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TANDON, CHORE, KANNAN AND CERTAIN OTHER COMMITTEES RECOMMENDATION

Financing of working capital had always been an exclusive domain of commercial banks. Too much emphasis on security by the banks directed the flow of credit to affluent section of society with the result that economic resources of the country were concentrated in a few hands. Projects promoted by technically qualified entrepreneurs with no tangible security to offer found it difficult to raise finance for the working capital required by them from banks. With the nationalisation of the banks an entirely new breed of entrepreneurs made a demand on bank credit. Small sector and other segments of priority sector were to be the major beneficiary of nationalisation and were preferred claimants of credit. This resulted in an unexpected demand on lendable funds of banks and naturally called for a reform in the policies of banks to orient them to the new developmental role assigned to the banking industry.

Another important factor which called for reforms was the inbuilt weakness in the cash credit system linked with emphasis on security. The limits were directly fixed on the basis of security available in the account which in many cases resulted in double finance. Banks also had no control over the level of advances at any particular time. It was not related to how much a bank can lend at a particular time but was linked to the decision of the borrower to borrow at that time. A major part of credit limits sanctioned by the bank remained unutilised and there was a strong tendency within the banks to oversell the credit. It was noted as at the end of June, 1974 that total limits sanctioned by the banking industry was far in excess of its total deposits. Bank could afford this overselling as 43% of the limits sanctioned by them remained unutilised. Any unexpected demand within the sanctioned limits could prove disastrous and had the capacity to put the entire banking industry out of gear. The fear was proved true in late 1973 when a sudden demand on bank credit was made due to unprecedented rate of inflation and the banks had to arbitrarily freeze the credit limits of their borrowers.

In view of such a situation obtaining at that time, Reserve Bank of India constituted a 'Study Group' with Shri Prakash Tandon as Chairman in July, 1974 to frame necessary guidelines on bank credit with the following terms of reference :

To suggest guidelines for commercial banks to follow up and supervise credit from the point of view of ensuring proper end-use of funds and keeping a watch on the safety of the advances and to suggest the type of operational data and other information that may be obtained by banks periodically from such borrowers and by the, Reserve Bank of India from the lending banks,

To make recommendations for obtaining periodical forecasts from borrowers of (a) business/production plans, and (b) credit needs,

To make suggestions for prescribing inventory norms for different industries both in the private and public sectors and indicate the broad criteria for deviating from these norms, To suggest criteria regarding satisfactory capital structure and sound financial basis in relation to borrowings, To make recommendations regarding the sources for financing the minimum working capital requirements, To make recommendations as to whether the existing pattern of financing working capital requirements of cash credit/overdraft system etc., requires to be modified, if so, to suggest suitable modifications, and To make recommendations on any other related matter as the Group may consider relevant to the subject of enquiry or any other allied matter which may be specifically referred to it by the Reserve Bank of India.

Based upon these terms of reference the Group attempted to identify the various constituents of working capital that could be financed by the banks and suggested norms for build up of inventory. Far reaching recommendations on the style of lending and improvement in the present system of Cash Credit were also made. These recommendations were mostly accepted by Reserve Bank and were referred to banks for implementation in late 1975. Many modifications have since been suggested by 'Chore Committee'. Nevertheless the basis of the recommendations of Tandon Committee have been retained. The recommendations of the group related to four important aspects as discussed in the following paragraphs.

Level of Current Assets


Working capital requirement of any unit is directly related to the level of current assets with the unit. As the main emphasis by the banks had been on security, the limits were sanctioned on the basis of the value of inventory held by the unit and no attempt whatsoever was made to assess the requirement of the unit. The Group analysed the inventory build up of various units and classified the inventory as under

Flabby inventory comprising finished goods, raw materials and stores held because of poor working capital management and inefficient distribution. Profit-making inventory representing stocks of raw materials and finished goods held for realising stock profits.

Safety inventory providing for failures in supplies, unexpected spurt in demand etc., in effect, an insurance cover. Normal inventory based on a production plan, lead time of supplies and economic ordering levels. Normal inventories will fluctuate primarily with change in production plan. Normal inventory also includes reasonable factor of safety.

Some excessive inventory may also have to be built up sometimes due to factors beyond the control of management as in case of bunched imports etc. Flabby and profit-making inventory are both non-productive and should be discouraged. Normal inventory includes an element of safety and it should be the endeavour of any management not to hold any excess inventory over its normal requirements. To arrive at this normal level of inventory, 'Tandon Group' suggested norms for 15 different kind of industries covering a major part of all industries in the country and the norms related to

Raw materials Stocks in process/semi-finished goods Finished goods Receivables

which together make for bulk of the current assets of any unit.

Reserve Bank also appointed various "Committees of Direction" to make recommendations regarding any changes to be brought in the norms suggested by the Group. 'Committee of Direction' had also recommended norms for other industries not included in the initial report of the Group. With the passage of time it was felt by trade and industry that these norms have become outdated and needed immediate review in the changing economic scenario. An In House Group under the chair personship of Ms I.T.Vaz, Executive Director, Reserve Bank of India, was constituted in January 1993 to review the need for continuing with the norms for holding of inventory/ receivables as also allocation of credit to industry by fixing Maximum Permissible Bank Finance (MPBF) based on such norms.

As per the recommendations of the 'In House Group' accepted by Reserve Bank of India, the banks have been given discretion to decide the levels of holding of individual items of inventory and of receivables, which should be supported by bank finance after taking into account the production/processing cycle of an industry as also other relevant factors.

The other factors will include the financial parameters of the borrower. Banks now have the freedom to decide the levels of holding of each item of inventory as also of receivables which would represent a reasonable build up of current assets for being supported by Bank finance. Reserve Bank will not prescribe detailed norms for each item of inventory as also of receivables; but only advise the overall levels of inventory and receivables for different industries for the guidance of the banks to serve as broad indicators. Banks may also frame suitable guidelines for accepting the projections made by borrowers relating to 'Sundry Creditors (Goods)', an item included in 'other current liabilities'. The above guidelines would apply to borrowers enjoying aggregate fund-based working capital limits of Rs. 1 crore. and above from the banking system.

Reserve Bank had advised broad indicators for 17 group of industries which are given in the following pages. Banks are however, now free to fix their own norms, if so desired by them.

BROAD INDICATORS
ANNEXURE I

Industry

Raw Materials including stores and other items used in the process of manufacture) (Months consumption)

Stock -in process (Months cost of production

Finished Goods (Months Cost of Sales)

Receivables (Months Sales)

Overall levels (Months)

1. Chemical Industry Segment/Groups:

1.Drugs & Pharmaceuticals 2.Petro-Chemicals 3.Speciality Chemicals1


4.Inorganic Chemicals (Other than Fertilisers) 5.Essential Oil based Chemical 6.Paints and Varnishes 7.Dyes & Dye Intermediates

2.75

0.75

1.50

1.50

6.50

1.50 1.50

0.50 0.75

1.00 1.50

1.50 2.00

4.50 5.75

2.00 1.50

0.50 0.25

1.00 1.75

2.00 1.50

5.50 5.00

2.25 2.50 (Imported/canalised) 2.25

0.50 1.00

1.50 3.50

2.00 3.50

6.25 7.00

8.Pesticides, weedicides etc.

(Indigenous/noncanalised) 2.75 0.75 4.00 4.00 7.50

2. Cement

i) ii) iii) iv)

Gypsum

2.25

0.50*

2.50

2.50

5.25

Limestone 1.25 Coal Packing Materials 2.00 1.50

3. Paper

Imported:
1) Pulp, water, Paper, Paper Cutting etc. 2) Felts and Wires 6.00 4.00

0.25

1.00 (Combined 2.00

2.00 level: months)

8.25

Indigenous: (i) (a) Bamboo 6.00

Wood, Bagasse Straw etc. (b)Waste Papers, Rags Leads etc


(ii) Chemical (iii) Coal * 2.00 2.00

3.00

(iv) Felts and Wires 3.00

4. Rubber

1. Tyre (other than


Bicycle Tyres)

Combined for imported and Indigenous

2.00

0.50

2.00

2.00

4.50

Additional raw material natural rubber for price support operation

1.25

5.75

during peak season ( Sept.-January)

2. Other Rubber
2.00 Product 3. Bicycle Tyres 1.75 0.50 3.00 3.00 5.25 0.25 1.75 1.75 4.00

5. Glass

2.50

Nil

3.25

3.25

5.75

6. Ceramics

1. Insulators
2. Other Items

3.00 3.00

1.00 0.50

3.50 1.00

3.50 1.00

7.50 5.50

7. Breweries 1. Hops 3.00 0.50 0.75 1.00 5.25

2. Malt, other raw2.00 materials and Packing Material

8. Distilleries @ if the allotment of molasses is on monthly basis, the norms should be suitably reduced, say to one month.

9. Diamond Exporter
3.50 1. DTC Sight Holders

1.00

3.00

7.50

2. Non-DTC Sight
Holders

3.00

1.00

3.00

7.00

10. Food & Food Product 1. Floor Mills 2. Biscuits and


Bakery Products 1.50 0.10 1.50 1.50 3.00 2.00 0.25 2.00 4.00

11. Electronics Industry


5

1. Consumer
Electronics e.g. radio receivers , tape recorders, television sets etc. 2. Communication equipments e.g. telephones, teleprinters, railway signalling equipment etc. 3. Computers including Calculators 6 4. Control instrumentation & electronics e.g. electronic meters, oscilloscopes testers, measuring instruments etc.

Imported Indigenous

4.00 2.00

0.75

2.50

2.50

7.25

Imported Indigenous

4.00 3.00 1.25 3.50 3.50 8.75

1. Components e.g.
resistors, capacitors, connectors, relays etc. 2. Aerospace and defence-e.g. Radars, instrument landing systems, defence communication systems, etc.

Imported Indigenous

4.00 3.00 1.25 4.00 4.00 9.25

Imported Indigenous

4.00 3.00 1.25 3.50 3.50 8.75

Imported Indigenous

4.00 2.00

1.00

2.50

2.50

7.50 5.50

Imported Indigenous

4.00 3.00

1.25

3.50

3.50

8.75 7.75

12. Power Generation Distribution Industries

Coal Fuel Oil 2.00

1.50

2.50

4.50

13. Engineering7
1. Four Wheelers & Commercial vehicles 2. Two Wheelers & Auto Rickshaws Indigenous 3. Agricultural Machinery Ancillary Industries Machinery (other than Electrical Machinery) Electrical Machinery Machine tools Electrical Cables, Wires, etc Steel Tubes, Pipes Nuts, Bolts, Bars, etc. Bearings Others (excl. Heavy Engg. 8 Industries) Bulbs, Fluorescent Tubes and Dry Cell Batteries Storage Indigenous 2.25 0.75 2.50 2.50 5.50 2.25 0.75 2.50 2.50 5.50 Indigenous 2.25 0.75 2.50 2.50 5.50

4.

5.

Indigenous

2.25

0.75

2.50

2.50

5.50

6.

Indigenous

2.75

1.50

3.50

3.50

7.75

7. 8.

Indigenous

2.75

1.25

3.50

3.50

7.50

9.

Indigenous Indigenous

2.75 2.00

1.25 0.75

3.50 2.75

3.50 2.75

7.50 5.50

10. 11.

Indigenous

2.00

0.75

2.50

2.50

5.25

12.

Indigenous

3.00

1.00

3.00

3.00

7.00

13.

