Compliance Management in Corporate Credit Portfolio Plan your strategy – part IV
Working Capital Facility
The terms of sanction for fund based working capital limits are as under:
| Nature of facility | Fund Based Working Capital (Cash Credit) limit enhanced from Rs.00.00 Lakhs to Rs.00.00 Lakhs under . |
| Limit | Rs.00.00 Crores ( subject to renewal/ review after 12 months) Non Fund based working capital limit : LC …../ guarantee Rs…..lacs (interchangeable) |
| Purpose | To meet working capital needs of the company |
| Security- Primary | Exclusive charge by way of Hypothecation on the entire stocks of inventory, receivables, bills and other chargeable Current Assets of the company (both present & future). Non fund based limits are secured by extension of the charge on current assets. |
| Margin | 25% on stocks & 40% on Book Debts (up to 90 Days) for which drawing power should be allowed.
Book debts for more than 90 days will not be considered for the purpose of DP. However, the same shall continue to be part of the security to the limit. |
| Rate of interest | One year MCLR (….%) + ….% i.e….% at present with monthly rest. The One Year MCLR effective on the date of renewal shall be linked to arrive at effective ROI and shall remain same for the period of one year or up to next renewal of the limit whichever is earlier. Charges in LC/guarantee are as per bank’s guidelines |
| Drawing Power | Drawl will be regulated by monthly stock statements. DP should be arrived at after deducting the unpaid stocks, (incl. Unpaid stocks received under DA LC), debtors more than 90 days & after providing margin as stipulated herein above. Stock under LC will not rank for DP. However Book debts more than 90days/unpaid stocks will continue to be the part of the primary security. Obsolete stocks shall be excluded for the purpose of DP Calculation. LC utilization is to be monitored on the basis of cash budget t be submitted by the borrower. |
| Basis of Valuation | Raw Materials: Lower of Cost or Current market price. Stock-in-Process : Raw Materials at cost PLUS Factory Overheads Stores and Spares / Components : At Cost Finished Goods: Lower of Cost or Current market price. Book Debts (not more than 90 days’ old): At Invoice price or sales price, whichever is lower) |
| Periodicity of Stock/Book Debt Statement | Monthly within the 10TH day of the month following the month to which such statement relates. The book debt statement shall indicate the debts outstanding up to 90 days and above for different slabs separately. Valuation of stocks, finished goods & Book debts to be certified by appropriate authority like stock auditor / C.A etc once in every six months. |
| Storage & Possession | Stored in loose in the company’s factory, building/ compound /shed /plot, stock in transit/depots/ shipment (or other places with prior permission of the Bank). |
| Inspection | The stocks etc at different go downs sites etc are to be inspected by the Bank’s representatives at quarterly intervals and the report thereof should be kept on record. |
| Insurance | The entire current assets charged to the bank will be comprehensively insured for the full value against risk of loss due to fire or any other risk pertaining to assets. The policy will be taken in the joint names of the banks and the borrower with standard bank clause, the cost of which to be borne by the company. The Bank, if deemed necessary reserves the right to insure the mortgaged property offered as collateral security to secure the loan and in such cases, the amount of premium will be recoverable from the company |
| Commitment Charge | As per extant guidelines of the bank. |
| Processing & documentation Charges | As per extant guidelines of the bank. |
Extending finance against current assets require the banks to be vigilant about the operations. The person at the desk has to be concerned about each and every transaction since the compliance norms require the bank to extend finance against paid for stock which are not stale. The primary instrument for surveillance is the stock/ debtors statement and ensures that the unit is functioning regularly. Since the charges are against current assets , which are volatile in nature and reflects the company’s worth at any point of time , the desk level person has to depend on the available information in the system to initiate transactions. The person responsible for credit monitoring has to be vigilant about the transactions and compare with the information received in the regular process. Weakness of the unit is manifested in the transactions which may or may not be revealed by the borrower. Inflow and outflow of fund require close scrutiny to ascertain unit’s real performance.
Utilization of non fund based limits requires examination of the cash budget submitted by the borrower and the trend of utilization. The payments falling due on account of maturity of LC within next week/ fortnight should be kept in view before allowing funds. Slow down in transactions also indicate business constraints for which the branch has to be vigilant. The terms of sanction should be based on the actual business behavior. In case there is inherent delay in realization of debtors, one has to study whether such delay is peculiar to that particular industry/ trade. In such cases the drawing power should include more than 90 days usance. Similarly renewal/ review of account has to be conducted after one year or one season ( in case of seasonal product) and the process should start 2 months before the sanction expires. The renewal process should involve proper assessment so that constraints faced by the borrower can be addressed. In case it is observed that the limit is in excess of actual requirement, the limit should be realigned to make it need based.
Bank guarantee is issued for a particular period. After the expiry of the period letter should be issued ( which should be served properly) advising that the guarantee is no longer valid and the same should be returned. After a reasonable time the outstanding guarantee should be deleted to provide room for issue of fresh guarantee. Issue of LC should be based on the payment pattern. In case it is observed that there is frequent devolvement of Lc, issue of fresh LC should be restricted , even if there is available limit. The debits in the account should be periodically verified to ensure that the fund is utilized for the purpose for which the sanction was made. The payments should go to suppliers etc of the product of business. Any payments made , which do not conform to the normal trend, should be investigated.
Referring to bank’s guidelines while advising sanction creates a dilemma. The bank’s guidelines should be provided/ incorporated in the sanction and the same should be signed/accepted by the borrower. Record keeping is an important aspect in the process. The letters issued by the borrower should be stored in proper place, so that they can be referred as and when required. Required information regarding the borrower should be updated periodically in the system, so that the person responsible for transaction can refer to the same as and when required. The responsibilities assigned to each person should be documented, including the process of reference to the higher level and details of delegation. Regular office orders should include field visit assignments to branch functionaries’ in rotation and each should be instructed to submit the report after the visit incorporating all required details. Normally format for field visit is available in each banks. Monitoring of accounts are group responsibility and such responsibilities are effective when they are incorporated in the systems & procedures. The reports generated from the branch are the basis of risk management at the corporate office. True representation of facts will facilitate promulgation of proper risk control measures. Credit rating, both internal & external , relies on information available from the bank. Quality of information plays a key role in deciding the risk potentiality of an account.
