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(^380) Financial Management
Traditionally, industrial borrowers enjoyed a relatively easy access to bank finance for
meet≠ing their working capital needs. Further, the cash credit arrangement, the principal
device through which such finance has been provided, is quite advantageous from the
point of view of borrowers. Ready availability of finance in a fairly convenient form led
to, in the opinion of many informed observers of the Indian banking scene, over-borrowing
by indus≠try and deprivation of other sectors.
Concerned about such a distortion in credit allocation, the Reserve Bank of India (RBI)
has been trying, particularly from the mid-sixties onwards, to bring a measure of discipline
among industrial borrowers and to redirect credit to the priority sectors of the economy.
From time to time, the RBI has been issuing guidelines and directives to the banking
sector toward this end. Important guidelines and directives have stemmed from the
recommenda≠tions of certain specially constituted groups entrusted with the task of
examining various aspects of bank finance to industry. In particular, the following
committees have signifi≠cantly shaped the regulation of bank finance for working capital
in India: the Dehejia Com≠mittee, the Tandon Committee, the Chore Committee, and
the Marathe Committee. The key elements of regulation are discussed below:
Norms for Inventory and Receivables
In the mid-seventies, the RBI accepted the norms for raw materials, stock-in-progress,
fin≠ished goods, and receivables that were suggested by the Tandon Committee for
fifteen ma≠jor industries. These norms were based, inter alia, on company finance
studies made by the Reserve Bank of India, process periods in different industries,
discussions with industry experts, and feedback received on the interim reports. These
norms represented the maxi≠mum levels for holding inventory and receivables in each
period.
From the mid-1980s onwards, special committees were set up by the RBI to prescribe
norms for several other industries and revise norms for some industries covered by the
Tandon Committee. However, these norms are now regarded as indicative. Banks
have a discretion to deviate from the norms. Still banks often look at them.
Chapter-14
Regulation of Bank Finance