary to assess the requirements on the basis of certain norms.

i. i. Banks make their own assessment of credit requirements of borrowers based on a total study of borrowers’ business operations and they can also decide the levels of holding each item of inventory as also of receivables which in their view would represent a reasonable built up of current assets for being supported by banks’ finance. the balance to come out of long-term funds. 31 . Computation of Maximum Permissible Bank Finance (MPBF): The Tandon Study group had suggested the following alternatives for working out the maximum permissible bank finance:a. A certain level of credit for purchases and other current liabilities inclusive of bank borrowings will not exceed 75 per cent of current assets.e. total current assets less current liabilities other than bank borrowings and finance a maximum of 75 per cent of the gap. i.e.). etc. receivables. it is necessary to project them correctly while calculating need of bank finance for working capital requirements.capital requirements and gives various suggestions to suit the changing requirements of the industry and trade. owned funds and term borrowings b. Banks may also consider suitable internal guidelines for accepting the projections made by the borrowers regarding sundry creditors as sundry creditors are taken as a source of financing current assets (inventories. owned funds and long term borrowings. e. Bank can work out the working capital gap. II. Borrower should provide for a minimum of 25 per cent of total current assets out of long-term funds.

The above minimum contribution of long-term funds is called minimum stipulated Net Working Capital (NWC) which comes from owned funds and term borrowings.It may be observed from the above that borrower’s contribution from long term funds would be 25 per cent of the working capital gap under the first method of lending and 25 per cent of total current assets under the second method of lending. including bills 110 discounted with bankers Other current assets 700 30 740 32 . projected as at the end of next year. including bills discounted with bankers 400 Receivables. Above two method of lending may be illustrated by taking the following example of a borrower’s financial position. Current Liabilities Creditors for purchase Other current liabilities Amt Current Assets Amt 380 40 180 200 Raw materials 100 Stock in process 300 Finished goods Bank borrowing.

In the second method. While estimating the total requirement of long-term funds for new projects.33:1 It may be observed from the above that in the first method. financial institutions/banks should calculate for working capital on the basis of norms prescribed for inventory and receivables and by applying the second method of lending. A project may 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. the borrower has to provide a minimum of 25 per cent of total current assets from long-term funds and gives a minimum current ratio of 1.First method Total current assets Less: current liabilities Other than bank borrowings 300 740 Second method total current assets 25% of above from long term sources 185 740 Working capital gap 25% of above from long term Sources 440 less: current liabilities 110 555 Other than bank borrowings 300 Maximum permissible bank 255 finance Maximum permissible bank 330 Finance Excess Bank borrowings Current ratio 70 1. Proper co-ordination between banks & financial institutions is necessary to ensure availability of sufficient working capital finance to meet the production requirement.17:1.17:1 Excess Bank borrowings Current ratio 145 1. 33 . the borrower has to provide a minimum of 25 per cent of working capital gap from ling-term funds and it gives a minimum current ratio 1.33:1.

Current assets: a. Finished goods including goods in transit h.III. Cash and bank balances b. Advances for purchases of raw materials. Investments c. Payment to be received from contracted sale of fixed assets during the next 12 months 34 . it is necessary to have proper classification of various items of current assets & current liabilities. All illustrative lists of current assets & current liabilities for the purpose of assessment of working capital are furnished below. Raw materials & components used in the process of manufactured including those in transit f. Installments by deferred receivables due within one year e. Receivables arising out of sales other than deferred receivables (including bills purchased & discounted by bankers) d. Prepaid expenses k. Advance payment for tax j. Stock in process including semi finished goods g. components & consumable stores l. Other consumable spares i. Classification of current assets & Current liabilities: In order to calculate net working capital & maximum permissible bank finance.

Statutory liabilities Provident fund dues Provision for taxation Sales-tax. Miscellaneous current liabilities Dividends Liabilities for expenses Gratuity payable within one year Any other payments due within one year ii.Current Liabilities: a. excise. Interest & other charges accrued but no due for payments f. Public deposits maturing within one year d. Short-term borrowings (including bills purchased & discounted) from Banks and b. Sundry creditors (trade) for raw material & consumer stores & spares e. Unsecured loans c. Obligation towards workers considered as statutory i. etc. h. Deposits from dealers selling agents. Advances/progress payments from customers g. Others 35 . etc.

Investment in shares. debenture. and advances to other firms/companies. 3. not connected with the business of the borrowing firm. should be excluded from current assets. 36 . 5. ‘Dead inventory’ i. 4. However. Security deposits/tender deposits given by borrower should be classified as noncurrent assets irrespective of whether they mature within the normal operating cycle of one year or not. as well as investment made and/or loans extended as inter-corporate deposits should not be included in the build-up of current assets while assessing maximum permissible bank finance. 2. slow moving or obsolete items should not be classified as current assets. where a part of advances received is required by government regulations to be invested in certain approved securities. the benefit of netting may be allowed to the extent of such investment and the balance may be classified as current liability. Therefore. Advances/progress payments from customer should be classified as current liabilities. export receivables may be included in the total current assets for arriving at the maximum permissible bank finance but the minimum stipulated net working capital may be reckoned after excluding the quantum of export receivables from the total current assets.Notes on classification of Current Assets & Current Liabilities: 1.e. etc. Similarly investment made in units of Unit Trust of India & other mutual funds & in associate companies/subsidiaries. The borrowers are not expected to make the required contribution of 25 per cent from long-term sources in respect of export receivables.

the borrower should be advised to make adequate provision so that he may be in a position to meet the liabilities as & when they accrue. The same principle may also be applied for disputed sales tax dues. 9. If disputed excise liability has been shown as contingent liability or by way of notes to the balance sheet. 7. The deposits. Where such disputed liabilities are treated as contingent liabilities for period beyond one year. should be classified as current liabilities. custom duty and electricity charges need not be treated as current liabilities except to the extent of provided for in the books of the borrower. etc.. received by the borrower may treated as term liabilities irrespective of their tenure if such deposits are accepted to be repayable only when the dealership/agency is terminated. selling agents. estimated amount payable within one year should be shown as current liabilities even if specific provisions have not been made for their payment. The amount of excise duty payable should be treated as current liability for the purpose of working out the permissible limit of the bank finance strictly on the basis of the certificate from the borrowers’ Statutory Auditors. Disputed liabilities in respect of income tax. 37 . excise. which do not fulfill the above condition. A certificate from the Statutory Auditors of the borrowers may be obtained regarding the amount collected from the customers in respect of disputed excise liability or provision made in the borrowers’ accounts. In case of other statutory dues. 8. etc.6. dividends. Deposits from dealers. it need not be treated as current liability for calculating the permissible bank finance unless it has been collected or provided for in the accounts of borrowers.

