The following points highlight the top four committees of regulation of bank finance.
The National Credit Council (NCC) was constituted in October 1968, under the Chairmanship of V. T. Dehejia, to examine how far the credit requirements of trade and industry were inflated and, at the same time, to suggest some measures on the basis of its findings.
In its words:
“The extent to which credit needs of industry and trade are likely to be inflated and how much trends could be checked”.
The Study Group submitted its report in September 1969. It may be noted here that the term ‘inflated’ means the borrowers have taken short-term credit in excess of their real requirements for working capital.
For the purpose of such ‘inflation’, the study group took the following criteria:
(i) Whether the rise in short-term credit was substantially higher than the growth in the value of output;
(ii) Whether the rise in such credit is higher than the increase in inventories;
(iii) Whether short-term bank borrowings have been diverted for building up fixed asset or other non-current assets;
(iv) Whether there is double or multiple financing of the same stocks; and
(v) Whether the period of credit is unduly lengthened.
The major findings of the Dehejia Committee were:
(a) Inflation of bank credit:
Granting bank credit to industry increased significantly in comparison with the increase in industrial output or inventories in value terms e.g. granting bank credit (short-term) to industry was increased by 130% in between 1961-62 and 1966-67, whereas industrial output was increased by only 60% for the same period.
(b) Improper utilisation of short-term credit:
Although the bank credit was allowed for short-term current assets, the same was actually utilised for the acquisition of non-current/fixed asset i.e., short-term credit was diverted.
(c) Granting credit without proper securities and projected financial statements:
Banks granted credit to industries without proper securities and without assessing their real needs which are based on their projected financial requirements.
(d) Prevailing Lending System:
The prevailing lending system helps the industry to depend on short-term bank financing in order to acquire fixed assets.
The following significant suggestions were prescribed by the Dehejia Committee in order to control the regulation of bank finance between the industry and other private sectors:
(a) The appraisal of credit applications must be made in relation to the total financial situation, i.e., current and projected, which can be reflected by Cash Flow Analysis along with forecast Profit and Loss Account and Forecast Balance Sheet submitted by the borrowers.
(b) Cash credit account must be distinguished into two parts, viz.,
(i) ‘the hard core’ which represents the minimum level of current assets required for maintaining a given level of production;
(ii) ‘the strictly short-term’ components which represent the fluctuating part of the account. The second component of the accounts, however, reveals the requirement of funds for short-term purpose. Thus, the said borrowings should be adjusted out of turnover in a short- period.
(c) In the case of ‘Double’ or ‘Multiple’ financing, the group, however, suggested that a customer must be required to deal with only one bank. But if the requirements of the borrowers are high or more, and which cannot be provided by one bank only, in that case, a ‘Consortium’ arrangement may be adopted which has been recommended by the group.
(d) The period of trade credit must not exceed 60 days and 90 day in case of special cases so that the bank’s resources must not be blocked in unproductive purposes.
(e) The committee also suggested that a levy of commitment charges on un-utilised limit along with a provision to impose a minimum interest charge should be considered to control the tendency of having credit more than their requirements.
(f) Another suggestion of the committee was that industry, trade and commercial banks may introduce the system of issuing bills which would help both the purchasers and the suppliers for their financial activities.
The Reserve Bank of India appointed a committee under the chairmanship of Marathe in 1982. The objectives of the committee was to analyse the working of the Credit Authorisation Scheme (CAS).
The Marathe Committee had given some importance to examine and to analyse the CAS in the following forms:
(i) The CAS must be considered as a regulatory measure which would be applicable in the case of all borrowers, irrespective of size, i.e., large or small.
(ii) The objectives of the CAS was to see that proper credit management and improved quality of bank lending had taken place according to the principles and policies which were laid down by the Central Banking Authority (CBA) for the purpose.
(iii) The CAS must not be applied only in case of certain kinds of borrowers; the lending criteria above the minimum level must be the same.
(iv) Simply by concentrating on only one point it is impossible to improve the quality of lending.
(v) The time taken by the commercial banks for their necessary formalities must be reduced together with the time taken by RBI for the same purpose.
However, the recommendations of the Marathe Committee was to give incentive to the borrowers of all categories after complying with the necessary formalities of the CAS and, at the same time, to improve the quality of lending.
