Supervision and Follow-up of Advances

Transcription

1 Supervision and Follow-up of Advances Jyoti Kumar Pandey Deputy General Manager & Member of Faculty College of Agricultural Banking Reserve Bank of India Pune

2 Credit Life Cycle Theory Credit Opportunity Credit Creation Credit Completion Credit Management

3 Risks in Bank Lending Credit Risk Market Risk Operational Risk

4 Credit Management Credit Management now includes Capital adequacy norms Risk Management including ALM Exposure Norms Pricing policy and credit risk rating IRAC norms Appraisal, credit-decision making and loan review mechanism

5 Approach for safety of loans Safety of loans is directly related to the basis on which decision to lend is taken Type and quantum of credit to be provided Terms and conditions of the loan

6 Approach for safety of loans (Contd.) Two-pronged approach Pre-Sanction appraisal To determine the bankability of each loan proposal Post-Sanction control To ensure proper documentation, follow-up and supervision

7 Pre-Sanction appraisal Concerned with measurement of risk(iness) of a loan proposal Requirements are: Financial data of past and projected working results Detailed credit report is compiled on the borrower / surety Market reports Final / audited accounts Income tax and other tax returns / assessments Confidential reports from other banks and financial institutions Credit Report (CR) needs to be regularly updated Appraisal should reveal whether a loan proposal is a fair banking risk

8 Post-Sanction appraisal Depends to large extent upon findings of presanction appraisal Requirements are: Documentation of the facility and after care follow- up Supervision through monitoring of transactions in loan amount Scrutiny of periodical statements submitted by the borrower Physical inspection of securities and books of accounts of the borrower Periodical reviews etc.

9 Need for Review of Borrowal Accounts NPA control NPA derives itself from liquidity Responsible for cash flows Preventive measures for improvement in cash flows slippage into substandard / doubtful category Necessary to ascertain if the business reflects an upward or downward trend

10 Precondition for Good Credit Good system of appraisal / assessment of credit needs Effective supervision and follow up post sanction

11 Causes of Problem Loans Management Control Inadequate Capitalization High Financial and Operating Leverage High Sales Growth Strong Competition Economic Downturn

12 Objectives of Post Sanction Supervision and Follow-up To ensure compliance with the terms and conditions of sanction To ensure that assumptions for credit sanction was correct To ensure end use of funds To ensure adequacy of credit on an ongoing basis depending on the needs of the borrowers To monitor the health of the unit and detect signs of weakness in the financial position of the borrower

13 Compliance Follow-up post sanction Ensure terms and conditions of sanction is intimated to borrower Borrower advised to ensure the same Ensure receipt of acceptance of terms and conditions and kept on record Ensure all terms and conditions are fulfilled before disbursement

14 Documentation Basis for legal relationship between bank and borrower Significant for enforcement of securities charged to the bank Spells out responsibilities of the borrowers Any additional limit sanctioned against same securities already charged to the bank Extend charge to such limits also All concerned may be kept informed Acknowledge debt / balance conformation

15 Monitoring Disbursement In case of Term Loan Loan to be disbursed as per the schedule approved by the bank Disbursement of installments related to actual progress in implementation of the project Site visits periodically Progress in project implementation should be as per schedule For any delay seek borrowers view on steps taken for rectification Monitor costs being incurred, borrower s contribution, reasons for cost overruns This requires receipt of statements from that needs to be scrutinised diligently by the bank

16 Monitoring (Contd.) Disbursement In case of Cash Credit If sanctioned along with Term Loan - Must be disbursed only when the unit commences commercial production

17 Monitoring (Contd.) Periodical Inspection Enables bank to keep check on the stocks charged to the bank Obtain first hand information about the functioning of the unit

18 Monitoring (Contd.) Periodical Inspection Hypothecation Account Verify adequacy of stocks Physical verification of stocks do a test check Valuation of stocks to be done on cost price or market price basis whichever is lower Quality of stocks charged Stock should not be old, obsolete, rejected goods etc. Ensure its saleability Segregation of stocks Stocks not hypothecated to the bank must be kept separately Checking of Record Books, register maintained by borrower must be verified to check the actual movement of goods and system of stock reconciliation with physical quantity Match with the stock statement of the borrower For limits sanction against book debts, appropriate documentary evidence supporting sale of goods must be verified Bank s name board to be prominently displayed indicating the goods hypothecated

19 Monitoring (Contd.) Periodical Inspection Pledge Account Ensure that godown is well maintained Goods are stored properly Entries in the godown register maintained appropriately If required conduct stock audit Periodical Inspection Operations of the unit Inspection of unit to be carried out periodically To ascertain first hand on the working conditions, activity and progress Availability of raw materials, spares, power supply any other issues that may affect the unit

20 Monitoring (Contd.) Maintenance of Inspection Register Bank must maintain register to record comments on findings of inspection Inspecting officer s signature required Irregularities / deviation to be brought to the notice of the borrower To be followed up vigorously

21 Monitoring (Contd.) Operations in the account Non payment of interest and installments on due dates to be followed up with the borrower Bank should have a system of issuing reminders in advance about the repayment obligation Cash credit account Frequent overdrawals not to be encouraged Frequent requests for overdrawals should be looked into In case of shortage of working capital consider enhancement Credits in account to be checked to see sales reported are routed through the account Look for transactions with sister concerns Book debt statements to be scrutinized to ensure that credit sales are realised within the stipulated period For old debts check from the borrowers steps taken to recover the dues Bills purchased / discounted, payment on due date to be closely monitored

22 Monitoring (Contd.) Insurance Bank to ensure that securities offered have adequate and proper insurance cover on continuous basis Cover to be obtained for full value of security Value of security should be more than the limit sanctioned and deterioration in its quality checked

23 Monitoring (Contd.) Information System Seek information at regular intervals for Progress in implementation of the project financed Quantum of production / sales Levels of current assets and current liabilities Stock position Debtors position Creditors position Funds flow and cash flow Information may be sought on regular basis

24 Monitoring (Contd.) Information System Statements called for should enable bank to monitor the levels achieved vis-à-vis projected figures of the unit Stock statement should reveal the quantity of paid and unpaid stock, their price and movement Statement on book debt should reveal age-wise breakup of debtors and creditors Timely and qualitative information must be obtained

25 Monitoring (Contd.) System of annual review of account To be done by bank To scrutinise Balance Sheet, P & L Account, Tax Returns of borrower Undesirable features to be discussed with the borrower Credit report of the borrower to be updated on a regular basis Mechanism to initiate corrective action early on

26 Conditions determining future trends Three factors which can undergo changes: Prospects Future risk profile Repayment capacity

27 Tools for determining future trends Financial Analysis past and projected Credit rating Assessment of credit needs Terms of sanction Documentation and creation of security interest Post-lending supervision 3 stages Regular surprise verification of security Stock audit Obtaining and scrutiny of control statement (stock statements, financial statements) Repayment and / or rollover

28 Thank You