Credit monitoring arrangement reports are nothing but special data reports that are used by banks, credit agencies and financial institutions for granting loans and enhancing the credit limit of business entities. The credit monitoring arrangement (CMA) Report was first introduced in the late 1980s and has been in operation since October 1988. The credit authorisation scheme (CAS) was the principal instrument of credit control between 1965 and 1988. Today the CAS is used by the RBI to regulate bank credits exceeding the prescribed credit limit directly. And the credit monitoring arrangement (CMA) replaced the credit authorisation scheme (CAS).
Certain limits of credit and terms and conditions were in place in the financial sector. Prior approval from the RBI for credit above specified limits was required under the credit authorisation scheme (CAS). However these conditions and limits of credit were revised from time to time. Initially the credit authorisation scheme (CAS) was considered to be a way of preventing the utilisation of scarce credit resources by only some large borrowers. The RBI’s authorisation process involved long delays which was inconvenient and frowned upon by both the customers and the banks. Additionally their system of monitoring the disbursement of the bank credit was also a grave concern. It was only later that the Tandon Group and the Chore Committee made some recommendations which were incorporated in the CAS scrutiny of credit proposals by banks. So in this article we will discuss what is the CMA report, what statements are covered in the CMA report and how to prepare the CMA report.
What is a CMA report?
A CMA report stands for credit monitoring arrangement report this report shows the past performance and the projected performance of a business entity in financial terms. The CMA report is compiled with all the necessary financial ratios and metrics in order to help the financial analysts and bankers to ascertain and predict the financial health of a business entity. Usually the financial institutions or the banks request the applicant for a business loan to prepare a credit monitoring arrangement report CMA report in order to understand the flow and application of the funds in their business. This is why CMA reports are so important. A professionally drafted CMA report can increase the chances of securing a bank loan. The banks are permitted to sanction credit proposals of large borrowers after detailed analysis of the past performance under the credit monitoring arrangement CMA. However the banks still need to submit the large credit proposals to the reserve bank of India for the post-sanction scrutiny. This is because these proposals consist of working capital limits of Rs.500 lakhs and/or term loan in excess of Rs.200 lakhs.
What are the statements covered in the CMA report?
A CMA report covers the following statements:
● Particulars of current and proposed limits – The very first statement in the credit monitoring arrangement (CMA) report states about the existing fund and non-fund based credit limits, their usage limits and their history. Additionally the statement also contains the applied or proposed limit of the borrower. It is necessary that this basic document is provided by the borrower to the banker.
● Operating statement – The second statement in the credit monitoring arrangements (CMA) report states that the borrowers business plan showing the current sales, the profits before and after taxes, direct and indirect expenses, sales projections, and the profit position for 3 to 5 years. The requirements are case to case specific on the basis of the working capital request of the borrowers. This statement is a scientific and objective analysis of existing and the projected profit generating capacity of the borrower business entity.
● Analysis of Balance Sheet – The third statement in the credit monitoring arrangement (CMA) report consists of the analysis of the current and projected financial years. This helps in showing a comprehensive analysis of current and noncurrent assets, current and non-current liabilities as well as the cash and bank position of the borrower business entity. The third statement also specifies the net worth position of the borrower for the future projected years. Just as the name suggests, this statement is the analysis of the balance sheet giving a complete picture on the financial position of the borrower business entity.
● Comparative statement of current asset and current liabilities – The fourth statement in the credit monitoring arrangement (CMA) report states the comparative analysis of the movement of the current assets and liabilities. This analysis is a helping factor in deciding the capacity of the borrower business entity to meet the working capital requirements as well as the actual working capital cycle for the projected period.
● Calculation of maximum permissible bank finance MPBF – The fifth statement in the credit monitoring arrangement (CMA) report, the Maximum Permissible Bank Finance consists of the calculation that indicates the borrowing capacity of the borrower, i.e. the borrower business entity’s capacity to borrow money.
● Fund flow statement – The sixth statement in the credit monitoring arrangement (CMA) report involves the fund flow analysis of the current and projected period. In this analysis the fund position of the borrower with reference to the projected balance sheets and MPBF maximum permissible bank finance calculations are indicated. The main purpose of this statement is to capture the movement of the fund for the given period.
● Ratio analysis – The seventh and last statement in the credit monitoring arrangement (CMA) report States the financial ratios for the perusal of bankers and financial analysts. The basic key ratios here are GP (gross profit) ratio, net profit ratio, quick ratio, current ratio, net worth, DP limit, stock turnover ratio, MPBF, the ratio of net worth to liabilities, asset turnover, debt equity ratio, current asset turnover, working capital turnover, fixed asset turnover etc.
List of documents required for the preparation of Credit Monitoring Arrangement (CMA) report:
● The audited financials of the previous two years.
● The provisional financials for the current year.
● The latest sanction letter in case of renewal.
● The term loan repayment schedule in case there is any.
● The details of proposed enhancements along with the terms and conditions in case there is any.
Why do you need to get a Credit Monitoring Arrangement (CMA) report prepared professionally?
Business entities need to get CMA reports prepared professionally because it is necessary at the time of applying for loans. This report ensures the banks that the previous funds that were allocated to the business entity were put to effective use.
In order to apply for project oriented loans, long-term loans and even for enhancing the working capital limits, business entities require a professionally prepared CMA report. The banks need to see these reports every year to be ensured about the effective management of the working capital.
Our team of experts can take up the task of analysing your business financials and collecting all the necessary documents for the CME report preparation of your business. Once all the information is gathered and analysed by our experts we will provide you with the drafted CME report for a final consultation before it is submitted to the bank. All you need to do is register now.
Frequently asked Questions
What is the purpose of CMA report?
The purpose of Credit monitoring Arrangement (CMA) report is to monitor the credit quality of a Bank and its respective borrowers. The CMA report reflects the past and projected financial performance of any borrower business entity. The CMA report highlights the financial ratios and and other parameters to help bankers and other financial analysts to ascertain the financial health of any business entity.
How should I get into the process of preparation of CMA report?
It is always advisable to get the CMA report prepared by the professionals or the team of professionals like MBAs and CAs to ensure better accuracy.
What is working capital?
Working capital is that capital which is needed to run your routine operations.
Does a good CMA report guarantee approval of CC?
Though it is quite likely that a good CMA report may result into a loan. However, approvals are dependent on various factors like CIBIL score, repayment capacity, your business outlook etc.