ADDITIONAL NOTES SIDBI
CAREER_GUIDEBRO
Regulatory Framework
A Regulatory Framework refers to a set of regulations that govern a specific industry. These
frameworks consist of legal mechanisms at both national and international levels. They can
be either mandatory and enforceable (such as national laws, regulations, or contractual
obligations) or voluntary (such as integrity pacts, codes of conduct, or arms control
agreements).
The regulatory framework for MSMEs encompasses the rules, regulations, and policies
established by the government to guide and support the functioning of Micro, Small, and
Medium Enterprises (MSMEs). The government plays a dual role: a regulatory role and a
protective role. It regulates small businesses by imposing certain restrictions and formalities
while also offering assistance and support to ensure their growth and sustainability.
Government Measures for the Promotion of MSMEs:
The government has taken several initiatives to support the development of MSMEs,
including:
• Administrative Framework: The Department of Small Scale Industries, Agro and
Rural Industries within the Ministry of Industry oversees the administrative
mechanisms for MSMEs.
• Small Industries Development Organization (SIDO): Under this department, SIDO is
led by a commissioner and manages a network of 27 Small Industries Service
Institutes, 31 branch institutes, 37 extension centres, 18 field testing centres, four
production centres, and two footwear training centres.
• District Industries Centres (DIC): To provide a range of services and support to small
entrepreneurs, 422 District Industries Centres have been established across 431
districts, out of the total 436 districts in India.
• National Institute of Small Industries Extension Training (NISIET): This institute
focuses on research, training programs, and consultancy services for MSMEs.
• National Small Industries Corporation (NSIC): NSIC helps MSMEs by assisting in
marketing, government procurement, and supplying machinery on a hire-purchase
basis.
Policy Instruments:
The government has adopted various policy instruments to foster the growth of
Small Scale Industries (SSI), which include:
1. Financial Incentives
2. Fiscal Incentives
3. General Incentives
4. Special Incentives for Backward Areas
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5. Reservation of Items for SSI
1. Financial Incentives:
The Small Industries Development Bank of India (SIDBI) offers direct assistance for
initiatives such as specialized marketing agencies, industrial estates, acquisition of
machinery (both indigenous and imported), the seed capital scheme, the National
Equity Fund Scheme, bills rediscounting, and direct discounting. Additionally, state and
local governments provide financial support through subsidies, including interest rate
subsidies, capital subsidies, water and electricity subsidies, and land acquisition
subsidies.
2. Fiscal Incentives:
Fiscal incentives include investment allowances, tax holidays, and additional
depreciation on new plant and machinery. State and local governments may also
provide exemptions from electricity tariffs.
3. General Incentives:
These include the reservation of certain items for exclusive SSI purchases, price
preferences over medium and large units in public sector procurements, and
schemes like the Self-Employment to Educated Unemployed Youths (SEEUY).
4. Special Incentives in Backward Areas:
Schemes operational in backward areas offer concessional finance, transport
subsidies, interest subsidy schemes, and income tax incentives, among others.
5. Reservation of Items:
Certain items are exclusively reserved for production in the MSME sector, protecting
MSMEs from competition with medium and large-scale enterprises. This policy aims
to support MSMEs involved in the manufacturing of these reserved items.
Statutory Boards: The government has established six specialized boards to support various
sectors, including:
1. Khadi and Village Industries Board
2. Handloom Board
3. Handicrafts Board
4. Coir Board
5. Sericulture Board
6. Small Scale Industries Board
Establishment of Industrial Estates: Industrial estates are designated areas where the
government provides essential infrastructure and factory spaces for entrepreneurs to set up
their businesses.
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Creation of the National Manufacturing Competitiveness Council (NMCC): The NMCC has
recommended a three-pole framework to boost manufacturing growth. This involves
promoting industrial, artisan, and agro-based clusters, as discussed in the PURA (Provision of
Urban Amenities in Rural Areas) initiative during the 2005-06 Union Budget. The NMCC also
suggests that Indian MSMEs (Micro, Small, and Medium Enterprises) should explore
partnerships with MSMEs in developing countries for technology transfer and trade
opportunities.
Penalties for Delayed Payments to MSMEs: The government has enacted the Interest on
Delayed Payments Act to protect MSMEs. This law requires customers to settle payments
within 120 days of receiving goods. If payments are delayed beyond this period, an interest
charge of 1.5 times the prime lending rate of the State Bank of India (SBI) will apply.
