Description
The various sources sources of finance include bank finance - overdraft, bill discounting, letter of credit, fixed deposits from public. It also explains the concept of factoring.
FINANCING CURRENT ASSETS
• Fluctuating component of Current Assets: • Permanent component – in the nature of fixed assets. • Temporary / fluctuating component – in the nature of current assets.
Reasons for fluctuating nature
• 1. Safety level / minimum level of stocks. • 2. Minimum credit period allowed to customers / dealers. • 3. Work-in-process or work-in-progress in case of construction or capital goods manufacturing companies. • 4. Stock-in-transit to deposits or to factory. • 5. Mailing /courier / speed post.
Sources of Finance for WC
• 1. Trade credit • 2. Accrued expenses – salaries and wages, power, expenses • 3. Provisions – bonus, leave encashment, gratuity, dividend, taxation, deferred tax liability
Trade Credit
1. Good record of profitability & liquidity, 2. Prompt payment or post dated cheques (PDCs) mailed in advance, 3. Prevents immediate cash out flow, 4. Negotiation in case of recession or other reason, 5. Cash discounts can be availed. 6. Image of company, 7. Flexibility of cash resources, by paying at the end of credit period.
Cost of trade credit
• Cost of trade credit vs opportunity cost of cash. • Rate of Discount/(1 – rate of disc) X No. of days in a year/(Cr. Period - discount period) • Examples: • 0.02/(1-0.02)X360/(30-15) = 48.98% • 0.005/(1-0.005)X360/(30-15) = 12.06% • 0.010/(1-0.010)X360/(60-30) = 12.12%
Bank finance for WC
• Cash Credit:
– 1. Pre-fixed limit – borrowing allowed, – 2. Interest charge on actual borrowal at quarterly intervals. – 3. Security – hypothecation of inventory and receivables, – 4. Second charge n fixed assets, – 5. Floating charge on other assets, – 6. Personal guarantees of promoter directors, – 7. Margin – flexible depending on nature of business.
Bank finance – cash credit
• 8. Review and renewal at annual intervals, 9. Roll over with flexible terms / revision of interest. • Steps:
– 1. Calculate actual working capital required, – 2. Calculate desirable working capital facility / drawing power, – 3. Extrapolate security level, – 4. Interpolate margin, – 5. Justify forecast / margin.
Bank finance – Cash credit
• Remember – bank’s criteria for differentiation between current assets and non-current assets is different. • Similarly, criteria for differentiation between current liability and non-current liability is also different. • Banks follow the norms fixed by Reserve Bank of India for banking industry.
Example of cash credit
• • • • • • Rs.Lakhs Rs.Lakhs 1. Sanctioned limit 200 200 2. Security – actual 200 300 3. Less:Margin @ 30% -60 -90 4. Value of security 140 210 5. Drawing power 140 200 (minimum of 1 and 4 )
Bank finance - Overdraft
• • • • 1. Pre-fixed limit – utilization, 2. Interest on actual drawings–daily balances, 3. Drawing power – actual basis, 4. Security will be pledge of shares, securities, LIC policy, mortgage of fixed assets, personal guarantee of partners or directors, • 5. Repayable on demand, but reviewed and renewed at annual intervals, • 6. “Roll over” with flexibility and revision in interest rate.
Bank finance – Bill discounting
• 1. Bill of Exchange (B/E) for sale of goods, drawn by seller and accepted by drawee or purchaser, • 2. Interest and charges deducted upfront, • 3. Stamp duty, if not accompanied by LR or ack.copy of delivery challan, • 4. Bound to pay on specific due date with grace days (3), • 5. Non-payment will lead to dishonor and punishable u/s 138 of N.I.Act..
Bank finance - Letter of credit
• 1. Opened by bank at the request of client, favoring vendor, • 2. Payment on due date, if client does not pay, • 3. Bank assumes risk, but credit provided by vendor (upto 180 days). • Security: Hypothecation – inventory /debts • Pledge–shares, book debts, L/C.
