Credit Monitoring Arrangement (CMA) - An Overview & Required Documents

Credit Monitoring Arrangement (CMA) - An Overview & Required Documents

Introduction:

The Credit Monitoring Arrangement (CMA) has been in operation since October 1988, replacing the Credit Authorisation Scheme (CAS) that was used by the Reserve Bank of India (RBI) to regulate bank credits between 1965 and 1988. The CAS required prior approval from the RBI for credit exceeding specified limits. Over time, the CAS was seen as a way to prevent the misuse of credit resources by large borrowers. However, the long delays in RBI authorization and concerns about monitoring the disbursement of bank credit led to the implementation of the CMA report.

So, what exactly is a CMA report? Also known as the Credit Monitoring Arrangement report, it provides a comprehensive analysis of a business's past and projected financial performance. This report, compiled with all the necessary financial ratios and metrics, helps financial analysts and bankers determine the financial health of a business. Most banking and financial institutions require a CMA report from business loan applicants to understand the flow and application of funds within the business. A professionally prepared CMA report can significantly increase the chances of obtaining a bank loan.

Under the Credit Monitoring Arrangement, banks are allowed to sanction credit proposals for large borrowers after a detailed analysis of their past performance. However, they must also submit these proposals to the Reserve Bank of India for post-sanction scrutiny. This requirement applies to working capital limits exceeding INR 500 lakhs (5 crores) and/or term loans exceeding INR 200 lakhs (2 crores).

The CMA report covers various statements that provide a detailed picture of the borrower's financial situation. These statements include:

1. Particulars of current and proposed limits: This statement outlines the existing fund and non-fund based credit limits, their usage limits, and history. It also includes details of the borrower's proposed or applied limit.

2. Operating statement: This statement presents the borrower's business plan, including current sales, profit before and after tax, sales projections, direct and indirect expenses, and profit position for 3 to 5 years. The specifics of this statement depend on the borrower's working capital request.

3. Analysis of Balance sheet: This statement analyzes the current and projected financial years, providing a comprehensive analysis of current and non-current assets, current and non-current liabilities, and cash and bank position. It also specifies the borrower's net worth position for future years.

4. Comparative statement of Current Assets and Current liabilities: This statement offers a comparative analysis of the movement of current assets and liabilities. It helps determine the borrower's capacity to meet working capital requirements and the actual working capital cycle for the projected period.

5. Calculation of Maximum Permissible Bank Finance (MPBF): This statement calculates the Maximum Permissible Bank Finance, indicating the borrower's borrowing capacity.

6. Fund flow statement: This statement analyzes the fund position of the borrower in relation to projected balance sheets and MPBF calculations for the current and projected periods.

7. Ratio analysis: This final statement provides key financial ratios, such as gross profit ratio, net profit ratio, current ratio, quick ratio, stock turnover ratio, net worth, net worth to liabilities ratio, DP limit, MPBF, asset turnover, current asset turnover, working capital turnover, fixed asset turnover, and debt-to-equity ratio. These ratios are essential for financial analysts and bankers to assess the borrower's financial performance.

In addition to these statements, several documents are required to prepare a CMA report, including the previous two years' audited financials, the latest sanction letter (in the case of renewal), provisional financials for the current year, and the term loan repayment schedule (if applicable). Any proposed enhancements also need to be detailed alongside their terms and conditions.

Overall, the CMA report plays a crucial role in providing a comprehensive analysis of a business's financial health for both bankers and financial analysts.

Introduction:

The Credit Monitoring Arrangement (CMA) has been in operation since October 1988, replacing the Credit Authorisation Scheme (CAS) that was used by the Reserve Bank of India (RBI) to regulate bank credits between 1965 and 1988. The CAS required prior approval from the RBI for credit exceeding specified limits. Over time, the CAS was seen as a way to prevent the misuse of credit resources by large borrowers. However, the long delays in RBI authorization and concerns about monitoring the disbursement of bank credit led to the implementation of the CMA report.

So, what exactly is a CMA report? Also known as the Credit Monitoring Arrangement report, it provides a comprehensive analysis of a business's past and projected financial performance. This report, compiled with all the necessary financial ratios and metrics, helps financial analysts and bankers determine the financial health of a business. Most banking and financial institutions require a CMA report from business loan applicants to understand the flow and application of funds within the business. A professionally prepared CMA report can significantly increase the chances of obtaining a bank loan.

Under the Credit Monitoring Arrangement, banks are allowed to sanction credit proposals for large borrowers after a detailed analysis of their past performance. However, they must also submit these proposals to the Reserve Bank of India for post-sanction scrutiny. This requirement applies to working capital limits exceeding INR 500 lakhs (5 crores) and/or term loans exceeding INR 200 lakhs (2 crores).

The CMA report covers various statements that provide a detailed picture of the borrower's financial situation. These statements include:

1. Particulars of current and proposed limits: This statement outlines the existing fund and non-fund based credit limits, their usage limits, and history. It also includes details of the borrower's proposed or applied limit.

2. Operating statement: This statement presents the borrower's business plan, including current sales, profit before and after tax, sales projections, direct and indirect expenses, and profit position for 3 to 5 years. The specifics of this statement depend on the borrower's working capital request.

3. Analysis of Balance sheet: This statement analyzes the current and projected financial years, providing a comprehensive analysis of current and non-current assets, current and non-current liabilities, and cash and bank position. It also specifies the borrower's net worth position for future years.

4. Comparative statement of Current Assets and Current liabilities: This statement offers a comparative analysis of the movement of current assets and liabilities. It helps determine the borrower's capacity to meet working capital requirements and the actual working capital cycle for the projected period.

5. Calculation of Maximum Permissible Bank Finance (MPBF): This statement calculates the Maximum Permissible Bank Finance, indicating the borrower's borrowing capacity.

6. Fund flow statement: This statement analyzes the fund position of the borrower in relation to projected balance sheets and MPBF calculations for the current and projected periods.

7. Ratio analysis: This final statement provides key financial ratios, such as gross profit ratio, net profit ratio, current ratio, quick ratio, stock turnover ratio, net worth, net worth to liabilities ratio, DP limit, MPBF, asset turnover, current asset turnover, working capital turnover, fixed asset turnover, and debt-to-equity ratio. These ratios are essential for financial analysts and bankers to assess the borrower's financial performance.

In addition to these statements, several documents are required to prepare a CMA report, including the previous two years' audited financials, the latest sanction letter (in the case of renewal), provisional financials for the current year, and the term loan repayment schedule (if applicable). Any proposed enhancements also need to be detailed alongside their terms and conditions.

Overall, the CMA report plays a crucial role in providing a comprehensive analysis of a business's financial health for both bankers and financial analysts.

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