Page 63 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes instead of relying on government. Another new source of demand was the growing
awareness of the need to achieve and equitable geographical development of industry,
and in its distribution of credit. Though industrial production increased at a slow pace but
the call on bank credit essentially for maintaining inventories even at the same level had
gone up with rising prices. If the growth process is resumed then the volume of inventory
required to maintain a higher level of production will increase and correspondingly the
demand for bank credit.
This state of affairs caused no problem in the year when the credit-deposit ratio in the
banking system was low and a sudden spurt in credit demand could easily be taken care of
and access to refinance from the Reserve Bank was easy. With control on monetary
expansion as part of anti-inflationary policy and a rise in demand for funds – both from
the old and the new claimants – the existing system of bank lending came under
considerable strain and the fundamental weakness of the system had been exposed.

2. Coverage of the Proposed Approach: The proposed approach to lending and the style of
credit may be extended to all borrowers having credit limits in excess of ` 10 lakh from the
banking system, while the information system may be introduced, to start with, in respect
of borrowers with limits of ` 1 crore and above from the entire banking system.
Progressively, banks should extend this system, first to borrowers with limits of ` 50 lakh
to ` 1 crore and next to those enjoying limits of ` 10 lakh to ` 50 lakh.
3. Information System: To meet the specific requirement of the new ventures and to ensure
the end-use and safety of bank advance, the borrower is expected to subject himself to the
budgeting and reporting system. The borrower will supply appropriate operational data
and figures relating to financial position at periodical intervals on the prescribed forms
which have been devised for the purpose. The information so furnished by the borrower
will have to be screened thoroughly and speedily and a view taken of his total activities.
All borrowers with total credit facilities from the Banking System in excess of ` 10 lakh
should submit (i) Operating Statement (ii) Funds Flow Statements (iii) Peak Level Balance
Sheet and Pro forma Balance Sheet for the ensuing year at the time of submitting the loan
application (whether for renewal/enhancement of fresh limits). The borrower with
aggregate credit facilities from the Banking System exceeding ` One crore should submit
(i) quarterly operating statement (ii) quarterly funds flow statement and (iii) current
assets and current liabilities every quarter for the purpose of follow-up.
4. Follow-up: A bank has to follow-up and supervise the use of credit to verify first whether
the assumptions on which the lending decision was taken continue to hold good, both in
regard to the borrower’s operations and the environment, and second, whether the
end-use in according to the purpose for which the credit was given. From the quarterly
expectations and signs, if any, of significant divergence reading as red signals to both the
banker and the customer. However, variance of say +10% may be treated as normal. In
addition to the quarterly data, the larger borrowers should submit a half yearly pro forma
balance sheet and profit and loss account within two months from the end of the half year.
5. Interfirm Comparison: To facilitate interfirm and industry-wise comparison for assessing
efficiency, it would be of added advantage if companies in the same industry could be
grouped under three or four categories, say, according to size of sales and the group-wise
financial ratios compiled by the Reserve Bank of India, for furnishing to the banks. Besides
examining financial and operating ratios, certain productivity ratios may also be examined
to determine efficiency in use of resources – man, money, machines and materials. A
banker can choose his own criteria, but some useful ones are: labor efficiency; capital
efficiency and fixed assets efficiency.

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