Fixed deposits from public
• 1. Regulated by Companies (Acceptance of Deposits) Rules, 1978. • 2. Not more than 10% of paid up capital and reserves. In case of government companies, upto 35 % of paid up capital and reserves. • 3. Max. maturity – 3years, minimum – 6 months. General – 1, 2, 3 years. • 4. Advertisement to be issued/ prospectus to be filed with Registrar of Companies.
Fixed deposits from public
• Information to be given in prospectus/ advertisement – Name of company, registration no. and date, business registered office, branch offices, subsidiary companies, Board of Directors, senior management personnel, summarized financials, PAT and dividend for 3 years, contingent liabilities, declaration of compliance of rules, Annual Return as on 31st March with auditor’s report should be filed by 30th June.
Evaluation of fixed deposits
• 1.Simple procedure, 2.Expenses limited/ minimal, 3. Unsecured facility, 4. After tax cost may be less than cash credit or overdraft, 5. Deposits maturing after 1 year up to 3 years will not be treated as current liabilities, hence, will not affect current ratio. Working capital gap will be favorable. 6. No restriction on dividend payments, appointment of managerial personnel, as in case of bank finance.
Evaluation of fixed deposits
• Limitations: • 1.Limited scope for mobilization, • 2. 3 years is maximum term. Servicing debt may be difficult – not safe to reduce interest, • 3. Companies refuse to refund on maturity, but insist on renewal – bad for investors / public. • 4. Brokerage for renewal or new deposits will increase effective cost of finance, • 5. Monitoring by RBI / ROC – annual reporting by filing of returns with auditor’s report.
Commercial Paper / Corporate Paper
• Short term usance promissory notes with fixed maturity value, issued by high ranking company or corporate house.
Factoring
• • • • • 1. Continuous arrangement, 2. Administers sales ledger, 3. Collection also arranged, 4. Loss de to bad debts may be taken, 5. Relevant advisory service to seller.
Factoring - Mechanics
• 1. Agreement – bills sent to bank • 2. 80% of credit sales – paid by bank to company, 3. 20% margin, • 4. Commission @ 0.40 % to 1.00%, • 5. Discount charged upfront – till receipt of payment from party, • 6. Discount comparable with interest rate.
Factoring - types
• 1. Recourse factoring – means recourse to client for bad debts. Any loss of bad debts will be borne by client. • 2. Full factoring or non-recourse – client gets total credit protection from bad debts, which will be a loss to the bank. Short term finance, administration of sales ledger, etc. these kind of services are provided by bank.
Factoring - types
• 3. Maturity factoring – no advance payment or prepayment. Payment at the end of credit period or agreed payment date or on collection from customer. • 4. Advance factoring – 80% of billing as advance.
• 5.Invoice discounting – sales ledger administration / collection are clients responsibility. Bank discounts invoices and deducts interest / service charges for unexpired credit period.
Factoring - types
• • • • 6. Bank participation factoring 7. Supplier guarantee factoring 8. International or cross-border factoring. Factoring is 3 decades old in Europe, but has not been popular in India even after its introduction in 1991, as recommended by Kalyana Sundaram Committee set up at the request of RBI. SBI Factors & Commercial Services Ltd. and Canbank Factors Ltd. were set up in 1991 to specially facilitate factoring.
Need for regulation of Bank Credit in India
• 1. Nationalization of banks in 1969. • 2. Banking sector to finance development and social sector, weak sectors of society, without security. • 3. Under Cash Credit or Overdraft, once sanctioned, banks keep on renewing. Hence, credit availability or other-wise do not matter for companies. Need of borrower take priority. • 4. Large borrowers used to borrow and divert funds for other uses.
Tondon Committee (July,74 to Aug.,75)
• Terms of reference: • 1.Guidelines for sanction of credit and ensure end use of funds, safety of advances, MIS system. • 2. Forecast of business / production plans and credit needs. • 3. Inventory norms. • 4. Capital structure and sound financial basis for lending.
Tondon Committee – July 74 to Aug 75
• 5. Interest on loan is higher (excess working capital) and on cash credit / overdraft is lower. This will compel companies to use minimum working capital, by way of loan.
• 6. Bills Discounting to be used on selective basis.
