WORKING CAPITAL & SHORT-TERM FINANCING

CONSORTIUM BASED FINANCING

Current Working Capital Limits

NAME OF THE BANK FUND BASED NON-FUND BASED

STATE BANK OF INDIA 3600 46000
ICICI BANK 1282 19000
HDFC BANK 1200 10000
STANDARD CHARTERED 1200 19000

BANK
STATE BANK OF 715 7500

SAURASHTRA
STATE BANK OF PATIALA 1300 7700
CANARA BANK 1203 6000
SOCIETE GENERALE 1000 4000
HSBC BANK 1000 18300
TOTAL 12500 137500

In order to finance the working capital needs of the firm in the form of Working

Capital Demand Loan, there is a consortium of nine banks. The consortium if banks

provide a fund based limit of 125 Crores which comprises of cash credit and working

capital demand loans and non-fund based limits which has bank gurantee and letter of

credit subject to a limit of 1375 Crores. The Lead Bank in this consortium of banks is

State Bank of India and the second lead bank is ICICI. It is SBI, which fixes the

limit on the basis of consortium. They, in consultation of the company decide the

allocation of limit to various member banks. The allocation cannot be higher than the
limits fixed by it. SBI is the biggest contributor in the consortium for both fund and

non-fund based limits with about

31.30 in funds and 34.02 in non-fund limits. The ratio of both limits for the year

2006 is 0.23:0.77

It is on the basis of the accounts receivable that the banks come to an agreement with

regards to the limits imposed. Though it is the fund based limits that finance the

working capital requirements, the non-fund based limits are important for the

management of the working capital as there might be clients who are not willing to sell

on open credit and might be demanding letters of credit before any advances.
RENEWAL OF LIMITS

LIMITS 2008 2007 2006

FUND 11500 11500 11500

BASED
NON 48500 38500 28500

FUND

BASED
TOTAL 60000 50000 40000

All banks sanction the limits for a period of one year. Thereafter it is to be renewed

every year. SBI appraises the limit on the basis of consortium. The individual banks

appraise for their own individual limit. The non fund based limits of the firm in

consortium financing has been subjected to change for the past two years as per the

requirements of the firm and the consent of the lead bank to its proposal. It was around

385 Crores in 2005 and had been risen to around 485 Crores in 2006.A proposal has

been made by the firm to further appraise the limits by 100 Crores to 585 Crores in

view of the growing operations of the firm with full interchangeability between letter

of credit and bank guarantee limits for operational flexibility. Allocation of the fund

based and non based limits among the banks based on operational convenience rather

than allocating the fund based and non fund based on the same ratio is also among the
proposals made by the firm.The company needs to provide the following information

to bank for appraisals:

 Credit Monitoring Appraisal

 Write Up on company

 Share holding pattern

 List of the directors

CONSORTIUM MEETING :

All the members of the consortium are required to meet to discuss various issues

relating to the working facilities. As per RBI guidelines, the lead bank, i.e., SBI should

ensure that one consortium meeting is held every quarter snd this meeting has to be

arranged by NTPC.

DOCUMENTATION and JOINT DOCUMENTATION:

There are various documents that need to be signed at the time of renewal or inducting

any bank to the consortium. The various documents are as follows:

 Loan agreement

 Hypothecation agreement for movable machinery

 Hypothecation agreement for movables and book debts

 Counter Indemnity
The above are the standard agreements asked for by the banks. The common seal has

to be witnessed by the company secretary and one of the directors of the company.

As of 2005, no additions or deletions were made to the consortium of the banks. But

over the years the number of banks in the consortium have been reduced. Indian Banks

and State Bank of Hyderabad are the two banks which were earlier a part of the

consortium.

Joint Documentation is executed between the company and the consortium of banks

for the working capital facilities extended by the consortium to the company. The joint

documentation is valid for three years. The documents comprising joint documentation

are:

 Working Capital consortium agreement

 Joint deed of documentation

 Inter se agreement between bankers

 Letter of authority to lead bank by other consortium banks

 Letter of authority to second lead bank by other consortium banks

 Undertaking to create charge on the assets of the company.

