Credit - Monitoring

Credit - MonitoringCredit - Monitoring

Why Monitoring / follow upWhy Monitoring / follow up

The basic objective of any follow up is to The basic objective of any follow up is to ensure safety of the advances granted by ensure safety of the advances granted by the bank.the bank.

In spite of various changes in the way in In spite of various changes in the way in which credit products are delivered, the which credit products are delivered, the banks will continue to be concerned about banks will continue to be concerned about the safety of their funds.the safety of their funds.

WHY ?WHY ?

The funds lent by the bankers come from The funds lent by the bankers come from the deposits kept by the general public the deposits kept by the general public and the bankers are custodians / trustees and the bankers are custodians / trustees of these funds. The banker is liable to of these funds. The banker is liable to repay the deposit money on demand.repay the deposit money on demand.

The other role that is expected from the The other role that is expected from the banker is that of an advisor or a guide to banker is that of an advisor or a guide to the customer. This role has gained more the customer. This role has gained more importance after the increase in industrial importance after the increase in industrial sickness. sickness.

The Banker employs various measures The Banker employs various measures to ensure the safety of funds lent liketo ensure the safety of funds lent like

1.1. Comprehensive Credit AppraisalComprehensive Credit Appraisal2.2. Perfect DocumentationPerfect Documentation3.3. Ensuring end use of funds.Ensuring end use of funds.4.4. Insisting on some collateral / main Insisting on some collateral / main

securitysecurity5.5. Monitoring and regular follow up.Monitoring and regular follow up. Today we are focussing on Monitoring. Today we are focussing on Monitoring.

Monitoring is a broader concept and Monitoring is a broader concept and includes inspection and much more.includes inspection and much more.

Credit Monitoring – Key ObjectivesCredit Monitoring – Key Objectives

Components of Credit MonitoringComponents of Credit Monitoring

Monitoring

Pre sanction Inspection –Retail Loans

Commercial loans

Post SanctionPre Disbursement

Inspection

Post disbursement Regular

Follow up andInspection

Pre – sanction InspectionPre – sanction Inspection

Retail Loans : Decision to lend is taken Retail Loans : Decision to lend is taken after verifying the repaying capacity of the after verifying the repaying capacity of the borrower, which in turn is dependent on borrower, which in turn is dependent on the earning capacity and hence inspection the earning capacity and hence inspection before sanction is rare. However, if the before sanction is rare. However, if the exposure is more, a visit to the residence / exposure is more, a visit to the residence / office of the borrower is made.office of the borrower is made.

e.g.e.g.

Commercial Advances : Inspection report Commercial Advances : Inspection report forms an important part of the credit forms an important part of the credit appraisal note put up to the higher appraisal note put up to the higher management for approval.management for approval.

Generally the visit is carried out by the Generally the visit is carried out by the officer from credit department assessing officer from credit department assessing the proposal along with a person from the proposal along with a person from Technical cell and Credit Enquiry or Technical cell and Credit Enquiry or Investigation Department.Investigation Department.

Generally these visits are pre planned in Generally these visits are pre planned in consultation with the proposed borrower.consultation with the proposed borrower.

Sometimes they could be surprise visits.Sometimes they could be surprise visits.The credit proposal put up by the borrower The credit proposal put up by the borrower contains details about the existing set up contains details about the existing set up and his projections about the future and his projections about the future ( atleast for the period for which the credit ( atleast for the period for which the credit facilities are sought).facilities are sought).

The Inspection team has to compare the The Inspection team has to compare the real picture as they see at the time of visit real picture as they see at the time of visit with the details provided by the borrower with the details provided by the borrower in the project report.in the project report.

The aspects the team will have to focus on The aspects the team will have to focus on will be dependent on the purpose for will be dependent on the purpose for which the finance is sought.which the finance is sought.

Some of the aspects areSome of the aspects are

1. Location and other details about the 1. Location and other details about the premises.premises.

2.Various licenses of the unit.2.Various licenses of the unit.

