August 28, 2016


1)  What all aspects have to be looked into while  deciding on a Credit Proposal,
We have to assess the  Persons behind the Proposal like 
1) Character
2) Capacity
3) Capital 
4) Credit Worthiness of the Proprietor, Directors etc., etc., 

b) We have to assess the Viability of the Proposal  viz
1) Economic Viability
2) Technical Feasibility
3) Financial Viability
4) Managerial Efficiency
c) We have to comply with  the KYC of the borrower
d) All the above
2)  What are the important financial indicators  to be looked into while assessing the  financial Viability
Liquidity Ratio
b) Debt Equity Ratio 
c) Solvency Ratio
d) Profitability Ratio
e) Break Even Point and Debt Service Coverage Ratio
f) All the above

3)  What is meant by Liquidity Ratio 
a) Liquidity Ratio measures the capacity of a firm/unit to meet its Current Liability out of the Current Asset
b)  Liquidity of a firm gives popularity among the creditors etc as the same represent the promptness of the firm with which pressing liabilities can be met on its due dates/ or when demanded
c) Liquidity measures the capacity of the firm to settle their current liability out of their current assets
d) All the above
4)  The most important liquidity  ratio include
a)  NWC = Current Asset - Current Liability

                               Current Asset
b)  Current Ratio =   -------------------
                               Current Liability

                           Current Asset - Stock or Inventory
c)  Quick Ratio =  =====================
                                         Current Liability

5)  What according to you is the best Current Ratio? 
a) 1.33 
b) 1.25
c) Above 1
d) All the above
6)  What will be the minimum Current ratio available in a unit enjoying working capital facilities  under Tandon Second Method of lending
a) 1.33 
b) 1.25
c) 1.15
d) All the above

7)  A Bank has sanctioned  working capital facility to a concern under Nayak’s Committee Turn over method. The current ratio for this account would be maximum of
a)  1.25 
b) 1.33
c) 1.50
d) Any of the above
5.  What is Tandon Second Method of Lending?
According to Tandon any Industry or system normally undergoes a cycle of operation of Conversion of Cash into Raw Materials into Work In Progress  into Finished Goods into Debtors and into Cash.   

Naturally, for the smooth running of the unit, the unit requires certain level of holding under RM, WIP, FG and Debtors.

The total of the Working funds is known as Total Current Asset or Gross Working Capital.  Normally a part of the money required for Procuring Raw Material etc., is provided by Creditors which is known as Other Current Liability. 

Thus, Working Capital Gap (WCG) = TCA - OCL. 

A portion of this WCG is met by the party by bringing his margin and the other part is financed by Bank.

As per Tandon Second Method of Lending

PBF1 = WCG - 25% of TCA

PBF2 = WCG - Projected NWC.

Maximum Permissible Bank Finance = PBF1 or PBF2 whichever is lower.

Naturally if projected NWC is more the PBF2 will be lower and that will be MPBF.

  What is Working Capital Gap?

Out of the total requirement of funds required for the normal working of the unit which is known as TCA a portion is available by way of other current liabilities.  So the gap or short fall in Working Capital is the difference between the total current asset and other current liabilities.


What is the difference between Working Capital Gap and Net Working Capital.

WCG = TCA - Other Current Liability


WCG - NWC = Bank Borrowings

  What is the measure of solvency of a firm?
Solvency = Tangible Net worth

6.    What is the Total Debt Equity Ratio
                                          Total Outside Liability
Total Debt to Equity Ratio  = --------------------------
                                           Tangible Net Worth
  This ratio can be between 2 and 3.
7.    What is Tangible Net Worth?
Tangible Net Worth = Equity Capital + Free Reserve - Intangible Asset
  Net Worth    = Equity Capital + Free Reserve

8.    What is meant by Free Reserve?
Free Reserve means, any money retained in the business created out of Revenue or profit created out of Capital Issue by way of  Premium or forfeiture of share and credited to Reserve Account.
9.  What do you know about contribution in respect of BEP?
                                Fixed Cost
BEP in numbers =   ---------------
                        Unit selling Price - Unit Variable cost