IV. fixed assets. the entire term loan investment falling due for payment in the next twelve months need not be treated as an item of current liabilities for the purpose of arriving at MPBF. However the entire amount of term loan installments due within the next twelve months should continue to be treated as current liability for the purpose of calculating the current ratio. As per the instructions issued by the Reserve Bank in October. Information/Data required for assessment of working capital: In order to assess the requirements of working capital on the basis of production needs. The scheme of credit authorization was changed into credit monitoring arrangement in 38 . Need not be taken into account while computing net working capital (NWC). current liabilities.10. etc. It may be added that the entire amount of term loan installments payable within the next twelve months which is kept outside the current liabilities while calculating MPBF. in order to ascertain the financial position of the borrowers & the amount of working capital needs to be financed by banks. long term liabilities. the Reserve Bank prescribed the forms in 1975 to submit the necessary details regarding the assessment of working capital under its credit authorization scheme. it is necessary to get the data from the borrowers regarding their past/projected production. current assets. operating profit. it is necessary to call for the data from the borrowers regarding their net worth. sales. cost of production. 1993. etc. cost of sales. However all overdue term loan should be treated as current liabilities unless the loan has been rescheduled by the financial institutions/banks.

goodsin-process. In addition to the information/data in the prescribed forms. a separate set of forms has been designed for traders and merchant exporters. bank may also call for additional information required by them depending on the nature of the borrowers’ activities & their financial position. 39 . As the traders and merchant exporters who do not have manufacturing activities are not required to submit the data regarding raw materials. power and fuel. The forms used under the credit authorization scheme for submitting necessary information have also been simplified in 1991 for reporting the credit sanctioned by banks above the cut-off point to reserve bank under its scheme of credit monitoring arrangement.1988. In view of the peculiar nature of leasing and the hire purchase concerns. etc. Maximum & minimum utilization of the limits during the last 12 months outstanding balances as on a recent date are also given so that a comparison can be made with the limits now requested & the limits actually utilized during the last 12 months.. Particulars of the existing/proposed limits from the banking system (form I) Particulars of the existing credit from the entire banking system as also the term loan facilities availed of from the term lending institutions/banks are furnished in this form. The data is collected from the borrowers in the following six forms: - 1. consumable stores. a separate set of forms has also designed for them.

The details of current liabilities. net sales. In case of inventory. power & fuel. Operating Statement (Form II) The data relating to last sales. depreciation. 40 . net worth. The figures given in this form should tally with the figures given in the form III where details of all the liabilities & assets are given.2. cost of raw material. 4. selling. term liabilities. direct labour. etc. interest. current year’s estimate & following year’s projections is given. general expenses. They are indicated in terms of numbers of months in bracket below their amounts. etc. in this form. 3. It also covers information on operating profit & net profit after deducting total expenditure from total sale proceeds. Analysis of Balance Sheet (Form III) A complete analysis various items of last year’s balance sheet. Comparative statement of current assets & current liabilities (Form IV) This form gives the details of various items of current assets and current liabilities as per classification accepted by banks. the holding/levels are given not only in absolute amount but also in terms of number of month so that a comparative study may be done with prescribed norms/past trends. current assets. are furnished in this form. other non-current assets. are given in this form as per the classification accepted by banks. receivables and sundry creditors.

41 . bank officials should hold discussions with the borrowers on projected sales. Computation of Maximum Permissible Bank Finance (Form V) On the basis of details of current assets & liabilities given in form IV. V. In addition to long term sources and uses. For this purpose.5. receivables. a visit to the factory may also be made to have a clear idea of products and processes. Check list for verification of the information/data: Bank should verify not only the arithmetical accuracy of the data furnished by the borrowers but also the logic behind various assumptions based on which the projections have been made. level of operations. level of inventory. 6. etc. Fund Flow Statement (Form VI) In this form. increase/decrease in current assets is also indicated in this form. Maximum Permissible Bank Finance is calculated in this form to find out credit limits to be allowed to the borrowers. if necessary. fund flow of long term sources & uses is given to indicate whether long term funds are sufficient for meeting the long term requirements.

In the second category it is convenient for the banker to fix the separate limit of the letter of credit.ASSESSEMENT OF OTHER LIMITS LETTER OF CREDIT The banker examines the proposal of the letter of credit from two angles: o The cases where letter of credit is required once only o The cases where letter of credit is required once regularly. 42 .

240lacs per annum and the normal lead time is 2 months. This period is also referred to as the lead-time. This is shown below Assessment of the limits under LC. Thus.40 Lacs.ASSESSEMENT OF THE LIMITS UNDER LETTER OF CREDIT-WITH LEAD TIME The buyer does not receive the goods immediately on the placement of the order on the seller. the buyer will be required to place order so that he has at least 2 months stock (ignoring safely level). There is always long time log between the order placement and the receipt of the material.40 Lacs Margin for customer @20%(B) Rs 8 Lacs Limits under letter of credit (A-B) Rs 32 Lacs 43 . Example: - If it is assumed that the total raw material requirement is Rs.with lead-time Annual requirement of raw material 240 Lacs Normal lead time 2 months Value per order (A) 240/6=Rs. the total number of order placed would be 6 per year and the value of per order would be Rs.

Appropriate conditions regarding cash margin and securities have to be laid down to protect the interest of the bank. The details pertaining to nature of guarantees. particulars of the contract. 44 . 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 required by borrower..Assessment of the limits under letter of credit-without lead-time Annual requirement of raw material 240 lacs Monthly requirement of raw material 240/12 months =20 lacs Normal inventory level (1 month) Rs 20 lacs Value per order (A) Rs 20 lacs Margin for customer @ 20% (B) Rs 4 lacs Limits under letter of credit (A-B) Rs 16 lacs BANK GUARANTEES There is no standard formula for assessment of bank guarantee limit. period for which the guarantee is sought and the amount of guarantee to be obtained.

Incase the payment defaults then the account will go into NPA in stages and the bank is then said to scrutinize the said account. 45 . The post sanctioning is the follow of the payment.PROCEDURE FOR WORKING CAPITAL FINANCE CREDIT SANCTION PROCESS The revised credit process is introduced with a view of reducing the time lag in the sanction of credit besides clearly delineating the areas of responsibilities of various functionaries. As per this the revised process is divide into two components that is Pre sanctioning and Post sanctioning In the pre sanctioning it is the only time that the bank can take due assessment and precautions to make sure that the investments are done for the benefit of the bank. PRE SANCTION PROCESS: - Obtain loan application When a customer required loan he is required to complete application form and submit the same to the bank also the borrower has to be submit the required information along with the application form.

In case the amount of loan required by borrower is 50 lacs and above he should be submit the CMA Report 46 . Profile for promoters/directors. senior management personnel of the company. is under: • Audited balance sheets and profit and loss accounts for the previous three year(in case borrower already in the business) • • • • Estimated balance sheet for current year. which is generally required to be submitted by the borrower along with the loan application.PRE SANCTION PROCESS APPRAISAL & RECOMMANDATION SANCTIONING ASSESSMENT The information. Projected balance sheet for next year.

