TERM ASSIGNMAENT ON HOW DO BANKS APPRAISE THE WORKING CAPITAL FINANCE?

Submitted to: DR. J. K.Sharma Prof. & Head Department of Business Administration, University Of Lucknow, Lucknow

Submitted By: Anuradha Sharma MBA Semester III

Project Preface
The project is based on the Bank visit State bank Of India, Lucknow. The objective of the study was to meet the people at the Credit Assessing department of the bank and understand various types of working capital finance provided by banks. The objective was also to understand during the visit the procedure of assessment of working capital finance extended by the banks. The project information is limited, as financing and its procedures tend to be closed confidential information of the financing intuition and the borrower. I would like to thank Miss. Gazala Kamal part of the credit appraisal team at The S.B.I. who invested her valuable time and provided information that I have presented in the report below. I was able to go through cases of few lenders like MS V & S Sinages. MS Arif Builders, MS Moksha Productions during the information visit. But details have not been extended due to bank policies.

FROM THE BANKSBI

We understand and care for your financial needs Assistance extended to both as Fund based and Non Fund based facilities to Corporate, Partnership firms, Proprietary concerns Working capital finance extended o all segments of industries and services sector such as IT.

Needless to say that every Small and Medium Enterprise wants to become big but often finds itself in unexpected financial crunch and working capital is the most critical of them. Without adequate working capital it cannot build enough inventory or purchase raw material. As a result the company cannot sell enough products to generate the profit to expand further. To avoid this you need to plan in advance, for the working capital needs of your Small and Medium Enterprise. With a strong working capital base you can fulfill the needs of your business as well as your target market. Your business can rise to the unforeseen challenges of today's highly competitive and changing business environment. You can concentrate on, expanding your business, finding newer business opportunities, utilizing your available funds to other more productive activities. Today many innovative companies have come up with hassle free working capital finance program, with minimal securities, sometime even without security. For all this you just need to broaden your view in terms of finding the best innovative solution offered, and need to explore all the options available in the market for the unique needs of your enterprise. The most important aspect of working capital is that : A business which is in financial trouble needs Working Capital Finance to pull it out of this situation thus It is in a great need of Working Capital Finance. But a business which is doing so well and expanding further, is in greater need of Working Capital Finance since it has to produce more and more products to keep the momentum going. So in both the conditions Working Capital Finance planning becomes imperative for any enterprise. Working Capital Finance benefits Protects the business against any unforeseen future challenges. Working capital finance gives strength, flexibility and stability to the business. With adequate working capital finance, other available funds can be utilized in other productive activities thus enabling the enterprise to realize its full potential. Working capital finance can be extremely useful when a business is experiencing financial troubles, it can provide instant finance and pull it out of trouble situation. The Bank is actively involved since 1973 in non-profit activity called Community Services Banking. All our branches and administrative offices throughout the country sponsor and participate in large number of welfare activities and social causes. Our business is more than banking because we touch the lives of people anywhere in many ways. Basic Common Documentation Proof of Identity: PAN Card, Voter Id Card, Passport, Driving License Proof of Address: Latest Telephone Bill or Electricity Bill

Public or Private Limited Companies Certificate of Incorporation and Commencement of Business Memorandum and Articles of Association Board resolution authorizing the opening and operation of the account PAN or GIR No. or completed Form 60 List of Directors with residential addresses

Partnership Firms Partnership Deed and Registration Certificate Shop and Establishment Certificate Letter from partners approving the persons concerned to open and operate the account

Proprietorship Concerns Trusts Copy of the trust deed Copy of the registration certificate Copy of the resolution by the trustees authorising the members concerned to open and operate the account List of Trustees with residential addresses Photographs of the members operating the account Associations or Clubs Bye-laws of the association or club Certificate of Registration Copy of the resolution by the Board authorising the members concerned to open and operate the account Photographs of the members operating the account Certificate from State Govt or Statutory Body or Trade License or Sales Tax Certificate or Shop and Establishment Certificate Letter of proprietorship, duly signed by the proprietor in his or her individual capacity (with a rubber stamp)Hindu Undivided Family Letter of HUF duly signed by Karta and all Co-Parceners PAN or GIR No. or completed Form 60 Names of Karta and Co-parceners with residential addresses Latest passport-size photographs of all the authorized signatories

WORKING CAPITAL FINANCE RATES 8.75% - 14%

1. What is Working Capital? The business not only requires financing for investing in fixed assets, but every business also requires funds on a continual basis for carrying on its operations. Such expenses include o expenses incurred for purchase of raw material, o manufacturing, o selling, and administration until such goods are sold and the funds are realized. Most business transactions are carried on credit. While part of the raw material may be purchased by credit, the business would still need to pay its employees, meet manufacturing and selling expenses (wages, power, supplies, transportation and communication) and the balance of its raw material purchases. Overall we can say that all the need for working capital arises from the prevalence of credit in business transactions, need to fund manufacturing and support and to account for the variations in the supply of raw material and demand for finished goods. Therefore Working Capital refers to the source of financing required to by businesses on a continual basis for meeting these needs. 2. Characteristics of working capital

It is continually required for a going concern the amount or quantity of working capital depends on the level of business activity Working Capital is impacted by numerous transactions on a continual basis

