SUMMER TRAINING REPORT

ON
ANALYSIS OF WORKING CAPITAL LOAN
UNDERTAKEN AT
PUNJAB NATIONAL BANK

GUIDED BY:

SUBMITTED BY:

Kranti Patidar

KOMAL RATHORE

(Sr. Credit Manager)

MBA (BE)
III SEM

DECLARATION

I Komal Rathore student of MBA (BE) 3rd semester hereby declare that the summer
internship project report on a study of ANALYSIS OF WORKING CAPITAL LOAN
in Punjab National Bank has been exclusively done by me for the degree of MASTERS
OF BUSINESS ADMINISTRATION and the report has not been submitted to any other
educational institute for any other purpose.

Komal Rathore
MBA (BE) 3rd Sem

ACKNOWLEDGEMENT

The most awaited movement of successful completion of an endeavor is always a result

of person involved explicitly or implicitly there in and it is impossible without the help
and guide of the people around.
I take the opportunity to express my sincere gratitude to each and every person who gave
me the guidance and help for preparing the report.
With the sense of gratitude. I express my thanks to my company guide Mrs. KRANTI
PATIDAR (Senior Manager Credit section) who motivated me in all my efforts. I
would like to express my gratitude to the entire staff of PUNJAB NATIONAL BANK
for supporting me during this project and providing me an opportunity to learn. It was
truly wonderful learning Experience. These past 45 days were of utmost importance as
they added value towards my path of Knowledge. I would like to end this acknowledge by
thanking the customers and people at large with whom I have interacted during the course
of my training.

I would also like to thank all those who directly or indirectly helped me in my training.

DATE:

Komal Rathore

INDEX
S.No Particulars

Page No.

ABBREVIATIONS

EXECUTIVE SUMMARY

INTRODUCTION

OBJECTIVE OF THE STUDY

HISTORY OF THE ORGANIZATION

10

CORPORATE SOCIAL RESPONSIBILITY

11

AWARDS

12

ORGANIZATIONAL STRUCTURE

13

VARIOUS ACTIVITIES IN TRAINING

14

10

INTRODUCTION TO WORKING CAPITAL

17

11

TYPES OF WORKING CAPITAL

18

12

WORKING OF CREDIT DIVISION AT PNB

19

13

TYPES OF LENDING

20

14

PRE SANCTION INSPECTION

20

15

LOAN SANCTION PROCEDURE

21

16

OPERATING CYCLE METHOD

22

17

ASSESSMENT OF WORKING CAPITAL

24

18

HOW TO RATE

29

19

WORKING CAPITAL LIMIT PROPOSAL FORMAT

31

20

SWOT ANALYSIS

43

21

CONCLUSION

44

22

SUGGESTION

45

23

REFERENCES

46

ABBREVIATIONS

AGM

Assistant General Manager

BG

Bank Guarantee

CC

Cash Credit

CMD

Chairman and Managing Director

CO

Circle Office

CASA

Current Account/Savings Account

DSCR

Debt Service Coverage Ratio

DER

Debt-Equity Ratio

FB

Fund Based

10

GM

General Manager

11

HO

Head Office

12

LC

Letter of Credit

13

LOC

Letter of Credit

14

MPBF

Maximum permissible Bank Finance

15

NWC

Net Working Capital

16

NFB

Non Fund Based

17

PMS

Preventive Monitoring System

18

PF

Provident Fund

19

PNB

Punjab National Bank

20

RBI

Reserve Bank of India

21

TL

Term Loan

22

WC

Working Capital

EXECUTIVE SUMMARY

The prime objective of any business is to maximize the value of the company and to
maximize the wealth of its shareholders. Working capital management has its own role to
play in attaining this goal. Working capital is the funds required for day to day working in
a business concern. The working capital management involves deciding upon the amount
and composition of current asset and how to finance those assets. There should be a
proper tradeoff between risk and profitability in each decision relating to it.
The project has been undertaken to known the procedures involved in
the working capital management in PUNJAB NATIONAL BANK. An attempt is made to
study the factors contributing towards working capital and the sources on which the
company is depending for funds. The research study was also conducted to derive
working capital ratios, to know the performance and efficiency of working capital
management and to know the kind of policy adopted in this part of the management. For
analyzing the factors and conditions influencing working capital.

INTRODUCTION

Banks are an important cog in the wheel of economic development. One of their main
functions is to make available funds, to enterprises which are short of funds, at reasonable
cost. The major source of income for banks is interest earned on loans and advances
disbursed. To disburse these loans and advances, funds are mobilized by bank through
various sources like small savings from numerous account holders, capital contribution
etc. (stake holders) and credit creation
Banks stand in a very delicate situation where it has to maximize returns on these funds
but at the same time maintain quality of their advances. A bank is approached by many
for funds for various uses and it may approach many for availing funds from it. The bank
ascertains credit worthiness of project and borrower in order to find eligible borrowers to
whom it would like to disburse funds.
To ascertain credit worthiness of project and borrower a comprehensive evaluation is
done on various parameters for example: past financials, techno-economic viability of the
project, management competence, future cash and fund flows, actual requirements etc.
This evaluation process is known as credit appraisal. Credit appraisal is one of the steps through
which banks safeguard interest of its stake holders.
Funds are required for various purposes, at various intervals and thus there are different
ways of disbursing funds. The broad objective of credit appraisal is to ascertain the
worthiness of the borrower but various methodologies are used for appraising different
methods of fund disbursement.
The current project is divided in two parts. First part deals with the credit requirements
arising after completion of the project (working capital requirements). The second part
deals in different banking arrangements under which a borrower can avail credit facilities
and a comparative analysis of the same is done.

