FUNDS MANAGEMENT BY

BANKS IN INDIA:
SOLUTION TO A PERSISTING
OPTIMIZATION PROBLEM
Banking in India
• Commercial banks in India as universal
banks
• Comprehensive financial services under
one roof
• Reserve Bank of India (RBI) regulates the
fund-based activities
• Securities and Exchange Board of India
(SEBI) regulates the fee-based activities.
 eemed universities in the State affected by
the Centre’s move to derecognise them have
sought a review of the Tandon committee
report placed before the Supreme Court.
 M.K. Padmanabhan, Vice-Chancellor, Dr. MGR

Educational and Research Institute, one of the

affected institutions, said on Wednesday that
the Centre had constituted the UGC
committee and the Tandon committee to look
into the functioning of the universities.
 While the UGC committee had teams of

specialists visiting the institutions, the

Working Capital Loan And Cash Credit System
• Working capital lending still a major
functional area for commercial banks
• Conventionally, working capital financing in
India is in the form of cash credit facility
• Under the cash credit system, the lending
bank sanctions a maximum loan limit to a
customer
• Utilisation is subject to availability of
adequate assets pledged or hypothecated
Working Capital Loan And Cash Credit System

Any arbitrary break-up of working capital facility

into fixed and variable components will thus not be
in line with the spirit of the policy of the central
bank.
  Tandon Committee Norms – Style Of Credit
(i)                  A fixed or demand loan component,
interest on which is to be charged at a certain fixed
rate throughout the year
(ii)                A variable or cash credit component,
interest on which is to be charged at a somewhat
higher rate. This component would indicate by
what amount the level of borrowing for a particular
customer exceeds the demand loan component
  Tandon Committee Norms – Style Of Credit
It would, therefore, be in the interest of the
borrowing company to ensure an efficient financial
planning and to project correct levels for its
projected fund requirement
Once the monthly requirement of working capital is
submitted by a borrowing company, the lending
bank has to work out the optimum level for
demand loan that will minimize the annual interest
burden
Conclusion
The practical problem of banking can thus be
solved by using a rather simple technique of
optimization used so often in Physics.
The result is perfect in the sense that no
approximation is involved in its derivation.
Also, the result is simple enough to be
implemented by any practical banker.
The outcome is thus interesting not only for its
mathematical exactitude but also for its easy
applicability.