R!i.

5-00

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Arthur Road, Bombay·400 034. Published by Shri T. J( , for the
Reserve Bank of India, Bomba·
 CONTENTS

CHAPTER PAGE

INTRODUCTION

2 OUR TASK 8

3 EVALUATION OF THE PRESENT SYSTEM 9

Review - Supply of and Demand for Funds - Present Style
of Credit - Weakness of the Cash Credit System - National
Credit Council's Study Group Report - Banker's Involvement
- Need for Change.

4 RA TlONALE OF OUR PROPOSALS 16

Need for Funds - Different Types of Current Assets - Reason-
able Levels of Current Assets - Purpose of Bank Lending.

5 NORMS FOR INVENTORY AND RECEIVABLES 18

Need for Norms - Interim Report - Approach to Norms-
- Suggested Norms - Heavy Engineering Industry - Devia-
tions from Norms - CoV'erage of Norms - Norms and Public
Sector - Application of Norms - Review of Norms .

.~ 6 OUR PROPOSED APPROACH TO LENDING .. 27

Working Capital Gap and Bank Finance - Aligning Credit with
Priority Industries - Funded Debt·Equity Relationship-
Additional Requirement of Credit - Proposed Style of Credit
- Proposed Information System - Bill Finance - Coverage
of the Proposed Approach.

"'7 OUR RECOMMENDED SCHEME 37

8 FOLLOW-UP, SUPERVISION AND CONTROL 40

Testing the Assumptions of Lending - Terms and Conditions
- Financial Follow-up - Stock Statements - Stock Inspec-
tions - Management Efficiency and Inter-firm Comparison
- Classification of Customers - End-use of Credit.
iii
 CONTENTS (Continued)

9 NORMS FOR CAPITAL STRUCTURE 49

10 IMPACT ON BANK'S INTERNAL WORKING .. 52

11 BANKER - CUSTOMER RELATIONSHIP 54

12 SOME RELATED ISSUES 56

Issues relating to Norms:

Norms for Trade - Statutory Authorities and Norms - Trans-
port Delays - Supplies from Canalising Agencies and Public
Sector Producers - Government Purchases - Shift to Cash
Sales.

Issues affecting Banks :

Consortium Advances - Banker's Leverage - Sticky Advances
- Environment - Lead Banks for Industry.

Other Issues :
Credit Authorisation Scheme - Public Sector Industry - Flow
of Information to the Reserve Bank.

13 THE NEXT STEP 63

14 ACKNOWLEDOEMENTS 65

15 SUMMARY OF OBSERVATIONS AND

RECOMMENDATIONS 66

ANNEXURES .. 79

iv
1
INTRODUCTION

1.1 Till nationalisation of the major commercial banks in July 1969, the
main contenders for bank credit were large and medium scale private indus-
try and internal and external trade. Very little credit went to small industry,
the self-employed and agriculture, or to the public sector, apart from the
assistance given by a few banks. There has never been and there still is
no tradition of bank lending for personal consumption.

1.2 Nationalisation of the major commercial banks, following upon social

control, called for a new policy, both for deposit mobilisation through accele-
rated branch expansion and for equitable disbursal of credit. The banking
system was asked to adopt a new approach as a credit agency, based on
development and potential rather than on security only, to assist the weaker
sectors of society and, later, to lend to the public sector also. Significant
sectors of the economy, which were once outside the scope of bank lending,
have now been brought within its ambit. While assistance to the new credit
users has gone up substantially since nationalisation, the bulk of bank credit
continues to go to organised industry, although its share as a percentage of
total credit has now somewhat diminished.

1 .3 Indian industry has not always made the best use of resources. Tradi-
tionally cheap labour, cheap money and a sheltered market have not been
conducive to efficient resource employment. Few borrowers planned their
credit needs and, until recently, few banks planned their resource mobilisa-
tion and credit disbursal.

1.4 A world-wide flare up of prices and stagnation in our agricultural and

industrial production recently, fuelled an unprecedented rise in prices and,
in turn, led to a rise in demand for credit. The unprecedented inflation has
been, in fact, a phenomenon of the past two to three years. Alongside,
monetary policy raised liquidity requirements of banks. Pressure on bank
resources thus developed over the recent years.

1.5 To fit in with prevailing economic compulsions, the Reserve Bank

has used selective credit controls, differential interest rates and varying
liquidity requirements as part of monetary policy.
1
1.6 In 1973, wheQ. demand for credit rose steeply at a time when produc-
tion was not rising, the Reserve Bank imposed certain credit restraints.
Later in 1974, when inflation touched the unprecedented level of 31 per
cent, a package of measures aimed at curbing it was introduced. Both steps,
along with other fiscal measures, proved effective.

1.7 Along with these steps, it was felt that the time was opportune to
bring about other reforms in the bank credit system, so that it could be
geared to fulfil a developmental role in the economy in the coming years.

1 .8 It was against this background that the Reserve Bank constituted, in

July 1974, the Study Group to frame guidelines for follow-up of bank
credit.

1. 9 Its terms of reference were:

(i) To suggest guidelines for commercial banks to follow-up and
supervise credit from the point of view of ensuring proper end-
use of funds and keeping a watch on the safety of the advances
and to suggest the type of operational data and other information
that may be obtained by banks periodically from such borrowers
and by the Reserve Bank of India from the lending banks,

(ii) To make recommendations for obtaining periodical forecasts from

borrowers of (a) business/production plans, and (b) credit needs,

(iii) To make suggestions for prescribing inventory norms for differ-

ent industries both in the private and public sectors and indicate
the broad criteria for deviating from these norms,

(iv) To suggest criteria regarding satisfactory capital structure and

sound financial basis in relation to borrowings,

(v) To make recommendations regarding the sources for financing

the minimum working capital requirements,

(vi) To make recommendations as to whether the existing pattern of

financing working capital requirements by cash credit/overdraft
system etc., rC<juires to be modified, if so, to suggest suitable
modifications, and

(vii) To make recommendations on any other related matter as the

Group may consider germane to the subject of enquiry or any

2
 other allied matter which may be specifically referred to it by
the Reserve Bank of India.

1.10 The members of the Group were:

(i) Shri Prakash Tandon, Chairman
Chairman,
Punjab National Bank,
NEW DELHI.

(ii) Prof. S. K. Bhattacharyya, Member

Indian Institute of Management,
AHMEDABAD.

(iii) Shri P. P. Dhir,

Director (Finance), "
Minerals and Metals Trading
Corporation of India Ltd.,
NEW DELHI.

(iv) Shri A. Ghosh,

General Ma~ager, "
Allahabad Bank,
CALCUTTA.

(v) Shri T. S. Kannan,

Managing Director,
"
Richardson & Cruddas (1972) Ltd.,
BOMBAY.

(vi) Shri R. C. Maheshwari,

General Manager, "
Texmaco Ltd.,
CALCUTTA.

(vii) Dr. P. B. Medhora,

Joint Managing Director, "
Industrial Credit and Investment
Corporation of In9ia Ltd.,
BOMBAY.

( viii) Shri P. K. Nanda,

"
Managing Director,
Metal Box Company of India Ltd.,
CALCUTTA.
3
 (ix) Shri S. Padmanabhan, Member
Chief Officer,
Commercial and Institutional Banking,
State Bank of India,
Central Office,
BOMBAY.

(x) Prof. Sampat P. Singh,

Faculty Member, "
National Institute of Bank Management,
BOMBAY.

(xi) Shri Y. V. Sivaramakrishnayya,

Assistant General Manager, "
(C & I Advances),
Bank of Baroda,
Central Office,
BOMBAY.

(xii) Shri A. K. Bhuchar, Member-Secretary

Joint Chief Officer,
Department of Banking Operations
and Development,
Reserve Bank of India,
Central Office,
BOMBAY.

(xiii) • Shri P. J. Fernandes, Member

Additional Secretary and
Director General,
Bureau of Public Enterprises,
Ministry of Finance,
Government of India,
NEW DELHI.

(xiv)·· Shri N. Rajan,

Adviser (Finance), "
Bureau of Public Enterprises,
Ministry of Finance,
Government of India,
NEW DELHI.
4
 (xv)· Dr. N. C. B. Nath. Member
Director (Commercial),
Steel Authority of India Ltd.)
NEW DELill.

• Later co~pted.

** Alternate to Shri P. J. Fernandes.

To assist the Study Group, the Reserve Bank provided the Secretariat
comprising:
(i) Shri T. K. K. Bhagavat,
Deputy Chief Officer.

(ii) Shri M. K. Desai,

Assistant Chief Officer.

(iii) Shri A. D. Navaneethan,

Banking Officer.

(iv) Shri A. Qavi,

Staff Officer.

all attached to its Department of Banking Operations and Development,

Central Office, Bombay.

1.11 Dr. R. K. Hazari, Deputy Governor, Reserve Bank of India, initiating

the deliberations of the Group on the 6th August 1974, observed that various
omnibus issues relating to credit were referred to one Group as it was neces-
sary to take an integrated view of the several problems in framing the guide-
lines for supervision and follow-up of bank credit. Referring to norms
for inventories, he said that there was a conflict of interest between corporate
policy, which would aim at maximum profits by enlarging inventories, and
economic policy in the present situation and that, therefore, any tendency
towards speculative hoarding had to be curbed, in the overall interest and
to prevent maldistribution of credit and other resources.

1.12 Touching upon the subject of information system which provided the
basis of communication between the borrower, the operating agency of the
bank, the bank's head office and the Reserve Bank, Dr. Hazari said that it
should be so devised that it took care of the objective of credit supervision
and also improved the responsiveness of the banking system to policy changes
introduced from time to time.
5
1.13 For detailed preparatory examination of the issues referred to us, we
set up three sub·groups; one on the subject of norms for current assets,
another covering credit policy issues and the third for devising a suitable
information system.

1.14 As a first step, we were asked by the Reserve Bank to submit an In-
terim Report on inventory norms for the 1974-75 'busy season'. Although
it was appreciated that the time was short, it was felt by the Reserve Bank
that some guidance in this regard from the Group would be helpful. An
Interim Report was accordingly submitted in October 1974 (discussed later-
paragraphs 5.4 and 5.5) which was accepted by the Reserve Bank.

1.15 We decided to pre-test some of our suggestions, like information re-

quirements from the customers. As the induction of a credit planning, assess-
ment and supervision system required the training of banks' staff, it was
felt by us, and the Reserve Bank agreed, that an experimental set of state-
ments for obtaining information from customers of the banks should be
prepared and launched at a bankers' seminar. We submitted to the Reserve
Bank our second Interim Report covering this subject (discussed later-
paragraph 6.27) in December 1974. On the 13th January 1975, senior cre-
dit executives of 34 banks with deposits of Rs. 50 crores and above were
invited to the Reserve Bank's Bankers Training College, Bombay, for a
seminar and at the end of the day's discussion, each participating bank was
asked to introduce the forms devised by us in the case of a minimum of five
to ten customers, on an experimental basis. As a follow-up, a second semi-
nar was held on the 22nd April 1975, attended by the same banks, to discuss
their experiences, in order to help us crystallise our views for purposes of
our final recommendations.

1.16 It is worth mentioning here that the Reserve Bank has been gratify-
ingly quick to react to our interim recommendations:
-It introduced, in November 1974, the norms suggested by us for the
'busy season' of 1974-75 which helped the banks, industry and our
Group to gain a whole season's experience.

-It introduced, on a trial basis, the information system, that we had

tentatively drawn up, among 34 banks, all with deposits of Rs. 50
crores and above. The results of the test run have helped us to sim-
plify the forms.

1 . 17 The Reserve Bank has also taken an important step in appointing

a Committee of Direction (discussed later-paragraph 13.6) for a frequent,
on-going, review of our recommendations to take forward the work done by
6
the Group. The Reserve Bank has also advised the banks with deposits of
Rs. 50 crores and above to set up similar committees at their end.

1.18 We had the opportunity of meeting a wide cross-section of industry,

private and public, chambers of commerce, industry associations, bankers,
industrialists, business executives and academicians. The list of questions
sent out is given in Annexure I. A list of those whom the Group and sub-
groups invited for discussions is furnished in Annexure II. The response
from all of them was goQCl and has assisted us in finalising our views.

7
2
OUR TASK

2. I From the terms of reference given to the Group, we have identified

the following tasks as we saw them:
-What constitutes working capital requirements of industry which
banks should finance and what is the end-use of credit?

-How is the quantum of bank advance to be determined?

-Can norms be evolved for build-up of current assets and for debt-
equity ratio to ensure minimal dependence on bank finance?

-Can the current manner and style of lending be improved?

-Can an adequate planning, assessment and information system be

evolved, to ensure a disciplined flow of credit to meet genuine pro-
duction needs and its proper supervision?

2.2 We have attempted to answer these questions; we have also spelt out
the operational tasks involved in implementing our recommendations and
have suggested suitable systems, forms and procedures for banks to follow.

2.3 We would state that our recommendations relate only to financing

of industry, and in that to working capital finance, as distinct from project
finance.

8
3
EV ALVATION OF THE PRESENT SYSTEM

3. 1 In the early years, bank lending in India was mostly directed to financing
of movement of agricultural produce from the grower to the trader, the task
of financing foreign trade being handled mostly
Review by foreign banks. Advances were sanctioned
against the security of stocks pledged or hypothe-
cated to the banks. Based on English banking practice, the purpose of com-
mercial bank lending in India has traditionally been seen as the provision
of short term finance for business.

3 . 2 With the growth of industrialisation, the same system of bank lending

continued with minor changes, and the banker saw his function as meeting
also the industry's need for short term funds. Working capital finance was
made available ostensibly for acquisition of current assets and as the advances
were made available in cash credit accounts, repayable on demand, they were
considered short-term in nature and self-liquidating in character. As indus-
trialisation in India was largely promoted by the managing agency houses, the
banker sought the guarantee of the managing agents, as an earnest of good
management, in addition to the security of the current assets of the borrow-
ing company; security-cum-guarantee advances thus became the pattern of
lending to industry. The security-oriented system tended to favour borro-
wers with strong financial resources, irrespective of their economic function.

3 . 3 With the advent of planning for economic development ansi a growing

social awareness of the role of bank credit in the economy, it was felt that
the prevailing commercial bank lending system had little social content and
that it aided concentration of economic power. It was feIt too that the
system was unresponsive to the needs of the weaker sectors of the economy,
small industry and agriculture and concentrated instead on security-cum-
guarantee-oriented lending to large customers.

3.4 The security-cum-guarantee system of lending was found inadequate

also with the termination of the managing agency system. With the de-
linking of industrial units from the managing agency houses, the erstwhile
guarantors sought termination of the guarantee obligations. The entry of
new entrepreneurs into industry, with technical knowledge but lacking finan-
9
cial backing and managerial background, also called for a new approach to
lending by banks.

3 . 5 The purpose and direction of commercial bank lending in the country

was questioned by the National Credit Council's Study Group No. 2 (NCC
Study Group) appointed in October 1968 to examine the extent to which
credit needs of industry and trade were likely to be inflated and how such
trends could be checked. Its report commented extensively on the short-
comings of the prevalent system of lending to industry and came to the
conclusion that the security-oriented approach to lending had led to over-
financing of industry in relation to production trends as also with reference
to inventory in industry. The NCC Study Group recommended, inter alia,
that the banking system should turn to financing of industry on the basis of
a total study of the borrower's operations rather than on security considera-
tions alone.

3.6 Nationalisation of the major commercial banks in 1969 raised expec-

tations of a new sense of direction in bank lending, and indeed advances to
new claimants of credit, and especially to small
Supply of and industry and agriculture, have since gone up.
Demand for Funds The following table presents the changing
picture of utilisation of bank credit:
SECTORAL UTILISATION OF CREDIT
March June March June
1968 1974 1968 1974
Rs. crores % of total credit
Industry 2068 4511 67.5 56.4
-Large & Medium 1857 3506 60.6 43.8
(188.7)
-Small Scale 211 1005 6.9 12.6
(476.3)
Agricultural & Allied Activities 67 749 2.2 9.4
(1117.9)
Food Procurement Advances 109 523 3.5 6.5
(479.8)
Other Internal Trade •• 479 869 15.7 10.9
(181.4)
Others 341 1347 11.1 16.8
(395.0)
-Services N.A. 461 N.A. 5.8
-Personal Loans 288 3.5
-Miscellaneous •. 598 7.5
Total 3064 7999 100.0 100.0
(261.1)
Note: Figures in brackets indicate the ratios of the levels of credit in June 1974 to the
corresponding level of credit in March 1968.
10
3.7 The public sector too has emerged as an important user of credit in
recent years, due both to its growing dominance and its turning increasingly
to commercial banks for its working capital finance instead of relying on
Government. Its share in total bank credit has increased from 9.7 % in
June 1969 to 16.7 % in June, 1974 and this demand from public sector
will continue to grow.

3 . 8 Another new source of demand is the growing awareness of the need

to achieve an equitable geographical development of industry, and in its wake
the distribution of credit. Many States, where advances as a percentage
of deposits are low, are insisting upon a greater utilisation of the deposits
collected from within the States for grant of additional advances in those
States.

3.9 On the supply side, the resources available to the banking system for
advances to the new credit claimants are only the incremental deposits
generated every year, after providing for statutory liquidity requirements,
because the bulk of its existing resources is already locked up with the
existing borrowers. The statutory liquidity requirements have also risen
over the years.

3.10 Banks are major mobilisers of savings and would be looked upon to
finance a range of diverse productive and viable activities in the economy.
In the last six or seven years, industrial production has risen at a slow pace,
but the call on bank credit, essentially for maintaining inventories even at the
same level, has gone up with increasing prices. If the growth process is
resumed-as indeed it has begun to do-then perforce the volume of in-
ventory required to maintain a higher level of production will increase and
correspondingly the demand for bank credit. Banks will thus have to ope-
rate in a context in which demand for bank credit for growth requirements
will be large and, to raise the matching resources, they will have to adopt
some aggressive deposit mobilisation schemes and systems.

3 . 11 The banking system has no doubt recovered somewhat from the

situation of 1973-74 busy season when several banks had to freeze credit
abruptly, and the demand for funds in the busy season of 1974-75 has been
reasonably met, aided negatively, though, by slack agricultural and industrial
production during 1973 and 1974. But the system should get prepared for
the year 1975-76 and onwards. When production and investment pick up
and demand for credit rises, we will have to be careful not to let recent
history repeat itself.

3.12 The problem of potential imbalance in demand for and supply of

11
funds is accentuated by the manner in which banks extend credit under
the present cash credit system of lending, where
a banker sanctions a maximum limit within which
Present Style of Credit
the borrower can draw at his will. Under this
procedure, the level of advances in a bank is
determined not by how much a banker can lend at a particular point of
time but by the borrower's decision to borrow at that time. When the
borrower's need for funds is low, the banker is faced with the problem of
large unutilised funds, and when the borrower's need for funds rises, the
banker faces the problem of meeting the demand without notice. In fact,
availability of funds with the banks and the customers' needs do not always
match. For example, during the 'busy' winter months, the customers need
more, while the banks have less lendable resources in relation to the demand.

3. 13 This ,state of affairs caused no problem in the years when the credit-
deposit ratio in the banking system was low and a sudden spurt in credit
demand could easily be taken care of and access to refinance from the
Reserve Bank was easy. With control on monetary expansion as part of
anti-inflationary policy and a rise in demand for funds':""both from the old
and the new claimants-the existing system of bank lending has come under
considerable strain and the fundamental weakness of the system has been
exposed.

3 .14 It is not realised widely that the total limits sanctioned by the bank-
ing system exceed even the total deposits, without taking into account the
liquidity requirements. As at end June 1974, deposits of scheduled com-
mercial banks amounted to Rs. 10706 crores. As against this, the credit
limits sanctioned aggregated Rs. 12880 crores, but the actual utilisation of
credit limits granted was only 57 per cent; thus in effect, 43 per cent of the
credit limits sanctioned had remained unutilised. With even a small in-
crease in the percentage of utilisation, the entire system can be thrown out
of gear; and this indeed was what happened at the end of 1973, when, as
mentioned earlier, under a fear of credit shortage, everyone wanted to use
his limits to the full and several banks were unable to meet the demand for
funds under the limits they had sanctioned and were forced to resort to
freezing of advances arbitrarily.

3 . 15 The weakness of the cash credit system can be illustrated by taking

Weakness of the Cash the following example of a borrower's financial
Credit System position:
Current liabilities Current assets
Bank borrowings Rs. 75,000 Inventory Rs. 1,00,000
Other current liabilities Rs. 10,000 Other current assets Rs. 10,000
Rs. 85,000 Rs. 1,10,000
12
3.16 Let us assume that the entrepreneur has raised equity and term loans
for covering the cost of fixed assets as well as a portion of current assets.
The banker's function is perceived as providing funds required for carrying
the balance of !he current assets. Against the total inventory of Rs. 1,00,000,
an advance of Rs. "75,000 is sanctioned by way of cash credit. The advance
is secured by a charge over inventory with an appropriate margin-in this
case 25 per cent-the margin representing the borrower's contribution to
carry the current assets.

3. 17 So long as there is security, which is declared in the periodical stock

statements, the borrower is permitted to draw up to the drawing limit, com-
puted on the basis of the value of stocks less stipulated margin, or the sanc-
tioned limit, whichever is lower.

3. 18 Under this system, it is possible for a borrower to draw against avail-

able security and utilise the funds for purposes other than increasing his cur-
rent assets or repaying his other current liabilities; he can, for instance, use
the funds for acquiring lixcd or non-current assets, as the following example
illustrates:
Current liabilities Current assets
Creditors for purchase Rs. 50,000 Inventory Rs. 1,00,000
Bank borrowings Rs. 75,000 Other current assets Rs. 10,000
Other current liabilities Rs. 10,000
---
Rs. 1,35,000 Rs. 1,10,000

3. 19 Inventory of the value of Rs. 1,00,000 is carried to the extent of

Rs. 50,000 by creditors for purchases; but the borrower is enabled to borrow
up to Rs. 75,000, on the security of stocks worth Rs. 1,00,000 less the pre-
scribed margin of 25 per cent, the drawing limit being Rs. 75,000. Had
the customer drawn genuinely for meeting his current assets requirements
only, his maximum eligibility (assuming nil contribution from him to carry
the current assets) would have been Rs. 50,000; the excess of Rs. 25,000
he can divert to non-approved uses without the banker's knowledge.

3.20 This weakness was highlighted by the NCC Study Group which came
to the conclusion that such diversion of bank funds was made possible by
the banker's fixation on security under the cash
credit lending system. Analysing the function of
NCC Study Group Report bank lending, the NCC Study Group felt that
while theoretically commercial bank lending was
for short term purposes, in actual practice it was not so. According to the
Nee Study Group Report, a large part of bank lending was really long term
in character and was repayable on demand only in name. To the extent
13
that outstandings in a cash credit account never fell below a certain level
during the course of a year, there was an element of what is called a 'hard
core' borrowing which was in reality a quasi-permanent lock-up of bank
funds in the borrower's business. The NCC Study Group thought that this
'hard core' borrowing should be repaid by the borrowers as early as pos-
sible. This recommendation, however, remained unimplemented. Pre-
sumably, the state of the capital market, available facilities to raise term
loans and the earnings of the borrowers were thought to be inadequate to
provide funds to repay the large quantum of the 'hard core'. The people
whom we met were of the opinion that even the present state of the capital
market was such that they did not consider it feasible that the 'hard core'
part of the current assets requirements as identified by the NCC Study Group
could be financed by industry out of equity in the foreseeable future and
that the scope to plough back earnings for the purpose was also limited.
During our discussions with representatives of the term financial institutions
also, we were told that they could not undertake the responsibility of pro-
viding funds for the 'hard core', for they felt that this would only mean fur-
ther financing of old units, instead of financing the promotion of new indus-
trial activity.

3.21 Most banks in the past generally had a system of supervision and
follow-up of the credit they disbursed which was primarily concerned with
the safety of the funds lent and keeping the ac-
Bankers' Involvement
count in order. Competition among banks was
not conducive to a bank taking a close look into the affairs of the customer
for fear of upsetting and losing him.

3 .22 The time is now opportune to review the existing system and effect
changes. It has to be borne in mind that in the current context of shortages,
bank credit, if not properly supervised, may be
Need for Change utilised for an undue build-up of stocks, which,
while proving profitable to some, will result in
misallocation of resources among all. Bank credit has thus a crucial role
in allocation of resources to prevent such a chase of scarce materials which
fuels inflation. The process of change has already set in since the NCC
Study Group's findings in this regard and many banks have, in fact, toned
up their credit appraisal and follow-up procedures. This trend was given
a further impetus by the changes effected in the Credit Authorisation Scheme
of the Reserve Bank in mid-1970. However, in the context of the need

-to meet larger credit demands arising from growth requirements in

future, keeping in view also certain priorities laid down by Govern-
ment and the Reserve Bank, from time to time,
14
 -to curb, at the same time, any tendency on the part of borrowers to
build up undue inventories or to misdirect credit, and

-to modify the style of credit so as to make credit planning effective,

the process of change has to be taken even further.

3.23 Any new system should, in particular,

-make a customer plan his credit needs in advance and observe a dis-
cipline in its use,

-indicate to the banker the likely demand for credit and thus enable
him to plan his own deposit-credit function,

-assure finance to industry for its genuine production needs, and

-having provided finance, enable the banker to receive from the cus-
tomer adequate flow of information on the use of credit, but with in-
built flexibility to suit changes in circumstances.