Tondon Committee
• Reporting system – • 1. Quarterly – Profit & Loss Account, only CA & CL. Comparison with previous year, Current year (CY) budget and Current year (CY) actual. • 2. Half-yearly Balance Sheet, PLA/c. (pro-forma) within 2 months from end of the half year. • 3. Annual accounts with auditor’s report within 3 months from end of accounting year. • 4. Monthly stock and book debts statement – detailed – within 15 days.
Chore Committee – April 79 to Aug 1979.
• 1. Review of cash credit systems, • 2. Suggestions for modifications of cash credit system, • 3. Alternate system of credit to ensure discipline and improve production / sales, • 4.Sources for financing minimum working capital needs, • 5. Modification of existing credit system, • 6. Recommendation on any related matter.
Chore Committee
• Approach to lending: • 1. Bank should only supplement resources of borrower.
• 2. Total CA minus CL, other than CC or OD = working capital gap. Bank should finance gap partly and partly by promoters through long term finances. • 3. Bank finance should not exceed Maximum Permissible Bank Finance (MPBF).
Chore Committee
• Style of credit: • 1. Eligibility of credit is divided into – loan and demand cash credit.
• 2. Minimum borrowing for permanent working capital and fluctuating capital by demand cash credit. • 3. Loan component will induce financial discipline on borrower.
Recommendations of Chore Committee
• 1. CC, B/D, and WCTL should continue. • 2. WCTL, CC – division not found acceptable. • 3. Reduce over dependence on medium and large borrowers. • 4. Shift to second method of lending and current ratio of 1.33: 1.00. Excess should be treated as WCTL and liquidated in installments. • 5. “Peak level” and “Non-peak level” limits.
Recommendations of Chore Committee
• 6. Ad-hoc / temporary accommodation by non-operable CC A/c. for contingencies. • 7. Quarterly forecast of funds in advance. Excess drawing over 10% will be penalized by additional interest. • 8. QIS I (forecast), QIS II (actual vs forecast), QIS III (PL & CF – HYly) – simplified. • 9. Relaxation of norms only after scrutiny & in exceptional cases. • 10.Stamps not available- should take up the matter with State Govt. Not valid now, with granking facility available everywhere.
Recommendations of Chore Committee
• 11. Sale bills –instead of CC system, change over to B/D system. • 12. Multiple banking discouraged. Consortium banking patronized.
Marathe Committee (1982)
• 1. Review objectives, scope, context of Credit Authorization Scheme and modifications. • 2. Adequacy of credit appraisal system / procedure and modifications. • 3. Existing set up of compliance at branch, regional, zonal and head office of banks and suggestions for proper appraisal.
Marathe Committee (1982)
• 4. Study of existing data base for authorizing credit. • 5. Study application format and revise. • 6. Time bound program to process and dispose applications.
Broad-basing objectives of CAS
• 1. Additional bank credit as per priorities proposal by government to SSI, agriculture, weak sectors and social objectives. • 2. Enforce financial discipline among borrowers. • 3. Multiple banking – appraisal and monitoring by one lead bank (leader of consrtium). • 4. Improve credit appraisal techniques and system of follow up.
Kannan Committee (Jan–Mar,97)
• 1. Dispense with uniform MPBF and fix limit on case to case basis at bank’s discretion. • 2. Corporates may issue12 – 18 months debentures for working capital and banks may subscribe. • 3.WC above Rs.20.00 crores – demand loan. • 4. WC Rs.10.00 crore to Rs.20.00 crore – 75% will be demand loan.
Kannan Committee
• 5. Margin requirements – left to banks. • 6. Current ratio of 1.33: 1.00 and Debt/Equity ratio also left to banks. • 7. Prior approval of ICD / investments in group company. • 8. Interest incentive for demand loans.
Nayak Committee Dec.,1991
• 1. Working capital for SSI on projected turnover and 20% of such projected turnover.
• 2. WC assessment was made simple and easy. • 3. Scrutiny of projected turnover was bank’s responsibility. • 4. This system of credit upto Rs.2.00 crores for SSI, upto Rs.5.00 crore for Non-SSI. • 5. Credit in excess of Rs.5.00 crore - MPBF or nay pther method or Csh Budget method to assess WC needs.
