Tandon,
Chore, Kannan and Certain Other Committees Recommendation
Financing of working capital had always been an exclusive domain of
commercial banks. Too much emphasis on security by the banks directed the flow
of credit to affluent section of society with the result that economic
resources of the country were concentrated in a few hands. Projects promoted by
technically qualified entrepreneurs with no tangible security to offer found it
difficult to raise finance for the working capital required by them from banks.
With the nationalisation of the banks an entirely new breed of entrepreneurs
made a demand on bank credit. Small sector and other segments of priority
sector were to be the major beneficiary of nationalisation and were preferred
claimants of credit. This resulted in an unexpected demand on lendable funds of
banks and naturally called for a reform in the policies of banks to orient them
to the new developmental role assigned to the banking industry.
Another important factor which called for reforms was the inbuilt
weakness in the cash credit system linked with emphasis on security. The limits
were directly fixed on the basis of security available in the account which in
many cases resulted in double finance. Banks also had no control over the level
of advances at any particular time. It was not related to how much a bank can
lend at a particular time but was linked to the decision of the borrower to
borrow at that time. A major part of credit limits sanctioned by the bank
remained unutilised and there was a strong tendency within the banks to
oversell the credit. It was noted as at the end of June, 1974 that total limits
sanctioned by the banking industry was far in excess of its total deposits.
Bank could afford this overselling as 43% of the limits sanctioned by them
remained unutilised. Any unexpected demand within the sanctioned limits could
prove disastrous and had the capacity to put the entire banking industry out of
gear. The fear was proved true in late 1973 when a sudden demand on bank credit
was made due to unprecedented rate of inflation and the banks had to
arbitrarily freeze the credit limits of their borrowers.
In view of such a situation obtaining at that time, Reserve Bank of
India constituted a 'Study Group' with Shri Prakash Tandon as Chairman in July,
1974 to frame necessary guidelines on bank credit with the following terms of
reference :
·
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,
· To make recommendations for obtaining periodical forecasts from borrowers of (a) business/production plans, and (b) credit needs,
·
To make suggestions for prescribing inventory
norms for different industries both in the private and public sectors and
indicate the broad criteria for deviating from these norms,
·
To suggest criteria regarding satisfactory
capital structure and sound financial basis in relation to borrowings,
·
To make recommendations regarding the sources
for financing the minimum working capital requirements,
·
To make recommendations as to whether the
existing pattern of financing working capital requirements of cash
credit/overdraft system etc., requires to be modified, if so, to suggest
suitable modifications, and
·
To make recommendations on any other related
matter as the Group may consider relevant to the subject of enquiry or any
other allied matter which may be specifically referred to it by the Reserve
Bank of India.
Based upon these terms of reference the Group attempted to identify the
various constituents of working capital that could be financed by the banks and
suggested norms for build up of inventory. Far reaching recommendations on the
style of lending and improvement in the present system of Cash Credit were also
made. These recommendations were mostly accepted by Reserve Bank and were
referred to banks for implementation in late 1975. Many modifications have
since been suggested by 'Chore Committee'. Nevertheless the basis of the
recommendations of Tandon Committee have been retained. The recommendations of the
group related to four important aspects as discussed in the following
paragraphs.
Level of Current Assets
Working capital requirement of any unit is directly related to the level
of current assets with the unit. As the main emphasis by the banks had been on
security, the limits were sanctioned on the basis of the value of inventory
held by the unit and no attempt whatsoever was made to assess the requirement
of the unit. The Group analysed the inventory build up of various units and
classified the inventory as under
·
Flabby inventory comprising finished goods, raw
materials and stores held because of poor working capital management and
inefficient distribution.
·
Profit‑making inventory representing
stocks of raw materials and finished goods held for realising stock profits.
·
Safety inventory providing for failures in
supplies, unexpected spurt in demand etc., in effect, an insurance cover.
·
Normal inventory based on a production plan,
lead time of supplies and economic ordering levels. Normal inventories will
fluctuate primarily with change in production plan. Normal inventory also
includes reasonable factor of safety.
Some excessive inventory may also have to be built up sometimes due to
factors beyond the control of management as in case of bunched imports etc.
Flabby and profit‑making inventory are both non‑productive and
should be discouraged. Normal inventory includes an element of safety and it
should be the endeavour of any management not to hold any excess inventory over
its normal requirements. To arrive at this normal level of inventory, 'Tandon
Group' suggested norms for 15 different kind of industries covering a major
part of all industries in the country and the norms related to
·
Raw
materials
·
Stocks
in process/semi‑finished goods
·
Finished goods
·
Receivables
which together make
for bulk of the current assets of any unit.
Reserve Bank also appointed various "Committees of Direction"
to make recommendations regarding any changes to be brought in the norms
suggested by the Group. 'Committee of Direction' had also recommended norms for
other industries not included in the initial report of the Group. With the
passage of time it was felt by trade and industry that these norms have become
outdated and needed immediate review in the changing economic scenario. An ‘In
House Group’ under the chair personship of Ms I.T.Vaz, Executive Director,
Reserve Bank of India, was constituted in January 1993 to review the need for
continuing with the norms for holding of inventory/ receivables as also
allocation of credit to industry by fixing Maximum Permissible Bank Finance
(MPBF) based on such norms.
As per the recommendations of the 'In House Group' accepted by Reserve
Bank of India, the banks have been given discretion to decide the levels of
holding of individual items of inventory and of receivables, which should be
supported by bank finance after taking into account the production/processing
cycle of an industry as also other relevant factors.
The other factors will include the financial parameters of the borrower.
Banks now have the freedom to decide the levels of holding of each item of
inventory as also of receivables which would represent a reasonable build up of
current assets for being supported by Bank finance. Reserve Bank will not
prescribe detailed norms for each item of inventory as also of receivables; but
only advise the overall levels of inventory and receivables for different
industries for the guidance of the banks to serve as broad indicators. Banks
may also frame suitable guidelines for accepting the projections made by
borrowers relating to 'Sundry Creditors (Goods)', an item included in 'other
current liabilities'. The above guidelines would apply to borrowers enjoying
aggregate fund‑based working capital limits of Rs. 1 crore. and above from
the banking system.
Reserve Bank had advised broad indicators for 17 group of industries
which are given in the following pages. Banks are however, now free to fix
their own norms, if so desired by them.
BROAD INDICATORS
ANNEXURE
I
|
Industry |
Raw Materials including stores and other items used in the process of manufacture) (Months’
consumption) |
Stock -in - process (Months’ cost of production |
Finished Goods (Months’ Cost of Sales) |
Receivables (Month’s Sales) |
Overall levels (Months) |
|
1 |
2 |
3 |
4 |
5 |
6 |
|
1. Chemical
Industry Segment/Groups: 1.Drugs & Pharmaceuticals 2.Petro-Chemicals 3.Speciality Chemicals1 4.Inorganic Chemicals (Other than Fertilisers) 5.Essential Oil based Chemical 6.Paints and Varnishes 7.Dyes & Dye
Intermediates 8.Pesticides, weedicides
etc. |
2.75 1.50 1.50 2.00 1.50 2.25 2.50 (Imported/canalised) 2.25
(Indigenous/non-
canalised) 2.75 |
0.75 0.50 0.75 0.50 0.25 0.50 1.00 0.75 |
1.50 1.00 1.50 1.00 1.75 1.50 3.50 4.00 |
1.50 1.50 2.00 2.00 1.50 2.00 3.50 4.00 |
6.50 4.50 5.75 5.50 5.00 6.25 7.00 7.50 |
|
2. Cement |
i) Gypsum 2.25 ii) Limestone 1.25 iii) Coal 2.00 iv) Packing 1.50 Materials |
0.50* |
2.50 |
2.50 |
5.25 |
|
3. Paper |
Imported:1) Pulp, water, 4.00 Paper, Paper Cutting etc. 2) Felts and Wires 6.00 Indigenous: (i)
(a) Bamboo 6.00 Wood, Bagasse Straw etc. (b)Waste 3.00 Papers, Rags Leads etc (ii) Chemical 2.00 (iii) Coal * 2.00 (iv) Felts and Wires 3.00 |
0.25 |
1.00 (Combined 2.00 |
2.00 level: months) |
8.25 |
4. Rubber
Product 3. Bicycle Tyres |
Combined
for 2.00 imported and
Indigenous Additional raw 1.25 material natural rubber for price support operation during peak season ( Sept.-January) 2.00
1.75 |
0.50 0.25 0.50 |
2.00 1.75 3.00 |
2.00 1.75 3.00 |
4.50 5.75 4.00 5.25 |
|
5. Glass |
2.50 |
Nil |
3.25 |
3.25 |
5.75 |
|
6.
Ceramics
2. Other Items |
3.00 3.00 |
1.00 0.50 |
3.50 1.00 |
3.50 1.00 |
7.50 5.50 |
|
7. Breweries |
1. Hops 3.00 2. Malt, other raw2.00
materials and Packing Material |
0.50 |
0.75 |
1.00 |
5.25 |
8. Distilleries
@ if the allotment of molasses is on monthly basis, the norms should
be suitably reduced, say to one month.
|
9. Diamond Exporter1. DTC Sight Holders
|
3.50 3.00 |
|
1.00 1.00 |
3.00 3.00 |
7.50 7.00 |
|
10. Food & Food Product
|
2.00 1.50 |
- 0.10 |
0.25 1.50 |
2.00 1.50 |
4.00 3.00 |
|
11. Electronics Industry 5
|
Imported 4.00 Indigenous 2.00 Imported 4.00 Indigenous 3.00 Imported 4.00 Indigenous 3.00 Imported 4.00 Indigenous 3.00 Imported 4.00 Indigenous 2.00 Imported 4.00 Indigenous 3.00 |
0.75 1.25 1.25 1.25 1.00 1.25 |
2.50 3.50 4.00 3.50 2.50 3.50 |
2.50 3.50 4.00 3.50 2.50 3.50 |
7.25 8.75 9.25 8.75 7.50 5.50 8.75 7.75 |
|
12. Power Generation Distribution
Industries |
Coal 1.50 Fuel Oil 2.00 |
- |
- |
2.50 |
4.50 |
13. Engineering71.
Four
Wheelers & Commercial vehicles 2.
Two
Wheelers & Auto Rickshaws 3.
Agricultural Machinery 4.
Ancillary Industries 5.
Machinery (other than Electrical Machinery) 6.
Electrical Machinery 7.
Machine tools 8.
Electrical Cables, Wires, etc 9.
Steel
Tubes, Pipes Nuts, Bolts, Bars, etc. 10.
Bearings 11.
Others (excl. Heavy Engg. Industries) 8 12.
Bulbs, Fluorescent Tubes and Dry Cell Batteries 13.
Storage Batteries 14.
