Corporation Bank is planning to introduce the cash budget method in place of the maximum permissible bank finance (MPBF) in line with the relaxation given by the Reserve Bank of India (RBI) in its last credit policy.
RBI in its last credit policy had given the freedom to banks not to adhere to the historic system of MPBF. Consequently, Corporation Bank plans to adopt three different methods for borrowers of varying sizes.
In case of borrowing limits of up to Rs 2 crore, the bank will use the turnover method.
Here the bank finance a company can avail of will be linked to the project turnover.
For borrowers between Rs 2 crore and Rs 10 crore, the bank will use a more flexible current ratio. It will also object to utilisation of bank finance for fixed assets. Generally, short finance advanced by banks are for funding current assets like inventory. In some cases, these funds are diverted to finance fixed assets which should essentially be done through long-term loans.
R S Hugar, chairman and managing director, Corporation Bank, said, We do not want to take a rigid view on the current ratio.
In fact, the bank will not always stick to the current ratio of 1.33. The ratio will depend on the requirements of the borrower and also the seasonality of the industry.
For borrowers with requirements over Rs 10 crore, Corporation Bank will use the cash budget method on a quarterly basis. Under this system, the bank will look at the projected cash inflows and outflows.
The limits of the company will then be fixed on the difference between the inflow and outflow of cash. Hence they are likely to vary every quarter.
Housing fin arm on cards
Corporation Bank is planning to float a housing finance subsidiary. R S Hugar, CMD, said the subsidiary will be operational in the next quarter.
The bank will be making its initial public offer in September 1997 at a minimum premium of around Rs 60.
We are keeping the options open to increase the premium above Rs 60 depending upon the market conditions at the slated time of the equity issue, Hugar said.
The banks public offering will increase the paid-up capital to Rs 120 crore from Rs 82 crore as on March 31, 1997 (the bank returned Rs 30 crore of its tier-I capital to the government during the financial year 1996-97). A premium of Rs 60 would mean the banks balance sheet increasing by nearly Rs 266 crore.
