Regulation of Bank Finance^411
say Rs. 50 lakhs and over should be analysed this way and then the system may gradually
be extended to borrowers with advances of over Rs. 10 lakhs.
Segregation of the Credit Market
The outstandings in the existing as well as further cash credit accounts should be
distinguished as between (i) ëthe hard coreí which would represent the minimum level
of raw materials, finished goods and stores which the industry was required to hold for
maintaining given level of production and (ii) the strictly short-term component which
would be the fluctuating part of the account. The latter part of the account would
represent the requirements of funds for temporary purchases, e.g. short-term increase
in inventories, tax, dividend and bonus payments etc., the borrowing being adjusted in a
short period out of sales. In the case of financially sound companies, the Group was of
the opinion to segregate the hard core element in the cash credit borrowings and put on
a formal term loan basis and subject to repayment schedule. But when the borrowersí
financial position was not too good or the size of the hard core, was so large that
repayment could not be expected within 7/10 years, it would be difficult for the banks to
continue to carry these liabilities over a long period of time. The possible solutions to be
attempted would be: the bringing in of long-term deposits and unsecured loans by the
promoters and their friends, additional issue of equity or preference capital, a debenture
issue with a long maturity. When the hard core was to be placed on a formal term loan
basis, the proposal should be subject to a detailed appraisal. The documents should
contain convenants in regard to the end-use of the loan, maintenance of minimum
financial ratios, repayment obligations restrictions on investments on shares and
debentures. To determine the hard core element of the cash credit account, the Group
considered that it would be worthwhile to attempt to study of industry-wise norms for
minimum inventory levels.
Double or Multiple Financing
Double or multiple financing may result where credit facilities are granted against
receivables either by way of documents against acceptance bills or drawing against
book debts; the purchase is also in a position to obtain bank credit by way of
hypothecation/pledge of the stocks which have not been paid for. For eliminating double
or multiple financing, the Group suggested that a customer should generally be required
to confine his dealings to one bank only. In case the credit requirements of borrowers
were to be large and could not be met out of resources of one bank, the Group has
commended the adoption of ëconsortiaí arrangement.
Period of Trade Credit
To prevent undue longation of the period of trade credit and the tying up of resources of
banks for unproductive purpose, the group suggested that the period of trade credit
should not normally exceed 60 days and in special circumstance up to 90 days (excluding