Fans 15. Transformers 16. Switchgears 17. Consumer Durables |
Indigenous 2.25 Indigenous 2.25 Indigenous 2.25 Indigenous 2.25 Indigenous 2.75 Indigenous 2.75 Indigenous 2.75 Indigenous 2.00 Indigenous 2.00 Indigenous 3.00 2.25 Imported 4.00 Indigenous 2.50 Imported 4.00 Indigenous 2.50 Imported 3.00 Indigenous 1.00 Imported & 2.50 Indigenous Imported & 2.50 Indigenous 2.00 |
0.75 0.75 0.75 0.75 1.50 1.25 1.25 0.75 0.75 1.00 0.75 0.50 1.00 0.50 2.00 0.50 0.75 |
2.50 2.50 2.50 2.50 3.50 3.50 3.50 2.75 2.50 3.00 2.50 3.00 3.00 Off
season During
Season 1.50 1.50 2.50 |
2.50 2.50 2.50 2.50 3.50 3.50 3.50 2.75 2.50 3.00 2.50 3.00 3.00 4.00 2.50 2.00 2.00 2.50 |
5.50 5.50 5.50 5.50 7.75 7.50 7.50 5.50 5.25 7.00 5.50 7.50 8.00 7.50 8.00 6.50 5.25 |
|
14. Fertiliser
Units near refinery Units away from refinery 1.50
Phoshpate) Units near port area Units away from port
Units in port areas Units away from port areas |
0.75 2.00 3.00 2.00 3.00 |
Negligible Negligible Negligible |
1.75 1.50 2.00 |
1.50 1.25 1.50 |
4.00 4.75 4.75 5.75 5.50 6.50 |
|
15. Leather industry
-Leather Products 1. Manufactures of finished leather 2. Manufactures of leather product like shoe uppers, leather garments and
other leather goods using: (i)Finished
leather manufactured by them (ii)Finished
leather purchased from others |
Indigenous 4.00 Imported 6.00 5.00 3.00 |
Indigenous 4.00 Imported 6.00 5.00 3.00 |
5.00* 5.00* 5.00* |
5.00* 5.00* 5.00* |
9.00 11.00 10.00 8.00 |
|
16. Textiles
2.Silk & Art Silk
Mills 3.Woollen Mills 4. Man-made/ Synthetic
fibre
|
i) Raw Cotton (a) Bombay and 2.00 Ahmedabad (b) Eastern Region 3.00 (c) Other than above areas 2.50 ii) Synthetic 1.50 Fibre/Yarn iii) Cloth 0.50 (For processing mills and composite mills using grey cloth as raw material) iv) Other raw 2.00 materials i) Synthetic Yarn 1.00 ii) Cloth (For 0.50 Processing mills) iii) Other material 2.00 i) Raw material 3.00 ii) Rags and Waster 3.00 iii) Synthetic fibre/ 1.00 yarn iv) Other material 2.00 1.50 2.50 |
Composite 1.50 Miles Processing 0.75 Mill for Non-job work & others Processing 0.50 Mill for Job work Weaving mills 0.50
Processing 0.75 Mills (including Processing Mills Composite Mills & Others) Processing/ 0.50 Composite
Mills for Job work 1.25 0.50 0.33 |
3.00 2.50 2.25 1.50 2.50 (including mills 4.00 (Off April- 3.00 (Busy Oct. 2.00 1.00 (for domestic sales) 1.50(for exports) |
3.00 2.50 2.25 1.50 2.50 Composite & others) 4.00 season: Sept.) 3.00 season: Mar.) 2.00 1.50 |
7.50 6.25 4.75 4.00 5.00 5.00 8.25 (Off season) 7.25 (Busy season) 4.00 5.83 |
|
17. Vegetable
and Hydrogenated Oil Industry i) Oil Mills ii) Solvent iii) Vanaspati and refining units iv) Composite Units (Expellers/Solvent Extraction and
refining and/or vanaspati) |
4
weeks 6
weeks 6
weeks 6
weeks |
2
days 4
days 8
days 8
days (only if vanaspati is manufactured) |
4 Weeks 6 Weeks (for oil) 8 Weeks (for deoiled cakes) 4 Weeks 4 Weeks (for oil) 8 Weeks (for deoiled cakes) |
4 Weeks 6 Weeks (for oil) 8 Weeks (for deoiled cakes) 4 Weeks 4 Weeks (for oil) 8 Weeks (for deoiled cakes) |
8 Weeks 2 days 12 Weeks 4 days 14 Weeks 8 days 12 Weeks 8 days 10 Weeks 8 days 14 Weeks 8 days |
|
Notes: 1. Overall level for
holding of inventory and receivables for each industry does not include
holding level of spares the norm for which has been fixed at 9 months
consumption level for indigenous spares and 12 months consumption level for
imported spares, unless otherwise indicated. 2. The overall level has
been arrived at by taking into account the levels of various components of
inventory & receivables from the stage of procurement of raw materials
till sale of finished goods. In respect of industries consuming different raw
materials (e.g. paper ,cement etc.)
the overall level has been indicated by taking the maximum of the holding period level for different
raw material. 3. Normlevels have been
indicated in months in decimal system in respect of all industries excepting
Vegetables and Hydrogenated Oil Industry which continue to be shown in weeks Spl. Provisions for manufacturers of writing instruments : At
the time of commencement of operations of a unit automatic plastic injection
moulds, are to be treated as fixed assets to be funded out of project i.e.
during the operating cycle for a unit/company. If these are required to be
replaced, the cost of replacement may be supported by way of working capital
credit by treating them as a part of current assets. |
The various components of working capital as suggested by the Group have already been assessed by us in the last chapter. However, while computing the requirement of current assets by the unit, we had permitted all inventories on the basis of average holding by the unit as derived from its past performance. Let us now consider that bank will permit level of holding as per broad indicators suggested by Reserve Bank of India and work out the requirements of the borrower. Let us further take that unit as an Engineering unit manufacturing consumer durables. The broad indicators for such units are given below
Raw materials 2
months
Stocks‑in‑Process
0.75
months
Finished goods and
receivables 2.50
months
On this basis the
permitted level of inventory will be calculated as under:
2
months requirement of raw materials
= 2
x 290.58 = Rs. 581,16 lacs
0.75
months of stock‑in‑process = 0.75 x 4326.1
12
= Rs. 270.38 lacs
But the unit is
working with average stocks‑in‑process of 2.68 weeks and will be
permitted to hold the inventory level upto that value only.
Thus stocks in
process = Rs. 222.96 lacs.
2.50 months finished
goods and receivables = Rs. 2.5 x 5315.82
12
= Rs. 1107.46 Lacs
We may also permit
stores and spares upto Rs. 10.00 lacs.
The total working
capital will now be worked out as under:
On average basis After application
of
broad indicators
Raw Materials 610.22 581.16
Stores 10.00 10.00
Stocks‑in‑process 222.96 222.96
Finished goods 478.05 1107.46
Bills
receivables/debtors 812.56
_______ ________
Total Rs. 2133.79 Rs.
1921.58 lacs
_______ ________
The excess level of
inventory and receivables projected by the unit is thus Rs. 2133.79 ‑ Rs.
1921.58 = Rs. 212.21 lacs. As per the broad indicators the unit should be
allowed to hold inventory and receivables upto Rs. 1921.58 lacs only and the
unit must make efforts to reduce its holding.
Approach to Lending
The second aspect of the recommendations of the Group related to
approach to lending. It was stipulated that the unit should finance a part of '
its current assets from owned funds and term liabilities. It prescribed a
minimum margin of 25% to be brought in by the unit from its owned funds and
long‑term liabilities and suggested 3 different methods of lending to
arrive at the contribution of the borrower in the above manner. The three
methods of lending as suggested by the Group were as under:
Method I. The borrower should bring in 25% of the net working capital (current
assets‑current liabilities excluding bank borrowing) from its owned and long‑term
liabilities.
Method II. The borrower should finance 25% of all current assets from
owned funds and long‑term liabilities and the balance he financed by the
bank.
Method III. The hard core current assets i.e., the current assets which are
permanently required by the unit for its functioning must be exclusively
financed by the borrower. The borrower should also provide 25% of the remaining
current assets and only the balance will be financed by the bank.
Let us now consider the following example to illustrate the application
of all the above three methods:
Current
liabilities Current
Assets
Creditors for
purchase 200 Raw material 300
Other current
liabilities 80 Stocks in process 100
Bank borrowings 400 Finished Goods 150
Receivables
and book debts 100
Other
Current assets
50
680 700
In this example
Total Current Assets
(TCA) = Rs. 700 lacs
Other current
liabilities (OCL) = Rs. 280 lacs
(Excluding bank borrowings)
Lending under Method I
Total current assets 700
Less: Other current
liabilities 280
Working capital gap 420
25% of the above as
margin from long‑term sources 105
Maximum permissible bank finance (M.P.B.F.) 315
Excess borrowings
85
Method II
Total current assets 700
Less: 25% of above as
margin from long‑term sources 175
525
Less : Other current
liabilities 280
Maximum permissible bank finance
(MPBF) 245
Excess borrowings 155
Method III
Total current assets 700
Less : Core current assets (assumed figure)
from long‑term sources 160
Balance current
assets 540
Less : 25% of above
from long‑term sources 135
405
Less : Other current
liabilities 280
Maximum Permissible
Bank Finance (MPBF) 125
Excess borrowings 275
It would he noticed from above that contribution from long‑term
sources is to be n Progressively increased as we move from 1st method of
lending to the 3rd method of lending and the ideal set up the group
was to bring all the borrowers to 3rd method in a phased manner. All the
existing and new borrowers were to conform to 1st method to start with. Due to
various difficulties in assessing the core assets, the 3rd method of lending
had been discarded and as per recommendations of 'Chore Committee' (discussed
in later part of this chapter) all the borrowers have now to conform to 2nd
method of tending. It would also be noticed that 1st method corresponds to a
minimum current ratio of 1. 17:1 while the 2nd method ensures a minimum current
ratio of 1.33 :1
As a first step now the existing units have to adjust the excess
borrowings by bringing in additional capital or arranging the funds from long‑term
sources. However, keeping in view the difficulties which the existing borrowers
would have faced due to this sudden change, it was proposed that a separate
'working capital loan' representing excess borrowing may he granted to such
units. The repayment of the loan may be fixed according to cash generating capacity
of the unit but in any case the repayment should not go beyond five years. By
proposing this temporary adjustment the long‑term sources of the unit
were strengthened and at the same time it was also ensured that contribution
from borrower was brought to desirable level in a phased manner.
On the basis of above discussion we shall now attempt to work out the
working capital limits of our exercise as given in tile last chapter. We have
by now calculated as under :
The projected level of inventories as per the past records Rs. 2133.79
The maximum level of inventories and receivables as per the broad
indicators suggested by Reserve Bank & accepted by the bankers Rs. 1921.58
Projected level of creditors for purchase Rs. 434.33
Working capital limits already availed Rs.
1323.76
(Presumed at the same level)
Other current assets Rs. 35.84
Other current
liabilities Rs. 190.66
The current assets
and liabilities may now be arranged as under:
Creditors for
purchase 434.33 Inventories 1921.58 2133.79
Other current
liabilities 190.66 Other current
35.84 35.84
Total Current
liabilities
other than
bank borrowings
624.99 1957.42 2169.63
Calculation of Working Capital Requirements under Method I
I II
(i) Total current assets 1957.42
2169.63
(ii)
Total current liabilities excluding banking
Borrowings 624.99 624.99
(iii) Working capital gap 1332.43 1544.64
(iv)
Minimum required margin being 25% of
Working
Capital gap i.e. of (iii) 333.11 386.16
(v) Actual/Projected
Networking Capital 200.98 200.98
(vi) (iii) ‑ (iv) 999.32 1158.48
(vii) (iii) ‑ (v) 1131.45 1343.66
(viii) Maximum permissible bank finance
(minimum of vi or vii) 999.32 1158.48
(ix) Excess bank borrowings 132.13 185.18
Calculation of Working Capital Requirements under Method II
I II
(i) Total current assets 1957.42 2169.63
(ii) Total current liabilities other than
bank borrowings 624.99
624.99
(iii) Working capital gap 1332.43 1544.64
(iii)
Minimum required margin being
25%
of total current assets i.e. of (i)
489.36 542.40
(v) Actual/projected net working capital 200.98 200.98
(vi) (iii)‑(iv) 843.07 1002.24
(vii) (iii)‑(v) 1131.45 1343.66
(viii) Maximum permissible bank finance
(minimum of VI or VII) MPBF 843.07 1002.24
(ix) Excess bank borrowings 288.38 341.42
The margin of 25%
under both the methods is the minimum requirement. If a borrower has more
liquid surplus, the MPBF will be reduced accordingly. To illustrate this point
let us consider the following example
Total current assets 1000
Total current liabilities
excluding bank borrowings 200
Net working capital 800
MPBF under method II
will be calculated as under:
(i)
Total current assets 1000
(ii)
Total current liabilities excluding bank
borrowings 200
(iii)
Working capital gap 800
(iv)
Minimum margin of 25% of total current assets 250
(v)
Actual net working capital 300
(vi)
iii ‑ iv 550
(vii)
iii‑v 500
(viii) MPBF (Minimum of vi or
vii) 500
(ix) Excess bank borrowing -
As per the erstwhile guidelines of Reserve Bank of India, sanction of aggregate fund based working capital limits of Rs. 1 crore and above from the banking system would be subject to the second method of lending so as to ensure maintenance of a minimum current ratio of 1.33:1. As regards borrowers enjoying aggregate fund based working capital limits of less than Rs. 1 crore from the banking system, a new summary procedure for assessment of working capital requirements had been prescribed. Banks are required to ensure maintenance of minimum margin of 5 per cent of the annual turnover. Under this method, 25 per cent of the output value should be computed as working capital requirement of which at least four fifth i.e. 80% should be provided by the banks and the balance one‑fifth i.e. 20% should be by way of promoters contribution towards margin money. Let us illustrate the above method by considering the following example :
(Rs.
