Working Capital FinanceRecommendations of Various Committees.

DAHEJA COMMITTEE
1. Method of Appraisal of Credit Applications: 2.Inventory Control: 3. Segregation of Credit: 4. Double finance: 5. Period of Trade Credit: 6. Commitment Charges: 7. Need for Bill Finance:

TANDON COMMITTEE
1. 2.

3.

Operating Plan: Production-based Financing: Partial Finance

Norms for Inventory and Receivables:

Industry Requirements in terns of months
Raw Material s
1

Stock in Process
or

Finished Goods
2

Receivables and Bills Purchased

-

Cotton and Synthetic Textiles

2 to 3

2 3 4 5 6 7 8 9

Man-made Fibres
Jute Textiles Rubber Products Fertilizers Pharmaceuticals Dyes and Dyestuffs Basic Industrial Chemicals Vegetable Hydro-generated Oils

1 2 2 to 3 2 2 2 1

Neg. 1 Neg.

1 1 to 1 1 to 1

1 1 2 1

1 1 2 1 -

Industry

Requirements in terns of months Raw Materials Stock in Process Finishe Receivables d and Bills Goods Purchased

10

Paper (a) Bamboo and Wood (b) Chemicals

2 to 6 2 to 2 2 2 1 -

11 12

Cement Engineering: Automobiles & Ancillaries Engineering Consumer Durables

13

14

Engineering ancillaries and Component Supplies

Engineering Machinery Manufacturers and other Capital Equipment Supplies

15

2.
3. 4. 5. 6. 7.

8.
9. 10. 11.

New Approach to Lending: Style of Credit. Differential Lending Rates. Bill Finance. Information System. Follow up and Supervision. Norms for Capital Structure. Norms for Trade. Need to Gear the Organisational Set-up of the Bank. Need for Inter-Bank Co-operation

Other Recommendations.
1.Management Efficiency:

2.Inter-firm Comparison.
3.Stock Valuation and Verification.

4.Classification of Borrowers.

13. Coverage of the Approach

CHORE COMMITTEE
1. 2. 3. 4. 5. 6. 7. 8. 9.

Credit System. Peak Level and Non-Peak Level Limits. Utilisation of Limits. Ad-hoc / Temporary Limits. Information System. Annual Review. Enhancement of Owners Contribution. Relaxation from Norms. Drawee Bill System.

Other Recommendations.
1.

The delay on the part of the banks in

sanctioning credit limits should be

reduced in cases where the

borrowers co-operate in giving the

necessary information about their

past performance as well as future

projections in time.

2. The bank should review the system of financing book debt through cash credit and insist on the conversion of such cash credit limits into bill limits. 3. As one of the reasons for the slow growth of the bill system was the stamp duty on usance bills and a difficulty in

obtaining the required denominations of

stamps, these questions are to be taken

up with the State Governments.

Precaution to be taken :
1. 2.

3.
4.

5. 6. 7. 8. 9. 10.

Integrity of the borrower Purpose of the loan Nature of the commodity Knowledge of different markets/ Proper care in valuation Proper storage Rented godown Title of the owner Insurance Handling of keys,inspection & supervision RBI directives

4. Credit control measures to be effective will have to be immediately communicated to the operational level and followed up. 5. The banks should continuously monitor the credit portfolio of the key branches. 6. The communication channels and systems and procedures within the banking system should be toned up so as to ensure that minimum time is taken for collection of instruments.

7. To encourage the bill system of financing and also to facilitate call money operations, an autonomous financial institution on the lines of Discount Houses may be set up.

8. Although the banks usually do not allow

their borrowers to deal with other banks,

some borrowers still maintain the current

accounts and arrange the bill facilities

with other banks.

MARATHE COMMITTEE

1. CAS is not to be looked upon as a mere

regulatory measure confined to the large

borrowers. 2. It would be desirable to evolve a system in which there is an incentive for the borrowers to comply with all the requirements of the Scheme and for the banks to improve the quality of credit appraisal.

3. The banks should be allowed discretion to deploy credit in CAS cases without the prior authorisation of the RBI, if the following requirements are fulfilled. a) Reasonableness of estimates / projections in regard to sales, chargeable current assets, current liabilities and

net working capital.

b) Classification of current assets and current liabilities is conformity with the guidelines issued by The Reserve Bank of India. c) Maintenance of minimum current ratio of 1.33:1.

d) Prompt submission of quarterly statements by the

borrowers. e) An undertaking by the borrower to submit his annual accounts promptly and regular annual review being carried out by the bank even where enhancement in

credit facility is not involved.

4. In respect of export-oriented manufacturing units,

which export not less than 75% of the turnover of

the goods manufactured by them.

