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Unit 4: The Financing Mix

It was in this context that the Reserve Bank of India appointed the Working Group under the Notes
Chairmanship of Shri K.B. Chore to review the system of credit in all aspects. The term of
reference of the Working Group was as follows:
1. To review the operation of the cash credit system with reference to the gap between
sanctioned credit limits and the extent of their utilization;

2. In the light of the review, to suggest:
(a) Modification in the system with a view to making the system more amenable to
rational management of funds by commercial banks, and/or

(b) Alternative types of credit facilities, which would ensure greater credit discipline
and also enable banks to relate credit limits to increase in output or other productive
activities; and
3. To make recommendations and any other related matter as the Group may germane to the
subject.

Recommendations

The Group made following recommendations in its final report.

1. Credit System: The advantages of the existing system of extending credit by a combination
of the three types of lending, viz., cash credit, loan and bill should be retained. At the same
time, it is necessary to give some directional changes to ensure that wherever possible the
use of cash credit would be supplanted by loans and bills. It would also be necessary to
introduce necessary corrective measures to remove the impediments in the use of bill
system of finance and also to remove the drawbacks observed in the cash credit system.
2. Bifurcation of Credit Limits: Bifurcation of cash credit limit into a demand loan portion
and a fluctuating cash credit component has not found acceptance either on the part of the
banks or the borrowers. Such bifurcation may not serve the purpose of better credit
planning by narrowing the gap between sanctioned limits and the extent of utilization
thereof. It is not likely to be voluntarily accepted and it does not confer enough advantages
to make it compulsory.
3. Reducing Over-dependence on Bank Borrowings: The need for reducing the over-
dependence of the medium and large borrowers-both in the private and public sectors-on
bank finance for their production/trading purposes is recognized. The net surplus cash
generation of an established industrial unit should be utilized partly as least for reducing
borrowing for working capital purposes.
4. Peak level and Normal Non-peak Level Limits to be Separate: While assessing the credit
requirements, the bank should appraise and fix separate limits for the ‘normal non-peak
level’ as well as for the ‘peak level’ credit requirements indicating the periods during
which the separate limits would be utilized by the borrower. This procedure would be
extended to all borrowers having working capital limits of ` 10 lakh and above. One of the
important criteria for deciding such limits should be the borrowers’ utilization of credit
limits in the past.
5. Financing Temporary Requirements through Loan: If any ad-hoc or temporary
accommodation is required in excess of the sanctioned limit to meet unforeseen
contingencies the additional finance should be given, where necessary, through a separate
demand loan account or a separate ‘non-operable cash credit account’. There should a stiff
penalty for such demand loan or non-operable cash credit portion, at least two per cent
above the normal rate, unless Reserve Bank exempts such penalty. This discipline may be
made applicable in cases involving working capital limits or ` 10 lakh and above.

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