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Financial Management - WORKING CAPITAL MANAGEMENT

Kannan committee - Working Capital And Banking Policy

   Posted On :  22.06.2018 12:38 am

In view of the ongoing liberalisation in the financial sector, the Indian Banks Association (IBA) constituted a committee headed by shri. K.Kannan, chairmanship and managing director of bank of Baroda to examine all the aspects of working capital finance including assessment of maximum permissible bank finance (MPBF).

Kannan committee

In view of the ongoing liberalisation in the financial sector, the Indian Banks Association (IBA) constituted a committee headed by shri. K.Kannan, chairmanship and managing director of bank of Baroda to examine all the aspects of working capital finance including assessment of maximum permissible bank finance (MPBF). The committee submitted its report on 25th February 1997. It recommended that the arithmetical rigidities imposed by Tandon committee (and reinforced by chore committee) in the form of MPBF computation so far in practice, should be scrapped. The committee further recommended that freedom to each bank should be given in regard to evolving its own system of working capital finance for a faster credit delivery so as to serve various borrowers more effectively. It also suggested that line of credit system (LCS), as prevalent in many advanced countries, should replace the existing system of assessment/fixation of sub-limits within total working capital requirements. The committee proposed to shift emphasis from the liquidity level lending (security based lending) to the cash deficit lending called desirable bank finance (DBF). Some of the recommendations of the committee have been already been accepted by the Reserve Bank of India with suitable modifications.

Recommendations


The important measures adopted by RBI in this respect are given below:

1. Assessment of working capital finance based on the concept of MPBF, as recommended by Tandon committee, has been withdrawn. The bank have been given full freedom to evolve an appropriate system for assessing working capital needs of the borrowers within the guidelines and norms already prescribed by reserve bank of India.

2. The turnover method may continue to be used as a tool to assess the requirement of small borrowers. For small scale and tiny industries, this method of assessment has been extended upto total credit limits of Rs 2 crore as against existing limit of 1 crore.
 
3. Banks may now adopt cash budgeting system for assessing the working capital finance in respect of large borrowers.

4. The banks have also been allowed to retain the present method of MPBF with necessary modification or any other system as they deem fit.

5. Banks should lay down transparent policy and guidelines for credit dispensation in respect of each broad category of economic activity.

6. The RBI’s instrument relating to directed credit, quantitative limits on lending and prohibitions of credit shall continue to be in force. The present reporting system to RBI under the Credit Monitoring Arrangement (CMA) shall also continue in force.
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