A REPORT ON

EXPORT CREDIT FINANCE

BY
SUBHAM GHOSH
ENROLLMENT NO – 18BSP3654

UNITED BANK OF INDIA

(OVERSEAS BRANCH)
 A REPORT ON
EXPORT CREDIT FINANCE
BY
SUBHAM GHOSH
ENROLLMENT NO – 18BSP3654
UNITED BANK OF INDIA
(OVERSEAS BRANCH)
A Report submitted in partial fulfilment of the requirement
of PGPM Program of IBS KOLKATA

Distribution List:
Sri Biswanath Dutta (Company Guide)
Dr. Ajay Pathak (Faculty Guide)

Date of Submission:

ABSTRACT
Export is one of the main aspects of Foreign Exchange. Export Finance refers to financial
assistance extended by banks and other financial institutions to businesses for the shipping
of products outside a country or region. Export financing helps companies to expand its
reach to a global audience. An exporter should first gain understanding of some documents
commonly required by export finance institutions. These documents are mandatory
requirements for most types of export finance assistance. The project aims to analyze
export finance in India and its several guidelines.

Export finance assistance is extended at various stages of exports. Loans or advances are
granted by financial institutions to exporters for financing the purchase, processing,
manufacturing or packing of goods prior to shipment which is known as pre-shipment credit.
Loans or advances are granted by financial institutions to exporters from the date of
extending credit after shipment of goods to the realization of export proceeds which is
known as post-shipment credit.

Pre-shipment credit or packing credit is issued by a financial institution when the seller
wants the payment of goods before shipment. The main objectives behind such finance is to
enable exporter to procure raw materials, carry out the manufacturing process, provide a
secure warehouse to stock the goods and raw materials, process and pack the goods and
finally ship the goods to the buyers. It may be generated against an LC (Letter of Credit) or
an order. The maximum duration of packing credit period is 270 days, which can be
extended up to 360 days.

The project will primarily include two case studies, from two different sectors, based on
packing credit requirement. A customer who has applied for packing credit from the bank is
selected. The bank will go through the company profile, do an in-depth analysis and decide
on whether to provide packing credit to the customer company or not. All this analysis from
the point of submission of the documents by the customer to the final decision by the bank
will be a part of the project. A further comparative study will be done on the two industries.

Post-shipment credit is a loan provided by a financial institution to an exporter or seller

against a shipment which has already been made. This type of export finance is granted
from the date of extending the credit after shipment of the goods to the realisation date of
the export proceeds. Exporters do not wait for the importers to deposit the funds.

In this context, the project aims at understanding the purpose of post-shipment credit, its
basis, the conditions on which it is offered, the eligibility required and the methodology
followed.

UNITED BANK OF INDIA

United Bank of India (UBI) is an Indian government owned financial service company
headquartered in Kolkata, West Bengal, India. The bank has a three tier organizational setup
consisting of its Head office in Kolkata, 37 Regional offices and 2122 branches spread all over
India. However, its major presence is in eastern India. The bank has full-fledged overseas
branches, one each at Kolkata, New Delhi and Mumbai. United Bank of India aims to expand
its international activities.

Key Financial Ratios of the Bank

Ratios 31’MAR 2018 31’MAR 2017

Net Interest Margin 1.03 1.36
Capital Adequacy Ratio (%) 12.62 11.14
Net NPA/Net advance (%) 16.49 10.02
Return on Asset (%) -1.04 0.16
Credit Deposit Ratio 50.19 55.15
(From the audited balance sheet of UBI)

Major Findings
 Net Interest Margin is decreasing, indicating decrease in profitability of the bank.
 Capital Adequacy ratio is increasing. So, the bank is less likely to become insolvent if
unexpected losses occur.
 Net NPA is increasing. Higher ratio reflects rising bad quality of loans.
 Return on Asset is decreasing. This shows that the company is earning less than it is
investing.
 The ideal CD ratio should be between 65 and 70. A lower CD ratio indicates that the
bank has a very strict credit policy.
 FOREIGN EXCHANGE IN INDIA
In India transaction in foreign exchange is regulated by Foreign Exchange Management Act
(FEMA) which came into effect from 1st June 2000. As per FEMA, foreign exchange means
foreign currency & includes:

I. Deposits, credits and balance payable in any foreign currency.

II. Deposits, traveler’s cheques, letter of credit or bills of exchange drawn in Indian
currency & payable in any foreign currency.
III. Drafts, traveler’s cheques, letter of credit, bills of exchange drawn by banks,
institutions or persons outside India but payable in Indian currency.
The regulatory authority for the Indian forex market is RBI. RBI issues guidelines/regulations
from time to time which govern the functioning of the market. Only ADs licensed by the RBI
can participate directly in the forex market.

