Regulation of Bank Finance^409
The Group submitted its report in September, 1969.
Major Findings
The major finding of Dehejia Study Group are listed below:
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 restraints,
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.
Fixing Credit Limits by Banks
The basis on which banks fix credit limits had an important bearing on the size of bank
credit in relation to the requirements of individual borrowers. For fixing credit limit
banks generally took into account several features of the working of the loanee concerns,
such as production, sales, inventory levels, past utilisation etc. The prevalent practices
of banks in this regard were so varied that they were unlikely to prevent the emergence
of excess demand for credit from certain borrowers. By and large, the scheduled banks
were inclined generally to relate their credit limits to the security offered by their
constituents but many do not appear to make any attempt to assess the overall financial
position of the borrowers through a cash flow analysis and in the light of this study fixed
their credit limits.
Valuation of Stocks and Margin Requirements
Banks did not generally adopt a uniform method of valuation of stock. The usual method,
for indigenous goods was based on ëcostí or ëmarket valueî whichever is lower and for
imported goods on landed cost. Similarly, there was considerable divergence in practice
as regards the prescription of margins by the banks. Some banks stipulated a lower
margin or pledge advances against hypothecation of stocks, while a few others did not
make this distinction. In the opinion of the Group, the varying practice could not be said
to constitute an important factor in the emergence of excess credit.