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A Project Submitted To

For The degree of
In the partial fulfillment of requirement of the











I , Priti Sakharam Kopade, wish to state that the work
embodied in this project entitled Assessment of Working
Capital of Borrowers is carried out under the
supervision of Prof.Prachi Kulkarni, Department of
B.M.S., D. G. Ruparel College, Mumbai. This work has
not been submitted for any other degree of this or any
other universities.

(Priti Sakharam Kopade )
Name of Candidate

(Prof. Prachi Kulkarni )

(Dr. Prakash Salvi)
BMS Coordinator


This is to acknowledge the invaluable support and co-operative
assistance extended to me by various individuals who are all very
great personalities in their very own fields.

First of all I would like to express my sincere gratitude to my
project mentor Mrs.Prachi Kulkarni for providing her valuable
time and assistance.

I would also like to take this opportunity to thank our
Coordinator, Mr.Prakash Salvi & our library staff to coordinate
with us.

My heart-felt thanks to Bank of Baroda for providing valuable
information on project. I would like to give special thanks to all
my friends.




Contents Page
1 Executive Summary

2 Objective of Study

3 Profile of Organisation

4 Research Methodology

5 Introduction To Working Capital
Operating cycle

5 Small & Medium Enterprise Sector ( SME )
Guidelines for lending to SME sector
Procedure for Working Capital Finance
Credit Monitoring Arrangement
Credit Rating Model
Banking Arrangements
Regulation of Bank Finance
Level of Credit Limit
Drawing Power of Borrower

6 Data Presentation, Analysis &
Case Study on working capital


Findings & Suggestions 66-67
8 Annexure


Conclusion 71-72
10 Bibliography





Banking is "accepting, for the purpose of lending or investment of deposits
of money from the public, repayable on demand or otherwise and withdraw
able by cheques, draft, order or otherwise."

Bank is defined as a person who carries on the business of banking. Banks
also perform certain activities which are ancillary to this business of
accepting deposits and lending. Since Banking involves dealing directly with
money, governments in most countries regulate this sector rather

Banks' activities can be divided into retail banking, dealing directly with
individuals; business banking, providing services to mid-size business;
corporate banking dealing with large business entities; private banking,
providing wealth management services to High Net Worth Individuals; and
investment banking, relates to helping customers raise funds in the Capital
Markets and advising on mergers and acquisitions. Banks are now moving
towards Universal Banking, which is a combination of commercial banking,
investment banking and various other activities including insurance.

Financial managers of today are responsible for shaping the fortunes of
enterprise & are involved in the most important management decision of
allocation of working capital. It is their duty to raise the funds most
economically & use it in an efficient manner.

Bank of Baroda gave me a broad view of how actually banks assess the
working capital requirements of borrowers. I have put my best efforts to get
the necessary information from concern persons as well as my search.




Objective of Study

To study various types of working capital finance.

To analyze in detail the assessment of working capital finance
extended by the bank.

Scope of Study

The project provides an understanding of the various types of Working
capital finance given by the bank to various institutions.

An overview of the operations carried out in the bank regarding the
assessment of working capital finance has been given in this stu



Bank Of Baroda

On 20th July 2008, the Bank completed its Centenary year. For Bank of
Baroda, it has been a long and eventful journey over 100 years and across
25 countries. After undergoing a massive transformation by changing its
logo in June 2005, the Bank won many industry level awards for its
marketing and business initiatives and strived to optimize its competitive
edge in the banking space. The Baroda brand positioning was entrenched in
the consumer mind as Indias International Bank, balancing its time tested
values over its 100 years of existence with the contemporary challenges of
being market sensitive and responsive as it marches tirelessly towards its
next century.

Being a Bank with a strong overseas presence, it in its fold has more than
36 million global customers enjoying the state-of-the-art technology. Its
performance in 2008-09 reflects its strength to consolidate its position as a
premier Public Sector Bank given its growing geographical reach, a vast
bouquet of products and services and robust risk management capabilities.

The value proposition of the Bank to its customers lies in its impregnable
foundation and inner strength as a financial service provider by leveraging
its technology and brand.

M. D. Mallya
Chairman & Managing Director

MSME Business

The Micro, Small and Medium Enterprises (MSME) segment has been a vital
component of Indian economy. This sector accounts for around 40.0% of
total industrial production, 34.0% of industrial exports, 95.0% of industrial
units and 35.0% of total employment in manufacturing and service sectors
of India. The unorganized sector which forms a major component of the MSE
segment comprises almost 95.0% of total industrial units and employs over
65 million people.

The contribution of Services Sector within the SME segment is quite
significant; especially IT enabled services, hospitality services, tourism,
couriering, transportation, etc. The SMEs have also been playing a vital role
in the job creation process.

To give a focused attention to emerging SMEs in India, the Bank has been
considering other commercial units with a turnover up to Rs 150 crore at
par with the SMEs.

To promote the growth of SME Sector, the Bank has launched a special and
novel delivery model, viz. SME Loan Factory, which at present, is operate
nationalised in 36 centres of the Bank and well accepted in the marketplace.
The SME Loan Factory is an innovative model for streamlining processes
and for timely sanctions of SME loan proposals. The model comprises of the
Central Processing Cell for speedy appraisal and sanctioning of proposals
within the stipulated deadline.

Out of 36 SME Loan Factories as on 31st March 2010, three SME Loan
Factories have been established during the year. The Bank has SME Loan
Factories at all major business centres across the country.

These SME Loan Factories sanctioned loans aggregating Rs.11,071 crore
during FY10 as against Rs 8,508 crore in the previous year.

Growth of Business

The total outstanding in MSME Sector works out to Rs 21,111 crore as on
31st March 2010. The growth in lending to MSME Sector during the last
three years is given in the table below.

Year Percentage

The percentage growth of MSME credit during FY10 is relatively high as the
advances up to Rs 20 lakh to Retail Trade are, now, classified under the
Micro & Small Enterprises Sector after the RBIs revised guidelines issued
during September, 2009. The Bank has taken the following initiatives in its
SME business segment during the year under review.

Initiatives in SME Financing During FY10

The Bank set up three new SME Loan factories during FY10

The SME Meets and interactive sessions were held at various centres
with SME customers.

The Bank introduced seven new customer-centric area specific
products to suit the local cluster needs.




This is analytical research area where we analyze information with cause
and its effects relationship. This analysis leads to the simple conclusions of
whether to lend money to the institution for business.

Certain financial parameters are taken into consideration while lending
funds to the borrowers.

Also if the money is lent then there is reality the norms are not always
perfect and hence it is essential to priorities stringent parameters and
secondary parameters.

Primary Data:

Discussion with employees & manager.

The company profile, annual reports have been obtained from BOB.

Secondary Data:

Secondary data relating to the procedure of assessment of working
capital finance, old sanction proposals, RBI guidelines etc. have been
sourced from reference books.



The capital required by a firm to run its daily business/activities is referred
to as working capital. Working Capital is defined as the gap between current
assets and current liabilities. To run a business, working capital is like
blood of human body which circulates to maintain human life. In the same
way, working capital is very essential to maintain a smooth running of a
business. No business can run successfully without an adequate amount of
working capital.

If working capital is more than the requirement that is also harmful for the
business because either the funds may remain idle or it will be deployed
without assessing the needs/requirements of the firm. Excess of anything
is bad.

Working capital refers to the part of firms capital which is required for
financing short term or current assets such as marketable securities,
debtors, inventories, etc. Working capital is the amount of funds necessary
for the cost of operations. Thus working capital, the funds available/used
for day-to-day operations of a business that is related to current operations.
In the present era, there are many financers/lenders which provide working

Every business requires capital to finance its fixed and long-term assets. It
is known as fixed capital. Business also requires capital to maintain certain
level of short-term assets. This requirement of short-term assets depends on
the nature of activity, availability of raw materials, level of production,
storage capacity and funds available. So, then funds/capital needed for a
smooth conduct of business and to maintain this required level of short-
term assets is called as Working Capital.

