Credit Monitoring Arrangement ( CMA ) – Overview & Documents Required

The Credit Monitoring Arrangement (CMA) report has been in practice since October 1988. Before its introduction, from 1965 to 1988, the Credit Authorization Scheme (CAS) served as the primary tool for controlling credit. The Reserve Bank of India (RBI) used CAS to regulate bank credit that exceeded specified limits.

Under the Credit Authorization Scheme (CAS), banks needed prior approval from the RBI before extending credit beyond prescribed limits. These credit limits and conditions were periodically updated. Initially, the CAS was implemented to prevent a few large borrowers from monopolizing limited credit resources. Over time, recommendations from the Chore Committee and Tandon Committee were incorporated into the CAS for better scrutiny of credit proposals by banks.

However, the CAS faced significant challenges—the requirement for RBI approval often led to lengthy delays, frustrating both banks and borrowers. Additionally, concerns arose regarding the effectiveness of monitoring bank credit disbursement under this system.

What is a CMA Report?

A CMA report, or Credit Monitoring Arrangement report, presents both the past and projected financial performance of a business. It includes key financial ratios and metrics that assist financial analysts and bankers in evaluating a company’s financial health.

Banks and financial institutions typically require a CMA report from businesses applying for loans. This report helps them assess the flow and application of funds within the business. A well-prepared CMA report can significantly improve a company’s chances of securing bank financing.

Under the Credit Monitoring Arrangement (CMA), banks are allowed to approve credit proposals for large borrowers after conducting a thorough analysis of their past financial performance. Additionally, banks must submit large credit proposals to the Reserve Bank of India (RBI) for post-sanction scrutiny. These proposals include:

• Working capital limits of ₹500 lakh (₹5 crore) and above
• Term loans exceeding ₹200 lakh (₹2 crore)

Statements Covered in a CMA Report

A CMA report consists of several key financial statements that provide a detailed analysis of a business’s financial health. These include:

1. Particulars of Current & Proposed Limits

The first section outlines the existing credit limits (both fund-based and non-fund-based), their utilization history, and the new credit limits being requested by the borrower. This document is a fundamental requirement for loan applications and is submitted to the banker.

2. Operating Statement

This statement presents the borrower’s business plan, including:

• Current sales figures
• Profit before & after tax
• Sales projections
• Direct & indirect expenses
• Profit estimates for the next 3 to 5 years

It provides a scientific analysis of the company’s profitability and is tailored to the borrower’s working capital needs.

3. Analysis of the Balance Sheet

This section examines both current and projected balance sheets, offering insights into:

• Current & non-current assets
• Current & non-current liabilities
• Cash & bank positions
• Net worth projections for future years

This analysis provides a comprehensive view of the borrower’s financial stability.

4. Comparative Statement of Current Assets & Liabilities

This statement offers a comparative analysis of the movement of current assets and liabilities. It helps banks determine:

• The borrower’s ability to meet working capital needs
• The actual working capital cycle for the projected period

5. Calculation of Maximum Permissible Bank Finance (MPBF)

One of the most crucial statements, this section determines the maximum amount of finance the bank can permit for the borrower based on their financial strength.

6. Fund Flow Statement

This statement analyzes fund inflows and outflows for the current and projected periods. It connects the fund position with the balance sheet and MPBF calculations to track financial movement over time.

7. Ratio Analysis

The final section includes key financial ratios used by financial analysts and bankers, such as:

• Gross Profit (GP) Ratio
• Net Profit Ratio
• Current Ratio & Quick Ratio
• Stock Turnover Ratio
• Net Worth & its Ratio to Liabilities
• Debt-Equity Ratio
• Asset Turnover & Working Capital Turnover
• Fixed Asset Turnover

Each of these ratios helps in evaluating the business’s financial health, risk profile, and creditworthiness.

Documents/Information Required to Prepare a CMA Report

To prepare a Credit Monitoring Arrangement (CMA) report, the following key documents and financial details are required:

1. Audited Financial Statements (Last 2 Years)

• Provides a detailed overview of the company’s financial performance.
• Includes the Profit & Loss Statement, Balance Sheet, and Cash Flow Statement for the past two years.

2. Latest Sanction Letter (For Renewal Cases)

• If the CMA report is being prepared for the renewal of an existing credit facility, the latest sanction letter from the bank is needed.
• It contains details of the current credit limits, interest rates, and repayment terms.

3. Provisional Financial Statements for the Current Year

• A provisional balance sheet and profit & loss statement for the ongoing financial year must be submitted.
• Helps banks assess the latest financial position of the business.

4. Term Loan Repayment Schedule (If Any)

• If the borrower has an existing term loan, a repayment schedule is required.
• This document outlines EMI details, outstanding balance, and loan tenure.

5. Details of Proposed Enhancement (If Any)

• If the business is seeking an increase in credit limits, details of the requested enhancement must be provided.
• This includes the purpose of additional credit, repayment terms, and expected impact on financials.