The above characteristics render limit based financing from banks ideal for working capital financing. This is because the client is charged interest only on the average outstanding utilized and is saved with the bother of reinvesting short term surpluses arising out of low working capital utilization at a point in time. Further since the transactions of the business are generally routed through a current account with a bank, availing a credit limit from the same bank is really convenient. Thus, working capital requirements are generally financed through limit based financing from banks. The amount of working capital required depends upon a number of factors which can be stated as below:

a) Nature of Business: Some businesses are such, due to their very nature, that their requirement of fixed capital is more rather than working capital. These businesses sell services and not the commodities and not the commodities and that too on cash basis. As such, no funds are blocked in piling inventories and also no funds are blocked in receivables. E.g. Public utility services like railways, electricity boards, infrastructure oriented projects etc. Their requirement of working capital is less. On the other hand, there are some business like trading activity, where the requirement of fixed capital is less but more money is blocked in inventories and debtors. Their afore making requirement of the working capital more. b) Length of Production Cycle: In some business like machine tool industry, the time gap between the acquisitions of raw material till the end of final production of finished product itself is quite high. As such more amounts may be blocked either in raw materials, or work in progress or finished goods or even in debtors. Naturally, their needs of working capital are higher. On the other hand, if the production cycle is shorter, the requirement of working capital is also less. c) Size and Growth of Business: In very small companies the working capital requirements are quite high overheads, higher buying and selling costs etc. As such, the medium sized companies positively have an edge over the small companies. But if the business starts growing after a certain limit, the working capital requirements may be adversely affected by the increasing size. d) Business I Trade Cycles: If the company is operating in the period of boom, the working capital requirements may be more as the company may like to buy more raw material, may increase the production and sales to take the benefits of favorable markets, due to the increased sales, there may be more and more amount of funds blocked in stock and debtors etc. Similarly, in case of depression also, the working capital requirements may be high as the sales in terms of value and quantity may be reducing, there may be unnecessary piling up of stocks without getting sold, the receivables may not be recovered in time etc.

e) Terms of Purchase and Sales: Sometimes, due to competition or custom, it may be necessary for the company to extend more and more credit to the customers, as a result of which more and more amounts is locked up in debtors or bills receivables which increase working capital requirements. On the other hand, in case of purchases, if credit is offered by the suppliers of goods and services, a part of working capital requirement may be financed by them, but if it is necessary to purchase these goods or services on cash basis, the working capital requirement will be higher. f) Profitability: The profitability of the business may vary in each and every individual case, which in its turn may depend upon numerous factors. But high profitability will positively reduce the strain on working capital requirements of the company, because the profits to the extent that they are earned in cash may be used to meet the working capital requirements of the company. However, profitability has to be considered from one more angles so that it can be considered as one of the ways in which strain on working capital requirements of the company may be relieved. And these angles are: Taxation Policy: How much is required to be paid by the company towards its tax liability? Dividend Policy: How much of the profits earned by the company are distributed by way of dividend? Effect of Inflation on Working Capital Requirement: The phase of inflation can be identified with the situation of increasing price levels, increasing demand and increasing supply. As such, the working capital requirements multiply during the phase of inflation due to increasing cost of production and increasing level of sales turnover. However, in order to control the increasing demand for working capital during the period of inflation, the following measures may be applied. Possibility of using cheaper substitute raw material, without affecting the quality, should be explored. For this purpose, research activities may be conducted. Attempts should be made to reduce the production costs to maximum possible extent. For this purpose, the techniques like time and motion study, incentive schemes, cost reduction programmes etc. may be implemented. Attempts should be made to reduce the operating cycle to the maximum possible extent. Aiming at greater turnover at short intervals will go a long way to reduce the stress on working capital requirements. Attempts should be made to reduce the locked up working capital in non-moving or

obsolete inventories. A clear-cut policy should be formulated and followed for timely disposal of non- moving and obsolete inventories. Similarly, efficient management information system should be developed to reflect the position of inventory from the various angles. Attempts should be made to reduce the amount looked up in receivables. Quicker realization of debts will go a long way to reduce the stress on working capital requirements. Attempts should be made to make the payments of to creditors in time. This helps the business to build up good reputation and increases its bargaining power with respect to period of credit of credit for payment and other conditions. Attempts should be made to match the projected cash inflows and projected cash outflows. If they do not match, some of the payments should be postponed or purchases of certain avoidable items should be deferred. 3. Estimation of Working Capital Requirements: First of all estimates of all current assets should be made. These current assets may include stock, debtors. Cash/Bank balance prepaid expenses etc. Difference between the estimated current assets and current liabilities will represent the working capital requirements. To this sometime a standard percentage may be added to take care of the contingencies. This technique is known as Cash Cost technique of estimating of working capital requirements. There is another technique available for estimating working capital requirements also and that is in the form of Balance Sheet Method. In this the forecast is made of various assets and liabilities, the difference between assets and liabilities indicating either the surplus or deficiency of cash. 4. Bank Credit as a Source of Meeting Working Capital Requirements: While bank credit is considered as a major source of meeting the working capital requirement of the industry, the banks have to consider the following factors before meeting their requirements. A].What should be the amount of working capital assistance? B].What should be the form in which working capital assistance may be extended? C].What should be the security that should be obtained for extending the working capital assistance? Amount of Assistance: To obtain the bank credit for meeting the working capital requirements, the company will

