The group headed by Mr. 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 lakhs or more. Its main recommendations related to norms for inventory and receivables, the approach to lending, style of credit, follow ups & information system.

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).

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 up to 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).

Assessment of need based credit of the borrower on a rational basis on the basis of their business plans.

Bank credit would only be supplementary to the borrower’s resources and not replace them, i.e. banks would not finance one hundred percent of borrower’s working capital requirement.

Bank should ensure proper end use of bank credit by keeping a closer watch on the borrower’s business, and impose financial discipline on them.

Working capital finance would be available to the borrowers on the basis of industry wise norms (prescribe first by the Tandon Committee and then by Reserve Bank of India) for holding different current assets, viz. Raw materials including stores and others items used in manufacturing process, Stock in Process, Finished goods, Accounts receivables.

Credit would be made available to the borrowers in different components like cash credit; bills purchased and discounted working capital, term loan, etc., depending upon nature of holding of various current assets.

In order to facilitate a close watch under operation of borrowers, bank would require them to submit at regular intervals, data regarding their business and financial operations, for both the past and the future periods.