Shree Precision Components: Drawing-Power Shortfall Meets an MSME Enhancement Request
Shree Precision Components Pvt Ltd, a Tier-3 auto-ancillary unit near Pune, holds a cash credit limit of Rs 1.25 crore sanctioned 34 months ago and fully drawn for the last nine months. The latest drawing power, computed on a stock-and-debtors statement dated 45 days ago, is Rs 88 lakh. FY2024 audited turnover is Rs 8.40 crore (FY2023: Rs 9.10 crore), EBITDA margin 9.8% and PAT Rs 26 lakh. Receivable days are 96, inventory days 78 and payable days 45. Two OEM customers account for 42% of debtors and pay in 120 days. GST returns show average monthly outward supplies of Rs 62 lakh, while bank statements show average monthly credits of Rs 54 lakh. The promoter offers a second charge on a residential flat valued at Rs 70 lakh and seeks an enhancement to Rs 2.50 crore, of which Rs 40 lakh is for a new CNC machine and the rest for working capital. No annual review has been documented since sanction, and the unit was last inspected 14 months ago.
1. Compute the operating cycle, the working capital requirement, the permissible bank finance under both Tandon Committee methods (on both the GST and the bank-credit turnover base), and the current drawing-power position. What does the arithmetic establish before the enhancement is even considered?
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Step 1 - Cycle. Operating cycle = 96 + 78 - 45 = 129 days. Day-sales on audited turnover = 8.40 crore / 365 = Rs 2.30 lakh.
Step 2 - Requirement. Current assets = (96 + 78) = 174 days x 2.30 = Rs 4.00 crore; current liabilities = 45 days x 2.30 = Rs 1.04 crore; working capital gap = Rs 2.96 crore.
Step 3 - MPBF.
- Method II: 0.75 x 4.00 - 1.04 = Rs 1.96 crore
- Method I: 0.75 x 2.96 = Rs 2.22 crore
Step 4 - Test the turnover. GST supplies and bank credits differ by about Rs 8 lakh a month (13%). Bank credits are the harder evidence of realised sales, so re-run on Rs 6.48 crore annualised: day-sales Rs 1.78 lakh, current assets Rs 3.09 crore, current liabilities Rs 0.80 crore, MPBF (Method II) = 2.32 - 0.80 = Rs 1.52 crore.
Step 5 - Drawing power. Outstanding Rs 1.25 crore against DP Rs 88 lakh means Rs 37 lakh is unsupported by current assets - effectively a hard-core, unsecured exposure sitting inside a secured limit.
Conclusion: the existing limit is defensible only at the top of its range and definitely not at Rs 2.50 crore. The request is roughly 60% above sustainable MPBF on the conservative base. The 45-day-old stock statement also overstates DP, since DP must be recomputed monthly; the true shortfall is probably larger than Rs 37 lakh.
2. The branch recommends sanction at Rs 2.50 crore. State your decision, the structure you would approve instead, and the conditions precedent.
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Decision: decline as proposed; restructure the ask. A single Rs 2.50 crore cash credit would convert a Rs 37 lakh deficiency into roughly Rs 1 crore of unsecured working capital finance, funded by a borrower whose turnover is falling and whose receivable days (96) already exceed the 120-day OEM terms on nearly half the book.
Structure to approve:
- Regularise first. Bring the CC outstanding down to the recomputed DP (Rs 88 lakh or the fresh monthly DP, whichever is lower) through debtor realisation routed into the account; a portion can be converted into a 24-month working capital term loan only if the promoter brings 15-20% margin.
- Re-fix CC at Rs 1.50-1.55 crore, reviewed annually, priced for the risk, with a DP recalculated monthly and a covenant capping debtor days at 90.
- Sanction the machine separately as a term loan of Rs 32 lakh, not Rs 40 lakh - 20% margin, 5-year tenor, 3-month moratorium, repayable from the incremental output of the machine, secured by hypothecation of the machine and a second charge on the flat.
Conditions precedent: NOC from the first charge-holder on the flat plus an inter-creditor arrangement; assignment of insurance on stock with the bank's name; trust-and-retention/escrow of the two OEM receivables; personal guarantee of the promoter and spouse; a fresh inspection and stock audit before disbursement; and a written undertaking that no part of the term loan is diverted to fund the DP shortfall.
The collateral offered (Rs 70 lakh flat, second charge) covers the term loan but cannot be used to justify unsecured working capital.
3. Identify the documentation and regulatory lapses visible in the file and state the consequence of each.
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- No documented annual review for 34 months. Working capital limits must be reviewed/renewed periodically under the bank's board-approved credit policy and RBI's guidance on timely review; an unreviewed limit is a control failure and the account should be flagged internally. Consequence: the limit cannot be enhanced until review is completed and the review finding recorded.
- 45-day-old stock and debtor statement. DP is valid for the statement period; monthly statements are the norm for a CC account of this size. Consequence: DP is stale, the Rs 37 lakh excess is understated, and any further drawing is unauthorised.
- No inspection for 14 months. Physical verification of hypothecated stock and charge verification are due diligence obligations. Consequence: possible stock/charge erosion, insurance lapse or prior charge created unnoticed.
- Charge formalities. Confirm Form CHG-1 registration with the Registrar of Companies within 30 days of creation, CERSAI registration of the security interest, and registration of the second charge with the first charge-holder's consent. Consequence: an unregistered charge is void against a liquidator and weakens SARFAESI enforcement.
- GST and bank-credit mismatch of 13%. Consequence: possible overstated turnover; reconciliation should be obtained before the limit is re-fixed.
- Concentration risk. 42% of debtors in two OEMs with 120-day terms - a single payment delay would push the account into SMA. Consequence: build a concentration covenant and a receivable-collection mechanism into the sanction.