OBJECTIVES OF THE STUDY

The primary objective of this study is to ascertain in depth, the process used by PNB for
appraisal of Working capital requirements of the borrowers and various criterias on
which such appraisal is done before sanctioning of loans. The study intends to look risk
mitigation for different inherent risks in extending working capital advances to dive to
study the sources and uses of the working capital.
The main objective of this project is to get the practical knowledge of credit
management in the organization.
To study the liquidity position through various working capital related ratios.
To understand the process of credit appraisal applied by the bank to provide loan
to the corporate.
To understand various types of risks involved in providing loan.
To analyze the credit worthiness of the clients.
To understand and carry out ratings provided by bank to rate any corporate.
To study the working capital components such as receivables accounts, Cash
management, Inventory management.
To make suggestions based on the finding of the study.

The study also looks into various ways of ascertaining working capital requirements of a
borrower and various ways of disbursing it. Another objective of this project is to study
different arrangements under which a borrower can avail funds from PNB and present a
comparative analysis of the same.

Punjab National Bank is an Indian multinational banking and financial services company. It is a
state-owned corporation based in New Delhi, India. Founded in 1894, the bank has over 6,968
branches and over 9,656 ATMs across 764 cities. It serves over 80 million customers.
Punjab National Bank is one of the Big Four banks of India, along with Bank of Baroda, ICICI
Bank and State Bank of India. It has a banking subsidiary in the UK (PNB International Bank, with
seven branches in the UK), as well as branches in Hong Kong, Kowloon, Dubai and Kabul. It has
representative offices in Almaty (Kazakhstan), Dubai (United Arab Emirates), Shanghai (China),
Oslo (Norway) and Sydney (Australia). In Bhutan it owns 51% of Druk PNB Bank, which has five
branches. PNB owns 20% of Everest Bank Limited, which has 50 branches in Nepal. Lastly, PNB
owns 84% of JSC (SB) PNB Bank in Kazakhstan, which has four branches.

VISION
"To be a Leading Global Bank with Pan India footprints and become a household brand in the IndoGangetic Plains providing entire range of financial products and services under one roof"

MISSION
"Banking for the unbanked"

HISTORY OF THE BANK

1895: PNB commenced its operations in Lahore. PNB has the distinction of being the first
Indian bank to have been started solely with Indian capital that has survived to the present.
(The first entirely Indian bank, the Ouch Commercial Bank, was established in 1881 in
Faizabad, but failed in 1958.) PNB's founders included several leaders of the Swadeshi
movement such as Dyal Singh Majithia and Lala Har Kishen Lal, Lala Lal chand, Shri Kali
Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi Ram, and Lala Dholan
Dass. Lala Lajpat Rai was actively associated with the management of the Bank in its early
years.

1904: PNB established branches in Karachi and Peshawar.

1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located in Delhi circle.

1947: Partition of India and Pakistan at Independence. PNB lost its premises in Lahore, but
continued to operate in Pakistan.

1951: PNB acquired the 39 branches of Bharat Bank (est. 1942);Bharat Bank became Bharat
Nidhi Ltd.

1961: PNB acquired Universal Bank of India.

1963: The Government of Burma nationalized PNB's branch in Rangoon (Yangon).

September 1965: After the Indo-Pak war the government of Pakistan seized all the offices in
Pakistan of Indian banks, including PNB's head office, which may have moved to
Karachi.PNB also had one or more branches in East Pakistan(Bangladesh).

1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue.

1969: The Government of India (GOI) nationalized PNB and 13other major commercial
banks, on July 19, 1969.

1976 or 1978: PNB opened a branch in London.

1986 The Reserve Bank of India required PNB to transfer its London branch to State Bank
of India after the branch was involved in a fraud scandal.

1986: PNB acquired Hindustan Commercial Bank (est. 1943) in are scue. The acquisition
added Hindustan's 142 branches to PNB'snetwork.

1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980.

1998: PNB set up a representative office in Almaty, Kazakhstan.

10

2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala. Rao
Bahadur T.M. Appu Nedungadi, author of Kundalatha, one of the earliest novels in
Malayalam, had established the bank in 1899. It was incorporated in 1913, and in 1965 had
acquired selected assets and deposits of the Coimbatore National Bank. At the time of the
merger with PNB, Nedungadi Bank's shares had zero value, with the result that its
shareholders received no payment for their shares.PNB also opened a representative office
in London.

2004: PNB established a branch in Kabul, Afghanistan.PNB also opened a representative

office in Shanghai.PNB established an alliance with Everest Bank in Nepal that permits
migrants to transfer funds easily between India and Everest Bank's 12 branches in Nepal.

2005: PNB opened a representative office in Dubai.

2007: PNB established PNBIL - Punjab National Bank(International) - in the UK, with two
offices, one in London, and one in South Hall. Since then it has opened a third branch in
Leicester, and is planning a fourth in Birmingham. Gatin Gupta became Chairmen of Punjab
National Bank.

2008: PNB opened a branch in Hong Kong.

2009: PNB opened a representative office in Oslo, Norway.

2010: PNB received permission to upgrade its representative office in the Dubai International
Financial Centre to a branch.

CORPORATE SOCIAL RESPONSIBILITY:

Corporate Social Responsibility (CSR) is an integral part of corporate business strategy of the Bank.
The Bank is promoting welfare of people living in rural and semi urban areas as a part of its CSR
activity. Under PNB VIKAS, the Bank has adopted 130 villages, out of which 68 are in Banks lead
districts.
Towards women empowerment, Punjab National Bank became the first bank in the country to start
opening of Sukanya Samriddhi Deposit accounts. The Bank also launched PNB Ladli scheme
wherein educational inputs were provided to needy girl students in adopted villages. PNB Asha
Kiran scheme was also launched by the Bank wherein 1000 rural women would be identified and
nurtured till their economic empowerment. Another development in this area was launch of PNB
Ujala scheme for providing solar street lights in the adopted villages and a solar lantern to each
beneficiary under PNB Ladli scheme. In line with the Governments Swachh Bharat Mission, the
11

Bank launched Swachh Vidyalaya Campaign to provide financial assistance for construction of
utilities in the Government schools of adopted villages.

