Working Capital for Service Industry

There is a common misconception in India that working capital facility cannot be extended to the service industry or software industry, as the model of business does not involve the holding of inventory or receivables. However, the RBI through various circulars has clearly mentioned that working capital facility can be extended to businesses in the service industry or software industry based on the projected annual revenue. In this article, we look at the regulations for sanction of working capital facilities for service industry.

Working Capital for MSME Businesses

The Reserve Bank of India through Master Circular on Loans and Advances has laid down the guidelines for providing of working capital facilities to MSME businesses. MSME businesses in the service sector are those enterprises having investment in plant and equipment of less than Rs. 5 crores. For such MSME enterprises, enjoying working capital limits of up to Rupees five crore, working capital finance is to be provided at 20% on the basis of their projected annual turnover. The guidelines have also mentioned that banks should adopt a simplified procedure in respect of all MSME units (new as well as existing) for sanctioning of working capital facilities. Hence, service businesses and technology businesses having MSME registration can request for sanction of working capital facilities based on the above simplified guidelines.

Working Capital for Information Technology and Software Industry

Based on the recommendations of the “National Task Force on Information Technology and Software development“, the RBI has provided for a guidelines for extending working capital facilities to the information technology and software industry. Some of the highlights of the guidelines include the following:

Banks can consider sanction of working capital limits based on the track record of the promoters group affiliation, composition of the management team and their work experience as well as the infrastructure.
In the case a business has working capital limits of up to Rs 2 crore, working capital assessment can be made at 20 percent of the projected turnover. In other cases, the banks can consider assessment of MPBF on the basis of the monthly cash budget system. For the businesses in the IT and software industry enjoying working capital limits of Rs 10 crore and above from the banking system, the regular guidelines regarding working capital financing would be applicable.
Banks can stipulate a reasonable amount as promoters’ contribution towards margin.
Banks can obtain collateral security wherever available. First / second charge on current assets, if available, can also be obtained.
The rate of interest for loan to the IT and software industry must be similar to the general category of borrowers. Further, concessional rate of interest can be provided for software exporters as pre-shipment/post-shipment credit.
Banks can evolve tailor-made follow up system for such loans and even obtain quarterly statements of cash flows to monitor the operations. In case the sanction was not made on the basis of the cash budgets, they can devise a reporting system, as they deem fit.

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Frequently Asked Questions

Common questions about Working Capital Solutions for Service Industry in India.

Yes, the Reserve Bank of India (RBI) has clearly stated that working capital facilities can be extended to businesses in the service industry or software industry based on their projected annual revenue. This is mentioned in various RBI circulars and guidelines.

For MSME enterprises in the service sector with investment in plant and equipment of less than Rs. 5 crores and working capital limits up to Rs. 5 crores, banks can provide working capital finance at 20% of their projected annual turnover. Banks should also adopt a simplified procedure for sanctioning working capital facilities to MSME units.

For IT and software companies with working capital limits up to Rs. 2 crores, banks can assess their working capital requirements at 20% of their projected turnover. For higher limits, banks can consider the Maximum Permissible Bank Finance (MPBF) based on the monthly cash budget system.

Banks can consider factors like the track record of the promoters, their group affiliation, composition and experience of the management team, and the company's infrastructure while sanctioning working capital facilities to IT and software companies.

For IT and software companies enjoying working capital limits of Rs. 10 crores and above from the banking system, the regular guidelines regarding working capital financing would be applicable.

Yes, banks can stipulate a reasonable amount as promoters' contribution towards margin and obtain collateral security wherever available, including first or second charge on current assets, if available.

The rate of interest for working capital loans to the IT and software industry must be similar to the general category of borrowers. However, banks can provide concessional rates of interest for software exporters as pre-shipment/post-shipment credit.

Banks can evolve tailor-made follow-up systems for such loans, obtain quarterly statements of cash flows to monitor operations, and devise reporting systems as deemed fit, especially if the sanction was not made on the basis of cash budgets.

Yes, according to the RBI guidelines, MSME businesses in the service sector can request for sanction of working capital facilities based on their projected annual turnover.

For IT and software companies enjoying working capital limits of Rs. 10 crores and above from the banking system, the regular guidelines regarding working capital financing would be applicable, as per the RBI guidelines.