Ratios

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Swapnil Tayal (Querist)
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09 July 2012 Hello Sir,
I want to know which ratios banks consider for sanctioning Cash Credit Limit and what are the standards for those ratios.

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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10 July 2012 1) Current ratio.
>1.33 for traders.
>1.75 for others.
2) Inventory turnover ratio.
< 60 days.
3) Total outside liabilities to total net worth.
< 2.50
4) Debt equity ratio(debt divided by equity).
< 1.50

Swapnil Tayal

Swapnil Tayal (Querist)
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10 July 2012 Dear Sir,
If a new project we need 3 cr of term loan and 6.5 cr Cash Credit limit. How much equity capital, reserves and quasi capital will be required.

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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20 July 2025 Hey! When banks consider sanctioning Cash Credit (CC) limits, they typically analyze a bunch of financial ratios to assess your creditworthiness and repayment capacity. Here are some important ones and general standards they look at:

1. Current Ratio
Measures liquidity.
Formula: Current Assets ÷ Current Liabilities
Standard: Usually around 1.33:1 or higher (means you have 1.33 times current assets than current liabilities).
2. Quick Ratio (Acid-Test Ratio)
More stringent liquidity test (excludes inventory).
Formula: (Current Assets - Inventory) ÷ Current Liabilities
Standard: Around 1:1.
3. Debt-Equity Ratio
Measures leverage and financial stability.
Formula: Total Debt ÷ Equity (Share Capital + Reserves)
Standard: Banks often prefer it below 2:1 or sometimes even lower (1:1 or 1.5:1), depending on the industry.
4. Interest Coverage Ratio
Ability to pay interest on debt.
Formula: EBIT ÷ Interest Expense
Standard: Usually minimum 2 or above.
5. Turnover Ratios (Inventory Turnover, Debtor Turnover)
To check operational efficiency.
About your funding requirement:
Term Loan: ₹3 Crore
Cash Credit Limit: ₹6.5 Crore
Equity and Quasi Equity Requirements:
Banks usually expect equity capital + reserves to be at least 25-40% of the total project cost or the working capital requirement.
So, for total finance of ₹9.5 Crore (3 Cr + 6.5 Cr), equity + reserves should be roughly around ₹2.5 to ₹3.8 Crore (approx).
The exact % depends on the project type, risk profile, and bank policies.
Quasi Capital:
Quasi equity (like unsecured loans from promoters) can be considered by banks to some extent, but pure equity and retained earnings are preferred.
Summary:

Maintain a healthy current ratio (~1.33) and debt-equity ratio (~1:1 to 2:1).
Have a good equity base (around 25-40% of total finance).
Show profitability and repayment capacity via interest coverage ratio.

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