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loss assets of the bank has remained an active topic of banking finance research.
The methodology followed is in accordance with the guidelines for post sanction follow up and
monitoring by Indian Overseas Bank. The HO is quite specific about the steps that are to be
taken to follow up with the borrowal accounts and reporting the same.
METHODS OF CREDIT APPRAISAL:
The main methods of credit appraisal are done according to the Indian Overseas banks Loan
Policy (2009-2010) as per RBIs Guidelines. This is framed by the Head Offices Credit
Division. The methods by which a credit proposal is appraised are as follows:
Assessment of the profile of the borrower:
Purpose or need for credit: The banker should be very clear as to why the credit is required by
the borrower and the sources wherefrom the borrower is expected to replay back the loan. If the
advance is for hoarding stocks or for speculation, it should be discouraged. Again, if the money
required is for liquidation of prior borrowings or to make good the loss incurred or for
unproductive expenditure, then the banker should cautiously appraise the proposal.
The borrower may require stop-gap finance till the money from other sources flows in (for
example, issuing of share capital/debentures likely to be subscribed to by the public). Such
proposals may be favorably considered for good parties depending upon merits of each case and
subject to RBI guidelines from time to time.
Also, with emphasis by government on export growth, the banks have been instructed to allocate
at least 12% of their total credit to export sector.
Types of facilities required: while appraising a credit proposal, the bank has to evaluate and
decide different types of credit that the borrower requires.
Integrity and reputation of borrower: the next step in appraisal process is to check the market
reputation and the integrity of the prospective borrower. This is to ensure the proper end use of
funds and timely service of the installment and interest.
Borrowers business expertise, status of his economic activity: the bank has to ensure the
efficiency with which the prospective borrower runs his business, his experience and expertise in
the business concerned and the short and long term economic viability of the business.
Current risk profile and its sensitivity to changes: the bank has to enumerate the risk profile
of the prospective borrower, check whether it fits for the advance and also evaluate the future
chances of the borrowers account being sensitive in terms of risk.
Internal and external credit rating: a very important next step is to accord suitable credit
rating to the prospective borrower. A credit rating estimates the credit worthiness of an individual
or corporation. It is an evaluation made by credit bureaus of a borrowers overall credit history.
Typically, a credit rating tells a lender or investor the probability of the subject being able to pay
back a loan. Internal credit rating is done by the bank itself whereas the external ratings are given
by professional credit rating agencies.
Adequacy and enforceability of the tangible securities/ guarantees under various scenarios:
the securities charged to the bank should be free from all encumbrances and they should be
legally enforceable at all times under all circumstances.
S. no
Key Ratios
1.
Current Ratio
ii.
as current liability)
1.17(with inclusion of annual maturing term liabilities as
iii.
current liability)
1.00(including annual maturing term liabilities
in
Debt
Equity
Ratio*
i.
ii.
TOL/TNW
DSCR
1.5 to 2- average; any year shall not be lower than 1.25 during the
repayment period
Interest
1.5 times
coverage ratio
6
Security
Coverage Ratio
FACR
i.
ii.
1.20
Debt Equity ratio- normally promoters contribution should be brought front end. However, in
big projects involving a construction period of more than a year or where a part of such funds are
expected to be funded through internal generation or proposed public/ private offering of equity,
bringing the promoters contribution up-front may not be feasible. In such circumstances it
should be ensured that at the minimum the pro rata level of promoters contribution is infused
before releasing the loan.
Exposure to Defaulters/ Willful defaulters:
While evaluating the proposal for credit, it has to be kept in view whether the names of the
borrower entity/ guarantors/ directors/ partners/ trustees of the borrowing entity are listed in the
caution list/ defaulters list circulated by RBI/ CIBIL/ECGC. As per RBI directives, no additional
facilities shall be granted to the willful defaulters whose names appear in the RBI willful
defaulters list.
Application for Credit facility: The pre-sanction includes obtention of application form from
the prospective borrower, analysis of the financial statements, projections, etc., compilation of a
Credit Report and determination of the eligible quantum of advance, type of advance, securities
to be obtained etc. At the time of receiving the credit proposal, branches should obtain a
declaration from the borrowers about their relatives, if any, employed in the Bank or in any other
bank / financial institution. Besides, facilities availed in other banks/branches should also be
furnished by them separately. The details of legal heirs of the borrower/guarantor (Name, Age,
Relationship, Address etc.,) should be obtained in the loan application. These details should be
obtained for the borrower and guarantor separately. The information should be updated on an
ongoing basis, even after filing suit against the borrower. A separate Credit Proposal Received
Register is maintained in the branch to record information relating to all applications received
for sanction of advances.
