2. LEARNING OBJECTIVES
Explain the benefits and costs of trade credit
Focus on the norms used by banks in financing a
firm’s working capital need
Emphasize the importance of commercial paper as
a method of working capital finance in India
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3. Regulation of Bank Finance
Dehejia Committee (1968)
Tandon Committee (1974)
Chore Committee (1979)
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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4. 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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6. The Tandon Committee-
Recommendations
1. Inventory and receivable norms
2. Lending norms
3. Maximum Permissible Bank Finance (MPBF)
First method
Second method
Third method
4. Style of credit
5. Information system
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7. The Chore Committee-
Recommendations
1. Reduced Dependence on Bank Credit.
2. Credit limit to be separated into “peak level”
and “normal non-peak level” limits.
3. Existing Lending System to Continue.
4. Information System.
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