Batteries

2.25

0.75

2.50

2.50

5.50

14.

Fans

Imported Indigenous

4.00 2.50

0.50

3.00

3.00

7.50

15. Transformers Imported Indigenous 16. Switchgears Imported Indigenous 17. Consumer Durables Imported & Indigenous 2.50 2.00 3.00 1.00 0.50 Off season During Season 1.50 2.00 8.00 4.00 2.50 7.50 4.00 2.50 1.00 3.00 3.00 8.00

1.50 Imported & Indigenous 2.50 0.50 2.00 6.50

2.50 2.00 0.75 2.50 5.25

14. Fertiliser

1. Nitrogenous
Units near refinery Units away from refinery 1.50 0.75 Negligible 1.75 1.50 4.00 4.75

2. SSP (Single
Super Phoshpate) Units near port area Units away from port 3.00 5.75 2.00 Negligible 1.50 1.25 4.75

3. Complex
Fertilisers Units in port areas 2.00 Units away from port 3.00 areas 6.50 Negligible 2.00 1.50 5.50

15. Leather industry Leather Products 1. Manufactures of finished leather

Indigenous 4.00 Imported

Indigenous 4.00 Imported 6.00

5.00*

5.00*

9.00

11.00

2. Manufactures of leather product like shoe uppers, leather garments and other leather goods using: (i)Finished leather manufactured by them (ii)Finished leather purchased from others

6.00

5.00

5.00

5.00*

5.00*

10.00

3.00

3.00

5.00*

5.00*

8.00

16. Textiles

1. Cotton/ Blended
Textile Mills

i) Raw Cotton

(a) Bombay and 2.00 Ahmedabad


(b) Eastern Region (c) Other than above areas 2.50 3.00

Composite 1.50 Miles

3.00

3.00

7.50

Processing 0.75 Mill for Non-job work & others

2.50

2.50

6.25

ii) Synthetic Fibre/Yarn

1.50

Processing 0.50 Mill for Job work

2.25

2.25

4.75

iii) Cloth (For processing

0.50

mills and composite mills using grey cloth as raw material)

iv) Other raw materials

2.00

i) Synthetic Yarn 1.00 2.Silk & Art Silk

Mills

ii) Cloth (For

0.50

Weaving mills 0.50 Processing 0.75

1.50 2.50

1.50 2.50 Composite

4.00 5.00

Processing mills)

Mills (including (including Processing Mills mills Composite Mills & Others) iii) Other material 2.00 Processing/ 0.50 Composite Mills for Job work

& others)

5.00

1.25

3.Woollen Mills

i) Raw material

3.00 4.00 4.00 season: (Off Sept.) April8.25 (Off season)

ii) Rags and Waster 3.00 iii) Synthetic fibre/ 1.00 yarn iv) Other material 2.00

7.25 3.00 3.00 season: 0.50 4. Man-made/ Synthetic fibre 1.50 Oct. 4.00 2.00 (Busy Mar.) (Busy season)

5. Jute Textiles
2.50

0.33

2.00 5.83

1.50 1.00 (for

domestic sales) 1.50(for exports)

17. Vegetable and Hydrogenated Oil Industry i) Oil Mills 4 weeks ii) Solvent 6 weeks 4 days 6 Weeks (for oil) 6 Weeks (for oil) 14 Weeks 8 days 8 Weeks (for deoiled cakes) iii) Vanaspati and refining units 8 Weeks (for deoiled cakes) 12 Weeks 8 days 6 weeks 8 days 4 Weeks 4 Weeks 12 Weeks 4 days 2 days 4 Weeks 4 Weeks 8 Weeks 2 days

iv) Composite Units (Expellers/Solvent Extraction and refining and/or vanaspati)

10 Weeks 8 days

6 weeks

8 days (only if vanaspati is manufactured)

4 Weeks (for oil)

4 Weeks (for oil) 14 Weeks 8 days

8 Weeks (for deoiled cakes)

8 Weeks (for deoiled cakes)

Notes:
1. Overall level for holding of inventory and receivables for each industry does not include holding level of spares the norm for which has been fixed at 9 months consumption level for indigenous spares and 12 months consumption level for imported spares, unless otherwise indicated. 2. The overall level has been arrived at by taking into account the levels of various components of inventory & receivables from the stage of procurement of raw materials till sale of finished goods. In respect of industries consuming different raw materials (e.g. paper ,cement etc.) the overall level has been indicated by taking the maximum of the holding period level for different raw material. 3. Normlevels have been indicated in months in decimal system in respect of all industries excepting Vegetables and Hydrogenated Oil Industry which continue to be shown in weeks

Spl. Provisions for manufacturers of writing instruments : At the time of commencement of operations of a unit automatic plastic injection moulds, are to be treated as fixed assets to be funded out of project i.e. during the operating cycle for a unit/company. If these are required to be replaced, the cost of replacement may be supported by way of working capital credit by treating them as a part of current assets.

The various components of working capital as suggested by the Group have already been assessed by us in the last chapter. However, while computing the requirement of current assets by the unit, we had permitted all inventories on the basis of average holding by the unit as derived from its past performance. Let us now consider that bank will permit level of holding as per broad indicators suggested by Reserve Bank of India and work out the requirements of the borrower. Let us further take that unit as an Engineering unit manufacturing consumer durables. The broad indicators for such units are given below

Raw materials Stocks-in-Process Finished goods and receivables

2 months 0.75 months 2.50 months

On this basis the permitted level of inventory will be calculated as under: 2 months requirement of raw materials = 2 x 290.58 = Rs. 581,16 lacs

0.75 months of stock-in-process = 0.75 x 4326.1 12 = Rs. 270.38 lacs

But the unit is working with average stocks-in-process of 2.68 weeks and will be permitted to hold the inventory level upto that value only.

Thus stocks in process

= Rs. 222.96 lacs.

2.50 months finished goods and receivables = Rs. 2.5 x 5315.82 12 = Rs. 1107.46 Lacs We may also permit stores and spares upto Rs. 10.00 lacs.

The total working capital will now be worked out as under:

On average basis application

After

of broad indicators

Raw Materials

610.22

581.16

Stores Stocks-in-process Finished goods Bills receivables/debtors

10.00 222.96 478.05 812.56 _______ Total Rs. lacs 2133.79

10.00 222.96 1107.46

________ Rs. 1921.58

_______

________

The excess level of inventory and receivables projected by the unit is thus Rs. 2133.79 - Rs. 1921.58 = Rs. 212.21 lacs. As per the broad indicators the unit should be allowed to hold inventory and receivables upto Rs. 1921.58 lacs only and the unit must make efforts to reduce its holding.

Approach to Lending
The second aspect of the recommendations of the Group related to approach to lending. It was stipulated that the unit should finance a part of ' its current assets from owned funds and term liabilities. It prescribed a minimum margin of 25% to be brought in by the unit from its owned funds and long-term liabilities and suggested 3 different methods of lending to arrive at the contribution of the borrower in the above manner. The three methods of lending as suggested by the Group were as under:

Method I.

The borrower should bring in 25% of the net working capital (current assets-current liabilities excluding bank borrowing) from its owned and long-term liabilities. The borrower should finance 25% of all current assets from owned funds and long-term liabilities and the balance he financed by the bank. The hard core current assets i.e., the current assets which are permanently required by the unit for its functioning must be exclusively financed by the borrower. The borrower should also provide 25% of the remaining current assets and only the balance will be financed by the bank.

Method II.

Method III.

Let us now consider the following example to illustrate the application of all the above three methods:

Current liabilities

Current Assets

Creditors for purchase 300 Other current liabilities 100 Bank borrowings 150

200

Raw material

80

Stocks in process

400

Finished Goods

Receivables and book debts 100 Other Current assets 50 680 700

In this example Total Current Assets (TCA) = Rs. 700 lacs Other current liabilities (OCL) = Rs. 280 lacs (Excluding bank borrowings)

Lending under Method I


Total current assets Less: Other current liabilities 700 280

Working capital gap 25% of the above as margin from long-term sources Maximum permissible bank finance (M.P.B.F.) Excess borrowings

420 105 315 85

Method II
Total current assets Less: 25% of above as margin from long-term sources 700 175 525 Less : Other current liabilities Maximum permissible bank finance (MPBF) Excess borrowings 280 245 155

Method III
Total current assets Less : Core current assets (assumed figure) from long-term sources Balance current assets Less : 25% of above from long-term sources 700 160 540 135 405 Less : Other current liabilities Maximum Permissible Bank Finance (MPBF) Excess borrowings 280 125 275

It would he noticed from above that contribution from long-term sources is to be n Progressively increased as we move from 1st method of lending to the 3rd method of lending and the ideal set up the group was to bring all the borrowers to 3rd method in a phased manner. All the existing and new borrowers were to conform to 1st method to start with. Due to various difficulties in assessing the core assets, the 3rd method of lending had been discarded and as per recommendations of 'Chore Committee' (discussed in later part of this chapter) all the borrowers have now

to conform to 2nd method of tending. It would also be noticed that 1st method corresponds to a minimum current ratio of 1. 17:1 while the 2nd method ensures a minimum current ratio of 1.33 :1

As a first step now the existing units have to adjust the excess borrowings by bringing in additional capital or arranging the funds from long-term sources. However, keeping in view the difficulties which the existing borrowers would have faced due to this sudden change, it was proposed that a separate 'working capital loan' representing excess borrowing may he granted to such units. The repayment of the loan may be fixed according to cash generating capacity of the unit but in any case the repayment should not go beyond five years. By proposing this temporary adjustment the long-term sources of the unit were strengthened and at the same time it was also ensured that contribution from borrower was brought to desirable level in a phased manner.

On the basis of above discussion we shall now attempt to work out the working capital limits of our exercise as given in tile last chapter. We have by now calculated as under :

The projected level of inventories as per the past records

Rs. 2133.79

The maximum level of inventories and receivables as per the broad indicators suggested by Reserve Bank & accepted by the bankers Rs. 1921.58 Projected level of creditors for purchase Working capital limits already availed (Presumed at the same level) Other current assets Other current liabilities Rs. 35.84 Rs. 190.66 Rs. 434.33 Rs. 1323.76

The current assets and liabilities may now be arranged as under:

Liabilities

Assets

I*

II**

Creditors for purchase 434.33

Inventories

1921.58

2133.79

Other current liabilities 190.66

Other current

35.84

35.84

Total Current liabilities other than bank borrowings 624.99 1957.42 2169.63

Calculation of Working Capital Requirements under Method I


I (i) (ii) Total current assets Total current liabilities excluding banking Borrowings (iii) (iv) Working capital gap Minimum required margin being 25% of Working Capital gap i.e. of (iii) (v) Actual/Projected Networking Capital (vi) (vii) (viii) (iii) - (iv) (iii) - (v) Maximum permissible bank finance (minimum of vi or vii) (ix) Excess bank borrowings 132.13 999.32 185.18 1158.48 200.98 200.98 999.321158.48 1131.45 1343.66 333.11 386.16 624.99 624.99 1332.43 1544.64 1957.42 II 2169.63

Calculation of Working Capital Requirements under Method II I


(i) (ii) Total current assets Total current liabilities other than bank borrowings (iii) (iii) Working capital gap Minimum required margin being 25% of total current assets i.e. of (i) (v) (vi) (vii) (viii) Actual/projected net working capital (iii)-(iv) (iii)-(v) Maximum permissible bank finance (minimum of VI or VII) MPBF (ix) Excess bank borrowings 288.38 843.07 341.42 1002.24 1131.45 489.36 200.98 843.07 1343.66 542.40 200.98 1002.24 624.99 624.99 1332.43 1544.64 1957.42