in lacs)
2002-03
2003-04
(Actual) (Estimated)
Annual turnover 320.61 485.00
Net working capital 25.25 27.00
(Margin for working’
capital)
Total working capital
requirements 80.15 121.25
@25% of turnover
Minimum margin to be
brought by the borrower 16.03 24.25
(One‑fifth or
20% of total working capital
requirement or 5% of
total turnover)
Actual NWC available
with unit - 25.25
Working capital (fund
based) limits - 97.00
to be sanctioned by
bank‑80% of
total requirement or
20% of turnover
The bank in this case will sanction total fund based working capital
limit of Rs. 97 lacs. It may be noted that assessment of total working capital
is to be based on the basis of estimated turnover while the margin is to be
taken at actual level. In case actual NWC with the borrower is less than the
minimum required, while the full limit as assessed in this method may be
sanctioned by the bank, a stipulation to arrange for additional margin may be
made by the bank. Or limit in that case may be released in phases depending
upon accumulation of profit during the current year so that necessary margin is
available with the borrower. This method is generally referred to as 'Turnover
Method'.
The actual drawings in the ale will, however, be permitted on the basis
of Drawing Power (D.P.) in the account.
It may further be noted that if the borrower needs higher limits than
assessed as per turnover method, the bank will be required to assess the
working capital requirements by conventional method. The higher of the two
limits may be allowed to the borrower and actual disbursement will be regulated
through availability of drawing power in the account. In other words the
assessment of working capital requirements for credit limit upto Rs. 1.00 crore
may be made under the conventional method and as well as under turnover method.
Higher of the two will be the maximum permissible bank finance.
The level of credit limits to be assessed by turnover method ' has since
been increased to Rs. 2.00 crores for all categories of borrowers and further
to Rs. 5.00 crores for SSI units. The banks have further been given discretion
to apply this method upto any level of limits not below the limits specified by
Reserve Bank of India and frame a suitable policy in this regard.
Withdrawal
of instructions relating to MPBF
While announcing 'Monetary and Credit Policy' for the first half of 1997‑98,
on 15th April, 1997, Reserve Bank of India has withdrawn prescription in regard
to assessment of working capital needs based on the concept of maximum
permissible bank finance (MPBF) enunciated by 'Tandon Working Group'. Banks
have been given freedom to evolve their own system for assessing working
capital needs of borrowers.
Important relaxation permitted in calculation of MPBF/Current Ratio of 1.33:1
1.
Treatment of export receivables :
As a measure to give incentives for exports, stipulation of providing
margin on export receivable has been waived. As such the minimum margin
required will be 25% of total current assets excluding export receivables (as
per second method of lending). We shall now calculate MPBF with this relaxation
for the sake of bringing clarity : (Rs. in lacs)
(i) Total current assets 2169.63
(including export receivables of Rs.
325.26 lacs)
(ii) Total current liabilities other than
bank borrowings 624.99
(iii) Working capital gap 1544.64
(iv)
Minimum required margin being 25% of total
current assets
excluding export receivables i.e. 25% of (2169.03‑325.26)
461.09
(v) Actual/projected net working capital 200.98
(vi) (iii) ~ (iv) 1083.55
(vii) (iii) ‑ (v)
1343.66
(viii) Maximum Permissible Bank Finance (MPBF) 1083.55
(Lower of vi or vii)
It shall be observed
that by allowing the above relaxation MPBF has increased to Rs. 1083.55 lacs as
compared to Rs. 1002.24 lacs calculated earlier with this data. The above
guideline has since been withdrawn by Reserve Bank of India and the banks are
free to frame their own policy in this regard. As exports continue to be a core sector, this relaxation is likely to
continue for the time being.
2. Additional
credit needs of exporters arising out of firm orders/confirmed letters of
credit (and which am not taken into account while fixing regular credit limits
of borrowers) are to be met in full even if sanction of such additional credit
limits exceeds MPBF.
3.
Borrowing units marketing/trading exclusively (100 per cent) the products and
merchandise manufactured by village, tiny and SSI units will be subject to the
first method of lending while assessing their MPBF provided dues of the said
village, time and SSI units have been settled by such borrowers within a
maximum period of 30 days from the date of supply. This relaxation is also
available to that portion of marketing business related to the products
manufactured by village, tiny and SSI units in respect of cases, where
borrowing units also market products manufactured by medium and large
industries and/or have manufacturing activity of their own.
4. Credit
limits of the borrowing units in the sugar industry may be determined on the
basis of a current ratio of 1:1.
5. Sick/Weak units under
rehabilitations will be exempted from the applications of
2nd method of tending.
Treatment of
bills negotiated under essence letters of credit as receivables :
Receivables arising out of domestic/inland sales by drawing bills of
exchange under usance letters of credit and negotiated in accordance with the
terms of letters of credit may be shown separately under "Current
Assets" for arriving at 'Maximum Permissible Bank Finance (MPBF) and
stipulated minimum networking capital maybe reckoned after excluding quantum of
such bills.
In other words domestic receivables covered by bills of exchange under
usance letters of credit shall be accorded the same treatment as export
receivables and no margin on such receivables will have to be brought.
Treatment of term loan Instalments1
Term loan instalments failing due for repayment within the next twelve
months are treated as items of current liabilities for assessing the MPBF. As
term loan instalments are generally repaid out of cash generated during the
year, and treating this as resource from the beginning of the year reduces the
quantum of working capital finance, it has, therefore, been decided by the
Reserve Bank that such term loan instalments payable within the next twelve
months should not be treated as Items of current liabilities for the purpose of
arriving at the MPBF. The following changes will thus take place as per this
stipulation:
(i) Term loan instalments payable within the next twelve months will not
be treated as items of current liabilities. However, all overdue instalments
will be treated as current liability unless the loan has been rescheduled by
the financial institutions/banks.
(ii) Term loan instalments payable within the next twelve months and
which would be kept outside the current liabilities, need not be taken into
account while computing net working capital (NWC).
(iii) The entire amount of term loan instalments due within the next
twelve months will continue to be treated as current liabilities for the
purpose of calculating current ratio.
The treatment of term loan instalments as above will thus affect only
the MPBF and other factors will remain the same. Let us illustrate the effect
of this provision and calculate MPBF of the given exercise as under:
Rs
in lacs
(i) Total current assets
(including export receivables of Rs.
325.26 lacs) 2169.63
(ii) Total current liabilities 624.99
other than bank borrowings
Less: Non‑overdue term loan
instalments payable within the
next 12 months (Rs. 104.50 ‑
36.00) 68.50
Current
liabilities to be taken for calculations
of
MPBF (624.99‑68.50) 556.49
(iii)
Working capital gap 1613.14
(iv)
Minimum required margin being 25% of total
current
assets
excluding export receivables 461.09
(v)
Actual projected net working capital 200.98
(vi)
(iii)‑(iv) 1152.05
(vii)
(iii)‑(v) 1412.16
(viii)
MPBF (lower of vi or vii) 1152.05
MPBF has thus increased to Rs. 1152.05 lacs as compared to Rs. 1083.55
lacs calculated earlier.
Style of Credit
The third important aspect of Group's recommendations related to the style of credit. Recommendations in this regard have four basic ingredients as under:
(i) Financing inventories
which is already in excess of stipulated norms.
(ii) Treatment
to be given to borrowings in excess of maximum permissible bank finance.
(iii) New structure of cash
credit facility.
(iv)
Financing the sales receivables.
·
Financing Inventories in Excess of Stipulated
Norms/broad indicators accepted by the banks
The banks would not normally extend any credit facilities against inventories in excess of norms and the units might be granted a short time say 2 months to 6 months to liquidate those excess stocks. This will result in the unit holding inventories as per the broad indicators accepted by the banks.
·
Treatment to be given to the excess borrowings
All units would first of all be brought to conform to first method of
lending. However, no slip back would be permitted if any unit is already on the
2nd method. The unit is progressively to be moved from 1st method to 2nd
method.
The borrowings in excess of the permitted bank finance should normally
be adjusted by the unit by arranging funds from long‑term sources by way
of additional capital etc. In cases where it is not possible for the unit to
arrange for funds for liquidating the excess borrowings, the bank may consider
to amortise these dues by granting a short‑term working capital loan. The
repayment of working capital loan may be fixed according to the cash generating
and capital raising capacity of the unit. To induce the units for early
adjustment of working capital loan, it was suggested that a higher interest may
be charged on the loan component as compared to the interest on normal working
capital limits.
The units were required to bring in matching funds from their long‑term
sources at the time of enhancement in their working capital limits.
·
New Structure of
Cash Credit Facility
Cash credit limit is considered a short‑term facility payable on
demand. But in practice it is rarely so. A part of facility, being the minimum
requirement at all times, is used almost permanently. It was, therefore,
suggested that this part representing permanent requirement of the unit may be
sanctioned as a loan and the balance amount of limit may be permitted as cash
credit facility. The total cash credit facility is thus to be bifurcated in two
parts ‑ a loan component representing fixed requirement and running
account facility representing the fluctuating requirement of the unit. It was
further provided that the loan component may be charged a rate of interest
which is lower by 1 % than that charged on the fluctuating component. This
provision was considered necessary to induce the borrowers to have proper
financial planning to envisage the level of borrowing for their fixed
requirements. This aspect has not been strictly implemented so far and has
finally been dropped. A new system of bifurcation of MPBF into cash credit
component and loan component has been introduced w.e.f. April, 95.
Financing
the Sales Receivables
It was suggested that the sales may be financed through the medium of
bills instead of granting running limits against debtors. Monitoring of credit
facilities granted as purchase/discount of bills is far easier and the seller
is also aware of the due date for realisation of his dues which is not possible
in case of finance against book debts.
The Group further suggested that banks should endeavour to grant credit
facilities to the purchasers as far as possible and seller should be paid
immediately after sale. This type of financing can also be arranged through the
medium of bills and is popularly known as 'Drawee Bill Scheme’. The seller
will be paid immediately on presentation of the bill and the liability against
these bills will be on account of the buyer as part of his working capital
limits. On due date the bills will be paid to the bank by the buyer. This
mechanism was considered better as it not only ensures end use of funds but
also imposes a discipline in respect of payments for purchases. The Group,
however, did not give any specific recommendations in the matter and left it to
concerned banks for implementation of the scheme.
Under the cash credit system the borrower can draw up to the sanctioned limit at his own option subject to the availability of drawing power. The limit is generally fixed for a period of one year. The Group recommended fixation of quarterly operative limits on the basis of quarterly budget and performance data to be furnished by the borrower every quarter. These quarterly operative statements and funds flow statements were parts of the annual projected operating plan submitted at the time of sanction. Actual drawings within the sanctioned limit were to be determined on the basis of inflow and outflow of funds as per quarterly operating statements. The Group prescribed standard preformae for submission of the quarterly data and thus introduced a new information system and brought in the new concept of ‘operating limits’ is now will established though the underlying proformae have been suitably modified subsequently.
