Introduction Apart from financing for investing in fixed assets, every business also requires funds on a continual basis for carrying on its operations. These include amounts expenses incurred for purchase of raw material, manufacturing, selling, and administration until such goods are sold and the monies realized. Business transactions are generally carried on credit with a number of days elapsing subsequent to the sale being effected for realization of proceeds 1 . While part of the raw material maybe purchased by credit, the business would still need to pay its employees, meet manufacturing & selling expenses (wages, power, supplies, transportation and communication) and the balance of its raw material purchases. Working capital refers to the source of financing required to by businesses on a continual basis for meeting these needs. Thus the need for working capital arises from the prevalence of credit in business transactions, need to fund manufacturing and support and to account for the variations in the supply of raw material and demand for finished goods. Characteristics of working capital: It is continually required for a going concern However, the quantum of working capital fluctuates depending on the level of activity Working Capital is impacted by numerous transactions on a continual basis The above characteristics render limit based financing from banks ideal for working capital financing. This is because the client is charged interest only on the average outstanding utilized and is saved with the bother of reinvesting short term surpluses arising out of low working capital utilization at a point in time. Further since the transactions of the business are generally routed through a current account with a bank, availing a credit limit from the same bank is really convenient. Thus, working capital requirements are generally financed through limit based financing from banks.
Transcript
Introduction
Apart from financing for investing in fixed assets, every business also requires funds on a continual basis for carrying on its operations. These include amounts expenses incurred for purchase of raw material, manufacturing, selling, and administration until such goods are sold and the monies realized. Business transactions are generally carried on credit with a number of days elapsing subsequent to the sale being effected for realization of proceeds1. While part of the raw material maybe purchased by credit, the business would still need to pay its employees, meet manufacturing & selling expenses (wages, power, supplies, transportation and communication) and the balance of its raw material purchases. Working capital refers to the source of financing required to by businesses on a continual basis for meeting these needs.
Thus the need for working capital arises from the prevalence of credit in business transactions, need to fund manufacturing and support and to account for the variations in the supply of raw material and demand for finished goods.
Characteristics of working capital:
It is continually required for a going concern However, the quantum of working capital fluctuates depending on the level of activity Working Capital is impacted by numerous transactions on a continual basis
The above characteristics render limit based financing from banks ideal for working capital financing. This is because the client is charged interest only on the average outstanding utilized and is saved with the bother of reinvesting short term surpluses arising out of low working capital utilization at a point in time. Further since the transactions of the business are generally routed through a current account with a bank, availing a credit limit from the same bank is really convenient. Thus, working capital requirements are generally financed through limit based financing from banks.
Bank Financing for Working Capital
The financing limits are granted based on assessment of the working capital requirement. The assessment factors include various characteristics such as the nature of industry, industry norms, actual level of activity for the previous year and the projected level of activity for the subsequent year to arrive at the working capital requirement. The bank financing limit is thereafter decided after factoring in margins on the different types of current assets forming part of the working capital.
The Bank Financing Limit is fixed on an annual basis. However, since such limit is provided to meet specific requirements, utilizing the limits is subjected to the Drawing Power, which is decided on a monthly/ quarterly basis.
The effective bank financing is therefore to the extent of the lower of:
Bank Financing Limit: Determined on an annual basis based on an assessment of the current year’s projections and the actuals for the previous year.
Drawing Power: Linked to the quantum of current assets (and current liabilities) owned by the business with appropriate margins. Fixed on a monthly/ quarterly basis depending on the submission of Monthly/Quarterly Information System returns indicating the position of the stock statement, receivables, Work in Progress, payables, etc.
Bank Financing (max. permissible) = Bank Financing Limit OR Drawing Power whichever is less
Estimation of Working Capital Requirement
Lack of adequate working capital is often stated as one of the major reasons for sickness in industry (especially in case of SMEs). The counter arguments from the banks have been that most firms face problems of inadequate working capital due to credit indiscipline (diversion of working capital to meet long term requirements or to acquire other assets). In this context it would be pertinent to understand the method adopted by banks in computing the working capital requirement of the business and the quantum of bank financing to be provided by the bank.
The main factors considered in the estimation of working capital requirement are:
The nature of business and sector-wise norms
Factors such as seasonality of raw materials or of demand may require a high level of inventory being maintained by the company. Similarly, industry norms of credit allowed to buyers determine the level of debtors of the company in the normal course of business.
