Unit VI: Financing of Working Capital | Financial Management & Economics Finance: CA Intermediate (Old Scheme) PDF Download

 Page 1


10.95 
MANAGEMENT OF WORKING CAPITAL 
UNIT - VI 
FINANCING OF WORKING CAPITAL  
 10.26 INTRODUCTION 
After determining the amount of working capital required, the next step to be taken 
by the finance manager is to arrange the funds.   
As discussed earlier, it is advisable that the finance manager bifurcate the working 
capital requirements between the permanent working capital and temporary 
working capital.   
The permanent working capital is always needed irrespective of sales fluctuation;
hence it should be financed by the long-term sources such as debt and equity.  On 
the contrary the temporary working capital may be financed by the short-term 
sources of finance. 
Broadly speaking, the working capital finance may be classified between the two 
categories: 
(i) Spontaneous sources; and 
(ii) Negotiable sources. 
Spontaneous Sources: Spontaneous sources of finance are those which naturally 
arise in the course of business operations.  Trade credit, credit from employees, 
credit from suppliers of services, etc. are some of the examples which may be 
quoted in this respect. 
Negotiated Sources: On the other hand, the negotiated sources, as the name 
implies, are those which have to be specifically negotiated with lenders say, 
commercial banks, financial institutions, general public etc. 
The finance manager has to be very careful while selecting a particular source, or a 
combination thereof for financing of working capital.  Generally, the following 
parameters will guide his decisions in this respect: 
(i) Cost factor 
(ii) Impact on credit rating 
(iii) Feasibility 
(iv) Reliability 
Page 2


10.95 
MANAGEMENT OF WORKING CAPITAL 
UNIT - VI 
FINANCING OF WORKING CAPITAL  
 10.26 INTRODUCTION 
After determining the amount of working capital required, the next step to be taken 
by the finance manager is to arrange the funds.   
As discussed earlier, it is advisable that the finance manager bifurcate the working 
capital requirements between the permanent working capital and temporary 
working capital.   
The permanent working capital is always needed irrespective of sales fluctuation;
hence it should be financed by the long-term sources such as debt and equity.  On 
the contrary the temporary working capital may be financed by the short-term 
sources of finance. 
Broadly speaking, the working capital finance may be classified between the two 
categories: 
(i) Spontaneous sources; and 
(ii) Negotiable sources. 
Spontaneous Sources: Spontaneous sources of finance are those which naturally 
arise in the course of business operations.  Trade credit, credit from employees, 
credit from suppliers of services, etc. are some of the examples which may be 
quoted in this respect. 
Negotiated Sources: On the other hand, the negotiated sources, as the name 
implies, are those which have to be specifically negotiated with lenders say, 
commercial banks, financial institutions, general public etc. 
The finance manager has to be very careful while selecting a particular source, or a 
combination thereof for financing of working capital.  Generally, the following 
parameters will guide his decisions in this respect: 
(i) Cost factor 
(ii) Impact on credit rating 
(iii) Feasibility 
(iv) Reliability 
 
 
10.96 
FINANCIAL MANAGEMENT  
(v) Restrictions 
(vi) Hedging approach or matching approach i.e., Financing of assets with the 
same maturity as of assets. 
 10.27 SOURCES OF FINANCE 
10.27.1 Spontaneous Sources of Finance 
(a) Trade Credit: As outlined above trade credit is a spontaneous source of 
finance which is normally extended to the purchaser organization by the sellers or 
services providers.  This source of financing working capital is more important since 
it contributes to about one-third of the total short-term requirements.  The 
dependence on this source is higher due to lesser cost of finance as compared with 
other sources.  Trade credit is guaranteed when a company acquires supplies, 
merchandise or materials and does not pay immediately.  If a buyer is able to get 
the credit without completing much formality, it is termed as ‘open account trade 
credit.’ 
(b) Bills Payable: On the other hand, in the case of “Bills Payable” the purchaser 
will have to give a written promise to pay the amount of the bill/invoice either on 
demand or at a fixed future date to the seller or the bearer of the note. 
Due to its simplicity, easy availability and lesser explicit cost, the dependence on 
this source is much more in all small or big organizations.  Especially, for small 
enterprises this form of credit is more helpful to small and medium enterprises.  
The amount of such financing depends on the volume of purchases and the 
payment timing. 
(c) Accrued Expenses: Another spontaneous source of short-term financing is 
the accrued expenses or the outstanding expenses liabilities.  The accrued expenses 
refer to the services availed by the firm, but the payment for which has yet to be 
made.  It is a built in and an automatic source of finance as most of the services 
like wages, salaries, taxes, duties etc., are paid at the end of the period.  The accrued 
expenses represent an interest free source of finance.  There is no explicit or implicit 
cost associated with the accrued expenses and the firm can ensure liquidity by 
accruing these expenses. 
10.27.2 Inter-corporate Loans and Deposits 
Sometimes, organizations having surplus funds invest for short-term period with 
other organizations.  The rate of interest will be higher than the bank rate of interest 
Page 3