Working capital like many other accounting terms and financial terms has
been used by different people in different senses. One school of thought
believes that, as all capital resources available to a business organization
From shareholders, bondholders, and creditors (secured and unsecured)
works up in the business activities to generate revenues and facilitate future
expansion and growth; they are to be considered as working capital.

Another school of thought links working capital with current assets and
current liabilities. According to them, the excess of current assets over
current liabilities is to be rightly considered as the working capital of a
business organization.

He defines working capital as the amount of funds necessary to cover the
cost of operating the enterprise. Working capital in a going concern is a
revolving (circulating fund), it consists of cash receipts from sales which are
used to cover the cost of current operations.

Circulating capital means current assets of the company that are changed
in the ordinary course of business from one form to another, as for example
from cash to inventories, inventories to receivables and receivables to cash.

Working capital is descriptive of that capital which is not fixed. But, the
more common use of working capital is to consider it as the difference
between the current assets and the current liabilities.

Current assets and current liabilities are assets and liabilities which arise in
the course of business.

Characteristics of Working Capital

Short-term needs: Working Capital is used to acquire current assets which
get converted into cash in a short period. The duration of working capital
depends on the production process. In other words, the time that elapses
between the sale and waiting period of cash receipt.

Circular Movement: Working capital cycle is continuous in nature. It
begins with purchase of current assets for which cash is used. When the
goods are produced and are sold; these current assets are converted into
cash. This is the circular movement of working capital. So, working capital
is also known as circulating capital.

Permanent Working Capital: Though, working capital is short-term is
nature, it is required regularly. It is essential for the smooth production
process of a firm. Therefore, the working capital which is required
permanently is known as permanent or regular working capital.

Temporary Working Capital: Working capital needs in a business keep
fluctuating from time-to-time. These needs may arise unexpectedly during
the course of operations. So every firm must have additional funds to meet
such contingencies. So, temporary working capital is also known as variable
working capital.

Liquidity: Working capital is short-term in nature. Hence, it can be
converted into cash in a short duration. This can be done by quick recovery
of bills receivables and accelerating the sales. In other words, working
capital has good liquidity as compared to fixed capital.

Less Risky: Funds should be properly invested in long & short term assets.
Investment in long-term assets is irreversible. Hence, it involves risk for the
firm. In the other case, working capital gets converted into cash in a very
short period and, so, it is less risky as compared to fixed capital.

Accounting System: It is essential to adopt accounting systems for
knowing the current position of business and, also, for estimating the
further financial requirements of the business. Working capital is required
for a short period for day-to-day activities. Hence, accounting system is not

Concepts of Working Capital
Working capital can be conceptually classified as:

Gross Working Capital

Net Working Capital

Gross working capital:
A firms investment in the current assets is called as gross working capital.
Current assets are the assets that can be converted into cash in an
accounting year. They include cash, marketable securities, inventory,
receivables and bills receivables. This concept helps to make financial
arrangements as and when working capital needs arise.

Net working capital:
Excess of current assets over current liabilities is referred to as net working
capital. It shows the liquidity position of the firm. Therefore, net working
capital plays a vital role in measuring the financial position of the firm. It
can be positive or negative. Positive net working capital refers to excess of
current assets over current liabilities. And reverse is the case for negative
working capital.

Net Working Capital = Current Assets Current Liabilities

Need of Working Capital
The main objective of any firm is to earn profits. For earning profits and
continuing production activity, the firm has to invest capital in current
assets. This is done because sometimes sales do not convert into cash
immediately. There is a time lag between sales and realization of sales into
cash. This involves an operating cycle.

Therefore, the need of working capital arises from the operating cycle of a
firm. It refers to the length of time required to complete the following stages:
conversion of cash into inventory, inventory into receivables and receivables
into cash. The longer the duration of operating cycle the more amount of
working capital will be needed. Thus operating cycle helps the firm to
estimate its working capital needs.

The operating cycle begins with the procurement of raw materials, which is
the basic function of a manufacturing unit. After purchase, the raw
materials undergo production process, which may range from a day to 90
days. The raw material procurement involves various costs incurred which
requires capital viz., cost of raw materials, labour charges, power, rent,
water, etc. The raw material is now converted into finished goods.

Once finished goods are produced, they may or may not be sold
immediately. If not sold immediately, they are stored in a warehouse that
involves holding and other related costs. Finished goods are thus sold either
on cash or credit. Cash sales helps to complete the operating cycle
immediately. Credit sales block the funds till they are not realized.
Oncethese sales proceeds are realized, the funds generated are used to
purchase raw materials. The whole cycle starts again.

The total time taken from the procurement of raw materials to the
realization of sales proceeds is called the operating cycle.

Operating Cycle

Different businesses have different working capital requirements as it
depends on what kind of business activity is carried out. Manufacturing and
trading enterprises require large amounts of working capital. Service
enterprises require less working capital as they do not deal in commodities.

Larger companies may be able to use their bargaining strength as customers
to obtain more favorable and extended credit terms from suppliers. In the
case of smaller companies, particularly those that have started trading may
be required to pay their suppliers immediately. This is because the new
companies that have started trading do not have a track record of credit

Some businesses will earn at certain times of the year, although they may
incur expenses throughout the year at a fairly consistent level. This is often
known as seasonality of cash flow. For example, travel agents have peak
sales in the weeks immediately following Christmas.

Working capital needs also fluctuate during the year. The amount of funds
invested in the working capital may not remain constant throughout the

Thus, working capital needs can be categorized into:
Fixed part

Fluctuating part

Fixed part, probably, is referred to as the minimum working capital
requirement for the year. So the fixed part of working capital should be
adequately financed well in advance. It can be done by using permanent
sources i.e. equity capital.

Fluctuating part of working capital refers to the need for working capital
during the variations or fluctuations in business conditions. So, the
fluctuating element should be financed from the short-term sources i.e.
bank overdraft. It can be drawn and repaid easily that too in a short period.
Fixed Working Capital

Fluctuating Working Capital

Permanent current asset
Temporary current asset
Permanent current asset
Component of Working Capital

Cash and cash equivalents: Cash is the most liquid form of working
capital. An adequate level of cash helps to meet regular expenditures. It also
helps to overcome unexpected contingencies. The inflow and outflow of cash
should be continuous since it is of vital importance to the daily operations of
a business.

Inventory: Inventory includes all types of stocks. Stocks of raw materials,
stores and spares, work-in-process, and finished goods form the inventory.
Inventory needs to be managed effectively to ensure effective working capital
management. Holding inventory is important if sales or production are not
stable and predictable. Therefore, inventory is held to ensure timely
availability of goods for sale or raw materials for production.

Accounts Receivables: Accounts receivables are also known as
receivables. These receivables get converted into cash over a short period
of time. There is an inflow of cash during the actual receipt of receivables.
Amount received from debtors during the credit period granted to them,
ensures timely inflow of funds.

Accounts Payables: Accounts payables are also known as payables . The
firms obligation to pay-off its creditors represents accounts payables. There
is an outflow of funds while paying off this short-term debt. The regular
payments enable the firm to get good credit facilities from its creditors.


Types of
Working Capital
Fund Based
Cash Credit
WC Loan
Bill Financing
Export Financing
Non Fund Based
Bank Gaurantee
Letter of Credit
Types of Working Capital Finance
Bank credit is the primary source of working capital finance in India. It
represents the most important source for financing of current assets.

A. Fund Based
The fund-based form of working capital finance refers to the finance that the
banks provide to its borrowers up to a certain limit assessed by the bank.
The borrower then has to repay to the bank the principal amount along with
the interest within a stipulated time.

1) Cash Credit
Under cash credit form of bank finance, the bank sanctions a limit to it
borrower. The borrower is allowed to borrow up to this limit at any time
interval up to the specific period of credit. This facility is available against
the security of tangible assets viz., stocks, book debts, etc. this cash credit
facility covers the fluctuating part of working capital.