The level of activity of the business
Inventories and receivables are normally expressed as a multiple of a day’s production or sale. Hence, higher the level of activity, higher the quantum of inventory, receivables and thereby working capital requirement of the business. So in order to arrive at the working capital requirement of the business for the year, it is essential to determine the level of production that the business would achieve. In case of well-established businesses, the previous year’s actuals and the management projections for the year provide good indicators. The problems arise mainly in the case of determining the limit for the first time or in the initial few years of the business. Banks often adopt industry standard norms for capacity utilization in the initial years.
Based on the level of activity decided and the unit cost and sales price projections, the banks calculate at the annual sales and cost of production.
The quantum of current assets (CA) in the form of Raw Materials, Work-in-progress, Finished goods and Receivables is estimated as a multiple of the average daily turnover. The multiple for each of the current assets is determined generally based on the industry norms.
The current liabilities (CL) in the form of credit availed by the business from its creditors or on its manufacturing expenses are deducted from the current assets (CA) to arrive at the Working Capital Requirement (WCR).
Standard Formulae for determination of Working Capital
The issue of computation of working capital requirement has aroused considerable debate and attention in this country over the past few decades. A directed credit approach was adopted by the Reserve Bank of ensuring the flow of credit to the priority sectors for fulfillment of the growth objectives laid down by the planners. Consequently, the quantum of bank credit required for achieving the requisite growth in Industry was to be assessed. Various committees such as the Tandon Committee and the Chore Committee were constituted and studied the problem at length.
Norms were fixed regarding the quantum of various current assets for different industries (as multiples of the average daily output) and the Maximum Permissible Bank Financing (MPBF) was capped at a certain percentage of the working capital requirement thus arrived at.
Working Capital assessment on the formula prescribed by the Tandon Committee:
Working Capital Requirement (WCR)= [Current assets i.e. CA (as per industry norms) – Current Liabilities i.e. CL] Permissible Bank Financing [PBF} = WCR – Promoter’s Margin Money i.e. PMM (to be brought in by the promoter)
As per Formula 1: PMM = 25% of [CA – CL] and thereby PBF = 75% of [CA – CL]
As per Formula 2: PMM = 25% of CA and thereby PBF = 75%[CA] – CL
As is apparent Formula 2 requires a higher level of PMM as compared to Formula 1. Formula 2 is generally adopted in case of bank financing. In cases of sick units where the promoter is unable to bring in PMM to the extent required under Formula 2, the difference in PMM between Formulae 1 and 2 may be provided as a Working Capital Term Loan repayable in installments over a period of time.
Illustrative Example:
Turnover of a manufacturing unit: Rs. 750 lakh p.a (assumed uniform across the year) Assumed value addition norm: 50% (i.e. cost of raw material = 50% of Realisation)
Promoter ProjectionsCurrent Assets Current Liabilities- Raw materials Rs. 50 lakh - Payables Rs. 35 lakh- Work in progress Rs. 25 lakh - Finished Goods Rs. 60 lakh - Receivables Rs. 125 lakh
Requirement assessed as per norms applicable for the industry:
Industry Norm (a)
Amount as per Norm (b)
Promoter Projection (c)
Applicable norm (d)
Current Asset - Raw material 1 month Rs. 31.25 lakh Rs. 50 lakh Rs. 31.25 lakh- Work in Progress (assumed at 50% complete)
Assumptions here include: No export turnover, uniform working capital requirement through out the year
Industry norms have been specified in the Tandon Committee Report for all important industry categories
Raw materials have been valued at cost of raw material (assumed at 50% of realization)
Work in progress has been valued at 50% complete basis Applicable norm (d) is the more conservative of (b) or (c) from the bank’s point of
view.
Computation of working capital requirement
Working Capital Requirement arrived at therefore is Rs. 171.82 lakh
Formula 1 PMM (Promoter Margin Money) as per formula 1 = 25% of 171.82 lakh = Rs. 42.95 lakh ~ Rs. 43 lakh Hence, Permissible Bank Finance 1 = Rs. 129 lakh
Formula 2 PMM as per formula 2 = 25% of Rs. 190.6 lakh = Rs. 47.65 lakh Permissible Bank Financing as per formula 2 = [75% of 190.6 lakh – Rs. 18.8 lakh ] = Rs. 124.1 lakh
The difference between the 2 methods is Rs. 4.90 lakh (which maybe extended as a Working Capital Term Loan in case of sick units.
