Page 37 - Banking Finance August 2019

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sanctioned to small borrowers against the monthly card method, it do not indicate the actual cash position of the
settlement. Loan is sanctioned even up to 200% of the firm. The true and fair ability of the firm cannot be
monthly sales proceeds received in the POS machines, ascertained from traditional interest coverage ratio.
through card payment. The entire procedure takes just
10 minutes. The repayment is also ensured as the Cash generation to debt repayment: The ratio is derived
amount collected from POS machine is collected in a (Cash flow from operation+interest on term loan )÷(interest
particular current account from where the repayment of on term loan+installment of term loan). It is a supplement
loan is made. to Debt Service Coverage Ratio (DSCR). Instead of Profit
after Tax (PAT), cash flow from operation is used to ascertain
The growing importance of cash flow based the capability to repay the debt obligation. The ratio is more
assessment has not only contributed to practical in nature as it considers the actual cash flow from
evolvement of new products but also several operation instead of Profit after tax.
ratios for better credit assessments. Some of the
Considering the benefits of "cash based lending" technique,
ratios are:
banks have started adopting the method for assessment.
Cash flow from operation to sales ratio: This ratio
indicates the ability of the firm to generate cash from the Conclusion:
sales which is registered. It indicates how much percentage
of sales is blocked in the debtors and how is the quality of Controlling of cash flow is need of the hour in order to ensure
the debtors. It also helps in lifting the veil of fake sales, if quality of credit. With a shift to cash flows, lenders can
the ratio is less and persistently declining then it may also better assess the repayment capacity and liquidity position
indicate that the firm is recording fake sales to make the of the clients. This shift will help in developing new lending
financial statement bankable. products and explore new target market.

Cash flow from operations to Interest: This ratio is also It will also benefit small borrowers as they will not be
known as "cash interest coverage ratio". It indicates ability required to offer collateral for availing credit. It can avail
of the firm to repay interest out of the cash generated from loan against the cash flow generated from the business.
the core business activity. The higher the ratio, the better
Let us accept that - "Revenue is Vanity, Profit is sanity
is the position of the firm. As we have already discussed
above, that profit after tax (PAT) is derived from accrual but cash is King". T

GST collections fall below Rs 1 trillion

Indirect tax mop-up in June fell marginally to Rs 99,936 crore, after breaching the Rs 1 trillion mark in goods and
services tax (GST) collections for two consecutive months. Following the GST Council’s decision to moderate rates, the
sluggish momentum in tax collection growth is partly due to the cuts in tax rates.

The sluggish pace of revenue growth also leaves very little room for the GST Council to cut tax rates in the near future
unless revenue collection sees a surge. It also implies that the authorities will now focus on improving compliance by
taxpayers using data collected from various sources. Central and state authorities had set a two-year transition pe-
riod till 30 June 2019 for GST to stabilize.
Abhishek Jain, tax partner, EY India, said, “Measures such as implementation of new return formats, upgradation of
the e-way bill system, launching e-invoicing, etc., should help check tax evasion."
Minister of state for finance Anurag Thakur warned businesses against generating fake invoices to evade GST. “The
menace of fake invoices needs to be checked as the actions of a few unscrupulous traders make the majority of honest
taxpayers uncompetitive and cause loss to government revenue." He added that tax officers will take strict action in
all such cases.

BANKING FINANCE | AUGUST | 2019 | 37