Drawing against Unclear effects (DAUE) is allowed only to those parties
which maintain satisfactory and well conducted current accounts in the
bank. Such customers can draw cheques against unclear balances. In other
words, they can draw against the cheques which are deposited in their
accounts but not yet realized. Then the bank may allow payment of such

3) Working Capital Loans
The working capital loans cover that part of working capital which is fixed or
permanent in nature. This facility can be availed by the borrower when the
bank assesses the limit on the basis of its working capital requirements.

4) Bills Financing
Bills of exchange are popularly used in a credit transaction of sale-purchase
in the trading business. The seller of the goods draws the bill on the
purchaser of goods. On acceptance by the purchaser, the seller offers it to
the bank for discounting. On discounting the bill, the bank will provide
funds to the seller. The bill is then presented to the banker of the purchaser.

5) Export Financing
Export financing is a form of working capital finance that banks provide to
the exporters for a short period of time.

B. Non-Fund Based
Non Fund-based form of finance involves the guarantee by the bank to the
borrowers client. In this case, the bank first issues a guarantee to the
borrowers client to provide him a credit period. If the borrower fails to pay
off its liability, then this non fund based form of financing gets converted
into the fund-based form. The bank bears the risk only in case of default by
the buyer.
1) Bank Guarantee
Bank guarantee is a form of non-fund based finance. Here, the bank issues
a guarantee for its borrower to their clients to grant them credit period. The
borrower is liable to pay off this amount within a stipulated time. If the
borrower fails to do so, then bank will make the payment.

2) Letter of Credit
Letter of credit is a document that a buyer can request his bank in order to
guarantee that the payment of goods will be made to the seller. The purpose
of this document is to provide reassurance to the seller that he will receive
the payment for the goods. The bank undertakes the responsibility to make
payment to the seller if the buyer fails to meet his obligations.

C. Structured Products
1) Factoring
Factoring is a financial service provided by specialised agents to help
manufacturers and traders etc. to manage their receivables. It is a process
of selling receivables to a third party on a discount. The supplier (exporter)
assigns his accounts receivables in favour of the factor and gives notice of
assignment to the debtor. It has been popular in developed countries. The
factors undertake collection/accounting and management of debts of their
clients. Factor may either lend against accounts receivables or by
purchasing invoices. He will take responsibility of collecting debt. The
factoring service may be offered with or without recourse. Factoring with
recourse refers to right of the factor to claim bad debts from his client,
whereas in without recourse factoring, the risk of bad debt will be borne by
the factoring agent himself.

2) Inter-corporate Deposits
Inter-corporate deposits are deposits made by one company with another
company, and usually carry a term of six months. An Inter-Corporate
Deposit (ICD) is an unsecured loan. The inter-corporate deposits market
shows a number of interesting characteristics. The biggest advantage of
inter-corporate deposits is that the transaction is free from bureaucratic and
legal hassles. The business world otherwise is regulated by a number of
rules and regulations. The existence of the inter-corporate deposits market
shows that the corporate world can be regulated without rules.

3) Commercial Papers
These are short-term promissory notes. An To give a boost to the money
market and for reducing the dependence of highly rated corporate borrowers
on bank finance for meeting their working capital requirements, corporate
borrowers were permitted to arrange short term borrowings by issue of
Commercial Paper (CP).

Who can issue Commercial Paper (CP)

1. Corporates; primary dealers (PDs) and satellite dealers (SDs), and the
all India financial institutions (FIs) that have been permitted to raise
short-term resources under the umbrella limit fixed by Reserve Bank
of India are eligible to issue CP.
a. "corporate" or "company" means a company as defined in
Section 45 I (aa) of the Reserve Bank of India Act; 1934 but does
not include a company which is being wound up under any law
for the time being in force.

b. 'Primary Dealer" means a financial institution which holds a
valid letter of authorisation as a Primary Dealer issued by the
Reserve Bank, in terms of the "Guidelines for Primary Dealers in
Government Securities Market dated March 29, 1995, as
amended from time to time.

c. "Satellite Dealer" means a financial institution which holds a
valid letter of authorisation as a Satellite Dealer issued by the
Reserve Bank, in terms of the "Guidelines for Satellite Dealers in
Government Securities Market dated December 31, 1996, as
amended from time to time.

d. "All India Financial Institutions (FIs)" means those financial
Institutions which have been permitted specifically by the
Reserve Bank of India to raise resources by way of Term Money,
Term Deposits and Certificates of Deposit within umbrella limit.

2. A corporate would be eligible to issue CP provided

a. The tangible net worth of the company, as per the latest audited
balance sheet, is not less than Rs.4 crore.

b. Company has been sanctioned working capital limit by banks or
all India financial institutions; and

c. The borrower account of the company is classified as a
Standard asset by the financing bank institutions.

Determinant of Working Capital

Nature of Business: There are various types of business. Nature of business
is an important determinant of working capital. Trading and financial forms
of business have a very small investment in fixed assets but require a large
sum of money to be invested in working capital. So, they have to maintain
sufficient amount of cash, inventories and book debts. The manufacturing
industry requires small or large investment in working capital depending on
the length of production cycle and the production policies they follow. There
are businesses that have small working capital requirements. Such
businesses generally trade more on cash basis or are involved in sale of
services. Thus, the working capital requirements of the business depends on
its nature.

Size of business: Working capital requirements depend on the size of
business. Size is generally measured in terms of the scale of operating cycle.
The larger the scale of operating cycle the larger will be the working capital
requirement and vice-versa. Therefore, size of business affects the working
capital requirements to a great extent.

Business Cycle: Every business experiences fluctuations which lead to
cyclical and seasonal changes. This affects the working capital position of
the firm. The business cycle variations are categorized into:
(i) upswing phase during boom periods
(ii) downswing phase in recession
The working capital needs are likely to grow during an upswing phase as the
level of activity expands. The level of inventories and book debts increase
due to the increase in the volume of sales. There may be additional
requirement of funds in this stage. The reverse case may be seen during the
downswing phase. The decline in the needs of working capital is witnessed
due to fall in the sales volume. In brief business fluctuations influence the
size of working capital.

Production Cycle: Production cycle or manufacturing cycle is an important
factor determining the amount of working capital needed by the firm. It is
the conversion of raw materials in to work-in-process into finished goods, a
component of operating cycle. The longer the production cycle, the larger
will be the working capital requirement. The manufacturing cycle depends
on the firms choice of technology and production policy. Therefore,
production cycle is a major determinant of working capital.

Production Policy: If a firm follows steady production policy, even when
demand is seasonal, inventory will accumulate during off-season periods
and there will be higher inventory costs & risks. Firms whose physical
facilities can be utilized for manufacturing a variety of products can have
the advantage of diversified activities. Such firms manufacture their main
products during the season and other products during off-season. Thus,
production policies may differ from firm to firm. Accordingly, the need for
working capital will also vary.

Credit Policy: A credit policy relating to sales and purchases also affects the
working capital needs. The credit policy affects in two ways:
(i) Credit policy for the customers
(ii) Credit policy to the firm from its creditors
The level of book debts determines the credit terms granted to its customers.
A long collection period will generally mean tying of larger funds in book
debts. If liberal credit terms are available from the creditors, the need for
working capital is less. The credit policies adopted by the firms are subject
to change with the changing economic conditions.

Price Level Changes: Generally, rising prices requires a higher investment
in working capital. With increasing prices the same levels of current assets
need enhanced investment. The effects of increasing price level may,
however, be felt differently by differently firms due to variations in individual
prices. It is possible that some companies may not be affected by the rising
prices, whereas others may be badly hit.


