Commercial Banking

Assets Productsand Contingent Liabilities

COBK - TAPMI

**AssetsFundbased Assets (FB):Loans & Advances like Cash Credits, Overdrafts, Term and Demand loans, Lines of Credit, Revolving Credits etc. Bills/Cheques purchased/discounted/negotiated etc.Other Assets like Fixed Assets etc.Non-fundbased Assets (NFB):Bank GuaranteesLetters of Credit Other Contingent Liabilities like;Standby Letters of Credit, Take-out FinanceAcceptances, Endorsements Forward Contracts, DerivativesUnderwriting Commitments and other ObligationsFor CRAR computation, Unutilized Limits are reckoned as Assets.Unutilized Limits of CC/ODUnutilized Limits of Revolving CreditUndisbursed portion of Term LoanUndrawn portion of Committed Lines of CreditCOBK - TAPMI

COBK - TAPMI

**Fundbased Assets: Working Capital / OverdraftsTo meet regular working capital needs or running expenditure of the business or industry. Based on present and future cash flows of business cycle (generally 3 months) of procurement of raw material, manufacturing, sale of goods, realization of receivables etc.Types of Working Capital Assessment:Operating Cycle (OC) MethodDrawing Power (DP) MethodTurnover (T/o) MethodMaximum Permissible Finance (MPBF) MethodCash Budget (CB) MethodBills Finance Subjected to periodic inspection, generally monthly.Subjected to review and renewal after 6 or 12 months.Benchmark Current Ratio/Liquidity Ratio (TCA/TCL) is 1.33. CR may be relaxed to 1.15 in case of small loans (~ Rs.5 crs)Margin of ~ 25% on Stocks of Raw Material and Finished Goods and ~ 50% on Semi-finished Goods and Receivables.Credit Monitoring Arrangement (CMA) data is compiled.Seasonal Industry: Peak and Non-peak needs are assessed.COBK - TAPMI

COBK - TAPMI

Working Capital: Typical Operating CycleLength of Operating Cycle = 30+10+20+30 = 90 days i.e. 4 Cycles in a year (365 / 90)OPERATINGCYCLERawMaterialStock inProcessFinishedGoodsBillsReceivableCash30 Days10 Days20 Days30 Days**COBK - TAPMI

COBK - TAPMI

WC Assessment - Operating Cycle Method**COBK - TAPMI

Operating Cycle Method (Rs. In lacs)A. Operating Cyclea. Procurement of Raw Material30 daysb. Conversion / Process time15 daysc. Average time of holding of FG15 daysd. Average Collection Period30 dayse. Operating Cycle (a+b+c+d)90 daysf. Number of Op. Cycles in a year (365 days/e)4 cyclesB. Total Operating Expenses per Annum Rs.60 lacsC. Total Sales Turnover per AnnumRs.70 lacsD. Working Capital = Total Operating Expenses No. of Operating Cycles in an yearRs.15 lacs

COBK - TAPMI

WC Assessment: Drawing Power Method**COBK - TAPMI

Drawing Power Method (generally for small units) (Rs. In lacs)ParticularsStock valueMargin DPPaid stocks 4.00 25% 3.00RM-Creditors 2.00 25% 1.50Semi Finished goods 2.00 50% 1.00Finished goods 4.00 25% 3.00Book debts 4.00 50% 2.00Total 16.0010.50

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WC Assessment: Turnover Method**COBK - TAPMI

Turnover Method (Naik Committee Recommendations for SSI Units)(Rs. In lacs)AProjected Sales Turnover70.00B25% of sales Turnover17.50C5% of Sales Turnover projected as margin3.50DActual NWC existing as per Last Financial Statement8.00EB C14.00FB D9.50GMPBF (E or F whichever is less)9.50HAdditional margin to be brought in (C-D)4.50

