2. Course Outcomes
Explore the recommendations of various
committees for regulations of working capital
finance in India
3. • Bank credit has been an inevitable and
important source of short term financing/WC
Financing for the business firms.
• Easily accessible source
• Resulted in distortion of allocation of bank
resources in favour of industry
4. INTRODUCTION
Bank regulation is a form
of government regulation which subjects banks to
certain requirements, restrictions and guidelines,
designed to create market transparency between
banking institutions and the individuals
and corporations.
RBI has appointed various study groups to suggest
ways and means to make the bank credit as effective
instrument of industrialization as well as to ensure
equitable distribution of Bank resources.
5. Regulation of Bank Finance
• Dehejia Committee (1968)
• Tandon Committee (1974)
• Chore Committee (1979)
• Marathe Committee
• Kannan Commitee
In the deregulated economic environment in India
recently, banks have considerably relaxed their
criteria of lending. In fact, each bank can develop its
own criteria for the working capital finance.
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6. Dehejia Committee
• A study group, under the Chairmanship of V.T
Dehejia, was constituted in October, 1968 by
the National Credit Council (NCC) to examine
how far the credit requirements of trade and
industry were inflated and at the same time to
suggest some measures on the basis of its
findings.
7. Dehejia Committee–Existing
Deficiencies
• It is the borrower who decides how much he would borrow; the banker
does not decide how much he would lend and is, therefore not in a
position to do credit planning.
• The bank credit is treated as first source of finance and not as
supplementary to other source of finance.
• The amount of credit extended is based on the amount of security
available, not on the level of operations of borrower.
• Security does not by itself ensure safety of bank funds since all bad and
sticky advances are secured advances; safety essentially lies in the
efficient follow-up of the industrial operations of the borrower.
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8. The major findings of the Dehejia Committee
were:
• Inflation of bank credit
• Improper utilization of short-term credit
• Granting credit without proper securities and
projected financial statements
• Prevailing Lending System
9. Tandon Commitee
In 1974, a study group under the
chairmanship of Mr. P. L. Tandon was constituted
for framing guidelines for commercial banks for
follow-up & supervision of bank credit for
ensuring proper end-use of funds. The group
submitted its report in August 1975, which came
to be popularly known as Tandon Committee
Report on Working Capital.
10. 1. Recommendations related to norms for
inventory and receivables, the approach to
lending, style of credit, follow-ups and
information system
2. Assessment of need based credit of the
borrower on a rational basis.
3. Banks would not finance one hundred percent
of borrowers working capital requirements.
4. Working capital finance would be available to
the borrowers on the basis of industry-wise
norms.
11. Recommendations
• Inventory and Receivable Norms:
Bank financing only for normal inventory .
Financing receivables as per the industry standards.
• Lending Norms or Maximum permissible Bank Finance
• Method1: MPBF= 0.75 (CA-CL)
• Method2: MPBF= 0.75 (CA)-CL
• Method3: MPBF= 0.75 (CA-Core CA) - CL
12. Question
The following are the details of current assets and current liabilities of ABC ltd. Find out maximum
permissible bank finance as per three methods suggested by Tandon Committee. Total Core
current assets are 300 lacs
Current
Assets
In lac Current
liabilities
In lac
Raw material 200 Creditors 250
Work in
progress
100 Other Current
liabilities
50
Finished
Goods
200 Bank
Borrowing
300
Receivables 300 Total 600
Other current
assets
50
Total 850
14. Recommendations
• Style of credit: The total MPBF should be bifurcated into
fixed and fluctuating portion. Fixed refers to loan component
and represents min. level of borrowing throughout the year.
Fluctuating is demand cash credit.
• Information and reporting system: There should
be regular flow of information from borrower to bank.
15. Chore Commitee
The Reserve Bank of India in March, 1979
appointed another committee under the
chairmanship of Shri K.B. Chore
• To review the working of cash credit system in
recent years with particular reference to the
gap between sanctioned limits and the extent
of their utilization and also to suggest
alternative type of credit facilities which
should ensure greater credit discipline.