Manufacturing Industries
1. Micro Enterprise is an enterprise where investment in plant and
machinery (original cost excluding land and building and the items specified
by the erstwhile Ministry of Small Scale Industries) does not exceed Rs.
25.00 Lacs
2. Small Enterprise is an enterprise where the investment in plant and
machinery (original cost excluding land and building and the items specified
by the erstwhile Ministry of Small Scale Industries) is more than Rs. 25.00
lacs but does not exceed Rs. 5.00 crores and
3. Medium Enterprise is an enterprise where the investment in plant and
machinery (original cost excluding land and building and the specified
items) is more than Rs.5.00 crores but does not exceed Rs.10.00 crores.

Service Sector

Enterprises engaged in providing or rendering services whose investments in
equipment (original cost excluding land & Building and Furniture, Fittings
and other items not directly related to the service rendered or as may be
notified under MSMED Act, 2006) are as detailed here under:
1) Micro Enterprise is an enterprise where the investment in equipment
does not exceed Rs.10.00 lacs;
2) Small Enterprise is an enterprise where the investment in equipment is
more than Rs.10.00 lacs but does not exceed Rs.2.00 crores and
3) Medium Enterprise is an enterprise where the investment in equipment
is more than Rs.2.00 crores but does not exceed Rs.5.00 crores. Units with
investment in plant and machinery in excess of Rs.5.00 crores & up to
Rs.10.00 crores in case of manufacturing units and in excess of Rs.2.00
crores & up to Rs.5.00 crores in respect of Service Sector will be treated as
Medium Enterprises (ME) and will not form the part of Priority Sector
advance. Financing to Micro & Small Enterprises will only be treated as part
of Priority Sector advance.

The SME Sector includes Micro Enterprises, Small Enterprises, Artisans &
Village Industries, Medium Enterprises, Service Sector units & individual
sub-sector units.
a. Micro Enterprises :
Micro Enterprises are those engaged in manufacturing, processing,
preservation of goods, mining, quarrying, servicing & repairing of specified
type of machinery & equipment, agro service units whose investment in
Plant and Machineries does not exceed Rs. 25.00 lacs irrespective of location
of the unit in respect of manufacturing units and investment in equipments
not exceeding Rs 10.00 lacs in respect of Service Sector units.
b. Small Enterprises :
A Small Enterprise industrial undertaking / unit is one which is engaged in
the manufacture, processing or preservation of goods or is a servicing and
repair workshop undertaking repairs of machinery used for production,
mining or quarrying or custom service unit (except water service units),
having investment in Plant and Machineries (original cost) above Rs 25.00
lacs but not exceeding Rs. 5.00 crores in respect of manufacturing unit and
above Ra 10.00 lacs but not exceeding Rs 2.00 crores in respect of Service
Sector unit.
c. Medium Enterprises :
A Unit which is engaged in the manufacture, processing or preservation of
goods or is a servicing and repair workshop undertaking repairs of
machinery used for production, mining or quarrying or custom service unit
(except water service units), with investment in Plant & Machinery in excess
of Rs 5.00 crores and upto Rs.10.00 crores in respect of manufacturing
units and investment in equipments in excess of Rs 2.00 crores and upto Rs
5.00 crores in respect of Service Sector units will be treated as Medium
Enterprises (MEs).


1. Application Forms for Financial Assistance:
Application forms in use to grant credit facilities are detailed as under :

1. Application form for credit facilities upto Rs.10/- lacs.
2. Application form for credit facilities of over Rs. 10/- lacs and upto
Rs.50/- lacs.
3. Application form for credit facilities of over Rs. 50/- lacs and upto
Rs. 2/- crore.
4. Application form for credit facilities over Rs. 2/- crore.

Application forms as aforesaid are devised for assistance by way of either
term loans or working capital or both and are applicable to new projects,
expansion, diversification and modernisation of existing projects. Bank is in
process of devising application forms for ME units and will be provided to
the branches on its approval by the competent authorities. In the meantime,
above forms may be used for ME units also.

2. Receipt of applications and acknowledgment: With a view to facilitate
timely sanction of adequate credit facilities, the following guidelines have
been issued to the branches:
An acknowledgment with the date of receipt for credit application
received to be given. A definite date to be intimated to the applicant for
discussions, clarifications etc. if considered necessary.
The banks decision regarding credit assistance to be communicated
to the applicant within the prescribed period.

3. Register of Credit Applications Received:
All applications received should be entered in a Register of Loan Application
Received for recording therein the complete particulars such as date of
sanction, rejection, reasons for rejection etc.

4. Time norms for disposal of loan applications:
In order to provide better customer service and to ensure that applications
for loans for all categories of borrowers are dealt with and disposed off
expeditiously, the following norms shall be adhered to, provided the loan
applications received are complete in all respects and duly accompanied by
a check list.
In respect of loans upto Rs.25,000/- within a maximum period of one
week of receipt of loan applications complete in all the respects and
duly accompanied by a check list.
In respect of other cases for loans above Rs.25,000/- and upto
Rs.5.00 lacs, within a maximum period of two weeks on receipt of
duly completed loan applications in all the respects and accompanied
by a checklist.
In respect of loans over Rs. 5.00 lacs, within a maximum period of 4
weeks on receipt of duly completed loan applications in all respects
and accompanied by a check list.
In respect of credit applications processed at SME loan Factories, it
should be disposed off within 14 working days on receipt of full
information if no TEV study is required and within 21 working days
on receipt of full information if TEV study is required.

5. Types of Facilities:
SME Units may be granted a variety of credit facilities for their different
needs which will include the following:
(a) Term Loan / Demand loan / Deferred Payment Guarantee:
For acquisition of capital goods (including second hand), fixed assets,
vehicles, plant & machinery, purchase of land, construction of buildings etc.
(b) Working Capital by way of Cash Credit, Overdraft etc for:
1. Purchase of raw material, components, stores, spares and maintenance of
stock of these items at minimum level and stock in process and finished
2. Finance against receivables including receipted challans / invoices.
3. Meeting marketing expenses where the units have to incur large-scale
expenditure towards marketing of their products.

(c) Bills Purchase / Discounting under L/C or outside L/c.
(d) Export Credit facilities like Packing Credit, FBP / UFBP.
(e) Letter of Credit on sight/usance basis for purchase of raw
material/capital goods
(f) Bank Guarantees for Performance, Advance Payment, Tender Money
Deposit, Guarantees for getting orders, for procurement of raw materials

6. Assessment of Working Capital Limits:
Presently, the following guidelines are in place for financing Working capital
facilities of SME units:
Limits upto Rs. 5.00 crores:
The credit requirements of village industries, Micro Enterprises, Small
Enterprises and Medium Enterprises having aggregate fund based working
capital limits upto Rs.5.00 crores from the banking system, will be
computed on the basis of a minimum of 20 % of their acceptable projected
annual turnover for new as well as existing units as per Nayak Committee
Limits above Rs. 5.00 crores:
For assessment of Working Capital requirements beyond Rs.5 crores of
Small Scale Industrial Units / Medium Enterprises, the guidelines on PBF
method of lending will be followed.
7. Margin
(a) For Term Loan
In case of factory land & building, overall margin of 30%
In case of Plant & Machineries and Equipments margin is proposed
at 25%
(b) For Working Capital
25% uniform margin is proposed on stocks and receivables. For export
credit margin may be stipulated @ 10 %.
8. Rate of interest:
If accounts are falling under SME category as per statutory guidelines, rates
as applicable to Micro, Small & Medium Enterprises to be applied.
However, if accounts are falling under SME category based on expanded
coverage i.e. they are outside the purview of regulatory definition, interest to
be applied as per separate guidelines being issued from time to time.
Rates of interest applicable for SME lending are displayed separately on
banks website.

