You are on page 1of 28

Supervision and Follow

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

College of Agricultural Banking, RBI, PUNE

Credit Life Cycle Theory

Credit Opportunity

Credit Creation

Credit Completion

Credit Management

College of Agricultural Banking, RBI, PUNE

Risks in Bank Lending


Credit Risk
Market Risk
Operational Risk

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

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.

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

Precondition for Good Credit


Good system of appraisal / assessment of credit
needs
Effective supervision and follow up post sanction

College of Agricultural Banking, RBI, PUNE

Causes of Problem Loans

Management Control
Inadequate Capitalization
High Financial and Operating Leverage
High Sales Growth
Strong Competition
Economic Downturn

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

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, borrowers contribution,


reasons for cost overruns
This requires receipt of statements from that needs to be scrutinised
diligently by the bank
College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

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
Banks name board to be prominently displayed indicating the
goods hypothecated

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

Monitoring (Contd.)
Information System
Statements called for should enable bank to monitor the
levels achieved vis--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

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

Conditions determining future trends


Three factors which can undergo changes:
Prospects
Future risk profile
Repayment capacity

College of Agricultural Banking, RBI, PUNE

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

College of Agricultural Banking, RBI, PUNE

Thank You

College of Agricultural Banking, RBI, PUNE