Follow Us :

Brief History and Background :– Prior to CMA between 1965 and 1988 another mechanism called Credit Authorization Scheme (CAS) was the key instrument for credit control in India. CAS was being used by the RBI to regulate Bank Credits exceeding prescribed limits. Under CAS mechanism provision of prior approval of RBI was required for sanctioning and dispensation of big credit proposals. RBI authorization was causing long delays which were disliked by Banks and customers. A better system of Monitoring and disbursement was the main concern of the country’s central bank.

Concept of CMA came into being in 1975 as a result of recommendation of the guidelines given by the Chore committee and Tandon group in 1974. However the CMA was not introduced in the banking system till 1988. The aim of CMA was to prevent delays in loan approval and disbursement. Later on in 1997 MPBF concept was withdrawn by the RBI (The Central Bank) and consequently the CMA was also scarped. Procedure of Working Capital Limit Assessment  has been left at the discretion of the banks, Boards of Banks were given power to device their own policies. Even if MPBF is not mandatory and CMA is not compulsory banks are continuing with the same system which was introduced in 1988.

Credit Monitoring Arrangement (CMA) Format – An analysis :- CMA format is a report on Past and Projected Performance of the applicant. It has an aim to understand Financial Health, It also provide information as to how applicant has procured funds and used them in past 2 years and how it will be done in next 3 years. Basically CMA ensure sanctioning of funds to sound businesses only. Not only arithmetical accuracy but also scientific (Logical) approach is needed in CMA preparation.

Form I (Concept) : : This is the first part of the CMA data which present details about Fund Based and Non Fund Based Limits, this part provide details about usage limit and credit history of the applicant. This part also inform that applicant has clean credit history and proposed limits are in conformity fund limits.

(Procedure Intricacies) : (Sub Head A) Information should be provided for in respect of each working capital Facility Viz. Cash Credit/OD/EPC/WCTL/Bills Purchased and Discounted. Details about Quasi Credit (Non Fund Based) Viz. LC/BG/co acceptance to be included. (Sub Head B) Details of  DPG (Loan backed by Deferred Payment Gurantee (DPG) /Term Loan/Foreign Currency Loans (Excluding WCTL) is to be provided in this sub head. Foreign Currency Loans which are not covered by DPG are to be shown separately. Exchange rates used for conversion of Foreign Currency Loans are to be indicated. In case of multi division companies, if separate limits are availed for different divisions then Form I has to be filled division wise. Credit Facilities which are outside consortium to be indicated separately. Maximum/Minimum utilization of facilities during past 12 months and their recent outstanding balances are to be shown. Information on Associate Companies should be given separately in Form I Annexure. Nature of Association to be indicated. Date upto which accounts are made is to be indicated.

Form II (Concept): Form II deals with Operating Statement. This Form is there to Analyze in a scientific (Logical) manner current and projected growth capacity of the applicant/borrower. It is conversion of  Growth Opportunities available in figures and also a roadmap of the organization to materialize those opportunities in real terms.

(Procedure Intricacies) : For Last Two Years if Audited Figures are not available we may go for Un Audited figures. Assumptions on which projections are based Viz. Sales (Turnover), Profitability, Stock, Receivables, Other Current Assets (OCA), Current Liabilities (CL), Other Current Liabilities (OCL) to be clearly defined and scientifically (Logically) evolved. In case multiple divisions are of applicant then division wise data is must for Form II and Form IV & is Optional for Form III (Where ever Possible). Sales/Costs etc. are to be projected at current ruling prices and in no case should comprise provisions for Price Escalation. If Projections shows wide variation as compared to trends details like Quantity and Units price to be shared in the form (Truth lies in details – Is the fundamental rule). Income/Expenditure related with subsidiaries/holding companies are to be provided by way of foot note.

Form III (Concept) : This is the form for Balance Sheet Analysis. It indicates Financial Soundness of the Applicant/Borrower. Under this form Current/Non Current Assets and Current/Non Current Liablities are analyzed. This form concludes Networth Position of the borrower. Here also 2 years Audited and 3 Years Projections are used.

