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TANDON COMMITTEE 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
of references of the committee were:

i. To suggest guidelines for commercial banks to follow up and supervise credit


ii. To suggest the type of operational data and other information that may be
obtained by banks
iii. To make suggestions for prescribing inventory norms for different industries
both in the private and public sectors
iv. To suggest criteria regarding satisfactory capital structure
v. To make recommendations regarding resources for financing the minimum
working capital requirements.
vi. To suggest whether the existing pattern of financing working capital
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. It is the borrower who decides how much he would borrow.


ii. Bank credit, instead of being taken as a supplementary to another source of
finance, is treated as the first source of finance
iii. Bank credit is extended on the account of security available and not according
to the level of operations of the borrower.
iv. There is a wrong notion that security by itself ensures the safety of bank funds.

Commitment 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 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 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.