Page 235 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes

Task Find out the importance of security required in bank finance in India.

Self Assessment

Fill in the blanks:

3. Under ……………………. mode of security, the banks provide working capital finance to
the borrower against the security of movable property, generally inventories.
4. A ……………………is bailment of goods as security for the repayment of a debt or
fulfillment of a promise.

14.3 Regulation of Bank Credit

Till the sixties, bank credit for working capital was available easily and in convenient form to
industrial borrowers. Further, the cash credit arrangement, the principal device through which
such finance has been provided, is quite advantageous from the point of view of borrowers.
Banks have not been concerning themselves about the soundness of the borrower or about the
actual end use of the loan. Bank financing was mainly security oriented. This security oriented
system tended to favour borrowers with strong financial resources irrespective of their economic
function. This resulted in the concentration of economic power. Another problem was that the
increase in the bank credit was not commensurate with the expansion in the level of inventory
and production.
This resulted in a number of distortions in financing of working capital by banks. Major Banks
was nationalized in 1969 and with that, approach to lending also changed. Consequently, bank
credit has been subjected to various rules, regulations and controls. The basic objective of
regulation and control of bank credit is to ensure its equitable distribution to various sectors of
the Indian economy. The RBI has been trying, particularly from the mid-sixties onwards, to
bring a measure of discipline among industrial borrowers and to redirect credit to priority
sectors of the economy. The RBI has been issuing guidelines and directives to the banking
sectors towards this end. Important guidelines and directives have derived from the
recommendations of certain specially constituted groups assigned with the task of examining
various aspects of bank finance to industry.

Task List out the important forms of working capital advance given by banks. Discuss
the modes security required by banks in this context.

14.4 Recent RBI Guidelines Regarding Working Capital Finance

In the past, working capital financing was constrained with detailed regulations on how much
credit the banks could give to their customers. The recent changes made by RBI in the guidelines
for bank credit for working capital finance are discussed below:
1. The notion of Maximum Permissible Bank Finance (MPBF) has been abolished by RBI and
a new system was proposed by the Indian Banking Association (IBA). This has given banks
greater freedom and responsibility for assessing credit needs and credit worthiness. The
salient features of new system are:

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