Working Capital Assessment — Operating Cycle, the Tandon Committee's MPBF Methods I and II, the Nayak Turnover Method (20% of Sales) for Limits up to ₹5 Crore, the Cash Budget Method, Margin, Drawing Power and How the Cash-Credit Limit Is Actually Fixed

Working capital is the money locked in the cycle from paying for raw material to collecting from the customer. Banks build it up in days: raw-material holding, work-in-progress, finished-goods holding and debtor collection add to the cycle; the credit received from suppliers reduces it. Each element is valued at the appropriate cost (raw material at purchase cost, WIP and finished goods at cost of production, debtors at sale price) to arrive at gross current assets. Current liabilities other than bank borrowing — creditors, advances from customers, statutory dues — are deducted to find the working-capital gap, and the bank funds a part of that gap, leaving the promoter to fund the margin.

• •Method II is the standard for limits above ₹5 crore (and for any borrower where the bank applies the 'second method of lending'); it forces 25% of current assets to come from long-term funds, which is the 1.33 current ratio.
• •If the actual net working capital is below the required margin, the shortfall is either brought in by the promoter, converted into a working-capital term loan (WCTL) repayable over a few years, or the limit is reduced.
• •The Chore Committee (1979) added that the cash-credit limit should be reviewed annually with the CMA and that the bank may fix a peak-level and non-peak-level limit for seasonal units.
• •Holding levels are not free: banks compare your days with industry norms and with your own past; a sudden increase in debtor days in the projection is cut back.

1. 1Estimate the projected annual turnover realistically (the bank checks it against GST returns and past growth).
2. 2Working-capital requirement = 25% of projected turnover (assumes a three-month operating cycle).
3. 3Bank finance = 20% of projected turnover; promoter's margin = 5% of turnover (i.e., 20% of the requirement), which must be visible as net working capital.
4. 4Example: projected turnover ₹4 crore → working capital ₹1 crore → cash-credit limit ₹80 lakh → margin ₹20 lakh.
5. 5Where the actual cycle is longer (say a six-month cycle in a seasonal trade), banks may assess by the Tandon method instead and sanction more; where it is shorter, the turnover method still gives the minimum for MSEs under RBI guidance.
6. 6The limit is reviewed annually; enhancement needs the next year's projected turnover and the achieved sales of the current year.

• •Cash budget method: for contractors, real-estate developers, seasonal agro-processing (sugar, cotton ginning, rice milling), film and event businesses, the bank funds the peak deficit shown in a month-wise cash budget of receipts and payments; the limit is the highest cumulative deficit, with a margin, and it is drawn and repaid in step with the budget.
• •Drawing power (DP): within the sanctioned limit, the amount you may actually draw each month is computed from the stock and book-debt statement — stock at cost or market (lower) less unpaid creditors, and debtors up to the agreed age (90–120 days), each after the margin (typically 25% on stock, 40% on debtors). DP below the outstanding means an excess drawing and a possible SMA classification.
• •Margin and security: primary security is the hypothecated stock and debtors; collateral is negotiated separately; CGTMSE-covered limits need none.
• •Interest: cash credit is charged on the daily outstanding; a WCTL carve-out carries term-loan pricing; unutilised limits above ₹1 crore may attract a commitment charge.
• •Renewal: the annual review needs audited financials, CMA data for two years' actuals and two years' projections, stock audit for larger limits, and the current-year performance against the last projection.