Credit Appraisal Techniques

(Training Program for Loan officers of DSCB)
 MSME -WORKING CAPITAL FINANCE
The participants of the training progam were curious to know the method of credit appraisal for working capital limits. The simplest way is collateral based. Though it is easy it does not require any appraisal skills to extend finance under this method.

PR Nayak Committee method, popularly known as Projected Turnover method requires the Banks to assess the working capital needs on the basis of the Sales projected for the ensuing year. The method is discussed in the box given on the left side. This method is easier and could be followed by Banks for smaller limits. The method considers the standard assumption that the operating cycle is 3 months (4 cylce in an year) and therefore 25% of sales projections as the eligible working capital needs of the units

Tandon Committee II Method , Popularly known as the Traditional Method is normally used for higher limits, it is but justifiable to calculate the holding levels of the current assets as well as the Current liabilities to arrive at the required levels of working capital need. The operating cycle  of any Bank depends on the holding levels projected on the basis of the trend in the Industry /  historical data. The working capital gap is arrived at to find the WC needs for the firms.The trainees were very eager to know more and more about the appraisal methods. Indeed a very interesting batch with inquisitiveness to know things more and more.