| Originally posted by :juzar |
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Dear Desperado,
Thanking you for your reply, basically i want to know :
1) banker point of view how strong is the financial of the company, is it possible to lend loan to them for not
2) Any common person view, how is strong is the balance sheet
regards
juzar para
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Dear Juzar,
The Financials are the key source through which any stake holder including bank evaluates the financial viablity / feasibility of the company while sanctioning loans etc., In this regard, Guidelines issued by Tandon Committee shall be worthwhile to be gone through, the same (Relevant) is being quoted here,
QUOTE:
Norms for inventory and receivables
Norms for 15 major industries proposed by the committee now have more than 50 disintegrated industry groups. Normally the borrower would not be allowed deviations from norms except in case of bunched receipt of raw material, power cuts, strikes, transport delays, accumulation of finished goods due to non-availability of shipping space for exports, build up of finished goods stocks due to failure on the part of purchasers. For those units which are not covered by the norms, past trends to be made the basis of assessment of working capital. (Discretion given to individual banks for deviations in norms)
Approach to lending
The committee suggested three methods of lending out of which RBI accepted two methods for implementation. According to First Method, the borrower can be allowed maximum bank finance upto 75% of the working capital gap (working capital gap denotes difference between total current assets required and amount of finance available in the shape of current liabilities other than short term bank borrowings). The balance 25% to be brought by the borrower as surplus of long term funds over the long term outlay.
As per Second Method of lending, the contribution of the borrower has to be 25% of the total current assets build-up instead of working capital gap. (Method of lending as per Vaz Committee will now apply to borrowers availing working capital fund based limits of Rs. 100 lac or more only)
UNQUOTE:
Banks shall have to follow the aforesaid guidlines provided by the Tandon Committee as legal obligation, however, some other factors are also required to be considered, like the following will also be important for a bank while lending loans to the borrowers.
The most widely used are: the acid-test ratio or quick ratio (short-term assets divided by current liabilities); the current ratio (current assets divided by current liabilities); and the debt coverage ratio (working capital divided by long-term debt). Financial ratios can be measured against ratios in prior years, or industry averages, for quick, easy comparison. Key performance ratios, such as the leverage ratio (long-term debt as a percentage of shareholder net worth), are frequently used in pricing commercial loans.
Since sound liquidity is as important in business as blood in human being, A highly profitable company could get liquidated if its liquidity position is not strong because creditors have a legal right to sue the company if they are not paid on time, on the other hand a loss suffering company, might perform better if its liquidity position is strong, so the Cash position, Cash operating cycle, working capital, inventory and receivable norms are observed by the bankers to evaluate the financial strongness of the company, besides the above, Financial leverage and use of debt in capital structure of the company cannot be overlooked by the bank while lending loans.
I hope the aforementioned is sufficed enough for you to jot down some relevant points.
Best Regards,
Desperado
CAclubindia