Thus the PMM while being at 25% of the Working Capital requirement1 could actually translate to as high as Rs. 225 lakh – Rs. 124 lakh i.e. Rs. 101 lakh assuming that the promoter projections really reflect his genuine need for working capital. It should however be understood by the entrepreneur that he ought to keep his working capital requirements to the minimum (whether or not bank financing is available) to ensure that his interest burden and capital blocked is kept to the minimum.
The following further points maybe worth mentioning here:
In case of export financing sought by the entrepreneur, the quantum of bank financing for the Working Capital build up for this purpose would normally be at a higher percentage
Within the overall limits, there could be sub-limits for bills financing (in case of receivables) with the result that such limits might not be fully available to the business.
The Bank Financing Limit arrived above is the Overall limit for the year. The actual quantum of bank financing that could be availed by the unit at a given point in time depends upon its drawing power based on its periodical returns filed to the banker.
1 Or at (25% of CA) as per Formula 2
Working Capital and Small Scale Industries
Small scale industries have a distinct set of characteristics such as low bargaining power leading to problems of receivables and lower credit on purchases, poor financial
strength, high level of variability due to dependence on local factors, etc. Consequently, it has been rightly argued that the industry norms on different current assets cannot be adopted.
The PR Nayak Committee that was appointed to devise norms for assessing the working capital requirement of small-scale industries arrived at simplified norm pegging the Working Capital bank financing at 20% of the projected annual turnover. However, in case of units which are non-capital intensive such as hotels, etc. banks often assess requirements both on the Nayak Committee norms as well as the working cycle norms and take the lower of the two figures.
Eligibility and Norms for bank financing of SSIs as per Nayak Committee
a. Applicability:
In case of SSIs, with working capital requirement of less than Rs. 5 crores In case of other industries, with working capital requirement of less than Rs. 1 crore
b. Quantum of Working Capital bank financing: 20% of the projected annual turnover
c. Subject to a Promoter bringing in a margin of:5% of the projected annual turnover (i.e. 20% of the total fund requirement that has
been estimated at 25% of the projected annual turnover)
Working Capital through Formula – Boon or bane ?
The formula driven computation of working capital requirement have been subjected to much debate over the past few decades. The advantage of such computation has been that it removes discretion from the officials of banks (which are largely from the Public Sector). The uniformity thus reduces the scope for accusation of bias.
However, the strongest argument against the MPBF based lending has been that it does not take into account the variations arising out of location, relative bargaining of the enterprise and other reasons, which could vary its need for working capital. Even though the banker could understand the problem, it was not possible to act on it due to the norms. Further, the “One Size fits all” theory ensured that banks never needed to develop credit appraisal skills and lent to all and sundry based on their seeming adherence to norms on paper.
The method has also been criticized as being more appropriate for the era where credit was rationed out. Banks today are capable of undertaking better assessment of the requirements and welcome the idea of offering higher limits (larger exposures) to established clients if required in order to retain their business in the face of competition from other banks.
In 1997, the RBI permitted banks to evolve their own norms for assessment of the Working Capital requirements of their clients.
Cash flow based computation of Working Capital
Cash flow is the most realistic means of assessing the operations of an enterprise. Drawing up cash flow statements (monthly or quarterly) for the past few years clearly indicate the seasonal and secular trend in utilization of working capital. The projections drawn up by the entrepreneur may then be jointly discussed with the banker as modified in light of the past performance and the banker’s opinions. The peak cash deficit is ascertained from the cash budgets. The promoter’s share (margin money) for such requirement maybe mutually arrived at by the banker and the borrower with the balance requirement forming the Bank financed part of Working Capital.
Cash flow based computation of working capital requirement has been recommended by the RBI for assessment of working capital requirement permitting the banks to evolve their own norms for such assessment. The reason for this has been that Cash flow factors in the past trends, takes into account the company specific factors and is based on mutual discussion between the banker and the borrower thereby increasing its acceptability. Also, large companies have adopted cash budgeting systems for managing their cash flows and hence such a system does not impose additional requirements on the corporates.
Cash flow system is extremely relevant in case of the seasonal industries to assess the peak credit requirement and in case of large companies (working capital requirements above Rs. 10 crores). However the reluctance to provide the cash budgets thereby revealing additional information to the banks, has led to even larger companies shying away from Cash Budget method of assessing Working Capital. Consequently Cash Budget method is currently prevalent mainly in case of seasonal industries, construction sector as well as other entities whose operations are linked to projects.
Bank financing based on cash budgets works well and is a good step form for the system.
