Burying The Past
The RBI evolving norms for bank lending go back quite a bit. The Tandon committees norms were framed to tackle the phenomenon of companies going in for overdrafts even when their sanctioned working limits went unutilised. While there was little control over these overdrafts which sometimes turned sticky, the profitability of banks suffered on the other hand because of partially unutilised sanctioned limits. The Tandon committee recommended that 25 per cent of the working capital gap (difference between current assets and liabilities) be met by long-term funds, and banks provide the remaining 75 per cent. The recommendations of the Chore committee, which came thereafter, were for the company providing 25 part of the financing of current assets, which amounted to greater deployment of long-term funds.
Control over maximum permissible bank finance, which was calculated according to these formulae, has itself been whittled down effectively with the minimum limit for referring sanctions to the RBI being successively raised. Thus the time has now come to scrap the entire idea of trying to tell the banks how much to lend through given formulae which are bound to be arbitrary. Detailed central bank supervision of commercial banks is a thing of the past. It did not work in the best of times. Today bank operations have become far too complex to persist with even a vestige of past practices. However, the central banks responsibility for ensuring health and sound practices among commercial banks remains. This is a matter of continued government concern because the greatest loss-makers are government banks with inadequate management skills and most in need of supervision.
The RBI has been rightly moving in the direction of impressing upon banks to stren-gthen their own prudential norms. It is upto them to determine what are the limits of safe lending and then ensure that they are implemented by providing for rigorous internal audit and also board supervision of the overall quality of assets. Once these formulae are jettisoned, external supervision by the RBI and also action on account of losses will have to be much more subtle. A view will have to be taken whether a risk was legitimate to take or not, instead of mechanistically asserting that the laid down norms were not adhered to. Such norms for the entire gamut of business, covering hundreds of industries, are in any case meaningless beca-use they have to change from sector to sector. They also have to take into account the general pace of business and the need for funds to support higher sales of higher inventories. The sooner these anachronistic formulae are done away with the better for everybody.