Foreign exchange operations can be controlled and regulated by following

guidelines:-
1. Trade Management - Managed by Ministry of Finance – through DFGT (Directorate
General of Foreign Trade) import & export – foreign trade (2015-2020).
DGFT is the organization which regulates the rules about the types of goods to be exported
or imported by the formulation of EXIM Policy & Foreign Trade Policy.

2. Exchange Management – Managed by Ministry of Finance – through RBI.

Classification of persons and entities that are authorized to deal in foreign

exchange are

CATEGORY OF Ads QUALIFYING ENTITIES MAJOR ACTIVITIES

Authorized Dealer Category All Commercial Banks and
I(AD-I) Scheduled Banks registered
under RBI act, Urban Co-
operative banks.
Authorized Dealer Category Upgraded Full Fledged
II(AD-II) Money Changer, Department
of Post and various types of
NBFCs who operate in open
market.
Authorized Dealer Category Financial Institutions, EXIM
III(AD-III) Bank, Clearing corporation of
India and Various Factoring
Agents.
It deals in all current &
capital account transaction
according to RBI norms.
It deals in transactions of
Foreign Exchange which are
non- trade in characteristics.
It deals with the activities
which are incidental to
financing of international
trade related activities
undertaken by these
institutions.
3. ECGC (Export Credit Guarantee Corporation of India) – Managed by Ministry of
Commerce – through board of directors representing Govt., Banking, Trade& Industry.

4. Foreign Exchange Dealer’s Association of India (FEDAI) - This is an association of AD’s

formed with the approval of RBI. The main objectives of its establishment were to frame the
rules and guidelines to conducts of foreign exchange business among the member’s banks
and with the public in general. Any dispute between AD’s in respect of forex transactions
can also be referred to FEDAI.
5. Foreign Exchange Management Act – This act amends the law relating to the Foreign
exchange with the objective of facilitating external trade and payments and for promoting
the orderly development and maintenance of foreign exchange market.

EXPORT
The statutory basis for regulation of exports from India is the Foreign Trade (Development
and Regulation) Act, 1992. Item – wise information on the exportability of the product is
published by the Director General of Foreign Trade. The goods may be classified under any
of the following categories:

 Free- items which can be exported without any restriction

 Restricted- items which can be exported only under a license or permission
 State trading- items exported only through only through the specified State Trading
Enterprise
 Prohibited- items which cannot be exported
ROLE OF BANKS IN RESPECT OF EXPORT

 Providing finance for exports at pre shipment and post shipment

 Foreign bills purchased, foreign bills discounted, foreign bills negotiated
 Receiving advance remittances for future exports
 Arranging foreign currency denominated loans for exports such as External
Commercial Borrowings (ECB), FCNR (B) loans, foreign currency term loans
 Advising Export letters of credit
 Advising, confirming letters of credit
 Issuance of related certificates
 Providing export guarantees

General Guidelines for Sanctioning Export Finance

ELIGIBILITY:
 Exporter’s name should not be in RBI caution list as well as in the specific approval list of
ECGC.
 The country with which the exporter wants to deal should not be under the restricted
cover countries of ECGC.

