42 42 Characteristics of Working Capital

7/31/2019 42 42 Characteristics of Working Capital

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Introduction

Apart from financing for investing in fixed assets, every business also requires funds

on a continual basis for carrying on its operations. These include amounts expenses incurred

for purchase of raw material, manufacturing, selling, and administration until such goods are

sold and the monies realized. Business transactions are generally carried on credit with anumber of days elapsing subsequent to the sale being effected for realization of proceeds

1.

While part of the raw material maybe purchased by credit, the business would still need to

pay its employees, meet manufacturing & selling expenses (wages, power, supplies,

transportation and communication) and the balance of its raw material purchases. Working

capital refers to the source of financing required to by businesses on a continual basis for

meeting these needs.

Thus the need for working capital arises from the prevalence of credit in business

transactions, need to fund manufacturing and support and to account for the variations in the

supply of raw material and demand for finished goods.

Characteristics of working capital:

It is continually required for a going concern

However, the quantum of working capital fluctuates depending on the level of activity

Working Capital is impacted by numerous transactions on a continual basis

The above characteristics render limit based financing from banks ideal for working capital

financing. This is because the client is charged interest only on the average outstandingutilized and is saved with the bother of reinvesting short term surpluses arising out of low

working capital utilization at a point in time. Further since the transactions of the business are

generally routed through a current account with a bank, availing a credit limit from the same

bank is really convenient. Thus, working capital requirements are generally financed through

limit based financing from banks.

Bank Financing for Working Capital

The financing limits are granted based on assessment of the working capital

requirement. The assessment factors include various characteristics such as the nature of

industry, industry norms, actual level of activity for the previous year and the projected level

of activity for the subsequent year to arrive at the working capital requirement. The bank

financing limit is thereafter decided after factoring in margins on the different types ofcurrent assets forming part of the working capital.

The Bank Financing Limit is fixed on an annual basis. However, since such limit is provided

to meet specific requirements, utilizing the limits is subjected to the Drawing Power, which is

decided on a monthly/ quarterly basis.


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The effective bank financing is therefore to the extent of the lower of:

Bank Financing Limit: Determined on an annual basis based on an assessment of the

current years projections and the actuals for the previous year.

Drawing Power: Linked to the quantum of current assets (and current liabilities)

owned by the business with appropriate margins. Fixed on a monthly/ quarterly basisdepending on the submission of Monthly/Quarterly Information System returns

indicating the position of the stock statement, receivables, Work in Progress,

payables, etc.

Bank Financing (max. permissible) = Bank Financing Limit OR Drawing Power whichever is

less

Estimation of Working Capital Requirement

Lack of adequate working capital is often stated as one of the major reasons for sickness in

industry (especially in case of SMEs). The counter arguments from the banks have been that

most firms face problems of inadequate working capital due to credit indiscipline (diversion

of working capital to meet long term requirements or to acquire other assets). In this context

it would be pertinent to understand the method adopted by banks in computing the working

capital requirement of the business and the quantum of bank financing to be provided by the

bank.

The main factors considered in the estimation of working capital requirement are:

The nature of business and sector-wise norms

Factors such as seasonality of raw materials or of demand may require a high level of

inventory being maintained by the company. Similarly, industry norms of credit

allowed to buyers determine the level of debtors of the company in the normal course

of business.

The level of activity of the business

Inventories and receivables are normally expressed as a multiple of a days production

or sale. Hence, higher the level of activity, higher the quantum of inventory,

receivables and thereby working capital requirement of the business. So in order to

arrive at the working capital requirement of the business for the year, it is essential to

determine the level of production that the business would achieve. In case of well-

established businesses, the previous years actuals and the management projections

for the year provide good indicators. The problems arise mainly in the case of

determining the limit for the first time or in the initial few years of the business.

Banks often adopt industry standard norms for capacity utilization in the initial years.


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Based on the level of activity decided and the unit cost and sales price projections, the

banks calculate at the annual sales and cost of production.

The quantum of current assets (CA) in the form of Raw Materials, Work-in-progress,

Finished goods and Receivables is estimated as a multiple of the average daily

turnover. The multiple for each of the current assets is determined generally based on

the industry norms. The current liabilities (CL) in the form of credit availed by the business from its

creditors or on its manufacturing expenses are deducted from the current assets (CA)

to arrive at the Working Capital Requirement (WCR).

Standard Formulae for determination of Working Capital

The issue of computation of working capital requirement has aroused considerable

debate and attention in this country over the past few decades. A directed creditapproach was adopted by the Reserve Bank of ensuring the flow of credit to the

priority sectors for fulfillment of the growth objectives laid down by the planners.