Analysis of collected information: a critical and careful analysis of the information collected
from the applicant and from other sources is undertaken in this project. After analyzing the data,
the Credit report/s of the borrower / guarantors is prepared and the applicant's request is
presented in the form of a credit proposal to the sanctioning authority. If the applicant is already
a customer of the bank (which is the case in this project) a scrutiny of the operations in the
account will reveal the trends, connections, nature of business dealings etc. As far as possible,
before sanctioning a credit facility, the borrower's place of business should be visited.
Preparation of Credit reports: Credit Report is the basic document on the basis of which
assessment of the borrower's character, capital and capacity (normally referred to as three C's)
is made by a banker. In preparing credit reports, the branch should be careful about the
following:
i.
ii.
Suppression of liabilities.
Credit reports are compiled only after individual verification by a Chartered accountant of the
information relating to the assets and liabilities furnished by them.
Calculation of Tangible Net Worth in Credit Reports:
The tangible net worth shall be arrived at as under:
i.
any share in the ancestral properties acquired on the division of the Joint Hindu Family)
Less
Loans taken against any of the above assets in individual name or offered as third party
security
The renewal proposal should invariably be accompanied by the Credit Report. Reasons for
increase or decrease in net worth should be indicated in the report. Reduction in net worth due to
disposal of fixed assets or incurring of loss is a danger signal. If there is any increase in fixed
assets, source of acquiring them should be ascertained or it should be verified whether it is due to
any revaluation of the assets.
When the borrower's/ guarantor's declared Net worth exceeds Rs.50 lakhs, the following
documents should be obtained
i. Certificate from a Chartered Accountant
ii. Photocopy of the title deeds in case of immovable properties
iii. A declaration that any disposal of properties will be intimated to the Bank
iv. A declaration that additional liability assumed will be intimated to the Bank
In the event of the prospective borrower enjoying credit facilities with other banks, confidential
report should be obtained from such banks and a certified true copy of the same should be sent to
the appropriate sanctioning authority along with the proposal
Assessment of quantum of credit required: The next process involved in the pre-sanction stage
is assessment of the credit requirements of the applicant. While carrying out this process,
branches have to keep in view the purpose, the period for which the advance is required, type of
facility, security offered, additional benefits that may accrue to the Bank etc. The assessment of
Working Capital shall be made, taking into account reasonable projected level of activity, so as to
avoid frequent sanction of adhoc limits and excess drawings. There are three main aspects that
are to be considered here:
i.
Assessment of the level of current assets required to be held for a given level
of production,
ii.
iii.
iv.
ii.
i.
ii.
Net Worth of the borrower/guarantor along with the Assets and liabilities
statements and credit reports.
iii.
iv.
Margin proposed, sources from which the borrower would bring in such margins.
v.
Nature and value of security offered, its title, the mode of charging such security
vi.
For appraising a credit proposal, lot of information are supposed to be meticulously checked to
ensure safety of the funds. The ways through which the banker would get these necessary
informations are as follows:
i.
ii.
independently and a balanced opinion has to be formed about the 'three Cs' of the
borrower.
iii.
iv.
Borrower's bank accounts: the bank accounts of the borrower lying with other
banks are studied side by side. Income-tax assessment order/returns are studied
to ascertain the various sources of income and the investments declared.
v.
Analysis of Assets and Liabilities Statement: these are very crucial sources of
informations as it gives a clear picture about the net worth of the borrower. The Assets
and Liabilities Statements should be obtained separately for each applicant and guarantor.
They should bear the latest date as far as possible and should be obtained within a
reasonable time, say, not more than 3 months from the date of such statements. The
statement shall contain complete details regarding the assets and liabilities of the
borrowers and guarantors. It must be accurate by collecting documentary evidences
regarding all movable and immovable assets of the firm/person to whom the statement is
related to. Similarly, all liabilities must also be recorded to arrive at the actual worth. If
the property of a guarantor has already been offered as a security to the assessing Bank or
other Bank/Financial Institution, the value of the same has to be excluded while arriving
at the net worth of that guarantor. It is necessary to obtain contingent liabilities of a
borrower/guarantor along with the Assets and Liabilities Statement. Even though the
contingent liabilities need not be taken into account for the purpose of arriving at the net
worth, a footnote should be given in the Credit Report.
