Financial Management - WORKING CAPITAL MANAGEMENT
Dehejia Committee - Working Capital And Banking Policy
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A study group under the chairmanship of V.T. Dehejia was constituted in 1968 in order to determine “the extent to which credit needs of industry and trade were inflated and to suggest ways and means of curbing this phenomenon”.
Dehejia Committee
A study group under the chairmanship of V.T. Dehejia was constituted in 1968 in order to determine “the extent to which credit needs of industry and trade were inflated and to suggest ways and means of curbing this phenomenon”. The committee submitted its reports in September 1969.
The important findings of the committee are given below.
A study group under the chairmanship of V.T. Dehejia was constituted in 1968 in order to determine “the extent to which credit needs of industry and trade were inflated and to suggest ways and means of curbing this phenomenon”. The committee submitted its reports in September 1969.
Findings
The important findings of the committee are given below.
1. Higher growth rate of bank credit to industry than the rise in industrial output.
2. Banks in general sanctioned working capital loans to the industry without properly assessing their needs based on projected financial statements.
3. There was also a tendency on the part of industry to divert short-term bank credit to some extent for acquiring fixed assets and for other purposes.
4. The present lending system facilitated industrial units to rely on short-term bank credit to finance for fixed assets.
1. On the basis of the above findings the following recommendations were made by Dehejia Committee to bring about improvements in the lending system:
2. Credit application should be appraised by the bankers with reference to present and projected total financial position as shown by cash flow analysis and forecast submitted by borrowers. The total cash credit requirement is divided into two parts namely (i) Hard core components representing the minimum level of raw materials, finished goods and stores which the industry requires for maintaining a given level of production and which is made on a formal term loan basis. (ii) Short-term components representing the fluctuating part of current assets.
3. In order to avoid the possibility of multiple financing, a customer should deal with only one bank. However if the credit requirement is more the committee recommended the adoption of “Consortium arrangement”.
2. Banks in general sanctioned working capital loans to the industry without properly assessing their needs based on projected financial statements.
3. There was also a tendency on the part of industry to divert short-term bank credit to some extent for acquiring fixed assets and for other purposes.
4. The present lending system facilitated industrial units to rely on short-term bank credit to finance for fixed assets.
Recommendations
1. On the basis of the above findings the following recommendations were made by Dehejia Committee to bring about improvements in the lending system:
2. Credit application should be appraised by the bankers with reference to present and projected total financial position as shown by cash flow analysis and forecast submitted by borrowers. The total cash credit requirement is divided into two parts namely (i) Hard core components representing the minimum level of raw materials, finished goods and stores which the industry requires for maintaining a given level of production and which is made on a formal term loan basis. (ii) Short-term components representing the fluctuating part of current assets.
3. In order to avoid the possibility of multiple financing, a customer should deal with only one bank. However if the credit requirement is more the committee recommended the adoption of “Consortium arrangement”.
The recommendations given by Dehejia Committee could not be implemented, further in view of unprecedented inflation during 1974 the demand for bank credit rose sharply. Most of the banks had to freeze the credit limit and therefore a need was felt to have a close look at the entire bank credit system. A Committee was, therefore appointed by RBI in July 1974, under the chairmanship of Shri P.L.Tandon.
Tags : Financial Management - WORKING CAPITAL MANAGEMENT
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