Methods of computing ceiling on Bank Finance

Having suggested the norms of the inventory and receivables, the Committee recommended ceilings and procedures for computing the ceilings on bank finance that could be made available to industry for working capital needs. There different procedures/methods were suggested. The method to apply, by the lending bank, should depend upon —

(1) the stage of implementation
(2) the priority of the industry (priority in the national developmental concept), and
(3) the age of the industry

The three methods are best described by the Tandon Committee Report.

The three methods are progressively more stringent. The Committee suggested a time bound programs, beginning with the first method and slowly phasing to the second and third method. However, it also suggested the use of bank credit as an instrument for influencing the directional flow of credit to priority industries through the judicious choice of the lending method. Similarly, old established units could be made to finance a large percentage of their working capital gap through their own generated funds plus long term borrowings.

Certain temporary deviations from the ceilings on bank finances could be considered in exceptional cases. For instance, additional funds may be needed for short duration in order to fill a big export order or government contract.

Monitoring and Control by banks:

Having thus suggested the regulation of the bank financing and inventory disciplines, the Tandon Committee further recommended:

Information to be supplied by the borrower to the lending bank such as:

1. Monthly stock statement.
2. Quarterly performance / budget information
3. Half yearly balance sheet and profit and loss account (within 60 days)
4. Annual audited accounts (within 3 months)

Monitoring and control actions by banks, such as:

1. Periodic stock inspection by the bank
2. Annual review cum detailed credit appraisal.
3. Inter-firm and industry wise comparisons and appraisal of management in the borrowers industry in order to examine productivity, viability and development.
4. Classifying borrowers as per a system, for instance as Excellent, Average, Below average, Unsatisfactory according to the credit usage, conformance to inventory norms, providing timely information etc

According to the classification there could be different interests, as an incentive to the industries to improve their credit rating.

The purpose of the above suggested action is to

(1) ensure that credit is being used properly (good use) and in a planned manner.
(2) help the banks to do their own credit planning.

Such monitoring and control needs special technical expertise on the part of the banks, which has been now built up over the year.

In short, the Tandon Committee recommends ceilings on inventories and receivables, on banks credit availability and an elaborate mechanism of monitoring and control by the banks over the operations of the borrowing industries so that they will utilize the funds efficiently as planned and help the banks in their credit management, ultimately helping the nation to allocate its scarce resources for overall balanced economic development.

This has been, indeed, a very significant service rendered by the Tandon Committee. For a production man, its immediate relevance is that, this credit system study has brought home the importance of planning and managing production and inventories. The Tandon Committee Report has been implemented over the years to a certain extent. One of the severe handicaps has been the paucity of appropriately skilled staff available with the banks for them to understand the different needs of the varying industries ad their businesses, processes and requirements. Monitoring and control by the banks is a mammoth task which they have been able to do only to a limited extent. Also, tightening of credit may not be in the individual bank’s interest; the motivation may therefore have been lacking to implement the recommendations fully.

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