SBI recasts working capital finance norms

Sitanshu Swain

Mumbai, Oct 5: The State Bank of India (SBI) has revamped its policy on working capital finance to lower the cost to corporates and also to monitor the performance of assets better. The new policy, effective October 1, was cleared by the bank's board recently.

The decades-old quarterly information system (QIS) has been scrapped and replaced with a modified and simpler version of financial followup reports, styled FFR1 and FFR2. These have to be submitted at quarterly and half-yearly intervals. The old penalties on non-submission of QIS have been scrapped. The system of fixing quarterly working capital limits for borrowers also stands withdrawn.

The bank has also reviewed the structure of charges/pricing relating to working capital financing. With effect from October, it has decided to withdraw the commitment charge of one per cent levied on the unutilised portion of fund-based working capital limits.

Moreover, the interest rate on additional working capital limits sanctioned as ad-hoc financing has been cut. Currently, ad hoc financing is priced two percentage points higher than the rate applicable to cash credit advances. Henceforth, the rate for ad-hoc working capital loans will be the same as that applicable to cash credit.

Under the new system, the bank has decided to focus on liquidity management as the key to determining a company's maximum permissible bank finance (MPBF). ``For sanctioning working capital limits, what really matters is the company's overall prospects over a period of time rather than day-to-day cash flows,'' says a top SBI official. The bank will, therefore, evaluate a company's eligibility for finance in terms of its inventory levels, treasury management and inter-firm comparisons.

The bank has replaced the old MPBF method for calculating working capital limits with a new assessment procedure called ``projected balance-sheet method'' (PBS). The procedure aims at assessing the short-term financial requirements of borrowers with a clear focus on their specific needs and a flexible approach. ``Middle-level corporates will be benefited by the changes,'' the SBI official says.

The PBS method expands the classification of current assets of a company by including all temporary investments like money market mutual funds, certificates of deposit and commercial paper in it. However, investments in inter-corporate deposits (ICDs), shares and debentures and in subsidiaries and associates will be classified as non-current assets.

ICDs taken from another companies will, however, be reckoned as current liabilities. The margins deposited for letters of credit (LCs) and guarantees relating to working capital, which were not recognised as current assets earlier, will be deemed as current assets by the bank.

The facility for purchase of demand and usance bills drawn under letters of credit will be computed outside the main assessment of working capital finance. Receivables in the form of sale bills (inland/export) drawn under LCs will not be included in current assets. Correspondingly, bank borrowings in the form of LC bill purchase limits will not be included in the projected bank finance under current liabilities.

The new assessment method will be used for assessing working capital finance above Rs 25 lakh. For small scale units which require working capital finance above Rs 25 lakh and upto Rs 2 crore, the assessment will to be carried out in terms of the projected turnover of the unit as mandated by the RBI. The PBS method of assessment will be used as a supporting analysis.

Even while withdrawing the need for QIS, the bank has emphasised that submission of financial followup reports will be a condition for disbursing the advances sanctioned. Non-submission or delayed submissions will be treated as defaults in complying with the terms of sanction and the bank will be free to take necessary action in this regard if such a default occurs.

The SBI's policy changes follow nearly six months after the Reserve Bank of India withdrew the detailed MPBF guidelines in its April credit policy. The central bank has permitted banks to evolve assessment methods which they consider appropriate.