final bank financing for working capital

7/31/2019 Final Bank Financing for Working Capital

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Submitted To:Prof. K.N.Badhani SubmittedBy: Gaurav

MandorePGP1013Harsh

PratapPGP1014

Himanshu


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Firms capital which is employed in short termoperations.

Net WC=Current Assets-Current LiabilitiesMeasures how much liquid assets a company has

to build its businessAllows to avail of unexpected opportunitiesManagement of working capital involves managing

inventories, accounts receivable and payable and

cash.Positive WC benefits:

1. Firm able to continue its operations2. Sufficient funds to satisfy short-term debt

and upcoming operational expenses.


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Cash

SalesOrder

Goods &Services

Sales

AccountReceivable


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Finance required to meet the costs involvedduring the operating cycle

Operating cycle: Time involved when raw

materials are purchased to the time they areconverted into finished goods and the same arefinally sold and realized.

Investment in current assets like raw materials,

stores, semi-finished goods, finished goods,sundry debtorsRate of interest on working capital finance

depends on quantum of loan, nature of activity,

purpose of loan, risk rating, financials etc


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Minimum level of current assets financingis known as permanent or fixed workingcapital.

Financed via long term debtExtra working capital needed to support

the changing production and sales is

temporary or fluctuating working capital.Financed on short term basis.


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Line of Credit

Accounts

Receivable (AR)

Loan

Factoring

Inventory Loan Term Loan


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Firms generally enjoy easy access tothe bank finance

RBI issues guidelines to the banks to strengthen theprocedures and norms for working capital financing.

Amount approved by the bank for the firms workingcapital requirement is called credit limit.

Seasonal business: bank may approve separate limitsfor peak season and non-peak season

Bank credit is available in the following forms:1.Cash credit 2.Overdraft3.Loans 4.Bill financing5.Letter of credit 6.Working capital loan


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Bank specifies a predetermined limit andborrower is allowed to withdraw funds fromthe bank up to that sanctioned credit limitagainst a bond or other security

He can draw it periodically to the extent of hisrequirements

Repayment can be made whenever desiredduring the period

There is no commitment charge involved andinterest is payable on the amount actuallyutilized by the borrower and not on thesanctioned limit


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Borrower is allowed to withdraw funds inexcess of the actual credit balance in hiscurrent account up to a certain specified limitduring a stipulated period against a security

Facility available against securities of lifeinsurance policies, fixed deposits receipts,Government securities, shares anddebentures, etc. of the corporate sector

Interest is charged on the amount actuallywithdrawn by the borrower, subject to someminimum(commitment) charges


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Total amount of borrowing is credited to thecurrent account of the borrower or released tohim in cash

Borrower has to pay interest on the totalamount of loan, irrespective of how much hedraws

Payable either on demand or in periodicalinstallments

Renewed from time to timeLoans imply a financial discipline on the part

of the borrowers


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Enables a borrower to obtain credit from abank against its bills

Bank purchases or discounts the bills of

exchange and promissionary notes of theborrower and credits the amount in hisaccount after deducting discount

Amount provided is covered by cash creditand overdraft limit

Before purchasing bills, bank verifiescredibility of borrower & bills


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Indirect form of working capital financing inwhich banks assumes only the risk and thesupplier himself provide the funds

Guarantee provided by the buyers banker tothe seller that in the case of default or failureof the buyer, the bank shall make thepayment to the seller

The bank opens letter of credit in favour of acustomer to facilitate his purchase of goods

The customer pays bank charges for thisfacility to the bank


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Banks provide credit through Working CapitalDemand Loan (WCDL) account or a separatenonoperable cash credit account for theunforeseen contingencies faced by borrower in

excess of sanctioned credit limit presently applicable to borrowers having working

capital requirement of Rs.10 crores or aboveminimum period of WCDL keeps on changingWCDL is granted for a fixed term on maturity of

which it has to be liquidated, renewed or rolledover Borrower has to pay a higher rate of interest more

than the normal rate of interest


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Hypothecation Pledge Lien

Mortgage Charge


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For borrowers with requirements of up to Rs. 25 lakhs, credit limits will becomputed after detailed discussions with borrower, without going into detailedevaluation.

For large borrowers not selling in the above categories, the cash budget systemmay be used to identify the working capital needs.

RBI had also issued lending norms for working capital, under which the bankswould decide the levels of holding of inventory & receivables, minimum currentratio, submission of data etc.

For borrowers with requirements above Rs. 25 lakhs, but up to Rs. 5 crores,credit

limit can be offered up to 20% of the projected gross sales of the borrower.


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final bank financing for working capital

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