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(^432) Financial Management
banks specify separate limits for each type of assistance. The Chore Committee
particularly stressed the need to insist on providing a part of the assistance by way of
drawee bill limits. Separate limits are also specified for raw materials, finished products
and receivables. The borrowers point out that this compartmentalisation hampers their
ability to make the best use of the credit sanctioned to them and should therefore, be
dispensed with, particularly since the components of working capital undergo changes
in the course of operations. The banks too have to spend considerable time and effort
to monitor the use of bank credit in accordance with the various sub-limits specified by
them. There is no doubt that the importance of timely availability of credit should be
reflected in the credit appraisal process at all stages, and borrowers should facilitate
quick decisions by promptly providing the information called for by banks.
Margin requirements: Long term financial institutions have reason to be concerned
that their relatively cheaper assistance is diverted to building up of working capital. At
the same time banks are vigilant that borrowers do not appropriate larger than justified
bank credit by diverting their own resources for expansion, modernisation or
inter≠corporate transactions. New companies find it difficult to have adequate margin
for working capital as they are expected to conform to Method II of lending by banks
from the time they start operations. Borrowers with a pronounced seasonal operation
also face difficulties in meeting margin requirements during the peak season even when
they are able to bring in their contribution during the year as a whole as required under
Method II of lending. These factors appear to have complicated the financing of industrial
operations.
Tax Concessions: Tax concessions available on additional fixed investment are attractive
to industrial concerns who are naturally keen on availing of these concessions to the
maximum extent possible, even if it means that they do not maintain margins stipulated
by the bankers or margins for working capital at levels which they estimated while
working out their project cost. Only when the borrowing concerns improve turnover of
their capital, strengthen their equity base and obtain long term funds from the capital
market will they be able to maintain adequate working capital margins on a regular
basis. These options are open more to the larger companies who have a good past
record of operations than to others, including new companies who are not well known
in the capital market.
Credit Utilisation: The overall credit limit for a borrower is determined on the basis of
Tandon/Chore norms and is generally thought of as being based on cash flow projections.
But this is not really the case. The approach outlined by the Tandon Committee rests on
the use of balance sheet data and the norms, therefore, are derived on the basis of
funds flow statements. As a result, the true cash requirements of a borrower are not
properly discernible in the statements provided to the banker for assessment of credit
limits. The extent of mismatch between credit limits and the credit requirements of the