Working capital management of automobiles industry in haryana [www.writekraft.com]

Writekraft Research & Publications LLP
(All Rights Reserved)
WORKING CAPITAL
MANAGEMENT OF
AUTOMOBILES
INDUSTRY IN
HARYANA
(Regd. No. AAI-1261)
Corporate Office: 67, UGF, Ganges Nagar (SRGP), 365 Hairis Ganj, Tatmill Chauraha,
Kanpur, 208004
Phone: 0512-2328181
Mobile: 7753818181, 9838033084
Email: info@writekraft.com
Web: www.writekraft.com

(All Rights Reserved)
WORKING
CAPITAL
MANAGEMENT
THEORT/CAL SURVEY
(Regd. No. AAI-1261)
Corporate Office: 67, UGF, Ganges Nagar (SRGP), 365 Hairis Ganj, Tatmill Chauraha,
Kanpur, 208004
Phone: 0512-2328181
Mobile: 7753818181, 9838033084
Email: info@writekraft.com
Web: www.writekraft.com

WORKING CAPITAL MANAGEMENT-THEORITICAL
SURVEY
An Organization's total capital can be classified under two
main categories: (1) fixed capital (ii) working capital.
Every business requires funds for two purposes- for its
establishment and carryout its day-to-day operations. Long term
funds are required to create production facilities through purchase
of fixed assets such as plant
& machinery, land, building, furniture etc. Investment in these
assets represent that part of firm’s capital which is blocked on a
permanent or fixed basis and is called fixed capital. Funds are also
needed for short-term purposes for the purchase of raw-material,
payment of wages and other day-to-day expanses. These funds
are known as working capital. In simple, working capital is required
for financing short-term or current assets such as cash, marketable
securities, debtors and inventories.
As far as the management of long term assets is concerned,
the decision are not so frequent, but the management of working
capital is a continuous problem and requires much attention of
management. Working Capital is most important for business
because long-term investment in fixed assets creates capacity,
working capital makes the utilization of the capacity available.

2
Dewing1 brings out this important fact in clear relief with
an apt analogy, if the fixed capital of business can be
likened to a mill, the current capital is the grist the mill
grinds. The business is the mill and grist together.
CONCEPT
Views differ on the concepts and definition of working
capital.
There are two concepts of working capital. Gross concept and
Net concept.
Gross concept : The financial concept is gross concept. The
'gross working capital' also known as current capital or circulating
capital, is represented by
the sum total of all current assets of the enterprise. This
view is supported by Jules Bogen2, Edward S. Meed3,
John C. Baker and D. W. Ma I lot4, Keneith Field5, A.S.
Dewing6 and A. K. Sen7.
Net Concept : It is an accounting concept. It is difference
between the current assets and current liabilities. It can
be defined in two ways.
(i) It is the excess of current assets over current
liabilities.
(ii) It is that portion of a firm's current assets which is financed by
long term funds.
This view is supported authorities like E.A. Sailors8,
Edward E. Lincoln9, W. Mackenzie Stevens10, H.G.

3
Guthmann and Herbert E. Dougall,11 Colin Park and John W.
Gladson.12
Gross working capital concept is "quantitative" aspect and net-
working capital concept is "qualitative" aspect. It is suggested by
Husband and Dockery.13
Some economists like Mead14, Mallot and Baker15, and
Field16 approve of gross or quantitative concept. They argue that..
(a) Profits are earned by the help of whole assets which are partly
fixed and partly current. Fixed assets represent the fixed
capital. So total of current assets should be taken to mean the
working capital of a corporation.
(b) The management is more concerned with the total of current
assets as they constitute the total funds available for operating
purposes than with the source from which the funds come.
(c) The net concept of working capital has relevance when a close
contact is involved between the ownership of capital and its
management. But nowa days when a separation is involved
between the management, ownership and control of the
concerns and consequently the ownership of current and fixed
assets, it is not given so much importance as in the past and
gross concepts importance is increased.

4
(d) The gross concept takes into account the fact that every
increase in funds will increase the working capital.
(e) The gross concept is used since one of the principle function
of a manager is to provide the correct amount of working
capital at the right time in order to enable a firm to realize the
greatest return on its investments.
Another groups of economists like Lincoln17 and Saliers18
approve of the net working capital or qualitative approach and
argue that-
(a) Net concept enables the investors to judge the financial
soundness of a concern.
(b) In the long run what matters is the surplus of current assets
over current liabilities.
(c) The approach helps to find out the current financial position of
the concerns having the same amount of current assets.
(d) The excess of current assets over the current liabilities is only
amount that can be relied upon to meet contingencies and
emergencies.
The two concepts of working capital are not exclusive, rather
they have equal significance from the management view-point.
These are acceptable terms and important fact of working capital
management. Gross

5
working capital deals with the problem of managing
individual current assets in day-to-day operations. It is
going concern concept which the management is
particularly interested because of the productive utilization
of fixed assets, all the current assets are necessary. But
for having a long run view of working capital we have to
concentrate on the net value of current assets, i.e., the
operations of current assets which are constant in short-
run analysis and decision-making, but variable and
manageable in long run operations. But in a concern one
would always want to know the real position of the
corporation. This can be ascertained through net working
capital concept, which of the two concepts is preferable
depends upon the purpose of study.
NEED AND IMPORTANCE OF WORKING CAPITAL
The need for working capital to run day-to-day
business activities cannot be over emphasized. We will
hardly find a business firm, which does not require any
amount of working capital.
Working capital is financial lubricant, which keeps
business operations going on. It is lifeblood of firm. The
need of working capital arises due to time gap between
production and realization of cash from sales.
The significance of working capital is increasing
because the firm realize that approximately half of their
investments are in working capital. Some special

6
characteristics of working capital like assets with a short time span,
its nearness to cash etc., further, emphasize its importance from a
managerial view point.19
Working capital management is a significant part of business
decision and is of major concern to finance manager in much as
accomplishment of value maximization goal depends essentially on
the present working capital decision. Mismanagement of working
capital is one of the leading cause of business failure.20
The management of working capital is one of the most
important aspects of overall financial management. A firm must
maintain a satisfactory level of working capital. Current assets
should be large enough to cover current liabilities in order to ensure
a reasonable margin of safety.21
Working capital management involves all aspects of
administration of current assets and current liabilities. In the words
of Kucchal, “Working capital management involves deciding upon
the amount and composition of current assets and how to finance
these assets".22 James C. Van Horne observes, "Working capital
management usually is considered to involve the administration of
current assets, namely, cash and marketable securities,
receivables and inventories and administration of current
liabilities".23 The thrust of course is on current assets

7
because current liabilities arise in the context of current assets.
In a developing country like India the manner of administration
of working capital will determine to a large extent the success or
failure of overall operation of an enterprise. Hence poor
management and absence of management skill are the main cause
of business failure. So, the working capital management is very
necessary to have adequate, healthy and efficient circulation of
working capital.
Unlike fixed assets, current assets reflect company’s daily
activities. Usually they are most active in the company. According
to Weston and Bringham, "Current assets represent more than half
of total assets of a business firm. Because they represent a large
investment and this investment tends to a relatively volatile, current
assets are worthy of the financial manager's careful attention".24
Thus, efficient working capital management is very necessary
for smooth operations of a concern. Financial managers pay
adequate attention to the management of working capital and its
components both on the assets as well as liabilities side.
NATURE OF WORKING CAPITAL
Working capital management is concerned with the problems that
arise in attempting to manage the current

8
asset, the current liabilities and the inter-relationship that
exists between them. The term current assets refers to
those assets which in the ordinary course of business can
be, or will be, turned into cash with in one year without
under going a diminution in value and without disrupting
the operations of the firm. The major current assets are
cash, marketable securities, accounts receivables and
inventories. Current liabilities are those liabilities which are
intended at their inception to be paid in the ordinary course
of business, with in a year, out of current assets or
earnings of the concern. The basic current liabilities are
accounts payables, bills payables, bank over-draft and
outstanding expenses. The goal of working capital
management is to manage firm's current assets and
current liabilities in such a way that a satisfactory level of
working capital is maintained. This is so because of if the
firm cannot maintain a satisfactory level of working capital,
it is likely to become insolvent and may even be forced into
bankruptcy. The current assets should be large enough to
cover its current liabilities in order to ensure a reasonable
margin of safety. Each of the current asset must be
manage efficiently in order to maintain the liquidity of the
firm, while not keeping too high level of any of them. Each
of the short-term source of financing must be continuously
managed to ensure that they are obtained and used in the
best possible way. The interaction between current

9
assets and current liabilities is, therefore, the main theme
of the theory of working capital management.
So, working capital management involves frequent
decision making. It is concerned with all those decision
that influence the size and effectiveness of working capital.
It deals with the determination of appropriate level of
current assets and their efficient use as well as the choice
of financing mix for raising current resources.
So, working capital management is three dimensional
in nature.
I. Dimension I is concerned with the formulation of
policies with regard to profitability, risk and
liquidity.
II. Dimension II is concerned with decision about
the composition and level of current assets.
III. Dimension III is concerned with the decision
about the composition and level of current
liabilities.
PilMBmTOU
W* * mi
SaggJiaigJLilDimension III
Composition Composition
and Level or an(j Level of
Current Current
Assets Liabilities
Figure 1.1 Nature of Working Capital