Guidelines followed by UBI

I. Bank must keep in view the past performance of exporter and future potential,
while assessing the credit proposal.
II. In case of new exporters, their experience in domestic market in dealing with the
related commodities and other backgrounds must be taken into consideration.
III. Bank may adopt a flexible attitude towards debt-equity ratio, margin and security
norms but there could be no comprise in respect of viability of the proposal and
the integrity of the borrower.
IV. Exporters should be able to satisfy their banker about their capacity to execute
the orders within the stipulated time and have proper expertise to manage the
export business.
V. The quantum of finance sought for should commensurate with the expected
export turnover and the cost of input required.
VI. If the exports will be covered under letter of credit, banks would need to be
satisfied about the standing of the credit opening bank and also the acceptability
of the conditions specified in the credit.
VII. If the exports are not covered by letter of credit and will be on the basis of firm
contracts, banks may insist for obtaining a satisfactory status report on the
overseas buyer.
VIII. Bank may also look into the regulations, the political and financial condition of
the buyer’s country by obtaining the names of major buyers, terms of payments,
country of exports, duration of realization of export proceeds and the risk
exposed to the country of exports.
IX. Ascertain the buyer’s bank position worldwide and position in 1000 Prime banks.
X. The limit proposed to be sanctioned will be within the discretionary limit
prescribed by ECGC per party for bank under PRE/POST shipment facility to
exporters.
XI. AD category branch should sanction the facility within the prescribed time
period:
 For fresh facility – within 45 days from the date of receipt of application.
 For renewal – within 30days from the date of receipt of application.
 For Ad- hoc – within 15 days from the date of receipt of application.

EXPORT FINANCE IS CATEGORISED INTO TWO TYPES:

a) Pre-shipment credit/ Packing credit

 b) Post-shipment credit

PRE-SHIPMENT CREDIT/PACKING CREDIT TO EXPORTERS

Pre-shipment Finance:

An exporter may need financial assistance for execution of an export order from the date of
receipt of an export order till the date of realization of the export proceeds at any stage.

Pre-shipment / packing credit means any loan or advance granted or any other credit
provided by a bank to an exporter for financing the purchase, processing, manufacturing or
packing of goods prior to shipment/working capital expenses towards rendering of services
on the basis of letter of credit opened in his favour or in favour of some other person, by an
overseas buyer or a confirmed and irrevocable order for the export of goods/services from
India.

 Pre-shipment credit /packing credit can be extended in both terms Indian rupee (INR) as
well as in foreign currency.
 Pre-shipment credit in Indian Rupee known as Rupee Export Credit
 Pre-shipment credit in foreign currency known as pre-shipment credit in foreign
currency (i.e. PCFC)

 PURPOSE OF PRE-SHIPMENT FINANCE

Pre-shipment finance is issued to enable exporter to:

 Procure raw materials

 Carry out manufacturing process
 Provide a secure warehouse for goods and raw materials
 Process and pack the goods
 Ship the goods to the buyers
 Meet other financial cost of the business

 PERIOD OF FINANCE
 The period for which a packing credit advance may be given by a bank will depend
upon the circumstances of the individual case, such as time required for procuring,
manufacturing or processing and shipping the relative goods/rendering of services.
 If the pre-shipment advances are not adjusted by submission of export document
within 360 days from the date of advance, the advances will cease to qualify for
concessive rate of interest to the exporter.
 RBI would provide refinance only for a period not exceeding 180 days.

 DISBURSEMENT OF PACKING CREDIT

 Disbursement can be done in two ways:

1) Loan/order back
a) Ordinarily, each packing credit sanctioned should be maintained as separate
account for the purpose of monitoring period of sanction and end-use of funds.
b) Banks may release the packing credit in one lump sum or in stages as per the
requirement for executing the order/ LC.
c) Proceeds of the bills against orders which are executed are adjusted for packing
credit advance given.

2) Running facility
Running Account facility in respect of any commodity (under HS-ITC), without
insisting on prior lodgment of letters of credit /firm export orders, depending on the
bank’s judgement regarding the need to extend such a facility and subject to the
following conditions:

a) Banks may extend the ‘Running Account “facility only to those exporters whose
track record has been good/ extended to bonafide customers / Gold card
exporters.
b) In all cases where pre-shipment “Running Account” facility has been, extended,
letter of credit/ firm orders should be produced within a reasonable period of
time to be decided by the banks.
c) Banks should ensure that concessive credit available in respect of individual pre-
shipment credit does not go beyond the period of sanction or 360 days from the
date of advance, whichever is earlier.
(In such a case, the matter goes to ECGC for the extension of due date in order to
execute the final shipment).