A big failure in the working capital system hitherto followed by our banks has been that the Drawing Power (within the PBF limit) is based on post facto stock statements and these are reset typically on a monthly basis. This means:
The borrowing unit is putting its money upfront and the Drawing Power is a form of reimbursement.
Responsiveness to sudden surges in demand/ seasonality/ other short term boom conditions is non-existent, putting a burden on the company to finance this at exorbitant rates from private financiers.
Finally, a growing company will always be playing “catch-up” and its Permissible Bank Financing will be lagging its cash requirements by atleast one year.
Procedures to avail working capital financing from banks
Banks exercise extreme caution in lending to first time applicants starting up their business. A first time applicant would be asked for collateral in the form of land, building or residential property. This would be in addition to a second charge on the fixed assets of the enterprise. Sequence of steps to avail working capital
Application for the working capital
Most of the large commercial banks are moving towards the trend of specialized SSI branches near the industrial concentrations. The applications for working capital are generally accepted and processed at these branches.
List of Documents accompanying the application
The application for working capital would need to have a covering letter containing a request for sanction of working capital limits. The following documents would need to be enclosed alongwith:
o Detailed Project Report containing the detailed financials at projected levels of operations for the next 5 years
o Memorandum and Articles of Associationo Copies of Incorporation documents (relating to formalities with the Registrar
of Companies in case of corporates)o Statutory approvals obtained/ applied for such as for power, water, pollution
control, environment clearance, clearances from other agencies/ departments with purview over the business.
o Other relevant documents – Letters of intent/ confirmed orders from prospective buyers.
o Networth statement of promoters.
In case of the larger loans (above Rs. 5 crore in case of most banks), the projections are generally submitted in the CMA format prescribed by Reserve Bank of India (earlier mandatory).
In- Principle Sanction for Working Capital
The timeframe for in-principle sanction depends upon two factors:
o Time taken for submission of necessary documentso The decision structure at the bank
Most of the large banks have specialized SSI branches at the industrial concentrations in the country. These branches are headed by senior executives often with sanctioning power of Rs. 5-6 crores at the branch. In such instances, delays for processing the applications at the bank are limited. Infact the stage of in-principle sanction maybe dispensed with and final sanction accorded on full appraisal.
In other cases, such processing may take 30-45 days for according In-Principle Sanction to the project. The newer private sector banks are generally faster in according such approval. The significance of the in-principle sanction of working capital is that such sanction is necessary for obtaining term funding from the financial institutions. While these financial institutions accord sanction to a industry,
Appraisal and Final Sanction
The appraisal and final sanction of the request for working capital is based on a thorough appraisal of the Detailed Project Report (DPR). The traditional banks generally have specified formats for submission of the DPR. The usual coverage of the DPR includes:
o Overview of the businesso Background of promoterso Details of products to be manufactured – manufacturing process and raw
materialo Market overview and competition Sensitivity Analysis – ‘What if’ on Finished
Goods prices, raw material costs and so ono Detailed financial projections covering the Balance Sheet, Profit and Loss
Account, Funds Flow and the Financial Ratios.
The timeframe for a Final Sanction in cases where all the requirements have already been submitted by the borrowing unit is 90 days from the submission of the application.
Post Sanction Requirements
Post sanction requirements involve completion of documentation creating a charge in favour of the bank. This could include a charge on assets related to the business and charge on collateral offered (if any). In case of the assets of the business already being mortgaged with the term lending institution, a second or third charge maybe created in favour of the bank.
The financing facilities sanctioned can thereafter be availed by the borrower.
Monitoring and follow-up
Working capital financing is extended for the current asset build up of a business, which is linked to its activity level. These assets are mobile (in case of inventory) and also easily convertible into cash. At best, the banks have a second charge on the fixed assets of the enterprise and without the power of Seizure (u/s Sec 29 as available to the state financial institutions) realizing money from the security is time consuming. Hence, banks pay extremely high importance to the monitoring and follow-up of the loan.
The system of a current account through which all the transactions are routed acts as an in-built check on the operations of the borrower. By studying the current account transactions in detail, the banker is able to make an assessment of the business. In addition to this, the banks also undertake other forms of monitoring.
These include:
Stock Statements collected on a monthly basis from the borrower. Quarterly Operating Statement giving details of the operations for the quarter
In addition to these checks, banks often employ methods such as:
Stock Audit by independent firms of chartered accountants.
This would involve a visit to the storage areas of the borrower, visual inspection and scrutiny of the stock statements at the spot. Cross-checking these with the statements given by the client would provide a means of check.
