ASSIGNMENT
ASSIGNMENT OF
OF
MANAGEMENT
MANAGEMENT OF
OF WORKING
WORKING
CAPITAL
CAPITAL ON
ON CHORE
CHORE
COMMITTEE
COMMITTEE
SUBMITTED BY:- SUBMITTED TO:-
SHUBHAM SINGH PROF. GEETIKA GROVER
M.B.A-II Sem4th
th
ROLL NO.-21
CHORE COMMITTEE:
In 1979, the Reserve Bank of India set lip a Working Group in order to review the cash credit
system under the chairmanship of Shri k. B Chore (Chief Officer of RBI, Dept. of Banking
Operations and Development). The working group made a number of recommendations
which were accepted by RBI after certain modifications. The features of the guidelines which
were issued by RBI in Dec.
1980 were as under:
(a) Annual Revenue of Accounts:
Bearing in mind the information that the system of cash credit cannot be totally replaced by
any other lending system, the RBI felt the necessity of streamlining the system with regular
periodical reviews of limits in order to verify the continued viability of borrowers and for
assessing the need-based character of their limits.
All scheduled banks are required to review accounts of the borrowers having working capital
limits of Rs 10 lakhs and over at least once in a year. If the borrowers’ limit exceeds by Rs.
50 lakhs and over, they are required to submit quarterly statement for the purpose.
(b) Bifurcation of Accounts Discontinued:
The RBI withdrew its past directives which were issued to the scheduled banks requiring
them to bifurcate the cash credit accounts into demand loan, cash credit components and
charging differential interest rates. If the accounts are already bifurcated, the differential rates
are to be abolished as an immediate effect.
The RBI indicated the following four measures that are applicable on all the borrowers
having total working capital limits of Rs. 50 lakhs and over.
(i) Peak Level and Non-Peak Level Limits:
Banks are to fix separate credit limits for the borrowers according to the normal peak level
and non-peak level as far as possible which are to be selected on the basis of past
performances of the borrowers and the utilization of such limits. At the same time, the period
for which the borrowings are to be utilized is to be specified.
For agriculture based industries and consumer goods industries, separate limits are to be fixed
since they have seasonal demand of their products and for others, only one limit is to be fixed
by the banks
(ii) Withdrawals of Funds:
After sanctioning the credit limit, the borrower must indicate, before the commencement of
each quarter, his expected requirements of funds in the said quarter. Such limits are known as
operating limit. It is expected that borrower must withdraw funds from bank within the
operating limit in that particular quarter subject to a tolerance limit of 10% either way.
That is, if a borrower withdraws any amount which is more than or less than that tolerance
limit, the same is considered as irregularity in the account and as a consequence, bank should
take corrective steps in order to avoid such repetition of irregularity of funds in future which
is actually the product of defective planning of the borrower.
(iii) Temporary Limits:
Banks must be very careful about the request made by the borrower for ad hoc/ temporary
limits in excess of the sanctioned limits in order to meet unforeseen contingencies. Such
limits should be allowed for pre-determined short-durations and in the form of a demand loan
or ‘non-operable’ cash credit account for which an additional interest of 1% over and above
the normal rate is to be charged.
But if the borrower is unable to provide corresponding additional contributions for this
purpose, bank will simply refuse.
(iv) Contribution of the Borrowers:
The RBI stressed the need in order to reduce the over-dependence on bank credit by medium
and large borrowers. Borrowers must increase their contribution towards working capital.
Bank must assess the maximum permissible bank finance by applying the second method of
lending which was recommended by Tandon Committee.
That is, under this method, borrowers must have to contribute from (i) his owned funds and
(ii) term loans an amount which must be at least 25% of total current assets. In short, the
contribution of the borrowers towards working capital should be increased from 25% of the
working capital gap (under 1st Method) to 25% of the total current assets which result in a
current ratio of 1.3: 1 instead of a 1: 1 current ratio.
ARRANGEMENT DURING TRANSITION PERIOD:
If it is found that the borrower fails to comply with the above requirements, immediately
bank may segregate the excess borrowing and may treat the same as Working Capital Term
Loan (WCTL). This loan must be repaid by the borrowers in half-yearly installments within a
period not exceeding 5 years.
Of course, banks may charge a higher rate of interest for this purpose which must not exceed
the ceiling for encouraging early payments. Bank also may charge a penal rate if there is any
default in repayment of the said loans.
Additional Credit Limits:
Banks are permitted to grant additional credit limits to the borrowers, if such limits are
necessary for increased production. But Bank must insist on (i) the incremental current ratio
of 1.33: 1 and (ii) WCTL component must not be increased.
EXEMPTION:
However, the RBI exempted the following categories of borrowers from the compliance
of this requirement:
(a) New companies floated prior to December 8, 1980.
(b) Companies showing signs of incipient sickness.
(c) Companies having finalized modernization or expansion programme before the Chore
Committee recommendation.
(d) Borrowers who have failed to pay the installment/interest due to term lending institutions,
if the efforts to re-schedule the installments do not succeed.
In the above categories of borrowers, the RBI has advised the scheduled banks to examine
carefully the financial position on the basis of cash flow/fund flow statements and other
relevant information.
If they are satisfied, they may assess the credit requirement of the borrowers without applying
the second method of lending recommended by Tandon Committee which is permitted only
for a period of 3 years and bank, in these cases, should impress upon the borrowers the
usefulness of changing-over to second method.
The RBI has also clarified that the above measures are not applicable in those cases that
enjoy aggregate working capital limits below Rs. 50 lakhs but exceed this level due to
sanctioning additional credit limits for the temporary periods.
RBI also has advised to adopt a flexible approach in case of exporters who are unable to
bring in additional contribution for additional credit limits sanctioned for specific export
transactions.
If any borrower exports a substantial part of his production and the WCTL has to be carved
out of the existing paking credit limit, bank may identify the WCTL on a national basis. That
is, the amount of excess borrowings may be identified but not transferred to a separate
account for concessionary rate of interest.
The borrower must contribute the required amount within a period of 5 years.
