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 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 done as 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 accumulation of finished goods due to non-availability n on-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 between total 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)
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 y y y y
No slip back in current ratio, normally. Classification guidelines for Current assets and current liabilities. Identification of excess borrowing. Information system, which was modified by Chore Committee Recommendations. 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 Form II Form III Form IV Form V Form VI
Particulars of Existing & Proposed Limits Operating Statement Analysis of Balance Sheet Comparative Statement of Current Assets & Current Liabilities Computation of Maximum Permissible Bank Finance (MPBF) Funds Flow Statement
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 in minimum 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
y
y
assessing the credit needs. While allowing deviations, the sanctioning authority must ensure that proper justification is available and given. 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 account would 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. 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.