The unit selling price - unit variable cost is called Contribution
10.  Can you tell me what is P-V Ratio?
  Profit Value Ratio is  Unit Contribution
                               =========== x 100
                                Unit Selling Price
                              Unit Selling Price - Unit Variable Cost
  PV Ratio =   -------------------------------------------------- x 100
                                        Unit Selling price

11.  When do we use DSCR as a financial indicator?
While assessing Term Loan we work out DSCR.  The acceptable DSCR is "2".  The average is "1.5"

12.  What is meant by diversion of Funds?

Normally the Current Asset is created by current liability and also a portion of Long Term Finance.  Thus in a healthy balance sheet, Long Term Source will be partially used for creating Long Term Use and also Short Term Use.  Short Term Sources should never be used for Long Term use as it will affect the liquidity which is measured by NWC.  The NWC should increase year by year, for  a healthy unit.

When however, NWC in a year declines over that available in the previous year, we say there is diversion.  The reason for diversion is utilisation of Short Term Source, towards acquiring long terms use or for repayment of Long Term Liability.

13.  What do you know about  Nayak Committee Recommendations on Working Capital.

Nayak Committee Recommended for arriving at PBF based on Sales Turn Over.  He recommended PBF can be 20% of Acceptable Projected Sales Turn Over and the Party should bring 5% of Sales Turn over as Margin.  He also suggested that this should be the Minimum PBF.

14) Who suggested the Introduction of Cash Flow Method for arriving at PBF.

 Kannan Committee suggested that, the best method of arriving at need based working capital facility is cash flow.

14.  Brief the system of assessment of working capital facility under cash flow.
The firms will be having Cash Flow under
  1. Operational activities
  1. Financing Activities
  1. Investment Activities
The firm will be advised to submit the cash flow statement for all the three activities referred above on a monthly basis over a period of 12 months.
The surplus or deficit under cash flow under each activity will be arrived at.  Then the net position is arrived at on a monthly basis.  Limit will be sanctioned based on the Peak net deficit.  The party has to then submit the cash flow statement on a monthly basis before the beginning of every month and accordingly the operating limit is fixed.

15.  Loan delivery system for Loans for Rs.10 Crores and above.
As per Rashid  Jilani Committees Recommendations Loan Delivery System for Advances of WC of Rs.10 Cores and above from Banking System was introduced.  As per the norms Banks can extend 80% of the sanctioned WC limit by way of DL and 20% by way of Cash Credit.
The portion of Bill Purchase/Discounted facilities can be out of the 80%  portion.
Recently, however, RBI have relaxed the norms and gave freedom to Bank.  Our Bank accordingly, have decided to give flexibility under the delivery norms.  As per C.O. guidelines, we can have a flexibility between 70% DL, 30% C/C to 90% DL and 10% C/C.  The Loan delivery system is not applicable to Export Credit.

16.  What is  Line of credit for Exporters.
This is a Credit Facility extended to Exporters where the sanction is extended for a period of 36 months.  The outer limit is fixed.  The scheme also envisages flexibility by way of interchange between say PC and Bills Purchase facility etc.,

17.  What is the difference between Adhoc facility and excess.
Excess facilities are allowed to meet very urgent contingency needs and any excess sanctioned has to be adjusted in 30 days time and requires reporting to sanctioning authorities.

Adhoc facility on the other hand is for meeting (executing) urgent large value orders and has to be brought down to the original limit within a period of 3 months.

18.  What is Renewal of credit facilities.
Renewal of Credit facility is an exercise to be carried an annually for all borrowal accounts where working capital facility are sanctioned.
The Renewal is a full exercise where besides analysis of the Audited financial statements, the operation in the Accounts are studied including rectification of irregularities in the Inspection Reports etc.,

In our Bank it has been decided to Review, large borrowal of Rs.5 Crore and above on a half yearly basis.

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