10.95 
MANAGEMENT OF WORKING CAPITAL 
UNIT - VI 
FINANCING OF WORKING CAPITAL  
 10.26 INTRODUCTION 
After determining the amount of working capital required, the next step to be taken 
by the finance manager is to arrange the funds.   
As discussed earlier, it is advisable that the finance manager bifurcate the working 
capital requirements between the permanent working capital and temporary 
working capital.   
The permanent working capital is always needed irrespective of sales fluctuation;
hence it should be financed by the long-term sources such as debt and equity.  On 
the contrary the temporary working capital may be financed by the short-term 
sources of finance. 
Broadly speaking, the working capital finance may be classified between the two 
categories: 
(i) Spontaneous sources; and 
(ii) Negotiable sources. 
Spontaneous Sources: Spontaneous sources of finance are those which naturally 
arise in the course of business operations.  Trade credit, credit from employees, 
credit from suppliers of services, etc. are some of the examples which may be 
quoted in this respect. 
Negotiated Sources: On the other hand, the negotiated sources, as the name 
implies, are those which have to be specifically negotiated with lenders say, 
commercial banks, financial institutions, general public etc. 
The finance manager has to be very careful while selecting a particular source, or a 
combination thereof for financing of working capital.  Generally, the following 
parameters will guide his decisions in this respect: 
(i) Cost factor 
(ii) Impact on credit rating 
(iii) Feasibility 
(iv) Reliability 
 
 
10.96 
FINANCIAL MANAGEMENT  
(v) Restrictions 
(vi) Hedging approach or matching approach i.e., Financing of assets with the 
same maturity as of assets. 
 10.27 SOURCES OF FINANCE 
10.27.1 Spontaneous Sources of Finance 
(a) Trade Credit: As outlined above trade credit is a spontaneous source of 
finance which is normally extended to the purchaser organization by the sellers or 
services providers.  This source of financing working capital is more important since 
it contributes to about one-third of the total short-term requirements.  The 
dependence on this source is higher due to lesser cost of finance as compared with 
other sources.  Trade credit is guaranteed when a company acquires supplies, 
merchandise or materials and does not pay immediately.  If a buyer is able to get 
the credit without completing much formality, it is termed as ‘open account trade 
credit.’ 
(b) Bills Payable: On the other hand, in the case of “Bills Payable” the purchaser 
will have to give a written promise to pay the amount of the bill/invoice either on 
demand or at a fixed future date to the seller or the bearer of the note. 
Due to its simplicity, easy availability and lesser explicit cost, the dependence on 
this source is much more in all small or big organizations.  Especially, for small 
enterprises this form of credit is more helpful to small and medium enterprises.  
The amount of such financing depends on the volume of purchases and the 
payment timing. 
(c) Accrued Expenses: Another spontaneous source of short-term financing is 
the accrued expenses or the outstanding expenses liabilities.  The accrued expenses 
refer to the services availed by the firm, but the payment for which has yet to be 
made.  It is a built in and an automatic source of finance as most of the services 
like wages, salaries, taxes, duties etc., are paid at the end of the period.  The accrued 
expenses represent an interest free source of finance.  There is no explicit or implicit 
cost associated with the accrued expenses and the firm can ensure liquidity by 
accruing these expenses. 
10.27.2 Inter-corporate Loans and Deposits 
Sometimes, organizations having surplus funds invest for short-term period with 
other organizations.  The rate of interest will be higher than the bank rate of interest 
 
