“Financing of working capital by bank & the banking regulations”
Ms Prachi Jain Ms Rajni Sinha (Assistant professor- Amity College of Commerce and Finance- Amity University – Noida)
Working capital is that portion of a firm’s capital which is employed in short term operations. Current assets represent Gross Working Capital. The excess of current assets over current liabilities is Net Working Capital.
WORKING CAPITAL FINANCING BY BANKS
Credit facility provided by commercial banks to meet the working capital requirement has been an important source of short term funds to business firms.
Usually, the bank credit is available in the following forms: • Overdraft • Cash Credit • Bills purchased & bills discounting • Letter of credit • Working capital term loan • Funded interest term loan
SECURITY REQUIRED IN BANK FINANCE
Banks generally do not provide working capital finance without adequate security. The nature and extent of security offered play an important role in influencing the decision of the bank to advance working capital finance. The bank provides credit on the basis of following modes of security:• • • • • Hypothecation Pledge Lien Mortgage Charge
REGULATION OF BANK FINANCE IN INDIA
The basic objective of regulation and control of bank credit is to ensure its equitable distribution to various sectors of the Indian economy. The RBI has been trying, particularly from the mid-sixties onwards, to bring a measure of discipline among industrial borrowers and to redirect credit to priority sectors of the economy. The important finding and recommendations of the following committees,have shaped the flow of bank credit in last three decades in India:• • • • • Dehijia Committee Tondon Committee Chore Committee Marathe Committee Nayak Committee
RECENT RBI GUIDELINES REGARDING WORKING CAPITAL FINANCE
The recent changes made by RBI in the guidelines for bank credit for working capital finance are discussed below: • For borrowers with...
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