Documents Required Before Disbursement of Pre-Shipment Credit

Exporter has to submit Application for packing credit against the confirmed order/LC.

1. Order copy should duly accepted by the exporter /LC been received by the exporter. An
export officer shall cross-check the following :
 Currency
 Terms of delivery (date of delivery)
 Terms of payment( sight/DP)
 Quantity
 Description of goods
 Miscellaneous information
2. Utilization certificate – mentioning the breakup of funds such as to justify the optimal
utilization of funds.
3. Profitability statement – Officer should ask as to verify that the customer is able to make
some profit out of funds, so that interest shall be covered out of the profit.
4. PC Bond paper – JUDICIAL PAPER i.e. subject to the Stamp Act of the state of exporter &
Bank.
5. ECGC Policy- verify the credit limit enjoy by the buyer, Percentage of coverage provided
under ECGC.

DIFFERENT STAGES OF PRE SHIPMENT FINANCE

1. Appraisal and Sanction of Limits
Before making any an allowance for Credit facilities banks need to check the different
aspects like product profile, political and economic details about country. Apart from these
things, the bank also looks in to the status report of the prospective buyer, with whom the
exporter proposes to do the business. To check all these information, banks can seek the
help of institution like ECGC or International consulting agencies like Dun and Brad street
etc.

The Bank extended the packing credit facilities after ensuring the following:

a) The exporter is a regular customer, a bona fide exporter and has goods standing in
the market.
b) Whether the exporter has the necessary license and quota permit (as mentioned
earlier) or not.
c) Whether the country with which the exporter wants to deal is under the list of
Restricted Cover Countries (RCC) or not.

2. Disbursement of Packing Credit Advance

Once the proper sanctioning of the documents is done, bank ensures whether exporter has
executed the list of documents mentioned earlier or not. Disbursement is normally allowed
when all the documents are properly executed.

Sometimes an exporter is not able to produce the export order at time of availing packing
credit. So, in these cases, the bank provides a special packing credit facility and is known as
Running Account Packing.

Before disbursing the bank specifically check for the following particulars in the submitted
documents:

a) Name of buyer
b) Commodity to be exported
 c) Quantity
d) Value (either CIF or FOB)
e) Last date of shipment / negotiation.
f) Any other terms to be complied with

The quantum of finance is fixed depending on the FOB value of contract /LC or the domestic
values of goods, whichever is found to be lower. Normally insurance and freight charged are
considered at a later stage, when the goods are ready to be shipped.

In this case disbursals are made only in stages and if possible not in cash. The payments are
made directly to the supplier by drafts/bankers/cheques.

The bank decides the duration of packing credit depending upon the time required by the
exporter for processing of goods.

The maximum duration of packing credit period is 180 days; however bank may provide a
further 90 days extension on its own discretion, without referring to RBI.

3. Follow up of Packing Credit Advance

Exporter needs to submit stock statement giving all the necessary information about the
stocks. It is then used by the banks as a guarantee for securing the packing credit in
advance. Bank also decides the rate of submission of these stocks.

Apart from this, authorized dealers (banks) also physically inspect the stock at regular
intervals.

4. Liquidation of Packing Credit Advance

Packing Credit Advance needs be liquidated out of as the export proceeds of the relevant
shipment, thereby converting pre-shipment credit into post-shipment credit.

This liquidation can also be done by the payment receivable from the Government of India
and includes the duty drawback, payment from the Market Development Fund (MDF) of the
Central Government or from any other relevant source.

In case if the export does not take place then the entire advance can also be recovered at a
certain interest rate. RBI has allowed some flexibility in to this regulation under which
substitution of commodity or buyer can be allowed by a bank without any reference to RBI.
Hence in effect the packing credit advance may be repaid by proceeds from export of the
same or another commodity to the same or another buyer. However, bank need to ensure
that the substitution is commercially necessary and unavoidable.
 CASE STUDY
ON
EXPORT CREDIT
FINANCE
 CASE 1: LEATHER INDUSTRY

The first case is on Company A, which is an exporter of leather. The company has applied for
packing credit from the bank.

