A wholesale trader firm's projected sales is Rs
20 Crore. Using Turnover method of calculatic
of working capital finance, what is the amount
of CC limit that can be granted?
Rs.3 crores
Rs 4 crores
Rs 5 crores
Rs 2 crores
Answers
Explanation:
Turnover method to estimate working capital requirement as per nayak committee is explained in hindi. Working capital limit is calculated as 25% of annual sales turnover of a company in this methodDrawing Power is usually applied on Cash Credit Accounts. It is usually calculated by taking a Margin of 25% on Stocks and 40% on Book Debts. ... The Limit of Credit that can be availed is determined by the bank mainly on ones Financials (differs from Bank to Bank lending Policy) and Drawing Power.lending to meet credit requirements of their borrowers and effective supervision and monitoring of advances have assumed considerable importance. Previously working capital finance provided by the banks to trade and industry was regulated by the Reserve Bank of India through a series of guidelines / instructions issued. There were various quantitative and qualitative restrictions on bank’s lending. The banks were also expected to ensure conformity with the basic financial disciplines prescribed by the RBI from time to time under Credit Authorisation Scheme (CAS).
1.2 However, consistent with the policy of liberalisation and financial sector reforms, several indirect measures to regulate bank credit such as exposure norms for lending to individual / group borrowers, prudential norms for income recognition, asset classification and provisioning for advances, capital adequacy ratios, etc. were introduced by RBI and greater operational freedom has been provided to banks in dispensation of credit.
1.3 Banks are expected to lay down, through their boards, transparent policies and guidelines for credit dispensation, in respect of each broad category of economic activity, keeping in view the credit exposure norms and various other guidelines issued by the Reserve Bank of India from time to time. Some of the currently applicable guidelines are detailed in the following paragraphs.
1.4 Banks are now operating in a fairly deregulated environment and are required to determine their own interest rates on deposits (other than saving account) and interest rates on their advances. The interest rates on banks' investments in government and other permissible securities are also market related. Intense competition for business, involving both the assets and liabilities, together with increasing volatility in the domestic interest rates as well as foreign exchange rates, has brought pressure on the management of banks to maintain an optimal balance between spreads, profitability and long-term viability. The unscientific and ad-hoc pricing of deposits in the context of competition, and alternative avenues for the borrowers, results in inefficient deployment of resources. At the same time, imprudent liquidity management can put banks' earnings and reputation at great risk. These pressures call for a comprehensive approach towards management of banks' balance sheets and not just ad hoc action. The managements of UCBs have to base their business decisions on sound risk management systems with the ultimate objective of protecting the interest of depositors and stakeholders. It is, therefore, important that UCBs scrupulously follow the Asset-Liability Management (ALM) guidelines