be required to estimate the working capital requirements and will be required to approach the banks along with the necessary supporting data. On the basis of the estimates submitted by the company, the bank may decide the amount of assistance which may be extended, after considering the margin requirements. This margin is to provide the cushion against the reduction in the value of security. If the company fails to fulfill its obligations, the bank may be required to realize the security for recovering the dues. Margin money is meant to take care of the possible reduction in the value of security. The percentage of margin money may depend upon the credit standing of the company, fluctuations in the price of security or the directives of Reserve Bank of India from time to time. Form of Assistance: After deciding the amount of overall assistance to be extended to the company, the bank can disburse the amount in any of the following forms A. Non-Fund Based Lending B. Fund Based Lending A. Non-Fund Based Lending In case of Non-Fund Based Lending, the lending bank does not commit any physical outflow of funds. As such, the funds position of the lending bank remains intact. The Non-Fund Based Lending can be made by the banks in two forms a. Bank Guarantee: Suppose Company A is the selling company and Company B is the purchasing company. Company A does not know Company B and as such is concerned whether Company B will make the payment or not. In such circumstances, D who is the Bank of Company B, opens the Bank Guarantee in favor of Company A in which it undertakes to make the payment to Company A if Company B fails to honor its commitment to make the payment in future. As such, interests of Company A are protected as it is assured to get the payment, either from Company B or from its Bank D. As such, Bank Guarantee is the mode which will be found typically in the sellers market. As far as Bank D is concerned, while issuing the guarantee in favor of Company A, it does not commit any outflow of funds. As such, it is a Non-Fund Based Lending for Bank D. If on due date, Bank D is required to make the payment to Company A due to failure on account of Company B to make the payment, this Non-Fund Based Lending becomes the Fund Based Lending for Bank D which can be recovered by Bank D from Company B. For

issuing the Bank Guarantee, Bank D charges the Bank Guarantee Commission from Company B which gets decided on the basis of two factors-what is the amount of Bank Guarantee and what is the period of validity of Bank Guarantee. In case of this conventional for of Bank Guarantee, both company A as well as Company B get benefited as it is able to make the credit purchases from Company A without knowing Company A. As such, Bank Guarantee transactions will be applicable in case of credit transactions. In some cases, interests of purchasing company are also to be protected. Suppose that Company A which manufactures capital goods takes some advance from the purchasing Company B. If Company A fails to fulfill its part of contract to supply the capital goods to Company B, their needs to be to be some protection available to Company B. In such circumstances, Bank C which is the banker of Company A opens a Bank Guarantee in favor of Company B in which it undertakes that if Company A fails to fulfill its part of the contract, it will reimburse any losses incurred by Company B due to this non fulfillment of contractual obligations. Such Bank Guarantee is technically referred to as performance Bank Guarantee and it ideally found in the buyers market. b. Letter of Credit: The non-fund based lending in the form of letter of credit is very regularly found in the international trade. In case the exporter and the importer are unknown to each other. Under these circumstances, exporter is worried about getting the payment from the importer and importer is worried as to whether he will get the goods or not. In this case, the importer applies to his bank in his country to open a letter of credit in favor of the exporter whereby the importers bank undertakes to pay the exporter or accept the bills or drafts drawn by the exporter on the exporter fulfilling the terms and conditions specified in the letter of credit. B. Fund Based Lending In case of Fund Based Lending, the lending bank commits the physical outflow of funds. As such, the funds position of the lending bank gets affected. The Fund Based Lending can be made by the banks in the following formsa. Loan: - In this case, the entire amount of assistance is disbursed at one time only, either in cash or by transfer to the companys account. It is a single advance. The loan may be repaid in installments, the interests will be charged on outstanding balance.

b. Overdraft: - In this case, the company is allowed to withdraw in excess of the balance standing in its Bank account. However, a fixed limit is stipulated by the Bank beyond which the company will not be able to overdraw the account. Legally, overdraft is a demand assistance given by the bank i.e. bank can ask for the repayment at any point of time. However in practice, it is in the form of continuous types of assistance due to annual renewal of the limit. Interest is payable on the actual amount drawn and is calculated on daily product basis. c. Cash Credit: - In practice, the operations in cash credit facility are similar to those of overdraft facility except the fact that the company need not have a formal current account. Here also a fixed limit is stipulated beyond which the company is not able to withdraw the amount. Legally, cash credit is a demand facility, but in practice, it is on continuous basis. The interests is payable on actual amount drawn and is calculated on daily product basis. d. Bills purchased or discounted: - This form of assistance is comparatively of recent origin. This facility enables the company to get the immediate payment against the credit bills raised by the company. The bank holds the bill as a security till the payment is made by the customer. The entire amount of bill is not paid to the company. The Company gets only the present worth of the amount of bill, the difference between the face value of the bill and the amount of assistance being in the form of discount charges. On maturity, bank collects the full amount of bill from the customer. While granting this facility to the company, the bank inevitably satisfies itself about the credit worthiness of the customer. A fixed limit is stipulated in case of the company, beyond which the bills are not purchased or discounted by the bank. e. Working Capital Term Loans: -To meet the working capital needs of the company, banks may grant the working capital term loans for a period of 3 to 7 years, payable in yearly or half yearly installments. f. Packing Credit: -This type of assistance may be considered by the bank to take care of specific needs of the company when it receives some export order. Packing credit is a facility given by the bank to enable the company to buy the goods to be exported. If the company holds a confirmed export order placed by the overseas buyer or a letter of credit in its favor, it can approach the bank for packing credit facility.

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WORKING CAPITAL FINANCE EXPLAINED

A manufacturing concern needs finance not only for acquisition of fixed assets but also for its day-to-day operations. It has to obtain raw materials for processing, pay wage bills and other manufacturing expenses, store finished goods for marketing and grant credit to the customers. It may have to pass through the following stages to complete its operating cycle.
CASH

DEBTORS

RAW MATERIAL

SALES

WORK IN PROCESS FINISHED GOODS

I. II. III. IV. V.

Conversion of cash into raw materials raw material procured on credit, cash may have to be paid after a certain period. Conversion of raw materials into stock in process. Conversion of stock in process into finished goods. Conversion of finished goods into receivables/debtors or cash. Conversion of receivables/debtors into cash.