ALLOCATION OF LIMIT BY LEAD BANK

SBI appraises the limit on behalf of the consortium. It in consultation with the

company decided the allocation of the limit to various member banks. The allocation

of any member bank cannot be higher than the limit sanctioned by it. The drawing

power for it fund based limits out of the consortium are determined on the basis of the

stock statement submitted by the company. NTPC is required to submit the stock

statement to all member banks in consortium for every month.

FINANCIAL FOLLOW UP REPORTS ( FFRI & FFRII):

Every quarterly and half quarterly intervals, the firm submits Financial Follow Up

Reports I and II. FFR I is an extract of the balance sheet. In this report, the company is

required to submit the details of sales, current assets and current liabilities for the

quarter and the estimates for the current year. FFR II – the company is required to

prepare P&L, B/S and Cash Flow in a different format. The information is to be

provided for the last year (actual), current year half yearly results (actual) and the

estimates for the next year.

SHORT TERM FINANCING

Other than the investment in current assets, the firm also has to be concerned with

short-term to long-term debt as this plays a very important role in determining the

amount of risk undertaken by the firm. That is , the firm not only has to be concerned

about current assets but also the sources through which they are financed. A firm

before financing in either of the two, has to take into consideration various aspects.

While short term might seem the ideal way to finance your assets than the long term

due to shorter maturity period and also less of costs are involved, there is an inherent

risk in short term financing due to fluctuating interest rates and due to the reason that

the firm might be unable to reay the amount in a shorter span of time.

SECURED 2006 2005 2004 2003

LOANS
SHORT TERM 3849 4991.28 6903.7 4987.52
LONG TERM 0 530.07 0 3461.36
TOTAL 3849 5521.35 6903.7 8448.88
%SHORT TERM 100 90.4 100 59.03

Under secured loan cash credit, along with non fund based facilities, foreign currency

term loan from banks are secured by way of hypothecation of stock-in-trade, book

debts as first charge and by way of second chanrge on all the immovable and movable

assets of the parent company. Term loan in Indian rupees from a bank is subject to a

prior charge in favour of company’s bankers on book debts and stock in trade for

working capital facilities.

 UNSECURED LOANS 2008 2007 2006 2005
SHORT TERM 15104 2593.39 63.94 76.84
LONG TERM 11 17 169.51 3261.42
TOTAL 15115 2610.39 233.45 3338.26
% SHORT TERM 99.93 99.348 27.38 2.3

Here NTPC has a major portion of their financing done through short term financing

than long term financing. The preference of short term financing to long term as such

is not the part of any policy employed by the firm but it was due to the reason that the

interest rates in short term were more investor friendly and the cost involved in them

were also low. At present, we can see that the firm is moving more towards long term

financing as the interest terms in the long term has reduced compared to the short term.
 YEAR- END COMMERCIAL PAPERS

PARTICULARS 2008 2007 2006 2005

COMMERCIAL 4000 2500 --- 3000

PAPERS

The credit rating by ICRA continued at ‘A1+’indicating highest safety to company’s

commercial paper program of Rs. 75 Crores. It acts as an effective tool in reducing the

interst cost and is used for financing inventories and other receivables. As and when

the firm issues commercial papers, it sends a letter to the leader of the consortium, i.e.,

SBI to reduce from the fund based limits the amount it has issued in the form of the

commercial papers. Suppose the firm issues 30 Crores as commercial papers and the

fund based limits are say 115 Crores. Then firm sends a letter to SBI to reduce the

existing fund based limits from 115 to 85 Crores.

In terms of desirability, the commercial papers are cheaper and advantageous to the

firm compared to the consortium financing. The main advantage being the interest rate

which is lower than the bank rates existing under consortium financing. But the firm

depends on both and for working capital financing, it is dependent on the banks for

funds sich as working capital demand loans and cash credits. There is no point in the

firm not making use of the fund based limits in the consortium banking as their

commercial papers are restricted to 75 Crores.

MERITS OF COMMERCIAL PAPERS:

 It is an alternative source of raising short-term finance, and proves to be

handy during periods of tight bank credit.

 It is a cheaper source of finance in comparison to the bank credit.

DEMERITS OF COMMERCIAL PAPERS:

 It is an impersonal method of financing.

 It is always available to the financially sound and highest rated companies.

 The amount of lonable funds available in the commercial paper market is

limited to the amount of excess liquidity of the various purchasers of

commercial paper.