 
10.97 
 
MANAGEMENT OF WORKING CAPITAL 
and depends on the financial soundness of the borrower company.  This source of 
finance reduces dependence on bank financing.  
10.27.3 Commercial Papers 
Commercial Paper (CP) is an unsecured promissory note issued by a firm to raise 
funds for a short period.  This is an instrument that enables highly rated corporate 
borrowers for short-term borrowings and provides an additional financial 
instrument to investors with a freely negotiable interest rate.  The maturity period 
ranges from minimum 7 days to less than 1 year from the date of issue.  CP can be 
issued in denomination of ` 5 lakhs or multiples thereof. 
Advantages of CP: From the point of the issuing company, CP provides the following 
benefits: 
(a) CP is sold on an unsecured basis and does not contain any restrictive 
conditions. 
(b) Maturing CP can be repaid by selling new CP and thus can provide a 
continuous source of funds. 
(c) Maturity of CP can be tailored to suit the requirement of the issuing firm. 
(d) CP can be issued as a source of fund even when money market is tight. 
(e) Generally, the cost of CP to the issuing firm is lower than the cost of 
commercial bank loans. 
However, CP as a source of financing has its own limitations: 
(i) Only highly credit rating firms can use it.  New and moderately rated firm 
generally are not in a position to issue CP. 
(ii) CP can neither be redeemed before maturity nor can be extended beyond 
maturity. 
10.27.4 Funds Generated from Operations 
Funds generated from operations, during an accounting period, increase working 
capital by an equivalent amount.  The two main components of funds generated 
from operations are profit and depreciation.  Working capital will increase by the 
extent of funds generated from operations.  Students may refer to funds flow 
statement given earlier in this chapter. 
  
Page 4


10.95 
MANAGEMENT OF WORKING CAPITAL 
UNIT - VI 
FINANCING OF WORKING CAPITAL  
 10.26 INTRODUCTION 
After determining the amount of working capital required, the next step to be taken 
by the finance manager is to arrange the funds.   
As discussed earlier, it is advisable that the finance manager bifurcate the working 
capital requirements between the permanent working capital and temporary 
working capital.   
The permanent working capital is always needed irrespective of sales fluctuation;
hence it should be financed by the long-term sources such as debt and equity.  On 
the contrary the temporary working capital may be financed by the short-term 
sources of finance. 
Broadly speaking, the working capital finance may be classified between the two 
categories: 
(i) Spontaneous sources; and 
(ii) Negotiable sources. 
Spontaneous Sources: Spontaneous sources of finance are those which naturally 
arise in the course of business operations.  Trade credit, credit from employees, 
credit from suppliers of services, etc. are some of the examples which may be 
quoted in this respect. 
Negotiated Sources: On the other hand, the negotiated sources, as the name 
implies, are those which have to be specifically negotiated with lenders say, 
commercial banks, financial institutions, general public etc. 
The finance manager has to be very careful while selecting a particular source, or a 
combination thereof for financing of working capital.  Generally, the following 
parameters will guide his decisions in this respect: 
(i) Cost factor 
(ii) Impact on credit rating 
(iii) Feasibility 
(iv) Reliability 
 
 
10.96 
FINANCIAL MANAGEMENT  
(v) Restrictions 
(vi) Hedging approach or matching approach i.e., Financing of assets with the 
same maturity as of assets. 
 10.27 SOURCES OF FINANCE 
10.27.1 Spontaneous Sources of Finance 
(a) Trade Credit: As outlined above trade credit is a spontaneous source of 
finance which is normally extended to the purchaser organization by the sellers or 
services providers.  This source of financing working capital is more important since 
it contributes to about one-third of the total short-term requirements.  The 
dependence on this source is higher due to lesser cost of finance as compared with 
other sources.  Trade credit is guaranteed when a company acquires supplies, 
merchandise or materials and does not pay immediately.  If a buyer is able to get 
the credit without completing much formality, it is termed as ‘open account trade 
credit.’ 
(b) Bills Payable: On the other hand, in the case of “Bills Payable” the purchaser 
will have to give a written promise to pay the amount of the bill/invoice either on 
demand or at a fixed future date to the seller or the bearer of the note. 
Due to its simplicity, easy availability and lesser explicit cost, the dependence on 
this source is much more in all small or big organizations.  Especially, for small 
enterprises this form of credit is more helpful to small and medium enterprises.  
The amount of such financing depends on the volume of purchases and the 
payment timing. 
(c) Accrued Expenses: Another spontaneous source of short-term financing is 
the accrued expenses or the outstanding expenses liabilities.  The accrued expenses 
refer to the services availed by the firm, but the payment for which has yet to be 
made.  It is a built in and an automatic source of finance as most of the services 
like wages, salaries, taxes, duties etc., are paid at the end of the period.  The accrued 
expenses represent an interest free source of finance.  There is no explicit or implicit 
cost associated with the accrued expenses and the firm can ensure liquidity by 
accruing these expenses. 
10.27.2 Inter-corporate Loans and Deposits 
Sometimes, organizations having surplus funds invest for short-term period with 
other organizations.  The rate of interest will be higher than the bank rate of interest 
 
