How to compute working capital limits under Turn-over method/Nayak committee

(Nayak Committee norms for computation of working capital limits)

The term working capital means sum of the funds invested at various current assets used in the operating cycle, by the industrial and trading establishments. Operating cycle means the length of time required to convert ‘Non-Cash current assets’, (like raw material (RM), work in process (WIP), finished goods (FG), and receivables) into cash. The appraisal of working capital finance means assessment of gross working capital, net- working capital and working capital gap for assessment of working capital limits for a company.

Banks in India have evolved their own method of lending as they have been given free hand by the Central Bank (that is RBI) to decide the lending methods. The method of assessment of working capital limits up to Rs.2 crore (Rs.7.50 Crore for SME) assessed under turn over method is called as limits assessed under Nayak Committee Norms.  Under turnover method the aggregate fund based working capital limits are computed on the basis of Minimum of 20% of their projected annual turnover. The borrower has to bring margin of 5% of the annual turn-over of such borrowers as margin money.

Example:

The following types of loans and advances are considered as working capital finance. 

1. Cash Credit/ Overdraft against inventories and book debts.
2. Demand Loan portion under Loan System for Delivery of Bank Credit

• If, permissible bank finance is Rs.10 Crore and above.

1. Packing Credit against inventories.
2. Bills purchased /Discounted (inland & foreign)
3. Cash Credit against book debts/Cheque purchase.
4. Working capital term loan (for excess borrowing)

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