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WC Assessment: Projected Balance Sheet MethodIn CB, Projected BS Method is used to evaluate past and assess future potential & arrive at Maximum Permissible Bank Finance:Borrowers Strengths & WeaknessesExperience and ExpertiseFinancial Ability and ManagementEvaluation of Previous PerformanceCash Flows and ProfitabilityFinancial Position & Financial ManagementScrutiny & Validation of future ProjectionsIncome and Expenses patternChanges in Cash Flows and ProfitabilityBusiness strengths & weaknessesProduction Process, trends/seasonality and capabilitiesIndustry Levels and Inter-firm comparison/competitionLevels of Inventory & ReceivablesRaw Materials source, consumption and cost of holding Receivables realization and market practicesAcceptability of financial RatiosLiquidity, Gearing, ROCE, TNW, Adjusted TNW, NWCBreak-even, Debt-Equity, Current Ratio, DSCR **COBK - TAPMI

COBK - TAPMI

WC Assessment: MPBF MethodCurrent Assets include cash, cash equivalents, short-term investments, accounts receivable, stock inventory and the portion of prepaid liabilities which will be paid within a year. Current Liabilities include obligations that are due and payable within one year like; Interest, TL instalments, short term debt, accounts payable, accrued liabilities and other misc. debts.Net Working Capital: Current Assets - Current Liabilities

Tandon Committee (1974), headed by Mr. Prakash Tandon, the then Chairman, PNB, recommended 2 types of WC assessment.

First Method (for FBWC less than Rs.10 lacs): Working Capital Gap = Total Current Assets (TCA) less Total Current Liabilities (TCL), other than bank borrowings (Maximum Permissible Bank Finance).Finance maximum 75% of WCG and balance to come from long-term funds i.e. owned funds and term borrowings. Second Method (for FBWC of Rs.10 lacs or more):Borrower to provide for a minimum of 25% of TCA out of long-term funds. Credit for purchases and other Current Liabilities are available to fund TCA and bank will provide the balance (MPBF). TCL inclusive of bank borrowings will not exceed 75% of TCA. **COBK - TAPMI

COBK - TAPMI

WC Assessment: Tandons 2nd Method (MPBF)

Estimates for Production, Sales, Profitability, levels of Inventory and Receivables, build up of Net Working Capital are assessed.Intra-firm comparison of estimates with previous years actuals.For new units, comparison of estimates with similar units.Excess borrowing projected is adjusted by additional funds by borrower and short fall in NWC by addl. bank finance over MPBF.**COBK - TAPMI

Tandons 2nd Method of Lending [from 300 to 375 lacs] (Rs. In lacs)Projected Total Turnover (Scrap Trading)2505ACurrent Assets802BCurrent Liabilities except bank WC borrowing (Rs.400 lacs)193CWorking Capital gap (A-B)609DMin. Stipulated NWC (25% CA excl. export receivables)201EActual / projected NWC (Current Assets-Current Liabilities)209FC D408GC E400HMPBF (F or G whichever is less)400IExcess borrowings / short fall in NWC (D-E) -8

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WC Assessment - Cash Budget MethodStatement showing forecast of cash receipts, cash payments and net cash balance over a period of time.Peak deficit is financed and drawings are regulated by monthly budgets, as per the Overdraft Balance/Cash Balance.Advantages:Where business cycle cannot be estimated and inflows are erratic and the advance tends to be highly self-liquidating.Suitable for commercial real estate developers, seasonal industries, contractors and software exporters etc. Limitations: Will not reflect changes in Current Assets & Current Liabilities.Will not give a clue whether a company is earning profit or not. Funds flow statement is required to detect diversion of funds.**COBK - TAPMI

Months ->1 2 3 4 5 6 7 8 9 10 11 12ACash ReceiptsBCash PaymentsCSurplus/deficit (A-B)DOverdraft/Cash BalanceOverdraft position is financed

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WC Assessment: Inventory Limit or Bills Limit**COBK - TAPMIReceivables or Sundry Debtors, which form the part of Current Assets are already reckoned in assessing FBWC.Bank may consider Inventory Limit or Documentary Bills Limit, as a sub-limit or separate limit, within MPBF.Inventory Limit would help shoring up of surplus Stocks, in case of future non-availability or shortage of Stocks. (NOT encouraged by banks, as this may lead to hoarding) Bills Finance would facilitate early cash-flows on goods sold, without the waiting period or usance, as per industry practice.Bills (domestic ILC and export FLC) have to be accompanied by i) Invoice and ii) Documents of title of the Goods.Inventory Limit A. Total Inventory (not more than 1 Operating Cycle)B. CreditorsC. Margin (~ 25%)D. Paid Inventory (A-B) E. Inventory Limit ( D-C) Bills/Book Debts LimitA. Receivables/Sundry Debtors (age < or = 90 days)B. Margin (~ 50%)C. Bills Limit ( A-B)

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WC: NFB Limits - LC & BG**COBK - TAPMILetters of Credit (with Recourse), Indian/Foreign, Sight or UsanceFor each of the LC issued, 15-25% cash margin is obtained.Devolvement of LC is reckoned as as a major default.

