The committee’s hearing followed the report from the Auditor-General for Scotland, which revealed that 34 of the 47 colleges in 1999-2000 had deficits totalling pound;18 million.

But the funding council forecasts college deficits will fall to pound;2.4 million by 2003-04, just 0.6 per cent of their income, and pound;1.1 million of this is from just one college.

The audit committee probed at length whether the funding council had systems in place to ensure problems did not escalate and Professor Sizer declared confidently: “The overall trend is improving, recovery plans are being implemented, liquidity is much more effectively managed than in the past and deficits are coming down.”

He added: “We are now anticipating problems. And if there are problems, principals tell us and they tell their boards. They don’t sit on them. So we have changed the culture.”

Liam McCabe, director of financial appraisal and monitoring at the funding council, described the position as a “no surprises culture”. The council’s approach, he said, is to strengthen colleges’ capability to deal with problems, particularly in their financial management.

Mr McCabe made it clear that in his opinion the council was not a soft touch: “We’re not a bank.”

Pressed by members of the audit committee to explain how the funding council sets about analysing the financial health of colleges, he described its approach as a balance of “objective analysis and professional judgment”.

The committee did not appear to be convinced that the council had enough powers, an issue which is to be the subject of a Scottish Executive review.

But Professor Sizer said that it had some “indirect levers” - the council could not shape college recovery plans, for example, but it did have the power to approve borrowings and would be unlikely to do so if it was not happy with a recovery plan.