II
2169.63

The margin of 25% under both the methods is the minimum requirement. If a borrower has more liquid surplus, the MPBF will be reduced accordingly. To illustrate this point let us consider the following example

Total current assets Total current liabilities excluding bank borrowings Net working capital MPBF under method II will be calculated as under: (i) Total current assets

1000 200 800

1000

(ii) (iii) (iv) (v) (vi) (vii) (viii) (ix)

Total current liabilities excluding bank borrowings Working capital gap Minimum margin of 25% of total current assets Actual net working capital iii - iv iii-v MPBF (Minimum of vi or vii) Excess bank borrowing

200 800 250 300 550 500 500 -

As per the erstwhile guidelines of Reserve Bank of India, sanction of aggregate fund based working capital limits of Rs. 1 crore and above from the banking system would be subject to the second method of lending so as to ensure maintenance of a minimum current ratio of 1.33:1. As regards borrowers enjoying aggregate fund based working capital limits of less than Rs. 1 crore from the banking system, a new summary procedure for assessment of working capital requirements had been prescribed. Banks are required to ensure maintenance of minimum margin of 5 per cent of the annual turnover. Under this method, 25 per cent of the output value should be computed as working capital requirement of which at least four fifth i.e. 80% should be provided by the banks and the balance one-fifth i.e. 20% should be by way of promoters contribution towards margin money. Let us illustrate the above method by considering the following example :

(Rs. in lacs) 2002-03 (Actual) Annual turnover Net working capital (Margin for working capital) Total working capital requirements @25% of turnover 80.15 121.25 320.61 25.25 2003-04 (Estimated) 485.00 27.00

Minimum margin to be brought by the borrower (One-fifth or 20% of total working capital requirement or 5% of total turnover) Actual NWC available with unit Working capital (fund based) limits to be sanctioned by bank-80% of total requirement or 20% of turnover

16.03

24.25

25.25 97.00

The bank in this case will sanction total fund based working capital limit of Rs. 97 lacs. It may be noted that assessment of total working capital is to be based on the basis of estimated turnover while the margin is to be taken at actual level. In case actual NWC with the borrower is less than the minimum required, while the full limit as assessed in this method may be sanctioned by the bank, a stipulation to arrange for additional margin may be made by the bank. Or limit in that case may be released in phases depending upon accumulation of profit during the current year so that necessary margin is available with the borrower. This method is generally referred to as 'Turnover Method'.

The actual drawings in the ale will, however, be permitted on the basis of Drawing Power (D.P.) in the account.

It may further be noted that if the borrower needs higher limits than assessed as per turnover method, the bank will be required to assess the working capital requirements by conventional method. The higher of the two limits may be allowed to the borrower and actual disbursement will be regulated through availability of drawing power in the account. In other words the assessment of working capital requirements for credit limit upto Rs. 1.00 crore may be made under the conventional method and as well as under turnover method. Higher of the two will be the maximum permissible bank finance.

The level of credit limits to be assessed by turnover method ' has since been increased to Rs. 2.00 crores for all categories of borrowers and further to Rs. 5.00 crores for SSI units. The banks have further been given discretion to apply this method upto any level of limits not below the limits specified by Reserve Bank of India and frame a suitable policy in this regard.

Withdrawal of instructions relating to MPBF

While announcing 'Monetary and Credit Policy' for the first half of 1997-98, on 15th April, 1997, Reserve Bank of India has withdrawn prescription in regard to assessment of working capital needs based on the concept of maximum permissible bank finance (MPBF) enunciated by 'Tandon Working Group'. Banks have been given freedom to evolve their own system for assessing working capital needs of borrowers.

Important relaxation permitted in calculation of MPBF/Current Ratio of 1.33:1

1.

Treatment of export receivables :

As a measure to give incentives for exports, stipulation of providing margin on export receivable has been waived. As such the minimum margin required will be 25% of total current assets excluding export receivables (as per second method of lending). We shall now calculate MPBF with this relaxation for the sake of bringing clarity : (Rs. in lacs) (i) Total current assets (including export receivables of Rs. 325.26 lacs) (ii) (iii) (iv) Total current liabilities other than bank borrowings Working capital gap Minimum required margin being 25% of total current assets excluding export receivables i.e. 25% of (2169.03-325.26) (v) (vi) (vii) (viii) Actual/projected net working capital (iii) ~ (iv) (iii) - (v) Maximum Permissible Bank Finance (MPBF) (Lower of vi or vii) 461.09 200.98 1083.55 1343.66 1083.55 624.99 1544.64 2169.63

It shall be observed that by allowing the above relaxation MPBF has increased to Rs. 1083.55 lacs as compared to Rs. 1002.24 lacs calculated earlier with this data. The above guideline has since been withdrawn by Reserve Bank of India and the banks are free to frame their own policy in this regard. As exports continue to be a core sector, this relaxation is likely to continue for the time being.

2.

Additional credit needs of exporters arising out of firm orders/confirmed letters of credit (and which am not taken into account while fixing regular credit limits of borrowers) are to be met in full even if sanction of such additional credit limits exceeds MPBF. Borrowing units marketing/trading exclusively (100 per cent) the products and merchandise manufactured by village, tiny and SSI units will be subject to the first method of lending while assessing their MPBF provided dues of the said village, time and SSI units have been settled by such borrowers within a maximum period of 30 days from the date of supply. This relaxation is also available to that portion of marketing business related to the products manufactured by village, tiny and SSI units in respect of cases, where borrowing units also market products manufactured by medium and large industries and/or have manufacturing activity of their own. Credit limits of the borrowing units in the sugar industry may be determined on the basis of a current ratio of 1:1. Sick/Weak units under rehabilitations will be exempted from the applications of 2nd method of tending.

3.

4.

5.

Treatment of bills negotiated under essence letters of credit as receivables :

Receivables arising out of domestic/inland sales by drawing bills of exchange under usance letters of credit and negotiated in accordance with the terms of letters of credit may be shown separately under "Current Assets" for arriving at 'Maximum Permissible Bank Finance (MPBF) and stipulated minimum networking capital maybe reckoned after excluding quantum of such bills.

In other words domestic receivables covered by bills of exchange under usance letters of credit shall be accorded the same treatment as export receivables and no margin on such receivables will have to be brought.

Treatment of term loan Instalments1

Term loan instalments failing due for repayment within the next twelve months are treated as items of current liabilities for assessing the MPBF. As term loan instalments are generally repaid out of cash generated during the year, and treating this as resource from the beginning of the year reduces the quantum of working capital finance, it has, therefore, been decided by the Reserve Bank that such term loan instalments payable within the next twelve months should not be treated as Items of current liabilities for the purpose of arriving at the MPBF. The following changes will thus take place as per this stipulation:

(i) Term loan instalments payable within the next twelve months will not be treated as items of current liabilities. However, all overdue instalments will be treated as current liability unless the loan has been rescheduled by the financial institutions/banks. (ii) Term loan instalments payable within the next twelve months and which would be kept outside the current liabilities, need not be taken into account while computing net working capital (NWC). (iii) The entire amount of term loan instalments due within the next twelve months will continue to be treated as current liabilities for the purpose of calculating current ratio.

The treatment of term loan instalments as above will thus affect only the MPBF and other factors will remain the same. Let us illustrate the effect of this provision and calculate MPBF of the given exercise as under: Rs in lacs (i) Total current assets (including export receivables of Rs. 325.26 lacs) (ii) Total current liabilities other than bank borrowings Less: Non-overdue term loan instalments payable within the next 12 months (Rs. 104.50 - 36.00) 68.50 2169.63 624.99

Current liabilities to be taken for calculations

of MPBF (624.99-68.50) (iii) (iv) Working capital gap Minimum required margin being 25% of total current assets excluding export receivables (v) (vi) (vii) (viii) Actual projected net working capital (iii)-(iv) (iii)-(v) MPBF (lower of vi or vii)

556.49 1613.14

461.09 200.98 1152.05 1412.16 1152.05

MPBF has thus increased to Rs. 1152.05 lacs as compared to Rs. 1083.55 lacs calculated earlier.

STYLE OF CREDIT
The third important aspect of Group's recommendations related to the style of credit. Recommendations in this regard have four basic ingredients as under:
(i) (ii) (iii) (iv) Financing inventories which is already in excess of stipulated norms. Treatment to be given to borrowings in excess of maximum permissible bank finance. New structure of cash credit facility. Financing the sales receivables. Financing Inventories in Excess of Stipulated Norms/broad indicators accepted by the banks

The banks would not normally extend any credit facilities against inventories in excess of norms and the units might be granted a short time say 2 months to 6 months to liquidate those excess stocks. This will result in the unit holding inventories as per the broad indicators accepted by the banks.
Treatment to be given to the excess borrowings

All units would first of all be brought to conform to first method of lending. However, no slip back would be permitted if any unit is already on the 2nd method. The unit is progressively to be moved from 1st method to 2nd method.

The borrowings in excess of the permitted bank finance should normally be adjusted by the unit by arranging funds from long-term sources by way of additional capital etc. In cases where it is not possible for the unit to arrange for funds for liquidating the excess borrowings, the bank may consider to amortise these dues by granting a short-term working capital loan. The repayment of working capital loan may be fixed according to the cash generating and capital raising capacity of the unit. To induce the units for early adjustment of working capital loan, it was suggested that a higher interest may be charged on the loan component as compared to the interest on normal working capital limits.

The units were required to bring in matching funds from their long-term sources at the time of enhancement in their working capital limits.

New Structure of Cash Credit Facility

Cash credit limit is considered a short-term facility payable on demand. But in practice it is rarely so. A part of facility, being the minimum requirement at all times, is used almost permanently. It was, therefore, suggested that this part representing permanent requirement of the unit may be sanctioned as a loan and the balance amount of limit may be permitted as cash credit facility. The total cash credit facility is thus to be bifurcated in two parts - a loan component representing fixed requirement and running account facility representing the fluctuating requirement of the unit. It was further provided that the loan component may be charged a rate of interest which is lower by 1 % than that charged on the fluctuating component. This provision was considered necessary to induce the borrowers to have proper financial planning to envisage the level of borrowing for their fixed requirements. This aspect has not been strictly implemented so far and has finally been dropped. A new system of bifurcation of MPBF into cash credit component and loan component has been introduced w.e.f. April, 95.

Financing the Sales Receivables


It was suggested that the sales may be financed through the medium of bills instead of granting running limits against debtors. Monitoring of credit facilities granted as purchase/discount of bills is far easier and the seller is also aware of the due date for realisation of his dues which is not possible in case of finance against book debts.

The Group further suggested that banks should endeavour to grant credit facilities to the purchasers as far as possible and seller should be paid immediately after sale. This type of financing can also be arranged through the medium of bills and is popularly known as 'Drawee Bill Scheme. The seller will be paid immediately on presentation of the bill and the liability against these bills will be on account of the buyer as part of his working capital limits. On due date the bills will be paid to the bank by the buyer. This mechanism was considered better as it not only ensures end use of funds but also imposes a discipline in respect of payments for purchases. The Group, however, did not give any specific recommendations in the matter and left it to concerned banks for implementation of the scheme.