AWARDS
AWARDS

BY

5 National Awards for the contribution made in

promoting MSMEs

Ministry of MSME

India Pride Awards for Excellence in PSU

Category

Dainik Bhaskar in association with Daily News

Analysis

Golden Peacock Award foabrivationsr

Excellence in Corporate Social Responsibility

Institute of Directors

Award for Best Home Loan Provider for 2010

Outlook Money

Global HR Excellence Award 2010 for the

outstanding Contribution to the cause of
Education
Award for Brand Excellence under Banking &
Financial Services
Overall Most Productive Bank Award 2011

World HRD Congress

Most Socially Responsive Bank 2011

Editorial Board Roll of Honour by CNBC
TV18 India Best Banks and Financial
Institutions Awards
Award for Excellence in Training

Business world-PwC
MCX and CNBC TV 18

Banking, Financial Services & Insurance under

Bank with leading Financial Inclusion
Initiatives
BFSI Awards for Bank with leading Financial
Inclusive on Initiatives 2015
PMJDY Award of Excellence 2015
IBA Banking Technology Awards 2014-15Training and Human Resources, eLearning initiatives (PSU) Second Runners Up.
Vigilance Excellence Award

CMO Asia
FICCI-IBA

Employer Brands Awards and World HRD

Congress
ABP News
ABP news
Federation of Industry Trade and Services
Indian Banks' Association

Institute of Public Enterprises

12

ORGANIZATIONAL STRUCTURE

Bank has its Corporate Office at New Delhi that supervises 13 FGM offices and 69 Circle
Offices under which the branches function. The delegation of powers is decentralized up to
the branch level to facilitate quick decision making.

HEAD OFFICE

FGM OFFICES & GM OVERSEAS

CIRCLE OFFICES

BRANCHES

VARIOUS ACTIVITIES IN TRAINING:

Dealing with loan proposals of different kind: By reading proposals analysing the
purpose of credit, ROC (Registrar Of Company) search, Commercial Cibil, Credit
Limit, about company/partnership firm, study of Cibil, Equifax, Experian etc.
S.No.
1
2
3
4
5
6

NAME
Venktesh softech private limited
M.P. woollen mills(P) limited
Keti KJ construction(India)limited
Kanya kubj Vidhya pracharni sabha
Shail education society
JMK beverages and agro foods(P)limited

ROC Search:

Commercial CIBIL:

Generating PMS (preventing monetary system) report: Preventing

Monetary System is report prepared by branches for each account through which
loan has been taken and to get the information related to performance of the
account this report is being prepared.

Generating internal rating: Before sanctioning any loan proposal internal

rating is being done through PNB trac and this rating helps in decision making of
sanctioning loan proposals.

ABS analysis: By analysing balance sheet of company, understand the past

performance and find out the strength of the projected balance sheet.

Checked online loan application and took follow up: By working on

PNBs Non-CBS site checking the online loan application of different branches
and updated its status. Took follow up regarding insurance of accounts, PMS
report, LSS report etc.

INTRODUCTION TO WORKING CAPITAL:

In accounting, Working capital is the difference between the inflow and outflow of
funds. In other words, it is the net cash inflow. It is defined as the excess of current assets
over current liabilities and provisions. in other words, it is net current assets or Net
Working Capital. A study of working Capital is of majaor importance to internal and
external analysis because of its close relationship with the day-to-day operations of a
business. Working capital is the portion of the assets of the assets of a business which are
used on or related to current operations, and represented at any one time by the operating
cycle of such items as against receivables, inventories of raw materials, stores, work in
process and finished goods, merchandise, notes or bill receivables and cash.
Working capital comprises current assets which are distinct from other assets. In
the first instance, current assets consist of these assets which are of short
duration. Working capital may be regarded as the life blood of a business. Its
effective provision can do much to ensure the success of a business while its
inefficient management can lead not only to loss of profits but also to the ultimate
downfall of what otherwise might be considered as a promising concern.
Capital required for business are classified under two main categories
1. Fixed capital
2. Working capital
1)

2)

Fixed capital: funds are required to every business for two purposes for its
establishment and carry on its day to day operations. At time of long term
funds are required to create production facilities through purchase of fixed
assets such as plant and machinery, land and building, furniture etc, funds
invested are for permanent or fixed basis which are called fixed capital.
Working capital: Gross Working Capital refers to the fund required for
financing total current assets of a business unit. On the other hand Net working
capital is the difference between current assets and current laibilities(including
bank borrowings) that is nothing but the surplus of long term uses as such it is
known as the liquid surplus available in a unit that can be either positive or
negative. A positive NWC is always desirable because of the fact that it
provides not only margin for the working capital requirement but also improves
ability of the borrower to meet its short term liabilities.

TYPES OF WORKING CAPITAL

1) PERMANENT WORKING CAPITAL
It means the minimum amount of investment in all current assets which is regarded at all time to
carry on minimum level of business activities. The magnitude of current assets increases and
decreases over a period of time due to increase in the level of activity. There is always a minimum
level of current asset required at all time by the firm to carry on its business operation, It has
following features :
It classified on the basis of time factors.
It constantly changes from one asset to another.

It changes from firm to firm.

