3. What is Working Capital ?
• Funds deployed for day-to-day operational requirements of any industry or business is referred to
as “Working Capital”.
• This essentially goes into the financing of Current Assets of the firm comprising of raw-materials,
stock-in-process, finished goods (stock-in-trade) and receivables apart from a reasonable level of
cash & bank balance.
• All businesses undergo an Operating Cycle. This starts with cash; converted to stocks of raw-
materials; undergoes a process of manufacturing/ value-addition is converted to finished products
and then to receivables after sale before ending with cash again.
3
4. OPERATING CYCLE
Length of Operating Cycle = 60+10+20+30 = 120 days
i.e. 3 Cycles in a year (365 / 120)
OPERATING
CYCLE
Raw
Material
Stock in
Process
Finished
Goods
Bills
Receivable
Cash
60
Days
10
Days
20
Days
30
Days
4
5. • Working capital is for short-term requirements as against Fixed Capital, which is meant for
acquisition of fixed assets like land, building, plant, machineries, furniture & fixtures, vehicles etc..
• The need for working capital arises to ensure continuity of the business activity. It is required for
such day to day operations like purchase and stocking of raw materials, stores and spares, to
convert them into finished goods and to store them until sale and generation of cash therefrom.
5
6. Assets which are normally converted into cash during the operating cycle of the
entity.
Cash & Bank balances
Inventory
Receivables
Advances to suppliers/others
Marketable Securities
Other Current assets
WHAT ARE CURRENT ASSETS ?
6
7. • In the context of Balance Sheet, the term “Working Capital” is used in two senses:
“Gross Working Capital” refers to the Total Current Assets.
“Net Working Capital” refers to the difference between “Current Assets” and “Current Liabilities”.
In other words, ‘Net Working Capital’ is that component for financing of current assets that comes
from long-term sources.
7
9. What are Working Capital Sources?
Own funds
Bank borrowings
Sundry Creditors
Advances from customers
Deposits due in a year
Other current liabilities
Trade credit
9
10. Sources of Working Capital Finance
Most significant short-term sources of finance for working capital
Trade credit
10
11. Trade Credit
• Trade Credit : It refers to the credit that a customer gets from
suppliers in normal course of trade. This deferral of payments is a
short term financing which is called trade credit.
• It is a major source of finance for firms. In India, it contributes to
about 1/3rd of the total short term financing.
• Particularly, small firms are heavily dependent on trade credit as a
source of finance since they find it difficult to raise funds from
banks or other sources.
• Trade Credit is also called Spontaneous Source of Financing.
11
12. Credit Terms
• Credit Terms : This refers to the conditions under which the supplier sells on
credit to the buyer, and the buyer is required to repay the credit.
• A typical way of expressing credit terms is for example : 3/15 net 45. This
means 3% discount is available if payment is made within 15 days and if this
discount is not availed payment is to be made on or before 45 days.
12
13. ACCRUED EXPENSES AND DEFERRED INCOME
Accrued Expenses
• Accrued expenses represent a liability that a firm has to pay for the
services which it has already received.
1. Accrued Wages and Salaries.
2. Accrued taxes and Interest.
Deferred Income
• Deferred income represents funds received by the firm for goods
and services which it has agreed to supply in future.
1. Advance Payments
13
14. Working Capital from Bank : It includes the facilities as under:
a) Cash Credit and Packing Credit (including Trust Receipts and Working
Capital Term Loan) against Pledge / Hypothecation of stock-in-trade
and / or standing crops (plantations). b) Discount / Purchase of Inland /
Foreign Demand Documentary (DP) Bills and Usance Documentary
(DA) Bills under Letters of Credit. c) Overdrafts against approved
securities with prescribed margin. d) Discount of Inland Usance DA Bills
with Banker’s Co-Acceptance / Guarantee (Under Re-discounting
Scheme of IDBI e) Import Loans against imported consignments
received under L/Cs opened by our Bank. f) Overdrafts against book
debts / Government Supply Bills. g) Discount of Inland / Foreign
Usance (DA) bills not covered under L/Cs. h) Advance against Demand
Documentary Bills for collection. i) Advance against Warehouse
Receipts. j) Advance against un-drawn balance. k) Channel Financing.
