Banks exercise extreme caution in lending to first time applicants starting up their business. A first time applicant would be asked for collateral in the form of land, building or residential property. This would be in addition to a second charge on the fixed assets of the enterprise. Sequence of steps to avail working capital

• Application for the working capital

Most of the large commercial banks are moving towards the trend of specialized SSI branches near the industrial concentrations. The applications for working capital are generally accepted and processed at these branches.

• List of Documents accompanying the application

The application for working capital would need to have a covering letter containing a request for sanction of working capital limits. The following documents would need to be enclosed alongwith:
• Detailed Project Report containing the detailed financials at projected levels of operations for the next 5 years
• Memorandum and Articles of Association
• Copies of Incorporation documents (relating to formalities with the Registrar of Companies in case of corporates)
• Statutory approvals obtained/ applied for such as for power, water, pollution control, environment clearance, clearances from other agencies/ departments with purview over the business.
• Other relevant documents – Letters of intent/ confirmed orders from prospective buyers.
• Networth statement of promoters.
In case of the larger loans (above Rs. 5 crore in case of most banks), the projections are generally submitted in the CMA format prescribed by Reserve Bank of India (earlier mandatory).
 
• In- Principle Sanction for Working Capital

The timeframe for in-principle sanction depends upon two factors:
• Time taken for submission of necessary documents
• The decision structure at the bank


Most of the large banks have specialized SSI branches at the industrial concentrations in the country. These branches are headed by senior executives often with sanctioning power of Rs. 5-6 crores at the branch. In such instances, delays for processing the applications at the bank are limited. Infact the stage of in-principle sanction maybe dispensed with and final sanction accorded on full appraisal.

In other cases, such processing may take 30-45 days for according In-Principle Sanction to the project. The newer private sector banks are generally faster in according such approval. The significance of the in-principle sanction of working capital is that such sanction is necessary for obtaining term funding from the financial institutions. While these financial institutions accord sanction to a industry,

• Appraisal and Final Sanction

The appraisal and final sanction of the request for working capital is based on a thorough appraisal of the Detailed Project Report (DPR). The traditional banks generally have specified formats for submission of the DPR. The usual coverage of the DPR includes:
• Overview of the business
• Background of promoters
• Details of products to be manufactured – manufacturing process and raw material
• Market overview and competition Sensitivity Analysis – ‘What if’ on Finished Goods prices, raw material costs and so on
• Detailed financial projections covering the Balance Sheet, Profit and Loss Account, Funds Flow and the Financial Ratios.


The timeframe for a Final Sanction in cases where all the requirements have already been submitted by the borrowing unit is 90 days from the submission of the application.

• Post Sanction Requirements

Post sanction requirements involve completion of documentation creating a charge in favour of the bank. This could include a charge on assets related to the business and charge on collateral offered (if any). In case of the assets of the business already being mortgaged with the term lending institution, a second or third charge maybe created in favour of the bank.

The financing facilities sanctioned can thereafter be availed by the borrower.

• Monitoring and follow-up

Working capital financing is extended for the current asset build up of a business, which is linked to its activity level. These assets are mobile (in case of inventory) and also easily convertible into cash. At best, the banks have a second charge on the fixed assets of the enterprise and without the power of Seizure (u/s Sec 29 as available to the state financial institutions) realizing money from the security is time consuming. Hence, banks pay extremely high importance to the monitoring and follow-up of the loan.

The system of a current account through which all the transactions are routed acts as an in-built check on the operations of the borrower. By studying the current account transactions in detail, the banker is able to make an assessment of the business. In addition to this, the banks also undertake other forms of monitoring.

These include:

• Stock Statements collected on a monthly basis from the borrower.
• Quarterly Operating Statement giving details of the operations for the quarter

In addition to these checks, banks often employ methods such as:

• Stock Audit by independent firms of chartered accountants.

        This would involve a visit to the storage areas of the borrower, visual inspection and scrutiny
        of the stock statements at the spot. Cross-checking these with the statements given by the
        client would provide a means of check.

• Branch Inspection conducted by the internal audit/ bank staff

In case of larger loans, Consortium meetings where the operations of the unit are jointly reviewed are also undertaken.

• Review, enhancement of limits and adhoc limits

Introduction to Working Capital
Types of Working Capital Financing
Estimation of Working Capital Requirement
Working Capital – The Status Today
 
We would look forward to receiving your feedback and suggestions on this module at services@indiamarkets.com