3.Sanctions from Electricity Boards, 3.Sanctions from Electricity Boards, Pollution control board.Pollution control board.

4. Factory lay out, shop floor , No. of shifts4. Factory lay out, shop floor , No. of shifts

5.Condition of machineries, other fixed 5.Condition of machineries, other fixed assets.assets.

6.Storage facility for raw material, WIP and 6.Storage facility for raw material, WIP and finished stock.finished stock.

7.Safety measures taken like fire 7.Safety measures taken like fire extinguishers, protection from water extinguishers, protection from water flooding etc.flooding etc.

8.Quantity and quality of stock.8.Quantity and quality of stock.

9.Care taken while handling hazardous 9.Care taken while handling hazardous materialsmaterials

10.Scrutiny of Insurance policies.10.Scrutiny of Insurance policies.

11.Labour situation, composition of staff - 11.Labour situation, composition of staff - qualified, experienced staff.qualified, experienced staff.

12.Change in key management positions.12.Change in key management positions.

13.Purchases/ Sales returns, quality control 13.Purchases/ Sales returns, quality control

and disposal of waste.and disposal of waste.

14.Position regarding posting of accounts14.Position regarding posting of accounts

15.Position of payment of various statutory 15.Position of payment of various statutory dues, payment of government dues.dues, payment of government dues.

16. Slow moving / obsolete stocks16. Slow moving / obsolete stocks

17.Particulars of any tailor made products 17.Particulars of any tailor made products lying undelivered / rejected by the buyer.lying undelivered / rejected by the buyer.

18.Position about tax payments. Completion 18.Position about tax payments. Completion of assessment for income tax, sales tax, of assessment for income tax, sales tax, excise etc.excise etc.

19.Any points made by borrower, executives 19.Any points made by borrower, executives during discussionduring discussion

The technical expert accompanying on the The technical expert accompanying on the visit will assess the condition of machinery visit will assess the condition of machinery and other equipments, manufacturing and other equipments, manufacturing process etc.process etc.

The CED officer may visit suppliers, The CED officer may visit suppliers, clientele units to get a better judgment clientele units to get a better judgment about the claims made by the proposed about the claims made by the proposed borrower.borrower.

He may hold market enquiries to assess He may hold market enquiries to assess whether the unit can achieve projected whether the unit can achieve projected sales.sales.

Post sanction but pre disbursement Post sanction but pre disbursement inspection .inspection .

This will typically happen in case of This will typically happen in case of housing loans.housing loans.The officer should personally visit the flat The officer should personally visit the flat being sold if it is a resale proposal or a being sold if it is a resale proposal or a new flat if it is ready for occupation.new flat if it is ready for occupation.If it is a partial / progressive disbursement If it is a partial / progressive disbursement in case of flat under construction, he in case of flat under construction, he should visit the site and inspect the activity should visit the site and inspect the activity over there.over there.

In case of second sale, see the condition In case of second sale, see the condition of the premises, condition of flat in of the premises, condition of flat in particular. Some bankers insist on particular. Some bankers insist on valuation report from approved valuers. valuation report from approved valuers. This ensures that the finance given is in This ensures that the finance given is in line with the existing market conditions.line with the existing market conditions.

The officer can contact the office bearers The officer can contact the office bearers of the society and confirm the transaction/ of the society and confirm the transaction/ sale. Check if there is any other charge on sale. Check if there is any other charge on the said flat and ensure that it is free from the said flat and ensure that it is free from all encumbrancesall encumbrances

In case of a new ready to occupy flat, the In case of a new ready to occupy flat, the officer should check, approach road to the officer should check, approach road to the society,water connections, electric supply.society,water connections, electric supply.

In case of first sale, one must check the In case of first sale, one must check the NOC issued by the builder. Confirm the NOC issued by the builder. Confirm the authenticity of the signatory. authenticity of the signatory.

