Tandon Committee Recommendations

TANDON COMMITTEE RECOMMENDATIONS RECOMMENDATIONS

Tandon committee was appointed by the RBI in july 1974 under the chairpersonship of Shri P.L. Tandon who was the Chairman of PNB then. The terms ter ms of references of the committee were: i. ii. iii. iii. iv. v. vi.

To sugg suggest est guid guideli elines nes for for comme commercia rciall banks banks to to follo follow w up and and supe supervi rvise se credi creditt To sugg suggest est the type type of operat operation ional al data data and and other other inform informatio ation n that that may may be be obtained by banks To make make sugge suggesti stions ons for pres prescrib cribing ing inve invento ntory ry norms norms for for diffe differen rentt indust industries ries  both in the private and public sectors To sugge suggest st criteri criteriaa rega regardi rding ng satisf satisfacto actory ry capita capitall stru structu cture re To make make recomm recommend endati ations ons regard regarding ing resourc resources es for for fina financi ncing ng the the mini minimum mum working capital requirements. To sugg suggest est whethe whetherr the the exist existing ing pattern pattern of fina financi ncing ng work working ing capita capitall requirements by cash credit/overdraft requires to be modified.

Findings of the committee: The committedd studied the existing system of extending working capital finance to industry and identified the following as its major  weaknesses:

i. ii. iii. iii. iv.

It is is the the borr borrow ower er who who deci decide dess how how much much he he woul would d borro borrow. w. Bank Bank credit credit,, instead instead of bein being g taken taken as a suppl suppleme ementa ntary ry to anothe anotherr sourc sourcee of  finance, is treated as the first source of finance Bank Bank credit credit is is exten extended ded on on the the accoun accountt of secu security rity availa available ble and and not not acco accordi rding ng to the level of operations of the borrower. There There is a wrong wrong noti notion on that that secu securit rity y by itself itself ensu ensures res the the safet safety y of bank bank funds. funds.

Commitment Recommendations: Recommendations: The report submitted by the Tandon Committee introduced major changes in financing of working capital by commercial banks in India. The report was submitted on 9 August 1975. Fixation of norms: An important feature of the Tandon Committee’s recommendations relate to fixation of norms for bank lending to industry. (i )Working )Working Capital Gap Working Capital Gap is the excess of current assets as per stipulations over  normal current liabilities (other than bank assistance). Bank assistance for working capital shall be based on the working capital gap, instead of the current assets need of  a business. This type of financing assistance by banks was introduced on the basis of  recommendations of the Tandon Committee. (ii )Lending )Lending Norms The lending norms have been suggested in view of the realization that the  banker’s role as a lender is only to supplement the borrower’s resources. The committee has suggested three alternative methods for working out the maximum  permissible level of bank borrowings. Each successive method reduces the involvement of short-term credit to finance the current assets, and increases the use of  long-term funds.

Tandon Committee recommendations are not relevant. Now banks are flush with funds. But good borrowers aren’t many. Tandon Committee recommendations were relevant when controlled economy prepared. Today, it is open economy. Besides, these recommendations were relevant in these years when money market was tight and capital rationing was needed. Today, the whole environment has changed.  Now banks want to provide long-term loans as well. Actually from April 15 1997, all instructions relating to maximum permissible bank finance(MPBF) were withdrawn.