5. Some of the present exemptions from prior

authorisation should be revised by the Reserve Bank of India as they appeared to be contrary to the

concept of permissible bank finance computed on

the basis of minimum contribution by the borrowers towards net working capital. 6. For the big borrowers having working capital limits in excess of Rs.5 crore, the bank should allow and

hoc limits for periods up to 3 months to the extent

of 25% of their additional limit sought for without any ceiling.

7. The Committee of Direction should immediately take

up the task of reviewing the existing inventory and

receivables norms and to prescribe the norms for more industries. 8. The Committee of Direction may examine certain suggestions of the Institute of Chartered Accountants of India about modifications in CAS forms and recommend changes in them. 9. The steps should be taken by the RBI to ensure prompt submission of data by the banks in Forms A & B, so as to make it an effective instrument of monitoring their

10. The data collected from Forms A & B contains a

great deal of important and relevant information. 11. A mechanism should be evolved by the RBI by which the aggrieved borrowers should have an opportunity to get redressal in appropriated cases. 12. RBI should prepare a booklet on CAS and revise and update it periodically. 13. The present CAS may be redesignated as Credit

Monitoring Scheme-CMS so as to reflect the

important changes in broad approach and emphasis.

NAYAK COMMITTEE (1991)

1.The bank should give priority to

village and tiny industries which

have successfully performed

and now need working capital

for making further progress.

2. The working capital loans to existing and new

SSI units should be 20% of the projected

Annual Sales Turnover upto Rs. One crore. 3. If any borrower needs more finance on the basis of inventory holdings or the operating cycle, bank should lend the higher amount.

4. Where more than 1000 and upto 2000 registered SSI units exist, the bank should open its specialised branches and the Branch Manager should have adequate discretionary powers. 5. The bank should adopt and implement single window scheme for redressal of SSI complaints. 6. State Finance Corporation should act as a principal financing agency in 40 out of 85 districts and the

remaining 45 districts and in the rest or the country, the

commercial banks should act as the principla financing agency.

S. L. KAPUR COMMITTEE.
The Committee made the following recommendations:

1. SIDBI should be accorded the status of NODAL/

co-ordinating agency for financing of small

industry on the lines of NABARD for agricultural finance. 2. SIDBI should launch venture funds initially for software and later on for other industries.

3. The limit for composite loans should be

enhanced to Rs. 5 lacs so that the entire requirement is met by single documentation. 4. The bank managers should have the powers to grant ad how facilities to the extent of 20% of the

limit.

5. Simplified application forms as suggested by

Committee should be used. 6. SSIs should get credit normally at Prime Lending Rate. 7. A small industrial unit which wishes to have an overseas presence should be allowed to invest up to US $ 20,000 based on a sample procedure. This

will increase export and upgrade technology.

KANNAN COMMITTEE

1. The banks should be given full operational freedom in assessing the working capital requirements of their borrowers, under the overall prudential norms and regulatory

guidelines of the Reserve Bank of India.

2. While framing internal guidelines for

working capital assessment by the bank, the following methods of assessment as suggested by the Committee may be kept in view.

3. Working capital facilities by way CC, PC, PCFC, BD, OD BP, FBP, Loan, L/C, Guarantees, etc., may be decided by each

bank taking into account its corporate loan

4. The borrowers with working capital requirements over Rs. 20 crore, may be granted the facility of 100% by way of loan. 5.The borrowers availing of 100% of working capital finance by way of loan component may be given an incentive by lower rate of interest than PLR. 6. The banks should be given discretion to decide the margin and inventory level as security.

7.Current Ratio and Debt Equity Ratio should be

decided by each bank as per its corporate loan policy.

8. Periodical statements of stock, book debts

coupled with physical verification of securities,

business sites of the borrowers, etc. should be continued as the basic monitoring tool. 9. Modality of periodical review should be decided by each bank independently.

10. Time schedule for disposal of loan application

is left to be framed by the bank it its policy. 11. As Cash Budget System has been recommended for the borrowers with working capital requirement over Rs. 5 crore, there is no

necessity for submitting separate cash projections.

12. Annual verification of current assets by the

borrowers auditors should be insisted. 13. The borrower should obtain the prior approval for investment of funds outside business. 14. In consortium lending, the legal aspects of documentation should be taken care of by individual banks in consultation with other financing

banks.

15. The member banks of consortium

should frame the ground rules based on

the consensus for smooth functioning of

consortium.
16. Quarterly Information system and

Credit Monitoring Arrangement may

cease to be a Regulatory requirement.

17. The guidelines in respect of Bill culture should be waived. 18. The restrictions on issuance of inland guarantee

and the extension of term loans for working capital

should be withdrawn. 19. Identification of current assets for the purpose of computation of Current Ratio should based on the guidelines of the Institute Chartered Accountants of

India.
20. Credit Rating Policy should be entirely left to the

discretion of the bank.

Thank You!!!