Loan Delivery System
• Rs.10.00 crores and above – 80:20 ratio for loan and cash credit. Loan is WCDL / WCTL, repayable within one year or such extended time.
• WCDL – working capital demand loan • WCTL – working capital term loan
3 Methods of lending
• I Method: MPBF = 0.75 (CA – CL), Current Ratio = unity. • II Method: Borrower will finance 75 % of CA through long term resources. Bank finance = (0.75 x CA) – CL. Current Ratio 1.33:1.0 • III Method: Excess borrowing = converted in WCTL = Actual borrowing minus MPBF. • MPBF = 0.75(CA- core CA)-CL. Core CA = permanent /fixed WC.
Illustrations of 3 methods
• • • • • • • Current Liabilities Current Assets Creditors 150 Raw Material 250 Other CL 50 WIP 50 Sub-total 200 Fin. Goods 150 Bankborrowings 360 Receivables 90 Other CA 20 Grand total 560 Grand total 560
I Method of lending
• • • • • • • • Total CA 560 Total CL 200 Working capital gap 360 25% margin 90 MPBF 75% of 360 270 Bank borrowings 360 Excess borrowings 90 Current Ratio 560/470 = 1.19.
II Method of lending
• • • • • • • • Total CA 560 25% of CA (LT resources) 140 75% of CA 420 CL actual 200 MPBF 220 WC Gap (560 – 200) 360 Excess borrowing 140 Current ratio 560/420 = 1.33.
III Method of lending
• • • • • • • • • • Total CA 560 Less : core CA(LT resources) 100 Real CA 460 25% from LT sources 115 WC from ST resources 345 Less: CL 200 MPBF 145 WC Gap (560 –200) 360 Excess borrowings 215 Current ratio 560/345 = 1.62
Comparison of 3 methods
• 1. In method I, 25% reduced after deducting CL or Creditors. • 2.in II method, 25% of gross CA is calculated. • 3. In III method, “core CA” are deducted and then, 25% of real CA is calculated as long term resources and deducted. This figure is compared with similar firm in same category of business or industry. Current Ratio is improved from 1.19 to 1.33 to 1.62.
doc_571892686.pptx
The various sources sources of finance include bank finance - overdraft, bill discounting, letter of credit, fixed deposits from public. It also explains the concept of factoring.
FINANCING CURRENT ASSETS
• Fluctuating component of Current Assets: • Permanent component – in the nature of fixed assets. • Temporary / fluctuating component – in the nature of current assets.
Reasons for fluctuating nature
• 1. Safety level / minimum level of stocks. • 2. Minimum credit period allowed to customers / dealers. • 3. Work-in-process or work-in-progress in case of construction or capital goods manufacturing companies. • 4. Stock-in-transit to deposits or to factory. • 5. Mailing /courier / speed post.
Sources of Finance for WC
• 1. Trade credit • 2. Accrued expenses – salaries and wages, power, expenses • 3. Provisions – bonus, leave encashment, gratuity, dividend, taxation, deferred tax liability
Trade Credit
1. Good record of profitability & liquidity, 2. Prompt payment or post dated cheques (PDCs) mailed in advance, 3. Prevents immediate cash out flow, 4. Negotiation in case of recession or other reason, 5. Cash discounts can be availed. 6. Image of company, 7. Flexibility of cash resources, by paying at the end of credit period.
Cost of trade credit
• Cost of trade credit vs opportunity cost of cash. • Rate of Discount/(1 – rate of disc) X No. of days in a year/(Cr. Period - discount period) • Examples: • 0.02/(1-0.02)X360/(30-15) = 48.98% • 0.005/(1-0.005)X360/(30-15) = 12.06% • 0.010/(1-0.010)X360/(60-30) = 12.12%
Bank finance for WC
• Cash Credit:
– 1. Pre-fixed limit – borrowing allowed, – 2. Interest charge on actual borrowal at quarterly intervals. – 3. Security – hypothecation of inventory and receivables, – 4. Second charge n fixed assets, – 5. Floating charge on other assets, – 6. Personal guarantees of promoter directors, – 7. Margin – flexible depending on nature of business.
