What is Credit Monitoring Arrangement?


Credit monitoring may seem to be a very complicated subject to most of us. The process of obtaining funding for a business can be complex and requires careful consideration of various sources, including internal reserves or external options such as equity or debt financing. Debt financing through loans or credit can provide businesses with quick access to necessary funds but requires comprehensive financial monitoring by lenders to evaluate the borrower’s ability and willingness to repay the loan.

Credit monitoring arrangement is essential for bankers and lenders to make informed credit decisions. A Credit Monitoring Arrangement (CMA) is an analytical tool used by bankers and financial analysts to evaluate a loan applicant’s current and projected financial statements. It systematically analyzes the borrower’s financial operations and management aspects, including their ability to manage funds efficiently, the application of funds, and business probabilities.

The CMA report is a simplified credit decision process for financial institutions, enabling them to sanction credit after evaluating the borrower’s self-assessed report. It replaced the cumbersome and inefficient Credit Authorization scheme, where authorization from RBI was mandatory for credit exceeding a specified limit. Banks evaluate the eligibility of borrowers for funding based on CMA data required for short-term or long-term loans, project loans, and working capital requirements. RBI guidelines require banks to ask for CMA data and submit the same to RBI if the term loan amount exceeds INR 2 crore or working capital finance exceeds INR 5 crore.

A CMA report typically consists of seven components:

Existing and proposed limits – Provides information on the borrower’s current and proposed credit limits, credit usage, and credit history.

Operating statement – Presents the borrower’s profit and loss statement, including current sales, direct and indirect expenses, profitability, and sales projections.

Balance sheet analysis – Analyzes the borrower’s balance sheet, including current and non-current assets and liabilities, cash position, and net worth.

Changes in working capital – Compares the movement of current assets and liabilities to determine the borrower’s ability to meet daily working capital requirements and future projected cycle growth.

Calculation of MPBF – Calculates the Maximum Permissible Bank Finance, determining the borrower’s capacity to borrow money.

Fund flow statement – Evaluates the borrower’s available funds and proper utilization of funds.

Ratio analysis – Analyzes operational and financial ratios, such as current ratio, net profit ratio, debt-equity ratio, and asset turnover ratios, to determine the entity’s growth, performance, and loan repayment capacity.

Maintaining accurate and transparent financial records is crucial for any borrower seeking credit. A Credit Monitoring Arrangement (CMA) report is a vital tool for bankers to evaluate the financial health and creditworthiness of the borrower. To ensure a successful CMA report, the borrower needs to adhere to the guidelines provided by the bank, including submitting audited financials, justifying all assumptions and estimates, and providing realistic projections. Additionally, fluctuations in performance should be justifiable, and all relevant data about fixed assets, depreciation, and loan repayment history should be annexed and linked to the CMA Data. By following these guidelines, borrowers can increase their chances of obtaining credit and maintaining a healthy financial standing with their creditors.

A CMA record becomes very important for any business. Professionals with certifications such as CMA (Certified Management Accountant) and CPA (Certified Public Accountant) are equipped with the necessary skills and knowledge to provide comprehensive credit monitoring and analysis, ensuring that businesses have the financial information they need to make informed decisions and maintain healthy credit standing. Finspire Academy is dedicated to guiding future professionals to achieve the much-in-demand certification with a well-planned study structure. To know more about us, visit us at https://finspireacademy.com/.  

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