 
10.97 
 
MANAGEMENT OF WORKING CAPITAL 
and depends on the financial soundness of the borrower company.  This source of 
finance reduces dependence on bank financing.  
10.27.3 Commercial Papers 
Commercial Paper (CP) is an unsecured promissory note issued by a firm to raise 
funds for a short period.  This is an instrument that enables highly rated corporate 
borrowers for short-term borrowings and provides an additional financial 
instrument to investors with a freely negotiable interest rate.  The maturity period 
ranges from minimum 7 days to less than 1 year from the date of issue.  CP can be 
issued in denomination of ` 5 lakhs or multiples thereof. 
Advantages of CP: From the point of the issuing company, CP provides the following 
benefits: 
(a) CP is sold on an unsecured basis and does not contain any restrictive 
conditions. 
(b) Maturing CP can be repaid by selling new CP and thus can provide a 
continuous source of funds. 
(c) Maturity of CP can be tailored to suit the requirement of the issuing firm. 
(d) CP can be issued as a source of fund even when money market is tight. 
(e) Generally, the cost of CP to the issuing firm is lower than the cost of 
commercial bank loans. 
However, CP as a source of financing has its own limitations: 
(i) Only highly credit rating firms can use it.  New and moderately rated firm 
generally are not in a position to issue CP. 
(ii) CP can neither be redeemed before maturity nor can be extended beyond 
maturity. 
10.27.4 Funds Generated from Operations 
Funds generated from operations, during an accounting period, increase working 
capital by an equivalent amount.  The two main components of funds generated 
from operations are profit and depreciation.  Working capital will increase by the 
extent of funds generated from operations.  Students may refer to funds flow 
statement given earlier in this chapter. 
  
  
 
10.98 
FINANCIAL MANAGEMENT  
10.27.5 Public Deposits 
Deposits from the public are one of the important sources of finance particularly 
for well-established big companies with huge capital base for short and medium-
term.   
10.27.6 Bills Discounting 
Bill discounting is recognized as an important short-term Financial Instrument and 
it is widely used method of short-term financing.  In a process of bill discounting, 
the supplier of goods draws a bill of exchange with direction to the buyer to pay a 
certain amount of money after a certain period, and gets its acceptance from the 
buyer or drawee of the bill.   
10.27.7 Bill Rediscounting Scheme 
The Bill rediscounting Scheme was introduced by Reserve Bank of India with effect 
from 1
st
 November, 1970 in order to extend the use of the bill of exchange as an 
instrument for providing credit and the creation of a bill market in India with a 
facility for the rediscounting of eligible bills by banks.  Under the bills rediscounting 
scheme, all licensed scheduled banks are eligible to offer bills of exchange to the 
Reserve Bank for rediscount. 
10.27.8 Factoring 
Students may refer to the unit on Receivable Management wherein the concept of 
factoring has been discussed.  Factoring is a method of financing whereby a firm 
sells its trade debts at a discount to a financial institution.  In other words, factoring 
is a continuous arrangement between a financial institution, (namely the factor) and 
a firm (namely the client) which sells goods and services to trade customers on 
credit.  As per this arrangement, the factor purchases the client’s trade debts 
including accounts receivables either with or without recourse to the client, and 
thus, exercises control over the credit extended to the customers and administers 
the sales ledger of his client.  To put it in a layman’s language, a factor is an agent 
who collects the dues of his client for a certain fee.   
The differences between Factoring and Bills discounting are as follows: 
(i) Factoring is called as ‘Invoice factoring’ whereas bills discounting is known as 
“Invoice discounting”. 
(ii) In factoring the parties are known as client, factor and debtor whereas in bills 
discounting they are known as Drawer, Drawee and Payee. 
Page 5