IS
4
RATIONALE OF OUR PROPOSALS

4. I A borrower needs funds for his operation mainly to buy and stock
nece~&ary quantities of raw materials and stores and to stock necessary quanti-
ties of finished goods. If it is the market practice
Need for Funds to give credit on sales, he would need funds for
carrying his receivables too. He may also make
advance payments for goods and services. All these constitute his needs
for funds, to carry current assets.

4.2 Inventory and receivables comprise the bulk of the current assets.
Different Types of The different types of inventory may be described
Current Assets as follows:

-Flabby inventory, comprising finished goods, raw materials and stores

held because of poor working capital management and ineficient dis-
tribution.

-Profit-making inventory, representing stocks of raw materials and

finished goods held for realising stock profit.

-Safety inventory, providing for failures in supplies, unexpected spurt

in demand, etc.; in effect, an insurance cover.

--Normal inventory, based on a production plan, lead time of supplies

and economic ordering levels. Normal inventories will fluctuate pri-
marily with change in production plan. Normal inventory also in-
cludes reasonable factor of safety.

4.3 There could be yet another type of inventory, viz., excessive inventory,
which even an efficient management may be compelled to build up for rea-
sons beyond its control, as in the case of a strategic import or as a measure
of Government price support of a commodity.

4.4 'Flabby' inventory should not be permitted, and 'profit-making' inven-

tory ought to be positively discouraged-both are selfish and an inequitable
and inefficient use of resources; as regards 'safety' inventory, good manage-
ment should bring it down to what disciplined experience, subjected to perio-
16
dical statistical checks, will justify. Carrying inventory in excess of the nor-
mal inventory, which includes reasonable factor of safety, is but an avoidable
luxury which the banker should not encourage.

4.5 If one were to analyse the normal inventory further, this is of two
parts--one which fluctuates and the other steady. In the steady part also,
there is a further 'core' which is a fixed element; this 'core' represents the
absolute minimum level of raw materials, process stock, finished goods and
stores which are in the pipe line, so to speak, to ensure a continuity of pro-
duction. Funds invested in core inventories, comprising process stock plus
minimum raw materials and finished goods and stores, are therefore block-
ed, on long term basis, arising out of technological and business considera-
tions, as is the investment in fixed assets such as machinery and buildings.

4.6 There are three factors influencing the level of receivables, viz., the nor-
mal credit in tune with the borrower's and his industry's market practices,
deliberate elongation of credit, and slow billing/collection procedures.
Theoretically speaking, there is no irreducible minimum in receivables as
these can be brought even to zero. Receivables not in tune with the unit's
and its industry'S practices should not be financed by the banker.

4.7 There is no uniformity in approach among banks in assessing work-

ing capital requirements, especially with regard to inventories. This diver-
gence is also sometimes found within the same
Reasonable Levels of bank. If bank credit is to be viewed as a tool
Current Assets of resource allocation in the economy, one can-
not get away from the need to define norms for
reasonable levels of inventories (including safety stock) and receivables in
each industry. One of our terms of reference, therefore, appropriately
requires us to make suggestions for prescribing inventory norms for different
industries, both in the private and in the public sectors, and to indicate the
broad criteria for any deviations from these norms.

4.8 In the new context, the main function of a banker as a lender is to

supplement the borrower's resources to carry an acceptable level of current
assets. The implications are two fold; one, the level of current assets must
be reasonable and based on norms; two, a part
Purpose of Bank Lending of the fund requirements for carrying current
assets must be found from long term funds com-
prising owned funds and term borrowings including other non-current
liabilities.

17
5
NORMS FOR INVENTORY AND RECEIVABLES

5. 1 The rationale of norms and the need to link credit with production
requirements is to us thus fairly clear; and we envisage that eventually the
entire system of credit planning will be dovetail-
Need for Norm, ed with production planning, both to make good
use of bank credit and also to create better
management of cash, materials and receivables.

5.2 Industry representatives in their discussions with us generally agreed

that it was necessary to prescribe some norms but they were doubtful about
our ability to fit the wide spectrum of industry adequately into what we lay
down. Their solution was that the norms should be applied flexibly.

5.3 While we realise that norms will have to be applied flexibly and not
rigidly, responsive to any major change in environment and within the
industry, we are unable to accept that uncertainties can be regarded as a
reason for not laying down norms, an argument that some, happily not many,
placed before us. In fact, the greater the uncertainties, the more is the need
for planning.

5.4 Our first attempt at norms was in our Interim Report to the Reserve
Bank. We suggested norms for inventory and receivables for ten major
industries. The objective was to introduce a dis-
Interim Report cipline and improvement in the maintenance of
reasonable inventory and receivables levels con-
sistent with encouragement of production on the basis of a helpful relation.
ship between the banker and the customer.

5 .5 The Reserve Bank accepted the suggested norms and advised all sche-
duled commercial banks to apply the norms in respect of these ten indus-
tries, both to the existing and new borrowers, on an experimental basis,
and to furnish it with a feed-back of the experience. A copy of the Interim
Report and the Reserve Bank circular letter are furnished in Annexures III
and IV.

5.6 The approach for prescribing norms for inventory and receivables
18
bristles with a variety of problems. We are, therefore, anxious that there
should be an understanding of the total problem
Approach to Norms
and a firm but helpful approach built into the
suggested norms and their implementation.

5.7 We have now suggested norms taking into account the following:
(i) company finance studies made by the Reserve Bank,

(ii) process period in the different industries,

(iii) discussions with experts in the industries concerned,

(iv) general discussions with the industry interests,

(v) need for ensuring smooth production, depending upon the availabi-
lity of the materials, seasonality, etc., and

(vi) reactions and feed-back on Interim Report.

5.8 We have extended our exercise to a total of 15 major industries, cover-

ing abOut one half of industrial advances of banks, and certain norms earlier
suggested have been revised in the light of the feed-
back received. The norms represent the maxi-
SUllested Norms mum levels for holding inventory and receivables
in each industry. Borrowers are not expected to
hold more than these levels. Neither is the norm an entitlement to hold
inventories or receivable upto this level. If a borrower has managed with
less in the past, he should continue to do so. The suggested norms are as
follows:

19
 SUGGESTED NORMS FOR INVENTORY AND RECEIVABLES
Industry Raw materials Stocks-in- Finished Receivables·
(including process goods and bills
stores and purchased
other items and
used in the discounted
processor
manufacture)
(I) (2) (3) (4) (5)
(i) Cotton Cotton
and 2 (Bombay f (Compo- 21
Synthetic and site
Textiles Ahmedabad textile
areas) mills)
3 (Eastern i (other
areas- mills)
Bihar, Orissa,
West Bengal
and Assam)
21 (Other than
the above
areas)
2 Other raw
materials
(Ii) Man-made 11 1 11
Fibre
(iii) Jute 21 1 (For 11
Textiles domestic
sales)
and
1l (For
exports)
(I,) Rubber 2 11
Products
(,) Fertilisers
(a) For f (Units Negli- (Where 11
nitro- near gible stocks are
genous refinery) in plant
plants site)
11 (Units away 11 (Where
from stocks are
refinery) also in
upcountry
centres)
(b) For 2 (Units in Negligible (Where 11
phosphatic port areas) stocks are
plants in plant
site)
3 (Units 11 (Where
away from stocks are
port areas) also in up-
country
centres)
(vi) Pharma- 21 1 2 11
ceuticals
(vii) Dyes and 21 1 21
Dyestuffs
20
 SUGGESTED NORMS FOR INVENTORY AND RECEIVABLES
IndustrY Raw Materials Stocks-in- Finished Receivables~
(includin& process goods and bills
stores and purchased
other items and
used in the discounted
process of
manufacture)
(1) (2) (3) (4) (5)
(11111) Basic 21 1 II
Industrial
Chemicals
(a) Vegetable Negli- I
and gible
Hyclrogenated
Oils
(x) Paper 2-6 Bamboo and (For con-
Wood trolled
(To be built sales)
up in stages and
from Novem- 1 (For free
berto May sales)
and there-
after to be
brou~t
down
21 Chemicals
(xl) Cement 21 Gypsum I
11 Limestone
1 Coal
II Packing
materials
(xii) Engineering- 21 1 ---------2·~1------------
Automo-
biles and
Ancillaries
(xiii) Engineering-
Consumer 2 1 --------~2:~1------------
Durables
(xiII) Eogineering-
Ancillaries 2 f --------~2:~1------------
(other than
Automobile
Ancillaries)
and Component
Suppliers
(xv) Engineerinll-
Machinery 21 II ---------3rl------
Manufacturers
and other
Capital Equip-
ment Suppliers
(other than
Heavy Enlli-
neering)~

NOles: (;) Raw materials are expressed as so many months' consumption. They include
stores and other items used in the process of manufacture_
21
 (II) (a) Stocks-in-process are expressed as so many months' cost of production.
(b) In individual cases, the baDk may deviate from the norm for stocks-in-PrQ-
cess if it is satisfied that the actual process time iDvolved in aDY particular
unit, say, in view of the nature of production .. past experience and techno-
logy employed, is more than the norm suggested.
(ill) (a)· Finished goods and receivables are expressed as so many months' cost of
sales and sales respectively. These figures represent only the average levels.
Individual items of finished goods and receivables CQuld be for different
periods which could exceed the indicated norms so long as the overall aver-
age level of finished goods and receivables does not exceed the amounts as
determined in terms of the norm.
*(b) The norm prescribed for receivables relates only to inland sales on, short
term basis (i.e. exclUding receivables arising out of deferred payment sales
and exports).
(Iv) Stocks of spares are not included for norms, since in financial terms they are
not significant in many industries. Banks will ascertain requirements of spares
for individual units. They should, however, keep a watchful eye if spares exceed
S% of total inventories.
*.(v) Heavy Engineering will include supply of whole or substantial plants involving
long manufacturing period, i.e. sugar, cement, steel and textile plants.
5.9 We have not suggested norms for the heavy engineering industry, as it
has certain special characteristics. The engineering industry is diversified
not only in terms of the product range but also in
Heavy Enelneerlng technology and size. We have attempted to
Industry classify some of the engineering ,units under fOUT
groups vide items (xii), (xiii), (xiv) and (xvf
in the preceding' paragraph. During recent yeats, the heavy engineering'
sector has grown considerably, particularly in the public sector. Though it
may be difficult to attempt a precise definition of the be~vy engineering units,
their main distinguishing features are (i) manufacturing heavy capital equip-
ment for other industries, (ii) technology-based manufacture of equipment
to suit specialised processes and specific end-uses, and (iii) considerable. ~ead
time in design, manufacture, supply and commissioning of equipment. Heavy
engineering industry is thus commonly understood to include units manufac-
turing heavy structurals, cranes, railway wagons, coaches, other heavy equip-
ment for railways, heavy electrical equipment including transformers, gene-
rators, pressure' vessels, heat exchangers and chemical equipment, boilers,
steel plant equipment, mining machinery, etc. Much of the equipment manu-
factured in the heavy engineering sector is supplied to the core sectors of
the economy which are predominantly Government projects, both' in' the
Central and in the State sectors. The commercial terms are, therefore, r~lat­
cd to the policies laid down by the various Government authorities from' time
to time.

5. 10 By its very nature, the process time for completion of any particular
contract or construction of any single equipment takes a long"period'-in
some cases, as long as two to three years. Often, at various stages of manu-
facture, they use
not the standard ~omponents, which ,are available ori tap,
~.:
but those which have to be tailor-made. There is also considerable diffi-
culty in this industry in maintaining standard inventories, as the production
pattern and product-mix vary in response to the changing needs of the user
industries. It is, therefore, difficult to lay down norms for different com-
ponents of inventory and receivables, i. e. for raw materials, work-in-pro-
gress, finished goods and receivables in the case of the heavy engineering
industry.

5 . 11 The system of financing working capital varies in the heavy engi-

neering industry from unit to unit. In some cases, principal raw materials
like steel are supplied by the purchasers. In many cases, advance payments
are made by the purchasers against orders as well as against procurement
of components. Progress payments are also made against despatch of
part equipment. Even so, the quantum of tie-up of funds in current assets
in this industry, by virtue of the nature of its operations, is very large and
the banking system may find it difficult to cope with the industry's demand
for funds in its entirety. One solution to the problem could be that the
funding pattern of the industry itself should be different from that in the
other industries, so as to take care of not only the conventional margin
money requirements for working capital but also something substantially
more, to meet the fund needs stemming from the industry's large build-up
of cudent assets. In that case, however, the capital structure will have
to be so massive, to finance the very large need, that, in effect, it will be
supporting the buyers of the manufacturing unit in their purchases and not
the unit's infra-structure for which it is meant. The correct course will be
that the buyer should pay for the purchases, not on delivery, but in pro-
gressive stages of manufacture. The banking system cannot take upon
itself the responsibility of financing goods which remain in process over
too long a period. This is so because, largely, the production is neither
competitive nor market-oriented, but custom-tailored. Therefore, it is only
appropriate that the buyer should take upon himself the responsibility of
financing to a substantial extent what is produced for him specifically. This
should be feasible as the heavy engineering industry supplies capital and
other equipment to user industries which would have, at any rate, placed
orders for the block assets only after a proper tie-up of financial arrange-
ments for their projects/expansion schemes. However, for financing of
inventory requirements in respect of items which are not tailor-made or
those with short process period for which, consequently, no progress pay-
ments may be forthcoming, banks may extend support to a reasonable ex-
tent. Working capital requirements of the heavy engineering sector should,
therefore, be assessed taking into account the foregoing factors, and the
extent to which banks may meet the working capital needs may be deter-
mined, case by case, on merits.
23"
5.12 Norms cannot be absolute or rigid. Allowance will have to be
made for some flexibility under circumstances justifying a need for re-exami-
Deviations from Norms nation; thus, deviations from norms may be visu-
alised under the following circumstances:

-bunched receipt of raw materials including imports,

-power-cuts, strikes and other unavoidable interruptions in the pro-

cess of production,

-transport delays and bottlenecks,

-accumulation of finished goods due to non-availability of shipping

space for exports or other disruptions in sales but not under circum-
stances where a sales stimulation is needed through reduction in
prices,

-build-up of stocks of finished goods such as machinery, due to failure

on the part of purchasers for whom these were specifically manufac-
tured to take delivery, and

-need to cover full or substantial requirement of raw materials for

specific export contract of short duration.

5.13 It was represented to us that Government and its agencies delay pay-
ments and that ~ometimes large units in the private sector also do not pay
promptly, particularly to the small ancillary suppliers. It was, therefore,
suggested that such delayed payments also should be treated as circumstances
warranting deviation from norms for receivables as there was need for the
banks to give credit till such dues were realised. We feel that the matter
should be tackled at the sources rather than throwing upon the banking
system the burden of providing credit which, in effect, would amount to under-
writing the delays. The Reserve Bank should discuss the matter with Govern-
ment agencies and the Bureau of Public Enterprises to overcome such delays
while in the case of private firms, the banker should put pressure upon the cus-
tomers by insisting that they recover their dues in time, and should not en-
courage such delays by merely extending further credit facilities. We would
add that the Reserve Bank should follow this up with the Government agen-
cies vigorously and we are confident that Government and public enterprises
would, no doubt, set a good example to the others.

5.14 The criteria for deviating from the norms need to be applied with
great care, especially to prevent industry from taking them for granted and
24
expecting concessions as a matter of course with very little economic func-
tion. For instance, the lead time required for obtaining supplies of mate-
rials, was often given as a reason for high inventories. This is apt to be
overstated. Regular supplies can be arranged and high inventories avoid-
ed by careful pla~ning in placing orders, allowing for the lead time, though
it is not denied that at times some allowance may have to be made for ex-
ceptional circumstances such as those we have visualised above.

5.15 We reiterate that the criteria for deviations must be fully justified.
'The deviations should be for known specific circumstances and situations
(which should be recorded) and allowed for agreed periods which should be
relatively short; and there should be a return to norms when conditions
revert to normal. It is important that flexibility in inventories and receiv-
ables should be both ways.

5.16 To start with, these norms should apply to all industrial borrowers,
including small scale industries, with aggregate limits from the banking
system in excess of Rs. 10 lakhs and extended to
Cov.,.•• of Norm. smaller borrowers progressively as early as
possible.

5. 17 In industries not covered by us, it should not be assumed that no

norms will apply and that the borrower is exempt from the discipline of
norms. In such cases, banks should keep in view the purpose and spirit
behind the norms when extending credit facilities.

5.18 We believe that norms for inventories and receivables should, in prin-
ciple, be extended progressively to cover the entire spectrum of industry,
both in the private sector and in the public sector. The list may, therefore,
be extended with experience. The Committee of Direction may consider
this task at specified intervals.

5. 19 Further, the principles should be uniform for all like industries, both
in the private and in the public sectors, although for certain industries, and
Norm. and Public Sector some borrowers, by virtue of their special nature,
separate considerations may be justifiable.

5.20 We suggest that all requests for enhancement of credit limits may be
considered in the light of the suggested norms. As for existing accounts,
where no enhancements in limits are required,
the banker should examine the existing levels of
Application of Norm.
inventory and receivables and seek a reduction in
levels where they are excessive. It is important
25
that all banks should apply the norms uniformly. To the extent that inven-
tory and receivables levels could be brought down, the outstanding dues to
the bank and/or the other creditors should also go down. As regards the
data to be obtained and the rate of interest to be charged to ensure imple-
mentation of the norms, we reiterate what has been said by us in para-
graphs 16 to 18 of our Interim Report (Annexure III). But even charging
of a higher rate of interest should not give a permanent immunity to the
customer from conforming to norms and some further action should be con-
sidered. We have no doubt that the borrower will not wish to jeopardise
his dealings with the bank if he realises that the bank means business.

5.21 Study and prescription of norms should be an on-going process, extend-

ing to cover the area of industrial activity not covered by us and also search-
ing to identify homogeneous groups of units in dif-
ferent industries where an industry does not res-
Review of Norms
pond to a single norm. We suggest that the
norms should be kept under constant review.

26
6
OUR PROPOSED APPROACH TO LENDING

6.1 As discussed in Chapter 4, a banker's main role, as a lender, will be

to supplement the borrower's resources in carrying
Working Capital Gap
and Bank Finance
a reasonable level of current assets in relation to
his production requirements.

6.2 Stated differently, we would expect the borrower to hold only a rea-
sonable level of inventory and receivables, according to the norms. The
total current assets will be carried partly by a certain level of credit for pur-
chases and other current liabilities. Funds required to carry the remaining'
current assets may be called the working capital gap which can be bridged
partly from the borrower's owned funds and long term borrowings and
partIy by bank borrowings.

6. 3In the context of the above approach, there are three alternatives for
working out the maximum permissible level of bank borrowings:

(i) Bank can work out the working capital gap, i.e., total current
assets less current liabilities other than bank borrowing;; and finance
a maximum of 75 per cent of the gap; the balance to corne out of
long-term funds, i. e., owned funds and term borrowings.

(ii) Borrower to provide for a minimum of 25 per cent of total cur-

rent assets out of long-term funds, i. e., owned funds plus term
borrowings. A certain level of credit for purchases and other cur-
rent liabilities will be available and the bank will provide the'
balance. Total current liabilities inclusive of bank borrowings
will not exceed 75 per cent of current assets.

(iii) Same as (ii) above, but excluding core current assets from total
current assets on the theory that core current assets should be
financed out of long-term funds, i. e., owned funds plus term bor-
rowing.

6.4 The three alternatives may be illustrated by taking the followiDg

27.
example of a borrower's financial position, projected as at the end of the
next year.

Currentllabilitiea

Creditors for purchases .. 100 Raw materials •. 200

Other current liabilities .. 50 Stocks-in-process 20
150 Finished goods 90
Bank borrowings, including bills dis- Receivables, including bills dis-
counted with bankers .. .. 200 counted with bankers .. 50
Other current assets 10
350 370

-As per suggested norms or past practice, whichever is lower, in relation to projected
production for the next year.

lIt Method 2nd Method Jrd Method

Total current assets 370 Total current assets 370 Total current assets .. 370
Lell : current liabilities 25% of above from long Lesa : core current assets
other than bank bor- term sources •. 92 (illustrative fiaure)
rowinss 150 from long term sources 95
278
Real current assets .. 275
Working capital gap .. 220 LeSI : curren t liabilities
other tban bank 25% of above from long
borrowings 150 term sources •. .. 69
128 206
LeSS: current liabilities
25% of above from long Working capital gap .. 220 other than bank bor-
term sources •. 55 rowings 150
56
Maximum bank borrow- Maximum bank borrow-
ings permissible .. 165 ings permissible 128 Working capital sap 220
Maximum bank borrow-
ings permissible 56
Excess borrowing 35 Excess borrowing 72 Excess borrowing 144
--------------------
Current ratio 1 . 17 : 1 Current ratio I. 33 : I Current ratio 1.79: 1

6.5 In case the existing net working capital (i. e. excess of current assets
over current liabilities) exceeds 25 per cent of the working capital gap (m
1st Method) or 25 per cent of total current assets/real current assets (in
2nd and 3rd Methods), the contribution from long-term sources will ordi-
narily be to the extent of the already existing net working capital.

6.6 The 1st Method would mean the banker financing upto a maximum of
75 per cent of the working capital gap of 220, i.e., 165 and the borrower
providing at least 55 out of his long-term funds, i. e., owned funds plus
28
long-term borrowings. This method will give a minimum current ratio of
1: 1.

6.7 The 2nd .Method would mean the borrower financing a minimum of
25 per cent of total current assets (92) through long-term funds and the
gap, i.e., maximum of 128(278-150), will be provided by the bank. This
will give a current ratio of at least 1.3: 1.

6.8 The 3rd Method would mean a further reduction in bank borrowing
and strengthening of the current ratio.

6.9 It is important to note that in an exercise like this for computing the
level of bank finance, the classification of current assets and current liabilities
should be made as per the usually accepted approach of bankers and not
as per definitions in the Companies Act. For instance, instalments of term
loans payable within 12 months from the date of balance sheet are classified
by the banker as current liabilities while it is not so in the balance sheet
prepared in accordance with the requirements of the Companies Act. These
differences in classification have been brought out in the form for analysis
of balance -sheet prescribed by the Reserve Bank under its Credit Authori-
sation Scheme.

6.10 We feel that the 3rd Method is an ideal to reach as it will provide
the largest multiplier of bank finance; the next best method from this aspect
is the second one, followed by the first. However, to avoid hardship to
borrowers, we recommend that we should make a beginning with the Ist
Method and then move to the 2nd and the 3rd Methods. It is necessary,
though, to have a time-bound programme and we suggest that banks should
initiate immediate action to place all borrowers, say, those having credit
limits in excess of Rs. 10 lakhs from the banking system, on the 1st Method,
beginning with the borrowers having weak financial position, as early as
possible, say, within a period of about one year. At that stage, the Reserve
Bank may review the system and chalk out a further programme for switch
over to the 2nd and 3rd Methods, in stages, in the light of circumstances
then prevailing.

6. 11 As regards the proposed programme of change, the Chairmen of

banks, whom we met under the auspices of the Indian Banks' Association,
were actually in favour of the banks straightway switching over to the 2nd
Method for the reason that some of the borrowers already fulfil the require-
ment of the 1st Method. Although most of them accepted the concept under-
lying the 3rd Method, they pointed out that much ground work would be
necessary to work out core current assets for various industries, which
29
would require detailed studies before this method could be accepted. We
suggest that the Indian Banks' Association may consider setting up a Work-
ing Group to determine the core current assets in the different industries.

6.12 We also feel that lending up to 75 per cent of the working capital gap as
in the 1st Method is liberal but it is our view that this should be considered
as the upper limit. The limit of 75 per cent has been suggested as the first
step, particularly to facilitate financial structuring of new companies, setting
up projects in backward areas and also for flexibility in re-structuring of
existing companies with a weak financial base. As mentioned earlier, we
reiterate that starting with the 1st Method banks should gradually reach the
ideal of the third. It should be understood that the aim should be to move
forward and borrowers who already fall in the third or the second category
should not increase their dependence on bank borrowings and revert to the
second or first category, respectively. That is to say, their existing current
ratio should not be impaired. Also, if the credit needs of such borrowers
increase in future, they should not be allowed to slip back from a higher to
a lower category.

6. 13 Like all changes, our proposals will involve some hardship to those
who are beneficiaries under the existing system. Some time is needed by
them to adjust themselves to the discipline of the new approach. It is desi-
rable for a banker to recognise the position of his borrower and guide him
towards norms and the new system of lending within a reasonable time.
The banks will work out the position of the existing customers and any
excess over the finance, to which a borrower would be eligible under the new
formula, will have to be reduced progressively by transferring the excess
to a term loan, to be anlOrtised over a suitable period, depending upon his
cash generating capacity, ability to raise additional equity, etc. The amount
to be amortised will stand at a higher level in the case of a borrower having
a negative working capital (i. e., a working capital debt), as the already
existing deficit in_ working capital will also have to be made up by him.

6.14 The concept of bank credit forming only a portion of the working
capital gap could also be used as an instrument for influencing the directional
flow of credit. It should be possible for the con-
Aligning Credit with cerned authorities to define from time to time the
Priority Industrlel order of priorities in the economy for different in-
dustries and we visualise monetary authorities
laying down different scales of financing, as percentage of the working capi-
tal gap for the different classes of industries as an important instrument of
economic policy, for aligning credit with the priorities for industries. Thus,
tbe relevant percentage could be comparatively low for the low-priority in-
dustries. Also, when a manufacturer has reached a stable level of produc-
tion for a reasonable number of years, there is no reason why bank finance
should continue to be made available to him on the same scale, because, if
a portion of the finance earlier made available could be withdrawn from
him, such funds would be available for promotion of new economic activity.
It is thus possible to envisage part of the working capital bank finance also
as an assistance for a limited period only, in the same manner as term
loans for initial investment

6.15 The question arises whether there should be a reasonable relationship

between the equity and total term loans (i. e., those from the financial insti-
tutions and banks). The term lending institu-
Funded Debt-Equity tions insist upon a certain relationship between
Relationship funded debt and equity according to certain ac-
cepted norms and also see that the long-term
funds are adequate to provide for a margin for working capital purposes.
No change is suggested in this practice. However, in future, while funding
the new projects, the term lending institutions may provide for margins on
the basis of our proposals. It will be useful if the bank which is to finance
the working capital requirements is associated at this stage in determining
the working capital and margin requirements. If this is done, there will
be no need to deviate from the standards of relationship between funded
debt and equity, which the term lending institutions normally follow.