Consequently, the quantum of bank credit required for achieving the requisite growth

in Industry was to be assessed. Various committees such as the Tandon Committee

and the Chore Committee were constituted and studied the problem at length.

Norms were fixed regarding the quantum of various current assets for different

industries (as multiples of the average daily output) and the Maximum Permissible

Bank Financing (MPBF) was capped at a certain percentage of the working capital

requirement thus arrived at.

Working Capital assessment on the formula prescribed by the Tandon Committee:

Working Capital Requirement (WCR)= [Current assets i.e. CA (as per industry norms)

Current Liabilities i.e. CL]

Permissible Bank Financing [PBF} = WCRPromoters Margin Money i.e. PMM (to be

brought in by the promoter)

As per Formula 1: PMM = 25% of [CACL] and thereby PBF = 75% of [CACL]

As per Formula 2: PMM = 25% of CA and thereby PBF = 75%[CA]CL

As is apparent Formula 2 requires a higher level of PMM as compared to Formula 1. Formula

2 is generally adopted in case of bank financing. In cases of sick units where the promoter is

unable to bring in PMM to the extent required under Formula 2, the difference in PMM

between Formulae 1 and 2 may be provided as a Working Capital Term Loan repayable in

installments over a period of time.


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Illustrative Example:

Turnover of a manufacturing unit: Rs. 750 lakh p.a (assumed uniform across the year)Assumed value addition norm: 50% (i.e. cost of raw material = 50% of Realisation)

Promoter Projections

Current Assets Current Liabilities

- Raw materials Rs. 50 lakh - Payables Rs. 35 lakh

- Work in progress Rs. 25 lakh

- Finished Goods Rs. 60 lakh

- Receivables Rs. 125 lakh

Requirement assessed as per norms applicable for the industry:

Industry

Norm (a)

Amount as per

Norm (b)

Promoter

Projection (c)

Applicable

norm (d)

Current Asset

- Raw material 1 month Rs. 31.25 lakh Rs. 50 lakh Rs. 31.25 lakh

- Work in Progress (assumed

at 50% complete)10 days Rs. 15.62 lakh Rs. 25 lakh Rs. 15.62 lakh

- Finished Goods 15 days Rs. 31.25 lakh Rs. 60 lakh Rs. 31.25 lakh

- Receivables1.5 months

Rs. 112.50

lakhRs. 125 lakh

Rs. 112.50

lakh

Rs. 190.62

lakh

Rs. 260.0 lakh Rs. 190.62

lakh

Current Liabilities

- Payables 15 days Rs. 18.80 lakh Rs. 35 lakh Rs. 18.80 lakh

Working Capital

Requirement

Rs. 171.82

lakhRs. 225.0 lakh

Rs. 171.82

lakh

Notes:

Assumptions here include: No export turnover, uniform working capital requirement

through out the year

Industry norms have been specified in the Tandon Committee Report for all important

industry categories

Raw materials have been valued at cost of raw material (assumed at 50% of

realization)

Work in progress has been valued at 50% complete basis

Applicable norm (d) is the more conservative of (b) or (c) from the banks point of

view.


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Computation of working capital requirement

Working Capital Requirement arrived at therefore is Rs. 171.82 lakh

Formula 1PMM (Promoter Margin Money) as per formula 1 = 25% of 171.82 lakh = Rs. 42.95 lakh ~

Rs. 43 lakh

Hence, Permissible Bank Finance 1 = Rs. 129 lakh

Formula 2

PMM as per formula 2 = 25% of Rs. 190.6 lakh = Rs. 47.65 lakh

Permissible Bank Financing as per formula 2 = [75% of 190.6 lakhRs. 18.8 lakh ] = Rs.

124.1 lakh

The difference between the 2 methods is Rs. 4.90 lakh (which maybe extended as a Working

Capital Term Loan in case of sick units.

Thus the PMM while being at 25% of the Working Capital requirement1

could actually

translate to as high as Rs. 225 lakhRs. 124 lakh i.e. Rs. 101 lakh assuming that the

promoter projections really reflect his genuine need for working capital. It should however be

understood by the entrepreneur that he ought to keep his working capital requirements to the

minimum (whether or not bank financing is available) to ensure that his interest burden and

capital blocked is kept to the minimum.

The following further points maybe worth mentioning here:

In case of export financing sought by the entrepreneur, the quantum of bank financing

for the Working Capital build up for this purpose would normally be at a higher

percentage

Within the overall limits, there could be sub-limits for bills financing (in case of

receivables) with the result that such limits might not be fully available to the

business.