It is important to note that recommendations of the 'Group' formed the
basis of first ever attempt to fix and operate credit limits on a scientific
basis. Most of the recommendations of the 'Group' were accepted and implemented
by Reserve Bank of India. Many modifications/changes have also since been
accepted but the basic ‑format of lending as suggested by the 'Group' has
remained intact.
Chore Committee
The quality of lending improved considerably but the cash credit system
continued to pose few difficulties. Bifurcation of working capital limit in two
parts as demand loan and a fluctuating cash credit component, as suggested by
Tandon Group, was not done by many banks. It was, therefore, considered
necessary by Reserve Bank to review the system of cash credit in all its
aspects and for this purpose a 'Working Group' headed by Sh. K. B. Chore was
appointed in 1979. The terms of reference to the 'Group' were as follows:
·
To review the operation of cash credit system
in recent years, particularly with reference to the gap between sanctioned
credit limits and the extent of their utilisation;
·
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 increases in
output or other productive activities, and
· To make recommendations on any other related matter as the 'Group' may consider germane to the subject.
The 'Group' gave its recommendations in 1979. Important recommendations
which are accepted by Reserve Bank and have a direct bearing on credit limits
of the borrowers are discussed below.
No Structural Change‑Continuation of Cash
Credit, Loan and Bills Facilities
No structural changes in the lending system are considered necessary and
working capital credit limits are to be sanctioned as a combination of cash
credit, loans and bills facilities as hitherto. However, a directional change
is necessary and the cash credit limit is to be supplemented by loan and bill
facility, wherever possible.
Review of Borrowal Accounts
All borrowal accounts enjoying total working capital credit limits of
Rs.10 lacs and above from the entire banking system must be reviewed at least
once in a year. The review is necessary not only to ensure the continued viability
of the borrower but also to assess the need based requirement for credit
limits.
Bifurcation of Cash Credit Limit
The scheme of bifurcating the cash credit limit in two parts as demand
loan and variable cash credit portion as recommended by 'Tandon Group' and
accepted by Reserve Bank is scrapped as it did not find any acceptance either
at borrower's level or at bank's level. The scheme was basically suggested to
enable the banks to have proper credit planning. The objective is now desired
to be achieved by streamlining and strengthening the information system.
All borrowers enjoying working capital credit limits of Rs.100 lacs and
above from the entire banking system are now required to submit the following
statements indicating in advance at the commencement of each quarter the
requirements of funds during that quarter:
Estimates for the ensuing quarter: This statement is to be submitted in Form 1 in the week preceding the
commencement of the quarter to which the statement relates. It gives the level
of current assets and current liabilities as are estimated for the ensuing
quarter on the basis of which operating limits will be fixed by the banks. The
discipline on the borrowers will be exercised on the strength of this operating
statement. As from April 1991, the Performa of this form has been revised.
Separate proformae have since been prescribed for traders/merchant exporters
and manufacturers (Appendix 16.1 & 16.11).
Performance during the previous quarter: This statement is to be submitted in Form 11 (Appendix 16.111 & IV)
within 6 weeks from the close of the quarter to which the statement relates. In
fact Form I submitted by the borrower for the ensuing quarter is to be followed
by Form H after the end of that quarter. Form I gives the estimates whereas
Form II gives the actual during the quarter. By making comparisons between
these statements the quality of credit planning by the borrower and his
efficiency to translate his plans into actual production can be effectively
ascertained.
New forms effective from April 1991 have been prescribed by Reserve Bank. Separate proformae for (a) traders and merchant exporters and (b) manufacturers have been given. The revised formats are given as Appendix 16 111 & 16 IV.
Half Yearly Operating and Funds Flow Statements‑ Form III. The
form III has since been bifurcated effective from I st April, 1991 as under
Form IIIA ‑Half yearly operating statement
Form IIIB ‑ Half yearly Funds Flow Statement
These statements are to be submitted within two months from the close of
half year to which they relate. Separate proformae have been prescribed for
traders/merchant exporters and for manufacturers. For proformae, refer to
Appendices 16.V to 16.VIII.
Application of 2nd Method of Lending
The permitted level of inventories with various groups of industries is
to be determined as per the system determined by individual banks as per broad
indicators accepted by them. However, the borrowers have to enhance their
contributions in the working capital and for this purpose all the borrowal
accounts with working capital limits of Rs.100 lacs and above from the entire
banking system are to be placed under the second method of lending as
recommended by 'Tandon Group'. Under the second method the borrowers have to
contribute a minimum of 25% of total current assets from long‑term
sources ensuring a minimum current ratio of 1.33 : 1.
Exemptions from 2nd method of lending now permitted have already been
discussed earlier.
Working Capital Term Loan
A few borrowers on being placed on 2nd method of lending may not be able
to bring in the additional contributions immediately. The banks may sanction
'Working Capital Term Loan' (WCTL) which may be placed on liquidation basis
within a maximum time of 5 years. The method to be adopted for segregating
excess borrowings on this account would be the same as already discussed under
'Tandon Group'. Higher interest at a rate which may be 1% more than the normal
rate charged on cash credit a/c may be charged on WCTL to induce the borrowers
for its early adjustment. Charging of higher rate has however, been left at the
discretion of the bank.
'Peak Level' and 'Normal Non‑Peak Level' Limits
Separate appraisal and fixation of credit limits for 'peak level' and
normal 'non‑peak level' must be necessary and the periods during which
the separate limits will be in operation must also be specified. The past trend
in utilisation of limits by the borrower must be taken into consideration at
the time of fixing up these limits. 'Peak Level' requirements are relevant not
only for seasonal agro based industries but assume importance even in
industries producing consumer goods like fans, refrigerators, woollens etc.
Demand of funds may also be created due to purchase of raw material in lot,
payment of tax, bonus to staff, dividend etc. at a particular point of time.
All these factors are required to be taken into cognisance while fixing 'peak
level' And 'normal non‑peak level' credit limits.
Adhoc or Temporary Limits
Bank have now been given full discretion to sanction ad hoc facilities
based on commercial judgement and merits of individual case. The rate of
interest and others terms and conditions including period of ad hoc/temporary
limits will be as per the discretion of concerned bank. It will no longer be
mandatory for the banks to charge additional interest of 1 per cent over and
above the normal rate of interest for sanction of ad hoc limits.
Fixation of Operative Limits
The operative limits will be fixed by the banks within the overall
sanctioned limits on the basis of quarterly Information submitted by the
borrower in Form I as already discussed before the commencement of a quarter.
This statement will form the basis of quarterly review of the account and
fixing of operative limits and should virtually set the level of drawings in
the account in that quarter subject to a tolerance of 10% on either way.
Any excess/under utilisation of operative limit beyond the tolerance
level should be taken as an irregularity revealing defective planning by the borrower
and calling for some corrective
measures to avoid recurrence of such irregularities in future.
The concept of 'operative limit' is desired to be set up on a more
formal basis and it is compulsory for all borrowers enjoying working capital
credit limits of Rs.100 lacs and above to submit the quarterly operating
statements before the commencement of the quarter. If a borrower does not
submit these statements within the prescribed time limits, the banks shall
charge penal interest of one per cent per annum on the total outstanding for
the period of default in submission of statements. The penalty is to be
followed by a notice to the borrower to freeze the account if the default
persists. Even in consortium accounts, the operations in cash credit accounts
of the borrower may be frozen. If the quarterly operative returns are not
submitted. No additional limits will be sanctioned to such defaulting
borrowers. The borrowers are, therefore, required to make necessary
arrangements for timely compilation and submission of quarterly statements to
the bank. The charging of penal interest on default/delay in submission of
statements under QIS which was mandatory for banks has now been left at the
discretion of the banks who have to make suitable policy in this regard.
Cash Credit Limits against Book Debts
Sales are financed either by allowing purchase/discount facilities of
drawn by the seller or simply as cash credit facility against book debts. The
facility of cash credit against book debts is to be discouraged and such limits
are to be converted to bill purchase/discount facilities wherever possible.
For all borrowers enjoying aggregate fund based working capital limits
of Rs.5 crores and more from the banking system a minimum of 25% of the limits
sanctioned to such borrowers for financing inland credit sales must be in the
shape of bill purchase/discount facilities. Banks are required to charge
interest at 2 percentage points above the relevant cash credit interest rate on
the portion of book‑ debt finance which is in excess of the prescribed
norm of 75 per cent of the limits sanctioned to such borrowers for financing
inland credit sales. The additional interest prescribed is in addition to the
overall ceiling of 2 per cent of penal interest charged for other
irregularities. The provision relating to charging of additional interest of 2%
for non‑compliance with bill culture as above has since been withdrawn by
Reserve Bank.
Drawee Bill Scheme
It has been recommended by 'Tandon Committee' as well that a part of
cash credit facility for purchase of raw material should be allowed by the
banks under 'Drawee Bill Scheme'. This concept has been put on a formal basis
and it is now recommended that 25% of the cash credit limit against raw
materials to manufacturing unit must be allowed by drawee bills only. It would
be interesting to clearly understand the mechanism of 'drawee bills' and also
the method suggested for fixation of limits and drawing power under this
system.
The drawee bill scheme may operate under two different methods as under:
·
Acceptance system: The seller may draw a bill
on the bank of the buyer who shall accept it under an arrangement with the
buyer. The seller can discount the bill with his banker. Seller's bank would
obtain payment of the bill from the buyer's bank on due date. The buyer's bank
will maintain a separate liability account on behalf of the buyer to keep
record of all bills accepted by the bank on its behalf. On due date the buyer's
bank will debit the bill amount in the cash credit account of the buyer.
·
Bill discounting system: Under this system the
buyer's bank will himself discount the bills drawn by the seller and will keep
the liability in a separate account against the buyer. On due date the amount
will be debited in the account of the buyer.
Under both the above systems the seller gets the payment immediately
after supply of goods. The liability for acceptance/discount of bills is held
in a separate account by the bank (buyer's) on account of the buyer under the
scheme and the bill amount is eventually debited to buyer's account on due
date.
The stocks represented by accepted/discounted bills are to be shown
separately and accounted for as such while determining the drawing power in an
account. The method that will be adopted by the bank to determine the drawing
power is illustrated below:
Limit sanctioned
against raw material Rs.400
lacs
Amount earmarked for drawee bills @ 25% of the limit Rs.100
lacs
Amount available for drawings in cash credit account Rs.300
lacs
Margin on stocks 25%
Stocks with the
borrower are as follows: Total stocks Rs.300
lacs
Out of which unpaid
stocks represented by accepted/ discounted bills Rs.100 lacs
The drawing power can
now be determined as under:
Total stocks Rs.350
lacs
Drawing power @ 75% Rs.262
lacs
Amount earmarked for
accepted/discounted bills Rs.100
lacs
D. P. available
against stocks Rs.162
lacs
In the calculation of drawing power as above it must be noted that
margin requirements for drawee bill facility has also been considered in
advance which has considerably reduced the available drawing power against
stocks.
The second method of calculating drawing power which is more liberal
could be as under:
Total stocks Rs.350
lacs
Stocks earmarked for accepted/discounted bills Rs.100 lacs
Stocks paid for Rs.250
lacs
Drawing power @ 75% Rs.187.50
lacs
Under this method borrower is entitled for a higher D. P. but will have
to provide the margin of 25% on the due date of the bill when it is debited to
the account otherwise the cash credit account will become irregular at the time
of debit.
