Working Capital

LETTERS TO THE EDITOR

The credit policy for 1997-98 has given full freedom to banks for assessing working capital requirements of borrowers following the recommendations of Kannan Committee that the system of maximum permissible bank finance (MPBF) should be scrapped.

Not many banks, however, have taken the required steps to make use of this freedom. As per your Banking Bureau report titled BOB plans 3-tier replacement for MPBF (May 8), Bank of Baroda (BOB) will asses working capital requirements of small borrowers with a capital of Rs 2 lakh and below on the basis of the turnover, medium sized borrowers according to the existing MPBF method, and large corporates on the basis of the cash flow method.

The report does not clarify the basis of categorising companies into medium and large categories.

Moreover the application of the turnover method to small borrowers with a capital base of Rs 2 lakh only will not serve any purpose.

It is suggested that 3-tier system be made applicable on the following basis:

1. Turnover method upto a turnover of Rs 2 crore

2. MPBF method for turnover exceeding Rs 2 crore and upto Rs 10 crore

3. Cash flow method for turnover exceeding RS 10 crores

The proposed three-tier system of BOB also does not take into account the nature of business of the borrower.

While the turnover method is more suitable for the non-manufacturing sector, MPBF is suitable for the manufacturing sector and the cash flow method is suitable for seasonal industries like tea, coffee and sugar.