The Bank Financing Limit arrived above is the Overall limit for the year. The actual

quantum of bank financing that could be availed by the unit at a given point in time

depends upon its drawing power based on its periodical returns filed to the banker.

1Or at (25% of CA) as per Formula 2


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Working Capital and Small Scale Industries

Small scale industries have a distinct set of characteristics such as low bargaining

power leading to problems of receivables and lower credit on purchases, poor financial

strength, high level of variability due to dependence on local factors, etc. Consequently, it hasbeen rightly argued that the industry norms on different current assets cannot be adopted.

The PR Nayak Committee that was appointed to devise norms for assessing the working

capital requirement of small-scale industries arrived at simplified norm pegging the Working

Capital bank financing at 20% of the projected annual turnover. However, in case of units

which are non-capital intensive such as hotels, etc. banks often assess requirements both on

the Nayak Committee norms as well as the working cycle norms and take the lower of the

two figures.

Eligibility and Norms for bank financing of SSIs as per Nayak Committee

a. Applicability:

In case of SSIs, with working capital requirement of less than Rs. 5 crores

In case of other industries, with working capital requirement of less than Rs. 1 crore

b. Quantum of Working Capital bank financing:

20% of the projected annual turnover

c. Subject to a Promoter bringing in a margin of:

5% of the projected annual turnover (i.e. 20% of the total fund requirement that hasbeen estimated at 25% of the projected annual turnover)

Working Capital through Formula Boon or bane ?

The formula driven computation of working capital requirement have been subjected

to much debate over the past few decades. The advantage of such computation has been that

it removes discretion from the officials of banks (which are largely from the Public Sector).

The uniformity thus reduces the scope for accusation of bias.

However, the strongest argument against the MPBF based lending has been that it does not

take into account the variations arising out of location, relative bargaining of the enterprise

and other reasons, which could vary its need for working capital. Even though the banker

could understand the problem, it was not possible to act on it due to the norms. Further, the

One Size fits all theory ensured that banks never needed to develop credit appraisal skills

and lent to all and sundry based on their seeming adherence to norms on paper.

The method has also been criticized as being more appropriate for the era where credit was

rationed out. Banks today are capable of undertaking better assessment of the requirements

and welcome the idea of offering higher limits (larger exposures) to established clients ifrequired in order to retain their business in the face of competition from other banks.


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In 1997, the RBI permitted banks to evolve their own norms for assessment of the Working

Capital requirements of their clients.

Cash flow based computation of Working Capital

Cash flow is the most realistic means of assessing the operations of an enterprise.

Drawing up cash flow statements (monthly or quarterly) for the past few years clearly

indicate the seasonal and secular trend in utilization of working capital. The projections

drawn up by the entrepreneur may then be jointly discussed with the banker as modified in

light of the past performance and the bankers opinions. The peak cash deficit is ascertained

from the cash budgets. The promoters share (margin money) for such requirement maybe

mutually arrived at by the banker and the borrower with the balance requirement forming the

Bank financed part of Working Capital.

Cash flow based computation of working capital requirement has been recommended by the

RBI for assessment of working capital requirement permitting the banks to evolve their own

norms for such assessment. The reason for this has been that Cash flow factors in the past

trends, takes into account the company specific factors and is based on mutual discussion

between the banker and the borrower thereby increasing its acceptability. Also, large

companies have adopted cash budgeting systems for managing their cash flows and hence

such a system does not impose additional requirements on the corporates.

Cash flow system is extremely relevant in case of the seasonal industries to assess the peak

credit requirement and in case of large companies (working capital requirements above Rs.10 crores). However the reluctance to provide the cash budgets thereby revealing additional

information to the banks, has led to even larger companies shying away from Cash Budget

method of assessing Working Capital. Consequently Cash Budget method is currently

prevalent mainly in case of seasonal industries, construction sector as well as other entities

whose operations are linked to projects.

Bank financing based on cash budgets works well and is a good step form for the system.

A big failure in the working capital system hitherto followed by our banks has been that the

Drawing Power (within the PBF limit) is based on post facto stock statements and these are

reset typically on a monthly basis. This means:

The borrowing unit is putting its money upfront and the Drawing Power is a form of

reimbursement.

Responsiveness to sudden surges in demand/ seasonality/ other short term boom

conditions is non-existent, putting a burden on the company to finance this at

exorbitant rates from private financiers.

Finally, a growing company will always be playing catch-up and its Permissible

Bank Financing will be lagging its cash requirements by atleast one year.