For Sole Proprietorship Concerns, the assets and liabilities of the firm and that of the
proprietor should be merged to have a clear picture of the net worth. Alternatively, in the
personal assets and liabilities statement, the capital employed in the sole proprietorship
concern should be shown as Investment in Business.
For Partnership Firms, for compiling the individual net worth of the partners, Assets and
Liabilities statements from individual partners showing all their private assets and
liabilities should be obtained and credit report prepared. The capital employed by a partner
in the firm should be ignored in the individual credit reports of the partners, as these
investments form part of the firms Net Worth.
In case of Limited companies, their audited Balance Sheets and Profit & Loss accounts
for three years should be obtained and an analysis and interpretation of the financial
statements shall be done.
List of documents to be verified and valued while analyzing A & L statement:
i.
ii.
In case of machinery:
Original sale invoices of plant and machinery should be verified.
iii.
Balance sheet
iv.
Bazaar reports
SANCTION AND DISBURSEMENT OF CREDIT:
It is necessary that the terms and conditions contemplated are discussed with the borrower
beforehand to judge the feasibility of including them in the sanction ticket. After such discussion
and firming up, these terms and conditions should be mentioned in the final recommendations
made to the sanctioning authority along with the reasons for instituting them.
Special conditions applicable to the respective loan/product depending on various factors like the
type of facility, type of security, period of repayment, method of charging interest, percentage of
margin, etc., could also be specified in the sanctions in addition to these general terms and
conditions.
The sanction should be informed to the borrower in writing mentioning therein the terms and
conditions to be complied with. The sanction communication should clearly divide the terms and
conditions into Pre-disbursement conditions and Post-disbursement conditions. The advance will
be released only upon completion of documentation in all respects as per Bank's rules.
Processing fee and other charges like equitable Mortgage charges are collected before
disbursement of credit. All fund based/non-fund based /fee based transactions shall be routed
only through the account with the Bank. For working capital facilities against stock etc, monthly
stock statement with break up of stocks as required by the Bank is to be submitted.
Documentation:
Documentation is done before disbursement of credit. This step is a must because the bank may
not be able to enforce its rights in a court of law for recovery of the money due unless the
documents executed by the borrowers and guarantors are complete in all respects and are in
order (and kept alive). The documents are useful in:
i.
ii.
iii.
iv.
v.
The documents should be current and legally enforceable. It should have the description of
securities, the amount of loan/facility, interest and overdue interest, the date of execution, should
give terms of repayment, major and important terms and conditions mutually agreed upon, the
place of execution etc.
The sanction is scrutinized, documents appropriate to the advance with reference to the terms
and conditions are listed out, procured, the blanks are filled in correctly without overwriting,
cutting, erasing, etc. Advances should not be released except when all the relevant documents are
obtained from the parties concerned duly executed by them. The documents should be duly filled
in and properly stamped before obtaining the signature of the borrowers.
Formats of documents: The Bank has printed standard forms of documents to be executed for
various products/services normally handled by the branches. These forms have been drafted by
the Bank's Legal Advisers in the (technical) language commonly adopted and judiciously
interpreted by the Courts with preamble and consideration clauses, obligations, privileges and
reservations and thus provide necessary legal safeguards to protect the Bank's interests.
Pre-release Audit:
On being satisfied that complete documentation / security creation/ compliance of terms and
conditions are completed, pre-release audit is to be conducted for applicable advances.
Pre release Audit is stipulated in respect of advances with limits of Rs.10 lakhs and above in
order to bring in discipline with regard to compliance of terms and conditions of credit sanctions,
zero error documentation and conduct of accounts.
Pre-release Audit shall cover only pre-disbursement conditions and completeness in
documentation.
POST SANCTION MONITORING OF ADVANCES:
While a qualitative credit appraisal indicates the viability and bankability of a credit proposal,
post sanction measures such as timely disbursement, proper documentation, monitoring and
follow-up play a crucial role in ensuring that the account continues to be a performing asset.