47 .) Qualifications to balance sheet auditors remarks etc. Compliance regarding transfer of borrowers accounts from one bank to another bank Government regulation / legislation impact on the industry Acceptability of the promoter and applicant status with regards to other unit to industries. excise etc.) Pending suits having financial implication (Customs.Examine for preliminary appraisal RBI guidelines. Arrive at the preliminary decision. Depreciation method Revaluation of fixed assets. dues etc. Records of defaults (Tax. Trend in sales and profitability and estimates /projection of sales. Examine/analysis /assessment Financial statement (in the prescribed forms) refers figure WC cycle & BS assessment thumb rules. Production capacities and utilization: past & projected production efficiency and cost. Policies Prudential exposure norms and bank lending policy Industry exposure restriction and related risk factors. Financial ratio & Dividend policy.

Management quality. Close supervision and follow up are equally essential for safety of bank credit and to ensure utilization of fund lend.Estimated working capital gap W.R. Assess MPBF –determine facilities required Assess requirement of off balance sheet facilities viz. competence. o Monthly stock statement o Inspection of stock o Scrutiny of operation in the account 48 . POST SANCTION PROCESS Supervision and follow up: - Sanction credit limit of working capital requirement after proper assessment of proposal is alone not sufficient. Unique feature Profitability factors Inventory/Receivable level Capacity utilization Capital market perception.T acceptable buildup of inventory/receivables/other current assets and bank borrowing patterns.B/gs etc.L/cs. track records Company’s structure and system Market shares of the units under comparison. A timely action is possible only close supervision and followed up by using following techniques.

o Under information system o Annual audited report POST SANCTION PROCESS FOLLOW UP MONITORING & CONTROL SUPERVISION 49 .o Quarterly/half quarterly statements.


Consequent upon the withdrawal of requirement of prior authorization under the erstwhile credit authorization scheme (CAS) and introduction of a system of post sanction scrutiny under credit monitoring arrangement (CMA) the database forms have been recognized as CMA database. The revised forms for CMA database as drawn up by the sub-committee of committee of directions have come into use from 1st April 1991.

The existing forms prescribed for specified industries continue to remain in force. With a view to imparting uniformity to the appraisal system, database from all borrowers including SSI units enjoying working capital limits of Rs. 50 lacs and more from the banking system should be obtained.

The revised sets of forms have been separately prescribed for industrial borrowers and traders/merchant exporters. The details of forms are as under: -

Form 1: - particulars of the existing/proposed limit from the banking system.

Form 2: -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.

Form 3 : - Analysis of balance sheet.

It is complete analysis of various items of last years balance sheet; current years estimate and following years projection are given in this form.


Form 4 : - Comparative statement of current asset and liabilities.

Details of various items of current asset and current liabilities are given.

The figures in this form must tally with those in form III.

Form 5: - Computation of maximum permissible bank finance for working capital.

The calculation of MPBF is done in this form to obtain the fund based credit limits to be granted to the borrower.

Form 6: - Fund flow statement

It provides the details of fund flow from long term sources and uses to indicate weather they are sufficient to meet the borrowers long term requirements.


The various risk faced by any company may be broadly classified as follows:

Industry Risk: It covers the industry characteristic, compensation, financial data etc.

Company/ business risk: It considers the market position, operating efficiency of the company etc.

Project risk: It includes the project cost, project implementation risk, post project implementation etc.


Management risk: It covers the track record of the company, their attitude towards risk, propensity for group transaction, corporate governance etc.

Financial risk: financial risk includes the quality of financial statements, ability of the company to raise capital, cash flow adequacy etc.


The drawing power that a borrower enjoys at any 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 explained with the following illustration


Suppose a borrower has Rs 100.00 lacs as working capital limit sanctioned to him by a bank.

The security provided by the borrower to the bank is the hypothecation of inventory. Suppose, the borrower needs to hold an inventory level of say 130 lacs in order to enjoy Rs 100 lacs as his working capital limit.

The actual level of inventory with the borrower at a point is say 110 lacs.

The inventory margin prescribed by the bank is say 25 %

Therefore with this inventory level, the borrower enjoys only Rs 82.5 lacs as his working capital limit as against Rs 100 lacs.


25 × 150) = Rs. in this case the borrower would still enjoy Rs 100 lacs as his working capital limits as against Rs 112.25× 110) = Rs 82. 53 .5 lacs Suppose. the borrower holds Rs 150 lacs of inventory. Therefore.Inventory level (Required) Rs 130 lacs Drawing power of borrower Rs 100 lacs Inventory level (Actual) Rs 110 lacs Margin prescribed by bank 25 % Drawing power of borrower 110-(0.5 lacs. 112.2 lacs Therefore. the lower of the two is always considered as the working capital limit or the drawing power of the borrower sanctioned by the bank. Inventory level (required) Rs 150 lacs Drawing power of borrower Rs 100 lacs Inventory level (actual) Rs 150 lacs Margin prescribed by bank 25 % Drawing power of borrower 150 − (0.


Banks need some security from the borrowers against the credit facilities extended to them to avoid any kind of losses. securities can be created in various ways. Banks provide credit on the basis of the following modes of security from the borrowers.

Hypothecation: under this mode of security, the banks provide credit to borrowers against the security of movable property, usually inventory of goods. The goods hypothecated, 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. Although the bank does not have the physical possession of the goods, it has the legal right to sell the goods to realize the outstanding loans.

Hypothecation facility is normally not available to new borrowers.

Mortgage: It is the transfer f a legal / equitable interest in specific immovable property for securing the payment of debt. It is the conveyance of interest in the mortgaged property. This interest terminated as soon as the debt is paid. Mortgages are taken as an additional security for working capital credit by banks.


Pledge: The goods which are offered as security, are transferred to the physical possession of the lender. An essential prerequisite of pledge is that the goods are in the custody of the bank. Pledge creates some kind of liability for the bank in the sense that ‘Reasonable care’ means care, which a prudent person would take to protect his property. In case of non-payment by the borrower, the bank has the right to sell the goods.

Lien: The term lien refers to the right of a party to retained goods belonging to other party until a debt due to him is paid. Lien can be of two types viz. Particular lien i.e. A right to retain goods until a claim pertaining to these goods are fully paid, and General lien, Which is applied till all dues of the claimant are paid. Banks usually enjoyed general lien.



Working capital is made available to the borrower under the following arrangements;


RBI till 1997 made it obligatory for availing working capital facilities beyond a limit (Rs 500 million in 1997), through the consortium arrangement. The objective of the arrangement was to jointly meet the financial requirement of big projects by banks and also share the risks involved in it.

While it consortium arrangement is no longer obligatory, some borrowers continue to avail working capital finance under this arrangement. The main features of this arrangement are as follows;

Bank with maximum share of the working capital limits usually takes the role of ‘lead bank’.

Lead bank, independently or in consultation with other banks, appraise the working capital requirements of the company.

Banks at the consortium meeting agree on the ratio of sharing the assessed limits.

Lead bank undertakes the joint documentation on behalf of all member banks.

Lead bank organizes collection and dissemination of information regarding conduct of account by borrower.


independent of each other. monitoring and conduct of the account Borrowers deals with all financing banks individually.MULTIPLE BANKING ARRANGEMENT Multiple banking is an open arrangement in which no banks will take the lead role. SYNDICATION A syndicated credit is an agreement between two or more lenders to provide a borrower credit facility using common loan agreement. It is similar to a consortium arrangement in terms of dispersal of risk but consist of a fixed repayment period. It is internationally practiced model for financing credit requirements. wherein banks are free to syndicate the credit limit irrespective of quantum involved. Banks. The major features are – Borrower needs to approach multiple banks to tie up entire requirement of working capital. Banks independently assessed the working capital requirements of the borrower. Most borrowers are shifting their banking arrangement to multiple banking arrangements. 57 . do documentation.

