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 AGENDA
 Introduction
 Norms for Inventory and Receivables
 Methods of Lending
 Tandon Committee’s Recommendations
 The Norms
 INTRODUCTION
Mr. Shri Prakash Lal Tandon was born in 1911 and graduated
from Government College, Lahore in 1929. Then he went to
England where he studied Commerce at the University of
Manchester and later qualified as a Chartered Accountant. (1911 – 2004)
After his return to India in 1937, he joined Unilever and
eventually became its first Indian Chairman. Later, he headed the S.T.C.
and the Punjab National Bank. He served on the boards of several institutions and
also taught at Universities in Berkeley, Boston, California, Chandigarh, Delhi and
Ahmedabad. He was working on a book on management and was keen on exploring
the form and content of the management system as it prevailed in ancient India. He
Was appointed in July 1974 as the head of Tandon Committee which was to frame
Guidelines for follow-up of bank credit and submitted its final report during 1975 and
Gave recommendations, applicable to borrowers availing fund based working capital
Limits of Rs 10 Lac or more. He was the chairman of Punjab National Bank.
 NORMS FOR INVENTORY AND RECEIVABLES

Norms for 15 major industries proposed by the committee now have more than 50
disintegrated industry groups . Normally the borrower would not be allowed
deviations from norms except in case of bunched receipt of raw material, power
cuts, strikes, transport delays, accumulation of finished goods due to non
availability of shipping space for exports, build up of finished goods stocks due
to failure on the part of purchasers. For those units which are not covered by
the norms, past trends to be made the basis of assessment of working capital.
(Discretion given to individual banks for deviations in norms)
 METHODS OF LENDING

The lending framework proposed by Tandon committee dominated commercial

bank lending in India for more than 20 years and its continues to do so despite
withdrawal of mandatory provision of Reserve Bank of India in 1997. As
indicated before the essence of Tandon committee’s recommendations was to
finance only portion of borrowers working capital needs not the whole of it. It
was thought that gradually the borrower should depend less on banks to fund
its working capital needs. From this point of view the committee three
graduated methods of lending which came to be known as MAXIMUM
PERMISSIBLE BANK FINANCE System or in short MPBF System. The
committee suggested three methods of lending out of which Reserve Bank of
India accepted two methods for implementation.
 CALCULATION OF MPBF OF A BORROWING UNIT
FOR ALL THE THREE METHODS

Working capital Gap is the difference between total current assets required and
the amount of finance available in the shape of current liabilities other than
short term borrowings.
Working capital Gap = Gross current assets – Accounts payable
as a basis which is translated arithmetically as follows:

Gross current assets Rs…………………………….

Less: Current Liabilities other than bank borrowings Rs…………………………….

___________________
WORKING CAPITAL GAP Rs…………………………….
I’ll provide you finance up
to 75 % . But you need to
arrange 25% of finance by
yourself.. What do you That sounds
say???? great to me!!!
FIRST METHOD

Banks can work out the working capital gap, i.e., total current assets less current
liabilities other than bank borrowing called MAXIMUM PERMISSIBLE BANK
FINANCE or MPBF and finance a maximum of 75% of the gap, the balance 25%
to come out of long-term funds, i.e., owned funds and term borrowings. This
approach was considered suitable only for very small borrower i.e., where the
requirements of credit were less than Rs. 10 Lacs. This method of lending gives
a current ration of only 1:1. This is obviously on the low side.
SECOND METHOD
Under this method, it was thought that the borrower should provide for a minimum
of 25% of total current assets out of long-term funds i.e., owned funds +
borrowings. A certain level of credit for purchases and other current liabilities
will be available to buildup of current assets and the bank will provide the
balance (MPBF). Consequently, total current liabilities inclusive of bank
borrowings could not exceed 75% of current assets. RBI stipulated that the
working capital needs of all the borrowers enjoying fund based credit facilities of
more than Rs. 10 Lacs should appraised( calculated) under this method. As many
of the borrowers may not be immediately in a position to work under the second
method of lending, the excess borrowing should be segregated and treated as a
working capital term loan which would be paid in installments. To induce the
borrowers to repay this loan, it should be charged at a higher rate of interest. For
the present , the group recommends that the additional interest may be fixed at
2% p.a over the rate applicable on the relative cash credit limits. This committee
would give a minimum current ratio of 1.33 : 1 .
THIRD METHOD

Under the third method, permissible bank finance would be calculated in the
same manner as the second method but only after deducting four current
assets from the gross current assets.
The borrower’s contribution from the 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 strengthening the current ratio further. This method will
provide the largest multiplier of bank finance.

