Financial Management - WORKING CAPITAL MANAGEMENT
Need for working capital banking policy?
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Banks provide finance to industrial entrepreneurs in India, in addition to financial institutions.
Need for
working capital banking policy?
Banks provide finance to industrial entrepreneurs in India, in addition to financial institutions. They provide finance in two ways – long-term loans to invest in the permanent assets and short-term loans for working capital finance. However the interest rates are different for the two different loans – a higher interest rate for long-term loans and a lower interest rate for working capital loans. This is because of two reasons. One, the long-term loans carry high risk and more administrative cost; second, when banks accept deposits from the public they pay higher interest for long-term deposits than for short-term deposits. By taking the advantage of the low interest rates for working capital loans, invariably most of the industrial entrepreneurs entered different banks. After using the short-term loans for working capital, they diverted to fixed assets also since it carries low interest rate than long-term loans. This results in low economic growth, loss for the banks and also failure of the individual entrepreneurs to grow. Hence the bank credit working capital has been subjected to various rules, regulations and controls. The RBI has appointed different study groups from time to time to suggest ways and means of making the bank credit an effective instrument for economic growth, industrialization as well as to improve the profit of the banking sectors. The current chapter discusses the various committees constituted by the RBI for the purpose of providing working capital finance.
Reports submitted by the following committees are significant in this respect:
1. Dehejia Committee Report 1969.
2. Tandon Committee Report 1974.
3. Chore Committee Report 1980.
4. Marathe Committee Report 1982.
5. Chakravarthy Committee Report 1985.
Banks provide finance to industrial entrepreneurs in India, in addition to financial institutions. They provide finance in two ways – long-term loans to invest in the permanent assets and short-term loans for working capital finance. However the interest rates are different for the two different loans – a higher interest rate for long-term loans and a lower interest rate for working capital loans. This is because of two reasons. One, the long-term loans carry high risk and more administrative cost; second, when banks accept deposits from the public they pay higher interest for long-term deposits than for short-term deposits. By taking the advantage of the low interest rates for working capital loans, invariably most of the industrial entrepreneurs entered different banks. After using the short-term loans for working capital, they diverted to fixed assets also since it carries low interest rate than long-term loans. This results in low economic growth, loss for the banks and also failure of the individual entrepreneurs to grow. Hence the bank credit working capital has been subjected to various rules, regulations and controls. The RBI has appointed different study groups from time to time to suggest ways and means of making the bank credit an effective instrument for economic growth, industrialization as well as to improve the profit of the banking sectors. The current chapter discusses the various committees constituted by the RBI for the purpose of providing working capital finance.
Reports submitted by the following committees are significant in this respect:
2. Tandon Committee Report 1974.
3. Chore Committee Report 1980.
4. Marathe Committee Report 1982.
6. Kannan Committee Report 1997.
Tags : Financial Management - WORKING CAPITAL MANAGEMENT
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