Banking News

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)


(9) 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 ?

Leave a Reply

Your email address will not be published. Required fields are marked *


error: Content is protected !!