The flat should be clearly identifiable. The flat should be clearly identifiable. Check if a name board is displayedCheck if a name board is displayed

In case of finance for two wheeler or car In case of finance for two wheeler or car finance, the vehicle is inspectedfinance, the vehicle is inspected

Post Disbursement InspectionPost Disbursement Inspection

In case of disbursement of term loan for In case of disbursement of term loan for purchase of machinery, equipment etc, purchase of machinery, equipment etc, inspection is made immediately on inspection is made immediately on installation of the same.installation of the same.

The inspecting officer confirms the The inspecting officer confirms the brand,capacity and other specifications as brand,capacity and other specifications as per the proforma invoice.per the proforma invoice.

In case of finance for construction of In case of finance for construction of factory building, the inspecting officer factory building, the inspecting officer verifies the work completed. Banks insist verifies the work completed. Banks insist on approved architect’s certificate for work on approved architect’s certificate for work completed at the time of each completed at the time of each disbursement.disbursement.

In case of working capital limits, the In case of working capital limits, the inspection and other follow up is on inspection and other follow up is on ongoing basis. The banker needs to ongoing basis. The banker needs to monitor the performance of the unit, monitor the performance of the unit, operations in the account regularly.operations in the account regularly.

The most popular form of working capital The most popular form of working capital advance is Cash Credit / Overdraft facility. advance is Cash Credit / Overdraft facility. The charge created in such cases is that The charge created in such cases is that of hypothecation. The banker therefore, of hypothecation. The banker therefore, needs to be alert to monitor this type of needs to be alert to monitor this type of advance.advance.

Under this type of facility, it is the Under this type of facility, it is the responsibility of the borrower to ensure responsibility of the borrower to ensure that there is always inventory of adequate that there is always inventory of adequate value to cover the amount borrowed,value to cover the amount borrowed,

Monitoring Operations in the Monitoring Operations in the account.account.

Unusual cash withdrawals.Unusual cash withdrawals. Debits in the account > average monthly Debits in the account > average monthly

debitsdebits Withdrawals are made in round amount.Withdrawals are made in round amount. Limits are fully utilised.Limits are fully utilised. Not much swing in the account.Not much swing in the account. Frequent request for TOD, ad hoc.Frequent request for TOD, ad hoc.

Cheques are returned for want of funds.Cheques are returned for want of funds. Cash deposited at the end of working Cash deposited at the end of working

hours to bring the account in order.hours to bring the account in order. Request for honouring certain cheques Request for honouring certain cheques

and returning some other cheques.and returning some other cheques. Request for cheque purchase, immediate Request for cheque purchase, immediate

credit of cheques depositedcredit of cheques deposited Request to honour cheques against un-Request to honour cheques against un-

clear effects.clear effects. Request to specify reasons other than Request to specify reasons other than

insufficient funds while returning cheques.insufficient funds while returning cheques.

Stock statement AnalysisStock statement Analysis

The Tandon and Chore committees made The Tandon and Chore committees made the bankers move away from security the bankers move away from security based banking to need based banking.based banking to need based banking.

They specified industry wise norms for They specified industry wise norms for lock up of funds in various types of lock up of funds in various types of industries.industries.

As the economic freedom and As the economic freedom and globalisation created impact on each globalisation created impact on each industry. Margins came under pressure.industry. Margins came under pressure.

Each commercial unit tried to optimise the Each commercial unit tried to optimise the lock up of funds in stock and debtors. lock up of funds in stock and debtors. Tried to squeeze more credit from its Tried to squeeze more credit from its creditors.creditors.

For cash credit account each borrowal unit For cash credit account each borrowal unit is required to submit details of its lock up is required to submit details of its lock up in stock, debtors and creditors to the in stock, debtors and creditors to the Banker. The D.P. is worked out on the Banker. The D.P. is worked out on the basis of margins specified for each basis of margins specified for each category. category.

The stock statement besides the levels of The stock statement besides the levels of stock, debtors and creditors at the end of stock, debtors and creditors at the end of month, also gives various other inputs like month, also gives various other inputs like production details, WIP, purchases done production details, WIP, purchases done during the month, sales effected during the during the month, sales effected during the month, sales at cost. month, sales at cost.

