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(^418) Financial Management
It is important to note that in an exercise like this for computing the level of bank
finance, the classification of current assets and current liabilities should be made as per
the usually accepted approach of bankers and not as per definitions in the Companies
Act. For instance, instalments of term loans payable within 12 months from the date of
balance sheet are classified by the banker as current liabilities while it is not so in the
balance sheet prepared in accordance with the requirements of the Companies Act.
These differences in classification have been brought out in the form for analysis of
balance sheet prescribed by the Reserve Bank under its Credit Authorisation Scheme.
The 3rd Method will provide the largest multiplier of bank finance; however, to avoid
hardship to borrowers, a beginning may be made with the 1st Method, placing all
borrowers in this method within a period of about one year, and the ideal of the 3rd
Method may be reached in stages. The liberal approach under the 1st Method has been
suggested as the first step, particularly to facilitate financial structuring of new companies,
setting up projects in backward areas and also for flexibility in restructuring of existing
companies with a weak financial base.
Style of Credit
Once the quantum of bank funds to finance a reasonable level of current assets is
agreed to, there is also need to change the style of extending bank credit. Instead of
making available the entire credit limit as a cash credit for a year, it may be bifurcated
into a loan and a demand cash credit, which will be reviewed annually. The loan
component would comprise the minimum level of borrowing which the borrower expects
to use throughout the year, while the cash credit part could take care of his fluctuating
requirements. As the loan would carry interest throughout the year, it will induce a
discipline in the customer to plan his need carefully to ensure that as little of it as
possible lies idle.
The demand cash credit should be charged a slightly higher rate of interest than the
loan component. This approach will give the borrower an incentive for good planning.
In order to ensure that customers do not use the new cash credit facility in an unplanned
manner, the financing should be placed on a quarterly budgeting-reporting system for
operational purposes.
Bill Finance
Apart from loan and demand cash credit, a part of the total requirements within the
overall eligibility, could also be provided by way of bill limits to finance receivables. It is
desirable that, as far as possible, receivables should be financed by way of bills rather
than cash credit against book debts, though the latter cannot be altogether eliminated,
particularly when the period of credit is short and the amount is small. These bills could
be on a demand basis or on a usance basis depending on the marketing practice in the
industry.