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(^424) Financial Management
(2) In the light of the review, to suggest:
(a)modifications in the system with a view to making the system more amenable
to rational management of funds by commercial banks, and/or
(b) alternative types of credit facilities, which would ensure greater credit discipline
and also enable banks to relate credit limits to increase in output or other
productive activities; and
(3} To make recommendations on any other related matter as the Group may
germane to the subject.
The Group made following recommendations in its final report. Recommendations
Credit System
The advantages of the existing system of extending credit by a combination of the three
types of lending, viz., cash credit, loan and bill should be retained. At the same time, it
is necessary to give some directional changes to ensure that wherever possible the use
of cash credit would be supplanted by loans and bills. It would also be necessary to
introduce necessary corrective measures to remove the impediments in the use of bill
system of finance and also to remove the drawbacks observed in the cash credit system.
Bifurcation of Credit Limits
Bifurcation of cash credit limit into a demand loan portion and a fluctuating cash credit
component has not found acceptance either on the part of the banks or the borrowers.
Such bifurcation may not serve the purpose of better credit planning by narrowing the
gap between sanctioned limits and the extent of utilisation thereof. It is not likely to be
voluntarily accepted and it does not confer enough advantages to make it compulsory.
Reducing Over-dependence on Bank Borrowings
The need for reducing the over-dependence of the medium and large borrowersó
both in the private and public sectors-on bank finance for their production/trading purposes
is recognised. The net surplus cash generation of an established industrial unit should
be utilised partly at least for reducing borrowing for working capital purposes.
Enhancement of Ownerís Contribution
In order to ensure that the borrowers do enhance their contributions to working capital
and to improve their current ratio, it is necessary to place them under the Second
Method of lending recommended by the Tandon Committee which would give a minimum
current ratio of 1.33:1. As many of the borrowers may not be immediatly in a position
to work under the Second Method of lending, the excess borrowings should be
segregated and treated as a working capital term loan which should be made repayable
in instalments. To induce the borrowers to repay this loan, it should be charged a higher
rate of interest. For the present, the Group recommends that the additional interest may