While announcing the Monetary and Credit Policy. for the Second Half of
1997‑98, Reserve Bank has reiterated that 25 per cent of inland credit
purchases of the borrowers should be through bills drawn on them by the
sellers. This mandatory provision will come into effect from 1st January, 1998.
The most notable contributions from, 'Chore Committee' can be summed up
as under:
·
Application of 2nd method of lending to all
borrowal accounts enjoying working capital credit limits of Rs.50 lacs and
above from the entire banking system. The limit has now been raised to Rs.100
lacs.
·
Scrapping of the scheme of bifurcation of cash
credit limit into two parts as demand loan and fluctuating cash credit account.
·
Formalisation of the system of operative limit
and strengthening of submission of quarterly information by the borrowers.
·
A new direction to implementation of 'Drawee
Bill Scheme' by making it compulsory to allocate 25% of the cash credit limit
against raw materials to be utilized by way of drawee bills.
These methods have not only brought in better financial planning by the
banks but have also helped the borrowers to have a planned and budgeted
approach to their production and operating schedules.
Note: These guidelines have since been withdrawn by Reserve Bank and
banks are free to frame their own policies in this regard. Some relaxations are
likely to be granted by the banks in the matter.
Non Submission of QIS statements
The drawings in credit accounts of all borrowers enjoying total working
capital limits of Rs.50 lacs (now Rs.100 lacs) and above from the entire
banking system are to be regulated by fixing operative limits based upon the
data furnished on Form 1 of 'Quarterly Information System' (QIS). It is,
therefore, absolutely necessary that these statements are submitted in time.
The system adopted for fixation of operative limits is as under:
(i) For
borrowers dealing exclusively with one bank: The limit will be; fixed by that
bank based upon the data furnished by the borrower.
(ii) For
borrowers having consortium arrangement: The limit will be fixed by the lead
bank along with the bank having the next largest shares. The individual banks'
share will also be intimated by the lead bank to all the member banks in the
consortium.
(iii) For
borrowers having multiple banking arrangement: All the banks financing the
borrower must obtain the data under QIS and fix the operative limits
accordingly.
Any default in submission of statements under QIS shall attract penalty
and the banks will charge penal interest of at least 1 % per annum for a period
of one quarter on entire outstanding under various working capital limits
sanctioned to the borrower. The charging of additional penal interest which was
hitherto mandatory has now been left to the discretion of banks. Further
instructions in this regard are as under:
(i) Where
default is of a serious nature or persists for two consecutive quarters, banks
may charge rate of interest higher than the normal lending rate determined for
a borrower on his entire outstandings under working capital limits sanctioned,
until such time as the position relating to timely submission of various
statements is regularised.
(ii) In
case of continuous/persisting defaults, banks may further consider freezing the
operations in the a/c after giving notice to the concerned borrower.
(iii) Sick
units, borrowers effected by political disturbances, riots and natural
calamities are exempted from the discipline of the timely submission of
statements under QIS.
Reserve Bank of India has since given full freedom to banks to frame
their own policies regarding obtention of data under QIS and fixation of
operative limits. The matter regarding charging of penal interest etc. has also
been left at the discretion of banks.
Slip Back in Current Ratio
The borrowers who have a current ratio higher than 1.33:1 should
normally be not allowed any slip back in current ratio. However, banks have
been permitted to consider on merits, slip back in current ratio for industrial
units with a good past performance record and a sound current ratio for the
following purposes subject to the condition that a current ratio of at least
1.33:1 is maintained:
(a) For
undertaking either an expansion of existing capacity or for diversification.
Diversification would include 'setting up of new units';
(b) For fuller utilisation
of existing plant capacity;
(c) For meeting a
substantial increase in the units working capital requirements on account of
abnormal price rise;
(d) For
investment in allied concerns with the concurrence of the bank, if such 'an
investment is considered necessary in the business interests of the borrowing
unit i.e. for processing or supply of raw materials, etc.
(e) For‑bringing
about reduction in the level of deposits accepted from the public for complying
with statutory requirements.
(f) For repayment of
instalments due under foreign currency loans and other term loans.
(g) For
rehabilitation/reviving weaker units in the Group by allowing flow of funds
from cash rich units in the 'Group' in terms of the guidelines framed under
'Group Approach' subject to the condition that no amount lent to a healthier
unit of the 'Group' for its working capital requirement is transferred to
another unit within the 'Group' so as to reduce the current ratio of the
transferor unit to a level below 1.33: 1.
Diversion of working capital finance
The funds lent by the banks against working capital limits are required
to be utilised for meeting genuine working capital needs of the borrowers and
cannot be allowed to he diverted for other purpose such as investment in
finance companies, associate companies/subsidiaries, inter‑cooperate
deposits etc. Reserve Bank has issued detailed guidelines1 for preventing such
diversion as under:
(i) Investments
made in shares, debentures, etc. of a current nature, units of Unit Trust of
India and other mutual funds, and in associate companies/subsidiaries, as well
as investments made and/or loans extended as inter corporate deposits shall be
excluded from the build up current assets at the time of assessing of MPBF. In
addition no corresponding adjustment in the projected net working capital shall
be made for such investments.
(ii) Current
ratio of 1.33:1 is only the minimum required to be maintained by a borrower and
a slip back in current ratio upto this level is permissible only for the
purposes already explained elsewhere in this chapter. Bank finance for working
capital purposes is not intended to support long term investments.
(iii) Steps
as indicated in (i) & (ii) above are to be taken not only at the time of
assessment but also at the time of fixing quarterly operative limit on the
basis of statements received under QIS.
(iv) In
case a borrower has diverted finance granted for working capital purposes for
other activities such as inter corporate deposits/investments made in associate
companies/subsidiaries/real estate etc. banks must recall the amounts so
diverted. In addition banks should charge penal interest of not less than 2 per
cent over and above the lending rate on the amounts diverted.
(v) Where
borrowers fail to repay the amount diverted from cash credit accounts for uses
other than for which working capital finance was sanctioned, the banks should
reduce the limits to the extent of amounts so diverted.
(vi) Each
drawal of Rs.50 lacs and above in respect of borrowers with MPB17 of Rs.10
crores and above from the entire banking system should be scrutinised by the
banks to ensure that the amount is drawn for the purposes for which credit has
been sanctioned.
KANNAN COMMITTEE REPORT ON WORKING CAPITAL
FINANCE AND WITHDRAWAL OF PRESCRIPTION RELATING TO MPBF
Indian Bank Association (IBA) constituted a 'Group' on 'Working Capital
Finance' including Assessment of Maximum Permissible Bank finance (MPBF). The
group was headed by Sh. K. Kannan, Chairman and Managing Director of Bank of
Baroda. The 'Group' studied all' the aspects of working capital finance and
gave far reaching recommendations on the modalities of assessment, of working
capital. It urged that more freedom be given to bank to evolve their own system
in this regard and also frame their own credit policy. The final report of the
group was submitted to Reserve Bank of India for its consideration in March,
1997. The main recommendations of the group were as under:
1. Modality
of working capital assessment of the borrowers will be left with each Bank who
may devise a flexible system under the overall regulatory guidelines of RBI
taking into account (a) Size of the Bank and whether it is a domestic private
bank or a foreign bank or a public sector bank, (b) Bank's Prudential exposure
limit and core resource base, (c) Bank's Credit (Loan) Policy guidelines, (d)
Credit Skill Management in the Bank and development of specialised cadre of
credit officer, (e) Bank's thrust for business priorities. Loan Policy of a
Bank should cover its Corporate Policy on Credit Deposit Ratio,
Industry/Sectoral Exposure, Group Exposure etc.
2. While
framing internal guidelines for working capital assessment by each bank, the
following methods of assessment as suggested by the Group may be kept in view :
(a) For
borrowers with total working capital requirement (funded and non-funded) upto
Rs. 25 lacs from the banking system, the assessment may be made upon an overall
study of borrower's existing and projected business performance, overall
financial parameters etc., after discussion with the borrower.
(b) For
borrowers with total working Capital requirement (funded and non funded) over
Rs.25 lacs but upto Rs.5 crores, turnover assessment as suggested by Nayak
Committee may be considered. Under the said system 20% of the projected gross
sales turnover of the borrower can be set up as credit limit.
(c) Borrowers
with workingcapital requirement (funded and non‑funded) over Rs.5 crores,
Cash Budget system may be considered. Draft of Cash Budget as mentioned in the
report may be adopted with modifications, as may be considered necessary, by
the financing bank. Wherever necessary, the concerned bank may also suitably
abridge Cash Budget format to facilitate need‑based assessment of credit
requirements of a particular borrower.
(d) The above
cut off limit is only indicative. Each bank may decide appropriate cut off
limit depending upon size of the Bank and other allied factors.
(e) Corporate borrowers may be allowed to issue Short Term Working Capital
Debentures of 1 to 1‑1/2 year maturity. Bank may subscribe to such
debentures as working capital assistance.
3. Line
of Credit (confirmed/unconfirmed) system of working capital (funded) facilities
by way of CC/PC/PCFC/BD/OD/BP/FBP/Loan etc. and Working Capital (non‑funded)
facilities such as L/C/Guarantee, may be introduced by each bank taking into
account its corporate Loan Policy for drawings under unconfirmed Line of
Credit. Higher rate of interest maybe stipulated as compared to rate of
interest on confirmed Line of Credit.
4. Borrowers
with working capital requirements over Rs.20crores may be granted the facility
100% by way of loan. Borrowers with working capital requirements over Rs.10
crores but up to Rs.20 crores may have 75% of Loan component and borrowers with
working capital requirements over Rs.5 crores but up to Rs.10 crores may have
60% of Loan component.
Loan component wherever stipulated in accordance with the above may be
spread over various maturity base after assessing needs of the borrowers and
source of repayment. Hence loan components may be 3 months, 6 months, 9 months
and 12 months tenure subject to allowing roll over at Bank's discretion. For
any pre‑payment (i.e. before tenure is over) the borrower may have to pay
additional interest as such repayments disturb Bank's Funds Management.
Under the proposed system peak level cash deficit will be die guiding
factor. Total working capital finance to be extended by the bank. This needs to
be given in the form of Working Capital, Demand Loan or Running Account
facility as per cut off limit/modality as may be decided by each bank. It may
be desirable that Working Capital Demand Loan with short/medium term maturities
are repaid out of internal cash inflows/infusion of external short term funds.
Long term Working Capital Demand Loan is to be repaid preferably out of
internal cash generations.
Where implementation of modality of Loan delivery system as mentioned
above is not feasible looking to the nature of business, banks may not
implement the same. The percentage of Loan component and Cash Credit component
as suggested above for different cut off limits is only indicative and may be
left to the discretion of each Bank.
5. As an
incentive to the borrowers availing of 100% of working capital finance by way
of loan component, rate of interest for working capital facility may be fixed
by each financing bank broadly on following basis:
(a) Cash Credit component to be
at PLR or PLR plus
(b) Loan component to be at
Minus PIR or PLR or PLR plus
(c) It may also be
considered by financing as an incentive to a borrower (for transferring a
portion of loan proceeds to Current Account with the same Bank) to allow some
credit by way of interest in die Loan account.
(d) Each bank to charge rate
of interest on working capital facility (including Loan component) based on
individual Credit Rating System. Term Loan for acquisition of fixed assets may
carry different rate of interest or higher rate of interest in comparison to
loan component for working capital.
(e) Individual bank may also
decide to have separate PLR and spread for Loan component and Cash Credit
component as per its Loan Policy.
6. Margin
and holding level of Stocks, Book Debts etc. as security for working capital
facility may entirely be left to die discretion of financing bank. If any Bank
so desires, it may continue to follow Tandon/Chore Committee guidelines.
7. Reasonableness
of Current Ratio/Debt Equity ratio may be decided by individual Banks as per
their Loan Policy. However, if any Bank desires to continue existing Bench
mark, Current Ratio of 1.33 it may continue to do so.