Of all the three method, only the first two methods has been accepted by Reserve
Bank of India.
 TANDON COMMITTEE'S
RECOMMENDATIONS
Breaking away from the traditional methods of security oriented lending, the
committee enjoyed upon the banks to move towards need based lending. The
committee pointed out that the best security of bank loan is a well functioning
business enterprise, not the collateral.
Major recommendations of the committee were as follows
1. Assessment of need based credit of the borrower on a rational on the basis of
their business plans.
2. Bank credit would only be supplementary to the borrower’s resources and not
replace them, i.e., banks would not finance 100% of borrower’s working capital
requirement.
3. Bank should ensure proper end use of bank credit by keeping a closer watch on
the borrower’s business and impose financial discipline on them.
4. Working capital finance would be available to the borrowers on the basis pf
industry wise norms (prescribe first by the Tandon Committee and then by
RBI) for holding different current assets, viz.
 TANDON COMMITTEE'S RECOMMENDATIONS
(Contd)

 Raw materials including stores and others items used in manufacturing

process.
 Stock in process.
 Finished goods.
 Accounts receivables

5. Credit would be made available to the borrowers in different components like

cash credit, bills purchased and discounted working capital, term loan.etc,.
Depending upon nature of holding of various current assets
6. In order to facilitate a close watch under operation of borrowers, bank would
require them to submit at regular intervals, data regarding their business and
financial operations, for both the past and the future periods.
 THE NORMS
Tandon committee had initially suggested norms for holding various current assets
for 15 different industries. Many oh these norms were revised and the least
extended to cover almost all major industries of the country.
The norms for holding different current assets were expressed as follows:
a) Raw materials as so many month’s consumption. They include stores and other
items used in the process of manufacture.
b) Stock – in – process, as so many months’ cost of production.
c) Finished goods and accounts receivable as so many months’ cost of sales and
sales respectively. These figures represent only the average levels. Individual items
of finished good and receivables could be for different periods which could not
exceed the indicated norms so long as the overall average level of finished goods
and receivables does not exceed the amount as determined in terms of the norm.
d) Stock of spares was not included in the norms. In financial terms, these were
considered to be a small part of total operating expenditure. Banks were expected
to assess the requirement of spares on case – by- case basis.
 THE NORMS (Contd)
However, they should keep a watchful eye if spares exceed 5% of total inventories.
The norms were based on average level of holding of a particular current asset,
not on the individual items of a group. For example , if receivables holding
norms of an industry was 2 months and an unit had satisfied this norm,
calculated by dividing annual sales with average receivables, then the unit
would not be asked to delete some of the accounts receivable, which were being
held for more than 2 months .
The Tandon committee while laying down the norms for holding various current
assets made it very clear that it was against any rigidity and straight jacketing.
On one hand, the committee said that norms were to be entitlements to hold
current assets up to this level. If a borrower had managed with less in the past,
he should continue to do so. On the other hand, the committee held that
allowance must be made for some flexibility under circumstances justifying a
need for re-examination.
 THE NORMS (Contd)
The committee itself visualized that there might be deviations of norms in the
following circumstances.
a) Bunched receipt of raw materials including imports.
b) Interruption of production due to power cuts, strikes or other unavoidable
circumstances.
c) Transport delays or bottlenecks.
d) Accumulation of finished goods due to non-availability of shipping space for
exports or other disruption in sales.
e) Building up of stocks of finished goods, such as machinery, due to failure on
the part of the purchaser for whom these were specifically designed and
manufactured.
f) Need to cover full or substantial requirement of raw materials for specific
export contract of short duration.
THANK YOU
 PRESENTED BY
M. SARANYA
K. DIVYA
T. GAYATHRI
M.R. ANUPRIYA
P. DIVYA BARATHY