WORKING CAPITAL FINANCE TO INFORMATION TECHNOLOGY (IT) AND SOFTWARE INDUSTRY
Software industry has highest potential for export growth and
recognising the importance of this sector, Government of India has taken several
measures in the recent past to facilitate rapid growth of Information
Technology (IT) and Software Industry. As the needs for working capital by
software industries are of different nature, banks are generally reluctant to
grant working capital limits to such units. The assessment of the requirements
also, created problems for the banks. Reserve Bank of India issued
comprehensive guidelines for sanction of working capital finance to Information
Technology and Software industry in August, 1998. These guidelines have been
issued to bring about uniformity in approach on various aspects of lending to
Information Technology and Software Industry to facilitate free flow of credit.
The banks are free to modify the guidelines as deemed fit without any reference
to Reserve Bank and may frame their own policies. The salient features of
guidelines issued by Reserve Bank of India are given in the succeeding
paragraphs.
IT Software means any representation of instruments, data, sound or
usage including source code and object code, recorded in a machine readable
form and capable of being manipulated or providing under activity to a user, by
means of an automatic data processing machine falling under "IT
products" but does not include "non IT products".
IT Service is defined as any service which results from the use of any
'IT Software' over a system of IT products realising value additions.
The term IT industry, shall cover development, production and services,
related to IT products.
IT product would connote computer, digital/data communication and
digital/ data broadcasting products.
The various segments of Information Technology and Software Industry for
the purpose of determining their funds requirements may he broadly classified
into four categories as under:
(a) Software
Services which include
staffing and programming services mainly relating to manpower exports involving
deputation of professionals for delivering programming services at customers'
location within the country, as Well as Abroad, under different contracts. Fund
requirements will be in the form of initial travel costs for order canvassing
and mobilisation expenses and also travel costs and living expenses of the
personnel deputed for executing orders. The contract may provide for some
advance payment or monthly/periodical payments or payment in lump sum after
execution of contract. The working capital requirements will thus depend upon
the gap in cash flows.
(b) Project
Services which may further be sub‑divided in
three segments as under:
(i) Customised software
development:
This is to provide solution to specific problems of the customer either
at customer's location or delivered on physical magnetic media (like floppies
and diskettes) or through satellite communication networks. This service is
offered under special contracts which provide for 'mile stone' payments.
Working capital requirements would be for meeting the gaps of cash flow.
(ii)
System solution &
integeration:
This is to provide complete business solution using
information technology. Ibis work
involves programming, testing, documenting customised software solution
for clients and integeration of this programme with the clients existing IT
system as well as with the system of the clients/parties/ associates if the
need be. The funds will be required mainly on account of expenditure on
professionals, purchase of software packages/tours etc. and working capital
requirements will be to bridge the gaps in cash flow.
(iii) Maintenance
of software: This may be taking of complete responsibility
for maintenance of the software of the client. Such contracts may cover trouble
shooting operations and even updation of software in some cases. Working
capital of this activity is the cost of hiring the professionals for this job.
(c) Software
products& packages: This may further be subdivided in two segments as under:
(i) System software viz operating system software, conversion of programmes and utilities which enhance the computers capabilities.
(ii) Application
software which lets the computer perform specific functions, packages like word
processing, graphic designs, financial analysis etc.
These products are prepared to meet standard requirements of end users
and are sold as packaged units comprising software manual and other user aids.
Development of these products involve large scale investments, the return on
which can be realised only after the ‑product is fully developed and
sufficient demand for that product is generated. Entire expenditure on
development may be borne by the party and developer would be receiving payments
only when the products are sold. Working capital requirements, In such cases,
will be mainly for meeting expenditure relating to salaries and other expenses
of professionals associated with the development. The period of development may
vary from product to product and may in some cases even extend to 2 years. The
financing of this category may be done by providing venture capital at
considerable risk.
(d) Information
technology related Services (IT Services): IT
services such as call centres, monitoring, teleconferencing, telemedicines etc.
result from the use of any IT software over a system of IT products realising
value additions. Working capital requirements under this category may not be of
a significant scale.