Industry Scenario
Leather is one of the most widely traded commodities globally. The growth in demand foe
leather is driven by the fashion industry, especially footwear. Apart from this, furniture and
interior design industries, as well as the automotive industry also demand leather. The
leather industry has a place of prominence in the Indian economy due to substantial export
earnings and growth.

The Indian Leather Industry accounts for around 12.93% of the world’s leather production of
hides/skins.

Export Highlights
Indian Leather Industry has grown drastically, transforming from a mere raw material
supplier to a value-added product exporter.

 Total leather good exports from India stood at US$ 3.05 billion during April-October
2018.
 During this phase, the major markets for Indian leather products were US (16.73%),
Germany (12.31%), UK (11.41%), Italy (7.48%), and France (5.54%)
 Exported products include leather footwear component (US$ 196 million), leather
garments (US$ 295.06 million), finished leather exports (US$ 466.76 million),
leather footwear (US$ 1293.20 million) and leather goods (US$ 799.47 million).

Council for Leather Exports (CLE)

CLE is an autonomous non-profit organization, which is entrusted with export promotion
activities and the development of the leather industry. About 3500 companies
manufacturing/exporting leather and leather products are members of the Council.

(www.ibef.org)
 AUDITED BALANCE SHEET OF THE COMPANY
2016 2017 2018 2019 2020
Estimate Projecte
PARTICULARS Audited Audited Audited d d
EQUITIES AND LIABILITIES          
SHAREHOLDER'S FUNDS          
Share Capital 90.00 90.00 90.00 90.00 90.00
General Reserves and Surplus 603.82 530.31 418.81 364.54 410.64
Money received against share
warrants 0.00 0.00 0.00 0.00 0.00
Total Shareholder's Fund 693.82 620.31 508.81 454.54 500.64
NON-CURRENT LIABILITIES          
Long term borrowings 77.81 43.39 27.41 0.00 0.00
Deferred Tax Liabilities 0.00 0.00 0.00 0.00 0.00
Other non-current liabilities 0.00 0.00 0.00 0.00 0.00
Total Non-Current Liabilities 77.81 43.39 27.41 0.00 0.00
CURRENT LIABILITIES          
Short term borrowings 1250.26 1061.28 898.25 1116.00 1116.00
Trade payables 360.22 534.43 531.40 355.00 345.00
Short term provisions 18.98 21.20 21.21 7.93 8.67
Other current liabilities 16.17 18.54 16.97 18.00 17.00
Total Current Liabilities 1645.63 1635.45 1467.83 1496.93 1486.67
TOTAL CAPITAL AND LIABILITIES 2417.26 2299.15 2004.05 1951.47 1987.31
           
ASSETS          
NON-CURRENT ASSETS          
Tangible assets 223.16 207.58 140.75 99.39 81.76
Intangible assets 2.06 2.47 2.95 2.95 0.00
Capital work in progress 135.79 206.66 0.00 0.00 0.00
Other non-current assets 0.00 83.55 2.13 2.64 2.64
Total Non-Current Assets 361.01 500.26 145.83 104.98 84.40
CURRENT ASSETS          
Current Investment 0.00 34.73 2.64 0.00 7.00
Inventories 1283.03 1316.59 1307.42 1279.00 1361.00
Trade receivables 370.29 151.07 206.38 200.00 240.00
Cash and cash equivalents 41.00 6.53 5.81 29.49 35.91
Short term loans and advances 361.93 289.97 335.97 338.00 259.00
Other current assets 0.00 0.00 0.00 0.00 0.00
Total Current Assets 2056.25 1798.89 1858.22 1846.49 1902.91
TOTAL ASSETS 2417.26 2299.15 2004.05 1951.47 1987.31
(All figures in Rs lakhs)

