Credit Monitoring

Arrangement

BY:-ABHILASH VISWANATHAN
 Regulation of bank finance

 Implemented by RBI in mid 1960s in order to

 Measure of discipline among industrial borrowers.
 Redirect credit to the priority sector of the economy

 RBI has been issuing guidelines and directives

to the banking sector toward this end.
 TANDON COMMITTEE

 Committee was under the chairmanship of Mr. P.L.

Tandon
 Committee was form in year 1974
 Committee submitted its report in August 1975
 Tandon committee
The terms of reference of the Committee were:

1. To suggest guidelines for commercial banks to

follow up and supervise credit from the point of view
of ensuring proper end use of funds and keeping a
watch on the safety of advances;

2. To suggest the type of operational data and other

Information that may be obtained by banks
periodically from the borrowers and by the Reserve
Bank of India from the leading banks;

3. To make suggestions for prescribing inventory

norms for the different industries, both in the
private and public sectors and indicate the broad
criteria for deviating from these norms ;
 Tandon committee

4. To make recommendations regarding resources for

financing the minimum working capital requirements ;

5. To suggest criteria regarding satisfactory’ capital

structure and sound financial basis in relation to
borrowings ;

6. To make recommendations as to whether the

existing pattern of financing working capital
requirements by cash credit/overdraft system etc.,
requires to be modified, if so, to suggest suitable
modifications
 Tandon committee

Recommendations

Norms of current asset.

Maximum permissible bank finance.

Emphasis on loan systems.

Periodic information and reporting system

 Tandon committee
Tandon Committee has recommended the following methods:

Method I
Borrowers to bring 25 % of the net working capital (Current Assets –Current
Liabilities)

Method II
Borrowers to bring 25% of the Current Assets

Method III
Borrowers to bring 100% of hard core assets + 25% of other current assets.

Under Method I the promoter has to bring minimum margin whereas the
margin to be brought in under
Method III is maximum
Method II is also known as Maximum Permissible Bank Finance (MPBF)
 Chore committee

Committee was formed under the leadership of

sh. K.B. Chore
This committee was appointed in 1979
Committee was formed to solve the problem of
cash credit system
 Chore Committee

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.
 Chore Committee

3. The banks should not separate 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.
 Nayak Commitee

The assessment of credit limits for all borrowers enjoying aggregate fund
based working capital limits of less than Rs. 1 crore from the banking system,
is to be done both as per the traditional method and on the turnover basis and
the higher of the two limits is to be fixed as the permissible bank finance.

Where the working capital cycle is shorter than 3 months, the working capital
required would be less than 25% of the projected turnover. In such case it is
not required to still give PBF at 20% of the turnover.

If the liquid surplus available with the borrower is higher than 5% of the
turnover, as stipulated under the recommendations, the limits can be fixed at
a lower level than 20% of the turnover keeping in view that the genuine
requirements of the unit are met adequately. If a unit has been managing its
working capital efficiently, the limits can be set at a lower level.
The units having longer operating cycle for working capital than
three months, should be provided proper limits to operate at a
viable level taking into account the recommendation that 20% of
the turnover is the minimum stipulation and not the maximum.

In case of seasonal industries the distinction between the peak

and non-peak level of turnover has to be considered instead of
annual turnover.

The creditors and other current liabilities are among the sources
of funds required for building up the current assets and will be
treated in the same manner as in the traditional method.
The borrower’s contribution (margin) will be 5% of the turnover in
all cases except where the working capital cycle is not taken at three
months. The margin will proportionately increase with the increase
in the period of operating cycle.

Care is to be taken that the proportion of margin to bank finance

should be maintained in the ratio of 1:4 or even higher in case of
availability of higher liquid surplus.

If the borrower is not able to bring in minimum contribution of 5%,

as a general rule, no dilution should be allowed except in special
circumstance like sick units or when permitted being desirable due
to peculiar circumstances in the sanction.
The recommendations made by Tandon Committee and reinforced by Chore
Committee were implemented in all Banks and Bank Credit became much
more organised.

With recent liberalisation of economy and reforms in the financial sector, RBI
has given the freedom to the Banks to work out their own norms for inventory
and the earlier norms are now to be taken as guidelines and not a mandate.

beginning with the slack season credit policy of 1997-98, RBI has also given
full freedom to all the Banks to devise their own method of assessing the short
term credit requirements of their clients and grant lines of credit accordingly.

Most banks, however, continue to be guided by the principles enunciated in

Tandon Committee report.
Thank you