Corporate Finance

Estimation of Working Capital 
 279

An Illustration

Whirlpool of India assessed its working capital requirement for 1998 is as shown: the company had a working

capital gap of Rs 250.76 crore, of which the margin money is Rs 56.80 crore.

(Rs crore)

Current assets Current liabilities

Norms Amount Norms Amount

Raw material

• Imported 37 .days 8.56 Sundry creditors 45 .days 53.42
  Other current liabilities 74.51


• Indigenous 21 .days 22.54
  Work-in-progress 2.days 4. 30
  Finished goods 56 .days 84.37
  Receivables 73 .days 175.69
  Consumables & spares 8.79
  Other current assets 74.44

378.69 127.93

Working Capital Gap 250.76

Margin money 15 percent of total current assets 56.80

APPROACHES TO LENDING

Banks adopt three methods for assessing working capital limit:

a) Operating cycle method for working capital limits up to Rs 25,000.

b) Tandon/KB Chore committee norms for working capital limits above Rs 10 lac.

c) Cash budget method for seasonal industries like sugar, tea, etc.

The first method has been explained earlier. The Tandon committee was set up in 1974 by RBI to study

the defects of the prevailing system of bank lending. The cash credit/overdraft system wherein the borrower

paid interest only on the amount drawn and not on the cash credit limit was tilted towards the borrower

rather than the banks. Many borrowers abused the bank finance to acquire inventory more than that warranted

and the prevailing system made credit planning extremely difficult for the lending bank. The terms of reference

of the Tandon Committee were:

• To prescribe norms for assessing working capital to be financed by banks,


• To prescribe norms for carrying current assets in different industries,


• To make recommendation for obtaining operational data, business forecasts, production plans and credit
  needs, and


• To make recommendation as regards the criteria to be used to measure a unit’s financial health.

The committee norms for inventory for receivable were initially applicable to 15 major industries but

later on the scope was enlarged and the norms substantially revised. The norms were applicable to all units