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 likeComprehensive Credit AppraisalPerfect DocumentationEnsuring end use of funds.Insisting on some collateral / main securityMonitoring 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

Pre sanction InspectionRetail 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 are1. 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 accounts15.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 displayedIn case of finance for two wheeler or car finance, the vehicle is inspected

Post Disbursement InspectionIn 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 architects 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 debitsWithdrawals 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 depositedRequest to honour cheques against un-clear effects.Request to specify reasons other than insufficient funds while returning cheques.

Stock statement AnalysisThe 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 borrowers 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 borrowers 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

DetailsQrtr 1Qrtr 2Qrtr 3Qrtr 4Action takenPrice reduced by 20%Competitor reduces priceSales ActualsProjectd100.00150.00 90.00200.0060.00200.00 50.00250.00Profit Nil ( break even)-30.00-40.00-50.00NWC90.0070.0030.00-20.00Inventory250.00230.00180.00150.00Bank finance200.00200.00200.00210.00 Inventory as per stock statement continued to be at250.00No inspection / financial data analysis done by the bank.

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