(Procedure Intricacies) : Projected carrying cost of Inventory and Receivable should be in conformity with norms/past trends/usual levels – If they are higher than there has to be reason thereof (Scientific and Logical). Exclude – Carrying of Inventory for speculative purposes and commodities under selective credit control provisions. Imported Spares more than 12 month and Domestic Spares more than 9 month consumption is to be categorized as Non Current Assets. Projected Level of Current Assets other than Inventory and Receivables & Current Liabilities are also to be compared with past trends. If variations are there then they have to be explained by way of logic and details. While preparation of CMA – valuation principals accepted for Financial Statement Preparation are to be followed. Current Liabilities and Current Assets are to understood in the way Banks understands them and not as per their accounting definitions. Specific provisions for Known Liabilities e.g. Dividend, Tax etc are to be made. Details of Term Liabilities raised during the Year are to furnished separately i.e. Term Loan, DPG, Long Term Deposits. Though Bills Purchased and Discounted are Contingent Liabilities yet they are to be shown in Form III item 28 (i) & (ii) and Form IV item 5 and 6. Outstanding Liability for credit purchases under usance LC/Co Acceptance facility from banks should be shown under point no. 3 of Form III. In case of Seasonal Activity based borrower where Peak Level is not achieved on Balance Sheet date, data in respect of peak levels to be provided separately. Details of Holding / Subsidiary i.e. Name, Extant & nature of holding interest is to be provided as foot note under Form III.

Credit Monitoring Arrangement (CMA Data) – An Insight

Form IV (Concept) : This form deals with Changes in Working Capital position of the Applicant/Borrower. This is comparative analysis of the movement of Current Assets and Liablities. This is a form which shows ability of the Applicant/Borrower to meet daily working capital on it’s own and also shows How much assistance is needed to meet working capital requirement of Applicant/Borrower.

Form V (Concept) : This form calculates the capacity of the borrower/applicant to borrow money. It is actually the borrowing capacity ( at sustainable level) in numerical terms which is calculated on the basis of the recommendation of Chore and Tandon Committee. Where Two method of Lending were prescribed and 2nd Method was termed superior than the 1st one. MPBF is applicable only for the cash credit component of borrower limit – MPBF is calculates Drawing Power.

(Procedure Intricacies) : This is applicable in all cases other than Sick/weak units MPBF has to be calculated on the basis of 2nd method of lending. Incase Applicant/Borrower wants to opt for 1st method then proper reason has to be assigned for the same.

Form VI (Concept) : Form VI is of Fund Flow Statement. This form ensure the Borrower/Applicant has sufficient fund available to carry on operations further This statement also ensure that Borrower/Applicant is using funds properly or not.

(Procedure Intricacies) : If there is unreasonable flow of fund towards Inventories and Receivables and there is substantial increase in their figures then that should be explained. If there is substantial decrease in Current Liabilities then changes there in has to be explained. Similarly if there is Increase in Working Capital which is not commensurate with the changes in sales figure then that has increase has to be explained. (Truth lies in details – Is the fundamental rule).

Form VII (Concept): Form VII is for ratio analysis. This is the concluding part of CMA which summarizes the applicant’s/Borrower’s growth and Loan Repayment Capacity.

Author Bio

I am a Chartered Accountant working with a nationalized bank in middle management. View Full Profile

My Published Posts

Indian Digital Currency: Types, Benefits, Present & Future Prospects Auditing Accounting Estimates : ISA 540 (Revised) Implementation Tools Audit of Accounting Estimates: Procedures and Importance Basics of Auditing: Some Important Ratios for Auditor Demystifying ISA 580: Management Representation Letters in Auditing View More Published Posts

Join Taxguru’s Network for Latest updates on Income Tax, GST, Company Law, Corporate Laws and other related subjects.

2 Comments

Leave a Comment

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

Search Post by Date
March 2024
M T W T F S S
 123
45678910
11121314151617
18192021222324
25262728293031