10
CIRCULATING CONCEPT OF WORKING CAPITAL
Working capital is just like the heart of business, if it becomes
weak, the business can hardly prosper and survive. Sooner or later
it will topple down. Just as the heart gets the blood and circulates
in the body, working capital funds are generated and these funds
are circulated in the business. Their proper circulation provides to
the business the right amount of cash to maintain regular flow of
operations. As and when this circulation stops, the business
becomes lifeless. Due to this reason working capital is also known
as 'circulating capital'.
The term 'circulating capital' is frequently used to designate
those assets that circulate from one form to another in ordinary
conduct of business (for example,
from cash to cost of operations and inventories, to
receivables and to cash) that forms the conventional chain of
business operations. The term 'circulating
capital’ has been suggested by Gestenberg to mean all assets of a
company that are changed from one form to another in the ordinary
course of business.25 As observed by Guthman, the working capital
is also known as circulating capital, because at one time the funds
of the business are tied up in a stock of goods, later the goods are
sold and there is an accounts receivables

11
substituted, and then the accounts receivables is turned
into cash, at which time the cycle is ready to begin again.26
Brown and Howard also suggested this term. Comparing it
with a river, which is always there, but whose water is
constantly changing.27
The working capital of a business enterprise
circulates continuously to finance the current operations of
the concern. This process has come to be known as
working capital cycle. The cycle, is of course, circular and
has no beginning or end as long as the enterprise remains
a going concern. This cycle starts with cash. The cash is
invested in merchandise inventory and various kinds of
operating supplies and services. Inventory, supplies and
services are also required from suppliers on credit which
later required payment in cash. Cash is received from
customers in payment of their accounts and notes. This
cycle is repeated on a continuous basis.28 According to
O.M. Joy, "The term cash cycle refers to the length of time
necessary to complete the following cycle of events:
(a) Conversion of cash into inventory.
(b) Conversion of inventory into receivables.
(c) Conversion of receivables into cash.29

12
Operating cycle of
Lending Institutions
and Service Firms.
CASH
Operating cycle of
DEBTORS STOCK OF GOODS Trading Concerns
'SALES
Figure 1.2 Operating Cycle of Different Firms

13
DURATION OF THE CYCLE
The time necessary to complete the operating cycle is
an important factor in determining working capital needs,
since working capital is required to bridge the gap between
spending money on the production of goods and services
and receiving back money through sales.
The duration of operating cycle/current asset cycle is
equal to the sum of the duration of each of the stages less
the credit allowed by the suppliers of materials. These
stages are as follows:
(i) Acquisition and storage of raw material after
deducting the period of credit allowed by creditors.
(ii) Production cycle i.e., the period of process of
converting raw materials into finished goods.
(iii) Storage of finished goods before realizing them for
sale.
(iv) Period of credit allowed to debtors.
Symbolically - 0= R+w+F+D-C
Where, 0- Duration of operating cycle
R- Raw-materials and spare storage period.
W- Work in process period.
F- Finished goods storage period.
D- Debtors collection period.
C- Creditors payment period.

14
It will be advantageous to a company to keep the operating
cycle as short as possible, provided that relationships with
customers and suppliers are not prejudiced. In this way a company
will require less working capital to finance a given scale of
operations and hence the return on capital will rise. In practice an
analyst employed by the company would wish to check trends, to
ascertain whether the working of the company was improving or
deteriorating. He would seek to ascertain the operating cycle of
other companies in the same industry, for comparative purpose.
SCOPE OF WORKING CAPITAL MANAGEMENT
Working Capital is made up of a number of distinct and
independent components. The three main components of working
capital are Cash. Receivables and Inventory. The goal of working
capital management is to manage each of the current asset in
order to maintain firm’s liquidity while not keeping any asset in
order to maintain the high level. So, working capital management
would involve an efficient management of each of these three
components-
(i) Inventory Management
(ii) Receivables Management
(iii) Cash Management

15
(i) Inventory Management
Inventories constitute significant proportion of a company's
current assets and total assets. The term “Inventory” is
used ........... to designate the aggregate of those of tangible
personal property which (1) are held for sale in the ordinary
course of business, (2) are in the process of production for
such sale, or (3) are to be currently consumed in the
production of goods or services to be available for sale.30
Nearly every organization have inventories, whether the
business organization is agricultural, institutional, a
manufacturing or service concern, inventories are a necessary
and significant element of operations. Because of the relatively
large investment in inventories and its importance in meeting
customer's needs, its management becomes important.
Inventories represent a substantial investment. Maintaining
inventories also require investment of capital. Investment in
inventory should be just adequate neither more nor less.
Maintenance of adequate inventory level is paramount for the
efficient operations of any organization. A reduction in
inventory level may slow a firm's production and in extreme
case a complete depletion at any point of time may effectively
halt its operations. Excess investment in inventory also affects
the firm's financial performance and efficiency. Excess

16
inventory lowers the return on total assets and inventory
turnover ratio. So, proper management of inventory is very
essential. According to Harold and Dyckman, "The
establishment of optimum inventory level is one part of
determining the current assets portfolio and is one of the more
important decision, the firm must make a continuing basis in
relation to its operations.31
(ii) Receivables Management
Accounts receivables is an important current asset. The
turnover of working capital finally rests on the transitive
behaviour of receivables. Companies sell some goods or
render services to the customers on credit, which is granted to
facilitate sales. It is valuable to customers as it augments their
resources. This consumer's credit makes up the remainder of
account receivables According to Gitman, "Accounts
receivables represents the extension of credit on open
account by the firm to its customers. In order to keep current
customer and attract new ones most concerns find it
necessary to offer credit".32
More commonly in accounting the term receivables is used in
a strict sense for claims, which can be collected in money in
near future. Most frequently these arise out of the delivery of
goods or rendering services and include accounts receivables,
notes

17
receivables and accrued receivables.33 But in a broad sense,
the terms receivables designation is applicable to all the
claims held against others for the future receipt of money,
goods and services.34 Revenues tied-up in the form of
receivables are non earnings revenues except to the extent
that the company may be able to charge and collect interest
on receivables balances. Accounts receivables should be
exihibited in the balancesheet at their cash value.35 This
requires that all amounts not ultimately to be collected in cash
be eliminated and also that the receivables be exhibited at
their present discounted value.
Receivables like other assets carry some direct and indirect
costs. The direct costs which receivables carry may include
concession and allowances to customers and losses from bad
debts. On the other hand collection cost, cost of preparing
statements and recording bills is included in indirect cost. It is
particularly appealing to those, who cannot borrow from other
source or find it very expansive. Thus, it is very necessary to
manage receivables efficiently so that the cost of carrying
receivables do not exceed the profitability of its operations.

18
(iii) Cash Management
Cash occupies an important place in the structure of
working capital. Cash is the form towards which most
of the current assets are moving, "Cash is both the
beginning and end of the operating cycle (cash,
inventory, sales, receivables, cash) and almost all the
transactions affect the cash account either directly or
indirectly.36 Cash is the most liquid current asset. It is
needed at all times to keep the business going.
Ample cash and Bank balance provide liquidity, but a
feature of liquid asset is that unless skillfully managed
that give little or no return on capital. Cash by itself
obviously produces no return. It is a non-earning
asset and large holding of it would rise to security
problems and costs. Cash should be adequate and
properly utilized. A lack of sufficiency of cash
hampers day-to-day operations. It would be wasteful
to hold excessive cash. Companies want to receive it
quickly but hold as little of it as possible. A minimum
level of cash is always required to business
operations going. Cash resources include cash and
bank-balance, marketable securities, demand
deposits, call loans, time deposits etc. The optimum
level of cash depends upon various factors. It is
different from firm to firm and it varies with the nature
of business. Speeding up collections and slowing
disbursements

19
can reduce cash requirements. If a firm's cash inflows and
cash outflows are perfectly matched, there will be no need to
maintain cash, however, it is not possible.
TYPE OF WORKING CAPITAL
Working capital is categorized on two basis. One base is
concept and second base is time. On the basis of concept, it is
stated already. Now, on the basis of time the researcher discussed
here and on this basis, working capital is mainly of two types:
(i) Fixed/ Permanent Working Capital
(ii) Temporary Working Capital
Kinds of Working Capital
On the basis of
f
concept
On the basis of time
▼ Permanent/Fixed Temporary
Gross Working Net Working f Working Capital
Capital Capital Working Capital
1Regular Reserve Seasonal Special
Working Capital Working Capita! Working Capital Working Capital
According to Gestenberg, the working capital can be
conveniently classified into permanent working capital and
temporary working capital. Fixed working capital can further be
divided into regular working capital and reserve working capital.
Temporary working can also be divided into two parts, seasonal
working capital and special working capital.

20
Fixed/Permanent Working Capital
Permanent/ Fixed Working Capital is the minimum level of
current assets which continuously required by the firm to carry on
its business operations. It is that portion of current assets below
which the level of its various components never falls. If this level is
not maintained, the circulation of the capital would be blocked. It is
called permanent because this part of investment in current assets
is as permanent as the investment in fixed assets. This takes the
form of a minimum amount of inventory, investment in receivables
and cash for the payment of wages and salaries and other
expenses. Permanent working capital is significant from financing
point of view, because to finance these assets long term funds
should be raised. Fixed working capital can be further divided as
regular working capital and reserve working capital.
a) Regular Working Capital
It is required to ensure circulation of current assets from cash
to inventories, inventories to receivables, from receivables to
cash and so on.
b) Reserve Working Capital
It is excess amount over the requirements of regular working
capital which may be provided for contingencies that may arise
as unstated periods such as strikes rise in prices, depression
etc.