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Procedures to avail working capital financing from banks

Banks exercise extreme caution in lending to first time applicants starting up their

business. A first time applicant would be asked for collateral in the form of land, building orresidential property. This would be in addition to a second charge on the fixed assets of the

enterprise. Sequence of steps to avail working capital

Application for the working capital

Most of the large commercial banks are moving towards the trend of specialized SSI

branches near the industrial concentrations. The applications for working capital are

generally accepted and processed at these branches.

List of Documents accompanying the application

The application for working capital would need to have a covering letter containing a

request for sanction of working capital limits. The following documents would need

to be enclosed alongwith:

o Detailed Project Report containing the detailed financials at projected levels of

operations for the next 5 years

o Memorandum and Articles of Association

oCopies of Incorporation documents (relating to formalities with the Registrarof Companies in case of corporates)

o Statutory approvals obtained/ applied for such as for power, water, pollution

control, environment clearance, clearances from other agencies/ departments

with purview over the business.

o Other relevant documentsLetters of intent/ confirmed orders from

prospective buyers.

o Networth statement of promoters.

In case of the larger loans (above Rs. 5 crore in case of most banks), the projections

are generally submitted in the CMA format prescribed by Reserve Bank of India

(earlier mandatory).

In- Principle Sanction for Working Capital

The timeframe for in-principle sanction depends upon two factors:

o Time taken for submission of necessary documents

o The decision structure at the bank

Most of the large banks have specialized SSI branches at the industrial concentrationsin the country. These branches are headed by senior executives often with sanctioning


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power of Rs. 5-6 crores at the branch. In such instances, delays for processing the

applications at the bank are limited. Infact the stage of in-principle sanction maybe

dispensed with and final sanction accorded on full appraisal.

In other cases, such processing may take 30-45 days for according In-Principle

Sanction to the project. The newer private sector banks are generally faster inaccording such approval. The significance of the in-principle sanction of working

capital is that such sanction is necessary for obtaining term funding from the financial

institutions. While these financial institutions accord sanction to a industry,

Appraisal and Final Sanction

The appraisal and final sanction of the request for working capital is based on a

thorough appraisal of the Detailed Project Report (DPR). The traditional banks

generally have specified formats for submission of the DPR. The usual coverage of

the DPR includes:

o Overview of the business

o Background of promoters

o Details of products to be manufacturedmanufacturing process and raw

material

o Market overview and competition Sensitivity AnalysisWhat if on Finished

Goods prices, raw material costs and so on

o Detailed financial projections covering the Balance Sheet, Profit and Loss

Account, Funds Flow and the Financial Ratios.

The timeframe for a Final Sanction in cases where all the requirements have already

been submitted by the borrowing unit is 90 days from the submission of the

application.

Post Sanction Requirements

Post sanction requirements involve completion of documentation creating a charge in

favour of the bank. This could include a charge on assets related to the business and

charge on collateral offered (if any). In case of the assets of the business already being

mortgaged with the term lending institution, a second or third charge maybe created in

favour of the bank.The financing facilities sanctioned can thereafter be availed by the borrower.

Monitoring and follow-up

Working capital financing is extended for the current asset build up of a business,

which is linked to its activity level. These assets are mobile (in case of inventory) and

also easily convertible into cash. At best, the banks have a second charge on the fixed

assets of the enterprise and without the power of Seizure (u/s Sec 29 as available to

the state financial institutions) realizing money from the security is time consuming.

Hence, banks pay extremely high importance to the monitoring and follow-up of the

loan.


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The system of a current account through which all the transactions are routed acts as an in-

built check on the operations of the borrower. By studying the current account transactions in

detail, the banker is able to make an assessment of the business. In addition to this, the banks

also undertake other forms of monitoring.

These include:

Stock Statements collected on a monthly basis from the borrower.

Quarterly Operating Statement giving details of the operations for the quarter

In addition to these checks, banks often employ methods such as:

Stock Audit by independent firms of chartered accountants.

This would involve a visit to the storage areas of the borrower, visual inspection and

scrutiny of the stock statements at the spot. Cross-checking these with the statements givenby the client would provide a means of check.

Branch Inspection conducted by the internal audit/ bank staff

In case of larger loans, Consortium meetings where the operations of the unit are jointly

reviewed are also undertaken.

Review, enhancement of limits and adhoc limits

Review of limits is usually undertaken on an annual basis. In cases where a request forenhancement of

limits is made by the borrower during the course of the year, such a request is processed

based on the

stock statements and QoS submitted. In case of temporary need, an adhoc limit of upto

25% of the

existing limits could be granted on request.

