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BANK FINANCE FOR WORKING CAPITAL HARIKRISHNAN

INTRODUCTIONBanks are the main institutional sources of

working capital finace in india. After trade credit,bank credit is the most important source of financing working capital requirements. A bank considers a firms sales and production plants and the desirable levels of current assets in determining its working capital requirements .The amount approved by the bank for the firms for the working capital is called credit limit.credit limit is the maximum funds which a firm can obtain from the banking system.

WORKING CAPITALWorking capital are refers to the funds invested in

current assets i.e, investment in sundry debtors , cash and other current assets.

current assets are essential to utilize facilities provided by plant and machinery,land and buildings. In case of the manufacturing organisation, a machine cannot be used without rawmaterials. The investment in the purchase of rawmaterials is identified as working capital.

DEFENITION According to shubin “working capital is the amount of funds necessary to cover the cost of operating the enterprise”.

FORMS OF BANK FINANCE

A firm can draw funds from its bank within the maximum credit limit sanctioned. It can draw funds in the following forms;(a) Overdraft(b) Cash credit(c) Purchase or discounting of bills(d) Letter of credit(e) Working capital loan

(A) OVERDRAFT

under the overdraft facility, the borrower is

allowed to withdraw funds in excess of the balance in his current account upto a certain specified limit during a stipulated period though overdrawn amount is repayable on demand,generally continue for a long period by annual renewals of the limits.

(B) CASH CREDIT

The cashcredit facility is similar to the overdraft arrangment. It is the most popular method of bank finance for working capital in india. Under the cash credit facility, a borrower is allowed to withdraw funds from the bank upto the sanctioned credit limit. Cash credit limits are sanctioned aganist the security of current assets . Cash credit is a most flexible arrangement from the borrowers point of view.

(C) PURCHASE OR DISCOUNTING OF BILLS

under the purchase or discounting of bills, a borrower can obtain credit from a bank aganist its bills . The bank purchases or discounts a borrowers bills. The amount provided under this agreement is covereded within the overall cash credit or overdraft limit .

(D) LETTER OF CREDIT

Suppliers , particularly the foreign suppliers , insit that the buyer should ensure that his bank will make the payment if he fails to honour its obligation. These is ensured through a letter of credit arrangement . A bank opens and letter of credit in favour of a customer to facilitate his purchase of goods.

(E) WORKING CAPITAL LOAN A borrower sometimes require adhoc for temporary

accomadation in excess of sanctioned credit limit to meet un forseen contigencies . Banks provide such accomadation through a demand loan account or separate non-operable cash credit account . The borrower is required to pay higher rate of interest above the normal rate of interest on such additional credit.

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