6.16 In the case of old units, it may be necessary to transfer, as mention-

ed earlier, a part of the present cash credit borrowing to a term loan repay-
able over a period in order to bring financing in line with our proposals. In
some of these cases, the funded debt and equity relationship may not imme-
diately conform to the norms laid down by the term lending institutions and
the borrowers may have to be given time to bring the position to normal
over a period. The banks will, however, have to ensure that, in such cases
the total outside liabilities to owned funds relationship is acceptable to them.

6. 17 Another question to be considered is as to how to take care of a

request for additional· credit from a borrower who already has an excess
borrowing under any of the above methods. Such
Additional Requirement a need for additional credit will normally arise
of Credit with an increase in production activity. We
would expect that if the additional fund needs are
on a regular basis, the borrower should bring a matching contribution requir-
ed under the relevant method of lending. He could do this by retained earn-
ings or by raising additional equity or by issuing debentures or by bringing
in more funds in any other suitable manner for the purpose. In very ex-
31
ceptional cases, where the borrower is not able to raise the requisite funds
immediately in the aforesaid manner, the banks may consider giving a term
loan to a reasonable extent provided the cash generation capacity of the
borrower is sufficiently good to take care of the amortisation of the existing
term obligations as already stipulated as also the proposed additional loan
within a short period acceptable to the bank. Where, however, the addi-
tional fund need is for a short duration (e. g. for executing a large export
order or a Government contract) and cannot be met from the existing credit
arrangement, it should be possible to consider additional credit for such needs
without necessarily insisting on matching contribution, only to enable com-
pletion of the specific transactions/contracts, on the clear understanding that
the borrower would return to the stage as in the relevant method of lending
within the stipulated period.

6. 18 Apart from the excess borrowing under any of the methods of lend-
ing, there may be excess borrowing representing the excess of inventory and
receivables vis-a-vis the relative norms. In such cases, we do not visualise
grant of additional credit facilities on a regular basis until such time as the
current assets levels are brought down to the required levels. Grant of addi-
tional facilities on purely temporary basis, however, could be considered but
only as an exception, say for purposes like execution of an export order, etc.

6. 19 Once the quantum of bank funds to finance a reasonable level of cur-

rent assets is agreed to, there is also need to
Proposed Style of Credit change the style of extending bank credit.

6.20 The drawbacks of the cash credit system of lending are well known
but may be reiterated:

-A bank has no control over the level of advances in the cash credit
accounts. No notice is required for drawing under limits that may
remain, unutilised for long periods.

--A bank is thus in no position to foresee demand for credit. This ham-
pers its credit planning.

-The 'cost' of the operation of the system to the banker, on account

of the attendant uncertainties, is high because whatever chances he may
take in 'overselling' credit, there will always be a limit to how far
he will 'oversell'. And this was indeed what happened in the 1973-74
'credit crisis' when some banks found themselves heavily 'oversold'.

6.21 It has been found in practice that the level of borrowings by industrial
units during the course of a year fluctuates from month to month depend-
32
ing on the scheduling of purchases of raw materials and despatch of finished
goods. It has also been observed that the outstandings in a cash credit ac-
count, particularly in non-seasonal industries, do not fall below a certain
level which represent the stable fund requirement during the year.

6.22 We suggest that instead of making available the entire credit limit as
a cash credit for a year, it may be bifurcated into a loan and a demand
cash credit, which will be reviewed annually.

6.23 The loan component would comprise the minimum level of borrow-
ing which the borrower expects to use throughout the year, while the cash
credit part could take care of his fluctuating requirements. As the loan
would carry interest throughout the year, it will induce a discipline in the
customer to plan his need carefully to ensure that as little of it as possible
lies idle--ideally none.

6 _24 Non-seasonal industries as well as most agro-based industries with

some degree of seasonality can conform to the suggested system without dif-
ficulty. In the case of industries with a very high degree of seasonality, as-
sessment of bank finance, i. e., the ovefall credit limit, may have to be done
on the basis of monthly cash budgets, as is being done at present for the
sugar industry by certain banks and thereafter also drawings will be regulat-
ed by up-dated monthly cash budgets.'

6.25 As the intention of introducing the new concept is to bring in a dis-

cipline in the system, we suggest that the demand cash credit should be
charged a slightly higher rate of interest than the loan component. This
approach will give the borrower an incentive for good planning. The cash
credit, in any case, involves additional cost and uncertainty to the banker
and, therefore, a slightly higher rate is not a penalty. The term loan repre-
senting the excess borrowing, to be amortised, as mentioned earlier, should
also be at a slightly higher rate than the cash credit rate_

6 _26 In order to ensure that customers do not use the new cash credit
Proposed Information facility in an unplanned manner and thus create
System the same problems as are faced in the present
system, we recommend that the financing should be placed on a quarterly
budgeting-reporting system for operational purposes.

6.27 The customer will submit a quarterly budget to the ban~r. The sys-
tem and the forms earlier envisaged for the purpose were outlined in our
Interim Report (Annexure V). On the basis of the experience gained and
the feed-back received from bankers and the borrowers, on whom they were
33
tried out, we have simplified them considerably; the revised forms are given
in Annexure VI.

6.28 It would be worthwhile mentioning here about the feed-back on forms

received by us from borrowers. The points made were mainly in regard to
the secrecy aspect, non-availability of audited financial statements, periodicity
ot the statements, inadequacy of systems and staff for the purpose in bor-
rower's organisation and need for simplification of the forms. We are
of the view that so long as banks provided the bulk of the funds for running
the industry, there should be no hesitation on the part of borrowers
to furnish to banks the information required by them. The proposed
system envisages only un-audited information except for balance sheet
at the year-end, though we would add that given a streamlined account-
ing system, one would not expect much divergence between audited and
un-audited figures. As regards the periodicity of the data, as the forms
are to be used on a roll-over basis, to enable the borrower and the
banker to learn from the previous experience, it is only appropriate that the
periodicity should not be longer than a quarter. We also expect that the
larger borrowers of banks (say, those enjoying total credit limits of Rs. I
crore and above) do have the organisational set-up to furnish the informa-
tion and if they do not have it, they should, in any case, be able to build up
the required systems in their organisations within a relatively short period.
Let us add that, during our discussioRs, both banks and industries agreed
with the quarterly information system in principle but only asked for it to
be as simple as possible.

6.29 We would also like to sound a note of caution to banks in regard to

the borrowers' concern about the secrecy and sensitive nature of the informa-
tion proposed to be called for from them. It may be argued that borrowers
have been furnishing to banks projected data even now, though not on
quarterly basis. Even so, we can appreciate their anxiety and we expect
banks to take due notice of their apprehension.

6. 30 There is an advantage in shortening the transaction cycle and we

should consider moving to a 'cash and carry' system which is already being
followed by some. However, a further detailed
Bill Finance
study of its implications may 'be necessary.
While this could, therefore, be the direction of change, sometimes it may
become necessary for manufacturing units to extend credit to maintain
sales. In such cases, apart from loan and demand cash credit, a part of
the total credit requirement, within the overall eligibility, could also be pro-
vided by way of bill limits to finance receivables. It is desirable that, as
far as possible, receivables should be financed by way of bills rather than
cash credit againSt book debts, though we do appreciate that the latter

34
cannot be altogether eliminated, particularly when the period of credit is
short and the amount is small. These bills could be on a demand basis
or on a usance basis depending on the marketing practice in the industry.
Some of the advantages of a bill arising out of sale of goods over the cash
credit against book debts are:

-the transaction is easily identifiable,

-there is a definite date of repayment,

-the bill will carry more than one signature if it is on usance basis,

-it represents an easily shiftable asset, and

-when goods are sold on credit to a wholesaler instead of to a user-

industry, bank finance for the transaction would in effect be credit for
trading purposes; in such cases, bank finance by way of bill discounts
would make for improvement in the quality of statistics in regard to
financing of trade. From the stand-point of monetary policy also,
such an arrangement would lend itself to better control.

6.31 We are also of the view that, to the extent feasible, the banking sys-
tem should move towards financing the purchaser, who is in fact the debtor,
rather than the seller, who is the creditor. In other words, the seller will
be paid off immediately after the sale and bank credit will be extended only
to the purchaser. As regards financing of the purchaser, however, there are
two different points of view. One view is that purchases should also as
far as possible, be on the basis of bills, for the following reasons:

-the amount will be drawn only at the time of actual need,

--the end-use of credit is automatically taken care of,

-credit to purchaser is directly related to his actual need, which is not

the case with the seller's bills, where credit is extended as a measure
of sales promotion, irrespective of the purchaser's ability to payor
his need for credit,

-a bill enables discipline to be imposed in respect of payments for pur-

chases-it ensures timely payment to suppliers, which a system of
book entries does not always ensure.

It is argued on the other side that under the revised system proposed by us,
35
the cash credit mode of financing is superior to bill financing in respect of
the borrower's purchase operations for the following reasons:
-drawals for non-approved purposes will be detected by the new in-
formation system proposed and by scrutiny of cheques; end-use of
credit will be effectively taken care of by the proposed information
system,

-the cost of operations to the borrower and the banker will be high;
borrower will have to pay more for cost of stamp duty while the
banker's administrative cost will go up because of additional paper
work without the assistance of mechanisation or computerisation, and

-the advantages of centralised borrowing by way of a close watch over

aggregate outstandings, debit and credit summations and borrowing
trends would be lost.

In view of the foregoing, without attempting a definitive view on the subject,

we would suggest that each bank may take its own decision, in consultation
with the borrower, having regard to the size of his operations, the individual
transactions and the administrative set-up obtaining in the bank.

6. 32 We recommend that the proposed approach to lending and the style

of credit be extended to all borrowers having credit limits in excess of Rs. 10
lakhs from the banking system as per the schedule
suggested in paragraph 6. 10. As regards the pro-
Coverage of the Proposed
Approach posed information system, however, we suggest
that, to start with, it may be introduced in respect
of borrowers with limits of Rs. 1 crore and above from the entire banking
system. Progressively, banks should extend this system, first to borrowers
with limits of Rs. 50 lakhs to Rs. 1 crore and next to those enjoying limits
of Rs. 10 lakhs to Rs. 50 lakhs.

36
7
OUR RECOMMENDED SCHEME

7. 1 The mechanics of lending in the framework we have suggested so far

will be as under:
(i) As a banker should be concerned with a borrower's total opera-
tions and not merely inventories or receivables, examination of the
borrower's operational plan for the next year assumes special sig-
nificance. It is in the customer's own interest to plan his opera-
tions, if he is to be assured by the banker of adequate credit to
meet his genuine production needs.

(ii) Financial analysis will cover examination of the borrower's past

and current financial position, profitability, production operations
for the next year and projected financial position at the end of the
next year.

The borrower should, therefore, furnish an operating statement and

a funds flow statement for the whole year (i.e. the next year) as
also a projected balance sheet as at the end of the next year, along
with the application for advance or renewal. Any assumptions
underlying the statements should be explained to and examined
by the banker.

(iii) The current asset position will be examined to ensure conformity

with inventory and receivables norms in relation to the projected
production.

(iv) The working capital gap will be computed, the extent of bank fin-
ance will be arrived at and the overall credit limit will be fixed
on the basis indicated in Chapter 6; fixation of a total limit will be
necessary for purposes of registration of charge with the Registrar
of Companies, credit authorisation from the Reserve Bank, docu-
mentation, etc.

In settling the quantum of bank finance, the operating, funds flow

and projected financial statements provided by the customer may
have to be amended.
37
 This will lead to an understanding between the banker and cus-
tomer on the financial needs arising from the next year's opera-
tions, covering both long term and short term finance, as well as
projected disposition of the resources generated.

(v) In respect of existing advances, excess finance over and above the
permissible level should be identified and placed on a repayment
basis, to be adjusted over a period of time, taking into account
customer's cash accruals and obligations and his capacity to raise
additional equity.

(vi) The agreed quantum of bank finance will be made available in

separate accounts; the minimum fund requirements during the year
by way of a fixed loan for 12 months and the balance, by way of
cash credit and/or bills.

(vii) There should be no rigidity, but a flexibility, in the matter of bifur-

cation of the limit between loan and cash credit, guided by the
customer's past plans, how they compared with the actual pattern
of drawings, and the expectation for the next year. For purposes
of credit authorisation from the Reserve Bank, the banker will
apply only for the total limit and not for the two limits separately.

(viii) Quarterly budget and performance data will be furnished in the

prescribed forms. The quarterly operating statement and funds
flow ~tatement will constitute a segment of the annual plan sub-
mitted earlier, and the banker will see whether the quarterly plan
is more or less in line with earlier expectations. Fund needs, not
directly linked to production needs such as for investments in or
loans to subsidiary firms or other companies, etc., will be evident
from the quarterly funds flow statement, and the banker will have
to take a view on what is not permissible.

(ix) Actual drawings within the sanctioned limit will be determined by

the customer's inflow of funds and outflow of funds as reflected
in the quarterly funds flow statement. The deficit in cash during
the quarter will be the level of additional demand cash credit bank
borrowings required in the quarter.

The permissible level of drawing in any quarter within the sanc-

tioned limit will thus be the level as at the end of the previous
quarter plus or minus the deficit or surplus shown in the funds
flow statement. It must be borne in mind that the peak require-
38
 ment within the quarter can conceivably be greater than what is
shown in the funds flow statement, which will only show move-
ment of funds between two dates. If so, the borrower will have
to specifically indicate the peak requirement to the banker.

(x) Within the overall permissible level of drawing, the day-to-day

operations in the account will be regulated on the basis of draw-
ing. power (subject to the margins stipulated by the banker against
the different components of inventory and receivables) as per
monthly stock statements, which will continue to be submitted.
The drawing power remaining after providing for the fixed loan-
vide item (vi) above (and excess finance, if any, placed on re-
payment basis-vide item (v) above) will be the drawing power
available for the demand cash credit account/bills on account of
purchases.

(xi) No budget or plan, however, carefully compiled, can always be

correct. Variances are bound to arise and it is suggested that
there should be flexibility in permitting drawings. Variance to the
extent of say ± 10 per cent should be permissible, and beyond
this, the banker and customer should discuss the reasons.

7.2 The system suggested is but an aid to a better understanding of the

customer's acceptable requirements. There would still be need for banker's
judgement.

7.3 It may be stated that we view our recommendations regarding inven-

tory/receivables norms and the mechanics of lending as a package; it is an
integrated scheme and the borrower is expected to subject himself to the
entire discipline envisaged by us.

39
8
FOLLOW-UP, SUPERVISION AND CONTROL

8.1 A bank has to follow-up and supervise the use of credit to verify first,
whether the assumptions on which the lending decision was taken continue
to hold good, both in regard to the borrower's
Testing the Assumptlonl operations and the environment and second, whe-
of Lending ther the end-use is according to the purpose for
which the credit was given. A banker will, there··
fore, need to know:

OPERATIONS

--Have the terms and conditions stipulated for the advance been ob-
served?

-Is the borrower keeping to the original plan of operations, and are
costs, sales, profits and funds flow according to plan?

-Is the security in order?

-Are there any danger signals and, if so, what remedial action can be
taken to cover the deficiencies and restore operations to normal
health?

MANAGEMENT

-Is the company properly managed?

-Have there been any changes in the ownership or management pattern?

ENVIRONMENT

-Have there been any changes in the business environment or in Gov-

ernmental laws and regulations affecting the customer or the banker?

-Any other considerations which may adversely affect the bank's posi-
tion in future; for example, whether there are arrears of payment
to cane growers in the case of sugar mills (Reserve Bank has already
40
 suggested to banks a detailed procedure to watch this position) or
whether adequate provision has been made for dues to employees,
etc.

8.2 Some of these responsibilities assumed by a banker are sometimes

viewed as transgression of a customer's right but, is it really so? In borrow-
ing from the pool of public funds for which there are competing claimants,
the customer cannot argue that so long as the banker's money is safe, he
should remain content. A bank today, and a nationalised bank at that,
cannot evade its social responsibility to ensure that the credit user, who has
access to scarce national resources, makes proper and efficient use of the
funds, which will bring about a multiplier effect in the economy. In fact,
the customer should deem it a privilege that he receives a share of the scarce
national resources, and he has, therefore, to justify both its need and its
end-use. Moreover, the discipline expected of the customer is as much in
his own interest as the banker's; besides, both the customer and the banker
are instruments in the same national development and growth process.

8.3 The terms and conditions stipulated by the commercial banker at

present are generally limited to maintenance of security, margin, insurance
arrangements and rate of interest. With some ex-
ceptions in special cases, it has not been customary
Terms and Conditions
to stipulate conditions in areas such as mainte-
nance of a satisfactory financial status or plough
back of earnings or curtailment of dividends, nor has the banker suggested
strengthening managerial competence-these are areas where term lending
institutions take active interest as a matter of course.

8.4 We feel that if the banker wants to get away from security-oriented
lending to production-related credit with security serving a subsidiary but
necessary role, he will have to keep in close touch with his borrower's opera-
tions. For instance, if the banker decides to lend on certain assumptions,
then these will have to be stated, examined and followed up. Where a .
borrower states in the annual plan that acquisition of fixed assets will be
restricted to routine additions and replacements, a decision to go in for
substantial expansion during the course of the year should not be taken with-
out consulting the banker, for it will affect the borrower's funds flow.
Equally, the original funds flow estimates might have been based on a cer-
tain dividend level. If profits were to fall much short of expectations during
the year, payment of dividends at the original level will affect the funds
flow adversely and, under these circumstances, the banker should be con-
sulted. A change in funds flow not only has an impact on the financial posi-
41
tion of the borrower Qut could also lead to a need for larger borrowings from
the banker for which he should be consulted and satisfied.

8 .5 The problem can be approached from several angles. One way would
be to stipulate, as certain foreign banks do, that the borrower shall main-
tain, during the currency of his borrowings, a debt-equity ratio and current
ratio, or net working capital (i. e. excess of current assets over current lia-
bilities) as the case may be, at agreed levels. A 'negative' lien is also taken
whereby the borrower agrees not to create a charge on his assets in favour
of third parties. This arrangement gives freedom to the borrower to take
decisions without seeking the banker's agreement. Another way of meet-
ing the situation would be to make no stipulations at all and leave it to
the borrower to approach the banker for any changes from the original
annual plan as agreed to beforehand with the banker. A third alternative
would be to spell out in specific terms what type of deviations from the
original plan would require prior consultation with the banker. These alter-
natives can be flexibly examined, but whatever is decided upon, there has
to be some understanding reached between the banker and the borrower to
make the information flow and its appraisal meaningful.

8 . 6 Barring exceptional cases, we would not suggest that commercial banks

should go to the length of adopting all the terms and conditions stipulated by
the term lending institutions. For example, it is not normally necessary for
banks to have a say in appointments of the executives of the company, or in
prescribing norms or guidelines for selling and purchasing arrangements.
It will suffice if the terms and conditions stipulated by the banker cover areas
which wiII have a material impact on the funds flow of the borrower, and
which are directly relevant to the banker's commitment. We may add that
since the projected funds flow statement would form the basis for determining
the line of credit, a banker would be justified in laying down a condition that
any material change, say around 10 per cent of the figure projected earlier,
would require his prior approval. We suggest that for normal cases certain
minimum terms and conditions could be stipulated. Thus, the bank could
stipulate that the borrower should consult it sufficiently in advance to give it
an opportunity to examine its own position, in the following matters:

-making other borrowing arrangements,

-taking up new projects or large scale expansion,

-making investments in or loans to subsidiaries, associate concerns,

individuals or other companies, other than loans to employees under
welfare schemes,
42
 -effecting mergers and acquisitions,

-paying dividends other than out of current year's earnings, after mak-
ing due provisions,

-giving guarantees on behalf of third parties,

-disposal of the whole or su~stantially the whole of the undertaking,

and
-premature repayment of loans and discharge of other liabilities.

8.7 So long as the borrower operates within the original plan accepted by
the banker, there would be no problem. Variances are only to be expect-
ed in all planning, and the quarterly review should take care of these vari-
ances. Once the system of. planning and appraisal is stabilised, stipUlation
of specific terms and conditions may diminish in importance, or even be
no longer necessary; but we, have some way to go yet in that direction.

8 . 8 The quarterly forms we have recommended for larger advances pro-

vide the basic framework of financial follow-up. Once the annual plan of
operations and year-end financial position are
accepted by the banker, the presumption is that
Financial Follow-up the intervening funds flow will also ipso facto be
acceptable. What the banker will be concerned
with, during the course of the year, is the extent to which actual operational
results conform to earlier expectations and signs, if any, of significant diver-
gence reading as red signals to both the banker and the customer. We
reiterate that variance of say, ± 10 per cent may be treated as normal, but
anything beyond it will need examination, with particular attention paid to
how it is going to affect profitability.

8.9 In addition to the quarterly data, we would suggest submission of a

half-yearly pro-forma balance sheet and profit and loss account within two
months from the end of the half-year for borrowers with credit limits of
Rs. 1 crore and more from the banking system. We are convinced that
large borrowers have sufficiently modern accounting systems to fulfil this
requirement.

8. 10 Many banks say that balance sheets of customers are delayed unduly.
In the new system, it is in the borrower's own interest that audited balance
sheets are produced as early as possible, say, in three months and we recom-
mend that he should take positive steps in this direction. This is not at all
a difficult proposition and is completely within the borrower's own control.
43
8.11 After the close of each year, detailed credit analysis should be done
as in respect of new advances. The annual drill will, in fact, be a review
of the past year's operations plus appraisal of the requirements for the next
year, based on next year's plans. In conducting this annual review-cum-
appraisal, the banker will re-examine the terms and conditions and make
necessary changes.

8.12 Stock statements will continue to be submitted but they need to be

improved. The valuation in the stock statement does not often tie up with
the financial data in the company's balance sheet.
Stock Statements If the lending procedures of banks are to be based
on a system of financial reporting by the bor-
rowers, it is essential that the valuation in the stock statement should be
congruent with that adopted for the financial statement. In operational
terms, the borrower will be asked to value stocks in the stock statement in
the same manner and adopting the same principles as for the financial
statement.

8. 13 A further improvement we would suggest is reconciliation of stocks

from month to month, so that the opening stocks and closing stocks are re-
conciled on the following lines, based on the example of a textile mill:
No. of Value
bales
Opening stocks of cotton in bales at the beginning of the month
Issued to the factory during the month
Purchases during the month
Closing stocks of cotton in bales at the end of the month

In the case of finished goods, the reconciliation would be as under:

Opening stocks of finished goods in)ales at the beginning of the
month
Received from the factory during the month
Sold/despatched during the month
Closing stocks of finished goods in bales at the end of the month

In the case of stocks-in-process, this type of reconciliation is not possible

and what the banker would look for is a steady pattern from month to month,
other things being equal.

8.14 The advantage in the above procedure is, firstly, a check on the finan-
cial data through the figures furnished in the stock statement. Secondly,
the reconciliation suggested by us would facilitate in the inspection of stocks
hy the bank's inspecting officials.
44
8. 15 Stock inspection poses problems particularly in large industries. Ex-
cepting perhaps the sugar industry, verification of quality and quantity of
stocks would be difficult, e. g., as in the engineer-
ing industry. In heavy machine building and
Stock Inspections
structurals, in particular, where the value of work-
in-progress will be considerable extending over
several months' production, verification of stocks by the banker can be an
ineffective exercise. In such cases, there is no alternative to depending on
financial follow-up, and the systems suggested by us should make the task
manageable. What is more important than inspection in such cases is a
system of plant visits by the banker, where opportunity is taken to talk to
management on current problems and look at figures. Where a banker feels
for special reasons that a detailed stock verification is called for, a regular
stock audit may have to be arranged with the assistance of outside consultants.
Such instances would, however, be few and restricted to difficult accounts.

8. 16 If the stock inspections were to disclose a short-fall in stocks, the

problem is serious. There are two possibilities; first, the figures furnished
by the borrower are incorrect and the company's financial position and pro-
fitability are worse than what have been disclosed; second, since submission
of the last quarterly budget, there has been a serious turn of events leading
to lower profitability or losses, resulting in a lower level of current assets.
In either event, the situation calls for serious notice being taken by the banker.

8. 17 Managerial competence is an important factor in the efficiency of ope-

rations, reflected in profitability and working capital and financial manage-
ment. Assessment of managerial efficiency is a
Management Efficiency and detailed subject in itself and while we would not
Inter-firm Comparison wish to enter into an in-depth discussion in this
area, we would suggest that it would be advis-
able for the banker to keep in mind that appraisal of management may be
essential, particularly as we place a new emphasis on viability and develop-
ment rather than on security alone. Further, changes in ownership or mana-
gerial pattern may also have to be watched, where circumstances warrant.

8.18 Inter-firm and industry-wise comparisons, where they are available,

constitute a good way of assessing efficiency. Company finance studies pub-
lished periodically by the Reserve Bank are useful. It would be of added
advantage if companies in the same industry could be grouped under three
or four categories, say according to size of sales and the group-wise financial
ratios compiled by the Reserve Bank. These may be made available to
banks regularly.