21
Temporary/Variable Working Capital
It can be called temporary or fluctuating working capital
depending upon the change in production and sales, the need for
working capital, will fluctuate. For example extra amount of finished
goods will have to be maintained to support the peak periods of
sale and investment in receivables may also increase during such
periods. So, the extra working capital needed to support the
changing productions and sales activities is called fluctuating
working capital.
O.M. Joy observes, "Any amount over and above the
permanent working capital is temporary, fluctuating or variable
working capital".37 Variable working capital can be further classified
as seasonal working capital and special working capital.
(a) Seasonal Working Capital:
The capital required to meet the seasonal needs of the
enterprise is called seasonal working capital.
(b) Special Working Capital:
The capital which is required to meet special exigencies such
as launching of extensive marketing campaigns for conducting
research etc.
Both kinds of working capital - permanent and temporary are
necessary to facilitate production and sales through the
operating cycle, but temporary

22
working capital is created by the firm to meet liquidity that will
last only temporarily. The difference between both the capitals
can be shown with the help of figure 1.3. It is shown that
permanent working capital is stable over time, while temporary
working capital is fluctuating. However, permanent working
capital is fluctuating over a period for a growing firm.
▲
Amount
of
Working
Capital
Amount
of
Working
Capital
Temporary Working
Capital
Permanent Working
Capital
►
Time
(For Stable Firms)
Temporary Working
Capital
Permanent Working
Capital
Time
(For Growing Firms)
Figure 1.3 Permanent and Temporary Working Capital

23
ADEQUECY OF WORKING CAPITAL
Financial management always want to maintain adequate
working capital for smooth running of any business and maximizing
returns on investment. The firm should maintain adequate working
capital to run its business operations. Both excessive as well as
inadequate working capital position are dangerous from the firm's
point of view.
According to McMullan, "Working capital should be sufficient in
amount to enable a company to conduct its business without
financial stringency and to meet emergencies and losses without
danger of financial disaster.38 If expansion is to take place, there
must be financial resources.39 In the absence of adequate amount
of working capital, fixed assets cannot be gainfully employed. A
business has enough cash to meet currently maturing obligations to
avoid interruptions in its production schedule and to maintain sales
or services. The adequacy of cash together with there efficient
handling virtually determines the survival or demise of an
enterprise.40 A concern by maintaining an adequate amount of
working capital is able to maintain a sound bank credit, trade credit
and can escape insolvency. It can take advantage of cash discount
facility. It can pass a period of depression without much difficulty. It
should be realized that working capital needs of a concern may

24
fluctuate with changing business activities. This may cause excess
or shortage of working capital frequently. So, the management
should be prompt in initiating action accordingly and correct the
imbalances.
Inadequate working capital is frequently considered to be the
cause of financial embarrassment and failure. As an explanation of
failure, this is superficial.41
• The dangers of excessive working capital are a follows:42
It results in unnecessary accumulation of inventories.
Thus, chance of inventory mishandling, wastage, theft
and losses increase.
It is an indication of defective credit policy and slack
collection period. Consequently, higher incidence of
bad debts results which adversely affects profits.
Excessive working capital makes management
complacent which degenerates managerial inefficiency.
A tendency of accumulating inventories to make
speculative profits grow. They may tend to make
dividend policy liberal and difficult to cope with future,
when the firm is enabling to make speculative profits.

25
• Inadequate working capital is also bad and has following
dangers.43
It stagnates growth. It becomes difficult for the firm to
undertake profitable projects for availability of working
capital funds.
It becomes difficult to implement operating plans and
achieve the firm profit target.
Operating inefficiencies creep in, when it
becomes difficult to meet day-to-day commitments.
Fixed assets are not efficiently utilized for the lack of
working capital funds. Thus firm's profitability would
deteriorate.
Paucity of working capital funds renders the firm unable
to avail attractive credit opportunities etc.
The firm loses its reputation, when it is not in position to
honour its short-term obligations. As a result, the firm
faces tight credit terms.
An enlightened management should, therefore, maintain a
right amount of working capital on a continuous basis. Only then a
proper functioning of the business operations will be ensured.

26
DETERMINANTS OF WORKING CAPITAL NEEDS
There are numerous factors which affect the working capital
requirements of a concern. An efficient appraisal of these factors
assists the management in formulating sound working capital
policies and estimating its requirements rightly.
The problem of working capital requirements of a concern
should be dealt within the context of overall financial requirements
of a concern and cannot be treated in isolation. As there occur
continuous variations in economic environment, it is very delicate
exercise to decide the level of current assets required at any time,
after making few adjustments for changes that have been place.
Though, it is very difficult to quantify the influence of each of the
factors affecting working capital, one can appreciate their
significance. Realising the complications involved in working capital
estimates, Gestenberg44 observes, "Although no definite rule can
be established for determining working capital requirements, we
can arrive at some general principles. Certain influences, some
inherent in the nature of business and other arising out of business
management policies, affect each ot items of current capital".
It is found that the factors that are given not only affects the
working capital requirements but also

27
influence to a great extent on composition or structure of working
capital. The important factors are as follows.
(1) Nature and Size of Business
This is the most significant factor for determining the amount of
working capital required by various companies. Public utilities
can generally operate with a small quantity of working capital
as compared to their total assets because they receive their
income with a fair degree of regularity at stated intervals from
a wide section of the population and from a wide range of
activities. In contrast to such corporations, an industrial
company, having problems of large investment of capital and
relatively slow turnover of inventories and receivables, would
require ‘larger quantity of working capital to invest in raw
materials, work in progress and finished goods.
The size of business has an important bearing on working
capital required by it. Size may be measured in terms of scale
of operations. A firm worth larger scale of operations will need
more working capital than a small firm.
(2) The Manufacturing Cycle
Time duration is a vital factor in production. More working
capital will be required in the longer manufacturing cycle and
vice-versa.

28
An extended time span between the raw-material purchase
and the completion of manufacturing process yielding the
finished product, will obviously mean a larger tie up of funds in
the form of enhanced working capital needs. A realization of
this aspect can trigger off management action to contain the
intervening period and effect economy in working capital
needs. Most products have alternate process of manufacture
and if working capital is considered a critical area, the choice
has to fall on those process that have shorter manufacturing
cycle. This is a technological choice with an eye on working
capital economy.
Having selected the process of manufacture, care has to be
exercised in adhering to the normal manufacturing cycle time.
This calls for effective organization and coordination at all
levels of enterprise activity. Some have only vague notions
about their operating cycle time and production capacities of
men and equipments in their charge. Frequent changes in set-
ups, waiting for materials, tools or instructions and
accumulation of work-in process have the inevitable
consequence of extending the cycle time, freezing up more
funds.
Certain policy steps concerning terms of credit for raw-material
and other supplies procured can help reduce working capital
requirements. Organized

29
negotiations with suppliers for attractive credit terms and
retention of their continued confidence by the settlement of
bills on agreed dates can go a long way in releasing the
financial pressure.
(3) Position of Business Cycle
Movements of business cycle bring about shifts in working
capital position. The upward swing is associated with spurt in
sales and increase in the levels of inventories and book debts.
Additional investment in plant and machinery is effected in
some cases. There is cash drain and borrowings become
necessary. On the other hand, when there is downswing, the
levels of inventories and book debts may fall, causing cash
flux.
(4) Competitive Conditions
The degree of competition prevailing in the market has an
important bearing on working capital needs. If the market is
strong and competition is weak, a firm can manage with
smaller working capital in form of inventories and book debts,
customers can be served after a delay and tighten up its credit
standards. In contrast, when competition is keen, a larger
amount of working capital is required as customers may not
inclined to wait and must be served promptly because other
firms are ready to meet their needs sooner. Further, generous
credit limits may have to be

30
offered to attract customers in a highly competitive market.
(5) Firm's Credit Policy
The credit policy of the firm affects working capital by
influencing the level of book debts. The credit terms to be
granted to the customers may depends upon the norms of
industry to which the firm belongs. But a firm has flexibility of
shaping its credit policy with in the constraints of industry
norms and practices.
If a firm's credit policy is liberal, large working capital is
required. In contrast, if firm's credit policy is strict, the concern
can maintain less amount of working capital.
(6) Availability of Credit
The working capital requirements of a firm are also affected by
credit terms granted by its creditors. A firm will need less
working capital if liberal credit terms are available to it and
vice-versa. Similarly, the availability of credit from banks also
influence the working capital needs of the firms. A firm which
can get bank credit easily on favourable conditions, will
operate less working capital in comparison to a firm without
such facility.

31
(7) Growth and Expansion Programmes
The working capital needs of the firm increases as it grows in
terms of sales or fixed assets. It is difficult to precisely
determine the relationship between volume of sale and the
working capital needs. The critical fact, however, is that the
need for increased working capital funds does not follow
growth in business activities, but proceeds it.45 It is, therefore,
necessary to make advance planning of working capital for a
growing firm on a continuous basis.
A growing firm may need to invest funds in fixed assets in
order to sustain its growing production and sales. This will, in
turn, increase investment in current assets to support enlarged
scale of operations. It should be realized that a growing firm
needs funds continuously. It uses external sources as well as
internal sources to meet the increasing needs of funds.
(8) Vagaries in Supply of Raw-materials
Certain raw-materials pose problems in the matter of
procurement and holding. Their sources may be few and
irregular. They may, therefore, be less amenable to the
discipline of planned inventory system. The enterprise may
feel compelled to purchase and carry large reserves of these
items, to sustains smooth

32
flow of production. Inventory levels rise, as a consequence
using up more funds.
Another problem, often confronting the enterprise, pertains to
the sporadic supplies of some essential raw-materials such as
steel, in scarcity conditions. Where controlled commodities are
involved the buyer has a very limited option as to the quantum
and timings of purchase.
Some raw materials may be available only in certain seasons,
so these have to be obtained and stored, in advance for the
lean months. The working capital requirements, in such
circumstances will registered seasonable fluctuations.
(9) Profit Margin and Profit Appropriation
Firm's differ in their capacities to generate profit from business
operations. Some firm's enjoy a dominant position, due to
quality product or good marketing management or monopoly
power in the market can earn a high profit margin. Some other
firms may have to operate in an environment of intense
competition and may earn low margin of profit. A high margin
contributes towards the working capital pool. In fact the net
profit margin is a source of working capital to the extent it has
been earned in cash. The cash profit can be computed by
adjusting non-cash items such as depreciation outstanding
and prepaid expenses,

