Page 69 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes (i) The projected current ratio is not below 1.33: 1.
(ii) The borrower has been submitting quarterly information and operating
statements (Form I, II and III) for the past six months within the prescribed
time and undertakes to do the same in future also.
Public Deposits: Business firms borrow directly from public in the nature of unsecured deposits.
Banks accept public deposits or term deposits. It is very popular for medium term finance, when
there is no availability of finance from banks. Public deposits as a source of finance have a
benefit like simple and convenient tax benefit, trading on equity, no security etc. NBFCs cannot
borrow by issue of public deposits more than 25 per cent of its paid up capital and free reserve.
Loan from Financial Institutions: Financial institutions such as Commercial Banks, Life Insurance
Corporation of India (LIC), General Insurance Corporation (GIC), Unit Trust of India (UTI), State
Financial Corporations (SFCs), Industrial Development Bank of India (IDBI), etc., provide short-
term medium term and long-term loans. It is most suitable for financing medium-term demand
of working capital. There will be a fixed rate of interest charge that is changed to profit and loss
account and can get tax benefit.

4.2.5 Recommendations of Kannan Committee

A committee constituted by the Indian Banks’ Association to examine the relevance of the
concept of Maximum Permissible Bank Finance (MPBF) as a method of assessing the requirements
of bank credit for working capital, and to suggest alternative methods. The committee was
headed by K. Kannan, Chairman, Bank of Baroda and its report submitted in 1997, includes the
following recommendations:
1. The MPBF prescription is not to be enforced and banks may use their discretion to determine
the credit limits of corporates.
2. The Credit Monitoring Arrangement and QIS may cease to be regulatory requirements.
3. The financing bank may use its discretion to determine the level of stocks and receivables
as security for working capital assistance.
4. The mechanism for verifying the end-use of bank credit should be strengthened.
5. A credit Information Bureau may be floated independently by banks.

Since April 1997, banks have been given the freedom to assess working capital requirement
within prudential guidelines and exposure norms. Banks may evolve their methods to assess
the working capital needs of borrowers – the Turnover Method or the Cash Budget Method or
the MPBF System with necessary modifications or any other system.

Self Assessment

Fill in the blanks:
4. A budget is a financial and/or quantitative expression of business plans and policies to be
pursued in the ........................ period of time.
5. The technique of ratio analysis can be employed for measuring ........................ liquidity or
working capital position of a firm.
6. ........................ is the transfer of a legal or equitable interest in a specific immovable property
for the payment of a debt.

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