The levels indicated in the previous month The levels indicated in the previous month are taken as opening balance / basis for are taken as opening balance / basis for calculating the figure for the current calculating the figure for the current month.month.

The stock statement also includes details The stock statement also includes details of debtors party wise and age wise. of debtors party wise and age wise. Debtors which are more than 6 months are Debtors which are more than 6 months are shown separately.shown separately.

Similarly creditors for purchases and any Similarly creditors for purchases and any other extra ordinary item should not be other extra ordinary item should not be clubbed.clubbed.

A banker sitting in his office by studying A banker sitting in his office by studying the stock statements submitted by the the stock statements submitted by the borrower over a period of time can detect borrower over a period of time can detect various things likevarious things like

A particular stock where no movement is A particular stock where no movement is happening for a long time.happening for a long time.

A payment from debtor is delayed for a A payment from debtor is delayed for a particular transaction.particular transaction.

The sales, purchases figures are The sales, purchases figures are manipulated.manipulated.

The sales purchases figures are in line The sales purchases figures are in line with the projections submitted by the with the projections submitted by the borrower or are they falling short?borrower or are they falling short?

Is there a consistency in valuation of Is there a consistency in valuation of stock?stock?

Insistence on valuation methods in the Insistence on valuation methods in the stock statement being same as those in stock statement being same as those in the financial statement is necessary. the financial statement is necessary. Otherwise it may result in showing lower Otherwise it may result in showing lower profits and tax evasion. It may also result profits and tax evasion. It may also result in over financing and arriving at an inflated in over financing and arriving at an inflated DP.DP.

The data on production, sales etc can The data on production, sales etc can further be reconciled with quarterly further be reconciled with quarterly information submitted by the unit.information submitted by the unit.

In case of WIP, there should be a steady In case of WIP, there should be a steady pattern from month to month. If production pattern from month to month. If production is more or less uniform every month, the is more or less uniform every month, the stock of WIP will not vary/ increase out of stock of WIP will not vary/ increase out of proportion.proportion.

The Banker can also use the ABC analysis The Banker can also use the ABC analysis for study of the stock statement. for study of the stock statement.

20% of items account for 80% value20% of items account for 80% value

30% of items account for 15% value30% of items account for 15% value

50% of items account for 5% value.50% of items account for 5% value.

Does the debtors figure include sales to Does the debtors figure include sales to associate concerns ? Are they genuine associate concerns ? Are they genuine transactions? What is the volume and transactions? What is the volume and value of such outstanding?value of such outstanding?

Whenever a physical inspection is carried Whenever a physical inspection is carried out the banker should carry a copy of the out the banker should carry a copy of the latest stock statement submitted by the latest stock statement submitted by the borrower and try to reconcile figures by borrower and try to reconcile figures by comparing the transactions that would comparing the transactions that would have happened b/w time of visit and stock have happened b/w time of visit and stock statement submission.statement submission.

If the stock is located at various If the stock is located at various geographical locations, verification should geographical locations, verification should be carried out simultaneously at all the be carried out simultaneously at all the places by team of officers. The banks places by team of officers. The banks therefore insist on Stock Audit by therefore insist on Stock Audit by independent CA firm for the verification.independent CA firm for the verification.

The board ‘ Stock Hypothecated to ……… The board ‘ Stock Hypothecated to ……… Bank’ should be distinctly displayed at the Bank’ should be distinctly displayed at the godown / warehouse.godown / warehouse.

Banker should verify whether the Banker should verify whether the insurance policy is in force, covers the insurance policy is in force, covers the stock adequately from possible risks.stock adequately from possible risks.

The officer going for physical verification The officer going for physical verification should keep his eyes and ears wide open should keep his eyes and ears wide open and record any strange event activity at and record any strange event activity at the site and should include this in the the site and should include this in the inspection report.inspection report.