9. Penal Interest
Penal Interest @ 1% to 2% to be charged for the period of default in
repayment, non submission of financial statement, non-compliance of terms
and conditions etc. as per extant guidelines of Bank.
10. Credit rating:
Internal Credit Rating System
The internal comprehensive credit rating system under CRISIL Model has
been approved by the bank and is already in place as advised to all
branches. Pricing of loan to be decided based on the guidelines issued from
time to time.
External Credit Rating System
Small Enterprises borrowers are rated by few external credit rating agencies.
In case of MEs, some of the borrowers are getting their accounts rated by
external credit agency like CRISIL etc.
External credit rating should be carried out in all Medium Enterprise
accounts going for expansion and fresh sanction involving exposure above
Rs 5.00 crores by the agencies approved by RBI. Due weightage will be given
for the credit rating of the external agency.
Collateral Free Loans:
Presently, Banks guidelines for providing collateral free loans are as under:
a) Collateral free loan upto Rs.5.00 Lacs to Micro & Small Enterprises.
b) Collateral free loans (including third party guarantee/ security) upto a
limit of Rs. 25.00 lacs to units having satisfactory dealings with the branch
for last 3 years and having sound and healthy financial position.

It is already decided to dispense with collateral security including third
party guarantee for loans to Medium Enterprises upto a limit of Rs. 25.00
lacs as in case of loans to Micro & Small Enterprises in manufacturing
activities subject to satisfying the following criteria in case of existing
borrower as also takeover accounts:
1. Consistent growth in sales for last 3 years.
2. Continuous profit for last 3 years.
3. Credit rating of A or equivalent and above and no slippage in credit
rating during last 3 years.
4. The units assets (fixed as also current) are charged to the bank and
promoters /
directors personal guarantee are available
5. Asset coverage ratio of more than 1.5
6. Other take over norms are complied with.

Coverage of loans under Credit Guarantee Fund Scheme for Micro & Small
All the collateral free loans upto Rs.50.00 lacs sanctioned to Micro &
Small Enterprises are eligible for cover under the Scheme.
Our bank is sharing the upfront fees and annual service charges on
50:50 basis with the borrower to reduce the cost burden to the

11. Composite Loan Scheme:
As per RBI guidelines, Credit assistance to artisans, village and
cottage industries and other Small Industrial units upto Rs.100.00
lacs for equipment finance or working capital or both should be
considered as Composite Term Loan.
This will enable majority of Micro and Small Enterprises to avail loans
from a single window eliminating the need for borrowing term loan
from SFCs and working capital from banks.
This will also facilitate to sign one set of documents only instead of
signing facility-wise separate documents.


Sr. No

Name of the Product/Scheme
1. Baroda Laghu Udhyami Credit Card
2. Baroda Artisan Credit Card
3. Loans under KVIC Margin Money Scheme
4. Collateral free loans under Credit Guarantee Fund Trust
5. Composite Loans to SSI units
6. Loans under Technology Upgradation Fund Scheme for
Textile units
7. Loans under Credit Linked Capital Subsidy Scheme for
Technology Upgradation of Small Enterprises
8. Loans under National Equity Fund Scheme
9. Scheme for financing Energy Efficiency Projects
10 SME Short Term Loans
11. SME Medium Term Loans
12. Baroda SME Gold Card
13. Baroda Overdraft against Land and Building
14. Baroda Vidyasthali Loan
15. Baroda SME Loan Pack
16. Baroda Arogyadham Loan
17. Scheme for financing existing borrowers under SME Segment
for purchase of new vehicles.


The revised credit process is introduced with a view of reducing the time lag
in the sanction of credit besides clearly delineating the areas of
responsibilities of various functionaries. As per this the revised process is
divide into two components that is
Pre sanctioning
Post sanctioning
In the pre sanctioning it is the only time that the bank can take due
assessment and precautions to make sure that the investments are done for
the benefit of the bank. The post sanctioning is the follow of the payment. In
case the payment defaults then the account will go into NPA in stages and
the bank is then said to scrutinize the said account.

Obtain loan application
When a customer required loan he is required to complete application form
and submit the same to the bank also the borrower has to be submit the
required information along with the application form.
The information, which is generally required to be submitted by the
borrower along with the loan application, is under: -
Audited balance sheets and profit and loss accounts for the previous
three year (in case borrower already in the business)
Estimated balance sheet for current year.
Projected balance sheet for next year.
Profile for promoters/directors, senior management personnel of the
In case the amount of loan required by borrower is 50 lacs and above
he should be submit the CMA Report.

Examine for preliminary appraisal

RBI guidelines. Policies

Prudential exposure norms and bank lending policy

Industry exposure restriction and related risk factors.

Compliance regarding transfer of borrowers accounts from one bank
to another bank

Government regulation / legislation impact on the industry

Acceptability of the promoter and applicant status with regards to
other unit to industries.

Arrive at the preliminary decision.

Examine/analysis /assessment

Financial statement (in the prescribed forms) refers figure WC cycle &
BS assessment thumb rules.

Financial ratio & Dividend policy.

Pre Sanction
Apprasial &
Assessment Santioning
Depreciation method

Revaluation of fixed assets.

Records of defaults (Tax, dues etc.)

Pending suits having financial implication (Customs, excise etc.)

Qualifications to balance sheet auditors remarks etc.

Trend in sales and profitability and estimates /projection of sales.

Production capacities and utilization: past & projected production
efficiency and cost.

Estimated working capital gap W.R.T acceptable build-up of
inventory/receivables/other current assets and bank borrowing

Assess MPBF determine facilities required

Assess requirement of off balance sheet facilities viz.L/cs,B/gs etc.

Management quality, competence, track records Companys structure
and system

Market shares of the units under comparison.

Unique feature

Profitability factors

Inventory/Receivable level

Capacity utilization

Capital market perception.


Supervision and follow up: -
Sanction credit limit of working capital requirement after proper assessment
of proposal is alone not sufficient. Close supervision and follow up are
equally essential for safety of bank credit and to ensure utilization of fund
lend. A timely action is possible only close supervision and followed up by
using following techniques.
Monthly stock statement
Inspection of stock
Scrutiny of operation in the account
Quarterly/half quarterly statements.
Under information system
Annual audited report

Post Sanctioned
Follow Up Supervision
Monitoring &

Consequent upon the withdrawal of requirement of prior authorization
under the erstwhile credit authorization scheme (CAS) and introduction of a
system of post sanction scrutiny under credit monitoring arrangement
(CMA) the database forms have been recognized as CMA database. The
revised forms for CMA database as drawn up by the sub-committee of
committee of directions have come into use from 1st April 1991.
The existing forms prescribed for specified industries continue to remain in
force. With a view to imparting uniformity to the appraisal system, database
from all borrowers including SSI units enjoying working capital limits of Rs.
50 lacs and more from the banking system should be obtained.
The revised sets of forms have been separately prescribed for industrial
borrowers and traders/merchant exporters. The details of forms are as
under: -
Form 1: - particulars of the existing/proposed limit from the banking

Form 2: -Operating statement. It contains data relating to gross sales, net
sales, cost of raw material, power and fuel, etc. It gives the operating profit
and the net profit figures.

Form 3 : - Analysis of balance sheet.
It is complete analysis of various items of last years balance sheet; current
years estimate and following years projection are given in this form.

Form 4 : - Comparative statement of current asset and liabilities. Details
of various items of current asset and current liabilities are given. The figures
in this form must tally with those in form III.

Form 5: - Computation of maximum permissible bank finance for
working capital. The calculation of MPBF is done in this form to obtain the
fund based credit limits to be granted to the borrower.
Form 6: - Fund flow statement It provides the details of fund flow from
long term sources and uses to indicate weather they are sufficient to meet
the borrowers long term requirements.

Bank also considers the followings points while sanctioning the working
capital limit to the concern:

Turnover size of the concern: The bank normally gives working capital
limit upto 20-25 % of the turnover estimated (for the year under
review) by the concern.

Current ratio should be 1.33: 1. In case of take over case the last
three year CR average should be 1.33:1. Some relaxation may be given
but subject to approvals from Circle Head or Head Office of bank.