8. Periodical
statement of stock, book debts coupled with physical verification of
securities, business site of the borrower should continue to be the basic
credit monitoring tool of the banks. Along with periodical stocks, book debts
statement, borrower must mention data relating to production, sales and other
assumptions on which working capital assessment is made by the financing bank.
If there is any variation more than 10%, justification thereof is to be
submitted.
9. Periodical
review of business performance data of the borrower should be made in
conjunction with operations of the borrower's account, drawing power of
securities, half yearly profitability statement etc. Modality of such
periodical review may be decided by each bank.
10. Time schedule for
disposal of loan application is left to be framed by each Bank in its Loan
Policy.
Financing banks may review their existing credit decision making process
to ensure speed in the credit disposal. Reporting of branches direct to the
sanctioning authority (under whose power the relative proposal falls) without
undergoing the usual administrative tier may be explored by the banks depending
upon its corporate policy to avoid delay in credit decision making.
11. As
Cash Budget System has been recommended for borrowers with working capital
requirement over Rs.5 crores there is no necessity for their submitting
separate cash flow projections to the financing bank from whom working capital
facilities are availed. However, if such borrowers prepare cash flow
projections as a statutory requirement/their internal requirement, they may
submit the same to the financing bank. For Term Loan/D P Guarantee facilities,
requirements of cash flow projections would continue to be operative.
12. Annual
verification of current assets (including compliance of Pollution Control
requirement wherever applicable) by borrower's Auditor (in respect of borrowers
with working capital limit over Rs.5 crores) should be insisted. Where however,
borrower's auditors are not in a position to submit report on annual
verification, banks may engage a Chartered Accountant/Chartered
Engineer/Architect as may be deemed fit by the financing bank for
verification/valuation of assets including compliance of Pollution Control
requirements wherever applicable at borrower's cost. An irrevocable undertaking
is to be obtained from the borrower empowering banks in this regard.
For Sick/Weak Units/BIFR Accounts individual Banks may decide their
periodicity of such verification as well as cut off limits for such borrowal
accounts to be covered under the proposed system of external verification.
13. The
financing banks may incorporate suitable covenant in the document in terms of
which borrower will undertake to utilise facilities from the banks for the
purpose for which the same is sanctioned.
14. Borrower
should obtain prior approval for investment of funds outside business by way of
ICD, investment in associate concerns etc. or in other outside investment. In
the loan covenant, borrower is to empower the financing bank to levy penal
interest and/or recalling of the advance at their discretion without any prior
reference to the borrower.
15. Legal
aspects of documentation for credit facilities to borrower under Multiple/
Consortium Banking arrangement are to be taken care of by individual Banks in
consultation with other financing Banks. Periodically financing Banks may at
their discretion obtain a declaration from the borrowers regarding charges created
on its Assets.
16. In
consortium lending the member banks should frame ground rules based on the
consensus for smooth functioning of consortium.
17. Syndication
System of Lending especially for large borrowers i.e. borrowers with working
capital limit over Rs.5 crores may be introduced by the financing banks as a
part of their Loan Policy. The syndication of loan may be undertaken both by
way of Disclosed Participation and Undisclosed Participation or with Risk
Participation/without Risk Participation as are prevalent in advanced
countries. Legal aspects of syndication lending if adopted by any bank are to
be thoroughly complied with.
18. Depending
upon the size and area of operation each Bank may maintain data base of large
borrowal accounts including Group Accounts at Central/Zonal Office. Cut off
limit for data base and coverage of information range may be decided by each
bank.
19. Each bank may decide its
policy guidelines about issue of Commercial Paper by the borrowers.
20. Quarterly
Information System (QIS) and Credit Monitoring Arrangement (CMA) may cease to
be a Regulatory requirement. However, individual banks may continue to obtain
QIS statement if they so desire as per their Loan Policy.
21. Existing guidelines on
Bills Culture may be waived.
22. Definition of group
concern may be entirely left to the perception of financing bank.
23. All
restrictive guidelines such as proposals for borrowers with credit limits over
Rs.25 lacs, wherein Director of any Bank is interested, be placed to Management
Committee of the Board. Restrictions on issuance of Inland Financial Guarantee
favouring Banks/Financial Institutions, extending Term Loan towards raising
long term resource by the borrower for Working Capital etc. be all withdrawn.
24. Identification
of current assets for the purpose of computation of current ratio should be
based on guidelines of Institute of Chartered Accountants of India. Also
computation of Debt Equity ratio guidelines of the aforesaid Institute may be
followed.
25. Credit
Rating Policy should be entirely left to the discretion of banks. Involvement
of external agencies may not be insisted. The banks should evolve appropriate
Credit Rating Policy taking into account, their overall financial parameters
and other allied matters having bearing on risk evaluation of such parties.
Some of the recommendations with suitable modifications have already
been accepted by Reserve Bank for implementation. In various 'Monetary and
Credit Policies' announced from time to time, Reserve Bank of India has given
more and more operational freedom to banks in credit dispensation. Banks have
been permitted to frame their own methods for assessment of working capital
needs of the borrowers. The details of important measures announced by Reserve
Bank are as under:
(i) Prescription as regards to assessment of
working capital needs based on the concept of Maximum Permissible Bank Finance
(MPBF) enunciated by Tandon Working Group has been withdrawn. Banks may evolve
ail appropriate system for assessing working capital needs of the borrowers,
within the prudential guidelines and exposure norms which have already been
prescribed by Reserve Bank of India.
Prudential exposure norms as per the guidelines of Reserve Bank of India1 provide that the maximum
exposure of a bank for all its fund based and non fund based credit facilities,
investments, underwriting, investment in bonds and commercial paper and any
other commitment should not exceed 15 per cent of its (bank's) capital funds to
an individual borrower and 40 per cent of its capital funds to a 'group'. For
arriving at exposure limits the sanctioned limits or outstandings which ever is
higher shall be reckoned. It may however, be noted that while calculating
exposure, the non fund based facilities are to be taken at 100 per cent of the
sanctioned limit or outstandings whichever is higher. To illustrate the point
let us consider the following examples:
Example 1. Rs.in crores
Capital Funds of the
bank 875.00
Maximum exposure permitted
for an individual 131.25
borrower (15% of
capital funds of the bank)
Maximum exposure
permitted for all borrowers 350.00
under the same group
(40% of capital funds of the bank)
Example 2.
Limits sanctioned to
a borrower
(i) Fund Based 75.00
(ii) Non Fund Based 25.00
Total 100.00
Total Exposure
(i) For fund Based limits‑@ 1 00c/v
of limits or outstanding whichever is
higher 75.00
(ii) for Non Fund Based Limits‑@ 100%
of limits or outstandings 2whichever is higher 25.00
100.00
Total credit limits to the above borrower are Rs.100 crores which are
within the maximum exposure norms of Rs.131.25 crores.
As advised by the Reserve Bank, loans and advances against bank's own
deposits may not be included while arriving at overall exposure to a borrower.
Total exposure to group is permitted upto 50 per cent if the additional
exposure is on account of finance to infrastructure finance relating to power,
telecommunication, roads and ports. However, exposure norm to individual
borrower remains restricted to 20% only even in such cases.
The concept of capital funds has been broadened to represent total
capital i.e., Tier I and Tier II capital (same as total capital defined under
capital adequacy standards) for the determination of exposure ceiling by banks.
(ii) The
turnover method, as already prevalent for small borrowers, may continue to be
used as a tool of assessment for this segment. For small scale and tiny
industries etc., this method of assessment may be extended upto total credit
limits of Rs. 5.00 crores.
(iii) Banks
may adopt cash budgeting system for assessing the working capital finance in
respect of large borrowers.
Reserve Bank of India has however, not suggested any specific form for
assessment of working capital based upon cash budgeting. 'Kannan Group' has
given a form which may be adopted by the banks with suitable modifications. In
any case it has been left to the banks to evolve their own method/form for this
purpose.
Proforma as suggested by Kannan Committee is given in Appendix 16.IX.
(iv) The
banks may also retain the concept of the present maximum permissible bank
finance with necessary modification or any other system as they deem fit.
(v) Banks
should lay down with due approval of their Boards, transparent policy and
guidelines for credit dispensation in respect of each broad category of
economic activity.
(vi) Reserve
Bank's instructions relating to directed credit (such as priority sector,
export etc.), quantitative limits on lending (such as against shares and for
consumer durables etc.) and prohibition of credit (such as bridge finance,
rediscounting of bills earlier discounted by NBFCs etc. subject to prescribed
exemption) shall continue to be in force.
(vii) RBI is
yet to evolve suitable guidelines for implementation as per the recommendations
of the Working Group on Bills
Discounting by Banks. The Group has made several recommendations duly taking
into account the Indian context in respect of bill financing, Banker's
acceptance and the scope for extending Bill financing to services sector
especially industries such as information technology, software services, travel
and tourism etc. Major recommendations are given later in the chapter.
(viii) RBI
has relaxed the requirement of PLR being the floor rate for loans above Rs.2
lakh. PLR will now serve as a benchmark and banks will be able to offer loans
at/below PLR rates to exporters or other creditworthy customers including
public enterprises on the lines of a transparent and objective policy approved
by their Boards.
Present Scenario
MPBF system as per the recommendations of Tandon Committee report was
introduced in November, 1975 and has been well established by now. Despite its
prescription being withdrawn by Reserve Bank, most of the banks are still
continuing with this approach.
Cash budgeting system will require many changes in the accounting system
being presently adopted by the borrowers and a new information system, the
transition to the new system is, therefore going to be slow and perhaps no
Indian Bank has adopted this system of assessment of working capital needs so
far in the real sense.
Many banks have however, adopted turnover method for assessment of
working capital needs upto Rs.2.00 crores in respect of all borrowers.
Recommendations of Working Group on Discounting of Bills
A Working Group under the Chairmanship of Shri K. Ramamoorthy, Chairman,
Vysya Bank Ltd. was set up by the Reserve Bank of India in December 1999 to
examine the possibility of extending bills discounting facility to services
sector especially industries such as information technology, software services,
travel and tourism, etc. The Working Group submitted its report to the Reserve
Bank of India on September 7,2000.
In view of services sector transforming the economic profile of the
country and being poised to register tremendous growth and contribute
significantly to overall strength of the economy, the Group undertook a
detailed scrutiny of the key issues involved in bill financing and examined the
possibility of strengthening the existing bill discounting mechanism and extend
its scope to services sector.
The important
recommendations in brief are:
·
Bill finance being the preferred style of
credit from the banker's point of view should carry interest lower than loan or
cash credit, which is in line with international practice.
·
In respect of bill transactions, individual
bank should be given the freedom to lay down norms for satisfying themselves
about the genuineness of underlying commercial transactions and/or the movement
of goods.
·
Banks should evolve the system of
"value-dating" of clients account.
·
Stamp duty for all bills of usance upto 182
days may be abolished.
·
The exemption from stamp duty should be made
available to bills discounted by Financial Institutions and Registered Non‑Bank
Finance Companies.
·
All corporate and other commercial entities who
have a turnover above a threshold level may be mandated to disclose the
"aging schedule" of their overdue payables in their annual reports as
well as in their periodical reports to their banks.
·
Borrowers may be permitted to discount bills
drawn under Letters of Credit with any bank of their choice, outside the
existing consortium/ multiple banking arrangements.
·
New alternatives to bill financing like Invoice
Financing and Secured Fixed Rate Note on the lines of asset ‑ backed
Commercial Paper, prevalent in developed markets may be introduced. Factoring
services could also be revitalized.
·
A Credit Insurance Scheme for ensuring domestic
receivables on lines similar to the ones prevailing abroad may be introduced.
·
Bankers' Acceptance (BA) may be introduced in
the Indian market to finance import, export and domestic trade transactions.
However, care has to be taken to ensure that BAs are issued to cover only
genuine trade transactions.
