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Regulation of Bank Finance^417

TABLE-1: Balance Sheet

• As per suggested norme or past practice, whichever is lower in relation to projected production
  for the next year.

The 1st Method would mean the banker financing upto a maximum of 75% of the
working capital gap of 220, i.e., 165 and the borrower providing at least 55 out of his
long-term funds, i.e., owned funds plus long-term borrowings. This method will give a
minimum current ratio of 1:1.

The 2nd Method would mean the borrower financing a minimum of 25% of total current
assets (92) through long-term funds and the gap, i.e., maximum of 128 (278-150), will
be provided by the bank. This will give a current ratio of at least 1.3.1.
TABLE-2: Permissible Levels of Bank Finance

The 3rd Method would mean a further reduction in bank borrowing and strengthening
of the current ratio.

Current Liabilities Current Assets*

Creditors for purchase 100 Raw materials 200

Other current liabilities 50 Stocks-in-process 20

150 Finished goods 90

(^) discounted with bankers Receivables including bills 50
Bank borrowings, including
bills discounted with bankers
200
350 Other current assets 10
370
1st Method 2nd Method 3rd Method
Total current assets 370 Total current assets 370 Total curreni assets 370
Less: Current Liabilities
other than bank
borrowings
150
Less: 25% of above
from long-term
sources
92
Less: Core current
assets (Illustrative
figure) from long-term
sources
95

----- 278 275
Working capital gap 220 Less: current
liabilities other than
bank borrowings
Real current assets
Less: 25% of above from
long-term sources
275

. 69
206
Less: 25% of above from
long-term sources

55 Working capital gap 220 Less: current liabilities

other than the bank

borrowings

150

56

Maximum bank

borrowings permissible

165 Maximum bank

borrowings

permissible

128

Working capital gap

Maximum bank

borrowings permissible

220

56

Excess borrowings 35 Excess borrowings 72 Excess borrowings 144

Current ratio 1.17:1 Current ratio 1.33:1 Current ratio 1.79:1