ASSIGNMENT OF

MANAGEMENT OF
WORKING CAPITAL ON
DEHEJIA COMMITEE

SUBMITTED TO: SUBMITTED BY:

PROF. GEETIKA GROVER NAVEEN SHARMA
M.B.A II SEM 4th
ROLL NO. 12
 DEHEJIA COMMITTEE:
The National Credit Council (NCC) was constituted in October 1968, under the
Chairmanship of V. T. Dehejia, to examine how far the credit requirements of trade and
industry were inflated and, at the same time, to suggest some measures on the basis of its
findings.

In its words:

“The extent to which credit needs of industry and trade are likely to be inflated and how
much trends could be checked”.

The Study Group submitted its report in September 1969. It may be noted here that the term
‘inflated’ means the borrowers have taken short-term credit in excess of their real
requirements for working capital.

CRITERIA:
For the purpose of such ‘inflation’, the study group took the following criteria:
(i) Whether the rise in short-term credit was substantially higher than the growth in the value
of output;

(ii) Whether the rise in such credit is higher than the increase in inventories;

(iii) Whether short-term bank borrowings have been diverted for building up fixed asset or
other non-current assets;

(iv) Whether there is double or multiple financing of the same stocks; and

(v) Whether the period of credit is unduly lengthened.

FINDINGS:
The major findings of the Dehejia Committee were:

(a) Inflation of bank credit:

Granting bank credit to industry increased significantly in comparison with the increase in
industrial output or inventories in value terms e.g. granting bank credit (short-term) to
industry was increased by 130% in between 1961-62 and 1966-67, whereas industrial output
was increased by only 60% for the same period.

(b) Improper utilisation of short-term credit:

Although the bank credit was allowed for short-term current assets, the same was actually
utilised for the acquisition of non-current/fixed asset i.e., short-term credit was diverted.

(c) Granting credit without proper securities and projected financial statements:
Banks granted credit to industries without proper securities and without assessing their real
needs which are based on their projected financial requirements.

(d) Prevailing Lending System:

The prevailing lending system helps the industry to depend on short-term bank financing in
order to acquire fixed assets.

SUGGESTIONS:
The following significant suggestions were prescribed by the Dehejia Committee in
order to control the regulation of bank finance between the industry and other private
sectors:
(a) The appraisal of credit applications must be made in relation to the total financial
situation, i.e., current and projected, which can be reflected by Cash Flow Analysis along
with forecast Profit and Loss Account and Forecast Balance Sheet submitted by the
borrowers.

(b) Cash credit account must be distinguished into two parts, viz.,
(i) ‘the hard core’ which represents the minimum level of current assets required for
maintaining a given level of production;

(ii) ‘the strictly short-term’ components which represent the fluctuating part of the account.
The second component of the accounts, however, reveals the requirement of funds for short-
term purpose. Thus, the said borrowings should be adjusted out of turnover in a short- period.

(c) In the case of ‘Double’ or ‘Multiple’ financing, the group, however, suggested that a
customer must be required to deal with only one bank. But if the requirements of the
borrowers are high or more, and which cannot be provided by one bank only, in that case, a
‘Consortium’ arrangement may be adopted which has been recommended by the group.

(d) The period of trade credit must not exceed 60 days and 90 day in case of special cases so
that the bank’s resources must not be blocked in unproductive purposes.

(e) The committee also suggested that a levy of commitment charges on un-utilised limit
along with a provision to impose a minimum interest charge should be considered to control
the tendency of having credit more than their requirements.

(f) Another suggestion of the committee was that industry, trade and commercial banks may
introduce the system of issuing bills which would help both the purchasers and the suppliers
for their financial activities.