Explain the following methods used by banks to assess working capital requirements of a borrower : (a) Maximum Permissible Banking Finance Method (Tandon Committee)

a) Maximum Permissible Banking Finance Method (Tandon Committee): A committee headed by Mr. P.L. Tandon, ex-chairman of PNB, was constituted with view to suggest improvement in the existing cash credit system. The Committee submitted its report on guidelines for follow up of credit in August 1974, suggesting three methods of lending as follows: 1st Method of Lending: 75% of the working capital gap (Working Capital Gap = Total current assets - Total current liabilities other than bank borrowings) is financed by the bank and the balance 25% of the Working Capital Gap considered as margin is to come out of long-term source i.e., owned funds and term borrowings. 2nd Method of Lending: Bank will finance maximum up to 75% of total current assets (TCA) and borrower has to provide a minimum of 25% of total current assets as the margin out of long-term sources. This will give a minimum current ratio of 1.33:1. 3rd Method of Lending: This is same as 2nd method of lending, but excluding core current assets from total assets and the core current assets are financed out of long-term funds of the company. The term 'core current assets' refers to the absolute minimum level of investment in current assets, which is required at all times to carry out minimum level of business activity.