WORKING CAPITAL FINANCE 1. What is Working Capital: 1.1 Any enterprise whether industrial, trading or other, requires two types of assets to run its business. It requires fixed assets which are necessary for carrying on the production/business such as land and buildings, plant and machinery, furniture and fixtures, etc. For a going concern these assets are of permanent nature. The other types of assets required for day to day working of a unit are known as current assets which are floating in nature and keep changing during the course of business. It is these total current assets which are generally referred to as gross working capital. 1.2 The working capital is employed in purchasing those items, which are transformed into saleable goods by way of production process or by delivery of services (In case of nonmanufacturing unit). 1.3 Current assets are assets which normally get converted into cash during the operating cycle of the unit. The different components of the current assets / working capital are Cash & bank balances, Inventory, Receivables, Advances to suppliers, Other Current assets etc. 2 Sources of working capital: 2.1 Own funds 2.2 Bank borrowings 2.3 Sundry Creditors 2.4 Advance from customers 2.5 Other current liabilities 3 Factors Influencing Working Capital Requirement: 3.1 Nature of business service/trade/manufacturing 3.2 Seasonality of operations peak/non peak 3.3 Production Policy of the unit constant/seasonal 3.4 Market conditions competition / credit terms 3.5 Level of activity quantum of production / turnover 3.6 Prevailing guidelines of RBI 3.7 Trade and industry practices 3.8 Operating Cycle of the concerned entity 3.9 Level of Current assets to be maintained 3.10 Financial and relevant parameters of the borrowers 3.11 Available margin in the business (Net Working Capital) 4 Concept of Operating Cycle: 4.1 It is the average time taken by the enterprise in manufacturing the goods and selling them for cash so that the funds can be deployed in starting another batch of production. 4.2 In other words, the operating cycle commences when cash is initially injected into the system for purchase of the basic raw material components required for production. The system completes one cycle when cash is realized out of the sale proceeds of finished goods including those from the receivables/debtors. 4.3 Every rupee invested in current assets at the beginning of the cycle comes back with the profit element added, after a lapse of a specific period of time. This length of time is known as Operating Cycle or Working Capital Cycle.
4.4 The period of the operating cycle is measured by the aggregate of the holding period of all the major components of the current assets viz., raw material, work in process, finished goods, receivables. 4.5 The time allowed by the trade creditors does not reduce the total operating time i.e. from the time of purchase of raw materials to the final realization of receivables. Trade credit is essentially a financing concept and it does not impact the total operating cycle. 5 Concept of Net Working Capital (NWC): 5.1 NWC is the entrepreneur s margin towards day to day operations, made available in the system from Long Term funds. 5.2 NWC is also referred to as liquid surplus and is the margin available for working capital requirements of the unit. 5.3 This is worked out as surplus of long term sources over the long term uses. 5.4 It is also calculated as under: NWC = LTS LTU, which is also equal to GWC or TCA TCL Where NWC: Net working capital, LTS: Long Term sources of funds, LTU: Long term uses of funds, TCA: Total Current Assets, TCL: Total Current Liabilities and GWC: Gross Working Capital 6 Methods of Assessment of Working Capital Limits:The assessment of Working Capital of the borrower can be done under anyone of the following four methods: 6.1 Turnover Method 6.2 Flexible Bank Finance Method 6.3 Cash Budget Method 6.4 Net Owned Funds Method for Residuary Non- Banking Companies. 7 Turnover Method: 7.1 Under this method, the working capital limit shall be computed at 20% of the projected sales turnover accepted by the Bank. In case of MSE borrowers seeking / enjoying fund based working capital facilities upto Rs.500 lacs from banking system, the limits shall be assessed on the basis of turn over method. 7.2 The turnover method shall be applied for sanction of fund based working capital limits to the non MSE borrowers requiring working capital facilities upto Rs.100 Lacs from the banking system. 7.3 In case of accounts sanctioned under Union Trade Scheme, the turnover method is applicable for working capital requirements upto Rs.200 lacs. 7.4 This system shall be made applicable to traders, merchants, exporters who are not having a predetermined manufacturing/trading cycle. 7.5 The actual withdrawal of funds should be allowed only to the extent of permitted level of drawing power.
