Working Capital Financing^379
can sell the leased automobile for more than zero rupees, he or she gained at the
expense of the lessee. Another example is full amortisation of costs in a sale and
leaseback of a building and the land on which it is constructed. While the building will
generally depreciate in value, very rarely will the land value decline to its eventual fully
amortised cost of zero rupees.
Another disadvantage of leasing is that typically the lessorís rate of return is higher
than the lesseeís cost of borrowing.
This makes borrowing a more desirable alternative than leasing.
Regulation of Bank Finance ñ Recommendation of Latest Committee
Banks were tied by the guidelines issued by the Reserve Bank of India (RBI), which in
turn has been influenced by various committees appointed by it from time to time. Now
the RBI has considerably relaxed the rules, but the banks still stick to the guidelines to
a high degree because shifting from protected to totally open environments is not easy
and banks want to make the transition smoothly. We will first discuss the development
of the guidelines through various committees.
The norms of working capital finance followed by banks since mid-70ís 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.