Bank Loan India

Traditionally, industrial borrowers enjoyed a relatively easy access to Bank Loan India for meeting their working capital needs. Further, the cash credit arrangement, the principal device through which such finance has been provided, is quite advantageous from the point of view of the borrowers.

Ready availability of finance in a fairly convenient form led to, in the opinion of many informed observers of the Indian banking scene, over-borrowing by industry and deprivation of other sectors. Concerned about such a distortion in credit allocation, the Reserve bank of India has Individuality - Refinance been trying, particularly from the mid-sixties onwards, to bring a measure of discipline among industrial borrowers and redirect credit to the priority sectors of the economy. From time to time, the Reserve bank of India has been issuing guidelines and directives have stemmed from the recommendations of certain specially constituted groups entrusted with the task of examining various aspects of bank loan to industry.

The National credit council to examine the extent to which credit needs of industry and trade were inflated and to suggest ways and means of curbing this phenomenon constituted Dehejia Committee in 1968. To examine whether the credit needs of industry were inflated, the Dehejia committee analyzed the relative growth rates of short-term credit and the value of industrial production. The relative growth rates of short term trade credit and inventories with industry and trade. In addition, the committee analyzed the diversion of short-term credit for fixed asset acquisition and for loans and investments.

The major findings of the Dehejia committee were bank credit to industry grew at a higher rate than the rise in industrial output. Banks, in general, related credit limits to the security provided by the borrowers without properly assessing their needs based on projected financial requirements. In addition, the committee was of the view that short-term bank credit was diverted to some extent for acquiring fixed assets and for other purposes.

The principal suggestions made by the Dehejia committee are mentioned below. Firstly, credit applications should be appraised on the basis of the financial situation, current and projected as reflected in the cash flow analysis and forecasts provided by the borrowers. Cash credit accounts should be segregated into two components: the hard-core component and the strictly short-term component. The hard-core component represents the minimum level of current assets required for maintaining a given level of production. On the other hand, the strictly short-term component represents the fluctuating part of the account. To eliminate multiple financing, committee suggested that a customer should be required to deal with only one bank. If the credit requirement of a customer is high a consortium arrangement should be adopted.

The trade credit period should normally not exceed 60 days- in special cases it may go up to 90 days. According to experts, to check the tendency to seek more than required credit limit, a commitment charge should be levied with a provision to impose a minimum interest charge. Commercial banks should promote the practice of issuing bill as this strengthens the financial discipline of the purchaser and also helps the supplier or producer to plan his financial commitments more realistically. Moreover, proper attention should be paid to the question of adequacy or otherwise of inventories held by various industries and the scope for minimizing the stocks required by industry must be examined while granting loan.

It is worth mentioning that the cash credit system of lending wherein the

borrower can draw freely within limits sanctioned by the banker hinders sound credit planning on the part of the banker and induces financial indiscipline in the borrower. On the other hand, the security- oriented approach to lending favored borrowers with strong financial resources and also led to diversion of funds, borrowed against the security of current assets, for financing fixed assets. Relatively easy access to working capital finance led to large inventory levels with industry. Working capital finance provided by banks, theoretically supposed to be short-term in nature, tended to be, in practice, a long-term source of finance.

For regulating bank credit, there are some factors that should be taken into perspective. Norms for inventory and receivables are the first one followed by quantum of permissible bank finance, style of lending and information and reporting system. Regarding style of lending, the experts are of the view that the overall credit limit may be bifurcated into a loan component, which would represent the minimum level of borrowing throughout the year, and a demand cash credit component, which would take care of the fluctuating requirements, both to be reviewed annually. There should, however, be no rigidity in the matter of bifurcation of the overall credit limit between the loan component and the demand cash credit component.

The demand cash credit component should be charged a slightly higher interest rate than the loan component. This would provide the borrower an incentive for better planning. The term loan representing the excess borrowing to be amortized over a period of time should also carry a slightly higher rate than the cash credit rate.

Apart from loan and cash credit, a part of the total credit requirement within the overall eligibility could also be provided by way of bill limits to finance seller’s receivables. It is desirable that, as far as possible, receivables should be financed by way of bills rather than cash credit against book debts. As regards the question whether purchases may be financed by way of cash credit or bills, each bank may rake its own decision in consultation with the borrower, keeping in view the size of his operations, the individual transaction, and the administrative set up obtaining in the bank.

Comprehensive information and reporting system can be of great help to banks because it seeks to induce the borrower to plan his credit needs carefully and maintain a greater discipline in its use. In addition, it also promotes a freer flow of information between the borrower and banker so that the latter can monitor the credit situation better and ensure that credit is used for intended purposes.

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