Note: It may be mentioned that it has been observed from the ABS as on 31-03-2018 that the company has
disposed off the capex being carried out at a book value of Rs 2.07 cr as at 31-03-2017 and has since been
reduced to zero as at 31-03-2018. Also the Land Free hold which was being carried out at a book value of Rs
0.79 lakh as at 31-03-2017 is being shown as zero at 31-03-2018. There is also a profit on sale of this asset at Rs
0.11 cr which has been categorized as a non-operating income for FY 2017-18.
 OPERATING STATEMENT OF THE COMPANY
PARTICULARS 2016 2017 2018 2019 2020
  Audited Audited Audited Estimated Projected
SALES          
Gross Sales 1440.74 1034.15 1054.14 1265.64 1518.77
Other Operating Income 159.09 117.63 87.04 84.00 86.00
Net Sales 1599.83 1151.78 1141.18 1349.64 1604.77
EXPENSES          
Cost of materials consumed 1069.20 825.63 716.24 806.34 995.38
Power and Fuel 15.88 14.32 9.95 10.52 114.58
Direct Labour 0.00 47.23 62.86 85.84 0.00
Depreciation/Amortisation 21.67 22.19 24.33 18.35 18.35
Other manufacturing Expenses 196.76 21.49 8.67 0.00 0.00
Total Prime Cost 1303.51 930.86 822.05 921.05 1128.31
Add: Opening Stock in Progress 467.99 511.96 514.62 498.35 455.00
Less: Closing Stock in Progress 511.96 514.62 498.35 485.00 481.00
Cost of Production 1259.54 928.20 838.32 934.40 1102.31
Add: Opening Stock of Finished
Goods 192.52 152.63 220.67 260.84 264.00
Less: Closing Stock of Finished
Goods 152.63 220.67 260.84 264.00 305.00
Cost of Goods Sold 1299.43 860.16 798.15 931.24 1061.31
Selling and Admin Expenses 168.16 254.95 365.64 369.25 401.19
Cost of Sales 1467.59 1115.11 1163.79 1300.49 1462.50
PBIT 132.24 36.67 -22.61 49.15 142.27
Interest and Financial Charges 151.66 112.95 102.21 128.42 139.50
Other Non-operating Income 36.54 10.36 12.81 0.00 0.00
PBT 17.12 -65.92 -112.01 -79.27 2.77
Tax paid 5.45 8.15 0.00 0.00 0.00
Provision for Taxes 0.00 0.00 0.00 0.00 6.67
PAT 11.67 -74.07 -112.01 -79.27 -3.90
(All figures in Rs lakhs)

RATIO ANALYSIS
2016 2017 2018 2019 2020
PARTICULARS Audited Audited Audited Estimated Projected
Gross Profit Margin 9.62% 5.11% 0.15% 5.00% 10.01%
Net Profit Margin 0.73% -6.43% -9.82% -5.87% 0.17%
TOL/TNW 2.49 2.72 2.96 3.31 2.97
Debt/Equity 0.11 0.07 0.05 0.00 0.00
Current Ratio 1.25 1.10 1.27 1.23 1.28
Quick Ratio 0.47 0.29 0.38 0.38 0.36
Interest Coverage Ratio 1.01 0.52 0.02 0.53 1.15
ANALYSIS OF FINANCIAL PERFORMANCE

1. Sales revenue
The entire sales of the company comprises of export of leather goods only. The net sales
of the company has been declining since the past three years. The sales of the company
was Rs 15.99 cr in FY 2015-16 which reduced to Rs 11.52 cr in FY 2016-17 and then to Rs
11.41 cr in FY 2017-18. The reason for the decline in sales is that the company is facing
severe competition in the leather industry. However, the company has achieved a sales
of Rs 2.97 cr in the last three months of the last FY. Against this, the sales is estimated by
the company at an increase of approx. 15% over the previous year’s sales and
accordingly the sales of Rs 13.5 cr may be taken to be acceptable.

2. Profit Margin
The PBDIT margin was at 5.11% for FY 2016-17 which has reduced to 0.15% for FY 2017-
18. For the FY 2018-19, a PBDIT margin of 5.00% is estimated which may be taken to be
acceptable as it is in line with the past trends and is thus a conservative estimate.

PAT margins were negative – (6.43)% for FY 2016-17 and (9.82)% for FY 2017-18. PAT
margins are estimated to improve, however, shall not be able to come to positive in FY
2018-19. PAT margins are estimated to be at (5.87)% which may be taken to be
acceptable.

3. TOL/TNW
Since the TOL/TNW is at 3.31 for FY 2018-19 and within benchmark guidelines of the
bank of 4:1 as per the lending policy norms, it may be taken to be acceptable.