Branch Inspection conducted by the internal audit/ bank staff
In case of larger loans, Consortium meetings where the operations of the unit are jointly reviewed are also undertaken.
Review, enhancement of limits and adhoc limits
Review of limits is usually undertaken on an annual basis. In cases where a request for enhancement of limits is made by the borrower during the course of the year, such a request is processed based on the stock statements and QoS submitted. In case of temporary need, an adhoc limit of upto 25% of the existing limits could be granted on request.
Working Capital – The Status Today
PSU Banks reaffirm faith in MPBF for industry lending and 20% norm for SSIThough norms for computation of Working Capital have been liberalized, PSU banks continue to adopt the formula based norms to assess working capital. This is on account of the affinity that the Public Sector has towards norm based lending which protects them from any accusation of bias in lending.
In short, it could be said that in most cases, industries get some credit but not customized to their requirement!
Fear of NPAs, enquiries on bad loans and capital adequacy constraints make banks credit averseOver the past few years, a combination of circumstances has made banks averse to taking on additional credit exposure. This is especially so in case of new projects where the promoter does not have a track record.
o The introduction of globally accepted norms of Asset Classification resulted in high level of Non-Performing Assets showing up in the books of banks, which had to be written off affecting profitability and eroding capital.
o The erosion of capital meant that banks were in danger of not meeting the newly introduced norm of 8% capital adequacy. Not achieving the 8% norm would affect credibility of the bank and possibility of accessing the capital markets for equity or debt.
o In a number of public sector banks that faced massive erosion in capital, enquiries were instituted against officials who sanctioned the bad loans thereby making bankers more cautious of taking any kind of credit decisions.
In such circumstances banks increasingly resorted to investing in risk-free government debt and avoided taking on industrial credit. The problem has been more acute in the small-scale sector. The sector had witnessed a high level of directed lending in the past decade most of which turned bad thereby putting off the banks from further credit to the sector. Even otherwise, the adverse impact of liberalization has been felt more in the SME sector that among larger industries. Increased competition for good client accountsOver the past few years, banks have been faced with the unenviable task of generating business while asset quality and facing growing competition in the sector. This has led to banks competing with each other for securing the business from proven clients (whether in the large, medium or small scale sector). Apart from providing competitive terms to the borrower, banks do not hesitate to provide project funding or meeting any other credit requirement of these clients in order to retain their business.
The younger, aggressive private sector and MNC banks are going after good credit in a big way. These banks are faster, friendlier and attempt to understand the borrower’s business and fund requirements, while structuring the transaction. They work through correspondent branches to extend their reach and pffer customized solutions including cash management, demand loans against assignment of immediate committed payments and branches banking and banking through the internet.
An analysis of the assisted units of State Financial Institutions reveals that in most cases, the proven clients have availed their subsequent loans from banks (most often PSU banks). Infact it was also seen that all good clients had been visited by more than one banker offering them better terms of credit. In many cases the existing loans of these clients to the SFC was prepaid through loans provided by the banks.Given the increased focus on credit quality, banks have become increasingly choosy in providing credit to industry. At the same time, the enhanced profit orientation has meant that banks are vying with each other to secure business from proven clients. This has become particularly acute in case of SMEs where availing Working Capital from banks is no longer a matter of routine. This is especially so in case of first generation entrepreneurs who lack a track record. Considerable homework displaying commitment in the project and stable financial position of the promoter is essential for obtaining a favourable response from bankers.
State Bank of India
At SBI, working capital loans are tailored to suit the precise requirements of the client, in any of the various instruments available or structured as a combination of cash credit, demand loan, bill financing and non-funded facilities.The bank’s accomplished credit crew can gauge the credit needs of each client and frame the exact solutions.
SBI’s dedicated credit team has a deep understanding of the intricacies of various industries and is richly experienced in reckoning the business potential of companies.These informed professionals can assess your specific credit requirements and tailor customized financial solutions to suit your risk profile and the working capital cycle of your company
Normally working capital finance is extended as a ‘limit’ for various facilities for tenors up to one year. ‘Ad hoc’ requirements are also considered. How are SBI working capital loans priced?The loans normally carry on a floating interest rate linked to SBAR, the SBI prime lending rate for working capital finance. Certain self-liquidating short-term loans are also linked to the bank’s Short Term Advance Rate (SBSTAR).
Working capital finance limits are normally valid for one year and repayable on demand. Specific, self-liquidating loans are linked to the natural tenor of the transaction (bill finance, export credit etc.).