7.6 The projected level of current assets or current liabilities is not analyzed in same way as in FBF method. Hence, it is preferable to take the available margin based on the latest audited balance sheet. 7.7 Under this method, projected annual sale is to be justified. The realistic projection of annual sales is absolutely essential, which minimizes the possibility of over financing or under financing. 7.8 The level of projected sales is analyzed and considered at a level accepted to the Bank based on the information provided by the borrower/applicant. The reasonableness of the projected/ accepted sales may be verified based on the following factors with proper justification: 7.8.1 Year on Year growth for the last three years 7.8.2 Achievement of projections by the unit in the last three years 7.8.3 Annualizing the sales based on the actual sales made during past months in the accounting year. 7.8.4 Additional orders / expansion 7.8.5 Marketing potential 7.8.6 Future production, any increase in the capacity utilization, etc. 7.8.7 Experience and capability of the borrower 7.8.8 Scope for expansion like additional distributorship/ orders/ franchise, etc. 7.9 Under this method, the total working capital requirements are pegged at 25% of the projected annual sales, which assumes an average working capital cycle of 3 months i.e. working capital would be turned over 4 times in a year. 7.10 Under the turnover method, branches/offices shall ensure maintenance of a minimum margin on the projected and accepted annual sales turnover. (i.e. 5% of the projected and accepted annual sales) 7.11 In case of seasonal activities, the seasonality of the sales and production are to be taken into account. The sales during the peak season and non peak season periods are to be annualized separately and two different limits are to be arrived as peak level and non-peak level limits. 7.12 Under this method, the working capital limit is arrived as under: 1. 25% of the accepted projected annual sales. 2. Less (a) minimum margin at 5% of accepted projected annual sales. (or) Actual margin (NWC) available (whichever is higher ) The resultant (Difference between 1 & 2)is the eligible working capital limit. 7.13 If the actual margin available is less than the minimum stipulated margin at 5% of the projected sales, then either (1) the borrower is to be advised to bring in the additional capital to the extent of the shortfall or (2) limit may be fixed at the 4 times of the margin available till the margin is improved to the minimum stipulated margin. 7.14 Wherever the production cycle is longer than 3 months, the customer has to bring in additional margin in addition to the minimum margin of 5%.
7.15 Generally the assessment of working capital credit limits is done both as per FBF and Turnover method. If the credit requirement based on FBF method is higher than the one assessed as per turnover method, the higher limit may be sanctioned. 7.16 On the other hand if the assessed limit as per FBF method is lower than the one assessed as per Turnover method, while the limit can be sanctioned upto 20% of the projected sales, actual drawals may be allowed on the basis of the drawing power. 7.17 The minimum of 20% of the projected sales as per the turnover method may not be treated as maximum. 7.18 In certain cases of traders like grains dealers, petrol bunks, commission agents, travel agents, turnover methods would not be appropriate as it may end up in over financing. In such cases, average stock holding level, storing capacity and the normal book debts level should be taken into consideration while determining the eligible working capital finance. Similarly, for traders dealing in perishable goods like vegetables, fruits, food products, milk and bakery products, not more than 15 days sales and debtors put together may be considered as working capital limit. Hence, in case of borrowers desiring facilities having a WC cycle of more/less than 3 months in a year, the WC requirements could also be funded after assessing his requirements on the basis of his WC cycle, after fixing proper margins. 7.19 Further the quantum of loan has to be assessed based on the nature of business and type of goods dealt. For small kirana shops engaged in retail trade the quantum of WC loan should be fixed at not more than 2 months average sales (IC : 10038 dated 27/08/2014). 7.20 CMA format may not be insisted upon for the credit limit upto Rs.1 crore covered under turnover method. 