The Concept Of Margin In Working Capital Finance

The basic work of a bank is to accept the surplus and / or investible money from public and lend the same to the needy persons known as Depositors and Borrowers respectively.

- V Sundararajan LL.B., CAIIB, DCBA

Introduction: Before globalization and liberalization or after that, the basic function of a Public Sector Lenders even today remains the same i.e., working capital finance. The working capital finance normally a short term running credit for a maximum period of one year.

This quantum of finance is assessed under various methods like Turnover Method, Flexible Bank Finance method etc. Whichever way we assess the quantum of finance, it basically depends upon two documents: The audited Balance Sheet and P&L account. The projected balance sheet is submitted to the bankers for the purpose of assessing the quantum of finance based on the balance sheet. It is interesting to note at this point that a full year’s need for working capital of a borrower is based on audited balance sheet which is the snapshot of the business concern as on a particular day. Whichever method we decide the quantum of finance one single element "The Margin" plays a crucial role in finalizing the working capital limits. This entire article is devoted to the clear and unambiguous understanding of the concept of margin.

What is margin?

Traditionally, when a new officer takes charge of the credit department, he is bombarded with technical jargons like "Audited Balance Sheet", "Turnover", Projected Sales", "P&L Account" "Current Assets", "Current Liabilities" etc. From the day the officer begins the career till the cessation of service one item that is often referred in assessment of working capital limits is the margin.

Anyone would have got their first lesson in starting the credit department is first to bifurcate the balance sheet as per the needs of the bankers. The rudimentary lessons are taught in basic segregation of balance sheet into Long Term Sources, Long Term Uses, Short Term Sources and Short Term Uses.