Working CapitalThe Status Today

PSU Banks reaffirm faith in MPBF for industry lending and 20% norm for SSI

Though norms for computation of Working Capital have been liberalized, PSU banks

continue to adopt the formula based norms to assess working capital. This is on account of

the affinity that the Public Sector has towards norm based lending which protects them from

any accusation of bias in lending.

In short, it could be said that in most cases, industries get some credit but not customized to

their requirement!

Fear of NPAs, enquiries on bad loans and capital adequacy constraints make banks

credit averseOver the past few years, a combination of circumstances has made banks averse to taking on


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additional credit exposure. This is especially so in case of new projects where the promoter

does not have a track record.

o The introduction of globally accepted norms of Asset Classification resulted in

high level of Non-Performing Assets showing up in the books of banks, which

had to be written off affecting profitability and eroding capital.o The erosion of capital meant that banks were in danger of not meeting the

newly introduced norm of 8% capital adequacy. Not achieving the 8% norm

would affect credibility of the bank and possibility of accessing the capital

markets for equity or debt.

o In a number of public sector banks that faced massive erosion in capital,

enquiries were instituted against officials who sanctioned the bad loans

thereby making bankers more cautious of taking any kind of credit decisions.

In such circumstances banks increasingly resorted to investing in risk-free government debt

and avoided taking on industrial credit. The problem has been more acute in the small-scale

sector. The sector had witnessed a high level of directed lending in the past decade most ofwhich turned bad thereby putting off the banks from further credit to the sector. Even

otherwise, the adverse impact of liberalization has been felt more in the SME sector that

among larger industries.

Increased competition for good client accounts

Over the past few years, banks have been faced with the unenviable task of generating

business while asset quality and facing growing competition in the sector. This has led to

banks competing with each other for securing the business from proven clients (whether in

the large, medium or small scale sector). Apart from providing competitive terms to the

borrower, banks do not hesitate to provide project funding or meeting any other credit

requirement of these clients in order to retain their business.

The younger, aggressive private sector and MNC banks are going after good credit in a big

way. These banks are faster, friendlier and attempt to understand the borrowers business and

fund requirements, while structuring the transaction. They work through correspondent

branches to extend their reach and pffer customized solutions including cash management,

demand loans against assignment of immediate committed payments and branches banking

and banking through the internet.

An analysis of the assisted units of State Financial Institutions reveals that in most cases, the

proven clients have availed their subsequent loans from banks (most often PSU banks). Infactit was also seen that all good clients had been visited by more than one banker offering them

better terms of credit. In many cases the existing loans of these clients to the SFC was prepaid

through loans provided by the banks.

Given the increased focus on credit quality, banks have become increasingly choosy in

providing credit to industry. At the same time, the enhanced profit orientation has meant that

banks are vying with each other to secure business from proven clients. This has become

particularly acute in case of SMEs where availing Working Capital from banks is no longer a

matter of routine. This is especially so in case of first generation entrepreneurs who lack a

track record. Considerable homework displaying commitment in the project and stable

financial position of the promoter is essential for obtaining a favourable response from

bankers.


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State Bank of India

At SBI, working capital loans are tailored to suit the precise requirements of the client, in any

of the various instruments available or structured as a combination of cash credit, demand

loan, bill financing and non-funded facilities.

The banks accomplished credit crew can gauge the credit needs of each client and frame the

exact solutions.

SBIs dedicated credit team has a deep understanding of the intricacies of various industries

and is richly experienced in reckoning the business potential of companies.These informed professionals can assess your specific credit requirements and tailor

customized financial solutions to suit your risk profile and the working capital cycle of your

company

Normally working capital finance is extended as a limit for various facilities for tenors up to

one year. Ad hoc requirements are also considered. How are SBI working capital loans

priced?

The loans normally carry on a floating interest rate linked to SBAR, the SBI prime lending

rate for working capital finance. Certain self-liquidating short-term loans are also linked to

the banks Short Term Advance Rate (SBSTAR).

Working capital finance limits are normally valid for one year and repayable on demand.

Specific, self-liquidating loans are linked to the natural tenor of the transaction (bill finance,

export credit etc.).

Micro enterprises and small scale industries with working capital limits up to Rs 10 crore will

be able to avail themselves of working capital finance at 10.25 per cent.

Other measures taken by the bank for MSMEs include extending the working capital cycle to

cover longer period of holding of inventory and receivables. The banknew product SMECARE for sanction of additional working capital limits up to 20 per cent over the earlier

limits, to meet the longer working capital cycle. The bank has also come forward with a

scheme to support MSMEs that require diesel generator sets to meet power shortage and

maintain their productive activity.