8 Flexible Bank Finance: (FBF) 8.1 Flexible Bank Finance Method is an extension of permissible Bank Finance Method with customer friendly approach in as much as the scope of Current Assets is made broad based and for evaluating projected liquidity, acceptable level of Current Ratio is taken at 1.17:1 against benchmark level of 1.33:1. 8.2 Flexible Bank Finance method is applicable for account with credit limits of Rs. 1 Crore & above for other advances & above Rs.5 Crores for MSE advances. 8.3 Under the FBF system, an uniform classification for Current Assets and Current Liabilities shall be adopted on the terms given in CMA data format. 8.4 The working capital finance is to bridge the gap between Current Assets and Current Liabilities. 8.5 FBF method is based on the assessment of limit as the difference between Working Capital Gap and Projected Net Working Capital. 8.6 The gap in required level of resources to maintain the projected level of current assets and the manner in which the current assets are managed need to be examined. 8.7 The assessment of credit requirement of a party shall be made based on the projected study of the borrower s business operations vis-à-vis the production / processing cycle of
the industry. The projected level of inventory and receivables shall be examined in relation to the past trend, market developments and industry trend. 8.8 Detailed circular on Flexible Bank finance was issued by the Bank vide IC 5637 dt.09-03-1998, which is to be scrupulously adhered to. 9 Collection of Financial Data: The required financial data are obtained from the borrower in CMA format (Credit Monitoring Arrangement).It consists of the following 6 parts/forms: 9.1 Form I: 9.1.1 It gives the particulars of existing / proposed limits from banking system including limits from all financial institutions as on the date of the application. 9.1.2 Information relating to Working capital and Term loan borrowing (existing and proposed) are captured. 9.1.3 Additional information regarding borrowings from NBFCs, Term Lending Institutions for Working Capital purposes, Inter Corporate Deposits taken, etc. are all collected in Form I. 9.2 Form II: It is the Operating Statement and the Manufacturing/Trading & Profit & Loss account is provided in this form to arrive at the details on Raw Materials consumed during the year, Cost of Production, Cost of Sales, Operating Profit, details on other income and expenses, and finally the Retained Profit after necessary appropriations. 9.3 Form III: 9.3.1 It is the analysis of Balance Sheet. 9.3.2 Analysis of balance sheet and profit & loss account over a period of years is an important tool in assessing the financial position of the borrower and his requirements 9.3.3 Audited financial statement for the last 3 years should be obtained and analyzed. 9.3.4 If the latest financials available is more than one year old, a certified unaudited provisional balance sheet and profit and loss account as at the end of the last accounting year to be obtained. 9.3.5 Analysis should be prepared in the lines as per Form III. 9.3.6 Total liabilities are captured with sub-totals of detailed entries under the heads Current Liabilities, Long Term Liabilities and Net Worth. 9.3.7 Similarly, total assets are captured with subtotals of detailed entries under the heads Current Assets, Fixed Assets, Non- Current Assets and Intangible Assets. 9.3.8 The auditor s certificate and the report of Board of Directors (in case of Limited Companies) together with the notes of the auditors on the financial statement should be carefully examined as they may have bearing on the borrower s financial position. 9.3.9 The borrower may be requested to furnish the required information if the same is not available in the financial statements. 9.3.10 By this method of analysis, uniformity across all the financial years in classification of various assets and liabilities mainly, current assets and current liabilities is adopted for assessing the working capital limit. 9.3.11 After ensuring the correctness of total liabilities and assets as per the Balance Sheet, Tangible Net Worth, Net Working Capital, Current Ratio, etc. are computed in Form III. 9.3.12 Additional details based on the notes on accounts attached to the audited statements, the information on the contingent liabilities if any, like disputed excise/customs/tax liabilities, arrears of cumulative dividends, gratuity liabilities, etc. are also provided.