8.19 Industries too have a responsibility to strengthen the data-base in the

45
country and we would like to see industry organisations themselves collect-
ing data from their members and publishing whole-industry balance sheets,
profit and loss accounts and relevant ratios.

8.20 In making inter-firm comparisons, banks have been accustomed to

examining financial and operating ratios. We recommend that productivity
also be examined to determine efficiency in use of resources-men, money,
machines and materials. A banker can choose his own criteria, but some
useful ones are :
LABOUR EPFICIENCY

Sales per worker

Value added per worker
Capital employed per worker

CAPITAL EFFICIENCY

Sales divided by capital employed

Percentage of profit before tax to capital employed
Value added divided by bank borrowings

FIXED ASSETS EFFICIENCY

Value added divided by gross fixed assets

Sales dividcd by gross fixed assets

8.21 The level of profitability is one index of managerial competence. Pro-

fitability can, however, be atIected by changes in business environment, com-
petition, product obsolescene and change in demand pattern, lack of research
and development or even loss of key executives. Expressed differently, cur-
rent profitability does not hold the key to future profitability. Profits in the
future will be conditioned by the capacity of the management to think ahead,
to anticipate changes in business environment and to plan and act accord-
ingly. Many successful companies of yesterday are sick today for want of
such foresight. The banker has to keep these aspects in view.

8.22 For purposes of better control, it is our view that there should be a
system of borrower classification in each bank, within a credit-rating scale.
To illustrate, there could be a five-point scale in
Classification of which borrowers could be classified as Excellent,
Customers Good, Average, Below-Average or Unsatisfactory;
an alphabetical range would do equally well.
46
Such a system of classification according to credit risk, will facilitate easy
identification of the borrower whose affairs require to be watched with more
than ordinary care. An incidental advantage of such classification will be
the formulation of a rational base for purpose of fixing the rates of interest
for the respective borrowers. For instance, borrowers who conform to the
discipline suggested by us could be given an incentive by way of a lower
rate of interest as their credit-rating will improve.

8.23 To sum up, the appraisal-cum-follow-'up drill will be as under:

-detailed credit analysis at the time of sanction of advance, with suit-
able terms and conditions,

-monthly stock statement in the revised form,

-periodical stock inspection,

-quarterly performance/budget information,

-half-yearly proforma balance sheet and profit and loss account with-
in 60 days,

-annual audited accounts within 3 months,

·-annual review-cum-detailed credit appraisal, and

-a system of 'borrower classification.

8.24 We may now proceed to discuss the question of ensuring the end-usc
of bank credit. Verification of end-use of bank advances poses no problem
where loans are granted for financing trade. It
End-use of Credit becomes somewhat blurred in industrial finance
if the level of the advance is directly linked to
availability of security, without taking into account the other current assets
and other current liabilities.

8.25 In the revised scheme suggested by us, al1 current assets and current
liabilities other than bank borrowings are taken into account in arriving at
the working capital gap, of which the banker's share should not exceed a
specified percentage. Consequently, a part of the working capital gap will
always be met by the borrower out of long term funds, i. e., owned
funds plus term borrowing. In this manner, one can ensure that the
bank advance goes to support only a reasonable level of current assets.
With the passage of time, borrower's share supporting current assets should
increase.
47
8.26 A question is sometimes raised whether payment of cheques for wages,
power, taxes, dividend etc., by a banker from a cash credit account would
be proper end-use of funds lent. If all transactions of the aforesaid nature
as also the sales realisations are put through the cash credit account, it would
be unrealistic for the banker to differentiate between the purpose of one
drawing and another in the account. The only feasible manner in which
he can satisfy himself in regard to end-use of funds would, therefore, be to
examine the relationship of the borrower's current assets to current liabilities
from time to time. So long as the current ratio and the respective shares
of the bank and the borrower's long term funds in meeting the working
capital gap do not change adversely, the conclusion would be that bank
finance has gone towards build-up of current assets. A more meaningful
appreciation of the borrower's financial position and current operations could
be made if the bank can call for appropriate operational data and figures
relating to financial position at periodical intervals. These are incorporat-
ed in the infonnation system recommended by us.

48
9
NORMS FOR CAPITAL STRUCTURE

9.1 The two basic financial ratios which a banker will always look to are
the debt-equity ratio (i. e. total outside liabilities to equity) and the currrent
ratio. Our proposed approach to lending discussed in Chapter 6 will take
care of the aspect of a satisfactory current ratio. We have also to consider
whether norms could be established for the relationship of debt-equity in an
industrial organisation.

9.2 The experience of other countries in this matter may not be of much
assistance to us in formulating guidelines in the Indian context. We have
the case of American companies on the one hand whose financial position
is strong and it would obviously be unrealistic to seek such standards in
India, at this stage. In contrast, we also have the example of Japan where
higher debt-equity ratios are encountered but this again cannot constitute
a model for us.

9.3 Without entering into a discussion on monetary and fiscal policy or

a
drawing parallel with other countries, we would stress that the debt-equity
relationship is a relative concept that depends on several factors and cir-
cumstances such as the state of the capital market at anyone time, Govern-
ment policy on created money, the need to maintain current assets at a
specific level (which again is contingent on other factors), marginal effi-
ciency of capital or the opportunity cost, etc.

9.4 The concept of debt-equity ratio in itself can be viewed from different
angles. A widely held approach-and adopted by the Controller of Capital
Issues and the leading term lending institutions-is that of relating long term
or funded debt to equity. The banker, besides looking to this ratio, sees, in
addition, the relationship of total outside liabilities of a borrower to equity;
bankers in other countries also look to this relationship. The debt-equity
ratio can also be viewed from a different stand point as the relationship of
net worth to total assets of the company, the purpose being to ascertain the
owner's stake in the business. In discussing norms for capital structure, we
therefore have to keep in mind both the relationships-long term debt to
equity and total outside liabilities to equity.
49
9.5 The impact of taxation in considering this subject is also important
for, under the taX structure, it is advantageous to trade as much as possible
on borrowed capital to maximise earnings per share. The higher the level
of borrowings, or the leverage, the greater is the advantage; in view of this
and coupled with the cheap money policy till recently, there has been limit-
ed incentive to the borrower for efficient management of funds. This posi-
tion has changed somewhat of late with the introduction of higher interest
rates in the banking system.

9.6 On the other side, the lending banker likes to see as high an equity
stake as possible because it makes his advance safer and, in times of credit
shortage, makes available bank funds go further.

9.7 In resolving this dichotomy of interest between the banker and the
borrower, one cannot lose sight of the need to promote the capital market,
the ultimate goal being to assist to maximise investment and production. If
the end-product of industry has to be sold at a cheaper price and adequate
dividends are also to be given to make equity attractive to the investor, no
company can afford, even if it were possible, to trade entirely on owned
funds, nor rely too heavily on borrowed funds. There has thus to be a
balance between the two-what the company provides and what it borrows.

9.8 We have had the benefit of the statistics furnished by the Reserve Bank
on the financial position of 1303 companies for three years, viz., 1970-71,
J971-72 and 1972-73. The data have been tabulated industry-wise for 16
industries, separately for public and private limited companies and is furnish-
ed in Annexure VII. These data should be up-dated periodically. Each
industry group is more or less homogeneous. Long term debt-net worth and
total outside liabilities-net worth ratios relate to capital structure and are
of special interest to the lending banker. In each case, three ratios for latest
three years have been provided. Median represents the industry average and
quartiles one and three provide the range within which the normal cases
fall. Extremes of top and bottom (25 per cent each) cases have been ex-
cluded. While 'these figures cannot, of course, be considered to be the ideal
long term debt-net worth or total outside liabilities-net worth ratios for the
industry, they do provide a benchmark of comparison for the banker and the
borrower.

9.9 Where a company's long term debt-net worth and total outside liabili-
ties-net worth ratios are worse than the medians, the banker would endea-
vour to persuade the borrower to strengthen his equity base as early as pos-
sible. We consider that this would be a more practical approach for the
banker than attempting to legislate absolute standards of long term debt-net
worth and total outside liabilities-net worth ratios for all industries or even
50
industry by industry. We do not expect a perceptible improvement within
a short period. But, the borrowers whose ratios are worse than the median
should pursue to reach the median on the basis of the data up-dated by the
Reserve Bank .

51
10
IMPACf ON BANKS' INTERNAL WORKING

10.1 The proposals we have made in the preceding chapters constitute a

major departure from the existing approach and practices. It is necessary
that the change-over should be effected with a minimum of inconvenience
to the banker and the customer.

10.2 Lending is a dynamic activity and the banking system must always
be ready to adapt itself to the challenges of new situations. One of the points
made by most borrowers whom we met was an apprehension that unless
banks re-oriented themselves both in terms of their attitudes and their work-
ing, the new system, however well thought of, was likely to be a fruitless
exercise. They particularly mentioned the various levels through which a
proposal had to go before it was sanctioned. They pleaded that these tiers
should be reduced and decisions given quickly. This is a matter for each
bank to examine in relation to its own administrative systems and proce-
dures and take appropriate action.

10 . 3 These and related topics were discussed in the two bank seminars
organised by the Reserve Bank where the forms for credit appraisal and fol-
low-up of bank credit were pre-tested. Several senior officials dealing with
advances expressed the view that the staff resources available with their banks
were inadequate to do justice to the job. We do realise the difficulties
faced by bank managements in providing adequate and competent staff in
all departments; nonetheless lending is a crucial area and failures will seriously
affect bank profitability, besides the loss of national resources. It will be
necessary to keep this in mind in examining requests for additional staff.

10.4 More importantly, we would like to emphasise that the new system
cannot succeed without the total commitment of the top management in each
bank to the new approach.

10.5 While we advocate the acceptance of discipline within the industry,

public or private, government and its agencies, we cannot over-emphasise
the need for the banking system also to practise re-orientation. From the
head' office to branch level, some re-education in the new systems will be
necessary, and also a change in the existing systems to make them speedier
'52
and smoother in dealing with the customer. In fact, banks could exercise
a far-reaching influence through their own discipline on the discipline of the
customers. Speed in appraisal, decision-making and flexible handling of the
new system on the part of bank will also induce a corresponding speed
among the customers. We, therefore, suggest extensive training facilities in
credit appraisal for bank staff at all levels, with particular emphasis on the
information system suggested by us and handling of inventory and receiv-
ables norms.
II
BANKER-CUSTOMER RELATIONSIllP

11 . 1 Three steps can distinguish the attitudes of banks towards their bor-
rower customers:
(i) The protective attitude--<oncern primarily with the bank's protec-
tion,

(ll) The constructive attitude-a more intelligent, exacting analysis by

which salient trends are brought out and future events prophesied
with greater accuracy, and

(iii) The creative attitude-informing the customer of these trends and

helping him to avoid unfavourable contingencies.

11 .2 Indian banking has passed the first stage and could now be consider-
ed to be in the second stage. While the 'adversary relationship' between
the banker and the customer may be on the way out, we have definitely not
reached the stage of mutual confidence as between the banker and the cus-
tomer. On the customer's side, the feeling still persists that having given
security, there is no need for him to furnish what he considers unnecessary
data to the banker who can make no purposeful use of the information;
worse, the information might even be used by the banker against him to
cut down the level of credit or otherwise. In our discussions with repre-
sentatives of industry, the point was also frequently made that no matter
what information the industry may furnish, the existing level of competence
in the banking system might not be adequate to assimilate and analyse the
information.

11 .3 Perhaps this may be an overstatement, but we are not sure whether

the banking system itself is not conscious of the need for general improve-
ment. The security-oriented approach until recently was not such as to
encourage the customer to go to the banker with his problems for advice,
and cases where the banker has taken a deep, sympathetic and constructive
interest in extending such advice could not have been the rule.

11 .4 It is essential to realise that there are rights and obligations on both

sides. The banker as the lender is entitled to information which he deems
54
necessary for his appraisal and follow-up. The banker also has a duty in
turn to appreciate that vicissitudes in industry's fortunes are not uncommon,
with problems in the economy abundant; and it would be short sighted to
insist ~n the borrower strengthening his security when he is passing through
difficult times. On the borrower's side too, the right to obtain bank finance
for his operations goes hand in hand with the obligation to furnish adequate
information to the banker and the borrower cannot rest content merely
with furnishing security. Under the new system that we suggest, the cus-
tomer owes it to his banker to develop an accountability and the benefit. he
should receive in turn is flexibility and understanding on the banker's part.

55
12
SOME RELATED ISSUES

12.1 We have also considered certain related issues and our views are as
follows:
ISSUES RELATING TO NORMS

12.2 Trade is highly diversified, and where it is handled by small traders

(outside the corporate sector), we realise the difficulty of fixing inventory
norms for the large number of commodities trad-
Norms for Trade ed in. Nevertheless, bank credit cannot be
made available to trade without constraint, thus
enabling it to hold goods in any manner and to any extent it may desire.
While financing trade, banks must keep in view, inter alia, the extent of own-
ed funds of the borrower in relation to the credit limits granted, annual turn-
over, possible diversion to other units or uses and how much is being ploughed
back from profits into the business. Normally, the total outside liabili-
ties should bear a reasonable proportion to owned funds of the borrower, so
that the creditors also may have a satisfactory margin. Goods which have
already been obtained on credit should not be financed by the bank.

12.3 Since holding of large inventories with the aid of bank credit needs
curbing, we appreciate the supplemental selective credit approach of the
Reserve Bank, by which credit is controlled in respect of certain commodities
by fixing of quantum of credit, margins and rates of interest, taking into
account the market position, subject to periodical reviews.

12.4 In industries like cotton and jute textiles, the respective Government
authorities prescribe inventory levels, sometimes to support the market and
sometimes to prevent speculative holding. To the
Statutory Authorities extent these may cut across the relative norms for
and Norms inventory holding, it will be useful if these autho-
rities consult the Reserve Bank before prescribing the stock levels.

12.5 Efficient transportation and availability of wagons are necessary. A

question was often asked whether railways should not assume some liability
for undue delays as a part of their own discipline,
Transport delay. as they do for damages in transit at railway risk.
We see considerable force in this .
S6
12.6 There was much comment on supplies made to industry through the
canalising agencies; the industry averred that supplies were often bunched,
while the canalising agencies pointed out that
industry did not always honour all its commit-
Supplies from Canallslnl d th
Agencies and PublIc Sector ments rna e to em.
A ··
sImI arIPOlOt
· was rna de
Producers regarding supplies of items like steel which, ac-
cording to industry, due to irregular distribution
procedures, meant customers carrying large stocks
of mis-matched items, thus locking up bank funds.

12.7 The canalising agencies pointed out that the build-up of inventory
with them was due to poor off-take by the customers. The off-take since
then is reported to have improved. While these agencies must be aware of
their problems and do have their own limitations, there is also a tendency
on the part of the customers to over-indent their requirements. The cana-
lising agencies assured us that they have rationalised their procedures in-
asmuch as sufficient advance notice of supplies is being given to their cus-
tomers to enable the latter to make arrangements for necessary finance. We
also understand that as far as steel is concerned, there have been attempts
to change the procedures so that consumer industry will be able to hold
minimum necessary stocks, while the producers will hold inventories for
them in their stocks. We suggest that the canalising agencies and public
sectOr producers may review, from time to time, their distribution proc,e-
dures, so as to prevent unproductive lock up of bank funds.

12.8 Delay in payment of bills for supplies effected to Government depart-

ments and public sector has been commented upon most widely in the past.
The industry representatives mentioned to us that
Government Purchases there had been no material improvement in the
situation. Like the public sector, Government
purchase agencies are the biggest buyers in the country. Tardy payments
by Government and public sector will only increase the level of receivables
of industry and consequently the working capital requirements from banks
for unproductive purposes. Working capital management cannot yield best
results if receivables remain high due to such delays in payments. A little
understanding and a little discipline would bring about economies to the
purchasers and also the industry. Government departments have already
been following the accepted commercial practices in respect of their pur-
chases from foreign suppliers but there seems to have been a reluctance on
their part to follow similar procedures in respect of their internal purchases.
It would be useful if the Reserve Bank could initiate discussions on this
matter. We also feel that Government should, pending streamlining its pro-
cedures, agree to pay interest on established delayed payments.
57
12.9 The prevailing shortages in various sectors do not, in fact, justify
sales on credit terms. While the emphasis of the monetary policy is on
restraint in the use of credit, delayed payment by
Shift to Cash Sales purchaser results in the purchaser forcing credit
out of seller and the latter needing more credit
from the banking system; in the process, the entire transaction cycle also
gets elongated. Further, the purchaser may also, unless the bank is vigilant,
obtain credit from the seller as also the bank for carrying the same stock. The
present system thus dilutes monetary policy. We are, therefore, of the view
that there should be a major change in the procedures of selling. We feel,
as mentioned earlier, that there is a virtue in an efficient shortening of the
transaction cycle, both in the private and public sectors, and wherever pos-
sible, a system of 'cash and carry' should be introduced, though after a
detailed study, or at least credit period allowed by sellers should be progres-
sively reduced. Banks could facilitate this shift to the 'cash and carry'
system by extending the necessary credit line to the purchaser industry to
payoff the suppliers on delivery. This would enable bank funds to achieve
a larger multiplier.

ISSUES AFFECTING BANKS

12.10 In the case of consortium advances, or where the borrower is financed
by more than one bank, the concerned banks should evolve a procedure
to ensure a uniform handling of the accounts in
Consortium Advances conformity with the inventory and receivables
norms and the financial discipline suggested. The
initiative for appraisal and review might be taken by a bank nominated as
leader for the purpose.

12.11 As we see it, the benefits of the new system are not one-sided and
the advantage to industry is considerable. For one thing, submission of a
mass of unrelated data at irregular intervals and
Banker's Leverage for indeterminate purposes would now be substi-
tuted by an orderly information system that would
be of even greater value to the borrowers themselves. Equally, if not more
important, we can also visualise a responsibility cast on the banker, as the
system stabilises, to provide the required funds to the borrower on the basis
of a periodic dialogue, in consonance with the overall credit policy. The
most important advantage will be a convergence in the approach of the
banker and the borrower which would lead to a better appreciation and
understanding of the borrower's problems, enabling the banker to stand by
the borrower in times of need. We are confident, therefore, that the mutual
advantages will soon be realised and the necessary co-operation would be
forthcoming from industry.
58
12.12 While there can be no problem with progressive borrowers, we have
considered how the banker would be in a position to enforce the new system
with the not-so-progressive customers. There could be a few cases where
borrowers may refuse to comply with the new requirements. We see no
alternative in such cases for the banker but to take first a holding action by
raising the rate of interest until such time as the requirements are fulfilled;
but if this fails, the banker will have no option but to stop operations in the
accounts, although we feel that such contingencies may not arise often.

12.13 It has been observed that sticky advances follow a particular pattern.
Few advances are bad ab initio; they were all good to begin with. With a
steady erosion of profitability, unnoticed by the
Sticky Advances banker, the borrower's liquidity declines and the
first sign of difficulty is delayed payments to credi-
tors, leading ultimately to default. With further deterioration in profitability,
followed by losses, current liabilities exceed current assets or, in other words,
a net working capital surplus becomes a net working capital deficit. At
this stage, cases are not unknown where a borrower may be tempted to
furnish incorrect stock statements in the fear that disclosure of the true
state of affairs would precipitate bank action. The banker may be vaguely
aware that the borrower is facing some problems, but feels reassured by the
fact that stock statements show his security intact and is lulled into com-
placency. When the borrower's activities finally begin to waver, the banker
attempts a detailed stock-taking, only to find large shortfalls in current assets,
and ultimately a loss to the bank.

12.14 It is not that danger signals do not become available in advance, but
what is more important is evolving a system of feed-back on the borrower's
operations, or to appraise what information is available. Timely examina-
tion and discussion of the problem areas by the bankers with the borrowers
would save many borrowing concerns from becoming sick. A customer has
no longer an inherent right to conduct business in a manner which will end
np in sickness if national funds have ultimately to bale out the operation.

12.15 It is true that even the best of systems cannot altogether prevent
poor performance and sticky advances cannot entirely be avoided. However,
once danger signals are thrown up and signs of difficulty emerge, speedy
action is called for on the part of the banker and timely and firm handling
are of essence. In dealing with large industrial advances in particular, the
banker's interests are best served not by sale and recovery of the security
charged to the bank, but by seeking implementation of appropriate measures
to overcome the incipient difficulties.
59
12.16 In such cases, a major inhibiting factor has been the reluctance of
the banker to offer advice to industry on what steps to take to restore health
or to intervene firmly to improve management in specific areas of deficiency,
or even to remove undesirable practices. In the past, competition has made
banks hesitant in this regard and rather than lose an account they have hoped
for the best and kept their fingers crossed. The consequential delay some-
times proves fatal both to the bank and the customer, although some cus-
tomers manage to get away and leave the sick company in the lap of Govern-
ment.

12.17 In such cases, there is a duty cast upon the banker to intervene even
in management, if that is necessary, in the interests of all concerned and
the public. The banker does not have to diagnose the ailment by himself.
He can go to a consultant, and can then arrange for action, including a
financial or structural reorganisation. We particularly stress this point
because of the past record of many sticky advances where the banker's main
anxiety was how his security could be strengthened or realised. And the
suffers ifl the end were both the banker and the society at large.

12.18 We feel that a body like the Indian Banks' Association has an im-
portant role to play in a study of the environment and particularly the im-
pact of regulations and enactments on the working
Environment of banks. Its contribution would be particularly
advantageous to the smaller banks, some of whom
cannot afford to arrange such facilities within their organisation.

12.19 Expertise has also to be built up in the banking system in organising

industry-wise studies. A point was frequently made by representatives of
industry that bank managers in India were not sufficiently aware of condi-
tions in industry and were excessively pre-occupied with .security. There
is no doubt a clear need for bankers to keep themselves fully informed of
conditions in each industry in which they are interested, its problems and
prospects. Such studies should necessarily be on an on-going basis and
should serve as a frame of reference for decision-making in regard to indivi-
dual cases.

12.20 In the light of the new responsibilities that we have envisaged for
the banking system, it was suggested that instead of every bank attempting
to make detailed studies of all the major indus-
tries and spreading its limited capabilities too
Lead Banks for Industry widely, it would be beneficial if some selected
banks-we would call them 'lead banks for in-
dustry' in this limited context-concentrate on one or two industries each
60
for which they may be best fitted to study by virtue of their locational ad-
vantage or large involvement or for other special reasons. By such spe-
cialisation and division of labour, the quality of the studies would be greatly
improved and the results could be made available to the other banks as also
to the Reserve Bank. In course of time, sufficient expertise will thus be
built up in the entire banking system, covering all major industries, which
can be utilised to the mutual advantage of the banking system as well as the
industry. We would, however, state in this context, that by 'lead bank for
industry' we do not mean that the bank concerned will deal exclusively
or predominantly in that industry; we only mean that the bank concerned
will have a normal portfolio but in an industry in which it happens to have
a predominant role in lending, it will use the knowledge it gains for con-
ducting studies for the benefit of others.

12.21 We find considerable merit in this suggestion and the benefits flow-
ing from such a pooling of resources are obvious. It would naturally not
absolve the individual banks, particularly the larger ones, of the responsibi-
lity of carrying out their own studies in the industries in which they are
involved. Indeed, such studies could help the 'lead banks for industry'. A
question was raised about the confidentialness of information, but the 'lead
banks for industry' would not provide firm-wise information and data, but
only industry-wise aggregates.

OTHER ISSUiS

12.22 Delays in taking credit decisions referred to earlier could also be

occasioned by the credit authorisation requirements of the Reserve Bank,
Credit Authorisation although they arise largely out of non-submission
Scheme of complete information to it in the first place.
Be that as it may, it is opportune to examine whether the limits for credit
authorisation should not be raised. The value of the rupee has altered
since introd.uction of the Credit Authorisation Scheme in November 1965
and the borrowing limit required for a given level of operations has gone
up. As mentioned earlier, there has already been a qualitative improvement
in the approach of commercial banks and their lending skills, which will
improve further under the system we are suggesting in this Report.

12.23 We had the opportunity to discuss credit problems of public sector

units with their managements. Financing public sector industry, though
relatively new to banks, should pose no special
problems. As stated earlier, public sector indus-
Public Sector Industry try should conform to the same norms as are ap-
plicable to comparable private industry. In our
discussions, public sector managers were insistent that their style of manage-
61
ment 'necessitated larger inventories and receivables'. It is possible that
in special cases norms may have to be relaxed, but only after a study in
depth. We feel that it would be inappropriate for banks to take on them-
selves projects which are not obviously bankable.

12.24 One of the terms of reference given to us relates to the flow of in-
formation from the lending banks to the Reserve Bank. The type of in-
formation required by the Reserve Bank and the
Flow of Information to periodicity of such information flow would largely
the Reserve Bank depend on the requirements of the Credit Autho-
risation Scheme on the one hand and credit plan-
ning on the other. The information furnished to the Reserve Bank at
present comprises data embodied in the applications for credit authorisation,
statements of analysis of advances, seasonal data furnished for the purpose
of credit planning and certain other special statements called for from time
to time. Besides, the Basic Statistical Returns also furnish a good data base.
What specific changes should be introduced in the matter of information
pertaining to borrowers would depend on the changes contemplated in the
Credit Authorisation Scheme and in credit planning. We have suggested
an information system for banks for obtaining data from their borrowers.
The Reserve Bank may consider what part of the information it requires and
the periodicity thereof. Such information flow from banks to the Reserve
Bank may include data in regard to each industry indicating how inventory
norms are being implemented, circumstances under which deviations have
been made and also the progress made in switching over to the new system
recommended by us. If we have refrained from offering detailed sugges-
tions in this area, despite the term of reference, it is because of our feeling
that decisions in this important area should await a detailed study.

