Regulation of Bank Finance^415
Under this system, it is possible for a borrower to draw against available security and
utilised the funds for purposes other than increasing his current assets of repaying his
other current liabilities; he can, for instance, use the funds for acquiring fixed or non-
current assets, as the following example illustrates:
Inventory of the value of Rs. 1,00,000 is carried to the extent of Rs. 50,000 by creditors
for purchases; but the borrower is enabled to borrow up to Rs. 75,000 on the security of
stocks worth Rs. 1,00,000 less the prescribed margin of 25%, the drawing limit being
Rs. 75,000. Had the customer drawn genuinely for meeting his current assets requirements
only, his maximum eligibility (assuming nil contribution from him to carry the current
assets) would have been Rs. 50,000; the excess of Rs. 25,000, he can divert to non-
approved uses without the bankerís knowledge.
Such diversion of bank funds was made possible by the bankerís fixation on security
under the cash credit lending system. To the extent that outstandings in a cash credit
account never fell below certain level during the course of a year, there was an element
of what is called a ëhard coreí borrowings which was in reality a quasi-permanent lock-
up of bank funds in the borrowerís business. The time is now opportune to review the
existing system and effect changes in such a way that under the new system the
borrower could plan his credit needs and the banker would be able to plan his deposit
credit function to assure finance to industry for its genuine production needs.
Norms of Inventories and Receivables
According to the Study Group, the main function of a banker is only to supplement the
borrowerís resources to carry a reasonable level of current assets. The Study Group
has, therefore, stipulated norms for 15 major industries. Not only will the bank credit be
regulated according to the norms but the units in these industries (except cotton and
jute) themselves are not supposed to carry inventories/receivables in excess of the
stipulated norms. In the case of cotton and jute industries, while stocks would be
maintained according to the permission of the Textile or Jute Commissioner, the bank
credit would be regulated according to the norms.
l Bunched receipt of raw materials including imports.
l Power cuts, strikes and other unavoidable interruptions in the process of
production.
l Transport delays and bottlenecks.
Current Liabilities Current Assets
Creditors for purchase Rs. 50,000 Inventory Rs. 1,00,000
Bank borrowings Rs. 75,000 Other current assets Rs. 10,000
Other Current liabilities Rs. 10,000
Rs. 1,35,000 Rs. 1,10,000