CAIIB-ABM-LAST MINUTE REVISION

Working Capital

The amount of raw materials, work in progress, finished goods, and receivables is called the working capital.

Method of Assessment of Bank Finance

1. Deciding on the level of Turnover of the Enterprise
2. Assessment of Gross or Total Working Capital : This is the sum total of the assessment of various components of the working capital.
(a) Inventory
(b) Receivables and Bills
(c) Other Current Assets

Sources for Meeting Working Capital Requirement:

(a) Own Sources (N W C)
(b) Suppliers’ Credit
(C) Other Current Liabilities like salaries payable, advances from customers, etc.
(d) Bank Finance

Calculation of Bank Finance

(a) First Method of Lending: Under this, the enterprise was required to bring in at least 25 per cent of the working capital gap (total current assets minus total current liabilities excluding bank finance)

(b) Second Method of Lending: Under this, the enterprise was required to bring in at least 25 per cent of the total current assets.

(b) Third Method of Lending: Under this, the enterprise was required to bring in 100 per cent of those current assets which are considered 'core assets' and at least 25 per cent of the remaining current assets.

Bills / Receivables Finance by the Banks

Receivables are part of the current assets of a business enterprise. These arise due to sales on credit basis to the customers. The bank provides finance against these in a fashion similar to that for inventory.

Another method of sales is through Bills of exchange drawn by the seller on the purchaser in the following manner;

(a) If no credit is to be provided to the customer, a demand bill is drawn.

(b) If the credit is to be provided on the sales, a bill of exchange, called usance bill, mentioning the period of payment, is drawn on the purchaser and is accepted by him The outstanding amount is shown in the accounts as 'bills receivables'.

The terms used in bills finance are purchase, discount and negotiation. Normally, 'purchase' is used in case of demand bills, 'discount' in case of usance bills and 'negotiation' in case of bills which are drawn under letters of credit opened by the purchaser's bank.

Non-Fund-Based Working Capital Limits

1. Guarantees
2. Co-acceptance of Bills
3. Letters of Credit

Commercial Paper (CP)

1. Unsecured money market instrument
2. Issued in the form of a promissory note
3. Introduced in India in
4. Cost of borrowing through CP is normally lower compared to other sources of short term finances

Factoring

1. Method of financing the receivables of a business enterprise.
2. The financier is called 'Factor' and can be a financial institution.
3. Banks are not permitted to do this business themselves but they can promote subsidiaries to do this. Under factoring, the factor not only purchases the book debts/receivables of the client, but may also control the credit given to the buyers and administer the sales ledger.
4. The purchase of book debts/receivables can be with recourse or without recourse to the client.
5. If without recourse, the client is not liable to pay to the factor in case of failure of the buyer to pay.

Forfaiting

1. This is similar to factoring but is used only in case of exports and where the sale is supported by bills of exchange/promissory notes.
2. The financier discounts the bills and collects the amount of the bill from the buyer on due dates. Forfaiting is always without recourse to the client. Therefore, the exporter does not carry the risk of default by the buyer. 

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Term Loans

Banks provide term loans normally for acquiring the fixed assets like land, building, plant and machinery, infrastructure etc., (personal loans, consumption loans, educational loans etc. being exceptions)

Deferred Payment Guarantees ( DPGs)

When the purchaser of a fixed asset does not pay to the supplier immediately, but pays according to an agreed repayment schedule, and the bank guarantees this repayment, the guarantee is called DPG. This is a Non-fund based method for financing purchase of fixed assets.

Types of Financing of infrastructure projects by Banks

(a) Take-out Financing
(b) Inter-institutional
(c) Financing Promoter’s Equity

Take-out Financing or Liquidity Support

(1) Take-out Financing or Liquidity Support
(2) Liquidity support from I D F C

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Credit Delivery

1. Documentation:
2. Proper stamping, dated, authority, with free will, duly filled in, roc charge, sub registrar, CERSAI, third party guarantee
3. Charges : Mortgage, hyp, pledge, lien, assignment
4. Disbursement of w/c and term loan, promoter’s contribution

Consortium/Syndication

• Two or more banks get into a formal arrangement
• Exchange of information
• Joint documentation/DP allocation
• For syndication mandate to one bank is given for arranging entire loan

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