Credit - Monitoring
Why Monitoring / follow up
The basic objective of any follow up is to
ensure safety of the advances granted by
the bank.
In spite of various changes in the way in
which credit products are delivered, the
banks will continue to be concerned about
the safety of their funds.
WHY ?
The funds lent by the bankers come from
the deposits kept by the general public
and the bankers are custodians / trustees
of these funds. The banker is liable to
repay the deposit money on demand.
The other role that is expected from the
banker is that of an advisor or a guide to
the customer. This role has gained more
importance after the increase in industrial
sickness.
The Banker employs various measures
to ensure the safety of funds lent like
1. Comprehensive Credit Appraisal
2. Perfect Documentation
3. Ensuring end use of funds.
4. Insisting on some collateral / main
security
5. Monitoring and regular follow up.
Today we are focussing on Monitoring.
Monitoring is a broader concept and
includes inspection and much more.
Credit Monitoring – Key Objectives
Components of Credit Monitoring
Monitoring
Pre sanction Post disbursement
Post Sanction
Inspection – Regular
Pre Disbursement
Retail Loans Follow up and
Inspection
Commercial loans Inspection
Pre – sanction Inspection
Retail Loans : Decision to lend is taken
after verifying the repaying capacity of the
borrower, which in turn is dependent on
the earning capacity and hence inspection
before sanction is rare. However, if the
exposure is more, a visit to the residence /
office of the borrower is made.
e.g.
Commercial Advances : Inspection report
forms an important part of the credit
appraisal note put up to the higher
management for approval.
Generally the visit is carried out by the
officer from credit department assessing
the proposal along with a person from
Technical cell and Credit Enquiry or
Investigation Department.
Generally these visits are pre planned in
consultation with the proposed borrower.
Sometimes they could be surprise visits.
The credit proposal put up by the borrower
contains details about the existing set up
and his projections about the future
( atleast for the period for which the credit
facilities are sought).
The Inspection team has to compare the
real picture as they see at the time of visit
with the details provided by the borrower
in the project report.
The aspects the team will have to focus on
will be dependent on the purpose for
which the finance is sought.
Some of the aspects are
1. Location and other details about the
premises.
2.Various licenses of the unit.
3.Sanctions from Electricity Boards,
Pollution control board.
4. Factory lay out, shop floor , No. of shifts
5.Condition of machineries, other fixed
assets.
6.Storage facility for raw material, WIP and
finished stock.
7.Safety measures taken like fire
extinguishers, protection from water
flooding etc.
8.Quantity and quality of stock.
9.Care taken while handling hazardous
materials
10.Scrutiny of Insurance policies.
11.Labour situation, composition of staff -
qualified, experienced staff.
12.Change in key management positions.
13.Purchases/ Sales returns, quality control
and disposal of waste.
14.Position regarding posting of accounts
15.Position of payment of various statutory
dues, payment of government dues.
16. Slow moving / obsolete stocks
17.Particulars of any tailor made products
lying undelivered / rejected by the buyer.
18.Position about tax payments. Completion
of assessment for income tax, sales tax,
excise etc.
19.Any points made by borrower, executives
during discussion
The technical expert accompanying on the
visit will assess the condition of machinery
and other equipments, manufacturing
process etc.
The CED officer may visit suppliers,
clientele units to get a better judgment
about the claims made by the proposed
borrower.
He may hold market enquiries to assess
whether the unit can achieve projected
sales.
Post sanction but pre disbursement
inspection .
This will typically happen in case of
housing loans.
The officer should personally visit the flat
being sold if it is a resale proposal or a
new flat if it is ready for occupation.
If it is a partial / progressive disbursement
in case of flat under construction, he
should visit the site and inspect the activity
over there.
In case of second sale, see the condition
of the premises, condition of flat in
particular. Some bankers insist on
valuation report from approved valuers.
This ensures that the finance given is in
line with the existing market conditions.
The officer can contact the office bearers
of the society and confirm the transaction/
sale. Check if there is any other charge on
the said flat and ensure that it is free from
all encumbrances
In case of a new ready to occupy flat, the
officer should check, approach road to the
society,water connections, electric supply.
In case of first sale, one must check the
NOC issued by the builder. Confirm the
authenticity of the signatory.
The flat should be clearly identifiable.
Check if a name board is displayed
In case of finance for two wheeler or car
finance, the vehicle is inspected
Post Disbursement Inspection
In case of disbursement of term loan for
purchase of machinery, equipment etc,
inspection is made immediately on
installation of the same.
The inspecting officer confirms the
brand,capacity and other specifications as
per the proforma invoice.
In case of finance for construction of
factory building, the inspecting officer
verifies the work completed. Banks insist
on approved architect’s certificate for work
completed at the time of each
disbursement.
In case of working capital limits, the
inspection and other follow up is on
ongoing basis. The banker needs to
monitor the performance of the unit,
operations in the account regularly.
The most popular form of working capital
advance is Cash Credit / Overdraft facility.
The charge created in such cases is that
of hypothecation. The banker therefore,
needs to be alert to monitor this type of
advance.
Under this type of facility, it is the
responsibility of the borrower to ensure
that there is always inventory of adequate
value to cover the amount borrowed,
Monitoring Operations in the
account.
Unusual cash withdrawals.
Debits in the account > average monthly
debits
Withdrawals are made in round amount.
Limits are fully utilised.
Not much swing in the account.