9.4 Form IV: 9.4.1 This is the comparative statement of Current Assets and Current Liabilities. 9.4.2 The entire break up of current assets and current liabilities based on Form III is provided. 9.4.3 The holding level in days/month of the major components in both current assets and current liabilities are computed. 9.4.4 The holding levels may be studied in comparison with the holding levels of similar units in the industry, wherever available. The study of the requirements / holding levels of raw materials, finished goods, stores, stocks in process etc. should be based on the past trend of the concern. 9.4.5 The levels of projection to be examined with reference to the borrower s specific operational strengths and weakness, their need to hold the current assets at the levels projected and their ability to absorb cost of carrying inventory / receivables at the levels proposed. 9.4.6 In cases where the projections of current assets reflect excessive and inefficient levels of inventory and receivables, or where the projected level of creditors is low and does not bear adequate explanation, the question of revising the projected values of Current Assets and Current Liabilities will arise and will have to be discussed with the borrower thoroughly. 9.4.7 Divergence in the holding levels as compared to past trend may be allowed with justification. Some of the reason for variation in holding levels is detailed herein below: 9.4.7.1 Bunched receipt of raw materials including imports. 9.4.7.2 Power cuts, strikes and other unavoidable interruption in the process of production. 9.4.7.3 Accumulation of finished goods due to non-availability of shipping space for exports or other disruptions in sales (but not under circumstances where a sales stimulation is needed through reduction in prices). 9.4.7.4 Build up of stocks of finished goods such as machinery, due to failure on the part of purchasers for whom these were specifically manufactured to take delivery. 9.4.7.5 Need to cover full or substantial requirements of raw materials for specific export contracts of short duration. 9.4.7.6 Care to be taken to ascertain the actual reasons for the excessive inventory before accepting the validity or deviations. 9.4.8 Variations have to be brought into the process note stating past levels and justification for accepting the same. 9.4.9 Normally the holding period is calculated for the following items of current assets and current liabilities for examining the projected level of inventory and receivables and creditors. Current Assets - Raw materials consumed Other consumable spares Stocks in process Finished Goods Export Receivables Other Receivables Current Liabilities - Creditors for purchases 9.5 Form V: 9.5.1 In this form, the overall eligible limit for working capital purpose under flexible bank finance method is computed in the following manner: Total Current Assets (TCA)..
Less Current Liabilities (other than Bank Borrowings).. The resultant is Working Capital Gap (WCG).. Less Actual / Projected Net Working Capital (NWC). The resultant is eligible finance (FBF). 9.5.2 No minimum margin (NWC) is stipulated and the actual or projected margin as computed in the CMA data as per the Form IV is taken for the respective years i.e. previous year, current year, next year, etc. Branch to classification of current assets and current liabilities as per bank s guidelines on flexible bank finance. 9.5.3 The projected bank borrowing shown in Form III which reflects the finance sought by the borrower, will be validated with reference to the operating cycle of the borrower, projected level of operations, nature of projected build up of Current Assets and Current Liabilities, Profitability, liquidity etc. When these projected parameters are acceptable, the projected bank borrowing will stand validated for sanction. 9.5.4 To find out whether there is sufficient margin in the system, the following calculations in % terms are also made immediately after the arrival of Flexible Bank Finance. 1. NWC (margin) to Total Current Assets (TCA) (%) 2. FBF (Limits) to Total Current Assets (TCA) (%) 3. Other Current liabilities to TCA (%) 9.6 Form VI-A: 9.6.1 It is the analysis of the flow of funds between two accounting years and whether there is diversion of funds, internally or externally. 9.6.2 How much funds have been raised by way of long term sources, how much spent on long term uses and whether there is surplus or deficit between long term sources and long term uses. 9.6.3 If it is deficit / negative, it is implied that the short term funds have been used for long term uses i.e. diversion of funds, which leads to negative NWC and lower Current Ratio. 9.6.4 In case of internal diversion, Borrower is to be advised suitably to infuse funds by way of long term sources. 9.6.5 If the deficit is because of diversion of funds outside the system, the entity should be advised to bring back the funds to shore up working capital. 9.7 Form VI-B: It is analysis of cash flow of the concern based on cash budget. 10 Cash Budget Method: 10.1 Cash Budget is a forecast of receipts and payments of an enterprise drawn at small intervals of time say monthly or quarterly. 10.2 It consists of all cash receipts and cash payments (either month wise or quarter wise) to arrive at the final closing cash balance at the end of the month/quarter after adjusting the opening cash balance. 10.3 It is drawn for a specific period in near future in order to ascertain the liquidity position of an enterprise at prescribed intervals during this period.
