RBI Introduced Credit Monitoring Arrangement

8/8/2019 RBI Introduced Credit Monitoring Arrangement

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CREDIT MONITORING ARRANGEMENT

RBI introduced Credit Monitoring Arrangement (CMA) after discontinuing Credit Authorisation

Scheme (CAS) in 1988. Under CMA system, RBI prescribed two sets of formats viz

(i) Assessment of working capital requirements and

(ii) (ii)Monitoring through Quarterly Information System (QIS), to cover borrowers i.e.General Category and Traders & Merchant Exporters. The Credit Monitoring

Arrangement (CMA) under which banks were required to report to RBI the details of

credit facilities sanctioned to large borrowers from the banking system for post

sanction scrutiny was also discontinued in December 1997 and in lieu thereof a new

reporting system was put in its place.

Where assessment of working capital limits is done as per Simplified Turnover method (Nayak

Committee), information on Credit Monitoring Arrangement (CMA) data base forms is not

required.In order to avoid unnecessary paper work which causes delay in sanction of credit

facilities including SMEs, it is required that where assessment of working capital limits is doneas per Simplified Turnover method (Nayak Committee), information on Credit Monitoring

Arrangement (CMA) data base forms shall not be obtained.

The group (headed by Sh. Prakash Tandon) was appointed in July 1974 which was to frame

guidelines for follow-up of bank credit and submitted its final report during 1975 and gave

following recommendations, applicable to borrowers availing fund based working capital limits

of Rs. 10 lac or more:

Norms for inventory and receivables

Norms for 15 major industries proposed by the committee now have more than 50

disintegrated industry groups. Normally the borrower would not be allowed deviations from

norms except in case of bunched receipt of raw material, power cuts, strikes, transport delays,

accumulation of finished goods due to non-availability of shipping space for exports, build up of

finished goods stocks due to failure on the part of purchasers. For those units which are not

covered by the norms, past trends to be made the basis of assessment of working capital.

(Discretion given to individual banks for deviations in norms)

Approach to lending

The committee suggested three methods of lending out of which RBI accepted two methods for

implementation. According to First Method, the borrower can be allowed maximum bank

finance upto 75% of the working capital gap (working capital gap denotes difference betweentotal current assets required and amount of finance available in the shape of current liabilities

other than short term bank borrowings). The balance 25% to be brought by the borrower as

surplus of long term funds over the long term outlay.

As per Second Method of lending, the contribution of the borrower has to be 25% of the total

current assets build-up instead of working capital gap. (Method of lending as per Vaz

Committee will now apply to borrowers availing working capital fund based limits of Rs. 100 lac

or more only)


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COMMITTEE RECOMMENDATIONS

Tandon Committee has recommended the following methods:

Method I

Borrowers to bring 25 % of the net working capital (Current Assets Current Liabilities)Method II

Borrowers to bring 25% of the Current Assets

Method III

Borrowers to bring 100% of hard core assets + 25% of other current assets.

Under Method I the promoter has to bring minimum margin whereasthe margin to be brought

in under

Method III is maximum

Chore Committee has discarded Method III and recommended MethodII

Method II is also known as Maximum Permissible Bank Finance (MPBF)

Banks mainly use this method for assessment of Working Capital Requirements

Other major recommendations of the committee were:

y No slip back in current ratio, normally.

y Classification guidelines for Current assets and current liabilities.

y Identification of excess borrowing.

y Information system, which was modified by Chore Committee Recommendations.

y Bifurcation of limits into loan and demand component.

All instructions relating to maximum permissible bank finance withdrawn by RBI as per

Credit Policy announced on 15.04.1997)

TURNOVER METHOD

Working Capital Requirement = 25% of Turnover

Promoter Contribution (Margin) = 5% of Turnover

Bank Finance = 20% of Turnover

CMA data is a tool used by the bankers to assess the requirementof working capital. It is divided

into six parts as follows:

Form I Particulars of Existing & Proposed Limits

Form II Operating Statement

Form III Analysis of Balance Sheet

Form IV Comparative Statement of Current Assets & Current Liabilities

Form V Computation of Maximum Permissible Bank Finance (MPBF)

Form VI Funds Flow Statement


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Important banking operational clarification on Nayak Committee Recommendations

The implementation of recommendations of Nayak Committee, relating particularly to the

assessment of working capital, gave rise to certain operational problems. Reserve Bank has

clarified these issues on the following lines:y The assessment of credit limits for all borrowers enjoying aggregate fund based working

capital limits of less than Rs. 1 crore from the banking system, is to be done both as per the

traditional method and on the turnover basis and the higher of the two limits is to be fixed

as the permissible bank finance. However, the neither the inventory norms stipulated under

Tandon Committee apply nor the PBF is subject to ceiling as per the first method of lending.

In cases where the limits determined by the traditional method are less than 20% of the

turnover, the assessment will have to be re-examined. Nayak Committee has stated that the

working capital below the minimum level of 20% may be justified under special

circumstances in which the requirement is demonstratively lower than the minimum level

as in the case of ancillary units.y Where the working capital cycle is shorter than 3 months, the working capital required

would be less than 25% of the projected turnover. In such case it is not required to still give

PBF at 20% of the turnover.

y If the liquid surplus available with the borrower is higher than 5% of the turnover, as

stipulated under the recommendations, the limits can be fixed at a lower level than 20% of

the turnover keeping in view that the genuine requirements of the unit are met adequately.

If a unit has been managing its working capital efficiently, the limits can be set at a lower

level.

y The units having longer operating cycle for working capital than three months, should be

provided proper limits to operate at a viable level taking into account the recommendation

that 20% of the turnover is the minimum stipulation and not the maximum.

y In case of seasonal industries the distinction between the peak and non-peak level of

turnover has to be considered instead of annual turnover.

y The creditors and other current liabilities are among the sources of funds required for

building up the current assets and will be treated in the same manner as in the traditional

method.

y The borrowers contribution (margin) will be 5% of the turnover in all cases except where

the working capital cycle is not taken at three months. The margin will proportionately

increase with the increase in the period of operating cycle. Care is to be taken that the

proportion of margin to bank finance should be maintained in the ratio of 1:4 or even

higher in case of availability of higher liquid surplus. If the borrower is not able to bring inminimum contribution of 5%, as a general rule, no dilution should be allowed except in

special circumstance like sick units or when permitted being desirable due to peculiar

circumstances in the sanction.

y The sub-limits against the various components of stocks and receivables should be fixed

taking into account the existing norms of inventory and receivables as bench mark and

bankers should adopt flexible approach on case to case basis in a realistic manner while


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assessing the credit needs. While allowing deviations, the sanctioning authority must ensure

that proper justification is available and given.

y With regard to the aspects like allowing drawing power on the basis of stocks and

receivables statements or calling data on actual turnover on a monthly basis or calling of

certificate from auditors every 6 months in respect of actual sales, it has been clarified that

calling for sales data on monthly basis and comparing with the drawings in the accountwould be helpful particularly in the matter of arriving at effective operational limits as also

in the monitoring the borrowal accounts. The drawing power in any case is to be allowed on

the basis of monthly stock statement.

y In order to check the validity of projections for turnover, in case of existing units sales data

pertaining to actuals of last five years, estimates for the current year and projections for the

next year together with the true analysis of the industry to which the borrowing unit

belongs would also be useful. Other relevant information i.e modernisation or expansion of

the existing manufacturing capacity, Govt. policy on taxation and other relevant internal

and external factors also need to be taken into account.

Documents

RBI Introduced Credit Monitoring Arrangement