Total Outside Liability/ Net Worth Ratio should be in the range of 2-3

As a measure to incentive to export sector while calculating the
margin i.e. 25% of current assets, export receivables are excluded
from current assets.

Additional credit needs of exporters arising out of firm order/
confirmed letter of credit (which are not taken into account while
fixing regular credit limits of borrowers) are to be met in full even if
sanction of such additional credit limit exceeds MPBF

Credit limits of the borrowing concern in the sugar industry may be
determined on the basis of a current ratio of 1:1.

Sick/weak units under rehabilitations will be exempted from the
application of 2nd method of lending.

Term loan Instalments payable within the next twelve months time are
excluded from current liabilities while calculating MPBF but included
while calculating Current Ratio.

The Drawing Power (DP) should be equal to or more than the limit
applied for. The above margin depends on industry to industry. Some
time margins may be nil.

The inventory holding period, time taken in realization of debtors,
advance to suppliers and credit availed from suppliers are also taken
into consideration. All the above factors are calculated in either days
or months. It shows the requirement of working capital in months or
days. In bank term it is called Working Capital Cycle of the concern.

It is very important factor because it shows blockage of funds and how
much time a concern takes to realize the same. It is the measure of
capability of concern to manage the liquidity in the system.
Bank compare the holding period of borrowing concern current assets with
the concern in same business and industry standards. If bank finds major
differences than it may instruct to borrowing concern, to standardize the
same with peers or industry standard, subject to necessary approvals from
higher authorities.

The various risks faced by any company may be broadly classified as

Industry Risk: It covers the industry characteristic, compensation, financial
data etc.

Company/ business risk: It considers the market position, operating
efficiency of the company etc.

Project risk: It includes the project cost, project implementation risk, post
project implementation, etc.

Management risk: It covers the track record of the company, their attitude
towards risk, propensity for group transaction, corporate governance etc.

Financial risk: Financial risk includes the quality of financial statements,
ability of the company to raise capital, cash flow adequacy etc.

Banks need some security from the borrowers against the credit facilities
extended to them to avoid any kind of losses. securities can be created in
various ways. Banks provide credit on the basis of the following modes of
security from the borrowers.

Hypothecation: under this mode of security, the banks provide credit to
borrowers against the security of movable property, usually inventory of
goods. The goods hypothecated, however, continue to be in possession of the
owner of the goods i.e. the borrower. The rights of the banks depend upon
the terms of the contract between borrowers and the lender. Although the
bank does not have the physical possession of the goods, it has the legal
right to sell the goods to realize the outstanding loans. Hypothecation facility
is normally not available to new borrowers.

Mortgage: It is the transfer f a legal / equitable interest in specific
immovable property for securing the payment of debt. It is the conveyance of
interest in the mortgaged property. This interest terminated as soon as the
debt is paid. Mortgages are taken as an additional security for working
capital credit by banks.

Pledge: The goods which are offered as security, are transferred to the
physical possession of the lender. An essential prerequisite of pledge is that
the goods are in the custody of the bank. Pledge creates some kind of
liability for the bank in the sense that Reasonable care means care, which a
prudent person would take to protect his property. In case of non-payment
by the borrower, the bank has the right to sell the goods.

Lien: The term lien refers to the right of a party to retained goods belonging
to other party until a debt due to him is paid. Lien can be of two types viz.
Particular lien i.e. A right to retain goods until a claim pertaining to these
goods are fully paid, and General lien, Which is applied till all dues of the
claimant are paid. Banks usually enjoyed general lien.

Working capital is made available to the borrower under the following

RBI till 1997 made it obligatory for availing working capital facilities beyond
a limit (Rs 500 million in 1997), through the consortium arrangement. The
objective of the arrangement was to jointly meet the financial requirement of
big projects by banks and also share the risks involved in it.

While it consortium arrangement is no longer obligatory, some borrowers
continue to avail working capital finance under this arrangement. The main
features of this arrangement are as follows;

Bank with maximum share of the working capital limits usually takes the
role of lead bank.

Lead bank, independently or in consultation with other banks, appraise the
working capital requirements of the company.

Banks at the consortium meeting agree on the ratio of sharing the assessed

Lead bank undertakes the joint documentation on behalf of all member

Lead bank organizes collection and dissemination of information regarding
conduct of account by borrower.


Multiple banking is an open arrangement in which no banks will take the
lead role.
Most borrowers are shifting their banking arrangement to multiple banking
The major features are
Borrower needs to approach multiple banks to tie up entire
requirement of working capital.

Banks independently assessed the working capital requirements of the

Banks, independent of each other, do documentation, monitoring and
conduct of the account

Borrowers deals with all financing banks individually.


A syndicated credit is an agreement between two or more lenders to provide
a borrower credit facility using common loan agreement. It is internationally
practiced model for financing credit requirements, wherein banks are free to
syndicate the credit limit irrespective of quantum involved. It is similar to a
consortium arrangement in terms of dispersal of risk but consist of a fixed
repayment period.


Bank follows certain norms in granting working capital finance to
companies. These norms have been greatly influenced by the reconditions of
various committees appointed by the RBI from time to time. The norms of
working capital finance followed by banks are mainly based on the
recommendation of Tandon committee and Chore committee.

These committees were appointed on the presumption that the existing
system of bank lending of number of weakness industries in India have
grown rapidly in the last three decades as result of which, the industrial
system has become vary complex. The banks role has shifted from trade
financing to industrial financing during this period. However, the banks
lending practices and styles have remained the same. Industries today fail to
use bank finance efficiently. Their techniques of managing funds are
unscientific and non-professional. The industries today lack in reducing
costs, optimizing the use of inputs, conserving resources etc.

The weakness of the existing system highlighted by the Dehejia committee in
1968 and identified by the tondon committee in 1974, are as follows:

It is the borrower who decides how much he would borrow ;the bankers
does not decide how much he would lend and is, therefore, not in a position
to do credit planning. The bank credit is treated as the first sources of
finance and not as supplementary to other sources of finance. The amount
of credit is extended is based on the amount of security available and not on
the level of operations of the borrower.
Security does not by itself ensure safety of bank. Funds since all bad sticky
advances are secure advances. Safety essentially lies in the efficient follow
up of the industrial operations of the borrower.

We discuss the following committees important finding and
recommendations for bank finance: -


The Tandon committee was appointed by the RBI in July 1974 and headed
by Shri. Prakash L. Tandon, the chairman of the Punjab national bank, to
suggest guidelines for rational allocation and optimum use of bank credit
taking into consideration the weakness of the leading system. Bank credit,
which had become a scare commodity, strictly rationed to meet the credit
requirement of all the sectors. The larger sector of the industry needed strict
rationing becomes. It was over relying on bank finance and pre empted most
of it while the other sectors were not getting even their due share. Therefore,
the method and criterion adopted for fixing credit ration needed to be
standardized so that there is minimum scope for miss-use or part of the
credit uses. The Tandon committee was concern exactly with this problem.
Its report laid down as to how the credit ratio of individual borrowers could
be fixed at imposed certain obligation on them for the efficient use of the
credit made available.

The recommendation of the Tandon committee based on the following
notions: The borrower should indicate the demand for credit for which he
should draw operating plans for the ensuring year and supply them to the
banker. This would facilitate credit planning at the banks level and help the
banker in evaluating the borrowers credit needs in a more realistic manner.

The banker should finance only the genuine production needs of the
borrower. The borrower maintained reasonable levels inventories and
receivables. Efficient management of resources should therefore be ensured
to eliminate slow moving and flabby inventories.
The working capital needs of borrower cannot entirely finance by the
banker. The banker will finance only a reasonable part of it for the
remaining; the borrower should depend on his own fund. Recommendation
of Tandon committee accordingly, the Tandon committee put forth in the
following recommendations.