A non-manufacturing trading concern may not require raw material for their processing, but it also needs finance for storing goods and providing credit to its customers. Similarly a concern engaged in providing services, it may not have to keep inventories but it may have to provide credit facility to its customers. Thus all enterprises engaged in manufacturing or trading or providing services require finance for their day-to-day operations, the amount required to finance day-to-day operation is called working capital and the assets and liabilities are created during the operating cycle are called current assets and current liabilities. The total of all the current assets is called gross working capital and the excess of current assets over current liabilities is called net working capital. When entrepreneurs for financing working capital requirements approach the banks, the bank has to examine the viability of the project before agreeing to provide working capital for it. Financial institutions and bank while providing term loan finance to unit for

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acquisition of fixed assets does a detailed viability study. They have to ensure that the project will generate sufficient return on the resources invested in it. The viability of a project depends on technical feasibility, marketability of the products, at a profitable price, availability of financial resources in time and proper management of the unit. In brief the project should satisfy the tests of technical, commercial, financial and managerial feasibility. Proper co-ordination amongst banks and financial institution is necessary to judge the viability of a project and to provide working capital at appropriate time without any delay. If a unit approaches banks only for working capital requirement and no viability study has been done earlier which is done at the time of providing term loans, a detailed viability study is necessary before agreeing to provide working capital finance. In the view of scarcity of bank credit, its increasing demand from various sectors of economy and its importance in the development of economy, bank should provide working capital finance according to production requirements. Therefore it is necessary to make a proper assessment of total requirement of the working capital, which depends on the nature of the activities of an enterprise and the duration of its operating cycle. It has to be ensured that the unit will have regular supply of raw material to facilitate uninterrupted production. The unit should be able to maintain adequate stock of finished goods for smooth sales operation. The requirement of trade credit, facilities to be given by the unit to its customers should also be assessed on the basis of practice prevailing in the particular industry/trade which assessing above requirements, it should also be ensured that carrying cost of inventories and duration of credit to customers are minimized. After assessing the total requirement of working capital, a part of working capital requirement should be financed for the long term and partly by determining maximum permissible bank finance.

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ASSESSMENT OF WORKING CAPITAL BY THE S.B.I.

TURNOVER METHOD _ Mainly used for small trading companies _ Not appropriate for manufacturing and big trading companies CASH BUDGET SYSTEM _ Mainly used for service sector companies _ Cash inflow Cash outflow = Bank finance in form of WC TONDON COMMITTEE RECOMMENDATIONS _ Out of 3 methods recommended, method II also known as Maximum Permissible Bank Finance (MPBF) is mainly used by the banks for assessment of WC finance

A unit needs working capital funds mainly to carry current assets required for its operations. Proper assessment of funds required for working capital is essential not only in the interest of the concerned unit but also in the national interest to use the scare credit according to production requirements. Inadequate levels of working capital may result in under-utilization of capacity and serious financial difficulties. Similarly excessive levels may lead to unproductive use of credit and unnecessary interest Burdon on the unit. Proper assessment of working capital requirement may be done as under-

I.

Norms for inventory and receivables:

If the bank credit is to be linked with production requirements, it is necessary to assess the requirements on the basis of certain norms. The study group to frame guidelines to follow-up of bank credit (Tandon Study Group) appointed by Reserve Bank of India had suggested the norms for inventory and receivables regarding major industries on the basis of company finance studies made by Reserve Bank process periods in the different industries, discussions with the industry experts and feed-back received on the interim report. The norms suggested by Tandon Study Group are being reviewed from time to time by the Committee of Direction constituted by the Reserve Bank to keep a constant view on working capital requirements. The committee has representatives from a few banks and it generally once in a quarter. It also consults the representatives from industry and trade. It keeps a watch on the various issues relating to working capital requirements and gives various suggestions to suit the changing requirements of the industry and trade. Banks make their own assessment of credit requirements of borrowers based on a total study of borrowers business operations and they can also decide the levels of holding

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each item of inventory as also of receivables which in their view would represent a reasonable built up of current assets for being supported by banks finance. Banks may also consider suitable internal guidelines for accepting the projections made by the borrowers regarding sundry creditors as sundry creditors are taken as a source of financing current assets (inventories, receivables, etc.), it is necessary to project them correctly while calculating need of bank finance for working capital requirements.

II.

Computation of Maximum Permissible Bank Finance (MPBF):

The Tandon Study group had suggested the following alternatives for working out the maximum permissible bank finance:a. Bank can work out the working capital gap. i. e. total current assets less current liabilities other than bank borrowings and finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e. owned funds and term borrowings b. Borrower should provide for a minimum of 25 per cent of total current assets out of long-term funds, i.e. owned funds and long term borrowings. Certain level of credit for purchases and other current liabilities inclusive of bank borrowings will not exceed 75 per cent of current assets. 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.

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The methods of lending may be illustrated by taking the following example of a borrowers financial position, projected as at the end of next year. Current Liabilities Creditors for purchase Other current liabilities Amt Current Assets Amt 380 40 180 including 110

200 Raw materials 100 Stock in process 300 Finished goods

Bank borrowing, including bills discounted with bankers

400 Receivables, bills

discounted with bankers Other current assets 700

30 740

First method Total current assets Less: current liabilities Other than bank borrowings 300 Working capital gap 25% of above from long term Sources 110 440 740

Second method total current assets 740

25% of above from long term sources 185 555 less: current liabilities Other than bank borrowings 300 Maximum permissible bank 255 finance 70 1.17:1 Excess Bank borrowings Current ratio 145 1.33:1

Maximum permissible bank 330 Finance Excess Bank borrowings Current ratio

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It may be observed from the above that in the first method, the borrower has to provide a minimum of 25 per cent 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 per cent 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 requirement.

