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- The current assets of a company vary depending upon the level depending upon the level of activity or operations.
- The level of Accounts Receivables will also tend to increase as a result of the increased level of sales. Thus, the level of current assets associated with the tempo of business activity can be regarded as the 'fluctuating or temporary component' of current assets.
- The level of current assets of a company can be looked upon as the permanent component of current assets superimposed by the fluctuating component.
- The 'temporary or fluctuating component' can be financed from short-term sources such as accounts payables or trade credit, short-term bank borrowings and public deposits.
- The 'behavior' of current assets influences in a broad sense the pattern of financing to be adopted by a company.
- Accrued Expenses, Provisions, Trade credit are important sources of financial current assets.
- Bank finance may be either direct or indirect.
- Under direct financing the bank not only provides the finance but also bears the risk. Cash credit, overdraft, note lending, purchase/discounting of bills belong to the category of direct financing.
- When the bank opens a Letter of Credit in favor of a customer, the bank assumes only the risk of default by the customer and the finance is provided by a third party.
- Examples of indirect financing are letter of credit, security, Hypothecation and pledge.
- The deposits mobilized from public by non-financial manufacturing companies are known as 'Public Deposits' or 'Fixed deposits'. These are governed by the regulations of public deposits under the companies (Acceptance of Deposits) Amendment Rules, 1978.
- Commercial Papers (CPs) are short-term usance promissory notes with a fixed maturity period., issued mostly by the leading, reputed, well-established, large corporations who have a very high credit rating. They can be issued by body corporates whether financial companies or non-financial companies. Hence, they are is also referred to as Corporate Papers.
- CPs are mostly used to finance current transactions of a company and to meet its seasonal needs for funds.
- The Reserve Bank of India had appointed some special study groups for streamlining the practices followed by banks so that the weakness of the existing practices are removed and a better sense of direction provided to the banking sector.
- The Reserve Bank of India (RBI) constituted in july, 1974 a study group to frame guidelines for follow up of bank credit under the chairmanship of P L Tandon. The report submitted by the committee in August, 1975 is popularly referred to as the Tandon Committee Report.
- The Tandon Committee Report had made some recommendations regarding the style of credit.
- The Working Group appointed under the Chairmanship of K B Chore in April, 1979 had analyzed the existing data in respect of cash credit/overdraft by the banking sector, practices followed by other countries and submitted its report on August 31, 1979.
- The Reserve Bank provided an additional measure of credit regulation for ensuring greater alignment of bank credit to the requirements of the plan. This regulation of RBI is the genesis for what has come to be known more popularly as the Credit Authorization Scheme (CAS).
- The Reserve Bank of India, set up a committee under the chairmanship of Shri S S Marathe in November, 1982.
- Kannan Committee headed by Bank of Baroda chairman, Me. K Kannan was formed on the suggestion of the Reserve Bank of India in January, 1997 to examine the validity of the MPBF concept and to suggest what could replace it.