62
13
THE NEXT STEP

13. 1 We are confident that, as we go along, with the implementation of the

package of the systems recommended by us, the pressure on the banking
system from the borrowers will ease considerably, enabling better re-alloca-
tion of credit in the economy.

13.2 We suggest that the inventory and receivables norms should be given
effect to immediately (subject to observations in Chapter 5), while action
should be initiated to implement the new approach to lending with a time-
bound schedule as proposed in Chapter 6. It should, however, be noted
that, in all cases where borrowers seek additional credit facilities on a regu-
lar basis, while the limits will be fixed on the basis of norms (or the past
practice, whichever is lower), the financing pattern should also be simul-
taneously brought in line with the 1st Method of lending and the excess
finance to be amortised should be identified and placed on a repayment basis.

13 . 3 Alongside, steps should be taken to introduce the information system

suggested by us, for all industrial borrowers with limits aggregating Rs. 1
crore and above from the banking system, and the process completed within
six months. The borrowers who have the information system should com-
mence submitting the quarterly data straightway, while the intervening period
of six months will be utilised by the borrowers who do not have the requisite
information system to build up such a system. Banks, on their part, will
utilise this period for conducting training sessions for their operating officials.

13 .4 We suggest that special courses should be organised by the National

Institute of Bank Management and the Bankers Training College. These in-
stitutions should also concentrate, to start with, on training the trainers so
that these trained instructors in turn could carry out extensive training pro-
grammes in their own training institutes; the process of change over to the
new system would then be speedier, smooth and fruitful. These institutions
may also help banks in preparing operational manuals based on our recom-
mendations and assist banks in bringing about the necessary changes in their
systems and procedures.

13 .5 We also suggest that each bank should conduct banker-borrower semi-

63
nars to create an understanding between the operating officials in the respec-
tive banks and their customers so that a better appreciation of each other's
problems and points of view could be gained. After six months, a bankers'
seminar could be convened in the Bankers Training College where operat-
ing officials can compare notes and attempt to find solutions to the opera-
tional problems that might have been thrown up in the interim.

13 . 6 Follow-up and supervision of bank credit and ensuring that borrowers

take effective action to improve their financial strength is a continuous exer-
cise. In this, the role of the Committee of Direction already appointed by
the Reserve Bank, with which are also associated some commercial bankers,
will be wide and varied. But its prime contribution will be to take forward
the work of the Study Group to a continuing function of a dialogue with
industry and banks, to make sure that the new system suggested by us runs
smoothly and changes in the environment warranting any revision are pick-
ed up quickly and examined. It could also assist the Reserve Bank in for-
mulating its policies in this regard. We reiterate the value of setting up this
Committee, particularly as it will place the work of the Study Group on to
a dynamic basis.

64
14
ACKNO~DGEMENTS

We received valuable information and guidance from several chambers

of commerce and industries' associations, individuals from the private and
public sectors as also bankers, in the examination of the issues covered by
our terms of reference, and we are grateful to them.

We are grateful to the Department of Banking Operations and Develop-

ment, Reserve Bank of India, for providing the Secretariat that assisted the
Group most admirably, and to the Department of Statistics, Reserve Bank of
India for making available to us extensive data on company finance.

Our thanks are also due to Shri G. S. Murti, Director, Department of

Statistics, Reserve Bank of India, Dr. R. Dhar of the National Institute of
Bank Management and Dr. S. K. Mukherjee of the Indian Institute of
Management, Ahmedabad, for their participation in the deliberations of the
sub-groups appointed by the Group. We are also grateful to Prof. S. K.
Bhattacharyya and Sarvashri S. Padmanabhan and Y. V. Sivaramakrisbnayya
for heading sub-groups set up for examining certain specific matters.

We make a particular mention of the valuable guidance we received

from Dr. R. K. Hazari, Deputy Governor, Reserve Bank of India, at various
stages, in fulfilling our task. We also place on record our high appreciation
of the excellent assistance given by Sarvashri T . K. K. Bhagavat, M. K. Desai,
A. D. Navaneethan and A. Qavi of the Reserve Bank of India to the Study
Group, and in particular, our Member-Secretary, Shri A. K. Bhuchar, whose
contribution was invaluable.

65
 15
SUMMARY OF OBSERVATIONS AND
RECOMMENDATIONS

1. Till nationalisation of the major commercial banks in July 1969, the

main contenders for bank credit were large and medium scale private indus-
try and internal and external trade. Nationalisation called for a new policy
and the banking system was asked to adopt a new approach as a credit
agency, based on development and potential rather than on security only,
to assist the weaker sectors of the society, and later to lend to the public
sector also (Paragraphs 1.1 and 1.2).

2. In the early years, bank lending in India was mostly directed to financ-
ing of movement of agricultural produce from the grower to the trader.
Advances were sanctioned against the security of stocks charged to the banks.
With the growth of industrialisation, the same system of bank lending
continued with minor changes, the general pattern of lending to industry
being security-cum-guarantee advances. The security-oriented system tend-
ed to favour borrowers with strong financial resources, irrespective of their
economic function. This system aided concentration of economic power
(Paragraphs 3.1 to 3.3).

3. Since nationalisation, there has been a new sense of direction in bank

lending and indeed advances to new claimants of credit, and especially to
small industry and agriculture, have since gone up. The public sector too
has emerged as an important user of credit in recent years. Another new
source of demand is the growing awareness of the need to achieve an equitable
geographical development of industry, and in its wake the distribution of
credit (Paragraphs 3.6 to 3.8).

4. In the last six or seven years, industrial production has risen at a slow
pace but the calIon bank credit, essentially for maintaining inventories
even at the same level, has gone up with increasing prices. If the growth
process is resumed-as indeed it has begun to do-then perforce the volume
of inventory required to maintain a higher level of production will increase
and correspondingly the demand for bank credit. Banks will thus have to
operate in a context in which demand for bank credit for growth require-
ments will be large (Paragraph 3. 10) .
66
5. The problem of potential imbalance in demand for and supply of funds
is accentuated by the manner in which banks extend credit under the pre-
sent cash credit system of lending. Under this system, the level of advances
in a bank is determined not by how much a banker can lend at a particular
point of time bu.t by the borrower's decision to borrow at that time. This
makes credit planning difficult in banks. Also, cash credit advances are
repayable on demand only in name. To the extent that outstandings in the
cash credit account never fell below a certain level during the course of a year,
there is an element of what is called a 'hard core' borrowing which is in
reality a quasi-permanent lock up of bank funds in the borrower's business
(Paragraphs_ 3.12 to 3.20).

6. In the light of .~he foregoing, time is now opportune to review the exist-
ing system and effect changes in such a way that under the new system the
borrower would plan his credit needs and the banker also would be able
to plan, having known the borrower's credit requirements (Paragraphs 3.22
and 3.23).

7. A borrower needs funds for the operation, mainly to carry current assets
required for the purpose. Inventory and receivables comprise the bulk of the
current assets. There is no uniformity in approach among banks in assess-
ing working capital requirements, especially with regard to inventories. If
bank credit is to be viewed as a tool of resource allocation in the economy,
one cannot get away from the problem of defining reasonable levels of inven-
tories (including safety stock) and receivables in each industry and hence
the need for norms for these current assets (Paragraphs 4.1, 4.2 and 4.7).

8. In the new context, the main function of a banker as a lender is to sup-

plement the borrower's resources to carry an acceptable level of current
assets. The implications are two-fold; one, the level of current assets must
be reasonable and based on norms; two, a part of the fund requirements for
carrying current assets must be found from long term funds comprising own-
ed funds and term borrowings including other non-current liabilities (Para-
graph 4.8).

9. Norms have been suggested for 15 major industries, taking into account,
inter alia, company finance studies made by the Reserve Bank, process period
in the different industries, discussions with the industry experts and feed-
back received on the Interim Report. The norms proposed represent the
maximum levels for holding inventory and receivables in each industry. If,
however, a borrower has managed with less in the past, he should continue
to do so (Paragraphs 5.7 and 5..8).
67
10. In view of the special characteristics of the heavy engineering industry,
particularly the large tie-up of funds in current assets, the banking system
may find it difficult to cope with the industry's demand for funds in its entirety.
The working capital requirements of the heavy engineering sector should,
therefore, be assessed taking into account the alternative ways of financing
the needs and the extent to which banks may meet them may be determin-
ed, case by case, on merits (Paragraphs 5.9 to 5.11).

11 . Norms cannot be absolute or rigid. Deviations from norms may be

visualised under certain circumstances, e. g., bunched receipt of raw mate-
rials, power cuts, strikes, transport delays, etc. However, delayed payments by
Government agencies and sometimes by large units in the private sector can-
not be treated as circumstances warranting deviations and the matter should
be tackled at the sources rather than throwing upon the banking system the
burden of providing additional credit. The Reserve Bank should discuss the
matter with Government agencies and the Bureau of Public Enterprises;
Government and public enterprises should set an example in prompt pay-
ments (Paragraphs 5.12 and 5.13).

12. Concessions under the criteria for deviating from norms should not
be expected as a matter of course but must be fully justified. D<!viations
should be for known specific circumstances and situations (which should
be recorded) and allowed for agreed periods which should be relatively short;
and there should be a return to norms when conditions revert to normal
(Paragraphs 5.14 and 5.15).

13. Norms should apply to all industrial borrowers, including small scale
industries, with aggregate limits from the banking system in excess of Rs. 10
lakhs and extended to smaller borrowers progressively as early as possible
(Paragraph 5.16).

14. In the case of industries not covered by norms at present, the purpose
and spirit behind the norms should be kept in view when extending credit
facilities (Paragraph 5.17).

15. The list of industries covered by norms should be extended with expe-
rience. Norms should be kept under constant review (Paragraphs 5. 18 and
5.21).

16. The principles should be uniform for all like industries, both in the
private and public sectors. Thus, public sector industry should conform to
the same norms as are applicable to comparable private industry, though in
68
special cases, norms may have to be relaxed, but after a study in depth
(Paragraphs 5.19 and 12.23).

17. All credit limits, whether enhanc.ement is sought for therein or not,
should be considered in the light of the norms and where the levels of inven-
tory and receivables are excessive, they should be reduced, bringing down
also the dues to the bank and/or other creditors (Paragraph 5.20).

18. The process of adjustment of inventories and receivables should be com-

pleted in about two months, other things being equal. In the event of default,
as a first step, the bank should charge a higher rate of interest. But even
charging of a higher rate of interest should not give a permanent immunity
to the customer from conforming to norms and some further action should
be considered (Paragraph 5.20).

19. The working capital gap, viz. the borrower's requirement of finance to
carry current assets (based on norms) other than those financed out of his
other current liabilities, could be bridged partly from his owned funds and
long term borrowings and partly by bank borrowings (Paragraph 6.2).

20. The maximum permissible level of bank borrowings could be worked

out in three ways. In the 1st Method, the borrower will have to contribute
a minimum of 25% of the working capital gap from long term funds, i. e.
owned funds and term borrowings; this will give a minimum current ratio
of 1: 1. In the 2nd Method, the borrower will have to provide a minimum
of 25% of total current assets from long term funds; this wiII give a current
ratio of at least 1.3: 1. In the 3rd Method, the borrower's contribution from
long term funds will be to the extent of the entire core current assets, as
defined, and a minimum of 25% of the balance current assets, thus strengthen-
ing the current ratio further (Paragraphs 6.3 to 6.8).

21. The classification of current assets and current liabilities for computing
the permissible level of bank finance should be made as per the usually ac-
cepted approach of bankers (Paragraph 6.9).

22. The 3rd Method will provide the largest multiplier of bank finance;
however, to avoid hardship to borrowers, a beginning may be made with
the 1st Method, placing all borrowers in this method within a period of about
one year, and the ideal of the 3rd Method may be reached in stages. The
liberal approach under the 1st Method has been suggested as the first step,
particularly to facilitate financial structuring of new companies, setting up
projects in backward areas and also for flexibility in restructuring of existing
companies with a weak financial base (Paragraphs 6.10 and 6.12).
69
23. The aim should be to move forward and borrowers in the third or
second category should not revert to the second or first category respectively
by increasing their dependence on bank borrowings. Also, when credit needs
increase, the borrower should not slip back from a higher to a lower cate-
gory (Paragraph 6.12).

24. Banks will work out the position of existing customers and any excess
over the finance, to which a borrower would be eligible under the new for-
mula, will have to be reduced progressively, by transferring the excess to a
term loan, amortised over a suitable period (Paragraph 6. 13).

25. The concept of bank credit forming only a portion of the working
capital gap could also be used as an instrument for influencing the directional
flow of credit, according to the priorities for industries indicated by the autho-
rities concerned from time to time by varying the scales of finance. Also,
when a manufacturer has reached a stable level of production for a reason-
able number of years, there is no reason why bank finance should continue
to be made available to him on the same scale, because if a portion of the
finance made available to him could be withdrawn, such funds would be
available for promotion of new economic activity (Paragraph 6.14).

26. In future, while funding new projects, the term lending institutions may
provide for margins on the basis of recommended proposals and the bank
which is to finance the working capital requirements should be associated
at this stage in determining the working capital and margin requirements.
In the case of old units, where a part of the present cash credit borrowing
is transferred to a term loan, to bring the borrowings in line with the recom-
mended proposals, the funded debt and equity relationship may not imme-
diately conform to the norms of the term lending institutions. In these
cases, borrowers may have to be given time to bring the position to normal,
but the total outside liabilities to owned funds relationship will have to be
acCeptable to the banks (Paragraphs 6.15 and 6.16).

27. A request for additional credit on a regular basis from a borrower

who already has an excess borrowing under any of the three methods may
be considered provided the borrower brings in matching contribution requir-
ed under the relevant method of lending. In very exceptional cases, however,
if the cash generating capacity of the borrower is sufficiently good, banks
may grant a term loan for the purpose to a reasonable extent for a short
period acceptable to the bank. If, however, the additional fund need is for
a short duration for specific transactions/contracts, the bank may consider
giving additional credit for such needs without insisting on matching contri-
bution, on the clear understanding that the borrower would return to the
70
stage as in the relevant method of lending within the stipulated period.
Borrowers having excess borrowing in relation to inventory norms will not
be eligible for additional limits on a regular basis until such time as the
current assets are brought down to the required levels (Paragraphs 6. 17 and
6.18). .

28. The annual credit limit may be bifurcated into a loan, which would
comprise the minimum level of borrowing throughout the year, and a demand
cash credit, which would take care of the fluctuating requirements, both
to be reviewed annually. There should, however, be no rigidity in the mat-
ter of bifurcation of the overall credit limit between loan and cash credit
(Paragraphs 6.22, 6.23 and 7.1).

29. In the case of industries with a very high degree of seasonality, assess-
ment of bank finance may have to be done on the basis of monthly cash
budgets (Paragraph 6.24).

30. The demand cash credit should be charged a slightly higher interest
rate than the loan component. This approach will give the borrower an
incentive for good planning. The term loan representing the excess bor-
rowing to be amortised should also be at a slightly higher rate than the cash
credit rate (Paragraph 6. 25) .

31 . In order to ensure that customers do not use the new cash credit
facility in an unplanned manner, the financing should be placed on a quarter-
ly budgeting-reporting system for operational purposes, as in the suggest-
ed forms (Paragraphs 6.26 and 6.27).

32. The borrowers expressed concern about the secrecy and sensitiveness
of the information proposed to be called for from them. Banks are expect-
ed to take due notice of their apprehension (Paragraph 6.29).

33. 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, receiv-
ables should be financed by way of biIIs 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 take 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 (Paragraphs
6.30 and 6.31).

34. The proposed system of lending and the style of credit may be extend-
71
ed to all borrowers having credit limits in excess of Rs. 10 lakhs from the
banking system, while the information system may be introduced, to start
with, in respect of borrowers with limits of Rs. 1 crore and above from the
entire banking system and then extended progressively to others (Para-
graph 6.32).

35. The mechanics of lending suggested covers examination of the bor-

rower's total operational plan as also his past and current financial position.
The borrower should, therefore, furnish to the banker an operating statement
and funds flow statement for the whole year (Le. the next year) as also
projected balance sheet as at the end of the next year, along with the appli-
cation for advance or renewal, for fixation of the overall credit limit (Para-
graph 7.1).

36. The working capital gap will be computed, the extent of bank finance
will be arrived at and the overtlJI credit limit will be fixed, on the basis
indicated in Chapter 6 (Paragraph 7. I).

37. Actual drawings within the sanctioned limit will be determined by the
customer's inflow and outflow of funds as reflected in the quarterly funds
flow statement and the permissible level of drawing will be the level as at
the end of the previous quarter plus or minus the deficit or surplus shown
in the funds flow statement (Paragraph 7.1).

38. Within the overall permissible level of drawing, the day-ta-day opera-
tions in the account will be regulated on the basis of drawing power (sub-
ject to the margins stipulated by the banker against the different components
of inventory and receivables), as per the monthly stock statements, which
will continue to be Submitted (Paragraph 7. 1).

39. Variances are bound to arise in any budget or plan; variances to the
extent of say ± 10 per cent should be permissible, and beyond this, the banker
and customer should discuss the reasons (Paragraph 7. 1).

40. The recommendations regarding inventory/receivables norms and the

mechanics of lending are to be viewed as a package; it is an integrated scheme
and the borrower is expected to subject himself to the entire discipline en-
visaged (Paragraph 7.3).

41. A bank has to foIIow up and supervise the use of credit to verify first,
whether the assumptions of lending in regard to borrower's operations con-
tinue to hold good and second, whether the end-use is according to the pur-
pose for which the credit was given (Paragraph 8. I).
72
42. If the banker is to get away from security-oriented lending to produc-
tion-related credit with security serving a subsidiary but necessary role, he
will have to be in close touch with the borrower's operations. Since project-
ed funds flow statement would form the basis for determining the line of
credit, a banker would be justified in laying down a condition that any mate-
rial change, say around 10 per cent of the figure projected earlier, would
require his prior approval. Thus, the banker may stipulate certain minimum
terms and conditions relating to matters having a material impact on the
funds flow of the borrower (Paragraphs 8.4 to 8.6).

43. From the quarterly forms, the banker will verify whether the opera-
tional results conform to earlier expectations and whether there is any diver-
gence reading as red signals; however, variance of, say around 10 per cent,
may be treated as normal (Paragraph 8.8).

44. In addition to the quarterly data, the larger borrowers should submit
a half-yearly proforma balance sheet and profit and loss account within two
months of the end of the half-year (Paragraph 8.9).

45. In the new system, it is in the borrower's own interest that audited
balance sheets are produced as early as possible, say, in three months, and
he should take positive steps in this direction (Paragraph 8.10).

46. After the close of each year, detailed credit analysis should be done
as in respect of new advances, when the banker will re-examine the terms
and conditions and make necessary changes (Paragraph 8. 11).

47. Stock statements will continue to be submitted but they need to be im-
proved. The basis of valuation in the stock statements and the balance
sheet should be uniform. The stocks should be reconciled in the stock
statements, showing the opening and closing stocks, quantity-wise and value-
wise (Paragraphs 8. 12 and 8. 13).

48. Stock inspection poses problems particularly in large industries. In

such cases, there is no alternative to depending on financial follow-up.
Where a banker feels, for special reasons, that a detailed stock verification
is called for, a regular stock audit may have to be arranged with the asssist-
ance of outside consultants (Paragraph 8. 15).

49. Managerial competence is an important factor in the efficiency of opera-

tions, reflected in profitability and working capital and financial manage-
ment. Banker should keep in mind that appraisal of management may be
73
essential particularly as we place a new emphasis on viability and develop-
ment rather than on security alone (Paragraph 8.17).

50. To facilitate inter-firm and industry-wise comparisons for assessing

efficiency, it would be of advantage if companies in the same industry could
be grouped under three or four categories, say, according to size of sales
and the grou~wise financial ratios compiled by the Reserve Bank for fur-
nishing to banks (Paragraph 8.18).

51. Industry organisations should also collect data from their members and
publish whole-industry balance sheets, profit and loss accounts and relevant
ratios (Paragraph 8. 19).

52. In making inter-firm comparisons, besides examining financial and ope-

rating ratios, certain productivity ratios may also be examined to determine
labour efficiency, capital efficiency and fixed assets efficiency (Paragraph
8.20).

53. For the purpose of better control, there should be a system of borrower
classification in each bank. This will facilitate easy identification of the
borrowers whose affairs require to be watched with more than ordinary care
and will also provide a rational base for purposes of fixing rates of interest for
the respective borrowers (Paragraph 8.22).

54. The only feasihle manner in which the banker can satisfy himself in
regard to end-use of funds would be to ensure, by calling for appropriate
bperational data and figures relating to financial position at periodical inter-
vals, that the borrower's current ratio and the respective shares of bank
finance and borrower's long term funds in meeting his working capital gap
do not change adversely; if the position in this regard does not change adverse-
ly, the conclusion would be that bank finance has gone towards build-up of
current assets (Paragraph 8.26).

55. Apart from the current ratio, the bank will look to the debt-equity ratio,
which may be looked at as funded debt-equity relationship or total outside
liabilities-equity relationship. It is not practicable to legislate absolute
standards for these ratios. Where the debt-equity ratios of a borrower are
worse than the median for his industry, the banker would endeavour to
persuade the borrower to strengthen his equity as early as possible and the
latter should pursue to reach the median on the basis of the data up-dated
by the Reserve Bank (Paragraphs 9. I to 9.9).

56. The change-over recommended should be effected with a minimum of

74
inconvenience to the banker and the customer. Borrowers suggested that
banks should reduce tiers and take quicker decisions. This is a matter for
each bank to examine in relation to its own administrative systems and pro-
cedures and take appropriate action. There should be total commitment
of the top management in each bank to the new approach. Extensive train-
ing facilities in credit appraisal should be provided for bank staff at all
levels, with particular emphasis on the suggested information system and
handling of inventory and receivables norms (Paragraphs 10.1 to 10.5).

57. A customer can no longer take a stand that having given security, there
is no necessity for him to give any data to banks. There are rights and
obligations on both sides. The banker as the lender is entitled to informa-
tion which he deems necessary for his appraisal and follow-up and also has
a duty in turn towards the borrower to appreciate his difficult situations. On
the same basis, the customer should also develop an accountability to his
banker (Paragraphs 11.2 to 11.4).

58. While financing trade, banks should keep in view, inter alia, the extent
of owned funds of the borrower in relation to the credit limits granted, the
annual turnover, possible diversion to other units or uses and how much is
being ploughed back from profits into the business. They should avoid
financing of goods which have already been obtained on credit (Paragraph
12.2).

59. It will be useful if Government authorities like the Textile Commissioner

or Jute Commissioner consult the Reserve Bank before prescribing stock
levels for the industries concerned to the extent these may cut across the
relative norms for inventory holding (Paragraph 12.4).

60. In view of the need for efficient transportation and availability of

wagons, railways should assume some liability for undue delays as a part
of their own discipline, as they do for damages in transit at railway risk
(Paragraph 12.5).

61. The canalising agencies and public sector producers may review, from
time to time, their distribution procedures so as to prevent unproductive
lock-up of bank funds (Paragraphs 12.6 and 12.7).

62. Government and the public sector are the biggest buyers in the country
and tardy payments by therr: will only increase the level of receivables and,
consequently, the need for bank credit. Government departments have
already been following the accepted commercial practices in respect of their
purchases from foreign suppliers but not in respect of their internal pur-
75
chases. It will be useful if the Reserve Bank could initiate discussions on
this matter. Further, Gove.rnment should, pending streamlining its proce-
dures, agree to pay interest on established delayed payments (Paragraph
12.8).

63. The possibility of switching over from credit sales to cash sales, wherever
possible, both in the private and the public sectors, should be examined, or
at least credit period allowed by sellers should be progressively reduced, in
order to shorten the transaction cycle and enable bank funds to achieve a
larger multiplier (Paragraph 12.9).
t .
64. In the case of consortium advances or where a borrower is financed by
more than one bank, the concerned banks should evolve a procedure to
ensure a uniform handling of the account in conformity with the inventory
and receivables norms and the financial discipline suggested (Paragraph
12.10).

65. If a borrower refuses to comply with the new requirements, there will
be no alternative to the banker but to take first a holding action by raising
the rate of interest until such time as the requirements are fulfilled; but if this
fails, the banker will have no option but to stop operations in the account
(Paragraphs 12.11 and 12.12).

66. Once danger signals are thrown up in the case of a borrower and signs
of difficulty emerge, speedy action is called for on the part of the banker and
timely and firm handling are of essence. In such cases, the banker may
intervene even in management, if that is necessary, in the interests of all
concerned and the public. To diagnose the ailment, the banker can go to
a consultant and can then arrange for action, including a financial or struc-
tural reorganisation (Paragraphs 12.13 to 12.17).

67. The Indian Banks' Association has an important role to play in a study
of the environme,nt and particularly the impact of regulations and enactments
on the working of banks (Paragraph 12.18).

68. Expertise has to be built up in the banking system in organising indus-

try-wise studies, on an on-going basis, which should serve as a frame of
leference for decision-making in regard to individual cases (Paragraph
12.19).

69. Instead of every bank attempting to make detailed studies of all the
major industries it would be beneficial if some selected banks concentrate on
one or two industries each, for which they may be best fitted to study; the
76
results of their study could be made available to the other banks as also the
Reserve Bank (Paragraph 12.20).

70. It is opportune to examine whether the limits for the credit authorisa-
tion requirements' of the Reserve Bank should not be raised, in view of the
altered value of the rupee since the introduction of the Credit Authorisation
Scheme and the qualitative improvement in the lending skills of commercial
banks (Paragraph 12.22).