Major Bank Finance for Working Capital
• Overdraft
• Cash Credit
• Purchase or Discounting of Bills
• Letter of Credit
• Working Capital Loan
14
15. Overdraft / adhoc
Under this facility, the borrower is allowed to withdraw funds in
excess of the balance in his current amount, up to a certain
specified limit, during stipulated period .
15
16. Cash Credit
• Meaning:
Cash credit is a short-term source of finance. Under cash credit, the bank
offers its customer to take a loan up to a certain limit. Cash credit is also
known as bank overdraft.
• Features of Cash Credit:
1. This loan is given to meet the working capital requirements of a company.
2. It is given against a tangible security.
3. Interest is charged only on the amount of loan taken by the customer and
not on the amount of credit sanctioned.
16
17. Cash Credit
• Advantages of Cash Credit:
1. It is an important source of working capital financing.
2. Cash credit can be obtained very easily and quickly.
3. Interest is charged only on the utilized amount.
• Disadvantages of Cash Credit:
1. The rate of interest charged by loan on cash credit is very high.
2. Such loan is granted by bank on the basis of company’s turnover, its financial
status, value of inventory, etc. So it is difficult for new and financially weak
companies to obtain cash credit.
3. For banks, cash credit disturbs their credit planning.
17
18. Difference between Cash Credit and Overdraft
Cash Credit Overdraft
It is normally given on security of
stock, debtors etc.
It is normally given on security of a
fixed asset.
The maximum amount is calculated as
a percentage of sale and stock along
with financial statements.
For e.g. A bank allowed cash credit
unto 80% of stock plus 20% of sales.
The maximum amount allowed is
calculated mainly on basis of financial
statements and security.
It should be used for the purpose of
business.
Can be used for any purpose
Balance Sheet, P & L account , VAT
reports is required be submitted to
bank generally annually or quarterly.
Financial statements are generally not
required to be resubmitted after
approval.
18
19. Purchase or Discounting of Bills
• Under the purchase and discounting bills, a borrower can
obtain credit from a bank against its bills. The bank purchases
or discounts the borrowers bills.
• The amount provided under this agreement is covered within
the overall cash credit or overdraft limit.
19
20. Letter of Credit
• Particularly the foreign suppliers, insist that the buyer should
ensure that his bank will make the payment if he fails to fulfil
its obligation.
• This is ensured through a letter of credit agreement.
• The bank opens an L/C in favour of a customer to facilitate his
purchase of goods.
20
21. Working Capital Loan
• A borrower may sometimes require funds in excess of the
sanctioned credit limits to meet unforeseen contingencies.
• Banks provide such accommodation through a “demand loan
account”. The borrower is expected to pay high rates of
interest in such exceptional cases.
21
22. WORKING CAPITAL
WC Assessment is outcome of two variables:
The volume of activity – Production & Sales
Required level of current assets (Inventory &
Receivables) to enable the unit to carry on
operations without interruptions
22
23. WORKING CAPITAL ASSESSMENT
Working Capital Assessment Methods:
Operating Cycle Method
Traditional method-Security
Projected Balance Sheet method
Cash Budget method
Projected Annual Turnover method
(Nayak Committee)
23
24. OPERATING CYCLE
Length of Operating Cycle = 60+10+20+30 = 120 days
i.e. 3 Cycles in a year (365 / 120)
OPERATING
CYCLE
Raw
Material
Stock in
Process
Finished
Goods
Bills
Receivable
Cash
60
Days
10
Days
20
Days
30
Days
24
25. OPERATING CYCLE: PERMISSIBLE BANK FINANCE
Operating cycle is 120 day (4 months) or 3 cycles in a year
Sales (P.A.) Rs. 200000/-
Operating expenses Rs.180000/-
What is Working Capital requirement?
Operating Expenses 180000
--------------------------- = ---------- = Rs 60000/-
No of cycles per annum 3
Thus, Working Capital requirement is influenced by:
(a) Level of operating expenses or Level of Operations.
