Basis for
Lending
An alternative approach to bank credit. From traditional committee norms to liberalized assessment, master the quantum of finance for long and short-term liquidity.
Need for Bank Credit: STL vs LTL
Every business, whether trading or manufacturing, needs liquidity. Bank lending follows two primary trajectories, each with distinct risk and maturity profiles.
Seasonal Liquidity
Aimed at building current assets or leveraging supplier credit. Repayment is self-liquidating through the conversion of inventory into receivables and finally cash.
Non-Current Assets
Carries higher risks and funds fixed assets. Repayment depends on internally generated cash throw-off (Net Profit + Depreciation) rather than asset conversion.
The Bilateral Face of Credit Risk
Lending can be "too safe" or "too risky". While too much credit to unproductive borrowers is a known hazard, the danger of insufficient credit on conservative terms is seldom recognized—both stifle production and employment.
Historical Evolution: The Committee Era
Indian banking transitioned from borrower creditworthiness to data-backed "Credit Measuring". Major milestones include:
Established inventory receivable norms, minimum margins (NWC), and MPBF (Maximum Permissible Bank Finance) formulas monitored via CMA data forms.
Withdrawal of Prior Credit Authorisation, doing away with inventory norms, and dilution of Selective Credit Controls (SCC).
RBI advises banks to evolve their own assessment methods (On-site/Off-site) while maintaining a fulcrum of supervision via DOS returns.
Core Approach
Credit decisions must emanate from common sense, judgment, and providence. We utilize quantitative data to reach a final qualitative judgment based on these 10 determinants:
Character & managerial ability.
Review of historical financial policies.
Gearing and leverage characteristics.
Current facilities & future capacity.
The Demand-supply marketability.
Realistic volume vs. potential.
Net profit and internal cash generation.
Expansion and shock-absorbing capacity.
Alternative means of repayment.
Predictable borrower behavior.
Determination of Credit Quantum
Starting from sales projections, we estimate the Total Current Assets (TCA) needed to accomplish targets. While borrowers have flexibility, we maintain the 1.33 Current Ratio yardstick.
The Receivables Policy
In modern assessment, we differentiate between inventory and book debts. This approach gives greater flexibility, treating receivables as "very near cash".
Trade Creditors/Suppliers
We leave it to the customer to forecast estimated levels under trade credit, avoiding standing in the way of necessary production liquidity.
Alternative Working Capital Sources
Suggested Methodology (CMA Form II)
Case Study: Rs 60 Crore Manufacturing Unit
Acceptance of sales (Rs. 5 Crores/month) based on infrastructure and material content (60%).
| Metric Item | Value (Cr.) |
|---|---|
| Material Component (60% / Annual Sale) | 36.00 |
| Monthly Average Purchase | 3.00 |
| Core Inventory (3 Months Target) | 9.00 |
| Credit Extended on Sales (2 Months) | 10.00 |
| Less: Credit From Suppliers (1 Month) | (3.00) |
| Total Current Asset Requirement | 16.00 |
| 25% Minimum Margin (NWC) | 4.00 |
| Eligible Bank Finance | 12.00 |
Policy Framework Highlights
- Consortium Lending: Individual bank methodology following the lead bank subject to scrutiny.
- A+ Rated Borrowers: Flexible approach permited subject to submission of Cash Budgets.
- SSI & MLI Segments: Nayak Committee norms applied for limits of Rs. 2.00 crores and below.
- Small SSI (< Rs. 10 lacs): "Line of Credit" without bifurcation for pre-sale/post-sale for rapid exposure.
Trading vs Manufacturing Thresholds
Turnover velocity is critical for determining interest servicing capacity.
Trading Units
Expected to turnaround working capital at least six times a year. Interest outgo must be covered by trading profits.
SSI Manufacturing
Sales turnover often four times the working capital limit. Requires a capital base of at least 5% margin.