The Reserve Bank of India in March, 1979 appointed another committee under the chairmanship of Shri K.B. Chore to review the working of cash credit system in recent years with particular reference to the gap between sanctioned limits and the extent of their utilisation and also to suggest alternative type of credit facilities which should ensure greater credit discipline.
The important recommendations of the Committee are as follows:
1. The banks should obtain quarterly statements in the prescribed format from all borrowers having working capital credit limits of Rs. 50 lacs and above.
2. The banks should undertake a periodical review of limits of Rs. 10 lacs and above.
3. The banks should not bifurcate cash credit accounts into demand loan and cash credit components.
4. If a borrower does not submit the quarterly returns in time the banks may charge penal interest of one per cent on the total amount outstanding for the period of default.
5. Banks should discourage sanction of temporary limits by charging additional one per cent interest over the normal rate on these limits.
6. The banks should fix separate credit limits for peak level and non-peak level, wherever possible.
7. Banks should take steps to convert cash credit limits into bill limits for financing sales.
Credit Authorization Scheme
Under the scheme, all selected commercial banks were advised to obtain the RBI’s prior authorization before sanctioning any credit limit of Rs.1 crore or more to an single party or any limit that would take the total limits enjoyed by such party from the entire banking system (including co-operating sector) as a whole to Rs.1 crore or more. The appraisal on the part of the banks related to need of funds, security for the advance and suitability of terms and conditions is taken for granted. Normally authorization is given within 3 days of the receipt of application.
Rejections are few and mainly related to the regular activity of the borrower, intermediate trading activities and double financing. Since 1965, the Credit Authorisation Scheme (CAS) has been playing a significant role as an effective instrument of credit regulation.
Relationalisation of the Scheme
RBI advised commercial banks in June 1970 to collect and examine data relating to
a. Utilisation of existing credit limits by borrowers
b. Total working capital requirements and bank finance permissible together with the borrower’s ability to meet the gap between the two.
c. Comparative financial position for the last 3 years
d. Cash flow
e. In respect of term loans, project cost and sources of financing the project.
CAS Form of Application
The forms prescribed under the Credit Authorization Scheme, particularly relating to the assessment of working capital requirements, considers the following important aspects of lending.
a. Examination of its operation cycle and total working capital requirement is necessary, as finance is required by a company for its total current operations and not merely inventory or
b. Assessment of the company’s peak requirement of current assets as balance sheet changes indicate only the movement in funds between 2 years.
c. Adjustments for other available sources of finance such as sundry creditors, advances received etc. so as to arrive at
i. networking capital requirements of the borrowing company
ii. the peak level of current assets to maintain a given level of production
d. Security and drawing power(after providing usual margins) to arrive at permissible bank finance
e. Margin requirement i.e the gap between the total working capital requirement and credit limits available ( including those proposed as per the application submitted to the RBI) to be met out of current working capital
f. margin requirement and credit limits available (including as per the application submitted to RBI) to meet the current working capital surplus and/or other long term sources of finance.
The objective of the Credit Authorization Scheme is in the nature of credit planning and control than credit appraisal