The banks MSME portfolio was at Rs 74,324 crore as at the end of March 2008 and it has

increased to Rs 81,794 crore as at the end of November 2008.


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Bank of Baroda

Bank offers corporations Working Capital Finance to meet their operating expenses,

purchasing inventory, receivables financing, either by direct funding or by issuing letter of

credit.

Key Benefits

Funded facilities, i.e. the bank provides funding and assistance to actually purchase

business assets or to meet business expenses.

Non-Funded facilities, i.e. the bank can issue letters of credit or can give a guarantee

on behalf of the customer to the suppliers, Government Departments for the

procurement of goods and services on credit.

Available in both Indian as well as Foreign currency.

Working capital finance for MSE units:

1. Working Capital against hypothecation of raw materials, work in

Process, finished goods etc.,

Above Rs.50000/- and up to Rs.5 Lac -15%

Above Rs.5 Lac -20%

2. Working Capital against Book Debts/Receivables

Margin to be taken as per our Banks general loan policy document, with out any concession

Andhra bank:

OPEN CASH CREDIT(OCC)(A running credit facility against stocks and receivables)

Purpose For working capital needs of MSME units

Assessment

of limit

Depending on the Working capital requirement of the unit assessed as per

Turnover Method/ MPBF System/ Cash Budget System Drawings from the

account shall be against Drawing limit arrived based on Stocks such as Raw

materials, work-in-process, finished goods and Book debts/ receivables not

older than 180 days with sub limit under cash credit limit

MinimumMargins 20% to 25% in case of Stocks and 30% in case of Book debts/ Receivables notolder than 180 days.


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Security Primary security: Stocks and receivables

Collateral security: Upto Rs.5 lakhs : Nil

Above Rs.5 lakhs Land &

Buildings, Plant & Machinery,

other fixed assets as per Bank

norms.

Co-

obligation/

Guarantee

Upto Rs.5 lakhs : Not required

Above Rs.5 lakhs : Suitable Third party guarantee as per Bank norms.

Repayment Limits are renewable every year

Guarantee d) Up to Rs.5 lakhs are covered under CGTMSE.

e) Loans above Rs.5 lakhs and upto Rs.100 lakhs can be covered under

CGTMSE subject to no collateral security and third party guarantee.

f) Guarantee fees and Annual service fees of CGTMSE have to borne

by the borrower

WORKING CAPITAL DEMAND LOAN FOR MSME UNITS

Eligibility Existing MSME borrowers having overall fund based credit facility upto Rs.10

crore

Purpose To meet need based adhoc working capital requirement

Quantum 20% of the existing fund based limit

Margin Same as existing margins to present working capital limits

Security Primary: Stocks and receivables

Collateral: Continuation of existing collateral securities

Co-obligation

/

Guarantee

Continuation of existing Co-obligation/Guarantee

Repayment One year with a provision of moratorium of six months, during which only

interest will have to be serviced.

Oriental Bank of Commerce

Eligibility :

1. Working Capital Finance is to be provided to those units, who have either availed

term loan from our bank or have not availed any loan facility from any other financial

institutions.

2. The term loan account of those should be Standard Regular.

3. Multiple banking arrangement is strictly prohibited under the scheme.


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Security :

Primary Security Hypothecation of receivables/ book debt arising out of advances.

Collateral Security First/second charge on fixed assets.

1. Personal guarantee of partners/promoters/directors.

2. Any other tangible collateral security if available.

i. Salient features of the Credit Guarantee Fund Trust for Micro and Small

Enterprises (CGTMSE)o The eligible loan limit under the Scheme is now Rs.100 lakhs.

o The credit guarantee cover has been raised from 75% to 85% for the following

category of loans:a. Loans to Micro enterprises upto Rs. 5 lakh; and

b. Loans to Micro and Small enterprises operated and/ or owned by

women.

o The coverage of the Scheme will now be extended to all new and existing

Micro and Small Enterprises (both in the Manufacturing Sector as well as

Service Sector).

Allahabad Bank

Purpose of Working Capital Loan:

Financing of Stock & other assets including book debts to be used in trade.

Development of shop /showroom / Acquiring block / fixed assets like air conditioners,delivery vans etc.

Purchase of shop/showroom upto 50%of the value of the shop as per Registered sale

deed or market value as assessed by Bank & valuer whichever is less ( to be secured

by mortgage of registered sale deed).

