Vinu: Manu, I’ve got one more doubt. How do banks assess working capital for commission agents in APMC markets, like those dealing in onions or potatoes?

Manu: Good question, Vinu. See, commission agents are very different from normal traders. They don’t usually buy and sell on their own account. They just act as middlemen between farmers and traders. Their income is only the commission, say 2% or 3% of the produce value.

Vinu: So, does that mean they don’t really need much working capital?

Manu: Not exactly. They don’t need funds for inventory because the goods are never theirs. But they do need short-term funds. Why? Because they have to pay the farmers quickly, while they collect money from the buyers after some days. That time gap is their working capital requirement.

Vinu: I see. But can’t we apply the turnover method, like 25% of their turnover?

Manu: That’s the tricky part. If you take turnover as the value of all goods handled, then 25% of that would show a huge limit requirement. But that’s misleading, because the commission agent doesn’t own that turnover, he only earns a small commission on it. So, we shouldn’t apply turnover method on the gross value of produce.

Vinu: Then what’s the right way?

Manu: The better way is the operating cycle or cash gap method. We calculate how much the agent has to pay to farmers before he collects from buyers, and for how many days. That cash gap multiplied by the daily settlement value gives the working capital requirement.

Vinu: Can you give me an example?

Manu:  Sure. Suppose a commission agent handles produce worth ₹50 lakhs in a month, and earns 2% commission, that’s ₹1 lakh income. He pays the farmers within 2–3 days, but gets money from buyers after 10–15 days. So, he needs to bridge about 12 days’ cash gap, which could be around ₹20–25 lakhs. That is his working capital need, not the full 25% of ₹50 lakhs turnover.

Vinu: Got it. So banks should always link the limit to the cash gap and check whether the commission income is enough to service the loan, right?

Manu: Exactly. That’s the prudent way. Don’t over-finance by taking gross turnover, just finance the actual working capital gap.

To learn more about Banking & Financial related topics
We invite you to join our Diamond Membership
Check - https://courses.carajaclasses.com/courses/Diamond-Membership-6305fad1e4b0cccc82d610be
For Special Discount on Diamond Membership 
Connect with us  - https://wa.me/919025100249?text=DLM