·
Borrowing clients who enjoyed working capital
limits of Rs.10 crore and above and whose rating with the bank has been
consistently satisfactory may be allowed drawal against the Working Capital
Demand Loan (WCDL) component on the basis of the tradable promissory note in
favour of the lending bank called 'Bank Paper'.
·
Banks may be permitted to entertain
purchase/discount of bills drawn by service providers on their debtors, subject
to the satisfaction of the banker that the service has been rendered.
The Group has also considered it appropriate to briefly advert to one of
the key emerging trends in the world of business, viz. the use of internet as a
potent cost effective tool for electronic commerce (e-commerce). Looking at the
wave of optimism being shared in the developed markets on the future potential
of e-commerce and their preparedness to meet them, the Group has recommended
that an expert group drawn from the fields of technology, banking and corporate
finance may be constituted to prepare the blue‑print for meeting the e‑commerce
challenges that may be thrown up in the financial sector of the country.
Quarterly
Information System Form I For Traders and Merchant Exporters
To be Submitted in the Week Preceding the Commencement of the Quareter
to Which the Statement Relates
Estimates for the ensuing quarter ending
.......................................
(Amount: Rs. in Lacs)
|
Name of borrower: (A) Estimates for the
current accounting year
indicated in the annual plan (B) Estimates for
the ensuing quarter ending…………… (B) Estimates of current
assets** and current
liabilities for the ensuing quarter ending
……… Current Assets I. Stocks‑in‑Trade
(Months ‘cost of sales)@ II. (a) Receivables
other than deferred and exports (including bills Purchased & discounted
by bankers)++ (Months’ Domestic Sales)@ (b)Export
receivables (including bills purchase /discounted by bankers)++ (Months’ Export sales)@ III. Advance to suppliers
of merchandise IV. Other current assets
including cash and bank balances
(specify major items) V. Total (estimated)
current assets Current Liabilities VI. Short
term bank borrowings including bills purchased/discounted ......................................…..Bank .......………………………….Bank,
etc. VII. Sundry
Creditors (Trade) (including those covered under Usance Letter of Credit/Co‑acceptance
facility from the banks) (Break up details to be furnished separately)
(Months' purchases)@ VIII. Advance Payments from
customers IX.
Statutory Liabilities X.
Other current liabilities
(Specify major items) XI.
Total (estimated) current
liabilities. |
(a) Sales Turnover i. Domestic Sales ii. Exports iii. Total (b)
Other Income (Duty drawback, cash assistance, commission & brokerage
received) (c)
Gross Income (Total a + b). (a)
Sales Turnover i. Domestic Sales ii. Exports iii. Total (b)
Other Income (Duty drawback, cash assistance, commission & brokerage
received) (c)
Gross Income (Total a + b) |
|
Notes: i) Information in these forms is to be
furnished for each line of activity/units separately as also for the company as a whole
and where the different activities/units are financed by different banks, the concerned
activity/unit-wise data and data relating to the whole company should be furnished to
each financing bank. ii) The
valuation of current liabilities in these forms should be on the same basis
as adopted for the statutory balance sheet and should be applied on a
consistent basis. iii) In
cases where Co‑acceptances, guarantees, us letter of credits etc., for
acquiring current assets are established over and above the levels determined
and not forming part of creditors level indicated at the time of assessment
of working capital requirement, available from these sources should be taken
into account for the purpose of working out, operative limits. |
|
Quarterly
Information System‑Form I (For Manufacturers)
To Be Submitted in the week preceding the commencement of the, Quarter
to which the Statement Relates
Estimates for the ensuing quarter ending
.....................................................
(Amount:
Rs. in lacs)
Name of Borrower(A)
Estimates for the current accounting year indicated in the annual plan (B) Estimates
for the ensuing quarter ending……………. (C) Estimates of current
assets
**and current liabilities for the ensuing quarter ending……………. Current Assets I.
Inventory (i) Raw material
(including sum & spares
used in the process of
manufacture) (a) Imported $(months' consumption) @ (b) Indigenous $ (months’ consumption)@ (ii)
Stocks‑in process (months' cost of
production) @ (iii)
Finished goods (months' cost of production)@ (iv)
Spares excluding those under Item I (i) above
(months' consumption)@ II. Receivables(other than
exports & deferred) including bills discounted with bankers **(month's domestic sales) @ III. Export receivables,
including bills purchased discount, with bankers ++(Months’ export sales)@ IV.
Advances to suppliers of raw material and stores/ bares & consumables V. Other current assets including cash and bank balances (specify
major items) VI.
Total (estimated) current assets Current Liabilities VII. Short term bank
borrowings from banks (including
bills purchased & discounted with bankers)*** ……………………….Bank …….………….Banks, etc. VIII.
Creditors for purchases of raw materials and
stores/spares &consumables (including those under Usance Letter of
Credit/Co-acceptances facility from the banks) ....... (a) Imported (months'
purchases) @ (b) Indigenous
(months' purchases) @ IX. Advance payments from customers X. Statutory liabilities XI. Other current liabilities (specify major items) XII.
Total (estimated) current liabilities |
(a) Production : (b) Gross Sales : I. Domestic : II.
Exports : ___________ ___________ (c) Net Sales :
(a) Production : (b) Gross Sales : I. Domestic : II.
Exports : __________ __________ (c) Net Sales : __________ __________ ____________ ____________ |
|
Notes: (i) Information‑should
be furnished for each line of activity/unit separately as also for the
company as a whole. In cases where the different activities/units are
financed by different banks, the concerned activity/unit‑wise data and
data relating to the Company as a whole should be furnished to each financing
bank. (ii) The
valuation of current, assets or current liabilities in these forms should be
on the same basis as adopted for the statutory balance sheet, and it should
be applied on a consistent basis. |
|
Quarterly Information System ‑ Form II For Traders & Merchant Exporters
To be Submitted Within Six Weeks from the Close of the Quarter to Which
the Statement Relates
Performance during the quarter ended ...............................................
( Amount Rs. in lacs)
|
Name of Borrower: (A)
Estimates for the current
accounting year indicated in the Annual Plan (a) Sales Turnover i.
Domestic ii.
Exports iii.
Total (b)
Other income (Duty drawback, cash
assistance, commission & brokerage received) (c) Gross income (Total a + b) |
|||
|
(B)
Actual Gross Income during the current accounting
year (data to he
furnished for the completed quarters) 1 st quarter ended 19 2nd quarter ended 19 3rd quarter ended 19 4th quarter ended 19 |
During
the Quarter Gross
Income |
Cummulative position Gross
Income |
|
|
(C) Data relating to
the latest completed quarter ended (a) Sales turnover i.
Domestic ii.
Exports iii.
Total (b) Other income (Duty drawback, cash
assistance, commission and brokerage received) (c) Gross income (Total a + b) (D) Current assets and current liabilities** for the latest completed
quarter ended Current Assets I. Stocking -in-Trade (Months cost of Sales)@ II. a)Receivables other than deferred and exports‑including bills purchased & discounted by bankers++ (Months' Domestic Sales)@ b) Export receives including bills purchased/discounted by bankers++ the exports sales)@ III. Advances to suppliers
of merchandise IV. Other current assets
including cash and bank balances (Specify major items) V.
Total current assets Current Liabilities VI. Short term bank
borrowings including bills purchase/
discounted .................................. Bank ..............................
Bank, etc. VII. Sundry Creditors
(Trade) including those covered under ‑Usance Letters of Credit /Co-acceptance
facility from the banks (break up details to be furnished separately)
(Months' purchases)@ VIII. Advance payments from
customers IX. Statutory liabilities X. Other current liabilities (Specify major items) M. Total current
liabilities |
Estimate (as
given in Form (at the beginning of the quarter) Estimate (as
given in Form (at the beginning of the quarter) |
Actuals Actuals |
|
|
Additional
Information Contingent liabilities a. Arrears of cumulative
dividends. B Disputed
excise/customs/liabilities C. Bills
accepted/guarantees extended to accommodate associate/sister concers or other
third parties. d. Other liabilities not
provided for NOTES: i) Information
in these forms is to be furnished for each line of activity unit separately
as also for the concerned an
as a whole. In cases where of the different activities units are financed by different banks, the
concerned activity/ unit‑wise data and data relating to the company as a whole should be
furnished to each financing bank. ii) The valuation of
current assets or current liabilities in these forms should be on the same basis as adopted for the statutory
balance sheet and should be applied on a consistent basis. |
|||
Quarterly Information System
‑ Form II
(For Manufacturers)
To be Submitted Within Six Weeks from the Close of the Quarter to
Which the Statement Relates
Performance during the quarter ended: ...................... (Amount Rs. in lacs)
|
Name of borrower: A. Estimates for the
current accounting year indicated in the Annual Plan. B. Actual
production/sales during the current accounting year (data
to be furnished for the completed
quarters) 1
st quarter ended 19 2nd
quarter ended 19 3rd
quarter ended 19 4th
quarter ended 19 C. Data
relating to latest completed quarter
ended ................ Production Gross
Sales i.
Domestic ii.
Exports _________ _________ Total Net
Sales D. Current assets and
current liabilities ** for
the latest completed quarter ended…… Current AssetsI Inventory (i) Raw materials (including stores
& spares used in the process of manufacture) (a) Imported $(months' consumption)@ (b) Indigenous $(months' consumption)@ (ii) Stocks‑in‑process (months' cost of production)@ (iii) Finished goods (months' cost of sales)@ (iv) Sales excluding those under Item I(i) above (months' consumption)@ II. Receivables (other than
exports & deferred) including bills purchased & discounted with
bankers++ (Months' domestic sales) @ III. Export receivables,
including bills purchased & discounted with bankers++ (Months' export sales) IV. Advances
to suppliers of raw materials
& stores/ spares & consumables V. Other current assets
including cash and bank balances (Specify major items) VI. Total current assets. Current Liabilities VII. Short term bank
borrowings including bills purchased/ discounted …………………..Bank, ...............……. Bank, etc. VIII. Creditors for purchases of raw materials and
stores/spares & consumables (including those under Usance Letters of
Credit/ Co‑acceptance facility from the banks)*** (a) Imported (months'
purchases) @ (b) Indigeneous (months' purchases) @of which Dues
to small units IX. Advance payments from
customers X. Statutory
liabilities XI. Other current
liabilities (Specify major items) XII. Total
current liabilities Additional Information Contingent liabilities i) Arrears
of dividend ii) Disputed excise
customs/ tax liabilities iii) Other
liabilities not provided for |
(a)
Production (b)
Gross Sales i. Domestic ii. Exports c) Net Sales During the Quarter Production Sales Estimate (As
given in Form I at
the beginning of the
quarter) Estimate (As
given in Form I at the beginning of the quarter) _________________ _________________ Estimate _______________ _______________ |
: : : : __________
__________ : Cumulative
position Production Sales Actuals
Actuals _______________ _______________ Actuals _____________ _____________ |
|
NOTES: (i) Information should be furnished for each line of activity/unit
separately and also for the company as a whole. In cases where the different
activities/units are financed by different banks, the concerned activity/unit‑wise
data and data relating to the company as a whole should be furnished to each
financing bank. (ii) The valuations of current assets or
current liabilities in the form should be on the same basis as adopted for
the statutory balance sheet and it should be applied on a consistent basis. (iii) The period should be shown in
relation to the annual projection for the relative item. If the levels of
inventory/receivables are higher than the stipulated norms, reasons therefor
should be given. (iv) If the canalised items form a
significant part of raw materials inventory, these may be shown separately. (v) Amount of bills discounted with
bankers included in item II of part D should be indicated separately. (vi) Amount of bills discounted with
bankers in respect of purchase, included in item VII or item VIII of Put D
should be indicated separately. (vii) The classification of current
assets or current liabilities should be made as per the usually accepted
approach of bankers and not as per definitions is in the Companies Act. |
||
Half‑Yearly Operating
Statement‑Form III(A)
(For Traders and Merchant
Exporters)
To be Submitted Within Two Months from the Close of the Half Year
(Amount
Rs. in lacs)
|
Name d borrower: |
Last year (Actual) |
Current year (Budget) |
Half year ended …………..19 Estimate
Actuals |
Current
half –year ending …………19 Estimate |
|
|
A. HALF‑YEARLY OPERATING STATEMENT I.
GROSS INCOME I.