2) TEMPORARY WORKING CAPITAL:
It is also known as fluctuating or variable working capital here the working capital keeps on
changing depending upon the changes in production and sales. The extra working capital
required to support the changes in production and sales is known as temporary working capital.

3) GROSS WORKING CAPITAL:

It is also known as guess working capital. The amount of funds invested in various components
of current assets.

4) NET WORKING CAPITAL:

The amount difference between current assets and current liabilities is called net working capital.
The concept of net working capital enables a firm to determine the extra amount available for
operational requirements.

5) NEGATIVE WORKING CAPITAL:

When current liabilities exceed and current asset, negative working capital emerges. This happens
when a firm is nearing crisis which might arise due to inefficiency of operative force.

6) CASH WORKING CAPITAL:

It is the one, which is calculated from item appearing in the profit & loss account. It shows the
real flow of money or value of a particular time is considered to the most reliable approach is
working capital. The cash working capital indicates the adequacy of cash flow, which is essential
pre requisite of business.

WORKING OF THE CREDIT DIVISION (CD) AT PNB

CD looks after all proposals for all of loans which fall within the purview of GMsHO/ED/CMD/MC/Board. A credit appraisal goes through different level of sanctioning to
enforce internal controls and other practices to ensure that exceptions to policies,
procedures and limits are reported in a timely manner to the appropriate level of
management for action.
The bank has introduced committee system in credit sanction process where in every
loan proposal falling within vested power is discussed in credit sanction committee. Such
committees have been formed both at head office and Zonal levels.
The CD is assisted by the Risk Management Department (RMD), Technical Department
and the Industry desk for risk analysis and technical feasibility of credit proposals. Credit
Risk Management structure at PNB involves:
1. Risk Management division
2. Zonal Risk Management department (ZRMD)
3. Regional Risk Management Department (RRMD)
4. Risk Management committee (RMC)
5. Credit risk management committee (CRMC)
6. Credit Audit Review Division (CARD)

TYPES OF LENDING

Fund Based Lending: This is a direct form of lending in which a loan with an actual
cash outflow is given to the borrower by the Bank. In most cases, such a loan is backed
by primary and/or collateral security. The loan can be to provide for financing capital
goods and/or working capital requirements.

Non-fund Based Lending: In this type of facility, the Bank makes no funds outlay.
However, such arrangements may be converted to fund-based advances if the client fails
to fulfill the terms of his contract with the counter party. Such facilities are known as
contingent liabilities of the bank. Facilities such as 'letters of credit' and 'guarantees' fall
under the category of non-fund based credit.

PRE-SANCTION INSPECTION
Once the incumbent is satisfied with the information furnished by the borrower that the
proposal for the term loan is worth consideration, he should inspect the factory or place of
business to check the authenticity of the information supplied. Inspection can bring into
light certain factors which are not revealed by mere study of financial statements. Even in
case of new unit, inspection of factory site is necessary. The assets of the concern which
are proposed to be charged should be verified physically and the title of the borrowers on
the same should be examined. The books of the accounts and other relevant papers should
be verified to see if all liabilities, claims, contingencies, disputes have been admitted by
the concern. Such an inspection can focus on the unfavorable aspects or weaknesses of the
unit and can help to a large extent in making an assessment of the proposal.

Loan Sanction Procedure

1. Idea and financial projections: conceiving the project and preparation of the
projection regarding the project.
2. Submission of loan application: The borrower submits an application form
which seeks comprehensive information about the project such as:

(a) Promoters background

(b) Particulars of industrial concern
(c) Cost of project
(d) Means of financing
(e) Marketing and selling arrangements
(f) Economic considerations
3. Initial processing of loan application: The loan application is reviewed to
ascertain whether it is complete for processing, if it is incomplete then it is sent back
to the borrower for re submission with all relevant information.
4. APPRAISAL OF THE PROPOSED PROJECT: The detailed appraisal of the
project covers the marketing, technical, managerial, and economic aspects which is
prepared after site inspection.
5. ISSUE OF LETTER OF SANCTION: If the project is accepted, a financial
letter of sanction is approved to the borrower.
6. Acceptance of terms and conditions by the borrowing unit: On receiving
the letter of sanction the borrowing unit convenes its board meeting at which the
terms and conditions associated with the letter of sanction are accepted and
appropriate resolution is passed to the effect.
7. EXECUTION OF LOAN AGREEMENT: After receiving the letter of
acceptance from the borrowers. The FI sends the draft of the agreement to the
borrower to be executed by the authorized persons and to be properly stamped as
per the Indian Stamp Act, 1899 and then the financial institution also sign it.

8. Disbursement of Funds: Disbursement of loans time to time as per the progress

of the projects and the financial status of the project.
9. Creation and Registration of Security: Creation of security through the first
mortgage of immovable properties and hypothecation of movable properties.
Creation of mortgage within one year from the date of first disbursement failing
which 1% additional interest to be paid. This time limit is given for acquiring the
assets which might be indigenous purchased or assembled or imported as the case
may be.
10. Monitoring/Post Disbursement check: Monitoring done at the implementation
stage as well as at the operational stage. Also monitoring recovery of dues of interst
and principal repayment.

