Bank credit is the primary institutional source of working capital finance in India. In fact, is represents the most important source for financing of current assets.
Forms of Credit
Working capital finance is provided by banks in five ways: (i) cash credits overdrafts, (ii) loans (iii) purchase discount bills, (iv) letter of credit and (v) working capital term loans. Proposal form for obtaining working capital funds from Punjab National Bank.
Cash Credit Overdrafts
Under cash credit overdraft form arrangement of bank finance, the bank specifies a predetermined borrowing credit limit. The borrower can draw borrow up to the stipulated credit overdraft limit. Within the specified limit of any number of draw a drawings are possible to the extent of his requirements periodically. Similarly, repayments can be made whenever desired during the period. The interest is determined on the basis of the running balance amount actually utilized by the borrower and not on the sanctioned limit. However, minimum (commitment) charge may be payable on the unutilised balance irrespective of the borrowing for availing of the facility. This form of bank financing of working capital is high attractive to the borrowers because, firstly, it is flexible in that although borrowed funds a repayable on demand, banks usually do not recall cash advances roll them over and, secondly, the borrower has the freedom to draw the amount in advance as and when required while the interest liability is only on the amount actually outstanding. However, cash credit overdraft is inconvenient to the banks and hampers credit planning.