71. Inventory/receivables norms should be given effect to immediately,

while action should be initiated to implement the new approach to lending
within the time-bound schedule as proposed in Chapter 6 (Paragraph 13.2).

72. Steps should be taken simultaneously to introduce the suggested in·

formation system for all industrial borrowers with limits aggregating Rs. I
crore and above from the banking system and the process completed within
six months (Paragraph 13.3).

73. Banks should utilise this transitory period of six months for conducting
training sessions for their operating officials (Paragraph 13.3).

74. Special courses should be organised by the National Institute of Bank

Management and the Bankers Training College for training the banks' ope-
rating officials. These institutions may also help banks in training the
trainers, preparing operational manuals, and in bringing about changes in
their systems and procedures (Paragraph 13.4).

75. Each bank should conduct banker..,borrower seminars to create an

understanding between the operating officials in the respective banks and their
customers (Paragraph 13.5).

76. After six months, a bankers' seminar may be convened in the Bankers
Training College where operating officials can find solutions to any operational
problems that might have been thrown up in the interim (Paragraph 13.5).

77. The prime contribution of the Committee of Direction appointed by

the Reserve Bank will be to take forward the work of the Study Group to a

77
continuing function of a dialogue with industry and banks to ensure smooth
running of the new system and to take care of the need for any revision
(Paragraph 13.6).
Prakash Tandon
Chairman

s. K. Bhattacharyya P. P. Dhir

A. Ghosh T. S. Kannan

R. C. Maheshwari P. B. Medhora

P. K. Nanda N. C. B. Nath

S. Padmanabhan N. Rajan

Sampat P. Singh Y. V. Sivaramakrishnayya

A. K. Bhuchar
Member-Secretary

BOMBAY
August 9, 1975.

78
 ANNEXURES

I LIST OF QUESTIONS

II NAMES OF PARTIES WHO MET THE STUDY GROUP/SUB-

GROUPS

III INTERIM REPORT ON INVENTORY NORMS

IV COpy OF RESERVE BANK'S CIRCULAR LETTER DBOD. NO.

CAS.BC. 113/C. 446-74 DATED THE 8TH NOVEMBER 1974,
REGARDING THE INTERIM REPORT ON INVENTORY
NORMS

V INTERIM REPORT ON FOLLOW-UP OF BANK CREDIT

VI FORMS RECOMMENDED FOR THE QUARTERLY INFORMA-

TION SYSTEM

VII IMPORTANT FINANCIAL RATIOS IN CERTAIN INDUSTRIES

79
I
ANNEXURE

LIST OF QUESTIONS

I. What are the broad categories of principal raw materials required by

your unit and what are the main products manufactured by it?

2. What are the key considerations that shape management decisions

relating to inventory in an industrial organisation and your unit in par-
ticular?

3. What are the main variables affecting inventory levels (raw materials,
stocks-in-process, finished goods and consumable stores) in your indus-
try and your unit in particular?

4. What are the usual levels of inventories [under various categories, ex-
pressed in terms of number of days'/months' consumption (raw mate-
rials and stores)/production (stocks-in-process)/sales (finished goods)]
for your industry and your unit in particular, the basis on which they
have been determined and the circumstances under which there are de-
partures from the usual levels?

5. What do you consider to be the criteria for determining safe minimum

levels of the different categories of inventories for your industry/unit?
If the minimum levels of inventory are governed by seasonal factors,
please indicate the minimum safe levels that will have to be maintained
during the different periods of the year (expressed in terms of the num-
ber of days'/months' consumption/production/sales).

6. What is the cycle of production in your industry/unit? If you are

manufacturing more than one item, the cycles for the major items may
be indicated, together with the relative importance (in percentages) of
those items in the total production. What is the relationship between
your cycle of production and your holding of raw materials?

7. What is the procurement system and the nature of inventory control in

your industry/unit and what improvements can be made therein?
80
 8. What are the methods of carrying inventories? Is there, a practice of
letting others carry stocks on behalf of your industry/unit on payment
of interest/commission etc.? What is the proportion of inventories car-
ried by others for you?

9. How to achieve smoother production without abnormal inventory build

up? What are your specific problems in inventory management, but for
which, perhaps, you could have carried on with much lower levels of
inventories? In particular, what are your suggestions for improving the
methods of supplying materials by agencies such as MMTC, STC, SAIL,
etc. and obtaining imports?

10. What is the usual credit given by your suppliers?

11. What portion of your sales is on credit basis? What is the period of
credit allowed by you or the general trade practice in your industry in
this regard? How are the credit sales financed?

12. What is the system of receivables management in your unit and what
are the specific problems faced in this regard?

13. Is there a system of forecasting production/business plan for your unit?

If so, on what basis and at what intervals it is drawn up? How is the
business plan correlated with the financial arrangements? A specimen
set of the forms used for the purpose by the unit may please be fur-
nished?

14. What are the various sources from which your industry/unit meets its
working capital finance and the relative shares of these sources? The
difficulties, if any, experienced and suggestions for improvement in the
pattern of financing may be given.

15. What are your views on replacing the cash credit/overdraft system of
financing working capital by banks by a mix of fixed loans, bills and
cash credit?

16. What should, in your oplfllon, be a suitable credit policy for financing
inventories by banks?

81
II
ANNEXURE

NAMES OF PARTIES WHO MET THE STUDY

GROUP/SUB-GROUPS

CHAMBERS OF COMMERCB AND INDUSTRY

1. Andhra Chamber of Commerce and Industry, Hyderabad.

2. Bengal Chamber of Commerce and Industry, Calcutta.
3. Bengal National Chamber of Commerce and Industry, Calcutta.
4. Bharat Chamber of Commerce, Calcutta.
5. Bihar Chamber of Commerce and Industry, Patna.
6. Bombay Chamber of Commerce and Industry, Bombay.
7. Federation of Andhra Pradesh Chambers of Commerce and Industry,
Hyderabad.
8. Federation of Indian Chambers of Commerce and Industry, New Delhi.
9. Gujarat Chamber of Commerce and Industry, Ahmedabad.
10. Indian Chamber of Commerce, Calcutta.
11. Indian Chamber of Commerce, Cochin.
12. Indian Merchants Chamber, Bombay.
13. Maharashtra Chamber of Commerce, Bombay.
14. Punjab Haryana and Delhi Chamber of Commerce and Industry,
New Delhi.
15. South Indian Chamber of Commerce, Madras.

INDUSTRY AssoCIATIONS

1. Ahmedabad Mill Owners' Association, Ahmedabad.

2. All India Manufacturers' Organisation, Bombay.
3. All India Rubber Industries Association, Bombay.
4. Association of Indian Engineering Industry, Calcutta.
5. Federation of Co-operative Sugar Factories, New Delhi.
82
6. Fertiliser Association of India, New Delhi.
7. Indian Cotton Mills' Federation, Bombay.
8. Indian Electrical Manufacturers' Association, Bombay.
9. Indian Jute Mills' Association, Calcutta.
10. Indian Paper Mills' Association, Calcutta.
11. Indian Sugar Mills' Association, New Delhi.
12. Indian Tobacco Association, Guntur.
13. Mill Owners' Association, Bombay.
14. Organisation of Pharmaceutical Producers of India, Bombay.
15. Silk and Art Silk Mills' Association, Bombay.
16. Vanaspati Manufacturers' Association of India, Bombay.

MANAGEMENT INSTITUTE

National Institute of Bank Management, Bombay.

BANKERS' ASSOCIATION

Indian Banks' Association, Bombay.

INDIVIDUALS

1. Shri Praful Anubhai Rustom Jehangir Vakil Mills Ltd.

2. Shri A. M. M. Arunachalam Tube Investment of India Ltd.
3. Shri C. Balakrishnan Associated Chambers of Commerce
and Industry of India.
4. Shri T. V. Balan Associated Cement Companies Ltd.
5. Shri M. G. Balasubramanian Department of Banking, Government
of India.
6. Shri N. Balasubramanyam Coromandel Fertilizers Ltd.
7. Shri S. C. Banatwala Glaxo Laboratories (I) Ltd.
8. Dr. A. K. Banerjee Unit Trust of India.
9. Shri Brij Berry Vazir Sultan Tobacco Co. Ltd.
10. Shri R. M. Bhandari Controller of Capital Issues, Govern-
ment of India.
83
11. Shri N. S. Bhat Associated Chambers of Commerce
and Industry of India.
12. Shri M. V. Bhatt Hindustan Construction Co. Ltd.
13 . Dr. H. C. Bhatt Unit Trust of India.
14. Shri S. K. Birla Kesoram Industries Ltd.
15. Mr. C. J. T. BIease Dunlop India Ltd.
16. Mr. M. V. Bourcier Mettur Beardsell Ltd.
17. Shri S. P. Chandavarkar Union Bank of India.
18. Shri Asit Chandrnal Tata Engineering & Locomotive Co.
Ltd.
19. Shri D. K., Chakravorty Bureau of Public Enterprises, Govern-
ment of India.
20. Shri V. V. Chari Industrial Development Bank of India.
21. Dr. A. C. Chatrapati Vanaspati Manufacturers' Association
of India.
22. Shri A. Nagappa Chettiar India Leather Corporation.
23. Shri R. N. Chopra Hoechst Pharmaceuticals Ltd.
24. Shri M. G. Darnani Simplex Mills Ltd.
25. Dr. S. A. Dave Industrial Development Bank of India.
26. Dr. R. Dhar National Institute of Bank Manage-
ment
27. Shri O. P. Dhir Engineering Construction Corporation
Ltd.
28. Shri Arun Desai Hindustan Lever Ltd.

29. Shri S. V. Desai Arnar Dye Chern Ltd.

30. Shri C. K. Doraivelan Leather Export Promotion Council.

31. Shri D. Y. Gaitonde Century Enka Ltd.
32. Shri S. K. Ghosh Bird & Co. (P) Ltd.
33. Shri D. P. Goenka Octavius Steel Co. Ltd.
34. Shri R. A. Gulrnoharned Dena Bank.
35. Shri I., K. Gupta Indian Telephone Industries Ltd.
84
36. Shri R. S. Gupta Fertiliser Corporation of India.
37. Shri P. P. S. Hariprasad Madras Fertilisers Ltd.
38 . Shri C. K. Hazari Escorts Ltd.
39. Shri N. L. Hingorani National Institute of Bank Manage-
ment.
40. Shri S. H. Jain Bharat Heavy Electricals Ltd.
41. Shri M. N. Kale Industrial Development Bank of India.
42. Shri M. V. Kamath Tube Investment of India Ltd.
43 . Shri Shrenik Kasturbhai Arvind Mills Ltd.
44. Shri A. M. Khadiresan Indian Overseas Bank.
45. Shri C. D. Khanna Industrial Finance Corporation of
India Ltd.
46. Shri O. M. Khosla Electric Construction and Equipment
Co. Ltd.
47. Shri D. C. Kothari Kothari (Madras) Ltd.
48. Shri S. Kumarasundaram Industrial Credit and Investment
Corporation of India Ltd.
49. Shri I. Malhotra Madura Coats Ltd.
50. Shri K. M. Mammen Mapillai Madras Rubber Factory Ltd.
51. Shri Paul Mampilly Indian Institute of Management,
Ahmedabad.
52. Shri C. V. Mariwala Vanaspati Manufacturers' Association
of India.
53. Dr. N. C. Mehta National Institute of Bank Manage-
ment.
54. Shri S. S. Mehta Industrial Credit and Investment
Corporation of India Ltd.
55. Shri J. P. Mishra Orient Paper MiIls Ltd.
56. Shri Mohd. Fazal Engineering Projects (I) Ltd.
57. Shri A. R. Motafram Merck Sharp & Dohme of India Ltd.
58. Prof. V. L. Mote Indian Institute of Management,
Ahmedabad.
8S
59. Shri R. Monani I.T.C. Ltd.
60. Dr. Shishir K. Mukherjee Indian Institute of Management,
Ahmedabad.
61. Shri S. A. Muraliprasad India Cements Ltd.
62. Shri M. Narasimham Ministry of Finance, Government of
India.

63. Shri R. Narasimhan Southern Petrochemical Industries

Corporation Ltd.
64. Shri N. S. L. Narasimhan Organisation of Pharmaceutical Pro-
ducers of India.
65. Shri V. L. Narayan Guindy Industrial Estates Association.

66. Shri K. S. Narayanan India Cements Ltd.

67. Shri S. Narayanaswamy South Indian Chamber of Commerce.
68. Shri H. N. Parekh National Rayon Corporation Ltd.
69. Shri H. T. Parekh Industrial Credit and Investment
Corporation of India Ltd.
70. Shri A. D. Parpia Southern Region Export Promotion
Council for Finished Leather.
71 . Shri Baldev Pasricha Industrial Finance Corporation of
India Ltd.
72. Shri B. G. N. Patel Larsen & Toubro Ltd.
73. Shri S. K. Patel Mafatlal Fine Spg. & Wvg. Mills Ltd.
74. Shri S. V. S. Raghavan Bharat Heavy Electricals Ltd.
75. Shri W. S. Rajadhyaksha Ceat Tyres of India Ltd.
76. Shri S. Ramachandran Minerals and Metals Trading Corpo-
ration of India Ltd.
77. Shri R. Ramanujam T.V.S. Group.
78. Shri V. V. Ramachandra Rao Indian Tobacco Association.
79. Shri C. S. S. Roo Indian Telephone Industries Ltd.
80. Shri C. S. Venkat Rao Industrial Development Bank of India.
81. Shri R. N. Ratnam E. I. D. Parry Ltd.
86
 82. Shri S. K. Sadasivan Southern Petrochemical Industries
Corporation Ltd.
83. Shri T. S. Santhanam T.V.S. Group.
84. Shri G. y. Seshagir Glaxo Laboratories (I) Ltd.
85. Shri D. S. Seth Tata Chemicals Ltd.
86. Shri C. C. Shah Pfizer Ltd.
87. Shri Viren J. Shah Mukund Iron & Steel Works Ltd.
88. Shri D. Shanna Industrial Development Bank of India.
89. Shri P. Bhoja Shetty Shibsha Instruments (I) Pvt. Ltd.
90. Shri M. L. Shrikant Mukund Iron & Steel Works Ltd.
91. Shri D. N. Shukla Bank of India.
92. Shri S. S. Shukla State Trading Corporation of India.
93 . Shri J agjit Singh Indian Drugs and Pharmaceuticals Ltd.
94. Shri B. H. Singhania Indian Jute Mills Association.
95. Shri B. K. Sircar Industrial Development Bank of India.
96. Shri N. A. Soonawala Tata Consultancy Services.
97. Shri N. T. Srinivasan Bharat Heavy Electricals Ltd.

98. Shri S. Srinivasan Southern Petrochemical Industries

Corporation Ltd.

99. Shri K. R. Srivastava Southern Petrochemical Industries

Corporation Ltd.
100. Shri A. Subramanian Leather Export Promotion Council.
101. Shri R. K. Talwar State Bank of India.
102. Shri D. V. Taneja Central Bank of India.
103. Shri K. N. Taneja Sarabhai M. Chemicals Pvt. Ltd.
104. Shri V. D. Thakkar Bank of Baroda.
105. Shri N. H. ThanawaUa Mafatlal Fine Spg. & Mfg. Co. Ltd.
106. Shri T. N. C. Veeraraghavan Bharat Heavy Electricals Ltd.
107. Shri A. Venugopal Binny Ltd.
108. Shri R. L. N. Vijayanagar Mill Owners' Association
87
109. Shri S. Vijji T.V.S. Group.
110. Shri M. P. Wadhwan Steel Authority of India Ltd.
111. Shri T. Abdul Wahid Mis. Abdul Wahid & Co.
112. Mr. P. D. Whiteley Binny Ltd.

BANKERS WHO ASSISTED THE STUDY GROUP/

SUB-GROUPS IN CERTAIN SPECIFIC MATTERS

l. Shri S. P. Sen Gupta State Bank of India.

2. Shri N. R. Kulkarni State Bank of India.
3. Shri R. Viswanathan State Bank of India.
4. Shri T. V. Sunder Rajan Punjab National Bank.
5. Shri A. B. Telang Punjab National Bank.

NAMES OF PARTIES WHICH WERE INVITED BUT DID NOT

RESPOND
1. Assam Chamber of Commerce & Industry, Shillong.
2. Association of Man-Made Fibre Industry, Bombay.
3. Cochin Chamber of Commerce & Industry, Cochin.
4. Federation of Karnataka Chamber of Commerce and Industry, Banga-
lore.
S. Goa Chamber of Commerce & Industry, Goa.
6. Leather Goods Manufacturers and Dealers Association, Bombay.
7. Man-made Fibre Spinners' Association, Bombay.
8. Madhya Pradesh Chamber of Commerce & Industry, Gwalior.
9. Nag-Vidarbha Chamber of Commerce, Nagpur.
10. Orissa Chamber of Commerce & Industry, Cuttack.
11. Rajasthan Chamber of Commerce & Industry, Jaipur.
12. Upper India Chamber of Commerce & Merchants' Units of Uttar Pra-
desh, Kanpur.
III
ANNEXURE

INTERIM REPORT ON INVENTORY NORMS

BACKGROUND

1 . For examining the issues involved, the Study Group set up two Sub-
Committees. !Jne Sub-Committee examined industry-wise requirements of
inventory while the other looked into the banker's approach to short term
financing of industry. Both Sub-Committees met a representative cross-sec-
tion of leaders of industry, industrial organisations as well as several pro-
fessionals. Data placed before us by certain industries, committee members
and the Study Group's Secretariat have also been examined.

COMPONENTS OF INVENTORY

2. Inventory could be in three parts:

(a) Minimum level of inventory in plant based on technical require-

ments.

(b) Additional inventory for strategic reasons to maintain uninterrupt-

ed cycle of production and sales.

(c) Excess inventory either for reasons of stock profit or conservative

policy or inefficient management.

NORMS

3 . The minimum level of inventory in plant depends on technological re-

quirements and norms could be thought of in this area. Inventory for strate-
gic reasons also could conform to norms. Inventory in excess of these re-
quirements will have to be considered excessive.

4. The case for norms is fairly clear. To the extent that some units have
access to more resources than others, imbalance develops in the system. As
current assets are largely supported by bank finance, distortions in alloca-
tion of bank credit can also arise. Norms of inventory holding for major
industries would ensure more equitable distribution of resources and, there-
fore, better allocation of credit for production.
89
DIFFICULTIES ENCOUNTERED

5. However, our examination and discussions reveal certain problem areas

in establishing norms. These are as under:

(a) Certain industries such as Heavy Engineering do not have a suffi-

ciently large sample for deriving conclusions.

(b) Geographical diversity results in diversified needs.

(c) Product-mix of units in several industries differ materially.
(d) Inadequacies in areas such as transportation systems, licensing for
imports and purchase and selling trade channels result in wide swings
in inventory levels.
(e) Bunching of canalised and imported supplies also cause distortions
in inventory levels.

6. In view of these factors, establishment of norms requires considerable

study at the unit level and assembling and analysis of data. The time at
our disposal was too short to undertake such detailed stat! work. Even in-
dustrial representatives who were expected to furnish meaningful data, could
not do so. In some instances, industry representatives were not in a posi-
tion even to give general guidelines on the factors having a bearing on in-
ventory levels in their industry.

STUDY GROUP'S VIEWS

7. Under these circumstances, the members feel that in-depth studies should
be undertaken industry-wise and that we should approach some consultants
to discuss the methodology of this study. We would, therefore, like to defer
our recommendations on norms until completion of these studies. It is,
however, understood that Reserve Bank of India will still like to have our
preliminary views on the basis of the data we have collected and the dis-
cussions we have had with industry representatives so far. We are, accord-
ingly, attaching a statement suggesting certain general guidelines industry-
wise. We would stress that these guidelines are based on a study of the
limited material available to us and should be viewed more as flexible guide-
lines than as rigid norms. Variations would be permissible under the fol-
lowing circumstances:
(a) Bunched receipts of raw materials.
(b) Power cut, strikes and other unavoidable interruptions in the pro-
cess of production.
(c) Transport bottlenecks.
90
 (d) Accumulations of finished goods due to non-availability of shipping
space for exports or other disruptions in sales.
(e) Build-up of stocks of finished goods such as machinery, due to fai-
lure on the part of purchasers-for whom these were specifically
manufactured-to take delivery.
(f) Necessity to cover full requirements of raw materials for specific
export contracts of short duration.

SUGGESTED NORMS

8. A statement is attached suggesting norms of inventories and receivables

for the following industries:
( a) Cotton textiles
(b) Synthetic textiles
(c) Jute textiles
( d) Pharmaceuticals
(e) Rubber products
(f) Fertilisers
(g) Vanaspati
(b) Paper

(i) Light engineering

0) Medium engineering

9. It will be noted that stocks-in-process and stores have been left out.
This is because of the wide divergence between unit and unit. It can be left
to the banker to ascertain the actual process time and stores requirements
for each borrowing unit, which should not be difficult.

10. Heavy engineering has been left out. This industry covers heavy struc-
turals and heavy machine building units which are not many in number.
The requirements of this sector cannot be generalised. The banker will
have to examine each case separately on merits taking into account the ex-
tent of financing the unit bas to do at various stages of production, the avail-
ability of advances, 'on account' payments, clients' raw material, etc. One
interesting observation which has been made in this context is that the
Heavy Engineering units' tie-up in the net current assets (inventories
plus receivables minus advances received and creditors for pW'Chases) should
91
not normally exceed 50 per cent of value of annual production. This will
be examined further by us.

11. We have also not dealt with the sugar industry. The norms being sug-
gested by us are for holding of inventory by each industry. Sugar industry
being entirely seasonal, the stocks of sugar-which is the main item of in-
ventory-will be determined entirely by the availability of cane on the one
hand and Government's release policy on the other. Therefore, no norms
need be suggested for this industry.

12. Raw material levels have been expressed as so many months' con-
sumption of raw materials required to support planned operations in the
ensuing year. Finished goods and receivables are expressed in terms of so
many months' sales.
ApPLICA TION OF NORMS

13. The norms represent reasonable levels of holding of inventory and

receivables in each industry. In assessing working capital requirements, the
banker will take these levels as what should reasonably be held by the bor-
rower concerned. If any borrower were to hold higher levels of inventory,
the banker would assume that the excess inventory should be off-loaded, ex-
cept where circumstances warrant otherwise for special reasons; excess re-
ceivables will also be realised.

14. In dealing with fresh requests for advances or for enhancements in

limits, the banker should ask for the relative data in the usual manner. While
computing current asset levels, the suggested norms will be taken as the
maximum levels (subject to flexibility as indicated) and the gap in resources
to be financed by bank borrowings worked out.

15. As for existing accounts where no enhancements in limits are required,

our expectation is that the banker will examine the existing levels of in-
ventory and receivables and seek a reduction in the levels where they are
excessive. To the extent that inventory and receivables levels could be
brought down, the outstanding dues to the bank should also go down.

16. Our suggestion is that existing borrowers should be asked to furnish

the following additional data along with their stock statements:

Last Current Projected for

month month current year
Sales
Production
Consumption ofraw materials ..
92
17. Where the stock statements represent only a part of the total stocks
of the borrower, a summary of the total stocks (inclusive of stocks not shown
in the stock statement) should be called for along with the stock statement,
classified into raw materials, stocks-in-process, finished goods, stores and
spares and book debts including bills discounted.

18. The banker should examine the existing stock POSition and level of
receivables in relation to the norms on receipt of the next stock statement.
Where the current assets are excessive, the matter will be taken up with
the borrower. A dialogue should be established with the borrower and a
programme for phased reduction in levels worked out; meanwhile the ope-
rations in the borrowers' accounts may not be stopped. The position will
be watched in the next stock statement and we would expect the process of
adjustment to be completed in about two months. Where, asset levels con-
tinue to be high at the end of two months, our suggestion is that the banker
may charge a rate of interest higher by 2 per cent on that part of the bor-
rowings which would be considered excessive. The excess borrowings will
be the value of excess stocks/receivables carried by the borrower on the
reasoning that had the asset levels been brought down-other fund-flows re-
'maining unaffected-borrowings from the bank would have gone down to
that extent.

It should be reiterated that the objective is to introduce a discipline and

improvement in the use of working capital, especially in the maintenance
of reasonable inventory levels consistent with encouragement of production
and maintenance of usual working relationship between banker and customer.

] 9 . As we have provided for different contingencies in which relaxations

would be permitted, there is room for sufficient flexibility in operating the
norms.

CONCLUSION

20. As mentioned earlier, our intention is to proceed with further studies

industry-wise and the norms suggested by us are only an interim measure.
We expect to get valuable feed-back from industry and banks in the next
few months on the application of these norms. This will assist us in finalis-
ing our views.

21 . We have examined whether the norms should be applied to all indus-

trial borrowers. While this could be left to the bankers to decide, our
own view is that, to start with, norms could be applied to large industrial
borrowers with aggregate limits in excess of Rs. 10 lakhs and extended to
even smaller borrowers as early as possible.
93
A WORD ABOUT COITON AND JUTE TBXTILB INDUSTRIES

22. Although these are seasonal, we have not provided for higher stock
levels for the season. This is on the reasoning that it is not the function
of industry to carry stocks in excess of what is required for current opera-
tions, as otherwise, industry will be taking over the functions of the trader.
We are also not taking into account the need or otherwise of price-support
operations and buffer stock operations. We presume that the Reserve Bank
would take into account these factors and decide how and by whom the
marketed stocks of raw cotton and jute should be financed.