4. Current ratio
As per estimates furnished for the FY 2018-19, the Current Ratio is at 1.23, which is
within bank’s acceptable norm of 1.18 for the MSME export credit. The Current Ratio is
also not improving due to inability of the company to raise substantial funds which can
fund the previous losses. Thus, the Current ratio may be accepted at 1.23 in FY 2018-19.

5. Interest Coverage Ratio

The estimated Interest Coverage Ratio for FY 2019-20 is 1.15. Since the ratio is
increasing, the company has sound liquidity. Therefore, bank can provide loan.
 BUILD-UP OF CURRENT ASSETS AND CURRENT LIABILITIES

Build-up of Current Assets

Components Holding Analysis Computation of Holding

Level in month
Raw material Based on past/ last actual/ Raw material/Raw material
last accepted levels in consumption*12
relation to consumption
Work-in-progress Based on past/ last actual/ WIP/Cost of production*12
last accepted levels in
relation to cost of
production
Finished Goods Based on past/ last actual/ FG/Cost of Sales*12
last accepted levels in
relation to cost of sales
Receivables Based on past/ last actual/ Receivables/gross sales*12
last accepted levels in
relation to purchase
Other current assets Based on past/ last actual

Build-up of Current Liabilities

Components Holding Analysis Computation of holding

level in month
Sundry Creditors Based on past/ last actual/ Creditors/purchase*12
last accepted levels in
relation to purchase
Other current liabilities* Based on past trends

*Excluding bank borrowings and installments of TL/Debenture, etc. due within next 12
months
COMPUTATION OF MAXIMUM PERMISSIBLE BANK FINANCE (MPBF)
2016 2017 2018 2019 2020
CURRENT ASSETS (A) Audited Audited Audited Estimated Projected
Receivables (Export) 370.29 151.07 206.38 200.00 240.00
Month Gross Export Sales 3.09 1.76 2.35 2.09 2.09
Raw Materials 576.43 539.14 501.67 530.00 575.00
Month's Consumption 6.47 7.84 8.41 7.89 6.93
Work In Progress 511.96 514.62 498.35 485.00 481.00
Month's Cost of Production 4.88 6.65 7.13 6.23 5.24
Finished Goods 152.63 220.67 260.84 264.00 305.00
Month Cost of Export Sales 1.41 3.08 3.92 3.40 3.45
Others 444.94 373.39 390.98 367.49 301.91
TOTAL (A) 2056.25 1798.89 1858.22 1846.49 1902.91
CURRENT LIABILITIES EXCLUDING
BANK BORROWINGS (B)
         
Sundry Creditors for Goods 360.22 534.43 531.40 355.00 345.00
Month Purchase 4.04 7.77 8.90 5.28 4.16
Others 35.15 39.74 38.18 25.93 25.67
TOTAL (B) 395.37 574.17 569.58 380.93 370.67
SECOND METHOD OF LENDING          
Working Capital Gap (A-B) 1660.88 1224.72 1288.64 1465.56 1532.24
25% of A excl. Export receivables
(C) 421.49 411.96 412.96 411.62 415.73
Actual/Projected NWC (D) 410.62 163.44 390.39 349.56 416.24
WCG - C ( E ) 1239.39 812.77 875.68 1053.94 1116.51
WCG - D ( F ) 1250.26 1061.28 898.25 1116.00 1116.00
MPBF ( MIN OF E & F ) 1239.39 812.77 875.68 1053.94 1116.00
(All figures in Rs lakhs)

Comments on holding level of different items of Current Assets and Creditors

1. Inventory
Raw Material: The holding period against raw materials was at 7.84 months as at 31-03-
2017 which has increased to 8.41 months as at 31-03-2018. The RM holding level is
estimated to reduce to 7.89 months as at 31-03-2019 and the same maybe accepted.

Work In Progress: The holding period against work in progress was 6.65 months as at 31-
03-2017 which has increased to 7.13 months as at 31-03-2018. The WIP holding level is
estimated to reduce to 6.23 months as at 31-03-2019 and the same maybe accepted.