These norms have been greatly influenced by the reconditions of various committees appointed by the RBI from time to time. are as follows: It is the borrower who decides how much he would borrow . the industrial system has become vary complex.REGULATION OF BANK FINANCE INTRODUCTION Bank follows certain norms in granting working capital finance to companies. The industries today lack optimizing the use of inputs. The norms of working capital finance followed by banks are mainly based on the recommendation of Tandon committee and chore committee. therefore. These committees were appointed on the presumption that the existing system of bank lending of number of weakness industries in India have grown rapidly in the last three decades as result of which.the bankers does not decide how much he would lend and is. Their techniques of managing funds are unscientific and non-professional. conserving resources etc. The weakness of the existing system highlighted by the Dehejia committee in 1968 and identified by the tondon committee in 1974. The 58 . the banks lending practices and styles have remained the same. The banks role has shifted from trade financing to industrial financing during this period. in reducing costs. Industries today fail to use bank finance efficiently. not in a position to do credit planning. However.

bank credit is treated as the first sources of finance and not as supplementary to other sources of finance. Funds since all bad sticky advances are secure advances. Security does not by itself ensure safety of bank. 59 . We discuss the following committee’s important finding and recommendations for bank finance: • • TANDON COMMITTEE CHORE COMMITTEE. The amount of credit is extended is based on the amount of security available and not on the level of operations of the borrower. Safety essentially lies in the efficient follow up of the industrial operations of the borrower.

Its report laid down as to how the credit ratio of individual borrowers could be fixed at imposed certain obligation on them for the efficient use of the credit made available.TANDON COMMITTEE INTRODUCTION: The Tandon committee was appointed by the RBI in July 1974 and headed by Shri. Tandon. Prakash L. 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 system. This would facilitate credit planning at the banks level and help the banker in evaluating the borrower’s credit needs in a more realistic manner. which had become a scare commodity. the method and criterion adopted for fixing credit ration needed to be standardized so that there is minimum scope for miss-use or part of the credit uses. The Tandon committee was concern exactly with this problem. 60 . The recommendation of the Tandon committee based on the following notions: The borrower should indicate the demand for credit for which he should draw operating plans for the ensuring year and supply them to the banker. The larger sector of the industry needed strict rationing becomes It was over relying on bank finance and pre empted most of it while the other sectors were not getting even their due share. Bank credit. strictly rationed to meet the credit requirement of all the sectors. Therefore.

Recommendation of Tandon committee accordingly. particularly inventory and receivable. The committee suggested the maximum level of raw material. The borrower maintained reasonable levels inventories and receivables. economic ordering levels and reasonable factor safety should be financed by the banker. stock in process. the borrower should depend on his own fund. Only the normal inventory based on a production plan. finished goods. lead-time of supplies. The working capital needs of borrower cannot entirely finance by the banker. The banker will finance only a reasonable part of it for the remaining.The banker should finance only the genuine production needs of the borrower. which corporate in an industry should be to hold. the Tandon committee put forth in the following recommendations Inventory and receivables norms The borrower is allowed to hold only a reasonable level of current asset. Efficient management of resources should therefore be ensured to eliminate slow moving and flabby inventories. 61 .

the remaining 75 % can be financed from bank borrowings.Lending norms: The banker should finance only a part of the working capital gap. whichever is lower. The current asset will be taken on the estimate values or values as per the Tandon committee norms.e owned fund and term borrowings. This method was considered suitable only for very small borrowers where the requirement 0 credit was less than Rs 10 lacs The borrower will contribute 25 % of the total current assets from long-term funds i. This method gives a current ratio of 1. owned funds and term borrowings. MAXIMUM PERMISSIBLE BANK FINANCE: The Tandon committee suggested the following three methods of determining the permissible level of bank borrowings- The borrower will contribute 25 % of the working capital gap from long term fund i. the current liabilities inclusive of bank borrowing could not exceed 75 % of current assets.3:1. and other current assets (OCA). This 62 . A 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. The current will consist of inventory and receivables. referred as chargeable current assets (CCA). This method gives a minimum current ratio of 1:1. Consequently. the other part should be financed by the borrower form long-term sources.e.

finished goods and stores. which was to be regulated over a period of time depending on the funds generating capacity and ability of the borrower. In some cases.20 lacs from the bank. This method covers straightness the current ratio.method was considered for all borrowers whose credit requirements were more than Rs 10 lacs. 63 . The third is the ideal method. defined at the absolute minimum level of raw material. This method applies to all borrowers having credit limit in excess of Rs. the net working capital was negative or 25 % of the working capital gap. which are in the pipeline. However this method was not accepted for implementation. processed stock. The new systems allowed this deficiency to be financed in addition to the permissible bank finance by the bank. For additional credit in subsequent year. A minimum level of the 25 % of the balance of the current assets should be finance from the long term funds and term borrowings. This kind of credit facility is called working capital demand loan. the borrower’s long-term sources were required to provide 25 % of the additional working capital gap. Borrowers in the second stage are not allowed to revert to the first stage. The borrower will contribute 100 % of core current assets. The working capital demand loan is not allowed to be raised in the subsequent year.

Information should be provided in the following forms: 64 . The new CC limit should be placed on a quarterly budgeting reporting system. which the borrower expected to use through out the year. The cash credit limits sanctioned (fluctuating) are currently 205 and the loan components (fixed) are 80 %. The interest rate on the loan components should be charged lower than the cash credit amount.4. The RBI has stipulated the interest differentiate at 1 %. The fixed component is then treated as demand loan for the year representing minimum level of borrowing. 5) INFORMATION SYSTEM: 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. Style of credit: The committee recommended the bifurcation of total credit limit into fixed and fluctuating parts. It could be partly used by way of bills. The fluctuating component is taken care of by a demand cash credit.

Also. actual current asset and current liabilities for the latest completed quarter should be mention. Half year operating statement form IIIA: Actual operating performance for the half year ended against the estimate should be mentioned. also. the current asset current liabilities estimates for the next quarter should be mentioned. Half year fund flow statement: Form IIIB: It should contain the estimate as well as the actual sources and use of fund for the half year ended. Borrowers with a credit limit of more than1 crore are required to supply the quarterly information. Quarterly information system: Form II: It should contain the actual production and sales finger during the current year and the latest completed year. 65 .QUARTERLY INFORMATION SYSTEM: FORM: It should contain the production and sales estimates for the current and next quarter. The bank to follow up and supervise the use of credit should properly use the information supplied by the borrower.

