ASSIGNMENT

BY, FENSTER B.C ROLL. NO: IM 2504

The hard core inventory represents the minimum level of inventories which the industry was
required to hold for maintaining a given level of . Banks should finance industry on the basis of
a study of borrowers1. total operations rather than security basis alone.term asset. The
recommendations are.2 NEW TRENDS IN FINANCING WORKING CAPITAL BY BANKS
A customer should be required toTo regulate and control bank finance. confine his dealings to
one bank only. the Reserve Bank of India has been issuing directives and guidelines to the bank
from time to time on the recommendations of certain specially constituted committees entrusted
with the task of examing various aspects of bank finance to industry.)Dehejia committee
National Credit Council constituted a committee under the chairmanship of Shri. Dehejia in 1968
for determine credit needs of industry and trade are likely to be inflaited and how such trends can
check Opinion and Recommendations The total Tendency to divert shot term credit for
long.T. V. credit requirement of the borrower should be segregated into hard core and short
term component.
Bank credit instead ofit will give minimum current ratio of 1. being taken as a supplimenatry
to other source of finance is treated as the first source of finance. Lending norms three
alternatives 1.33 : 1 .3 production should be put on a formal team loan basis and subject to Bank
should also know the end-use of bank creditrepayment schedule. so that the finances are used
only for purpose for which they are lent.Borrower contribute minimum 25% of total current asset
from long-term fund .Borrower contribute minimum 25%of working capital from long-term
fund.L. it will give minimum current ratio of 1. The bank should get the information about the
operational plans of2. customer in advance.) Tandom committee report Continuation ofRBI
set up a committee under the chairman of Shri P. the existing cash credit system according to
some modifications for control the bank finance. Tandom In july 1974 Opinions Bank credit is
extended on the amount of security available and not according to the level of operations of the
customer.17:1 2.
Banks should discourage sanction of temporary limits by charging additional 1% interest over
the normal rate. Borrower contribute from long. RECOMMENDATIONS Bank should obtain
quarterly statements in the preseribed format from Banks shouldall borrowers having working
capital credit limit of RS. not bifurcate cash credit account into demand loans and cash credit
components.4 Banks should take step to convert cash credit limits into bills3. limits for
financing sales.term funds will be to the extend of the entire core current asset and a minimum of
25% of the balance current Bank should undertake a periodical review of limits of RS.asset .
Bank should fix separate credit limit for peak. 50 lakhs and above. If a borrower does not
submit the quarterlylevel and non-peak level. returns in time the banks may charge penal
interest of 1% on the total amount outstanding for the period of default.) CHORE COMMITTEE
REPORT RBI in march 1979 appointed another committee under the chairmanship of Shri k. 10
lakhs and above. 3. Chori to review the working of cash credit system.B.
the banks would provide credit for working capital according to the second method of lending.
The projected current ratio is 1.33:1 The introduction of the Fast Track Scheme to improve
the quality. of credit appraisal in banks. appointed a committee under the chairmanship of
marathe to review the working of Credit Authorization Scheme(CAS) and suggest measures for
giving meaningful directions to the credit management function of the RBI. Hence in future.
Under some sircumstancess. 1. RECOMMENDATIONS Third Method of Lending as suggested
by the Tandon Committee to be dropped.) MARATHE COMMITTEE REPORT Commercial
banks can release without prior approvalThe RBI in 1982. of the RBI 50% of the additional
credit required by the borrowers (75% in case of export oriented manufacturing units).5 4.
RECOMMENTATIONS Penal Interest for Delayed Payment The government must insist that
all public sector units . Committee submitted report in April. and the Normal Working Capital
Limit be charge as below.) CHAKRAVARTY COMMITTEE REPORT The RBI appointed
another committee under the chairmanship of Sukhamoy Chakravarty to review the working of
monetary system of India. a)Cash Credit Portion : Maximum prevailing lending rate of the bank
Classification if Credit Limit Under Three Different Heads. 1)Cash Credit I to include
suppliers to government 2) Cash Credit II to cover special circumstances 3) Normal Working
Capital Limit to cover the balance credit facilities.iii)for the past six months within the
prescribed time and undertakes to do the same in future.1985. The penal interest may be fixed at
2% higher than the minimum lending rate of the suppliers bank.6 2.The borrower has been
submitted quarterly information and operating statements(form i. 5.ii. Basic lending rate of the
bank should charge to Cash Credit II. large private sector units and government departments
must include penal interest payment clause in their contracts for payments delayed beyond a
specified period .
