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Working Capital Management

Notes customers. The security-cum-guarantee system of lending was found inadequate also with the
termination of the managing agency system. With the de-linking in of industrial units from the
managing agency houses, the erstwhile guarantors sought termination of the guarantee
obligations, the entry of new entrepreneurs into industry, with technical knowledge but lacking
financial backing and managerial background, also called for a new approach to lending by
banks.
It was against this background, the Reserve Bank of India appointed different study groups from
time to time.

4.2.1 Recommendations of Dahejia Study Group

The National Credit Council constituted, in October 1968, a study Group under the Chairmanship
of Shri V.T. Dahejia to examine the subjected of the extent to which credit needs of industry and
trade are likely to be inflated and how such trends could be checked. Since the bulk of bank
credit is short-term, the Group’s enquiry was primarily concerned with the inflation of the
short-term bank credit. The credit needs of industry or trade may be considered to be inflated or
either of the two sectors may be regarded to have received credit in excess of its genuine
requirements
1. If, over a period of years, the rise in short-term credit is found to be substantially higher
than the growth in the value of industrial production;
2. If the rise in short-term credit in appreciably higher than the increase in inventories with
industry or trade;
3. If there is a diversion of short-term bank borrowings of concerns in industry for building
up of fixed assets or other non-current assets such as loans and investments;

4. If there is double or multiple financing of the same stock;
5. If the period of credit is unduly lengthened.
The Group submitted its report in September, 1969.

Major Findings

The major findings of Dahejia study Groups are listed below:
1. Expansion of Bank Credit to Industry in Excess of Output: The Group found that the bank
credit during the period from 1960–61 to 1966–67 expanded at a higher rate than the rise in
industrial output. This finding was supported by the available data on inventories in
relation to short-term bank credit. Between 1961–62 and 1966–67, the rise in the value of
inventories with industry was 80% while the rise in short-term bank credit was as much as
130%. The ratio of short-term bank borrowings to inventories went up from 40% in
1961–62 to 52% in 1966–67. A similar analysis showed that some industries, particularly
those in the traditional group, and several industrial units obtained credit from banks
over and above the rise in their production. The Group therefore came to the conclusion
that in the absence of specific restraint, there was a tendency on the part of the industry
generally to avail itself of short term credit from banks in excess of the amount based on
the growth in production and/or inventories in value terms.
2. Fixing Credit Limits by Banks: The basis on which banks fix credit limits has an important
bearing on the size of bank credit in relation to the requirements of individual borrowers.
For fixing credit limit bans generally took into account several features of the working of
the loaned concerns, such as production, sales, inventory levels, past utilization etc. The

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