New Information System

Under the cash credit system the borrower can draw up to the sanctioned limit at his own option subject to the availability of drawing power. The limit is generally fixed for a period of one year. The Group recommended fixation of quarterly operative limits on the basis of quarterly budget and performance data to be furnished by the borrower every quarter. These quarterly operative statements and funds flow statements were parts of the annual projected operating plan submitted at the time of sanction. Actual drawings within the sanctioned limit were to be determined on the basis of inflow and outflow of funds as per quarterly operating statements. The Group prescribed standard preformae for submission of the quarterly data and thus introduced a new information system and brought in the new concept of operating limits is now will established though the underlying proformae have been suitably modified subsequently.

It is important to note that recommendations of the 'Group' formed the basis of first ever attempt to fix and operate credit limits on a scientific basis. Most of the recommendations of the 'Group' were accepted and implemented by Reserve Bank of India. Many modifications/changes have also since been accepted but the basic -format of lending as suggested by the 'Group' has remained intact.

Chore Committee
The quality of lending improved considerably but the cash credit system continued to pose few difficulties. Bifurcation of working capital limit in two parts as demand loan and a fluctuating cash credit component, as suggested by Tandon Group, was not done by many banks. It was, therefore, considered necessary by Reserve Bank to review the system of cash credit in all its aspects and for this purpose a 'Working Group' headed by Sh. K. B. Chore was appointed in 1979. The terms of reference to the 'Group' were as follows:

To review the operation of cash credit system in recent years, particularly with reference to the gap between sanctioned credit limits and the extent of their utilisation; In the light of the review, to suggest: (a) modifications in the system with a view to making the system more amenable to rational management of funds by commercial banks, and/or (b) alternative types of credit facilities, which would ensure greater credit discipline and also enable banks to relate credit limits to increases in output or other productive activities, and

To make recommendations on any other related matter as the 'Group' may consider germane to the subject.

The 'Group' gave its recommendations in 1979. Important recommendations which are accepted by Reserve Bank and have a direct bearing on credit limits of the borrowers are discussed below.

No Structural Change-Continuation of Cash Credit, Loan and Bills Facilities

No structural changes in the lending system are considered necessary and working capital credit limits are to be sanctioned as a combination of cash credit, loans and bills facilities as hitherto. However, a directional change is necessary and the cash credit limit is to be supplemented by loan and bill facility, wherever possible.

Review of Borrowal Accounts


All borrowal accounts enjoying total working capital credit limits of Rs.10 lacs and above from the entire banking system must be reviewed at least once in a year. The review is necessary not only to ensure the continued viability of the borrower but also to assess the need based requirement for credit limits.

Bifurcation of Cash Credit Limit


The scheme of bifurcating the cash credit limit in two parts as demand loan and variable cash credit portion as recommended by 'Tandon Group' and accepted by Reserve Bank is scrapped as it did not find any acceptance either at borrower's level or at bank's level. The scheme was basically suggested to enable the banks to have proper credit planning. The objective is now desired to be achieved by streamlining and strengthening the information system.

All borrowers enjoying working capital credit limits of Rs.100 lacs and above from the entire banking system are now required to submit the following statements indicating in advance at the commencement of each quarter the requirements of funds during that quarter:

Estimates for the ensuing quarter: This statement is to be submitted in Form 1 in the week preceding the commencement of the quarter to which the statement relates. It gives the level of current assets and current liabilities as are estimated for the ensuing quarter on the basis of which operating limits will be fixed by the banks. The discipline on the borrowers will be exercised on the strength of this operating statement. As from April 1991, the Performa of this form has been revised. Separate proformae have since been prescribed for traders/merchant exporters and manufacturers (Appendix 16.1 & 16.11).

Performance during the previous quarter: This statement is to be submitted in Form 11 (Appendix 16.111 & IV) within 6 weeks from the close of the quarter to which the statement relates. In fact Form I submitted by the borrower for the ensuing quarter is to be followed by Form H after the end of that quarter. Form I gives the estimates whereas Form II gives the actual during the quarter. By making comparisons between these statements the quality of credit planning by the borrower and his efficiency to translate his plans into actual production can be effectively ascertained.

New forms effective from April 1991 have been prescribed by Reserve Bank. Separate proformae for (a) traders and merchant exporters and (b) manufacturers have been given. The revised formats are given as Appendix 16 111 & 16 IV.

Half Yearly Operating and Funds Flow Statements- Form III. The form III has since been bifurcated effective from I st April, 1991 as under Form IIIA -Half yearly operating statement

Form IIIB - Half yearly Funds Flow Statement

These statements are to be submitted within two months from the close of half year to which they relate. Separate proformae have been prescribed for traders/merchant exporters and for manufacturers. For proformae, refer to Appendices 16.V to 16.VIII.

Application of 2nd Method of Lending


The permitted level of inventories with various groups of industries is to be determined as per the system determined by individual banks as per broad indicators accepted by them. However, the borrowers have to enhance their contributions in the working capital and for this purpose all the borrowal accounts with working capital limits of Rs.100 lacs and above from the entire banking system are to be placed under the second method of lending as recommended by 'Tandon Group'. Under the second method the borrowers have to contribute a minimum of 25% of total current assets from long-term sources ensuring a minimum current ratio of 1.33 : 1.

Exemptions from 2nd method of lending now permitted have already been discussed earlier.

Working Capital Term Loan


A few borrowers on being placed on 2nd method of lending may not be able to bring in the additional contributions immediately. The banks may sanction 'Working Capital Term Loan' (WCTL) which may be placed on liquidation basis within a maximum time of 5 years. The method to be adopted for segregating excess borrowings on this account would be the same as already discussed under 'Tandon Group'. Higher interest at a rate which may be 1% more than the normal rate charged on cash credit a/c may be charged on WCTL to induce the borrowers for its early adjustment. Charging of higher rate has however, been left at the discretion of the bank.

'Peak Level' and 'Normal Non-Peak Level' Limits


Separate appraisal and fixation of credit limits for 'peak level' and normal 'non-peak level' must be necessary and the periods during which the separate limits will be in operation must also be specified. The past trend in utilisation of limits by the borrower must be taken into consideration at the time of fixing up these limits. 'Peak Level' requirements are relevant not only for seasonal agro based industries but assume importance even in industries producing consumer goods like fans, refrigerators, woollens etc. Demand of funds may also be created due to purchase of raw material in lot, payment of tax, bonus to staff, dividend etc. at a particular point of time. All these factors are required to be taken into cognisance while fixing 'peak level' And 'normal non-peak level' credit limits.

Adhoc or Temporary Limits


Bank have now been given full discretion to sanction ad hoc facilities based on commercial judgement and merits of individual case. The rate of interest and others terms and conditions including period of ad hoc/temporary limits will be as per the discretion of concerned bank. It will no longer be mandatory for the banks to charge additional interest of 1 per cent over and above the normal rate of interest for sanction of ad hoc limits.

Fixation of Operative Limits


The operative limits will be fixed by the banks within the overall sanctioned limits on the basis of quarterly Information submitted by the borrower in Form I as already discussed before the commencement of a quarter. This statement will form the basis of quarterly review of the account and fixing of operative limits and should virtually set the level of drawings in the account in that quarter subject to a tolerance of 10% on either way.

Any excess/under utilisation of operative limit beyond the tolerance level should be taken as an irregularity revealing defective planning by the borrower and calling for some corrective measures to avoid recurrence of such irregularities in future.

The concept of 'operative limit' is desired to be set up on a more formal basis and it is compulsory for all borrowers enjoying working capital credit limits of Rs.100 lacs and above to submit the quarterly operating statements before the commencement of the quarter. If a borrower does not submit these statements within the prescribed time limits, the banks shall charge penal interest of one per cent per annum on the total outstanding for the period of default in submission of statements. The penalty is to be followed by a notice to the borrower to freeze the account if the default persists. Even in consortium accounts, the operations in cash credit accounts of the borrower may be frozen. If the quarterly operative returns are not submitted. No additional limits will be sanctioned to such defaulting borrowers. The borrowers are, therefore, required to make necessary arrangements for timely compilation and submission of quarterly statements to the bank. The charging of penal interest on default/delay in submission of statements under QIS which was mandatory for banks has now been left at the discretion of the banks who have to make suitable policy in this regard.

Cash Credit Limits against Book Debts


Sales are financed either by allowing purchase/discount facilities of drawn by the seller or simply as cash credit facility against book debts. The facility of cash credit against book debts is to be discouraged and such limits are to be converted to bill purchase/discount facilities wherever possible.

For all borrowers enjoying aggregate fund based working capital limits of Rs.5 crores and more from the banking system a minimum of 25% of the limits sanctioned to such borrowers for financing inland credit sales must be in the shape of bill purchase/discount facilities. Banks are required to charge interest at 2 percentage points above the relevant cash credit interest rate on the portion of book- debt finance which is in excess of the prescribed norm of 75 per cent of the limits sanctioned to such borrowers for financing inland credit sales. The additional interest prescribed is in addition to the overall ceiling of 2 per cent of penal interest charged for other irregularities. The provision relating to charging of additional interest of 2% for non-compliance with bill culture as above has since been withdrawn by Reserve Bank.

Drawee Bill Scheme


It has been recommended by 'Tandon Committee' as well that a part of cash credit facility for purchase of raw material should be allowed by the banks under 'Drawee Bill Scheme'. This

concept has been put on a formal basis and it is now recommended that 25% of the cash credit limit against raw materials to manufacturing unit must be allowed by drawee bills only. It would be interesting to clearly understand the mechanism of 'drawee bills' and also the method suggested for fixation of limits and drawing power under this system.

The drawee bill scheme may operate under two different methods as under:

Acceptance system: The seller may draw a bill on the bank of the buyer who shall accept it under an arrangement with the buyer. The seller can discount the bill with his banker. Seller's bank would obtain payment of the bill from the buyer's bank on due date. The buyer's bank will maintain a separate liability account on behalf of the buyer to keep record of all bills accepted by the bank on its behalf. On due date the buyer's bank will debit the bill amount in the cash credit account of the buyer.

Bill discounting system: Under this system the buyer's bank will himself discount the bills drawn by the seller and will keep the liability in a separate account against the buyer. On due date the amount will be debited in the account of the buyer.

Under both the above systems the seller gets the payment immediately after supply of goods. The liability for acceptance/discount of bills is held in a separate account by the bank (buyer's) on account of the buyer under the scheme and the bill amount is eventually debited to buyer's account on due date.

The stocks represented by accepted/discounted bills are to be shown separately and accounted for as such while determining the drawing power in an account. The method that will be adopted by the bank to determine the drawing power is illustrated below:

Limit sanctioned against raw material Amount earmarked for drawee bills @ 25% of the limit Amount available for drawings in cash credit account Margin on stocks Stocks with the borrower are as follows: Total stocks

Rs.400 lacs Rs.100 lacs Rs.300 lacs 25% Rs.300 lacs

Out of which unpaid stocks represented by accepted/ discounted bills The drawing power can now be determined as under: Total stocks Drawing power @ 75% Amount earmarked for accepted/discounted bills D. P. available against stocks

Rs.100 lacs

Rs.350 lacs Rs.262 lacs Rs.100 lacs Rs.162 lacs

In the calculation of drawing power as above it must be noted that margin requirements for drawee bill facility has also been considered in advance which has considerably reduced the available drawing power against stocks.

