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(^444) Financial Management
requiring this size of limit, (i) are in upper strata of the economy; (ii) are
predominantly corporates, and therefore, are statutorily required to maintain
various financial data base and statements (such as, balance sheet, profit and
loss Account, Fund Flow statements etc.) as per the proforma prescribed under
the relevant statutes/Acts apart from being statutorily subjected to at least
annual audits; (iii) have in-built system to maintain easily and promptly retrievable
wide data-base to facilitate in-depth analysis and understanding of the
borrowerís profile; and, (iv) usurp a lionís share of the bankís lendable resources
in the arena of working capital finance. Such borrowers do not generally run
out of adequate holding level of inventory and/or receivables but suffer more
from the cash deficits arising from time to time. Further, because of the mammoth
size of the finance required by such borrowers, the banks are more required to
vigil their funds-managing ability to timely resource the funds-availability as
well as to conceive a proper funds-deployment.
In view of the above, arriving at a merit based credit decision necessitates a closer risk-
forecastingóderived from:
(i) detailed risks-analysis carried out with the intra-firm comparison, and inter-
firm comparison if necessary, of the borrowerís financial and operational
statements and projections; and,
(ii) risk-perceptions based on the interface with the borrowers, the market reports,
industry/activity-profile, managerial competence, government policies and cross-
country risks (wherever applicable).
In this context, the committee suggested that the quantum of working capital finance
should be decided based on perception of the cash-deficit likely to be experienced by
the borrower over the foreseeable/predictable near future as per the Cash Budgetó
proformae on the Annexure-4A. However, since the cash deficit system is to have its
induction for the first time, the committee suggested the banks to satisfy upon the
veracity of the ìperceptionsî, generated out of the aforesaid, with a list of financial
indicators.
It may be noted that reasonableness of Current ratio and Debt equity ratio (DER) as
well as margin and holding level of inventory/receivables shall be at the discretion of
the sanctioning/recommending authorities as per individual merits on case to case basis.
Nevertheless, wherever the sanctioning authorities acquiesces to (i) Current Ratio (a)
less than 1.17 for working capital finance less than Rs. 10.00 lacs, and (b) less than
1.33 for working capital finance of and above Rs. 10.00 lacs; and, (ii) Debt equity ratio
more than 2:1, necessary justification for accepting lower current ratio and/or higher
DER is to be elucidated. However, periodical verification of current assets/liabilities is
to be done by the bankís official(s) and/or, subject to approval of the sanctioning authority