Inventory and receivables norms
The borrower is allowed to hold only a reasonable level of current asset,
particularly inventory and receivable. The committee suggested the
maximum level of raw material, stock in process, finished goods, which
corporate in an industry should be to hold. Only the normal inventory based
on a production plan, lead-time of supplies, economic ordering levels and
reasonable factor safety should be financed by the banker.

Lending norms:
The banker should finance only a part of the working capital gap; the other
part should be financed by the borrower form long-term sources. The
current asset will be taken on the estimate values or values as per the
Tandon committee norms, whichever is lower. The current will consist of
inventory and receivables, referred as chargeable current assets (CCA), and
other current assets (OCA).

The Tandon committee suggested the following three methods of
determining the permissible level of bank borrowings-

The borrower will contribute 25 % of the working capital gap from long term
fund i.e owned fund and term borrowings; the remaining 75 % can be
financed from bank borrowings. This method gives a minimum current ratio
of 1:1. This method was considered suitable only for very small borrowers
where the requirement 0 credit was less than Rs 10 lacs.

The borrower will contribute 25 % of the total current assets from long-term
funds i.e. owned funds and term borrowings. A certain level of credit for
purchases and other
current liabilities will be available to fund the building up of current assets
and the bank will provide the balance. Consequently, the current liabilities
inclusive of bank borrowing could not exceed 75 % of current assets. This
method gives a current ratio of 1.3:1. This method was considered for all
borrowers whose credit requirements were more than Rs.10 lacs.

It may be observed from the above that borrowers contribution from long
term funds would be 25 per cent of the working capital gap under the first
method of lending and 25 per cent of total current assets under the second
method of lending. The above minimum contribution of long-term funds is
called minimum stipulated Net Working Capital (NWC) which comes from
owned funds and term borrowings.

Above two method of lending may be illustrated by taking the following
example of a borrowers financial position, projected as at the end of next

Current Liabilities


Current Asset


Creditors for purchase


Raw Material


Other current liabilities


Stock in process



Finished goods

Bank borrowing,including
discounted with bank

Receivables (including bills
discounted with bank )


Other current asset



Calculation Of Maximum Permissible Bank Finance (MPBF)

Method 1 Method 2

Total Current Assets 370 Total Current Assets 370
Less: Current Liabilities 150 25% of above from long 92
(other than bank borrowing) term sources

Working Capital Gap 220 278
Less: 25% of above from 55 Less: Current Liabilities 150
long term sources (other than bank borrowing)
MPBF 165 MPBF 128
Excess bank borrowings 35 Excess bank borrowings 72
Current ratio 1.71:1 Current ratio 1.33:1

It may be observed from the above that in the first method, the borrower has
to provide a minimum of 25% of working capital gap from ling-term funds
and it gives a minimum current ratio 1.17:1. In the second method, the
borrower has to provide a minimum of 25% of total current assets from
long-term funds and gives a minimum current ratio of 1.33:1.
While estimating the total requirement of long-term funds for new projects,
financial institutions/banks should calculate for working capital on the
basis of norms prescribed for inventory and receivables and by applying the
second method of lending. A project may suffer from shortage of working
capital funds if sufficient margin for working capital is not provided as per
the second method of lending while funding new projects. Proper co-
ordination between banks & financial institutions is necessary to ensure
availability of sufficient working capital finance to meet the production

Style of credit:
The committee recommended the bifurcation of total credit limit into fixed
and fluctuating parts. The fixed component is then treated as demand loan
for the year representing minimum level of borrowing, which the borrower
expected to use through out the year. The fluctuating component is taken
care of by a demand cash credit. It could be partly used by way of bills. The
new CC limit should be placed on a quarterly budgeting reporting system.
The interest rate on the loan components should be charged lower than the
cash credit amount.

In April 1979, the RBI constituted a working group to review the system of
cash credit under the chairmanship of Mr. K. B. Chore, Chief Officer,
DBCOD, RBI. The main terms of reference for the group were to review the
cash credit discipline and relate credit limit to production.

Recommendations by Chore Committee: -
Bank credit: -
Borrower should contribute more funds to finance their working capital
requirement and reduce their dependence on bank credit. The committee
suggested placing the second method of lending as explain in the Tandon
committee report.
In case the borrower is unable to comply with this requirement immediately,
he would be granted excess borrowing in the form of working capital loan
(WCTL). The WCTL should be paid in seamy annual installments for a period
not exceeding 5 years and a higher rate of interest than under the cash
credit system would be charged. This procedure should apply to those
borrowers, having working capital requirements of more than Rs 1lacs.

Bank should appraise and fix separate limits for the peak level and normal
non pick level credit requirements for all borrowers in excess of Rs.10 lacs
indicating the relevant periods.

With the sanctioned limits for these two periods, the borrower should
indicate in advance his need for funds during the quarter. Any deviation in
utilization of funds Beyond 10% should be considered irregular and is
subject to penalty fix by the RBI (2% p.a. over the normal rate)

Bank should discourage ad hoc or temporary credit limits. If sanction under
exceptional circumstances the same should be given in the form of a
separate demand loan and additional interest of at least 1% should charged.

Lending system:
The system of three types of lending should continue i.e. cash credit loan
and bills wherever possible; the bank should replace cash credit system by
loan and bills. Bank should scrutinize the cash credit accounts of large
borrowers ones a year. Bifurcation of cash credit account into demand loan
fluctuating cash credit component, as recommended by the Tandon
committee should discontinue. Advances against books debts should be
converted to bills wherever possible and at least 50% of cash credit limit
utilize for financing purchases of raw material inventory should also be
charged to the bill system.

The drawing power that a borrower enjoys at any one point depends on each
components of working capital. The bank for each component, which the
borrower must hold as his contribution to finance working capital,
prescribes margins. The drawing power of the borrower can be best
explained with the following illustration

Suppose a borrower has Rs 100.00 lacs as working capital limit sanctioned
to him by a bank. The security provided by the borrower to the bank is the
hypothecation of inventory.

Example 1: Suppose, the borrower needs to hold an inventory level of say
130 lacs in order to enjoy 100 lacs as his working capital limit.

The actual level of inventory with the borrower at a point is say 110 lacs.

The inventory margin prescribed by the bank is say 25 %

Therefore with this inventory level, the borrower enjoys only Rs 82.5 lacs as
his working capital limit as against Rs 100 lacs.

Inventory level (Required ) Rs 130 lacs
Drawing power of borrower Rs 100 lacs
Inventory level ( Actual ) Rs 110 lacs
Margin prescribed by bank 25 %
Drawing power of borrower 110-( 0.25110 )= Rs.82.5lacs

Example 2: Suppose, the borrower holds Rs 150 lacs of inventory,

Inventory level (required) Rs. 150 lacs
Drawing power of borrower Rs. 100 lacs
Inventory level (actual) Rs. 150 lacs
Margin prescribed by bank 25 %
Drawing power of borrower 150 ( 0.25150 )= Rs.112.2 lacs

Therefore, in this case the borrower would still enjoy Rs 100 lacs as his
working capital limits as against Rs 112.5 lacs.

Therefore, the lower of the two is always considered as the working capital
limit or the drawing power of the borrower sanctioned by the bank.





Background of the Company
ABC Ltd. is engaged in construction activities since July, 2008. It was
formed by a well known RTD group which are in this business since the last
15 years. The company has been dealing with big corporate firms and has
successfully completed every project so far. Their main objective is to
construct, develop, repair or remodel any civil constructions on behalf or on
contract or act as experts and consultants in civil constructions.

Performance of the company
The company was incorporated on July 17, 2008. Hence, FY 2008-09 was
the first financial year of operations of the company. Though the company
was newly established, it was able to achieve total sales of Rs.629.44 lacs as
at 31.03.2008 (within 6 months) as per Annexure I. The sales are estimated
to increase up to Rs.1625 lacs. The estimated increase will be 29%. The
company has projected a 10% increase in its sales. The actual sales
achieved by the company for 10 months are Rs.1549 lacs. The work orders
in hand are Rs.7491 lacs. So the company is confident about achieving its
estimated sales. Considering the past years performance and experience of
directors, the working results are reasonable and acceptable.

