Letters: RBI - Lessons from the past?

This refers to the report "RBI asks banks to increase bad loan provisions" (November 17). When faced with a similar situation the Reserve Bank of India (RBI) had appointed, in July 1974, a study group to frame guidelines on bank credit (known as the Tandon committee). The group, inter alia, examined whether norms could be evolved for the debt-equity ratio to ensure minimal dependence on bank finance. And as a result of its deliberations, the group evolved the concept of maximum permissible bank finance (MPBF) for each individual borrower and recommended that bank lending should not, in any case, exceed MPBF. In broader terms, it meant that not less than 25 per cent of the funds required to finance working capital of a borrower should come out of "long-term sources", which meant equity or quasi-equity. To ensure adherence to this requirement in the case of large borrowers, both in public and private sector (the definition of "large" was revised from time to time), the RBI had set up the Credit Authorisation Scheme (CAS). As a result of this, by 1979, almost the entire banking system was working within the limits of the Tandon committee norms.

With the advent of liberalisation, the norms and CAS were withdrawn. Now that the problem appears to have re-emerged, the remedy lies certainly not in reviving those norms. More sophisticated tools would be available now. Yet, it would not be a bad idea for the RBI to look into its archives to see whether some lessons could still be learnt from the past.

R C Mody New Delhi

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