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CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital

Under the Tandon Committee's lending norms for assessing bank finance for working capital, which method requires the borrower to finance a part of the total current assets from long-term sources, with the maximum permissible bank finance being 75% of current assets less current liabilities other than bank borrowings?

The second method of lending is correct. Under it, maximum permissible bank finance equals 75% of total current assets less current liabilities other than bank borrowings, so the borrower funds at least 25% of current assets from long-term sources. The first method applies 75% to the working capital gap instead.

  1. AFirst method of lending
  2. BSecond method of lendingCorrect
  3. CThird method of lending
  4. DTurnover method

Explanation

Under the second method, MPBF = 75% of current assets minus current liabilities (other than bank borrowings), so the borrower contributes at least 25% of current assets. The first method uses 75% of the working capital gap, and the third also excludes core current assets. The turnover method uses 20% of projected sales.

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