III.

Classification of current assets & Current liabilities:

In order to calculate net working capital & maximum permissible bank finance, it is necessary to have proper classification of various items of current assets & current liabilities. All illustrative lists of current assets & current liabilities for the purpose of assessments of working capital are furnished below; Current assets: a. Cash and bank balances b. Investments c. Receivables arising out of sales other than deferred receivables (including bills purchased & discounted by bankers) d. Installments by deferred receivables due within one year e. Raw materials & components used in the process of manufactured including those in transit f. Stock in process including semi finished goods g. Finished goods including goods in transit h. Other consumable spares i. Advance payment for tax j. Prepaid expenses k. Advances for purchases of raw materials, components & consumable stores l. Payment to be received from contracted sale of fixed assets during the next 12 months

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Current Liabilities: a. Short-term borrowings (including bills purchased & discounted) from i. Banks and ii. Others b. Unsecured loans c. Public deposits maturing within one year d. Sundry creditors (trade) for raw material & consumer stores & spares e. Interest & other charges accrued but no due for payments f. Advances/progress payments from customers g. Deposits from dealers selling agents, etc. h. Statutory liabilities Provident fund dues Provision for taxation Sales-tax, excise, etc. Obligation towards workers considered as statutory i. Miscellaneous current liabilities Dividends Liabilities for expenses Gratuity payable within one year Any other payments due within one year Notes on classification of Current Assets & Current Liabilities: 1. Investment in shares, debenture, etc. and advances to other firms/companies, not connected with the business of the borrowing firm, should be excluded from current assets. Similarly investment made in units of Unit Trust of India & other mutual funds & in associate companies/subsidiaries, as well as investment made and/or loans extended as inter-corporate deposits should not be included in the build-up of current assets while assessing maximum permissible bank finance. 2. The borrowers are not expected to make the required contribution of 25 per cent from long-term sources in respect of export receivables. Therefore, export receivables may be included in the total current assets for arriving at the maximum permissible bank finance but the minimum stipulated net working capital may be reckoned after excluding the quantum of export receivables from the total current assets. 3. Dead inventory i.e. slow moving or obsolete items should not be classified as current assets. 4. Security deposits/tender deposits given by borrower should be classified as noncurrent assets irrespective of whether they mature within the normal operating cycle of one year or not.

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5. Advances/progress payments from customer should be classified as current liabilities. However, where a part of advances received is required by government regulations to be invested in certain approved securities, the benefit of netting may be allowed to the extent of such investment and the balance may be classified as current liability. 6. Deposits from dealers, selling agents, etc. received by the borrower may treated as term liabilities irrespective of their tenure if such deposits are accepted to be repayable only when the dealership/agency is terminated. The deposits, which do not fulfill the above condition, should be classified as current liabilities. 7. Disputed liabilities in respect of income tax, excise, custom duty and electricity charges need not be treated as current liabilities except to the extent of provided for in the books of the borrower. Where such disputed liabilities are treated as contingent liabilities for period beyond one year, the borrower should be advised to make adequate provision so that he may be in a position to meet the liabilities as & when they accrue. 8. If disputed excise liability has been shown as contingent liability or by way of notes to the balance sheet, it need not be treated as current liability for calculating the permissible bank finance unless it has been collected or provided for in the accounts of borrowers. A certificate from the Statutory Auditors of the borrowers may be obtained regarding the amount collected from the customers in respect of disputed excise liability or provision made in the borrowers accounts. The amount of excise duty payable should be treated as current liability for the purpose of working out the permissible limit of the bank finance strictly on the basis of the certificate from the borrowers Statutory Auditors. The same principle may also be applied for disputed sales tax dues. 9. In case of other statutory dues, dividends, etc., estimated amount payable within one year should be shown as current liabilities even if specific provisions have not been made for their payment. 10. As per the instructions issued by the Reserve Bank in October, 1993, the entire term loan investment falling due for payment in the next twelve months need not be treated as an item of current liabilities for the purpose of arriving at MPBF. However all overdue term loan should be treated as current liabilities unless the loan has been rescheduled by the financial institutions/banks. It may be added that the entire amount of term loan installments payable within the next twelve months which is kept outside the current liabilities while calculating MPBF. Need not be taken into account while computing net working capital (NWC). However the entire amount of term loan installments due within the next twelve months should continue to be treated as current liability for the purpose of calculating the current ratio.

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IV.

Information/Data required for assessment of working capital:

CMA data is a tool used by the bankers to assess the requirement of working capital. It is divided into six parts as follows: Form I Particulars of Existing & Proposed Limits Form II Operating Statement Form III Analysis of Balance Sheet Form IV Comparative Statement of Current Assets & Current Liabilities Form V Computation of Maximum Permissible Bank Finance (MPBF) Form VI Funds Flow Statement

