What changed
This master circular supersedes the August 4, 2004 version, consolidating all instructions on advance management up to June 30, 2005. It reaffirms the liberalized approach: banks now have greater operational freedom, with credit decisions guided by board-approved policies and prudential norms rather than quantitative restrictions like the Credit Authorisation Scheme.
What it means for you
For urban co-operative banks, this circular provides a clear, simplified framework for working capital assessment—especially for smaller borrowers—using projected turnover. Banks must ensure borrowers contribute 5% of turnover as margin, while the bank provides at least 20%. This reduces reliance on traditional methods, speeding up credit delivery, but banks must verify turnover reasonableness through documents like sales tax returns.
What you must do
- Update your board-approved credit policy to reflect the turnover-based working capital assessment method for loans up to ₹1 crore (₹5 crore for SSI units).
- Ensure loan officers verify projected turnover using annual accounts or sales tax returns for both new and existing borrowers.
- Maintain margin money at 5% of projected turnover from borrowers, with bank finance capped at 20% of turnover (minimum).
- Document cases where traditional assessment yields higher credit than turnover method, and sanction the higher amount if justified.
Who it affects
Primary (Urban) Co-operative Banks, Borrowers seeking working capital limits up to ₹1 crore (non-SSI) or ₹5 crore (SSI), Board of Directors of PCBs (for policy formulation), Credit officers and loan approval authorities
What is the new working capital assessment method for small borrowers?
For fund-based working capital limits up to ₹1 crore (non-SSI) or ₹5 crore (SSI), banks can assess needs at 25% of projected annual turnover. The borrower contributes 5% as margin, and the bank provides at least 20% of turnover as finance.
Can we still use the traditional method for working capital assessment?
Yes, banks have discretion to use either the projected turnover method or the traditional production/processing cycle method. If the traditional method gives a higher requirement, the higher amount can be sanctioned, provided the borrower gets at least 20% of turnover as finance.
How do we verify the projected turnover of borrowers?
Banks must satisfy themselves about the reasonableness of projections using annual statements of accounts, sales tax returns, or other revenue documents. For existing units, historical growth trends should be checked to ensure estimates are realistic.