Eligibility:

Traders both wholesalers & Retailers of goods and Commodities which are not

prohibited by Govt/RBI. Borrowers may be individual/ sole proprietorship/

Partnership firms/ HUF/ Joint stock companies/ co-operative societies.

Traders having Registration/ License as applicable under local laws (i.e. Shops &Establishments Act). The registration/ license may be as under: Sales Tax Registration


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Drug License for Retail Trade of Drugs/ Medicines (where ever applicable) Trade

license Ration & Civil supplies etc.

The proponent should preferably be engaged in the line of business for at least 1(one)

year. New units can also be considered in deserving cases. In such cases, reasonable

projected sales should be estimated depending on the merchandise area, market

potential, capacity of the borrower etc.

Quantum of Loan:

Overall Ceiling (Working Capital and/or Term Loan) will be Rs.200.00 lakhs. Out of which

Term Loan component should not exceed 25% of the overall limit or Rs.25.00 lakhs which

ever is lower.

Types of Facility:

Overdraft facility for working capital.

Term Loan for purchase/ development of shop/showroom. Letter of Credit may be sanctioned keeping in view, the genuine requirement of the

borrower, only in favour of reputed suppliers within the overall ceiling.

Security:

In addition to the Hypothecation of Stocks and other assets created out of the Bank

Loan, the loan will also be secured by mortgage of immovable property - Value of

Mortgagedproperty as assessed by Valuer & Bank Officials (as per instruction

Circular) should not be less than 100%of the loan.

In cases where it is observed during the visit for stock verification that the normal

margin requirement of 25% of the Stocks for WC limit is not being regularly

maintained, the borrower will provide additional liquid security in the shape of our

FDR/ DDP etc. to the extent of 25%of the limit.

3rd party property / FDR/DDP may be accepted which will be backed by Personal

Guarantee.

Rate of Interest:

Up to Rs.10.00 Lacs: PLR w.m.r.

Above Rs.10 Lacs as per Risk rating (on CRG -02/4).

Risk rating Interest rate w.m.r

AB-1 & AB-2

AB - 3

AB4

PLR - 0.50%

PLR

PLR+ 1%

Processing Fee:

Rs.200/- per lakhs, Minimum Rs.1000/- & maximum Rs.20000/-


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Period:

Working Capital : One Year

Term Loan: Five Years excluding gestation period of maximum 3 months.

Repayment of Loan:

Working Capital: On Demand

Term Loan: Equated Monthly/ quarterly Installments. At the time of disbursal 24

PDCs for the EMI are to be obtained and fresh set of PDCs should be obtained 3

months before expiry of the stock of PDCs.

Canara bank

NATURE OF

LIMIT

LAGHU UDHYAMI CREDIT CARD SCHEME

Eligibility All existing small borrowers Micro and small enterprises

including artisans, village industries, professional and self

employed. Retail traders are also eligible

Total aggregate limit including the one under the scheme should not

exceed Rs.10 lakhs Eligible borrower should have satisfactorydealings with the Bank for the last 3 yearsParties with continuous

satisfactory dealings for a minimum of 3 years but not having any

liability are also eligible

Purpose To meet working capital requirement

Maximum limit Rs.10 lakhs (aggregate)

Security Stocks/receivables created out of facility wherever applicable

Collateral/Third party guarantee: Upto Rs.5 lakhsNIL

Over Rs.5 lakhs, as determined by Bank

Repayment The limit is valid for 3 years subject to annual review

Guarantee cover CGMSE cover available to SME units for loans upto Rs.50 lakhs

where collateral security and third party guarantee are not obtainedMargin Upto 25000/- NIL; Above Rs.25000/- 25%

Rate of interest Upto Rs.50000/- 11.25%; Above Rs.50000/- upto Rs.2 lakhs:

13.25%

Above Rs.2 lakhs to Rs.10 lakhs: 12.50% to 15%

Processing charges 0.10% of loan

Insurance coverage Assets created out of loan and securities charged to be insured

Special offers, if

any

No need to submit monthly stock statements upto Rs.2 lakhs

Above Rs.2 lakhs, simplified monthly stock statements and detailed

stock statements annually.

Laminated LUCC cards will be issued


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PURPOSE For working capital needs of SME units.

ASSESSMENT

OF LIMIT

Depending on the working capital requirement

of the unit assessed as per turnover

method/MPBF System/Cash Budget System.

Drawings from the account shall be against

Drawing limit arrived based on stocks such as

raw materials, work-in-process, finished goods

and receivables.

Whenever required, Overdraft against Book

debts (ODBD) is also permitted against bookdebt of specific age arising out of genuine trade

transactions with Govt./Public Sector

Undertakings/Joint Stock Companies/firms of

repute.

