Part 03 — Products

Working Capital

Working capital finance funds the operating cycle: cash becomes raw material or traded goods, then inventory, then receivables, then cash again. In India the classic bank product is cash credit (CC) or overdraft (OD) against stock and book debts. It is renewed annually, monitored through stock statements, and controlled by drawing power (DP). Unlike an unsecured business loan, a working-capital account is meant to revolve; a permanently maxed-out CC with unpaid interest is an early-warning signal, not normal utilisation.

For the embedded e-commerce version of short-tenor working capital, see Marketplace Seller Finance.

RBI’s current MSME Master Direction does not prescribe one universal working-capital formula for every bank borrower, but it does preserve important MSME conduct rules: collateral-free lending for MSE loans up to ₹20 lakh, composite loan up to ₹1 crore for working-capital plus term-loan needs, lifecycle support such as additional working capital for emergent needs, mid-term review of limits, and 14-working-day decision timelines for MSE loans up to ₹25 lakh (RBI MSME Master Direction, updated February 9, 2026). For urban co-operative banks, RBI’s 2025 Management of Advances circular states the turnover method explicitly: micro and small enterprises needing fund-based working-capital limits up to ₹5 crore may be assessed at 25% of projected turnover, with 5% borrower net working capital and minimum 20% bank finance (RBI UCB Management of Advances, April 1, 2025).

Working-capital cycle from cash to stock, sales invoices, receivables, collections and back to cash, with CC or OD drawing power and annual renewal controls. — A CC or OD facility revolves with the operating cycle, while drawing power and annual renewal keep the funded assets current and eligible.

Product Parameters

Facility	Typical ticket	Tenor/review	Security and margin	Pricing and fees
Small CC/OD under turnover method	₹5 lakh-₹5 crore	12-month review, quarterly monitoring	Hypothecation of stock/book debts; collateral-free up to MSE threshold where applicable; CGTMSE possible	Bank benchmark plus spread, often 9%-16%; processing 0.20%-1% in many PSU/private banks
Assessed MPBF working capital	₹1 crore-₹100 crore	Annual renewal; quarterly CMA/stock review	Primary charge on inventory/debtors; collateral or collateral-free depending policy/scheme	Risk-rated spread; stock audit/legal/valuation costs
Dropline OD	₹5 lakh-₹5 crore	Limit reduces monthly/quarterly	Often unsecured or property-backed	Interest on utilisation; non-utilisation or annual charges may apply
Ad hoc / seasonal limit	10%-25% of regular WC limit	30-180 days	Same security, specific purpose	Higher spread or one-time fee

Method 1: Turnover / Nayak Method

The turnover method is designed for small units where a full operating-cycle build-up is overkill. The rule of thumb is:

Component	Formula
Total working-capital requirement	25% of projected annual turnover
Borrower’s margin / net working capital	5% of projected annual turnover
Bank finance	Minimum 20% of projected annual turnover

Worked example: a small garment trader projects FY27 gross sales of ₹4 crore, supported by FY26 GST sales of ₹3.35 crore and confirmed orders. Total working-capital requirement is ₹1 crore. Borrower contribution is ₹20 lakh. Bank finance is ₹80 lakh. If the trader already has ₹12 lakh net working capital, the banker either asks for ₹8 lakh additional margin, reduces the practical limit, or approves a deviation with cash-generation evidence.

The method is a floor, not a blind entitlement. If the borrower’s actual cycle requires more because inventory holding is 90 days and debtors are 75 days, the lender can assess higher need through traditional method. If turnover projection is inflated compared with GST, bank credits and industry growth, the lender should scale it down.

Method 2: MPBF / Projected Balance Sheet

Maximum Permissible Bank Finance (MPBF), historically associated with the Tandon Committee approach, uses projected current assets and current liabilities. RBI has deregulated detailed bank-credit assessment for commercial banks over time, so banks now use board-approved methods, but MPBF remains embedded in credit monitoring arrangement (CMA) data and bank appraisal formats.

Worked example for a manufacturer:

Item	Amount
Raw material inventory	₹80 lakh
Work-in-progress	₹30 lakh
Finished goods	₹70 lakh
Receivables up to policy age	₹120 lakh
Other current assets	₹20 lakh
Total current assets	₹320 lakh
Trade creditors	₹75 lakh
Other current liabilities	₹25 lakh
Working capital gap	₹220 lakh
Borrower margin at 25% of current assets	₹80 lakh
MPBF / bank finance	₹140 lakh

The credit officer then checks current ratio, tangible net worth, debt-equity, profitability, GST/bank turnover, buyer concentration and whether debtors above 90/120 days are excluded. The bank may sanction ₹1.40 crore, or lower if conduct is weak. If the borrower wants ₹2 crore, the file must justify longer operating cycle, fresh capital, collateral, or structured receivable finance.

Method 3: Cash Budget

Cash-budget assessment is used when monthly inflows and outflows matter more than year-end balance sheet: sugar mills, agro processors, contractors, exporters with shipment cycles, schools with fee-seasonality, and businesses with large festival inventory. The lender projects month-wise opening cash, collections, purchases, wages, statutory dues, debt servicing and closing cash. The limit is set near peak deficit, with a cushion.

Example: a snack manufacturer needs to buy ₹1.8 crore raw material in August-September for Diwali sales, while receivables come in November-December. A simple MPBF may understate the September deficit. A cash budget may justify a ₹1.25 crore seasonal enhancement for 120 days, liquidated from post-festival collections.

Drawing Power

Sanctioned limit is not the same as usable limit. Drawing power is usually:

DP = eligible stock after margin + eligible receivables after margin - unpaid creditors/overdues - deductions

Worked example:

Security item	Gross	Margin / haircut	Eligible
Raw material and finished goods	₹90 lakh	25%	₹67.5 lakh
Receivables below 90 days	₹70 lakh	35%	₹45.5 lakh
Receivables above 90 days	₹18 lakh	100% excluded	₹0
Less unpaid creditors over 90 days			-₹12 lakh
Drawing power			₹101 lakh

If sanctioned limit is ₹125 lakh, the borrower can draw only ₹101 lakh. If outstanding is already ₹112 lakh, the account is overdrawn even though it is below sanctioned limit. This is why monthly stock statements, debtor ageing and insurance matter.

Renewal and Monitoring

Annual renewal is not clerical. The lender refreshes Udyam, KYC, bureau, GST, financials, stock audit, insurance, CERSAI/charge records, conduct, covenant compliance and DP history. Enhancement should be tied to real turnover growth. Reduction or exit is considered where sales are stagnant, account is continuously overdrawn, stock statements are late, debtor ageing worsens, statutory dues accumulate, or the borrower opens unreported current accounts. Cross-link this with Monitoring & EWS.