OPERATING CYCLE METHOD

Every business unit has an operating cycle which indicates that a unit procures raw material
from its funds, convert into stock in process which again is converted into finished goods
which can be sold for cash and thus transformed into fund. Alternatively it can be sold on
credit and on realization thereof gets converted into fund.
Thus every rupee invested in current assets at the beginnings of the cycle comes back to the
promoter with the profit element added, after the lapse of a specific period of time. This
lenght of time is known as operating cycle or working capital cycle.
AR CONVERTED
TO CASH
CASH

CASH
ACCOUNT
RECIEVAB
LE

DELIVER
GOODS
OR
SERVICE
S

GOODS AND SERVICES

CONVERTED TO ACCOUNT
RECIEVABLES

SALE
S
ORDE
R

PRODUCE
GOODS OR
SERVICES

CASH
CONVERTED
TO PREPAID
EXPENSES

OPERATING CYCLE RATIOS

Stages

Time

Value

Raw Material

Holding Period

II

Stock in Process

Time taken in
converting RM into
FG

III

Finished Goods

Holding period of FG
before being sold

IV

Receivables

Credit allowed to
buyer

Value of RM
consumed during the
period
RM + Manufacturing
expenses during the
period (cost of
production)
RM + mfg. exp. +
adm. Overheads for
the period (cost of
sales)
RM + mfg. exp. +
adm. Exp. + profit for
the period (Sales)

DATA REQUIRED FOR ASSESSMENT OF WORKING CAPITAL

REQUIREMENT
For assessing the working capital needs of an organization, bank follows CMA (Credit
Monitoring Arrangement). It is required by banks and other financial institutions, to
introspect or study the minutes of balance sheet and other financial statements of a body
corporate for financing their projects. In other words it is the detailed explanation of the
balance sheet and other financial ratios of the firm or any other corporate.
The CMA includes analysis of following six documents:
i)Existing and proposed banking arrangements
ii) Operating statement
iii) Analysis of Balance Sheet
iv) Build up of current assets and current liabilities
v) Calculation of MPBF (Maximum Permissible Bank Finance)
vi) Fund Flow Statement.

ASSESSMENT OF FUND BASED WORKING CAPITAL

A unit needs working capital funds mainly to carry current assets required for its
operations. Proper assessment of funds required for working capital is essential not only
in the interest of the concerned unit but also in the national interest to use the scare credit
according to production requirements. Inadequate levels of working capital may result in
under-utilization of capacity and serious financial difficulties. Similarly excessive levels
may lead to unproductive use of credit and unnecessary interest Burdon on the unit.
Proper assessment of working capital requirement may be done as underI. NORMS FOR INVENTORY AND RECEIVABLES:
If the bank credit is to be linked with production requirements, it is necessary to assess the
requirements on the basis of certain norms. The study group to frame guidelines to follow-up of
bank credit (Tandon Study Group) appointed by Reserve Bank of India had suggested the norms
for inventory and receivables regarding 1: major industries on the basis of company finance
studies made by Reserve Bank process periods in the different industries, discussions with the
industry experts and feed-back received on the interim report. The norms suggested by Tandon
Study Group are being reviewed from time to time by the Committee of Direction constituted by
the Reserve Bank to keep a constant view on working capital requirements. The committee has
representatives from a few banks and it generally once in a quarter. It also consults the
representatives from industry and trade. It keeps a watch on the various issues relating to working
capital requirements and gives various suggestions to suit the changing requirements of the
industry and trade.

II.COMPUTATION OF MAXIMUM PERMISSIBLE BANK FINANCE (MPBF):

The Tandon Study group had suggested the following alternatives for working out the maximum
permissible bank finance:a. Bank can work out the working capital gap. i. e. total current assets less current liabilities
other than bank borrowings 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
b. Borrower should provide for a minimum of 25 per cent of total current assets out of long term
funds, i.e. owned funds and long term borrowings. A certain level of credit for purchases and
other current liabilities inclusive of bank borrowings will not exceed 75 per cent of current
assets.

It may be observed from the above that borrowers contribution from long term funds would be
25 per cent of the working capital gap under the first method of lending and 25 per cent of total
current assets under the second method of lending. The above minimum contribution of long-term
funds is called minimum stipulated Net Working Capital (NWC) which comes from owned funds
and term borrowings.

Item

Next Years
Projected

Accepted for
Next Year

Chargeable current assets

--

Other current assets

Total current assets

Other current liabilities

Working capital gap

Net Working Capital at 25% of Total Current Assets less

Export Receivables

Projected net working capital

Permissible bank finance

III. CLASSIFICATION OF CURRENT ASSETS & CURRENT LIABILITIES:

in order to calculate net working capital and maximum permissible bank finance, it is
necessary to have proper classification of various items of current assets and current
liabilities. all illustrative lists of current assets & current liabilities for the purpose of
assessment of working capital are furnished below;

CURRENT ASSETS: a. Cash and bank balances.

b. Receivables arising out of sales other than deferred receivables (including bills purchased
& discounted by bankers).
c. Installments by deferred receivables due within one year.
d. Raw materials & components used in the process of manufactured including those
in transit.
e. Stock in process including semi finished goods.
f. Finished goods including goods in transit.
g. Advance payment for tax.
h. Prepaid expenses.
i. Advances for purchases of raw materials, components & consumable stores.
j. Payment to be received from contracted sale of fixed assets during the next 12
Months.
CURRENT LIABILITIES:
a. Short-term borrowings (including bills purchased & discounted)
b. Unsecured loans
c. Public deposits maturing within one year
d. Sundry creditors (trade) for raw material & consumer stores & spares
e. Interest & other charges accrued but no due for payments
f. Advances/progress payments from customers
g. Deposits
agents,

from
etc.

dealers
h.

current liabilities

selling

Miscellaneous

ASSESSMENT OF NON - FUND BASED WORKING CAPITAL

FACILITY
The credit facilities given by the banks where actual bank funds are not involved are
termed as 'non-fund based facilities'. These facilities are divided in three broad categories
as under:
Letters of credit
Guarantees
Co-acceptance of-bills/deferred payment guarantees.
Units for the above facilities are also simultaneously sanctioned by banks while
sanctioning other fund based credit limits.
Facilities for co-acceptance of bills/deferred payment guarantees are generally required
for acquiring plant and machinery and may, technically be taken as a substitute for term
loan which would require detailed appraisal of the borrower's needs and financial position
in the same manner as in case of any other term loan proposal.