It also stated that the commercial banks should be given discretion to grant credit without the prior authorisation of RBI if the following conditions are satisfied:
(a) The estimates relating to production, sales, current assets, current liabilities (excluding bank borrowings), working capital are quite reasonable in comparison with the past trend, and norms are justified assumptions for the future.
(b) Whether or not the so-called classification of assets and liabilities as per RBI norm are made.
(c) The estimated or projected current ratio must not be less than 1.33: 1 (although the norm is 2: 1 in all other normal cases) excluding certain specified categories.
(d) Whether the borrower submitted the quarterly income-statement for the past six months within the scheduled date/period and promises to do the same in future also.
(e) Whether the borrower submitted his annual accounts in time and the bank makes an annual review of the various facilities provided by it and also to examine whether the borrower requires any further credit.
However, the Marathe Committee recommended that the CAS should be renamed as Credit Monitoring Scheme as a result of the proposed change in its approach.
Now we are going to explain the Credit Monitoring Arrangement in brief:
The Reserve Bank of India introduced the term Credit Monitoring Arrangement (CMA) in place of Credit Authorization Scheme (CAS) on the basis of the recommendation of the Marathe Committee in October 1988.
The fundamental characteristics of CMA are:
(a) A post-sanction security of term loans and working capital limits which were provided by commercial banks will be made by the RBI. It is the duty of the commercial bank to submit the necessary papers to the RBI within 15 days from such transactions.
(b) The commercial banks must mention whether the minimum prescribed level made by RBI relating to finance for credit transactions by drawing and accepting trade bills in each and every case and steps must be taken if RBI norms are not followed.
The RBI appointed a committee under the chairmanship of Sukhamoy Chakraborty in order to review and to analyse the working of the Indian monetary system. The report was submitted by him in April 1985. In the report, the Committee presented some suggestions for the improvement of lending activities by the commercial banks.
Its two major recommendations were:
After careful scrutiny the Committee observed that delayed payments were made at random. Thus, in order to control such activities, the Committee suggested that the government should introduce a penal interest payment clause for delayed payments beyond a certain specific date, e.g. 3 months.
It should be remembered that such rate of interest should be fixed at 2% more than the basic interest rate for borrowings.
For this purpose, the committee prescribed the following rates of interest under different heads;
(a) Cash Credit I — to cover supplies to Governments
(b) Cash Credit II — to coyer special circumstances or contingencies
(c) Limit of normal working capital
(a) Cash Credit I — Minimum basic lending rate
(b) Cash Credit II — Minimum prevailing lending rate
Normal Working Capital Limit
(i) Loan portion — The rate between the minimum and the maximum lending rate
(ii) Bill finance limit — 2% below the basic minimum
(iii) Cash Credit Portion — Maximum prevailing lending rate
The Reserve Bank of India appointed a committee under the Chairmanship of Mr. P. R. Nayak, Deputy Governor, RBI. The purpose of this committee was to examine the adequacy of institutional credit to Small Scale Industries (SSI). Some measures were taken as per the recommendations of the Nayak Committee in order to issue adequate and timely credit to this sector.
The significant suggestions of this Committee are:
(a) It is the duty of the bank to ascertain the actual and legitimate requirements of small scale industries to maintain the credit flow. For this purpose, at the beginning of the year, every branch of the bank must prepare its budget relating to working capital requirement of this sector.
(b) A single financing agency must be established to meet both the requirements of both working capital as well as term loan needed by this sector, e.g. State Financial Corporation (SFC) or the Commercial Banks may provide both requirements of working capital and term loans.
(c) RBI decided that the first method of lending, the norms for Inventory and Receivables will not apply to in those industries whose requirement for working capital does not exceed Rs. 100 lakhs. These SSI sectors may be provided with working capital limits ascertained on the basis of a minimum of 20% of their projected annual turnover.
As a result in 1994, MPBF (Maximum Permissible Bank Finance) was, however, extended to nil borrowers to take credit for working capital purpose (not exceeding Rs. 100 lakhs) considering the projected annual turnover. So as per Nayak Committee recommendations, all the borrowers (including SSI and others) may enjoy credit facility for their working capital limits of not exceeding Rs. 100 lakhs.
(d) The borrowers must bring in 5% of their annual projected turnover as margin money, i.e. 25% of the value of goods should be considered as the requirement of working capital out of which 1/5th must be provided by the borrowers and 4/5th by the banks.