Prime Minister’s Rozgar Yojana (PMRY): Launched on October 2, 1993, the PMRY aims to
generate one million jobs over five years by providing loans for the establishment of small
and micro enterprises.
Industrial Cluster Development: An industrial cluster refers to a concentration of businesses,
particularly Micro, Small, and Medium Enterprises (MSMEs), within a specific sector and
geographical area. These businesses share similar opportunities and face common
challenges.
Support for MSME Exports: The following forms of assistance are provided to MSMEs to
support their exports:
1. MSMEs receive support for participating in trade exhibitions, with the government
covering expenses such as space rental, handling and clearing charges, insurance,
and shipment costs.
2. MSMEs are granted triple weightage for being recognized as Export Houses, Trading
Houses, Star Trading Houses, or Super Star Trading Houses.
3. The Capital Goods Zero Duty Scheme is made available to MSMEs without any
specific conditions.
4. Marketing Development Assistance (MDA) is offered to MSMEs to support activities
such as market research and publicity.
Other Schemes: A summary of key schemes is as follows:
1. Integrated Infrastructure Development Scheme: Under this scheme, the Central
Government contributes Rs. 5 crore, with a funding ratio of 2:3, to support the
development of industrial infrastructure in rural and backward areas. The goal is to
promote the establishment of MSMEs in these regions and strengthen the connection
between agriculture and industry.
2. Marketing Development Assistance (MDA) Scheme: Launched in August 2001, the
MDA scheme offers five types of assistance:
a. Support for individuals to participate in overseas trade fairs and exhibitions.
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b. Assistance for individuals to join overseas study tours or trade delegations
abroad.
c. Financial support for the production of publicity materials for international
marketing.
d. Support for small industry associations to conduct sector-specific market
research overseas, and
e. Support for SSI associations in initiating or contesting anti-dumping cases.
(c) Trade-Related Entrepreneurship Assistance and Development for Women (TREAD): This
scheme provides trade-related support to women entrepreneurs through loans, grants,
training, information, counselling, and extension services.
(d) Preferential Government Purchases: Government departments and agencies are required
to prioritize purchases of certain items from MSME sector constituents.
Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE)
The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was jointly
established by the Ministry of Micro, Small, and Medium Enterprises (MSME) and the Small
Industries Development Bank of India (SIDBI). The trust was created to implement a credit
guarantee scheme specifically for MSMEs.
Both the Government of India and SIDBI contribute to the fund's corpus, with the primary
goal of providing financial support to small and medium enterprises without requiring third-
party guarantees or collateral.
Guarantee Coverage (Effective from April 1, 2023)
Guarantee
Category Credit Limit
Cover
Micro Enterprises Up to ₹5 lakhs 85%
Above ₹5 lakhs to ₹50
75%
lakhs
MSEs located in the North Eastern Region (NER) Up to ₹50 lakhs 80%
Above ₹50 lakhs to
75%
₹500 lakhs
Women Entrepreneurs / SC/ST / PwD / MSEs
Any Amount 85%
promoted by Agniveers
MSEs in Aspirational Districts / ZED Certified MSEs Any Amount 75%
All other categories of borrowers Any Amount 75%
Additional Coverage for Credit Deficient Districts
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Effective from December 15, 2023, MSEs situated in Identified Credit Deficient Districts (ICDD)
will receive an additional 5% guarantee cover over the standard coverage. For example, for a
guarantee cover of 75%, the coverage will increase to 80%, for 80% it will rise to 85%, and for
85%, the coverage will be 90%.
Eligibility – Both new and existing enterprises are eligible to participate in the scheme.
Candidates who meet the eligibility requirements can approach banks or financial institutions,
including eligible Regional Rural Banks, to seek assistance under this scheme.
Nature of Assistance – The scheme provides a guarantee cover of 50%, 75%, 80%, or 85% of
the sanctioned credit facility amount. For micro-enterprises with credit facilities up to 5 lakhs,
the guarantee cover is 85%. In the event of a default, the trust will settle up to 75% of the
defaulted amount of the credit facility, for amounts up to 200 lakhs, as extended by the
lending institution.