Bank finance – cash credit
• 8. Review and renewal at annual intervals, 9. Roll over with flexible terms / revision of interest. • Steps:
– 1. Calculate actual working capital required, – 2. Calculate desirable working capital facility / drawing power, – 3. Extrapolate security level, – 4. Interpolate margin, – 5. Justify forecast / margin.
Bank finance – Cash credit
• Remember – bank’s criteria for differentiation between current assets and non-current assets is different. • Similarly, criteria for differentiation between current liability and non-current liability is also different. • Banks follow the norms fixed by Reserve Bank of India for banking industry.
Example of cash credit
• • • • • • Rs.Lakhs Rs.Lakhs 1. Sanctioned limit 200 200 2. Security – actual 200 300 3. Less:Margin @ 30% -60 -90 4. Value of security 140 210 5. Drawing power 140 200 (minimum of 1 and 4 )
Bank finance - Overdraft
• • • • 1. Pre-fixed limit – utilization, 2. Interest on actual drawings–daily balances, 3. Drawing power – actual basis, 4. Security will be pledge of shares, securities, LIC policy, mortgage of fixed assets, personal guarantee of partners or directors, • 5. Repayable on demand, but reviewed and renewed at annual intervals, • 6. “Roll over” with flexibility and revision in interest rate.
Bank finance – Bill discounting
• 1. Bill of Exchange (B/E) for sale of goods, drawn by seller and accepted by drawee or purchaser, • 2. Interest and charges deducted upfront, • 3. Stamp duty, if not accompanied by LR or ack.copy of delivery challan, • 4. Bound to pay on specific due date with grace days (3), • 5. Non-payment will lead to dishonor and punishable u/s 138 of N.I.Act..
Bank finance - Letter of credit
• 1. Opened by bank at the request of client, favoring vendor, • 2. Payment on due date, if client does not pay, • 3. Bank assumes risk, but credit provided by vendor (upto 180 days). • Security: Hypothecation – inventory /debts • Pledge–shares, book debts, L/C.
Fixed deposits from public
• 1. Regulated by Companies (Acceptance of Deposits) Rules, 1978. • 2. Not more than 10% of paid up capital and reserves. In case of government companies, upto 35 % of paid up capital and reserves. • 3. Max. maturity – 3years, minimum – 6 months. General – 1, 2, 3 years. • 4. Advertisement to be issued/ prospectus to be filed with Registrar of Companies.
Fixed deposits from public
• Information to be given in prospectus/ advertisement – Name of company, registration no. and date, business registered office, branch offices, subsidiary companies, Board of Directors, senior management personnel, summarized financials, PAT and dividend for 3 years, contingent liabilities, declaration of compliance of rules, Annual Return as on 31st March with auditor’s report should be filed by 30th June.
Evaluation of fixed deposits
• 1.Simple procedure, 2.Expenses limited/ minimal, 3. Unsecured facility, 4. After tax cost may be less than cash credit or overdraft, 5. Deposits maturing after 1 year up to 3 years will not be treated as current liabilities, hence, will not affect current ratio. Working capital gap will be favorable. 6. No restriction on dividend payments, appointment of managerial personnel, as in case of bank finance.
Evaluation of fixed deposits
• Limitations: • 1.Limited scope for mobilization, • 2. 3 years is maximum term. Servicing debt may be difficult – not safe to reduce interest, • 3. Companies refuse to refund on maturity, but insist on renewal – bad for investors / public. • 4. Brokerage for renewal or new deposits will increase effective cost of finance, • 5. Monitoring by RBI / ROC – annual reporting by filing of returns with auditor’s report.
Commercial Paper / Corporate Paper
• Short term usance promissory notes with fixed maturity value, issued by high ranking company or corporate house.
Factoring
• • • • • 1. Continuous arrangement, 2. Administers sales ledger, 3. Collection also arranged, 4. Loss de to bad debts may be taken, 5. Relevant advisory service to seller.
Factoring - Mechanics
• 1. Agreement – bills sent to bank • 2. 80% of credit sales – paid by bank to company, 3. 20% margin, • 4. Commission @ 0.40 % to 1.00%, • 5. Discount charged upfront – till receipt of payment from party, • 6. Discount comparable with interest rate.