In order to assess the requirements of working capital on the basis of production needs, it is necessary to get the data from the borrowers regarding their past/projected production, sales, cost of production, cost of sales, operating profit, etc. in order to ascertain the financial position of the borrowers & the amount of working capital needs to be financed by banks, it is necessary to call for the data from the borrowers regarding their net worth, long term liabilities, current liabilities, fixed assets, current assets, etc. the Reserve Bank prescribed the forms in 1975 to submit the necessary details regarding the assessment of working capital under its credit authorization scheme. The scheme of credit authorization was changed into credit monitoring arrangement in 1988. The forms used under the credit authorization scheme for submitting necessary information have also been simplified in 1991 for reporting the credit sanctioned by banks above the cut-off point to reserve bank under its scheme of credit monitoring arrangement. As the traders and merchant exporters who do not have manufacturing activities are not required to submit the data regarding raw materials, consumable stores, goods inprocess, power and fuel, etc., a separate set of forms has been designed for traders and merchant exporters. In view of the peculiar nature of leasing and the hire purchase concerns, a separate set of forms has also designed for them. In addition to the information/data in the prescribed forms, bank may also call for additional information required by them depending on the nature of the borrowers activities & their financial position. The data is collected from the borrowers in the following six forms: 1. Particulars of the existing/proposed limits from the banking system (form I) Particulars of the existing credit from the entire banking system as also the term loan facilities availed of from the term lending institutions/banks are furnished in this form. Maximum & minimum utilization of the limits during the last 12 months outstanding balances as on a recent date are also given so that a comparison can be made with the limits now requested & the limits actually utilized during the last 12 months.

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2. Operating Statement (Form II) The data relating to last sales, net sales, cost of raw material, power & fuel, direct labor, depreciation, selling, general expenses, interest, etc. are furnished in this form. It also covers information on operating profit & net profit after deducting total expenditure from total sale proceeds. 3. Analysis of Balance Sheet (Form III) A complete analysis various items of last years balance sheet, current years estimate & following years projections is given, in this form. The details of current liabilities, term liabilities, net worth, current assets, other non-current assets, etc. are given in this form as per the classification accepted by banks. 4. Comparative statement of current assets & current liabilities (Form IV) This form gives the details of various items of current assets and current liabilities as per classification accepted by banks. The figures given in this form should tally with the figures given in the form III where details of all the liabilities & assets are given. In case of inventory, receivables and sundry creditors; the holding/levels are given not only in absolute amount but also in terms of number of month so that a comparative study may be done with prescribed norms/past trends. They are indicated in terms of numbers of months in bracket below their amounts. 5. Computation of Maximum Permissible Bank Finance (Form V) On the basis of details of current assets & liabilities given in form IV, Maximum Permissible Bank Finance is calculated in this form to find out credit limits to be allowed to the borrowers. 6. Fund Flow Statement (Form VI) In this form, fund flow of long term sources & uses is given to indicate whether long term funds are sufficient for meeting the long term requirements. In addition to long term sources and uses, increase/decrease in current assets is also indicated in this form.

V. Check list for verification of the information/data:

Bank should verify not only the arithmetical accuracy of the data furnished by the borrowers but also the logic behind various assumptions based on which the projections have been made. For this purpose, bank officials should hold discussions with the borrowers on projected sales, level of operations, level of inventory, receivables, etc. if

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necessary, a visit to the factory may also be made to have a clear idea of products and processes. ASSESSEMENT OF OTHER LIMITS LETTER OF CREDIT The banker examines the proposal of the letter of credit from two angles: o The cases where letter of credit is required once only o The cases where letter of credit is required once regularly. In the second category it is convenient for the banker to fix the separate limit of the letter of credit. ASSESSEMENT OF THE LIMITS UNDER LETTER OF CREDIT-WITH LEAD TIME The buyer does not receive the goods immediately on the placement of the order on the seller. There is always long time log between the order placement and the receipt of the material. This period is also referred to as the lead-time. Example: If it is assumed that the total raw material requirement is Rs.240lacs per annum and the normal lead time is 2 months, the buyer will be required to place order so that he has at least 2 months stock (ignoring safely level). Thus, the total number of order placed would be 6 per year and the value of per order would be Rs.40 Lacs. This is shown below Assessment of the limits under LC- with lead-time Annual requirement of raw material Normal lead time Value per order (A) Margin for customer @20%(B) Limits under letter of credit (A-B) 240 Lacs 2 months 240/6=Rs.40 Lacs Rs 8 Lacs Rs 32 Lacs

Assessment of the limits under letter of credit-without lead-time Annual requirement of raw material Monthly requirement of raw material 240 lacs 240/12 months =20 lacs

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Normal inventory level Value per order (A) Margin for customer @ 20% (B) Limits under letter of credit (A-B) BANK GUARANTEES

(1 month) Rs 20 lacs Rs 20 lacs Rs 4 lacs Rs 16 lacs

There is no standard formula for assessment of bank guarantee limit. The details pertaining to nature of guarantees, particulars of the contract, period for which the guarantee is sought and the amount of guarantee to be obtained, this information along with the view on the creditworthiness of the borrower and relationship with the bank comprise the major input towards deciding the sanction of limits required by borrower. Appropriate conditions regarding cash margin and securities have to be laid down to protect the interest of the bank.

PROCEDURE FOR WORKING CAPITAL FINANCE

Credit sanction Process 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 and 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. PRE SANCTION PROCESS: 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: -

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Audited balance sheets and profit and loss accounts for the previous three year (incase 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 company. 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. 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 buildup of inventory / receivables / other current assets and bank borrowing patterns. 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

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 Capital market perception. POST SANCTION PROCESS 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

CREDIT MONITORING ARRANGEMENT 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 system. 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; years estimate and following years projection are given in this form.

current

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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 whether they are sufficient to meet the borrowers long term requirements. CREDIT RATING MODEL The various risk faced by any company may be broadly classified as follows: 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. DRAWING POWER OF THE BORROWER 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 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. Suppose, the borrower needs to hold an inventory level of say 130 lacs in order to enjoy Rs 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 %

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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) Drawing power of borrower Inventory level (Actual) Margin prescribed by bank Drawing power of borrower Suppose, the borrower holds Inventory level (required) Drawing power of borrower Inventory level (actual) Margin prescribed by bank Drawing power of borrower Rs 130 lacs Rs 100 lacs Rs 110 lacs 25 % 110-(0.25 110) = Rs 82.5 lacs Rs 150 lacs of inventory, Rs 150 lacs Rs 100 lacs Rs 150 lacs 25 % 150 (0.25 150) = 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. SECURITY 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

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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. BANKING ARRANGEMENTS Working capital is made available to the borrower under the following arrangements; CONSORTIUM BANKING ARRANGEMENT: 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 limits. Lead bank undertakes the joint documentation on behalf of all member banks. Lead bank organizes collection and dissemination of information regarding conduct of account by borrower.