(b) Length of operating cycle.
Reduction in either will bring down WC requirement.
Reduction also indicates improved efficiency in WC Mgt.
26
26. Measuring Period for W C Components
1. RM Holding Period: (Stock of RM * 365 / Annual Consumption of
RM)
2. SIP Holding Period : (SIP * 365 / Cost of Production)
3. Fin. Goods Holding Period : (FG Level * 365 / Cost of Sales)
4. Receivables Holding Period : (Bills Receivable * 365 /Annual Gross
Sales)
5. Advances paid to Suppliers Period : (Advances paid * 365 / Annual
Purchases)
6. Trade Creditors Holding Period : (TC Level * 365 / Annual
Purchases)
7. Adv. Recd. against Sales Period : (Advance Received * 365 / Annual
Gross Sales)
Stage wise monitoring not possible. Rely on Averages
27
27. Projected Balance Sheet Method
Proper examination of performance
• Profitability
• Financial Position
• Financial Management
Scrutiny & Validation of Projections
• Income & Expenses
• Changes in Financial Position
Acceptability of Liquidity, Overall gearing,
efficiency of operations
28
28. Projected Balance Sheet Method
Obtain Data on CMA (separate projections for Peak / Non-peak)
Validate Current Liabilities ?
Validate Current Assets ?
29
29. Projected Balance Sheet Method
Validation of Current Liabilities
1. Short term borrowings (including bills purchased)
2. Unsecured loans
3. Public deposits maturing within one year
4. Sundry Creditors (trade)
5. Interest / other charges accrued & due
6. Advance / progress payment from customers
7. Deposit from dealers (subject to conditions)
8. Install. of term loans / debentures / redeemable preference
shares (falling due in next 12 months)
9. Statutory liabilities
10. Misc. C.L. - Dividends & other payments (falling due in next
12 months)
30
30. Projected Balance Sheet Method
Validation of Current Assets
1. Cash & Bank Balance
2. Investments :
a) Govt. & other Trustee Securities
b) Fixed Deposits with Banks
3. Receivables
4. Instalments of deferred receivables due within one year
5. Raw Material / components used in manufacturing
6. SIP & Finished Goods
7. Advance payment of Tax
8. Pre - paid expenses
9. Advance for purchase of raw materials etc.
10. Receivable from sale of fixed assets ( in 12months)
31
31. Levels of Inventory, Receivables & Sundry Creditors
Trends
Inter-firm comparison
Industry Levels
Borrowers specific strengths & weaknesses
Suggested levels of inventory & receivables
Production Policy – Constant/seasonal
32
32. Validation of Raw Material Holding
Average consumption / holding
Source – local / outside / abroad
Time taken
Minimum order quantity
Cost of holding
Criticality
Transport Cost
Credit available
Seasonality
33
33. Validation of SIP Holding
Processing time
Processing technology
No. of shifts
34
34. Validation of Finished Goods Holding
Firm order or anticipated order
Minimum despatch quantity
Transport availability / cost
Seasonality
Marketing arrangement
35
36. PBS (ASSESSED BANK FINANCE) METHOD
Previous
Year
Current
Year
Next Year
A Total CA
B Other CL
C Working Capital Gap (A - B)
D Net Working Capital (Actual / Projected)
E Assessed Ban Finance (ABF) (C - D)
NWC / TCA (%)
Bank Finance / TCA (%)
S. Creditor / TCA (%)
Other CL / TCA (%)
Inventory to Net Sales (days)
Receivable to Gross Sales (days)
S. Creditor / Purchases (days) 37
37. Evaluation of Liquidity
Benchmark current ratio is 1.33
Depends upon:
Size of operation
Overall financial position
Term Loan installments
Export oriented units
Expansion of existing capacity
Setting up new unit
Reduction in level of deposits accepted, etc.
38
38. Cash Budget Method
Applicable to seasonal industry
(such as tea, sugar)
Specific industry
(such as Information Technology and software)
Based on Peak Deficit projected as per cash flow
statement
39
39. CASH BUDGET METHOD
Forecasted Cash Flow Statement showing
estimates of cash receipts, cash payments and
net cash balance over the project term.
