Professional Documents
Culture Documents
For
Bank Management
For
MBA
Indian Institute of Management Calcutta
( For study purpose only )
Prepared by
Praloy Majumder
1
Table of Contents
Fund Based Working Capital Assessment ................................................................... 3
MPBF Method of assessment ...................................................................................... 3
Letter of Credit Assessment ........................................................................................... 4
Problem on LC assessment for uniform purchase throughout the year .............. 4
Solution : ........................................................................................................................ 5
Problem on seasonal LC Assessment : ...................................................................... 6
Solution : ........................................................................................................................ 7
Export Finance Assessment : .......................................................................................... 8
Problem: ......................................................................................................................... 8
Solution : ........................................................................................................................ 9
Term Loan Assessment ................................................................................................. 11
Problem : ...................................................................................................................... 11
Solution ........................................................................................................................ 12
Capital Adequacy Calculation ..................................................................................... 14
Problem: ....................................................................................................................... 14
Solution : ...................................................................................................................... 17
2
Fund Based Working Capital Assessment
c) Working Capital Gap = Current Asset – Other Current Liability = Rs 320 crores
d) Estimated Net Working Capital = 1.25 * Minimum Net Working Capital as per
Method II of lending under MPBF = 1.25* 25% of Current Asset =1.25* 25% * Rs
400 crores = Rs 125 crores
3
Letter of Credit Assessment
The audited sales for ABC Limited for the FY 2014-15 are Rs 150 crores. The
consumption of raw materials to sales ratio was 60%. Out of the total consumption
, the imported consumption was 40% and indigenous consumption was 60%. As
on March 31, 2015 , the closing stock of imported Raw Material holding was 2
months and the same for domestic Raw Material holding was 1 month. Out of the
total purchase , the entire imported purchase would happen under LC . Out of the
total domestic purchase, 70% purchase would be under Letter of Credit . The
usance period for Imported LC is 90 days and the lead time is 7 days . The usance
period for Inland LC is 60 days and the lead time is 5 days. The purchase is uniform
throughout the year . The sales to GDP multiple are 2.5 times and GDP is likely to
grow for FY 2015-16 by 7.5% p.a. The company is estimated to maintain the same
holding level and the same cost to sales ratio. Based on the above , find out the
Import and Inland LC limit which can be sanctioned to the company .
4
Solution :
LC Assessment
2014-15 Imported Inland 2015-16
Sales 150 178.13
Consumption
/Sales Ratio 60% 60%
Consumption 90 106.88
Consumption
break up in %
terms for
Import and
Inland 40% 60%
Consumption
Break up in
Import and
Inland ( Rs in
crores) 42.75 64.13 106.88
Holding Level
of RM in
Months 2 1
Opening Stock
of RM 6 4.5
Closing Stock of
RM 7.13 5.34
Purchase of
Raw Material 43.88 64.97
LC Purchase % 100% 70%
5
LC Purchase
amount 43.88 45.48
LC Usance
Period ( days) 90 60
LC Lead time (
days) 7 5
LC Period (
days ) 97 65
No of LC to be
opened 4 6
LC Requirement
( Rs crores ) 10.97 7.58
The audited sales for ABC Limited for the FY 2014-15 are Rs 200 crores. The
consumption of raw materials to sales ratio was 55%. Out of the total consumption
, the imported consumption was 60% and indigenous consumption was 40%. As
on March 31, 2015 , the closing stock of imported Raw Material holding was 0.25
months and the same for domestic Raw Material holding was 3 months. Out of
the total purchase , the entire imported purchase would happen under LC . Out of
the total domestic purchase, 70% purchase would be under Letter of Credit . The
usance period for Imported LC is 90 days and the lead time is 7 days . The usance
period for Inland LC is 60 days and the lead time is 5 days. The company purchases
the imported raw material in two consignments to save the transportation cost and
to avail the discount . The company would open the first LC in the beginning of
June and the second LC in the beginning of August . The sales to GDP multiple
are 2.5 times and GDP is likely to grow for FY 2015-16 by 7.5% p.a. The company
is estimated to maintain the same holding level and the same cost to sales ratio.
6
Based on the above , find out the Import LC limit which can be sanctioned to the
company .
Solution :
LC Assessment
2014-15 Imported 2015-16
Sales 200 237.50
Consumption
/Sales Ratio 55% 55%
Consumption
break up in %
terms for
Import and
Inland 60%
Consumption
Break up in
Import and
Inland ( Rs in
crores) 78.38 130.63
Holding Level
of RM in
Months 0.25
7
Opening Stock
of RM 1.375
Closing Stock
of RM 1.63
Purchase of
Raw Material 78.63
LC Purchase % 100%
LC Purchase
amount 78.63
8
Creditor 30
Other Current Liability
excluding term loan payable
within 1 year 10
40
The estimated Other current Liability would be segregated into the export and
domestic sales percentage. The Other current liability contributing to the Current
Asset for pre shipment and post shipment current assets would be segregated into
the percentage of eligible current asset for pre shipment and post shipment stages.
