Banking Finance 2023, Banking Finance April 2023

“CREDIT MONITORING ARRANGEMENT”- a tool for effective credit assessment.

Every business be it a small or big needs funding to expand in its capacities in the form of plants, machinery, equipment, meeting working capital requirements, etc. For fulfilling this purpose, generally huge amount of investment is required. The investment may come from either internal or external sources. If the investment comes from internal sources, we call the source as capital or reserves or surplus profits are reinvested in the business. On the other hand if the sources are external, they might be of two types i.e. Equity funding & Debt funding. While in debt financing capital is acquired through the borrowing of funds from financial institutions against a security to be repaid at a later date. In equity financing, rising of capital is by selling stocks to investors. While each method of funding comes with its fair share of pros &cons, Debt financing is a simpler and reliable method of funding for businesses through loans and credit, as it allows a business to use a small amount of money into a much larger sum enabling faster growth that otherwise might be possible. Whereas equity financing contains a large amount of time comparatively, complex paperwork, disclosures& legal arrangement. Hence borrowing from a lender or bank or NBFCs or even from a modern-day Fin-tech lending platforms is convenient as they take pride in their ability to disburse a loan within a day or two.

Basically, when an applicant approaches a lending institution like banks or NBFC, banks want to ensure that they are lending funds in safe hands i.e. they want to ensure two important things about the borrowing concern, one, ability to repay and the other is willingness to repay. The later can be assessed by proper due diligence while the former can be assessed by obtaining various financial statements. These financial statements will speak about the financial position, performance & health of the business entity, credit history, timely repayment, etc. The banks rely very much on these reports for their credit decisions by carefully evaluating the proposal, taking all measures to mitigate the possible risks while arriving at the eligibility of funding.

Thus bankers require a comprehensive tool to know the existing financial position and projected financial position of the borrowing concern using all the financial information provided by the borrower.

   What is CMA? How it origin?

The Credit Monitoring Arrangement data or CMA report is an analytical tool of the current and projected financial statements of a loan application by the banker. It showcases a systematic analysis of the financial operations and management aspects of the borrower i.e. the way the entity manages its funds in an efficient way, application of the funds, business probabilities, etc.

The concept of CMA came into existence in 1975 with the recommendations of the Chore Committee & Tandon group in 1974. Introduced in 1988, the CMA system aimed to prevent delays in loan approvals & loan disbursements which earlier required RBI’s approval. Prior to the introduction of CMA, Credit Authorization scheme was in place. Under this practice, an authorization from RBI was mandatory for credit above the specified limit as fixed by RBI. This is to ensure curtailing the mismanagement of the limited capital available for credit. But, this process was cumbersome, time-consuming, and inefficient. Hence the Government initiated to introduce the system of the CMA report. CMA has simplified the credit decision process as the financial institutions are given authority to sanction the credit after self-assessment of the CMA report submitted by the client. Although now the process is much simplified, mandatory scrutiny by the RBI after the approval of loan is required.

Applicability of CMA report.

Through the CMA report, banks evaluate the eligibility of funding borrower based on the careful evaluation of the CMA data, as it allows bankers & financial analysts to take the financial pulse of the undertaking. For this reason, borrowers are required to submit CMA data while getting loans from the bank every year for business loans like short term or long term loans, project loans& even for meeting working capital requirements for day-to-day business. As per RBI guidelines, banks should ask for CMA data and submit the same to RBI, if the amount of term loan is above INR Two crore (2 Cr) and working capital finance of INR five crores (5 Cr).

 Components of a CMA report

Typically, there are seven components/statements that together constitute a CMA report which helps bankers to evaluate the financial aspects of a business entity.

  1.     EXISTING & PROPOSED LIMITS:This is the first constituent of a CMA report, through which the banker wants to know about the present fund& non-fund based credit limits of the borrower along with their credit limit usage and their credit history. Also, other details like current outstanding along with proposed limits are required to be mentioned in the statement. It is always advised that the applicant should have a clean credit history with no defaults and the proposed amount should match with the fund limits.
  2.    OPERATING STATEMENT: Secondly, every banker requires the borrower enterprise to present a profit& loss statement which contains details like current sales, direct& indirect expenses, PBTA, PAT, sales projections, expenses, profitability projections for the coming 3 to 5 years based on the capability of borrower’s business. In other words, this statement is a scientific analysis of the current & projected financial growth potentiality of the borrower.
  3.    BALANCE SHEET ANALYSISAnalysis of the balance sheet is the third statement in the CMA report, which gives the indication that the company is financially sound. The statement gives a detailed analysis of current& non-current assets and liabilities, cash position of the borrower. In other words, the analysis of the balance sheet provides a clear insight into the applicant’s financial position and the net worth.

Generally, creditors require at least two years of audited balance sheets and upcoming three years projected and estimates for effective analysis.

