Chapter 27: Working Capital Management

📚 JAIIB 2026 • AFM • Module C • Chapter 9 of 10 • Unit 27

Working Capital Management
(The Oxygen of Business — Cash, Stock, Debtors & How Banks Fund Them!)

Fixed assets are the BODY. Working capital is the BLOOD. Without it, the body dies. This chapter covers the WC cycle, NWC, sources of WC finance (trade credit, CP, factoring, forfaiting), and the 3 bank assessment methods — Holding Norms (MPBF), Cash Budget, and Turnover method.

⏱ 22 min read🎯 Banker’s Daily Work⚡ 14 Flash Cards

Banky Manages the BLOOD of Business! 🩸🏭

A textile company has ₹2 crore in raw cotton, ₹1 crore in finished cloth, and ₹50 lakh stuck with customers. How much working capital loan should the bank give? That’s what this chapter teaches!

“Sir, the borrower says he needs ₹3 crore WC limit. How do I VERIFY this?” — “Three methods! Holding norms, Cash budget, or Turnover. Let’s calculate!” 📊
🚀
Section 1 of 9

Working Capital — Cycle, Sources & Assessment

📖 Part 1 — WC Cycle, NWC & Current Assets

Working Capital Cycle: Cash → Buy Raw Material → Convert to WIP → Finished Goods → Sell on Credit → Collect Cash → Repeat! Longer cycle = more WC needed.

Gross Working Capital = Total Current Assets. Net Working Capital (NWC) = Current Assets − Current Liabilities = excess of LT funds over LT uses. NWC = margin money from LT sources. Banks expect minimum 25% of TCA as NWC.

5 Factors affecting WC needs: (1) Nature of business (utilities need LESS, trading needs MORE). (2) Size. (3) Production policy (steady vs seasonal). (4) Seasonal variations. (5) Length of operating cycle.

Current Assets = Cash, Inventory (RM + WIP + FG), Receivables, Other CA.

🧑‍💼 Banky: “GWC = total CA. NWC = CA − CL = the borrower’s OWN skin in the game! Longer cycle = more money stuck = more WC needed!” 🔄

📋 Part 2 — 10 Sources of WC Finance

1. NWC (own LT funds — minimum 25% of CA). 2. Accruals (wages/expenses payable). 3. Trade Credit (supplier credit). 4. Bank WC loans (CC/OD). 5. Public Deposits. 6. Inter-Corporate Deposits (unsecured, unstructured market). 7. Rights Debentures. 8. Commercial Paper (CP — unsecured promissory note, 7 days to 1 year, min ₹5 lakh, issued at discount, no call/put options, min rating A3, buyback after 30 days). 9. Factoring (sell receivables to factor — with or without recourse). 10. Forfaiting (exports only, ALWAYS without recourse, bill-based).

Non-fund facilities: LCs and Bank Guarantees = BOTH non-funded. A funded facility CAN become non-funded and vice versa.

🧑‍💼 Banky: “Factoring = sell your debtors! Forfaiting = factoring for EXPORTS (always without recourse)! CP = cheap short-term money for good companies!” 📄

🏦 Part 3 — 3 Methods of Bank WC Assessment

1. Holding Norms / MPBF Method (Tandon Committee):

1st Method: MPBF = TCA − OCL − 25% of WC Gap. WC Gap = TCA − OCL. CR ≈ 1.17.

2nd Method: MPBF = TCA − OCL − 25% of TCA. CR ≈ 1.33 (stricter!). More NWC required.

3rd Method: MPBF = TCA − OCL − 100% of Core CA − 25% of remaining CA. Strictest!

Best for: Uniform operations, stable markets.

2. Cash Budget Method: Project cash inflows & outflows month by month. Peak deficit = WC limit. NWC ≥ 25% of peak deficit. Best for: SEASONAL operations, project contracts, volatile businesses.

3. Turnover Method: WC = 25% of annual turnover. Bank finance = 20% (bank) + 5% (margin/NWC). Best for: MSEs up to ₹5 crore. May under-finance if WC cycle > 3 months.

Banks are FREE to adopt any method — RBI does NOT mandate a specific method!

🧑‍💼 Banky: “1st method = lenient (CR 1.17). 2nd = stricter (CR 1.33). 3rd = strictest! Cash budget = seasonal. Turnover = small units. Banks choose freely!” 📊
🎯
Section 2 of 9

Exam-Ready Points

🎯 Must Remember!

