1.

Tandon committee
o Reserve Bank of India setup a committee under the chairmanship of Shri P.L. Tandon in July 1974.
o The practices of most of the banks are still influenced by tandon committee recommendations though financial
liberalization occurred in 1990s.
2. Tandon committee
o The terms of reference of the Committee were:
o 1. To suggest guidelines for commercial banks to follow up
o and supervise credit from the point of view of ensuring
o proper end use of funds and keeping a watch on the safety
o of advances;
o 2. To suggest the type of operational data and other
o Information that may be obtained by banks periodically from the borrowers and by the Reserve Bank of India
from the leading banks;
o 3. To make suggestions for prescribing inventory norms for
o the different industries, both in the private and public sectors and indicate the broad criteria for deviating from
these norms ;
3. Tandon committee
o 4. To make recommendations regarding resources for financing the minimum working capital requirements ;
o 5. To suggest criteria regarding satisfactory’ capital structure and sound financial basis in relation to
borrowings ;
o 6. To make recommendations as to whether the existing pattern of financing working capital requirements by
cash credit/overdraft system etc., requires to be modified , if so, to suggest suitable modifications
4. Tandon committee
o Recommendations
o Norms of current asset.
o Maximum permissible bank finance.
o Emphasis on loan systems.
o Periodic information and reporting system .
5. Tandon committee
o Norms for current assets .
o They defined the norms(15 industries) for
o Raw materials
o Stock in progress
o Finished goods
o Receivables
6. Tandon committee
o Maximum permissible bank finance (MPBF )
o Three methods for determining MPBF
o Method 1: MPBF=0.75(CA-CL)
o Method 2: MPBF=0.75(CA)-CL
o Method 3: MPBF=0.75(CA-CCA)-CL
o CA- current asset, CL- current liabilities,
o CCA- core current assets (permanent component of working capital).
7. Tandon committee
o Current Assets Rs.(in millions)
o Raw material 18
o Work in process 5
o Finished goods 10
o Receivables(including billsDiscounted) 15
o Other current assets 2
o —
o 50
o —
o Current Liabilities
o Trade Creditors - 12
o Other current liabilities - 3
o Bank borrowings (including Bills discounted)- 25
o —
 o 40
o —
o MPBF for Mercury Company Limited as per above methods are:
o Method 1: 075(CA-CL) = 075(50-15) = Rs.26.25 million
o Method 2: 0.75(CA)-CL = 0.75(50)-15 = Rs.22.5 million
o Method 3: 0.75(CA-CCA)-CL = 075(50-20)-15 = Rs.75 million
o Method 2 is adopted.
8. Tandon committee
o Emphasis on loan system
o Only a portion of MPBF must be cash credit component and the balance must be in the form of working
capital demand loan.
o Periodic information and report system.
o quarterly information system-form I
 Estimate production and sale for current and ensuring quarter.
 The estimate of current asset and liabilities for the ensuing quarter.
9.
o Quarterly information system-form II
 Production and sales during current year and for the latest completed year.
 Asset and liabilities for the latest completed year.
o Half yearly operating statements- form III
 Actual and estimated operating performance for the half year ended.
o Half yearly operating statements- form IIIB
 Actual and estimated sources and uses of funds for the half year ended.

TANDON, CHORE, KANNAN AND CERTAIN OTHER

COMMITTEES RECOMMENDATION
 
Financing of working capital had always been an exclusive domain of commercial banks. Too much emphasis
on security by the banks directed the flow of credit to affluent section of society with the result that economic
resources of the country were concentrated in a few hands. Projects promoted by technically qualified
entrepreneurs with no tangible security to offer found it difficult to raise finance for the working capital
required by them from banks. With the nationalisation of the banks an entirely new breed of entrepreneurs
made a demand on bank credit. Small sector and other segments of priority sector were to be the major
beneficiary of nationalisation and were preferred claimants of credit. This resulted in an unexpected demand
on lendable funds of banks and naturally called for a reform in the policies of banks to orient them to the new
developmental role assigned to the banking industry.
 
Another important factor which called for reforms was the inbuilt weakness in the cash credit system linked
with emphasis on security. The limits were directly fixed on the basis of security available in the account
which in many cases resulted in double finance. Banks also had no control over the level of advances at any
particular time. It was not related to how much a bank can lend at a particular time but was linked to the
decision of the borrower to borrow at that time. A major part of credit limits sanctioned by the bank remained
unutilised and there was a strong tendency within the banks to oversell the credit. It was noted as at the end of
June, 1974 that total limits sanctioned by the banking industry was far in excess of its total deposits. Bank
could afford this overselling as 43% of the limits sanctioned by them remained unutilised. Any unexpected
demand within the sanctioned limits could prove disastrous and had the capacity to put the entire banking
industry out of gear. The fear was proved true in late 1973 when a sudden demand on bank credit was made
due to unprecedented rate of inflation and the banks had to arbitrarily freeze the credit limits of their
borrowers.
 
