Page 236 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 14: Working Capital Management Practices in India

(a) For borrowers with requirements of up to ` 25 lakh, credit limits will be computed Notes
after detailed discussions with borrower, without going into detailed evaluation.
(b) For borrowers with requirements above `25 lakh, but up to ` 5 crore, credit limit can
be offered up to 20% of the projected gross sales of the borrower.
(c) For large borrowers not selling in the above categories, the cash budget system may
be used to identify the working capital needs. However, RBI permits banks to follow
Tandon/Chore Committee guidelines and retain MPBF concept with necessary
modifications.
2. Earlier RBI had prescribed consortium arrangements for financing working capital beyond
`50 crore. Now it is not essential to have consortium arrangements. However, banks may
themselves decide to form consortium so that the risks are spread. The disintegration of
consortium system, the entry of term lending institutions into working capital finance
and the emergence of money market borrowing options gives the best possible deal.
3. Banks were advised not to apply the second method of lending for assessment of MPBF to
those exporter borrowers, who had credit export of not less than 25% of their total turnover
during the previous accounting year, provided that their fund based working capital
needs from the banking system were less than `1 crore. RBI has also suggested that the
units engaged in export activities need not bring in any contribution from their long term
sources for financing that portion of current assets as is represented by export receivables.
4. RBI had also issued lending norms for working capital, under which the banks would
decide the levels of holding of inventory and receivables, which should be supported by
bank finance, after taking into account the operating cycle of an industry as well as other
relevant factors. Other aspects of lending discipline, viz; maintenance of minimum current
ratio, submission and use of data furnished under quarterly information system etc. would
continue though with certain modifications, which would make it easier for smaller
borrowers to comply with these guidelines.

Self Assessment

State whether the following statements are true or false:
5. The basic objective of regulation and control of bank credit is to ensure its equitable
distribution to various sectors of the Indian economy.
6. RBI permits banks to follow Tandon/Chore Committee guidelines and retain MPBF concept
with necessary modifications.

14.5 Working Capital Management in Domestic and
Multinational Enterprises

Although the fundamental principles governing the managing of working capital such as
optimization and suitability are almost the same in both domestic and multinational enterprises,
the two differ in respect of the following:

MNCs, in managing their working capital, encounter with a number of risks peculiar to
sourcing and investing of funds, such as the exchange rate risk and the political risk.

Unlike domestic firms, MNCs have wider options of procuring funds for satisfying their
requirements or the requirements of their subsidiaries such as financing of subsidiaries
by the parent, borrowings from local sources including banks and funds from Eurocurrency
markets, etc.

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