Peak deficit is financed.
Banks & Financial Institutions supervise the
end use of the funds sanctioned through
actual Cash Flow.
40
41. Projected Turnover Method (Nayak Committee)
• Up to FBWC Limit of Rs. 5 crores - SME
• WC Requirement = 25% of realistic Projected Annual Turnover
(min. 5% of turnover to be brought by borrowers as their contribution)
42
42. TURNOVER METHOD
A. Annual Turnover as projected by Borrower
B. Turnover as accepted by Bank
C. Working Capital Requirement (25% of B)
D. Minimum margin required (5% of B)
E. Actual Margin available (CA - CL)
F. Item C - item D
G. Item C - item E
H. Min. WC Finance - F or G, whichever is less
COMPUTATION
43
43. Projected Annual Turnover Method
A. Annual Turnover as projected by Borrower 1200
B. Turnover as accepted by Bank 1200
C. Working Capital Requirement (25% of B) 300
D. Minimum margin required (5% of B) 60
E. Actual Margin available (CA - CL) 20
F. Item C - item D 240
G. Item C - item E 280
H. Min. WC Finance - F or G, whichever is less 240
COMPUTATION
44
44. NAYAK COMMITTEE (Projected Annual Turnover Method) :
• Bank Finance for working capital to be extended to the extent of a minimum of 20 % of the
Projected Annual Turnover.
• The “Gross Working Capital” has to be estimated at 25% of such projected turnover.
• The “Net Working Capital” (NWC) should be a minimum of 5% of turnover, which has to be met out
of the Promoters’ contribution/ from long-term sources.
• The remaining 20% may be extended by bank(s) as short-term bank borrowing or Working Capital
Finance.
The following important points may be reckoned with reference to the above method of financing :
45
45. • This method assumes an operating/ production cycle of 3 months (4 operating cycles in a year).
Hence, Gross Working Capital is estimated at 25% of the projected turnover.
• The bank finance should therefore be a minimum of 20% of the projected turnover. In case of
longer cycles, the bank finance may be more. However, matching contribution in the form of NWC
amounting to 20% of the GWC is to be brought in by the borrower from long-term sources.
• In case the projected NWC is more than the minimum stipulated 5%, the same should be reckoned
with and the PBF should be scaled down to that extent.
46
46. • This simplified method of lending for working capital has been adopted by banks for financing
working capital requirements of SSIs up to Rs.5.00 Crores and other non-SSI borrowers up to
Rs.2.00 Crores.
• However, in certain cases banks do also apply the operating cycle or MPBF method for a
comparative analysis.
47
47. MPBF: Method of Lending (Tandon/ Chore Committee):
• Before attempting this concept of Working Capital finance, let us define the following
terminologies :
I. Gross Working Capital = Total Current assets
II. Net Working Capital = Total Current Assets – Total
Current Liabilities.
III. Other Current Liabilities (OCL) = Current Liabilities
other than bank borrowings.
IV. Working Capital Gap = Total Current Assets –
Other Current Liabilities
(TCA-OCL).
V. MPBF = Maximum Permissible Bank Finance.
48
48. • There are three sources of financing the total Current Assets (or Gross Working Capital). They are :
– Other Current Liabilities (or Creditors and advance from customers predominantly);
– Net Working Capital (amount from long-term sources); and
– Bank Borrowings as given by MPBF computation.
• After the first step of sourcing finance from Trade Creditors, the remainder is called Working
Capital Gap.
• The second step involves the amount of Net Working Capital (NWC), to be brought in from long-
term sources.
• Under the the First method, minimum stipulated NWC is 25% of the Working Capital Gap.
Whereas, under the 2nd method, the minimum required NWC is higher; i.e., at 25% of Total Current
Assets.
49
49. • After reckoning higher of minimum stipulated NWC or actual NWC, the remainder qualifies as the
MPBF (Maximum Permissible Bank Finance).
