Page 234 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 14: Working Capital Management Practices in India

Working Capital Loan: Sometimes a borrower may require additional credit in excess of Notes
sanctioned credit limit to meet unforeseen contingencies. Banks provide such credit through
a Working Capital Demand Loan (WCDL) account or a separate ‘non–operable’ cash credit
account. This arrangement is presently applicable to borrowers having working capital
requirement of `10 crore or above. The minimum period of WCDL keeps on changing.
WCDL is granted for a fixed term on maturity of which it has to be liquidated, renewed or
rolled over. On such additional credit, the borrower has to pay a higher rate of interest
more than the normal rate of interest.

Self Assessment

Fill in the blanks:
1. The main sources of working capital financing are trade credit, bank credit, factoring and
……………….
2. The amount approved by the bank for the firm’s working capital requirement is called
…………………..

14.2 Security Required in Bank Finance

Banks generally do not provide working capital finance without adequate security. The nature
and extent of security offered play an important role in influencing the decision of the bank to
advance working capital finance. The bank provides credit on the basis of following modes of
security:
Hypothecation: Under this mode of security, the banks provide working capital finance to
the borrower against the security of movable property, generally inventories. It is a
charge against property for the amount of debt where neither ownership nor possession
is passed to the creditor. In the case of default the bank has the legal right to sell the
property to realise the amount of debt.
Pledge: A pledge is bailment of goods as security for the repayment of a debt or fulfillment
of a promise. Under this mode, the possession of goods offered as security passes into the
hands of the bank. The bank can retain the possession of goods pledged with it till the debt
(principal amount) together with interest and other expenses are repaid. In case of non-
payment of loan the bank may either; Sue the borrower for the amount due; Sue for the
sale of goods pledged; or after giving due notice, sell the goods.
Lien: Lien means right of the lender to retain property belonging to the borrower until he
repays the debt. It can be of two types: (i) Particular lien and (ii) General lien. Particular
lien is a right to retain property until the claim associated with the property is fully paid.
On the other hand, General lien is applicable till all dues of the lender are paid. Banks
usually enjoy general lien.
Mortgage: Mortgage is the transfer of a legal or equitable interest in a specific immovable
property for the payment of a debt. In case of mortgage, the possession of the property
may remain with the borrower, while the lender enjoys the full legal title. The mortgage
interest in the property is terminated as soon as the debt is paid. Mortgages are taken as an
additional security for working capital credit by banks.

Charge: Where immovable property of one person is made security for the payment of
money to another and the transaction does not amount to mortgage, the latter person is
said to have a charge on the property and all the provisions of simple mortgage will apply
to such a charge. A charge may be created by the act of parties or by the operation of law.
It is only security for payment.

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