33
accumulated expenses and losses written off etc., in the net
profit. But, in practice, the net cash inflows from operations
can not be considered as cash available for use at the end of
the period. The contribution towards working capital would be
affected by the way in which profits are appropriated. The
availability of cash generated from operations, thus, depends
upon taxation, dividend and retention and depreciation policy.
(10)Price Level Changes
The shifts in price levels over the years have always
succeeded in clouding the vision of finance manager. The
financial experts, all over the world, are still debating and
endeavouring to spell out the right way to resolve the enigma
of changing price levels.
Rapidly rising prices create the need for more funds for
maintaining the present volume of activity. For same levels of
inventories, higher cash outflows are needed. In an
inflationary set-up , even operating expenses will grow for a
given levels of activity. Wage increases will have to be
financed and for current level of services higher costs will
have to be incurred. Replacement of fixed assets will have to
be enhanced prices requiring a much higher cash outlay that
what has been contemplated by depreciation charges. A
partial saving feature, however, is that the

34
company can seek to compensate these cost jumps by
upward revision of its product prices. While some companies
are in the advantageous position of bring able to effect more
than compensating prices increase for their products, other are
not placed in that fortunate a position. So, the implications of
changing price levels on working capital position will vary from
company to company depending upon the nature of its
operations, its standing in the market and other relevant
considerations.
It is also true that not all prices move in pace, nor do they all
move in the same direction. This diversity in price changes
creates contradictions. It leaves some companies relieved of
their working capital problems and, at the same time, it
aggravates or intensifies the working capital problems of
others.
(11) Operating Efficiency
The operating efficiency of the firm relates to the optimum
utilization of resources at minimum costs. The firm will be
effectively contributing to its working capital , if it is efficient in
controlling the operating costs. The use of working capital is
improved and the pace of the cash cycle is accelerated with
the operating efficiency. Better utilisation of resources
improves profitability and thus helps in releasing the pressure
on working capital. Although it may not be

35
possible for a firm to control the prices of materials or wages,
but it can certainly ensure efficient and effective use of its
materials, labour and other resources.
Besides the above considerations a number of factors i.e.,
dividend policy, lack of technology, absence of co-ordination in
policy, hazard and contigencies and scale of operations
influence the amount of working capital.
CHANGES IN THE LEVEL OF WORKING CAPITAL
There is not an optimum level of working capital in every
business. This is because changes always occur in the level of
working capital. The following are the reasons for such changes.
1. Changes in the level of sales and/over operating expenses.
2. Policy changes.
3. Changes in Technology.
1. Changes in the level of Sales and Operating expenses:
The first factor causing a change in the working capital level is a
change in sales and operating expenses. The changes in this
factor may be due to three reasons:

36
a) There may be a long-term trend of change. For instance, the
price of raw-material constantly rise, necessitating the
holding of a large amount in inventory.
b) Cyclical changes in the economy leading to ups and downs
in the business activity, will influence the level of working
capital.
c) Seasonality in this sales activities. Seaonality-peeks and
trougs-can be said to be the main source of variation in the
level of temporary working capital.
The change in sales and operating expenses may be either in
the form of increase or decrease. An increase in the volume of
sales is bound to be accompanied by higher level of cash,
inventory and receivables. The decline in sales will have exactly
the opposite effect- a decline in the need of working capital.
A change in the operating expenses-rise or fall will have a
similar effect on the levels of working capital.
POLICY CHANGES
The second major cause of working capital is due to changes
in policies initiated by management. There is a wide choice in the
policy of current assets and sales volume. A firm following a
conservative policy, in this respect having a very high level of
current assets in relation to sales, may deliberately opt for a less
conservative policy and vice-versa. These conscious

37
managerial decisions will certainly have an impact on the level of
working capital.
TECHNOLOGICAL CHANGES
Finally, another factor that can cause changes in the level of
working capital is technological changes. If a new process
emerges as a result of technological development, which shorten
the operating cycle., it will reduce the need for working capital and
vice-versa.
Table 1.1
SHOWING SOURCES OF CHANGES IN
WORKING CAPITAL
Source of Working Capital Reason
Change Affected
Sales Volume Permanent Different levels of
cash, receivables and
inventory needed at
new sales level.
Seasonal and Variable Receivables and in
cyclical factors ventory must be
available on tempor
ary basis
Technology Permanent Level of inventory must
support the new
production capacity
Policies of the Permanent & Some policies tie up
firm Variable working capital; others
free it.
WORKING CAPITAL POLICY
There are two important issues while formulating the working
capital policy are:

38
1. What should be the ratio of current assets to sales.
2. What should be the ratio of short-term financing to long-term
financing.
Current Assets in Relation to Sales
If the firm can forecast its level and pattern of sales, inventory
procurement time, inventory usage rates, level and pattern of
production, production cycle time, split between cash and credit
sales, collection period, and other factors which impinge on working
capital components, the investment in current assets can be
defined uniquely. When uncertainty characterizes the above
factors, as it usually does, the investment in current assets cannot
be specified uniquely. In face of uncertainty, the outlay on current
assets would consist of a base component meant to meet normal
requirements and a safety component meant to cope with unusual
demands and requirements. The safety components depends on
how conservative or aggressive is the current asset policy of the
firm. If the firm pursues a very conservative current asset policy, it
would carry a high level of current assets in relation to sales (this
happens because the safety component is substantial). If the firm
adopts a moderate current asset policy, it would carry a moderate
level of current assets in relation to sales. Finally, if the firm follows
a highly aggressive current asset policy, it would carry a low level
of current assets

39
in relation to sales. The relationship between current
assets and sales under these different current assets
policies is shown in fig. 1.4.
Current
Assets
Figure 1.4 Various Current Assets Policies
A conservative current asset policy tends to reduce
risk. The surplus current assets under this policy enable
the firm to cope rather easily with variations in sales,
production plans and procurement time. Further, the
higher liquidity associated with this policy diminishes the
chances of technical insolvency. The reduction of risk,
however, is also accompanied by lower expected
profitability.

40
An aggressive current asset policy, seeking to minimize the
investment in current assets exposes the firm to greater risk. The
firm may be unable to cope with unanticipated changes in the
market place and operating conditions. Further, the risk of technical
insolvency becomes greater. The composition for higher risk, of
course, is higher expected profitability.
The moderate current assets policy having moderate degree
of risk and profitability.
Ratio of Short-term Financing to Long-term Financing
Or Current Assets Financing Policy
The main problem in working capital is deciding upon the
financing policy. Both long-term sources and short term sources
are used to finance the current assets of an enterprise. The long-
term sources of finance provide support for a part of current assets
which is termed as 'net working capital’. It is the excess of current
assets over current liabilities. The total current assets consists of
permanent current assets or hard core current assets and variable
current assets. Hard core/Permanent current assets represent the
minimum level of current assets required to maintain a firm's daily
operations. Temporary or variable current assets are those current
assets which fluctuate with the operational needs of the firm.
There are mainly three financing plans that management can
adopt to finance the current assets.

41
I) Matching or Hedging Approach
II) Conservative Approach
III) Aggressive Approach
I) Matching/Hedging Approach
This policy involves the matching of the expected life of assets
with the expected life of funds raised. Under this policy of
financing each asset would offset with a financing instrument
of approximately corresponding maturity. The basic
assumption underlying this policy is that the implied cash flow
pattern is known with certainly.
According to this approach, temporary current assets should
be financed by spontaneous source of financing such as
creditors, bills payables and outstanding expenses, as well as
short-term borrowings. Permanent current assets and fixed
assets should be financed by long-term sources.
The underlying logic is that if the firm finances a part of its
permanent current assets with short-term sources, it increases
the risk of funds shortage at the time of maturity of such short
debts. On the other hand, if long-term sources are used to
finance a part of temporary current asset, many times excess
funds remain idle, thus increasing financing cost. Hence

42
the matching policy ensures less risk and lower financing cost.
Short-term Sources
Permanent Current
A Assets
p*Long-term Sources
J
Figure1.5 Financing Under Matching/Hedging Approach
II) Conservative Approach
The matching approach is based on the assumption that the
cash flow pattern is known with certainty and the management
can easily determine at any time what portion of current assets
is a temporary investment and which portion is permanent. In
practice, it may not always be possible to follow the exact
matching approach. Therefore, a firm may choose to follow a
conservative policy which ignores the distinction between
temporary and permanent working capital. Under this policy,
almost all the assets are financed through long-term funds.
During slack season, current asset's level contracts and
liquidity is stored in the form of short-term

43
marketable securities. The conservative policy is safest in
terms of risk of illquidity but it is less profitable, because of
higher financing cost.
Assets A
Temporary Current
Assets >. Short-term Sources
Assets
Long-term Sources
J
►
Time
Figure 1.6 Financing Under Conservative Approach
AGGRESSIVE APPROACH
An aggressive approach involves the use of more short-term
sources of financing than warranted by matching policy. Under this
approach short-term finances are not only used for temporary but
also part or all of permanent current assets. Some times short-term
credit is used to finance a part of fixed assets also. This approach
increase the risk of illiquidity, but profitability is maximum and cost
is minimum in this approach.