LETTER OF CREDIT:
Letter of credit (LC) is a method of settlement of payment of a trade transaction and is widely used to
finance purchase of raw material, machinery etc. It contains a written undertaking by the bank on
behalf of the purchaser to the seller to make payment of a stated amount on presentation of stipulated
documents and fulfillment of all the terms and conditions incorporated therein. Letters of credit thus
offers both parties to a trade transaction a degree of security. The seller can look forward to the issuing
bank for payment instead of relying on the ability and willingness of the buyer to pay.

BANK GUARANTEE
A contract of guarantee can be defined as a contract to perform the promise, or discharge
the liability of a third person in case of his default. The contract of guarantee has three
principal parties as under:
Principal debtor: The person who has to perform or discharge the liability and for
whose default the guarantee is given.
Principal creditor: The person to whom the guarantee for due fulfillment of
contract by principal debtor. Principal creditor is also sometimes referred to as
beneficiary.

Bills

Co-Acceptance:
It is same as letter of credit. The difference is that the letter of credit is accepted by buyer
as well by co-accepting bank.

Deferred

Payment Guarantee (DPG):

A deferred payment guarantee is a contract under which a bank promises to pay the supplier the price
of machinery supplied by him on deferred terms, in agreed installments with stipulated interest in the
respective due dates, in case of default in payment thereof by the buyer. As far as the buyer of the plant
and machinery is concerned, it serves the same purpose as term loan. The advantage to the buyer is
that he is benefited to the extent of savings in interest charges accruing on account of opting equipment
financing under installment payment system less the guarantee.

HOW TO RATE
The ratios of the company are compared with the benchmark ratios and rating is given to
the company up to 2 decimal points based on its position within the benchmark values.
Procedure for evaluation at PNB is as follows:
1. Each industry has its own risk and depending on it, a suitable risk factor is
chosen and industry risk is adjusted into the score of rating.
2. These areas cover different parameters based on which the past and the
future performance of the company are evaluated.
3. The combined scores of these areas are calculated.
4. Then based on the weight age assigned (given in brackets above) the
overall score is calculated.
5. This overall score is used to determine the ratings as illustrated in following table:

RATING
CATEGORY
AAA

DESCRIPTION
Minimum Risk

SCORE OBTAINED
Above 80.00

GRADES
AAA

AA

Marginal Risk

Modest risk

BB

Average risk

Marginally acceptable
risk

Between 77.50 - 80.00

AA+

Between 72.50 - 77.50

AA

Between 70.00 - 72.50

AA-

Between 67.50 - 70.00

A+

Between 62.50 - 67.50

Between 60.00 - 62.50

A-

Between 57.50 - 60.00

BB+

Between 52.50 - 57.50

BB

Between 50.00 - 52.50

BB-

Between 47.50 - 50.00

B+

Between 42.50 - 47.50

Between 40.00 - 42.50

B-

High risk

Between 30.00 40.00

Caution risk

Below 30.00

Based on the above table rating is done. Once the rating is done, the rate of
interest at which the bank will be lending the money is determined. Normally, a
company with higher rating is given loan at a lower interest as compared to
company with lower ratings. This is because the risk involved with higher rated
company is lower.

WORKING CAPITAL LIMITS PROPOSAL FORMAT:

CREDIT APPRAISAL FORMAT FOR LIMITS UPTO RS.2 CRORE (FOR MSME UPTO
RS.5 CRORE)

SANCTIONING AUTHORITY
The proposal falls under the powers of __________on account of ____________________

Credit Proposal Tracking System (CPTS) No. / Date:

1. Name of the Borrower, BO & Controlling Office

Date of proposal
Whether
fresh/renewal/
enhancement/
In-principle
Asset
Classification
as
on ..
Credit Risk Rating by Bank

Rating

Credit Risk Rating

Last PMS
Score (as
on ), if applicable
Customer ID No./Corporate
Identity No.(CIN)
Code

Validity
Date*

Reasons
for
degradation

Present
Previous
Present
Previous

Facility Rating

Activity
LADDER

Date oScore ABS

Rating

as

per

Whether sensitive sector

Real estate/Capital
market
alongwith
applicable risk
weight
Whether priority/non priority
sector
as per
PS&LB

*12 months from the month of confirmation of rating or 18 months from

the date of balance sheet on the basis of which credit risk rating was
assigned, whichever is earlier.

guidelines (Sub-sector may

also be mentioned.)
Date of last sanction &
Sanctioning Authority

GIST OF THE PROPOSAL

1.

a) Name of the Borrower and

Constitution
b) Address of Regd. Office with email ID
c) Works/Factory
d) Date
of
establishment

incorporation/

e) Dealing with PNB since

f) Business
Activity
Installed Capacity

(Product)/

2. Branch Office/CO
3.a)

Directors/Partners/Proprietors
(Name, Address, Mobile No., email
ID of main Directors/Key persons)
with PAN No. & DIN(in case of
Co.)

b) Whether any of them, in RBIs

Caution advices/ECGC Caution
list/Wilful defaulters' list. If yes,
the reasons for considering the
proposal.
c) If any of them, related to
Directors/ Sr. Officers of PNB
d) Management Change since last
sanction, if any

e)

Whether
Memorandum
of
Association permits the Activity &
Powers for borrowings

f)

Shareholding Pattern

g)

(i) Confirmation that

CRs have
been compiled/reviewed as per
extant guidelines
(presently L&A
Circular No. 33 dated 31.03.2011)
and comments on adverse features,
if any
(ii) Confirmation that CIRs have
Date of
been drawn from CICs data
CIR
base(CIBIL/Equifax/Experian/
High Mark) and comments on
adverse features, if any:

