SOURCE OF WORKING CAPITAL
Industry claims about one-half of the total credit extended by commercial banks. Banks supply short-term or working capital. Banks’ lending to industry is governed by guidelines issued by the RBI. Among these the important are:
»
Adequate credit support should
be extended to meet the genuine essential requirements
of production.
»
An undue involvement in term lending should be avoided
so that resources can be conserved for meeting the demand
for short-term credit.
»
The newly established units due to start production,
as well as the existing units undergoing expansion,
diversification, and modernization may be allowed working
capital limits taking into account their installed capacity,
expected utilization and anticipated level of production.
»
There must be periodical review of credit limits; particularly
cash credit limits, to verify the continued viability
of borrowing units and to assess the need-based character
of their limits.
»
An increasing share of bank credit should go to small-scale
industries.
TYPE OF ASSISTANCE
Short-term:
Commercial banks extend two types of short-term assistance to industry:
1.Granting advances, loans, cash credits, etc
2.Discounting bills and other commercial paper
The most popular of these has been the assistance through cash credits.
The short-term assistance provided by commercial banks can be converted into medium-term finance through renewal and extension from time to time. commercial banks also undertake the business of underwriting of capital issues. They also contribute indirectly to industrial finance by contributing substantially to the funds of the State financial corporations and the State industrial development corporations.
Long-term:
Historically, commercial banks never lent long-term for new projects, except that a small percentage of bank investments could be put into debentures and other debt instruments floated by corporate. The assumption was that the long-term financing is both the privilege ad responsibility of development financial institutions.
This whole thesis is now being gradually dispensed with. commercial banks are increasingly getting involved in what is perceived as “total banking”.
An industrial project can get a maximum of Rs. 500 crores from the commercial banking system by way of loans, although as per the prudential norms adopted in individual banks, lending to one single project cannot exceed 25 percent of the total capital of a bank.
CONSORTIUM ADVANCES
When the financial requirements of a borrower are substantial, it is generally not advisable for a single bank to meet the same individually. This is more so in cases of industrial advances where the risks involved are high. In such cases, the various banks join, pool together the available resources and try to meet the total credit requirements of the borrower on a joint footing. Such advances where a number of banks have joined with a view to meeting the credit needs of a single borrower or a project, are known as consortium advances.
Generally, the lead bank of the area, or the bank having maximum share of lending is selected as consortium leader. The consortium leader has specific roles to play as under:
»Overall
coordination between the participating banks
»Dealing
with the borrower
»Acting
as focal point for dealing with the various banks and
other authorities like the RBI etc. in the matters of
appraisal, supervision and follow-up
The participating banks formulate the ground rules for the consortium.
SYNDICATION OF LOANS
Following the recommendations of the Shetty Committee set up to review consortium-based lending, the RBI allowed syndication of loans.
Typically, the syndication of a loan is done as follows. A company first approaches a merchant banker asking a loan to be syndicated. The merchant banker then shops around for banks that might want to participate in such syndication. Moreover, depending on the bids received, the merchant banker quotes a price to the borrower. If acceptable, the borrower signs a letter of agreement with a clause for a one-time repayment fixed on a particular day. Alternatively, he can pay in installments, at fixed intervals decided by the various parties.
Where it differs from a Consortium:
More often than not, the parties in the consortium charge an identical rate of interest. However, in syndication, there is no law binding each participant to a uniform rate of interest. In effect, this means that the pricing is free and left to the members of the syndicate.
Syndication will help banks to manage their cash reserves better, without being hit by a sudden change in short-term money rates. Asset-liability management could become more efficient, making banks’ bottom lines look better.
PARTIAL LOAN SYSTEM
The conventional mode of providing working capital finance by banks has been by way of cash credit. The basic consideration for cash-credit finance is presence or absence of security. In case the industrial unit has sufficient security, banks can allow drawings in the account irrespective of the fact whether the same is required for genuine productive purpose or not. This can lead to diversion of funds also. As such, it was a long felt need that the banking system should finance industry on the basis of total operations rather than on security considerations alone.
The system is reviewed periodically by K. B. Chore Committee (1979), Rashid Jilani Committee (1993) and P. L. Tandon Committee (1994). Acting on the recommendations of the Jilani Committee, the RBI modified the cash-credit system and introduced what has come to be known as ‘partial loan system’. Difference between the two systems is that whereas under the loan system interest is to be charged from the day the loan is sanctioned under the cash credit system interest is not attracted till the funds are drawn.
The main features of the system are as follows:
»
For borrowers with working capital credit
limit of Rs.10 crores and above from the banking system,
the loan component is to be 80 percent. Banks can also
vary this component. »
For borrowers with credit limits less
than Rs. 10 crores, the bank and the customer can decide
the proportion of loan and cash components mutually. »
For certain business activities that
are cyclical and seasonal in nature or have inherent
volatility, banks may exempt them from the loan system
of delivery. »
The concerned banks could fix the maximum
period of loan with the provision for rollover also. »
The financing bank may permit borrowers
to invest their short-term surplus in short-term money
market instruments like Commercial Paper, CDs, Term-Deposits
with banks, etc.
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