Page 227 - DMGT405_FINANCIAL%20MANAGEMENT

Unit 10: Working Capital Management

Self Assessment Notes

Fill in the blanks:
11. ……………….represents credit granted by suppliers of goods
12. ……………….is an arrangement under which a customer is allowed to draw advance up to
a certain limit against credit granted by bank.

10.7 Regulation of Bank Finance

Traditionally banks credit has been an easily accessible source of meeting the working capital
needs of business firms. Indian banks have not been concerning themselves about the soundness
or otherwise of the business carried out or about the actual end use of the loan. In other words, they
have been extending credit to industry and trade on the basis of security. This resulted in a number
of distortions in financing of working capital by banks. Consequently, bank credit has been
subjected to various rules, regulations and controls. The Reserve Bank of India had appointed
various committees to ensure equitable distribution of bank resources to various sectors of
economy. These committees suggest ways and means to make the bank credit an effective
instrument of industrialization. Now we shall discuss the recommendations of various committees.

10.7.1 The Dehejia Committee

In September 1969, Dehejia Committee of the RBI pointed out in its reports that in the financing
practice of banks, there was no relationship between the optimum requirements for production
and the bank loan. The general tendency with business was to take short-term credit from banks
and use it for purposes other than production. The Committee also pointed out that bank to not
give proper attention to the financing pattern of their clients. Further, the clients resort to
double financing or multiple financing of stocks.
The Dehejia Committee suggested that the banks should make an appraisal of credit applications
with reference to the total financial situations of the client. It also suggested that all cash credit
account with banks should be bifurcated in the following two categories:
1. The hard core which would represent the minimum level of raw material, finished goods
and stores, which any industrial concern is required to hold for maintaining certain level
of production.
2. The strictly short-term components, which should be the fluctuating part of the account.
This part would represent the short-term increases in inventories, tax, dividends and
bonus payments.
The Committee also recommended that to determine the hard-core element of cash credit account,
norms for inventory levels should be worked out by the Chambers of Industry or by the Indian
Bank Association.
It can, thus, be seen that the orientation towards project oriented and need based lending was
first given by the Dehejia Committee. However, in practice the recommendations of the
Committee did not have more than a marginal effect on the pattern of bank financing.

10.7.2 Tandon Committee

In July 1974, the Reserve Bank constituted a Study Group under the Chairmanship of Mr. P.L.
Tandon. This study group was asked to give its recommendations on the following matters:
1. What constitutes the working capital requirements of the industry and what is the end use
of credit?

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