Micro enterprises and small scale industries with working capital limits up to Rs 10 crore will be able to avail themselves of working capital finance at 10.25 per cent.
Other measures taken by the bank for MSMEs include extending the working capital cycle to cover longer period of holding of inventory and receivables. The bank new product ‘SME CARE’ for sanction of additional working capital limits up to 20 per cent over the earlier limits, to meet the longer working capital cycle. The bank has also come forward with a scheme to support MSMEs that require diesel generator sets to meet power shortage and maintain their productive activity.
The bank’s MSME portfolio was at Rs 74,324 crore as at the end of March 2008 and it has increased to Rs 81,794 crore as at the end of November 2008.
Bank of Baroda
Bank offers corporations Working Capital Finance to meet their operating expenses, purchasing inventory, receivables financing, either by direct funding or by issuing letter of credit.
Key Benefits
Funded facilities, i.e. the bank provides funding and assistance to actually purchase business assets or to meet business expenses.
Non-Funded facilities, i.e. the bank can issue letters of credit or can give a guarantee on behalf of the customer to the suppliers, Government Departments for the procurement of goods and services on credit.
Available in both Indian as well as Foreign currency.
Working capital finance for MSE units:
1. Working Capital against hypothecation of raw materials, work in Process, finished goods etc., Above Rs.50000/- and up to Rs.5 Lac -15% Above Rs.5 Lac -20%
2. Working Capital against Book Debts/Receivables
Margin to be taken as per our Bank’s general loan policy document, with out any concession
Andhra bank:OPEN CASH CREDIT(OCC)(A running credit facility against stocks and receivables)
Purpose For working capital needs of MSME units
Assessment of limit
Depending on the Working capital requirement of the unit assessed as per Turnover Method/ MPBF System/ Cash Budget System Drawings from the account shall be against Drawing limit arrived based on Stocks such as Raw materials, work-in-process, finished goods and Book debts/ receivables not older than 180 days with sub limit under cash credit limit
Minimum Margins
20% to 25% in case of Stocks and 30% in case of Book debts/ Receivables not older than 180 days.
Security Primary security: Stocks and receivablesCollateral security: Upto Rs.5 lakhs : NilAbove Rs.5 lakhs Land &
Buildings, Plant & Machinery, other fixed assets as per Banknorms.
Co-obligation/Guarantee
Upto Rs.5 lakhs : Not requiredAbove Rs.5 lakhs : Suitable Third party guarantee as per Bank norms.
Repayment Limits are renewable every year
Guarantee d) Up to Rs.5 lakhs are covered under CGTMSE.e) Loans above Rs.5 lakhs and upto Rs.100 lakhs can be covered under CGTMSE subject to no collateral security and third party guarantee.f) Guarantee fees and Annual service fees of CGTMSE have to borne by the borrower
WORKING CAPITAL DEMAND LOAN FOR MSME UNITS
Eligibility Existing MSME borrowers having overall fund based credit facility upto Rs.10 crore
Purpose To meet need based adhoc working capital requirement
Quantum 20% of the existing fund based limit
Margin Same as existing margins to present working capital limits
Security Primary: Stocks and receivablesCollateral: Continuation of existing collateral securities
Co-obligation /Guarantee
Continuation of existing Co-obligation/Guarantee
Repayment One year with a provision of moratorium of six months, during which only interest will have to be serviced.
Oriental Bank of Commerce
Eligibility :
1. Working Capital Finance is to be provided to those units, who have either availed term loan from our bank or have not availed any loan facility from any other financial institutions.
2. The term loan account of those should be Standard Regular. 3. Multiple banking arrangement is strictly prohibited under the scheme.
Security :
Primary Security Hypothecation of receivables/ book debt arising out of advances. Collateral Security First/second charge on fixed assets.
1. Personal guarantee of partners/promoters/directors. 2. Any other tangible collateral security if available.
i. Salient features of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) o The eligible loan limit under the Scheme is now Rs.100 lakhs. o The credit guarantee cover has been raised from 75% to 85% for the following
category of loans: a. Loans to Micro enterprises upto Rs. 5 lakh; and b. Loans to Micro and Small enterprises operated and/ or owned by
women. o The coverage of the Scheme will now be extended to all new and existing
Micro and Small Enterprises (both in the Manufacturing Sector as well as Service Sector).
Allahabad Bank
Purpose of Working Capital Loan:
Financing of Stock & other assets including book debts to be used in trade. Development of shop /showroom / Acquiring block / fixed assets like air conditioners,
delivery vans etc. Purchase of shop/showroom upto 50% of the value of the shop as per Registered sale
deed or market value as assessed by Bank & valuer whichever is less ( to be secured by mortgage of registered sale deed).
