Working Capital Requirements Assessment (As per RBI Master Circular on Management of Advances)
Working Capital Requirements Assessment
Differences in Working Capital Assessment
Criteria
Up to ₹1 crore
Above ₹1 crore
Method of Assessment
Turnover Method (25% of turnover)
Turnover Method, Cash Budget, or MPBF method
Minimum Bank Finance
20% of projected turnover
Flexible; based on assessment
Borrower Contribution (NWC)
5% of projected turnover
Minimum 1/5th of working capital requirement
Assessment Flexibility
Standardized based on RBI guidance
More flexible, bank discretion
Current Ratio Requirement
Not mandatory
No fixed norm, to be decided by the bank
Method of Finance Approval
Based on projected turnover
Based on detailed credit assessment
Working Capital requirements UPTO Rs. 1 crore
1. How should the working capital requirement of borrowers, other than SSI units, be assessed if their fund-based working capital limits are up to Rs.1.00 crore?
A. Based on their total assets
B. Based on their projected profit
C. Based on their projected annual turnover
D. Based on their cash flow
According to the guidelines, the working capital requirement of borrowers other than SSI units is assessed based on their projected annual turnover.
2. How much of the projected turnover should the borrower contribute as net working capital (NWC)?
A. 10%
B. 5%
C. 25%
D. 20%
The borrower is required to contribute 5% of the projected turnover as net working capital (NWC).
3. What percentage of the projected turnover is the bank required to provide as finance for working capital?
A. 10%
B. 15%
C. 25%
D. 20%
The bank is required to provide a minimum of 20% of the projected annual turnover as finance for working capital.
4. In what cases can banks assess the working capital requirement based on the traditional method?
A. If the borrower has a poor credit history
B. If the turnover method is unavailable
C. If the credit requirement based on traditional method is higher than the one assessed on projected turnover
D. If the borrower requests the traditional method
The banks may assess the working capital requirement using the traditional method if the credit requirement based on the traditional production/processing cycle is higher than the one assessed on the projected turnover basis.
5. What documents may the banks use to assess the reasonableness of the projected annual turnover of the applicants?
A. Only the applicant's balance sheet
B. Only sales tax returns
C. Annual statements of accounts or any other documents such as returns filed with sales-tax/revenue authorities
D. Only the applicant's income tax returns
Banks may use annual statements of accounts or other documents such as returns filed with sales-tax/revenue authorities to assess the reasonableness of the projected annual turnover.
6. What percentage of the annual turnover is the borrower required to contribute as margin money?
A. 2%
B. 5%
C. 10%
D. 15%
The borrower is required to contribute 5% of their annual turnover as margin money.
7. What is the minimum contribution of the banking sector towards the working capital requirement?
A. 10%
B. 15%
C. 20%
D. 80%
The banking sector is required to provide at least four-fifths (80%) of the working capital requirement.
8. If the initial assessment of working capital is found inadequate or if output exceeds projections, what action should be taken?
A. No action is required
B. The borrower must cover the excess working capital requirement from their own funds
C. A suitable enhancement in the working capital limits should be considered by the competent authority
D. The borrower must reduce the working capital requirement
In cases where the initial assessment is found inadequate or where output exceeds projections, the competent authority should consider enhancing the working capital limits.
9. If a borrower's annual turnover is projected at Rs. 60.00 lakh, what will be the working capital requirement?
A. Rs. 10.00 lakh
B. Rs. 12.00 lakh
C. Rs. 15.00 lakh
D. Rs. 18.00 lakh
The working capital requirement is computed at 25% of the projected annual turnover, which in this case is Rs. 15.00 lakh (25% of Rs. 60.00 lakh).
10. How much of the working capital requirement of Rs. 15.00 lakh for a borrower with a turnover of Rs. 60.00 lakh will be provided by the bank?
A. Rs. 3.00 lakh
B. Rs. 5.00 lakh
C. Rs. 9.00 lakh
D. Rs. 12.00 lakh
The bank would provide Rs. 12.00 lakh (80% of Rs. 15.00 lakh) as part of the working capital requirement.
11. What is required for banks to allow drawals against working capital limits?
A. Banks must allow unlimited drawals without safeguards
B. Drawals should only be allowed for personal expenses
C. Drawals should be allowed against usual safeguards to ensure the funds are used for the intended purpose
D. Drawals can be made without any documentation
Drawals against working capital limits should be allowed against usual safeguards, ensuring the funds are used for the intended purpose.
12. What documents must borrowers submit to the bank to ensure regular monitoring of their working capital usage?
A. Only a single document confirming the turnover
B. Monthly statements of stocks, receivables, etc.
C. Quarterly balance sheets
D. No documentation is required
Borrowers are required to submit regular and timely monthly statements of stocks, receivables, etc., to ensure proper monitoring of their working capital usage.