• Since, the minimum warranted NWC under the 2nd method of lending is 25% of the total current
assets, it implies a minimum Current Ratio of 1.33.
• The steps are shown in the table below under both the methods.
50
50. First Method of Lending Second Method of Lending
I. Total Current Assets Total Current Assets
II. Current Liabilities (Other than Bank
Borrowings)
Current Liabilities (Other than
Bank Borrowings)
III.
= ( I – II )
Working Capital Gap Working Capital Gap
IV. Minimum stipulated NWC
(25% of III)
Minimum stipulated NWC
( 25% of I )
V. Actual/ Projected NWC Actual/ Projected NWC
VI. Item III - IV Item III - IV
VII. Item III – V Item III – V
VIII. MPBF (Lower of VI or VII) MPBF (Lower of VI or VII)
51
51. A Current Assets
B Current Liabilities other than Bank
Borrowings
C Working Capital Gap (A - B)
D Minimum Stipulated NWC (25% of CA
excluding export receivables)
E Actual / Projected NWC
F C – D
G C – E
H MPBF (F or G whichever is less)
MPBF METHOD
(TANDON’S II Method of Lending)
52
52. Particulars Security Margin DP
Paid Raw Material
(RM-Creditors)
(a) (e) [a * (1-e)]
Semi Finished
goods
(b) (f) [b * (1-f)]
Finished goods (c) (g) [c * (1-g)]
Book debts (d) (h) [d * (1-h)]
Total
DRAWING POWER (DP)
53
53. Regulations of Bank Finance
• Banks follow certain norms in granting working capital finance
to firms.
These norms are greatly influenced by the recommendations of
various committees appointed by the RBI.
• Banks followed the norms suggested by the “Tandon
Committee”.
• Further recommendations were made by the “Chore
Committee” to strengthen the procedures and norms.
54
54. The Tandon Committee Regulations
1.Operating Plan : The borrowers should prepare operating plans and
on that basis indicate the amount of working capital finance
requirement.
2.Production based financing : The bankers should finance only the
genuine production needs of borrower. The borrower should
maintain reasonable levels of inventory and receivables.
3.Partial bank financing : The bank should not finance the total
requirement of the borrower. Only a reasonable part of it should be
financed by the bank.
55
55. 4.Reasonable level of Current Assets : The committee further
recommends that the borrower should be allowed to maintain
current assets specifically debtors and inventories only up to a
reasonable level. Flabby, profit making or excessive
inventory should not be permitted under any circumstance.
However, the bank also visualized the abnormal circumstances
such as strikes, power cuts etc. and allowed flexibility to the
bankers.
56
56. 5.Maximum permissible bank finance (MPBF) :
The committee suggested the following three methods of determining the
MBFC.
1. The borrower will contribute 25% of the working capital gap, the remaining
75% will be financed from bank borrowings.
W. C. Gap = CA-CL excluding bank borrowings.(Some analysts define the
networking capital in the same manner)
2. The borrower will contribute 25% of the total current assets. The
remaining of the working capital gap will be financed by the bank.
3. The borrower will contribute 100% of the core assets and 25% of the
balance of current assets. The remaining of the working capital gap will be
financed.
57
57. The Chore Committee Regulations
1. Reduced dependence on Bank Credit : The borrowers should contribute more
funds to finance their working capital requirements. The idea was to place all
borrowers in the 2nd method suggested by the Tandon Committee. In case of
difficulties the resort could be taken to WCTL.
2. Credit limits to be separated in to “Peak level” and “Non Peak Level” limits :
Credit limits should be assessed and separated in to “Peak level” and “Normal level”
for borrowers with credit limits more than 10 lacs. Borrowers should, in advance,
inform the requirement of peak level limits. Moreover, any deviation in utilization
beyond 10% tolerance, should be treated as an irregularity. Additional interest of 1%
should be charged on ad hoc borrowings.
58
58. The Chore Committee Regulations
4. Existing lending system to continue : The existing system had three types of
lending.
(a) Cash credit
(b) WCTL,
(C) Bill discounting.
