Term Loan vs Working Capital: How the CAM Differs

TL;DR

• A term loan CAM tests long life repayment from future earnings. A working capital CAM tests month to month funding of the operating cycle.
• RBI mandates due diligence on viability. It does not fix a fresh sanction DSCR or current ratio. Ratio lines are bank policy since the April 1997 MPBF withdrawal.
• The same borrower can pass one test and fail the other. Net working capital and the next twelve months instalment link the two sections.
• Use the paired workbook below. It runs the term loan DSCR and the working capital MPBF on one borrower file, with checks.

A borrower often asks for two facilities in one visit. A term loan for a machine. A cash credit limit for stock and debtors. Inside the bank that becomes two appraisals. Each hunts for a different failure. This guide shows how the credit appraisal memorandum, the CAM, changes between them.

A note on words before the numbers. Where this guide says RBI requires, a direction or circular sits behind the sentence and the source list names it. Where it says banks often or officers usually, you are reading bank policy and practice. Your sanction letter is the binding document for your file. No guide can replace it.

What is the core difference between a term loan CAM and a working capital CAM?

The core difference is the repayment source each CAM must prove. A term loan CAM proves that earnings over the loan life can pay principal and interest. A working capital CAM proves that the operating cycle can fund itself month after month.

A term loan funds a fixed asset. Plant, machinery, a shed, a vehicle fleet. The asset stays in the business for years. The loan repays in instalments across that life. The cash for those instalments must come from profit the asset helps create. If the profit does not arrive, the loan has no second source. Sale of the asset is a recovery route, not a repayment plan. Officers therefore read the future. Project cost, promoter contribution, projected sales, margins, and sensitivity to a bad year sit at the centre of the section.

Working capital funds the cycle that repeats every few weeks. Raw material becomes work in progress. Work in progress becomes finished goods. Finished goods become debtors. Debtors become cash. Cash buys raw material again. The loan is not repaid once and closed. It revolves inside that cycle, drawn and repaid as stock and collections move. Officers therefore read the present cycle in fine detail. Stock levels, creditor days, debtor days, and the cash gap between paying suppliers and collecting from buyers decide the limit. The full memorandum that carries both readings is the credit appraisal memorandum. Its shape changes with the facility, even when the borrower does not.

Tenor sharpens the split. Term loans run for years, often three to ten for plant and machinery, longer for project finance. Working capital limits run for twelve months at a time, renewable each year, repayable on demand in legal form even when the relationship runs for a decade. A one year lens cannot appraise a seven year promise. A seven year lens cannot set a monthly drawing. The CAM respects both clocks.

What does a term loan CAM actually test?

A term loan CAM tests four things. Is the project technically and commercially sound? Is the cost real and fully funded? Can cash accruals service the debt in each year? What protects the bank if the plan slips?

Project soundness comes first. The officer records what the asset does and what changes after it arrives. Capacity, power, labour, supply, and buyer demand sit here. Past performance anchors the projection. The new machine must lift output, cut cost, or open a line the market will absorb. A projection that doubles sales with no buyer logic fails here, before any ratio runs.

Cost and funding come second. The CAM lists each cost head and the funding for each rupee. Promoter contribution is tested against bank statements. Convention puts it near one quarter to one third of cost. That is bank policy, not an RBI line. Omit installation, electrical work, or margin money, and the project returns for more funds within a year. Officers price that omission now.

Debt service capacity is the decider. The officer projects profit after tax, adds back depreciation and term loan interest, and divides by principal plus interest due in each year. That is the debt service coverage ratio, DSCR, in the Indian banking variant. The method and the sensitivity habit sit in our guide to DSCR with a worked calculator. The gates officers apply on top of the arithmetic, year by year and on average, sit in term loan appraisal ratios.

Now the regulatory split this article will keep honest. RBI requires due diligence on viability and bankability for term lending. It does not fix a DSCR floor for a fresh sanction. The figures 1.25 and 1.33 that many borrowers quote as RBI law come from a restructuring viability appendix. The language there is should and around. In short, average DSCR should stay above 1.25 across the viability period, year by year should stay above 1.0, and a ten year repayment should be around 1.33. That is illustration for stressed accounts, not a pass mark for a new machine loan. Banks set stricter fresh loan comfort, often an average near 1.50 to 2.00, with the minimum year read hard. Passing the illustration does not compel a sanction. Failing the bank line does not breach an RBI rule. It fails a policy test you can restructure around, with tenor, moratorium, or a lower loan amount.

