Regulation of Bank Finance^437
Concurring with recommendations of the Kannan Committee, Reserve Bank of India
(vide circular No. IECD No. 23/08.12.01/96 dated 15.04.1997) advised to all the banks,
inter-alia, as under:
It has now been decided that the Reserve Bank of India shall withdraw forthwith the
prescription in regard to assessment of working capital needs based on the concept of
maximum permissible bank finance (MPBF) enunciated by Tandon Working Group.
Accordingly, an appropriate system may be evolved by banks for assessing the working
capital needs of borrowers within the prudential guidelines and exposure norms already
prescribedî.
The turnover method, as already prevalent for small borrowers. may continue to be
used as a tool of assessment for this segment: since major corporates have adopted
cash budgeting as a tool of funds management, banks may follow cash budget system
for assessing the working capital finance in respect of large borrowers; there should
also be no objection to the individual banks retaining the concept of the present maximun,
permissible bank finance, with necessary modifications or any systemî.
Reserve Bank of India further directed that: Working capital credit may henceforth be
determined by banks according to their perception of the borrower and the credit needs.
Banks should lay down, through their boards, transparent policy and guidelines for
credit dispensation in respect of each broad category of economic activity.
New System of Assessment of Working Capital Finance
Considering that Indian economy has already ushered into shores ofíliberalisation
and deregulations necessiating the banks in India to expeditiously integrate with
global trends, followed by an ongoing process of elimination of barriers between
operational areas of development banks and commercial banks, the Kannan
Committee could not find any convincing justification to continue with separate
assessment/fixations of jargon of various sub-limits, within overall working capital
requirements, such as pre-sale finance, post-sale finance, domestic credit, export/
import credit, fund based limits and non-fund based limits. Instead, the Committee
felt that Line of Credit System (LCS), as is prevalent in many advanced countries,
should replace the existing system of assessment/fixation of sub-limits within total
working capital credit requirement. Under LCS, the borrowerís working capital
credit requirement is assessed at an outer limit (i.e., the maximum limit) which is
flexible enough to be used in one or more of the following forms as selected by
the borrower in lieu of his requirements from time to time. In other words, the
Line of Credit is not a credit facility per se, but, is an outer limit for total (funded
and non-funded) working capital finance, and within this outer limit, various types