Grow More Ltd. is presently operating at 60% capacity level, producing 36,000 units of a product per annum. In view of favourable market conditions, it has been decided that from 1st January, 2016, the company would oper

CS Professional · Banking - Law and Practice · PYQS · June 2016
Grow More Ltd. is presently operating at 60% capacity level, producing 36,000 units of a product per annum. In view of favourable market conditions, it has been decided that from 1st January, 2016, the company would operate at 90% capacity. Following information is available: Existing cost-price structure per unit is : Raw material : ₹4 Wages : ₹2 Variable overheads : ₹1 Fixed overheads : ₹1 Profits : ₹1 It is expected that the cost of raw material, wages, overheads and sales per unit will remain unchanged in the year 2016. Raw material remain in stores for 2 months before being issued to production. These units remain in production process for one month. Finished goods remain in godown for 2 months. Credit allowed to debtors is 2 months while credit allowed by creditors is 3 months. Lag in wages and overheads payments is 1 month; it may be assumed that wages and overheads accrue evenly throughout the production cycle. Assume that the opening balance of raw material, work-in-progress and finished goods have already been brought to desired level. Consequently, goods purchased during the period will only be for the production requirement and not for increasing the level of stock. You are required to — (e) What precautions should have been taken by the bank, if the bank has granted working capital finance to the company against inventory/goods?

Answer & Explanation:

Answer 1(e) Precautions to be taken Advances against goods should be restricted to genuine traders and not to speculators. Loans must be given for short periods, since the quality and the value of the security is likely to diminish. The Banker must have a working knowledge and gather information of the different types of goods regarding their character, price movements, storage value etc. The Banker should confirm the state of goods. The goods should be insured against loss by theft or fire. The Banker should verify and confirm the title of the borrower to the goods by inspecting the invoice or cash memos. The Banker as a Pawnee is liable, if reasonable care is not taken of the goods pledged. He should therefore, take proper care for their storage and also take reasonable steps to protect them from damage and pilferage. The price of the goods must be accurately ascertained. Necessary margin should be kept. The banker must obtain absolute or constructive possession of the goods. In the case of hypothecated goods, the Bank should obtain from the borrower a written undertaking that the goods are not charged to any bank or creditor and will not be so charged as long as the borrower regarding the quantity and valuation of the goods, which should be physically verified by the banker.

Topics: Banking Law and Practice

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic