BY: -ABHILASH VISWANATHAN

Credit Monitoring Arrangement

Regulation of bank finance

Implemented by RBI in mid 1960s in order to Measure of discipline among industrial borrowers. Redirect credit to the priority sector of the economy

RBI has been issuing guidelines and directives to the banking sector toward this end.

TANDON COMMITTEE

Committee was under the chairmanship of Mr. P.L. Tandon

Committee was form in year 1974Committee submitted its report in August 1975

Tandon committee

The terms of reference of the Committee were:

1. To suggest guidelines for commercial banks to follow up and supervise credit from the point of view of ensuring proper end use of funds and keeping a watch on the safety of advances;

2. To suggest the type of operational data and otherInformation that may be obtained by banks periodically from the borrowers and by the Reserve Bank of India from the leading banks;

3. To make suggestions for prescribing inventory norms for the different industries, both in the private and public sectors and indicate the broad criteria for deviating from these norms ;

Tandon committee

4. To make recommendations regarding resources for financing the minimum working capital requirements ;

5. To suggest criteria regarding satisfactory’ capital structure and sound financial basis in relation to borrowings ;

6. To make recommendations as to whether the existing pattern of financing working capital requirements by cash credit/overdraft system etc., requires to be modified, if so, to suggest suitable modifications

Tandon committee

Recommendations

Norms of current asset.

Maximum permissible bank finance.

Emphasis on loan systems.

Periodic information and reporting system

Tandon committee Tandon Committee has recommended the following methods:

Method I Borrowers to bring 25 % of the net working capital (Current Assets –

Current Liabilities)

Method II Borrowers to bring 25% of the Current Assets

Method III Borrowers to bring 100% of hard core assets + 25% of other current

assets.

Under Method I the promoter has to bring minimum margin whereas the margin to be brought in under

Method III is maximum Method II is also known as Maximum Permissible Bank Finance

(MPBF)

Chore committee

Committee was formed under the leadership of sh. K.B. Chore

This committee was appointed in 1979Committee was formed to solve the problem

of cash credit system

Chore Committee

This committee was formed by RBI to review the cash credit system of banks.

The important recommendations of the Committee are as follows:

1. The banks should obtain quarterly statements in the prescribed format from all borrowers having working capital credit limits of Rs. 50 lacs and above.

2. The banks should undertake a periodical review of limits of Rs. 10 lacs and above.

Chore Committee

3. The banks should not separate cash credit accounts into demand loan and cash credit components.

5. Banks should discourage sanction of temporary limits by charging additional one per cent interest over the normal rate on these limits.

6. The banks should fix separate credit limits for peak level and non-peak level, wherever possible.

7. Banks should take steps to convert cash credit limits into bill limits for financing sales.

Nayak Commitee

The assessment of credit limits for all borrowers enjoying aggregate fund based working capital limits of less than Rs. 1 crore from the banking system, is to be done both as per the traditional method and on the turnover basis and the higher of the two limits is to be fixed as the permissible bank finance.

Where the working capital cycle is shorter than 3 months, the working capital required would be less than 25% of the projected turnover. In such case it is not required to still give PBF at 20% of the turnover.

If the liquid surplus available with the borrower is higher than 5% of the turnover, as stipulated under the recommendations, the limits can be fixed at a lower level than 20% of the turnover keeping in view that the genuine requirements of the unit are met adequately. If a unit has been managing its working capital efficiently, the limits can be set at a lower level.

The units having longer operating cycle for working capital than three months, should be provided proper limits to operate at a viable level taking into account the recommendation that 20% of the turnover is the minimum stipulation and not the maximum.

In case of seasonal industries the distinction between the peak and non-peak level of turnover has to be considered instead of annual turnover.

The creditors and other current liabilities are among the sources of funds required for building up the current assets and will be treated in the same manner as in the traditional method.

The borrower’s contribution (margin) will be 5% of the turnover in all cases except where the working capital cycle is not taken at three months. The margin will proportionately increase with the increase in the period of operating cycle.

Care is to be taken that the proportion of margin to bank finance should be maintained in the ratio of 1:4 or even higher in case of availability of higher liquid surplus.

If the borrower is not able to bring in minimum contribution of 5%, as a general rule, no dilution should be allowed except in special circumstance like sick units or when permitted being desirable due to peculiar circumstances in the sanction.

The recommendations made by Tandon Committee and reinforced by Chore Committee were implemented in all Banks and Bank Credit became much more organised.

With recent liberalisation of economy and reforms in the financial sector, RBI has given the freedom to the Banks to work out their own norms for inventory and the earlier norms are now to be taken as guidelines and not a mandate.

beginning with the slack season credit policy of 1997-98, RBI has also given full freedom to all the Banks to devise their own method of assessing the short term credit requirements of their clients and grant lines of credit accordingly.

Most banks, however, continue to be guided by the principles enunciated in Tandon Committee report.

Thank you