The Reserve Bank of India is expected to phase out the maximum permissible bank finance (MPBF) when it announces its credit policy on April 15.
The system, which has been in existence for the past three decades, is likely to be replaced with the syndicated form of lending. This will effectively replace the prevalent practice of consortium lending and will ensure quicker credit disbursal.
MPBF was introduced in the early seventies based on the recommendations of the Tandon and Chore Committee. Corporates, however, were never really in favour of it.
They have been demanding that it should be scrapped because the norms are outdated resulting in inadequate working capital limits and delayed credit disbursals.
The RBI had asked the Indian Banks Association (IBA) in December 1996 to find out whether the system could be done away with, and the assessment of working capital needs of corporates be left entirely to the banks.
The Kannan Committee, set up by the IBA and headed by Bank of Baroda chief, K Kannan, has suggested that the uniform formula should be scrapped .Instead, the banks should have the sole discretion in determining the working capital limits of corporates.
The Kannan committee has also said that corporate borrowers may be allowed to issue short term working capital debentures of one year and 18 months maturity.
Subscriptions by banks to these debentures can be considered as working capital assistance to corporates.
