Regulation of Bank Finance^413
Tandon Study Group
The Reserve Bank of India constituted a Study Group to frame guidelines for follow up
of bank credit in July 1974 under the Chairmanship of Shri Prakash Tandon. The terms
of reference of the Group were:
(i) To suggest guidelines for commercial bank to follow-up and supervise credit
from the point of view of ensuring proper end-use of funds and keeping a
watch on the safety of the advances and to suggest the type of operational
data and other information that may be obtained by banks periodically from
such borrowers and by the Reserve Bank of India from the leading banks.
(ii) To make recommendations for obtaining periodical forecasts from borrowers
of (a) business/production plans, (b) credit needs,
(iii) To make suggestions for prescribing inventory norms for different industries
both in the
private and public sectors and indicate the broad criteria for deviating from these norms.
(iv) To suggest criteria regarding satisfactory capital structure and sound financial
basis in relation to borrowings.
(v) To make recommendations regarding the sources for financing the minimum
working capital requirements.
(vi) To make recommendations as to whether the existing pattern of financing
working capital requirements by cash credit/overdraft system etc. requires to
be modified, if so, to suggest suitable modifications.
(vii) To make recommendations on any other related matter as the Group may
consider germane to the subject of enquiry or any other allied matter which
may be specifically referred to it by the Reserve Bank of India.
Observations and Recommendations
The Study Group submitted its report to the RBI in August 1975. The summary of the
Groupís main observations and recommendations is given below:
Supply of and Demand for Funds
Nationalisation of the major commercial banks in 1969 raised expectations of a new
sense of direction in bank lending, and indeed advances to new claimants of credit, and
especially to small industry and agriculture had since gone up. The public sector has
emerged as an important user of credit due both to its growing dominance and its
turning increasingly to commercial banks for its working capital finance instead of
relying on government. Another new source of demand was the growing awareness of
the need to achieve an equitable geographical development of industry, and in its