The second method of calculating drawing power which is more liberal could be as under: Total stocks Stocks earmarked for accepted/discounted bills Stocks paid for Drawing power @ 75% Rs.350 lacs Rs.100 lacs Rs.250 lacs Rs.187.50 lacs

Under this method borrower is entitled for a higher D. P. but will have to provide the margin of 25% on the due date of the bill when it is debited to the account otherwise the cash credit account will become irregular at the time of debit.

While announcing the Monetary and Credit Policy. for the Second Half of 1997-98, Reserve Bank has reiterated that 25 per cent of inland credit purchases of the borrowers should be through bills drawn on them by the sellers. This mandatory provision will come into effect from 1st January, 1998.

The most notable contributions from, 'Chore Committee' can be summed up as under:

Application of 2nd method of lending to all borrowal accounts enjoying working capital credit limits of Rs.50 lacs and above from the entire banking system. The limit has now been raised to Rs.100 lacs. Scrapping of the scheme of bifurcation of cash credit limit into two parts as demand loan and fluctuating cash credit account. Formalisation of the system of operative limit and strengthening of submission of quarterly information by the borrowers. A new direction to implementation of 'Drawee Bill Scheme' by making it compulsory to allocate 25% of the cash credit limit against raw materials to be utilized by way of drawee bills.

These methods have not only brought in better financial planning by the banks but have also helped the borrowers to have a planned and budgeted approach to their production and operating schedules.

Note: These guidelines have since been withdrawn by Reserve Bank and banks are free to frame their own policies in this regard. Some relaxations are likely to be granted by the banks in the matter.

Non Submission of QIS statements


The drawings in credit accounts of all borrowers enjoying total working capital limits of Rs.50 lacs (now Rs.100 lacs) and above from the entire banking system are to be regulated by fixing operative limits based upon the data furnished on Form 1 of 'Quarterly Information System' (QIS). It is, therefore, absolutely necessary that these statements are submitted in time. The system adopted for fixation of operative limits is as under:

(i)

For borrowers dealing exclusively with one bank: The limit will be; fixed by that bank based upon the data furnished by the borrower. For borrowers having consortium arrangement: The limit will be fixed by the lead bank along with the bank having the next largest shares. The individual banks' share will also

(ii)

be intimated by the lead bank to all the member banks in the consortium.

(iii)

For borrowers having multiple banking arrangement: All the banks financing the borrower must obtain the data under QIS and fix the operative limits accordingly.

Any default in submission of statements under QIS shall attract penalty and the banks will charge penal interest of at least 1 % per annum for a period of one quarter on entire outstanding under various working capital limits sanctioned to the borrower. The charging of additional penal interest which was hitherto mandatory has now been left to the discretion of banks. Further instructions in this regard are as under:

(i)

Where default is of a serious nature or persists for two consecutive quarters, banks may charge rate of interest higher than the normal lending rate determined for a borrower on his entire outstandings under working capital limits sanctioned, until such time as the position relating to timely submission of various statements is regularised. In case of continuous/persisting defaults, banks may further consider freezing the operations in the a/c after giving notice to the concerned borrower. Sick units, borrowers effected by political disturbances, riots and natural calamities are exempted from the discipline of the timely submission of statements under QIS.

(ii)

(iii)

Reserve Bank of India has since given full freedom to banks to frame their own policies regarding obtention of data under QIS and fixation of operative limits. The matter regarding charging of penal interest etc. has also been left at the discretion of banks.

Slip Back in Current Ratio


The borrowers who have a current ratio higher than 1.33:1 should normally be not allowed any slip back in current ratio. However, banks have been permitted to consider on merits, slip back in current ratio for industrial units with a good past performance record and a sound current ratio for the following purposes subject to the condition that a current ratio of at least 1.33:1 is maintained:

(a)

For undertaking either an expansion of existing capacity or for diversification. Diversification would include 'setting up of new units';

(b)

For fuller utilisation of existing plant capacity;

(c) For meeting a substantial increase in the units working capital requirements on account of abnormal price rise; (d) For investment in allied concerns with the concurrence of the bank, if such 'an investment is considered necessary in the business interests of the borrowing unit i.e. for processing or supply of raw materials, etc. For-bringing about reduction in the level of deposits accepted from the public for complying with statutory requirements. For repayment of instalments due under foreign currency loans and other term loans. For rehabilitation/reviving weaker units in the Group by allowing flow of funds from cash rich units in the 'Group' in terms of the guidelines framed under 'Group Approach' subject to the condition that no amount lent to a healthier unit of the 'Group' for its working capital requirement is transferred to another unit within the 'Group' so as to reduce the current ratio of the transferor unit to a level below 1.33: 1.

(e)

(f) (g)

Diversion of working capital finance


The funds lent by the banks against working capital limits are required to be utilised for meeting genuine working capital needs of the borrowers and cannot be allowed to he diverted for other purpose such as investment in finance companies, associate companies/subsidiaries, inter-cooperate deposits etc. Reserve Bank has issued detailed guidelines1 for preventing such diversion as under:

(i)

Investments made in shares, debentures, etc. of a current nature, units of Unit Trust of India and other mutual funds, and in associate companies/subsidiaries, as well as investments made and/or loans extended as inter corporate deposits shall be excluded from the build up current assets at the time of assessing of MPBF. In addition no corresponding adjustment in the projected net working capital shall be made for such investments. Current ratio of 1.33:1 is only the minimum required to be maintained by a borrower and a slip back in current ratio upto this level is permissible only for the purposes already explained elsewhere in this chapter. Bank finance for working capital purposes is not intended to support long term investments.

(ii)

(iii)

Steps as indicated in (i) & (ii) above are to be taken not only at the time of assessment but also at the time of fixing quarterly operative limit on the basis of statements received under QIS. In case a borrower has diverted finance granted for working capital purposes for other activities such as inter corporate deposits/investments made in associate companies/subsidiaries/real estate etc. banks must recall the amounts so diverted. In addition banks should charge penal interest of not less than 2 per cent over and above the lending rate on the amounts diverted. Where borrowers fail to repay the amount diverted from cash credit accounts for uses other than for which working capital finance was sanctioned, the banks should reduce the limits to the extent of amounts so diverted. Each drawal of Rs.50 lacs and above in respect of borrowers with MPB17 of Rs.10 crores and above from the entire banking system should be scrutinised by the banks to ensure that the amount is drawn for the purposes for which credit has been sanctioned.

(iv)

(v)

(vi)

KANNAN COMMITTEE REPORT ON WORKING CAPITAL FINANCE AND WITHDRAWAL OF PRESCRIPTION RELATING TO MPBF

Indian Bank Association (IBA) constituted a 'Group' on 'Working Capital Finance' including Assessment of Maximum Permissible Bank finance (MPBF). The group was headed by Sh. K. Kannan, Chairman and Managing Director of Bank of Baroda. The 'Group' studied all' the aspects of working capital finance and gave far reaching recommendations on the modalities of assessment, of working capital. It urged that more freedom be given to bank to evolve their own system in this regard and also frame their own credit policy. The final report of the group was submitted to Reserve Bank of India for its consideration in March, 1997. The main recommendations of the group were as under:

1.

Modality of working capital assessment of the borrowers will be left with each Bank who may devise a flexible system under the overall regulatory guidelines of RBI taking into account (a) Size of the Bank and whether it is a domestic private bank or a foreign bank or a public sector bank, (b) Bank's Prudential exposure limit and core resource base, (c) Bank's Credit (Loan) Policy guidelines, (d) Credit Skill Management in the Bank and development of specialised cadre of credit officer, (e) Bank's thrust for business priorities. Loan Policy of a Bank should cover its Corporate Policy on Credit Deposit Ratio, Industry/Sectoral Exposure, Group Exposure etc.

2.

While framing internal guidelines for working capital assessment by each bank, the following methods of assessment as suggested by the Group may be kept in view :

(a) For borrowers with total working capital requirement (funded and non-funded) upto Rs. 25 lacs from the banking system, the assessment may be made upon an overall study of borrower's existing and projected business performance, overall financial parameters etc., after discussion with the borrower. (b) For borrowers with total working Capital requirement (funded and non funded) over Rs.25 lacs but upto Rs.5 crores, turnover assessment as suggested by Nayak Committee may be considered. Under the said system 20% of the projected gross sales turnover of the borrower can be set up as credit limit. (c) Borrowers with workingcapital requirement (funded and non-funded) over Rs.5 crores, Cash Budget system may be considered. Draft of Cash Budget as mentioned in the report may be adopted with modifications, as may be considered necessary, by the financing bank. Wherever necessary, the concerned bank may also suitably abridge Cash Budget format to facilitate need-based assessment of credit requirements of a particular borrower. (d) The above cut off limit is only indicative. Each bank may decide appropriate cut off limit depending upon size of the Bank and other allied factors. (e) Corporate borrowers may be allowed to issue Short Term Working Capital Debentures of 1 to 1-1/2 year maturity. Bank may subscribe to such debentures as working capital assistance.

3.

Line of Credit (confirmed/unconfirmed) system of working capital (funded) facilities by way of CC/PC/PCFC/BD/OD/BP/FBP/Loan etc. and Working Capital (non-funded) facilities such as L/C/Guarantee, may be introduced by each bank taking into account its corporate Loan Policy for drawings under unconfirmed Line of Credit. Higher rate of interest maybe stipulated as compared to rate of interest on confirmed Line of Credit.

4.

Borrowers with working capital requirements over Rs.20crores may be granted the facility 100% by way of loan. Borrowers with working capital requirements over Rs.10 crores but up to Rs.20 crores may have 75% of Loan component and borrowers with working capital requirements over Rs.5 crores but up to Rs.10 crores may have 60% of Loan component.

Loan component wherever stipulated in accordance with the above may be spread over various maturity base after assessing needs of the borrowers and source of repayment. Hence loan components may be 3 months, 6 months, 9 months and 12 months tenure subject to allowing roll over at Bank's discretion. For any pre-payment (i.e. before tenure is over) the borrower may have to pay additional interest as such repayments disturb

Bank's Funds Management.

Under the proposed system peak level cash deficit will be die guiding factor. Total working capital finance to be extended by the bank. This needs to be given in the form of Working Capital, Demand Loan or Running Account facility as per cut off limit/modality as may be decided by each bank. It may be desirable that Working Capital Demand Loan with short/medium term maturities are repaid out of internal cash inflows/infusion of external short term funds. Long term Working Capital Demand Loan is to be repaid preferably out of internal cash generations.

Where implementation of modality of Loan delivery system as mentioned above is not feasible looking to the nature of business, banks may not implement the same. The percentage of Loan component and Cash Credit component as suggested above for different cut off limits is only indicative and may be left to the discretion of each Bank.

5.

As an incentive to the borrowers availing of 100% of working capital finance by way of loan component, rate of interest for working capital facility may be fixed by each financing bank broadly on following basis:

(a) Cash Credit component to be at PLR or PLR plus (b) Loan component to be at Minus PIR or PLR or PLR plus (c) It may also be considered by financing as an incentive to a borrower (for transferring a portion of loan proceeds to Current Account with the same Bank) to allow some credit by way of interest in die Loan account. (d) Each bank to charge rate of interest on working capital facility (including Loan component) based on individual Credit Rating System. Term Loan for acquisition of fixed assets may carry different rate of interest or higher rate of interest in comparison to loan component for working capital. (e) Individual bank may also decide to have separate PLR and spread for Loan component and Cash Credit component as per its Loan Policy.

6.

Margin and holding level of Stocks, Book Debts etc. as security for working capital facility may entirely be left to die discretion of financing bank. If any Bank so desires, it may continue to follow Tandon/Chore Committee guidelines.

