In the first part of the article, the author, after evaluating the principles governing the maximum permissible bank finance, concludes that as long as banks perform their task expeditiously and adopt a flexible approach in computing the annual working capital limits of companies, there was no reason to rue the demise of MPBF.

Banks have to ensure that the removal of MPBF does not result in loose lending. It is up to the banks to make sure that this does not happen in the banks' credit delivery system.

Banks like the State Bank of India and Bank of Baroda should take the lead in evolving a system which may be adopted by others. One unfortunately comes across ill-informed views to say that hereafter there can be no system for meeting the credit requirements of corporates. According to a section of experts, banks and their corporate customers have to sit across and arrive at the need-based limits in individual cases. Although this appears to be acceptable to some extent, individual banks have a system for assessing the working capital requirements of corporates.

The RBI has suggested that banks may follow cash-budget system for assisting the working capital finance in respect of large borrowers. The reason seems to be that major corporates have adopted cash budgeting as a tool for funds management.

Using cash-budget (CB) for working capital assessment has its limitations. CB tracks only movement of cash and not funds. For example, any change in the component of current assets (other than cash) results in movement of funds and not cash. Similarly, CB overlooks earning of profit or incurring losses during a working capital cycle.

It is therefore suggested that the corporates should submit projected funds flow-cum-cash flow statements. Banks should deliver the goods as regards funds/cash estimates based on the previous records of funds/cash flow statements. Banks should also take into account the seasonality in the operations both in funds and cash flow statements. The RBI has hinted that banks may follow the cash-budget system adopted by the big corporates. Bankers have, therefore, started looking into the cash-budgeting system or its derivatives followed by the corporates.

For a corporate finance manager, cash budget involves forecasting the future sources and uses of cash. The exercise serves two purposes for him. First, it alerts him to future cash needs. Second, it provides a standard, or budget, against which subsequent performance can be judged. The process of cash-budgeting becomes all the more important in the post-MPBF era. Many large companies have developed elaborate models for cash-budgeting; others use a spreadsheet programme to plan their cash needs. The procedures of smaller firms may be less formal. But there are common issues that all firms must face when they forecast.

The same differential basis of analysis must be followed by the banks while analysing the future needs and the repayment capabilities of their customers. In fact, the banks would be more comfortable in assessing the credit-worthiness of their clients if they too carry out the cash-budgeting of their customers.

Most firms keep tract of the average time it take the customers to pay their bills. From this they can forecast what proportion of a quarter's sales is likely to be converted into cash in that quarter, and what proportion is likely to be carried over to the next quarter as accounts receivable.

So much for the incoming cash. There always seem to be many more uses for cash than there are sources. Companies generally use the cash flows for purposes such as payments of bills for raw material, spare parts, electricity, wages, administrative and other expenses, capital expenditure, taxed, interest and dividend payments.

The forecasted net inflow of cash indicates how much finance the firm will have to raise if its cash flow forecast are right.

Most financial managers regard a planned cash balance of zero as driving too close to the edge of the cliff. They establish a minimum operating cash balance to absorb unexpected cash inflows and outflows. Some criticism against MPBF is that it is at best an incomplete quantitative technique and that it does not take into account qualitative factors like management technology, market share, future, strategy etc. MPBF itself has been explained as an incomplete quantitative technique because it does not take into account cash flow, leverage, sustainable growth etc. It is not correct to assume that the working capital assessment based on the MPBF does not take into account the qualitative factors. Any working capital proposal comments on all the qualitative aspects of the borrower.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.