(^436) Financial Management
Kannan Committee Report (The Latest Committee)
With a view to free the banks from rigidities of the Tandon Committee recommendations
in the area of Working Capital Finance and considering the ongoing liberalisation in the
financial sector, IBA constituted, following a meeting of the Chief Executives of selected
public sector banks with the Deputy Governor of Reserve. Bank of India on 31.8.96, a
committee on ëWorking Capital Financeí including Assessment of Maximum Permissible
Bank Finance (MPBF), headed by K. Kannan, Chairman and Managing Director of
Bank Baroda.
The Committee examined all the aspects of working capital finance and gave far reaching
recommendations on the modalities of assessment of working capital finance in its
report submitted to IBA on February 25,1997. It observed that since commercial banks
in India are undergoing a metamorphosis of deregulations and liberalisations, it is
imperative that micro-level credit administration should be handled by each bank
individually with their own risks-perceptions, risks-analysis and risks-forecastings. The
final report of the Committee was submitted to RBI for its consideration in March,
- In its final report, the Kannan Committee also pointed that alongwith modification
of existing systems of working capital assessment and credit monitoring, certain
undermentioned areas require to be given greater attention:
(1) Regular interface with the borrower to have a better understanding of (i) his
business/activity; and, (ii) problems/constraints faced by him and the future
action plan envisaged;
(2) Periodical obtaining of affidavits from the borrowers, declaring highlights of
their assets, liabilities and operating performance (in lieu of subjecting even the
high rated/high valued borrowers to several routine inspections/verifications)
in order to bestow faith-oriented, rather than ab initio doubt-oriented, approach
in monitoring the credit dispensation.
(3) Periodical exchange of information between/among financing banks/financial
institutions to pick-up the alarm signals at the earliest.
(4) Establishing, within, a time bound programme, a ìCredit Information Bureauî
to provide updated information of existing/new borrowers before taking a credit
decision. (Modality of Information Bureau in advanced countries may be takení
as a guide for floating an appropriate Credit Information Bureau).
Accordingly, the Kannan Committee recommended that the arithmetical rigidities,
imposed by Tandon Committee (and reinforced by Chore Committee) in the form of
MPBF-computation, having so far been in vogue, should be given a go-by. The committee
also recommended for freedoms to each bank in regard to evolving their own system of
working capital finance for a faster credit delivery in order to serve more effectively
various segments of borrowers in the Indian economy.