Eligibility:
Traders both wholesalers & Retailers of goods and Commodities which are not prohibited by Govt/RBI. Borrowers may be individual/ sole proprietorship/ Partnership firms/ HUF/ Joint stock companies/ co-operative societies.
Traders having Registration/ License as applicable under local laws (i.e. Shops & Establishments Act). The registration/ license may be as under: Sales Tax Registration
Drug License for Retail Trade of Drugs/ Medicines (where ever applicable) Trade license Ration & Civil supplies etc.
The proponent should preferably be engaged in the line of business for at least 1(one) year. New units can also be considered in deserving cases. In such cases, reasonable projected sales should be estimated depending on the merchandise area, market potential, capacity of the borrower etc.
Quantum of Loan:
Overall Ceiling (Working Capital and/or Term Loan) will be Rs.200.00 lakhs. Out of which Term Loan component should not exceed 25% of the overall limit or Rs.25.00 lakhs which ever is lower.
Types of Facility:
Overdraft facility for working capital. Term Loan for purchase/ development of shop/showroom. Letter of Credit may be sanctioned keeping in view, the genuine requirement of the
borrower, only in favour of reputed suppliers within the overall ceiling.
Security:
In addition to the Hypothecation of Stocks and other assets created out of the Bank Loan, the loan will also be secured by mortgage of immovable property - Value of Mortgaged property as assessed by Valuer & Bank Officials (as per instruction Circular) should not be less than 100% of the loan.
In cases where it is observed during the visit for stock verification that the normal margin requirement of 25% of the Stocks for WC limit is not being regularly maintained, the borrower will provide additional liquid security in the shape of our FDR/ DDP etc. to the extent of 25% of the limit.
3rd party property / FDR/DDP may be accepted which will be backed by Personal Guarantee.
Rate of Interest:
Up to Rs.10.00 Lacs: PLR w.m.r. Above Rs.10 Lacs as per Risk rating (on CRG -02/4).
Risk rating Interest rate w.m.r
AB-1 & AB-2 AB - 3 AB – 4
PLR - 0.50% PLR PLR+ 1%
Processing Fee:
Rs.200/- per lakhs, Minimum Rs.1000/- & maximum Rs.20000/-
Period:
Working Capital : One Year Term Loan: Five Years excluding gestation period of maximum 3 months.
Repayment of Loan:
Working Capital: On Demand Term Loan: Equated Monthly/ quarterly Installments. At the time of disbursal 24
PDCs for the EMI are to be obtained and fresh set of PDCs should be obtained 3 months before expiry of the stock of PDCs.
Canara bankNATURE OF LIMIT
LAGHU UDHYAMI CREDIT CARD SCHEME
Eligibility All existing small borrowers – Micro and small enterprises including artisans, village industries, professional and self employed. Retail traders are also eligible
Total aggregate limit including the one under the scheme should not exceed Rs.10 lakhs – Eligible borrower should have satisfactory dealings with the Bank for the last 3 years – Parties with continuous satisfactory dealings for a minimum of 3 years but not having any liability are also eligible
Purpose To meet working capital requirementMaximum limit Rs.10 lakhs (aggregate)Security Stocks/receivables created out of facility wherever applicable
Collateral/Third party guarantee: Upto Rs.5 lakhs – NIL Over Rs.5 lakhs, as determined by Bank
Repayment The limit is valid for 3 years subject to annual reviewGuarantee cover CGMSE cover available to SME units for loans upto Rs.50 lakhs
where collateral security and third party guarantee are not obtainedMargin Upto 25000/- NIL; Above Rs.25000/- 25%Rate of interest Upto Rs.50000/- 11.25%; Above Rs.50000/- upto Rs.2 lakhs:
13.25%Above Rs.2 lakhs to Rs.10 lakhs: 12.50% to 15%
Processing charges 0.10% of loan Insurance coverage Assets created out of loan and securities charged to be insuredSpecial offers, if any
No need to submit monthly stock statements upto Rs.2 lakhsAbove Rs.2 lakhs, simplified monthly stock statements and detailed stock statements annually.Laminated LUCC cards will be issued
PURPOSE For working capital needs of SME units.
ASSESSMENT OF LIMIT
Depending on the working capital requirement of the unit assessed as per turnover method/MPBF System/Cash Budget System.