44
Figure 1.7 Financing under Aggressive Approach
Since, three different approaches are associated with different
degrees of risk, they are also subject to different rates of return.
The table depicts the situation more clearly.
Table 1.2
^OVERALL WORKING CAPITAL POLICY
Policy Symbol The Mix Risk Profit
ability
WCPc I) High long term debt Less Less
(Conservative)
II) Zero/less Current Liabilit
ies
III)High Current Assets
WCPm I) Average Long-term Debt Average Moderate
(Moderate) II) Average Current Liabilities
III) Average Current Assets
WCPa I) Zero or Less Long term High High
(Aggressive) debt
II) High Current Liabilities
III)Low Current Assets

45
CHOOSING THE WORKING CAPITAL POLICY
The overall working capital policy adopted by the firm may
broadly be conservative, moderate, or aggressive. A conservative
overall working capital policy means that the firm chooses a
conservative current asset policy alongwith a conservative current
assets financing policy. A moderate overall working capital policy
reflects a combination of a conservative current assets policy and
an aggressive current asset financing policy or a combination of an
aggressive current asset policy and conservative current assets
financing policy. An aggressive overall working capital policy
consists of an aggressive current asset policy alongwith aggressive
current assets financing policy. Table 1.2 shows visually the
various ways of combining individual policies, with respect to
current assets and current financing, into an overall working capital
policy.
An overall conservative policy reduces risk and offers low
return. An overall moderate working capital policy offers moderate
return accompanied with moderate risk. An overall aggressive
working capital policy provides a package of high risk and high
return. The choice of an overall working capital policy would
depend upon the risk disposition of management.

46
PRINCIPLES OF WORKING CAPITAL
The following are the general principles of a sound
working capital management policy. These are given by
E.W. Walker.46
Principles of Working Capital Management
^ ^
I
^
Principle of Risk Principle of Cost of Principle of Equity Principle of Maturity
Variation Capital Position of Payment
1) Principle of Risk Variation
Risk here refers to the inability of a firm to meet its obligations
as and when become due. Larger investment in current assets
with less dependence on short-term borrowings increase
liquidity, reduce risk and thereby decreases the opportunity for
gain or loss. On the other hand less investment in current
assets with greater dependence on short-term borrowings
increase risk, reduce liquidity and increase profitability. In other
words, there is definite direct relationship between risk and
profitability. A conservative management prefers to minimize
risk by maintaining higher level of current assets or working
capital, while a liberal management assumes greater risk by
reducing working capital. However, the goal of the
management should be establish a suitable trade off between
profitability and risk.

47
2) Principle of Cost of Capital
The various sources of raising working capital finance have
different cost of capital and degree of risk involved. Generally,
higher the risk lower is the cost and lower the risk higher is the
cost. A sound working capital management should always try
to achieve a proper balance between these two.
3) Principle of Equity Position
This principle is concerned with planning the total investment
in current assets. According to this principle, the amount of
working capital invested in each component should be
adequately justified by a firm's equity position. Every rupee
invested in current assets should contribute to the net worth of
the firm.
4) Principle of Maturity of Payment
This principle is concerned with planning the source of finance
for working capital a firm should make every effort to relate
maturities of payment to its flow of internally generated funds.
THE PROFITABILITY-SOLVENCY TANGLE : THE TWIN-
OBJECTIVES OF WORKING CAPITAL MANAGEMENT
Profitability and solvency are the twin objectives of working
capital management. Solvency, more aptly referred to as technical
solvency, is a continued state of readiness to meet maturing
obligations. The financial

48
manager is on the horns of dilemma. An apparent conflict is evident
and the task is one of establishing an optimum balance between
profitability and solvency, which tend to work as cross purposes.
Risk - taking is an approach to profitability, but risk-aversion is
counselled on considerations of solvency.
Among the providers of working capital are the shareholders
and the lenders expecting a reasonable return by way of dividend
and interest, respectively. For this, profitability is a pre-condition.
Lenders and creditors expect prompt settlements of their claims as
and when due. This presupposes the company's solvency on a
continued basis. Survival and growth of the company, thus, depend
on its ability to meet the two tests of profitability and solvency.
The risk of becoming technically insolvent is measured using
net working capital. It is assumed that the greater the amount of
working capital, the less risky the firm is or more liquid the firm and
therefore is less likely it is to become technically insolvent.
Conversely, lower levels of not working capital and liquidity are
associated with increasing level of risk. Thus the relationship
between liquidity and networking capital is such that when net
working capital and liquidity
increases, the firm’s risk decreases. If a firm wants to increase its
profitability, it must also increase its risk. If it is to decrease its risk,
it means decrease in profitability.

49
The trade-off between these variables is regardless of
how the firm increases its profitability through the manipulation of
working capital, the consequence is a
corresponding increase in risk as measured by level of net working
capital.
The effects of changing current assets and current liabilities on
the firm's liquicy^®3^L profitability trade-off
are discussed as ; | J Jg
The lower the cash balarooitKe higher would be the expected
return, but there is more risk of running out of cash,. The risk is
higher because there is possibility of shortage of cash in urgent
situations and higher return is due to less amount tied up in non-
earning asset. Thus a low liquidity is associated with high rate of
return, However, it does not understand that low liquidity is in the
best interest of shareholders.
When a firm maintains low level of inventory, it is incurring risk
of shortage of raw-materials or work in progress inventory, that can
shut down the production process. On the other hand, when
inventory level is high. There is less risk, but it has also less
profitable, but it should be remembered that inadequate level of
current assets in long-term affects firm's earnings adversely
because inadequate current assets are not in a position to utilize its
fixed assets efficiently.

50
So, together with the company's profits, the company's growth
has to sustained by an unfailing credit soundness at all times.
Funds should ever be available to meet maturing obligations. If the
company defaults in its commitments and its credit reputation is
tarnished, as a consequence it might virtually be shutting itself off
from ready sources of supplies and funds. The need to maintain
reasonable level of liquid or near-liquid assets at all times is,
therefore, imperative.
If a liberal, view is taken of the need to permit some additional
levels of stocks and debtors to aid unhindered production and
accelerated sales, solvency may be impaired. If solvency is
regarded as of overriding importance and investment in profit
opportunities may have to be forgone, owing to interruptions and
rigid credit policies.
Solvency resets on a continuing state of liquidity and is a
function of the degree of liquidity attaching to the current assets.
The assumptions of an innate conflict between the objectives of
profitability and liquidity has its limitations. It has validity only in
extreme situations of excessive investment in current assets and
inadequate liquidity or of excess curtailed investment in current
assets and excessive liquidity. When the approach is optimal, due
recognition being given to both profitability and liquidity, each
enables and aids to other.

51
In a restricted sense, however, the twin objectives of
liquidity and profitability may be viewed as antithetical
propositions........... ,
Maintenance of a sound liquidity position may enhance
profits, provided that the established liquidity level
harmonizes with the nature of the enterprise. Further
more, in a sense, liquidity is a very short term
proposition......... By keeping
this short run position secure, the financial manager is
able to plan for profitability in the long run. In this sense,
liquidity is not competing with profitability: rather is a
mean towards the end profits.47
When in a tight corner and funds are needed
desperately urgently, the company may have to resort to
cash borrowings, at high rates and rigid terms. A poor
liquidity position thus impairs profitability.
Effective management will entail predetermination of
the minimum funds required, study of the pattern of
receipts and payments and advance planning of short
term borrowings and investments. While prevalence of
idle, unused funds has to be avoided, care has also to be
taken to desist from over strading or attempting to use
merge funds to support considerably increased
production and sales activity.
It is the trade off between profitability and liquidity
that presents probably the most challenging phase of
working capital management. The related decisions will
reflect the degree of conservatism or otherwise in
management outlook.

52
SOURCES OF WORKING CAPITAL FINANCE
After determining the requirements of current assets in the
aggregate and in various components of working capital, the next
important task before financial manager is to select an assortment
of appropriate source to finance current assets. A business firm
has diverse source to meet its financial requirements. In selecting a
particular source, financial manager has to consider the merits and
demerits of each source in the context of the constraints of the firm.
The sources of finance of a firm may be classified broadly
into two categories from the viewpoint of time element - Long term
sources and short term sources. Each of these can further be
divided into internal and external sources as follows:
l
Sources of Working Capital Finance
■
1 }
Long-term & Medium Short-term Sources of Finance
Term Sources of Finance
“““I▼
▼
▼ Internal Sources External Sources
Internal Sources External Sources 1) Dividend 1) Trade Credit
1) Retained i) Equity Provisions II) Bank Credit
Earnings Capital II) Tax II!) Public Deposits
II) Depreciation ii) Debentures Provisions IV) Commercial
Provisions iii) Long-term Papers
loans from V) Miscellaneous
Financial sources such as
Institutions deposits from
including stockiest and
commercial contractors etc.
banks

53
Depending upon the availability of the sources and the policy
of a concern, all the above sources can be used either jointly or
separately.
The concept of permanent and temporary working capital
helps in determining the quantum of funds to be obtained from
different sources of finance. As observed by financial experts like
Robert H. Wessel, permanent working capital should be financed
by equity capital or other long term sources, whereas temporary
working capital should generally be financed by short term
sources.48
The long-term sources of finance provides support for a
relatively small portion of current assets requirements that is called
net working capital. On the other hand, short term sources, referred
to as current liabilities, provide for a major portion of current assets
financing.
The concepts of gross working capital and net working
capital, also helpful in determining the use of different source of
finance for working capital. Net working capital represents the
amount raised from long term sources for current assets. In case,
net working capital is negative, it indicates that a part of fixed
assets has also been financed through current liabilities.