Cash credit system should be replaced by the other two wherever possible. Cash
credit accounts of large borrowers to be scrutinized, at least once a year.
5. Information System : The discipline regarding submission of quarterly
statements should be strictly adhered to, in respect of all borrowers having
limits of 50 lacs and above.
59
59. Commercial Paper
In India, the issue of CP’s is regulated by the RBI.
Only those Companies, which have
(a) Net Worth of 10 Crores,
(b) MPBF of not less than 25 Crores &
(c) Listed in Stock Exchange can issue CP’s.
Size of a single issue should be at least One Crore and size of each CP
should be at least 25 Lacs. (5 lacs suggested by Vaghul).
60
60. Methods for Assessment of Working Capital Requirements
In tune with the liberalized environment, CBI has adopted the
following system for assessment of working capital
requirements of the borrower.
1. Turnover Method: This method should be used for assessing
fund based working capital requirements enjoyed from the
banking system uptoRs.5.00 crore.
61
61. 2. Traditional Method: Fund based working capital
requirements under this method shall be assessed
under Method II for borrowers enjoying fund based
working capital limits of above Rs.5.00 crore but less
than Rs.50.00 crore. As per RBI guidelines, Non-Funded
limits are also to be a part of MPBF.
3. Cash Budget Method This method would be applicable
to borrowers who are i. Falling under Cyclical Industries
like Tea, Sugar etc. ii. Borrowers availing Fund Based
Working Capital limits of Rs.50.00 crore and above
from the banking system for Central Bank of India.
62
62. While considering fresh/ new credit proposals the following Financials shall be kept in view:
Ratio Benchmark
Current Ratio 1.33
Current Ratio (Trading) 1.20
Current Ratio (Seasonal Industry) 1.00
Current Ratio (NBFC-MFI) 1.11
TOL/TNW 5:1
TOL/ATNW 4:1
TOL/TNW (Trading) 6:1
TOL/TNW (NBFC/MFI) 8:1
TOL/TNW (Infrastructure Projects) 7:1
Debt-Equity TL (other than Infra) 3:1
Debt-Equity TL (Infra, SEZ & SPVs created for Infra ) 5:1
Bank Borrowing/TNW 4:1
DSCR (Avg.) 1.5
Interest Coverage Ratio 2.1
Asset Coverage Ratio (ACR) 1.5:1
Fixed Assets Coverage Ratio (FACR) 1.5:1
TOL/ TNW + Quasi Equity 4:1
(Quasi Equity= Unsecured Loans equal to 100% of
TNW)
Bank allows deviations in the above ratios, if it is properly justified. Powers of deviations in the above
ratios falls with various higher authorities committee.
63
63. Recommended Margins:
Approved Securities Minimum Margin (%)
1 FDR held in the name of the borrowers 10
2 Fixed deposits in the name of the third party 25
3 Gilt edged securities viz., bonds / stocks issued by 25
Central/ State Government/Statutory/quasi-Government
Corporation or Body repayment of which is guaranteed by
the Central/ State Government (including Post office)
4 National Saving Certificates with accrued value 20
5 Surrender value of Life Insurance Policies issued by LIC 10
of India and other Life Insurance Companies.
6 Kisan Vikas Patra (KVP) with accrued value 25
7 Shares and debentures (on Bank’s approved list – In Dematerialized form 50
8 Stocks of tradable commodities / goods having realizablevalue (RM, SIP, FG) 25
9 Book Debts.
- For Book debts Up to 90days 25
- For Book debts beyond 90 days and up to 180 days 35
10 Plant and Machinery (New) 25
11 Plant and Machinery (Secondhand) 40 (of residual value of second hand machinery).
12 Bills of Exchange with Documents / acceptances Nil
13 Gold Ornaments 40
14 Vehicles 25
15 Furniture / Fixtures 25
16 Consumer durables 25
17 Live Stocks 25
18 Land and Buildings / Free Hold Plots 40
19 Land & building forming part of project 25
20 Commodities falling under Selective Credit Control. As directed byRBI fromtime to time
21 Any other Securities so approved by Central Office. Margin will be notified by Bank Management
22 Stocks of Sugar 25
64
64. ISSUES OF WORKING CAPITAL
1. Proper assessment of working capital requirement is very
important. Lower working capital loan requirement adversely
affects turnover and profitability of the Company. Higher bank
working capital loan requirements will increase interest
burden to the Company and will entail laziness in recovery
from debtors. For bank also higher loan is risky since there are
chances of diversion of funds.
