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    Ilv Special MessengerF. No.6(2)tCACl2016Governnrent of IndiaMinistry o1'Finance

    Departrrent of E-rpend itr-r reO1'flce of Chief Aclviscr Cost

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    'n Cop)' to: Chief Executive Officer. Khadi and Village Industries Commission (KVIC).'Ciramodal'a' 3. IRLA Road. Vile Parle (West), Mumbai, Maharashtr"a - 400056, rvith a c,opy ofilrc leport lor rreccssarr actiorr.

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    P.K. Aggarnal)

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    CONFIDENTIALF. No. 6(2)tCACl2016

    Report No. 8632

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    Study on Working Capital Formulaunder Interest Subsidy Eligibility certificate scheme of

    Khadi and Village Industries Commission

    Ministry of FinanceDepartment of ExpenditureOffice of Chief Adviser Cost

    February 2018

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    t; Contents'#

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    Cirapter'- I lntroductionI

    111.1 Background1

    i1.2 Ieuns of RefbrenceI .-1 Study Metlioclology I

    Chapter- 2 Interest S u bsidy Eli gibility Certiflcate Schenie aJ2.1 Overview of KVIC J2.2 Interest Subsidy Eligibility Certificate Sche,ne gtSfC;

    Backgrouud-)

    !..J KVIC',s guidelines regarding fixation tf tffia-sales

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    2.4 ;ireme"t "f

    w".ilr,tCapital

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    2.5 Recommendations of Other Comniittees 7

    82.6 Guidelines being observed t y t unt

    unitsChapter- 3 Analysis of Working Capital Requirement t2

    3.1 Assessment of Working Capitil by KVIC 12Operating Cycle and Cash Cycle3.2 15

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    J.J Analysis of Profitability and Liquidity of KGChapter- 4 Methodology for Assessrnent of Wortiing Capital

    4.1 Working Capital Assessment MethoclsA''.l.z- Actual operati,g cycle (based onffi 18

    194.3 Comparison of Assessed Working @

    Operating Cycle)Chapter- 5 Recommendations 21

    215.1 Working Capital Assessment Method5.2

    215.3 Inventory of Finished Goods anA CreAitors nu1,rr*r-,t 2t

    n5.4 Market Devel.pment Assi stance /rnffiState Boards _

    5.5 Others 22

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    tr ist of Table

    List of Annexure

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    Table 1 working capital amouni approved by KVIC and finance sancti,r,rcdby the banks

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    Table2 Khadi Production and Saies during 2An-14 to 2015-i6 5Table 3 KVIC's Method of Assessment of Requirement of working capr-tal 6Table 4 Banks' guidelines regarding working capital ugainri LSe- ittu.,i

    by KVIC9

    Table 5 consolidated Production and Sales values, working cupital ,r-,dBank Finance

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    Table 6 Assessment of Net wo'king capital for ISEC for udu,ralpetSarvodaya Sangh for 2013-14

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    TableT Opeiating Cycle for the period from 2013-t+ to ZOtS-iO i6Table 8 Profitability and Liquidity Ratio 17Table 9 Actual operating cycle (on an average) for trre period fi orl zo t :- i +

    to 2016-1719

    Terms of Reference

    from 2013-14 to 2015-16

    State wise Details of V/orking Capital Amount appr.oueA UyKVIC and Bank Finance sanctioned by the Ba,ks for the years

    Statement of working capital *ss"ss.ffiAssessment of working capital cycle (in Nos. of oayg c,f rt*aiInstitutions for tle years from 2013-14 to 2015-l 6Statement of Position of profitability ancl Liq;i,lity

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    fiorn 201 3- 14 to 201 5-16.statemellt of Actual operating cycle for the vear' rrorl 2013-lato 2015-16"Statement of Comparison of Assessment of Working CapitatRequirement for the years from 2013-14 to 2015-16.

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    Annexure-1 't.t

    Annexure-2 26

    Annexure-3 27

    Annexure-4 28

    Annexure-5 2q

    Annexure-6 30

    Annexure-731

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    tii! Abbreviation

    Ir A!VI'rT Artisan Wellare Fund TlustCIBC Consortiurn Bank Credit

    \3 CtlA Core Current Assets:"r CGTMSE Credit Guarantee Fund Tlust for Micro and Small Enterprises;* CSPs Central Slivel Plants''l

    iSEC Inreresr Subsidy Eligibility Certificatee KIs Khadi Institutions,:,* KRDP Khadi Reform and Development programme? r o -'-------

    KVIBs State Khadi and Village Industries BoardsY KVIC Khacii and Village Industries CommissionS MBPF Maximum Pemrissible Bank Finance,- MMDA Moditled Market Development Assistance5 MSE Micro and Small EnterprisesI MSME Mi,istry of Micro, Small and Mediurr EnterprisesS OCL Other Curent LiabilitiesPMEGP Flime Minister's Employment Generation Programme'* RBI Reserve Bank of India.q REGP Rural Employment Generation programme