Factoring - types
• 1. Recourse factoring – means recourse to client for bad debts. Any loss of bad debts will be borne by client. • 2. Full factoring or non-recourse – client gets total credit protection from bad debts, which will be a loss to the bank. Short term finance, administration of sales ledger, etc. these kind of services are provided by bank.
Factoring - types
• 3. Maturity factoring – no advance payment or prepayment. Payment at the end of credit period or agreed payment date or on collection from customer. • 4. Advance factoring – 80% of billing as advance.
• 5.Invoice discounting – sales ledger administration / collection are clients responsibility. Bank discounts invoices and deducts interest / service charges for unexpired credit period.
Factoring - types
• • • • 6. Bank participation factoring 7. Supplier guarantee factoring 8. International or cross-border factoring. Factoring is 3 decades old in Europe, but has not been popular in India even after its introduction in 1991, as recommended by Kalyana Sundaram Committee set up at the request of RBI. SBI Factors & Commercial Services Ltd. and Canbank Factors Ltd. were set up in 1991 to specially facilitate factoring.
Need for regulation of Bank Credit in India
• 1. Nationalization of banks in 1969. • 2. Banking sector to finance development and social sector, weak sectors of society, without security. • 3. Under Cash Credit or Overdraft, once sanctioned, banks keep on renewing. Hence, credit availability or other-wise do not matter for companies. Need of borrower take priority. • 4. Large borrowers used to borrow and divert funds for other uses.
Tondon Committee (July,74 to Aug.,75)
• Terms of reference: • 1.Guidelines for sanction of credit and ensure end use of funds, safety of advances, MIS system. • 2. Forecast of business / production plans and credit needs. • 3. Inventory norms. • 4. Capital structure and sound financial basis for lending.
Tondon Committee – July 74 to Aug 75
• 5. Interest on loan is higher (excess working capital) and on cash credit / overdraft is lower. This will compel companies to use minimum working capital, by way of loan.
• 6. Bills Discounting to be used on selective basis.
Tondon Committee
• Reporting system – • 1. Quarterly – Profit & Loss Account, only CA & CL. Comparison with previous year, Current year (CY) budget and Current year (CY) actual. • 2. Half-yearly Balance Sheet, PLA/c. (pro-forma) within 2 months from end of the half year. • 3. Annual accounts with auditor’s report within 3 months from end of accounting year. • 4. Monthly stock and book debts statement – detailed – within 15 days.
Chore Committee – April 79 to Aug 1979.
• 1. Review of cash credit systems, • 2. Suggestions for modifications of cash credit system, • 3. Alternate system of credit to ensure discipline and improve production / sales, • 4.Sources for financing minimum working capital needs, • 5. Modification of existing credit system, • 6. Recommendation on any related matter.
Chore Committee
• Approach to lending: • 1. Bank should only supplement resources of borrower.
• 2. Total CA minus CL, other than CC or OD = working capital gap. Bank should finance gap partly and partly by promoters through long term finances. • 3. Bank finance should not exceed Maximum Permissible Bank Finance (MPBF).
Chore Committee
• Style of credit: • 1. Eligibility of credit is divided into – loan and demand cash credit.
• 2. Minimum borrowing for permanent working capital and fluctuating capital by demand cash credit. • 3. Loan component will induce financial discipline on borrower.
Recommendations of Chore Committee
• 1. CC, B/D, and WCTL should continue. • 2. WCTL, CC – division not found acceptable. • 3. Reduce over dependence on medium and large borrowers. • 4. Shift to second method of lending and current ratio of 1.33: 1.00. Excess should be treated as WCTL and liquidated in installments. • 5. “Peak level” and “Non-peak level” limits.
Recommendations of Chore Committee
• 6. Ad-hoc / temporary accommodation by non-operable CC A/c. for contingencies. • 7. Quarterly forecast of funds in advance. Excess drawing over 10% will be penalized by additional interest. • 8. QIS I (forecast), QIS II (actual vs forecast), QIS III (PL & CF – HYly) – simplified. • 9. Relaxation of norms only after scrutiny & in exceptional cases. • 10.Stamps not available- should take up the matter with State Govt. Not valid now, with granking facility available everywhere.