Finished Goods: The holding period against finished goods was 3.08 months as at 31-03-
2017, which has increased to 3.92 months as at 31-03-2018. The FG holding level is
estimated to reduce to 3.40 months as at 31-03-2019 and the same maybe accepted.
 The high nature of the inventory is due to the fact that it has to store the entire variety
of all inventory components due to a variety of products to be manufactured, i.e.,
leather gloves, leather bags and wallets.

2. Receivable Holding
Export Receivable holding period was at 1.76 months as at 31-03-2017 which has
increased to 2.35 months as at 31-03-2018. The receivables holding level is estimated to
reduce to 2.09 months as at 31-03-2019 and the same maybe accepted as it is in line
with the previous year trend.

3. Sundry Creditors
The holding period of sundry creditors was at7.77 months as at 31-03-2017, which has
increased to 8.90 months as at 31-03-2018. Due to drop in sales, the repayment of the
creditors was affected adversely, leading to increase in creditor level. The cash flows
arising out of the sales shall facilitate the repayment of the creditors and accordingly the
creditor holding period is estimated to reduce to 5.28 months which may be taken to be
acceptable.

ASSESSMENT OF EXPORT CREDIT LIMIT

For PC Limit:

Sl. No. Particulars 2017-18 2018-19

A Total annual sales 10.54 11.46
A1 Cost of sales 7.98 9.31
B Average Monthly cost of sales 0.67 0.78
C Raw Material Holding Period 9.18 7.89
(months)
D WIP Holding Period (months) 7.13 6.23
E Finished Goods Holding Period 3.92 3.40
(months)
F Sundry Creditors Holding Period 8.90 5.28
(months)
G Total Requirement [B*(C+D+E-F)] 7.59 9.55
H Less: Margin @20% 1.52 1.91
I PC limit eligible 6.07 7.64
J PC limit requested 6.66 6.66
K PC limit recommended 6.66 6.66
(In Rupees Crores)

The company is eligible for a PC limit of Rs 7.64 cr as per the CMA estimates furnished by
the company and accepted by the bank. However, the company is already enjoying an inter-
changeability of Rs 2.50 cr which is proposed to be continued. The aggregate inventory
holding level for 2017-18 is 20.32 months while for 2018-19 is 17.52 months. Peaking is
observed based on the demand from the overseas buyer. In case peak holding level of 20.32
months (in view of the previous year trend), the company is eligible for a limit of Rs 9.33 cr
for FY 2018-19 which includes the inter-changeability of Rs 2.50 cr (Rs 6.66+2.50, i.e., Rs
9.16 cr) which has been granted from FBP to PC. Thus the company is being allowed the PC
limits of Rs 6.66 cr and over and above that the inter-changeability of Rs 2.50 cr from FBP to
PC

For FBP/FBD/FBN limit:

Sl. No. Particulars 2017-18 2018-19 2019-20

A Total annual sales 10.54 11.46 13.75
(export)
B Monthly sales (export) 0.88 0.96 1.15
C Receivables Holding 2.35 2.09 2.09
Period (months)
D Receivables considered 2.07 2.01 2.40
for limit (B*C)
E Less: Margin 0.00 0.00 0.00
F Maximum Permissible 2.07 2.01 2.40
Limit
G Recommended Limit 4.50 4.50 4.50
H Limit requested/availed 4.50 4.50 4.50
(In Rupees Crores)

The company generally avails higher PC limits as the stock holding is higher. Based on the
CMA level of receivables as on 31-03-2019, the eligible FBP limit comes to RS 2.01 cr. As the
company is already enjoying need based inter-changeability from FBP to PC to an extent of
Rs 2.50 cr which at present is at Rs 3.20 cr, for the increased execution of orders, the
requirement of FBP limits is low as the bills of the company are either sent on collection
basis or discounted by availing FBP limits and the proceeds are then realized within 30-45
days. However, in the competitive scenario, there are possibilities where the sufficient FBP
limits are required to enable the company adjust the PC limits in case the tenure of PC
exceeds 180 or 270 days as the case may be and thus FBP limits of Rs 4.50 cr are being
proposed to continue.

RATIONALE FOR RECOMMENDATION

 Satisfactory credit relationship during last 30 years
 Promoters experience in the line of business
 MSME lending is the thrust area of bank finance
 The company is 100% export oriented unit
 Overall exposure is working capital in nature