In view of such a situation obtaining at that time, Reserve Bank of India constituted a 'Study Group' with Shri
Prakash Tandon as Chairman in July, 1974 to frame necessary guidelines on bank credit with the following
terms of reference :
  
                      To suggest guidelines for commercial banks to follow up and supervise credit from the point
of view of ensuring proper end-use of funds and keeping a watch on the safety of the advances and to
suggest the type of operational data and other information that may be obtained by banks periodically
from such borrowers and by the, Reserve Bank of India from the lending banks,
                      To make recommendations for obtaining periodical forecasts from borrowers of (a)
business/production plans, and (b) credit needs,
                      To make suggestions for prescribing inventory norms for different industries both in the
private and public sectors and indicate the broad criteria for deviating from these norms,
                      To suggest criteria regarding satisfactory capital structure and sound financial basis in
relation to borrowings,
                      To make recommendations regarding the sources for financing the minimum working
capital requirements,
                      To make recommendations as to whether the existing pattern of financing working capital
requirements of cash credit/overdraft system etc., requires to be modified, if so, to suggest suitable
modifications, and
                      To make recommendations on any other related matter as the Group may consider relevant
to the subject of enquiry or any other allied matter which may be specifically referred to it by the
Reserve Bank of India.
 
Based upon these terms of reference the Group attempted to identify the various constituents of working
capital that could be financed by the banks and suggested norms for build up of inventory. Far reaching
recommendations on the style of lending and improvement in the present system of Cash Credit were also
made. These recommendations were mostly accepted by Reserve Bank and were referred to banks for
implementation in late 1975. Many modifications have since been suggested by 'Chore Committee'.
Nevertheless the basis of the recommendations of Tandon Committee have been retained. The
recommendations of the group related to four important aspects as discussed in the following paragraphs.
 
Level of Current Assets
 
Working capital requirement of any unit is directly related to the level of current assets with the unit. As the
main emphasis by the banks had been on security, the limits were sanctioned on the basis of the value of
inventory held by the unit and no attempt whatsoever was made to assess the requirement of the unit. The
Group analysed the inventory build up of various units and classified the inventory as under
 
                      Flabby inventory comprising finished goods, raw materials and stores held because of poor
working capital management and inefficient distribution.
                      Profit-making inventory representing stocks of raw materials and finished goods held for
realising stock profits.
                      Safety inventory providing for failures in supplies, unexpected spurt in demand etc., in
effect, an insurance cover.
                      Normal inventory based on a production plan, lead time of supplies and economic ordering
levels. Normal inventories will fluctuate primarily with change in production plan. Normal inventory
also includes reasonable factor of safety.
 
Some excessive inventory may also have to be built up sometimes due to factors beyond the control of
management as in case of bunched imports etc. Flabby and profit-making inventory are both non-productive
and should be discouraged. Normal inventory includes an element of safety and it should be the endeavour of
any management not to hold any excess inventory over its normal requirements. To arrive at this normal level
of inventory, 'Tandon Group' suggested norms for 15 different kind of industries covering a major part of all
industries in the country and the norms related to
 
                      Raw materials
                      Stocks in process/semi-finished goods
                      Finished goods
                      Receivables
which together make for bulk of the current assets of any unit.
 
Reserve Bank also appointed various "Committees of Direction" to make recommendations regarding any
changes to be brought in the norms suggested by the Group. 'Committee of Direction' had also recommended
norms for other industries not included in the initial report of the Group. With the passage of time it was felt
by trade and industry that these norms have become outdated and needed immediate review in the changing
economic scenario. An ‘In House Group’ under the chair personship of Ms I.T.Vaz, Executive Director,
Reserve Bank of India, was constituted in January 1993 to review the need for continuing with the norms for
holding of inventory/ receivables as also allocation of credit to industry by fixing Maximum Permissible Bank
Finance (MPBF) based on such norms.
 
As per the recommendations of the 'In House Group' accepted by Reserve Bank of India, the banks have been
given discretion to decide the levels of holding of individual items of inventory and of receivables, which
should be supported by bank finance after taking into account the production/processing cycle of an industry
as also other relevant factors.
 
The other factors will include the financial parameters of the borrower. Banks now have the freedom to
decide the levels of holding of each item of inventory as also of receivables which would represent a
reasonable build up of current assets for being supported by Bank finance. Reserve Bank will not prescribe
detailed norms for each item of inventory as also of receivables; but only advise the overall levels of
inventory and receivables for different industries for the guidance of the banks to serve as broad indicators.
Banks may also frame suitable guidelines for accepting the projections made by borrowers relating to 'Sundry
Creditors (Goods)', an item included in 'other current liabilities'. The above guidelines would apply to
borrowers enjoying aggregate fund-based working capital limits of Rs. 1 crore. and above from the banking
system.
 
Reserve Bank had advised broad indicators for 17 group of industries which are given in the following pages.
Banks are however, now free to fix their own norms, if so desired by them.

Approach to Lending
 
The second aspect of the recommendations of the Group related to approach to lending. It was stipulated that
the unit should finance a part of ' its current assets from owned funds and term liabilities. It prescribed a
minimum margin of 25% to be brought in by the unit from its owned funds and long-term liabilities and
suggested 3 different methods of lending to arrive at the contribution of the borrower in the above manner.
The three methods of lending as suggested by the Group were as under:
 
Method I. The borrower should bring in 25% of the net working capital (current assets-current liabilities
excluding bank borrowing) from its owned and long-term liabilities.
Method II. The borrower should finance 25% of all current assets from owned funds and long-term
liabilities and the balance he financed by the bank.
Method III. The hard core current assets i.e., the current assets which are permanently required by the unit
for its functioning must be exclusively financed by the borrower. The borrower should also
 provide 25% of the remaining current assets and only the balance will be financed by the
bank.