Recommendations of Chore Committee
• 11. Sale bills –instead of CC system, change over to B/D system. • 12. Multiple banking discouraged. Consortium banking patronized.
Marathe Committee (1982)
• 1. Review objectives, scope, context of Credit Authorization Scheme and modifications. • 2. Adequacy of credit appraisal system / procedure and modifications. • 3. Existing set up of compliance at branch, regional, zonal and head office of banks and suggestions for proper appraisal.
Marathe Committee (1982)
• 4. Study of existing data base for authorizing credit. • 5. Study application format and revise. • 6. Time bound program to process and dispose applications.
Broad-basing objectives of CAS
• 1. Additional bank credit as per priorities proposal by government to SSI, agriculture, weak sectors and social objectives. • 2. Enforce financial discipline among borrowers. • 3. Multiple banking – appraisal and monitoring by one lead bank (leader of consrtium). • 4. Improve credit appraisal techniques and system of follow up.
Kannan Committee (Jan–Mar,97)
• 1. Dispense with uniform MPBF and fix limit on case to case basis at bank’s discretion. • 2. Corporates may issue12 – 18 months debentures for working capital and banks may subscribe. • 3.WC above Rs.20.00 crores – demand loan. • 4. WC Rs.10.00 crore to Rs.20.00 crore – 75% will be demand loan.
Kannan Committee
• 5. Margin requirements – left to banks. • 6. Current ratio of 1.33: 1.00 and Debt/Equity ratio also left to banks. • 7. Prior approval of ICD / investments in group company. • 8. Interest incentive for demand loans.
Nayak Committee Dec.,1991
• 1. Working capital for SSI on projected turnover and 20% of such projected turnover.
• 2. WC assessment was made simple and easy. • 3. Scrutiny of projected turnover was bank’s responsibility. • 4. This system of credit upto Rs.2.00 crores for SSI, upto Rs.5.00 crore for Non-SSI. • 5. Credit in excess of Rs.5.00 crore - MPBF or nay pther method or Csh Budget method to assess WC needs.
Loan Delivery System
• Rs.10.00 crores and above – 80:20 ratio for loan and cash credit. Loan is WCDL / WCTL, repayable within one year or such extended time.
• WCDL – working capital demand loan • WCTL – working capital term loan
3 Methods of lending
• I Method: MPBF = 0.75 (CA – CL), Current Ratio = unity. • II Method: Borrower will finance 75 % of CA through long term resources. Bank finance = (0.75 x CA) – CL. Current Ratio 1.33:1.0 • III Method: Excess borrowing = converted in WCTL = Actual borrowing minus MPBF. • MPBF = 0.75(CA- core CA)-CL. Core CA = permanent /fixed WC.
Illustrations of 3 methods
• • • • • • • Current Liabilities Current Assets Creditors 150 Raw Material 250 Other CL 50 WIP 50 Sub-total 200 Fin. Goods 150 Bankborrowings 360 Receivables 90 Other CA 20 Grand total 560 Grand total 560
I Method of lending
• • • • • • • • Total CA 560 Total CL 200 Working capital gap 360 25% margin 90 MPBF 75% of 360 270 Bank borrowings 360 Excess borrowings 90 Current Ratio 560/470 = 1.19.
II Method of lending
• • • • • • • • Total CA 560 25% of CA (LT resources) 140 75% of CA 420 CL actual 200 MPBF 220 WC Gap (560 – 200) 360 Excess borrowing 140 Current ratio 560/420 = 1.33.
III Method of lending
• • • • • • • • • • Total CA 560 Less : core CA(LT resources) 100 Real CA 460 25% from LT sources 115 WC from ST resources 345 Less: CL 200 MPBF 145 WC Gap (560 –200) 360 Excess borrowings 215 Current ratio 560/345 = 1.62
Comparison of 3 methods
• 1. In method I, 25% reduced after deducting CL or Creditors. • 2.in II method, 25% of gross CA is calculated. • 3. In III method, “core CA” are deducted and then, 25% of real CA is calculated as long term resources and deducted. This figure is compared with similar firm in same category of business or industry. Current Ratio is improved from 1.19 to 1.33 to 1.62.
doc_571892686.pptx