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Guidelines of wise men

The RBI had laid down comprehensive norms and guidelines to banks in 1975

Business Standard 

With reference to “Monumental failures of RBI” (August 23), Gajendra Haldea has said that it was the Reserve Bank of India’s (RBI) job to lay down effective (lending) norms and to The had laid down comprehensive norms and to in 1975. These were evolved not internally by the bureaucracy and dictated by it to They were based on recommendations of a study group (later known as Tandon Committee) appointed by under Prakash Tandon, the much celebrated then chairman of Punjab National Bank and comprising 14 other eminent men.

These wise men, after year-long deliberations, prescribed industry-wise norms for inventories and receivables and laid down guide lines for bank The basic principle on which the were based was that the function of a bank was only to supplement its own resources (including long-term funds raised elsewhere) of a in running an enterprise. The bank’s lendings were not to exceed the Maximum Permissible Bank Finance for each borrower, based on a formula laid down by the study group.

The accepted major recommendations of the study group and required to restrict their lendings accordingly. It required its supervisory machinery to oversee their implementation. As a result, the quality of loan portfolios of showed perceptible improvements and what we call non-performing assets today (a term not in vogue then) did not contaminate them to any visible extent. Then came the era of liberalisation in the wake of the economic reforms of 1991, which dispensed with the undue restrictions and controls associated with the license-permit raj. The RBI’s norms for bank lending, which were evolved with the consent of and in co-ordination with those affected (viz. and their borrowers) did not fall in the ambit of the said reforms, although their revision from time to time, in the light of changing scenario, was always called for. But at some stage, the norms and were dropped lock, stock and barrel and a free-for-all was created; could lend as they liked. And the result is there for all to see. The wholesale abandonment of aforesaid discipline in the name of liberalisation tantamounts to throwing the baby out with the bathwater.


R C Mody, New Delhi

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First Published: Mon, August 28 2017. 22:33 IST
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