Name
CIC

of Adverse features, if
any observed

(iii)
In
case of Joint
Lending/multiple banking/
consortium lending arrangement:
Due diligence report on
prescribed from
banks approved
CA/CS.
If qualified, whether rectified?
Adverse
features, if any, are
discussed in
the proposal
(copy to be enclosed with the
proposal)
Confirmation that Sharing
of Information on prescribed format
[L&A Circular
No.31/2012 &
99/2012 (compulsory)] have been
obtained from all lenders and
adverse features, if any, are
discussed* in the proposal (copy to
be enclosed with the proposal)

Details of other lenders:

1.____________
2.______________
3.______________
4.______________

iv)
Views/comments* for the
adverse
report
about
the
borrower/guarantor, if any, in the
public domain/media:

4. Facilities Recommended:
(Rs.in lac)
Nature

Existing

Proposed

Fund Based
CC(H)/CC (Book Debt)
Inland Bills limit
FOBP/FOUBP/FABC
Others
Fund Based Ceiling
Non Fund Based
ILC/FLC
ILG/ FLG
Non Fund Based Ceiling
Term Loan
Limit of credit exposure on account of all
derivative products
Exposure Limit for capital adequacy on
account of all derivative products.
TOTAL COMMITMENT

Details of loans from other Banks/FIs/Consortium/Multiple Banking/JLA as on.

(Rs.in lac)

Name of the Bank

Existing
FB

Share %
NFB

FB

Proposed
NFB

FB

Share %
NFB

FB

NFB

6.A Details of Group Companies/Allied/Associate firms and the facilities sanctioned to them
Name of the Company

NFB
FB

6.B

Name of Dealing Bank

Classification
Account

Comments on conduct of these accounts with our bank/other banks

of

6.C Key Financial Figures (Audited) of Group/Allied/Associate concerns (for the last 3
years).
(Rs. in lac)
31.03._____

31.03._____

31.03._____
Paid Up Capital
Reserves & Surplus

Tangible Networth
Block Assets
Secured/Unsecured Loans
Sales
Profit before Tax
Profit After Tax

Comments on Financial Indicators

7.A(i) Financial Position of the borrower
(Rs. in lac)
Two
years
earlier
(31.3.__)
Audited

Gross Sales
Other Income
Operating Profit/Loss
Profit before tax
Profit after tax
Cash profit/ (Loss)

Block Assets
Depreciation
Net Assets
Secured Loan
Unsecured Loan
Paid up capital
Reserves and Surplus
excluding revaluation
reserves

Misc.
expenditure
not written off
Accumulated losses

Deferred
Tax
Liability/Asset
Tangible Net Worth
Net Working Capital
Current Ratio
Debt Equity Ratio

One
year
earlier
(31.3.__)
Audited

Previous
(31.3.__)
Estimated

year

Audite
d

Latest
data up to
last
quarter of
current
financial
year

Estimates
for the
current
year
(31.3.___)

Projections
for the nex
year (31.3.__)

Operating Profit/Sales

7. A(ii) Comments on Financial Indicators

7.B Details of investment in Shares, Debentures, Units or diversion of funds outside the
business etc.

7. C Details of Liabilities not accounted for/Contingent liabilities

7. D Status/details of adverse comments by Auditors of the borrowing unit
7. E Position of assessment of income tax/sales tax/wealth tax of the borrowing concern/
partners/proprietor
7. F Overall likely impact of (7.B to 7.E) on the financial position of the
borrowing unit.

8. A Primary Security.
i)

Working capital facility

ii) Term Loan facility

8. B Guarantee/Guarantors
Name of Guarantor

NMs
Previous

Present

IPs
Previous

Present

CR Date
Previous

Comments on changes, if any:

8. C

Total Commitments by Guarantor(s)

8. D

(i) Collateral Security (Including details of changes in IPs as security from last
sanction, if any)

Present

in lac)
Security
Area in Ownership
Description Sq M o
Sq Ft

(Amt Rs.
Value
Last
sanction

Present
book
value

Realisable
value

Basis for
valuation

Date

Whether
existing/
fresh

(ii) Status of verification of the IP

Name of the Officer, who visited
the site/IP

Designation

PF No.

Date of Visit

9.Position of Account as on:

(Rs. in lac)
Nature

Limit

VS

DP
Balance

Irregularity alongwith
reasons

10. A Conduct of the Account

Availment of limit (FB & NFB), overdrawings,
Turnover in the A/c (FB/NFB), Routing of proportionate business in
consortium, routing of sale proceeds, honouring of commitment in non fund
based facilities(details of LC/LG devolved/invoked with amount),
Regularity in submission of CMA data/ financial statement/QMS/Stock Statement.

The information regarding no. of cheques returned with amount involved due
to financial reasons during the review period should be mentioned.
The amount/frequency of irregularity in the account during the review period
should be mentioned.
10. B Review of the Account (Appendix C also to be discussed)
10.C

Value of the Account

(Rs.in lac)

Period

Nature of Limit

Amount Average
Availment

Interest/Commission

Yield (%)

Earned

Comments, if any:
10.D

Summary of irregularities pointed out by Banks Inspectors, Concurrent Auditors, Credit Audit &
Review Division (CA&RD), RBI Inspectors, Statutory Auditors, observations of

Stock Audit Report, Comment on Preventive Monitoring Score Trends, (and status
of rectification of these irregularities)
11. Brief History (Should also include comments on industry scenario and industry
outlook, management, production and marketing, borrowers' diversification,
expansion, modernisation programme, risk perception including environmental and
social risk alongwith proposed mitigations)
12. Present Proposal
a) Brief of the proposal:
b) Justification for working capital sanction as per simplified method or traditional
method of lending, as the case may be:
i) Assessment of Fund Based Limits as per second method of lending:
Rs. in lacs)

Item

Last year actuals

Current
Estimates
20__

Years Accepted
20__- assessment
20__- 20__

for
Year

Chargeable current assets

Other current assets
Total current assets
Other current liabilities
Working capital gap
Net Working Capital at 25% of
Total Current Assets less Export
Receivables
Projected net working capital
Permissible bank finance
(Reasons for any variation in actual, estimates and accepted level be discussed)

ii) Assessment of Fund Based Limits as per simplified turnover method

PBF will be computed at 25% of estimated turnover accepted for PBF net of margin The margin
will be computed higher of 5% of estimated turnover or projected NWC.

