Recommendation of various

committees in Banking in india

vaibhav jain
MBA 4th sem
UCE, RTU
Recommendation of various
committees in Banking in india
 Dehejia Committee (1968)

 Tandon Committee (1974)

 Chore Committee (1979)

 Nayak Committee

 Vaz Committee
Dehejia Committee–Existing
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.
The Tandon Committee
Recommendations
 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
 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
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
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 credit facilities of more than Rs. 10 lacs should be appraised
(calculated) under this method.
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. 

OTHER MAJOR RECOMMENDATIONS
 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
 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.
 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.
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.
 SSI loan application should be dispsed off within time frame laid down as
follows :
 In case of cr. Upto25000 15days
 In all other cases 8 to 9 week
 To help eliminate sanction of limit to SSI units, banks should adopt a system of
committee approach in which deceision are taken by competent authority after a
structural discussion with the branch manager and also the authorities at
intervening levels.
 Rejection of limits by sanctioned authority should be reffere to the next higher
authority for confirmation.
 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.
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.
 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 bankers bearing the direct relation
ship to his expected turnover.