10.95 
MANAGEMENT OF WORKING CAPITAL 
UNIT - VI 
FINANCING OF WORKING CAPITAL  
 10.26 INTRODUCTION 
After determining the amount of working capital required, the next step to be taken 
by the finance manager is to arrange the funds.   
As discussed earlier, it is advisable that the finance manager bifurcate the working 
capital requirements between the permanent working capital and temporary 
working capital.   
The permanent working capital is always needed irrespective of sales fluctuation;
hence it should be financed by the long-term sources such as debt and equity.  On 
the contrary the temporary working capital may be financed by the short-term 
sources of finance. 
Broadly speaking, the working capital finance may be classified between the two 
categories: 
(i) Spontaneous sources; and 
(ii) Negotiable sources. 
Spontaneous Sources: Spontaneous sources of finance are those which naturally 
arise in the course of business operations.  Trade credit, credit from employees, 
credit from suppliers of services, etc. are some of the examples which may be 
quoted in this respect. 
Negotiated Sources: On the other hand, the negotiated sources, as the name 
implies, are those which have to be specifically negotiated with lenders say, 
commercial banks, financial institutions, general public etc. 
The finance manager has to be very careful while selecting a particular source, or a 
combination thereof for financing of working capital.  Generally, the following 
parameters will guide his decisions in this respect: 
(i) Cost factor 
(ii) Impact on credit rating 
(iii) Feasibility 
(iv) Reliability 
 
 
10.96 
FINANCIAL MANAGEMENT  
(v) Restrictions 
(vi) Hedging approach or matching approach i.e., Financing of assets with the 
same maturity as of assets. 
 10.27 SOURCES OF FINANCE 
10.27.1 Spontaneous Sources of Finance 
(a) Trade Credit: As outlined above trade credit is a spontaneous source of 
finance which is normally extended to the purchaser organization by the sellers or 
services providers.  This source of financing working capital is more important since 
it contributes to about one-third of the total short-term requirements.  The 
dependence on this source is higher due to lesser cost of finance as compared with 
other sources.  Trade credit is guaranteed when a company acquires supplies, 
merchandise or materials and does not pay immediately.  If a buyer is able to get 
the credit without completing much formality, it is termed as ‘open account trade 
credit.’ 
(b) Bills Payable: On the other hand, in the case of “Bills Payable” the purchaser 
will have to give a written promise to pay the amount of the bill/invoice either on 
demand or at a fixed future date to the seller or the bearer of the note. 
Due to its simplicity, easy availability and lesser explicit cost, the dependence on 
this source is much more in all small or big organizations.  Especially, for small 
enterprises this form of credit is more helpful to small and medium enterprises.  
The amount of such financing depends on the volume of purchases and the 
payment timing. 
(c) Accrued Expenses: Another spontaneous source of short-term financing is 
the accrued expenses or the outstanding expenses liabilities.  The accrued expenses 
refer to the services availed by the firm, but the payment for which has yet to be 
made.  It is a built in and an automatic source of finance as most of the services 
like wages, salaries, taxes, duties etc., are paid at the end of the period.  The accrued 
expenses represent an interest free source of finance.  There is no explicit or implicit 
cost associated with the accrued expenses and the firm can ensure liquidity by 
accruing these expenses. 
10.27.2 Inter-corporate Loans and Deposits 
Sometimes, organizations having surplus funds invest for short-term period with 
other organizations.  The rate of interest will be higher than the bank rate of interest 
 
 
10.97 
 
MANAGEMENT OF WORKING CAPITAL 
and depends on the financial soundness of the borrower company.  This source of 
finance reduces dependence on bank financing.  
10.27.3 Commercial Papers 
Commercial Paper (CP) is an unsecured promissory note issued by a firm to raise 
funds for a short period.  This is an instrument that enables highly rated corporate 
borrowers for short-term borrowings and provides an additional financial 
instrument to investors with a freely negotiable interest rate.  The maturity period 
ranges from minimum 7 days to less than 1 year from the date of issue.  CP can be 
issued in denomination of ` 5 lakhs or multiples thereof. 
Advantages of CP: From the point of the issuing company, CP provides the following 
benefits: 
(a) CP is sold on an unsecured basis and does not contain any restrictive 
conditions. 
(b) Maturing CP can be repaid by selling new CP and thus can provide a 
continuous source of funds. 
(c) Maturity of CP can be tailored to suit the requirement of the issuing firm. 
(d) CP can be issued as a source of fund even when money market is tight. 
(e) Generally, the cost of CP to the issuing firm is lower than the cost of 
commercial bank loans. 
However, CP as a source of financing has its own limitations: 
(i) Only highly credit rating firms can use it.  New and moderately rated firm 
generally are not in a position to issue CP. 
(ii) CP can neither be redeemed before maturity nor can be extended beyond 
maturity. 
10.27.4 Funds Generated from Operations 
Funds generated from operations, during an accounting period, increase working 
capital by an equivalent amount.  The two main components of funds generated 
from operations are profit and depreciation.  Working capital will increase by the 
extent of funds generated from operations.  Students may refer to funds flow 
statement given earlier in this chapter. 
  
