Any business enterprise whether engaged in manufacturing or purely trading activity, has to have sufficient capital to finance both, its fixed and long term assets, viz. land, building, machineries, etc. and to maintain certain level of short term assets for smooth conduct of day to day business activities/production schedule. Such short term assets which are required for day to day operation are called the current assets.
The amount of current assets required for a smooth conduct of business is dependent on the nature of the activity, availability of the raw materials, level of production, storage capacity and funds available. So the funds/capital actually required to maintain this required level of current assets, is called the gross working capital.
(c) Out of the level of gross working capital, required as above, the borrower raises the necessary funds from many sources, viz. :
(c1) Share Capital
(c2) Retained Profits
(c3) Bank Borrowings
(c4) Trade Creditors
(c5) Advance from Purchasers
(d) Out of the above, credit available in the form of trade creditors and advance from purchasers etc., are sources of finance which are short term in nature and are available as per trade practices and market conditions. The remaining resources are, therefore, to be raised from own capital or through bank borrowing. Such short term credits available to the firm are called current liabilities and the difference of gross working capital and the current liabilities is called the 'Net Working Capital'.
In any typical manufacturing unit, the components that constitute the gross working capital or current assets are as under:
(a) Raw materials
(b) Consumable stores and spares
(c) Stock in process
(d) Finished goods
(e) Receivables
(f) Cash and bank balance.
Suitable rating module should be devised. The loan should be granted to such applicants who get eligible rating.
Fixed rate; Compounding at monthly rest; Tentatively 10% p.a. Interest should be debited at the end of every month. There should be credit in the account in the subsequent month at least to the extent of interest charged in the previous month.
The interest rate can be changed , at the Bank’s discretion, subject to a 15 days’ notice to the borrower.
The collateral security as well as the place of trading and go down should be inspected by a bank official before sanctioning of the facility. The request for the facility should be considered only on satisfactory inspection report. After sanctioning of the facility, stock inspection should be carried out by bank officials not less than once in three months. Inspection of collateral security should be carried out by the bank officials at least once in a year.
Stock inspections should include identification numbers of stock items, date of purchase, cost price and market price.
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- Hypothecation of the goods held by the borrower in the trading / manufacturing business.
- Mortgage of the property. In case of building the age of the property should not be older than 15 years and the remaining life of the property should not be less than 15 years.
The facility should be sanctioned for a period of 12 months. The O/D facility should come into credit or zero balance at least 4 times a year. If the conduct of the account is satisfactory, the facility may be reviewed by the competent authorities for one more year before the expiry of the loan period. However, this is not to be treated as an “ever green”
facility ; a definite repayment plan must be stipulated and adhered to.
The repayment of loan (principal as well as interest) should be personally guaranteed by minimum two persons having a satisfactory net worth. In case the borrower fails to repay, the bank can ask the guarantors to pay on behalf of the borrower.
The transactions in the account should be monitored by the bank officials continuously. It should be ensured that the withdrawals in the account are for the borrower’s business purpose only.