Financial Management - WORKING CAPITAL MANAGEMENT
Chakravarthy Committee - Working Capital And Banking Policy
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The Reserve Bank of India appointed another committee under the chairmanship of Mr. Chakravarthy to review the working capital of the monetary system of India.
Chakravarthy
Committee
The Reserve Bank of India appointed another committee under the chairmanship of Mr. Chakravarthy to review the working capital of the monetary system of India. The committee submitted its report in April 1985. The committee made two major recommendations in regard to the working capital finance
The committee has suggested that the government must insist all public sectors units, large private sector units and government departments must include penal interest payment clause in their contracts for payment delayed beyond a specified period. The penal interest may be fixed at 2 percent higher than the minimum lending rate of the supplier’s bank.
The committee further suggested that the total credit limit to be sanctioned to a borrower should be considered under the three different heads: (1) Cash credit I to include supplies to government, (2) Cash credit II to cover special circumstances and (3) Normal working capital limit to cover the balance credit facilities. The interest rates proposed for the three heads are also different. Basic lending rate of the bank should be charged to cash credit II, and the normal working capital limit be charged as below:
1. For cash credit portion: Maximum prevailing lending rate of the bank.
2. For bill finance portion: 2% below the basic lending rate of bank.
3. For loan portion: The rate may vary between the minimum and maximum lending rate of the bank.
The Reserve Bank of India appointed another committee under the chairmanship of Mr. Chakravarthy to review the working capital of the monetary system of India. The committee submitted its report in April 1985. The committee made two major recommendations in regard to the working capital finance
1. Penal Interest for Delayed Payment
The committee has suggested that the government must insist all public sectors units, large private sector units and government departments must include penal interest payment clause in their contracts for payment delayed beyond a specified period. The penal interest may be fixed at 2 percent higher than the minimum lending rate of the supplier’s bank.
2. Classification of credit limit under three different heads
The committee further suggested that the total credit limit to be sanctioned to a borrower should be considered under the three different heads: (1) Cash credit I to include supplies to government, (2) Cash credit II to cover special circumstances and (3) Normal working capital limit to cover the balance credit facilities. The interest rates proposed for the three heads are also different. Basic lending rate of the bank should be charged to cash credit II, and the normal working capital limit be charged as below:
1. For cash credit portion: Maximum prevailing lending rate of the bank.
2. For bill finance portion: 2% below the basic lending rate of bank.
3. For loan portion: The rate may vary between the minimum and maximum lending rate of the bank.
Tags : Financial Management - WORKING CAPITAL MANAGEMENT
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