  
 
10.98 
FINANCIAL MANAGEMENT  
10.27.5 Public Deposits 
Deposits from the public are one of the important sources of finance particularly 
for well-established big companies with huge capital base for short and medium-
term.   
10.27.6 Bills Discounting 
Bill discounting is recognized as an important short-term Financial Instrument and 
it is widely used method of short-term financing.  In a process of bill discounting, 
the supplier of goods draws a bill of exchange with direction to the buyer to pay a 
certain amount of money after a certain period, and gets its acceptance from the 
buyer or drawee of the bill.   
10.27.7 Bill Rediscounting Scheme 
The Bill rediscounting Scheme was introduced by Reserve Bank of India with effect 
from 1
st
 November, 1970 in order to extend the use of the bill of exchange as an 
instrument for providing credit and the creation of a bill market in India with a 
facility for the rediscounting of eligible bills by banks.  Under the bills rediscounting 
scheme, all licensed scheduled banks are eligible to offer bills of exchange to the 
Reserve Bank for rediscount. 
10.27.8 Factoring 
Students may refer to the unit on Receivable Management wherein the concept of 
factoring has been discussed.  Factoring is a method of financing whereby a firm 
sells its trade debts at a discount to a financial institution.  In other words, factoring 
is a continuous arrangement between a financial institution, (namely the factor) and 
a firm (namely the client) which sells goods and services to trade customers on 
credit.  As per this arrangement, the factor purchases the client’s trade debts 
including accounts receivables either with or without recourse to the client, and 
thus, exercises control over the credit extended to the customers and administers 
the sales ledger of his client.  To put it in a layman’s language, a factor is an agent 
who collects the dues of his client for a certain fee.   
The differences between Factoring and Bills discounting are as follows: 
(i) Factoring is called as ‘Invoice factoring’ whereas bills discounting is known as 
“Invoice discounting”. 
(ii) In factoring the parties are known as client, factor and debtor whereas in bills 
discounting they are known as Drawer, Drawee and Payee. 
10.99 
MANAGEMENT OF WORKING CAPITAL 
(iii) Factoring is a sort of management of book debts whereas bills discounting is 
a sort of borrowing from commercial banks. 
(iv) For factoring there is no specific Act; whereas in the case of bills discounting, 
the Negotiable Instrument Act is applicable.   
 10.28 WORKING CAPITAL FINANCE FROM BANKS 
Banks in India today constitute the major suppliers of working capital credit to any 
business activity.  Recently, some term lending financial institutions have also 
announced schemes for working capital financing.  The two committees viz., 
Tandon Committee and Chore Committee have evolved definite guidelines and 
parameters in working capital financing, which have laid the foundations for 
development and innovation in the area. 
10.28.1 Instructions on Working Capital Finance by Banks 
Assessment of Working Capital  
? Reserve Bank of India has withdrawn the prescription, in regard to assessment 
of working capital needs, based on the concept of Maximum Permissible Bank 
Finance (MPBF), in April 1997.  Banks are now free to evolve, with the approval 
of their Boards, methods for assessing the working capital requirements of 
borrowers, within the prudential guidelines and exposure norms prescribed.  
Banks, however, have to take into account Reserve Bank’s instructions relating 
to directed credit (such as priority sector, export, etc.), and prohibition of 
credit (such as bridge finance, rediscounting of bills earlier discounted by 
NBFCs) while formulating their lending policies. 
? With the above liberalizations, all the instructions relating to MPBF issued by 
RBI from time to time stand withdrawn.  Further, various 
instructions/guidelines issued to banks with objective of ensuring lending 
discipline in appraisal, sanction, monitoring and utilization of bank finance 
cease to be mandatory.  However, banks have the option of incorporating 
such of the instructions/guidelines as are considered necessary in their 
lending policies/procedures.