Since the bank finance is only intended to support need based requirement of a borrower if the
available NWC (net long term surplus funds) is more than 5 per cent of the turnover the former
should be reckoned for assessing the extent of bank finance.

c) Justification of non-fund based facilities

i)

Assessment of Non Fund Based Limits

LETTER OF CREDIT
Particulars
1.

Total purchases during the year

(Rs in Crore)
ILC (Indigenous)

FLC
(Imported)

2.

Purchases proposed against LC (FOB/CIF

Value)
3. RM requirement against LC per month
4. Usance Period in months
5. Lead Period in month
6. Total period in months
7. LC requirement (3 X 6)
8. LC recommended

BANK GUARANTEE
Nature & amount of limit sanctioned
Outstanding as on
Name of the beneficiary / ies in whose favour guarantees to be issued
Nature of the guarantee limit required i.e. performance/ financial/ Bid

Bond etc.
Margin proposed
Security
Justification for the proposed limit

d)

Justification for term loan/DPG

Purpose
Summary of cost of project and means of finance
Summary of profitability, Break-Even, DSCR and IRR, with comments
thereon: Status of various statutory approvals and clearances
Implementation

schedule/Draw

down

schedule Proposed repayment schedule

Present status of project (physical as well as financial)

13.

a) Rate of Interest applicable as well as proposed

b) Risk perception, if any

14.

Other Issues

15.

Summary of merits/justifications for considering the proposal.

16. Recommendations:
16.A Deviations in the proposal observed by the recommending authority

16.B

Recommendations:

SIGNATURE OF APPRAISING AUTHORITY

ORDER OF SANCTIONING AUTHORITY

General Instructions
If account is eligible for stock audit, the observations of stock audit reports along
with comments be furnished.
Under risk perception comments about generation of employment, social development
aspects, backward area development incentives, social disorder/ unrest, availability of
pollution control certificate, changes in regulatory policies of Local/State/Central Govt. etc.
Activity is Prohibitive or not, location of unit in Restrictive Area ( i.e. near to Residential,
Historic Monuments, etc.) be given.

The following Annexure be enclosed with the proposal:

Profit & Loss Account and Balance Sheet/Fund Flow Statement for last three years.
Key financial figures i.e. paid up capital, sales, net profit: Latest Data for the current
financial year.
Credit Risk Rating Report.
Key financial indicators for associate/ group/allied/subsidiary companies should
include Gross Sales, PBT and TNW. Terms & conditions proposed

SWOT ANALYSIS

STRENGTH

WEAKNES

Well known brand and history.

Lack of unified global identity.

Capture small retail sector.

Not able to position itself

correctly.

Knowledge of Indian market.

Having sound market share.
OPPORTUNITY

THREATS

Growing Indian baking sector.

People are becoming more
service oriented in global
market.

various competitors
o Foreign banks
o Private banks
oFuture market trends.

CONCLUSIONS

The requirement of working capital finance is ever increasing.

Loans and advances formed a major portion of the current assets of the firm
because of which the working capital gap is large.
The bank prefers to use the second method of lending working capital
under the MPBF rather than evolving their own method.
In most of the cases, hypothecation and/or mortgage are used to create
securities for the banks.
In most of the cases, hypothecation and/or mortgage are used to create
securities for the banks.
Bank has their own internal credit rating procedure to rate the clients
(Borrowers).
After doing the assessment of the financial indicators it is up to the
judgment of the top management of the bank to sanction such loan. The
very decision could be against the assessment result.
If the company is with bank from inception stage then they are given
preference, as credible and loyal party over their financial indicators.
There is a stiff competition to the nationalized banks from the foreign
investors as their lending rates are much lower than nationalized banks.
Today the foreign investors are very big threat to business and its existence.
Bank of Maharashtra has kept a conservative look to banking.

SUGGESTIONS
Closely monitoring and inspecting the activities and stocks of the borrowers from
Time to time can avoid the misuse of working capital
While working out the working capital limits, banks must exclude the loans and
Advances from the current assets. The assessment should be done mainly Stock
and the inventory level of borrower.
Bank must extend working capital finance through non-fund based facilities.

Another ideal method would be to use LC as the primary source of extending,

working capital clubbed with bill discounting. This would ensure that the credit is
put to the right use by the borrower and repayment is guaranteed to the bank.
The bank must further secure them by holding a second charge on all the fixed
assets of the borrower.
The time period taken by the banks to sanction the limits should be significantly
reduced to allow the borrowers to make use of the credit when the need is most
felt.

REFERENCES
PNB JOURNAL (INTERNAL CIRCULATION)
PNB, Annual Report ( 2013-2014)
PNB, Book of Instruction 2012.
Gist of operative circulars on loans and

advances.
Internal files of PNB.
INTERNET WEBSITES

www.investopedia.com.

www.pnbindia.com.

Wikipedia.

Slide share.