10.4 An enterprise with an ideal funds flow position may face severe liquidity crunch during a specific period of the year. In order to find out the specific reasons behind the strain on liquidity during the period, the enterprise would have to draw a realistic cash budget and it is only on the basis of the pragmatic cash budget that an enterprise would be in a position to decide when and how to meet the short term cash deficit so that it can tide over a temporary liquidity crisis. 10.5 Under this method, the required finance is quantified from the projected cash flows and not from the projected values of assets and liabilities. 10.6 The working capital limit/cap is fixed based on the maximum deficit of the cash balance (negative cash balance) based on the projected cash budget submitted either monthly or quarterly for the next accounting year. 10.7 The operations in the account are allowed based on the liquidity requirement of the enterprise subject to the working capital limit fixed and subject to the availability of the drawing power. 10.8 Though the working capital limit is determined by the peak level of deficit in the cash budget, the availability of finance is limited to the extent of deficit in the cash budget for the respective months. 10.9 No capital expenditure may be included in the cash budget without providing for a matching item of cash inflow to ensure that funds provided for working capital is not utilized for funding acquisition of capital assets or for other purposes. 10.10 In case there is a significant change in the pattern of inflows and outflows vis-à-vis the figures originally worked out in the projected cash budget, the cash budget may be revised subject to validation by the bank and operations may be allowed as per the revised cash flow within the maximum limit fixed. 10.11 In this method of assessment, besides the cash budget, other aspects like the borrower s projected profitability, liquidity, gearing, funds flow, etc, are also to be analyzed. 10.12 Cash Budget Method may be adopted in case of specific Industries/Seasonal activities such as Software Development, Construction Industry, Film Industry, Sugar, Fertilizers etc., and all working capital short term loans. Hence, the Cash budgeting method may be used in the following circumstances when: 10.12.1 A business enterprise requests the banker for a short-term loan. 10.12.2 Before issuing Letter of Credit, the banker has to ensure that a comfortable liquidity position exists in the client s account when the bills against LC are presented for payment. 10.12.3 A borrower applies for an adhoc working capital credit facility which is to be repaid by the end of a specific period, say 3 months. It is necessary to analyse that adequate cash surplus is likely to accrue in the borrower s books during this period which would take care of the repayment of the adhoc working capital limit. 10.12.4 Credit proposals involving financing of bills, issue of Deferred Payment Guarantee.
10.12.5 Credit proposals for financing construction activities would require application of realistic cash budgeting in order to ascertain the level of projected requirements at specified intervals. The amount and periodicity of repayment may also be ascertained by cash budgets drawn for the purpose. 10.12.6 Peak and non-peak levels of working capital credit requirements for seasonal activities can be effectively worked out by employing cash budgeting method. Activities depending on agriculture are generally seasonal in nature. Activities like firecracker manufacturing, printing & publication of text books, etc. are also seasonal in nature. Credit decisions in respect of these activities are usually taken on the basis of carefully drawn cash budgets for a year. Limits may go high during the peak activity period of a year and may go down during the non-peak period. 10.12.7 Financing agro-based seasonal activities like sugar/ tea/coffee/rubber/cardamom/rice milling etc. and software development activities are essentially financing of cash gaps. 10.12.8 Cash budget method can be used for assessment while lending to NBFCs. 10.12.9 Working capital requirements of above Rs. 5.00 crore under Union Liqui Property Scheme. 10.13 Bank has to monitor the end use of the advance with the help of a cash budget and also to ensure that the outstanding balance of bank loan is covered by the value of the primary security less margin stipulated. 11 Net owned Funds Method: 11.1 RBI has withdrawn Net Owned Funds Method for NBFCs except for Residuary Non Banking Companies (RNBC). 11.2 The Bank s exposure shall be normally restricted to NBFC sponsored by reputed Group clients with the proven track record, sound financials and those complying with the RBI stipulated norms/usual lending norms prescribed by the Bank from time to time. 12 Loan System of Delivery of Bank Credit 12.1 As per RBI guidelines, in the case of borrowers enjoying limits of Rs. 10 crores and above from the banking system, the loan component should normally be 80 percent of the assessed limits. Banks, however, have the freedom to change the composition of working capital by increasing the cash credit component beyond 20 percent or to increase the Loan Component beyond 80 percent, as the case may be, if they so desire. Banks are expected to appropriately price each of the two components of working capital finance, taking into account the impact of such decisions on their cash and liquidity management. In the case of borrowers enjoying working capital credit limit of less than Rupees ten crore, banks may persuade them to go in for the Loan System by offering an incentive in the form of lower rate of interest on the loan component, as compared to the cash credit component. The actual percentage of loan component in these cases may be settled by the bank with its borrower clients. In respect of certain business activities, which are cyclical and seasonal in nature or have inherent volatility, the strict application of loan system may create difficulties for the borrowers. Hence, Banks may, with the approval of their respective Boards, identify such business activities, which may be exempted from the loan system of delivery. 12.2 Since RBI has given the banks freedom to decide the Loan and Cash Credit components, the respective sanctioning authority, based on the request of the constituent, may decide the extent of loan and Cash Credit component.