Protection is the fourth test. Primary security is the asset financed. Collateral and promoter guarantees sit behind it. The CAM records charge, insurance, valuation, and covenants. The sanction letter carries the binding version.

What does a working capital CAM actually test?

A working capital CAM tests whether long term funds carry their fair share of current assets, whether the cycle length is honest, and what drawing the stock and book debts can support each month.

The section opens with the operating cycle. Stock days, process days, finished goods days, and collection days, minus creditor days. That gap is what the bank must help fund. Every extra day locks money in stock or debtors. Officers compare your cycle with your past and with trade habit. A debtor book that jumps from 45 days to 85 days invites the hardest question in the room.

The funding split comes next. Current assets must not sit wholly on short term bank debt. Long term sources, owned funds plus term borrowing that is truly long, must fund a slice of current assets. That slice is net working capital. The Tandon methods turned that idea into arithmetic. Method I funds 75 percent of the working capital gap, where the gap is current assets minus other current liabilities. Method II funds 75 percent of current assets minus other current liabilities, so the borrower funds 25 percent of current assets from long term sources and the balance sheet holds a 1.33 current ratio at full drawing. Method III asked for still more long term funding and did not take hold in practice.

Here the history matters, because borrowers still hear these methods quoted as live RBI orders. They are not. RBI withdrew the mandatory MPBF prescription in April 1997. Banks may now use an MPBF method with changes, the turnover method, a cash budget method, or another board approved method, inside prudential norms. Many banks still use Method II logic because the discipline is sound. Sound convention is not the same as current law. Our deep guide to the MPBF method walks through each method and that withdrawal in full. For small MSE limits, the turnover tool still runs in practice, near 20 percent of projected turnover as the assessed need, with borrower margin and bank finance split inside it. Segment rules vary by bank. Read your sanction letter for the method your bank actually applied.

Drawing power closes the section. The sanctioned limit is the ceiling for the year. Drawing power is the usable amount this month, from your stock statement. Paid stock and debtors within the age your bank accepts, usually up to 90 days, enter the sum. Margins come off as bank policy. The lower of the limit and drawing power is what you can draw. Mechanics sit in our drawing power calculator guide.

Term loan CAM vs working capital CAM: side by side, what changes?

Nine rows change between the two CAM sections. Purpose, tenor, repayment source, lead ratios, security, and monitoring lead the list.

Read the ratio row once more. DSCR never sets a working capital limit. MPBF never services a term loan. Files fail when a borrower answers the term loan question with working capital logic, or the reverse. A fat stock position does not pay a principal instalment. A strong future profit does not pay a supplier next Tuesday. Each CAM guards its own cash.

The projection pack behind both sections is your CMA data. One set of projected profit, balance sheet and fund flow statements must feed both readings. If the term loan section assumes sales of 6 crore and the working capital section assumes 8 crore, the officer stops trusting both. Consistency is not polish. It is the appraisal.

One borrower, both facilities: how do the numbers run?

One borrower file can carry both facilities and still fail one test. The paired example below uses a single borrower for both sections, so you can watch the link.

Meet Meera Engineering Works of Pune, a pressed components maker. The name is illustrative. The arithmetic is real. Audited turnover stands at Rs 4.20 crore. The firm will install a new press line and asks for both facilities in one file. Project cost is Rs 150.00 lakh. Plant and machinery take 110.00. Installation and electrical work take 15.00. Pre-operative cost and contingency take 10.00. Margin money for working capital takes 15.00. Promoter contribution is Rs 38.00 lakh, 25.3 percent of cost. The term loan ask is Rs 112.00 lakh for seven years at 10.75 percent, principal Rs 16.00 lakh each year.

DSCR in each year is profit after tax plus depreciation plus term loan interest, divided by principal plus the same interest. The average is 1.97. The minimum is 1.32 in year one. Read that pair the way an officer does. The file clears the RBI restructuring illustration with room. Year one still sits below the fresh loan comfort many banks apply near 1.50 on the weak year. The conversation that follows is not about fraud or fate. It is about structure. A short moratorium till the line stabilises, a step up in principal after year one, or a lower loan with higher promoter funds can lift the weak year without touching the sales story. Fudging year one profit cannot. The bank statement and past margins will expose it.