7.

Reasonableness of Current Ratio/Debt Equity ratio may be decided by individual Banks as per their Loan Policy. However, if any Bank desires to continue existing Bench mark, Current Ratio of 1.33 it may continue to do so.

8.

Periodical statement of stock, book debts coupled with physical verification of securities, business site of the borrower should continue to be the basic credit monitoring tool of the banks. Along with periodical stocks, book debts statement, borrower must mention data relating to production, sales and other assumptions on which working capital assessment is made by the financing bank. If there is any variation more than 10%, justification thereof is to be submitted.

9.

Periodical review of business performance data of the borrower should be made in conjunction with operations of the borrower's account, drawing power of securities, half yearly profitability statement etc. Modality of such periodical review may be decided by each bank.

10. Time schedule for disposal of loan application is left to be framed by each Bank in its Loan Policy.

Financing banks may review their existing credit decision making process to ensure speed in the credit disposal. Reporting of branches direct to the sanctioning authority (under whose power the relative proposal falls) without undergoing the usual administrative tier may be explored by the banks depending upon its corporate policy to avoid delay in credit decision making.

11.

As Cash Budget System has been recommended for borrowers with working capital requirement over Rs.5 crores there is no necessity for their submitting separate cash flow projections to the financing bank from whom working capital facilities are availed. However, if such borrowers prepare cash flow projections as a statutory requirement/their internal requirement, they may submit the same to the financing bank. For Term Loan/D P Guarantee facilities, requirements of cash flow projections would continue to be operative.

12.

Annual verification of current assets (including compliance of Pollution Control requirement wherever applicable) by borrower's Auditor (in respect of borrowers with working capital limit over Rs.5 crores) should be insisted. Where however, borrower's auditors are not in a position to submit report on annual verification, banks may engage a Chartered Accountant/Chartered Engineer/Architect as may be deemed fit by the financing bank for verification/valuation of assets including compliance of Pollution Control requirements wherever applicable at borrower's cost. An irrevocable undertaking is to be obtained from the borrower empowering banks in this regard. For Sick/Weak Units/BIFR Accounts individual Banks may decide their periodicity of such verification as well as cut off limits for such borrowal accounts to be covered under the proposed system of external verification.

13.

The financing banks may incorporate suitable covenant in the document in terms of which borrower will undertake to utilise facilities from the banks for the purpose for which the same is sanctioned.

14.

Borrower should obtain prior approval for investment of funds outside business by way of ICD, investment in associate concerns etc. or in other outside investment. In the loan covenant, borrower is to empower the financing bank to levy penal interest and/or recalling of the advance at their discretion without any prior reference to the borrower.

15.

Legal aspects of documentation for credit facilities to borrower under Multiple/ Consortium Banking arrangement are to be taken care of by individual Banks in consultation with other financing Banks. Periodically financing Banks may at their discretion obtain a declaration from the borrowers regarding charges created on its Assets.

16.

In consortium lending the member banks should frame ground rules based on the consensus for smooth functioning of consortium.

17.

Syndication System of Lending especially for large borrowers i.e. borrowers with working capital limit over Rs.5 crores may be introduced by the financing banks as a part of their Loan Policy. The syndication of loan may be undertaken both by way of Disclosed Participation and Undisclosed Participation or with Risk Participation/without Risk Participation as are prevalent in advanced countries. Legal aspects of syndication lending if adopted by any bank are to be thoroughly complied with.

18.

Depending upon the size and area of operation each Bank may maintain data base of large borrowal accounts including Group Accounts at Central/Zonal Office. Cut off limit for data base and coverage of information range may be decided by each bank.

19. Each bank may decide its policy guidelines about issue of Commercial Paper by the borrowers.

20.

Quarterly Information System (QIS) and Credit Monitoring Arrangement (CMA) may cease to be a Regulatory requirement. However, individual banks may continue to obtain QIS statement if they so desire as per their Loan Policy.

21.

Existing guidelines on Bills Culture may be waived.

22.

Definition of group concern may be entirely left to the perception of financing bank.

23.

All restrictive guidelines such as proposals for borrowers with credit limits over Rs.25 lacs, wherein Director of any Bank is interested, be placed to Management Committee of the Board. Restrictions on issuance of Inland Financial Guarantee favouring Banks/Financial Institutions, extending Term Loan towards raising long term resource by the borrower for Working Capital etc. be all withdrawn.

24.

Identification of current assets for the purpose of computation of current ratio should be based on guidelines of Institute of Chartered Accountants of India. Also computation of Debt Equity ratio guidelines of the aforesaid Institute may be followed.

25.

Credit Rating Policy should be entirely left to the discretion of banks. Involvement of external agencies may not be insisted. The banks should evolve appropriate Credit Rating Policy taking into account, their overall financial parameters and other allied matters having bearing on risk evaluation of such parties.

Some of the recommendations with suitable modifications have already been accepted by Reserve Bank for implementation. In various 'Monetary and Credit Policies' announced from time to time,

Reserve Bank of India has given more and more operational freedom to banks in credit dispensation. Banks have been permitted to frame their own methods for assessment of working capital needs of the borrowers. The details of important measures announced by Reserve Bank are as under:

(i)

Prescription as regards to assessment of working capital needs based on the concept of Maximum Permissible Bank Finance (MPBF) enunciated by Tandon Working Group has been withdrawn. Banks may evolve ail appropriate system for assessing working capital needs of the borrowers, within the prudential guidelines and exposure norms which have already been prescribed by Reserve Bank of India.

Prudential exposure norms as per the guidelines of Reserve Bank of India1 provide that the maximum exposure of a bank for all its fund based and non fund based credit facilities, investments, underwriting, investment in bonds and commercial paper and any other commitment should not exceed 15 per cent of its (bank's) capital funds to an individual borrower and 40 per cent of its capital funds to a 'group'. For arriving at exposure limits the sanctioned limits or outstandings which ever is higher shall be reckoned. It may however, be noted that while calculating exposure, the non fund based facilities are to be taken at 100 per cent of the sanctioned limit or outstandings whichever is higher. To illustrate the point let us consider the following examples:

Example 1. Rs.in crores Capital Funds of the bank 875.00 Maximum exposure permitted for an individual 131.25 borrower (15% of capital funds of the bank) Maximum exposure permitted for all borrowers 350.00 under the same group (40% of capital funds of the bank)

Example 2. Limits sanctioned to a borrower

(i)

Fund Based 75.00 Non Fund Based 25.00 Total 100.00

(ii)

Total Exposure (i) For fund Based limits-@ 1 00c/v of limits or outstanding whichever is higher 75.00

(ii) for Non Fund Based Limits-@ 100% of limits or outstandings 2whichever is higher 25.00

100.00 Total credit limits to the above borrower are Rs.100 crores which are within the maximum exposure norms of Rs.131.25 crores.

As advised by the Reserve Bank, loans and advances against bank's own deposits may not be included while arriving at overall exposure to a borrower.

Total exposure to group is permitted upto 50 per cent if the additional exposure is on account of finance to infrastructure finance relating to power, telecommunication, roads and ports. However, exposure norm to individual borrower remains restricted to 20% only even in such cases.

The concept of capital funds has been broadened to represent total capital i.e., Tier I and Tier II capital (same as total capital defined under capital adequacy standards) for the determination of exposure ceiling by banks.

(ii)

The turnover method, as already prevalent for small borrowers, may continue to be used as a tool of assessment for this segment. For small scale and tiny industries etc., this method of assessment may be extended upto total credit limits of Rs. 5.00 crores.

(iii)

Banks may adopt cash budgeting system for assessing the working capital finance in respect of large borrowers.

Reserve Bank of India has however, not suggested any specific form for assessment of working capital based upon cash budgeting. 'Kannan Group' has given a form which may be adopted by the banks with suitable modifications. In any case it has been left to the banks to evolve their own method/form for this purpose.

Proforma as suggested by Kannan Committee is given in Appendix 16.IX.

(iv)

The banks may also retain the concept of the present maximum permissible bank finance with necessary modification or any other system as they deem fit. Banks should lay down with due approval of their Boards, transparent policy and guidelines for credit dispensation in respect of each broad category of economic activity. Reserve Bank's instructions relating to directed credit (such as priority sector, export etc.), quantitative limits on lending (such as against shares and for consumer durables etc.) and prohibition of credit (such as bridge finance, rediscounting of bills earlier discounted by NBFCs etc. subject to prescribed exemption) shall continue to be in force. RBI is yet to evolve suitable guidelines for implementation as per the recommendations of the Working Group on Bills Discounting by Banks. The Group has made several recommendations duly taking into account the Indian context in respect of bill financing, Banker's acceptance and the scope for extending Bill financing to services sector especially industries such as information technology, software services, travel and tourism etc. Major recommendations are given later in the chapter. RBI has relaxed the requirement of PLR being the floor rate for loans above Rs.2 lakh. PLR will now serve as a benchmark and banks will be able to offer loans at/below PLR rates to exporters or other creditworthy customers including public enterprises on the lines of a transparent and objective policy approved by their Boards.

(v)

(vi)

(vii)

(viii)

Present Scenario
MPBF system as per the recommendations of Tandon Committee report was introduced in November, 1975 and has been well established by now. Despite its prescription being withdrawn by Reserve Bank, most of the banks are still continuing with this approach.

Cash budgeting system will require many changes in the accounting system being presently adopted by the borrowers and a new information system, the transition to the new system is, therefore going to be slow and perhaps no Indian Bank has adopted this system of assessment of working capital needs so far in the real sense.

Many banks have however, adopted turnover method for assessment of working capital needs upto Rs.2.00 crores in respect of all borrowers.

Recommendations of Working Group on Discounting of Bills


A Working Group under the Chairmanship of Shri K. Ramamoorthy, Chairman, Vysya Bank Ltd. was set up by the Reserve Bank of India in December 1999 to examine the possibility of extending bills discounting facility to services sector especially industries such as information technology, software services, travel and tourism, etc. The Working Group submitted its report to the Reserve Bank of India on September 7,2000.

In view of services sector transforming the economic profile of the country and being poised to register tremendous growth and contribute significantly to overall strength of the economy, the Group undertook a detailed scrutiny of the key issues involved in bill financing and examined the possibility of strengthening the existing bill discounting mechanism and extend its scope to services sector.

The important recommendations in brief are: Bill finance being the preferred style of credit from the banker's point of view should carry interest lower than loan or cash credit, which is in line with international practice. In respect of bill transactions, individual bank should be given the freedom to lay down norms for satisfying themselves about the genuineness of underlying commercial transactions and/or the movement of goods. Banks should evolve the system of "value-dating" of clients account. Stamp duty for all bills of usance upto 182 days may be abolished.

The exemption from stamp duty should be made available to bills discounted by Financial Institutions and Registered Non-Bank Finance Companies. All corporate and other commercial entities who have a turnover above a threshold level may be mandated to disclose the "aging schedule" of their overdue payables in their annual reports as well as in their periodical reports to their banks. Borrowers may be permitted to discount bills drawn under Letters of Credit with any bank of their choice, outside the existing consortium/ multiple banking arrangements. New alternatives to bill financing like Invoice Financing and Secured Fixed Rate Note on the lines of asset - backed Commercial Paper, prevalent in developed markets may be introduced. Factoring services could also be revitalized. A Credit Insurance Scheme for ensuring domestic receivables on lines similar to the ones prevailing abroad may be introduced. Bankers' Acceptance (BA) may be introduced in the Indian market to finance import, export and domestic trade transactions. However, care has to be taken to ensure that BAs are issued to cover only genuine trade transactions. Borrowing clients who enjoyed working capital limits of Rs.10 crore and above and whose rating with the bank has been consistently satisfactory may be allowed drawal against the Working Capital Demand Loan (WCDL) component on the basis of the tradable promissory note in favour of the lending bank called 'Bank Paper'. Banks may be permitted to entertain purchase/discount of bills drawn by service providers on their debtors, subject to the satisfaction of the banker that the service has been rendered.

