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Source : http://www.bankingindiaupdate.com
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last activity : 06 11 2011 14:54:19 +0000
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The group (headed by Sh. Prakash Tandon) was appointed in July 1974 which was to frame guidelines for follow-up of bank credit and submitted its final report during 1975 and gave following recommendations, applicable to borrowers availing fund based working capital limits of Rs. 10 lac or more:
Norms for inventory and receivables
Norms for 15 major industries proposed by the committee now have more than 50 disintegrated industry groups. Normally the borrower would not be allowed deviations from norms except in case of bunched receipt of raw material, power cuts, strikes, transport delays, accumulation of finished goods due to non-availability of shipping space for exports, build up of finished goods stocks due to failure on the part of purchasers. For those units which are not covered by the norms, past trends to be made the basis of assessment of working capital. (Discretion given to individual banks for deviations in norms)
Approach to lending
The committee suggested three methods of lending out of which RBI accepted two methods for implementation. According to First Method, the borrower can be allowed maximum bank finance upto 75% of the working capital gap (working capital gap denotes difference between total current assets required and amount of finance available in the shape of current liabilities other than short term bank borrowings). The balance 25% to be brought by the borrower as surplus of long term funds over the long term outlay.
As per Second Method of lending, the contribution of the borrower has to be 25% of the total current assets build-up instead of working capital gap. (Method of lending as per Vaz Committee will now apply to borrowers availing working capital fund based limits of Rs. 100 lac or more only)
Other major recommendations of the committee were:
Norms for inventory and receivables
Norms for 15 major industries proposed by the committee now have more than 50 disintegrated industry groups. Normally the borrower would not be allowed deviations from norms except in case of bunched receipt of raw material, power cuts, strikes, transport delays, accumulation of finished goods due to non-availability of shipping space for exports, build up of finished goods stocks due to failure on the part of purchasers. For those units which are not covered by the norms, past trends to be made the basis of assessment of working capital. (Discretion given to individual banks for deviations in norms)
Approach to lending
The committee suggested three methods of lending out of which RBI accepted two methods for implementation. According to First Method, the borrower can be allowed maximum bank finance upto 75% of the working capital gap (working capital gap denotes difference between total current assets required and amount of finance available in the shape of current liabilities other than short term bank borrowings). The balance 25% to be brought by the borrower as surplus of long term funds over the long term outlay.
As per Second Method of lending, the contribution of the borrower has to be 25% of the total current assets build-up instead of working capital gap. (Method of lending as per Vaz Committee will now apply to borrowers availing working capital fund based limits of Rs. 100 lac or more only)
Other major recommendations of the committee were:
- No slip back in current ratio, normally.
- Classification guidelines for Current assets and current liabilities.
- Identification of excess borrowing.
- Information system, which was modified by Chore Committee Recommendations.
- Bifurcation of limits into loan and demand component.
All instructions relating to maximum permissible bank finance withdrawn by RBI as per Credit Policy announced on 15.04.1997)
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6 comments on "Approach to lending of working Capital"
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Yatin Bhandari, Advisor/Outside Consultant, Ocado
| 06 11 2011 14:54:19 +0000
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Yatin Bhandari, Advisor/Outside Consultant, Ocado
| 06 11 2011 14:04:10 +0000
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Yatin Bhandari, Advisor/Outside Consultant, Ocado
| 06 11 2011 14:03:45 +0000
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| 05 02 2009 08:58:11 +0000
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| 08 22 2008 05:12:01 +0000
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| 08 04 2008 05:03:06 +0000
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