Estimation of Working Capital 285Multiple Banking Arrangement
This is an open arrangement in which no bank takes the lead role. Most borrowers are shifting their banking
arrangement to multiple banking now. The major features of this arrangement are:
- Borrower needs to approach multiple banks to tie-up entire requirement of working capital.
- Banks independently assess the working capital requirements of the borrower.
- Banks independent of each other do documentation, monitoring and conduct of the account.
- Borrower deals with all financing banks individually.
Syndication
A syndicated credit is an arrangement between two or more lenders to provide a borrower credit facility
using common loan agreement. It is an internationally practiced model for financing credit requirements,
wherein banks are free to syndicate the credit limits irrespective of the quantum involved. It is similar to a
consortium arrangement in terms of dispersal of risk but consists of a fixed repayment period.
Under this arrangement:
- The borrower intending to raise resources awards mandate to a bank to raise the resources (referred to as
lead manager). - Lead manager prepares as information memorandum and distributes the same amongst prospective lend-
ers. Information memorandum provides basis for each lending bank for making independent valuation
of borrower. - A meeting of prospective lenders is convened by the lead manager to finalise deal-timing, cost of
credit, share of participating banks, etc. - Loan agreement is prepared and signed by all participating banks. The borrower gives prior notice to lead
manager for drawing loan amount (to enable tie-up disbursement with other lending banks)
It is easy to arrange syndication for borrowers that are rated strong by rating agencies regarding payment
of principal and interest.
IN CONCLUSION
It should be understood that the focus of working capital management should not be on ratios but on the
important, underlying business drivers. Working capital policy should be aligned with the strategic thrust of
the company. A decision to pursue product differentiation strategy may be frustrated if the executives are
forced to cut inventory and/or credit period. Likewise, a firm pursuing cost leadership strategy should make
an all-out effort to squeeze the extra flab of inventory to stay competitive. Some of the action areas have
already been mentioned earlier under different components of working capital like lot size, batch run, etc.
Working capital management is not the job of finance managers alone. It is the joint effort of production,
marketing, and finance departments. The finance function will only provide required (decision making)
financial inputs. The actual implementation rests with other line executives.