Regulation of Bank Finance^419
To the extent feasible, the banking system should move towards financing the purchaser,
who is in fact the debtor, rather than the seller, who is the creditor. In other words, the
seller will be paid off immediately after the sale and the bank credit will be extended
only to the purchaser. As regards financing of the purchaser, however, there are two
different points of view. One view is that purchases should also as far as possible, be on
the basis of bills, for the following reasons:
l the amount will be drawn only at the time of actual need.
l the end-use of credit is automatically taken care of,
l credit to purchaser is directly related to his actual need, which is not the case
with the sellerís bills, where credit is extended as a measure of sales promotion
irrespective of the purchaserís ability to pay or his need for credit.
l a bill enables discipline to be imposed in respect of payments for purchases-it
ensures timely payment to suppliers, which a system of book entries does not
always ensure.
It is argued on the other side that under the proposed revised system, the cash
credit mode of financing is superior to bill financing in respect of the borrowerís purchase
operations for the following reasons:
l drawals for non-approved purposes will be detected by the new information
system proposed and by scrutiny of cheques; end-use of credit will be effectively
taken care of by the proposed information system,
l the cost of operations to the borrower and the banker will be high; borrower
will have to pay more for cost of stamp duty which the bankerís administrative
cost will go up because of additional paper work without the assistance of
mechanisation or computerisation, and
l the advantages of centralised borrowing by way of a close watch over aggregate
outstandings, debit and credit summations and borrowing trends would be lost.
In view of the foregoing, it seems desirable that each banks should take its own decision,
in consultation with the borrower, having regard to the size of his operations, the individual
transactions and the administrative set-up obtaining in the bank.
Coverage of the Proposed Approach
The proposed approach to lending and the style of credit may be extended to all borrowers
having credit limits in excess of Rs. 10 lakhs from the banking system, while the
information system may be introduced, to start with, in respect of borrowers with limits
of Rs. 1 crore and above from the entire banking system. Progressively, banks should
extend this system, first to borrowers with limits of Rs. 50 lakhs to Rs. 1 crores and
next to those enjoying limits of Rs. 10 lakhs to Rs. 50 lakhs.