54
We have three guidelines for financing working capital, these
are mutually exclusive, i.e., a firm will attempt to follow one norm
not all three. The rationale for each set of guidelines are as:
Guideline 1 : Permanent and Variable Working Capital
These sources of funds are compared against the firm's
permanent and temporary working capital. A firm's variable needs
for current assets should be financed from short-term sources and
only for the period needed. The permanent needs may be partially
(perhaps one third) matched against short-term sources. The
remainder of the permanent working capital plus all the fixed assets
should be financed from long term sources.
Guideline 2 : Major Current Accounts
Cash and receivables are the most liquid assets and are or
will soon be available to pay bills. These may be matched against
current liabilities. Inventories and other assets are less liquid and
should be financed through long-term sources.
Guideline 3 : Total Current Assets
A 2:1 normal current ratio means that one half of the current
assets will be matched against short-term liabilities. The remaining
current assets and all fixed assets will be financed by long-term
sources of funds.

55
Table 1.3
TABLE SHOWING THREE SETS OF GUIDELINES FOR
SOURCES OF FUNDS TO FINANCE WORKING CAPITAL
Permanent Working Major Current Assets Total Current
Capital & Variable Assets
Working Capital
Item Source Item Source Item Source
Variable Short Cash and Short 1/2 Short
Working term Receivables term Current term
Capital Assets
1/3 Short Inventories Long 1/2 Long
Permanent term term Current term
Working Assets
Capital
2/3 Long Fixed Long Fixed Long
Permanent term Assets term Assets term
Working
Capital
SOURCES OF PERMANENT OR LONG TERM FINANCE OF
WORKING CAPITAL
Permanent sources of working capital finance are both
internal and external. Among the internal ones, the most important
are retained earnings and depreciation provision.
Internal Sources
Among Internal sources depreciation provision and retained
earnings aj^emain.

56
DEPRECIATION PROVISION
Depreciation constitutes a part of the cost of business
operations and consequently represents an expense that is
chargeable against earnings. So, this charge is added to the cost of
the commodity produced. However, unlike most expenses, it does
not represent a cash outlay and it is referred to as 'non-cash'
expenses. Consequently, an enterprise gathers capital in an
amount equal to the depreciation provision charged against the
earnings. The purpose of this accumulation is to provide for the
ultimate replacement of the depreciating asset. To the extent that
this is not done presently, the enterprise use this cash for financing
the working capital. The alternate user for which depreciation
charges are utilized, are for investment in industrial securities
outside the business and/or for future expansion.
Retained Earnings or Ploughing back of Profits or
Accumulated Surplus
A profit retained in the business refers to the reinvestment by
a concern of its surplus earnings in the business. It equals to net
profit minus tax and dividend. The amount of retained earnings
depends upon a number of factors such as the rate of corporate
taxation, the dividend policy of a company and the extent of
discriminatory taxation of dividends as compared to that of
undistributed profits. Retained earnings are generally

57
used for financing expansion and development in an organization,
but to some extent they may also be used as working capital. The
availability of retained earnings for working capital depends on the
extent of surplus and the company's policy regarding appropriation
thereof.
Retained earnings and the depreciation funds may prove to
be the best sources of permanent working capital finance, but they
are not available in the initial stages of an enterprise. Unless an
enterprise has been in operation for sufficiently long, their share in
the working capital finance is not likely to be too much.
External Sources
If these above two internal sources - are
inadequate and the policy of the government is not in the favour of
accumulation, the enterprise might be required to finance the
needs of their permanent working capital from the external sources.
Among the external sources equity share capital, debentures and
loans from financial institution are main.
Equity Share Capital
Equity share capital is the most important source for raising
the permanent portion of working capital. Equity shares do not
have any fixed commitment charge and the dividend on these
shares is to be paid subject to the availability of sufficient profits. As
far as possible, a

58
company should raise the maximum amount of permanent working
capital by the issue of the equity shares.(especially in the initial
years of an enterprise), efforts should be made to finance the
permanent part of working capital of the industry.
Debentures
A debenture is an instrument issued by the company
acknowledging its debt to its holder. It is an important method of
raising long-term or permanent working capital. The debenture
holders are the creditors of the company. A fixed rate of interest is
paid on debentures. This interest on debentures is a charge against
profit and loss account. The debenture as a source of finance has a
number of advantages both to the investors and the company.
Since interest on debentures have to be paid on certain
predetermined intervals at a fixed rate and also debenture get
priority on repayment at the time of liquidation, they are very well
suited to cautious investors. The firm issuing debenture also enjoys
a large number of benefits such as trading on equity, retention of
control, tax benefits, etc.
Loans from Financial Institutions
Financial institutions such as Commercial Banks, Life
Insurance Corporation (LIC), Industrial Finance Corporation of
India (IFCI), State Financial Corporation

59
(SFC), State Industrial Development Corporation (SIDC), Industrial
Development Bank of India (IDBI) etc., also provide short-term,
medium-term and long-term loans. This source of finance is more
suitable to meet the medium term demands of working capital.
Interest is charged on suchloans is to be re-paid by way of
installment in a number of years.
Sources of Short-term Finance
Short-term sources of working capital finance falls mainly in
two categories, internal sources and external source. In the internal
source dividend provisions and taxation provisions are main and in
external sources trade credit, bank credit, non-bank short-term
borrowings, public deposits are main.
The main importance of these sources vary from country to
country and from time to time depending on the prevailing
environment. In India, the primary sources for financing working
capital are trade credit and short term bank credit. According to an
estimate, both these sources together finance about three-fourth of
the
working capitalrequirements of indsutry.49 Another estimate50
regarding the relative contribution of various sources reveals that
trade credit constitutes the most important source accounting for
approximately two-fifths of the total while short-term bank credit
finances more than one-fourth.

60
Internal Source
Current Provisions like Provision for Taxation and Dividend
Current provisions arise in the normal course of business
operations such as provision for taxation and provision for
dividends etc., and mature for payment within a short period of few
months. For a brief while, they serve as source of working capital
funds. But the scope for using these provisions as discretionary
source, by varying their periods of duration and the amount, is
limited.
External Source
Among short-term external sources trade credit, bank credit,
public deposits and commercial papers are main.
Trade Credit
Trade credit refers to the credit that a customer gets from
supplier of goods in the normal course of business. In practice, the
buying firm do not have to pay cash immediately for the purchase
made. This deferral of payment is a short-term financing called
trade credit. It is a major part of financing for firm. In India, it
contributes to about one-third of the short-term financing.
Particularly small firms are heavily dependent on trade credit as a
source of finance since they find it difficult to

61
raise funds from banks or other sources in the capital market.
It is an informal-arrangement, and is granted on an open
account basis. A supplier sends goods to the buyer on credit which
the buyer accepts, and thus, in effect, agrees to pay the amount
due as per sales terms in the invoice. However, buyer does not
formally acknowledge it as a debt; the buyer does not sign any
legal instrument. Once the trade links have been established
between the buyer and seller, they have each others mutual
confidence, and trade credit becomes a routine activity which may
be periodically reviewed by the supplier.
Trade credit may also take the form of bills payable. When
the buyer signs a bill - a negotiable instrument - to obtain trade
credit, it appears on the buyer's balance sheet on bills payable. The
bill has a specified future date, and it usually used when the
supplier is less assure about the buyer's willingness and ability to
pay or when the supplier wants cash by discounting a bill from the
bank.
II. Bank Credit
Banks are the main institutional source of working capital
finance in India. After trade credit, bank credit is the most
important source of financing
working capital requirements in India.A bank

62
considers a firm's sales and production plans and desirable
level of current assets in determining its working capital
requirements.
Forms of Bank Finance
A firm can draw funds from a bank within the maximum credit
limit sanctioned. It ca draw funds in the following forms; (a)
Overdraft (b) Cash Credit (c) Bills purchasing or discounting (d)
Working capital loan.
a. Bank Overdraft
Under the overdraft facility, the borrower is allowed to
withdraw funds in excess of the balance in current account
up to a certain specified limit during a stipulated period.
Though overdrawn amount is repayable on demand, they
generally continue for a long period by annual renewals of
the limits. It is a very flexible arrangement from the
borrower's point of view since the borrower can withdraw and
repay funds whenever the firm desires within the overall
stipulations. Interest is charged on daily balances - on the
amount actually withdrawn-subject to some
minimum charges. The borrower operates the account
through cheque.

63
b. Cash Credit
The cash credit facility is similar to the overdraft arrangement.
It is the most popular method of bank finance for working
capital in India. Under the cash credit facility, a borrower is
allowed to withdraw funds from the bank up to the sanction
credit limit. The borrower is not required to borrow the entire
sanctioned credit once, rather he can draw periodically to the
extent of his requirement and repay by depositing surplus
funds in his cash credit
account. There is no commitment charges; therefore, interest
is payable on the amount actually utilized by the borrower.
Cash credit limits are sanctioned against the security of
current assets. Though funds borrowed are repayable on
demand, banks usually do not recall such advances unless
they are compelled by adverse circumstances. Cash credit is
the most flexible arrangement from the borrower's point of
view.
c. Purchase or Discounting of Bills
Under the purchase or discounting of bills, a borrower obtain
credit from a bank against its bills. The bank purchases or
discounts the borrower's bills. The amount provide under this
agreement is covered within the overall cash credit or
overdraft limit. Before purchasing or discounting the bills, the

64
bank satisfies itself as to the credit worthiness of the
drawer. Though the term 'bills purchased' implies that
the bank becomes owner of the bills, in practice, bank
hold bills as security for the credit. When a bill is
discounted, the borrower is paid the discounted
amount of the bill (viz., full amount of bill minus the
discount charged by the bank). The bank collects the
full amount on maturity.
To encourage bills as instrument of credit, the
Reserve bank of India introduced the New Bill market
Scheme in 1970. The scheme was intended to reduce
the borrower's reliance on the cash credit system
which is susceptible to misuse. It was also envisaged
that the scheme will facilitate banks to deploy their
surpluses and deficits by rediscounting or selling the
bills purchased or discounted by them. Bank with
surplus funds could repurchase or rediscount bills in
the possession of bank with deficits. There can be
situation where every bank wants to sell its bill.
Therefore, the Reserve Bank of India, plays the role
of the lender of last resort under the New Bill Market
Scheme. Unfortunately, the scheme has not worked
successfully so far.
d. Working Capital Loan
A borrower may sometimes require adhoc or
temporary accommodation in excess or sanctioned

65
credit limit to meet unforeseen contingencies. Banks
provide such accommodation through a demand loan
account or a separate 'non-operable' cash credit
account. The borrower is required to pay a higher
rate of interest above the normal rate of interest on
such additional credit.
III. Commercial Paper
Commercial Paper (CP) is an important money
market instrument in advance countries like the U.S.A
to raise short-term funds. In India, on the
recommendation of the Vaghul Working Group, the
Reserve Bank of India introduced the commercial
paper scheme in 1989. Commercial paper, as it is
known in the advance countries, in a form of
unsecured promissory note issued by firms to raise
short-term funds. The commercial paper market in
the US.A is a blue-chip market where financially
sound and higher rated companies are able to issue
commercial papers. The buyer of commercial papers
include banks, insurance companies, Unit trusts and
firms with surplus funds to invest for a short period
with minimum of risk.