The minimum net working capital for pre shipment credit would be 10% of eligible
current asset and the same for post shipment credit would be 0%. The company
would bring in just the minimum net working capital .Based on the above assess
the pre shipment credit and post shipment credit amount and the time period for
sanction of pre shipment credit and post shipment credit . Please assume a 15 days
grace period from the actual holding level of current asset.
Solution :
Other Current
Asset 3.75 11.25 15
Receivable 15 48 63
Total 41.25 48.00 118.00
% 46% 54%
Other Current Liability
Domestic Export
9
Preshipment Post Shipment Total
Creditor 7.5 10.40 12.10 30
Other Current
Liability
excluding term
loan payable
within 1 year 2.5 3.47 4.03 10
10 13.87 16.13 40
Working
Capital Gap 27.38 31.87
Min NWC 4.13 0.00
Fund based
Working
Capital 23.26 31.87
Eligible
Current Asset 41.25 48.00
No of months
of sales 3.3 3.84
Grace period
in months 0.5 0.5
Total Period in
months 3.8 4.34
10
Term Loan Assessment
Problem :
ABC Limited wants to set up a factory for its expansion of operation. ABC Limited
manufactures Auto Ancillary Component. For the expansion of the project , the
company requires the following Fixed Asset :
11
would be capitalised. Out of the total project cost of fixed asset and miscellaneous
expenses , 50% would be disbursed at the beginning of the project and another
50% would be disbursed after 3 months from the beginning of the project. The
margin money would be disbursed at the time of commercial operation. The term
loan interest would be 12% p.a. chargeable monthly basis. Please assume 30 days
a month and 360 days a year. The IDC would be funded by equity only . Margin
Money for working capital would be funded by way of debt and equity in the same
ratio. Based on the above , please calculate :
i) Fixed Asset Cost
ii) Interest During Construction
iii) Margin Money for Working Capital
iv) Term Loan amount
v) Margin Money for Term Loan
Solution :
Term Loan Assessment
Invoice Value
Plant and
Machinery 10
Furniture and
Fixture 3.00
IT 2.00
Misc.
expenses 1.00
16.00
Term Loan 12.00
Margin
Money for
Term Loan 4.00
Interest rate
on term loan 12.00%
12
Interest
Opening Closing No of During
Time Balance Debit Credit Balance days Construction
1 0 6.00 6.00 30 0.06
2 6.00 0.00 6.00 30.00 0.06
3 6.00 0.00 6.00 30.00 0.06
4 6 6.00 12.00 30.00 0.12
5 12.00 0.00 12.00 30.00 0.12
6 12.00 0.00 12.00 30.00 0.12
0.54
Current Asset 6
Margin
Money for
Working
Capital 1.5
Project Cost
Interest
During
Invoice Value Construction Total
Fixed Asset 16.00 0.54 16.54
Margin
Money for
Working
Capital 1.50 1.50
Total Project
Cost 18.04
Means of Finance
Term Loan 13.13
Equity 4.92
18.04
13
Capital Adequacy Calculation
Problem:
Tier II Govt
Bond 200 Investment 2400
14
Private
Deposit 23800 Investment 1200
Loans and
Advances 20400
Government
loans 2400
AAA 3000
AA 4000
A 2000
BBB 9000
Cash and
Bank 900
25400 25400
Letter of
Credit AAA 200
Letter of
Credit AA 100
Letter of
Credit A 50
15
Bank
Guarantee:
FG A 300
Bank
Guarantee
: PG A 200
Credit Risk would be calculated as per Standardised Method, Market Risk would
be calculated as per Standardised Method and Operational Risk would be
calculated as per Basic Indicator approach.
The credit conversion factor for LC is 20% ; for Bank Guarantee for FG is 100% and
for PG is 50%. The last three years gross income is given below ( all figures are in
Rs crores ) :
Year 1 Year 2 Year 3
100 150 170
The specific risk and general market risk as per standardised method is given
below :
Specific General
MKT Risk Risk Risk
Standardised
Government 2400 0% 1%
Private 1200 3% 2%
16
Solution :
Risk
Credit RWA weight
Government
Loan 2400 0% 0
AAA 3000 20% 600
17
BBB 9000 100% 9000
Risk
CCF CE Weight RWA
C&B 900 0% 0
12519
Specific General
MKT Risk Risk Risk RWA
Standardised
Government 2400 0% 1% 24
Private 1200 3% 2% 60
84 1050
Operational
Risk Year 1 Year 2 Year 3 RWA
GI 100 150 170
140 21 262.50
18
Min
Capital
Adequacy Regulatory
RWA ratio Capital
A B C=A*B
Regulatory
Capital 13831.50 9% 1244.84
Capital
from Capital
Balance Adequacy
Sheet RWA Ratio
A B C=A/B
19