What changed
RBI issued a master circular consolidating all instructions on advance management for UCBs issued up to June 30, 2007, replacing the earlier circular of January 22, 2007. It retains the turnover method for working capital assessment: for borrowers other than SSI units, limits up to ₹1 crore; for SSI units, up to ₹5 crore. The working capital requirement is set at 25% of projected turnover, with the borrower contributing 5% as net working capital and the bank providing at least 20%.
What it means for you
Banks now have a single reference document for lending norms, reducing confusion from multiple circulars. The turnover-based assessment simplifies credit appraisal for smaller loans, but banks must verify projected turnover using audited statements or tax returns. This approach gives banks flexibility to use either the turnover method or traditional method, but they must ensure the borrower's margin is met.
What you must do
- Update your credit policy manual to reference this master circular as the governing document for advances.
- Train loan officers on the turnover-based assessment method for working capital up to ₹1 crore (₹5 crore for SSI).
- Verify borrower's projected turnover using annual accounts or sales tax returns before sanctioning limits.
- Ensure borrower brings in 5% of projected turnover as margin money for working capital facilities.
- Review existing advances to confirm compliance with the consolidated guidelines.
Who it affects
All Primary (Urban) Co-operative Banks, Borrowers seeking working capital limits up to ₹1 crore (non-SSI) or ₹5 crore (SSI), Credit officers and risk management teams at UCBs
What is the turnover method for working capital assessment?
Under this method, working capital requirement is 25% of the borrower's projected annual turnover. The borrower must bring in 5% of turnover as margin, and the bank provides at least 20% of turnover as finance.
Can banks use the traditional method instead of the turnover method?
Yes, banks have discretion to use either method. If the traditional method gives a higher requirement, the bank may sanction that amount, but must still ensure the borrower contributes 5% of turnover as margin.
How should banks verify the projected turnover?
Banks should satisfy themselves about reasonableness using annual statements of accounts, sales tax returns, or other documents. They must ensure the estimated growth is realistic for both new and existing units.