Drawings from the account shall be against Drawing limit arrived based on stocks such as raw materials, work-in-process, finished goods and receivables.
Whenever required, Overdraft against Book debts (ODBD) is also permitted against book debt of specific age arising out of genuine trade transactions with Govt./Public Sector Undertakings/Joint Stock Companies/firms of repute.
SECURITY Prime security - Stocks, receivables.
Collateral security - Land and building, plant and machinery plus personal guarantee shall be obtained whenever applicable.
REPAYMENT Since the limit is permitted as running limit, the limit is renewable every year subject to review.
GUARANTEE Cover under Credit Guarantee Fund for Small
COVER Industries (CGFSI) (in case the aggregate credit facility permitted is up to Rs.50 lakhs) is available wherever collateral security or third party guarantee is not taken
PURPOSE For working capital needs of Small Enterprises units. Facility available as Running Limit.
MAXIMUM LIMIT
Rs.5 lakhs only
SECURITY Prime security - Assets created out of the credit facility
No collateral security for loans upto Rs.5 lakhs
REPAYMENT Facility is permitted as a Running Limit subject to review /renewal every year
GURANTEE COVER
Cover under Credit Guarantee for Micro and Small Enterprises (CGMSE) is available wherever collateral security and/or third party guarantee is not taken
Punjab national bank
Credit is provided for:
Financing stock in trade, book debts and other assets to be used in the trade.
Acquiring of assets for furnishing of shop & show room like partition, fixture and furnishing etc, purchase of air-conditioners, other gadgets and delivery van required for running the business.
Eligibility
i) Traders, who are individuals, firms, HUFs, cooperative societies registered under any law relating to cooperative societies and companies etc. Promoters /co-obligants must have existing satisfactory relationship of minimum at least six months with the Bank.
ii) Traders should comply with applicable statutory requirements, such as State/Central Sales Tax Registration Certificate, Licence under Shops & Commercial Establishment Act, Registration with Excise Department, etc.iii) Advances against goods or any other item prohibited by RBI/Govt. from time to time will not be covered under this scheme.
Extent of Loan for Working Capital
Small Traders may be granted facility of term loan for working capital to extent of 60% to 70% of their requirement subject to maximum of Rs. 5 lac.
For other traders with a working capital requirement of above Rs. 5 lac, 60% to 70% of their requirement can be financed with no upper limit.
Term Loan: 70% of the cost of assets to be purchased with a maximum of Rs.100 lac for Metro and Urban centre and Rs. 25 lac for SU and rural centre
Security
Primary Security: Legally enforceable charge by way of hypothecation/pledge/assignment, etc. on stocks/book debts/fixed assets/block assets of the borrower;
Collateral Security- Legally Enforceable Equitable/Registered Mortgage of IP / pledge or creation of charge on liquid security having realizable/ surrender value equal to the amount of loan/credit facilities;
Loans /limits up to Rs.5 lac, advance should be collaterally secured by way of suitable third party guarantee.
Repayment
Working capital limit upto Rs.5 lac granted by way of term loan (WCTL) will be repayable in equal monthly/quarterly instalments within a period of 3 to 5 years.
The term loan for acquiring fixed assets will be repayable in equal monthly/quarterly instalments within a period of 5 to 7 years including moratorium period of 3-6 months.
Disbursement
For term loan for fixed assets and working capital, the loan amount shall be payable directly to the suppliers of the assets by draft/cash order.
For other working capital advances, cash credit limit shall be set up.
Indian overseas bank
The manufacturing / Service activity of the unit can smoothly progress while adequate working capital funds are available. Our Bank provides necessary working capital assistance to MSME units.
The quantum of working capital funds can be ascertained by looking into the working capital cycle of the unit. Working Capital Cycle can be explained by way of flow chart as below: Cash > Raw Material > Work in Process > Finished Goods > Receivables > Cash It is normally presumed that the working capital cycle will be of three months i.e. the period taken for conversion of cash into raw material, raw material into finished goods, finished goods into receivables and receivables into cash. Depending on the nature of activity and various other factors it may be either more than 3 months or lesser than 3 months.
The working capital limits can be availed by way of cash credit, bills limit, Letter of Guarantee, Letter of Credit etc., Security / Third Party Guarantee:
Bank will not insist for collateral security / Third Party Guarantee for total credit limits upto Rs.5 lakhs for SME borrowers. In respect of credit limits above Rs.5 lakhs and upto Rs.25 lakhs Collateral Security / Third Party Guarantee may be waived on deserving cases and those limits will be covered under Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE).
