Vinu: Manu, I’ve seen something called “margin money against LC or BG” in a balance sheet. What does that mean?

Manu: Great question, Vinu. When a company avails a Letter of Credit (LC) or Bank Guarantee (BG) from a bank, the bank usually asks the company to deposit a certain amount as security. This deposit is called margin money.

Vinu: So the company gives this money to the bank as a kind of backup?

Manu: Exactly. It’s like a safety net for the bank. This money is held by the bank—either in a fixed deposit or a lien-marked account—and cannot be used by the company for business operations until the LC or BG is settled.

Vinu: Interesting. How is this shown in the company’s financial statements?

Manu: Since this amount is still technically the company’s asset, it appears on the asset side of the balance sheet. It’s typically shown under “Loans and Advances” or “Other Current Assets,” depending on how the company classifies it.

Vinu: Can you give me a simple example?

Manu: Sure. Let’s say a company avails an LC of Rs. 50 lakhs from a bank. The bank demands 10% margin, which is Rs. 5 lakhs. The company deposits this amount, and it’s kept aside by the bank. This Rs. 5 lakhs appears in the balance sheet as “Margin Money with Bank – LC/BG” under current assets.

Vinu: So it’s not an expense, right?

Manu: Correct, it’s not an expense. It’s a blocked asset. Once the obligation under the LC or BG is fulfilled, the margin money is released back to the company.

Vinu: And what if the LC or BG is valid for more than a year?

Manu: Then it would be shown as a non-current asset, but in most cases, LCs and BGs are for less than 12 months, so it remains a current asset.

Vinu: I see. And why is this margin money important for financial analysis?

Manu: Because it impacts liquidity. Even though it’s shown as an asset, the company can’t use it for operations. So while analyzing working capital, one must consider margin money as a blocked fund.

Vinu: Got it. So it’s important for both banks and companies to keep an eye on it.

Manu: Absolutely, Vinu. It’s a small detail, but it plays a big role in credit assessment and liquidity management.