Nayak Committee (Turnover Method)

The Nayak Committee and its recommendation of the Turnover Method represent an important milestone in the evolution of credit appraisal for small-scale industries and micro, small and medium enterprises in India. Constituted to address long-standing challenges in working capital finance, the committee sought to simplify lending norms, improve credit flow, and strengthen the role of banks in supporting productive economic activity. Its recommendations have had lasting implications for banking practices, financial inclusion, and the structure of the Indian economy.

Background and Constitution of the Nayak Committee

The Nayak Committee, formally known as the Committee to Examine the Adequacy of Institutional Credit to the Small Scale Industries Sector, was set up in the early 1990s under the chairmanship of P. R. Nayak. The committee was constituted at a time when India was undergoing significant economic transition, marked by financial sector reforms, liberalisation, and a growing emphasis on efficiency and competitiveness.
Small-scale industries and emerging business units faced persistent difficulties in accessing timely and adequate bank finance. Existing methods of working capital assessment were often complex, documentation-intensive, and poorly suited to the operational realities of smaller enterprises. The Nayak Committee was tasked with reviewing these issues and recommending measures to ensure smoother and more realistic credit delivery.

Rationale for the Turnover Method

Before the Nayak Committee’s recommendations, working capital finance was largely governed by traditional methods such as the cash budget system and the Maximum Permissible Bank Finance framework. These approaches required detailed projections, inventory norms, and financial statements, which many small businesses found difficult to prepare.
The committee observed that small enterprises typically operated on short operating cycles, relied heavily on sales turnover, and lacked sophisticated accounting systems. In this context, linking working capital limits directly to turnover was considered a practical and transparent alternative. The Turnover Method was therefore proposed as a simplified and standardised approach to assess credit requirements.

Concept and Mechanics of the Turnover Method

Under the Turnover Method, the working capital requirement of a borrower is assessed as a fixed percentage of the projected annual turnover. The Nayak Committee recommended that banks should provide working capital finance up to 25 per cent of the projected annual sales turnover.
Within this framework, it was envisaged that:

• Borrowers would contribute at least 5 per cent of turnover from their own sources
• Banks would finance the remaining 20 per cent as working capital

This approach was designed to ensure adequate liquidity for business operations while also encouraging borrower discipline and financial participation. By focusing on turnover rather than detailed asset and inventory calculations, the method aimed to reduce procedural delays and administrative burden.

Adoption by Banks and Regulatory Support

The Turnover Method gained regulatory acceptance and was recommended for adoption by scheduled commercial banks, particularly for small-scale and small business borrowers. The Reserve Bank of India endorsed the approach as part of its broader efforts to enhance credit delivery to priority sectors.
Banks were given flexibility to apply the Turnover Method depending on the size, nature, and risk profile of the borrower. For units with relatively simple operations and predictable sales patterns, the method became a preferred tool for working capital assessment.
Over time, the approach was extended beyond traditional small-scale industries to include traders, service enterprises, and other small business entities.

Impact on Banking Practices

The introduction of the Turnover Method significantly influenced banking operations and credit appraisal practices. It simplified loan processing, reduced reliance on complex financial projections, and enabled faster decision-making. This was particularly beneficial for branch-level banking, where officers often dealt with large volumes of small borrowers.
By standardising working capital assessment, the method improved consistency and transparency in lending decisions. Borrowers gained clearer expectations regarding eligibility and credit limits, reducing uncertainty and disputes.
For banks, the Turnover Method also helped in better portfolio management by linking credit exposure to business activity levels. This alignment between sales performance and financing contributed to improved monitoring and early identification of stress.

Significance for Small Enterprises and Financial Inclusion

From the perspective of small enterprises, the Nayak Committee’s recommendations marked a shift towards borrower-friendly banking. Easier access to working capital enabled businesses to manage day-to-day operations, purchase raw materials, and meet short-term obligations without excessive dependence on informal credit sources.
The method supported financial inclusion by bringing a larger number of small units into the formal banking system. Enterprises that previously relied on moneylenders or trade credit could now access institutional finance on more predictable terms.
This expansion of formal credit had positive spillover effects on employment generation, income stability, and local economic development, especially in semi-urban and rural areas.

Role in the Indian Economy

At the macroeconomic level, the Turnover Method contributed to strengthening the link between banking and real economic activity. By ensuring smoother credit flow to small businesses, banks supported sectors that are labour-intensive and critical for balanced growth.
Small and medium enterprises play a vital role in India’s industrial output, exports, and employment. Improved access to working capital enhanced their productivity and competitiveness, supporting broader economic objectives such as inclusive growth and regional development.
The method also aligned with policy goals of decentralised industrialisation by enabling credit access beyond major urban centres.