This plays the most crucial role as it ensures that the account continues to be a performing asset
and the project continues to run in terms of the projections made. Monitoring also includes
anticipation of problems in advance and taking suitable corrective measure in consultation with
the borrower.
No industry becomes sick overnight and a careful watch over the working of the unit would help
in tracking and averting sickness in the incipient stage itself. Close monitoring is of paramount
importance particularly in the light of the fact that once a unit slips into sickness, it becomes
difficult for the Bank to recover its advance in full or even part of it, at times.
The post sanction appraisal depends largely on the pre sanction appraisal. The requirements of
post sanction follow up are:
Security Monitoring:
Banks borrowings must be adequately secured by core current assets. To ensure this, margins are
prescribed on each of core current assets. Irregularity in the cash credit account arises when bank
borrowings exceed the Drawing Power and the security position is adversely affected. If assets,
existing or to be created out of bank borrowings, are taken as security, following things should be
ensured:
The security conforms to the terms of sanction, is adequate, in good condition and readily
enforceable.
All the legal formalities have been complied with and a valid charge on the security in the
banks favor has been created.
While arriving at drawing limits on stocks/book debts, sundry creditors for goods
(including those under suppliers credit, co-acceptance liability under DA/LC) should be
deducted from the values of such stocks/book debts.
Monthly stock statement and monthly data on production and sales (Monthly Select
operational data/MSODs),
ii.
Inspection of stocks,
iii.
iv.
v.
vi.
vii.
Review/renewal of advance,
viii.
ix.
x.
xi.
Stock statements:
Borrowers should submit a stock statement showing the quantity and value of stocks
hypothecated to the bank. The stock statement should clearly show the value of unpaid stock,
stocks under DA/LC etc.
Regular submission of stock statements from the OCC borrowers should be ensured. The stock
statement received should be properly made use of by entering the advance value, insurance in
force, verification of declaration in the statement, entering the relevant details in the appropriate
registers, cross verification of particulars with borrower's books and physical verification of
stocks during inspection etc.
Stocks - quantity and value should be reconciled from month to month showing opening stock,
receipts, issues and closing stock. Wherever book debts are financed, the book debts upto the
tenor accepted in the CMA only should be recognized. In case no specific tenor is fixed by the
sanctioning authority, only book debts up to 180 days are to be taken cognizance for arrival of
Drawing Power.
A review of stock statements (at least once in 6 months) shall reveal the degree of movement of
inventory, raw material, finished goods, etc., and indicate the non-moving items and the degree
of obsolescence of inventory. For this purpose, borrower should give break up of large value
items under raw materials, stock in progress and finished goods. Such observations shall be
confined only to high value items constituting substantial monetary value of inventory. (Stockin-process, for instance, would remain the same if production is more or uniform every month).
Inspection of stocks:
Stock inspection is usually done on a monthly basis with an element of surprise maintained at the
time of inspection. Such inspections are besides Stock Audit exercise for fund based and nonfund based working Capital limit of Rs.1 Crore and above.
Where there are large volumes of stocks, thorough stock inspection should be taken up on a
small portion in quantity but significant in value.
All the establishments of the borrower in the same city like factory, go-down and office should
be inspected on each inspection.
Stocks shown in the stock statement shall be cross verified with those in the books of accounts
and the records maintained for the purpose of excise and other statutory authorities.
Valuation rates adopted for stocks with market rates/cost shall be verified to ascertain whether
the company follows the same basis of valuation as disclosed in the audited Balance Sheet.
The supplementary data on consumption, production, sales etc., shall also be verified with the
books of accounts of the borrower.
Insurance on stocks shall be examined for its adequacy and coverage and to ensure that all the
policies are in force.
Periodical inspection of goods secured under KCC/OCC should be done. Periodical inspection
and verification may also be undertaken of machineries and immovable properties taken as
security for term loans. It is to be noted that the purpose of inspection is not only to ensure the
availability of sufficient security cover for the advance but also to have a first hand knowledge
about the borrower's current business position, his problems, bottle necks faced etc. so that
necessary corrective measures can be taken immediately.
Inspection of the units financed / securities charged on a regular basis constitutes a vital tool in
effective credit administration. Besides, the signals forewarning the onset of any problems could
also be detected during such inspection.
