The assessment of fund based working capital limit for MSME units requiring fund based working capital limits upto Rs.5.00 crore and for others up to Rs.2.00 crore from the banking system may be on the basis of the Turnover method (Nayak Committee norms). As the earlier instruction regarding Maximum Permissible Bank Finance (MPBF), based on a minimum current ratio of 1.33:1, recommended by Tandon Working Group has since been withdrawn, Banks are now free to decide on the minimum current ratio and determine the working capital requirements according to their perception of the borrowers and their credit needs. However, banks may, at their discretion, carry out the assessment based on projected turnover basis or the traditional method, if the credit requirement based on traditional production / processing cycle is higher than the one assessed on projected turnover basis. Since major corporates have adopted cash budgeting as a tool of funds management, banks may follow the cash budget system for assessing the working capital finance in respect of large borrowers. Banks may even retain the concept of the MPBF with necessary modifications wherever they feel necessary.
The credit limits are normally considered by the banks on the basis of annual statements of accounts or other documents such as returns filed with sales-tax (GST) / revenue authorities and also ensure that the estimated growth during the year is realistic. Nevertheless, Banks must insist on the audited financial statements from the borrowers enjoying large limits; since such borrowers would, in any case, be submitting audit certificate to the income-tax authorities, based on audit of their books of accounts by a Chartered Accountant. Further, Banks may consider developing appropriate internal guidelines for accepting the projections made by their borrowers relating to the item “Sundry Creditors (Goods)” appearing as an item under “Other Current Liabilities” in the balance sheet. The non-payment of statutory dues is one of the symptoms of incipient sickness of an industrial unit. In the case of insolvency / winding up of a borrowing company, there are certain priorities with regard to the recovery of statutory dues e.g., employees contribution towards provident fund deducted from wages of the employee members for a period of more than six months and not paid to the Commissioner, are a first charge on the assets of borrowers. Therefore, at the time of considering limits, renewal of limits, enhancement of limits, banks shall ensure that the borrower companies have been promptly meeting their statutory obligations like PF payment, Employees State Insurance and other statutory dues. Banks may also consider suitable restrictions on the outflow of funds till the statutory defaults are cleared by the borrower company.
In order to provide flexibility in the assessment of credit requirements of borrowers based on a complete reading of borrowers’ business operations, i.e., taking into account the production / processing cycle of the industry as well as the financial and other relevant parameters of the borrower. Banks may consider the levels of holding of each item of inventory as and of receivables and fix a specific credit limit which in their view would represent a reasonable build-up of current assets for being supported by bank finance. However, RBI no longer prescribes detailed norms for each item of inventory as also of receivables and it’s solely bank’s discretion to decide the sub-limit. In relation to borrowers enjoying fund-based working capital credit limits of Rs. 5 crore and more from the banking system, the banks are required to ensure that the book-debt finance does not exceed 75 per cent of the limits sanctioned to borrowers for financing inland credit sales. The remaining 25 per cent of the credit sales may be financed through bills to ensure greater use of bills for financing sales.
Loan delivery system (Loan Component and Cash Credit Component)