Frequent request for TOD, ad hoc.
Cheques are returned for want of funds.
Cash deposited at the end of working
hours to bring the account in order.
Request for honouring certain cheques
and returning some other cheques.
Request for cheque purchase, immediate
credit of cheques deposited
Request to honour cheques against un-
clear effects.
Request to specify reasons other than
insufficient funds while returning cheques.
Stock statement Analysis
The Tandon and Chore committees made
the bankers move away from security
based banking to need based banking.
They specified industry wise norms for
lock up of funds in various types of
industries.
As the economic freedom and
globalisation created impact on each
industry. Margins came under pressure.
Each commercial unit tried to optimise the
lock up of funds in stock and debtors.
Tried to squeeze more credit from its
creditors.
For cash credit account each borrowal unit
is required to submit details of its lock up
in stock, debtors and creditors to the
Banker. The D.P. is worked out on the
basis of margins specified for each
category.
The stock statement besides the levels of
stock, debtors and creditors at the end of
month, also gives various other inputs like
production details, WIP, purchases done
during the month, sales effected during the
month, sales at cost.
The levels indicated in the previous month
are taken as opening balance / basis for
calculating the figure for the current
month.
The stock statement also includes details
of debtors party wise and age wise.
Debtors which are more than 6 months are
shown separately.
Similarly creditors for purchases and any
other extra ordinary item should not be
clubbed.
A banker sitting in his office by studying
the stock statements submitted by the
borrower over a period of time can detect
various things like
A particular stock where no movement is
happening for a long time.
A payment from debtor is delayed for a
particular transaction.
The sales, purchases figures are
manipulated.
The sales purchases figures are in line
with the projections submitted by the
borrower or are they falling short?
Is there a consistency in valuation of
stock?
Insistence on valuation methods in the
stock statement being same as those in
the financial statement is necessary.
Otherwise it may result in showing lower
profits and tax evasion. It may also result
in over financing and arriving at an inflated
DP.
The data on production, sales etc can
further be reconciled with quarterly
information submitted by the unit.
In case of WIP, there should be a steady
pattern from month to month. If production
is more or less uniform every month, the
stock of WIP will not vary/ increase out of
proportion.
The Banker can also use the ABC analysis
for study of the stock statement.
20% of items account for 80% value
30% of items account for 15% value
50% of items account for 5% value.
Does the debtors figure include sales to
associate concerns ? Are they genuine
transactions? What is the volume and
value of such outstanding?
Whenever a physical inspection is carried
out the banker should carry a copy of the
latest stock statement submitted by the
borrower and try to reconcile figures by
comparing the transactions that would
have happened b/w time of visit and stock
statement submission.
If the stock is located at various
geographical locations, verification should
be carried out simultaneously at all the
places by team of officers. The banks
therefore insist on Stock Audit by
independent CA firm for the verification.
The board ‘ Stock Hypothecated to ………
Bank’ should be distinctly displayed at the
godown / warehouse.
Banker should verify whether the
insurance policy is in force, covers the
stock adequately from possible risks.
The officer going for physical verification
should keep his eyes and ears wide open
and record any strange event activity at
the site and should include this in the
inspection report.
If any short fall is noticed in the stocks, the
same should be reported immediately to
the Regional office. The borrower should
be asked to regularise the position and he
should be questioned for the lapses. The
borrower’s plan of action should be called
for and scrutinised.
Many Banks insist that the original Fire
Insurance policies should be in the
custody of the Banks as in case of any
misfortune, the policy documents are not
lost and immediate action for taking up the
matter with the insurance company can
be initiated.
Bankers also insist that the Insurance
Policy should be endorsed in favour of the
Bank i.e. the policy is issued in the name
of ……… Bank a/c M/s xyz industries.
This ensures that the claim cheque will be
issued in the name of the bank for the
particular client.
The cash sales figures and debtors
collection as shown in the stock statement
can be compared with the credit turnover
in the account. If there is a large gap, the
reasons need to be investigated. It can
also show if the borrower is banking with
some other bank.
The same can be verified by scrutiny of
cash bank account at the time of visit.
When advance is granted against book
debts, the books of accounts and records
of the borrower must be verified.
Periodical confirmation obtained by the
borrower from his debtors must be
verified. In many banks there is a practice
to have a receivable audit conducted by a
firm of chartered accountants.
Thus study of stock statement will enable
the bankers to observe the trend in the
borrower’s performance and detect
symptoms of sickness if any.
Case Study
Let us take a case study of Mr. Hopeful
who was an MD of a company producing
storage batteries. The financial position of
the company in the beginning of the
financial year was as under:
TNW 200 lacs Debt: Equity 2.5
NWC 100 lacs Current Ratio 1.33
Bank Fin 200 lacs Other CL 100 lacs
Total CA 400 lacs Of which stock 280 lacs
Details Qrtr 1 Qrtr 2 Qrtr 3 Qrtr 4
Action taken Price reduced Competitor
by 20% reduces price
Sales Actuals 100.00 90.00 60.00 50.00
Projectd 150.00 200.00 200.00 250.00
Profit Nil ( break -30.00 -40.00 -50.00
even)
NWC 90.00 70.00 30.00 -20.00
Inventory 250.00 230.00 180.00 150.00
Bank finance 200.00 200.00 200.00 210.00
Inventory as per stock statement continued to be at 250.00
No inspection / financial data analysis done by the bank.