  • GWC = Total Current Assets. NWC = CA − CL. NWC is from LONG-TERM sources (margin).
  • Banks are FREE to adopt any WC assessment method. RBI does NOT mandate only Turnover or MPBF!
  • WC assessment IS affected by level of operations (higher turnover = more WC).
  • NWC = difference between TCA and TCL (answer to “TCA − TCL = ?”)
  • Sources of WC: All — ICDs, public deposits, factoring, trade credit, CP, bank loans.
  • LC and Bank Guarantee = BOTH non-funded. A funded facility may become non-funded and vice versa.
  • Cash Budget method = best for SEASONAL operations (wide fluctuations month to month).
  • Turnover method: 25% of turnover = GWC. 20% bank + 5% margin. For MSEs up to ₹5 crore.
  • CP: Min ₹5 lakh. 7 days to 1 year. Issued at discount. No call/put. Min rating A3. Buyback after 30 days.
  • Forfaiting = exports only. Always WITHOUT recourse. Bill-based. Factoring = with or without recourse.

📝 Past Exam Questions

Q: About WC assessment — which is correct?
A: Each bank is FREE to adopt its own method.
Q: TCA − TCL = ?
A: Net Working Capital (NWC).
Q: Sources of WC finance?
A: All — ICDs, public deposits, factoring.
Q: LC and BG are?
A: BOTH non-funded facilities.
Q: Cash budget best for?
A: Seasonal operations (wide monthly fluctuations).
Section 3 of 9

Last-Minute Flash Cards

GWC vs NWC
GWC = Total CA | NWC = CA − CL
NWC = margin from LT sources. Min 25% of TCA expected by banks.
WC Cycle
Cash → RM → WIP → FG → Sell → Collect → Repeat
Longer cycle = more WC needed. Depends on industry + credit terms.
1st Method (MPBF)
MPBF = WCG − 25% of WCG
WCG = TCA − OCL. Lenient. CR ≈ 1.17. Tandon Committee origin.
2nd Method (MPBF)
MPBF = TCA − OCL − 25% of TCA
Stricter. CR ≈ 1.33. More NWC required from borrower.
Cash Budget Method
Project monthly inflows/outflows → peak deficit = limit
Best for SEASONAL operations. NWC ≥ 25% of peak deficit.
Turnover Method
WC = 25% of turnover | Bank = 20% + Margin = 5%
For MSEs up to ₹5 crore. May under-finance if cycle > 3 months.
Bank’s Freedom
FREE to choose any method! Not RBI mandated!
RBI does NOT require only Turnover or MPBF. Banks decide.
Commercial Paper
Unsecured promissory note | 7 days to 1 year | ₹5 lakh min
At discount. No call/put. Min A3 rating. Buyback after 30 days. Cheaper than bank loans.
Factoring
Sell receivables to Factor | With or Without recourse
Factor buys book debts + may manage sales ledger. Banks can do via subsidiaries.
Forfaiting
Like factoring but EXPORTS only | ALWAYS without recourse
Bill-based. Exporter doesn’t carry buyer’s default risk. Financier collects from buyer.
LC & BG
BOTH are non-funded facilities
Funded can become non-funded (and vice versa) depending on invocation.
ICD
Inter-Corporate Deposits = unsecured, unstructured
Simple procedure. Rate not fixed. Market not structured. Between companies.

⚡ Module C • Chapter 9 (Unit 27) Done!

  • GWC = TCA. NWC = CA − CL = margin from LT sources. Min 25% expected by banks.
  • 3 Methods: Holding Norms/MPBF (uniform), Cash Budget (seasonal!), Turnover (MSEs ≤ ₹5cr).
  • 1st Method: CR 1.17. 2nd: CR 1.33 (stricter). Banks are FREE to choose any method.
  • 10 Sources: NWC, Accruals, Trade Credit, Bank, Public Deposits, ICD, Debentures, CP, Factoring, Forfaiting.
  • CP: 7 days–1 year, ₹5L min, discount, A3 rating. Forfaiting = exports, without recourse.

Banky says: “NWC = borrower’s own skin! 3 methods: MPBF, Cash Budget, Turnover! Banks choose freely! CP = cheap! Forfaiting = exports without recourse! ONE MORE CHAPTER!” 🎉📊

Next: Chapter 28 — Derivatives! THE GRAND FINALE! 🏆

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