Bank Guarantees (for Specific Period) , Indian or ForeignPayable on failure to honour committed financial obligations.For each of the BG issued, 15-25% cash margin is obtained. Counter Guarantee; authorizing to debit account & pay beneficiary.Performance Guarantees - To large Infrastructure Projects.Financial Guarantees - Bid Bonds/Security Deposits/Mobilization Advance/Retention Money.

Computation of Usance LC LimitsILC/FLC1Annual purchase/import of Raw Material1002Out of (1) on usance LC basis603Average of (2) per month54Lead time (no. of months)15Usance period (no. of months)26Usance LC requirement (3) X (4+5)157Borrowers margin (say 20%)38LC Limit considered12

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**WC: Other Non-fundbased ExposuresDeferred Payment GuaranteesTo investment in Plant/Machinery, repayable in installments. Commercial Papers (CP-1990): Tradable Money Market instrument, in promissory note form. Issued for 45-90 days. Not usually backed by any collaterals.Corporate with high quality debt rating permitted to borrow. Underwritings: Commitment to invest in shortfall devolved, in IPOs/Rights. Acceptances, Endorsements: Commitment to meet obligations of the negotiable instruments, in case of dishonour by issuer.===============================================================================================================================Acid Test or Gearing Ratio for NFB Limits: Max. 10, Ideal is 3.= Total Outside Liabilities + 100% of NFB Limits Net Worth (NCA + Investments in Associate Concerns)Total Outside Liabilities (excl. Sundry Creditors for stocks under LC/BG and mobilisation advance o/s against BGs) Networth (excl. Intangible Assets)Net Current Assets (excl. Adv. for capital goods for business)COBK - TAPMI

COBK - TAPMI

**Fundbased Assets: Term LoansLong-term Debt, to meet part-cost of constructing the Plant and/or acquiring Machinery and other Equipment.Repayable in a time horizon of 5-15 years. Margin of 20-25%Maximum Debt (bank) : Equity (promoters) [DE] Ratio is 6:1 Ideal DE Ratio is 2:1. Unusually not considered more than 3:1Schedule of Implementation is essential.Viability is based on the Debt Service Coverage Ratio (DSCR)

Gross Debt Service Coverage Ratio (GDSCR): Total Coverage (PAT + Depreciation + Interest on Term Loan) Total Service (Term Loan installment + Interest on T. Loan) Net Debt Service Coverage Ratio (NDSCR): Total Coverage (PAT + Depreciation) Total Service (Term Loan installment)

Ratio of Total Coverage and Total Service for the entire period of TL in both the cases, defined as Average GDSCR and Average NDSCR respectively, is expected to be 2.

COBK - TAPMI

COBK - TAPMI

**Other Fundbased AssetsDemand Loans (DL): Purchase of consumer durables or consumption loans.Loans against the gold ornaments or deposit accounts. With or without collateral security. Period of 1-3 years.Working Capital Demand Loans (WCDL):To meet specific short-term financial needs of business.Temporary short fall in WC or acquire specific current assetsTo acquire specific FA/implement specific strategic planning.With or without collateral security. Period of 1-3 years.Lines of Credit or Revolving Credit:A pre-set loan limit and drawn as per borrowers requirement. Borrower may take funds at any time over several years. To meet emergent business needs, especially when operating income is seasonal or varies from month to month. Other Assets like Fixed Assets etc.: Acquiring of Fixed Assets for the own use in the bank. Un-cleared/un-reconciled inter-bank or inter-customer A/csThough not loans, reckoned as Assets for computing CRAR.Investments and Forex Exposures (dealt separately) Equity, Govt. /other Securities, Bonds, Buyers/Sellers CreditCOBK - TAPMI

COBK - TAPMI

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