Hi friends today’s topic is maximum permissible bank finance.

Frankly speaking I didn’t know

anything abt. The topic but after 2 hours & 48 Rs in café I manage to get some information I would
like to share with u guys……. Hope u ll find it interesting.

The regulation of bank finance was developed in order to cope with the problems that came up due to over
borrowing of working capital by a particular business sector while the other sector was being deprived. In order to bring
a discipline among the borrowers, it was necessary to come up with some regulations from the central bank.

Tandon Committee

The study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank, was constituted
by the RBI in July 1974 with eminent personalities drawn from leading banks, financial institutions and a wide
cross-section of the Industry with a view to study the entire gamut of Bank's finance for working capital and
suggest ways for optimum utilisation of Bank credit. This was the first elaborate attempt by the central bank to
organise the Bank credit. The report of this group is widely known as Tandon Committee report.

Tandon Committee, the corporates should be discouraged from accumulating too much of stocks
of current assets and should move towards very lean inventories and receivable levels. The
committee even suggested the maximum levels of Raw Material, Stock-in-process and Finished
Goods which a corporate operating in an industry should be allowed to accumulate

The committee suggested norms, i.e., ceilings for inventory and receivables, which could be
considered for bank finance the 15 industries included cotton and synthetic textiles, paper,
cement, pharmaceuticals and engineering. Thus, for instance, the norms proposed for the
pharmaceutical industry were

Raw materials : 2.75 months' consumption

Stocks in process : ½ month's cost of production
Finished goods : 2 months' cost of sales
Receivables : 1.25 months' sales

the funding of these working capital needs of the corporates could be met by one of the following methods:

First Method of Lending:

The bank can finance total of 75 % of working capital gap (I.e. current assets – Liabilities) the
balance to come out of long-term funds, i.e., owned funds and term borrowings. This approach was
considered suitable only for very small borrowers i.e. where the requirements of credit were less
than Rs.10 lacs MPBF: 0.75 (CA - CL)

Second Method of Lending:

 Under this method, it was thought that the borrower should provide for a minimum of 25% of total
current assets out of long-term funds i.e., owned funds plus term borrowings and the bank will
provide the balance (MPBF). Consequently, total current liabilities inclusive of bank borrowings
could not exceed 75% of current assets. This approach was considered suitable for borrowers
whose requirement for the credit is more than 10 lakhs.

MPBF: 0.75 CA - CL

There is another method of lending which involves core current assets was not accepted for
implementation that’s why I m nt going into that.

MPBF: 0.75 (CA – CCA) – CL

Thus as u can see all these computation require careful analysis of current assets , so RBI has
suggested a certain way of analyzing a balance sheet which is different from CLB and is called
“CMA Data formate”
(Credit Monitoring Arrangements)So that to give a more detailed and accurate picture of the
affairs of a corporate

Norms for 15 major industries proposed by the committee now have more than 50 disintegrated industry groups.

1. Chore Committee(1979)
○ This committee was formed by RBI to review the cash credit system of banks.
○ The important recommendations of the Committee are as follows:
○ 1. The banks should obtain quarterly statements in the
○ prescribed format from all borrowers having working capital
○ credit limits of Rs. 50 lacs and above.
○ 2. The banks should undertake a periodical review of limits of Rs. 10 lacs and above.
2. Chore Committee
○ 3. The banks should not bifurcate cash credit accounts into
○ demand loan and cash credit components.
○ 5. Banks should discourage sanction of temporary limits by charging additional one per cent interest over the normal rate on these
limits.
○ 6. The banks should fix separate credit limits for peak level and non-peak level, wherever possible.
○ 7. Banks should take steps to convert cash credit limits into bill limits for financing sales.
3. Marathe committee
○ A committee set up to review the licensing policy for new urban co-operative banks. Headed by S. S. Marathe of the Reserve Bank
of India (RBI) Board, the committee’s prescriptions submitted in May 1992, favour a liberal entry policy and include :
○ Establishment of new urban co-operative banks on the basis of need and potential, and achievement of revised viability norms. The
one-bank-per-district approach is to be discarded.
○ Achieving prescribed viability norms in terms of share capital, initial membership and other parameters within a specified time.
○ Introduction of a monitoring system to generate early warning signals and for the timely detection of sickness.
4. Dahejia committee(1968)
○ Existing deficiencies .
 It is the borrower who decides how much would borrow, the banker does not decide how much he would lend and is,
therefore not in a position to do credit sales.
 The bank credit is treated is considered s first source of finance.
  Amount of credit extended is based on the amount of securities available and not the level of operations of the borrower.
5. Present practice
○ Assessment of working capital requirement.
○ Projected balance sheet method.
○ Cash budget method
○ Turnover method
○ Current ratio norm.
○ 1.33 is considered only as benchmark and banks do accept a lower current ratio.
6. Present practice
○ Emphasis on loan system
○ Bulk of the working capital limit is in the form of working capital demand loan and only a small portion in cash credit component.
○ Financial follow up results
○ FFR I- simplified form of form II used under tandon. Has to be submitted on quarterly basis.
○ FFR II- simplified form of form III. Has to be submitted in half yearly basis.