A+/. The bankers have found a difficult to implement the committee’s recommendations. However. The recommendations of the Tandon committee have been widely debated and criticized.The bank must ensure that the bank credit was used for the purposes for which it is granted. The bank should confirm whether the actual result is in conformity with the expected results. the Tandon committee has brought about a perceptible change in the outlook and attitude of both the banker and their customers. keeping in view the borrowers operation and environment. The committee has help in bringing the financial discipline through a balanced and integrated scheme of bank lending. The banker should be treated as a partner in the business with whom information should be shared freely and frankly. even today continue to look at the needs of the corporate in the light of recommendation of the Tandon committee 66 . They have become quite aware in the matter of making the best use of a scare resource like bank credit. Most of banks in India.10% variation is considered normal.

DBCOD. K. Chief Officer. Chore. RBI.CHORE COMMITTEE INTRODUCTION In April 1979. 67 . In case the borrower is unable to comply with this requirement immediately. the RBI constituted a working group to review the system of cash credit under the chairmanship of Mr. The WCTL should be paid in seamy annual installments for a period not exceeding 5 years and a higher rate of interest than under the cash credit system would be charged. B. This procedure should apply to those borrowers. he would be granted excess borrowing in the form of working capital loan (WCTL). The committee suggested placing the second method of lending as explain in the Tandon committee report. RECOMMENDATION OF CHORE COMMITTEE: - Bank credit: - Borrower should contribute more funds to finance their working capital requirement and reduce their dependence on bank credit. having working capital requirements of more than Rs 10 lacs. The main terms of reference for the group were to review the cash credit discipline and relate credit limit to production.

Bank should scrutinize the cash credit accounts of large borrowers one’s a year. over the normal rate) Bank should discourage ad hoc or temporary credit limits. Bifurcation of cash credit account into demand loan fluctuating cash credit component.e. Lending system: The system of three types of lending should continue i. Any deviation in utilization of funds Beyond 10% should be considered irregular and is subject to penalty fix by the RBI (2% p. the bank should replace cash credit system by loan and bills. 68 .LEVEL OF CREDIT LIMIT Bank should appraise and fix separate limits for the “peak level” and normal “non pick level” credit requirements for all borrowers in excess of Rs. the borrower should indicate in advance his need for funds during the quarter.a. cash credit loan and bills wherever possible. If sanction under exceptional circumstances the same should be given in the form of a separate demand loan and additional interest of at least 1% should charged. 10 lacs indicating the relevant periods. as recommended by the Tandon committee should discontinue. With the sanctioned limits for these two periods.

more than the contracted rate. If the borrower does not submit report within the prescribed time. he should be penalized by charging a penal rate of interest. Delays on the part of the banks in sanctioning credit limits should be reduced in cases where the borrowers cooperate in giving the necessary information about their past performance and future projection in time. Banks 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 quarterly reports. Information System The discipline relating to the submission of Quarterly Statements to be obtained from the borrower should be strictly adhered to in respects of all borrowers having working capital limits of more than Rs. a. 69 . which is 2% p. Other recommendations: Request for relaxation of inventory norms and for ad hoc increases in limits should be subjected by banks to close scrutiny and agreed only in exceptional circumstances.Advances against books debts should be converted to bills wherever possible and at least 50% of cash credit limit utilize for financing purchases of raw material inventory should also be charged to the bill system.50 lacs.

K may be set up to encourage the bill system of financing and to facilitate all money operations. There should be a “cell” attached to the chairmen’s office at the central office of each bank to attend to matters like immediate communication of credit control measures at the operational level. 70 . Bank should give particular attention to monitor the key branches and critical accounts. The communication channels and system and procedures with in the banking system should be toned up so as to ensure that minimum time is taken for collection of instruments. The central offices of bank should take a second look at the credit budget as soon as changes in the credit policy are announced by the RBI and they should revised their plan of action in the right of new policy and communicate the corrective measures at the operational levels at the earliest.Autonomous institutions on the lines of the discount houses in U.

Indicates how high the stake of the creditors is. Anything over 5 should be viewed with concern. Indicate what proportion of the company finance is represented by the tangible net worth.33. The lower the ratio.FINANCIAL RATIOS CURRENT RATIO=CURRENT ASSET/ CURRENT LIABITIES Help to measure liquidity and financial strength. stability and degree of solvency. greater the solvency. 71 . The higher the ratio betters the liquidity position. Indication of net margin of profit available on Rs. Generally it should be at least 1. OPERATING PROFIT RATIO=OPERATING PROFIT/NET SALES×100 This ratio indicates operating efficiency. TOL/TNW=TOL/TANGIABLE NET WORTH Indicate size of stakes. 100 sales. The ratio should be studied at the peak level of operations. indication of availability of current assets to pay current liabilities. Trend for company over a period should be encouraging.

With the help of this ratio (popularly known as DSCR). It is in order to ask for this sum in reduction of loan. This ratio of 1. We have already touched upon depreciation as non cash expenditure and since the funds are available with the enterprise to that extent.DSCR(DEBT SERVICE COVERAGE RATIO)=DEPRICIATION+INTREST ON TERM LOAN/ INTREST ON TERM LOAN+INSTALLMENT OF TERM LOAN It indicates the number of times total debt service obligation consisting of interest and repayment of the principal in installment is covered by the total fund available after taxes.5 to 2 considered adequate. 72 . Higher the ratio more is the security to the lender. we can find out whether the loan taken for acquisition of fixed assets can be rapid conveniently. INTEREST COVERAGE RATIO=EARNINGS BEFORE TERM LOAN AND TAXATION / INTEREST ON TERM LOAN The ratio indicates adequacy of profit to cover interest.

41 84.Intang Ass.66 * Net Worth Less: Revaluation Reserves Less: Intangible Assets Tangible Net Worth 31.53 TL 12.43 Unsec Ln TL from BOM TL(car) Scred Bk Borr OCL TCL 31.04 Audited Capital 17.91 51. 18.01 2.32 31.03.91 51.53 31.03.76 9.42 129.Dom Export OCA TCA Inv Tot NCA Acc Loss Tot.84 FA Depr.41 18.96 184.84 Liabilities 31.46 81.41 84.18 1.Analysis & Interpretation of the data Case studies Case study 1: Comparative Balance Sheet and Performance / Financial Indicators: Abridged Balance sheet (Rs in lacs) 31. Tot Ass 31.84 84.15 13.15 26.11 0.38 15.41 31.96 184.09 9.00 35.73 21.00 FG Rec.03.61 16.38 17.06 Prov.35 Tot Liab 40.46 WIP 1.85 6.03.88 13.51 1.53 Reserves NW 17.84 73 .53 17.2004 17.53 0.05 Audited Audited 23.26 1.13 2.04 31. 150.20 12.03.00 15.30 20.66 40.31 2.23 0.98 Cash & Bank RM 2.84 15.64 5.06 84.19 23. Net Block 18.03.05 31.05 18.06 Assets Audited Prov.03.98 2.71 55.77 8.70 15.47 0.

