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Methods of Lending Tandon Commitee

The document discusses three methods of lending that were recommended by the Tandon Committee and implemented by the Reserve Bank of India until 1994 to control lending to corporates. The first method allowed banks to finance up to 75% of a corporate's working capital gap for very small borrowers requiring under Rs. 10 lacs. The second method required corporates to fund at least 25% of current assets through long-term funds and allowed banks to provide the balance. The third method was not accepted for implementation. The committee also suggested inventory and receivable norms for corporates. Banks analyzed corporate balance sheets using the CMA data format mandated by RBI, which differed slightly from the format of the Company Law Board.

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344 views2 pages

Methods of Lending Tandon Commitee

The document discusses three methods of lending that were recommended by the Tandon Committee and implemented by the Reserve Bank of India until 1994 to control lending to corporates. The first method allowed banks to finance up to 75% of a corporate's working capital gap for very small borrowers requiring under Rs. 10 lacs. The second method required corporates to fund at least 25% of current assets through long-term funds and allowed banks to provide the balance. The third method was not accepted for implementation. The committee also suggested inventory and receivable norms for corporates. Banks analyzed corporate balance sheets using the CMA data format mandated by RBI, which differed slightly from the format of the Company Law Board.

Uploaded by

Kinjal Thakkar
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© Attribution Non-Commercial (BY-NC)
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Methods of lending Like many other activities of the banks, method and quantum of short-term finance that can

be granted to a corporate was mandated by the Reserve Bank of India till 1994. This control was exercised on the lines suggested by the recommendations of a study group headed by Shri Prakash Tandon. The study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank, was constituted by the RBI in July 1974 with eminent personalities drawn from leading banks, financial institutions and a wide cross-section of the Industry with a view to study the entire gamut of Bank's finance for working capital and suggest ways for optimum utilisation of Bank credit. This was the first elaborate attempt by the central bank to organise the Bank credit. The report of this group is widely known as Tandon Committee report. Most banks in India even today continue to look at the needs of the corporates in the light of methodology recommended by the Group. As per the recommendations of Tandon Committee, the corporates should be discouraged from accumulating too much of stocks of current assets and should move towards very lean inventories and receivable levels. The committee even suggested the maximum levels of Raw Material, Stock-in-process and Finished Goods which a corporate operating in an industry should be allowed to accumulate These levels were termed as inventory and receivable norms. Depending on the size of credit required, the funding of these current assets (working capital needs) of the corporates could be met by one of the following methods:

First Method of Lending: 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. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs

Second Method of Lending: 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 buildup 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 credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method.

Third Method of Lending: 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 borrowing.

(This method was not accepted for implementation and hence is of only academic interest). As can be seen above, the basic foundation of all banks' appraisal of the needs of creditors is the level of current assets. The classification of assets and balance sheet analysis, therefore, assumes a lot of importance. RBI has mandated a certain way of analysing the balance sheets. The requirements of this break-up of assets and liabilities differs slightly from that mandated by the Company Law Board (CLB). The analysis of balance sheet in CMA data is said to give a more detailed and accurate picture of the affairs of a corporate. The corporates are required by all banks to analyse their balance sheet in this specific format called CMA data format and submit to banks. While most qualified accountants working with the firms are aware of the method of classification in this format, professional help is also available in the form of Chartered Accountants, Financial Analysts for this analysis.

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