Tandon & Chore Committee

A study group headed by Shri Prakash Tandon, the then

Chairman of Punjab National Bank, was constituted by the RBI
in July 1974 with eminent personalities drawn from leading
banks, financial institutions and a wide cross-section of the
industry with a view to study the entire gamut of Bank's
finance for working capital and suggest ways for optimum
utilization of Bank credit. This was the first elaborate
attempt by the central bank to organize the Bank credit. Most
banks in India even today continue to look at the needs of
the corporate in the light of methodology recommended by the
Group. The report of this group is widely known as Tandon
Committee report.
The weaknesses in the Cash Credit system have persisted with
the non-implementation of one of the crucial recommendations
of the Committee. In the background of credit expansion seen
in 1977-79 and its ill effects on the economy, RBI appointed
a working group to study and suggest i) modifications in the
Cash Credit system to make it amenable to better management
of funds by the Bankers and ii) alternate type of credit
facilities to ensure better credit discipline and co relation
between credit and production. The Group was headed by Sh.
K.B. Chore of RBI and was named Chore Committee.
Another group headed by Sh. P.R. Nayak (Nayak Committee) was
entrusted the job of looking into the difficulties faced by
Small Scale Industries due to the sophisticated nature of
Tandon & Chore Committee recommendations. His report is
applicable to units with credit requirements of less than
Rs.50 lacs.
The recommendations made by Tandon Committee and reinforced
by Chore Committee were implemented in all Banks and Bank
Credit
became
much
more
organized.
However,
the
recommendations were perceived as too strict by the industry
and there has been a continuous clamour from the Industry for
movement from mandatory control to a voluntary market related
restraint. With recent liberalization of economy and reforms
in the financial sector, RBI has given the freedom to the
Banks to work out their own norms for inventory and the
earlier norms are now to be taken as guidelines and not a
mandate. In fact, beginning with the slack season credit
policy of 1997-98, RBI has also given full freedom to all the
Banks to devise their own method of assessing the short term
credit requirements of their clients and grant lines of
credit accordingly. Most banks, however, continue to be
guided by the principles enunciated in Tandon Committee
report.

The group (headed by Sh. Prakash Tandon) was appointed in July

1974 which was to frame guidelines for follow-up of bank credit
and submitted its final report during 1975 and gave following
recommendations, applicable to borrowers availing fund based
working capital limits of Rs. 10 lac or more:
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)
Approach to lending
The committee suggested three methods of lending out of which RBI
accepted two methods for implementation. According to First
Method, the borrower can be allowed maximum bank finance upto 75%
of the working capital gap (working capital gap denotes difference
between total current assets required and amount of finance
available in the shape of current liabilities other than short
term bank borrowings). The balance 25% to be brought by the
borrower as surplus of long term funds over the long term outlay.
As per Second Method of lending, the contribution of the borrower
has to be 25% of the total current assets build-up instead of
working capital gap. (Method of lending as per Vaz Committee will
now apply to borrowers availing working capital fund based limits
of Rs. 100 lac or more only)
Other major recommendations of the committee were:

No slip back in current ratio, normally.

Classification guidelines for Current assets and current
liabilities.
Identification of excess borrowing.
Information system, which was modified by Chore Committee
Recommendations.
Bifurcation of limits into loan and demand component.
All instructions relating to maximum permissible bank finance
withdrawn by RBI as per Credit Policy announced on 15.04.1997)