05 95.53 1.62 4.41 2. Besides BHEL (Hyd) have also started placing sample orders.18 40.57 1.PERFORMANCE / KEY FINANCIAL INDICATORS: (Rs in Lacs) Particulars Net Sales % Increase / Decrease Net Profit After Tax % to Net Sales Cash Accruals TNW excl Revaluation Reserve TOL / TNW Ratio NWC Current Ratio 31. During the year up to Nov’05 the firm has already done sale of Rs.42 17.00 lacs by this year end.00 lacs from BHEL (Haridwar) are on hand scheduled to be completed before March’06.00 Lacs.33 14.70 70. Against this backdrop the estimated profitability of 4. Orders worth Rs.41 1. 100.03.89 0.11 71.00 88% 8. 250.93% 7.00 lacs besides the job work. During discussion it is clarified that as the firm has shifted its focus from mare job work to direct 74 .06 180. and HAL for use of its products – DSC & ESC. Sales: As partners have been engaged in marketing the new technology to various users for the initial 2/3 years vigorously and their efforts are started yielding results. Agreement with NTPC through BHEL (Haridwar) is exclusive supply (not to any other companies) for annual turnover of Rs.35 3. Completion of this of these orders will enable the firm to achieve a sale of Rs.84 1.79% 30.69 1.00%. The orders are of repetitive nature.79% in the current appears unreasonable.57 31.55% 0.01% 6. 2. 150.03.03. 250.04 56. During the year 2005 the firm has obtained approval from BHEL.47 2. This is acceptable. NTPC.1% 0. The firm has also been able to secure orders from HAL (Koraptut) for DSC & ESC.40 31. Profit: Hitherto the net profit in terms of sales has been about 1.04 84.82 18.28 18.

TNW: Up to 2004-05 the TNW has been increasing with retention of profits. This payment was to the tune of 25% (appx) of the job work revenue.95 lacs p.03 lacs. Accordingly the net profit for the 2nd year would be Rs.70 lacs and then Rs. 32. 30. This appears to be on the higher side. In the coming 7 years the firm has estimated profitability ranging from 8.00 lacs we may accept the profitability of 4. In fact it has set up its own machining plant and has secured approval from BHEL for the Quality of its own materials.5%. It used to pay for job works to other companies/firms for the machining purpose. 30. a. Remaining Rs 20. 14.62 lacs respectively.00 lacs for the year 2005 followed by Rs. It is informed that depending upon the advice of their auditors they would be either increasing the amount of individual capital and/or brings in unsecured loans from friends/relatives to be converted to capital over a period of time. 3. Moreover with increased sales the marginal revenue would be proportionately high adding to the increased yield. 4. In view of the above factors we may accept the profitability estimates made by the firm. Besides. 46.00 lacs. margin of direct selling of its materials is better.00 lacs from internal accrual.5% to 12. For the year 2005 as the job work is being done in-house the expenses are estimated to be hardly 5%. 13. As the sales are estimated to stabilize at Rs. In the year 2005 for the expansion plan the partner have agreed in bring in additional capital of Rs. Thus with accepted profitability the accrual would be Rs. Since the existing work is being carried out from their own sources the branch is advised to obtain a CA’s certificate certifying the amount investing that will be 75 . Rs. 312.selling the margin will be high. Cash Accrual: With addition to fixed assets the depreciation shall be high. The position is acceptable. We have discussed the issue of infusion of capital by partners.79% as acceptable for the year 2005.

5 month to 1. Inventory & receivables: Except the receivables the firm has estimated other current asset as per past trend and hence acceptable. R. The holding level of receivables has been 1.: Both the parameters have been well above their respective benchmark levels and are estimated to improve further over the existing levels.03. Working capital assessment: A. NWC & C. 30. For the current year it has estimated the same to 76 .18 which is acceptable being well within benchmark level. Assessment of present proposal: A. Thus the overall financial position of the firm is satisfactory. Since the cash accrual for the year 2005 is accepted at Rs. 5. 6. However the partners have informed that after the expansion is completed in March 06 they may approach us for additional working if required at that point of time.00 lacs the remaining contribution of Rs.75 months sales. TOL/TNW: The ratio has been below 2. It may be mentioned that even though the firm is increasing its production capacity and consequently sales it has not requested any additional working capital. Sales projections: Already discussed. ii.00 up to 31. 20.considered as their contribution.05 and with proposed capital infusion the same is estimated to be about 1. Comments on: i. During discussion it is gathered that with direct selling the payment term would be 90 % against supply of materials which would improve its cash flow and hence there will not be additional requirement of working capital.00 lacs from partners appears reasonable.

41 17.93 Projected 55.00 15. OCL Excl. Actual/Projected NWC f. Total current assets b. short term BB c.11 18.00 lacs worth of orders from BHEL in next 4 months ( At least Rs 80.be 2. Min.09 23. Creditors have been nil and are estimated to be nil too.62 9. It is clarified that as the firm would be executing Rs 150.35 13.08 40.90 Audited 31.62 13. MPBF i.00 23.52 5.61 0.47 23. Stipulated NWC (25% of TCA) e.51 15.03. Working of MPBF: WORKING OF MAXIMUM PERMISSIBLE BANK FINANCE: (Rs in lacs). Item c-e h. Working Capital Gap(a-b) d.15 31.06 Audited a.35 55. Item c-d g.11 9.05 31.04 31. excess borrowings if any 14. Hence the estimates appear reasonable.33 months.35 41.03.08 13.55 7.84 77 . Against this background PBF is calculated as under. B.00 lacs as accepted by us) there will be concentration of debtors at the year end.70 0.03. Particulars 31.

34 0.34 (NCA) 1.75 6.47 78 31.30 4.92 1.30 1.00 Advance/Deposits 0.17 28.03.30 31.16 56% 0.53 2.59 1.81 31.74 48.03.05 31.52 0.68 59.68 101.05 31.15 29.25 3.99 68.05 (audited) 1126.45 1.23 4.63% 0.18 0.03.30 41.23 4.69 70.63 13.60 3.Case Study 2: Comparative Balance Sheet and Performance / Financial Indicators: Bridged Balance Sheet: (Rs in lacs) 31.06 68.99 Net Worth Less: Revaluation Reserves Less: Intangible Assets Tangible Net Worth 31.09 58.06 41.77 36.33 161.04 31.42 2.86 Stock Recurring Dep Cash OCA Chits Total 34.75 2.07 48.06 Assets (Audit) (Audit) (Estm) (Audit) (Audit) 27.77 1.87 45.87 27.03.81 41.51 36.03.91 31.03.74 3.20 1.49 .42 31.06 (estimated) 1749.62 101.07 (projected) 1866.10 2.00 3.42 31.71 100.04 2.14 2.04 31.30 36.04 PERFORMANCE / KEY FINANCIAL INDICATORS: (Rs in Lacs) Particulars Net Sales % Increase / Decrease Net Profit After Tax Cash Accruals TNW excl Revaluation Reserve TOL / TNW Ratio 31.77 27.89 Liabilities Capital Unsec Ln Term Loan Sundry Creditors Bank Borrowing Chits Other liabilities Total 31.36 1.64 55% 0.04 48.08 6.24 11.41 3.26 0.03.05 36.03.06 (Estm) 4.2004 27.21 25.00 5.03.89 161.42 Net Block 3.04 (audited) 720.71 1.03.00 1.68 Sundry Debtors 24.

