2. Working capital
The capital of a business which use in day to day business operating activity
Objective of working capital Assessment
โข Working capital limit
โข Assess the short term debt pay ability
โข Assess the credit worthiness
General consideration by bank
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โข
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Nature of the business carried
Size of the business
Production cycle of the organization
Changes in technology , as the advance technology requires less working
capital
โข Credit policy of the organization
โข Growth and expansion
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3. Methods of working capital
assessment
Maximum
permissible bank
finance (MPBF)
Cash budget
system
Turnover method
โข MPBF= 0.75(CA-CL)
โข MPBF=0.75(CA)-CL
โข MPBF=0.75(CA- core current asset(CCA))-CL
โข Estimation of cash in flow and out flow of business for specific time period
โข Apply when borrower require credit facility more than 25 cr. (INR)
โข MPBF method also apply
โข Generally use industries like construction, tea, sugar, any specific any industry etc.
โข Working capital limit is 20% of projected gross sale
โข Projection will be made on the sale of previous period and demand of the products
โข Under this method offices/ branches shall ensure to maintain 25% of the projected gross sale value is
provided as working capital requirement
โข Out of 25 % - bank will provide 20% and 5% promoter keep as margin with bank
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4. Benchmark for current ratio 1.33 if
the bank follow MPBF and cash
budget method otherwise 1.25
(turnover method)
If current ratio not find as per
benchmark of respective method
then it should not less than 1. If less
than 1 that case before sanction
any loan bank must take permission
of higher authority
Other important
factors of working
capital assessment
Benchmark for debt equity ratio1:1
. If the ratio not as per benchmark
then bank may sanction loan on the
basis of client profile
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Benchmark for DSCR ratio 2:1. If the
ratio not as per benchmark then
bank may sanction loan on the
basis of client profile
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5. Prime
Security
Collateral
security
Insurance
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โข Cash credit facility-hypothecation of paid stock or book
debt of reputed company
โข Bills drawn on or accepted by reputed company
โข Bonds of reputed companies
โข Shares of reputed companies
โข Securities or mortgage immovable property
โข Life insurance policy
โข National saving certificate (NSC)
โข Securities like stock , vehicle, flat etc. should properly
insure as per bank clause
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