Gross Sales (net of returns) a. Domestic Sales b. Export Sales c. Sub‑Total (a + b) II. Other Income a. Duty Draw back b. Cash assistance c. Commission and brokerage received d. Sub‑total (a + b + c) III. Total (i) + (ii) II.
Cost of Sales i. Purchases ii. Other trading expenses
(carriage inward, commission and brokerage, on purchases) iii. Sub‑Total (i + ii) iv) Add: Opening stock v) Sub‑total (iii + iv) vi) Less: Closing stock vii) Total cost of sales (v + vi) III. Selling, General
& Administrative Expenses including, Bonus Payments IV. Interest V.
Depreciation Sub‑total (III + IV + V) VI. Operating Profit/Loss (Item 1 minus total
of items II, III, IV & V) VII. Other non-operating
Income /expenses (Net+) VIII. Profit Before Tax /Loss
(Item VI plus item VII) |
1 |
2 |
3 |
4 |
5 |
APPENDIX 16.VI
Half‑yearly Funds Flow
Statement Form III (B)
(For Traders & Merchant
Exporters)
(Amount
Rs. in lacs)
|
1. SOURCES (a) Profit before tax (b) Depreciation (c) Increase in capital (d) Increase in Deferred Liabilities (incl. public deposits)* (e) Decrease
in: i) Fixed assets ii) Other non‑current
assets (f)
Others (g) TOTAL (A) 2. USES (a) Net loss (b) Decrease in Deferred Liabilities (incl. public deposits) ** (c) Increase in: i)
Fixed assets ii)
Other non‑current assets (d) Dividend payments (e) Taxes paid (f) Others (g)
TOTAL (B) 3. Long Term Surplus
(+)/Deficit (-)(A‑B) 4. Increase/decrease
in current assets 5. Increase/decrease in current liabilities other the Bank borrowings 6. Increase/decrease in working capital gap 7. Net surplus (+)/deficit (‑) (Difference of 3 & 6) 8. Increase/decrease in Bank borrowings |
Last
year (Actuals) _______ 1 _______ |
Current
year (Budget) __________ 2 __________ |
Half year ended ………………… Estimate
Actuals 3
4 ______________ |
Current half‑ year ending ……………… Estimate 5 ___________ |
|
NOTE: Increase/decrease under items 4 to 8 should be indicated by (+)/(‑)
signs. (i) Information
should be furnished for each line of activity/unit separately as also for the
company as a whole. In cases where the different activities/units are
financed by different banks, the concerned activity/unit‑wise data and
data relating to the company as a whole should be furnished to each financing
bank. (ii) The valuation of
current assets or current liabilities and recording of income and expenses
should be on the same basis as adopted for the statutory balance sheets, and
it should be applied on a consistent basis. (iii) Increase
in carry of various items of current assets which is disproportionate to
percentage rise in sales turnover
should be explained in detail separately. (iv) Similarly,
a decrease in current liabilities which is not commensurate with percentage
rise or fall in sales turnover should be explained in detail separately. (v) Item
7 (net surplus/deficit) and item 8 (increase/decrease in bank borrowings)
would be algebraical opposite figures
and these should agree with each other |
||||
Half‑Yearly Operating
Statement ‑ Form III(A)
(For Manufacturers)
To be Submitted Within Two Months from the Close of the Half Year
(Amount Rs. in lacs)
|
Name of borrower: A. Half yearly operating statement 1. Gross sales (net of returns) (a) Domestic (b) Exports Total 2. Less Excise duty 3. Net Sales (Item 1 ‑
item 2) 4. Cost of goods sold (a) Raw materials consumption
(including stores & spares used in the process of manufacture) (b) Other spare (c) Power & fuel (d) Direct labour (factory wages & salaries) (e) Other manufacturing expenses, including depreciation Sub‑total Add:
Opening stocks‑in‑process, & finished goods Sub‑total Deduct:
Closing, stocks‑in‑process & finished goods 5. Total cost of goods sold 6. Selling, general &
administrative expenses 7. Interest. 8. Sub‑Total (5 + 6 + 7) 9. Operating Profit/Loss) (3 ‑ 8) 10. Other non‑operating
income/expenses Net 11. Profit before tax/Loss (9 + 10) |
Last
year (Actual) __________ 1 __________ |
Current
year (Budget) __________ 2 __________ |
Half year ended ………….20 Estimate
Actuals 3
4 ______________ |
Current half-year ended ……………20 Estimate 5 ___________ |
Half‑Yearly Funds Flow
Statement‑ Form III(B)
(For Manufacturers)
(Amount
Rs. in lacs)
|
1. Sources (a) Profit before tax (b) Depreciation (c) Increase in Capital (d) Increase in term
liabilities* (incl. Public deposits) (e) Decrease in (i) Fixed assets (ii) Other non‑current
assets (f) Others (g) TOTAL (A) 2. Uses (a) Net Loss (b) Decrease in term liabilities **(incl. public deposits) (c)
Increase in: i) Fixed assets ii) Other non‑current
assets (d)
Dividend payments (c) Taxes paid (f) Others g) TOTAL (B) 3. Long term
surplus (*) / deficit (‑) (A‑B) 4. Increase/decrease
in current assets* (as per details given below) 5. Increase/decrease
in current liabilities other than Bank borrowings 6. Increase/decrease in working capital gap 7. Net
surplus (+) /deficit (-) (Difference of 3&6) 8. Increase/decrease
in Bank borrowings *Break‑up of (4) i) Increase/Decrease in Raw Materials ii) Increase/Decrease in Stock
in Process iii) Increase/Decrease in Finished Goods iv) Increase/Decrease in Stores
& Spares v) Increase/Decrease in Receivables (a) Domestic. (b) Export vi) Increase/Decrease in other
current assets |
Last
year (Actual) ___________ 1 ___________ __________ |
Current
year (Budget) __________ 2 __________ __________ |
Previous
Half Year
ended …………….. Estimate
Actual ______________
3 4 ______________ ______________ |
Current half-year ending ……………. Estimate ___________ 5 ___________ ___________ |
NOTE: Increase/decrease under items 4 to
8, as also under break‑up of (4) should be indicated by (+)/(‑)
signs.
(i) Information
should be furnished for each line of activity/unit separately as also for the
company as a whole. In cases where the different activities/units are financed
by different banks, the concerned activity/unit‑wise data and data
relating to the company as a whole should be furnished to each financing bank.
(ii) The
valuation of current assets or current liabilities and recording of income and
expenses should be on the same basis as adopted for the statutory balance
sheets, and it should be applied on a consistent basis.
(iii) Increase
in carry of various items of current assets which is disproportionate to
percentage rise in sales turnover
should be explained in detail separately.
(iv) Similarly,
a decrease in current liabilities which is not commensurate with percentage
rise or fall in sales turnover should be explained in detail separately.
(v) Item
7 (net surplus/deficit) and item 8 (increase/decrease in bank borrowings) would
be algebraical opposite figures and these should agree with each other.
APPENDIX 16.1X
DRAFT CASH BUDGET
|
Particulars |
Audited
Figures Previous
2 Yrs 199..‑9..199..‑9.. |
Actual/Projection Current
Year 1st
2nd 3rd 4th Qtr.
Qtr. Qtr. Qtr. |
|
1. Cash Flow from Business Operations A. Receipts : Cash Sales Collection
from trade debtors (Annexure to contain figures of outstanding trade debtors
: ·
with age upto 90 days ·
with age between 91 & 180 days ·
with age more than 180 days ·
Total Outstanding Debtors) Others (specify) Total (A) B. Payments : Cash
purchases (of inventory items) Payments to trade creditors (Annexure to contain figures of outstanding
trade creditors : ·
with age upto, 90 days; ·
with age between 91 & 180 days; ·
with age more than 180 days; ·
Total Outstanding Creditors) Other Manufacturing expenses, Administrative & Selling expenses, interest on business borrowings Short term & long term : (Annexure to contain total payments made to each payee having received
10% or more of total interest payments) Others
(specify) Total
(B) Cash From Business Operations i.e., Net of A & B II. Cash from Non‑Business
Operations C. Receipts : Dividend/interest
on investments (Annexure to contain details for (i) from associates; (ii)
from other companies;(iii) on bonds/shares of F.I.s and banks;(iv) others
(specify), Sale of investments (specify), Exchange fluctuations Profits, Others (specify) Total (C) D. Payments : Dividend/interest
on investments (Annexure to contain details for (i) to associates; (ii) to
other companies: (iii) others (specify), Purchase of investments (specify
nature and annex details if necessary), Exchange fluctuations, Losses Others (specify) Total (D) Cash
Flow from Non‑Business Operations i.e., Net of (C) & (D) III. Cash flow From Capital Accounts: E. Receipts.. Issue of shares (and
receipts on allotments, calls, forfeiture etc.) issue of debentures/ bonds, Issue
of Commercial Papers, Borrowings from- ·
Directors, friends & relatives, ·
associates; ·
public (specify nature) ·
others (specify) Borrowings
from F.I.s. Borrowings
from banks (term
loans borrowings for capital expenses) Capital
subsidy Margin
money loan (specify) Sale
of Fixed assets Others
(Specify) Total
(E) F. Payments : Repayments
of borrowings (principal
amount) to : § Directors, friends & relatives etc. § associates § public § Margin money loan § others (specify) Repayments
of borrowing (principal) to F.I.s. : Repayments
of borrowing (principal) to banks : §
for term loans (taken for capital expenditure) §
for working capital finance and others Purchase
of Fixed Assets (details
to be annexed) Others
(specify) Total (F) Cash Flow on Capital Account i.e.,
Net of (E) and (F) IV.
Cash Flow on Sundry Items: G. Receipts : Refund
of tax/duty (specify or annex details) others
(specify) Total
(G) H. Payments : Payment of income tax Payment of other
tax/duty/penalty (specify or annex details) Others (specify) Total (H) Net Cash Flow on Sundry
Items i.e., net of (G.) and (H) Assessment of Bank Finance for Working
Capital 1 Total cash outflow from business operations (i.e., as arrived at under the
point No. 1 (B) above) Less: 2. Total cash inflows to
business operations ( i.e., as arrived
under the point No. 1 (A) above) 3. Cash Gap in Business Operations [i.e., difference between (1) & (2)]. Less : 4. Amount brought/proposed to be brought ‑in from other
source, i.e., Cash Surplus
(es) under (II), (III) & (IV)
above. 5. Net Cash Gap for
Business Operations financed/proposed
to be financed by bank finance: |
|
|
|
Note : The
outer limit for finance (for working capital requirements) from Banking
system to be the highest GAP
among all the Four Quarters of the current year. Overall Position of Cash BudgetOpening Cash Balance Add: (1) Net Cash Flows
[i.e., netting of the figures under (1), (11), (111),
(IV) above] (2) Working capital finance from
bank/banks ……………………………………. Closing Cash Balance
……………………………………. Notes : (1) Particulars
of Production/Sales (gross) both in terms of quantity/value for each of the quarters,
actual/projected to be given along with Half‑yearly Profitability
statement. (2) Reasons/justification
of "year to year “and “quarter to quarter” variance of more than, say,
10%, in respect of any of the above said items should be furnished by way of
footnote. (3) In case
of sale/purchase of Investments and fixed assets, necessary particulars,
source of funding, justification should be stated by way of annexure. |
||