Page 57 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes Self Assessment

Fill in the blanks:
1. The ........................ approach suggests that the entire estimated investments in current
assets should be financed from long-term sources.

2. ……………..refers to two off-selling transactions of a simultaneous but opposite nature
which counterbalance the effect of each other.
3. The hedging approach implies low cost, high profit and high risk while the conservative
approach leads to high cost, …………….and……………...

4.2 Working Capital and Banking Policy

Banks have been following certain norms in granting working capital finance to companies.
These norms have been greatly influenced by the recommendations of various committees
appointed by the Reserve Bank of India from time to time. The norms of working capital finance
followed by bank since mid-70 were mainly based on the recommendations of the Tandon
Committee. The Chore Committee made further recommendations to strengthen the procedures
and norms for working capital finance by banks. The norms based on the recommendations of
these committees are discussed below. In the deregulated economic environment in India recently,
banks have considerably relaxed their criteria of lending. In fact, each bank can develop its own
criteria for the working capital finance.

A study group, popularly known as the Tandon Committee, was appointed by the Reserve Bank
of India in July 1974 to suggest guidelines for the rational allocation and optimum use of bank
credit. This was done on the presumption that the existing system of bank lending had a number
of weaknesses.

Notes The existing system has served its primary objective of financing trade quite
efficiently in the past, when the industrial structure was simple. Industries in India, however,
grew rapidly in the last three decades and, as a result, the industrial system became very
complex. One can also witness a shift in the bank’s role from trade financing to industrial
financing during this period. But the commercial bank’s lending practices and style
remained almost the same.
Because of the easy availability of bank credit, industries in the past did not use it properly arid
efficiently. Still today industries are not using banks funds skillfully and for appropriate purposes.
A majority of the companies in India are not cash, or resource, conscious; their techniques of
managing funds at times, are unscientific and non-professional. A number of companies, even
among the largest industrial units, have yet to learn the methods of reducing costs, optimising
use of inputs per unit of output, conserving resources, improving and developing product,
orienting their marketing practices and policies to customers and so on. If they fail in using
these techniques of modem management, industries in the country may become a national
burden. Already a number of units have become sick and the number of such units is on the
increase. To an extent, the abnormal conditions are the cause for this, but, perhaps,
mismanagement of resources is far more responsible for the present state of industries.
Background: Bank credit is a scarce resource; hence it should be optimally utilised under all
circumstances. For industrial units, it has become scarcer. There are many other contenders for
bank credit: agriculture, small-scale industry, farmers, small man and many others. Public
enterprises also approach commercial bank for their working capital requirements.

52 LOVELY PROFESSIONAL UNIVERSITY