Banks in India have been providing finance to industry and trade on the basis of security. To ensure its equitable distribution in the right channel bank credit has been subject matter of regulation and control by the government.
To regulate and control bank finance the RBI has been issuing directives and guidelines to the banks from time to time on the recommendation of certain specially constituted committee entrusted with the task of examining various aspects of bank finance to the industry.
The national credit council constituted in October 1968. A study under the chairmanship of shri. V.t.dehejia. to examine the credit needs of industry and trade are likely to be inflated and how such trend could be checked. The bulk of bank credit is short term; the groups enquiry was primarily concerned with the inflation of the short term credit.
The group made suggestion for a change in the leading corporate and other borrowers in formulating financial plans, regulating production on a more rational basis and economising the demand for bank credit.
Reserve bank of India setup a committee under the chairmanship of shri.p.l.tandon in July 1974.
The terms of references of the committee were:
To suggest guidelines for commercial banks. (To follow up and supervise from the point of view of ensuring proper use of funds and keeping a watch on the safety of advances.)
To suggest the type of operational data and other information. (That may obtained from banks periodically from the borrowers and by the RBI from the lending banks.)
To make suggestions for prescribing inventory norms for the different industry. (Both in the private and public sector and indicate the broad criteria for deviating from these norms)
To make recommendations regarding resources for financing the minimum working capital requirement.
To suggest regarding satisfactory capital structure and sound financial basis in relating to borrowings.
Committee opinion :
Bank credit is extended on the amount of security available and not according to the level of the operation of the customer.
Bank credit instead of being taken as a supplementary to other source of finance is treated as the first source of finance.
The RBI 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 references to the gap between sanctioned limit and the extend of their utilisation and also to suggest alternative type of credit facility which should ensure alternative credit discipline.