Regulation of Bank Finance^423
Another problem which was no less important could be about the manipulation in the
figures of ìother current assetsî, ìother current liabilitiesî etc. as the permissible bank
finance was based on figure work only. Further it was felt that the calculation of excess
finance poses a realistic problem because while the working capital gap was computed
on the basis of the projected net current assets, the figures of liability were the existing
ones and not the projected levels. For growing higher levels of current assets, the
Committee provided exceptions where under higher holdings might be permitted. It
was feared that each party might argue to be brought within the exceptions to circumvent
the rigours of the norms.
However, in order to improve the operational efficiency and to develop a belter
understanding of the new lending system of banks, if all the banks are serious in
implementing the Tandon Scheme and if they are able to get the cooperation from their
customers, the problem areas are nothing and can be ignored. On the other hand, if
unwarranted concessions and deviations are shown by banks against the ethics of the
implementation of the scheme as a whole, the very philosophy of the Tandon Scheme
will be defeated and it will create a situation in which the scrupulous banks will regret
for going the Tandon way.
Chore Committee
While reviewing the monetary and credit trends in March 1979 the Governor of the
Reserve Bank of India stressed the need for exercising continued restraint on expansion
of credit. He also indicated in his meeting with bankers the need for considering certain
long-term issues relating to banking operations. In his letter dated 16th March 1979 to
all scheduled commercial banks, he indicated:
ìI would like to initiate action on certain structural matters which need further examination.
It is necessary to take a fresh look at another major problem faced by banks in
implementing the credit regulatory measures, viz., the extensive use of the cash credit
system. Its drawbacks have been pointed out by the various Committees in the past
including the Tandon Committee, which suggested the bifurcation of credit limits into a
demand loan and a fluctuating cash credit component. Although the banks were advised
to implement this recommendation, I am afraid, the progress achieved has been very
slow. Clearly, this problem needs to be looked into further and for this purpose I proposes
to set up immediately a small Working Group, to report to me......on the reforms to be
introducedî.
It was in this context that the Reserve Bank of India appointed the Working Group
under the Chairmanship of Shri K.B. Chore to review the system of credit in all aspects.
The term of reference of the Working Group were as follows:
(1) To review the operation of the cash credit system with reference to the gap
between sanctioned credit limits and the extent of their utilisation;