This document discusses methods for assessing working capital requirements. It outlines three common methods - maximum permissible bank finance, cash budget system, and turnover method. It also discusses general considerations like business nature, size, production cycle, and credit policy. Benchmark ratios for current, debt-equity, and debt service coverage are provided. The document emphasizes the importance of prime security, collateral security, and insurance when obtaining working capital financing.

1. Working
Capital
Assessment
By
Arijit Saha
12/17/2013 10:20 AM
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2. Working capital
The capital of a business which use in day to day business operating activity
Objective of working capital Assessment
• Working capital limit
• Assess the short term debt pay ability
• Assess the credit worthiness
General consideration by bank
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•
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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
• Credit policy of the organization
• Growth and expansion
12/17/2013 10:20 AM
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3. Methods of working capital
assessment
Maximum
permissible bank
finance (MPBF)
Cash budget
system
Turnover method
• MPBF= 0.75(CA-CL)
• MPBF=0.75(CA)-CL
• MPBF=0.75(CA- core current asset(CCA))-CL
• Estimation of cash in flow and out flow of business for specific time period
• Apply when borrower require credit facility more than 25 cr. (INR)
• MPBF method also apply
• Generally use industries like construction, tea, sugar, any specific any industry etc.
• Working capital limit is 20% of projected gross sale
• Projection will be made on the sale of previous period and demand of the products
• Under this method offices/ branches shall ensure to maintain 25% of the projected gross sale value is
provided as working capital requirement
• 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
12/17/2013 10:20 AM
• Cash credit facility-hypothecation of paid stock or book
debt of reputed company
• Bills drawn on or accepted by reputed company
• Bonds of reputed companies
• Shares of reputed companies
• Securities or mortgage immovable property
• Life insurance policy
• National saving certificate (NSC)
• Securities like stock , vehicle, flat etc. should properly
insure as per bank clause
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