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Committes on Working capital

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BhushanPhirke

This document summarizes a presentation given by Bhushan Vijay Phirke on working capital. It defines working capital and current assets and liabilities. It discusses the Nayak Committee norms for computing working capital limits up to Rs. 2 crore based on a minimum of 20% of projected annual turnover. It also outlines the recommendations of the Tandon Committee to frame bank credit guidelines, including inventory and receivable norms and different methods for lending working capital. The conclusion is that these recommendations provided useful inputs for the Reserve Bank of India to frame lending policies for banks.

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JSPM’s Rajarshi Shahu College of Engineering Tathawade , Pune:33 Presentation on Topic: “ Committees on Working capital ” Department of MBA Date: 21.04.2020 Presented By : Name of student: Bhushan Vijay Phirke Roll Number: 191415 Subject : Financial Management (MBA-Sem II)
Working Capital • Meaning:- 1. Working capital typically means the firm’s holding of current or short-term assets such as cash, receivables, inventory and marketable securities. 2. These items are also referred to as circulating capital 3. Corporate executives devote a considerable amount of attention to the management of working capital.
Working Capital management Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelations that exist between them.
Current Assets • Current assets refer to those assets which in the ordinary course of business can be, or will be, converted into cash within one year without undergoing a diminution in value and without disrupting the operations of the firm. • Examples- cash, marketable securities, accounts receivable and inventory.
Current Liabilities • Current liabilities are those liabilities which are intended, at their inception, to be paid in the ordinary course of business, within a year, out of the current assets or the earnings of the concern. • Examples- accounts payable, bills payable, bank overdraft and outstanding expenses.
Nayak Committee norms For computation of working capital limits • Banks in India have evolved their own method of lending as they have been given free hand by the Central Bank (that is RBI) to decide the lending methods. • The method of assessment of working capital limits up to Rs.2 crore (Rs.7.50 Crore for SME) assessed under turn over method is called as limits assessed under Nayak Committee Norms. • Under turnover method the aggregate fund based working capital limits are computed on the basis of Minimum of 20% of their projected annual turnover. • The borrower has to bring margin of 5% of the annual turn- over of such borrowers as margin money.
Recommendations • The following types of loans and advances are considered as working capital finance. 1. Cash Credit/ Overdraft against inventories and book debts. 2. Demand Loan portion under Loan System for Delivery of Bank Credit • If, permissible bank finance is Rs.10 Crore and above. 1. Packing Credit against inventories. 2. Bills purchased /Discounted (inland & foreign) 3. Cash Credit against book debts/Cheque purchase. 4. Working capital term loan (for excess borrowing)
Tandon Committee To frame guidelines for bank credit • Findings of the committee were as follows: 1. The banks do not have any credit appraisal or planning. It is the borrower who decides how much he would borrow. 2. The security-based approach to lending has led to division of funds to purchase of fixed assets. 3. Bank credit is treated as the first source of finance rather than being taken as a supplementary to other sources of finance. 4. The working capital finance should be made available only for a short period, as it has otherwise, led to accumulation of inventories with the industry.
Recommendations 1. Inventory and receivable norms 2. Lending norms or Maximum Permissible Bank Finance (MPBF) 3. Style of Credit 4. Information and Reporting System
Recommendations • First Method of Lending: Banks can work out the working capital gap, i.e. total current assets less current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long- term funds, i.e., owned funds and term borrowings. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs
Recommendations • Second Method of Lending: Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit for purchases and other current liabilities will be available to fund the build up of current assets and the bank will provide the balance (MPBF). Consequently, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the working capital needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method.
Recommendations • Third Method of Lending: Under this method, the borrower's contribution from long term funds will be to the extent of the entire CORE CURRENT ASSETS, which has been defined by the Study Group as representing the absolute minimum level of raw materials, process stock, finished goods and stores which are in the pipeline to ensure continuity of production and a minimum of 25% of the balance current assets should be financed out of the long term funds plus term borrowings.
Conclusion • Different types of suggestions and recommendations were provided to the Reserve Bank of India on the Working capital. • These all inputs were useful for the RBI to frame the lending policy for the Banks and to make the suitable amendments from time to time.
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Committes on Working capital