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MULTIPLE BANKING ARRANGEMENT 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 arrangements. 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 borrower. Banks, independent of each other, do documentation, monitoring and conduct of the Account Borrowers deals with all financing banks individually. SYNDICATION 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. REGULATION OF BANK FINANCE INTRODUCTION 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 very complex. The banks role has shifted from trade financing to industrial financing during this period.

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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.

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ANALYSIS AND INTERPRETATION OF THE ASSESSED DATA CASE STUDY

Comparative Balance Sheet and Performance / Financial Indicators: Abridged Balance sheet

(Rs in lacs)
Liabilities 31.03.04 Audited Capital 17.53 Reserves 17.53 NW TL 12.43 Unsec Ln TL from BOM TL(car) Scred Bk Borr OCL TCL 31.03.05 31.03.06 Assets Audited Prov. 18.41 84.84 FA Depr. 18.41 84.84 Net Block 15.98 2.98 Cash & Bank RM 2.46 81.46 WIP 1.88 13.08 0.15 13.23 0.38 15.00 15.00 FG Rec- Dom Export OCA TCA Inv Tot NCA Acc Loss Tot .Intang Ass. Tot Ass 31.03.2004 17.53 17.53 31.03.04 Audited 23.15 5.85 17.30 1.47 31.03.05 Audited 26.64 6.38 20.26 0.84 31.03.06 Prov. 150.73 21.42 129.31 2.51

1.76 9.11 0.09 9.20

12.77 8.18 1.19 23.61

16.53 12.01 2.32 31.70

15.00 35.13 2.71 55.35

Tot Liab

40.91

51.96

184.66

40.91 31.03.05 18.41 18.41

51.96

184.66

* Net Worth Less: Revaluation Reserves Less: Intangible Assets Tangible Net Worth

31.03.06 84.84 84.84

PERFORMANCE / KEY FINANCIAL INDICATORS: (Rs in Lacs) Particulars Net Sales % Increase / Decrease Net Profit After Tax % to Net Sales Cash Accruals TNW excl Revaluation Reserve TOL / TNW Ratio NWC Current Ratio 31.03.04 56.11 71.1% 0.57 1.01% 6.42 17.53 1.33 14.41 2.57 31.03.05 95.70 70.55% 0.89 0.93% 7.28 18.41 1.82 18.47 2.40 31.03.06 180.00 88% 8.62 4.79% 30.04 84.84 1.18 40.35 3.69

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IMPORTANT FINANCIAL RATIOS

KEY RATIO LEVELS
PARTICULARS Current Ratio TOL/TNW Interest Coverage PAT/SALES% Inventory (No. of days) Debtors (No. of days) Debt Equity Ratio DSCR (For TL) LOW RISK > 1.40 < 2.00 > 3.50 > 10.00 < 60 < 45 < 1.25 > 2.00 MEDIUM RISK 1.20 - 1.40 2.00 - 3.50 2.00 - 3.50 4.00 - 10.00 60 90 45 - 90 1.25 - 1.75 1.25 - 2.00 HIGH RISK < 1.20 < 3.50 < 2.00 < 4.00 > 90 > 90 > 1.75 < 1.25

CURRENT RATIO=CURRENT ASSET/ CURRENT LIABITIES The CR helps to measure liquidity and financial strength. The CR gives the indication of availability of current assets to pay the current liabilities. While considering CR the higher the ratio betters the liquidity position. Generally it should be at least 1.33. LEVERAGE TOL / TNW = TOL / TANGIABLE NET WORTH Indicate size of stakes, stability and degree of solvency. Indicates how high the stake of the creditors is. Indicate what proportion of the company finance is represented by the tangible net worth. The lower the ratio, greater is the solvency. Anything over 5 should be viewed with concern. The ratio should be studied at the peak level of operations. OPERATING PROFIT RATIO=OPERATING PROFIT/NET SALES x100 This ratio indicates operating efficiency. Indication of net margin of profit available on Rs. 100 sales. Trend for company over a period should be encouraging. DSCR (DEBT SERVICE COVERAGE RATIO)=DEPRICIATION+INTREST ON TERM LOAN/ INTREST ON TERM LOAN+INSTALLMENT OF TERM LOAN It indicates the number of times total debt service obligation consisting of interest and repayment of the principal in installment is covered by the total fund available after taxes. With the help of this ratio (popularly known as DSCR), we can find out whether the loan taken for acquisition of fixed assets can be rapid conveniently. This ratio of 1.5 to 2 considered adequate. We have already touched upon depreciation as non cash expenditure and since the funds are available with the enterprise to that extent. It is in order to ask for this sum in reduction of loan.

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INTEREST COVERAGE RATIO=EARNINGS BEFORE TERM LOAN AND TAXATION / INTEREST ON TERM LOAN The ratio indicates adequacy of profit to cover interest. Higher the ratio more is the security to the lender.