13. How should banks verify the information provided by borrowers in their monthly statements?
A. Banks should rely on the borrowers' self-reporting only
B. Banks should not verify any information provided
C. Banks should periodically verify the statements vis-Ã -vis physical stocks
D. Banks should rely solely on tax returns
Banks are required to periodically verify the monthly statements submitted by borrowers, comparing them with physical stocks to ensure accuracy.
14. According to RBI guidelines, how should working capital credit limits be assessed?
A. Only based on projected turnover
B. Both on projected turnover basis and traditional method
C. Only based on the traditional production/processing cycle
D. Only based on the borrower’s financial statements
The assessment of working capital credit limits should be done both on the projected turnover basis and the traditional method, with the bank finance being at least 20% of the projected turnover.
15. What happens if the credit requirement based on production/processing cycle is higher than the one assessed on the projected turnover basis?
A. The higher credit requirement is ignored
B. The credit requirement is reduced to match the turnover assessment
C. The higher credit requirement may be sanctioned as per the RBI guidelines
D. The credit limit is not granted
If the credit requirement based on the production/processing cycle is higher, it may be sanctioned, as RBI guidelines require that banks provide a minimum of 20% of the projected turnover.
16. What happens if the assessed credit requirement is lower than the projected turnover basis?
A. The bank can only sanction 10% of the projected turnover
B. The limit must be raised to match the higher requirement
C. The bank can sanction 20% of the projected turnover, and drawals are based on drawing power after excluding unpaid stocks
D. The credit limit is not sanctioned
If the assessed credit requirement is lower than the projected turnover basis, the bank can sanction 20% of the turnover, but actual drawals are based on drawing power, excluding unpaid stocks.
17. For commodities under Selective Credit Control, how should drawing power be determined?
A. As per the RBI directive for Selective Credit Control commodities
B. Based on the market price of the commodity
C. Based on the borrower’s past credit history
D. Banks should not consider Selective Credit Control commodities for drawing power
For Selective Credit Control commodities, the drawing power must be determined in line with the RBI directive for such commodities.
18. How should the projected turnover/output value be interpreted according to the RBI guidelines?
A. As the net sales value excluding excise duty
B. As the total sales excluding excise duty
C. As the projected Gross Sales, including excise duty
D. As the sales value after deducting all taxes
The projected turnover/output value should be interpreted as projected 'Gross Sales,' which includes excise duty as per the RBI guidelines.
19. According to the extant guidelines, how should the working capital requirement be assessed?
A. At 30% of the projected turnover, with no involvement from the borrower
B. At 25% of the projected turnover, with the borrower contributing 5% and the bank providing 20%
C. At 15% of the projected turnover, with the borrower contributing 10% and the bank providing 5%
D. At 50% of the projected turnover, with the borrower contributing 20% and the bank providing 30%
The working capital requirement is to be assessed at 25% of the projected turnover, with the borrower contributing 5% as NWC and the bank providing 20%, based on the guidelines.
20. How should the working capital requirement be adjusted if the production/processing cycle is shorter than 3 months?
A. The borrower must reduce the NWC contribution
B. The working capital requirement is not changed
C. The bank will provide less than 20% of the turnover
D. The same principle applies, as the aim is to make available at least 20% of turnover as bank finance
If the production/processing cycle is shorter than 3 months, the same principle applies, ensuring that at least 20% of turnover is provided as bank finance.
21. How should the working capital requirement be adjusted if the production/processing cycle is longer than 3 months?
A. The borrower should bring in a proportionately higher stake in relation to the bank finance required
B. The bank should increase the finance to cover the longer cycle
C. The working capital requirement should be reduced
D. The borrower should bring in less margin due to the longer cycle
If the production/processing cycle is longer than 3 months, the borrower should bring in a proportionately higher stake in relation to the bank finance required.
22. How should the borrower’s contribution be adjusted in relation to working capital if the cycle is longer than 3 months?
A. The borrower’s contribution remains the same
B. The borrower is required to bring in a lower contribution
C. At least 1/5th of the working capital requirement should be brought in by way of NWC
D. The borrower is not required to contribute if the cycle is longer
If the cycle is longer, at least 1/5th of the working capital requirement should be brought in by way of NWC by the borrower.
23. How should the bank finance requirement be adjusted if the available NWC (Net Long-Term Surplus Funds) is more than 5% of the turnover?