The main emphasis by the bank must be made on track record of' the
promoters, their group affiliations, the management team, academic/professional
qualifications and work experience particularly in software
writing/development/marketing besides infrastructure available with the unit.
The new units should also be considered for finance on the above criteria. Thus
the business age of the borrower unit and/or quantum of turnover may not
necessarily influence the decision of the bank if the promoters are trustworthy
and have requisite professional expertise for the job.
(b)
Methodology of
assessment of working capital
Monthly cash budget system should be used for arriving at the
permissible bank finance. A proforma for obtaining cash budget statement has
also been suggested by Reserve Bank of India.
For working capital limits upto Rs. 2.00 crores, the turnover method may
be applied and 20 percent of projected turnover may be sanctioned as limits
provided 5% is brought in by the borrower as margin.
Cash budget system may be applied only for borrowers with working
capital limits above Rs. 2.00 crores. However, the borrower may be given the
option to select cash budget system even for working capital limits upto Rs.
2.00 crore.
For the borrowers enjoying working capital limits of Rs. 10 crore and
above from the banking system the guidelines regarding the loan system would be
applicable.
Financing for software products and packages which are normally financed
out of equity, seed money, venture capital shall be considered for finance on
case to case basis.
(c)
Documents to be submitted for
credit appraisal
In addition to usual
documentations as required by banks while considering any credit proposal, the
borrowers under this category may be required to submit the under noted
documents.
(i)
Operating Statement ‑ Form'A'(Appendix 27.I)
(ii)
Balance Sheet - Form ‘B’ (Appendix 27.II)
(iii)
Cash Budget ‑ Form 'C' (Appendix 27.111)
(Only in those cases
where working capital limits are in
excess of Rs. 2.00 crores or the borrower opts to get working capital
finance on the basis of cash budget for limits below Rs. 2.00 crores.
(iv)
Statement of Economics ‑ Form D (Appendix 2TIV)
(v) Note on the assumptions underlying the operating statement. The
borrower should also give a detailed project report and a business plan clearly
describing the short‑term and long‑term goals of the unit, the strategies
proposed to develop and market software, the stage wise financial outlay and
revenue/cost projections.
The nature of credit facilities will primarily depend upon the need of
the borrower. For credit facilities of Rs. 10 crore and above, the cash credit
component shall not exceed 20 per cent of the total credit facilities
sanctioned to the borrowing unit. Allowances will, however, have to be made for
export credit, bill purchase/discount limit as in case of other borrowers while
bifurcating the limits in cash credit/loan components as in case of other
borrowers.
In case of specific orders from abroad, the credit provided would amount to pre‑shipment or post‑shipment finance as the case may be
(e) Margin
–Banks
may determine the margin requirements on their own and frame suitable policy in
this regard.
(f) Collateral
Security –No
tangible security may be created unlike in case of other manufacturing activity
and banks may obtain first/second charge on assets, if available. The banks are
free to obtain collateral security, if available.
(g) Rate of Interest:
(i) Export credit to such
borrowers shall be allowed at concessional rates as applicable for other
exporters.
(ii) For
all other types of advances,‑the interest rates as applicable for general
category of borrowers shall be charged. No concession in these rates is
envisaged and the banks will thus have full freedom to determine rates of
interest subject to their PLR and the maximum permitted spread.
(h)
Periodical Reporting System :
Banks may obtain a quarterly actual cash flow statement so that mid
course corrections can be made in respect of further cash budget, if necessary.
In case of borrowers where cash budget is not the basis of sanction i.e.
borrowers with credit limits upto Rs. 2.00 crore the banks may devise their own
reporting system
As stated earlier, the banks are free to develop their own systems and
also modify the guidelines wherever necessary. As the scheme of financing is
new to the banking and entire reliance is to be made on the skills of the
professionals/ promoters, the banks would have to carefully evaluate the
promoter's track record, their competence, their stake in the business, market
strategies etc. Strict monitoring and follow up systems will also have to be
drawn up to ensure proper end use of funds.