Credit Guarantee Scheme for Subordinate Debt (CGSSD)
The Credit Guarantee Scheme for Subordinate Debt (CGSSD) is designed to support the
promoters of operational MSMEs that are stressed or have turned into Non-Performing
Assets (NPA) as of April 30, 2020. Under this scheme, the promoters are required to invest
the provided amount as equity into their MSME units, which will help improve liquidity and
maintain a balanced debt-equity ratio.
Subordinate debt plays a crucial role in helping MSMEs that are either classified as NPA or are
close to becoming one, by providing much-needed financial support to sustain and revive
their operations. Promoters of eligible MSMEs will be able to access credit equivalent to 15%
of their total stake (equity plus debt), or a maximum of Rs. 75 lakh, whichever is lower.
Eligibility: Operational MSMEs that are either NPA or stressed are eligible for the scheme.
Promoters of these MSMEs who meet the criteria can apply for the scheme by approaching
scheduled commercial banks.
Nature of Assistance: The scheme offers a 90% credit guarantee for the subordinate debt,
with the remaining 10% to be provided by the promoters. The maximum repayment tenure
is 10 years, with a 7-year moratorium on principal repayments.
MSME Business Loan for Startups in 59 Minutes
The Government of India has introduced the MSME Business Loan scheme for startups,
allowing loan processing within 59 minutes through a newly launched online portal. This
automated system speeds up the loan process for MSMEs, providing approval within an hour.
Once approved, the loan is typically disbursed to the applicant within 7 to 8 working days.
The scheme focuses on automating and digitizing various business loan processes, including
term loans, working capital loans, and MUDRA loans.
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Any existing business or MSME seeking a business loan (term or working capital loan) can
apply for in-principle approval, provided the business is IT-compliant and has a six-month
bank statement.
SIDBI Make In India Loan for Enterprises (SMILE)
The SIDBI Make In India Loan for Enterprises (SMILE) aims to support the Government of
India’s ‘Make in India’ initiative by assisting MSMEs in participating in the campaign. This
scheme offers soft loans in the form of quasi-equity, along with term loans on favorable terms
to help MSMEs meet the required debt-equity ratio for their establishment. Additionally, it
provides funding to existing MSMEs to seize growth opportunities.
Eligibility: This scheme is available for new enterprises in both the manufacturing and services
sectors. Existing enterprises looking to expand and capitalize on emerging opportunities are
also eligible. Furthermore, businesses undertaking modernization, technology upgrades, or
other projects aimed at business growth can benefit from this scheme. The focus is on
financing smaller enterprises within the MSME sector.
Nature of Assistance: The minimum loan amount for equipment and finance is Rs. 10 lakh,
while the minimum loan size for other purposes is Rs. 25 lakh. The repayment period extends
up to 10 years, with a moratorium of up to 36 months.
Working Capital/Term Loan
To prepare a comprehensive Credit Report or Appraisal for a borrower seeking a Credit Limit
(working capital and/or term loan), the following sections should be included. Each section
provides a structured approach to the analysis of the borrower and their business.
1. Basic Information about the Applicant
• Constitution of the Applicant: Specify whether the applicant is an Individual,
Proprietorship, Partnership, or Private Limited Company.
• Name: Full legal name of the borrower or business entity.
• Age: For individuals, provide the age and for firms/companies, mention the date of
establishment.
• Location:
o Residential: Address of the applicant's residence.
o Business: Address of the business (for companies, include the registered office
address).
• Experience in the Line: Duration of experience in the business sector, relevant skills,
or prior operations.
• Net-worth: Provide the total assets and liabilities along with proof (such as a balance
sheet) and offer comments on financial health.
2. Brief Narration of Proposed Activity
• Provide an overview of the business activities or the project being financed.
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• Manufacturing Units: If applicable, explain the processes involved in the production,
including raw materials, stages of production, and finished goods.
• Service/Trade Units: Outline the nature of services or trading operations involved.
3. Permissions & Licenses
• Confirm if the business has obtained all the necessary permissions, licenses, and
registrations required for operation, such as:
o Factory License (for manufacturing)
o GST Registration
o Environmental Approvals (if applicable)
o Other Regulatory Approvals specific to the industry.
4. Availability of Resources
• Power: Availability of reliable power sources for operations.
• Water: Access to water for manufacturing or other needs.
• Labour:
o Skilled Labour: Availability of skilled workers for specialized tasks.
o Unskilled Labour: Availability of general workforce for basic tasks.