If any short fall is noticed in the stocks, the If any short fall is noticed in the stocks, the same should be reported immediately to same should be reported immediately to the Regional office. The borrower should the Regional office. The borrower should be asked to regularise the position and he be asked to regularise the position and he should be questioned for the lapses. The should be questioned for the lapses. The borrower’s plan of action should be called borrower’s plan of action should be called for and scrutinised.for and scrutinised.

Many Banks insist that the original Fire Many Banks insist that the original Fire Insurance policies should be in the Insurance policies should be in the custody of the Banks as in case of any custody of the Banks as in case of any misfortune, the policy documents are not misfortune, the policy documents are not lost and immediate action for taking up the lost and immediate action for taking up the matter with the insurance company can matter with the insurance company can be initiated.be initiated.

Bankers also insist that the Insurance Bankers also insist that the Insurance Policy should be endorsed in favour of the Policy should be endorsed in favour of the Bank i.e. the policy is issued in the name Bank i.e. the policy is issued in the name of ……… Bank a/c M/s xyz industries. of ……… Bank a/c M/s xyz industries.

This ensures that the claim cheque will be This ensures that the claim cheque will be issued in the name of the bank for the issued in the name of the bank for the particular client.particular client.

The cash sales figures and debtors The cash sales figures and debtors collection as shown in the stock statement collection as shown in the stock statement can be compared with the credit turnover can be compared with the credit turnover in the account. If there is a large gap, the in the account. If there is a large gap, the reasons need to be investigated. It can reasons need to be investigated. It can also show if the borrower is banking with also show if the borrower is banking with some other bank.some other bank.

The same can be verified by scrutiny of The same can be verified by scrutiny of cash bank account at the time of visit. cash bank account at the time of visit.

When advance is granted against book When advance is granted against book debts, the books of accounts and records debts, the books of accounts and records of the borrower must be verified. of the borrower must be verified. Periodical confirmation obtained by the Periodical confirmation obtained by the borrower from his debtors must be borrower from his debtors must be verified. In many banks there is a practice verified. In many banks there is a practice to have a receivable audit conducted by a to have a receivable audit conducted by a firm of chartered accountants.firm of chartered accountants.

Thus study of stock statement will enable Thus study of stock statement will enable the bankers to observe the trend in the the bankers to observe the trend in the borrower’s performance and detect borrower’s performance and detect symptoms of sickness if any.symptoms of sickness if any.

Case StudyCase Study

Let us take a case study of Mr. Hopeful Let us take a case study of Mr. Hopeful who was an MD of a company producing who was an MD of a company producing storage batteries. The financial position of storage batteries. The financial position of the company in the beginning of the the company in the beginning of the financial year was as under:financial year was as under:

TNW 200 lacs Debt: Equity 2.5TNW 200 lacs Debt: Equity 2.5

NWC 100 lacs Current Ratio 1.33NWC 100 lacs Current Ratio 1.33

Bank Fin 200 lacs Other CL 100 lacsBank Fin 200 lacs Other CL 100 lacs

Total CA 400 lacs Of which stock 280 lacs Total CA 400 lacs Of which stock 280 lacs

DetailsDetails Qrtr 1Qrtr 1 Qrtr 2Qrtr 2 Qrtr 3Qrtr 3 Qrtr 4Qrtr 4

Action takenAction taken Price reduced Price reduced by 20%by 20%

Competitor Competitor reduces pricereduces price

Sales ActualsSales Actuals

ProjectdProjectd

100.00100.00

150.00150.00

90.0090.00

200.00200.00

60.0060.00

200.00200.00

50.0050.00

250.00250.00

Profit Profit Nil ( break Nil ( break even)even)

-30.00-30.00 -40.00-40.00 -50.00-50.00

NWCNWC 90.0090.00 70.0070.00 30.0030.00 -20.00-20.00

InventoryInventory 250.00250.00 230.00230.00 180.00180.00 150.00150.00

Bank financeBank finance 200.00200.00 200.00200.00 200.00200.00 210.00210.00

Inventory as per stock statement continued to be atInventory as per stock statement continued to be at 250.00250.00

No inspection / financial data analysis done by the bank.No inspection / financial data analysis done by the bank.