23. In regard to the textile industry in particular, while we have adopted

the norms stipulated by the Textile Commissioner, we have not included the
exemptions given by him. On what grounds the Textile Commissioner has
provided for exemptions is not clear. Here again, we would leave it to the
Reserve Bank of India to decide whether these exemptions should also be
extended.

GENERAL

24. Norms have been suggested by us only for some of the major indus-
tries. As regards industries not covered by norms, we would expect the
banks to observe the purpose and spirit behind the norms while dealing with
their proposals. It is also needless for us to stress that the banks should
be on their guard against any attempts to defeat the purpose of the norms
in one way or the other as, for example, by over-estimation of production or
undervaluation/understatement of stocks.

Bombay, 26th October, 1974.

94
 SUGGESTED INVENTORY NORMS

Raw materials Finished goods Receivables and inland bill

discounts (exclusive of foreign
bill discounts)
(I) (2) (3)
1. Cotton textiles 11 (Bombay & Ahmedabad
areas)
21 (Eastern areas-Bihar, Orissa,
-----------2-----------
West Bengal and Assam)
2 (other than the above)
2. Synthetic textiles HI 1 to 1 l-
3. Jute textiles 2-21 1 (for domestic sales)
1i (for export)
4. Pharmaceuticals 2-21 2 1
5. Rubber products 2 I I
6. Fertilisers :
(i) For nitrogenous plants 1-1 (near the refinery) t (where stocks are in 1-1
plant site)
1-11 (for inland units) Ii (where stocks are also in
upcountry centres)
(ii) For phosphatic plants 2 (for units in port areas) -do- -do-
3 (for inland units)
7. Vanaspati --------1--------
8. Paper:
(i) Bamboo and wood 4-8 (to be built up in stages (i) Controlled sales t I
from November to May (ii) Free sales l- -do-
and thereafter to be
brought down)
(ii) Chemicali 21
9. Light engineering 3 -----------:2 -----------

Note: 1. Raw materials are expressed as so many months' consumption.

2. Finished goods and receivables are expressed as so many months' sales. These figures represent only the average lewis. Indi-
vidual items of finished goods and receivables could be for different periods which could exceed the indicated norms so long as
\0 the overall average level of finished goods and receivables does not exceed the amounts as determined in terms of the norm.
VI
IV
ANNEXURE

Telegrams: RESERVE BANK OF INDIA Post Box No.

"Reservbaok" 1030
Bombay. CENTRAL OFFICE
DEPARTMENT OF BANKING OPERATIONS
AND DEVELOPMENT
BOMBAY-l

CONFIDENTIAL
Ref. DBOD. No. CAS. BC. 113/C.446-74 November 8, 1974
Kartika 17, 1896 (Saka)

To
All Scheduled Commercial Banks.

Dear Sirs,
Study Group to frame guidelines for follow-up of
bank credit-Inventory norms for financing of in-
dustries by commercial banks.

Please refer to paragraph 9 of Governor's circular letter DBOD. No. Dir.

Be. 109/C. 96-74 dated the 29th October 1974. We now enclose for your
information and necessary action a copy of the interim note on inventory
norms furnished to the Reserve Bank by the above Study Group. The
Reserve Bank has accepted the tentative suggestions of the Group.

2. Norms have been suggested by the Group only for certain major in-
dustries. These norms are to be applied in respect of both the existing
and new borrowers. All fresh proposals (including those from existing
borrowers seeking enchanced credit facilities) may now be assessed in the
light of the norms suggested by the Study Group. In the case of all existing
borrowers (whether or not they have sought for enhancement in credit limits,
if the levels of inventories and receivables are excessive on the basis of the
suggested norms, a dialogue should be established with them and a pro-
96
gramme for a phased reduction therein worked out. In case the excess level
persists without justification, while the banks may not abruptly stop opera-
tions in the borrower's accounts which may upset his normal functioning,
they may, as suggested in paragraph 18 of the interim note of the Group,
consider after a {easonable period, say about 2 months, whether they should
charge a higher rate of interest on the portion of borrowings considered as
excessive in the light of the norms suggested by the Group. To keep a
watch in this regard, banks may call for additional information as suggested
in paragraph 16 of the note. The control should, however, be exercised
with due flexibility and understanding of the circumstances which may
warrant deviation from the norms, for temporary periods, as mentioned in
the Group's interim note.

3. As regards stocks-in-process and stores, etc., no norms have been sug-

gested by the Group. In fixing credit limits, banks should, however, care-
fully ascertain the actual process time involved in the case of each borrow-
ing unit and arrive at the value of the process stocks. As regards stores
and spares, banks should normally finance consumable stores, the level of
which should not be out of tune with the past trends.

4. Although norms have been suggested by the Group only for some of
the major industries, it is expected that as regards other industries, banks
would endeavour to observe the purpose and spirit behind the norms sug-
gested in the note while appraising the relative credit proposals.

5. It may be clarified that the norms suggested by the Study Group will
be subject to the Reserve Bank's selective credit control directives wherever
applicable. Also, in respect of cotton and jute, the stock holding of which
is regulated by the Textile Commissioner and Jute Commissioner respec-
tively, while the actual maintenance of stocks by the borrower would be
subject to the levels that may be indicated by the concerned authority, the
credit limit extended by the bank should be broadly related to the norms
suggested by the Study Group, unless otherwise specifically advised by us.

6. It should be noted that the norms suggested by the Group are at this
stage in the nature of an experiment. The Group expects to get valuable
feedback from industries and banks in the next few months on the appli-
cation of these norms. The Group hopes that this feedback information
will assist it in finalising its views when it submits its final report. We would,
therefore, request the banks to submit a repon to us furnishing comments,
industry-wise, in regard to their experience in applying the norms, together
with suggestions, if any, for improvement. In order to enable the Group
to make its final recommendations expeditiously, it would be helpful if the
97
banks could arrange to send this report so as to reach us not later than the
end of February 1975.

7. We may also mention that in view of the restrictions placed on the dis-
tribution of dividends by companies under the Companies (Temporary Res-
trictions on Dividends) Act, 1974, to the extent these provisions result in
the retention of a larger share of profits within the business, the borrowing
companies' dependence on outside borrowings would be reduced and this
should result in reducing the demand for bank credit. Banks will no doubt
keep this aspect in mind while assessing the credit needs of borrowers.

8. Please acknowledge receipt.

Yours faithfully,

Sd/-

(R. K. Hazari)
Deputy Governor.

98
v
ANNEXURE

INTERIM REPORT ON FOLLOW-UP

OF BANK CREDIT

INTRODUCTION

1.1 One of the tasks of the Study Group is to suggest guidelines for com-
mercial banks to follow-up and supervise credit from the point of view of
ensuring proper end-use of funds and keeping a watch on the safety of the
advances and to suggest the type of operational data and other information
that may be obtained by banks periodically from borrowers.

1 .2 In this context, the Group is attempting to suggest a new approach to

appraisal and follow-up of bank credit with a view to gearing bank credit
to the borrower's production plan and the anticipated gap in his resources
for implementing the plan, and introducing a system of review of the per-
formance of the borrowers at shorter intervals.

1.3 While the Group is examining the subject in detail and frolll different
angles, and will suggest an integrated scheme in the main report, consider-
ing the importance of the subject, it has prepared this interim note and de-
vised the enclosed forms in regard to the operational and linancial data which
may be obtained by banks from borrowers.

2. COVBRAGB

2. I The Group has considered the question of the coverage of the new fol-
low-up scheme and has come to the conclusion that it is not feasible to
introduce the proposed system immediately in respect of aU or even larger
accounts for the following reasons:

(a) Discussions amongst members and with the senior operating offi-
cials in some banks reveal that certain basic difficulties of the bank-
ing system will have to be reckoned with. The operating staff
dealing with advances will require to be trained in administering
the new system, if this has to be effective. There is also need
for evolving suitable operating instructions to enable the staff to
utilise the forms being recommended by the Group to the maximum
benefit.
99
 (b) There is need for understanding the concepts involved from the
borrowers' side too. Used as they are to the long established prac-
tice of submitting stock statements and certain other minimal in-
formation, the borrowers may require some time to switch over to
the more meaningful system the Group has in view.

(c) The Group's discussions have revealed some other problem areas
in administering the new system as, for example, in dealing with
multi-product and multi-loeational companies.

(d) The organisational structure to administer credit differs from bank

to bank, and the levels at which these fonns will have to be re-
ceived and examined vary widely. Procedures will have to be
evolved in each bank to suit its requirements for proper implemen-
tation of the new system.

2.2 The Group, therefore, suggests that the appraisal and follow-up on the
basis of the data proposed to be obtained in these forms may be tried out
in the first instance on an experimental basis on certain selected borrowers.
This would enable the Group to take care of any unforeseen problems which
might be thrown up before finalising the forms for introduction on a wider
scale.

2.3 While in the long run the data would form the basis for determining
the credit needs and regulating the drawings, in the experimental stage the
objective should be limited to testing the feasibility of obtaining and pro-
cessing the data and identifying the problems that may arise both at the
borrowers' and the bankers' levels in switching over to the new system. The
system may be tried out on at least five to ten borrowers in each bank with
deposits of Rs. 50 crores and above. The aim should also be to monitor
the operation of this system in order to meet problems as and when they
arise.

2.4 In designing forms for appraising bank credit and follow-up, the objec-
tive has been to obtain data which would ensure that the amount of credit
requested is realistic in relation to the needs of business operations and is
used for approved purposes. Consequently, having regard to the many vari-
ables in the current business environment, the Study Group has come to the
conclusion that it will be more practicable to relate such needs to a period
for which the borrowers' operational plans (in terms of production, sales,
inventories, costs and profits) could be projected more precisely. The Group
has, therefore, formulated its recommendations in terms of a scheme which
requires the borrower to furnish detailed operational plans for a quarter
100
rather than at longer intervals. This would also facilitate reviews of bank
credit in relation to such short term projections. The proposed system pro-
vides for a self-disciplining mechanism for the borrower as he will have to
furnish explanations for variations between projections and actuals for each
quarter.

3. SUGGESTED FORMS

3 . 1 It is suggested that the following forms, which are a part of an inte-

grated scheme for review of bank credit and follow-up, may be introduced
at this stage, on an experimental basis:
Form I-Projected quarterly operational plan, and estimates of cur-
rent assets and current liabilities.

Form II-Projected quarterly funds-flow

3.2 The two forms (I and II) should normally be sufficient for the pur-
pose in view. However, there may be cases of difficult accounts calling for
a closer monitoring. In such cases, it may be advisable also to call for
cash flow statements with monthly projections. The form which may be
used for the purpose (Form III) is also attached.

4. IMPLEMENTATION

4. 1 The forms could be tried out by all banks with deposits of Rs. 50
crores and above. It would be worth-while to involve the major foreign
banks also in this exercise.

4.2 As the intention is to test the forms on an experimental basis, banks

could choose those borrowers who would earnestly co-operate. Incidentally,
several in industry whom the Group has met thOUght that compiling such
forms would be quite feasible. The expectation also is that, inasmuch as
the exercise would lead to a better understanding on the part of the banker
of the credit needs of the borrower, it would also help the latter in getting
the necessary credit support and induce him to readily furnish the data to
banks in the proposed forms.

4.3 In selecting customers, banks should aim at a coverage of different

industries as also a good cross-section comprising the very large, large and
medium-sized borrowers.

5. PREPARATORY STEPS

Having regard to the importance of the matter, it is necessary to ensure

101
that adequate preparatory steps are taken to ensure a smooth change over
to the new system. The following suggestions are made in this regard:
(a) The Reserve Bank should conduct a seminar in the Bankers Train-
ing College at Bombay for briefing one official from each partici-
pating bank regarding the scope and content of the suggested forms
and interpretation of the data reported therein.

(b) Five members of the Study Group could guide the deliberations
of the proposed seminar.

(c) The participating banks may be asked to nominate an official, who

would be charged with the responsibility of introducing the pro-
posed system in the bank, to participate in the seminar.

(d) The officials concerned should thereafter brief, in the respective

banks, the other officials who would be involved in the implemen-
tation of the scheme of bringing into use the new forms.

(e) The composition of the samples selected by the banks will also be
discussed and depending upon the reaction, the exact number of
accounts that each bank will test will also be decided.

6. EVALUATION

The evaluation of the experience gained by banks in introducing the

forms on a pilot basis in the case of the selected borrowers may be made
in the last week of March or first week of April 1975. For this purpose,
another seminar may be organised by the Reserve Bank of India in the Bank-
ers Training College at two levels, viz., the senior management level and
the operating level. The consensus arrived at the seminar will be a valu-
able feedback to the Study Group, which will be taken into account for the
Group's final recommendations.

102
 QUARTERLY OPERATING STATEMENT £
Form-I
(OOO's omitted)
Actuals Project- Previous quarter ended Current Next Subsequent
for pre- ions for quarter quarter quarter
vious current ----------------------~enwng enwng ending
account- account- Budget Actuals Variance ..... .
ing year ing year @ Actuals/U Budget Budget
(Whole (Whole Estimate
year) + year)
Part-A 2 3 4 s 6 7 8

I. Sales
2. Less Excise duty
3. Net Sales (item 1 - item 2)

4. Cos t of Sales;-
(a) Raw materials consumption
(b) Power and fuel
(c) Salaries and Wages
(d) Consumable stores
(e) Repairs aDd maintenance

(0 Other manufacturing expenses

(g) Depreciation

-
ow
Sub-Total
-i QUARTERLY OPERATING STATEMENT £-Contd.

(000' omitted)
Actuals Projec- Previous quarter ended Current Next Subsequent
for pre- tions for quarter quarter quarter
vious current -ending ending ending
account- account- Budget Actuals Variance
ing year ing year @ Actuals/H Budget Budget
(Whole (Whole Estimate
year) + year)
2 3 4 S 6 7 8

Sub-Total:
Add: Opening stocks-in-process and finished goods

Sub-Total:

Deduct: Closing stocks-in-process and finished

goods

Total cost of sales:

S. Gross profit (item 3-item 4)
6. Other overheads :
(a) Interest
(b) Selling. general and administrative
expenses.
7. Operating profit (item S-item 6)
8. Other income/expenses-Net (±)
9. Profit before tax (item 7 + item 8)
 QUARTERLY OPERATING STATEMENT -iCon/d.

(OOO's omitted)

Previous Current Next Subsequent

quarter quarter quarter quarter
ended ..... . ending ending' ending
Budget Actuals Variance Actuals/U Budget Budget
@ Estimate
Part-B
2 3 4 s 6
Current Assets
J. Inventory
(i) Raw materials·-Imported
Indigenous
(ii) Stocks-in-process··
(iii) Finished goods···
(iv) Consumable stores·

II. Receivables···
(including bills discounted with bankers) + +

III. Advances to suppliers of raw materials and stores

IV. Other current assets

-
oVI
Total Current Assets
-
o
0'1
QUARTERLY OPERATING STATEMENT£-Contd.

(OOO's omitted)

Previous Current Next Subsequent

quarter quarter quarter quarter
ended ..... . ending ending ending
Budget Actuals Variance Actuals/H Budget Budget
@ Estimate

2 3 4 5 6
Current Liabilities:-
V. Short term bank borrowings (including bills
discounted with bankers) @@
+++
A ..... ·................................ .
B...................................... .
C ...................................... .

VI. Creditors for purchases of raw materials

and stores+++
VII. Advances from Customers
VIII. Accrued expenses
IX. Statutory liabilities
X. Other current liabilities

Total current liabilities

 (i) Information in this form is to be furnished for each line of activity/unit separately as also for the company as a whole and where
any particular line of activity/ unit is financed by more than one bank, the activity/unit-wise data and data relating to the whole
company should be furnished to each financing bank.
@ (ii) Where estimates have been given under the head "actuals"', reasons may be given.
~ (iii) As the form has to be furnished during the current quarter, vide note below, the actuals would not be available for the whole
quarter. For the period actuals are not available, estimates may be taken into account for arriving at the figure to be furnished
in column 6 of Part A and column 4 of Part B.
(iv) In columns (I), (2), (4), (5) and (6) in Part B of the statement, also indicate, within brackets, under each figures (against item
I (i), (ii), (iii), (iv) and (II), how many months' consumption */cost of production ** /sales *** the relative item represents in
relation to the annual projected production/sales. Further, if the budgeted levels of inventory/receivables (columns 5 and 6 in
Part B) are higher than the norms indicated by the bank, reasons may be given in an annexure.
@@ (v) Outstandings with different banks should be given separately.
,. (vi) In case audited balance sheet and profit and loss account for the previous accounting year are not available, estimated/provisional
figures for the previous year may be furnished in column (I) and the figures for the preceding year based on audited balance sheet
should be given in an additional column before column (1).
++ (vii) Amount of bills discounted with bankers, included in items II of Part B, should be indicated separately.
+++ (viii) Amount of bills discounted with bankers in respect of purchases, included in item V or item VI of Part B, should be indicated
separately.
NOTE:-DATA IN THE FORMS SHOULD BE SUBMITTED AT LEAST ONE WEEK BEFORE THE COMMENCEMENT
OF THE NEXT QUARTER.

-
Q
-..I
-
o
00
QUARTERLY FUNDS FLOW STATEMENT
Form-II
(OOO's omitted)

Actuals Projections Previous Current Next Subsequent

for pre- for quarter quarter quarter quarter
vious current ended ending ending ending
account- accounting
ing year year Actuals/U Budget Budget
(Whole year) (Whole year) Budget Actuals@ Variance Estimate
(1) (2) (3) (4) (5) (6) (7) (8)

Sources
Lo"g term:
1. Profit before tax (+ )fLoss (-)'
2. Depreciation
3. Sub-total (item 1 +item 2)

4. Sale of fixed assets

5. Capital issue
6. Term loans/debentures/ deferred credits
7. Public deposits
8. Others (specify)·

9. Sub-total (item 3 to 8)
 QUARTERLY FUNDS FLOW STATEMENT-Col/td.

(OOO's omitted)

Actuals Projections Previous Current Next Subsequent

for pre- for quarter quarter quarter quarter
vious current ended ending ending ending
accounl- accounting
ing year year Actuals/H Budget Budget
(Whole year) (Whole year) Budget Actuals@ Variance Estimate
(I) (2) (3) (4) (5) (6) (7) (8)

Short term:
10. Decrease in current assets:
(a) Inventory
(b) Receivables (including bills discounted
with bankers)
(c) Others (specify)*
11. Increase in current liabilities:
(a) Creditors for purchases of raw
materials and stores
(b) Short-term bank borrowings (including
bills discounted with bankers)
(c) Other short term payables
(d) Others (specify)-
12. Sub-total (item 10+item 11)
----

-
0
\C
13. Grand Total (item 9+item 12)
--
o
QUARTERLY FUNDS FLOW STATEMENT-Contd.

(000'5 omitted)

Actuals Project- Previous Current Next Subsequent

for pre- ions for quarter quarter quarter quarter
vious current ended ending ending ending
account- account-
ing year ing year ActualsrU Budget Budget
(Whole year) (Whole year) Budget Actuals@ Variance Estimate
(1) (2) (3) (4) (5) (6) (7) (8)

Uses
Long term:
14. Additions to fixed assets
15. Repayment of term loans/debentures/deferred
credits
16. Repayment of public deposits
17. Investments in subsidiaries and affiliates
18. Advances to subsidiaries and affiliates
19. Payment of taxes
20. Dividends
21. Others (specify)*

22. Sub-total (item 14 to 21)

 QUARTERLY FUNDS FLOW STATEMENT-Contd.
(OOO's omitted)
Actuals Projections Previous Current Next Subsequent
for pre- for quarter quarter quarter quarter
vious current ended ending cnding ending
accounting accounting
year year Actuals/U Budget Budget
(Whole year) (Whole year) Budget Actuals@ Variance Estimate
(I) (2) (3) (4) (5) (6) (7) (8)
Short term:
23. Increase in current assets:
(a) Inventory
(b) Receivables (including bills discour.ted
with bankers)
(c) Others (specify)·
24. Decrease in current liabilities
(a) Creditors for purchases of raw
materials and stores
(b) Short-term bank borrowings (including
bills discounted with bankers)
(c) Other short term payables
(d) Others (specify)·
25. Sub-total (item 23+item 24)
26. Grand Total (item 22+item 25)
27. Balance (item 13-item 26) : SUrplus (+)/
Shortfall (-)
28. Opening cash and bank balance
29. Closing cash and bank balance
(item 27+item 28)
@ (j) Where estimates have been given under the head "actuals", reasons may be given.
U (ii) As the form has to be furnished during the current quarter, vide note appended to Form J, the actuals would not be available for
the whole quarter. For the period actuals are not available, estimates may be taken into account for arriving at the figure to be

--
furnished in column 6.
• (iii) If any Significant amount/s is/are included in this item, particulars thereof may be furnished separately.
$ (iv) The figure should tally with item (9) in Part A of Form I.
....
.... QUARTERLY CASH FLOW STATEMENT
~ Form-III
(OOO's omitted)
Previous Current Next quarter SubsequeDt
quarter quarter ending quarter
ended ending ending
Budget
Actuals/H Budget
Budget Actuals@ Variance Estimate Month I Month II Month III
(1) (2) (3) (4) (5) (6) (7) (8)

Cash Inflows:
1. Opening cash/bank balaDce
2. Realisation from sales
3. Advances from customers
4. Capital issue
5. Term loans/debentures
6. Public deposits
7. Others (specify)·

8. Total (item I to 7)

Cash Outflows:
9. Payments to suppliers of raw materials
and stores
10. Advances to Suppliers
11. Salaries, wages and bonus
12. Power, fuel and other maDufacturing/
miscellaneous operating expenses
13. Excise duty and sales tax
 QUARTERLY CASH FLOW STATEMENT-Contd.
(OOO's omitted)
Previous Current Next quarter Subsequent
quarter quarter ending quarter
ended ending ending
Budget
Actuals/H Budget
Budget Actuals@ Variance Estimate Month I Month II Month III
(I) (2) (3) (4) (5) (6) (7) (8)
14. Interest and other financial charges
15. Income tax
16. Capital expenditure
17. Repayment of term loans/debenturesi
deferred credits
18. Repayment of public deposits
19. Dividends
20. Closing cash/bank balance
21. Others (specify)*
22. Total (items 9 to 21)
23. Cash deficit (-) / surplus-(+)
(item 8-item 22)
24. Opening short term bank borrowings
(including bills discounted with bankers)
25. Closing short term bank borrowings@@
(includiDg bills discounted with bankers)
(item 23+item 24)
@ (i) Where estimates have been given under the head "actuals", reasons may be given.
H (ii) As the form has to be furnished during the current quarter, vide note appended to Form I, the actuals would not be available for
the whole quarter. For the period actuals are not available, estimates may be taken into account for arriving at the figure to be

--
furnished in column 4.
*(iji) If any significant amount/s is/are included in this item, particulars thereof may be furnished separately.
w @@(ivJ Peak requirements in each month may be indicated, within brackets, against item 25 under columns 5 to 7.
VI
ANNEXURE

FORMS FOR QUARTERLY INFORMATION SYSTEM

Form I
QUARTERLY OPERATING STATEMENr
(Ooo's omitted)
Last Current Previous quarter Current
year year ended ..•........ quarter
Actuals+ Budget ending
......
Estimate Actuals Estimate
(I) (2) (3) (4) (5)
Part A
I. Sales
2. Less: Excise duty
3. Net sales (item I-item 2)
4. Cost of sales
(a) Raw materials
consumption
(b) Stores and spares
consumption
(c) Salaries and wages
(d) •.•.•••.•.•.•...•
(e) Other manufacturing
expenses, including depre-
ciation
Sub-total:
Add: Opening stocks-in-process
and finished goods
Sub-total:
Deduct: Closing stocks-in-process
Ilnd finished goods
Total cost of sales
S. Gross profit (item 3-item 4)
6. Interest and other overheads
7. Other income/expenses-
Net (±)
8. Profit before tax-
(item 5-items (6+ 7)
(Please see Page 117 for notes)
114
 Previous CUrrent
quarter quarter
ended ending

Estimate Actuals Estimate

(I) (2) (3)
Pari B**
Current Assets
I. Inventory
(I) Raw materials
(a) Imported £
(months' conswnption)@
(b) Indigenous £
(months' consumption)@
(ii) Stocks-in-process
(months' cost ofproduction)@
(iii) Finished goods
(months' cost of sales)@
(iv) Consumable stores
(months' consumption)@
II. Receivables-including bills discounted with
bankers + +
(months'sales)@
III. Advances to suppliers of raw materials
and stores
IV. Other current assets including cash and
bank balances
Total current assets

Current Liabilities:
V. Short term bank borrowings including
bills discounted with bankers+ + +
......................•.. Bank
......................... Bank
......................... Bank
VI. Creditors for purchases of raw materials and
stores+++
(months' purchases)@
VII. Advances from customers
VIII. Accrued expenses
IX. Statutory liabilities
X. Other current liabilities
Total current liabilities

(Please see Page 117 for notes)

115
 FormU
QUARTERLY FUNDS FLOW~STATEMENT
(OOO's omitted)
Last Current Previous quarter Current
year year ended •......... quarter
Actuals Budget ending
+ ......
Estimate Actuals Estimate
(I) (2) (3) (4) (5)
Sources:
Profit before tax
Depreciation
Funds generated from operations
Increase in capital
in TLfDeb/ D. P. Liab.
in public deposits
Decrease in inter-corporate
investments & advances
Increase in short term bank
borrowings (including
bills discounted)
in other current liabilities
Decrease in inventory
in receivables (including
bills discounted)
in other assets
Total funds available
Uses:
Increase in fixed assets
Decrease in TLfDebfD.P. Liab.
.. in public deposits
Increase in inter·corporate
investments &
advances
Decrease in short term bank
borrowings
(including bills
discounted)
in other current
Iiabili ties
Increase in inventory
.. in receivables
(including bills
discounted)
in other assets
Payment of taxes
Dividends
Total uses of funds
Surplus (+)/ deficit (-)
Opening cash & bank balances
Closing cash & bank balances.
(Please see Page 117 for notes)
116
Notel: (I) Data in these forms should be submitted not later than a fortnight from the
commencement of the current quarter.
(ii) Information in these forms is to be furnished for each line of activity/unit
separately as also for the company as a whole and where the different activi-
ties/units are financed by different banks, the concerned activity/unit-wise
data and data relating to the whole company should be furnished to each
financing bank.
(iii) The valuation of current assets or current liabilities and recording of income
and expenses in these forms should be on the same basis as adopted for the
statutory balance sheet, and should be applied on a consistent basis.
+(iv) In case audited balance sheet and profit and loss account for the previous
accounting year are not available, estimated/provisional figures for the pre-
vious year may be furnished in column (I) of Forms I (Part A) and II and
the figures for the preceding year based on audited balance sheet should be
given in an additional column before column (I).
*(v) Any item of expenditure which forms a significant proportion, say 15% or
more, of the total cost of production or has special significance otherwise,
e.g., power in the case of aluminium industry, the information may be fur-
nished separately, under appropriate heads.
@(vi) The period is to be shown in relation to the annual projection for the relative
item. If the levels of inventory/receivables are higher than the norms indi-
cated by the bank, reasons may be given.
l(vii) If the canalised items form a significant part of raw materials inventory,
they may be shown separately.
++(viii) Amount of bills discounted with bankers, included in item II of Part B in
Form I, shOuld be indicated separately.
+ + +(Ix) Amount of bills discounted with bankers in respect of purchases, included
in item V or item VI of Part B in Form I, should be indicated separateiy.
"(x) The classification of current assets or current liabilities should be made as per
the usually accepted approach of bankers and not as per definitions in the
Companies Act (e.g. instalment of term loans payable within 12 months
from the date of b:llance sheet should be classified as current liabilities).

