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Working Capital Management
Notes 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 ` 5 crore In
case of other industries, with working capital requirement of less than `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).
Self Assessment
State whether the following statements are true or false:
7. MNCs enjoy greater latitude than the domestic firms.
8. The managed costs should be properly scrutinized in terms of their costs and benefits.
9. Managed costs include office decorating expenses, advertising, managerial salaries and
payments, etc.
10. Special economic zone have a distinct set of characteristics such as low bargaining power
leading to problems of receivables and lower credit on purchases.
14.8 Summary
Working capital is the fund invested in current assets. It occupies an important place in a
firm’s Balance Sheet. Working capital financing is a specialized area and is designed to
meet the working requirements of a business.
The amount approved by the bank for the firm’s working capital requirement is called
credit limit. Thus, it is maximum fund which a firm can obtain from the bank.
A letter of credit is the guarantee provided by the buyer’s banker to the seller that in the
case of default or failure of the buyer, the bank shall make the payment to the seller.
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 nature and extent of security offered play an important role in influencing the decision
of the bank to advance working capital finance.
Bank financing was mainly security oriented. This security oriented system tended to
favour borrowers with strong financial resources irrespective of their economic function.
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.
It is desirable to check the increasing demand for capital, for maintaining the existing
level of activity. Such a control acquires even more significance in times of inflation.
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.
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