The inspection of units should be done on a monthly basis unless or otherwise the periodicity of
the same is specified quarterly / half-yearly etc., in the sanction.
The order of priority for inspecting the Units is as follows:
i. Accounts which do not show healthy signs of operation and wherein the submission of stock
statements and other financial data is irregular
ii. Accounts with healthy operations
iii.Consortium advances
Monitoring the operations in the account:
The operations in the cash credit accounts should be verified to check the health of the account,
that is, if there are healthy fluctuations in the account depending on the sales etc. It should also
be checked if there are any drawings for the purposes other than that for which the advance has
been taken.
Following aspects should be meticulously checked in terms of an account
1. Unusual debit/ credit entry
2. Return of Bills Receivables/ Cheques unpaid
3. Repeated requests for additional funds which may indicate decline in sales, low
realization of debtors or payment to pressing creditors, diversion of funds, cash loss etc.
4. Decline in level of operations in the account.
5. Large return of inward bills
6. Default in payment of Term Loan installments/interest
7. Devolvement of LCs, invocation of guarantees or excessive extension.
8. Notice of demand from PF/Tax assessment, law suits or other legal action against the
borrowers.
2. Variation in NWC compared with the actuals of previous quarters shall be analyzed for
possible diversion.
3. Actual sale and inventories of two quarters shall be compared with figures given in halfyearly statement. Cumulative sales for four quarters shall be compared with the audited
accounts of the corresponding year.
QIS III
1. Sales, cost of goods sold and other expenses and operating profit shall be studied to
understand the trend. Any negative trend should be noted down.
2. Variation over 10% between estimates and actuals shall be studied and analyzed.
3. Relationship between insured value of stock/security and value declared shall be studied.
Any inadequacy has to be corrected.
Funds flow statement:
1. Variation in excess of 10% between estimates and actuals shall be analyzed to know how
deficit was covered or excess was utilized.
2. Increase in bank borrowing without corresponding increase in inventory and receivables
shall indicate that such borrowings were used for other purposes. Borrower should be
advised to take steps to repay the amount so diverted.
Review/Renewal of advances:
Scope:
Review/renewal of advances is an important post sanction exercise. Review helps to identify the
state of health of an advance and is an opportunity to evaluate the performance of borrowers and
to adopt remedial measures to safeguard our Bank's interest.
Review/ renewal is also one of the many parameters on which the RBI evaluates a banks
performance. So, all the borrowal accounts are subject to periodical review or renewal.
Review/renewal of advances involves collection and analysis of individual account data like
i. Account behavior
ii. Financial performance
iii. Market reports of the borrowers
iv. Production performance
v. Overall change in credit rating
The review exercise pays more attention to future performance of the company, apart from
detailing account operations, profitability and security. The review covers the market risks and
management risks (for example, there may be change in the management or in the quality of
management).
The financial performance analysis has to give importance to the underlying reasons for the
variance in actual performance vis-a-vis projections and management action required to correct
the situation.
Proposals for increased working capital assistance shall be based on increase in sales projection.
Any increase in demand for Working Capital without considerable improvement in sales calls for
deeper study of the circumstances. Such a trend shall indicate that the company is using current
surplus towards liquidation of term loan dues or acquisition of capital asset.
This process gives the banker an opportunity to evaluate the borrower's operational performance
both quantitatively and qualitatively, to reassess his credit requirements, to check up afresh the
continuity or otherwise of his financial solvency, to review the rating of his credit worthiness etc.
These aspects help him decide his recommendations as to whether the limits should be renewed
or reduced or cancelled.
Banks and FIs will report all cases of willful defaults which occurred or detected after 31st
March, - (then and there without any delay) to RBI. A willful default would be deemed to have
occurred, if any of the following events is noticed
The unit has defaulted in meeting its payment / repayment obligations to the
lender even when it has the capacity to honor the said obligations.
The unit has defaulted in meeting its payment / repayment obligations to the
lender and has not utilized the finance from the lender for the specific purposes
for which the finance was availed of but has diverted the funds for other
purposes.
The unit has defaulted in meeting its payment / repayment obligations to the
lender and has siphoned off the funds so that the funds have not been utilized
for the specific purpose for which the finance was availed of nor are the funds
available with the unit in the form of other assets.