Treatment of Overdraft (Against FDR) towards Assessment of MPBF Calculation

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Abhishek Dutta (Querist)
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28 February 2022 One of my customer is willing to avail a CC limit of 2.5 Crores against stocks and BD. Further he is willing to avail OD (Against FDR) of 1.00 Crore against FDRs of 1.20 Crores

Now, my question is whether the OD Limit will be treated as part of working Capital MPBF calculation for Computing CC limit, since my understanding is that the borrower will be utilizing the OD Limit for Working Cpaital Needs, however my seniors are suggesting that there is no such condition, the OD limit can be utilized for Long term use as well, since we do not state any such condition for sanctioning OD (Against FDR) Limit.

Please guide..

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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11 July 2024 In the context of banking and lending practices, the treatment of OD (Overdraft) limits against Fixed Deposit Receipts (FDRs) can vary based on the specific policies and guidelines of the lending institution. Here are some considerations regarding whether OD limits should be included in the calculation of Working Capital (WC) MPBF (Maximum Permissible Bank Finance):

1. **Nature of OD Against FDRs**:
- OD against FDRs is typically considered a form of secured lending where the borrower pledges FDRs with the bank to obtain an overdraft facility.
- Unlike Cash Credit (CC) limits, which are specifically intended for short-term working capital needs, OD against FDRs may not always be utilized for immediate working capital requirements. It can also serve as a source of liquidity or as a backup fund.

2. **Treatment in MPBF Calculation**:
- MPBF calculation for working capital generally includes limits that are intended to finance current assets and short-term operating expenses.
- Cash Credit limits are specifically designed to meet working capital needs such as raw materials, inventory, and operating expenses.
- OD against FDRs, while it provides liquidity, may not always be directly linked to current assets or operational expenses. Therefore, some banks do not include OD limits against FDRs in the computation of MPBF for working capital purposes.

3. **Banking Policies**:
- Banks may have internal policies or guidelines that dictate whether OD limits against FDRs are considered part of the MPBF calculation.
- If your bank does not explicitly include OD limits against FDRs in the MPBF calculation for working capital, it may be based on the understanding that these funds are not exclusively for short-term operational needs but can also serve other financial purposes.

4. **Senior Management Guidance**:
- Your seniors' guidance should align with the specific policies and practices of your institution.
- If they indicate that OD limits against FDRs are not typically included in the MPBF calculation for working capital, this could be based on internal policies and industry practices.

5. **Verification with Policy and Documentation**:
- To ensure clarity, you should refer to your bank's lending policies, credit manual, or guidelines regarding the treatment of OD against FDRs.
- If necessary, consult with the credit risk management team or the department responsible for credit policy to understand the rationale behind the treatment of such limits.

In conclusion, while CC limits are typically included in the calculation of MPBF for working capital due to their direct linkage to operational needs, OD limits against FDRs may not always be included unless specified by internal policies or regulatory requirements. Clarifying this with your bank's policy and guidance will provide the most accurate answer for your specific situation.