Regulation of Bank Finance^431
changes in supply schedules prescribed by large public sector buyers, and so on. Under
these circumstances borrowers point out that with the best of efforts they cannot project
their working capital requirements even for one quarter, let alone for a year, with any
degree of certainty. The management of these uncertainties itself consumes considerable
time and efforts, and sanction of credit based on rigid norms compounds the difficulties
in managing the industrial unit. These problems get magnified in the case of smaller
borrowers as they are less able to determine the terms of purchase or sale of goods and
have a weaker financial structure as compared to the larger borrowers.
Specification of different norms for different stages of production and marketing, detailed
instructions regarding classification of items as current liabilities and current assets,
difficulties in assessing the validity of projections of working capital requirements based
on uncertainties referred to above, all combine to make the credit appraisal process a
difficult and time consuming exercise. Again it is stated that during the protracted time
over which credit appraisal is being undertaken, unforeseen developments occur, prices
and market situation change, monetary policy stance may change, resulting in a need to
revise earlier projections which leads to another cycle of delays. This brings in a tendency
to inflate the amount of credit sought in the original application for sanction of credit
limits.
Long-term Resources Contribution: The main thrust of the Chore Committee
recommendations was on bringing a larger segment of borrowers under the Method II
of lending wherein the borrowers are required to contribute long term resources through
their own funds and term loans to the extent of 25 per cent of total current assets as
against Method I of lending where their contribution would be no more than 25 per cent
of the difference between current assets and current liabilities excluding bank
borrowings. The borrowers are of the view that a rigid enforcement of this change
would hurt industrial units. The resources at the disposal of the borrowers are limited
and the application of Method II of lending should be gradual and based on the capacity
of the units to augment their internal resources and term loans in situation where the
financial strength and industry characteristics of different borrowers vary widely, and
the state of the capital market is also not uniform over the years. Borrowers have
argued that they need funds for modernisation, expansion and diversification, and further
many of them need to improve their capacity utilisation which calls for higher levels of
working capital. While term lending financial institutions insist on greater contributions
by the borrowers towards the cost of fixed investment in projects being financed by
them, bank insist on higher contributions by borrowers for financing their working capital
requirements. The borrowers feel that both these demands can hardly be met by them
at the same time with their limited resources.
Form of Bank credit: Bank credit sanctioned to borrowers takes the form of cash
credit loans and bill financing. While cash credit is the more favoured form of financing,