16. The important recommendations of
of the Committee were as follows:
System of credit: The advantage of existing system, combining three types of
lending viz. cash credit, loan and bills should be retained.
Bifurcation of credit limit: May not serve the purpose of better credit
planning by narrowing the gap between sanctioned limits and extent of
utilization thereof
Reduction in overdependence of bank finance: for medium and large
borrowers.
Increase in owner contribution: Second method of lending recommended by
Tandon Committee for borrowers
Separation of peak level and non peak level requirements
Temporary accommodation through loans: if any ad hoc or temporary
accommodation is required in excess of sanctioned limit.
Relaxation of norms: Requests for relaxation of inventory norms etc. may be
done in exceptional circumstances.
17. Marathe Committee
• The Reserve Bank of India, in 1982, appointed a committee
under the chairmanship of Marathe to review the working of
Credit Authorisation Scheme (CAS) and suggest measures for
giving meaningful directions to the credit management
function of the Reserve Bank. The recommendations of the
committee have been accepted by the Reserve Bank of India
with minor modifications.
• Under CAS, all the banks were required to obtain the prior
authorization of RBI for sanctioning credit limits of 6 crore or
more
18. Recommendations of the
Marathee Committee
• Incentive to borrowers meeting CAS requirements
• Commercial banks should be given discretion to deploy credit in CAS cases
(without RBI approval)
• CAS was replaced with CMA ( Credit monitory arrangement)
(Only loan above 5 cr will be scrutinize by banks)
19. Kannan Committee
In view of the ongoing liberalization in the
financial sector, the Indian Banks Association
(IBA) constituted a committee headed by Shri
K. Kannan, Chairman and Managing Director
of Bank of Baroda to examine all the aspects
of working capital finance including
assessment of maximum permissible bank
finance (MPBF). The Committee submitted its
report on 25th February, 1997.
20. It recommended that the arithmetical rigidities
imposed by Tandon Committee (and reinforced by
Chore Committee) in the form of MPBF
computation so far been in practice, should be
scrapped. The Committee further recommended
that freedom to each bank be given in regard to
evolving its own system of working capital finance
for a faster credit delivery so as to serve various
borrowers more effectively
21. Key recommendations
• Bank will decide working capital requirement
• Cash credit should be replaced by working
capital loan
• Borrowers can issue short term debentures
• Margin and stock holding level will be decided
by banks
• Periodic statements of stocks, debtors for
CMA
24. MCQ
Permanent working capital
• varies with seasonal needs.
• includes fixed assets.
• is the amount of current assets required to meet
a firm's long-term minimum needs..
• includes accounts payable.
25. MCQ
Which of the following illustrates the use of a
hedging (or matching) approach to financing?
• Short-term assets financed with long-term
liabilities.
• Permanent working capital financed with long-
term liabilities..
• Short-term assets financed with equity.
• All assets financed with a 50 percent equity, 50
percent long-term debt mixture.
26. MCQ
Deciding the appropriate level of current assets
for the firm, management is confronted with
• a trade-off between profitability and risk..
• a trade-off between liquidity and
marketability.
• a trade-off between equity and debt.
• a trade-off between short-term versus long-
term borrowing.
28. MCQ
• If credit terms of "1/10, net 35" are offered, the
approximate cost (using 365 days) of not taking the
discount and paying at the end of the credit period
would be __________.
•
• 10.0%
• 10.3%
• 14.7%
• 35.0%
29. MCQ
• Which of the following is not a form of short-
term, spontaneous credit?
• Accrued wages.
• Trade credit.
• Commercial paper..
• Accrued taxes.
30. MCQ
• The trade terms "1/10, net 45" indicate that
__________.
• a 1% discount is permitted if payment is made within
10 days
• a 10% discount is permitted if payment is made within
45 days
• a 1% discount is permitted if payment is made within
45 days
• a 45% discount is permitted if payment is made within
10 days
