Working Capital
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NWC · Ratios · Tandon Method · WC Cycle Days

Most public sector banks (SBI, PNB, Union Bank, etc.) require a minimum Current Ratio of 1.33:1 for working capital credit facilities (CC, OD). This comes from the Tandon Committee Method II, which requires the borrower to finance at least 25% of current assets from long-term sources (own Net Working Capital). If CR falls below 1.33:1, the bank may: (1) Reduce the sanctioned limit, (2) Require additional collateral, or (3) Impose a higher interest rate. HDFC, ICICI, and private banks have their own thresholds — typically 1.20:1 to 1.50:1 depending on the borrower's credit rating.

Method I: MPBF = 75% of Working Capital Gap (Total CA − Current Liabilities excluding bank borrowing). Borrower must contribute 25% of CA from own sources (margin). Method II: MPBF = 75% of (Total CA − Current Liabilities). This means the borrower's NWC must be at least 25% of Total CA. Method II is stricter — it typically results in a lower bank limit than Method I. Most banks use Method II for limits above ₹5 crore. Method III: Rarely used. Bank finances the entire WC gap based on projected cash budget. Only for large, highly creditworthy borrowers with advanced cash management. Methods I and II are standard for MSME and mid-market borrowers.

The WC cycle = Debtor Days + Inventory Days − Creditor Days. To reduce it: Reduce Debtor Days: (1) Offer early payment discounts (1-2% for 10 days instead of 30), (2) Use TReDS (invoice discounting) to receive cash in 1-2 days, (3) Tighten credit terms for new customers, (4) Factor receivables with a bank/NBFC. Reduce Inventory Days: (1) Switch to JIT (Just-in-Time) buying for raw materials, (2) Reduce minimum order quantities, (3) Clear slow-moving inventory with discounts, (4) Improve demand forecasting accuracy. Increase Creditor Days: (1) Negotiate 45-60 day credit terms with suppliers, (2) Use supply chain finance programs where bank pays supplier and you pay bank later. Each 10-day reduction in WC cycle can free up 2.7% of annual revenue as cash.

Banks typically require: (1) CMA Data — last 3 years audited financials + current year estimates + next 2 year projections in prescribed format, (2) Audited P&L and Balance Sheet for 2-3 years, (3) Income Tax Returns for 3 years, (4) GST Returns (GSTR-3B) for 12 months, (5) Stock and Debtor Statements (monthly for existing borrowers), (6) Provisional Financials for the current year, (7) Sanction Letter from existing lenders (for consortium), (8) KYC documents of directors/partners. TAXAJ prepares all financial documents in the bank's prescribed CMA format — SBI, Canara, PNB, HDFC, Axis, IDFC First, and more.

No — negative working capital is not always a sign of financial distress. Certain business models thrive with negative WC: Retail / e-commerce (collect cash at sale, pay suppliers later), subscription businesses (advance billing), fast-moving consumer goods (high inventory turnover with longer payable terms). Companies like Amazon, Zomato, and Flipkart have historically operated with negative WC — they have a powerful position with suppliers. However, negative WC for a manufacturing company with long production cycles is usually a red flag — it means current liabilities may not be coverable from current assets. Banks almost always require positive NWC for working capital credit facilities.