Regulation of Bank Finance in india under RBI
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Transcript of Regulation of Bank Finance in india under RBI
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Recommendation of various
committees in Banking inindia
}Dehejia Committee (1968)
}Tandon Committee (1974)
}Chore Committee (1979)
}
Nayak Committee
}Vaz Committee
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Dehejia CommitteeExisting
Deficiencies} It is the borrower who decides how much he would borrow; the banker does
not decide how much he would lend and is, therefore not in a position to do
credit planning.
} The bank credit is treated as first source of finance and not as
supplementary to other source of finance.
} The amount of credit extended is based on the amount of security
available, not on the level of operations of borrower.
} Security does not by itself ensure safety of bank funds since all bad and
sticky advances are secured advances; safety essentially lies in the
efficient follow-up of the industrial operations of the borrower.
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The Tandon CommitteeRecommendations
} Norms for holding inventory and receivables
}
Production Based Financing} Style of credit
} Maximum PermiSSIble Bank Finance
1. First Method
2. Second Method
3. Third Method
} Follow up and supervision of credit
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Norms for holding inventory and
receivables} The contribution of the committee, headed by Prakash Tandon, that stands out
relates to :The framing of norms for INVENTORY and receivables for 15 major
industries.
} Determining the amount of permiSSIble bank finance.
} The committee suggested norms, i.e., ceilings for inventory and receivables, which
could be considered for bank finance. The 15 industries included cotton and synthetic
textiles, paper, cement, pharmaceuticals and engineering. Thus, for instance, the
norms proposed for the pharmaceutical industry were :
Raw materials : 2.75 months' consumption
Stocks in process : 1/2 month's cost of production
Finished goods : 2 months' cost of sales
Receivables : 1.25 months' sales
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First Method of Lending :
0.75 (CA CL)
} Banks can work out the working capital gap, i.e. total current assets less
current liabilities other than bank borrowings (called Maximum permissible
Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap;
the balance to come out of long-term funds, i.e., owned funds and term
borrowings.
} The balance 25% to be brought by the borrower as surplus of long term
funds over the long term outlay.
} This approach was considered suitable only for very small borrowers i.e.
where the requirements of credit were less than Rs.10 lacs
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Second Method of Lending:
0.75 CA CL} Under this method, it was thought that the borrower should provide for
a minimum of 25% of total current assets out of long-term funds i.e.,
owned funds plus term borrowings. A certain level of credit for
purchases and other current liabilities will be available to fund the build
up of current assets and the bank will provide the balance (MPBF).
Consequently, total current liabilities inclusive of bank borrowings
could not exceed 75% of current assets. RBI stipulated that the
working capital needs of all borrowers enjoying fund based creditfacilities of more than Rs. 10 lacs should be appraised (calculated)
under this method.
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Third Method of Lending:
0.75 (CA CCA) CL} Under this method, the borrower's contribution from long term
funds will be to the extent of the entire CORE CURRENT
ASSETS, which has been defined by the Study Group as
representing the absolute minimum level of raw materials,
process stock, finished goods and stores which are in the
pipeline to ensure continuity of production and a minimum of
25% of the balance current assets should be financed out of
the long term funds plus term borrowings.
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OTHER MAJORRECOMMENDATIONS
} No slip back in current ratio, normally.
} ClaSSIfication guidelines for Current assets and current
liabilities.
} Identification of excess borrowing.
} Information system, which was modified by Chore Committee
Recommendations.
} Bifurcation of limits into loan and demand component
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The Chore Committee
Recommendations} In assessing credit requirements, banks should appraise and fix separate
limits for the normal level and for peak level needs.
} Simplification of the Quarterly Information System (QIS) and penalty for
delay in submitting the reports.
} Establishment of a discount house in India.
} Use of different types of advances, cash credit, loan & bills -all type to
continue.
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} Bifurcation of cash credit limit into demand loan and fluctuating
cash credit portions not favoured because :
} For seasonal industries the differences is to much , for sales person period the
account may be in credit in which case the loan portion should be nil.
} For non seasonal industries difference is to much narrow to be help to the
banker
} All borrowers except sick units with working capital requirement
of Rs 10 lakh and above to be placed under 2nd method of
lending recommended by Tandon committee.
} Bank to take up financing a portion of raw material by way of
drawee bill.
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Nayak committee Recommendations
} To give preference to village industries, tiny industries, & other small scale
industries in order while meeting the credit requirement of small scale sector.
} Prepration of annual budget in respect of working capital requirement of SSI
sector on bottom up Basis.
} Sick SSI industry redifined.
} Banks are advised to have single financing approach for meeting both term loan
and working capital requirement of SSI industry. The single window scheme od
sidbi enables commercial banks to provide term loans and working capital to SSI
units to have project outlay upto 20 lakh and working capital requirementupto 10
lakh.
} Banks to set up grievance cell to enable SSI borrowers to approach in case
difficulties.
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} Branch should not insist on deposit mobilisation of stipulated
amounts as preconditioned to the sanction of credit. However,
they can enlist the cooperation of these customers for deposit
mobilisation.
} Branch level officials should have right aptitude< skills and
orientations with respect to financing SSI sector.
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Vaz committee recommendation
} Extension of nayak committee to all business enterprises,
which also has been accepted and implemented. The
borrower has to bring in margin of 5% of projected turn over
from a long term source as his contribution and 20% would be
provided by financing bank, thus the working capital limits
have no relation to current assets which is a total departure
from tandon and chore committee.
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} In arriving 25% of projected turnover as working capital
requirement , the committee has assumed an average 4 working
capital cycles in a year. This method of determining the working
capital has understandably made the small entrepreneur happy
as he is assured of working capital facility from his bankersbearing the direct relation ship to his expected turnover.