## Working Capital Finance from Banks
Banks are the main suppliers of working capital credit for businesses in India (term-lending institutions have also launched such schemes recently).
### Key developments
- Key committees: The Tandon Committee and Chore Committee developed the guidelines that laid the foundation for innovation in working capital financing.
- Assessment: RBI withdrew the Maximum Permissible Bank Finance (MPBF) method in April 1997. Banks may now develop their own assessment methods (with Board approval), subject to prudential guidelines and exposure norms.
- Banks' discretion: Banks have flexibility but must follow RBI directions on directed credit (e.g., priority sector, export) and prohibited credit (e.g., bridge finance).
- Liberalization effect: With MPBF withdrawn, lending-discipline instructions (appraisal, sanction, monitoring, utilization) are no longer mandatory, though banks may include such guidelines in their own policies.
## Forms of Bank Credit
| Form | Description |
|---|---|
| Cash Credit | Continuous credit facility; borrower cannot exceed the sanctioned limit |
| Bank Overdraft | Short-term facility for urgent funds; bank sets limits and can call it on short notice |
| Bills Discounting | Company draws a bill on the buyer and discounts it with the bank; bank sets the discounting limit |
| Bills Acceptance | Company draws a bill on the bank; the bank accepts it, committing to pay on a future date |
| Line of Credit | Bank's commitment to lend up to a maximum amount on demand |
| Letter of Credit | Bank guarantees payment / negotiates documents on behalf of a customer under specified terms |
| Bank Guarantees | Bank guarantees payment to a third party (beneficiary) on behalf of its client |