Assessment
1. Sales: As partners have been engaged in marketing the new technology to various users for the initial 2/3 years vigorously and their efforts are started yielding results. During the year 2005 the firm has obtained approval from BHEL, NTPC, and HAL for use of its products DSC & ESC. Agreement with NTPC through BHEL (Haridwar) is exclusive supply (not to any other companies) for annual turnover of Rs. 250.00 Lacs. The orders are of repetitive nature. Besides BHEL (Hydrabad) have also started placing sample orders. The firm has also been able to secure orders from HAL (Koraptut) for DSC & ESC. During the year up to Nov05 the firm has already done sale of Rs. 100.00 lacs besides the job work. Orders worth Rs. 150.00 lacs from BHEL (Haridwar) are on hand scheduled to be completed before March06. Completion of this of these orders will enable the firm to achieve a sale of Rs. 250.00 lacs by this year end. This is acceptable. 2. Profit: Hitherto the net profit in terms of sales has been about 1.00%. Against this backdrop the estimated profitability of 4.79% in the current appears unreasonable. During discussion it is clarified that as the firm has shifted its focus from mare job work to direct selling the margin will be high. In fact it has set up its own machining plant and has secured approval from BHEL for the Quality of its own materials. It used to pay for job works to other companies/firms for the machining purpose. This payment was to the tune of 25% (app.) of the job work revenue. For the year 2005 as the job work is being done in-house the expenses are estimated to be hardly 5%. Besides, margin of direct selling of its materials is better. Moreover with increased sales the marginal revenue would be proportionately high adding to the increased yield. In view of the above factors we may accept the profitability estimates made by the firm. In the coming 7 years the firm has estimated profitability ranging from 8.5% to 12.5%. This appears to be on the higher side. As the sales are estimated to stabilize at Rs. 312.00 lacs we may accept the profitability of 4.79% as acceptable for the year 2005. Accordingly the net profit for the 2nd year would be Rs. 13.70 lacs and then Rs. 14.95 lacs p. a. 3. Cash Accrual: With addition to fixed assets the depreciation shall be high. Thus with accepted profitability the accrual would be Rs. 30.00 lacs for the year 2005 followed by

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Rs. 32.03 lacs, Rs. 30.62 lacs respectively. The position is acceptable. 4. TNW: Up to 2004-05 the TNW has been increasing with retention of profits. In the year 2005 for the expansion plan the partner have agreed in bring in additional capital of Rs. 46.00 lacs, Remaining Rs 20.00 lacs from internal accrual. We have discussed the issue of infusion of capital by partners. It is informed that depending upon the advice of their auditors they would be either increasing the amount of individual capital and/or brings in unsecured loans from friends/relatives to be converted to capital over a period of time. Since the existing work is being carried out from their own sources the branch is advised to obtain a CAs certificate certifying the amount investing that will be considered as their contribution. Since the cash accrual for the year 2005 is accepted at Rs. 30.00 lacs the remaining contribution of Rs. 20.00 lacs from partners appears reasonable. 5. TOL/TNW: The ratio has been below 2.00 up to 31.03.05 and with proposed capital infusion the same is estimated to be about 1.18 which is acceptable being well within benchmark level. 6. NWC & C. R.: Both the parameters have been well above their respective benchmark levels and are estimated to improve further over the existing levels. It may be mentioned that even though the firm is increasing its production capacity and consequently sales it has not requested any additional working capital. During discussion it is gathered that with direct selling the payment term would be 90 % against supply of materials which would improve its cash flow and hence there will not be additional requirement of working capital. However the partners have informed that after the expansion is completed in March 06 they may approach us for additional working if required at that point of time. Thus the overall financial position of the firm is satisfactory. Assessment of present proposal OF Working capital assessment: A. Comments on: i. Sales projections: As partners have been engaged in marketing the new technology to various users for the initial 2/3 years vigorously and their efforts are started yielding results. During the year 2005 the firm has obtained approval from BHEL, NTPC, and HAL for use of its products DSC & ESC. Agreement with NTPC through BHEL (Haridwar) is exclusive supply (not to any other companies) for annual turnover of Rs. 250.00 Lacs.

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The orders are of repetitive nature. Besides BHEL (Hydrabad) have also started placing sample orders. The firm has also been able to secure orders from HAL (Koraptut) for DSC & ESC. During the year up to Nov05 the firm has already done sale of Rs. 100.00 lacs besides the job work. Orders worth Rs. 150.00 lacs from BHEL (Haridwar) are on hand scheduled to be completed before March06. Completion of this of these orders will enable the firm to achieve a sale of Rs. 250.00 lacs by this year end. This is acceptable. ii. Inventory & receivables: Except the receivables the firm has estimated other current asset as per past trend and hence acceptable. The holding level of receivables has been 1.5 month to 1.75 months sales. For the current year it has estimated the same to be 2.33 months. It is clarified that as the firm would be executing Rs 150.00 lacs worth of orders from BHEL in next 4 months ( At least Rs 80.00 lacs as accepted by us) there will be concentration of debtors at the year end. Hence the estimates appear reasonable. Creditors have been nil and are estimated to be nil too. Against this background PBF is calculated as under. B. Working of MPBF: WORKING OF MAXIMUM PERMISSIBLE BANK FINANCE: (Rs in lacs).

Particulars

31.03.04 31.03.05 31.03.06 Audited 23.61 0.09 23.52 5.90 14.41 17.62 9.11 9.11 Audited 31.70 0.15 31.55 7.93 18.47 23.62 13.08 13.08 Projected 55.35 55.35 13.84 40.35 41.51 15.00 15.00 -

a. Total current assets b. OCL Excl. short term BB c. Working Capital Gap(a-b) d. Min. Stipulated NWC (25% of TCA) e. Actual/Projected NWC f. Item c-d g. Item c-e h. MPBF i. excess borrowings if any

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