the Indian Banks Association(IBA) constituted a committee headed by Shri K. The committee
submit the report on 25 -2 1997. 6. Chairman and Managing Director of Bank of Baroda to
examine all the aspects of working capital finance including assessment of maximum
permissible bank finance(MPBF). RECOMMENTATIONS Arithmetical rigidity imposed by
Tandon Committee(reinforced by Chore Committee) in the form of MPBF computation so far
been in practice. Line of credit system (LIS) should replace the existing system of assessement/
fixation of sub-limits within total working capital requirement. should be scrapped.7 b)Bill
finance Portion : 2% below basic lending rate of the bank c)Loan Portion :The rate may vary
between the minimum and maximum lending rate of the bank. KANNAN COMMITTEE
REPORT Liberalization in the financial sector . Freedom to each bank be given in regard to
evolving its own system. of working capital finance for a faster credit delivery so as to serve
various borrowers more effectively. Kannan.
8 Shift emphasis from the liquidity level lending (security based lending) to Cash Deficit
Lending called Desirable Bank Finance(DBF) .
Current Trends in Working Capital Management
Flash back almost three years ago, to the "technical" end of the Great Recession in June of 2009.
The depth of the financial crisis was just beginning to be felt, and banks were tightening the reins
on credit, which resulted in a credit crunch that made it nearly impossible for many businesses to
obtain the capital they needed to grow, much less keep their operations going.
In this environment, cash conservation became the name of the game for many CFOs. To try to
squeeze more cash out of their supply chains, businesses focused on tightening collection of
receivables, stretching out their payables and reducing inventory.
A Different Scenario
Now, fast forward to today. According to the data revealed in the 2011 CFO/REL Working
Capital Scorecard, U.S. businesses are now flush with cash. As a result, the emphasis on
wringing every dollar out of working capital seems to have dissipated somewhat.
For example, the scorecard revealed a paltry 2% decrease in days working capital (DWC).
Meanwhile, days sales outstanding (DSO) declined by just 0.1% and days inventory outstanding
(DIO) and days payable outstanding (DPO) both rose by just 1.1%.
These modest improvements in working capital performance seem to indicate that the emphasis
by U.S. businesses has shifted from working capital improvements to sales growth and profit
enhancement. "The energy and focus have now been placed much more on the profit-and-loss
statement," noted Mark Tennant, a principal with REL, which co-sponsored the research. "There
isn't a continuous focus on cash flow and working capital."
Meanwhile, business lending activity appears to be on the rise. Data recently released by the
FDIC reveals that overall commercial and industrial (C&I) lending by banks increased during
each of the five quarters preceding third-quarter 2011 after declining steadily since early 2008.
And the growth rate in borrowing among small businesses (as measured by the Thomson
Reuters/PayNet Small Business Lending Index) increased by double digits over the previous year
for the 17th consecutive month in December.
A New Mindset?
So, do improved corporate balance sheets, a brighter business lending picture and an improving
economy mean that CFOs should adopt a new mindset when it comes to working capital
management? Not necessarily. In fact, statistics like those noted here could lead CFOs to adopt a
false sense of security.
In the article posted on CFO.com reporting on the results of Working Capital Scorecard, Stephen
Payne, Americas leader of working capital advisory services at Ernst & Young, stated that
corporate balance sheets may not be nearly as impervious as they seem. Despite an impressive
recent comeback in corporate productivity, high unemployment continues to plague the
economy, Payne noted. To produce sustainable growth, companies will "have to hire people and
invest via capex, and that's going to start depleting their cash hoards," he said.
Also, while there have been recent signs of improvement in the U.S. economy, we're by no
means out of the woods yet. While positive, economic growth remains anemic, especially
compared to most other post-recession rebounds. And unemployment remains stubbornly high,
despite some recent improvements in the employment picture.
Promising Signs
The first quarter of the year has offered some promising economic signs so far-and if the
economy continues to pick up steam, small business credit demand will certainly rise. But many
small businesses still won't qualify for bank financing, making them good candidates for non-
traditional and asset-based loans.
The most recent Asset-Based Lending Index, which is published quarterly by the Commercial
Finance Association, reported a 1.5% increase in total committed credit lines in the third quarter
of 2011 from the previous quarter, which was the fourth consecutive quarterly increase in asset-
based credit lines. Total asset-based credit commitments grew by 5% compared to the third
quarter of 2010, and new commitments were up by more than 26%.
In addition, half of asset-based lenders reported an increase in new credit commitments, and 70%
reported an increase in total commitments. Meanwhile, utilization of asset-based lenders' credit
lines increased for the third consecutive quarter-to 40.5%.
If you have small businesses that still don't qualify for traditional bank financing, please contact
us to discuss how we might be able to help meet their financing needs with a non-traditional or
asset-based loan.
To learn more about CFGs accounts receivable management programs, please visit
www.cfgroup.net or contact us at (800) 757-5195.
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