12.3 By and large, for borrowers enjoying credit limits of RS.10 crores and above the Loan component shall be 80% of the assessed limits. 12.4 Borrowers will have to adjust the WCDL component at least for a day in a year. This will enable the Bank to exercise Exit Option. 13 Working Capital Finance to Information Technology and Software Industry (RBI guidelines):following the recommendations of the National Task Force on Information Technology and Software development, Reserve Bank of India has framed guidelines for extending working capital to the said industry. Banks are however free to modify the guidelines based on their own experience without reference to the Reserve Bank of India to achieve the purpose of the guidelines in letter and spirit. The salient features of these guidelines are set forth below: 13.1 Banks may consider sanction of working capital limits based on the track record of the promoter s group affiliation, composition of the management team and their work experience as well as the infrastructure. 13.2 In the case of the borrowers with working capital limits of up to Rs 2 crore, assessment may be made at 20 percent of the projected turnover. However, in other cases, the banks may consider assessment of Bank Finance on the basis of the monthly cash budget system. For the borrowers enjoying working capital limits of Rs 10 crore and above from the banking system the guidelines regarding the loan system of Delivery of Bank Credit would be applicable. 13.3 Banks can stipulate reasonable amount as promoters contribution towards margin. 13.4 Banks may obtain collateral security wherever available. First/ second charge on current assets, if available, may be obtained. 13.5 The rate of interest as prescribed for general category of borrowers may be levied. Concessional rate of interest as applicable to pre-shipment/post-shipment credit may be levied. 13.6 Banks may evolve tailor-made follow up system for such advances. The banks could obtain quarterly statements of cash flows to monitor the operations. In case the sanction was not made on the basis of the cash budgets, they can devise a reporting system, as they deem fit. 14. Scheme for Finance to Cotton Ginners & Traders: (IC 95-2015 dt. 01.06.2015) 14.1 All existing profit making units which are involved in cotton ginning and / or trading with credit rating of CR-4 or better are eligible for finance under the scheme. Accounts with rating of CR-5 or below will not be eligible under the scheme. 14.2 Take over of units is also covered subject to observance of take over norms. 14.3 Technical, economic and financial feasibility of the proposal and repaying capacity of the borrower is to be assessed.
14.4 Assistance in the form of Cash Credit (Hyp.) for day to day running of business and/or in the form of medium to long term loan for acquiring/maintenance of assets necessary to smooth running of the business. 14.5 Margin should be 20% on stock and 40% on book debt for working capital facility and minimum 25% for term loan. 14.6 Term loans are repayable within 7 years including maximum 2 years of moratorium. 14.7 Rate of interest is based on the credit rating and is lower than the general advances. No separate term premium is charged for term loans. 14.8 Collateral security of at least 125% of the aggregate facility shall be stipulated. 14.9 Third party guarantee/personal guarantee of partners/promoters/directors and owners of the properties offered as collateral security to be obtained. 14.10 Key benchmark ratios are Current Ratio = 1.10 or above, DER = 3.00 or below, Average DSCR = 1.50 or above and minimum DSCR in any year = 1.20. Any deviations can be considered by the respective ZLCC on case to case basis incorporating justification in the process note. 15. INTERNATIONAL TRADE: emanual on foreign exchange published by Domestic Foreign Business & International Banking Division, Central Office explains in detail various types of import and export transactions together with exchange control requirements to be observed by bank s officials as also the systems and procedure prescribed for handling such transactions at branch level. The following paragraphs explain in brief, credit facilities usually extended to the exporter/importer customers. 15.1 Packing Credit 15.1.1 Packing credit advance is granted to exporters or manufacturers or sub-suppliers for financing the procurement of raw materials, processing, manufacturing, packing, transporting, warehousing and shipping of goods meant for export. This limit is sanctioned in accordance with RBI guidelines, usual credit norms, Bank s policies and internal procedures. 15.1.2 Manual of foreign exchange contains guidelines regarding granting of packing credit advance to manufacturers / exporters. 15.1.3 While assessing export credit requirements of such customers, special aspects of this type of facility should be taken into consideration in arriving at need based finance. 15.1.4 Since packing credit loans have to be liquidated out of export proceeds, they are considered along with appropriate and adequate post shipment facilities. 15.1.5 Packing credit advance is to be sanctioned/ disbursed to exporters or the manufacturers against evidence/ lodgement of irrevocable letter of credit established through prime banks or confirmed orders placed by overseas buyers for export of goods from India. 15.1.6 Permissions to be obtained from competent authority, if L/Cs is opened by non prime banks. 15.1.7 At the limit processing stage a careful study of the customers requirements vis-à-vis the procurement, production and shipment schedule is to be made and need based limits are to be fixed.
