banking
overview
| news
| basics
|
lendings
|advanced banking
| products
| IT
in banking
articles
& policies |
banking software|
deposits|
bank directory|
internet banking|
bank results|
banking & you
Banking > Lendings
> Domestic Lendings > Committees
> Tandon Committee
The Tandon Committee Report
Basically, the Group identified the function of bank finance as
supplementing the borrower's resources to carry on acceptable level of
current assets.
The implications of this are two-fold;
-
the level of current assets must be reasonable and based on certain norms
-
a part of the funds required for carrying current assets must be found from long term funds, comprising owned funds and term borrowings including other non-current liabilities.
The major recommendations made by the Group, cover the undernoted aspects of bank lending:
-
A corporate needs funds for its operations to maintain necessary quantities of inventory and receivables. It may also make advance payment for goods and services. All these constitute its need for funds to carry current assets.
-
The Study Group expressed the opinion that if bank credit is to be viewed as a tool of resource allocation in the economy, the need to define reasonable levels of inventories and receivable in each industry is paramount. Accordingly, the Group suggested inventory norms for 15 major industries, taking into account, interalia, company finance studies made by the Reserve Bank, process period in different industries, discussion with the industry experts and feed back received on the Interim Report of the Group.
-
An important point that the Group made was that the norms stipulated represent only the maximum level of holding inventory and receivables and are not entitlements. If a corporate has managed with lesser inventories/receivables in the past, it should continue to do so. The norms were made applicable to all industrial borrowers, including small-scale industries with aggregate limits from the banking system in excess of Rs.10 lacs.
-
The Committee, however, conceded that the norms could be absolute or rigid. Hence it recommended that deviations from norms may be permitted under certain circumstances e.g. (i) bunched receipt of raw materials including imports, (ii) power cuts, strikes and other unavoidable interruptions in the process of production (iii) transport delays and other bottlenecks (iv) accumulation of finished goods due to non-availability of shipping space for exports or other disruptions in sales but not under circumstances where a sales stimulation is needed through reduction in prices, (v) build up of stocks of finished goods such as machinery, due to failure on the part of purchasers for whom these were specifically manufactured, to take delivery and (vi) need to cover full or substantial requirement of raw materials for specific export contracts of short duration.
-
First Method of Lending:
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. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs.
-
Second Method of Lending:
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 credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method.
-
Third Method of Lending: 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.
(This method was not accepted for implementation and hence is of only academic interest).
a)
Norms for inventory & receivables
b) Approach to lending
c) Follow-up, supervision and control
In
the context of its approach to the role of Bank Finance, the Committee
suggested three alternatives (more popularly known as methods of
lending) for working out the maximum permissible level of bank
borrowings:-
The Group also recommended that the cash credit limits of the borrowers should be bifurcated into two parts viz. a minimum level which the borrower is expected to have throughout the year and a second part to take care of the fluctuations in the requirements. This second part should be periodically reviewed to make adjustments in the requirements of the borrowers in tune with increase and decrease in the level of activity. The recommendation though very significant in movement towards third method of lending was found to be too cumbersome/restrictive and was not implemented by any of the Banks.
The recommendations of the Committee were made applicable to borrowers with fund based working capital requirements in excess of Rs.10 lacs.
about us | contact us |
advertise
copyright banknetindia.com. All rights reserved worldwide.