QA Series 22 - MSME - Part 2

 

The Banking Tutor

Question Answer Series 2025

S No 22                                                                    13-07-2025

MSME – Part 02 

26. What are important recommendations of Daheja Committee ? 

Daheja committee recommended that  Credit application should be appraised by the bankers with reference to present and projected total financial position as shown by cash flow analysis and forecast submitted by borrowers. 

27. As per Daheja Committee recommendation how the working capital requirement to be bifurcated ? 

As per Daheja Committee recommendations the total cash credit requirement is divided into two parts namely – Hard Core Components and Short Term Components. 

28. What are Hard Core Components in Working Capital Requirement? 

Hard core components represent the minimum level of raw materials, finished goods and stores which the industry requires for maintaining a given level of production and which is made on a formal term loan basis. 

29. What are Short Term Components in Working Capital Requirement? 

Short-term components represent  the fluctuating part of current assets. 

30. Which committee recommended Consortium Arrangement? 

If the credit requirement is more Daheja committee recommended the adoption of “Consortium arrangement”. 

31. Why Daheja Committee’s recommendations could not be implemented ? 

The recommendations given by Dehejia Committee could not be implemented, further in view of unprecedented inflation during 1974 the demand for bank credit rose sharply. 

32.  What are important recommendations of  Chore Committee ? 

The banks should obtain quarterly statements in the prescribed format from all borrowers having working capital credit limits of Rs. 50 lacs and above. 

The banks should undertake a periodical review of limits of Rs. 10 lacs and above. 

The banks should not bifurcate cash credit accounts into demand loan and cash credit components. 

33. Who has recommended fixing separate limits to Peak Season and Non-peak season? 

Chore Committee recommended that the banks should fix separate credit limits for peak level and non-peak level, wherever possible. Banks should take steps to convert cash credit limits into bill limits for financing sales. 

34. What is Committee appointed for framing guidelines for ensuring end use of bank finance ? 

In 1974, a study group under the chairmanship of Mr. P. L. Tandon was constituted for framing guidelines for commercial banks for follow-up & supervision of bank credit for ensuring proper end-use of funds. 

35. What are important recommendations of the Tandon committee ? 

Major recommendations of the Tandon committee were as follows: 

Assessment of need based credit of the borrower on a rational basis on the basis of their business plans. 

Bank credit would only be supplementary to the borrower’s resources and not replace them, i.e. banks would not finance one hundred percent of borrower’s working capital requirement. 

Bank should ensure proper end use of bank credit by keeping a closer watch on the borrower’s business, and impose financial discipline on them. 

36. Which Committee had recommended to follow industry wise norms for holding current assets ? 

Tandon Committee recommended to make available working capital finance on the basis of industry wise norms for holding different current assets, viz. Raw material including stores etc. used in manufacturing process ;  Stock in Process ; Finished goods ; Accounts receivables. 

37. How the Holding of Raw Material fixed ? 

Raw material holding is fixed based on Consumption,  as so many months’ consumption. They include stores and other items used in the process of manufacture. 

38. How the Holding of  Stock-in Process  fixed ? 

SIP holding is fixed based on Cost of Production. Stock-in-process, as so many months’ cost of production. 

39. How the Holding of  Fixed Goods  fixed ? 

Finished goods holding is fixed based on cost of sales. 

40. How the Holding of  Receivables  fixed ? 

Accounts receivable holding is decided based on sales. 

41. What is holding norm for stock of spares ? 

Stock of spares was not included in the norms.  In financial terms, these were considered to be a small part of total operating expenditure. Banks were expected to assess the requirement of spares on case-by-case basis. However, they should keep a watchful eye if spares exceed 5% of total inventories. 

42. What is the essence of Tandon Committee recommendations ? 

The essence of Tandon Committee’s recommendations was to finance only portion of borrowers working capital needs not the whole of it. It was thought that gradually, the borrower should depend less on banks to fund its working capital needs.

43. Which Committee has recommended Methods of Lending ? 

Tandon Committee suggested  three graduated methods of lending, which came to be known as maximum permissible bank finance system or in short MPBF system. 

44. What is the First Method of Lending ? 

First Method of Lending - The contribution by the borrowing unit is fixed at a minimum of 25% working capital gap from long-term funds. 

45. What will be Current Ratio if we apply First Method of Lending ? 

First method of lending gives a current ratio of only 1.17 :1. This is obviously on the low side. 

46. What is Second Method of Lending ? 

Under Second Method of Lending, The borrower will have to provide a minimum of 25% of total current assets from long-term funds. However, total liabilities inclusive of bank finance would never exceed 75% of gross current assets. 

47. What will be Current Ratio if we apply Second Method of Lending ? 

Second method of lending give a minimum current ratio of 1.33:1. 

48. What is Third Method of Lending ? 

Under Third method of lending permissible bank finance would be calculated in the same manner as the second method but only after deducting four current assets from the gross current assets.

The borrower’s contribution from long-term funds will be to the extent of the entire core current assets, as defined, and a minimum of 25% of the balance current assets, thus strengthening the current ratio further. 

49. What are Core Current Assets as per Tandon Committee ? 

Core portion current assets were presumed to be that permanent level which would generally vary with the level of the operation of the business. This core level is considered to be equivalent to fixed assets and hence, was recommended to be financed from long-term sources. 

50. What will be Current Ratio if we apply Third Method of Lending ? 

The third method results in a current ratio of 1.79:1. 

51. What is MPBF Method in Lending? 

The Maximum Permissible Bank Finance (MPBF) method is the one recommended by the Tandon Committee for determining how much working capital a bank can provide to a borrower. This method involves calculating the maximum amount of bank finance a borrower is eligible for, based on their working capital needs and financial position. The Tandon Committee proposed three methods for calculating MPBF, all of which involve assessing the borrower's current assets, current liabilities, and the gap between them. 

Next Issue  will be shared on 15^th   July 2025.

Sekhar Pariti

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