536 lacs : Rs. was Rs.04. as per last review.55 43.44 Net Sales: The firm deals in the products of Hindustan Lever Ltd and Bharti Tele Ltd (Airtel).79 1. From October 05. 135 lacs : Rs.04.51 1. Lakme products of Hindustan Ltd and the products of Airtel. with a growth of 95% over previous year. 1750. Achievement is 80%. For the year 01. the firm was dealing in detergents.68 35. 1866.64 lacs and for the next year. 1405 lacs.00 lacs during the current year appears reasonable.08 lacs.05 to 31. the firm added the business of personal of Hindustan Lever Ltd.62 1. In this connection. 121 lacs (Oct 05 to Jan 06) : Rs.01.06 is as under: Detergent of Hindustan Lever Ltd Lakme of Hindustan Lever Ltd Personal products of HLL Airtel Total : Rs. The performance of the firm during the year 01. As per the estimate. the 79 .05 to 31.38 50. However the actual sales were Rs. the firm has estimated a sale of Rs. with a growth of 56%. Till September 05. the firm has informed that the estimated growth of 20% in Hindustan Lever products could not be achieved and hence the variation. of dealers as well as product consolidation. 1126 lacs. The estimated sale for 2004-05. 1434 lacs in the first ten months the estimated sales of Rs.01. projected a sale of Rs. 1434 lacs Considering the actual sale of Rs. 1749. This is due to policy changes contemplated by HLL to reduce the no.06. 642 lacs : Rs.19 1.NWC Current Ratio 26.

Tangible Net Worth: The firm has been maintaining the TNW at a satisfactory level.3% growth) : Rs. but the margin is very thin. Net Profit: The firm has been earning profits consistently. 168 lacs (24%) : Rs. The profitability has been between 0.growth in sales during the year 05-06 is 55% compared to 04-05.28%) : Rs. Hence it is acceptable. 80 . 4. During 2004-05 the profitability further dropped as compared to its previous year mainly due to competitive pricing in the consume/personal goods segments offered by various companies. the firm has projected a sale of Rs. 388 lacs (7% annualized) : Rs.00 lacs followed by Rs. Major portion of the profits are retained in the business. The position is acceptable. with the break up of sales as under: Detergent of Hindustan Lever Ltd Lakme of Hindustan Lever Ltd Personal products of HLL Airtel Total : Rs.23% in the year 2005-06 followed by similar trend in the next year. appears achievable in view of the performance of the firm in the past and during the year till Jan 06.25% in 2004-05 and is estimated to be 0. During the year 2005-06 the firm has proposed to infuse additional capital of Rs.00 lacs in the next year. the firm has informed that they were allotted more areas/jurisdiction by Hindustan Lever Ltd. 602 lacs (12. The estimated/projected sales. The trend is estimated/projected to continue. 1866 lacs. 2. 1866 lacs The growth of the sale projected for the next year is around 7%. For the next year. in this connection. 708 lacs (10.

Working capital assessment Comments on: i. An undertaking is to be obtained not to repay this unsecured loan during current of our credit facilities.TOL/TNW: The ratio has been consistently below the bench mark level. A suitable certificate from the CA is to be obtained to this effect. Inventory: As per past trend. the present level estimated/projected is higher in view of view of the additional borrowings for the increased turnover. ii. the level of stocks held by the firm is between 18 days to 20 days during last tow years and the same is estimated to be 15 days in this year 2005-06. However compared to the previous years. Current Ratio: The firm has been maintaining current ratio at a satisfactory level. Through the estimated level for the year 2005-06. Assessment of Proposal: A. 4. This being an improvement over the past years is acceptable.00 lacs to improve the NWC position. The firm has proposed infusion of addition unsecured loan of Rs. is slightly lower compared to year 2004-05 – it is still above the bench mark level. Thus overall financial position is satisfactory. Receivables: 81 . However the same is still below the bench mark. Net Working Capital: The firm has been maintaining NWC at more than 25% of TCA level which is above the stipulated bench mark and is estimated to well within the bench mark too.

In this connection the firm has informed that present outstanding claims receivable from Hindustan Lever Ltd is around 25 lacs and the level is likely to continue.40 month’s sales. v. the firm has another current asset in the form of ‘Claims Receivable’. iii.30 to 0. 58. Other than the above. The branch is to obtain a CA’s certificate in this regard. iv. The estimated/projected level of these assets is in conformity with the earlier levels. Sundry Creditors: The firm is reportedly not getting any credit from either Hindustan Lever Ltd of Airtel. 25 lacs and Rs. the firm has estimated/projected a higher level of Rs.54 month’s sale this level appears on the higher side and therefore bank recast the figures of receivables with a 0. Other Current Liability: 82 . However the firm estimated/projected a higher level of 0. Till year 2004-05 the level was quite on lower side oaround Rs. The level is in conformity with the past trend. 30 lacs respectively. Other Current Assets: The current assets include cash and bank deposits (RD).As per past trend. 11 lacs for miscellaneous credits. These are amount receivables from M/s Hindustan Lever Ltd for any breakage in stock supplied. Accordingly the acceptable level of debtors would be Rs. the level of credit allowed by the firm is between 0. 3 to 4 lacs. However the firm has estimated/projected a level of Rs.50 lacs.40 month’s sales. However during the year 2005-06 and 2006-07.

75 Excess borrowings.00 - 83 . The estimated/projected level is in conformity with the past trend.24 TCL (except bank borrowings) 8.57 143.51 Item (c-d) 39.07 (Projected) 165.00 - 31.39 100. Method Lending: The method of lending is based on build up of current assets and liabilities.19 56.The other current liabilities include provisions for expenses and taxation.79 109.11 80.03.19 15.40 50. if any - 31.21 45.03.98 Working Capital Gap 56.06 (Estimated) 159. Working of MPBF: Particulars A B C D E F G H I 31. B.62 103.78 35.04 (audited) Total Current Assets 65.75 MPBF (lower of above two) 29.03.99 24.03.26 Minimum stipulated margin (25% 16. vii.62 39.60 14. vi.00 100.80 45.80 43.31 of TCA) Actual/ estimated NWC 26. Comments on NWC: The estimated/projected NWC is adequate to meet the margin requirement of working capital.82 100.80 - 31.81 150.79 41.05 (audited) 99.10 18.00 100.95 Item (c-e) 29. with second method of lending.

