regulation of bank finance in india under rbi

8/9/2019 Regulation of Bank Finance in india under RBI

1/16


2/16

Recommendation of various

committees in Banking inindia

}Dehejia Committee (1968)

}Tandon Committee (1974)

}Chore Committee (1979)

}

Nayak Committee

}Vaz Committee


3/16

Dehejia CommitteeExisting

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.


4/16

The Tandon CommitteeRecommendations

} Norms for holding inventory and receivables

}

Production Based Financing} Style of credit

} Maximum PermiSSIble Bank Finance

1. First Method

2. Second Method

3. Third Method

} Follow up and supervision of credit


5/16

Norms for holding inventory and

receivables} The contribution of the committee, headed by Prakash Tandon, that stands out

relates to :The framing of norms for INVENTORY and receivables for 15 major

industries.

} Determining the amount of permiSSIble bank finance.

} The committee suggested norms, i.e., ceilings for inventory and receivables, which

could be considered for bank finance. The 15 industries included cotton and synthetic

textiles, paper, cement, pharmaceuticals and engineering. Thus, for instance, the

norms proposed for the pharmaceutical industry were :

Raw materials : 2.75 months' consumption

Stocks in process : 1/2 month's cost of production

Finished goods : 2 months' cost of sales

Receivables : 1.25 months' sales


6/16

First Method of Lending :

0.75 (CA CL)

} Banks can work out the working capital gap, i.e. total current assets less

current liabilities other than bank borrowings (called Maximum permissible

Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap;

the balance to come out of long-term funds, i.e., owned funds and term

borrowings.

} The balance 25% to be brought by the borrower as surplus of long term

funds over the long term outlay.

} This approach was considered suitable only for very small borrowers i.e.

where the requirements of credit were less than Rs.10 lacs


7/16

Second Method of Lending:

0.75 CA CL} Under this method, it was thought that the borrower should provide for

a minimum of 25% of total current assets out of long-term funds i.e.,

owned funds plus term borrowings. A certain level of credit for

purchases and other current liabilities will be available to fund the build

up of current assets and the bank will provide the balance (MPBF).

Consequently, total current liabilities inclusive of bank borrowings

could not exceed 75% of current assets. RBI stipulated that the

working capital needs of all borrowers enjoying fund based creditfacilities of more than Rs. 10 lacs should be appraised (calculated)

under this method.


8/16

Third Method of Lending:

0.75 (CA CCA) CL} Under this method, the borrower's contribution from long term

funds will be to the extent of the entire CORE CURRENT

ASSETS, which has been defined by the Study Group as

representing the absolute minimum level of raw materials,

process stock, finished goods and stores which are in the

pipeline to ensure continuity of production and a minimum of

25% of the balance current assets should be financed out of

the long term funds plus term borrowings.


9/16

OTHER MAJORRECOMMENDATIONS

} No slip back in current ratio, normally.

} ClaSSIfication guidelines for Current assets and current

liabilities.

} Identification of excess borrowing.

} Information system, which was modified by Chore Committee

Recommendations.

} Bifurcation of limits into loan and demand component


10/16

The Chore Committee

Recommendations} In assessing credit requirements, banks should appraise and fix separate

limits for the normal level and for peak level needs.

} Simplification of the Quarterly Information System (QIS) and penalty for

delay in submitting the reports.

} Establishment of a discount house in India.

} Use of different types of advances, cash credit, loan & bills -all type to

continue.


11/16

} Bifurcation of cash credit limit into demand loan and fluctuating

cash credit portions not favoured because :

} For seasonal industries the differences is to much , for sales person period the

account may be in credit in which case the loan portion should be nil.

} For non seasonal industries difference is to much narrow to be help to the

banker

} All borrowers except sick units with working capital requirement

of Rs 10 lakh and above to be placed under 2nd method of

lending recommended by Tandon committee.

} Bank to take up financing a portion of raw material by way of

drawee bill.


12/16

Nayak committee Recommendations

} To give preference to village industries, tiny industries, & other small scale

industries in order while meeting the credit requirement of small scale sector.

} Prepration of annual budget in respect of working capital requirement of SSI

sector on bottom up Basis.

} Sick SSI industry redifined.

} Banks are advised to have single financing approach for meeting both term loan

and working capital requirement of SSI industry. The single window scheme od

sidbi enables commercial banks to provide term loans and working capital to SSI

units to have project outlay upto 20 lakh and working capital requirementupto 10

lakh.

} Banks to set up grievance cell to enable SSI borrowers to approach in case

difficulties.


13/16


14/16

} Branch should not insist on deposit mobilisation of stipulated

amounts as preconditioned to the sanction of credit. However,

they can enlist the cooperation of these customers for deposit

mobilisation.

} Branch level officials should have right aptitude< skills and

orientations with respect to financing SSI sector.


15/16

Vaz committee recommendation

} Extension of nayak committee to all business enterprises,

which also has been accepted and implemented. The

borrower has to bring in margin of 5% of projected turn over

from a long term source as his contribution and 20% would be

provided by financing bank, thus the working capital limits

have no relation to current assets which is a total departure

from tandon and chore committee.


16/16

} In arriving 25% of projected turnover as working capital

requirement , the committee has assumed an average 4 working

capital cycles in a year. This method of determining the working

capital has understandably made the small entrepreneur happy

as he is assured of working capital facility from his bankersbearing the direct relation ship to his expected turnover.

regulation of bank finance in india under rbi

Documents