I. G. Patel, the governor of the Reserve Bank of India in late 1979 established a working group to review the credit system and recommend necessary reforms for better credit management, particularly with regard to excessive reliance on cash credit. The committee was chaired by K. B. Chore, Additional Chief Officer at the Reserve Bank of India. Committee members included S. P. Chandravarkar (Senior Deputy General Manager of Union Bank of India); V. Mahadevan (General Manager at State Bank of India); R. P. Vaidya (Deputy General Manager at Bank of India); M. Tyagarajan (Director of Economics Department at RBI); and M. L. Isanu (Joint Chief Officer at Department of Banking Operations and Development at RBI and Member-Secretary).

The Indian economy during the late 1970s was marked by fluctuations in industrial production and by financial instability, which created a pressing need for better credit policies to support industrial growth and manage inflation. The cash credit system, predominant in India, accounted for over half of total credit issued by banks. For instance, in June 1973, cash credits and overdrafts formed around 57 percent of the total credit limits sanctioned by scheduled banks, which slightly decreased to 51 percent by June 1977 because of an increase in term loans and bills. The Reserve Bank of India’s introduction of credit-control measures, such as the Credit Authorisation Scheme, aimed to regulate fund flow and ensure efficient credit use. Despite these measures, a significant gap persisted between the sanctioned credit limits and their actual utilization, averaging around one-third of the limits.

The committee’s findings highlighted several reasons for this persistent gap. There were substantial delays between the application and sanctioning of credit limits, often taking several months, leading borrowers to inflate their credit demands to cover potential future needs. For example, credit utilization for accounts with limits between Rs. 10 lakhs and Rs. 1 crore increased from 69 percent in November 1978 to 73 percent in March 1979. Credit utilization for accounts with limits of Rs. 1 crore and above varied, with some accounts showing an increase from 61 to 80 percent and others a decrease from 61 to 41 percent. Public sector units had lower utilization rates (50–55 percent) compared to the private sector (around 70 percent). Additionally, economic uncertainties concerning matters such as power cuts, transport bottlenecks, and changes in import policies led borrowers to overestimate their credit needs. The assessment techniques used by banks, based on projections, further contributed to inflated credit limits. Industries such as petroleum, cement, and electricity generation consistently showed low utilization, while paper, leather, and engineering industries exhibited high utilization.

The committee recommended several measures to address these inefficiencies. It proposed refining the cash credit system by encouraging the use of short-term loans and bill finance over cash credit. Borrowers were to submit quarterly statements projecting their credit requirements, with penalties for significant overuse or underuse. The committee also suggested increasing owners’ contribution to working capital and shifting borrowers to the Second Method of Lending, which required a higher current ratio, to reduce reliance on bank borrowings and improve financial discipline. Additionally, developing a bill market in India was recommended to promote better inventory control and planning, with part of the cash credit limit against raw materials given via drawee bills. These proposed regulations aimed to make the banking system more efficient and responsive to economic changes, facilitating easier and more effective credit access for businesses, despite some initial adjustments required by borrowers.

The Chore Committee’s accepted recommendations included obtaining quarterly statements from borrowers with limits over Rs. 50 lakhs, annual reviews of limits above Rs. 10 lakhs, charging penalty interest for late submissions, and setting separate peak/nonpeak credit limits. Additionally, temporary limits were discouraged with higher interest rates. The recommendation to bifurcate cash credit accounts into demand loans and cash credit components was not accepted.

The Chore Committee addressed issues in the cash credit system, such as inflated credit limits, underutilization, and delays in sanctioning. Its recommendations aimed to promote financial discipline, reduce reliance on cash credit, and enhance credit management through measures like quarterly projections, penalties for misuse, and the promotion of alternative financing methods.