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How to compute working capital limits under Turn-over method/Nayak committee

(Nayak Committee norms for computation of working capital limits)

The term working capital means sum of the funds invested at various current assets used in the operating cycle, by the industrial and trading establishments. Operating cycle means the length of time required to convert ‘Non-Cash current assets’, (like raw material (RM), work in process (WIP), finished goods (FG), and receivables) into cash. The appraisal of working capital finance means assessment of gross working capital, net- working capital and working capital gap for assessment of working capital limits for a company.

Banks in India have evolved their own method of lending as they have been given free hand by the Central Bank (that is RBI) to decide the lending methods. The method of assessment of working capital limits up to Rs.2 crore (Rs.7.50 Crore for SME) assessed under turn over method is called as limits assessed under Nayak Committee Norms.  Under turnover method the aggregate fund based working capital limits are computed on the basis of Minimum of 20% of their projected annual turnover. The borrower has to bring margin of 5% of the annual turn-over of such borrowers as margin money.


If Projected sales turn-over  Rs.100, 000.00
Then, working capital gap is 25% of turnover  Rs.100, 000.00
Minimum permissible Bank Finance should be 20% of turnover Rs.  20,000.00
Margin money from the borrower should be 5% of Rs.100000.00



The following types of loans and advances are considered as working capital finance. 

  1. Cash Credit/ Overdraft against inventories and book debts.
  2. Demand Loan portion under Loan System for Delivery of Bank Credit
  • If, permissible bank finance is Rs.10 Crore and above.
  1. Packing Credit against inventories.
  2. Bills purchased /Discounted (inland & foreign)
  3. Cash Credit against book debts/Cheque purchase.
  4. Working capital term loan (for excess borrowing)


(17) Comments

  1. ANANT

    Sir I am working in Central Bank of India. One of our customer has approached me for Mudra Loan . He is a Jewellery business. His sales for the year ended 31.03.2017 is 18,76,123/- and extimate for 31.03.2018 is 39,50,000 and projection for 31.03.2019 is 43,75,000/- Whether the growth is acceptable or Not? Please Advice. Tahnking You Anant K

    1. Surendra NaikSurendra Naik - Post author

      Call for the provisional balance sheet as of 31.12.2017 and find out the actual sales for first 3 quarters. If it is almost 3/4th of the project for 31.03.2018 then you may accept the projection as of 31.03.2018 as well as the figures projected for the financial year 2017-18. You may call for the Sales Tax/GST return filed by the customer to confirm that the actual sales have taken place.

  2. TULIKA sen

    I am working in SBI,one customer want a loan of Rs.5lacs, having a new business plan of processing,(potato chips), a factory has been set up but business not started.He showed an estimated sales of 7lacs per month ....current estimated expenses 4lacs 14 thousand..How i calculate his eligibility of loan amount and what should I ask him for supporting documents?

    1. Surendra NaikSurendra Naik - Post author

      If you are satisfied that business projected is realistic you may compute the limit under turnover method. Please read the following links

  3. Manoj

    Sir one customer came my branch with project balance sheet in this bal sheet Rs. 5 Lac is debtors Rs. 9 Lac is creditor Rs. 20 Lac is sales & Rs. 5 Lac stock how much working capital is in bal sheet in paid up stock

    1. Surendra NaikSurendra Naik - Post author

      Under Turnover method is eligible 20% of the turnover that is Rs. 4 lakh. However, his working capital requirement is fully financed by sundry creditors (Rs.9 lakh) as against turnover of 20 lakh and debtors 5 lakh. In my opinion he does not require any additional finance from the bank. You may not evince interest on this proposal.

  4. Shyam Sundar Choudhury

    Sir, Under turnover method for calculation of MPBF, the margin of 5 per cent is to be calculated on projection or latest actual Balance Sheet ?

  5. Rohit Kumar

    Sir one customer come up with proposal of rs 5 lac cc and 3 lac for term loan under pmmy for establishing kirana shop. How to judge the same and what analysis needs to be done.

    1. Surendra NaikSurendra Naik - Post author

      Ask him to submit the proforma invoice/quotaion assets which he intends to acquire through the term loan. Click the following link to know the term loan appraisal. For working capital limit, apply turnover method (However you must be satisfied with the projection).

  6. Sib

    Sir under TURNOVER method what should be the turnover accepted by it same as turnover projected by the borrower or the turnover of the account

    1. Surendra NaikSurendra Naik - Post author

      If the borrower presents the over-ambitious turnover projection, the bank need not accept such proposal without being satisfied with it. Usually, present turnover plus about 20% increase is treated as reasonable and banks may accept such proposals. If the projection is much higher, the customer has to give convincing reasons that how he will achieve such projected turnover.

  7. jayanth

    dear sir,iam having doubt that when we enter data in CMA format whether proposed working capital loan (day to day activities) amount for the current year to be entered in current liabilities side to arrive current ratio.IF so,does it to be entered in projections or in actuals

    1. Surendra NaikSurendra Naik - Post author

      It should be on projection. current year figures would help us to compare the actual and projection. If you feel assets and liabilities are overestimated you may ask the party to provide a realistic figure or convince you how they will achieve the projected sales etc.

  8. Chandrasekhar

    In turn over method,is it required to reduce the excess of NWC than 5% of projected sales from eligibility calculated @20% of projected sales

    1. Surendra NaikSurendra Naik - Post author

      Many accountants ask the borrower requirement of limit. Then they work out in the reverse order i.e 5 times the limit required is the projected sales and arrive working capital gap (CA-CL) as 5% of projected sales. The above method is used to fool the credit officer of the bank. The bank should not go by such projections given by the borrower. They have to estimate the realistic sales projection based on the previous year business or on the basis of confirmed orders in hand. You need to call the months wise list of Sundry creditors and sundry debtors from April 1st to till date so that you can ascertain the correctness of current assets and current liabilities statement submitted by the borrower.

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