SECURITY Prime security - Stocks, receivables.

Collateral security - Land and building, plant

and machinery plus personal guarantee shall be

obtained whenever applicable.

REPAYMENT Since the limit is permitted as running limit, the

limit is renewable every year subject to review.


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GUARANTEE

COVER

Cover under Credit Guarantee Fund for Small

Industries (CGFSI) (in case the aggregate credit

facility permitted is up to Rs.50 lakhs) isavailable wherever collateral security or third

party guarantee is not taken

PURPOSE For working capital needs of Small Enterprises

units. Facility available as Running Limit.

MAXIMUMLIMIT

Rs.5 lakhs only

SECURITY Prime security - Assets created out of the credit

facility

No collateral security for loans upto Rs.5 lakhs

REPAYMENT Facility is permitted as a Running Limit subject

to review /renewal every year

GURANTEE

COVER

Cover under Credit Guarantee for Micro and

Small Enterprises (CGMSE) is available

wherever collateral security and/or third party

guarantee is not taken

Punjab national bank

Credit is provided for:

Financing stock in trade, book debts and other assets to be used in the trade.

Acquiring of assets for furnishing of shop & show room like partition, fixture and

furnishing etc, purchase of air-conditioners, other gadgets and delivery van required for


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running the business.

Eligibility

i) Traders, who are individuals, firms, HUFs, cooperative societies registered under any lawrelating to cooperative societies and companies etc. Promoters /co-obligants must have

existing satisfactory relationship of minimum at least six months with the Bank.

ii) Traders should comply with applicable statutory requirements, such asState/Central Sales Tax Registration Certificate, Licence under Shops &Commercial Establishment Act, Registration with Excise Department, etc.

iii) Advances against goods or any other item prohibited by RBI/Govt. from time

to time will not be covered under this scheme.

Extent of Loan for Working Capital

Small Traders may be granted facility of term loan for working capital to extent of 60% to

70% of their requirement subject to maximum of Rs. 5 lac.

For other traders with a working capital requirement of above Rs. 5 lac, 60% to 70% of

their requirement can be financed with no upper limit.

Term Loan: 70% of the cost of assets to be purchased with a maximum of Rs.100lac for Metro and Urban centre and Rs. 25 lac for SU and rural centre

Security

Primary Security: Legally enforceable charge by way of

hypothecation/pledge/assignment, etc. on stocks/book debts/fixed assets/block

assets of the borrower;

Collateral Security- Legally Enforceable Equitable/Registered Mortgage of IP /

pledge or creation of charge on liquid security having realizable/ surrender value

equal to the amount of loan/credit facilities;Loans /limits up to Rs.5 lac, advance should be collaterally secured by way of

suitable third party guarantee.

Repayment


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Working capital limit upto Rs.5 lac granted by way of term loan (WCTL) will be

repayable in equal monthly/quarterly instalments within a period of 3 to 5 years.

The term loan for acquiring fixed assets will be repayable in equal monthly/quarterly

instalments within a period of 5 to 7 years including moratorium period of 3-6 months.

Disbursement

For term loan for fixed assets and working capital, the loan amount shall be payable

directly to the suppliers of the assets by draft/cash order.

For other working capital advances, cash credit limit shall be set up.

Indian overseas bank

The manufacturing / Service activity of the unit can smoothly progress while adequate

working capital funds are available. Our Bank provides necessary working capital

assistance to MSME units.

The quantum of working capital funds can be ascertained by looking into the workingcapital cycle of the unit. Working Capital Cycle can be explained by way of flow chart as

below:

Cash > Raw Material > Work in Process > Finished Goods > Receivables > Cash

It is normally presumed that the working capital cycle will be of three months i.e. the

period taken for conversion of cash into raw material, raw material into finished goods,

finished goods into receivables and receivables into cash. Depending on the nature of

activity and various other factors it may be either more than 3 months or lesser than 3

months.

The working capital limits can be availed by way of cash credit, bills limit, Letter of

Guarantee, Letter of Credit etc.,

Security / Third Party Guarantee:

Bank will not insist for collateral security / Third Party Guarantee for total credit limits

upto Rs.5 lakhs for SME borrowers. In respect of credit limits above Rs.5 lakhs and upto

Rs.25 lakhs Collateral Security / Third Party Guarantee may be waived on deserving cases

and those limits will be covered under Credit Guarantee Trust for Micro and Small

Enterprises (CGTMSE).


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42 42 Characteristics of Working Capital

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Transcript of 42 42 Characteristics of Working Capital