Commercial Banking

Assets Products
and
Contingent Liabilities

Assets
Fundbased 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 Guarantees

Letters of Credit

Other Contingent Liabilities like;

o Standby Letters of Credit, Take-out Finance
o Acceptances, Endorsements
o Forward Contracts, Derivatives

Underwriting Commitments and other Obligations

For CRAR computation, Unutilized Limits are reckoned as Assets.

o
o
o
o

Jul 31, 201

Unutilized Limits of CC/OD

Unutilized Limits of Revolving Credit
Undisbursed portion of Term Loan
Undrawn portion of Committed Lines of Credit
COBK - TAPMI

Fundbased Assets: Working Capital / Overdrafts

To 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:
o Operating Cycle (OC) Method
o Drawing Power (DP) Method
o Turnover (T/o) Method
o Maximum Permissible Finance (MPBF) Method
o Cash Budget (CB) Method
o Bills 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.
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Working Capital: Typical Operating Cycle

30
Days

Cash

Bills
Receivable

20
Days

30
Days
Raw
Material

OPERATING
CYCLE

Finished
Goods

Stock in
Process

10
Days

Length of Operating Cycle = 30+10+20+30 = 90 days

i.e. 4 Cycles in a year (365 / 90)
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WC Assessment - Operating Cycle Method

Operating Cycle Method

lacs)

(Rs. In

A. Operating Cycle
a. Procurement of Raw Material

30 days

b. Conversion / Process time

15 days

c. Average time of holding of FG

15 days

d. Average Collection Period

30 days

e. Operating Cycle (a+b+c+d)

90 days

f. Number of Op. Cycles in a year (365 days/e)

4 cycles

B. Total Operating Expenses per Annum

Rs.60 lacs

C. Total Sales Turnover per Annum

Rs.70 lacs

D. Working Capital = Total Operating Expenses

Rs.15 lacs
No. of Operating Cycles in an year

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WC Assessment: Drawing Power Method

Drawing Power Method (generally for small units)

lacs)
Particulars

Stock value

(Rs. In

Margin

DP

Paid stocks

4.00

25%

3.00

RM-Creditors

2.00

25%

1.50

Semi Finished goods

2.00

50%

1.00

Finished goods

4.00

25%

3.00

Book debts

4.00

50%

2.00

Total

16.00

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10.50

WC Assessment: Turnover Method

Turnover Method (Naik Committee Recommendations for SSI Units)

(Rs. In lacs)
A

Projected Sales Turnover

70.00

25% of sales Turnover

17.50

5% of Sales Turnover projected as margin

3.50

Actual NWC existing as per Last Financial Statement

8.00

BC

14.00

BD

9.50

MPBF (E or F whichever is less)

9.50

Additional margin to be brought in (C-D)

4.50

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COBK - TAPMI

WC Assessment: Projected Balance Sheet Method

In CB, Projected BS Method is used to evaluate past and assess
future potential & arrive at Maximum Permissible Bank Finance:
Borrowers Strengths & Weaknesses
o Experience and Expertise
o Financial Ability and Management
Evaluation of Previous Performance
o Cash Flows and Profitability
o Financial Position & Financial Management
Scrutiny & Validation of future Projections
o Income and Expenses pattern
o Changes in Cash Flows and Profitability
Business strengths & weaknesses
o Production Process, trends/seasonality and capabilities
o Industry Levels and Inter-firm comparison/competition
Levels of Inventory & Receivables
o Raw Materials source, consumption and cost of holding
o Receivables realization and market practices
Acceptability of financial Ratios
o Liquidity, Gearing, ROCE, TNW, Adjusted TNW, NWC
Jul 31, 2015o Break-even, Debt-Equity,
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- TAPMI Ratio, DSCR
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WC Assessment: MPBF Method

Current 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.
o 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):
o Working Capital Gap = Total Current Assets (TCA) less Total
Current Liabilities (TCL), other than bank borrowings
(Maximum Permissible Bank Finance).
o 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):
o Borrower to provide for a minimum of 25% of TCA out of longterm funds.
o Credit for purchases and other Current Liabilities are available
to fund TCA and bank will provide the balance (MPBF).
o TCL inclusive of bank borrowings will not exceed 75% of TCA.
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WC Assessment: Tandons 2nd Method (MPBF)

Tandons 2nd Method of Lending [from 300 to 375 lacs]

(Rs. In lacs)

Projected Total Turnover (Scrap Trading)

2505

Current Assets

802

Current Liabilities except bank WC borrowing (Rs.400 lacs)

193

Working Capital gap (A-B)

609

Min. Stipulated NWC (25% CA excl. export receivables)

201

Actual / projected NWC (Current Assets-Current Liabilities)

209

CD

408

CE

400

MPBF (F or G whichever is less)

400

Excess borrowings / short fall in NWC (D-E)

-8

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 NWCCOBK
by addl.
bank finance over MPBF.
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- TAPMI
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WC Assessment - Cash Budget Method

Months ->
A

Cash Receipts

Cash Payments

Surplus/deficit (A-B)

Overdraft/Cash Balance

1 2 3

6 7 8

9 10 11 12

Overdraft position is financed

Statement 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.

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WC Assessment: Inventory Limit or Bills Limit

Receivables 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
o A. Total Inventory (not more than 1 Operating Cycle)
o B. Creditors
o C. Margin (~ 25%)
o D. Paid Inventory (A-B)
o E. Inventory Limit ( D-C)
Bills/Book Debts Limit
o A. Receivables/Sundry Debtors (age < or = 90 days)
o B. Margin (~ 50%)
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C. Bills Limit ( A-B)

WC: NFB Limits - LC & BG

Letters of Credit (with Recourse), Indian/Foreign, Sight or Usance

o For each of the LC issued, 15-25% cash margin is obtained.
o Devolvement of LC is reckoned as as a major default.
Computation of Usance LC Limits
ILC/FLC
1

Annual purchase/import of Raw Material

Out of (1) on usance LC basis

Average of (2) per month

Lead time (no. of months)

Usance period (no. of months)

Usance LC requirement (3) X (4+5)

Borrowers margin (say 20%)

8 LC
Limit
considered
Bank
Guarantees
(for Specific Period) , Indian or Foreign

100
60

15
3
12

Payable on failure to honour committed financial obligations.

o For each of the BG issued, 15-25% cash margin is obtained.
o Counter Guarantee; authorizing to debit account & pay beneficiary.
o Performance Guarantees - To large Infrastructure Projects.
o Financial Guarantees - Bid Bonds/Security Deposits/Mobilization
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o

WC: Other Non-fundbased Exposures

Deferred Payment Guarantees
o To investment in Plant/Machinery, repayable in installments.
Commercial Papers (CP-1990):
o Tradable Money Market instrument, in promissory note form.
o Issued for 45-90 days. Not usually backed by any collaterals.
o Corporate with high quality debt rating permitted to borrow.
Underwritings:
o Commitment to invest in shortfall devolved, in IPOs/Rights.
Acceptances, Endorsements:
o 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)
o Total Outside Liabilities (excl. Sundry Creditors for stocks under
LC/BG and mobilisation advance o/s against BGs)
o Networth (excl. Intangible Assets)
o Net Current Assets (excl. Adv. for capital goods for business)

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Fundbased Assets: Term Loans

Long-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 3:1
Schedule 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.
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Other Fundbased Assets

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