The Group has also considered it appropriate to briefly advert to one of the key emerging trends in the world of business, viz. the use of internet as a potent cost effective tool for electronic commerce (e-commerce). Looking at the wave of optimism being shared in the developed markets on the future potential of e-commerce and their preparedness to meet them, the Group has recommended that an expert group drawn from the fields of technology, banking and corporate finance may be constituted to prepare the blue-print for meeting the e-commerce challenges that may be thrown up in the financial sector of the country.

APPENDIX 16.I Quarterly Information System Form I For Traders and Merchant Exporters

To be Submitted in the Week Preceding the Commencement of the Quareter to Which the Statement Relates Estimates for the ensuing quarter ending .......................................

(Amou nt: Rs. in Lacs)

Name of borrower: (A) Estimates for the current accounting year indicated in the annual plan

(a) Sales Turnover i. Domestic Sales ii. Exports iii. Total (b) Other Income (Duty drawback, cash assistance, commission & brokerage received)

(B)

Estimates for the ensuing quarter ending

(c) Gross Income (Total a + b).

(a) Sales Turnover i. Domestic Sales ii. Exports iii. Total

(B)

Estimates of current assets and current liabilities for the ensuing quarter ending

**

(b) Other Income (Duty drawback, cash assistance, commission & brokerage received)

Current Assets
I. Stocks-in-Trade (Months cost of sales)@

(c) Gross Income (Total a + b)

II.

(a) Receivables other than deferred and exports (including bills Purchased &

discounted by bankers)++ (Months Domestic Sales)@ (b)Export receivables (including bills ++ purchase /discounted by bankers) @ (Months Export sales)

III.

Advance to suppliers of merchandise

IV.

Other current assets including cash and bank balances (specify major items)

V.

Total (estimated) current assets

Current Liabilities VI. Short term bank borrowings including bills purchased/discounted ........................................Bank ........Bank, etc.

VII.

Sundry Creditors (Trade) (including those covered under Usance Letter of Credit/Co-acceptance facility from the banks) (Break up details to be furnished @ separately) (Months' purchases)

VIII.

Advance Payments from customers

IX.

Statutory Liabilities

X.

Other current liabilities (Specify major items)

XI.

Total (estimated) current liabilities.

Notes: i) Information in these forms is to be furnished for each line of activity/units separately as also for the company as a whole and where the different activities/units are financed by different banks, the concerned activity/unitwise data and data relating to the whole company should be furnished to each financing bank.

ii)

The valuation of current liabilities in these forms should be on the same basis as adopted for the statutory balance sheet and should be applied on a consistent basis.

iii)

In cases where Co-acceptances, guarantees, us letter of credits etc., for acquiring current assets are established over and above the levels determined and not forming part of creditors level indicated at the time of assessment of working capital requirement, available from these sources should be taken into account for the purpose of working out, operative limits.

APPENDIX 16.II Quarterly Information System-Form I (For Manufacturers)

To Be Submitted in the week preceding the commencement of the, Quarter to which the Statement Relates Estimates for the ensuing quarter ending .....................................................

(Amount: Rs. in lacs)

Name of Borrower
(A) Estimates for the current accounting year indicated in annual plan the

(a) Production (b) Gross Sales I. Domestic II. Exports ___________ ___________ (c) Net Sales

: : : :

(B)

Estimates for the ensuing quarter ending. (a) Production (b) Gross Sales I. Domestic II. Exports __________ : : : :

(C)

Estimates of current assets **and current liabilities for the ensuing quarter ending.

__________ (c) Net Sales :

Current Assets

I.

Inventory

(i) Raw material (including sum spares used in the process of

&

manufacture) (a) Imported (months' @ consumption) (b) Indigenous $ (months consumption)@ (ii) Stocks-in process (months' cost of production) @ Finished goods (months' cost of production)@ Spares excluding those under Item I (i) above (months' consumption)@
$

(iii)

(iv)

II.

Receivables(other than exports & deferred) including bills discounted with bankers **(month's domestic sales) @

III.

Export receivables, including bills purchased discount, with bankers ++ (Months export sales)@

IV.

Advances to suppliers of raw material and stores/ bares & consumables

V.

Other current assets including cash and bank balances (specify major items)

VI.

Total (estimated) current assets

Current Liabilities
__________ VII. Short term bank borrowings from banks (including bills purchased & *** discounted with bankers) .Bank ..Banks, etc. __________

VIII.

Creditors for purchases of raw materials and stores/spares &consumables (including those under Usance Letter of Credit/Coacceptances facility from the banks) ....... (a) Imported (months' purchases)
@

(b) Indigenous (months' purchases) @

IX.

Advance payments from customers

X.

Statutory liabilities

XI.

Other current liabilities (specify major items)

XII.

Total (estimated) current liabilities

____________

____________

Notes:
(i) Information-should be furnished for each line of activity/unit separately as also for the company as a whole. In cases where the different activities/units are financed by different banks, the concerned activity/unit-wise data and data relating to the Company as a whole should be furnished to each financing bank.

(ii)

The valuation of current, assets or current liabilities in these forms should be on the same basis as adopted for the statutory balance sheet, and it should be applied on a consistent basis.

APPENDIX 16.III

Quarterly Information System - Form II For Traders & Merchant Exporters


To be Submitted Within Six Weeks from the Close of the Quarter to Which the Statement Relates Performance during the quarter ended ............................................... ( Amount Rs. in lacs)

Name of Borrower:
(A) Estimates for the current accounting year indicated in the Annual Plan (a) Sales Turnover i. Domestic ii. Exports iii. Total

(b) cash

Other income (Duty drawback,

brokerage (c) (B) the to Actual Gross Income during current accounting year (data he furnished for the completed quarters)

assistance, commission & received) Gross income (Total a + b)

During the Quarter 1 st quarter ended 2nd quarter ended 3rd quarter ended 4th quarter ended 19 Gross Income 19 19 19

Cummulative position Gross Income

(C)

Data relating to the latest completed quarter ended

Estimate (as given in Form (at the beginning of the quarter)

Actuals

(a) Sales turnover i. ii. iii. Domestic Exports Total

(b) Other income (Duty drawback, cash assistance, commission and brokerage received) (c) Gross income (Total a + b)

(D) Current assets and current liabilities** for the latest completed quarter ended Estimate (as given in Form (at the beginning of the quarter) Actuals

Current Assets

I.

Stocking -in-Trade (Months cost of Sales)@

II.

a)Receivables other than deferred and exports-including bills purchased & discounted by bankers++(Months' Domestic

Sales)@
b) Export receives including bills purchased/discounted by bankers++ the exports sales)@

III.

Advances to suppliers of merchandise

IV.

Other current assets including cash and bank balances (Specify major items)

V.

Total current assets

Current Liabilities

VI.

Short term bank borrowings including bills purchase/ discounted .................................. Bank

.............................. Bank, etc.

VII.

Sundry Creditors (Trade) including those covered under -Usance Letters of Credit /Coacceptance facility from the banks (break up details to be furnished separately) (Months' purchases)@

VIII.

Advance payments from

customers

IX.

Statutory liabilities

X.

Other current liabilities (Specify major items)

M.

Total current liabilities

Additional Information

Contingent liabilities

a. B C. other d.

Arrears of cumulative dividends. Disputed excise/customs/liabilities Bills accepted/guarantees extended to accommodate associate/sister concers or third parties. Other liabilities not provided for

NOTES:

i) Information in these forms is to be furnished for each line of activity unit separately as also for the concerned an as a whole. In cases where of the different activities units are financed by different banks, the concerned activity/ unit-wise data and data relating to the company as a whole should be furnished to each financing bank.

ii) The valuation of current assets or current liabilities in these forms should be on the same basis as adopted for the statutory balance sheet and should be applied on a consistent basis.

APPENDIX 16.IV Quarterly Information System - Form II (For Manufacturers)

To be Submitted Within Six Weeks from the Close of the Quarter to Which the Statement Relates

Performance during the quarter ended: ...................... in lacs)

(Amount Rs.

Name of borrower:
A. Estimates for the current accounting year indicated in the Annual Plan.

(a) (b)

Production Gross Sales i. Domestic ii. Exports

: : : : __________ __________

c) B. Actual production/sales during the current accounting year (data to be furnished for the completed quarters)

Net Sales

During the Quarter Production Sales

Cumulative position Production Sales

1 st quarter ended 2nd quarter ended 3rd quarter ended 4th quarter ended

19 19 19 19

C. Data relating to latest completed quarter ended ................ Actuals Estimate Production Gross Sales i. Domestic the quarter) (As given in Form I at the beginning of

ii. Exports

_________ _________

Total Net Sales

D.

Current assets and current liabilities ** for the latest completed quarter ended

Actuals

Current Assets
Estimate I Inventory (i) Raw materials (including stores & spares used in the process of manufacture) (a) Imported (months' consumption)@ (b) Indigenous $(months' consumption)@ (ii) Stocks-in-process (months' @ cost of production)
$

(As given in Form I at the beginning of the quarter)

(iii) Finished goods (months' cost of sales)@

(iv) Sales excluding those under Item I(i) above (months' consumption)@

II.

Receivables (other than

exports & deferred) including bills purchased & discounted with bankers++ (Months' domestic sales) @

III.

Export receivables, including bills purchased & discounted with bankers++ (Months' export sales)

IV.

Advances to suppliers of raw materials & stores/ spares & consumables

V.

Other current assets including cash and bank balances (Specify major items)

VI.

Total current assets.

Current Liabilities

VII.

Short term bank borrowings including bills purchased/ discounted ..Bank, ................ Bank, etc.

VIII. Creditors for purchases of raw materials and stores/spares & consumables (including those under Usance Letters of Credit/ Co-acceptance facility from the banks)***

_________________ _________________

_______________ _______________

(a) Imported (months' purchases) @

Estimate

Actuals

(b) Indigeneous (months' @ purchases) of which

Dues to small units

IX.

Advance payments from customers

X.

Statutory liabilities

XI.

Other current liabilities (Specify major items)

XII.

Total current liabilities

Additional Information Contingent liabilities

i) ii)

Arrears of dividend Disputed excise customs/ tax liabilities Other liabilities not provided for

iii)

_______________ _______________

_____________ _____________

NOTES:

(i) Information should be furnished for each line of activity/unit separately and also for the company as a whole. In cases where the different activities/units are financed by different banks, the concerned activity/unit-wise data and data relating to the company as a whole should be furnished to each financing bank.

(ii) The valuations of current assets or current liabilities in the form should be on the same basis as adopted for the statutory balance sheet and it should be applied on a consistent basis.

(iii) The period should be shown in relation to the annual projection for the relative item. If the levels of inventory/receivables are higher than the stipulated norms, reasons therefor should be given.

(iv) If the canalised items form a significant part of raw materials inventory, these may be shown separately.

(v) Amount of bills discounted with bankers included in item II of part D should be indicated separately.