Financial Position of the company
Initially, the company has introduced Rs.62.85 lacs as capital as per
Annexure I. The Net Worth of the company is increasing every year. As
equity capital remains at the existing level, the net worth is estimated to
increase from Rs.102.27 lacs to Rs.227.02 lacs. Total reserves are 39.42 lacs
which are estimated to rise to Rs.164.17 lacs as the profit earned is retained
in the business. Current Ratio is above benchmark from the year of
inception i.e. 2.20. Due to T/L Instalments, the ratio is estimated to fall at
1.23. If these T/L instalments are excluded, then the ratio improves to 1.55
and would stabilize at 1.45 in coming years. The liquidity position of the
company is satisfactory as per past records.

Current Assets and Current Liabilities
The company has estimated total current assets at Rs.293 lacs for current
year as against Rs.137.80 lacs for last year. Total current liabilities (other
than bank borrowings & T/L inst.) is Rs.62.60 lacs as on 31.03.09 and is
estimated at Rs.189 lacs for the current year.
Let us see the inventory holding, debtors and creditors level.

31.03.09 31.3.10 31.3.11

Days Amt. Days Amt. Days Amt.

09 15.98

19 83.55 19 91.68
Sundry Debtors

0 0.00 24 106.18 25 121.79
Sundry Creditors

23 35.55 17 19.55 17 21.71

i. Stock Holding Level
The company is engaged in service industry and deals with civil
constructions. Hence, stock holding level consists only stock of work-in-
process. The WIP stock is for temporary period and after finalization of bills
from the builder the same will be converted into debtors. The estimated and
projected holding period of 19days is considered reasonable.

ii. Debtors Holding Level
The first year of operations and performance was for 6 months only. Hence,
no debtors were outstanding. The debtors holding level is estimated at 24
days because the company is engaged in civil constructions of Big Projects
of Hiranandani, Lodha group, etc and contract amount is sizeable. Hence
realization period is around 24 months.

iii. Creditors Holding Level
The creditors level as on 31.03.09 is 23 days, estimated to reduce up to 17
days for current and projected years. This would be possible s the company
will avail additional bank finance and utilize it to reduce creditors.

Financial Ratios
Financial ratios aid to know a firm's performance and financial situation.
Most ratios can be calculated from information provided by the financial
statements. These ratios can be used to analyze trends and to compare the
firm's financials to those of other firms. In some cases, ratio analysis can
predict future bankruptcy.

Current Ratio: Current Assets/Current Liabilities
The current ratio helps to know the liquidity position of a firm to measure
financial strength. Care should be taken in interpreting this ratio as, this
ratio should be used with an approach to measure liquidity, rather than a
judgment on the going concern. The seasonal character of the business
resulting in fluctuating current ratio is a disturbing factor. If current
liabilities exceed current assets, liquidity could be severely affected. The
higher the ratio, the better the liquidity position.

Debt Equity Ratio: There are three ratios under debt-equity ratio.
1. Total Term Liability/Total Net Worth (TTL/TNW:)
2. Total Outside Liability/Total Net Worth (TOL/TNW)
3. Quasi DE Ratio

Financial Leverage Ratio

31.3.09 31.3.10 31.3.11

0.00 0.18 0.03

0.61 1.14 0.66
Quasi DE Ratio

0.61 1.14 0.66

It indicates size of stake, stability and degree of solvency. Indicated what
proportion of the companys finance is represented by the tangible net
worth. The lower the ratio the greater the solvency. The ratio is usually
higher in case of SMES. The ratio should be studied at the peak level of

Profitability Ratio
It measures the success of the firm. The returns on investment can be
checked by using this ratio. The profit of the company is as follows:


31.3.09 31.3.10 31.3.11
NPAT to Net Sales ( % )

6.11 7.67 6.78
Net Profit to Capital Employed

37.61 46.40 33.94

0.37 0.55 0.35




The Bank launched a new business process reengineering and
organizational restructuring project Navnirmaan- Baroda Next. The
project is primarily designed to optimise on available resources to
maximise business and profits and to build a next step for Bank of
Baroda, that is, Baroda Next.

For the current year, the Bank has selected the motto Leveraging
technology for augmenting business growth and profitability.

The Bank has been actively designing strategies for enhancing sales
and raising brand equity through continuous market research.

Bank of Barodas long standing reputation for financial soundness,
long-term customer relationships and proactive management are

Bank should focus on improving credit initiation and effective credit

Baroda Next project can help the bank to gain more prospective

Technology has enhanced and increased the pace of credit lending

Easy accessibility and short credit lending procedures will prove
beneficial to both the customers as well as the bank.


Annexure I

Financial Parameters
Audited As


A) B/S Data / Capital Structure
Paid up Capital
a) Equity Share Capital
b) Preference Share Capital



Res & Surplus (Excl. Rev reserves
& net of intangible assets)
39.42 164.17 285.38
Tangible Net Worth 102.27 227.02 348.23
Term Liabilities 0.00 21.78 8.82
Capital Employed 102.27 248.80 357.05
Net Block 25.87 192.12 255.28
Funds Invested Outside
1.20 1.20 1.20
Current Assets 137.80 293.23 322.22
Current Liabilities 62.60 237.75 221.65
Net Current Assets 75.20 55.48 100.57
Current Liabilities Excluding. TL
62.60 189.03 192.47
Net Current Assets Excluding. TL
75.20 102.20 129.25

B) Operational Data
Gross Sales 629.44 1625.00 1787.50
Less: Excise/Sales Tax 0.00 0.00 0.00
Net Sales 629.44 1625.00 1787.50
Of which exports 0.00 0.00 0.00
Other Income 0.00 19.00 10.00
Manufacturing Expenses 562.97 1393.94 1528.81
Adm. & Selling Expenses 8.59 30.00 46.50
Depreciation 1.21 35.00 36.00
Interest 0.90 13.00 19.00
Net Profit Before Tax 55.77 172.06 167.19
Net Profit After Tax 38.47 124.75 121.21
Dividend 0.00 0.00 0.00
1 Manufacturing Expenses include raw materials, power & fuel, other
manufacturing expenses.
2. Adm. & Selling expenses include Sales Promotion & Publicity, Salaries &
Wages and other administration expenses.
Annexure II

Fund Flow Statement :-

31.3.2010 31.3.2011
Long Term Sources 181.53 157.20
Long Term Uses 201.25 112.11
Surplus / ( Deficit ) (19.72) 45.09

Computation of Working Capital Finance


i. Total Current Asset

137.80 293.23 322.22
ii. Less: Current Liabilities
(Other than Bank
Borrowings & T/L
instalments payable in a

62.60 39.03 42.97
iii. Working Capital Gap

75.20 254.20 379.25
iv. Actual/Projected bank

0.00 150.00 150.00
v. Total Current Liabilities

62.60 189.30 192.97
vi. 25% of Total Current

34.45 73.30 80.56
vii. Actual/Projected NWC (i-v)

75.20 104.20 129.25
viii. Min. stipulated margin
(vi or vii whichever is

75.20 104.20 129.55
ix. MPBF (iii-vii)

0.00 150.00 150.00
Excess borrowings, if any

0.00 0.00 0.00



The analysis of this project leads to the conclusion of whether to
lend money to the institution for business. Certain financial
parameters are taken under study while lending funds to the

By considering various financial parameters it is decided whether
to lend funds to borrowers or not.

The project had provided an overview of the operations carried
out in the bank regarding the Assessment of Working Capital
Finance and guidelines to full fill the requirements and take
proper decisions for lending to borrowers.



Financial Management, Fourth Edition, M.Y.Khan & P.K.Jain

Handbook on Working Capital Finance By D. P. Sarda

How to Read a Balance Sheet (Indian adaptation) By Prof.