65
65. 2. Operating statements and Balance Sheet of the Company is
required to be estimated / projected item wise based on past
trend, future estimations, market share, competition
prevailing etc.
3. Holding period of each item of current assets like Inventory
(RM, WIP, FG), debtors, creditors and other expenses to be
estimated / projected logically and based on past trend.
66
66. • CMA Forms (to be used/submitted):
• Form I ( Particulars of existing and proposed Limits )
• Form II ( Operating Statement )
• Form III ( Analysis of Balance Sheet )
• Form IV ( Comparative Statement of Current Assets & Current
Liabilities)
• Form V ( Computation of Maximum Permissible Bank Finance )
• Form VI ( Funds Flow Statement ).
67
67. Nature of Business & Operations
Production Policy
Market conditions
Conditions of supply of RM / stores &
spares, etc.
Level of activity & Operating Cycle
FACTORS INFLUENCING WORKING
CAPITAL REQUIREMENT
68
68. A) Fund Based
Cash Credit / Overdraft Packing Credit
Demand Loan Bill Finance
B) Non Fund Based
Letter of Credit Bank Guarantee
WORKING CAPITAL FINANCE
69
69. For genuine trade & manufacturing
transaction
Various Types:
Discounting / Purchase of Bills of
Exchange
Cheque Purchase
Advance against delivery
Advance against acceptance
Packing Credit
BILL FINANCE
70
70. Letter of Credit:
Bills sent for Collection:
Bank Guarantee:
Performance / Financial
Inland / Foreign
NON FUND BASED LIMITS
71
71. For Existing Units:
Intra-Firm Comparison (i.e. Trend Analysis)
Inter-Firm Comparison
Evidences (Orders in Hand, Orders in
Pipeline)
For New Units:
Pure Play Technique
Note: Higher projections should be justified.
JUSTIFICATION OF THE PERFORMANCE
PROJECTION
72
72. Security for Bank Finance
• Hypothecation
• Pledge
• Mortgage
• Lien
73
73. Hypothecation
• Under this the borrower is provided working capital finance
against the security of movable property (stock, debtors).
• The borrower does not transfer the property to the bank
physically.
• Thus hypothecation is a charge against property where neither
ownership nor the possession is passed on to the creditor.
• Banks generally grant credit against hypothecation only to first
class customers with high integrity.
74
74. Pledge
• Under this arrangement the borrower, is required to physically
transfer the possession of the property offered as security to
the bank to obtain credit.
(e.g. Share certificates, Insurance policy documents, etc.)
75
75. Mortgage
Mortgage is the transfer of a legal or equitable interest in a
specific immovable property for the payment of a debt.
Lien
Lien means right of the lender to retain property belonging to
the borrower till he repays the credit.
76
76. Working Capital Limit
Generally for 12 months,
or
Seasonal industry – short duration / Peak & Non-peak
level,
or
Subject to specific repayment schedule, viz EPC
Renewal necessary (within 180 days to avoid its becoming NPA)
77
77. For Renewals/Enhancements:
(Put a clause in the sanction letter itself)
Send an intimation 2 months prior to renewal.
Call for:
Audited Financial Statements for 2 years (for non-
corporate T.O. Rs. 60 lac & above / G P < 8% of T.O.)
Break up of various items
Projected Balance Sheet and P&L A/c
Funds Flow Statement
Renewal of Limits
78
78. A note containing major developments in :
Ø Production facilities
Ø Marketing
Ø Expansion Plan
Ø Industrial Relations
Ø Prospects of the Industry
Ø Management set-up
Ø Major shareholders etc.
Assumptions & assessment of Credit Requirement
WORKING CAPITAL LIMIT
79