  • 1. JSPM’s Rajarshi Shahu College of Engineering Tathawade , Pune:33 Presentation on Topic: “ Committees on Working capital ” Department of MBA Date: 21.04.2020 Presented By : Name of student: Bhushan Vijay Phirke Roll Number: 191415 Subject : Financial Management (MBA-Sem II)
  • 2. Working Capital • Meaning:- 1. Working capital typically means the firm’s holding of current or short-term assets such as cash, receivables, inventory and marketable securities. 2. These items are also referred to as circulating capital 3. Corporate executives devote a considerable amount of attention to the management of working capital.
  • 3. Working Capital management Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelations that exist between them.
  • 4. Current Assets • Current assets refer to those assets which in the ordinary course of business can be, or will be, converted into cash within one year without undergoing a diminution in value and without disrupting the operations of the firm. • Examples- cash, marketable securities, accounts receivable and inventory.
  • 5. Current Liabilities • Current liabilities are those liabilities which are intended, at their inception, to be paid in the ordinary course of business, within a year, out of the current assets or the earnings of the concern. • Examples- accounts payable, bills payable, bank overdraft and outstanding expenses.
  • 6. Nayak Committee norms For computation of working capital limits • Banks in India have evolved their own method of lending as they have been given free hand by the Central Bank (that is RBI) to decide the lending methods. • The method of assessment of working capital limits up to Rs.2 crore (Rs.7.50 Crore for SME) assessed under turn over method is called as limits assessed under Nayak Committee Norms. • Under turnover method the aggregate fund based working capital limits are computed on the basis of Minimum of 20% of their projected annual turnover. • The borrower has to bring margin of 5% of the annual turn- over of such borrowers as margin money.
  • 7. Recommendations • The following types of loans and advances are considered as working capital finance. 1. Cash Credit/ Overdraft against inventories and book debts. 2. Demand Loan portion under Loan System for Delivery of Bank Credit • If, permissible bank finance is Rs.10 Crore and above. 1. Packing Credit against inventories. 2. Bills purchased /Discounted (inland & foreign) 3. Cash Credit against book debts/Cheque purchase. 4. Working capital term loan (for excess borrowing)
  • 8. Tandon Committee To frame guidelines for bank credit • Findings of the committee were as follows: 1. The banks do not have any credit appraisal or planning. It is the borrower who decides how much he would borrow. 2. The security-based approach to lending has led to division of funds to purchase of fixed assets. 3. Bank credit is treated as the first source of finance rather than being taken as a supplementary to other sources of finance. 4. The working capital finance should be made available only for a short period, as it has otherwise, led to accumulation of inventories with the industry.
  • 9. Recommendations 1. Inventory and receivable norms 2. Lending norms or Maximum Permissible Bank Finance (MPBF) 3. Style of Credit 4. Information and Reporting System
  • 10. Recommendations • First Method of Lending: Banks can work out the working capital gap, i.e. total current assets less current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long- term funds, i.e., owned funds and term borrowings. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs
  • 11. Recommendations • Second Method of Lending: Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit for purchases and other current liabilities will be available to fund the build up of current assets and the bank will provide the balance (MPBF). Consequently, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the working capital needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method.
  • 12. Recommendations • Third Method of Lending: Under this method, the borrower's contribution from long term funds will be to the extent of the entire CORE CURRENT ASSETS, which has been defined by the Study Group as representing the absolute minimum level of raw materials, process stock, finished goods and stores which are in the pipeline to ensure continuity of production and a minimum of 25% of the balance current assets should be financed out of the long term funds plus term borrowings.
  • 13. Conclusion • Different types of suggestions and recommendations were provided to the Reserve Bank of India on the Working capital. • These all inputs were useful for the RBI to frame the lending policy for the Banks and to make the suitable amendments from time to time.