  1.  CHANGES IN WORKING CAPITAL:This is the fourth statement that provides the comparative analysis of the movement of current assets& liabilities. This analysis gives an idea regarding the ability of the applicant to meet their daily working capital requirements. Besides, indications regarding the working capital requirement (actuals) along with future projected cycle growth are made.
  2.     CALCULATION OF MPBF: As per the recommendations of the Tandon committee, calculation of Maximum Permissible Bank Finance helps us to know the difference between the working capital requirement & permissible finance in the borrower’s enterprise i.e. capacity of the applicant to borrow money.

There are generally two ways to calculate MPBF:

  •  In the first method, the permissible limit of funding shall be 75% of the networking capital gap which means 75 % (current assets less current liabilities other than bank borrowings).
  •  Under the second method, MPBF shall allow (75% of the current assets) less current liabilities other than bank borrowings.

Thus, the MPBF limit is only the cash credit component of the borrower which is generally known as the drawing limit (DP), and this is the reason why this statement forms the basis of the CMA report.

  1.    FUND FLOW STATEMENT:Generally a fund flow statement of the borrower’s enterprise is given to evaluate if there are sufficient funds available with the entity or if the concern is utilizing its funds properly or not.
  2.  RATIO ANALYSIS:Last but not the least, analysis of operational and financial ratios gives an overall summary of the entity’s growth, performance & loan repayment capacity. Some of the important ratios like current ratio, net profit ratio, net worth ratios, quick ratio, stock & asset turnover ratios, debt-equity ratio, etc. help the bankers to make the credit decision regarding approval of funds.

Steps involved in drafting CMA data.

Past performance and actuals should be exactly as per Audited Financials.

All assumptions and estimates mentioned in preparation of CMA data should be mentioned separately with valid justifications.

Future projections should be realistic and not merely arithmetic multiples of current year figures.

The borrower has to prepare reports for existing loans, credits, repayment status, and any other liabilities in any form.

The borrowing concern need to submit all the financial reports& statements, including Balance sheet and Profit and loss accounts and also Audit Report.

Calculation of MPBF and preparation of changes in working capital along with ratio analysis.

Fluctuations in performance should be justifiable with valid reasons.

All the data pertains to fixed assets, depreciation and loan repayment history along with schedules should be annexed and linked to CMA Data.

The entity should be able to justify the performance and numbers projected

In case of multiple businesses activities or locations, detailed report / annexure should be attached showing breakup of how the projected numbers are arrived at?

CMA Data should represent a viable business performance – over borrowing is un-favorable and cannot be justified through mere projecting some financial ratios.


A.  Significance of CMA Data for Borrowers

CMA data gives a financial blueprint of an entity’s performance year-on-year basis. The overall financial position, performance and health, loan eligibility, repayment capacity, etc., can be determined with the use of CMA data report. CMA data clearly marks out the flow of & application of funds in a concerned business. A properly planned and well drafted CMA Data is sufficient to establish eligibility for loan as it is the mirror of creditworthiness for borrower who wants to enjoy credit facility from banks.

B.  Significance of CMA Data for Banks

Bank and financial institutions do employ various measures to mitigate the chances of risks and further wants to decrease the impacts of the risks if happens like default of loan. With the help of CMA data and its components banks will know the financial position, the changes in the balance sheet’s components, knowing the flow of funds, knowing the performance of the borrowing concern and also understand the earning cycle for paying the expenses. It also helps them to know short term solvency of borrowing concerns.  With ratio analysis, bank will understand the position and efficiency of the entity more clearly within few minutes. Compilation of CMA report helps the banks to find out the financial health of the enterprise as it is unworthy to provide funds to such entities who are already sick or where chances of survival are few.


As mentioned above, a professionally crafted CMA data report could really make the loan approval process simple, quick& hassle-free. Even though a CMA Data is a very detailed analysis of the Profit and Loss statement and balance sheet of an entity, the key to prepare a good CMA Data is to present a healthy financial projection to analyze the past & proposed flow of funds and viability of the project of the borrower. Therefore, someone with vast experience and in-depth knowledge of finance should study & prepare CMA report.

From a banker’s perspective CMA data is a systematic analysis of working capital management of a borrower and the main objective is to ensure the usage of long term and short term funds for the given purpose. Though, the Banks have been given liberty by RBI not to follow CMA for deciding the eligibility and magnitude of working capital finance, yet many are relying on the CMA data, as the CMA system is so scientific and systematic, that it transpires the whole activity of the firm and shows the errors of the borrower and their ill intention to misuse the Banks’ funds.

Another key area where proper knowledge about CMA data is imperative is avoiding creative accounting. In the recent past banks have been in news mostly in wrong sense because of the frauds happened mostly financial statement frauds. A deeper analysis of those cases reveals that somewhere down the line bankers lack the skills to identify the red-flags thrown by the CMA. Hence a thorough knowledge and proper interpretation of the CMA data is needed for effective credit assessment and decision making.

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