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).
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.
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 Assessment of working capital finance based on the concept of MPBF, as recommended by Tandon committee, has been withdrawn.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.
Tags : Financial Management - WORKING CAPITAL MANAGEMENT
Last 30 days 3477 views