117
VII
ANNEXURE

IMPORTANT FINANCIAL RATIOS IN CERTAIN INDUSTRIES

Page
I. Cotton Textiles .. 119
2. Silk and Rayon Textiles 119
3. lute Textiles 120
4. Rubber and Rubber Products 120
5. Chemical Fertilisers 121
6. Pharmaceuticals .. 121
7. Indus trial Chemicals 122
8. Vegetable and Hydrogenated Oils 122
9. Paper and Paper Products 123
10. Motor Vehicles .. 123
11. Other Transport Equipment 124
12. Electrical Machinery, Apparatus, Appliances etc. 124
13. Foundries and Engineering Workshops 125

14. Ferrous and Non-Ferrous Metal Products 125

IS. Miscellaneous Machinery 126
16. Construction 126
Notes 127

118
 1. COTION TEXTILES
IMPORTANT FINANCIAL RATIOS
Category of
Companies
Public Limited
Companies
I Pnvate limited
Companies
Year 1970-71 1971-72 1972-73 1970-71 1971-72 1972-73
No. of companies 270 270 27i)h;- 53 53
Current assets/
Current liabilities •. Q1 1.37 1.33 1.40 1.15 1.15 1.16
.. M 1.10 1.09 1.16 0.88 0.91 0.92
.. QI 0.82 0.85 0.91 0.72 0.68 0.70
Long term debt/
Net worth .. Q1 0.16 0.15 0.15 0.15
.. M 0.39 0.34 0.34 0.10 0.19 0.34
Q3 0.81 0.74 0.67 0.51 0.55 0.67
Total outside liabilities/
Net worth .. Q1 1.36 1.53 1.44 1.68 1.68 1.42
M 1.90 2.12 2.15 2.24 2.60 2.32
.• QI 3.30 3.39 3.26 3.08 3.71 3.79
Net sales /Net fixed assets .. Q1 5.77 6.14 6.56 5.16 5.52 6.53
.. M 3.71 3.84 4.47 3.63 3.92 4.06
.. QI 2.23 2.47 2.81 2.75 2.88 3.02
Net sales/Current assets .. Q1 3.04 3.12 3.02 3.29 3.43 3.34
.. M 2.36 2.32 2.33 2.58 2.74 2.59
.. QI 1.87 I.S1 1.96 1.87 2.04 1.91

2. SILK AND RAYON TEXTILES

IMPORTANT FINANCIAL RATIOS
Category of Public Limited Private limited
Companies Companies Companies
Year 1970-71 1971-72 1972-73 1970-71 1971-72 1972-73
No. of companies 18 18
----
18 20
- 20 20
Current assets/
CUrrent liabilities .. Q1 1.47 1.67 1.84 I. 30 1.27 1.34
.. M 1.22 I. 31 1.33 1.17 1.16 1.14
.. QI 0.99 0.97 1.09 1.03 1.02 1.0)
Long term debt/Net worth .. Q1 0.09 0.09 0.07
.. M 0.13 0.18 0.20 0.04 0.07 0.03
•. Q8 0.29 0.31 0.29 0.17 0.22 0.16
Total outside Iiabili ties/
Net worth .. Q1 0.77 0.75 0.77 1.63 1. 78 1.55
.. M I. 31 1.13 1.15 2.17 2.22 2.37
.• Q8 1.89 I. 70 1.97 2.52 3.24 4.59
Net sales/Net fixed
assets •. Q1 5.11 4.80 5.97 7.59 11.06 10.71
.. M 3.68 3.54 3.62 5.17 5.28 6.04
•• Q8 2.32 2.37 2.53 3.36 3.49 2.95
Net sales/Current assets •. Q1 2.65 2.68 2.94 I. 73 2.05 1.85
M 2.04 1.83 2.02 1.55 1.61 1.49
" QI 1.65 1.48 1.61 1.25 1.25 1.18

1J9
 3. JUTE TEX1UES
IMPORTANT FINANCIAL RATIOS
Category of Pu lie Limited Private Limited
Companies Companies Companies
Year 1970-71 1971-72 1972-731197O-~ 1971-72 1972-73
No. of companies 43 43 43 3 3 3
Current assets/
Current liabilities .• Ql 1.27 1.35 1.28
.. M 1.09 1.15 1.11 1.10 1.09 1.16
•• Q8 0.90 0.99 0.99
Long term debt/
Net worth .. QI 0.07 0.07 0.07
M 0.31 0.24 0.21 0.34 0.26 0.29
Q3 0.44 0.38 0.34
Total outside liabilities/
Net worth •. Ql 1.82 1.69 1.89
M 2.31 2.44 2.46 2.40 3.17 1. 70
.. Q3 3.60 3.22 3.02
Net salesfNet fixed assets •. Ql 7.36 9.01 8.81
.. M 5.42 6.39 6.13 5.50 6.47 6.16
•. Q3 3.37 4.94 5.15
Net sales/Current assets .. Ql 2.61 2.99 3.28
.. M 2.26 2.72 2.73 2.70 2.42 2.93
.. Q3 1.72 2.20 2.31

4. RUBBER & RUBBER PRODUCTS

IMPORTANT FINANCIAL RATIOS
Category 0 Public Limited Private LImit
Companies Companies Companies
Year 1970-71 1971-72 1972-73 1970-71 1971-72 1972-73
No. of companies 15 15 15 13 13 13
Current assets/
CUrrent liabilities .• Ql 1. 78 1. 57 1. 71 1.25 1.17 1.18
M I. 52 1.43 1.46 1.12 1.05 0.99
Q3 1.03 1.16 1.25 0.96 1.00 0.90
Long term debt/
Net worth Ql 0.18 0.09 0.12
M 0.44 0.41 0.39 0.31 0.24 0.38
Q3 0.70 0.74 0.89 0.65 0.77 0.70
Total outside Iiabilities/
Net worth •• Ql 1.10 1.14 0.83 1.65 1.88 1. 73
.. M 1.34 1.47 1.10 1.84 2.21 2.61
•• Q3 1.98 2.21 2.74 3.04 2.69 2.97
Net salesfNet fixed assets .. Ql 4.71 4.47 6.00 7.51 6.29 5.24
M 3.65 3.77 3.52 4.19 5.37 3.64
.. Q3 I. 71 2.00 1.61 3.37 2.65 2.16
Net sales/Current assets •. Ql 2.40 2.03 2.41 2.78 3.19 2.71
M 2.12 1.91 2.25 2.42 2.49 2.44
•• Q3 1.28 1.43 I. 76 2.26 1.91 1.77

120
 S. CHEMICAL FERTILISERS
IMPORTANT FINANCIAL RATIOS
Category of Public Limited Private Limited
Companies Companies Companies
Year 1970-71 1971-72 1972-73 I 1970-71 1971-72 i972-73

No. of companies 15 15
Current assets/ Current
liabilities .. Ql 1.50 1. 56 I. 75
M 1.15 1.12 1.19
.• Q3 0.94 0.64 0.74

Long term debt/

Net worth .. Ql 0.01 0.01
M 0.19 0.18 0.11
•. Q3 0.84 1.20 0.90
Total outside lIabilities/
Net worth .. Ql 1.15 1.13 0.75
.. M 1. 86 1.65 1.41
•• Q3 2.60 2.58 1.64
Net sales/ Net fixed asset~ .. Ql 4.56 4.13 3.85
M 2.21 2.35 2.65
•• Q3 0.69 0.86 0.92
Net sales/Current assets .. Ql 2.03 2.30 2.61
M 1.68 1.90 2.33
•. Q3 1.47 1.50 1.47

6. PHARMACElITICALS
IMPORTANT FINANCIAL RATIOS
Category of
Companies
Public Limited
Companies
I Private Limited
Companies
Year 1970-71 1972-72 ~972-731970-71 1971-~ 1972-73
No. of Companies 42 42 42 I 21 21 21
Current assets/ Current
liabilities .. Ql 1.82 1.68 1.69 1.27 1.22 1.22
M 1.27 I. 33 I. 33 1.12 1.04 1.07
•• Q3 1.18 1.16 1.13 0.77 0.89 0.88

Long term debt/

Net worth .. Ql
M 0.02 0.01
" Q3 0.32 0.27 0.24 0.04 0.06 0.28

Total outside Iiabilities/

Net worth Ql 0.92 0.95 0.95 1.54 1.58 1.87
M 1.29 1.38 I. 54 2.52 2.41 2.42
Q3 2.16 2.15 2.19 4.38 3.83 4.09
Net sales/Net fixed assets .. Ql 5.63 6.68 6.19 9.24 9.75 11.36
M 4.20 4.73 4.79 6.64 6.70 7.18
.• Q3 2.79 2.71 3.00 2.09 2.70 2.28
Net sales/Current assets .. Ql 2.26 2.09 2.12 2.19 2.25 1.98
M 1.79 1. 78 1.87 1.82 1.80 I. 75
.. Q3 1.33 1.48 1.48 1.48 I. 57 1.48

121
 7. INDUSTRIAL CHEMICALS
IMPORTANT FINANCIAL RATIOS
Category of Public Limited Private Limited
Companies Companies Companies
Year 1970-71 1971-72 1972-73 1970-71 1971-72 1972-73
No. of Companies
---
55 55
---
55
---
18 18 18
Current assets/Current
liabilities .. Ql 1.86 1.99 1.98 1.46 1.45 1.65
.. M 1.40 1.41 1.38 1.18 1.14 1.09
QI 1.09 1.08 1.07 0.93 0.88 0.91
Long term debt/
Net worth .. Ql
.. M 0.21 0.16 0.19
•• Q" 0.68 0.60 0.72 0.51 0.38 0.36
Total outside Iiabilities/
Net worth .. Ql 0.82 0.77 0.62 0.79 0.94 0.86
.. M 1.31 1.09 1.12 1.27 1.54 1.55
•• QI 2.02 1.40 1.79 3.49 3.97 3.99
Net salesfNet fixed assets .. Ql 2.94 2.80 3.85 4.95 4.42 4.89
.. M 1.55 1.87 1.86 3.11 3.44 3.31
.. Q' 0.89 0.94 1.01 1.01 1.11 1.22
Net sales/Current assets .• Ql 1.95 2.02 2.16 1.91 1.61 1.88
.• M 1.63 1. 70 1.72 1.62 1.36 1.67
.. QI 1.11 1.18 1.25 0.99 0.96 1.07

B. VEGETABLE & HYDROGENATED OILS

IMPORTANT FINANCIAL RATIOS
Category 0
Companies
Year 1972-73
~-- ~--

No. of Companies 14 14 14 21 21 21
CUrrent assets/Current
liabilities .• Ql 1.27 1.21 1.22 1.27 1.20 1.31
•. M 1.14 1.06 1.06 1.10 1.04 1.11
•• QI 0.88 0.80 0.81 0.81 0.77 0.83
Long term debt/
Net worth •• Ql 0.01
•. M 0.23 0.26 0.23
•• Q" 0.37 0.41 0.34 0.22 0.34 0.33
Total outside Iiabilities/
Net worth •• Ql 1.48 1.92 1.99 1.23 1.23 1.51
.. M 2.15 2.61 3.17 2.60 2.30 2.98
•. QI 3.05 4.03 5.09 3.81 4.81 4.00
Net salesfNet fixed assets •. Ql 24.40 20.93 20.09 23.95 23.00 24.77
•. M 17.46 13.72 14.54 14.27 10.16 12.70
•• QI 8.16 6.86 8.9'1 6.78 5.97 8.23
Net sales/Current assets .. Ql 6.95 6.67 6.18 7.73 7.79 5.87
.. M 6.32 5.45 5.43 5.19 5.77 5.26
.. QI 4.33 3.33 3.21 3.22 3.67 3.66

122
 9. PAPER AND PAPER PRODUcrS
IMPORTANT FINANCIAL RATIOS
~tegory of PUblic Limited Private Lunitea
Companies Companies Companies
Year 1970-71 1971-72 1972-73 1970-71 1971-72 1972-73
- - - ---
No. of Companies 36 36 36 10 10 10
CUrrent assets!
Current liabilities Ql 1.39 1.41 1.45
M0.98 0.94 0.93 1.23 1.16 1.12
•• Q3 0.63 0.69 0.69
Long tenn debt!
Net worth •• Ql 0.13 0.18 0.13
.. M 0.53 0.48 0.39 0.15
.• QI 1.01 0.74 0.70
Total outside liabilities!
Net worth •. Ql 1.01 0.88 0.89
.. M 2.12 1.68 1.57 1.52 1.20 1.04
.. QI 2.82 2.65 3.01
Net salesfNet fixed assets .. Ql 2.35 2.21 2.06
.. M 1.48 1.66 1.58 3.10 3.50 2.52
.. QI 0.82 0.83 0.95
Net sales! Current assets •. Ql 2.66 2.82 2.45
.. M 1.95 2.04 2.08 1.97 2.23 2.01
•. Q3 1.53 1.45 1.50

10. MOTOR VEHICLES

IMPORTANT FINANCIAL RATIOS
Category of Public Limited Private Limited
Companies Companies Companies
Year 1970-71 1971-72 1972-73 1970-·71 1971-72 1972-73
No. of Companies 32 32
-32----
21 21 21
Current assets/ Current
liabilities. •. Ql 1.76 1. 78 1.85 1.61 1.55 I. 75
.. M 1.22 1.31 1.23 1.29 1.32 1.17
•• QI 0.92 1.03 1.02 0.96 0.99 1.01
Long term debt!
Net worth " Ql 0.04
.. M 0.23 0.23 0.20 0.01 0.04
.. QI 0.49 0.42 0.46 0.22 0.27 0.26
Total outside liabilities/
Net worth .• Ql 1.09 0.80 0.83 0.84 1.12 1.06
.. M 1.57 1.47 1.59 1.69 1.91 2.11
.. QI 2.86 2.33 2.36 2.93 2.87 3.19
Net sales/ Net fixed assets .. Ql 3.75 4.51 f4.97 4.64 6.61 6.32
.. M 2.89 3.15 3.39 3.92 4.09 4.91
.. 0' 1.86 1.98 2.53 2.06 2.71 2.97
Net sales/ Current assets •• Ql 1.75
.. M 1.53
.. QI 1.14
I. 71
1.51
1.16
"'1.92
"1.63
1.28
2.18
1.45
1.09
2.04
1.38
1.10
1.88
1.57
1.05

123
 11. ornER TRANSPORT EQUIPMENT
IMPORTANT FINANCIAL RATIOS
category of Pubt;, Um;,,' ~';...' UmU'"
Companies Companies Companies
Year 1970-71 1971-72 1972-731970-71 1971-72 1972-73
No. of Companies 12 12 12 6 6 6
Current assets/ Current
liabili ties ., Ql 1.53 1.60 1.49
M 1.14 1.03 1.16 1.13 1.10 1.08
.. QI 0.84 0.88 0.80
Long term debt/
Net worth .. Ql 0.03
M 0.14 0.09 0.07 0.35 0.24 0.17
QI 0.32 0.46 1.01
Total outside liabilities/
Net worth. .. Ql 0.90 0.95 1.30
.. M 2.07 3.51 2.87 2.51 2.22 2.06
.. Q3 5.08 7.65 8.04
Net sales/ Net fixed assets .. Ql 5.52 4.92 5.74
.. M 4.03 3.11 4.10 3.83 4.31 3.81
.. Q3 1.98 1.85 1.98
Net sales/Current assets .. Ql 1.88 1.84 1. 74
.. M 1.39 \. 33 1.36 2.37 2.14 2.17
.. Q3 0.95 0.78 1.12

12. ELECTRICAL MAClDNERY, APPARATUS, APPLIANCES, ETC.

IMPORTANT FINANCIAL RATIOS
Category of Public Limited Private Limited
Companies Companies Companies
Year 1970-71 1971-72 1972-73 1970-71 1971-72 1972-73
No. of Companies 108 108
---
108
---
42 42 42
Current assets/ Current
liabilities. .. Ql 1.42 1.45 1.42 1.25 1.25 1.16
.. M 1.17 1.20 1.19 1.11 1.09 1.03
Q3 0.99 1.03 1.00 0.84 0.89 0.89

Long term debt/

Net worth .. Ql 0.02 0.04
.. M 0.22 0.24 0.18 0.10 0.08
QI 0.57 0.48 0.44 0.42 0.29 0.27

Total outside liabilities/

Net worth Ql 1.28 1.25 1.23 1.20 1.17 1.61
.. M 1.99 2.15 2.19 2.42 2.62 2.36
.. Q3 3.16 3.13 2.97 4.80 3.88 4.16

Net salesfNet fixed assets .. Ql 5.33 6.01 6.02 7.62 8.34 8.75
.. M 3.03 3.90 3.86 3.78 4.37 4.83
.. QI 1.62 2.17 2.19 1.74 1.72 2.47

Net sales/Current assets .. Ql 1.66 1. 76 1.74 2.30 2.20 2.27

M 1.36 1.48 1.45 1.55 1.44 1.55
.. Q3 1.02 1.07 1.05 0.87 0.97 0.86

124
 13. FOUNDRIES & ENGINEERING WORKSHOPS
IMPORTANT FINANCIAL RATIOS
Category or Public Limited Private Limited
Companies Companies Companies
Year 1970-71 1971-72 1972-73 1970-71 1971-72 1972-73
No. of Companies 45 45
---
45
---
43 43 43
Current assets/Current
liabiJitios .. Ql 1.47 2.00 1.48 1.55 1.52 1.35
M 1.04 1.14 1.07 1.19 1.19 1.20
.. Q3 0.74 0.77 0.80 1.04 1.05 1.07
Long term debt/
Net worth .. Ql 0.05 0.05 0.10
M 0.45 0.38 0.43 0.03 0.03 0.03
Q3 1.01 0.61 1.28 0.22 0.23 0.25
Total outside liabilities/
Net worth .. Ql 0.90 1.00 1.14 0.86 1.01 1.13
M 1.77 1.64 1.83 1.39 1. 33 1.44
Q3 2.29 2.00 2.94 2.08 2.20 2.65
Net sales/ Net fixed assets .. Ql 2.76 3.31 3.63 7.51 6.50 8.87
M 1.56 I. 56 1.60 4.25 3.75 5.46
.. Q3 0.78 1.03 1.07 2.30 2.11 2.69
Net sales/Current assets .. Ql 2.07 1.84 1.87 3.28 2.58 3.18
.. M 1.43 1.47 1.47 2.07 2.04 2.49
•. Q3 1.07 1.13 1.05 1.61 1.47 1.81

14. FERROUS & NON-FERROUS METAL PRODUCTS

IMPORTANT FINANCIAL RATIOS
category of Public Limited Private Limited
Companies Companies Companies
Year 1970-71 1971-72 1972-73 1970-71 1971-72 1972-73
- - - ----
No. of Companies 72 72 72 58 58 58
Current assets/Current
liabilities .. Ql 1.58 1.59 2.68 1.41 1.29 1.25
M 1.26 1.22 1.24 1.13 1.07 1.12
Q3 0.96 0.97 1.01 0.80 0.84 0.88
Long term debt/
Net worth Ql
M 0.16 0.14 0.18 0.04 0.03 0.01
Q3 0.46 0.46 0.49 0.42 0.35 0.27
Total outside liabilities/
Net worth ., Ql 0.87 0.95 0.87 0.94 1.14 1.30
.. M 1.66 1.67 1.72 1.89 2.02 2.16
•• Q3 2.30 2.42 2.49 2.95 3.15 3.27
Net salesfNet fixed assets .. Ql 4.16 5.24 5.75 6.62 6.53 7.26
M 2.85 3.26 3.75 3.35 3.73 4.25
.. Q3 1.22 1.45 1.67 1. 71 1. 75 2.09
Net sales/Current assets .. Ql 1.87 1.95 2.11 2.51 2.27 2.32
M 1.41 1.46 1.60 2.03 1.60 1.58
" Q3 1.19 1.06 1.14 1.23 1.11 1.05

125
 15. MISCELLANEOUS MACHINERY
IMPORTANT FINANCIAL RATIOS
Category of Public Limited Private Limited
Companies Companies Companies
Year 1970-71 1971-72 1972-73 1970-71 1971-72 1972-73
No. of Companies 122 122
---
122
---
35 35 35
Current assets/Current
liabilities •. Ql 1.53 1.43 1.52 1.45 1.37 1.39
.. M 1.18 1.19 1.18 1.13 1.10 1.10
.. Q8 1.02 1.02 1.00 0.97 0.96 1.00
Long term debt/
Net worth .. Ql
" M 0.25 0.19 0.19 0.14 0.08 0.09
" Q3 0.47 0.45 0.40 0.37 0.29 0.24
Total outside liabilities/
Net worth Ql
1.20 1.16 1.18 1.26 1.25 1.07
.. M 2.04 2.07 2.07 2.20 2.14 2.41
.. Q3 3.34 3.49 3.13 4.71 3.56 3.65
Net sales/ Net fixed assets .. Ql 4.70 5.58 5.00 5.53 6.95 7.08
.. M 2.78 2.91 3.40 3.31 3.67 4.44
.. Q3 1.57 1.73 1.87 I. 74 2.33 2.57
Net sales/ Current assets •. Ql 1.39 1.44 1.47 1.59 I. 70 1.80
.. M 1.09 1.14 1.22 1.23 I. 31 1. 31
.. Q8 0.86 0.79 0.91 0.97 1.05 1.01

16. CONSTRUCTION
IMPORTANT FINANCIAL RATIOS
Category of Public Limited Private Limited
Companies Companies Companies
Year 1970-71 1971-72 1972-73 1970-71 1971-72 1972-73
No. of Companies 17 17
------
17 23 23 23
Current assets/Current
liabilities •. Ql 1.14 1.15 1.09 1.19 1.18 1.21
.. M 1.04 1.04 1.02 1.00 1.00 0.99
.. QI 0.97 0.95 0.94 0.90 0.88 0.91
Long term debt/
Net worth .. Ql
.. M 0.01 0.06 0.03
.. Q" 0.31 0.32 0.29 0.37 0.19 0.08
Total outside liabilities/
Net worth .. Ql 1.59 1.68 2.44 1.65 1.81 2.45
M3.17 3.72 3.88 2.93 3.71 3.31
.. Q" 8.17 14.38 10.76 8.57 7.35 10.72
Net salesfNet fixed assets .. Ql 13.52 6.25 4.99 7.86 10.33 9.32
.. M 3.58 3.08 3.40 4.40 4.13 4.99
.. Q" 1.23 1.29 1.44 1.51 2.09 2.37
Net sales/Current assets •. Ql
1.56 1.49 1.07 2.55 2.28 2.33
.. M 1.24 0.99 0.91 1.23 1.56 1.48
.. Q8 0.29 0.12 0.22 0.83 0.66 0.53

126
NOTES (I) Individual units make the industry and their performance is the
performance of the indus try. Depending upon their efficiency, the
Best ratio units show dilTerent performance which is indicated by dilTerent

-rQl values of ratios. If these values are arranged in a descending order

of favourableness from the point of view of the lending banker,
the range shows dilTerent shades. For easy comparison, it can be

-'M
divided into four quartiles as shown in the figure alongside, so that
the best 25% ratio values fall above QI and the worst 25% below
Q3, M being the median value of the industry. The units showing
the ratio values above Ql level can be graded as class A, those bet·
- ,QI ween Ql and M levels, as class B, those between M and Q3 levels, as
class C and those below Q8 level, as class D. These three quartile
values of 5 important financial ratios in respect of 16 industries for
-'-Worst ratio 1970·71, 1971·72 and 1972·73 are shown in the preceding tables.

(2) QI = First Quartile.

M = Median.
Q3 = Third Quartile.

127