Page 44 - Banking Finance December 2022

ARTICLE

capital purpose, Inter Corporate deposits taken, Lease and weaknesses, their need to hold the current assets at
finance availed shall also be collected in Form-I. projected levels and their ability to absorb costing involved
in carrying inventory/ receivables at the projected level.
How to calculate working capital limit under Flexible Bank
Finance method II. Concept of working capital operating cycle
In simple terms, Operating Cycle means the length of time
The quantum of finance is calculated as under- required to convert "Non Cash current assets like raw
material, work-in-progress, finished goods and receivables
Sr No Particulars
into cash.
1 Total Current Assets (TCA)
2 Less Current Liabilities (other than Bank
Raw
Borrowings) Cash
Material
3 The resultant is Working Capital Gap
(WCG)
4 Less Less Actual / Projected Net Working
Capital (NWC)
5 The resultant is eligible finance (FBF)
Finished
Receivables WIP
To find out whether there is sufficient margin in the system, Goods
the following calculations in % terms are also made
immediately after the arrival of Flexible Bank Finance III. Holding period/ level
1. NWC (margin) to Total Current Assets (TCA) (%) Holding level means the period of a particular current asset
or current liability after which it is converted or realized or
2. FBF (Limits) to Total Current Assets (TCA) (%)
is paid.
3. Other Current liabilities to TCA (%)
The justification of holding period holds the crucial part of
Classification of Current Assets/ Current the FBF system of finance.
Liabilities (Form-III)
A business unit needs to hold the stock of raw materials,
Under Flexible Bank Finance (FBF) method a more liberal
work-in-progress, finished goods (stock in case of traded
approach has been adopted for classification of current
goods) for a length of time in the workplace before
assets and includes the following as part of current assets-
despatching the final products to the customers.
I. Margin in the form of cash deposits for LCs (Letter of
Credit) and Bank guarantees. The holding levels are studied in comparison with the holding
II. Fixed deposits with banks and government. levels of similar units in the industry, wherever available. The
study of the requirements / holding levels of raw materials,
III. Temporary investments like
finished goods, stores, stocks in process etc. should be based
i) CP (Commercial paper)
on the past trend of the concern. The levels of projection to
ii) CD (Certificate of Deposit)
be examined with reference to the borrower's specific
iii) MMMF (Money Market Mutual Funds), that are operational strengths and weakness, their need to hold the
made with prior consent of the bank for parking current assets at the levels projected and their ability to
short term funds absorb cost of carrying inventory / receivables at the levels
proposed.
Verification of levels of Inventory/
Normally the holding period is calculated for the following
Receivables/ Sundry creditors items of current assets and current liabilities for examining
The projected level of these is to be examined with the projected level of inventory and receivables and
reference to the borrower's specific operational strengths creditors.

44 | 2022 | DECEMBER | BANKING FINANCE