Working Capital Finance-Working Capital Finance-Recommendations of Various Recommendations of Various

Committees.Committees.

DAHEJA COMMITTEEDAHEJA 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 COMMITTEETANDON COMMITTEE

1. Operating Plan:

2. Production-based Financing:

3. Partial Finance

Norms for Inventory and ReceivablesNorms for Inventory and Receivables::

Industry Requirements in terns of months

Raw Materials

Stock in Process

Finished Goods

Receivables and Bills Purchased

1 Cotton and Synthetic Textiles

2 to 3 ½ or ¾ 2 ¼ - -

2 Man-made Fibres 1 ½ ½ 1 ¾ - -

3 Jute Textiles 2 ½ ¼ 1 to 1 ½ 1 ½ -

4 Rubber Products 2 ¼ - 1 ¼ -

5 Fertilizers ¾ to 3 Neg. 1 to 1 ½ - 1 ¼

6 Pharmaceuticals 2 ¾ ½ - 2 1 ¼

7 Dyes and Dyestuffs 2 ¼ 1 - ¾ 2 ¼

8 Basic Industrial Chemicals 2 ¾ ¼ - 1 1 ¾

9 Vegetable Hydro-generated Oils

1 Neg. ¾ ¾ -

Industry Requirements in terns of months

Raw Materials

Stock in Process

Finished Goods

Receivables and Bills Purchased

10 Paper

(a) Bamboo and Wood 2 to 6 - - - -

(b) Chemicals 2 ¼ - - - -

11 Cement ¾ to 2 ¼ ¼ - - 1

12 Engineering: Automobiles & Ancillaries

2 ¼ ¾ - 2 ½ -

13 Engineering Consumer Durables

2 ¾ - - 2 ½

14 Engineering ancillaries and Component Supplies

2 ¾ - - 2 ½

15 Engineering Machinery Manufacturers and other Capital Equipment Supplies

2 ¾ 1 ¼ - - 3 ½

2. New Approach to Lending:3. Style of Credit.4. Differential Lending Rates.5. Bill Finance.6. Information System.7. Follow up and Supervision.8. Norms for Capital Structure.9. Norms for Trade.10. Need to Gear the Organisational

Set-up of the Bank.11. Need for Inter-Bank Co-operation.

Other RecommendationsOther Recommendations. .

1.Management Efficiency:

2.Inter-firm Comparison.

3.Stock Valuation and Verification.

4.Classification of Borrowers.

13. Coverage of the Approach

CHORE COMMITTEECHORE COMMITTEE

1. Credit System.2. Peak Level and Non-Peak Level Limits.3. Utilisation of Limits.4. Ad-hoc / Temporary Limits.5. Information System.6. Annual Review.7. Enhancement of Owner’s Contribution.8. Relaxation from Norms.9. Drawee Bill System.

Other Recommendations. 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 takenPrecaution to be taken : :1. Integrity of the borrower2. Purpose of the loan3. Nature of the commodity4. Knowledge of different markets/ Proper

care in valuation 5. Proper storage6. Rented godown7. Title of the owner8. Insurance9. Handling of keys,inspection & supervision10. 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

advance portfolios.

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

policy.

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

borrower’s 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!!!Thank You!!!