• Transport: Proximity to transport infrastructure, availability of transport facilities for
raw materials and finished goods.
• Storage: Availability of adequate storage space for raw materials, work-in-progress,
and finished goods.
5. Pre-Sanction Visit & Market Enquiries
• Pre-Sanction Visit: Summarize your observations from the site visit (if applicable). This
can include an assessment of the operations, cleanliness, organization, and
operational readiness.
• Market Enquiries: Feedback from suppliers, customers, competitors, or other market
participants regarding the applicant’s business reputation, financial health, and
credibility.
6. Industry Outlook
• Current Situation in the Industry: Provide an analysis of the market conditions in the
industry the applicant operates in, including demand-supply dynamics, competition,
and regulatory challenges.
• Prospects for the Proposed Activity: Evaluate the future growth prospects for the
activity based on current trends, market opportunities, and potential risks. This can
include a focus on emerging technologies, policy changes, or sector-specific growth
factors.
7. Securities Offered
• Securities: Outline the securities offered by the applicant to secure the credit, such as
property, inventory, or any other tangible assets.
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• Legal Opinion: Provide the legal status of the offered security, its ownership, and legal
enforceability.
• Valuation Report: Summarize the valuation of the offered assets (land, machinery,
stock, etc.) and comment on whether the value is adequate to cover the loan
exposure.
8. Risks and Mitigation Measures
• Probable Risks: List the potential risks that may adversely affect the loan, such as:
o Market risks (fluctuations in demand, raw material prices)
o Operational risks (machine breakdowns, supply chain issues)
o Financial risks (cash flow issues, low profitability)
o Regulatory risks (changes in laws or policies)
• Mitigation Steps: Discuss the steps the applicant has taken or plans to take to mitigate
these risks, such as diversification, insurance, hedging, or contractual safeguards.
9. Eligible Amount Calculation
• Term Loan: Calculate the eligible term loan amount based on the fixed asset value
(like machinery or property) and the repayment capacity of the borrower.
• Working Capital: Calculate the eligible working capital based on the borrower’s
current assets, turnover, and working capital cycle.
• Working capital can be determined based on the Current Ratio and Working Capital
Cycle analysis.
• Total Credit Requirement: In cases where both term loan and working capital are
required, calculate the combined credit limit and assess the overall creditworthiness
of the applicant.
Term Loan Appraisal
In the context of a Term Loan Appraisal, several key financial metrics and concepts come into
play to determine the viability of a loan application.
1.) Debt Equity Ratio (DER)
This is the ratio between debt and equity. i.e., debt / equity. It indicates the relation-ship
between the loan capital and capital raised by way of equity. In the numerator we take only
Long Term Outside Liabilities as Debt.
Debt to Equity Ratio = (short term debt + long term debt + fixed payment obligations) /
Shareholders’ Equity
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The main difference between loan capital and equity is that the interest payable on the loan
capital has prior charge and has to be paid before any dividend can be declared. While there
can be no dividend without profits, interest may have to be paid even if there is no profit.
In the calculation of the ratio, debt is defined as the outside liabilities. As per the definition,
the debt would include debentures, current liabilities, and loans from banks and financial
institutions. However, the inclusion of current liability is controversial because debt to equity
ratio is all about long-term financial solvency and current liability is a short-term liability and
the amount of current liability fluctuates far and wide over the year. Further, current liabilities
are taken care of in liquidity ratios (such short-term ratio and quick ratio) and the interest on
them is not so huge. In view of the above in calculation of DER, Debt represents long term
outside liabilities.
'Equity' refers to tangible net worth.
As the debt-to-equity ratio expresses the relationship between external equity (liabilities) and
internal equity (stockholder’s equity), it is also known as “external-internal equity ratio”.
If a unit has more debt and less capital, it may be in a disadvantageous position as the
servicing of loan, i.e., payment of instalments and interest, may be a problem, in the event of
its failure to earn sufficient profit.
Though, the optimal debt/equity ratio is 1:1, it cannot be applied to all situations. In respect
of traders, loans from friends and relatives received on a long term basis, subordinated to the
Bank can be treated as equity.
A capital-intensive entity may have a high debt/equity ratio indicating that net assets have
been regularly maintained and financed through the debts obtained which would increase
returns in the future due to higher production
2.) Debt Service Coverage Ratio (DSCR)
DSCR is a ratio of cash available to cash required for debt servicing. In other words, it is the
ratio of the sufficiency of cash to repay the debt. It measures a company’s ability to service
its current debts by comparing its net operating income with its total debt service obligations.
