Ratios
This query is : Resolved
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.
I want to know which ratios banks consider for sanctioning Cash Credit Limit and what are the standards for those ratios.
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
>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
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.
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.
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.
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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