CMA data for bank loans: mistakes that delay sanction – a banker's view

Introduction

Every working capital proposal that reaches a bank's credit desk comes with a set of CMA data: the operating statement, the analysis of the balance sheet, the comparative statement of current assets and liabilities, the MPBF computation and the funds flow statement. For the credit officer, these forms are the starting point of the assessment. Before a single site visit or a single discussion with the promoter, the CMA tells the bank how the business has performed, how it is funded and what it expects to do next.

In my years in bank credit, underwriting working capital, business loans and loans against property, I saw a large number of CMAs prepared by practising Chartered Accountants. Many were excellent. But a recurring set of mistakes caused most of the queries, the back-and-forth emails and, ultimately, the delays in sanction. Interestingly, these mistakes were rarely about arithmetic. They were about classification, about understanding the client's business, and about projections that did not connect to the numbers already on record.

This article sets out those mistakes from the lender's side of the table. It covers how a banker tests projections, what we look at first in the audited financials, and why getting the classification right matters so much for the final limit. The aim is simple: to help fellow CAs send CMA data that a credit officer can work with on the first read.

1. Classification of the balance sheet

The most common mistake I saw was incorrect classification of the balance sheet into non-current liabilities, current liabilities, non-current assets and current assets.

This is not a formality. The bank's entire working capital assessment rests on the split between current and non-current items. A few typical examples:

• Current maturities of term loans shown entirely under long-term borrowings, when the instalments falling due within the next twelve months belong with current liabilities in the CMA format.
• Creditors for capital goods clubbed with trade creditors. They have nothing to do with the operating cycle, but they inflate current liabilities and distort the working capital gap.
• Advances to suppliers of machinery or long-term security deposits shown as current assets, which overstates liquidity.
• Old and doubtful receivables shown as fully current. Many banks treat debtors outstanding beyond six months as non-current, and a CMA that ignores this invites an immediate query.
• Unsecured loans from promoters placed wherever convenient, without stating whether they will remain in the business and be subordinated to the bank's loan. That decides whether the bank can treat them as quasi-equity.

Each of these changes the current ratio, the net working capital and the MPBF. When the credit officer reclassifies them, the numbers move, the recommendation changes, and the proposal goes back for clarification.

2. Profit and loss heads booked in the wrong place

The second mistake is punching profit and loss data into the wrong heads of the operating statement. The classic confusion is between manufacturing expenses and selling, general and administrative expenses.

Power and fuel, factory wages, stores and spares, and repairs to plant and machinery are part of the cost of production. Freight outward, commission on sales and advertising are selling expenses. Office salaries, rent and professional fees are administrative.

Why does this matter to the bank? Because the operating statement isn't just a presentation. Holding periods for work-in-progress and finished goods are measured against the cost of production and the cost of sales. If manufacturing costs are booked under selling expenses, the cost of production looks lower, the stock holding periods look longer than they really are, and the bank sees a business that appears to carry excess inventory. The gross margin also looks better than it is. A credit officer who knows the industry will spot this at once, and from that point the whole CMA is read with suspicion.

3. Projections that don't connect to the business model

The most critical gap, in my experience, is in the projections. Too often they are vague and illogical, because the person preparing them has not fully understood the balance sheet, cannot read what the financial numbers are saying, and has not linked the projections to the client's existing and proposed business model.

Typical signs:

• Sales jump sharply in the first projected year, with no capex, no new product and no new market to explain it.
• Margins improve every year without a reason.
• Receivable and inventory days fall dramatically in the projections, even though they have been rising in the audited years.
• The projected balance sheet doesn't tie back to the projected profit and loss account and the funds flow.

Projections are where a CMA either earns the banker's confidence or loses it.

How a banker checks whether projections are realistic

When I tested projections, I always started with the past trends: what the ratios have been saying about the business over the last few years.