66
IV. Public Deposits and Other Non-Bank Short Term
Loans
Public deposits constituted a profolic source of easy finance
in the early stages of Indian industrial development, at a time
when modern banking facilities were yet to be establish
themselves. But with the advent of a large number of
financial institutions, the position changed and the
dependence of companies on public deposits seemed to
have declined.
Firm can also take loans from other non-bank sources.
V Factoring
A factor is a financial institution which offers services relating
to the management and financing of debts arising from credit
sales. While factoring is well-established in western
countries, only two factors, the SBI factoring and Commercial
Services Limited and Canra Bank factoring limited, which has
been mandated by the Reserve Bank of India to operate in
the western region and the southern region respectively,
have been set up recently in India. The Punjab National Bank
and bank of Allahabad are expected to set up factoring
agencies

67
to serve the northern region and the eastern region
respectively.
Features of a Factoring Arrangement
The key features of a factoring arrangement are as follows:
The factor selects the accounts of the client that would be
handled by it and establishes, along with the client, the credit limits
applicable to the selected accounts.
• The factor assumes responsibility for collecting the debt of
accounts handled by it. For each account, the factor pays to
the client at the end of the credit period or when the account
is collected, whichever comes earlier.
• The factor advances money to the client against non-yet
collected and not-yet-dues debts. Typically, the amount
advance is 70 to 80 percent of the face value of the debt and
carries on interest rate with may be equal to or marginally
higher than the lending rate of commercial banks.
Factoring may be on a recourse basis (this means that the
credit risk is borne by the client) or on a non-recourse basis
(this mean that the credit risk is

68
borne by the factor). Presently, factoring in India is done on a
recourse basis.
• Besides the interest on advances against debt, the factor
charges a commission, which may be 1 or 2 percent of the
face of debt factored.
Evaluation
Factoring offers the following advantages which makes it
quite attractive.
1. Factoring ensures a definite patter of cash inflows from credit
sales.
2. Continuous factoring may virtually eliminate the need for the
credit and collection departments.
Limitations
1. The cost of factoring tends to be higher than the cost of other
forms of short term borrowings.
2. Factoring of debt may be preceived as a sign of financial
weakness.

69
Figure 1.8 Mechanics of Factoring
WORKING CAPITAL CONTROL AND BANKING POLICY
In recent years, the availability of bank credit to industry has
been subject-matter of regulation and control, the idea being to
secure alignment of bank credit with planning priorities and ensures
its equitable distribution to various sectors of the Indian economy.
Seven report are of special significance in this respect.
a. Dehejia Committee Report, 1969
b. Tondon Committee Report, 1975
c. Chore Committee Report, 1979

70
d. Marathe Committee Report, 1982
e. Chakravarty Committee Report, 1985
f. Nayak Committee Report, 1991
g. Kannan Committee Report, 1997
A. Dehejia Committee Report (1969)51
National Credit Council constituted a committee under the
chairmanship of Sh. V.T. Dehejia in 1968 to “determine the extent
to which credit needs of industry and trade are likely to be inflated
and how such trends could be checked” and to go into establishing
some norms for lending operations by commercial banks. The
committee was of opinion that there was a tendency to divert short-
term credit for long-term assets. Although committee was of the
opinion that it was difficult to envolve norms for lending to industrial
concerns, the committee recommended that the bank should
finance industry on the basis of a study of borrower's total
operations rather than security basis alone. The committee further
recommended that the total credit requirements of a borrower
should be segregated into 'Hard Core' and 'Short-term’ component.
The 'Hardcore' component which should represent the minimum
level of inventories which the industry was required to hold for
maintain a given level of production and subject to repayment
schedule. The committee was also of the

71
opinion that generally a customer should be required to confine his
dealings to only one bank.
B. Tondon Study Group
The Reserve Bank of India set up a study group to frame
guidelines for follow-up to bank credit in July, 1974 under the
chairmanship of Sh. Parkash Tondon. The term of references to
the group were.
i) To suggest guidelines for commercial banks to follow up and
supervise credit from the point of view of ensuring proper
end-use of funds and keeping a watch on the safety of the
advances and to suggest the type of operational data and
other information that may be obtained by banks periodically
from such borrowers and by the Reserve Bank of India from
the lending banks.
ii) To make recommendations for obtaining periodical forecasts
from borrowers of : (a) business/product ion plans, and (b)
credit needs.
iii) To make suggestions for prescribing inventory norms for the
different industries both in the private and public sectors and
indicate the broad criteria for deviating from these norms.

72
iv) To suggest criteria regarding satisfactory capital structure
and sound financial basis in relation to borrowing.
v) To make recommendations as to whether the pattern of
financing working capital requirements by cash
credit/overdraft system etc. required to be modified, if so, to
suggest suitable modification.
vi) To make recommendations regarding the resources for
financing the minimum working capital requirements, and
vii) To make recommendation of any other related matter as the
group may consider necessary to the subject of inquiry or any
other allied matter which may be specifically referred to it by
Reserve Bank of India.
Observation and Recommendations52
i. Bank credit is extended on the amount of security available
and not according to the level of operations of the customer.
ii. Bank credit instead of being taken as a supplementary to
other sources of finance is treated as the first source.
Although the committee recommended the continuation of
the existing cash credit system, it suggested certain
modifications so

73
as to control the bank finance. The banks should get the
information regarding the operational plans of the customer
in advance, so as to carry a realistic appraisal of such plans
and the banks should also know the end-use of bank credit
so that the finances are used only for the purposes for which
they are lent.
The recommendations of the committee regarding lending
norms suggested under three alternatives. According to the
first method, the borrower will have to contribute a minimum
of 25 percent of working capital gap from long-term funds,
i.e., owned funds and borrowings, this will give a minimum
current ratio of 1.17:1. Under the second method the
borrower will have to provide a minimum 25 percent of total
current assets from long term funds; this will give a minimum
current ratio of 1.33 : 1. In the third method, the borrower’s
contribution from long-term funds will be to the extent of the
entire core current assets and a minimum of 25 percent of the
balance current assets, thus strengthening the current ratio
further.
Chore Committee Report53
The Reserve Bank of India constituted a working group under
the chairmanship of K.B. Chore in March 1979 with the following
terms of reference.

74
1. To review the operation of the cash credit system with
reference to the gap between sanctioned credit limits and the
extent of their utilization.
2. In the light of the review to suggest (a) modifications in the
system with a view to making the system more amenable to
rational management of funds by commercial banks and/or
(b) alternative types of credit facilities, which would ensure
greater credit discipline and also enable banks to relate credit
limits to increase in output or other productive activities.
3. To make recommendations on any other related matter as
the group may think in germane to the subject.
The important recommendations of the committee are as
follow:
i) The banks should maintain quarterly statements in the
prescribed format from all borrowers having working capital
credit limits of Rs. 50 lakhs and above.
ii) The banks should undertake a periodical review of limits of
Rs. 10 lakhs and above.
iii) The banks should not bifurcate cash credit accounts into
demand loan and cash credit component.

75
iv) If a borrower does not submit the quarterly returns in time the
banks may charge penal interest of one percent on the total
amount outstanding for the period default.
v) Banks should discourage sanction of temporary limits by
charging additional one percent interest over the normal rate
on these limits.
vi) The banks should fix separate credit limits for peak level and
non-peak level wherever possible.
vii) Banks should take steps to convert cash credit limits into bill
limits for financing sales.
Marathe Committee Report54
The Reserve Bank of India, in 1982, appointed a committee
under the chairmanship of Marathe to review the working of Credit
Authorization Scheme (CAS) and suggest measures for giving
more meaningful directions to the credit management function of
Reserve Bank. The recommendations of the committee have been
accepted by the Reserve Bank of India with minor modifications.
The principal recommendations of the Marathe Committee
include:
i) The committee has declared the third method of lending as
suggested by the Tondon Committee to be droped. Hence, in
future the banks would provide

76
credit for working capital according to the second method of
lending.
) The committee has suggested the introduction of the
'Fast Track Scheme' to improve the quality of credit
appraisal in banks. It recommended that commercial
banks can release without prior approval of the
Reserve Bank 50 percent of the additional credit
required by the borrowers (75 percent in case of
export oriented manufacturing units) where the
following requirements are fulfilled.
a. The estimate/projections in regard to
production, sales, chargeable current assets,
other current assets, current liabilities other
than bank borrowings and net working capital
are reasonable in terms of the past trends and
assumptions regarding most likely trends
during the future projected period.
b. The classification of assets and liabilities as 'current'
and 'non-current' is in conformity with the guidelines
issued by the Reserve Bank of India.
c. The projected current ratio is not below 1.33:1.
d. The borrower has been submitting quarterly
information and operating statements (Form I, II and III)
for the past six months within the

77
prescribed time and undertakes to do the same
in future also.
e. The borrower undertakes to submit to the bank
his annual accounts regularly and promptly.
Further, the bank is required to review the
borrower's facilities at least once in a year even
if the borrower does not need enhancement in
credit facilities.
Chakravarty Committee55
A high-powered committee under the chairmanship of
Sukhmony Chakravarty was appointed by the Reserve
Bank of India to review the working of monetary system of
India. In its report, submitted in April 1985, the committee
examined the monetary system in India and offered wide-
ranging suggestions for its improvement. In respect of
finance for working capital the committee made two major
recommendations which hare described below.
i) Penal Interest for Delayed Payments
The committee observed that delayed payments by
public sector units, some big private sector units and
government departments in their purchase contracts
with suppliers must include a penal interest payment
clause for payments delayed beyond a pre-specified
period. The penal rate of

78
interest may be fixed at 2 percentage points higher
than to basic minimum lending rate of the supplier's
banker.
ii) Segeration of Credit Limit Under Three Different
Heads
The total credit limit to be sanctioned to a borrow should be
considered under three heads (a) cash credit I cover supplies
to government, (b) cash credit II to cover special
circumstances or contingencies, (c) normal working capital
limit to cover the balance of the credit facilities.
The committee proposed the following interest rates for
assistance under various heads.
Cash Credit 1 Basic (minimum) lending
rate of bank
Cash Credit II Maximum prevailing lending
rate of the bank
Normal Working Capital
Limit
• Loan Portion A rate that may very
between the basic
(minimum) and the
maximum lending rate of
the bank

79
• Bill Finance
• CashCredit
Portion
2 percent below the basic
(minimum) lending rate of bank.
Maximum prevailing lending
rate of bank.
NAYAK COMMITTEE REPORT, 1991
The Reserve Bank of India constituted on 9th December, 1991
a committee under the chairmanship of Shri P.R. Nayak, Deputy
Governor to examine the difficulties confronting the small scale
industries in the country in the matter of securing finance. The
representatives of the SSI associations had earlier placed before
the Governor, Reserve Bank of India, various problems issues and
difficulties which the SSI sector had been facing.
The terms of reference of the committee are follows.
I. To examine the adequacy of Institutional Credit for the SSI
sector, particularly with reference to the increase in the cost
of raw material and locking up of the available resources due
to delay in realization of sale proceeds from large companies
and Government agencies.
II. To examine the adequacy of institutional credit for term
finance to the SSI sector.

80
III. To examine the need for making any modifications/relaxations
in the norms prescribed by the Tondon/Chore committee in
respect of SSI units.
IV. To examine whether any revision is required in the present
RBI guidelines for the rehabilitation of sick SSI units.
V. In the light of the above to suggest.
a. Suitable arrangement for ensuring adequate flow of
Institutional Credit for working capital and term finance
to SSI sector including refinance arrangement by
SIDBI/NABARD etc.
b. Modifications/Relaxations, If any, required in the norms
prescribed by the Tondon/Chore committee in respect
of SSI units.
c. Methods of which the locking up of resources on
account of delay in realization of bills can be
minimized.
d. Changes, if any, required in the present guidelines for
rehabilitation of sick SSI units.
VI. To make recommendations on any other related matter which
the committee may consider germane to the subject.
MAJOR RECOMMENDATIONS
The committee examined the profile of bank finance of
working capital, as SSI were strongly of the view that

81
the SSI sector was not getting adequate support from the banking
system. The examination revealed that in the SSI sector as a whole
presently received a level of working capital which was only about
8.1 percent of its output. Among them the village industries and the
smaller tiny industries could scrape working capital of a base 2.7
percent of their output, while the larger units commanded about
18.8 percent which was still a little lower than the level of about 20
percent of the output considered by the committee to be the
reasonable bank finance requirement of larger SSI. The
recommendations of the committee, therefore, are as under :
1. In regard to the larger SSI, the recommended minimum level
of working capital bank finance at 20 percent of the output
should be put on a firm footing by the provision of the
required amount of credit by the commercial banks through
an annual budgetary exercise. Besides, if the genuine need
based demand of the SSI sector as reflected in the budget
requires diversion of a part of the resources flowing to the
medium and large industries (MLI) sector at present, the
same should be mandated by the top management of banks.
The working capital needs to the larger SSI should be fully
met by the commercial banks and the chief executive of each
bank shall ensure that is done.

82
2. The committee examined the demand for and availability of
bank finance for the working capital requirements of the SSI
sector during the 8th plan
period. Based on the recommendations regarding the
provisions of working capital to the various segments of the
SSI sector and also the past growth trends the total
incremental credit demand was estimated at Rs. 22,100
crores. As against this, the availability of resources for the
sector is eliminated at about Rs. 23,400 crores. Despite
uncertainties, due to recent new developments in the
financial system, the committee feels that the banks will
manage in the financial system, the committee feels that the
banks will manage to find the enhanced level of working
capital resources needed by SSI.
3. If however, the resources constraint is experienced for
meeting demand for working capital during the 8th plan
(1992-97), one or more of the under-noted measurers for
securing additional resources could be resorted to :
a. Funds could be provided by the Central Government in
the form of loans to the Credit Institutions through on
appropriate mechanism and the resources for the
purpose may even be secured through International
support.

83
b. A supplementary refinance window .may be
provided to the commercial banks by
SIDBI/NABARD, as is being done in the case of
seasonal agricultural operations of the co operative
banks by NABARD. Such resources support to the
banks by SIDBI/NABARD may be supplemented by
RBI, if necessary.
4. There should be frequent interaction between the bank’s
staff and the SSI borrowers as a part of training
programmes. The confidential reporting on the bank
should take into account their attitude towards the SSI
borrowers and their achievements in lending to this
sector.
5. The banks should prepare a budget in respect of working
capital required by SSIs well before the year begins. The
budgeting exercise should begin at the level of the
borrowing units and the branches financing them. The
budget should be based on the discussions held with the
units specifically for the purpose. Alternatively, the feed
back obtained by the branch from units at the time of
renewal of their credit facilities could also be made use of
wherever such a course is feasible. The branches could
also meet the representatives of various categories of
SSI and obtain first hand information about the prospects
of the industry in the coming year. The budget should
take into account, among other

84
relevant aspects, normal sales growth, price rise during the
past year, anticipated spurt in business etc.
6. It is essential that the unit level working capital budget should
be accepted by the unit itself and once the budget is so
prepared it should not be modified by the bank unilaterally. In
finalizing the budgets of individual units, working capital at
around 25 percent of the output should be considered as the
minimum requirement in cases where inventory norms as per
the Tondon Committee recommendations are not applicable
or not available.
7. In regard to the larger units with aggregate credit limits of
over Rs. 10 lakhs, the budget will follow prescribed inventory
norms, whenever such norms are available. Even in these
cases, there is a need to eschew a rigid application of the
norms and reiterate the flexible approach suggested by the
Tondon Committee. For other industries for which inventory
norms have been prescribed, banks should form their own
judgment as what be regarded as reasonable inventory level
having due regard to the requirements of individual units.
8. When the borrower and the branch Manager are unable to
reach an agreement, the views of both the

85
borrower and the branch manager clearly indicating the
reasons therefore should be kept on record by the branch.
This procedure is likely to fortify the confidence of the branch
manager in taking decisions without fear of consequences.
9. The working capital budget prepared by the bank branches
should form the basis on which resources should be
allocated to the SSI sector by the top management of banks.
Macro-level shifts in the allocation of resources from MLI
sector should be ordered by the Chief Executive, if such a
course from MLI sector should be ordered by the Chief
Executive, if such a course become necessary. Banks should
advise RBI of the budgets so prepared and the resources
allocated there against.
10. RBI should accepted the bank’s collection for the budgeted
working capital to SSI or suggest suitable inter-se changes in
allocation. RBI should however, provide refinance for working
capital to the extent the bank’s budget, as it emerges finally,
exceeds to available funds including those expected from
NABARD/SIDBI, subjected to the reservation of such
minimum percentage of total credit for SSI as may be fixed
by RBI, much in the same manner as it provides refinance for
agricultural operations to state co-operative banks in excess
of their prescribed involvement in agricultural lending.

86
11. Contingencies may arise which will demand urgent
enhancement in the working capital for individual units or for
groups/categories of units commercial banks should take a
positive attitude towards such demands. It the banks can be
accommodated these demand from out of the available
resources as per the budget, RBI/SIDBI intervene in
deserving cases and according raise the quantum of
refinance.
12. There should also be a provision for inputs from the individual
industrial units themselves, either directly or through the SSI
associations, SIDBI should be the nodal institution for this
task of furnishing the client input for inclusion in the
information system.
13. SFCs and banks should endeavour to cover the financial
requirements of SSI under the single window scheme (SWS)
to the maximum extent. SIDBI should make concerted efforts
to make SWS popular with SFCs and commercial banks and
to inform entrepreneurs of its salient features.
14. The SFCs should act as the principal financing agency for
SSIs in about 40 districts out of the 85 districts having a
concentration of SSI units. In these 40 districts the
concerned SFCs will take care of both term loan and working
capital requirements of all new SSI units which can be
financed under SWS. The new units to be financed under
SWS by

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