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(^434) Financial Management
here again there is considerable variation even amongst large borrowers; and the
relatively smaller ones are still way behind, Altogether, while the working of the CAS
has contributed a great deal and the banks as well as the borrowers have in many cases
improved their systems, there is still long way to go.î Considering that the CAS has
been in operation since 1965, these observations of the Marathe Committee are not
encouraging. The reluctance of borrowers to comply with the requirements of the
information system which constitutes a critical element for the success of the present
system of credit appraisal is a real hurdle in the way of achieving the objectives of the
credit appraisal system. The use of the funds flow approach based on balance sheet
information in setting credit limits instead of a cash flow approach also makes monitoring
of credit limits over the short term a difficult task.
The operation of the credit appraisal system since the introduction of the Tandon
Committee norms has evidently succeeded in reducing dependence of industrial
borrowers on bank finance for meeting their working capital requirements. In the case
of medium and large public limited companies in the manufacturing sector the ratio of
bank finance to total current assets declined from 30.1 per cent in 1974-75 to 26.8 per
cent in 1980-81, as revealed in the regular suryes of the finances of such companies
undertaken by the Reserve Bank of India. In the case of large publics limited companies
in the manufacturing sector for which survey results are available, it is seen that the
ratio job bank finance to total current assets declined from 26.9 per cent in 1980-81 to
26.3 per cent in 1981-82 and further to 23.1 per cent in 1982-83.
The reduced reliance on bank finance has been made possible for the better established
companies since 1980 by either greater access to the capital market facilitated by
modifications in the official guidelines for the issue of convertible and non-convertible
debentures. For the bulk of the lessor known industrial borrowers however, this would
not be the case. The latter have responded of stricter credit appraisal by banks by
resorting to ways and means in increasing their current liabilities. The RBI survey
indicates that to 1980-81 the ratio of current liabilities excluding bank borrowing in
current assets was 53.3 per cent for large public limited companies in the manufacturing
sector. In comparison the ratio was 45.5 per cent for the medium and large public
limited companies in 1980-81 having risen from 36.9 per cent in 1974-75. This is not a
surprising finding and one can reasonably surmise that the effect of stricter credit
appraisal was being passed on successively by the larger borrowers to the smaller and
weaker borrowers, to greater or lesser degree depending on prevailing economic
conditions and the stance of monetary policy.
Burden of Financing Sales: The transmission mechanism of the impact of stricter
enforcement of working capital norms in financing the larger borrowers noted above is
suggestive of a similar transmission of the burden of financing sales to government and
semi-government agencies and public sector organisations who as a group are considered