86 25.05 Aud 46.80 9.17 27.06 Estm 17.06 34.17 8.10 70.70 24.33 12.26 34.12 6.17 0.03.02 31.49 18.37 10.10 2.04 Audited 30.34 31. Net Block Cash & Bank RM WIP FG RecDom Export OCA TCA Inv Oth NCA Tot NCA Acc Loss Oth Intang Ass.85 12.Case Study 3: Comparative Balance Sheet and Performance / Financial Indicators: (Rs in lacs) Liabilities Capital Reserves Def tax NW TL 31. Tot Ass 31.03.50 40.27 21.49 32.08 3.25 43.40 10.03.2004 21.59 6.71 27.03.97 5.00 61.20 15.32 84 .92 31.20 4.80 18.08 24.03.19 122.86 0.64 7.00 36.71 6.03.82 26.10 34.09 31.05 Aud 17.99 31.82 2.00 2.03.10 70.70 0.37 21.66 Assets FA Depr.77 Unsec Ln OTL TTL Scred Bk Borr OCL TCL 14.05 24.16 16.71 2.40 0.20 4.06 Estm 64.06 16.64 76.08 Tot Liab 50.03 - 2.23 11.77 50.97 12.19 122.08 34.77 * Net Worth Less: Revaluation Reserves Less: Intangible Assets Tangible Net Worth 31.10 21.07 31.03.16 6.17 1.15 24.08 0.36 12.54 2.10 0.04 Audited 16.63 23.17 0.86 4.03.

00lacs. We may accept the said level. Sales: Sales mean service charges/ consultancy fees received for the NDT inspection and course fees received for its various training programs on NDT. The consultancy fees depend upon the volume of machineries put under NDT inspection.37 13.02 31. 85 .07 1.00 lacs and training fees of Rs 24.PERFORMANCE / KEY FINANCIAL INDICATORS: (Rs in Lacs) Particulars Net Sales % Increase / Decrease Net Profit After Tax % to Net Sales Cash Accruals TNW excl Revaluation Reserve TOL / TNW Ratio NWC Current Ratio Comments: 31. As such we are of the view that the company would be in a position to achieve a sale of Rs150.15 4. The company has estimated a sale of Rs 204. During 2004-05 the sales have declined due to this factor only.18% 6.00lacs.73 31.57 15.03.18 2.29 5.09 1.71 1. ONGC. As mentioned earlier the company is mainly doing NDT inspection of oil refineries of Reliance Industries.04% 19.36% 3. In the year 2005-06 the company has received contracts worth Rs 87.05 the company has already booked a sale of Rs129.00 lacs comprising consultancy fee & component sale of Rs 180.11.35 69.28% 7. The training fee is slightly less than the last year’s fees.91 13. Besides it has orders from small & medium companies. As on 30.04 75.05 61.21 -ve 2.00 3.00 lacs.63 24.03.06 204. It may be mentioned here that during the year the course fees have grown by 200% whereas consultancy fees have declined by 65% (appx).68 1. and NTPC.00 lacs from RIL for its Jamnagar Plant.26 1.03.03 21.32 2.29 34.00 10.

03.R: During 2002-03 sundry creditor’s mode of financing was resorted to by the company for its working funds and partly for its fixed assets resulting in C. However during the current year the company proposes to add fixed assets from its internal accruals and partly out of its existing built up of NWC resulting in reduction in NWC level to 20% of the TCA.03.25 the 86 .05 as declared by the company has been Rs. 4. 34. NWC & C.05 is also above the respective bench mark. below 1. During 2005-06 the company has estimated a net profit of Rs 10. Consequently current ratio is estimated at 1.04%.29 lacs with profitability of lacs. TNW: With 100% retention of net profit the TNW acceptable as on 31. In fact as the minimum acceptable NWC is 20% and current ratio is 1. 3. 5.06 would be Rs. Net Profit: Profit margins in consultancy works are comparatively more. The position as at 31. Therefore with decline in consultancy fees the profitability has declined during 2004-05. The company officials have clarified that with increased sales and without any additional cost the marginal revenue will be more.R. Moreover net profit as of 30.11.2. TOL/TNW: The ratio for the last three years has been below the bench mark and is expected to be so in the current year too. 10. Accordingly the estimates appear reasonable. This imbalance is rectified in 2003-04 by raising capital and infusing unsecured loans from directors and others.10 lacs.

ii.11.57 lacs which is 49% of total sales as on that date.00 lacs for its contract worth Rs 87.11. For the current year it has estimated a TCA level of Rs. 62. This is acceptable too. Thus overall financial position is satisfactory. Comments on NWC: Already discussed.00 lacs. Comments on: i. Working Capital Assessment: A.05.00 lacs from RIL which will be completed within 4 months. South Central railways etc in ensuing months for which it requires the working capital. 76.71 lacs which works out to 51% of accepted sales level.11. 200. But the company is able to obtain similar contracts from others like L&T. Since the estimated level is more or less equivalent to the actual level as on 30. As at 30.05 we may accept the same. Sales Projections: Already dealt with elsewhere in the note.00 lacs which as per the actual level prevailing as on 30. The company has estimated an OCL level of Rs. In fact for the next year it has estimated a sale of more than Rs. Accordingly PBF is arrived as under. 36. Assessment: The company had requested for project specific working capital (CC) facility of Rs 25.05 the TCA level is Rs. 87 . This job is completed.proposed estimates can be acceptable as the purpose of utilization of NWC is for acquiring fixed assets required for business purposes only. Assessment of Present Proposal: A.

00lacs.34lacs Rs15. vi. ii. TCA level accepted OCL WCG Required NWC (20%) Estimated level MPBF Rs76.71lacs Rs15. iv.71lacs Rs36. iii.71lacs Rs25. 88 .i.00lacs Rs40. v.

In most of the cases. There is a stiff competition to the nationalized banks from the foreign investors as their lending rates are much lower than nationalized banks. Loans and advances formed a major portion of the current assets of the firm because of which the working capital gap is large. Bank of Maharashtra has kept a conservative look to banking. Bank has their own internal credit rating procedure to rate the clients (Borrowers). After doing the assessment of the financial indicators it is up to the judgment of the top management of the bank to sanction such loan.Conclusions The requirement of working capital finance is ever increasing. hypothecation and/or mortgage are used to create securities for the banks. The very decision could be against the assessment result. Today the foreign investors are very big threat to business and its existence. The bank prefers to use the second method of lending working capital under the MPBF rather than evolving their own method. as credible and loyal party over their financial indicators. 89 . If the company is with bank from inception stage then they are given preference.

This would ensure that the credit is put to the right use by the borrower and repayment is guaranteed to the bank. The bank must further secure themselves by holding a second charge on all the fixed assets of the borrower. Bank must extend working capital finance through non-fund based facilities. The assessment should be done mainly stock and the inventory level of borrower. The time period taken by the banks to sanction the limits should be significantly reduced to allow the borrowers to make use of the credit when the need is most felt. 90 . Another ideal method would be to use LC as the primary source of extending. working capital clubbed with bill discounting.Suggestions Closely monitoring and inspecting the activities and stocks of the borrowers from time to time can avoid the misuse of working capital While working out the working capital limits. banks must exclude the loans and advances from the current assets.

com http://www. SARDA.banknetindia. NEW DELHI. 2000.J. MUMBAI.businessfinance.indiamarkets. SECOND EDITION. IMPEX. INTERNET SITES: http://www. FINANCIAL MANAGEMENT R. RUSTAGI.Bibliography Books: 1. PUBLISHED BY S.in http://www.com http://www.com 91 .D. GALGOTIA PUBLICATION. FOURTH EDITION 2. P. HAND BOOK ONWORKING CAPITAL FINANCE D.bankofmaharashtra. P.

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