Financing of Working Capital in India Industry

...

finance, keeping in.mind the need to pro-

vide sufficient time to borrowers to adjust

their base of long term funds. In the context

of a 'time-bound programme', the report

states, "We feel that the third method is an ideal to reach, as it will provide the largest multiplier of bank finance; the next best method from this aspect is the second one,

followed by the first. However, to avoid hard-

ship to borrowers, we recommend that we

should make a beginning with the first

method and then move to the second and the third methods. It is necessary though, to have a time-bound programme and we

suggest that banks should initiate immediate

actiQn to place all borrowers, say, those hav-

ing credit limits in excess of Rs 10 lakh from

the banking system, on the first method,

beginning with the borrowers having weak

financial positions, as early as possible, say, within a period of about one year. At that stage, the Reserve Bank may review the

system and chalk out a further programme for switching over to the second and third

methods, in stages, in the light of circum-

stances then prevailing" (para 6.10).

As recommended by the Tandon Commit-tee, the Reserve Bank initiated a review ex-ercise in 1979 by appointing a working group under the chairmanship of K R Chore to review the system of cash credit (popularly known as the Chore Committee). This work-ing group looked into the feasibility of swit-

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ching over borrowers from the first method to the second and the third methods. Inter alia, the report states, "Although it was the intention of the Thndon Committee that the borrowers should gradually progress from the first method to second, by and large, it has not happened in practice. A shift to the second method will necessarily imply in-creasing either the capital funds or the term borrowings. Because of the tax advantages in bank borrowings, borrowers are normally reluctant to improve their gearing ratio. Similarly, on account of the convertibility clause, borrowers are also reluctant to make increasing use of term borrowings. Because

of the above considerations, it is hardly likely

that, left to themselves, the borrowers enhance their contributions to working capital and to improve their current ratio it is necessary to place them under the second method of lending which would give a minimum current ratio of 1.33" (para 5.9).

It is apparent from the above statement that the Chore Committee suggested the se-cond method mostly based on industrialists views about bank borrowings and not on the basis of a review of working captal finance of industries which the Committee was ex-pected to do in 1979. Similarly, after the

implementation of the Chore Committee's recommendations in respect of the second

method, a fresh review is now expected to find out how far industries have changed their style of working capital finance as desired by the Chore Committee. This paper

is written to fulfil these two expectations. To

state more specifically, the paper makes a

review of working capital finance of in-dustries at two points of time: (i) 1979 and

(ii) 1983 (the year for which latest data were

available).

II

Data Base

The study used data as given in the Reserve Bank of India studies of finances of large public limited companies for the period 1975-1983. Data related to selected

large, non-financial, non-government public

limited' companies (each with a paid-up capital of Rs one crore or above). The size of the sample of the selected companies

varied from year to year. The number of the companies included in the study for the year

1975, 1979 and 1983 stood at 385, 415 and

478 respectively. Data covered major items

of balance sheet, ratios and funds-flow

statement. Companies in the sample closed

their accounts during the period April 1 to

March 31 of each year. On an average, 35

Economic and Political Weekly Vol XX, No 35

Review of Management, August 1985 M-123

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Review of Management August 1985 ECONOMIC AND POLITICAL WEEKLY

per cent of the selected companies closed their annual accounts in December, 27 per cent in June, 9 per cent in September and the rest in the other months. We collected data for each of the 12 major industries besides aggregate figures of all industries.

Balance sheet data speak of the position of various assets and liabilities at different points of time. Study of assets and liabilities with the use of ratios indicated liquidity, solvency, profitability and capital structure

of the companies. From the data as given

in the funds-flow statement, it was possible to get an idea of management of funds in general and of working capital in particular.

Since