15.1.8 The mode of payment to the suppliers viz., either by cheque or by cash is to be assessed e.g. payment of wages which can be predetermined can be allowed to be drawn in cash for manufacturers / exporters. 15.1.9 Branch need to look into the eligibility criteria and check points as per RBI guidelines before sanctioning export credit limits to the customer. 15.1.10 Methods of assessment of export credit limit is same as assessing for domestic credit limit and are to be assessed by applying appropriate methods of assessment (Turnover/ FBF/ Cash budget). 15.1.11 As per RBI guidelines, sanctioning authority to adopt flexible approach in terms of stipulating margin, current ratio, collaterals etc. while sanctioning export credit limits. 15.1.12 Since packing credit loans extended at concessional rate are specific purpose advance, it is the responsibility of branch to ensure proper end use of the amount disbursed to the exporters. 15.1.13 Advance should be disbursed in a phased manner taking into account specific purpose and needs of the borrower, viz., shipment schedule, procurement and production schedule, warehousing, insurance and freight requirements and other aspects related to procurement processing and ultimate exports. 15.1.14 Bank has advised branches to follow uniform procedure in operation of packing credit account, which is to be adhered to. 15.1.15 Under packing credit advance drawing power is based on the value of export order/ L/Cs submitted by the exporter and is arrived at as follows: CIF value of the order Less: Insurance, Freight (i.e. FOB Value) Less: Margin (as per existing guidelines) = Amount eligible for advance. 15.1.16 The stock is to be inspected periodically and M-6 statement is to be submitted to the controlling office. 15.1.17 Customer is required to submit copies of final invoices received from supplier evidencing purchase of raw material/ goods for exports. 15.1.18 Suitable documentary evidence of end use of funds in case of cash payment should also be obtained from the customers. 15.1.19 Risk of failure of customer in repaying the packing credit advance is covered by the bank under Whole Turnover policy issued by Export Credit Guarantee Corporation (ECGC) taken by our bank. It is the responsibility of the branch to ensure that exporter is not on Specific Approval List of ECGC, exporting country is not under restricted cover country of ECGC (Branch to refer latest circulars/ ECGC website and all the terms and conditions of the policy as informed by ECGC/Bank to be scrupulously complied with.) 15.2 Post-Shipment Credit: Post-shipment finance is a short term working capital finance extended against export receivables. Bank has to liquidate the PC advance, allowed against the particular order, once exporter submits export documents to the bank on shipment. 15.2.1 Post-shipment finance is granted under the following heads- 15.2.1.1 Purchase of bills against confirmed orders on sight (DP) basis controlled under foreign documentary bills purchased (FDBP) 15.2.1.2 Discounting of bills against confirmed orders on usance (DA) basis controlled under foreign usance documentary bills purchased (FUDBP) 15.2.1.3 Negotiation of bills under letter of credit (sight/ usance) and controlled under FDBP/ FUDBP depending upon the tenor. 15.2.1.4 Advance against export bills sent for collection (AFDBC).
15.2.2 Risk of failure of the customer / non realization of the export bill is covered by the bank under ECIB(PS) policy issued by Export Credit Guarantee Corporation (ECGC) taken by our bank. It is the responsibility of the branch to ensure that the overseas importer is not in the Buyer Specific Approval List (BSAL) of ECGC, exporting country is not under restricted cover country of ECGC (Branch to refer latest circulars/ ECGC website and all the terms and conditions of the policy as informed by ECGC/Bank to be scrupulously complied with.) 15.3 The detailed discussion of pre-shipment and post-shipment credit facilities is available in Manual of Foreign Exchange (International Banking Division) & may be referred to for guidance.)