DSCR=Net Operating Income/Total Debt Service
where: Net Operating Income=Revenue−COE
COE=Certain operating expenses
Total Debt Service=Current debt obligations
This ratio indicates whether the earnings are adequate to meet the burden of fixed financial
charges. A borrowing concern is required to pay interest on the loan as also to pay the
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stipulated instalments. It must, therefore, have sufficient earnings to enable it to meet these
financial commitments.
Interpretation of Debt Service Coverage Ratio :
The result of a debt service coverage ratio is an absolute figure. Higher this figure better is
the debt serving capacity.
If the ratio is less than 1, it is considered bad because it simply indicates that the cash of the
firm are not sufficient to service its debt obligations.
The acceptable norm for a debt service coverage ratio is between 1.5 to 2.
3. Promoter's Contribution
• The Promoter's Contribution refers to the portion of the total project cost that the
promoters (or owners) are required to finance from their own resources.
• It is typically expressed as a percentage of the total project cost or loan amount.
• This ensures the promoters have "skin in the game" and are financially committed to
the project, reducing risk for the bank.
4. Margin
• Margin refers to the portion of the loan that the borrower must contribute from their
own funds. For instance, if the bank finances 80% of a project, the borrower is required
to provide a 20% margin.
• This helps reduce the bank’s exposure to risk and ensures the borrower has a financial
stake in the success of the project.
5. Security & Collateral
• Security refers to the assets pledged to the bank to secure the loan. In a term loan,
this typically includes the machinery or equipment purchased with the loan (known as
Prime Security).
• Collateral refers to any additional security offered by the borrower to cover the loan,
such as land, property, or other assets. If the loan defaults, the bank can liquidate the
collateral to recover the loan amount.
• Personal Guarantee: If no additional collateral is available, the bank might require a
personal guarantee from the promoters or directors of the business.
6. Interest Rates and Concessions
• Banks set the Rate of Interest based on various factors like the borrower’s category
(e.g., women entrepreneurs, startups, etc.), the risk grade of the borrower, and the
term of the loan.
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• Banks often provide concessions in the form of reduced interest rates or favorable
terms to specific categories of borrowers like women entrepreneurs, small businesses,
or those in certain sectors.
7. Guarantee Schemes
• If the applicant does not offer collateral, the loan can be covered under guarantee
schemes such as:
o CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises)
o CGFMU (Credit Guarantee Fund for MSME Units) These schemes provide the
bank with additional security, reducing the risk associated with unsecured
loans.
8. Repayment Holiday Period
• The Repayment Holiday Period is the time the borrower is allowed before starting to
repay the term loan. It is essential to consider the time for generating income,
including:
o Time taken for project completion
o Time to commence commercial production
o Time for realization of sale proceeds from the unit’s operations.
• Incorrect or unrealistic stipulation of repayment holidays (like automatic 6 months
from the first disbursement) can lead to financial strain on the borrower, especially
for first-generation entrepreneurs or small units.
• A rational approach by the bank, considering the project’s cash flow cycle, is crucial
to avoid the unit becoming "sick" or financially distressed.
9. Loan Sanctioning Process
• After analyzing the DER, DSCR, and Promoter’s Contribution, and ensuring the margin
requirement is met, the bank can sanction the loan. The eligible loan amount will
depend on these calculations.
• The bank will also stipulate the security for the loan (including prime and collateral),
rate of interest, disbursement conditions, and whether the loan requires personal
guarantees.
Gestation Period & Repayment Holiday (Moratorium)
In any manufacturing unit, there is typically a time lag between the initiation of a project
and the commencement of commercial production. This time frame is referred to as the
"gestation period." From a banking perspective, this period is critical since no funds are
generated during this time. Consequently, a repayment holiday may need to be granted.
• Many banks currently consider only the gestation period when granting a repayment
holiday. However, in my view, additional time should be accounted for to allow for
the realization of sales by the unit. In the early stages of the business, cash sales can
be challenging. Therefore, it would be prudent to also factor in the debtor collection
period when determining the repayment holiday.