Now the working capital section on the same file. At peak, projected current assets stand at Rs 145.00 lakh. Stock holds 60.00, split across raw material, work in progress and finished goods. Receivables hold 80.00. Other current assets hold 5.00. Other current liabilities, creditors and other dues without bank borrowing, stand at Rs 55.00 lakh. The working capital gap is 90.00. Method I gives MPBF of 67.50. Method II gives 53.75, from 75 percent of 145.00 minus 55.00. Required net working capital under Method II is 36.25, one quarter of current assets. At full Method II drawing, total current liabilities reach 108.75 and the current ratio is 145.00 divided by 108.75, 1.33 on the nose. The workbook recomputes each line from inputs, so you can test your own file in the same shape.

Two links now bind the sections. First, existing net working capital is 26.00. The file needs 36.25. The shortfall is 10.25. The project cost already carries 15.00 as margin money for working capital. That line is not padding. It funds this shortfall and leaves a small cushion. Cut it, and the working capital section fails even if the machine DSCR shines. Second, the term loan instalment due in the next twelve months, 16.00, sits inside current liabilities when the officer computes the current ratio. Training practice keeps that instalment outside other current liabilities for the MPBF gap itself, so the two denominators differ by design. Graded as convention in our research notes, it explains why a file can show MPBF headroom and a tight current ratio in the same month. The monthly cash discipline that keeps both honest sits in our guide to cash budget vs fund flow.

Sanction and drawing add the last layer. Assessed MPBF is 53.75. The example sanction is 50.00. Drawing power on paid stock of 50.00 and debtors within 90 days of 62.00, at 25 percent and 40 percent margins, is 74.70 before the cap. The sanction caps it at 50.00. In a lean month drawing power can fall below the sanction and bind instead. Three numbers, three jobs.

Why do banks appraise the two facilities together?

Banks appraise the two facilities together because each one changes the other. A term loan lifts capacity and debt service. Working capital decides whether that capacity can run.

A new machine without working capital stands idle. Sales in the DSCR projection assume the cycle is funded. If the working capital section funds a smaller cycle than the term loan section assumes, the sales line is fiction. Officers read turnover in both sections against one CMA data pack and against past bank credits. That cross check is where optimistic files break.

Debt links the same way. Term loan principal due within a year presses on the current ratio. Working capital drawings press on total leverage. The full sequence sits in the credit appraisal process, step by step. Read the two sections as one solvency story at two speeds. Fast cash for the cycle. Slow cash for the asset.

What should you prepare before you ask for both?

Prepare one consistent file that answers the earnings question and the cycle question in the same numbers. Officers reward files that reconcile without a second meeting.

Start with project truth. Supplier quotes. Proof that promoter funds exist. A sales logic that names buyers, volumes or cost savings. Build the DSCR with the weak year left visible. A file that shows a soft first year plus a structuring answer earns more trust than seven perfect years. Run the sensitivity first. A 10 percent sales miss in year one should still leave DSCR above 1.0.

Build the cycle with the same care. Stock and debtor lists that match your ledger. Net working capital you can prove from the last audited balance sheet, plus the route to the required level. If a shortfall exists, name the source that fills it. Officers cut limits for unexplained gaps. They respect files that name the gap and fund it.

Close with conduct. Six to twelve months of statements with no return habit. Collections that match reported sales. Stock statements filed on time. The CAM narrates numbers. Conduct proves the narrator.

Sources

• Reserve Bank of India: Master Circular on Loans and Advances, Statutory and Other Restrictions: due diligence on viability and bankability for term lending and project exposures. Modal wording is should. No fresh sanction DSCR floor is prescribed.
• Reserve Bank of India: Master Circular on Income Recognition and Asset Classification: restructuring viability appendix lineage for the illustrative DSCR benchmarks, worded should and around.

MPBF methods, the 1.33 current ratio, DSCR comfort bands, margins and stock audit triggers in this article are bank policy and convention, described as practice. RBI withdrew the mandatory MPBF prescription in April 1997. Your sanction letter and your bank policy decide your file.

Frequently Asked Questions

Last updated: October 2026. Regulatory facts are from the RBI circulars cited above. Ratio bands, margins and methods described as practice are bank policy. Your sanction letter decides your file.