    SFC Standing Finance CommitteeS SITURTI Scheme of Fr-urd fbr Regeneration of Traditional Industries-:1 SLBT State Level Budget Team- TCA Total Current Assets, ,.... -: .' VIs Village Industries

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    Chapter - 1

    lntroduction

    I.1. Background

    1.1'f i\{inistry of Micro, Smiill and Mediurn Enterprises (MSME) through Khadi a,cl VillageIndustries Clornrnission (KVIC) has been implenrerrting a Central Sector Schenre, namely, InterestSubsid"v Eligibility Cerlificate (ISEC) Scheme since lg77-78 for institutiolal financing of theKhadi ancl Village Industries programme. Under the ISEC Scheme, the woriiing capital creclit isprovided to the Khadi Institutions (KIs) as per their requirement assessed by the banks. Theinstitutit'rl'ts are to bear the interest liability only at the rate of 4 percerlt per aprlu* u,lrile thedifierence betr'r'een tlre actual Iending rate and 4 percent is borne and paid by ttre Ce,tralGovernment through KVIC to the lending banks and the funcls for this purpose are proviclecl unclerthe'Khadi Granr'Ilead of KVIC.

    1.2. Terms of Reference

    | .2.1 . KVIC vide their Ietter No. KVIC/Ec.R .lATN261-DRPSCI/Reporr/2o14- 15 clatecl18.03.2016 has requested this office for conducting a study to ascertain an appropriate rvorkipgcapital formula for Iuterest Subsidy Eligibility Certificate (ISEC) Scheme. Subsequenrly. Ministrl,of Micro, Srnalland Mediurn Enterprises has sent the study reference to this Office vide their D.0.letterNo. C.-27017104/2A16-KVI dated23.06.2016 (Annexure-l) on the same issue a,d appriseclthat KVIC has recently adopted flexible pricing policy by which Khadi Insritutions are fi-ee to addmargin over and above the production cost and therefore, they can sustain their activity to theextent of 10A% of their turnover under this scenario. KVIC's existing method of assessment ol.higher working capital than the production cost for which banks are reluctant to provicle workingcapital to Khadi Institutions as per ISEC issued. Banks normally aclopt Naik Conrmitteerecotnmendations for assesstnent of rvorking capital to provide financial suppofi to Igs.

    1.3. Study Methodology

    I'3.1. This Office has already conducted a study and subnritteci its repolt on the issue vicle ReportNo. 8349 of January, 201 3 vide this Office's letter No. F.No. 6(4)lCAC:2Ol I dated 24.01 .2013.During discussion with the ofllcials of KVIC, it has been informed that no action has bee, takerron the recommendations made in that report. However, ttris Office has accepted fi.esh referencesent by MSME vide their D.O. letter No.G.-270 1710412016-KVI dated 23.06.2016.

    1.3.2. The methodology adopted for this str,rdy includes issuance of questionnaire for datacoliection lrom (i) KVIC, (ii) KIs, (iii) Reserve Bank of Inclia, and (iv) Bapl

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    discussion hetd by Officers of this Ofirce rvith few Kls around.laipur/ Daltsa (before issltance oi'

    questiopnaire), study of literature, discussion rvith KVIC Officers, data analysis and interpt'etatiotr

    anci firrally made recorlrnendations. In the instant case, questionnaire rvas issued on 31.10.2016

    vide tiris Office letter No F.No. 6(2)/CAC/2016 dated 3 1 . 10.201 6.

    1.3.3" KVIC subrnitted partial and incomplete data to this Office in response to the questiottttaire

    vide their letrer No. DK (BF)/ISEC Study W.C./REC/Varanasi/2016-17 dated 1510312017.Subsequently, this Office issued reminder seeking complete data/infbrmation alorrg rr itharjditional data/information pertaining to Cotton Khadi, Muslin Khadi, Silk Khadi, Woolen Khadi

    and Polyvastra like (i) annual buclget guidelines of KVIC, (ii) calculation of rvorliing capital asper KVIC's metlrod, (iii) Working Capital Cycle: (iv) cost of production/sale; (v) financial clata,inrespectofatleast5l(lsofeachcategory('A+',A,B,C &'D' category)assamplefortheyear2013-14,2014-15, 2015-16 r,vitli annual financial accounts vide this Office letter No F.No.6(2)l C ACIZO 1 6 dated 1 6.06.2017 .

    1.3.4. Again KVIC submitted partial data/inficrmation to this Offrce vide their letter: No.DK(BFyISEC Study W.C./2017-181274 dared 04.08.2017 against this Olfrce reminder letter F.hio.

    6(2)lCACl20l6 dated 16.06.201