1. Ratios over time. How have gross margin, EBITDA margin, inventory days, receivable days and creditor days moved? Projections should continue that story unless something has genuinely changed.
2. How expenses move with sales. Variable costs should move broadly in line with sales, and fixed costs should not shrink as sales grow. If expenses are projected flat while sales rise steeply, there must be a reason.
3. Capex plans. If the client is adding capacity, when will it be commissioned, and when will it start contributing to sales?
4. Sales against capacity. Projected sales must be linked to the installed capacity of the unit and a realistic utilisation level. Sales that need 120% capacity utilisation without any expansion will not pass.

The underlying rule is simple: there should not be a major upward or downward movement in ratios and calculations unless there is substantial proof for it. If there is a genuine reason, such as a new order book, a new plant or a change in product mix, say so in the covering note and support it with documents. That one paragraph can save a week of queries.

What a banker looks at first in the audited numbers

Before trusting the CMA, I looked at whether the past data was aligned with the business model. For example, a sudden jump or fall in EBITDA, with nothing in the business to explain it, often signals data punched into the wrong head rather than a real change in performance.

The first things I reviewed in the past years' numbers were:

• Sales, EBITDA and PAT trends, and whether they move together sensibly.
• Gearing and leverage: the debt-equity position and TOL/TNW.
• MPBF and drawing power as calculated from past data, and whether the existing limits were adequate or excessive.
• The working capital cycle: how many days of inventory and receivables the business actually carries, and how much credit it gets from suppliers.

If these past numbers are clean and consistent, the projections get a fair reading. If the past data itself looks wrongly classified, the credit officer has to rebuild it before even reaching the projections.

Why classification flows straight into the bank's assessment

Classification errors are not cosmetic, because the bank's assessment tools are built on the CMA:

• MPBF under the Tandon Committee methods is calculated from total current assets and other current liabilities. Misclassify either and the permissible finance changes.
• The turnover method for MSE borrowers starts from projected annual turnover. If the sales projection is unrealistic, the limit is unrealistic too.
• Drawing power depends on paid stock and eligible receivables, so the treatment of creditors and aged debtors matters.
• DSCR, for term loans, depends on projected cash accruals. Inflated margins mean an inflated DSCR that the bank will not accept.

A CMA that gets classification and projections right lets the credit officer move straight to the real questions about the business, instead of spending days correcting the data.

A short checklist before sending CMA data to the bank

• Understand the client's business model, process and operating cycle before opening the CMA template.
• Classify every balance sheet item by its nature: current or non-current, operating or capital.
• Place each expense in the correct head of the operating statement.
• Tie projected sales to installed capacity, utilisation and capex timing.
• Keep ratios in line with past trends, or explain every major change with evidence.
• Check that the projected balance sheet, profit and loss account and funds flow agree with each other.
• Attach a short covering note explaining the assumptions.

Conclusion

If I could ask one thing of every CA preparing CMA data for a bank, it would be this: learn about the client's business model first, before you start preparing the CMA, and apply common sense and logical reasoning while classifying the data.

CMA data is not a form-filling exercise. It is the financial story of the borrower, told in the format the bank uses to make its decision. When that story is consistent, with past numbers classified correctly, expenses in the right heads and projections connected to the business, the credit officer can read it with confidence, and the proposal moves faster through appraisal and sanction.

For the client, that means quicker access to funds. For the CA, it builds a reputation with bankers, which is one of the most valuable things a practising professional can have. And for the banking system, it means credit decisions based on numbers that genuinely reflect the business.

References

1. Reserve Bank of India, Report of the Study Group to Frame Guidelines for Follow-up of Bank Credit (Tandon Committee), 1975.
2. Reserve Bank of India, Master Direction – Lending to Micro, Small & Medium Enterprises (MSME) Sector (assessment of working capital limits on the turnover method).
3. Schedule III to the Companies Act, 2013 (classification of current and non-current assets and liabilities).
4. Standard CMA data formats used by banks: Operating Statement, Analysis of Balance Sheet, Comparative Statement of Current Assets and Current Liabilities, Computation of MPBF, and Funds Flow Statement.

Views expressed are personal and based on the author's experience in bank credit.