A. The bank will reduce its finance to 10% of turnover
B. The bank finance remains unaffected by NWC
C. The available NWC should be reckoned for assessing the extent of the bank finance
D. The borrower needs to bring in a higher contribution to the working capital
If the available NWC (Net Long-Term Surplus Funds) is more than 5% of the turnover, the former should be reckoned for assessing the extent of the bank finance, as the bank finance is intended to support the need-based requirement of the borrower.
24. Should unpaid stocks be included in the calculation of drawing power and how should it be regulated?
A. Unpaid stocks should be included for drawing power calculation
B. Unpaid stocks should be financed as it is considered part of the working capital
C. Unpaid stocks should be deducted to avoid double financing
D. Drawing power should be regulated as per the discretion of banks, but unpaid stocks should not be financed
The regulation of drawing power is left to the discretion of banks. However, unpaid stocks should be deducted in the calculation of drawing power, as financing unpaid stocks would lead to double financing. Additionally, the drawing power should conform to RBI directives for Selective Credit Control commodities.
25. How should the actual drawals be allowed for traders, and how should unpaid stocks be treated?
A. Actual drawals should be based on 20% of the projected turnover
B. Actual drawals should be allowed based on drawing powers determined by banks, excluding unpaid stocks
C. Banks should finance unpaid stocks if they are part of the working capital
D. In case of SCC commodities, the bank finance should be restricted to 20% of the projected turnover
For traders, while bank finance can be assessed at 20% of the projected turnover, the actual drawals should be determined based on drawing powers, with unpaid stocks excluded. The directive for Selective Credit Control (SCC) commodities should also be strictly followed as per RBI guidelines.
Working Capital Requirements ABOVE Rs. 1 crore
26. What is the revised guideline for assessing working capital requirements above ₹1 crore (₹5 crore for SSI units)?
A. Banks must follow only the projected turnover method for such limits
B. Traditional method must be mandatorily used without exception
C. Banks are given more flexibility in assessing working capital needs without compromising RBI’s prudential lending norms
D. The borrower is required to bring in 50% of the working capital as margin
For working capital limits above ₹1 crore (₹5 crore for SSI units), revised RBI guidelines allow banks greater operational flexibility in assessment, provided they continue to adhere to prudential norms prescribed by RBI.
27. What change has been made regarding the Maximum Permissible Bank Finance (MPBF) norms originally recommended by the Tandon Committee?
A. The MPBF method must still be followed with a minimum current ratio of 1.33:1
B. Banks must maintain a uniform current ratio of 1.50:1 across all borrowers
C. The earlier MPBF guidelines have been withdrawn and banks are now free to decide the current ratio and assess working capital based on their own credit judgment
D. The MPBF formula has been modified to allow for higher borrower contribution
The RBI has withdrawn the MPBF norms based on the Tandon Committee's recommendation of a 1.33:1 current ratio. Banks now have the discretion to determine the appropriate current ratio and working capital needs based on their evaluation of the borrower's creditworthiness and business model.
28. What methods can banks use to assess the working capital needs of borrowers with requirements above ₹1 crore?
A. Only the MPBF method with a current ratio of 1.33:1
B. Only the turnover method as applicable to small borrowers
C. Only the cash budget method for all types of borrowers
D. Turnover method, cash budget method, or a modified version of MPBF – based on the bank’s discretion
For borrowers with working capital limits above ₹1 crore, banks have the flexibility to use various assessment methods including the turnover method, the cash budget system, or a suitably modified version of the MPBF method, depending on the nature and size of the borrower.
29. What has been withdrawn as per the revised guidelines for working capital limits above ₹1 crore?
A. Cash budget system
B. Turnover method
C. Prescription of Maximum Permissible Bank Finance (MPBF) based on a minimum current ratio of 1.33:1
D. Flexibility to primary cooperative banks
The earlier prescription of MPBF based on a minimum current ratio of 1.33:1 as recommended by the Tandon Committee has been withdrawn. Banks now have the freedom to set the current ratio and assess credit needs as per their discretion.
30. Which of the following statements is true about the revised RBI guidelines for working capital above ₹1 crore?
A. MPBF must still be calculated based on a 1.33:1 current ratio
B. Banks may decide the current ratio and choose any suitable method for assessment
C. Only MPBF method is allowed for all borrowers
D. Cash budgeting is only for small borrowers
Banks now have flexibility to decide on the appropriate current ratio and select the method of working capital assessment, such as turnover method, cash budget, or modified MPBF based on the borrower's profile.
31. For large borrowers, which of the following is considered a valid method for working capital assessment?
A. Cash budget system
B. Turnover method
C. Modified MPBF method
D. All of the above
For borrowers with working capital needs above ₹1 crore, banks may assess requirements using the turnover method, cash budget system, or a modified MPBF method depending on borrower type and bank policy.