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• Promoter’s Contribution & Margin
• A business owner or promoter is required to contribute a portion of the total project
cost, known as the Promoter's Contribution. The margin refers to a specific part of
this Promoter's Contribution. While in some cases, the Promoter's Contribution and
Margin are the same, this is not always the case. Although they may overlap in
certain situations, there are many instances where they differ.
Working Capital Assessment
• Working capital finance is used to acquire current assets. Key concepts in this context
include current assets, current liabilities, working capital gap, net working capital, and
the current ratio. These terms are explained further in the sections below.
• There are three primary methods for assessing working capital: the MPBF method, the
turnover method, and the cash budget system. For MSMEs, we typically use either the
MPBF method or the turnover method, so we will not cover the cash budget system
here.
• Both the MPBF and turnover methods focus on "Sales Accepted" to determine the
"Eligible Limit." The borrower submits the estimated sales for the current financial
year, projected sales for the next financial year, along with the actual balance sheets
for the last two financial years.
• For established units, future sales can be projected based on historical performance,
the unit’s capabilities, and market conditions. Even accounting for inflation, sales
generally increase by a minimum of 15% year over year under normal conditions. If
the projected sales seem overly optimistic, especially for established units, you can
adjust them downward and accept a more conservative sales figure to calculate the
permissible bank finance (PBF).
• Under the Turnover method, the basis for calculating the PBF (Preliminary Borrowing
Facility) is the Accepted Sales. Similarly, in the MPBF (Maximum Permissible Bank
Finance) system, Accepted Sales serve as the basis, but the levels of current assets
and liabilities are considered to determine the PBF. Borrowers can choose the
method that is most advantageous for them, and the bank can apply whichever
method is more suitable for assessing their working capital needs. Actual borrowings
will be based on the drawing power, which is computed according to the bank's
guidelines.
• Key Concepts in Working Capital Assessment:
• Current Assets (CA): Stock + Receivables + Other Current Assets
• Current Liabilities (CL): Creditors + Other Current Liabilities + Bank Borrowings
• Net Working Capital (NWC): Current Assets – Current Liabilities (or Long-Term Funds
– Long-Term Uses)
• NWC can be understood as the amount to be funded by long-term sources, and
while it can be represented mathematically as (Current Assets – Current Liabilities),
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this isn't entirely accurate. To simplify calculations, we often use the formula (CA –
CL) to represent NWC.
• Working Capital Gap: Current Assets – Current Liabilities Other Than Bank Borrowing
• Current Ratio: Current Assets / Current Liabilities
• Turnover Method: In this approach, the eligible fund-based credit limit is determined
as 20% of the projected gross annual sales turnover, which is accepted by the bank. A
minimum margin of 5% on the projected sales turnover must be maintained, with the
promoter contributing this margin towards working capital. If the available NWC
exceeds the minimum 5% margin, it will be considered in assessing the bank finance,
and the limits will be adjusted accordingly.
• MPBF Method (Tandon's Second Method):
In this method, the Maximum Permissible Bank Finance (MPBF) is calculated by
subtracting the margin from the working capital gap.
In this approach, the borrower is required to arrange a margin of 25% of the total current
assets. The Maximum Permissible Bank Finance (MPBF) is then calculated by subtracting this
margin from the total current assets.
The borrower has the flexibility to choose the calculation method that is most beneficial to
them. The Primary Borrowing Limit (PBF) represents only the upper limit; however, the
drawings in the Overdraft-Cash Credit (OCC) account must be monitored based on the
Drawing Power, which is determined by the actual inventory (such as Stock, Work in Process,
Finished Goods, and Book Debts) held at monthly intervals.
The MPBF method described here is known as Method II. Under Method I, the borrower
would typically receive more financing compared to Method II, while Method III would
result in a lower amount of financing than Method II.
The assessment provided here is a basic analysis, and depending on the situation, the
financing can be adjusted by approximately 10%, with appropriate justification.
Key points to note:
• If the Net Working Capital (NWC) is positive (i.e., current assets exceed current
liabilities), the Current Ratio will be greater than 1.
• If the NWC is negative (i.e., current assets are less than current liabilities), the
Current Ratio will be less than 1.
• If the NWC is zero (i.e., current assets equal current liabilities), the Current Ratio will
be 1.
• If limits are assessed using the Turnover Method, the Current Ratio will be
approximately 1.25.
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• If limits are assessed using the MPBF Method, the Current Ratio will be
approximately 1.33.
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