Indian industry tends to rely heavily on the credit extended by commercial banks to finance its short-term working capital needs, with banks meeting as much as 55-60% of inventory finance requirements. The availability of bank finance is regulated through the credit policy of the RBI. There has been a deregulation of interest rates, with effect from October 18,1994, for credit limits of over Rs. 2 lakhs, the prescription of a minimum lending rate has been abolished, and banks have been granted freedom to fix the lending rate for such credit limits. Further, for limits over Rs. 25,000.00 and upto Rs. 2 lakhs, the rate of interest for all advances, including term loans has been reduced to 13.5% p.a. For limits upto Rs. 25,000.00, the rate of interest remains unchanged at 12%p.a.
The current assets of companies, i.e. their inventories and receivables are expected to conform to specified levels. Typically 25% of these current assets are to be financed by companies through their own sources, while bank finance is permissible for the difference between, the balance 75% of the current assets, and the current liabilities.
Based on these guidelines of maximum permissible bank finance, companies negotiate a working capital limit with a consortium of banks. The advances are normally secured by the hypotehcation of current assets, usually inventories and receivables.
Centre for Monitoring Indian Economy, Bombay
Contact Addresses for More Information
Last updated: May 1995.