Tandon & Chore Committee

Tandon & Chore Committee

A 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 utilization of Bank credit. This was the first elaborate attempt by the central bank to organize the Bank credit. Most banks in India even today continue to look at the needs of the corporate in the light of methodology recommended by the Group. The report of this group is widely known as Tandon Committee report.The weaknesses in the Cash Credit system have persisted with the non-implementation of one of the crucial recommendations of the Committee. In the background of credit expansion seen in 1977-79 and its ill effects on the economy, RBI appointed a working group to study and suggest i) modifications in the Cash Credit system to make it amenable to better management of funds by the Bankers and ii) alternate type of credit facilities to ensure better credit discipline and co relation between credit and production. The Group was headed by Sh. K.B. Chore of RBI and was named Chore Committee.Another group headed by Sh. P.R. Nayak (Nayak Committee) was entrusted the job of looking into the difficulties faced by Small Scale Industries due to the sophisticated nature of Tandon & Chore Committee recommendations. His report is applicable to units with credit requirements of less than Rs.50 lacs.The recommendations made by Tandon Committee and reinforced by Chore Committee were implemented in all Banks and Bank Credit became much more organized. However, the recommendations were perceived as too strict by the industry and there has been a continuous clamour from the Industry for movement from mandatory control to a voluntary market related restraint. With recent liberalization of economy and reforms in the financial sector, RBI has given the freedom to the Banks to work out their own norms for inventory and the earlier norms are now to be taken as guidelines and not a mandate. In fact, beginning with the slack season credit policy of 1997-98, RBI has also given full freedom to all the Banks to devise their own method of assessing the short term credit requirements of their clients and grant lines of credit accordingly. Most banks, however, continue to be guided by the principles enunciated in Tandon Committee report.

The group (headed by Sh. Prakash Tandon) was appointed in July 1974 which was to frame guidelines for follow-up of bank credit and submitted its final report during 1975 and gave following recommendations, applicable to borrowers availing fund based working capital limits of Rs. 10 lac or more:

Norms for inventory and receivables

Norms for 15 major industries proposed by the committee now have more than 50 disintegrated industry groups. Normally the borrower would not be allowed deviations from norms except in case of bunched receipt of raw material, power cuts, strikes, transport delays, accumulation of finished goods due to non-availability of shipping space for exports, build up of finished goods stocks due to failure on the part of purchasers. For those units which are not covered by the norms, past trends to be made the basis of assessment of working capital. (Discretion given to individual banks for deviations in norms)

Approach to lending

The committee suggested three methods of lending out of which RBI accepted two methods for implementation. According to First Method, the borrower can be allowed maximum bank finance upto 75% of the working capital gap (working capital gap denotes difference between total current assets required and amount of finance available in the shape of current liabilities other than short term bank borrowings). The balance 25% to be brought by the borrower as surplus of long term funds over the long term outlay.

As per Second Method of lending, the contribution of the borrower has to be 25% of the total current assets build-up instead of working capital gap. (Method of lending as per Vaz Committee will now apply to borrowers availing working capital fund based limits of Rs. 100 lac or more only)

Other major recommendations of the committee were:

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.

All instructions relating to maximum permissible bank finance withdrawn by RBI as per Credit Policy announced on 15.04.1997)