(vi) Amount of bills discounted with bankers in respect of purchase, included in item VII or item VIII of Put D should be indicated separately.

(vii) The classification of current assets or current liabilities should be made as per the usually accepted approach of bankers and not as per definitions is in the Companies Act.

APPENDIX 16.V Half-Yearly Operating Statement-Form III(A) (For Traders and Merchant Exporters)

To be Submitted Within Two Months from the Close of the Half Year

(Amount Rs. in lacs) Name d borrower: Last year (Actual)


+

Current year (Budget)

Half year ended ..19

Current half year ending 19 Estimate

Estimate Actuals 3 4

A. HALF-YEARLY OPERATING STATEMENT I. GROSS INCOME I. Gross Sales (net of returns) a. Domestic Sales b. Export Sales c. Sub-Total (a + b) II. Other Income a. Duty Draw back b. Cash assistance c. Commission and brokerage received d. Sub-total (a + b + c)

III. Total (i) + (ii)

II. Cost of Sales i. Purchases

ii. Other trading expenses (carriage inward, commission and brokerage, on purchases) iii. Sub-Total (i + ii) iv) Add: Opening stock v) Sub-total (iii + iv)

vi) Less: Closing stock vii) Total cost of sales (v + vi)

III.

Selling, General & Administrative Expenses including, Bonus Payments Interest Depreciation Sub-total (III + IV + V)

IV. V.

VI.

Operating Profit/Loss (Item 1 minus total of items II, III, IV & V)

VII.

Other nonoperating Income /expenses (Net+)

VIII.

Profit Before Tax /Loss (Item VI plus item VII)

APPENDIX 16.VI
Half-yearly Funds Flow Statement Form III (B) (For Traders & Merchant Exporters)

(Amount Rs. in lacs) Last year (Actuals) Current year (Budget) Half year ended Current halfyear ending

Estimate _______ 1 _______ 1. SOURCES (a) tax (b) Profit before __________ 2 __________ Estimate Actuals 5 3 4 ___________ ______________

Depreciation

(c) Increase in capital (d) Increase in Deferred Liabilities (incl. public

deposits)* (e) Decrease in: i) Fixed assets ii) Other non-current assets (f) Others

(g)

TOTAL (A)

2. USES

(a) Net loss (b) Decrease in Deferred Liabilities (incl. public deposits) ** (c) Increase in: i) Fixed assets ii) Other non-current assets (d) Dividend payments (e) Taxes paid (f) Others

(g) TOTAL (B)

3. Long Term Surplus (+)/Deficit (-)(A-B) 4. Increase/decrease current assets in

5. Increase/decrease in current liabilities other the Bank borrowings 6. Increase/decrease working capital gap in

7. Net surplus (+)/deficit (-) (Difference of 3 & 6) 8. Increase/decrease in Bank borrowings

NOTE: Increase/decrease under items 4 to 8 should be indicated by (+)/(-) signs.

(i)

Information should be furnished for each line of activity/unit separately as also for the company as a whole. In cases where the different activities/units are financed by different banks, the concerned activity/unit-wise data and data relating to the company as a whole should be furnished to each financing bank.

(ii) The valuation of current assets or current liabilities and recording of income and expenses should be on the same basis as adopted for the statutory balance sheets, and it should be applied on a consistent basis.

(iii) Increase in carry of various items of current assets which is disproportionate to percentage rise in sales turnover should be explained in detail separately.

(iv)

Similarly, a decrease in current liabilities which is not commensurate with

percentage rise or fall in sales turnover should be explained in detail separately.

(v)

Item 7 (net surplus/deficit) and item 8 (increase/decrease in bank borrowings) would be algebraical opposite figures and these should agree with each other

APPENDIX 16.VII Half-Yearly Operating Statement - Form III(A) (For Manufacturers)

To be Submitted Within Two Months from the Close of the Half Year (Amount Rs. in lacs)

Name of borrower:
Last year A. Half yearly operating statement (Actual)
+

Current year (Budget)

Half year ended .20

Current halfyear ended 20 Estimate

__________ 1 __________ 1. Gross sales (net of returns) (a) Domestic (b) Exports

__________ 2

Estimate Actuals 3 4

5 ___________

__________ ______________

Total

2. Less Excise duty 3. Net Sales (Item 1 item 2) 4. Cost of goods sold

(a) Raw materials consumption (including stores & spares used in the process of manufacture)

(b) Other spare

(c) Power & fuel (d) Direct labour (factory wages & salaries) (e) Other manufacturing expenses, including depreciation

Sub-total

Add: Opening stocks-in-process, & finished goods

Sub-total

Deduct: Closing, stocks-in-process & finished goods

5. Total cost of goods sold

6. Selling, general & administrative expenses

7. Interest.

8. Sub-Total (5 + 6 + 7)

9.

Operating Profit/Loss) (3 - 8)

10. Other non-operating income/expenses Net

11. Profit before tax/Loss

(9 + 10)

APPENDIX 16.VIII Half-Yearly Funds Flow Statement- Form III(B) (For Manufacturers) (Amount Rs. in lacs) Last year (Actual) Current year (Budget) Previous Half Year ended . .. Estimate Estimate ___________ 1 ___________ 1. Sources (a) Profit before tax (b) Depreciation (c) Increase in Capital (d) Increase in term liabilities* (incl. Public deposits) (e) Decrease in (i) Fixed assets (ii) Other non-current assets (f) Others __________ 2 __________ Actual ___________ ______________ 5 3 4 ___________ ______________ Current halfyear ending

(g) TOTAL (A) __________ __________ ______________ ___________

2. Uses (a) Net Loss (b) Decrease in term liabilities **(incl. public deposits) (c) Increase in:

i) Fixed assets ii) Other non-current assets (d) Dividend payments (c) Taxes paid (f) Others

g) TOTAL

(B)

3.

Long term surplus ( ) / deficit (-) (A-B) Increase/decrease in current assets* (as per details given below) Increase/decrease in current liabilities other than Bank borrowings

4.

5.

6.

Increase/decrease in working capital gap


Net surplus (+) /deficit

7.

(-) (Difference 3&6) 8. Increase/decrease Bank borrowings

of

in

Break-up of (4)

i)

Increase/Decrease in Raw Materials

ii) Increase/Decrease in Stock in Process

iii) Increase/Decrease in Finished Goods


iv) Increase/Decrease in Stores & Spares

v) Increase/Decrease in Receivables
(a) Domestic. (b) Export vi) Increase/Decrease in other current assets

NOTE: Increase/decrease under items 4 to 8, as also under break-up of (4) should be indicated by (+)/(-) signs. (i) Information should be furnished for each line of activity/unit separately as also for the company as a whole. In cases where the different activities/units are

financed by different banks, the concerned activity/unit-wise data and data relating to the company as a whole should be furnished to each financing bank.

(ii)

The valuation of current assets or current liabilities and recording of income and expenses should be on the same basis as adopted for the statutory balance sheets, and it should be applied on a consistent basis.

(iii)

Increase in carry of various items of current assets which is disproportionate to percentage rise in sales turnover should be explained in detail separately.

(iv)

Similarly, a decrease in current liabilities which is not commensurate with percentage rise or fall in sales turnover should be explained in detail separately.

(v)

Item 7 (net surplus/deficit) and item 8 (increase/decrease in bank borrowings) would be algebraical opposite figures and these should agree with each other.

APPENDIX 16.1X

DRAFT CASH BUDGET


Audited Figures Previous 2 Yrs Particulars 199..-9..199..-9.. Actual/Projection Current Year 1st 2nd 3rd 4th Qtr. Qtr. Qtr. Qtr. 1. Cash Flow from Business Operations

A. Receipts :

Cash Sales Collection from trade debtors (Annexure to contain figures of outstanding trade debtors : with age upto 90 days with age between 91 & 180 days with age more than 180 days Total Outstanding Debtors)

Others (specify) Total (A)

B.

Payments :

Cash purchases (of inventory items) Payments to trade creditors (Annexure to contain figures of outstanding trade creditors : with age upto, 90 days; with age between 91 & 180 days; with age more than 180 days; Total Outstanding Creditors)

Other Manufacturing expenses, Administrative & Selling expenses, interest on business borrowings Short term & long term :
(Annexure to contain total payments made

to each payee having received 10% or more of total interest payments)

Others (specify) Total (B) Cash From Business Operations i.e., Net of A & B

II.

Cash from Non-Business Operations

C. Receipts :

Dividend/interest on investments (Annexure to contain details for (i) from associates; (ii) from other companies;(iii) on bonds/shares of F.I.s and banks;(iv) others (specify), Sale of investments (specify), Exchange fluctuations Profits,

Others (specify) Total (C)

D. Payments :

Dividend/interest on investments (Annexure to contain details for (i) to associates; (ii) to other companies: (iii) others (specify), Purchase of

investments (specify nature and annex details if necessary), Exchange fluctuations, Losses

Others (specify) Total (D) Cash Flow from Non-Business Operations i.e., Net of (C) & (D)

III. Cash flow From Capital Accounts:

E. Receipts..

Issue of shares (and receipts on allotments, calls, forfeiture etc.) issue of debentures/ bonds, Issue of Commercial Papers, Borrowings from Directors, friends & relatives, associates; public (specify nature) others (specify)

Borrowings from F.I.s. Borrowings from banks (term loans borrowings for capital

expenses) Capital subsidy Margin money loan (specify) Sale of Fixed assets Others (Specify) Total (E)

F. Payments :

Repayments of borrowings (principal amount) to : Directors, friends & relatives etc. associates public Margin money loan others (specify)

Repayments of borrowing (principal) to F.I.s. : Repayments of borrowing (principal) to banks : for term loans (taken for capital expenditure) for working capital finance and others

Purchase of Fixed Assets (details to be annexed)

Others (specify) Total Cash (F) Flow on Capital Account

i.e., Net of (E) and (F)

IV. Cash Flow on Sundry Items:

G. Receipts : Refund of tax/duty (specify or annex details) others (specify) Total (G)

H. Payments :

Payment of income tax Payment of other tax/duty/penalty (specify or annex details) Others (specify) Total (H) Net Cash Flow on Sundry Items i.e.,

net of (G.) and (H)

Assessment of Bank Finance for Working Capital

Total cash outflow from business operations (i.e., as arrived at under the point No. 1 (B) above) Less:

2.

Total cash inflows to business operations ( i.e., as arrived under the point No. 1 (A) above)

3.

Cash Gap in Business Operations [i.e., difference between (1) & (2)]. Less :

4.

Amount brought/proposed to be brought -in from other source, i.e., Cash Surplus (es) under (II), (III) & (IV) above.

Net Cash Gap for Business Operations financed/proposed to be financed by bank finance: Note : The outer limit for finance (for working capital requirements) from Banking system to be the highest GAP among all the Four Quarters of the current year.

5.

Overall Position of Cash Budget

Opening Cash Balance

Add:

(1) Net Cash Flows [i.e., netting of the figures under (1), (11), (111), (IV) above]

(2) Working capital finance from bank/banks . Closing Cash Balance .

Notes :

(1) Particulars of Production/Sales (gross) both in terms of quantity/value for each of the quarters, actual/projected to be given along with Half-yearly Profitability statement.

(2) Reasons/justification of "year to year and quarter to quarter variance of more than, say, 10%, in respect of any of the above said items should be furnished by way of footnote.

(3) In case of sale/purchase of Investments and fixed assets, necessary particulars, source of funding, justification should be stated by way of annexure.

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