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(^430) Financial Management
to be provided by borrowers on past performance and future projections of
working capital needs and overall performance.
(e) Final clearance by RBI of credit requests for amounts above the cut-off point
under CAS was an essential element in the credit allocation system as banks
were not always in a position to resist pressures from their larger clients, nor
adequately equipped to undertake scrutiny of credit requests with the required
degree of thoroughness.
(f) Continuous efforts are to be made by the borrowers, banks and the Reserve
Bank to improve the information system which is seen as the key to the success
of the approach to credit allocation outline above.
The borrowing community has over the years argued strongly against what it considers
as the inflexibility and other inadequacies of the system of working capital financing
adopted by the banks and the Reserve Bank of India. They have had the opportunity to
present their views, in writing and during discussions, to the various committees and
Study Groups appointed by the Reserve Bank of India to improve the methods of bank
lending to industry and trade. Their criticism of the credit appraisal system as it has
evolved over the past two decades covers conceptual as well as procedural aspects of
the system. Some of these criticisms voiced by them are pointed out below.
Variation in Inventory level: The norms evolved by the Tandon Committee for
assessing working capital requirements of different industries have been criticised by
borrowers on the ground that the norms do not provide for variations in inventory levels
occasioned by the operation of several commercial factors, apart from locational factors
and impact of unforeseen developments. For example, it is pointed out that in the case
of industrial units located in areas with inadequate transport facilities inventory levels
would reflect the longer lead time for supply of raw materials and despatch of finished
goods. It has also been argued that the norms which may be valid under ideal conditions,
do not distinguish between different units and variations in market conditions overtime.
The levels of inventories in particular and the level of total working capital requirements
also depend on a host of extraneous factor in the economy over which the borrower,
has no control. These factors are inadequate and uncertain availability of power affecting
production schedules, transport bottlenecks resulting from non ≠availability of railway
wagons, non-availability of shipping space in the case of exports, changes in import
policy, bottlenecks at the ports, bunching of imports, unanticipated changes in prices of
raw materials and products made available by the public sectors canalising agencies,
government policies regarding the permitted level of stocks in specific industries, ad
hoc allocations by canalising agencies of scarce raw materials, strikes and disturbed
industrial relations affecting purchase of supplies or sales of finished goods, uncertainties
associated with imposition of duties in the annual budget of the government, sudden